UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2/A
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
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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 . . . . . 800,000 $ 0.31(2) $ 248,000 $ 62.00(2)
------------------ ------------------ ------------------- ------------------
Common Stock to be
offered for resale by
Selling Stockholders
upon Conversion of
Series A Convertible
Notes. . . . . . . . . 10,500,000(3) $ 0.31(2) $ 3,255,000 $ 813.75(2)
------------------ ------------------ ------------------- ------------------
Common Stock for
resale by holders of
Warrants assuming
the exercise of such
Warrants . . . . . . . 1,520,000(3)(4) $ 0.31(2) $ 471,200 $ 117.80(2)
------------------ ------------------ ------------------- ------------------
Total Registration
Fee. . . . . . . . . . $ 993.55
---------------------- ------------------
<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").
Additional shares issuable to holders of the Series A Convertible Notes beyond the 10,500,000 shares of
common stock registered on this registration statement as a consequence of declines in the market price
for the common stock will not be covered by this registration statement.
(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 January 8, 2001, 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
<PAGE>
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 that may be issued on conversion of the Notes and exercise of the warrants.
We have estimated that up to 10,500,000 shares of common stock (at a conversion price of $0.20 per
share) will be issued upon conversion of the Notes. 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
----------------, 2001
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 12,820,000
shares of common stock in connection with the resale of:
- up to 10,500,000 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
- 800,000 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 January 2, 2001, the bid quotation for one share of common stock
was $0.281. 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.
<PAGE>
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.
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 _____________________, 2001.
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
OUR BUSINESS 5
SUMMARY OF RISK FACTORS 6
THE OFFERING 6
SUMMARY FINANCIAL DATA 6
RISK FACTORS 7
THE OFFERING 13
USE OF PROCEEDS 14
PRICE RANGE OF COMMON STOCK 14
DIVIDEND POLICY 15
MANAGEMENT DISCUSSION AND ANALYSIS AND PLAN OF OPERATION 15
BUSINESS 23
PROPERTY 37
MANAGEMENT 37
EXECUTIVE COMPENSATION 40
OPTIONS GRANTED IN THE CURRENT YEAR 42
VALUE OF THE OPTIONS GRANTED IN THE CURRENT YEAR 43
DISCLOSURE OF SEC POSITION OF INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES 44
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 44
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 46
PLAN OF DISTRIBUTION 47
SELLING STOCKHOLDERS 48
SERIES A 10% SENIOR SECURED CONVERTIBLE NOTES AND SERIES A WARRANTS 52
DESCRIPTION OF CAPITAL STOCK 59
LEGAL PROCEEDINGS 60
LEGAL MATTERS 60
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 60
EXPERTS 61
WHERE YOU CAN FIND MORE INFORMATION 61
FINANCIAL STATEMENTS AND SCHEDULES 61
<PAGE>
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.
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.
The multi-line fax program is expected to be in full commercial release by
January 20, 2001.
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
<PAGE>
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 Merlin's common stock involves a number of risks which
should be carefully considered and evaluated. These risks would include:
- the fact that Merlin has suffered recurring losses from operations and
has no established source of income and that these circumstances raise
substantial doubt about Merlin's ability to continue as a going concern as
described in an explanatory paragraph to our independent accountant's opinion
issued in connection with our financial statements for the period ended
December 31, 1999;
- the fact that Merlin is a development stage company, has generated only
minimal operating revenues, that future operating revenues 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 12,523,357 shares of common stock outstanding as of
December 31, 2000.
The selling stockholders are registering for resale up to 12,820,000 shares
of Merlin's common stock including:
- up to 10,500,000 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
- 800,000 shares of common stock currently held by the selling stockholders.
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.
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 Discussion and
<PAGE>
Analysis and 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
NINE MONTHS ENDED (INCORPORATION) TO
SEPTEMBER 30, 2000 DECEMBER 31, 1999
--------------------- --------------------
<S> <C> <C>
Revenue . . . . . . . . . . . . . . . . . . . $ 21,301 $ 0
--------------------- --------------------
Net Loss for the Period . . . . . . . . . . . $ (3,050,623) $ (616,628)
--------------------- --------------------
Loss Per Share - basic and diluted. . . . . . $ (0.29) $ (0.09)
--------------------- --------------------
AS AT AS AT
SEPTEMBER 30, 2000 DECEMBER 31, 1999
--------------------------------------------- --------------------- ---------------------
Working Capital (Deficit) . . . . . . . . . . $ $493,762 $ 397,830
--------------------- --------------------
Total Assets. . . . . . . . . . . . . . . . . $ $1,024,477 $ 831,374
--------------------- --------------------
Total Stockholders' Equity (Deficit). . . . . $ $578,066 $ (320,606)
--------------------- --------------------
Deficit Accumulated in the Development Stage. $ $(3,667,251) $ (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 It Difficult to Evaluate Whether We Will Operate Profitably.
We are a development stage company which is primarily involved in the
development, manufacture and marketing of utility software programs for the
Linux and Unix operating systems. As a relatively new company, we have just
started selling our software products, and as a result, we do not have a
historical record of sales and revenues nor an established business track
record. We have not earned any significant revenues since our formation.
Unanticipated problems, expenses and delays are frequently encountered in
ramping up sales and developing new products. Our ability to successfully
develop, produce and sell our software programs and to eventually generate
operating revenues will depend on our ability to, among other things:
- successfully develop and market our utility software products, including
PerfectBACKUP+ and Communicado Fax;
- successfully continue to enhance our current software products to keep
pace with changes in technology and changes demanded by users of such software
products; and
- obtain the necessary financing to implement our business plan.
Given our limited operating history, minimal sales and operating losses,
there can be no assurance that we will be able to achieve any of these goals and
develop a sufficiently large customer base to be profitable.
<PAGE>
Since We Have a History of Net Losses and a Lack of Established Revenues, We
Expect to Incur Net Losses in the Future.
Our subsidiary did not generate any revenues from the sale of our software
products and incurred a loss of $616,628 for the period from June 25, 1999
(incorporation) to December 31, 1999. We have generated $21,301 in revenues
through the first three quarters of 2000. Although we anticipate 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 existing software products gain sufficient market acceptance to
generate a commercially viable and sustainable level of sales, and/or
additional software products are developed and 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.
We Are Uncertain That We Will Be Able to Obtain Additional Capital That May Be
Necessary to Establish Our Business.
Our subsidiary incurred a net loss for the period from June 25, 1999
(incorporation) to December 31, 1999 of $616,628. We incurred a further
consolidated loss of $3,050,623 in the nine months ended September 30, 2000. As
a result of these losses and negative cash flows from operations, our ability to
continue operations will be dependent upon the availability of capital from
outside sources unless and until we achieve profitability.
Our future capital requirements will depend on many factors, including cash
flow from operations, progress in developing new products, competing knowledge
and market developments and 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 May, 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 and May Strain Our Managerial and Operational Resources.
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.
Shareholders of Our Common Stock May Suffer Significant 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.
Since the number of our shares issuable upon conversion of the notes is
based on a discount to the market price of our common stock, the holders of the
convertible notes will receive more shares upon conversion if the share price
decreases at the time of conversion. The conversion of the convertible notes
and the exercise of warrants may result in substantial dilution to the interests
of other holders of common stock since each holder of convertible notes and
warrants may ultimately convert the full amount of the notes, fully exercise the
warrants and sell all of these shares into the public market.
Assuming a 75% decline in the price of our common stock from the price on
January 2, 2001, we would be required to issue 31,466,566 shares upon conversion
of all the convertible notes and 1,520,000 shares upon exercise of all the
warrants. The total amount of shares issued would be 32,986,566 and would
represent approximately 72% of our current issued and outstanding shares after
such conversion of the notes and the exercise of the warrants (assuming no
exercises of otherwise outstanding stock options and warrants).
In other words, the lower the stock price around the time the holder
converts, the more common shares each holder will receive upon conversion of the
notes. To the extent the selling shareholders convert and then sell their
common stock, the common stock price may decrease due to the additional shares
in the market. This decrease in the market price could allow the holders of the
notes to convert their notes into greater amounts of shares of our common stock.
The Prevailing Market Price Of Our Common Stock May Be Adversely Affected By
Sales Of A Substantial Number Of Shares Into The Public Market.
The actual daily trading volume of our shares of common stock over the
three months ended December 31, 2000 has averaged less than 29,319 shares which
indicates the ability of our stockholders to realize the current trading price
of the shares they hold may fluctuate if a substantial number of shares were to
be offered for resale.
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
12,523,357 shares of common stock issued and outstanding as of December 31,
2000. Through this offering, the selling stockholders may be reselling up to
10,500,000 shares of our common stock, only 500,000 of which are included in the
12,523,357 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.
<PAGE>
To the extent the selling shareholders convert their notes, exercise their
warrants and then sell their shares of common stock, the price of our common
stock may decrease due to the additional shares of common stock in the market.
This could allow the holders of the convertible notes to convert their notes
into a greater amount of shares of our common stock, the sales of which may
further depress the price of our common stock.
Any significant downward pressure on the price of our common stock as the
selling shareholders convert their notes, exercise their warrants and sell
material amounts of shares could encourage short sales by the selling
shareholders or others. Any such short sales could place a further downward
pressure on their price of the common stock.
Future Sales Of Common Stock By Our Existing Shareholders Could Reduce The Price
Of Our Common Stock.
The market price of our common stock could decline as a result of sales by
our existing stockholders of shares of common stock in the market. Likewise,
the perception that these sales could occur may result in the decline of the
market price of our common stock. These sales also might make it more difficult
for us to sell equity securities in the future at a time and at a price we deem
appropriate.
All of Our Assets are Secured and Consequently If We Default On The Convertible
Notes, Our Continued Operation Will Be Adversely Affected.
We are financing our operations primarily 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. Please refer to section entitled
Please refer to section entitled "Series A 10% Senior Secured Convertible Notes
and Series A Warrants" for a description of the security we granted to the
holders of the convertible notes.
Unless We Can Establish Significant Sales Of Two Products, Our Potential
Revenues May Be Significantly Reduced.
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 and our ability to generate revenues.
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 introduction and market acceptance of these
two software programs,and on the development, introduction and market acceptance
of 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.
If We Are Unable to Achieve Market Acceptance For Our Products, We Will Be
Unable to Build Our Business.
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 and
build our business.
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 Will 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
<PAGE>
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 And Consequently Affect Our
Ability To Generate Revenues and Become or Remain Profitable.
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 further 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 further
enhancements to PerfectBACKUP+ and Communicado Fax on a timely basis or that we
will implement our sales and marketing program in a timely manner. A
significant delay in the development, testing and commercial release of our
software programs or a delay in the implementation of our sales and marketing
program could result in increased costs and could have a material adverse
effect on our financial condition and results in operations.
If We Are Unable To Protect Our Intellectual Property Rights, Our Business
Operations Could Be Adversely Affected.
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.
<PAGE>
The Loss of Merlin's Key Technical Individuals Would Have an Adverse Impact on
Future Development And Could Impair Our Ability To Succeed.
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 In A Highly Competitive Industry And Some Of Our Competitors May Be More
Successful In Attracting And Retaining Customers. We May Not Be Able to Compete
Effectively Because We Are In The Process Of Establishing Our Name Recognition
And Because Our Competitors Are More Established And Have Greater Resources Than
We Do.
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.
Since Our Shares Are Subject To Significant Price and Volume Fluctuations,
Stockholders May Have Difficulty Reselling Their Shares.
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 the Nasdaq Stock Market, Inc., you may have
difficulty reselling any of the shares you purchase from the selling
stockholders.
<PAGE>
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 are
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.
The penny stock rules require a broker-dealer, prior to a transaction in a penny
stock not otherwise exempt from the rules, to deliver a standarized risk
disclosure document in a form prepared by the SEC which provides information
about penny stocks and the nature and level of risks in the penny stock market.
The broker-dealer also must provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson in the transaction and monthly account statements showing the market
value of each penny stock held in the customer's account. The bid and offer
quotations, and the broker-dealer and salesperson compensation information, must
be given to the customer orally or in writing prior to effecting the transaction
and must be given to the customer in writing before or with the customer's
confirmation. In addition, the penny stock rules require that prior to a
transaction in a penny stock not otherwise exempt from these rules, the
broker-dealer must make a special written determination that the penny stock is
a suitable investment for the purchaser and receive the purchaser's written
agreement to the transaction. These disclosure requirements may have the effect
of reducing the level of trading activity in the secondary market for the stock
that is subject to these penny stock rules. Consequently, these penny stock
rules may affect the ability of broker-dealers to trade our securities. We
believe that the penny stock rules discourage investor interest in and limit the
marketability of, our common stock.
Since A Relatively Small Group of Stockholders Own a Large Percentage Of Our
Outstanding Shares, They Are Able to Significantly Influence Matters Requiring
Stockholder Approval.
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.
We Do Not Expect to Declare or Pay Any Dividends.
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:
- 10,500,000 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
- 800,000 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.
<PAGE>
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 59 of this prospectus.
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 Convertible Notes, the purchasers of the
Convertible 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. This prospectus also covers the reasle by E.
B. Coxe & Co. LLC of 300,000 shares of common stock which were issued pursuant
to a consulting agreement with E.B. Coxe & Co. LLC.
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
December 31, 2000. . . . . . . . $1.34 $0.22
================================== ====== =====
</TABLE>
<PAGE>
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.
As of December 31, 2000, we had 12,523,357 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 DISCUSSION AND ANALYSIS AND 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.
