FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
--------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------------------- -----------------------
Commission file number 0-26327
------------------------------------------------
SOFTQUAD SOFTWARE, LTD.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 65-087774
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
161 Eglinton Avenue East, Suite 400, Toronto, Ontario M4P 1J5 Canada
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(416) 544-9000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
The American Sports Machine, Inc., 222 Lakeview Avenue,
Suite 160-146, West Palm Beach, Florida
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---------
The number of shares of common stock, par value $.001 per share,
outstanding as of May 18, 2000 (not including any shares subject to derivative
securities) was 6,572,382.
Transitional Small Business Disclosure Format (check one):
Yes No X
------- ----
<PAGE>
SOFTQUAD SOFTWARE, LTD.
QUARTERLY REPORT
QUARTER ENDED MARCH 31, 2000
CONTENTS
--------
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
March 31, 2000 and September 30, 1999........................ 1
Condensed Consolidated Statements of Operations
Three and Six Months Ended March 31, 2000 and
March 31, 1999.............................................. 2
Condensed Consolidated Statements of Cash Flows
Six Months Ended March 31, 2000 and March 31, 1999........... 3
Notes to Financial Statements................................ 4
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition............................... 13
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds......................... 29
Item 4. Submission of Matters to a Vote of Security Holders............... 30
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits ............................................... 31
(b) Reports on Form 8-K..................................... 31
Index to Exhibits.......................................................... 33
<PAGE>
<TABLE>
SOFTQUAD SOFTWARE, LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<CAPTION>
March 31, 2000 September 30, 1999
-------------- ------------------
(unaudited) (1)
<S> <C> <C>
ASSETS
Current
Cash and short term deposits $ 7,953 $ 727
Accounts receivable 748 590
Inventory 67 22
Prepaid expenses and deposits 504 137
----------------- -----------------
Total Current Assets 9,272 1,476
Deferred financing costs -- 54
Capital assets 268 233
Goodwill 33 41
----------------- -----------------
TOTAL ASSETS $ 9,573 $ 1,804
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,658 $ 347
Accrued liabilities 163 480
Deferred revenue 114 30
Current portion of notes payable -- 698
----------------- -----------------
Total Current Liabilities 1,935 1,555
Notes Payable -- 100
----------------- -----------------
Total Liabilities 1,935 1,655
----------------- -----------------
Shareholders' Equity
Share Capital
Preferred stock, par value $0.001 per share
Authorized: 25,000,000 shares
Issued and outstanding:
Class A: 1,473,405 at March 31, 2000; none at September 30, 1999 1 --
Class B: 1,722,222 at March 31, 2000; none at September 30, 1999 2 --
Special voting stock, par value $0.001 per share
Authorized: 1 share
Issued and outstanding: 1 at March 31, 2000; none at September 30, 1999 -- --
Common stock, par value $0.001 per share -- --
Authorized: 50,000,000 shares
Issued and outstanding:
12,145,977 at March 31, 2000(2); 8,993,890 at September 30, 1999 3,341 3,201
Warrants to purchase common stock 498 --
Special warrants to acquire common stock 2,098 --
Additional Paid-In-Capital 6,348 --
Accumulated Other Comprehensive Income 17 31
Deficit (4,667) (3,083)
------------------------------------
Total Shareholders' Equity 7,638 149
----------------- -----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 9,573 $ 1,804
================= =================
- -------------
(1) The balance sheet at September 30, 1999 has been derived from audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
(2) Includes 5,773,605 shares reserved for issuance upon the exchange of
exchangeable shares. See Notes 2 and 3.
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
1
<PAGE>
<TABLE>
SOFTQUAD SOFTWARE, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share information)
(unaudited)
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
--------- ---------
2000 1999 2000 1999
---- ---- ---- ----
REVENUES
<S> <C> <C> <C> <C>
Licenses $ 1,104 $ 521 $ 1,950 $ 1,704
Services 11 -- 25 --
------------ ------------ ------------ ------------
TOTAL REVENUES 1,115 521 1,975 1,704
------------ ------------ ------------ ------------
COST OF REVENUES
Licenses 159 139 265 339
Services 92 -- 174 --
------------ ------------ ------------ ------------
TOTAL COST OF REVENUES 251 139 439 339
------------ ------------ ------------ ------------
GROSS PROFIT 864 382 1,536 1,365
------------ ------------ ------------ ------------
EXPENSES:
Selling and marketing 866 439 1,528 885
Research and development 392 266 665 492
General and administrative 489 319 830 616
------------ ------------ ------------ ------------
1,747 1,024 3,023 1,993
------------ ------------ ------------ ------------
LOSS BEFORE OTHER
INCOME AND EXPENSES (883) (642) (1,487) (628)
OTHER INCOME (EXPENSES) 1 -- (20) --
------------ ------------ ------------- ------------
NET LOSS $ (882) $ (642) $ (1,507) $ (628)
============= ============= ============= =============
LOSS PER SHARE-BASIC $ (0.07) $ (0.17) $ (0.14) $ (0.20)
=============== =============== ============= =============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING(1) 12,056,000 3,704,000 10,553,000 3,130,000
============== ============= ============= =============
- ------------------
(1) Includes 5,773,605 shares of common stock reserved for issuance upon the
exchange of exchangeable shares. See Notes 2 and 3.
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
2
<PAGE>
<TABLE>
SOFTQUAD SOFTWARE, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<CAPTION>
Six Months Ended
March 31, 2000 March 31, 1999
-------------- --------------
(unaudited) (unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,507) $ (628)
Adjustments to reconcile net loss to net cash used for operations activities
Compensation recorded on stock options 75 --
Amortization of capital assets 77 40
Amortization of goodwill 8 --
Amortization of deferred financing costs 54 --
---------------- --------------
(1,293) (588)
Changes in non-cash operating working capital items
Accounts receivable (158) (353)
Inventory (45) 72
Prepaid expenses and deposits (367) (105)
Accounts payable and accrued liabilities 993 299
Deferred revenue 84 2
---------------- --------------
Net cash used in operating activities (786) (673)
----------------- ---------------
CASH FLOWS USED IN INVESTING ACTIVITIES
Acquisition of net assets excluding cash -- (161)
Purchase of capital assets (112) --
----------------- --------------
Net cash used in investing activities (112) (161)
----------------- ---------------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Issuance of share capital 9,087 839
Repayment of notes payable (798) --
----------------- --------------
Net cash provided by financing activities 8,289 839
---------------- --------------
FOREIGN EXCHANGE (165) 144
----------------- --------------
NET CASH INFLOW 7,226 149
CASH POSITION, BEGINNING OF PERIOD 727 39
---------------- --------------
CASH POSITION, END OF PERIOD $ 7,953 $ 188
================ ==============
CASH INCLUDES THE FOLLOWING:
Cash $ 1,023 $ 188
Short-term deposits 6,930 --
---------------- --------------
$ 7,953 $ 188
================ ==============
SUPPLEMENTARY FINANCIAL INFORMATION
Interest paid $ 23 $ --
Interest received $ 27 $ --
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
3
<PAGE>
SOFTQUAD SOFTWARE, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
SoftQuad Software, Ltd. (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the guidelines set forth by the Securities and Exchange Commission for
quarterly reporting on Form 10-QSB and Item 310 of Regulation S-B. Accordingly,
they do not include all the information and footnotes required by generally
accepted accounting principles for complete financial statements. The financial
statements include the accounts of the Company and its wholly owned
subsidiaries. All material intercompany accounts and transactions have been
eliminated in consolidation. All dollar amounts are in U.S. dollars.
The Company's current corporate structure is the result of a series of
transactions among various entities and persons through which the former
shareholders of the Company's operating subsidiary, SoftQuad Software Inc.
("SoftQuad Canada"), and the former shareholders of a corporation that had been
formed to facilitate certain financings of SoftQuad Canada ("FinanceCo"),
acquired control of the Company. These transactions are summarized in
Management's Discussion and Analysis under "Our History and Corporate
Structure."
In brief, on January 17, 2000, the former shareholders of SoftQuad Canada
irrevocably agreed to tender their shares for securities exchangeable for shares
of FinanceCo. Although this share tender was not formally completed until April
5, 2000, it has been deemed effective for financial accounting purposes as of
January 17, 2000, the date on which it became irrevocable by the shareholders.
On March 2, 2000, FinanceCo merged with the Company. Upon consummation of the
merger, for financial accounting purposes, the former shareholders of SoftQuad
Canada and the former shareholders of FinanceCo owned approximately 91% of the
common stock of the Company (on a fully diluted basis) and, accordingly, the
merger is accounted for as a reverse takeover transaction.
As a result of the application of reverse takeover accounting:
i. the condensed consolidated financial statements of the combined entity
(including statements of shareholders' equity) are issued under the
name of the Company, but are considered a continuation of the
financial statements (and statements of shareholders' equity) of
FinanceCo and its consolidated subsidiaries, SoftQuad Acquisition
Corp. and SoftQuad Canada (the operating company); and
ii. the assets and liabilities in the condensed consolidated financial
statements are included at their historical carrying values.
In the opinion of management, the financial statements and the related notes
included herein present fairly, in all material respects, the financial position
and quarterly results of operations of the Company and its wholly owned
subsidiaries as at and for the three months ended March 31, 2000. The stated
financial position and quarterly results of operations are not necessarily
indicative of expected results for future periods.
4
<PAGE>
NOTE 2. SHAREHOLDERS' EQUITY
The Company's authorized capital stock consists of 50,000,000 shares of common
stock, $0.001 par value per share, 25,000,000 shares of preferred stock, $0.001
par value per share, and one share of special voting stock, $0.001 par value.
The following summary of the terms of the Company's capital stock is qualified
in its entirety by reference to the Company's Restated Certificate of
Incorporation, attached as an exhibit to the Company's report on Form 8-K filed
with the Securities and Exchange Commission (the "SEC") on April 10, 2000.
OUTSTANDING COMMON STOCK
As of March 31, 2000, there were 12,145,977 shares of common stock issued and
outstanding, including 5,773,605 shares reserved for issuance upon the exchange
of exchangeable shares of the Company's subsidiary, SoftQuad Acquisition Corp.
("SAC"), which are described below.
The holders of common stock are entitled to one vote per share on all matters to
be voted on by the stockholders. Subject to preferences that may be applicable
to any outstanding preferred stock, the holders of common stock are entitled to
receive ratably such dividends, if any, as may be declared from time to time by
the Board of Directors out of funds legally available therefor. In the event of
the liquidation, dissolution, or winding up of the Company, the holders of
common stock are entitled to share ratably in all assets remaining after payment
of liabilities, subject to prior rights of preferred stock, if any, then
outstanding.
OUTSTANDING PREFERRED STOCK
As of March 31, 2000, there were 1,473,405 shares of Class A convertible
preferred stock and 1,722,222 shares of Class B convertible preferred stock
issued and outstanding.
The shares of Class A convertible preferred stock and Class B convertible
preferred stock are convertible at any time at the option of the holder, on a
one-for-one basis, for shares of common stock. The number of shares of common
stock into which Class A convertible preferred stock and Class B convertible
preferred stock is convertible is subject to adjustment or modification in the
event of a stock split or other change to the Company's capital structure so as
to maintain the initial one-to-one relationship between the shares of such
preferred stock and the common stock. The holders of Class A convertible
preferred stock and Class B convertible preferred stock are entitled to the
number of votes per share equal to the number of share of common stock into
which such preferred stock is convertible on all matters to be voted on by the
stockholders. With respect to dividends, Class A convertible preferred stock and
Class B convertible preferred stock rank on parity with each other and the
Company's common stock. With respect to distributions upon liquidation, the
holders of Class A convertible preferred stock and Class B convertible preferred
stock are entitled to receive an initial preferred distribution before any
payment is made in respect of share of common stock of $1.3574 and $2.903226 per
share, respectively.
