<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM 8-K/A
AMENDMENT TO APPLICATION OR REPORT
FILED PURSUANT TO SECTION 12, 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
THE TITAN CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
AMENDMENT NO. TWO
The undersigned registrant hereby amends the following items, financial
statements, exhibits or other portions of its Current Report on Form 8-K (Dated
December 22, 1999 and November 2, 1999) and Amendment No. One (Dated January 19,
2000) as set forth in the pages attached hereto:
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Businesses Acquired.
Assist Cornerstone Technologies, Inc. financial statements for the years
ended December 31, 1996, 1997 and 1998 and the SFG Technologies Inc.
financial statements for the years ended April 30, 1996, 1997 and 1998.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment to be signed on its behalf by the
undersigned, thereunto duly authorized.
(c) Exhibits
23.1 Consent of Arthur Andersen LLP, Independent Public Accountants.
23.2 Consent of Arthur Andersen LLP, Independent Public Accountants.
23.3 Consent of Ernst & Young LLP, Independent Auditors.
23.4 Consent of KPMG LLP, Independent Chartered Accountants
<TABLE>
<S> <C> <C>
THE TITAN CORPORATION
(Registrant)
By: /s/ ERIC M. DEMARCO
----------------------------------------------
Eric M. DeMarco
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
</TABLE>
Date January 24, 2000
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<PAGE>
PRO FORMA FINANCIAL INFORMATION
The accompanying pro forma financial statements should be read in
conjunction with the Notes to Consolidated Financial Statements contained in The
Titan Corporation's ("the Company" or "Titan") Annual Report on Form 10-K for
the year ended December 31, 1998, the Notes to Consolidated Financial Statements
contained in the Company's Quarterly Report on Form 10-Q for the nine months
ended September 30, 1999 and the Notes to the Transnational Partners II, LLC,
("TNP"), JB Systems, Inc., ("Mainsaver"), Assist Cornerstone Technologies, Inc.,
("Assist") and SFG Technologies, Inc. ("SFG"), (collectively, the "Acquired
Companies"), financial statements.
The following unaudited pro forma condensed balance sheets and unaudited pro
forma condensed statements of operations (collectively, the "Pro Forma
Statements") have been prepared to illustrate the estimated effects of the
mergers and purchase of the Acquired Companies, for the balance sheet purposes
as of September 30, 1999, and for statement of operations purposes for the year
ended December 31, 1998 and for the nine months ended September 30, 1999. The
operating results for TNP are included in the Titan operating results for the
nine months ended September 30, 1999. The unaudited pro forma condensed
statements of operations combine Titan's revenues and expenses for the year
ended December 31, 1998 (Titan's fiscal year end) with the Acquired Companies
aggregate revenues and expenses for the year ended December 31, 1998; and
Titan's revenues and expenses for the nine months ended September 30, 1999 with
the Acquired Companies aggregate revenues and expenses for the nine months ended
September 30, 1999. The unaudited pro forma adjustments are based upon available
information and upon certain assumptions that the Company believes are
reasonable in the circumstances. The unaudited pro forma statements of
operations include the recurring items which are directly attributable to the
mergers and acquisitions, such as amortization of additional goodwill, increase
in interest expense, increase in preferred dividends, and the related tax
effects thereof. The unaudited pro forma statements do not purport to represent
what Titan's financial position or results of operations would actually have
been if the acquisitions in fact had occurred on the date or at the beginning of
the periods indicated, nor do they purport to project Titan's financial position
or results of operations for any future date or period.
<PAGE>
THE TITAN CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
THE TITAN CORPORATION
Pro Forma Financial Statements (Unaudited):
Pro Forma Condensed Combined Balance Sheet
(Unaudited)............................................ F-2
Pro Forma Condensed Combined Statements of Operations
(Unaudited)............................................ F-3
Notes to Pro Forma Condensed Combined Financial
Statements (Unaudited)................................. F-5
TRANSNATIONAL PARTNERS II, LLC
Report of Independent Public Accountants.................. F-8
Balance Sheets............................................ F-9
Statements of Income...................................... F-10
Statements of Members' Equity............................. F-11
Statements of Cash Flows.................................. F-12
Notes to Financial Statements............................. F-13
JB SYSTEMS, INC.
Report of Independent Public Accountants.................. F-15
Balance Sheets............................................ F-16
Statements of Operations.................................. F-17
Statements of Stockholders' Deficit....................... F-18
Statements of Cash Flows.................................. F-19
Notes to Financial Statements............................. F-20
ASSIST CORNERSTONE TECHNOLOGIES, INC.
Report of Independent Auditors............................ F-27
Balance Sheets............................................ F-28
Statements of Operations.................................. F-29
Statements of Shareholders' Equity (Deficit).............. F-30
Statements of Cash Flows.................................. F-31
Notes to Financial Statements............................. F-32
SFG TECHNOLOGIES, INC.
