SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the fiscal year ended September 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ____________
Commission File No. 000-26327
SOFTQUAD SOFTWARE, LTD.
(Name of Small Business Issuer in Its Charter)
Delaware 65-0877744
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
161 Eglinton Avenue East, Suite 400, Toronto, Ontario, Canada M4P 1J5
(Address of principal executive offices) (ZIP Code)
(416) 544-9000
(Issuer's Telephone Number, Including Area Code)
SECURITIES REGISTERED UNDER TO SECTION 12 (b) OF THE EXCHANGE ACT: None
SECURITIES REGISTERED UNDER TO SECTION 12 (g) OF THE EXCHANGE ACT:
Common Stock, $0.001 par value
(Title of Class)
Check whether the registrant (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes X No
Check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
State issuer's revenue for its most recent fiscal year. $4,285,762
The aggregate market value of the voting and non-voting Common Stock held
by non-affiliates of November 30, 2000 the registrant, computed by reference to
the closing sales price of the Common Stock on the OTC Bulletin Board on
December 18, 2000 was $3.05
The number of shares of the Registrant's Common Stock outstanding was
13,223,855 as of November 302000. This includes 5,673,605 shares reserved for
issuance upon the exchange of exchangeable shares.
Transitional Small Business Disclosure Format (check one): Yes No X
---- ---
DOCUMENTS INCORPORATED BY REFERENCE: None
<PAGE>
INDEX
<TABLE>
<CAPTION>
PART I
<S> <C>
Item 1. Description of Business
Item 2. Description of Property
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 7. Financial Statements
Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons
Compliance with Section 16(a) of the Exchange Act
Item 10. Executive Compensation
Item 11. Security Ownership of Certain Beneficial Owners and Management
Item 12. Certain Relationships and Related Transactions
Item 13. Exhibits List and Reports on Form 8-K
</TABLE>
This Annual Report of SoftQuad Software, Ltd. ("SoftQuad") on Form 10-KSB
contains various forward-looking statements, as contemplated by the Private
Securities Litigation Reform Act of 1995. Forward-looking statements may be
identified by the use of forward-looking terminology such as "may," "will,"
"should," "expect," "intend," "estimate" or "continue" or the negative thereof
or comparable terminology and may include, among other things, expected growth,
business strategies, future revenues, future sales, future operating
performance, plans, objectives, goals and strategies of SoftQuad. Such
forward-looking statements are based upon information currently available in
which SoftQuad's management shares its knowledge and judgment about factors that
it believes may materially affect SoftQuad's performance. The forward-looking
statements are made in good faith by SoftQuad and are believed by SoftQuad to
have a reasonable basis. However, such statements are speculative, speak only as
of the date made and are subject to certain risks, uncertainties and
assumptions. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, estimated or expected. Factors that might
cause actual results to differ materially from those in such forward-looking
statements include, but are not limited to, the factorsdiscussed in "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations", as well as other factors discussed from time to time in the reports
filed by SoftQuad with the Securities and Exchange Commission.
Readers are urged to review carefully and consider disclosures made by
SoftQuad in this and other reports that discuss factors germane to SoftQuad's
business.
<PAGE>
PART I
ITEM 1. 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.
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 HTML and 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
<PAGE>
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, we retained a Toronto-based investment dealer to act as
an agent in facilitating private placement financings of SoftQuad Canada.
Pursuant to this agreement, money was advanced 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 securityholders of SoftQuad Canada to acquire all of the
outstanding securities of SoftQuad Canada through FinanceCo's subsidiary,
SoftQuad Acquisition Corp., an Ontario (Canada) corporation ("SAC"). Pending
completion of that acquisition, FinanceCo loaned the proceeds of completed
financings to SoftQuad Canada for operating purposes.
MERGER WITH THE AMERICAN SPORTS MACHINE, INC.
On March 2, 2000, FinanceCo merged with 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.
<PAGE>
OUR CURRENT CORPORATE STRUCTURE
We currently conduct our operations through SoftQuad Canada and its
wholly-owned subsidiary, SoftQuad UK Limited. All of the common shares of
SoftQuad Canada are owned by SAC, and all of the common shares of SAC are owned
by SoftQuad Software, Ltd. 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) |
|________________________________________|
<PAGE>
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.
INDUSTRY
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 and person-to-person 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 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%.
<PAGE>
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 SUPPLIER'S 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 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, rather than 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:
<PAGE>
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.
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's 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:
<PAGE>
[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.
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.
<PAGE>
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 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
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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.
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
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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.
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.
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,
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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
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 attendance) 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.
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.
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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.
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 scalable
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."
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."
<PAGE>
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 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 scalable.
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.
<PAGE>
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 the European Union., Australia and New Zealand. 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
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.
<PAGE>
RESEARCH AND DEVELOPMENT
During the years ended September 30, 2000 and 1999 and for the nine-month
period ended September 30, 1998, we spent $2.0 million, $1.1 million and $798
thousand respectively, on research and development activities, no part of which
was borne directly by any customer.
EMPLOYEES
As of September 30, 2000, we had a total of 106 full-time employees. Of
these employees, 32 were in development, 36 in sales and marketing, 10 in
product solution and customer support and 28 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.
RISK FACTORS
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.
<PAGE>
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 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
$3.0 million and $6.7 million for the years ended September 30, 1999 and 2000,
and $1.3 million for the nine-month period ended September 30, 1998. 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.
<PAGE>
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:
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, and such comparisons may not be accurate indicators of
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 analysts 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 sales 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
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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.
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
<PAGE>
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 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 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.
<PAGE>
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 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 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:
<PAGE>
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.
Certain provisions of Delaware law may also discourage, delay or prevent
someone from acquiring or merging with us.
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.
<PAGE>
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 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
stockholders 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.
<PAGE>
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 a 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.
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.
ITEM 2. DESCRIPTION OF PROPERTY
-----------------------
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.
ITEM 3. LEGAL PROCEEDINGS
-----------------
We are not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No matters were submitted to a vote of the securities holders during the fourth
quarter of the fiscal year ended September 30, 2000.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
--------------------------------------------------------
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."
<PAGE>
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 $ 0.125
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 number of shares of common stock deemed to be beneficially owned
includes shares reserved for exchange of exchangeable shares, conversion of
preferred stock and the exercise of warrants and special warrants. The number of
stockholders of record of our common stock as of November 30, 2000 was 36, and
there is a substantially greater number of beneficial owners of such stock.
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 deem relevant.
RECENT SALE OF UNREGISTERED SECURITIES
SALES BY ASM
The following sales of unregistered securities were made by ASM before it
merged with FinanceCo:
On December 1, 1998, ASM sold a total of 400,000 shares of its common stock
at a price of $0.05 per share, for aggregate proceeds of approximately $20,000,
to 25 individuals. These sales were made pursuant to Section 3(b) and 4(2) of
the Securities Act of 1933, as amended (the "Securities Act") and Rules 505 and
506 of Regulation D thereunder.
On December 1, 1998, ASM issued 500,000 shares of its common stock to
Angela Michelle Bartolotta, the President, Secretary and Treasurer of ASM, in
consideration and in exchange for services valued at $25,000 to be rendered in
connection with the reorganization of ASM. On March 12, 1999, Ms. Bartolotta
resigned her position and tendered her 500,000 shares to ASM for cancellation.
Such shares were canceled. On March 12, 1999, ASM issued 500,000 shares of its
common stock to James Donald Brock, Jr., in consideration and in exchange for
services valued at $25,000 to complete the reorganization of ASM. James Donald
Brock, Jr. was also elected President, Secretary, Treasurer, and Director of
ASM. The issuance of shares to Ms. Bartolotta on December 1, 1998 and the
issuance of shares to Mr. Brock on March 12, 1999 were made in reliance on
Section 4(2) of the Securities Act and Rule 506 of Regulation D thereunder. Ms.
Bartolotta and Mr. Brock each represented to ASM that they were accredited
investors (as defined in Rule 501 under the Securities Act), the books and
records of ASM were made available to them, and at the respective times of their
acquisition of shares, each was serving as the sole officer and director of ASM.
SALES BY SOFTQUAD CANADA
<PAGE>
The following sales of unregistered securities were made by SoftQuad
Canada, an Ontario (Canada) corporation, prior to its acquisition by FinanceCo,
all of which were effected outside of the United States to persons other than
U.S. persons. Accordingly, they were not subject to U.S. securities laws.
On August 7, 1998, SoftQuad issued five shares of its common stock, at a
price of $0.13 per share, to Roberto Drassinower.
On November 6, 1998, SoftQuad Canada issued 142,855 shares of common stock
to Roberto Drassinower, 142,860 shares of common stock to each of Peter Sharpe,
Bruce Sharpe, Lauren Wood and Jonathan Sachs, and 2,285,700 shares of common
stock to James Clark at a price of approximately $.23, for aggregate gross
proceeds of $690,000. On that same date, SoftQuad Canada issued 703,705 shares
of common stock to a subsidiary of NewKidCo International Inc. pursuant to its
obligations under a purchase agreement dated September 9, 1998.
On April 9, 1999, SoftQuad Canada issued 351,850 common share purchase
warrants with an exercise price of $0.47 per share to NewKidCo as partial
consideration for the cancellation of shares of common stock held by NewKidCo's
subsidiary. On that same date, SoftQuad Canada issued 1,947,040 shares of common
stock to an institutional investor and 623,055 shares of common stock to James
Clark, each at a per share subscription price of approximately $0.43 for
aggregate subscription proceeds of $1,105,141. In connection with these
issuances, SoftQuad Canada issued 973,520 common share purchase warrants to the
institutional investor, and 311,530 common share purchase warrants to James
Clark, each with an exercise price of approximately $0.43, and SoftQuad Canada
paid a fee to KBL Capital Partners Inc. for investment advisory services of
$41,563 plus 58,410 shares of common stock and 233,645 common share purchase
warrants with an exercise price of approximately $0.43.
On May 14, 1999, SoftQuad Canada issued 228,160 shares of common stock to
an institutional investor at a per share subscription price of approximately
$0.43, for aggregate gross proceeds of $98,110. In connection with that
transaction, SoftQuad Canada issued 114,080 common share purchase warrants to
the institutional investor with an exercise price of $0.43, and paid a fee to an
investment advisor of $4,870 plus 6,845 shares of common stock and 18,255 common
share purchase warrants with an exercise price of approximately $0.43.
On July 30, 1999, SoftQuad Canada issued $697,522 of debt through an agent.
In connection with this transaction, SoftQuad Canada issued 1,025,000 common
share purchase warrants to the agent at an exercise price of approximately $0.43
and issued warrants to purchase 102,500 shares of common stock to an investment
advisor with an exercise price of $0.43.
On September 30, 1999, James Clark, certain institutional investors,
NewKidCo and the agent for the debtholders sold their warrants to SoftQuad
Canada in exchange for shares of common stock of SoftQuad Canada on a 1-for-1
basis, with 311,530 shares of common stock issued to James Clark, 723,520 shares
of common stock issued to the institutional investors, 351,850 shares of common
stock issued to NewKidCo and 1,025,000 shares of common stock issued to the
agent.
On December 9, 1999, SoftQuad Canada issued 215,385 shares of common stock
to a U.K. company in consideration of services rendered that were valued at
$95,807.
SALES BY FINANCECO
The following sales of unregistered securities were made by FinanceCo
before its merger with ASM:
On December 16, 1999, FinanceCo issued 736,702 shares of its common stock
at a price of $1.3574 per share, aggregating $1,000,000 to an institutional
accredited investor. This sale was deemed to be exempt from registration under
the Securities Act in reliance upon Rule 504 promulgated under Section 3(b) of
the Securities Act as a transaction not exceeding $1,000,000.
On December 16, 1999, FinanceCo issued 1,473,405 shares of its Class A
preferred stock at $14 per share, aggregating $2.0 million, to an institutional
accredited investor. In connection with this transaction, the institutional
accredited investor received warrants, exercisable on or before December 16,
2002, at a price of $1.3574 per share
<PAGE>
to purchase an aggregate of 442,022 shares of common stock of FinanceCo. In
addition, the agent in respect of this purchase, also an institutional
accredited investor, received warrants to purchase 220,011 shares of common
stock of FinanceCo on identical terms. All of the foregoing sales were deemed to
be exempt from registration pursuant to Regulation S under the Securities Act.
