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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 20-F
[ ] Registration statement pursuant to Section 12(b) or 12(g) of the
Securities Exchange Act of 1934 (Fee Required)
or
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (Fee Required)
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required)
For the transition period from to
Commission file number ______________
PC DOCS GROUP INTERNATIONAL INC.
(Exact Name of Registrant as Specified in its Charter)
NOT APPLICABLE
(Translation of Registrant's Name Into English)
ONTARIO
(Jurisdiction of Incorporation or Organization)
2005 Sheppard Avenue East, Suite 800
Toronto, Ontario
M2J 5B4
Securities registered or to be registered pursuant to
Section 12(b) of the Act: NONE
Securities registered or to be registered pursuant to
Section 12(g) of the Act: NONE
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act:
Common shares without par value
(Title of Class)
As at June 30, 1998, there were 23,644,147 common shares outstanding
Indicated by check mark which financial statement item the registrant
has elected to follow.
Item 17 X Item 18
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TABLE OF CONTENTS
PART 1.........................................................................1
Item 1. DESCRIPTION OF BUSINESS...........................................1
Incorporation.....................................................1
General Development of the Business...............................1
Industry Overview.................................................2
Business of the Company...........................................4
Item 2. DESCRIPTION OF PROPERTY..........................................13
Item 3. LEGAL PROCEEDINGS................................................13
Item 4. CONTROL OF REGISTRANT............................................13
Item 5. NATURE OF TRADING MARKET.........................................14
Price Range of Common Shares.....................................14
Item 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING
SECURITY HOLDERS...............................................14
Investment Canada Act............................................15
Competition Act..................................................15
Shareholder Rights Plan..........................................15
Item 7. TAXATION.........................................................16
Certain Canadian Federal Income Tax Considerations...............16
Item 8. SELECTED FINANCIAL DATA..........................................17
Annual Information...............................................17
Quarterly Information............................................19
Exchange Rates...................................................20
Dividends........................................................20
Item 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS......................................20
Item 9A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK........20
Item 10. DIRECTORS AND OFFICERS OF THE COMPANY............................21
Item 11. COMPENSATION OF DIRECTORS AND OFFICERS...........................23
Summary Compensation Table.......................................23
Item 12. OPTIONS TO PURCHASE SECURITIES FROM THE COMPANY OR SUBSIDIARIES..24
Option Grants During The Most Recently Completed Fiscal Year.....24
Aggregated Option Exercises During The Most Recently Completed
Fiscal Year And Fiscal Year End Option Values....................25
Option Repricing.................................................25
Item 13. INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS........26
PART II.......................................................................26
Item 14. (NOT APPLICABLE).................................................26
PART III......................................................................26
Item 15. (NOT APPLICABLE).................................................26
Item 16. (NOT APPLICABLE).................................................26
PART IV.......................................................................26
Item 17. FINANCIAL STATEMENTS.............................................26
Item 18. (NOT APPLICABLE).................................................27
Item 19. FINANCIAL STATEMENTS AND EXHIBITS................................27
SIGNATURES.......................................................28
FINANCIAL STATEMENTS AND REPORT..................................29
The following trademarks owned by the Company or its subsidiaries are used in
this Annual Report: BillWiz(TM), Case Open(TM), CLO*2(R), CMS/Data(R), CMS
ALERT!(TM), CMS OPEN(R), CompInfo LawPack(TM), CyberDOCS(R), Data Dictionary
Editor(TM), DOCS Designer(R), DOCS Development Kit(TM), DOCS Document Sentry
Agent(TM), DOCS Enterprise Suite(TM), DOCSFulcrum(TM), DOCSFusion(TM), DOCS
Imaging(TM), DOCS Interchange(TM), DOCS Open(R), DOCS Routing(TM),
DOCSummit(TM), DOCS Unplugged(R), DocuDraft(R), FulView(TM), Inquiry
Painter(TM), Intuitive Searching(TM), LawPack(R), LawPack Connect(TM),
MarketSense(R), PC DOCS(R), PC DOCS Group(TM), Power Desktop(TM), ProActive
Agents(TM), Quartex(R), Report Writer(TM), SearchBuilder(R), SearchServer(TM),
Screen Painter(TM), WebFIND!(TM). All other products or company names used in
this Annual Report are the trademarks of their respective holders.
All currency is stated in Canadian dollars, unless otherwise specified. As at
June 30, 1998, the exchange rate to United States dollars of Canadian dollars
was CDN $1.4716 to U.S. $1.00, and as at September 30, 1998, CDN$1.5259 to U.S.
$1.00.
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PC DOCS GROUP INTERNATIONAL INC.
PART 1
ITEM 1. DESCRIPTION OF BUSINESS
INCORPORATION
PC DOCS Group International Inc. ("PC DOCS Group" or the "Company") is a
corporation amalgamated by Articles of Amalgamation under the Business
Corporations Act (Ontario). PC DOCS Group's head office and principal office is
located at 2005 Sheppard Avenue East, Suite 800, Toronto, Ontario, Canada, M2J
5B4.
PC DOCS Group is the corporation continuing from an amalgamation of Micom
Computer Systems Limited with Compuventure, Inc. on June 30, 1986, under the
name Maxon Computer Systems Incorporated. The name was changed by Articles of
Amendment to The Quartex Corporation in 1990 and to PC DOCS Group International
Inc. on June 29, 1994.
During 1994, the Company created by Articles of Amendment an unlimited number of
common shares and an unlimited number of special shares issuable in series, and
reclassified and consolidated the issued Class A non-voting shares, the issued
Class B multiple-voting shares and the issued Series 1 non-voting preferred
shares, into common shares of the Company on a one-for-four basis. The
authorized but unissued shares of all classes other than common shares and
special shares issuable in series were then cancelled.
As the result of transactions in 1986, 1989, 1993, 1994 and 1997, the Company
owns 100% of PC DOCS Group U.S., Inc. which in turn owns 100% of CMS/Data
Corporation ("CMS"), a Florida corporation which has its principal office in
Tallahassee, Florida, PC DOCS, Inc., a Delaware corporation with its principal
office in Burlington, Massachusetts and another office in Tallahassee, Florida,
and CompInfo, Inc. ("CompInfo"), a New York corporation with its principal
office in New York, New York. In 1996, the Company acquired all of the shares of
DataRamp, Inc. (formerly Working Set, Inc.) ("DataRamp") which, in 1997, was
then merged with PC DOCS, Inc. On September 4, 1996, the Company acquired all of
the shares of PC DOCS Group Europe Ltd. (formerly Quintec International Limited)
("PC DOCS Europe"), a U.K. corporation with its principal office in Watford, U.K
and another office in Central London, U.K.
As a result of Canadian reorganizations in 1996 and 1997, the Company owns 100%
of PC DOCS Group Canada Inc. which in turn owns 100% of The Quartex Corporation
Inc. ("Quartex") and PC DOCS Canada Inc., both Ontario corporations with
principal offices in Toronto, Canada.
In March 1998, the Company acquired all of the outstanding shares of Fulcrum
Technologies Inc. ("Fulcrum"), a Canadian corporation with its principal office
in Ottawa, Canada and other offices throughout the world including Burlington,
Massachusetts, Paris, London, Frankfurt, Rome, Singapore, Tokyo, Seoul and
Sydney. In 1998, the Company also acquired all of the shares of PC DOCS Asia
Ltd. ("PC DOCS Asia"), a British Virgin Islands corporation with its principal
offices in Singapore and Hong Kong, and Globus International Quality Group Inc.
("Globus"), an Ontario corporation with its principal office in Toronto, Canada.
GENERAL DEVELOPMENT OF THE BUSINESS
The Company is a software development company and systems integrator. The
Company's revenues are generated from sales of computer software, integrated
computer software and hardware systems, systems integration and implementation
services, and software and hardware support services. The Company's ability to
produce high quality software for complex business applications has resulted in
the development of both custom systems to fit the needs of particular clients
and standard packages suitable for industry-wide applications. The Company
markets a number of
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products, including DOCS Open and CyberDOCS, document management software
products designed to accommodate requirements of a diverse range of document
users; SearchServer and DOCSFulcrum (formerly known as Fulcrum Knowledge
Network) designed to improve the ability to find and categorize information from
a variety of data sources; CMS OPEN, a professional office management system
which runs on a variety of hardware platforms and with a number of operating
systems; CompInfo LawPack, a case management system for corporate and government
law departments; BillWiz and LawPack Connect, EDI software packages for
electronic transfer of law firm billing information to CompInfo LawPack and Case
Open, a case management system for law firms. The Company is expanding its sales
and marketing efforts for its document and knowledge management products into
over 40 countries in Europe, the Asia-Pacific region, South and Central America
and the Caribbean and intends to continue expanding its sales, marketing and
development activities with respect to these products.
CMS/Data is a software developer and systems integrator which designs, develops,
markets, installs and supports integrated turnkey law and other professional
office computer systems. In March 1989, CMS/Data introduced Document
Organization and Control System software ("PC DOCS"), a document management
product designed to assist in managing the filing, retrieving and archiving of
documents produced in WordPerfect word processing software on networks. In 1990,
PC DOCS, Inc. was incorporated to operate this business and, in 1995, PC DOCS,
Inc. moved its head office to Burlington, Massachusetts.
CompInfo was formed in 1978 by data processing professionals who provided
software consulting services to Fortune 2000 companies and large financial
institutions. In 1980, CompInfo developed a law firm accounting system known as
LawPack. This system has evolved over the years into CompInfo LawPack for
Windows, a legal matter management system.
Fulcrum was formed in 1983, acquired by Datamat Ingegneria dei Sistemi S.p.A.
("Datamat") in 1990 and completed its initial public offering in 1993. Fulcrum
develops, markets, licenses and supports software that indexes and retrieves
information in electronically-stored documents, and software that manages the
knowledge of a corporation's various databases.
Globus owns, manages and publishes directories of organizations, registrars and
consultants related to the ISO industry.
Quartex specializes in retail information management systems for university book
stores.
The Company's enterprise document and knowledge management systems are
distributed in Canada by PC DOCS Canada Inc. and in Asia by PC DOCS Asia. PC
DOCS Europe distributes the Company's products throughout Europe.
INDUSTRY OVERVIEW
Industry Background
Commencing in the mid-1980s, the computer industry underwent a significant
transformation as PCs began to replace traditional minicomputer and mainframe
systems that operated with closed proprietary software systems. This
transformation has led to the proliferation of networked computing systems
consisting of local and wide area networks which connect multiple PCs in one
location and across multiple locations through powerful servers. As
organizations began to shift their business-critical applications to PC
networks, a need arose for sophisticated, open architecture software solutions
that could operate in a client/server environment and across a variety of
computing platforms. Concurrently with these changes in computing systems came
the increasing market acceptance of structured query language ("SQL") database
technology and the widespread use of personal productivity applications such as
word processing, spreadsheets and presentation graphics.
As the means of computing changed, the variety and use of both structured and
unstructured data within organizations grew. Structured data, such as sales
records, inventory data or accounting and billing information, is typically
stored in tables in traditional database management systems. Unstructured data,
such as word processing, spreadsheet, CAD, image, graphics and multimedia files,
is produced by a myriad of desktop and professional applications. Unstructured
data typically exists in hard copy as well as in a multitude of electronic data
types and file formats. In a typical corporate environment, unstructured
electronic documents are created, modified, distributed and stored using
multiple
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software systems which run on a variety of different platforms that may be
geographically dispersed, with little compatibility or data sharing capability
between systems.
In recent years, the Internet has emerged as an increasingly important medium
for communications and information publishing. The Internet and the World Wide
Web have dramatically increased the volumes of unstructured information
available in organizations today. As well, Internet technologies are having a
significant influence on the configuration of network computing environments as
organizations are increasingly adopting private "intranets" based on Internet
data formats and communications technologies to connect geographically dispersed
networks and information repositories. Although the Internet and corporate
intranets have given users widespread access to new sources of unstructured
information, the tools available for harnessing, managing and controlling that
1information are limited.
Many organizations have begun to recognize that a competitive advantage can be
gained from the more effective use of available information, in particular, by
the rapid searching of text or other unstructured information contained in
internal or external databases, including through the Internet.
Enterprise Document Management Systems
The proliferation of relational database management systems enabled the
effective management of much of the structured data within large organizations.
However, these systems are not designed to manage the complexity and variety of
unstructured data, resulting in inefficiencies in document-related processes
that hamper productivity at the individual, team, department and enterprise
levels. Without an effective means of searching for and reusing unstructured
enterprise information, individuals are often forced to recreate documents,
duplicating effort and increasing the risk of error and inconsistency. As a
result, individuals are spending a disproportionate amount of their time
locating, assembling, processing and duplicating data rather than engaging in
more productive activities. In addition, today's PC users often work in
collaborative teams which are geographically dispersed and use different client
platforms. The lack of effective tools for communicating and sharing information
across organizational and geographic borders and for automating workflow among
individuals makes group collaboration even more time-consuming, inefficient and
error-prone. In order to resolve these problems, several vendors have come forth
in recent years with Enterprise Document Management (EDM) technologies. EDM
systems provide a means to store, easily locate and retrieve document-based
information throughout the document's life cycle. An effective document
management system must be able to operate in a heterogeneous computing
environment, permit users to collaborate and contribute information across
enterprise and geographic boundaries and be flexible enough to adapt to emerging
hardware and software platforms, including the Internet and intranets. In
addition, the ability to create libraries for secure document access and
retrieval based on a variety of criteria, to maintain a record of user activity
and to control multiple document versions is essential. While a number of
technology suppliers have developed proprietary software systems to address
these challenges, many of these solutions serve only single applications (for
example, word processing) and individual environments (for example, a single
network operating system) and therefore do not address enterprise-wide concerns.
Information Retrieval and Knowledge Management Systems
Information Retrieval (IR) software builds a comprehensive index of all terms
that appear in documents, which can then be searched in their original format
for relevant information. Unlike traditional database management systems, IR
does not require information to be rigorously structured before it is stored and
later accessed. Typically embedded as a core component within a larger EDM
software solution, IR technology provides an effective mechanism for retrieving
documents based on their content without needing to know where specifically on
an organization's networks they may be physically stored.
As the technologies of EDM and IR have evolved within the context of the new
challenges and opportunities presented by the emergence of the Internet, many
organizations have started to seek better ways to leverage these core
technologies and take better advantage of their collected organizational
knowledge. Knowledge Management is the process of capturing an organization's
collective expertise, wherever it resides, in databases, EDM systems, workgroup
servers (such as Lotus Notes and Microsoft Exchange Server) or on paper, and
distributing this expertise automatically to the users who most need access to
it. Knowledge Management systems combine advanced document management
technology, sophisticated information retrieval and innovative content analysis
techniques, leveraging the collective knowledge and experience of an
organization to accelerate innovation and sharpen competitive edge.
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Professional Time-Based Information Management Systems
Professional services organizations, such as legal, accounting and consulting
firms, have historically relied on time-based information management systems to
keep track of the revenues, costs and expenses relating to their professionals'
billable activities. Traditionally, these organizations primarily used closed,
host-based systems that limited access by individuals to information within and
across the organization. In addition, these legacy systems were inflexible and
could not be readily customized to meet the ongoing challenges of changing
organizational structures and competitive environments. Moreover, the
proprietary nature of these systems did not allow for integration with popular
personal computer applications increasingly used by professionals within these
organizations.
With the shift to network-based computing, a need arose for systems which allow
for on-line, real-time access by professionals to the organization's financial
management infrastructure, and which can be integrated with the organization's
existing hardware and software applications. As professional services industries
have become more competitive, it has become increasingly important for
information within organizations to be readily available, and quickly and
accurately collected, analyzed and dispersed.
BUSINESS OF THE COMPANY
Since its inception in 1977, the Company has been developing and selling
software packages and integrated computer systems to clients in a wide variety
of industries throughout the world. The Company's ability to produce high
quality software for complex business applications resulted in the development
of both custom systems to fit the needs of particular clients and standard
packages suitable for industry-wide applications. While packaged software can
meet many of a client's needs, there are often critical parts of its business
that do not lend themselves to "off-the-shelf" solutions. In such cases, clients
often prefer to buy complete integrated systems, purchasing both hardware and
software from a single source.
The Company has established teams of employees who are familiar with clients'
businesses and information needs, and are able to provide ongoing support
services ranging from assistance in the day-to-day operation of systems to
problem solving and the development and implementation of enhancements. Revenues
generated from software support services are an integral part of the Company's
business.
The Company also resells hardware and software products of third parties, and
provides project management services, training services and conversion services.
The Company's revenues in accordance with U.S. generally accepted accounting
principles ("GAAP") by sales type were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30
---------------------------
1998 1997 1996
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Software sales $ 76,198 $ 52,387 $ 51,458
Software support, services and other sales 54,831 36,837 21,430
Hardware sales 2,347 3,018 6,622
Interest and other revenues 3,053 3,932 1,663
-------- -------- --------
$136,429 $ 96,174 $ 81,173
======== ======== ========
</TABLE>
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Revenues in accordance with U.S. GAAP by country in which the Company's
customers are located were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30
---------------------------
1998 1997 1996
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Canada $ 15,805 $ 10,423 $ 8,483
United States 85,527 68,242 66,850
Other Foreign 35,097 17,509 5,840
-------- -------- --------
$136,429 $ 96,174 $ 81,173
======== ======== ========
</TABLE>
Throughout its 21 year history, the Company has maintained a pattern of growth
through expanded markets and acquisitions. The Company designs and markets
integrated systems to law firms, other professional firms, corporations,
government agencies and college bookstores in North America. The Company's
document and knowledge management software is marketed in North America, Europe,
Australia, New Zealand, the Asia-Pacific region, South and Central America and
the Caribbean, the Company's time-based information management software is
marketed in North America, Europe, South Africa and parts of the Asia-Pacific
region, and the Company's case and matter management software is marketed in
North America. The Company's client base generates revenues from installation,
training, consulting, programming, software support and first line support
service for hardware problems.
PRODUCTS
The Company develops, markets and supports both client/server and Internet-based
document management , knowledge management and professional information
management systems. The Company also supports its retail information management
systems and resells third-party hardware and software components that operate
with certain of its products.
The Company's development work during the past year was based on open systems
hardware platforms and client/server architecture, and a three-tier architecture
supporting thin clients. The software provides the user with the capability of
making requests for data on the server through a Windows-based or Internet
browser client, using SQL. These applications are able to interface with
third-party software such as Microsoft Office and other information systems.
ENTERPRISE DOCUMENT MANAGEMENT SYSTEMS
The Company's best known product, DOCS Open, is a client/server EDM system which
enables organizations to organize, access and share unstructured electronic data
across an enterprise, including on multiple hardware, operating systems and
database platforms. DOCS Open has a search and retrieval capability which can be
based on a document profile containing a variety of customizable information
fields which describe the key attributes of each document, such as author,
project name or security classification. Document searches may incorporate these
attributes, as well as words contained within the document itself. DOCS Open is
integrated with many commonly used desktop applications, including those offered
by Microsoft, Lotus Development Corporation, a division of IBM Corporation
("Lotus") and WordPerfect, a division of Corel Corporation Limited.
Additionally, the product's open architecture enables it to operate on popular
network operating systems, including Novell, Microsoft and Banyan, to support
the leading SQL databases including Oracle, Sybase and Microsoft NT SQL Server.
The emergence of the Internet and, in particular, the World Wide Web has brought
organizations' networking and electronic document management needs to the
forefront. Organizations are being challenged to find ways to take advantage of
the near universal access to document-based information that the Web provides.
In addition, Internet technologies deployed within corporate computing
environments ("intranets") have provided a new framework for the cost-effective
deployment of information systems and related applications.
During the past year, the Company has focused on the development of an expanded
product architecture that integrates Web-based document management into the
current client/server environment. The DOCSFusion Server, released in December,
1997, is based on a server-centric, thin-client architecture. DOCSFusion Server
is the first in a new line of server-based products from the Company that will
integrate the DOCS Open document management architecture with additional
applications running on both servers and clients. The Company believes that by
delivering products based on
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the DOCSFusion platform, that are easier to install, to use, to deploy and to
support in a corporate Intranet environment, it now has an opportunity to reach
a broader market and deliver products in higher volume.
System Architecture
DOCS Open has been designed with a modular architecture which enables it to
scale as the network grows in size and complexity, to operate in a
multiple-platform environment, to adapt to changes in technology and to utilize
fewer administrative resources. The core of the DOCS Open and DOCSFusion
architecture is the concept of a "library", which consists of three components:
one or more document servers, which secure the electronic files stored in DOCS
Open or DOCSFusion; a library server, which consists of a SQL relational
database management system (Sybase, Microsoft NT SQL Server or Oracle) which
stores the document "metadata"; and full text index servers which store a
real-time index of text in each document stored in the EDM system.
By using object-oriented programming techniques, DOCS Open and DOCSFusion
insulate the underlying complexity of the network and system infrastructure so
that users see a managed and uniform environment of organized libraries of
information, rather than an unorganized array of disk drives, file names and
database fields. Further, the distributed nature of the software gives
implementers flexibility to configure the system in a multi-tier network of
clients and servers, enabling more of the computing power of the network to be
utilized for high performance.
Many companies today operate in a mixed network environment in which users can
simultaneously reside on the corporate LAN or WAN, the Internet, intranets,
extranets or in mobile environments. The expanded, multi-tier architecture,
together with DOCSFusion Server, enables organizations to provide a single,
unified environment for all users, allowing them to access the document
management system from the client that is most convenient for them.
The first client interface to DOCSFusion Server, CyberDOCS, Web-enables DOCS
Open to deliver full document management functionality over an intranet,
extranet or the Internet. CyberDOCS 2.0, released with DOCSFusion Server in
December 1997, includes functionality such as: check-in/check-out, searching
across multiple repositories, audit history, document creation and full
customization capabilities. With DOCSFusion Server and CyberDOCS, users can
choose multiple points of entry to corporate documents. As a result, users have
access to the same document repository whether they are using the DOCS Open
Power Desktop or any Web browser running CyberDOCS.
DOCS Open 3.7 and DOCSFusion 2.5
DOCS Open 3.7 and DOCSFusion 2.5, the current versions of the Company's document
management software, provide enterprise-wide scalability and enable users to
share, manage and control documents within an organization, across divisional
and geographical borders. DOCS Open 3.7 is a 32-bit product designed
specifically for Windows 95 and NT 4.0 desktops. Also available is DOCS Open
3.5, a 16-bit product version for Windows 3.x desktops. DOCSFusion 2.5
centralizes the full range of DOCS Open features at the application server level
and enables powerful document management seamlessly across a mix of different
client environments - from Windows PC's to Web-browsers. New document management
functionality in DOCS Open 3.7 includes an Open Full Text Retrieval API, PDF
indexing for full text searching, PDF viewing, viewing support for document
headers and footers, and activity log purge utility. DOCSFusion 2.5 is a
high-performance, stateless server process for Windows NT servers, featuring
DCOM connectivity, a fault tolerant architecture, configurable SQL connection
pooling, server side caching, simultaneous multi-repository searching and many
other advanced features.
The list price for a typical 100-seat installation of DOCS Open 3.7 or
DOCSFusion 2.5, which includes a SQL database server and certain add-on
products, ranges from approximately US$50,000 to US$80,000.
Certain of the core features of DOCS Open 3.7 and DOCSFusion 2.5 include:
Security: Secures documents to seven access control levels, thereby allowing
users to limit access to documents and restrict what actions may be performed.
Check-in/check-out: Enables users to log documents off the network and lock them
so they are temporarily uneditable by other users.
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Version control: Enables users to store up to 99 versions and 26 subversions of
a document.
Full-text retrieval: Enables users to create searches incorporating elements
such as relevancy ranking, proximity to words or phrases, "sounds like" and
fuzzy logic. This technology also supports multiple index servers thereby
allowing enterprises to scale easily to accommodate an enterprise's indexing
requirements.
Document usage history: Provides the capability to log activities performed on a
document and to record who performed those activities.
DOCS Designer: Provides an interactive tool for customizing certain DOCS Open
screens and database fields.
Storage management: Allows documents to be deleted, archived to tape or stored
on optical disk at the user's option or automatically after a pre-determined
period of time.
Enterprise administration: This feature is designed to ease the administration
of large networks in heterogeneous environments by allowing systems
administrators to manage NT and Novell users simultaneously within a common
administration scheme.
The Company has also introduced a group of complementary add-on products
designed to build upon the core functionality of DOCS Open 3.7 and DOCSFusion
2.5. These products include:
DOCS Document Sentry Agent (DSA): Provides an added layer of configurable
security for DOCS Open libraries.
DOCS Unplugged: Extends full DOCS Open functionality to mobile computer users
and to desktop users when they are not connected to their network. Changes made
to checked-out documents are automatically resynchronized when the documents are
checked back into the network.
DOCS Interchange for Microsoft Exchange: Enables DOCS Open users to publish
documents stored in a DOCS Open library to specified public folders in Microsoft
Exchange.
DOCS Interchange for Lotus Notes: Allows users to replicate documents from DOCS
Open libraries to a Lotus Notes database, while still maintaining links between
replicated copies.
DOCS Development Kit (DDK): Enables developers and system integrators to build
customized applications for DOCS Open with an object-oriented tool set.
DOCS Enterprise Suite
The convergence of complementary document management technologies - imaging and
routing - has created an opportunity for organizations to extend the
functionality of document management to a broad range of strategic business
processes. DOCS Enterprise Suite enables organizations to take advantage of
these technologies. DOCS Enterprise Suite combines DOCS Open, DOCS Imaging and
DOCS Routing into one integrated product and provides a single source for
enterprise document management, ad hoc imaging and serial and parallel routing.
This combination enables users to manage critical corporate data, capture
digitized images and route documents to others directly from the DOCS Open Power
Desktop or a different desktop application.
