UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
MERLIN SOFTWARE TECHNOLOGIES INTERNATIONAL, INC.
------------------------------------------------
(Name of small business issuer in its charter)
NEVADA 7372 88-0398103
------ ---- ----------
State or jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Identification No.)
organization Classification Code Number)
4199 LOUGHEED HIGHWAY, SUITE 200 AND 201,
BURNABY, BRITISH COLUMBIA, CANADA V5C 3Y6
(604) 320-7227
(Address and telephone number of principal executive offices)
4199 LOUGHEED HIGHWAY, SUITE 200 AND 201,
BURNABY, BRITISH COLUMBIA, CANADA V5C 3Y6
(604) 320-7227
(Address of principal place of business or intended principal place of business)
ROBERT HELLER, PRESIDENT AND CEO
MERLIN SOFTWARE TECHNOLOGIES INTERNATIONAL, INC.
4199 LOUGHEED HIGHWAY, SUITE 200 AND 201,
BURNABY BRITISH COLUMBIA, CANADA V5C 3Y6
(604) 320-7227
(Name, address and telephone number of agent for service)
Copy to:
Virgil Z. Hlus, Esq.
Clark, Wilson, Barristers and Solicitors
Suite 800 - 885 West Georgia Street
Vancouver, British Columbia, Canada V6C 3H1
Telephone: 604-687-5700
Approximate date of proposed sale to the public As soon as practicable after
the registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
<PAGE>
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
Title of each Proposed maximum Proposed maximum
class of securities Amount to be offering price aggregate offering Amount of
to be registered(1) registered per share price registration fee
---------------------- ------------------ ------------------ ------------------- ------------------
<S> <C> <C> <C> <C>
Common Stock to be
offered by Selling
Stockholders . . . . . 500,000 $ 0.969(2) $ 484,500 $ 127.91(2)
------------------ ------------------ ------------------- ------------------
Common Stock to be
offered for resale by
Selling Stockholders
upon Conversion of
Series A Convertible
Notes. . . . . . . . . 2,575,000(3) $ 0.969(2) $ 2,495,175 $ 658.73(2)
------------------ ------------------ ------------------- ------------------
Common Stock for
resale by holders of
Warrants assuming
the exercise of such
Warrants . . . . . . . 1,520,000(3)(4) $ 0.969(2) $ 1,472,880 $ 388.84(2)
------------------ ------------------ ------------------- ------------------
Total Registration
Fee. . . . . . . . . . $ 1,175.48
---------------------- ------------------
<FN>
(1) In the event of a stock split, stock dividend, or other transaction involving our common stock,
the number of shares registered shall automatically be increased to cover the additional shares in
accordance with Rule 416(a) under the Securities Act of 1933, as amended ("Securities Act").
(2) Fee calculated in accordance with Rule 457(c) of the Securities Act. Estimated for the sole
purpose of calculating the registration fee and based upon the average quotation of the high and low
price per share of the Company's common stock on October 31, 2000, as reported on the OTC Bulletin
Board.
(3) Represents common stock that may be issued upon the conversion of Series A 10% Senior Secured
Convertible Notes. Each Convertible Note is convertible into shares of common stock at 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 ending on the trading date
immediately proceeding the conversion date. We agreed to register a minimum of 4,095,000 shares of
common stock
<PAGE>
that may be issued on conversion of the Notes and exercise of the warrants. See
"Description of Securities" for further details on the terms of the notes and warrants.
(4) Represents common stock that may be issued upon the exercise of outstanding warrants. The
exercise price is $1.75 per share, subject to adjustment.
</TABLE>
The registrant hereby amends this registration statement on the date or dates as
may be necessary to delay its effective date until the registrant shall file a
further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on the date as the Commission, acting pursuant to said Section 8(a),
may determine.
PROSPECTUS SUBJECT TO COMPLETION
----------------, 2000
MERLIN SOFTWARE TECHNOLOGIES INTERNATIONAL, INC.
COMMON STOCK
This prospectus relates to the resale by certain selling stockholders of
Merlin Software Technologies International, Inc. of up to 4,595,000 shares of
common stock in connection with the resale of:
- up to 2,575,000 shares of common stock held by the selling stockholders
upon the conversion of certain outstanding Series A 10% Senior Secured
Convertible Notes;
- up to 1,520,000 shares of common stock held by the selling stockholders
assuming the exercise of certain outstanding Series A Warrants issued in
connection with the Series A 10% Senior Secured Convertible Notes; and
- 500,000 shares of common stock currently held by the selling stockholders.
The selling stockholders may offer to sell the shares of common stock being
offered in this prospectus at fixed prices, at prevailing market prices at the
time of sale, at varying prices or negotiated prices. We will not receive any
proceeds from the resale of shares of common stock by the selling stockholders.
However, we have received proceeds from the sale of shares of common stock that
are presently outstanding and will receive proceeds upon the exercise of any
Series A Warrants that may be exercised by the selling stockholders. We will
pay for expenses of this offering.
Our common stock is quoted on the "OTC Bulletin Board" under the symbol
"MLSW." On October 31, 2000, the bid quotation for one share of common stock
was $0.938. We do not have any securities that are currently traded on any
other exchange or quotation system.
OUR BUSINESS IS SUBJECT TO MANY RISKS AND AN INVESTMENT IN OUR COMMON STOCK
WILL ALSO INVOLVE A HIGH DEGREE OF RISK. YOU SHOULD INVEST IN OUR COMMON STOCK
ONLY IF YOU CAN AFFORD TO LOSE YOUR ENTIRE INVESTMENT. YOU SHOULD CAREFULLY
CONSIDER THE VARIOUS RISK FACTORS DESCRIBED BEGINNING ON PAGE 8 BEFORE INVESTING
IN OUR COMMON STOCK.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
<PAGE>
The information in this prospectus is not complete and may be changed. The
selling stockholders may not sell or offer these securities until this
registration statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these securities and it is
not soliciting an offer to buy these securities in any state where the offer or
sale is not permitted.
The date of this prospectus is _____________________, 2000.
Please read this prospectus carefully. You should rely only on the
information contained in this prospectus. We have not authorized anyone to
provide you with different information. You should not assume that the
information provided by the prospectus is accurate as of any date other than the
date on the front of this prospectus.
The following table of contents has been designed to help you find
important information contained in this prospectus. We encourage you to read
the entire prospectus.
TABLE OF CONTENTS
PROSPECTUS SUMMARY 6
OUR BUSINESS 6
SUMMARY OF RISK FACTORS 6
THE OFFERING 7
SUMMARY FINANCIAL DATA 7
RISK FACTORS 8
THE OFFERING 13
USE OF PROCEEDS 14
PRICE RANGE OF COMMON STOCK 14
DIVIDEND POLICY 15
MANAGEMENT'S PLAN OF OPERATIONS 15
General 15
Plan of Operation 15
Cash Requirements 15
Research and Development 16
Marketing 16
Personnel 16
Purchase or Sale of Equipment 16
BUSINESS 17
General Overview 17
Corporate History 17
Our Software Programs 17
Overview of the Industry and the Market 21
Our Strategy 22
<PAGE>
Methods of Distribution of Our Software Products 22
Competition 23
Intellectual Property, Government Approvals and Regulations 25
Suppliers 26
Customers 26
Employees 26
Research and Development 26
PROPERTY 26
MANAGEMENT 27
EXECUTIVE COMPENSATION 29
OPTIONS GRANTED IN THE CURRENT YEAR 31
VALUE OF THE OPTIONS GRANTED IN THE CURRENT YEAR 31
DISCLOSURE OF SEC POSITION OF INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES 32
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 32
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 34
PLAN OF DISTRIBUTION 35
SELLING STOCKHOLDERS 36
DESCRIPTION OF CAPITAL STOCK 40
LEGAL PROCEEDINGS 42
LEGAL MATTERS 42
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 42
EXPERTS 42
WHERE YOU CAN FIND MORE INFORMATION 42
FINANCIAL STATEMENTS AND SCHEDULES 43
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements as that term is defined
in the Private Securities Litigation Reform Act of 1995. These statements
relate to future events or our future financial performance. In some cases, you
can identify forward-looking statements by terminology such as "may", "will",
"should", "expects", "plans", "anticipates", "believes", "estimates",
"predicts", "potential" or "continue" or the negative of these terms or other
comparable terminology. These statements are only predictions and involve known
and unknown risks, uncertainties and other factors, including the risks in the
section entitled "Risk Factors", that may cause our or our industry's actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by these forward-looking statements.
<PAGE>
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Except as required by applicable law,
including the securities laws of the United States, we do not intend to update
any of the forward-looking statements to conform these statements to actual
results.
As used in this prospectus, the terms "we", "us", "our", and "Merlin" mean
Merlin Software Technologies International, Inc. and its subsidiary, unless
otherwise indicated.
All dollar amounts refer to US dollars unless otherwise indicated.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this prospectus. Consequently, this summary does not contain all of the
information that you should consider before investing in our common stock. You
should carefully read the entire prospectus, including the "Risk Factors"
section and the documents and information incorporated by reference into it.
Our Business
Merlin is a developer and producer of utility software programs for
personal computers with a Linux or Unix operating system. Currently, Merlin has
two software programs: a computer backup and restore program called
PerfectBACKUP+ and a multi-line fax program called Communicado Fax. The backup
and restore program is a utility software program that allows a computer user to
create a backup copy of the electronic computer files stored in a computer and
to use this backup copy to recover these files should the user accidentally
delete such files, wish to recover an earlier version of such files or if the
user's computer crashes and some or all of such files are lost. The multi-line
fax program allows a computer user to perform a number of facsimile type
functions using a modem on a personal computer, including receiving and printing
documents sent by facsimile from another location and creating and sending new
documents by facsimile. Both of these products are marketed to both small and
medium-sized businesses and are or will be distributed by way of bundling
agreements with original equipment manufacturers, reseller and distributor
agreements with independent resellers and distributors, and by ordering and
downloading either of the programs from our website. Version 6.2 of
PerfectBACKUP+ has been released and is available for sale on our website and
through our distributors and resellers. New versions of PerfectBACKUP+ which
incorporate new features and enhancements will be periodically released. It is
expected that an updated version of PerfectBACKUP+ will be released by November
15, 2000. The multi-line fax program is not in commercial release although an
evaluation copy is available for download from our website. It is expected that
the multi-line fax program will be in full commercial release by December 2000.
Merlin is a Nevada corporation with its business offices located at Suites
200 and 201, 4199 Lougheed Highway, Burnaby, British Columbia V5G 3Y6. Its
telephone number is (604) 320-7227. Merlin carries on business through its
wholly-owned subsidiary, Merlin Software Technologies Inc., a Nevada corporation
which maintains its business office at the same location. We were formed in
Nevada on August 30, 1995 under the name Austin Land & Development Inc. We were
inactive until we acquired all of the issued and outstanding shares, options and
warrants of Merlin Software Technologies Inc., also a Nevada corporation formed
on June 25, 1999. The acquisition was completed on April 26, 2000 by a share
exchange reorganization whereby we acquired shares, options and warrants of
Merlin Software Technologies Inc. in exchange for issuing an equal number of our
shares, options and warrants. The stockholders of Merlin Software Technologies
Inc. controlled approximately 64% of Merlin immediately after the share exchange
and accordingly, the acquisition has been treated like a reverse acquisition.
Financial information contained in this prospectus is presented as a
continuation of Merlin Software Technologies Inc.
Summary of Risk Factors
An investment in our Merlin's common stock involves a number of risks which
should be carefully considered and evaluated. These risks would include:
<PAGE>
- the fact that Merlin is a developing company and has generated only
minimal operating revenues, that operating revenues are and will be dependent on
the sale of its two software programs, and to date operating revenues have not
been sufficient to cover expenses;
- the fact that Merlin is involved in developing new software programs for
the Linux and Unix operating systems which software programs may not be
commercially accepted and successful; and
- the fact that Merlin may not be able to develop or expand the markets for
its software.
For a more complete discussion of risk factors relevant to an investment in
our common stock see the "Risk Factors" section beginning on page 8 of this
prospectus.
The Offering
Merlin has a total of 12,520,024 shares of common stock outstanding as of
September 30, 2000.
The selling stockholders are registering for resale up to 4,595,000 shares
of Merlin's common stock including:
- up to 2,575,000 shares of common stock held by the selling stockholders
upon the conversion of certain outstanding Series A 10% Senior Secured
Convertible Notes;
- up to 1,520,000 shares of common stock held by the selling stockholders
assuming the exercise of certain outstanding Series A Warrants issued in
connection with the Series A 10% Senior Secured Convertible Notes; and
- 500,000 shares of common stock currently held by the selling stockholders.
In August, 2000, we sold Series A 10% Senior Secured Convertible Notes to
four accredited investors for an aggregate principal 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 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 convertible notes, we issued Series A Warrants to
the holders 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.
We are also registering 500,000 shares which were issued in an earlier
private placement by Merlin Software Technologies Inc. and which were exchanged
for an equal number of shares of our common stock when we acquired Merlin
Software Technologies Inc.
We will not receive any of the proceeds of the shares of common stock
offered by the selling stockholders. Any proceeds we receive from the exercise
of the Series A Warrants will be used for further development of both of our
current software programs, implementation of a planned sales and marketing
program and/or for other general corporate purposes. See the section entitled
"Management's Plan of Operation" for further details.
<PAGE>
Summary Financial Data
The summarized consolidated financial data presented below is derived from
and should be read in conjunction with the financial statements, including the
notes to those financial statements which are included elsewhere in this
prospectus along with the section entitled "Management's Plan of Operation"
beginning on page 15 of this prospectus. As a result of our acquisition of our
subsidiary on April 26, 2000 via a reverse acquisition, our financial statements
are presented as a continuation of our subsidiary's operations. Accordingly,
financial information relating to periods prior to the acquisition is that of
our subsidiary.
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
JUNE 25, 1999
SIX MONTHS ENDED (INCORPORATION) TO
JUNE 30, 2000 DECEMBER 31, 1999
--------------------- --------------------
<S> <C> <C>
Revenue . . . . . . . . . . . . . . . . . . . $ 18,870 $ 0
--------------------- --------------------
Net Loss for the Period . . . . . . . . . . . $ (2,270,191) $ (616,628)
--------------------- --------------------
Loss Per Share - basic and diluted. . . . . . $ (0.24) $ (0.09)
--------------------- --------------------
AS AT AS AT
JUNE 30, 2000 DECEMBER 31, 1999
--------------------------------------------- --------------------- ---------------------
Working Capital (Deficit) . . . . . . . . . . $ (43,698) $ 397,830
--------------------- --------------------
Total Assets. . . . . . . . . . . . . . . . . $ 199,308 $ 831,374
--------------------- --------------------
Total Stockholders' Equity (Deficit). . . . . $ 68,378 $ (320,606)
--------------------- --------------------
Deficit Accumulated in the Development Stage. $ (2,886,819) $ (616,628)
--------------------------------------------- --------------------- --------------------
</TABLE>
RISK FACTORS
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 due to any of the
following risks. The trading price of the shares of our common stock could
decline due to any of these risks, 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.
<PAGE>
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.
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 $18,870 in revenues
through the first two quarters of 2000. Although we anticipate revenues to
increase, we also expect development costs and operating costs to 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 timely followed 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 $2,270,191
was realized in the six months ended June 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 an 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 August, 2001. We have
predicted that we will require approximately $3.9 million over the period ending
October 1, 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 were unable to obtain financing in the amounts and on terms deemed
acceptable, our business and future success may be adversely affected.
<PAGE>
Our Failure to Effectively Manage Our Growth Could Harm Our Future Business
Results.
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 September 30,
2000. Through this offering, 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 this offering,
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.
<PAGE>
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 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 the 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
because 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
<PAGE>
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 material adverse effect on our financial
condition and results in operations.
Lack of Patent and Copyright Protections for Merlin's Technologies Could Result
in Duplication or Infringement Allegations by Competitors.
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 our 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 material 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 among 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 material adverse effect on
our business.
<PAGE>
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 prospectus. In
addition, the OTC Bulletin Board is not an exchange and, because trading of the
securities on the OTC Bulletin Board is often more sporadic than the trading of
securities listed on an exchange of 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 shareholders.
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.
THE OFFERING
The selling stockholders are offering for resale up to:
- 2,575,000 shares of common stock held by the selling stockholders upon the
conversion of certain outstanding Series A 10% Senior Secured Convertible Notes;
- 1,520,000 shares of common stock held by the selling stockholders assuming
the exercise of certain outstanding Series A Warrants issued in connection with
the Series A 10% Senior Secured Convertible Notes; and
- 500,000 shares of common stock currently held by the selling stockholders.
The Series A 10% Senior Secured Convertible Notes and the Series A Warrants
were issued in connection with a private placement where we sold an aggregate
value of $2.1 million in Series A 10% Senior Secured Convertible Notes to
investors. 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 terms of the Convertible Notes and the Series A
Warrants are discussed in the section entitled "Description of Capital Stock"
starting on page 40 of this prospectus.
<PAGE>
The principal amount or any portion of the principal amount of the Series A
10% Senior Secured Convertible Notes can be converted by the holders at any time
until the close of business on the business day before the final maturity of the
Notes at the conversion price in effect at the date of conversion. The
conversion price will be 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 the common stock for the 30 day period ending
on the trading date immediately preceding the conversion date.
In addition to the Notes, the purchasers of the Notes also received Series
A Warrants to purchase up to 1,520,000 shares of our common stock at an exercise
price of $1.75 per share, subject to adjustment from August 18, 2001 until
August 18, 2007. We issued Series A Warrants to purchase up to 770,000 shares
of our common stock on August 24, 2000.
As part of the sale of the Convertible Notes and Series A Warrants, we
agreed to register at least 4,095,000 of our shares of common stock for resale
upon conversion of the notes and exercise of the warrants. Accordingly, this
prospectus covers the resale by the noteholders of 2,575,000 shares of common
stock issuable on conversion of the notes and 1,520,000 shares of common stock
issuable on exercise of the warrants.
This prospectus also covers the resale by certain selling stockholders of
500,000 shares of common stock which were issued pursuant to a private placement
at $0.50 per share by Merlin Software Technologies Inc. and which were exchanged
for an equal number of shares of our common stock when we acquired Merlin
Software Technologies Inc.