Selected Financial Data
Set forth below is selected financial data as of September 30, 2000 and
1999 and for the period from June 25, 1999 (incorporation of Merlin Software
Technologies Inc.) to December 31, 1999. The financial statements of Merlin
Software Technologies Inc. as of December 31, 1999 and for the period then ended
are derived from the financial statements audited by BDO Dunwoody LLP that
appear elsewhere in this prospectus. As a result of our acquisition of Merlin
Software Technologies Inc. via reverse acquisition on April 26, 2000, our
financial statements are presented as a continuation of Merlin Software
Technologies Inc. Accordingly, financial information relating to periods prior
to the acquisition is that of Merlin Software Technologies Inc. The information
set forth below should be read in conjunction with our financial statements and
"Management's Discussion and Analysis" included in this prospectus.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Period from
June 25
Three-month Three-month Nine-month 1999
period ended period ended period ended (incorporation)
September 30, September 30, September 30, to December
2000 1999 2000 31, 1999
-------------- -------------- --------------- ---------
Sales . . . . . . . . . . . . 2,431 - 21,301 -
Cost of Sales . . . . . . . . 1,600 - 15,678 -
-------------- -------------- --------------- ---------
831 - 5,623 -
-------------- -------------- --------------- ---------
Expenses
Depreciation . . . . . . . 12,053 1,991 34,477 7,964
General and Administration 468,804 114,435 1,250,381 268,042
Professional fees. . . . . 41,822 14,903 119,815 64,907
Promotion and advertising. 78,798 45,730 854,600 180,312
Research and Development . 81,985 30,251 705,407 98,329
-------------- -------------- --------------- ---------
683,462 207,310 2,964,680 619,554
-------------- -------------- --------------- ---------
Loss from operations. . . . . (682,631) (207,310) (2,959,057) (619,554)
Interest and financing costs. (97,801) 83 (91,566) 2,926
-------------- -------------- --------------- ---------
Net loss for the period . . . (780,432) (207,227) (3,050,623) (616,628)
-------------- -------------- --------------- ---------
</TABLE>
<TABLE>
<CAPTION>
As at As at As at
September 30 September December 31
2000 1999 1999
------------- ---------- ------------
<S> <C> <C> <C>
Working Capital (Deficit) . . . . . . . . . . 493,762 84,832 397,830
Total Assets. . . . . . . . . . . . . . . . . 1,024,477 119,547 831,374
Total Stockholders Equity (Deficit) . . . . . 578,066 (121,843) (320,606)
Deficit Accumulated in the Development Stage. (3,667,251) (182,156) (616,628)
</TABLE>
We are still in our infancy as a viable commercial entity and consequently
our focus over the past eighteen months has been on the identification of market
needs, development of our two software products, PerfectBACKUP+ and Communicado
Fax, to meet these needs and the branding of our company and our products. The
sales figures reported to date reflect sales of an older outdated version of
PerfectBACKUP+ to a limited group of individuals seeking an inexpensive solution
without the added features included with more expensive products. We believe
that we will generate increased revenue over the next three fiscal years due to
the recent release of PerfectBACKUP+ version 7.0, the anticipated release of
Communicado Fax version 3.0, and the anticipated release of updated versions of
our two existing software products in the future. In addition, we have recently
hired two experienced sales and marketing individuals to develop and enhance our
sales and marketing program. These two individuals will focus on increasing
sales volume by way of OEM (original equipment manufacturer) bundling and
<PAGE>
partnering arrangements with large corporate organizations. We expect that
initial revenue growth will be reflected in the first quarter of fiscal 2001,
and we expect further revenue growth in the third and fourth quarter of fiscal
2001. We also anticipate a further increase in revenues in fiscal 2002 and 2003,
which we expect will result from increased sales from our existing products
combined with sales from the introduction of new products which we may release
during that period. We anticipate that the expected growth in revenues may
enable us to attract additional financing to allow us to add the needed
resources in order to further support the growth of our operations. Despite our
expectations there are no assurances that our estimated revenue growth can be
achieved. Should we be unable to achieve the anticipated revenue growth, our
business and future success may be adversely affected.
Nine Months Ended September 30, 2000
Results of Operations
The acquisition of Merlin Software Technologies Inc. was accounted for as a
reverse acquisition, as the former stockholders of Merlin Software Technologies
Inc. controlled approximately 64% of our common stock immediately after the
acquisition. Pursuant to the accounting requirements for reverse acquisitions,
the financial statements subsequent to the acquisition are presented as a
continuation of Merlin Software Technologies Inc. The operations of Merlin
Software Technologies Inc. (incorporated in June 1999) prior to the acquisition
were limited to product development and corporate organizational activities.
The acquisition by us provided Merlin Software Technologies Inc. with the access
to capital markets necessary to expand development of our two software products.
As a result, and due to 1999 being our subsidiary's first fiscal period,
comparisons of results of operations to the initial period in 1999 does not
provide a meaningful analysis. Therefore, the management discussion and
analysis below for the nine-month period ended September 30, 2000 focuses upon
expenditures during that period plus our plan of operation. Comparison of
three-month periods ending September 30, 2000 and 1999 is also provided below.
We incurred a net loss of $3,050,623 for the nine-month period ended
September 30, 2000, including $1,316,972 of compensation expense relating to the
exchange of outstanding stock options in Merlin Software Technologies Inc. for
stock options in our company which occurred on May 1, 2000. The exchange of
stock options resulted in an increase in value of the stock options, which
increased the value that was charged to the Statement of Operations as
additional compensation expense. The majority of options exchanged have vested.
Some of the significant components to the composition of the results of
operations for the nine-month period were:
Sales - $21,301
Sales of $21,301 were generated from two different sources: the sales of
PerfectBACKUP+ software by product resellers ($9,924) and orders for
PerfectBACKUP+ from our website ($11,377). These sales represent sales
of an outdated, yet functional version of PerfectBACKUP+. Total sales were
minimal due to a lack of market recognition of the product and the lack of
additional product features to make it competitive with similar products.
Unforeseen delays in consolidating our operations into a single office in
Burnaby, British Columbia resulted in the delay of the release of updated
versions of our software products, originally scheduled for release in July and
August 2000. The fact that we did not commercially release our two software
products primarily contributed to our lack of sales. PerfectBACKUP+ version 7.0
was released on November 15, 2000 and Communicado Fax version 4.0 is expected to
be released on January 20, 2001.
Cost of Sales - $15,678
The principal components of cost of sales are direct printing charges for
the retail boxes used to distribute our software products and the protective
covers for the compact disc shipped in each retail box. We do not include
overhead charges to our cost of sales.
<PAGE>
General and Administration - $1,250,381
General and administration expense charges represent costs incurred in the
ongoing management and administration of our operations. Included in this amount
are fees in the amount of $449,665 paid to various consultants for marketing,
financing and general corporate management services including $180,333 paid to
our officers for technical, financial, marketing and general management
services. Also in this amount is stock option compensation in the amount of
$542,109 relating to the granting of stock options (primarily to consultants)
that have provided management and advisory services to our company. The balance
of general and administration expense represents other general overhead items,
like rent, telecommunication services, insurance and employee recruitment
charges.
Professional fees - $119,815
Professional fee expenses represent fees incurred for accounting and legal
services provided during the period, including those incurred in preparation
of this registration statement and in concluding the share exchange with our
subsidiary.
Promotion and Advertising - $854,600
Promotion and advertising expense charges represent costs incurred in the
following areas: marketing of our products - $252,636, public relations fees -
$130,681 and charges for investor relation activities - $39,840. Marketing
activities included attendance at industry tradeshows, costs for the development
and printing of sales literature, and advertising in industry journals and on a
strategic partners' website. Public relation fees included the cost of
retaining outside consultants to assist us in drafting and distributing our news
releases to various media groups. Costs incurred for investor relations
activities include amounts paid to external organizations for the distribution
of press releases and various listings and advertising in strategic investor
publications. Also included in promotion and advertising costs stock option
compensation in the amount of $431,443 relating to stock options granted
(primarily to consultants) who have provided services related to promotion and
advertising. While we spent $854,600 in raising awareness of our company in the
investor community along with branding our company's products and image in the
marketplace, we lacked the capital resources required to implement and support
an effective sales and marketing program (i.e. we lacked experienced personnel
and the financial resources for marketing and advertising). This lack of
resources combined with the delay of release of updated software products
limited our ability to generate any significant revenues.
Research and Development - $705,407
Research and development charges represent the gross salaries and fees paid
to our software development personnel and consultants. Included in this amount
is stock option compensation of $343,420 relating to the granting of stock
options to research and development personnel and consultants.
Interest and Financing Costs - $91,566
Interest and financing costs includes $53,000 related to the beneficial
conversion feature associated with the issuance of the convertible notes during
the period and $34,000, being the amortization of the discount on the
convertible notes to September 30, 2000. The discount results from the Black
Scholes value of $1,047,000 attributable to the detachable share purchase
warrants issued in connection with the convertible notes.
Three Months Ended September 30, 2000 Compared To Three Months Ended September
30, 1999
While our subsidiary was incorporated in June 25, 1999, it did not actively
commence operations until October 1999. Consequently, the activity level in the
three month period ended September 30, 2000 is significantly greater than the
three month period ended September 30, 1999 which is reflected in the total
costs reported in each respective period.
<PAGE>
General and Administration
General and administration expenses increased in the three month period
ended September 30, 2000 by $354,369 to $468,804 due to the increased level of
activity in our company. Included in this amount is an increase in consulting
fees of approximately $100,000 paid to various individuals for general
management, marketing and fund raising services. Other items included in this
period-to-period increase amount are an increase in travel of $17,364, and
employee recruitment charges in the amount of $34,190. Charges related to the
operation of two offices during this period, including rent, telecommunication
charges, insurance and the salaries and benefits for two administrative and
telemarketing personnel, were also incurred.
Included in this amount for the three month period ended September 30, 2000
is stock option compensation in the amount of $48,995 relating to the granting
of stock options (primarily to consultants) who have provided management and
advisory services to our company.
Professional Fees
Professional fees increased in the three month period ended September 30,
2000 by $26,919 to $41,822 due to the additional legal services required
to secure additional financing during the period and prepare this registration
statement.
Promotion and Advertising
Promotion and advertising expenses increased in the three month period
ended September 30, 2000 by $33,068 to $78,798 during the period due to the
increased marketing and promotional activities, including investor relation
activities, during the period.
Research and Development
Research and development charges increased in the three month period ended
September 30, 2000 by $51,734 to $81,935 during the period due to the salaries
and benefits incurred relating to the addition of five software development
personnel.
Interest and financing costs
Interest and financing costs increased in the three month period ended
September 30, 2000 by $97,718 to $97,801 during the period primarily due to
the recognition of an accounting adjustment of $53,000 related to the
beneficial conversion feature associated with the issuance of the convertible
notes during the period and $34,000, being the amortization of the discount
on the convertible notes to September 30, 2000. The discount results from
the Black Scholes value of $1,047,000 attributable to the detachable share
purchase warrants issued in connection with the convertible notes.
Period From June 25, 1999 (Inception) To December 31, 1999
Our subsidiary incurred a net loss of $616,628 for the period from June 25,
1999 to December 31, 1999, its initial year of operations. No revenue was
earned in the period as the subsidiary devoted its efforts towards developing
its products, organizing its corporate structure and identifying financing
opportunities. Included in the loss were the following costs:
General and Administration - $268,042
General and administration charges represent costs incurred in the ongoing
management and administration of our operations. Included in this amount are
fees in the amount of $234,277 paid to various consultants for marketing,
investor relations and general corporate management services. Included in this
amount is $142,287 paid to officers of the corporation for management and
marketing services. Included in this amount is stock option compensation in the
amount of $12,022 relating to the granting of stock options (primarily to
consultants) that have provided management and advisory services. The balance
of general and administration expense represents other general overhead items,
including rent, telecommunication services and insurance.
<PAGE>
Professional fees - $64,907
Professional fees represent fees incurred for accounting and legal services
provided during the period. Included in this amount are year-end audit fees.
Promotion and Advertising - $180,312
Promotion and advertising costs represent costs incurred in the following
areas: marketing of our products - $135,312 and public relations fees -
$45,000. Marketing activities included attendance at industry tradeshows, costs
for the development and printing of sales literature, and advertising in
industry journals. While we spent $180,312 in raising awareness of our company
and positioning our company in the market, we lacked the capital resources
required to implement and support an effective sales and marketing program.
Research and Development - $98,329
Research and development charges represent the gross salaries and fees paid
to contract software development personnel. We did not have any permanent
employees on staff as of December 31, 1999.
Summary
Presently, we have no significant source of revenue. We have incurred
operating losses since inception. The continuation of our business is dependent
upon the continuing financial support of our creditors and stockholders,
obtaining further financing, successful and sufficient market acceptance of
updated versions of our existing software products and the successful
development of our software products and achieving a profitable level of
operations. There are, however, no assurances we will be able to generate
further funds required for our continued operations. Accordingly, our financial
statements contain note disclosures describing the circumstances that lead there
to be doubt over our ability to continue as a going concern. In their report on
the financial statements of Merlin Software Technologies Inc., our auditors
included an explanatory paragraph regarding our ability to continue as a going
concern.
Liquidity and Capital Resources
Our principal capital requirements to date have been to fund: (1) the
development of PerfectBACKUP+ and Communicado Fax; (2) the marketing and
advertising activities undertaken to raise awareness of our company and our
software products; and (3) the promotion and investor relation programs in place
to disseminate information about our company and our products. Net cash used in
operating activities for the nine-month period ended September 30, 2000 was
$1,495,464. Net cash used in investing activities during the nine-month period
ended September 30, 2000 was $54,504 which was directly spent in the acquisition
of fixed assets, primarily computer equipment. Net cash provided from financing
activities for the nine-month period ended September 30, 2000 was $1,608,559.
Our primary financing activity during the nine-month period ended September 30,
2000 of $1,921,472 consisted of proceeds on loans totalling $128,513, proceeds
received on the issuance of common stock totalling $760,000 (including $600,000
raised by the public company prior to the acquisition of our subsidiary),000 and
proceeds received on the issuance of convertible notes totalling $1,032,959 (net
of financing costs of $67,041). Net cash provided from financing activities was
reduced by $312,913 due to the repayment of demand loans during the period.
The net increase in cash during the nine-month period ended September 30,
2000 was $58,591.
We believe, based on currently proposed plans and assumptions relating to
our operations, that the proceeds from the issuance of convertible notes will
be sufficient to fund our operations and working capital requirements until May
31, 2000. We anticipate that projected increases in revenue in the first
quarter of fiscal 2001 and/or the generation of significant OEM or partnering
agreements will enable us to raise the necessary funding required to
<PAGE>
finance our operations and working capital for at least twelve months. During
this period we also anticipate an increase in revenues that in addition to any
financing raised, will fund operations and working capital requirements.
In the event that our plans or assumptions change or prove inaccurate (due
to delays in product development, the inability to sign any significant sales
agreements or generate revenues, unfavourable economic conditions, or other
unforeseen circumstances), there can be no assurance that such additional
financing would be available to us, or if available, that the terms of such
additional financing will be acceptable to us.