Auditors Report........................................... F-42
Balance Sheets............................................ F-43
Consolidated Statements of Operations..................... F-44
Consolidated Statements of Deficit........................ F-45
Consolidated Statements of Cash Flows..................... F-46
Notes to Consolidated Financial Statements................ F-47
</TABLE>
F-1
<PAGE>
THE TITAN CORPORATION
PRO FORMA CONDENSED COMBINED BALANCE SHEET
(IN THOUSANDS, EXCEPT PAR VALUES)
AS OF SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS PRO FORMA
TITAN MAINSAVER ASSIST SFG (NOTE 4) COMBINED
-------- --------- -------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents....... $ 4,207 $ -- $ 413 $ -- $ -- $ 4,620
Accounts receivable--net........ 131,787 1,559 2,627 2,639 138,612
Inventories..................... 12,492 -- -- -- -- 12,492
Prepaid expenses and other...... 8,938 69 380 290 -- 9,677
Deferred income taxes........... 5,635 -- -- -- -- 5,635
-------- -------- ------- ------- ------- --------
Total current assets.......... 163,059 1,628 3,420 2,929 -- 171,036
-------- -------- ------- ------- ------- --------
Property and equipment--net....... 28,476 805 293 693 30,267
Goodwill--net..................... 89,064 -- -- 55,795 144,859
Other assets...................... 11,929 64 260 128 -- 12,381
Net assets of discontinued
operations...................... 580 -- -- -- -- 580
-------- -------- ------- ------- ------- --------
Total assets.................. $293,108 $ 2,497 $ 3,973 $ 3,750 $55,795 $359,123
-------- -------- ------- ------- ------- --------
LIABILITIES AND STOCKHOLDERS'
EQUITY
CURRENT LIABILITIES:
Line of credit.................. $ 6,163 $ 1,512 $ -- $ 947 $(1,512) $ 7,110
Accounts payable................ 29,598 953 1,219 1,266 -- 33,036
Acquisition debt................ 4,800 -- -- -- 4,800
Current portion of long-term
debt.......................... 2,089 211 187 400 (400) 2,487
Accrued compensation and
benefits...................... 17,008 -- -- -- -- 17,008
Deferred revenue................ -- 1,515 508 1,996 4,019
Other accrued liabilities....... 12,010 729 445 -- 7,300 20,484
-------- -------- ------- ------- ------- --------
Total current liabilities..... 71,668 4,920 2,359 4,609 5,388 88,944
Other long term liabilities....... 16,801 485 197 504 5,176 23,163
Long term debt.................... 7,090 1,653 2,327 3,110 (6,590) 7,590
Line of credit.................... 110,712 -- -- -- 39,352 150,064
Preferred stock................... -- -- 305 -- (305) --
STOCKHOLDERS' EQUITY:
Preferred stock................. 695 -- -- -- -- 695
Common stock.................... 437 6,197 5 2,981 (9,182) 438
Additional paid-in capital...... 98,833 -- 9 -- (9) 98,833
Retained earnings (deficit)..... (10,492) (10,758) (1,229) (7,454) 21,965 (7,968)
Treasury stock.................. (2,636) -- -- -- -- (2,636)
-------- -------- ------- ------- ------- --------
Total stockholders' equity.... 86,837 (4,561) (1,215) (4,473) 12,774 89,362
-------- -------- ------- ------- ------- --------
Total liabilities and
stockholders' equity........ $293,108 $ 2,497 $ 3,973 $ 3,750 $55,795 $359,123
======== ======== ======= ======= ======= ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS UNAUDITED PRO FORMA BALANCE
SHEET.
F-2
<PAGE>
THE TITAN CORPORATION
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
ASSIST SFG ADJUSTMENTS PRO FORMA
TITAN MAINSAVER CORNERSTONE TECHNOLOGIES (NOTE 4) COMBINED
-------- --------- ----------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues.......................... $274,059 $ 6,267 $9,585 $4,960 $ -- $294,871
Cost of revenues.................. 211,147 1,626 5,596 219 -- 218,588
-------- ------- ------ ------ ------- --------
Gross profit.................... 62,912 4,641 3,989 4,741 -- 76,283
Operating expenses:
Selling, general and
administrative................ 32,957 3,962 4,049 4,113 2,092 47,173
Research and development........ 5,317 1,774 440 597 -- 8,128
-------- ------- ------ ------ ------- --------
Total operating expenses...... 38,274 5,736 4,489 4,710 2,092 55,301
-------- ------- ------ ------ ------- --------
Income (loss) from operations..... 24,638 (1,095) (500) 31 (2,092) 20,982
Interest income................... 585 -- -- -- -- 585
Interest expense.................. (6,712) (309) (146) (215) (2,269) (9,651)
-------- ------- ------ ------ ------- --------
Income (loss) before tax.......... 18,511 (1,404) (646) (184) (4,361) 11,916
Income tax provision (benefit).... 5,553 -- -- -- (908) 4,645
-------- ------- ------ ------ ------- --------
Net income (loss)................. $ 12,958 $(1,404) $ (646) $ (184) $(3,453) $ 7,271
Dividend requirements on preferred
stock........................... (521) -- -- -- -- (521)
-------- ------- ------ ------ ------- --------
Net income (loss) available to
common stock.................... $ 12,437 $(1,404) $ (646) $ (184) $(3,453) $ 6,750
======== ======= ====== ====== ======= ========
Basic earnings (loss) per share... $ 0.33 $ 0.17
======== ========
Weighted average shares--basic.... 38,076 -- 516 -- -- 38,592
======== ======= ====== ====== ======= ========
Diluted earnings (loss) per
share........................... $ 0.29 $ 0.15
======== ========
Weighted average
shares--diluted................. 45,732 -- 516 -- -- 46,248
======== ======= ====== ====== ======= ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED PRO FORMA
FINANCIAL STATEMENTS.
F-3
<PAGE>
THE TITAN CORPORATION
PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
ASSIST SFG ADJUSTMENTS PRO FORMA
TITAN TNP MAINSAVER CORNERSTONE TECHNOLOGIES (NOTE 4) COMBINED
-------- -------- --------- ----------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues........................ $303,428 $5,644 $ 7,218 $11,523 $4,868 $ -- $332,681
Cost of revenues................ 232,041 4,067 2,387 6,917 206 -- 245,618
-------- ------ ------- ------- ------ ------- --------
Gross profit.................. 71,387 1,577 4,831 4,606 4,662 -- 87,063
Operating expenses:
Selling, general and
administrative.............. 37,553 146 5,187 4,477 3,016 3,213 53,592
Research and development...... 5,590 -- 946 397 1,853 -- 8,786
Special acquisition related
charges and other........... 9,891 -- -- -- -- -- 9,891
-------- ------ ------- ------- ------ ------- --------
Total operating expenses.... 53,034 146 6,133 4,874 4,869 3,213 72,269
-------- ------ ------- ------- ------ ------- --------
Income (loss) from operations... 18,353 1,431 (1,302) (268) (207) (3,213) 14,794
Interest expense................ (7,377) -- (165) (319) (363) (2,641) (10,865)
Interest income................. 392 9 -- 29 -- -- 430
-------- ------ ------- ------- ------ ------- --------
Income (loss) from continuing
operations before income taxes
and cumulative effect of
change in accounting
principle..................... 11,368 1,440 (1,467) (558) (570) (5,854) 4,359
Income tax provision
(benefit)..................... 4,155 5 -- (180) -- (1,057) 2,923
-------- ------ ------- ------- ------ ------- --------
Income (loss) from continuing
operations before cumulative
effect of change in accounting
principle..................... 7,213 1,435 (1,467) (378) (570) (4,797) 1,436
Cumulative effect of change in
accounting principle, net of
taxes......................... (19,474) -- -- -- -- -- (19,474)
Loss from discontinued
operations, net of taxes...... (7,444) -- -- -- -- -- (7,444)
-------- ------ ------- ------- ------ ------- --------
Net income (loss)............... $(19,705) $1,435 $(1,467) $ (378) $ (570) $(4,797) $(25,482)
Dividend requirements on
preferred stock............... (778) -- -- -- -- -- (778)
Net income (loss) available to
common stock.................. $ 20,483 $1,435 $(1,467) $ (378) $ (570) $(4,797) $(26,260)
======== ====== ======= ======= ====== ======= ========
Basic earnings (loss) per
share.........................