DOCS Imaging: Enables DOCS Open users to integrate and manage scanned documents,
faxes, OCR text, and other electronic images on their network.
DOCS Routing: Enables DOCS Open users to logically route documents for review
and approval, incorporating comments and providing status checks.
INFORMATION RETRIEVAL AND KNOWLEDGE MANAGEMENT SYSTEMS
The Company's products in the IR and KM sector are available on many different
hardware platforms and operating systems, including Windows, Windows NT, a wide
variety of UNIX-based systems and Macintosh. The Company's
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software supports the development of applications employing many graphical user
interfaces such as Windows, OSF/Motif, and Macintosh.
The Company's IR and KM products include:
SearchServer.
SearchServer is an SQL-based family of high-performance indexing and retrieval
software products. Fulcrum first introduced SearchServer in April 1993 and the
Company currently markets version 3.7, which began shipping in March 1998.
SearchServer incorporates the Company's core indexing and retrieval engine.
These products allow MIS professionals and third party application developers,
particularly those familiar with the SQL programming language, to prototype and
implement text-retrieval solutions that can be deployed in corporations and
other large organizations. SearchServer is designed to allow developers to build
a wide variety of IR applications that are easy to use. These applications
include customer service, corporate publishing, regulatory submissions and
litigation support and may take advantage of the Company's Intuitive Searching
feature, which enables end-users to search for and retrieve information in a
natural and instinctive way using words, phrases and representative passages of
text.
SearchBuilder.
The SearchBuilder series of products features high-level graphical development
tools for integrating SearchServer in custom application solutions for the
Windows desktop. Fulcrum supports a variety of leading application development
environments such as Microsoft Visual Basic and Visual C++.
DOCSFulcrum.
Formerly known as Fulcrum Knowledge Network, DOCSFulcrum is the Company's latest
Knowledge Management solution. This product ties together information stored in
diverse repositories and formats such as Lotus Notes, Microsoft Exchange Server,
Web sites, file systems, document management systems, databases, and more. These
sources are gathered together into a common information model called a Knowledge
Map, which presents diverse information sources as a logical, unified folder
hierarchy. The Knowledge Map can be customized for the enterprise presenting a
logical "business view" of all available information, insulating users from the
need to concern themselves with the physical location or access requirements of
individual data sources. Users can also create personalized views of the various
information sources by creating personal folders that match their own areas of
responsibility.
Some other key features of the DOCSFulcrum solution include:
ProActive Agents. With ProActive Agents, users can create software "agents" that
monitor specific information sources and bring back relevant information based
on the user's predefined retrieval criteria and keywords.
Document Summarization. For intranet users, DOCSFulcrum's WebFIND! interface
provides the option to preview large documents with an automatically generated
one-page abstract of the retrieved item. Document summarization lets users know
instantly whether or not a particular document is the one they were looking for,
without needing to open the full document.
Intuitive Searching. DOCSFulcrum's Intuitive Searching allows users to search
for new items similar to each other, using a simple "find more items like this"
query. Through this feature, an existing paragraph or an entire document can be
used as the basis of a new query. Results are returned with the relevant
sections of each document highlighted for easy identification.
Administration. DOCSFulcrum is Microsoft BackOffice certified, and tightly
integrated with the Windows NT Server architecture. The entire DOCSFulcrum
system can be administered from a single computer, even remotely. DOCSFulcrum
tracks and logs user and system activities through integration with Windows NT
features like NT security, Event Log, and Performance Monitor.
Web Searching. From a Web browser, users can issue search queries that span
multiple and different information sources, including corporate intranet and
external Web sites. The result list ranks the documents according to their
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relevance. FulView, an ActiveX control included with the DOCSFulcrum product,
provides high-fidelity viewing of HTML, office file formats and PDF's with the
search terms highlighted. DOCSFulcrum also includes a Web scanner to traverse
internal and external Web sites and return a list of relevant site addresses
(URLs) to the indexing engine so that documents from external Web sources are
available to the user for searching.
INFORMATION MANAGEMENT SYSTEMS FOR PROFESSIONALS
The Company develops, markets and supports information management systems for
professionals. Its principal products in this area include:
CMS OPEN
CMS OPEN, released in May 1995, is the successor to a product family which
included CLO*2 and was first developed in 1978. This system automates,
streamlines, organizes and reports on the activities and operations of
professionals such as lawyers and accountants engaged in time-based billable
activities. It is compatible with multiple operating systems, relational
databases and hardware platforms, including Microsoft Windows NT, UNIX,
Microsoft NT SQL Server and Sybase. CMS OPEN consists of a number of software
modules, including financial management, information management and practice
management, which are designed to work together and share a common database. The
software can operate independently or be integrated with other products,
including DOCS Open and systems developed by other vendors. CMS OPEN is targeted
for sale to professional service markets such as law firms, accounting firms and
other organizations which operate on a time-based billing financial model,
ranging in size from 20 to more than 1,000 timekeepers. With CMS OPEN, the
Company also offers practice management software modules which include document
assembly, records management and marketing functions. The list price for a
typical installation of the complete CMS OPEN system (without hardware) for 80
to 100 professionals is approximately US$150,000.
The CMS OPEN system includes the following core modules:
Time Accounting: Enables the addition, modification, transfer or deletion of
time entries and allows an unlimited number of fee rates to be defined within an
organization with specifics regarding timekeeper ranks, timekeepers, client
matters and/or action codes. Using an on-line calendar, a user can review total
billable hours by month and add new time entries without leaving the system.
Client Disbursements: Enables the addition, modification, transfer or deletion
of disbursement entries and classifies and reports disbursements based on the
status of the matter or the disbursement type.
Billing: Allows organizations to utilize the Company's DocuDraft document
assembly engine to format bills in Microsoft Word and WordPerfect, while
protecting the integrity of the organization's accounting information.
Accounts Payable: Enables users to process and schedule incoming invoices for
payment and includes a check-writing feature for the automatic printing of
checks on a prescheduled basis.
General Ledger: Provides for the automatic posting of journal entries from all
CMS OPEN accounting applications, thereby ensuring data integrity throughout the
system, and permits additional functions which can be tailored for user-specific
needs.
The Company also offers a number of optional add-on modules which are designed
to complement CMS OPEN. These add-on modules include:
Conflicts of Interest: Enables users to identify potential conflicts as new
clients and matters are brought into a professional service organization. This
system's tracking capability allows for more complete conflict searching on
various levels and criteria.
Calendar Management: Provides a central calendaring module for all practice
areas and applications and includes individual, group, firm, matter and client
calendar applications.
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MarketSense: Tracks current and prospective client information based on a
variety of criteria. With the mailing list management feature, MarketSense
eliminates the labor-intensive tasks involved in wide-based mailings.
Records Management: Simplifies the file check-in, updating and transfer process
by tracking files from the date of creation to their closure and destruction.
Mobile Time and Expenses: Provides the full functionality of time accounting on
a remote or laptop computer. Synchronization allows the central system to be
updated with information.
CMS ALERT!: Push technology that enables clients to establish business rules and
automatically receive e-mail notification of pre-established conditions.
The Company also offers a series of tools for the customization of the CMS OPEN
system to address specific customer requirements. These tools include a
specialized menu application which assists users in learning and moving through
the system; Inquiry Painter, which enables easy construction of information
queries in various levels of detail; Report Writer, which enables the creation
of tailored reports as required by different departments or users within an
enterprise; Screen Painter, which allows users to customize a screen in CMS OPEN
based on the specific requirements of the user; and Data Dictionary Editor,
which provides a means to supplement the structure of a database with additional
firm-specific information.
While the Company no longer actively markets CLO*2, it continues to provide
enhancements for this product and support to its existing CLO*2 customers.
CompInfo LawPack
CompInfo LawPack is a case and matter management software solution for Fortune
2000 companies, regulatory bodies and government agencies. This product was
originally developed for the legal departments of large corporations to track
outside legal expenses, manage caseloads and generally organize information
within a department. This product was subsequently standardized for general
distribution and expanded to include modules for time recording, file room
management, corporate secretary management, departmental chargebacks, case
management, docket control, accounts payable, task-based billing, matter
budgeting and electronic transfer of outside counsel billing data. CompInfo
LawPack features a client/server architecture utilizing standard SQL databases
and provides greater flexibility, increased scalability and reduced network
traffic. The cost of the CompInfo LawPack software system license for a typical
70 seat installation ranges between approximately US$80,000 and US$110,000.
The Company markets and supports BillWiz and LawPack Connect, software products
that work with CompInfo LawPack and allow corporate legal departments to receive
invoices electronically from law firms and compare budgeted matters to actual
expenses in a variety of formats.
RETAIL INFORMATION MANAGEMENT SYSTEMS
The Company's Quartex retail information management system is an
enterprise-wide, point-of-sale inventory management and financial management
software product used by university bookstores. This system provides the
retailer with full financial reporting capabilities, complete customer profiling
and the ability to analyze customer buying patterns, check merchandise movement,
perform payment analysis, make real-time credit limit adjustments and gather
information relating to customers' accounts.
THIRD-PARTY HARDWARE AND SOFTWARE
For the convenience of its customers who are seeking a turnkey system solution,
the Company resells hardware components which work with its CMS OPEN systems.
Also, in connection with its sales of DOCS Open and DOCSFusion, the Company
offers various third-party software products from vendors such as Microsoft,
Sybase and Oracle.
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SALES AND MARKETING
The Company offers its products in North America through multiple sales channels
which include a direct sales force, integrators, resellers and value-added
application developers. The Company currently markets and sells its document and
knowledge management software principally through a network of integrators and
resellers which sell, customize, deploy and support its products. This network
includes a select group of "premier partners" who exclusively market and sell
the Company's enterprise document and knowledge management products. The
Company's direct sales force works closely with the integrator and reseller
network to identify and generate customer leads. In addition, in the case of
significant sales, the Company supplements the efforts of its integrators and
resellers with a team-based approach which includes the Company's technical and
sales personnel. On September 30, 1998, the Company's sales and marketing force
consisted of 248 (266 as at June 30, 1998) persons.
The Company utilizes a network of third-party, value-added application
developers to supplement its sales efforts. These developers build products
which work in conjunction with DOCS Open, DOCSFusion and other products, and
which address specialized applications within the Company's markets, thereby
broadening the reach of the Company's sales efforts. These developers market and
sell the Company's products concurrently with their own products using the
Company's integrators and resellers as well as their own marketing channels. The
Company believes that fostering development of these add-on products by
third-party application developers results in an expanded range of solutions for
potential customers across a variety of vertical markets. The Company has strong
alliances with industry leaders such as Microsoft, Digital Equipment Corporation
("Digital"), NEC, Sybase, Oracle and Unisys. In October, 1998, the Company was
awarded, for the second consecutive year, the annual Microsoft Industry Solution
Award for the Best Document Management solution. To support its sales force, the
Company conducts comprehensive marketing programs, which include public
relations, telemarketing seminars, trade shows, advertising, Web-based
marketing, education and user group conferences, including its annual user and
partner conference, DOCSummit.
The Company's professional information management systems are sold primarily
through the Company's dedicated direct sales force. More recently, the Company
has begun to market CMS OPEN through reseller channels outside North America.
Further, the Company also has sales relationships in connection with its
professional information management products with companies such as Microsoft,
Sybase, Digital and Hewlett-Packard.
Internationally, the Company sells its document and knowledge management
products through independent distributors who sell into over 40 countries. These
distributors generally localize the Company's products, including translation of
software and documentation and provision of local language support services, and
distribute the products through direct and indirect sales and marketing channels
similar to those employed by the Company in North America. In some cases,
distributors are given sole distribution rights within a geographic area in
exchange for marketing and sales commitments. The Company sells its CMS OPEN
products to customers outside of North America through PC DOCS Europe and
independent distributors and resellers.
The sales cycle for the Company's products varies depending upon the product and
the customer, but typically ranges from six to 12 months. The Company generally
experiences lower sales during the summer months of July and August and higher
sales in the fourth quarter to June.
SERVICE AND SUPPORT
The Company believes that a customer's decision to purchase its products is
based in part on the service and support provided by the Company and its network
of third party distributors, integrators and resellers. The Company, and/or its
integrators and resellers, provides software support, installation assistance,
training support, project management services and consulting services. Software
support services for the Company's document and knowledge management products,
consisting of telephone hotline assistance and software upgrades, is available
in the form of annual maintenance agreements. Approximately 70% of customers
choose to purchase such services. The Company's professional information
management systems customers must purchase support services from the Company at
the time of sale. The Company's annual support service fees typically range from
15% to 20% of the total list price for the system purchased. The Company also
provides field-based services for integrating and deploying CMS OPEN and
CompInfo Lawpack for direct sales customers. As of September 30, 1998, the
Company had 273 (250 as at June 30, 1998) employees providing customer service
and support in addition to that provided by the Company's distributors and
resellers.
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RESEARCH AND DEVELOPMENT
The Company commits substantial resources to research and development in order
to maintain and enhance the competitiveness of its existing products and to
develop new products that meet the rapidly changing requirements of its
marketplace. The Company's current software development efforts are focused
primarily on software enhancements and upgrades to all its products, as well as
expanding its family of document and knowledge management software products,
particularly for the Microsoft Windows NT desktop and server, Microsoft SQL
Server, Microsoft Exchange and the complete BackOffice environments. In
addition, the Company continues to focus its development efforts on enhancing
its products' ability to operate on the Internet and the World Wide Web. These
capabilities include the ability to search, access and publish documents on the
Internet and to engage in secure document management and financial information
transfer over the Internet and corporate intranets.
The Company conducts its research and development activities at its facilities
located in the United States and Canada. As at September 30, 1998, the Company
had 249 (266 as at June 30, 1998) employees engaged in research and development.
The Company's total research and development spending was $13.2 million, $20.0
million and $27.7 million, respectively, for the three years ended June 30,
1998.
INTELLECTUAL PROPERTY
The Company has not applied for any patents relating to any of its software
because it does not believe that patents would provide meaningful protection.
The Company regards its software as proprietary and relies for protection upon
trade secret and copyright laws and non-disclosure agreements with its employees
as well as restrictions on disclosure and transferability contained in its
software license agreements with its customers.
The Company's practice is to seek trademark protection for the names of its
major products. The Company together with its subsidiaries owns approximately 57
trademarks, including the following: BillWiz, Case Open, CLO, CLO*2, CMS,
CMS/Data, CMS OPEN, CompInfo LawPack, Corporate Manager, CyberDOCS, CyberDOCS
Routing, CyberRouting, DOCS, DOCS Designer, DOCS Development Kit, DOCS Document
Sentry Agent, DOCS Enterprise Suite, DOCS Esq, DOCS Explorer, DOCSFulcrum,
DOCSFulcrum Server, DOCSFusion, DOCSFusion Routing, DOCS Imaging, DOCS
Interchange, DOCS Mobile, DOCS Open, DOCS Routing, DOCSummit, DOCS Unplugged,
DocuDraft, The Global Leader In Time And Billing Solutions, Knowledge Enterprise
Server, Know. Decide. Succeed!, The Knowledge Management Company, LawPack,
LawPack Puts Law In Order, Lawpack Connect, Link To The Future, MarketSense,
Orion, PC DOCS, PC DOCS Fulcrum, PC DOCS Group, PC DOCS Open, Power Desktop,
PowerDOCS, Quartex and SmartDOCS.
The Company has also obtained licenses for certain protected technology from
other companies for use in its products.
EMPLOYEES
As at September 30, 1998, the Company employed 886 (905 as at June 30, 1998)
full-time employees of whom 544 (549 as at June 30, 1998) were employed in the
United States. None of the Company's employees is covered by a collective
bargaining agreement.
CUSTOMERS
The Company's customers consist of organizations in a wide range of markets,
including professional and financial services, government, manufacturing,
consumer products, utilities, communications and pharmaceuticals. These
customers have implementations ranging from team and department use to
enterprise-wide deployment. There is no single customer that accounts for 10% or
more of the Company's consolidated revenues.
COMPETITION
The market for the Company's products is intensely competitive, subject to rapid
change and significantly affected by new product introductions and other market
activities of industry participants. The Company's products are targeted at the
emerging market for open, client/server and thin-client software solutions, and
the Company's competitors offer a variety of products and services to address
this market. The Company's products currently encounter direct competition
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from a number of public and private companies or divisions thereof, including,
in the case of document and knowledge management software, Documentum, FileNet,
Open Text, NetRight Technologies, Verity, Dataware and Lotus, and in the case of
the Company's professional time-based information management products, Elite,
Barrister, CABS and CompuTrac. Certain of these competitors (together with their
parent companies) have longer operating histories, significantly greater
financial, technical, marketing and other resources, greater name recognition
and a larger installed base of customers than the Company. With respect to case
and matter management systems, the Company's direct competitors include Law
Manager, Mitratech and Legal Edge.
In addition to the Company's current competitors, the Company may face
competition from new competitors. These competitors may include relational
database management systems vendors, such as Oracle and Sybase, and operating
system and application vendors such as Microsoft and Netscape. Certain of these
companies currently conduct joint marketing activities with the Company.
The Company believes that the principal competitive factors affecting its
markets include product features, including performance, reliability,
flexibility, adaptability, scalability, ability to integrate with third party
products, functionality, ease of use and security, as well as product
reputation, quality, price and customer service and support. Although the
Company believes that it currently competes favorably with respect to these
factors, there can be no assurances that the Company can maintain its
competitive position with respect to its current and potential competitors.
ITEM 2. DESCRIPTION OF PROPERTY
All the Company's facilities are comprised of leased office space. The Company's
principal and head office (18,460 square feet) is located in Toronto, Ontario
and it has a second Canadian office (39,964 square feet) in Ottawa, Ontario. The
Company has two offices located in Tallahassee, Florida (21,800 and 14,900
square feet, respectively), an office in Burlington, Massachusetts (30,800
square feet), an office in New York City (16,500 square feet) and an office in
San Francisco, California (2,933 square feet). In Europe, the Company has an
office in Watford (7,700 square feet), is in the process of leasing an office in
Central London (2,994 square feet) and has an office in Paris, France (6,552
square feet). In Australia, the Company is in the process of leasing an office
in Sydney (2,330 square feet). The Company also has small offices in Tokyo,
Rome, Milan, Frankfurt and Washington, D.C. All of these premises are adequate
for the Company's present needs and all leases are at market rates.
ITEM 3. LEGAL PROCEEDINGS
There are currently no material pending legal proceedings to which the Company
is a party or to which any of its properties is subject. No material legal
proceedings involving the Company are pending, or, to the knowledge of the
Company, contemplated, by any governmental authority.
ITEM 4. CONTROL OF REGISTRANT
To the knowledge of the Company, it is not directly or indirectly owned or
controlled by any other corporation or by any foreign government.
To the knowledge of the Company based upon public filings, no person, including
any corporation or government, beneficially owns, directly or indirectly, or
exercises control or direction over, shares carrying more than 10% of the voting
rights attached to the Company's issued and outstanding common shares other than
Datamat, which exercises control over 2,366,931 shares of the Corporation,
representing, as at September 30, 1998, 10.18% of the outstanding common shares.
To the knowledge of the Company, as at September 30, 1998, the directors and
officers of the Company and its subsidiaries beneficially owned, directly or
indirectly, approximately 7% (1,549,889 shares) of the issued and outstanding
common shares of the Company.
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On January 26, 1998, the Company made an offer (the "Offer") to purchase all of
the outstanding shares of Fulcrum which was completed on March 10, 1998. In
connection with the Offer, the Company entered into a lock-up agreement (the
"Lock-Up Agreement") dated December 22, 1997, as amended, with Datamat, the then
majority shareholder of Fulcrum, pursuant to which Datamat agreed that, for a
period of five years from the date upon which the shares of Fulcrum owned by
Datamat were taken up pursuant to the Offer, (i) Datamat would not vote, in
respect of any Common Shares received by Datamat in connection with the Offer,
against any matters to be voted on by shareholders of the Company; (ii) Datamat
would not acquire any additional Common Shares or other securities of the
Company (except in limited circumstances) or take any action to acquire or
affect the control of the Company; and (iii) so long as Datamat beneficially
owns at least 7.5% of the outstanding Common Shares, one nominee of Datamat will
be included in the slate of directors recommended by management to be elected to
the Board of Directors of the Company at each annual meeting of the shareholders
of the Company, provided that the nominee of Datamat is acceptable to the
Company, acting reasonably, and provided that the name of such nominee is
provided to the Company on a timely basis.
There are no arrangements, known to the Company, the effect of which may at a
subsequent date result in a change in control of the Company.
ITEM 5. NATURE OF TRADING MARKET
PRICE RANGE OF COMMON SHARES
The Company's common shares are traded on the NASDAQ National Market ("NASDAQ")
under the symbol "DOCSF" and on The Toronto Stock Exchange ("TSE") under the
symbol "DXX." The table below sets forth the high and low sale prices for the
Company's common shares on NASDAQ and the TSE during the periods indicated. The
reported last sale price of the common shares on September 30, 1998 on NASDAQ
was US$3.75 and on the TSE was $5.70.
<TABLE>
<CAPTION>
PRICE RANGE OF COMMON SHARES
NASDAQ NATIONAL MARKET THE TORONTO STOCK EXCHANGE
----------------------- --------------------------
HIGH LOW HIGH LOW
<C> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1998
1st Quarter US$ 6 5/8 US$ 5 1/4 CDN$ 9.09 CDN$ 7.14
2nd Quarter 7 7/16 4 7/8 10.25 6.80
3rd Quarter 5 15/16 4 1/4 8.19 6.14
4th Quarter 7 9/16 5 1/8 11.19 7.44
YEAR ENDED JUNE 30, 1997
1st Quarter US$ 21 US$12 3/8 CDN$ 28.00 CDN$16.20
2nd Quarter 13 3/4 7 3/4 18.75 10.50
3rd Quarter 10 3/16 6 1/2 13.90 9.00
4th Quarter 7 1/2 5 10.10 6.50
</TABLE>
As at September 30, 1998, to the knowledge of the Company, shareholders of
record in the United States held approximately 62% of the issued and outstanding
common shares of the Company.
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
There are currently no limitations imposed by Canadian federal or provincial
laws on the rights of non-resident or foreign owners of Canadian securities to
hold or vote the securities held. There are also no such limitations imposed by
the Company's articles and bylaws with respect to the common shares of the
Company.
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INVESTMENT CANADA ACT
Under the Investment Canada Act, the acquisition of certain "businesses" by
"non-Canadians" are subject to review by Investment Canada, a federal agency,
and will not be allowed unless they are found likely to be of "net benefit" to
Canada. An acquisition will be reviewable by Investment Canada only if the value
of the assets of the Canadian business being acquired is $5 million or more in
the case of a "direct" acquisition or $50 million or more in the case of an
indirect acquisition. Under the Free Trade Agreement between Canada and the
United States, these thresholds have been increased for purposes of the
acquisition of Canadian businesses by Americans or American-controlled
businesses. A direct acquisition by an American is reviewable only if it
involves the direct acquisition of a Canadian business with assets of $150
million or more (as adjusted annually since 1992 to reflect inflation dollar
levels). Indirect acquisitions by Americans are no longer reviewable, regardless
of the size of the Canadian business acquired. These increased thresholds do not
apply to businesses engaged in certain foreign investments, sensitive activities
such as oil and gas reserves or financial services. If the foregoing thresholds
are not reached, the acquisition of a Canadian business by a non-Canadian will
not be subject to review unless it relates to Canada's cultural heritage or
national identity. Even if the transaction is not reviewable, a non-Canadian
acquiror must still give notice to Investment Canada of the acquisition of a
Canadian business within 30 days after its completion.
COMPETITION ACT
Under the Competition Act (Canada), certain transactions are subject to the
pre-notification requirements of the Act whereby notification of the transaction
and specific information in connection therewith must be provided to the
Director of Investigation and Research, Bureau of Competition Policy and the
transaction may not be completed, in normal circumstances, until 21 days after
the Director has received the information required under the Act.
A proposed transaction is subject to pre-notification only if the parties to the
transaction together with their affiliates have assets in Canada that exceed
$400 million in aggregate value or have gross revenues from sales in, from or
into Canada, that exceed $400 million in aggregate value. Having met this first
threshold, the parties must then provide pre-notification if any one of the
following additional thresholds is met: 1) for an acquisition of assets in
Canada (either directly or by means of a share purchase) where the aggregate
value of the assets or the gross revenues from sales in or from Canada that are
being acquired exceeds $35 million; 2) in the case of an acquisition of shares
of a company in Canada, where as a result of the proposed acquisition, the
person acquiring the shares, together with its affiliates, would own more than
20% (or, if the person making the acquisition already owns 20% or more of the
voting shares of the target, then 50%) of the shares of a corporation that are
publicly traded, or in the case of a company of which the shares are not
publicly traded, the threshold is 35% (and 50% if the acquiror owns 35% or more
of the shares of the subject company prior to making the acquisition); or 3) in
the case of a proposed amalgamation of two or more corporations where one or
more of the amalgamating corporations carries on an operating business (either
directly or indirectly) where the aggregate value of the assets in Canada that
would be owned by the continuing corporation resulting from the amalgamation
would exceed $70 million or the gross revenues from sales in or from Canada
generated from the assets of the amalgamated entity would exceed $70 million.
SHAREHOLDER RIGHTS PLAN
On October 2, 1995, the Board of Directors of the Company adopted a shareholder
rights plan (the "Rights Plan") which was ratified and confirmed by the
shareholders of the Company on November 28, 1995. The purpose of the Rights Plan
is to give adequate time for shareholders of the Company to properly assess the
merits of a take-over bid without undue pressure and to allow competing bids to
emerge. The Rights Plan is designed to give the Board of Directors of the
Company time to consider alternatives to enhance the prospect that all
shareholders will receive full and fair value for their Common Shares.
