Exhibit 99.1
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Chancery Software Ltd.
Consolidated Financial Statements
September 30, 2000 and 1999
(tabular amounts expressed in thousands of U.S. dollars)
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PricewaterhouseCoopers LLP
Chartered Accountants
1111 West Hastings Street
Vancouver British Columbia
Canada V6E 3R2
Telephone +1 (604) 806 7000
Facsimile +1 (604) 806 7806
Auditors' Report
To the Directors and Shareholders of
Chancery Software Ltd.
We have audited the consolidated balance sheets of Chancery Software Ltd. as at
September 30, 2000 and 1999 and the consolidated statements of operations,
changes in shareholders' equity and cash flows for the years ended September 30,
2000 and 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at September 30,
2000 and 1999 and the results of its operations and its cash flows for the years
ended September 30, 2000 and 1999 in accordance with generally accepted
accounting principles in the United States.
PricewaterhouseCoopers LLP
Chartered Accountants
Vancouver, Canada
November 10, 2000 (except for note 12 which is as of December 15, 2000)
PricewaterhouseCoopers refers to the Canadian firm of PricewaterhouseCoopers LLP
and other members of the worldwide PricewaterhouseCoopers organization
Chancery Software Ltd.
Consolidated Balance Sheets
As at September 30, 2000 and 1999
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(tabular amounts expressed in thousands of U.S. dollars)
2000 1999
$ $
Assets
Current assets
Cash and cash equivalents 6,311 2,580
Short-term investments 7,399 --
Accounts receivable (note 4) 2,956 3,046
Prepaid expenses and deposits 511 307
Work-in-process 169 --
Inventory 132 112
----------------------
17,478 6,045
Long-term accounts receivable 100 --
Investment - at cost -- 6
Property and equipment - net (note 4) 1,804 672
Intangible assets 1,308 244
Goodwill 1,991 --
----------------------
22,681 6,967
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The accompanying notes are an integral part of these consolidated
financial statements.
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Chancery Software Ltd.
Consolidated Balance Sheets...continued
As at September 30, 2000 and 1999
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(tabular amounts expressed in thousands of U.S. dollars)
2000 1999
$ $
Liabilities
Current liabilities
Accounts payable and accrued liabilities (notes 4 and 6) 2,160 2,521
Income taxes payable 42 --
Note payable (note 5) 500 --
----------------
2,702 2,521
Unearned revenue 5,736 3,925
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Total current liabilities 8,438 6,446
Deferred income taxes 268 --
----------------
8,706 6,446
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Redeemable Convertible Preferred Stock (note 7)
Authorized
100,000,000 Class A voting redeemable convertible preferred shares,
no par value, 4% cumulative dividend
Issued and outstanding
4,667,419 (1999 - nil) Class A voting redeemable convertible
preferred shares (including accretion of cumulative
dividend of $629,997 and net of issuance costs of 326,000) 32,204 --
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Shareholders' Equity
Capital stock (note 8)
Authorized
100,000,000 voting common shares, no par value
Issued and outstanding
7,208,348 (1999 - 18,095,715) voting common shares (net of
issuance costs of $86,600) 4,399 9,360
Other capital accounts (72) 494
Accumulated other comprehensive income 1,558 1,098
Deficit (24,114) (10,431)
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(18,229) 521
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22,681 6,967
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Approved by the Board of Directors
_________________________ Director ______________________________ Director
The accompanying notes are an integral part of these consolidated
financial statements.
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Chancery Software Ltd.
Consolidated Statements of Operations
For the years ended September 30, 2000 and 1999
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(tabular amounts expressed in thousands of U.S. dollars except per share
amounts)
2000 1999
$ $
Revenue 14,029 11,453
Costs 3,786 2,652
---------------------
Gross profit 10,243 8,801
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Expenses
Sales and marketing 5,946 3,799
Research and development 5,170 1,949
General and administration 3,616 2,387
Depreciation 489 235
Amortization of intangible assets 330 37
Amortization of goodwill 398 --
---------------------
15,949 8,407
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(5,706) 394
Gain on sale of investment 945 --
Interest income 421 26
Foreign exchange gain (loss) 656 (217)
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(Loss) earnings before income taxes (3,684) 203
Provision for income taxes 167 --
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Net (loss) earnings for the year (3,851) 203
---------------------
The accompanying notes are an integral part of these consolidated
financial statements.