Income (loss) from continuing
operations.................... $ 0.18 $ 0.02
======== ========
Weighted average
shares--basic................. 34,895 -- -- 516 -- -- 35,411
======== ====== ======= ======= ====== ======= ========
Diluted earnings (loss) per
share.........................
Income (loss) from continuing
operations.................... $ 0.18 $ 0.02
======== ========
Weighted average
shares--diluted............... 36,177 2,345 -- 516 -- (2,345) 36,177
======== ====== ======= ======= ====== ======= ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED PRO FORMA
FINANCIAL STATEMENTS.
F-4
<PAGE>
THE TITAN CORPORATION
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
Cayenta, Inc. ("Cayenta" or the "Company") was formed as a wholly-owned
subsidiary of The Titan Corporation ("Titan") in 1997. Cayenta acquired
substantially all of the assets and liabilities of Transnational Partners II,
LLC ("TNP") in January 1999, and J.B. Systems, Inc. in November 1999, and Assist
Cornerstone Technologies, Inc. ("Assist") and SFG Technologies, Inc. ("SFG") in
December 1999. (See Note 3 The 1999 Aquired Companies).
2. BASIS OF PRESENTATION
The accompanying unaudited pro forma condensed consolidated financial
statements are based on adjustments to the historical consolidated financial
statements of Titan to give effect to the acquisitions described in Note 3
below. The pro forma condensed consolidated statements of operations assume the
acquisitions were consummated as of the beginning of the periods presented. The
pro forma condensed consolidated statements of operations are not necessarily
indicative of results that would have occurred had the acquisitions been
consummated as of the beginning of the periods presented or the results that may
be attained in the future.
Certain information normally included in financial statements prepared in
accordance with generally accepted accounting principles has been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission. The pro forma condensed consolidated financial statements should be
read in conjunction with the historical consolidated financial statements of
Titan and the historical financial statements of the Acquired Companies.
The information in the unaudited pro forma condensed consolidated statements
of operations for the year ended December 31, 1998 and for the nine months ended
September 30, 1999 have been derived from (i) the audited statements of
operations of Titan, TNP and each of the 1999 Acquired Companies for the year
ended December 31, 1998, (except with respect to SFG Technologies which includes
the audited eight month period ended December 31, 1998 and the unaudited four
month period ended April 30, 1998) (ii) the unaudited statements of operations
of Titan for the nine months ended September 30, 1999 and (iii) the unaudited
statements of operations of the 1999 Acquired Companies for the nine months
ended September 30, 1999.
The financial statements of SFG Technologies are translated from Canadian
dollars to U.S. dollars based on the end of the period exchange rate for balance
sheet items and average for the period rates for statement of operations data.
There are no significant differences between U.S. and Canadian GAAP relative to
SFG Technologies.
3. ACQUISITIONS
All acquisitions were accounted for as purchases. Accordingly the operating
results are reflected in the consolidated results of Cayenta from the date of
acquisition. Summary information on the acquisitions follows:
TNP. In January 1999, Cayenta acquired substantially all of the assets of
TNP, an enterprise application integration consulting company. The Company
acquired these assets for an initial installment of $7.0 million in cash and
2,345,000 shares of Cayenta convertible preferred stock. The Company will pay an
additional $2.8 million note that was issued as part of its acquisition of TNP,
plus
F-5
<PAGE>
THE TITAN CORPORATION
NOTES TO PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. ACQUISITIONS (CONTINUED)
7% interest thereon, in January 2000. Acquisition goodwill of $12.7 million is
being amortized on a straight-line basis over 30 years.
THE 1999 ACQUIRED COMPANIES
MAINSAVER. In November 1999, Cayenta acquired J.B. Systems, an enterprise
asset management, or EAM, company doing business under the name Mainsaver. The
Company acquired Mainsaver for $11.7 million in cash, of which $8.2 million was
paid at the closing. Of the $3.5 million withheld at the closing, $500,000 is
due in February 2000 and $3.0 million is due in May 2001, after satisfaction of
possible working capital adjustments or indemnification obligations. In
addition, the Company paid approximately $3.4 million to reduce outstanding
indebtedness of Mainsaver.
ASSIST CORNERSTONE. In December 1999, Cayenta acquired Assist Cornerstone,
an e-commerce solutions and software company. The Company acquired Assist
Cornerstone for 516,000 shares of Cayenta Class A common stock and approximately
$12.9 million in cash, of which $9.9 million was paid at the closing. Of the
$3.0 million withheld at the closing, $1.7 million is due in March 2000 and
$1.3 million is due in June 2001, after satisfaction of possible working capital
adjustments or indemnification obligations. In addition, the Company paid
approximately $3.2 million to retire outstanding indebtedness of Assist
Cornerstone and redeem all of its outstanding redeemable preferred stock.
