EXHIBIT 20.1
INDEX TO THE FINANCIAL STATEMENTS
PAGE
Report of Caplin Meehan, Independent Auditors ............................. F-2
Combined Balance Sheets as of October 31, 1997 and 1998.................... F-3
Combined Statements of Operations for the period August 7, 1996 (date of
inception) to October 31, 1996, the years ended October 31, 1997 and 1998
and the period August 7, 1996 (date of inception) to October 31, 1998.... F-4
Combined Statements of Changes in Shareholders' Equity (Deficit) for the
period August 7, 1996 (date of inception) to October 31, 1996 and the years
ended October 31, 1997 and 1998 .......................................... F-5
Combined Statements of Cashflows for the period August 7, 1996 (date of
inception) to October 31, 1996, the years ended October 31, 1997 and 1998
and the period August 7, 1996 (date of inception) to October 31, 1998..... F-6
Notes to the Combined Financial Statements................................. F-7
F-1
REPORT OF CAPLIN MEEHAN, INDEPENDENT AUDITORS
The Board of Directors and Shareholders,
Knowledge Well Group Limited and Knowledge Well Limited
We have audited the accompanying combined balance sheets of Knowledge Well Group
Limited (a development stage enterprise) and Knowledge Well Limited (a
development stage enterprise) as of October 31, 1997 and 1998 and the related
combined statements of operations, changes in shareholders' equity (deficit) and
cash flows for the period August 7, 1996 (date of inception) to October 31,
1996, the years ended October 1997 and 1998 and for the period August 7, 1996
(date of inception) to October 31, 1998. 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 United States generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, based on our audits, the financial statements referred to above
present fairly, in all material respects, the combined financial position of
Knowledge Well Group Limited and Knowledge Well Limited at October 31, 1997 and
1998, and the combined results of their operations and their cash flows for the
period August 7, 1996 (date of inception) to October 31, 1996, the years ended
October 31, 1997 and 1998 and the period August 7, 1996 (date of inception) to
October 31, 1998 in conformity with United States generally accepted accounting
principles.
/s/ Caplin Meehan
- -----------------
CAPLIN MEEHAN
Chartered Accountants
Dublin, Ireland
Date: April 1, 1999
F-2
KNOWLEDGE WELL GROUP LIMITED
(A DEVELOPMENT STAGE ENTERPRISE)
COMBINED BALANCE SHEET
(in United States dollars)
KNOWLEDGE WELL LIMITED
BALANCE SHEETS
October 31 October 31
1997 1998
----------- -----------
ASSETS
Current assets
Cash $ 1,160,972 $ 4,744,899
Prepaid expenses 50,616 342,536
----------- -----------
Total current assets 1,211,588 5,087,435
Property and equipment, net 218,240 686,201
----------- -----------
Total assets $ 1,429,828 $ 5,773,636
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Borrowings under bank overdraft facilities and
overdrafts -- 74,085
Accounts payable 38,598 95,607
Accrued payroll and related expenses 14,429 45,478
Other accrued liabilities 213,566 977,546
Deferred income -- 971,550
----------- -----------
Total current liabilities 266,593 2,164,266
Non current liabilities
Other liabilities 103,542 146,752
----------- -----------
Total non current liabilities 103,542 146,752
Shareholders' equity
Ordinary Shares in Knowledge Well Group Limited 2 80,235
Ordinary Shares in Knowledge Well Limited 1,807,215 3,238,299
Preferred shares in Knowledge Well Group Limited -- 15,468
Additional paid-in capital 1,112,129 6,773,000
Accumulated development stage (deficit) (1,652,895) (6,075,113)
Accumulated other - comprehensive income (206,758) (395,631)
Receivable from shareholder - (173,640)
----------- -----------
Total shareholders' equity 1,059,693 3,462,618
----------- -----------
Total liabilities and shareholders' equity $ 1,429,828 $ 5,773,636
=========== ===========
(see accompanying notes)
F-3
KNOWLEDGE WELL GROUP LIMITED
(A DEVELOPMENT STAGE ENTERPRISE)
COMBINED STATEMENTS OF OPERATIONS
(in United States dollars)
For the Period For the Period
August 7, 1996 August 7, 1996
(Date of For the Year For the Year (Date of
Inception) to Ended Ended Inception) to
October 31, 1996 October 31, 1997 October 31, 1998 October 31, 1998
---------------- --------------- ---------------- ----------------
Revenues $ - $ - $ 48,011 $ 48,011
Cost of revenues - - - -
-------- ----------- ----------- -----------
