<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 25, 2000
Registration No. 333-90185
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________
AMENDMENT NO. 2 TO
FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
____________________
SOFTLINK, INC.
(Name of Small Business Issuer in Its Charter)
NEVADA 7372 86-0891610
---- ----------
(State or Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
2041 Mission College Boulevard, Suite 259
Santa Clara, California 95054
(408) 496-6668
(Address and Telephone Number of Principal Executive Offices)
2041 Mission College Boulevard, Suite 259
Santa Clara, California 95054
(Address of Principal Place of Business or Intended Principal Place of Business)
Mr. William Yuan
President
Softlink, Inc.
2041 Mission College Boulevard, Suite 259
Santa Clara, California 95054
(408) 496-6668
(Name, Address and Telephone Number of Agent for Service)
Copy to:
James C. Chapman, Esq.
Cathryn S. Gawne, Esq.
Romin P. Thomson, Esq.
Silicon Valley Law Group
152 N. Third Street, Suite 900
San Jose, California 95112
Approximate Date of Proposed Sale to Public: As soon as practicable after this
Registration Statement becomes effective.
<PAGE>
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) 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(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 delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
====================================================================================================================
Title of each
class of Proposed maximum Proposed maximum
securities to be Amount to be offering price per aggregate offering Amount of registration
registered registered unit price fee
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, 3,630,000 shares $ 0.97 (1) $ 3,521,100 (1) $ 978.87 (1)
$.001 par value
Common Stock, 3,531,058 shares $ 3.156 (1) $11,144,019 (1) $2,942.02 (1)
$.001 par value
Common Stock, 240,000 shares $2.43756 (2) $ 585,014 (2) $ 162.63 (2)
$.001 par value
Common Stock, 150,000 shares $ 2.25 (2) $ 337,500 (2) $ 93.83 (2)
$.001 par value
Total 7,551,058 shares $15,587,633 (1)(2) $4,177.35 (1)(2)(3)
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Calculated in accordance with Rule 457(c).
(2) Calculated in accordance with Rule 457(g).
(3) $1,235.33 of this amount has been previously paid.
The registrant hereby amends this registration statement on such 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 such date as the commission, acting pursuant to said section 8(a),
may determine.
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the 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.
Subject to Completion, January 25, 2000
[SOFTLINK, INC. LOGO]
7,551,058 Shares
Common Stock
We have prepared this prospectus to allow Deephaven Private Placement
Trading, Ltd., Hornblower Investors LLC and Cardinal Capital Management LLC, or
their respective pledgees, donees, transferees or other successors in interest,
to sell up to 7,551,058 shares of our common stock which they own or may acquire
upon conversion of our preferred stock and exercise of warrants previously
acquired in private placements. We will receive no proceeds from the sale of
these shares, except for the proceeds from the exercise of the warrants.
Our common stock is listed on the NASD O-T-C Market Bulletin Board under
the symbol "SFLK". On January 14, 2000, the closing price of our common stock
was $2.437 per share.
The selling stockholders may offer their Softlink shares through public or
private transactions in or off the NASD O-T-C Market Bulletin Board in the
United States, at prevailing market prices or at privately negotiated prices.
For details of how the selling stockholders may offer their Softlink shares,
please see the section of this prospectus called "Plan of Distribution".
______________________
See "Risk Factors" beginning on page 5 for a discussion of material issues to
consider before purchasing our common stock.
_______________________
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is ____________, 2000.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary 3
Risk Factors 5
Use of Proceeds 9
Price Range of Common Stock and Dividend Policy 10
Capitalization 12
Selected Consolidated Financial Data 13
Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Business 22
Management 35
Related Party Transactions 42
Selling Stockholders 45
Principal Stockholders 47
Description of Capital Stock 48
Shares Eligible for Future Sale 54
Plan of Distribution 55
Legal Matters 56
Experts 56
Where You Can Find Additional Information 56
Index to Financial Statements F-1
</TABLE>
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or of any sale of the common stock. In this
prospectus, "Softlink", "we", "us" and "our" refer to Softlink, Inc. and its
wholly-owned subsidiary, Softlink Incorporated.
"eMail inChorus" is a trademark of Softlink. All other trademarks, service
marks or tradenames referred to in this prospectus are the property of their
respective owners.
All share information has been adjusted to reflect our reorganization in
March 1998.
2
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information described more fully elsewhere in this
prospectus. You should read the entire prospectus carefully.
SOFTLINK
Our Business Softlink provides multimedia email solutions that bring life
to online communication with voice, sound, animation and
graphics. We develop and market software products that use
our proprietary technology to allow businesses and consumers
to communicate through text, voice, sound, annotation and
animation.
THE OFFERING
Common stock offered by selling stockholders 7,551,058 shares
Common stock to be outstanding after this 16,599,603 shares,
Offering excluding an aggregate of
3,017,430 shares reserved
for issuance of outstanding
stock options and
warrants.
Use of proceeds Other than the proceeds from
the exercise of the warrants,
none of the proceeds from the
sale of the common stock
offered by this prospectus
will be received by us. Any
warrant exercise proceeds
received by us will be used
for marketing, establishment
of our consulting and service
business and for working
capital and general corporate
purposes.
O-T-C Market Bulletin Board symbol: "SFLK"
Plan of Distribution The selling stockholders may
offer their Softlink shares
through public or private
transactions in or off the
NASD O-T-C Market Bulletin
Board in the United States, at
prevailing market prices or at
privately negotiated prices.
For details of how the selling
stockholders may offer their
Softlink shares, please see
the section of this prospectus
called "Plan of
Distribution".
3
<PAGE>
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
Six Months Ended September 30, Years Ended March 31,
------------------------------ --------------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Consolidated Statements of Operations Data:
Net sales, including license fee income $ 660,900 $ 335,500 $ 731,100 $ 23,500
Cost of sales 176,000 35,100 39,200 12,900
Loss from operations (1,504,300) (272,200) (1,128,100) (620,100)
Net loss (1,534,400) (272,000) (1,015,900) (620,800)
Basic and diluted loss per share $ (0.25) $ (0.04) $ (0.14) $ (0.26)
Basic and diluted weighted-average common shares outstanding 7,856,700 6,062,900 7,132,600 2,377,200
September 30,
1999
Consolidated Balance Sheet Data:
Cash and cash equivalents $ 1,785,500
Working capital $ 2,741,700
Total assets $ 3,296,600
Short-term debt $ 0
Total stockholders' equity $ 2,937,900
</TABLE>
4
<PAGE>
RISK FACTORS
An investment in the shares of our common stock offered by this prospectus
involves a high degree of risk. You should consider carefully the following
risk factors as well as the other information set forth in this prospectus
before you decide to buy our common stock.
Risks Related to Softlink's Operations
We have a history of losses, and we expect losses for the foreseeable future.
Since our inception in November 1995, we have incurred substantial losses.
Our net loss equaled approximately $620,800 for the year ended March 31, 1998,
approximately $1,015,900 for the year ended March 31, 1999, and approximately
$1,534,400 for the six months ended September 30, 1999. As of September 30,
1999, we had an accumulated deficit of approximately $3,207,200.
We anticipate that our expenses relating to developing, marketing and
supporting our current and future products and services will increase
substantially in the future. Accordingly, for the foreseeable future we expect
to experience additional losses as these increased expenses exceed our total
revenues. These additional losses will increase our accumulated deficit.
The report of BDO Seidman, LLP on our consolidated financial statements for
the year ended March 31, 1999 contains an explanatory paragraph indicating that
our accumulated deficit and net losses raise substantial doubt about our ability
to continue as a going concern. This going concern qualification may adversely
affect our perception by prospective customers and suppliers, as well as by the
financial community.
Our revenues currently depend on one product family.
To date, we have generated nearly all of our revenues from our eMail VOICELink
and eMail inChorus family of products. We expect that our current eMail
VOICELink and eMail inChorus family of software products and software products
in the future will continue to account for a substantial majority of our
revenues for the foreseeable future. Therefore, our future financial
performance is dependent, in significant part, upon the successful development,
introduction and customer acceptance of new and enhanced versions of eMail
VOICELink and eMail inChorus and of related new products and services that we
may develop. We cannot assure you that we will be successful in upgrading eMail
VOICELink and eMail inChorus or that we will successfully develop new products
and services, or that any new product or service will achieve market acceptance.
For more information on the sources of our revenues, please see the section of
this prospectus entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
5
<PAGE>
Our revenues are also dependent on one licensing customer and licensing revenue.
For the six months ended September 30, 1999 and the year ended March 31,
1999, approximately $153,000 and $640,000, respectively, or 23% and 87.5%,
respectively, of our net sales were derived from licensing revenue from one
customer, NIC Ltd. In addition, we had accounts receivable from NIC Ltd. of
$550,000 and $421,900 at September 30, 1999 and March 31, 1999, respectively.
The loss of this customer or the inability to collect in full the receivable
from this customer could have a material and adverse effect on our business,
results of operations or financial condition. Although we are seeking to
increase our sales of software products, we expect that a substantial majority
of our revenues for the foreseeable future will be derived from the licensing of
our software products.
We are changing our business model from one focused on licensing to one focused
on sales of software. This new model is unproven.
Our core business model has focused on licensing software designed to
enable our customers to enhance their email communications with voice and
multimedia features. To date, substantially all of our revenue has been derived
from licensing of our software. We are attempting to increase sales of our
software to complement our licensing revenue; however, we believe that it is too
early to determine whether this business model will be successful in the future.
We also intend to broaden our business by offering turnkey multimedia email
services. These services would transfer to us the responsibility for
constructing and disseminating multimedia messages on behalf of our customers.
We would be competing against production and advertising companies in this
market, and we may not compete effectively with these current or future service
providers based on price, performance or other features. We expect to devote
significant engineering, marketing, sales and customer support resources to
enhance the competitiveness and cost-effectiveness of these services. These
actions may divert resources from our other products and services and may thus
harm our core eMail VOICELink and eMail inChorus business.
Multimedia email is a new and evolving business, competes with other methods of
online communication, and may not receive widespread acceptance.
Multimedia email is in its very early stages of development. Like many new
businesses, it is characterized by rapidly evolving technologies, quickly
changing marketing and sales strategies, multiple and aggressive market
participants, fluctuating demand and uncertain market acceptance for products
and services. Businesses and consumers have the option of using other methods of
online communication, including video and audio streaming. These methods may
receive greater acceptance than our multimedia email model. Multimedia email is
also heavily dependent on the success of the Internet, which itself is a
relatively new medium with an unpredictable future.
6
<PAGE>
We are growing rapidly, and effectively managing our growth may be difficult.
We are currently experiencing a period of significant expansion. In order
to execute our business plan, we must continue to grow significantly by
expanding our product line and hiring new employees. This growth will strain our
management, resources and systems. Our ability to compete effectively and manage
future growth, if any, will require us to implement and improve our operational,
financial and management information systems on a timely basis and to attract,
hire, train and retain additional personnel. If we cannot effectively manage our
growth, our business could be harmed.
The loss of the services of one or more of our key personnel or our failure to
hire, integrate or retain other qualified personnel could disrupt our business.
We depend upon the continued services and performance of our executive
officers and other key employees, particularly William Yuan, our President and
Chief Executive Officer, Johnson Lee, our Chairman, and Edmund Leung, our Chief
Technical Officer. We currently maintain key person life insurance on Messrs.
Yuan, Lee and Leung; however, the loss of the services of any of them could
materially and adversely affect our business. Competition for qualified
personnel in technology is intense and we may not be able to retain or hire
necessary personnel.
We would lose revenues and incur significant costs if our systems or material
third-party systems are not year 2000 compliant.
Although as of January 14, 2000 we have experienced no material technical
problems related to the year 2000, we are currently assessing any remaining
impact of the year 2000 issue on our business and operations. We have not
devised a year 2000 contingency plan. The failure of our internal systems, or
any material third-party systems, to be year 2000 compliant could have a
material and adverse effect on our business, results of operations and financial
condition.
We believe that the current versions of our eMail VOICELink and eMail
inChorus products are year 2000 compliant. However, we cannot assure you that
our products will not experience year 2000 problems in the future. Any such
problems could result in a decrease in sales of our products, an increase in the
allocation of our resources to address year 2000 problems of our customers
without additional revenue and an increase in litigation costs relating to
losses suffered by our customers due to year 2000 problems.
To date, we have not incurred any material costs in identifying or
evaluating year 2000 compliance issues. However, we may fail to discover year
2000 compliance problems in our systems that will require substantial revisions
or replacements. There can be no assurance that third-party software, hardware
or services incorporated into our material systems will not need to be revised
or replaced, which could be time-consuming and expensive. Our inability to fix
or replace third-party software, hardware or services on a timely basis could
result in lost revenues, increased operating costs and other business
interruptions, any of which could have a material and adverse effect on our
business, results of operations and financial condition. Moreover, the
7
<PAGE>
failure to adequately address year 2000 compliance issues in our software,
hardware or systems could result in claims of mismanagement, misrepresentation
or breach of contract and related litigation, which could be costly and time-
consuming to defend.
In addition, there can be no assurance that governmental agencies, utility
companies, Internet access companies, third-party service providers and others
outside our control will be or continue to be year 2000 compliant. The failure
by these entities to be year 2000 compliant could result in a systemic failure
beyond our control, including, for example, a prolonged Internet,
telecommunications or electrical failure, which could also prevent us from
delivering our services to our users, decrease the use of the Internet or
prevent users from accessing our services, any of which would have a material
and adverse effect on our business, results of operations and financial
condition.
We are heavily reliant on third parties for order fulfillment and any delays or
other problems in fulfillment could adversely affect our business.
We are heavily reliant on the ability of Pakpro and Russ Thill, our
fulfillment houses, to package and ship orders of our products. Growth in the
volume of orders for our products may strain the capacity of our fulfillment
houses, and delays or other problems with order fulfillment could have a
material and adverse effect on our business.
Anti-takeover provisions and our right to issue preferred stock could delay or
prevent a change of control.
We are a Nevada corporation. Anti-takeover provisions of Nevada law could
make it more difficult for a third party to acquire control of us, even if such
change in control would be beneficial to stockholders. Our articles of
incorporation provide that our Board of Directors may issue up to 1,000,000
shares of preferred stock and to determine the rights, preferences and
privileges of these shares without stockholder approval. The issuance of
preferred stock could make it more difficult for a third party to acquire us.
All of the foregoing could adversely affect prevailing market prices for our
common stock.
Some of the information in this prospectus contains forward-looking statements.
Some of the information in this prospectus contains forward-looking statements
that involve substantial risks and uncertainties. You can identify these
statements by forward-looking words such as "may", "will", "expect",
"anticipate", "believe", "estimate" and "continue" or similar words. You should
read statements that contain these words carefully because they:
- discuss our expectations about our future performance;
- contain projections of our future operating results or of our future
financial condition; or
- state other "forward-looking" information.
8
<PAGE>
We believe it is important to communicate our expectations to our stockholders.
There may be events in the future, however, that we are not able to predict
accurately or over which we have no control. The risk factors listed in this
section, as well as any cautionary language in this prospectus, provide examples
of risks, uncertainties and events that may cause our actual results to differ
materially from the expectations we describe in our forward-looking statements.
Before you invest in our common stock, you should be aware that the occurrence
of any of the events described in these risk factors and elsewhere in this
prospectus could have a material and adverse effect on our business, results of
operations and financial condition and that upon the occurrence of any of these
events, the trading price of our common stock could decline and you could lose
all or part of your investment.
USE OF PROCEEDS
Other than the proceeds from the exercise of the warrants, we will not
receive any of the proceeds from the sale of the common stock offered by this
prospectus. The holders of the warrants are not obligated to exercise their
warrants, and there can be no assurance that we will receive any additional
proceeds. If all of the warrants are exercised, however, the gross proceeds to
us would be approximately $923,000, assuming exercise as of January 14, 2000.
We currently intend to use the proceeds as follows:
- approximately 30% of the proceeds, or $277,000, will be used to expand
our marketing and promotional campaigns in traditional and online media;
- approximately 20% of the proceeds, or $185,000, will be used for the
promotion and establishment of our consulting and service business
operations; and
- the balance of the proceeds, which should be approximately 50% or
$461,000, will be used for working capital and general corporate
purposes, including possible acquisitions of or investment in
complementary businesses, products or technologies.
9
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Our common stock has been traded on the NASD O-T-C Market Bulletin Board
under the trading symbol "SFLK" since October 21, 1998. Prior to that date, our
common stock was not actively traded in the public market. The following table
sets forth, for the periods indicated, the high and low closing prices for our
common stock as reported by various Bulletin Board market makers. The quotations
do not reflect adjustments for retail mark-ups, mark-downs, or commissions and
may not necessarily reflect actual transactions.
<TABLE>
<CAPTION>
Period Low Close High Close
- ------ --------- ----------
<S> <C> <C>
Fiscal 2000
Fourth Quarter (January 1, 2000 to January 14, 2000) $1.843 $2.625
Third Quarter (October 1, 1999 to December 31, 1999) $0.562 $2.687
Second Quarter (July 1, 1999 to September 30, 1999) $ 1.50 $ 3.00
First Quarter (April 1, 1999 to June 30, 1999) $1.937 $4.687
Fiscal 1999
Fourth Quarter (January 1, 1999 to March 31, 1999) $1.250 $8.062
Third Quarter (October 21, 1998 to December 31, 1998) $0.875 $5.500
</TABLE>
On January 14, 2000, the closing price of our common stock on the Bulletin
Board was $2.437 per share, and there were approximately 165 holders of record
of the common stock.
The market price of our common stock has been, and is likely to continue to
be, highly volatile as the stock market in general, and the market for
technology companies in particular, has been highly volatile. Investors may not
be able to resell their shares of our common stock following periods of
volatility because of the market's adverse reaction to volatility. The trading
prices of many technology companies' stocks have reached historical highs within
the last 52 weeks and have reflected valuations substantially above historical
levels. During the same period, these companies' stocks have also been highly
volatile and have recorded lows well below historical highs. We cannot assure
you that our stock will trade at the same levels of other technology stocks or
that technology stocks in general will sustain their current market prices.
Factors that could cause such volatility may include, among other things:
- actual or anticipated fluctuations in our quarterly operating results;
- announcements of technological innovations;
- changes in financial estimates by securities analysts;
- conditions or trends in the Internet industry;
- changes in the market valuations of other technology companies;
and
10
<PAGE>
- general market conditions.
To date, we have never declared or paid any cash dividends on our capital
stock. We currently intend to retain any future earnings for funding growth and
therefore, do not expect to pay any dividends in the foreseeable future. We are
obligated to pay dividends on our outstanding Series A Preferred Stock at the
rate of seven percent per annum. We may pay these dividends in either cash or
shares of our common stock. We currently intend to retain earnings, if any, to
fund the development and growth of our business and do not anticipate paying
cash dividends on the common stock in the foreseeable future. Payment of future
dividends, if any, will be at the discretion of our Board of Directors after
taking into account various factors, including our financial condition,
operating results, current and anticipated cash needs and plans for
expansion.
11
<PAGE>
CAPITALIZATION
The following table sets forth, as of September 30, 1999, Softlink's
capitalization on an actual basis, and as adjusted to reflect the conversion of
the preferred stock and exercise of the warrants. This information should be
read in conjunction with our Consolidated Financial Statements and the related
Notes appearing elsewhere in this prospectus.
The "As Adjusted" column assumes a conversion price for the preferred stock
of $0.4969 per share, which was the conversion price at January 14, 2000. Since
after December 15, 1999 the conversion price is dependent upon the market price
of Softlink's common stock prior to conversion the number of outstanding shares
in the "As Adjusted" column does not equal the number of shares being registered
in this offering. Please see "Description of Capital Stock". It also assumes
payment of dividends on the preferred stock, payable in shares of common stock
at the rate of seven percent per annum through January 14, 2000, at a price of
$2.437 per share, the price per share as of January 14, 2000, and exercise
prices for the warrants ranging from $2.25 to $2.43756 per share.
<TABLE>
<CAPTION>
As
Actual Adjusted
------ --------
<S> <C> <C>
Short-term debt $ - $ -
Stockholders' Equity
Preferred stock, .001 par value; 1,000,000 shares authorized; 3,026,300 -
300 shares issued and outstanding, no shares issued and
outstanding as adjusted
Common stock, $0.001 par value; 50,000,000 shares authorized,
59,000,000 shares authorized; 9,364,130 shares issued and 9,400 15,800
outstanding actual and 15,827,566 shares issued and
outstanding as adjusted
Additional paid-in capital 6,269,200 10,272,300
Accumulated deficit (3,610,400) (3,671,100)
----------- -----------
5,694,500 6,617,000
Less: Treasury stock at cost (1,454,356 shares) (2,738,800) (2,738,800)
Less: Notes receivable (17,800) (17,800)
----------- -----------
Total Stockholders' Equity 2,937,900 3,860,400
----------- -----------
Total Capitalization $ 2,937,900 $ 3,860,400
=========== ===========
</TABLE>
12
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
Set forth below are summary consolidated statements of operations data for
the six months ended September 30, 1999 and 1998, respectively, and the years
ended March 31, 1999 and 1998, respectively, and summary balance sheet data as
of September 30, 1999 and 1998 and March 31, 1999 and 1998. You should read this
information in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our Consolidated Financial
Statements and related Notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
Six Months Ended September 30, Years Ended March 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Consolidated Statements of Operations Data:
Net Sales, including license fee income $ 660,900 $ 335,500 $ 731,100 $ 23,500
Cost of Sales 176,000 35,100 39,200 12,900
----------- ---------- ----------- ----------
Gross Profit 484,900 300,400 691,900 10,600
----------- ---------- ----------- ----------
Operating Expenses :
Research and development 359,500 62,300 286,300 30,200
Sales and marketing 636,100 350,100 688,600 123,800
General and administrative 993,600 160,200 845,100 476,700
----------- ---------- ----------- ----------
Total Operating Expenses 1,989,200 572,600 1,820,000 630,700
----------- ---------- ----------- ----------
Loss From Operations (1,504,300) (272,200) (1,128,100) (620,100)
----------- ---------- ----------- ----------
Other Income (Expense):
Interest income 18,400 3,500 115,500 100
Interest expense (10,400) (2,500) (2,500) -
Other (7,200) - - -
----------- ---------- ----------- ----------
Total Other Income (Expense) (800) 1,000 113,000 100
----------- ---------- ----------- ----------
Loss Before Provision for Income Taxes (1,503,500) (271,200) (1,015,100) (620,000)
Provision for Income Taxes 30,900 800 800 800
----------- ---------- ----------- ----------
Net Loss $(1,534,400) $ (272,000) $(1,015,900) $ (620,800)
Preferred Stock Dividends 429,500 - - -
----------- ---------- ----------- ----------
Net Loss available to common shareholders $(1,963,900) $ (272,000) $(1,015,900) $ (620,800)
----------- ---------- ----------- ----------
Basic and diluted loss per share $ (0.25) $ (0.04) $ (0.14) $ (0.26)
----------- ---------- ----------- ----------
Basic and diluted weighted-average common shares outstanding 7,856,700 6,062,900 7,132,600 2,377,200
Consolidated Balance Sheet Data:
Cash and Cash Equivalents $1,785,000 108,800 307,500 51,900
Working Capital 2,741,700 57,200 774,800 (75,000)
Total Assets 3,296,600 317,500 967,500 85,300
Short-term Debt - 184,600 - 146,200
Total Stockholders' Equity 2,937,900 87,400 881,100 (63,400)
</TABLE>
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
We provide multimedia email solutions that bring life to online
communication with voice, sound, animation and graphics. We develop and market
software products that use our proprietary technology to allow businesses and
consumers to communicate through text, voice, sound, annotation and animation.
