Exhibit 99.2
[Letterhead of PriceWaterhouseCoopers LLP]
March 9, 2001
(except for note 22 (i), which is as of March 28, 2001 and note 22 (ii), which
is as of April 11, 2002)
Auditors' Report
To the Directors of
MGI Software Corp.
We have audited the consolidated balance sheets of MGI Software Corp. as at
January 31, 2001 and 2000 and the consolidated statements of operations and
deficit and cash flows for the years then ended. 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 Canadian and United States generally
accepted auditing standards. 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 January 31, 2001
and 2000 and the results of its operations and its cash flows for the years then
ended in accordance with Canadian generally accepted accounting principles.
Chartered Accountants
/s/ PriceWaterhouseCoopers LLP
Consolidated Balance Sheets
As at January 31, 2001 and 2000 (in thousands of Canadian dollars)
- ------------------------------------------------------------------------------------------------------
2001 2000
- ------------------------------------------------------------------------------------------------------
$ $
ASSETS
Current assets
Cash 2,444 2,088
Short-term investments (note 3(a)) 33,880 -
Notes receivable (note 3(b)) - 31,616
Accounts receivable
Trade (note 4) 9,790 11,460
Other 830 787
Inventories 2,047 488
Prepaids and other assets 1,925 1,063
- ------------------------------------------------------------------------------------------------------
50,916 47,502
- ------------------------------------------------------------------------------------------------------
Investments (notes 5 and 17) 3,986 2,450
Capital assets (note 6) 6,928 4,853
Acquired technology (note 7) 5,517 11,711
- ------------------------------------------------------------------------------------------------------
67,347 66,516
- ------------------------------------------------------------------------------------------------------
LIABILITIES
Current liabilities
Accounts payable and accrued liabilities 19,212 10,632
Deferred revenue 1,767 1,013
Current portion of long-term debt (note 8) 165 167
Current portion of capital lease obligations (note 9) 27 28
- ------------------------------------------------------------------------------------------------------
21,171 11,840
Deferred revenue 2,113 1,787
Long-term debt (note 8) - 165
Capital lease obligations (note 9) 22 45
- ------------------------------------------------------------------------------------------------------
23,306 13,837
SHAREHOLDERS' EQUITY
Capital stock
Common shares (note 10) 116,819 72,867
Other equity (note 10) 3,964 24,047
Deficit (76,742) (44,235)
- ------------------------------------------------------------------------------------------------------
44,041 52,679
- ------------------------------------------------------------------------------------------------------
Commitments and contingencies (notes 16 and 21) 67,347 66,516
- ------------------------------------------------------------------------------------------------------
Consolidated Statement of Operations and Deficit
For the years ended January 31, 2001 and 2000 (in thousands of Canadian dollars,
except per share amounts)
- ------------------------------------------------------------------------------
2001 2000
- ------------------------------------------------------------------------------
$ $
REVENUE 47,050 30,840
COST OF SALES 10,419 4,763
- ------------------------------------------------------------------------------
36,631 26,077
- ------------------------------------------------------------------------------
EXPENSES
Marketing and selling 30,418 17,722
Research and development (note 11) 20,105 12,484
Administration 6,998 4,227
Foreign exchange (780) 436
Amortization of capital assets 1,851 1,022
- ------------------------------------------------------------------------------
58,592 35,891
- ------------------------------------------------------------------------------
LOSS BEFORE UNDERNOTED ITEMS (21,961) (9,814)
ONE-TIME CHARGES (note 19) (3,871) -
INTEREST INCOME 949 344
INTEREST EXPENSE ON LONG-TERM DEBT (188) (371)
AMORTIZATION OF ACQUIRED TECHNOLOGY (6,820) (10,594)
- ------------------------------------------------------------------------------
LOSS BEFORE INCOME TAXES (31,891) (20,435)
INCOME TAXES (note 12) 616 -
- ------------------------------------------------------------------------------
LOSS FOR THE YEAR (32,507) (20,435)
DEFICIT - BEGINNING OF YEAR (44,235) (23,800)
- ------------------------------------------------------------------------------
DEFICIT - END OF YEAR (76,742) (44,235)
- ------------------------------------------------------------------------------
LOSS PER SHARE - BASIC AND DILUTED (0.85) (0.67)
- ------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 38,161,796 30,613,492
- ------------------------------------------------------------------------------
Consolidated Statement of Cash Flows
For the years ended January 31, 2001 and 2000 (in thousands of Canadian dollars)
- -----------------------------------------------------------------------------------------------------------
2001 2000
- -----------------------------------------------------------------------------------------------------------
$ $
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Loss for the year (32,507) (20,435)
Items not affecting cash
Amortization of capital assets 1,851 1,022
Amortization of acquired technology 6,820 10,594
Unrealized foreign exchange (gain) loss (73) 246
Non-cash financing expense - 102
Net change in non-cash working capital amounts relating to operations (note 13) 9,805 (4,457)
- -----------------------------------------------------------------------------------------------------------
(14,104) (12,928)
- -----------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net proceeds on issuance of common shares 2,399 23,746
Net proceeds on issuance of units 21,336 -
Net proceeds on issuance of special units - 23,550
Net proceeds on receipt of convertible debt - 5,865
Repayment of long-term debt (167) (168)
Repayment of capital lease obligations (24) (32)
- -----------------------------------------------------------------------------------------------------------
23,544 52,961
- -----------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of capital assets - net (3,792) (3,431)
Acquisition of intangible assets (3,259) (7,158)
Decrease (increase) in notes receivable 31,616 (31,756)
- -----------------------------------------------------------------------------------------------------------
24,565 (42,345)
- -----------------------------------------------------------------------------------------------------------
FOREIGN EXCHANGE GAIN (LOSS) ON CASH HELD IN FOREIGN CURRENCY 231 (68)
- -----------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS DURING THE YEAR 34,236 (2,380)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,088 4,468
- -----------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR 36,324 2,088
- -----------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS COMPRISED OF:
CASH 2,444 2,088
SHORT-TERM INVESTMENTS 33,880 -
- -----------------------------------------------------------------------------------------------------------
36,324 2,088
- -----------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION (NOTE 13)
Notes to Consolidated Financial Statements
For the years ended January 31, 2001 and 2000 (tabular amounts in thousands of
Canadian dollars, except per share amounts)
1 NATURE OF OPERATIONS
MGI Software Corp. was incorporated on September 22, 1995 under the laws of
the Province of Ontario to design, develop, market and support Internet
imaging products and digital video and photography solutions for PCs,
devices, and the Internet. The products apply to content creation and
editing, content encoding and decoding, Internet distribution systems, web
printing and online navigation. To date, the Company's primary markets have
been the United States, Europe and Asia Pacific.
The Company has decided to retain the Canadian dollar as its reporting
currency.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of consolidation
Effective August 1, 2000, Live Picture Japan K. K. is accounted for on a
consolidated basis due to a change in circumstances resulting in the Company
having the ability to control Live Picture Japan K. K.
These consolidated financial statements include the accounts of the Company,
its 50.1% interest in Live Picture Japan K. K. and the following wholly
owned subsidiaries: MGI Software Inc., and Live Picture Development S.A.R.L.
All intercompany accounts and transactions have been eliminated on
consolidation.
Revenue recognition
Revenue from packaged software products and related end-user telephone
support sold to distributors and resellers is recognized when shipped, the
price is fixed and collection is reasonably assured except in certain
circumstances where product returns cannot be reasonably estimated.
Provisions are recorded for returns and rebates. Where returns cannot be
reasonably estimated revenue is recognized when products are sold to
end-users.
Revenue from software products and related customer post-contract support
sold to original equipment manufacturers (OEMs) is recognized when the OEMs
ship the products to their customers, except in certain circumstances where
vendor specific objective evidence (VSOE) of the price of the customer
post-contract support is not available. Where VSOE is not available for
customer post-contract support, the entire fee is recognized ratably over
the term of the agreement. End-user telephone support and customer
post-contract support sold to OEMs are included in product sales when the
support is for a period of less than 12 months and the related estimated
costs and upgrades are insignificant. Costs related to such support are
accrued.
Revenue from the sale of development services is recognized as the services
are performed under the terms of the contract using the percentage of
completion method.
Deferred revenue represents that portion of income received upon sale of
licensed software and co-marketing arrangements where significant
obligations remain.
Cash and cash equivalents
Cash and cash equivalents include cash and highly liquid investments with
original maturities of three months or less.
Short-term investments
Short-term investments are valued at the lower of cost and market value.
Investments
The Company's long-term portfolio investments are accounted for on the cost
basis. The carrying value of investments is written down to net realizable
value if there is a loss of value that is considered to be other than
temporary.
Inventories
Inventories are valued at the lower of cost and net realizable value. Cost
is determined using the weighted average basis.
Notes to Consolidated Financial Statements
For the years ended January 31, 2001 and 2000 (in thousands of Canadian dollars,
except per share amounts) continued
Capital assets
Capital assets are recorded at the lower of cost, net of accumulated
amortization, and net recoverable amount. Amortization charges are
calculated on the following bases using the following annual rates:
Computer equipment 30% declining balance
Computer software straight-line over 3 years
Furniture and equipment 20% declining balance
Furniture and equipment under capital lease straight-line over related lease term
Leasehold improvements over the useful life or remaining lease term
Trademarks and patents straight-line over 5 years
Acquired technology
Acquired technology is stated at the lower of cost, net of accumulated
amortization, and net recoverable amount. Amortization is provided on a
straight-line basis over the useful life of the acquired technology ranging
from one to three years. The carrying values are reviewed regularly for
recoverability based on the future operating income generated by the related
assets. Where the carrying amount exceeds the net recoverable amount, the
acquired technology is written down.
Research and development
Research costs are expensed as incurred. Development costs are expensed as
incurred unless a project meets the criteria under generally accepted
accounting principles for deferral and amortization. The Company has not
deferred any development costs to date.
Government assistance is available to the Company through the Industrial
Research Assistance Program (IRAP) and investment tax credits.
IRAP funds qualified research and development activities on preapproved
projects. IRAP assistance is recorded as a reduction of research and
development expenses in the year in which it is claimed.
Investment tax credits are accounted for using the cost reduction method
and, accordingly, are deducted from the related research and development
expenses in the year of expenditure provided there is reasonable assurance
they will be realized. During fiscal 2001 and 2000, no amounts were accrued.
Income taxes
The Company follows the asset and liability method of accounting for income
taxes. Under this method, future tax assets and liabilities are determined
based on the differences between the financial reporting and income tax
bases of assets and liabilities and are measured using the substantively
enacted tax rates and laws. Valuation allowances are established, when
necessary, to reduce future tax assets to the amounts expected to be
realized.
Foreign currency translation
Transactions denominated in foreign currencies, and the accounts of the
Company's integrated foreign subsidiaries, are translated using the temporal
method. Under the temporal method, monetary assets and liabilities are
translated at the exchange rates in effect at the balance sheet date whereas
other non-monetary assets and liabilities are translated at monthly average
rates prevailing at the respective transaction dates. Revenue and expenses
are translated at monthly average rates prevailing throughout the year,
except for amortization which is translated at exchange rates prevailing
when the related assets were acquired. Exchange gains and losses are
reflected in the statements of operations and deficit.
Use of estimates
The preparation of financial statements in conformity with Canadian
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities, disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
Financial instruments
Financial instruments are initially recorded at historical cost. If
subsequent circumstances indicate that a decline in the fair value of a
financial asset is other than temporary, the financial asset is written down
to its fair value. Unless otherwise indicated, the fair values of financial
instruments approximate their recorded amounts. The fair values of cash,
short-term investments, notes receivable, accounts receivable, and accounts
payable and accrued liabilities approximate their carrying amounts at
January 31, 2001 and 2000 because of the short period to receipt or payment
of cash. The fair value of long-term debt approximates its carrying value
because of the floating interest rate.
Notes to Consolidated Financial Statements
For the years ended January 31, 2001 and 2000 (in thousands of Canadian dollars,
except per share amounts) continued
Earnings (loss) per share
Effective February 1, 2001, the Company adopted the new recommendations of
the Canadian Institute of Chartered Accountants (CICA) Handbook Section
3500, "Earnings per Share". This new standard is mandatory for fiscal years
beginning on or after January 1, 2001 and has been given retroactive
application. Under this new standard, the "treasury stock" method is used
instead of the imputed earnings approach for determining the dilutive effect
of options issued on presenting diluted earnings per share. Potential common
shares are excluded from the calculation if their effect is anti-dilutive.
Basic earnings per share are computed by dividing the earnings for the
period by the weighted average number of common shares outstanding during
the period.
Stock options issued to service providers
Stock options issued to service providers are recorded at their fair market
value at the date of the grant. This amount is charged to operations over
the periods in which services are rendered.
Stock-based compensation plans
The Company's stock option plan is described in note 10(i). No compensation
expense is recognized for these plans when stock or stock options are issued
to employees. Any consideration paid by employees upon the exercise of stock
options or purchase of stock is included in share capital. If stock or stock
options are repurchased from employees, the excess if any of the
consideration paid over the carrying amount of the stock or stock option
cancelled is charged to deficit.
3 SHORT-TERM INVESTMENTS AND NOTES RECEIVABLE
a) Short-term investments consist of bonds and commercial notes from
Canadian and U.S. corporations as follows:
January 31, 2001
- --------------------------------------------------------------------------------------------------------
Interest
$ % Maturity
Canadian crown corporation bonds 23,929 5.30 - 6.75 March 1, 2001
U.S. corporate bonds 6,747 6.20 March 1, 2001
U.S. commercial notes 3,204 5.25 - 5.45 February 1 - 26, 2001
- --------------------------------------------------------------------------------------------------------
33,880
- --------------------------------------------------------------------------------------------------------
b) Notes receivable at January 31, 2000 consists of commercial notes from
Canadian and U.S. corporations as follows:
January 31, 2000
- ----------------------------------------------------------------------------------------------
Interest
$ % Maturity
U.S. commercial notes 4,616 5.2 - 5.345 February 1 - 14, 2000
Canadian commercial notes 27,000 5.050 February 28, 2000
- ----------------------------------------------------------------------------------------------
31,616
- ----------------------------------------------------------------------------------------------
4 ACCOUNTS RECEIVABLE
During fiscal 2001, the Company entered into an agreement to sell designated
trade receivables to a Trust Company. At January 31, 2001, accounts
receivable is reported net of receivables sold.
