UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 2000
--------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
Commission file number 000-27189
---------
MERLIN SOFTWARE TECHNOLOGIES INTERNATIONAL, INC.
------------------------------------------------
(Exact name of small business issuer as specified in its charter)
NEVADA 88-0398103
------ ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
SUITE 200 & 201 - 4199 LOUGHEED HIGHWAY, BURNABY, BRITISH COLUMBIA,
CANADA V5C 3Y6
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(Address of principal executive offices)
(604) 320-7227
--------------
(Issuer's telephone number)
SUITE 420 - 6450 ROBERTS STREET, BURNABY, BRITISH COLUMBIA, CANADA V5G 4E1
--------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
<PAGE>
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
12,520,024 common shares outstanding, as of October 31, 2000
--------------------------------------------------------------------
Transitional Small Business Disclosure Format (Check one): [ ] Yes [X] No
PART I- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Our financial statements are stated in United States Dollars (US$) and are
prepared in accordance with United States Generally Accepted Accounting
Principles.
It is the opinion of management that the interim financial statements for the
quarter ended September 30, 2000 include all adjustments necessary in order to
ensure that the financial statements are not misleading.
Vancouver, British Columbia /s/ Robert Heller
November 20, 2000 Director of Merlin Software Technologies
International, Inc.
MERLIN SOFTWARE TECHNOLOGIES INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE-MONTH PERIOD ENDED
SEPTEMBER 30, 2000
(UNAUDITED)
<PAGE>
MERLIN SOFTWARE TECHNOLOGIES INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2000
(UNAUDITED)
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets
Statement of Changes in Stockholders' Equity
Statements of Operations
Statement of Cash Flows
Notes to the Financial Statements
<PAGE>
<TABLE>
<CAPTION>
MERLIN SOFTWARE TECHNOLOGIES INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
September 30 December 31
2000 1999
(UNAUDITED)
<C> <S> <C> <C>
ASSETS
CURRENT
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 775,786 $ 717,195
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . 37,149 18,667
Prepaid expenses and supplies . . . . . . . . . . . . . . . . 40,238 8,948
------------------------
853,173 744,810
DEFERRED FINANCING COSTS (Note 5) . . . . . . . . . . . . . . 64,713 -
PROPERTY AND EQUIPMENT. . . . . . . . . . . . . . . . . . . . 106,591 86,564
------------------------
$ 1,024,477 $ 831,374
========================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
LIABILITIES
CURRENT
Accounts payable and accrued liabilities. . . . . . . . . . . $ 333,811 $ 136,980
Demand loans payable, non-interest bearing. . . . . . . . . . 25,600 210,000
------------------------
359,411 346,980
LOANS PAYABLE (Note 3). . . . . . . . . . . . . . . . . . . . - 805,000
CONVERTIBLE NOTES PAYABLE (Note 5). . . . . . . . . . . . . . 87,000 -
------------------------
446,411 1,151,980
------------------------
STOCKHOLDERS' EQUITY (DEFICIT)
Share capital
Authorized
50,000,000 Common shares, par value $0.001
Issued
12,536,690 (1999 - 7,900,000) Common shares. . . . . . . .. 12,537 7,900
Additional paid-in capital. . . . . . . . . . . . . . . . . . 4,236,780 292,122
Deficit accumulated during the development stage. . . . . . . (3,667,251) (616,628)
Reduction for initial contribution of intellectual property . (4,000) (4,000)
------------------------
578,066 (320,606)
------------------------
$ 1,024,477 $ 831,374
========================
</TABLE>
The accompanying notes are an integral part of these consolidated interim
financial statements.
<PAGE>
<TABLE>
<CAPTION>
MERLIN SOFTWARE TECHNOLOGIES INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2000
Deficit Reduction
Accumulated for Initial Total
Additional During the Contribution of Stockholders'
Common Stock Paid-in Development Intellectual Equity
Shares Amount Capital Stage Property (Deficit)
<S> <C> <C> <C> <C> <C> <C>
BALANCE, January 1,
2000. . . . . . . . . . 7,900,000 $ 7,900 $ 292,122 $ (616,628) $ (4,000) $ (320,606)
Private placement
of common stock
on April 3, 2000
at a price of $1.50
per share (Note 3). . . 86,665 87 129,913 - - 130,000
------------- ------------- ------------ ----------- ---------- ------------
7,986,665 7,987 422,035 (616,628) (4,000) (190,606)
Settlement of loans
payable on acquisition
(Note 3). . . . . . . . - - 1,275,000 - - 1,275,000
Adjustment for the
stockholders' deficit
of the Company at
the acquisition date. . 4,450,025 4,450 (37,127) - - (32,677)
Stock option
compensation (Note 4) . - - 1,316,972 - - 1,316,972
Value of warrants and
beneficial conversion
feature on convertible
notes (Note 5). . . . . - - 1,100,000 - - 1,100,000
Cash received on
private placement
In September 2000
at $1.60 per share
(Note 6). . . . . . . . 100,000 100 159,900 - - 160,000
Net loss for the
period. . . . . . . . . - - - (3,050,623) - (3,050,623)
------------- ------------- ------------- --------------- ------------- ------------
BALANCE, September 30,
2000. . . . . . . . . . 12,536,690 $ 12,537 $ 4,236,780 $ (3,667,251) $ (4,000) $ 578,066
============= ============= ============= =============== ============= ============
</TABLE>
The accompanying notes are an integral part of these consolidated interim
financial statements.
<PAGE>
<TABLE>
<CAPTION>
MERLIN SOFTWARE TECHNOLOGIES INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Period From
June 25
1999
Three-Month Nine-Month (Incorporation)
period ended period ended to September 30
September 30 September 30 2000
2000 1999 2000 (CUMULATIVE)
<S> <C> <C> <C> <C>
SALES . . . . . . . . . . . . $ 2,431 $ - $ 21,301 $ 21,301
COST OF SALES . . . . . . . . 1,600 - 15,678 15,678
-------------- ----------------- ------------ -------------
831 - 5,623 5,623
-------------- ----------------- ------------ -------------
EXPENSES (Note 4)
Depreciation. . . . . . . . . 12,053 1,991 34,477 42,441
General and administration. . 468,804 114,435 1,250,381 1,518,423
Professional fees . . . . . . 41,822 14,903 119,815 184,722
Promotion and advertising . . 78,798 45,730 854,600 1,034,912
Research and development. . . 81,985 30,251 705,407 803,736
-------------- ----------- ----------------- ------------
683,462 207,310 2,964,680 3,584,234
-------------- ----------- ----------------- ------------
LOSS FROM OPERATIONS. . . . . (682,631) (207,310) (2,959,057) (3,578,611)
INTEREST AND FINANCING COSTS
(Note 5). . . . . . . . . . (97,801) 83 (91,566) (88,640)
-------------- ----------- ----------------- -----------
NET LOSS FOR THE PERIOD . . . $ (780,432) (207,227) $ (3,050,623) $(3,667,251)
============== ============ ============ ============
LOSS PER SHARE - basic and
diluted . . . . . . . . . . $ (0.06) $ (0.03) $ (0.29)
============= ============ ============
WEIGHTED AVERAGE SHARES
OUTSTANDING . . . . . . . . 12,289,807 6,433,334 $ 10,350,318
============= ============= ============
</TABLE>
The accompanying notes are an integral part of these consolidated interim
financial statements.