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Chancery Software Ltd.
Consolidated Statements of Changes in Shareholders' Equity
For the years ended September 30, 2000 and 1999
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(tabular amounts expressed in thousands of U.S. dollars)
Other capital accounts
-----------------------------------
Accumu-
lated other Total
Common Stock Additional Deferred compre- stock-
--------------------- paid-in compen- hensive holders'
Shares Amount capital sation income Deficit equity
$ $ $ $ $ $
Balance - September 30, 1998 1,557,185 1,910 109 -- 905 (10,634) (7,710)
Issuance of shares for cash 111,050 42 -- -- -- -- 42
Issuance on conversion of Class A
Preferred Stock 2,820,930 1,280 140 -- -- -- 1,420
Issuance on conversion of Class B
Preferred Stock 2,782,135 1,263 (26) -- -- -- 1,237
Issuance on conversion of Class C
Preferred Stock 1,224,555 556 7 -- -- -- 563
Issuance on conversion of Class D
Preferred Stock 14,480 7 -- -- -- -- 7
Issuance on conversion of Class A
debentures 3,467,880 1,574 -- -- -- -- 1,574
Issuance on conversion of Class B
debentures 6,117,500 2,776 -- -- -- -- 2,776
Share issuance costs -- (48) -- -- -- -- (48)
Employee option grants -- -- 462 (462) -- -- --
Amortization of deferred
compensation expense -- -- -- 264 -- -- 264
Comprehensive income (loss)
Accumulated other
comprehensive income -
foreign currency translation -- -- -- -- 193 --
Net earnings for the year -- -- -- -- -- 203
Total comprehensive income -- -- -- -- -- -- 396
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Balance - September 30, 1999 18,095,715 9,360 692 (198) 1,098 (10,431) 521
Issuance of shares for cash 1,002,028 329 -- -- -- -- 329
Issuance on acquisition of Misty
City Software Inc. 467,835 546 -- -- -- -- 546
Redemption (12,537,230) (5,836) (715) -- -- (8,067) (14,618)
Class A Preferred Stock
cumulative dividend -- -- -- -- -- (630) (630)
Adjustment of Class A Preferred
Stock to redemption value -- -- -- -- -- (1,135) (1,135)
Employee option grants -- -- 23 (23) -- -- --
Amortization of deferred
compensation expense -- -- -- 149 -- -- 149
Comprehensive income (loss)
Accumulated other
comprehensive income -
foreign currency translation -- -- -- -- 460 --
Loss for the year -- -- -- -- -- (3,851)
Total comprehensive income -- -- -- -- -- -- (3,391)
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Balance - September 30, 2000 7,028,348 4,399 -- (72) 1,558 (24,114) (18,229)
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The accompanying notes are an integral part of these consolidated
financial statements.
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Chancery Software Ltd.
Consolidated Statements of Cash Flows
For the years ended September 30, 2000 and 1999
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(tabular amounts expressed in thousands of U.S. dollars)
2000 1999
$ $
Cash flows used in operating activities
Net (loss) earnings for the year (3,851) 203
Adjustments to reconcile loss for the year to net cash used in
operating activities
Non-cash revenue (506) --
Depreciation 489 284
Amortization of intangible assets 330 --
Amortization of goodwill 398 --
Gain on sale of investment (945) --
Stock-based compensation 149 264
Foreign exchange gain (656) --
Deferred income taxes 125 --
Changes in operating working capital items
Accounts receivable 177 (1,317)
Prepaid expenses and deposits (202) (126)
Work-in-process (169) --
Inventory (16) 8
Long-term accounts receivable (100) --
Accounts payable and accrued liabilities (437) 944
Income taxes payable 42 --
Unearned revenue 1,041 1,055
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(4,131) 1,315
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Cash flows used in investing activities
Proceeds on sale of investment 951 --
Purchase of Misty City Software (1,225) --
Cash acquired on acquisition of Misty City Software Inc. 102 --
Purchase of property and equipment (1,582) (749)
Purchase of intangible assets (236) --
Purchase of short-term investments (7,399) --
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(9,389) (749)
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Cash flows used in financing activities
Redemption of common shares (14,618) --
Issuance of Common Stock for cash 329 42
Issuance of redeemable convertible Preferred Stock for cash 31,574 --
Repayment of note payable (500) --
Share issuance costs -- (48)
Convertible debentures -- (66)
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16,785 (72)
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Foreign exchange effect on cash 466 193
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Increase in cash and cash equivalents 3,731 687
Cash and cash equivalents - Beginning of year 2,580 1,893
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Cash and cash equivalents - End of year 6,311 2,580
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The accompanying notes are an integral part of these consolidated
financial statements.