Gross profit - - 48,011 48,011
Operating expenses:
Research and development 44,741 1,393,091 3,027,300 4,465,132
Sales and marketing - 300,875 1,087,920 1,388,795
General and administrative 13,415 146,414 352,128 511,957
-------- ----------- ----------- -----------
Total operating expenses 58,156 1,840,380 4,467,348 6,365,884
-------- ----------- ----------- -----------
Loss from operations (58,156) (1,840,380) (4,419,337) (6,317,873)
Interest income, net - 51,431 20,318 71,749
Net exchange gain - 194,210 (23,199) 171,011
-------- ----------- ----------- -----------
Income before provision for income taxes (58,156) (1,594,739) (4,422,218) (6,075,113)
Provision for income taxes - - - -
-------- ----------- ----------- -----------
Net loss $(58,156) $(1,594,739) $(4,422,218) $(6,075,113)
======== =========== =========== ===========
Net loss per share - Basic and diluted $(3.15) $(0.30) $(0.49) $(0.95)
======== =========== =========== ===========
(see accompanying notes)
F-4
KNOWLEDGE WELL GROUP LIMITED
(A DEVELOPMENT STAGE ENTERPRISE)
COMBINED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
AND COMPREHENSIVE INCOME
(in United States dollars)
Shareholders' Equity (Deficit)
----------------------------------------------------------------------------------
Accumulated
Convertible Additional Development Receivable
Preferred Ordinary paid-in Stage from Comprehensive
shares shares capital (deficit) shareholder income/(loss)
--------- ----------- ----------- ----------- ----------- -----------
Issuance of 8 "C" ordinary shares
on incorporation in limited ......... -- 3 -- -- -- --
Issuance of 42,856 ordinary
shares in Limited .................... -- 10,720 39,356 -- -- --
Receivable from shareholder .......... -- -- -- -- (50,079) --
Cumulative translation adjustment .... -- -- -- -- -- (653)
Net loss ............................. -- -- -- (58,156) -- (58,156)
--------- ----------- ----------- ----------- ----------- -----------
Balance October 31,1996 .............. -- 10,723 39,356 (58,156) (50,079) (58,809)
Issuance of 5,451,428 "A" ordinary
shares in Limited .................... -- 1,362,857 -- -- -- --
Issuance of 505,716 "A" ordinary
shares in Limited .................... -- 126,429 463,994 -- -- --
Issuance of 234,856 "A" ordinary
shares in Limited .................... -- 58,714 215,480 -- -- --
Issuance of 428,264 "A" ordinary
shares in Limited .................... -- 107,066 377,951 -- -- --
Issuance of 548,576 "A" ordinary
shares in Limited .................... -- 137,144 -- -- -- --
Issuance of 8 ordinary Shares
in Company ........................... -- 2 -- -- -- --
Issuance of 17,128 "A" ordinary
shares in Limited .................... -- 4,282 15,348 -- -- --
Receivable from shareholder .......... -- -- -- -- 50,079 --
Cumulative translation adjustment .... -- -- -- -- -- (206,105)
Net loss for the period .............. -- -- -- (1,594,739) -- (1,594,739)
--------- ----------- ----------- ----------- ----------- -----------
Balance October 31, 1997 ............. -- 1,807,217 1,112,129 (1,652,895) -- (1,859,653)
Issuance of 794,496 "A" ordinary
shares in Limited .................... -- 198,624 539,125 -- -- --
Issuance of 2,428,384 "C" ordinary
shares in Limited .................... -- 831,294 538,004 -- -- --
Issuance of 6,295,184 "A" ordinary
shares in Limited .................... -- 401,166 1,098,834 -- -- --
Issuance of 8,023,320 ordinary
shares in Company .................... -- 80,233 -- -- -- --
Issuance of 1,546,814 convertible
preferred shares in Company .......... 15,468 -- 3,358,350 -- -- --
Compensation expense for
stock options ........................ -- -- 126,558 -- -- --
Receivable from shareholder .......... -- -- -- -- (173,640) --
Cumulative translation adjustment .... -- -- -- -- -- (188,873)
Net loss ............................. -- -- -- (4,422,218) -- (4,422,218)
--------- ----------- ----------- ----------- ----------- -----------
Balance October 31, 1998 ............. $ 15,468 $ 3,318,534 $ 6,773,000 $(6,075,113) $ (173,640) $(6,470,744)
--------- ----------- ----------- ----------- ----------- -----------
Shareholders' Equity (Deficit)
------------------------------
Accumulated
other Total
comprehensive shareholders'
income/(loss) equity(deficit)
----------- -----------
Issuance of 8 "C" ordinary shares
on incorporation in limited ......... -- 3
Issuance of 42,856 ordinary
shares in Limited .................... -- 50,076
