Exhibit 99.1
CHANCERY SOFTWARE LTD.
Consolidated Financial Statements
SEPTEMBER 30, 2001 AND 2000
(tabular amounts expressed in thousands
of U.S. dollars)
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, 2001 and 2000 and the consolidated statements of operations,
changes in shareholders' deficiency and cash flows for the years ended
September 30, 2001 and 2000. 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,
2001 and 2000 and the results of its operations and its cash flows for the years
ended September 30, 2001 and 2000 in accordance with generally accepted
accounting principles in the United States.
"PricewaterhouseCoopers LLP"
CHARTERED ACCOUNTANTS
Vancouver, Canada
October 31, 2001
CHANCERY SOFTWARE LTD.
Consolidated Balance Sheets
AS AT SEPTEMBER 30, 2001 AND 2000
- -------------------------------------------------------------------------------------------------------------------------------
(tabular amounts expressed in thousands of U.S. dollars)
2001 2000
$ $
ASSETS
CURRENT ASSETS
Cash and cash equivalents 4,567 6,311
Short-term investments - 7,399
Accounts receivable (note 4) 4,259 2,956
Prepaid expenses and deposits 613 511
Work-in-process - 169
Inventory 104 132
Restricted cash (note 5) 400 -
------------------------------------
9,943 17,478
LONG-TERM ACCOUNTS RECEIVABLE - 100
PROPERTY AND EQUIPMENT (note 4) 2,143 1,804
INTANGIBLE ASSETS (note 4) 554 1,308
GOODWILL - 1,991
------------------------------------
12,640 22,681
====================================
The accompanying notes are an integral part of these
consolidated financial statements.
CHANCERY SOFTWARE LTD.
Consolidated Balance Sheets...CONTINUED
AS AT SEPTEMBER 30, 2001 AND 2000
- -------------------------------------------------------------------------------------------------------------------------------
(tabular amounts expressed in thousands of U.S. dollars)
2001 2000
$ $
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities (note 4) 3,845 2,160
Income taxes payable 65 42
Note payable (note 6) - 500
------------------------------------
3,910 2,702
Unearned revenue 6,478 5,736
------------------------------------
TOTAL CURRENT LIABILITIES 10,388 8,438
LONG-TERM ACCOUNTS PAYABLE 63 -
DEFERRED INCOME TAXES - 268
------------------------------------
10,451 8,706
------------------------------------
MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK (note 8)
Authorized
100,000,000 Class A Voting Mandatorily Redeemable Convertible Preferred shares,
no par value, 4% cumulative dividend
Issued and outstanding
4,667,419 (2000 - 4,667,419) Class A Voting Redeemable Convertible Preferred
shares (including accretion of cumulative dividend of $1,309,747 (2000 -
$629,997) and net of issuance costs of $326,000) 33,514 32,204
------------------------------------
STOCKHOLDERS' DEFICIENCY
CAPITAL STOCK (note 9)
Authorized
500,000,000 voting common shares, no par value
Issued and outstanding
7,430,404 (2000 - 7,028,348) voting common shares (net of issuance
costs of $86,600) 4,504 4,399
OTHER CAPITAL ACCOUNTS (9) (72)
ACCUMULATED OTHER COMPREHENSIVE INCOME 2,503 1,558
DEFICIT (38,323) (24,114)
------------------------------------
(31,325) (18,229)
------------------------------------
12,640 22,681
====================================
NATURE OF OPERATIONS (note 1)
COMMITMENTS (note 12)
Director Director
- --------------------------- -----------------------------
The accompanying notes are an integral part of these
consolidated financial statements.
CHANCERY SOFTWARE LTD.
Consolidated Statements of Operations
FOR THE YEARS ENDED SEPTEMBER 30, 2001 AND 2000
- --------------------------------------------------------------------------------------------------------------------------------
(tabular amounts expressed in thousands of U.S. dollars)
2001 2000
$ $
REVENUE 18,498 14,029
COSTS 7,516 3,786
-----------------------------------------
GROSS PROFIT 10,982 10,243
-----------------------------------------
EXPENSES
Sales and marketing 7,002 5,946
Research and development 5,784 5,170
General and administration 5,152 3,616
Write-off of goodwill, intangible assets and capital assets 2,146 -
Restructuring charges 1,004 -
Depreciation 900 489
Amortization of goodwill 749 398
Amortization of intangible assets 683 330
Business development 579 -
-----------------------------------------
23,999 15,949
-----------------------------------------
(13,017) (5,706)
FOREIGN EXCHANGE GAIN 1,037 656
INTEREST INCOME 456 421
GAIN ON SALE OF INVESTMENT - 945
-----------------------------------------
LOSS BEFORE INCOME TAXES (11,524) (3,684)
(RECOVERY OF) PROVISION FOR INCOME TAXES (223) 167
-----------------------------------------
LOSS FOR THE YEAR (11,301) (3,851)
=========================================
The accompanying notes are an integral part of these
consolidated financial statements.