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Chancery Software Ltd.
Notes to Consolidated Financial Statements
September 30, 2000 and 1999
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(tabular amounts expressed in thousands of U.S. dollars)
1 The Company
Chancery Software Ltd. ("the Company") is incorporated under the laws of
British Columbia, Canada. The Company develops, markets, and sells Student
Information Systems ("SIS") software primarily to schools and school
districts in the K-12 market. The Company also operates its web portal,
K12Planet.com, which serves as an online community incorporating the
information generated by its SIS software at the school level with
educational and informational content for teachers, students, parents, and
other stakeholders in the educational system.
2 Summary of significant accounting policies
Use of estimates
The preparation of consolidated 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.
Principles of consolidation and basis of presentation
The financial statements as at September 30, 2000 and for the year then
ended are consolidated and include the accounts of the Company and its
wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated on consolidation.
Foreign currency translation and transactions
The Company has adopted the U.S. dollar as its reporting currency. The
functional currency of the Company's operations located outside the U.S.
is the Canadian currency. The consolidated financial statements are
translated to U.S. dollars using the period-end exchange rate for assets
and liabilities and weighted-average exchange rates for the period for
revenues and expenses. Translation gains and losses are deferred and
accumulated as a component of other comprehensive income in shareholders'
equity. Net gains and losses resulting from foreign exchange transactions
are included in the consolidated income statement.
Cash and cash equivalents
Cash and cash equivalents consists of cash on deposit and highly liquid
short-term interest bearing securities with maturity at the date of
acquisition of three months or less.
Short-term investments
Short-term investments consist of highly liquid short-term interest
bearing securities with maturities at the date of acquisition greater than
three months. Interest earned is recognized immediately in the statement
of operations.
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Chancery Software Ltd.
Notes to Consolidated Financial Statements
September 30, 2000 and 1999
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(tabular amounts expressed in thousands of U.S. dollars)
Fair value of financial instruments
The Company's financial instruments, consisting of cash and cash
equivalents, accounts receivable, and accounts payable and accrued
liabilities are carried at cost, which approximates their fair value due
to the short-term maturity of these instruments.
Inventory
Inventory consists of finished product and raw materials for the Company's
products. Inventory is valued at the lower of cost, determined on the
first-in first-out basis, and net realizable value.
Property and equipment
Property and equipment are stated at historical cost. Depreciation and
amortization are computed using the straight line method over the
estimated useful lives of the assets, generally five years or less.
Intangible assets
Goodwill and other intangible assets resulting from the acquisition of
Misty City Software Inc. ("Misty City") were estimated by management to be
primarily associated with the intellectual property of Misty City's core
product and to the acquired customer list. As a result of the rapid
technological changes occurring in the software industry, goodwill and
other intangible assets are amortized on a straight-line basis over 36
months, being the estimated periods of benefit. See note 5 - Acquisition.
Acquired computer software, including third party installation charges, is
recorded at cost and is amortized on a straight-line basis over 36 months.
Intangible assets - Web site development costs
The Company accounts for web site development costs in accordance with
Emerging Issues Task Force Abstract ("EITF") No. 00-02, "Accounting for
Web Site Development Costs". EITF 00-02 requires the capitalization of
certain web site development costs incurred in the production and building
of a web site for quarters beginning after June 30, 2000. Costs related to
planning and web site maintenance are expensed as incurred. Amounts
capitalized are capitalized in accordance with AICPA Statement of Position
("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use". Prior to June 30, 2000, the Company expensed
all web site development costs as part of research and development
expenses. Web site development costs are amortized on a straight-line
basis over three years, being the estimated period of benefit.