5 INVESTMENTS
2001 2000
- ------------------------------------------------------------------------------
$ $
Investment in related company (a) 2,450 2,450
Investment in imaging service provider (b) 1,536 -
- ------------------------------------------------------------------------------
3,986 2,450
- ------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
For the years ended January 31, 2001 and 2000 (in thousands of Canadian dollars,
except per share amounts) continued
a) In January 2000, the Company entered into a software licensing
arrangement with a related company in exchange for an investment in the
related company (see note 17)
b) In June 2000, the Company entered into a co-marketing arrangement with an
imaging service provider in exchange for 1,536,580 special warrants in the
imaging service provider. Each special warrant was converted, without
additional consideration into one common share on October 31, 2000.
6 CAPITAL ASSETS
2001
- --------------------------------------------------------------------------------------------------
Accumulated
Cost amortization Net
$ $ $
Computer equipment 5,143 1,915 3,228
Computer software 1,245 590 655
Furniture and equipment 1,858 633 1,225
Furniture and equipment under capital lease 105 55 50
Leasehold improvements 1,143 360 783
Trademarks and patents 1,212 225 987
- --------------------------------------------------------------------------------------------------
10,706 3,778 6,928
- --------------------------------------------------------------------------------------------------
2000
- --------------------------------------------------------------------------------------------------
Accumulated
Cost amortization Net
$ $ $
Computer equipment 3,186 1,018 2,168
Computer software 1,030 289 741
Furniture and equipment 1,295 401 894
Furniture and equipment under capital lease 105 24 81
Leasehold improvements 928 238 690
Trademarks and patents 340 61 279
- --------------------------------------------------------------------------------------------------
6,884 2,031 4,853
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7 ACQUIRED TECHNOLOGY
- --------------------------------------------------------------------------------------------------
Accumulated
Cost amortization Net
$ $ $
2001 22,975 17,458 5,517
- --------------------------------------------------------------------------------------------------
2000 22,305 10,594 11,711
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8 LONG-TERM DEBT
2001 2000
- --------------------------------------------------------------------------------------------------
$ $
Royal Bank, interest at prime plus 1.0%, due February 2002, repayable in monthly
installments of $13,889, secured by a general security agreement covering all
of the assets of the Company other
than real property 165 332
Less: Current portion 165 167
- --------------------------------------------------------------------------------------------------
- 165
- --------------------------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
For the years ended January 31, 2001 and 2000 (in thousands of Canadian dollars,
except per share amounts) continued
9 CAPITAL LEASE OBLIGATIONS
The following schedule sets out future minimum lease payments on capital
leases, together with the balance of obligations, by fiscal year:
$
2002 32
2003 29
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61
Less: Imputed interest 12
- --------------------------------------------------------------------------------------------------
49
Less: Current portion 27
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22
- --------------------------------------------------------------------------------------------------
10 CAPITAL STOCK
Authorized
An unlimited number of common shares
An unlimited number of Class A, voting, special shares
Issued
2001 2000
- -----------------------------------------------------------------------------------------------------------
$ $
42,140,524 (2000 - 36,058,818) common shares 116,819 72,867
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
2001 2000
- -----------------------------------------------------------------------------------------------------------
$ $
Other equity
Stock options issued to service providers (h) 150 150
Compensation options issued in connection with private placement (c) 150 161
Warrants issued in connection with convertible debt (e) 186 186
Special warrants (d) - 23,550
Warrants issued in connection with units (f) 3,478 -
- -----------------------------------------------------------------------------------------------------------
3,964 24,047
- -----------------------------------------------------------------------------------------------------------
The common share transactions are summarized as follows:
2001 2000
- --------------------------------------------------------------------------------------------------------------
Number Number
of shares Amount of shares Amount
$ $
Issued - Beginning of year (a) 36,058,818 72,867 24,279,412 32,365
Conversion of warrants pursuant to terms of
a subscription agreement (a) 813,647 - - -
Issued for cash upon private placement (b) - - 4,494,863 15,255
Upon conversion of special warrants (c, d) 1,000,000 23,550 3,000,000 6,826
On exercise of broker compensation options (d) 9,000 38 45,000 189
Purchase of software technology (20(a)) - - 450,000 3,420
Purchase of selected assets of Live Picture (20(b)) - - 1,550,410 6,085
Purchase of selected DVD software technology (20(c)) - - 373,134 1,496
On conversion of convertible debt (e) - - 1,038,461 5,916
Common shares issued in connection with units (f) 2,875,000 17,858 - -
Purchase of trademark (g) 7,000 134 - -
On exercise of employee stock options (i) 1,377,059 2,372 827,538 1,315
- --------------------------------------------------------------------------------------------------------------
Issued - End of Year 42,140,524 116,819 36,058,818 72,867
- --------------------------------------------------------------------------------------------------------------
a) On September 30, 1997, the company issued 1,022,757 common shares for
cash of $2,765,999 pursuant to the terms of a subscription agreement. In
addition, the same number of common share purchase warrants was issued for
an aggregate consideration of $1.00. Each warrant entitles the holder to
purchase one common share of the company, subject to adjustment, at the
lower of: (i) $3.95 per common share; and (ii) the higher of the then
current market price of the common shares of the company and $3.20 per
common share. On October 13, 2000, pursuant to the
Notes to Consolidated Financial Statements
For the years ended January 31, 2001 and 2000 (in thousands of Canadian
dollars, except per share amounts) continued
terms of the subscription agreement, the common share purchase warrants were
converted on a net basis into 813,647 common shares for no additional
consideration.
b) In anticipation of the acquisition referred to in note 20(b), the Company
entered into a financing agreement dated June 22, 1999, and accordingly: 1)
issued on June 23, 1999, 2,910,959 common shares for cash proceeds of
$9,996,000 (US$6,800,000) pursuant to a private placement to Perseus Capital
LLC, Trans Cosmos USA Inc. and Encompass Group Inc., all residents of the
United States of America; 2) issued on June 30, 1999, 941,781 common shares
for cash proceeds of $3,234,000 (US$2,200,000) pursuant to a private
placement to Perseus Capital LLC; and 3) issued on December 31, 1999,
642,123 common shares for cash proceeds of $2,175,000 (US$1,500,000)
pursuant to a private placement to Perseus Capital LLC.
Total fees and costs associated with the issue were approximately $150,000.
c) On April 16, 1999, the Company issued 3 million special warrants at a
price of $2.55 for net proceeds of $6,826,000 (net of issue costs of
$609,000 and fair value attributed to non-cash broker special warrants of
$215,000). On July 31, 1999, the special warrants were converted into 3
million common shares without additional compensation. As additional
compensation under the agency agreement, the Company issued 180,000 broker
special warrants. On July 31, 1999, each broker special warrant was
converted into one compensation option without payment of additional
consideration. Each compensation option will entitle the holder to purchase
one common share at a price of $3.00 per common share within two years from
the closing date. At year-end, 126,000 compensation options valued at
$150,000 remained outstanding.
d) On January 18, 2000, the Company issued 1 million special warrants at a
price of $25.00 for gross proceeds of $25,000,000. In connection with the
underwriting agreement, commissions of $1,250,000 were paid to the
underwriters. Fees and costs associated with this issuance were
approximately $200,000. On May 25, 2000 the special warrants were all
converted into 1,000,000 common shares without additional consideration.
e) During the year, the company issued $6 million of subordinated
convertible debt (the debt) consisting of a $3 million convertible debenture
and a $3 million standby facility. The debt was for a term of three years,
bore interest at 6% per annum and was convertible into common shares of the
Company at a price of $3.25 for the first $3 million and $26.00 for the
second $3 million. The fair value attributed to the conversion feature was
$278,000. Cash fees associated with the debt were $135,000. As additional
compensation, the Company issued 135,000 warrants to purchase common shares.
The term of the warrants is three years at an exercise price of $3.25. The
fair value attributed to the warrants is $186,000. As at the year-end, all
the warrants remained outstanding.
On April 16, 1999, the Company received the first $3 million which was
subsequently converted at the holders' option into 923,077 common shares on
December 17, 1999 and January 19, 2000. On January 12, 2000, the $3 million
standby facility was drawn. On January 20, 2000, the $3 million standby
facility was converted at the holders' option into 115,384 common shares.
f) On January 17, 2001, the Company signed an underwriting agreement for the
issuance of 2,875,000 units, with each unit consisting of one common share
of the Company and one-half of one warrant ("Warrant"). Each whole warrant
entitles the holder thereof to purchase one common share at a purchase price
of $9.50 at any time prior to July 31, 2002 (which is 18 months after the
completion of the offering). The Units were issued at a price of $8.00 for
gross proceeds of $23,000,000. The purchase price allocated to the Warrants
was $1.30 per Warrant for net proceeds of $3,478,000 (net of issue costs of
$260,000). In connection with the underwriting agreement, commissions of
$1,150,000 were paid to the underwriters. Fees and costs associated with the
issuance were approximately $514,000.
g) On September 7, 2000, the Company issued 7,000 common shares pursuant to
an agreement to acquire a trademark. The fair value of the common shares at
the time of issue was $134,400.
h) In November 1999, the Company issued 55,000 stock options to various
service providers as compensation for services to be provided. The fair
value of these services was determined to be $150,000, and will be charged
to operations over the periods in which the services are rendered.
Notes to Consolidated Financial Statements
For the years ended January 31, 2001 and 2000 (in thousands of Canadian dollars,
except per share amounts) continued
i) The Company has an incentive plan under which options to purchase common
shares may be granted to its directors, officers, employees and service
providers at the discretion of the Board of Directors. Each option under the
incentive plan allows for the purchase of one common share and expires not
later than ten years from the date granted. Options for an aggregate of
8,392,116 shares may be granted, subject to shareholder ratification. The
options are subject to various vesting requirements as outlined in the plan.
A summary of the Company's fixed stock option plan as of January 31, 2001
and 2000 and changes during the years ended on those dates is summarized
below:
2001 2000
- ---------------------------------------------------------------------------------------------------------
Weighted Weighted
average average
exercise exercise
Options price Options price
$ $
Issued and outstanding - Beginning of year 4,949,428 4.97 3,130,875 1.43
Issued 1,748,000 15.34 3,040,850 7.46
Exercised (1,377,059) 1.70 (827,538) 1.60
Cancelled (583,726) 10.57 (394,759) 3.10
- ---------------------------------------------------------------------------------------------------------
Issued and outstanding - End of year 4,736,643 9.13 4,949,428 4.97
- ---------------------------------------------------------------------------------------------------------
Options exercisable at year-end 1,703,693 5.42 1,317,490 1.79
- ---------------------------------------------------------------------------------------------------------
As at January 31, 2001, the Company had stock options outstanding as follows:
Number Weighted
outstanding average Weighted
Range of at remaining average
exercise January 31, contractual exercise
prices 2001 life price
$ $
1.00 to 1.50 643,592 1.6 1.36
1.51 to 2.00 47,950 2.8 1.75
2.01 to 2.50 242,850 1.6 2.29
2.51 to 3.00 34,250 1.3 2.68
3.01 to 3.50 91,625 2.9 3.34
3.51 to 4.00 7,500 2.3 4.00
4.01 to 4.50 1,274,126 3.1 4.09
4.51 to 5.00 4,500 3.6 4.75
6.01 to 6.50 66,500 3.7 6.36
6.51 to 7.00 17,000 3.0 6.83
7.01 to 7.50 258,600 3.7 7.17
7.51 to 10.00 244,300 3.1 18.46
10.01 to 15.00 193,250 4.8 12.00
15.01 to 20.00 1,396,300 4.2 17.13
20.01 to 25.00 87,500 4.4 20.36
25.01 to 35.00 126,800 4.0 28.53
- ---------------------------------------------------------------------------------------------------------
4,736,643 3.3 9.13
- ---------------------------------------------------------------------------------------------------------
11 RESEARCH AND DEVELOPMENT
2001 2000
- ---------------------------------------------------------------------------------------------------------
$ $
Gross research and development expenses 20,105 12,614
IRAP funding - (130)
- ---------------------------------------------------------------------------------------------------------
Research and development expenses - net 20,105 12,484
- ---------------------------------------------------------------------------------------------------------
The IRAP funding received or receivable at January 31, 2001 amounted to $NIL
(2000 - $130,000).
Notes to Consolidated Financial Statements
For the years ended January 31, 2001 and 2000 (in thousands of Canadian dollars,
except per share amounts) continued
12 INCOME TAXES
The Company's income tax provision has been determined as follows:
2001 2000
- --------------------------------------------------------------------------------------------------------
$ $
Loss for the year (31,891) (20,435)
- --------------------------------------------------------------------------------------------------------
Combined basic federal and provincial income tax recovery
at 43.75% (2000 - 43.58%) (13,951) (8,906)
Permanent non-tax deductible expenses 492 151
Foreign tax differential 8 -
Provincial research and development deduction (91) (174)
Foreign non-refundable taxes 616 -
Net operating loss and temporary differences for which no
benefit was recognized 13,542 8,929
- --------------------------------------------------------------------------------------------------------
616 -
- --------------------------------------------------------------------------------------------------------
As at January 31, 2001, the Company has available non-capital losses for
tax purposes that may be used to reduce taxable income in future years.