We were incorporated in November 1995 as Softlink, Inc., a California
corporation ("Softlink California") and shipped our first product, eMail
VOICELink, in August 1997. For the period from inception through December 1997,
our revenue was minimal and our operating activities related primarily to the
development of our infrastructure and our first products.
In March 1998, Softlink California entered into a reorganization with Draco
Technologies, Inc., a Nevada corporation. Under the reorganization, the
stockholders of Softlink California received approximately 0.6745344 shares of
common stock of Draco Technologies, Inc. in exchange for each of their shares of
Softlink California, and Softlink California became a wholly-owned subsidiary of
Draco. Draco then changed its name to Softlink, Inc.
We began the marketing and promotion of our products when we introduced our
second product, PowerLink, a precursor of eMail inChorus, in November 1997.
Beginning in 1998, we also focused on recruiting personnel and raising capital.
To date, our revenues have been derived primarily from the licensing of our
products. We are attempting to increase sales of our software to complement our
licensing revenue; however, we believe that it is too early to determine whether
this business model will be successful in the future.
We also intend to broaden our business in 2000 by offering turnkey
multimedia email services. These services would transfer to us the
responsibility for constructing and disseminating multimedia messages on behalf
of our customers. We would be competing against production and advertising
companies in this market, and we may not compete effectively with these current
or future service providers based on price, performance or other features. We
expect to devote significant engineering, marketing, sales and customer support
resources to enhance the competitiveness and cost-effectiveness of these
services; however, to date we have not devoted substantial resources to this
effort. Once commenced, these actions may divert resources from our other
products and services and may thus harm our core eMail VOICELink and eMail
inChorus business.
Due to the fact that we were founded in November 1995 and commercially
released version 1.0 of our first product, eMail VOICELink, in August 1997, we
have a limited operating history, and we face all of the risks and uncertainties
encountered by early stage companies such as the need to establish our
credibility with customers, advertising and other service providers,
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and prospective strategic partners. There can be no assurance that we will be
able to overcome some of these obstacles; if we do not, we may be unable to
achieve our business goals and raise sufficient capital to expand our
business.
Results Of Operations
The following table sets forth the percentage relationship to net sales of
principal items contained in our Consolidated Statements of Operations for the
six months ended September 30, 1999 and 1998, respectively, and for the fiscal
years ended March 31, 1999 and 1998, respectively. It should be noted that
percentages discussed throughout this analysis are stated on an approximate
basis. Our revenues, gross margins and other operating results may vary
significantly from quarter to quarter. The fluctuations may be due to a number
of factors, many of which are beyond our control, including actions of our
competitors, market acceptance of our products, changes in pricing and margins,
and unanticipated costs. Given our limited operating history, we believe that an
analysis of our cost and expense categories as a percentage of net sales is not
meaningful.
<TABLE>
<CAPTION>
Six Months Ended September 30, Years Ended March 31,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Consolidated Statements of Operations Data:
Net sales, including license fee income 100% 100% 100% 100%
Cost of sales 27 10 5 55
----- ----- ----- ------
Gross profit 73 90 95 45
Operating expenses 301 171 249 2,684
----- ----- ----- ------
Loss from operations (228) (81) (154) (2,639)
Other income (expense) (1) 0 15 1
----- ----- ----- ------
Loss before provision for income taxes (227) (81) (139) (2,638)
Provision for income taxes 5 0 0 4
----- ----- ----- ------
Net loss (232%) (25%) (139%) (2,642%)
===== ===== ===== ======
</TABLE>
Six Months Ended September 30, 1999 and 1998
Net sales for the six months ended September 30, 1999 were $660,900,
compared to net sales of $335,500 for the six months ended September 30, 1998.
The increase reflects expanded sales efforts for our eMail VOICELink and eMail
inChorus products offset by a decrease in licensing fees. The sales of VOICELink
and inChorus are subject to product returns from distributors. In the six months
ended September 30, 1999, $153,100, or 23%, of our revenues consisted of
licensing revenues as compared to licensing revenues of $320,000, or 95%, of
revenues for the six months ended September 30, 1998. Included in accounts
receivable as of September 30, 1999 was $550,000 due from NIC Ltd. for licensing
fees. Of this amount, $396,900 has been outstanding since March 31, 1999. Cost
of sales increased to $176,000 for the six months ended September 30, 1999 from
$35,100 for the comparable period in 1998, due to increased production of our
products.
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Operating expenses increased to $1,989,200 for the six months ended
September 30, 1999, compared to $572,600 for the six months ended September 30,
1998. The increase was comprised of growth in all components of our operating
expenses such as research and development, sales and marketing and general and
administrative expenses. Research and development expenditures increased to
$359,500 for the six months ended September 30, 1999 compared to $62,300 for the
six months ended September 30, 1998, due primarily to costs associated with the
development of new versions of our existing products and the design and
development of new products. Sales and marketing expenses increased to $636,100
in the six months ended September 30, 1999 compared to $350,000 for the
comparable period in 1998, due to expanded marketing efforts for our eMail
VOICELink and eMail inChorus software introduced at the end of fiscal 1998.
These efforts included hiring additional sales personnel and participation in
trade shows. General and administrative expenses increased to $993,600 for the
six months ended September 30, 1999 compared to $160,200 for the six months
ended September 30, 1998, due primarily to the expansion of our infrastructure
through the hiring of additional personnel and management and the lease of
additional facilities.
Our interest income increased to $18,400 for the six months ended
September 30, 1999, compared to $3,500 for the six months ended September 30,
1998. The increase was due to slightly increased average balances of cash and
cash equivalents in the first six months of fiscal 2000.
As a result of these factors, we incurred a net loss of $1,534,400 for the
six months ended September 30, 1999 compared to a net loss of $272,000 for the
six months ended September 30, 1998. Net loss available to common shareholders
for the six months ended September 30, 1999 equaled $1,963,900, due to the
accrual of $429,500 in dividends on outstanding shares of preferred stock.
Years Ended March 31, 1999 and 1998
Net sales for the year ended March 31, 1999 were $731,100, compared to net
sales of $23,500 for the year ended March 31, 1998. The increase in sales
reflects expanded sales efforts for our eMail VOICELink and eMail inChorus
products, introduced in August 1997 and November 1997, respectively, as well as
licensing fees under our license agreement with NIC Ltd., a Japanese company.
For the year ended March 31, 1999, $640,000 or 87.5%, of our revenues consisted
of licensing revenues from NIC. Cost of sales increased to $39,200 for fiscal
1999 from $12,900 in fiscal 1998, due primarily to increased production of our
software products.
Operating expenses increased to $1,820,000 for the year ended March 31,
1999, compared to $630,700 for the year ended March 31, 1998. The increase was
comprised of growth in all components of our operating expenses, such as
research and development, sales and marketing and general and administrative
expenses. Research and development expenditures increased to $286,300 for the
year ended March 31, 1999 compared to $30,200 for the year ended March 31, 1998,
due primarily to costs associated with the refinement of our existing products,
the development of new versions of these products and the design and development
of anticipated products. Sales and marketing expenses increased to $688,600 in
fiscal 1999 compared to $123,800 in fiscal 1998 due to the expanded marketing
efforts required by the
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<PAGE>
introduction of our eMail VOICELink and eMail inChorus software at the end of
fiscal 1998. These efforts included hiring additional sales personnel and
participation in trade shows. General and administrative expenses increased to
$845,100 in the year ended March 31, 1999 compared to $476,700 for the year
ended March 31, 1998, due primarily to the hiring of additional personnel and
management.
Our interest income, net of interest expense increased to $113,000 for the
year ended March 31, 1999, compared to $100 for the year ended March 31, 1998.
The increase was due to interest received on notes receivable on the sale of
common stock.
As a result of these factors, we incurred a net loss of $1,015,900 for the
year ended March 31, 1999 compared to a net loss of $620,800 for the year ended
March 31, 1998.
Income Taxes
At September 30, 1999 and March 31, 1999, Softlink had deferred tax assets
of $1,506,000 and $651,600, respectively, principally arising from net operating
loss carryforwards available to offset future taxable income. As management
cannot determine that it is more likely than not that Softlink will realize the
benefit of these assets, a 100% valuation allowance has been established.
Liquidity And Capital Resources
Our working capital requirements have been financed over the past two years
through private placements of common and preferred stock and, to a lesser
extent, from borrowings from principal stockholders. In the years ended March
31, 1999 and 1998, financing activities, principally private placements,
generated $1,363,000 and $314,600, respectively, of cash. In the six months
ended September 30, 1999 and 1998, financing activities generated $3,169,400 and
$448,500, respectively, of cash. As of September 30, 1999, we had approximately
$1,785,500 in cash and cash equivalents, an increase from $307,500 of cash and
cash equivalents at March 31, 1999. Our accounts receivable equaled $947,700 at
September 30, 1999, as compared to $430,600 at March 31, 1999, due primarily to
amounts due under the license agreement with NIC, Ltd.
In fiscal 1999, our operating activities utilized $1,005,600 in cash.
Investing activities utilized $101,800 of cash in the same period. Operating
activities utilized $1,496,800 in cash for the six months ended September 30,
1999, while investing activities utilized $194,600 during the same period.
In August 1999, we completed a private placement in which we issued 300
shares of preferred stock and warrants to purchase an aggregate of 390,000
shares of common stock. The warrants, which have exercise prices ranging from
$2.25 to approximately $2.44 per share, expire in August 2004. We received net
proceeds, after placement agent commissions and expenses, of $2,788,700 from
this private placement.
Our independent certified public accountants have issued a report on our
audited financial
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<PAGE>
statements with an explanatory paragraph regarding our ability to continue as a
going concern. Our continuation as a going concern is dependent upon our ability
to obtain additional financing or refinancing as may be required, and ultimately
upon our ability to attain profitability.
We need working capital to execute our business plan and, in the future, we
may acquire or make investments in complementary businesses, products, services
or technologies on an opportunistic basis when we believe they will assist us in
carrying out our business strategy. We do not have any present understanding,
nor are we having any discussions relating to any such acquisition or
investment. Any such acquisition or investment could harm our operating results
or cause our stock price to decline because:
- the amount of time and level of resources required to successfully
integrated its business operation could be substantial;
- challenges in assimilating personnel, organizational structure, and
technology could cause significant delays in executing other key areas of our
business plan;
- the key personnel of the acquired company may decide not to work for
us, which could result in the loss of key technical or business knowledge to us;
and
- we may have to incur debt or issue equity securities to pay for any
future acquisitions, the issuance of which could be dilutive to our existing
stockholders.
We believe that our current cash and cash equivalents will be sufficient to
meet our anticipated cash needs for working capital and capital expenditures
through March 2000. If cash generated from operations is insufficient to
satisfy our liquidity requirements after that date, we may seek to sell
additional equity or debt securities or to obtain a credit facility; however, at
the present time, we have not entered into any arrangements or understandings
with respect to any such financings. The sale of additional equity or
convertible debt securities could result in additional dilution to our
stockholders. The incurrence of indebtedness would result in an increase in our
fixed obligations and could result in operating covenants that would restrict
its operations. There can be no assurance that financing will be available in
amounts or on terms acceptable to us, if at all. If financing is not available
when required or is not available on acceptable terms, we may be unable to
develop or enhance our products or services. In addition, we may be unable to
take advantage of business opportunities or respond to competitive pressures.
Any of these events could have a material and adverse effect on our business,
results of operations and financial condition.
Impact Of The Year 2000
Many currently installed computer systems and software products are coded
to accept or recognize only two digit entries in the date code field. These
systems may recognize a date using "00" as the year 1900 rather than the year
2000. As a result, computer systems and/or software used by many companies and
governmental agencies may need to be upgraded to comply with Year 2000
requirements or risk system failure or miscalculations causing disruptions of
normal business activities.
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<PAGE>
State of Readiness. Although as of January 14, 2000, we have experienced no
------------------
material technical problems related to the year 2000, we shall continue to seek
verification from our key vendors, distributors and suppliers that they are year
2000 compliant or, if they are not presently compliant, to provide a description
of their plans to become so. To the extent that vendors failed to provide
certification that they were year 2000 compliant by October 1999, we planned to
terminate and replace these relationships. To date, however, none of our systems
have needed to be revised or replaced.
We are conducting an internal assessment of all material information
technology and non-information technology systems at our headquarters. Until we
complete the assessment, we will not know whether these systems are or will
continue to be year 2000 compliant.
Costs. To date, we have not incurred any material costs in identifying or
-----
evaluating year 2000 compliance issues. Most of our expenses have related to,
and are expected to continue to relate to, the upgrades or replacements, when
necessary, of software or hardware, as well as costs associated with time spent
by employees in the evaluation process and year 2000 compliance matters
generally. These expenses are included in our capital expenditures budget and
are not expected to be material to our financial position or results of
operations. These expenses, however, if higher than anticipated, could have a
material and adverse effect on our business, results of operations and financial
condition.
Risks. Although as of January 14, 2000, we have experienced no material
-----
technical problems related to the year 2000, there can be no assurance that we
will not discover year 2000 compliance problems in our systems that will require
substantial revisions or replacements. In the event that the operational
facilities that support our business are not year 2000 compliant, we may be
unable to deliver goods or services to our customers. In addition, there can be
no assurance that third-party software, hardware or services incorporated into
our material systems will not need to be revised or replaced, which could be
time-consuming and expensive. Our inability to fix or replace third-party
software, hardware or services on a timely basis could result in lost revenues,
increased operating costs and other business interruptions, any of which could
have a material and adverse effect on our business, results of operations and
financial condition. Moreover, the failure to adequately address year 2000
compliance issues in our software, hardware or systems could result in claims of
mismanagement, misrepresentation or breach of contract and related litigation,
which could be costly and time-consuming to defend.
In addition, there can be no assurance that governmental agencies, utility
companies, Internet access companies and others outside our control will be year
2000-compliant. The failure by these entities to be year 2000-compliant could
result in a systemic failure beyond our control, including, for example, a
prolonged Internet, telecommunications or electrical failure, which could also
prevent us from delivering our services to our users, decrease the use of the
Internet or prevent users from accessing our services, any of which would have a
material and adverse effect on our business, results of operations and financial
condition.
Contingency Plan. As discussed above, we are engaged in an ongoing year
----------------
2000 assessment and do not currently have a contingency plan to deal with the
worst case scenario that
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<PAGE>
might occur if technologies on which we depend are not year 2000-compliant and
fail to operate effectively after the year 2000. The results of our year 2000
compliance evaluation and the responses received from distributors, suppliers
and other third parties with which we conduct business will be taken into
account in determining the need for and nature and extent of any contingency
plans.
If our present efforts to address the year 2000 compliance issues discussed
above are not successful, or if distributors, suppliers and other third parties
with which we conduct business do not successfully address such issues, our
users could seek alternate suppliers of our products and services. Any material
year 2000 problem could require us to incur significant unanticipated expenses
to remedy and could divert our management's time and attention, either of which
could have a material and adverse effect on our business, operating results and
financial condition.
Effects Of Inflation
Due to relatively low levels of inflation in 1997 and 1998, inflation has
not had a significant effect on our results of operations since inception.
Recent Accounting Pronouncements
On October 27, 1997, the American Institute of Certified Public Accountants
issued Statement of Position No. 97-2, "Software Revenue Recognition", which
provides guidance on when revenue should be recognized and in what amounts for
licensing, selling, leasing, or otherwise marketing computer software. If the
software arrangement does not require significant production, modification, or
customization of software, revenue should be recognized when all of the
following criteria are met:
- persuasive evidence of an arrangement exists;
- delivery has occurred;
- the vendor's fee is fixed or determinable; and
- collectibility is probable. The adoption of SOP No. 97-2 did not have
a material impact on our consolidated financial statements.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position No. 98-1, "Software for Internal Use", which
provides guidance on accounting for the cost of computer software developed or
obtained for internal use. SOP No. 98-1 is effective for financial statements
for fiscal years beginning after December 15, 1998. The adoption of SOP No. 98-
1 did not have a material impact on our consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 requires that
20
<PAGE>
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. SFAS No. 133, as amended, is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
Historically, we have not used derivatives and therefore this new pronouncement
is not applicable.
21
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BUSINESS
Overview
Softlink provides multimedia email solutions that bring life to online
communication with voice, sound, animation and graphics. We develop and market
software products that use our proprietary technology to allow businesses and
consumers to communicate through text, voice, sound, annotation and animation.
Our two key products are eMail VOICELink and eMail inChorus. eMail
VOICELink adds voice messages to email communications over the Internet,
allowing users to add personality, clarity and impact to their email messages.
eMail inChorus is a multimedia email product that integrates text, voice, sound,
annotation and animation with email. Users of both eMail VOICELink and eMail
inChorus can send their messages through industry standard email packages such
as Netscape Mail, Microsoft Outlook, America Online and Eudora, and can utilize
our products with MSN and other major Internet service providers.
International Data Corporation predicts that the number of email addresses
on the Internet will double yearly from an installed base of 52 million in 1995,
and will continue doubling until 2000. Industry sources also indicate that
email accounts for 70% of all Internet connect time. Businesses are currently
using email in their e-commerce strategies to replace or supplement banners and
other online advertising strategies. To date, however, most email products only
allow the transmission of text or text with file attachments due to the large
amount of capacity, or bandwidth, required for more complex messages.
Our proprietary multimedia composer and compression technology allows
multimedia email messages to be transmitted over the Internet with the minimum
consumption of bandwidth. Use of this technology permits businesses to expand
their e-commerce marketing capabilities with multimedia email by offering
product demonstrations or complex graph and tables to customers. In addition,
we believe that companies could realize cost savings by using multimedia email
in lieu of printed brochures, flyers and coupons. We do not currently own any
patented technology registered with the United States Patent and Trademark
Office.
Our products provide online communication solutions for consumers and
business users across a variety of industries. We have established strategic
relationships with several manufacturers of multimedia computer components ,
such as Sony Electronics, Inc., to promote our software products by including
them in computer hardware products sold by Sony and have entered an agreement
with Earthlink/Sprint combining its Internet access services with our products
in return for a payment from new Earthlink subscribers. We also have an
agreement with one of the largest Japanese distributors, NIC, Ltd., to sell our
products in Japan through distributors and original equipment manufacturer
partners.
22
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Industry Background And Market Opportunities
Email
- -----
Global communication using the Internet has expanded exponentially in the
past few years. In addition to providing a medium for basic communication, email
can be used for e-commerce. The increased use of email generally has opened up
significant opportunities for the large number of businesses that are working on
e-commerce strategies. While these companies have relied on banner advertising
and other online advertising strategies to reach potential customers over the
Internet, they are now turning to email as another e-commerce marketing tool.
Various e-commerce functions can be accomplished with email. First of all,
it can be used as a promotional tool to get information out to a targeted list
of customers. This can be done in mass mailing, i.e., bulk email, or on an
individualized basis for businesses that emphasize person-to-person selling.
Second, it can be used as a customer service tool for products that must be
installed by the user, or products that need more than text instruction to
explain clearly. Third, it can be used to obtain customer registrations.
Finally, it can be used as a form of intra-company communications on an
Intranet, which might also include extranet communications through an external
network, an extranet, with vendors and subcontractors.
In each of these functional areas, email reduces costs and improves the
communication with the receiver. For example, using a bulk email approach to a
targeted list of online users is a very inexpensive way to reach customers
directly. Moreover, email has been found by some commercial marketers to be
more effective than banner ads in driving online sales. ZDNet, an industry
media analyst, has reported that Tower Records increased its response rate from
4.4% to 14.9% after introducing personalized email, while The Gap doubled its
online sales after launching an email campaign. Thus, we believe the eventual
use of email as a functional replacement for what is currently used in these
areas by companies is reasonably likely likely.
Multimedia Opportunities
- ------------------------
One of the problems with email to date as a tool to market products is that
most email products only allow text or text with file attachments. Two
important means of reaching customers, the use of sound and the use of pictures,
have been missing, partly due to the bandwidth problem and the need to compress
data files. In today's multimedia environment, the lack of these features has
held email back as a marketing tool. However, due to technical advances,
companies are now able use innovative multimedia email business solutions.
Multimedia email is substantially different than text email, or even voice
email when used as an e-commerce tool. Many products require being viewed or
benefit when the customer can see a picture, as well as hear a promotional
pitch. Voice in some ways is superior to text since it easier to listen than it
is read. Voice can add a level of persuasiveness not available with text alone.
Also, if one is sitting in front of a computer screen, it is possible to avoid
reading, but not easy to avoid listening. When voice is combined with pictures
or graphics a far more powerful tool is created.
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In order to utilize multimedia email, both the sender and recipient of the
message must have a multimedia computer. Most new computers and much of the
installed base in the United States are multimedia computers.
In e-commerce, the primary beneficiaries of multimedia email will be
companies online that need graphics and sound in their selling pitch and in
their communications with others. This would include companies offering
consumer products that must be seen before they are bought because the
particular design and look of the product is important in the buying decision;
leisure and other products that are selling excitement and adventure; products
that are primarily sold by a broker or salesperson to an individual consumer;
and products that are more complicated and may require explanations using graphs
and tables. The other important benefits are cost saving and improve time to
market for companies to market their product and service. Companies can save
thousands or hundreds of thousands of dollar by introducing their products with
multimedia email instead of printed brochures, flyers and coupons.
All of these applications, however, require an enormous increase in the
current capacity, or bandwidth, of communications networks. Behind this
phenomenal rise in consumption of bandwidth is the simple fact that there are
more people connected to networks, sending more bits of information more often.
The Internet has become not only a primary means for interpersonal
communication, but a commercial tool as well. Businesses are now looking at the
Internet and the Web as a connectivity tool to implement remote access, wire
their suppliers and customers to their networks, and potentially integrate their
voice and data traffic over a single network. We believe that a flood of demand
is being created for the products and services that will enable this
connectivity to occur as seamlessly as possible - either through increased
bandwidth or by using the existing capacity to maximum advantage.
Because we are in the business of multimedia email solutions, our success
is directly tied to the widespread acceptance and continued use of the Internet.
However, the Internet may not be accepted as a viable commercial medium for a
number of reasons, including the following:
- inadequate Internet infrastructure;
- security concerns;
- possible governmental regulation and taxation;
- inconsistent quality of service; and
- unavailability of cost-effective, high-speed service.
