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December 14, 1999
Mr. Roberto Drassinower
President & Chief Executive Officer
SoftQuad Software Inc.
161 Eglinton Avenue East, Suite 400
Toronto, Ontario
M4P 1J5
Dear Mr. Drassinower:
Re: US$8 MILLION PRIVATE PLACEMENT OF COMMON SHARES
This letter will confirm our mutual agreement with respect to your engagement of
Thomson Kernaghan & Co. Ltd. (the "Agent") as the exclusive agent of SoftQuad
Software Inc. ("Softquad"), and a new Delaware corporation to be formed for the
purpose of acquiring Softquad (the "Company"), to act on its behalf, on a best
efforts basis, in connection with its offer and sale of up to US$8 million of
the Company's common shares ("Common Shares"), in two placements as detailed in
the attached term sheet (see Schedule B) (the "Offering") the first of which
shall be exempt from the registration requirements of applicable Canada
securities laws, and from the registration requirements of the U.S. Securities
Act of 1933, as amended (the "Securities Act"), pursuant to Regulation D of the
U.S. Securities and Exchange Commission, and the second of which shall be
registered under the Securities Act on the following terms.
1. Our engagement shall begin upon your signed acceptance of this letter and
shall end on the earlier of i) completion of the Offering or ii) May 31,
2000.
2. The Agent shall retain the right of first refusal to act as lead or co-lead
agent on any financing transaction by the Company for a period of 12 months
commencing on the date of listing.
3. On or before February 15, 2000, the Company will provide the Agent with (i)
a detailed statement of its intended use of the proceeds from the placement
of the Shares; (ii) monthly unaudited financial statements from the date of
its last audit, consisting of a balance sheet, statement of income,
statement of cash flows, and statement of changes in shareholders' equity,
all prepared in accordance with US GAAP and applicable SEC regulations; and
(iii) such other information regarding the Company and its financial
condition and operations as the Agent may reasonably request.
4. The Company will provide the Agent with, a subscription agreement,
Purchasers' Warrants, Agent's Warrants, and such other documentation as the
Company's counsel or the Agent's counsel deems reasonably necessary, and an
opinion of the Company's counsel with respect to the organization and good
standing of the Company, the authorization and issuance of the Shares, the
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offering's compliance with applicable law, the validity and enforceability
of the subscription agreements and the warrants, and such other matters
contemplated by this letter as the Agent or its legal counsel may
reasonably request. All such documentation must be reasonably satisfactory
to the Agent and its legal counsel.
5. Softquad represents and warrants to the Agent that:
(a) Softquad is and the Company will be duly organized, is and will confirm
its' valid existence and is in good standing in the jurisdiction of
it's incorporation, and is qualified to do business in every
jurisdiction where the nature of its business or activities so require;
(b) Softquad has all requisite corporate power and authority to execute and
perform this letter agreement. All corporate action necessary for the
authorization, execution, delivery and performance of this letter
agreement and the transactions contemplated hereby have been taken.
This agreement constitutes a valid and binding obligation of Softquad,
enforceable against Softquad in accordance with its terms.
(c) The execution and performance of this letter agreement by Softquad, the
Company's offer and sale of the Preferred and Common Shares, and the
issuance of the Purchasers' Warrants and the Agent's Warrants, will not
violate any provision of the certificate of incorporation or bylaws of
Softquad or the Company or any material agreement or other instrument
to which Softquad or the Company is a party or by which it is bound,
the violations of which, in each case or in the aggregate, would have a
material adverse effect on the business or financial condition of
Softquad or the Company.
(d) Softquad is in material compliance with all laws applicable to it, is
not materially in default in any of its obligations under any agreement
or other instrument, and no materially adverse change has occurred in
Softquad's financial condition since the date of its last audit.
(e) Except as set forth in this agreement, Softquad has no public or
private offering of Securities pending or contemplated that it has not
disclosed in writing to us.
6. The Company will make no public or private offering of securities prior to
May 31st, 2000 provided that the first tranche of US$3 million is raised.