All of the entities that purchased the unregistered securities were accredited
investors (as defined in Regulation D under the Securities Act) and non-U.S.
persons (as defined in Regulation S under the Securities Act), and provided
representations as to this status at the time of their purchase.
On February 28, 2000, FinanceCo issued 1,722,222 shares of its Class B
preferred stock to institutional accredited investors at a price of $2.90 per
share, aggregating $5 million. In connection with this transaction, the
institutional accredited investors received warrants, exercisable on or before
February 28, 2003, to purchase an aggregate of 694,445 shares of common stock of
FinanceCo, with an exercise price of $1.53 per share, and the agent in respect
of this purchase, also an institutional accredited investor, received warrants
to purchase 347,222 shares of common stock of FinanceCo on identical terms. All
of the foregoing sales were deemed to be exempt from registration pursuant to
Regulation S under the Securities Act. All of the entities that purchased the
unregistered securities were accredited investors and non-U.S. persons, and
provided representations as to this status at the time of their purchase.
On February 29, 2000, an institutional accredited investor, as agent on
behalf of Canadian-resident subscribers, purchased 1,000,000 special warrants at
a price of $2.50 per special warrant. Each special warrant entitled the holder
thereof to acquire one share of common stock of FinanceCo for no additional
consideration. For its services, the agent received warrants, exercisable on or
before February 28, 2003, to purchase 100,000 shares of common stock of
FinanceCo, with an exercise price of $2.50 per share. All of the foregoing sales
were deemed to be exempt from registration pursuant to Regulation S under the
Securities Act. All of the foregoing sales were made by FinanceCo outside of the
United States to non-US persons, who provided representations as to this status
at the time of their purchase.
ISSUANCES UPON MERGER OF ASM AND FINANCECO
On March 2, 2000, FinanceCo merged with and into ASM. In connection with
the merger, all of the securityholders of FinanceCo exchanged their securities
for equivalent securities of ASM. All of the issuances of securities in
connection with this merger were deemed to be exempt from registration pursuant
to Regulation S under the Securities Act. All of the persons and entities that
received the unregistered securities were accredited investors and non-U.S.
persons, having provided representations as to this status at the time of their
purchase.
SALES AFTER MERGER OF ASM AND FINANCE CO
On April 5, 2000, we issued 3,435,670 shares of common stock to two U.S.
persons, and SAC issued 5,773,605 exchangeable shares to Canadian persons in
exchange for all of the outstanding shares of SoftQuad Canada. All of the
issuances of securities were deemed to be exempt from registration pursuant to
Regulation S under the Securities Act and Section 4(2) of the Securities Act on
the basis that the transaction did not involve a public offering.
On April 18 and 20, 2000, we issued an aggregate of 200,010 shares of
common stock to an institutional accredited investor for a purchase price per
share of $7.50, special warrants to acquire 1,906,660 shares of common stock for
no additional consideration at a purchase price per special warrants of $7.50,
and warrants to purchase 1,053,335 shares of common stock at an exercise price
of $12.50 per share, for gross proceeds of $15,800,025. The foregoing sales were
deemed to be exempt from registration pursuant to Regulation S under the
Securities Act and Section 4 (2) of the Securities Act on the basis that the
transaction did not involve a public offering.
On June 5, 2000, we issued special warrants to acquire 44,760 shares of
common stock for no additional consideration 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 $335,700. All of the
foregoing issuances were deemed to be exempt from registration pursuant to
Regulation S under the Securities Act and Section 4(2) of the Securities Act on
the basis that the transaction did not involve a public offering.
<PAGE>
In addition, the agent in respect of the April 18, April 20 and June 5,
2000 private placements received 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 covering the underlying shares. The foregoing issuance was deemed to
be exempt from registration pursuant to Section 4(2) of the Securities Act on
the basis that the transaction did not involve a public offering.
On May 29, 2000, we issued 88,409 shares of common stock to a financial
advisor in consideration of advisory services provided pursuant to an advisory
services agreement. The foregoing issuance was deemed to be exempt from
registration pursuant to Regulation S under the Securities Act and Section 4(2)
of the Securities Act on the basis that the transaction did not involve a public
offering.
On May 29, 2000, we issued 39,076 shares of common stock to an attorney in
consideration of services rendered valued at $97,691 pursuant to an agreement
dated February 29, 2000. The foregoing issuance was deemed to be exempt from
registration to Regulation S under the Securities Act and Section 4(2) of the
Securities Act.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANICAL CONDITION AND REUSLTS
OF OPERATIONS
You should read the following discussion and analysis together with our
financial statements and related notes as at and for the years ended September
30, 2000 and 1999 and for the nine-month period ended September 30, 1998
contained elsewhere in this annual report on Form 10-KSB. In this report, "we,"
"us" and "our" refer to the business that is owned and conducted by SoftQuad
Software, Ltd. and its subsidiaries and that was previously owned and conducted
by their predecessors. Certain information contained in the following discussion
and analysis and elsewhere in this annual report includes forward looking
statements that involve risks and other uncertainties. See "Risk Factors" for a
discussion of important factors that could cause actual results to differ
materially from the results described in or implied by the forward looking
statements contained in this annual report.
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. Our XMetaL(R) product, launched in
May 1999, is an advanced, yet easy-to-use, XML content creation solution that
allows authors throughout an organization to create and adapt content for use in
e-commerce, e-publishing and knowledge management applications. Our
MarketAgility(TM) product, launched in September 2000, is an XML-based content
delivery solution that gives suppliers more control over the collection,
processing and real-time delivery of product information in XML to
e-marketplaces and e-procurement systems. While we currently are focusing our
efforts towards our XML products, we have derived and will continue to derive
portions of our revenues from HoTMetaL(R), our HTML-based Web page creation and
management tool. In recent quarters, total HoTMetaL revenues world-wide have
declined and HoTMetaL has lost market share to competitors. We expect revenues
from HoTMetaL to continue to decline and revenues from our XML products to grow.
We generate our revenues from license fees, maintenance and support
contracts and product solution services. Product solution services include
integration of software, application development, training and software
installation. We expect to increase the revenue generated from product solution
services in the next fiscal year as the mix of product sales continues to
changes from HoTMetaL to XMetaL and MarketAgility. We recognize revenues from
license agreements on product delivery if an agreement exists with a fixed or
determinable fee, no significant performance obligations exist under the
agreement, and collection of the related receivable is reasonably assured.
Revenue from maintenance and support agreements is initially recorded as
deferred revenue and
<PAGE>
recognized as revenue over the term of the agreement. Service revenue consists
of fees for product solution services and is recognized as revenue as the work
is completed. During the year ended September 30, 2000, the Company adopted the
Statement of Positions ("SOP") 97-2 "Software Revenue Recognition", which
provides guidance on applying US generally accepted accounting principles in
recognizing revenue from software transactions.
Our cost of revenues includes costs to manufacture, package, and
distribute our products and related documentation, royalty payments to third
parties, payments to vendors and inventory write-downs, as well as personnel and
other expenses, if any, related to providing product solution services and
customer support services.
Since our inception, we have incurred substantial costs to develop our
technology and products, to recruit and train personnel for our development,
sales and marketing (including business development and product management) and
product solution services departments, and to establish an administrative
infrastructure. As a result, we have incurred significant losses since
inception. As of September 30, 2000, we have an accumulated deficit of
approximately $9.8 million.
We believe that our future success depends on XML technology and our
XMetaL and MarketAgility products. We plan to increase our operating expenses
and expect to continue to incur operating losses for at least the next 18
months.
Because our business has historically been carried on by entities other
than SoftQuad Software, Ltd., the historical financial results described in this
section are primarily the results of: SoftQuad Software Inc., our Ontario
operating subsidiary, for the fiscal years ended September 30, 2000 and 1999 and
the Web division of a subsidiary of NewKidCo International Inc. for the
nine-month period ended September 30, 1998.
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 advanced 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 Ontario (Canada) corporation ("SAC"). Pending completion
of that acquisition, FinanceCo loaned the proceeds of completed financings to
SoftQuad Canada for operating purposes.
<PAGE>
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 security holders of FinanceCo
exchanged their securities for equivalent securities of ASM.
COMPLETION OF THE CANADIAN ACQUISITION
On April 5, 2000, ASM 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 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.
OUR CURRENT CORPORATE STRUCTURE
We currently conduct our operations through SoftQuad Canada and its
wholly-owned subsidiary, SoftQuad UK Limited. SAC owns all of the common shares
of SoftQuad Canada, and SoftQuad Software, Ltd. owns all of the common shares of
SAC.
RESULTS OF OPERATIONS
The following table sets forth the results of operations for the Company
expressed as a percentage of total revenues for the years ended September 30,
2000 and 1999 and the nine-month period ended September 30, 1998. The Company's
historical operating results are not necessarily indicative of the results for
any future period. This information should be read in conjunction with the
consolidated financial statements and related notes thereto included in this
report.
<TABLE>
<CAPTION>
------------------------------------------------ ------------ --------------- ---------------------
Year ended Year ended Nine month period
September September 30, ended September 30,
30, 2000 1999 1998
------------------------------------------------ ------------ --------------- ---------------------
<S> <C> <C> <C>
Revenue
------------------------------------------------ ------------ --------------- ---------------------
Licenses 99% 100% 100%
------------------------------------------------ ------------ --------------- ---------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------ ------------ --------------- ---------------------
Services 1% - -
---
------------------------------------------------ ------------ --------------- ---------------------
<S> <C> <C> <C>
100% 100% 100%
----
------------------------------------------------ ------------ --------------- ---------------------
Cost of Revenue
------------------------------------------------ ------------ --------------- ---------------------
Licenses 12% 17% 18%
------------------------------------------------ ------------ --------------- ---------------------
Services 8% 2% 4%
------------------------------------------------ ------------ --------------- ---------------------
80% 81% 78%
------------------------------------------------ ------------ --------------- ---------------------
Expenses
------------------------------------------------ ------------ --------------- ---------------------
Selling and marketing 122% 62% 54%
------------------------------------------------ ------------ --------------- ---------------------
Research and development 46% 32% 54%
------------------------------------------------ ------------ --------------- ---------------------
General and administrative 78% 34% 62%
------------------------------------------------ ------------ --------------- ---------------------
246% 128% 170%
------------------------------------------------ ------------ --------------- ---------------------
Loss from operations (166%) (47%) (92%)
------------------------------------------------ ------------ --------------- ---------------------
Other (income) expenses (10%) 2% -
------------------------------------------------ ------------ --------------- ---------------------
Net loss (156%) (49%) (92%)
------------------------------------------------ ------------ --------------- ---------------------
Value of share capital issued on acquisition - 43% -
of warrants
------------------------------------------------ ------------ --------------- ---------------------
Net loss (156%) (92%) (92%)
------------------------------------------------ ------------ --------------- ---------------------
</TABLE>
Our operating history makes financial forecasting difficult. To read more
about this, please see "Risk Factors-Risks Related to Our Business-Our operating
history makes financial forecasting difficult."
Our revenues and operating results may vary significantly from quarter to
quarter. To read about factors that are likely to cause these variations, please
see "Risk Factors-Risks Related to Our Business-We expect our revenues and
operating results to fluctuate." Accordingly, we believe that quarter-to-quarter
comparisons of our operating results are not necessarily meaningful. You should
not rely on the results of one quarter as an indication of future performance.
We plan to increase our operating expenses to expand sales and marketing
operations, develop new distribution channels, fund greater levels of research
and development, broaden support services and support and improve operational
and financial systems. If revenues do not increase along with these expenses,
our business operating results or financial condition could be materially
adversely affected and net losses in a given quarter could be even greater than
expected.
