<PAGE> 1
EXHIBIT 99.2
Consolidated Financial Statements of
FASTLANE TECHNOLOGIES INCORPORATED
December 31, 1998 and 1999
(Canadian Dollars)
<PAGE> 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
<PAGE> 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
<PAGE> 4
FASTLANE TECHNOLOGIES INCORPORATED
CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT
YEARS ENDED DECEMBER 31
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
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)
============ ============
</TABLE>
See accompanying notes to the financial statements
1
<PAGE> 5
FASTLANE TECHNOLOGIES INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1999
------------ ------------
NET INFLOW (OUTFLOW) OF CASH RELATED TO THE
FOLLOWING ACTIVITIES:
<S> <C> <C>
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
============ ============
</TABLE>
See accompanying notes to the financial statements
2
<PAGE> 6
FASTLANE TECHNOLOGIES INCORPORATED
CONSOLIDATED BALANCE SHEETS
AS AT DECEMBER 31
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1999
------------ ------------
CURRENT ASSETS
<S> <C> <C>
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
============ ============
</TABLE>
See accompanying notes to the financial statements
3
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 12
FASTLANE TECHNOLOGIES INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
--------------------------------------------------------------------------------
9. CAPITAL ASSETS
<TABLE>
<CAPTION>
1998 1999
----------------------------------------------------------------------
Net Book Accumulated Net Book
Value Cost Amortization Value
---------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
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
========== ========== ========== ==========
</TABLE>
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
<PAGE> 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
<TABLE>
<CAPTION>
1998 1999
------------------------------ --------------------------------
Shares Amount Shares Amount
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
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
========== =========== ========== ===========
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
1998 1999
------------------------------ ------------------------------
Weighted WEIGHTED
Number of Average NUMBER OF AVERAGE
Options Exercise Price OPTIONS EXERCISE PRICE
--------- -------------- --------- --------------
<S> <C> <C> <C> <C>
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
======= =========
</TABLE>
<TABLE>
<CAPTION>
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
------------------- ----------- ------------ -------- ------------ --------
<S> <C> <C> <C> <C> <C>
$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
=========== ========= === ===== ======= =====
</TABLE>
11
<PAGE> 15
FASTLANE TECHNOLOGIES INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
--------------------------------------------------------------------------------
13. CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
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
=========== ===========
</TABLE>
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
<PAGE> 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
<PAGE> 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
<PAGE> 18
The effect of the above differences on the Company's financial
statements is set out below:
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
1998 1999
----------- -------------
<S> <C> <C>
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)
</TABLE>
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
<PAGE> 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
<PAGE> 20
FASTLANE TECHNOLOGIES INCORPORATED
CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT
(CANADIAN DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1999 2000
------------ ------------
<S> <C> <C>
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)
============ ============
</TABLE>
See accompanying notes to the financial statements
1-A
<PAGE> 21
FASTLANE TECHNOLOGIES, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CANADIAN DOLLARS)
(UNAUDITED)
NET INFLOW (OUTFLOW) OF CASH RELATED
TO THE FOLLOWING ACTIVITIES:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1999 2000
----------- -----------
<S> <C> <C>
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
=========== ===========
</TABLE>
See accompanying notes to the financial statements
2-A
<PAGE> 22
FASTLANE TECHNOLOGIES INCORPORATED
CONSOLIDATED BALANCE SHEETS
(CANADIAN DOLLARS)
<TABLE>
<CAPTION>
(Unaudited)
DECEMBER 31, JUNE 30,
1999 2000
------------ ------------
<S> <C> <C>
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
============ ============
</TABLE>
See accompanying notes to the financial statements
3-A
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS DECEMBER 31, JUNE 30,
1999 2000
----------- -----------
<S> <C> <C>
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
<CAPTION>
CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT SIX MONTHS ENDED JUNE 30,
1999 2000
----------- -----------
<S> <C> <C>
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
</TABLE>
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
<PAGE> 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