Pursuant to the terms of the Rights Plan, on October 10, 1995 (being the
effective date of the Rights Plan) one Right was issued and attached to each
outstanding common share. One Right also attaches to any subsequently issued
common shares. The issuance of Rights is not of itself dilutive, does not affect
reported earnings per share and does not change the way in which shareholders of
the Company otherwise trade common shares. However, the Rights will separate
from the common shares to which they are attached and will become exercisable at
the time (the "Separation Time") that is eight trading days after the earlier of
(i) a person having acquired, or (ii) the commencement or
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announcement date or such later date as may be determined by the Board of
Directors of the Company in respect of a take-over bid to acquire, 20% or more
of the common shares, other than by an acquisition pursuant to a take-over bid
permitted by the Rights Plan (a "Permitted Bid"). To qualify as a Permitted Bid,
a take-over bid must be made to all holders of common shares, other than the
bidder, and must be open for 60 days after the bid is made. If at least 50% of
the common shares held by shareholders other than the bidder, its affiliates and
persons acting jointly or in concert with the bidder are deposited or tendered
pursuant to the bid and not withdrawn, the bidder may take up and pay for such
shares. The bid must then remain open for a further period of ten business days
on the same terms.
The acquisition by a person (an "Acquiring Person"), including others acting in
concert, of 20% or more of the common shares, other than by way of a Permitted
Bid, is referred to as a "Flip-in Event." Any Rights held by an Acquiring Person
on or after the Separation Time or the first date of public announcement by the
Company or an Acquiring Person that an Acquiring Person has become such, will
become void upon the occurrence of a Flip-in Event. Eight trading days after the
occurrence of the Flip-in Event, the Rights (other than those held by the
Acquiring Person) will permit the holder to purchase that number of common
shares having an aggregate market price on the day of the Flip-in Event equal to
twice the exercise price for an amount in cash equal to the exercise price, the
exercise price being equal to five times the common share trading price as at
the Separation Time.
ITEM 7. TAXATION
CERTAIN CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
The following summarizes the principal Canadian federal income tax
considerations applicable to the holding and disposition of a common share by a
holder (the "Holder") of one or more common shares who is resident in the United
States of America and holds the common share as capital property. This summary
is based on the current provisions of the Income Tax Act (Canada) (the "Tax
Act"), the regulations thereunder and all amendments to the Tax Act publicly
proposed by the government of Canada to the date hereof. It is assumed that each
such amendment will be enacted as proposed and there is no other relevant change
in any governing law, although no assurance can be given in these respects.
Every Holder is liable to pay a withholding tax on every dividend that is or is
deemed to be paid or credited to him on his common shares. Under the
Canada-United States Income Tax Convention (1980), as amended by Protocols (the
"Treaty"), the rate of withholding tax is 15%, other than where the Holder is a
company that beneficially owns at least 10% of the voting stock of the company
and beneficially owns the dividend in which case the withholding tax is 5% of
the gross amount of any dividends paid.
Under the Tax Act, a Holder will not be subject to Canadian tax on any capital
gain realized on an actual or deemed disposition of a common share, including a
deemed disposition at death, provided that he did not hold the common share as
capital property used in carrying on a business in Canada, and that neither he
nor persons with whom he did not deal at arm's length alone or together owned
25% or more of the issued shares of any class of the company at any time in the
five years immediately preceding the disposition.
A Holder who otherwise would be liable for Canadian tax in respect of a capital
gain realized on an actual or deemed disposition of a common share will be
relieved under the Treaty from such liability unless:
a) the common share formed part of the business property of a permanent
establishment in Canada that the Holder had within the twelve-month
period preceding the disposition; or
b) the Holder:
i) was resident of Canada for 120 months during any 20 year period
preceding the disposition,
ii) was resident of Canada at any time during the 10 years
immediately preceding the disposition, and
iii) owned the common share when he ceased to be a resident of Canada.
16
<PAGE> 19
ITEM 8. SELECTED FINANCIAL DATA
ANNUAL INFORMATION
The following selected consolidated financial information of the Company should
be read in conjunction with the June 30, 1998 Audited Consolidated Financial
Statements of the Company in accordance with U.S. GAAP and the Notes thereto,
which are attached hereto.
(in thousands of dollars, except per share information)
<TABLE>
<CAPTION>
JUNE 30 (AUDITED)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
FOR THE PERIOD ENDED
Total revenues $ 136,429 $ 96,174 $ 81,173 $51,616 $ 28,935
Earnings before writedowns, dilution 5,913 6,483 18,419 6,863 (4,468)
gain, income taxes and minority
interest
Net earnings (loss) (79,415)(1) 3,879 11,525(2) 6,461 (9,100)(3)
Earnings (loss) per common share (4)
Basic (3.79)(1) 0.20 0.73(2) 0.43 (1.09)(3)
Diluted (3.79) 0.18 0.63(2) 0.41 Antidilutive
AS AT PERIOD END
Total assets $ 185,294 $162,399 $150,244 $43,414 $ 19,774
Long-term debt, including bank loan, 22,044 2,228 2,102(5) 618 671
long-term capital lease obligations
and lease inducements
</TABLE>
(1) Includes $92.8 million of pre-tax or $4.43 per share write-downs of product
development costs, goodwill and restructuring and other unusual charges.
(2) Includes a merger charge of $3.9 million and related tax benefit of $2.7
million or $0.07 per share.
(3) Includes $5.1 million of pre-tax or $0.61 per share writedowns of product
development costs, goodwill and investment tax credits.
(4) Per share information takes into account the one-for-four share
consolidation which occurred April 11, 1994.
(5) Restated to conform with the financial statement presentation adopted for
the fiscal year ended June 30, 1997.
REVENUES
Revenues for fiscal 1995 increased significantly to $51.6 million, up 79% over
fiscal 1994, with increases apparent in all revenue categories and for virtually
all operations.
Revenues for fiscal 1996 were $81.2 million, up $29.6 million or 57% compared
with 1995, with increases again apparent in all revenue categories and for
virtually all operations.
Revenues for fiscal 1997 were $96.2 million, up $15.0 million or 18% compared
with 1996. Software support services and other sales increased by $15.5 million
or 72%, while software sales increased by $0.9 million or 2%. Interest income
and other revenues increased by $2.2 million or 136%. These increases were
offset by a reduction in hardware sales of $3.6 million.
Revenues for fiscal 1998 were $136.4 million, up $40.2 million or 42% compared
with 1997. Software support services and other sales increased by $17.9 million
or 49% while software sales increased by $23.8 million or 45%. Hardware sales
decreased by $0.7 million while interest income and other revenues decreased by
$0.9 million.
17
<PAGE> 20
NET EARNINGS/LOSS
The net loss for fiscal 1994 was $9.1 million. Included in the loss were $1.5
million for the write-down of certain product development costs and $3.5 million
for the write-off of goodwill. The results also reflect the increased costs
attributable to the building of the PC DOCS, Inc. infrastructure and continued
development work on CMS OPEN.
Net earnings for fiscal 1995 were a record $6.5 million, attributable to the
significant increase in revenues experienced in 1995 coupled with tight control
over expenses.
Net earnings for fiscal 1996 were once again a record at $11.5 million. Included
in the net earnings were a merger charge of $3.9 million and related tax benefit
of $2.7 million. The results reflect a significant increase in revenues
experienced in 1996 coupled with continued control over expenses.
The net earnings for fiscal 1997 were $3.9 million. The results reflect a
continued increase in revenues experienced in 1997 which were partly offset by
increased costs due to the expansion of the Company's marketing and sales
organization.
The net loss for fiscal 1998 was $79.4 million. Included in the loss were
restructuring and other unusual charges of $21.4 million, write-down of product
development costs of $16.6 million and purchased in-process research and
development costs of $54.8 million related to the Fulcrum acquisition. The
results from operations reflect a significant increase in revenues and expenses
over 1997 primarily due to the Fulcrum acquisition.
ASSETS
Total assets at year end 1995 amounted to $43.4 million, an increase of
$23.6 million from $19.8 in 1994. Of this amount, $13.0 million was cash and
short-term deposits, largely derived from the $10.8 million of equity issued
during the year. Reflecting the significant increase in revenues in fiscal 1995,
accounts receivable increased by $11.0 million from the prior year end.
Total assets at year end 1996 were $150.2 million, an increase of $106.8 million
from $43.4 million in 1995. Cash and short-term investments were $95.9 million,
an increase of $82.5 million largely derived from the US$59.2 million of equity
issued in April, 1996. Reflecting the significant increase in revenues in fiscal
1996, accounts receivable increased by $15.3 million from the prior year end. A
deferred income tax benefit of $2.7 million was recorded on the acquisition of
DataRamp, Inc.
Total assets at year end 1997 were $162.4 million, an increase of $12.2 million
from $150.2 million in 1996. Cash and short-term investments were $89.7 million,
a decrease of $6.2 million. During fiscal 1997, the Company invested $1.7
million in its distributor for Asia and loaned $1.3 million to the distributor,
which loan is currently repayable. Accounts receivable increased by $3.8 million
from the prior year end reflecting the increase in revenues in fiscal 1997. In
fiscal 1997 goodwill of $2.3 million was recorded on the acquisition of Quintec
International Ltd. (now PC DOCS Group Europe Ltd.).
Total assets at year end 1998 were $185.3 million, an increase of $22.9 million
from $162.4 million in 1997. Cash and short-term investments were $62.5 million,
a decrease of $27.2 million. During fiscal 1998, the Company acquired Fulcrum
and the Company's distributor for Asia, PC DOCS Asia. These acquisitions
contributed to the increase in total assets. Accounts receivable increased by
$39.5 million from 1997 primarily due to the increase in revenues and the
Fulcrum acquisition. Acquired software of $3.0 million represents the estimated
future income producing capabilities of software products acquired on the
Fulcrum acquisition. Prepaid and other assets increased by $3.9 million from
1997 primarily due to the acquisition of Fulcrum. Product development costs
decreased by $11.6 million as a result of the write-down made due to changing
market conditions such as the shift of customers to internet-based products from
client/server products.
18
<PAGE> 21
LONG-TERM DEBT
During 1994, the Company received capital lease funding of $0.8 million and
repaid capital lease obligations of $0.6 million, while in 1995, the Company
received capital lease funding of $0.9 million and repaid capital lease
obligations of $0.8 million.
Included in long-term debt as at June 30, 1996 were lease inducements of $0.4
million and capital lease obligations of $1.7 million.
Included in long-term debt as at June 30, 1997 were lease inducements of $1.4
million and capital lease obligations of $0.8 million.
Included in the long-term debt as at June 30, 1998 was a $20 million bank loan
bearing interest at Canadian bank prime rate, repayable on March 9, 2000 and
collateralized by a General Security Agreement providing a first charge on all
corporate assets of Fulcrum other than real property, subject only to permitted
encumbrances. The Company has guaranteed the repayment of the loan up to a
maximum of $7.0 million.
Long-term debt also includes lease inducements of $1.3 million and capital lease
obligations of $0.7 million
QUARTERLY INFORMATION
This information is derived from unaudited quarterly reports expressed in
accordance with U.S. GAAP.
(in thousands of dollars, except per share information)
<TABLE>
<CAPTION>
EARNINGS PER SHARE
QUARTER ENDED TOTAL REVENUES EARNINGS FULLY DILUTED
- ------------- -------------- -------- ------------------
<S> <C> <C> <C>
1998
June 30, 1998 $ 46,245 1,535 $ 0.06
March 31, 1998 34,490 (82,510)(1) (4.02)(1)
December 31, 1997 29,863 977 0.05
September 30, 1997 25,831 583 0.03
-------- --------- -------
$136,429 $ (79,415) $(3.79)
======== ========= =======
1997
June 30, 1997 $ 27,111 $ 1,213 $ 0.06
March 31, 1997 24,015 380 0.02
December 31, 1996 24,990 2,068 0.10
September 30, 1996 20,058 218 0.01
-------- --------- -------
$ 96,174 $ 3,879 $ 0.18
======== ========= =======
</TABLE>
(1) After pre-tax restructuring and other unusual items of $92.8 million or
$4.43 per share.
The Company's business is seasonal only to the extent that the summer months of
July and August included in the Company's first reporting quarter tend to be
less active than other months, and that the Company's fourth quarter to June
tends to be particularly strong, both as are typical in the software industry.
CURRENCY TRANSLATION
The Company publishes its consolidated financial statements in Canadian dollars.
All dollar amounts set forth herein are in Canadian dollars unless otherwise
indicated. Certain United States dollar amounts set forth herein are translated
into Canadian dollars. These translations should not be construed as
representations that the United States dollar amounts actually represent
Canadian dollar amounts or could be converted into Canadian dollars at the rate
indicated.
19
<PAGE> 22
EXCHANGE RATES
The following table sets forth, for the periods indicated, the high and low of
the exchange rates on the last business day of each month during the period, and
the average and period-end exchange rates, of the Canadian dollar in exchange
for one United States dollar, as defined by the Bank of Canada noon rates, as
utilized by the Company in translating its financial statements:
U.S. $1 =
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
High $1.4716 $1.3970 $1.3743 $ 1.4086 $1.3847
Low 1.3814 1.3408 1.3395 1.3408 1.2841
Average 1.4177 1.3663 1.3613 1.3793 1.3306
Period End 1.4716 1.3811 1.3651 1.3734 1.3823
</TABLE>
The exchange rate as of September 30, 1998 was $1.5259.
DIVIDENDS
To date, the Company has not paid any dividends on its common shares. The
payment of dividends is within the discretion of the Board of Directors and
depends upon the Company's earnings, capital requirements, financial condition,
as well as other relevant factors. The Board does not intend to declare any
dividends in the foreseeable future, but instead intends to retain all earnings
for use in the Company's business operations.
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS
Reference is made to "Management's Discussion and Analysis - U.S. GAAP" on pages
17 to 29 of the 1998 Annual Report to Shareholders attached hereto for a
comparison of fiscal years 1998 and 1997, and "Management's Discussion and
Analysis- U.S. GAAP" on pages 16 to 20 of the 1997 Annual Report to Shareholders
filed as part of Form 20-F for the fiscal year 1997 for a comparison of fiscal
years 1997 and 1996, which is incorporated herein by reference.
ITEM 9A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company does not utilize market-risk-sensitive instruments (i.e. derivative
financial instruments) to manage market risk exposure or for trading or
speculative purposes. Accordingly, the Company has no quantitative information
concerning the market risk of participating in such investments.
The Company's primary market risk exposures are in the areas of interest rate
risk and foreign currency exchange rate risk. The Company invests available cash
in money market accounts or highly liquid debt instruments with original
maturities of up to three months. The Company's investment portfolio of cash and
cash equivalents is subject to interest rate fluctuations, but the Company
believes this risk is immaterial due to the short term nature of these
investments. Substantially all of the Company's business outside the United
States is conducted in the local currency of the country in which the business
is physically located. The Company has no foreign exchange contracts, option
contracts or other foreign hedging arrangements. However, because both the
revenues and the operating expenses of the foreign operations are conducted
principally in the local currencies, the Company believes that any associated
market risk is unlikely to have a material adverse effect on the Company's
business, results of operations or financial condition.
20
<PAGE> 23
ITEM 10. DIRECTORS AND OFFICERS OF THE COMPANY
The following table indicates information as of the date hereof regarding the
directors and officers of the Company from 1993 unless otherwise indicated.
<TABLE>
<CAPTION>
NAME AND MUNICIPALITY OF OFFICE HELD PRINCIPAL OCCUPATION DIRECTOR
RESIDENCE SINCE(1)
- ------------------------ ----------- -------------------- ---------
<S> <C> <C> <C>
Rubin I. Osten President, Chief Executive President and Chief Executive 1977
Toronto, Ontario Officer and Director Officer of the Company
Benjamin Swirsky(2)(3)(4) Chairman Chairman and Chief Executive 1997
Toronto, Ontario Officer of Nextel Group Inc., a
telecommunications company
Edward F. Tabah Vice-President and Director Vice-President of CMS/Data 1977
Tallahassee, Florida Corporation
P. Scott Kadlec Vice-President and Director Vice-President of the Company 1989
Burlington, MA
Bruce Light(3)(4) Director President of Light and 1995
Toronto, Ontario Associates Ltd., a management
consulting firm
Harvey Gellman(2)(4) Director Executive Vice-President of 1997
Toronto, Ontario Alacrity Inc., a software
company
Mark Skapinker(2)(3) Director Chairman and Chief Executive 1997
Toronto, Ontario Officer of Balisoft
Technologies Inc., a software
company
Giancarlo Giglio(5) Director Managing Director of Datamat 1998
Rome, Italy Ingegneria dei Sistemi S.p.A.,
a systems integration company
Martin Day Vice-President, General Vice-President, General Counsel
Toronto, Ontario Counsel and Corporate and Corporate Secretary of the
Secretary Company; lawyer with Goodman
Phillips & Vineberg to 1996
Jonathan Hamovitch Vice President, Human Vice-President, Human Resources
Toronto, Ontario Resources of the Company; Vice-President,
People Division of Wal-Mart
Canada Inc., to 1997
Lynn Kauffman Vice-President President of PC DOCS Canada Inc.
Toronto, Ontario
</TABLE>
21
<PAGE> 24
<TABLE>
<S> <C> <C>
Dennis Moir Vice-President, Finance and Vice-President, Finance and
Toronto, Ontario Chief Financial Officer Chief Financial Officer of the
Company; Vice-President,
Finance, Insurance Systems and
Services, CGI Information
Systems and Management
Consultants Inc., to 1998
Michael O'Connor Clarke Vice-President, Corporate Vice-President, Corporate
Toronto, Ontario Marketing Marketing of the Company;
Director, Product Marketing,
Lava Systems Inc., to 1998
</TABLE>
Notes:
(1) Calculated from the date such individuals first became directors of Micom
Computer Systems Limited, a predecessor of the Company, or of the
Company.
(2) Member of the Audit Committee.
(3) Member of the Compensation and Organization Committee.
(4) Member of the Corporate Governance Committee.
(5) Nominee of Datamat as permitted pursuant to the terms of the Lock-Up
Agreement. See Item 4, "Control of Registrant".
The Company has not constituted an executive committee.
A majority of the persons named above as directors qualify as resident Canadians
under the Business Corporations Act (Ontario). Each of the current directors has
served continuously since the date he or she first became a director. The
Articles of the Company provide that the board shall consist of not less than
three and not more than twelve directors to be elected annually. The board of
directors has resolved that the number of directors be set at eight. Each
director holds office until the next Annual Meeting of Shareholders or until his
or her successor is duly elected, unless his or her office is earlier vacated in
accordance with the by-laws of the Company.
22
<PAGE> 25
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS
Total compensation of the Company's directors and officers listed above as a
group for the year ended June 30, 1998 paid or accrued by the Company and its
subsidiaries was $1,844,459. Compensation of the five highest-paid senior
executive officers of the Company and its subsidiaries was as follows:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
AWARDS
------------------------------------------------ -----------------------
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS(1) OTHER ANNUAL OPTIONS
($) ($) COMPENSATION
($)
- --------------------------- ---- --------- -------- ------------- -----------------------
<S> <C> <C> <C> <C> <C>
Rubin I. Osten 1998 620,000 - - -
President and 1997 620,000 - - 100,000(2)
Chief Executive Officer of the 1996 395,600 - (3) - 125,000(3)
Corporation
---- ------- ------- ------- -------
Gary Rogers 1998 166,885 212,655 - 107,500
President and Chief Operating Officer, - - - - -
CMS/Data Corporation(4) - - - - -
---- ------- ------- ------- -------
P. Scott Kadlec 1998 317,620 - - -
Vice President of 1997 262,181 - - 25,000(5)
the Company 1996 210,900 - (6) - 45,000(6)
---- ------- ------- ------- -------
Bob Berkow 1998 283,540 35,443 - -
President and Chief Operating Officer 1997 273,260 102,473 - 75,000(8)
CompInfo, Inc.(7) - - - - -
---- ------- ------- ------- -------
Brian Zanghi 1998 223,560 48,570 165,074 129,500
President and Chief Operating Officer, 1997 136,599 19,426 128,683 500
PC DOCS, Inc.(9) 1996 130,610 62,305 53,656 5,000
---- ------- ------- ------- -------
</TABLE>
Notes:
(1) Compensation has been converted into Canadian dollars using the
following U.S. Dollar exchange rates:
1998 = $1.4177
1997 = $1.3663
1996 = $1.3613
(2) Following the 1998 financial year, Mr. Osten agreed to cancel 150,000
options.
(3) Of the 125,000 options, Mr. Osten received 50,000 options in August,
1996 in lieu of a cash bonus earned in the financial year ended June
30, 1996.
(4) Mr. Rogers became an officer of CMS/Data Corporation on September 2,
1997 and was Vice-President, Sales of CMS/Data Corporation until July
1, 1998.
(5) Following the 1998 financial year, Mr. Kadlec agreed to cancel 50,000
options.
(6) Of the 45,000 options, Mr. Kadlec received 25,000 options in August,
1996 in lieu of a cash bonus earned in the financial year ended June
30, 1996.
(7) Mr. Berkow became an officer of CompInfo, Inc. on October 1, 1996.
(8) On April 3, 1998, the Corporation approved the repricing of certain
outstanding options granted prior to July 11, 1997 which affected
75,000 options which had been granted to Mr. Berkow during the 1997
financial year of the Corporation. See "Option Repricing".
(9) Mr. Zanghi ceased to be an officer of PC DOCS, Inc. on September 25,
1998. Mr. Zanghi was appointed President and Chief Operating Officer of
PC DOCS, Inc. on April 9, 1998. The 1998 Bonus and Other Annual
Compensation are amounts which Mr. Zanghi earned in his previous
capacity as Vice-President, Sales of PC DOCS, Inc.
The Company does not provide pension, retirement or similar benefits for
directors and officers of the Company.
23
<PAGE> 26
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM THE COMPANY OR SUBSIDIARIES
The following table sets forth individual grants of stock options to purchase
common shares of the Company made during the fiscal year ended June 30, 1997 to
the following five executive officers.
OPTION GRANTS
DURING THE MOST RECENTLY COMPLETED FISCAL YEAR
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITION SECURITIES % OF TOTAL EXERCISE PRICE MARKET VALUE OF EXPIRATION
UNDER OPTIONS ($/SECURITY) SECURITIES UNDERLYING
OPTIONS GRANTED TO OPTIONS ON
GRANTED EMPLOYEES IN THE DATE OF GRANT
(#) FINANCIAL YEAR ($/SECURITY)
- --------------------------- ---------- -------------- --------------- ---------------------- -----------
<S> <C> <C> <C> <C> <C>
Rubin I. Osten - - - - -
President and
Chief Executive Officer
---------- ---- --------------- ------------------- -----------
Gary Rogers 1. 30,000 5.53% 1. U.S.$5.75/ 1. U.S.$5.75/ 1. 09/30/07
President and Chief 2. 77,500 common share common share
Operating Officer, CMS/Data 2. U.S.$6.63/ 2. U.S.$6.63/ 2. 07/01/08
Corporation common share common share
---------- ---- --------------- ------------------- -----------
P. Scott Kadlec - - - - -
Vice-President of
the Company
---------- ---- --------------- ------------------- -----------
Bob Berkow - - - - -
President and Chief
Operating Officer,
CompInfo, Inc.(1)
---------- ---- --------------- ------------------- -----------
Brian Zanghi 1. 4,500 6.66% 1. U.S.$6.00/ 1. U.S.$6.00/common 1. 08/19/07
President and Chief 2. 25,000 common share share
Operating Officer, PC 3. 100,000 2. U.S.$5.88/ 2. U.S.$5.88/common 2. 09/15/07
DOCS, Inc.(2) common share share
3. U.S.$5.38/ 3. U.S.$5.38/common 3. 03/31/08
common share share
---------- ---- --------------- ------------------- -----------
</TABLE>
Notes:
(1) On April 3, 1998, the Corporation approved the repricing of certain
outstanding options granted prior to July 11, 1997 which affected
75,000 options which had been granted to Mr. Berkow during the 1997
financial year of the Corporation. See "Option Repricing".
(2) Mr. Zanghi ceased to be an officer of PC DOCS, Inc. on September 25,
1998.
24
<PAGE> 27
The following table sets forth the individual aggregate exercises of stock
options made during the fiscal year ended June 30, 1998 by the following five
executive officers, and the fiscal year end number and value of their
unexercised options.
AGGREGATED OPTION EXERCISES DURING THE MOST RECENTLY COMPLETED FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITION SECURITIES AGGREGATE UNEXERCISED OPTIONS VALUE OF UNEXERCISED
ACQUIRED ON VALUE AT FINANCIAL YEAR-END IN-THE-MONEY OPTIONS
EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE AT FINANCIAL YEAR-END
(#) ($) (#) EXERCISABLE/UNEXERCISABLE(1)
($)
- ---------------------------- --------- --------- ------------------------- ----------------------------
<S> <C> <C> <C> <C>
Rubin I. Osten - - 357,800 / 0(2) $1,195,990 / 0
President and
Chief Executive Officer
--------- --------- ---------------- ------------------
Gary Rogers - - 0 / 107,500 0 / $38,649
President and Chief Operating
Officer, CMS/Data Corporation
--------- --------- ---------------- ------------------
P. Scott Kadlec - - 200,000 / 0(3) $1,116,500 / 0
Vice-President of
the Company
--------- --------- ---------------- ------------------
Bob Berkow - - 0 / 75,000 0 / $88,897
President and Chief Operating
Officer
CompInfo, Inc.
--------- --------- ---------------- ------------------
Brian Zanghi - - 16,833 / 138,167 $91,335 / $260,515
President and Chief Operating
Officer, PC DOCS, Inc.(4)
--------- --------- ---------------- ------------------
</TABLE>
Notes:
(1) Based on a share price of $9.75, representing the closing trading price
of such shares as at June 30, 1998 on The Toronto Stock Exchange.
