AUDITED COMBINED FINANCIAL STATEMENT OF LACERTE
Published on July 6, 1998
EXHIBIT 99.01
LACERTE SOFTWARE CORPORATION AND LACERTE EDUCATIONAL SERVICES CORPORATION
COMBINED FINANCIAL STATEMENTS
MARCH 31, 1998, 1997 AND 1996
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Lacerte Software Corporation and Lacerte Educational
Services Corporation
In our opinion, the accompanying combined balance sheets and the related
combined statements of income, of changes in stockholders' equity, and of cash
flows present fairly, in all material respects, the combined financial position
of Lacerte Software Corporation and Lacerte Educational Services Corporation
(together the "Company") at March 31, 1998 and 1997, and the combined results of
their operations and their cash flows for each of the three years in the period
ended March 31, 1998, in conformity with generally accepted accounting
principles. 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 of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Dallas, Texas
May 15, 1998
LACERTE SOFTWARE CORPORATION AND
LACERTE EDUCATIONAL SERVICES CORPORATION
COMBINED BALANCE SHEETS
MARCH 31, 1998 AND 1997
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The accompanying notes are an integral
part of these combined financial statements.
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LACERTE SOFTWARE CORPORATION and
LACERTE EDUCATIONAL SERVICES CORPORATION
COMBINED STATEMENTS OF INCOME
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
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The accompanying notes are an integral
part of these combined financial statements.
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LACERTE SOFTWARE CORPORATION and
LACERTE EDUCATIONAL SERVICES CORPORATION
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
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The accompanying notes are an integral
part of these combined financial statements.
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LACERTE SOFTWARE CORPORATION and
LACERTE EDUCATIONAL SERVICES CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
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The accompanying notes are an integral part of these
combined financial statements.
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LACERTE SOFTWARE CORPORATION AND
LACERTE EDUCATIONAL SERVICES CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
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1. ORGANIZATION AND BASIS OF FINANCIAL STATEMENT PRESENTATION
Lacerte Software Corporation ("Lacerte Software") was incorporated in the
State of California in December 1978. In July 1996, Lacerte Software
completed a reorganization resulting in the merger of the California
corporation into a newly created Delaware corporation of the same name. In
connection with the 1996 reorganization, the California corporation was
dissolved. Lacerte Software develops, markets and sells computer software
for the professional tax preparation market.
In April 1996, the stockholders of Lacerte Software formed Lacerte
Educational Services Corporation ("Lacerte Educational"), a Delaware
corporation, to provide seminars and educational services to the
professional tax preparer market. The stockholders of Lacerte Educational
and Lacerte Software are similar such that these entities are companies
under common control.
The accompanying combined financial statements present the combined
balances of Lacerte Software and Lacerte Educational (together the
"Company") for the period after the formation of Lacerte Educational
Services Corporation. All intercompany accounts and transactions have been
eliminated. Prior to the formation of Lacerte Educational, the financial
statements represent the balances and activities of Lacerte Software on a
stand alone basis.
Effective May 1, 1996, Lacerte Software and Lacerte Educational entered
into a Service and Management Agreement. Lacerte Software agreed to
provide Lacerte Educational with support services and Lacerte Educational
agreed to provide Lacerte Software with sales leads for Lacerte Software's
products and services. Lacerte Educational made payments to Lacerte
Software of $300,000 and $210,082 for services provided during fiscal
years ending March 31, 1998 and 1997, respectively. Unpaid balances accrue
interest at 7%. Unpaid balances were $180,237 and $165,937 at March 31,
1998 and 1997, respectively. Such intercompany balances and transactions
have been eliminated in these combined financial statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of these combined financial statements in conformity with
generally accepted accounting principles requires management of the
Company 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 these financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
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LACERTE SOFTWARE CORPORATION AND
LACERTE EDUCATIONAL SERVICES CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
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REVENUE RECOGNITION
In-house
In-house software includes federal and state income tax forms for the tax
preparer market. In-house revenue is generally recognized at the time of
shipment of the Company's software, as no significant vendor obligations
exist and collections of accounts receivable are probable. Advance
payments are recorded as deferred revenue until the related products are
shipped. The Company accrues the cost of providing vendor obligations at
the time of shipment. Such costs are included in accrued post-contract
customer support.
