<PAGE> 1
EXHIBIT 99.1
Consolidated Financial Statements
Pace Financial Network LLC
(A Development Stage Company)
Years ended December 31, 1999 and
December 31, 1998
with Report of Independent Auditors
<PAGE> 2
Pace Financial Network LLC
(A Development Stage Company)
Consolidated Financial Statements
Years ended December 31, 1999 and December 31, 1998
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors.........................................................................1
Audited Consolidated Financial Statements
Consolidated Balance Sheets............................................................................2
Consolidated Statements of Operations..................................................................3
Consolidated Statements of Changes in Members' Equity................................................4-5
Consolidated Statements of Cash Flows..................................................................6
Notes to Consolidated Financial Statements..........................................................7-13
</TABLE>
<PAGE> 3
Report of Independent Auditors
The Board of Directors and Shareholders
Pace Financial Network LLC
We have audited the accompanying consolidated balance sheets of Pace Financial
Network LLC (a development stage company, the "Company") as of December 31, 1999
and 1998, and the related consolidated statements of operations, members' equity
and cash flows for the years then ended and for the period from June 6, 1996
(inception) to December 31, 1999. 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 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, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Pace Financial
Network LLC at December 31, 1999 and 1998, and the consolidated results of its
operations and its cash flows for the years then ended and for the period from
June 6, 1996 (inception) to December 31, 1999, in conformity with accounting
principles generally accepted in the United States.
/s/ Ernst & Young LLP
McLean, Virginia
February 4, 2000,
except for Note 7, as to which the date is
March 8, 2000
1
<PAGE> 4
Pace Financial Network LLC
(A Development Stage Company)
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
------------------ -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,644,743 $ 585,475
Accounts receivable 27,229 31,299
Prepaid expenses and other current assets 129,735 89,738
------------------ -----------------
Total current assets 1,801,707 706,512
Property and equipment, net 337,887 199,621
Software development costs, net 6,532,518 4,286,599
Security deposits and other 84,745 84,434
------------------ -----------------
Total assets $ 8,756,857 $ 5,277,166
================== =================
LIABILITIES AND MEMBERS' EQUITY
Accounts payable and accrued expenses $ 1,317,466 $ 1,051,597
Deferred lease incentives 83,706 86,678
------------------ -----------------
Total liabilities 1,401,172 1,138,275
Members' equity:
Class A Units, 450,335 and 298,770 units issued
and outstanding at December 31, 1999 and
1998, respectively 25,130,707 11,911,464
Class B Units, 30,164 and 28,164 units issued and
outstanding at December 31, 1999 and 1998, respectively 210,028 28
Subscriptions receivable (26,250) (474,600)
Accumulated deficit (17,958,800) (7,298,001)
------------------ -----------------
Total members' equity 7,355,685 4,138,891
------------------ -----------------
Total liabilities and members' equity $ 8,756,857 $ 5,277,166
================== =================
</TABLE>
See accompanying notes.
2
<PAGE> 5
Pace Financial Network LLC
(A Development Stage Company)
Consolidated Statements of Operations
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM JUNE 6,
1996 (INCEPTION)
YEAR ENDED DECEMBER 31, TO DECEMBER 31,
1999 1998 1999
----------------------------------- ---------------------
<S> <C> <C> <C>
Revenues:
Interest $ 59,831 $ 47,679 $ 144,672
Annuities 2,354 21,994 24,348
Consulting - 75,000 75,000
Commissions 74,034 - 77,219
Other revenue 108,467 1,305 109,772
----------------- ------------------ ---------------------
Total revenues 244,686 145,978 431,011
----------------- ------------------ ---------------------
Cost of sales:
Distribution Partner service fees 6,000 5,500 11,500
Outsourced call center fees 10,800 - 10,800
Other cost of revenues 7,398 8,760 16,158
----------------- ------------------ ---------------------
Total cost of revenues 24,198 14,260 38,458
----------------- ------------------ ---------------------
Operating expenses:
Salaries and benefits 2,057,538 1,942,239 5,765,098
Unit based compensation - employees 2,635,020 441,251 3,483,212
Unit based compensation - other 315,000 278,250 593,250
Travel and related meetings 187,794 101,052 288,846
Facility rent 322,631 385,054 707,685
Equipment rent 102,241 95,346 197,587
Professional fees 994,944 576,231 1,872,591
Marketing and promotion 136,137 49,221 375,415
General and administrative 500,744 150,297 856,424
Licenses and fees 110,744 142,530 357,126
Insurance 43,906 51,161 95,067
Write-off of proprietary software 3,438,281 - 3,438,281
Contract termination charge - - 100,000
Miscellaneous 36,307 184,464 220,771
----------------- ------------------ ---------------------
Total operating expenses 10,881,287 4,397,096 18,351,353
----------------- ------------------ ---------------------
Total expenses 10,905,485 4,411,356 18,389,811
----------------- ------------------ ---------------------
Net loss $(10,660,799) $(4,265,378) $(17,958,800)
================= ================== =====================
</TABLE>
See accompanying notes.