(2) Following the 1998 financial year, Mr. Osten agreed to cancel 150,000
of his 357,800 unexercised options.
(3) Following the 1998 financial year, Mr. Kadlec agreed to cancel 50,000
of his 200,000 unexercised options.
(4) Mr. Zanghi ceased to be an officer of PC DOCS, Inc. on September 25,
1998.
As at September 30, 1998, there were issued and outstanding options to purchase
4,514,101 shares of the Company. The exercise prices of the options ranged from
$0.34 per common share to $31.57, and expiry dates ranged from March 1999 to
September 2008.
The total number of stock options held by directors and reporting officers of
the Company and subsidiaries as a group at September 30, 1998 was 1,546,300.
OPTION REPRICING
On April 3, 1998, the shareholders of the Company approved a resolution
authorizing the Company to reprice outstanding options held by current employees
of the Company (excluding any options held by former and current directors of
the Company) granted prior to July 11, 1997 at exercise prices of greater than
$8.00 (U.S.$5.82) to $8.00 (U.S.$5.82) per share and to amend the date on which
such options may be exercised by extending the exercise dates of such options by
one year. Pursuant to this resolution, option holders holding 546,000 options
repriced their outstanding options to $8.00 (U.S.$5.82) and the exercise dates
of such options were extended by one year.
25
<PAGE> 28
The following table sets forth details regarding the repricings of options held
by senior executive officers of the Company and its subsidiaries during the
fiscal year ended June 30, 1998.
<TABLE>
<CAPTION>
NAME DATE OF SECURITIES UNDER MARKET PRICE EXERCISE PRICE NEW EXERCISE LENGTH OF
REPRICING OPTIONS REPRICED OF SECURITIES AT TIME OF PRICE ORIGINAL
OR AMENDED (#) AT TIME OF REPRICING OR ($/SECURITY) OPTION TERM
REPRICING OR AMENDMENT REMAINING AT
AMENDMENT ($/SECURITY) DATE OF
($/SECURITY) REPRICING OR
AMENDMENT
- ---------- ---------- --------------- -------------- -------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Bob Berkow, President 07/11/97 75,000 $8.00 US$8.25 US$5.82 9.32 years
and Chief Operating (U.S.$5.82)
Officer, CompInfo,
Inc.
---------- --------------- -------------- -------------- ------------ -------------
Martin Day, 07/17/97 25,000 $8.00 $18.70 $8.00 9.23 years
Vice President, (U.S.$5.82)
General Counsel and
Secretary of the
Company
---------- --------------- -------------- -------------- ------------ -------------
Lynn Kauffman, Vice 07/11/97 1. 5,000 $8.00 1. $13.00 1. $8.00 1. 8.09 years
President of the 2. 10,000 U.S.$5.82) 2. $18.80 2. $8.00 2. 9.14 years
Company
---------- --------------- -------------- -------------- ------------ -------------
</TABLE>
ITEM 13. INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS
During the year ended June 30, 1998, there was no indebtedness, other than
routine indebtedness, of the directors, executive officers and senior officers
the Company.
PART II
ITEM 14. (NOT APPLICABLE)
PART III
ITEM 15. (NOT APPLICABLE)
ITEM 16. (NOT APPLICABLE)
PART IV
ITEM 17. FINANCIAL STATEMENTS
The financial statements filed as part of this Annual Report are listed in Item
19 - Financial Statements and Exhibits.
All financial statements herein are presented in accordance with generally
accepted accounting principles applicable in
26
<PAGE> 29
the U.S. For a history of exchange rates which were in effect for the
Canadian dollar against the United States dollar, see "Exchange Rates" in
Item 8.
ITEM 18. (NOT APPLICABLE)
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS
The following financial statements and exhibits are filed as part of this Annual
Report
(a) Financial Statements and Reports
Audited Consolidated Balance Sheets of PC DOCS Group International Inc. as
at June 30, 1998 and 1997 and the audited Consolidated Statements of Income and
Cash Flows for each of the years in the three year period ended June 30, 1998
together with the Notes to the Audited Consolidated Financial Statements,
reported on by Deloitte & Touche, Chartered Accountants, contained in the 1998
Annual Report to Shareholders.
(b) Exhibits*
1.0 Articles of Amalgamation dated June 30, 1986
1.1 Articles of Amendment dated October 16, 1986
1.2 Articles of Amendment dated October 19, 1990
1.3 Articles of Amendment dated July 4, 1994
2.0 By-laws of the Company:
By-law Number 5, enacted by the Board of Directors of the Company on
October 16, 1986
By-law Number 6, enacted by the Board of Directors of the Company on
April 1, 1990
By-law Number 7, enacted by the Board of Directors of the Company on
January 31, 1994
3.0 Specimen stock certificate for common shares of the Company
- --------
* Incorporated by reference from Form 20-F for the year ended June 30, 1995.
27
<PAGE> 30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this Annual Report to be signed by the
undersigned, thereunto duly authorized.
PC DOCS Group International Inc.
(Registrant)
/s/Martin Day
--------------------------------------------------
Martin Day
Vice President, General Counsel and
Corporate Secretary
Date: November 13, 1998
28
<PAGE> 31
FINANCIAL STATEMENTS AND REPORT
29
<PAGE> 32
Management's Responsibility for Financial Reporting U.S. GAAP
The accompanying consolidated financial statements have been prepared by
management and approved by the Board of Directors of the Company. The
consolidated financial statements have been prepared in accordance with U.S.
generally accepted accounting principles, and where appropriate, reflect
management's best estimates and judgments. The Company has developed and
maintains a system of internal accounting controls in order to ensure, on a
reasonable and cost-effective basis, the reliability of its financial
information.
The Board of Directors is responsible for ensuring that management fulfills its
responsibilities for financial reporting and internal control. The Board
exercises these responsibilities through the Audit Committee, the majority of
whose members are outside directors. The Audit Committee meets with management
and the external auditors each fiscal period to satisfy itself that management's
responsibilities are properly discharged and to review the consolidated
financial statements.
Deloitte & Touche, the independent auditors appointed by the shareholders, have
conducted an examination of the consolidated financial statements in accordance
with U.S. generally accepted auditing standards, and have expressed their
opinion on these statements. Their examination included a review and evaluation
of the Company's systems of internal control and appropriate tests and
procedures to provide reasonable assurance that the consolidated financial
statements are presented fairly, in all material respects, in accordance with
U.S. generally accepted accounting principles. The auditors have full and free
access to the Audit Committee of the Board of Directors.
/s/ Rubin I. Osten
Rubin I. Osten
Chairman, President and Chief Executive Officer
/s/ Dennis F. Moir
Dennis F. Moir
Vice President, Finance and Chief Financial Officer
30
<PAGE> 33
Management's Discussion and Analysis U.S. GAAP
The following discussion should be read in conjunction with the Company's 1998
Consolidated Financial Statements and Notes presented in accordance with U.S.
generally accepted accounting principles ("GAAP"). All amounts are in Canadian
dollars. "1998" and "1997" refer to the fiscal years ended June 30, 1998 and
1997, respectively.
FORWARD-LOOKING STATEMENTS
The following discussion contains forward-looking statements that are subject to
significant risks and uncertainties. There are a number of important factors
that could cause actual results to differ materially from historical results and
percentages, and results anticipated by the forward-looking statements contained
in the following discussion. Such factors and risks include, but are not limited
to, intense competition and rapid change in the application and enterprise
software industry and the client/server and Internet application software
markets, including price and product feature competition and emerging standards;
the introduction of new products by existing or new competitors; the overall
economic environment, including government and corporate spending patterns;
dependence on distributors and the emergence of new distribution channels,
including the Internet; dependence of the Company on the legal services market;
reliance by the Company on its third-party resellers; dependence of the Company
on its key management; customer acceptance of operating systems and the
positioning of the Company's products in these markets; the timing and customer
acceptance of new or upgraded products; the ability to develop, market, support
and acquire new products in an environment of rapidly changing technology and
operating systems and the cost of such activities; acquisition risks, including
operational disruption, unexpected expenses and losses, expenses associated with
the integration of such acquisitions, and uncertain benefits and the ability to
effectively integrate operations of acquired companies and manage growth;
fluctuations in the Company's operating results due to product demand, length of
the sales cycle, size and timing of individual customer transactions and
seasonality in the software market; and risks associated with international
operations, including currency conversion, taxes and other legal restrictions.
Readers should carefully review the risk factors described in the other
documents the Company files from time to time with the Securities and Exchange
Commission and the Ontario Securities Commission.
REVENUE GROWTH
(in millions of dollars)
<TABLE>
<S> <C>
1994 ............................... 29
1995 ............................... 52
1996 ............................... 81
1997 ............................... 96
1998 ............................... 136
</TABLE>
31
<PAGE> 34
Management's Discussion and Analysis U.S. GAAP
RESULTS OF OPERATIONS
OVERVIEW
PC DOCS Group International Inc. develops, markets and supports object-oriented,
client/server and intranet enterprise document and knowledge management products
and information management software products for professionals. These products
enable customers in a broad range of industries to leverage the intellectual
assets and expertise within their organizations by managing business-critical
information and other documents in an efficient and cost-effective manner. The
open architecture of the Company's principal products enables their deployment
in a standardized fashion, permits sophisticated customization and extensions,
and facilitates scalability across an enterprise.
The Company's products are focused in two principal markets: enterprise document
and knowledge management systems ("EDKMS") (PC DOCS, Inc. and Fulcrum
Technologies Inc.) and financial and practice information management systems for
professionals (CMS/Data Corporation and CompInfo, Inc.). In addition, the
Company has products in retail point-of-sale, and financial and inventory
management (The Quartex Corporation Inc.).
ACQUISITIONS
On February 28, 1998, the Company acquired its distributor for Asia, PC DOCS
Asia Ltd., and accounted for the transaction using the purchase method, under
which PC DOCS Asia's results of operations were included only from the date of
acquisition.
On March 10, 1998, the Company acquired Fulcrum Technologies Inc. and accounted
for the transaction using the purchase method, under which Fulcrum's results of
operations were included only from the date of acquisition.
32
<PAGE> 35
The following table presents selected consolidated financial information for
each of the fiscal years in the three-year period ended June 30, 1998.
<TABLE>
<CAPTION>
For the years ended June 30
(in millions of dollars) 1998 1997 1996
- --------------------------- --------- --------- ---------
<S> <C> <C> <C>
REVENUES
Software sales $ 76.2 $ 52.4 $ 51.5
Software support,services and other sales 54.8 36.9 21.4
Hardware sales 2.3 3.0 6.7
Interest income and other revenues 3.1 3.9 1.6
--------- --------- ---------
TOTAL REVENUES 136.4 96.2 81.2
COST OF SALES 12.9 13.0 12.3
--------- --------- ---------
GROSS PROFIT 123.5 83.2 68.9
--------- --------- ---------
OPERATING EXPENSES
Selling and marketing 46.0 29.7 17.1
Support and services 19.2 10.2 7.0
Research and development 20.3 12.3 11.0
General and administration 21.1 16.3 10.0
--------- --------- ---------
TOTAL OPERATING EXPENSES 106.6 68.5 45.1
--------- --------- ---------
EARNINGS BEFORE DEPRECIATION, AMORTIZATION,
INTEREST AND OTHER UNUSUAL ITEMS 16.9 14.7 23.8
Depreciation and amortization 10.5 8.0 5.2
Interest on long-term debt 0.5 0.2 0.2
Restructuring and other unusual charges 21.4 -- --
Write-down of product development costs 16.6 -- --
Purchased in-process research and development 54.8 -- --
Merger charge -- -- 3.9
--------- --------- ---------
EARNINGS (LOSS) BEFORE INCOME TAXES (86.9) 6.5 14.5
Income tax expense (recovery) (7.5) 2.6 3.0
--------- --------- ---------
NET EARNINGS (LOSS) $ (79.4) $ 3.9 $ 11.5
--------- --------- ---------
EARNINGS (LOSS) PER SHARE
Basic $ (3.79) $ 0.20 $ 0.73
Diluted (3.79) 0.18 0.63
--------- --------- ---------
BALANCE SHEET DATA:
Cash and short-term investments $ 62.5 $ 89.7 $ 95.9
Working capital 66.6 105.6 109.3
Total assets 185.3 162.4 150.2
Shareholders' equity 82.1 133.2 126.7
--------- --------- ---------
</TABLE>
<TABLE>
1998 REVENUE BY QUARTER
(in millions of dollars)
<S> <C>
Q1 ................................. 25.8
Q2 ................................. 29.9
Q3 ................................. 34.5
Q4 ................................. 46.2
</TABLE>
33
<PAGE> 36
Management's Discussion and Analysis U.S. GAAP
REVENUES
The Company generates revenues through sales of licenses of its software
products and systems; sales of third-party software; software support, which
includes software updates and maintenance fees under annual (or, increasingly,
multi-year) service agreements; consulting, software installation, project
management and training services; custom software and modifications; sales of
third-party hardware and related maintenance contracts; together with interest
income on cash and short-term securities. Software sales grew 45% in 1998
increasing significantly by $23.8 million over 1997 to $76.2 million. EDKMS
software sales increased by 54% while information management for professionals
software sales increased by 39%. Software support revenues, services and other
sales increased by 49% for the same period. The increase in support and service
revenues is related to the Company's increasing installed client base worldwide,
together with a trend to customers purchasing higher levels of services.
Recurring revenue from support to the installed client base was approximately
$35 million in 1998, up from $22 million in 1997. Hardware sales for 1998
declined by 23% over 1997 levels as fewer CMS/Data clients purchased integrated
systems, a trend that is likely to continue. Total revenues of the EDKMS
business grew by 61% while those of the financial and practice information
management for professionals business grew by 33%. Interest income decreased
from $3.9 million in 1997 to $3.1 million in 1998.
In 1998, sales to customers outside North America constituted 26% of total
revenues, an increase from 18% in 1997, in part due to the acquisition of the
Fulcrum and PC DOCS Asia operations and otherwise due to increased penetration
of foreign, especially European, markets.
COST OF SALES AND GROSS MARGIN
The Company incurs variable costs related to the sales of hardware and
third-party software, certain license fees and royalties, and dealer
commissions. As a percentage of revenues, cost of sales is subject to
significant variations based on changing proportions of relatively lower-margin
hardware sales to total revenues. In fiscal 1998, lower margin hardware sales
declined to 2% of total revenues from 3%, while higher margin software sales
increased to 56% of total revenues from 55%. As a direct consequence, the gross
margin increased from 87% of revenues to 91% of revenues.
SELLING AND MARKETING
Selling and marketing expenses consist of the salaries, sales commissions,
travel and other expenses required to implement the Company's marketing and
sales plans. Programs aimed at increasing sales, such as advertising, trade
shows and promotional programs
34
<PAGE> 37
designed for specific sales channels and customer target markets are also
included in these expenses. The Company sells its document and knowledge
management products in conjunction with software resellers and solutions
integrators. The Company's other products are sold predominantly by its direct
sales forces.
Selling and marketing expenses grew by $16.3 million in 1998 from $29.7 million
to $46.0 million, increasing as a percentage of revenues from 31% for 1997 to
34%. The Company continued its emphasis on, and increased its resources in,
selling and marketing in anticipation of higher sales, which were in fact
achieved. The increase in expenses was principally a result of the expansion of
the Company's marketing and sales organization from 159 employees at June 30,
1997, to 266 employees at year end (including the addition of approximately 94
Fulcrum selling and marketing personnel), and the efforts to stimulate market
demands for its major products through increased market research and other
marketing activities. The Company believes that its investment in sales staff,
travel, marketing materials and trade shows is required to provide a foundation
for future sales.
SUPPORT AND SERVICES
Support and services expenses consist of the telephone support, programming,
conversion, training, project management and technical staff expenses required
to conduct product and client support activities.
Support and services expenses totaled $l9.2 million in 1998, increasing as a
percentage of revenues from 11% to 14%. The $9.0 million increase in expenses
from $10.2 million to $19.2 million reflects the increase in the installed
client base, support for the range of products added during the year and the
higher level of services sold. The Company's support staff increased to 218
employees at June 30, 1998 (including the addition of approximately 13 Fulcrum
support and service employees) from 155 at the prior year end.
RESEARCH AND DEVELOPMENT
Research and development expenses consist of the personnel, outside consulting,
facility and equipment expenses required to conduct the Company's product
development projects and contracted development efforts. The Company capitalizes
its software development costs for major projects in accordance with U.S. GAAP.
Once a product is released to market, such capitalized amounts are amortized
over the expected economic life of the product, not exceeding three years.
<TABLE>
SEGMENTED REVENUES BY PRINCIPAL MARKETS
(in percentages)
<S> <C>
1997
EDKMS........................................ 57
Financial & Practice Information Management
for Professionals........................... 39
Retail & Other............................... 4
1998
EDKMS........................................ 64
Financial & Practice Information Management
for Professionals........................... 33
Retail & Other............................... 3
</TABLE>
35
<PAGE> 38
Management's Discussion and Analysis U.S. GAAP
The Company's research and development expenditures are directed towards
developing new software and enhancing the capabilities of its existing software.
During 1998, the Company invested significant resources to enhance existing
products and to develop several major new product extensions, including:
. CyberDOCS(R) 2.0, 2.5 and DOCSFusion(TM) 1.0, 2.5 (PC DOCS)
. CMS OPEN(R) 3.0 and Omni-Currency Accounting (CMS/Data)
. LawPack(R) 5.1 (CompInfo)
. SearchServer(R) 3.7 (Fulcrum)
The following table summarizes the Company's investment in research and product
development:
<TABLE>
<CAPTION>
For the years ended June 30 (in millions of dollars) 1998 1997
- ---------------------------------------------------- ------- -------
<S> <C> <C>
Research and development expenses, as reported $ 20.3 $ 12.3
Capitalized product development costs 7.4 7.7
------- -------
$ 27.7 $ 20.0
======= =======
</TABLE>
In fiscal 1998, the total investment in software product development increased
by $7.7 million from fiscal 1997, or by 39%, and amounted to 20% of revenues in
both 1998 and 1997. The staffing level was 298 at year end (including the
addition of approximately 74 Fulcrum research and development personnel)
compared with 183 at June 30, 1997.
Amortization of product development costs amounted to $4.5 million, down 2% from
$4.6 million in 1997, due to the write-down of product development costs at the
end of the third quarter.
GENERAL AND ADMINISTRATION
General and administration expenses consist of the personnel, professional
services, office and occupancy costs required to manage the Company, as well as
realized and unrealized foreign exchange gains or losses. General and
administration expenses, as a percentage of revenues, were 15% for 1998,
compared with 17% for 1997. The increase in general and administration expenses
from $16.3 million to $21.1 million is a reflection of personnel growth from 88
to 123 (including the addition of approximately 28 Fulcrum personnel) over the
year including additional executives, and the general and administration
expenses from Fulcrum and PC DOCS Asia.
36
<PAGE> 39
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses consist of the depreciation or
amortization of the following items: (a) product development costs, (b) acquired
software costs, (c) fixed assets and (d) goodwill. Depreciation and amortization
increased by $2.5 million from fiscal 1997 or by 31%. This resulted primarily
from amortization of goodwill and of the acquired software costs associated with
the Fulcrum acquisition of $0.8 million and an increase of $1.7 million related
to depreciation of fixed assets.
RESTRUCTURING AND OTHER UNUSUAL CHARGES
In the latter part of the 1998 fiscal year, management undertook a thorough
review of all aspects of the Company and its operating units including Fulcrum
and PC DOCS Asia.
In its review, management considered the following:
(a) Changing market conditions and broad industry trends such as the shift of
customers to Internet-based products from client/server products,
(b) Product and market synergies of Fulcrum with existing business units, and
(c) The costs associated with the elimination of organizational and facility
duplication.
This review resulted in a significant planned restructuring including
integration of businesses which resulted in reductions in overhead, closures of
duplicate offices and refocusing future efforts on higher potential integration
of products and business units.
As a result of this comprehensive review, management determined that it should
write off or write down certain assets to lower values. The resulting charges to
income in the year ended June 30, 1998, include the following:
(a) Restructuring and other unusual charges of $21.4 million made up as follows:
(i) Reduction of $7.9 million in the carrying value of goodwill from
acquisitions which in management's view is permanently impaired because
of changes in business focus.
(ii) Closure of offices and headcount reductions from organizational and
facility duplication due to the Fulcrum acquisition of $13.5 million.
(b) Write-down of product development costs of $16.6 million made up as follows:
(i) Reduction in the carrying value of previously capitalized software
development of $15.4 million and reduction in the carrying value of
acquired software of $1.2 million.
<TABLE>
GROSS RESEARCH AND DEVELOPMENT INVESTMENT
(in millions of dollars)
<S> <C>
1996................................ 16.3
1997................................ 20.0
1998................................ 27.7
</TABLE>
37
<PAGE> 40
Management's Discussion and Analysis U.S. GAAP
(c) Purchased in-process research and development
(i) As a result of the Fulcrum acquisition a write-off of in-process
research and development of $54.8 million relating to Fulcrum's
products which have not reached technological feasibility and which are
required to be expensed under U.S. GAAP.
INCOME TAXES
In 1998, the Company recorded an income tax recovery of $7.5 million as compared
to an income tax expense of $2.6 million in 1997. The income tax recovery
represented 9% of the pre-tax loss in 1998 while in 1997 the income tax expense
was 40% of the pre-tax earnings.
The Company's combined Canadian statutory income tax rate approximates 44%.
How-ever, the provision for income taxes does not equal the Canadian statutory
rate as the results of operations include those of subsidiaries in foreign
jurisdictions with different statutory income tax rates and also include certain
items which are non-taxable or non-deductible for income tax purposes (see Note
12 to the Consolidated Financial Statements). In the United States, the Company
has net operating loss carryforwards of approximately $10.7 million available to
offset future taxable earnings. These losses expire beginning in 2011. The
Company also has an alternative minimum tax credit of $0.2 million and research
and development tax credits of $0.7 million available to offset future U.S.
federal income tax liabilities.
In Canada, the Company has federal and provincial net operating loss
carryforwards of approximately $16.4 million and $24.0 million, respectively,
available to offset future tax-able earnings. These losses expire beginning in
2002. The Company also has Canadian federal and provincial research and
development expense carryovers of $12.0 million and $5.0 million, respectively,
available to offset future taxable earnings. These expenses have an indefinite
carryover period. In addition, the Company has Canadian investment tax credits
of $4.4 million available to offset future Canadian federal income tax
liabilities. These credits expire beginning in 2003.
NET EARNINGS (LOSS)
Net earnings before depreciation, amortization, interest, unusual charges and
income taxes for 1998 was $16.9 million as compared to $14.7 million in 1997.
The net loss for 1998 was $79.4 million after unusual charges of $92.8 million
as compared to net earnings of $3.9 million in 1997.
During the year, the increase in human resources was 55%, from 585 to 904,
including adding 215 staff in the acquisition of the Fulcrum operations.
38
<PAGE> 41
The weighted average number of shares used to calculate 1998 basic earnings per
share was 20.9 million, up from 19.8 million for 1997.
FUTURE PROSPECTS AND RISKS
As more organizations recognize the need for document and knowledge management,
and as the Company's other software products become increasingly well known in
their respective markets, the Company is optimistic about its prospects for
continued growth in a fast-growing and highly competitive environment. In the
past, the Company has invested increasing amounts in selling and marketing
activities and in research and development in order to capitalize on its market
opportunities, and intends to continue to do so judiciously in the future.
The Company operates in a market that is subject to rapid technological change
and is significantly affected by new product introductions and other market
activities of the increasing number of industry participants. The most important
technological change presently taking place in the Company's markets is the
increasing adoption of the Internet and corporate intranets as a means for
communications either as an adjunct to, or instead of, local and wide area
networks. All of the Company's major products either are, or are planned to be,
Internet-enabled. The Company may not be able to continue to compete
successfully against current and future competitors, many of which have greater
resources than the Company, and competitive pressures faced by the Company may
adversely affect its business, operating results and financial position.
The Company anticipates that it may make additional acquisitions of
complementary technologies and businesses. The search for such acquisitions may
divert significant management time and other resources of the Company. Completed
transactions may give rise to operational disruptions; unexpected operating
costs; expenses or losses; acquisition expenses and accounting charges; and
unexpected expenses associated with the integration of such acquisitions - any
of which may adversely affect the Company's business, operating results and
financial position.
The Company has experienced and expects to continue to experience
period-to-period fluctuations in the number and value of sales contracts signed,
for reasons including seasonality, customers' budget cycles and decision-making
processes, as well as competitors' activities. These fluctuations may have a
significant impact on the Company's revenues and net earnings in any given
period as a result of the relatively fixed nature of the Company's operating
expenses.
SEGMENTED REVENUES BY GEOGRAPHIC REGION
<TABLE>
<S> <C>
North America....................... 75%
Europe.............................. 21%
Asia & Others....................... 4%
</TABLE>
39
<PAGE> 42
Management's Discussion and Analysis U.S. GAAP
In 1998, the Company derived approximately 50% of its consolidated revenues from
sales to the legal services market, as compared with 60% in 1997. The Company
markets various significant products and consequently is not wholly dependent on
any one product, although the EDKMS business generates approximately 65% of the
Company's consolidated revenues.
The Company generates approximately 75% of its sales and expenses in U.S.
dollars and could be affected positively or negatively by fluctuations in the
U.S. exchange rate. In 1998, the Company's operating results were positively
affected by the exchange rate. There is no assurance that exchange rate
fluctuations will positively affect operating results in future years.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Cash used for operating activities for 1998 amounted to $2.4 million compared
with cash provided by operating activities of $9.0 million in 1997. The major
factor for the decrease in cash generated for 1998 was the increase in
receivables (an increase of $23 million in 1998 as compared to an increase of
$2.5 million in 1997).