<PAGE>
<TABLE>
<CAPTION>
MERLIN SOFTWARE TECHNOLOGIES INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Period from
Period from June 25
June 25 1999
Nine-month 1999 (incorporation)
period ended (incorporation) to September 30
September 30 to September 30 2000
2000 1999 (CUMULATIVE)
<S> <C> <C> <C>
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Net loss for the period . . . . . . . . . . . . . $ (3,050,623) $(207,227) $ (3,667,251)
Adjustments to reconcile net loss to net
cash used in operating activities
Amortization of deferred financing costs. . . . 2,328 - 2,328
Depreciation. . . . . . . . . . . . . . . . . . . 34,477 1,991 42,441
Stock option compensation . . . . . . . . . . . . 1,316,972 - 1,328,994
Beneficial conversion feature on
convertible notes and amortization
of discount . . . . . . . . . . . . . . . . . . 87,000 - 87,000
Decrease (increase) in assets
Receivables . . . . . . . . . . . . . . . . . . (18,482) (2,965) (37,149)
Prepaid expenses and supplies . . . . . . . . . . (31,290) (7,933) (40,238)
Increase (decrease) in liabilities
Accounts payable and accrued liabilities. . . . . 164,154 23,747 301,134
----------------- ----------- ----------------
(1,495,464) (192,387) (1,982,741)
----------------- ------------ -----------------
FINANCING ACTIVITIES
Repayment of demand loans . . . . . . . . . . . . (312,913) - (312,913)
Proceeds on demand loans. . . . . . . . . . . . . 128,513 20,000 338,513
Proceeds of loan payable. . . . . . . . . . . . . 600,000 - 1,275,000
Proceeds on issuance of common stock. . . . . . . 160,000 284,000 574,000
Proceeds on issuance of convertible
notes, net of financing costs . . . . . . . . . 1,032,959 - 1,032,959
----------------- ------------ -----------------
1,608,559 304,000 2,907,559
----------------- ------------ -----------------
INVESTING ACTIVITY
Purchase of property and equipment. . . . . . . . (54,504) (35,416) (149,032)
----------------- ----------- -----------------
INCREASE IN CASH. . . . . . . . . . . . . . . . . 58,591 76,197 775,786
CASH, beginning of period . . . . . . . . . . . . 717,195 - -
----------------- ----------- -----------------
CASH, end of period . . . . . . . . . . . . . . . $ 775,786 $ 76,197 $ 775,786
================ ========== =================
SUPPLEMENTARY INFORMATION:
Non-cash investing and financing activities:
Acquisition of business and settlement of debt
in exchange for common stock in reverse
acquisition (Note 2). . . . . . . . . . . . . $ 1,242,323 $ -
================ =================
Issuance of common stock for proceeds
advanced in 1999. . . . . . . . . . . . . . . $ 130,000 $ -
================ =================
</TABLE>
The accompanying notes are an integral part of these consolidated interim
financial statements.
<PAGE>
1. BASIS OF PRESENTATION AND CONTINUED OPERATIONS
The consolidated interim financial statements for the nine-month period ended
September 30, 2000 included herein have been prepared by the Company without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading.
These financial statements reflect all adjustments consisting of normal
recurring adjustments, which, in the opinion of management, are necessary for
fair presentation of the information, contained herein. It is suggested that
these interim financial statements be read in conjunction with the financial
statements of the Company for the years ended December 31, 1999 and 1998 and the
notes thereto included in the Company's Form 10-KSB Annual Report and financial
statements of Merlin Software Technologies Inc. for the period from June 25,
1999 (incorporation) to December 31, 1999 included in an 8-K current report.
The Company follows the same accounting policies in preparation of interim
reports.
Results of operations for the interim periods are not indicative of annual
results.
The Company was organized August 30, 1995, under the laws of the State of Nevada
as Austin Land & Development, Inc. On January 7, 2000, the Company changed its
legal name to Merlin Software Technologies International, Inc. in contemplation
of closing a share exchange agreement with the principal stockholders of Merlin
Software Technologies Inc., a Nevada company developing Linux-based software
utilities and other business management software. The acquisition closed on
April 26, 2000 (Note 2). At September 30, 2000, the Company is considered a
development stage company in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 7.
These accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities and commitments in the normal course of business. As at September
30, 2000, the Company has recognized minimal revenue and has accumulated
operating losses of approximately $3.7 million since its inception. The
continuation of the Company is dependent upon the continuing financial support
of creditors and stockholders and obtaining long-term financing and achieving
profitability. Management plans to raise additional equity capital to provide
additional financing for operating and capital requirements of the Company. It
is management's intention to raise new equity financing of approximately $3.9
million within the upcoming year. Amounts raised will be used for further
development of the Company's products, to provide financing for the marketing
and promotion of its products, to secure products and for other working capital
purposes including hardware and software upgrades. While the Company is
expending its best efforts to achieve the above plans, there is no assurance
that any such activity will generate funds that will be available for
operations.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. These financial statements do not include any adjustments
that might arise from this uncertainty.
<PAGE>
2. ACQUISITION OF MERLIN SOFTWARE TECHNOLOGIES INC.
Effective April 26, 2000, the Company closed a share exchange agreement to
acquire all of the issued and outstanding shares of software developer Merlin
Software Technologies Inc. ("Merlin Private Co.") in exchange for 7,986,665
shares of the Company's common stock. Merlin Private Co. is a Nevada company
incorporated on June 25, 1999 for the purpose of the development of Linux-based
software utilities and other business management software. At September 30,
2000, 7,969,999 Merlin Private Co. common shares had been exchanged leaving
16,666 still to be exchanged.
The transaction was accounted for as a recapitalization using accounting
principles applicable to reverse acquisitions. Following reverse acquisition
accounting, financial statements subsequent to the closing date are presented as
a continuation of Merlin Private Co. The value assigned to common stock of the
Company on acquisition based on the fair value of the net assets of the Company
at the date of acquisition was $1,242,323. Net assets at the acquisition date
included $1,275,000 raised by the Company in an equity private placement and
loaned to Merlin Private Co. and settled in contemplation of closing the
acquisition and accounts payable of $32,677.
Pro-forma information assuming the acquisition occurred on January 1, 2000 is as
follows:
Revenue $ 21,301
Loss for the period $ (3,068,300)
Loss per share $ (0.24)
Also, in connection with the acquisition, the Company was required to issue
86,665 share purchase warrants (Note 3) and 781,000 stock options (Note 4) to
previous holders of warrants and options in Merlin Private Co. Options and
warrants were to be exchanged on a 1:1 basis under the same terms and conditions
as existed in Merlin Private Co. As a consequence of the exchange of stock
options, additional compensation expense was booked in the period representing
the difference in value of stock options between the date of exchange and the
grant date (Note 4).
3. LOANS PAYABLE
a) Private placement proceeds in Merlin Private Co. in 1999 totalling
$130,000 did not bear interest. On April 3, 2000, Merlin Private Co. issued
86,665 units of Merlin Private Co. whereby each unit consisted of one share of
common stock of Merlin Private Co. and a warrant to purchase one share of Merlin
Private Co. common stock at a price of $2 per share until expiry on March 31,
2002. Under the terms of the share exchange agreement, the common shares were
exchanged for common shares of the Company. Warrants were exchanged for
warrants of the Company on a 1:1 basis under similar terms as existed for
warrants in Merlin Private Co.
