As filed with the Securities and Exchange Commission on December , 2000
Registration No. 333-________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
SOFTQUAD SOFTWARE, LTD.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
DELAWARE 7372 65-0877744
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
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161 Eglinton Avenue East
Suite 400
Toronto, Ontario M4P 1J5 Canada
(416) 544-9000
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
--------------
Roberto Drassinower
Chief Executive Officer
161 Eglinton Avenue East, Suite 400
Toronto, Ontario M4P 1J5 Canada
(416) 544-9000
(Name, address, including zip code, and telephone number, including area
code, of agent for service)
--------------
Copies to:
Neill May, Esq. Michael J. Shef, Esq.
Goodman Phillips & Vineberg Parker Chapin LLP
250 Yonge Street, Suite 2400 The Chrysler Building, 405 Lexington Avenue,
Toronto, Ontario M5B 2M6 Canada New York, NY 10174
(416) 979-2211 (212) 704-6000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. |_|
If the securities being registered on this Form are being offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
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Calculation Of Registration Fee
---------------------------- ----------------------- ----------------------- ------------------------ ------------------------
Title of Each Class of Proposed Maximum Proposed Maximum
Securities to be Amount To Be Offering Price Per Aggregate Offering Amount of Registration
Registered Registered Share(1) Price(1) Fee
---------------------------- ----------------------- ----------------------- ------------------------ ------------------------
<S> <C> <C> <C> <C> <C>
Common Stock, par value
$.001 per share 10,179,318 $2.45 $24,939,329 $6,234.83
---------------------------- ----------------------- ----------------------- ------------------------ ------------------------
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(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933, based on the
average of the high and low prices of the Registrant's common stock as reported
on the OTC Bulletin Board on December 26, 2000.
Pursuant to Rule 416 under the Securities Act, this Registration
Statement also registers that number of additional shares of common stock that
may become issuable pursuant to anti-dilution provisions of preferred stock,
special warrants and warrants held by certain of the selling stockholders.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON THE DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEN BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON THE DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT
TO SAID SECTION 8(A), MAY DETERMINE.
<PAGE>
SUBJECT TO COMPLETION, DATED DECEMBER 29, 2000.
The information in this prospectus is not complete and may be changed. We have
filed a registration statement relating to these securities with the Securities
and Exchange Commission. The selling stockholders may not sell these securities
nor may they accept offers to buy these securities prior to the time the
registration statement becomes effective. This prospectus is not an offer to
sell these securities and is not soliciting an offer to buy these securities in
any state in which the offer or sale is not permitted.
PRELIMINARY PROSPECTUS
10,179,318 SHARES
[SOFTQUAD SOFTWARE LOGO]
COMMON STOCK
---------------------------
This prospectus covers 10,179,318 shares of SoftQuad Software, Ltd.'s
common stock which the selling stockholders listed in this prospectus under
"Principal and Selling Stockholders" (or their successors-in-interest) may offer
and sell from time to time. Of these shares, 936,712 currently are owned by
selling stockholders, 3,195,627 are issuable upon conversion of preferred stock
owned by a selling stockholder, 2,951,420 are issuable upon the exercise of
special warrants that currently are owned by selling stockholders and 3,095,559
are issuable upon exercise of warrants that currently are owned by selling
stockholders. We issued the common stock and other securities currently owned by
the selling stockholders in private placements during February, April and June
2000. In connection with the private placements, we agreed with the initial
purchasers that we would file a registration statement covering the shares of
common stock issued to them or issuable upon the conversion or exercise of
derivative securities issued to them.
The selling stockholders may sell their shares, directly or through
broker-dealers or underwriters, in the over-the-counter market, in any
securities exchange or market in which our common stock may in the future be
traded, in privately negotiated transactions or otherwise. Sales may be made at
market prices prevailing at the time of sale, at prices related to such market
prices or at negotiated prices. The selling stockholders should deliver a copy
of this prospectus when they offer and sell their shares.
The selling stockholders will receive all of the net proceeds from sales of
their shares and will pay all brokerage commissions and similar selling
expenses, if any. We will not receive any proceeds from sales of the shares by
the selling stockholders. We will be responsible for paying all other expenses
relating to the registration of the shares.
Our common stock currently is quoted on the OTC Bulletin Board under the
symbol "SXML." The last reported price of our common stock on the OTC Bulletin
Board on December 26, 2000 was $2.90.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS WHICH ARE DESCRIBED UNDER
"RISK FACTORS" BEGINNING ON PAGE 2.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------------------
The date of this prospectus is ________ __,2001.
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TABLE OF CONTENTS CAUTION ABOUT
<S> <C>
Where You Can Find More Information.....................3 FORWARD-LOOKING STATEMENTS
Prospectus Summary......................................4 This prospectus contains certain
"forward-looking statements" as defined in the
Risk Factors............................................8 Private Securities Litigation Reform Act of 1995,
including statements regarding, among other things,
Use Of Proceeds........................................17 our business and operating strategy, operations,
economic performance and financial condition. When
Price Range Of Common Stock............................17 used in this prospectus, the words "estimate,"
"project," "believe," "anticipate," "intend,"
Dividend Policy........................................17 "expect," "plan" and similar expressions identify
forward-looking statements. These forward-looking
Business ..............................................18 statements reflect our current views with respect to
future events and are subject to risks and
Management.............................................31 uncertainties that could cause actual results to
differ materially from those contemplated in these
Principal Stockholders.................................37 forward-looking statements, including those risks
discussed in this prospectus under "Risk Factors."
Selling Stockholders...................................38
STATISTICAL DATA
Certain Relationships And Related Transactions.........42
This prospectus includes statistical data
Description Of Capital Stock...........................45 about the Internet industry that comes from
information published by sources such as
Shares Eligible For Future Sale........................49 International Data Corporation, also known as IDC,
and Forrester Research, which are providers of market
Plan Of Distribution...................................50 information and strategic information for the
Internet industry. Although we believe that data from
Legal Matters..........................................52 these companies is generally reliable, this type of
data is inherently imprecise. We caution you not to
Experts ..............................................52 place undue reliance on this data.
------------------------ DOLLAR AND SHARE AMOUNTS
You should rely only on the information contained in All dollar amounts included in this
this prospectus. We have not authorized anyone to prospectus are expressed in U.S. dollars. All share
provide you with different information. The selling and per share amounts have been adjusted to give
stockholders are not making an offer of these effect to the five-for-one common stock split that
securities in any jurisdiction where the offer is not occurred on July 28, 1999.
permitted. You should not assume that the information
provided by this prospectus is accurate as of any NAMES
date other than the date of this prospectus.
The names SoftQuad(R), XMetaL(R),
------------------------ HoTMetaL(R) and MarketAgility(TM) are trademarks that
belong to us. See "Business--Proprietary Rights and
Licensing." This prospectus also contains other names
that belong to their respective owners.
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WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-3 under the
Securities Act of 1933 with respect to the common stock covered by this
prospectus. This prospectus, which is part of the registration statement, does
not contain all of the information contained in the registration statement or in
the exhibits to the registration statement. For further information with respect
to us and the common stock, you should review the registration statement,
including the exhibits to the registration statement. We also file annual,
quarterly and special reports, proxy statements and other information with the
SEC. The registration statement, as well as the periodic reports and other
information we have filed with the SEC, may be inspected and copied at the
Public Reference Section of the SEC at Room 1024, Judiciary Plaza, 450 Fifth
Street, NW, Washington, DC 20549 and at the regional offices of the SEC located
at 75 Park Place, Room 1400, New York, New York 10007 and Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. You may obtain
information as to the operation of the Public Reference Room by calling the SEC
at 1-800-SEC-0330. Our SEC filings are also available to the public from the
SEC's Web site at http://www.sec.gov. Statements contained in this prospectus as
to the contents of any contract or other document filed as an exhibit to the
registration statement are not necessarily complete, and in each instance we
refer you to the copy of the contract or document filed as an exhibit to the
registration statement, each statement being qualified in all respects by this
reference.
The SEC allows us to "incorporate by reference" the information we file
with them, which means that we can disclose important information to you about
us by referring you to those documents. The information incorporated by
reference is considered to be part of this prospectus, and information that we
file later with the SEC will automatically update and supersede this
information. We incorporate by reference the documents listed below as well as
any future filings made by us with the SEC under Sections 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934 until the offering is complete:
(a) Our Annual Report filed on Form 10-KSB for the fiscal year ended
September 30, 2000 and;
(b) Our Current Report on Form 8-K filed December 5, 2000.
You may request a copy of these filings, at no cost, by writing or
telephoning us at the following address:
David R. Lewis
Chief Financial Officer
SoftQuad Software, Ltd.
161 Eglinton Avenue East, Suite 400
Toronto, Ontario M4P 1J5
Canada
(416) 544-9000
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PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information, including our financial statements and the notes to our financial
statements, incorporated by reference in this prospectus. Because this is only a
summary, it does not contain all of the information that you should consider
before buying shares of our common stock. You should read the entire prospectus
carefully. In this prospectus, "SoftQuad," "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.
OUR BUSINESS
SoftQuad is a leading developer of software products for the creation and
management of content in XML. XML (eXtensible Markup Language) is a language for
the exchange of data on the World Wide Web that is a rapidly emerging standard
for business-to-business (B2B) e-commerce. Forrester Research estimates that B2B
e-commerce will grow from $406 billion in 2000 to $2.7 trillion in 2004 and
constitute 90 percent of the total dollar-value of e-commerce in the United
States by 2003. This is expected to create a substantial demand for e-commerce
software applications. According to International Data Corporation, the
worldwide market for e-commerce software applications will grow from $1.7
billion in 1999 to $13.2 billion in 2003.
Our XMetaL product is an advanced, yet easy-to-use, XML content creation
solution. XMetaL allows authors throughout an organization to create and adapt
content for use in e-commerce, e-publishing and knowledge management
applications. Since its release in May 1999, XMetaL has received enthusiastic
reviews and awards from the media and has been sold to over 1,000 customers in a
wide range of industries. Our customers include leading companies such as
Amazon.com, Continental Airlines, DaimlerChrysler, Deutsche Bank, IBM, Lucent
Technologies, Microsoft, USATODAY.com, Ziff Davis, GE Power, Lotus, Quantas,
British Aerospace, British Telecom, Nortel Networks, Ericsson and Nokia. In
addition, we have formed strategic alliances with leading software companies
that offer complementary products, such as Vignette, Documentum and Software AG,
to develop comprehensive B2B e-commerce solution platforms integrating XMetaL.
Our MarketAgility product is an XML-based content management solution for
e-commerce. MarketAgility gives e-commerce suppliers more control over the
collection, processing and real-time delivery of product information in XML to
e-marketplaces and e-procurement systems. MarketAgility allows suppliers to
quickly gather product information from wherever it resides within their
enterprises, whether in content management systems, electronic resource planning
systems, enterprise databases or Microsoft Word or Excel files. After any
non-XML information is converted into XML, Market Agility delivers this
information to e-markets in a format that is fully customized for different
e-markets in their specific dialect of XML. MarketAgility also allows suppliers
to maintain their competitive advantage by rapidly and incrementally updating
product and pricing information across all channels. We released MarketAgility
on September 25, 2000.
Our HoTMetaL product is an HTML (Hyper Text Markup Language)-based Web page
creation and management tool which gives developers the advanced capabilities
and productivity tools needed to create Web sites. As we focus our efforts on
providing solutions to the e-commerce industry, we are transitioning our
business away from HoTMetaL and towards our XML products.
OUR BUSINESS STRATEGY
Our goal is to be a dominant supplier of software products for the creation
and management of content by suppliers in e-business. To that end, we have
developed XMetaL and MarketAgility, which enable suppliers to significantly
improve their ability to create and distribute product information in XML to
potential buyers over the Web. In order to be successful, our strategy is to:
o work with customers in key market sectors to become reference accounts
for prospective customers;
o establish technology partnerships with major vendors of complementary
products;
o establish strategic partnerships with e-marketplaces;
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o establish a strong distribution network of value-added resellers;
o expand our direct sales efforts in North America and internationally;
o invest in research and development to sustain leadership; and
o maintain a solid financial structure to fund our operations.
OUR COMPETITIVE STRENGTHS
We believe that we have the following competitive strengths:
o We are a leader in XML development and software. Members of our
management team have been and continue to be leaders in the
development of XML specifications through the World Wide Web
Consortium (W3C).
o Our award-winning XMetaL product is recognized as a leading XML
content creation solution for the B2B market.
o We expect our MarketAgility product to be a key supply-side solution
for B2B e-commerce.
o We have developed partnerships and alliances with industry leading
technology companies in important B2B segments. We expect these
partnerships to enhance the acceptance of our XML products and allow
us to be in the forefront of B2B solutions.
o We have an experienced management team that has extensive experience
in marketing leading edge products.
OUR HISTORY AND CORPORATE STRUCTURE
COMMENCEMENT OF OUR BUSINESS
We commenced our business in 1986 under the name SoftQuad Inc. During the
1980s, we developed software products based on SGML (Standard Generalized Markup
Language), the predecessor of XML. In 1992, SoftQuad Inc. was acquired by
SoftQuad International Inc. (now renamed NewKidCo International Inc.), which is
a publicly-traded company listed on the Toronto Stock Exchange. During the early
1990s, we began to focus on HTML-based software, culminating with the launch in
1993 of HoTMetaL. In 1996, members of our management identified a need for a
more versatile language than HTML and began to work, together with
representatives of other technology companies, on developing XML.
ESTABLISHMENT OF SOFTQUAD CANADA
In August 1998, certain members of our 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." In May 1999, we launched XMetaL.
ESTABLISHMENT OF FINANCECO
In December 1999, a Toronto-based investment dealer agreed to act as agent
in facilitating private placement financings of SoftQuad Canada. Pursuant to
this agreement, money was first funded by investors to a new Delaware
corporation formed to facilitate the financings ("FinanceCo") in exchange for
FinanceCo stock and warrants. As of January 17, 2000, FinanceCo entered into
agreements with the security holders of SoftQuad Canada to acquire all of the
outstanding securities of SoftQuad Canada through FinanceCo's subsidiary,
SoftQuad Acquisition Corp., an
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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 and into The American Sports
Machine, Inc., a Florida corporation ("ASM"). ASM was organized on June 2, 1995
but, at the time of the merger, had not engaged in an active trade or business
other than to seek to merge with a private operating company. 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 continued as 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. In connection with the merger, the securityholders of FinanceCo
exchanged their securities for equivalent securities of ASM.
COMPLETION OF THE CANADIAN ACQUISITION
On April 5, 2000, ASM, through SAC, 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) because
of Canadian tax considerations, the remaining Canadian holders of common shares
of SoftQuad Canada exchanged (on a one-for-one basis) their common shares of
SoftQuad Canada for exchangeable shares of SAC (which have voting and economic
rights functionally equivalent to, and are exchangeable on a one-for-one basis
with, shares of our 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 economically equivalent terms.
REDOMICILING TO DELAWARE
To facilitate ASM's 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 and into this new subsidiary, upon which
the separate corporate existence of ASM terminated, and SoftQuad Software, Ltd.
continued as the surviving entity.
ACQUISITION OF ADEI
On November 20, 2000, we completed our acquisition of Advanced Data
Engineering Inc. (ADEi) of Petaluma, California. ADEi provides content
transformation solutions which enable organizations to convert large volumes of
existing data from multiple sources into XML. ADEi merged with SoftQuad
California Inc. ("California"), and California is continuing as the surviving
entity.
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OUR CURRENT CORPORATE STRUCTURE
We currently conduct our operations through SoftQuad Canada and its
wholly-owned subsidiary, SoftQuad UK Limited. SAC owns all the common shares of
SoftQuad Canada, and SoftQuad Software, Ltd. owns all the common shares of SAC.
The following diagram illustrates this structure:
_________________________________________
| SoftQuad Software, Ltd. |
| (a Delaware corporation) |
|_________________________________________|
. . Exchangeable
. . Shareholders
100% . .
common . .
equity . .
. . .
. . .
_________________________ . 100% common equity .
|SoftQuad California, Inc.| . ......................
|(a California corporation| . .
|_________________________| . .
. .
. .
_________________________________________
| SoftQuad Acquisition Corp. |
| (an Ontario (Canada) corporation) |
|_________________________________________|
. 100% common equity
.
.
.
_________________________________________
| SoftQuad Software Inc. |
| (an Ontario (Canada) corporation) |
|_________________________________________|
. 100% common equity
.
.
.
________________________________________
| SoftQuad UK Limited |
| (a UK limited company) |
|________________________________________|
OUR PRINCIPAL EXECUTIVE OFFICES
We maintain our principal executive offices at 161 Eglinton Avenue East,
Suite 400, Toronto, Ontario M4P 1J5 Canada. Our telephone number is (416)
544-9000. Our Web site is located at www.softquad.com. Information contained on
our Web site does not constitute part of this prospectus.
CAPITAL STOCK
As of November 30, 2000, there were issued and outstanding 7,550,250 shares
of our common stock and 5,673,605 exchangeable shares of SAC (which have voting
and economic rights functionally equivalent to, and are exchangeable on a
one-for-one basis with, shares of our common stock). An additional 14,142,875
shares of our common stock were issuable upon the conversion, exercise or
exchange of our outstanding preferred stock, options, special warrants and
warrants. To read more about our capital stock, including exchangeable shares of
SAC, please see "Description of Capital Stock."
