EX-99.2 2 a66066a1ex99-2.txt EXHIBIT 99.2 1 EXHIBIT 99.2 Consolidated Financial Statements of FASTLANE TECHNOLOGIES INCORPORATED December 31, 1998 and 1999 (Canadian Dollars) 2 AUDITORS' REPORT To the Shareholders of FastLane Technologies Incorporated We have audited the consolidated balance sheets of FastLane Technologies Incorporated as at December 31, 1998 and 1999 and the consolidated statements of loss and deficit and of cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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 December 31, 1998 and 1999 and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in Canada which, except as disclosed in Note 16 to the consolidated financial statements, also conform in all material respects with United States generally accepted accounting principles. Ottawa, Ontario (signed) Deloitte & Touche LLP (Canada) January 28, 2000 except as to Chartered Accountants Notes 16 and 17, which are as of September 29 3 FASTLANE TECHNOLOGIES INCORPORATED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1999 -------------------------------------------------------------------------------- PAGE ---- Consolidated Statements of Loss and Deficit 1 Consolidated Cash Flow Statements 2 Consolidated Balance Sheets 3 Notes to the Consolidated Financial Statements 4 - 16 4 FASTLANE TECHNOLOGIES INCORPORATED CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT YEARS ENDED DECEMBER 31 --------------------------------------------------------------------------------
1998 1999 ------------ ------------ Revenues License revenue $ 3,769,225 $ 6,461,618 Services revenue 752,174 1,674,682 ------------ ------------ Total revenue 4,521,399 8,136,300 Cost of sales 709,975 590,139 ------------ ------------ 3,811,424 7,546,161 ------------ ------------ Expenses Research and development (Note 6) 2,059,091 4,385,604 Sales and marketing 6,017,575 11,996,671 Finance and administration 2,964,006 2,076,511 ------------ ------------ 11,040,672 18,458,786 ------------ ------------ Less: Government funding (Note 5) (661,759) (599,590) Other income (86,001) (141,495) Research and development funding (Note 6) (719,309) -- ------------ ------------ (1,467,069) (741,085) ------------ ------------ 9,573,603 17,717,701 ------------ ------------ NET LOSS (5,762,179) (10,171,540) DEFICIT, BEGINNING OF YEAR (390,162) (6,152,341) ------------ ------------ DEFICIT, END OF YEAR $ (6,152,341) $(16,323,881) ============ ============
See accompanying notes to the financial statements 1 5 FASTLANE TECHNOLOGIES INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31 --------------------------------------------------------------------------------
1998 1999 ------------ ------------ NET INFLOW (OUTFLOW) OF CASH RELATED TO THE FOLLOWING ACTIVITIES: OPERATING Net loss $ (5,762,179) $(10,171,540) Item not affecting cash Amortization 359,701 894,745 ------------ ------------ (5,402,478) (9,276,795) Changes in non-cash working capital items (Note 13) (179,313) (922,352) ------------ ------------ (5,581,791) (10,199,147) ------------ ------------ INVESTING Acquisition of capital assets, net of investment tax credits (654,576) (991,975) ------------ ------------ FINANCING Issuance of share capital, net of issuance costs of $28,374 (1998 - $27,064) 4,104,031 15,471,088 Capital lease repayments (278,372) (463,468) Increase in government funding 2,647,035 2,398,352 ------------ ------------ 6,472,694 17,405,972 ------------ ------------ NET CASH INFLOW 236,327 6,214,850 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,247,961 1,484,288 ------------ ------------ CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,484,288 $ 7,699,138 ============ ============
See accompanying notes to the financial statements 2 6 FASTLANE TECHNOLOGIES INCORPORATED CONSOLIDATED BALANCE SHEETS AS AT DECEMBER 31 --------------------------------------------------------------------------------
1998 1999 ------------ ------------ CURRENT ASSETS Cash and cash equivalents $ 1,484,288 $ 7,699,138 Accounts receivable (Note 3) 2,279,431 3,577,925 Due from related parties (Note 4) 779,846 622,529 Shareholder loans receivable (Note 7) 71,556 69,857 Refundable investment tax credits (Note 8) 38,779 38,779 Prepaids and other 240,155 493,804 ------------ ------------ 4,894,055 12,502,032 CAPITAL ASSETS (Note 9) 2,013,736 2,110,966 ------------ ------------ $ 6,907,791 $ 14,612,998 ============ ============ CURRENT LIABILITIES Accounts payable and accrued liabilities $ 2,064,668 $ 2,754,372 Due to related party (Note 6) 894,706 -- Deferred revenue 403,123 1,078,900 Current portion of obligations under capital lease (Note 10) 463,236 463,537 Current portion of government funding (Note 5) -- 1,900,000 ------------ ------------ 3,825,733 6,196,809 OBLIGATIONS UNDER CAPITAL LEASE (Note 10) 761,085 297,316 GOVERNMENT FUNDING (Note 5) 3,531,816 4,030,168 ------------ ------------ 8,118,634 10,524,293 ------------ ------------ SHAREHOLDERS' EQUITY Share capital (Note 11) 4,941,498 20,412,586 Deficit (6,152,341) (16,323,881) ------------ ------------ (1,210,843) 4,088,705 ------------ ------------ $ 6,907,791 $ 14,612,998 ============ ============