<PAGE>
3. LOANS PAYABLE - CONTINUED
b) In contemplation of closing the acquisition, the Company previously
advanced $1,275,000 to Merlin Private Co. out of the proceeds of a $1,275,000
private placement received in December 1999 and January 2000. The amounts were
advanced on an unsecured, non-interest bearing basis with no specific terms of
repayment. The private placement resulted in the issuance of 850,000 units of
the Company at $1.50 per unit with each unit consisting of one share of common
stock and one warrant to purchase common stock until February 11, 2002 at $2 per
share. All warrants remained outstanding at September 30, 2000.
On consolidation, the intercompany loan was settled and reclassified as
additional paid-in capital.
4. STOCK OPTIONS
On May 1, 2000, the Company's Board of Directors approved the Company's 2000
Stock Option Plan to be approved by the Company's stockholders at the Company's
annual general meeting. The Plan provides for the granting of stock options to
key employees and consultants to purchase up to 3,000,000 common shares of the
Company. Under the Plan, the granting of incentive and non-qualified stock
options, exercise prices and terms are determined by the Company's Board of
Directors. For incentive options, the exercise price shall not be less than the
fair market value of the Company's common stock on the grant date. (In the case
of options issued to an employee who owns stock possessing more than 10% of the
voting power of all classes of the Company's stock on the date of grant, the
option price must not be less than 110% of the fair market value of common stock
on the grant date.). Options granted are not to exceed terms beyond ten years
(5 years in the case of an incentive stock option granted to a holder of 10
percent of the Company's common stock). Options granted in substitution for
outstanding options of an acquired company may be issued with an exercise price
equal to the exercise price of the substituted option in the acquired company.
Unless otherwise specified by the Board of Directors, stock options shall vest
at the rate of 25% per year starting one year following the granting of options.
Compensation expense of $1,316,972 during the nine months ended September 30,
2000 (1999 - $Nil) was recorded for options granted during the period including
an amount representing the difference in value of options exchanged for options
in Merlin Private Co. Details of options granted and cancelled during the
period ended September 30, 2000 are as follows:
<PAGE>
4. STOCK OPTIONS - CONTINUED
<TABLE>
<CAPTION>
Exercisable on
Exercise September 30
Number Price Expiry 2000
------------------------- -------------- ------------- ---------- -------
<S> <C> <C> <C> <C>
Options granted to a
consultant. . . . . . . 48,000 $ 1.00 April 2010 12,000
Options granted on share
exchange (Note 2) . . . 781,000 $ 1.00 May 2005 477,800
Options cancelled . . . . (123,800) $ 1.00 May 2005 -
--------------- -------
Options outstanding at
September 30, 2000. . . 705,200 489,800
=============== =============
</TABLE>
The Company granted an additional 72,000 stock options, vesting at 6,000 per
month with exercise prices of $1.25 and $1.75 expiring in October 2010. In
November, vested options totaling 75,000 expired and 75,000 options with an
exercise price of $1.00 were exercised.
The Company follows the provisions of Accounting Principles Board ("APB")
Opinion No. 25, including interpretations provided in Interpretation No. 44,
"Accounting for Certain Transactions Involving Stock Compensation", in
recognizing and measuring compensation expense for options granted to employees.
Generally, compensation expense is recorded for the difference between the
market price of the underlying common stock and the exercise price of the stock
options. The Company regularly re-measures compensation expense for unvested
options where there has been a substantive change or modification to such stock
options such as the exchange of stock options described in Note 2.
The Company follows the provisions and related interpretations of Financial
Accounting Standard No. 123 ("FAS 123") for options granted to non-employees.
Compensation expense is recognized based upon the fair value based method
prescribed using the Black-Scholes option pricing model. Compensation expense
is re-measured on a quarterly basis for options still unvested.
Compensation expense is amortized over the length of the contract period (if one
exists) or the period to which the options vest.
Compensation expense for the nine months ended September 30, 2000 was recorded
as follows:
Expense Amount
------- ------
General and administration $ 542,109
Promotion and advertising 431,443
Research and development 343,420
------------
$ 1,316,972
============
<PAGE>
5. CONVERTIBLE NOTES PAYABLE
On August 18, 2000, the Company entered into an agreement to issue $2.1 million
of Series A Senior Secured Convertible Notes due on August 18, 2003 and bearing
interest at 10% per annum due semi-annually. The convertible notes are
collateralized by all of the Company's assets and intellectual property.
The Company issued $1.1 million of convertible notes on August 24, 2000 with the
remaining $1.0 million balance to be issued within seven days of a related
registration statement being declared effective by the SEC. The notes are
immediately convertible at the option of the holders into shares of common stock
of the Company at the lesser of $1.60 or the price which is 95% of the lowest of
the two lowest intra-day trading prices of the common stock for the 30 day
period ending on the trading date immediately preceding the conversion date. As
a result, a beneficial conversion feature of $53,000 related to the issuance of
$1.1 million of convertible notes payable was recorded as interest expense on
the date of issuance. The beneficial conversion feature associated with
additional convertible notes payable not yet issued will be recorded on the date
additional notes payable are issued. At September 30, 2000, none of the
convertible notes payable have been converted.
The $1.1 million of convertible notes payable also contain 770,000 detachable
warrants exercisable to purchase shares of the Company's common stock at any
time after August 24, 2001 to expiry on August 18, 2007 at a price of $1.75 per
share. An additional 750,000 detachable warrants with the same terms will be
issued in connection with the unissued balance of the convertible notes payable.
No warrants have been exercised at September 30, 2000. The value of the 770,000
warrants based on a Black-Scholes option pricing model was $1,047,000 using the
following assumptions:
- No dividends;
- Risk-free interest of 6.24%
- Volatility of expected market price of the Company's common stock of 182%
- Expected life of the warrants of 36 months
The discount was recorded as additional paid-in capital during the period and is
being amortized as interest expense on a straight-line basis over the term of
the convertible notes payable. $34,000 was amortized during the period ended
September 30, 2000.
The convertible notes contain provisions to adjust the conversion price for,
among other matters, changes in the capital structure and situations where the
Company issues common stock at a price of less than $1.60 per share. Among
other matters, damages are payable to the noteholders at the rate of 2% per
month, should the Company's registration statement not be declared effective by
the SEC within 150 days of issuance.
The Company incurred direct costs in connection with the convertible notes
payable of $67,041 which is being amortized to the Statement of Operations over
the term of the notes payable. To September 30, 2000, $2,328 has been amortized
leaving a net book value of the deferred asset of $64,713.
<PAGE>
6. SHARE PURCHASE WARRANTS
Details of share purchase warrants issued during the period are as follows:
<TABLE>
<CAPTION>
Exercisable on
Exercise September 30
Number Price Expiry 2000
<S> <C> <C> <C> <C>
Issued:
On private placement (*). . . 200,000 $ 1.75 March 2001 200,000
On private placement (Note 3) 850,000 $ 2.00 February 2002 850,000
On share exchange (Note 2). . 86,665 $ 2.00 March 2002 86,665
On convertible notes (Note 5) 770,000 $ 1.75 August 2007 -
-------------- -------
1,906,665 1,136,665
============== =============
<FN>
(*) In September 2000, the Company completed a private placement of 100,000 units at
a price of $1.60 per unit for total proceeds of $160,000. Each unit comprised of one
share of the Company's common stock plus two warrants exercisable at $1.75 each until
expiry in March 2001.