3
<PAGE> 6
Pace Financial Network LLC
(A Development Stage Company)
Consolidated Statements of Changes in Members' Equity
<TABLE>
<CAPTION>
Class A Units Class B Units
Units Amounts Units Amounts
------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at June 6, 1996 (inception) -- $ -- -- $ --
Issuance of initial units 200,000 200 -- --
Conversion to Class B Units (28,164) (28) 28,164 28
Redemption of units (10,000) -- -- --
Sales of units 4,000 450,000 -- --
Conversion of debt into class A units 6,000 350,000 -- --
Additional capital contributions from existing unit-holders -- 150,000 -- --
Net loss -- -- -- --
------------------------------------------------------
Balance at December 31, 1996 171,836 950,172 28,164 28
Issuance of units to employees 6,201 406,940 -- --
Business acquisition 1,500 131,250 -- --
Redemption of units (1,000) -- -- --
Issuance of units pursuant to warrant agreement 3,763 -- -- --
Sale of units 48,580 4,250,625 -- --
Net loss -- -- -- --
------------------------------------------------------
Balance at December 31, 1997 230,880 5,738,987 28,164 28
Issuance of units to employees 13,145 443,092 -- --
Issuance of units pursuant to release agreement 2,500 262,500 -- --
Issuance of units to business partners 150 15,750 -- --
Sale of units, net of issuance costs of 18,840 52,095 5,451,135 -- --
Net loss -- -- -- --
------------------------------------------------------
Balance at December 31, 1998 298,770 $11,911,464 28,164 $ 28
</TABLE>
<TABLE>
<CAPTION>
Subscriptions Accumulated
Receivable Deficit Total
-----------------------------------------------
<S> <C> <C> <C>
Balance at June 6, 1996 (inception) $ -- $ -- $ --
Issuance of initial units -- -- 200
Conversion to Class B Units -- -- --
Redemption of units -- -- --
Sales of units -- -- 450,000
Conversion of debt into class A units -- -- 350,000
Additional capital contributions from existing unit-holders -- -- 150,000
Net loss -- (616,900) (616,900)
-----------------------------------------------
Balance at December 31, 1996 -- (616,900) 333,300
Issuance of units to employees -- -- 406,940
Business acquisition -- -- 131,250
Redemption of units -- -- --
Issuance of units pursuant to warrant agreement -- -- --
Sale of units -- -- 4,250,625
Net loss -- (2,415,723) (2,415,723)
-----------------------------------------------
Balance at December 31, 1997 -- (3,032,623) 2,706,392
Issuance of units to employees -- -- 443,092
Issuance of units pursuant to release agreement -- -- 262,500
Issuance of units to business partners -- -- 15,750
Sale of units, net of issuance costs of 18,840 (474,600) -- 4,976,535
Net loss -- (4,265,378) (4,265,378)
-----------------------------------------------
Balance at December 31, 1998 $(474,600) $(7,298,001) $ 4,138,891
</TABLE>
See accompanying notes.