SPECIAL VOTING STOCK
The one authorized share of special voting stock has been issued to Montreal
Trust Company in its capacity as trustee for the benefit of holders of
exchangeable shares of SAC. The special voting share is the vehicle through
which holders of exchangeable shares are able to exercise their voting rights,
as described below under "Exchangeable Shares of SoftQuad Acquisition Corp." The
special voting stock has attached to it a number of votes equal to the number of
exchangeable shares outstanding from time to time (other than exchangeable
shares held by the Company or the Company's affiliates), which votes may be cast
at any meeting at which the Company's common stockholders are entitled to vote.
When all exchangeable shares are held by the Company or the Company's affiliates
(as a consequence of their redemption or repurchase), the special voting share
will be cancelled. The one share of special voting stock is not included in the
shareholders' equity tables in Note 3.
5
<PAGE>
EXCHANGEABLE SHARES OF SOFTQUAD ACQUISITION CORP.
The following summary of the terms of the exchangeable shares of SAC is
qualified in its entirety by reference to the Voting and Exchange Trust
Agreement and the Support Agreement attached as exhibits to the Company's report
on Form 8-K filed with the SEC on April 20, 2000.
As of March 31, 2000, there were 5,773,605 exchangeable shares of SAC issued and
outstanding. The exchangeable shares were issued to certain Canadian
shareholders of SoftQuad Canada in exchange for their shares of SoftQuad Canada
in connection with the acquisition by the Company of all of the outstanding
shares of SoftQuad Canada. The exchangeable shares are intended to be
economically equivalent to shares of the Company's common stock, and were issued
to such shareholders in lieu of shares of the Company's common stock because of
Canadian tax considerations.
The exchangeable shares are exchangeable at any time at the option of the
holder, on a one-for-one basis, for shares of common stock. The Company, SAC and
Montreal Trust Company of Canada, as trustee for the exchangeable shareholders,
have entered into the voting and exchange trust agreement with respect to the
exchangeable shares. By furnishing instructions to the trustee under the voting
and exchangeable trust agreement, holders of the exchangeable shares are able to
exercise essentially the same voting rights with respect to the Company as they
would have if they had exchanged their exchangeable shares for shares of the
Company's common stock. Holders of exchangeable shares are also entitled to
receive from SAC dividends payable in Canadian dollars that are economically
equivalent to any cash dividends paid by the Company on the common stock. The
exchangeable shares are subject to adjustment or modification in the event of a
stock split or other change to the Company's capital structure so as to maintain
the initial one-to-one relationship between the exchangeable shares and the
common stock.
Pursuant to the support agreement between the Company and SAC, the Company has
made the following covenants for so long as any exchangeable shares (other than
exchangeable shares owned by the Company or its affiliates) remain outstanding:
o the Company will not declare or pay dividends on the Company's common
stock unless SAC is able to declare and pay and simultaneously
declares and pays an equivalent dividend on the exchangeable shares;
o the Company will advise SAC in advance of the declaration of any
dividend on the Company's common stock and ensure that the declaration
date, record date and payment date for dividends on the exchangeable
shares are the same as those for the corresponding dividend on the
Company's common stock;
o the Company will ensure that the record date for any dividend declared
on the Company's common stock is not less than ten business days after
the declaration date of such dividend; and
o the Company will take all actions and do all things reasonably
necessary or desirable to enable and permit SAC, in accordance with
applicable law, to pay to the holders of the exchangeable shares the
applicable amounts in the event of a liquidation, dissolution or
winding-up of SAC, a retraction request by a holder of exchangeable
shares or a redemption of exchangeable shares by SAC.
The exchangeable share structure support agreement provides that, without the
prior approval of SAC and the holders of the exchangeable shares, the Company
will not issue or distribute additional common stock, securities exchangeable
for or convertible into or carrying rights to acquire common stock, rights,
options or warrants to subscribe therefor, evidences of indebtedness or other
assets, to all or substantially all holders of common stock, nor shall the
Company change the common stock, unless the same or an economically equivalent
distribution on or change to the exchangeable shares (or in the rights of the
holders thereof) is made simultaneously. The board of directors of SAC is
conclusively empowered to determine in good faith and in its sole discretion
whether any corresponding distribution on or change to the exchangeable shares
is the same as or economically equivalent to any proposed distribution on or
change to the common stock.
6
<PAGE>
SPECIAL WARRANTS
As of March 31, 2000, 1,000,000 special warrants were outstanding, all of which
were held by Canadian residents. Each special warrant entitles the holder
thereof to acquire a one share of common stock for no additional consideration.
The special warrants expire on the fifth business day following the date of
effectiveness in the holder's province of residence of a prospectus qualifying
the tradability of the underlying shares of common stock. The special warrants
are exercisable at any time, and are automatically exercised immediately prior
to their expiration. The special warrants were sold to certain Canadian
purchasers in lieu of shares of the Company's common stock because of Canadian
securities law considerations.
7
<PAGE>
SHAREHOLDERS' EQUITY TABLES
(a) Changes in Shareholders' Equity
The following two tables summarize the changes in shareholders' equity as at
March 31, 2000:
<TABLE>
Changes in Shareholders' Equity By Number of Shares
---------------------------------------------------
(unaudited)
<CAPTION>
Shares
Reserved Shares Subject to Shares
Common Preferred Subject to Special Subject to
Date Common Stock Stock(1) Stock Warrants Warrants Options Total
- ---- ------------ -------- ----- -------- -------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1999 8,993,890 -- -- -- -- 1,856,000 10,849,890
Issuances on:
December 9, 1999 215,385 -- -- -- -- -- 215,385
December 16, 1999 736,702 -- 1,473,405 663,033 -- -- 2,873,140
January 17, 2000 (5,773,605) 5,773,605 -- -- -- -- --
February 28, 2000 -- -- 1,722,222 1,041,667 -- 1,532,500 4,296,389
February 29, 2000 -- -- -- 100,000 1,000,000 -- 1,100,000
March 1, 2000 -- -- -- -- -- 489,000 489,000
Shares resulting from merger
on March 2, 2000 2,200,000 -- -- -- -- -- 2,200,000
Forfeited -- -- -- -- -- (14,000) (14,000)
--------- --------- --------- --------- --------- --------- ----------
Balance at March 31, 2000 6,372,372 5,773,605 3,195,627 1,804,700 1,000,000 3,863,500 22,009,804
========= ========= ========= ========= ========= ========= ==========
Changes in Shareholders' Equity By Value
----------------------------------------
(unaudited)
Shares
Reserved Shares Subject to Additional
Common Common Preferred Subject to Special Paid-In-
Date Stock Stock(1) Stock Warrants Warrants Capital Total
- ---- ----- -------- ----- -------- -------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1999 $ 3,201,399 $ -- $ -- $ -- $ -- $ -- $ 3,201,399
Issuances on
December 9, 1999 95,807 -- -- -- -- -- 95,807
December 16, 1999 736 -- 1,473 271,000 -- 2,726,791 3,000,000
January 17, 2000 (3,201,399) 3,201,399 -- -- -- -- --
February 28, 2000 -- -- 1,722 281,000 -- 4,717,278 5,000,000
February 29, 2000 -- -- -- 27,000 2,473,000 -- 2,500,000
Shares resulting from merger
on March 2, 2000 140 -- -- -- -- 45,860 46,000
----------- ----------- --------- --------- ----------- ----------- -----------
96,683 3,201,399 3,195 579,000 2,473,000 7,489,929 13,843,206
Compensation -- -- -- -- -- 76,142
76,142
Shares Issuance Costs (32,622) -- -- (81,554) (375,148) (1,141,755) (1,631,079)
----------- ----------- --------- --------- ----------- ----------- -----------
Balance at March 31, 2000 $ 140,203 $ 3,201,399 $ 3,195 $ 497,446 $ 2,097,852 $ 6,348,174 $12,288,269
=========== =========== ========= ========= =========== =========== ===========
- -----------------
(1) Common stock reserved for issuance upon the exchange of exchangeable shares.
</TABLE>
8
<PAGE>
(b) Stock Options
The following tables summarize the status of stock options outstanding as at
March 31, 2000:
Summary of Stock Options
------------------------
(unaudited)
Number of
Weighted Shares
Average Subject to
Exercise Price Options
-------------- -------
Balance October 1, 1999 $ 0.0057 1,856,000
Forfeited $ 0.0057 (14,000)
Granted $ 2.9059 2,021,500
Exercised -- --
Balance March 31, 2000 3,863,500
Weighted average fair value of options granted $ 1.5212
<TABLE>
Outstanding Options
-------------------
(unaudited)
<CAPTION>
Remaining Number of Shares Number of Shares Subject
Exercise Price Calculated Life in Years Subject to Options to Exercisable Options
-------------- ------------------------ ------------------ ----------------------
<S> <C> <C> <C>
$ 0.0013 2.0 1,050,000 630,000
$ 0.2310 3.0 292,000 --
$ 0.0066 3.0 500,000 --
$ 1.4400 10.0 1,532,500 --
$ 7.5000 10.0 489,000 --
------- --------
Total 3,863,500 630,000
========= =======
</TABLE>
9
<PAGE>
(c) Warrants and Special Warrants
The following tables summarize warrants and special warrants outstanding as at
March 31, 2000:
<TABLE>
Warrants
--------
(unaudited)
<CAPTION>
Number of
Shares Subject
to Warrants Value
----------- -----
<S> <C> <C>
Outstanding warrants to purchase shares of common stock at
$1.44 per share, expiring December 10, 2002 663,033 $271,000
Outstanding warrants to purchase shares of common stock at
$1.53 per share, expiring February 28, 2003 1,041,667 281,000
Outstanding warrants to purchase shares of common stock at
$2.50 per share, expiring February 29, 2003 100,000 27,000
------------- ---------
1,804,700 579,000
Cost of Issuance -- (81,554)
------------- ---------
Total 1,804,700 $497,446
============= ========
</TABLE>
<TABLE>
Special Warrants
----------------
(unaudited)
Number of Shares
Subject to
Special Warrants Value
---------------- -----
<S> <C> <C>
Outstanding special warrants to acquire shares of common
stock 1,000,000 $2,473,000
Cost of Issuance -- (375,148)
--------- -----------
Total 1,000,000 $2,097,852
========= ===========
</TABLE>
10
<PAGE>
NOTE 3. LOSS PER SHARE
Basic net loss per share is based on the weighted effect of all shares of common
stock issued and outstanding and is calculated by dividing net loss available to
common stockholders by the weighted average shares outstanding during the
period. Diluted net loss per share has not been presented because the effect of
the assumed exercise or conversion of the Company's convertible preferred stock,
and options and warrants to purchase common stock, is antidilutive due to the
Company's net loss for the indicated period. Diluted net loss per share is
calculated by dividing net loss available to common stockholders by the weighted
average number of shares of common stock used in the basic net loss per share
calculation plus the number of shares of common stock that would be issued
assuming conversion of all potentially dilutive derivative securities
outstanding.
The following table presents the calculation of basic and pro-forma basic net
loss per share of common stock (in thousands, except per share data):
<TABLE>
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
-------------- --------------
(unaudited) (unaudited)
<S> <C> <C>
Historical:
Net loss applicable to common stockholders $ (882) $ (642)
Weighted average shares 12,056(1) 3,704
Basic net loss per share ($0.07) ($0.17)
Pro Forma (2):
Net loss applicable to common stockholders ($882) --
Weighted average shares used to calculate basic earnings 12,056 --
per share(1)
Shares issued subsequent to balance sheet date 200 --
Pro forma weighted average shares(1) 12,256 --
Pro forma net loss per share ($0.07) --
- -------------------
(1) Includes 5,773,605 shares of common stock issuable upon the exchange of
exchangeable shares of SAC.