</TABLE>
7. COMMITMENTS
a) On June 20, 2000, the Company entered into a consulting agreement for
financial services. The contract expires on June 30, 2002 and provides for
compensation should the Company receive financing from any investor introduced
by the consultant. Compensation includes:
i) payment of $100,000 and 300,000 shares of the Company's common stock in
2000;
ii) payment of $230,000 in 2001;
iii) payment of 100,000 shares of the Company's common stock should the
Company achieve a NASDAQ listing; and
iv) right of first refusal on additional financing in consideration for a
commission of 5% of such capital in cash and 5% in stock.
Payments under (i) and (ii) are due to the consultant regardless of contract
termination. The total committed cost of the contract of $969,000, including
$639,000 being the value attributable to the common stock using the trading
price of the common stock on the agreement date, is being recognized on a
straight-line basis over the term of the contract. During the period ended
September 30, 2000, the Company recorded an expense of $121,125. 300,000 shares
of common stock issuable under the terms of the contract ((i) above) have not
yet been issued.
<PAGE>
7. COMMITMENTS
b) In March 2000, the Company previously entered into agreements with three
other officers. Amongst other matters, terms of these agreements require that
the Company pay to the officers amounts aggregating $672,000 plus 1.9 million
shares of common stock in the event of a change of control of the Company. On
July 7, 2000, one of the three officers resigned his position with the Company
and, accordingly, his consulting agreement terminated, thus reducing the
Company's obligation on potential change of control to $432,000 plus 1.2 million
shares of common stock. The Company also entered into an agreement with an
officer for services in April 2000 which provides for, among other matters, a
payment of approximately $46,000 and 100,000 shares of common stock should a
change of control occur.
c) The Company entered into an agreement with a consultant whereby the
Company would issue 80,000 shares of common stock in exchange for corporate
finance services for a period expiring in April 2001. The shares have yet to be
issued, but the cost of services based upon the trading price of the underlying
common stock on the agreement date is being amortized on a straight-line basis
over the term of the contract.
8. NEW ACCOUNTING PRONOUNCEMENTS
a) In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation", an interpretation of Accounting Principles Board Opinion No. 25.
The Interpretation requires, among other matters, that stock options that have
been modified to reduce the exercise price be accounted for as variable. This
standard was adopted during the period ended September 30, 2000 but did not have
a material effect on the Company's financial statements.
b) In June 1998, Statement of Financial Accounting Standards ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities" was issued.
SFAS No. 133 required companies to recognize all derivatives contracts as either
assets or liabilities on the balance sheet and to measure them at fair value.
If certain conditions are met, a derivative may be specifically designated as a
hedge, the objective of which is to match the timing of gain or loss recognition
on the hedging derivative with the recognition of (i) the changes in the fair
value of the hedged asset or liability that are attributable to the hedged risk
or (ii) the earnings effect of the hedged forecasted transaction. For a
derivative not designated as a hedging instrument, the gain or loss is
recognized in income in the period of change. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000.
Historically, the Company has not entered into derivatives contracts either
to hedge existing risks or for speculative purposes. Accordingly, the Company
does not expect adoption of the new standards on January 1, 2001 to affect its
financial statements.
<PAGE>
8. NEW ACCOUNTING PRONOUNCEMENTS - CONTINUED
c) In 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 dealing with revenue recognition which is effective in the
fourth quarter of 2000. The Company does not expect its adoption to have a
material effect on the Company's financial statements.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion and analysis should be read in conjunction with our
financial statements and the notes to the financial statements, included as part
of this Quarterly Report.
Certain statements contained in this Quarterly Report on Form 10-QSB, including,
without limitation, statements containing the words "believes", "anticipates",
"estimates", "intends", "expects" and words of similar import, constitute
forward-looking statements within the meaning of the Private Securities Reform
Act of 1995. Although management believes that the expectations reflected in
these forward-looking statements are reasonable, it can give no assurance that
such expectations will prove to have been correct. Actual results could vary
materially from those expressed in those forward-looking statements. Readers
are referred to the "Sales and Marketing", "Research and Development" and "Plan
of Operation" sections contained in this Quarterly Report, as well as the
factors described below in the section entitled "Factors That May Affect Our
Future Results", which identify some of the important factors or events that
could cause our actual results or performance, or the actual results or
performance of our subsidiary, Merlin Software Technologies Inc., to differ
materially from those contained in the forward looking statements.
As used in this Quarterly Report, the terms "we", "us", "our" and "Merlin" mean
Merlin Software Technologies International Inc., and our subsidiary, Merlin
Software Technologies Inc., unless otherwise indicated.
ACQUISITION OF MERLIN SOFTWARE TECHNOLOGIES, INC.
As described in our Form 10-QSB for the quarter ended March 31, 2000, we
acquired (the "Acquisition") all of the issued and outstanding shares of our
subsidiary as of April 26, 2000. We have continued the business operations of
our subsidiary (see "Business of Merlin Software Technologies, Inc." below).
BUSINESS OF MERLIN SOFTWARE TECHNOLOGIES, INC.
A detailed description of our business following the Acquisition can be found in
our Form 10-KSB Annual Report, filed on April 14, 2000.
PLAN OF OPERATION
The following discussion should be read in conjunction with our financial
statements and the related notes that appear elsewhere in this Quarterly Report.
The following discussion contains forward-looking statements that reflect our
plans, estimates and beliefs. Our actual results could differ materially from
those discussed in the forward looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
below and elsewhere in this Quarterly Report, particularly in the section
entitled "Factors That May Affect Our Future Results".
General
We were formed in Nevada on August 30, 1995 under the name Austin Land &
Development Inc. We changed our name to Merlin Software Technologies
International, Inc. on January 7, 2000. We were inactive until the acquisition
of 100% of the issued and outstanding shares of Merlin Software Technologies
Inc. (a company incorporated in Nevada on June 25, 1999). That acquisition was
completed by a share exchange reorganization with Merlin Software Technologies
Inc. on April 26, 2000. Since incorporation, Merlin Software Technologies Inc.
has been in the business of developing utility software programs for computers
using a Linux or Unix operating system.
<PAGE>
Since April 26, 2000, our focus has been on the development and marketing of our
two utility software programs: a computer backup and restore program called
PerfectBACKUP+ and a multi-line fax program called Communicado Fax. Our
principal executive offices are located in Burnaby, British Columbia, Canada.
Plan of Operation
Our primary objective over the next 12 months will be to complete development of
both of our current utility software programs, PerfectBACKUP+ and Communicado
Fax, for commercial release and to implement an aggressive sales and marketing
program in connection with the sale of both of these utility software programs.
