U.S. GAAP
Consolidated Financial Statements of
SOFTQUAD SOFTWARE INC.
September 30, 1999 and 1998
(in U.S. dollars)
<PAGE>
U.S. GAAP
AUDITORS' REPORT
To the Shareholders of
SoftQuad Software Inc.
We have audited the consolidated balance sheets of SoftQuad Software Inc. as at
September 30, 1999 and 1998 and the consolidated statements of operations,
shareholders' equity and cash flows for the year ended September 30, 1999, the
nine-month period ended September 30, 1998 and the year ended December 31, 1997.
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 Canadian generally accepted auditing
standards. 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.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at September 30,
1999 and 1998 and the results of its operations and its cash flows for the year
ended September 30, 1999, the nine-month period ended September 30, 1998 and the
year ended December 31, 1997 in accordance with accounting principles generally
accepted in the United States of America.
On October 29, 1999, except as to Note 14 which is as of June 5, 2000, we
reported separately to the shareholders of SoftQuad Software Inc. on the
consolidated financial statements as at, and for the year ended September 30,
1999, prepared in accordance with Canadian generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
Chartered Accountants
Toronto, Ontario
October 29, 1999
(except as to Note 14 which is as of June 5, 2000)
<PAGE>
U.S. GAAP
<TABLE>
SOFTQUAD SOFTWARE INC.
CONSOLIDATED BALANCE SHEETS
(IN U.S. DOLLARS)
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------
December 31, September 30, September 30,
1999 1999 1998
-------------- --------------- ----------
(Unaudited) (Note 3)
<S> <C> <C> <C>
ASSETS
CURRENT
Cash $ 2,969,280 $ 726,784 $ -
Accounts receivable (Note 4) 647,102 590,432 396,892
Inventory 57,365 21,776 94,626
Prepaid expenses and deposits 61,447 137,032 79,000
-----------------------------------------------------------------------------------------------------------------------------
3,735,194 1,476,024 570,518
DEFERRED FINANCING COSTS (net of cumulative amortization
of $28,232 - December 31, 1999; $11,562 - September 30, 1999) 37,681 54,441 -
CAPITAL ASSETS (Note 5) 234,029 233,415 257,872
GOODWILL (net of cumulative amortization of $24,874 -
December 31, 1999; $20,217 - September 30, 1999) 36,174 40,831 -
-----------------------------------------------------------------------------------------------------------------------------
$ 4,043,078 $ 1,804,711 $ 828,390
-----------------------------------------------------------------------------------------------------------------------------
LIABILITIES
CURRENT
Accounts payable $ 435,060 $ 347,786 $ 265,856
Accrued commission 197,642 145,941 -
Accrued royalties 132,948 133,779 -
Other accruals 211,350 200,669 423,488
Deferred revenue 33,410 30,404 -
Current portion of notes payable (Note 6) 756,254 697,522 -
-----------------------------------------------------------------------------------------------------------------------------
1,766,664 1,556,101 689,344
NOTES PAYABLE (Note 6) 2,629,933 100,035 -
-----------------------------------------------------------------------------------------------------------------------------
4,396,597 1,656,136 689,344
-----------------------------------------------------------------------------------------------------------------------------
COMMITMENTS (Note 10)
SHAREHOLDERS' EQUITY (DEFICIENCY)
SHARE CAPITAL (Note 7)
Authorized
Unlimited number of common shares
Issued
9,209,275 common shares (September 30, 1999 - 8,993,890) 3,654,881 3,559,074 -
DEFERRED STOCK COMPENSATION EXPENSE (318,696) (357,675) -
ACCUMULATED OTHER COMPREHENSIVE INCOME 19,233 30,805 53,323
NET INVESTMENT BY NEWKIDCO INTERNATIONAL, INC. - - 85,723
DEFICIT (3,708,937) (3,083,629) -
-----------------------------------------------------------------------------------------------------------------------------
(353,519) 148,575 139,046
-----------------------------------------------------------------------------------------------------------------------------
$ 4,043,078 $ 1,804,711 $ 828,390
-----------------------------------------------------------------------------------------------------------------------------
APPROVED ON BEHALF OF THE BOARD
/s/ Roberto Drassinower..................................... Director
/s/ Sheldon Inwentash....................................... Director
See accompanying notes to the consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
SOFTQUAD SOFTWARE INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN U.S. DOLLARS)
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------
Nine-Month
Three Months Ended Year Ended Period Ended Year Ended
December 31, December 31, September 30, September 30, December 31,
1999 1998 1999 1998 1997
--------------- -------------- ---------------- --------------- ----------
(Unaudited) (Unaudited) (Note 3) (Note 3)
<S> <C> <C> <C> <C> <C>
REVENUE
Licenses $ 846,086 $ 1,182,706 $ 3,291,335 $1,466,138 $2,843,155
Services 14,185 - - - -
-------------------------------------- ----------------- ---------------- ----------------- ---------------- -----------------
860,271 1,182,706 3,291,335 1,466,138 2,843,155
