<PAGE>
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
-------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------- -------------------
Commission file number 0-26327
-----------------
SOFTQUAD SOFTWARE, LTD.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 65-087774
--------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
161 Eglinton Avenue East, Suite 400, Toronto, Ontario M4P 1J5 Canada
--------------------------------------------------------------------------------
(Address of principal executive offices)
(416) 544-9000
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
The number of shares of common stock, par value $.001 per share,
outstanding as of August 10, 2000 (including exchangeable shares of the
registrant's subsidiary, SoftQuad Acquisition Corp., which have voting and
economic rights functionally equivalent to shares of common stock, but not
including any shares subject to other derivative securities) was 12,473,472.
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
<PAGE>
SOFTQUAD SOFTWARE, LTD.
QUARTERLY REPORT
QUARTER ENDED JUNE 30, 2000
CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
June 30, 2000 and September 30, 1999.............................1
Condensed Consolidated Statements of Operations
Three and Nine Months Ended June 30, 2000 and June 30, 1999......2
Condensed Consolidated Statements of Cash Flows
Nine Months Ended June 30, 2000 and June 30, 1999................3
Notes to Financial Statements....................................4
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition.............................................13
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds............................26
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits 26
(b) Reports on Form 8-K........................................26
Index to Exhibits.............................................................31
</TABLE>
<PAGE>
SOFTQUAD SOFTWARE, LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
June 30, 2000 September 30, 1999
------------- ------------------
(unaudited) (1)
<S> <C> <C>
ASSETS
Current
Cash and short term deposits $ 19,659 $ 727
Accounts receivable 735 590
Inventory 74 22
Prepaid expenses and deposits 467 137
------------ ------------
Total Current Assets 20,935 1,476
Deferred financing costs -- 54
Capital assets 775 233
Goodwill 30 41
------------ ------------
TOTAL ASSETS $ 21,740 $ 1,804
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,184 $ 347
Accrued liabilities 1,174 480
Deferred revenue 88 30
Current portion of notes payable -- 698
------------ ------------
Total Current Liabilities 2,446 1,555
Notes Payable -- 100
------------ ------------
Total Liabilities 2,446 1,655
------------ ------------
Shareholders' Equity
Share Capital
Preferred stock, par value $0.001 per share
Authorized: 25,000,000 shares
Issued and outstanding:
Class A: 1,473,405 at June 30, 2000; none at September 30, 1999 1 --
Class B: 1,722,222 at June 30, 2000; none at September 30, 1999 2 --
Special voting stock, par value $0.001 per share
Authorized: 1 share
Issued and outstanding: 1 at June 30, 2000; none at September 30, 1999 -- --
Common stock, par value $0.001 per share -- --
Authorized: 50,000,000 shares
Issued and outstanding:
12,473,472 at June 30, 2000(2); 8,993,890 at September 30, 1999 3,444 3,559
Warrants to purchase common stock 3,980 --
Special warrants to acquire common stock 13,310 --
Additional Paid-In-Capital 5,543 --
Deferred Stock Compensation Expense (335) (358)
Accumulated Other Comprehensive Income 48 31
Deficit (6,699) (3,083)
------------ -------------
Total Shareholders' Equity 19,294 149
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 21,740 $ 1,804
============ ============
</TABLE>
-------------
(1) The balance sheet at September 30, 1999 has been derived from audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
(2) Includes 5,773,605 exchangeable shares of SoftQuad Acquisition Corp. See
Note 3.
See Notes to Condensed Consolidated Financial Statements.
1
<PAGE>
SOFTQUAD SOFTWARE, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share information)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------------ ------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES
Licenses $ 907 $ 707 $ 2,857 $ 2,410
Services 8 -- 33 --
------------ ------------ ------------ ------------
TOTAL REVENUES 915 707 2,890 2,410
------------ ------------ ------------ ------------
COST OF REVENUES
Licenses 145 87 410 426
Services 80 32 254 32
------------ ------------ ------------ ------------
TOTAL COST OF REVENUES 225 119 664 458
------------ ------------ ------------ ------------
GROSS PROFIT 690 588 2,226 1,952
------------ ------------ ------------ ------------
EXPENSES
Selling and marketing 1,570 645 3,098 1,529
Research and development 628 284 1,294 776
General and administrative 737 243 1,566 859
------------ ------------ ------------ ------------
2,935 1,172 5,958 3,164
------------ ------------ ------------ ------------
LOSS BEFORE OTHER
(INCOME) EXPENSES (2,245) (584) (3,732) (1,212)
OTHER (INCOME) EXPENSES (212) 45 (117) 45
------------ ------------ ------------- ------------
NET LOSS $ (2,033) $ (629) $ (3,615) $ (1,257)
============ ============ ============ ============
LOSS PER SHARE-BASIC $ (0.16) $ (0.11) $ (0.34) $ (0.32)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING(1) 12,668,960 5,626,168 10,717,174 3,937,932
============ ============ ============ ===========
</TABLE>
------------------
(1) Includes 5,773,605 exchangeable shares of SoftQuad Acquisition Corp. See
Note 3.
See Notes to Condensed Consolidated Financial Statements.
2
<PAGE>
SOFTQUAD SOFTWARE, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
June 30, 2000 June 30, 1999
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (3,615) $ (1,257)
Adjustments to reconcile net loss to net cash used for operating activities
Compensation recorded on stock options 113 --
Amortization of capital assets 134 45
Amortization of goodwill 11 --
Amortization of deferred financing costs 54 --
------------- -----------
(3,303) (1,212)
Changes in non-cash operating working capital items
Accounts receivable (145) (198)
Inventory (52) 63
Prepaid expenses and deposits (330) (53)
Accounts payable and accrued liabilities 1,529 136
Deferred revenue 58 1
------------- -----------
Net cash used in operating activities (2,243) (1,263)
------------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES
Purchase of capital assets (676) --
------------- -----------
Net cash used in investing activities (676) --
------------- -----------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Issuance of share capital 22,631 1,750
Repayment of notes payable (797) 98
-------------- -----------
Net cash provided by financing activities 21,834 1,848
------------- -----------
FOREIGN EXCHANGE 17 (53)
------------- -----------
NET CASH INFLOW 18,932 532
CASH POSITION, BEGINNING OF PERIOD 727 --
------------- -----------
CASH POSITION, END OF PERIOD $ 19,659 $ 532
============= ===========
CASH INCLUDES THE FOLLOWING:
Cash $ 786 $ 532
Short-term deposits 18,873 --
------------- -----------
$ 19,659 $ 532
============= ===========
SUPPLEMENTARY FINANCIAL INFORMATION
Interest paid $ 30 $ --
Interest received $ 231 $ --
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
SOFTQUAD SOFTWARE, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 and 1999
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
SoftQuad Software, Ltd. (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the guidelines set forth by the Securities and Exchange Commission for
quarterly reporting on Form 10-QSB and Item 310 of Regulation S-B. Accordingly,
they do not include all the information and footnotes required by generally
accepted accounting principles for complete financial statements. The financial
statements include the accounts of the Company and its wholly owned
subsidiaries. All material intercompany accounts and transactions have been
eliminated in consolidation. All dollar amounts are in U.S. dollars.
The Company's current corporate structure is the result of a series of
transactions among various entities and persons through which the former
shareholders of the Company's operating subsidiary, SoftQuad Software Inc.
("SoftQuad Canada"), and the former shareholders of a corporation that had been
formed to facilitate certain financings of SoftQuad Canada ("FinanceCo"),
acquired control of the Company. These transactions are summarized in
Management's Discussion and Analysis under "Our History and Corporate
Structure."
In brief, on January 17, 2000, the former shareholders of SoftQuad Canada
irrevocably agreed to tender their shares for securities exchangeable for shares
of FinanceCo. Although this share tender was not formally completed until April
5, 2000, it has been deemed effective for financial accounting purposes as of
January 17, 2000, the date on which it became irrevocable by the shareholders.