Receivable from shareholder .......... -- (50,079)
Cumulative translation adjustment .... (653) (653)
Net loss ............................. -- (58,156)
----------- -----------
Balance October 31,1996 .............. (653) (58,809)
Issuance of 5,451,428 "A" ordinary
shares in Limited .................... -- 1,362,857
Issuance of 505,716 "A" ordinary
shares in Limited .................... -- 590,423
Issuance of 234,856 "A" ordinary
shares in Limited .................... -- 274,194
Issuance of 428,264 "A" ordinary
shares in Limited .................... -- 485,017
Issuance of 548,576 "A" ordinary
shares in Limited .................... -- 137,144
Issuance of 8 ordinary Shares
in Company ........................... -- 2
Issuance of 17,128 "A" ordinary
shares in Limited .................... -- 19,630
Receivable from shareholder .......... -- 50,079
Cumulative translation adjustment .... (206,105) (206,105)
Net loss for the period .............. -- (1,594,739)
----------- -----------
Balance October 31, 1997 ............. (206,758) 1,059,693
Issuance of 794,496 "A" ordinary
shares in Limited .................... -- 737,749
Issuance of 2,428,384 "C" ordinary
shares in Limited .................... -- 1,369,298
Issuance of 6,295,184 "A" ordinary
shares in Limited .................... -- 1,500,000
Issuance of 8,023,320 ordinary
shares in Company .................... -- 80,233
Issuance of 1,546,814 convertible
preferred shares in Company .......... -- 3,373,818
Compensation expense for
stock options ........................ -- 126,558
Receivable from shareholder .......... -- (173,640)
Cumulative translation adjustment .... (188,873) (188,873)
Net loss ............................. -- (4,422,218)
----------- -----------
Balance October 31, 1998 ............. $ (395,631) $ 3,462,618
----------- -----------
(see accompanying notes)
F-5
KNOWLEDGE WELL GROUP LIMITED
(A DEVELOPMENT STAGE ENTERPRISE)
COMBINED STATEMENTS OF CASH FLOWS
(in United States dollars)
For the Period For the Period
August 7, 1996 August 7, 1996
(Date of For the Year For the Year (Date of
Inception) to Ended Ended Inception) to
October 31, 1996 October 31, 1997 October 31, 1998 October 31, 1998
---------------- ---------------- ---------------- ----------------
Cash from operating activities
Net loss $ (58,156) $ (1,594,739) $ (4,422,218) $ (6,075,113)
Adjustments to reconcile
net loss to net
cash used in operating activities
Depreciation and amortization -- 57,179 95,012 152,191
Changes in operating assets and liabilities:
Prepaid expenses and other assets (65,006) 14,390 (291,921) (342,537)
Accounts payable -- 38,598 57,009 95,607
Accrued payroll and related expenses
and other accrued liabilities 17,802 313,736 838,238 1,169,776
Deferred revenue -- -- 971,550 971,550
------------ ------------ ------------ ------------
Net cash used by operating activities (105,360) (1,170,836) (2,752,330) (4,028,526)
------------ ------------ ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (39,295) (236,124) (562,973) (838,392)
------------ ------------ ------------ ------------
Net cash used in investing activities (39,295) (236,124) (562,973) (838,392)
------------ ------------ ------------ ------------
Cash flows from financing activities:
Proceeds from notes payable 162,840 -- -- 162,840
Proceeds from bank overdraft -- -- 74,085 74,085
Payment of notes payable -- (162,840) -- (162,840)
Proceeds (payments) of receivables
from/to shareholders (50,079) 50,079 (173,640) (173,640)
Proceeds from issuance of ordinary
shares, net 50,079 2,869,267 7,187,656 10,107,002
------------ ------------ ------------ ------------
Net cash provided by financing activities 162,840 2,756,506 7,088,101 10,007,447
------------ ------------ ------------ ------------
Effect of exchange rates on cash (653) (206,106) (188,871) (395,630)
Net increase in cash 17,532 1,143,440 3,583,927 4,744,899
Cash at beginning of period -- 17,532 1,160,972 --
------------ ------------ ------------ ------------
Cash at end of period 17,532 1,160,972 4,744,899 4,744,899
------------ ------------ ------------ ------------
(see accompanying notes)
F-6
KNOWLEDGE WELL GROUP LIMITED
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
The accompanying financial statements combine the financial position, results of
operations and cash flows of Knowledge Well Group Limited and Knowledge Well
Limited companies whose majority voting ordinary shares are owned by the same
shareholder.