7. The Company also agrees to indemnify the Agent as per the attached
Schedule A.
8. This letter is a binding agreement between the Company and the Agent, and
it shall be construed and enforced in accordance with the laws of the
province of Ontario and the national laws of Canada; provided, however, if
any provision of this letter agreement in unenforceable under the laws of
Ontario or Canada, but is enforceable under the laws of the U.S. state of
Delaware, then the law of Delaware shall govern the construction and
enforcement of that provisions. Softquad hereby consents to the
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jurisdiction of the courts of Ontario in any action to construe or enforce
this letter agreement, or to recover damages for its breach.
Please confirm our engagement on these terms by signing this letter in the space
provided below.
Sincerely,
THOMSON KERNAGHAN & CO. LTD.
By:__________________________________
John Koshan
Vice President & Director
Confirmed, accepted and agreed to on December __, 1999.
SOFTQUAD SOFTWARE CORP.
By: ________________________________
Roberto Drassinower
President & Chief Executive Officer
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SCHEDULE "A"
SOFTQUAD SOFTWARE LTD. ("SOFTQUAD"), AND A NEW DELEWARE CORPORATION TO BE FORMED
FOR THE PURPOSES OF ACQUIRING SOFTQUAD its subsidiaries or affiliated companies
(collectively the "Indemnitor") hereby agrees to indemnify and hold TK and/or
any of its respective affiliates (hereinafter referred to as the "Agent") and
each of the directors, officers, employees and shareholders of the Agent
(hereinafter referred to as the "Personnel") harmless from and against any and
all expenses, losses (other than loss of profits), claims, actions, damages or
liabilities, whether joint or several (including the aggregate amount paid in
reasonable settlement of any actions, suits, proceedings or claims), and the
reasonable fees and expenses of its counsel that may be incurred in advising
with respect to and/or defending any claim that may be made against the Agent,
to which the Agent and/or its Personnel may become subject or otherwise involved
in any capacity under any statute or common law or otherwise insofar as such
expenses, losses, claims, damages, liabilities or actions arise out of or are
based, directly or indirectly, any breach by the Indemnitor of any of its
representations warranties or agreements contained in the agreement to which
this letter is attached or in any certificate or other document given pursuant
thereto, or the non-compliance by the Indemnitor with any requirement of
applicable securities laws or other laws in connection with the transactions
contemplated by said agreement, provided, however, that this indemnity shall not
apply to the extent that a court of competent jurisdiction in a final judgment
that has become non-appealable shall determine that:
(i) the Agent or its Personnel have been negligent or
dishonest or have committed any fraudulent act in
the course of such performance; and
(ii) the expenses, losses, claims, damages or
liabilities, as to which indemnification is
claimed, were caused by the gross negligence,
dishonesty or fraud referred to in (i).
If for any reason (other than the occurrence of any of the events itemized in
(i) and (ii) above), the foregoing indemnification is unavailable to the Agent
or insufficient to hold it harmless, then the Indemnitor shall contribute to the
amount paid or payable by the Agent as a result of such expense, loss, claim,
damage or liability in such proportion as is appropriate to reflect not only the
relative benefits received by the Indemnitor on the one hand and the Agent on
the other hand but also the relative fault of the Indemnitor and the Agent, as
well as any relevant equitable considerations; provided that the Indemnitor
shall in any event contribute to the amount paid or payable by the Agent as a
result of such expense, loss, claim, damage or liability any excess of such
amount over the amount of the fees received by the Agent hereunder pursuant to
the letter to which this is attached. No party who has engaged in any fraud,
fraudulent misrepresentation or negligence shall be entitled to claim
contribution from any person who is not engaged in such conduct.