RISK FACTORS
You should consider carefully all of the information described in this
prospectus before investing in our common stock. In particular, you should
consider the factors described under "Risk Factors" beginning on page 2.
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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 contained in this prospectus and information
incorporated by reference in this prospectus, including our financial statements
and the related notes.
RISKS RELATED TO OUR BUSINESS
WE CANNOT ASSURE YOU 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 on the market success of these products to propel our
growth in the near and medium term. (For a description of XMetaL and
MarketAgility, see "Business--Products.") Although we have been able to secure
initial sales of the XMetaL product, we cannot assure you that existing
customers will deploy XMetaL in larger numbers (which will require a significant
commitment and investment of resources by these customers) or that XMetaL will
be adopted by new customers or secure widespread market acceptance. Similarly,
we cannot assure you that MarketAgility will be adopted by customers or secure
widespread market acceptance. The failure of XMetaL and MarketAgility to achieve
meaningful market acceptance could have a material adverse effect on our
business, operating results and financial condition.
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, most of our past revenues have been derived from HoTMetaL. (For a
description of HoTMetaL, see "Business--Products.") 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, and our business, operating results and
financial condition could be materially adversely affected.
RELIANCE ON DISTRIBUTION CHANNELS AND TECHNOLOGY PARTNERS MAY AFFECT SALES
BECAUSE WE LACK CONTROL OVER THESE CHANNELS
We rely on reseller, distribution and technology partners to support our
own selling efforts. Some of these partners must have the expertise required to
work with XML. Because XML is a relatively new technology, expertise is not
widespread. If these partners fail to develop, do not acquire appropriate XML
expertise or otherwise fail to adequately support our products, our business,
operating results and financial condition could be materially adversely
affected.
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 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.
Competing products based on new technologies or new industry standards could
render our existing products obsolete and unmarketable. To succeed, we will need
to enhance our current products and develop new products on a timely basis.
E-commerce technology, particularly XML content creation technology, is complex,
and new products and product enhancements can require long development and
testing periods. If we do not develop
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and release enhanced or new products on a timely basis, our business, operating
results and financial condition could be materially adversely affected.
WE FACE INTENSE COMPETITION
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. The market for supply-side e-market
infrastructure software, which MarketAgility targets, currently is fragmented,
but we anticipate strong competition to develop from new entrants as well as
existing software companies. HoTMetaL faces strong competition from products
such as Microsoft's FrontPage, Macromedia's Dreamweaver and Adobe's GoLive. Most
of our 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, MarketAgility and HoTMetaL serve.
Competitive pressures may make it difficult for us to acquire and retain
customers and may require us to reduce the price of our software. We cannot be
certain that we will be able to compete successfully with current or future
competitors. If we fail to compete successfully against current or future
competitors, our business, operating results and financial condition could be
materially adversely affected.
WE HAVE INCURRED AND EXPECT TO CONTINUE TO INCUR LOSSES
We have not achieved profitability and we expect to incur net losses for at
least the next 18 months. To date, we have funded our operations primarily from
the sale of equity and debt securities and borrowings. We incurred losses of
$1.3 million, 3.0 million and $6.7 million for the nine months ended September
30, 1998 and the years ended September 30, 1999 and 2000, respectively. As of
September 30, 2000, our losses have resulted in an accumulated deficit of $9.8
million. We plan to increase our operating expenses to expand our sales and
marketing operations, develop new distribution channels, fund greater levels of
research and development, broaden professional services and support and improve
operational and financial systems. 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 OPERATING HISTORY MAKES FINANCIAL FORECASTING DIFFICULT
We began operations in 1986. However, from 1992 to 1998, we operated as
part of NewKidCo. In addition, we currently are transitioning our operations
from supporting HoTMetaL to supporting XMetaL and MarketAgility. As a result, it
is difficult for us to forecast operating expenses based on historical results.
Accordingly, we base our anticipated expenses in part on projected future
revenues. 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 our projections.
If revenues do not meet our projections, our business, operating results and
financial condition could be materially adversely affected and net losses in any
period 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:
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o varying demand for our products and services;
o seasonal fluctuations, including those resulting from the introduction
of new versions of our products or new products, our clients' calendar
year budgeting cycles and slow summer purchasing patterns in Europe;
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. You should not rely on the results of one quarter as an
indication of our future performance. The operating results of companies in the
electronic commerce industry have, in the past, experienced significant
quarter-to-quarter fluctuations. If our revenues for a quarter fall below our
expectations and we are not able to quickly reduce our spending in response, our
operating results for the quarter will be harmed. It is likely that in some
future quarter our operating results may be below the expectations of public
market analysis and investors and, as a result, the price of our common stock
may fall. As with other companies in our industry, our operating expenses, which
include selling and marketing, research and development and general and
administrative, are based on our expectations of future revenues and relatively
fixed in the short term. You should not rely on the results of one quarter as an
indication of our future performance.
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 employees require training and
take time to achieve full productivity. We cannot be certain that our new
employees 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. Because 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
employees or by hiring experienced personnel.
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. In recent quarters, worldwide HoTMetaL revenues have
declined and HoTMetaL has lost market share. Although we have planned for
HoTMetaL's absolute and proportionate share of total revenues to decline over
the next several quarters, if HoTMetaL revenues were to decline faster than
anticipated, our business, operating results and financial condition could be
materially adversely affected.
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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
We expect revenue outside of North America to continue to account for a
significant percentage of our total revenue in the future and we believe that we
must continue to expand international sales in order to be successful.
International operations are generally subject to a number of risks, including:
o expenses associated with customizing products for foreign countries;
o laws and business practices that favor local competition;
o dependence on local vendors;
o multiple, conflicting and changing governmental laws and regulations;
o potentially adverse tax consequences;
o difficulties in collecting accounts receivable; and
o foreign currency exchange rate fluctuations.
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 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. In
addition, while 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. To date, we have not
engaged in any foreign exchange hedging transactions. 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 SERVICES
BUSINESS 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 personnel that our services business needs. Clients that
license our XML software products may engage our professional services business
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 professional
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 are a limited number of people who have the skills to
provide the services that our clients demand.
IN ORDER TO PROPERLY MANAGE GROWTH, WE NEED TO IMPLEMENT AND IMPROVE OUR
OPERATIONAL SYSTEMS ON A TIMELY BASIS
We have expanded our operations rapidly 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 our
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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
could 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 depends 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 qualified
personnel have greater resources than we have. We cannot be certain that we will
be successful in attracting or retaining qualified personnel in the future.
WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS
We believe that we can fund our planned operations for at least the next 18
months from our existing working capital. Nevertheless, we may need, or
otherwise seek, to raise additional funds in the future to maintain and grow our
business. We cannot assure you that we will be able to obtain additional
financing on favorable terms, if at all. If we issue equity securities,
stockholders may experience dilution of their holdings. New equity securities
may also have rights, preferences or privileges senior to those of existing
holders of common stock. If we cannot raise funds 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 or
other costs, which could have a material adverse effect on our business,
operating results and financial condition. In our license and "shrinkwrap"
agreements, we seek to limit liability for certain claims associated with
product defects, but we cannot assure you that these limitations will be
enforceable.
DELAYS IN RELEASING ENHANCED VERSIONS OF OUR PRODUCTS COULD ADVERSELY
AFFECT OUR COMPETITIVE POSITION
We will need to continue to introduce new versions of our products to add
new features, functionality and technology that customers desire. In the past,
we have experienced delays in releasing new products. As a result, we cannot
assure you that we will be able to successfully complete the development of
currently planned or future products in a timely and efficient manner. Due to
the complexity of these products, internal quality assurance testing and
customer testing of pre-commercial releases may reveal product performance
issues or desirable feature enhancements that could lead us to postpone the
release of these new versions. In addition, the reallocation of resources
associated with any such postponement would likely cause delays in the
development and release of other future products or enhancements to our
currently available products.
OUR PRODUCT SHIPMENTS COULD BE DELAYED IF THIRD PARTY SOFTWARE
INCORPORATED IN OUR PRODUCTS IS NO LONGER AVAILABLE
We integrate third-party software into our software. This third-party
software may not continue to be available to us on commercially reasonable
terms. If we cannot maintain licenses for key third-party software, such as
Accusoft, Ipswitch Inc., Inxight and Ulead, shipments of our products could be
delayed until equivalent software is
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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 PROPRIETARY RIGHTS TO OUR TECHNOLOGY, AND IF WE
FAIL TO ADEQUATELY PROTECT THESE RIGHTS, OUR BUSINESS MAY BE SERIOUSLY
HARMED
We depend upon our ability to develop and protect our proprietary
technology and intellectual property rights to distinguish our products from our
competitors' products. The use by others of our proprietary rights could
materially harm our business. We rely on a combination of copyright, trademark
and trade secret laws, as well as confidentiality agreements and licensing
arrangements, to establish and protect our proprietary rights. We have no issued
patents. Attempts may be made to copy or reverse-engineer aspects of our
products or to obtain and use information that we regard as proprietary. Despite
our efforts to protect our proprietary rights, existing laws afford only limited
protection. Accordingly, we cannot be certain that we will be able to protect
our proprietary rights against unauthorized third-party copying or use.
Furthermore, policing the unauthorized use of our products is difficult, and
expensive litigation may be necessary to enforce our intellectual property
rights.
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 claims of alleged infringement of patents and other intellectual
property rights. We could incur substantial costs to 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 as a result of an alleged
infringement of another's intellectual property. If a claim of infringement of
intellectual property rights was decided against us, we could be required to:
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; or
o redesign those products or services that incorporate such technology.
ANTI-TAKEOVER PROVISIONS COULD INHIBIT THE ACQUISITION OF OUR COMPANY
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 our board of directors to fix the rights and preferences
of and issue 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.
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Certain provisions of Delaware law may also discourage, delay or prevent someone
from acquiring or merging with us. See "Description of Capital
Stock-Anti-takeover effects of certain provisions of Delaware law and our
certificate of incorporation and bylaws."
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
speedily 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 E-commerce or the use of XML for e-commerce do not continue to grow or
grow more slowly than expected.
o Consumers or businesses reject the Internet as a viable commercial
medium.
o E-commerce businesses are unable to achieve adequate profitability or
are unable to raise additional capital.
o The Internet infrastructure is not 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 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-BASED SOFTWARE
PRODUCTS AND E-MARKET INFRASTRUCTURE SOFTWARE SOLUTIONS
The market for XML-based software products and e-market infrastructure
software products is new and rapidly evolving. We expect that we will continue
to need intensive marketing and sales efforts to educate prospective customers
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 and may be reluctant
to alter those patterns or to provide personal data in connection with
purchasing goods over the Internet. Any of these factors could inhibit the
growth of online business generally and the market's acceptance of our products
and services in particular.
LAWS AND REGULATIONS COULD EITHER DIRECTLY RESTRICT OUR BUSINESS OR
INDIRECTLY IMPACT OUR BUSINESS BY LIMITING THE GROWTH OF E-COMMERCE
Laws and regulations directly applicable to Internet communications,
commerce and advertising are becoming more prevalent, and new laws and
regulations are under consideration by the United States Congress and state
legislatures. Any new legislation or restrictions arising from current or future
government investigations or policy could dampen the growth in use of the
Internet generally and decrease the acceptance of the Internet as a
communications, commercial and advertising medium. The governments of other
states or foreign countries might attempt to regulate Internet communications,
commerce and advertising or levy sales or other taxes relating to these
activities. The European Union has enacted its own privacy regulations that may
result in limits on the collection and use of certain user information. The laws
governing the Internet, however, remain largely unsettled, even in
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areas where there has been some legislative action. Governmental bodies have not
yet determined in many instances whether and how existing laws such as those
governing intellectual property, privacy, libel, taxation and antitrust apply to
the Internet and e-commerce. For example, the U.S. Federal Trade Commission is
currently examining whether B2B e-commerce exchanges may create opportunities
for collusion and price-fixing that violate antitrust laws. In addition, the
growth and development of the market for e-commerce may prompt calls for more
stringent consumer protection laws, both in the United States and abroad, that
may impose additional burdens on companies conducting business over the
Internet. Our business, results of operations and financial condition could be
materially adversely affected by the adoption, modification or enforcement of
laws or regulations relating to the Internet and e-commerce.
RISK RELATED TO THE SECURITIES MARKETS
OUR STOCK PRICE IS HIGHLY VOLATILE
The market price of our common stock has been highly volatile. In addition,
the stock market has experienced extreme price and volume fluctuations. The
market prices of the securities of Internet-related companies have been
especially volatile. Future market prices 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 stockholders; and
o fluctuations in stock market price and volume, which are particularly
common among highly volatile securities of Internet and software
companies.
POSSIBILITY OF WIDE PRICE SWINGS AND INACCURATE PRICING INFORMATION COULD
CREATE A RISK THAT STOCKHOLDERS WILL NOT BE ABLE TO ACCURATELY ASSESS THE
MARKET VALUE OF OUR COMMON STOCK
While our stock trades over-the-counter and is 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 our stock. Increases in the volatility could also make it
more difficult to pledge the common stock as collateral, if stockholders 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 stockholders
under this registration statement or under another registration statement filed
pursuant to registration rights agreements or otherwise, or under Rule 144 or
other exemptions that may be available under the Securities Act of 1933, could
drive the market price of our 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.
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WE HAVE BECOME SUBJECT TO THE SECURITIES AND EXCHANGE COMMISSION'S PENNY
STOCK RULES
We have 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 system). Unless
exempt, the penny stock 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 each 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 penny stocks rules,
stockholders may have difficulty selling our common stock in the open market as
our market price has dropped below $5.00 per share.
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USE OF PROCEEDS
We will not receive any proceeds from the sale of common stock by the
selling stockholders. All net proceeds from the sale of common stock will go to
the stockholders who offer and sell their shares. We will, however, receive
approximately $_______ if all of the warrants for the shares of common stock
being registered are exercised. We expect to use these proceeds, if any, for
general corporate purposes.
PRICE RANGE OF COMMON STOCK
Our common stock has been quoted on the OTC Bulletin Board since January 7,
2000. From January 7, 2000 until February 21, 2000 it was quoted under the
symbol "AMRP," from February 22, 2000 until April 10, 2000 it was quoted under
the symbol "AMRR" and since April 11, 2000 it has been quoted under the symbol
"SXML." The following table sets forth, for the periods indicated, the high and
low closing bid prices per share of our common stock as quoted on the OTC
Bulletin Board. Quotes on the OTC Bulletin Board may reflect inter-dealer
prices, without retail mark-ups, mark-downs or commissions and may not
necessarily represent actual transactions.
High Low
Quarter ended March 31, 2000(1) $36.63 $ .125
Quarter ended June 30, 2000 $25.00 $10.00
Quarter ended September 30, 2000 $13.50 $ 6.94
(1)Prior to March 2, 2000, which was the effective date of the merger
between FinanceCo and ASM, the high and low closing bid prices per share
of ASM's common stock as quoted on the OTC Bulletin Board were $7.50 and
$0.125, respectively. From March 2 through March 31, 2000, the high and
low closing bid prices per share of ASM's common stock as quoted on the
OTC Bulletin Board were $36.625 and $24.50, respectively.
The last reported price of our common stock on the OTC Bulletin Board on
December 26, 2000 was $2.90.
DIVIDEND POLICY
We have never paid any dividends on our common stock and we do not intend
to pay any dividends on our common stock in the foreseeable future. Any future
determination as to the payment of dividends will be at the discretion of our
board of directors, and will depend on our financial condition, results of
operations and capital requirements, and such other factors as our board of
directors deems relevant.
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BUSINESS
OVERVIEW
SoftQuad is a leading developer of software products for the creation and
management of content in XML. XML (eXtensible Markup Language) is a language for
the exchange of data on the World Wide Web that is a rapidly emerging standard
for business-to-business (B2B) e-commerce. Forrester Research estimates that B2B
e-commerce will grow from $406 billion in 2000 to $2.7 trillion in 2004 and
constitute 90 percent of the total dollar-value of e-commerce in the United
States by 2003. This is expected to create a substantial demand for e-commerce
software applications. According to International Data Corporation, the
worldwide market for e-commerce software applications will grow from $1.7
billion in 1999 to $13.2 billion in 2003.
Our XMetaL product is an advanced, yet easy-to-use, XML content creation
solution. XMetaL allows authors throughout an organization to create and adapt
content for use in e-commerce, e-publishing and knowledge management
applications. Since its release in May 1999, XMetaL has received enthusiastic
reviews and awards from the media and has been sold to over 1,000 customers in a
wide range of industries. Our customers include leading companies such as
Amazon.com, Continental Airlines, DaimlerChrysler, Deutsche Bank, IBM, Lucent
Technologies, Microsoft, USATODAY.com, Ziff Davis, GE Power, Lotus, Quantas,
British Aerospace, British Telecom, Nortel Networks, Ericsson and Nokia. In
addition, we have formed strategic alliances with leading software companies
that offer complementary products, such as Vignette, Documentum and Software AG,
to develop comprehensive B2B e-commerce solution platforms integrating XMetaL.