If use of the Internet does not grow as expected, our business, results of
operations and financial condition would be materially and adversely
affected.
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The Softlink Solution
Softlink provides multimedia email solutions that bring life to online
communication through multimedia. Our founders, Johnson Lee and Edmund Leung,
formed Softlink in 1995 in recognition of the growing need for complex
communications on the Internet, the diminishing capacity of text-only email to
meet this need and the need to provide this solution within the existing
bandwidth. Our multimedia email solution is based upon our multimedia composer
and proprietary compression technology, which permits users to shorten the time
and bandwidth required to send and receive complex multimedia email without the
loss of quality or resolution. We shipped our first product, eMail VOICELink,
in August 1997, and introduced PowerLink, a previous generation of eMail
inChorus, in November 1997.
Our business is being positioned to capitalize on the growing marketplace
opportunities attributable to several overlapping factors such as the increase
in the number of email addresses on the Internet, the increase in frequency of
email use in e-commerce solutions, and the rapidly growing installed base of
multimedia computers.
Due to the fact that we were founded in November 1995 and commercially
released version 1.0 of our first product, eMail VOICELink, in August 1997, we
have a limited operating history, and we face all of the risks and uncertainties
encountered by early stage companies such as the need to establish our
credibility with customers, advertising and other service providers, and
prospective strategic partners. There can be no assurance that we will be able
to overcome some of these obstacles; if we do not, we may be unable to achieve
our business goals and raise sufficient capital to expand our business.
Strategy
Our strategy is to be the leading provider of multimedia communications
solutions, based on our proprietary multimedia composer and compression
technology, for communication over the Internet. Key elements of our strategy
include:
Extend Technology Leadership By Producing Superior Products. Since
inception, we have focused our research and development efforts on developing
our multimedia composer and core compression technology that addresses the issue
of inadequate capacity on the Internet for the transmission of complex
communications. Our products integrate a number of advanced technologies,
including our proprietary data compression technology, that provide a 50:1
compression rate without loss of quality or resolution. We believe that we are
currently a leader in multimedia communications technology, and we intend to
extend this leadership position by continuing to devote additional resources to
research and development efforts.
Create Brand Recognition. We are focused on building brand awareness and
acceptance as well as on developing strategic marketing and distribution
relationships. We have a comprehensive marketing strategy with several key
components:
- image and awareness building;
25
<PAGE>
- direct marketing to prospective and existing customers using demographic
profiling;
- a strong Web presence and broad scale marketing programs in conjunction
with key partners.
Our corporate marketing strategy also includes trade shows, television
commercials and public relations activities. Our business and products have
received news coverage from ABC, CBS and NBC as well as their affiliated
stations nationwide through brief interview segments. We also have received
coverage to date from many radio stations.
Expand Market Leadership Position Through Strategic Licensing
Relationships. We are attempting to establish a leading position in the
emerging market for multimedia communications solutions. To accelerate the
adoption of VOICELink and inChorus as the standard multimedia communications
solutions and to facilitate global acceptance of our products, we have
established and are continuing to establish strategic licensing relationships
with leading personal and laptop computer manufacturers and distributors. Our
strategic licensing partners include Sony Electronics, Inc., NEC, and
Earthlink/Sprint. In general, these relationships provide for the inclusion of
our software in hardware products sold by our partners. In the case of
Earthlink, our agreement provides for the combining of Internet access services
offered by Earthlink/Sprint with our software in return for a payment form new
Earthlink subscribers. We believe that brand recognition is essential to our
business success, and encourage all of our partners and resellers to use the
Softlink brand name in conjunction with their applications. We intend to
further develop our existing strategic licensing relationships and enter into
new partnerships in both licensing and sales to expand our market presence and
brand recognition.
Broaden Distribution Channels. To date, we have sold our products
primarily through OEM partners and distributors as well as through direct sales.
We intend to expand our direct sales force as well as to leverage and grow our
existing network of OEM partners and distributors.
Increase International Presence. While to date our international sales
have been limited, we plan to increase our international sales presence. We
have entered into an agreement with NIC, Ltd., one of the largest Japanese
distributors, to sell our products in Japan, and are also working with our
Chinese partners to stimulate sales in that country. We have also commenced
sales into the Middle East and European markets.
Products And Technology
Products
- --------
We currently offer two primary communications products. These are called
eMail inChorus and eMail VOICELink. eMail inChorus, introduced in August 1997,
develops and transmits full-featured multimedia presentations via email on the
Internet and corporate Intranets. An email message generated with eMail
inChorus integrates text, voice, sound, annotation and
26
<PAGE>
animation. Users can import, manipulate and edit text, pictures, photos and
graphics, capture screen shots displayed on a monitor, annotate directly from a
document, cut and paste documents and use original art works within a single
email message as though the message were being presented on a white board to an
audience. We also include graphical templates and clip art to reduce the time
required for message creation.
eMail inChorus uses our proprietary compression technology to shorten the
time and bandwidth required to send and receive multimedia email. For example, a
one minute multimedia message sent through eMail inChorus requires only 200
kilobytes of capacity, as compared to the 6 megabytes required to send the same
message through competitive channels such as QuickTime. eMail inChorus is
compatible with the most popular email programs including Netscape Mail,
Microsoft Outlook and Eudora, and works with America Online, MSN and other major
Internet service providers. An eMail inChorus message is sent as an attached
file with a free player, giving the recipient the opportunity to play the
message. To send a response, however, the recipient must also have the eMail
inChorus software.
Our eMail inChorus software is currently configured for use with all
Windows and Macintosh applications. In addition, we are currently developing a
version of eMail inChorus with database connectivity and mass mailing
capabilities, called eMail inChorus Pro, for corporate users, and plan to
release this version in the fourth quarter of 1999.
Our second product, eMail VOICELink, was introduced in November 1997.
eMail VOICELink allows users to add voice capability to their email messages to
provide personality, clarity and impact without the cost of long distance. Like
eMail inChorus, eMail VOICELink features our proprietary compression technology,
permitting a one-minute eMail VOICELink message to require just 100 kbpm as
compared to 5,200 kbpm utilized by a standard one minute audio file.
Except for our Macintosh version, as Macintosh computers already contain a
built-in microphone, we package eMail VOICELink with a high quality microphone,
player software, the message recipient must also have eMail VOICELink to send a
reply, and over 200 pre-designed graphical templates and clip art images. eMail
VOICELink is compatible with both Windows and Macintosh applications, and works
with email packages such as Netscape Mail, Microsoft Outlook, Lotus Notes and
Eudora. eMail VOICELink messages may be sent through most major Internet
service providers, including America Online and MSN.
In addition to refining our existing software products and expanding their
applicability, we are considering the development of complementary
communications services. These services would provide turnkey multimedia
messaging capability, message construction and transmission, for the business
market, using our already developed proprietary multimedia composer and
compression technology. The development and commercialization of these services
will require significant additional effort and resources; accordingly, we
currently do not have an anticipated date of introduction.
Software products frequently contain errors, defects or performance
problems, commonly called "bugs", especially when they are first introduced or
when new versions or enhancements
27
<PAGE>
are released. Although we test our products extensively prior to introduction,
we cannot assure you that our testing will detect all serious defects, errors
and performance problems prior to commercial release of our future software
products. Any future software defects, errors or performance problems discovered
after commercial release could result in the diversion of scarce resources away
from customer service and product development, lost revenues or delays in
customer acceptance of our products and damage to our reputation, which, in each
case, could have a material and adverse effect on our business, results of
operations or financial condition.
Although our license agreements with our customers typically contain
provisions designed to limit our exposure to liabilities arising from product
liability claims, we cannot assure you that these provisions will be enforceable
under existing or future international, federal, state or local laws and
judicial decisions. We have not experienced any product liability claims to
date, but we may be subject to such claims in the future. A product liability
claim brought against us could have a material and adverse effect on our
business, results of operations or financial condition.
Technology
- ----------
Most email systems contain the limited capability to attach digital files
through a technology known as MIME, multi-purpose Internet mail extension.
While MIME technology permits the compression of data before sending and the
decompression of this data at the recipient's end of the transmission, its data
standards are borrowed from other uses and are not optimal for e-mail. The data
compression standards provided by MIME require 960 kbpm for a one-minute audio
file and 12,000 kbpm for a one-minute video file. Audio, video and text
attachments are not integrated in a MIME transmission, but instead must be
played/viewed/read in sequence.
Our eMail inChorus and eMail VOICELink software features our proprietary
multimedia composer and compression technology. This technology uses neural
network architecture to reduce the size of an input data string to a minimal
number of components. The compressed data is then transmitted and
reconstructed by the message recipient. Our multimedia email messages are
integrated, and can be played simultaneously and synergistically, similar to a
movie. A one-minute email can blend text annotation, graphics, audio and
animation into one coherent message. We do not currently own any patented
technology registered with the United States Patent and Trademark Office.
28
<PAGE>
Marketing And Sales
We are focused on building brand awareness and acceptance as well as on
developing strategic marketing and distribution relationships. We have a
comprehensive marketing strategy with several key components:
- image and awareness building;
- direct marketing to prospective and existing customers using demographic
profiling;
- a strong Web presence and broad scale marketing programs in conjunction
with key partners.
Our corporate marketing strategy also includes television commercials and
syndicated interviews, public relations activities and trade shows.
We currently sell or license our products through four channels:
- through distributors to retailers, including Fry's, Comp USA, Office Max
and Electronic Boutique;
- through bundling relationships with OEMs as Sony Electronics, Inc. and
Earthlink;
- through e-commerce outlets such as Beyond.com and America Online; and
- through direct sales to the corporate market.
Our products are distributed in North America by Merisel and Norvar, the largest
domestic distributors of computer products. Through our Japanese distribution
channel, we have gained a significant presence in the hard to penetrate Japanese
domestic market. Our Japanese language edition products were rated the fifth and
sixth best selling products in the retail productivity category in the 1998
Softbank retail report. We believe that eMail inChorus and eMail VOICELink have
provided a solution to the Japanese executive's cultural and complexity problem
of typing email by allowing the executives to use their own voice to
communicate, and anticipate that similar solutions may prove attractive to
speakers of other languages.
From time to time, we have successfully sold our products through other
sales channels. Recently, our products were featured on the QVC home shopping
network and over 5,000 units of eMail VOICELink were sold during the program. We
currently intend to conduct more sales campaigns through television shopping
networks such as QVC, and may evaluate similar sales opportunities in the
future.
29
<PAGE>
Customer And Technical Support
We believe that providing superior customer service is critical to the
successful sale and marketing of our products. We provide email and telephone
support during normal business hours, and supplement this with Web-based support
services 24 hours a day, seven days a week, including product update and
download areas. We also have an instructional guide for our customers for
common product usage questions, and we notify our customers about the latest
product updates.
Research And Development
Our research and development team consists of development engineers,
product managers, quality assurance engineers and technical writers. Research
and development expenses were $286,300 for the year ended March 31, 1999 and
$359,500 for the six months ended September 30, 1999. We intend to continue to
make substantial investments in research and development and related activities
to maintain and enhance our products. We believe that our future success will
depend in part on our ability to support current and future releases of popular
operating systems and applications, to maintain and improve our current products
and to timely develop new products and services that achieve market acceptance.
Competition
We compete in a market that is intensely competitive and characterized by
rapidly changing technology and evolving standards. Our principal competitors
for our eMail inChorus software are companies that create, produce and transmit
mass multimedia email, such as eCommercial.com and CyberLink. While we share
with these companies the goal of using email as a tool to deliver dynamic
marketing messages, they have a greater emphasis on the design and creation of
multimedia email messages rather than the tools for transmission of multimedia
e-mail.
In the voice email market, we compete directly with Qualcomm and a variety
of smaller, privately held companies. Some of our competitors bundle their
voice email solutions with existing email products such as Eudora, an email
product owned and marketed by Qualcomm.
In the multimedia email market, we compete with companies that create,
produce and transmit mass multimedia email, such as eCommercial.com and
CyberLink. These companies have a greater emphasis on the design and creation of
multimedia email messages, however, rather than providing the tools for
transmission of multimedia e-mail.
We believe that the principal competitive factors in our market are
technological innovation and time to market. We believe that we currently
feature the only multimedia email product on the market, and that our products
offer more sophisticated data compression technology than that of our
competitors. However, many of our current and potential competitors have
significantly greater financial, technical, marketing and other resources than
we do, and therefore may be able to respond more quickly to new or emerging
technologies and changes in customer requirements or devote more resources to
the development and
30
<PAGE>
commercialization of their products. In addition, certain of our competitors may
have greater name recognition and the ability to leverage significant installed
customer bases. We expect additional competition as other established and
emerging companies enter into the multimedia email solutions market and new
products and technologies are introduced. Increased competition could result in
price reductions, reduced gross margins, longer sales cycles and loss of market
share, any of which would materially and adversely affect our business,
operating results and financial condition.
We believe that our ability to compete depends on many factors both within and
beyond our control, including:
- the ease of use, performance, features, price and reliability of our
solutions as compared to those of our competitors;
- the timing and market acceptance of new solutions and enhancements to
existing solutions developed by us and our competitors;
- the quality of our customer service and support; and
- the effectiveness of our sales and marketing efforts.
Many of our current and potential competitors are likely to enjoy
substantial competitive advantages, including:
- longer operating histories;
- greater name recognition;
- more extensive customer bases; and
- cooperative relationships among themselves or with third parties to
enhance their products.
Increased competition is likely to result in price reductions, reduced
gross margins and loss of market share, any one of which could impair our
finances and business prospects. We cannot assure you that we will be able to
compete successfully against existing or potential competitors or that
competitive pressures will not materially impair our finances or business
prospects.
Intellectual Property
We are in the process of registering our trademark "eMail inChorus"
with the United States Patent and Trademark Office.
We regard the protection of our copyrights, service marks, trademarks,
trade dress and trade secrets as critical to our future success and rely on a
combination of copyright, trademark, service mark and trade secret laws and
contractual restrictions to establish and protect our proprietary rights in
products and services. For example, we license our software pursuant to
shrinkwrap or signed license agreements, which impose certain restrictions on
licensees' ability
31
<PAGE>
to utilize the software. We have entered into confidentiality and invention
assignment agreements with our employees and contractors, and nondisclosure
agreements with its suppliers and strategic partners in order to limit access to
and disclosure of its proprietary information. There can be no assurance that
these contractual arrangements or the other steps taken by us to protect our
intellectual property will prove sufficient to prevent misappropriation of our
technology or to deter independent third-party development of similar
technologies. While we intend to pursue registration of our trademarks and
service marks in the U.S. and internationally, effective trademark, service
mark, copyright and trade secret protection may not be available in every
country in which our services are made available online. We do not currently own
any patented technology registered with the United States Patent and Trademark
Office.
Policing unauthorized use of our products is difficult. The laws of other
countries may afford little or no effective protection of our technology. We
cannot assure you that the steps taken by us will prevent misappropriation of
our technology or that agreements entered into for that purpose will be
enforceable. In addition, litigation may be necessary in the future to enforce
our intellectual property rights, to protect our trade secrets, to determine the
validity and scope of the proprietary rights of others, or to defend against
claims of infringement or invalidity. Such litigation, whether successful or
unsuccessful, could have a material and adverse effect on our business, results
of operations or financial condition.
The success and competitiveness of our products depend in part upon our
ability to protect our current and future technology through a combination of
trademark, trade secret and copyright law. Because laws protecting certain
ownership rights in software are uncertain and still evolving, we cannot give
you any assurance about the future viability or value of any of our current
technology ownership rights.
We enter into intellectual property agreements with our employees and
consultants and confidentiality agreements with certain other parties, and
generally control access to and distribution of our software, documentation and
other proprietary information. Notwithstanding these precautions, it may be
possible for a third party to copy or otherwise obtain and use our software or
other proprietary information without authorization or to develop similar
software independently.
Although we do not believe that we infringe the proprietary rights of third
parties, there can be no assurance that third parties will not claim
infringement by us with respect to past, current or future technologies. We
expect that participants in our markets will be increasingly subject to
infringement claims as the number of services and competitors in our industry
segment grows. Any such claim, whether meritorious or not, could be time-
consuming, result in costly litigation, cause service upgrade delays or require
us to enter into royalty or licensing agreements. Such royalty or licensing
agreements might not be available on terms acceptable to us or at all. As a
result, any such claim could have a material adverse effect upon our business,
results of operations and financial condition.
32
<PAGE>
Governmental Regulation
Government regulation of communications and commerce on the Internet varies
greatly from country to country. The United States has recently enacted
legislation addressing such issues as the transmission of certain materials to
children, intellectual property protection, taxation, and the transmission of
sexually explicit material. There is some risk that the United States and other
countries will increase their regulation of the Internet in the future. As our
products are utilized solely in connection with the Internet, any new law or
regulation pertaining to the Internet, or the application or interpretation of
existing laws, could adversely impact our sales, increase our cost of doing
business or otherwise have a material and adverse effect on our business,
results of operations and financial condition.
Litigation
On April 9, 1999, the Securities and Exchange Commission issued a formal
Order Directing Private Investigation and Designating Officers to Take Testimony
in the Matter of Softlink, Inc. and Certain Other Companies.
The private order empowers the SEC enforcement staff to investigate whether
Softlink, its employees or associates:
- made misleading statements regarding projected financial revenues of
Softlink;
- purchased or sold securities of Softlink while in possession of material
non-public information; and
- offered or sold securities through the use or medium of prospectuses or
similar means while no registration statement was in effect.
The private order also authorizes the staff to investigate possible similar
violations by another unrelated, unaffiliated company. In connection with the
private order, the SEC has issued a subpoena duces tecum to which we have
responded. On January 7, 2000, the SEC issued subpoenas compelling the testimony
of Mr. Johnson Lee, a member of our board of directors and our Chairman, Mr.
William Yuan, a member of our board of directors and our Chief Executive Officer
and Mr. Edmund Leung, a member of our board of directors and our Chief Technical
Officer and Secretary. All of these individuals intend to comply with the
subpoenas and cooperate with the SEC in connection with this matter.
The SEC has not advised us that Softlink, its employees or affiliates are
presently or will be the subject of any enforcement action by the SEC. To the
best of our knowledge, there are presently no other material pending legal
proceedings to which we or any of our subsidiaries is a party or to which any of
our property is subject and, to the best of our knowledge, no such actions
against us are contemplated or threatened.
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<PAGE>
Employees
As of January 14, 2000, we had 24 employees, including 6 in product
development, 10 in sales, marketing and business development, 1 in customer
support and 7 in administration. We believe that our future success will depend
in part on our continued ability to attract, integrate, retain and motivate
highly qualified technical and managerial personnel, and upon the continued
service of our senior management and key technical personnel. The competition
for qualified personnel in our industry and geographical location is intense,
and there can be no assurance that we will be successful in attracting,
integrating, retaining and motivating a sufficient number of qualified personnel
to conduct its business in the future. From time to time, we also employ
independent contractors to support our research and development, marketing,
sales and support and administrative organizations. We have never had a work
stoppage, and no employees are represented under collective bargaining
agreements. We consider our relations with our employees to be good.
Facilities
Our executive offices, comprising a total of approximately 5,236 square
feet, are located in Santa Clara, California. We lease these facilities pursuant
to two lease agreements, one of which has a term of 24 months, expiring in
September 2001, and the other of which has a term of 18 months, expiring in
August 2000. We believe that our current facilities are suitable for our
current needs, however, we anticipate that we will require additional space in
the next six months.
We maintain substantially all of our computer systems at our Santa Clara
facility. Our operations are dependent in part on our ability to protect our
operating systems against physical damage from fire, floods, earthquakes, power
loss, telecommunications failures, break-ins or other similar events.
Furthermore, despite our implementation of network security measures, our
servers are also vulnerable to computer viruses, break-ins and similar
disruptive problems. To the extent commercially feasible, we have secured
casualty insurance to protect our properties. However, the occurrence of any of
these events could result in interruptions, delays or cessations in service to
our users which could have a material adverse effect on our business, results of
operations and financial condition.
34
<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table sets forth the names and positions of our directors and
executive officers as of January 14, 2000:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
William Yuan 45 President, Chief Executive Officer, Director and Member of
the Compensation Committee.
- -------------------------------------------------------------------------------------------------
Edmund T. Leung 32 Chief Financial Officer, Chief Technical Officer and
Director and Member of the Compensation Committee. Mr.
Leung also served as our Chief Financial Officer until
October 1999.
- -------------------------------------------------------------------------------------------------
Johnson C. Lee 33 Chairman, Director and Member of the Compensation Committee.
Mr. Lee served as our Chief Executive Officer until March 1,
1999.
- -------------------------------------------------------------------------------------------------
Ralph G. Coan 57 Chief Financial Officer and Vice President of Operations.
Mr. Coan has served as our Chief Financial Officer since
October 1999.
- -------------------------------------------------------------------------------------------------
</TABLE>
All members of our board of directors hold office until the next annual
meeting of the shareholders following their election or until their successors
have been elected and qualified. Executive officers are appointed by and serve
at the pleasure of the Board of Directors. The following sets forth biographical
information concerning our directors and executive officers for at least the
past five years:
William Yuan. Mr. Yuan was appointed to the Board of Directors and became
president and Chief Executive Officer of Softlink in March 1999. Mr. Yuan served
as the chief operating officer of Net USA, a provider of telecommunications and
technology softward solutions, from July 1998 to December 1998. He served as the
president of KPY Corp., a systems integration company, from March 1990 until
June 1998, and was also the president of Network Partners, a software company,
from November 1993 until December 1994. Mr. Yuan earned his bachelor's degree in
Computer Science in 1986 from the University of California at Santa Cruz and his
master's degree in Business Administration in 1989 from National University.
Edmund Leung. Mr. Leung co-founded Softlink in September 1995. He has
served as the Chief Financial Officer and as a member of the board of directors
since 1995. He became the Chief Technical Officer of Softlink in September 1998.
Mr. Leung has over nine years' experience in software development, and has
participated in the development of several commercial software products. Prior
to founding Softlink, he served as a software engineer at MediaMotion, Inc., a
multimedia software company, from November 1993 to August 1995, and worked at
Integrated Information Technology, Inc. from June 1990 to October 1993 as a
software engineer. At Integrated Information Technology, Inc., he developed
algorithms for the most time-critical portion of that company's "XtraDrive". Mr.
Leung received his bachelors'
35
<PAGE>
degree in Computer Science from the University of California at Berkeley in 1989
and his masters' degree in Computer Science from Stanford University in 1990.
Johnson C. Lee. Mr. Lee was a co-founder of Softlink and has served as a
member of the board of directors since September 1995 and as Chairman since
March 1999. From September 1995 to March 1999, he served as Softlink's Chief
Executive Officer. As Chairman, Mr. Lee is a full time employee of the Softlink.