<PAGE>
RESULTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 2000 AND 1999
REVENUE
Total revenue increased from $3.3 million for the year ended September 30,
1999 to $4.3 million for the year ended September 30, 2000 representing a 30%
increase in revenue. This increase is attributable to an increase in license,
support and maintenance fee revenues associated with XMetaL coupled with a
significant decrease in HoTMetaL product license revenues for the year ended
September 30, 2000. XMetaL revenues increased from $356 thousand for the year
ended September 30, 1999 to $2.4 million for the year ended September 30, 2000,
representing a 574% increase. For the year ended September 30, 2000, revenue
generated from XMetaL and HoTMetaL was 57% and 43% respectively, compared with
10% and 90% respectively for the year ended September 30, 1999. We expect
XMetaL's product license revenues and related professional services revenues,
both in absolute dollars and their proportionate share of total revenues to
continue to increase over the next several quarters while HoTMetaL's product
license revenues, both in absolute dollars and their proportionate share of
total revenues, continue to decline. We also expect to begin to generate both
license and related professional services revenues during the second or third
quarter of fiscal 2001 from MarketAgility 1.0, which was launched in September
2000.
SoftQuad also offers customers maintenance and support contracts for which
technical support and updates are provided over the life of the contract
(usually one year). Given this strategy, ratable revenue recognition is required
for maintenance fees earned under these contracts. The increase in deferred
revenue in 2000 is consistent with the increase in license sales.
We categorize our geographic information into two major market regions:
the Americas and Europe (including the UK). For the year ended September 30,
2000, revenue generated from the Americas and Europe was divided 61% and 39%,
respectively, compared with 63% and 37% for the year ended September 30, 1999.
COST OF REVENUES
Cost of revenues increased from $636 thousand for the year ended September
30, 1999 to $866 thousand for the year ended September 30, 2000, representing an
increase of 36%. The increase is primarily due to higher costs associated with
increasing headcount and building infrastructure in the product solution
services and customer support services groups. Cost of licenses decreased
slightly during the period due to the change in our product mix from HoTMetaL to
XMetaL as multiple copies of XMetaL are more frequently shipped on one master
disk which reduces both production and distribution costs as a percentage of
revenue. We expect cost of revenues to increase, both in absolute dollars and as
a percentage of revenue, as we continue to invest in product solution services
and customer support services by hiring and training new personnel in
anticipation of increased service revenue and customer base associated with
XMetaL and MarketAgility.
SALES AND MARKETING
Sales and marketing expenses increased from $2.1 million for the year
ended September 30, 1999 to $5.2 million for the year ended September 30, 2000,
representing an increase of 148%. The increase is primarily attributable to an
increase in sales and marketing personnel and increased marketing program
expenditures associated with and the launch of XMetaL 2.0 in June 2000 and
MarketAgility 1.0 in September 2000. During the year ended September 30, 2000,
we increased our headcount by 25 as a result of expanding both the sales and
marketing teams in addition to building new business development and product
management teams within the sales organization. The increase for the year ended
September 30, 2000 was also attributed to increased travel related expenses
resulting from increased sales, business development and marketing activities.
We expect sales and marketing spending will continue to increase in absolute
dollars as we continue to increase due to the planned growth in sales, business
development and marketing personnel and due to expected additional increases in
marketing programs and other promotional activities.
<PAGE>
RESEARCH AND DEVELOPMENT
Research and development expenses increased from $1.1 million for the year
ended September 30, 1999 to $2.0 million for the year ended September 30, 2000,
representing an increase of 82%. The increase is primarily attributable to an
increase in personnel related costs largely related to the development of
XMetaL2.0 launched June 2000 and MarketAgility 1.0 launched September 2000. For
the year ended September 30, 2000, we increased our headcount by 18. We believe
that continued investment in research and development is critical to attaining
our strategic objectives and, as a result, we expect that research and
development expenses will increase in absolute dollars in future periods. To
date, all software development costs have been expensed in the period incurred.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased from $1.1 million for the
year ended September 30, 1999 to $3.4 million for the year ended September 30,
2000, representing an increase of 209%. The increase is primarily attributable
to increased personnel related costs, increased costs of investor relations,
legal and other professional services, increased facility expenses in Toronto
and London and increased costs incurred to build our administrative
infrastructure. Such expenditures are necessary to support our expanding
operations. For the year ended September 30, 2000, we increased our headcount by
12. We expect that general and administrative spending will increase in absolute
dollars to support our expanding operations and as we continue to enhance our
administrative infrastructure.
OTHER (INCOME) EXPENSE
Other income increased to $421 thousand for the year ended September 30,
2000 from a net expense of $68 thousand for the year ended September 30, 1999.
The large increase in other income is due to the high level of interest income
generated on short-term investments held as a result of the equity transactions
completed during fiscal 2000 along with a decline in interest expense due to the
repayment of the note payable in June 2000.
NET LOSS
Our net loss increased from $1.6 million or $0.37 per share for the year
ended September 30, 1999 to $6.7 million or $0.60 per share for the year ended
September 30, 2000, reflecting that our higher gross profit earned in the year
ended September 30, 2000 was offset by higher operating expenses for the same
period. We expect to incur losses for at least the next 18 months.
RESULTS OF OPERATIONS FOR THE YEAR ENDED SEPTEMBER 30, 1999 AND THE NINE-MONTH
PERIOD ENDED SEPTEMBER 30, 1998
The 1999 fiscal year described below represents the twelve months ended
September 30, 1999. The 1998 fiscal year described below represents the
nine-month period ended September 30, 1998. This short period is a consequence
of the October 1998 management buyout of our business from NewKidCo, which had a
December 31 fiscal year end. You should take the resulting three-month
discrepancy into account when considering each of the following comparisons of
our operating results, in addition to any other factors we identify below as
having affected specific periods.
REVENUE
Total revenue increased from $1.5 million for the nine-month period ended
September 30, 1998, to $3.3 million for the year ended September 30, 1999,
representing a 120% increase in revenue. This increase is primarily attributable
to the higher license and service revenues associated with the launch in May
1999 of the first version of XMetaL and the release of a new version of HoTMetaL
in October 1998. The revenue increase derived from XMetaL and the new version of
HoTMetaL was partially offset by a revenue disruption resulting from a change in
a major distribution relationship. For the nine-month period ended September 30,
1998, all our revenues were derived from HoTMetaL product license revenues.
<PAGE>
COST OF REVENUES
Cost of revenues increased from $322 thousand for the nine-month period
ended September 30, 1998, to $636 thousand for the year ended September 30,
1999, as a result of higher royalties and production costs associated with the
release of HoTMetaL in October 1998.
SALES AND MARKETING
Sales and marketing expenses increased from $794 thousand for the
nine-month period ended September 30, 1998, to $2.0 million for the year ended
September 30, 1999. The increase is primarily attributable to an increase in
sales and marketing personnel and the increased marketing program expenditures
associated with the launches of new versions of HoTMetaL and XMetaL.
RESEARCH AND DEVELOPMENT
Research and development expenses increased from $798 thousand for the
nine-month period ended September 30, 1998, to $1.1 million for the year ended
September 30, 1999. The increase was primarily attributable to the development
of XMetaL.
We expect that research and development expenses will increase in absolute
dollars in future periods based on our belief that continued investment in
research and development is critical to attaining our strategic objectives. To
date, all software development costs have been expensed in the period incurred.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased from $902 thousand for the
nine-month period ended September 30, 1998, to $1.1 million for the year ended
September 30, 1999. The increase was primarily due to increased personnel and
facility expenses necessary to support our expanding operations.
NET LOSS
Our net loss increased from $1.3 million for the nine-month period ended
September 30, 1998, to $1.6 million for the year ended September 1999 primarily
reflecting higher sales and marketing and research and development expenses that
offset higher revenues generated by XMetaL and the release of a new version of
HoTMetaL.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have funded our operations and met our capital
expenditure requirements through the private sale of equity and debt securities.
From December 1999 through September 2000, we raised approximately $22.0 million
in net proceeds from equity financings in order to expand our sales and
marketing and product development efforts and support our administrative
infrastructure.
The number of days our accounts receivable balances are outstanding
increased in fiscal 2000 to 46 days from 39 days in fiscal 1999. This increase
can be attributed to the large volume of sales realized in the last quarter of
fiscal 2000.
For the years ended September 30, 2000 and 1999 and the nine-month period
ended September 30, 1998, net cash used for operating activities was $4.9
million, $1.4 million, and $1.2 million, respectively. For the years ended
September 30, 2000 and 1999 and the nine-month period ended September 30, 1998,
respectively, the increase in cash used for operating activities was primarily
due to net losses of $6.7 million, $1.6 million, and $1.3 million respectively,
offset by changes in operating working capital.
Net cash used in investing activities was $1.0 million, $185 thousand, and
$23 thousand for the years ended September 30, 2000 and 1999 and the nine-month
period ended September 30, 1998, respectively. Cash used in
<PAGE>
investing activities for the year ended September 30, 2000 related to the
purchase of capital assets, mainly computer hardware and software to build our
information technology infrastructure and as a result of increasing headcount.
At September 30, 2000, we do not have any material commitments for capital
expenditures. We anticipate a modest increase in our capital expenditures
consistent with anticipated growth in operations, infrastructure and personnel.
Net cash provided by financing activities was $21.6 million, $2.5 million
and $1.4 million for the years ended September 30, 2000 and 1999 and the
nine-month period ended September 30, 1998, respectively. The cash provided in
the year ended September 30, 2000 resulted primarily from net proceeds from
equity financings. The cash provided in the prior periods resulted primarily
from net proceeds of private financings.
As of September 30, 2000, our principal sources of liquidity included
approximately $16.3 million of cash and cash equivalents.
We believe that we have sufficient cash, cash equivalents and short-term
investments to meet our presently anticipated operating losses and working
capital requirements for at least the next 18 months. After that time,
additional funds may be required to support our working capital requirements or
for other purposes. Our future liquidity and capital requirements will depend
upon numerous factors. The rate of expansion of our operations in response to
potential growth opportunities and competitive pressures will affect our capital
requirements as will financing of continued net losses and negative cash flows.
Our forecast of the period of time through which our financial resources will be
adequate to support operations is a forward-looking statement that involves
risks and uncertainties, and actual results could vary materially as a result of
the factors described above. We may seek to raise such additional funds through
public or private equity or debt financings or from other sources. We cannot
assure you that additional financing will be available at all or, if available,
on terms favorable to us or that any additional financing will not be dilutive.
RECENT ACCOUNTING PRONOUNCEMENTS
We have adopted the recently issued accounting standard SFAS 133
"Accounting for Derivative Instruments and Hedging Activities," effective for
our fiscal year ended September 30, 2001. It requires that all derivatives be
recognized as either assets or liabilities and measured at fair value. The
criteria for determining whether all or a portion of a derivative instrument may
be designated as a hedge has changed. Derivatives that are fair market value
hedges, together with the financial instrument being hedged, will be marked to
market with adjustments reflected in income. Derivatives which are cash flow
hedges will be marked to market with adjustments reflected in comprehensive
income. As at September 30, 2000, we have not entered into any derivative
contracts. Further, as at September 30, 2000, we have completed a review of all
contracts for embedded derivatives and none were noted. Thus, the adoption of
SFAS 133 will not have a significant impact on either our statement of
operations or financial position. In June 2000, the Securities and Exchange
Commission issued Staff Accounting Bulletin No. 101B "Second Amendment: Revenue
Recognition in Financial Statements" ("SAB 101B"). SAB 101B amends Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB
101") to further defer the implementation date of SAB 101 for registrants with
fiscal years that begin between December 16, 1999 and March 15, 2000 SAB 101
provides guidance on the recognition, presentation and disclosure of revenue in
financial statements of all public registrants. Changes in the Company's revenue
recognition policy resulting from the interpretation of SAB 101 would be
reported as a change in accounting principle. The change in the revenue
recognition policy could result in a cumulative adjustment in the quarter the
Company adopts SAB 101. The Company has fully assessed the implications of SAB
101 and management believes the adoption of this statement will not have a
significant impact on the Company's consolidated financial position, results of
operations or cash flows.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
---------------------
Our financial statements, including the auditor's report and notes to
the financial statements, appear on pages F-1 to F-23, which follow immediately
after the signature page on page II-47. Pages F-1 to F-23 are incorporated
herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
-------------------------------------------------------------
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
-------------------------------------------------
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 November
30, 2000.
<TABLE>
<CAPTION>
NAME AGE POSITION
---------------------------------- --------- ----------------------------------------------------------
<S> <C>
Roberto Drassinower 37 Chief Executive Officer and Director
Andrew Muroff 32 President and 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
Brock Armstrong 54 Director
Lawrence Goldberg 50 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.
<PAGE>
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 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.
<PAGE>
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 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. Goldeberg, 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.