-------------------------------------- ----------------- ---------------- ----------------- ---------------- -----------------
COST OF REVENUE
Licenses 105,880 200,009 572,167 261,632 424,089
Services 81,852 - 63,494 60,234 103,296
-------------------------------------- ----------------- ---------------- ----------------- ---------------- -----------------
187,732 200,009 635,661 321,866 527,385
-------------------------------------- ----------------- ---------------- ----------------- ---------------- -----------------
672,539 982,697 2,655,674 1,144,212 2,315,770
-------------------------------------- ----------------- ---------------- ----------------- ---------------- -----------------
EXPENSES
Selling and marketing 662,281 445,354 2,052,983 794,065 2,587,509
Research and development 273,105 226,242 1,069,449 797,604 1,005,428
General and administrative 341,401 297,090 1,093,730 901,958 1,603,089
-------------------------------------- ----------------- ---------------- ----------------- ---------------- -----------------
1,276,787 968,686 4,216,162 2,493,627 5,196,026
-------------------------------------- ----------------- ---------------- ----------------- ---------------- -----------------
EARNINGS (LOSS) FROM
OPERATIONS (604,248) 14,011 (1,560,488) (1,349,355) (2,880,256)
-------------------------------------- ----------------- ---------------- ----------------- ---------------- -----------------
OTHER EXPENSES
Interest 21,060 - 14,063 - -
Other expenses - - 54,226 - -
-------------------------------------- ----------------- ---------------- ----------------- ---------------- -----------------
21,060 - 68,289 - -
-------------------------------------- ----------------- ---------------- ----------------- ---------------- -----------------
NET EARNINGS (LOSS) (625,308) 14,011 (1,628,777) (1,349,355) (2,880,256)
VALUE OF SHARE CAPITAL
ISSUED ON ACQUISITION
OF WARRANTS (Note 7) - - (1,387,647) - -
-------------------------------------- ----------------- ---------------- ----------------- ---------------- -----------------
NET EARNINGS (LOSS)
ATTRIBUTABLE TO
SHAREHOLDERS $ (625,308) $ 14,011 $(3,016,424) $ (1,349,355) $(2,880,256)
-------------------------------------- ----------------- ---------------- ----------------- -----------------
----------------
EARNINGS (LOSS)
PER SHARE $ (0.07) $ 0.01 $(0.37)
-------------------------------------- ----------------- ---------------- -----------------
WEIGHTED AVERAGE
NUMBER OF COMMON
SHARES OUTSTANDING 9,050,000 2,496,000 4,377,000
-------------------------------------- ----------------- ---------------- -----------------
See accompanying notes to the consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
SOFTQUAD SOFTWARE INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN U.S. DOLLARS)
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
Net
Accumulated Deferred Investment
Retained Other Stock by NewKidCo
Common Shares Earnings ComprehensiveCompensation International,
Shares Amount (Deficit) Income (Loss) Expense Inc. Total
----------- ---------- ------------------------------------- ----------- ---------
(Note 7)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997 - $ - $ - $ - $ - $ - $ -
COMPREHENSIVE LOSS
Net loss attributable to - - - - - (2,880,256) (2,880,256)
shareholders
NET CONTRIBUTIONS BY
NEWKIDCO INTERNATIONAL, INC. - - - - - 2,880,256 2,880,256
-------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 - $ - $ - $ - $ - $ - $ -
-------------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 1998 - $ - $ $ - $ - $ - $
- -
COMPREHENSIVE LOSS
Foreign currency translation - - - 53,323 - - 53,323
Net loss attributable to - - - - - (1,349,355) (1,349,355)
shareholders
-------------
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
Foreign currency translation - - - 150,297 - - 150,297
Net earnings attributable to - - 14,011 - - - 14,011
shareholders
-------------
TOTAL COMPREHENSIVE INCOME 164,308
-------------
ISSUANCE OF COMMON SHARES
For cash 3,000,000 678,069 - - - - 678,069
As deferred stock compensation - 446,000 - - (446,000) - -
expense
As compensation under stock - - - - 13,165 - 13,165
option plan
On acquisition of assets (Note 2) 703,705 161,374 - - - - 161,374
-------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 3,703,706 $1,285,444 $ 14,011 $150,297 $(432,835) $ - $ 1,016,917
-------------------------------------------------------------------------------------------------------------------------------
BALANCE, OCTOBER 1, 1998 1 $ 1 $ - $ - $ - $ - $ 1
-------------
COMPREHENSIVE LOSS
Foreign currency translation - - - 30,805 - - 30,805
Net loss attributable to - - (3,016,424) - - - (3,016,424)
shareholders
-------------
TOTAL COMPREHENSIVE LOSS (2,985,619)
-------------
PREMIUM ON REDEMPTION
OF COMMON STOCK - - (67,205) - - - (67,205)
ISSUANCE OF COMMON SHARES
For cash 3,000,000 678,069 - - - - 678,069
On acquisition of assets (Note 2) 703,705 161,374 - - - - 161,374
Repurchase of shares (703,705) (162,809) - - - - (162,809)
For cash 2,863,509 1,048,792 - - - - 1,048,792
On acquisition of warrants 3,130,380 1,387,647 - - - - 1,387,647
As deferred stock compensation - 446,000 - - (446,000) - -
expense
As compensation under stock - - - - 88,325 - 88,325