Mr. Lee has over nine years of extensive experience in network multimedia
software development. Prior to founding Softlink, he worked as a software
engineer for MediaMotion, Inc. from November 1993 to August 1995. From June 1989
to November 1993 he worked as a software engineer for Oracle Corp. Mr. Lee
received his bachelor's degree in Computer Science from the University of
California at Berkeley in 1989.
Ralph G. Coan, Jr, Mr. Coan has served as our Chief Financial Officer and
Vice President of Operations since October 1999. Mr. Coan has over twenty-five
years of financial management and operations experience with high technology
companies. Prior to joining Softlink, he was Chief Financial Officer of Dryden
Engineering Company from January 1998 until to September 1999, where he was
instrumental in the negotiation and sale of the company to MPW Corporation.
Previously, he served as Chief Financial Officer of Fairchild Technologies from
February 1997 until December 1997. Previously, he served as Chief Operating
Officer and Chief Financial Officer of Optical Media International from April
1994 until December 1996, where he negotiated the sale of the company to
Microtest Corporation. His previous employment experience includes ten years at
Memorex Corporation and three years at Raychem Corporation. His contributions
include raising capital, renegotiation of debt repayment terms, joint venture
structuring, technology sales, mergers and acquisitions, growing company sales,
and IPO preparation. Mr. Coan earned his B.S. in Economics from the University
of Oregon in Eugene in June of 1965 and an MBA in Finance from the University of
Oregon in June of 1967.
Board Committees
The Compensation Committee of the board of directors determines the
salaries and incentive compensation of our officers and provides recommendations
for the salaries and incentive compensation of our other employees. The
compensation committee also administers our Stock Option Plan. The current
members of the Compensation Committee are Messrs. Yuan, Leung and Lee. Prior to
September 1999, we did not have a Compensation Committee or any other committee
of the board of directors that performed any similar functions. See
"Compensation Committee Interlocks and Insider Participation."
The board of directors does not currently have an audit or nominating
committee.
Compensation Committee Interlocks and Insider Participation
We did not have a Compensation Committee or other committee of the board of
directors performing similar functions during the fiscal year ended March 31,
1999. Messrs. William Yuan, Edmund Leung and Johnson L. Lee are each officers of
Softlink and, as members of the board of directors, participated in
deliberations of the board of directors relating to the
36
<PAGE>
compensation of our executive officers. The board of directors established a
Compensation Committee as of September 30, 1999.
Messrs. Yuan, Leung and Lee, current members of the Compensation Committee,
are also officers and directors of Softlink. However, no member of the
Compensation Committee serves as a member of the board of directors or
compensation committee of any entity that has one or more executive officers
serving as a member of our board of directors or Compensation Committee.
Compensation Summary
The following table sets forth the compensation awarded or paid to, or
earned by, our Chief Executive Officer and all our other executive officers who
earned in excess of $100,000 in salary and bonus, collectively the "Named
Executives" for services rendered to us during the year ended March 31, 1999.
Mr. William Yuan became our Chief Executive Officer in March 1999 and thus, the
table only reflects one month's salary earned by Mr. Yuan.
Summary Compensation Table
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
ANNUAL COMPENSATION LONG-TERM COMPENSATION
- -----------------------------------------------------------------------------------------------------------------
NAME SALARY ($) NUMBER OF SECURITIES
UNDERLYING OPTIONS (#)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
William Yuan, President 12,000 500,000
- -----------------------------------------------------------------------------------------------------------------
Johnson C. Lee 96,000 80,201
- -----------------------------------------------------------------------------------------------------------------
Edmund Leung 96,000 80,201
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
On March 1, 1999, Mr. Yuan was granted options to purchase up to 500,000
shares of our common stock. These options were rescinded by our Board of
Directors. Mr. Yuan was subsequently granted options to purchase 657,143 shares
of our common stock on September 1, 1999, of which options to purchase 260,000
shares will vest upon the achievement of certain business objectives which have
been described elsewhere in this prospectus.
Option Grants in Last Year
The following table sets forth information concerning options granted to
the Named Executives during the fiscal year ended March 31, 1999. Each option
listed in the table, represents the right to purchase one share of our common
stock. Options may terminate before their expiration dates if the optionee's
status as an employee or consultant is terminated or upon the optionee's death
or disability.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Name Number of Securities % of Total Options Exercise Price Fair Market Expira-tion Date
Underlying Options Granted to Employees Per Share ($/Sh) Value of Stock
Granted (#) on Grant Date
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
William Yuan 240,000 13% $1.20 $4.062 3/1/04
</TABLE>
37
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
130,000 7% $1.20 $4.062 3/1/04
- -----------------------------------------------------------------------------------------------------------------------------
130,000 7% $1.20 $4.062 3/1/04
- -----------------------------------------------------------------------------------------------------------------------------
Johnson C. Lee 80,201 7% $0.61 $ 0.61 5/6/03
- -----------------------------------------------------------------------------------------------------------------------------
Edmund Leung 80,201 7% $0.61 $ 0.61 5/6/03
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
During the year ended March 31, 1999, we granted officers, employees and
consultants options to purchase an aggregate of 1,834,324 shares of our common
stock. In September 1999, we rescinded options to purchase 958,000 of these
shares.
The options shown granted to Mr. Yuan were rescinded by our Board of
Directors in April 1999. The Board subsequently granted Mr. Yuan options to
purchase 657,143 shares of our common stock, of which options to purchase
260,000 shares will vest upon the achievement of certain business objectives
described elsewhere in this prospectus.
The options shown granted to Mr. Lee and Mr. Leung vest in 36 equal monthly
installments commencing on May 6, 1998.
Aggregate Option Exercises in Year Ended March 31, 1999 and Year-End Option
Values
The following table sets forth certain information with respect to the
Named Executives concerning exercisable and unexercisable stock options held by
them as of March 31, 1999. No Named Executives exercised options to purchase
shares of our common stock in the year ended March 31, 1999.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Name Number of Unexercised Options at Year End(#) Value of Unexercised In-the-Money
Options at Year End($)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Exercisable Unexercisable Exercisable Unexercisable
- --------------------------------------------------------------------------------------------------------------
William Yuan None None N/A N/A
- --------------------------------------------------------------------------------------------------------------
Johnson C. Lee 22,278 57,923 $59,861 $155,639
- --------------------------------------------------------------------------------------------------------------
Edmund Leung 22,278 57,923 $59,861 $155,639
- --------------------------------------------------------------------------------------------------------------
</TABLE>
The calculation of the value of unexercised in-the-money options at year
end is based on a per share fair market value of our common stock equal to
$2.687 at March 31, 1999, the closing price for our common stock on that date as
reported by various market makers for our common stock on the NASD Over-The-
Counter Market Bulletin Board.
Employment Agreements And Termination Of Employment And Change Of Control
Arrangements
38
<PAGE>
We have entered into executive employment agreements with each of Mr.
William W. Yuan, Mr. Johnson C. Lee, Mr. Edmund Leung and Mr. Ralph G. Coan.
Under the agreements, the executives receive paid vacation and are eligible to
participate in the health and other benefit programs which we may offer from
time to time. We may terminate either executive at any time with or without
"cause". The term "cause" is defined in the executive employment agreements as:
- the failure to follow directions of our board of directors which are
not inconsistent with the executive employment agreement;
- the gross neglect of the executive's responsibilities;
- any act by the executive of dishonesty, fraud, misrepresentation,
harassment or employment discrimination;
- the executive's indictment for a felony; and
- the executive's unauthorized dissemination of our confidential
information or trade secrets.
The executives are eligible to receive severance pay if they are terminated
without cause. The severance payment would be an amount equal to one year's
salary in one lump sum and must be paid no later than 30 days from the date of
termination. The executive employment agreements also contain covenants
regarding the assignment of inventions, the disclosure of our confidential
information, the solicitation of our employees or agents and the ability of the
executives to engage in competing activities.
William Yuan's executive employment agreement has a term of three years
commencing March 1, 1999 and automatically renews for successive periods of one
year unless terminated prior to such renewal. He serves as our President and
Chief Executive Officer and will perform duties consistent with these positions
and under the direction of the board of directors. He receives a monthly salary
of $15,000. His agreement specifically provides that our failure to pay him as
required by the agreement is to be deemed a breach of the agreement. If there is
a change in control of Softlink and Mr. Yuan is terminated without cause within
12 months of the change, he will be eligible for severance pay and all of his
outstanding options will immediately vest. "Change in control" is defined as a
new owner controlling more than 50% of our common stock.
Johnson C. Lee's agreement has a term of three years commencing August 31,
1999 and automatically renews for successive periods of one year unless
terminated prior to such renewal. He serves as our Chairman and will perform
duties consistent with the position and under the direction of the board of
directors. He receives a monthly salary of $10,000.
Edmund Leung's agreement has a term of three years commencing August 31,
1999 and automatically renews for successive periods of one year unless
terminated prior to such renewal. He serves as our Secretary and Chief Technical
Officer and will perform duties consistent with the positions and under the
direction of the board of directors. He receives a monthly salary of
39
<PAGE>
$10,000.
Ralph G. Coan's agreement has a term of two years commencing October 1999
and automatically renews for successive periods of one year unless terminated
prior to such renewal. He serves as our Chief Financial Officer and will perform
duties consistent with the position and under the direction of the board of
directors. He receives a monthly salary of $11,250. The agreement also provides
that Mr. Coan is to receive options to purchase up to two hundred thousand
(200,000) shares of our common stock pursuant to our stock option plan. The
right to exercise the option vests quarterly over four years and the exercise
price is $1.75, the fair market value of the stock on the date of grant.
Employee Benefit Plans
1999 Stock Option Plan. Our 1999 Stock Option Plan was adopted by the board
of directors as of September 3, 1999 and has not yet been ratified by our
stockholders. We plan to present the 1999 Stock Option Plan to our stockholders
for approval at the next annual meeting of stockholders, which we currently
anticipate will occur shortly after our fiscal year ending March 31, 2000. The
following description of the 1999 Stock Option Plan is a summary and qualified
in its entirety by the text of the Plan, which is filed as an exhibit to the
registration statement of which this prospectus is a part.
The purpose of the 1999 Stock Option Plan is to enhance our profitability
and stockholder value by enabling us to offer stock based incentives to
employees, directors and consultants. The plan authorizes the grant of options
to purchase shares of common stock to employees, directors and consultants of
Softlink and its affiliates. Under the plan, we may grant incentive stock
options within the meaning of Section 422 of the Internal Revenue Code of 1986
and non-qualified stock options. Incentive stock options may only be granted to
our employees.
The number of shares available for options under the 1999 Stock Option Plan
is 2,400,000. The Plan is administered by our board of directors. Subject to the
provisions of the plan, the board of directors has authority to determine the
employees, directors and consultants who are to be awarded options and the terms
of such awards, including the number of shares subject to such options, the fair
market value of the common stock subject to options, the exercise price per
share and other terms.
Incentive stock options must have an exercise price equal to at least 100%
of the fair market value of a share on the date of the award and generally
cannot have a duration of more than 10 years. If the grant is to a stockholder
holding more than 10% of our voting stock, the exercise price must be at least
110% of the fair market value on the date of grant. Terms and conditions of
awards are set forth in written agreements between Softlink and the respective
option holders. Awards under the Plan may not be made after the tenth
anniversary of the date of its adoption but awards granted before that date may
extend beyond that date.
If the employment of the holder of an incentive stock option is terminated
for any reason other than as a result of the holder's death or disability or for
"cause" as defined in the 1999
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<PAGE>
Stock Option Plan, the holder may exercise the option, to the extent exercisable
on the date of termination of employment, until the earlier of the option's
specified expiration date and 90 days after the date of termination. If an
option holder dies or becomes disabled, both incentive and non-qualified stock
options may generally be exercised, to the extent exercisable on the date of
death or disability, by the option holder or the option holder's survivors until
the earlier of the option's specified termination date and one year after the
date of death or disability.
As of January 14, 2000, no shares had been issued as the result of the
exercise of options previously granted under the 1999 Stock Option Plan;
however, 1,282,714 shares were subject to outstanding options and 1,117,286
shares were available for future grants. The exercise prices of the outstanding
options ranged from $1.45 to $2.00. The options under the Plan vest over varying
lengths of time pursuant to various option agreements that we have entered into
with the grantees of such options.
We have not registered the 1999 Stock Option Plan, or the shares subject to
issuance thereunder, pursuant to the Securities Act of 1933. Absent
registration, such shares, when issued upon exercise of options, would be
"restricted securities" as that term is defined in Rule 144 promulgated under
the Securities Act of 1933. We intend to file a registration statement under the
Securities Act of 1933 to register the 1999 Stock Option Plan and the shares
subject to issuance thereunder, shortly after we become a reporting company
under the Securities Exchange Act of 1934.
Optionees have no rights as stockholders with respect to shares subject to
option prior to the issuance of shares pursuant to the exercise thereof. Options
issued to employees under the Plan shall expire no later than ten years after
the date of grant. An option becomes exercisable at such time and for such
amounts as determined at the discretion of the board of directors at the time of
the grant of the option. An optionee may exercise a part of the option from the
date that part first becomes exercisable until the option expires. The purchase
price for shares to be issued to an employee upon his exercise of an option is
determined by the board of directors on the date the option is granted. The
purchase price is payable in full in cash, by promissory note, by net exercise
or by delivery of shares of our common stock when the option is exercised. The
plan provides for adjustment as to the number and kinds of shares covered by the
outstanding options and the option price therefor to give effect to any stock
dividend, stock split, stock combination or other reorganization of or by
Softlink.
Directors' Compensation
Directors who are also employees of Softlink receive no compensation for
serving on the board of directors. With respect to directors who are not
employees, we intend to reimburse such directors for all travel and other
expenses incurred in connection with attending meetings of the board of
directors and any committees of the board. Non-employee directors will also be
eligible to receive grants of non-qualified stock options under our 1999 Stock
Option Plan. We also intend to establish a non-employee director stock option
plan which will provide for initial option grants of a fixed number of shares of
our common stock to non-employee directors and successive annual option grants
to such non-employee directors covering an additional fixed number of shares, to
provide us with an effective way to recruit and retain qualified individuals to
serve as members of the board of directors.
Limitation of Liability and Indemnification
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Our Articles of Incorporation, with certain exceptions, eliminate any
personal liability of directors or officers to us or our stockholders for
monetary damages for the breach of such person's fiduciary duty, and, therefore,
an officer or director cannot be held liable for damages to us or our
stockholders for gross negligence or lack of due care in carrying out his or her
fiduciary duties as a director or officer except in certain specified instances.
We may also adopt by-laws which provide for indemnification to the full extent
permitted under law which includes all liability, damages and costs or expenses
arising from or in connection with service for, employment by, or other
affiliation with us to the maximum extent and under all circumstances permitted
by law.
There are presently no material pending legal proceeding to which a
director, officer and employee of ours is a party. There is no pending
litigation or proceeding involving one of our directors, officers, employees or
other agents as to which indemnification is being sought, and we are not aware
of any pending or threatened litigation that may result in claims for
indemnification by any director, officer, employee or other agent.
We have purchased directors' and officers' liability insurance to defend
and indemnify directors and officers who are subject to claims made against them
for their actions and omissions as directors and officers of Softlink. The
insurance policy provides standard directors' and officers' liability insurance
in the amount of $1,000,000 per claim.
We intend to enter into indemnification agreements with our directors and
officers. These agreements will provide, in general, that we shall indemnify and
hold harmless such directors and officers to the fullest extent permitted by law
against any judgments, fines, amounts paid in settlement, and expenses,
including attorneys' fees and disbursements, incurred in connection with, or in
any way arising out of, any claim, action or proceeding against, or affecting,
such directors and officers resulting from, relating to or in any way arising
out of, the service of such persons as our directors and officers.
To the extent provisions of our articles of incorporation provide for
indemnification of directors for liabilities arising under the Securities Act of
1933 or the Securities Exchange Act of 1934, those provisions are, in the
opinion of the Securities and Exchange Commission, against public policy and
therefore are unenforceable.
RELATED PARTY TRANSACTIONS
The following describes transactions to which we were or are a party and
in which any of our directors, officers, or significant stockholders, or members
of the immediate family of any of the foregoing persons, had or has a direct or
indirect material interest.
Unless otherwise indicated, information in this section regarding shares
of our common stock reflect the conversion ratio applied to shares of our common
stock at the time of the reorganization described below.
Stock Transactions by Softlink, Inc., a California Corporation
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<PAGE>
Issuances to Founders. Softlink, Inc., a California corporation ("Softlink
California") was formed in November 1995 by Johnson C. Lee and Edmund Leung. At
the time of formation, each of them was issued 1,011,802 shares of common stock
of Softlink California in consideration of their efforts in establishing that
company and developing its initial business strategy.
All the shares of Softlink California held by Johnson C. Lee and Edmund
Leung were converted into shares of our common stock in the reorganization with
Draco Technologies, Inc. described below.
Reorganization with Draco Technologies, Inc.
In March 1998, Softlink California entered into the reorganization with
Draco Technologies, Inc., a Nevada corporation incorporated in July 1997 . Under
the reorganization, the Softlink California stockholders received approximately
0.6745344 shares of common stock of Draco in exchange for each of the 4,259,449
outstanding shares of Softlink California common stock, and Softlink California
became a wholly-owned subsidiary of Draco. An aggregate of 2,873,145 shares was
issued to the former Softlink California stockholders in the reorganization with
Draco and the Softlink California stockholders owned approximately 52% of Draco
immediately after the reorganization. As part of the reorganization, all of the
executive officers and directors of Draco resigned and the executive officers
and directors of Softlink California became the executive officers and directors
of Draco, which then changed its name to Softlink, Inc.
Stock Option Grants
In May 1998, Johnson C. Lee and Edmund Leung each were issued options to
purchase 80,201 shares of Softlink common stock.
In March 1999, we issued William Yuan options to purchase up to 500,000
shares of our common stock, and in April 1999, each of Johnson C. Lee and Edmund
Leung were granted options to purchase up to 50,000 shares of our common stock.
All of these options were rescinded by our board of directors and are now of no
further force or effect.
In September 1999, we issued each of Johnson C. Lee and Edmund Leung
options to purchase 50,000 shares of Softlink common stock pursuant to our stock
option plan. These options had an exercise price of $2.00, which was more than
110% of the fair market value of our common stock on the date of grant. For each
of Mr. Lee and Mr. Leung, the right to purchase 6,250 shares vested on the date
of grant and the right to purchase the remainder vest in seven quarterly
installments.
In September 1999, we also issued William Yuan options to purchase up to
657,143 shares of our common stock. These options have an exercise price of
$1.75, the fair market value of our common stock on the date of grant. Mr.
Yuan's right to purchase 217,143 shares vested on the date of grant. Options to
purchase 180,000 of the shares vest in 18 monthly
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<PAGE>
installments. The right to purchase 130,000 shares vests upon the listing of
Softlink with Nasdaq. The right to purchase the remaining 130,000 shares vests
upon the recording by Softlink of $12 million in revenue.
In October 1999, we issued Ralph G. Coan options to purchase up to 200,000
shares of our common stock. These options have an exercise price of $1.45, the
fair market value of our common stock on the date of grant. The right to
exercise these options vests in 16 equal quarterly installments.
Offering Of Preferred Stock And Warrants
On August 17, 1999, we entered into a convertible preferred stock purchase
agreement with Deephaven Private Placement Trading Ltd. and Hornblower Investors
LLC pursuant to which Deephaven and Hornblower were each issued 150 shares of
convertible preferred stock and received warrants to purchase 120,000 shares of
our common stock. The preferred stock is convertible into a variable number of
shares of our common stock at the option of the preferred stockholders. In
addition, subject to certain exceptions the preferred stock automatically
converts into common stock on August 17, 2002. Holders of preferred stock are
entitled to receive cumulative dividends at the rate of seven percent per year,
payable in cash or shares of our common stock. We may redeem the preferred stock
at any time, with prior notice, if the conversion price falls below or equals
$1.75 per share. The warrants may be exercised at any time during the five-year
period following their issuance at an exercise price of $2.43756 per share. In
connection with this private placement of preferred stock and warrants, we
issued warrants to purchase 150,000 shares of common stock to Cardinal Capital
Management LLC. Cardinal Capital Management LLC, who also received a payment of
$180,000, acted as a finder in this financing. In January 2000, Hornblower
Investors LLC notified us of its intention to convert 23 shares of preferred
stock into 476,393 shares of common stock.
Other Agreements
As described above, we have entered into employment agreement with William
Yuan, our President and Chief Executive Officer, Johnson C. Lee, our Chairman,
and Edmund Leung, our Chief Financial Officer, Chief Technical Officer and Vice
President of Engineering.
During the year, we accepted a loan from Silicon Valley New Issues, a
shareholder of Softlink, in the amount of $165,000. We have since repaid this
loan during the quarter ended September 30, 1999.
In December 1999, the Company issued each of William Yuan, Johnson C. Lee
and Edmund Leung 1,250 shares of Common Stock of the Company as bonus
compensation for services rendered by the officers on behalf of the Company.
In December 1999, the Company issued 1,000 shares of Common Stock of the
Company to Ralph G. Coan as bonus compensation for services rendered by Mr. Coan
on behalf of the Company.
We believe that all of the transactions set forth above were made on terms
no less favorable to us than could have been obtained from unaffiliated third
parties. We intend that all future transactions, including loans, between us and
our officers, directors, principal stockholders and their affiliates will be
approved by a majority of the board of directors, including a majority of the
independent and disinterested directors, and will be on terms no less favorable
to us than could be obtained from unaffiliated third parties.
SELLING STOCKHOLDERS
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This prospectus relates to the offering by the selling stockholders for resale
of shares of our common stock acquired by them upon conversion of preferred
stock and exercise of warrants which the selling stockholders received in
private placements and other transactions. All of the shares of common stock
offered by this prospectus are being offered by the selling stockholders for
their own accounts.
The following table sets forth information with respect to the common stock
beneficially owned by the selling stockholders as of the date of this
prospectus, including shares obtainable upon the conversion of preferred stock
and exercise of warrants convertible or exercisable, respectively, within 60
days of such date. The selling stockholders provided us the information included
in the table below. To our knowledge, each of the selling stockholders has sole
voting and investment power over the shares of common stock listed in the table
below. Other than as set forth below, no selling stockholder, to our knowledge,
has had a material relationship with us during the last three years, other than
as an owner of our common stock or other securities.
We note that the certificate of designation governing the Series A
Preferred Stock and the closing warrants, as defined below, prohibit the holder
from converting shares of Series A Preferred Stock or exercising the closing
warrant to the extent that it would result in the holder owning more than 4.999%
of our outstanding shares of common stock.