<PAGE>
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING REQUIREMENTS
Section 16(a) of the Exchange Act of 1934, as amended ("Section 16(a)"),
requires the Company's directors and officers and persons who own more than 10%
of SoftQuad's Common Stock (collectively, "Insiders"), to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
(the "Commission"). Insiders are required by Commission regulations to furnish
the Company with copies of all Section 16(a) forms they file. Based soley upon a
review of copies of such forms received by the Company, the Company believes
that its Reporting Persons have compiled with all Section 16 filing requirements
applicable to them with respect to the Company's fiscal year ended Septemer 30,
2000, except for the following:
Margo Day, an officer of the Company, filed a late Statement of Changes in
Beneficial Ownership on Form 4 reflecting the receipt of a stock option, and
Michael Mendelson, a former director of the Company, has not filed an Annual
Statement of Changes in Beneficial Ownership on Form 5 reflecting the receipt of
a stock option.
ITEM 10. EXECUTIVE COMPENSATION
----------------------
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 and 1999, 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 $13,400 50,000
</TABLE>
(1) Represents housing loan
(2) Johnathan Sachs left SoftQuad effective October, 2000.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth each grant of stock options during the
fiscal year ended September 30, 2000 to the named executive officers. The
percentage of total options set forth below is based on an aggregate of
2,658,700 options granted to employees during the fiscal year ended September
30, 2000. The market value on the date of grant has been determined by our board
of directors. Potential realizable values are net of exercise price, but before
taxes associated with exercise. Amounts represent hypothetical gains that could
be achieved for the options if exercised at the end of the option term. The
assumed 5% and 10% rates of stock price appreciation are provided in accordance
with the rules of the SEC and do not represent our estimate or projection of the
future common stock price.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
PERCENT OF
TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED TO POTENTIAL REALIZABLE VALUE AT
UNDERLYING EMPLOYEES EXERCISE ASSUMED ANNUAL RATES OF STOCK
OPTIONS IN FISCAL PRICE EXPIRATION PRICE APPREASTION FOR OPTION
GRANTED 2000 ($/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
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>
<PAGE>
OPTION VALUES
The following table sets forth the number and value of securities
underlying unexercised options that are held by the name 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
SoftQuad Software (UK)
Johnathan Sachs 193,330 190,000 $1,352,000 $278,000
</TABLE>
DIRECTORS 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
"Employee Benefit Plans." On February 25, 2000, in consideration for their
agreement to serve as directors, we granted to each of Sheldon Inwentash ,
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.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The following tables set forth certain information regarding the
beneficial ownership of SoftQuad Common Stock as of September 30, 2000, unless
otherwise noted, by (i) all persons who, to SoftQuad's knowledge, are beneficial
owners of five percent or more of the Common Stock, (ii) each member of the
Board of Directors, (iii) each of the executive officers of SoftQuad named in
Item 10, and (iv) all current directors and executive officers of SoftQuad as a
group. Unless otherwise noted, each of the stockholders has sole voting and
investment power with respect to the shares beneficially owned by them, subject
to community property laws, where applicable
<TABLE>
<CAPTION>
Number of Percent of
Name and Address Shares of Outstanding Shares of
of Beneficial Owner Common Stock Common Stock
---------------------------------------- ------------------------- ---------------------
<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 - CEO (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
(2) Includes 2,670,560 exchangeable shares of SAC. Pinetree's address is 130
King Street West, Suite 2810, Toronto, Ontario, Canada M5X 1A9
<PAGE>
(3) Two executive officers of Thomson Kernaghan (including the Chairman) are
also executive officers of the general partner of VC Advantage Limited
Partnership and general partner of CALP II LP. Accordingly, Thomson
Kernaghan, VC Advantage and CALP II may be considered a group which
beneficially owns all the shares beneficially owned by any of them. Under an
agreement with the Company, Thomson Kernaghan, VC Advantage and CALP II
agreed not to have the right to convert any preferred stock or exercise any
warrants or special warrant if, after having given effect the conversion or
exercise, all of them considered as a group would be deemed to own more than
9.9% of the then outstanding common stock. If not for this 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 the group is 365 Bay Street, 10th floor, Toronto, Ontario,
Canada M5H 2V2.
(4) Under an agreement with the Company, Hammock agreed not to have the
right to convert any preferred stock or exercise any warrants if, after
having given effect the conversion or exercise, it would be deemed to
beneficially own more than 9.9% of the then outstanding common stock. If not
for this 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 365 Bay Street, 10th floor,
Toronto, Ontario, Canada M5H 2V2.
(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 exericise of options.
(7) Includes 428,580 exchangeable shares of SAC and 801,670 shares of common
stock issuable upon exercise of options.
ITEM 13. 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 October 2, 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
<PAGE>
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 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
<PAGE>
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 "Executive Compensation--Directors' Compensation" for a
description of stock options granted to directors for service as directors.
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.
ITEM 14. EXHIBITS LIST AND REPORTS ON FORM 8-K
-------------------------------------
None
a) Exhibits
Exhibit No. Description
----------- -----------
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
3.1(2) Restated Certificate of Incorporation of SoftQuad Software,
Ltd.
3.2(1) Restated By-Laws of SoftQuad Software, Ltd.
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) Purchaser'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
<PAGE>
4.3(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
4.4(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
4.5(1) Agent's Warrant to Purchase Shares of Common Stock of SoftQuad
Software, Ltd. pursuant to the Class B Convertible Stock
Purchase Agreement with VC Advantage Limited Partnership,
dated February 29, 2000
4.6(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
4.7(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
4.8(1) Special Warrant for Thomson Kernaghan & Co. Limited, as agent,
to Purchase Shares of Common Stock of SoftQuad Software, Ltd.,
dated February 29, 2000
4.9(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
4.10(1) Warrant Indenture Agreement between SoftQuad Software, Ltd.
and Montreal Trust Company of Canada, dated April 18, 2000
4.11(2) Form of Subscription Agreement for Canadian Subscribers in
April 18, 20 and June 5, 2000 private placements
4.12(2) Form of Subscription Agreement for American Subscribers in
April 18, 20 and June 5, 2000 private placements
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 Common Stock
Purchase Agreement, dated December 8, 1999 and the Class A
Convertible Stock Purchase Agreement, dated December 9, 1999
4.14(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
4.15(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
4.16(2) Registration Rights Agreement between SoftQuad Software, Ltd.
and SmallCaps Online LLC, for itself and as agent, dated April
18, 2000
4.17(1) Registration Rights Agreement between SoftQuad Software, Ltd.
and Thomson Kernaghan & Co. Limited, for itself and as agent,
dated April 18, 2000
9.1(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
10.1(3) Support Agreement between SoftQuad Software, Ltd. and SoftQuad
Acquisition Corp., dated February, 2000
10.2(1) Form of Option Holder Lock-Up Agreement, dated December 10,
1999
10.3(1) Form of Option Holder Escrow Agreement, dated December 16,
1999
<PAGE>
10.4(1) Common Stock Purchase Agreement between SoftQuad Software,
Ltd. (referredtointhis Report as FinanceCo.) and VC Advantage
Limited Partnership, dated December 8, 1999
10.5(1) Class A Convertible Preferred Stock Purchase Agreement between
SoftQuad Software,Ltd. and VC Advantage Limited Partnership,
dated December 9, 1999
10.6(1) VC Advantage Limited Partnership Class B Convertible Preferred
Stock Purchase Agreement, dated February 28, 2000
10.7(1) Hammock Group Ltd. Class B Convertible Preferred Stock
Purchase Agreement,dated February 28, 2000
10.8(1) Special Warrant Purchase Agreement between SoftQuad Software,
Ltd. and Thomson Kernaghan & Co. Limited, as Agent, dated May
18, 2000
10.9(1) Engagement Letter Agreement between SoftQuad Software Inc and
Thomson Kernaghan & ` Co. Limited, dated February 28, 2000
10.10(3) Form of Share Purchase Agreement for acquisition of shares of
SoftQuad Software Inc.
10.11(3) Form of Option Exchange Agreement for acquisition of options
of SoftQuad Software Inc.
10.12(1) Form of Indemnification Agreement between Registrant and its
officers and directors
10.13(1) 2000 Stock Option Plan and Forms of Agreements thereunder
10.14(1) Advisory Services Agreement between the SoftQuad Software Inc.
and KBLCapitalPartners, Inc., dated April 9, 1999, amended
July 31, 1999
10.15(1) Agency Agreement between SodftQuad Software, Ltd. and Thomson
Kernaghan & Co. Limited, dated April 18, 2000
10.16(1) Agency Agreement between SodftQuad Software, Ltd. and Small
Caps Online LLC, dated April, 2000
21 Subsidiaries of the Registrant
27 Financial Data Schedule
------------------------------
(1) Incorporated by reference to Exhibits to the Registrant's Quarterly
Report on Form 10-QSB dated August 14, 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.
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed in the last quarter of the
fiscal year ended September 30, 2000
<PAGE>
SIGNATURES
In accordance with Section 13 or 15 (d) of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, there unto duly authorized.
Date: Dec. 19, 2000
SOFTQUAD SOFTWARE, LTD.
By: /s/ Roberto Drassinower
------------------------------
Roberto Drassinower
Chief Executive Officer
In accordance with the Securities Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Date: December 19, 2000 /s/ Roberto Drassinower
---------------------------------------
Roberto Drassinower
Chief Executive Officer and Director
(principal executive officer)
Date: December 19, 2000 /s/ Andrew Muroff
---------------------------------------
Andrew Muroff
President and Director
Date: December 19, 2000 /s/ David R. Lewis
---------------------------------------
David R. Lewis
Chief Financial Officer
(principal financial and accounting officer)
Date: December 19, 2000 /s/ Joan Dea
---------------------------------------
Joan Dea
Director
Date: December 19, 2000 /s/ Robert Bagga
---------------------------------------
Robert Bagga
Director
Date: December 19, 2000 /s/ Lawrence Goldberg
---------------------------------------
Lawrence Goldberg
Director
Date: December 19, 2000 /s/ Brock Armstrong
---------------------------------------
Brock Armsrong
Director
<PAGE>
MANAGEMENT'S REPORT
Management is responsible for all information and representations contained in
the consolidated financial statements and other sections of this Annual Report.
Management believes that that the consolidated financial statements have been
prepared in conformity with U.S generally accepted accounting principles
appropriate in the circumstances to reflect, in all material respects, the
substance of events and transactions that should be included, and that the other
information in this Annual Report is consistent with those statements. In
preparing the consolidated financial statements, management makes informed
judgments and estimates of the expected effects of events and transactions that
are currently being accounted for.
In meeting their responsibility for the reliability of the consolidated
financial statements, management depends on the Company's system of internal
accounting controls. These systems are designed to provide reasonable assurance
that assets are safeguarded and transactions are executed in accordance with
management's authorization, and are recorded properly to permit the preparation
of consolidated financial statements in accordance with U.S generally accepted
accounting principles. In designing control procedures, management recognizes
that errors or irregularities may nevertheless occur. Also, estimates and
judgments are required to assess and balance the relative cost and expected
benefits of the controls. Management believes that the Company's accounting
controls provide reasonable assurance that errors or irregularities that could
be material to the consolidated financial statements are prevented or would be
detected within a timely period by employees in the normal course of performing
their assigned functions.
The Board of Directors pursues its oversight role for these consolidated
financial statements through the Audit Committee, which is comprised solely of
directors who are not officers or employees of the Company. The Audit Committee
meets with management periodically to review their work and to monitor the
discharge of each of their responsibilities. The Audit Committee also meets
periodically with Deloitte & Touche LLP, the independent auditors, who have free
access to the Audit Committee or the Board of Directors, without management
present, to discuss internal accounting control, auditing, and financial
reporting matters.
Deloitte & Touche LLP is engaged to express an opinion on our consolidated
financial statements. Their opinion is based on procedures believed by them to
be sufficient to provide reasonable assurance that the consolidated financial
statements are not materially misleading and do not contain material errors.
David R. Lewis
Chief Financial Officer
November 2, 2000
<PAGE>
DELOITTE & TOUCHE LLP
5140 YONGE STREET, SUITE 1700
TORONTO, ON M2N 6L7
CANADA
TEL: (416) 601 6150
FAX: (416) 229 2524 DELOITTE
WWW.DELOITE.CA & TOUCHE
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Shareholders of SoftQuad Software, Ltd.