The Indemnitor agrees that in case any legal proceeding shall be brought against
the Indemnitor and/or the Agent by any governmental commission or regulatory
authority or any stock exchange or other entity having regulatory authority,
either domestic or foreign, shall investigate the Indemnitor and/or the Agent
and any Personnel of the Agent shall be required to testify in connection
therewith or shall be required to respond to procedures designed to discover
information regarding, in connection with, or by reason of the performance of
professional services rendered to the Indemnitor by the Agent, the Agent shall
have the right to employ its own counsel in connection therewith, and the
reasonable fees and expenses of such counsel as well as the reasonable costs
(including an amount to reimburse the Agent for time spent by its Personnel in
connection therewith) and out-of-pocket expenses incurred by its Personnel in
connection therewith shall be paid by the Indemnitor as they occur.
If any matter or thing contemplated by this section shall be asserted against
the Agent or any of its Personnel (an "Indemnified Person") in respect of which
matter or thing indemnity may be sought against the Indemnitor pursuant to this
agreement or any such potential matter or thing comes to their knowledge, the
Agent shall promptly notify the Indemnitor in writing of the nature of the
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action or claim. The Indemnitor shall (i) be entitled to (but not required to)
assume the defence of that action or claim, including the employment of counsel
(satisfactory to the Agent, acting reasonably) and (ii) assume payment of
expenses in relation thereto as and when they are received.
The Indemnified Person(s) shall have the right to employ separate counsel in any
case and to participate in the defence thereof, but the fees and expenses of
such counsel should be at the expense of the Indemnified Person(s) unless (a)
the employment of such counsel has been specifically authorized in writing by
the Indemnitor in connection with the defence of such action or claim; (b) the
Indemnitor shall not, within a reasonable time after receiving written notice,
have employed counsel to have charge of the defence of such action or claim; or
(c) the named parties to any such action or claim include both the Indemnified
Person(s) and the Indemnitor and the Indemnified Person(s) shall have been
advised by counsel, acting reasonably, that there may be defences available to
such person(s) which are different from or additional to those available to the
Indemnitor, in any of which events the fees and expenses of such counsel shall
be borne by the Indemnitor. Notwithstanding the foregoing, no settlement may be
made by any Indemnified Person hereunder without the prior written consent of
the other parties, including the Indemnitor, which consent shall not be
unreasonably withheld."
The indemnity and contribution obligations of the Indemnitor shall be in
addition to any liability which the Indemnitor may otherwise have, shall extend
upon the same terms and conditions to the Personnel of the Agent and shall be
binding upon and enure to the benefit of any successors, assigns, heirs and
personal representatives of the Indemnitor, the Agent and any of the Personnel
of the Agent. The foregoing provisions shall survive the completion of
professional services rendered under the letter to which this is attached or any
termination of the authorization given by the letter to which this is attached.
FOR THOMSON KERNAGHAN & CO LTD
BY: _______________________________
John Koshan
Vice President & Director
SOFTQUAD SOFTWARE INC.,
its subsidiaries or affiliated companies
BY: _______________________________
Roberto Drassinower
President & Chief Executive Officer
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SCHEDULE B
SOFTQUAD SOFTWARE LTD.
SUMMARY OF TERMS
Up to US$8 Million Private Placement
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ISSUER: Softquad Software Ltd. (a private
Delaware incorporated company (the
"Issuer").
TARGET: Softquad Software Inc. (the Canadian
operating company) ("Softquad Canada").
The Issuer will acquire 100% of the
issued and outstanding shares of Softquad
Canada on a 1:1 share for share exchange.
Softquad Canada may use "exchangeable
shares". Issuer may use wholly owned
Canadian acquisition corporation.
SOFTQUAD CANADA - Approximately 11,065,275 (consisting of 2
CURRENT FULLY DILUTED SHARES groups of Shareholders; Group 1-
OUTSTANDING: approximately 7,469,975 shares (including
James Clark, Pinetree Capital Corp,
Beacon M International Investments Inc.,
Protege and Newkidco); Group 2 - balance
of shares).
PLACEMENT AGENT: Thomson Kernaghan & Co. Ltd. (the
"Agent")
FINANCIAL ADVISOR: Thomson Kernaghan & Co. Ltd. (subject to
separate "Financial Advisory" agreement).