Our MarketAgility product is an XML-based content management solution for
e-commerce. MarketAgility gives e-commerce suppliers more control over the
collection, processing and real-time delivery of product information in XML to
e-marketplaces and e-procurement systems. MarketAgility allows suppliers to
quickly gather product information from wherever it resides within their
enterprises, whether in content management systems, electronic resource planning
systems, enterprise databases or Microsoft Word or Excel files. After any
non-XML information is converted into XML, Market Agility delivers this
information to e-markets in a format that is fully customized for different
e-markets in their specific dialect of XML. MarketAgility also allows suppliers
to maintain their competitive advantage by rapidly and incrementally updating
product and pricing information across all channels. We released MarketAgility
on September 25, 2000.
Our HoTMetaL product is an HTML (Hyper Text Markup Language)-based Web page
creation and management tool which gives developers the advanced capabilities
and productivity tools needed to create Web sites. As we focus our efforts on
providing solutions to the e-commerce industry, we are transitioning our
business away from HoTMetaL and towards our XML products.
To read about our history and corporate structure, please see the
Prospectus Summary under "Our History and Corporate Structure."
MARKET ANALYSIS
INDUSTRY BACKGROUND
The Internet has emerged as the fastest growing communication medium in
history. With over 97 million users at the end of 1998, growing to 320 million
users by 2002, as estimated by International Data Corporation, the Internet is
dramatically changing how businesses and individuals communicate and share
information. The Internet has created new opportunities for conducting commerce,
such as business-to-consumer ("B2C") and person-to-person ("P2P") e-commerce.
Recently, the widespread adoption of intranets and the acceptance of the
Internet as a business communications platform has created a foundation for B2B
e-commerce that will enable organizations to streamline complex processes, lower
costs and improve productivity.
With this foundation, Internet-based B2B e-commerce is poised for rapid
growth and is expected to present a significantly larger opportunity than
business-to-consumer or person-to-person e-commerce. According to Forrester
Research, B2B e-commerce is expected to grow from $406 billion in 2000 to $2.7
trillion in 2004 and constitute
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90% of the total dollar-value of e-commerce in the United States by 2003. This
is expected to create a substantial demand for e-commerce software applications.
According to International Data Corporation, the worldwide market for e-commerce
software applications is expected to experience tremendous growth, increasing
from $1.7 billion in 1999 to $13.2 billion in 2003.
THE IMPACT OF E-PROCUREMENT ON SUPPLIERS
The growth of B2B e-commerce is dramatically changing today's business
environment. Increasingly, buyers and sellers are automating and streamlining
their commercial interactions through the use of Web-based e-procurement
systems. The reason for adopting and adapting to this new technology is simple:
the potential gains, for both buyers and sellers, can be enormous.
Buyers are realizing dramatic cost savings in both transaction costs and
actual product costs by building their own e-procurement systems, or
participating in e-marketplaces. The integration of business and transaction
processes reduces the time and paperwork associated with procurement. The
centralization of supplier and product information into an e-procurement system
increases the efficiency with which buyers can source and compare goods.
Companies can even improve the quality of their purchases by gaining access to a
wider range of suppliers whose products may better suit their needs. For buyers,
the return on investment on e-procurement can be dramatic. According to Morgan
Stanley Dean Witter, procurement costs can be reduced by as much as 90%.
Suppliers are realizing benefits from Web-based procurement as well. It
gives them access to a broader range of buyers without increasing selling costs.
It also can help avoid price-driven competition by allowing suppliers to
identify and target buyers whose needs are better met by their products'
specific strengths.
For suppliers, participating in e-procurement systems will increasingly
become a necessity. A survey of CFOs carried out by Duke University indicates
that the percentage of companies selling over the Web will increase from 24% at
the end of 1998 to 56% by the end of 2000. In some industries, large buyers are
already creating their own e-procurement systems and demanding that their
suppliers integrate with these systems; in others, third party intermediaries
are establishing electronic marketplaces to bring buyers and suppliers together.
Regardless of which becomes the winning business model, sellers risk losing out
to competitors who have taken the necessary steps to enable themselves for
e-commerce.
THE SUPPLIERS' CHALLENGE
Most of the building blocks necessary for the growth of Web-based
procurement are in place. Electronic Data Interchange (EDI) software set the
stage for automating order transactions. Enterprise Resource Planning (ERP)
software advanced the integration of business processes across multiple
divisions and companies. Both systems, however, have proven to be expensive,
inflexible and difficult to implement, hampering wide-scale adoption. With the
rise of the Web and the ascendancy of XML technologies for both content
management and data interchange, electronic procurement through an exchange or
directly between buyers and sellers has finally become practical for most
businesses. The major challenge that remains for buyers, suppliers, and
intermediaries is content management.
Content management is the process by which vendor information is collected,
categorized and delivered to the e-procurement system. Traditionally, suppliers
provided this information through the arduous production and distribution of
paper catalogs. But, as noted by industry observers like Aberdeen Group,
Forrester, and Morgan Stanley Dean Witter, developing electronic versions of
these catalogs has proved to be an onerous task. Product information is
generally stored in a variety of systems throughout an enterprise and in a
variety of formats. Buyers, suppliers, exchanges or other organizations that
have created electronic catalogs have found it difficult to transform these
disparate sources of information into a consistent and updatable format.
E-marketplaces are developing their own approaches to help transform
supplier data into a consistent and updatable format as part of their
procurement solution. However, it is not yet clear that they can develop
scaleable solutions. As Morgan Stanley Dean Witter has found, "Getting supplier
catalogs loaded quickly is a bottleneck, given the poor condition much of such
data are in and the lack of standard product codes for every industry." And,
according to the Aberdeen Group, "Because of the complexity of catalog
management and the difficulty of dealing with multiple supplier exchange
standards, we found that not a single organization had implemented more than 10
to
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15 suppliers on their e-procurement system [in 1999]." These bottlenecks are not
only delaying suppliers' entry into these new e-procurement channels, they are
placing control of their product information in outside hands, and limiting
their ability to keep their product and pricing information current.
In order to participate and compete effectively in the e-marketplace,
suppliers must take control over the creation, management and delivery of their
product information, including rich content such as graphics and animation.
A key part of the solution to the content management problem is XML, which
is becoming the accepted format for information interchange over the Web. XML is
a standardized, interoperable document format that uses custom tags to describe
the structure and meaning of information within a document as well as how it
should be presented. This provides greater control over how information is
collected, combined, formatted and delivered to different audiences for
different purposes. Because of this versatility and utility, XML is emerging as
the document format used by e-marketplaces.
But XML is simply a data standard. For suppliers to overcome the challenges
of delivering their product information to e-procurement channels, they need to
be able to resolve four main issues:
COLLECTION: Product information is generally stored throughout an
enterprise in a number of disparate systems and formats. Product information and
specifications may be stored in word processing, desktop publishing and Web
formats, while part numbers, pricing and availability information may be stored
in relational databases, spreadsheets, accounting and ERP systems, as well as
other applications. Suppliers need an effective and efficient way to integrate
new e-commerce and e-procurement processes with existing systems and to collect
this information for delivery to electronic marketplaces.
TRANSLATION/NORMALIZATION: Suppliers must be able to deliver product
information in the format required by individual e-marketplaces and
e-procurement systems. Although XML is becoming the standard format for
information interchange over the Web, different e-markets and e-procurement
systems use different dialects of XML. In addition, each system uses
standardized units of measurement, product coding schemes and product
identifiers that may not correspond to those used by a supplier's internal
systems. This data has to be standardized for easy transformation to the schemes
used by each system.
MANAGEMENT: In order to be successful in e-markets, suppliers need a secure
and effective way to manage and deliver reliable, up-to-date, product
information that is personalized for different buying groups. To accommodate
regional requirements, language needs and specialized pricing arrangements,
suppliers must have the flexibility to create and deliver customized product
listings for different e-markets and e-procurement systems. In order to react
effectively to market conditions, suppliers must also be able to update product
and pricing information rapidly across all channels and target new e-markets as
they are identified. Finally, they require assured, secure delivery of approved
product information to electronic marketplaces.
DIFFERENTIATION: In order to compete effectively, retain and enhance
margins and build customer loyalty within e-marketplaces, suppliers need new
ways to present their products in a manner that will improve branding and
differentiate themselves from the competition. Therefore, in addition to basic
product, pricing and distribution information, suppliers must be able to include
images, marketing information and other rich content.
BUSINESS STRATEGY
At present, buy-side e-market infrastructure is well supported by companies
such as Ariba and Commence One, whereas there are no dominant supply-side
infrastructure companies. Our goal is to be a dominant supplier of software
products for the creation and management of content by suppliers in e-business.
To that end, we have developed XMetaL and MarketAgility which we believe address
the four challenges described above for suppliers. In order to be successful,
our strategy is to:
o work with customers in key market sectors to become reference accounts
for prospective customers;
o establish technology partnerships with major vendors of complementary
products;
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o establish strategic partnerships with e-marketplaces;
o establish a strong distribution network of value-added resellers;
o expand our direct sales efforts in North America and internationally;
o invest in research and development to sustain leadership; and
o maintain a solid financial structure to fund our operations.
TECHNOLOGY BACKGROUND: HTML, SGML AND XML
HYPER TEXT MARKUP LANGUAGE (HTML)
HTML is currently the most prevalent language used on the World Wide Web.
HTML is used to encode display information on Web pages. Web Browsers, such as
Microsoft Internet Explorer and Netscape Navigator, use this display information
to format Web Pages on individuals' screens as they browse the Web. HTML uses
"tags" to indicate how a particular item should be formatted. It is concerned
with the set up or presentation, as opposed to the content or substance, of the
information. For example, if a name is to be displayed in bold, HTML dictates
that that word should be surrounded by the bold ("b") tag, as follows:
(begin bold tag) b John Doe (end bold)
HTML is an international standard governed by the W3C, an industry
organization composed of member companies with the objective of developing
international standards for the World Wide Web.
STANDARD GENERALIZED MARKUP LANGUAGE (SGML)
SGML is the parent technology to HTML. SGML is an open international
standard governed by the International Standards Organization. SGML was
developed in the 1980 to enable the encoding of important documents in a
standard format, which was independent of any particular software vendor. SGML's
focus is on encoding the information contained in documents, as opposed to the
set up or presentation of that information. Formatting (the laying out of a
document on a printed page or display) is accomplished as a separate step,
allowing the same information to be displayed on multiple destinations, such as
print, CD-ROM and online, from the same source. SGML, like HTML, uses "tags" to
label items in a document but, unlike HTML, these tags refer to an item's
meaning rather than its format. For example, the name of the author of a given
article might be encoded as follows:
[OPEN BRACKET author CLOSE BRACKET John Doe END OPEN BRACKET author CLOSE
BRACKET
SGML is used in a number of high-end publishing and engineering
applications for a number of industries, including telecommunications,
aerospace, pharmaceuticals, legal and commercial publishing and semiconductors.
However, the growth of SGML usage is hampered by the fact that the language was
not designed for use on the World Wide Web.
EXTENSIBLE MARKUP LANGUAGE (XML)
As noted above, the HTML protocol was designed to allow the display of
information on the Web. However, because it is focused on presentation and not
content, it does not assist in encoding the meaning of displayed information.
The use of the Web for e-commerce imposes new requirements on Web content. These
requirements go beyond simple presentation to full-fledged information
processing. For example, a purchase order sent to a supplier needs to be
processed by that supplier's order entry system, not merely displayed on
someone's screen. Also, while HTML is useful for displaying product information
to prospective customers, it does not allow a computer program to automatically
search and compare products on the Web. As a result, labor-intensive manual
searches must be performed.
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Our Chief Scientist, Peter Sharpe, and representatives of several other
technology companies identified the need to create a new language that would
enable information processing and exchange on the Web using SGML as its
foundation. In 1996, this group proposed the concept to the W3C, founded the XML
Working Group and produced the XML specification. In February 1998, the XML
specification was approved by the W3C and officially designated as a standard by
the Director of the W3C.
XML, like both HTML and SGML, uses "tags" to identify items in an
electronic document. XML is "extensible" in the sense that it is capable of
being expanded or customized. As such, it allows users to define new tags as
required by a given application. For example, tags relating to financial
information might be (html tag)"earnings per share" and (OPEN BRACKET)revenue
(CLOSED BRACKET), whereas tags relating to a product catalog might include
(BEGIN HTML TAG)product name(CLOSED BRACKET) and (OPEN BRACKET)price(CLOSED
BRACKET). A typical HTML Web Page might encode a product description as follows:
(BEGIN BOLD TAG)Hoover Vacuum Cleaner(END BOLD TAG)
(BEGIN PARAGRAPH TAG) This vacuum has power and is light weight (END
PARAGRAPH TAG)
(BEGIN BOLD TAG) Special Price: $99.95 (END BOLD TAG)
(In HTML ("BEGIN BOLD TAG) b" denotes bold font and ("BEGIN PARAGRAPH TAG p")
denotes a paragraph displayed in normal font.)
Using XML, the same information would be encoded as follows:
(OPEN BRACKET) product name(CLOSED BRACKET) Hoover Vacuum Cleaner(END OPEN
BRACKET)product name(CLOSED BRACKET)
(OPEN BRACKET) description (CLOSED BRACKET) This vacuum has power and is
light weight (END OPEN BRACKET) description (CLOSE BRACKET)
(OPEN BRACKET) price (CLOSE BRACKET) $99.95 (END OPEN BRACKET)price (CLOSE
BRACKET)
By clearly tagging electronic content and identifying its constituent
components (product name, description and price above), XML enables computer
applications to create, share and process information automatically.
There are a number of organizations devoted to establishing standard tag
sets for particular applications, including XML.org (of which we are a founding
member), Microsoft's BizTalk and Rosetta.net. We continue to participate in the
development and future direction of XML and its related standards, alongside
other technology companies.
OUR PRODUCTS
XMETAL
Released in May 1999, XMetaL is our flagship product. XMetaL is a software
program that enables organizations to create XML content easily and avoid the
complexities of formatting languages. As organizations continue to adopt XML,
they will need to create valid XML documents that conform precisely to the rules
of a specific application. For example, product descriptions for product
catalogues, user guides for consumer products, articles, newsletters, purchase
orders, bills of material and part specifications all have particular XML rules
as to their structure and syntax. XMetaL enables non-technical individuals to
create valid XML documents without having to remember and correctly apply all
these rules. XMetaL reduces training costs and enables businesses to deploy XML
applications broadly, both internally and to business partners.
Unlike HTML, which has a fixed set of tags which can be easily learned and
applied, XML uses arbitrary tags which can vary with each application. XML also
incorporates rules about how these tags are to be combined and used. These rules
are specific to each application. Consequently, it is much more difficult for
people to create valid XML documents.
XMetaL enables people to create XML content from scratch or by importing
information from word processors, spreadsheets and databases. XMetaL requires
minimal customization and eliminates lengthy learning curves and
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training costs associated with alternative options. XMetaL won the Outstanding
Product of the Year in the Authoring Tools category at the Web'99 Web Tool
Awards presented by Web Techniques, a respected industry journal. XMetaL also
was named one of Internet Week's "Best of the Best" and one of the "Most
Innovative" software packages in Internet World's Best of the Year Awards. We
have announced strategic partnerships with XML solutions vendors such as
Vignette, Documentum, and Software AG to integrate XMetaL with these vendors'
products.
XMetaL integrates with content management systems, ensuring that the
content coming into those systems adheres to the rules specific to the
application in question. XML content is then stored in these systems as reusable
components which can be selectively processed and displayed by Web applications.
Using this kind of solution, Web architects and designers are free to manage the
content, redeploy applications and connect to new partners and new systems,
without disrupting the work of content contributors. XMetaL communicates with
the content management system to ensure that content is properly stored and
allows users to work in a familiar interface.
On June 26, 2000, we announced the shipping of XMetaL 2.0, a major upgrade
to XMetaL.
MARKETAGILITY
SoftQuad's MarketAgility is an XML-based content management solution that
gives suppliers an efficient and cost-effective way to move product information
from their enterprise to multiple e-procurement channels.
Drawing on SoftQuad's expertise in XML, MarketAgility allows suppliers to:
o collect product information from wherever it resides in their
enterprises, whether in content management systems, ERPs, other
databases, or Word and Excel files;
o transform and deliver product information to e-markets and
e-procurement systems using the XML formats and schemas they require;
o rapidly and incrementally update product and pricing information
across all channels;
o create and manage multiple catalogs that reflect different regional
requirements, languages, and pricing information; and
o differentiate themselves in the e-marketplace by supplementing product
data with rich content, created and revised directly in XML using
XMetaL technology.
MARKETAGILITY ARCHITECTURE
MarketAgility's architecture is made up of three components: the
MarketAgility XML Connector, the MarketAgility XML Server and the MarketAgility
XML Transporter.
o MARKETAGILITY XML CONNECTOR
The MarketAgility XML Connector consists of a series of information
processors and XML composition tools that can collect, manipulate and
standardize product information stored throughout a supplier's enterprise.
COLLECTING DATA. XML Connector provides secure, reliable retrieval of both
structured and unstructured data sources from local and remote data
repositories.
Structured data can be collected from relational databases, ERP systems,
office productivity applications like spreadsheets, standardized reports and Web
pages, as well as content management systems and enterprise applications.
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The XML Connector can retrieve information from inconsistent formats like
desktop publishing and word processing applications, as well HTML and XML pages.
Because not all information sources allow automated retrieval,
MarketAgility provides an XML composition workbench where suppliers can extract
information from disparate data sources.