We have audited the accompanying consolidated balance sheets of SoftQuad
Software, Ltd. as at September 30, 2000 and 1999 and the consolidated statements
of operations, shareholders' equity and cash flows for the years ended September
30, 2000 and 1999, and for the nine-month period ended September 30, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform an audit to obtain reasonable assurance whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at September 30,
2000 and 1999 and the results of its operations and its cash flows for the years
ended September 30, 2000 and 1999 and for the nine-month period ended September
30, 1998 in conformity with accounting principles generally accepted in the
United States of America.
/S/ DELOITTE & TOUCHE LLP
Chartered Accountants
Toronto, Ontario
November 2, 2000, except as to Note 11
which is as of November 20, 2000
<PAGE>
SOFTQUAD SOFTWARE, LTD.
CONSOLIDATED BALANCE SHEETS
(IN U.S. DOLLARS)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
------------------------------------
September 30,
------------------------------------
2000 1999
---------------- ----------
ASSETS
CURRENT
<S> <C> <C>
Cash and cash equivalents $ 16,305,820 $ 726,784
Accounts receivable (Note 4) 1,146,954 590,432
Inventory 71,954 21,776
Prepaid expenses and deposits 482,226 137,032
----------------------------------------------------------------------------------------------------
18,006,954 1,476,024
CAPITAL ASSETS (Note 5) 1,017,061 233,415
GOODWILL (net of cumulative amortization of
$37,495 - 2000; $20,217 - 1999) 23,553 40,831
DEFERRED FINANCING COSTS - 54,441
----------------------------------------------------------------------------------------------------
$ 19,047,568 $ 1,804,711
====================================================================================================
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
SOFTQUAD SOFTWARE, LTD.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN U.S. DOLLARS)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
------------------------------------
September 30,
------------------------------------
2000 1999
---------------- ----------------
LIABILITIES
CURRENT
<S> <C> <C>
Accounts payable $ 834,453 $ 347,786
Accrued legal fees 468,555 -
Accrued commission - 145,941
Accrued royalties - 133,779
Other accruals 1,637,492 200,669
Deferred revenue 129,844 30,404
Current portion of notes payable (Note 6) - 697,522
------------------------------------------------------------------------------------------------------------------------------
3,070,344 1,556,101
NOTES PAYABLE (Note 6) - 100,035
------------------------------------------------------------------------------------------------------------------------------
3,070,344 1,656,136
------------------------------------------------------------------------------------------------------------------------------
COMMITMENTS (Note 10)
SHAREHOLDERS' EQUITY (Note 7)
SHARE CAPITAL
Preferred stock, par value $0.001 per share
Authorized
25,000,000 preferred shares
Issued and outstanding
1,473,405 (NIL at September 30,1999) Class A shares 1,473 -
1,722,222 (NIL at September 30,1999) Class B shares 1,722 -
Special voting stock, par value $0.001 per share
Authorized
1 special voting share
Issued and outstanding
1(NIL at September 30,1999) special voting share 1 -
Common stock, par value $0.001 per share
Authorized
50,000,000 shares
Issued and outstanding
12,473,472 shares (8,993,890 at September 30, 1999) (1) 3,645,906 3,559,074
------------------------------------------------------------------------------------------------------------------------------
3,649,102 3,559,074
WARRANTS 3,918,204 -
SPECIAL WARRANTS 13,240,802 -
------------------------------------------------------------------------------------------------------------------------------
20,808,108 3,559,074
DEFERRED STOCK COMPENSATION EXPENSE (655,992) (357,675)
ADDITIONAL PAID-IN CAPITAL 5,699,597 -
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME (73,971) 30,805
DEFICIT (9,800,518) (3,083,629)
------------------------------------------------------------------------------------------------------------------------------
15,977,224 148,575
------------------------------------------------------------------------------------------------------------------------------
$ 19,047,568 $ 1,804,711
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 5,773,605 shares reserved for issuance upon the exchange of
exchangeable shares.
See accompanying notes to the consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
SOFTQUAD SOFTWARE, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN U.S. DOLLARS)
------------------------------------------------------------------------------------------------------------------------------
Nine-Month
Period Ended
------------
Year ended September 30,
-------------------------------- September 30,
2000 1999 1998
--------------- --------------- --------------
(Note 3)
REVENUE
<S> <C> <C> <C>
Licenses $ 4,241,685 $3,291,335 $ 1,466,138
Services 44,077 - -
------------------------------------------------------------------------- ---------------- ----------------- ----------------
4,285,762 3,291,335 1,466,138
------------------------------------------------------------------------- ---------------- ----------------- ----------------
COST OF REVENUE
Licenses 527,550 572,167 261,632
Services 338,612 63,494 60,234
------------------------------------------------------------------------- ---------------- ----------------- ----------------
866,162 635,661 321,866
------------------------------------------------------------------------- ---------------- ----------------- ----------------
3,419,600 2,655,674 1,144,272
------------------------------------------------------------------------- ---------------- ----------------- ----------------
EXPENSES
Selling and marketing 5,239,286 2,052,983 794,065
Research and development 1,957,856 1,069,449 797,604
General and administrative 3,359,868 1,093,730 901,958
------------------------------------------------------------------------- ---------------- ----------------- ----------------
10,557,010 4,216,162 2,493,627
------------------------------------------------------------------------- ---------------- ----------------- ----------------
LOSS FROM OPERATIONS (7,137,410) (1,560,488) (1,349,355)
------------------------------------------------------------------------- ---------------- ----------------- ----------------
OTHER (INCOME) EXPENSES
Interest (584,864) 14,063 -
Other expenses 164,343 54,226 -
------------------------------------------------------------------------- ---------------- ----------------- ----------------
(420,521) 68,289 -
------------------------------------------------------------------------- ---------------- ----------------- ----------------
NET LOSS BEFORE VALUE OF SHARE CAPITAL
ISSUED ON ACQUISITION OF WARRANTS (6,716,889) (1,628,777) (1,349,355)
VALUE OF SHARE CAPITAL ISSUED ON
ACQUISITION OF WARRANTS - 1,387,647 -
------------------------------------------------------------------------- ---------------- ----------------- ----------------
NET LOSS $ (6,716,889) $ (3,016,424) $ (1,349,355)
------------------------------------------------------------------------- ---------------- ----------------- ----------------
LOSS PER SHARE $ (0.60) $ (0.37)
------------------------------------------------------------------------- ---------------- ----------------- ----------------
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 11,158,648 4,377,000
------------------------------------------------------------------------- ---------------- ----------------- ----------------
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
SOFTQUAD SOFTWARE, LTD.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN U.S. DOLLARS)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
Net
Deferred Accumulated Investment
Stock Additional Other by NewKidCo
Shares/ Compensation Paid-In Comprehensive International,
Warrants Amount Expense Capital Income (Loss) Inc. Deficit Total
-------- ------ ------------ --------- ------------- ----------- ------- -----
(Note 7)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1998 - $ - $ - $ - $ - $ - $ - $ -
COMPREHENSIVE LOSS
Foreign currency translation - - - - 53,323 - - 53,323
Net loss (1,349,355)
- - - - - (1,349,355) - ------------
TOTAL COMPREHENSIVE LOSS (1,296,032)
NET CONTRIBUTIONS BY
NEWKIDCO INTERNATIONAL,
INC. - - - - - 1,435,078 - 1,435,078
-------------------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1998 - $ - $ - $ - $53,323 $ 85,723 $ - $ 139,046
-------------------------------------------------------------------------------------------------------------------------------
BALANCE, OCTOBER 1, 1998 1 $ 1 $ - $ - $ - $ - $ - $ 1
-----------
COMPREHENSIVE INCOME LOSS
Foreign currency translation - - - - 30,805 - - 30,805
Net loss - - - - - - (3,016,424) (3,016,424)
-----------
TOTAL COMPREHENSIVE LOSS (2,985,619)
-----------
PREMIUM ON REDEMPTION
OF COMMON STOCK - - - - - - (67,205) (67,205)
ISSUANCE OF COMMON STOCK
For cash 5,863,509 1,726,861 - - - - - 1,726,861
On acquisition of assets
(Note 2) 703,705 161,374 - - - - - 161,374
Repurchase of stock (703,705) (162,809) - - - - - (162,809)
On acquisition of warrants 3,130,380 1,387,647 - - - - - 1,387,647
As deferred stock
compensation - 446,000 (446,000) - - - - -
Amortization of stock based
compensation - - 88,325 - - - - 88,325
-------------------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1999 8,993,890 3,559,074 (357,675) - 30,805 - (3,083,629) 148,575
COMPREHENSIVE LOSS
Foreign currency translation - - - - (104,776) - - (104,776)
Net loss - - - - - - (6,716,889) (6,716,889)
-----------
TOTAL COMPREHENSIVE LOSS (6,821,665)
-----------
ISSUANCE OF COMMON STOCK
For cash 936,711 936 - 793,048 - - - 793,984
As deferred stock
compensation (622,985) 622,985 - - - -
Amortization of stock based
compensation - - 324,668 - - - - 324,668
In satisfaction of debt 342,870 85,756 - 138,007 - - - 223,763
Resulting from reverse
takeover 2,200,000 140 - - - - - 140
ISSUANCE OF SPECIAL
VOTING STOCK 1 1 - - - - - 1
ISSUANCE OF PREFERRED
STOCK
Class A 1,473,405 1,473 - 1,153,347 - - - 1,154,820
Class B 1,722,222 1,722 - 2,992,210 - - - 2,993,932
ISSUANCE OF WARRANTS 3,095,558 3,918,204 - - - - - 3,918,204
ISSUANCE OF SPECIAL
WARRANTS 2,951,420 13,240,802 - - - - - 13,240,802
-------------------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2000 21,716,077$20,808,108 $(655,992) $5,699,597 $(73,971) $ - $(9,800,518)$15,977,224
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
SOFTQUAD SOFTWARE, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN U.S. DOLLARS)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
Nine-Month
Year ended September 30, Period Ended
------------------------------ September 30,
2000 1999 1998
-------------- -------------- --------------
(Note 3)
NET INFLOW (OUTFLOW) OF CASH RELATED
TO THE FOLLOWING ACTIVITIES
OPERATING
<S> <C> <C> <C>
Net loss $ (6,716,889) $ (1,628,777) $ (1,349,355)
Items not affecting cash:
Loss on disposal of capital assets 59,253 10,140 -
Compensation under stock option plan 324,668 88,325 -
Amortization of capital assets 191,138 77,337 122,196
Amortization of goodwill 17,278 20,217 -
Amortization of deferred financing costs 54,441 11,562 -
Changes in non-cash operating working capital items
Accounts receivable (556,523) (254,355) (372,447)
Inventory (50,178) 72,850 (18,904)
Prepaid expenses and deposits (345,194) 2,783 (63,008)
Accounts payable and accrued liabilities 2,025,829 138,831 463,603
Deferred revenue 99,440 30,404 (3,890)
------------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (4,896,737) (1,430,683) (1,221,805)
------------------------------------------------------------------------------------------------------------------------------
INVESTING
Acquisition of net assets excluding cash (Note 2) - (122,013) -
Purchase of capital assets (1,034,037) (67,948) (23,361)
Proceeds from disposal of capital assets - 4,886 -
------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,034,037) (185,075) (23,361)
------------------------------------------------------------------------------------------------------------------------------
FINANCING
Issuance of share capital 22,412,142 1,888,236 -
Redemption of common shares - (162,809) -
Repayment of notes payable (797,557) - -
Increase in notes payable - 797,557 -
Deferred financing costs - (66,003) -
Contributions by NewKidCo International, Inc. (Note 3) - - 1,435,078
------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 21,614,585 2,456,981 1,435,078
------------------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (104,775) (114,439) (189,912)
------------------------------------------------------------------------------------------------------------------------------
NET CASH INFLOW 15,579,036 726,784 -
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 726,784 - -
------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 16,305,820 $ 726,784 $ -
------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS INCLUDES:
Cash $ 223,960 $ 726,784 $ -
Short-term deposits 16,081,860 - -
------------------------------------------------------------------------------------------------------------------------------
$ 16,305,820 $ 726,784 $ -
------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTARY CASH FLOW INFORMATION
Interest paid $ 27,862 $ - $ -
Interest received $ 612,726 $ 14,083 $ 3,811
Value of share capital issued on acquisition of warrants $ - $ 1,387,647 $ -
Value of common stock recorded on stock compensation expenses $ 622,985 $ 446,000 $ -
Issuance of share capital as payment for debt $ 313,504 $ - $ -
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
SoftQuad Software, Ltd. (the "Company"), through its direct and indirect
subsidiaries, develops, markets and supports digital content authoring
and publishing software tools and provides related services that enable
non-technical and expert users to create and publish multi-platform,
standards-based, formatted, interactive, digital content via the
Internet, Web, intranets, CD-Rom and paper.