Future Cash Requirements
We expect that our recent addition of senior sales and marketing personnel
and the commercial release of PerfectBACKUP+ version 7.0 and the first version
of the Communicado Fax product will lead to an increase in revenues in fiscal
2001. We expect that further development and marketing of both these products
combined with the planned introduction of new products or updated versions of
our existing products in late 2001 will lead to increased revenues in fiscal
years 2002 and 2003. Although we expect to see an increase in revenues in 2001,
we do not anticipate this to materialize until the third and fourth quarter of
fiscal 2001. Consequently, we will require a minimum of approximately $3.9
million over the period ending October 31, 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 31, 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 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 31, 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.
Plan of Operation
Our primary objective in the next 12 months will be to complete development
of our Communicado Fax utility software program for commercial release, to
implement an aggressive sales and marketing program in connection with the
sale of both our PerfectBACKUP+ and Communicado Fax utility software programs.
Version 7.0 of PerfectBACKUP+ was released on November 15, 2000 for purchase and
download from our website and we have commenced design work on PerfectBACKUP+
Version 8.0, which is intended as a backup program for large networks and not
as a replacement for Version 7.0. Communicado Fax requires further development
and testing before it can be made available for commercial release, which is
expected to be on January 20, 2001. In addition to the development and testing
work that has to be performed, an aggressive sales and marketing campaign must
be implemented.
<PAGE>
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 September 30, 2000, we have expended $803,736 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, updating both
PerfectBACKUP+ and Communicado Fax so that they can be purchased for several
different languages (i.e. German and Spanish), 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.
Although we believe that the current release of PerfectBACKUP+ is competitive,
we will continue to update the design of and add new features to PerfectBACKUP+
in order to ensure that that product remains competitive in the marketplace. We
do not anticipate encountering any uncertainties in updating the design or
adding new features and will add such features as are demanded or requested by
users of PerfectBACKUP+. 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. We have recently hired a Vice-President of Sales and a Vice-President
of Marketing. 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 up to five additional 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.
Personnel
As of December 31, 2000, we have 17 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. This is because operating systems on
their own only allow computers to be operated. This means that the computer
can be switched on and will display messages on the screen and accept input
from devices such as keyboards. Operating systems also allow other software to
be operated on the computer, like word processing and spreadsheet programs.
However, operating systems do not usually come with software utility
applications such as backup or faxing programs that are needed by users to
perform normal day-to-day tasks with their computers. Such programs are
typically supplied by third party software companies, like Merlin. We expect
to meet this demand for software utility programs by further 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 December 15, 2000,
there was one shareholder of Merlin Software Technologies Inc. who had yet to
tender an aggregate of 13,333 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 or 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
<PAGE>
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.
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
exclusive rights to FastBACK Plus Unix were then re-acquired by Gary
Heller. Between 1990 and 1995 , 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 7.0) 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 7.0) 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. Several companies including Caldera, IBM and Cable + Wireless
BET Limited have purchased earlier versions of the software. We have also
provided complimentary copies to several educational institutions including
the University of Minnesota, Stanford University, Awhus University (Denmark),
Morgan County Board of Education (TN) and Whitefish Bay School (WI). 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.
Users with questions regarding PerfectBACKUP+ can currently access our
technical support where frequently encountered problems can be addressed by our
technical support staff and will be able to access our technical support through
our website where frequently encountered problems will be posted and addressed
by our technical staff.
<PAGE>
A public test version of PerfectBACKUP+ version 7.0 was released on October
8, 2000, and continues to be available for download from our website. Users who
download this public test version have access to the program on a time limited
basis, usually 30 days, and agree to provide us with any comments or provide us
with details of any bugs or errors they may encounter in use of the public test
version. These free downloads of public test versions allow us to uncover and
verify any errors or bugs in our programs before such programs are released for
retail sales. It also allows us to determine which features users may want
added to future versions of our software programs. By minimizing the amounts of
potential errors or bugs with our software programs before they are released to
the public for sale, we are attempting to increase the success and acceptance of
our software programs by the public. A commercial version of PerfectBACKUP+ was
announced and released on November 15, 2000 at Comdex, a software conference
held in Las Vegas, Nevada. It is available for purchase and download from our
website at a cost of $129 (the same price is applicable whether the product is
purchase through download, or a CD in a retail box with manual).
The release of PerfectBACKUP+ version 7.0 was a natural progression in the
development of the product. It provides additional features and addresses some
errors found in earlier releases of PerfectBACKUP+. The new features include a
full system backup wizard to make backing up a complete hard disk easier, an
online manual, a backup scheduling wizard to make scheduling regular backups
easier, an improved file selection dialog to make the inclusion and exclusion of
files for a particular backup easier and a media copy wizard that made the
duplicating of the data on a backup tape easy. A 'wizard' as used above refers
to a simple, straightforward set of questions presented in a logical sequential
manner that makes it easy for the user to establish the parameters for the use
of the program.
Concurrent with the completion of PerfectBACKUP+ version 7.0, we commenced
design work on PerfectBACKUP+ version 8. PerfectBACKUP+ version 8 is not
scheduled for release until March of 2001 and, due to the fact that it is
targeted as a backup program for large networks, will not be sold as a
replacement for version 7.0 of PerfectBACKUP+ but as an additional product with
a different focus and with additional features. As the version 8 of
PerfectBACKUP+ is still in the early stages it is not possible to say with any
certainty that it will be released in March 2001, but we believe that the
release of version 8 will not have any impact on the sales of version 7.0 of
PerfectBACKUP+.
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 the Internet
since 1996. We acquired the rights to HotWireFax from Robert Heller, a
director and officer of Merlin and our subsidiary, on July 13, 1999 for
1,600,000 shares of common stock of Merlin Software Technologies Inc., which
shares were exchanged for 1,600,000 shares of our common stock in connection
with our acquisition of Merlin Software Technologies Inc. In late 1999, we had
records from our server that approximately 22,000 copies of HotWireFax had
been downloaded from the Internet. In January, 2000, HotWireFax version 3.0
was announced and made available for download. Since we released the new version
for download, we have experienced approximately 200 to 300 downloads per month.
We have assumed that some of these copies would be redistributed and accordingly
we estimate that approximately 30,000 copies of the various versions of
HotWireFax have been downloaded from the Internet.
The use of free downloads provides us with an indication that there is a
demand for a product like HotWireFax and that we may be able to commercially
sell an improved version of such product. It also allows us to uncover and
rectify any errors or bugs in our programs before such programs are released for
retail sales. In addition, it allows us to determine which features users may
want added to future versions of our software programs. By minimizing the
amounts of potential errors or bugs with our software programs before they are
released to the public for sale, we are attempting to increase the success and
<PAGE>
acceptance of our software programs by the public. However, to date, these free
downloads have not resulted in any revenues, primarily because we have not yet
released our retail commercial version of the product.
HotWireFax version 3.0 for the Linux operating system was subsequently
re-branded as Communicado Fax version 3.0 and is currently undergoing testing.
This version contains support for a much wider range of modems and contains a
new graphical user interface. A public test version of Communicado Fax version
4.0 was released on December 27, 2000. A public test version is available so
that users have access to the program on a time limited basis, usually 30 days,
and can provide us with general comments and details of any bugs or errors they
may encounter in use of the public test version. A commercial version of
Communicado Fax version 4.0 is expected to be released by January 20, 2001, and
should retail for $49 (by way of download, or as a CD or retail box with
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;
- online "help" - allows users to find assistance online; and
- automatic retry - automatic spooler to retry faxes and to advise of
results via email.
Communicado Fax version 4.0 will operate on Linux operating systems including
RedHat 6.1, 6.2 and 7.0, Caldera Open Linux 2.3 and eServer 2.3 and 2.4,
S.U.S.E. 6.3, 7.0 and 7.1, Corel Linux 1.0 and 1.2, Turbo Linux 6.X and 7.0,
Mandrake 6.X and 7.X, the current releases of the Linux operating Debian and
Stormix. 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.
<PAGE>
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 in order
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.
We plan to expand and capitalize upon this open source 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 in addition 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 which 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 programs. In return
for providing us with a non-exclusive license and half of the intellectual
property rights, we will compensate the programmers with cash or issue them
options, if allowable under applicable securities laws. Since the programmers
have the possibility of obtaining options, we have named this project the
Option Source Project.
<PAGE>
Overview of the Industry and the Market
We operate in the software development industry with emphasis on 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, we believe that
the Linux operating system will continue to be an important system for both
servers and desktop computer workstations for the foreseeable future.
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.
We are also aware of an increase 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 consists of both
businesses and individuals who adopt the Linux operating system to run their
computer systems, or who continue to utilize the Unix operating system to run
their computer systems. With each new update release of the Linux operating
system, approximately two updates per calendar year, the operating system
becomes more friendly to the average consumer. We expect that this, in turn,
will help to facilitate growth and acceptance of the Linux operating system.
With each new Linux installation we expect that there will be a corresponding
increase in the demand for mission critical applications for the operating
system. Merlin intends to exploit this expected increase in demand 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
<PAGE>
- 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. To date, we have entered into OEM or bundling
agreements with Caldera Systems, Inc. and TurboLinux Inc. Under both of these
OEM agreements, an evaluation version of PerfectBACKUP+ version 6.2 was to be
included in retail packages marketed and distributed by these companies.
Caldera included the evaluation in its eDesktop release 2.4 which commenced
distribution in May, 2000. An evaluation version is also to be included in
TurboLinux's release 7.0, which is yet to be distributed. TurboLinux has
announced that they expect their version 7.0 to be released some time in
March, 2001.
We also sell and distribute our products through our website where users
can order retail box versions on CD and will soon be able to download a
digital distribution version 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;
<PAGE>
- 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;
Each of resellers has agreed to:
- order our software programs from us or from an authorized dealer as
necessary;
- market, demonstrate and distribute our software products to customers in
their territory;
- advise customers and potential customers of technical support options
provided by us; and
- provide us with a written quarterly report detailing information about
sales of our products.
To date, the reseller agreement with Frank Kasper and Associates has
generated revenue of $2,180, the reseller agreement with Italsel SRL has
generated $2,447 and the reseller agreement with LinuxMall.com has generated
$1,082. Although the reseller agreements have not generated significant
revenues to date, we believe that such reseller agreements are a necessary part
in establishing a distribution network to have our products marketed locally and
internationally.
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:
<PAGE>
- product features and performance;
- price;
- 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.
As a result of some in-house evaluation work that we have done on Enhanced
Software Technologies' Backup and Recover (BRU) program, Lone Star Software's
Lone Tar and Microlite's Backup Edge, we believe that they represent the main
competitors for PerfectBACKUP+ version 7.0 for Linux. Knox's Arkeia, CA's
Arcserve, Legato's Networker and Veritas' BackupExec also provide some
additional competition, but, we believe, only indirectly, as they tend to offer
products which are much more comprehensive, complex and expensive that are aimed
at higher-end markets.
We feel that the key competitive advantages that PerfectBACKUP+ version 7.0
enjoys are its overall feature set and a very competitive price. In addition,
we believe that the user interface provides ease of use without sacrificing
overall performance, and that the manual provided with the new version 7.0
release is the easiest to read, most complete manual of all the products that we
regard as the key competitors to PerfectBACKUP+.
The following are what we believe to be PerfectBACKUP+'s key features that
we believe are attractive to users. As indicated, some of these features are
also found on some of our key competitors' products:
- Relatively Fast Data Transfer Speed. In non-technical terms, the two
fastest products that we have identified in raw data transfer are Enhanced
Software Technologies' BRU program and our own PerfectBACKUP+. These two
products utilize high-performance, multi-buffering engines to provide a high
rate of data transfer, whether during the backup or restore process.
- Format Flexibility. Our archive format is a Linux standard format which
provides added facility for data verification and portability, providing the
user with the ability to restore a PerfectBACKUP+ archive on a system which does
not already contain a version of PerfectBACKUP+. Lone Tar also uses a Linux
standard format but one that does not readily provide data integrity, although
it is portable. We have not determined the format of Enhanced Software
Technologies' BRU program and Microlite's BackupEdge products.
- Encryption Ability. PerfectBACKUP+ includes the ability to encrypt data
as it is written to the backup media thus making it more secure than a normal
backup performed by one of our competitor's utilities.
- Built In Compression Algorithm. We also utilize a built in compression
algorithm that provides compression levels and speeds higher than those found in
the other key competitor products.
- Full Featured Graphical User Interface. PerfectBACKUP+ features a command
line, menu-driven, full-featured graphical user interface. Because the
interface is written in the C++ programming language, it is fast, robust and
does not overutilize central processing unit resources the way interfaces
written in the
<PAGE>
Tcl/Tk programming language are prone to do. It should be noted that
PerfectBACKUP+ version 7.0 utilizes a character based menuing system that is
being phased out in the industry, but that we intend to replace it in the next
version of PerfectBACKUP+ that is currently in development.
Enhanced Software Technologies' BRU program features a command line,
menu-driven, and X window interface. The graphic interface is written in Tcl/Tk
which, as noted above, demands significant central processing unit resources
when running, sometimes utilizing up to 90% and higher of the central processing
unit's capability, making ordinary use of the computer difficult while a backup
is in progress.
Lone Tar provides only a character-based, menu-driven interface. We feel the
lack of a graphical user based interface is a significant disadvantage for Lone
Tar.
Microlite's BackupEdge provides a command line and menu-driven interface, and a
graphical interface for fast file restore operations. We feel that Microlite's
lack of a full-featured graphical interface will become a disadvantage.
- Autodetection. PerfectBACKUP+, Enhanced Software Technologies' BRU
program release 16 and Microlite's BackupEdge automatically detect and configure
Linux supported disk drives and tape devices. Lone Tar does not appear to
support autodetection of such disk drives and tape devices.
- Autochanger. PerfectBACKUP+ versions 6.2 and 7.0 include an autochanger
module that will automatically detect Linux supported tape libraries.
Microlite's BackupEdge also includes autochanger support while Lone Tar does
not. It is unknown at this time to what degree Enhanced Software Technologies'
BRU program supports autochangers.
- Network Backup Support. Both our PerfectBACKUP+ and the products of our
key competitors provide complete support for network backup including Novell
servers, Microsoft Windows and NT servers and workstations, Apple and network
file system attached hard drives.
- Ease of Installation. PerfectBACKUP+ is delivered as an RPM automatic
installation package which facilitates easy graphical installation of the
product, while the competitive products feature command line installation
scripts which are somewhat more cumbersome.
- Price. Enhanced Software Technologies' BRU program retails for $299,
PerfectBACKUP+ version 7.0 for $129 and Microlite's BackupEdge for $300. The
personal version of Lone Tar retails for $89 and pricing for the commercial
version of Lone Tar is not currently available.