These losses expire as follows:
Federal Provincial US
$ $ $
Tax losses expiring in
2002 200 300 -
2003 400 1,900 -
2004 2,600 6,900 -
2005 3,800 6,600 -
2006 4,800 6,300 -
2007 4,900 15,900 -
2008 19,000 31,300 -
2020 - - 300
2021 - - 200
- ---------------------------------------------------------------------------------------------------------
35,700 69,200 500
- ---------------------------------------------------------------------------------------------------------
Excess of amounts booked for accounting purposes over amounts claimed for tax
(temporary differences), not subject to expiry
Unclaimed scientific research and experimental
development expenditures 7,000 5,700
Amortization 23,400 (3,600)
Share issue costs 5,000 5,000
Warranty and other provisions 1,800 1,800
Deferred revenue 3,500 3,500
- ---------------------------------------------------------------------------------------------------------
40,700 12,400
- ---------------------------------------------------------------------------------------------------------
Losses for accounting purposes carried forward 76,400 81,600
- ---------------------------------------------------------------------------------------------------------
In addition, the Company has earned non-refundable investment tax credits
amounting to approximately $3,000,000 that can be applied to reduce future
federal income taxes payable, expiring as follows:
$
2007 200
2008 950
2009 850
2010 500
2011 500
- ---------------------------------------------------------------------------------------------------------
3,000
- ---------------------------------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
For the years ended January 31, 2001 and 2000 (in thousands of Canadian dollars,
except per share amounts) continued
The benefit of these losses and non-refundable investment tax credits has not
been reflected in these financial statements. The significant components of
future income tax assets and liabilities are summarized as follows:
2001 2000
- -----------------------------------------------------------------------------------------------------------
$ $
Future income tax assets
Benefit of unclaimed scientific research and experimental development 2,300 3,700
expenditures
Non-capital loss carry-forwards 17,800 8,800
Benefit of investment tax credits 3,000 3,900
Amortization 4,700 4,500
Share issue costs 1,800 1,300
Reserves 1,300 900
Deferred revenue 700 800
- -----------------------------------------------------------------------------------------------------------
31,600 23,900
Valuation allowance (31,600) (23,900)
- -----------------------------------------------------------------------------------------------------------
Net future tax asset - -
- -----------------------------------------------------------------------------------------------------------
The Company has recorded a full valuation allowance against its future tax
assets because it believes it is not more likely than not that sufficient
taxable income will be realized during the carry-forward period to utilize
the future tax asset. The valuation allowance increased by $7,700,000 during
2001 (2000 - $10,400,000). Realization of the future tax benefits is
dependent upon many factors, including the Company's ability to generate
taxable income within the loss carry-forward periods.
13 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Net change in non-cash working capital amounts relating to operations
2001 2000
- -----------------------------------------------------------------------------------------------------------
$ $
Accounts receivable
Trade 1,670 (6,814)
Other (43) (425)
Prepaids and other assets (820) (443)
Inventories (1,559) 293
Accounts payable and accrued liabilities 11,013 2,582
Deferred revenue (456) 350
- -----------------------------------------------------------------------------------------------------------
9,805 (4,457)
- -----------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information
2001 2000
- ----------------------------------------------------------------------------------------------------------
$ $
Interest paid 77 264
Common shares issued in connection with acquired technology assets (note 20) - 11,001
Common shares issued in connection with conversion of convertible debt (note 10 - 5,916
(e))
Warrants issued in connection with convertible debt (note 10(e)) - 186
Common shares issued in connection with conversion of special warrants
(notes 10(c) and 10(d)) 23,550 6,826
Warrants issued in connection with private placement (note 10(c)) - 215
Stock options issued to service providers (note 10(h)) - 150
Special warrants received on the sale of software (notes 5(a) and 17) - 2,450
Common shares issued in connection with units (note 10 (f)) 17,858 -
Warrants issued in connection with units (note 10(f)) 3,478 -
Special warrants received in connection with a co-marketing agreement (note 5(b)) 1,536 -
Common shares issued in connection with trademark acquisition (note 10 (g)) 134 -
Common shares issued on exercise of broker compensation options (note 10(c)) 11 54
Notes to Consolidated Financial Statements
For the years ended January 31, 2001 and 2000 (in thousands of Canadian dollars,
except per share amounts) continued
14 SEGMENTED INFORMATION
The Company's operations are located in Canada with two principal reportable
segments, e-Imaging and Digital Video products, across geographically
diverse markets.
Geographic information
2001
- -------------------------------------------------------------------------------------------------------------------------------
Canada United States Europe Asia Pacific Total
$ $ $ $ $
Revenue 2,709 23,381 11,195 9,765 47,050
Capital assets 5,944 893 16 75 6,928
2000
- -------------------------------------------------------------------------------------------------------------------------------
Canada United States Europe Asia Pacific Total
$ $ $ $ $
Revenue 1,469 20,205 6,815 2,351 30,840
Capital assets 4,194 649 10 - 4,853
Reportable segments
2001
- -------------------------------------------------------------------------------------------------------------------------------
e-Imaging Digital Video Total
$ $ $
Revenue 28,265 18,785 47,050
Cost of sales 5,851 4,568 10,419
- -------------------------------------------------------------------------------------------------------------------------------
Contribution 22,414 14,217 36,631
- ---------------------------------------------------------------------------------------------------------------
Expenses 58,592
- -------------------------------------------------------------------------------------------------------------------------------
(21,961)
One-time charges (note 19) (3,871)
Interest income 949
Interest expense on long-term debt (188)
Amortization of intangible assets (6,820)
- -------------------------------------------------------------------------------------------------------------------------------
Loss before income taxes (31,891)
Income taxes 616
- -------------------------------------------------------------------------------------------------------------------------------
Loss for the year (32,507)
- -------------------------------------------------------------------------------------------------------------------------------
2000
- -------------------------------------------------------------------------------------------------------------------------------
e-Imaging Digital Video Total
$ $ $
Revenue 23,632 7,208 30,840
Cost of sales 3,813 950 4,763
- -------------------------------------------------------------------------------------------------------------------------------
Contribution 19,819 6,258 26,077
- ---------------------------------------------------------------------------------------------------------------
Expenses 35,891
- -------------------------------------------------------------------------------------------------------------------------------
(9,814)
Interest income 344
Interest expense on long-term debt (371)
Amortization of intangible assets (10,594)
- -------------------------------------------------------------------------------------------------------------------------------
Loss before income taxes (20,435)
Income taxes -
- -------------------------------------------------------------------------------------------------------------------------------
Loss for the year (20,435)
- -------------------------------------------------------------------------------------------------------------------------------
15 OPERATING LINE OF CREDIT
The Company's bank line of credit of $4,000,000 bears interest at the bank's
prime rate plus 3/4% and is secured by substantially all of the assets of
the company. At January 31, 2001, the line of credit had a balance of
$60,000 (2000 - $NIL).
Notes to Consolidated Financial Statements
For the years ended January 31, 2001 and 2000 (in thousands of Canadian dollars,
except per share amounts) continued
16 COMMITMENTS
The Company is obligated under operating leases for the rental of facilities
and minimum royalty payments under certain licensing agreements. Future
payments under the Company's current obligations in effect as at January 31,
2001, which expire on December 31, 2008, are approximately as follows:
$
2002 1,802
2003 1,633
2004 1,430
2005 1,190
2006 539
Thereafter 773
The Company has collaborative arrangements with certain third parties that
provide for royalty payments. Under these arrangements, the Company is required
to make certain royalty payments on specified sales to customers ranging from
10% to 15%.
17 RELATED PARTY TRANSACTIONS
Research and development fees are paid to a company controlled by a director
and a significant shareholder. The total fees paid in 2001 were $259,000
(2000 - $245,300).
In January 2000, the Company entered into an arrangement with a related
company whereby the Company entered into a perpetual site license of certain
software, agreed to provide related maintenance and support services, and
entered into a two year co-marketing agreement. The Company received
1,969,023 special warrants in exchange for the arrangement. The special
warrants are exercisable, without further consideration, into 1,969,023
common shares. The special warrants are restricted until they are qualified
as part of a prospectus or registration statement for the public issuance or
sale of the related company's shares within 18 months. Absent such
qualification, the special warrants are subject to resale restrictions as
provided under the Securities Act (Ontario). The transaction was recorded at
fair value of the consideration received in the amount of approximately
$2,450,000. The related revenue will be recorded ratably over the estimated
four-year economic life of the software license underlying the arrangement.
The companies are related by virtue of a director and significant
shareholder of the Company who is also a significant shareholder of the
related company.
18 CREDIT AND CURRENCY RISKS
Concentrations of credit risk on trade accounts receivable are indicated in
the following table by the percentage of the total balance receivable by
individual customers accounting for in excess of 10% of total accounts
receivable. At January 31, 2001, one customer accounted for 21% (2000 -
three customers accounted for 37%) of total accounts receivable.
Substantially all of the Company's revenue is denominated in foreign
currencies and accordingly is exposed to the risk of currency fluctuation.
19 ONE-TIME CHARGES
In November, 2000, the Company established a business re-alignment plan to
streamline operations and eliminate redundant activities and assets. This
includes the consolidation of customer service, sales, marketing, research
and development and administrative activities. It is expected that these
activities will be completed by July 2001.
At January 31, 2001, lease termination costs and other associated costs of
$718,000 have been provided for and included in accounts payable and accrued
liabilities.
The Company has written off goodwill of $931,000 which was incurred as a
result of the change in method of accounting for its 50.1% interest in Live
Picture Japan K. K.
In addition to the business re-alignment, the Company has incurred other
significant unusual costs associated with the decision to abandon the
planned U.S. public offering.
Notes to Consolidated Financial Statements
For the years ended January 31, 2001 and 2000 (in thousands of Canadian dollars,
except per share amounts) continued
$
Facility rationalization and severance 289
Other re-alignment expenditures 718
Write off of goodwill 931
U.S. public offering costs 1,933
- -----------------------------------------------------------------------------------------------------------------
3,871
- -----------------------------------------------------------------------------------------------------------------
20 ACQUISITIONS
During the year ended January 31, 2000, the Company completed three
acquisitions of selected software technology and other assets summarized as
follows:
a) On November 12, 1999, the Company acquired software technology from a
U.S. public corporation, for a purchase price of $5,638,000 summarized as
follows:
Net cash flow
on acquisition
$ $
Cash payment due February 2, 2000 (US$ 1,500,000) 2,218 -
Issuance of 450,000 common shares 3,420 -
- -----------------------------------------------------------------------------------------------------------------
5,638 -
- -----------------------------------------------------------------------------------------------------------------
b) On June 30, 1999, the Company acquired selected assets of Live Picture,
Inc., a private California company. The total purchase price of $13,950,000
is summarized as follows:
Net cash flow
on acquisition
$ $
Cash payment 6,202 6,202
Assumption of liabilities 413 -
Issuance of 1,550,410 common shares 6,085 -
Costs of acquisition and assumption of other liabilities 1,250 -
- -----------------------------------------------------------------------------------------------------------------
13,950 6,202
- -----------------------------------------------------------------------------------------------------------------
The purchase price was allocated to identifiable non-monetary assets as follows:
$
Capital assets 100
Technology assets 13,850
- -----------------------------------------------------------------------------------------------------------------
13,950
- -----------------------------------------------------------------------------------------------------------------
c) On June 28, 1999, the Company acquired selected DVD software technology
and related assets from Zoran Corporation (Zoran), a California based public
company specializing in integrated circuits and software for digital audio
and digital video applications for a purchase price summarized as follows:
Net cash flow
on acquisition
$ $
Cash payment (US$600,000) 891 891
Issuance of 373,134 common shares 1,496 -
Costs of acquisition 65 65
- -----------------------------------------------------------------------------------------------------------------
2,452 956
- -----------------------------------------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
For the years ended January 31, 2001 and 2000 (in thousands of Canadian dollars,
except per share amounts) continued
In connection with this acquisition, the purchase price included contingent
consideration based on a defined percentage of net revenue received by the
Company from the licensing or sale of DVD software technology acquired from
Zoran, up to a maximum royalty of $2,963,000 (US$2,000,000).
21 CONTINGENCIES
The Company has received correspondences alleging infringement of certain
technology rights. Management believes that these allegations are without
merit and, however resolved, will not have a material adverse effect on the
Company's financial position. No amount has been provided in these financial
statements in respect of these allegations. Loss sustained, if any, will be
recorded in the statements of operations in the year such loss is
determinable.
22 SUBSEQUENT EVENTS
(i) On March 28, 2001, the Company approved a plan to consolidate and
streamline operations. This includes the consolidation of research and
development and sales and marketing activities in the Company's Richmond
Hill, Ontario facilities, a reduction in staffing levels, and the
termination of certain lease arrangements.
It is expected that these activities will be substantially completed by June
30, 2001 and will cost approximately $3,300,000; $1,500,000 related to
severance of employees; and $1,800,000 for lease termination costs. These
restructuring costs have not been accrued and included in the accounts as of
January 31, 2001.
(ii) Subsequent to March 9, 2001:
(a) On January 31, 2002, all the Company's outstanding common shares were
sold to Roxio, Inc. Pursuant to this transaction:
. Costs amounting to approximately $4,300,000 were incurred in
respect of investment banking, legal costs, employee severance and
other administrative matters;
. Certain changes were made to marketing strategies resulting in a
write-down of inventories and accounts receivable in the amount of
$965,000 and $1,124,000, respectively;
. 1,195,500 unvested share options held by directors, officers and
employees vested immediately, in accordance with the Company's
original option agreements. These options were exercised for cash
consideration of $890,000;
. Effective March 11, 2002, the Company ceased to be a public
corporation;
. The Company received approximately US $12,300,000 (approximately
Cdn. $19,680,000) as consideration for intellectual property sold
to corporations controlled by Roxio, Inc.; and
. It was resolved that the Company would pay an amount of
$15,129,700 as a pro-rata return of capital on the Company's
common shares.