As of the present date, PerfectBACKUP+ requires testing of recent additional
features which were added in order to make it competitive in the existing
marketplace; Communicado Fax requires further development and testing before it
can be made available for commercial release. In addition to the development
and testing work to be performed, technical documentation for both of these
software programs must be completed and an aggressive sales and marketing
campaign must be implemented. In order for us to accomplish these goals within
the next 12 months we will need to achieve the goals set out in the following
paragraphs:
Cash Requirements
We will require a minimum of approximately $3.9 million over the period ending
September 30, 2001 in order to accomplish our goals. The cash requirements of
$3.9 million are based on our estimates for operational costs for the period
ending September 30, 2001. We estimate that approximately $654,000 will be
required to hire further software developers and programmers, $1,717,000 will be
required to hire marketing and sales persons and to implement our planned sales
and marketing program and $200,000 will be required to support an investor
relations program. The balance of $1,329,000 will be required to support
general corporate expenses, including expenses in connection with engaging both
senior and intermediate management personnel and other general operating
expenses. We have recently sold an aggregate of $2.1 million dollars of
convertible notes which we believe will be sufficient to pay for ongoing
operating costs and capital expenditures through May, 2001 (for further
information with respect to the convertible notes, please refer to Part II, Item
2 "Changes in Securities"). We intend to obtain the balance of our cash
requirements through the sale of our equity securities, proceeds received from
the exercise of outstanding warrants and stock options or by obtaining further
debt financing. Additionally, we will explore the possibility of raising funds
by way of government grants made available to high-technology companies
operating in British Columbia, Canada.
Research and Development
The computer software industry is characterized by rapid technological change
and is highly competitive in regard to timely product innovation. Accordingly,
we believe that our future success depends upon our ability to enhance our
current software programs to meet a wide range of customer needs and to develop
new software programs rapidly to attract new customers and provide additional
solutions to existing customers.
Our strategy is to continue to enhance PerfectBACKUP+'s and Communicado Fax's
functionality through new feature development, in order to meet the continually
advancing requirements of its customers. At the same time, we may seek to
acquire and develop new software programs to meet the needs of a broader group
of users.
As of September 30, 2000, we have expended $803,736 on the development of
PerfectBACKUP+ and Communicado Fax, including $343,420 representing the value
assigned to stock option compensation to employees and consultants working in
research and development. We will expend a significant amount of time in the
next 12 months on research and development activities. These activities will
focus on the following three areas: updating the design and adding new features
to PerfectBACKUP+, translating both PerfectBACKUP+ and Communicado Fax so that
they will operate on different computer operating systems and developing new
products that will compliment our present software programs. By updating
the design of PerfectBACKUP+, PerfectBACKUP+ will become more functional and
easier to use. The benefit of porting, or translating our software programs so
that they are capable of running on other operating systems, is that our
products become saleable to a greater number of users.
Sales and Marketing
<PAGE>
In order to generate any significant sales volume, we predict that we must
recruit three senior sales people, including a Vice-President of Marketing, an
Original Equipment Manufacturer Sales Manager and a Product Manager.
The addition of these personnel will ensure that the overall strategy
for sales of our products is developed and maintained for all relevant
marketing channels. It is expected that these three individuals will be
supported by an additional five individuals whose functions will range from
telemarketing to customer support. In order to compete in the existing markets
for our products and to generate consumer awareness, we will be required to
undertake a very aggressive advertising and marketing campaign. This will
require that we place advertisements in several key trade magazines and
publications, as well as exhibiting our software products at the major
tradeshows held throughout the year. An external public relations firm is
presently engaged to ensure that developments and news releases are provided in
a timely manner to the key media sources in the software industry and to the
public market.
Personnel
As of October 31, 2000, we have 24 permanent employees and 3 independent
contractors, including 4 in the area of corporate administration, 1 in investor
relations, 15 in product development and 4 in sales and customer support.
Over the next 12 months, we plan to expand our total number of permanent
employees in these departments to approximately 35.
Purchase or Sale of Equipment
We do not anticipate that we will expend any significant amount on equipment for
our present or future operations. However, we will continue to purchase
computer hardware and software for our ongoing operations.
FACTORS THAT MAY AFFECT OUR FUTURE RESULTS
An investment in our common stock involves a number of very significant risks.
You should carefully consider the following risks and uncertainties in addition
to other information in this prospectus in evaluating Merlin and its business
before purchasing shares of common stock. Our business, operating results and
financial condition could be seriously harmed as a result of any of the
following factors. The trading price of the shares of our common stock could
decline due to any of these factors, and you could lose all or part of your
investment.
Merlin is a Development Stage Company with a Limited Operating History Which
Makes Future Performance Very Difficult to Predict.
We are a development stage company which is primarily involved in the
development, manufacture and marketing of utility software programs for the
Linux and Unix operating systems. As a relatively new company, we have just
started selling our software products, and as a result, we do not have a
historical record of sales and revenues nor an established business track
record. We have not earned any significant revenues since our formation.
Unanticipated problems, expenses and delays are frequently encountered in
ramping up sales and developing new products. Our ability to successfully
develop, produce and sell our software programs and to eventually generate
operating revenues will depend on our ability to, among other things:
- successfully develop and market our utility software products, including
PerfectBACKUP+ and Communicado Fax;
- successfully continue to enhance our current software products to keep
pace with changes in technology and changes demanded by users of such
software products; and
- obtain the necessary financing to implement our business plan.
Given our limited operating history, minimal sales and operating losses, there
can be no assurance that we will be able to achieve any of these goals and
develop a sufficiently large customer base to be profitable.
<PAGE>
Lack of Established Revenue Stream Will Result in Anticipated Operating Losses.
Our subsidiary did not generate any revenues from the sale of our software
products and incurred a loss of $616,628 for the period from June 25, 1999
(incorporation) to December 31, 1999. We have generated $ 21,301 in revenues
through the first three quarters of 2000. Although we anticipate that revenues
will increase, we also expect that development costs and operating costs will
increase as well. Consequently, we expect to incur operating losses and
negative cash flow until our software products are developed, commercially
released and sales of such products made so that we are operating in a
profitable manner. These circumstances raise substantial doubt about our
ability to continue as a going concern as described in an explanatory paragraph
to our independent accountant's opinion on the December 31, 1999 financial
statements. To the extent that such expenses are not followed in a timely
manner by increased revenues, our business, results of operations, financial
condition and prospects would be materially adversely affected.
Lack of Profits, Negative Cash Flow and Our Need for Substantial Capital in the
Future to Fund Our Business Growth.
Our subsidiary incurred a net loss for the period from June 25, 1999
(incorporation) to December 31, 1999 of $616,628. A further loss of $3,050,623
was realized in the nine months ended September 30, 2000. As a result of these
losses and negative cash flows from operations, our ability to continue
operations will be dependent upon the availability of capital from outside
sources unless and until we achieve profitability.
Our future capital requirements will depend on many factors, including cash flow
from operations, progress in developing new products, competing knowledge and
market developments and our ability to successfully market our products. Our
recurring operating losses and growing working capital needs will require us to
obtain additional capital to operate our business before we have established
that our business will generate significant revenue. With our recent sale of
convertible notes, we believe sufficient funds are available to pay for ongoing
operating costs and capital expenditures through May, 2001. We have predicted
that we will require approximately $3.9 million over the period ending
September 30, 2001 in order to accomplish our goals. However, there is no
assurance that actual cash requirements will not exceed our estimates. In
particular, additional capital may be required in the event that:
- we incur unexpected costs in completing the development of PerfectBACKUP+
or Communicado Fax or encounter any unexpected technical or other
difficulties;
- we incur delays and additional expenses as a result of technology failure;
- we are unable to create a substantial market for our software products; or
- we incur any significant unanticipated expenses.
The occurrence of any of the aforementioned events could adversely affect our
ability to meet our business plans.
We will depend almost exclusively on outside capital to pay for the continued
development of PerfectBACKUP+ and Communicado Fax. Such outside capital may
include the sale of additional stock and/or commercial borrowing. There can be
no assurance that capital will continue to be available, if necessary, to meet
these continuing development costs or, if the capital is available, it will be
on terms acceptable to us. The issuance of additional equity securities by us
would result in a significant dilution in the equity interests of our current
stockholders. Obtaining commercial loans, assuming those loans would be
available, will increase our liabilities and future cash commitments.