PerfectBACKUP+ does suffer a number of disadvantages when compared with our
key competitors' products. These include the lack of a fast file restore
function, inadequate CD-ROM and DVD support and the need to update the graphical
user interface to a more modern look and feel.
Enhanced Software Technologies' BRU program and Lone Tar both come with
crash recovery booting mechanisms, called CRU and Lone Tar, respectively, which
are not a part of the standard PerfectBACKUP+. Microlite's product provides a
crash recovery utility called RecoverEdge which provides for making a bootable
floppy disk, CD or DAT tape for recovery purposes. However, as most Linux
distributions now include the automatic creation of a bootable recovery disk, we
feel a crash recovery feature is almost redundant at this time. Lone Tar
provides a fast recovery function that will "block-seek" through a tape at high
speed to locate a particular file for restoring. We regard this as a necessary
feature for any future version of PerfectBACKUP+.
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 purchase and operate 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, being mainframe computers, and the pricing model they have
implemented, we do not feel that we compete with them directly, nor do we
anticipate competing with them in the near future .
<PAGE>
In addition to commercial competition from the products mentioned above,
PerfectBACKUP+ must also compete against Amanda, an open source network
archiving utility developed at the University of Maryland and supported at
Source Forge, an open source development. At the present time, however, Amanda
does not support all of the different network protocols and devices supported by
most commercial packages, including PerfectBACKUP+. Furthermore, Amanda is not
supported and is provided to users on an as is basis. Accordingly, we feel that
Amanda is not currently a competitor in environments where Linux is used
commercially, due to its lack of commercial support.
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 should we release
PerfectBACKUP+ for use on the Microsoft Windows operating system.
Communicado Fax
We anticipate that Communicado Fax will be priced at $49 (download CD or
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.
As a result of an in-house evaluation, we have identified the main
competitors of Communicado Fax from Linux based multi-line fax software programs
as including:
- VSI-Fax distributed by VSystems Inc., whose base product for Linux is
priced at $1,434 and is limited to 5 users and four fax ports, or lines;
- Faximum Software Inc., 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;
- Lightning FAX, distributed by Interstar Technologies Inc.;
- fax2send, distributed by Beacon Computer Services;
- Sendfax, an open source product that does not provide many of the features
found in Communicado Fax; and
- Hylafax, 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.
We used to consider Faximum a competitive threat. However, we have found
it very difficult to determine from Faximum's website and literature exactly
which products are available for the Linux platform. Almost all of Faximum's
products appear to be available for traditional Unix platforms and only three
products, Faximum Messaging Server, Faximum Messaging Gateway and Mfax appear to
be available for Linux.
Of the above, only Mfax can possibly be considered a competitive product as
it provides the fax sending and receiving functions that are part of the server
program of Communicado FAX. However, it does not provide scheduling or user
<PAGE>
interface capabilities that are a part of Communicado FAX. Mfax is priced at
$495 while Communicado FAX is priced at $49 including the user interface
features.
While it is possible Mfax and Faximum's products could compete with
Communicado FAX in the future, we do not feel that Faximum's products are a
competitive threat at this time.
VSI-FAX and Fax2send, on the other hand, do provide features for the Linux
platform that are a part of the Communicado FAX product. These products are
available for Linux distributors from RedHat and Caldera and provide:
- multiple modem/incoming and outgoing line capabilities;
- customizable cover sheets;
- integration with desktop office applications such as word processing and
spread sheets;
- fax address books;
- broadcasting;
- scheduling;
- clients and printer drivers for Unix, Linux and Windows;
- fax viewing within a graphical environment;
- fax printing; and
- multiuser capabilities
VSI-FAX Advantages:
- intelligent fax board support;
- least cost routing (to reduce the cost of sending faxes);
- close integration with Microsoft Outlook and Lotus Notes; and
- web client (for some operating systems).
VSI-FAX Disadvantages:
- this product has a significant cost disadvantage when compared with
Communicado FAX due to the basic product pricing and the additional cost per
additional supported modem line;
- the initial 5 client licence is $1,495;
- additional line support is charged on a declining scale from $780 per
line; and
- per user costs are $50 which is competitive with Communicado FAX.
<PAGE>
Fax2send Advantages:
- competitively priced with Communicado FAX for single modem line
configurations: $25 for a single user, single line; $99 for 4 user, single
modem line and $299 for 25 user, single line configuration.
Fax2send Disadvantages:
- produced and supported from the United Kingdom;
- additional modem line charges start at $500 and the client must first
purchase the Enterprise version for $1,499.
Communicado FAX advantages:
- completely portable between operating systems with Java programming
language interface;
- fast fax creation reduces need to use work processing or other application
to produce fax initially;
- fax filtering to limit junk fax reception;
- $50 for single user version, multiple line is very competitive with
VSI-FAX but not quite competitive with Fax2send; and
- $200 for the 5 user version, multi-line is very competitive with Fax2send
at $1,499 + $500 per additional line and the VSI-FAX per additional port charge
of $750.
Communicado FAX disadvantages:
- no least cost routing (to reduce fax costs);
- limited integration with Microsoft Outlook and Lotus Notes;
- no web/browser interface; and
- no intelligent fax board support at this time.
Finally, LightningFAX, which is available for Linux, appears to only
support "intelligent" fax boards and does not appear to support lower cost fax
modems. We do not consider LightningFAX a competitor at this time due to its
high implementation costs of at least $1,500 per server, and the fact that it
does not support desktop fax modems.
In summary, we feel that Fax2send is our major competitor in the Linux fax
marketplace. However, we feel we have an advantage in the North American and
Asia Pacific regions due to our proximity to those markets.
We do not feel that either of the open source options, Hylafax and Sendfax,
represent competition for Communicado FAX largely because they are not
completely integrated solutions, nor do they come with commercial support, even
though they are distributed free. In fact, both products are provided on a
strictly as-is basis with no warranties of any kind.
Software Market - Competition Generally
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.
<PAGE>
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" ,
"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.
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 Option 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.
<PAGE>
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 September 30, 2000, we have expended an aggregate of $803,736 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 updating both PerfectBACKUP+ and Communicado Fax so
that they can be purchased for several different languages (ie. German and
Spanish) 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 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
<PAGE>
Hank Barber Director 57 Director since October
25, 2000
Kevin O'Reilly Vice President of Marketing 34 Vice President since
January 4, 2001
James Baglot Vice President of Sales 44 Vice President since
January 4, 2001
================================= =============================================== === ====================
</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, Director and 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, Director and 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, Director and Vice President
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
<PAGE>
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.
Kevin O'Reilly, Vice President of Marketing
Kevin O'Reilly has been involved in marketing or market analysis for the
last seven years. Since August, 2000, he was the Vice President of Market
Development for Ezula Inc., where he was a member of an executive team
responsible for revenue generation and technology distribution. From January,
2000 to August, 2000, he was the Senior Director of Strategic Development for
1stUp.com Corporation responsible for developing revenue streams for new
advertising technology. From July, 1999 to January, 2000, he was the Director
of Business Development for Evesta.com and was responsible for development of
distribution channels for free and filtered internet access. From January, 1999
to June, 1999, Mr. O'Reilly was an Executive Analyst with George S May
International Company, a management consulting firm, during which time he
performed business analysis of small and medium sized companies. From January,
1998 to November, 1998, he was a Sales Executive with Silicon Graphics, Inc. and
was responsible for sales of software to internet service providers and web
hosting companies. From January, 1997 to January, 1998, he was the Director of
Marketing for Lantech, Inc. and developed an internet strategy for companies
using local and wide area computer networks. From November, 1993 to January,
1997, he was the Director of Market Analysis at Intelligent Electronics and was
responsible for developing business plans and market analyses for various
companies.
Mr. O'Reilly obtained a Master's Degree in Cognitive Science from the
University of Essex and a Bachelor's Degree in Psychology from the University of
Warwick.
James Baglot, Vice President of Sales
James Baglot has been involved in sales and marketing in the computer and
software industries for over ten years. Mr. Baglot is a founder of Rocket
Builders, a company which provides management consulting services. Rocket
Builders was founded in November, 1999. He has been providing management
consulting services, primarily focusing on sales and marketing, to various
companies from November, 1999 to the present. From April, 1999 to December,
1999, he was the Director of Sales for Onvia.com, Inc. and from January, 1998 to
February, 1999, he was the Director of Sales and Marketing for Multiactive
Technologies Inc. In both of these positions he was responsible for all aspects
<PAGE>
of the sales, marketing and management of these companies products and services.
From April, 1997 to December 1997, he was the General Manger (British Columbia
region) for Gandalf Canada Ltd., a company which provides hardware, consulting
and associated computer network services. At Gandalf, Mr. Baglot was
responsible for the sales and operations in British Columbia of Gandalf. From
January, 1994 to February, 1997, Mr. Baglot was the Multivendor Customer Service
Sales Manager for British Columbia responsible for sales of Digital's computer
equipment and services in British Columbia. Mr. Baglot has taken numerous
industry courses related to technology and computers during the last 18 years.
Committees of the Board
We do not have an audit or compensation committee at this time.
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
<PAGE>
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 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.
On January 4, 2001, we entered into an agreement with Kevin O'Reilly in
connection with his position as Vice President of Marketing. Mr. O'Reilly's
annual salary is $120,000, together with a performance bonus related to the
level of sales of our products. Mr. O'Reilly's agreement was effective January
4, 2001 and continues until terminated in accordance with its provisions. We
are entitled to terminate Mr. O'Reilly's agreement at any time for cause and
without cause if we pay Mr. O'Reilly a severance payment of $30,000.
On January 4, 2001, we entered into an agreement with Jim Baglot in
connection with his position as Vice President of Sales. Mr. Baglot's annual
salary is $90,000, together with a signing bonus of CDN$5,000 (approximately
$3300) and a performance bonus related to the level of sales of our products.
Mr. Baglot's agreement was effective January 4, 2001 and continues until
terminated in accordance with its provisions. We are entitled to terminate Mr.
Baglot's agreement at any time for cause and without cause if we pay Mr. Baglot
a severance payment of $22,500.
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.
<PAGE>
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
$100,000. Shares subject to options under the 2000 Stock Option Plan may be
purchased for cash. Unless otherwise provided by the board, an option granted
under the 2000 Stock Option Plan is exercisable for a term of ten years (or for
a shorter period up to ten years). An option granted to an individual whose
holdings exceed 10% of the voting power is exercisable for a term of 5 years.
The 2000 Stock Option Plan is administered by the board of directors, which has
discretion to determine optionees, the number of shares to be covered by each
option, the vesting and exercise schedule, and any other terms of the options.
The purchase price and number of shares of each option may be adjusted in
certain cases, including stock splits, recapitalizations and reorganizations.
The 2000 Stock Option Plan may be amended, suspended or terminated by our board
of directors, but no action may impair rights under a previously granted option.
Options under the 2000 Stock Option Plan can not be assigned except in the case
of death and may be exercised only while an optionee is employed by us, or in
certain cases, within a specified period after employment ends. As of
December 31, 2000 , 901,000 options to acquire shares of common stock were
granted under the 2000 Plan.
<TABLE>
<CAPTION>
OPTIONS GRANTED IN THE CURRENT YEAR
(through September 30, 2000)
NUMBER OF SHARES % OF TOTAL MARKET
OF COMMON STOCK OPTIONS GRANTED EXERCISE PRICE
UNDERLYING OPTIONS TO EMPLOYEES OR BASE PRICE ON DATE EXPIRATION
NAME(4) GRANTED IN 2000 IN 2000(1) ($/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.
<PAGE>
(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.
(4) 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
(4) Kevin O'Reilly was appointed as an officer of Merlin on January 4, 2001 and was granted
120,000 options to purchase common shares at an exercise price of $0.21 (as to 20,000 options) and
$0.35 (as to 100,000 options), expiring on January 4, 2006. The options vest as to 20,000 options on
January 4, 2001 and as to 100,000 options on January 4, 2002. The market price at the date of grant
was $0.34.
(4) James Baglot was appointed as an officer of Merlin on January 4, 2001 and was granted
100,000 options to purchase common shares at an exercise price of $0.35, expiring on January 4, 2006.
The options vest as to 20,000 options on January 4, 2001 and as to 80,000 options on January 4, 2002.
The market price at the date of grant was $0.34.
</TABLE>
<TABLE>
<CAPTION>
VALUE OF THE OPTIONS GRANTED IN THE CURRENT YEAR (through September 30, 2000)
NUMBER OF SHARES
OF COMMON STOCK VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY
SHARES VALUE AT SEPT. 30, 2000 OPTIONS AT
ACQUIRED ON REALIZED EXERCISABLE/ SEPT. 30, 2000 EXERCISABLE/
NAME EXERCISE (#) ($) 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>
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.
<PAGE>
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 December 31 , 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(10) OF BENEFICIAL OWNERSHIP(1)(9) OF CLASS(1)
------------------------------------------- ------------------------------ -----------
<S> <C> <C>
Gary Heller
1409 North Cove Blvd.
Longwood, Florida 32750. . . . . . . . . . 2,575,000 common shares(2) 20.6%
------------------------------ -----------
Robert Heller
1912 Ironwood Court
Port Moody, BC V3H 4C3 . . . . . . . . . . 2,425,000 common shares(3) 19.4%
------------------------------ -----------
<PAGE>
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 12,523,357 shares of common stock issued and outstanding as of
December 31, 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
converted into shares of our common stock.
(10) Kevin O'Reilly was appointed as the Vice President of Marketing on January 4,
2001. Mr. O'Reilly does not own any shares of our common stock but was granted
an aggregate of 120,000 options, 20,000 of which are exercisable within sixty
days. James Baglot was appointed as the Vice President of Sales on January 4,
2001. Mr. Baglot does not own any shares of our common stock but was granted an
aggregate of 100,000 options, 20,000 of which are exercisable within sixty days.
</TABLE>
<PAGE>
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.
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
<PAGE>
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.
On October 16, 2000, we entered into a consulting agreement with Rocket
Builders LP whereby we agreed to pay Rocket Builders $75,000 (approximately
$50,000) and issue 75,000 shares of our common stock in return for certain
consulting services to be provided by Rocket Builders. One of our new officers,
James Baglot, was a partner of Rocket Builders, but ceased that relationship on
January 4, 2001.
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
<PAGE>
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 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 post-effective amendment
to this registration statement 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 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 DECEMBER 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 post-effective amendment to the
<PAGE>
registration statement has been filed and become effective. We will file a
post-effective amendment to include additional selling stockholders upon request
and upon provision of all required information to us.