On March 2, 2000, FinanceCo merged with the Company. Upon consummation of the
merger, for financial accounting purposes, the former shareholders of SoftQuad
Canada and the former shareholders of FinanceCo owned approximately 91% of the
common stock of the Company (on a fully diluted basis) and, accordingly, the
merger is accounted for as a reverse takeover transaction.
As a result of the application of reverse takeover accounting:
i. the condensed consolidated financial statements of the combined
entity (including statements of shareholders' equity) are issued
under the name of the Company, but are considered a continuation of
the financial statements (and statements of shareholders' equity) of
FinanceCo and its consolidated subsidiaries, SoftQuad Acquisition
Corp. ("SAC") and SoftQuad Canada (the operating company); and
ii. the assets and liabilities in the condensed consolidated
financial statements are included at their historical carrying
values.
In the opinion of management, the financial statements and the related
notes included herein present fairly, in all material respects, the financial
position and quarterly results of operations of the Company and its wholly owned
subsidiaries as at and for the three and nine month periods ended June 30, 2000.
The stated financial position and quarterly results of operations are not
necessarily indicative of expected results for future periods.
NOTE 2. REVENUE RECOGNITION
In fiscal 2000, The Company adopted Statement of Position (98-9)
"Modifications of SOP 97-2, Software Revenue Recognition, with respect to
Certain Transactions" ("SOP 98-9"). The Company believes that the adoption of
SOP 98-9 does not have a significant impact on the Company's results of
operations.
Revenue from software products and licenses is generally recognized upon
shipment if an agreement exists with a fixed or determinable fee, provided
collection is determined to be probable and no significant obligations remain.
The Company provides for estimated future returns at the time the related
revenue is recorded.
Revenue from support and software maintenance agreements is initially
recorded as deferred revenue and recognized as revenue over the term of the
agreement. The related expenses are expensed as incurred.
4
<PAGE>
NOTE 3. SHAREHOLDERS' EQUITY
The Company's authorized capital stock consists of 50,000,000 shares of
common stock, $0.001 par value per share, 25,000,000 shares of preferred stock,
$0.001 par value per share, and one share of special voting stock, $0.001 par
value.
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
As of August 10, 2000, there were 12,473,472 shares of common stock
issued and outstanding, including 5,773,605 shares reserved for issuance upon
the exchange of exchangeable shares of the Company's subsidiary, Softquad
Acquisition Corp. ("SAC"), which are described below.
The holders of common stock are entitled to one vote per share on all
matters to be voted on by the stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of common stock are
entitled to receive ratably such dividends, if any, as may be declared from time
to time by the Board of Directors out of funds legally available therefore. 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.
PREFERRED STOCK
As of August 10, 2000, there were 1,473,405 shares of Class A preferred
stock and 1,722,222 shares of Class B preferred stock issued and outstanding.
The shares of Class A preferred stock and Class B preferred stock are
convertible at any time at the option of the holder, on a one-for-one basis, for
shares of common stock. The number of shares of common stock into which Class A
preferred stock and Class B preferred stock is convertible is subject to
adjustment or modification in the event of a stock split or other change to 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 preferred stock and Class B preferred stock are entitled
to the number of votes per share equal to the number of share of common stock
into which such preferred stock is convertible on all matters to be voted on by
the stockholders. With respect to dividends, Class A preferred stock and Class B
preferred stock rank equally with each other and the common stock. With respect
to distributions upon liquidation, the holders of Class A preferred stock and
Class B preferred stock are entitled to receive an initial preferred
distribution before any payment is made in respect of share of common stock of
$1.3574 and $2.9032 per share, respectively.
SPECIAL VOTING STOCK
As of August 10, 2000, the one authorized share of special voting stock
has been issued to Montreal Trust Company of Canada in its capacity as trustee
for the benefit of holders of exchangeable shares of SAC. The special voting
share is the vehicle through which holders of exchangeable shares are able to
exercise their voting rights, as described below under "Exchangeable Shares of
SoftQuad Acquisition Corp." The special voting stock has attached to it a number
of votes equal to the number of exchangeable shares outstanding from time to
time (other than exchangeable shares held by the Company or its affiliates),
which votes may be cast at any meeting at which common stockholders are entitled
to vote. When all exchangeable shares are held by the Company or its affiliates
(as a consequence of their redemption or repurchase), the special voting share
will be cancelled.
EXCHANGEABLE SHARES OF SAC
As of August 10, 2000, there were 5,773,605 exchangeable shares of SAC
(the Company's subsidiary) issued and outstanding. The exchangeable shares were
issued to certain Canadian shareholders of SoftQuad Canada in exchange for their
shares of SoftQuad Canada in connection with the acquisition by the Company of
all of the outstanding shares of SoftQuad Canada. The exchangeable shares have
economic and voting rights functionally equivalent to shares of the Company's
common stock, and were issued to Canadian shareholders in lieu of shares of the
Company's common stock because of Canadian tax considerations.
5
<PAGE>
The exchangeable shares are exchangeable at any time at the option of the
holder, on a one-for-one basis, for shares of the Company's common stock. The
Company has entered into the voting and exchange trust agreement with respect to
the exchangeable shares with SAC and Montreal Trust Company of Canada, as
trustee for the exchangeable shareholders. By furnishing instructions to the
trustee under the voting and exchangeable trust agreement, holders of the
exchangeable shares are able to exercise essentially the same voting rights as
they would have if they had exchanged their exchangeable shares for shares of
the Company's common stock. Holders of exchangeable shares are also entitled to
receive from SAC dividends payable in Canadian dollars that are economically
equivalent to any cash dividends paid by the Company on the common stock. The
exchangeable shares are subject to adjustment or modification in the event of a
stock split or other change to the Company's capital structure so as to maintain
the initial one-to-one relationship between the exchangeable shares and the
common stock.
Pursuant to the support agreement between the Company and SAC, the Company
made the following covenants for so long as any exchangeable shares (other than
exchangeable shares owned by the Company or its affiliates) remain outstanding:
o the Company will not declare or pay dividends on its common stock
unless SAC is able to declare and pay and simultaneously declares and
pays an equivalent dividend on the exchangeable shares;
o the Company will advise SAC in advance of the declaration of any
dividend on its common stock and ensure that the declaration date,
record date and payment date for dividends on the exchangeable shares
are the same as those for the corresponding dividend on its common
stock;
o the Company will ensure that the record date for any dividend declared
on its common stock is not less than ten business days after the
declaration date of such dividend; and
o the Company will take all actions and do all things reasonably
necessary or desirable to enable and permit SAC, in accordance with
applicable law, to pay to the holders of the exchangeable shares the
applicable amounts in the event of a liquidation, dissolution or
winding-up of SAC, a retraction request by a holder of exchangeable
shares or a redemption of exchangeable shares by SAC.
The exchangeable share structure support agreement provides that, without
the prior approval of SAC and the holders of the exchangeable shares, the
Company will not issue or distribute additional common stock, securities
exchangeable for or convertible into or carrying rights to acquire common stock,
rights, options or warrants to subscribe therefor, evidences of indebtedness or
other assets, to all or substantially all holders of common stock, nor shall the
Company change the common stock, unless the same or an economically equivalent
distribution on or change to the exchangeable shares (or in the rights of the
holders thereof) is made simultaneously. The board of directors of SAC is
conclusively empowered to determine in good faith and in its sole discretion
whether any corresponding distribution on or change to the exchangeable shares
is the same as or economically equivalent to any proposed distribution on or
change to the common stock.
OPTIONS
As of August 10, 2000, there were options outstanding to purchase
4,223,700 shares of common stock with a weighted average exercise price per
share of $2.0615
SPECIAL WARRANTS
As of August 10, 2000, 2,951,420 special warrants were outstanding, all of
which were held by Canadian residents. Each special warrant entitles the holder
thereof to acquire one share of common stock for no additional consideration.
The special warrants expire on the fifth business day following the date of
effectiveness in the holder's province of residence of a prospectus qualifying
the exercise of the special warrants into 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.