option plan
-------------------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1999 8,993,890 3,559,074 (3,083,629) 30,805 (357,675) - 148,575
-------------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE LOSS
Foreign currency translation - - - (11,572) - - (11,572)
Net loss attributable to - - (625,308) - - - (625,308)
shareholders
-------------
TOTAL COMPREHENSIVE LOSS (637,060)
-------------
ISSUANCE OF COMMON SHARES
As compensation under stock - - - - 38,979 - 38,979
option plan
In satisfaction of debt 215,385 95,807 - - - - 95,807
-------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 9,209,275 $3,654,881 $(3,708,937) $19,233 $(318,696) $ - $ (353,519)
-------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
SOFTQUAD SOFTWARE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN U.S. DOLLARS)
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
Nine-Month
Three Months Ended Year Ended Period Ended Year Ended
December 31, December 31, September 30, September 30, December 31,
1999 1998 1999 1998 1997
------------- ------------- -------------- -------------- ---------
(Unaudited) (Unaudited) (Note 3) (Note 3)
<S> <C> <C> <C> <C> <C>
NET INFLOW (OUTFLOW) OF CASH RELATED
TO THE FOLLOWING ACTIVITIES
OPERATING
Net (loss) earnings $(625,308) $ 14,011 $ (1,628,777) $ (1,349,355) $(2,880,256)
Items not affecting cash
Loss on disposal of capital assets - - 10,140 - -
Compensation under stock option plan 38,979 13,165 88,325 - -
Amortization of capital assets 21,416 28,046 77,337 122,196 233,376
Amortization of goodwill 4,657 - 20,217 - -
Amortization of deferred financing costs 16,760 - 11,562 - -
------------------------------------------------------------------------------------------------------------------------------
(543,496) 55,222 (1,421,196) (1,227,159) (2,646,880)
Changes in non-cash operating
working capital items
Accounts receivable 4,145 (499,083) (254,355) (372,447) 3,686,014
Inventory (35,589) 62,724 72,850 (18,904) 14,078
Prepaid expenses and deposits 14,770 15,847 2,783 (63,008) 99,717
Accounts payable and accrued liabilities 148,825 (102,272) 138,831 463,603 (2,404,550)
Deferred revenue 3,006 - 30,404 (3,890) 3,891
------------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (408,339) (467,562) (1,430,683) (1,221,805) (1,247,730)
------------------------------------------------------------------------------------------------------------------------------
INVESTING
Acquisition of net assets excluding cash (Note - (122,013) (122,013) - -
2)
Purchase of capital assets (22,030) - (67,948) (23,361) 39,178
Proceeds from disposal of capital assets - - 4,886 - -
Deferred financing costs - - (66,003) - -
------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (22,030) (122,013) (251,078) (23,361) 39,178
------------------------------------------------------------------------------------------------------------------------------
FINANCING
Issuance of share capital - 826,279 1,888,236 - -
Repurchase of common shares - - (162,809) - -
Repayment of notes payable (50,128) - - - -
Increase in amounts due to SoftQuad
Software, Ltd. 2,638,758 - 797,557 - -
Contributions by NewKidCo International, Inc. - - - 1,435,078 1,208,552
------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 2,588,630 826,279 2,522,984 1,435,078 1,208,552
------------------------------------------------------------------------------------------------------------------------------
FOREIGN EXCHANGE (84,235) 132,994 (114,439) (189,912) -
------------------------------------------------------------------------------------------------------------------------------
NET CASH INFLOW 2,242,496 369,698 726,784 - -
CASH POSITION, BEGINNING OF PERIOD 726,784 - - - -
------------------------------------------------------------------------------------------------------------------------------
CASH POSITION, END OF PERIOD $2,969,280 $ 369,698 $ 726,784 $ - $ -
------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTARY CASH FLOW INFORMATION
Interest paid $21,060 $ - $ - $ - $ -
Interest received $5,513 $ 1,555 $ 14,083 $ 3,811 $ 6,686
Value of share capital issued
on acquisition of warrants $- $ - $ 1,387,647 $ - $ -
Value of share capital recorded on stock $38,979 $ 13,165 $ 88,325 $ - $ -
options
Issuance of share capital on conversion of debt $95,807 $ - $ - $ - $ -
See accompanying notes to the consolidated financial statements.
</TABLE>
<PAGE>
U.S. GAAP
SOFTQUAD SOFTWARE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION RELATING TO DECEMBER 31, 1999 AND 1998 IS UNAUDITED
(IN U.S. DOLLARS)
--------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS
The Company 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 OPERATION
On October 1, 1998 the Company 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 Generally
Accepted Accounting Principles ("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 and the year ended December 31, 1997 are
presented as the business operated by NewKidCo prior to the sale to the
Company and include the 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 overhead expenses are based on management's best estimates and
may not be representative of the overhead expenses had the Company
operated as a separate entity.