(2) Pro forma calculation takes into account the issuance of an aggregate of
200,010 shares of common stock on April 18, 2000.
</TABLE>
NOTE 4. OTHER COMPREHENSIVE INCOME
Other Comprehensive Income
--------------------------
(unaudited)
Balance at December 31, 1999 $ 70,405
Foreign currency translation (53,338)
-------------
Balance at March 31, 2000 $ 17,067
============
Balance at December 31, 1998 $ 150,297
Foreign currency translation 11,257
------------
Balance at March 31, 1999 $ 161,554
===========
11
<PAGE>
NOTE 5. SUBSEQUENT EVENTS
On April 18 and 20, 2000, the Company issued an aggregate of 200,010 shares of
common stock for a purchase price per share of $7.50, special warrants to
acquire 1,906,660 shares of common stock for no additional consideration at a
purchase price per share subject to such special warrants of $7.50, and warrants
to purchase 1,053,335 shares of common stock at an exercise price of $12.50 per
share, for gross proceeds of $15,800,025.
In addition, pursuant to various agreements, the Company has the obligation to
issue an additional aggregate of 202,480 shares of common stock, and additional
warrants to purchase an aggregate of 765,000 shares of common stock at a
weighted average exercise price of $26.96 per share.
NOTE 6. RECENT PRONOUNCEMENTS
The Company will be required to adopt the recently issued accounting standard
SFAS 133 "Accounting for Derivative Instruments and Hedging Activities" for
reporting purposes in future years. It requires that all derivatives be
recognized as either assets or liabilities and measured at fair value. The
criteria for determining whether all or a portion of a derivative instrument may
be designated as a hedge has changed. Derivatives that are fair market value
hedges, together with the financial instrument being hedged, will be marked to
market with adjustments reflected in income. Derivatives, which are cash flow
hedges will be marked to market with adjustments, reflected in comprehensive
income. The Company has not yet determined what effects, if any, the adoption of
SFAS 133 will have on the Company's operating results or financial position.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with our
condensed consolidated financial statements and notes thereto as at and for the
three months ended March 31, 2000 and 1999 contained elsewhere in this quarterly
report on form 10-QSB. In this report, "we," "us" and "our" refer to the
business that is owned and conducted by SoftQuad Software, Ltd. and its
subsidiaries and that was previously owned and conducted by their predecessors.
This quarterly report on Form 10-QSB contains certain "forward-looking
statements" as defined in the Private Securities Litigation Reform Act of 1995,
including statements regarding, among other things, our business and operating
strategy, operations, economic performance and financial condition. When used in
this report, the words "estimate," "project," "believe," "anticipate," "intend,"
"expect," "plan" and similar expressions identify forward-looking statements.
These forward-looking statements reflect our current views with respect to
future events and are subject to risks and uncertainties that could cause actual
results to differ materially from those contemplated in these forward-looking
statements, including those risks discussed in this report under "Risk Factors."
OVERVIEW
We are a leading developer of XML enabling technologies and commerce
solutions for e-business. XML, which stands for eXtensible Markup Language, is a
language for structured document and data interchange on the World Wide Web
which may have significant advantages over other programming languages, like
HTML and SGML, for use in e-commerce. HTML, which stands for Hyper Test Markup
Language, is used for the display of information on a Web page, but not for the
processing of content or substance. SGML, which stands for Standardized General
Markup Language, was originally developed in the 1980's to encode information
contained in documents. However, traditional SGML authoring tools are
specialized and require an author who is experienced not only in SGML, but also
in particular documents being used. SGML was not designed for use on the Web.
XML was developed specifically to create, share and process information on
the Web, with SGML as its foundation. XML is rapidly becoming the standard
format for information exchange over the Web because XML alleviates the problems
associated with data exchange from industry to industry. XML is expected to
become the software language underlying the anticipated growth in
Business-to-Business ("B2B") e-commerce.
Our XMetaL product allows authors throughout an organization to create and
adapt content that automatically flows into e-commerce and e-publishing
applications without dealing with the complexities of the XML language. XMetaL's
software interface has a familiar word-processor-like outlook which covers up
the complexities of XML to the author, and thereby drastically reduces training
and implementation costs. XMetaL is a content creation tool which allows
technical publications, document repositories, knowledge management systems,
on-line publishing, and numerous other applications to exploit XML for increased
efficiency.
Our MarketAgility product is an XML-based content solution that gives
businesses more power and control over the creation, management, and real-time
delivery of product information to e-marketplaces and e-procurement systems.
MarketAgility provides suppliers with an efficient and cost effective way to
move product information from their enterprises to multiple electronic
distribution channels. We plan to release MarketAgility in September 2000.
While we currently are focusing our efforts towards our XML products, we
have derived and will continue to derive significant portions of our revenues
from HoTMetaL, our HTML based Web page creation and management tool. In recent
quarters, total HoTMetaL revenues world-wide have declined and HoTMetaL has lost
market share to competitors. We expect revenues from HoTMetaL to continue to
decline and revenues from our XML products to grow.
We generate our revenues from product sales, license fees and maintenance
and support contracts. We have not yet realized any revenue from product
solution services. Product solution services include integration of software,
application development, training and software installation. We expect to begin
to generate revenue from product
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solution services as the mix of product sales changes from HoTMetal to XMetaL
and MarketAgility. We recognize revenues from product and license agreements on
product delivery if an agreement exists with a fixed or determinable fee and
collection of the related receivable is reasonably assured. Service revenue
consists of fees for product solution services and from maintenance and support
agreements. Revenue from maintenance and support agreements is initially
recorded as deferred revenue and recognized as revenue over the term of the
agreement. Our cost of revenues includes costs to manufacture, package, and
distribute our products and related documentation, royalty payments to third
parties, payments to vendors, and inventory write-downs, as well as personnel
and other expenses, if any, related to providing product solution services and
customer support services
Since our inception, we have incurred substantial costs to develop our
technology and products, to recruit and train personnel for our development,
sales and marketing and product solution services departments, and to establish
an administrative organization. As a result, we have incurred significant losses
since inception. As of March 31, 2000, we had an accumulated deficit of
approximately $4.7 million.
We believe that our future success depends on our focus on XML technology
and our XMetaL and MarketAgility products. We plan to increase our operating
expenses and expect to continue to incur substantial operating losses for an
indefinite period of time.
OUR HISTORY AND CORPORATE STRUCTURE
ESTABLISHMENT OF SOFTQUAD CANADA
Prior to October 1, 1998, our business was operated as the Web division of
SoftQuad Inc., which was a subsidiary of SoftQuad International Inc. (now
renamed NewKidCo International Inc.). In August 1998, certain members of the Web
division's management organized a management buyout of substantially all of the
assets and liabilities of SoftQuad Inc. and 100% of the shares of SoftQuad UK
Limited, which was SoftQuad International Inc.'s European subsidiary. To
facilitate the buyout, on August 7, 1998, they established SoftQuad Software
Inc., an Ontario (Canada) corporation ("SoftQuad Canada"). SoftQuad Canada
completed the buyout on October 1, 1998. The assets acquired in the buyout
included, among other things, the rights to the name "SoftQuad."
ESTABLISHMENT OF FINANCECO
In December 1999, we entered into an agreement with Thomson Kernaghan & Co.
Limited, a Toronto-based investment dealer ("TK"), for TK to act as agent in
facilitating private placement financings of SoftQuad Canada. Pursuant to this
agreement, money raised in financings was first funded to a newly created
Delaware corporation ("FinanceCo") which, as of January 17, 2000, entered into
agreements with the securityholders of SoftQuad Canada to acquire all of the
outstanding securities of SoftQuad Canada through its subsidiary, SoftQuad
Acquisition Corp., an Ontario (Canada) corporation ("SAC"). Pending completion
of that acquisition, FinanceCo loaned the proceeds of completed financings to
SoftQuad Canada for operating purposes.
MERGER WITH THE AMERICAN SPORTS MACHINE, INC.
On March 2, 2000, FinanceCo merged with The American Sports Machine, Inc.,
a Florida corporation ("ASM"). ASM was organized on June 2, 1995 but, as of the
time of the merger, had not engaged in an active trade or business. At the time
of the merger, ASM's common stock was registered under Section 12(g) of the
Securities Exchange Act of 1934, as amended, and its common stock was quoted on
the OTC Bulletin Board under the symbol "AMRR." Upon the merger, the separate
corporate existence of FinanceCo terminated and ASM was the surviving entity.
Under the terms of the merger agreement, ASM agreed to seek stockholder approval
to rename the merged company SoftQuad Software, Ltd. and to redomicile it to
Delaware.
COMPLETION OF THE CANADIAN ACQUISITION
On April 5, 2000, ASM formally completed its acquisition of all of the
outstanding securities of SoftQuad Canada. In the acquisition, (i) two holders
of common shares of SoftQuad Canada exchanged (on a one-for-one basis) their
common shares of SoftQuad Canada for shares of ASM's common stock, (ii) the
remaining holders of common shares of SoftQuad Canada exchanged (on a
one-for-one basis) their common shares of SoftQuad Canada
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for exchangeable shares of SAC, each of which was exchangeable for one share of
ASM's common stock and (iii) each holder of an option to acquire common shares
of SoftQuad Canada exchanged such option for an option issued by ASM with
equivalent terms.
REDOMICILING TO DELAWARE
To facilitate its redomiciling to Delaware and the change of its name, on
March 7, 2000, ASM formed a new Delaware corporation named SoftQuad Software,
Ltd. On April 10, 2000, ASM merged with this new subsidiary, upon which the
separate corporate existence of ASM terminated and SoftQuad Software, Ltd. was
the surviving entity.
OUR CURRENT CORPORATE STRUCTURE
Our operations are conducted through SoftQuad Canada and its wholly owned
subsidiary, SoftQuad UK Limited. All of the common shares of SoftQuad Canada are
owned by SAC, and all of the common shares of SAC are owned by SoftQuad
Software, Ltd.
RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
REVENUE
Total revenue increased from $521 thousand in the three months ended March
31, 1999 to $1.1 million in the three months ended March 31, 2000, representing
a 114% change in revenue. This increase is attributable to an increase in
HoTMetaL's product license revenue (which had been disrupted in the three months
ended March 31, 1999 because of a change in a major distribution relationship)
and license and support and maintenance fees associated with XMetaL, which did
not contribute revenue in the three month period ended March 31, 1999.
COST OF REVENUES
Cost of revenues increased from $139 thousand for the three months ended
March 31, 1999 to $251 thousand for the three months ended March 31, 2000,
reflecting the increase in revenues from HoTMetaL and XMetaL. Improved
production unit costs resulted in an improvement of cost of licenses as a
percentage of revenue from 26.7% for the three months ended March 31, 1999 to
14.4% for the three months ended March 31, 2000. The Company continues to invest
in product solution services and customer support services by hiring and
training new personnel in anticipation of service revenue associated with XMetaL
and MarketAgility.
SALES AND MARKETING
Sales and marketing expenses increased from $439 thousand in the three
months ended March 31, 1999 to $866 thousand for the three months ended March
31, 2000. The increase is primarily attributable to an increase in sales and
marketing personnel and the increased marketing program expenditures associated
with XMetaL.
RESEARCH AND DEVELOPMENT
Research and development expenses increased from $266 thousand in the three
months ended March 31, 1999 to $392 thousand for the three months ended March
31, 2000. The increase is primarily attributable to an increase in personnel
related costs largely related to the development of our XMetaL product.
We believe that continued investment in research and development is
critical to attaining our strategic objectives and, as a result, we expect that
research and development expenses will increase in absolute dollars in future
periods. To date, all software development costs have been expensed in the
period incurred.