See accompanying notes to the financial statements 3 7 FASTLANE TECHNOLOGIES INCORPORATED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1999 -------------------------------------------------------------------------------- 1. DESCRIPTION OF BUSINESS The Company was incorporated in March 1993 and its principal business activity consists of software development and sales. 2. SIGNIFICANT ACCOUNTING POLICIES The financial statements have been prepared in Canadian dollars in accordance with accounting principles generally accepted in Canada and include the following significant accounting policies: Basis of consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Capital assets Capital assets are recorded at cost and amortized using the declining-balance method at the following rates: Furniture 20% Computer equipment 30% Office equipment 30% Telecommunications equipment 20% Leasehold improvements 20% Software 100% Revenue recognition Revenue from software license sales is recorded upon shipment. Revenue derived from training and professional services is recorded as the services are performed. Maintenance and support revenue is recorded as deferred revenue and recognized ratably in earnings over the term of the contract. Research and development costs Research costs are expensed as incurred. Development costs are deferred and amortized when the criteria for deferral under generally accepted accounting principles are met, or otherwise, are expensed as incurred. To date, no development costs have been deferred. 4 8 FASTLANE TECHNOLOGIES INCORPORATED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1999 -------------------------------------------------------------------------------- 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Cash and cash equivalents Cash and cash equivalents include investments that are liquid and have original terms to maturity that are three months or less. Foreign currency translation The consolidated financial statements are prepared using Canadian dollars. All operations whose principal economic activities are undertaken in currencies other than Canadian dollars have been determined to be self-sustaining. Monetary assets and liabilities denominated in foreign currencies are translated at the rate of exchange in effect at year-end. Foreign currency transactions included in earnings are translated at the rates in effect on the transaction date. Foreign exchange gains and losses are reflected in the statement of earnings. Foreign exchange risk arises because of fluctuations in exchange rates. The Company conducts a significant portion of its business activities in foreign currencies, primarily United States dollars. The assets, liabilities, revenue and expenses that are denominated in foreign currencies will be affected by changes in the exchange rate between the Canadian dollar and these foreign currencies. Stock option plans The Company has a stock option plan as described in Note 12. No compensation expense is recognized for these plans when stock options are issued to employees. Any consideration paid by employees on exercise of stock options or purchase of stock is credited to share capital. If stock or stock options are repurchased for employees, the excess of the consideration paid over the carrying amount of the stock or stock option canceled is charged to retained earnings. Statement of cash flows During the year ended December 31, 1999, the Company adopted the Canadian Institute of Chartered Accountants new accounting recommendations for cash flow statements. These recommendations have been applied retroactively to all years reflected and have resulted in the reclassification of capital lease financing on the statement of cash flows. 5 9 FASTLANE TECHNOLOGIES INCORPORATED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1999 -------------------------------------------------------------------------------- 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Use of accounting estimates The preparation of financial statements in conformity with generally accepted accounting principles requires the Company's management to make estimates 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 presented. Actual results could differ from the estimates made by management. 3. ACCOUNTS RECEIVABLE Accounts receivable includes $190,948 of sales taxes receivable (1998 - $1,052,967). The Company is subject to normal credit risk with respect to its receivables. This risk is mitigated by the diversity of the Company's customer base and credit approval and monitoring procedures implemented by the Company. 