<PAGE>
U.S. GAAP
SOFTQUAD SOFTWARE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION RELATING TO DECEMBER 31, 1999 AND 1998 IS UNAUDITED
(IN U.S. DOLLARS)
--------------------------------------------------------------------------------
3. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Basis of presentation (Continued)
The above financial statements for the nine-month period ended September
30, 1998 and the year ended December 31, 1997 have been prepared in
accordance with accounting principles generally accepted in the United
States of America.
The financial statements include the accounts of the Company and its
wholly owned subsidiary, SoftQuad (UK) Limited.
Inventory
Inventory is valued at the lower of cost, determined on a first-in
first-out basis, and net realizable value.
Capital assets
Capital assets are stated at cost. Amortization is provided on a
declining-balance basis at the following rates per annum:
Computer hardware - 30%
Furniture and fixtures - 20%
Computer software - 30%
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
(i) Revenue from software products and licences is generally recognized
on delivery if an agreement exists with a fixed or determinable fee
and collection of the related receivable is reasonably assured.
(ii) Revenue from support and software maintenance agreements is
initially recorded as deferred revenue and recognized as revenue
over the term of the agreements. The related expenses are expensed
as incurred.
<PAGE>
U.S. GAAP
SOFTQUAD SOFTWARE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION RELATING TO DECEMBER 31, 1999 AND 1998 IS UNAUDITED
(IN U.S. DOLLARS)
--------------------------------------------------------------------------------
3. SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
Income taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes".
SFAS 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 No. 130, "Reporting
Comprehensive Income" ("SFAS 130"). SFAS 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.
<PAGE>
U.S. GAAP
SOFTQUAD SOFTWARE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION RELATING TO DECEMBER 31, 1999 AND 1998 IS UNAUDITED
(IN U.S. DOLLARS)
--------------------------------------------------------------------------------
3. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock options
The Company grants stock options for a fixed number of shares to its key
officers, directors, employees and consultants with a fixed price. The
Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), 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. Under APB 25, no compensation expense is
recognized when the exercise price of the Company's employee stock options
equals the estimated market price of the underlying stock on the date of
the grant.
Earnings (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.
Earnings (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 the stock options referred to in Note 7 is not dilutive.
Fully diluted earnings per share are not calculated for the three months
ended December 31, 1998 as it is not materially different from basic
earnings per share.
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.
Cash equivalents
For purposes of the statement of cash flows, highly liquid investments
with maturities of three months or less are considered cash equivalents.
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 December 31, 1999 and September 30, 1999.
<PAGE>
U.S. GAAP
SOFTQUAD SOFTWARE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION RELATING TO DECEMBER 31, 1999 AND 1998 IS UNAUDITED
(IN U.S. DOLLARS)
--------------------------------------------------------------------------------
3. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Interim financial statements
The interim financial statements of the Company are unaudited, and in the
opinion of management, contain all adjustments that are of a normal and
recurring nature necessary to present fairly the financial position and
results of operations for the interim reporting period. The financial
data disclosed in these notes to the financial statements for these
interim periods are also unaudited. Operating results for the three
months ended December 31, 1999 and December 31, 1998 are not necessarily
indicative of results that may be expected for any future periods.
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 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 which are cash flow hedges will be marked to market with
adjustments reflected in comprehensive income. The Company has not yet
determined what effects, if any, the adoption of SFAS 133 will have on
its operating results or financial position.