ENHANCING AND VALIDATING DATA. MarketAgility's XML composition workbench
also features powerful validation, viewing and editing capabilities. Validation
ensures that information is consistent with corporate data sources. Suppliers
can view collected data to identify exceptional cases and, using MarketAgility's
XML content creation tools, modify data directly. These same editing tools allow
suppliers to easily supplement their product data with rich content to help
better differentiate themselves in e-markets.
MAPPING AND STANDARDIZING DATA. The XML Connector maps content from its
original sources to MarketAgility's internal XML schema. Data is processed to
ensure that disparate data representations are harmonized to use standard units
of measurement, product coding schemes and product identifiers. This facilitates
transformation to the schemes used by individual marketplaces.
o MARKETAGILITY XML SERVER
The XML Server provides server-based control over the storage, management
and delivery of product information to multiple e-markets. Built on industry
standard databases, and administered through a Web interface, it provides a
secure and reliable repository and staging area for the development and
management of customized product listings.
RAPID AUTOMATIC UPDATES. In conjunction with the XML Connector, the XML
Server provides a sophisticated mechanism for automatically detecting changes in
the original data sources, and providing rapid, incremental updates to collected
product information. When changes are detected, the XML Server pulls updated
data from original source materials and integrates it into the database. After
updates have been validated and approved, using the XML Server's workflow, they
are pushed using the XML Server's workflow to marketplaces or e-procurement
systems either on demand or during regularly scheduled updates.
STAGING AND WORKFLOW. The XML Server provides a staging area where
suppliers can preview, revise and approve individual product entries and entire
product listings. Suppliers can review listings for accuracy before they are
sent to e-marketplaces. To support this capability further, the XML Server uses
a workflow system for approvals and to ensure only authorized users can access
and revise entries.
o MARKETAGILITY XML TRANSPORTER (COMMUNICATOR /DISPATCHER/ BROADCASTER
/PUBLISHER)
The XML Transporter controls the extraction, transformation and the
assured, secure delivery of a supplier's product information from the XML Server
to multiple e-marketplaces, e-procurement systems and other electronic
distribution channels.
CUSTOMIZED PRODUCT LISTINGS. The XML Transporter extracts required product
data residing on the XML Server based on the needs of different e-markets.
Customized datasets can be defined based on parameters such as marketplace,
customer, geographic region or language. This process can be automated by
incorporating business rules to determine required information, presentation and
conditional routing.
AUTOMATIC TRANSFORMATION. The XML Transporter automatically converts
customized product information from MarketAgility's internal data model to those
required by specific e-markets. Data is validated according to the schemas used
by each marketplace to ensure error free postings and updates.
ASSURED DELIVERY. Finally, the XML Transporter provides assured, secure
delivery of product information to multiple electronic channels, including
e-marketplaces and e-procurement systems.
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HOTMETAL
Our HoTMetaL software program was the first commercially available HTML
editor. Currently in its sixth version, HoTMetaL remains a very versatile
HTML-based Web page creation and management tool. Its powerful, customizable,
and extensible features give developers the advanced capabilities and
productivity tools required to quickly create and display Web sites. It is a
comprehensive Web publishing solution targeted at the Web developer and has an
installed base of over 100,000 users worldwide.
CUSTOMERS AND MARKETS
Our products serve the retail market and the corporate market. We target
the retail market with HoTMetaL and the corporate market with our XML products,
XMetaL and MarketAgility.
For the year ended September 30, 2000, there were four customers in the
United States and one customer in Europe who each had greater than 10% of total
sales in their respective markets. For the year ended September 30, 1999, there
were two customers in the United States and one customer in Europe who each had
greater than 10% of total sales in their respective markets.
HOTMETAL
HoTMetaL has a customer base of Web developers and consumers. HoTMetaL is
distributed through retail channels in North America and Europe, with roughly
30% of our sales in fiscal 1999 being through our Web site. Retail distribution
partners include Ingram Micro, Techdata, CompUSA, Best Buy, Ingram Micro UK and
Computer World.
XMETAL
XMetaL is targeted to e-business applications in the following market
segments: e-publishing, e-commerce and knowledge management.
o E-PUBLISHING
Web publishers must keep their content fresh in order to increase and
sustain readership. Sites change daily, or even several times per day.
Turn-around times are short and publishing deadlines tight. In such an
environment, "posting" content manually on a Web site is inefficient and
difficult to manage, particularly if content simultaneously comes from numerous
external content suppliers and internal contributing writers. Accordingly,
high-volume online publishers rely on Web publishing applications, which create
Web Pages on a continuous basis from content stored in a database.
As the Web turns more and more organizations into publishers, for both
internal and public Web presence, the demand for these solutions is growing. The
central issue is the same - how to allow non-technical writers to contribute
content to the Web site without requiring a manual process that slows down the
Web group or requires expensive Web design houses to perform routine Web
updates. Due to its inherent structure, XML Web content can be automatically
read by publishing applications and processed in a streamlined fashion.
XMetaL, due to its ease-of-use and ability to generate valid XML, is an
ideal solution for non-technical writers to create XML Web content to power
modern Web publishing and content management systems.
o E-COMMERCE
The central challenge for e-commerce vendors is to find the most direct
market for their products online. There are a large number of business models
and distribution channels, and new ones emerge all the time (including building
a portal or destination web site, participating in affiliate and reseller
programs to list products in existing high-traffic sites, participating in
electronic markets and vertical portals, or a combination of these techniques).
Vendors must be able to tailor product information to specific channels quickly
while keeping all information synchronized, up-to-date and consistent.
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Management of this electronic content, therefore, plays a key role in
determining the success of an e-commerce strategy. The content being processed
includes product descriptions, pricing information, and a whole host of
value-added content such as product reviews, product comparisons, links to
related products and other commentary.
As the number of potential channels continues to multiply and the volume of
business increases, the need for vendors to build flexible and scaleable
electronic catalogues of products and services continues to grow. XMetaL is an
ideal solution to create and maintain XML content within these e-commerce
applications, because of its flexibility, ease of use and ability to generate
valid XML from inputs prepared by non-technical sources.
o KNOWLEDGE MANAGEMENT
Knowledge management is the effective gathering and distribution of
corporate knowledge to better support employees, partners and customers.
Corporate knowledge includes information about procedures, products and
services, case studies, usage scenarios and key competitive issues. Examples of
knowledge management applications include customer help desk systems, document
management systems, search and retrieval tools, and knowledge bases. Knowledge
management applications are important to enable service offerings over the Web,
helping customers and distribution partners get accurate, timely information to
better support business transactions.
XML plays an important role in these systems by organizing content
fragments, supporting intelligent searching, and allowing control of the flow of
content automatically. XMetaL enables information workers to contribute content
directly into these knowledge management applications without being aware of
their internal structure.
MARKETAGILITY
MarketAgility is targeted at suppliers participating in e-marketplaces and
e-procurement systems who wish to manage, control and deliver their product
information using XML. This segment also is targeted by XMetaL. See "Customers
and Markets-XMetaL-E-commerce."
SALES AND MARKETING
Central to SoftQuad's marketing strategy is the development of partnerships
to significantly expand its market reach. To date, XMetaL market development
efforts have secured a number of key strategic partnerships with various
companies that provide XML-based technologies and services. We are focusing on
expanding these relationships with various companies focused on e-procurement,
e-markets and XML. We believe that such relationships create opportunities for
SoftQuad as well as its partners, and will greatly supplement its direct sales
efforts. SoftQuad's partnering efforts focus on three areas: technology
partnerships, e-market partnerships and solutions providers.
o TECHNOLOGY PARTNERS - SoftQuad has and is further expanding
partnerships with companies that are involved in the developing and
marketing of complementary technologies. Specifically, SoftQuad
pursues relationships with companies developing XML technology and
XML-based products with which XMetaL software can be integrated.
Through such partnerships, we hope to expand the XMetaL and
MarketAgility user base. Some of our partners in this category include
Vignette, Documentum and Software AG.
o E-MARKET PARTNERS - SoftQuad is targeting e-markets and e-procurement
hubs that are geared towards e-enabling the supplier base of these
large enterprises by implementing MarketAgility. We believe that a
large opportunity exists here for SoftQuad as these companies have
extensive lists of suppliers most of whom are not technologically
positioned to efficiently participate in e-markets.
o SOLUTIONS PROVIDERS - Solutions provider partners, such as systems
integrators and valued-added resellers, will integrate XMetaL and
MarketAgility solutions into their e-commerce packages. SoftQuad is
looking to build its network of solutions provider partners. Many
specialize in XML solutions to vertical markets and, in addition,
provide value-added services in the form of consulting services,
training, installation, technical support, and system configuration.
We have signed reseller agreements with a number of XML capable
value-added resellers. These organizations combine their own expertise
and professional services
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with market leading products to deliver fully customized solutions to
customers. Value-added resellers receive special discounts from us and
make a margin on product sales. To date, our network of value-added
resellers has over forty members in thirteen countries, including
DataChannel, Reed Technology, STEP and Agra Systems. System
Integrators, such as consulting firms, would integrate our XML
software as part of the total solution they provide to clients. They
would work with SoftQuad on a project-by-project basis and jointly
ensure successful project implementation and post implementation
support.
PROMOTIONAL ACTIVITIES
Our promotional activities combine awareness campaigns (through public
relations and trade show attendances) with targeted lead generation (through
direct mail, free evaluations and Web sites). We use professional public
relations agencies to manage our media relations program in the United States,
Canada and Europe. Media relations activities include drafting press releases,
press briefings and encouraging product reviews and corporate profiles. In
addition, XML-related trade shows are an important element of the marketing
strategy since they provide a one-to-many communications and sales opportunity.
XML-specific trade shows include XML 99, XML One and XML World, which are each
held twice a year, once in North America and once in Europe. Attendees include
individuals responsible for technology purchases in large organizations. Due to
our involvement in various industry standards setting committees, a number of
our key personnel are routinely invited to deliver papers at conferences and
seminars. We intend to complement these speaking opportunities with regional
seminars which will showcase proven XML solutions using XMetaL and
MarketAgility.
OUR COMPETITION
The market for our products is intensely competitive, subject to rapid
technological change and significantly affected by new product introductions and
other market activities of industry participants. We expect competition to
persist and intensify in the future. To read more about risks resulting from our
competition, see "Risk Factors--We Face Intense Competition."
XMETAL COMPETITION
Alternative solutions to XMetaL presently include modified SGML authoring
tools, enhanced text editors which require a high degree of knowledge of XML and
solutions based on word processors. Although some of these alternatives are
functionally similar to XMetaL, we believe that none adequately offers all the
features embedded in XMetaL.
o SGML AUTHORING TOOLS
Traditional SGML authoring tools are very specialized and require an author
who is experienced not only in SGML, but also in the particular document types
being used. The high set-up, deployment and installation costs typical of these
tools are justified only in specialized applications. Recent attempts by SGML
tool providers to support XML have not, in our view, altered these fundamental
characteristics in their products. Products in this category include Excosoft's
Documentor, Adobe's FrameMaker+SGML, Interleaf Panorama, and ArborText's Adept
Editor. Market penetration of these products is, we believe, limited in our
target markets.
o TEXT BASED XML EDITORS
Most of the XML authoring software introduced to date consists of enhanced
text editors of various kinds. These programs require a high degree of
understanding of XML and are not generally suitable for commercial content
authoring by ordinary business users. They are used primarily by software
developers creating XML data-oriented systems. Products in this category include
Vervet Logic's XML Pro and Stilo.
o MICROSOFT WORD
Microsoft Word is not an XML authoring application; it does not support the
definition of tags, nor does it create validated XML content, both of which are
essential attributes of a commercial grade XML editor. Microsoft
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Office 2000 will not create valid XML content, but uses XML as a storage format.
Microsoft Word's design and architecture is optimized for paper publishing,
where presentation, not structure, is the primary concern.
As a result, Microsoft Word documents must undergo a conversion process to
be translated into XML. Conversion is expensive, labor-intensive, time-consuming
and error-prone. Conversion is employed effectively in applications where the
documents being converted do not change often and have a useful life of several
years, such as repair and maintenance procedures for a particular model of
airplane that might be in service for a decade or more. On the Web, where
lead-time is short and the emphasis is on new, up-to-the-minute information,
continuous conversion of new content is unworkable.
MARKETAGILITY COMPETITION
The marketplace for MarketAgility is a new and developing environment. Many
vendors have or are developing XML-based solutions to address content
collection, translation and management. E-marketplaces and e-procurement systems
continue to evolve and their capability to accept rich content continues to
evolve. Competition for MarketAgility may come from e-market and e-procurement
infrastructure software vendors, e-catalog aggregators and e-catalog software
solution vendors, ERP vendors, e-publishing solutions vendors and content
management, document management, workflow and workgroup software solutions
vendors. MarketAgility's competitive advantage is its ability to collect and
translate into XML both structured and unstructured content. Current solutions
for the collection and translation of unstructured content are labor-intensive
and not very scaleable.
HOTMETAL COMPETITION
HoTMetaL faces strong competition from products such as Microsoft's
FrontPage, Macromedia's Dreamweaver and Adobe's GoLive. As a result, HoTMetaL
revenues have declined in recent quarters. As we focus our efforts on our XML
products, we expect sales of HoTMetaL to continue to decline.
PROPRIETARY RIGHTS AND LICENSING
Our success and ability to compete is dependent on our ability to develop
and maintain the proprietary aspects of our technology and operate without
infringing on the proprietary rights of others. We rely on a combination of
trademark, trade secret, and copyright law and contractual restrictions to
protect the proprietary aspects of our technology. These legal protections
afford only limited protection for our technology. We presently own no patents.
We seek to protect our source code for our software, documentation and other
written materials under trade secret and copyright laws. We license our software
pursuant to signed license or "shrinkwrap" agreements that impose certain
restrictions on the licensee's ability to utilize the software. Finally, we seek
to avoid disclosure of our intellectual property by requiring employees and
consultants with access to our proprietary information to execute
confidentiality agreements with us and by restricting access to our source code.
Due to rapid technological change, we believe that factors such as the
technological and creative skills of our personnel, new product developments and
enhancements to existing products are more important to establishing and
maintaining a technology leadership position than legal protections.
We also have rights in the trademarks that we use to market our products.
These trademarks include SoftQuad, HoTMetaL, MarketAgility and XMetaL. We have
applied to register our trademarks in the United States, Canada, the United
Kingdom and the European Union. We have received registrations for SoftQuad,
HoTMetaL and XMetaL, among others.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. Policing unauthorized use of our products is
difficult and while we are unable to determine the extent to which piracy of our
software exists, we expect software piracy to be a persistent problem.
Litigation may be necessary in the future to enforce our intellectual property
rights, to protect our trade secrets, to determine the validity and scope of the
proprietary rights of others or to defend against claims of infringement or
invalidity. However, the laws of many countries do not protect our proprietary
rights to as great an extent as do the laws of the United States and Canada. Any
such resulting litigation could result in substantial costs and diversion of
resources and could have a material adverse effect on our business, operating
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results and financial condition. We cannot assure you that our means of
protecting our proprietary rights will be adequate or that our competitors will
not independently develop similar technology. If we fail to meaningfully protect
our proprietary rights, our business, operating results and financial condition
could be materially adversely affected.
To date, we have not been notified that our products infringe the
proprietary rights of third parties, but we cannot assure you that third parties
will not claim infringement by us with respect to our current or future
products. We expect that developers of Web-based commerce software products will
increasingly be subject to infringement claims as the number of products and
competitors in our industry segment grows and as the functionality of products
in different segments of the software industry increasingly overlaps. Any such
claims, with or without merit, could be time-consuming to defend, result in
costly litigation, divert management's attention and resources, cause product
shipment delays or require us to enter into royalty or licensing agreements.
Such royalty or licensing agreements, if required, may not be available on terms
acceptable to us or at all. A successful claim of product infringement against
us and our failure or inability to license the infringed technology or develop
or license technology with comparable functionality could have a material
adverse effect our business, financial condition and operating results.
We integrate third-party software into our products. This third-party
software may not continue to be available on commercially reasonable terms. If
we cannot maintain licenses to key third-party software, 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.
REVENUES
We presently derive revenues from the sale of software product licenses for
our HoTMetaL and XMetaL products, as well as from support and maintenance
agreements. Our HoTMetaL product is priced at $129 per license and XMetaL is
priced at $495 per license. Product license revenue is recognized on delivery if
an agreement exists with a fixed or determinable fee and collection of the
related receivable is reasonably assured. More specifically, revenue is
recognized upon shipment to a channel distributor; we apply a 10% provision
allowance for potential returns. Actual returns of product are then applied
against this provision allowance. Typically, the provision allowance grows
throughout the year. When a new version of the product is shipped, the returns
of the older version from the distributor and retailer's inventories are applied
against this provision allowance. We also derive revenues from product upgrades.
HoTMetaL customers generally do not purchase annual maintenance agreements,
while the majority of XMetaL customers do purchase annual maintenance
agreements. The pricing of maintenance agreements is based on a percentage of
the associated product license agreement. We record cash receipts under
maintenance agreements as deferred revenue. Deferred revenue is recognized as
support revenue on a straight line basis over the term of the maintenance
agreements, typically one year. The timing and amount of cash receipts from
clients can vary significantly depending on specific payment and contract terms
and can have a significant impact on the amount of deferred revenue in any given
period.