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GENERAL AND ADMINISTRATIVE
General and administrative expenses increased from $319 thousand in the
three months ended March 31, 1999 to $489 thousand for the three months ended
March 31, 2000. The increase is primarily attributable to increased personnel
related costs, costs of legal and accounting services, and facility expenses
necessary to support our expanding operations.
NET LOSS
Our net loss increased from $642 thousand for the three months ended March
31, 1999 to $882 thousand for the three months ended March 31, 2000, reflecting
that our higher gross profit earned in the three months ended March 31, 2000 was
offset by higher operating expenses for the same period.
RESULTS OF OPERATIONS FOR SIX MONTHS ENDED MARCH 31, 2000 AND 1999
REVENUE
Total revenue increased from $1.7 million in the six months ended March 31,
1999 to $1.975 million in the six months ended March 31, 2000, representing a
16% change in revenue. This increase is primarily attributable to higher license
and support and maintenance fees associated with XMetaL, which did not
contribute revenue in the six months ended March 31, 1999. In October 1998, a
new version of HoTMetaL (version 6.0) was released which contributed to
increased early revenue during the six months ended March 31, 1999 which then
was offset by a decline in revenue caused by a change in a major distribution
relationship. Revenue from HoTMetaL continues to decline.
COST OF REVENUES
Cost of revenues increased from $339 thousand for the six months ended
March 31, 1999 to $439 thousand for the six months ended March 31, 2000. Cost of
licenses decreased as a result of higher royalties and production costs
associated with the new version of HoTMetaL introduced in the six months ended
March 31, 1999. The Company continues to invest in product solution services and
customer support services by hiring and training new personnel in anticipation
of services revenue associated with XMetaL and MarketAgility.
SALES AND MARKETING
Sales and marketing expenses increased from $885 thousand in the six months
ended March 31, 1999 to $1.5 million for the six months ended March 31, 2000.
The increase is primarily attributable to an increase in sales and marketing
personnel and the increased marketing program expenditures associated with
XMetaL.
RESEARCH AND DEVELOPMENT
Research and development expenses increased from $492 thousand in the six
months ended March 31, 1999 to $665 thousand for the six months ended March 31,
2000. The increase is primarily attributable to an increase in personnel related
costs largely related to the development of our XMetaL product.
We expect that research and development expenses will increase in absolute
dollars in future periods based on our belief that continued investment in
research and development is critical to attaining our strategic objectives. To
date, all software development costs have been expensed in the period incurred.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased from $616 thousand in the six
months ended March 31, 1999 to $830 thousand for the six months ended March 31,
2000. The increase is primarily attributable to increased personnel related
costs, legal and accounting services, and facility expenses necessary to support
our expanding operations.
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NET LOSS
Our net loss increased from $628 thousand for the six months ended March
31, 1999 to $1.5 million for the six months ended March 31, 2000, reflecting
that our higher gross profit earned in the three months ended March 31, 2000 was
offset by higher operating expenses for the same period.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have funded our operations and met our capital
expenditure requirements through the private sale of equity securities and
borrowings. From December 1999 through February 2000, we raised approximately
$9.1 million in net proceeds from equity financings in order to expand our sales
and marketing and product development efforts.
Net cash used for operating activities was $786 thousand and $673 thousand
for the six months ended March 31, 2000 and 1999, respectively. The increase in
cash used for operating activities was primarily due to net losses of $1.5
million, offset by changes in operating working capital.
Net cash used in investing activities was $112 thousand and $161 thousand
for the six months ended March 31, 2000 and 1999, respectively. Cash used in
investing activities for the six months ended March 31, 2000 related to the
purchase of capital assets, mainly computer hardware and software. At March 31,
2000, we did not have any material commitments for capital expenditures.
Net cash provided by financing activities amounted to $8.3 million and $839
thousand for the six months ended March 31, 2000 and 1999, respectively. During
the six months ended March 31, 2000, net proceeds of $9.1 million was provided
by the sale of equity to certain venture capital investors. We repaid a note
payable of $798 thousand.
At March 31, 2000, we had $7.9 million in cash and cash equivalents and
$7.3 million in working capital. This compared to $727 thousand in cash and cash
equivalents and a negative $79 thousand in working capital as of September 30,
1999.
We do not have a line of credit for general operating expenses. We do
have equipment lines of credit from vendors for certain office equipment. At
March 31, 2000, we had no notes or loans payable outstanding.
We believe that we have sufficient cash, cash equivalents and short-term
investments to meet our working capital requirements for at least the next 20
months. Thereafter, additional funds may be required to support our working
capital requirements or for other purposes. We may seek to raise such additional
funds through public or private equity or debt financings or from other sources.
There can be no assurance that additional financing will be available at all or,
if available, on terms favorable to us or that any additional financing will not
be dilutive.
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YEAR 2000 COMPLIANCE
The "Year 2000 Issue" refers generally to the problems that some software
may have in determining the correct century for the year. For example, software
with date-sensitive functions that is not Year 2000 compliant may not be able to
distinguish whether "00" means 1900 or 2000, which may result in failures or the
creation of erroneous results.
We have conducted a Year 2000 readiness review for the current versions of
our products. The review included assessment and implementation, remediation,
upgrading and replacement of certain product versions and validation testing and
contingency planning.
We completed all phases of our plan with respect to the current versions of
all of our products. As a result, the current versions of each of our products
are "Year 2000 Compliant" as defined below, when configured and used in
accordance with the related documentation and provided that the underlying
operating system of the host machine and any other software used with or in the
host machine is also Year 2000 Compliant.
"Year 2000 Compliant" is defined as the ability to:
o correctly handle date information needed for the December 31, 1999 to
January 1, 2000 date change;
o function according to the product documentation provided for this date
change without changes in operations resulting from the advent of a
new century, assuming correct configuration;
o where appropriate, respond to a two-digit input in a way that resolves
the ambiguity as to century in a disclosed, defined and pre-determined
manner;
o if the date elements in interfaces and data storage specify if the
century, store and provide output of date information in ways that are
unambiguous as to century; and
o recognize Year 2000 as a leap year.
We tested software obtained from third parties (licensed software,
shareware and freeware) that is incorporated into our products and sought
assurances from our vendors that licensed software is Year 2000 Compliant.
Despite testing by us and by current and potential clients and assurances from
developers of products incorporated into our products, our products may contain
undetected errors or defects associated with Year 2000 date functions. Known or
unknown errors or defects in our products could result in delay or loss of
revenue, diversion of development resources, damage to our reputation or
increased service and warranty costs, any of which could materially adversely
affect our business, operating results or financial condition. Some commentators
have predicted significant litigation regarding Year 2000 compliant issues.
Because of the unprecedented nature of such litigation, it is uncertain whether
or to what extent we may be affected by it.
Our internal systems include both our information technology, or IT, and
non-IT systems. An assessment of our material internal IT systems has been done,
including both our own software products and third-party software and hardware
technology.
As of May 18, 2000, we had not experienced any material problems or
difficulties with our products or our internal information technology resulting
from the Year 2000 issue. However, we may in the future experience material
unanticipated problems and costs marked by undetected errors or defects in the
technology used in our internal IT and non-IT systems. As a result, our
business, results of operations or financial condition could be materially
adversely affected.
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As of May 18, 2000, we were not aware of any customers experiencing any
material Year 2000 Compliant problems. However, our current and potential
clients may incur Year 2000 Compliant problems in the future. This may cause
them to experience material costs to remedy problems or they may face litigation
costs. In either case, Year 2000 issues could reduce or eliminate budgets that
current or potential customers could have for purchases of our products and
services. As a result, our business, results of operations or financial
condition could be materially adversely affected.
We funded our Year 2000 plan from available cash and have not separately
accounted for these costs. To date, these costs have not been material.
Additional costs, related to the Year 2000 plan included costs for
administrative personnel to manage the project, technical support for our
products, product engineering and customer satisfaction.
RISK FACTORS
You should carefully consider the following risks before investing in
shares of our common stock. The risks described below are not the only ones that
we face. Additional risks that we do not yet know of or that we currently think
are immaterial may also impair our business operations. Our business, operating
results or financial condition could be materially adversely affected by any of
the following risks. The trading price of our common stock could decline due to
any of these risks, and you may lose all or part of your investment. You should
also refer to the other information set forth in this report, including our
condensed consolidated financial statements and the related notes.
RISKS RELATED TO OUR BUSINESS
THERE IS NO ASSURANCE THAT THE MARKET WILL ACCEPT OUR XMETAL AND
MARKETAGILITY PRODUCTS
We are focusing our business plan on our XMetaL and MarketAgility Products
and are therefore relying very heavily on the market success of these products
to propel our growth in the near and medium term. Although we have been able to
secure initial sales of the XMetaL product, there is no assurance that existing
customers will deploy XMetaL in larger numbers (which will require a significant
commitment and investment of resources by our existing customers and partners)
or that XMetaL will be adopted by new customers or secure widespread market
acceptance. Similarly, there is no assurance that MarketAgility, which is
planned to be released in September 2000, will be adopted by new customers or
secure widespread market acceptance. The failure of XMetaL and MarketAgility to
achieve meaningful market acceptance could have a very material adverse effect
on our business, operating results and financial condition.
THERE IS NO ASSURANCE THAT THE MARKET WILL ADOPT AND ACCEPT XML
We are relying on the continued and speedy adoption of XML technology as a
major technology for content interchange and processing on the World Wide Web.
Since our XMetaL and MarketAgility products are XML tools, the success of these
products is dependent on growth in market acceptance of XML and that success
could be materially adversely affected if XML fails to be adopted broadly for
use in applications where our products are also applicable.
THE CHANGE IN OUR DIRECTION AND OPERATIONAL FOCUS FROM HTML PRODUCTS TO XML
PRODUCTS MAY BE DIFFICULT TO MANAGE
While we expect our revenue growth to be driven largely by XMetaL and
MarketAgility, a significant proportion of our revenues continue to be derived
from our HoTMetaL product, which continues to be a very versatile HTML- based
Web page creation and management tool. Target markets, sales, marketing and
distribution models for HoTMetaL are quite different from the XMetaL and
MarketAgility products and we will require different skills and business
practices to market and support the XMetaL and MarketAgility products.
Consequently, the transition from the HTML product focus to the XML product
focus may be difficult to manage quickly, and our business, operating results
and financial condition could be materially adversely affected.
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RELIANCE ON DISTRIBUTION CHANNELS AND TECHNOLOGY PARTNERS MAY AFFECT SALES
BECAUSE WE LACK CONTROL OVER THESE CHANNELS
We rely on resellers, distribution and technology partners to support our
own selling efforts. If these resellers, distribution and technology partners
fail to develop or fail to continue to adequately support our products, this
would have a material adverse effect on our business, operating results and
financial condition.
We also rely on technology and reseller partners having the expertise
required to work with XML. Since XML is a relatively new technology, expertise
is currently relatively scarce. If partners do not acquire the expertise
required to work with XML in applications where our products are applicable,
then this could have a material adverse effect on our business, operating
results and financial condition.
IF WE ARE UNABLE TO MEET THE RAPID CHANGES IN XML CONTENT CREATION
TECHNOLOGY OR A SUPERIOR OR MORE WIDELY ACCEPTED TECHNOLOGY IS DEVELOPED,
OUR EXISTING PRODUCTS COULD BECOME OBSOLETE
The market for our products is marked by rapid technological change,
frequent new product introductions and Internet-related technology enhancements,
uncertain product life cycles, dynamic changes in client demands and constantly
evolving industry standards. We cannot be certain that we will successfully
develop and market new products or new product enhancements that respond to
technological change, evolving industry standards or client requirements. New
competing products based on new technologies or new industry standards can
render existing products obsolete and unmarketable. To succeed, we will need to
enhance our current products and develop new products on a timely basis to keep
pace with technological developments and to satisfy the increasingly
sophisticated requirements of our clients. Internet commerce technology,
particularly XML content creation technology, is complex and new products and
product enhancements can require long development and testing periods. Any
delays in developing and releasing enhanced or new products could have a
material adverse effect on our business, operating results and financial
condition.