SFG TECHNOLOGIES. In December 1999, Cayenta acquired SFG Technologies, a
solutions and software provider focusing on revenue cycle services for the
utility industry. The Company acquired SFG Technologies for $11.6 million in
cash, of which $9.5 million was paid at the closing. Of the $2.1 million placed
into escrow at the closing, $600,000 is due in March 2000 and $1.5 million is
due in June 2001, after satisfaction of possible working capital adjustments or
indemnification obligations. In addition, the Company paid approximately
$3.1 million to retire outstanding indebtedness of SFG Technologies and redeem
all of its outstanding redeemable preferred stock.
Acquisition costs related to the 1999 Acquired Companies approximated $5.1
million which includes approximately $2.1 million of estimated fair value
assigned to 495,800 warrants granted to an investment advisor for certain
advisory services performed in connection with these acquisitions. Goodwill
related to these acquisitions amounted to approximately $55.8 million and is
being amortized over 20 years.
4. ADJUSTMENTS TO HISTORICAL FINANCIAL STATEMENTS
The following pro forma adjustments have been made to the historical
condensed consolidated balance sheets and statements of operations as if the
acquisitions described in Note 3 were consummated at September 30, 1999 and as
of the beginning of the periods presented, respectively:
BALANCE SHEETS
(a) To reflect the goodwill related to the 1999 Acquired Companies,
F-6
<PAGE>
THE TITAN CORPORATION
NOTES TO PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. ADJUSTMENTS TO HISTORICAL FINANCIAL STATEMENTS (CONTINUED)
(b) To reflect the retirement of certain debt of the 1999 Acquired
Companies using advances under our line of credit,
(c) To reflect the purchase price holdbacks and to accrue for
transaction costs,
(d) To eliminate the 1999 Acquired Companies equity accounts
STATEMENTS OF OPERATIONS
(e) To reflect incremental amortization (on a straight-line basis over
20 years) of goodwill related to the purchase of the 1999 Acquired Companies
and to reflect the amortization (on a straight line basis over 30 years) of
goodwill related to the TNP acquisition
(f) To reflect incremental interest expense on advances under our line
of credit to fund the cash portion of the purchase prices of the TNP
acquisition and of the 1999 Acquired Companies and to reflect interest
expense related to holdback amounts for the 1999 Acquired Companies.
(g) To reflect (i) the change in income taxes related to pro forma
adjustments, and (ii) income taxes on TNP as if it were a C corporation for
federal income tax purposes.
F-7
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Cayenta, Inc.:
We have audited the accompanying balance sheets of Transnational
Partners II, LLC, a California limited liability company, (the "Company"), as of
December 31, 1997 and 1998, and the related statements of income, members'
equity, and cash flows for the period from commencement of operations (February
9, 1997) to December 31, 1997 and for the year ended December 31, 1998. 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 generally accepted auditing
standards. 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 financial position of Transnational Partners II,
LLC as of December 31, 1997 and 1998, and the results of its operations and its
cash flows for the period from commencement of operations (February 9, 1997) to
December 31, 1997 and for the year ended December 31, 1998 in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
San Diego, California
December 28, 1999
F-8
<PAGE>
TRANSNATIONAL PARTNERS II, LLC
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1998
---------- ----------
<S> <C> <C>
ASSETS
Current Assets
Cash...................................................... $183 $259
Accounts receivable....................................... 370 612
---- ----
Total assets............................................ $553 $871
==== ====
LIABILITIES AND MEMBERS' EQUITY
Accounts payable and accrued expenses..................... $285 $448
---- ----
Total liabilities....................................... 285 448
---- ----
Commitments and contingencies
Members' Equity:
Members' capital.......................................... 20 20
Retained earnings......................................... 248 403
---- ----
Total members' equity................................... 268 423
---- ----
Total liabilities and members' equity................... $553 $871
==== ====
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-9
<PAGE>
TRANSNATIONAL PARTNERS II, LLC
STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 9, 1997
(COMMENCEMENT
OF OPERATIONS) TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1998
----------------- ------------
<S> <C> <C>
Revenues.................................................... $2,850 $5,644
Cost of revenues............................................ 2,211 4,067
------ ------
Gross profit.............................................. 639 1,577
Selling, general, and administrative expenses............... 31 146
------ ------
Income from operations...................................... 608 1,431
Interest income............................................. 5 9
------ ------
Income before tax........................................... 613 1,440
Provision for income tax.................................... 5 5
------ ------
Net income.................................................. $ 608 $1,435
====== ======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-10
<PAGE>
TRANSNATIONAL PARTNERS II, LLC
STATEMENTS OF MEMBERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
MEMBERS' RETAINED
CAPITAL EARNINGS TOTAL
-------- -------- --------
<S> <C> <C> <C>
Balances at February 9, 1997 (Commencement of Operations)... $-- $ -- $ --
Membership contributions.................................. 20 -- 20
Net income................................................ 608 608
Distributions............................................. -- (360) (360)
--- ------- -------
Balances at December 31, 1997............................... 20 248 268
Membership contributions.................................. 2 -- 2
Repurchase of membership shares........................... (2) -- (2)
Net income................................................ 1,435 1,435
Distributions............................................. -- (1,280) (1,280)
--- ------- -------
Balances at December 31, 1998............................... $20 $ 403 $ 423
=== ======= =======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE BALANCE SHEETS.
F-11
<PAGE>
TRANSNATIONAL PARTNERS II, LLC
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 9, 1997
(COMMENCEMENT
OF OPERATIONS) TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1998
----------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 608 $ 1,435
Adjustments to reconcile net income to net cash provided
by operating activities:
Changes in operating assets and liabilities:
Accounts receivable................................... (370) (242)
Accounts payable and accrued expenses................. 285 163
------ -------
Net cash provided by operating activities................... 523 1,356
------ -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of membership shares................................. 20 2
Repurchase of membership shares........................... -- (2)
Distributions to members.................................. (360) (1,280)
------ -------
Net cash used in financing activities....................... (340) (1,280)
------ -------
Net increase in cash........................................ 183 76
Cash at beginning of period................................. -- 183
------ -------
Cash at end of period....................................... $ 183 $ 259
====== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
State income taxes paid................................... $ 1 $ 4
====== =======
</TABLE>
THE ACCOMPANYINIG NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-12
<PAGE>
TRANSNATIONAL PARTNERS II, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
(IN THOUSANDS)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Transnational Partners II, LLC a California limited liability company, (the
"Company") is an enterprise application integration consulting company. The
Company was formed on September 25, 1996, with the execution of a limited
liability company operating agreement (the "Agreement"), commenced operations on
February 9, 1997. In January 1999, Cayenta, Inc. acquired substantially all of
the assets and liabilities of the Company.