If we are unable to obtain financing in the amounts and on terms deemed
acceptable, our business and future success may be adversely affected.
Our Failure to Effectively Manage Our Growth Could Harm Our Future Business
Results.
<PAGE>
As we proceed with the development of our software products, we expect to
experience significant and rapid growth in the scope and complexity of our
business. We will need to add staff to market our products, manage operations,
handle sales and marketing efforts and perform finance and accounting functions.
We will be required to hire a broad range of additional personnel in order to
successfully advance our operations. This growth is likely to place a strain on
our management and operational resources. The failure to develop and implement
effective systems or to hire and retain sufficient personnel for the performance
of all of the functions necessary to effectively service and manage our
potential business or the failure to manage growth effectively, could have a
material adverse effect on our business and financial condition.
There May Be a Change of Control and Dilution Upon Conversion of the Convertible
Notes and Exercise of Warrants.
The four purchasers of the convertible notes may convert their convertible notes
into shares of our common stock at conversion prices equal to the lower of a
fixed price and the price which is 95% of the average of the two lowest
intra-day trading prices of our common stock for the 30 day period on the
trading day immediately preceding the conversion date. In addition, these
holders also acquired warrants to purchase 1,520,000 shares of our common stock
at an exercise price of $1.75. If the holders convert the notes and exercise
the warrants, there could be a change in control. The holders' ownership
interest may be significantly increased at the time they actually convert since
the conversion and sale of the common stock could have an adverse effect on the
price of our common stock. The existence of these convertible notes and
warrants could depress the market price of our stock and effect the cost and
terms of our future stock placements.
Future Sales of Our Common Stock Pursuant to this Prospectus May Depress Our
Stock Price.
Sales of a substantial number of shares of our common stock in the public market
could cause a reduction in the market price of our common stock. We had
12,520,024 shares of common stock issued and outstanding as of October 31, 2000.
Through the recent sale of the convertible notes, the selling stockholders may
be reselling up to 4,395,000 shares of our common stock, only 500,000 of which
are included in the 12,520,024 issued and outstanding common shares. As a
result of the sale, a substantial number of our shares of common stock are
becoming available for resale, which could have an adverse effect on the price
of our common stock.
All of Our Assets are Secured.
We are financing our operations partially through the issuance of the
convertible notes. These convertible notes have been secured primarily by all
of our assets. If we default on any of these convertible notes, it would have a
material adverse effect on our business.
Our Ability to Generate Revenue is Dependent on the Sale of Two Products.
We expect that a substantial portion, if not all, of our future revenue will be
derived from the sale of our two software programs: PerfectBACKUP+ and
Communicado Fax. We expect that these products and their extensions and
derivatives will account for a majority, if not all, of our revenue for the
foreseeable future. Broad market acceptance of these software programs is,
therefore, critical to our future success. Failure to achieve broad market
acceptance of these software programs, as a result of competition, technological
change or otherwise, would significantly harm our business. Our future financial
performance will depend in significant part on the successful development,
introduction and market acceptance of these two software programs and their
respective enhancements. There can be no assurance that we will be successful
in marketing either of these software programs or any new software programs,
applications or enhancements, and any failure to do so would significantly harm
our business.
The Market Acceptance of Our Products is Uncertain.
We have sold only limited quantities of our software programs. Our success will
depend on the acceptance of our products by the computer and technology
industry, including businesses and the general public. Achieving such
acceptance will require significant marketing investment. We cannot assure you
that our existing or proposed
<PAGE>
software programs will be accepted by the computer and technology industry at
sufficient levels to support our operations.
We are Dependent on Resellers and Distributors for the Sales of Our Products and
if We are not Successful in Expanding our Distribution Channels, Our Ability to
Generate Revenues May Be Harmed.
We have entered into various distribution and reseller agreements to distribute
and/or bundle our software programs. While we believe that these arrangements
will be beneficial, there can be no assurance that we will be able to deliver
our software programs to these companies in a timely manner or that these
companies will be able to sell our software programs in volumes anticipated by
us. Further, these agreements are our only significant distribution agreements
to date. Our growth will be dependent on our ability to expand our third-party
distribution channels to market, sell and distribute our software programs.
While our strategy is to enter into additional agreements with resellers and
distributors, we may not be able to successfully attract additional vendors to
distribute our software programs. In addition, we have only limited experience
in marketing our software programs through distributors and resellers and we
will have little, if any, control over our third-party distributors. There can
be no assurance that we will be successful in our efforts to generate revenue
from these distribution channels, nor can there be any assurance that we will be
successful in recruiting new organizations to represent us and our software
programs. Any such failure would result in us having expended significant
resources with little or no return on our investment, which would significantly
harm our business.
Rapid Technological Changes in the Computer Software and Hardware Industry Could
Render Our Products Non-competitive or Obsolete.
The development and sales of our software programs are exposed to risks as a
result of the rapidly changing technology in the computer software and hardware
industry. Although we will engage software developers and programmers who are
experienced in the utility software program market, we only have limited
experience in developing and marketing such utility software programs.
In addition, future advances in the computer software and hardware industry
could lead to new technologies or software programs competitive with the
software programs provided by us. Those technological advances could also lower
the costs of other software programs that compete with our software programs,
resulting in pricing or performance pressure on our software programs, which
could adversely affect our results of operations.
Unscheduled Delays in Development of Our Software Products or the Implementation
of Our Sales Program Could Result in Lost or Delayed Revenues.
Delays and related increases in costs in the development or improvement of
PerfectBACKUP+ and Communicado Fax or the implementation of our sales and
marketing program could result from a variety of causes, including:
- delays in the development, testing and commercial release of our software
programs;
- delays in hiring or retaining experienced software developers and
programmers;
- delays in locating and hiring experienced sales and marketing
professionals; and
- delays caused by other events beyond our control.
There can be no assurance that we will successfully develop PerfectBACKUP+ and
Communicado Fax on a timely basis or that we will implement our sales and
marketing program in a timely manner. A significant delay in the development,
testing and commercial release of our software programs or a delay in the
implementation of our sales and marketing program could result in increased
costs and could have a materially adverse effect on our financial condition and
results of operations.
Lack of Patent and Copyright Protections for Merlin's Technologies Could Result
in Duplication or Infringement Allegations by Competitors.
<PAGE>
Although we have applied for or are in the process of applying for copyright
registration in the United States, neither PerfectBACKUP+ or Communicado Fax is
protected by any patents. We do treat our software programs and their
associated technology as proprietary. Despite the precautions taken to protect
our software programs, unauthorized parties may attempt to reverse engineer,
copy or obtain and use our software programs, which could adversely effect our
results of operations.
The Loss of Merlin's Key Technical Individuals Would Have an Adverse Impact on
Future Development.
Our performance is substantially dependent on the technical expertise of Robert
Heller and other key software programmers and developers and our ability to
continue to hire and retain such personnel. There is intense competition for
skilled personnel, particularly in the field of software development. The loss
of Robert Heller or any of Merlin's key software programmers and developers
could have a materially adverse effect on our business, development, financial
condition and operating results. We do not maintain "key person" life insurance
on any of our directors or senior executive officers.