The Company's working capital was $66.6 million as of June 30, 1998, including
cash and short-term investments of $62.5 million. At June 30, 1997, working
capital was $105.6 million with cash and short-term investments of $89.7
million. Total accounts receivable, net of reserves, increased by $39.5 million,
or 106%, reflecting the 42% increase in revenues and the addition of Fulcrum's
receivables during the year. Included in total receivables are unbilled
receivables, which arise from contractual payment terms for financial management
software system sales, which typically range from six to nine months. As is
typical in the software industry, the Company's sales tend to be concen-trated
at the end of a quarter, particularly so at year end. Consequently, accounts
receivable balances tend to be unusually high at quarter and year end relative
to the average balances over the periods. The Company's accounts receivable
reserves increased from $0.7 million in 1997 to $11.2 million in 1998, primarily
as a result of the Fulcrum acquisition. Prepaid expenses and other assets
increased by $3.9 million or 93% in 1998, primarily due to the acquisition of
Fulcrum.
The Company's current income tax liabilities in the United States for 1998 were
nil primarily due to loss carryforwards. In Canada, current income tax
liabilities were reduced by $0.6 million as a result of the tax benefits of
financing costs which arose in association with financings in the years ended
1995 and 1996.
40
<PAGE> 43
During 1998, the Company acquired $5.6 million in fixed assets, as compared to
$6.6 million in the prior year, consisting primarily of computer hardware,
furniture and equipment. The Company rents substantially all of its corporate
offices and certain office equipment under operating leases which expire in 2007
and which require, in aggregate, minimum payments of approximately $5.4 million
in 1999.
As it continues its expansion of its present businesses, the Company estimates
that its capital expenditures will be approximately $5.0 million to $6.0 million
during fiscal 1999, but has not entered into any material capital purchase
commitments.
The Company assumed a $20 million term loan as part of the Fulcrum acquisition.
The Company has guaranteed the repayment of the loan up to a maximum of $7
million and the balance is required to be paid only from the assets of Fulcrum.
The loan is repayable on March 9, 2002, bears interest at Canadian bank prime
and is collateralized by a General Security Agreement on all the assets of
Fulcrum. The Company's other long-term debt consists of obligations under
capital leases which totaled $0.7 million at year end ($0.8 million in 1997).
The Company believes that, based on current business plans, cash on hand from
operations together with operating bank lines will be more than adequate to fund
the Company's financial requirements through the 1999 fiscal year.
THE YEAR 2000
Many computer software systems, as well as certain hardware and equipment
containing date sensitive data, were structured to utilize a two-digit date
field such that they may not be able to recognize dates properly in the Year
2000. This could result in significant system and equipment failures. The
Company has implemented a Year 2000 compliance program designed to ensure that
the Company's computer systems, hardware and equipment will function properly
beyond 1999. The Company believes that it has allocated adequate resources for
this purpose and expects its Year 2000 compliance program to be completed on a
timely basis. The Company has commenced testing on certain systems and hardware,
and will continue to test the remainder of the systems and hardware throughout
the course of the compliance program. Based on its assessments to date, the
Company believes that it will not experience any material disruption as a result
of Year 2000 issues with any of its computer software systems, hardware or
equipment. However, there can be no assurance that the systems of other
companies on which the Company's systems rely will not experience Year 2000
disruptions and that such disruptions will not have an adverse affect on the
Company's systems.
<TABLE>
TOTAL ASSETS
(in millions of dollars)
<S> <C>
1996................................ 150.2
1997................................ 162.4
1998................................ 185.2
</TABLE>
41
<PAGE> 44
Management's Discussion and Analysis U.S. GAAP
The Company has completed its review of the software products that it has
developed and sells and has determined which are not Year 2000 compliant. Where
appropriate, modifications to certain products are being made to ensure that
they will be Year 2000 compliant in their next release or version. Both existing
and prospective customers are being informed of the Year 2000 status of their
particular products and whether the Company intends to make them compliant.
Although the Company believes that the identified modifications will make the
selected products Year 2000 compliant, no assurance can be given that additional
modifications for Year 2000 compliance will not be necessary. In addition, as
the Company's software is typically installed with a customer's other software
which may not be Year 2000 compliant, Year 2000 issues may arise which could be
attributed to the Company's software products. The Company many incur additional
costs in ascertaining the cause of these problems.
The majority of the costs related to the Year 2000 compliance program will be
expensed as incurred and are expected to be funded through operating cash flows.
In the aggregate, these costs have so far not been and are not expected to be
substantially different from normal, recurring costs that are incurred for
system development and implementation. As a result, these costs are not expected
to have a material adverse effect on the Company's overall results of operations
or cash flows.
The assessment of the costs of the Company's Year 2000 compliance effort, and
the timetable for the Company's planned completion of the Year 2000 compliance
program, are management's best estimates. These estimates were based upon
numerous assumptions as to future events, including assumptions as to the
continued availability of certain resources, in particular personnel with
experience in this area, and as to the ability of such personnel to locate and
either re-program or replace, and test, all affected computer software systems
and hardware in accordance with the Company's planned schedule. There can be no
guarantee that these estimates will prove accurate, and actual results could
differ from those estimated if these assumptions prove inaccurate. Based upon
progress to date, however, the Company believes that it is unlikely that the
foregoing factors will cause actual results to differ significantly from those
estimated.
42
<PAGE> 45
It is also recognized that the purchasing patterns of software customers and
thus the demand for software may be affected by the Year 2000 in a number of
different ways. Some portion of the current demand for software may be generated
by customers in the process of replacing or upgrading software not designed to
accommodate the Year 2000. Once such customers have completed their preparations
for the Year 2000, the software industry, generally, and the Company,
specifically, may experience deceleration from the strong annual growth rates
recently experienced in the software marketplace. In addition, as certain
customers expend significant amounts of time and money on resolving their Year
2000 issues, they may reduce or completely cancel expenditures that had been
allocated for the Company's software products. No assurance can be given that
general market conditions such as these will not have a material affect on the
Company's operations.
43
<PAGE> 46
Auditors' Report U.S. GAAP
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF PC DOCS GROUP INTERNATIONAL INC.
We have audited the accompanying consolidated balance sheets of PC DOCS Group
International Inc. and subsidiaries as of June 30, 1998 and 1997, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended June 30, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of June 30, 1998 and
1997, and the results of their operations and their cash flows for each of the
three years in the period ended June 30, 1998, in conformity with generally
accepted accounting principles in the United States.
We have also reported on the financial statements of PC DOCS Group International
Inc. for the same period presented in accordance with accounting principles
generally accepted in Canada. The significant differences between the accounting
principles generally accepted in the United States and in Canada are summarized
in Note 15 to those statements.
/s/ Deloitte & Touche
Deloitte & Touche
Toronto, Ontario
July 31, 1998
44
<PAGE> 47
Consolidated Balance Sheets
In accordance with U.S. generally accepted accounting principles
(Canadian dollars, in thousands)
<TABLE>
<CAPTION>
As of June 30 1998 1997
-------- --------
<S> <C> <C>
ASSETS
Current
Cash and short-term investments $ 62,537 $ 89,708
Accounts receivable, net of reserves of $11,153 (1997 - $689) 65,717 27,008
Unbilled receivables 11,146 10,392
Prepaid expenses and other assets 8,039 4,176
Loan receivable (Note 3) -- 1,259
-------- --------
147,439 132,543
Fixed assets (Note 4) 13,813 9,820
Product development costs, net 1,832 13,457
Acquired software, net 3,011 -
Deferred income taxes (Note 12) 12,695 2,708
Investment (Note 3) 2,762 1,723
Goodwill, net (Note 5) 3,742 2,148
-------- --------
$185,294 $162,399
======== ========
LIABILITIES
Current
Accounts payable and accrued liabilities $ 55,299 $ 14,093
Deferred revenues 25,548 12,867
-------- --------
80,847 26,960
Long-term debt (Note 6) 22,044 2,228
Minority interest 297 -
-------- --------
103,188 29,188
-------- --------
COMMITMENTS (Note 7)
SHAREHOLDERS' EQUITY
Share capital (Note 8) 146,456 119,606
Cumulative translation adjustments 2,371 911
Retained earnings (deficit) (66,721) 12,694
-------- --------
82,106 133,211
-------- --------
$185,294 $162,399
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
Approved by the Board
/s/ Benjamin Swirsky /s/ Bruce Light
Benjamin Swirsky Bruce Light
Director Director
45
<PAGE> 48
Consolidated Statements of Operations
In accordance with U.S. generally accepted accounting principles
(Canadian dollars, in thousands except per share information)
<TABLE>
<CAPTION>
For the years ended June 30 1998 1997 1996
- --------------------------- -------- -------- --------
<S> <C> <C> <C>
REVENUES
Software sales $ 76,198 $ 52,387 $ 51,458
Software support, services and other sales 54,831 36,837 21,430
Hardware sales 2,347 3,018 6,622
Interest income and other revenues 3,053 3,932 1,663
-------- -------- --------
TOTAL REVENUES 136,429 96,174 81,173
COST OF SALES 12,932 12,965 12,291
-------- -------- --------
GROSS PROFIT 123,497 83,209 68,882
-------- -------- --------
EXPENSES
Selling and marketing 46,020 29,735 17,070
Support and services 19,172 10,243 7,041
Research and development 20,314 12,281 10,977
General and administration 21,044 16,270 9,972
Depreciation and amortization (Note 9) 10,502 8,038 5,180
Interest on long-term debt 532 159 223
Restructuring and other unusual charges (Note 10) 21,368 -- --
Write-down of product development costs (Note 10) 16,564 -- --
Purchased in-process research and development (Note 10) 54,823 -- --
Merger charge (Note 11) -- -- 3,881
-------- -------- --------
TOTAL EXPENSES 210,339 76,726 54,344
======== ======== ========
EARNINGS (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST (86,842) 6,483 14,538
Income tax provision (recovery) (Note 12) (7,461) 2,604 5,678
Income tax benefit, merger related (Note 11) -- -- (2,665)
Minority interest 34 -- --
-------- -------- --------
NET EARNINGS (LOSS) $ (79,415) $ 3,879 $ 11,525
-------- -------- --------
EARNINGS (LOSS) PER SHARE (Note 13)
Basic $ (3.79) $ 0.20 $ 0.73
Diluted (3.79) 0.18 0.63
-------- -------- --------
</TABLE>
See Notes to Consolidated Financial Statements
46
<PAGE> 49
Consolidated Statements of Shareholders' Equity
In accordance with U.S. generally accepted accounting principles
(Canadian dollars and number of shares, in thousands)
<TABLE>
<CAPTION>
Share Capital Cumulative Retained Total
(Notes 8 & 11) Translation Earnings Shareholders'
Shares Amount Adjustments (Deficit) Equity
------- -------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1995 15,199 $ 23,194 $ 451 $ (2,636) $ 21,009
Exercise of stock options 764 791 -- -- 791
U.S. tax benefit on exercise of stock options (Note 12) -- 3,800 -- -- 3,800
Public offering of shares, net of expenses and related
tax benefits 3,450 82,763 -- -- 82,763
Contribution to capital in settlement of compensatory
liability (Note 11) -- 6,904 -- -- 6,904
Translation adjustments -- -- (50) -- (50)
Net earnings -- -- -- 11,525 11,525
Distribution to DataRamp shareholders -- -- -- (74) (74)
------ -------- ----------- --------- ------------
BALANCE, JUNE 30, 1996 19,413 $ 117,452 $ 401 $ 8,815 $ 126,668
Exercise of stock options 420 474 -- -- 474
U.S. tax benefit on exercise of stock options (Note 12) -- 1,412 -- -- 1,412
Issue of shares for acquisition (Note 5) 75 1,455 -- -- 1,455
Adjustment to tax benefit relating to compensation
plans (Note 11) -- (1,187) -- -- (1,187)
Translation adjustments -- -- 510 -- 510
Net earnings -- -- -- 3,879 3,879
------ -------- ----------- --------- ------------
BALANCE, JUNE 30, 1997 19,908 $ 119,606 $ 911 $ 12,694 $ 133,211
Exercise of stock options 422 965 -- -- 965
U.S. tax benefit on exercise of stock options (Note 12) -- 892 -- -- 892
Issue of shares for acquisition (Note 5) 3,806 28,527 -- -- 28,527
Issue of shares for employee stock purchase plan 45 298 -- -- 298
Repurchase of common stock (537) (3,832) -- -- (3,832)
Translation adjustments -- -- 1,460 -- 1,460
Net loss -- -- -- (79,415) (79,415)
------ -------- ---------- --------- ------------
BALANCE, JUNE 30, 1998 23,644 $ 146,456 $ 2,371 $ (66,721) $ 82,106
====== ======== ========== ========= ============
</TABLE>
See Notes to Consolidated Financial Statements
47
<PAGE> 50
Consolidated Statements of Cash Flows
In accordance with U.S. generally accepted accounting principles
(Canadian dollars, in thousands)
<TABLE>
<CAPTION>
For the years ended June 30 1998 1997 1996
- --------------------------- --------- ------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings (loss) $ (79,415) $ 3,879 $ 11,525
Adjustments to reconcile net earnings (loss) to net cash
provided by (used for) operating activities net of acquisitions:
Depreciation and amortization 10,502 8,038 5,180
Restructuring and other unusual charges 19,241 - -
Write-down of product developments costs 16,564 - -
Purchased in-process research and development 54,823 - -
Loss on disposal of fixed assets 229 - -
Minority interest 34 - -
Compensatory expense related to merger - - 3,718
Increase in accounts receivable (22,213) (1,272) (9,342)
Increase in unbilled receivables (754) (1,194) (5,938)
Increase in prepaid expenses and other assets (1,657) (2,484) (226)
Decrease (increase) in deferred income taxes (9,987) 85 (3,980)
Increase (decrease) in accounts payable and accrued liabilities 526 (2,282) 2,405
Increase in deferred revenues 9,751 4,223 1,638
------ ------ ------
Net cash provided by (used for) operating activities (2,356) 8,993 4,980
------ ------ ------
INVESTING ACTIVITIES
Decrease (increase) in loan receivable 1,259 (1,259) -
Proceeds on disposal of fixed assets 555 - -
Additions to fixed assets (5,612) (6,649) (4,842)
Additions to product development costs (7,870) (7,655) (5,289)
Acquisitions (8,459) - -
Increase in investment (2,762) (1,723) -
Cumulative translation adjustments 616 250 (7)
------ ------ ------
Net cash used for investing activities (22,273) (17,036) (10,138)
------- ------- -------
FINANCING ACTIVITIES
Increase (decrease) in long-term debt (865) (6) 320
Repurchase of common stock (3,832) - -
Net proceeds from issuance of common stock 2,155 1,886 87,354
Distributions to DataRamp shareholders - - (74)
------- ------- -------
Net cash provided by (used for) financing activities (2,542) 1,880 87,600
------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (27,171) (6,163) 82,442
CASH AND CASH EQUIVALENTS
Beginning of year 89,708 95,871 13,429
------- ------- -------
End of year $ 62,537 $ 89,708 $ 95,871
======== ======== ========
See Notes to Consolidated Financial Statements
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued for business acquisitions $ 28,527 $ 1,455 $ -
SUPPLEMENTAL DISCLOSURES OF CASHFLOW INFORMATION:
Cash paid during the year for interest $ 532 $ 180 $ 223
Cash paid during the year for income taxes 981 440 572
------- ------- -------
</TABLE>
48
<PAGE> 51
Notes to Consolidated Financial Statements U.S. GAAP
In accordance with U.S. generally accepted accounting principles
(Canadian dollars, tabular amounts in thousands except per share information)
1. CORPORATE INFORMATION
The Company and its subsidiaries are in the business of developing,
marketing, selling and supporting computer software. Computer hardware is
also purchased and resold on a contract basis only as part of an integrated
computer system.
2. SIGNIFICANT ACCOUNTING POLICIES
a. CONSOLIDATION
These consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, PC DOCS Group U.S., Inc.
("PCDGUSI"), PC DOCS Group Canada Inc. ("PCDGCI"), PC DOCS Group Europe
Ltd. ("PCDGEL"), PC DOCS Asia Ltd. ("PCDAsia"), PC DOCS Japan K.K.
("PCDJapan"), Fulcrum Technologies Inc. and its subsidiaries
("Fulcrum"), and PCDGUSI's wholly owned subsidiaries, PC DOCS, Inc.,
CMS/Data Corporation and CompInfo, Inc., together with PCDGCI's wholly
owned subsidiaries, PC DOCS Canada Inc., The Quartex Corporation Inc.
and Canterbury Systems Corp.
On February 28, 1998, the Company purchased all the outstanding shares
of PCDAsia. On March 10, 1998, the Company issued common shares for all
the outstanding shares of Fulcrum. These acquisitions have been
accounted for by the purchase method under which the assets purchased
and liabilities assumed were recorded at their fair values with the
excess of the purchase price over the fair value of net assets acquired
reported as goodwill. Also, under the purchase method, PCDAsia's and
Fulcrum's operations are included in the Company's Consolidated
Statements of Operations only from the date of acquisition.
b. FOREIGN CURRENCY TRANSLATION
The self-sustaining subsidiaries' revenues and expenses denominated in
foreign currencies have been translated into Canadian dollars at average
exchange rates for the fiscal years. Assets and liabilities are
translated at the fiscal year-end rates. Cumulative translation
adjustments are recorded as a separate component of shareholders'
equity.
c. CASH AND SHORT-TERM INVESTMENTS
The Company has a cash management program which provides for the
investment of excess cash balances in short-term investments. These
investments are stated at cost, which approximates market value, are
restricted to securities with ratings of R1-mid or higher, and comprise
money market instruments, government securities and loans, all with
maturities of less than four months.
d. UNBILLED RECEIVABLES
Unbilled receivables represent amounts receivable for hardware and
software shipped to customers which will become billable in accordance
with contractual payment terms.
e. FIXED ASSETS
Fixed assets are recorded at cost and are amortized on a straight-line
basis over their estimated useful lives of three to five years for
computer hardware, computer software, and furniture and equipment.
Leasehold improvements are recorded gross of any leasehold inducements
and are amortized over the terms of their leases of up to 11 years.
49
<PAGE> 52
Notes to Consolidated Financial Statements U.S. GAAP
In accordance with U.S. generally accepted accounting principles
(Canadian dollars, tabular amounts in thousands except per share information)
f. PRODUCT DEVELOPMENT COSTS
The Company capitalizes costs incurred to develop its computer software
products once technological feasibility has been established for each
product. All costs to establish the technological feasibility of
computer software products are charged to operations as incurred.
Capitalized product development costs are carried at the lower of
unamortized cost or net realizable value. These costs are amortized
using the straight-line method over the estimated economic life of the
product, not to exceed three years. Capitalization ceases and
amortization commences when the product is available for general
release. The Company reviews the net book value of product development
costs on a quarterly basis to ensure that continued deferral is
appropriate.
Accumulated amortization of capitalized product development costs as of
June 30, 1998, was $13,000 (1997 - $9,999,000).
g. GOODWILL
Goodwill represents the excess of the purchase price over the fair
market values of net assets acquired. Goodwill is amortized on a
straight-line basis over a seven-year period.
Accumulated amortization of goodwill as of June 30, 1998, was $163,000
(1997 - $195,000).
The Company reviews the recoverability of goodwill based on expected
future cash flows on a quarterly basis and, where applicable, writes
such amounts down to net realizable value.
h. ACQUIRED SOFTWARE
Acquired software represents the present value of the estimated future
income producing capabilities of software products acquired on
acquisitions. These amounts are amortized using the straight-line method
over the estimated economic lives of the products, not to exceed three
years.
Accumulated amortization of acquired software as of June 30, 1998, was
$724,000 (1997 - nil).
The Company reviews the recoverability of acquired software based on
expected future cash flows on a quarterly basis and, where applicable,
writes such amounts down to net realizable value.
i. LEASE INDUCEMENTS
Lease inducements represent leasehold improvements paid for by the
landlord and the value of rent-free periods. Lease inducements are
amortized on a straight-line basis over the periods of the leases and
the amortization is recorded as a reduction of rent expenses.
j. REVENUE RECOGNITION AND DEFERRED REVENUES
The Company's revenues are derived primarily from the sale of software
license agreements and related services, which include maintenance and
support, consulting, training and other services. The Company also
derives revenues from the sale of computer hardware. Software license
revenues are recognized upon shipment of the product if remaining vendor
obligations are insignificant and collection of the receivable is
probable. Maintenance and support revenues which consist of ongoing
support and product updates are recognized ratably over the term of the
contract. Revenues from consulting, training and other services are
recognized when the services are performed. Computer hardware revenues
are recognized upon shipment of the hardware, as the Company considers
the earnings process substantially complete upon shipment.
50
<PAGE> 53
Deferred revenues comprised maintenance and support agreements for which
services have yet to be provided, software license revenues where significant
vendor obligations have yet to be satisfied, and any payments received from
customers in advance of revenue recognition.
k. INCOME TAXES
The Company calculates its provision for income taxes in accordance with
Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes" which requires an asset and liability approach to financial accounting
for income taxes.
l. ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
periods. In particular with respect to its accounting for product development
costs, management develops estimates of the future recoverability of these
costs. Actual results could differ from those estimates and assumptions.
m. NEW ACCOUNTING STANDARDS
In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS No. 128"). SFAS No. 128 replaces the presentation of primary EPS and
fully diluted EPS with a presentation of basic EPS and diluted EPS,
respectively. Basic EPS excludes dilution and is computed by dividing
earnings (loss) available to common shareholders by the weighted average
number of common shares outstanding for the period. Similar to fully diluted
EPS, diluted EPS reflects the potential dilution of securities that could
share in the earnings (loss).
The Company adopted SFAS No. 128 in the year ended June 30, 1998, (Note 13)
and all periods presented have been restated to conform to this presentation.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"), effective for fiscal years beginning after December 15,
1997. SFAS No. 130 requires that all items that are required to be recognized
under accounting standards as components of comprehensive income be reported
in a financial statement that is displayed with the same prominence as other
financial statements. The Company will adopt this accounting standard on July
1, 1998, as required.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"), effective for fiscal
years beginning after December 15, 1997. SFAS No. 131 establishes standards
for reporting information about operating segments in annual financial
statements and requires selected information about operating segments in
interim financial reports issued to shareholders.
The Company is in the process of determining the effect that this Statement
will have on its financial statement disclosure and will adopt this
accounting standard on July 1, 1998, as required. In October 1997, the
Accounting Standards Executive Committee (AcSEC) of the American Institute of
Certified Public Accountants (AICPA) issued Statement of Position 97-2,
"Software Revenue Recognition" ("SOP 97-2"), effective for transactions
entered into in fiscal years beginning after December 15, 1997. The Company
believes its current revenue recognition policies and practices are
materially consistent with SOP 97-2 based upon its reading and interpretation
of the SOP.
51
<PAGE> 54
Notes to Consolidated Financial Statements U.S. GAAP
In accordance with U.S. generally accepted accounting principles
(Canadian dollars, tabular amounts in thousands except per share information)
n. RECLASSIFICATION OF COMPARATIVE AMOUNTS
Certain 1997 and 1996 comparative amounts have been reclassified to conform
with the financial statement presentation adopted for the current year.
3. LOAN RECEIVABLE AND INVESTMENT
As of June 30, 1998, the Company had invested $2,762,000 in convertible
preferred shares of a software company. This investment is carried at cost.
Subsequent to year end, the Company exercised its right to exchange its
preferred shares for a perpetual royalty-free source code license.
As of June 30, 1997, the Company had invested $1,723,000 in non-voting
preferred shares of PCDAsia. The Company acquired PCDAsia on February 28,
1998 (see Note 5b).
As of June 30, 1997, the loan receivable comprised a $690,000
interest-bearing loan outstanding to PCDAsia and $569,000 for expenses paid
on its behalf.
4. FIXED ASSETS
<TABLE>
<CAPTION>
1998
---------------------------------------------
ACCUMULATED
DEPRECIATION NET BOOK
COST AND AMORTIZATION VALUE
-------- ---------------- --------
<S> <C> <C> <C>
COMPUTER HARDWARE $ 16,895 $ 10,181 $ 6,714
COMPUTER SOFTWARE 2,853 906 1,947
EQUIPMENT UNDER CAPITAL LEASE 1,179 1,113 66
FURNITURE AND FIXTURES 4,014 1,529 2,485
LEASEHOLD IMPROVEMENTS 3,267 666 2,601
-------- -------- --------
$ 28,208 $ 14,395 $ 13,813
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1997
-------------------------------------------
Accumulated
Depreciation Net Book
Cost and Amortization Value
------- ---------------- --------
<S> <C> <C> <C>
Computer hardware $ 8,699 $ 4,430 $ 4,269
Computer software 911 456 455
Equipment under capital lease 4,207 3,465 742
Furniture and fixtures 2,830 923 1,907
Leasehold improvements 2,228 272 1,956
Property 659 168 491
-------- ------- -------
$ 19,534 $ 9,714 $ 9,820
======== ======= =======
</TABLE>
52
<PAGE> 55
5. ACQUISITIONS
a. FULCRUM TECHNOLOGIES INC.
On March 10, 1998, the Company acquired all of the issued and outstanding
shares of Fulcrum for a total purchase price of $30,650,000. The purchase
price includes shares acquired for cash of $678,000, the issue of
3,806,000 common shares and accrual of 6,000 common shares of the Company
still to be issued, with estimated market values of $28,527,000 and
$45,000, respectively, and expenses of $1,400,000 related to the
acquisition.
The transaction has been accounted for by the purchase method under which
the assets purchased and liabilities assumed were recorded at their fair
values with the excess of the purchase price over the fair value of net
assets acquired reported as goodwill. Also under the purchase method,
Fulcrum's operations are included in the Company's Consolidated Statements
of Operations only from the date of acquisition.