4
<PAGE> 7
Pace Financial Network LLC
(A Development Stage Company)
Consolidated Statements of Changes in Members' Equity
<TABLE>
<CAPTION>
Class A Units Class B Units
Units Amounts Units Amounts
----------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1998 brought forward 298,770 $11,911,464 28,164 $ 28
Receipt of subscriptions receivable -- -- -- --
Issuance of units to employees 50,023 2,635,020 -- --
Issuance of units to vendors 1,000 105,000 2,000 210,000
Sale of units, net of costs of issuance of $61,661 103,092 10,736,973 -- --
Redemption of units (2,550) (257,750) -- --
Net loss -- -- -- --
----------------------------------------------------------
Balance at December 31, 1999 450,335 $25,130,707 30,164 $210,028
</TABLE>
<TABLE>
<CAPTION>
Subscriptions Accumulated
Receivable Deficit Total
---------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1998 brought forward $ (474,600) $ (7,298,001) $ 4,138,891
Receipt of subscriptions receivable 474,600 -- 474,600
Issuance of units to employees -- -- 2,635,020
Issuance of units to vendors -- -- 315,000
Sale of units, net of costs of issuance of $61,661 (26,250) -- 10,710,723
Redemption of units -- -- (257,750)
Net loss -- (10,660,799) (10,660,799)
---------------------------------------------------
Balance at December 31, 1999 $ (26,250) $(17,958,800) $ 7,355,685
===================================================
</TABLE>
See accompanying notes.
5
<PAGE> 8
Pace Financial Network LLC
(A Development Stage Company)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM JUNE 6, 1996
(INCEPTION) TO
YEAR ENDED DECEMBER 31, DECEMBER 31,
1999 1998 1999
------------------------------------- ----------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(10,660,799) $(4,265,378) $(17,958,800)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 73,021 27,837 111,490
Unit based compensation 2,950,020 721,340 4,076,462
Loss on write-off of proprietary software 3,438,281 3,438,281
Write-off of intangible assets 183,673 183,673
Changes in assets and liabilities:
Accounts receivable 4,070 (31,299) (27,229)
Prepaid expenses and other current assets (39,997) (31,368) (129,735)
Security deposits and other (630) (83,635) (84,022)
Accounts payable and accrued expenses 82,536 706,994 1,134,133
Deferred lease incentives (2,973) 86,678 83,705
------------------- ------------------ ----------------------
Net cash used in operating activities (4,156,471) (2,685,158) (9,172,042)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiary, net - - (52,423)
Software development (5,684,200) (2,932,306) (9,970,799)
Purchase of property and equipment (210,967) (161,140) (448,261)
------------------- ------------------ ----------------------
Net cash used in investing activities (5,895,167) (3,093,446) (10,471,483)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of units 11,185,323 4,976,537 21,362,685
Redemption of units (74,417) - (74,417)
------------------- ------------------ ----------------------
Net cash provided by financing activities 11,110,906 4,976,537 21,288,268
------------------- ------------------ ----------------------
Net increase (decrease) in cash and cash equivalents 1,059,268 (802,067) 1,644,743
Cash and cash equivalents at beginning of period 585,475 1,387,542 -
------------------- ------------------ ----------------------
Cash and cash equivalents at end of period $ 1,644,743 $ 585,475 $ 1,644,743
=================== ================== ======================
</TABLE>
See accompanying notes.
6
<PAGE> 9
Pace Financial Network LLC
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
1. ORGANIZATION
Pace Financial Network LLC (the "Company") was formed in the State of Delaware
on June 6, 1996. The Company, based in Vienna, Virginia, is developing a
national distribution channel using the latest advances in electronic commerce
technology to provide a broad array of name brand, high-quality, low cost
financial products and services to the members, supporters, and affiliates of a
variety of affinity group distribution partners. The primary distribution
channel will be the web site, which is in the final stages of development.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries (PFN Mortgage Services LLC, PFN Mortgage Services Inc., PFN
Financial LLC, PFC Insurance Agency LLC, PFN Insurance Agency Inc., PFN
Investment Management LLC, PFN Consumer Credit, LLC, Global Health Network,
National Automotive Financial Network, Inc. and Financial Passport Insurance
Agency, Inc.). All significant inter-company accounts and transactions have been
eliminated in consolidation.
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 amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.
7
<PAGE> 10
Pace Financial Network LLC
(A Development Stage Company)
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING COST
The Company expenses the production costs of advertising the first time the
advertising takes place, except for direct-response advertising, which is
capitalized and amortized over its expected period of future benefits. All other
advertising is expensed as incurred. Advertising expense was approximately
$52,793 and $4,500 in 1999 and 1998, respectively.
LONG LIVED ASSETS
Property and Equipment
Property and equipment and leasehold improvements are stated at historical cost.
The costs of additions and improvements are capitalized, while maintenance and
repairs are charged to expense as incurred. Depreciation and amortization of
property and equipment are provided using the straight-line method over the
following useful lives ranging from 3 to 5 years. Leasehold improvements are
amortized over the shorter of the lease term or the estimated useful life of the
asset.