(b) In connection with the contingencies referred to in note 21 and other
matters subsequent, the Company has made a provision in the approximate
amount of $6 million, representing new management's best estimate of the
most likely outcome of the claim and possible claim negotiations. If and
when the possible claims become actions against the Company, the actual
claim amounts could be higher than amounts currently provided by the
Company. Nevertheless, management believes that the amounts provided will be
sufficient to settle such claims. To the extent that losses are sustained in
excess of these amounts, such losses will be recorded in operations in the
period of settlement.
23 COMPARATIVE FIGURES
Certain comparative figures have been reclassified to conform to the
financial statement presentation adopted in the current year.
Notes to Consolidated Financial Statements
For the years ended January 31, 2001 and 2000 (in thousands of Canadian dollars,
except per share amounts) continued
24. DIFFERENCE BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES
The material variations between Canadian and United States (U.S. GAAP) are
discussed and presented below. However, all the disclosures required under
U.S. GAAP and Regulation S-X of the Securities and Exchange Commission of
the United States of America (SEC) have not, as permitted by the SEC, been
presented.
Consolidated statements of operations
January 31,
----------------------------------------
2001 2000
$ $
Net loss for the year per consolidated financial statements in accordance
with Canadian GAAP (32,507) (20,435)
Impact of U.S. accounting principles
Stock-based compensation costs (f)
Service providers (23) (104)
Employees (18) (38)
Accretion of convertible debenture - 222
-------------------------------------------
Net loss for the year in accordance with U.S. GAAP (32,548) (20,355)
-------------------------------------------
Basic and diluted net loss per share in accordance with Canadian GAAP (0.85) (0.67)
-------------------------------------------
Basic and diluted loss per share in accordance with U.S. GAAP (0.85) (0.66)
-------------------------------------------
Comprehensive loss (a)
Net loss for the year in accordance with U.S. GAAP (32,548) (20,355)
Unrealized holding loss on investment - net of recovery of deferred
income taxes of $nil (a) (691) -
-------------------------------------------
Comprehensive loss under U.S. GAAP (33,239) (20,355)
-------------------------------------------
Weighted average number of common shares outstanding - basic and diluted
under Canadian and U.S. GAAP 38,162 30,613
-------------------------------------------
Notes to Consolidated Financial Statements
For the years ended January 31, 2001 and 2000 (in thousands of Canadian dollars,
except per share amounts) continued
Consolidated shareholders' equity
January 31,
--------------------------------------------------------------------------
2001 2000
------------------------------------ -----------------------------------
U.S. Cdn. U.S. Cdn.
GAAP GAAP GAAP GAAP
$ $ $ $
Common shares (b)(c)(d)(e)(f) 116,947 116,819 72,364 72,867
Special warrants - - 23,550 23,550
Additional paid-in capital (c)(d)(f) 4,525 3,964 1,689 497
Deferred stock-based compensation (f) (168) - (191) -
Accumulated comprehensive loss (a) (691) - - -
Deficit (b)(e)(f) (77,431) (76,742) (44,883) (44,235)
-----------------------------------------------------------------------------
43,182 44,041 52,529 52,679
-----------------------------------------------------------------------------
a) Investments
Under Canadian generally accepted accounting principles (Canadian
GAAP), portfolio investments in the amount of $3,986,000 at January
31, 2001 (2000 - $2,450,000) are accounted for at cost, less
provision for decline in value that is other than temporary. Under
U.S. GAAP, such available for sale securities are reflected in assets
at their fair value. Where fair value is less than carrying amount,
the unrealized loss is reflected in accumulated other comprehensive
loss. As at January 31, 2001, these unrealized losses amount to
$691,000 (2000 - $nil).
b) Early retirement of convertible debentures
Under Accounting Principles Board (APB) Opinion No. 26, "Early
Extinguishment of Debt", gains or losses resulting from the early
extinguishment of debt should be recognized in operations in the
period in which the debt is extinguished. On February 26, 1996, in
connection with the early retirement of $785,000 convertible
debentures, the Company issued an additional 650,000 one-half common
share purchase warrants to the remaining convertible debenture
unitholders. Under U.S. GAAP, the Black-Scholes option-pricing model
was used to determine the fair value of the warrants issued whereas,
under Canadian GAAP, the intrinsic method was used, resulting in a
difference of $216,000 in the deficit and share capital as at January
31, 1997 and thereafter.
c) Broker warrants and options
On September 29, 1997, in connection with the issuance of 3,500,000
special warrants offered at $4.25 each, the Company issued 175,000
broker special warrants. Each broker special warrant was converted
into a compensation option to purchase one common share at a price of
$5.25 per share, which expired on December 29, 1998. In accordance
with Financial Accounting Standards Board (FASB) Statement No. 123,
the warrants issued to brokers in connection with this financing
arrangement were recorded at their fair value using the Black-Scholes
option-pricing model at the date of the grant, and an amount of
$350,000 was netted against the proceeds of the offering as a
financing cost. Under Canadian GAAP, a nominal amount was assigned.
d) Common share purchase warrants
On September 30, 1997, the Company issued 1,022,757 common shares and
the same number of common share purchase warrants for total cash
consideration of $2,765,999 pursuant to the terms of a subscription
agreement. Each warrant entitles the holder to purchase one common
share of the Company, subject to adjustment, at the lower of (i)
$3.95 per common share and (ii) the higher of the then current market
price of the common shares of the Company and $3.20 per common share.
On October 13, 2000, pursuant to the terms of the subscription
agreement, all purchase warrants were converted on a net basis into
813,647 common shares for no additional consideration. In accordance
with FASB Statement No. 123, the common share purchase warrants
issued in connection with this financing arrangement were recorded at
their fair value using the Black-Scholes option-pricing model at the
date of the grant, and an amount of $558,000 was allocated to the
common share purchase warrants. Under Canadian GAAP, a nominal amount
was assigned.
Notes to Consolidated Financial Statements
For the years ended January 31, 2001 and 2000 (in thousands of Canadian dollars,
except per share amounts) continued
e) Convertible debentures
Under Canadian GAAP, a financial instrument that contains both a
liability and an equity element must be split into its component
parts at fair value. Accordingly, an amount of $278,000 was
attributed to the conversion feature of the subordinated convertible
debenture. Under U.S. GAAP, a beneficial conversion feature is
recognized on financial instruments using the intrinsic value method
which, in this case, was $nil. Accretion of the debt under Canadian
GAAP was $380,000 whereas, under U.S. GAAP, accretion of the debt
amounted to $158,000.
f) Stock-based compensation
Under U.S. GAAP, the Company follows FASB Statement No. 123,
"Accounting for Stock-Based Compensation", which permits the use of
APB Opinion No. 25, "Accounting for Stock Issued to Employees", to
account for stock options issued to employees. Under APB Opinion No.
25, the Company uses the intrinsic value method to determine the cost
associated with the granting of stock options to employees.
Accordingly, the amount by which the market price of the underlying
shares exceeds the exercise price of the options, if any, is
accounted for as compensation expense over the vesting period.
Under FASB Statement No. 123, all transactions with non-employees in
which equity instruments are issued in exchange for goods and
services should be accounted for based on the fair value of the
consideration received or given, whichever is more reliably measured.
Where consideration received is not determinable, equity instruments
issued as compensation to outside service providers are valued using
the Black-Scholes option-pricing model at the measurement date, and
this amount is charged to operations over the periods in which
services are rendered. While the Company also records share options
issued to outside service providers at fair value for Canadian GAAP
purposes, the determination of such fair value under Canadian GAAP
does not mandate the use of option-pricing models prescribed under
U.S. GAAP.
[Letterhead of PriceWaterhouseCoopers LLP]
March 3, 2000
Auditors' Report
To the Directors of
MGI Software Corp.
We have audited the consolidated balance sheets of MGI Software Corp. as at
January 31, 2000 and 1999 and the consolidated statements of operations and
deficit and cash flows for the years then ended. 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 Canadian and United States generally
accepted auditing standards. 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 January 31, 2000
and 1999 and the results of its operations and its cash flows for the years then
ended in accordance with Canadian generally accepted accounting principles.
Chartered Accountants
/s/ PriceWaterhouseCoopers LLP
Consolidated Balance Sheets
As at January 31, 2000 and 1999 (in thousands of Canadian dollars)
- --------------------------------------------------------------------------------------------------------------
2000 1999
- --------------------------------------------------------------------------------------------------------------
$ $
ASSETS
Current assets
Cash $ 2,088 $ 2,441
Short-term investments - 2,027
Notes receivable (note 3) 31,616 -
Accounts receivable
Trade 11,460 4,789
Other 787 362
Inventories 488 781
Prepaids and other assets 1,063 335
- --------------------------------------------------------------------------------------------------------------
47,502 10,735
Investments (notes 4 and 15) 2,450 -
Capital assets (note 5) 4,853 2,444
Acquired technology, net of accumulated amortization of $10,594 (note 17) 11,711 -
- --------------------------------------------------------------------------------------------------------------
66,516 13,179
- --------------------------------------------------------------------------------------------------------------
LIABILITIES
Current liabilities
Accounts payable and accrued liabilities 10,632 4,009
Deferred revenue 1,013 -
Current portion of long-term debt (note 6) 167 167
Current portion of capital lease obligations (note 7) 28 28
- --------------------------------------------------------------------------------------------------------------
11,840 4,204
Deferred revenue 1,787 -
Long-term debt (note 6) 165 333
Capital lease obligations (note 7) 45 77
- --------------------------------------------------------------------------------------------------------------
13,837 4,614
- --------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Capital stock
Common shares (note 8) 72,867 32,365
Other equity (note 8) 24,047 -
Deficit (44,235) (23,800)
- --------------------------------------------------------------------------------------------------------------
52,679 8,565
- --------------------------------------------------------------------------------------------------------------
66,516 13,179
- --------------------------------------------------------------------------------------------------------------
Commitments and contingency (notes 14 and 19)
20
Consolidated Statements of Operations and Deficit
For the years ended January 31, 2000 and 1999 (in thousands of Canadian dollars,
except per share amounts)
- -----------------------------------------------------------------------------------------------------------
2000 1999
- -----------------------------------------------------------------------------------------------------------
$ $
REVENUE $ 30,840 $ 15,962
COST OF SALES 4,763 2,245
- -----------------------------------------------------------------------------------------------------------
26,077 13,717
- -----------------------------------------------------------------------------------------------------------
EXPENSES
Marketing and selling 17,722 13,199
Research and development (note 9) 12,484 6,480
Administration 4,227 2,143
Foreign exchange 436 (9)
Amortization of capital assets 1,022 659
- -----------------------------------------------------------------------------------------------------------
35,891 22,472
- -----------------------------------------------------------------------------------------------------------
LOSS BEFORE UNDERNOTED ITEMS (9,814) (8,755)
INTEREST INCOME 344 304
INTEREST EXPENSE ON LONG-TERM DEBT (371) -
AMORTIZATION OF INTANGIBLE ASSETS (10,594) -
- -----------------------------------------------------------------------------------------------------------
LOSS FOR THE YEAR (20,435) (8,451)
DEFICIT - BEGINNING OF YEAR (23,800) (15,349)
- -----------------------------------------------------------------------------------------------------------
DEFICIT - END OF YEAR (44,235) (23,800)
- -----------------------------------------------------------------------------------------------------------
LOSS PER SHARE - basic and fully diluted (0.67) (0.35)
- -----------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 30,613,492 24,122,095
- -----------------------------------------------------------------------------------------------------------
21
Consolidated Statements of Cash Flows
For the years ended January 31, 2000 and 1999 (tabular amounts in thousands of
Canadian dollars)
- ----------------------------------------------------------------------------------------------------------
2000 1999
- ----------------------------------------------------------------------------------------------------------
$ $
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Loss for the year $(20,435) $(8,451)
Items not affecting cash
Amortization of capital assets 1,022 659
Amortization of intangible assets 10,594 -
Unrealized foreign exchange (gain) loss 246 (150)
Deferred financing costs written off 135 -
Non-cash financing expense 102 -
Amortization of deferred revenue (51) -
Net change in non-cash working capital amounts relating to operations (note 11) (4,541) 471
- ----------------------------------------------------------------------------------------------------------
(12,928) (7,471)
- ----------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net proceeds on issuance of common shares 23,746 346
Net proceeds on issuance of special warrants 23,550 -
Net proceeds on receipt of convertible debt 5,865 -
Repayment of capital lease obligations (32) -
Proceeds (repayment) from long-term debt (168) 500
- ----------------------------------------------------------------------------------------------------------
52,961 846
- ----------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of capital assets - net (3,431) (1,511)
Acquisition of intangible assets (7,158) -
Decrease (increase) in notes receivable (31,756) 10,813
Decrease (increase) in short-term investments 2,027 (2,027)
- ----------------------------------------------------------------------------------------------------------
(40,318) 7,275
- ----------------------------------------------------------------------------------------------------------
FOREIGN EXCHANGE GAIN (LOSS) ON CASH HELD IN FOREIGN CURRENCY (68) 37
- ----------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH DURING THE YEAR (353) 687
CASH - BEGINNING OF YEAR 2,441 1,754
- ----------------------------------------------------------------------------------------------------------
CASH - END OF YEAR 2,088 2,441
- ----------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION (note 11)
22
Notes to Consolidated Financial Statements
January 31, 2000 and 1999 (tabular amounts in thousands of Canadian dollars,
unless otherwise stated)
1 NATURE OF OPERATIONS
MGI Software Corp. was incorporated on September 22, 1995 under the laws of
the Province of Ontario to design, develop, market and support Internet
imaging products and digital video and photography solutions for PCs,
devices, and the Internet. The products apply to content creation and
editing, content encoding and decoding, Internet distribution systems, web
printing and online navigation. To date, the Company's primary markets have
been the United States, Europe and Asia Pacific.