Assets and liabilities acquired were as follows:
<TABLE>
<S> <C>
Current assets (including cash of $519) $ 19,584
Fixed assets 3,626
--------
23,210
Current liabilities 35,340
Long-term debt 20,588
Minority interest 263
--------
Net liabilities acquired, at fair value 32,981
Goodwill 3,904
Acquired software 4,904
Purchased in-process research and development 54,823
--------
Purchase price $ 30,650
========
</TABLE>
As of March 31, 1998, the Company completed a review of the acquired
software arising on the acquisition of Fulcrum and wrote down the
remaining balance by $1,169,000 because, due to a change in business
focus, a reduction in net cash flow from certain products was anticipated.
The following unaudited pro forma summary combines the consolidated
results of operations of the Company and Fulcrum as if the acquisition had
occurred at the beginning of 1998 and 1997 after giving effect to certain
pro forma adjustments, including, among others, the amortization of
intangibles arising from the transaction and the write-down of acquired
software. This pro forma financial information is presented for
informational purposes only and may not be indicative of the results of
operations as they would have been had the transactions been effected on
the assumed dates, nor is it necessarily indicative of the results of
operations which may occur in the future. Anticipated efficiencies from
the consolidation of the Company and Fulcrum are not fully determinable
and therefore have been excluded from the amounts included in the pro
forma summary presented below.
<TABLE>
<CAPTION>
Year ended June 30 1998 1997
----------- -----------
(in thousands, except per share data) (UNAUDITED) (unaudited)
<S> <C> <C>
Revenues $ 152,379 $ 155,969
Net loss (a) (157,725) (74,499)
Net loss per share (6.67) (3.16)
(a) Includes the following unusual charges 138,925 70,847
</TABLE>
53
<PAGE> 56
Notes to Consolidated Financial Statements U.S. GAAP
In accordance with U.S. generally accepted accounting principles
(Canadian dollars, tabular amounts in thousands except per share information)
b. PC DOCS ASIA LTD.
As of June 30, 1997, the Company had invested $1,723,000 in non-voting
preferred shares of PCDAsia. On February 28, 1998, the Company acquired all
of the remaining issued and outstanding shares of PCDAsia for $297,000
including expenses of $10,000 related to the acquisition.
The transaction has been accounted for by the purchase method under which the
assets purchased and liabilities assumed were recorded at their fair values
with the excess of the purchase price over the fair value of net assets
acquired reported as goodwill. Also under the purchase method, PCDAsia's
operations are included in the Company's Consolidated Statements of
Operations only from the date of acquisition.
Assets and liabilities acquired were as follows:
<TABLE>
<S> <C>
Current assets (including cash of $24) $ 379
Current liabilities 4,232
Net liabilities acquired, at fair value 3,853
Goodwill 5,873
-------
Purchase price $ 2,020
=======
</TABLE>
As of March 31, 1998, the Company completed a review of the recorded goodwill
arising on the acquisition of PCDAsia and wrote off the remaining balance of
$5,873,000 because, due to the acquisition of Fulcrum and the resulting
change in strategy and business focus, a reduction in net cash flow from
PCDAsia was anticipated.
Due to the insignificance of the acquisition, pro forma statements have not
been provided.
c. PC DOCS GROUP EUROPE LTD.
On September 3, 1996, the Company acquired all of the issued and outstanding
shares of Quintec International Limited (subsequently renamed PC DOCS Group
Europe Ltd.) for 75,000 common shares of the Company, with an estimated
market value of $1,455,000, plus $200,000 of expenses related to the
acquisition.
The transaction has been accounted for by the purchase method under which the
assets purchased and liabilities assumed were recorded at their fair values
with the excess of the purchase price over the fair value of net assets
acquired reported as goodwill. Also under the purchase method, PCDGEL's
operations are included in the Company's Consolidated Statements of
Operations only from the date of acquisition.
Assets and liabilities acquired were as follows:
<TABLE>
<S> <C>
Current assets (including cash of $9) $ 1,689
Fixed assets 1,089
--------
2,778
Current liabilities 3,466
--------
Net liabilities acquired, at fair market value 688
Goodwill 2,343
--------
Purchase price $ 1,655
========
</TABLE>
54
<PAGE> 57
As of March 31, 1998, the Company completed a review of the recorded
goodwill arising on the acquisition of PCDGEL and wrote off the remaining
balance of $2,031,000 because, due to the acquisition of Fulcrum and the
resulting change in strategy and business focus, a reduction in net cash
flows from PCDGEL was anticipated.
Due to the insignificance of the acquisition, pro forma statements have
not been provided.
6. LONG-TERM DEBT
a. BANK LOAN
As of June 30, 1998, the recorded balance of the bank loan of $20,000,000
(1997-nil) approximated the fair value of the obligation. The loan bears
interest at Canadian bank prime rate, is repayable on March 9, 2002, and
is collateralized by a General Security Agreement providing a first charge
on all corporate assets of Fulcrum Technologies Inc. other than real
property, subject only to permitted encumbrances. The Company has
guaranteed the repayment of the loan up to a maximum of $7,000,000.
During the year ended June 30, 1998, interest on the bank loan was
$372,000 (1997-nil, 1996 nil).
b. CAPITAL LEASE OBLIGATIONS
As of June 30, 1998, the recorded value of capital lease obligations of
$733,000 (1997 - $834,000) approximated the fair market value of such
obligations.
Capital lease obligations are secured by specific computer, furniture and
telephone equipment, and bear interest at imputed rates of between 10% and
17% per annum.
During the year ended June 30, 1998, interest on capital lease obligations
was $160,000 (1997-$159,000, 1996-$223,000).
c. LEASE INDUCEMENTS
As of June 30, 1998, the unamortized balance of lease inducements was
$1,311,000 (1997 - $1,394,000).
7. COMMITMENTS AND CONTINGENCIES
a. The Company and its subsidiaries rent their office space and certain
computer and office equipment under operating leases. As of June 30, 1998,
the Company was committed to pay aggregate rentals on a fiscal year basis
as follows:
<TABLE>
<S> <C>
1999 $ 5,429
2000 5,145
2001 3,166
2002 1,701
2003 1,394
Future years 3,637
--------
$ 20,472
========
</TABLE>
During the year ended June 30, 1998, the Company recorded operating lease
expenses of $3,454,000 (1997 - $2,182,000, 1996 - $1,848,000).
b. The Company is subject to various claims and proceedings which have been
instituted against it during the normal course of business. Management
believes that the disposition of the matters pending or asserted, for
which provision has not been made, is not expected to have a material
adverse effect on the financial position of the Company or its results of
operations.
55
<PAGE> 58
Notes to Consolidated Financial Statements U.S. GAAP
In accordance with U.S. generally accepted accounting principles
(Canadian dollars, tabular amounts in thousands except per share information)
8. SHARE CAPITAL
a. AUTHORIZED
Authorized share capital consists of an unlimited number of common shares
and an unlimited number of special shares. As of June 30, 1998, there were
23,644,000 common shares and nil special shares issued and outstanding.
The special shares are issuable in series and the Company's Directors may
determine any rights or restrictions attributable to such shares upon
issuance. Any special shares have preference over the common shares
regarding dividend payouts and, in the event of the Company's liquidation,
the distribution of assets or return of capital.
In April 1997, The Toronto Stock Exchange approved a normal course issuer
bid for the Company to repurchase up to 1,000,000 of its common shares
over the ensuing year. As of June 30, 1998, the Company had repurchased
and canceled 536,800 of its common shares at an average price of $7.12 per
share. In July 1998, The Toronto Stock Exchange approved a normal course
issuer bid for the Company to repurchase up to 1,974,667 of its common
shares over the ensuing year.
b. EMPLOYEE STOCK PURCHASE PLAN
On December 12, 1997, the shareholders adopted a resolution by the Board
of Directors to implement an employee stock purchase plan (the "1997
Purchase Plan"). Employees electing to participate in the 1997 Purchase
Plan may during each six-month period, November 1 to April 30 and May 1 to
October 31 (each period a "Payment Period"), purchase shares in the
Company at a 15% discount from the lower of the average market price of
the common shares on either the first business day or last business day of
the applicable Payment Period.
During the year ended June 30, 1998, 45,243 shares were issued to
employees under this plan (1997 - nil). The aggregate number of shares
still available to be issued under this plan is 754,757.
c. STOCK OPTIONS
In November 1995, the shareholders approved the amendment of the Company's
existing stock option plan (the "1995 Option Plan") and reserved a maximum
of 4,200,000 common shares for options to be granted, net of forfeitures,
under the 1995 Option Plan. In November 1996, the shareholders approved an
additional stock option plan (the "1996 Option Plan") and reserved a
maximum of 800,000 common shares for options to be granted, net of
forfeitures, under the 1996 Option Plan.
On April 3, 1998, the shareholders adopted a resolution by the Board of
Directors increasing the number of common shares available for issuance
under the 1996 Option Plan by 1,400,000 common shares to 2,200,000 common
shares.
56
<PAGE> 59
i. History
<TABLE>
<CAPTION>
Exercise Prices Number
---------------- ------
<S> <C> <C>
Balance, June 30, 1995 3,262
Granted $13.00 to $28.58 816
Forfeited $1.45 to $25.00 (152)
Exercised $0.26 to $11.88 (764)
---------------- ------
Balance, June 30, 1996 3,162
Granted $8.37 to $7.46 1,322
Forfeited $1.45 to $28.00 (468)
Exercised $0.70 to $2.90 (420)
---------------- ------
Balance, June 30, 1997 3,596
Granted $4.71 to $9.57 1,943
Forfeited $1.45 to $30.45 (819)
Exercised $0.70 to $7.65 (422)
---------------- ------
Balance, June 30, 1998 4,298
================ ======
</TABLE>
As of June 30, 1998, 1,570,000 options had been granted, net of forfeitures,
under the 1996 Option Plan and 4,074,000 under the 1995 Option Plan. Thus,
the options available to be issued under the 1996 Option Plan and under the
1995 Option Plan as of June 30, 1998, were 630,000 and 126,000,
respectively.
ii. Options outstanding
<TABLE>
<CAPTION>
Granted during
the years ended Number
June 30 Expiry Dates Exercise Prices Outstanding
- --------------- -------------------------------- --------------- -----------
<S> <C> <C> <C>
1987 to 1993 November 5, 1999 $0.72 15
1994 April 18, 2004 $1.45 698
1995 October 24, 2004 to June 6, 2005 $0.70 to $12.38 668
1996 July 1, 2005 to June 28, 2006 $8.00 to $30.45 379
1997 July 1, 2006 to June 1, 2007 $8.00 to $29.26 805
1998 July 1, 2007 to June 1, 2008 $4.71 to $9.57 1,733
-------------------------------- --------------- -----------
Average of $7.52 4,298
================ ===========
</TABLE>
As of June 30, 1998, 1,570,000 options were outstanding under the 1996
Option Plan and 2,728,000 under the 1995 Option Plan.
57
<PAGE> 60
Notes to Consolidated Financial Statements U.S. GAAP
In accordance with U.S. generally accepted accounting principles
(Canadian dollars, tabular amounts in thousands except per share information)
d. STOCK OPTION REPRICING
On April 3, 1998, the shareholders adopted a resolution authorizing the
Company to amend the exercise prices of out-standing options held by current
employees and officers of the Company (excluding options held by former and
current Directors of the Company) issued before July 11, 1997, at prices
greater than $8.00 (U.S. $5.82) to $8.00 (U.S. $5.82) and to extend the
vesting date on which such options become exercisable by one year.
e. SFAS 123 REQUIRED DISCLOSURE
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123"). This Statement requires that companies with
stock-based compensation plans either recognize compensation expense based on
new fair-value accounting methods or continue to apply the provisions of
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" ("APB 25") and disclose pro forma net earnings (loss) per share
assuming the fair-value method had been applied. The Company has elected to
follow APB 25 and related interpretations in accounting for its employee
stock options.
Pro forma information regarding net earnings (loss) and earnings (loss) per
share is required by SFAS 123, and has been determined as if the Company had
accounted for its employee stock options under the fair-value method of that
Statement. The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following weighted
average assumptions: volatility factors of the expected market price of the
Company's common stock of 49%, 68% and 58%, and dividend yields of 0%, 0%
and 0% for 1998, 1997 and 1996, respectively, weighted average expected life
of the options ranging from 3 to 5 years, (1997 and 1996 - 3 to 10 years) and
risk-free interest rates ranging from 5.4% to 6.4%, (1997 and 1996 - 6% to
7%).
SFAS 123 requires that, for the pro forma disclosure, the compensation cost
based on the fair values of the options at the grant dates be amortized over
the vesting period. If compensation cost for stock options had been
determined based on the fair value at the grant dates for 1998, 1997 and 1996
consistent with the method prescribed by SFAS 123, the Company's net earnings
(loss) and earnings (loss) per share would have been adjusted to the
following pro forma amounts:
58
<PAGE> 61
<TABLE>
<CAPTION>
1998 1997 1996
---------- ------- --------
<S> <C> <C> <C>
Net earnings (loss)
As reported $ (79,415) $ 3,879 $ 11,525
Pro forma (79,842) 2,048 10,930
Earnings (loss) per share, diluted
As reported $ (3.79) $ 0.18 $ 0.63
Pro forma (3.79) 0.10 0.60
</TABLE>
A summary of the status of stock options outstanding as of June 30, 1998, 1997
and 1996 and changes during the years ending on those dates is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------ --------------------- ------------------------
WEIGHTED Weighted Weighted
AVERAGE Average Average
EXERCISE NUMBER Exercise Number Exercise Number
PRICE OUTSTANDING Price Outstanding Price Outstanding
--------- ----------- -------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at
beginning of year $ 9.49 3,596 $ 5.92 3,162 $ 1.99 3,262
Granted 7.37 1,943 18.18 1,322 17.19 816
Forfeited 14.47 (819) 17.57 (468) 1.04 (152)
Exercised 2.29 (422) 1.12 (420) 6.50 (764)
------ ----- ------ ----- ------ -----
Balance at
end of year $ 7.52 4,298 $ 9.49 3,596 $ 5.92 3,162
------ ----- ------ ----- ------ -----
Weighted average fair
value of options granted
during the year $ 3,339 $10,049 $4,062
</TABLE>
The following table summarizes information about the outstanding options as of
June 30, 1998:
<TABLE>
<CAPTION>
Outstanding Exercisable
------------------------ --------------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Contractual Exercise Exercise
Exercise Prices Life Price Number Price Number
----------- -------- --------- -------- ---------
<C> <C> <C> <C> <C> <C>
$ 0.70 to $ 0.94 6.1 $ 0.70 365 $ 0.70 365
1.03 to 2.21 5.9 1.47 825 1.47 802
2.90 to 4.90 5.0 3.66 78 3.73 71
6.36 to 9.25 8.2 7.63 2,266 6.71 98
9.36 to 16.50 7.5 12.56 285 13.03 163
18.13 to 19.88 8.1 18.91 225 18.80 191
20.38 to 30.45 7.8 21.82 254 21.02 114
---- ------ ----- ------ -----
4,298 1,804
==== ====== ===== ====== =====
</TABLE>
59
<PAGE> 62
Notes to Consolidated Financial Statements U.S. GAAP
In accordance with U.S. generally accepted accounting principles
(Canadian dollars, tabular amounts in thousands except per share information)
Non-exercisable options as of June 30, 1998, become available as follows:
<TABLE>
<S> <C>
1999 580
2000 733
2001 661
2002 520
-----
2,494
=====
</TABLE>
9. DEPRECIATION AND AMORTIZATION
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- -------
<S> <C> <C> <C>
Depreciation of fixed assets $ 5,008 $ 3,280 $ 1,880
Amortization of product development costs 4,490 4,563 3,300
Amortization of acquired software 724 - -
Amortization of goodwill 280 195 -
--------- --------- -------
$ 10,502 $ 8,038 $ 5,180
========= ========= =======
</TABLE>
10. RESTRUCTURING AND OTHER UNUSUAL CHARGES
In the latter part of the 1998 fiscal year, management undertook a thorough
review of all aspects of the Company and its operating units including
Fulcrum and PCDAsia. In its review, management considered the following:
(a) Changing market conditions and broad industry trends such as the shift
of customers to Internet-based products from client/server products,
(b) Product and market synergies of Fulcrum with existing business units,
and
(c) The costs associated with the elimination of organizational and facility
duplication.
This review resulted in a significant planned restructuring including
integration of businesses which resulted in reductions in over-head,
closures of duplicate offices, and refocusing future efforts on higher
potential integration of products and business units.
As a result of this comprehensive review, management determined that it
should write off or write down certain assets to lower values. The resulting
charges to income in the year ended June 30, 1998, include the following:
(a) Restructuring and other unusual charges of $21,368,000 made up as
follows:
(i) Reduction of $7,904,000 in the carrying value of goodwill from
acquisitions which in management's view is permanently impaired
because of changes in business focus.
(ii) Closure of offices and headcount reductions from organizational and
facility duplication due to the Fulcrum acquisition of $13,464,000.
(b) Write-down of product development costs of $16,564,000 made up as
follows:
(i) Reduction in the carrying value of previously capitalized software
development of $15,395,000 and reduction in the carrying value of
acquired software of $1,169,000.
60
<PAGE> 63
(c) Purchased in-process research and development.
(i) As a result of the Fulcrum acquisition, a write off of in-process
research and development of $54,823,000 relating to Fulcrum's
products which have not reached technological feasibility and which
are required to be expensed under U.S. GAAP.
11. DATARAMP MERGER
On May 31, 1996, the Company issued 466,277 common shares in exchange for
all of the outstanding shares of DataRamp, Inc. The merger has been
accounted for as a pooling of interests and, accordingly, the Company's
consolidated financial statements have been restated to combine the
financial statements of DataRamp, as adjusted to conform to the accounting
policies adopted by the Company, for all periods prior to the merger.
DataRamp's sole shareholder of record had committed to compensate and to
transfer to employees of DataRamp, for nominal consideration, 47.5% of the
466,277 common shares of the Company received as merger consideration. Total
compensatory expense of approximately $6,904,000 had been recorded as of
June 30, 1996, by DataRamp in connection with this transaction, of which
$3,881,000 was accrued as of the date of the merger in the Consolidated
Statements of Income. The $6,904,000 liability is reported as a non-cash
addition in the Consolidated Statements of Shareholders' Equity as of the
date of the merger because the liability was effectively satisfied by the
issuance of Company shares to the sole shareholder of record.
Prior to the merger, only DataRamp's sole shareholder was taxed on
DataRamp's net income pursuant to the "subchapter S corporation" rules. A
deferred income tax benefit of $2,665,000 (arising primarily from the
compensatory expense) was recorded in the Consolidated Statement of Income
as of the merger date since, as a subsidiary of the Company, DataRamp ceased
to be a subchapter S corporation and its deferred tax benefits became
available to the Company.
During fiscal 1997, the sole shareholder transferred the common shares
mentioned above at consideration less than that recorded in fiscal 1996. The
above addition to share capital was reduced by the $1,187,000 reduction in
tax benefit receivable.
61
<PAGE> 64
Notes to Consolidated Financial Statements U.S. GAAP
In accordance with U.S. generally accepted accounting principles
(Canadian dollars, tabular amounts in thousands except per share information)
12. INCOME TAXES
a. INCOME TAX PROVISION (RECOVERY)
The provision (recovery) for income taxes consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Current
Federal, U.S. $ - $ 806 $ 3,738
State 447 124 593
Canadian and other 1,187 1,188 400
-------- ------- -------
1,634 2,118 4,731
-------- ------- -------
Deferred
Federal, U.S. $ (6,663) $ (319) $ 1,213
State (654) 176 64
Canadian and other (1,778) 629 (330)
-------- ------- -------
(9,095) 486 947
-------- ------- -------
$ (7,461) $ 2,604 $ 5,678
======== ======= =======
</TABLE>
The following table reconciles the income tax provision computed at the
rates specified in Canadian taxing statutes to the reported income tax
provision:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ------- --------
<S> <C> <C> <C>
Tax provision (recovery) computed at combined
Canadian federal and provincial tax rates (44.6%) (a) $ (38,732) $ 2,893 $ 8,221
Tax on non-deductible expenses and write-offs 29,368 466 267
Effect of deductible state taxes (301) (73) (308)
Application of net loss carryforwards and credits - (547) (1,787)
Effect of differences between Canadian and other
combined tax rate 2,204 (135) (715)
-------- ------- -------
Income tax provision (recovery) (a) $ (7,461) $ 2,604 $ 5,678
======== ======= =======
</TABLE>
(a) In 1996, excluding the separately reported tax benefit of the merger
charge.
For the year ended June 30, 1998, the source of the loss before income taxes
and minority interest was:
<TABLE>
<S> <C>
United States $ (19,072)
Canada and other (67,770)
---------
$ (86,842)
=========
</TABLE>
62
<PAGE> 65
b. DEFERRED INCOME TAXES
Deferred income taxes reported in the Consolidated Balance Sheets were as
follows:
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Deferred tax asset $ 14,000 $ 8,392
Deferred tax liability 1,305 5,684
-------- -------
$ 12,695 $ 2,708
======== =======
</TABLE>
The types of temporary differences and their related tax effects which create
deferred income taxes are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
--------- -------
<S> <C> <C>
ASSETS
Net operating loss carryforwards and certain tax credits $ 20,237 $ 3,105
Expenses of public offerings of shares 1,162 1,756
Accruals and other not currently deductible 5,366 1,792
Deferred revenues 1,980 1,739
--------- -------
Gross deferred tax assets 28,745 8,392
Valuation allowance (14,745) -
--------- -------
$ 14,000 $ 8,392
--------- -------
Liability
Product development costs and other $ 1,305 $ 5,684
========= =======
</TABLE>
Management has performed an analysis to determine whether it is more
likely than not that the Company will realize the tax benefits associated
with the deferred tax assets. Based on this analysis, management believes
that net operating loss and credit carryovers generated by acquired
subsidiaries may not be utilized before they expire. In recognition of
the risk of realizing these tax benefits, the Company has provided a
valuation allowance for the deferred tax assets relating to these
carryovers. Although realization is not assured for the remaining
deferred tax assets, management believes it is more likely than not that
the Company will realize the tax benefits relating to these assets.
During the year ended June 30, 1998, the Company recorded tax benefits of
$892,000 (1997 - $1,412,000, 1996 - $3,800,000) which arose from U.S.
employees exercising Company stock options. These tax benefits were
recorded as adjustments to Share Capital in the Consolidated Statements
of Shareholders' Equity.
As of June 30, 1998, the Company had recorded U.S. income tax NOL
carryovers of $10,660,000 and had recorded Canadian federal NOL and
Canadian provincial NOL carryovers of $16,400,000 and $24,000,000,
respectively, available to offset future taxable earnings. The U.S. NOL
carryovers will expire through 2013 as follows: 2011 - $3,850,000, 2013 -
$6,810,000. The Canadian federal NOL carryovers will expire through 2005
as follows: 2003 - $8,000,000, 2004 - $3,412,000, 2005 - $4,988,000. The
Canadian provincial NOL carryovers will expire through 2005 as follows:
2002 - $6,133,000, 2003 - $10,890,000, 2004 - $3,066,000, 2005 -
$3,911,000.
63
<PAGE> 66
Notes to Consolidated Financial Statements U.S. GAAP
In accordance with U.S. generally accepted accounting principles
(Canadian dollars, tabular amounts in thousands except per share information)
As of June 30, 1998, the Company had recorded Canadian federal and Canadian
provincial research and development expense carryovers of $12,000,000 and
$5,000,000, respectively, available to offset future taxable earnings. These
expenses have an indefinite carryover period.
As of June 30, 1998, the Company also had recorded the tax benefit of
financing costs of $2,606,000 available to offset future taxable Canadian
earnings in the years ending June 30, 1999 ($1,331,000) and 2000
($1,275,000), respectively. These costs arose in association with financings
in the years ended June 30, 1996 and 1995, and the related tax benefits were
recorded as adjustments to Share Capital in the Consolidated Statements of
Shareholders' Equity.
As of June 30, 1998, the Company had recorded an alternative minimum tax
credit of $207,000 available to offset future U.S. federal income tax
liability and had recorded other tax credits of $5,130,000 available to
offset future U.S. ($715,000) and Canadian ($4,415,000) federal income tax
liabilities. These credits expire as follows:
<TABLE>
<CAPTION>
Expiration U.S. Alternative U.S. Research and Canadian Investment
as of June 30 Minimum Tax Credit Development Tax Credits Tax Credits
- ----------------------------------------------------------------------------------------------------
<C> <C> <C> <C>
2002-2003 $ - $ - $ 876
2004 - - 1,398
2005 - - 1,201
2006 - - 940
2009 - 178 -
2010 - 294 -
2012 - 243 -
No expiration 207 - -
----- ----- -------
$ 207 $ 715 $ 4,415
===== ===== =======
</TABLE>
13. EARNINGS (LOSS) PER SHARE
The following is a reconciliation of the numerators and denominators of the
basic and diluted EPS computations for net earnings (loss) and net earnings
(loss) available to common shareholders.
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------- -------------------------------- --------------------------------
Earnings Per Earnings Per Earnings Per
(loss) Shares Share (loss) Shares Share (loss) Shares Share
(Numerator) (Denominator) (Numerator) (Denominator) (Numerator) (Denominator)
----------- ------------- ----- ----------- ------------- ----- ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS $ (79,415) 20,944 $ (3.79) $ 3,879 19,756 $ 0.20 $ 11,525 15,840 $ 0.73
Effect of dilutive
securities:
stock options - - - - 1,613 - - 2,472 -
Diluted EPS
Net earnings (loss)
available to
common
shareholders $ (79,415) 20,944 $ (3.79) $ 3,879 21,369 $ 0.18 $ 11,525 18,312 $ 0.63
========= ====== ======= ======= ====== ====== ======== ====== ======
</TABLE>
64
<PAGE> 67
For the year ended June 30, 1998, options to purchase 4,298,000 shares of
common stock at prices ranging from $0.70 to $30.45 were outstanding but
were not included in the computation of diluted EPS because the effect would
be antidilutive.