6
<PAGE>
WARRANTS
As of August 10, 2000, there were warrants outstanding to purchase
3,095,559 shares of common stock with a weighted average purchase price per
share of $5.769. Warrants to purchase 663,033 shares expire on December 16,
2002, warrants to purchase 1,141,688 shares expire on February 28, 2003 and
warrants to purchase 1,290,838 shares expire on the second anniversary of the
effective date of the registration statement covering the shares underlying
these warrants
7
<PAGE>
SHAREHOLDERS' EQUITY TABLES
(a) Change in Shareholders' Equity
The following two tables summarize the changes in shareholders' equity as
at June 30, 2000:
Changes in Shareholders' Equity By Number of Shares
---------------------------------------------------
(unaudited)
<TABLE>
<CAPTION>
Shares
Shares Subject to Shares
Preferred Subject to Special Subject to
Date Common Stock Stock Warrants Warrants Options Total
--- ------------ ----- -------- -------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1999 8,993,890 -- -- -- 1,356,000 10,349,890
Issuances on:
December 9, 1999 215,385 -- -- -- -- 215,385
December 16, 1999 736,702 1,473,405 663,033 -- -- 2,873,140
February 28, 2000 -- 1,722,222 1,041,668 -- 2,032,500 4,796,390
February 29, 2000 -- -- 100,000 1,000,000 -- 1,100,000
March 1, 2000 -- -- -- -- 489,000 489,000
Shares resulting from merger on March 2, 2,200,000 -- -- -- 2,200,000
2000
April 18/20, 2000 200,010 -- 1,268,478 1,906,660 3,375,148
May 29, 2000 127,485 -- -- -- 127,485
June 1, 2000 -- -- -- -- 199,100 199,100
June 5, 2000 -- -- 22,380 44,760 -- 67,140
Forfeited -- -- -- -- (76,500) (76,500)
---------- --------- --------- --------- --------- ----------
Balance at June 30, 2000 12,473,472 3,195,627 3,095,559 2,951,420 4,000,100 25,716,178
========== ========= ========= ========= ========= ==========
</TABLE>
Changes in Shareholders' Equity By Value
----------------------------------------
(unaudited)
<TABLE>
<CAPTION>
Shares
Shares Subject to
Common Preferred Subject to Special Additional
Date Stock Stock Warrants Warrants Paid-In-Capita Total
---- ----- ----- -------- -------- -------------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1999 $ 3,114,074 $ -- $ -- $ -- $ -- $ 3,114,074
Issuances on
December 9, 1999 95,807 -- -- -- -- 95,807
December 16, 1999 736 1,473 271,000 -- 2,726,791 3,000,000
February 28, 2000 -- 1,722 281,000 -- 4,717,278 5,000,000
February 29, 2000 -- -- 27,000 2,473,000 -- 2,500,000
Shares resulting from merger on March 2, 140 -- -- -- 45,860 46,000
2000
April 18/20, 2000 200 -- 3,549,000 11,955,950 294,875 15,800,025
May 29, 2000 127 -- -- -- 217,569 217,696
June 5, 2000 -- 50,000 285,700 -- 335,700
---------- ------- ----------- ----------- ----------- -----------
3,211,084 3,195 4,178,000 14,714,650 8,002,373 30,109,302
Compensation 446,000 -- -- -- -- 446,000
Shares Issuance Costs (213,269) -- (197,866) (1,404,464) (2,459,618) (4,275,217)
---------- ------- ----------- ----------- ----------- -----------
Balance at June 30, 2000 $3,443,815 $ 3,195 $ 3,980,134 $13,310,186 $ 5,542,755 $26,280,085
========== ======= =========== =========== =========== ===========
</TABLE>
8
<PAGE>
(b) Stock Options
The following tables summarize the status of stock options outstanding as
June 30, 2000:
<TABLE>
<CAPTION>
Summary of Stock Options
------------------------
(unaudited)
Number of
Weighted Shares
Average Subject to
Exercise Price Options
-------------- -------
<S> <C> <C>
Balance October 1, 1999 $ 0.0057 1,356,000
Forfeited $ 0.9167 (76,500)
Granted $ 2.6536 2,720,600
Exercised -- --
---------
Balance June 30, 2000 4,000,100
=========
Weighted average fair value of options granted $ 1.7522
=========
</TABLE>
<TABLE>
Outstanding Options
-------------------
(unaudited)
-----------
<CAPTION>
Remaining Number of Shares Number of Shares Subject
Exercise Price Calculated Life in Years Subject to Options to Exercisable Options
-------------- ------------------------ ------------------ ----------------------
<S> <C> <C> <C>
$ 0.0013 9.0 1,050,000 420,000
$ 0.2310 9.0 274,500 --
$ 0.0066 10.0 500,000 --
$ 1.4400 10.0 1,542,500 --
$ 7.5000 10.0 633,100 --
--------- -------
Total 4,000,100 420,000
========= =======
</TABLE>
9
<PAGE>
(c) Warrants and Special Warrants
The following tables summarize warrants and special warrants outstanding
as at June 30, 2000:
<TABLE>
<CAPTION>
Warrants
--------
(unaudited)
Number of
Shares Subject
to Warrants Value
----------- -----
<S> <C> <C>
Outstanding warrants to purchase shares of common stock at
$1.44 per share, expiring December 10, 2002 663,033 $271,000
Outstanding warrants to purchase shares of common stock at
$1.53 per share, expiring February 28, 2003 1,041,668 281,000
Outstanding warrants to purchase shares of common stock at
$2.50 per share, expiring February 29, 2003 100,000 27,000
Outstanding warrants to purchase shares of common stock at $7.50 per share,
expiring on the second anniversary of the effective date of a registration
statement covering the
underlying shares 215,143 1,205,000
Outstanding warrants to purchase shares of common stock at $12.50 per share,
expiring on the second anniversary of the effective date of a registration
covering the underlying
shares 1,075,715 2,394,000
--------- ----------
3,095,559 4,178,000
Cost of Issuance -- (197,866)
--------- ----------
Total 3,095,559 $3,980,134
========= ==========
</TABLE>
<TABLE>
<CAPTION>
Special Warrants
----------------
(unaudited)
Number of Shares
Subject to
Special Warrants Value
---------------- -----
<S> <C> <C>
Outstanding special warrants to acquire shares of common
stock 2,951,420 $14,714,650
Cost of Issuance -- (1,404,464)
--------- -----------
Total 2,951,420 $13,310,186
========= ===========
</TABLE>
10
<PAGE>
NOTE 4. LOSS PER SHARE
Basic loss per share is based on the weighted effect of all shares of
common stock issued and outstanding and is calculated by dividing net loss
available to common stockholders by the weighted average shares outstanding
during the period. Diluted loss per share has not been presented because the
effect of the assumed exercise or conversion of the Company's convertible
preferred stock, and options and warrants to purchase common stock, is
antidilutive due to the Company's net loss for the indicated period. Diluted
loss per share is calculated by dividing net loss available to common
stockholders by the weighted average number of shares of common stock used in
the basic net loss per share calculation plus the number of shares of common
stock that would be issued assuming conversion of all potentially dilutive
derivative securities outstanding.
The following table presents the calculation of basic loss per share of
common stock (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
June 30, 2000 June 30, 1999
------------- -------------
(unaudited) (unaudited)
<S> <C> <C>
Historical:
Net loss applicable to common stockholders $ (2,033) $ (629)
Weighted average shares 12,669(1) 5,626
Basic loss per share ($0.16) ($0.11)
-------------------
(1) Includes 5,773,605 exchangeable shares of SAC.
</TABLE>
NOTE 5. OTHER COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Other Comprehensive Income
--------------------------
(unaudited)
<S> <C>
Balance at December 31, 1999 $ 70,405
Foreign currency translation (22,563)
--------------
Balance at June 30, 2000 $ 47,842
==============
Balance at December 31, 1998 $ 150,297
Foreign currency translation 32,534
--------------
Balance at June 30, 1999 $ 182,831
==============
</TABLE>
NOTE 6. RECENT PRONOUNCEMENTS
The Company will be required to adopt the recently issued accounting
standard SFAS 133 "Accounting for Derivative Instruments and Hedging Activities"
for reporting purposes in future years. It requires that all derivatives be
recognized as either assets or liabilities and measured at fair value. The
criteria for determining whether all or a portion of a derivative instrument may
be designated as a hedge has changed. Derivatives that are fair market value
hedges, together with the financial instrument being hedged, will be marked to
market with adjustments reflected in income. Derivatives, which are cash flow
hedges will be marked to market with adjustments, reflected in comprehensive
income. The Company has not yet determined what effects, if any, the adoption of
SFAS 133 will have on the Company's operating results or financial position.