USE OF PROCEEDS
We will not receive any proceeds from the resale of the shares of common
stock by the selling stockholders. However, we will receive proceeds from the
exercise of the Series A Warrants referred to in this prospectus. The proceeds
from the exercise of Series A Warrants, if any, will be used for further
development of both of our current utility software programs, implementation of
a planned sales and marketing program and/or for other general corporate
purposes.
PRICE RANGE OF COMMON STOCK
Our common stock began quotation on the OTC Bulletin Board under the symbol
"MLSW" on January 13, 2000 but there was no trading activity until January 18,
2000. Prior to January 13, 2000, there was no public market for our shares of
common stock. The following quotations reflect the high and low bids for our
common stock based on inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions. The high and low prices
of our common stock for the periods indicated below are as follows:
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
<S> <C> <C>
January 18, 2000 to March 31, 2000 $10.00 $2.97
------ -----
June 30, 2000. . . . . . . . . . . $ 4.50 $1.16
------ -----
September 30, 2000 . . . . . . . . $ 2.94 $1.25
================================== ====== =====
</TABLE>
Our common shares are issued in registered form. Alpha Tech Stock Transfer (929
East Spiers Lane, Draper, UT 84020 (telephone: (801) 571-5118, facsimile (801)
571-6112) is the registrar and transfer agent for our common shares.
Our management is of the view that our market capitalization, being the
number of shares of our common stock outstanding multiplied by the trading price
of those shares, may not reflect our true value. The actual daily trading
volume of our shares of common stock over the three months ended September 30,
2000 has averaged less than 27,013 shares which indicates that the ability of
our stockholders to realize the current trading price of the shares they hold
may fluctuate if any substantial number of shares were to be offered for sale.
In addition, due to the
<PAGE>
extremely limited nature of the market for our common stock, any significant
trading may have a dramatic effect on the price of our common stock.
As of September 30, 2000, we had 12,520,024 shares of common stock
outstanding and approximately 75 stockholders of record. This number of
stockholders does not include stockholders who hold our securities in street
name.
DIVIDEND POLICY
We have not declared or paid any cash dividends since inception. We intend
to retain future earnings, if any, for use in the operation and expansion of our
business and do not intend to pay any cash dividends in the foreseeable future.
Although there are no restrictions that limit our ability to pay dividends on
our common shares, we intend to retain future earnings for use in our operations
and the expansion of our business.
MANAGEMENT'S PLAN OF OPERATION
The following discussion should be read in conjunction with our financial
statements and the related notes that appear elsewhere in this prospectus. 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 prospectus, particularly in the section entitled
"Risk Factors".
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. 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 in 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 for it to be competitive in the existing
marketplace and Communicado Fax requires further development and testing before
it can be made available for commercial release. In addition to the development
and testing work that has 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 do the following:
Cash Requirements
We will require a minimum of approximately $3.9 million over the period
ending October 1, 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 October 1, 2001. We estimate that approximately $654,000 is required to
hire further software developers and programmers, $1,717,000 is 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 the engaging of both senior and
intermediate management personnel and other general operating expenses. We have
<PAGE>
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. We intend to obtain the balance of the 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 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 on 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 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 June 30, 2000, we have expended $721,751 on the development of
PerfectBACKUP+ and Communicado Fax. 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.
Marketing
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 Value-Added Reseller Sales
Manager. The addition of these personnel will ensure that the overall strategy
for sales of our products is developed and maintained for each of these key
marketing channels. It is expected that these three individuals will be
supported by an additional five individuals whose function will range from
telemarketing to customer support. In order to compete in the existing markets
for our products and generate consumer awareness, we will be required to
undertake a very aggressive advertising and marketing campaign. This will
require us to place advertisements in several key trade magazine and publication
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 sources of media in the software industry and to the public market.
Personnel
As of October 15, 2000, we have 15 permanent employees with 4 in the area
of corporate administration, 10 in product development and 1 in sales. In the
next 12 months we plan to expand our total number of permanent employees in
these same departments to approximately 22 with four additional part-time
employees in product development.
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.
<PAGE>
BUSINESS
General Overview
Merlin is a developer and producer of utility software for personal
computers with a Linux or Unix operating system. We currently have two software
programs which include a computer backup and restore program called
PerfectBACKUP+ and a multi-line fax program call Communicado Fax.
The increased use of the Linux and Unix operating systems have created a
demand for packaged software applications and utility programs designed to
operate on these operating systems. We are meeting this demand by developing
and producing our two utility software programs: PerfectBACKUP+ and Communicado
Fax.
Corporate History
Merlin Software Technologies International Inc. is a Nevada corporation
formed on August 30, 1995 under the name Austin Land & Development, Inc. On
January 7, 2000, we changed our name to Merlin Software Technologies
International, Inc. Our subsidiary, Merlin Software Technology Inc., is also a
Nevada corporation which was formed on June 25, 1999.
On January 14, 2000, we entered into a letter agreement with Merlin
Software Technologies Inc. and its principal shareholders whereby we agreed to
acquire all of the issued and outstanding shares, options and warrants of Merlin
Software Technologies Inc. in exchange for issuing an equal number of our
shares, options and warrants. We agreed to issue these shares, options and
warrants on the same terms as had been issued by Merlin Software Technologies
Inc. On April 26, 2000, as a result of a share exchange agreement, we agreed to
issue 7,986,665 shares of our common stock, warrants to purchase up to 86,665
shares of our common stock and options to purchase up to 781,000 shares of our
common stock in exchange for all the issued and outstanding shares, warrants and
options of Merlin Software Technologies Inc. Merlin Software Technologies Inc.
had designated a further 150,000 options for grant, which designation was
cancelled and not included in the share exchange. As of September 30, 2000,
there were two shareholders of Merlin Software Technologies Inc. who had yet to
tender an aggregate of 16,666 shares for exchange. The share exchange resulted
in Merlin Software Technologies Inc. becoming our wholly owned subsidiary.
Prior to the share exchange, we were an inactive company called Austin Land &
Development Inc. Austin Land & Development Inc. did not generate any revenue
but did incur administrative expenses. Administration expenses were $14,210 and
$897 for the years ended December 31, 1999 and 1998 respectively.
The share exchange with the stockholders of Merlin Software Technologies
Inc. was accounted for as a reverse acquisition, since at the completion of the
share exchange the former stockholders of Merlin Software Technologies Inc.
controlled our company. Following the accounting for reverse acquisitions, the
financial statements subsequent to closing of the share exchange are presented
as a continuation of Merlin Software Technologies Inc. consistent with the
change of business to software development. Accordingly, our operations are
consolidated with those of Merlin Software Technologies Inc. since the date of
acquisition.
Our Software Programs
We are currently focussing on utility software programs developed for the
Linux and Unix operating systems. The primary utility program is our backup and
restore utility software program called PerfectBACKUP+, which allows a computer
user to create a backup copy of the electronic computer files stored in a
computer and to use this backup copy to recover these files should the user
accidentally delete such files, wish to recover an earlier version of such files
or if the user's computer crashes and some or all of such files are lost. The
second utility software program is Communicado Fax which is a multi-line fax
program which allows a computer user to perform a number of facsimile type
functions using a modem on a personal computer, including receiving and printing
documents sent by facsimile from another location and creating and sending new
documents by facsimile through the modem on a personal computer.
<PAGE>
PerfectBACKUP+
All computer operating systems are subject to loss of valuable data and
critical information through hardware failure and other forms of computer
crashes. For users, the loss of data from such crashes can be catastrophic. As
a result, users demand software that can back up and restore data and
information contained on their personal computers. PerfectBACKUP+ is a high
performance backup and restore software utility program for use on systems
utilizing Linux and Unix operating systems. PerfectBACKUP+ was originally
developed for the Unix operating system and was sold under the name "FastBACK
Plus Unix". All versions of FastBACK Plus sold over two million copies worldwide
before the rights to FastBACK Plus Unix were sold to Symantec. Because of
Symantec's orientation towards the Microsoft operating system, it did not pursue
the Unix market and the Linux operating system did not exist at that time. The
rights to FastBACK Plus Unix were then re-acquired by Gary Heller. In 1990,
PerfectBACKUP+ underwent an extensive re-write to convert it for use on the
Linux operating system, incorporate the various utilities that had been
developed and to upgrade PerfectBACKUP+ to a complete back-up and emergency
recovery tool. We acquired the rights to PerfectBACKUP+ from Gary Heller, a
former director and officer of both Merlin and its subsidiary, on July 13, 1999.
Gary Heller received 1,600,000 shares of common stock of our subsidiary for all
of his rights to PerfectBACKUP+ and FleetPro II, which shares were exchanged for
1,600,000 shares of our common stock in connection with our acquisition of
Merlin Software Technologies Inc.
PerfectBACKUP+'s (version 6.2) features include:
- device support - PerfectBACKUP+ supports all of the disk and tape devices
supported by a user's operating system;
- automated backups - PerfectBACKUP+ allows users to create and store
different backup packages, then schedule their operation automatically, even if
the user is present during the operation;
- easy to use file selection methods - PerfectBACKUP+'s include files and
exclude files options to allow the user to quickly browse and select files for
backup and restore operations using file names, wild cards and data criteria;
- graphical user interface - allows a user to quickly and easily begin using
PerfectBACKUP+ using a windows menu type environment, eliminating the learning
curve and user error; and
- menu driven character interface - allows a user to operate PerfectBACKUP+
from a dumb terminal, telenet session or over a modem.
PerfectBACKUP+ (Version 6.2) will operate on Linux operating systems
including RedHat 6.0 and 6.1, Caldera Open Linux 2.3 and eServer 2.3 and 2.4,
S.U.S.E. 6.1, 6.2 and 6.3, Corel Linux 1.0, Turbo Linux 4.0 and 6.0, Mandrake
6.X and Debian. PerfectBACKUP+ is now in use at Corel Labs, Caldera, IBM,
Tetley, Mitsubishi, AT&T and a wide range of commercial and educational
institutions around the world. At this time, in order to use PerfectBACKUP+ to
backup Apple Macintosh computers, the user must build a Linux backup server
using one of the above-noted Linux distributions and install PerfectBACKUP+ onto
that server.
PerfectBACKUP+ version 6.2 is currently available to be purchased and
downloaded from our website at www.merlinsoftech.com at a cost of $69 (download
or CD) or $89 (retail box and manual). The previously released version of
PerfectBACKUP+ is also available on our website, and can currently be downloaded
free of charge.
Users with questions regarding PerfectBACKUP+ can access our technical
support through the our website where frequently encountered problems are posted
and addressed by our technical support staff.
A test (beta) version of PerfectBACKUP+ version 7.0 for use on Red Hat's
6.2 and 7.0 Linux operating systems was released on October 18, 2000. This test
version can be downloaded for free from our website.
<PAGE>
We are currently completing version 7.0 of PerfectBACKUP+ which includes
additional and enhanced features. We anticipate that PerfectBACKUP+ version 7.0
will be commercially released by November 15, 2000 and a further version of
PerfectBACKUP+ (version 8.0) will be commercially released in February, 2001.
PerfectBACKUP+ version 7.0 will be available for purchase and download from our
website at a cost of $69 (download or CD) or $89 (retail box and manual).
Communicado Fax
In today's electronic age many people send information to each other by way
of facsimile transmission. As a result, people have demanded software programs
which will allow them to use their personal computers to send and receive
facsimile transmissions and thereby eliminate the need to purchase and maintain
an independent fax machine. Communicado Fax is a multi-line fax program that
allows a computer user to perform a number of facsimile type functions using a
modem on a personal computer. Communicado Fax is a desktop fax client and
server application for Linux and Unix operating systems, originally developed
for Unix and converted for use on Linux operating systems in 1994. It was
originally distributed under the name "HotWireFax" and Version 2 of HotWireFax
for the Linux operating system has been available free on our website since
August 1, 1999. We estimate that 30,000 copies have been downloaded by users
since its release. On July 13, 1999, we acquired the rights to Communicado Fax
and Internet Service Provider from Robert Heller, a director and officer of
Merlin and our subsidiary, for 1,600,000 shares of common stock of our
subsidiary, which shares were exchanged for 1,600,000 shares of our common stock
in connection with our acquisition of Merlin Software Technologies Inc.
HotWireFax version 3.0, now called Communicado Fax, for the Linux
operating system was announced in January, 2000 and is currently undergoing
testing. This latest version contains support for a much wider range of modems
and contains a new graphical user interface. A commercial version of
Communicado Fax version 4.0 is expected to be released by November 15, 2000, and
should retail for $69 (download or CD) or $89 (retail box and manual). The
basic features of Communicado Fax includes:
- quick fax - immediate transmission of faxes;
- packaged faxes - create standard faxes which can be sent on demand;
- modem support - ability to support almost any desktop personal computer
modem;
- custom coversheets - allows a user to create custom cover sheets with
graphics;
- acceptance of user input in ASCII text;
- view faxes - view faxes on screen and zoom and rotate images;
- attach documents - allows users to attach word processing, postscript,
ASCII text documents and inbound/outbound faxes to any fax;
- ability to be configured to work as a printer driver to Star Office,
Applixware, WordPerfect and others;
- call screening - allows users to disconnect unwanted faxes;
- call forwarding - allows users to have faxes retransmitted upon reception
to another number;
- online "help" - allows users to find assistance online;
- automatic retry - automatic spooler to retry faxes and to advise of
results via email;
<PAGE>
- export faxes - allows user to export pages of a fax in a graphical format
to another software program; and
- flexible login - allows user to accept fax and data logins on the same
modem.
Communicado Fax version 4.0 will operate on Linux operating systems including
RedHat 6.0 and 6.1, Caldera Open Linux 2.3 and eServer 2.3 and 2.4, S.U.S.E.
6.1, 6.2 and 6.3, Corel Linux 1.0, Turbo Linux 4.0 and 6.0, Mandrake 6.X and
Debian. Users with questions regarding Communicado Fax will be able to access
our technical support through our website where frequently encountered problems
will be posted and addressed by our technical staff.
FleetPro II
On July 13, 1999, we also acquired the rights to FleetPro II. FleetPro II
is a software program which provides automated management functions for
companies which use fleets of vehicles in their business operations. The
software program includes modules that perform various functions including
dispatching, order processing, delivery route optimization, vehicle tracking,
vehicle load optimization, vehicle maintenance scheduling, tracking and
analyzing vehicle fuel consumption and general accounting functions.
To date, we have focussed on the development and commercial release of
PerfectBACKUP+ and Communicado Fax and have not expended any significant
resources on the development of FleetPro II. We do not expect to expend any
resources on the development and release of FleetPro II until we have generated
significant revenues from the sales of our other software programs.
BDI Virage
On July 13, 1999, we also acquired the rights to BDI Virage which is an
internet based business directory software program. The program provides a
business directory service over the Internet similar to that found in the yellow
pages of a telephone directory.
To date, we have focussed on the development and commercial release of
PerfectBACKUP+ and Communicado Fax and have not expended any significant
resources on the development of BDI Virage. We do not expect to expend any
resources on the development of BDI Virage until we have generated significant
revenues from the sale of our other software programs.
Internet Service Provider Software
On July 13, 1999, we also acquired the rights to certain accounting and
management software intended for use by internet service providers. The program
provides accounting and customer management for companies who are internet
service providers.
To date, we have focussed on the development and commercial release of
PerfectBACKUP+ and Communicado Fax and have not expended any significant
resources on the development of the Internet Service Provider Software. We do
not expect to expend any resources on the development of this product until we
generate significant revenues from the sales of our other software programs.
Option Source Project
We have also implemented a concept of rewarding developers of software
programs for the Linux operating system by announcing the Option Source Project.
Through the Option Source Project, we plan upon taking advantage of a modified
form of the existing model of open source code development in Linux. Currently,
Linux is "open source" which means the rights are held by the developer of the
code but this code is also available to the public to be modified as needed so
long as any modifications are also published and made available to the public.
This has allowed programmers all over the world to collaborate to develop the
Linux operating system and the applications which run on it. Through this
method Linux has evolved to become a highly reliable operating system.
<PAGE>
We plan upon expanding and capitalizing upon this method of software
development. Through the Option Source Project we will be able to acquire a
nonexclusive license from programmers of approved projects for their software
and half of their intellectual property rights in the software that they
develop. We expect that this will speed the development of new software
programs for the Linux operating system, provide us with direct access to the
new software programs and to experienced developers and software programmers.
The Option Source Project is a natural evolution of the open source method
currently in use. We expect this program to benefit programmers who have
developed proprietary software packages that have not realized their commercial
potential. By placing their software with us under this program, we will assist
them in establishing a market for their software programs once the software
program is completed and we will assist them in distributing and selling the new
packaged software programs.
Overview of the Industry and the Market
We operate in the software development industry. The most dynamic changes
in this industry continue to be in the market consisting of networked computer
systems comprised of servers and workstations. Historically, servers have used
the Unix operating system, and since 1993, the Linux operating system although
Microsoft's Windows NT operating system has gained some significant market share
over the past few years. In the last two years, installation of the Linux
operating system for both servers and desktop has grown significantly.
Accordingly, the Linux operating system has moved in to compete with the growth
of these existing operating systems.
The Linux operating system is an open source operating system meaning that
it is both free to download from the Internet and open to modification and
enhancement by users and software programmers/developers. The Linux operating
system, however, still tends to be used by sophisticated technical users as it
lacks sophisticated tool and utility software programs with the same ease of
configuration and user friendliness as is found with the Microsoft Windows and
Apple Macintosh operating systems.
Commercial adoption of the Linux operating system is being promoted by
companies such as Red Hat, SuSE, TurboLinux, VA Linux, Linuxcare, Silicon
Graphics, IBM and others. These commercial providers of Linux operating systems
take the freely available Linux operating system and package it with
enhancements that add commercial value and make the operating system easier to
install and use. In addition they offer service and support contracts for their
Linux operating systems.
There is another group of vendors that provide Intel and Alpha processor
based servers and workstation with pre-installed Linux operating systems. These
vendors do not support Microsoft Windows or Apple Macintosh OS on their
hardware. These hardware manufacturers include VA Linux, Cobalt Networks and
Atipa.
In addition to the above, major Unix hardware and software vendors are now
pushing the commercialization of Linux with major investments and commitments in
various forms from IBM, Dell, Gateway, Compaq, Hewlett-Packard and rebel.com.
Many traditional Unix software vendors are beginning support for the operating
system including Oracle, Sybase, Informix, IBM, Lotus, Corel, Sun and Progress.