Impairment of long-lived assets
The Company evaluates the recoverability of long-lived assets in
accordance with Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of". SFAS No. 121 requires recognition of
impairment of long-lived assets in the event the net book value of such
assets exceeds the future undiscounted cash flows attributable to such
assets.
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Chancery Software Ltd.
Notes to Consolidated Financial Statements
September 30, 2000 and 1999
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(tabular amounts expressed in thousands of U.S. dollars)
Revenue recognition
Revenues are recognized in accordance with AICPA SOP 97-2, "Software
Revenue Recognition". The Company generally sells product with multiple
elements, including software, post-contract customer support,
implementation consulting, and training. For these transactions, the
Company recognizes revenue for delivered elements upon delivery, when the
Company's fee is fixed and determinable, collection is probable and
persuasive evidence of an arrangement exists. The fair value of the
undelivered elements, based on vendor-specific objective evidence, is
deferred and recognized as revenue upon the ultimate delivery of such
elements.
The Company also sells post-contract customer support and consulting
services. For post-contract customer support, the Company recognizes
revenue ratably over the period, when the Company's fee is fixed and
determinable and collection is probable. For consulting services, the
Company recognizes revenue as services are performed, when the Company's
fee is fixed and determinable and collection is probable.
Revenue from a contract to develop state specific reporting templates has
been accounted for on the completed contract basis. Direct costs of the
contract are included in work-in-process at the lower of cost and net
realizable value. Provision would be made for all anticipated losses as
soon as they became evident.
Research and development
Research and development costs include expenses incurred by the Company to
develop, enhance, and manage the Company's suite of software products, as
well as to enhance, manage, monitor, and operate the Company's various web
sites. Research and development costs are expensed as incurred.
Stock-based compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees", and complies
with the disclosure provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation". Under APB No. 25, compensation expense is based
on the difference, if any, on the date of the grant, between the fair
value of the Company's stock and the exercise price. The Company accounts
for stock issued to non-employees in accordance with the provisions of
SFAS No. 123 and EITF 96-18.
Income taxes
Income taxes are accounted for using an asset and liability approach,
which requires the recognition of taxes payable or refundable for the
current year and deferred tax liabilities and assets for the future tax
consequences of events that have been recognized in the Company's
financial statements or tax returns. The measurement of the current and
deferred tax liabilities and assets are based on the provisions of enacted
tax law; the effects of future changes in tax laws or rates are not
anticipated. The measurement of deferred tax assets is reduced, if
necessary, by a valuation allowance where, based on available evidence,
the probability of realization of the deferred tax asset does not meet a
more likely than not criteria.
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Chancery Software Ltd.
Notes to Consolidated Financial Statements
September 30, 2000 and 1999
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(tabular amounts expressed in thousands of U.S. dollars)
Investment tax credits
Prior to the completion of a financing in March 2000, the Company was a
Canadian Controlled Private Corporation ("CCPC"). A CCPC is entitled to an
investment tax credit at a rate of 35% of the first $2 million (20% on
amounts in excess of $2 million) of eligible current research and
development expenditures. Investment tax credits on current expenditures
earned at the 35% rate are fully refundable in cash to the Company upon
filing a claim and having it approved by taxation authorities. Current
investment tax credits earned on capital expenditures at a rate of 35% and
on excess current expenditures at a rate of 20% are refundable in cash at
a rate of 40% of the amount of the credit. The non-refundable investment
tax credit component can be applied against future income taxes payable.
Non-CCPC corporations are entitled to investment tax credits at a rate of
20%, with no refundable cash components available, on both current and
capital expenditures.
On March 30, 2000, the Company lost its CCPC status as a result of the
issuance of redeemable convertible Preferred Stock. Accordingly, the
Company is not entitled to the refundable component of investment tax
credits for the year ending September 30, 2000.
The refundable and non-refundable portion of investment tax credits are
accounted for as a reduction of the related expenditure for items of a
current expense nature and a reduction of the related assets for items of
a long-term nature, when the Company has reasonable assurance that the
credit will be realized.