REVENUE RECOGNITION The majority of the Company's revenues are derived from
time and material contracts and are recognized as services are performed.
Revenues derived from fixed-price contracts are recognized under the
percentage-of-completion method. Estimated losses on fixed-price contracts are
recorded in the period the losses are determinable.
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INCOME TAXES The Company is treated as a partnership for income tax
reporting purposes, rather than an association taxable as a corporation.
Accordingly, no provision for federal taxes has been included in the
accompanying statements of income. Such taxes are imposed on the individual
members for their respective shares of the Company's income. The tax returns and
amounts of distributable income or loss of the Company are subject to
examination by federal and state taxing authorities. If such examination results
in a change in the Company's income tax status or in a change to distributable
income or loss of the Company, the tax liability of the Company or of the
members could be changed accordingly.
DISTRIBUTIONS Membership interests of the members reflect capital
contributions made in accordance with the Agreement. Distributions or
allocations of assets are made in proportion to the partner's respective
membership interest, and are made at the sole discretion of the Company's
management.
FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of the Company's
financial instruments, including cash, accounts receivable, and accounts payable
approximate their fair values due to the short-term nature. Financial
instruments which potentially subject the Company to concentrations of credit
risk consist primarily of trade accounts receivable. The Company believes it is
not exposed to any significant credit risk on its accounts receivable.
2. CREDIT RISK
All of the Company's revenues are from a single customer. Accounts
receivable due from this customer totaled $612 and $370 at December 31, 1998 and
1997, respectively. Historically, the Company has not incurred credit losses.
F-13
<PAGE>
TRANSNATIONAL PARTNERS II, LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(IN THOUSANDS)
3. SALE OF LLC MEMBERSHIP UNITS
The Company was formed with a contribution of $20 made by the two senior
(voting) members for 60% and 40% of the membership units, respectively.
On April 2, 1998, the Company sold associate membership units to 16
individuals. Associate membership units are non-voting but are otherwise
entitled to all the benefits afforded to associated members as defined in the
agreement. The units were sold for $0.1 and entitled the member to 0.5% of the
equity of the Company.
4. SUBSEQUENT EVENT
In January 1999, the Company was acquired by Cayenta, Inc., a wholly owned
subsidiary of The Titan Corporation, for $9.8 million in a transaction that was
accounted for as a purchase. The purchase price consisted of $7.0 million cash,
a $2.8 million note due January 2000 (bearing interest at 7%), subject to
certain post-closing adjustments, and 2,345 shares of convertible preferred
stock of Cayenta, Inc.
F-14
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Cayenta, Inc.:
We have audited the accompanying balance sheets of JB Systems, Inc., d.b.a.
Mainsaver (the "Company") (a California corporation) as of December 31, 1997 and
1998, and the related statements of operations, stockholders' deficit and cash
flows for each of the three years in the period ended December 31, 1998. 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 generally accepted auditing
standards. 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 financial position of JB Systems, Inc. as of
December 31, 1997 and 1998 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998 in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
San Diego, California
December 28, 1999
F-15
<PAGE>
JB SYSTEMS, INC.
(D.B.A. MAINSAVER)
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1997 1998 1999
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash...................................................... $ 15 $ 24 --
Accounts receivable, net of allowance for doubtful
accounts of $0, $123 and $400, respectively............. 522 729 1,559
Prepaid expenses and other current assets................. 16 75 69
------- ------- --------
Total current assets.................................... 553 828 1,628
Property and equipment, net................................. 295 605 805
Capitalized software, net................................... 182 45 --
Other assets................................................ 23 102 64
------- ------- --------
Total assets............................................ $ 1,053 $ 1,580 $ 2,497
======= ======= ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Bank overdraft............................................ $ 192 $ 191 452
Line of credit............................................ -- 1,192 1,512
Accounts payable.......................................... 227 560 953
Accrued expenses.......................................... 280 230 277
Deferred revenues......................................... 1,087 1,020 1,515
Current portion of capital lease obligations.............. 70 67 211
Current portion of note payable to stockholder............ 79 -- --
------- ------- --------
Total current liabilities............................... 1,935 3,260 4,920
------- ------- --------
Deferred revenues........................................... 388 326 222
Capital lease obligations................................... 93 148 263
Notes payable to stockholder, net........................... 423 1,400 1,653
------- ------- --------
Total liabilities....................................... 2,839 5,134 7,058
------- ------- --------
Stockholders' Deficit:
Common Stock:...............................................
Class A common stock, no par value; 2,250 shares
authorized, 1,272 and 1,174 shares issued and
outstanding, respectively............................... 216 5,800 6,197
Class B nonvoting common stock, no par value; 250 shares
authorized, no shares issued and outstanding............ -- -- --
Accumulated deficit......................................... (2,002) (9,354) (10,758)
------- ------- --------
Total stockholders' deficit............................. (1,786) (3,554) (4,561)
------- ------- --------
Total liabilities and stockholders' deficit................. $ 1,053 $ 1,580 $ 2,497
======= ======= ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE BALANCE SHEETS.
F-16
<PAGE>
JB SYSTEMS, INC.
(D.B.A. MAINSAVER)
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues........................................... $5,183 $6,162 $ 7,218 $5,909 $ 6,267
Cost of revenues................................... 1,747 2,459 2,387 2,043 1,626
------ ------ ------- ------ -------
Gross profit..................................... 3,436 3,703 4,831 3,866 4,641
------ ------ ------- ------ -------
Operating expenses:
Selling, general and administrative.............. 2,714 2,932 4,892 3,139 3,799
Research and development......................... 823 778 946 594 1,774
Depreciation and amortization.................... 255 274 295 253 163
------ ------ ------- ------ -------
Total operating expenses....................... 3,792 3,984 6,133 3,986 5,736
------ ------ ------- ------ -------
Loss from operations............................... (356) (281) (1,302) (120) (1,095)
Interest expense................................... 68 75 165 93 309
------ ------ ------- ------ -------
Net loss......................................... $ (424) $ (356) $(1,467) $ (213) $(1,404)
====== ====== ======= ====== =======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-17
<PAGE>
JB SYSTEMS, INC.