Even Microsoft has taken a stake in the Linux operating system through it recent
investment in Corel Corporation. There is also strong growth in the number of
companies offering training and support services for the Linux operating system
with the premier suppliers being SCO (Santa Cruz Operations) and Linuxcare.
Today many colleges are providing Linux courses.
The market for our software products is widespread and is growing as more
businesses and individuals adopt the Linux operating system to run their
computer systems and continue to utilize the Unix operating system to run their
computer systems. The market for Merlin's software is growing in proportion to
the growth and acceptance of the Linux operating system. According to IDC,
Linux servers already represent 36% of all internet servers. With each new
update release of the Linux operating system, approximately two updates per
calendar year, the operating system becomes more friendly and more acceptable to
the average consumer. With each new Linux installation, the demand for mission
critical applications for the operating system becomes more pressing. Merlin
intends to fill this void by providing best-of-breed tools and utilities. As
businesses and individuals are using their computers for more time sensitive and
important functions that are integral to a businesses day to day operations and
to conduct business over the Internet, the demand for the Linux operating system
will continue to grow. Merlin
<PAGE>
intends to meet this growth by providing superior software utility programs for
the Linux and Unix operating system.
Our Strategy
Our objective is to be a leading provider of high quality and competitively
priced utility software programs. To achieve our business objectives, we have
identified the following key components to our business strategy:
- development of software programs that are competitive in terms of price
and features;
- development of software programs that can be used on a variety of
different operating systems;
- development of software programs that integrate functionality from
previously separate software programs;
- development of software programs with superior technology and features;
and
- development and implementation of our sales marketing model which focuses
on distributing our software products through resellers, distributors and
bundling our software products with other companies software products and
original equipment manufacturers.
Methods of Distribution of Our Software Products
Our current sales and marketing strategy focuses on distributing and
selling our products through resellers, distributors and other companies who
bundle their software programs with our software programs. These relationships
have allowed us to distribute and sell our software programs to a greater number
of users in a range of different markets. We are currently investing, and
intend to continue to invest, significant resources to develop these
distribution channels. Our efforts to expand our distribution channels are
intended to penetrate the market and achieve widespread commercial acceptance of
our software utility programs.
We will also attempt to capture market share for our products through the
distribution of evaluation versions of our software over the internet. By
distributing such evaluation versions of our software programs, we intend to
attract future customers who will purchase our software programs after they have
actually had an opportunity to use and evaluate a version of our software
programs. A number of companies, like Netscape, Winzip, Eudora, Pegasus and
Microsoft, have achieved success in the sales and acceptance of their software
products by using such a sales and marketing strategy.
We recently began a process to establish an original equipment manufacturer
sales group. The focus of this group will be to develop partnership
opportunities that will see our software programs bundled with manufacturers of
modems, backup and archive devices, and other computer equipment direct from the
factory. We see this as a key component in our business development strategy
for our software programs.
We also sell and distribute our products through our website where users can
order or download copies of our current software programs.
We have entered into distribution, bundling or reseller agreements with the
following companies:
- Caldera Systems, Inc. - bundling PerfectBACKUP+ with Caldera's OpenLinux
line of software products;
- TurboLinux Inc. - bundling PerfectBACKUP+ with TurboLinux's line of Linux
software products;
- Koch Media Ltd. - distribution and sale of PerfectBACKUP+ to Koch's retail
customers in the United Kingdom and Southern Ireland;
<PAGE>
- LinuxLand - sale of PerfectBACKUP+ to its international customer base
through its online retail outlet and bundling PerfectBACKUP+ with its Linux
product Mandrake;
- The LinuxStore.com - sale of PerfectBACKUP+ to its customer base through
its online retail outlet and its direct sales force;
- G.T. Enterprises - distribution and sale of PerfectBACKUP+ to its chain of
distributors, resellers and retailers throughout India;
- LinuxMall.com - distribution and sale of PerfectBACKUP+ to other
distributors, resellers and end user customers worldwide, with the exception of
direct sales in the UK and Southern Ireland;
- Impera Software Corp. - distribution and sale of PerfectBACKUP+ to other
distributors, resellers and end user customers worldwide, with the exception of
direct sales in the UK and Southern Ireland;
- Beyond 2000 Solutions - distribution and sale of PerfectBACKUP+ to other
distributors, resellers and end user customers worldwide, with the exception of
direct sales in the UK and Southern Ireland;
- LinuxPlaza - distribution and sale of PerfectBACKUP+ to other
distributors, resellers and end user customers worldwide, with the exception of
direct sales in the UK and Southern Ireland;
- IU Software - distribution and sale of PerfectBACKUP+ to other
distributors, resellers and end user customers worldwide, with the exception of
direct sales in the UK and Southern Ireland;
- Circadian Software - distribution and sale of PerfectBACKUP+ to other
distributors, resellers and end user customers worldwide, with the exception of
direct sales in the UK and Southern Ireland;
- eLinux.com (a division of Creative Computers Inc.) - license for the
distribution and sale of all our current products;
- Hamni Information & Communications Co. Ltd. - distribution and sale of
PerfectBACKUP+ to other distributors, resellers and end user customers
worldwide, with the exception of direct sales in the UK and Southern Ireland;
- Cosmos Engineering Co. Ltd. - distribution and sale of PerfectBACKUP+ to
its chain of distributors, resellers and retailers throughout the United States
and worldwide, with the exception of direct sales in the UK and Southern
Ireland;
- Italsel SRL - distribution and sale of PerfectBACKUP+ to its chain of
distributors, resellers and retailers throughout Italy and worldwide, with the
exception of direct sales in the UK and Southern Ireland;
- Programmers Paradise Inc. - distribution and sale of PerfectBACKUP+ to its
chain of distributors, resellers and retailers throughout the United States;
Competition
We face competition from numerous companies, some of which are more
established, have greater market recognition, and have greater financial,
production, and marketing resources than we do. Our software programs compete
on the basis of certain factors, including:
- product features and performance;
- price;
<PAGE>
- ease of use; and
- compatibility.
The market for our software programs is competitive, subject to rapid
change and significantly affected by new product introductions and other market
activities of industry participants. Many of our competitors have longer
operating histories, an established base of customers, greater market experience
and greater financial, technical, name recognition and other resources than we
do.
PerfectBACKUP+
Competition for PerfectBACKUP+ comes from two sources, other Linux software
vendors that provide backup utility software for Linux systems and backup
software developers that provide backup software utilities on Microsoft Windows,
Windows NT and Unix.
Further, a new source of competition is building in the networked backup
services market. This is a service where the Internet service provider
establishes a server farm and provides disk storage space to end users at remote
locations. The end users use the storage space for making backups.
Our main competitors of PerfectBACKUP+ which provide Linux based backup
utility software programs include:
- Enhanced Software Technologies which has a product called BRU. BRU sells
for $99 for a non-network, personal version and $289 for a full scale network
version which is the product most comparable to PerfectBACKUP+;
- Lone-Tar, a backup program from Lone Star Software, has a retail price of
$236. For an additional $59 the customer can purchase the AIR-BAG product, a
crash recovery tool. Unlike PerfectBACKUP+, this software does not currently
have a graphical user interface;
- Microlite has a product called BackupEDGE which sells for $300 for Linux
but this product also does not have a graphical interface;
- Seagate Software has a backup product similar to PerfectBACKUP+ that sells
for $695. Seagate's backup software division is a part of Veritas; and
- Arkeia has a product that provides essentially the same features as
PerfectBACKUP+. They are currently providing a two client version for personal
use for free. Commercial server use begins at $700 per copy. Clients are an
additional charge.
In the Unix operating system area, the main competitor is Legato, a company
that focuses on enterprise Unix server backup. However, Legato's product is
extremely expensive to install and maintain when compared with PerfectBACKUP+.
Other competing products and services exist from Computer Associates and IBM.
However, due to the significantly different focus of their products, for
mainframe computers, and the pricing model they have implemented, we do not feel
that we compete with them directly, nor to we anticipate competing with them in
the near future.
There is also an open source backup utility project but we do not see this
as a significant competitor at this time. Finally, there are a number of
shareware backup products available for the Microsoft Windows operating system.
We feel that these products are not direct competitors as they are not available
for the Linux or Unix operating systems, but could provide us competition in the
future when we release PerfectBACKUP+ for use on the Microsoft Windows operating
system.
Part of our strategy for dealing with the competition is our own pricing
model. With the download version priced at $69 and the retail boxed product
priced at $89, we feel we can be very competitive in this market.
<PAGE>
Communicado Fax
We anticipate that Communicado Fax will be priced at $69 (download or CD)
or $89 (retail box and manual). Competition for Communicado Fax comes primarily
from Unix fax software suppliers and the new software technologies including
electronic mail and Internet conferencing. However, there are also fax products
similar to Communicado Fax available for the Microsoft Windows and Windows NT
operating systems and there are a couple of open source fax products. None of
these competing products provides a complete end-to-end solution. The Internet
has also given rise to e-mail to fax gateways and fax portals.
Our main competitors of Communicado Fax from Linux based multi-line fax
software programs include:
- VSI*Fax whose base product for Linux is priced at $1,434 and is limited to
5 users and four fax ports, or lines;
- Faximum whose client server product sells for $495 or more depending on
configuration. As of this date, Faximum does not appear to provide fax viewing
for the X-Window environment used by Linux and Unix;
- RightFax, a Windows NT operating system based fax server product, is
extremely expensive and does not provide the features or performance of the Unix
based fax servers;
- Sendfax is an open source product that does not provide many of the
features found in Communicado Fax; and
- Hylafax is another open source product that does not provide many of the
features found in Communicado Fax and is not as user-friendly as Communicado
Fax.
Sendfax is widely used and provides some voice facility but is not very
well supported and is very difficult to configure. It also does not include an
integrated desktop environment and the user is left to their own devices to put
together different programs to provide a desktop solution. Hylafax, the latest
open source entry, is also a difficult product to configure and suffers problems
similar to Sendfax for desktop use.
The market in which we compete is intensely competitive, highly fragmented
and rapidly changing. In order to compete, we must enhance our current software
programs, enhance the interoperability of our software programs with other
programs and operating systems, develop new products in a timely fashion and
develop key strategic partnerships with other hardware and software vendors.
Many of our competitors are larger and have greater financial, technical,
marketing and other resources than us. Because there are relatively low
barriers to entry in the software market, we expect additional competition from
other established and emerging companies. Increased competition is likely to
result in price reductions, reduced gross margins and increased difficulty in
establishing market share, any of which could have a material adverse affect on
our business, operating results and financial condition.
Intellectual Property, Government Approvals and Regulations
We have applied for or are in the process of applying for trademark
protection in the United States for "Merlin Software Technologies, Inc.",
"Software That's Pure Magic", "Linux for the Masses", "Communicado Fax", "Merlin
Softech" and "Option Source". We have applied for trademark protection in
Canada for "Linux for the Masses". We have also sought trademark protection in
the United States and Canada for our corporate symbol which is a penguin dressed
in a magicians cape and hat with wand in hand. We have secured the registration
of the domain name "www.merlinsoftech.com", among others.
Our software programs are not protected by any patents nor do we intend to
seek any such protection. We do treat our software programs and their
associated technology as proprietary and own all copyrights in such programs.
We have applied for or are in the process of applying for copyright
registrations in the United States for our software programs.
<PAGE>
We require all employees to sign confidentiality agreements regarding their
work for us and all rights to technology created by such employees are retained
by us. We distribute our software programs under license agreements that are
signed by end-users. Despite our precautions taken to protect our software
programs, unauthorized parties may attempt to reverse engineer, copy, or obtain
and use information we regard as proprietary. Policing unauthorized use of our
products and infringement of our copyrights is difficult and software piracy is
expected to be a persistent problem. Additionally, the laws of some foreign
countries do not protect our proprietary rights, including our copyrights, to
the same extent as do the laws of the United States.
We have however filed a patent application in connection with the process
involved in our Open Source Project.
We are not aware that our products, trademarks, or other proprietary rights
infringe the proprietary rights of third parties. However, from time to time,
we may receive notices from third parties asserting that we have infringed their
patents or other intellectual property rights. In addition, we may initiate
claims or litigation against third parties for infringement of our proprietary
rights or to establish the validity of our proprietary rights. Any such claims
could be time-consuming, result in costly litigation, cause product shipment
delays or lead us to enter into royalty or licensing agreements rather than
disputing the merits of such claims. As the number of software products in the
industry increases and the functionality of such products further overlap, we
believe that software developers may become increasingly subject to infringement
claims. Any such claims, with or without merit, can be time consuming and
expensive to defend. An adverse outcome in litigation or similar proceedings
could subject us to significant liabilities to third parties, require
expenditure of significant resources to develop non-infringing technology,
require disputed rights to be licensed from others, or require us to cease the
marketing or use of certain products, any of which could have a material adverse
effect on our business, operating results and financial condition.
Suppliers
All supplies used in our business are readily available from a number of
sources.
Customers
We believe that a majority of our future growth will be generated from new
customers. This expectation is the reason why we intend on developing an
in-house sales and marketing team.
Employees
We have 15 permanent employees in the areas of corporate administration,
product development and sales and development. We also have 4 independent
contractors providing research and strategic planning services, management
consulting services, market research services and capital raising services.
Research and Development
As of June 30, 2000, we have expended an aggregate of $721,751 on the
development of PerfectBACKUP+ and Communicado Fax. We will expend a significant
amount of time and money 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.
PROPERTY
Merlin leases approximately 3,700 square feet of office space located at
4199 Lougheed Highway, Suites 200 and 201, Burnaby, British Columbia, Canada V5C
3Y6 (604) 320-7227 under a lease which expires on August
<PAGE>
30, 2002 for an annual rent of approximately CDN$51,800 (approximately $35,000),
including its proportionate share of operating expenses.
MANAGEMENT
Directors and Executive Officers of Merlin
All directors of the Company hold office until the next annual meeting of
the shareholders or until their successors have been elected and qualified. The
officers of the Company are appointed by the Board of Directors and hold office
until their death, resignation or removal from office.
Our directors and executive officers, their ages, positions held, and duration
as such, are as follows:
<TABLE>
<CAPTION>
DATE FIRST
NAME POSITION HELD WITH THE COMPANY AGE ELECTED OR APPOINTED
--------------------------------- ----------------------------------------------- --- --------------------
<S> <C> <C> <C>
Robert Heller Director and President 45 Director and President
since January 19, 2000
Trevor McConnell Director, Chief Financial Officer and Treasurer 36 Director since May 22,
2000 and Chief Financial
Officer and Treasurer
since May 10, 2000
Shelley Montgomery Director, Vice President and Secretary 43 Director since January
19, 2000 and Vice
President and Secretary
since June 23, 2000
Webb Green Director 58 Director since October
4, 2000
Hank Barber Director 57 Director since October
25, 2000
================================= =============================================== === ====================
</TABLE>
Business Experience
The following is a brief account of the education and business experience
during at least the past five years of each director, executive officer and key
employee, indicating the principal occupation during that period, and the name
and principal business of the organization in which such occupation and
employment were carried out.
Robert Heller, President and Chief Executive Officer
Robert Heller has been involved in the computer and software industries
since 1978 and in the Internet business since 1990. He has owned his own
software consulting business for over 17 years, providing design development and
management to key corporate accounts throughout Canada and the United States.
He is also the President of B.O.S.S. Systems Inc., a software development and
consulting firm, having served in that capacity since 1986. He was the
President of Express Lane Communications Corporation, an Internet service
provider, for two years from 1995 until 1997. For the six years prior to 1986,
Mr. Heller held various managerial positions at Radio Shack, Canada, and Tandy
Corporation, U.K. where he spent six years.
Mr. Heller was educated in South Africa and England, graduating from
Cauldon College of further education in the UK in 1976. Mr. Heller has
completed a number of post secondary education courses through private and
professional institutions. Mr. Heller has over eighteen years of experience
with UNIX based software
<PAGE>
application and development. He has designed, developed and implemented systems
including health care management systems, financial management software for
automotive dealerships and UNIX based voice and faxmail server systems for
InstaFax. Mr. Heller has also provided consulting services to N.C.R.
Corporation, Xerox, Data Processing Managers Association and Unisys, and
specializes in the analysis of business needs and procedures.
Trevor McConnell, Chief Financial Officer and Treasurer
Trevor McConnell is a member of the Certified General Accountants
Association of British Columbia. He was been involved in accounting and
financial management since 1982. From April 1992 to September 1996, he was the
Vice President of Finance for Glas-Aire Industries Ltd., a public company
involved in the manufacture of automotive accessories, whose common shares trade
on the Nasdaq SmallCap Market. From September 1996 to September 1999, he was
the Director of Finance and Administration for Seacor Environmental Inc., the
Canadian subsidiary of Secor Inc., an environmental engineering company.
From March 1988 to April 1992, he was employed with a firm of Chartered
Accountants, as an accountant and performed a wide range of services for public,
private and non-profit organizations. From October 1999 to April 2000, he was
an independent consultant to a legal practice specializing in real estate
transactions and has provided consulting services to various businesses on
Canadian commodity tax matters.
Shelley Montgomery, Vice President Sales
Shelley Montgomery has been involved in marketing since the early 1970s.
Between 1998 and January, 1999, Ms. Montgomery was the Vice President of
Marketing and a director of Agenta Systems Inc. From 1996 to 1997, she was the
Vice President of Marketing and a director for Express Lane Communications Inc.,
an Internet service provider. From 1986 until 1996, Ms. Montgomery was
President and owner of Medpro Billing Inc., a medical billing service provider
and franchisor. Ms. Montgomery sold the company in 1996, and successfully
undertook the development of an Internet service provider's marketing program,
an on-line directory franchise marketing plan, and a franchise program for an
international software company.
Webb Green, Director
Webb Green has been involved in providing market research services for over
twenty years. Since 1986, Mr. Green has been the CEO of TRD Frameworks who
provided market research services for a number of regional and national clients
like Airborne Express, Alaska Airlines, DuPont, Microsoft Corporation among
others. Mr. Green obtained his Masters of Business Administration from
California State University. Since then he has taken some post-graduate courses
at Harvard University, University of California at Berkeley and the University
of Washington.