CHANCERY SOFTWARE LTD.
Consolidated Statements of Changes in Shareholders' Deficiency
FOR THE YEARS ENDED SEPTEMBER 30, 2001 AND 2000
- ----------------------------------------------------------------------------------------------------------------------------------
(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 EFICIENCY
$ $ $ $ $ $
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 loss - - - - - - (3,391)
------------------------------------------------------------------------------------------------
BALANCE - SEPTEMBER 30, 2000 7,028,348 4,399 - (72) 1,558 (24,114) (18,229)
Issuance of shares for cash 403,271 106 - - - - 106
Repurchase of common shares (1,215) (1) - - - - (1)
Class A Preferred Stock
cumulative dividend - - - - - (1,310) (1,310)
Adjustment of Class A
Preferred Stock to
redemption value - - - - - (1,598) (1,598)
Amortization of deferred
compensation expense - - - 63 - - 63
Comprehensive income (loss)
Accumulated other
comprehensive income -
foreign currency
translation - - - - 945 -
Loss for the year - - - - - (11,301)
Total comprehensive loss - - - - - - (10,356)
------------------------------------------------------------------------------------------------
BALANCE - SEPTEMBER 30, 2001 7,430,404 4,504 - (9) 2,503 (38,323) (31,325)
================================================================================================
The accompanying notes are an integral part of these
consolidated financial statements.
CHANCERY SOFTWARE LTD.
Consolidated Statements of Cash Flows
FOR THE YEARS ENDED SEPTEMBER 30, 2001 AND 2000
- ---------------------------------------------------------------------------------------------------------------------------------
(tabular amounts expressed in thousands of U.S. dollars)
2001 2000
$ $
CASH FLOWS USED IN OPERATING ACTIVITIES
Loss for the year (11,301) (3,851)
Adjustments to reconcile loss for the year to net cash used in
operating activities
Non-cash revenue - (506)
Depreciation 900 489
Write-off of goodwill, intangible assets and capital assets 2,146 -
Amortization of intangible assets 683 330
Amortization of goodwill 749 398
Gain on sale of investment - (945)
Stock-based compensation 63 149
Foreign exchange gain (1,037) (656)
Deferred income taxes (268) 125
Changes in operating working capital items
Accounts receivable (1,348) 177
Prepaid expenses and deposits (112) (202)
Work-in-process 166 (169)
Inventory 23 (16)
Restricted cash (412) -
Long-term accounts receivable 98 (100)
Accounts payable and accrued liabilities 1,776 (437)
Income taxes payable 24 42
Long-term accounts payable 63 -
Unearned revenue 791 1,041
-----------------------------------------
(6,996) (4,131)
-----------------------------------------
CASH FLOWS USED IN INVESTING ACTIVITIES
Proceeds on sale of investment - 951
Purchase of Misty City Software Inc. - (1,225)
Cash acquired on acquisition of Misty City Software Inc. - 102
Purchase of property and equipment (1,439) (1,582)
Purchase of intangible assets (751) (236)
Purchase of short-term investments - (7,399)
Proceeds on sale of short-term investments 7,246 -
-----------------------------------------
5,056 (9,389)
-----------------------------------------
CASH FLOWS USED IN FINANCING ACTIVITIES
Redemption of common shares (1) (14,618)
Issuance of common stock for cash 106 329
Issuance of Redeemable Convertible Preferred Stock for cash - 31,574
Repayment of note payable (500) (500)
-----------------------------------------
(395) 16,785
-----------------------------------------
FOREIGN EXCHANGE EFFECT ON CASH 591 466
-----------------------------------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,744) 3,731
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 6,311 2,580
-----------------------------------------
CASH AND CASH EQUIVALENTS - END OF YEAR 4,567 6,311
=========================================
The accompanying notes are an integral part of these
consolidated financial statements.
CHANCERY SOFTWARE LTD.