Software Development Costs
The Company's services will be comprised of various features which contribute to
the overall functionality and continuity of the service. The service will be
delivered primarily through one distribution channel, the Company's internet web
site. The Company capitalizes costs incurred for the development of computer
software to be used in the sale of its services. Capitalized costs include
consulting fees, programming fees, and related overhead incurred by the Company
and the cost of related services purchased from third parties. All costs in the
software development process are expensed as incurred until technological
feasibility has been established. Once technological feasibility has been
established, such costs are capitalized until the software has completed beta
testing and is generally available for use in the operations. Amortization, a
cost of revenue, is provided using the straight-line method over five years,
commencing the month after the date placed in service. The Company reviews
recoverability of the total unamortized cost of its software in relation to
estimated service and relevant revenues and, if warranted, makes an appropriate
adjustment to reduce the carrying value to net realizable value.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
8
<PAGE> 11
Pace Financial Network LLC
(A Development Stage Company)
Notes to Consolidated Financial Statements (continued)
Software development costs charged to expense for the years ended December 31,
1999 and 1998 were approximately $250,000 and $150,000, respectively.
Capitalized software development costs consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998
-------------------- --------------------
<S> <C> <C>
Balance, beginning of year $ 4,286,599 $ 1,354,293
Costs capitalized 5,684,200 2,932,306
Costs written off (3,438,281) -
-------------------- --------------------
Balance, end of year $ 6,532,518 $ 4,286,599
==================== ====================
</TABLE>
Intellectual Property
Intellectual property consists of certain proprietary trade secrets, off shore
trust documents and contractual rights obtained in connection with the Company's
acquisition of Global Health Network on December 23, 1997. The Company
periodically evaluates whether changes have occurred that would require revision
of the remaining estimated useful life of the intellectual property or render
such property not recoverable. If such circumstances arise, the Company would
use an estimate of the undiscounted value of expected future operating cash
flows to determine whether the carrying value of the intellectual property
should be reduced. During 1998, the intellectual property was written off as the
Company was unable to assign a present valuation.
Impairment Losses on Long Lived Assets
The Company assesses the impairment of long-lived assets including intangible
assets in accordance with Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long Lived Assets and for Long Lived Assets to
be Disposed of ("SFAS 121"). SFAS 121 requires impairment losses to be
recognized for long-lived assets when indicators of impairment are present and
the undiscounted cash flows are not sufficient to recover the assets' carrying
amounts. Intangibles are also evaluated for recoverability by estimating the
projected undiscounted cash flows, excluding interest, of the related business
activities. The impairment loss of these assets, including goodwill, is measured
by comparing the carrying amount of the asset to its fair value with any excess
of carrying value over fair value written off. Fair value is based on market
prices where available, an estimate of market value, or various valuation
techniques including discounted cash flow.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
9
<PAGE> 12
Pace Financial Network LLC
(A Development Stage Company)
Notes to Consolidated Financial Statements (continued)
UNIT-BASED COMPENSATION
The Company has granted Class A and Class B membership units to its employees,
directors and consultants. Grants to employees and directors are accounted for
using the intrinsic value method under APB Opinion No. 25, "Accounting for Stock
Issued to Employees." Expense is recognized for such grants based on the fair
market value of the membership unit on the date of grant. Grants to consultants
are accounted for using the fair value method under SFAS No. 123, "Accounting
for Stock-Based Compensation." SFAS No. 123 requires disclosure of the pro forma
effect on net income (loss) had the fair value method been used to account for
units granted to employees. The impact of using the fair value method of
accounting for the employee grants approximates the amount recorded.
INCOME TAXES
The Company has elected to be treated as a partnership for income tax purposes.