11
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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 Bulleting 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, which was previously deferred by
Staff Accounting Bulletin No. 101A "Amendment: Revenue Recognition in Financial
Statements". 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 resulted 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. Although, the Company has not fully assessed
the implications of SAB 101, management does not believe the adoption of this
statement will have a significant impact on the Company's consolidated financial
position, results of operations or cash flows.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
our condensed consolidated financial statements and notes thereto as at and for
the three months ended June 30, 2000 and 1999 contained elsewhere in this
quarterly report on form 10-QSB. In this report, "we," "us" and "our" refer to
the business that is owned and conducted by SoftQuad Software, Ltd. and its
subsidiaries and that was previously owned and conducted by their predecessors.
This quarterly report on Form 10-QSB contains certain "forward-looking
statements" as defined in the Private Securities Litigation Reform Act of 1995,
including statements regarding, among other things, our business and operating
strategy, operations, economic performance and financial condition. When used in
this report, the words "estimate," "project," "believe," "anticipate," "intend,"
"expect," "plan" and similar expressions identify forward-looking statements.
These forward-looking statements reflect our current views with respect to
future events and are subject to risks and uncertainties that could cause actual
results to differ materially from those contemplated in these forward-looking
statements, including those risks discussed in this report under "Risk Factors."
OVERVIEW
SoftQuad'r' 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 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 (which we plan to release 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 significant 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 product sales, license fees and maintenance
and support contracts. We have not yet realized any revenue from product
solution services. Product solution services include integration of software,
application development, training and software installation. We expect to begin
to generate revenue from product solution services in the next six months as the
mix of product sales changes from HoTMetal to XMetaL and MarketAgility. We
recognize revenues from product and license agreements on product delivery if an
agreement exists with a fixed or determinable fee and collection of the related
receivable is reasonably assured. Service revenue consists of fees for product
solution services and from maintenance and support agreements. Revenue from
maintenance and support agreements is initially recorded as deferred revenue and
recognized as revenue over the term of the agreement. Our cost of revenues
includes costs to manufacture, package, and distribute our products and related
documentation, royalty payments to third parties, payments to vendors and
inventory write-downs, as well as personnel and other expenses, if any, related
to providing product solution services and customer support services.
Since our inception, we have incurred substantial costs to develop our
technology and products, to recruit and train personnel for our development,
sales and marketing and product solution services departments, and to establish
an administrative organization. As a result, we have incurred significant losses
since inception. As of June 30, 2000, we had an accumulated deficit of
approximately $6.7 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 substantial 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:
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o SoftQuad Software Inc., our Ontario operating subsidiary, for the
fiscal year ended September 30, 1999 and for the nine months ended June
30, 1999 and 2000; and
o the Web division of a subsidiary of NewKidCo International Inc. for the
nine-month period ended September 30, 1998 and the calendar year ended
December 31, 1997.
OUR HISTORY AND CORPORATE STRUCTURE
COMMENCEMENT OF OUR BUSINESS
We commenced our business in 1986 under the name SoftQuad Inc. During the
1980s, we developed software products based on SGML (Standard Generalized Markup
Language), the predecessor of XML. In 1992, SoftQuad Inc. was acquired by
SoftQuad International Inc. (now renamed NewKidCo International Inc.), which is
a publicly-traded company listed on the Toronto Stock Exchange. During the early
1990s, we began to focus on HTML-based software, culminating with the launch in
1993 of HoTMetaL. In 1996, members of our management identified a need for a
more versatile language than HTML and began to work, together with
representatives of other technology companies, on developing XML.
ESTABLISHMENT OF SOFTQUAD CANADA
In August 1998, certain members of our management organized a management
buyout of substantially all of the assets and liabilities of SoftQuad Inc. and
100% of the shares of SoftQuad UK Limited, which was SoftQuad International
Inc.'s European subsidiary. To facilitate the buyout, on August 7, 1998, they
established SoftQuad Software Inc., an Ontario (Canada) corporation ("SoftQuad
Canada"). SoftQuad Canada completed the buyout on October 1, 1998. The assets
acquired in the buyout included, among other things, the rights to the name
"SoftQuad." In May 1999, we launched XMetaL.
ESTABLISHMENT OF FINANCECO
In December 1999, a Toronto-based investment dealer agreed to act as agent
in facilitating private placement financings of SoftQuad Canada. Pursuant to
this agreement, money was first funded by investors to a new Delaware
corporation formed to facilitate the financings ("FinanceCo") in exchange for
FinanceCo stock and warrants. As of January 17, 2000, FinanceCo entered into
agreements with the 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 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.
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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. All of the common shares of
SoftQuad Canada are owned by SAC, and all of the common shares of SAC are owned
by SoftQuad Software, Ltd.
RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999
REVENUE
Total revenue increased from $707 thousand in the three months ended June
30, 1999 to $915 thousand in the three months ended June 30, 2000, representing
a 29% increase in revenue. This increase is attributable to an increase in
license, support and maintenance fee revenues from XMetaL (which was initially
launched in May 1999) which was partially offset by a decrease in HoTMetaL's
product license revenue. For the three months ended June 30, 2000, revenue
generated from XMetaL and HoTMetaL was 45% and 55% respectively, compared with
11% and 89% respectively in the third quarter of fiscal 1999. We expect
HoTMetaL's produce license revenues, both in absolute dollars and their
proportionate share of total revenues, to decline over the next several
quarters.
We categorize our geographic information into two major market regions:
the Americas and Europe. In the third quarter of fiscal 2000, revenue generated
from the Americas and Europe was 55% and 45%, respectively, compared with 70%
and 30% for the third quarter of fiscal 1999.
COST OF REVENUES
Cost of revenues increased from $119 thousand for the three months ended
June 30, 1999 to $225 thousand for the three months ended June 30, 2000,
reflecting higher costs associated with product solution services and customer
support services. For the three months ended June 30, 1999, cost of revenues
represented primarily HoTMetaL production costs which were decreasing during the
period in anticipation of the release of a new version. We expect cost of
revenues to increase as we continue to invest in product solution services and
customer support services by hiring and training new personnel in anticipation
of service revenue associated with XMetaL and MarketAgility.
SALES AND MARKETING
Sales and marketing expenses increased from $645 thousand in the three
months ended June 30, 1999 to $1.6 million for the three months ended June 30,
2000. The increase is primarily attributable to an increase in sales and
marketing personnel and the increased marketing program expenditures associated
with XMetaL. In the three months ended June 30, 2000, we increased our headcount
by 14 sales and marketing personnel. We expect sales and marketing spending will
increase in absolute dollars as we continue to increase our presence in the
e-commerce markets.
RESEARCH AND DEVELOPMENT
Research and development expenses increased from $284 thousand in the
three months ended June 30, 1999 to $628 thousand for the three months ended
June 30, 2000. The increase is primarily attributable to an increase in
personnel related costs largely related to the development of our XMetaL and
MarketAgility products. For the three months ended June 30, 2000, we increased
our headcount by 4 research and development personnel.
We believe that continued investment in research and development is
critical to attaining our strategic objectives and, as a result, we expect that
research and development expenses will increase in absolute dollars in future
periods. To date, all software development costs have been expensed in the
period incurred.
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GENERAL AND ADMINISTRATIVE
General and administrative expenses increased from $243 thousand in the
three months ended June 30, 1999 to $737 thousand for the three months ended
June 30, 2000. The increase is primarily attributable to increased personnel
related costs, costs of legal, accounting and other professional services, and
facility expenses necessary to support our expanding operations. In the three
months ended June 30, 2000, we increased our headcount by 4 general and
administrative personnel. We expect that general and administrative spending
will increase in absolute dollars to support ongoing administrative
infrastructure.