Cost of revenue consists of costs to manufacture, package and distribute
products and related documentation, royalties to third party vendors and
inventory write-downs. Since inception, we have incurred substantial costs to
develop our technology and products, and to recruit and train engineering, sales
and marketing, and administrative personnel. As a result, we have incurred net
losses in each fiscal quarter since inception except for the quarter ended
December 31, 1998. At September 30, 2000, we had an accumulated deficit of $9.8
million.
EMPLOYEES
As of December 13, 2000, we had a total of 122 full-time employees. Of
these employees, 34 were in development, 39 in sales and marketing, 11 in
product solution and customer support, 12 in content services group and 26 in
finance and administration. Our future success depends in part on our ability to
attract, retain and motivate highly qualified technical and management
personnel, for whom competition is intense. From time to time we also employ
independent contractors to support our product solution services, product
development, sales, marketing and business development activities. Our employees
are not represented by any collective bargaining unit, and we have never
experienced a work stoppage. We believe relations with our employees are good.
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<PAGE>
OFFICE LOCATIONS
We maintain our principal executive offices at 161 Eglinton Avenue East,
Suite 400, Toronto, Ontario M4P 1J5 Canada, which consists of approximately
8,541 square feet of office space under a lease expiring January 31, 2002. Our
research and development group is primarily located in a 10,697 square foot
facility located in Vancouver, Canada under a lease expiring August 30, 2002.
Our Content Services Group is located in a 2,300 square foot facility located in
Petaluma, California under a lease expiring January 1, 2004. We also lease 3,000
square feet of office space for our European headquarters in London, England,
under a 5-year lease expiring May 31, 2005.
LEGAL PROCEEDINGS
We are not a party to any pending material legal proceedings.
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<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The following table sets out certain information regarding the directors,
executive officers and key employees of SoftQuad Software, Ltd. as of December
13, 2000.
<TABLE>
<CAPTION>
NAME AGE POSITION
------------------- ---------- ----------------------------------------------------------
<S> <C> <C>
Roberto Drassinower 37 Chief Executive Officer and Director
Andrew Muroff 32 President and a Director
David R. Lewis 55 Chief Financial Officer, Secretary and Treasurer
Bruce Sharpe 46 Chief Technology Officer
Peter Sharpe 48 Chief Scientist
Margo Day 40 Executive Vice President of Strategy & Business Development
Pamela Geoga 49 Vice President of Sales
Joan Dea 37 Director
Robert Bagga 31 Director
Lawrence Goldberg 50 Director
Brock Armstrong 54 Director
</TABLE>
ROBERTO DRASSINOWER has served as the President and Chief Executive Officer of
SoftQuad Canada since its inception in October 1998. He was appointed to the
same positions with SoftQuad Software, Ltd., and elected as a director of
SoftQuad Software, Ltd., on its inception in April 2000. He began his career
with SoftQuad in January 1996, when it was part of SoftQuad International Inc.
Over the last three years, Mr. Drassinower has been instrumental in refocusing
our business on our XML products. From January 1995 to December 1995, Mr.
Drassinower served as President of Carolian Systems, a UNIX network management
company. While with Carolian Systems, Mr. Drassinower was responsible for
research and development, technical support and developing a successful
corporate sales team serving customers such as Compaq, Pepsi and 3M. Mr.
Drassinower has worked in the software industry since 1985 and has over seven
years experience managing technology businesses. In addition, Mr. Drassinower
has over five years experience as a software engineer and systems designer.
ANDREW MUROFF, MBA, has many years of experience in leading mergers and
acquisitions efforts for high-tech public companies, having led and closed about
$100 million in acquisitions for a publicly traded company as well as having
headed up business development for an international internet service provider.
Before joining SoftQuad as President, Mr. Muroff was Director of Corporate and
Legal Development of CYBERPLEX, Inc (CX:TSE), an international internet
professional services firm, from January 1999 to October 2000. From May 1996 to
December 1998, Mr. Muroff was Director of Business Development at Managed
Network Systems, Inc., an international internet communications provider, where
he cultivated key strategic partnerships. Mr. Muroff is a member of the Michigan
Bar and holds an MBA degree from the University of Windsor, a BA in Economics
from the University of Western Ontario and a law degree from the Detroit College
of Law at Michigan State University.
DAVID R. LEWIS, CA has nearly 30 years of business experience including more
than 15 years in the high-tech industry with specific software and Internet
experience in the B2C and B2B global marketplaces. Since 1992, he has been CFO
to a number of Nasdaq-listed companies, accumulating strong global experience in
the software and B2C/B2B marketplaces. Prior to joining SoftQuad, from July 1999
to October 2000 he was CFO, Corporate Secretary, and Treasurer for SUMmedia.com
Inc., a publicly traded (OTC Bulletin Board: ISUM) global, internet media and
marketing company in the content management applications and solution sectors.
From March 1999 to July 1999, Mr. Lewis was Chief Financial Officer of Alya
International, Inc. (OTCBB: ALYA), a publicly listed
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<PAGE>
software company engaged in the electronic security industry. From March 1998 to
December 1999, Mr. Lewis was Chief Financial Officer, Corporate Secretary, and
Director of Net Nanny Software International Inc. (V. NNS; OTCBB:NNSWF), a
publicly listed software company involved in the personal computer e-commerce
business. From September 1996 to February 1998, Mr. Lewis was Chief Financial
Officer, Director and Corporate Secretary for Big Server Software Inc., a
software company which developed enterprise-wide business databases. From July
1994 to February 1996, Mr. Lewis was Chief Financial Officer of Weir Jones
Automotive Inc., a developer of patented automotive security devices. Mr. Lewis
is a Chartered Accountant and holds a Bachelor of Engineering from Dalhousie
University.
BRUCE SHARPE has served as the Chief Technology Officer of SoftQuad Canada since
its inception in October 1998. He was appointed to the same position with
SoftQuad Software, Ltd., and elected as a director of SoftQuad Software, Ltd. on
its inception in April 2000. He held the same position when our business was
conducted by SoftQuad International Inc. from January 1996 to October 1998. His
responsibilities include product development activities, product design, feature
selection, project management and quality assurance. From October 1993 to
December 1995, Mr. Sharpe was the Director of R&D at Gravis Computer
Technologies Ltd., a manufacturer of PC peripherals. Mr. Sharpe holds a Ph.D. in
mathematics from the University of British Columbia. He is the brother of Peter
Sharpe.
PETER SHARPE has served as the Chief Scientist of SoftQuad Canada since its
inception in October 1998. He was appointed to the same position with SoftQuad
Software, Ltd. on its inception in April 2000. He held the same position when
our business was conducted by SoftQuad International Inc. from August 1996 to
October 1998. Mr. Sharpe is the head designer and lead programmer of our
products, including HoTMetaL and XMetaL. Mr. Sharpe was one of the founders of
SoftQuad International Inc., and held the position of Director of SGML
Development from February 1986 to May 1996. Mr. Sharpe was one of the original
creators of XML and worked with other industry participants to define the XML
standard as a founding member of the World Wide Web Consortium and its XML
Technical Working Group. Mr. Sharpe holds a Masters of Science-Mathematics from
the University of Toronto. He is the brother of Bruce Sharpe.
MARGO DAY has served as Vice President, Business Development of SoftQuad
Software, Ltd. from April 2000 to October 2000. and Executive Vice President
Strategy & Business Development from October 2000. From August 1999 to March
2000, Ms. Day was Vice President and Managing Director of Go2Net, one of the
Internet's leading networks. While with Go2Net, she created HyperMart Business
Unit, a leading small business e-commerce solutions-hosting community that now
boasts more than 800,000 members. From November 1998 to July 1999, Ms. Day was
Executive Vice President of Medweb, a provider of web-based telemedicine
solutions. From April 1992 to September 1998, Ms. Day was with Lotus Development
Corp., a provider of knowledge management, e-business, desktop and collaborative
software and professional services, where she held increasingly senior roles,
including Senior Director for North American small and medium business, sales
and field marketing, Director of Enterprise Sales and Director of US Business
Partner Sales.
PAMELA GEOGA has served as Vice President, Sales of SoftQuad Canada and SoftQuad
Software, Ltd. since March 2000. For 25 years until July 1998, Ms. Geoga worked
for IBM Corporation and its subsidiary Lotus Development Corp. As Vice
President, North America, for Lotus, a position she held from May 1988 to July
1998, Ms. Geoga led sales and service teams of up to 800 professionals
generating annual revenues of approximately $600 million. Under her direction,
the North American division evolved from a group of independent operating units
into a fully integrated operation with dynamic, cross-organizational teams
focused on specific market segments. She also introduced the Lotus Solution
Sales process, a process which became a standard for IBM senior executives
worldwide. Ms. Geoga holds a Bachelor of Science degree from Western Michigan
University
JOAN DEA has been a director of SoftQuad Software, Ltd. since June 13, 2000. Ms.
Dea is currently a Vice President and an officer of The Boston Consulting Group
("BCG"). Ms. Dea became an officer of BCG in 1994 after its merger with The
Canada Consulting Group. She had been with Canada Consulting since 1989 and was
a manager at the time of the merger. At BCG, Ms. Dea has co-led the development
of BCG's global e-ventures business, which incubates and builds e-commerce
businesses. Some of the e-commerce ventures Ms. Dea has been instrumental in
building include a comprehensive consumer electronics navigation and retail
site, a licensing marketplace for pharmaceutical companies and a B2B exchange.
Ms. Dea also has extensive international consulting experience assisting
corporations improve their competitiveness and performance. From 1995 to 1999,
Ms. Dea built and led
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<PAGE>
BCG's Canadian financial services practice. Ms. Dea holds a B.A. Economics and
Political Science from Yale University and an MSc Economics (International
Relations) from the London School of Economics.
ROBERT BAGGA has been a director of SoftQuad Software, Ltd. since July 27, 2000.
Mr. Bagga is currently the Chief Executive Officer of iJoin.com, Inc., a
provider of online B2B creative solutions. Mr. Bagga founded Barter Business
Exchange in 1993, and held the position of Chief Executive Officer until March
1999, when he successfully negotiated the merger of Barter Business Exchange
with Seattle-based International Barter Corporation. The Company created by the
merger, Ubarter.com, quickly became one of the world's largest B2B barter
companies. After the merger, Mr. Bagga held the position of Chief Operating
Officer of Ubarter.com until March 2000, when he became the Chief Executive
Officer of iJoin.com. Mr. Bagga studied economics at York University. He has
served on the Board of Directors of the International Reciprocal Trade
Association, where he headed the Certification Committee responsible for the
Certified Trade Broker Program, and is currently a member of the Young
Entrepreneurs Organization.
LAWRENCE GOLDBERG is the Executive Vice President and Chief Financial Officer of
Pinetree Capital Corp. Mr. Goldberg, a Chartered Accountant, brings with him
over 20 years of experience in the software industry. During that time, he has
worked in both a financial and operational capacity with a number of companies,
typically during their periods of highest growth. In addition to his
responsibilities at Pinetree, Mr. Goldberg sits on the Boards of many of
Pinetree's investee companies, acting as an advisor to management of those
companies.
BROCK ARMSTRONG is President and Chief Executive Officer of DC DiagnostiCare
Inc. From August 1994 to April 1997 Mr. Armstrong was Executive Vice President
of London Insurance Group, a Canadian financial services company with operations
in Canada, the United States and Asia. From April 1997 to October 1998 Mr.
Armstrong was Senior Vice President of The Prudential Insurance Company of
America, one of the largest life insurance companies in the United States. From
October 1998 to December 1999 Mr. Armstrong was President of ING Equitable Life
and Chief Executive Officer - Annuities of ING US Retail Financial Services,
both US subsidiaries of ING Group, a global financial services company. Mr.
Armstrong is an experienced senior executive with a proven record of creating
and managing profitable growth as well as significant experience in mergers and
acquisitions. Mr. Armstrong is a Chartered Accountant and holds an Honours
Bachelor of Business Administration degree from the University of Western
Ontario.
BOARD OF DIRECTORS
There currently are six directors of SoftQuad Software, Ltd. Directors hold
office until the next annual meeting of stockholders or until their successors
are elected or appointed. Executive officers are appointed by and serve at the
discretion of the board of directors.
BOARD COMMITTEES
The board of directors currently has an audit committee consisting of Joan
Dea and Brock Armstrong, neither of whom is an employee. The audit committee
makes recommendations to the board of directors regarding the selection of
independent accountants, reviews the results and scope of audit and other
services provided by our independent accountants and reviews and evaluates our
audit and control functions.
The board of directors also has a compensation committee consisting of Joan
Dea and Robert Bagga. The compensation committee makes recommendations regarding
compensation and benefits, including stock options, given to our employees.
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information concerning total compensation
paid to our chief executive officer and other members of the executive team in
excess of $100,000 for services rendered during the fiscal year ended September
30, 2000 for services in all capacities to the Company since its inception. In
accordance with the rules of the SEC, the compensation described in this table
does not include perquisites and other personal benefits totaling less than 10%
of the total salary and bonus reported. The columns for "Other Annual
Compensation" and "All Other Compensation" have been omitted because there is no
such compensation required to be reported.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------- -----------------------------------------
NUMBER OF SECURITIES
Executive YEAR SALARY BONUS OTHER UNDERLYING OPTIONS
--------- ---- ---------- --------- --------- -----------------------
<S> <C> <C> <C> <C> <C>
Roberto Drassinower - CEO 2000 $102,092 $77,050 $120,000(1) 400,000
Roberto Drassinower - CEO 1999 $80,000 $27,000 550,010
Bruce Sharpe - Chief Technology Officer 2000 $80,400 $30,150 50,000
Peter Sharpe - Chief Scientist 2000 $80,400 $30,150 50,000
Nick Mongston - Managing Director of
SoftQuad Software (UK) Ltd. 2000 $98,150 $40,540 60,000
Johnathan Sachs (2) - Vice President of
Marketing 2000 $98,300 $13,400 50,000
</TABLE>
(1) Represents housing loan
(2) Johnathan Sachs left SoftQuad effective October, 2000.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth each grant of stock options during the
fiscal year ended September 30, 2000 to the named executive officers. The
percentage of total options set forth below is based on an aggregate of
2,568,700 options granted to employees during the fiscal year ended September
30, 2000. The market value on the date of grant has been determined by our board
of directors. Potential realizable values are net of exercise price, but before
taxes associated with exercise. Amounts represent hypothetical gains that could
be achieved for the options if exercised at the end of the option term. The
assumed 5% and 10% rates of stock price appreciation are provided in accordance
with the rules of the SEC and do not represent our estimate or projection of the
future common stock price.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
PERCENT OF
TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED TO POTENTIAL REALIZABLE VALUE AT
UNDERLYING EMPLOYEES EXERCISE ASSUMED ANNUAL RATES OF STOCK
OPTIONS IN FISCAL PRICE EXPIRATION PRICE APPREASTION FOR OPTION
GRANTED 2000 ($/SHARE) DATE TERM
5% 10%
<S> <C> <C> <C> <C> <C> <C> <C>
Roberto Drassinower - 400,000 15% $1.44 2/25/2010 $362,200 $918,000
Bruce Sharpe - 50,000 2% $1.44 2/25/2010 $ 45,300 $114,700
Peter Sharpe - 50,000 2% $1.44 2/25/2010 $ 45,300 $114,700
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Nick Mongston - 60,000 2% $1.44 2/25/2010 $ 54,300 $137,700
Johnathan Sachs - 50,000 2% $1.44 2/25/2010 $ 45,300 $114,700
</TABLE>
OPTION VALUES
The following table sets forth the number and value of securities
underlying unexercised options that are held by the named executive officers as
of September 30, 2000. No officer exercised any options during the fiscal year
ended September 30, 2000. The value of unexercised in-the-money options is based
on the fair market value of our common stock on September 30, 2000 of $7.00, as
quoted on the OTC Bulletin Board, minus the actual exercise price.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT SEPTEMBER 30, 2000 AT SEPTEMBER 30, 2000 ($)
----------------------------- --------------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Roberto Drassinower 340,010 610,000 $2,378,000 $3,694,000
Bruce Sharpe 193,330 190,000 $1,352,000 $278,000
Peter Sharpe 193,330 190,000 $1,352,000 $278,000
Nick Mongston - 60,000 - $334,000
Jonathan Sachs 193,330 190,000 $1,352,000 $278,000
</TABLE>
STOCK OPTION PLAN
As of February 25, 2000, our 2000 Stock Option Plan (the "Plan") was
approved by our board of directors and our stockholders. The Plan permits the
grant of non-qualified stock options and incentive stock options, within the
meaning of Section 422 of the Internal Revenue Code. We have reserved 4,899,500
shares of common stock for issuance under the Plan. However, the board of
directors has the right, from time to time, to increase this number subject to
the approval of our stockholders. Common stock issued on exercise of options
under the Plan may be authorized and unissued shares of the common stock, issued
shares of common stock held in our treasury or shares of common stock acquired
on the open market.
