Complete finacial statements
KASTEN CHASE APPLIED RESEARCH LTD ("KCA-T;KCARF-0") - Revenues Improve 56% Over 2000 (Part 2 of 2)
Consolidated Balance Sheets
December 31, December 31,
(in thousands of dollars) 2001 2000
Assets
Current assets:
Cash and cash equivalents $ 4,897 $ 4,580
Short-term investments (note 3) 22,292 12,870
Accounts receivable, net of allowance
for Doubtful accounts of
$34 (2000 - $94) 4,868 5,040
Unbilled work in progress 89 297
Inventory (note 4) 1,310 1,154
Prepaid expenses 237 300
33,693 24,241
Other assets (note 5) 142 142
Capital assets (note 6) 2,444 3,357
$ 36,279 $ 27,740
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and
accrued liabilities $ 2,777 $ 2,276
Deferred revenue 802 513
3,579 2,789
Shareholders' equity:
Capital stock (note 7) 64,066 62,606
Deficit (31,366) (37,655)
32,700 24,951
$ 36,279 $ 27,740
Commitments (note 11)
See accompanying notes to consolidated financial statements
KASTEN CHASE APPLIED RESEARCH LIMITED
Consolidated Statements of Operations and Deficit
(in thousands of dollars, except per share data)
For the years ended December 31 2001 2000
Revenues $ 23,702 $ 15,220
Cost of sales 5,834 7,881
Gross margin 17,868 7,339
Operating expenses:
Sales, marketing and customer support 4,683 5,413
Product development 2,751 3,271
General and administrative 3,862 3,199
Amortization 1,060 596
Loss on disposal of assets 194 82
Interest income (971) (718)
11,579 11,843
Net income (loss) for the year 6,289 (4,504)
Deficit, beginning of year (37,655) (32,969)
Dividends on preference shares - (182)
Deficit, end of year $ (31,366) $ (37,655)
Net income (loss) per share $ 0.121 ($0.102)
Diluted income (loss) per share $ 0.119 ($0.102)
Weighted average number of shares
used in computing:
Basic 51,996 46,089
Diluted 53,427 49,695
See accompanying notes to consolidated financial statements
KASTEN CHASE APPLIED RESEARCH LIMITED
Consolidated Statements of Cash Flows
(in thousands of dollars)
For the years ended December 31 2001 2000
Cash provided by (used for):
Operations:
Net income (loss) for the year $ 6,289 $ (4,504)
Add (deduct) items not affecting cash:
Amortization 1,060 596
Loss on disposal of assets 194 82
Foreign exchange gain (268) (60)
Net changes in non-cash working
capital items:
Accounts receivable 328 626
Unbilled work in progress 208 (30)
Inventory (202) (120)
Prepaid expenses 14 61
Accounts payable and accrued
liabilities 473 224
Deferred revenue 253 285
8,349 (2,840)
Financing:
Dividends on preference shares - (182)
Issuance of common shares 1,460 22,138
Share issue costs - (1,700)
1,460 20,256
Investing:
Decrease in other assets - 142
Proceeds from sale of assets 105 -
Purchase of short-term investments (9,422) (12,870)
Acquisition of assets - (2,650)
Additions to capital assets (302) (253)
(9,619) (15,631)
Foreign exchange gain on cash
held in foreign currency 127 20
Increase in cash and cash equivalents 317 1,805
Cash and cash equivalents,
beginning of year 4,580 2,775
Cash and cash equivalents,
end of year $ 4,897 $ 4,580
Supplemental disclosure:
Interest received in cash $ 589 $ 438
See accompanying notes to consolidated financial statements
Kasten Chase Applied Research Limited (the Company) is a high-assurance data security company. The Company has developed products to permit its customers to securely communicate and store confidential, sensitive and classified information. The Company is focused on the government and financial services markets. During 2001, the Company commenced focusing its efforts on its high-assurance data security products. Included in revenues is $11,200 of non-recurring revenues from two licensing arrangements in the Secure Internet Access and Wireless Communications business sectors.
1. Significant accounting policies:
These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in Canada, and include the following significant accounting policies: (a) Basis of consolidation:
The consolidated financial statements include the accounts of
the Company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated. (b) Revenue recognition:
Revenue from the license and sale of products is recognized at
the time of shipment if the installation and inspection
process is straightforward, other obligations are
insignificant and the costs associated with these activities
are reasonably determinable. When installation or inspection
are other than incidental to the sale, or obligations
remaining after delivery are significant, revenue is
recognized only when the goods have been installed and
accepted by the customer and any other significant obligations
have been fulfilled.
Revenues derived from longer term contracts to customize and
develop software or products are recognized on a
percentage-of-completion basis whereby revenue is recognized
at the estimated realizable value of work completed to date.