Hank Barber, Director
Hank Barber is the founder and President of Hank Inc., a consulting firm
that specializes in brand audits and strategic growth planning for developing
brands and companies. Hank Inc. was founded in 1997. Prior to that from 1983
to 1997, Mr. Barber was the Managing Director of the Seattle office of McCann, a
multinational advertising agency.
Mr. Barber is a graduate of the University of Washington in Journalism
where he served as an extension program advisor and instructor for three years.
He also completed the University of Chicago Graduate School executive program
and has served as Chairman of the Washington State Council of the American
Association of Advertising Agencies.
Committees of the Board
We do not have an audit or compensation committee at this time.
<PAGE>
Family Relationships
There are no family relationships between any director or executive
officer.
EXECUTIVE COMPENSATION
No compensation was paid to the officers and directors of Merlin (the
inactive public company) during the fiscal year ended December 31, 1999. No
executive officer of Merlin received annual salary and bonus in excess of
$100,000. Prior to the acquisition of Merlin Software Technologies Inc. and for
the period between June 25, 1999 (incorporation) and December 31, 1999, Merlin
Software Technologies Inc. paid the following compensation to its chief
executive officer and its executive officers:
<TABLE>
<CAPTION>
SECURITIES
NAME AND PRINCIPAL POSITION SALARY PAID(1) UNDERLYING OPTIONS
------------------------------------------------- --------------- -------------------
<S> <C> <C>
Robert Heller, President. . . . . . . . . . . . . $ 67,750 150,000(2)
--------------- -------------------
Shelley Montgomery, Secretary and Vice President. $ 42,700 150,000(2)
--------------- -------------------
Gary Heller(3). . . . . . . . . . . . . . . . . . $ 57,500 150,000(2)
================================================= =============== ===================
<FN>
(1) For the period between June 25, 1999 (incorporation) and December 31, 1999.
(2) Represents options to acquire 150,000 shares at $1.00 per share. These were
exchanged for options to acquire 150,000 shares of our common stock at $1.00 per share
as part of our acquisition of Merlin Software Technologies Inc.
(3) Gary Heller resigned as a director and officer of Merlin and our subsidiary as
of July 7, 2000.
</TABLE>
There were no grants of stock options or stock appreciation rights made
during the fiscal year ended December 31, 1999 to Merlin's (the inactive public
company) executive officers and directors, prior to the acquisition of Merlin
Software Technologies Inc. Prior to the share exchange, Merlin Software
Technologies Inc. granted an aggregate of 781,000 stock options to its
employees, consultants, officers and directors. On January 14, 2000, we entered
into a letter agreement with Merlin Software Technologies Inc. whereby we agreed
to grant an equal number of stock options in exchange for these existing stock
options. The options were actually exchanged on April 26, 2000. The grants of
stock options are described below.
Employment/Consulting Agreements
On March 8, 2000, we entered into an agreement with Robert Heller in
connection with his positions as President and Chief Executive Officer. Mr.
Heller's annual salary is $120,000, together with any annual bonuses as may be
determined by our board of directors. Mr. Heller's agreement was effective
January 19, 2000 and continues until terminated in accordance with its
provisions. The Company is entitled to terminate Mr. Heller's agreement at any
time for cause and without cause on three months written notice (or twelve
months salary in lieu of such written notice). Pursuant to the terms of the
agreement, Mr. Heller is entitled to a severance payment of $240,000 or two
years salary, whichever is greater, plus 700,000 shares of common stock should
there be a change of control of Merlin.
On May 1, 2000, we entered into an agreement with Trevor McConnell in
connection with his position as Chief Financial Officer and Treasurer. Mr.
McConnell's annual salary is CDN$66,000 (approximately $44,000) together with
any annual bonuses as may be determined by our board of directors. Mr.
McConnell's agreement was effective April 24, 2000 and continues until
terminated in accordance with its provisions. The Company is entitled to
terminate Mr. McConnell's agreement at any time for cause and without cause on
three months written notice (or twelve months salary in lieu of such written
notice). Pursuant to the terms of the agreement, Mr. McConnell is
<PAGE>
entitled to a severance payment of CDN$69,000 (approximately $46,000) or twelve
months salary, which ever is greater, plus 100,000 shares of our common stock
should there be a change of control of Merlin.
On March 6, 2000, we entered into an agreement with Shelley Montgomery in
connection with her positions as Treasurer and Vice President of Sales. Ms.
Montgomery's annual salary is $96,000, together with any annual bonuses as may
be determined by our board of directors. Ms. Montgomery's agreement was
effective January 19, 2000 and continues until terminated in accordance with its
provisions. We are entitled to terminate Ms. Montgomery's agreement at any time
for cause and on three months written notice (or ten months salary in lieu of
such written notice). Pursuant to the terms of the agreement, Ms. Montgomery is
entitled to a severance payment of $192,000 or two years salary, whichever is
greater, plus 500,000 shares of our common stock should there be a change of
control of Merlin.
On October 5, 2000, we entered into a consulting agreement with Webb Green
whereby Webb Green will provide market research services. Webb Green is one of
our directors. The consulting agreement is for a one year term and we will
grant to Webb Green options to acquire 36,000 shares of our common stock at
$1.75 per share. Those options will vest as to 3,000 options per month
commencing on October 5, 2000. We may terminate the consulting agreement on 30
days written notice.
On October 25, 2000, we entered into a consulting agreement with Hank
Barber whereby Hank Barber will provide strategic management and marketing
services. Hank Barber is one of our directors. The consulting agreement is for
a one year term and we will grant to Hank Barber options to acquire 36,000
shares of our common stock at $1.75 per share. Those options will vest as to
3,000 options per month commencing on October 25, 2000. We may terminate the
consulting agreement on 30 days written notice.
There are no arrangements or plans in which the Company provides pension,
retirement or similar benefits for directors or executive officers, except that
our directors and executive officers may receive stock options at the discretion
of our board of directors. Other than the management agreements discussed
above, we do not have any material bonus or profit sharing plans pursuant to
which cash or non-cash compensation is or may be paid to our directors or
executive officers, except that stock options may be granted at the discretion
of our board of directors.
Stock Option Plan
On May 1, 2000, our board of directors approved a Stock Option Plan
referred to as the "2000 Stock Option Plan".
We established the 2000 Stock Option Plan to serve as a vehicle to attract
and retain the services of key employees and to help them realize a direct
proprietary interest in us. The 2000 Plan provides for the grant of up to
3,000,000 non-qualified or incentive stock options. Under the 2000 Stock Option
Plan, officers, directors, consultants and employees are eligible to
participate. The exercise price of any incentive stock option granted under the
2000 Stock Option Plan may not be less than 100% of the fair market value of our
common stock on the date of grant. The exercise price of options granted to an
individual whose holdings exceeding 10% of voting power must be at 110% of the
fair market value on the date of grant. The aggregate fair market value
(determined as of the grant date) of the shares of common stock for which
incentive stock options may first become exercisable by an optionee during any
calendar year, together with shares subject to incentive stock options first
exercisable by the optionee under any of our other plans, cannot exceed
$100,000. Shares subject to options under the 2000 Stock Option Plan may be
purchased for cash. Unless otherwise provided by the board, an option granted
under the 2000 Stock Option Plan is exercisable for a term of ten years (or for
a shorter period up to ten years). An option granted to an individual whose
holdings exceed 10% of the voting power is exercisable for a term of 5 years.
The 2000 Stock Option Plan is administered by the board of directors, which has
discretion to determine optionees, the number of shares to be covered by each
option, the vesting and exercise schedule, and any other terms of the options.
The purchase price and number of shares of each option may be adjusted in
certain cases, including stock splits, recapitalizations and reorganizations.
The 2000 Stock Option Plan may be amended, suspended or terminated by our board
of directors, but no action may impair rights under a previously granted option.
Options under the 2000 Stock Option Plan can not be assigned except in the case
of death and may be exercised only while an optionee is employed by us, or in
certain cases, within a specified period after employment ends. As of October
25, 2000, 901,000 options to acquire shares of common stock were granted under
the 2000 Plan.
<PAGE>
<TABLE>
<CAPTION>
OPTIONS GRANTED IN THE CURRENT YEAR
(through September 30, 2000)
NUMBER OF SHARES % OF TOTAL MARKET
OF COMMON STOCK OPTIONS GRANTED EXERCISE PRICE
UNDERLYING OPTIONS TO EMPLOYEES OR BASE PRICE ON DATE EXPIRATION
NAME(4) GRANTED IN 2000 IN 2000(1) ($/SHARE) OF GRANT DATE
------------------- ------------------- ---------------- --------------- --------- --------------
<S> <C> <C> <C> <C> <C>
Robert Heller . . . 150,000(2) 18.1% $ 1.00 $ 2.50 May 1, 2005
------------------- ---------------- --------------- --------- --------------
Shelley Montgomery. 150,000(2) 18.1% $ 1.00 $ 2.50 May 1, 2005
------------------- ---------------- --------------- --------- --------------
Trevor McConnell. . 48,000 5.8% $ 1.00 $ 2.625 April 24, 2010
------------------- ---------------- --------------- --------- --------------
Gary Heller(3). . . 150,000(2)(3) 18.1% $ 1.00 $ 2.50 May 1, 2005
------------------- ------------------- ---------------- --------------- --------- --------------
<FN>
(1) The total number of options to purchase common shares granted to employees/consultants to
September 30, 2000 is 829,000. Subsequent to September 30, 2000, there were options to acquire 72,000
shares of our common stock granted to two new directors. See footnotes (4) and (5) below.
(2) The options were granted as part of the share exchange with Merlin Software Technologies Inc.
were we granted options in exchange for all outstanding options in Merlin Software Technologies Inc.
We granted these options on the same terms and conditions as were granted by Merlin Software
Technologies Inc.
(3) Gary Heller resigned as a director and officer of Merlin and our subsidiary as of July 7,
2000, at which time 75,000 options had vested and 75,000 unvested options expired immediately.
(4) Webb Green was appointed to the Board of Directors of Merlin on October 4, 2000. Also on
October 4, 2000, Mr. Green was granted 36,000 options to purchase common shares at an exercise price
of $1.75, expiring on October 4, 2010. The options vest as to 3,000 per month. The market price at
the date of grant was $1.25.
(5) Hank Barber was appointed to the Board of Directors of Merlin on October 25, 2000. Also on
October 25, 2000, Mr. Barber was granted 36,000 options to purchase common shares at an exercise price
of $1.75, expiring on October 25, 2010. The options vest as to 3,000 per month. The market price at
</TABLE>
<TABLE>
<CAPTION>
VALUE OF THE OPTIONS GRANTED IN THE CURRENT YEAR (through September 30, 2000)
NUMBER OF SHARES
OF COMMON STOCK VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY
SHARES VALUE AT SEPT. 30, 2000 OPTIONS AT
ACQUIRED ON REALIZED EXERCISABLE/ SEPT. 29, 2000 EXERCISABLE/
NAME EXERCISE (#) ($) UNEXERCISABLE UNEXERCISABLE(1)
------------------- -------------------- ------------- ----------------- -----------------------------
<S> <C> <C> <C> <C>
Robert Heller . . . nil nil 75,000 / 75,000 $ 28,125 / $28,125
-------------------- ------------- ----------------- -----------------------------
Shelley Montgomery. nil nil 100,000 / 50,000 $ 37,500 / $18,750
-------------------- ------------- ----------------- -----------------------------
Trevor McConnell. . nil nil 16,000 / 32,000 $ 6,000 / $12,000
-------------------- ------------- ----------------- -----------------------------
Gary Heller(2). . . nil nil 75,000 / 0 $ 28,125 / $0
------------------- -------------------- ------------- ----------------- -----------------------------
<FN>
(1) The value of the unexercised in-the-money option is based on a per share price of $1.375 as quoted
on the OTC Bulletin Board on September 29, 2000.
(2) Gary Heller resigned as of July 7, 2000, at which time 75,000 options had vested. He has
indicated an interest to exercise all of the options but has yet to provide the necessary option exercise
</TABLE>
<PAGE>
Directors Compensation
Merlin reimburses its directors for expenses incurred in connection with
attending board meetings but did not pay director's fees or other cash
compensation for services rendered as a director in the year ended December 31,
1999.
We have no formal plan for compensating our directors for their service in
their capacity as directors although such directors are expected to receive in
the future options to purchase shares of common stock as awarded by our board of
directors or (as to future options) a compensation committee which may be
established in the future. Directors are entitled to reimbursement for
reasonable travel and other out-of-pocket expenses incurred in connection with
attendance at meetings of our board of directors. The board of directors may
award special remuneration to any director undertaking any special services on
behalf of Merlin other than services ordinarily required of a director. Other
than indicated below, no director received and/or accrued any compensation for
his or her services as a director, including committee participation and/or
special assignments.
DISCLOSURE OF SEC POSITION OF
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
The General Corporate Law of Nevada empowers a company incorporated in
Nevada, such as Merlin, to indemnify its directors and officers under certain
circumstances.
Our Certificate of Incorporation and Articles provide that no director or
officer shall be personally liable to Merlin or any of its stockholders for
damages for breach of fiduciary duty as a director or officer involving any act
or omission of such director or officer unless such acts or omissions involve
material misconduct, fraud or a knowing violation of law, or the payment of
dividends in violation of the General Corporate Law of Nevada.
Our Bylaws provide that no officer or director shall be personally liable for
any obligations of Merlin or for any duties or obligations arising out of any
acts or conduct of the officer or director performed for or on behalf of Merlin.
The By-Laws also state that we will indemnify and hold harmless each person and
their heirs and administrators who shall serve at any time hereafter as a
director or officer from and against any and all claims, judgments and
liabilities to which such persons shall become subject by reason of their having
heretofore or hereafter been a director or officer, or by reason of any action
alleged to have heretofore or hereafter taken or omitted to have been taken by
him or her as a director or officer. We will reimburse each such person for all
legal and other expenses reasonably incurred by him in connection with any such
claim or liability, including power to defend such persons from all suits or
claims as provided for under the provisions of the General Corporate Law of
Nevada; provided, however, that no such persons shall be indemnified against, or
be reimbursed for, any expense incurred in connection with any claim or
liability arising out of his (or her) own negligence or wilful misconduct. Our
By-Laws also provide that we, our directors, officers, employees and agents will
be fully protected in taking any action or making any payment, or in refusing so
to do in reliance upon the advice of counsel.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
Merlin under Nevada law or otherwise, Merlin has been advised the opinion of the
Securities and Exchange Commission is that such indemnification is against
public policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
Principal Stockholders
The following table sets forth, as of September 30, 2000, certain
information with respect to the beneficial ownership of our common stock by each
stockholder known by us to be the beneficial owner of more than 5% of our common
stock and by each of our current directors and executive officers. Each person
has sole voting and investment power with respect to the shares of common stock,
except as otherwise indicated. Beneficial ownership consists of a direct
interest in the shares of common stock, except as otherwise indicated.
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENTAGE
NAME AND ADDRESS OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP(1) (9) OF CLASS(1)
------------------------------------------- ------------------------------ -----------
<S> <C> <C>
Gary Heller
1409 North Cove Blvd.
Longwood, Florida 32750. . . . . . . . . . 2,500,000 common shares(2) 20.0%
------------------------------ -----------
Robert Heller
1912 Ironwood Court
Port Moody, BC V3H 4C3 . . . . . . . . . . 2,425,000 common shares(3) 19.4%
------------------------------ -----------
Shelley Montgomery
1302 - 9708 East Via Linda
Scottsdale, Arizona 85258. . . . . . . . . 1,140,000 common shares(4) 9.1%
------------------------------ -----------
Trevor McConnell
4636 - 220th Street
Langley, BC V3A 8J3. . . . . . . . . . . . 16,000 common shares(5) 0.1%
------------------------------ -----------
Webb Green
5932 California Avenue S.W.
Seattle, WA 98163. . . . . . . . . . . . . 3,000 common shares(6) Nil
------------------------------ -----------
Hank Barber
9202 27th Avenue N.W.
Seatlle, WA 98117 . . . . . . . . . . . . . 23,000 common shares(7) 0.2%
------------------------------ -----------
Directors and Executive Officers as a Group 3,607,000 common shares(8) 28.8%
=========================================== ============================== ===========
<FN>
(1) Based on 12,520,024 shares of common stock issued and outstanding as of
September 30, 2000. Except as otherwise indicated, we believe that the beneficial
owners of the common stock listed above, based on information furnished by such owners,
have sole investment and voting power with respect to such shares, subject to community
property laws where applicable. Beneficial ownership is determined in accordance with
the rules of the SEC and generally includes voting or investment power with respect to
securities. Shares of common stock subject to options or warrants currently
exercisable, or exercisable within 60 days, are deemed outstanding for purposes of
computing the percentage ownership of the person holding such option or warrants, but
are not deemed outstanding for purposes of computing the percentage ownership of any
other person.
(2) Includes 75,000 options exercisable within sixty days.
(3) Includes 75,000 options exercisable within sixty days.
(4) Includes 100,000 options exercisable within sixty days.
(5) Includes 16,000 options exercisable within sixty days.
(6) Webb Green was appointed to our Board of Directors on October 4, 2000. Includes
3,000 options exercisable within sixty days.
(7) Hank Barber was appointed to our Board of Directors on October 25, 2000.
Includes 3,000 options exercisable within sixty days.
(8) Includes 197,000 options exercisable within sixty days.
<PAGE>
(9) Two holders of the convertible notes, Narragansett Offshore, Ltd. and Pequot
Scout Fund L.P., may become beneficial owners of more than 5% of our common stock
depending on the current conversion price upon which the convertible notes could be
</TABLE>
Changes in Control
The Company is unaware of any contract or other arrangement the operation
of which may at a subsequent date result in a change of control of the Company.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Except as otherwise indicated below, we have not been a party to any
transaction, proposed transaction, or series of transactions in which the amount
involved exceeds $60,000, and in which, to its knowledge, any of its directors,
officers, five percent beneficial security holder, or any member of the
immediate family of the foregoing persons has had or will have a direct or
indirect material interest.