Unless otherwise determined by the board of directors, the Plan is
administered by a committee comprised of two or more persons not employed by
SoftQuad as designated by the board of directors. Subject to the provisions of
the Plan, the committee may establish from time to time any regulations,
provisions, proceedings and conditions of awards that, in its sole opinion, it
deems advisable for the administration of the Plan. The persons eligible to
participate in the Plan include our officers and employees who are regularly
employed on a salary or hourly basis, our non-employee directors and our
consultants. Subject to the limitations described below, the committee has the
complete discretion and authority to determine, among other things, the persons
to whom options shall be granted, the times when such options shall be granted,
the number of options, the exercise price of each option, the period(s) during
which an option shall be exercisable, the restrictions to be applicable to
options and other terms and provisions relating to the options. The committee
also has the authority to establish the procedures for exercising options.
The exercise price of any incentive stock option granted under the Plan may
not be less than 100% of the fair market value of the common stock on the date
the option is granted. If the person to whom an incentive stock option is
granted owns shares of our stock possessing more than 10% of the total combined
voting power of all of the classes of stock, the exercise price may not be less
than 110% of the fair market value of the common stock on the option grant date
and the term of the option cannot exceed five years. The exercise price may be
paid in cash or in outstanding shares of common stock. To the extent that the
aggregate of all incentive stock options granted to an individual during any
calendar year exceeds $100,000 in value, based on the fair market value of the
shares of common stock subject to such options as at the date(s) of grant of
such option(s), the excess shares of common stock are not deemed to be
purchasable pursuant to incentive stock options, but are deemed to be
purchasable pursuant to non-qualified options.
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<PAGE>
Concurrently with the award of an option, the committee may in its
discretion award additional options in an amount equal to the number of shares
of our common stock, if any, that would be acquired on the exercise of the
primary option plus, to the extent authorized by the committee, the number of
shares of common stock that would be used to satisfy any tax withholding
requirements related to the exercise of the primary option. The grant of such
secondary options becomes effective upon the exercise of the primary option and
may be, at the discretion of the committee, treated as an incentive stock
option.
In the event there is any change in our outstanding common stock by reason
of any reorganization, recapitalization, stock split, stock dividend, a
combination of shares or other form of substitution, the number and kind of
shares of our stock into which options may be exercised and the price per share
thereof are to be appropriately adjusted. Upon certain defined events causing a
change in control of SoftQuad, an option or other award under the Plan becomes
fully exercisable or fully vested if the option or award is not assumed by the
surviving corporation or its parent or if the surviving corporation or its
parent does not substitute another award on substantially the same terms. In the
event of a merger or other reorganization, the agreement of merger or
reorganization may provide that outstanding options and other awards under the
stock option plan shall be assumed by the surviving corporation or its parent,
shall be continued by us if we are the surviving corporation, shall have
accelerated vesting and then expire early, or shall be cancelled for a cash
payment.
Our board of directors has the authority to amend or terminate the Plan,
provided any amendment or termination does not impair the rights of any holder
of any outstanding options without the written consent of that holder, and that
any required stockholder approvals are obtained.
DIRECTOR COMPENSATION
Directors currently do not receive any cash compensation for their services
as members of the board of directors, although members are reimbursed for actual
and reasonable out of pocket expenses in connection with attendance at board of
directors and committee meetings. Directors are eligible to participate in our
2000 Stock Option Plan and may receive options at the discretion of the board of
directors. For a description of this plan, please see "Stock Option Plan." On
February 25, 2000, in consideration for their agreement to serve as directors,
we granted to each of Sheldon Inwentash and Michael Mendelson (or their
nominees) and Joan Dea options to purchase 80,000 shares of common stock, all at
an exercise price of $1.44 per share. Messrs. Inwentash and Mendelson no longer
are directors. On July 27, 2000, in consideration for his agreement to serve as
a director, we granted to Robert Bagga options to purchase 80,000 shares of
common stock, at an exercise price of $7.50 per share. On December 13, 2000, in
consideration for their agreement to serve as directors, we granted to each of
Lawrence Goldberg and Brock Armstrong options to purchase 80,000 shares of
common stock, all at an exercise price of $3.25 per share. All of these options
become exercisable as to one-third of the underlying shares on each of the
yearly anniversaries of the date of grant. They expire ten years from the date
of grant.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets out information known to us regarding the
beneficial ownership of our common stock as November 30, 2000 by:
o each person known to us to be the beneficial owner of more than 5% of
our common stock;
o each of our directors and named executive officers; and
o all of our directors and executive officers as a group.
The number of shares of common stock deemed to be beneficially owned by the
respective person or entity in the table below and in "Selling Stockholders"
includes shares issuable upon the exchange of exchangeable shares of SAC,
conversion of preferred stock, and the exercise of options, special warrants and
warrants held by the respective person or entity that may be exchanged,
converted or exercised within 60 days after November 30, 2000. For purposes of
calculating each person's or entity's percentage ownership, the number of
outstanding shares includes the 7,550,250 shares of common stock and 5,673,605
exchangeable shares of SAC (which have voting and economic rights functionally
equivalent to, and are exchangeable on a one-for-one basis with, shares of
common stock) outstanding on November 30, 2000, plus shares issuable upon the
conversion or exercise of that person's or entity's preferred stock, options,
special warrants and warrants that are exchangeable, convertible or exercisable
within 60 days after November 30, 2000. Except as indicated in the footnotes
below, to our knowledge, the persons named in this table have sole voting and
investment power with respect to the shares beneficially owned by them.
Footnotes to the table describe (i) the nature of any position, office or other
material relationship which a selling stockholder has had with SoftQuad
Software, Ltd. or any of its predecessors or affiliates and (ii) whether any of
the shares beneficially owned are issuable upon the conversion of preferred
stock or the exercise of special warrants or warrants.
The address of each of our directors and executive officers is c/o SoftQuad
Software, Ltd., 161 Eglinton Avenue East, Suite 400, Toronto, Ontario M4P 1J5
Canada. The addresses of the other principal stockholders are included in
footnotes.
<TABLE>
<CAPTION>
---------------------------------------- ------------------------- ---------------------
Number of
Shares
Beneficially
Name Owned Percent of Class
---------------------------------------- ------------------------- ---------------------
<S> <C> <C> <C>
James Clark (1) 3,220,285 24.4%
Pinetree Capital Corporation (2) 2,710,128 20.5%
VC Advantage Limited Partnership,
Thomson Kernaghan & Co. Ltd. and CALP
II LP (3) 1,599,775 9.9%
Hammock Group Ltd (4) 1,545,667 9.9%
Roberto Drassinower (5) 482,870 3.5%
Bruce Sharpe (6) 336,190 2.5%
Peter Sharpe (6) 336,190 2.5%
Jonathan Sachs 336,190 2.5%
All current directors and executive
officers of the Company as a group (11 persons)(7) 1,230,250 8.5%
</TABLE>
(1) Mr. Clark's address is Prasanmir Place 164/5 Sukhimrit Soi 23 Bangkok,
Thailand 10110.
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<PAGE>
(2) Includes 2,670,560 exchangeable shares of SAC. Pinetree's address is 130
King Street West, Suite 2810, Toronto, Ontario M5X 1A9, Canada.
(3) Two executive officers of Thomson Kernaghan (including its Chairman) also
are executive officers of the general partner of VC Advantage Limited
Partnership and the general partner of CALP II LP. Accordingly, Thomson
Kernaghan, VC Advantage and CALP II may be considered a group which
beneficially owns all of the shares beneficially owned by any of them.
Under an agreement with SoftQuad (the "TK Conversion Cap Agreement"),
Thomson Kernaghan, VC Advantage and CALP II agreed not to have the right to
convert any preferred stock or exercise any warrant or special warrant if,
after having given effect the conversion or exercise, all of them
considered as a group would be deemed to beneficially own more than 9.9% of
the then outstanding common stock. If not for the TK Conversion Cap
Agreement, Thomson Kernaghan, VC Advantage and CALP II, considered as a
group, would beneficially own 5,285,715 shares of common stock, including
1,806,738 shares of common stock issuable upon conversion of preferred
stock, 91,422 shares of common stock issuable upon exercise of special
warrants and 1,787,777 shares of common stock issuable upon exercise of
warrants. The address for each of Thomson Kernaghan, VC Advantage and CALP
II is Thomson Kernaghan & Co. Limited, 365 Bay Street, 10th Floor, Toronto,
Ontario M5H 2V2, Canada.
(4) Under an agreement with SoftQuad (the "Hammock Conversion Cap Agreement"),
Hammock agreed not to have the right to convert any preferred stock or
exercise any warrant if, after having given effect to the conversion or
exercise, it would be deemed to beneficially own more than 9.9% of the then
outstanding common stock. If not for the Hammock Conversion Cap Agreement,
Hammock would beneficially own 1,545,667 shares of common stock, including
1,267,889 shares of common stock issuable upon conversion of preferred
stock and 277,778 shares of common stock issuable upon exercise of
warrants. Hammock's address is c/o Thomson Kernaghan & Co. Limited, 365 Bay
Street, 10th Floor, Toronto, Ontario M5H 2V2, Canada.
(5) Includes 142,860 exchangeable shares of SAC and 340,010 shares of common
stock issuable upon exercise of options.
(6) Includes 142,860 exchangeable shares of SAC and 193,330 shares of common
stock issuable upon exercise of options.
(7) Includes 428,580 exchangeable shares of SAC and 801,670 shares of common
stock issuable upon exercise of options.
SELLING STOCKHOLDERS
The information under the columns "Number of Shares to be Beneficially
Owned After the Offering" and "Percent of Class After the Offering" is provided
in accordance with SEC rules and is based on 22,466,460 shares of common stock
outstanding after the offering on the assumption that:
o all of the shares that may be offered by the selling stockholders
actually are sold;
o the selling stockholders do not acquire beneficial ownership of any
other shares or dispose of any shares other than in this offering; and
o we do not issue or cancel any other shares.
<TABLE>
<CAPTION>
------------------------------------------------- ----------------- ------------------ --------------- ---------------
NUMBER OF
NUMBER OF SHARES TO BE
SHARES BENEFICIALLY PERCENT OF
BENEFICIALLY NUMBER OF SHARES OWNED IF ALL THE CLASS
OWNED BEFORE THAT MAY BE SHARES ARE AFTER THE
NAME THE OFFERING OFFERED SOLD OFFERING
------------------------------------------------- ----------------- ------------------ --------------- ---------------
<S> <C> <C> <C> <C>
VC Advantage Limited Partnership, Thomson 1,599,775 4,422,639 863,076 3.8%
Kernaghan & Co. Limited and CALP II LP (1)
Hammock Group, Ltd. (2) 1,545,667 1,545,667 ___ ___
Signature Explorer Fund (3) 500,010 500,010 ___ ___
Thomas Kernaghan & Co. Limited 1,000,000 1,000,000 ___ ___
(as agent) (4)
O'Donnell Canadian Emerging Growth Fund (5) 420,000 420,000 ___ ___
Beluga NV (6) 250,002 250,002 ___ ___
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Third Point Advisors LLC (7) 200,010 200,010 ___ ___
Bissett & Associates (8) 199,500 199,500 ___ ___
Acquity Investment Management Inc. (9) 160,005 160,005 ___ ___
Devin Huber (10) 121,000 121,000 ___ ___
F.G. Ghantous Investments Inc. (11) 120,000 120,000 ___ ___
Royal Trust Corporation of Canada for PH&N 105,105 105,105 ___ ___
Canadian Equity Plus Pension Trust (12)
Ansbacher (Bahamas) Limited (13) 100,005 100,005 ___ ___
Casurina Limited Partnership (14) 100,005 100,005 ___ ___
Lawvest Company Limited (15) 100,005 100,005 ___ ___
Peconic Fund, Ltd. (16) 100,005 100,005 ___ ___
Royal Trust Corporation of Canada for PH&N 93,450 93,450 ___ ___
Canadian Small Float Fund (17)
Royal Trust Corporation of Canada for PH&N 81,600 81,600 ___ ___
Canadian Equity Fund (18)
Claret Asset Management Corp. (19) 80,010 80,010 ___ ___
Nick Mylonakis (20) 71,100 71,100 ___ ___
Royal Bank of Canada (21) 69,000 69,000 ___ ___
Royal Trust Corporation of Canada for PH&N 67,500 67,500 ___ ___
Canadian Equity Plus Pension Trust (22)
Elljay, Inc (23) 67,140 67,140 ___ ___
Tyler Armstrong (24) 66,600 66,600 ___ ___
Cona Capital Ltd. (25) 40,500 40,500 ___ ___
Royal Trust Corporation of Canada for PH&N 27,000 27,000 ___ ___
Canadian Equity Plus Fund (26)
Benitz & Partners Limited (27) 26,100 26,100 ___ ___
Royal Trust Corporation of Canada for PH&N 25,350 25,350 ___ ___
Balanced Fund (28)
New Paradigm Inc. (29) 20,010 20,010 ___ ___
TOTALS 11,142,399 10,179,318 863,076 3.8%
</TABLE>
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<PAGE>
(1) Two executive officers of Thomson Kernaghan (including its Chairman) also
are executive officers of the general partner of VC Advantage Limited
Partnership and the general partner of CALP II LP. Accordingly, Thomson
Kernaghan, VC Advantage and CALP II may be considered a group which
beneficially owns all of the shares beneficially owned by any of them.
Under the TK Conversion Cap Agreement, Thomson Kernaghan, VC Advantage and
CALP II agreed not to have the right to convert any preferred stock or
exercise any warrant or special warrant if, after having given effect the
conversion or exercise, all of them considered as a group would be deemed
to beneficially own more than 9.9% of the then outstanding common stock. If
not for the TK Conversion Cap Agreement, Thomson Kernaghan, VC Advantage
and CALP II, considered as a group, would beneficially own 5,285,715 shares
of common stock, including 1,806,738 shares of common stock issuable upon
conversion of preferred stock, 91,422 shares of common stock issuable upon
exercise of special warrants and 1,787,777 shares of common stock issuable
upon exercise of warrants. "Certain Relationships and Related Transactions"
for a description of the position, office or other material relationship of
VC Advantage, CALP II and Thomson Kernaghan with us or our predecessors or
affiliates.
(2) Under the Hammock Conversion Cap Agreement, Hammock agreed not to have the
right to convert any preferred stock or exercise any warrant if, after
having given effect to the conversion or exercise, it would be deemed to
beneficially own more than 9.9% of the then outstanding common stock. If
not for the Hammock Conversion Cap Agreement, Hammock would beneficially
own 1,545,667 shares of common stock, including 1,267,889 shares of common
stock issuable upon conversion of preferred stock and 277,778 shares of
common stock issuable upon exercise of warrants.
(3) Includes 333,340 shares of common stock issuable upon exercise of special
warrants and 166,670 shares of common stock issuable upon exercise of
warrants.
(4) Includes 1,000,000 shares of common stock issuable upon the exercise of
special warrants held by Thomas Kernaghan as agent for certain non-US
persons. Thomson Kernaghan disclaims beneficial ownership of these shares.
(5) Includes 280,000 shares of common stock issuable upon exercise of special
warrants and 140,000 shares of common stock issuable upon exercise of
warrants.
(6) Includes 166,668 shares of common stock issuable upon exercise of special
warrants and 83,334 shares of common stock issuable upon exercise of
warrants.
(7) Includes 66,670 shares of common stock issuable upon exercise of warrants.
(8) Includes 133,000 shares of common stock issuable upon exercise of special
warrants and 66,500 shares of common stock issuable upon exercise of
warrants.
(9) Includes 106,670 shares of common stock issuable upon exercise of special
warrants and 53,335 shares of common stock issuable upon exercise of
warrants.
(10) Includes 121,000 shares of common stock issuable upon the conversion of
preferred stock.
(11) Includes 80,000 shares of common stock issuable upon exercise of special
warrants and 40,000 shares of common stock issuable upon exercise of
warrants.
(12) Includes 70,070 shares of common stock issuable upon exercise of special
warrants and 35,035 shares of common stock issuable upon exercise of
warrants.
(13) Includes 66,670 shares of common stock issuable upon exercise of special
warrants and 33,335 shares of common stock issuable upon exercise of
warrants.
(14) Includes 66,670 shares of common stock issuable upon exercise of special
warrants and 33,335 shares of common stock issuable upon exercise of
warrants.
(15) Includes 66,670 shares of common stock issuable upon exercise of special
warrants and 33,335 shares of common stock issuable upon exercise of
warrants.
(16) Includes 33,335 shares of common stock issuable upon exercise of
warrants.
(17) Includes 62,300 shares of common stock issuable upon exercise of special
warrants and 31,150 shares of common stock issuable upon exercise of
warrants.
(18) Includes 54,400 shares of common stock issuable upon exercise of special
warrants and 27,200 shares of common stock issuable upon exercise of
warrants.
(19) Includes 53,340 shares of common stock issuable upon exercise of special
warrants and 26,670 shares of common stock issuable upon exercise of
warrants.
(20) Includes 47,400 shares of common stock issuable upon exercise of special
warrants and 23,700 shares of common stock issuable upon exercise of
warrants.
(21) Includes 46,000 shares of common stock issuable upon exercise of special
warrants and 23,000 shares of common stock issuable upon exercise of
warrants.
(22) Includes 45,000 shares of common stock issuable upon exercise of special
warrants and 22,500 shares of common stock issuable upon exercise of
warrants.
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<PAGE>
(23) Includes 44,760 shares of common stock issuable upon exercise of special
warrants and 22,380 shares of common stock issuable upon exercise of
warrants.