Notes to Consolidated Financial Statements
SEPTEMBER 30, 2001 AND 2000
- --------------------------------------------------------------------------------
(tabular amounts expressed in thousands of U.S. dollars)
1 NATURE OF OPERATIONS
Chancery Software Ltd. (the company) is incorporated under the laws of
British Columbia, Canada. The company develops, markets, and sells Student
Management Solutions software primarily to schools and school districts in
the K-12 market.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
These financial statements consolidate the accounts of the company and its
wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated on consolidation.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles in the United States 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.
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 statement of operations.
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
consolidated statement of operations.
(1)
CHANCERY SOFTWARE LTD.
Notes to Consolidated Financial Statements
SEPTEMBER 30, 2001 AND 2000
- --------------------------------------------------------------------------------
(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 6 - 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 No. 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 36 months, 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.
(2)
CHANCERY SOFTWARE LTD.
Notes to Consolidated Financial Statements
SEPTEMBER 30, 2001 AND 2000
- --------------------------------------------------------------------------------
(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 rateably 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 is made for all anticipated losses as soon as
they become 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", the Financial
Accounting Standards Board (FASB) Interpretation (FIN) No. 44 "Accounting
for Certain Transactions Involving Stock Compensation on interpretation of
APB No. 25", 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 estimated fair value of the company's stock and the exercise
price. Compensation expense is recognized immediately for past services
and rateably for future services over the option vesting period. 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
consolidated 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.
(3)
CHANCERY SOFTWARE LTD.
Notes to Consolidated Financial Statements
SEPTEMBER 30, 2001 AND 2000
- --------------------------------------------------------------------------------
(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 years ending September 30, 2001 and 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 June 1998, the FASB issued Statement No. 133 "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133). SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
embedded in other contracts, and for hedging activities. It requires that
an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair
value. The accounting for changes in fair value of the derivative depends
on the intended use of the derivative and the resulting designation. The
company does not expect that the adoption of SFAS No. 133 will have a
material impact on its consolidated financial position or results of
operations, as it does not use financial derivative instruments.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations", and
SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141
requires that the purchase method of accounting be used for all business
combinations subsequent to June 30, 2001 and specifies criteria for
recognizing intangible assets acquired in a business combination. SFAS No.
142 requires that goodwill and intangible assets with indefinite useful
lives no longer be amortized, but instead be tested for impairment at
least annually. Intangible assets with definite useful lives will continue
to be amortized over their respective estimated useful lives. The
(4)
CHANCERY SOFTWARE LTD.
Notes to Consolidated Financial Statements
SEPTEMBER 30, 2001 AND 2000
- --------------------------------------------------------------------------------
(tabular amounts expressed in thousands of U.S. dollars)
company does not expect that the implementation of these guidelines will
have a material impact on its consolidated financial position or results
of operations.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 requires that asset retirement
obligations be recognized when they are incurred, and be capitalized as
part of the asset's carrying value and displayed as liabilities. SFAS No.
143 also requires increased disclosure surrounding asset retirement
obligations. SFAS No. 143 is effective for fiscal years beginning after
June 15, 2002. The company does not expect that the implementation of
these guidelines will have a material impact on its consolidated financial
position or results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 requires that
long-lived assets be classified as assets either to be held and used, to
be disposed of other than by sale, or to be disposed of by sale. It also
prescribes various approaches to valuing these types of long-lived assets.
SFAS No. 144 is effective for fiscal years beginning after December 15,
2001. The company does not expect that the implementation of these
guidelines will have a material impact on its consolidated financial
position or results of operations.
3 SUPPLEMENTAL CASH FLOW INFORMATION
2001 2000
$ $
Cash paid for income taxes 5 -
Cash paid for interest 47 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
(5)
CHANCERY SOFTWARE LTD.
Notes to Consolidated Financial Statements
SEPTEMBER 30, 2001 AND 2000
- --------------------------------------------------------------------------------
(tabular amounts expressed in thousands of U.S. dollars)
4 BALANCE SHEET COMPONENTS
2001 2000
$ $
Accounts receivable
Trade accounts receivable 4,332 2,738
Other 28 292
Less: Allowance for doubtful accounts (101) (74)
-----------------------------------------
4,259 2,956
=========================================
Property and equipment
Computer equipment 3,315 2,636
Furniture and fixtures 1,348 1,024
Leasehold improvements 392 341
Capital lease equipment 438 445
-----------------------------------------
5,493 4,446
Less: Accumulated depreciation (3,350) (2,642)
-----------------------------------------
2,143 1,804
=========================================
Intangible assets
Computer software acquired 1,148 667
Website development - 160
Acquired technology - 842
Acquired customer list - 123
Human capital - 30
-----------------------------------------
1,148 1,822
Less: Accumulated amortization (594) (514)
-----------------------------------------
554 1,308
=========================================
During 2001, the company's revenues from the key product of Misty City did
not meet expectations, and the company therefore adjusted its future
estimates with regard to this product. As a result, the company also
assessed the carrying value of the intangible assets and goodwill which
arose on the acquisition of Misty City. The company determined that the
undiscounted expected future cash flows from the sales of the product were
less than the carrying value of these intangible assets.