Knowledge Well Limited is organized as a private limited company under the laws
of the Republic of Ireland. Knowledge Well Limited ("Limited") develops and
markets business, management and professional software training using
interactive learning technologies. Knowledge Well Limited was incorporated on
August 7, 1996.
Knowledge Well Group Limited is organized as a private limited company under the
laws of the Republic of Ireland. Knowledge Well Group Limited (the "Company" or
"Knowledge Well") sells and markets business, management and professional
software training using interactive learning technologies. The Company was
incorporated on May 1, 1997. Knowledge Inc. ("Inc."), a subsidiary of Knowledge
Well Group Limited, was incorporated on March 19, 1997, prior to the
incorporation of Knowledge Well Group Limited. These combined financial
statements include the results of operations of Knowledge Well Limited from
August 7, 1996, Knowledge Well Inc. from March 19, 1997 and the Company from May
1, 1997. If Knowledge Well Inc. had been accounted for as an acquisition by the
Company in May 1997, there would be no material difference on the financial
position or results of operation of the Company as reported herein.
Basis of Presentation and Principles of Consolidation
The combined financial statements are prepared in accordance with generally
accepted accounting principles in the United States and include the Company and
its wholly owned subsidiary and its affiliate Knowledge Well Limited after
eliminating all material inter-company accounts and transactions. The financial
statements of Knowledge Well Group Limited are being presented as a development
stage enterprise. From August 7, 1996 (date of inception) Limited has devoted
most of its efforts to research and development and the Company has devoted most
of its efforts to developing markets in the United States.
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 amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Translation of Financial Statements of Foreign Entities
The reporting currency for the combined entity is the U.S. dollar ("dollar").
The functional currency of the Company and Inc. is the dollar and the functional
currency of Limited is the Irish pound. Balance sheet amounts are translated to
the dollar from the local functional currency at year-end exchange rates, while
statements of operations amounts in local functional currency are translated
using average exchange rates. Translation gains or losses are recorded in other
comprehensive income. Currency gains or losses on transactions denominated in a
currency other than an entity's functional currency are recorded in the results
of the operations. The combined entity has not undertaken hedging transactions
to cover its currency exposures.
F-7
KNOWLEDGE WELL GROUP LIMITED
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE COMBINED FINANCIAL STATEMENTS- (Continued)
Revenue Recognition
Beginning in fiscal 1998, the Company adopted Statement of Position 97-2
"Software Revenue Recognition" as amended by Statement of Position 98-4. The
effect of adoption did not have a material impact on the Company's results of
operations.
The Company derives its revenues primarily pursuant to license agreements under
which customers license usage of delivered products for a period of one, two or
three years. On each anniversary date during the term of multiyear license
agreements, customers are allowed to exchange any or all of the licensed
products for an equivalent number of new products. The first year license fee is
generally recognized as revenue at the time of delivery of all products,
provided the Company's fees are fixed or determinable and collections of
accounts receivable are probable. Subsequent annual license fees are recognized
on each anniversary date, provided the Company's fees are fixed or determinable
and collections of accounts receivable are probable. The cost of satisfying any
Post Contract Support ("PCS") is accrued at the time revenue is recognized as
PCS fees are included in the annual license fee, the estimated cost of providing
PCS during the agreements is insignificant and unspecified upgrades or
enhancements offered have been and are expected to be minimal and infrequent.
For multi-element agreements the Company analyzes whether Vendor Specific
Objective Evidence exists to allocate the license fee among the various
elements. Where such evidence exists, license fees associated with delivered
elements are recognized and license fees associated with undelivered elements
are deferred. Where no such evidence exists the entire license fee is deferred.
Revenues from license agreements providing product exchange rights other than
annually during the term of the agreement are deferred and recognized ratably
over the contract period. Such amounts, together with unearned development and
license revenues, are recorded as deferred revenues in the combined financial
statements.
Research and Development
Research and development expenditures are generally charged to operations as
incurred. Statement of Financial Accounting Standards No. 86, "Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,"
requires capitalization of certain software development costs subsequent to the
establishment of technological feasibility. Based on the Company's product
development process, technological feasibility is established upon completion of
a working model. Development costs incurred by the Company between completion of
the working model and the point at which the product is ready for general
release have been insignificant. Through October 31, 1998, all research and
development costs have been expensed as incurred.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
computed using the straight-line method over estimated useful lives of three to
four years. Major classes of property and equipment are summarized as follows:
1997 1998
---- ----
Office and computer equipment $275,419 $838,392
-------- --------
Total property and equipment $275,419 $838,392
Accumulated depreciation 57,179 152,191
-------- --------
Property and equipment, net $218,240 $686,201
======== ========
Depreciation of property and equipment amounted to $0, $57,179, and $95,012, for
the period August, 7 1996 (date of inception) to October 31, 1996 and for the
years ended October 31, 1997 and 1998, respectively.