IT MAY BE DIFFICULT TO ACQUIRE AND RETAIN CLIENTS NOW AND IN THE FUTURE
BECAUSE WE FACE INTENSE COMPETITION FOR INTERNET CONTENT CREATION AND
E-MARKET INFRASTRUCTURE SOFTWARE
The Internet content creation and e-market infrastructure software market
is intensely competitive. Our clients' requirements and the technology available
to satisfy those requirements continually change. We expect competition to
persist and intensify in the future.
Our principal competitors offering alternatives to XMetaL include Adobe,
Corel, Arbortext, Excosoft and Stilo, among others. The market for supply-side
e-market infrastructure software, which MarketAgility targets, is currently
fragmented, but we anticipate strong competition to develop from new entrants as
well as existing software companies. Most of these competitors have longer
operating histories and significantly greater financial, technical, marketing
and other resources than we do. Many of these companies can also leverage
extensive customer bases and adopt aggressive pricing policies to gain market
share. Potential competitors (which may develop products with features similar
to XMetaL and MarketAgility, such as Adobe, Macromedia and Microsoft may bundle
or price their products in a manner that may discourage users from purchasing
our products. In addition, it is possible that new competitors or alliances
among competitors may emerge and rapidly acquire significant market share. There
are no significant barriers to entering the markets which XMetaL and
MarketAgility serve.
Competitive pressures may make it difficult for us to acquire and retain
clients and may require us to reduce the price of our software. We cannot be
certain that we will be able to compete successfully with existing or new
competitors. If we fail to compete successfully against current or future
competitors, our business, operating results and financial condition would be
materially adversely affected.
WE EXPECT TO CONTINUE TO INCUR LOSSES
We have not achieved profitability and we expect to incur net losses for
the foreseeable future. To date, we have funded our operations primarily from
the sale of equity securities and borrowings and have not generated significant
cash from operations. We plan to increase our operating expenses to expand our
sales and marketing operations,
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develop new distribution channels, fund greater levels of research and
development, broaden professional services and support, and improve operational
and financial systems. We also expect to continue to incur significant product
development expenses. As a result, we will need to generate significant revenues
to achieve and maintain profitability. If our revenues do not increase along
with these expenses, our net losses in a given quarter would be even greater
than expected. We cannot be certain that we can sustain revenue growth rates or
that we will achieve sufficient revenues for profitability. If we do achieve
profitability, we cannot be certain that we can sustain or increase
profitability in the future.
OUR LIMITED OPERATING HISTORY MAKES FINANCIAL FORECASTING DIFFICULT
Since the launch of XMetaL in May of 1999, we have been transitioning our
operations to support XMetaL and MarketAgility (upon its launch) in the market
and have a limited operating history in that regard. As a result of this limited
operating history, we cannot forecast operating expenses based on our historical
results. Accordingly, we base our expenses in part on future revenue
projections. Most of our expenses are fixed in the short term and we may not be
able to quickly reduce spending if our revenues are lower than we had projected.
The difficulty in forecasting our quarterly revenue accurately is compounded
because our software products have a long sales cycle that makes it difficult to
predict the quarter in which sales will occur. We would expect our business,
operating results and financial condition to be materially adversely affected if
our revenues do not meet our projections and that net losses in any quarter
would be even greater than expected.
WE EXPECT OUR QUARTERLY REVENUES AND OPERATING RESULTS TO FLUCTUATE
Our revenues and operating results are likely to vary significantly from
quarter to quarter. A number of factors are likely to cause these variations,
including:
o Varying demand for our products and services;
o The timing of customer orders, support/service requirements and
product implementations;
o Unexpected delays in introducing new products and services;
o Increased expenses, whether related to sales and marketing, product
development or administration;
o Changes in the rapidly evolving market for XML content creation
technology and e-market infrastructure software;
o The mix of product license and services revenue, as well as the mix of
products licensed;
o The mix of services provided and whether these services are provided
by staff or third party contractors; and
o The mix of domestic and international sales.
Accordingly, we believe that quarter-to-quarter comparisons of our
operating results are, and will continue for the foreseeable future to be, not
necessarily meaningful. Investors should not rely on the results of one quarter
as an indication of our future performance.
We believe that our quarterly operating results may experience seasonal
fluctuations. For instance, quarterly results may fluctuate based on the
introduction of new versions of our products, our clients' calendar year
budgeting cycles and slow summer purchasing patterns in Europe.
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IN ORDER TO INCREASE MARKET AWARENESS OF OUR PRODUCTS AND GENERATE
INCREASED REVENUE WE NEED TO EXPAND OUR SALES AND DISTRIBUTION CAPABILITIES
We must expand our direct and indirect sales operations in order to
increase market awareness of our products and generate increased revenue. We
cannot be certain that we will be successful in this effort. We have recently
expanded our direct sales force and plan to hire additional sales personnel. Our
products and services require a sophisticated sales effort targeted at the
senior management of our prospective clients. New hires will require training
and take time to achieve full productivity. We cannot be certain that our recent
hires will become as productive as necessary or that we will be able to hire
enough qualified individuals in the future. We also plan to expand our
relationships with value-added resellers, systems integrators and other
third-party resellers to build an indirect sales channel. In addition, we need
to manage potential conflicts between our direct sales force and third party
reselling efforts. Finally, XML expertise is often lacking in the value-added
resellers, systems integrators and third-party resellers and individuals with
XML expertise are in increasingly high demand. We cannot be certain that
partners will be successful in acquiring XML expertise, either through training
or by hiring new personnel, to meet demand.
WE HAVE RELIED AND EXPECT TO CONTINUE TO RELY ON HOTMETAL REVENUES
We have derived and will continue to derive significant portions of our
revenues from HoTMetaL, our HTML-based Web page creation and management tool. In
recent quarters, total HoTMetaL revenues world-wide have declined and HoTMetaL
has lost market share to competitors. Although management expects both absolute
revenues of HoTMetaL and their proportionate share of total revenues to decline
over the next several quarters, if HoTMetaL revenues were to decline faster than
anticipated, it could have a material adverse effect on our business, operating
results and financial condition.
WE RELY PRIMARILY ON SALES OF OUR XMETAL AND MARKETAGILITY PRODUCT LINES
FOR REVENUE GROWTH
We are relying on our XMetaL and MarketAgility products to generate revenue
growth. We cannot be certain that we will be successful in marketing XMetaL and
MarketAgility or that we will successfully develop and market new products and
services or that even if we are successful, that such success will compensate
for declining sales of our HoTMetaL product. If we do not continue to increase
revenue related to our XMetaL product or generate revenue from MarketAgility and
other new products and services, our business, operating results and financial
condition would be materially adversely affected.
IF OUR INTERNATIONAL BUSINESS CONTINUES TO GROW IN ABSOLUTE DOLLARS AND AS
A PERCENTAGE OF REVENUE, OUR BUSINESS WOULD BECOME INCREASINGLY SUSCEPTIBLE
TO RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
International operations are generally subject to a number of risks,
including:
o Expenses associated with customizing products for foreign countries;
o Protectionist laws and business practices that favor local
competition;
o Dependence on local vendors;
o Multiple, conflicting and changing governmental laws and regulations;
o Difficulties in collecting accounts receivable; and
o Foreign currency exchange rate fluctuations.
We expect international revenue to continue to account for a significant
percentage of total revenue in the future and we believe that we must continue
to expand our international sales activities in order to be successful. Our
international sales growth will be limited if we are unable to establish
additional foreign operations, expand international sales channel management and
support organizations, hire additional personnel, customize products for
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local markets, develop relationships with international service providers and
establish relationships with additional distributors and third party
integrators. In that case, our business, operating results and financial
condition could be materially adversely affected. Even if we are able to
successfully expand international operations, we cannot be certain that we will
be able to maintain or increase international market demand for our products.
To date, a majority of our international revenues and costs have been
denominated in foreign currencies. We believe that an increasing portion of our
international revenues and costs will be denominated in foreign currencies in
the future. To date, we have not engaged in any foreign exchange hedging
transactions and we are therefore subject to foreign currency risk. We intend to
consider entering into foreign exchange hedging transactions in the future, if
appropriate.
WE MAY BE UNABLE TO ADEQUATELY DEVELOP A PROFITABLE PROFESSIONAL SERVICE
ORGANIZATION WHICH COULD AFFECT BOTH OUR RESULTS AND OUR ABILITY TO ASSIST
OUR CLIENTS WITH THE IMPLEMENTATION OF OUR PRODUCTS
We cannot be certain that we can attract or retain a sufficient number of
the highly qualified services personnel that our business needs. Clients that
license our XML software may engage our professional services organization to
assist with support, training, consulting and implementation. Growth in our
product sales therefore depends on our ability to provide our clients with these
services and to educate third-party resellers on how to use our products. As a
result, we plan to increase the number of service personnel to meet these needs.
We expect our services revenue to increase in absolute dollars as we continue to
provide consulting and training services that complement our products and as our
installed base of clients grows. We cannot be certain that our services business
will ever achieve profitability. We generally bill our clients for our services
on a "time and materials" basis. However, from time to time we enter into
fixed-price contracts for services. We cannot be certain that our fees from
these contracts will exceed the costs of providing the services. In addition,
competition for qualified services personnel is intense. We are in a new market
and there is a limited number of people who have acquired the skills needed to
provide the services that our clients demand.
IN ORDER TO PROPERLY MANAGE GROWTH, WE MAY NEED TO IMPLEMENT AND IMPROVE
OUR OPERATIONAL SYSTEMS ON A TIMELY BASIS
We have expanded our operations rapidly in the recent past and we intend to
continue to expand in the foreseeable future to pursue existing and potential
market opportunities. This rapid growth places a significant demand on
management and operational resources. In order to manage growth effectively and
to execute our business plan, we must implement and improve our operational
systems, procedures and controls on a timely basis. If we fail to implement and
improve these systems, our business, operating results and financial condition
will be materially adversely affected.
WE MAY BE ADVERSELY AFFECTED IF WE LOSE OUR EXECUTIVE OFFICERS AND CERTAIN
KEY PERSONNEL, OR ARE UNABLE TO ATTRACT NEW KEY PERSONNEL OR ARE UNABLE TO
ATTRACT AND RETAIN HIGHLY SKILLED PERSONNEL GENERALLY
Our success depends largely on the skills, experience and performance of
some key members of our management, including Roberto Drassinower, our President
and Chief Executive Officer, and Peter Sharpe, our Chief Scientist. If we lose
one or more of these key employees, our business, operating results and
financial condition could be materially adversely affected. Also, our future
success will depend largely on our ability to continue attracting and retaining
highly skilled personnel. Like other software companies, we face intense
competition for qualified personnel, particularly in the areas of engineering
and technology as well as in sales and marketing. Many of our competitors for
the services of qualified personnel have greater resources than us. We cannot be
certain that we will be successful in attracting, assimilating or retaining
qualified personnel in the future. In addition, the growth in and redirection of
our business to XML products places a significant demand on our management and
operational resources. We expect that future expansion will continue to
challenge our ability to hire, train, motivate and manage our employees.
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WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS
We have not achieved profitability and we expect to incur net losses for
the foreseeable future. Therefore, we may need to raise additional funds in the
future and we cannot be certain that we would be able to obtain additional
financing on favorable terms, if at all. Further, if we issue equity securities,
stockholders may experience additional dilution or the new equity securities may
have rights, preferences or privileges senior to those of existing holders of
common stock. If we cannot raise funds, as, if and when needed, on acceptable
terms, we may not be able to develop or enhance our products, take advantage of
future opportunities or respond to competitive pressures or unanticipated
requirements, which could have a material adverse effect on our business,
operating results and financial condition.