We Are Significantly Smaller Than Some of Our Competitors and Consequently, We
May Lack the Financial Resources Needed to Enter Markets and Increase Market
Share.
We will encounter competition from other software companies and from an
increasingly competitive computer software industry in general. The growing
market for utility software programs for the Linux and Unix operating systems
has attracted new market participants, as well as expansion by established
participants, resulting in substantial and increasing competition. Many of our
present and future competitors in the utility software program market have
substantially greater:
- financial, marketing, technical and development resources;
- name recognition; and
- experience
than we do.
Our competitors may be able to respond more quickly to new or emerging
advancements in the utility software program market and to devote greater
resources to the development, promotion and sale of their software programs. In
addition, companies that develop operating systems could introduce new or
upgrade existing operating systems or environments that include similar software
programs to those offered by us, which could render our products obsolete and
unmarketable. We may not be able to successfully compete against current or
future competitors which could significantly harm our business.
While we believe that PerfectBACKUP+ and Communicado Fax are competitive in the
utility software program market, no assurances can be given that competitors, in
the future, will not succeed in developing better software programs.
In addition, current and potential competitors may make strategic acquisitions
or establish cooperative relationships amongst themselves or with third parties
that could increase their ability to capture a larger portion of the market
share for such software programs. This type of existing and future competition
could affect our ability to form and maintain agreements with our distribution,
reseller, bundling and marketing partners. No assurances can be given that we
will be able to compete successfully against current and future competitors, and
any failure to do so would have a materially adverse effect on our business.
Our Stock Price is Volatile.
Our common stock is quoted on the OTC Bulletin Board and is thinly traded. In
the past, our trading price has fluctuated widely, depending on many factors
that may have little to do with our operations or business prospects. In
addition, the OTC Bulletin Board is not an exchange and, because trading of the
securities on the OTC Bulletin
<PAGE>
Board is often more sporadic than the trading of securities listed on an
exchange or NASDAQ, you may have difficulty reselling any of the shares you
purchase from the selling stockholders.
Trading of Our Stock May Be Restricted by the SEC's Penny Stock Regulations
Which May Limit a Stockholder's Ability to Buy and Sell our Stock.
The U.S. Securities and Exchange Commission has adopted regulations which
generally define "penny stock" to be any equity security that has a market price
(as defined) less than $5.00 per share or an exercise price of less than $5.00
per share, subject to certain exceptions. Merlin's securities may be covered by
the penny stock rules, which impose additional sales practice requirements on
broker-dealers who sell to persons other than established customers and
"accredited investors." The term "accredited investor" refers generally to
institutions with assets in excess of $5,000,000 or individuals with a net worth
in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly
with their spouse. For transactions covered by this rule, the broker-dealers
must make a special suitability determination of the purchaser and receive the
purchaser's written agreement of the transaction prior to the sale.
Consequently, these rules may affect the ability of broker-dealers to trade
Merlin's securities and affect the ability of existing stockholders to sell
their shares in the secondary market.
Concentration of Voting Share Ownership Could Allow a Relatively Few
Stockholders to Influence the Affairs of Merlin.
Stockholders owning a majority (i.e. 51%) of Merlin's outstanding voting stock
represent the ultimate control over Merlin's affairs. Three stockholders
currently control approximately 46% of the outstanding shares of Merlin's common
stock. As a result of this ownership, these stockholders will likely be able to
approve any major transactions including the election of directors without the
approval of the other stockholders.
No Dividends are Expected to be Declared in the Foreseeable Future.
We have not declared or paid any dividends on our common stock since our
inception, and we do not anticipate paying any such dividends for the
foreseeable future.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We know of no material, active or pending legal proceedings against us, nor are
we involved as a plaintiff in any material proceedings or pending litigation.
There are no proceedings in which any of our directors, officers or affiliates,
or any registered or beneficial shareholder, is an adverse party or has a
material interest adverse to our interest.
ITEM 2. CHANGES IN SECURITIES.
As set out in our Form 10-QSB Quarterly Report for the quarter ended June 30,
2000, pursuant to the Share Exchange Agreement, we acquired all of the issued
and outstanding common shares of our subsidiary, in exchange for the issuance of
an aggregate of 7,986,665 of our common shares. On July 27, 2000, we issued
6,667 common shares to a former shareholder of our subsidiary in an offshore
transaction, relying on Regulation S of the Securities Act of 1933 (the "1933
Act").
On August 7, 2000, also pursuant to the Share Exchange Agreement, we issued
20,000 common shares to one of the former shareholders of our subsidiary in an
offshore transaction relying on Regulation S of the 1933 Act.
On August 24, 2000, we sold Series A 10% Senior Secured Convertible Notes to
four accredited investors for an aggregate principal purchase amount of $2.1
million pursuant to a private placement. The Convertible Notes mature on August
18, 2003. The purchase price of $2.1 million is payable in two tranches.
Convertible Notes in the aggregate principal amount of $1.1 million were issued
on August 24, 2000. The principal amount or any portion of
<PAGE>
the principal amount of the Notes can be converted, at the holder's option, into
shares of common stock at the lesser of a fixed conversion price of $1.60,
subject to adjustment, or the price which is 95% of the average of the two
lowest intra-day trading prices of our common stock for the 30 day period on the
trading date immediately preceding the conversion date.
In connection with the sale of the Convertible Notes, we issued Series A
Warrants to the holder of the Convertible Notes to purchase up to 1,520,000
shares of our common stock at an exercise price of $1.75 per share from August
18, 2001 until August 18, 2007. The warrants will also be issued in two
tranches. We issued Series A Warrants to purchase up to 770,000 shares of our
common stock on August 24, 2000.
Both the Convertible Notes and the Series A Warrants were issued to four
accredited investors relying on Rule 506 of Regulation D and/or section 4(6) of
the 1933 Act. The transaction was private in nature and we had reasonable
grounds to believe that the investors were accredited, capable of evaluating the
merits and risks of their investment and that they acquired the Convertible
Notes and Series A Warrants for investment purposes.
On September 27, 2000, we issued 100,000 common shares to an accredited
investor, relying on Rule 506 of Regulation D and/or section 4(6) of the 1933
Act. The transaction was private in nature and we had reasonable grounds to
believe that the investor was accredited, capable of evaluating the merits and
risks of his investment and that he acquired the shares for investment purposes.
On September 27, 2000, also pursuant to the Share Exchange Agreement, we issued
an aggregate of 130,000 common shares to two former shareholders of our
subsidiary in offshore transactions, relying on Regulation S of the 1933 Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
On October 4, 2000, Webb Green was appointed to our Board of Directors, and on
October 25, 2000, Hank Barber was appointed to our Board of Directors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Reports of Form 8-K
On July 7, 2000, we filed a Current Report on Form 8-K announcing the
resignation of Hank Barber from our Board of Directors, effective June 25, 2000.
On August 10, 2000, we filed a Current Report on Form 8-K announcing the
following:
- the resignation of Gary Heller as a director and as our Chief Information
Officer and Secretary, effective July 7, 2000;
- the appointment of Trevor McConnell as a director (effective May 22, 2000)
and as our Chief Financial Officer and Treasurer (effective May 10,
2000);
- the resignation of Martin Holt as a director (effective May 16, 2000); and
<PAGE>
- the resignation of Shelley Montgomery her position our Treasurer
(effective May 10, 2000) and the appointment of Ms. Montgomery as our
Secretary.