4. ACCOUNTS RECEIVABLE
<TABLE>
December 31, September 30,
----------------------
1999 1999 1998
--------------- ----------- --------
(Unaudited)
<S> <C> <C> <C>
Trade $ 686,463 $ 591,216 $ 411,470
Less allowance for doubtful accounts 39,361 784 14,578
--------------------------------------------- ----------------- -------------- --------------
$ 647,102 $ 590,432 $ 396,892
--------------------------------------------- ----------------- -------------- --------------
</TABLE>
<PAGE>
U.S. GAAP
SOFTQUAD SOFTWARE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION RELATING TO DECEMBER 31, 1999 AND 1998 IS UNAUDITED
(IN U.S. DOLLARS)
--------------------------------------------------------------------------------
5. CAPITAL ASSETS
<TABLE>
December 31, 1999
------------------------------
Accumulated Net Book
Cost Amortization Value
---- ------------ -----
(Unaudited)
<S> <C> <C> <C>
Computer hardware $ 150,244 $ 44,682 $ 105,562
Furniture and fixtures 76,377 15,791 60,586
Computer software 107,283 39,402 67,881
---------------------------------------------------------------------------------------------------------------
$ 333,904 $ 99,875 $ 234,029
---------------------------------------------------------------------------------------------------------------
September 30, 1999 September 30, 1998
----------------------------------------- ------------------------------
Accumulated Net Book Accumulated Net Book
Cost Amortization Value Cost Amortization Value
------------ ------------ ------------ ----------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Computer
hardware $ 130,888 $ 35,086 $ 95,802 $ 175,296 $ 51,961 $ 123,335
Furniture and
fixtures 75,565 11,659 63,906 75,296 2,706 72,590
Computer
software 105,421 31,714 73,707 65,462 3,515 61,947
---------------------------------------------------------------------------------------------------------------
$ 311,874 $ 78,459 $ 233,415 $ 316,054 $ 58,182 $ 257,872
---------------------------------------------------------------------------------------------------------------
</TABLE>
6. NOTES PAYABLE
<TABLE>
December 31, September 30,
1999 1999
----------------- ----------
(Unaudited)
<S> <C> <C>
Loan payable to SoftQuad Software, Ltd. bears
Interest at 7% per annum, secured by a general
security Agreement with no fixed terms of repayment $ 2,629,933 $ -
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 706,251 697,522
Note payable, non-interest bearing, unsecured,
maturing November 6, 2001 50,003 100,035
------------------------------------------------------------------------- ------------------ ------------------
3,386,187 797,557
Less current portion 756,254 697,522
------------------------------------------------------------------------- ------------------ ------------------
Long-term portion $ 2,629,933 $ 100,035
------------------------------------------------------------------------- ------------------ ------------------
</TABLE>
<PAGE>
U.S. GAAP
SOFTQUAD SOFTWARE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION RELATING TO DECEMBER 31, 1999 AND 1998 IS UNAUDITED
(IN U.S. DOLLARS)
--------------------------------------------------------------------------------
6. NOTES PAYABLE (Continued)
As of January 17, 2000, the securityholders of the Company entered into
agreements with a company that had been formed to facilitate certain
financings of the Company ("FinanceCo") for FinanceCo to acquire all of
the outstanding securities of the Company through FinanceCo's subsidiary,
SoftQuad Acquisition Corp. Although this acquisition was not formally
completed until April 5, 2000, it has been deemed effective for financial
accounting purposes as of January 17, 2000, the date on which it became
irrevocable by the Company's securityholders. On March 2, 2000, FinanceCo
merged with and into The American Sports Machine, Inc. ("ASM"). On April
10, 2000, ASM redomiciled to Delaware under the name SoftQuad Software,
Ltd. It is not the intention of SoftQuad Software, Ltd. to demand payment
of the 7% loan payable of $2,629,933 in the ensuing fiscal year,
therefore, the loan has been classified as long-term.
Deferred financing costs are amortized over the term of the loan.
On February 8, 2000 and June 5, 2000, respectively, the 12% note payable
of $706,251 and the non-interest bearing note payable of $50,003 were
repaid in full.
7. SHARE CAPITAL
During the year ended September 30, 1999, the directors approved the
issuance of 703,705 shares of common stock for certain of the net assets
of 1225322 Ontario Inc. having a value of $161,374 (Note 2). Further, the
directors approved the issuance of 3,000,000 shares of common stock on
November 5, 1998 and 2,863,509 shares of common stock on April 9, 1999
for gross proceeds of $1,909,887 less expenses of issuance of $183,036.
In connection with these transactions, the purchasers received 2,778,530
warrants exercisable at any time at prices ranging from $0.64 to $0.65
per warrant expiring over the period from April 8, 2000 to July 29, 2000.
On April 9, 1999, the Company redeemed 703,705 shares of common stock for
a cash consideration of $230,014 and 351,850 warrants, resulting in a
premium on redemption of $67,205.
On September 30, 1999, the Company issued 3,130,380 shares of common
stock as consideration for the purchase of 3,130,380 previously issued
warrants. The common stock issued was valued at $1,387,647 an amount
equivalent to the exercise price of the warrants previously issued.
On December 7, 1999 the Company issued 215,385 shares of common stock to
a supplier in satisfaction of a debt of $95,807.
<PAGE>
U.S. GAAP
SOFTQUAD SOFTWARE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION RELATING TO DECEMBER 31, 1999 AND 1998 IS UNAUDITED
(IN U.S. DOLLARS)
--------------------------------------------------------------------------------
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 and consultants. The maximum number of shares of common stock
which may be reserved for issue under the Plan at December 31, 1999 is
1,842,000 (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
three 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, 1999 and December 31, 1999
are as follows:
<TABLE>
December 31, September 30,
1999 1999
----------------- ----------------
(Unaudited)
<S> <C> <C>
Outstanding options to purchase common shares at
$0.001 per share expiring November 5, 2008 1,050,000 1,050,000
Outstanding options to purchase common shares at
$0.24 per share expiring May 25, 2009 292,000 306,000
Outstanding options to purchase common shares at
$0.01 per share expiring September 29, 2009 500,000 500,000
------------------------------------------------------------------------ ------------------ -----------------
1,842,000 1,856,000
------------------------------------------------------------------------ ------------------ -----------------
</TABLE>
Accounting for stock-based compensation
The Company applies APB Opinion 25 in accounting for its stock option
plan.