The following table also indicates the shares of common stock issuable to
the selling stockholders upon conversion of the Series A Preferred Stock issued
to the selling stockholders at January 14, 2000 at an assumed conversion price
of $0.4969 and exercise of the closing warrants. On and after December 15, 1999,
the number of shares of common stock issuable upon conversion of the Series A
Preferred Stock is dependent in part upon the market price of the common stock
prior to conversion. For purposes of this prospectus, we have assumed that the
actual number of shares of common stock issuable in respect of such conversions
and the exercise of warrants issued to the selling stockholders and,
consequently, offered for sale under this prospectus is a total of 7,551,058
shares of common stock. Additionally, the following table assumes the sale of
all shares of common stock offered by this prospectus.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
BENEFICIAL OWNERSHIP OF COMMON BENEFICIAL OWNERSHIP OF COMMON
STOCK PRIOR TO THE OFFERING STOCK AFTER THE OFFERING
- --------------------------------------------------------------------------------------------------
SELLING NUMBER OF NUMBER OF NUMBER OF PERCENT OF CLASS (3)
STOCKHOLDERS SHARES SHARES TO BE SHARES(3)
SOLD UNDER
THIS PROSPECTUS
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Deephaven Private 3,700,529 3,700,529 -0- -0-
Placement Trading,
Ltd.
- --------------------------------------------------------------------------------------------------
Hornblower Investors 3,700,529 3,700,529 -0- -0-
LLC
- --------------------------------------------------------------------------------------------------
Cardinal Capital 150,000 150,000 -0- -0-
Management LLC
- --------------------------------------------------------------------------------------------------
</TABLE>
The selling stockholders will receive substantial proceeds from
converting their preferred stock and warrants and selling the resulting common
stock in this offering. We will
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<PAGE>
pay the offering expenses of the selling stockholders in this offering, other
than brokers' commissions. We currently estimate these expenses to be
$80,000.
To date, we have had a very limited trading volume in our common stock.
Sales of substantial amounts of common stock, including shares issued upon the
exercise of outstanding options and warrants, under Securities and Exchange
Commission Rule 144 or otherwise could adversely affect the prevailing market
price of our common stock and could impair our ability to raise capital at that
time through the sale of our securities.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of January 14, 2000 and as adjusted to
reflect the sale of the shares of common stock offered by this prospectus, the
ownership of our common stock by each of our directors and executive officers,
all of our executive officers and directors as a group, and all persons known by
us to beneficially own more than 5 % of our common stock.
Unless otherwise indicated in the footnotes to the table, the following
individuals have sole vesting and sole investment control with respect to the
shares they beneficially own and the address of each beneficial owner listed
below is c/o Softlink, Inc., 2041 Mission College Boulevard, Suite 259, Santa
Clara, California 95054.
The amount of shares owned by each shareholder in the following table was
calculated pursuant to Rule 13d-3(d) of the Exchange Act. Under Rule 13d-3(d),
shares not outstanding which are subject to options, warrants, rights or
conversion privileges exercisable within 60 days are deemed outstanding for the
purpose of calculating the number and percentage owned by each other person
listed. The total number of outstanding shares of common stock at January 14,
2000 is 9,048,545.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Name And Address Of Beneficial Owner Amount And Nature Of Percent Of Class Percent Of Class After
Beneficial Ownership Before the Offering the Offering
Executive Officers and Directors:
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Johnson C. Lee 1,097,666 12.0% 6.6%
- ----------------------------------------------------------------------------------------------------------------------------------
William Yuan 278,393 3.1% 1.6%
- ----------------------------------------------------------------------------------------------------------------------------------
Edmund T. Leung 1,097,666 12.0% 6.6%
- ----------------------------------------------------------------------------------------------------------------------------------
Ralph G. Coan 13,500 * *
- ----------------------------------------------------------------------------------------------------------------------------------
All directors and executive officers as 2,487,225 26.3% 14.6%
a group (three persons)
- ----------------------------------------------------------------------------------------------------------------------------------
Other 5% Stockholders:
- ----------------------------------------------------------------------------------------------------------------------------------
EPB Industries, Inc. 861,696 9.5% 5.2%
696 Orion Drive
New Braunfels, TX 78130
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Less than one percent
The number of shares shown for Mr. Leung and Mr. Lee each includes 67,762
shares of common stock subject to options that are exercisable within 60 days of
January 14, 2000. The number of shares shown for Mr. Yuan includes 277,143
shares of common stock subject to options that are exercisable within 60 days of
January 14, 2000. The number of shares shown for Mr. Coan includes 12,500
shares of common stock subject to options that are exercisable within 60 days of
January 14, 2000. The number of shares shown for all directors and executive
officers includes
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425,167 shares of common stock subject to options that are exercisable
within 60 days of January 14, 2000.
We have been informed that the principal of EPB Industries is Mr. Norvell
D. Berg.
After this offering, our executive officers and directors will, in the
aggregate, beneficially own approximately 14.6% of our outstanding common stock,
if all of the preferred stock and warrants subject to this prospectus are
converted to common stock. As a result these stockholders may, as a practical
matter, be able to influence all matters requiring stockholder approval
including the election of directors, merger or consolidation and the sale of all
or substantially all of our assets. This concentration of ownership may delay,
deter or prevent acts that would result in a change of control, which in turn
could reduce the market price of our common stock.
DESCRIPTION OF CAPITAL STOCK
The descriptions in this section and in other sections of this prospectus
of our securities and various provisions of our articles of incorporation and
our bylaws are descriptions of the material terms of our securities. We note,
that our articles of incorporation and bylaws have been filed with the SEC as
exhibits to this registration statement of which this prospectus forms a part.
Our authorized capital stock consists of 59,000,000 shares of common
stock, par value $.001 per share, and 1,000,000 shares of Preferred Stock, par
value $.001. As of January 14, 2000 9,048,545 shares of our common stock were
issued and outstanding and 3,407,430 shares of common stock were reserved for
issuance upon exercise of outstanding options and warrants. Only our common
stock is being registered under the Exchange Act pursuant to this Registration
Statement. As of January 14, 2000, 300 shares of our Preferred Stock were
issued and outstanding.
Description of Common Stock
The holders of our common stock are entitled to equal amounts per share of
any dividends and distributions declared by the board of directors. No holder of
any shares of our common stock has a pre-emptive right to subscribe for any of
our securities, nor are any common shares subject to redemption or convertible
into other of our securities. Upon liquidation, dissolution or winding up of
Softlink, and after payment of creditors and preferred stockholders, if any, the
assets will be divided pro-rata on a share-for-share basis among the holders of
the shares of common stock. All shares of common stock now outstanding are fully
paid, validly issued and non-assessable.
Each share of common stock is entitled to one vote with respect to the
election of any director or any other matter upon which shareholders are
required or permitted to vote. Holders of the common stock do not have
cumulative voting rights, so the holders of more than 50% of the combined shares
voting for the election of directors may elect all of the directors if they
choose to do so, and, in that event, the holders of the remaining shares will
not be able to elect any members to the board of directors.
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<PAGE>
Description of Preferred Stock
The board of directors is authorized, without further stockholder
approval, to issue from time to time up to an aggregate of 1,000,000 shares of
preferred stock. The preferred stock may be issued in one or more series and
the board of directors may fix its rights, preferences and designations.
On August 17, 1999, we issued 300 shares of Series A Convertible Preferred
Stock to two investors. The Series A Convertible Preferred Stock is convertible
at the option of the preferred stockholders into shares of our common stock
equal to the stated value of the Series A Convertible Preferred Stock, equal to
$10,000 per share plus all accrued but unpaid dividends, divided by the
conversion price. Until December 15, 1999, the conversion price was $2.51. After
December 15, 1999, the conversion price was the lesser of $2.51 or 95% of the
lowest three closing bid prices of our common stock on the Over-the-Counter
market during the 50 trading days preceding the conversion date, if the
conversion date had occurred on or after December 16, 1999 and before January
14, 2000. The conversion price is 90% of the lowest three closing bid prices of
our common stock on the Over-The-Counter market during the 50 trading days
preceding the conversion date, if the conversion date occurs on or after January
14, 2000 and before February 13, 2000, and 85% of the lowest three closing bid
prices of our common stock on the Over-The-Counter market during the 50 trading
days preceding the conversion date, if the conversion date occurs on or after
February 13, 2000. As of January 14, 2000, one investor provided us with notice
of the intent to convert 23 shares of preferred stock into 476,393 shares of
common stock. No holder of Series A Convertible Preferred Stock together with
any affiliate thereof may beneficially own in excess of 4.999% of the
outstanding shares of common stock following conversion. These restrictions may
only be waived by a holder of the Series A Preferred Stock after providing 61
days' notice to Softlink.
If the Series A Convertible Preferred Stock has not been converted or
redeemed by August 17, 2002, it will automatically convert into common stock on
that date, subject to exceptions. Upon the occurrence of certain events
specified in the securities purchase agreement, the holders of Series A
Convertible Preferred Stock may elect to have us redeem the Series A Convertible
Preferred Stock at a premium to their purchase price. These events include, the
following:
- failure by us to maintain the effectiveness of the registration
statement of which this prospectus is a part;
- failure of our common stock to be eligible for quotation on the Nasdaq
O-T-C Market, or any subsequent market on which our common stock may
be listed;
- failure by us to issue shares of our common stock upon conversion of
the Series A Convertible Preferred Stock;
- participation by us in a change of control transaction, agreement by
us to sell, in one or a series of related transactions all or
substantially all of our assets, or redemption by us of more than a de
minimus amount of securities;
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- failure by us to cure an event of default under the securities
purchase agreement within 60 days after receipt of notice of such
default; and
- failure by us to keep the specified number of shares of our common
stock reserved for issuance upon conversion of the Series A
Convertible Preferred Stock.
We may also redeem the Series A Convertible Preferred Stock at any time,
with prior notice, if the conversion price is equal to or falls below $1.75 per
share. Holders of Series A Convertible Preferred Stock are entitled to receive
cumulative dividends at the rate of seven percent per year, payable in cash or
shares of our common stock.
The foregoing has been a brief description of some of the terms of our
Series A Convertible Preferred Stock. For a more detailed description of the
rights of the holders of the Series A Convertible Preferred Stock, prospective
investors are directed to the actual certificate of designation that has been
filed as an exhibit to the registration statement of which this prospectus is a
part.
Other than the Series A Convertible Preferred Stock described above,
no shares of preferred stock are currently outstanding and we have no present
plans to issue any shares of preferred stock. The issuance of preferred stock,
while providing desirable flexibility in connection with possible acquisitions
and other corporate purposes, could have the effect of making it more difficult
for a third party to acquire, or of discouraging a third party from acquiring, a
majority of our outstanding voting stock.
Description of Warrants
In connection with the August 1999 issuance of our Series A Preferred
Stock, we also issued warrants to purchase shares of our common stock to the two
investors, Deephaven Private Placement Trading Ltd. and Hornblower Investors
LLC. These warrants may be exercised at any time during the five-year period
following their issuance at an exercise price of $2.43756 per share. The
warrants contain certain provisions that limit the number of shares of common
stock into which they are exercisable. Under these provisions, no holder of a
warrant may exercise his or her warrant if such exercise would result in the
holder beneficially owning more than 4.999% of our common stock.
In consideration for services provided by Cardinal Capital Management,
Inc. to us, we have issued to Cardinal Capital warrants to purchase up to
150,000 shares of our common stock. The warrants may be exercised at any time
during the five-year period following their issuance at an exercise price of
$2.25 per share. The number of shares issuable upon exercise of the warrants is
subject to adjustment upon the occurrence of stock splits, dividends or
reclassifications. The warrants carry registration rights which are described
below.
This has been a brief description of some of the terms of our outstanding
warrants. For a more detailed description of the rights of the holders of the
warrants, prospective investors are
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<PAGE>
directed to the actual forms of warrants that have been filed as exhibits to the
registration statement of which this prospectus is a part.
Registration Rights
Deephaven Private Placement Trading Ltd. and Hornblower Investors LLC
have registration rights with respect to the Series A Preferred Stock and
warrants they hold. Pursuant to a registration rights agreement, the common
stock underlying the Series A Preferred Stock and warrants issued to these
investors are to be registered as part of the registration statement of which
this prospectus forms a part. The registration rights agreement requires us to
file a registration statement with respect to the common stock within a
specified period of time, and to have the registration statement declared
effective within a specific period of time. We must also keep the registration
statement effective until all of the common stock offered has been sold. We are
responsible for the payment of all fees and costs associated with the
registration of the common stock, except that we are not responsible for fees
generated by the investors' counsel. We are required to indemnify and hold
harmless each investor and its officers, directors, agents and brokers against
any untrue statement of a material fact in a registration statement, prospectus
or amendment or supplement to a registration statement or prospectus. Specific
procedures for carrying out the indemnification are set forth in the
registration rights agreement.
Cardinal Capital Management, Inc. has registration rights with respect
to the warrants it holds. Pursuant to our agreement with Cardinal Capital, the
common stock underlying warrants issued to Cardinal Capital are to be registered
as part of the registration statement of which this prospectus forms a part.
Anti-Takeover Effects of Various Provisions of Nevada Law and Our Articles of
Incorporation and Bylaws
We are incorporated under the laws of the State of Nevada and are
therefore subject to various provisions of the Nevada Corporation laws, which
may have the effect of delaying or deterring a change in the control or
management of Softlink.
Nevada's "Combination with Interested Stockholders Statute," Nevada Revised
Statutes 78.411-78.444 applies to Nevada corporations having at least 200
stockholders. It prohibits a stockholder who owns at least 10% of the
outstanding voting shares of a company from entering into a merger, exchange,
sale of assets, liquidation or other similar, major transaction with that
company unless certain conditions are met.
A company to which the statute applies may not engage in such a
"combination" within three years after the interested stockholder acquired its
shares, unless the combination or the interested stockholder's acquisition of
shares was approved by the board of directors before the interested stockholder
acquired the shares. If this approval was not obtained, then after the three-
year period expires, the combination may be consummated if all the requirements
in the Articles of Incorporation are met and either
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<PAGE>
- the board of directors or the shareholders approve of the transaction
- the market value of cash and other consideration other than cash to be
received by holders of common shares and holders of any other class or series of
shares meets the minimum requirements set forth in Sections 78.411 through
78.443, inclusive, and prior to the consummation of the combination, except in
limited circumstances, the "interested stockholder" will not have become the
beneficial owner of additional voting shares of the corporation.
Nevada's "Control Share Acquisition Statute," Nevada Revised Statute
Section 78.378-78.379, generally prohibits a shareholder from attempting to
acquire the company from voting shares of the company's stock once the
shareholder owns a certain percentage of the company's stock unless the
shareholders first approve.This statute only applies to Nevada corporations with
at least 200 stockholders, including at least 100 record stockholders who are
Nevada residents, and which do business directly or indirectly in Nevada. While
we do not currently exceed these thresholds, we may well do so in the near
future. The Control Share Acquisition Statute also provides that the
stockholders who do not vote in favor of restoring voting rights to the Control
Shares may demand payment for the "fair value" of their shares (which is
generally equal to the highest price paid in the transaction subjecting the
stockholder to the statute).
Certain provisions of our Bylaws, which are summarized below, may affect
potential changes in control of Softlink. The board of directors believes that
these provisions are in the best interests of stockholders because they will
encourage a potential acquiror to negotiate with the board of directors, which
will be able to consider the interests of all stockholders in a change in
control situation. However, the cumulative effect of these terms maybe to make
it more difficult to acquire and exercise control of Softlink and to make
changes in management more difficult.
The Bylaws provide the number of directors of Softlink shall be established
by the board of directors, but shall be no less than one. Between stockholder
meetings, the Board may appoint new directors to fill vacancies or newly created
directorships. A director may be removed from office by the affirmative vote of
66-2/3% of the combined voting power of the then outstanding shares of stock
entitled to vote generally in the election of directors.
The Bylaws further provide that stockholder action may be taken at a
meeting of stockholders and may be effected by a consent in writing if such
consent is signed by the holders of the percentage of our shares required to
approve the action at a meeting. We are not aware of any proposed takeover
attempt or any proposed attempt to acquire a large block of our common stock.
The provisions described above may have the effect of delaying or deterring
a change in the control or management of Softlink.
Application of California GCL
Although we are incorporated in Nevada, our headquarters is in the State of
California. Section 2115 of the California GCL ("Section 2115") provides that
certain provisions of the
52
<PAGE>
California GCL shall be applicable to a corporation organized under the laws of
another state to the exclusion of the law of the state in which it is
incorporated, if the corporation meets certain tests regarding the business done
in California and the number of its California stockholders.
An entity such as us can be subject to Section 2115 if the average of the
property factor, payroll factor and sales factor deemed to be in California
during its latest full income year is more than 50 percent and more than one-
half of its outstanding voting securities are held of record by persons having
addresses in California. Section 2115 does not apply to corporations with
outstanding securities listed on the New York or American Stock Exchange, or
with outstanding securities designated as qualified for trading as a national
market security on NASDAQ, if such corporation has at least 800 beneficial
holders of its equity securities. Since the average of our property factor,
payroll factor and sales factor deemed to be in California during our latest
fiscal year was almost 100%, and over 60% of our outstanding voting securities
are held of record by persons having addresses in California, and our securities
do not currently qualify as a national market security on NASDAQ, we are subject
to Section 2115.
During the period that we are subject to Section 2115, the provisions of
the California GCL regarding the following matters are made applicable to the
exclusion of the law of the State of Nevada:
- general provisions and definitions;
- annual election of directors;
- removal of directors without cause;
- removal of directors by court proceedings;
- filling of director vacancies where less than a majority in office
were elected by the stockholders;
- directors' standard of care;
- liability of directors for unlawful distributions;
- indemnification of directors, officers and others;
- limitations on corporate distributions of cash or property;
- liability of a stockholder who receives an unlawful distribution;
- requirements for annual stockholders' meetings;
- stockholders' right to cumulate votes at any election of directors;
- supermajority vote requirements;
- limitations on sales of assets;
- limitations on mergers;
- reorganizations;
- dissenters' rights in connection with reorganizations;
- required records and reports;
- actions by the California Attorney General; and
- rights of inspection.
53
<PAGE>
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is U.S. Stock
Transfer, and its telephone number is (800) 835-8778.
SHARES ELIGIBLE FOR FUTURE SALE
On January 14, 2000, 9,048,545 shares of our common stock were outstanding,
and 1,282,714 shares of common stock were subject to options granted under our
1999 Stock Option Plan. In addition, as of January 14, 2000, 6,603,524 shares of
common stock were issuable upon conversion or exercise of the preferred stock
and warrants held by the selling stockholders. Of the outstanding shares,
4,400,705 shares of common stock are immediately eligible for sale in the public
market without restriction or further registration under the Securities Act of
1933, unless purchased by or issued to any "affiliate" of ours, as that term is
defined in Rule 144 promulgated under the Securities Act of 1933, described
below. All other outstanding shares of our common stock are "restricted
securities" as such term is defined under Rule 144, in that such shares were
issued in private transactions not involving a public offering and may not be
sold in the absence of registration other than in accordance with Rules 144,
144(k) or 701 promulgated under the Securities Act of 1933 or another exemption
from registration.
In general, under Rule 144 as currently in effect, a person, including an
affiliate, who has beneficially owned shares for at least one year is entitled
to sell, within any three-month period commencing 90 days after the date of this
prospectus, a number of shares that does not exceed the greater of one percent
of the then outstanding shares of our common stock or the average weekly trading
volume in our common stock during the four calendar weeks preceding the date on
which notice of such sale is filed, subject to various restrictions. In
addition, a person who is not deemed to have been an affiliate of ours at any
time during the 90 days preceding a sale and who has beneficially owned the
shares proposed to be sold for at least two years would be entitled to sell
those shares under Rule 144(k) without regard to the requirements described
above. To the extent that shares were acquired from an affiliate, such person's
holding period for the purpose of effecting a sale under Rule 144 commences on
the date of transfer from the affiliate. As of January 14, 2000, 3,526,849 of
our outstanding restricted shares were eligible for sale under Rule 144.
The shares of common stock issuable upon conversion of the preferred
stock and exercise of the warrants held by the selling stockholders are being
registered under the registration statement of which this prospectus is a part.
Upon effectiveness of that registration statement, such shares will also be
immediately eligible for sale in the public market. We also intend to file a
registration statement to register for resale the 2,400,000 shares of common
stock reserved for issuance under our 1999 stock option plan. That registration
statement will become effective immediately upon filing. Accordingly, shares
covered by that registration statement would become eligible for sale in the
public market subject to vesting restrictions. As of January 14, 2000, options
to purchase 389,075 shares of common stock were exercisable under the 1999
stock option plan.
54
<PAGE>
There has been very limited trading volume in our common stock to date.
Sales of substantial amounts of our common stock under Rule 144, this prospectus
or otherwise could adversely affect the prevailing market price of our common
stock and could impair our ability to raise capital through the future sale of
our securities.
PLAN OF DISTRIBUTION
The selling stockholders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The selling stockholders may use any one or more of the
following methods when selling shares:
- ordinary brokerage transactions and transactions in which the broker-
dealer solicits purchasers;
- block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
- purchases by a broker-dealer as principal and resale by the broker-
dealer for its account;
- an exchange distribution in accordance with the rules of the
applicable exchange;
- privately negotiated transactions;
- short sales;
- broker-dealer may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
- a combination of any such methods of sale; and
- any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.
The selling stockholders may also engage in puts and calls and other
transactions in securities of Softlink or derivatives of our securities and may
sell or deliver shares in connection with these trades. The selling
stockholders may pledge their shares to their brokers under the margin
provisions of customer agreements. If a selling stockholder defaults on a
margin loan, the broker may, from time to time, offer and sell the pledged
shares.
55
<PAGE>
Broker-dealers engaged by the selling stockholders may arrange for other
broker-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the selling stockholders, or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser in amounts to be
negotiated. The selling stockholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions
involved.
The selling stockholders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales. In such event,
any commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act.
We are required to pay all fees and expenses incident to the registration
of the shares, including fees and disbursements of counsel to the selling
stockholders. We have agreed to indemnify the selling stockholders against
certain losses, claims, damages and liabilities, including liabilities under the
Securities Act.
LEGAL MATTERS
The validity of the issuance of the common stock offered hereby will be
passed upon for us by Silicon Valley Law Group, San Jose, California.
EXPERTS
The financial statements included in the registration statement on Form
SB-2 have been audited by BDO Seidman, LLP, independent certified public
accountants, to the extent and for the periods set forth in their report, which
contains an explanatory paragraph regarding our ability to continue as a going
concern, appearing elsewhere herein and in the registration statement, and are
included in reliance upon such report given upon the authority of said firm as
experts in auditing and accounting.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on form SB-2. This prospectus, which is a part of the registration
statement, does not contain all of the information included in the registration
statement. Some 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, agreement or other document of Softlink, such
references are not necessarily complete and you should refer to the exhibits
attached to the registration statement for copies of the actual contract,
agreement or other document. You may review a copy of the registration
statement, including exhibits, at the Securities and Exchange Commission's
public reference room at Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 or Seven World Trade Center, 13/th/ Floor, New York, New York 10048
or Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661.
56
<PAGE>
The public may obtain information on the operation of the public
reference room by calling the Securities and Exchange Commission at 1-800-SEC-
0330.