Remote Entry Processing
Remote entry processing has a transaction based fee structure whereby the
user is charged a fee for each tax return processed. Revenue from remote
entry processing is recognized upon delivery of an electronic encryption
key to unlock the Company's software, as no significant future vendor
obligations exist and collections of accounts receivable are probable.
Advance deposits are recorded as deferred revenue until the Company's
software is shipped. Unused deposits are recorded as revenue upon shipment
of the subsequent year's software.
Training revenue
Training revenue is recognized as the services are performed.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are incurred for the development of new
products or bringing about significant improvements to existing products.
Statement of Financial Accounting Standard No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed" (SFAS
No. 86), requires the capitalization of certain software development costs
once technological feasibility is established. The capitalized cost is
then amortized on a straight-line basis over the estimated product life,
or based on the ratio of current revenues to total projected product
revenues, whichever is greater. Technological feasibility does not occur
for the Company's products until testing of a working model has been
performed at which time the products are substantially ready for release
to the customer, therefore, no costs have been capitalized with respect to
product development.
INTANGIBLE ASSETS
The cost of identified intangibles is generally amortized on a
straight-line basis over periods ranging from one to seven years. The
carrying value of intangible assets is reviewed by management on a
periodic basis for indications of a potential impairment as required by
Statement of Financial Accounting Standard No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" ("SFAS No. 121"). To date, no impairment has been recorded for the
Company's intangible assets.
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LACERTE SOFTWARE CORPORATION AND
LACERTE EDUCATIONAL SERVICES CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
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CASH AND EQUIVALENTS
Cash and cash equivalents includes all highly liquid investment
instruments with an original maturity of three months or less.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is recorded using the straight-line method over the estimated
useful lives of the assets, ranging from three to twenty years. Leasehold
improvements are amortized over the shorter of the remaining term of the
lease or the estimated life of the asset. Expenditures for repairs and
maintenance are charged to expense as incurred.
FAIR VALUE OF FINANCIAL INSTRUMENTS
As of March 31, 1998 and 1997, the Company is not a party to any
off-balance sheet financial instruments. All financial instruments
recorded at March 31, 1998 and 1997 are either of very short maturity or
carry interest rates which approximate market rates. As such, the fair
value of financial instruments approximates their carrying value as of
March 31, 1998 and 1997.
INCOME TAXES
The Company, with the consent of its stockholders, has elected under the
Internal Revenue Code to be an "S" corporation. In lieu of federal
corporate income taxes, the stockholders of an "S" corporation are taxed
on their proportionate shares of the Company's taxable income. Therefore,
no provision or liability for federal income taxes has been included in
these financial statements, as the tax effects of the Company's activities
accrue to the individual stockholders.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expense for the
years ended March 31, 1998, 1997 and 1996 was approximately $390,585,
$635,995 and $377,779, respectively.
NEW ACCOUNTING PRONOUNCEMENTS
On October 27, 1997, the American Institute of Certified Public
Accountants ("AICPA") issued Statement of Position 97-2, "Software Revenue
Recognition" ("SoP 97-2"). This statement, which supercedes Statement of
Position 91-1, provides guidance for recognizing revenue on software
transactions. SoP 97-2 is effective for transactions entered into during
fiscal years beginning after December 31, 1997. The Company will adopt SoP
97-2 in its fiscal year ending March 31, 1999 and is currently assessing
the impact of SoP 97-2 on its revenue recognition policy.
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LACERTE SOFTWARE CORPORATION AND
LACERTE EDUCATIONAL SERVICES CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
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The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 129, "Disclosure of Information about Capital
Structure". The Company adopted the statement effective April 1, 1997. The
adoption did not have a material effect on the Company's combined
financial statements.
3. INTANGIBLE ASSETS
Components of intangible assets are as follows at March 31, 1998 and 1997:
Amortization expense for intangible assets totaled $535,590, $576,840 and
$743,791 for the years ended March 31, 1998, 1997 and 1996, respectively.