FIRST TRANCHE
FINANCING i) US$1 million to purchase 736,702
Common Shares (Rule 504);
ii) US$2 million to purchase
1,473,405 Convertible Preferred
Shares (convertible into Common
Shares on a 1:1 basis)
SOFTQUAD CANADA -
VALUATION (PRE-MONEY): US$15 million (approximately US$1.3574
per share)
INITIAL CLOSING DATE: On or before December 15, 1999
PURCHASER'S WARRANTS: The Issuer shall issue on closing
warrants to purchase Common Shares equal
to 20% of the aggregate subscription
amount. The Purchaser's Warrants shall
expire 3 years after the Initial Closing
Date and shall have an exercise price
based on a post first tranche valuation
of US$20 million (approximately US$1.44
per share).
AGENT'S WARRANTS: The Issuer shall issue on closing to the
Agent warrants to purchase Common Shares
equal to 10% of the aggregate
subscription amount. The Agent's Warrants
shall expire 3 years after the Initial
Closing Date and shall have an exercise
price based on a post first tranche
evaluation of US$20 million
(approximately US$1.44 per share).
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AGENT'S FEE: 7% of the aggregate purchase price of the
Common Shares and Convertible Preferred
Shares placed.
RULE 504: The Issuer shall commit to the issuance
of the first $1 million of Common Shares
as unrestricted shares under SEC Rule
504. Such Common Shares will comprise the
first million dollars of the first
tranche.
USE OF PROCEEDS: To fund ongoing operations of the Issuer,
consulting fee of US$100,000 payable to
KBL Capital, and to repay approximately
CDN $1,000,000 in debt.
SECOND TRANCHE
FINANCING: Up to US$3 million to purchase 2,083,333
Common Shares.
SOFTQUAD CANADA - US$20 million (approximately US$1.44 per
VALUATION (PRE-MONEY): share).
SECONDARY CLOSING DATE: Subject to successful completion of the
Issuer's registration statement.
PURCHASER'S WARRANTS: The Issuer shall issue on closing
warrants to purchase Common Shares equal
to 20% of the aggregate subscription
amount. The Purchaser's Warrants shall
expire 3 years after the Initial Closing
Date and shall have an exercise price
based on a post second tranche valuation
of US$25.5 million (approximately US$1.53
per share).
AGENT'S WARRANTS: The Issuer shall issue on closing to the
Agent warrants to purchase Common Shares
equal to 10% of the aggregate
subscription amount. The Agent's Warrants
shall expire 3 years after the Initial
Closing Date and shall have an exercise
price based on a post second tranche
valuation of US$25.5 million
(approximately US$1.53 per share).
AGENT'S FEE: 7% of the aggregate purchase price of the
Common Shares placed.
STRATEGIC INVESTOR: The Company may solicit up to an
additional US$2 million from strategic
investors on the same terms outlined in
the Second Tranche. The Agent's Fee
including brokers warrants on this
transaction shall be 25% to the Agents
and 75% to KBL Capital.
REGISTRATION: The Issuer shall register for both the
first and second tranche:
(i) the Common Shares underlying the
conversion of the Convertible
Preferred Shares in the first
tranche;
(ii) the issuance of Common Shares in
the second tranche;
(iii) 100% of the Common Shares
underlying the Purchaser's
Warrants;
(iv) 100% of the Common Shares
underlying the Agent's Warrants;
(v) 100% of the Issuer's Common
Shares issuable to Group 1 and
Group 2 (or Common Shares
underlying the conversion of the
Softquad Exchangeable Shares)
subject to the Escrow Agreement
below.
(vi) 100% of the Common Shares
associated with the Financial
Advisory Agreement share
issuance.
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The Issuer shall cause such
registration to be effective before
March 31, 2000, and shall keep such
registration effective (1) with respect
to the Common Shares underlying the
Preferred Shares, and the Common Shares
issued or issuable to current investors,
for a period expiring only when the
Purchaser no longer qualifies as an
affiliate of the Issuer, and (2) with
respect to the Common Shares underlying
the Purchaser's Warrants and the Agent's
Warrants, until 30 days after the
warrants have been fully exercised or
expired.