(24) Includes 44,400 shares of common stock issuable upon exercise of special
warrants and 22,200 shares of common stock issuable upon exercise of
warrants.
(25) Includes 27,000 shares of common stock issuable upon exercise of special
warrants and 13,500 shares of common stock issuable upon exercise of
warrants.
(26) Includes 18,000 shares of common stock issuable upon exercise of special
warrants and 9,000 shares of common stock issuable upon exercise of
warrants.
(27) Includes 17,400 shares of common stock issuable upon exercise of special
warrants and 8,700 shares of common stock issuable upon exercise of
warrants.
(28) Includes 16,900 shares of common stock issuable upon exercise of special
warrants and 8,450 shares of common stock issuable upon exercise of
warrants.
(29) Includes 13,340 shares of common stock issuable upon exercise of special
warrants and 6,670 shares of common stock issuable upon exercise of
warrants.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
FINANCINGS
We have engaged in financing transactions in which the amount involved
exceeded $60,000 with the following persons who, on or prior to December 15,
2000, beneficially owned more than 5% of our common stock: Beacon M
International Investments Inc. ("Beacon"), Hammock Group Ltd., Pinetree Capital
Corp. ("Pinetree"), Thomson Kernaghan & Co. Limited, VC Advantage Limited
Partnership, CALP II LP and James Clark. One of our former directors, Sheldon
Inwentash, is a director and officer of, and owner of a greater than 10% equity
interest in, Pinetree. In addition, we have engaged in transactions in which the
amount involved exceeded $60,000 with KBL Capital Partners Inc. and KBL
Technology Funding Inc. Each of Mr. Inwentash and Michael Mendelson, who also
was one of our directors, is a director and officer of KBL Capital Partners. In
addition, each of Michael Mendelson and Pinetree is an owner of a greater than
10% equity interest in KBL Capital Partners. Mr. Mendelson is also a director
and officer of, and owner of a greater than 10% interest in, KBL Technology
Funding. Mr. Clark was chairman and a director of SoftQuad Canada from July,
1998 until August 1, 2000. The following is a description of these transactions.
On November 6, 1998, we issued 2,285,700 shares of common stock to James
Clark, at a price of approximately $0.23 per share, for aggregate gross proceeds
of $525,711.
On April 9, 1999, we issued 1,947,040 shares of common stock to Pinetree
and 623,055 shares of common stock to James Clark, each at approximately $0.43
per share, for aggregate gross proceeds of $1,105,141. In connection with the
issuance of these shares, we issued warrants to purchase 973,520 shares of
common stock to Pinetree, and warrants to purchase 311,530 shares of common
stock to Mr. Clark, each with an exercise price of $0.43 and we paid an
investment advisory fee to KBL Capital Partners of $41,563, 58,410 shares of
common stock and warrants to purchase 233,645 shares of common stock with an
exercise price of $0.43 per share. After the completion of this financing, we
entered into an advisory services agreement with KBL Capital Partners under
which KBL Capital Partners was to receive $3,330 per month for a term of twelve
months (automatically renewable subject to termination by us), together with an
advisory fee of $13,300 for advisory services in connection with structuring and
venture financing, and an advisory fee of $500,000 for services in connection
with preparation, structuring and executing a series of private placements. This
advisory services agreement was subsequently amended on July 31, 1999 to extend
its initial term to July 31, 2000, which term has subsequently been renewed, and
to increase the monthly fee to $6,650 per month.
On May 14, 1999, we issued 228,160 shares of common stock to Beacon, at
approximately $0.43 per share, for aggregate gross proceeds of $98,110. In
connection with that transaction, we issued warrants to purchase 114,080 shares
of common stock to Beacon with an exercise price of $0.43 per share, and paid an
investment advisory fee to KBL Capital Partners of $4,870, plus 6,845 shares of
common stock and warrants to purchase 18,255 shares of common stock with an
exercise price of $0.43 per share.
On July 30, 1999, KBL Technology Funding acted as agent in connection with
the issuance by us of $697,522 of debt. In connection with this issuance, we
issued 1,025,000 warrants to purchase shares of common stock to KBL Technology
Funding at an exercise price of $0.43 and paid KBL Capital Partners a placement
fee of $67,114 and warrants to purchase 102,500 shares of common stock at an
exercise price of $0.43.
On September 30, 1999, KBL Technology Funding (as agent), James Clark,
Pinetree and Beacon sold their warrants to us in exchange for shares of common
stock on a 1-for-1 basis, with 1,025,000 shares issued to KBL Technology Funding
(as agent), 311,530 shares issued to James Clark, 723,520 shares issued to
Pinetree and 718,480 shares issued to Beacon.
On December 16, 1999, VC Advantage purchased 736,702 shares of our common
stock at a price of approximately $1.3574 per share, aggregating $1,000,000. On
December 16, 1999, VC Advantage also purchased 1,473,405 shares of Class A
preferred stock at approximately $1.3574 per share, aggregating $2 million. In
connection with this transaction, VC Advantage received warrants, exercisable on
or before December 16, 2002, with an exercise price of $1.3574 per share, to
purchase an aggregate of 442,022 shares of common stock of FinanceCo. In
addition, Thomson Kernaghan, for its services as agent in respect of these
transactions, received
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<PAGE>
warrants to purchase an aggregate of 221,011 shares of common stock on identical
terms and received a sales commission of 7% of the offering (for an aggregate of
$210,000).
On February 25, 2000, in consideration for advisory services rendered, we
granted to each of Sheldon Inwenash and Michael Mendelson options to purchase
80,000 shares of common stock, and Bo Manor (who holds a 7.9% interest in KBL)
options to acquire 60,000 shares of common stock, all at an exercise price of
$1.44 per share.
On February 28, 2000, VC Advantage purchased 1,033,333 shares of Class B
preferred stock and Hammock purchased 688,889 shares of Class B preferred stock
at a price of $2.90 per share, for aggregate gross proceeds of $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 694,445
shares of common stock, with an exercise price of $1.53 per share (Hammock
received 277,778 and VC Advantage received 416,667), and Thomson Kernaghan, for
its services as agent in respect of this purchase, received warrants to purchase
347,223 shares of common stock on identical terms and received a sales
commission of 7% of the offering (for an aggregate of $350,000).
On February 29, 2000, in connection with our sale of 1,000,000 special
warrants at a price of $2.50 per special warrant, Thomson Kernaghan received an
agency fee of warrants to purchase 100,000 shares of common stock, with an
exercise price of $2.50 per share, exercisable on or before February 28, 2003,
and a fee in the amount of 8% of the offering (for an aggregate of $200,000).
On April 18 and 20, 2000, we issued an aggregate of 200,010 shares of
common stock to institutional investors, including CALP II, for a purchase price
per share of $7.50, special warrants to acquire 1,906,660 shares of common stock
at a purchase price per special warrant 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. On June 5, 2000, we issued special warrants to
acquire 44,760 shares of common stock at a purchase price per special warrant of
$7.50, and warrants to purchase 22,380 shares of common stock at an exercise
price of $12.50 per share, for gross proceeds of $335,750. Under the terms of
the warrants issued in the April and June transactions, from September 30, 2000
until the effectiveness of a registration statement covering the shares
underlying the warrants (and satisfaction of a related condition concerning the
qualification of a prospectus in certain Canadian provinces), the average
warrant exercise price declines by $0.0082 each day until October 31, 2000 and
by $0.50 per month thereafter, to a minimum exercise price of $3.75. Thomson
Kernaghan, for its services as agent in respect of these private placements,
received $1,290,858 plus compensation options exercisable at no cost for
warrants to purchase 215,143 shares of common stock with an exercise price of
$7.50 per share, exercisable at any time on or prior to the second anniversary
of the date of effectiveness of the registration statement filed for the shares
underlying these warrants.
On May 29, 2000, we issued 88,409 shares of common stock valued at $119,500
to Thomson Kernaghan in consideration of financial advisory services provided
pursuant to a financial advisory services agreement dated as of December 10,
1999.
OPTION GRANTS TO DIRECTORS
Please see "Management--Director compensation" for a description of stock
options granted to directors for service as directors.
INDEMNIFICATION OF DIRECTORS AND OFFICERS AND LIMITATION OF LIABILITY
Our certificate of incorporation and bylaws require us to indemnify our
directors and officers to the fullest extent permitted by law against costs and
expenses incurred in connection with any actual or threatened litigation by
reason of the fact that they were directors or officers.
In addition, our certificate of incorporation eliminates the personal
liability of our directors for monetary damages for breach of fiduciary duty as
a director, except:
o for any breach of the director's duty of loyalty to us or our
stockholders;
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<PAGE>
o for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
o for unlawful dividends and stock purchases under section 174 of the
Delaware General Corporation Law; or
o for any transaction from which the director derived an improper
personal benefit.
We have entered into indemnity agreements with each of our directors and
executive officers to give them additional contractual assurances regarding the
scope of the indemnification described above and to provide additional
procedural protections. In addition, we have obtained directors' and officers'
insurance providing indemnification for our directors, officers and key
employees for various liabilities. We believe that these indemnification
provisions and agreements are necessary to attract and retain qualified
directors and officers.
---------------------------------
We believe that all of the transactions set forth above were made on terms
no less favorable to us than could have been obtained from unaffiliated third
parties. All future transactions, including loans between us and our officers,
directors, principal stockholders and their affiliates, will be approved by a
majority of the board of directors, including a majority of the independent
outside directors on the board of directors, and will continue to be on terms no
less favorable to us than could be obtained from unaffiliated third parties.
44
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Our 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.
COMMON STOCK
As of November 30, 2000, there were 7,550,250 shares of common stock issued
and outstanding. In addition 5,673,605 exchangeable shares of SAC were issued
and outstanding, each of which is intended have economic and voting rights
equivalent to shares of our common stock. These exchangeable shares are
described below under "Exchangeable Shares of SAC."
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 ratably to receive dividends, if any, as may be declared from time to
time by the board of directors. In the event of our liquidation, dissolution, or
winding up, the holders of common stock are entitled to share ratably in all
assets remaining after payment of liabilities, subject to prior rights of the
holders of the preferred stock, if any, then outstanding.
PREFERRED STOCK
As of November 30, 2000, there were 1,473,405 shares of Class A preferred
stock and 1,722,222 shares of Class B preferred stock issued and outstanding.
The shares of Class A preferred stock and Class B preferred stock are
convertible at any time at the option of the holder, on a 1-for-1 basis, into
shares of common stock. The number of shares of common stock into which Class A
preferred stock and Class B preferred stock is convertible is subject to
adjustment or modification in the event of a stock split or other change to our
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
preferred stock and Class B preferred stock are entitled to the number of votes
per share equal to the number of shares 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 preferred stock and Class B
preferred stock rank equally with each other and our common stock. With respect
to distributions upon liquidation, the holders of Class A preferred stock and
Class B preferred stock are entitled to receive an initial preferred
distribution before any payment is made in respect of shares of common stock of
$1.3574 and $2.9032 per share, respectively.
SPECIAL VOTING STOCK
As of November 30, 2000, the one authorized share of special voting stock
has been issued to Montreal Trust Company of Canada 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
SAC." 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 us or our affiliates), which votes may be cast at
any meeting at which our common stockholders are entitled to vote. When all
exchangeable shares are held by us or our affiliates (as a consequence of their
redemption or repurchase), the special voting share will be cancelled.
EXCHANGEABLE SHARES OF SAC
As of November 30, 2000, there were 5,673,605 exchangeable shares of SAC
(our subsidiary) 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 SAC of all of the
outstanding shares of SoftQuad Canada. The exchangeable shares have economic and
voting rights functionally equivalent to
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<PAGE>
shares of our common stock, and were issued to Canadian shareholders in lieu of
shares of our common stock because of Canadian tax considerations.
The exchangeable shares are exchangeable at any time at the option of the
holder, on a 1-for-1 basis, for shares of common stock. We have entered into a
voting and exchange trust agreement with respect to the exchangeable shares with
SAC and Montreal Trust Company of Canada, as trustee for the exchangeable
shareholders. By furnishing instructions to the trustee under the voting and
exchange trust agreement, holders of the exchangeable shares are able to
exercise essentially the same voting rights as they would have if they had
exchanged their exchangeable shares for shares of our 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
us on the common stock. The exchangeable shares are subject to adjustment or
modification in the event of a stock split or other change to our capital
structure so as to maintain the initial 1-to-1 relationship between the
exchangeable shares and the common stock.
Pursuant to the support agreement between us and SAC, we made the following
covenants for so long as any exchangeable shares (other than exchangeable shares
owned by us or our affiliates) remain outstanding:
o we will not declare or pay dividends on our common stock unless SAC is
able to declare and pay and simultaneously declares and pays an
equivalent dividend on the exchangeable shares;
o we will advise SAC in advance of the declaration of any dividend on
our 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 our common stock;
o we will ensure that the record date for any dividend declared on our
common stock is not less than ten business days after the declaration
date of such dividend; and
o we 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, we 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 we 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.
OPTIONS
As of November 30, 2000, there were options outstanding to purchase
4,900,270 shares of common stock with a weighted average exercise price per
share of $2.2451.
SPECIAL WARRANTS
As of November 30, 2000, 2,951,420 special warrants were outstanding, all
of which were held by Canadian residents. Each special warrant entitles the
holder thereof to acquire one share of common stock for no additional
consideration. The special warrants expire on the fifth business day following
the date we obtain a receipt for a final prospectus qualifying the exercise of
the special warrants into shares of common stock in the holder's province of
residence. 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 our
common stock because of Canadian securities law considerations.
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<PAGE>
WARRANTS
As of November 30, 2000, there were warrants outstanding to purchase
3,095,558 shares of common stock with a weighted average purchase price per
share of $5.6753. Warrants to purchase 663,033 shares expire on December 16,
2002, warrants to purchase 1,141,667 shares expire on February 28, 2003 and
warrants to purchase 1,290,858 shares expire on the second anniversary of the
effective date of the registration statement covering the shares underlying
these warrants. Of the latter 1,290,858 warrants, 215,143 are in the form of
compensation options that are exercisable at no cost for the underlying
warrants.
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF DELAWARE LAW AND OUR CERTIFICATE
OF INCORPORATION AND BYLAWS
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. Generally, Section 203 prohibits a publicly-held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the interested
stockholder attained that status with the approval of the board of directors or
unless the business combination is approved in a prescribed manner. A "business
combination" includes mergers, asset sales and other transactions resulting in a
financial benefit to the interested stockholder. Generally, an "interested
stockholder" is a person who, together with affiliates and associates, owns, or
within three years did own, 15% or more of a corporation's voting stock. This
statute could prohibit or delay the accomplishment of mergers or other takeovers
or changes in control with respect to us and, accordingly, may discourage
attempts to acquire us.
In addition, provisions of our certificate of incorporation and bylaws may
delay, defer or prevent a tender offer or takeover attempt that stockholders
might consider to be their its best interest, including those attempts that
might result in a premium over the market price for the shares held by
stockholders.
BOARD OF DIRECTORS VACANCIES. Our certificate of incorporation authorizes
the board of directors to fill vacant directorships or increase the size of the
board of directors. This may prevent a stockholder from removing incumbent
directors and simultaneously gaining control of the board of directors by
filling the resulting vacancies created by such removal with its own nominees.
SPECIAL MEETINGS OF STOCKHOLDERS. Our bylaws provide that special meetings
of our stockholders may be called only by the chairman of the board, the chief
executive officer or a majority of the board of directors.
AUTHORIZED BUT UNISSUED SHARES. The board of directors can in the future
issue the authorized but unissued shares of common stock and preferred stock,
and fix the rights and preferences of the preferred stock, without stockholder
approval, subject to the limitations imposed by any market on which our stock is
listed for trading. These additional shares may be utilized for a variety of
corporate purposes, including future public offerings to raise additional
capital, corporate acquisitions and employee benefit plans. The existence of
authorized but unissued and unreserved common stock and preferred stock could
render more difficult or discourage an attempt to obtain control of us by means
of a proxy contest, tender offer, merger or otherwise.
The limitation of liability and indemnification provisions in our
certificate of incorporation and bylaws may discourage stockholders from
bringing a lawsuit against directors for breach of their fiduciary duty. These
provisions are described above under "Certain Relationships and Related
Transactions--Indemnification of directors and officers and limitation of
liability." These provisions may also have the effect of reducing the likelihood
of stockholder derivative litigation against directors and officers, even though
a derivative action, if successful, might otherwise benefit us and our
stockholders. Furthermore, a stockholder's investment may be adversely affected
to the extent we pay the costs of settlement and damage awards against directors
and officers under these indemnification provisions.
Presently, there is no pending litigation or proceeding involving any of
our directors, officers or employees for which indemnification is sought, nor
are we aware of any threatened litigation that may result in claims for
indemnification.
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TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Atlas Stock
Transfer Corp., 5899 South State Street, Salt Lake City, Utah 84107. We do not
have a transfer agent and registrar for our preferred stock or special voting
stock and there is no transfer agent and registrar for exchangeable shares of
SAC.
QUOTATION OF COMMON STOCK
Our common stock is quoted on the OTC Bulletin Board maintained by the
NASD.