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.
FOR A DESCRIPTION OF THE SERIES A 10% SENIOR SECURED CONVERTIBLE NOTES AND
SERIES A WARRANTS - SEE THE SECTION BELOW ENTITLED "SERIES A 10% SENIOR SECURED
CONVERTIBLE NOTES AND SERIES A WARRANTS".
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 2,148,000(4) 310,950(4) 2,458,950 0 / 0%
purchaser and holder
of Convertible Notes
----------- ------------ ----------------------- ---------------------- -----------------------
Narragansett
Offshore, Ltd. Nil 2,854,000(5) 413,150(5) 3,267,150 0 / 0%
purchaser and holder
of Convertible Notes
----------- ------------ ----------------------- ---------------------- -----------------------
Pequot Scout Fund,
L.P. Nil 4,009,000(6) 580,350(6) 4,859,350 0 / 0%
purchaser and holder
of Convertible Notes
----------- ------------ ----------------------- ---------------------- -----------------------
SDS Merchant Fund,
L.P. Nil 1,489,000(7) 215,550(7) 1,704,550 0 / 0%
purchaser and holder
of Convertible Notes
----------- ------------ ----------------------- ---------------------- -----------------------
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%
----------- ------------ ----------------------- ---------------------- -----------------------
<PAGE>
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%
----------- ------------ ----------------------- ---------------------- -----------------------
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%
----------- ------------ ----------------------- ---------------------- -----------------------
E.B. Coxe & Co. LLC 300,000 N/A N/A 300,000 0 / 0%
----------- ------------ ----------------------- ---------------------- -----------------------
TOTAL . . . . . . . . 800,000 10,500,000 1,520,000 12,820,000
--------------------- ----------- ------------ ----------------------- ----------------------
<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. We have estimated that up to 10,500,000 shares
of common stock (at a conversion price of $0.20 per share) will be issued upon conversion of the Notes. Accordingly, we are
registering a minimum of 10,500,000 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.
<PAGE>
(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.
Narrangansett Assett Management, LLC, in its capacity as the general partner of Narragansett I, L.P., exercises dispositive and
voting powers with respect to the shares of our common stock that the selling stockholders will own on conversion of the Notes
or exercise of the warrants.
(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.
Leo Holdings, LLC, in its capacity as the investment manager of Narragansett Offshore, Ltd., exercises dispositive and voting
powers with respect to the shares of our common stock that the selling stockholders will own on conversion of the Notes or
exercise of the warrants.
(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.
Pequot Capital Management, Inc., in its capacity as investment manager of Pequot Scout Fund, L.P., exercises dispositive and
voting powers with respect to the shares of our common stock that the selling stockholders will own on conversion of the Notes
or exercise of the warrants.
(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.
SOS Capital Partners, LLC, in its capacity as the general manager of SOS Merchant Fund, L.P., exercises dispositive and
voting powers with respect to the shares of our common stock that the selling stockholders will own on conversion of the Notes
or exercise of the warrants.
(8) Brint Coxe has voting or investment control over our common stock that the entity will own on conversion of the Notes of
exercise of the warrants.
</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.
<PAGE>
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 SEC and similar
events, for a period not to exceed 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.
SERIES A 10% SENIOR SECURED CONVERTIBLE NOTES AND SERIES A WARRANTS
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 four
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.
Interest, Maturity And Prepayment
The Notes bear interest on the outstanding principal amount until the Notes
are paid in full at an annual rate of 10%. Interest on the Notes is payable
semi-annually in shares of our common stock computed based upon the conversion
price at the time of such payment unless we default on the Notes, then the
holders can demand that we pay the interest in cash.
All principal and interest on the Notes shall be due on August 24, 2003.
We may not prepay the Notes without the written consent of 50% of the
holders. We may however prepay all or part of the Notes with respect to which a
holder sends a conversion notice at a rate of 105% of the principal amount of
such Notes, together with interest thereon, at any time the conversion price is
less than $1.00.
Conversion Provisions, Conversion Price and Adjustments
The holder, at his option, may convert, at any time until the close of
business on the business day before the date of final maturity of the Notes, all
or any portion of the principal amount of the Notes and the interest thereon
<PAGE>
into fully paid and non-assessable shares of our common stock at the conversion
price in effect at the date of conversion. The holder is restricted from
converting the Note, where such conversion would result in the holder together
with other members of a "group" within the meaning of the Securities Exchange
Act of 1934, as amended, that it is deemed a part of, becoming the beneficial
owner of more than 9% of the outstanding shares of our common stock.
We may require the holders to convert their Notes if (i) our common stock
has a closing bid price of at least $4.00 for twenty (20) consecutive trading
days, (ii) this registration statement has been in effect, without lapse, for
the immediately preceding thirty (30) trading days; and (iii) the average daily
trading volume of our common stock over the previous two month period exceeds
90,000 shares per day. We may exercise this right with respect to a maximum of
$250,000 in any thirty (30) day period.
The conversion price shall equal the lesser of a fixed conversion price of
$1.60, subject to adjustment, and the adjustable conversion price. The
adjustable conversion price is equal to 95% of the average of the two lowest
intra-day trading prices of our common stock for the thirty day trading period
ending on the trading day immediately preceding the conversion date.
The following table sets forth the number and percentage of shares of our
common stock that would be issuable if the holders of the Notes converted the
Notes at the stated conversion prices.
<TABLE>
<CAPTION>
Number of Shares Issuable
Market Price of Our on Conversion of Percentage of Issued and
Common Stock(1) Conversion Price(2) Convertible Notes(3) Outstanding(4)
--------------------- --------------------------- ------------------------- --------------
<S> <C> <C> <C>
1.00 . . . . . . . . $ 0.95 2,210,526 15.0%
--------------------------- ------------------------- --------------
0.75 . . . . . . . . $ 0.7125 2,947,368 19.1%
--------------------------- ------------------------- --------------
0.50 . . . . . . . . $ 0.475 4,421,052 26.1%
--------------------------- ------------------------- --------------
0.35 . . . . . . . . $ 0.3325 6,315,789 33.5%
--------------------------- ------------------------- --------------
0.25 . . . . . . . . $ 0.2375 8,842,105 41.4%
--------------------------- ------------------------- --------------
0.20 . . . . . . . . $ 0.19 11,052,631 46.9%
--------------------------- ------------------------- --------------
0.15 . . . . . . . . $ 0.1425 14,736,842 54.1%
--------------------------- ------------------------- --------------
0.10 . . . . . . . . $ 0.085 22,105,263 63.8%
--------------------- --------------------------- ------------------------- --------------
<FN>
(1) Represents a range of market prices taking into account the recent price history of
our common stock.
(2) Represents the conversion price, which is equal to a fixed conversion price of $1.60,
subject to adjustment, and the adjustable conversion price. The adjustable conversion price
is equal to 95% of the average of the two lowest intra-day trading prices of our common stock
for the thirty day trading period ending on the trading day immediately preceding the
conversion date.
(3) Represents the number of shares issuable if all of the Notes were converted at the
corresponding conversion price, and assuming no other existing stock options or warrants are
exercised.
(4) Represents the percentage of the total outstanding common stock that the shares
issuable on conversion of the convertible notes without regard to any contractual or other
restriction on the number of securities a particular selling security holder may own at any
point in time.
</TABLE>
<PAGE>
The following table sets forth the number and percentage of shares of our
common stock that would be issuable if the holders of the Notes converted the
Notes at the current market price of $0.281, as of January 2, 2001, and upon a
decline of 25%, 50% and 75% from the current market price:
<TABLE>
<CAPTION>
Number of Shares Issuable
Market Price of Our on Conversion of Percentage of Issued and
Common Stock(1) Conversion Price(2) Convertible Notes(3) Outstanding(4)
--------------------- --------------------------- ------------------------- --------------
<S> <C> <C> <C>
0.281. . . . . . . . $ 0.26695 7,866,642 38.6%
--------------------------- ------------------------- --------------
0.21075. . . . . . . $ 0.2002125 10,488,855 45.6%q
--------------------------- ------------------------- --------------
0.1405 . . . . . . . $ 0.133475 15,733,283 55.7%
--------------------------- ------------------------- --------------
0.07025. . . . . . . $ 0.0667375 31,466,566 71.5%
--------------------- --------------------------- ------------------------- --------------
<FN>
(1) Represents a range of market price on January 2, 2001 and a decline of 25%, 50% and
75% of that market price.
(2) Represents the conversion price, which is equal to a fixed conversion price of $1.60,
subject to adjustment, and the adjustable conversion price. The adjustable conversion price
is equal to 95% of the average of the two lowest intra-day trading prices of our common stock
for the thirty day trading period ending on the trading day immediately preceding the
conversion date.
(3) Represents the number of shares issuable if all of the Notes were converted at the
corresponding conversion price, and assuming no other existing stock options or warrants are
exercised.
(4) Represents the percentage of the total outstanding common stock that the shares
issuable on conversion of the convertible notes without regard to any contractual or other
restriction on the number of securities a particular selling security holder may own at any
point in time.
</TABLE>
The fixed conversion price of $1.60 will be adjusted on the occurrence of
any one of the following events:
- we declare a dividend payable in, or other distribution of, additional
shares of our common stock;
- we subdivide or combine our outstanding shares of common stock;
- we make a cash distribution (other than a cash dividend payable out of
earnings or earned surplus legally available for the payment of dividends);
- we issue any evidences of its indebtedness, any shares of stock of any
class or any other securities or property of any nature whatsoever (other than
cash, convertible securities or additional shares of common stock); and
- we issue any warrants or other rights to subscribe for or purchase any
evidences of its indebtedness, any shares of stock of any class or any other
securities or property of any nature whatsoever (other than cash, convertible
securities or additional shares of common stock).
If any one of these events happens, then the conversion price shall be
adjusted to equal (x) the current conversion price multiplied by the number of
shares of common stock into which the Notes are convertible immediately prior to
the adjustment divided by (y) the number of shares of common stock into which
the Notes are convertible immediately after such adjustment.
<PAGE>
The fixed conversion price will also be adjusted on the occurrence of any
one of the following events:
- if we issue or sell any shares of common stock, other than any such sales
pursuant to options or warrants that are outstanding the date hereof and sales
of up to an additional 750,000 options to incoming management or current or
future employees, having an exercise price of at least 80% of the fair market
value of the common stock on the date hereof, for consideration per share less
than the conversion price in effect immediately prior to the time of such issue
or sale, then the conversion price for the Notes will be reduced to a price
equal to the consideration per share paid for such common stock;
- if we issue or sell any warrants or other rights to subscribe for or
purchase any additional shares of common stock or any convertible securities,
whether or not the rights to exchange or convert thereunder are immediately
exercisable, and the price per share for which common stock is issuable upon the
exercise of such warrants or other rights or upon conversion or exchange of such
convertible securities is less than the current conversion price, then the
conversion price for the Notes will be reduced to a price equal to the
consideration per share paid for such common stock.
- if we issue or sell any shares of common stock, other than any such sales
pursuant to options or warrants that are outstanding the date hereof and sales
of up to an additional 750,000 options to incoming management or current or
future employees, having an exercise price of at least 80% of the fair market
value of the common stock on the date hereof, for consideration per share less
than the current market price in effect immediately prior to the time of such
issue or sale, then the conversion price for the notes will be reduced by the
product of such conversion price multiplied by a percentage by which such
issuance or sale is below the current market price;
- if we issue or sell, any warrants or other rights to subscribe for or
purchase any additional shares of common stock or any convertible securities,
whether or not the rights to exchange or convert thereunder are immediately
exercisable, and the price per share for which common stock is issuable upon the
exercise of such warrants or other rights or upon conversion or exchange of such
convertible securities is less than the current market price in effect
immediately prior to the time of such issue or sale, then the current conversion
price for the Notes will be reduced by the product of such conversion price
multiplied by a percentage by which such issuance or sale is below the current
market price; and
- in case at any time or from time to time we take any action in respect of
our common stock and such action has a materially adverse effect upon the rights
of the holder of the Notes, the number of shares of common stock or other stock
into which the Notes are convertible exercisable and/or the conversion price
thereof shall be adjusted in such manner as may be equitable in the
circumstances.
The holders of 50% or more of the principal amount of the Notes then
outstanding may waive any of the adjustment provisions with respect to any
issuance of securities.
Fundamental Changes
In the event that we are a party to (i) any recapitalization or
reclassification of our common stock (other than a change in par value or as a
result of a subdivision or combination of the common stock); (ii) any
consolidation or merger with or into another corporation as a result of which
holders of common stock are entitled to receive securities or other property or
assets (including cash) with respect to or in exchange for their common stock
(other than a merger which does not result in a reclassification, conversion,
exchange or cancellation of our outstanding common stock); (iii) any sale or
transfer of all or substantially all of our assets; or (iv) any compulsory share
exchange, pursuant to any of which holders of our common stock shall be entitled
to receive other securities, cash or other property, then if this Note is not
converted prior to such fundamental change, then the holder of each Note then
outstanding shall may convert such security only into the kind and amount of the
securities, cash or other property that would have been receivable upon such
recapitalization, reclassification, consolidation, merger, sale, transfer or
<PAGE>
share exchange by a holder of the number of shares of our common stock issuable
upon conversion of such Note immediately prior to such recapitalization,
reclassification, consolidation, merger, sale, transfer or share exchange, at
the conversion price.
Events of Default
We will be considered in default of the Notes if any of the following,
among others, occurs:
- we fail to pay interest on any of the Notes on or before the date such
payment is due or within 10 days after such date;
- we fail to pay principal on any of the Notes on or before the date such
payment is due;
- we fail to convert the Notes, which failure continues for a period of 15
business days;
- a custodian, receiver, liquidator or trustee of our company, or of any of
our property, is appointed or takes possession of our company or our property;
or an order for relief is entered under the Federal Bankruptcy Code; or any of
our property is sequestered by court order; or a petition or other proceeding is
filed against us under any bankruptcy, reorganization, arrangement, insolvency,
readjustment of indebtedness, dissolution or liquidation law of any
jurisdiction;
- we file a petition in voluntary bankruptcy or seeking relief under any
provision of any bankruptcy, reorganization, arrangement, insolvency,
readjustment of indebtedness, dissolution or liquidation law of any
jurisdiction, whether now or hereafter in effect, or consent to the filing of
any petition under any such law;
- we make an assignment for the benefit of our creditors, or generally fails
to pay our obligations as they become due, or consent to the appointment of or
taking possession by a custodian, receiver, liquidator or trustee of our company
of all or any material part of our property;
- one or more final judgments, orders or decrees is rendered against us
and/or our subsidiary in an aggregate amount equal to or in excess of $100,000
which are not vacated, satisfied, discharged or execution thereof stayed within
a period of 30 days from the entry thereof;
- we fail to comply with any law or regulation, whether with respect to the
conduct of its business or otherwise, which failure has a material adverse
effect;
- we suspend all or any part of our operations and such suspension would
reasonably be expected to have a material adverse effect;
- we assign, pledge, hypothecate, transfer, exchange, grant or otherwise
dispose or encumber of all or any part of the capital stock of our subsidiary;
or
- we failure to have a registration statement registering the common stock
underlying the Notes and Warrants declared effective within 150 days of August
24, 2000.