Comprehensive income
The Company accounts for comprehensive income in accordance with SFAS No.
130, "Reporting Comprehensive Income". Comprehensive income, as defined,
includes all changes in equity (net assets) during a period from non-owner
sources. The Company's comprehensive income consists of foreign currency
translation adjustments and net income.
Recent accounting pronouncements
In December 1999 and during calendar 2000, the Securities and Exchange
Commission issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue
Recognition in Financial Statements", and subsequent amendments and
interpretations. The Company believes that its current revenue recognition
and reporting policies are consistent with the Staff's views set out in
those bulletins.
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Chancery Software Ltd.
Notes to Consolidated Financial Statements
September 30, 2000 and 1999
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(tabular amounts expressed in thousands of U.S. dollars)
3 Supplemental cash flow information
2000 1999
$ $
Cash paid for income taxes -- --
Cash paid for interest (35) --
Non-cash investing and financing activities
Issuance of promissory note on purchase of Misty City 1,000 --
Issuance of Common Stock on purchase of Misty City 546 --
Redemption of term preferred shares by issuance of Common Stock -- 3,227
Redemption of subordinated debentures by issuance of
Common Stock -- 4,350
Additional paid-in capital -- 121
4 Balance Sheet components
2000 1999
$ $
Accounts receivable
Trade accounts receivable 2,738 2,827
Tax credit receivable -- 205
Other 292 94
Less: Allowance for doubtful accounts (74) (80)
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2,956 3,046
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Property and equipment
Computer equipment 2,636 1,678
Furniture and fixtures 1,024 513
Leasehold improvements 341 134
Capital lease equipment 445 453
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4,446 2,778
Less: Accumulated depreciation 2,642 2,106
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1,804 672
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Intangible assets
Computer software acquired 667 430
Website development 160 --
Acquired technology 842 --
Acquired customer list 123 --
Human capital 30 --
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1,822 430
Less: Accumulated amortization (514) (185)
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1,308 245
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Chancery Software Ltd.
Notes to Consolidated Financial Statements
September 30, 2000 and 1999
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(tabular amounts expressed in thousands of U.S. dollars)
2000 1999
$ $
Accounts payable and accrued liabilities
Trade 884 663
Accrued sales and marketing 180 252
Accrued compensation and related benefits 683 999
Other accrued liabilities 413 607
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2,160 2,521
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5 Acquisition of Misty City Software Inc.
On April 6, 2000, the Company acquired 100% of the Common Stock of Misty
City Software Inc. ("Misty City"), which develops, markets, and sells
software aimed at the educational industry. The agreement stated a
purchase price of $3,000,000 consisting of 467,835 shares of the Company
stock, a note payable for $1,000,000 and cash of $1,200,000. Under APB 16
the shares have been valued at the announcement date which resulted in the
Common Stock being recorded at $546,000. The acquisition has been
accounted for using the purchase method of accounting and accordingly, the
purchase price of $2,771,000, including related expenses of approximately
$25,000, consisting primarily of legal and other professional service
fees, has been allocated to the tangible and intangible assets acquired
and liabilities assumed on the basis of their respective fair values on
the acquisition date.
The purchase price was allocated to net tangible liabilities assumed
($471,000) and intangible assets, including completed technology
($842,000), customer list ($123,000), human capital ($31,000), and
goodwill ($2,246,000). The intangible assets are being amortized over
their estimated useful lives of 36 months.
As at September 30, 2000, $500,000 of the note payable was outstanding
with the remaining instalments of $250,000 due on December 31, 2000 and
March 31, 2000 with interest at 6% per annum.
6 Income taxes
Income before income taxes
Income before income taxes was generated by both domestic and U.S.
operations during 2000 and 1999.
The components of income before equity income, income taxes and minority
interest are as follows:
2000 1999
$ $
Canadian (3,996) (519)
U.S. 312 722
----------------
(3,684) 203
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Chancery Software Ltd.