F-8
KNOWLEDGE WELL GROUP LIMITED
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE COMBINED FINANCIAL STATEMENTS- (Continued)
Stock Based Compensation
The Statement of Financial Accounting Standards No. 123, (SFAS 123), "Accounting
for Stock Based Compensation," allows companies to account for employee stock
based compensation either under the provisions of SFAS 123 or under the
provisions of Accounting Principles Board Opinion No. 25, (APB 25), "Accounting
for Stock Issued to Employees", but requires pro forma disclosure in the
footnotes to the financial statements as if the measurement provisions of SFAS
123 had been adopted. The Company has continued to account for its stock based
compensation in accordance with the provisions of APB 25.
Net Loss Per Share
Basic net loss per share is computed using the weighted average number of
ordinary shares outstanding during the period. Diluted net loss per share
includes the dilution, if any, from potential ordinary shares, such as shares
issuable pursuant to the exercise of options outstanding (using the treasury
stock method). Potential ordinary shares are anti-dilutive in all periods
presented On August 31, 1998, Knowledge Well Limited effected a split of its
issued and outstanding ordinary shares of $1.00 into four ordinary shares of
$0.25 each. The comparative per share data has been restated to reflect the
effects of Knowledge Well Limited's ordinary share split.
Defined Contribution Plan
The Company sponsors and contributes to a defined contribution plan for certain
employees and directors. Contribution amounts by the Company are determined by
management and allocated to employees on a pro rata basis based on the
employees' contribution. The Company contributed $0, $0 and $20,544 to the Plan
in the period August 7, 1996 (date of inception) to October 31, 1996 and in the
years ended October 31, 1997 and 1998, respectively.
Advertising Costs
Costs incurred for producing and communicating advertising are expensed when
incurred. The Company incurred no advertising for the period August 7, 1996
(date of inception) to October 31, 1996 or in the years ended October 31, 1997
and 1998 respectively.
Accounting for Income Taxes
The Company uses the liability method in accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws which will be in effect when the
differences are expected to reverse.
F-9
KNOWLEDGE WELL GROUP LIMITED
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE COMBINED FINANCIAL STATEMENTS- (Continued)
2. NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net income
per share:
For the Period For the Period
August 7,1996 For the year For the year August 7,1996
(Date of Inception) ended ended (Date of Inception)
to October 31, October 31, October 31, to October 31,
1996 1997 1998 1998
------------------- ----------- ----------- -------------------
Numerator:
Numerator for basic and diluted
net loss per share $ (58,156) $(1,594,739) $(4,422,218) $(6,075,113)
=========== =========== =========== ===========
Denominator:
Denominator for basic and diluted net
loss per share - weighted average shares 18,448 5,238,156 9,017,461 6,370,920
=========== =========== =========== ===========
Basic and dilutive net loss per share $ (3.15) $ (0.30) $ (0.49) $ (0.95)
=========== =========== =========== ===========
4. COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Financial Accounting Standards Board
Statement No.130 ("SFAS 130"), "Reporting Comprehensive Income", which
establishes new rules for the reporting and display of comprehensive income and
its components; however, adoption in 1998 will have no impact on the Company's
net income or shareholders' equity. SFAS 130 requires foreign currency
translation adjustments, which prior to adoption were reported separately in
stockholders' equity, to be included in other comprehensive income. Prior year
financial statements have been reclassified to conform to the requirements of
SFAS 130.
5. OPERATING LEASE COMMITMENTS
The Company leases various facilities, automobiles and equipment under non-
cancellable operating lease arrangements. The major facilities leases are for
terms of 2 to 5 years, and generally provide renewal options for terms of up to
3 additional years. Rent expense under all operating leases was approximately
$1,252, $98,209 and $151,745 in the period August 7, 1996 (date of inception) to
October 31, 1996, and for the years ended October 31, 1997 and 1998,
respectively. Future minimum lease payments under these non-cancellable
operating leases as of October 31, 1998 are as follows:
1999 $276,460
2000 276,460
2001 276,460
2002 276,460
2003 276,460
Thereafter 5,667,430
----------
Total minimum lease payments $7,049,730
==========
F-10
KNOWLEDGE WELL GROUP LIMITED
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE COMBINED FINANCIAL STATEMENTS- (Continued)
6. SHAREHOLDERS' EQUITY
The Company's authorized share capital is divided into ordinary shares, each
with a par value of $0.01 and convertible preferred shares, each with a par
value of $0.01.