For the year ended June 30, 1997, options to purchase 1,162,000 shares of
common stock at prices ranging from $13.47 to $28.58 were outstanding but
were not included in the computation of diluted EPS because the options'
exercise prices were greater than the average market price of the common
shares.
For the year ended June 30, 1996, options to purchase 12,000 shares of
common stock at prices ranging from $28.00 to $28.24 were outstanding but
were not included in the computation of diluted EPS because the options'
exercise prices were greater than the year end market price of the common
shares.
14. FINANCIAL INSTRUMENTS
Financial instruments included in the Consolidated Balance Sheets comprised
cash and short-term investments, accounts receivable, unbilled receivables,
loans receivable, accounts payable, accrued liabilities and long-term debt.
a. FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES
The fair values of cash, accounts receivable, unbilled receivables, loan
receivable, accounts payable and accrued liabilities are equivalent to
their carrying value because of the short-term maturity of those
instruments. It is not practicable to determine the fair value of the
Company's long-term investment. The long-term debt approximates the fair
value of the obligations. The Company is not party to any derivative
instruments.
b. CREDIT RISK
The Company is subject to credit risk through billed and unbilled
receivables and short-term cash investments. Receivables are with
customers in many industries and are subject to normal industry credit
risks. However, receivables from no single customer constitute 10% or
more of the Company's consolidated receivables. The Company places its
temporary excess cash in high-quality, short-term financial instruments
issued by or guaranteed by major financial institutions or governments.
c. FOREIGN EXCHANGE RISK
The Company is subject to foreign exchange risk because a number of its
financial instruments are denominated in foreign currencies. The net
effect of this risk is not expected to be material.
65
<PAGE> 68
Notes to Consolidated Financial Statements U.S. GAAP
In accordance with U.S. generally accepted accounting principles
(Canadian dollars, tabular amounts in thousands except per share information)
15. SEGMENTED INFORMATION
Revenues are segmented according to the country in which the Company's
customers are located:
<TABLE>
<CAPTION>
United States Canada International Consolidated
------------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Year ended June 30, 1998 $ 85,527 $ 15,805 $ 35,097 $ 136,429
Year ended June 30, 1997 68,242 10,423 17,509 96,174
Year ended June 30, 1996 66,850 8,483 5,840 81,173
======== ======== ======== =========
</TABLE>
Amortization and depreciation, net earnings (loss) and assets at year end
are segmented on a corporate basis, as follows:
<TABLE>
<CAPTION>
United Canada Inter-Segment
States and Other Adjustments Consolidated
-------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
Year ended June 30, 1998
Depreciation and amortization $ 7,976 $ 1,778 $ 748 $ 10,502
Net earnings (loss) (13,068) (1,384) (64,963) (79,415)
Assets at year end 76,916 169,964 (61,586) 185,294
------- ------- ------- --------
Year ended June 30, 1997
Depreciation and amortization $ 7,121 $ 921 $ (4) $ 8,038
Net earnings 3,022 2,894 (2,037) 3,879
Assets at year end 73,039 136,347 (46,987) 162,399
------- ------- ------- --------
Year ended June 30, 1996
Depreciation and amortization $ 5,048 $ 292 $ (160) $ 5,180
Net earnings 7,869 3,675 (19) 11,525
Assets at year end 53,716 131,489 (34,961) 150,244
======= ======= ======= =======
</TABLE>
16. EMPLOYEE BENEFIT PLAN
The Company, through its wholly owned U.S. subsidiary PCDGUSI, provides a
profit sharing plan under Section 401(k) of the 1986 Internal Revenue Code,
as amended. The plan covers substantially all United States-based employees
of the Company's U.S. subsidiaries and allows participating employees to
contribute to the plan a maximum of 7% of their earned compensation during
any calendar year, subject to annual contribution limitations. The Company,
at its sole discretion, may make contributions to the 401K plan. No
contributions were made by the Company to this plan during the years ended
June 30, 1998, 1997 and 1996.
66
<PAGE> 69
[PC DOCS GROUP INTERNATIONAL INC. LETTERHEAD]
ANNUAL REPORT SUPPLEMENT
For the year ended June 30, 1998
In accordance with Canadian generally accepted accounting principles.
The enclosed Annual Report Supplement is required to be filed by the Company
with Canadian securities regulators.
The financial information contained in this Annual Report Supplement is prepared
in accordance with Canadian generally accepted accounting principles ("Canadian
GAAP"). The Company's filings with the United States Securities and Exchange
Commission, as well as press releases and other shareholder communications are
generally prepared in accordance with United States generally accepted
accounting principles ("U.S. GAAP").
READERS SHOULD NOTE THAT THERE ARE MATERIAL DIFFERENCES BETWEEN THE COMPANY'S
CANADIAN GAAP AND U.S. GAAP FINANCIAL INFORMATION.
67
<PAGE> 70
Auditors' Report Canadian GAAP
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF PC DOCS GROUP INTERNATIONAL INC.
We have audited the consolidated statements of financial position of PC DOCS
Group International Inc. as at June 30, 1998 and 1997, and the consolidated
statements of earnings (loss), retained earnings (deficit) and changes in
financial position for each of the years in the three-year period ended June 30,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in Canada. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatements. 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 June 30, 1998 and
1997, and the results of its operations and the changes in its financial
position for each of the years in the three-year period ended June 30, 1998, in
accordance with accounting principles generally accepted in Canada.
/s/ Deloitte & Touche
Deloitte & Touche
Toronto, Ontario
July 31, 1998
68
<PAGE> 71
Consolidated Statements of Financial Position
In accordance with Canadian generally accepted accounting principles
(Canadian dollars, in thousands)
<TABLE>
<CAPTION>
As at June 30 1998 1997
- ------------- -------- --------
<S> <C> <C>
ASSETS
Current
Cash and short-term investments $ 62,537 $ 89,708
Accounts receivable 65,717 27,008
Unbilled receivables 11,146 10,392
Prepaid expenses and other assets 8,039 4,176
Loan receivable (Note 3) - 1,259
-------- --------
147,439 132,543
Fixed assets (Note 4) 13,813 9,820
Product development costs, net 1,832 13,521
Acquired software, net 3,011 -
Deferred income taxes 12,695 2,708
Investment (Note 3) 2,762 1,723
Goodwill and purchased research and development,
net (Note 5) 51,860 2,148
-------- --------
$ 233,412 $ 162,463
========= =========
LIABILITIES
Current
Accounts payable and accrued liabilities $ 55,292 $ 14,093
Deferred revenues 25,548 12,867
-------- --------
80,840 26,960
Long-term debt (Note 6) 22,044 2,228
Minority interest 297 -
-------- --------
103,181 29,188
======== ========
COMMITMENTS (Note 7)
SHAREHOLDERS' EQUITY
Share capital (Note 8) 144,688 121,899
Cumulative translation adjustments 2,652 1,192
Retained earnings (deficit) (17,109) 10,184
-------- --------
130,231 133,275
-------- --------
$ 233,412 $162,463
========= ========
</TABLE>
See Notes to Consolidated Financial Statements
Approved by the Board
/s/ /s/
Director Director
69
<PAGE> 72
Consolidated Statements of Earnings (Loss)
In accordance with Canadian generally accepted accounting principles (Canadian
dollars, in thousands except per share information)
<TABLE>
<CAPTION>
For the years ended June 30 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
REVENUES
Software sales $ 76,198 $ 52,387 $ 48,544
Software support, services and other sales 54,831 36,837 21,430
Hardware sales 2,347 3,018 6,622
Interest income and other revenues 3,053 3,932 1,617
-------- -------- --------
TOTAL REVENUES 136,429 96,174 78,213
COST OF SALES 12,932 12,965 12,291
-------- -------- --------
GROSS PROFIT 123,497 83,209 65,922
-------- -------- --------
EXPENSES
Selling and marketing 46,020 29,735 17,041
Support and services 19,172 10,243 7,041
Research and development 20,314 12,337 7,462
General and administration 21,044 16,270 9,907
-------- -------- --------
TOTAL EXPENSES 106,550 68,585 41,451
-------- -------- --------
EARNINGS BEFORE AMORTIZATION, INTEREST AND
OTHER UNUSUAL ITEMS 16,947 14,624 24,471
Amortization (Note 9) 12,594 9,346 5,258
Interest on long-term debt 532 159 223
Restructuring and other unusual charges (Note 10) 21,368 11,957 -
Write-down of product development costs (Note 10) 16,628 - -
-------- -------- --------
EARNINGS (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST (34,175) (6,838) 18,990
-------- -------- --------
Income taxes (Note 11)
Current 1,634 2,326 4,730
Deferred (9,095) 222 1,347
-------- -------- --------
(7,461) 2,548 6,077
Minority Interest 34 - -
-------- -------- --------
NET EARNINGS (LOSS) $ (26,748) $ (9,386) $ 12,913
-------- -------- --------
EARNINGS (LOSS) PER SHARE (NOTE 12)
Basic $ (1.28) $ (0.48) $ 0.82
Fully diluted Antidilutive Antidilutive 0.70
============ ============ ========
</TABLE>
See Notes to Consolidated Financial Statements
Consolidated Statements of Retained Earnings (Deficit)
In accordance with Canadian generally accepted accounting principles (Canadian
dollars, in thousands except per share information)
<TABLE>
<CAPTION>
For the years ended June 30 1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
RETAINED EARNINGS, BEGINNING OF YEAR $ 10,184 $ 19,570 $ 6,657
Premium on repurchase and cancellation of common shares (Note 8 (545) - -
Net earnings (loss) (26,748) (9,386) 12,913
--------- -------- --------
RETAINED EARNINGS (DEFICIT), END OF YEAR $ (17,109) $ 10,184 $ 19,570
========= ======== ========
</TABLE>
See Notes to Consolidated Financial Statements
70
<PAGE> 73
Consolidated Statements of Changes in Financial Position
In accordance with Canadian generally accepted accounting principles (Canadian
dollars, in thousands except per share information)
<TABLE>
<CAPTION>
As at June 30 1998 1997 1996
- ------------- ---------- --------- --------
<S> <C> <C> <C>
CASH FROM (USED FOR) THE FOLLOWING ACTIVITIES:
OPERATING ACTIVITIES
Net earnings (loss) $ (26,748) $ (9,386) $ 12,913
Charges (credits) not affecting cash
Amortization (Note 9) 12,594 9,346 5,258
Deferred income taxes (9,987) 1,272 (1,308)
Restructuring and other unusual charges 19,241 11,957 -
Write-down of product development costs 16,628 - -
Loss on disposal of fixed assets 229 - -
Minority interest 34 - -
-------- -------- -------
11,991 13,189 16,863
======== ======== =======
Changes in non-cash working capital items relating to
operations
Accounts receivable (22,213) (1,272) (9,888)
Unbilled receivables (754) (1,194) (5,938)
Prepaid expenses and other assets (1,656) (2,484) (209)
Accounts payable and accrued liabilities 519 (2,082) 2,869
Deferred revenues 9,751 4,223 1,617
(14,353) (2,809) (11,549)
-------- -------- -------
(2,362) 10,380 5,314
======== ======== =======
INVESTING ACTIVITIES
Loan receivable 1,259 (1,259) -
Proceeds on disposal of fixed assets 555 - -
Additions to fixed assets (5,612) (6,649) (4,770)
Additions to product development costs (7,870) (7,655) (5,353)
Adjustment to goodwill recorded on prior year
acquisition (Note 15) - (1,187) -
Increase in investment (2,762) (1,723) -
Acquisitions (32,373) (1,655) (14,718)
Cumulative translation adjustments 615 250 6
-------- -------- -------
(46,188) (19,878) (24,835)
======== ======== =======
FINANCING ACTIVITIES
Increase (decrease) in long-term debt (865) (6) 320
Share capital issued for acquisitions (Note 5) 23,921 1,455 14,688
Repurchase of common shares (3,832) - -
Share capital issued for cash, net of expenses 2,155 1,886 87,354
-------- -------- -------
21,379 3,335 102,362
======== ======== =======
INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS (27,171) (6,163) 82,841
CASH AND SHORT-TERM INVESTMENTS
Beginning of year 89,708 95,871 13,030
-------- -------- -------
End of year $ 62,537 $ 89,708 $ 95,871
======== ======== =======
</TABLE>
See Notes to Consolidated Financial Statements
71
<PAGE> 74
Notes to Consolidated Financial Statements Canadian GAAP
In accordance with Canadian generally accepted accounting principles
(Canadian dollars, tabular amounts in thousands except per share information)
1. CORPORATE INFORMATION
The Company and its subsidiaries are in the business of developing,
marketing, selling and supporting computer software. Computer hardware is
also purchased and resold on a contract basis only as part of an integrated
computer system.
2. SIGNIFICANT ACCOUNTING POLICIES
a. CONSOLIDATION
These consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, PC DOCS Group U.S., Inc.
("PCDGUSI"), PC DOCS Group Canada Inc. ("PCDGCI"), PC DOCS Group Europe
Ltd. ("PCDGEL"), PC DOCS Asia Ltd. ("PCDAsia"), PC DOCS Japan K.K.
("PCDJapan"), Fulcrum Technologies Inc. and its subsidiaries ("Fulcrum"),
and PCDGUSI's wholly owned subsidiaries, PC DOCS, Inc., CMS/Data
Corporation and CompInfo, Inc., together with PCDGCI's wholly owned
subsidiaries, PC DOCS Canada Inc., The Quartex Corporation Inc. and
Canterbury Systems Corp.
On February 28, 1998, the Company purchased all the outstanding shares of
PCDAsia. On March 10, 1998, the Company issued common shares for all the
outstanding shares of Fulcrum. These acquisitions have been accounted for
by the purchase method under which the assets purchased and liabilities
assumed were recorded at their fair values with the excess of the purchase
price over the fair value of net assets acquired reported as goodwill.
Also, under the purchase method, PCDAsia's and Fulcrum's operations are
included in the Company's Consolidated Statements of Earnings (Loss) only
from the date of acquisition.
b. FOREIGN CURRENCY TRANSLATION
The self-sustaining subsidiaries' revenues and expenses denominated in
foreign currencies have been translated into Canadian dollars at average
exchange rates for the fiscal years. Assets and liabilities are translated
at the fiscal year end rates. Cumulative translation adjustments are
recorded as a separate component of shareholders' equity.
c. CASH AND SHORT-TERM INVESTMENTS
The Company has a cash management program which provides for the
investment of excess cash balances in short-term investments. These
investments are stated at cost, which approximates market value, are
restricted to securities with ratings of R1-mid or higher, and comprise
money market instruments, government securities and loans, all with
maturities of less than four months.
d. UNBILLED RECEIVABLES
Unbilled receivables represent amounts receivable for software and
hardware shipped to customers which will become billable in accordance
with contractual payment terms.
e. FIXED ASSETS
Fixed assets are recorded at cost and are amortized on a straight-line
basis over their estimated useful lives of three to five years for
computer hardware, computer software, and furniture and equipment.
Leasehold improvements are recorded gross of any leasehold inducements and
are amortized over the terms of their leases of up to 11 years.
f. PRODUCT DEVELOPMENT COSTS
The Company capitalizes costs incurred to develop its computer software
products once technological feasibility has been established for each
product. All costs to establish the technological feasibility of computer
software products are charged to operations as incurred. Capitalized
product development costs are carried at the lower of unamortized cost or
net
72
<PAGE> 75
realizable value. These costs are amortized using the straight-line method
over the estimated economic life of the product, not to exceed three
years. Capitalization ceases and amortization commences when the product
is available for general release. The Company reviews the net book value
of product development costs on a quarterly basis to ensure that continued
deferral is appropriate.
Accumulated amortization of capitalized product development costs as at
June 30, 1998, was $13,000 (1997 - $9,999,000).
g. GOODWILL AND PURCHASED RESEARCH AND DEVELOPMENT
Goodwill and purchased research and development represents the excess of
the purchase price over the fair market values of net assets acquired.
Goodwill and purchased research and development is amortized on a
straight-line basis over a seven-year period.
Accumulated amortization of goodwill and purchased research and
development as at June 30, 1998, was $2,255,000 (1997 - $195,000).
The Company reviews the recoverability of goodwill and purchased research
and development based on expected future earnings on a quarterly basis
and, where applicable, writes such amounts down to net realizable value.
h. ACQUIRED SOFTWARE
Acquired software represents the present value of the estimated future
income-producing capabilities of software products acquired on
acquisitions. These amounts are amortized using the straight-line method
over the estimated economic lives of the products, not to exceed three
years. Accumulated amortization of acquired software as at June 30, 1998,
was $724,000 (1997 - nil).
The Company reviews the recoverability of acquired software based on
expected future cash flows on a quarterly basis and, where applicable,
writes such amounts down to net realizable value.
i. LEASE INDUCEMENTS
Lease inducements represent leasehold improvements paid for by the
landlord and the value of rent-free periods. Lease inducements are
amortized on a straight-line basis over the periods of the leases and the
amortization is recorded as a reduction of rent expenses.
j. REVENUE RECOGNITION AND DEFERRED REVENUES
The Company's revenues are derived primarily from the sale of software
licence agreements and related services, which include maintenance and
support, consulting, training and other services. The Company also derives
revenues from the sale of computer hardware. Software licence revenues are
recognized upon shipment of the product if remaining vendor obligations
are insignificant and collection of the receivable is probable.
Maintenance and support revenues which consist of ongoing support and
product updates are recognized ratably over the term of the contract.
Revenues from consulting, training and other services are recognized when
the services are performed. Computer hardware revenues are recognized upon
shipment of the hardware, as the Company considers the earnings process
substantially complete upon shipment.
Deferred revenues comprise maintenance and support agreements for which
services have yet to be provided, software licence revenues where
significant vendor obligations have yet to be satisfied, and any payments
received from customers in advance of revenue recognition.
73
<PAGE> 76
Notes to Consolidated Financial Statements Canadian GAAP
In accordance with Canadian generally accepted accounting principles (Canadian
dollars, tabular amounts in thousands except per share information)
k. INCOME TAXES
The Company provides for income taxes on the tax allocation basis.
Accordingly, deferred income taxes are recorded in the Consolidated
Statements of Financial Position and the Consolidated Statements of
Earnings (Loss) in order to reflect the income tax effects of timing
differences.
l. ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. In particular with respect to its accounting
for product development costs, management develops estimates of the future
recoverability of these costs. Actual results could differ from those
estimates and assumptions.
3. LOAN RECEIVABLE AND INVESTMENT
As at June 30, 1998, the Company had invested $2,762,000 in convertible
preferred shares of a software company. This investment is carried at cost.
Subsequent to year end, the Company exercised its right to exchange its
preferred shares for a perpetual royalty-free source code licence.
As at June 30, 1997, the Company had invested $1,723,000 in non-voting
preferred shares of PCDAsia. The Company acquired PCDAsia on February 28,
1998 (see Note 5b).
As at June 30, 1997, the loan receivable comprised a $690,000
interest-bearing loan outstanding to PCDAsia and $569,000 for expenses paid
on its behalf.
4. FIXED ASSETS
<TABLE>
<CAPTION>
1998
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
-------- ------------ --------
<S> <C> <C> <C>
COMPUTER HARDWARE $ 16,895 $ 10,181 $ 6,714
COMPUTER SOFTWARE 2,853 906 1,947
EQUIPMENT UNDER CAPITAL LEASE 1,179 1,113 66
FURNITURE AND FIXTURES 4,014 1,529 2,485
LEASEHOLD IMPROVEMENTS 3,267 666 2,601
-------- -------- --------
$ 28,208 $ 14,395 $ 13,813
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1997
Accumulated Net Book
Cost Amortization Value
------- ------------ --------
<S> <C> <C> <C>
Computer hardware $ 8,699 $ 4,430 $ 4,269
Computer software 911 456 455
Equipment under capital lease 4,207 3,465 742
Furniture and fixtures 2,830 923 1,907
Leasehold improvements 2,228 272 1,956
Property 659 168 491
-------- ------- -------
$ 19,534 $ 9,714 $ 9,820
======== ======= =======
</TABLE>
74
<PAGE> 77
5. ACQUISITIONS
a. FULCRUM TECHNOLOGIES INC.
On March 10, 1998, the Company acquired all of the issued and outstanding
shares of Fulcrum for a total purchase price of $26,037,000. The purchase
price includes shares acquired for cash of $678,000, the issue of
3,806,000 common shares and accrual of 6,000 common shares of the Company
still to be issued, with estimated market values of $23,921,000 and
$38,000, respectively, and expenses of $1,400,000 related to the
acquisition.
The transaction has been accounted for by the purchase method under which
the assets purchased and liabilities assumed were recorded at their fair
values with the excess of the purchase price over the fair value of net
assets acquired reported as goodwill. Also under the purchase method,
Fulcrum's operations are included in the Company's Consolidated Statements
of Earnings (Loss) only from the date of acquisition.
Assets and liabilities acquired were as follows:
<TABLE>
<S> <C>
Current assets (including cash of $519) $ 19,584
Fixed assets 3,626
23,210
Current liabilities 35,340
Long-term debt 20,588
Minority interest 263
--------
Net liabilities acquired, at fair value 32,981
Goodwill and purchased research and development 54,114
Acquired software 4,904
--------
Purchase price $ 26,037
========
</TABLE>
As at March 31, 1998, the Company completed a review of the acquired
software arising on the acquisition of Fulcrum and wrote down the
remaining balance by $1,169,000 because, due to a change in business
focus, a reduction in net cash flow from certain products was anticipated.
b. PC DOCS ASIA LTD.
As at June 30, 1997, the Company had invested $1,723,000 in non-voting
preferred shares of PCDAsia. On February 28, 1998, the Company acquired
all of the remaining issued and outstanding shares of PCDAsia for $297,000
including expenses of $10,000 related to the acquisition.
The transaction has been accounted for by the purchase method under which
the assets purchased and liabilities assumed were recorded at their fair
values with the excess of the purchase price over the fair value of net
assets acquired reported as goodwill. Also under the purchase method,
PCDAsia's operations are included in the Company's Consolidated Statements
of Earnings (Loss) only from the date of acquisition.
Assets and liabilities acquired were as follows:
<TABLE>
<S> <C>
Current assets (including cash of $24) $ 379
Current liabilities 4,232
Net liabilities acquired, at fair value 3,853
Goodwill 5,873
---------
Purchase price $ 2,020
=========
</TABLE>
75
<PAGE> 78
Notes to Consolidated Financial Statements Canadian GAAP
In accordance with Canadian generally accepted accounting
principles (Canadian dollars, tabular amounts in thousands except per share
information)
As at March 31, 1998, the Company completed a review of the recorded
goodwill arising on the acquisition of PCDAsia and wrote off the remaining
balance of $5,873,000 because, due to the acquisition of Fulcrum and the
resulting change in strategy and business focus, a reduction in net cash
flow from PCDAsia was anticipated.
c. PC DOCS GROUP EUROPE LTD.
On September 3, 1996, the Company acquired all of the issued and
outstanding shares of Quintec International Limited (subsequently renamed
PC DOCS Group Europe Ltd.) for 75,000 common shares of the Company, with
an estimated market value of $1,455,000, plus $200,000 of expenses related
to the acquisition.
The transaction has been accounted for by the purchase method under which
the assets purchased and liabilities assumed were recorded at their fair
values with the excess of the purchase price over the fair value of net
assets acquired reported as goodwill. Also under the purchase method,
PCDGEL's operations are included in the Company's Consolidated Statements
of Earnings (Loss) only from the date of acquisition.
Assets and liabilities acquired were as follows:
<TABLE>
<S> <C>
Current assets (including cash of $9) $ 1,689
Fixed assets 1,089
2,778
Current liabilities 3,466
Net liabilities acquired, at fair market value 688
Goodwill 2,343
-------
Purchase price $ 1,655
=======
</TABLE>
As at March 31, 1998, the Company completed a review of the recorded
goodwill arising on the acquisition of PCDGEL and wrote off the remaining
balance of $2,031,000 because, due to the acquisition of Fulcrum and the
resulting change in strategy and business focus, a reduction in net cash
flows from PCDGEL was anticipated.
6. LONG-TERM DEBT
a. BANK LOAN
As at June 30, 1998, the recorded balance of the bank loan of $20,000,000
(1997 - nil) approximated the fair value of the obligation. The loan bears
interest at Canadian bank prime rate, is repayable on March 9, 2002, and
is collateralized by a General Security Agreement providing a first charge
on all corporate assets of Fulcrum other than real property, subject only
to permitted encumbrances. The Company has guaranteed the repayment of the
loan up to a maximum of $7,000,000.
During the year ended June 30, 1998, interest on the bank loan was
$372,000 (1997 - nil, 1996 nil).
b. CAPITAL LEASE OBLIGATIONS
As at June 30, 1998, the recorded value of capital lease obligations of
$733,000 (1997 - $834,000) approximated the fair market value of such
obligations.
Capital lease obligations are secured by specific computer, furniture and
telephone equipment, and bear interest at imputed rates of between 10% and
17% per annum.
During the year ended June 30, 1998, interest on capital lease obligations
was $160,000 (1997 - $159,000, 1996 - $223,000).
c. LEASE INDUCEMENTS
As at June 30, 1998, the unamortized balance of lease inducements was
$1,311,000 (1997 - $1,394,000).
76
<PAGE> 79
7. COMMITMENTS AND CONTINGENCIES
a. The Company and its subsidiaries rent their office space and certain
computer and office equipment under operating leases. As at June 30, 1998,
the Company was committed to pay aggregate rentals on a fiscal year basis
as follows:
<TABLE>
<S> <C>
1999 $ 5,429
2000 5,145
2001 3,166
2002 1,701
2003 1,394
Future years 3,637
--------
$ 20,472
========
</TABLE>
During the year ended June 30, 1998, the Company recorded operating lease
expenses of $3,454,000 (1997 - $2,182,000, 1996 - $1,848,000).
b. The Company is subject to various claims and proceedings which have been
instituted against it during the normal course of business. Management
believes that the disposition of the matters pending or asserted, for
which provision has not been made, is not expected to have a material
adverse effect on the financial position of the Company or its results of
operations.