Accordingly, no provision for income taxes has been included in these financial
statements, as taxable income or loss passes through to, and is reported by,
members individually.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
--------------------- --------------------
<S> <C> <C>
Computer hardware and software $ 351,132 $ 134,897
Furniture and fixtures 13,236 14,211
Leasehold improvements 83,893 88,186
--------------------- --------------------
448,261 237,294
Less accumulated depreciation (110,374) (37,673)
--------------------- --------------------
Net property and equipment $ 337,887 $ 199,621
===================== ====================
</TABLE>
10
<PAGE> 13
Pace Financial Network LLC
(A Development Stage Company)
Notes to Consolidated Financial Statements (continued)
4. COMMITMENTS AND CONTINGENCIES
The Company leases facilities and equipment primarily under several long and
short term operating leases. Future minimum payments under non-cancelable
operating leases with initial terms of one year or more consist of the
following:
<TABLE>
<CAPTION>
Year ending December 31, (in thousands)
------------------------ --------------
<S> <C>
2000 $ 395,000
2001 352,000
2002 355,000
2003 351,000
Thereafter 359,000
--------------------
Total $ 1,812,000
====================
</TABLE>
The Company's rental expense under operating leases for the year ended December
31, 1999 and 1998, totaled approximately $425,000 and $461,000, respectively.
5. CAPITAL ACCOUNTS
The Company's capital accounts are reflected in accordance with its Limited
Liability Company Operating Agreement (the "Agreement") which provides
significant authority to the Company's Management Committee. The Company's
members' liability is limited to their capital account balances.
CLASS A MEMBERSHIP UNITS
The Company's Class A membership units have no stated par value and are not
limited in number by the Agreement. The Company has issued Class A membership
units at various rates ranging from $0.001 (at inception) to $105.00 per unit.
Class A Membership Unit holders have all rights of ownership including, without
limitation, (a) a right to receive distributions of revenues, allocations of
income and loss and distributions of liquidation proceeds and (b) all management
rights, voting rights or rights to consent.
11
<PAGE> 14
Pace Financial Network LLC
(A Development Stage Company)
Notes to Consolidated Financial Statements (continued)
5. CAPITAL ACCOUNTS (CONTINUED)
CLASS B MEMBERSHIP UNITS
In 1997, the Company's members approved an amendment and restatement of the
Agreement which authorized the Management Committee to convert an unlimited
number of Class A membership units into Class B membership units. As of December
31, 1999, the Company had converted 28,164 Class A units into Class B units, net
of 1,022 Class B membership units converted back to Class A membership units and
transferred to an existing unit holder and a newly admitted unit holder. Class B
Membership Unit holders have rights to receive distributions of revenues,
allocations of income and loss and distributions of liquidation proceeds but do
not have management rights, voting rights, or rights to consent.
OTHER
In connection with the Company's issuance of 10,000 Class A membership units
during 1996, the Company executed an anti-dilution agreement with the unit
holder to issue additional Class A membership units, as necessary, to prevent
the unit holder's interest in the Company from being diluted below 15% and
13.333% due to the first and second equity financings in excess of $5 million,
respectively, for no additional consideration. During 1997, the Company issued
an additional 3,763 Class A membership units under the terms of this agreement.
The Company's obligation to issue additional units under this agreement is not
determinable at December 31, 1999.
6. LITIGATION
The Company filed a lawsuit in January 2000 against a third party seeking
declaratory relief regarding the ownership of certain intellectual property. The
third party subsequently filed for declaratory relief and contract damages. The
Company and the third party had worked together concerning the development of
certain software for use in the Company's website. Because of the early stages
of the lawsuit, the Company is unable to determine the outcome of the
litigation, but does not expect the outcome to materially affect its financial
position or results of operations.
12
<PAGE> 15
Pace Financial Network LLC
(A Development Stage Company)
Notes to Consolidated Financial Statements (continued)
7. SUBSEQUENT EVENT
On March 8, 2000 the Company converted from a limited liability company to a
corporation and changed its name to Financial Passport, Inc. In connection
therewith, each vested Class A and B unit was converted to 10 shares of common
stock of Financial Passport, Inc. Holders of unvested Class A units will receive
either unvested stock, non qualified options or incentive stock options in
exchange for the unvested Class A units. The impact of these events on the
financial position and results of operations of the Company has not been
determined.
8. IMPACT OF YEAR 2000 (UNAUDITED)
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. The Company has not experienced
any material issues as a result of the Year 2000 issue. The Company cannot
provide assurances, however, that suppliers and customers have not been nor will
not be affected in a manner that is not yet apparent. In addition, certain
computer programs which were date sensitive to the Year 2000 may not have been
programmed to process the Year 2000 as a leap year, and any negative
consequential effects remain unknown. As a result, the Company will continue to
monitor Year 2000 compliance and the Year 2000 compliance of suppliers and
customers. Nonetheless, based on the actions taken as described above, the
Company believes that its operations will not be materially impacted by the Year
2000 issue.
13