The rights attaching to the classes of shares are identical except for the
following rights attaching to the preference shares:
In the event of any liquidation, dissolution or winding up of the Company the
preference shares shall be entitled to receive in priority to the holders of any
other class of shares an amount of $2.18114 for each preference share, plus all
declared but unpaid dividends.
The vote of the majority of all the preference shares, voting together as a
single class, is required to approve certain decisions of the Company.
The preference shares may be converted to ordinary shares at the option of the
preference shareholders subject to certain provisions.
The authorized share capital of Knowledge Well Limited is divided into three
classes of shares, "A" ordinary shares of $0.25 each, "B" ordinary shares of
$0.25 each and "C" ordinary shares of IR(pound)0.25 each.
The "A", "B", and "C" ordinary shares rank pari passu in all respects except for
the following:
. The maximum amount of dividends payable in respect of the "C" ordinary
shares shall be IR(pound)0.812 per share in total. On a winding up of the
Company, the "C" ordinary shares will receive the amount paid up or
credited as paid up on the shares and also any unpaid dividends due at the
time of the winding up.
. On a winding up the "A" and "B" ordinary shares will receive the amount
paid up or credited as paid up on the shares. Any surplus which is
available for distribution after the "C" ordinary shares receive their full
dividend entitlement will be distributed to the "A" and "B" ordinary
shareholders, except that the "B" ordinary shares will not be entitled to
participate until a sum equivalent to US$1,800,000 has been distributed to
the holders of the "A" ordinary shares.
Dividends may only be declared and paid out of profits available for
distribution determined in accordance with accounting principles generally
accepted in Ireland and applicable Irish Company Law. Any dividends, if and when
declared, will be declared and paid in United States Dollars. No reserves are
available for distribution as dividends at October 31, 1998.
Share Option Plans
The Company has elected to follow Accounting Principles Board Opinion 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its stock options because, as discussed below,
the alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation" ("Statement 123"), requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options generally equals the market price of the underlying stock
on the date of grant, no compensation expense is generally recognized.
In January 1998 the Company and Limited adopted the 1998 Share Option Scheme
(the "Company 1998 Plan"), the 1998 Share Option Scheme (the "Limited 1998
Plan"), (collectively the "Plans").
F-11
KNOWLEDGE WELL GROUP LIMITED
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE COMBINED FINANCIAL STATEMENTS- (Continued)
Under the Plans, incentive stock options and non qualified stock options may be
granted to any director or employee of the Company or Limited and any
independent contractor who performs services for either the Company or Limited
in accordance with law.
As of October 31, 1998, 3 million and 3 million ordinary shares have been
reserved for issuance under the Company 1998 Plan, and the Limited 1998 Plan,
respectively. The Plans are administered by the Stock Option Committees (the
"Committees").
The terms of the options granted are generally determined by the Committee. The
exercise price of options granted under the plans and ISO's cannot be less than
the fair market value of ordinary shares on the date of grant. The term of an
option under the Plans cannot exceed ten years. The term of an ISO granted to a
holder of more than 10% of the voting power of the Company cannot exceed five
years. An option may not be exercised unless the option holder is at the date of
exercise, or within three months of the date of exercise has been, a director,
employee or contractor of the Company. There are certain exceptions for
exercises following retirement or death. Options under the Plans generally
expire not later than 90 days following termination of employment or service or
six months following an optionees' death or disability.
In the event that options under the Plans terminate or expire without having
been exercised in full, the shares subject to those options are available for
additional option grants. Vesting periods of the options are determined by the
Committee and are currently for periods of up to four years. No options were
exercisable at October 31, 1998. As of October 31, 1998, 586,868 options are
available for grant under the plans.
Pro forma information regarding net income and earnings per share is required by
Statement 123, and has been determined as if the Company and limited had
accounted for its stock options under the minimum value method of that
Statement. The minimum value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following weighted-
average assumptions during the years ended October 31, 1997 and 1998
respectively: risk-free interest rates of approximately 6%, and 5%; dividend
yields of 0%; volatility factors of the expected market price of the Company's
ordinary shares of 0% and a weighted-average expected life of the option of five
years.