(D.B.A. MAINSAVER)
STATEMENTS OF STOCKHOLDERS' DEFICIT
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
--------------------
NUMBER ACCUMULATED
OF SHARES AMOUNT DEFICIT TOTAL
--------- -------- ----------- --------
<S> <C> <C> <C> <C>
Balances at December 31, 1995.......................... 477 $ 77 $ (1,208) $(1,131)
Net loss............................................. -- -- (424) (424)
Stock compensation charge............................ -- 100 -- 100
Exercise of stock options and warrants............... 809 33 -- 33
------ ------ -------- -------
Balances at December 31, 1996.......................... 1,286 210 (1,632) (1,422)
Net loss............................................. -- -- (356) (356)
Repurchase of common stock and stockholder
distributions...................................... (15) (1) (14) (15)
Stock compensation charge............................ -- 6 -- 6
Exercise of stock options and warrants............... 1 1 -- 1
Issuance of common stock............................. -- -- -- --
------ ------ -------- -------
Balances at December 31, 1997.......................... 1,272 216 (2,002) (1,786)
Net loss............................................. -- -- (1,467) (1,467)
Repurchase of common stock and stockholder
distributions...................................... (1,272) (216) (5,885) (6,101)
Issuance of common stock............................. 1,174 5,800 -- 5,800
------ ------ -------- -------
Balances at December 31, 1998.......................... 1,174 5,800 (9,354) (3,554)
------ ------ -------- -------
The following information is unaudited:
Net loss (unaudited)................................... -- -- (1,404) (1,404)
Issuance of warrants................................... -- 397 -- 397
Balances at September 30, 1999 (unaudited)............. 1,174 $6,197 $(10,758) $(4,561)
====== ====== ======== =======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-18
<PAGE>
JB SYSTEMS, INC.
(D.B.A. MAINSAVER)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(424) $(356) $(1,467) $ (213) $(1,404)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 255 274 295 253 163
Stock compensation charge............................... 100 6 -- --
Amortization of debt discount........................... -- -- -- 50
Loss on disposal of assets.............................. -- -- 8 --
Changes in operating assets and liabilities:
Accounts receivable, net.............................. 144 145 (207) (427) (830)
Prepaid expenses and other current assets............. 25 18 (59) (100) 5
Accounts payable...................................... (32) (50) 333 (188) 393
Accrued expenses...................................... 85 (41) (50) 211 46
Deferred revenues..................................... (122) 249 (129) 341 392
Other assets.......................................... 16 -- (79) (82) 39
----- ----- ------- ------ -------
Net cash provided by (used in) operating
activities........................................ 47 245 (1,355) (205) (1,146)
----- ----- ------- ------ -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (43) (67) (352) (45) (27)
----- ----- ------- ------ -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net line of credit borrowings (repayments)................ 110 (200) 1,192 -- 320
Change in bank overdraft.................................. -- 192 -- (192) 261
Net (repayments) borrowings on note payable to
stockholder............................................. (3) 404 (502) (502) 600
Repayment of capital lease obligations.................... (41) (59) (73) (51) (32)
Net repayments on long term debt.......................... (89) (502) -- --
Proceeds from issuance of common stock.................... 33 1 5,800 5,800
Repurchase of Common Stock................................ -- (15) -- -- --
Distributions to stockholders............................. -- -- (4,701) (4,701) --
----- ----- ------- ------ -------
Net cash provided by (used in) financing
activities........................................ 10 (179) 1,716 354 1,149
----- ----- ------- ------ -------
Net increase (decrease) in cash............................. 14 (1) 9 104 (24)
Cash, beginning of year..................................... 2 16 15 15 24
----- ----- ------- ------ -------
Cash, end of year........................................... $ 16 $ 15 $ 24 119 --
===== ===== ======= ====== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest................................................ 58 59 139 69 235
Income taxes............................................ 1 -- -- -- 1
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:
Redemption of common stock in exchange for note payable to
stockholder in connection with the leveraged
recapitalization........................................ -- -- 1,400 1,400 --
Acquisition of equipment financed by capital lease
obligations............................................. 80 32 125 92 290
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-19
<PAGE>
JB SYSTEMS, INC.
(D.B.A. MAINSAVER)
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1. DESCRIPTION OF BUSINESS
JB Systems, Inc. (the "Company") is an enterprise asset management, or EAM,
company whose software enables customers to efficiently manage their equipment
maintenance processes.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION The Company generates revenues from licensing the
rights to use its software products primarily to end users. The Company also
generates revenues from post-contract support (maintenance), consulting and
training services performed for customers who license its products.
Revenues from software license agreements are recognized currently, provided
that all of the following conditions are met: a noncancelable license agreement
has been signed, the software has been delivered, there are no material
uncertainties regarding customer acceptance, collection of the resulting
receivable is deemed probable and the risk of concession is deemed remote, and
no other significant vendor obligations exist. Revenues from maintenance
services are recognized ratably over the term of the maintenance period,
generally one year. Maintenance revenues which are bundled with license
agreements are unbundled using vendor specific objective evidence. Consulting
revenues are primarily related to implementation services performed on a time
and material basis under separate service agreements for the installation of the
Company's software products. Revenues from consulting and training services are
recognized as the respective services are performed.
DEFERRED REVENUES Deferred revenues consists principally of customer
deposits and payments for software maintenance agreements with customers whereby
the Company receives payment in advance of performing the service. Revenues from
the contracts is recognized ratably over the contract period.
SOFTWARE DEVELOPMENT COSTS In accordance with Statement of Financial
Accounting Standards No. 86, "Accounting for the costs of computer software to
be sold, leased or otherwise marketed", software development costs are
capitalized from the time the product's technological feasibility has been
established until such time as the product is released for sale to the general
public. Amortization of capitalized software is generally recorded on a
straight-line basis over four years. No amounts were capitalized in the years
ended December 31, 1996, 1997, 1998 or in the nine month period ended
September 30, 1999, respectively. Amortization of capitalized software amounted
to $137, $137, $137, and $45 in such periods.