As a result, the company has determined the fair value, based on
discounted expected future cash flows, of the intangible assets and
goodwill to be $nil. Accordingly, the company has written off the
remaining carrying value of the goodwill, acquired technology, and
customer list as at September 30, 2001, which amounted to $1,242,000,
$421,000, and $61,000, respectively.
(6)
CHANCERY SOFTWARE LTD.
Notes to Consolidated Financial Statements
SEPTEMBER 30, 2001 AND 2000
- --------------------------------------------------------------------------------
(tabular amounts expressed in thousands of U.S. dollars)
During 2001, the company determined that the costs incurred to develop one
of its web sites no longer met the criteria for capitalization and, as a
result, the company wrote off its unamortized web site development costs
in the amount of $422,000.
2001 2000
$ $
Accounts payable and accrued liabilities
Trade 1,336 884
Accrued sales and marketing 289 180
Accrued compensation and related benefits 553 683
Other accrued liabilities 1,667 413
-----------------------------------------
3,845 2,160
=========================================
5 RESTRICTED CASH
The company maintains a restricted deposit totalling $400,000 as a form of
security over payroll payments.
6 ACQUISITION OF MISTY CITY SOFTWARE INC.
On April 6, 2000, the company acquired 100% of the common stock of 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 No. 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 were paid on December 31, 2000
and March 31, 2001 with interest at 6% per annum.
(7)
CHANCERY SOFTWARE LTD.
Notes to Consolidated Financial Statements
SEPTEMBER 30, 2001 AND 2000
- --------------------------------------------------------------------------------
(tabular amounts expressed in thousands of U.S. dollars)
7 INCOME TAXES
INCOME BEFORE INCOME TAXES
Income before income taxes was generated by both domestic and U.S.
operations during 2001 and 2000.
The components of income before equity income, income taxes and minority
interest are as follows:
2001 2000
$ $
Canadian (9,067) (3,996)
U.S. (2,457) 312
-----------------------------------------
(11,524) (3,684)
=========================================
CURRENT INCOME TAXES
The provision for current income taxes consists of the following:
2001 2000
$ $
Current
Canadian - 17
U.S. federal 45 25
-----------------------------------------
45 42
Deferred
U.S. federal (268) 125
-----------------------------------------
(223) 167
=========================================
(8)
CHANCERY SOFTWARE LTD.
Notes to Consolidated Financial Statements
SEPTEMBER 30, 2001 AND 2000
- --------------------------------------------------------------------------------
(tabular amounts expressed in thousands of U.S. dollars)
The provision for income taxes differs from the amount computed by
applying the statutory income tax rate to net income before taxes as
follows:
2001 2000
% %
Canadian statutory rate (44.62) (45.62)
Change in valuation allowance 35.66 47.93
Foreign tax at other than Canadian statutory rate (0.40) (1.98)
Non-deductible expenses 4.14 7.62
Non-taxable income - (3.88)
Write-off of goodwill 4.90 -
Other (1.62) 0.46
-----------------------------------------
(1.94) 4.53
=========================================
DEFERRED INCOME TAXES
Significant components of the company's deferred tax assets and
liabilities are as follows:
2001 2000
$ $
Deferred tax assets
Capital and intangible assets 941 479
Other 326 199
Tax losses carryforward 5,184 1,259
Scientific research and experimental development expenditures
carried forward 655 792
-----------------------------------------
7,106 2,729
Valuation allowance (7,106) (2,997)
-----------------------------------------
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 $11,619,000, and
scientific research and experimental development (SR&ED) expenditures of
approximately $1,468,000, which are available for carryforward against
taxable income earned in Canada in future years.
(9)
CHANCERY SOFTWARE LTD.
Notes to Consolidated Financial Statements
SEPTEMBER 30, 2001 AND 2000
- --------------------------------------------------------------------------------
(tabular amounts expressed in thousands of U.S. dollars)
The SR&ED expenditures carry forward indefinitely, and non-capital losses
expire as follows:
$
2002 838
2003 171
2007 3,488
2008 7,122
------------------
11,619
==================
8 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
(10)
CHANCERY SOFTWARE LTD.