On January 14, 2000, we entered into a letter agreement with Merlin
Software Technologies Inc. and its principal shareholders whereby we agreed to
acquire all of the issued and outstanding shares, options and warrants of Merlin
Software Technologies Inc. in exchange for issuing an equal number of our
shares, options and warrants. We agreed to issue these shares, options and
warrants on the same terms as had been issued by Merlin Software Technologies
Inc. On April 26, 2000, as a result of a share exchange agreement, we issued
7,986,665 shares of our common stock, warrants to purchase up to 86,665 shares
of our common stock and options to purchase up to 781,000 shares of our common
stock in exchange for all the issued and outstanding shares, warrants and
options of Merlin Software Technologies Inc. The stock exchange resulted in
Merlin Software Technologies Inc. becoming our wholly owned subsidiary. Prior
to the share exchange, we were an inactive shell called Austin Land &
Development Inc. The shell corporation did not generate any revenue but did
incur administrative expenses. Administrative expenses were $14,210 and $897
for the years ended December 31, 1999 and 1998 respectively. Immediately before
the share exchange we had 4,450,025 shares of our common stock outstanding and
immediately after the share exchange we had 12,436,690 shares of our common
stock outstanding.
At the time the transaction closed, Robert Heller, Shelley Montgomery and
Gary Heller were officers or directors of both Merlin and Merlin Software
Technologies Inc. As a result of the share exchange (i) the former shareholders
of the subsidiary became 64% shareholders of Merlin and Merlin Software
Technologies Inc. became a wholly-owned subsidiary of Merlin; and (ii) Robert
Heller, Shelley Montgomery and Gary Heller continued as the officers and
directors of both Merlin and the subsidiary.
On July 13, 1999, Robert Heller entered into a Letter Agreement with the
subsidiary whereby he transferred all of his rights to HotWireFax (now
Communicado Fax) and certain accounting and management software intended for use
by internet service providers to our subsidiary in exchange for 1,600,000 shares
of common stock of our subsidiary, which shares were exchanged for 1,600,000
shares of our common stock in connection with our acquisition of Merlin Software
Technologies Inc.
In July, 1999, our subsidiary applied for trademark protection for three
designs: a penguin wizard design, a penguin roman design and a penguin bogey
design, which applications are still pending. In May, 2000, our subsidiary
assigned to Merlinesque, a Nevada corporation, the rights in the trademark
applications for the penguin bogey design and the penguin roman design in
consideration of $10. At the time of this assignment, Robert Heller, Shelley
Montgomery and Gary Heller were directors of Merlinesque. We retained the
trademark for the penguin wizard design which we use in the promotion of our
software programs and our corporate image. We assigned the trademarks to
Merlinesque because we saw no value in those trademarks in connection with our
business of a software development company, as these trademarks were intended to
be used in connection with the manufacture and sale of stuffed toys.
Pursuant to a license agreement, dated August 8, 2000, we make use of these
three graphical designs in the promotion of our product and corporate image.
The ownership of the copyrights for these three designs and trademarks of the
penguin roman design and penguin bogey design belongs to Merlinesque whose
current directors include Robert Heller. We license the three designs for an
annual license fee of $1.00 for an indefinite term.
<PAGE>
Pursuant to a license agreement, dated August 8, 2000, our subsidiary
granted to Merlinesque the right to use the trademark for the penguin wizard
design in relation to Merlinesque's business of the manufacture and sale of
children's toys, games, clothing, furniture, books, puzzles, computer games,
animation film or videos, television programs and radio programs. The license
is for an indefinite term for a fee of $1.00 per year.
Pursuant to a domain name assignment agreement, dated August 14, 2000, we
obtained for no consideration the ownership rights to 13 domain names from Boss
Systems Inc., a British Columbia corporation. The directors of Boss Systems
Inc. include Robert Heller and Susan Heller . We use several of these domain
names in the operation of our business.
On July 13, 1999, Shelley Montgomery entered into a Letter Agreement with
the subsidiary whereby she transferred all her rights to BDI Virage (an internet
based business directory software program) to the subsidiary in exchange for
800,000 shares of common stock of the subsidiary which shares were exchanged for
800,000 shares of our common stock in connection with our acquisition of Merlin
Software Technologies Inc.
On July 13, 1999, Gary Heller entered into a Letter Agreement with the
subsidiary whereby he transferred all his rights to PerfectBACKUP+ and FleetPro
II to the subsidiary in exchange for 1,600,000 shares of common stock of the
subsidiary which shares were exchanged for 1,600,000 shares of our common stock
in connection with our acquisition of Merlin Software Technologies Inc.
PLAN OF DISTRIBUTION
The selling stockholders may, from time to time, sell all or a portion of
the shares of common stock on any market upon which the common stock may be
quoted (currently the OTC Bulletin Board), in privately negotiated transactions
or otherwise. Such sales may be at fixed prices that may be changed, at market
prices prevailing at the time of sale, at prices related to the market prices or
at negotiated prices. The shares of common stock may be sold by the selling
stockholders by one or more of the following methods, without limitation:
(a) block trades in which the broker or dealer so engaged will attempt
to sell the shares of common stock as agent but may position and resell a
portion of the block as principal to facilitate the transaction;
(b) purchases by broker or dealer as principal and resale by the broker
or dealer for its account pursuant to this prospectus;
(c) an exchange distribution in accordance with the rules of the
exchange;
(d) ordinary brokerage transactions and transactions in which the
broker solicits purchasers;
(e) privately negotiated transactions;
(f) market sales (both long and short to the extent permitted under the
federal securities laws); and
(g) a combination of any aforementioned methods of sale.
In effecting sales, brokers and dealers engaged by the selling stockholders
may arrange for other brokers or dealers to participate. Brokers or dealers may
receive commissions or discounts from the selling stockholders or, if any of the
broker-dealers act as an agent for the purchaser of such shares, from the
purchaser in amounts to be negotiated which are not expected to exceed those
customary in the types of transactions involved. Broker-dealers may agree with
the selling stockholders to sell a specified number of the shares of common
stock at a stipulated price per share. Such an agreement may also require the
broker-dealer to purchase as principal any unsold shares of common stock at the
price required to fulfil the broker-dealer commitment to the selling
stockholders if such broker-dealer is unable to sell the shares on behalf of the
selling stockholders. Broker-dealers who acquire shares of common stock as
principal may thereafter resell the shares of common stock from time to time in
transactions which may involve block transactions and sales to and through other
broker-dealers, including transactions of the nature
<PAGE>
described above. Such sales by a broker-dealer could be at prices and on terms
then prevailing at the time of sale, at prices related to the then-current
market price or in negotiated transactions. In connection with such resales,
the broker-dealer may pay to or receive from the purchasers of the shares,
commissions as described above.
The selling stockholders and any broker-dealers or agents that participate
with the selling stockholders in the sale of the shares of common stock may be
deemed to be "underwriters" within the meaning of the Securities Act in
connection with these sales. In that event, any commissions received by the
broker-dealers or agents and any profit on the resale of the shares of common
stock purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act.
From time to time, the selling stockholders may pledge their shares of
common stock pursuant to the margin provisions of their customer agreements with
their brokers. Upon a default by a selling stockholder, the broker may offer
and sell the pledged shares of common stock from time to time. Upon a sale of
the shares of common stock, the selling stockholders intend to comply with the
prospectus delivery requirements, under the Securities Act, by delivering a
prospectus to each purchaser in the transaction. We intend to file any
amendments or other necessary documents in compliance with the Securities Act
which may be required in the event any selling stockholder defaults under any
customer agreement with brokers.
To the extent required under the Securities Act, a supplemental prospectus
will be filed, disclosing, the name of any broker-dealers, the number of shares
of common stock involved, the price at which the common stock is to be sold, the
commissions paid or discounts or concessions allowed to such broker-dealers,
where applicable, that such broker-dealers did not conduct any investigation to
verify the information set out or incorporated by reference in this prospectus,
as supplemented, and other facts material to the transaction.
We and the selling stockholders will be subject to applicable provisions of
the Exchange Act and the rules and regulations under it, including, without
limitation, Rule 10b-5 and, insofar as the selling stockholders are distribution
participants and we, under certain circumstances, may be a distribution
participant, Regulation M. All of the foregoing may affect the marketability of
the common stock.
All expenses of the registration statement including, but not limited to,
legal, accounting, printing and mailing fees are and will be borne by us. Any
commissions, discounts or other fees payable to brokers or dealers in connection
with any sale of the shares of common stock will be borne by the selling
stockholders, the purchasers participating in such transaction, or both.
Any shares of common stock covered by this prospectus which qualify for
sale pursuant to Rule 144 under the Securities Act of 1933, as amended, may be
sold under Rule 144 rather than pursuant to this prospectus.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Alpha Tech Stock
Transfer (929 East Spiers Lane, Drepa, UT 84020).
SELLING STOCKHOLDERS - AS AT OCTOBER 31, 2000
All of the shares of common stock issued or to be issued upon conversion of
certain outstanding Series A 10% Senior Secured Convertible Notes, through the
exercise of outstanding Series A Warrants and from a previous private placement
are being offered by the selling stockholders listed in the table below. We
issued the Series A 10% Senior Secured Convertible Notes and the Series A
Warrants in a private placement transaction exempt from registration under the
Securities Act of 1933.
No offer or sale under this prospectus may be made by a selling stockholder
unless that selling stockholder is listed in the table below or until that
selling stockholder has notified us and a supplement to this prospectus has been
filed or an amendment to the registration statement has become effective. We
will supplement or amend this prospectus to include additional selling
stockholders upon request and upon provision of all required information to us.
<PAGE>
The selling stockholders may offer and sell, from time to time, any or all
of their common stock issued upon conversion of certain outstanding Series A 10%
Senior Secured Convertible Notes, through the exercise of outstanding Series A
Warrants and acquired in a previous private placement. Because the selling
stockholders may offer all or only some portion of the shares of common stock
listed in the table, no estimate can be given as to the amount or percentage of
these shares of common stock that will be held by the selling stockholders upon
termination of the offering.
The following table sets forth certain information regarding the beneficial
ownership of shares of common stock by the selling stockholders as of October
31, 2000, and the number of shares of common stock covered by this prospectus.
The number of shares in the table represents an estimate of the number of shares
of common stock to be offered by the selling stockholders, including shares that
may be acquired upon the exercise of the Series A 10% Senior Secured Convertible
Notes, the Series A Warrants or other rights to acquire shares.
<TABLE>
<CAPTION>
NUMBER OF
SHARES
NAME OF SELLING OWNED BY NUMBER OF NUMBER OF SHARES OWNED
STOCKHOLDER AND SELLING SHARES NUMBER OF BY SELLING STOCKHOLDER
POSITION, OFFICE OR STOCKHOLDER UNDERLYING SHARES AFTER OFFERING(1) AND
MATERIAL RELATIONSHIP BEFORE CONVERTIBLE UNDERLYING TOTAL SHARES PERCENT OF TOTAL ISSUED
WITH MERLIN OFFERING NOTES(2) WARRANTS REGISTERED AND OUTSTANDING
--------------------- ----------- ------------ ----------------------- ---------------------- -----------------------
# OF SHARES / % OF CLASS
----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Narragansett I, L.P.. Nil 526,845(4) 310,950(4) 837,795 0 / 0%
----------- ------------ ----------------------- ---------------------- -----------------------
Narragansett
Offshore, Ltd.. . . . Nil 699,885(5) 413,150(5) 1,113,035 0 / 0%
----------- ------------ ----------------------- ---------------------- -----------------------
Pequot Scout Fund,
L.P.. . . . . . . . . Nil 983,135(6) 580,350(6) 1,563,485 0 / 0%
----------- ------------ ----------------------- ---------------------- -----------------------
SDS Merchant Fund,
L.P.. . . . . . . . . Nil 365,135(7) 215,550(7) 580,685 0 / 0%
----------- ------------ ----------------------- ---------------------- -----------------------
Anita Chan. . . . . . 40,000 N/A N/A 40,000 0 / 0%
----------- ------------ ----------------------- ---------------------- -----------------------
Jean Chao . . . . . . 10,000 N/A N/A 10,000 0 / 0%
----------- ------------ ----------------------- ---------------------- -----------------------
Wayne J. Cooper . . . 20,000 N/A N/A 20,000 0 / 0%
----------- ------------ ----------------------- ---------------------- -----------------------
Kwok Fong . . . . . . 10,000 N/A N/A 10,000 0 / 0%
----------- ------------ ----------------------- ---------------------- -----------------------
Patrick Fung. . . . . 10,000 N/A N/A 10,000 0 / 0%
----------- ------------ ----------------------- ---------------------- -----------------------
Ranjit Gill . . . . . 10,000 N/A N/A 10,000 0 / 0%
----------- ------------ ----------------------- ---------------------- -----------------------
Yann J. Hsiao . . . . 10,000 N/A N/A 10,000 0 / 0%
----------- ------------ ----------------------- ---------------------- -----------------------
Allan Johnson . . . . 10,000 N/A N/A 10,000 0 / 0%
----------- ------------ ----------------------- ---------------------- -----------------------
Shayda Kassam . . . . 20,000 N/A N/A 20,000 0 / 0%
----------- ------------ ----------------------- ---------------------- -----------------------
Austin Kay. . . . . . 20,000 N/A N/A 20,000 0 / 0%
----------- ------------ ----------------------- ---------------------- -----------------------
Janet Lin . . . . . . 20,000 N/A N/A 20,000 0 / 0%
----------- ------------ ----------------------- ---------------------- -----------------------
William Negus . . . . 4,000 N/A N/A 4,000 0 / 0%
----------- ------------ ----------------------- ---------------------- -----------------------
Paolo Rubino. . . . . 10,000 N/A N/A 10,000 0 / 0%
----------- ------------ ----------------------- ---------------------- -----------------------
Rory Stowell. . . . . 30,000 N/A N/A 30,000 0 / 0%
----------- ------------ ----------------------- ---------------------- -----------------------
Chih-Cheng Tai. . . . 30,000 N/A N/A 30,000 0 / 0%
----------- ------------ ----------------------- ---------------------- -----------------------
<PAGE>
Keith J. Tapp . . . . 100,000 N/A N/A 100,000 100,000 / 0.8%
----------- ------------ ----------------------- ---------------------- -----------------------
Chester Thorton . . . 50,000 N/A N/A 50,000 0 / 0%
----------- ------------ ----------------------- ---------------------- -----------------------
Malek Virani. . . . . 10,000 N/A N/A 10,000 0 / 0%
----------- ------------ ----------------------- ---------------------- -----------------------
Tasneem Virani. . . . 36,000 N/A N/A 36,000 0 / 0%
----------- ------------ ----------------------- ---------------------- -----------------------
Wade Wills. . . . . . 40,000 N/A N/A 40,000 0 / 0%
----------- ------------ ----------------------- ---------------------- -----------------------
Chen Tao Wu . . . . . 10,000 N/A N/A 10,000 0 / 0%
----------- ------------ ----------------------- ---------------------- -----------------------
TOTAL . . . . . . . . 500,000 2,575,000 1,520,000 4,595,000
--------------------- ----------- ------------ ----------------------- ----------------------
<FN>
(1) Assumes all of the shares of common stock offered are sold.
(2) Pursuant to a Registration Rights Agreement, we agreed to register a minimum of 4,095,000 shares of our common stock
issuable upon conversion of the convertible notes and exercise of the warrants. Accordingly, we agreed to register a minimum of
2,575,000 shares of our common stock upon conversion of the notes and 1,520,000 shares of common stock issuable on exercise of
the warrants. However, the actual number of shares of common stock issued or issuable upon the conversion of the convertible
notes or exercise of the warrants is subject to adjustment depending upon factors which cannot be predicted by us at this time,
including, among others, the future market prices of the common stock. Accordingly, the number of shares of common stock set
forth for the selling stockholder may exceed the actual number of shares of common stock that the selling stockholders could own
beneficially at any given time through its ownership of the notes and the warrants.
The convertible notes issued to such selling stockholder, among other things, prohibit the holder thereof from converting a
principal amount of such convertible debentures to the extent that such conversion would result in the holder, together with
other members of a "group", (as that term is defined in the Securities Exchange Act of 1934), that the holder is deemed a part
of, beneficially owning in excess of 9% of the outstanding common shares following such conversion.
(3) Assumes that the selling stockholders will exercise all of the outstanding warrants held by them.
(4) The number of common stock listed as beneficially owned by such selling stockholder represents the number of common
stock issuable to such selling shareholder, subject to the limitation set forth in the footnote (2) above upon (i) conversion of
the principal amount of such selling shareholder's convertible notes, and (ii) exercise of the warrants issued to such selling
shareholder in conjunction with the sale of the convertible notes. The selling stockholder purchased convertible notes in the
principal amount of $225,000 and warrants to purchase 157,500 shares in the first tranche closing and has agreed to purchase
notes in the principal amount of $204,600 and warrants to purchase 153,450 shares in the second tranche closing which will close
seven days after this registration statement has been declared effective by the SEC. The warrants are exercisable at any time
after August 18, 2001 until August 18, 2007, at an exercise price of $1.75 per common share, subject to adjustment.
(5) The number of common stock listed as beneficially owned by such selling stockholder represents the number of common
stock issuable to such selling shareholder, subject to the limitation set forth in the footnote (2) above upon (i) conversion of
the principal amount of such selling shareholder's convertible notes, and (ii) exercise of the warrants issued to such selling
shareholder in conjunction with the sale of the convertible notes. The selling stockholder purchased convertible notes in the
principal amount of $299,000 and warrants to purchase 209,300 shares in the first tranche closing and has agreed to purchase
notes in the principal amount of $271,800 and warrants to purchase 203,850 shares in the second tranche closing which will close
seven days after this registration statement has been declared effective by the SEC. The warrants are exercisable at any time
after August 18, 2001 until August 18, 2007, at an exercise price of $1.75 per common share, subject to adjustment.
<PAGE>
(6) The number of common stock listed as beneficially owned by such selling stockholder represents the number of common
stock issuable to such selling shareholder, subject to the limitation set forth in the footnote (2) above upon (i) conversion of
the principal amount of such selling shareholder's convertible notes, and (ii) exercise of the warrants issued to such selling
shareholder in conjunction with the sale of the convertible notes. The selling stockholder purchased convertible notes in the
principal amount of $420,000 and warrants to purchase 294,000 shares in the first tranche closing and has agreed to purchase
notes in the principal amount of $381,800 and warrants to purchase 286,350 shares in the second tranche closing which will close
seven days after this registration statement has been declared effective by the SEC. The warrants are exercisable at any time
after August 18, 2001 until August 18, 2007, at an exercise price of $1.75 per common share, subject to adjustment.