On September 1, 2000, we filed a Current Report on Form 8-K announcing the
completion of a private placement, pursuant to which we sold an aggregate of US
$2.1 million in Convertible Notes and 1,520,000 Share Purchase Warrants. $1.1
million was advanced to us upon closing, and a further $1.0 million is due seven
trading days after the effectiveness of a Form SB-2 filed with the Securities
and Exchange Commission on November 6, 2000. The Convertible Notes mature on
August 18, 2003, and are convertible into shares of our common stock at a fixed
conversion price of $1.60 or such lesser adjustable price, as calculated
pursuant to the Note and Warrant Purchase Agreement. The Share Purchase
Warrants entitle the holders thereof to purchase up to 1,520,000 shares in our
common stock at an exercise price of $1.75 per share, subject to adjustment
pursuant to the terms of the Note and Warrant Purchase Agreement.
Consolidated Financial Statements Filed as a Part of the Quarterly Report
Our consolidated financial statements include:
Balance Sheets
Statements of Changes in Stockholders' Equity
Statement of Operations
Statements of Cash Flows
Notes to the Financial Statements
Exhibits Required by Item 601 of Regulation S-B
Exhibit
Number Description
(3) Articles of Incorporation/Bylaws
3.1 Articles of Incorporation of the Company (incorporated by reference
from the Company's Form 10-SB Registration Statement filed August 31,
1999)
3.2. Bylaws of the Company (incorporated by reference from the Company's
Form 10-SB Registration Statement filed August 31, 1999)
3.3 Certificate of Amendment to Articles of Incorporation, dated January 7,
2000 (incorporated by reference from the Company's Form 10-KSB
Annual Report, filed April 14, 2000)
3.4 Corporate Charter, dated March 27, 2000 (incorporated by reference
from the Company's Form 10-KSB Annual Report, filed April 14, 2000)
(10) Material Contracts
10.1 Note and Warrant Purchase Agreement between Merlin, Merlin Software
Technologies Inc., Narrangansett I, L.P., Narragansett Offshore Ltd.,
Pequot Scout Fund, L.P. and SDS Merchant Fund L.P., dated August
18, 2000
10.2 Registration Rights Agreement between Merlin, Narrangansett I, L.P.,
Narragansett Offshore Ltd., Pequot Scout Fund, L.P. and SDS Merchant
Fund L.P., dated August 18, 2000
10.3 Security Agreement between Merlin, Narrangansett I, L.P., Narragansett
Offshore Ltd., Pequot Scout Fund, L.P. and SDS Merchant Fund L.P.,
dated August 18, 2000
<PAGE>
10.4 Subsidiary Security Agreement between Merlin Software Technologies
Inc., Narrangansett I, L.P., Narragansett Offshore Ltd., Pequot Scout
Fund, L.P. and SDS Merchant Fund L.P., dated August 28, 2000
10.5 Intellectual Property Security Agreement between Merlin, Narrangansett
I, L.P., Narragansett Offshore Ltd., Pequot Scout Fund, L.P. and SDS
Merchant Fund L.P., dated August 18, 2000
10.6 Subsidiary Intellectual Property Security Agreement between Merlin
Software Technologies Inc., Narrangansett I, L.P., Narragansett
Offshore Ltd., Pequot Scout Fund, L.P. and SDS Merchant Fund L.P.,
dated August 18, 2000
10.7 Subsidiary Guaranty Agreement between Merlin Software Technologies
Inc., Narrangansett I, L.P., Narragansett Offshore Ltd., Pequot Scout
Fund, L.P. and SDS Merchant Fund L.P., dated August 18, 2000
10.8 Pledge Agreement between Merlin, Narrangansett I, L.P., Narragansett
Offshore Ltd., Pequot Scout Fund, L.P. and SDS Merchant Fund L.P.,
dated August 18, 2000
10.9 Note Agreement between Merlin and Narrangansett I, L.P., dated August
18, 2000.
10.10 Note Agreement between Merlin and Narrangansett Offshore Ltd., dated
August 18, 2000
10.11 Note Agreement between Merlin and Pequot Scout Fund, L.P., dated
august 18, 2000
10.12 Note Agreement between Merlin and SDS Merchant Fund, L.P., dated
August 18, 2000
10.13 Lock-up letter between Robert Heller, Narrangansett I, L.P.,
Narragansett Offshore Ltd., Pequot Scout Fund, L.P. and SDS Merchant
Fund L.P., dated August 17, 2000
10.14 Lock-up letter between Shelley Montgomery, Narrangansett I, L.P.,
Narragansett Offshore Ltd., Pequot Scout Fund, L.P. and SDS Merchant
Fund L.P., dated August 17, 2000
10.15 Lock-up letter between Trevor McConnell, Narrangansett I, L.P.,
Narragansett Offshore Ltd., Pequot Scout Fund, L.P. and SDS Merchant
Fund L.P., dated August 17, 2000
10.16 Lock-up letter between Brint Coxe, Narrangansett I, L.P., Narragansett
Offshore Ltd., Pequot Scout Fund, L.P. and SDS Merchant Fund L.P.,
dated August 28, 2000
10.17 Escrow Agreement between Merlin, Narrangansett I, L.P., Narragansett
Offshore Ltd., Pequot Scout Fund, L.P. SDS Merchant Fund L.P. and Kane
Kessler P.C., dated August 18, 2000
10.18 OEM Agreement between Merlin and Caldera Systems, Inc., dated October
16, 2000
10.19 Consulting Agreement between Merlin and E.B. Coxe & Co. LLC, dated
June 28, 2000
10.20 Consulting Agreement between Merlin and Matt Daen, dated October 3,
2000
10.21 Trademark and Copyright License between Merlinesque and Merlin
Software Technologies Inc., dated August 8, 2000
10.22 Trade-mark License (North America) between Merlin Software
Technologies Inc. and Merlinesque, dated August 8, 2000
10.23 Domain Name Assignment Agreement between Boss Systems Inc. and Merlin
Software Technologies Inc., dated August 14, 2000
<PAGE>
10.24 Offer to Sublease between Samsports.com and Merlin Software
Technologies Inc., dated August 25, 2000
10.25 Letter of Intent between Merlin and Certain Shareholders of Merlin
Software Technologies Inc., dated January 14, 2000
10.26 Consulting Agreement between Merlin and Webb Green, dated October 5,
2000
10.27 Stock Option Agreement between Merlin and Webb Green, dated October 4,
2000
10.28 Agreement between Merlin and Karen Thomas, dated May 3, 2000
10.29 Consulting Agreement between Merlin and Hank Barber, dated October 25,
2000
10.30 Stock Option Agreement between Merlin and Hank Barber, dated October
25, 2000
(**Exhibits 10.1 through 10.30 inclusive are incorporated by reference from
the Company's Form SB-2 Registration Statement, filed with the SEC on November
6, 2000)
10.31 Consulting Agreement between the Company and The Nostas Group, dated
April 11, 2000
(21) Subsidiary
21.1 Merlin Software Technologies Inc.
(27) Financial Data Schedule
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MERLIN SOFTWARE TECHNOLOGIES
INTERNATIONAL, INC.
By: /s/ Robert Heller
Robert Heller, President and CEO/Director
Date: November 20, 2000
By: /s/ Trevor McConnell
Trevor McConnell, Chief Financial Officer
and Treasurer/Director
Date: November 20, 2000