If any one of the above defaults occurs, the holders of more than 50% of
the principal amount of the Notes then outstanding may, among other actions:
- declare the principal of the Notes, plus accrued interest, to be
immediately due and payable, and upon any such declaration such principal and
accrued interest shall become due and payable immediately. Upon such
declaration, the rate of interest on the unpaid principal shall be increased to
18% percent from the date of such declaration until such unpaid principal is
repaid in full; and
<PAGE>
- may protect and enforce its rights or remedies either by suit in equity or
by action at law, or both, whether for the specific performance of any covenant,
agreement or other provision contained herein, in the Purchase Agreement or in
any document or instrument delivered in connection with or pursuant to this
Note, or to enforce the payment of the outstanding Notes or any other legal or
equitable right or remedy.
Redemption
The holders may require us to redeem an amount equal to the total principal
amount remaining (plus any accumulated and unpaid interest thereon) on the Notes
upon the occurrence of (i) a fundamental change or (ii) the acquisition by any
person or group of the beneficial ownership of more than 30% of the combined
voting power of our outstanding securities.
Security Granted in Connection with Issuance of Convertible Notes
As collateral security for the payment and satisfaction of all of our
obligations under the Series A 10% Convertible Notes, we and our subsidiary
granted a continuing first priority security interest in and to all of our and
our subsidiary's assets (which we now own or which we acquire in the future) to
the holders of the Notes. The assets included all accounts, accounts
receivable, contracts, notes, bills, inventory, machinery, equipment, supplies,
furniture, furnishings, fixtures, corporate or business records, inventions,
designs, patents, patent applications, trademarks, trademark registrations and
applications, goodwill, trade names, trade secrets, trade processes, copyrights,
copyright registrations and applications, licenses, permits, franchises,
customer lists, computer programs, all claims under guaranties and tax refund
claims.
As collateral security for the payment and satisfaction of all of our
obligations under the Series A 10% Convertible Notes, we also pledged and
collaterally assigned to the holders a first priority security interest in the
shares of common stock of our subsidiary and in any and all cash, securities,
dividends, rights, and other property at any time and from time to time declared
or distributed in respect of or in exchange for any or all of such shares.
If we default on the Notes, the holders of the Notes have the following rights:
- all of the rights and remedies of a secured party under the Uniform
Commercial Code of the state where such rights and remedies are asserted, or
under other applicable law;
- the right to foreclose by any available judicial procedure or without
judicial process;
- the right to enter into our premises through self-help and without
judicial process, without first obtaining a final judgment or giving us notice,
to remove any of our assets in order effectively to collect or liquidate such
assets;
- the right to sell, assign, lease or to otherwise dispose of all or any our
assets in its then existing condition, or after any further manufacturing or
processing thereof, at public or private sale or sales; and
- the right to sell, assign and deliver or collect the whole or any part of
the pledged stock.
Series A Warrants
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.
<PAGE>
The exercise price of the warrants will be adjusted on the occurrence of any one
of the following events:
- we declare a dividend payable in, or other distribution of, additional
shares of our common stock;
- we subdivide or combine our outstanding shares of common stock;
- we make a cash distribution (other than a cash dividend payable out of
earnings or earned surplus legally available for the payment of dividends;
- we issue any evidences of its indebtedness, any shares of stock of any
class or any other securities or property of any nature whatsoever (other than
cash, convertible securities or additional shares of common stock); and
- we issue any warrants or other rights to subscribe for or purchase any
evidences of its indebtedness, any shares of stock of any class or any other
securities or property of any nature whatsoever (other than cash, convertible
securities or additional shares of common stock).
If any one of these events happens, then the exercise price shall be
adjusted to equal (x) the current exercise price multiplied by the number of
shares of common stock for which the warrant is exercisable immediately prior to
the adjustment divided by (y) the number of shares of common stock for which the
warrant is exercisable immediately after such adjustment.
The exercise price will also be adjusted on the occurrence of any one of
the following events:
- if we issue or sell any shares of common stock, other than any such sales
pursuant to options or warrants that are outstanding the date hereof and sales
of up to an additional 750,000 options to incoming management or current or
future employees, having an exercise price of at least 80% of the fair market
value of the common stock on the date hereof, for consideration per share less
than the exercise price in effect immediately prior to the time of such issue or
sale, then the exercise price for which the warrant is exercisable shall be
reduced to a price equal to the consideration per share paid for such common
stock;
- if we issue or sell any warrants or other rights to subscribe for or
purchase any additional shares of common stock or any convertible securities,
whether or not the rights to exchange or convert thereunder are immediately
exercisable, and the price per share for which common stock is issuable upon the
exercise of such warrants or other rights or upon conversion or exchange of such
convertible securities is less than the current exercise price, then the
exercise price for which the warrant is exercisable will be reduced to a price
equal to the consideration per share paid for such common stock;
- if we issue or sell any shares of common stock, other than any such sales
pursuant to options or warrants that are outstanding the date hereof and sales
of up to an additional 750,000 options to incoming management or current or
future employees, having an exercise price of at least 80% of the fair market
value of the common stock on the date hereof, for consideration per share less
than the current market price in effect immediately prior to the time of such
issue or sale, then the exercise price for which the warrant is exercisable will
be reduced by the product of such exercise price multiplied by a percentage by
which such issuance or sale is below the current market price; and
- if we issue or sell, any warrants or other rights to subscribe for or
purchase any additional shares of common stock or any convertible securities,
whether or not the rights to exchange or convert thereunder are immediately
exercisable, and the price per share for which common stock is issuable upon the
exercise of such warrants or other rights or upon conversion or exchange of such
convertible securities is less than the current market price in effect
immediately prior to the time of such issue or sale, then the current exercise
price for which the warrant is exercisable will be reduced by the product of
<PAGE>
such exercise price multiplied by a percentage by which such issuance or sale is
below the current market price.
Consequences of Adjustments in the Conversion Price of the Notes or Exercise
Price of the Warrants
Any adjustments to the fixed conversion price or any decreases in the
market price which reduces the conversion price of the Notes will result in the
holders of the Notes receiving more shares upon conversion of the Notes. If the
holders of the Notes are entitled to receive a greater number of shares of our
common stock due to adjustments to the conversion price or decreases in the
market price, then:
- the other holders of common stock will experience substantial and
increasing dilution;
- to the extent the holders of the Notes convert the Notes, exercise the
Warrants and sell their shares of common stock, the price of our common stock
may decrease and continue to decrease as these additional shares are sold in the
market;
- the issuance of the shares and any decrease in the market price may make
it more difficult for us to raise capital or sell equity securities in the
future; and
- the issuance of a significant number of shares could result in a change of
control of our company.
Any adjustment which reduces the exercise price of the Warrants may also
result in a decrease in the market price of our common stock.
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 50,000,000 shares of common stock,
$.001 par value. As of December 31, 2000, there were 12,523,357 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 for 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.
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:
<PAGE>
<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 Woodburn and Wedge,
Reno, Nevada, United States.
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
<PAGE>
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)
Unaudited Pro-forma Consolidated Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Pro-forma Consolidated Statement of Operations for the nine-month period ended September 30, 2000 . . . . . . . . . . . . . F-2
Pro-forma Consolidated Statement of Operations for the period from June 25, 1999 (inception) to December 31, 1999 . . . . . F-3
Note to the Pro-forma Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
<PAGE>
Merlin Software Technologies International, Inc. (unaudited)
Consolidated Balance Sheets as at September 30, 2000 and December 31, 1999. . . . . . . . . .. . . . . . . . . . . . . . . . F-7
Consolidated Statements of Changes in Stockholders' Equity for the period ended September 30, 2000. . . . . . . . . . . . . F-8
Consolidated Statement of Operations for the three-month periods ended September 30, 2000 and 1999
and for the nine-month period ended September 30, 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-9
Consolidated Statements of Cash Flows for the nine-month period ended September 30, 2000 and for
the period from June 25, 1999 (incorporation) to September 30, 1999 . . . . . . . . . . . .. . . . . . . . . . . . . . . . . F-10
Notes to the Consolidated Financial Statements. . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-11
Merlin Software Technologies Inc. (audited)
Report of Independent Accountants, dated February 18, 2000. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-21
Balance Sheet at December 31, 1999. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-22
Statement of Changes in Capital Deficit for the period from June 25, 1999 (incorporation) to December 31, 1999.. . . . . . . F-23
Statement of Operations for the period from June 25, 1999 (incorporation) to December 31, 1999. .. . . . . . . . . . . . . . F-24
Statement of Cash Flows for the period from June 25, 1999 (incorporation) to December 31, 1999. . . . . . . . . . . . . . . F-25
Summary of Significant Accounting Policies. . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-19
Notes to the Financial Statements.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-26
</TABLE>
Prior to the Acquisition, Merlin (the inactive public company) was not
operating, and had earned no revenue from its inception in 1995 through 1999 and
during that period incurred only $21,000 of cumulative general and
administrative expenses. Due to the fact that the predecessor business is that
of Merlin Software Technologies Inc. and the public company was inactive,
separate financial statements of the inactive, public company have been excluded
from this registration statement.
<PAGE>
PAGE F-1
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The Unaudited Pro-Forma Consolidated Financial Information reflects financial
information which gives pro-forma effect to the acquisition of all the
outstanding common shares of Merlin Software Technologies Inc. ("Merlin
PrivateCo.") in exchange for the shares of common stock of Merlin Software
Technologies International, Inc. ("International") on a one-for-one basis had it
occurred on June 25, 1999.
The Pro-Forma Consolidated Statements of Operations included herein reflect use
of the purchase method of accounting for the above transaction. The acquisition
of Merlin PrivateCo. (which closed on April 26, 2000) was accounted for as a
reverse acquisition as the former stockholders of Merlin PrivateCo. controlled
the voting common shares of International immediately after the acquisition.
Such financial information has been prepared from, and should be read in
conjunction with, the historical financial statements and notes thereto included
elsewhere in this SB-2 Registration Statement and in our 1999 10-KSB Annual
Report.
The Pro-Forma Consolidated Statements of Operations give effect to the
transaction as if it had occurred at the beginning of the earliest period
presented, combining the results of International and Merlin PrivateCo. for the
period from June 25, 1999 (incorporation of Merlin PrivateCo.) to December 31,
1999 and for the nine-month period ended September 30, 2000. International was
inactive prior to the acquisition of Merlin PrivateCo.
The Pro-Forma Consolidated Financial Information is unaudited and is not
necessarily indicative of the consolidated results which actually would have
occurred if the above transaction had been consummated at the beginning of the
period presented; nor does it purport to present the results of operations for
future periods.
<PAGE>
PAGE F-2
<TABLE>
<CAPTION>
MERLIN SOFTWARE TECHNOLOGIES INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
Pro-Forma Consolidated Statement of Operations
(Unaudited)
Pro-forma
For The Nine-Month Period Ended September 30, 2000 Consolidated Adjustments (1) Balance
<S> <C> <C> <C>
SALES . . . . . . . . . . . . . . . $ 21,301 $ - $ 21,301
COST OF SALES . . . . . . . . . . . 15,678 - 15,678
------------- ------------ ------------
5,623 - 5,623
------------- ------------ ------------
EXPENSES
Depreciation. . . . . . . . . . . 34,477 - 34,477
General and administration. . . . 1,250,381 - 1,250,381
Professional fees . . . . . . . . 119,815 17,677 137,492
Promotion and advertising . . . . 854,600 - 854,600
Research and development` . . . . 705,407 - 705,407
------------- ------------ ------------
2,964,680 17,677 2,982,357
------------- ------------ ------------
LOSS FROM OPERATIONS. . . . . . . . (2,959,057) (17,677) (2,976,734)
INTEREST AND FINANCING COSTS. . . . (91,566) - (91,566)
------------- ------------ ------------
NET LOSS FOR THE PERIOD . . . . . . $( 3,050,623) $ (17,677) $(3,068,300)
------------- ------------ ------------
BASIC AND DILUTED LOSS PER SHARE. . $ (0.29) $ (0.25)
------------- ------------
WEIGHTED AVERAGE SHARES OUTSTANDING 10,350,318 12,408,418
------------- ------------
</TABLE>
The accompanying note forms an integral part of these pro-forma consolidated
financial statements.
<PAGE>
PAGE F-3
<TABLE>
<CAPTION>
MERLIN SOFTWARE TECHNOLOGIES INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
Pro-Forma Consolidated Statement of Operations
(Unaudited)
Merlin Software
Technologies
International, Inc. Merlin
(formerly Austin Software
FOR THE PERIOD FROM JUNE 25, 1999 Land & Development, Technologies Pro-Forma
(INCORPORATION) TO DECEMBER 31, 1999 Inc.) Inc. Adjustments(1) Balance
<S> <C> <C> <C> <C>
EXPENSES
Depreciation. . . . . . . . . . . $ - $ 7,964 $ - $ 7,964
General and administration. . . . - 268,042 - 268,042
Professional fees . . . . . . . . 14,210 64,907 - 79,117
Promotion and advertising . . . . - 180,312 - 180,312
Research and development. . . . . - 98,329 - 98,329
---------- ----------- ----------- ---------
14,210 619,554 - 633,764
INTEREST AND OTHER INCOME . . . . . - (2,926) - (2,926)
---------- ----------- ----------- ---------
NET LOSS FOR THE PERIOD . . . . . . $ 14,210 $ 616,628 $ - $630,838
====================================================================================================
BASIC AND DILUTED LOSS PER SHARE. . $ 0.00 $ 0.09 $ 0.04
---------- ----------- -----------
WEIGHTED AVERAGE SHARES OUTSTANDING 7,410,000 7,166,666 14,576,666
---------- ----------- -----------
</TABLE>
The accompanying note forms an integral part of these pro-forma consolidated
financial statements.