The Company has decided to retain the Canadian dollar as its reporting
currency.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of consolidation
These consolidated financial statements include the accounts of the Company
and the following wholly owned subsidiaries: MGI Software Inc. and Live
Picture Development S.A.R.L. All intercompany accounts and transactions have
been eliminated on consolidation.
Revenue recognition
Revenue from sale of merchandise is recognized at the time of shipment to
the customer, net of provision for returns.
Royalties and license fees are recognized as earned in accordance with the
terms of the related agreements. Revenue from arrangements which include
license and post-contract customer support is recognized ratably over the
period that the customer support services are provided, which is generally
less than one year. In arrangements where post-contract customer support
meets certain criteria, revenue is recognized at the time of delivery and
the estimated costs for providing the post-contract customer support are
accrued at the time of the sale.
Revenue from the sale of services is recognized as the services are
performed under the terms of the contract using the percentage of completion
method. Deferred revenue represents unearned income from software license
agreements where significant vendor obligations remain. In certain
circumstances, license payments are received in advance. These amounts are
deferred and subsequently recognized as revenue ratably over the period that
the customer support services are provided.
Short-term investments
Short-term investments are valued at the lower of cost and market value.
Investments
The company's investments, over which it has significant influence, are
accounted for on the equity basis. Other long-term investments are accounted
for on the cost basis. The carrying value of investments is written down to
net realizable value if there is a loss of value that is considered to be
other than temporary.
Inventories
Inventories are valued at the lower of cost and net realizable value. Cost
is determined on the weighted average basis.
Capital assets
Capital assets are recorded at the lower of cost, net of accumulated
amortization, and net recoverable amount. Amortization charges are
calculated on the following bases using the following annual rates:
Furniture and equipment 20% declining balance
Furniture and equipment under capital lease straight-line over related lease term
Computer equipment 30% declining balance
Leasehold improvements over the useful life or remaining lease term
Computer software straight-line over 3 years
Trademarks and patents straight-line over 5 years
23
Notes to Consolidated Financial Statements
January 31, 2000 and 1999 (tabular amounts in thousands of Canadian dollars,
unless otherwise stated)
Acquired technology
Acquired technology is stated at the lower of cost, net of accumulated
amortization, and net recoverable amount. Amortization is provided on a
straight-line basis over the useful life of the acquired technology ranging
from one to three years. The carrying values are reviewed regularly for
recoverability based on the future operating income generated by the related
assets. Where the carrying amount exceeds the net recoverable amount, the
acquired technology is written down.
Research and development
Research costs are expensed as incurred. Development costs are expensed as
incurred unless a project meets the criteria under generally accepted
accounting principles for deferral and amortization. The Company has not
deferred any development costs to date.
Government assistance is available to the Company through the Industrial
Research Assistance Program (IRAP) and investment tax credits.
IRAP funds qualified research and development activities on preapproved
projects. IRAP assistance is recorded as a reduction of research and
development expenses in the year in which it is claimed.
Investment tax credits are accounted for using the cost reduction method
and, accordingly, are deducted from the related research and development
expenses in the year of expenditure provided there is reasonable assurance
they will be realized. During fiscal 2000 and 1999, no amounts were
accrued.
Income taxes
The company follows the asset and liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are determined
based on differences between the financial reporting and income tax bases of
assets and liabilities and are measured using the enacted tax rates and
laws. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amounts expected to be realized.
Foreign currency translation
Transactions denominated in foreign currencies, and the accounts of the
Company's integrated foreign subsidiaries, are translated using the temporal
method. Under the temporal method, monetary assets and liabilities are
translated at the exchange rates in effect at the balance sheet date whereas
other non-monetary assets and liabilities are translated at monthly average
rates prevailing at the respective transaction dates. Revenue and expenses
are translated at monthly average rates prevailing throughout the year,
except for amortization which is translated at exchange rates prevailing
when the related assets were acquired. Exchange gains and losses are
reflected in the statement of operations and deficit.
Use of estimates
The preparation of financial statements in conformity with Canadian
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities, disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
Financial instruments
Financial instruments are initially recorded at historical cost. If
subsequent circumstances indicate that a decline in the fair value of a
financial asset is other than temporary, the financial asset is written down
to its fair value. Unless otherwise indicated, the fair values of financial
instruments approximate their recorded amounts. The fair values of cash,
short-term investments, notes receivable, accounts receivable, and accounts
payable and accrued liabilities approximate their carrying amounts at
January 31, 2000 and 1999 because of the short period to receipt or payment
of cash.
Earnings (loss) per share
Effective February 1, 2001, the Company adopted the new recommendations of
the Canadian Institute of Chartered Accountants (CICA) Handbook Section
3500, "Earnings per Share". This new standard is mandatory for fiscal years
beginning on or after January 1, 2001 and has been given retroactive
application. Under this new standard, the "treasury stock" method is used
instead of the imputed earnings approach for determining the dilutive effect
of options issued on presenting diluted earnings per share. Potential common
shares are excluded from the calculation if their effect is anti-dilutive.
Basic earnings per share are computed by dividing the earnings for the
period by the weighted average number of common shares outstanding during
the period.
Stock options issued to service providers
Stock options issued to service providers are recorded at their fair market
value at the date of the grant. This amount is charged to operations over
the periods in which services are rendered.
Stock-based compensation plans
The Company's stock option plan is described in note 8(g). No compensation
expense is recognized for these plans when stock or stock options are issued
to employees at fair value. Any consideration paid by employees on the
exercise of stock options or purchase of stock is credited to share capital.
If stock or stock options are repurchased from employees, the excess of the
consideration paid over the carrying amount of the stock or stock option
cancelled is charged to retained earnings.
24
Notes to Consolidated Financial Statements
January 31, 2000 and 1999 (tabular amounts in thousands of Canadian dollars,
unless otherwise stated)
3. NOTES RECEIVABLE
Notes receivable at January 31, 2000 consist of commercial notes from
Canadian and U.S. corporations as follows:
Interest rate Maturity
Canadian (a) $ 27,000 5.05% February 28, 2000
U.S. (US$ 3,196) 4,616 US5.2%-US5.345% February 1-14, 2000
- --------------------------------------------------------------------------------------------
31,616
- ---------------------------------------------------
a) The note is guaranteed by a commercial bank and was collected in full on
maturity.
4 INVESTMENTS
2000 1999
$ $
Investment in Live Picture Japan (a) - -
Investment in related company (b) 2,450 -
- --------------------------------------------------------------------------------------------
2,450 -
- --------------------------------------------------------------------------------------------
a) As part of the acquisition of selected assets of Live Picture, Inc. (note
17(b)) the Company acquired a non-controlling interest in Live Picture Japan
(LPJ). LPJ is involved in the sale of certain of the Company's E-Commerce
Imaging products. The investment was recorded at its fair value of $1 and is
accounted for on the equity basis. From the date of acquisition to January
31, 2000, LPJ reported revenue in the amount of $1,270,000 and had incurred
expenses in the amount of $1,968,000, resulting in an operating loss of
$698,000. As at January 31, 2000, the net assets of LPJ amounted to
$(635,000).
b) In January 2000, the Company entered into a software licensing
arrangement with a related company in exchange for an investment in the
related company (see note 15).
5 CAPITAL ASSETS
2000
- -------------------------------------------------------------------------------------------------
Accumulated
Cost amortization Net
$ $ $
Furniture and equipment 1,295 401 894
Furniture and equipment under capital lease 105 24 81
Computer equipment 3,186 1,018 2,168
Leasehold improvements 928 238 690
Computer software 1,030 289 741
Trademarks and patents 340 61 279
- -------------------------------------------------------------------------------------------------
6,884 2,031 4,853
- -------------------------------------------------------------------------------------------------
1999
- -------------------------------------------------------------------------------------------------
Accumulated
Cost amortization Net
$ $ $
Furniture and equipment 818 245 573
Furniture and equipment under capital lease 105 2 103
Computer equipment 1,531 618 913
Leasehold improvements 831 144 687
Computer software 390 379 11
Trademarks and patents 166 9 157
- -------------------------------------------------------------------------------------------------
3,841 1,397 2,444
- -------------------------------------------------------------------------------------------------
25
Notes to Consolidated Financial Statements
January 31, 2000 and 1999 (tabular amounts in thousands of Canadian dollars,
unless otherwise stated)
6 LONG-TERM DEBT
2000 1999
$ $
Royal Bank, interest at prime plus 1.125%, due February 2002, repayable in
monthly installments of $13,889, secured by a general security agreement
covering all of the assets of the Company other than real property 332 500
Less: Current portion 167 167
- ------------------------------------------------------------------------------------------------------
165 333
- ------------------------------------------------------------------------------------------------------
7 CAPITAL LEASE OBLIGATIONS
The following schedule sets out future minimum lease payments on capital
leases, together with the balance of obligations, by fiscal year:
$
2001 32
2002 32
2003 29
- ------------------------------------------------------------------------------------------------------
93
Less: Imputed interest 20
- ------------------------------------------------------------------------------------------------------
73
Less: Current portion 28
- ------------------------------------------------------------------------------------------------------
45
- ------------------------------------------------------------------------------------------------------
8 CAPITAL STOCK
Authorized
An unlimited number of common shares
An unlimited number of Class A, voting, special shares
Issued
2000 1999
$ $
36,058,818 (1999 - 24,279,412) common shares 72,867 32,365
- -----------------------------------------------------------------------------------------------------------
2000 1999
$ $
Other equity
Stock options issued to service providers (c) 150 -
Compensation options issued in connection with private placement (d) 161 -
Warrants issued in connection with convertible debt (e) 186 -
Special warrants (f) 23,550 -
- -----------------------------------------------------------------------------------------------------------
24,047 -
- -----------------------------------------------------------------------------------------------------------
26
Notes to Consolidated Financial Statements
January 31, 2000 and 1999 (tabular amounts in thousands of Canadian dollars,
unless otherwise stated)
The common share transactions are summarized as follows:
2000 1999
- ---------------------------------------------------------------------------------------------------------
Number of shares Amount Number of shares Amount
$ $
Issued - Beginning of year (a) 24,279,412 32,365 23,963,712 32,019
Issued for cash upon private placement (b) 4,494,863 15,255 - -
Upon conversion of special warrants (d) 3,000,000 6,826 - -
Purchase of software technology (17(a)) 450,000 3,420 - -
Purchase of selected assets of Live Picture 1,550,410 6,085 - -
(17(b))
Purchase of selected DVD software technology (17 373,134 1,496 - -
(c))
On conversion of convertible debt (e) 1,038,461 5,916 - -
On exercise of broker compensation warrants (d) 45,000 189 - -
On exercise of employee stock options (g) 827,538 1,315 315,700 346
- ---------------------------------------------------------------------------------------------------------
36,058,818 72,867 24,279,412 32,365
- ---------------------------------------------------------------------------------------------------------
a) On September 30, 1997, the company issued 1,022,757 common shares for
cash of $2,765,999 pursuant to the terms of a subscription agreement. In
addition, the same number of common share purchase warrants was issued for
an aggregate consideration of $1.00. Each warrant entitles the holder to
purchase one common share of the company, subject to adjustment, at the
lower of: (i) $3.95 per common share; and (ii) the higher of the then
current market price of the common shares of the company and $3.20 per
common share. These common share purchase warrants expire on September 30,
2000. At year-end, all purchase warrants remained outstanding.
b) In anticipation of the acquisition referred to in note 17(b), the Company
entered into a financing agreement dated June 22, 1999 and accordingly:
1) issued on June 23, 1999, 2,910,959 common shares for cash proceeds of
$9,996,000 (US$6,800,000) pursuant to a private placement to Perseus Capital
LLC, Trans Cosmos USA Inc. and Encompass Group Inc., all residents of the
United States of America;
2) issued on June 30, 1999, 941,781 common shares for cash proceeds of
$3,234,000 (US$2,200,000) pursuant to a private placement to Perseus Capital
LLC; and
3) issued on December 31, 1999, 642,123 common shares for cash proceeds of
$2,175,000 (US$1,500,000) pursuant to a private placement to Perseus Capital
LLC.
Total fees and costs associated with the issue were approximately $150,000.
c) In November 1999, the Company issued 55,000 stock options to various
service providers as compensation for services to be provided. The fair
value of these services was determined to be $150,000, and will be charged
to operations over the periods in which the services are rendered.
d) On April 16, 1999, the Company issued 3 million special warrants at a
price of $2.55 for net proceeds of $6,826,000 (net of issue costs of
$609,000 and fair value attributed to non-cash broker special warrants of
$215,000). On July 31, 1999, the special warrants were converted into 3
million common shares without additional compensation. As additional
compensation under the agency agreement the Company issued 180,000 broker
special warrants. On July 31, 1999, each broker special warrant was
converted into one compensation option without payment of additional
consideration. Each compensation option will entitle the holder to purchase
one common share at a price of $3.00 per common share within two years from
the closing date. At year-end, 135,000 compensation options valued at
$161,000 remained outstanding.
e) During the year, the company issued $6 million of subordinated
convertible debt (the debt) consisting of a $3 million convertible debenture
and a $3 million standby facility. The debt was for a term of three years,
bore interest at 6% per annum and was convertible into common shares of the
Company at a price of $3.25 for the first $3 million and $26.00 for the
second $3 million. The fair value attributed to the conversion feature was
$278,000. Cash fees associated with the debt were $135,000. As additional
compensation, the Company issued 135,000 warrants to purchase common shares.
The term of the warrants is three years at an exercise price of $3.25. The
fair value attributed to the warrants is $186,000. As at the year-end, all
the warrants remained outstanding.