The Black-Scholes option model was developed for use in estimating the fair
value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the minimum value estimate, in the management's opinion,
the existing models do not provide a reliable single measure of the minimum
value of its stock options.
For the purposes of pro forma disclosures, the estimated minimum value of the
options is amortized to expense over the options' vesting period.
Pro forma (loss) for the years ended October 31, 1997 and 1998 was $(1,594,739)
and $(4,527,447) respectively. Pro forma basic and dilutive net (loss) per share
was $(0.30) and $(0.50) for the years ended October 31, 1997 and 1998
respectively. Because options vest over several years and additional grants are
expected, the effects of these hypothetical calculations are not likely to be
representative of similar future calculations.
F-12
KNOWLEDGE WELL GROUP LIMITED
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE COMBINED FINANCIAL STATEMENTS- (Continued)
A summary of the Company's stock option activity, and related information for
the period ended October 31, 1996 and for the years ended October 31, 1997 and
1998 follows:
Options Outstanding
Price Weighted Average
Number of Shares per Share ExercisePrice
---------------- --------- -------------
Balance at October 31, 1996 -- $ -- $ --
Granted in 1997 809,456 $ 0.01 -- 0.86 $0.43
---------- --------------- ------
Balance at October 31, 1997 809,456 $ 0.01 - 0.86 $0.43
Granted in 1998 4,603,680 $ 0.01 - 1.50 $0.76
---------- --------------- ------
Balance at October 31, 1998 5,413,136 $ 0.01 - 1.50 $0.58
---------- --------------- ------
Options Outstanding
At October 31, 1998 Options Exercisable
--------------------------------------------------------- --------------------------------------
Weighted
Average Weighted Weighted
Range of Shares Remaining Average Number of Average
Exercise Prices Outstanding Contractual Life Exercise Price Shares Exercise Price
- --------------- ----------- ---------------- -------------- ------ --------------
$ 0.01 2,706,658 9.28 $0.01 -- $ --
$ 0.86 404,728 8.97 $0.86 -- $ --
$ 1.19 2,288,680 9.96 $1.50 -- $ --
$ 1.50 13,250 9.96 $1.50 -- $ --
--------- ---- ----- ----- ------
$ 0.01 - 1.50 5,413,136 9.16 $0.58 -- $ --
--------- ---- ----- ----- ------
At October 31, 1997 and 1998 there were no options exercisable. The weighted
average minimum value of options granted during the years ended October 31, 1997
and 1998 was $0.43, and $0.76, respectively.
7. INCOME TAXES
The Company and its affiliate Limited have incurred losses since inception and,
therefore, have not been subject to corporation taxes. As of October 1998, the
Company and Limited have net operating losses forward of approximately $1million
and $3 million respectively, available to reduce future income taxes.
The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been recognized differently in the
financial statements or tax returns. Under this method deferred tax liabilities
and assets are determined based on the difference between the financial
statement carrying amounts and tax bases of assets and liabilities using enacted
tax rates and laws in effect in the years in which the differences are expected
to reverse. Deferred tax assets are evaluated for realization based on a
more-likely-than-not criteria in determining if a valuation allowance should be
provided. As the combined entities have had cumulative losses and there is no
assurance of future taxable income, the
F-13
KNOWLEDGE WELL GROUP LIMITED
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE COMBINED FINANCIAL STATEMENTS- (Continued)
valuation allowance has been increased by approximately $1.4m over the prior
year. The components of the Company's deferred tax assets as of October 31, 1997
and 1998 are as follows:
October 31,
1997 1998
---- ----
(in United States dollars)
Deferred tax assets
Net operating loss carry forwards $ 584,374 $ 1,988,900
Valuation allowance (584,374) (1,988,900)
----------- -----------
Net deferred tax assets $ -- $ --
=========== ===========
At November 1, 1996 the valuation allowance was $19,773
8. SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION
On January 1, 1998 the Company adopted Statement of Financial Accounting
Standard No. 131 "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131"). The new rules establish revised standards for public
companies relating to the reporting of financial information about operating
segments. The adoption of SFAS 131 did not have a material effect on the
Company's primary consolidated financial statements but did affect the Company's
segment information disclosures.
Segment Information
Upon adoption of SFAS 131, the Company and Limited have presented financial
information for its two reportable operating segments: United States of America
and Ireland. The United States of America segment is a sales operations and
Ireland is Limited's Research and Development operation. The Company and its
subsidiaries operate in one industry segment, the development and marketing of
interactive education and training software. Operations outside of Ireland
consist principally of sales and marketing.