WE DEVELOP COMPLEX SOFTWARE PRODUCTS SUSCEPTIBLE TO SOFTWARE ERRORS OR
DEFECTS THAT COULD RESULT IN LOST REVENUES, OR DELAYED OR LIMITED MARKET
ACCEPTANCE
Complex software products such as ours often contain errors or defects,
particularly when first introduced or when new versions or enhancements are
released. Despite internal testing and testing by current and potential
customers, our current and future products may contain serious defects. Serious
defects or errors could result in lost revenues, a delay in market acceptance,
and/or additional costs, which would have a material adverse effect on our
business, operating results and financial condition. In addition, though in our
license and shrink wrap agreements we seek to limit liability for certain
liabilities associated with product defects, such as consequential damages or
economic loss, there can be no assurance as to the enforceability of such
limitations.
OUR PRODUCT SHIPMENTS COULD BE DELAYED IF THIRD PARTY SOFTWARE INCORPORATED
IN OUR PRODUCTS IS NO LONGER AVAILABLE
We integrate third-party software as a component of our software. The
third-party software may not continue to be available to us on commercially
reasonable terms. If we cannot maintain licenses to key third-party software,
such as Image Gear from Accusoft Corporation, shipments of our products could be
delayed until equivalent software could be developed or licensed and integrated
into our products, which could materially adversely affect our business,
operating results and financial condition.
OUR BUSINESS IS BASED ON OUR INTELLECTUAL PROPERTY AND WE COULD INCUR
SUBSTANTIAL COSTS DEFENDING OUR INTELLECTUAL PROPERTY FROM INFRINGEMENT OR
A CLAIM OF INFRINGEMENT
In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. We could incur
substantial costs to prosecute or defend any such litigation. Although we are
not currently involved in any intellectual property litigation, we may be a
party to litigation in the future to protect our intellectual property or as a
result of an alleged infringement of other's intellectual property, forcing us
to do one or more of the following:
o Cease selling, incorporating or using products or services that
incorporate the challenged intellectual property;
o Obtain from the holder of the infringed intellectual property right a
license to sell or use the relevant technology, which license may not
be available on reasonable terms; and
o Redesign those products or services that incorporate such technology.
We rely on a combination of patent, trademark, trade secret and copyright
law and contractual restrictions to protect our technology. These legal
protections provide only limited protection. If we litigated to enforce our
rights, it would be expensive, divert management resources and may not be
adequate to protect our business.
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ANTI-TAKEOVER PROVISIONS
Certain provisions of our certificate of incorporation and bylaws may
discourage, delay or prevent a merger or acquisition that stockholders may
consider favorable. These provisions include:
o Authorizing the issuance of "blank check" preferred stock;
o Prohibiting cumulative voting in the election of directors;
o Limiting the persons who may call special meetings of stockholders;
and
o Establishing advance notice requirements for election to the board of
directors or for proposing matters that can be acted on by
stockholders at special meetings of stockholders.
Certain provisions of Delaware law may also discourage, delay or prevent
someone from acquiring or merging with us.
CHANGES IN ACCOUNTING STANDARDS COULD ADVERSELY AFFECT OUR FINANCIAL
RESULTS
Accounting standards regarding software companies, including us, are in a
dynamic state of evolution, and the development of new standards may affect our
financial results and operations. We are presently in material compliance with
all relevant accounting standards.
CURRENCY EXPOSURE
Although our financial results are currently reported in U.S. dollars, a
significant portion of our sales are denominated in U.K. pounds sterling, the
Euro and other currencies. Significant long-term fluctuations in relative
currency values may adversely affect our consolidated results of operations. In
particular, our consolidated results of operations may be adversely affected by
a significant strengthening of the U.S. dollar against U.K. pounds sterling, the
Euro or other currencies in which we generate revenues.
MATERIAL PROBLEMS AND COSTS ASSOCIATED WITH YEAR 2000 COMPLIANCE COULD
ADVERSELY AFFECT OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
The "Year 2000" issue is the result of computer programs using two digits
rather than four to define the applicable year. Because of this programming
convention, software products, IT and non-IT systems may recognize a date using
"00" as the year 1900 rather than the year 2000. Use of non-Year 2000 compliant
programs could result in system failures, miscalculations or errors causing
disruptions of operations or other business problems, including, among others, a
temporary inability to process transactions and invoices or engage in similar
normal business activities.
Although our products and our internal IT and non-IT systems did not, as of
May 18, 2000, seem to have any Year 2000 issues, we may experience material
problems and costs with Year 2000 compliance that could adversely affect our
business, results of operations and financial condition. In addition, while our
customers have not, as of May 18, 2000, informed us that they have experienced
any material Year 2000 compliance problems, they, as well as potential clients,
may face Year 2000 compliance problems in the future. This may cause them to
incur material costs to remedy problems or even face litigation costs. In either
case, Year 2000 issues could reduce or eliminate budgets that current or
potential customers would otherwise use to purchase our products and services.
As a result, our business, results of operations or financial condition could be
materially adversely affected.
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RISKS RELATED TO THE INTERNET INDUSTRY
OUR PERFORMANCE WILL DEPEND ON THE GROWTH OF THE INTERNET FOR COMMERCE AND
XML
Our future success depends heavily on the Internet and XML technology being
accepted and widely used for commerce. Any of the following circumstances could
have a materially adverse effect on our business, operating results and
financial condition:
o Internet commerce or the use of XML for Internet commerce do not
continue to grow or grow more slowly than expected.
o Consumers and businesses reject the Internet as a viable commercial
medium for a number of reasons, including potentially inadequate
network infrastructure, slow development of enabling technologies or
insufficient commercial support.
o The Internet infrastructure is not being able to support the demands
placed on it by increased Internet usage and bandwidth requirements.
o Delays in the development or adoption of new standards and protocols
required to handle increased levels of Internet activity, or increased
government regulation cause the Internet to lose its viability as a
commercial medium.
o The use of XML technology on the Web does not grow or grows more
slowly than expected.
o We incur substantial expenses adapting our solutions to changing or
emerging technologies and market conditions, which could occur even if
the required infrastructure, standards, protocols or complementary
products, services or facilities are developed and the adoption of XML
for Internet commerce continues as expected.
OUR PERFORMANCE WILL DEPEND ON THE NEW MARKET FOR XML CONTENT CREATION AND
E-MARKET INFRASTRUCTURE SOFTWARE SOLUTIONS
The market for XML content creation and e-market infrastructure software
solutions is new and rapidly evolving. We expect that we will continue to need
intensive marketing and sales efforts to educate prospective clients about the
uses and benefits of our products and services. Accordingly, we cannot be
certain that a viable market for our products will emerge or be sustainable.
Enterprises that have already invested substantial resources in other methods of
conducting business may be reluctant or slow to adopt a new approach that may
replace, limit or compete with their existing systems. Similarly, individuals
have established patterns of purchasing goods and services. They may be
reluctant to alter those patterns. They may also resist providing the personal
data necessary in connection with our customers' use of our products in
e-commerce and other potential applications. Any of these factors could inhibit
the growth of online business generally and the market's acceptance of our
products and services in particular.
THERE IS SUBSTANTIAL RISK THAT FUTURE REGULATIONS COULD BE ENACTED THAT
EITHER DIRECTLY RESTRICT OUR BUSINESS OR INDIRECTLY IMPACT OUR BUSINESS BY
LIMITING THE GROWTH OF INTERNET COMMERCE
As Internet commerce evolves, we expect that federal, state or foreign
agencies will adopt regulations covering issues such as user privacy, pricing,
content and quality of products and services. If enacted, such laws, rules and
regulations could limit the market for our products and services, which could
materially adversely affect our business, financial condition and operating
results. Although many of these regulations may not apply to our business
directly, we expect that laws regulating the solicitation, collection or
processing of personal/consumer information could indirectly affect our
business. The Telecommunications Act of 1996 prohibits certain types of
information and content from being transmitted over the Internet. The
prohibition's scope and the liability associated with a Telecommunications Act
violation are currently unsettled. In addition, although substantial portions of
the Communications Decency Act were held to be unconstitutional, we cannot be
certain that similar
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legislation will not be enacted and upheld in the future. It is possible that
such legislation could expose companies involved in Internet commerce to
liability, which could limit the growth of Internet commerce generally.
Legislation like the Telecommunications Act and the Communications Decency Act
could dampen the growth in Web usage and decrease its acceptance as a
communications and commercial medium.
RISK RELATED TO THE SECURITIES MARKETS
OUR STOCK PRICE IS HIGHLY VOLATILE
The market price of our common stock is highly volatile and may fluctuate
significantly in response to the following factors, some of which are beyond our
control:
o Variations in quarterly operating results;
o Changes in market valuations of Internet software companies;
o Announcements by us of significant contracts, strategic partnerships,
joint ventures or capital commitments;
o Loss of a major client or failure to complete significant license
transactions;
o Additions or departures of key personnel;
o Sales of our common stock in the future by us and/or by our insiders
and significant shareholders; and
o Fluctuations in stock market price and volume, which are particularly
common among highly volatile securities of Internet and software
companies.
POSSIBILITY OF VOLATILE PRICE SWINGS AND INACCURATE PRICING INFORMATION
COULD CREATE A RISK THAT YOU WILL NOT BE ABLE TO ACCURATELY ASSESS THE
MARKET VALUE OF YOUR COMMON STOCK.
Because our stock is traded over-the-counter and quoted on the OTC Bulletin
Board, a relative lack of liquidity or volume and the participation of only a
few market makers makes it more likely that wide fluctuations in the quoted
price of our common stock could occur. As a result, there is a risk that you
will not be able to obtain accurate price quotes or be able to correctly assess
the market price of your stock. Increases in the volatility could also make it
more difficult to pledge the common stock as collateral, if you sought to do so,
because a lender might also be unable to accurately value the common stock.
SUBSTANTIAL SALES OF OUR COMMON STOCK COULD ADVERSELY AFFECT OUR STOCK
PRICE
Sales of a substantial number of shares of common stock by the selling
stockholders or by others pursuant to Rule 144 or other exemptions that may be
available under the Securities Act of 1933 could drive the market price of the
common stock down by introducing a large number of shares into a market in which
there is a relatively small number of shares publicly traded and the price is
already volatile. In addition, the sale of these shares could impair our ability
to raise capital through the sale of additional equity securities.
Our directors, executive officers and certain other stockholders, including
the holders of exchangeable shares of SAC, have executed escrow agreements that
limit their ability to sell common stock. These stockholders have agreed not to
sell or otherwise dispose of any shares of common stock for certain prescribed
periods without the prior written approval of Thomson Kernaghan & Co. Limited.
When the escrow agreements expire, these shares and the shares underlying the
options will become eligible for sale, in some cases only pursuant to the
volume, manner of sale and notice requirements of Rule 144.
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WE MAY BECOME SUBJECT TO THE SECURITIES AND EXCHANGE COMMISSION'S PENNY
STOCK RULES.
We may become subject to the SEC's penny stock rules. Penny stocks
generally are equity securities with a price of less than $5.00 per share (other
than securities registered on certain national securities exchanges or quoted on
Nasdaq, provided that current price and volume information with respect to
transactions in that security is provided by the exchange or system). Unless
exempt, the rules require delivery, prior to any transaction in a penny stock,
of a disclosure schedule about commissions payable to both the broker-dealer and
the registered representative and current quotations for the securities.