8. SHARE CAPITAL
a. AUTHORIZED
Authorized share capital consists of an unlimited number of common shares
and an unlimited number of special shares. As at June 30, 1998, there were
23,644,000 common shares and nil special shares issued and outstanding.
The special shares are issuable in series and the Company's Directors may
determine any rights or restrictions attributable to such shares upon
issuance. Any special shares have preference over the common shares
regarding dividend payouts and, in the event of the Company's liquidation,
the distribution of assets or return of capital.
In April 1997, The Toronto Stock Exchange approved a normal course issuer
bid for the Company to repurchase up to 1,000,000 of its common shares
over the ensuing year. As at June 30, 1998, the Company had repurchased
and cancelled 536,800 of its common shares at an average price of $7.12
per share. The premium on cancellation of $545,000 was charged to retained
earnings (deficit).
In July 1998, The Toronto Stock Exchange approved a normal course issuer
bid for the Company to repurchase up to 1,974,667 of its common shares
over the ensuing year.
b. EMPLOYEE STOCK PURCHASE PLAN
On December 12, 1997, the shareholders adopted a resolution by the Board
of Directors to implement an employee stock purchase plan (the "1997
Purchase Plan"). Employees electing to participate in the 1997 Purchase
Plan may during each six-month period, November 1 to April 30 and May 1 to
October 31 (each period a "Payment Period"), purchase shares in the
Company at a 15% discount from the lower of the average market price of
the common shares on either the first business day or last business day of
the applicable Payment Period.
During the year ended June 30, 1998, 45,243 shares were issued to
employees under this plan (1997 - nil). The aggregate number of shares
still available to be issued under this plan is 754,757.
77
<PAGE> 80
Notes to Consolidated Financial Statements Canadian GAAP
In accordance with Canadian generally accepted accounting principles (Canadian
dollars, tabular amounts in thousands except per share information)
c. ISSUED AND FULLY PAID
Details of the issuances of share capital with amounts net of related
expenses and taxes are as follows:
<TABLE>
<CAPTION>
Number Amount
-------- --------
<S> <C> <C>
Balance, June 30, 1995 14,733 $ 16,516
Exercise of stock options 764 791
U.S. tax benefit on exercise of stock options (Note 11) - 3,800
Public offering of shares, net of expenses of $3,542 after taxes 3,450 82,763
Issue of shares for acquisition 466 14,688
------- --------
Balance, June 30, 1996 19,413 118,558
Exercise of stock options 420 474
U.S. tax benefit on exercise of stock options (Note 11) - 1,412
Issue of shares for acquisition (Note 5c) 75 1,455
------- --------
Balance, June 30, 1997 19,908 121,899
Exercise of stock options 422 965
U.S. tax benefit on exercise of stock options (Note 11) - 892
Issue of shares for acquisition (Note 5a) 3,806 23,921
Issue of shares for employee stock purchase plan 45 298
Repurchase of common shares, net of premium on
repurchase of $545 (537) (3,287)
------- --------
Balance, June 30, 1998 23,644 $ 144,688
======= =========
</TABLE>
In November 1995, the shareholders approved the amendment of the Company's
existing stock option plan (the "1995 Option Plan") and reserved a maximum
of 4,200,000 common shares for options to be granted, net of forfeitures,
under the 1995 Option Plan. In November 1996, the shareholders approved an
additional stock option plan (the "1996 Option Plan") and reserved a
maximum of 800,000 common shares for options to be granted, net of
forfeitures, under the 1996 Option Plan.
On April 3, 1998, the shareholders adopted a resolution by the Board of
Directors increasing the number of common shares available for issuance
under the 1996 Option Plan by 1,400,000 common shares to 2,200,000 common
shares.
d. STOCK OPTIONS
i. History
<TABLE>
<CAPTION>
Exercise Prices Number
---------------- -------
<S> <C> <C>
Balance, June 30, 1995 3,262
Granted $13.00 to $28.58 816
Forfeited $1.45 to $25.00 (152)
Exercised $0.26 to $11.88 (764)
---------------- ------
Balance, June 30, 1996 3,162
Granted $8.37 to $27.46 1,322
Forfeited $1.45 to $28.00 (468)
Exercised $0.70 to $2.90 (420)
---------------- ------
Balance, June 30, 1997 3,596
Granted $4.71 to $9.57 1,943
Forfeited $1.45 to $30.45 (819)
Exercised $0.70 to $7.65 (422)
---------------- ------
Balance, June 30, 1998 4,298
================ ======
</TABLE>
78
<PAGE> 81
As at June 30, 1998, 1,570,000 options had been granted, net of
forfeitures, under the 1996 Option Plan and 4,074,000 under the 1995
Option Plan. Thus, the options available to be issued under the 1996
Option Plan and under the 1995 Option Plan as at June 30, 1998, were
630,000 and 126,000, respectively.
ii. Options outstanding
<TABLE>
<CAPTION>
Granted during
the years ended Number
June 30 Expiry Dates Exercise Prices Outstanding
- --------------- ----------------------------------- ---------------- ------------
<S> <C> <C> <C>
1987 to 1993 November 5, 1999 to August 15, 2000 $0.72 15
1994 April 18, 2004 $1.45 698
1995 October 24, 2004 to June 6, 2005 $0.70 to $12.38 668
1996 July 1, 2005 to June 28, 2006 $8.00 to $30.45 379
1997 July 1, 2006 to June 1, 2007 $8.00 to $29.26 805
1998 July 1, 2007 to June 1, 2008 $4.71 to $9.57 1,733
----------------------------------- --------------- -----
Average of $7.52 4,298
================ =====
</TABLE>
As at June 30, 1998, 1,570,000 options were outstanding under the 1996
Option Plan and 2,728,000 under the 1995 Option Plan.
e. STOCK OPTION REPRICING
On April 3, 1998, the shareholders adopted a resolution authorizing the
Company to amend the exercise prices of out-standing options held by
current employees and officers of the Company (excluding options held by
former and current Directors of the Company) issued before July 11, 1997,
at prices greater than $8.00 (U.S. $5.82) to $8.00 (U.S. $5.82) and to
extend the vesting date on which such options become exercisable by one
year.
9. AMORTIZATION
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Amortization of fixed assets $ 5,008 $ 3,280 $ 1,856
Amortization of product development costs 4,490 4,563 3,300
Amortization of acquired software 724 - -
Amortization of goodwill 2,372 1,503 102
------- ------- -------
$ 12,594 $ 9,346 $ 5,258
======== ======= =======
</TABLE>
10. RESTRUCTURING AND OTHER UNUSUAL CHARGES
In the latter part of the 1998 fiscal year, management undertook a thorough
review of all aspects of the Company and its operating units including
Fulcrum and PCDAsia. In its review, management considered the following:
(a) Changing market conditions and broad industry trends such as the shift
of customers to Internet-based products from client/server products,
(b) Product and market synergies of Fulcrum with existing business units,
and
(c) The costs associated with the elimination of organizational and facility
duplication.
This review resulted in a significant planned restructuring including
integration of businesses which resulted in reductions in over-head,
closures of duplicate offices, and refocusing future efforts on higher
potential integration of products and business units.
79
<PAGE> 82
Notes to Consolidated Financial Statements Canadian GAAP
In accordance with Canadian generally accepted accounting principles (Canadian
dollars, tabular amounts in thousands except per share information)
As a result of this comprehensive review, management determined that it
should write off or write down certain assets to lower values. The
resulting charges to income in the year ended June 30, 1998, include the
following:
(a) Restructuring and other unusual charges of $21,368,000 made up as
follows:
(i) Reduction of $7,904,000 in the carrying value of goodwill from
acquisitions which in management's view is permanently impaired
because of changes in business focus.
(ii) Closure of offices and headcount reductions from organizational
and facility duplication due to the Fulcrum acquisition of
$13,464,000.
(b) Write-down of product development costs of $16,628,000 made up as
follows:
(i) Reduction in the carrying value of previously capitalized software
development of $15,459,000 and reduction in the carrying value of
acquired software of $1,169,000.
11. INCOME TAXES
The following table reconciles the income tax provision (recovery) computed
at the rates specified in Canadian taxing statutes to the reported income
tax provision (recovery):
<TABLE>
<CAPTION>
1998 1997 1996
---------- --------- --------
<S> <C> <C> <C>
Tax provision (recovery) computed at combined
Canadian federal and provincial tax rates (44.6%) $ (15,242) $ (3,051) $ 8,476
Tax on non-deductible expenses and write-offs 5,878 6,410 248
Effect of deductible U.S. state taxes (301) (73) (311)
Application of net loss carryforwards and credits - (603) (1,457)
Effect of differences between Canadian and other
combined tax rates 2,204 (135) (879)
---------- --------- --------
Income tax provision (recovery) $ (7,461) $ 2,548 $ 6,077
========== ========= ========
</TABLE>
During the year ended June 30, 1998, the Company recorded tax benefits of
$892,000 (1997 - $1,412,000, 1996 - $3,800,000) which arose from U.S.
employees exercising Company stock options. These tax benefits were
recorded as adjustments to Share Capital (see Note 8c).
As at June 30, 1998, the Company had recorded income tax benefits relating
to net operating loss carryforwards of $11,985,000 available to offset
future taxable earnings. The U.S. net operating loss of $10,660,000 will
expire through 2013 as follows: 2011 - $3,850,000, 2013 - $6,810,000. The
Canadian net operating loss of $1,325,000 will expire through 2005 as
follows: 2004 - $248,000, 2005 - $1,077,000. The Company also had
unrecorded Canadian federal and Canadian provincial net operating loss
carryforwards of $15,000,000 and $24,000,000, respectively, available to
offset future taxable earnings. These losses expire beginning in 2002.
As at June 30, 1998, the Company had unrecorded Canadian federal research
and development expense carryovers of $12,000,000 and Canadian provincial
research and development expense carryovers of $5,000,000 available to
offset future taxable earnings. These expenses have an indefinite
carryover period.
As at June 30, 1998, the Company had recorded the tax benefit of financing
costs of $2,606,000 available to offset future taxable Canadian earnings
in the years ended June 30, 1999 ($1,331,000) and 2000 ($1,275,000),
respectively. These costs arose in association with financings in the
years ended June 30, 1996 and 1995, and the related tax benefits were
recorded as adjustments to Share Capital (see Note 8c).
80
<PAGE> 83
As at June 30, 1998, the Company had recorded an alternative minimum tax
credit of $207,000 and had recorded other tax credits of $715,000 available
to offset future U.S. federal income tax liabilities. These credits expire
as follows:
<TABLE>
<CAPTION>
U.S. Alternative U.S. Research and
Expiration at June 30 Minimum Tax Credit Development Tax Credits
- ------------------------ ------------------ -----------------------
<S> <C> <C>
2009 $ - $ 178
2010 - 294
2012 - 243
No expiration 207 -
----- -----
$ 207 $ 715
===== =====
</TABLE>
In addition, as at June 30, 1998, the Company had unrecorded Canadian
investment tax credits of approximately $4,415,000 which expire beginning in
2003.
12. EARNINGS (LOSS) PER SHARE
The weighted average numbers of shares used to calculate earnings (loss) per
share were:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Basic 20,944 19,756 15,840
Fully diluted 25,000 23,220 19,074
======= ====== ======
</TABLE>
13. FINANCIAL INSTRUMENTS
Financial instruments included in the Consolidated Statements of Financial
Position comprise cash and short-term investments, accounts receivable,
unbilled receivables, loans receivable, accounts payable, accrued
liabilities and long-term debt.
a. FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES
The fair values of cash, accounts receivable, unbilled receivables, loan
receivable, accounts payable and accrued liabilities are equivalent to
their carrying value because of the short-term maturity of those
instruments. It is not practicable to determine the fair value of the
Company's long-term investment. The long-term debt approximates the fair
value of the obligations. The Company is not party to any derivative
instruments.
b. CREDIT RISK
The Company is subject to credit risk through billed and unbilled
receivables and short-term cash investments. Receivables are with
customers in many industries and are subject to normal industry credit
risks. However, receivables from no single customer constitute 10% or
more of the Company's consolidated receivables. The Company places its
temporary excess cash in high-quality, short-term financial instruments
issued by or guaranteed by major financial institutions or governments.
c. FOREIGN EXCHANGE RISK
The Company is subject to foreign exchange risk because a number of its
financial instruments are denominated in foreign currencies. The net
effect of this risk is not material.
81
<PAGE> 84
Notes to Consolidated Financial Statements Canadian GAAP
In accordance with Canadian generally accepted accounting principles (Canadian
dollars, tabular amounts in thousands except per share information)
14. SEGMENTED INFORMATION
Revenues are segmented according to the country in which the Company's
customers are located:
<TABLE>
<CAPTION>
United States Canada International Consolidated
------------- -------- -------------- ------------
<S> <C> <C> <C> <C>
Year ended June 30, 1998 $ 85,527 $ 15,805 $ 35,097 $ 136,429
Year ended June 30, 1997 68,242 10,423 17,509 96,174
Year ended June 30, 1996 63,890 8,483 5,840 78,213
======== ======== ======== =========
</TABLE>
Amortization, net earnings (loss) and assets at year end are segmented on a
corporate basis, as follows:
<TABLE>
<CAPTION>
United Canada Inter-Segment
States and Other Adjustments Consolidated
------- --------- ------------- ------------
<S> <C> <C> <C> <C>
Year ended June 30, 1998
Amortization $ 7,976 $ 1,778 $ 2,840 $ 12,594
Net earnings (loss) (13,068) (1,384) (12,296) (26,748)
Assets at year end 76,916 169,964 (13,468) 233,412
------- ------- ------- --------
Year ended June 30, 1997
Amortization $ 7,121 $ 921 $ 1,304 $ 9,346
Net earnings (loss) 3,022 (9,063) (3,345) (9,386)
Assets at year end 73,039 136,347 (46,923) 162,463
------- ------- ------- --------
Year ended June 30, 1996
Amortization $ 5,024 $ 292 $ (58) $ 5,258
Net earnings 9,257 3,675 (19) 12,913
Assets at year end 53,716 131,489 (22,819) 162,386
------- ------- ------- --------
</TABLE>
15. DIFFERENCES BETWEEN U.S. AND CANADIAN GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP)
These consolidated financial statements have been prepared in accordance
with Canadian GAAP. In addition, consolidated financial statements have been
prepared in accordance with U.S. GAAP. The material differences between
these consolidated financial statements prepared in accordance with
Canadian GAAP and those prepared in accordance with U.S. GAAP are as
follows:
(i) Under U.S. GAAP, the acquisition of DataRamp was accounted for as a
merger under the pooling of interests method rather than as a purchase.
Under the purchase method, goodwill is recognized on the excess of the
purchase price over the net assets acquired, and the results of
operations are included only from the date of acquisition. Under pooling
of interests, the financial position and the results of operations of
the two companies are combined from inception and, accordingly, all of
the Company's consolidated statements would be restated to combine the
financial statements of DataRamp, as adjusted to conform to the
accounting principles adopted by the Company for all periods prior to
the merger. Under U.S. GAAP, the write-off of goodwill on the DataRamp
acquisition would not be recorded.
(ii) Under U.S. GAAP, the effective date of valuing the shares issued for
the Fulcrum acquisition was the five-day weighted average market price
before and after the acquisition announcement date of December 23, 1997.
Under Canadian GAAP, the effective date of valuing the shares issued was
the five-day weighted average market price before and after the closing
date of March 10, 1998, less transaction costs normally incurred when
issuing shares for cash but avoided in the business combination. This
resulted in an increase to the fair value of the shares issued and to
the purchased research and development under U.S. GAAP by $4,606,000.
82
<PAGE> 85
Under U.S. GAAP, the purchased research and development of $54,823,000
arising on the acquisition of Fulcrum would be expensed rather than
capitalized and amortized over a seven-year period. As a result, the
amortization of goodwill under U.S. GAAP would be $2,092,000 lower than
that under Canadian GAAP.
(iii) Under U.S. GAAP, the premium on share repurchases would be debited to
stated share capital rather than to retained earnings (deficit) referred
to in Note 8a.
(iv) Under U.S. GAAP, the elimination of the June 30, 1994, deficit and
corresponding reduction in stated share capital would not be recorded.
(v) Under U.S. GAAP, research and development and investment tax credits
would be credited to the income tax provision rather than to research
and development expenses.
(vi) Under U.S. GAAP, diluted earnings per share would reflect the maximum
potential dilution computed using the Treasury Stock Method based on the
market price of the Company's common shares at year end.
The following are summary Consolidated Statements of Financial Position
reconciled to the U.S. GAAP format including the differences above:
<TABLE>
<CAPTION>
Per DataRamp Fulcrum Share
Canadian Pooling Acquisition Repurchase Other Per U.S.
GAAP Adjustments Adjustments Adjustments Adjustments GAAP
As at June 30, 1998 (i) (ii) (iii) (iv)
-------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Current assets $ 147,439 - - - - $ 147,439
Fixed assets 13,813 - - - - 13,813
Product development costs 1,832 - - - - 1,832
Acquired software 3,011 - - - - 3,011
Deferred income taxes 12,695 - - - - 12,695
Investment 2,762 - - - - 2,762
Goodwill 51,860 - (48,118) - - 3,742
--------- ----------- ----------- ----------- --------- ---------
$ 233,412 - (48,118) - - $ 185,294
--------- ----------- ----------- ----------- --------- ---------
Liabilities $ 103,181 - 7 - - $ 103,188
--------- ----------- ----------- ----------- --------- ---------
Share capital 144,688 (14,688) 4,606 (545) 6,677 146,456
- 5,718(a) - - -
Cumulative translation
adjustments 2,652 (281) - - - 2,371
Deficit (17,109) 9,251 (52,731) 545 (6,677) (66,721)
--------- ----------- ----------- ----------- --------- ---------
$ 130,231 - (48,125) - - $ 82,106
--------- ----------- ----------- ----------- --------- ---------
$ 233,412 - (48,118) - - $ 185,294
--------- ----------- ----------- ----------- --------- ---------
</TABLE>
83
<PAGE> 86
Notes to Consolidated Financial Statements Canadian GAAP
In accordance with Canadian generally accepted accounting principles
(Canadian dollars, tabular amounts in thousands except per share information)
<TABLE>
<CAPTION>
Per DataRamp Fulcrum Share
Canadian Pooling Acquisition Repurchase Other Per U.S.
GAAP Adjustments Adjustments Adjustments Adjustments GAAP
As at June 30, 1997 (i) (ii) (iii) (iv)
- ------------------- --------- ----------- ----------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Current assets $ 132,543 - - - - $ 132,543
Fixed assets 9,820 - - - - 9,820
Product development costs 13,521 (64) - - - 13,457
Deferred income taxes 2,708 - - - - 2,708
Investment 1,723 - - - - 1,723
Goodwill 2,148 - - - - 2,148
--------- --------- -------- ------ ----- ---------
$ 162,463 (64) - - - $ 162,399
--------- --------- -------- ------ ----- ---------
Liabilities $ 29,188 - - - - $ 29,188
--------- --------- -------- ------ ----- ---------
Share capital 121,899 (14,688) - - 6,677 119,606
- 5,718(a) - - - -
Cumulative translation adjustments 1,192 (281) - - - 911
Retained earnings 10,184 9,187 - - (6,677) 12,694
--------- --------- -------- ------ ----- ---------
133,275 (64) - - - $ 133,211
--------- --------- -------- ------ ----- ---------
$ 162,463 (64) - - - $ 162,399
========= ========= ======== ====== ===== =========
</TABLE>
The following are summary Consolidated Statements of Earnings (Loss) reconciled
to the U.S. GAAP format including the differences above:
<TABLE>
<CAPTION>
Per DataRamp Fulcrum
Canadian Pooling Acquisition Other Per U.S.
GAAP Adjustments Adjustments Adjustments GAAP
Year ended June 30, 1998 (i) (ii) (v) (vi)
- ------------------------ --------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues $ 136,429 - - - $ 136,429
Cost of sales 12,932 - - - 12,932
--------- ------- ----- ------ ---------
Gross profit 123,497 - - - 123,497
Expenses 107,082 - - - 107,082
Amortization 12,594 - (2,092) - 10,502
Restructuring and other unusual charges 21,368 - - - 21,368
Write-down of product development costs 16,628 (64) - - 16,564
Purchased in-process research
and development - - 54,823 - 54,823
Income tax recovery (7,461) - - - (7,461)
Minority interest 34 - - - 34
--------- ------- ----- ------ ---------
Net loss $ (26,748) 64 (52,731) - $ (79,415)
========= ======= ======= ====== =========
Loss per share
Basic $ (3.79)
Diluted (3.79)
Weighted average number of shares
Basic 20,944
Diluted 20,944
</TABLE>
84
<PAGE> 87
<TABLE>
<CAPTION>
Per DataRamp Fulcrum
Canadian Pooling Acquisition Other Per U.S.
GAAP Adjustments Adjustments Adjustments GAAP
Year ended June 30, 1997 (i) (ii) (v) (vi)
- ------------------------ --------- ------------ ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
Revenues $ 96,174 - - - $ 96,174
Cost of sales 12,965 - - - 12,965
-------- ------- ------ ----- --------
Gross profit 83,209 - - - 83,209
Expenses 68,744 - - (56) 68,688
Amortization 9,346 (1,308) - - 8,038
Write-down of goodwill 11,957 (11,957) - - -
Income tax 2,548 - - 56 2,604
-------- ------- ------ ----- --------
Net earnings (loss) $ (9,386) 13,265 - - $ 3,879
======== ======= ====== ===== ========
Earnings per share
Basic $ 0.20
Diluted 0.18
Weighted average number of shares
Basic 19,756
Diluted 21,369
</TABLE>
<TABLE>
<CAPTION>
Per DataRamp Fulcrum
Canadian Pooling Acquisition Other Per U.S.
GAAP Adjustments Adjustments Adjustments GAAP
Year ended June 30, 1996 (i) (ii) (v) (vi)
- ------------------------ -------- ----------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
Revenues $ 78,213 2,960 - - $ 81,173
Cost of sales 12,291 - - - 12,291
-------- ----- ----- ---- --------
Gross profit 65,922 2,960 - - 68,882
Expenses 41,674 3,279 - 330 45,283
Amortization 5,258 (78) - - 5,180
Merger charge - 3,881(a) - - 3,881
Income tax provision 6,077 (69) - (330) 5,678
Income tax benefit, merger related - (2,665)(a) - - (2,665)
-------- ----- ----- ---- --------
Net earnings $ 12,913 (1,388) - - $ 11,525
======== ====== ===== ==== ========
Earnings per share
Basic $ 0.73
Diluted 0.63
Weighted average number of shares
Basic 15,840
Diluted 28,312
</TABLE>
85
<PAGE> 88
Notes to Consolidated Financial Statements Canadian GAAP
In accordance with Canadian generally accepted accounting principles (Canadian
dollars, tabular amounts in thousands except per share information)
(a) DataRamp's sole shareholder of record had committed to compensate and to
transfer to other employees of DataRamp, for nominal consideration,
47.5% of the 466,277 common shares of the Company received as merger
consideration. Under U.S. GAAP, total compensatory expense of
approximately $6,904,000 had been recorded as at June 30, 1996, by
DataRamp in connection with this transaction, of which $3,881,000 was
accrued as at the date of the merger. The $6,904,000 liability is
reported under U.S. GAAP as a non-cash addition as of the date of the
merger to DataRamp's $1,000 share capital because the liability was
effectively satisfied by the issuance of Company shares to the sole
share-holder of record. Prior to the merger, only DataRamp's sole
shareholder was taxed on DataRamp's net income pursuant to the
"subchapter S corporation" rules. A deferred income tax benefit of
$2,665,000 (arising primarily from the compensatory expense) was
reported under U.S. GAAP as of the merger date since, as a subsidiary of
the Company, DataRamp ceased to be a subchapter S corporation and its
deferred tax benefits became available to the Company. During fiscal
1997, the sole shareholder transferred the common shares noted above at
consideration less than that recorded in fiscal 1996. The above addition
to share capital was reduced by the $1,187,000 reduction in tax benefit
receivable.
16. THE YEAR 2000
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. The effects of the Year 2000 issue
may be experienced before, on, or after January 1, 2000, and, if not
addressed, the impact on operations and financial reporting may range from
minor errors to significant systems failure which could affect an entity's
ability to conduct normal business operations. It is not possible to be
certain that all aspects of the Year 2000 issue affecting the Company,
including those related to the efforts of customers, suppliers, or other
third parties, will be fully resolved.
17. RECLASSIFICATION OF COMPARATIVE AMOUNTS
Certain 1997 and 1996 comparative amounts have been reclassified to conform
with the financial statement presentation adopted for the current year.
86
<PAGE> 89
INDEX TO EXHIBITS (1)
<TABLE>
<S> <C>
1.0 Articles of Amalgamation dated June 30, 1986
1.1 Articles of Amendment dated October 16, 1986
1.2 Articles of Amendment dated October 19, 1990
1.3 Articles of Amendment dated July 4, 1994
2.0 By-laws of the Company:
By-law Number 5, enacted by the Board of Directors of the Company on October, 1986
By-law Number 6, enacted by the Board of Directors of the Company on April 1, 1990
By-law Number 7, enacted by the Board of Directors of the Company on January 31, 1994
3.0 Specimen stock certificated for common shares of the Company
</TABLE>
- ---------------------------
(1) Incorporated by reference from Form 20-F for the year ended June 30, 1995.
87