Certain of the above options have been granted at exercise prices, which
were less than the estimated market price of the stock on the day
preceding the grant. Accordingly, compensation was calculated on the
options granted as 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. Salaries
and benefits are increased and deferred stock compensation expense
decreased over the vesting period of the stock options granted. Salaries
and benefits have increased and deferred stock compensation expense
decreased by $38,979, $13,165 and $88,325 for the three months ended
December 31, 1999 and 1998 and the year ended September 30,1999
respectively.
<PAGE>
U.S. GAAP
SOFTQUAD SOFTWARE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION RELATING TO DECEMBER 31, 1999 AND 1998 IS UNAUDITED
(IN U.S. DOLLARS)
--------------------------------------------------------------------------------
7. SHARE CAPITAL (Continued)
Accounting for stock-based compensation (Continued)
If the fair values of the options granted 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 $2,244,000 and increased the loss per common share by $0.51 for the
year ended September 30, 1999.
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 6.5%;
expected life of the options of 3 years; expected volatility of zero
percent and a dividend yield of zero.
A summary of the status of stock options outstanding as at September 30,
1999 and December 31, 1999 and changes during the period are presented
below:
<TABLE>
Weighted
Average Number
Exercise Price Outstanding
-------------- -----------
<S> <C> <C>
Granted $ 0.0057 1,856,000
Forfeited $ - -
Exercised $ - -
-------------------------------------------------------------------------------------------------------------
Balance, September 30, 1999 1,856,000
Granted $ - -
Forfeited $ 0.0057 9,000
Exercised $ - -
-------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 1,847,000
-------------------------------------------------------------------------------------------------------------
Weighted average fair value of options granted $ 0.0057
-------------------------------------------------------------------------------------------------------------
</TABLE>
Subsequent to December 31, 1999, an additional 5,000 options were
forfeited.
The following table summarizes information about the outstanding options
as of December 31, 1999 and September 30, 1999:
<TABLE>
December 31, 1999
------------------------------------------------------------------------------------------------------------
(Unaudited)
Remaining
Exercise Contractual Outstanding Exercisable
Price Life (years) Number Number
------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
$ 0.0013 2.0 1,050,000 630,000
$ 0.2310 3.0 297,000 -
$ 0.0066 3.0 500,000 -
------------------------------------------------------------------------------------------------------------
1,847,000 630,000
------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
U.S. GAAP
SOFTQUAD SOFTWARE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION RELATING TO DECEMBER 31, 1999 AND 1998 IS UNAUDITED
(IN U.S. DOLLARS)
--------------------------------------------------------------------------------
U.S. GAAP
SOFTQUAD SOFTWARE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION RELATING TO DECEMBER 31, 1999 AND 1998 IS UNAUDITED
(IN U.S. DOLLARS)
--------------------------------------------------------------------------------
7. SHARE CAPITAL (Continued)
<TABLE>
September 30, 1999
------------------------------------------------------------------------------------------------------------
Remaining
Exercise Contractual Outstanding Exercisable
Price Life (years) Number Number
------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
$ 0.0013 3.0 1,050,000 420,000
$ 0.2310 3.0 306,000 -
$ 0.0066 3.0 500,000 -
------------------------------------------------------------------------------------------------------------
1,856,000 420,000
------------------------------------------------------------------------------------------------------------
</TABLE>
8. INCOME TAXES
The Company and its subsidiary have the following losses available as at
September 30, 1999 for carryforward which, if unused, will expire as
follows:
<TABLE>
United
Canadian Kingdom
---------------- ----------------
<S> <C> <C>
2006 $ 448,000 $ -
Indefinite carryforward - 660,000
-------------------------------------------------------------------------------------------------------------
$ 448,000 $ 660,000
-------------------------------------------------------------------------------------------------------------
</TABLE>
The Company has investment tax credits available for carryforward to
reduce future years' taxes payable amounting to approximately $242,000
which expire in 2009. In addition the Company has approximately $852,000
of unclaimed scientific research and experimental development
expenditures which may be carried forward indefinitely to reduce future
years' federal taxable income.
The benefit of these loss carryforwards, unclaimed scientific research
and experimental development expenditures and investment tax credits for
income tax purposes at September 30, 1999 would be as follows:
Tax benefit of losses carryforward, unclaimed
scientific research and experimental development
expenditures and investment tax credits $ 1,062,000
Valuation allowances 1,062,000
------------------------------------------------------ ---------------
$ -
------------------------------------------------------ ---------------
A valuation allowance of 100% has been established in respect of the loss
carryforwards, unclaimed scientific research and experimental development
expenditures and the investment tax credits due to the uncertainty of the
Company's utilization of such accounts.