Finally, the rules require that broker-dealers send monthly statements
disclosing recent price information for the penny stock held in the account and
information on the limited market in penny stocks. Because of the burden placed
on broker-dealers to comply with the rules applicable to penny stocks, you may
have difficulty selling our common stock in the open market if the market price
drops below $5.00 per share.
OUR BUSINESS MAY BE ADVERSELY AFFECTED BY CLASS ACTION LITIGATION DUE TO
STOCK PRICE VOLATILITY
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. We may in the future be the target of similar litigation. Securities
litigation could result in substantial costs and divert management's attention
and resources, which could have a material adverse effect on our business,
operating results and financial condition.
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PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On February 28, 2000, VC Advantage Limited Partnership ("VC Advantage")
purchased 1,033,333 shares of Class B convertible preferred stock of FinanceCo,
and Hammock Group Ltd. ("Hammock") purchased 688,889 shares of Class B
convertible preferred stock of FinanceCo at a price of $2.90 per share,
aggregating approximately $5 million. In connection with this transaction, VC
Advantage and Hammock received warrants, exercisable on or before February 28,
2003, to purchase an aggregate of 694,444 shares of common stock of FinanceCo,
with an exercise price of $1.53 per share (Hammock received 277,778 and VC
Advantage received 416,667), and Thomson Kernaghan & Co. Limited ("TK"), for its
services as agent in respect of this purchase, received warrants to purchase
347,222 shares of common stock of FinanceCo on identical terms.
On February 29, 2000, TK, as agent on behalf of Canadian-resident
subscribers, purchased 1,000,000 special warrants at a price of $2.50 per
special warrant. Each special warrant entitled the holder thereof to acquire one
share of common stock of FinanceCo for no additional consideration. TK, for its
services as agent in respect of this purchase, received warrants, exercisable on
or before February 29, 2003, to purchase 100,000 shares of common stock of
FinanceCo, with an exercise price of $2.50 per share.
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On March 2, 2000, the following securities of the Company were issued
or became issuable in exchange for equivalent securities of FinanceCo upon the
merger of ASM and FinanceCo:
<TABLE>
Amount of Shares Terms of Conversion
Issued or Subject to or Exercise of
Title of Securities Derivative Security Derivative Security Purchasers
- ------------------- ------------------- ------------------- ----------
<S> <C> <C> <C>
Common Stock 245,567 -- Aberdeen Avenue LLC
Common Stock 245,567 -- Ashland Resources Inc.
Common Stock 245,568 -- Striker Capital Limited
Class A Preferred Stock 491,135 (1) Aberdeen Avenue LLC
Class A Preferred Stock 491,135 (1) Ashland Resources Inc.
Class A Preferred Stock 491,135 (1) Striker Capital Limited
Class B Preferred Stock 1,133,333 (1) VC Advantage
Class B Preferred Stock 688,889 (1) Hammock
Warrants to purchase Common Stock 442,022 Exercise Price Per Share: $1.44 VC Advantage
Expiration Date: Dec. 16, 2002
Warrants to purchase Common Stock 694,444 Exercise Price Per Share: $1.53 VC Advantage
Expiration Date: Feb. 28, 2003
Warrants to purchase Common Stock 277,778 Exercise Price Per Share: $1.53 Hammock
Expiration Date: Feb. 28, 2003
Warrants to purchase Common Stock 221,011 Exercise Price Per Share: $1.35 TK
Expiration Date: Dec. 16, 2002
Warrants to purchase Common Stock 347,222 Exercise Price Per Share: $1.44 TK
Expiration Date: Feb. 28, 2003
Warrants to purchase Common Stock 100,000 Exercise Price Per Share: $2.50 TK
Expiration Date: Feb. 29, 2003
Special warrants to acquire 1,000,000 Exercisable for no additional TK as agent on behalf of
Common Stock consideration Canadian-resident
Expiration Date: fifth business subscribers
day after qualification under
Canadian securities laws
- ----------------
(1) The terms of the conversion of the Class A and Class B preferred stock, and
their preferences with respect to liquidation over shares of common stock, are
set forth in the Company's Restated Certificate of Incorporation, which is
incorporated by reference herein from the Form 8-K filed on April 10, 2000, and
are summarized in Note 2 to the accompanying condensed consolidated financial
statements.
</TABLE>
All of the foregoing sales by the Company of its unregistered
securities on February 28, 2000 and March 2, 2000 were made by the Company in
reliance upon Section 4(2) of the Securities Act of 1933, as amended (the
"Securities Act"). All of the individuals and entities that purchased the
unregistered securities were accredited investors (as defined in Rule 501
promulgated under the Securities Act).
All of the foregoing sales by the Company of its unregistered special
warrants on February 29, 2000 were made by the company through TK, as agent,
outside of the United States in reliance upon Regulation S under the Securities
Act.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
By written consent dated March 9, 2000, shareholders owning
approximately 70% of the outstanding common stock of the Company as of March 9,
2000, authorized the reincorporation of the Company in Delaware and the change
of the Company's name to SoftQuad Software, Ltd., as more fully described in the
Definitive
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Information Statement on Schedule 14C filed by the Company with the Securities
and Exchange Commission on March 21, 2000, which is incorporated by reference
herein.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
The following documents are referenced or included in this report:
3 (i) Articles of Incorporation of SoftQuad Software, Ltd. (1)
(ii)Bylaws of SoftQuad Software, Ltd.
27 Financial Data Schedule.
- -------------------
(1) Incorporated herein by reference from the Form 8-K filed on April 10, 2000.
(b) Reports on Form 8-K.
Report on Form 8-K filed on March 9, 2000 reporting the merger of ASM
and FinanceCo.
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SIGNATURES
----------
In accordance with the requirements of the Securities Exchange Act of
1934, as amended, the registrant has duly caused this report to be signed in its
behalf by the undersigned thereunto duly authorized.
SOFTQUAD SOFTWARE, LTD.
Date: May 22, 2000 By: /s/ Roberto Drassinower
------------------------
Roberto Drassinower
President and Chief Executive Officer
Date: May 22, 2000 By: /s/ David T. Adams
-------------------
David T. Adams
Chief Financial Officer and Treasurer
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INDEX TO EXHIBITS
-----------------
Exhibit No. Description
- ----------- -----------
3 Bylaws of SoftQuad Software, Ltd.
27 Financial Data Schedule
33
SOFTQUAD SOFTWARE, LTD.
A DELAWARE CORPORATION
BY-LAWS
ARTICLE I
STOCKHOLDERS
SECTION 1.1 ANNUAL MEETING.
An annual meeting of stockholders for the purpose of electing directors
and transacting such other business as may come before it shall be held each
year at such date, time, and place, as may be specified by the Board of
Directors.
SECTION 1.2 SPECIAL MEETINGS.
Special meetings of stockholders, for any purpose or purposes, may be
held at any time upon call of the Chairman of the Board, if any, the President
or a majority of the Board of Directors, at such time and place as may be stated
in the notice. A special meeting of stockholders shall be called by the
President upon the written request, stating time, place, and the purpose or
purposes of the meeting, of stockholders who together own of record ten percent
of the outstanding stock of all classes entitled to vote at such meeting.
SECTION 1.3 NOTICE OF MEETINGS.
Written notice of stockholders meetings, stating the place, date, and
hour thereof, and, in the case of special meetings, the purpose or purposes for
which the meeting is called, shall be given by the Chairman of the Board, if
any, the President, any Vice President, the Secretary, or an Assistant
Secretary, to each stockholder entitled to vote thereat at least ten days but
not more than sixty days before the date of the meeting, unless a different
period is prescribed by law.
SECTION 1.4 QUORUM.
Except as otherwise provided by law or in the Certificate of
Incorporation or these By-Laws, at any meeting of stockholders, the holders of
one-third of the outstanding shares of each class of stock entitled to vote
any the meeting shall be present or represented by proxy in order to constitute
a quorum for the transaction of any business. In the absence of a quorum, a
majority interest of the stockholders present who are entitled at the time to
vote or the chairman of the meeting may adjourn the meeting from time to time in
the manner provided in Section 1.5 of these By-Laws until a quorum shall attend.
SECTION 1.5 ADJOURNMENT.
Any meeting of stockholders, annual or special, may adjourn from time
to time to reconvene at the same or some other place, and notice need not be
given of any such adjourned meeting if the time and place thereof are announced
at the meeting at which the adjournment is taken. At the adjourned meeting, the
Corporation may transact any business which might have been transacted at the
original meeting. If the adjournment is for more than thirty days, or if after
the adjournment a new record date is fixed for the adjourned meeting, a notice
of the adjourned meeting shall be given to each stockholder of record entitled
to vote at the meeting.
SECTION 1.6 ORGANIZATION.
The Chairman of the Board, if any, or in his absence the President, or
in their absence any Vice President, shall call to order meetings of
stockholders and shall act as chairman of such meetings. The Board of Directors
or, if the Board fails to act, the stockholders may appoint any stockholder,
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director, or officer of the Corporation to act as chairman of any meeting in the
absence of the Chairman of the Board, the President, and all Vice Presidents.
The Secretary of the Corporation shall act as secretary of all meetings
of stockholders, but, in the absence of the Secretary, the chairman of the
meeting may appoint any other person to act as secretary of the meeting.
SECTION 1.7 VOTING.
Except as otherwise provided by law or in the Certificate of
Incorporation or these By-Laws and except for the election of directors, at any
meeting duly called and held at which a quorum is present, a majority of the
votes cast at such meeting upon a given question by the holders of outstanding
shares of stock of all classes of stock of the Corporation entitled to vote
thereon who are present in person or by proxy shall decide such question. At any
meeting duly called and held for the election of directors at which a quorum is
present, directors shall be elected by a plurality of the votes cast by the
holders (acting as such) of shares of stock of the Corporation entitled to elect
such directors.
SECTION 1.8 ACTION WITHOUT MEETING.
Nothing contained in these By-Laws shall be deemed to restrict the
power of the stockholders to take any action required or permitted to be taken
by them without a meeting.
SECTION 1.9 TELEPHONE MEETINGS.
Nothing contained in these By-Laws shall be deemed to restrict the
power of the stockholders to participate in a meeting, by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other.
ARTICLE II
BOARD OF DIRECTORS
SECTION 2.1 NUMBER AND TERM OF OFFICE.
The business, property, and affairs of the Corporation shall be managed
by or under the direction of a Board of Directors. The directors shall be
elected by the holders of the shares entitled to vote thereon at the annual
meeting of stockholders, and each shall serve (subject to the provisions of
Article IV) until the next succeeding annual meeting of shareholders and until
his respective successor has been elected and qualified.
SECTION 2.2 CHAIRMAN OF THE BOARD.
The directors may elect one of their members to be Chairman of the
Board of Directors. The Chairman shall be subject to the control of and may be
removed by the Board of Directors. He shall perform such duties as may from time
to time be assigned to him by the Board.
SECTION 2.3 MEETINGS.
The annual meeting of the Board of Directors, for the election of
officers and the transaction of such other business as may come before the
meeting, shall be held [without notice] at the same place as, and immediately
following, the annual meeting of the stockholders.
Regular meetings of the Board of Directors may be held [without notice]
at such time and place as shall from time to time be determined by the Board.
Special meetings of the Board of Directors shall be held at such time
and place as shall be designated in the notice of the meeting whenever called by
the Chairman of the Board, if any, the President, or by a majority of the
directors then in office.
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SECTION 2.4 NOTICE OF SPECIAL MEETINGS.
The Secretary, or in his absence any other officer of the Corporation,
shall give each director notice of the time and place of holding of special
meetings of the Board of Directors by mail at least three days before the
meeting, or by telegram, cable, radiogram, or personal service at least one day
before the meeting. Unless otherwise sated in the notice thereof, any and all
business may be transacted at any meeting without specification of such business
in the notice.