(7) The number of common stock listed as beneficially owned by such selling stockholder represents the number of common
stock issuable to such selling shareholder, subject to the limitation set forth in the footnote (2) above upon (i) conversion of
the principal amount of such selling shareholder's convertible notes, and (ii) exercise of the warrants issued to such selling
shareholder in conjunction with the sale of the convertible notes. The selling stockholder purchased convertible notes in the
principal amount of $156,000 and warrants to purchase 109,200 shares in the first tranche closing and has agreed to purchase
notes in the principal amount of $141,800 and warrants to purchase 106,350 shares in the second tranche closing which will close
seven days after this registration statement has been declared effective by the SEC. The warrants are exercisable at any time
after August 18, 2001 until August 18, 2007, at an exercise price of $1.75 per common share, subject to adjustment.
</TABLE>
On August 18, 2000, we entered into a registration rights agreement with
the initial purchasers of the Convertible Notes. That agreement requires that
we make this prospectus available to the selling stockholders, subject to the
exceptions described below, until the earliest of:
- the expiration of the period referred to in Rule 144(k) of the Securities
Act of 1933 with respect to those securities held by persons that are not
affiliates of Merlin;
- the time when all of the securities have been sold under this prospectus;
and
- the time when none of the securities remain outstanding.
We may require the selling security holders to suspend the sales of the
securities offered by this prospectus upon the occurrence of any event that
makes any statement in this prospectus or the related registration statement
untrue in any material respect or that requires the changing of statements in
these documents in order to make statements in those documents not misleading.
We will be permitted to suspend the use of this prospectus in connection with
pending corporate developments, public filings with the Securities and Exchange
Commission and similar events, for a period not to exceed 20 an aggregate of 45
days whether or not consecutive, in any twelve month period.
In the event that:
- we fail to file this registration statement within 75 days of August 24,
2000;
- we fail to have this registration statement declared effective within 150
days of August 24, 2000;
- before the end of the effectiveness period, this prospectus is unavailable
for periods in excess of those set forth in the preceding paragraph;
- we fail to file with the SEC a request for acceleration to have the
registration statement declared effective within five days of receiving notice
from the SEC that they have no further comments on this registration statement;
or
- trading in our common stock is suspended for more than three days in
total;
(each of these is deemed to be a registration default) then we will pay
liquidated damages to the holders of the securities entitled to be sold under
this prospectus that are affected by the registration default. For the period
beginning from and including the date of the registration default to but
excluding the date on which the registration
<PAGE>
default is cured, these liquidated damages will accrue in respect of the
convertible notes, at a rate per month equal to 2% of the principal amount of
the affected convertible notes.
Persons purchasing securities in this offering will not be entitled to
liquidated damages.
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 50,000,000 shares of common stock,
$.001 par value. As of September 30, 2000, there were 12,520,024 shares of
common stock issued and outstanding.
Each stockholder is entitled to one vote for each share of common stock
held on all matters submitted to a vote of stockholders, including the election
of directors.
Each stockholder is entitled to receive the dividends as may be declared by
our Board of Directors out of funds legally available for dividends and, in the
event of liquidation, to share pro rata in any distribution of our assets after
payment of liabilities. Our Board of Directors is not obligated to declare a
dividend. Any future dividends will be subject to the discretion of our Board of
Directors and will depend upon, among other things, future earnings, the
operating and financial condition of Merlin, its capital requirements, general
business conditions and other pertinent factors. It is not anticipated that
dividends will be paid in the foreseeable future.
Stockholders do not have preemptive rights to subscribe to additional
shares of common stock if issued by us. There are no conversion, redemption,
sinking fund or similar provisions regarding the common stock. All of the
outstanding shares of common stock are fully paid and non-assessable and all of
the shares of common stock issued upon the exercise of the outstanding Series A
10% Senior Secured Convertible Notes and any warrants will be, upon issuance,
fully paid and non-assessable.
Series A 10% Senior Secured Convertible Notes
The Series A 10% Senior Secured Convertible Notes and the Series A Warrants
were issued in connection with a private placement where we sold an aggregate
value of $2.1 million in Series A 10% Senior Secured Convertible Notes to
investors. The Convertible Notes mature on August 18, 2003. The purchase price
of $2.1 million is payable in two tranches. We received $1.1 million on August
24, 2000 and will receive $1 million seven days after this registration
statement is declared effective with the SEC.
We may not prepay the Notes without the written consent of 50% of the
holders. However, we may prepay the Notes by paying to the holders 105% of the
principal amount of the Notes, together with interest, if any of the holders
elects to convert and the conversion price is less than $1.00.
The principal amount or any portion of the principal amount of the Notes
can be converted by the holders at any time until the close of business on the
business day before the date of final maturity of the Notes, at the conversion
price in effect at the date of conversion. The conversion price will be 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 the
common stock for the 30 day period ending on the trading date immediately
preceding the conversion date.
The fixed conversion price of $1.60 is subject to adjustment upon specified
events, including:
- the issuance of our common stock as a dividend or distribution on our
common stock;
- the subdivision or combination of all of the outstanding shares of our
common stock;
- the issuance to all holders of our common stock of rights or warrants to
purchase or subscribe for common stock at less than the current conversion price
or Current Market Price, as defined in the Notes, other than issuances pursuant
to outstanding options and warrants and up to 750,000 options for incoming
management;
<PAGE>
- the issuance of any shares of our common stock at a price less than the
current conversion price or Current Market Price, as defined in the Notes;
- the issuance of any warrants or other rights to acquire our common stock
at a price per share of common stock less than the current conversion price or
Current Market Price, as defined in the Notes;
- the distribution to all holders of common stock of cash, any evidences of
indebtedness, any shares of stock of any class or any other securities or
property or any warrants or other rights to subscribe for or purchase any
evidences of indebtedness , any shares of stock of any class or any other
securities or property; or
- distributions with respect to shares of our common stock consisting of
cash, excluding a cash dividend payable out of earnings or earned surplus
legally available for the payment of dividends.
We have the right to require the holders of the Notes to convert, at the
conversion price, a maximum of an aggregate of $250,000 in any 30 day period
where our common stock has a closing bid price of at least $4.00 for a period of
20 consecutive trading days and the average daily trading volume exceeds 90,000
shares per day.
In connection with the sale of Convertible Notes, we also sold an aggregate
of 1,520,000 share purchase Series A Warrants to the initial purchasers of the
Convertible Notes. The warrants will be issued in two tranches. We issued
770,000 warrants on August 24, 2000 and will issue a further 750,000 warrants
seven days after this registration statement is declared effective with the SEC.
The warrants entitle the holders to purchase an aggregate of 1,520,000 shares of
our common stock at $1.75 per share, subject to adjustment, and are exercisable
at any time after August 18, 2001 until August 18, 2007.
As part of the sale of the Convertible Notes and Series A Warrants, we agreed to
register at least 4,095,000 of our shares of common stock for resale upon
conversion of the rates and exercise of the warrants. Accordingly, this
prospectus covers the resale by the noteholders of 2,575,000 shares of common
stock issuable on conversion of the notes and 1,520,000 shares of common stock
issuable on exercise of the warrants.
As part of the Sale of the Convertible Notes and Series A Warrants, the
purchasers took security over all of our assets and intellectual property.
Should we default on the Convertible Notes, then the purchasers have the right
to proceed against our assets and intellectual property.
Warrants
In connection with the share exchange with our subsidiary and various
financing transactions, we have issued the following warrants, all of which are
exercisable into shares of common stock:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE PRICE
ISSUE DATE SHARES COVERED EXERCISABLE PER SHARE EXPIRATION DATE
------------------ --------------- --------------- ---------- -----------------
<S> <C> <C> <C> <C>
February 10, 2000. 850,000(1) Any time $ 2.00 February 11, 2002
--------------- --------------- ---------- -----------------
April 26, 2000 . . 86,665(1) Any time $ 2.00 March 31, 2002
--------------- --------------- ---------- -----------------
Any time after
August 24, 2000. . 770,000(1)(2) August 24, 2001 $ 1.75 August 18, 2007
--------------- --------------- ---------- -----------------
September 23, 2000 200,000(1) Any time $ 1.75 March 23, 2001
------------------ --------------- --------------- ---------- -----------------
<FN>
(1) Of this amount no warrants have been exercised.
<PAGE>
(2) Pursuant to the Note and Warrant Purchase Agreement, we agreed to issue a
</TABLE>
Options
As of October 25, 2000, we have issued options to purchase 901,000 shares
of common stock to 16 individuals. Of this amount options to purchase 107,000
shares have expired. All options are exercisable at $1.00 per share and are
exercisable for up to ten years for all non-affiliates of Merlin and for five
years for all affiliates of Merlin unless the option holder's association with
us is terminated, in which case, the options must be exercised within 90 days of
such termination and are cancelled thereafter.
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 shareholders are an adverse party or
has a material interest adverse to us.
LEGAL MATTERS
The validity of the shares of common stock offered by the selling
stockholders will be passed upon by the law firm of Clark, Wilson, Vancouver,
British Columbia, Canada.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
On March 20, 2000, we engaged BDO Dunwoody LLP, Chartered Accountants, to
audit its financial statements for the fiscal years ended December 31, 1999 and
1998. During our two most recent fiscal years, and any subsequent interim
periods preceding the change in accountants, there were no disagreements with
Barry Friedman P.C., CPA on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope procedure. Mr. Friedman
provided us with a letter, dated April 4, 2000, confirming that he agreed with
our disclosure on Form 8-K in connection with the change of accountants. The
decision to change accountants was based on the appointment of new directors to
our board of directors.
The Company did not consult BDO Dunwoody LLP, Chartered Accountants,
regarding the application of accounting principles to any specific completed or
contemplated transaction or the type of audit opinion that might be rendered on
the Company's financial statements.
EXPERTS
The financial statements of Merlin Software Technologies Inc. for the
period from June 25, 1999 (incorporation) to December 31, 1999 included in this
prospectus and registration statement have been audited by BDO Dunwoody LLP,
independent chartered accountants, as set forth in their report accompanying the
financial statements (which contains an explanatory paragraph regarding Merlin's
ability to continue as a going concern) and are included in reliance upon the
report, given on the authority of the firm, as experts in accounting and
auditing.
WHERE YOU CAN FIND MORE INFORMATION
We are not required to deliver an annual report to our stockholders but
will voluntarily send an annual report, together with our annual audited
financial statements. We are required to file annual, quarterly and current
reports, proxy statements and other information with the Securities and Exchange
Commission. Our Securities and Exchange Commission filings are available to the
public over the Internet at the SEC's website at http://www.sec.gov.
<PAGE>
You may also read and copy any materials we file with the Securities and
Exchange Commission at the SEC's public reference room at 450 Fifth Street N.W.,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information on the operation of the public reference rooms.
We have filed with the Securities and Exchange Commission a registration
statement on Form SB-2, under the Securities Act with respect to the securities
offered under this prospectus. This prospectus, which forms a part of that
registration statement, does not contain all information included in the
registration statement. Certain information is omitted and you should refer to
the registration statement and its exhibits. With respect to references made in
this prospectus to any contract or other document of Merlin, the references are
not necessarily complete and you should refer to the exhibits attached to the
registration statement for copies of the actual contract or document. You may
review a copy of the registration statement at the SEC's public reference room,
and at the SEC's regional offices located at 500 West Madison Street, Suite
1400, Chicago, Illinois 60661, and Seven World Trade Center, 13th Floor, New
York, New York 10048. Please call the SEC at 1-800-SEC-0330 for further
information on the operation of the public reference rooms. Our filings and the
registration statement can also be reviewed by accessing the SEC's website at
http://www.sec.gov.
FINANCIAL STATEMENTS
The Company's financial statements are stated in United States Dollars
(US$) and are prepared in accordance with United States Generally Accepted
Accounting Principles.
The following Financial Statements pertaining to Merlin and its subsidiary
are filed as part of this Prospectus:
<TABLE>
<CAPTION>
NAME PAGES
<S> <C>
Merlin Software Technologies International, Inc. (unaudited) F-1
Consolidated Balance Sheets at June 30, 2000 and December 31, 1999. F-3
Consolidated Statement of Changes in Stockholders' Equity for the six-month period ended June 30, 2000. F-4
Consolidated Statement of Operations for the six-month period ended June 30, 2000. F-5
Consolidated Statement of Cash Flows for the six-month period ended June 30, 2000. F-6
Notes to the Consolidated Financial Statements. F-7
Merlin Software Technologies Inc. (audited) F-12
Report of Independent Accountants, dated February 18, 2000. F-14
Balance Sheet at December 31, 1999. F-15
Statement of Changes in Capital Deficit for the period from June 25, 1999 (incorporation) to December 31, 1999. F-16
Statement of Operations for the period from June 25, 1999 (incorporation) to December 31, 1999. F-17
Statement of Cash Flows for the period from June 25, 1999 (incorporation) to December 31, 1999. F-18
Summary of Significant Accounting Policies. F-19
Notes to the Financial Statements. F-23
</TABLE>
<PAGE>
Prior to the Acquisition, Merlin (the inactive public company) was not
operating, and had no assets and no revenue during 1999. Pro-forma financial
statements, which serve to state the results of 1999 as if Merlin and the
Company had combined operations during 1999, therefore, will not differ in any
material way from the audited financial statements of Merlin (the acquired
company); therefore, the Company has not included separate pro-forma financial
statements. Combining the net loss for 1999 with that of Merlin would not
change the loss per share.
<PAGE>
Page F-1
MERLIN SOFTWARE TECHNOLOGIES INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2000
<PAGE>
Page F-2
CONTENTS
--------
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets 2
Statement of Changes in Stockholders' Equity 3
Statements of Operations 4
Statement of Cash Flows 5
Notes to the Financial Statements 6 - 10
<PAGE>
Page F-3
<TABLE>
<CAPTION>
MERLIN SOFTWARE TECHNOLOGIES INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
June 30 December 31
2000 1999
(unaudited)
<C> <S> <C> <C>
ASSETS
CURRENT
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,107 $ 717,195
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . 41,522 18,667
Prepaid expenses and supplies . . . . . . . . . . . . . . . . 36,603 8,948
----------------------------
87,232 744,810
PROPERTY AND EQUIPMENT. . . . . . . . . . . . . . . . . . . . 112,076 86,564
$ 199,308 831,374
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
LIABILITIES
CURRENT
Accounts payable and accrued liabilities. . . . . . . . . . . $ 108,017 $ 136,980
Demand loans payable, non-interest bearing. . . . . . . . . . 22,913 210,000
130,930 346,980
LOANS PAYABLE (Note 3). . . . . . . . . . . . . . . . . . . . - 805,000
---------------------------
130,930 1,151,980
STOCKHOLDERS' EQUITY (DEFICIT)
Share capital
Authorized
50,000,000 Common shares, par value $0.001
Issued
12,436,690 (1999 - 7,900,000) Common shares. . . . . . . . 12,437 7,900
Additional paid-in capital. . . . . . . . . . . . . . . . . . 2,946,760 292,122
Deficit accumulated during the development stage. . . . . . . (2,886,819) (616,628)
Reduction for initial contribution of intellectual property . (4,000) (4,000)
---------------------------
68,378 (320,606)
---------------------------
$ 199,308 831,374
</TABLE>
The accompanying notes are an integral part of these consolidated interim
financial statements.
<PAGE>
Page F-4
<TABLE>
<CAPTION>
MERLIN SOFTWARE TECHNOLOGIES INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
FOR THE SIX-MONTH PERIOD ENDED JUNE 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) . - - 1,286,852 - - 1,286,552
Net loss for the
period. . . . . . . . . - - - (2,270,191) - (2,270,191)
BALANCE, June 30,
2000. . . . . . . . . . 12,436,690 $ 12,437 $ 2,946,760 $ (2,886,819) $ (4,000) $ 68,378
</TABLE>
The accompanying notes are an integral part of these consolidated interim
financial statements.
<PAGE>
Page F-5
<TABLE>
<CAPTION>
MERLIN SOFTWARE TECHNOLOGIES INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Period from
June 25
1999
Six-month (incorporation)
Period Ended to June 30
June 30 2000
2000 (cumulative)
<S> <C> <C> <C> <C>
SALES. . . . . . . . . . . . . . . . $ 18,870 $ 18,870
COST OF SALES. . . . . . . . . . . . 14,078 14,078
--------------------------
4,792 4,792
EXPENSES (Note 4)
Depreciation . . . . . . . . . . . . 22,424 30,388
General and administration . . . . . 781,577 1,049,619
Professional fees. . . . . . . . . . 77,993 142,900
Promotion and advertising. . . . . . 775,802 956,114
Research and development . . . . . . 623,422 721,751
--------------------------
2,281,218 2,900,772
LOSS FROM OPERATIONS . . . . . . . . (2,276,426) (2,895,980)
INTEREST AND OTHER INCOME. . . . . . 6,235 9,161
NET LOSS FOR THE PERIOD. . . . . . . $ (2,270,191) $(2,886,819)
LOSS PER SHARE - basic and diluted . $ (0.24)
WEIGHTED AVERAGE SHARES OUTSTANDING. 9,369,917
</TABLE>
The accompanying notes are an integral part of these consolidated interim
financial statements.
<PAGE>
Page F-6
<TABLE>
<CAPTION>
MERLIN SOFTWARE TECHNOLOGIES INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
Period from
June 25
1999
Six month (incorporation)
period ended to June 30
June 30 2000
2000 (cumulative)
<S> <C> <C>
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Net loss for the period . . . . . . . . . . . . . $ (2,270,191) $ (2,886,819)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation. . . . . . . . . . . . . . . . . . . 22,424 30,388
Stock option compensation . . . . . . . . . . . . 1,286,852 1,298,874
Decrease (increase) in assets
Receivables . . . . . . . . . . . . . . . . . . (22,855) (41,522)
Prepaid expenses and supplies . . . . . . . . . . (27,655) (36,603)
Increase (decrease) in liabilities
Accounts payable and accrued liabilities. . . . . (61,640) 75,340
(1,073,065) (1,560,342)
FINANCING ACTIVITIES
Repayment of demand loans . . . . . . . . . . . . (290,000) (290,000)
Proceeds on demand loans. . . . . . . . . . . . . 102,913 312,913
Proceeds of loan payable. . . . . . . . . . . . . 600,000 1,275,000
Proceeds for common stock . . . . . . . . . . . . - 414,000
---------------------------------
412,913 1,711,913
INVESTING ACTIVITY
Purchase of property and equipment. . . . . . . . (47,936) (142,464)
INCREASE (DECREASE) IN CASH . . . . . . . . . . . (708,088) 9,107
CASH, beginning of period . . . . . . . . . . . . 717,195 -
CASH, end of period . . . . . . . . . . . . . . . $ 9,107 $ 9,107
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>
Page F-7
MERLIN SOFTWARE TECHNOLOGIES INTERNATIONAL, INC.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
(Unaudited)
June 30, 2000
1. BASIS OF PRESENTATION AND CONTINUED OPERATIONS
The consolidated interim financial statements for the six-month period ended
June 30, 2000 included herein have been prepared by the Company without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
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 June 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 June 30,
2000, the Company has recognized minimal revenue and has accumulated operating
losses of approximately $2,900,000 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 $5 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>
Page F-8
MERLIN SOFTWARE TECHNOLOGIES INTERNATIONAL, INC.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
(Unaudited)
June 30, 2000
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 June 30, 2000,
2,813,332 Merlin Private Co. common shares had been exchanged leaving 173,333
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 $ 18,870
Loss for the period $ (2,287,868
Loss per share $ (0.22)
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 in the amount
of $1,265,558 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 in April 2002.