NET LOSS
Our net loss increased from $629 thousand or $0.11 per share for the three
months ended June 30, 1999 to $2.0 million or $0.16 per share for the three
months ended June 30, 2000, reflecting that our higher gross profit earned in
the three months ended June 30, 2000 was offset by higher operating expenses for
the same period. We expect to incur net losses for at least the next 18 months.
RESULTS OF OPERATIONS FOR NINE MONTHS ENDED JUNE 30, 2000 AND 1999
REVENUE
Total revenue increased to $2.9 million in the nine months ended June 30,
2000 from $2.4 million in the nine months ended June 30, 1999, representing a
21% increase in revenue. This increase is attributable to an increase in
license, support and maintenance fee revenues from XMetaL (which was initially
launched in May 1999) which was partially offset by a decrease in HoTMetaL's
product license revenue. For the nine months ended June 30, 2000, revenue
generated from XMetaL and HoTMetaL was 41% and 59% respectively compared with
18% and 82% of revenue generated from HoTMetaL in the third quarter of fiscal
1999.
We categorize our geographic information into two major market regions:
the Americas and Europe. In the nine month period ended June 30, 2000, revenue
generated from the Americas and Europe was 58% and 42%, respectively, compared
with 70% and 30% in the nine month period ended June 30, 1999.
COST OF REVENUES
Cost of revenues increased from $458 thousand for the nine months ended
June 30, 1999 to $664 thousand for the nine months ended June 30, 2000,
reflecting higher costs associated with product solution services and customer
support services. For the nine months ended June 30, 1999, cost of revenues
represented primarily HoTMetaL production costs that were decreasing during the
period in anticipation of the release of a new version. We expect cost of
revenues to increase as we continue to invest in product solution services and
customer support services by hiring and training new personnel in anticipation
of service revenue associated with XMetaL and MarketAgility.
SALES AND MARKETING
Sales and marketing expenses increased from $1.5 million in the nine
months ended June 30, 1999 to $3.1 million for the nine months ended June 30,
2000. The increase is primarily attributable to an increase in sales and
marketing personnel and the increased marketing program expenditures associated
with XMetaL.
RESEARCH AND DEVELOPMENT
Research and development expenses increased from $776 thousand to $1.3
million for the nine months ended June 30, 1999 and June 30, 2000. Research and
development costs have continued to increase due to increases in personnel
related costs largely related to the development of our XMetaL and MarketAgility
products.
We expect to increase research and development expenses in absolute
dollars in future periods because we believe 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.
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GENERAL AND ADMINISTRATIVE
General and administrative expenses increased from $859 thousand in the
nine months ended June 30, 1999 to $1.6 million for the nine months ended June
30, 2000. The increase is primarily attributable to increased personnel related
costs, legal, accounting and other professional services, and facility expenses
necessary to support our expanding operations.
NET LOSS
Our net loss increased from $1.3 million or $0.32 per share for the nine
months ended June 30, 1999 to $3.6 million or $0.34 per share for the nine
months ended June 30, 2000, reflecting our lower gross profit earned in the nine
months ended June 30, 2000 coupled with higher operating expenses for the same
period. We expect to incur net losses for the foreseeable future.
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 June 2000, we raised approximately $22.6 million in
net proceeds from equity financings in order to expand our sales and marketing
and product development efforts and support our administrative infrastructure.
For the nine months ended June 30, 2000 and 1999, net cash used for
operating activities was $2.2 million and $1.3 million respectively. For the
nine months ended June 30, 2000 and 1999 respectively, the increase in cash used
for operating activities was primarily due to net loss of $3.6 million and $1.3
million respectively, offset by changes in operating working capital.
Net cash used in investing activities was $676 thousand and $nil for the
nine months ended June 30, 2000 and 1999, respectively. Cash used in investing
activities for the nine months ended June 30, 2000 related to the purchase of
capital assets, mainly computer hardware and software. At June 30, 2000, we did
not have any material commitments for capital expenditures.
Net cash provided by financing activities amounted to $21.8 million and
$1.8 million for the nine months ended June 30, 2000 and 1999, respectively.
During the nine months ended June 30, 2000, net proceeds of $22.6 million were
provided by the sale of equity to certain institutional and venture capital
investors. We repaid a note payable of $797 thousand.
At June 30, 2000, we had $19.7 million in cash and cash equivalents and
working capital of $18.5 million. This compares to $532 thousand in cash and
cash equivalents and working capital of $463 thousand as of June 30,1999.
We do not have a line of credit for general operating expenses. We do have
equipment lines of credit from vendors for certain office equipment. At June 30,
2000, we had no notes or loans payable outstanding.
We believe that we have sufficient cash, cash equivalents and short-term
investments to meet our working capital requirements for at least the next 20
months. Thereafter, additional funds may be required to support our working
capital requirements or for other purposes. We may seek to raise such additional
funds through public or private equity or debt financings or from other sources.
There can be no assurance that additional financing will be available at all or,
if available, on terms favorable to us or that any additional financing will not
be dilutive.
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RISK FACTORS
You should carefully consider the following risks before investing in
shares of our common stock. The risks described below are not the only ones that
we face. Additional risks that we do not yet know of or that we currently think
are immaterial may also impair our business operations. Our business, operating
results or financial condition could be materially adversely affected by any of
the following risks. The trading price of our common stock could decline due to
any of these risks, and you may lose all or part of your investment. You should
also refer to the other information contained in this report, including our
financial statements and the related notes.
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. 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, which we plan to release in September 2000, 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. Target
markets, sales, marketing and distribution models for HoTMetaL are quite
different from the XMetaL and MarketAgility products and we will require
different skills and business practices to market and support the XMetaL and
MarketAgility products. Consequently, the transition from the HTML product focus
to the XML product focus may be difficult to manage, and our business, operating
results and financial condition could be materially adversely affected.
RELIANCE ON DISTRIBUTION CHANNELS AND TECHNOLOGY PARTNERS MAY AFFECT SALES
BECAUSE WE LACK CONTROL OVER THESE CHANNELS
We rely on reseller, distribution and technology partners to support our
own selling efforts. Some of these partners must have the expertise required to
work with XML. Because XML is a relatively new technology, expertise is not
widespread. If these partners fail to develop, do not acquire appropriate XML
expertise or otherwise fail to adequately support our products, our business,
operating results and financial condition could be materially adversely
affected.
IF WE ARE UNABLE TO MEET THE RAPID CHANGES IN XML CONTENT CREATION
TECHNOLOGY OR A SUPERIOR OR MORE WIDELY ACCEPTED TECHNOLOGY IS DEVELOPED,
OUR EXISTING PRODUCTS COULD BECOME OBSOLETE
The market for our products is marked by rapid technological change,
frequent product introductions and Internet-related technology enhancements,
uncertain product life cycles, dynamic changes in client demands and constantly
evolving industry standards. We cannot be certain that we will successfully
develop and market new products or new product enhancements that respond to
technological change, evolving industry standards or client requirements.
Competing products based on new technologies or new industry standards could
render our existing products obsolete and unmarketable. To succeed, we will need
to enhance our current products and develop new products on a timely basis.
E-commerce technology, particularly XML content creation technology, is complex,
and new products and product enhancements can require long development and
testing periods. If we do not develop 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.
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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 vendors such
as Microsoft's FrontPage, Macromedia's Dreamweaver and Adobe's GoLive. Most of
our competitors have longer operating histories and significantly greater
financial, technical, marketing and other resources than we do. Many of these
companies can also leverage extensive customer bases and adopt aggressive
pricing policies to gain market share. Potential competitors (which may develop
products with features similar to XMetaL and MarketAgility), such as Adobe,
Macromedia and Microsoft, may bundle or price their products in a manner that
may discourage users from purchasing our products. In addition, it is possible
that new competitors or alliances among competitors may emerge and rapidly
acquire significant market share. There are no significant barriers to entering
the markets which XMetaL, MarketAgility and HoTMetaL serve.