<PAGE>
PAGE F-4
MERLIN SOFTWARE TECHNOLOGIES INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
Note to the Pro-forma Consolidated Financial Statements
(Unaudited)
SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
----------------------------------------------
1. To reflect operations of International for the period from January 1,
2000 to April 26, 2000 (the acquisition date). Because the acquisition was
accounted for as a reverse acquisition (or a recapitalization) there was neither
goodwill recognized nor any adjustments to the book value of the net assets of
International which would also affect the pro-forma statements of operations.
<PAGE>
PAGE F-5
MERLIN SOFTWARE TECHNOLOGIES INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2000
(UNAUDITED)
<PAGE>
PAGE F-6
MERLIN SOFTWARE TECHNOLOGIES INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2000
(UNAUDITED)
CONTENTS
--------
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets
Statement of Changes in Stockholders' Equity
Statements of Operations
Statement of Cash Flows
Notes to the Financial Statements
<PAGE>
PAGE F-7
<TABLE>
<CAPTION>
MERLIN SOFTWARE TECHNOLOGIES INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
September 30 December 31
2000 1999
(unaudited)
<C> <S> <C> <C>
ASSETS
CURRENT
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 775,786 $ 717,195
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . 37,149 18,667
Prepaid expenses and supplies . . . . . . . . . . . . . . . . 40,238 8,948
----------------------------
853,173 744,810
DEFERRED FINANCING COSTS (Note 5) . . . . . . . . . . . . . . 64,713 -
PROPERTY AND EQUIPMENT $ 106,591 86,564
---------------------------
$ 1,024,477 $ 831,374
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
LIABILITIES
CURRENT
Accounts payable and accrued liabilities. . . . . . . . . . . $ 333,811 $ 136,980
Demand loans payable, non-interest bearing. . . . . . . . . . 25,600 210,000
--------------------------
359,411 346,980
LOANS PAYABLE (Note 3). . . . . . . . . . . . . . . . . . . . - 805,000
CONVERTIBLE NOTES PAYABLE (Note 5) . . . . . . . . . . . . . . 87,000 -
---------------------------
446,411 1,151,980
STOCKHOLDERS' EQUITY (DEFICIT)
Share capital
Authorized
50,000,000 Common shares, par value $0.001
Issued
12,536,690 (1999 - 7,900,000) Common shares. . . . . . . . 12,537 7,900
Additional paid-in capital. . . . . . . . . . . . . . . . . . 4,236,780 292,122
Deficit accumulated during the development stage. . . . . . . (3,667,251) (616,628)
Reduction for initial contribution of intellectual property . (4,000) (4,000)
---------------------------
578,066 (320,606)
---------------------------
$ 1,024,477 831,374
===========================
</TABLE>
The accompanying notes are an integral part of these consolidated interim
financial statements.
<PAGE>
PAGE F-8
<TABLE>
<CAPTION>
MERLIN SOFTWARE TECHNOLOGIES INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
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>
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 - - 12,022 - - 12,022
Net Loss for the
period - - - (616,628) - (616,628)
-------------------------------------------------------------------------------------------------
Balance, December
31, 1999 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
Settlement of loans
payable on acquisition
(Note 3) - - 1,275,000 - - 1,275,000
Adjustment for the
stockholders' deficit
of the Company at
the acquisition date 4,450,025 4,450 (37,127) - - (32,677)
Stock option
compensation (Note 4) . - - 1,316,972 - - 1,316,972
Value of warrants and
beneficial conversion
feature on convertible
notes (Note 5) - - 1,100,000 - - 1,100,000
Cash received on
private placement in
September 2000 at $1.60
per unit (Note 6) 100,000 100 159,900 - - 160,000
Net loss for the
period - - - (3,050,623) - (3,050,623)
-----------------------------------------------------------------------------------------------------------------------
BALANCE, September
30, 2000 12,536,690 $ 12,537 $ 4,236,780 $ (3,667,251) $ (4,000) $ 578,066
=======================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated interim
financial statements.
<PAGE>
PAGE F-9
<TABLE>
<CAPTION>
MERLIN SOFTWARE TECHNOLOGIES INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
PERIOD FROM
JUNE 25
1999
THREE-MONTH NINE-MONTH (INCORPORATION)
PERIODS ENDED PERIOD ENDED TO SEPTEMBER 30
SEPTEMBER 30 SEPTEMBER 30 2000
2000 1999 2000 (CUMULATIVE)
<S> <C> <C> <C> <C>
SALES . . . . . . . . . . . . $ 2,431 $ - $ 21,301 $ 21,301
COST OF SALES . . . . . . . . 1,600 - 15,678 15,678
------------ ----------- ------------ ------------
831 - 5,623 5,623
------------ ----------- ------------ ------------
EXPENSES (Note 4)
Depreciation. . . . . . . . . 12,053 1,991 34,477 42,441
General and administration. . 468,804 114,435 1,250,381 1,518,423
Professional fees . . . . . . 41,822 14,903 119,815 184,722
Promotion and advertising . . 78,798 45,730 854,600 1,034,912
Research and development. . . 81,985 30,251 705,407 803,736
------------ ----------- ------------ ------------
683,462 207,310 2,964,680 3,584,234
------------ ----------- ------------ ------------
LOSS FROM OPERATIONS. . . . . (682,631) (207,310) (2,959,057) (3,578,611)
INTEREST AND FINANCING COSTS
(Note 5). . . . . . . . . . (97,801) 83 (91,566) (88,640)
------------ ----------- ------------ ------------
NET LOSS FOR THE PERIOD . . . $ (780,432) $ (207,227) $(3,050,623) $(3,667,251)
==========================================================
LOSS PER SHARE - basic and
diluted . . . . . . . . . . $ (0.06) $ (0.03) $ (0.29)
=======================================
WEIGHTED AVERAGE SHARES
OUTSTANDING . . . . . . . . 12,441,038 6,433,334 10,508,225
=======================================
</TABLE>
The accompanying notes are an integral part of these consolidated interim
financial statements.
<PAGE>
PAGE F-10
<TABLE>
<CAPTION>
MERLIN SOFTWARE TECHNOLOGIES INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
PERIOD FROM
PERIOD FROM JUNE 25
JUNE 25 1999
NINE-MONTH 1999 (INCORPORATION)
PERIOD ENDED (INCORPORATION) TO SEPTEMBER 30
SEPTEMBER 30 TO SEPTEMBER 30 2000
2000 1999 (CUMULATIVE)
<S> <C> <C> <C>
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Net loss for the period . . . . . . . . . . . . . $(3,050,623) $(207,227) $(3,667,251)
Adjustments to reconcile net loss to net
cash used in operating activities
Amortization of deferred financing costs. . . . 2,328 - 2,328
Depreciation. . . . . . . . . . . . . . . . . . . 34,477 1,991 42,441
Stock option compensation . . . . . . . . . . . . 1,316,972 - 1,328,994
Beneficial conversion feature on
convertible notes and amortization
of discount . . . . . . . . . . . . . . . . . . 87,000 - 87,000
Decrease (increase) in assets
Receivables . . . . . . . . . . . . . . . . . . (18,482) (2,965) (37,149)
Prepaid expenses and supplies . . . . . . . . . . (31,290) (7,933) (40,238)
Increase (decrease) in liabilities
Accounts payable and accrued liabilities. . . . . 164,154 23,747 301,134
------------ ---------- ------------
(1,495,464) (192,387) (1,982,741)
------------ ---------- ------------
FINANCING ACTIVITIES
Repayment of demand loans . . . . . . . . . . . . (312,913) - (312,913)
Proceeds on demand loans. . . . . . . . . . . . . 128,513 20,000 338,513
Proceeds of loan payable. . . . . . . . . . . . . 600,000 - 1,275,000
Proceeds on issuance of common stock. . . . . . . 160,000 284,000 574,000
Proceeds on issuance of convertible
notes, net of financing costs . . . . . . . . . 1,032,959 - 1,032,959
------------ ---------- ------------
1,608,559 304,000 2,907,559
------------ ---------- ------------
INVESTING ACTIVITY
Purchase of property and equipment. . . . . . . . (54,504) (35,416) (149,032)
------------ ---------- ------------
INCREASE IN CASH. . . . . . . . . . . . . . . . . 58,591 76,197 775,786
CASH, beginning of period . . . . . . . . . . . . 717,195 - -
------------ ---------- ------------
CASH, end of period . . . . . . . . . . . . . . . $ 775,786 $ 76,197 $ 775,786
================================================
SUPPLEMENTARY INFORMATION:
Non-cash investing and financing activities:
Acquisition of business and settlement of debt
in exchange for common stock in reverse
acquisition (Note 2). . . . . . . . . . . . . $ 1,242,323 $ -
Issuance of common stock for proceeds
advanced in 1999 $ 130,000 $ -
</TABLE>
The accompanying notes are an integral part of these consolidated interim
financial statements.
<PAGE>
PAGE F-11
1. BASIS OF PRESENTATION AND CONTINUING OPERATIONS
The consolidated interim financial statements for the nine-month period ended
September 30, 2000 included herein have been prepared by the Company without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading.
These financial statements reflect all adjustments consisting of normal
recurring adjustments, which, in the opinion of management, are necessary for
fair presentation of the information, contained herein. It is suggested that
these interim financial statements be read in conjunction with the financial
statements of the Company for the years ended December 31, 1999 and 1998 and the
notes thereto included in the Company's Form 10-KSB Annual Report and financial
statements of Merlin Software Technologies Inc. for the period from June 25,
1999 (incorporation) to December 31, 1999 included in an 8-K current report.
The Company follows the same accounting policies in preparation of interim
reports.
Results of operations for the interim periods are not indicative of annual
results. Merlin Software Technologies Inc. was incorporated on June 25,
1999 and was inactive until July 1999. Accordingly, comparative figures are
only provided for the three months ended September 30, 1999.
The Company was organized on August 30, 1995, under the laws of the State of
Nevada as Austin Land & Development, Inc. On January 7, 2000, the Company
changed its legal name to Merlin Software Technologies International, Inc. in
contemplation of closing a share exchange agreement with the principal
stockholders of Merlin Software Technologies Inc., a Nevada company developing
Linux-based software utilities and other business management software. The
acquisition closed on April 26, 2000 (Note 2). At September 30, 2000, the
Company is considered a development stage company in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 7.
These accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities and commitments in the normal course of business. As at September
30, 2000, the Company has recognized minimal revenue and has accumulated
operating losses of approximately $3.7 million since its inception. The
continuation of the Company is dependent upon the continuing financial
support of creditors and stockholders and obtaining long-term financing and
achieving profitability. Management plans to raise additional equity capital
to provide additional financing for operating and capital requirements of the
Company. It is management's intention to raise new equity financing of
approximately $3.9 million within the upcoming year. Amounts raised will be
used for further development of the Company's products, to provide financing for
the marketing and promotion of its products, to secure products and for other
working capital purposes including hardware and software upgrades. While the
Company is expending its best efforts to achieve the above plans, there is no
assurance that any such activity will generate funds that will be available
for operations.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. These financial statements do not include any adjustments
that might arise from this uncertainty.
<PAGE>
Page F-12
2. ACQUISITION OF MERLIN SOFTWARE TECHNOLOGIES INC.
Effective April 26, 2000, the Company (then an inactive publicly-traded shell)
closed a share exchange agreement to acquire all of the issued and outstanding
shares of software developer Merlin Software Technologies Inc. ("Merlin Private
Co.") in exchange for 7,986,665 shares of the Company's common stock. Merlin
Private Co. is a Nevada company incorporated on June 25, 1999 for the purpose of
the development of Linux-based software utilities and other business
management software. At September 30, 2000, 7,969,999 Merlin Private Co. common
shares had been exchanged leaving 16,666 still to be exchanged.
The transaction was accounted for as a recapitalization using accounting
principles applicable to reverse acquisitions. Following reverse acquisition
accounting, financial statements subsequent to the closing date are presented as
a continuation of Merlin Private Co. The value assigned to common stock of the
Company on acquisition based on the fair value of the net assets of the Company
at the date of acquisition was $1,242,323. Net assets at the acquisition date
included $1,275,000 raised by the Company in an equity private placement and
loaned to Merlin Private Co. and settled in contemplation of closing the
acquisition and accounts payable of $32,677.
Pro-forma information assuming the acquisition occurred on January 1, 2000 is as
follows:
Revenue $ 21,301
Loss for the period $ (3,068,300)
Loss per share $ (0.25)
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 at the date of exchange
representing the difference in value of stock options between the date of
exchange and the grant date (Note 4).
3. LOANS PAYABLE
a) Private placement proceeds in Merlin Private Co. in 1999 totalling
$130,000 did not bear interest. On April 3, 2000, Merlin Private Co. issued
86,665 units of Merlin Private Co. whereby each unit consisted of one share of
common stock of Merlin Private Co. and a warrant to purchase one share of Merlin
Private Co. common stock at a price of $2 per share until expiry on March 31,
2002. Under the terms of the share exchange agreement, the common shares
were exchanged for common shares of the Company. Warrants were exchanged for
warrants of the Company on a 1:1 basis under similar terms as existed for
warrants in Merlin Private Co.
<PAGE>
PAGE F-13
3. LOANS PAYABLE - CONTINUED
b) In contemplation of closing the acquisition, the Company previously
advanced $1,275,000 to Merlin Private Co. out of the proceeds of a $1,275,000
private placement received in December 1999 and January 2000. The amounts were
advanced on an unsecured, non-interest bearing basis with no specific terms of
repayment. The private placement resulted in the issuance of 850,000 units of
the Company at $1.50 per unit with each unit consisting of one share of common
stock and one warrant to purchase common stock until February 11, 2002 at $2 per
share. All warrants remained outstanding at September 30, 2000.
On consolidation, the intercompany loan was settled and reclassified as
additional paid-in capital.
4. STOCK OPTIONS
On May 1, 2000, the Company's Board of Directors approved the Company's 2000
Stock Option Plan to be approved by the Company's stockholders at the Company's
annual general meeting. The Plan provides for the granting of stock options to
key employees and consultants to purchase up to 3,000,000 common shares of the
Company. Under the Plan, the granting of incentive and non-qualified stock
options, exercise prices and terms are determined by the Company's Board of
Directors. For incentive options, the exercise price shall not be less than the
fair market value of the Company's common stock on the grant date. (In the case
of options issued to an employee who owns stock possessing more than 10% of the
voting power of all classes of the Company's stock on the date of grant, the
option price must not be less than 110% of the fair market value of common stock
on the grant date.). Options granted are not to exceed terms beyond ten years
(5 years in the case of an incentive stock option granted to a holder of 10
percent of the Company's common stock). Options granted in substitution for
outstanding options of an acquired company may be issued with an exercise price
equal to the exercise price of the substituted option in the acquired company.