2. COMMENCEMENT OF OPERATIONS
On October 1, 1998 the Company's indirect subsidiary, SoftQuad Software
Inc. ("SoftQuad Canada") acquired substantially all the operating assets
and liabilities of 1225322 Ontario Inc. (formerly "SoftQuad Inc."), a
subsidiary of NewKidCo International, Inc. ("NewKidCo"), a Canadian
public company, and immediately commenced operations.
The assets and liabilities were acquired for share consideration of
$161,374 and are comprised of the following:
Cash $ 44,551
Accounts receivable 583,598
Inventory 56,244
Prepaid expenses and deposits 98,981
Capital assets 259,379
-------------------------------------------------------- --------------
1,042,753
Accounts payable and accrued charges (942,427)
Goodwill 61,048
-------------------------------------------------------- --------------
Net assets acquired and purchase price $ 161,374
-------------------------------------------------------- --------------
3. SIGNIFICANT ACCOUNTING POLICIES
The financial statements have been prepared in accordance with Accounting
Principles Generally Accepted ("GAAP") in the United States of America
and reflect the following significant accounting policies:
Basis of presentation
The statements of operations and cash flows for the nine-month period
ended September 30, 1998 are presented as the business operated by
NewKidCo prior to the sale to SoftQuad Canada and include revenues from
the sale of digital content authoring and publishing software tools, the
related costs of product sold, shipping, royalties, software agreement
costs, direct advertising and marketing expenditures, salary and benefit
costs for staff involved directly with the operations of the business,
administrative and overhead costs, consulting fees and direct occupancy
costs. The allocation of the various expenses is based on management's
best estimates and may not be representative of the overhead expenses had
the business been operated as a separate entity.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The statement of shareholders' equity for the nine-month period ended
September 30, 1998 presents the cumulative losses of the business and
contributions of NewKidCo prior to the formation of the Company.
The financial statements include the accounts of the Company and its
wholly owned subsidiary, SoftQuad Acquisition Corp. SoftQuad Acquisition
Corp.'s subsidiary, SoftQuad Canada and SoftQuad Canada's subsidiary
SoftQuad (UK) Limited. All significant intercompany accounts and
transactions have been eliminated.
Reverse takeover accounting
The current corporate structure of the Company and its direct and
indirect subsidiaries, is the result of a series of transactions through
which the former shareholders of SoftQuad Canada and the former
shareholders of a company that had been formed to facilitate certain
financings of SoftQuad Canada ("FinanceCo") acquired control of the
Company.
On January 17, 2000, the shareholders of SoftQuad Canada irrevocably
agreed to tender their shares for securities exchangeable for shares of
FinanceCo. On March 2, 2000, FinanceCo merged with The American Sports
Machine, Inc. Upon consummation of the merger, the former shareholders of
SoftQuad Canada and the former shareholders of FinanceCo owned
approximately 91% of the common stock of the Company and, accordingly,
the merger was accounted for as a reverse takeover transaction.
As a result of the application of reverse takeover accounting:
(i) the consolidated financial statements of the combined entity are
issued under the name of the Company, but are considered a
continuation of the financial statements of FinanceCo and its
consolidated subsidiaries, SoftQuad Acquisition Corp., SoftQuad
Canada and SoftQuad (UK) Limited; and
(ii) the assets and liabilities in the consolidated financial statements
are included at their historical carrying value.
Cash equivalents
For purposes of the statements of cash flows, highly liquid investments
with maturities of three months or less are considered cash equivalents.
Inventory
Inventory is valued at the lower of cost, determined on a first-in
first-out basis, and net realizable value.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Capital assets
Capital assets are stated at cost. Amortization is provided on a
declining-balance basis, except for leasehold improvements that are
amortized on the straight-line basis, at the following rates per annum:
Computer hardware - 30%
Furniture and fixtures - 20%
Computer software - 30%
Leasehold improvements - Lease term
Goodwill
The excess of purchase consideration over fair market value of net
identifiable assets acquired is recorded as goodwill. Goodwill is being
amortized on a straight-line basis over three years.
Revenue recognition and deferred revenues
The Company recognizes revenue in accordance with applicable accounting
regulations, including American Institute of Certified Public Accountants
Statement of Position 97-2, "Software Revenue Recognition," as amended.
Revenue from sale of products is recognized when a contract has been
executed, the product has been delivered, the sales price is fixed and
determinable and collection of the resulting receivable is probable.
Revenue earned on software arrangements involving multiple elements
(i.e., software products, upgrades/enhancements, post contract customer
support, installation, training) is allocated to each element based on
vendor specific objective evidence of relative fair value of the
elements. The revenue allocated to post contract support is recognized
ratably over the term of the support and revenue allocated to service
elements (such as training and installation) is recognized as the
services are performed. When arrangements contain multiple elements and
vendor specific objective evidence exists for all undelivered elements,
the Company recognizes revenue for the delivered elements using the
residual method. For arrangements containing multiple elements for which
vendor specific objective evidence does not exist for all undelivered
elements, revenue for the delivered and undelivered elements is deferred
until vendor specific objective evidence exists or all elements have been
delivered.
Research and development
Research costs are expensed as incurred.
Development costs that meet the criteria for deferral under GAAP are
deferred and amortized based on the estimated sales revenue of the
products, to a maximum period of three years. Other development costs
that do not meet these criteria are expensed as incurred. During the
period, in management's opinion, no costs met the criteria for deferral.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes".
SFAS No. 109, requires the Company to use an asset and liability approach
to recognize deferred tax assets and liabilities for the future tax
consequences of events that have been recognized at different times in
the financial statements than in the tax returns. These differences
relate primarily to different amortization methods used for financial
reporting and income tax purposes.
Foreign currency translation
Effective October 1, 1999, the Company changed its reporting currency to
the U.S. dollar. Accordingly, historical balance sheet figures previously
reported in Canadian dollars were translated into U.S. dollars at the
rate of exchange prevailing at year-end, while revenue and expenses were
translated at average rates for the periods. The adjustment resulting
from translating the financial statements is reflected as a component of
comprehensive income in the shareholders' equity on the balance sheet.
Comprehensive income
The Company has adopted the requirements of SFAS 130, "Reporting
Comprehensive Income". SFAS No. 130, requires that a statement of
comprehensive income be displayed with the same prominence as other
financial statements. Comprehensive income, which incorporates net
income, includes all changes in equity during a period except those
resulting from investments by and distributions to owners.
Stock based compensation
The Company grants stock options for a fixed number of shares to its key
officers, directors, employees, advisors and consultants at a fixed
price. The Company has elected to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") for
those options issued to employees and directors, and related
interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), requires the use
of option valuation models. However options granted to advisors and
consultants are accounted for under SFAS No. 123. Under APB 25, no
compensation expense is recognized when the exercise price of the
Company's employee stock option granted equals the estimated market price
of the underlying stock on the date of the grant.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Loss per share
All share and per share amounts presented herein give effect to the five
for one stock split approved by the board of directors on July 28, 1999.
Loss per share has been calculated using the weighted average number of
common shares outstanding. The effect on the loss per share of the
exercise of all dilutive securities including preferred shares, warrants,
special warrants and stock options referred to in Note 7 is
anti-dilutive.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Long-lived assets
The Company accounts for its investments in long-lived assets in
accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" (SFAS 121). Under SFAS 121, an impairment loss
must be recognized for long-lived assets and certain identifiable
intangibles to be held and used by an entity whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Management believes there has been no material impairment of
the long-lived assets as of September 30, 2000.
Recently issued accounting standards not yet implemented
The Company will be required to adopt the following recently issued
accounting standards for United States reporting purposes in future
years.
SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities" will be effective for fiscal 2001. It requires that all
derivatives be recognized as either assets or liabilities and measured at
fair value. The criteria for determining whether all or a portion of a
derivative instrument may be designated as a hedge has changed.
Derivatives that are fair market value hedges, together with the
financial instrument being hedged, will be marked to market with
adjustments reflected in income. Derivatives that are cash flow hedges
will be marked to market with adjustments reflected in comprehensive
income. As at September 30, 2000, the Company has not entered into any
derivative contracts. Further, as at September 30, 2000, the Company has
completed a review of all contracts for embedded derivatives and none
were noted. Thus, the adoption of FAS133 will have no impact on either
the Company's statement of operations or financial position.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recently issued accounting standards not yet implemented (continued)
In June 2000, the Securities and Exchange Commission issued Staff
Bulletin No. 101B "Second Amendment: Revenue Recognition in Financial
Statements" ("SAB 101B"). SAB 101B amends Staff Accounting Bulletin No.
101 "Revenue Recognition in Financial Statements" ("SAB 101") to further
defer the implementation date of SAB 101 for registrants with fiscal
years that begin between December 16, 1999 and March 15, 2000. SAB 101
provides guidance on recognition, presentation and disclosure of revenue
in financial statements of all public registrants. Changes in the
Company's revenue recognition policy resulting from the interpretation of
SAB 101 would be reported as a change in accounting principle. The change
in revenue recognition policy could result in a cumulative adjustment in
the quarter the Company adopts SAB 101. The Company has assessed the
implications of SAB 101, and management believes the adoption of this
statement will have no impact on the Company's consolidated financial
position, results of operations or cash flows.
4. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
September 30,
---------------------------------
2000 1999
------------- ----------------
Trade $ 1,147,884 $ 591,216
<S> <C> <C>
Less allowance for doubtful accounts (930) (784)
----------------------------------------------------------------------------- ---------------- ----------------
$ 1,146,954 $ 590,432
----------------------------------------------------------------------------- ---------------- ----------------
</TABLE>
5. CAPITAL ASSETS
<TABLE>
<CAPTION>
September 30, 2000 September 30, 1999
-------------------------------------------- -------------------------------------------
Accumulated Net Book Accumulated Net Book
Cost Amortization Value Cost Amortization Value
------------ --------------- ------------ ----------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Computer hardware $ 624,513 $ 108,545 $ 515,968 $ 130,888 $ 35,086 $ 95,802
Furniture and
fixtures 270,749 47,159 223,590 75,565 11,659 63,906
Computer software 236,355 56,938 179,417 105,421 31,714 73,707
Leasehold
improvements 112,235 14,149 98,086 - - -
---------------------------------------------------------------------------------------------------------------
$ 1,243,852 $ 226,791 $ 1,017,061 $ 311,874 $ 78,459 $ 233,415
---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
6. NOTES PAYABLE
September 30,
2000 1999
--------------------------
<S> <C>
Note payable bearing interest at 12% per annum,
interest payable quarterly commencing October 15,
1999, secured by a general security agreement,
maturing July 15, 2000, repaid February 12, 2000 $ - $ 697,522
Note payable, non-interest bearing, unsecured,
maturing November 6, 2001 - 100,035
----------------------------------------------------------------------------------- -------------- ------------
- 797,557
Less current portion - 697,522
----------------------------------------------------------------------------------- -------------- ------------
Long-term portion $ - $ 100,035
----------------------------------------------------------------------------------- -------------- ------------
On June 5, 2000, the non-interest bearing note payable was paid in full.