In conjunction with the acquisition of the above intangible assets, the
Company issued certain notes payable, some of which were personally
guaranteed by the Company's President and Chief Executive Officer.
Principal payments on notes payable totaled $802,403 and $882,238 for the
years ended March 31, 1997 and 1996, respectively. Related interest
expense was $5,973 and $50,706 for the years ended March 31, 1997 and
1996, respectively.
4. NOTES RECEIVABLE FROM STOCKHOLDERS
During the years ended March 31, 1998, 1997, and 1996, the Company loaned
money to certain stockholders totaling $4,025,000, $1,690,000 and $84,000.
These loans, in the form of notes receivable, are unsecured. Two of the
Company's principal stockholders also have unsecured lines of credit with
the Company. These amounts are due upon demand by the Company. Draws on
these lines of credit totaled $303,519, $229,060 and $155,483 for the
years ended March 31, 1998, 1997 and 1996, respectively. The above notes
receivable and lines of credit are interest bearing at rates ranging from
5% to 7.5%. The Company recognized interest income related to these notes
receivable and lines of credit totaling $224,390, $296,266 and $313,927,
for the years ended March 31, 1998, 1997 and 1996, respectively. Both the
notes receivable and the outstanding borrowings on the lines of credit are
included in notes receivable from stockholders.
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LACERTE SOFTWARE CORPORATION AND
LACERTE EDUCATIONAL SERVICES CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
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5. LINE OF CREDIT
In August 1995, the Company entered into an unsecured line of credit
agreement with a bank for an amount up to $2,000,000. Outstanding balances
are payable upon demand with interest to be paid monthly at the bank's
prime rate minus 2% (6.5% at March 31, 1997). At March 31, 1997, the
Company had an outstanding balance of $1,000,000 under this facility.
Available balances under this agreement were $2,000,000 and $1,000,000 at
March 31, 1998 and 1997, respectively. There are no commitment fees
related to this credit facility.
The line of credit is guaranteed by an unsecured personal guarantee of the
Company's President and Chief Executive Officer, supported by an
assignment of a life insurance policy in the amount of $1,000,000. The
premiums for this policy are paid by the Company. The credit facility
contains certain restrictive covenants.
6. PROPERTY AND EQUIPMENT
Property and equipment at March 31, 1998 and 1997 is comprised of the
following:
Depreciation expense totaled $960,421, $1,176,962 and $950,559 for the
years ended March 31, 1998, 1997 and 1996, respectively.
7. COMMITMENTS AND CONTINGENCIES
The Company leases its office facilities under a non-cancelable operating
lease, which expires October 31, 2001. In addition to base rent, the
Company is obligated to pay its pro-rata share of operating expenses.
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LACERTE SOFTWARE CORPORATION AND
LACERTE EDUCATIONAL SERVICES CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
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Future minimum lease commitments under the operating lease as of March 31,
1998 are as follows:
Rent expense for the years ended March 31, 1998, 1997 and 1996 was
approximately $1,785,114, $1,797,856 and $1,738,580, respectively.
The company entered into a three year contract, which extends through
October 31, 2000, whereby it has committed to purchase at least $900,000
per year of long distance service with a carrier.
8. BENEFIT PLANS
Management Incentive Program
The Company maintains a management incentive program for certain of its
full-time employees. Amounts provided are determined pursuant to criteria
established by the President and Chief Executive Officer. Compensation
expense related to this program was approximately $6,455,295, $5,667,673
and $4,436,730 for the years ended March 31, 1998, 1997 and 1996,
respectively.
401(k) Retirement Savings Plan
The Company maintains a 401(k) retirement savings plan for its full-time
employees. Each participant may elect to contribute from 1% to 14% of his
or her annual salary to the plan, subject to IRS limitations. The Company
matches 50% of employee contributions. Matching contributions were
approximately $649,435, $616,321, and $506,977, respectively, for the
years ended March 31, 1998, 1997, and 1996.
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