4. TRANSACTIONS WITH RELATED PARTIES The Company has entered into funding arrangements with related parties under which $622,529 (1998 - $779,846) of government funding through the related party has been accrued as due from related parties. The Company also leases premises from a company which is a shareholder and is controlled by the Chairman of the Board, under terms and conditions reflecting market conditions at the time of the lease. During the fiscal year ended December 31, 1999 the Company paid $217,000 (1998 - $163,000) in rent for the leased premises. 6 10 FASTLANE TECHNOLOGIES INCORPORATED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1999 -------------------------------------------------------------------------------- 5. GOVERNMENT FUNDING The Company entered into a funding agreement with Newbridge Networks Corporation ("Newbridge"), a significant shareholder of the Company which also has the same Chairman of the Board of Directors as the Company. This agreement provides the Company with access to funding from the Province of Nova Scotia which is presently available to Newbridge. The funding is for 50% of research and development expenses and 80% of the money received is repayable by way of royalty commencing in the year 2000. The remaining 20% is a grant which is not repayable. As security for its future payment obligations, the Company has provided a floating charge debenture in the amount of $10,000,000 in favour of Newbridge. The Company received $2,375,413 during 1999 (1998 - $2,528,948) and had $622,529 (1998 - $779,846) receivable at year-end in respect of research and development expenses incurred in the year. Of this total funding, 80% or $2,398,352 (1998 - $2,647,035) is recorded as long-term debt, and 20% or $ 599,590 (1998 - $661,759) is recorded in earnings. 6. RESEARCH AND DEVELOPMENT FUNDING During 1997, the Company entered into a contract with a company which is a shareholder and is controlled by the Chairman of the Board under which $2,000,000 of research and development activities relating to specific projects would be performed by the Company no later than June 1999. As at December 31, 1998, the Company had received the full $2,000,000 in contract fees for research and development work completed. The Company was granted an exclusive, worldwide, perpetual right and license to market, sell and/or sub-license products based on the technology developed under the development agreement. In turn, the Company granted the shareholder, as security, a non-exclusive, worldwide, perpetual and fully-paid right, privilege and license to market, sell and/or sub-license any enhancements to the above-noted products developed at the Company. As part of a related agreement, the Company had the option to purchase all of the technology developed in exchange for the issuance of 1,988,235 common shares. In August 1998, the Company exercised this option and issued 1,988,235 common shares to the shareholder in exchange for all rights to the technology developed. This transaction was recorded in the financial statements of the Company as an increase of share capital by the carrying amount of $1. The Company had a balance of $894,706 due to related party remaining on the balance sheet as at December 31, 1998 arising from this transaction representing the sales taxes owing on the transfer of shares for technology. 7 11 FASTLANE TECHNOLOGIES INCORPORATED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1999 -------------------------------------------------------------------------------- 7. SHAREHOLDER LOANS RECEIVABLE During the year, pursuant to the Company's Employee Share Purchase Plan, the Company loaned amounts to employees to acquire common shares of the Company. These loans are non-interest bearing and are repayable in biweekly installments ending in August, 2000. 8. INVESTMENT TAX CREDITS AND INCOME TAXES The Company claims research and development deductions and related investment tax credits for tax purposes based on management's interpretation of the applicable legislation in the Income Tax Act of Canada. These claims are subject to audit by Revenue Canada and any adjustments that result could affect investment tax credits recorded in the financial statements. In the opinion of management, the treatment of research and development for income tax purposes is appropriate. Investment tax credits In 1998, the Company received and recorded as a reduction of capital assets $50,167 of investment tax credits in respect of research and development capital expenditures incurred in 1997. The $38,779 of refundable investment tax credits recorded as receivable at year-end relate to expenditures incurred in 1995 and 1996. No investment tax credits have been recorded in respect of current or capital research and development expenditures incurred in 1999 or 1998. Research and development expenses As at December 31, 1999, the Company has research and development costs of approximately $2,000,000 (1998 - $1,000,000) which have not been deducted for income tax purposes, and which are available indefinitely to reduce future years' Canadian Federal and Provincial taxable income. No recognition has been given in these financial statements to the potential tax benefits associated with the balance of these unused research and development costs. The Company also has investment tax credit carryforwards of approximately $38,000 (1998 - $38,000) expiring in 2007. Tax loss carryforwards The Corporation has tax loss carryforwards totaling approximately $14,500,000 (1998 - $5,500,000) expiring in years 2003 to 2006 to reduce future years' income for Federal and Provincial tax purposes, the benefit of which has not been recorded in these financial statements. 