The OTC Bulletin Board is a dealer-driven quotation service. Unlike the
Nasdaq Stock Market, companies cannot apply to be quoted on the OTC Bulletin
Board, only market makers can initiate quotes, and quoted companies do not have
to meet any quantitative financial requirement. Any equity security of a
reporting company not listed on Nasdaq or on a national securities exchange is
eligible.
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SHARES ELIGIBLE FOR FUTURE SALE
As of December 13, 2000, we had 27,366,730 shares of common stock
outstanding or issuable under derivative securities, comprised of:
o 7,550,250 shares of common stock issued and outstanding;
o 3,195,627 shares of common stock issuable upon the conversion of
shares of our preferred stock;
o 5,673,605 shares of common stock issuable upon the exchange of
exchangeable shares of SAC;
o 4,900,270 shares of common stock issuable upon exercise of outstanding
options with a weighted average exercise price per share of $2.2451
o 2,951,420 shares of common stock issuable upon exercise of special
warrants for no additional consideration; and
o 3,095,558 shares of common stock issuable upon exercise of warrants
with a weighted average exercise price per share of $5.6753.
Of the 17,187,412 shares outstanding or issuable under derivative
securities not covered by this prospectus, 2,000,000 represent shares that were
originally issued by ASM to its initial shareholder on June 2, 1995. On December
1, 1998, the initial shareholder agreed to transfer these shares to 25
individuals in exchange for a commitment by these individuals to pay the cost of
reactivating the corporation (which had never engaged in an active trade or
business), providing for the reinstatement of its charter in Florida (which had
been suspended in 1996 for failure to pay annual fees and costs) and bringing
its books and records up to date. Before the merger of ASM and FinanceCo, ASM
determined that these 2,000,000 shares were not restricted securities within the
meaning of Rule 144 in reliance on Rule 144(k). The remaining []15,187,412
shares are restricted securities and may be publicly sold only in compliance
with the applicable provisions of Rule 144, unless sold pursuant to an effective
registration statement under the Securities Act (filed pursuant to registration
rights agreements or otherwise).
In general, under Rule 144, a person (or persons whose shares are
aggregated) who has beneficially owned shares for at least one year is entitled
to sell within any three-month period a number of shares that does not exceed
the greater of (a) 1% of the then outstanding shares of common stock or (b) the
average weekly trading volume during the four calendar weeks preceding such
sale, subject to certain other requirements. A person (or persons whose shares
are aggregated) who has not been our affiliate at any time during the 90 days
immediately preceding the sale and who has beneficially owned his or her shares
for at least two years is entitled to sell these shares pursuant to Rule 144(k)
without regard to the limitations described above. Persons deemed to be our
affiliates must always sell pursuant to Rule 144, even after the applicable
holding period is satisfied, unless their sales are made pursuant to an
effective registration statement under the Securities Act.
Sales of a substantial number of shares of common stock could drive the
market price of our 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.
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PLAN OF DISTRIBUTION
We are registering the shares offered hereby on behalf of the selling
stockholders. As used herein, "selling stockholders" includes donees, pledgees,
transferees or other successors-in-interest selling shares received after the
date of this prospectus from a named selling stockholder as a gift, pledge or
other non-sale related transfer. All costs, expenses and fees in connection with
the registration of the shares offered by this prospectus will be borne by us,
other than brokerage commissions and similar selling expenses, if any,
attributable to the sale of shares offered hereby which will be borne by the
selling stockholders. Sales of the shares offered hereby may be effected by
selling stockholders from time to time in one or more types of transactions
(which may include block transactions), in the over-the-counter market, in any
securities exchange or market in which our common stock may in the future be
traded, in privately negotiated transactions, through put or call options
transactions relating to the shares offered hereby, through short sales of the
shares offered hereby, or a combination of these methods of sale, at market
prices prevailing at the time of sale, at prices related to such market prices,
or at negotiated prices. These transactions may or may not involve brokers or
dealers. The selling stockholders have advised us that they have not entered
into any agreements, understandings or arrangements with any underwriters or
broker-dealers regarding the sale of their securities, nor is there an
underwriter or coordinating broker acting in connection with the proposed sale
of the shares offered hereby by the selling stockholders.
The selling stockholders may enter into hedging transactions with
broker-dealers or other financial institutions. In connection with these
transactions, broker-dealers or other financial institutions may engage in short
sales of the shares offered hereby or of securities convertible into or
exchangeable for such shares in the course of hedging positions they assume with
selling stockholders. The selling stockholders may also enter into options or
other transactions with broker-dealers or other financial institutions which
require the delivery to such broker-dealers or other financial institutions of
the shares offered by this prospectus, which shares such broker-dealer or other
financial institution may resell pursuant to this prospectus (as amended or
supplemented to reflect such transaction).
The selling stockholders may effect these transactions by selling the
shares offered hereby directly to purchasers or to or through broker-dealers,
which may act as agents or principals. These broker-dealers may receive
compensation in the form of discounts, concessions or commissions from the
selling stockholders and/or the purchasers of the shares offered hereby for whom
these broker-dealers may act as agents or to whom they sell as principal, or
both (which compensation as to a particular broker-dealer might be in excess of
customary commissions).
The selling stockholders and any broker-dealers that act in connection with
the sale of the shares offered hereby might be deemed to be "underwriters"
within the meaning of Section 2(11) of the Securities Act, and any commissions
received by such broker-dealers and any profit on the resale of the shares
offered hereby sold by them while acting as principals might be deemed to be
underwriting discounts or commissions under the Securities Act. We have agreed
to indemnify certain selling stockholder against certain liabilities, including
liabilities arising under the Securities Act. The selling stockholders may agree
to indemnify any agent, dealer or broker-dealer that participates in
transactions involving sales of the shares offered hereby against certain
liabilities, including liabilities arising under the Securities Act.
Because selling stockholders may be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Act, the selling stockholders will be
subject to the prospectus delivery requirements of the Securities Act. We have
informed the selling stockholders that the anti-manipulative provisions of
Regulation M promulgated under the Securities Exchange Act of 1934, as amended
(the "Exchange Act") may apply to their sales in the market.
Selling stockholders also may resell all or a portion of the shares offered
hereby in open market transactions in reliance upon Rule 144 under the
Securities Act, provided they meet the criteria and conform to the requirements
of Rule 144.
Upon our being notified by a selling stockholder that any material
arrangement has been entered into with a broker-dealer for the sale of shares
offered hereby through a block trade, special offering, exchange distribution or
secondary distribution or a purchase by a broker or dealer, we will file a
supplement to this prospectus, if required, pursuant to Rule 424(b) under the
Securities Act, disclosing:
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o the name of each such selling stockholder and of the participating
broker-dealer(s);
o the number of shares involved;
o the initial price at which such shares were sold;
o the commissions paid or discounts or concessions allowed to such
broker-dealer(s), where applicable;
o that such broker-dealer(s) did not conduct any investigation to verify the
information set out or incorporated by reference in this prospectus; and
o other facts material to the transaction.
In addition, upon our being notified by a selling stockholder that a donee,
pledgee, transferee or other successor-in-interest intends to sell more than 500
shares, we will file a supplement to this prospectus.
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LEGAL MATTERS
The validity of the issuance of SoftQuad's securities offered by this
prospectus will be passed upon for SoftQuad by Parker Chapin LLP, New York, New
York.
EXPERTS
The consolidated financial statements of SoftQuad Software, Ltd. and the
related financial statement schedules incorporated in this registration
statement by reference from the Company's Annual Report on Form 10-KSB for the
year ended September 30, 2000 filed December 28, 2000 have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report, which is
incorporated herein by reference, and have been so incorporated in reliance upon
the report of such firm given upon their authority as experts in accounting and
auditing.
52
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II-6
PART II INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Our estimated expenses in connection with the issuance and distribution of
the securities being offered hereby are as follows:
Securities and Exchange Commission Registration Fee.......$ 6,234.83
Legal Fees and Expenses...................................$ 25,000.00
Accounting Fees and Expenses..............................$ 5,000.00
Miscellaneous.............................................$ 1,765.17
Total.....................................................$ 43,000.00
ITEM 15..INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law ("DGCL") provides that
a corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative, or investigative (other
than an action by or in the right of the corporation) by reason of the fact that
the person is or was a director, officer, employee or agent of the corporation,
or is or was serving at the request of the corporation as director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by the person in
connection with the action, suit or proceeding if the person acted in good faith
and in a manner the person reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe the person's conduct was
unlawful. Section 145 further provides that a corporation similarly may
indemnify the person serving in that capacity who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor,
against expenses actually and reasonably incurred by the person in connection
with the defense or settlement of the action or suit if the person acted in good
faith and in a manner the person reasonably believed to be in or not opposed to
the best interests of the corporation and except that no indemnification shall
be made in respect of any claim, issue or matter as to which the person shall
have been adjudged to be liable to the corporation unless and only to the extent
that the Delaware Court of Chancery or the court in which the action or suit was
brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, the person is fairly
and reasonably entitled to indemnity for the expenses which the Court of
Chancery or other court shall deem proper. The provisions regarding
indemnification and advancement of expenses under Section 145 of the DGCL shall
not be deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under any bylaw,
agreement, stockholders' or disinterested directors' vote or otherwise.
As permitted by Section 102(b)(7) of the DGCL our certificate of
incorporation includes a provision eliminating the personal liability of a
director to the corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director, except: (i) for any breach of the director's
duty of loyalty to the corporation or its stockholders; (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law; (iii) under Section 174 of the DGCL (relating to unlawful
payment of dividends and unlawful stock purchase and redemption); or (iv) for
any transaction from which the director derived an improper personal benefit.
As permitted by Section 145(e) of the DGCL, our certificate of
incorporation and our bylaws provide that we shall indemnify our directors and
officers, and, to the extent our board at any time authorizes, incorporators,
employees or agents, as such, to the fullest extent permitted by applicable law,
and that expenses reasonably incurred by any officer or director or other person
entitled to indemnification in connection with a threatened or actual action or
proceeding shall be advanced or promptly reimbursed by us in advance of the
final disposition of the action or proceeding, provided that, if required to do
so under the DGCL, we receive an undertaking by or on behalf of the officer or
director or other person to repay the amount if and to the extent that it is
ultimately determined by final judicial decision from which there is no further
right of appeal that the officer or director or other person is not entitled to
indemnification.
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We have entered into indemnity agreements with each of our directors and
executive officers to give them additional contractual assurances regarding the
scope of the indemnification described above and to provide additional
procedural protections. In addition, we have obtained directors' and officers'
insurance providing indemnification for our directors, officers and key
employees for various liabilities.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
EXHIBIT INDEX
Exhibit
Number Description of Document
--------- -----------------------
2.1(1) Acquisition Agreement among SoftQuad Software, Ltd., SoftQuad
Acquisition Corp. and SoftQuad Canada, dated December 16, 1999
2.2(2) Plan and Agreement of Merger between The American Sports Machine,
Inc. and SoftQuad Software, Ltd., dated March 1, 2000
2.3(2) Agreement and Plan of Reorganization among The American Sports
Machine, Inc., SoftQuad Software, Ltd. and its Stockholders, dated
March 1, 2000
2.4(4) Plan and Agreement of Merger between The American Sports Machine,
Inc. and SoftQuad Software, Ltd., dated March 9, 2000
4.1(1) Agent's Warrant to Purchase Shares of Common Stock of SoftQuad
Software, Ltd. pursuant to the Class A Convertible Stock Purchase
Agreement, dated December 9, 1999
4.2(1) VC Advantage Limited Partnership's Warrant to Purchase Shares of
Common Stock of SoftQuad Software, Ltd. pursuant to the Class B
Convertible Stock Purchase Agreement, dated February 28, 2000
4.3(1) Hammock Group Ltd.'s Warrant to Purchase Shares of Common Stock of
SoftQuad Software, Ltd. pursuant to the Class B Convertible Stock
Purchase Agreement, dated February 28, 2000
4.4(1) Agent's Warrant to Purchase Shares of Common Stock of SoftQuad
Software, Ltd. pursuant to the Class B Convertible Stock Purchase
Agreement with VC Advantage Limited Partnership, dated February 29,
2000
4.5(1) Agent's Warrant to Purchase Shares of Common Stock of SoftQuad
Software, Ltd. pursuant to the Class B Convertible Stock Purchase
Agreement with Hammock Group Ltd., dated February 29, 2000
4.6(1) Agent's Warrant to Purchase Shares of Common Stock of SoftQuad
Software, Ltd. pursuant to the Special Warrant Purchase Agreement
dated, May 19, 2000
4.7(1) Special Warrant for Thomson Kernaghan & Co. Limited, as agent, to
Purchase Shares of Common Stock of SoftQuad Software, Ltd., dated
February 29, 2000
4.8(1) Form of Special Warrant to Purchase Shares of Common Stock of
SoftQuad Software, Ltd., issued in April 18, 20 and June 5, 2000
private placements
4.9(1) Warrant Indenture Agreement between SoftQuad Software, Ltd. and
Montreal Trust Company of Canada, dated April 18, 2000
II-2
<PAGE>
4.10(2) Form of Subscription Agreement for Canadian Subscribers in April 18,
20 and June 5, 2000 private placements
4.11(2) Form of Subscription Agreement for American Subscribers in April 18,
20 and June 5, 2000 private placements
4.12(2) Registration Rights Agreement between SoftQuad Software Ltd., VC
Advantage Limited Partnership and Thomson Kernaghan & Co. Limited,
as agent, in connection with the Common Stock Purchase Agreement,
dated December 8, 1999 and the Class A Convertible Stock Purchase
Agreement, dated December 9, 1999
4.13(2) Registration Rights Agreement between SoftQuad Software Ltd., VC
Advantage Limited Partnership and Thomson Kernaghan & Co. Limited,
as agent, in connection with the Class B Convertible Stock Purchase
Agreement, dated February 28, 2000
4.14(2) Registration Rights Agreement between SoftQuad Software Ltd. Hammock
Group Ltd. and Thomson Kernaghan & Co. Limited, as agent, in
connection with the Class B Convertible Stock Purchase Agreement,
dated February 28, 2000
4.15(2) Registration Rights Agreement between SoftQuad Software, Ltd. and
SmallCaps Online LLC, for itself and as agent, dated April 18, 2000
4.16(1) Registration Rights Agreement between SoftQuad Software, Ltd. and
Thomson Kernaghan & Co. Limited, for itself and as agent, dated
April 18, 2000
4.17(3) Voting Trust and Exchange Agreement, among SoftQuad Software, Ltd.,
SoftQuad Acquisition Corp., SoftQuad Software, Inc. and Montreal
Trust Company of Canada, dated February, 2000
4.18 Registration Rights Letter to holders of exchangeable shares of SAC,
dated September 20, 2000 (to be filed by amendment)
5 Opinion of Parker Chapin LLP regarding legality (to be filed by
amendment)
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Parker Chapin (included in Exhibit 5)
------------------------------
(1) Incorporated by reference to Exhibits to the registrant's Quarterly
Report on Form 10-QSB for the quarter ended June 30, 2000.
(2) Incorporated by reference to Exhibits to the registrant's Current
Report on Form 8-K dated March 9, 2000.
(3) Incorporated by reference to Exhibits to the registrant's Current
Report on Form 8-K dated April 21, 2000.
(4) Incorporated by reference to Exhibits to the registrant's Definitive
Information Statement on Schedule 14C dated March 21, 2000.
II-3
<PAGE>
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant under the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling persons of the registrant
in the successful defense of any action suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether the indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(a) To include any Prospectus required by Section 10(a)(3) of
the Securities Act;
(b) To reflect in the Prospectus any facts or events arising
after the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the Registration
Statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement;
(c) To include any material information with respect to the
plan of distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new Registration
Statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement on Form S-3 to be signed on its
behalf by the undersigned, thereunto duly authorized, on December 29, 2000.
SOFTQUAD SOFTWARE, LTD.
By: /s/ Roberto Drassinower
--------------------------
Roberto Drassinower
Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Roberto
Drassinower and David R. Lewis, and each of them, as true and lawful
attorneys-in-fact and agents with full power of substitution and resubstitution
for each such person and in such person's name, in any and all capacities, (A)
to sign all amendments (including pre-effective and post-effective amendments)
to this Registration Statement; (B) to file such amendments with all exhibits
and other related documents with the Securities and Exchange Commission; and (C)
to perform every act necessary in connection with (A) or (B), granting unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as such person might or could do in person,
hereby ratifying and confirming all that said attorney-in-fact and agent, or his
substitute or substitutes, may lawfully do or cause to be done by virtue
thereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-3 has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C>
Date: December 29, 2000 /s/ Roberto Drassinower
------------------------------
Roberto Drassinower
Chief Executive Officer and Director
(principal executive officer)
Date: December 29, 2000 /s/ Andrew Muroff
------------------------------
Andrew Muroff
President and Director
Date: December 29, 2000 /s/ David R. Lewis
------------------------------
David R. Lewis
Chief Financial Officer
(principal financial and accounting officer)
Date: December 29, 2000 /s/ Joan Dea
------------------------------
Joan Dea
Director
Date: December 29, 2000 /s/ Robert Bagga
------------------------------
Robert Bagga
Director
<PAGE>
Date: December 29, 2000 /s/ Lawrence Goldberg
------------------------------
Lawrence Goldberg
Director
Date: December 29, 2000 /s/ Brock Armstrong
------------------------------
Brock Armstrong
Director
</TABLE>