Notes to Consolidated Financial Statements
September 30, 2000 and 1999
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(tabular amounts expressed in thousands of U.S. dollars)
Current income taxes
The provision for current income taxes consists of the following:
2000 1999
$ $
Current
Canadian 17 --
U.S. federal 25 --
-------------------
42 --
Deferred
U.S. federal 125 --
-------------------
167 --
-------------------
The provision for income taxes differs from the amount computed by
applying the statutory income tax rate to net income before taxes as
follows:
2000 1999
% %
Canadian statutory rate (45.62) 45.62
Loss carry forward not recognized 21.44 --
Deferred tax assets not recognized 31.10 112.31
Foreign tax at other than Canadian statutory rate (1.98) (40.01)
Non-deductible expenses 7.62 66.32
Prior year's loss carry forward not previously recognized (4.61) (184.24)
Non-taxable income (3.88) --
Large corporations tax 0.46 --
----------------
4.53 --
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Chancery Software Ltd.
Notes to Consolidated Financial Statements
September 30, 2000 and 1999
- --------------------------------------------------------------------------------
(tabular amounts expressed in thousands of U.S. dollars)
Deferred income taxes
Significant components of the Company's deferred tax assets and
liabilities are as follows:
2000 1999
$ $
Deferred tax asset
Property and equipment and intangible assets 479 129
Other 199 (43)
Tax losses carryforward 1,259 1,985
Scientific research and experimental development
expenditures carried forward 792 675
------------------
2,729 2,746
Valuation allowance (2,997) (2,746)
------------------
Net deferred tax liability (268) --
------------------
Management believes that, based on a number of factors, it is more likely
than not that the deferred tax assets will not be utilized. Accordingly, a
valuation allowance for the full amount of the deferred tax assets has
been recorded.
The Company has non-capital losses of approximately $2,759,000, and
scientific research and experimental development ("SR&ED") expenditures of
approximately $1,737,000, which are available for carryforward against
taxable income earned in Canada in future years.
The SR&ED expenditures carry forward indefinitely, and non-capital losses
expire as follows:
$
2001 160
2002 858
2003 175
2007 1,566
-----
2,759
-----
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Chancery Software Ltd.
Notes to Consolidated Financial Statements
September 30, 2000 and 1999
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(tabular amounts expressed in thousands of U.S. dollars)
7 Mandatorily Redeemable Convertible Preferred Stock
On March 15, 2000, the Company cancelled its previously authorized Class
A, B, C, and D Preferred Stock. None of this stock was issued and
outstanding at the date of cancellation.
On March 15, 2000, the Company authorized 100,000,000 shares of Class A
Voting Mandatorily Redeemable Convertible Preferred Stock.
Class A Mandatorily Redeemable Convertible Preferred Stock
On March 30, 2000, the Company issued 4,667,419 shares of its Class A
Mandatorily Redeemable Convertible Preferred Stock ("Class A Preferred
Stock") for $31,900,000.
The Class A Preferred Stock entitles holders to a 4% cumulative stock
and/or cash dividend accruing from the date of issuance. Holders of the
Class A Preferred Stock are entitled to the number of votes equal to the
number of Common Shares into which the Class A Preferred Stock could be
converted at the time of the vote, and vote on an equal basis with holders
of the Company's Common Stock, together as a single class. The Class A
Preferred Stock ranks senior to all classes of capital stock upon
liquidation, dissolution, and wind-up, and ranks junior in right of
payment of all indebtedness of the Company and its subsidiaries.
The Class A Preferred Stock has a mandatory redemption on the earlier of
March 31, 2005, liquidation, dissolution, or wind-up of the Company,
change in control of the Company, a sale of substantially all the assets
of the Company, bankruptcy of the Company, or any material breach of the
terms and conditions surrounding the Class A Preferred Stock. The Class A
Preferred Stock is redeemable at a liquidation value of the greater of (a)
$6.82 per share plus all accrued but unpaid cumulative dividends thereon,
or (b) the fair market value of the Preferred Stock, on an after
conversion basis, based upon the number of shares of Common Stock the
Class A Preferred Stock is convertible into and the market price, as
determined by a published market (if one exists), of the Common Stock. At
the option of the Company, any accrued but unpaid cumulative dividends may
be settled by issuance of additional Class A Preferred Stock, the number
of shares to be determined by dividing the accrued but unpaid cumulative
dividends by $6.82.