On April 16, 1999, the Company received the first $3 million which was
subsequently converted at the holders' option into 923,077 common shares on
December 17, 1999 and January 19, 2000. On January 12, 2000, the $3 million
standby facility was drawn. On January 20, 2000, the $3 million standby
facility was converted at the holders' option into 115,384 common shares.
27
Notes to Consolidated Financial Statements
January 31, 2000 and 1999 (tabular amounts in thousands of Canadian dollars,
unless otherwise stated)
f) On January 18, 2000, the Company signed an underwriting agreement for the
issuance of 1 million special warrants at a price of $25.00 for gross
proceeds of $25,000,000. These special warrants are convertible into one
common share for each special warrant at the earlier of: (i) the issuance of
the receipt(s) for a final prospectus; and (ii) 12 months after the closing
date, without payment of additional consideration. If the receipt(s) for a
final prospectus are not received within 120 days following the closing
date, each special warrant holder will receive anadditional common share
purchase warrant for every ten special warrants without payment of
additional consideration. Each whole share purchase warrant will entitle the
holder to purchase one common share at a price of $25.00 per common. In
connection with the underwriting agreement, commissions of $1,250,000 were
paid to the underwriters. Fees and costs associated with this issuance were
approximately $200,000.
g) The Company has an incentive plan under which options to purchase common
shares may be granted to its directors, officers, employees and service
providers at the discretion of the Board of Directors. Each option under the
incentive plan allows for the purchase of one common share and expires not
later than ten years from the date granted. Options for an aggregate of
6,592,116 shares may be granted, subject to shareholder ratification. On
October 30, 1998, the Board of Directors adopted a resolution authorizing
the Company to amend the exercise prices of outstanding options held by
certain employees and subcontractors of the Company (excluding options held
by former and current directors and officers of the Company) at prices
greater than $1.50 to $1.50. The repriced options subscribed will be fully
vested as of September 30, 2001. The options are subject to various vesting
requirements as outlined in the plan.
A summary of the Company's fixed stock option plan as of January 31, 2000
and 1999 and changes during the years ended on those dates is summarized
below:
2000 1999
- -----------------------------------------------------------------------------------------------------------
Weighted average Weighted average
Options exercise price Options exercise price
$ $
Issued and outstanding -
Beginning of year 3,130,875 1.43 3,075,675 1.47
Issued 3,040,850 7.46 907,500 1.60
Exercised (827,538) 1.60 (315,700) 1.09
Cancelled (394,759) 3.10 (536,600) 2.16
- -----------------------------------------------------------------------------------------------------------
Issued and outstanding -
End of year 4,949,428 4.97 3,130,875 1.43
- -----------------------------------------------------------------------------------------------------------
Options exercisable at year-end 1,317,490 1.79 1,128,213 1.19
- -----------------------------------------------------------------------------------------------------------
As at January 31, 2000, the Company had stock options outstanding as follows:
Range of Number outstanding Weighted-average Weighted-average
exercise prices at January 31, 2000 remaining contractual life exercise price
$ $
1.00 to 1.50 1,766,453 2.69 1.18
1.51 to 2.00 49,000 3.78 1.75
2.01 to 2.50 280,350 2.68 2.21
2.51 to 3.00 46,000 2.53 2.72
3.01 to 3.50 114,750 4.55 3.32
3.51 to 4.00 20,500 3.67 3.96
4.01 to 4.50 1,704,575 3.85 4.08
4.51 to 5.00 9,000 4.52 4.75
5.01 to 5.50 - - -
5.51 to 6.00 - - -
6.01 to 6.50 85,000 4.21 6.36
6.51 to 7.00 12,000 3.69 6.80
7.01 to 7.50 319,500 4.62 7.17
7.51 to 20.00 442,000 4.02 19.10
20.01 to 30.00 100,300 4.91 28.79
- ---------------------------------------------------------------------------------------------------------------
4,949,428 3.47 4.97
- ---------------------------------------------------------------------------------------------------------------
28
Notes to Consolidated Financial Statements
January 31, 2000 and 1999 (tabular amounts in thousands of Canadian dollars,
unless otherwise stated)
9 RESEARCH AND DEVELOPMENT
2000 1999
$ $
Gross research and development expenses 12,614 6,600
IRAP funding (130) (120)
- ----------------------------------------------------------------------------------------------------
Research and development expenses - net 12,484 6,480
- ----------------------------------------------------------------------------------------------------
The IRAP funding received or receivable at January 31, 2000 amounted to
$130,000 (1999 - $120,000). At January 31, 2000, included in accounts
receivable were IRAP receivables of $nil (1999 - $40,000).
Investment tax credits are calculated at the rate of 20% for qualifying
research and development expenditures and can be offset against future taxes
payable within the tax carry-forward period of ten years.
10 INCOME TAXES
The company's income tax provision has been determined as follows:
2000 1999
$ $
Loss for the year 20,435 8,451
- ----------------------------------------------------------------------------------------------------------
Combined basic federal and provincial income tax recovery at 43.58% (1999 - 44.62%) 8,906 3,771
Permanent non-tax deductible expenses (151) -
Provincial research and development deduction 174 412
Net operating loss and temporary differences for which no benefit was recognized (8,929) (4,183)
- ----------------------------------------------------------------------------------------------------------
- -
- ----------------------------------------------------------------------------------------------------------
As at January 31, 2000, the Company has available non-capital losses for tax
purposes that may be used to reduce taxable income in future years. These losses
expire as follows:
Federal Provincial
$ $
Tax losses expiring in
2002 200 300
2003 400 1,900
2004 2,200 6,400
2005 3,800 6,600
2006 2,200 5,300
2007 3,100 14,700
- ----------------------------------------------------------------------------------------------------
11,900 35,200
- ----------------------------------------------------------------------------------------------------
Excess of amounts booked for accounting purposes over amounts claimed for tax
(temporary differences), not subject to expiry
Unclaimed scientific research and experimental development 8,900 7,600
expenditures
Amortization 15,900 400
Share issue costs 2,900 2,900
Warranty and other provisions 2,000 2,000
Deferred revenue 1,800 1,800
- ----------------------------------------------------------------------------------------------------
31,500 14,700
- ----------------------------------------------------------------------------------------------------
Losses for accounting purposes carried forward 43,400 49,900
- ----------------------------------------------------------------------------------------------------
29
Notes to Consolidated Financial Statements
January 31, 2000 and 1999 (tabular amounts in thousands of Canadian dollars,
unless otherwise stated)
In addition, the Company has earned non-refundable investment tax credits
amounting to approximately $3,900,000 that can be applied to reduce future
federal income taxes payable, expiring as follows:
$
2007 400
2008 900
2009 1,700
2010 900
- ----------------------------------------------------------------------------------------------------
3,900
- ----------------------------------------------------------------------------------------------------
The benefit of these losses and non-refundable investment tax credits has not
been reflected in these financial statements.
The significant components of future income tax assets and liabilities are
summarized as follows:
2000 1999
$ $
Future income tax assets
Benefit of unclaimed scientific research and experimental development 3,700 2,800
expenditures
Non-capital loss carry-forwards 8,800 5,700
Benefit of investment tax credits 3,900 3,000
Amortization 4,500 1,200
Share issue costs 1,300 500
Reserves 900 300
Deferred revenue 800 -
- ----------------------------------------------------------------------------------------------------------
23,900 13,500
Valuation allowance (23,900) (13,500)
- ----------------------------------------------------------------------------------------------------------
Net deferred tax asset - -
- ----------------------------------------------------------------------------------------------------------
The Company has recorded a full valuation allowance against its deferred tax
assets because it believes it is not more likely than not that sufficient
taxable income will be realized during the carry-forward period to utilize the
deferred tax asset. The valuation allowance increased by $10,400,000 during
2000. Realization of the future tax benefits is dependent upon many factors,
including the Company's ability to generate taxable income within the loss
carry-forward periods.
11 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Net change in non-cash working capital amounts relating to operations
2000 1999
$ $
Accounts receivable
Trade (6,814) (167)
Other (425) (7)
Prepaids and other assets (578) 220
Inventories 293 (235)
Accounts payable and accrued liabilities 2,582 660
Deferred revenue 401 -
- ----------------------------------------------------------------------------------------------------------
(4,541) 471
- ----------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information
2000 1999
$ $
Interest paid 264 9
Capital assets acquired under capital lease obligations - 105
Common shares issued in connection with acquired technology assets (note 17) 11,001 -
Common shares issued in connection with conversion of convertible debt (note 8) 5,916 -
Warrants issued in connection with convertible debt (note 8(e)) 186 -
Common shares issued in connection with conversion of special warrants (note 8(d)) 6,826 -
Warrants issued in connection with private placement (note 8(d)) 215 -
Stock options issued to service providers (note 8(c)) 150 -
30
Notes to Consolidated Financial Statements
January 31, 2000 and 1999 (tabular amounts in thousands of Canadian dollars,
unless otherwise stated)
12 SEGMENTED INFORMATION
The Company's operations are located in Canada with two principal reportable
segments, E-Commerce Imaging and Digital Video products, across
geographically diverse markets.
Geographic information
2000
- ----------------------------------------------------------------------------------------------------------
United Asia
Canada States Europe Pacific Total
$ $ $ $ $
Revenue 1,469 20,205 6,815 2,351 30,840
Capital Assets 4,194 649 10 - 4,853
1999
- ----------------------------------------------------------------------------------------------------------
United Asia
Canada States Europe Pacific Total
$ $ $ $ $
Revenue 1,271 10,437 2,687 1,567 15,962
Capital Assets 2,429 10 5 - 2,444
Reportable segments
2000
- ----------------------------------------------------------------------------------------------------------
e-Imaging Digital
Video Total
$ $ $
Revenue 23,632 7,208 30,840
Cost of sales 3,813 950 4,763
- ----------------------------------------------------------------------------------------------------------
Contribution 19,819 6,258 26,077
- ----------------------------------------------------------------------------------------------
Expenses 35,891
- ----------------------------------------------------------------------------------------------------------
(9,814)
Interest income 344
Interest expense on long-term debt (371)
Amortization of intangible assets (9,348) (1,246) (10,594)
- ----------------------------------------------------------------------------------------------------------
Loss for the year (20,435)
- ----------------------------------------------------------------------------------------------------------
1999
- ----------------------------------------------------------------------------------------------------------
e-Imaging Digital
Video Total
$ $ $
Revenue 13,604 2,358 15,962
Cost of sales 2,020 225 2,245
- ----------------------------------------------------------------------------------------------------------
Contribution 11,584 2,133 13,717
- ----------------------------------------------------------------------------------------------
Expenses 22,472
- ----------------------------------------------------------------------------------------------------------
(8,755)
Interest income 304
- ----------------------------------------------------------------------------------------------------------
Loss for the year (8,451)
- ----------------------------------------------------------------------------------------------------------
In fiscal 2000, two customers accounted for 23% and 22% of total revenue for
the year, respectively, of which 91% comprised E-Imaging and 9% comprised
Digital Video, respectively.
In fiscal 1999, two customers accounted for 32% and 16% of total revenue for the
year, respectively, of which 80% comprised E-Imaging and 20% comprised Digital
Video, respectively.
13 OPERATING LINE OF CREDIT
The Company's bank line of credit of $4,000,000 bears interest at the bank's
prime rate plus 3/4% and is secured by substantially all of the assets of
the company. At January 31, 2000 and 1999, no amounts were drawn on this
line of credit.
31
Notes to Consolidated Financial Statements
January 31, 2000 and 1999 (tabular amounts in thousands of Canadian dollars,
unless otherwise stated)
14 COMMITMENTS
The Company is obligated under operating leases for the rental of facilities
and minimum royalty payments under certain licensing agreements. Future
payments under the Company's current obligations in effect as at January 31,
2000, which expire on December 31, 2008, are approximately as follows:
$
2001 2,328
2002 1,616
2003 1,175
2004 1,011
2005 1,020
Thereafter 2,084
The Company has collaborative arrangements with certain third parties that
provide for royalty payments. Under these arrangements, the Company is
required to make certain royalty payments on specified sales to customers
ranging from 10% to 15%.
15 RELATED PARTY TRANSACTIONS
Research and development fees are paid to a company controlled by a director
and a significant shareholder. The total fees paid in 2000 were $245,300
(1999 - $151,800).
During fiscal 1999, payments relating to the rental of facilities were made
to a company controlled by a significant shareholder and a party related to
a senior officer. Included in administration expense is fair market value
rent of $102,000. As at January 31, 1999, $55,000 of this amount was
included in accounts payable and accrued liabilities. This amount was paid
subsequent to the year-end. In January 1999, the facilities were sold to a
third party.
In January 2000, the Company entered into an arrangement with a related
company whereby the Company entered into a perpetual site license of certain
software, agreed to provide related maintenance and support services, and
entered into a 2 year co-marketing agreement. The Company received 1,969,023
special warrants in exchange for the arrangement. The special warrants are
exercisable, without further consideration, into 1,969,023 common shares.
The special warrants are restricted until they are qualified as part of a
prospectus or registration statement for the public issuance or sale of the
related company's shares within 18 months. Absent such qualification, the
special warrants are subject to resale restrictions as provided under the
Securities Act (Ontario). The transaction was recorded at fair value of the
consideration received in the amount of approximately $2,450,000. The
related revenue will be recorded ratably over the estimated four-year
economic life of the software license underlying the arrangement. The
companies are related by virtue of a director and significant shareholder of
the Company who is also a significant shareholder of the related company.
16 CREDIT AND CURRENCY RISKS
Concentrations of credit risk on trade accounts receivable are indicated in
the following table by the percentage of the total balance receivable by
individual customers. At January 31, 2000, three customers accounted for 37%
(1999 - 66%) of total accounts receivable, as follows:
2000 1999
% %
First customer 15 36
Second customer 13 20
Third customer 9 10
Substantially all of the Company's revenue is denominated in foreign
currencies and accordingly is exposed to the risk of currency fluctuation.