Unbilled work in progress represents revenue earned on
projects in excess of amounts billed.
Amounts received in advance of revenue recognition are treated
as deferred revenue. (c) Inventory:
Inventory is valued at the lower of cost and net realizable
value. (d) Capital assets:
Capital assets are recorded at cost less related investment
tax credits and accumulated amortization. Amortization is
provided on a straight-line basis over the estimated useful
lives of the assets beginning in the year they are put into
production or acquired as follows:
Development equipment and software 20% and 33% per annum
Office equipment and computers 20% and 33% per annum
Leasehold improvements over the term of the lease
Acquired technology 25% per annum
(e) Foreign currency translation:
The Company's foreign subsidiaries are considered to be
integrated operations and their accounts are translated into
Canadian dollars using the temporal method. Under this method,
monetary items are translated at the rate of exchange at the
balance sheet dates, non-monetary items are translated at
historical exchange rates and revenue and expenses are
translated at the average exchange rate for the years.
Amortization of assets is translated at the same exchange rate
as the assets to which they relate.
The monetary assets and liabilities of the Company which are
denominated in foreign currencies are translated at the rates
of exchange at the balance sheet dates. Revenue and expenses
are translated at rates of exchange prevailing on the
transaction dates. Exchange gains or losses on translation are
included in the determination of net income. (f) Research and development costs:
Research costs, net of related investment tax credits, are
expensed as incurred. Costs related to development of
software, net of related investment tax credits, are expensed
as incurred unless such costs meet the criteria for deferral
and amortization under generally accepted accounting
principles. The Company has not deferred any software
development costs during 2001 or 2000.
Expenditures on development equipment, net of related
investment tax credits, are recorded as capital assets. (g) Stock-based compensation:
The Company has a stock option plan for directors, officers
and employees which is disclosed in note 7(b). All stock
options issued under the plan have an exercise price not less
than the market price of the shares on the date the option is
granted. As a result, no compensation expense is recorded on
the grant of the options under the plan. Consideration paid by
employees on the exercise of the stock options is recorded as
capital stock. (h) Income taxes:
The Company uses the asset and liability method of accounting
for income taxes. Under the asset and liability method, future
tax assets and liabilities are recognized for the future tax
consequences attributable to difference between the financial
statement carrying amounts of existing assets and liabilities
and their respective tax bases. Future tax assets and
liabilities are measured using enacted or substantially
enacted tax rates expected to be recovered or settled. The
effect on future tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the
date of enactment or substantive enactment. (i) Income (loss) per share:
In fiscal 2001, the Company adopted the new provisions of The
Canadian Institute of Chartered Accountants' Handbook, Section
3500, "Earnings per share". Basic income (loss) per share is
computed using the weighted average number of common shares
outstanding during the year. Diluted income per share is
computed using the weighted average number of common and
potential common shares outstanding during the year. Potential
common shares consist of the incremental common shares
issuable upon the exercise of stock options using the treasury
stock method.
Previously, the Company calculated the diluted earnings per
shares using the current imputed earnings method. The change
in accounting policy has been applied retroactively and had no
significant impact on previously reported earnings per share. (j) Use of estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenue and expenses during the
year.
2. Acquisition of assets
On December 29, 2000, the Company acquired certain assets necessary to continue the Palladium Secure Modem business for total cash consideration of $2,650, including acquisition costs of $35. The cash consideration paid has been allocated to the net identifiable assets acquired based on their fair values. The transaction is summarized as follows:
Net identifiable assets acquired at fair values:
Inventory $100
Development equipment 20
Acquired technology 2,530
Fair value of identifiable assets $2,650
Purchase price:
Cash $2,615
Acquisition expenses 35
Purchase price $2,650
3. Cash and cash equivalents and short-term investments:
Cash of $816 (2000 - $480) consists of deposits with major financial institutions. Cash equivalents of $4,081 (2000 - $4,000) consist of money market instruments and short-term bonds with an original maturity of three months or less from the date of acquisition. Short-term investments of $22,292 (2000 - $12,870), include money market instruments and bonds with a maturity of three months or more and are recorded at the lower of cost or market value.
4. Inventory:
2001 2000
Raw materials $638 $236
Work in progress 432 203
Finished goods 326 852
Provision for obsolescence (86) (137)
Total $1,310 $1,154
5. Other assets:
Other assets consists of a non-interest bearing loan to an officer of the Company in the amount of $142 (2000 - $142) to purchase shares of the Company. The loan bears no interest and has no fixed terms of repayment.