Upon a qualified underwritten initial public offering, each share of the
Class A Preferred Stock will be converted into Common Stock of the Company
at a ratio of five for one. A qualified underwritten initial public
offering is one in which net proceeds to the Company are at least $40
million, occurs prior to March 31, 2005, and occurs at a price not less
than four times the initial issue price of the Class A Preferred Stock,
which was $6.82. If the underwritten initial public offering occurs prior
to March 31, 2001, the price need only be two times the initial issue
price, and if prior to September 30, 2001, the price need only be three
times the initial issue price, in order to be qualified.
The Class A Preferred Stock may be converted by the holders into Common
Stock at any time, at a ratio of five for one. At the option of the
Company, any accrued but unpaid cumulative dividends may be settled by
issuance of additional Class A Preferred Stock, the number of shares to be
determined by dividing the accrued but unpaid cumulative dividends by
$6.82. In addition, the holders of the Class A Preferred Stock have anti-
dilution protection.
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Chancery Software Ltd.
Notes to Consolidated Financial Statements
September 30, 2000 and 1999
- --------------------------------------------------------------------------------
(tabular amounts expressed in thousands of U.S. dollars)
8 Capital Stock
Share capital transactions
On October 30, 1998, the shareholders and debentureholders accepted an
offer from the principal investors of the Company to convert all
previously authorized class A, B, C and D preferred shares and its series
A and B debentures into Common Stock. Pursuant to this offer, each
security held was converted as follows: all debentures and shareholder
loans outstanding at the time of the restructuring were assigned one share
of Common Stock for every $3.50 of debt outstanding; the Class A and B
preferred shares were discounted at 0.888 to reflect the present value at
the redemption date times the original purchase price of the preferred
shares and issued one share of Common Stock for every $3.50 of the
discounted original purchase price; each Class C preferred share was
exchanged for 33.82 shares of Common Stock and each Class D preferred
share was exchanged for 0.4 shares of Common Stock.
On March 30, 2000, 12,537,230 shares of Common Stock were redeemed for
$14,618,000. The redemption has been recorded as a reduction in Common
Stock of $5,836,000, a reduction in additional paid in capital of $715,000
and a charge to deficit of 8,067,000.
On April 6, 2000, in connection with the acquisition of Misty City, the
Company issued 467,835 shares of Common Stock. The issuance was recorded
at $546,000, being the estimated fair value of the shares of Common Stock
at the date of acquisition.
On June 29, 2000, the Board of Directors approved a five-for-one share
split of the Company's Common Stock. All share amounts have been presented
on a post stock split basis.
9 Stock based compensation
Stock option plan
In December 1998, the Company's Board of Directors adopted the Stock
Option Plan (the "Plan") and reserved 10,000,000 shares of Common Stock
for issuance thereunder. The Plan provides for the granting of stock
options to Eligible Persons (defined as directors, officers, employees,
or consultants of the Company or any of its subsidiaries). No person shall
be eligible to receive more than 5% of the total number of outstanding
number of Common Shares at the date of the grant.
Terms and conditions of options granted under the Plan are determined
solely by the Compensation Committee (the "Committee") of the Board of
Directors, however, generally are granted for periods not exceeding eight
years at prices equal to the fair value of the shares on the date of grant
as determined by the Committee. Exercise prices for the Company's stock
options are fixed in Canadian dollars.
Options under the plan are not immediately exercisable and generally vest
over a period of 36 months. The vesting schedule for each grant is
determined by the Committee.
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Chancery Software Ltd.