SECTION 2.5 QUORUM AND ORGANIZATION OF MEETINGS.
A majority of the total number of members of the Board of Directors as
constituted from time to time shall constitute a quorum for the transaction of
business, but, if at any meeting of the Board of Directors (whether or not
adjourned from a previous meeting) there shall be less than a quorum present, a
majority of those present may adjourn the meeting to another time and place, and
the meeting may be held as adjourned without further notice or waiver. Except as
otherwise provided by law or in the Certificate of Incorporation or these
By-Laws, a majority of the directors present at any meeting at which a quorum is
present may decide any question brought before such meeting. Meetings shall be
presided over by the Chairman of the Board, if any, or in his absence by the
President, or in the absence of both by such other person as the directors may
select. The Secretary of the Corporation shall act as secretary of the meeting,
but in his absence the chairman of the meeting may appoint any person to act as
secretary of the meeting.
SECTION 2.6 COMMITTEES.
The Board of Directors may, by resolution passed by a majority of the
whole Board, designate one or more committees, each committee to consist of one
or more of the directors of the Corporation. The Board may designate one or more
directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in place of any such absent or disqualified
member. Any such committee, to the extent provided in the resolution of the
Board of Directors, shall have and may exercise all the powers and authority of
the Board of Directors in the management of the business, property, and affairs
of the Corporation, and may authorize the seal of the Corporation to be affixed
to all papers which may require it; but such committee shall not have power or
authority in reference to amending the Certificate of Incorporation of the
Corporation (except that a committee may, to the extent authorized in the
resolution or resolutions providing for the issuance of shares of stock adopted
by the Board of Directors pursuant to authority expressly granted to the Board
of Directors by the Corporation's Certificate of Incorporation, fix any of the
preferences or rights of such shares relating to dividends, redemption,
dissolution, any distribution of assets of the Corporation, or the conversion
into, or the exchange of such shares for, shares of any other class or classes
or any other series of the same or any other class or classes of stock of the
Corporation), adopting an agreement of merger or consolidation under Section 251
or 252 of the General Corporation Law of the Sate of Delaware, recommending to
the stockholders the sale, lease, or exchange of all or substantially all of the
Corporation's property and assets, recommending to the Stockholders a
dissolution, or amending these By-Laws; and, unless the resolution expressly so
provided, no such committee shall have the power or authority to declare a
dividend, to authorize the issuance of stock, or to adopt a certificate of
ownership and merger pursuant to Section 253 of the General Corporation Law of
the State of Delaware. Each committee which may be established by the Board of
Directors pursuant to these By-Laws may fix its own rules and procedures. Notice
of meetings of committees, other than of regular meetings provided for by the
rules, shall be given to committee members. All action taken by committees shall
be recorded in minutes of the meetings.
SECTION 2.7 ACTION WITHOUT MEETING.
Nothing contained in these By-Laws shall be deemed to restrict the
power of members of the Board of Directors or of any committee designated by the
Board to take any action required or permitted to be taken by them without a
meeting.
3
<PAGE>
SECTION 2.8 TELEPHONE MEETINGS.
Nothing contained in these By-Laws shall be deemed to restrict the
power of members of the Board of Directors, or any committee designated by the
Board, to participate in a meeting of the Board, or committee, by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other.
ARTICLE III
OFFICERS
SECTION 3.1 EXECUTIVE OFFICERS.
The executive officers of the Corporation shall be a President, one or
more Vice Presidents, a Treasurer, and a Secretary, each of whom shall be
elected by the Board of Directors. The Board of Directors may elect or appoint
such other officers (including a Chief Financial Officer, Controller and one or
more Assistant Treasurers and Assistant Secretaries) as it may deem necessary or
desirable. Each officer shall hold office for such term as may be prescribed by
the Board of Directors from time to time. Any person may hold at one time two or
more offices.
SECTION 3.2 POWERS AND DUTIES.
The Chairman of the Board, if any, or, in his absence, the President,
shall preside at all meetings of the stockholders and of the Board of Directors.
Unless otherwise determined by the Board of Directors, the President shall be
the chief executive officer of the Corporation. In the absence of the President,
a Vice President appointed by the President or, if the President fails to make
such appointment, by the Board, shall perform all the duties of the President.
The officers and agents of the Corporation shall each have such powers and
authority and shall perform such duties in the management of the business,
property, and affairs of the Corporation as generally pertain to their
respective offices, as well as such powers and authorities and such duties as
from time to time may be prescribed by the Board of Directors.
ARTICLE IV
RESIGNATIONS, REMOVALS, AND VACANCIES
SECTION 4.1 RESIGNATIONS.
Any director or officer of the Corporation, or any member of any
committee, may resign at any time by giving written notice to the Board of
Directors, the President, or the Secretary of the Corporation. Any such
resignation shall take effect at the time specified therein or, if the time is
not specified therein, then upon receipt thereof. The acceptance of such
resignation shall not be necessary to make it effective.
SECTION 4.2 REMOVALS.
The Board of Directors, by a vote of not less than a majority of the
entire Board, at any meeting thereof, or by written consent, at any time, may,
to the extent permitted by law, remove with or without cause from office or
terminate the employment of any officer or member of any committee and may, with
or without cause, disband any committee. Any director or the entire Board of
Directors may be removed, with or without cause, by the holders of a majority of
the shares entitled at the time to vote at an election of directors.
SECTION 4.3 VACANCIES.
Any vacancy in the office of any director or officer through death,
resignation, removal, disqualification, or other cause, and any additional
directorship resulting from increase in the number of directors, may be filled
at any time by a majority of the directors then in office (even though less than
a quorum remains) or, in the case of any vacancy in the office of any director,
by the stockholders who are at the time entitled to vote at an election of
directors, and, subject to the provisions of this Article IV, the person so
chosen shall hold office until his successor shall have been elected and
4
<PAGE>
qualified; or, if the person so chosen is a director elected to fill a vacancy,
he shall (subject to the provisions of this Article IV) hold office for the
unexpired term of his predecessor.
ARTICLE V
CAPITAL STOCK
SECTION 5.1 STOCK CERTIFICATES.
The certificates for shares of the capital stock of the Corporation
shall be in such form as shall be prescribed by law and provided, from time to
time, by the Board of Directors.
SECTION 5.2 TRANSFER OF SHARES.
Shares of the capital stock of the Corporation may be transferred on
the books of the Corporation only by the holder of such shares or by his duly
authorized attorney, upon the surrender to the Corporation or its transfer agent
of the certificate representing such stock properly endorsed.
SECTION 5.3 FIXING RECORD DATE.
In order that the Corporation may determine the stockholders entitled
to notice of or to vote at any meeting of stockholders or any adjournment
thereof or to express consent to corporate action in writing without a meeting,
or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion, or exchange of stock, or for the purpose of any other lawful
action, the Board of Directors may fix, in advance, a record date, which unless
otherwise provided by law, shall not be more than sixty nor less than ten days
before the date of such meeting, nor more than sixty days prior to any other
action.
SECTION 5.4 LOST CERTIFICATES.
The Board of Directors or any transfer agent of the Corporation may
direct a new certificate or certificates representing stock of the Corporation
to be issued in place of any certificate or certificates theretofore issued by
the Corporation, alleged to have been lost, stolen, or destroyed, upon the
making of an affidavit of that fact by the person claiming the certificate to be
lost, stolen, or destroyed. When authorizing such issue of a new certificate or
certificates, the Board of Directors (or any transfer agent of the Corporation
authorized to do so by a resolution of the Board of Directors) may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen, or destroyed certificate or certificates, or his
legal representative, to give the Corporation a bond in such sum as the Board of
Directors (or any transfer agent so authorized) shall direct to indemnify the
Corporation against any claim that may be made against the Corporation with
respect to the certificate alleged to have been lost, stolen, or destroyed or
the issuance of such new certificates, and such requirement may be general or
confined to specific instances.
SECTION 5.5 REGULATIONS.
The Board of Directors shall have power and authority to make all such
rules and regulations as it may deem expedient concerning the issue, transfer,
registration, cancellation, and replacement of certificates representing stock
of the Corporation.
ARTICLE VI
MISCELLANEOUS
SECTION 6.1 CORPORATE SEAL.
The corporate seal shall have inscribed thereon the name of the
Corporation and shall be in such form as may be approved from time to time by
the Board of Directors and the words "Corporate Seal" and "Delaware."
5
<PAGE>
SECTION 6.2 FISCAL YEAR.
The fiscal year of the Corporation shall be determined by resolution of
the Board of Directors.
SECTION 6.3 NOTICES AND WAIVERS THEREOF.
Whenever any notice whatever is required by law, the Certificate of
Incorporation, or these By-Laws to be given to any stockholder, director, or
officer, such notice, except as otherwise provided by law, may be given
personally, or by mail, or, in the case of directors or officers, by telegram,
cable, or radiogram, addressed to such address as appears on the books of the
Corporation. Any notice given by telegram, cable, or radiogram shall be deemed
to have been given when it shall have been delivered for transmission and any
notice given by mail shall be deemed to have been given when it shall have been
deposited in the United States mail with postage thereon prepaid. Whenever any
notice is required to be given by law, the Certificate of Incorporation, or
these By-Laws, a written waiver thereof, signed by the person entitled to such
notice, whether before or after the meeting or the time stated therein, shall be
deemed equivalent in all respects to such notice to the full extent permitted by
law.
SECTION 6.4 STOCK OF OTHER CORPORATIONS OR OTHER INTERESTS.
Unless otherwise ordered by the Board of Directors, the President, the
Secretary, and such attorneys or agents of the Corporation as may be from time
to time authorized by the Board of Directors or the President, shall have full
power and authority on behalf of this Corporation to attend and to act and vote
in person or by proxy at any meeting of the holders of securities of any
corporation or other entity in which this Corporation may own or hold shares or
other securities, and at such meetings shall possess and may exercise all the
rights and powers incident to the ownership of such shares or other securities
which this Corporation, as the owner or holder thereof, might have possessed and
exercised if present. The President, the Secretary, or such attorneys or agents,
may also execute and deliver on behalf of the Corporation powers of attorney,
proxies, consents, waivers, and other instruments relating to the shares or
securities owned or held by this Corporation.
ARTICLE VII
AMENDMENTS
The holders of shares entitled at the time to vote for the election of
directors shall have power to adopt, amend, or repeal the By-Laws of the
Corporation by vote of not less than a majority of such shares, and except as
otherwise provided by law, the Board of Directors shall have power equal in all
respects to that of the stockholders to adopt, amend, or repeal the By-Laws by
vote of not less than a majority of the entire Board. However, any By-Law
adopted by the Board may be amended or repealed by vote of the holders of a
majority of the shares entitled at the time to vote for the election of
directors.
6
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited condensed consolidated balance sheet at March 31, 2000 and unaudited
condensed consolidated statement of operations for the three months ended March
31, 2000 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-END> MAR-31-2000
<CASH> 1,023
<SECURITIES> 6,930
<RECEIVABLES> 898
<ALLOWANCES> (150)
<INVENTORY> 67
<CURRENT-ASSETS> 9,272
<PP&E> 450
<DEPRECIATION> (182)
<TOTAL-ASSETS> 9,573
<CURRENT-LIABILITIES> 1,935
<BONDS> 0
0
3
<COMMON> 3,341
<OTHER-SE> 8,944
<TOTAL-LIABILITY-AND-EQUITY> 9,573
<SALES> 1,975
<TOTAL-REVENUES> 1,975
<CGS> 439
<TOTAL-COSTS> 439
<OTHER-EXPENSES> 3,023
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (20)
<INCOME-PRETAX> (1,507)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,507)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,507)
<EPS-BASIC> (0.14)
<EPS-DILUTED> 0
</TABLE>