Competitive pressures may make it difficult for us to acquire and retain
customers and may require us to reduce the price of our software. We cannot be
certain that we will be able to compete successfully with current or future
competitors. If we fail to compete successfully against current or future
competitors, our business, operating results and financial condition could be
materially adversely affected.
WE HAVE INCURRED AND EXPECT TO CONTINUE TO INCUR LOSSES
We have not achieved profitability and we expect to incur net losses for
at least the next 18 months. To date, we have funded our operations primarily
from the sale of equity and debt securities and borrowings. We incurred losses
of $1.3 million and $3.6 million for the nine months ended June 30, 1999 and
2000, and $2.9 million, $1.3 million and $1.6 million for the year ended
December 31, 1997, the nine month period ended September 30, 1998 and the year
ended September 30, 1999, respectively. As of June 30, 2000, our losses have
resulted in an accumulated deficit of $6.7 million. We plan to increase our
operating expenses to expand our sales and marketing operations, develop new
distribution channels, fund greater levels of research and development, broaden
professional services and support and improve operational and financial systems.
As a result, we will need to generate significant revenues to achieve and
maintain profitability. If our revenues do not increase along with these
expenses, our net losses in a given quarter would be even greater than expected.
We cannot be certain that we can sustain revenue growth rates or that we will
achieve sufficient revenues for profitability. If we do achieve profitability,
we cannot be certain that we can sustain or increase profitability in the
future.
OUR OPERATING HISTORY MAKES FINANCIAL FORECASTING DIFFICULT
We began operations in 1986. However, from 1992 to 1998, we operated as
part of NewKidCo. In addition, we currently are transitioning our operations
from supporting HoTMetaL to supporting XMetaL and MarketAgility. As a result, it
is difficult for us to forecast operating expenses based on historical results.
Accordingly, we base our anticipated expenses in part on projected future
revenues. Most of our expenses are fixed in the short term and we may not be
able to quickly reduce spending if our revenues are lower than our projections.
If revenues do not meet our projections, our business, operating results and
financial condition could be materially adversely affected and net losses in any
period would be even greater than expected.
WE EXPECT OUR QUARTERLY REVENUES AND OPERATING RESULTS TO FLUCTUATE
Our revenues and operating results are likely to vary significantly from
quarter to quarter. A number of factors are likely to cause these variations,
including:
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;
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o The mix of product license and services revenue, as well as the mix of
products licensed;
o The mix of services provided and whether these services are provided by
staff or third party contractors; and
o The mix of domestic and international sales.
Accordingly, we believe that quarter-to-quarter comparisons of our
operating results are, and will continue for the foreseeable future to be, not
necessarily meaningful. You should not rely on the results of one quarter as an
indication of our future performance.
IN ORDER TO INCREASE MARKET AWARENESS OF OUR PRODUCTS AND GENERATE
INCREASED REVENUE WE NEED TO EXPAND OUR SALES AND DISTRIBUTION
CAPABILITIES
We must expand our direct and indirect sales operations in order to
increase market awareness of our products and generate increased revenue. We
cannot be certain that we will be successful in this effort. We have recently
expanded our direct sales force and plan to hire additional sales personnel. Our
products and services require a sophisticated sales effort targeted at the
senior management of our prospective clients. New employees require training and
take time to achieve full productivity. We cannot be certain that our new
employees will become as productive as necessary or that we will be able to hire
enough qualified individuals in the future. We also plan to expand our
relationships with value-added resellers, systems integrators and other
third-party resellers to build an indirect sales channel. In addition, we need
to manage potential conflicts between our direct sales force and third party
reselling efforts. Finally, XML expertise is often lacking in the value-added
resellers, systems integrators and third-party resellers. Because individuals
with XML expertise are in increasingly high demand, we cannot be certain that
partners will be successful in acquiring XML expertise, either through training
employees or by hiring experienced personnel.
WE HAVE RELIED AND EXPECT TO CONTINUE TO RELY ON HOTMETAL REVENUES
We have derived and will continue to derive significant portions of our
revenues from HoTMetaL. In recent quarters, worldwide HoTMetaL revenues have
declined and HoTMetaL has lost market share. Although we have planned for
HoTMetaL's absolute and proportionate share of total revenues to decline over
the next several quarters, if HoTMetaL revenues were to decline faster than
anticipated, our business, operating results and financial condition could be
materially adversely affected.
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
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products for local markets, develop relationships with international service
providers and establish relationships with additional distributors and third
party integrators. In that case, our business, operating results and financial
condition could be materially adversely affected. Even if we are able to
successfully expand international operations, we cannot be certain that we will
be able to maintain or increase international market demand for our products. In
addition, while our financial results are currently reported in U.S. dollars, a
significant portion of our sales are denominated in U.K. pounds sterling, the
Euro and other currencies. Significant long-term fluctuations in relative
currency values may adversely affect our consolidated results of operations. In
particular, our consolidated results of operations may be adversely affected by
a significant strengthening of the U.S. dollar against U.K. pounds sterling, the
Euro or other currencies in which we generate revenues. To date, we have not
engaged in any foreign exchange hedging transactions. We intend to consider
entering into foreign exchange hedging transactions in the future, if
appropriate.
WE MAY BE UNABLE TO ADEQUATELY DEVELOP A PROFITABLE PROFESSIONAL SERVICES
BUSINESS WHICH COULD AFFECT BOTH OUR RESULTS AND OUR ABILITY TO ASSIST OUR
CLIENTS WITH THE IMPLEMENTATION OF OUR PRODUCTS
We cannot be certain that we can attract or retain a sufficient number of
the highly qualified personnel that our services business needs. Clients that
license our XML software products may engage our professional services business
to assist with support, training, consulting and implementation. Growth in our
product sales therefore depends on our ability to provide our clients with these
services and to educate third-party resellers on how to use our products. As a
result, we plan to increase the number of service personnel to meet these needs.
We expect our services revenue to increase in absolute dollars as we continue to
provide consulting and training services that complement our products and as our
installed base of clients grows. We cannot be certain that our professional
services business will ever achieve profitability. We generally bill our clients
for our services on a "time and materials" basis. However, from time to time we
enter into fixed-price contracts for services. We cannot be certain that our
fees from these contracts will exceed the costs of providing the services. In
addition, competition for qualified services personnel is intense. We are in a
new market and there are a limited number of people who have the skills to
provide the services that our clients demand.
IN ORDER TO PROPERLY MANAGE GROWTH, WE NEED TO IMPLEMENT AND IMPROVE OUR
OPERATIONAL SYSTEMS ON A TIMELY BASIS
We have expanded our operations rapidly and we intend to continue to
expand in the foreseeable future to pursue existing and potential market
opportunities. This rapid growth places a significant demand on our management
and operational resources. In order to manage growth effectively and to execute
our business plan, we must implement and improve our operational systems,
procedures and controls on a timely basis. If we fail to implement and improve
these systems, our business, operating results and financial condition could be
materially adversely affected.
WE MAY BE ADVERSELY AFFECTED IF WE LOSE OUR EXECUTIVE OFFICERS AND CERTAIN
KEY PERSONNEL, OR ARE UNABLE TO ATTRACT NEW KEY PERSONNEL OR ARE UNABLE TO
ATTRACT AND RETAIN HIGHLY SKILLED PERSONNEL GENERALLY
Our success depends largely on the skills, experience and performance of
some key members of our management, including Roberto Drassinower, our President
and Chief Executive Officer, and Peter Sharpe, our Chief Scientist. If we lose
one or more of these key employees, our business, operating results and
financial condition could be materially adversely affected. Also, our future
success depends on our ability to continue attracting and retaining highly
skilled personnel. Like other software companies, we face intense competition
for qualified personnel, particularly in the areas of engineering and technology
as well as in sales and marketing. Many of our competitors for qualified
personnel have greater resources than we have. We cannot be certain that we will
be successful in attracting or retaining qualified personnel in the future.
WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS
We believe that we can fund our planned operations for at least the next
20 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.
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<PAGE>
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.