Under the terms of the share exchange agreement, the common shares were
exchanged for common shares of the Company. Warrants are to be exchanged for
warrants of the Company on a 1:1 basis under similar terms as existed for
warrants in Merlin Private Co. The exchange of warrants has not occurred as of
June 30, 2000.
<PAGE>
Page F-9
MERLIN SOFTWARE TECHNOLOGIES INTERNATIONAL, INC.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
(Unaudited)
June 30, 2000
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 March 2002 at $2 per share.
All warrants remained outstanding at June 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.
On April 24, 2000, the Company granted 48,000 stock options with a exercise
price of $1 per option expiring in April 2010. On May 1, 2000, the Company's
Board of Directors approved the granting of 781,000 stock options with an
exercise price of $1 per share to previous optionees of Merlin Private Co. and
expiring in 2001 and 2002. At June 30, 2000, 829,000 stock options remained
outstanding of which 443,600 were exercisable on that date. The options granted
vest over periods from immediately to 24 months.
Compensation expense was recorded for options granted in replacement for options
in Merlin Private Co. in the amount of $1,265,558 representing the difference in
value of options exchanged and was recorded as follows:
<PAGE>
Page F-10
MERLIN SOFTWARE TECHNOLOGIES INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2000
4. STOCK OPTIONS - CONTINUED
Expense Amount
General and administration $ 493,114
Promotion and advertising 433,861
Research and development 338,583
--------------
$1,265,558
The Company also recorded in general and administration expense for 2000 an
amount of $21,294 related to the issuance of 48,000 options granted to a
consultant on April 24, 2000. The total amount is being amortized over the
vesting period.
5. 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:
- payment of $100,000 and 300,000 shares of the Company's common stock in
2000;
- payment of $230,000 in 2001;
- payment of 100,000 shares of the Company's common stock should the Company
achieve a NASDAQ listing; and
- right of first refusal on additional financing in consideration for a
commission of 5% of such capital in cash and 5% in stock.
b) The Company entered into an agreement with an officer for services in
April 2000 which provides for, among other things, a payment of approximately
$46,000 and 100,000 shares of common stock should a change of control occur. 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.
<PAGE>
Page F-11
MERLIN SOFTWARE TECHNOLOGIES INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2000
6. NEW ACCOUNTING PRONOUNCEMENTS
a) 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.
b) 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.
c) 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 Company is required to adopt the Interpretation on July 1, 2000. The
Interpretation requires, among other things, that stock options that have been
modified to reduce the exercise price be accounted for as variable. Adoption of
this standard is not expected to have a material effect on the financial
statements.
<PAGE>
Page F-12
MERLIN SOFTWARE TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)
FINANCIAL STATEMENTS
FOR THE PERIOD FROM JUNE 25, 1999
(INCORPORATION) TO DECEMBER 31, 1999
<PAGE>
Page F-13
MERLIN SOFTWARE TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)
FINANCIAL STATEMENTS
FOR THE PERIOD FROM JUNE 25, 1999
(INCORPORATION) TO DECEMBER 31, 1999
CONTENTS
--------
REPORT OF INDEPENDENT ACCOUNTANTS 2
FINANCIAL STATEMENTS
Balance Sheet 3
Statement of Changes in Capital Deficit 4
Statement of Operations 5
Statement of Cash Flows 6
Summary of Significant Accounting Policies 7 - 10
Notes to the Financial Statements 11 - 14
<PAGE>
Page F-14
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE DIRECTORS AND STOCKHOLDERS OF
MERLIN SOFTWARE TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)
We have audited the Balance Sheet of Merlin Software Technologies Inc. (a
development stage company) as at December 31, 1999, the Statements of Changes in
Capital Deficit, Operations and Cash Flows for the period from June 25, 1999
(incorporation) to December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in United States. Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Merlin Software Technologies Inc. (a
development stage company) as at December 31, 1999 and the related statements
of Changes in Capital Deficit, Operations and Cash Flows for the period from
June 25, 1999 (incorporation) to December 31, 1999 in conformity with accounting
principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company has suffered recurring losses from operations and has no
established source of revenue. This raises substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are described in Note 1. These financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/S/ BDO DUNWOODY LLP
Chartered Accountants
Vancouver, Canada
February 18, 2000
<PAGE>
Page F-15
MERLIN SOFTWARE TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
DECEMBER 31, 1999
------------
ASSETS
CURRENT
Cash $ 717,195
Sales taxes recoverable 18,667
Prepaid expenses 8,948
-------------
744,810
FIXED ASSETS (Note 3) 86,564
-------------
$ 831,374
LIABILITIES AND CAPITAL DEFICIT
LIABILITIES
CURRENT
Accounts payable and accrued liabilities $ 136,980
Demand loans payable (Note 4) 210,000
-------------
346,980
DUE TO MERLIN SOFTWARE TECHNOLOGIES INTERNATIONAL, INC. (Note 5) 675,000
LOANS PAYABLE (Note 6) 130,000
------------
1,151,980
CAPITAL DEFICIT
Share capital
Authorized
1,000,000 Preferred shares, par value $0.01
50,000,000 Common shares, par value $0.001
Issued
7,900,000 Common shares 7,900
Additional paid-in capital 292,122
Deficit accumulated during the development stage (616,628)
Reduction for initial contribution of intellectual property (4,000)
-------------
(320,606)
-------------
$ 831,374
The accompanying summary of significant accounting policies and notes are an
integral part of these financial statements.
<PAGE>
Page F-16
<TABLE>
<CAPTION>
MERLIN SOFTWARE TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN CAPITAL DEFICIT
FOR THE PERIOD FROM JUNE 25, 1999 (INCORPORATION) TO DECEMBER 31, 1999
Reduction Deficit
for Initial Accumulated
Additional Contribution of During the Total
Common Stock Paid-in Intellectual Development Capital
Shares Amount Capital Property Stage Deficit
<S> <C> <C> <C> <C> <C> <C>
Initial contribution
of intellectual property
in July 1999. . . . . . . 4,000,000 $ 4,000 $ - $ (4,000) $ - $ -
Private placement
for cash in July 1999
at $0.01 per share. . . . 3,400,000 3,400 30,600 - - 34,000
Private placement
for cash in August
1999 at $0.50 per
share . . . . . . . . . . 500,000 500 249,500 - - 250,000
Stock option
compensation
(Note 7). . . . . . . . . - - 12,022 - - 12,022
Net loss for the
period. . . . . . . . . . - - - - (616,628) (616,628)
BALANCE, end of
period. . . . . . . . . . 7,900,000 $ 7,900 $ 292,122 $ (4,000) $(616,628) $(320,606)
</TABLE>
The accompanying summary of significant accounting policies and notes are an
integral part of these financial statements.
<PAGE>
Page F-17
<TABLE>
<CAPTION>
MERLIN SOFTWARE TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JUNE 25, 1999 (INCORPORATION) TO DECEMBER 31, 1999
<S> <C>
EXPENSES
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,964
General and administration . . . . . . . . . . . . . . . . . . . 268,042
Professional fees. . . . . . . . . . . . . . . . . . . . . . . . 64,907
Promotion and advertising. . . . . . . . . . . . . . . . . . . . 180,312
Research and development . . . . . . . . . . . . . . . . . . . . 98,329
619,554
------------
INTEREST AND OTHER INCOME. . . . . . . . . . . . . . . . . . . . (2,926)
------------
NET LOSS FOR THE PERIOD. . . . . . . . . . . . . . . . . . . . . $ 616,628
LOSS PER SHARE - basic and diluted . . . . . . . . . . . . . . . $ 0.09
-----------
WEIGHTED AVERAGE SHARES OUTSTANDING. . . . . . . . . . . . . . . 7,166,666
</TABLE>
The accompanying summary of significant accounting policies and notes are an
integral part of these financial statements.
<PAGE>
Page F-18
<TABLE>
<CAPTION>
MERLIN SOFTWARE TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JUNE 25, 1999 (INCORPORATION) TO DECEMBER 31, 1999
<S> <C>
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Net loss for the period . . . . . . . . . . . . . . . . . . . . . $ (616,628)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities
Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . 7,964
(Increase) decrease in assets
Sales taxes recoverable . . . . . . . . . . . . . . . . . . . . (18,667)
Prepaid expenses and deposits . . . . . . . . . . . . . . . . . . (8,948)
Increase (decrease) in liabilities
Accounts payable and accrued liabilities. . . . . . . . . . . . . 136,980
------------
(487,277)
FINANCING ACTIVITIES
Proceeds on demand loans. . . . . . . . . . . . . . . . . . . . . 210,000
Issuance of common stock. . . . . . . . . . . . . . . . . . . . . 284,000
Advances from Merlin Software Technologies International, Inc.. . 675,000
Proceeds on loans payable . . . . . . . . . . . . . . . . . . . . 130,000
-----------
1,299,000
INVESTING ACTIVITY
Purchase of fixed assets. . . . . . . . . . . . . . . . . . . . . (94,528)
INCREASE IN CASH DURING THE PERIOD AND CASH, end of period. . . . $ 717,195
</TABLE>
The accompanying summary of significant accounting policies and notes are an
integral part of these financial statements.
<PAGE>
Page F-19
MERLIN SOFTWARE TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DECEMBER 31, 1999
-------------------
BASIS OF PRESENTATION These financial statements are expressed in US dollars
and are prepared in accordance with accounting principles generally accepted in
the United States.
The Company has selected December 31 as its fiscal year end.
FIXED ASSETS Fixed assets are carried at cost less accumulated depreciation.
Computers are depreciated using the straight-line method over their estimated
useful life of three years. Furniture and fixtures and trademarks are
depreciated over their estimated useful lives of five years. Acquired internal
use software is capitalized and depreciated over its estimated useful life of
one year.
One half period's depreciation is taken in the period of acquisition.
FINANCIAL INSTRUMENTS The Company's financial instruments consist of cash,
sales taxes recoverable, accounts payable and accrued liabilities and loans
payable. Unless otherwise noted, it is management's opinion that the Company is
not exposed to significant interest, currency or credit risks arising from these
financial instruments. The fair value of cash, sales taxes recoverable and
accounts payable and accrued liabilities approximates their carrying value,
unless otherwise noted, since they are short-term in nature or they are
receivable or payable on demand.
It is not practicable to determine the fair value of amounts advanced by
Merlin Software Technologies International, Inc. and other long-term loans.
INCOME TAXES The Company follows the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes", which
requires the Company to recognize deferred tax liabilities and assets for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns using the liability method. Under
this method, deferred tax liabilities and assets are determined based on the
temporary differences between the financial statement carrying amounts and tax
bases of assets and liabilities using enacted rates in effect in the years in
which the differences are expected to reverse.
<PAGE>
Page F-20
MERLIN SOFTWARE TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DECEMBER 31, 1999
-------------------
FOREIGN CURRENCY TRANSACTIONS Transactions undertaken in currencies other
than the US dollar are translated to US dollars using the exchange rate in
effect as of the transaction date. Monetary assets and liabilities denominated
in foreign currencies are then translated to US dollars using the period end
rate. Any exchange gains and losses are included in the Statement of
Operations.
LOSS PER SHARE Loss per share is computed in accordance with SFAS No. 128,
"Earnings Per Share". Basic loss per share is calculated by dividing the net
loss available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution of securities that could share in earnings of an entity. In
loss periods, dilutive common equivalent shares are excluded as the effect would
be anti-dilutive. Basic and diluted earnings per share are the same for the
periods presented.
For the period from June 25, 1999 (incorporation) to December 31, 1999,
total stock options of 761,000 were not included in the computation of diluted
earnings per share because the effect was anti-dilutive.
STOCK BASED COMPENSATION The Company applies Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", and related
interpretations in accounting for stock option plans. Under APB 25,
compensation cost is recognized for stock options granted at prices below the
market price of the underlying common stock on the date of grant.
SFAS No. 123, "Accounting for Stock-Based Compensation", requires the
Company to provide pro-forma information regarding net income as if compensation
cost for the Company's stock option plan had been determined in accordance with
the fair value based method prescribed in SFAS No. 123.
<PAGE>
Page F-21
MERLIN SOFTWARE TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DECEMBER 31, 1999
-------------------
SOFTWARE DEVELOPMENT
COSTS In accordance with SFAS No. 86, "Accounting for the Cost of Computer
Software to be Sold, Leased, or Otherwise Marketed", development costs incurred
in the research and development of new software products are expensed as
incurred until technological feasibility in the form of a working model has been
established. To December 31, 1999, the Company's software development is in
progress and commercial feasibility had not yet been established. Accordingly,
all software development costs (consisting of amounts paid or payable to
consultants) have been charged to the accompanying statement of operations.
REVENUE RECOGNITION Product revenues from the sale of Linux-based software
is to be recognized upon shipment, except that an amount representing the value
of future services including upgrades and customer support will be deferred and
recognized on a pro-rata basis over the terms of the contracts.
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.
COMPREHENSIVE INCOME SFAS No. 130, "Reporting Comprehensive Income",
establishes standards for reporting and presentation of comprehensive income
(loss). This standard defines comprehensive income as the changes in equity of
an enterprise except those resulting from stockholder transactions.
Comprehensive loss for the period from June 25, 1999 (incorporation) to December
31, 1999 equalled the net loss for the period.
<PAGE>
Page F-22
MERLIN SOFTWARE TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DECEMBER 31, 1999
-------------------
NEW ACCOUNTING
PRONOUNCEMENTS In June 1998, 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>
Page F-23
MERLIN SOFTWARE TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1999
-------------------
1. NATURE OF BUSINESS AND CONTINUED OPERATIONS
The Company was incorporated in the state of Nevada on June 25, 1999 for the
purpose of the development of Linux-based software utilities and other business
management software. In January 2000, the Company's principal stockholders
entered into a letter of intent with Merlin Software Technologies International,
Inc. ("Merlin Pubco", formerly Austin Land & Development, Inc.) (Note 2), an
inactive Nevada company, which would result in the Company becoming a
wholly-owned subsidiary of Merlin Pubco. The common stock of Merlin Pubco is
traded on the National Association of Securities Dealers Over-the-Counter
Bulletin Board ("NASD OTC:BB") and was registered with the Securities and
Exchange Commission in the United States.
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 December
31, 1999, the Company has recognized no revenue and has accumulated operating
losses of $616,628 since incorporation. The continuation of the Company is
dependent upon the conclusion of the share exchange with Merlin Pubco and the
continuing financial support of creditors and stockholders and obtaining
long-term financing as well as the successful development of the Company's
software and achieving a profitable level of operations. Management plans to
raise equity capital to finance the operations and capital requirements of the
Company. It is management's intention to raise new equity financing of
approximately $25 million within the upcoming year. Amounts raised will be used
to further development of the Company's product, 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.
2. REVERSE ACQUISITION OF MERLIN PUBCO
On January 14, 2000, the Company's principal stockholders signed a letter of
intent with Merlin Pubco, an inactive Nevada company whose common stock trades
on the NASD OTC:BB. The letter of intent will form the basis for a share
exchange agreement with the parties subject to the satisfaction of certain
specified conditions. Terms of the agreement have Merlin Pubco acquiring all of
the issued and outstanding shares of the Company at the closing date in exchange
for an equal number of shares in Merlin Pubco. Merlin Pubco will also exchange
stock options and warrants outstanding in the Company for commitments to issue
its stock under similar terms to those existing in the Company.
<PAGE>
Page F-24
2. REVERSE ACQUISITION OF MERLIN PUBCO - CONTINUED
The transaction will be accounted for as a recapitalization of the Company using
accounting principles applicable to reverse acquisitions. Following reverse
acquisition accounting, financial statements subsequent to the closing date will
be presented as a continuation of the Company. The net book value of the net
assets of Merlin Pubco at December 31, 1999 was $Nil as Merlin Pubco has been
inactive since its incorporation in 1995. Accordingly, the value assigned to
common stock issued by Merlin Pubco for the acquisition of the Company is
expected to be $Nil.
<TABLE>
<CAPTION>
3. FIXED ASSETS
ACCUMULATED NET BOOK
COST DEPRECIATION VALUE
<S> <C> <C> <C>
Computer hardware. . . $ 46,567 $ 3,880 $42,687
Furniture and fixtures 36,516 1,826 34,690
Computer software. . . 8,428 2,107 6,321
Trademarks . . . . . . 3,017 151 2,866
----------------------------------------
$ 94,528 $ 7,964 $86,564
</TABLE>
4. DEMAND LOANS PAYABLE
To December 31, 1999, the Company received unsecured, non-interest bearing
demand bridge loans totalling $210,000 from subscribers to a private placement
in Merlin Pubco. On January 5, 2000, a further $80,000 was advanced to the
Company by these subscribers. The demand loans were repaid later in January
2000.
5. DUE TO MERLIN SOFTWARE TECHNOLOGIES INTERNATIONAL, INC.
In December 1999, the Company received $675,000 from Merlin Pubco out of the
proceeds of a $1.275 million private placement expected to be completed in 2000.
The amounts were advanced on an unsecured, non-interest bearing basis with no
specific terms of repayment. The remaining $600,000 from this private placement
was advanced to the Company by Merlin Pubco in January 2000 under similar terms.