6. Capital assets:
Capital assets consist of the following:
December 31, 2001 December 31, 2000
Accumulated Net Accumulated Net
Cost Amor- book Cost Amor- book
tization value tization value
Development equipment
and software $1,141 $1,078 $63 $1,305 $1,074 $231
Office equipment and
computers 1,642 1,351 291 1,731 1,356 375
Leasehold improvements 550 441 109 563 342 221
Acquired technology 2,630 649 1,981 2,530 - 2,530
Total $5,963 $3,519 $2,444 $6,129 $2,772 $3,357
7. Capital stock:
(a) Authorized and issued:
The authorized capital consists of an unlimited number of common,
and during 2000, 2,804,631 preference shares.
December 31,2001 December 31, 2000
Number Amount Number Amount
Common shares:
Balance, beginning
of year 51,464,904 $62,606 38,677,761 $35,743
Issued during the year:
Under stock option
plan 1,145,500 1,460 1,983,962 2,878
Exercise of special
warrants -- 7,998,550 17,560
Conversion of preference
shares - - 2,804,631 6,425
Total 52,610,404 $64,066 51,464,904 $62,606
(b) Stock option plan:
The Company has established a stock option plan under which options to purchase 7,500,000 common shares of the Company may be granted to directors, officers and employees of the Company. The exercise price to acquire shares under the plan is a price not less than the market price of the shares on the date the option is granted. The vesting and exercise periods for options are at the discretion of the Company. The exercise period for options cannot exceed ten years.
December 31,2001 December 31, 2000
Weighted-average Weighted-average
Options exercise Options exercise
price price
Outstanding, beginning of 2,958,783 $2.21 4,353,444 $1.29
year
Granted 429,000 3.71 824,700 4.97
Exercised (1,145,500) 1.27 (1,983,962) 1.45
Expired / Forfeited (140,992) 3.68 (235,399) 1.34
Outstanding, end of year 2,101,291 $2.93 2,958,783 $2.21
Options outstanding Options exercisable
Weighted-
average
Range of Weighted-average remaining Weighted-average
exercise prices Number exercise life Number exercise
price (years) price
$0.59 to 0.79 926,627 $0.63 7.2 342,068 $0.64
1.00 to 1.06 241,875 1.01 5.8 241,875 1.01
1.50 to 2.81 119,231 2.60 4.5 119,231 2.60
3.45 to 12.85 813,558 6.16 8.8 152,806 8.22
$0.59 to 12.85 2,101,291 $2.93 855,980 $2.37
(c) Special warrants:
On February 24, 2000, the Company completed a special warrant
offering, whereby the Company issued 4,000,000 special
warrants at a price of $1.25 per special warrant, raising
gross proceeds of $5,000. Each special warrant allowed the
holder to acquire, for no additional consideration, units
consisting of one common share and one-half of one common
share purchase warrant of the Company, at any time prior to
February 24, 2001. Each whole common share purchase warrant
entitled the holder to purchase one common share of the
Company at a price of $1.75 per share until August 24, 2000.
On May 11, 2000 the special warrants were converted into
4,000,000 common shares and 2,000,000 common share purchase
warrants. During 2000, 1,915,550 of the common share purchase
warrants were exercised for proceeds of $3,352. The remaining
84,450 common share purchase warrants expired, unexercised
during 2000.
In connection with the above offering, the Company granted the
underwriter 400,000 broker warrants, exchangeable, at no cost
for compensation options of the Company, entitling the holder
to purchase, at any time prior to February 24, 2002, one
common share and one-half of a purchase warrant at a price of
$1.37 per compensation option. Each whole common share
purchase warrant entitled the underwriter to purchase one
common share at a price of $1.75 per share. On May 18, 2000
the broker warrants were exchanged for compensation options.
All of the compensation options and common share purchase
warrants were exercised during 2000 for proceeds of $898.
On March 15, 2000, the Company completed a special warrant
offering, whereby the Company issued 1,483,000 special
warrants at a price of $6.75 per special warrant, raising
gross proceeds of $10,010. Each special warrant allowed the
holder to acquire, for no additional consideration, units
consisting of one common share and one-half of one common
share purchase warrant of the Company at any time prior to
March 15, 2001. Each whole common share purchase warrant
entitled the holder to purchase one common share of the
Company at a price of $7.75 per share until September 17,
2001. On May 11, 2000 the special warrants were converted into
1,483,000 common shares and 714,500 common share purchase
warrants. The common share purchase warrants expired,
unexercised, on September 17, 2001.
In connection with the above offering, the Company granted the
underwriter 148,300 broker warrants, exchangeable, at no cost
for compensation options of the Company, entitling the holder
to purchase, at any time prior to March 15, 2002, one common
share and one-half of a common share purchase warrant at a
price of $6.90 per compensation option. Each whole common
share purchase warrant will entitle the underwriter to
purchase one common share at a price of $7.75 per share until
September 17, 2001. On May 18, 2000 the broker warrants were
exchanged for compensation options. At December 31, 2001, all
the compensation options remain outstanding.