ESCROW AGREEMENT: All Group 1 investors shall be subject to
an escrow agreement consisting of the
following release terms; (i) 1,725,000
escrowed shares shall vest over a twelve
month period commencing monthly on
January 1, 2000. The resale amount is a
product of 143,750 (ie. 1/12 of
1,725,000) and a fraction (the numerator
of which is the number of Escrowed Shares
beneficially owned by the Shareholder,
and the denominator of which is the total
number of escrowed shares owned by all
Group 1 shareholders (including the
shareholder); and
(ii) 2,083,333 escrowed shares shall vest
over a six month period commencing on the
effective date of the Registration
Statement and expiring six months later.
The resale amount is a product of 348,000
(ie. 1/6 of 2,083,333) and a fraction
(the numerator of which is the number of
Escrowed Shares beneficially owned by the
Shareholder, and the denominator of which
is the total number of escrowed shares
owned by all Group 1 shareholders
(including the shareholder).
(iii) The residual number of shares shall
vest over a period expiring May 31, 2001
and commencing on the effective date of
the Registration Statement. The resale
amount shall mirror similar "dribble out"
provisions as defined by Rule 144.
All Group 2 investors shall be subject to
an escrow agreement vesting over three
years in equal annual installments
commencing on the date of closing. The
resale amount shall mirror similar
"dribble out" provisions as defined by
Rule 144.
ESCROW AGENT: The Issuer shall deliver to Thomson
Kernaghan & Co. Ltd., as escrow agent,
the share certificates issuable in the
first and second tranche, underlying the
Convertible Preferred Shares, Purchaser's
Warrants and Agent's Warrants and the
respective Group 1 and Group 2 shares.
LIQUIDATED DAMAGES: The Issuer shall pay to the Purchaser,
pro rata, an amount per day equal to
0.067% of the aggregate purchase price of
the Common Shares issued in the first
tranche for each day after March 31,
2000, that the registration statement is
not effective.
The Issuer shall also pay the Purchaser
and the Placement Agent, pro rata, an
amount per day equal to 0.067% of the
aggregate exercise price of the Common
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Stock underlying their respective
warrants issued in the first tranche for
each day after March 31, 2000, that the
registration statement is not effective.
LEGAL OPINION The Issuer shall furnish the Placement
Agent with an opinion of counsel,
reasonably satisfactory to the Placement
Agent and its legal counsel, with respect
to the transactions contemplated by this
term sheet.
PLACEMENT AGENT'S EXPENSES The Issuer shall reimburse the Placement
Agent for its reasonable out-of-pocket
expenses, including the fees and expenses
of its legal counsel. Expenses of counsel
shall be capped at US$100,000 and any
additional amounts to be approved by the
Company.
OTHER ISSUER UNDERTAKINGS: The Issuer also undertakes to engage the
services of a professional US based
investor relations firm and a US public
relations firm on or before the effective
date of its listing on a public US
exchange.
ACCOUNTANT'S LETTER The Issuer shall furnish the Placement
Agent with a letter from the Issuer's
independent public accountants (upon
completion of the Issuer's annual audit)
with respect to certain financial and
accounting matters, including the absence
of the receipt of any information that
would lead them to conclude that any
materially adverse change has occurred in
the Issuer's financial condition since
the date of their last audit.
CAPITAL STRUCTURE SoftQuad, prior to the closing of this
Offering, will effect a re-organization
of the current share structure, the
result of which will reflect the common
shares detailed in this term sheet.
DUE DILIGENCE AND
DOCUMENTATION: This offering is subject to the Agent's
satisfactory review and due diligence.
All documents and execution of definitive
agreements shall be subject to review and
approval by Thomson Kernaghan and its
counsel.
CANADIAN TAX ISSUES: The transactions are subject to such
modification and restructuring as may be
necessary to minimize the imposition of
Canadian taxes.
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