PROPERTY AND EQUIPMENT Property and equipment are stated at cost.
Depreciation and amortization of property and equipment are provided for using
the straight-line method over the estimated useful lives of the assets of five
years. Leasehold improvements are amortized on a straight-line basis over the
shorter of the lease term or estimated useful life of the leasehold improvement.
INCOME TAXES
Deferred income taxes are provided for temporary differences between the
financial statement and income tax bases of the Company's assets and
liabilities, based on statutory tax rates. A valuation
F-20
<PAGE>
JB SYSTEMS, INC.
(D.B.A. MAINSAVER)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
allowance is provided when it is more likely than not that some portion or all
of the deferred income tax assets will not be realized.
CONCENTRATION OF CREDIT RISK
Financial instruments that subject the Company to credit risk consist
primarily of accounts receivable. The Company performs ongoing credit
evaluations of its customers and maintains an allowance for potential credit
losses.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities, at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset may not
be recoverable. If the sum of the expected future cash flows is less than the
carrying amount of the asset, the Company recognizes an impairment loss.
INTERIM RESULTS (UNAUDITED). The accompanying balance sheet as of
September 30, 1999 and the related statements of operations and of cash flows
for the nine months ended September 30, 1998 and 1999, and the statement of
stockholders' deficit for the nine months ended September 30, 1999 are
unaudited. In the opinion of management, these statements have been prepared on
the same basis as the audited financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for the fair
statement of results of the interim periods. The data disclosed in these notes
to the financial statements at such dates and for such periods are also
unaudited.
3. RECAPITALIZATION
On August 11, 1998, the Company completed a leveraged buyout
recapitalization (the "Recapitalization") pursuant to a Plan of Merger (the
"Merger") among JBS Acquisition, Inc. ("Newco") as a purchaser, and both the
Company and the founder and majority stockholder of the Company (the "Founder")
as sellers. Under the Recapitalization, Newco was merged with and into the
Company, and the separate corporate existence of Newco ceased, resulting in the
Company as the surviving corporation. Each share of common stock of Newco issued
and outstanding immediately prior to the Merger was converted into one share of
common stock of the Company.
Under the Recapitalization, each share of the Company's stock issued and
outstanding immediately prior to the merger, other than the Founder's 25%
retained interest, was canceled and extinguished and converted automatically
into the right to receive Merger consideration as follows: (a) the Founder
F-21
<PAGE>
JB SYSTEMS, INC.
(D.B.A. MAINSAVER)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
3. RECAPITALIZATION (CONTINUED)
received a note in the principal amount of $2.0 million and a cash payment of
$1.9 million and (b) the minority stockholders of the Company who owned common
stock prior to the Merger received a cash payment of $2.3 million. The
Recapitalization was financed through cash contributions of $5.0 million by
stockholders of Newco in exchange for Newco common stock. These transactions are
being accounted for as a recapitalization under which the existing basis of
accounting will be continued, and assets and liabilities of the continuing
business are being carried forward.
On April 30, 1999, as a result of certain disputes, the Company, its
stockholders and the Founder agreed to reduce the note payable to the Founder
from $2.0 million $1.4 million, which has been recorded as a $600 reduction in
note payable to stockholder and repurchase of common stock and stockholder
distributions in the accompanying financial statements.
On August 11, 1998, one of the stockholders of Newco entered into a Purchase
Option Agreement with the Company and each of the other stockholders of the
Company, whereby the stockholder is entitled to buy out the other stockholders
of the Company. The purchase price of the option paid to the stockholders was
$757 in aggregate, which the stockholders used to acquire additional shares of
stock from the Company. The purchase option expired upon the acquisition of the
Company by Cayenta, Inc. (See Note 13.)
Sources and uses of cash in connection with the Recapitalization are
summarized below:
<TABLE>
<S> <C>
Sources of cash:
Newco common stock issued................................. $5,043
Purchase option agreement................................. 757
------
$5,800
======
Uses of cash:
Payment to founder........................................ $1,924
Payment to minority stockholders.......................... 2,326
Repayment of debt and accrued interest.................... 772
Transaction costs......................................... 421
Remaining cash............................................ 357
------
$5,800
======
</TABLE>
F-22
<PAGE>
JB SYSTEMS, INC.
(D.B.A. MAINSAVER)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 and 1998 are summarized as
follows:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Computer equipment.......................................... $ 518 $ 721
Leasehold improvements...................................... -- 21
Furniture and fixtures...................................... 140 277
----- ------
Total cost.................................................. 658 1,019
Accumulated depreciation.................................... (363) (414)
----- ------
Net property and equipment.................................. $ 295 $ 605
===== ======
</TABLE>
5. LINE OF CREDIT
The Company has a $2.0 million line of credit with a bank. Advances against
the line of credit bear interest at the bank's reference rate plus 0.75% (8.5 %
at December 31, 1998). Interest is payable monthly. The line of credit matures
April 2000 and is collateralized by substantially all of the assets of the
Company. The line of credit contained certain restrictions and financial
covenants. The line of credit was extinguished in connection with the Company
being acquired by Titan.
6. NOTES PAYABLE TO STOCKHOLDERS
At December 31, 1996, the Company had a note payable to an
officer/stockholder in the amount of $45 with interest payable quarterly at 8%
and principal due on demand. Additionally, the Company had a note payable to an
officer/stockholder of $457, due in monthly installments of $11 including
interest at 11.25%, maturing September 2002. Both of these notes were
extinguished in connection with the recapitalization (see Note 3).
In connection with the Recapitalization, the Company issued a note payable
to the Founder in the amount of $2.0 million, which was subsequently reduced to
$1.4 million (see Note 3), payable in full on September 1, 2001, plus interest
at a rate of ten percent per annum. The principal sum of this note may be
prepaid in whole or in part without penalty at any time by or on behalf of the
Company. Interest is payable monthly. This note was paid down to $500 in
connection with Cayenta's acquisition of the Company (see Note 13).