8 12 FASTLANE TECHNOLOGIES INCORPORATED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1999 -------------------------------------------------------------------------------- 9. CAPITAL ASSETS
1998 1999 ---------------------------------------------------------------------- Net Book Accumulated Net Book Value Cost Amortization Value ---------- ---------- ------------ ---------- Furniture $ 340,935 $ 455,891 $ 125,509 $ 330,382 Computer equipment 1,145,466 2,015,320 816,634 1,198,686 Office equipment 53,734 105,710 39,799 65,911 Telecommunications equipment 97,728 146,350 49,521 96,829 Leasehold improvements 216,054 272,478 139,150 133,328 Software 159,819 529,333 243,503 285,830 ---------- ---------- ---------- ---------- $2,013,736 $3,525,082 $1,414,116 $2,110,966 ========== ========== ========== ==========
Capital assets are recorded net of accumulated investment tax credits of $Nil (1998 - $50,167). The total cost of assets under capital lease is $1,575,009 (1998 - $1,575,009). 10. OBLIGATIONS UNDER CAPITAL LEASE The Company entered into capital leases for capital assets in prior years at imputed interest rates ranging from 9% to 10%. These leases mature in years 2000 through 2002 with minimum lease repayments as follows: 2000 $515,402 2001 305,875 2002 4,745 -------- 826,022 Less imputed interest (65,169) -------- Total capital lease obligations 760,853 Less current portion 463,537 -------- Long-term portion $297,316 ======== 9 13 FASTLANE TECHNOLOGIES INCORPORATED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1999 -------------------------------------------------------------------------------- 11. SHARE CAPITAL Authorized Unlimited number of Class A voting and Class B non-voting common shares Class A shares are convertible at any time Class B shares on a 1:1 basis and Class B shares are mandatory convertible into Class A shares on a 1:1 basis in the event of a public offering of shares. The Class B shares are also optionally convertible if certain events occur including a formal take-over bid, acquisitions of control or voluntary or winding up. Unlimited number of non-voting preferred shares issuable in series Issued and outstanding
1998 1999 ------------------------------ -------------------------------- Shares Amount Shares Amount ---------- ----------- ---------- ----------- Class A Outstanding, beginning of year 5,516,667 $ 739,717 8,609,640 $ 3,977,458 Issued for cash consideration, net of issue costs of $28,374 (1998 - $27,064) 1,155,938 3,240,750 3,881,583 15,133,588 Issued in exchange for technology rights (Note 6) 1,988,235 1 -- -- Converted to Class B (50,000) (10) -- -- Purchased for cancellation (1,200) (3,000) -- -- ---------- ----------- ---------- ----------- Outstanding end of year 8,609,640 3,977,458 12,491,223 19,111,046 ---------- ----------- ---------- ----------- Class B Outstanding, beginning of year 1,150,000 97,750 1,488,760 964,040 Converted from Class A 50,000 10 -- -- Issued for cash consideration 288,760 866,280 87,500 337,500 ---------- ----------- ---------- ----------- Outstanding, end of year 1,488,760 964,040 1,576,260 1,301,540 ---------- ----------- ---------- ----------- Total share capital 10,098,400 $ 4,941,498 14,067,483 $20,412,586 ========== =========== ========== ===========
Under an Amended and Restated Shareholders Agreement dated August 19, 1998 subject to a Counterpart Agreement dated August 25, 1999, certain parties have the right to acquire sufficient common shares, at a price equal to the then current market value of the common shares, to maintain the level of their proportionate ownership of the capital stock of the Company. This right is exercisable should the Company issue any additional capital stock of any class or should the exercise of stock options result in the dilution of its ownership level. 10 14 FASTLANE TECHNOLOGIES INCORPORATED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1999 -------------------------------------------------------------------------------- 12. STOCK OPTION PLAN The Company has a stock option plan under which it can grant options to employees, directors and consultants. The board of directors periodically establishes a pool of available options for the purposes of the plan. As at December 31, 1999 the pool of options available for grant was 2,250,000 options for shares of common stock. Unless otherwise determined by the compensation committee of the board of directors at the time of granting an option, 25% of the option shares granted are exercisable on each of the first four anniversary dates with the option expiring on the fifth anniversary of the date of the grant. A summary of the status of the Company's stock option plan as of December 31, 1998 and 1999, and changes during the years ending on those dates is presented below:
1998 1999 ------------------------------ ------------------------------ Weighted WEIGHTED Number of Average NUMBER OF AVERAGE Options Exercise Price OPTIONS EXERCISE PRICE --------- -------------- --------- -------------- Outstanding at beginning of the year 422,732 $ 1.00 879,507 $ 1.71 Granted 487,750 $ 2.32 1,350,175 $ 3.75 Exercised -- -- (3,900) $ 1.27 Forfeited (30,975) $ 1.55 (69,725) $ 2.86 ------- ------ --------- ------ Outstanding at end of year 879,507 $ 1.71 2,156,057 $ 2.89 ======= ====== ========= ====== Options exercisable at year-end 137,684 360,062 ======= =========
Options Outstanding Options Exercisable -------------------------------------------------------------------------- ------------------------- Weighted Average Weighted Weighted Range of Remaining Average Average Exercise Number Contractual Exercise Number Exercise Prices Outstanding Life (Years) Price Exercisable Price ------------------- ----------- ------------ -------- ------------ -------- $1.00 560,682 2.6 $1.00 275,424 $1.00 2.50 180,100 3.5 2.50 45,025 2.50 3.00 378,400 4.0 3.00 39,613 3.00 3.75 191,300 4.5 3.75 -- -- 4.00 845,575 4.9 4.00 -- -- ----------- --------- --- ----- ------- ----- $1.00-$4.00 2,156,057 4.0 $2.89 360,062 $1.41 =========== ========= === ===== ======= =====
11 15 FASTLANE TECHNOLOGIES INCORPORATED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1999 -------------------------------------------------------------------------------- 13. CASH FLOW INFORMATION
1998 1999 ----------- ----------- Cash and cash equivalents are comprised of: Cash $ 680,303 $ 196,710 Cash equivalents 803,985 7,502,428 ----------- ----------- $ 1,484,288 $ 7,699,138 =========== =========== Changes in non-cash working capital items is comprised of: Accounts receivable $(2,002,403) $(1,298,494) Due from related parties (78,190) 157,317 Shareholder loans receivable (25,346) 1,699 Refundable investment tax credits 100,939 -- Prepaid and other (191,425) (253,649) Accounts payable and accrued liabilities 1,408,587 689,704 Due to related party 894,706 (894,706) Deferred revenue 213,819 675,777 Advance from related party (500,000) -- ----------- ----------- $ (179,313) $ (922,352) =========== =========== Other: Interest received $ 79,080 $ 202,507 =========== =========== Interest paid $ 61,488 $ 121,487 =========== ===========
During 1998, capital assets were acquired at an aggregate cost of $1,757,894 of which $1,103,318 were acquired by means of capital lease. No assets were acquired by means of capital lease in 1999. 12 16 FASTLANE TECHNOLOGIES INCORPORATED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1999 -------------------------------------------------------------------------------- 14. COMMITMENTS The Company has committed to lease facilities in Halifax, Nova Scotia for a fixed term expiring in 2003. Additionally, facilities in Kanata, Ontario are leased at fair market value from a company controlled by the Chairman of the Board for a fixed period expiring in 2003. Future lease payments are as follows: Kanata Halifax ------ ------- 2000 $275,000 $355,000 2001 275,000 355,000 2002 183,000 355,000 2003 -- 207,000 -------- ---------- $733,000 $1,272,000 ======== ========== 15. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE The Year 2000 Issue arises because many computerized systems use two digits rather than four to identify a year. Date-sensitive systems may recognize the year 2000 as 1900 or some other date, resulting in errors when information using year 2000 dates is processed. In addition, similar problems may arise in some systems, which use certain dates in 1999 to represent something other than a date. 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 entity, including those related to the efforts of customers, suppliers, or other third parties, will be fully resolved. 13 17 FASTLANE TECHNOLOGIES INCORPORATED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1999 -------------------------------------------------------------------------------- 16. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES These financial statements have been prepared in accordance with accounting principles generally accepted in Canada (Canadian GAAP) which differ in some respects from those used in the United States (U.S. GAAP). The significant differences in accounting principles as they pertain to the accompanying financial statements are as follows: Research and Development Funding As part of the research and development funding agreement (see Note 6), the purchase of the technology was recorded in the financial statements of the Company as an increase of share capital by the carrying amount of $1. Under U.S. GAAP, ABP No. 17 requires the cost of the technology purchased to be valued at the fair value of consideration given. The fair value of the common shares at the time of issuance was $3 per share. Accordingly, the fair value of the technology (net of amortization using a three-year life) of $5,136,275 and $3,148,043 at December 31, 1998 and 1999, respectively, has not been recorded for Canadian GAAP. Stock-Based Compensation Under U.S. GAAP, SFAS No. 123 requires that stock-based compensation be accounted for based on a fair value methodology. As permitted by the statement, the Company has elected to continue measuring compensation costs using the intrinsic value based method of accounting. Under this method, compensation is the excess, if any, of the quoted market value of the stock at the date of the grant over the amount an optionee must pay to acquire the stock. As the exercise price of the options approximate fair value at date of grant, no compensation expense has been recognized under the stock option plan. Had compensation cost for the Company's stock option plan been determined based on the fair value at the grant date of the awards consistent with the methodology presented under SFAS 123, additional compensation costs of $20,175 and $133,145 for 1998 and 1999, respectively, would have been recorded in the Statements of Loss and Deficit. 14 18 The effect of the above differences on the Company's financial statements is set out below:
CONSOLIDATED BALANCE SHEETS 1998 1999 ----------- ------------- Total assets (as reported) $ 6,907,791 $ 14,612,998 APB 17 acquired technology, net 5,136,275 3,148,043 ----------- ------------- Total assets (U.S. GAAP) $12,044,066 $ 17,761,041 CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT 1998 1999 ----------- ------------- Net loss (as reported) $(5,762,179) $ (10,171,540) APB 17 amortization of acquired technology (828,430) (1,988,232) ----------- ------------- Net loss (U.S. GAAP) $(6,590,609) $ (12,159,772) FAS 123 compensation expense (20,175) (133,145) ----------- ------------- Pro forma net loss (U.S. GAAP) $(6,610,784) $(12,292,917) Total deficit, end of year (as reported) $(6,152,341) $(16,323,881) APB 17 amortization of acquired technology (828,430) (1,988,232) ----------- ------------- Total deficit, end of year (U.S. GAAP) $(6,980,771) $(18,312,113)
Reclassifications As part of the Company's funding agreement with Newbridge, as discussed in Note 5 to the Company's December 31, 1998 and 1999 consolidated financial statements, the non-repayable portion of the funding received of $661,759 and $599,590 for the year ended December 31, 1998 and 1999, respectively, has been recorded separately as income in the Statements of Loss and Deficit. U.S. GAAP requires this to be recorded as an offset to research and development expenses and therefore would require reclassification. At December 31, 1998 and 1999 the Company had outstanding a shareholder loan of $71,556 and $69,857, respectively that was recorded as a current asset. U.S. GAAP requires these amounts be recorded as a component of shareholders' equity and therefore would require reclassification. 17. SUBSEQUENT EVENT In September 2000, the Company was acquired by a wholly-owned subsidiary of Quest Software, Inc. (Quest), a developer of software products for businesses that enhance the performance and reliability of e-business, packaged and custom computing applications. Quest issued 1,125,262 shares of common stock, options to purchase 257,717 shares of common stock, and paid approximately $56.9 million in cash in exchange for all capital stock of the Company, net liabilities assumed of approximately $12 million and other costs of approximately $0.8 million. 15 19 In conjunction with this acquisition, the Company's funding agreement with Newbridge as discussed in Note 5 has been cancelled as has the floating charge debenture in favour of Newbridge. The Province of Nova Scotia Funding Agreement previously with Newbridge has been assigned to the Company and the repayable funding recorded in the financial statements will be repaid directly to the Province of Nova Scotia by the Company. The repayments have been fixed at $1.8 million in each of July 2001, 2002 and 2003 with the balance repayable in 2004. 16 20 FASTLANE TECHNOLOGIES INCORPORATED CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT (CANADIAN DOLLARS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1999 2000 ------------ ------------ REVENUE Product Revenue $ 2,686,401 $ 5,421,010 Service Revenue 641,789 1,433,823 ------------ ------------ Total Revenue 3,328,190 6,854,833 COST OF SALES 307,302 925,034 ------------ ------------ 3,020,888 5,929,799 EXPENSES Research and devlopment 2,204,315 3,201,544 Sales and marketing 5,002,961 9,155,402 Finance and administration 983,078 1,863,342 ------------ ------------ 8,190,354 14,220,288 ------------ ------------ (5,169,466) (8,290,489) LESS: Government Funding (305,638) -- Other Income (29,034) (220,073) ------------ ------------ (334,672) (220,073) ------------ ------------ NET LOSS (4,834,794) (8,070,416) DEFICIT, BEGINNING OF PERIOD (6,152,341) (16,323,881) ------------ ------------ DEFICIT, END OF PERIOD $(10,987,135) $(24,394,297) ============ ============