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 product 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 other's intellectual property. If a claim of
infringement of intellectual property rights was decided against us, we could be
required to:
o Cease selling, incorporating or using products or services that
incorporate the challenged intellectual property;
o Obtain from the holder of the infringed intellectual property right a
license to sell or use the relevant technology, which license may not
be available on reasonable terms; or
o Redesign those products or services that incorporate such technology.
ANTI-TAKEOVER PROVISIONS COULD INHIBIT THE ACQUISITION OF OUR COMPANY
Certain provisions of our certificate of incorporation and bylaws may
discourage, delay or prevent a merger or acquisition that stockholders may
consider favorable. These provisions include:
o Authorizing our board of directors to fix the rights and preferences of
and issue preferred stock;
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<PAGE>
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.
MATERIAL PROBLEMS AND COSTS ASSOCIATED WITH YEAR 2000 COMPLIANCE COULD
ADVERSELY AFFECT OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL
CONDITION.
The "Year 2000" issue is the result of computer programs using two digits
rather than four to define the applicable year. Because of this programming
convention, software products, IT and non IT systems may recognize a date using
"00" as the year 1900 rather than the year 2000. Use of non Year 2000 compliant
programs could result in system failures, miscalculations or errors causing
disruptions of operations or other business problems, including, among others, a
temporary inability to process transactions and invoices or engage in similar
normal business activities.
Although our products and our internal IT and non-IT systems did not, as of
August 10, 2000, seem to have any Year 2000 issues, we may experience material
problems and costs with Year 2000 compliance that could adversely affect our
business, results of operations and financial condition. In addition, while our
customers have not, as of August 10, 2000, informed us that they have
experienced any material Year 2000 compliance problems, they, as well as
potential customers, may face Year 2000 compliance problems in the future. This
may cause them to incur material costs to remedy problems or even face
litigation costs. In either case, Year 2000 issues could reduce or eliminate
funds that current or potential customers would otherwise use to purchase our
products and services. As a result, our business, results of operations or
financial condition could be materially adversely affected.
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.
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<PAGE>
OUR PERFORMANCE WILL DEPEND ON THE NEW MARKET FOR XML-BASED SOFTWARE
PRODUCTS AND E-MARKET INFRASTRUCTURE SOFTWARE SOLUTIONS
The market for XML-based software products and e-market infrastructure
software products is new and rapidly evolving. We expect that we will continue
to need intensive marketing and sales efforts to educate prospective customers
about the uses and benefits of our products and services. Accordingly, we cannot
be certain that a viable market for our products will emerge or be sustainable.
Enterprises that have already invested substantial resources in other methods of
conducting business may be reluctant or slow to adopt a new approach that may
replace, limit or compete with their existing systems. Similarly, individuals
have established patterns of purchasing goods and services and may be reluctant
to alter those patterns or to provide personal data in connection with
purchasing goods over the Internet. Any of these factors could inhibit the
growth of online business generally and the market's acceptance of our products
and services in particular.
LAWS AND REGULATIONS COULD EITHER DIRECTLY RESTRICT OUR BUSINESS OR
INDIRECTLY IMPACT OUR BUSINESS BY LIMITING THE GROWTH OF E-COMMERCE
Laws and regulations directly applicable to Internet communications,
commerce and advertising are becoming more prevalent, and new laws and
regulations are under consideration by the United States Congress and state
legislatures. Any legislation enacted 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 shareholders; and
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<PAGE>
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 YOU WILL NOT BE ABLE TO ACCURATELY ASSESS THE MARKET
VALUE OF OUR COMMON STOCK
While our stock trades over-the-counter and is quoted on the OTC Bulletin
Board, a relative lack of liquidity or volume and the participation of only a
few market makers makes it more likely that wide fluctuations in the quoted
price of our common stock could occur. As a result, there is a risk that you
will not be able to obtain accurate price quotes or be able to correctly assess
the market price of your stock. Increases in the volatility could also make it
more difficult to pledge the common stock as collateral, if you sought to do so,
because a lender might also be unable to accurately value the common stock.
SUBSTANTIAL SALES OF OUR COMMON STOCK COULD ADVERSELY AFFECT OUR STOCK
PRICE
Sales of a substantial number of shares of common stock by securityholders
in a registered offering (under registration statements filed pursuant to
registration rights agreements or otherwise), or pursuant to Rule 144 or other
exemptions from registration 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 MAY BECOME SUBJECT TO THE SECURITIES AND EXCHANGE COMMISSION'S PENNY
STOCK RULES
We may become subject to the SEC's penny stock rules. Penny stocks
generally are equity securities with a price of less than $5.00 per share (other
than securities registered on certain national securities exchanges or quoted on
Nasdaq, provided that current price and volume information with respect to
transactions in that security is provided by the exchange 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 the penny stock held in the
account and information on the limited market in penny stocks. Because of the
burden placed on broker-dealers to comply with the penny stocks rules, you may
have difficulty selling our common stock in the open market if the market price
drops below $5.00 per share.
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<PAGE>
PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
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 of 1933, as amended (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 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.
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 pursuant to Section 4(2) of the Securities Act.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------ -----------------------
<S> <C>
3.1(1) Restated Certificate of Incorporation of SoftQuad Software,
Ltd.
3.2* Restated Bylaws of SoftQuad Software, Ltd.
4.1(2) Support Agreement between SoftQuad Software, Ltd. and SoftQuad
Acquisition Corp., dated February, 2000
4.2* 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
4.3* 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
</TABLE>
26
<PAGE>
<TABLE>
<S> <C>
4.4* 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
4.5* 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
4.6* 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
4.7* 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
4.8* Agent's Warrant to Purchase Shares of Common Stock of SoftQuad
Software, Ltd. pursuant to the Special Warrant Purchase
Agreement dated, May 19, 2000
4.9* Special Warrant for Thomson Kernaghan & Co. Limited, as agent,
to Purchase Shares of Common Stock of SoftQuad Software, Ltd.,
dated February 29, 2000
4.10* 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
4.11* Warrant Indenture Agreement between SoftQuad Software, Ltd. and
Montreal Trust Company of Canada, dated April 18, 2000
4.12* Form of Subscription Agreement for Canadian Subscribers in April 18,
20 and June 5, 2000 private placements
4.13* Form of Subscription Agreement for American Subscribers in April 18,
20 and June 5, 2000 private placements
4.14* 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
4.15* 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
4.16* 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
4.17* Registration Rights Agreement between SoftQuad Software, Ltd.
and Small Caps Online LLC, for itself and as agent, dated April 18, 2000
4.18* Registration Rights Agreement between SoftQuad Software, Ltd.
and Thomson Kernaghan & Co. Limited, for itself and as agent,
dated April 18, 2000
9.1(2) 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* Asset and Share Purchase Agreement among 1308870 Ontario Inc.,
SoftQuad Inc. and SoftQuad International Inc., dated November
6, 1998
10.2* Acquisition Agreement among SoftQuad Software, Ltd., SoftQuad
Acquisition Corp. and SoftQuad Software Inc., dated December 16, 1999
10.3* Form of Option Holder Lock-Up Agreement, dated December 10, 1999
</TABLE>
27
<PAGE>
<TABLE>
<S> <C>
10.4* Form of Amended and Restated Escrow Agreement, dated December 16,
1999
10.5* Common Stock Purchase Agreement between SoftQuad Software, Ltd.
and VC Advantage Limited Partnership, dated December 8, 1999
10.6* Class A Convertible Preferred Stock Purchase Agreement between
SoftQuad Software, Ltd. and VC Advantage Limited Partnership,
dated December 9, 1999
10.7* VC Advantage Limited Partnership Class B Convertible Preferred
Stock Purchase Agreement, dated February 28, 2000
10.8* Hammock Group Ltd. Class B Convertible Preferred Stock Purchase
Agreement, dated February 28, 2000
10.9* Special Warrant Purchase Agremeent between SoftQuad Software,
Ltd. and Thomson Kernaghan & Co. Limited, as Agent, dated May
18, 2000
10.10* Engagement Letter Agreement between SoftQuad Software Inc. and
Thomson Kernaghan & Co. Limited, dated December 14, 1999
10.11* Engagement Letter Agreement between SoftQuad Software Inc. and
Thomson Kernaghan & Co. Limited, dated February 28, 2000
10.12(1) Plan and Agreement of Merger between The American Sports
Machine, Inc. and SoftQuad Software, Ltd., dated March 1, 2000
10.13(1) Agreement and Plan of Reporganization among the American
Sports Machine, Inc., SoftQuad Software, Ltd. and its Stockholders
dated March 1, 2000
10.14(3) Plan and Agreement of Merger between The American Sports
Machine, Inc. and SoftQuad Software, Ltd., dated March 9, 2000
10.15(2) Form of Share Purchase Agreement for acquistion of shares of
SoftQuad Software Inc.