<PAGE>
U.S. GAAP
SOFTQUAD SOFTWARE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION RELATING TO DECEMBER 31, 1999 AND 1998 IS UNAUDITED
(IN U.S. DOLLARS)
--------------------------------------------------------------------------------
9. SEGMENTED INFORMATION
The Company operates in the United States and Europe. The Company
services the United States market from its Canadian subsidiary. This
subsidiary incurs all costs in Canada and earns license and services
revenues of approximately 90% in the United Sates and 10% in Canada.
<TABLE>
Three Months Ended
December 31, 1999
(Unaudited)
-----------------------------------------------
United
States Europe Total
------ ------ -----
<S> <C> <C> <C>
Revenue
Licenses $ 510,234 $ 335,852 $ 846,086
Services 14,185 - 14,185
------------------------------------------------------------ ---------------- --------------- ----------------
524,419 335,852 860,271
------------------------------------------------------------ ---------------- --------------- ----------------
Cost of revenue
Licenses 62,892 42,988 105,880
Services 81,852 - 81,852
------------------------------------------------------------ ---------------- --------------- ----------------
144,744 42,988 187,732
------------------------------------------------------------ ---------------- --------------- ----------------
379,675 292,864 672,539
------------------------------------------------------------ ---------------- --------------- ----------------
Expenses
Selling and marketing 373,211 289,070 662,281
Research and development 273,105 - 273,105
General and administrative 264,520 76,881 341,401
------------------------------------------------------------ ---------------- --------------- ----------------
910,836 365,951 1,276,787
------------------------------------------------------------ ---------------- --------------- ----------------
Loss from operations (531,161) (73,087) (604,248)
------------------------------------------------------------ ---------------- --------------- ----------------
Other expenses
Interest 21,060 - 21,060
Other expenses - - -
------------------------------------------------------------ ---------------- --------------- ----------------
21,060 - 21,060
------------------------------------------------------------ ---------------- --------------- ----------------
Net loss $ (552,221) $ (73,087) $ (625,308)
------------------------------------------------------------ ---------------- --------------- ----------------
Total assets $ 3,693,054 $ 350,024 $ 4,043,078
------------------------------------------------------------ ---------------- --------------- ----------------
Expenditures for segment capital assets $ 19,356 $ 2,674 $ 22,030
------------------------------------------------------------ ---------------- --------------- ----------------
</TABLE>
There were two customers in the United States and one customer in Europe
who each had greater than 10% of the total sales in their respective
market.
<PAGE>
U.S. GAAP
SOFTQUAD SOFTWARE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION RELATING TO DECEMBER 31, 1999 AND 1998 IS UNAUDITED
(IN U.S. DOLLARS)
--------------------------------------------------------------------------------
9. SEGMENTED INFORMATION (Continued)
<TABLE>
Three Months Ended
December 31, 1998
(Unaudited)
--------------------------------------------
United
States Europe Total
------ ------ -----
<S> <C> <C> <C>
Revenue
Licenses $ 769,526 $ 413,180 $ 1,182,706
Services - - -
------------------------------------------------------------ ----------------- -------------- ----------------
769,526 413,180 1,182,706
------------------------------------------------------------ ----------------- -------------- ----------------
Cost of revenue
Licenses 137,992 62,017 200,009
Services - - -
------------------------------------------------------------ ----------------- -------------- ----------------
137,992 62,017 200,009
------------------------------------------------------------ ----------------- -------------- ----------------
631,534 351,163 982,697
------------------------------------------------------------ ----------------- -------------- ----------------
Expenses
Selling and marketing 270,584 174,770 445,354
Research and development 226,242 - 226,242
General and administrative 237,989 59,101 297,090
------------------------------------------------------------ ----------------- -------------- ----------------
734,815 233,871 968,686
------------------------------------------------------------ ----------------- -------------- ----------------
Net earnings (loss) $ (103,281) $ 117,292 $ 14,011
------------------------------------------------------------ ----------------- -------------- ----------------
Total assets $ 1,081,860 $ 508,694 $ 1,590,554
------------------------------------------------------------ ----------------- -------------- ----------------
Expenditures for segment capital assets $ - $ - $ -
------------------------------------------------------------ ----------------- -------------- ----------------
</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.
<PAGE>
U.S. GAAP
SOFTQUAD SOFTWARE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION RELATING TO DECEMBER 31, 1999 AND 1998 IS UNAUDITED
(IN U.S. DOLLARS)
--------------------------------------------------------------------------------
9. SEGMENTED INFORMATION (Continued)
<TABLE>
Year Ended
September 30, 1999
---------------------------------------------
United
States Europe Total
------ ------ -----
<S> <C> <C> <C>
Revenue
Licenses $ 2,063,812 $ 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 $ (1,483,884) $ (144,893) $ (1,628,777)
--------------------------------------------------------- ----------------- ---------------- -----------------
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 in the United States and one customer in Europe
who each had greater than 10% of the total sales in their respective
market.