Notes to Consolidated Financial Statements
September 30, 2000 and 1999
- --------------------------------------------------------------------------------
(tabular amounts expressed in thousands of U.S. dollars)
The following table summarizes activity under the Company's stock option
plan for the years ended September 30, 2000 and 1999:
2000 1999
-------------- ---------------------------
Weighted Weighted
average average
Shares exercise price Shares exercise price
Cdn. $ Cdn. $
Stock options
Outstanding -
beginning of year 4,670,905 0.56 333,590 0.20
Granted 3,175,705 2.34 4,477,760 0.58
Exercised (234,700) 0.41 (19,375) 0.53
Cancelled (158,425) 0.62 (121,070) 0.50
Expired -- -- -- --
--------- ---------
Outstanding -
end of year 7,453,485 1.32 4,670,905 0.56
--------- ---------
Exercisable -
September 30 3,159,825 -- 1,351,404 --
--------- ---------
Weighted average fair
value of options
granted during the
year 0.08 1.22
The following table summarizes information about fixed stock options
outstanding at September 30, 2000:
Options outstanding at September 30, 2000
--------------------------------------------------------------------
Exercise Number Remaining Number
price outstanding contractual life exercisable
Cdn. $ (years)
0.20 223,915 3.7 211,215
0.53 3,531,625 6.1 2,214,024
1.00 861,925 7.1 261,916
2.50 2,836,020 7.5 472,670
--------- ---------
1.32 7,453,485 3,159,825
--------- ---------
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Chancery Software Ltd.
Notes to Consolidated Financial Statements
September 30, 2000 and 1999
- --------------------------------------------------------------------------------
(tabular amounts expressed in thousands of U.S. dollars)
Fair value disclosures
The Company calculated the minimum fair value of each option grant on the
date of grant using the Black-Scholes option pricing model as prescribed
by SFAS No. 123 using the following assumptions:
2000 1999
% %
Risk-free interest rate 6.3 4.8
Expected lives (in years) 3.0 3.0
Dividend yield 0.0 0.0
Expected volatility 0.0 0.0
The fair value of each option grant was determined using the minimum value
method. The effect of compensation cost on net income and (loss) earnings
per share for the years ended September 30, 2000 and 1999 is as follows:
2000 1999
$ $
Net (loss) earnings
As reported (3,703) 203
Pro forma (3,779) (67)
Unearned stock-based compensation
In connection with certain stock option grants during the years ended
September 30, 2000 and 1999, the Company recognized unearned compensation
totalling $23,000 and $462,000, respectively, which is being amortized
over the three year vesting periods of the related options. Amortization
expense recognized during the years ended September 30, 2000 and 1999
totalled approximately $149,000 and $264,000, respectively.
10 Concentration of credit risk
Financial instruments that potentially subject the Company to a
significant concentration of credit risk consist mainly of cash and cash
equivalents and accounts receivable. The Company limits its exposure to
credit loss by placing its cash and cash equivalents with high credit,
quality financial institutions.
Concentration of credit risk with respect to accounts receivable is
considered to be limited due to the credit quality of the customers
comprising the Company's customer base. The Company's customer base
consists primarily of government-funded organizations including schools,
school districts, and state and provincial governments. The Company
performs ongoing credit evaluations of the financial condition of those
customers not represented by this customer base, in order to determine the
need for an allowance for doubtful accounts. The Company maintains an
allowance for doubtful accounts receivable based upon the expected
collectibility of accounts receivable. The Company has not experienced
significant credit losses to date, and during the years ended September
30, 2000 and 1999, no customers accounted for more than 10% of net
revenues or net accounts receivable.
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Chancery Software Ltd.
Notes to Consolidated Financial Statements
September 30, 2000 and 1999
- --------------------------------------------------------------------------------
(tabular amounts expressed in thousands of U.S. dollars)
11 Commitments
The Company leases certain facilities and equipment used in its operations
under operating leases. Future minimum lease payments under these lease
agreements at September 30, 2000 are as follows:
$
2001 742
2002 728
2003 266
2004 20
2005 --
12 Subsequent event
On December 15, 2000, the Company signed a memorandum of understanding
("MOU") to merge with a company in the K-12 market whose products and
services are complimentary to Chancery's own products and services. The
MOU is not binding unless and until a final definitive agreement has been
executed, except for the requirement of the Company to pay a break up fee
of $1,500,000 in the event certain dates are not met as a direct result of
the Company's failure to use commercially reasonable efforts to negotiate
terms or conclude the transaction.
13 Unaudited subsequent event
On February 2, 2001, the company terminated the arrangement to merge
with the target company pursuant to the MOU (note 12). The target company
subsequently filed a lawsuit to recover the break-up fee of $1,500,000.
The company believes the lawsuit is without merit and intends to
vigorously defend the lawsuit.
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