We will also file annual, quarterly and current reports, proxy statements
and other information with the Securities and Exchange Commission. You may read
and copy any reports, statements or other information on file at the public
reference rooms. You can also request copies of these documents, for a copying
fee, by writing to the Securities and Exchange Commission.
Our Securities and Exchange Commission filings and the registration
statement can also be reviewed by accessing the Securities and Exchange
Commission's Internet site at http://www.sec.gov, which contains reports, proxy
------------------
and information statements and other information regarding registrants that file
electronically with the Securities and Exchange Commission.
You should rely only on the information provided in this prospectus or
any prospectus supplement. Neither we nor the selling stockholders have
authorized anyone else to provide you with different information. Neither we
nor the selling stockholders are making an offer to sell, nor soliciting an
offer to buy, these securities in any jurisdiction where that would not be
permitted or legal. Neither the delivery of this prospectus nor any sales made
hereunder after the date of this prospectus shall create an implication that the
information contained herein or our affairs have not changed since the date
hereof.
57
<PAGE>
Report of Independent Certified Public Accountants F-2
Consolidated Financial Statements
Consolidated balance sheets F-3 - F-4
Consolidated statements of operations F-5
Consolidated statements of stockholders' equity (deficiency) F-6
Consolidated statements of cash flows F-7
Notes to consolidated financial statements F-8 - F-26
<PAGE>
Report of Independent Certified Public Accountants
The Board of Directors and Stockholders of
Softlink, Inc.
We have audited the accompanying consolidated balance sheet of Softlink, Inc.
and subsidiary as of March 31, 1999, and the related consolidated statements of
operations, stockholders' equity (deficiency), and cash flows for each of the
two years in the period ended March 31, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audits to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Softlink, Inc. and subsidiary as of March 31, 1999, and the results of their
consolidated operations and cash flows for each of the two years in the period
ended March 31, 1999, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to
the financial statements, the Company has an accumulated deficit of $1,646,500
as of March 31, 1999 and incurred net losses of $1,015,900 and $620,800 for the
years ended March 31, 1999 and 1998, respectively. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans regarding those matters are also described in Note 1. The
consolidated financial statements do not include any adjustments relating to the
recoverability and classification of reported asset amounts or the amount and
classification of liabilities that might result from the outcome of this
uncertainty.
/S/ BDO Seidman, LLP
San Jose, California
July 15, 1999
F-2
<PAGE>
Softlink, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
==================================================================================================
September 30, March 31,
1999 1999
- ---------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents (Note 12) $ 1,785,500 $ 307,500
Notes receivable (Note 12) 105,000 -
Accounts receivable, net of allowance for doubtful accounts 947,700 430,600
of $19,500 and $0, respectively (Notes 5 and 9)
Inventories 85,100 39,600
Prepaid expenses and other current assets 177,100 83,500
- ---------------------------------------------------------------------------------------------------
Total Current Assets 3,100,400 861,200
Property and Equipment, net (Note 2) 121,400 54,300
Deposits and Other Assets (Note 3) 74,800 52,000
- ---------------------------------------------------------------------------------------------------
$ 3,296,600 $ 967,500
===================================================================================================
</TABLE>
F-3
<PAGE>
Softlink, Inc.
Consolidated Balance Sheets
<TABLE>
===================================================================================================
September 30, March 31,
1999 1999
- ---------------------------------------------------------------------------------------------------
(Unaudited)
Liabilities and Stockholders' Equity
<S> <C> <C>
Current Liabilities:
Accounts payable $ 72,400 $ 79,700
Accrued liabilities 206,900 6,700
Deferred revenue 72,900 -
Obligations under capital lease 6,500 -
- ---------------------------------------------------------------------------------------------------
Total Current Liabilities 358,700 86,400
- ---------------------------------------------------------------------------------------------------
Commitments, Contingencies and Subsequent Events (Notes 6, 8,
11, and 12)
Stockholders' Equity (Notes 4, 6, 8 and 12):
Convertible preferred stock $0.001 par value; 1,000,000 3,026,300 -
shares authorized; 300 shares issued and outstanding
Common stock, $0.001 par value; 59,000,000 and 50,000,000 9,400 9,400
shares authorized; 9,364,130 and 9,363,130 shares issued and
outstanding, respectively
Additional paid-in capital 6,269,200 5,634,700
Accumulated deficit (3,610,400) (1,646,500)
--------------------------------------------------------------------------------------------------
5,694,500 3,997,600
Less: Treasury stock at cost (1,454,356 and 1,593,750 shares,
respectively) (2,738,800) (3,116,500)
Less: Notes receivable (17,800) -
- ---------------------------------------------------------------------------------------------------
Total Stockholders' Equity 2,937,900 881,100
- ---------------------------------------------------------------------------------------------------
$ 3,296,600 $ 967,500
===================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
Softlink, Inc.
Consolidated Statements of Operations
================================================================================
<TABLE>
<CAPTION>
Six Months Ended September 30, Years Ended March 31,
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net Sales, including license fee income (Notes 5 and 9) $ 660,900 $ 335,500 $ 731,100 $ 23,500
Cost of Sales 176,000 35,100 39,200 12,900
- ----------------------------------------------------------------------------------------------------------------------------------
Gross Profit 484,900 300,400 691,900 10,600
- ----------------------------------------------------------------------------------------------------------------------------------
Operating Expenses (Notes 6 and 8):
Research and development 359,500 62,300 286,300 30,200
Sales and marketing 636,100 350,100 688,600 123,800
General and administrative 993,600 160,200 845,100 476,700
- ----------------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 1,989,200 572,600 1,820,000 630,700
- ----------------------------------------------------------------------------------------------------------------------------------
Loss From Operations (1,504,300) (272,200) (1,128,100) (620,100)
- ----------------------------------------------------------------------------------------------------------------------------------
Other Income (Expense):
Interest income 18,400 3,500 115,500 100
Interest expense (10,400) (2,500) (2,500) -
Other (7,200) - - -
- ----------------------------------------------------------------------------------------------------------------------------------
Total Other Income (Expense) 800 1,000 113,000 100
- ----------------------------------------------------------------------------------------------------------------------------------
Loss Before Provision for Income Taxes (1,503,500) (271,200) (1,015,100) (620,000)
Provision for Income Taxes (Note 7) 30,900 800 800 800
- ----------------------------------------------------------------------------------------------------------------------------------
Net Loss $(1,534,400) $ (272,000) $(1,015,900) $ (620,800)
Preferred Stock dividends 429,500 - - -
- ----------------------------------------------------------------------------------------------------------------------------------
Net loss available to common shareholders $(1,963,900) $ (272,000) $(1,015,900) $ (620,800)
==================================================================================================================================
Basic and diluted loss per share $ (0.25) $ (0.04) $ (0.14) $ (0.26)
==================================================================================================================================
Basic and diluted weighted-average common shares outstanding 7,856,700 6,062,900 7,132,600 2,377,200
==================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
Softlink, Inc.
Consolidated Statements of Stockholders' Equity (Deficiency)
(Notes 1, 4, 8 and 12)
================================================================================
<TABLE>
<CAPTION>
Additional
Preferred stock Common Stock Paid-in Accumulated
------------------ ------------------
Shares Amount Shares Amount Capital Deficit
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances, April 1, 1997 - $ - 2,192,236 $ 2,200 $ 30,300 $ (9,800)
Issuance of common stock for services - - 453,621 500 335,700 -
Issuance of common stock for cash - - 222,327 200 164,600 -
Stock option grants - - - - 30,000 -
Exercise of stock options - - 4,961 - 3,700 -
Issuance of common stock in connection with reverse
merger - - 2,627,280 2,600 547,400 -
Net loss - - - - - (620,800)
- ----------------------------------------------------------------------------------------------------------------------------
Balances, March 31, 1998 - - 5,500,425 5,500 1,111,700 (630,600)
Issuance of common stock for cash and notes receivable - - 6,512,835 6,500 5,033,400 -
Stock option grants - - - - 343,000 -
Repurchase and retirement of common stock - - (2,650,130) (2,600) (971,300) -
Treasury stock acquired, at cost - - - - - -
Issuance of treasury stock for retirement of debt - - - - 22,600 -
Issuance of treasury stock as bonus to existing
shareholders - - - - 95,300 -
Payments received on notes receivable - - - - - -
Net loss - - - - - (1,015,900)
- ----------------------------------------------------------------------------------------------------------------------------
Balances, March 31, 1999 - - 9,363,130 9,400 5,634,700 (1,646,500)
Stock option grants (Unaudited) - - - - 421,300 -
Issuance of treasury stock for cash and notes
receivable (Unaudited) - - - - 700 -
Issuance of treasury stock (Unaudited) - - - - 19,400 -
Issuance of common stock (Unaudited) - - 1,000 - 1,200 -
Issuance of convertible preferred stock, net of
offering costs of $211,300 (Unaudited) 300 3,000,000 - - (211,300) -
Deemed dividend on issuance of warrants in connection
with preferred stock offering (Unaudited) - - - - 403,200 (403,200)
Dividend in arrears - convertible preferred stock
(Unaudited) - 26,300 - - - (26,300)
Net loss (Unaudited) - - - - - (1,534,400)
- ----------------------------------------------------------------------------------------------------------------------------
Balances, September 30, 1999 (Unaudited) 300 $3,026,300 9,364,130 $ 9,400 $6,269,200 $(3,610,400)
============================================================================================================================
<CAPTION>
Treasury Stock Notes
--------------------------
Shares Amount Receivable Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balances, April 1, 1997 - $ - $ - $ 22,700
Issuance of common stock for services - - - 336,200
Issuance of common stock for cash - - - 164,800
Stock option grants - - - 30,000
Exercise of stock options - - - 3,700
Issuance of common stock in connection with reverse
merger - - (550,000) -
Net loss - - - (620,800)
- -------------------------------------------------------------------------------------------------------------------
Balances, March 31, 1998 - - (550,000) (63,400)
Issuance of common stock for cash and notes receivable - - (4,976,300) 63,600
Stock option grants - - - 343,000
Repurchase and retirement of common stock - - 973,900 -
Treasury stock acquired, at cost (1,771,209) (3,186,500) 3,186,500 -
Issuance of treasury stock for retirement of debt 21,209 57,000 - 79,600
Issuance of treasury stock as bonus to existing
shareholders 156,250 13,000 - 108,300
Payments received on notes receivable - - 1,365,900 1,365,900
Net loss - - - (1,015,900)
- -------------------------------------------------------------------------------------------------------------------
Balances, March 31, 1999 (1,593,750) (3,116,500) - 881,100
Stock option grants (Unaudited) - - - 421,300
Issuance of treasury stock for cash and notes
receivable (Unaudited) 72,727 197,100 (17,800) 180,000
Issuance of treasury stock (Unaudited) 66,667 180,600 - 200,000
Issuance of common stock (Unaudited) - - - 1,200
Issuance of convertible preferred stock and related
warrants, net of offering costs of $211,300
(Unaudited) - - - 2,788,700
Dividend in arrears - convertible preferred stock
(Unaudited) - - - -
Net loss (Unaudited) - - - (1,534,400)
- -------------------------------------------------------------------------------------------------------------------
Balances, September 30, 1999 (Unaudited) (1,454,356) $(2,738,800) $ (17,800) $ 2,937,900
===================================================================================================================
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
Softlink, Inc.
Consolidated Statements of Cash Flows
(Note 10)
<TABLE>
<CAPTION>
=================================================================================================================================
Six Months Ended Years Ended March 31,
September 30,
1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss $ (1,534,400) $ (272,000) $ (1,015,900) $ (620,800)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 11,700 2,900 7,100 3,800
Allowance for doubtful accounts 19,500 - - -
Compensation relating to stock options issued 421,300 12,800 343,000 30,000
Compensation relating to stock issued for services - - - 336,200
Compensation relating to issuance of treasury stock - - 108,300 -
Accrued interest on notes receivable (5,000) - - -
Changes in current operating assets and liabilities:
Accounts receivable (536,600) (137,000) (423,700) (6,900)
Inventories (45,500) (19,800) (25,600) (14,000)
Prepaid expenses and other current assets (93,600) - (82,700) (800)
Accounts payable (7,300) 42,200 77,200 600
Accrued expenses 200,200 800 6,700 -
Deferred revenue 72,900 - - -
- ---------------------------------------------------------------------------------------------------------------------------------
Net Cash Used In Operating Activities (1,496,800) (370,100) (1,005,600) (271,900)
- ---------------------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Payments to acquire property and equipment (71,800) (18,700) (49,800) (4,200)
Deposits and other assets (22,800) (2,800) (52,000) -
Payments for notes receivable (130,000) - - -
Proceeds from repayment of notes receivable 30,000 - - -
- ---------------------------------------------------------------------------------------------------------------------------------
Net Cash Used In Investing Activities (194,600) (21,500) (101,800) (4,200)
- ---------------------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Proceeds from note payable to shareholder 218,300 - - 50,000
Principal payments on notes payable to shareholder (218,300) (50,000) (50,000) -
Proceeds from borrowing on notes payable 120,000 100,000 - 100,000
Principal payments on notes payable (120,000) (11,500) (16,500) (3,900)
Principal payments on capital lease obligations (500) - - -
Proceeds from issuance of convertible preferred stock 2,788,700 - - -
Proceeds from issuance of common stock 1,200 410,000 63,600 164,800
Proceeds from issuance of treasury stock 380,000 - - -
Proceeds from exercise of stock options - - - 3,700
Payments received on notes receivable - - 1,365,900 -
- ---------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided By Financing Activities 3,169,400 448,500 1,363,000 314,600
- ---------------------------------------------------------------------------------------------------------------------------------
Net Increase in Cash and Cash Equivalents 1,478,000 56,900 255,600 38,500
Cash and Cash Equivalents, beginning of period 307,500 51,900 51,900 13,400
- ---------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, end of period $ 1,785,500 $ 108,800 $ 307,500 $ 51,900
=================================================================================================================================
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE>
Softlink, Inc.
Notes to Consolidated Financial Statements
(Information with respect to September 30, 1999 and 1998 is unaudited)
================================================================================
1. Summary of The Company
Significant
Accounting Softlink, Inc. (formerly Draco Technologies, Inc., a
Policies and publicly traded shell corporation) (the Company), a Nevada
Basis of Corporation, was incorporated on July 24, 1997.
Presentation
On March 31, 1998 the Company completed the acquisition of
100% of the outstanding common stock of Softlink, Inc., a
California corporation, (Softlink CA) in exchange for
2,873,145 shares of the Company's $.001 par value common
stock. For accounting purposes, the acquisition has been
treated as the acquisition of the Company by Softlink CA
with Softlink CA as the acquirer (reverse acquisition). The
historical financial statements prior to March 31, 1998 are
those of Softlink CA. Since the Company prior to the reverse
acquisition was a public shell corporation with no
significant operations, pro-forma information giving effect
to the acquisition is not presented. All shares and per
share data prior to the acquisition have been restated to
reflect the stock issuance as a recapitalization of Softlink
CA. The 2,627,280 shares held by the shareholders of the
Company prior to the acquisition have been recognized as if
they were issued in connection with the acquisition of the
Company by Softlink CA. On October 21, 1998, the Company's
stock became publicly traded.
Softlink CA was incorporated on November 8, 1995. Softlink
CA's principal activities consist of developing e-mail
enhancement software, and licensing and marketing its
products through wholesalers and end-users located primarily
in North America.
Basis of Presentation
The accompanying balance sheet as of September 30, 1999 and
the statements of operations and cash flows for each of the
six month periods ended September 30, 1999 and 1998 have not
been audited. However, in the opinion of management, they
include all normal recurring adjustments necessary for a
fair presentation of the financial position and the results
of operations for the periods presented. The results of
operations for the six months ended September 30, 1999 are
not necessarily indicative of results to be expected for any
future period.
F-8
<PAGE>
Softlink, Inc.
Notes to Consolidated Financial Statements
(Information with respect to September 30, 1999 and 1998 is unaudited)
================================================================================
The accompanying financial statements have been prepared on
a going concern basis, which contemplates the realization of
assets and the satisfaction of liabilities in the normal
course of business. As shown in the financial statements,
the Company had an accumulated deficit of $1,646,500 as of
March 31, 1999 and incurred losses of $1,015,900 and
$620,800 for the years ended March 31, 1999 and 1998,
respectively.
These conditions give rise to substantial doubt about the
Company's ability to continue as a going concern. The
consolidated financial statements do not include any
adjustments relating to the recoverability and
classification of reported asset amounts or the amount and
classification of liabilities that might be necessary should
the Company be unable to continue as a going concern. The
Company's continuation as a going concern is dependent upon
its ability to obtain additional financing or refinancing as
may be required and ultimately to attain profitability. The
Company is actively marketing its existing and new products,
which it believes will ultimately lead to profitable
operations. Management is also pursuing additional financing
and has obtained additional financing of $3,000,000 through
the issuance of 300 shares of convertible preferred stock
(Note 12).
Consolidation
The accompanying consolidated financial statements include
the accounts of Softlink, Inc. and its wholly-owned
subsidiary, Softlink CA. All intercompany accounts and
transactions have been eliminated in the consolidated
financial statements.
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
consolidated financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
F-9
<PAGE>
Softlink, Inc.
Notes to Consolidated Financial Statements
(Information with respect to September 30, 1999 and 1998 is unaudited)
================================================================================
Cash and Cash Equivalents
The Company considers all highly liquid investments with
original maturities of three months or less to be cash
equivalents. The Company places its cash and cash
equivalents with a high quality institution. At times, such
funds may be in excess of the Federal Deposit Insurance
Company limit of $100,000.
Accounts Receivable and Allowance for Doubtful Accounts
The Company grants credit to its customers after undertaking
an investigation of credit risk for all significant amounts
and generally does not require cash collateral. When
necessary, an allowance for doubtful accounts is provided
for estimated credit losses at a level deemed appropriate to
adequately provide for known and inherent risks related to
such amounts. The allowance is based on reviews of loss,
adjustments history, current economic conditions and other
factors that deserve recognition in estimating potential
losses. While management uses the best information available
in making its determination, the ultimate recovery of
recorded accounts receivable is also dependent upon future
economic and other conditions that may be beyond
management's control.
Inventories
Inventories, which consist principally of software and
packaging, are stated at the lower of cost (average) or
market (net realizable value).
Property and Equipment
Property and equipment are stated at cost, net of
accumulated depreciation and amortization. Depreciation is
provided on the straight-line method over the estimated
useful lives of the assets, generally ranging from two to
five years.
Long-Lived Assets
The Company periodically reviews its long-lived assets for
impairment based upon the estimated future cash flows
expected to result from the use
F-10
<PAGE>
Softlink, Inc.
Notes to Consolidated Financial Statements
(Information with respect to September 30, 1999 and 1998 is unaudited)
================================================================================
of the asset and its eventual disposition. When events or
changes in circumstances indicate that the carrying amount
of an asset may not be recoverable, the Company writes the
asset down to its estimated then-current fair value.
Revenue Recognition
Sales are recognized at the time of shipment provided no
significant obligations remain, no uncertainty exists about
customer acceptance and collectibility is probable. License
fees are earned according to the terms of the license
agreement with the licensee (Note 5). Deferred revenue,
included in accrued liabilities on the balance sheet,
represent the unearned portion of amounts billed to
customers.
Research and Development Costs
Costs incurred in the research and development of new
software products are expensed as incurred until
technological feasibility has been established. To date, the
establishment of technological feasibility of the Company's
products and general release substantially coincide. As a
result, the Company has not capitalized any software
development costs since such costs qualifying for
capitalization have not been significant.
Advertising Costs
The cost of advertising is expensed as incurred, except for
direct response advertising, which is capitalized and
amortized over its expected period of future benefits.
Direct response advertising consists primarily of television
infomercials which are broadcast to elicit sales to
customers who respond specifically to the advertisement. The
capitalized costs of the advertising are amortized over the
one year period that the infomercial is broadcasted. As of
March 31, 1999, $76,100 of these advertising costs,
pertaining to infomercial production, are included in
prepaid expenses and other current assets. As of September
30, 1999, $109,600 of these costs were included in prepaid
expenses (unaudited). Advertising expense for the fiscal
years ended March 31, 1999 and 1998 aggregated $23,900 and
$1,700, respectively. Advertising expense for the six months
ended September 30, 1999 and 1998 aggregated $155,300 and
$2,500, respectively (unaudited).
F-11
<PAGE>
Softlink, Inc.
Notes to Consolidated Financial Statements
(Information with respect to September 30, 1999 and 1998 is unaudited)
================================================================================
Income Taxes
The Company reports income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income
Taxes. Deferred income taxes are recognized for the tax consequences
of temporary differences by applying the tax rate expected to be in
effect in future years to differences between the financial statements
carrying amounts and the tax basis of existing assets and liabilities.
Tax credits are recorded as a reduction of the provision for federal
income taxes in the year realized. A valuation allowance is
established for deferred income tax assets when realization is not
deemed more likely than not.
Adoption of New Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) No. 98-1, Software for Internal
Use, which provides guidance on accounting for the cost of computer
software developed or obtained for internal use. SOP No. 98-1 is
effective for financial statements for fiscal years beginning after
December 15, 1998. The adoption of SOP No. 98-1 did not have a
material impact on its consolidated financial statements.
In June 1998, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 133, Accounting for Derivative Instruments and
Hedging Activities. SFAS No. 133 requires companies to recognize all
derivatives contracts as either assets or liabilities in 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 assets 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 and loss is recognized in income in the period of
change. SFAS No. 133, as amended, is effective for all fiscal quarters
of fiscal years beginning after June 15, 2000.
F-12
<PAGE>
Softlink, Inc.
Notes to Consolidated Financial Statements
(Information with respect to September 30, 1999 and 1998 is unaudited)
================================================================================
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 standard
to affect its financial statements.
On October 27, 1997, the American Institute of Certified Public
Accountants issued Statement of Position (SOP) No. 97-2, Software
Revenue Recognition, which provides guidance on when revenue should be
recognized and in what amounts for licensing, selling, leasing, or
otherwise marketing computer software. If the software arrangement
does not require significant production, modification, or
customization of software, revenue should be recognized when all of
the following criteria are met: (1) persuasive evidence of an
arrangement exists, (2) delivery has occurred, (3) the vendor's fee is
fixed or determinable, and (4) collectibility is probable. The
adoption of SOP No. 97-2 did not have a material impact on the
Company's financial statements.
Fair Values of Financial Instruments
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents:
The carrying amount reported in the consolidated balance sheet
for cash and cash equivalents approximates fair value for cash
and cash equivalents.
Loan receivable from Actanet, Inc.:
The fair value of the loan receivable from Actanet, Inc. is not
determinable because of the uncertain period of time to maturity.
Short-term debt:
The fair value of short-term debt approximates cost because of
the short period of time to maturity.
F-13
<PAGE>
Softlink, Inc.