<PAGE>
U.S. GAAP
SOFTQUAD SOFTWARE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION RELATING TO DECEMBER 31, 1999 AND 1998 IS UNAUDITED
(IN U.S. DOLLARS)
--------------------------------------------------------------------------------
9. SEGMENTED INFORMATION (Continued)
<TABLE>
Nine-Month Period Ended
September 30, 1998
-----------------------------------------------
United
States Europe Total
------ ------ -----
<S> <C> <C> <C>
Revenue
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.
<PAGE>
U.S. GAAP
SOFTQUAD SOFTWARE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION RELATING TO DECEMBER 31, 1999 AND 1998 IS UNAUDITED
(IN U.S. DOLLARS)
--------------------------------------------------------------------------------
9. SEGMENTED INFORMATION (Continued)
<TABLE>
Year Ended
December 31, 1997
------------------------------------------------
United
States Europe Total
------ ------ -----
<S> <C> <C> <C>
Revenue
Licenses $ 1,786,189 $ 1,056,966 $ 2,843,155
Services - - -
--------------------------------------------------------- ----------------- ---------------- -----------------
1,786,189 1,056,966 2,843,155
--------------------------------------------------------- ----------------- ---------------- -----------------
Cost of revenue
Licenses 239,755 184,334 424,089
Services 103,296 - 103,296
--------------------------------------------------------- ----------------- ---------------- -----------------
343,051 184,334 527,385
--------------------------------------------------------- ----------------- ---------------- -----------------
1,443,138 872,632 2,315,770
--------------------------------------------------------- ----------------- ---------------- -----------------
Expenses
Selling and marketing 2,066,273 521,236 2,587,509
Research and development 1,005,428 - 1,005,428
General and administrative 781,584 821,505 1,603,089
--------------------------------------------------------- ----------------- ---------------- -----------------
3,853,285 1,342,741 5,196,026
--------------------------------------------------------- ----------------- ---------------- -----------------
Net loss $ (2,410,147) $ (470,109) $ (2,880,256)
--------------------------------------------------------- ----------------- ---------------- -----------------
Total assets $ 381,716 $ 91,149 $ 472,865
--------------------------------------------------------- ----------------- ---------------- -----------------
Expenditures for segment capital assets $ 155,336 $ - $ 155,336
--------------------------------------------------------- ----------------- ---------------- -----------------
</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.
<PAGE>
U.S. GAAP
SOFTQUAD SOFTWARE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION RELATING TO DECEMBER 31, 1999 AND 1998 IS UNAUDITED
(IN U.S. DOLLARS)
--------------------------------------------------------------------------------
10. COMMITMENTS
The Company is committed to the following minimum lease payments under
operating leases for its office premises and certain equipment:
2000 $ 60,000
2001 27,000
2002 31,000
2003 41,000
2004 3,000
-------------------------------------
$ 162,000
-------------------------------------
11. FINANCIAL INSTRUMENTS
Fair value
All financial assets and liabilities are stated at book value which
approximates fair value, except for a note payable which is non-interest
bearing.
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 December 31, 1999 - 58% (September 30,
1999 - 32%) of the trade accounts receivable balance was owing from two
customers (two customers - September 30, 1999). There were no customers
that had significant trade accounts receivable at September 30, 1998.
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. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use two
digits rather than four to identify a year. Date-sensitive systems may
recognize the year 2000 as 1900 or some other date, resulting in errors
when information using year 2000 dates is processed. In addition, similar
problems may arise in some systems which use certain dates in 1999 to
represent something other than a date. Although the change in date has
occurred, it is not possible to conclude that all aspects of the Year
2000 Issue that may affect the Company, including those related to
customers, suppliers, or other third parties, have been fully resolved.
<PAGE>
U.S. GAAP
SOFTQUAD SOFTWARE INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION RELATING TO DECEMBER 31, 1999 AND 1998 IS UNAUDITED
(IN U.S. DOLLARS)
--------------------------------------------------------------------------------
13. SUBSEQUENT EVENTS
(a) On February 8, 2000 and June 5, 2000, respectively, the 12% note
payable of $706,251 and the non-interest bearing note payable of
$50,003 were repaid in full (Note 6).
(b) As of January 17, 2000, the securityholders of the Company entered
into agreements with a company that was formed to facilitate
certain financings of the Company ("FinanceCo") for FinanceCo to
acquire all of the outstanding securities of the Company through
FinanceCo's subsidiary, SoftQuad Acquisition Corp. Although this
acquisition was not formally completed until April 5, 2000, it has
been deemed effective for financial accounting purposes as of
January 17, 2000, the date on which it became irrevocable by the
Company's securityholders. On March 2, 2000, FinanceCo merged with
and into The American Sports Machine, Inc. Upon consummation of the
merger, for financial accounting purposes, the former
securityholders of the Company and the former securityholders of
FinanceCo owned approximately 91% of the common stock of the
Company (on a fully diluted basis) and, accordingly, the merger is
accounted for as a reverse takeover transaction.
14. COMPARATIVE FIGURES
Certain of the prior years comparative figures have been reclassified to
conform to the current year's presentation.