The Company incurred share issue costs of $1,700 in connection
with the above offerings in 2000. (d) Preference shares:
The non-voting convertible redeemable preference shares had a
fixed cumulative preferential dividend of $0.1355 per share
per annum. The preference shares were convertible on a
one-for-one basis into common shares at the option of the
holder. The Company could redeem the preference shares at any
time for a cash payment of $2.23 per share provided the 20 day
weighted average trading price of the common shares of the
Company was not less than $4.25 per share. The preference
shares had to be redeemed on or before July 24, 2001 for a
cash payment of $2.23 per share or the equivalent value of
common shares of the Company.
On June 23, 2000, the preference shares were converted into
common shares of the Company on a one-for-one basis for no
additional proceeds.
8. Income taxes:
The provision for income taxes differs from the amount computed by applying the statutory income tax rate to net income (loss) before income taxes. The sources and tax effects of the differences are as follows:
2001 2000
Basic rate applied to net income (loss)
before provision for income taxes $ 2,649 $ (1,979)
Adjustments resulting from:
Research expenses not deducted for tax 271 276
Foreign subsidiary losses affected
at lower rates 13 111
Financing fee deducted for tax (285) (316)
Other 482 224
3,130 (1,684)
Non-recognition of tax benefit of
losses 432 1,684
Recognition of tax benefit of losses (3,562) -
Total income tax provision $ - $ -
Significant components of the Company's future tax assets are as
follows:
2001 2000
Undeducted research and
development expenses $ 2,561 $ 2,805
Financing fees 358 691
Capital assets 863 810
Net operating losses 4,473 8,012
Other 165 288
Future tax asset 8,420 12,606
Valuation allowance (8,420) (12,606)
Total $ - $ -
In assessing the realizability of future tax assets, management considers whether it is more likely than not that some portion or all of the future tax benefits will not be realized. The ultimate realization of future tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers projected future taxable income, uncertainties related to the industry in which the Company operates, and tax planning strategies in making this assessment. Due to the uncertainties related to the industry in which the Company operates, the tax benefit of the Company's future tax assets have been completely offset by a valuation allowance. The Company has non-capital losses of approximately $7,000 for Canadian tax purposes expiring over the period 2006 to 2007. In addition, the Company has approximately $4,000 of losses for United States tax purposes which expire over the period 2019 to 2021.
9. Fair value of financial instruments:
Financial instruments that potentially expose the Company to
concentrations of credit risk consist primarily of cash and
cash equivalents, short-term investments, and accounts
receivable.
The Company invests excess cash and cash equivalents and
short-term investments in high grade guaranteed investment
certificates and fixed income securities with governmental
agencies and large Canadian and US corporations. Short-term
investments have maturities of less than one year. Due to the
nature of these investments, the carrying value of these
investments approximates the fair value.
The reported values of financial instruments which consist of
cash and cash equivalents, short-term investments, accounts
receivable and accounts payable and accrued liabilities,
approximate their fair values due to the near term maturity of
these instruments.
The Company performs periodic credit evaluations of the
financial condition of its customers. Allowances are
maintained for potential credit losses consistent with the
credit risk of specific customers.
10. Segmented information:
The Company designs, develops and manufactures data
communications technology. The Company's products and services
include network communication devices, remote access servers,
wireless modems, radio frequency identification systems and
communications management systems. Management reviews the
Company's performance primarily by revenues in three business
sectors.
a) Revenues from business sectors were as follows:
2001 2000
Secure Remote Access $ 7,729 $ 5,290
Secure Internet Access 8,689 2,223
Wireless Communications 7,284 7,707
Total $ 23,702 $ 15,220
b) The Company operates from Canada and also has a sales and
service operation in the United States. Revenues and assets by
geographic location of offices were as follows:
December 31, December 31,
2001 2000
Revenues Capital Revenues Capital
assets assets
Canada $ 16,160 $ 2,381 $ 10,003 $ 3,329
United States 7,542 63 5,217 28
Total $ 23,702 $ 2,444 $ 15,220 $ 3,357
c) Revenues attributed to regions based on location of customer
were as follows:
2001 2000
Canada $ 10,264 $ 3,902
United States 8,140 6,681
Europe 5,298 4,637
Total $ 23,702 $ 15,220
The Company's three largest customers accounted for approximately 78% of revenues in 2001 (2000 - 61% from three different customers) and approximately 78% of accounts receivable at December 31, 2001 (2000 - 57%).
11. Commitments:
The Company is committed to the following future minimum lease
payments for the rental of premises and other operating leases
for the years ending December 31 as follows:
2002 $ 958
2003 300
2004 128
2005 124
Thereafter 12
Total $ 1,522
TEL: (905) 238-6900
John Carlesso, Investor Relations, ext. 3315
Kasten Chase EMAIL: j.carlesso@kastenchase.com
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