The Company's Chief Operating Decision Maker ("CODM"), the Company's President
and CEO allocates resources and evaluates performance based on a measure of
segment profit or loss from operations. The accounting policies of the
reportable segments are the same as described in the summary of significant
accounting policies. The Company's CODM does not view segment results below
operating profit (loss), therefore, net interest income, other income and the
provision for income taxes are not broken out by segment below. The Company does
not account for nor report to the CODM its assets or capital expenditures by
segment, thus asset information is not provided on a segment basis. A summary of
the segment financial information reported to the CODM is as follows:
Year Ended October 31, 1998
(in United States dollars)
--------------------------
United States of Consolidated
America Ireland Total
------- ------- -----
Revenues - External $ 48,011 $ -- $ 48,011
Inter segment Revenues -- -- --
Depreciation and Amortization 8,351 86,661 95,012
Segment Operating Loss 1,166,467 3,255,751 4,422,218
F-14
KNOWLEDGE WELL GROUP LIMITED
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE COMBINED FINANCIAL STATEMENTS- (Continued)
Year Ended October 31, 1997
(in United States dollars)
--------------------------
United States of Consolidated
America Ireland Total
------- ------- -----
Revenues - External $ -- $ -- $ --
Inter segment Revenues -- -- --
Depreciation and Amortization -- 57,179 57,179
Segment Operating Loss 300,874 1,293,865 1,594,739
Period from August 7, 1996 (date of
inception) to October 31, 1996
(in United States dollars)
--------------------------
United States of Consolidated
America Ireland Total
------- ------- -----
Revenues - External $ -- $ -- $ --
Inter segment Revenues -- -- --
Depreciation and Amortization -- -- --
Segment Operating Loss -- 58,156 58,156
Long-Lived assets are those assets that can be directly associated with a
particular geographic area. These assets are categorized by geographical areas
as follows:
Long-Lived Assets
- -----------------
October 31
1997 1998
---- ----
(in United States dollars)
Ireland $208,204 $568,125
United States 10,216 118,076
------ -------
Total $218,420 $686,201
-------- --------
9. RECENT DEVELOPMENT
In December 1998, CBT Group PLC ("CBT") announced its intention to seek to
acquire Knowledge Well Limited (Limited") and Knowledge Well Group Limited
("Company"). In the acquisition each ordinary share of Limited and Company will
be exchanged for 0.1635 ordinary shares of CBT and CBT will assume outstanding
stock options of Knowledge Well. The transaction is intended to be tax free to
the shareholders
F-15
KNOWLEDGE WELL GROUP LIMITED
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO THE COMBINED FINANCIAL STATEMENTS- (Continued)
and is intended to be accounted for using the purchase method. Consummation of
the transaction is subject to the Company's shareholder approval, expiration or
termination of the applicable Hart-Scott-Rodino waiting period and other
customary closing conditions. The acquisition is expected to be completed during
the second quarter of 1999.
10. EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". The SOP requires the
capitalization of certain costs incurred after the date of adoption in
connection with developing or obtaining software for internal use once certain
criteria are met. The Company has adopted the provisions of SOP 98-1 in fiscal
1998.
In February 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No.132, "Employers' Disclosures About Pensions and Other Post-Retirement
Benefits." This statement revises employers' disclosures about pensions and
other post-retirement benefit plans. It does not, however, change the
measurement of recognition of those plans. This statement standardizes the
disclosure requirements for pensions and other post-retirement benefits to the
extent practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures. Restatement of disclosures for
earlier periods is required. The Company has implemented the provisions of SFAS
132 in 1998 for its defined contribution plan.
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activity" ("SFAS
133") which is required to be adopted in years beginning after June 15, 1999.
The Company has yet to determine its date of adoption. The Statement will
require the Company to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges of underlying transactions must be
adjusted to fair value through income. If the derivative is a hedge, depending
on the nature of the hedge, changes in the fair value of derivatives will either
be offset against the change in fair value of the hedged assets, liabilities or
firm commitments through earnings or recognized in other comprehensive income
until the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
Management has not yet determined what the effect of SFAS 133 will be on the
Company's consolidated financial position, results of operations or cash flows.
In December 1998, the AICPA issued SOP 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain Transactions" and
addresses software revenue recognition as it applies to certain multiple-element
arrangements. SOP 98-9 also amends SOP 98-4, "Deferral of the Effective Date of
a Provision of SOP 97-2 through fiscal years beginning on or before March 15,
1999. All other provisions of SOP 98-9 are effective for transactions entered
into in fiscal years beginning after March 15, 1999.
F-16