Notes to Consolidated Financial Statements
(Information with respect to September 30, 1999 and 1998 is unaudited)
================================================================================
Earnings Per Share
During the year ended March 31, 1998, the Company adopted the
provisions of SFAS No. 128, Earnings Per Share. SFAS No. 128
provides for the calculation of basic and diluted earnings per
share. Basic earnings per share includes no dilution and is
computed by dividing income 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 the
earnings of an entity. For the years ended March 31, 1999 and
1998, options to purchase 2,315,026 and 485,663 shares of
common stock, respectively, were excluded from the computation
of diluted earnings per share since their effect would be
antidilutive. For the six months ended September 31, 1999 and
1998, options to purchase 2,579,493 and 1,565,026 shares of
common stock, respectively, were excluded from the computation
of diluted earnings per share since their effect would be
anti-dilutive (unaudited).
2. Property and A summary of property and equipment follows:
Equipment
September 30, March 31,
1999 1999
-------------------------------------------------------------
(Unaudited)
Furniture and fixtures $ 57,100 $ 38,900
Equipment 77,500 25,900
Software 12,400 3,400
-------------------------------------------------------------
147,000 68,200
Less accumulated depreciation 25,600 13,900
-------------------------------------------------------------
$ 121,400 $ 54,300
=============================================================
3. Deposits and Included in deposits and other assets is a $49,200 loan
other Assets receivable from Actanet Inc., an unrelated company. The loan
is non-interest bearing and is payable when Actanet Inc.
raises $250,000 of debt or equity funding from investors.
4. Short-Term In March 1998, the Company borrowed $50,000 from a
Borrowings stockholder under the terms of a promissory note bearing a
12% interest rate. In August 1998, the note payable and
accrued interest were repaid in full.
F-14
<PAGE>
Softlink, Inc.
Notes to Consolidated Financial Statements
(Information with respect to September 30, 1999 and 1998 is unaudited)
================================================================================
In December 1997, the Company received a $100,000 deposit
from Compressant, Inc., a company who had entered into a
merger agreement with the Company. In April 1998, the
Company cancelled the merger agreement with Compressant,
Inc. and executed an 8% promissory note payable in December
1998. In July 1998, the promissory note was assigned to
Harris & Hull, who subsequently filed a complaint against
the Company in January 1999 for breach of contract on the
promissory note. In March 1999, the Company entered into a
settlement agreement with Harris & Hull which provided for a
$5,000 cash payment and a transfer of 21,209 shares of the
Company's common stock as full payment on the $84,600
remaining balance due under the promissory note. Since the
Company issued shares of treasury stock carried at their
acquisition cost of $57,000 to settle this note payable, the
resulting gain on this transaction has been recorded as an
increase to additional paid-in capital.
5. License On March 27, 1998, Softlink, Inc. entered into a license
Agreement agreement with an unrelated Japanese company ("the
Licensee"), which provides for the exclusive right to sell
certain of Softlink, Inc.'s products in Japan. The license
agreement calls for the payment of a minimum guarantee
royalty by the licensee of $800,000 during the first fifteen
months and $1,200,000 during the next twelve months. As
such, Softlink, Inc. has recognized $640,000 and $6,900 in
license fee income during the years ended March 31, 1999 and
1998, respectively. During the six months ended September
30, 1999 and 1998, the Company recognized $153,100 and
$320,000 respectively (unaudited). Included in accounts
receivable as of September 30, 1999 and March 31, 1999 are
$550,000 and $421,900, respectively, due from the Licensee.
Future minimum license fee income to be earned under the
terms of the license agreement totals $1,059,800 and
$293,300 during the years ended March 31, 2000 and 2001,
respectively.
F-15
<PAGE>
Softlink, Inc.
Notes to Consolidated Financial Statements
(Information with respect to September 30, 1999 and 1998 is unaudited)
================================================================================
6. Commitments The Company has an employment agreement with one of its
officers which provides for a severance payment equal to one
year's salary and immediate vesting of outstanding stock
options if the officer is terminated without cause.
The Company leases its facilities under operating leases.
The facility leases require the Company to pay certain
maintenance and operating expenses such as utilities,
property taxes and insurance costs. Rent expense related to
these leases was $32,000 and $1,500 for the fiscal years
ended March 31, 1999 and 1998, respectively.
A summary of the future minimum lease payments under these
non-cancelable operating leases follows:
Years Ended March 31, Amount
------------------------------------------------------------
2000 $ 54,000
2001 24,600
------------------------------------------------------------
$ 78,600
------------------------------------------------------------
7. Income Taxes Income tax expense for the years ended March 31, 1999 and
1998 consisted of the State minimum tax. During the six
months ended September 30, 1999, the Company incurred
foreign taxes of approximately $30,900 relating to license
fee income from a Japanese company (Note 5).
The Company's effective tax rate differs from the statutory
federal income tax principally as a result of Federal and
State net operating losses for which a full valuation
allowance has been provided. Deferred tax assets
(liabilities) comprise the following:
September 30, March 31,
1999 1999
-----------------------------------------------------------
(Unaudited)
Loss carryforwards $ 1,141,100 $ 455,200
Depreciation and amortization (2,800) (2,800)
Deferred compensation 328,300 159,800
F-16
<PAGE>
Softlink, Inc.
Notes to Consolidated Financial Statements
(Information with respect to September 30, 1999 and 1998 is unaudited)
================================================================================
Reserves not currently deductible 39,400 39,400
-----------------------------------------------------------
1,506,000 651,600
Valuation allowance (1,506,000) (651,600)
-----------------------------------------------------------
Net deferred tax asset $ - $ -
===========================================================
As of March 31, 1999, the Company has net operating loss
carryforwards of approximately $1,175,300 and $590,300
available to reduce future taxable income, if any, for
Federal and California state income tax purposes. The net
operating loss carryforwards expire in various years through
2019.
Pursuant to the "change in ownership" provisions of the Tax
Reform Act of 1986, utilization of the Company's net
operating loss carryover may be limited, if a cumulative
change of ownership of more than 50% occurs within any
three-year period. The Company has not made this
determination as of March 31, 1999.
8. Capital Stock Common Stock
During the year ended March 31, 1998, Softlink CA sold
222,327 shares of its common stock to various investors
resulting in $164,800 in proceeds. In addition, Softlink CA
issued 453,621 shares of its common stock to various
consultants. Compensation costs relating to stock issued for
services totaling $336,200 were recorded based on the $0.74
price per share obtained from the sale of common stock
during the period.
On March 31, 1998, the Company completed the acquisition of
100% of the outstanding common stock of Softlink CA in a
transaction recorded as a reverse acquisition (Note 1).
During the year ended March 31, 1999, the Company sold
6,512,835 shares of its common stock in exchange for several
8% notes receivable totaling $4,976,300 and $63,600 in cash.
On October 21, 1998 (prior to when the Company's stock
became publicly traded), 2,650,130 of these shares of common
stock were repurchased at the original per-share issuance
price and retired by the Company in exchange for the
cancellation of $973,900 in notes receivable due to non-
payment.
F-17
<PAGE>
Softlink, Inc.
Notes to Consolidated Financial Statements
(Information with respect to September 30, 1999 and 1998 is unaudited)
================================================================================
Treasury Stock
On March 31, 1999, the Company repurchased 1,771,209 shares
of its common stock at the then-current market value in
exchange for the cancellation of $3,186,500 in notes
receivable due to non-payment. A former shareholder reserves
the right to repurchase 250,000 of these shares from the
Company at $3.00 per share through September 30, 1999 (Note
12).
The Company reserved 625,000 of these treasury shares (with
a cost of $52,000) for issuance to its existing shareholders
upon achieving the following three milestones: 25% of the
shares would be issued upon the collection of the first
$250,000 due under a license agreement (Note 5), 35% of the
shares would be issued if the Company generated $2 million
in sales and $100,000 in "audited profits" for the year
ended December 31, 1998, the remaining 40% of the shares
would be issued if the Company generated $1.5 million in
sales and $200,000 in "audited profits" for the six months
ended June 30, 1999. The Company met the first milestone in
June 1998, and recorded $108,300 in compensation expense for
the issuance of 156,250 of these reserved treasury shares
based on their cost. However, the Company did not achieve
the second two milestones. As of the date of this report,
management has not yet formulated a plan for the remaining
468,750 shares reserved in treasury stock.
On March 31, 1999, 21,209 of the shares held in treasury
were reissued for the retirement of $79,600 in debt (Note
4).
In March 1999, the Company reserved 875,000 shares of
treasury stock (with a cost of $2,400,000) for issuance in
exchange for radio and television advertising.
Based upon an agreement dated April 30, 1999 with a barter
company which is acting as an intermediary in this
transaction, the Company will be invoiced for radio and
television advertising at the standard billing prices
established by the media supplier, less 20%. The number of
treasury shares to be transferred for payment of invoices
received will be based on the lower of $2.50 per share or
50% of the trading price of the Company's common stock on
the date of transfer.
F-18
<PAGE>
Softlink, Inc.
Notes to Consolidated Financial Statements
(Information with respect to September 30, 1999 and 1998 is unaudited)
===============================================================================
Stock Options
Options are exercisable as determined by the Board of
Directors on the date of grant and expire five years
from the date of grant. The Company applies Accounting
Principles Board (APB) No. 25, Accounting for Stock
Issued to Employees, and Related Interpretations in
Accounting for Stock Options Issued to Employees. Under
APB Opinion No. 25, employee compensation cost is
recognized when the estimated fair value of the
underlying stock on date of grant exceeds the exercise
price of the stock option. For stock options issued to
non-employees, the Company applies SFAS No. 123,
Accounting for Stock-Based Compensation, which requires
the recognition of compensation cost based upon the
fair value of stock options at the grant date using the
Black-Scholes option pricing model. During the years
ended March 31, 1999 and 1998, the Company recognized
$343,000 and $30,000 in compensation cost relating to
stock options issued to employees and consultants.
A summary of the status of the Company's stock options
of March 31, 1999 and 1998, and changes during the
years then ended is presented in the following table:
<TABLE>
<CAPTION>
Options Outstanding
--------------------------------------------------------------------------
March 31, 1999 March 31, 1998
-------------------------------- -------------------------------------
Wtd.-Avg Wtd.-Avg
Shares Ex. Price Shares Ex. Price
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning 480,702 $0.74 - $ -
Granted 1,834,324 $0.94 485,663 $ 0.74
Exercised - $ - (4,961) $ 0.74
Forfeited (8,533) $0.74 - $ -
----------------------------------------------------------------------------------------------------
Ending 2,306,493 $0.90 480,702 $ 0.74
----------------------------------------------------------------------------------------------------
Exercisable
at year-end 1,150,177 $0.75 480,702 $ 0.74
========== ========
</TABLE>
F-19
<PAGE>
Softlink, Inc.
Notes to Consolidated Financial Statements
(Information with respect to September 30, 1999 and 1998 is unaudited)
===============================================================================
The following table summarizes information about stock
options granted during the year ended March 31, 1999:
<TABLE>
<CAPTION>
Exercise Price
Equals, Exceeds
or is Less Than Weighted-
Number of Mkt. Price of Average Range of Weighted-
Options Granted Stock on Grant Exercise Exercise Average
During 1999 Date Price Price Fair Value
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
800,991 Equals $0.61 $ 0.61 $ 0.09
283,333 Exceeds $1.20 $ 1.20 $ 0.01
750,000 Less Than $1.19 $0.61-2.00 $ 4.07
---------------------------------------------------------------------------------------------------------------
1,834,324 $0.94 $ 1.70
============= ===== =========
</TABLE>
The weighted-average exercise price and weighted-average fair
value of stock options granted during the year ended March 31,
1998 was $0.74 and $0.06, respectively.
The following table summarizes information about stock options
outstanding as of March 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------------------------------------------------------------
Weighted
Number Average
Range of Exercise Outstanding as of Remaining Weighted Number Weighted
Price 3/31/99 Contractual Life Average Exercisable Average
(Years) Exercise Price 3/31/99 Exercise Price
<S> <C> <C> <C> <C> <C>
$ 0.50 75,000 4.9 $0.50 40,625 $0.50
$ 0.61 830,991 4.2 $0.61 471,771 $0.61
$ 0.74 472,168 3.9 $0.74 472,169 $0.74
$ 1.20 853,333 4.9 $1.20 164,778 $1.20
$ 2.00 75,000 5.0 $2.00 834 $2.00
--------- ---------
2,306,493 1,150,177
========= =========
</TABLE>
F-20
<PAGE>
Softlink, Inc.
Notes to Consolidated Financial Statements
(Information with respect to September 30, 1999 and 1998 is unaudited)
===============================================================================
SFAS No. 123 requires the Company to provide pro forma
information regarding net loss and loss per share as if
compensation cost for the Company's stock option plans
had been determined in accordance with the fair value
based method prescribed in SFAS No. 123. The Company
estimates the fair value of stock options at the grant
date by using the Black-Scholes option pricing-model with
the following weighted-average assumptions used for
grants in 1999 and 1998, respectively: no dividend yield;
expected volatility of 227.3 percent (for options granted
while the Company's stock was publicly traded) and 0.1
percent (for options granted prior to when the Company's
stock was publicly traded); risk-free interest rate of
5.7 and 6.0 percent; and expected lives of three years
for all plan options.
Under the accounting provisions of SFAS No. 123, the
Company's net loss and loss per share would have been
increased to the pro forma amounts as follows:
<TABLE>
<CAPTION>
Years ended March 31, 1999 1998
-----------------------------------------------------------------------------------------
<S> <C> <C>
Net loss:
As reported $ (1,015,900) $(620,800)
-----------------------------------------------------------------------------------------
Pro forma $ (1,069,100) $(620,800)
-----------------------------------------------------------------------------------------
Basic loss per share:
As reported $ (0.14) $ (0.26)
-----------------------------------------------------------------------------------------
Pro forma $ (0.15) $ (0.26)
-----------------------------------------------------------------------------------------
</TABLE>
9. Major Customers For the year ended March 31, 1999, revenues from two
customers amounted to $72,000, or 79% of net sales,
excluding the revenue from license fees (Note 5).
Included in accounts receivable as of March 31, 1999 is
$5,500 due from these two customers.
For the year ended March 31, 1998, revenues from two
customers amounted to $15,500 or 93% of net sales,
excluding the revenue from license fees.
F-21
<PAGE>
Softlink, Inc.
Notes to Consolidated Financial Statements
(Information with respect to September 30, 1999 and 1998 is unaudited)
===============================================================================
10. Statements of The Company paid $2,500 and $0 for interest in the fiscal
Cash Flows years ended March 31, 1999 and 1998, respectively. The
Company made no income tax payments during the year ended
March 31, 1999 and paid $800 for income taxes during the
year ended March 31, 1998.
Supplemental Schedule of Non-Cash Investing and Financing
Activities:
In September 1999, the Company accrued dividends to the
shareholders of convertible preferred stock in the amount
of $26,300.
In May 1999, the Company purchased a copier in the amount
of $7,000 under a capital lease.
In June 1999, the Company received notes receivable
totaling $17,800 for the issuance of treasury stock.
During the year ended March 31, 1999, the Company
received notes receivable totaling $4,976,300 for the
sale of common stock. Of this amount, $973,900 in notes
receivable were cancelled for the repurchase and
retirement of common stock, and $3,186,500 in notes
receivable were cancelled for the acquisition of treasury
stock. In addition, a note payable amounting to $79,600
was retired through the issuance of treasury stock (Notes
4 and 8).
During the year ended March 31, 1998, a $550,000 note
receivable pertaining to the sale of common stock was
recorded in connection with the completion of a reverse
acquisition (Note 1).
11. Contingency The Company is currently under an investigation by the
Securities and Exchange Commission. As of the date of
this report, the outcome of this investigation is not
determinable.
12. Subsequent Events During the six months ended September 30, 1999, 283,000
and Interim Period stock options with a $2.00 exercise price were issued to
Information employees and consultants.
F-22
<PAGE>
Softlink, Inc.
Notes to Consolidated Financial Statements
(Information with respect to September 30, 1999 and 1998 is unaudited)
================================================================================
In May 1999, the Company issued 66,667 shares of treasury
stock to a shareholder for proceeds of $200,000 as an
exercise of that shareholder's right to repurchase shares
of treasury stock (Note 8). The Company also borrowed
$100,000 with zero interest from the same shareholder
during the period.
In May 1999, the Company purchased fully vested options
to buy 10,000 shares of the Company's common stock with
an exercise price of $0.61 per share from a consultant
for $5,500.
In June 1999, the Company entered into a license
agreement with an unrelated U.S. company ("the
Licensee"), which grants the licensee the right to bundle
certain software with a hardware product and/or computer
services provided by the licensee. The agreement also
provides the right to make, sell and offer for sale
copies of the licensed software. The licensee shall pay
the Company a one-time license fee of $50,000 for the use
of the licensed software for a period of 12 months from
the date of first shipment of the licensed software with
licensee's products, not to exceed 300,000 units. The
Company shall share a fixed amount of upgrade revenue
with licensee each time the licensee's customers upgrade
to the Company's product. In July 1999, the Company
delivered the initial shipment to the licensee, and in
September 1999, the one-time license fee was received.
In June 1999, the Company entered into an agreement to
sell 72,727 shares of treasury stock to two investors for
notes receivable totaling $17,800 and $180,000 in cash.
In June 1999, the Company entered into a lease agreement
to rent office space for two years, effective September
13, 1999. The lease required a security deposit of
$7,800, and a minimum monthly payment of approximately
$7,900.
In June 1999, the Company entered into a license
agreement with an unrelated U.S. company ("the
Licensor"), which gave the Company an exclusive right to
reproduce, manufacture, sell and distribute certain
motion pictures. In July 1999, the Company paid $41,400
to acquire the royalty right and deposit for the use of
certain titles.
F-23
<PAGE>
Softlink, Inc.
Notes to Consolidated Financial Statements
(Information with respect to September 30, 1999 and 1998 is unaudited)
================================================================================
In June 1999, the Company entered into a license
agreement with an unrelated Japanese company ("the
Licensee"), which provides for the non-exclusive right to
distribute certain media titles in Japan. The license
agreement calls for the payment of $38,500 by the
licensee for the initial shipment of product, and an
additional $60,500 royalty payments at the time when
additional materials are ordered.
In July 1999, the Company borrowed a total of $102,300
with zero interest from three shareholders, and $16,000
interest-free loan from an officer, respectively. In
August 1999, all of these loans were paid in full
(unaudited).
In July 1999, the Company entered into a license
agreement with a U.S. based Japanese company ("the
Licensee"), which allows the licensee to replicate, copy
and license certain computer software programs as part of
a bundle for use with a hardware product. As part of the
agreement, the Company will deliver its standard user
manual as well as the user guide for the program. The
Company will also provide continued upgrades and support
to the program. The licensee shall pay the Company a
royalty for the program at a fixed price per unit, and
the royalty payments will be made to the Company on a
quarterly basis (unaudited).
In July 1999, the Company borrowed $20,000 interest-free
loan from an independent lender. In September 1999, the
note payable was repaid in full (unaudited).
In July 1999, the Company borrowed $100,000 from an
unrelated lender under the terms of a promissory note
bearing a 10% interest rate. In August, 1999, the loan
was paid in full (unaudited).
In August 1999, the Company entered into employment
agreements with two officers providing for severance
payments equal to one year's salary if either officer is
terminated without cause (unaudited).
In August 1999, the Company restated its Articles of
Incorporation to authorize 59,000,000 shares of common
stock and 1,000,000 shares of preferred stock, each unit
a par value of $0.001 per share (unaudited).
F-24
<PAGE>
Softlink, Inc.
Notes to Consolidated Financial Statements
(Information with respect to September 30, 1999 and 1998 is unaudited)
================================================================================
In August 1999, the Company obtained an additional
financing of $3,000,000 through the issuance of 300
shares of Series A convertible preferred stock to
investors. The Company also issued warrants to purchase
an aggregate of 390,000 shares of common stock. The
warrants, which have exercise prices ranging from $2.25
to approximately $2.44 per share, expire in August 2004.
The preferred stock is convertible into that number of
shares of common stock equal to the stated value of the
Series A convertible preferred stock divided by the
conversion price in effect at the time of the conversion
(unaudited).
In August 1999, the Company purchased $1,400,000 zero
coupon commercial paper at a discount price of $98.725
with a remaining maturity of three months or less. The
commercial paper is rated above A1 (unaudited).
During the six months ended 1999, the Company loaned
$130,000 to two independent companies under the terms of
promissory notes bearing a 20% and 10% interest rate,
respectively (unaudited).
In September 1999, the Company entered into a license
agreement with an unrelated Japanese Company, ("the
Licensee"), which gives the licensee an exclusive right
in Japan to utilize and sell the Company's technology for
phone-to-PC voice email through March 31, 2001. The
licensee shall make an initial payment for the
development cost of $12,000 and a prepaid royalty of
$10,000 to the Company. The licensee shall also pay a
fixed price per copy of software provided to users, and a
fixed percentage of usage charge for the phone-to-PC
voice email system. Royalty payments will be made to the
Company on a quarterly basis (unaudited).
In September 1999, the Company's board of directors
adopted the 1999 Stock Option Plan, which has not yet
been ratified by the stockholders. Under the Plan
2,400,000 shares of common stock are available for
options, which may be granted to employees, directors,
and consultants (unaudited).
In September 1999, the Company's board of directors voted
by unanimous consent to rescind options to purchase
958,000 shares of
F-25
<PAGE>
Softlink, Inc.
Notes to Consolidated Financial Statements
(Information with respect to September 30, 1999 and 1998 is unaudited)
================================================================================
common stock previously granted to various employees. The
board then granted options to purchase 1,082,714 shares
of common stock under the newly adopted stock option plan
(unaudited).
In October 1999, the Company entered into a license
agreement with an unrelated U.S. Company, ("the
Licensee"), which gives the licensee the right to bundle
certain software with a hardware product and/or computer
services provided by the licensee. The agreement also
provides the right to make, sell and offer for sale
copies of the licensed software. The Company shall share
a fixed amount of upgrade revenue with licensee each time
the licensee's customers upgrade to the Company's product
(unaudited).
From October 1, 1999 through December 13, 1999, the
Company granted employees options to purchase an
aggregate of 297,000 shares of the Company's common stock
at the fair market value of the Company's common stock on
the dates of grant (unaudited).
In December 1999, the Company issued an aggregate of
20,250 shares of the Company's common stock to employees
as a bonus, resulting in compensation costs of $20,900
(unaudited).
In January 2000, a shareholder notified the Company of
its intention to convert 23 shares of preferred stock and
accrued dividends into 476,393 shares of common stock
(unaudited).
F-26
<PAGE>
Until __________, 2000, 25 days after the date of this prospectus, all
dealers that buy, sell or trade our common stock, whether or not participating
in this offering, may be required to deliver a prospectus. This requirement is
in addition to the dealers' obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
SOFTLINK, INC.