See accompanying notes to the financial statements 1-A 21 FASTLANE TECHNOLOGIES, INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (CANADIAN DOLLARS) (UNAUDITED) NET INFLOW (OUTFLOW) OF CASH RELATED TO THE FOLLOWING ACTIVITIES:
SIX MONTHS ENDED JUNE 30, 1999 2000 ----------- ----------- OPERATING Net loss $(4,834,794) $(8,070,416) Items not affecting cash Amortization 418,717 366,681 Stock-based compensation -- 10,236 ----------- ----------- (4,416,077) (7,693,499) Changes in non-cash working capital items (1,033,626) 661,664 ----------- ----------- (5,449,703) (7,031,835) INVESTING Acquisition of capital assets, net of investment tax credits (331,218) (1,013,348) FINANCING Capital lease repayments (228,296) (253,074) Repayment of (Increase in) Shareholder Loans (31,588) 58,566 Issuance (Cancellation) of Shares 5,477,924 (8,110) Increase in Government Funding 1,266,520 610,560 ----------- ----------- 6,484,560 407,942 Net cash inflow (outflow) 703,639 (7,637,241) Cash and cash equivalents, beginning of period 1,484,288 7,699,138 ----------- ----------- Cash and cash equivalents, end of period $ 2,187,927 $ 61,897 =========== ===========
See accompanying notes to the financial statements 2-A 22 FASTLANE TECHNOLOGIES INCORPORATED CONSOLIDATED BALANCE SHEETS (CANADIAN DOLLARS)
(Unaudited) DECEMBER 31, JUNE 30, 1999 2000 ------------ ------------ ASSETS CURRENT ASSETS Cash and Cash Equivalents $ 7,699,138 $ 61,897 Accounts Receivable 3,577,925 4,901,526 Due From Related Parties 622,529 -- Refundable Investment Tax Credits 38,779 118,290 Shareholder Loans Receivable 69,857 11,291 Prepaids and Other 493,804 430,522 ------------ ------------ 12,502,032 5,523,526 Capital Assets 2,110,966 2,757,633 TOTAL ASSETS $ 14,612,998 $ 8,281,159 ============ ============ LIABILITIES & SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts Payable & Accrued Liabilities $ 2,754,372 $ 3,378,539 Current Portion of Obligations Under Capital Lease 463,537 395,227 Deferred Revenue 1,078,900 1,833,698 Current Portion of Governement Funding 1,900,000 1,800,000 ------------ ------------ 6,196,809 7,407,464 LONG TERM DEBT Government Funding 4,030,168 4,740,728 Obligations under Capital Lease 297,316 112,552 ------------ ------------ 4,327,484 4,853,280 TOTAL LIABILITIES 10,524,293 12,260,744 SHAREHOLDERS' EQUITY (DEFICIT) Share Capital 20,412,586 20,414,712 Deficit (16,323,881) (24,394,297) ------------ ------------ 4,088,705 (3,979,585) TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 14,612,998 $ 8,281,159 ============ ============
See accompanying notes to the financial statements 3-A 23 FASTLANE TECHNOLOGIES INCORPORATED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CANADIAN DOLLARS) 1. BASIS OF PRESENTATION The financial statements at June 30, 2000, and for the six months ended June 30, 1999 and 2000 are unaudited, but include all adjustments (consisting only of normal recurring adjustments) that the Company considers necessary for a fair presentation of financial position and operating results. Operating results for the six month periods ended June 30, 2000 are not necessarily indicative of results that may be expected for any future periods. The accompanying unaudited interim financial statements have been prepared with the assumption that users of the interim financial information have read FastLane Technologies Incorporated audited financial statements for the years ended December 31, 1998 and 1999. Accordingly, footnote disclosures which would substantially duplicate the disclosures contained in these audited financial statements have been omitted from these unaudited interim financial statements. While management believes the disclosures presented are adequate to make these financial statements not misleading, these financial statements should be read in conjunction with FastLane's audited financial statements and related notes. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results may differ from those estimates. 2. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES These financial statements have been prepared in accordance with accounting principles generally accepted in Canada (Canadian GAAP) which differ in some respects from those used in the United States (U.S. GAAP). The significant differences in accounting principles as they pertain to the accompanying financial statements are as follows: Research and Development Funding During 1997, the Company entered into a contract with a company which is a shareholder and is controlled by the Chairman of the Board under which certain research and development activities were performed by the Company. The Company was granted an exclusive, worldwide, perpetual right and license to market, sell and/or sub-license products based on the technology developed under the development agreement. As part of the agreement, the company had the option to purchase all of the technology developed in exchange for stock. In August 1998, the Company exercised the option to purchase all of the technology developed in exchange for the issuance of 1,988,235 common shares. The transaction was recorded in the financial statements of the Company as an increase of share capital by the carrying amount of $1. Under U.S. GAAP, ABP No. 17 requires the cost of the technology purchased to be valued at the fair value of consideration given. The fair value of the common shares at the time of issuance was $3 per share. Accordingly, the fair value of the technology (net of amortization using a 4-A 24 three-year life) of $3,148,043 and $2,153,927 at December 31, 1999 and June 30, 2000, respectively, has not been recorded for Canadian GAAP. Stock-Based Compensation Under U.S. GAAP, SFAS No. 123 requires that stock-based compensation be accounted for based on a fair value methodology. As permitted by the statement, the Company has elected to continue measuring compensation costs using the intrinsic value based method of accounting. Under this method, compensation is the excess, if any, of the quoted market value of the stock at the date of the grant over the amount an optionee must pay to acquire the stock. As the exercise price of the options approximate fair value at date of grant, no compensation expense has been recognized under the stock option plan. Had compensation cost for the Company's stock option plan been determined based on the fair value at the grant date of the awards consistent with the methodology presented under SFAS 123, additional compensation costs of $66,572 and $155,350 for the six months ended June 30, 1999 and 2000, respectively, would have been recorded in the Statements of Loss and Deficit. The effect of the above differences on the Company's financial statements is set out below:
CONSOLIDATED BALANCE SHEETS DECEMBER 31, JUNE 30, 1999 2000 ----------- ----------- Total assets (as reported) $14,612,998 $ 8,281,159 APB 17 acquired technology, net 3,148,043 2,153,927 ----------- ----------- Total assets (U.S. GAAP) $17,761,041 $10,435,086 CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT SIX MONTHS ENDED JUNE 30, 1999 2000 ----------- ----------- Net loss (as reported) $ 4,834,794 $ 8,070,416 APB 17 amortization of acquired technology 994,116 994,116 ----------- ----------- Net loss (U.S. GAAP) $ 5,828,910 $ 9,064,532 FAS 123 compensation expense 66,572 155,350 ----------- ----------- Pro forma net loss (U.S. GAAP) $ 5,895,482 $ 9,219,882 Total deficit, end of period (as reported) $10,987,135 $24,394,297 APB 17 amortization of acquired technology 994,116 994,116 ----------- ----------- Total deficit, end of period (U.S. GAAP) $11,981,251 $25,388,413
Reclassifications As part of the Company's funding agreement with Newbridge, as discussed in Note 5 to the Company's December 31, 1998 and 1999 consolidated financial statements, the non-repayable portion of the funding received of $305,638 for the six months ended June 30, 1999 (none in 2000) has been recorded separately as income in the Statements of Loss and Deficit. U.S. GAAP requires this to be recorded as an offset to research and development expenses and therefore would require reclassification. 5-A 25 At December 31, 1999 and June 30, 2000 the Company had outstanding a shareholder loan of $69,857 and $11,291, respectively, that was recorded as current assets. U.S. GAAP requires these amounts be recorded as a component of shareholders' equity and therefore would require reclassification. 3. SUBSEQUENT EVENTS In September 2000, the Company was acquired by a wholly-owned subsidiary of Quest Software, Inc. (Quest), a developer of software products for businesses that enhance the performance and reliability of e-business, packaged and custom computing applications. Quest issued 1,125,262 shares of common stock, options to purchase 257,717 shares of common stock, and paid approximately $56.9 million in cash in exchange for all capital stock of the Company, net liabilities assumed of approximately $12 million and other costs of approximately $0.8 million. In conjunction with the acquisition by Quest, the Company's funding agreement with Newbridge, as discussed in Note 5 to the Company's December 31, 1998 and 1999 consolidated financial statements, has been cancelled as has the floating charge debenture in favour of Newbridge. The Province of Nova Scotia Funding Agreement previously with Newbridge has been assigned to the Company and the repayable funding recorded in the financial statements will be repaid directly to the Province of Nova Scotia by the Company. The repayments have been fixed at $1.8 million in each of July 2001, 2002 and 2003 with the balance repayable in 2004. 6-A