32
Notes to Consolidated Financial Statements
January 31, 2000 and 1999 (tabular amounts in thousands of Canadian dollars,
unless otherwise stated)
17 ACQUISITIONS
During the year, the Company completed three acquisitions of selected
software technology and other assets summarized as follows:
a) On November 12, 1999, the Company acquired software technology from a
U.S. public corporation, for a purchase price of $5,638 summarized as
follows:
Net cash
flow on
acquisition
$ $
Cash payment due February 2, 2000 (US$ 1,500,000) 2,218 -
Issuance of 450,000 common shares 3,420 -
- --------------------------------------------------------------------------------------------------------
5,638 -
- --------------------------------------------------------------------------------------------------------
b) On June 30, 1999, the Company acquired selected assets of Live Picture,
Inc., a private California company. The total purchase price of $13,950,000
is summarized as follows:
Net cash
flow on
acquisition
$ $
Cash payment 6,202 6,202
Assumption of liabilities 413 -
Issuance of 1,550,410 common shares 6,085 -
Costs of acquisition and assumption of other liabilities 1,250 -
- ----------------------------------------------------------------------------------------------------------
13,950 6,202
- ----------------------------------------------------------------------------------------------------------
The purchase price was allocated to identifiable non-monetary assets as follows:
$
Capital assets 100
Technology assets 13,850
- ------------------------------------------------------------------------------------------
13,950
- ------------------------------------------------------------------------------------------
c) On June 28, 1999, the Company acquired selected DVD software technology
and related assets from Zoran Corporation (Zoran), a California based public
company specializing in integrated circuits and software for digital audio
and digital video applications for a purchase price summarized as follows:
Net cash
flow on
acquisition
$ $
Cash payment (US$ 600,000) 891 891
Issuance of 373,134 common shares 1,496 -
Costs of acquisition 65 65
- ----------------------------------------------------------------------------------------------------------
2,452 956
- ----------------------------------------------------------------------------------------------------------
In connection with this acquisition, the purchase price included contingent
consideration based on a defined percentage of net revenue received by the
Company from the licensing or sale of DVD software technology acquired from
Zoran, up to a maximum royalty of $2,963,000 (US$2,000,000). As at January
31, 2000, royalties of $365,000 have been included in accounts payable and
accrued liabilities.
18 UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date sensitive systems may recognize
the year 2000 as 1900 or some other date, resulting in errors when
information using year 2000 dates is processed. In addition, similar
problems may arise in some systems which use certain dates in 1999 to
represent something other than a date. Although the change in date has
occurred, it is not possible to conclude that all aspects of the year 2000
Issue that may affect the entity, including those related to customers,
suppliers, or other third parties have been fully resolved.
33
Notes to Consolidated Financial Statements
January 31, 2000 and 1999 (tabular amounts in thousands of Canadian dollars,
unless otherwise stated)
19 CONTINGENCY
The Company has received correspondence alleging infringement of certain
technology rights. Management believes that the allegations are without
merit and, however resolved, will not have a material adverse effect on the
Company's financial position. No amount has been provided in these financial
statements in respect of these allegations. Loss, if any, sustained upon
ultimate resolution will be accounted for prospectively in the year of
settlement in the statement of operations.
20 COMPARATIVE FIGURES
Certain comparative figures have been reclassified to conform to the
financial statement presentation adopted in the current year.
21. DIFFERENCE BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES
The material variations between Canadian and United States (U.S. GAAP) are
discussed and presented below. However, all the disclosures required under
U.S. GAAP and Regulation S-X of the Securities and Exchange Commission of
the United States of America (SEC) have not, as permitted by the SEC, been
presented.
Consolidated statements of operations
Year ended January 31,
--------------------------------------
2000 1999
$ $
Net loss for the year per consolidated financial statements in accordance
with Canadian GAAP (20,435) (8,451)
Impact of U.S. accounting principles
Stock-based compensation costs (e)
Service providers (104) (116)
Employees (38) (46)
Accretion of convertible debenture 222 -
--------------------------------------
Net loss for the year in accordance with U.S. GAAP (20,355) (8,613)
--------------------------------------
Basic and diluted net loss per share in accordance with Canadian GAAP (0.67) (0.35)
--------------------------------------
Basic and diluted loss per share in accordance with U.S. GAAP (0.66) (0.36)
--------------------------------------
Weighted average number of common shares outstanding - basic and diluted
under Canadian and U.S. GAAP 30,613 24,122
--------------------------------------
34
Notes to Consolidated Financial Statements
January 31, 2000 and 1999 (tabular amounts in thousands of Canadian dollars,
unless otherwise stated)
Consolidated shareholders' equity
January 31,
--------------------------------------------------------------------------------
2000 1999
-------------------------------------- --------------------------------------
U.S. GAAP Cdn. GAAP U.S. GAAP Cdn. GAAP
$ $ $ $
Common shares (b)(c)(d)(e) 72,364 72,867 31,788 32,365
Special warrants 23,550 23,550 - -
Additional paid-in capital (c)(d)(e) 1,689 497 1,488 -
Deferred stock-based compensation (e) (191) - (183) -
Deficit (b)(e) (44,883) (44,235) (24,528) (23,800)
--------------------------------------------------------------------------------
52,529 52,679 8,565 8,565
--------------------------------------------------------------------------------
a) Investments
Under Canadian generally accepted accounting principles (Canadian GAAP),
portfolio investments in the amount of $2,450,000 at January 31, 2000 (1999
- $nil) are accounted for at cost, less provision for decline in value that
is other than temporary. Under U.S. GAAP, such available for sale securities
are reflected in assets at their fair value. Where fair value is less than
carrying amount, the unrealized loss is reflected in accumulated other
comprehensive loss. As at January 31, 2000, these unrealized losses amount
to $nil (1999 - $nil).
b) Early retirement of convertible debentures
Under Accounting Principles Board (APB) Opinion No. 26, "Early
Extinguishment of Debt", gains or losses resulting from the early
extinguishment of debt should be recognized in operations in the period in
which the debt is extinguished. On February 26, 1996, in connection with the
early retirement of $785,000 convertible debentures, the Company issued an
additional 650,000 one-half common share purchase warrants to the remaining
convertible debenture unitholders. Under U.S. GAAP, the Black-Scholes
option-pricing model was used to determine the fair value of the warrants
issued whereas, under Canadian GAAP, the intrinsic method was used,
resulting in a difference of $216,000 in the deficit and share capital as at
January 31, 1997 and thereafter.
c) Broker warrants and options
On September 29, 1997, in connection with the issuance of 3,500,000 special
warrants offered at $4.25 each, the Company issued 175,000 broker special
warrants. Each broker special warrant was converted into a compensation
option to purchase one common share at a price of $5.25 per share, which
expired on December 29, 1998. In accordance with Financial Accounting
Standards Board (FASB) Statement No. 123, the warrants issued to brokers in
connection with this financing arrangement were recorded at their fair value
using the Black-Scholes option-pricing model at the date of the grant, and
an amount of $350,000 was netted against the proceeds of the offering as a
financing cost. Under Canadian GAAP, a nominal amount was assigned.
d) Common share purchase warrants
On September 30, 1997, the Company issued 1,022,757 common shares and the
same number of common share purchase warrants for total cash consideration
of $2,765,999 pursuant to the terms of a subscription agreement. Each
warrant entitles the holder to purchase one common share of the Company,
subject to adjustment, at the lower of (i) $3.95 per common share and (ii)
the higher of the then current market price of the common shares of the
Company and $3.20 per common share. On October 13, 2000, pursuant to the
terms of the subscription agreement, all purchase warrants were converted on
a net basis into 813,647 common shares for no additional consideration. In
accordance with FASB Statement No. 123, the common share purchase warrants
issued in connection with this financing arrangement were recorded at their
fair value using the Black-Scholes option-pricing model at the date of the
grant, and an amount of $558,000 was allocated to the common share purchase
warrants. Under Canadian GAAP, a nominal amount was assigned.
e) Stock-based compensation
Under U.S. GAAP, the Company follows FASB Statement No. 123, "Accounting for
Stock-Based Compensation", which permits the use of APB Opinion No. 25,
"Accounting for Stock Issued to Employees", to account for stock options
issued to employees. Under APB Opinion No. 25, the Company uses the
intrinsic value method to determine the cost associated with the granting of
stock options to employees. Accordingly, the amount by which the market
price of the underlying shares exceeds the exercise price of the options, if
any, is accounted for as compensation expense over the vesting period.
35
Notes to Consolidated Financial Statements
January 31, 2000 and 1999 (tabular amounts in thousands of Canadian dollars,
unless otherwise stated)
Under FASB Statement No. 123, all transactions with non-employees in which
equity instruments are issued in exchange for goods and services should be
accounted for based on the fair value of the consideration received or
given, whichever is more reliably measured. Where consideration received is
not determinable, equity instruments issued as compensation to outside
service providers are valued using the Black-Scholes option-pricing model at
the measurement date, and this amount is charged to operations over the
periods in which services are rendered. While the Company also records share
options issued to outside service providers at fair value for Canadian GAAP
purposes, the determination of such fair value under Canadian GAAP does not
mandate the use of option-pricing models prescribed under U.S. GAAP.
36
Consolidated Balance Sheets
(unaudited), (tabular amounts in thousands of Canadian dollars)
October 31 January 31
2001 2001
- ----------------------------------------------------------
ASSETS
Current assets
Cash and short-term investments 2,971 36,324
Accounts receivable
Trade 7,398 9,790
Other 904 830
Inventories 2,468 2,047
Prepaids and other assets 939 2,211
- ----------------------------------------------------------
- ----------------------------------------------------------
14,680 51,202
Investments (Note 3) - 3,986
Capital assets 5,156 6,928
Acquired technology,
net of accumulated amortization 1,308 5,231
- ----------------------------------------------------------
21,144 67,347
- ----------------------------------------------------------
- ----------------------------------------------------------
LIABILITIES
Current liabilities
Bank loan of subsidiary 1,687 2,057
Accounts payable and accrued
liabilities (Note 5) 13,068 17,155
Deferred revenue 300 1,767
Current portion of long-term debt 40 165
Current portion of capital lease
obligations 38 27
- ----------------------------------------------------------
- ----------------------------------------------------------
15,133 21,171
Accrued liabilities (Note 5) 307 -
Deferred revenue - 2,113
Capital lease obligations - 22
- ----------------------------------------------------------
15,440 23,306
SHAREHOLDERS' EQUITY
Capital stock
Common shares (Note 6) 117,168 116,819
Other equity 3,964 3,964
Deficit (115,428) (76,742)
- ----------------------------------------------------------
5,704 44,041
- ----------------------------------------------------------
21,144 67,347
- ----------------------------------------------------------
Contingencies (Note 8)
- ----------------------------------------------------------
Consolidated Statement of Operations and Deficit
(unaudited), (in thousands of Canadian dollars, except per share amounts)
Nine Nine
months months
ended ended
October 31 October 31
2001 2000
- -------------------------------------------------------------
REVENUE 20,684 35,963
COST OF SALES 7,997 5,907
- -------------------------------------------------------------
12,687 30,056
EXPENSES
Marketing and selling 19,682 21,522
Research and development 11,949 14,024
Administration 8,161 4,806
Foreign exchange (494) (923)
Amortization of capital assets 1,332 1,335
- -------------------------------------------------------------
- -------------------------------------------------------------
40,630 40,764
- -------------------------------------------------------------
LOSS BEFORE UNDERNOTED ITEMS (27,943) (10,708)
INTEREST INCOME 426 794
INTEREST EXPENSE ON LONG-TERM DEBT (36) (29)
WRITE-DOWN OF INVESTMENTS,
NET OF RELATED DEFERRED REVENUE (2,392) -
RESTRUCTURING COSTS (3,742) -
WRITE-OFF OF GOODWILL - (931)
AMORTIZATION OF ACQUIRED
TECHNOLOGY (3,924) (6,224)
- -------------------------------------------------------------
LOSS BEFORE INCOME TAXES (37,611) (17,098)
INCOME TAXES (1,075) (377)
- -------------------------------------------------------------
LOSS FOR THE PERIOD (38,686) (17,475)
DEFICIT, BEGINNING OF PERIOD (76,742) (44,235)
- -------------------------------------------------------------
DEFICIT, END OF PERIOD (115,428) (61,710)
- -------------------------------------------------------------
LOSS PER SHARE
- - basic and diluted (0.92) (0.46)
- -------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 42,272 38,067
- -------------------------------------------------------------
Consolidated Statement of Cash Flows
(unaudited), (tabular amounts in thousands of Canadian dollars)
Nine Nine
months months
ended ended
October 31 October 31
2001 2000
- ---------------------------------------------------------------
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Loss for the period (38,686) (17,475)
Items not affecting cash
Amortization of capital assets 1,332 1,335
Amortization of acquired
technology 3,924 6,224
Unrealized foreign exchange gain (767) (365)
Amortization of deferred revenue (1,986) 163
Amortization of deferred
financing costs - 26
Write-down of investments,
net of deferred revenue 2,392 -
Write-off of goodwill - 931
Net change in non cash
working capital amounts (362) (2,829)
- ---------------------------------------------------------------
(34,153) (11,990)
- ---------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds on issuance of common shares 349 1,942
Repayment of long-term debt (125) (125)
Repayment of capital lease obligations (11) (9)
- ---------------------------------------------------------------
- ---------------------------------------------------------------
213 1,808
- ---------------------------------------------------------------
INVESTMENT ACTIVITIES
Proceeds from sale of (purchase of)
capital assets, net (101) (3,123)
Payment for intangible assets - (2,803)
- ---------------------------------------------------------------
- ---------------------------------------------------------------
(101) (5,926)
- ---------------------------------------------------------------
FOREIGN EXCHANGE GAIN ON
CASH HELD IN FOREIGN CURRENCY 688 264
- ---------------------------------------------------------------
DECREASE IN CASH AND CASH
EQUIVALENTS DURING THE PERIOD (33,353) (15,844)
- ---------------------------------------------------------------
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 36,324 33,703
- ---------------------------------------------------------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD 2,971 17,859
- ---------------------------------------------------------------
CASH AND CASH EQUIVALENTS
COMPRISED OF:
Cash 461 6,485
Short-term investments 2,510 11,374
- ---------------------------------------------------------------
2,971 17,859
- ---------------------------------------------------------------
Notes to Consolidated Financial Statements
October 31, 2001
(unaudited), (tabular amounts in thousands of Canadian dollars)
1. NATURE OF OPERATIONS
MGI Software Corp. (the "Company") was incorporated on September 22, 1985 under
the laws of the Province of Ontario to design, develop, market and support
Internet imaging products and digital video and photography solutions for PCs,
devices, and the Internet. The products apply to content creation and editing,
content encoding and decoding, Internet distribution systems, web printing and
online navigation. To date, the Company's primary markets have been the United
States, Europe and Asia Pacific.
2. SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements have been prepared
in accordance with Canadian generally accepted accounting principles for interim
financial statements and, accordingly, certain information and footnote
disclosure normally included in financial statements prepared in accordance with
Canadian generally accepted accounting principles have been condensed, or
omitted. These financial statements have been prepared using the same accounting
principles as used in the annual audited consolidated financial statements and
should be read in conjunction with the audited consolidated financial statements
of the Company for the year ended January 31, 2001. The results of operations
for any interim period are not necessarily indicative of the results of
operations for any other interim period or for a full fiscal year.
3. INVESTMENTS
|-------------------------+-------------------------+-------------------------|
| |2001 |2000 |
| |$ |$ |
|-------------------------+-------------------------+-------------------------|
|Investment in related |- |2,450 |
|company | | |
|-------------------------+-------------------------+-------------------------|
|Investment in imaging |- |1,536 |
|service provider | | |
|-------------------------+-------------------------+-------------------------|
In the first quarter, the Company recorded a write-down of the above noted
investments to their estimated fair market value. The write-down amounted to
$3,986,000. In addition, as a result of new arrangements, the Company reduced
deferred revenue relating to one of these investments by $1,594,000.
4. BANK LINE OF CREDIT
The Company has a bank line of credit that is secured by the Company's cash and
short-term investments equivalent to the amounts borrowed at any point in time
up to a maximum of $1.5 million (October 31, 2000 - $4.0 million). At October
31, 2001 the Company had utilized $220,000 of the line of credit.
5. RESTRUCTURING COSTS
In the fourth quarter ended January 31, 2001, the Company began streamlining
operations and eliminating redundant activities. In March 2001, the Company
approved its restructuring plan to consolidate research and development
activities and certain sales and marketing functions. Included in accounts
payable and accrued liabilities at October 31, 2001 is an accrual for
restructuring costs of approximately $1.3 million comprised of the following
items:
Employee termination $ 719
Accrual for lease costs associated with office closures 561
- --------------------------------------------------------------------------------
$1,280
- --------------------------------------------------------------------------------
6. CAPITAL STOCK
During the nine months ended October 31, 2001, a total of 154,672 common shares
were issued on the exercise of stock options for total cash consideration of
$349,000.
Effective August 1, 2001, the Company implemented a Stock Purchase Plan for
eligible employees. Treasury stock will be issued to those employees enrolled in
the program in lieu of the equivalent amount of cash compensation. On November
22, 2001 the Stock Purchase Plan was terminated.
7. EARNINGS PER SHARE
The Company has an incentive plan under which options to purchase common shares
may be granted to its directors, officers, employees and service providers. The
aggregate number of options outstanding at October 31, 2001 were 3,592,531.
These options were not included in the computation of diluted earnings per share
as they are anti-dilutive for the periods presented. In connection with the
proposed transaction described in Note 8 below, the Board of Directors have
approved the acceleration of the vesting of the outstanding stock options
contingent on the completion of the proposed transaction.
8. CONTINGENCIES
The Company has received correspondence alleging infringement of certain
technology rights. Management believes that these allegations are without merit
and, however resolved, will not have a material adverse effect on the Company's
financial position. No amount has been provided in these financial statements in
respect of these allegations. Loss sustained, if any, will be recorded in the
statements of operations in the period such loss is determinable.
9. SUBSEQUENT EVENTS
(i) On December 3, 2001 MGI's Board of Directors voted unanimously to enter
into a combination agreement with Roxio, Inc. whereby Roxio agreed to
acquire all of MGI's outstanding Common Shares pursuant to an arrangement
under the Business Corporations Act (Ontario). In connection with the
proposed transaction, MGI entered into an agreement with its financial
advisor that provides for the payment of fees for work performed, and
additional fees contingent on the completion of the transaction, as well as
an indemnification in respect of certain liabilities that may arise
resulting from their engagement as financial advisor. The company will be
liable to pay certain amounts relating to termination provisions contained
in existing employment agreements. Under the terms of the definitive
agreement, Roxio has agreed to provide MGI with a line of credit of up to
US$1.5 million, that may be converted, at Roxio's option, into Common
Shares of the Company. At December 17, 2001, MGI had borrowed US$1.0
million under this line of credit.
(ii) Subsequent to March 9, 2001:
(a) On January 31, 2002, all the Company's outstanding common shares were
sold to Roxio, Inc. Pursuant to this transaction:
. Costs amounting to approximately $4,300,000 were incurred in respect
of investment banking, legal costs, employee severance and other
administrative matters;
. Certain changes were made to marketing strategies resulting in a
write-down of inventories and accounts receivable in the amount of
$965,000 and $1,124,000, respectively;
. 1,195,500 unvested share options held by directors, officers and
employees vested immediately, in accordance with the Company's
original option agreements. These options were exercised for cash
consideration of $890,000;
. Effective March 11, 2002, the Company ceased to be a public
corporation;
. The Company received approximately US $12,300,000 (approximately
Cdn. $19,680,000) as consideration for intellectual property sold to
corporations controlled by Roxio, Inc.; and
. It was resolved that the Company would pay an amount of $15,129,700
as a pro-rata return of capital on the Company's common shares.
(b) In connection with the contingencies referred to in note 7 and other
matters subsequent, the Company has made a provision in the approximate
amount of $6 million, representing new management's best estimate of the
most likely outcome of the claim and possible claim negotiations. If and
when the possible claims become actions against the Company, the actual
claim amounts could be higher than amounts currently provided by the
Company. Nevertheless, management believes that the amounts provided
will be sufficient to settle such claims. To the extent that losses are
sustained in excess of these amounts, such losses will be recorded in
operations in the period of settlement.
Notes to Consolidated Financial Statements October 31, 2001 (unaudited),
(tabular amounts in thousands of Canadian dollars) Continued
10. SEGMENTED INFORMATION
The Company's operations are primarily located in Canada with two principal
reportable segments, e-Imaging and Digital Video products, across geographically
diverse markets.
Nine months ended October 31, 2001 Nine months ended October 31, 2000
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Digital Digital
e-Imaging Video Total e-Imaging Video Total
- ------------------------------------------------------------------------------------------------------------------------
Revenue 11,607 9,077 20,684 20,896 15,067 35,963
Cost of Sales 3,584 4,413 7,997 3,515 2,392 5,907
- ------------------------------------------------------------------------------------------------------------------------
Gross Margin 8,023 4,664 12,687 17,381 12,675 30,056
Operating Expenses 40,630 40,764
- ------------------------------------------------------------------------------------------------------------------------
Loss before the undernoted (27,943) (10,708)
Interest income 426 794
Interest expense on long-term debt (36) (29)
Restructuring costs (3,742) -
Write-down of investments (2,392) -
Write-off of goodwill - (931)
Amortization of acquired technology (3,924) (6,224)
Income taxes (1,075) (377)
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Loss for the period (38,686) (17,475)
- ------------------------------------------------------------------------------------------------------------------------
11. COMPARATIVE FIGURES
Certain comparative figures have been reclassified to conform to the current
period's presentation.
Notes to Consolidated Financial Statements October 31, 2001
(unaudited), (tabular amounts in thousands of Canadian dollars) Continued
12. DIFFERENCE BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
The material variations between Canadian and United States (U.S. GAAP) are
discussed and presented below. However, all the disclosures required under U.S.
GAAP and Regulation S-X of the Securities and Exchange Commission of the United
States of America (SEC) have not, as permitted by the SEC, been presented.
Consolidated statements of operations
Nine-month periods ended
October 31,
----------------------------------------
2001 2000
$ $
(Unaudited) (Unaudited)
Net loss for the period per consolidated financial statements in
accordance with Canadian GAAP (38,686) (17,475)
Impact of U.S. accounting principles
Stock-based compensation costs (e)
Service providers - (23)
Employees - (18)
----------------------------------------
Net loss and comprehensive loss for the period in accordance with U.S. GAAP (38,686) (17,516)
----------------------------------------
Basic and diluted net loss per share in accordance with Canadian GAAP (0.92) (0.46)
----------------------------------------
Basic and diluted loss per share in accordance with U.S. GAAP (0.92) (0.46)
----------------------------------------
Weighted average number of common shares outstanding - basic and diluted
under Canadian and U.S. GAAP 42,272 38,067
----------------------------------------
Consolidated shareholders' equity
October 31,
----------------------------------------------------------------------
2001 2000
----------------------------------- -------------------------------
U.S. Cdn. U.S. Cdn.
GAAP GAAP GAAP GAAP
$ $ $ $
Common shares (a)(b)(c)(d)(e) 117,356 117,168 114,208 114,089
Additional paid-in capital (b)(c)(e) 4,465 3,964 1,056 486
Deferred stock-based compensation (e) (168) - (150) -
Deficit (a)(d)(e) (116,117) (115,428) (62,399) (61,710)
----------------------------------------------------------------------
5,536 5,704 52,715 52,865
----------------------------------------------------------------------
Notes to Consolidated Financial Statements October 31, 2001
(unaudited), (tabular amounts in thousands of Canadian dollars) Continued
a) Early retirement of convertible debentures
Under Accounting Principles Board (APB) Opinion No. 26, "Early
Extinguishment of Debt", gains or losses resulting from the early
extinguishment of debt should be recognized in operations in the
period in which the debt is extinguished. On February 26, 1996, in
connection with the early retirement of $785,000 convertible
debentures, the Company issued an additional 650,000 one-half common
share purchase warrants to the remaining convertible debenture
unitholders. Under U.S. GAAP, the Black-Scholes option-pricing model
was used to determine the fair value of the warrants issued whereas,
under Canadian GAAP, the intrinsic method was used, resulting in a
difference of $216,000 in the deficit and share capital as at January
31, 1997 and thereafter.
b) Broker warrants and options
On September 29, 1997, in connection with the issuance of 3,500,000
special warrants offered at $4.25 each, the Company issued 175,000
broker special warrants. Each broker special warrant was converted
into a compensation option to purchase one common share at a price of
$5.25 per share, which expired on December 29, 1998. In accordance
with Financial Accounting Standards Board (FASB) Statement No. 123,
the warrants issued to brokers in connection with this financing
arrangement were recorded at their fair value using the Black-Scholes
option-pricing model at the date of the grant, and an amount of
$350,000 was netted against the proceeds of the offering as a
financing cost. Under Canadian GAAP, a nominal amount was assigned.
c) Common share purchase warrants
On September 30, 1997, the Company issued 1,022,757 common shares and
the same number of common share purchase warrants for total cash
consideration of $2,765,999 pursuant to the terms of a subscription
agreement. Each warrant entitles the holder to purchase one common
share of the Company, subject to adjustment, at the lower of (i)
$3.95 per common share and (ii) the higher of the then current market
price of the common shares of the Company and $3.20 per common share.
On October 13, 2000, pursuant to the terms of the subscription
agreement, all purchase warrants were converted on a net basis into
813,647 common shares for no additional consideration. In accordance
with FASB Statement No. 123, the common share purchase warrants
issued in connection with this financing arrangement were recorded at
their fair value using the Black-Scholes option-pricing model at the
date of the grant, and an amount of $558,000 was allocated to the
common share purchase warrants. Under Canadian GAAP, a nominal amount
was assigned.
d) Convertible debentures
Under Canadian GAAP, a financial instrument that contains both a
liability and an equity element must be split into its component
parts at fair value. Accordingly, an amount of $278,000 was
attributed to the conversion feature of the subordinated convertible
debenture. Under U.S. GAAP, a beneficial conversion feature is
recognized on financial instruments using the intrinsic value method
which, in this case, was $nil. Accretion of the debt under Canadian
GAAP was $380,000 whereas, under U.S. GAAP, accretion of the debt
amounted to $158,000.
e) Stock-based compensation
Under U.S. GAAP, the Company follows FASB Statement No. 123,
"Accounting for Stock-Based Compensation", which permits the use of
APB Opinion No. 25, "Accounting for Stock Issued to Employees", to
account for stock options issued to employees. Under APB Opinion No.
25, the Company uses the intrinsic value method to determine the cost
associated with the granting of stock options to employees.
Accordingly, the amount by which the market price of the underlying
shares exceeds the exercise price of the options, if any, is
accounted for as compensation expense over the vesting period.
Under FASB Statement No. 123, all transactions with non-employees in
which equity instruments are issued in exchange for goods and
services should be accounted for based on the fair value of the
consideration received or given, whichever is more reliably measured.
Where consideration received is not determinable, equity instruments
issued as compensation to outside service providers are valued using
the Black-Scholes option-pricing model at the measurement date, and
this amount is charged to operations over the periods in which
services are rendered. While the Company also records share options
issued to outside service providers at fair value for Canadian GAAP
purposes, the determination of such fair value under Canadian GAAP
does not mandate the use of option-pricing models prescribed under
U.S. GAAP.