Notes to Consolidated Financial Statements
SEPTEMBER 30, 2001 AND 2000
- --------------------------------------------------------------------------------
(tabular amounts expressed in thousands of U.S. dollars)
$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.
9 CAPITAL STOCK
SHARE CAPITAL TRANSACTIONS
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.
During 2001, the company issued 403,271 shares of common stock to
employees of the company, substantially pursuant to employee stock option
exercises. Total proceeds of these transactions was $106,000. In addition,
the company repurchased 1,215 shares of common stock from various
employees for $1,000.
10 STOCK-BASED COMPENSATION
STOCK OPTION PLAN
In December 1998, the company's board of directors adopted the Stock
Option Plan (the Plan) and reserved 10,000,000 shares of common stock for
issuance thereunder. The Plan provides for the granting of stock options
to Eligible Persons (defined as directors, officers, employees, or
consultants of the company or any of its subsidiaries). No person shall be
eligible to receive more than 5% of the total number of outstanding common
shares at the date of the grant.
Terms and conditions of options granted under the Plan are determined
solely by the Compensation Committee (the Committee) of the board of
directors, however, generally are granted for periods not exceeding eight
years at prices equal to the fair value of the shares on the date of grant
as determined by the Committee. Exercise prices for the company's stock
options are fixed in Canadian dollars.
(11)
CHANCERY SOFTWARE LTD.
Notes to Consolidated Financial Statements
SEPTEMBER 30, 2001 AND 2000
- --------------------------------------------------------------------------------
(tabular amounts expressed in thousands of U.S. dollars)
Options under the Plan are not immediately exercisable and generally vest
over a period of 36 months. The vesting schedule for each grant is
determined by the Committee.
The following table summarizes activity under the company's stock option
plan for the years ended September 30, 2001 and 2000:
2001 2000
----------------------------------------- -----------------------------------------
WEIGHTED WEIGHTED
AVERAGE SHARES AVERAGE
EXERCISE PRICE EXERCISE PRICE
SHARES CDN$ CDN$
(as restated) (as restated)
STOCK OPTIONS
Outstanding -
Beginning of year 7,984,838 1.41 4,670,905 0.56
Granted 743,957 2.50 3,783,532 2.37
Exercised (377,744) 0.41 (234,700) 0.41
Forfeited (1,169,867) 1.42 (234,899) 0.88
Expired - - - -
------------------- ------------------
Outstanding -
End of year 7,181,184 1.50 7,984,838 1.41
==================== ==================
Exercisable -
September 30 4,743,165 3,159,825
==================== ==================
Weighted average fair
value of options
granted during the
year 0.02 0.08
For the year ended September 30, 2000, the number of shares granted and
cancelled and the weighted average exercise price amounts have been
restated. There was no financial statement impact for these changes.
The following table summarizes information about fixed stock options
outstanding and exercisable at September 30, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------------------------ -----------------------
EXERCISE REMAINING
PRICE NUMBER CONTRACTUAL LIFE NUMBER
CDN$ OUTSTANDING (YEARS) EXERCISABLE
0.53 3,209,372 5.2 2,985,101
1.00 547,000 6.0 359,819
2.50 3,424,812 6.8 1,398,245
---------------------------------------------------------------------------------------------------------
1.50 7,181,184 6.1 4,743,165
=========================================================================================================
(12)
CHANCERY SOFTWARE LTD.
Notes to Consolidated Financial Statements
SEPTEMBER 30, 2001 AND 2000
- --------------------------------------------------------------------------------
(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:
2001 2000
% %
Risk-free interest rate 4.6 6.3
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 per share
for the years ended September 30, 2001 and 2000 is as follows:
2001 2000
$ $
Loss
As reported (11,301) (3,851)
Pro forma (11,338) (3,927)
UNEARNED STOCK-BASED COMPENSATION
In connection with certain stock option grants during the years ended
September 30, 2001 and 2000, the company unearned compensation totalling
$nil and $23,000, respectively, which is being amortized over the three
year vesting periods of the related options. Amortization expense
recognized during the years ended September 30, 2001 and 2000 totalled
approximately $63,000 and $149,000, respectively.
(13)
CHANCERY SOFTWARE LTD.
Notes to Consolidated Financial Statements
SEPTEMBER 30, 2001 AND 2000
- --------------------------------------------------------------------------------
(tabular amounts expressed in thousands of U.S. dollars)
11 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 any
significant credit losses to date.
12 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, 2001 are as follows:
$
2002 1,132
2003 639
2004 394
2005 374
2006 312
(14)