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. SHARE CAPITAL
Authorized
The Company's authorized capital stock consists of 50,000,000 shares of
common stock, $0.001 par value per share, 25,000,000 shares of preferred
stock, $0.001 par value per share, and one share of special voting stock,
$0.001 par value.
i) Common stock
------------
The holders of common stock are entitled to one vote per share on
all matters to be voted on by the stockholders. Subject to
preferences that may be applicable to any outstanding preferred
stock, the holders of common stock are entitled to receive ratably
such dividends, if any, as may be declared from time to time by the
Board of Directors out of funds legally available therefor. In the
event of the liquidation, dissolution, or winding up of the
Company, the holders of common stock are entitled to share ratably
in all assets remaining after payment of liabilities, subject to
prior rights of preferred stock, if any, then outstanding.
ii) Preferred stock
---------------
The shares of Class A convertible preferred stock and Class B
convertible preferred stock are convertible at any time at the
option of the holder, on a one-for-one basis, for shares of common
stock. The number of shares of common stock into which Class A
convertible preferred stock and Class B convertible preferred stock
is convertible is subject to adjustment or modification in the
event of a stock split or other change to the Company's capital
structure so as to maintain the initial one-to-one relationship
between the shares of such preferred stock and the common stock.
The holders of Class A convertible preferred stock and Class B
convertible preferred stock are entitled to the number of votes per
share equal to the number of 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 convertible
preferred stock and Class B convertible preferred stock rank on
parity with each other and the Company's common stock. With respect
to distributions upon liquidation, the holders of Class A
convertible preferred stock and Class B convertible preferred stock
are entitled to receive an initial preferred distribution before
any payment is made in respect of shares of common stock of $1.3574
and $2.903226 per share, respectively.
iii) Special voting stock
--------------------
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 SoftQuad Acquisition
Corp. The special voting share is the vehicle through which holders
of exchangeable shares are able to exercise their voting rights.
The special voting stock has attached to it a number of votes equal
to the number of exchangeable shares outstanding from time to time,
which votes may be cast at any meeting at which the Company's
common stockholders are entitled to vote.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. SHARE CAPITAL (CONTINUED)
Authorized (continued)
iv) Exchangeable shares
-------------------
The exchangeable shares are exchangeable at any time at the option
of the holder, on a one-for-one basis, for shares of common stock.
The Company, SoftQuad Acquisition Corp. and Montreal Trust Company
of Canada, as trustee for the exchangeable shareholders, have
entered into the voting and exchange trust agreement with respect
to the exchangeable shares. By furnishing instructions to the
trustee under the voting and exchangeable trust agreement, holders
of the exchangeable shares are able to exercise essentially the
same voting rights with respect to the Company as they would have
if they had exchanged their exchangeable shares for shares of the
Company's common stock. Holders of exchangeable shares are also
entitled to receive from SoftQuad Acquisition Corp. dividends
payable in Canadian dollars that are economically equivalent to any
cash dividends paid by the Company on the common stock. The
exchangeable shares are subject to adjustment or modification in
the event of a stock split or other change to the Company's capital
structure so as to maintain the initial one-to-one relationship
between the exchangeable shares and the common stock.
The book value of the exchangeable shares is $3,201,399 and is
presently included as a component of common stock on the balance
sheet. When the exchangeable shares are exchanged for common stock
of the Company, $3,195,625 of the value of the exchangeable shares
will be allocated to additional paid in capital.
Share transactions
During the year the Company entered into the following share
transactions:
(a) On December 16, 1999 FinanceCo was incorporated in the United
States of America to facilitate the raising of financing for
SoftQuad Canada. On incorporation 736,702 shares of common stock
and 1,473,405 Class A preferred shares were issued. The estimated
costs of $210,000 associated with the issuance were recorded as a
reduction of paid-in and additional paid-in capital for net
proceeds of approximately $2,790,000. In connection with this
transaction, the purchaser and the agent received 442,022 and
221,011 warrants respectively, exercisable at any time, at a price
of $1.44 per share, expiring December 10, 2002. The Company also
issued 166,500 options to purchase common stock of the Company at
$1.44 per share, expiring December 16, 2009.
(b) On January 17, 2000 the securityholders of SoftQuad Canada entered
into agreements with FinanceCo to acquire all the outstanding
securities of SoftQuad Canada through FinanceCo's subsidiary
SoftQuad Acquisition Corp. Although this acquisition was not
formalized until April 5, 2000 it has been deemed effective for
financial accounting purposes as of January 17, 2000, the date on
which it became irrevocable by the SoftQuad Canada
securityholders. As a result there were 5,773,605 shares of common
stock reserved for issuance upon the exchange of exchangeable
shares of the Company's subsidiary, SoftQuad Acquisition Corp. and
3,435,670 exchangeable shares of the Company's subsidiary were
exchanged for shares of common stock in the Company.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. SHARE CAPITAL (CONTINUED)
Share transactions (continued)
(c) On February 28, 2000, FinanceCo completed the private placement of
1,722,222 Class B preferred shares having a par value of $0.001 at
a price of $2.90 per share. The estimated costs of $400,000
associated with the placement were included as a reduction of
paid-in and additional paid-in capital for net proceeds of
approximately $4,600,000. In connection with this transaction, the
purchaser and agent received 694,445 and 347,222 warrants
respectively, exercisable at any time, at a price of $1.53 per
share, expiring February 28, 2003.
(d) On February 25, 2000 the Company issued an aggregate of 2,009,000
options to purchase common stock of the Company at $1.44 per
share, expiring at various dates from December 2090 to April 2010.
(e) On February 29, 2000 FinanceCo completed the private placement of
1,000,000 special warrants at a price of $2.50 per special
warrant. Each special warrant entitled the holder to acquire one
share of common stock of FinanceCo for no additional
consideration. The estimated costs of $200,000 associated with
this placement were included as a reduction of paid-in and
additional paid-in capital for net proceeds of approximately
$2,300,000. In connection with this transaction, the agent
received 100,000 warrants, exercisable any time, at a price of
$2.50 per share, expiring February 28, 2003.
(f) On March 2, 2000 FinanceCo merged with The American Sports
Machine, Inc. to form the Company. Upon consummation of the
merger, for financial accounting purposes, the former
securityholders of SoftQuad Canada and FinanceCo owned
approximately 91% of the common stock of the Company, and,
accordingly, the merger was accounted for as a reverse takeover
transaction.
(g) On April 18 and 20 and June 5, 2000, the Company issued an
aggregate of 200,010 shares of common stock for a purchase price
per share of $7.50, special warrants to acquire 1,951,420 shares
of common stock for no additional consideration at a purchase
price per share subject to such special warrants of $7.50 per
special warrant and warrants to purchase 215,143 and 1,075,715
shares of common stock at an exercise price of $7.50 and $12.50
per warrant (subject to adjustment on a periodic basis until a
registration statement has been filed) respectively, for gross
proceeds of $16,135,725.
(h) On May 29, 2000, the Company issued 127,485 shares of common stock
in consideration of financial advisory services provided in
connection with financing transactions completed during the year.
(i) During the period from March to September 30, 2000, the Company
issued an aggregate of 599,700 options to purchase common stock of
the Company at $7.50, expiring at various dates from March to
September 2010.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. SHARE CAPITAL (CONTINUED)
Stock option plan
The Company has established a stock option plan (the "Plan") to encourage
ownership of the Company's common stock by its key officers, directors,
employees, advisors and consultants. The maximum number of shares of
common stock that may be reserved for issue under the Plan at September
30, 2000 is 4,899,500 (September 30, 1999 - 1,856,000) with provision
that the Board of Directors of the Company has the right from time to
time to increase such number subject to the approval of the shareholders
of the Company. Options under the Plan vest equally over various periods
to a maximum of ten years on the anniversary date of the granting of the
option. All options granted under the Plan that have not been exercised
on or before the tenth anniversary of the grant will expire on that date
subject to earlier termination upon the optionee ceasing to be an
officer, director, employee or consultant of the Company.
The stock options outstanding at September 30, 2000 and 1999 are as
follows:
<TABLE>
<CAPTION>
September 30,
-------------------------------
2000 1999
------------- -------------
<S> <C> <C> <C> <C>
Outstanding options to purchase common shares at
$0.00013 per share expiring November 6, 2008 1,050,000 1,050,000
Outstanding options to purchase common shares at
$0.231 per share expiring May 26, 2009 267,000 306,000
Outstanding options to purchase common shares at
$0.0066 per share expiring September 29, 2009 500,000 500,000
Outstanding options to purchase common shares at
$1.44 per share expiring at various dates from
December 2009 to April 2010 2,009,000 -
Outstanding options to purchase common shares at
$7.50 per share expiring at various dates from
March 2010 to September 2010 599,700 -
-------------------------------------------------------------- --------------- ----------------
4,425,700 1,856,000
-------------------------------------------------------------- --------------- ----------------
</TABLE>
The Company applies APB Opinion 25 in accounting for its stock option
plan for options issued to employees and members of the Board of
Directors.
During the year ended September 30, 2000, options were issued to
contractors and advisors. The Company has accounted for these options
grants under SFAS No. 123 "Accounting for Stock-Based Compensation". As a
result, share capital and deferred stock compensation expense were each
increased by $622,985 during the year ended September 30, 2000.
During the year ended September 30, 1999, certain stock options were
granted to employees at exercise prices which were less than the
estimated market price of the common stock on the day preceding the
grant. Accordingly, compensation expense was calculated on the stock
options granted on the difference between the option price at the date of
the grant and the estimated market price of the stock on that date. As a
result, share capital and deferred stock compensation expense were each
increased by $446,000 during the year ended September 30, 1999.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. SHARE CAPITAL (CONTINUED)
Stock option plan (continued)
As a result of these transactions, payroll costs will increase and
deferred stock compensation expense will decrease over the vesting period
of the stock options granted. For the year ended September 30, 2000,
payroll costs increased by $51,215 in selling and marketing expenses,
$102,430 in research and development expenses and $171,023 in general and
administrative expenses and deferred stock compensation decreased by
$324,668. For the year ended September 30, 1999, payroll costs in general
and administrative expenses increased and deferred stock compensation
decreased by $88,325.
Accounting for stock-based compensation
If the fair values of the options granted to employees and members of the
Board of Directors in the period had been recognized as compensation
expense, on a straight-line basis over the vesting period of the grant
(consistent with the method prescribed by SFAS 123), stock-based
compensation costs would have reduced net earnings by $3,719,200 and
$2,244,000 and increased the basic loss per share by $0.33 and $0.50 for
the years ended September 30, 2000 and 1999, respectively.
The fair value of the options was estimated at the date of grant using
the minimum-value option pricing model with the following weighted
average assumptions for the period: risk-free interest rate of 6.0% (1999
- 6.5%); expected life of the options of 3 years; expected volatility of
35 percent (1999 - zero percent) and a dividend yield of zero.
A summary of the status of stock options outstanding as at September 30,
2000 and 1999 and changes during the periods are presented below:
<TABLE>
<CAPTION>
Weighted
Average Number
Exercise Outstanding
Price
<S> <C> <C>
Granted $ 0.0408 1,856,000
Forfeited - -
Exercised - -
------------------------------------------------------------------------ ------------------- ------------------
Balance, September 30, 1999 1,856,000
Granted 2.8103 2,658,700
Forfeited 1.0119 (89,000)
Exercised - -
------------------------------------------------------------------------ ------------------- ------------------
Balance, September 30, 2000 4,425,700
------------------------------------------------------------------------ ------------------- ------------------
Weighted average fair value of options granted $ 1.6850
------------------------------------------------------------------------ ------------------- ------------------
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. SHARE CAPITAL (CONTINUED)
Accounting for stock-based compensation (continued)
The following table summarizes information about the outstanding options
as of September 30, 2000:
<TABLE>
<CAPTION>
Remaining
Exercise Contractual Outstanding Exercisable
Price Life (years) Number Number
--------------- ---------------- --------------- -----------
<S> <C> <C> <C> <C>
$ 0.0013 8.0 1,050,000 420,000
$ 0.2310 9.0 267,000 -
$ 0.0066 9.0 500,000 500,000
$ 1.4400 10.0 2,009,000 -
$ 7.5000 10.0 559,700 -
---------------------------------------------------------------------------------------------------------------
4,425,700 920,000
---------------------------------------------------------------------------------------------------------------
</TABLE>
Warrants and special warrants
The following tables summarize warrants and special warrants outstanding
as of September 30, 2000:
Warrants
<TABLE>
<CAPTION>
Number Value
<S> <C> <C>
Outstanding warrants to purchase shares of common stock
at $1.44 per share, expiring December 10, 2002 663,033 $ 271,000
Outstanding warrants to purchase shares of common stock
at $1.53 per share, expiring February 28, 2003 1,041,667 281,000
Outstanding warrants to purchase shares of common stock
at $2.50 per share, expiring February 28, 2003 100,000 27,000
Outstanding warrants to purchase shares of common stock
at $7.50 per share, expiring on the second anniversary of
an effective registration statement 215,143 1,205,000
Outstanding warrants to purchase shares of common stock
at $12.50 per share, expiring on the second anniversary
of an effective registration statement 1,075,715 2,394,000
--------------------------------------------------------------------------- ----------------- -----------------
3,095,558 4,178,000
--------------------------------------------------------------------------- -----------------
Allocated cost of issuance (259,796)
-----------------
Total $ 3,918,204
-----------------
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. SHARE CAPITAL (CONTINUED)
Warrants (continued)
The 1,075,715 warrants to purchase shares of common stock at $12.50 per
warrant requires a registration statement to be filed no later than
September 1, 2000. If a registration statement is not filed by September
1, 2000 the exercise price of a warrant is reduced monthly on a
systematic basis ($0.25 September and October, 2000 then $0.50 per month
to February 2002) until either the registration statement is filed or the
exercise price is reduced to $3.75. As of November 2, 2000, a
registration statement had not been filed and the warrant price has been
reduced by $0.50.