Unless otherwise specified by the Board of Directors, stock options shall vest
at the rate of 25% per year starting one year following the granting of options.
Compensation expense of $1,316,972 during the nine months ended September 30,
2000 (1999 - $Nil) was recorded for options granted during the period including
an amount representing the difference in value of options exchanged for options
in Merlin Private Co. Details of options granted and cancelled during the
period ended September 30, 2000 are as follows:
<PAGE>
PAGE F-14
4. STOCK OPTIONS - CONTINUED
Exercisable on
Exercise September 30
Number Price Expiry 2000
----------- ----- ------ ----
Options granted to a
consultant 48,000 $1.00 April 2010 12,000
Options granted on
share exchange (Note 2) 781,000 $1.00 May 2005 477,800
Options cancelled (123,800) $1.00 May 2005 -
------------ --------
Options outstanding at
September 30, 2000 705,200 489,800
======= =======
The Company granted an additional 72,000 stock options, vesting at 6,000 per
month with exercise prices of $1.25 and $1.75 expiring in October 2010. In
November, vested options totalling 75,000 expired and a further 75,000 options
with an exercise price of $1 were exercised.
The Company follows the provisions of Accounting Principles Board ("APB")
Opinion No. 25, including interpretations provided in Interpretation No. 44,
"Accounting for Certain Transactions Involving Stock Compensation", in
recognizing and measuring compensation expense for options granted to employees.
Generally, compensation expense is recorded for the difference between the
market price of the underlying common stock and the exercise price of the stock
options. Effective from the date of the modification, the Company regularly
re-measures compensation expense for unvested options where there has been a
substantive change or modification to such stock options such as the exchange of
stock options described in Note 2.
The Company follows the provisions and related interpretations of Financial
Accounting Standard No. 123 ("FAS 123") for options granted to non-employees.
Compensation expense is recognized based upon the fair value based method
prescribed using the Black-Scholes option pricing model. Compensation expense
is re-measured on a quarterly basis for options still unvested.
Compensation expense is amortized over the length of the contract period (if one
exists) or the period to which the options vest.
Compensation expense for the periods ended September 30, 2000 were recorded as
follows:
Three months Nine-months
ended ended
Expense September 30, 2000 September 30, 2000
------- -------------------- -------------------
General and administration $ 48,995 $ 542,109
Promotion and advertising (2,418) 431,443
Research and development 4,837 343,420
------------ -------------
$ 51,414 $ 1,316,972
====================================
<PAGE>
PAGE F-15
5. CONVERTIBLE NOTES PAYABLE
On August 18, 2000, the Company entered into an agreement to issue $2.1 million
of Series A Senior Secured Convertible Notes due on August 18, 2003 and bearing
interest at 10% per annum due semi-annually. The convertible notes are
collateralized by all of the Company's assets and intellectual property.
The Company issued $1.1 million of convertible notes on August 24, 2000 with the
remaining $1.0 million balance to be issued within seven days of a related
registration statement being declared effective by the SEC. The notes are
immediately convertible at the option of the holders into shares of common stock
of the Company at the lesser of $1.60 or the price which is 95% of the lowest of
the two lowest intra-day trading prices of the common stock for the 30 day
period ending on the trading date immediately preceding the conversion date. As
a result, a beneficial conversion feature of $53,000 (based on 95% of the two
lowest intra-day trading prices of the common stock of $1.64) related to the
issuance of $1.1 million of convertible notes payable was recorded as interest
expense on the date of issuance. The beneficial conversion feature associated
with additional convertible notes payable not yet issued will be recorded and
measured on the date additional notes payable are issued. At September 30,
2000, none of the convertible notes payable have been converted.
The $1.1 million of convertible notes payable also contain 770,000 detachable
warrants exercisable to purchase shares of the Company's common stock at any
time after August 24, 2001 to expiry on August 18, 2007 at a price of $1.75 per
share. An additional 750,000 detachable warrants with the same terms will be
issued in connection with the unissued balance of the convertible notes payable.
No warrants have been exercised at September 30, 2000. The value of the 770,000
warrants based on a Black-Scholes option pricing model was $1,047,000 using the
following assumptions:
- No dividends;
- Risk-free interest of 6.24%
- Volatility of expected market price of the Company's common stock of 182%
- Expected life of the warrants of 36 months
The discount was recorded as additional paid-in capital during the period and is
being amortized as interest expense on a straight-line basis over the term of
the convertible notes payable. $34,000 was amortized during the period ended
September 30, 2000.
The convertible notes contain provisions to adjust the conversion price for,
among other matters, changes in the capital structure and situations where the
Company issues common stock at a price of less than $1.60 per share. Among
other matters, damages are payable to the noteholders at the rate of 2% per
month should the Company's registration statement not be declared effective by
the SEC within 150 days of issuance.
The Company incurred direct costs in connection with the convertible notes
payable of $67,041 which is being amortized to the Statement of Operations over
the term of the notes payable. To September 30, 2000, $2,328 has been amortized
leaving a net book value of the deferred asset of $64,713.
The accompanying notes are an integral part of these consolidated interim
financial statements.
<PAGE>
PAGE F-16
6. SHARE PURCHASE WARRANTS
Details of share purchase warrants issued during the period are as follows:
Exercisable on
Exercise September 30
Number Price Expiry 2000
--------- ----- ------ ----
Issued:
On private placement (*) 200,000 $1.75 March 2001 200,000
On private placement
(Note 3) 850,000 $2.00 February 2002 850,000
On share exchange (Note 2) 86,665 $2.00 March 2002 86,665
On convertible notes
(Note 5) 770,000 $1.75 August 2007 -
--------- ---------
1,906,665 1,136,665
========= =========
(*) In September 2000, the Company completed a private placement of 100,000
units at a price of $1.60 per unit for total proceeds of $160,000. Each unit
comprised of one share of the Company's common stock plus two warrants
exercisable at $1.75 each until expiry in March 2001.
7. COMMITMENTS
a) On June 20, 2000, the Company entered into a consulting agreement for
financial services. The contract expires on June 30, 2002 and provides for
compensation should the Company receive financing from any investor introduced
by the consultant. Compensation includes:
- 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.
Payments under (i) and (ii) are due to the consultant regardless of contract
termination. The total committed cost of the contract of $744,000, including
$414,000 being the value attributable to the common stock using the trading
price of the common stock on the period end date, is being recognized on a
straight-line basis over the term of the contract. During the period ended
September 30, 2000, the Company recorded an expense of $121,125. 300,000 shares
of common stock issuable under the terms of the contract ((i) above) have not
yet been issued.
The accompanying notes are an integral part of these consolidated interim
financial statements.
<PAGE>
PAGE F-17
7. COMMITMENTS - CONTINUED
(b) In March 2000, the Company previously entered into agreements with three
other officers. Amongst other matters, terms of these agreements require that
the Company pay to the officers amounts aggregating $672,000 plus 1.9 million
shares of common stock in the event of a change of control of the Company.
On July 7, 2000, one of the three officers resigned his position with the
Company and, accordingly, his consulting agreement terminated, thus reducing the
Company's obligation on potential change of control to $432,000 plus 1.2 million
shares of common stock. The Company also entered into an agreement with an
officer for services in April 2000 which provides for, among other matters, a
payment of approximately $46,000 and 100,000 shares of common stock should a
change of control occur.
c) The Company entered into an agreement with a consultant whereby the
Company would issue 80,000 shares of common stock in exchange for corporate
finance services for a period expiring in April 2001. The shares have yet to be
issued, but the cost of services based upon the trading price of the underlying
common stock on the period end date is being amortized on a straight-line basis
over the term of the contract.
d) Subsequent to September 30, 2000, the Company entered into a consulting
agreement with a company to obtain marketing and sales strategy services for a
period of eight weeks. For these services, the Company agreed to pay the
consultant $75,000 and issue 75,000 shares of our common stock. The cost of the
portion of services obtained with common stock (currently unissued) will be
based upon the trading value of the Company's common stock on the commitment
date and will be charged to the Statement of Operations in the fourth quarter of
the Company's 2000 fiscal year.
8. REVENUE RECOGNITION
Revenues from the sale of software products for which no technical support is
provided is recognized upon shipment of the products, net of a reserve for
estimated returns. A reserve for sales returns is recognized for sales of
software products to distributors, who have a right of return, based on the
Company's historical experience of sell-through to the end user by the
distributor. The Company recognizes revenues from the sale of software products
to new distributors of its software products based upon sell-through to the end
user until the Company has sufficient historical experience with the distributor
to allow the accurate estimation of sales returns.
The Company expects to provide certain telephone and e-mail technical support
services for a period of one year from the date of registration of the software
products for no additional fee. The Company also expects to provide to
purchasers of its products subscription services for a period of one year from
the date of registration of the software products. In accordance with the
provisions of Statement of Position ("SOP") No. 97-2, "Software Revenue
Recognition" as amended by SOP 98-4 and SOP 98-9, the Company will recognize any
revenue from support and subscription services sold as a package with its
software products over the period that the technical support and subscription
services are provided. The Company does not expect to sell these technical
support and subscription services separately and therefore will not have vendor
specific objective evidence of the fair value of these services. For these
packages, any revenues are expected to be recognized ratably over the term of
the technical support agreement which is expected to be twelve months.
The accompanying notes are an integral part of these consolidated interim
financial statements.
<PAGE>
PAGE F-18
9. NEW ACCOUNTING PRONOUNCEMENTS
a) In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation", an interpretation of Accounting Principles Board Opinion No. 25.
The Interpretation requires, among other matters, that stock options that have
been modified to reduce the exercise price be accounted for as variable. This
standard was adopted during the period ended September 30, 2000 but did not have
a material effect on the Company's financial statements as the majority of
options granted to date were to consultants.
b) In June 1998, Statement of Financial Accounting Standards ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities" was issued.
SFAS No. 133 required companies to recognize all derivatives contracts as either
assets or liabilities on the balance sheet and to measure them at fair value.
If certain conditions are met, a derivative may be specifically designated as a
hedge, the objective of which is to match the timing of gain or loss recognition
on the hedging derivative with the recognition of (i) the changes in the fair
value of the hedged asset or liability that are attributable to the hedged risk
or (ii) the earnings effect of the hedged forecasted transaction. For a
derivative not designated as a hedging instrument, the gain or loss is
recognized in income in the period of change. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000.
Historically, the Company has not entered into derivatives contracts either
to hedge existing risks or for speculative purposes. Accordingly, the Company
does not expect adoption of the new standards on January 1, 2001 to affect its
financial statements.
c) In 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 dealing with revenue recognition which is effective in the
fourth quarter of 2000. The Company does not expect its adoption to have a
material effect on the Company's financial statements.
<PAGE>
PAGE F-19
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-20
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
FINANCIAL STATEMENTS
Balance Sheet
Statement of Changes in Capital Deficit
Statement of Operations
Statement of Cash Flows
Summary of Significant Accounting Policies
Notes to the Financial Statements
<PAGE>
PAGE F-21
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 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-22
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-23
<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-24
<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-25
<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-26
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.
IMPAIRMENT OF LONG-LIVED ASSETS The Company evaluates the recoverability of its
fixed assets in accordance with Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets to be Disposed of"
("SFAS 121"). SFAS 121 requires recognition of impairment of long-lived assets
in the event the net book value of such assets exceeds the estimated future
undiscounted cash flows attributable to such assets or the business to which
such assets relate. No impairment was required to be recognized during the
period from June 25, 1999 (inception) to December 31, 1999.
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.
<PAGE>
PAGE F-27
MERLIN SOFTWARE TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DECEMBER 31, 1999
-------------------
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.
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-28
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 Revenues from the sale of software products for which no
technical support is provided will be recognized upon shipment of the products,
net of a reserve for estimated returns. A reserve for sales returns would be
recognized for sales of software products to distributors, who have a right of
return, based on the Company's historical experience of sell-through to the end
user by the distributor. The Company will recognize revenues from the sale of
software products to new distributors of its software products based upon
sell-through to the end user until the Company has sufficient historical
experience with the distributor to allow the accurate estimation of sales
returns.
The Company expects to provide certain telephone and e-mail technical
support services for a period of one year from the date of registration of the
software products for no additional fee. The Company also expects to provide
to purchasers of its products subscription services for a period of one year
from the date of registration of the software products. To date, the Company
has not recognized any revenues. In accordance with the provisions of Statement
of Position No. 97-2, "Software Revenue Recognition" ("SOP 97-2") as amended by
SOP 98-4 and SOP 98-9, the Company will recognize any revenue from support and
subscription services sold as a package with its software products over the
period that the technical support and subscription services are provided. The
Company does not expect to sell these technical support and subscription
services separately and therefore will not have vendor specific objective
evidence of the fair value of these services. For these packages, any revenues
are expected to be recognized ratably over the term of the technical support
agreement, which is expected to be twelve months.
<PAGE>
PAGE F-29
MERLIN SOFTWARE TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DECEMBER 31, 1999
-------------------
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.
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-30
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-31
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-32
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 86,665
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-33
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 $993.55
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 $68,993.55
(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
December 15, 2000 there was one shareholder of Merlin Software Technologies
Inc. who had yet to tender an aggregate of 13,333 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. On January 10, 2001, we issued 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
10.48 Management Agreement between Merlin and Kevin O'Reilly, dated January
4, 2001
10.49 Stock Option Agreement between Merlin and Kevin O'Reilly, dated
January 4, 2001
10.50 Management Agreement between Merlin and James Baglot, dated January 4,
2001
10.51 Stock Option Agreement between Merlin and James Baglot, dated January
4, 2001
10.52 Consulting Agreement between Merlin and Rocket Builders, dated October
16, 2000
<PAGE>
(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 September 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
<PAGE>
(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.
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 January 9, 2001.
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 January 9,2001
/s/ Trevor McConnell
Trevor McConnell, CFO, Treasurer and Director January 9, 2001
/s/ Shelley Montgomery
Shelley Montgomery, Secretary and Director January 9, 2001
/s/ Webb Greem
Webb Green, Director January 9, 2001
/s/ Hank Barber
Hank Barber, Director January 9, 2001