10.16(2) Form of Option Exchange Agreement for acquisition of options of
SoftQuad Software Inc.
10.17* Form of Indemnification Agreement between Registrant and its
officers and directors
10.18* 2000 Stock Option Plan and Forms of Agreements thereunder
10.19* Advisory Services Agreement between SoftQuad Software Inc.
and KBL Capital Partners, Inc., dated April 9, 1999, amended
July 31, 1999
10.20* Agency Agreement between SoftQuad Software, Ltd. and Thomson
Kernaghan & Co. Limited, dated April 18, 2000
10.21* Agency Agreement between SoftQuad Software, Ltd. and SmallCaps
Online LLC, dated April, 2000
21 Subsidiaries of the Registrant
27* Financial Data Schedule
</TABLE>
------------------------------
* Filed herewith.
(1) Incorporated by reference to Exhibits to the Registrant's Current Report
on Form 8-K dated march 9, 2000.
(2) Incorporated by reference to Exhibits to the Registrant's Current Report
on Form 8-K dated April 21, 2000.
(3) Incorporated by reference to Exhibits to the Definitive Information
Statement on Schedule 14C dated March 21, 2000.
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<PAGE>
(b) Reports on form 8-K.
Report on form 8-K filed on April 10, 2000 reporting the election of
the officers and directors of SoftQuad Software, Ltd.
Report on form 8-K filed on April 20, 2000 reporting the completion of
the acquisition by SoftQuad Software Ltd. of all of the outstanding securities
of SoftQuad Software Inc. and issuance of a press release announcing the
redomiciling of SoftQuad Software, Ltd. to Delaware with a new trading symbol.
Amendment No.1 to Report on 8-K filed on April 20, 2000, filed on June
19, 2000, to include financial statements and pro forma financial information of
SoftQuad Software Inc.
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<PAGE>
SIGNATURES
----------
In accordance with the requirements of the Securities Exchange Act of
1934, as amended, the registrant has duly caused this report to be signed in its
behalf by the undersigned thereunto duly authorized.
SOFTQUAD SOFTWARE, LTD.
Date: August 14, 2000 By: /s/ Roberto Drassinower
-------------------------------------
Roberto Drassinower
President and Chief Executive Officer
Date: August 14, 2000 By: /s/ David T. Adams
-------------------------------------
David T. Adams
Chief Financial Officer and Treasurer
30
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------ -----------------------
<S> <C>
3.1(1) Restated Certificate of Incorporation of SoftQuad Software,
Ltd.
3.2* Restated Bylaws of SoftQuad Software, Ltd.
4.1(2) Support Agreement between SoftQuad Software, Ltd. and SoftQuad
Acquisition Corp., dated February, 2000
4.2* 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
4.3* 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
</TABLE>
31
<PAGE>
<TABLE>
<S> <C>
4.4* 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
4.5* 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
4.6* 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
4.7* 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
4.8* Agent's Warrant to Purchase Shares of Common Stock of SoftQuad
Software, Ltd. pursuant to the Special Warrant Purchase
Agreement dated, May 19, 2000
4.9* Special Warrant for Thomson Kernaghan & Co. Limited, as agent,
to Purchase Shares of Common Stock of SoftQuad Software, Ltd.,
dated February 29, 2000
4.10* 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
4.11* Warrant Indenture Agreement between SoftQuad Software, Ltd. and
Montreal Trust Company of Canada, dated April 18, 2000
4.12* Form of Subscription Agreement for Canadian Subscribers in
April 18, 20 and June 5, 2000 private placements
4.13* Form of Subscription Agreement for American Subscribers in
April 18, 20 and June 5, 2000 private placements
4.14* 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
4.15* 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
4.16* 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
4.17* Registration Rights Agreement between SoftQuad Software, Ltd.
and Small Caps Online LLC, for itself and as agent, dated April 18,
2000
4.18* Registration Rights Agreement between SoftQuad Software, Ltd.
and Thomson Kernaghan & Co. Limited, for itself and as agent,
dated April 18, 2000
9.1(2) 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* Asset and Share Purchase Agreement among 1308870 Ontario Inc.,
SoftQuad Inc. and SoftQuad International Inc., dated November
6, 1998
10.2* Acquisition Agreement among SoftQuad Software, Ltd., SoftQuad
Acquisition Corp. and SoftQuad Software Inc., dated December 16,
1999
10.3* Form of Option Holder Lock-Up Agreement, dated December 10, 1999
</TABLE>
32
<PAGE>
<TABLE>
<S> <C>
10.4* Form of Amended and Restated Escrow Agreement, dated December 16,
1999
10.5* Common Stock Purchase Agreement between SoftQuad Software, Ltd.
and VC Advantage Limited Partnership, dated December 8, 1999
10.6* Class A Convertible Preferred Stock Purchase Agreement between
SoftQuad Software, Ltd. and VC Advantage Limited Partnership,
dated December 9, 1999
10.7* VC Advantage Limited Partnership Class B Convertible Preferred
Stock Purchase Agreement, dated February 28, 2000
10.8* Hammock Group Ltd. Class B Convertible Preferred Stock Purchase
Agreement, dated February 28, 2000
10.9* Special Warrant Purchase Agremeent between SoftQuad Software,
Ltd. and Thomson Kernaghan & Co. Limited, as Agent, dated May
18, 2000
10.10* Engagement Letter Agreement between SoftQuad Software Inc. and
Thomson Kernaghan & Co. Limited, dated December 14, 1999
10.11* Engagement Letter Agreement between SoftQuad Software Inc. and
Thomson Kernaghan & Co. Limited, dated February 28, 2000
10.12(1) Plan and Agreement of Merger between The American Sports
Machine, Inc. and SoftQuad Software, Ltd., dated March 1, 2000
10.13(1) Agreement and Plan of Reporganization among the American
Sports Machine, Inc., SoftQuad Software, Ltd. and its Stockholders
dated March 1, 2000
10.14(3) Plan and Agreement of Merger between The American Sports
Machine, Inc. and SoftQuad Software, Ltd., dated March 9, 2000
10.15(2) Form of Share Purchase Agreement for acquistion of shares of
SoftQuad Software Inc.
10.16(2) Form of Option Exchange Agreement for acquisition of options of
SoftQuad Software Inc.
10.17* Form of Indemnification Agreement between Registrant and its
officers and directors
10.18* 2000 Stock Option Plan and Forms of Agreements thereunder
10.19* Advisory Services Agreement between SoftQuad Software Inc.
and KBL Capital Partners, Inc., dated April 9, 1999, amended
July 31, 1999
10.20* Agency Agreement between SoftQuad Software, Ltd. and Thomson
Kernaghan & Co. Limited, dated April 18, 2000
10.21* Agency Agreement between SoftQuad Software, Ltd. and SmallCaps
Online LLC, dated April, 2000
21 Subsidiaries of the Registrant
27* Financial Data Schedule
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* Filed herewith.
(1) Incorporated by reference to Exhibits to the Registrant's Current Report
on Form 8-K dated march 9, 2000.
(2) Incorporated by reference to Exhibits to the Registrant's Current Report
on Form 8-K dated April 21, 2000.
(3) Incorporated by reference to Exhibits to the Definitive Information
Statement on Schedule 14C dated March 21, 2000.
33
STATEMENT OF DIFFERENCES
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The trademark symbol shall be expressed as............................. 'TM'
The registered trademark symbol shall be expressed as.................. 'r'