Special warrants
<TABLE>
<CAPTION>
Number Value
<S> <C> <C>
Outstanding special warrants to acquire shares of common stock 2,951,420 $ 14,714,650
--------------------------------------------------------------------------- -----------------
Allocated cost of issuance (1,473,848)
-----------------
Total $ 13,240,802
-----------------
</TABLE>
Canadian residents hold all the special warrants. Each special warrant
entitles the holder to acquire one share of common stock for no
additional consideration. The special warrants expire on the fifth
business day following the date of effectiveness in the holder's province
of residence of a prospectus qualifying the tradability of the underlying
shares of common stock. The special warrants are exercisable at any time,
and are automatically exercised immediately prior to their expiration.
The special warrants were sold to certain Canadian purchasers in lieu of
shares of the Company's common stock because of Canadian securities law
considerations.
8. INCOME TAXES
The following is a geographic breakdown of consolidated loss before
income taxes by income tax jurisdiction:
<TABLE>
<CAPTION>
Nine-Month
Year ended September 30, Period Ended
--------------------------------- September 30,
2000 1999 1998
--------------- --------------- -----------------
<S> <C> <C> <C>
United States $ (87,388) $ - $ -
Foreign (6,629,501) (1,628,777) (1,349,355)
------------------------------------------------------ ----------------- ------------------ -------------------
$ (6,716,889) $ (1,628,777) $ (1,349,355)
------------------------------------------------------ ----------------- ------------------ -------------------
</TABLE>
There has been no provision for U.S federal or state income taxes for any
period as the Company has incurred operating losses in all periods.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's deferred tax assets are
as follows:
<TABLE>
<CAPTION>
September 30,
---------------------------------------
2000 1999
----------------- -------------------
Net deferred tax assets:
<S> <C> <C>
Foreign operating loss carry-forwards 2,399,000 606,000
Unclaimed foreign scientific research,
experimental development expenditures and
investment tax credits 535,000 387,000
Other 105,000 -
------------------------------------------------------------------------ ------------------- ------------------
Deferred tax assets 3,039,000 993,000
Less valuation allowance (3,039,000) (993,000)
------------------------------------------------------------------------ ------------------- ------------------
Net deferred tax assets $ - $ -
------------------------------------------------------------------------ ------------------- ------------------
</TABLE>
Realization of deferred tax assets is dependent upon future earnings, if
any. The timing and amount of such future earnings are uncertain.
Accordingly, the net deferred tax assets have been fully offset by a
valuation allowance. During the year ended September 30, 2000, the
valuation allowance increased by approximately $ 2.0 million.
The Company and its subsidiaries have the following losses available as
at September 30, 2000 for carry forward, which if unused, will expire as
follows:
<TABLE>
<CAPTION>
United
Canadian Kingdom
-------- -------
<S> <C> <C> <C>
2006 $ 374,000 $ -
2007 4,872,000 -
Indefinite carry-forward - 2,324,000
------------------------------------------------------------------------ ------------------- ------------------
$ 5,246,000 $ 2,324,000
------------------------------------------------------------------------ ------------------- ------------------
</TABLE>
The Company's Canadian subsidiary has investment tax credits that are
available for carry-forward to reduce future years' taxes payable
expiring in 2009 and 2010. In addition the Company's Canadian subsidiary
has unclaimed scientific research and experimental development
expenditures that may be carried forward indefinitely to reduce future
years' federal taxable income.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. SEGMENTED INFORMATION
The Company's operations fall into one dominant industry segment, the
software industry. The Company manages its operations and accordingly
determines its operating segments on a geographic basis. The performance
of geographic segments is monitored based on net loss. Inter-segment
transactions are reflected at market value. The accounting policies of
the geographic segments are the same as those described in Note 3.
<TABLE>
<CAPTION>
Year ended September 30, 2000
----------------------------------------------------
United
States Europe Total
Revenue
<S> <C> <C> <C>
Licenses $ 2,459,845 $ 1,781,840 $ 4,241,685
Services 44,077 - 44,077
Inter-segment royalties 257,000 - 257,000
------------------------------------------------------- ---------------- ------------------ -----------------
2,760,922 1,781,840 4,542,762
------------------------------------------------------- ---------------- ------------------ -----------------
Cost of revenue
Licenses 243,378 284,172 527,550
Services 338,612 - 338,612
Inter-segment royalties - 257,000 257,000
------------------------------------------------------- ---------------- ------------------ -----------------
581,990 541,172 1,123,162
------------------------------------------------------- ---------------- ------------------ -----------------
2,178,932 1,240,668 3,419,600
------------------------------------------------------- ---------------- ------------------ -----------------
Expenses
Selling and marketing 3,533,511 1,705,775 5,239,286
Research and development 1,957,856 - 1,957,856
General and administrative 3,052,081 307,787 3,359,868
------------------------------------------------------- ---------------- ------------------ -----------------
8,543,448 2,013,562 10,557,010
------------------------------------------------------- ---------------- ------------------ -----------------
(6,364,516) (772,894) (7,137,410)
------------------------------------------------------- ---------------- ------------------ -----------------
Other expenses
Interest (584,338) (526) (584,864)
Other expenses 164,343 - 164,343
------------------------------------------------------- ---------------- ------------------ -----------------
(419,995) (526) (420,521)
------------------------------------------------------- ---------------- ------------------ -----------------
Net loss $ (5,944,521) $ (772,368) $ (6,716,889)
------------------------------------------------------- ---------------- ------------------ -----------------
Total assets $ 18,323,028 $ 724,540 $ 19,047,568
------------------------------------------------------- ---------------- ------------------ -----------------
Expenditures for segment capital assets $ 847,212 $ 186,825 $ 1,034,037
------------------------------------------------------- ---------------- ------------------ -----------------
</TABLE>
There were four (1999 - two) customers in the United States and one
customer (1999 - one) in Europe who each had greater than 10% of the
total sales in their respective market.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. SEGMENTED INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
Year ended September 30, 1999
--------------------------------------------------------
United
States Europe Total
Revenue
<S> <C> <C> <C>
Licenses $ 2,068,812 $ 1,222,523 $ 3,291,335
Services - - -
------------------------------------------------------- ----------------- ------------------ ------------------
2,068,812 1,222,523 3,291,335
------------------------------------------------------- ----------------- ------------------ ------------------
Cost of revenue
Licenses 383,311 188,856 572,167
Services 63,494 - 63,494
------------------------------------------------------- ----------------- ------------------ ------------------
446,805 188,856 635,661
------------------------------------------------------- ----------------- ------------------ ------------------
1,622,007 1,033,667 2,655,674
------------------------------------------------------- ----------------- ------------------ ------------------
Expenses
Selling and marketing 1,094,002 958,981 2,052,983
Research and development 1,069,449 - 1,069,449
General and administrative 874,151 219,579 1,093,730
------------------------------------------------------- ----------------- ------------------ ------------------
3,037,602 1,178,560 4,216,162
------------------------------------------------------- ----------------- ------------------ ------------------
(1,415,595) (144,893) (1,560,488)
------------------------------------------------------- ----------------- ------------------ ------------------
Other expenses
Interest 14,063 - 14,063
Other expenses 54,226 - 54,226
------------------------------------------------------- ----------------- ------------------ ------------------
68,289 - 68,289
------------------------------------------------------- ----------------- ------------------ ------------------
Net loss before value of share capital accrued
or acquisition of warrants (1,483,884) (144,893) (1,628,777)
Value of share capital issued on
acquisition of warrants 1,387,647 - 1,387,647
------------------------------------------------------- ----------------- ------------------ ------------------
Net loss $ (2,871,531) $ (144,893) $ (3,016,424)
------------------------------------------------------- ----------------- ------------------ ------------------
Total assets $ 1,492,149 $ 312,562 $ 1,804,711
------------------------------------------------------- ----------------- ------------------ ------------------
Expenditures for segment capital assets $ 54,150 $ 13,798 $ 67,948
------------------------------------------------------- ----------------- ------------------ ------------------
</TABLE>
There were two customers (1999 - two) in the United States and one
customer (1999 - one) in Europe who each had greater than 10% of the
total sales in their respective market.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. SEGMENTED INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
Nine-Month Period September 30, 1998
-------------------------------------------------------
United
States Europe Total
Revenue
<S> <C> <C> <C>
Licenses $ 787,110 $ 679,028 $ 1,466,138
Services - - -
------------------------------------------------------- ----------------- ------------------ ------------------
787,110 679,028 1,466,138
------------------------------------------------------- ----------------- ------------------ ------------------
Cost of revenue
Licenses 154,773 106,859 261,632
Services 60,234 - 60,234
------------------------------------------------------- ----------------- ------------------ ------------------
215,007 106,859 321,866
------------------------------------------------------- ----------------- ------------------ ------------------
572,103 572,169 1,144,272
------------------------------------------------------- ----------------- ------------------ ------------------
Expenses
Selling and marketing 582,022 212,043 794,065
Research and development 797,604 - 797,604
General and administrative 481,412 420,546 901,958
------------------------------------------------------- ----------------- ------------------ ------------------
1,861,038 632,589 2,493,627
------------------------------------------------------- ----------------- ------------------ ------------------
Net loss $ (1,288,935) $ (60,420) $ (1,349,355)
------------------------------------------------------- ----------------- ------------------ ------------------
Total assets $ 528,305 $ 339,446 $ 867,751
------------------------------------------------------- ----------------- ------------------ ------------------
Expenditures for segment capital assets $ 23,361 $ - $ 23,361
------------------------------------------------------- ----------------- ------------------ ------------------
</TABLE>
There were two customers in the United States and two customers in Europe
who each had greater than 10% of the total sales in their respective
market.
10. COMMITMENTS
The Company is committed to the following minimum lease payments under
operating leases for its office premises and certain equipment:
2001 $ 140,100
2002 139,600
2003 119,000
2004 92,070
2005 53,500
----------------------------------------
$ 544,270
----------------------------------------
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. FINANCIAL INSTRUMENTS
Fair value
All financial assets and liabilities are stated at book value which
approximate fair value.
Credit risk
The Company is subject to risk of non-payment of accounts receivable. The
Company mitigates this risk by monitoring the credit worthiness of its
customers and limiting its concentration of receivables to any customer
or specific group of customers. At September 30, 2000 - 34% (1999 - 32%)
of the trade accounts receivable balance was owing from two customers
(two customers -1999).
Foreign exchange risk
The Company may undertake sales and purchase transactions in foreign
currencies, and therefore is subject to gains or losses due to
fluctuations in foreign currencies.
12. SUBSEQUENT EVENTS
On November 20, 2000, the Company completed its acquisition of Advanced
Data Engineering Inc., (ADEi), a provider of content transformation
solutions. The transaction was affected through the issuance of 750,383
common shares, and the exchange of 80,770 vested options, based on the
publicly traded price, for all the outstanding shares and vested options
of ADEi. The total purchase price is approximately $5.7 million. The
acquisition will be accounted for using the purchase method of accounting
with substantially all the purchase price allocated to goodwill.