7,551,058 Shares of
Common Stock
________________________
PROSPECTUS
________________________
_____________, 2000
<PAGE>
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24 INDEMNIFICATION OF DIRECTORS AND OFFICERS
The General Corporation Law of Nevada limits the liability of officers and
directors for breach of fiduciary duty except in certain specified
circumstances, and also empowers corporations organized under Nevada Law to
indemnify officers, directors, employees and others from liability in certain
circumstances such as where the person successfully defended himself on the
merits or acted in good faith in a manner reasonably believed to be in the best
interests of the corporation.
Our Articles of Incorporation, with certain exceptions, eliminate any
personal liability of a directors or officers to us or our stockholders for
monetary damages for the breach of such person's fiduciary duty, and, therefore,
an officer or director cannot be held liable for damages to us or our
stockholders for gross negligence or lack of due care in carrying out his or her
fiduciary duties as a director or officer except in certain specified instances.
We may also adopt by-laws which provide for indemnification to the full extent
permitted under law which includes all liability, damages and costs or expenses
arising from or in connection with service for, employment by, or other
affiliation with us to the maximum extent and under all circumstances permitted
by law.
There are presently no material pending legal proceeding to which a
director, officer and employee of ours is a party. There is no pending
litigation or proceeding involving one of our directors, officers, employees or
other agents as to which indemnification is being sought, and we are not aware
of any pending or threatened litigation that may result in claims for
indemnification by any director, officer, employee or other agent.
We have purchased directors and officers liability insurance to defend and
indemnify directors and officers who are subject to claims made against them for
their actions and omissions as directors and officers of Softlink. The
insurance policy provides standard directors and officers liability insurance in
the amount of $5,000,000.
We intend to enter into indemnification agreements with our directors and
officers. These agreements will provide, in general, that we shall indemnify and
hold harmless such directors and officers to the fullest extent permitted by law
against any judgments, fines, amounts paid in settlement, and expenses,
including attorneys' fees and disbursements, incurred in connection with, or in
any way arising out of, any claim, action or proceeding against, or affecting,
such directors and officers resulting from, relating to or in any way arising
out of, the service of such persons as our directors and officers.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, and controlling persons pursuant to the
foregoing provisions or otherwise, we have has been advised that in the opinion
of the SEC, such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable.
II-1
<PAGE>
ITEM 25 OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth an itemization of various expenses, all of
which we will pay, in connection with the sale and distribution of the
securities being registered. All of the amounts shown are estimates, except the
Securities and Exchange Commission registration fee.
Securities and Exchange Commission Registration Fee.............. $ 4,177
Accounting Fees and Expenses..................................... $ 30,000
Legal Fees and Expenses.......................................... $ 40,000
Miscellaneous.................................................... $ 8,765
--------
Total....................................................... $ 82,942
ITEM 26 RECENT SALES OF UNREGISTERED SECURITIES
Set forth in chronological order is information regarding shares of common
stock issued and options and warrants and other convertible securities granted
by us during the past three years. Also included is the consideration, if any,
received by us for such shares and options and information relating to the
section of the Securities Act, or rule of the SEC under which exemption from
registration was claimed.
Transactions described in Items (1) through (6) below refer to the
securities of Softlink, Inc., a California corporation which was the predecessor
entity of the filer of this Registration Statement, and transactions described
in Items (7) through (20) below refer to the securities of Softlink, Inc. a
Nevada corporation which is the Registrant in this Registration Statement.
Unless otherwise indicated, information in this section regarding shares
of our common stock reflect the conversion ratio applied to shares of our common
stock at the time of the reorganization described above.
(1) In January 1997, Softlink issued 33,727 shares of common stock to a
consultant in exchange for services provided to Softlink valued at approximately
$5,000. The issuance was made in reliance on Section 4(2) of the Securities Act
of 1933 and was made without general solicitation or advertising. The consultant
was a sophisticated investor with access to all relevant information necessary
to evaluate the investment, and who represented to Softlink that the shares were
being acquired for investment.
(2) In January 1997, Softlink issued 33,727 shares of common stock to an
investor in exchange for $12,500. The issuance was made in reliance on Section
4(2) of the Securities Act of 1933 and was made without general solicitation or
advertising. The purchaser was a sophisticated investor with access to all
relevant information necessary to evaluate the investment, and who represented
to Softlink that the shares were being acquired for investment.
(3) In September 1997 Softlink issued 33,727 shares of common stock to a
consultant in exchange for consulting services valued at approximately $25,000.
The issuance was made in reliance on Section 4(2) of the Securities Act of 1933
and was made without general solicitation or
II-2
<PAGE>
advertising. The consultant was a sophisticated investor with access to all
relevant information necessary to evaluate the investment, and who represented
to Softlink that the shares were being acquired for investment.
(4) In November 1997 Softlink issued 92,380 shares of common stock to 8
investors in exchange for $68,477. The issuances were made in reliance on
Section 4(2) of the Securities Act of 1933 and Rule 504 of Regulation D
promulgated under the Securities Act of 1933 and was made without general
solicitation or advertising. The purchasers were sophisticated investors with
access to all relevant information necessary to evaluate the investment, and who
represented to Softlink that the shares were being acquired for investment.
(5) In January 1998, Softlink issued 134,907 shares of common stock to an
investor in exchange for $100,000. The issuance was made in reliance on Section
4(2) of the Securities Act of 1933 and was made without general solicitation or
advertising. The purchaser was a sophisticated investor with access to all
relevant information necessary to evaluate the investment, and who represented
to Softlink that the shares were being acquired for investment.
(6) From January to March 1998, Softlink issued 419,894 shares of common
to 7 consultants in exchange for services performed for Softlink valued at
$311,249. The issuances were made in reliance on Section 4(2) of the Securities
Act of 1933 and were made without general solicitation or advertising. The
consultants were sophisticated investors with access to all relevant information
necessary to evaluate the investment, and who represented to Softlink that the
shares were being acquired for investment.
(7) In March 1998, Softlink and its stockholders entered into a
reorganization with Draco Technologies, Inc., a Nevada corporation. Under the
reorganization, the 17 stockholders of Softlink received 0.6745344 shares of
common stock of Draco Technologies for each share of Softlink they owned prior
to the reorganization and Softlink became a wholly-owned subsidiary of Draco
Technologies. Draco Technologies changed its name to Softlink, Inc. and
references to "Softlink" hereafter refer to Softlink, Inc., the filer of this
registration statement. The issuance was made in reliance on Section 4(2) of the
Securities Act of 1933 and Rule 504 of Regulation D promulgated under the
Securities Act of 1933 and were made without general solicitation or
advertising. The purchasers were sophisticated investors with access to all
relevant information necessary to evaluate these investments, and who
represented to Softlink that the shares were being acquired for investment.
(8) In March 1998, immediately prior to the reorganization, Softlink
conducted a private offering of its common stock. Pursuant to that offering, a
total of 875,000 shares of common stock were sold to American Universal Group,
Inc. for total cash and notes receivable consideration of $558,750. The issuance
was made in reliance on Section 4(2) of the Securities Act of 1933 and was made
without general solicitation or advertising. The purchaser was a sophisticated
investor with access to all relevant information necessary to evaluate the
investment, and who represented to Softlink that the shares were being acquired
for investment. 355,000 of the shares issued pursuant to this offering were
later cancelled by Softlink due to nonpayment under the notes.
(9) In March 1998, immediately prior to the reorganization, Softlink
conducted a private offering of its common stock. Pursuant to that offering, a
total of 1,625,000 shares of common
II-3
<PAGE>
stock were sold to 8 individuals for total notes receivable consideration of
$16,250. The issuances were made in reliance on Section 4(2) of the Securities
Act of 1933 and Rule 504 of Regulation D promulgated under the Securities Act of
1933 and were made without general solicitation or advertising. The purchasers
were sophisticated investors with access to all relevant information necessary
to evaluate the investments, and who represented to Softlink that the shares
were being acquired for investment. 1,088,000 of the shares issued pursuant to
this offering were later cancelled by Softlink due to nonpayment under the
notes.
(10) In May 1998, Softlink issued 612,295 shares of common stock to 4
investors pursuant to promissory notes in favor of Softlink in the aggregate
amount of $373,500. The issuances were made in reliance on Section 4(2) of the
Securities Act of 1933 and Regulation S promulgated under the Securities Act of
1933 and were made without general solicitation or advertising. The purchasers
were sophisticated investors with access to all relevant information necessary
to evaluate these investments, and who represented to Softlink that the shares
were being acquired for investment. All of the shares issued pursuant to this
offering were later cancelled by Softlink due to nonpayment under the notes.
(11) In May 1998, Softlink issued 737,705 shares of common stock to 4
investors pursuant to promissory notes in favor of Softlink in the aggregate
amount of $450,000. The issuances were made in reliance on Section 4(2) of the
Securities Act of 1933 and were made without general solicitation or
advertising. The purchasers were sophisticated investors with access to all
relevant information necessary to evaluate these investments, and who
represented to Softlink that the shares were being acquired for investment.
594,835 of the shares issued pursuant to this offering were later cancelled by
Softlink due to nonpayment under the notes.
(12) Subsequent to the investments noted in (8) and (9) above, Softlink
purchased 625,000 shares of common stock for treasury and placed these shares
into an escrow account in favor of employees of Softlink. The shares were to be
distributed to the employees upon the achievement by Softlink of three
performance milestones. In June 1998, Softlink issued 156,250 shares of this
treasury stock to an aggregate of 24 employees upon the achievement of the first
of three performance milestones. The issuances were made in reliance on Section
4(2) of the Securities Act of 1933 and were made without general solicitation or
advertising. The purchasers were sophisticated investors with access to all
relevant information necessary to evaluate these investments, and who
represented to Softlink that the shares were being acquired for investment.
(13) In October 1998, Softlink issued 425,130 shares of common stock to
an aggregate of 3 investors in exchange for notes receivable and cash in the
amount of $260,901. The issuances were made in reliance on Section 4(2) of the
Securities Act of 1933 and were made without general solicitation or
advertising. The purchasers were sophisticated investors with access to all
relevant information necessary to evaluate these investments, and who
represented to Softlink that the shares were being acquired for investment.
(14) In October 1998, Softlink issued 2,737,705 shares of common stock to
one investor in exchange for $1,670,000. The issuances were made in reliance on
Section 4(2) of the Securities Act of 1933 and was made without general
solicitation or advertising. The purchaser was a sophisticated investor with
access to all relevant information necessary to evaluate the investment, and who
represented to Softlink that the shares were being acquired for investment.
II-4
<PAGE>
(15) In October 1998, Softlink issued 2,000,000 shares of common stock to
one investor in exchange for promissory notes in favor of Softlink in the
aggregate amount of $2,400,000. The issuance was made in reliance on Section
4(2) of the Securities Act of 1933 and Rule 506 of Regulation D promulgated
under the Securities Act of 1933 and was made without general solicitation or
advertising. The purchasers was an accredited investor with access to all
relevant information necessary to evaluate the investment, and who represented
to Softlink that the shares were being acquired for investment 1,146,209 of
these shares were later purchased by Softlink and converted to treasury stock of
Softlink in exchange for the forgiveness of the remaining unpaid amount due
under the promissory notes.
(16) In March 1999, Softlink issued 21,209 shares of treasury stock to an
investor to satisfy a loan obligation of Softlink. The issuance was made in
reliance on Section 4(2) of the Securities Act of 1933 and Rule 504 of
Regulation D promulgated under the Securities Act of 1933 and were made without
general solicitation or advertising. The purchaser was a sophisticated investor
with access to all relevant information necessary to evaluate the investment,
and who represented to Softlink that the shares were being acquired for
investment.
(17) In June 1999, Softlink issued an aggregate of 72,727 shares of
treasury stock to two investors in consideration of an aggregate of $180,000 in
cash and notes receivable. The issuances were made in reliance on Section 4(2)
of the Securities Act of 1933 and Rule 504 of Regulation D promulgated under the
Securities Act of 1933, and were made without general solicitation or
advertising. The purchasers were sophisticated investors with access to all
relevant information necessary to evaluate the investment, and who represented
to Softlink that the shares were being acquired for investment.
(18) In August 1999, Softlink issued 300 shares of preferred stock and
warrants to purchase up to 240,000 shares of common stock to two investors in
exchange for $3,000,000 in cash consideration. The issuances were made in
reliance on Section 4(2) of the Securities Act of 1933 and Rule 506 of
Regulation D promulgated under the Securities Act of 1933 and were made without
general solicitation or advertising. The purchasers were accredited investors
with access to all relevant information necessary to evaluate the investment,
and who represented to Softlink that the shares were being acquired for
investment.
(19) In September 1999, Softlink issued options to purchase 1,082,714
shares of common stock to 3 officers and 10 employees of Softlink, with exercise
prices ranging from $1.75 to $2.00 per share. The issuances were made in
reliance on Section 4(2) of the Securities Act of 1933 and Rule 701 promulgated
under the Securities Act of 1933 and were made without general solicitation or
advertising. The recipients were sophisticated investors with access to all
relevant information necessary to evaluate these investments, and who
represented to Softlink that the shares were being acquired for investment.
(20) In October 1999, Softlink issued options to purchase 200,000 shares
of common stock to an officer of Softlink, with an exercise price per share of
$1.45. The issuance was made in reliance on Section 4(2) of the Securities Act
of 1933 and Rule 701 promulgated under the Securities Act of 1933 and was made
without general solicitation or advertising. The recipient was a sophisticated
investor with access to all relevant information necessary to evaluate the
investment, and who represented to Softlink that the shares were being acquired
for investment.
(21) In December 1999, the Company issued 20,250 shares of Common Stock of
the Company to 4 officers and 19 employees of the Company as bonus compensation
for services rendered by the officers and employees on behalf of the Company.
The issuances were made in reliance on Section 4(2) of the Securities Act of
1933 and Rule 504 of Regulation D promulgated under the Securities Act of 1933,
and were made without general solicitation or advertising. The purchasers were
sophisticated investors with access to all relevant information necessary to
evaluate the investment, and who represented to Softlink that the shares were
being acquired for investment.
II-5
<PAGE>
ITEM 27. EXHIBITS
The following exhibits are filed with this Registration Statement:
Exhibit No. Exhibit Name
- ---------- ------------
3.1 Articles of Incorporation of the Registrant, dated as of July 24,
1997 (1)
3.2 Certificate of Amendment to the Articles of Incorporation of the
Registrant, dated as of March 23, 1998 (1)
3.3 Certificate of Amendment of Articles of Incorporation of the
Registrant, dated as of August 12, 1999 (1)
3.4 Certificate of Designation of Preferences for Series A Preferred
Stock of the Registrant (1)
3.5 By-Laws of Registrant (1)
4.1 Sample Stock Certificate of the Registrant
4.2 See Exhibit No. 3.1, 3.2 and 3.3 (1)
5.1 Opinion of Silicon Valley Law Group
10.1 License Agreement dated as of March 27, 1998 by and between NIC
Ltd. and the Registrant (1)
10.2 Employment Agreement dated as of March 1, 1999 by and between
William W. Yuan and the Registrant (1)
10.3 First Amendment to Employment Agreement dated as of August 31,
1999 by and between William W. Yuan and the Registrant (1)
10.4 Office Rent Sublease Agreement dated as of April 9, 1999 by and
between Auken-Redac and the Registrant (1)
10.5 Computer Software Distribution Agreement dated as of April 29,
1999 by and between Navarre Corporation and the Registrant (1)
10.6 Escrow Agreement, dated as of April 30, 1999 by and between The
Providers, Inc. and the Registrant (1)
10.7 Contract of Engagement by and between Cardinal Capital
Management, Inc. and the Registrant dated May 18,1999 (1)
II-6
<PAGE>
10.8 Lease Agreement dated as of June 14, 1999 by and between
Koll/Intereal Bay Area and the Registrant (1)
10.9 Software Distribution and Marketing Rights Agreement, dated as of
June 29, 1999, by and between Fountain Technologies, Inc. and the
Registrant (1)
10.10 OEM and License Agreement dated as of July 1, 1999 by and between
Information Technologies Division, a division of Sony
Electronics, Inc. and the Registrant (1)
10.11 Warrant Agreement dated August 17, 1999 by and between Deephaven
Private Placement Trading Ltd. and the Registrant (1)
10.12 Warrant Agreement dated August 17, 1999 by and between Hornblower
Investors L.L.C. and the Registrant (1)
10.13 Registration Rights Agreement dated as of August 17, 1999 by and
between Hornblower Investors L.L.C., Deephaven Private Placement
Trading Ltd. and the Registrant (1)
10.14 Convertible Preferred Stock Purchase Agreement dated August 17,
1999 by and between Hornblower Investors, L.L.C., Deephaven
Private Placement Trading Ltd. and the Registrant (1)
10.15 Distribution Agreement by and between Earthlink Network, Inc. and
the Registrant (1)
10.16 Executive Employment Agreement dated as of August 31, 1999
between Johnson Lee and Registrant (1)
10.17 Executive Employment Agreement dated August 31, 1999 between
Edmund Leung and Registrant (1)
10.18 Letter Agreement dated as of August 31, 1999 by and between
Packard Bell/NEC and the Registrant (1)
10.20 1999 Stock Option Plan (1)
10.21 Form Stock Option Agreement (1)
23.1 Consent of BDO Seidman, LLP
23.2 Consent of Silicon Valley Law Group (contained in Exhibit
5.1)
27.1 Financial Data Schedule
__________________
(*) To be filed by amendment.
(1) Previously filed
II-7
<PAGE>
ITEM 28. UNDERTAKINGS
The undersigned registrant hereby undertakes to:
(1) file, during any period in which offers or sales are being made, a post-
effective amendment to this registration statement:
(i) to include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually, or in the
aggregate, represent a fundamental change in the information set
forth 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)
(230.424(b) of this Chapter) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration Statement;
and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement
or any material change to such information in the Registration
Statement.
[Provided, however, that paragraphs (b)(1)(i) and (b)(1)(ii) do not apply if
the registration statement is on Form S-3 or Form S-8, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed by the registrant pursuant to Section 13 or
Section 15(d) of the Securities and Exchange of 1934 that are incorporated by
reference in the registration statement].
(2) That, for the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment shall be deemed to be a new
Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the at the
termination of the Offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of
the Securities Exchange Act of 1934 and, where applicable, each filing of
an employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934, that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the
II-8
<PAGE>
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
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 Santa
Clara, State of California, on January 25, 2000.
SOFTLINK, INC.
By: /s/ William Yuan
- -----------------------
William Yuan
Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 3 to the registration statement was signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ William Yuan President and Director January 25, 2000
- -------------------
William Yuan (principal executive officer)
* Chief Executive Officer, Director January 25, 2000
- -------------------
Johnson Lee
* Treasurer, Secretary and Director January 25, 2000
- -------------------
Edmund Leung
/s/ Ralph G. Coan Vice President and Finance January 25, 2000
- -------------------
Ralph G. Coan and Chief Financial Officer
(principal accounting officer)
</TABLE>
* By executing his name hereto on January 25, 2000, William Yuan is signing
this document on behalf of the persons indicated above pursuant to powers of
attorney duly executed by such persons and filed with the Securities and
Exchange Commission.
By: /s/ William Yuan
- --------------------
William Yuan
(Attorney-in-Fact)
II-9
<PAGE>
EXHIBIT 4.1
NUMBER SHARES
- ------------------ ------------------
LU 3065
- ------------------ ------------------
SOFTLINK, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF NEVADA
PAR VALUE $0.001 CUSIP NO. 83402U 10 3
COMMON STOCK
SPECIMEN
THIS CERTIFIES THAT
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK PAR VALUE OF
$0.001 EACH OF
SOFTLINK INC.
transferable on the books of the Corporation in person or by duly
authorized attorney upon surrender of this Certificate properly endorsed.
This Certificate is not valid until countersigned by the Transfer Agent
and registered by the Registrar. Witness the facsimile seal of the
Corporation and the facsimile signatures of the duly authorized officers.
DATED:
Countersigned and Registered.
/s/ Johnson Lee
PRESIDENT
-------------------
-------------------
By
/s/ Edmund Leung
SECRETARY
[SEAL]
Authorized Signature
<PAGE>
Exhibit 5.1
OPINION OF SILICON VALLEY LAW GROUP
[Letterhead of Silicon Valley Law Group]
January 25, 2000
Softlink, Inc.
2041 Mission College Blvd., Suite 259
Santa Clara, California 95054
Re: Form SB-2 Registration Statement
Ladies and Gentlemen:
We are rendering this opinion in connection with the Registration Statement
on Form SB-2 (File No. 333-90185) originally filed by Softlink, Inc. (the
"Company") with the Securities and Exchange Commission under the Securities Act
of 1933, as amended (such Registration Statement as amended from time to time is
referred to herein as the "Registration Statement"). The Registration Statement
relates to the registration of an aggregate of 7,551,058 shares of the Company's
Common Stock, $0.001 par value per share (the "Shares"), which may be offered
for resale by certain parties listed therein. The Shares are issuable upon
conversion and/or exercise of the Company's preferred stock and warrants held by
the parties listed in the Registration Statement. We understand that the Shares
are to be offered and sold in the manner described in the Registration
Statement.
We have acted as your counsel in connection with the preparation of the
Registration Statement and are familiar with the proceedings taken by the
Company in connection with the authorization and preparation for issuance of the
Shares. We have examined all such documents as we consider necessary to enable
us to render this opinion.
Based upon the foregoing, we are of the opinion that the Shares have been
duly authorized and when issued and delivered by the Company, following a
conversion of the preferred stock and/or exercise of the warrants in accordance
with the terms of such preferred stock and warrants, will be legally issued,
fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under "Legal Matters" in
the Registration Statement.
Very truly yours,
/s/ Silicon Valley Law Group
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement on Form SB-2 of our report dated July 15, 1999, relating
to the consolidated financial statements of Softlink, Inc., which is contained
in that Prospectus. Our report contains an explanatory paragraph regarding
Softlink's ability to continue as a going concern.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ BDO SEIDMAN, LLP
San Jose, California
January 25, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SOFTLINK, INC. AT MARCH 31, 1999 AND FOR THE YEAR THEN
ENDED, AND AT SEPTEMBER 30, 1999 AND FOR THE SIX MONTHS THEN ENDED AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,785,500
<SECURITIES> 0
<RECEIVABLES> 1,052,700
<ALLOWANCES> 19,500
<INVENTORY> 85,100
<CURRENT-ASSETS> 3,100,400
<PP&E> 121,400
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,296,600
<CURRENT-LIABILITIES> 358,700
<BONDS> 0
0
3,026,300
<COMMON> 9,400
<OTHER-SE> 6,269,200
<TOTAL-LIABILITY-AND-EQUITY> 3,296,600
<SALES> 660,900
<TOTAL-REVENUES> 660,900
<CGS> 176,000
<TOTAL-COSTS> 1,989,200
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,400
<INCOME-PRETAX> (1,503,500)
<INCOME-TAX> 30,900
<INCOME-CONTINUING> (1,534,400)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,534,400)
<EPS-BASIC> .20
<EPS-DILUTED> .20
</TABLE>