<PAGE>
Page F-25
MERLIN SOFTWARE TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1999
-------------------
6. LOANS PAYABLE
Additional amounts advanced to the Company were loaned on a non-interest bearing
basis without security and with no specific terms of repayment. The Company has
agreed with the lenders to settle the indebtedness with the issuance of 86,667
units of the Company. Each unit consists of one share of common stock and a
warrant to purchase one share of common stock at a price of $2 per share until
expiry in March 2002.
7. STOCK OPTIONS
On November 1, 1999, the Company's Board of Directors approved the Company's
1999 Stock Option Plan. 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). 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.
In 1999, the Company's Board of Directors approved the granting of 931,000 stock
options with an exercise price of $1 per share and expiring in 2001. At
December 31, 1999, 761,000 stock options were granted and remained outstanding
of which 387,800 were exercisable on that date. Subsequent to December 31,
1999, the Company granted a further 20,000 options under the same terms and
entered into an employment agreement committing to grant 150,000 options under
the same terms. The options granted vest over periods from the date of grant to
12 months subsequent to commencement of services.
Pro-forma information regarding Net Loss and Loss per Share is required under
SFAS No. 123, and has been determined as if the Company had accounted for its
stock options under the fair value method of SFAS No. 123. The fair value of
options granted in the period ended December 31, 1999 was $0.08. The fair value
of these options was estimated at the date of the grant using a Black-Scholes
option pricing model with the following assumptions: no dividends, a risk-free
interest rate of 5.45%, volatility factor of the expected market price of the
Company's common stock of 0.001 and a weighted average expected life of the
options of 18 months.
Under the accounting provisions of SFAS No. 123, the Company recorded in general
and administration expense for 1999 an amount of $12,022 representing the value
of options granted to consultants during the period. Additionally, the
Company's Net Loss and Loss per Share on a pro-forma basis would be
approximately $659,000 and $0.09 for the period from June 25, 1999
(incorporation) to December 31, 1999.
<PAGE>
Page F-26
MERLIN SOFTWARE TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1999
-------------------
8. INCOME TAXES
The tax effects of temporary differences that give rise to the Company's
deferred tax asset are as follows:
1999
Tax loss carryforwards $ 210,000
Valuation allowance (210,000)
-------------
$ -
The provision for income taxes differs from the amount estimated using the
federal statutory income tax rate as follows:
1999
Provision (benefit) at federal statutory rate $ (210,000)
Increase in valuation allowance 210,000
---------------
$ -
The Company evaluates its valuation allowance requirements based on projected
future operations. When circumstances change and this causes a change in
management's judgement about the recoverability of deferred tax assets, the
impact of the change on the valuation allowance is reflected in current income.
At December 31, 1999, the Company had losses available for income tax purposes
of approximately $610,000 which will expire in 2019.
<PAGE>
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24 Indemnification of Directors and Officers.
Nevada corporation law provides that:
- a corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative,
except an action by or in the right of the corporation, by reason of the fact
that he is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses, including attorneys' fees, judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with the action, suit or proceeding if he acted in good faith and in
a manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful;
- a corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses, including amounts paid in
settlement and attorneys' fees actually and reasonably incurred by him in
connection with the defense or settlement of the action or suit if he acted in
good faith and in a manner which he reasonably believed to be in or not opposed
to the best interests of the corporation. Indemnification may not be made for
any claim, issue or matter as to which such a person has been adjudged by a
court of competent jurisdiction, after exhaustion of all appeals therefrom, to
be liable to the corporation or for amounts paid in settlement to the
corporation, unless and only to the extent that the court in which the action or
suit was brought or other court of competent jurisdiction determines upon
application that in view of all the circumstances of the case, the person is
fairly and reasonably entitled to indemnity for such expenses as the court deems
proper; and
- to the extent that a director, officer, employee or agent of a corporation
has been successful on the merits or otherwise in defense of any action, suit or
proceeding, or in defense of any claim, issue or matter therein, the corporation
shall indemnify him against expenses, including attorneys' fees, actually and
reasonably incurred by him in connection with the defense.
We may make any discretionary indemnification only as authorized in the
specific case upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances. The determination
must be made:
- by our stockholders;
- by our board of directors by majority vote of a quorum consisting of
directors who were not parties to the action, suit or proceeding;
- if a majority vote of a quorum consisting of directors who were not
parties to the action, suit or proceeding so orders, by independent legal
counsel in a written opinion;
- if a quorum consisting of directors who were not parties to the action,
suit or proceeding cannot be obtained, by independent legal counsel in a written
opinion; or
<PAGE>
- by court order.
Our Certificate of Incorporation and Articles provide that no director or
officer shall be personally liable to Merlin or any of its stockholders for
damages for breach of fiduciary duty as a director or officer involving any act
or omission of such director or officer unless such acts or omissions involve
material misconduct, fraud or a knowing violation of law, or the payment of
dividends in violation of the General Corporate Law of Nevada.
Our Bylaws provide that no officer or director shall be personally liable for
any obligations of Merlin or for any duties or obligations arising out of any
acts or conduct of the officer or director performed for or on behalf of Merlin.
The By-Laws also state that we will indemnify and hold harmless each person and
their heirs and administrators who shall serve at any time hereafter as a
director or officer from and against any and all claims, judgments and
liabilities to which such persons shall become subject by reason of their having
heretofore or hereafter been a director or officer, or by reason of any action
alleged to have heretofore or hereafter taken or omitted to have been taken by
him or her as a director or officer. We will reimburse each such person for all
legal and other expenses reasonably incurred by him in connection with any such
claim or liability, including power to defend such persons from all suits or
claims as provided for under the provisions of the General Corporate Law of
Nevada; provided, however, that no such persons shall be indemnified against, or
be reimbursed for, any expense incurred in connection with any claim or
liability arising out of his (or her) own negligence or wilful misconduct. Our
By-Laws also provide that we, our directors, officers, employees and agents will
be fully protected in taking any action or making any payment, or in refusing so
to do in reliance upon the advice of counsel.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
Merlin under Nevada law or otherwise, Merlin has been advised the opinion of the
Securities and Exchange Commission is that such indemnification is against
public policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event a claim for indemnification against such
liabilities (other than payment by Merlin for expenses incurred or paid by a
director, officer or controlling person of Merlin in successful defense of any
action, suit, or proceeding) is asserted by a director, officer or controlling
person in connection with the securities being registered, Merlin will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction, the question of
whether such indemnification by it is against public policy in said Act and will
be governed by the final adjudication of such issue.
Item 25 Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses payable by us in
connection with the issuance and distribution of the securities being registered
hereunder. No expenses shall be borne by the selling stockholders. All of the
amounts shown are estimates, except for the SEC Registration Fees.
SEC registration fees $1,175.48
Printing and engraving expenses $2,000(1)
Accounting fees and expenses $25,000(1)
Legal fees and expenses $35,000(1)
Transfer agent and registrar fees $5,000(1)
Fees and expenses for qualification under state
securities laws $0
Miscellaneous $1,000(1)
Total $69,175.48
(1) We have estimated these amounts
<PAGE>
Item 26 Recent Sales of Unregistered Securities - Last Three Years.
On February 10, 2000, we sold an aggregate of 850,000 units at a price of
$1.50 per unit to three private investors residing outside of the United States
for proceeds of $1,275,000 in an offshore transaction relying on Regulation S
under the Securities Act of 1933. Each unit consisted of one common share and
one share purchase warrant with each share purchase warrant entitling the holder
to purchase one additional common share at the price of $2.00 per common share
for a period of two (2) years. No commissions were paid.
On January 14, 2000, we entered into a letter agreement with Merlin
Software Technologies Inc. and its principal shareholders whereby we agreed to
acquire all of the issued and outstanding shares, options and warrants of Merlin
Software Technologies Inc. in exchange for issuing an equal number of our
shares, options and warrants. We agreed to issue these shares, options and
warrants on the same terms as had been issued by Merlin Software Technologies
Inc. As part of the Share Exchange Agreement whereby Merlin Software
Technologies Inc. became our wholly-owned subsidiary, on April 26, 2000, we
issued an aggregate of 7,986,665 shares of common stock, share purchase warrants
to purchase 86,665 shares of common stock and stock options to purchase 781,000
shares of common stock in exchange for all the outstanding shares, share
purchase warrants and options of Merlin Software Technologies Inc. from all of
the shareholders of Merlin Software Technologies Inc. The shares, share
purchase warrants and options were issued to 46 persons residing outside of the
United States in an "offshore transaction" relying on Regulation S of the
Securities Act of 1933 and to 4 shareholders in the United States relying on
Section 4(2) and Rule 506 of Regulation D of the Securities Act of 1933. As of
September 30, 2000 there were two shareholders of Merlin Software Technologies
Inc. who had yet to tender an aggregate of 16,666 shares for exchange. No
commissions were paid. See "Description of Business" for further details of the
Share Exchange.
On September 23, 2000, we sold an aggregate of 100,000 units at a price of
$1.60 per unit to one accredited individual investor for proceeds of $160,000.
Each unit consisted of one common shares and two share purchase warrants, with
each share purchase warrant entitling the holder to purchase one additional
common share at a price of $1.75 per share for a period of six months. The
transaction was private in nature and we had reasonable grounds to believe that
the individual was an accredited investor, capable of evaluating the merits and
risks of his investment and bearing the economic risks of his investment,
acquired the units for investment purposes. Accordingly, we issued the units
relying on Rule 506 and Section 4(6) of the Securities Act of 1933.
On August 18, 2000, Merlin sold Series A 10% Senior Secured Convertible
Notes in the aggregate principal amount of $2,100,000 to four accredited
investors. The purchase price of $2.1 million is payable in two tranches. We
received $1.1 million on August 24, 2000 and will receive $1 million seven days
after this registration statement is declared effective with the SEC. As part
of the sale of the convertible notes we sold Series A Warrant to the initial
purchasers of the notes to purchase 1,520,000 shares of our common stock at an
exercise price of $1.75 per share. The warrants are issuable in two tranches.
We issued 770,000 warrants on August 24, 2000 and will issue 750,000 warrants
seven days after the registration statement is deemed effective with the SEC.
The transaction was private in nature and we had reasonable grounds to believe
that the investors were accredited investors, capable of evaluating the merits
and risks of their investment, bearing the economic risks of their investment
and acquired the note and warrants for investment purposes. Accordingly, the
notes and share purchase warrants were issued relying on Rule 506 and Section
4(6) of the Securities Act of 1933.
On June 28, 2000, we agreed to issue to E.B. Coxe & Co. L.L.C. a total of
300,000 shares of common stock upon execution of a Consulting Agreement between
us and E.B. Coxe & Co. L.L.C. The shares are being issued in consideration of
services to be provided under the Consulting Agreement. The transaction was
private in nature and we had reasonable grounds to believe that E.B. Coxe & Co.
L.L.C. was an accredited investor, capable of evaluating the merits and risks of
its investment, bearing the economic risks of its investment and acquired the
shares for investment purposes. Accordingly, we will issue the shares relying
on Sections 4(2) and 4(6) and Rule 506 of Regulation D of the Securities Act of
1933.
<PAGE>
Item 27 Exhibits.
The following Exhibits are filed with this Prospectus:
Exhibit
Number Description
(2) Plan of Acquisition, Reorganization etc.
2.1** Letter of Intent between Merlin, Merlin Software Technologies Inc.,
Robert Heller, Gary Heller and Shelley Montgomery, dated January 14,
2000
2.2** Share Exchange Agreement between Merlin, Merlin Software Technologies
Inc., Robert Heller, Gary Heller and Shelley Montgomery, dated April
3, 2000
(3) Articles of Incorporation/Bylaws
3.1* Articles of Incorporation
3.2.* Bylaws
3.3* Certificate of Amendment to Articles of Incorporation, dated January 7,
2000
3.4* Corporate Charter
(5) Opinion (legality)
5.1 Opinion of Clark, Wilson regarding the legality of the securities being
registered (To be filed)
(10) Material Contracts
10.1** Management Agreement between Merlin and Shelley Montgomery, dated
March 6, 2000
10.2** Management Agreement between Merlin and Robert Heller, dated March 8,
2000
10.3** Management Agreement between Merlin and Trevor McConnell, dated May
1, 2000
10.4** Consulting Agreement between Merlin and Hank, Inc., dated February 5,
2000
10.5** Consulting Agreement between Merlin and Douglas West, dated March 2,
2000
10.6** Consulting Agreement between Merlin and William Heller, dated March
3, 2000
10.7** Consulting Agreement between Merlin and Negus Communications Inc.,
dated March 5, 2000
10.8** Stock Option Agreement between Merlin and Haide-Anne James, dated
November 1, 1999
10.9** Stock Option Agreement between Merlin and Chang-Cheng Chao, dated
November 1, 1999
10.10** Stock Option Agreement between Merlin and Shelley Montgomery, dated
November 1, 1999
<PAGE>
10.11** Stock Option Agreement between Merlin and Robert Heller, dated
November 1, 1999
10.12** Stock Option Agreement between Merlin and Douglas West, dated
November 1, 1999
10.13** Stock Option Agreement between Merlin and Patricia Negus, dated
November 1, 1999
10.14** Stock Option Agreement between Merlin and William Negus, dated
November 1, 1999
10.15** Stock Option Agreement between Merlin and Hank Inc., dated November
1, 1999
10.16** Stock Option Agreement between Merlin and Alireza Admadi, dated
November 1, 1999
10.17**** 2000 Stock Option Plan, effective May 1, 2000
10.18 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
10.19 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
10.20 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
10.21 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
10.22 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
10.23 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
10.24 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
10.25 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
10.26 Note Agreement between Merlin and Narrangansett I, L.P., dated August
18, 2000.
10.27 Note Agreement between Merlin and Narrangansett Offshore Ltd., dated
August 18, 2000
10.28 Note Agreement between Merlin and Pequot Scout Fund, L.P., dated
august 18, 2000
10.29 Note Agreement between Merlin and SDS Merchant Fund, L.P., dated
August 18, 2000
10.30 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
<PAGE>
10.31 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
10.32 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
10.33 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
10.34 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
10.35 OEM Agreement between Merlin and Caldera Systems, Inc., dated October
16, 2000
10.36 Consulting Agreement between Merlin and E.B. Coxe & Co. LLC, dated
June 28, 2000
10.37 Consulting Agreement between Merlin and Matt Daen, dated October 3,
2000
10.38 Trademark and Copyright License between Merlinesque and Merlin
Software Technologies Inc., dated August 8, 2000
10.39 Trade-mark License (North America) between Merlin Software
Technologies Inc. and Merlinesque, dated August 8, 2000
10.40 Domain Name Assignment Agreement between Boss Systems Inc. and Merlin
Software Technologies Inc., dated August 14, 2000
10.41 Offer to Sublease between Samsports.com and Merlin Software
Technologies Inc., dated August 25, 2000
10.42 Letter of Intent between Merlin and Certain Shareholders of Merlin
Software Technologies Inc., dated January 14, 2000
10.43 Consulting Agreement between Merlin and Webb Green, dated October 5,
2000
10.44 Stock Option Agreement between Merlin and Webb Green, dated October 4,
2000
10.45 Agreement between Merlin and Karen Thomas, dated May 3, 2000
10.46 Consulting Agreement between Merlin and Hank Barber, dated October 25,
2000
10.47 Stock Option Agreement between Merlin and Hank Barber, dated October
25, 2000
(16) Letter (change in certifying accountant)
16.1***** Letter from Barry Friedman, P.C., C.P.A., dated April 12, 2000
(21) Subsidiary
21.1 Merlin Software Technologies Inc.
(23) Consent of Experts and Counsel
<PAGE>
23.1 Consent of Clark, Wilson (contained in Exhibit 5)
23.2 Consent of BDO Dunwoody LLP
(27) Financial Data Schedule
27.1 June 30, 2000
27.2 December 31, 1999
* Previously filed with Merlin's Registration Statement on Form 10-SB filed
on August 31, 1999
** Previously filed with Merlin's Annual Report on Form 10-KSB filed on
April 14, 2000
*** Previously filed with Merlin's Quarterly Report on Form 10-QSB filed on
May 11, 2000
**** Previously filed with Merlin's Registration Statement on Form S-8 filed
on June 5, 2000
***** Previously filed with Merlin's Current Report on Form 8-K filed on
April 13, 2000.
Item 28 Undertakings.
The undersigned Company hereby undertakes that it will:
(1) file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to include:
(a) any prospectus required by Section 10(a)(3) of the Securities Act;
(b) reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
registration statement. Notwithstanding the foregoing, any increase or decrease
in volume of securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20% change
in the aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement; and
(c) any additional or changed material information with respect to the
plan of distribution not previously disclosed in the registration statement;
(2) for the purpose of determining any liability under the Securities Act,
each of the post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of the
securities at that time shall be deemed to be the initial bona fide offering
thereof; and
(3) remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
Merlin pursuant to the foregoing provisions, or otherwise, Merlin has been
advised that in the opinion of the Commission that type of indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against said
liabilities (other than the payment by Merlin of expenses incurred or paid by a
director, officer or controlling person of Merlin in the successful defense of
any action, suit or proceeding) is asserted by the director, officer or
controlling person in connection with the securities being registered, Merlin
will, unless in the opinion of our counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of the issue.
<PAGE>
For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of
Burnaby, Province of British Columbia on November 3, 2000.
MERLIN SOFTWARE TECHNOLOGIES INTERNATIONAL, INC.
a Nevada corporation
/s/ Robert Heller
By: Robert Heller, President
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person who signature appears
below constitutes and appoints Robert Heller as his true and lawful
attorney-in-fact and agent, with full power of substitution and re-substitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this registration
statement, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorney-in-fact and agent, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in connection
therewith, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and agent
or any of them, or of their substitute or substitutes, may lawfully do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1922, this
registration statement has been signed by the following persons in the
capacities and on the dates stated.
SIGNATURES DATE
/s/ Robert Heller
Robert Heller, President and Director November 3, 2000
/s/ Trevor McConnell
Trevor McConnell, CFO, Treasurer and Director November 3, 2000
/s/ Shelley Montgomery
Shelley Montgomery, Secretary and Director November 3, 2000
/s/ Webb Greem
Webb Green, Director November 3, 2000
/s/ Hank Barber
Hank Barber, Director November 3, 2000