7. INCOME TAXES
As of December 31, 1998, the Company had net operating loss carryforwards of
approximately $2.0 million and $800 for Federal and California reporting
purposes, respectively. The differences between the federal and the California
losses are primarily attributable to the 50% limitation on state carryforwards.
The Federal loss carryforwards will begin expiring in 2018, unless previously
utilized, while the California losses will begin expiring in 2003. Utilization
of the Company's net operating loss carryforwards may be limited as a result of
certain changes in the Company's ownership. The realization of the deferred tax
asset is dependant upon the Company generating sufficient taxable income prior
to expiration of its operating loss and credit carryforwards. Due to the
uncertainty
F-23
<PAGE>
JB SYSTEMS, INC.
(D.B.A. MAINSAVER)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
7. INCOME TAXES (CONTINUED)
regarding realization of the deferred tax asset, management has provided a full
valuation allowance against the net deferred tax asset.
8. COMMITMENTS
The Company leases its facilities under operating leases that require
minimum monthly payments of $24, as well as payment of all property taxes,
insurance and other costs. In addition, the Company leases certain office
equipment under operating leases through September 2002.
Property under capital leases at December 31, 1998 consists primarily of
computer and office equipment. Total cost of property under capital leases was
$412 at December 31, 1998. Accumulated depreciation related to property under
capital leases was $218 at December 31, 1998.
Future minimum rentals under capital and operating leases as of
December 31, 1998 are approximately as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
-------- ---------
<S> <C> <C>
1999.................................................... $ 87 $ 307
2000.................................................... 68 179
2001.................................................... 51 6
2002.................................................... 31 --
2003.................................................... 23 --
-------- --------
Total future minimum lease payments..................... 260 $ 492
========
Less amount representing interest....................... (45)
--------
Present value of minimum lease payments................. 215
Current portion of capital lease obligations............ (67)
--------
Long-term capital lease obligations..................... $ 148
========
</TABLE>
9. EMPLOYEE BENEFIT PLANS
The Company maintains a 401(k) plan. Under the plan, qualified employees may
elect to defer up to 15% of their salaries, subject to the Internal Revenue Code
limits. The Company contributes a matching 30% of employee contributions for all
employees with annual incomes less than $80. Employees with annual incomes of
$80 or more do not receive matching contributions from the Company. Company
contributions to the Plan were $13, $14, $36, $32, and $46 during the years
ended December 31, 1996, 1997, 1998 and for the nine months ended September 30,
1998 and 1999, respectively.
10. STOCK OPTIONS
The Company had an incentive stock option plan which was terminated in 1998,
and all outstanding options were canceled. The Company adopted a new stock
option plan (the "Plan") in 1998 to enable key employees and non-employees to
acquire shares of the Company's common stock.
F-24
<PAGE>
JB SYSTEMS, INC.
(D.B.A. MAINSAVER)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
10. STOCK OPTIONS (CONTINUED)
Up to 141 options may be issued under the Plan at an exercise price of not less
than 100% of the fair market value at the date of grant. The stock options vest
ratably over a four-year period from the date of grant. The stock options may be
granted with expiration dates not to exceed ten years. The Company granted 118
and 14 stock options during the year ended 1998 and the nine month period ended
September 30, 1999, respectively, with an exercise price of $6.31 per share. No
options are exercisable at December 31, 1998.
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," defines and encourages the use of the fair-value
method of accounting for employee stock-based compensation, but allows the
continued use of the intrinsic value based method of accounting prescribed in
Accounting Principles Board Opinion No. 25 and related interpretations. As
permitted under SFAS No. 123, the Company continues to use the intrinsic method
of accounting for stock-based compensation. Had the compensation cost for the
Plan been determined using the fair-value method described in SFAS No. 123, the
Company's net loss would not have been substantially different from the reported
net loss in 1997 and 1998.
11. RELATED PARTY TRANSACTIONS
The Company has a management agreement with one of its stockholders to
provide management and consulting services related to the operations of the
Company. The monthly service fee in connection with the agreement is $8 plus
out-of-pocket expenses, and will continue until the occurrence of certain events
as defined in the agreement. Additionally, the Company paid a $50 transaction
fee to the stockholder in connection with the Recapitalization described in
Note 3.
Additionally, the Company entered into a consulting agreement with the
Founder to provide services commencing February 1999 at $17 per month, plus
benefits and out-of-pocket expenses, for one year.
12. LEGAL PROCEEDINGS
On September 14, 1998, a former distributor of the Company filed an action
alleging the Company wrongfully terminated its distribution agreement and is
claiming damages of not less than $650. Settlement negotiations are in process.
Management believes that the claim is without merit. Additionally, the Company
has received indemnification from loss on the claim from the Founder.
13. EVENTS SUBSEQUENT TO DECEMBER 31, 1998
On August 18, 1999, the Company entered into a Convertible Subordinated Loan
Agreement whereby a total of $600 was loaned to the Company by its stockholders
in amounts proportionate to their respective ownership percentages. The loans
are payable in $100 monthly installments commencing March 15, 2000, with a final
payment due on August 15, 2000. Interest is payable monthly commencing
September 15, 1999 at eight %. The loan is subordinated to the credit line the
Company has with a bank (see Note 5).
The stockholders may convert any unpaid balance on August 15, 2000 into a
certain number of Class A common stock determined by dividing the unpaid balance
by the conversion price of $3.71.
F-25
<PAGE>
JB SYSTEMS, INC.
(D.B.A. MAINSAVER)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
13. EVENTS SUBSEQUENT TO DECEMBER 31, 1998 (CONTINUED)
The agreement also provides that, upon repayment of the loans, the Company will
issue the stockholders 59 warrants of the Company's Class A common stock at an
exercise price of $3.71 per share. The warrants expire after ten years. The
Company has recorded debt discount related to these warrants of $397 as of
August 1999 and has recorded related amortization of $50 in the nine month
period ended September 30, 1999.
In November 1999, the Company was acquired by Cayenta, Inc. for
$11.7 million cash of which approximately $8.2 million was paid at closing, $500
due in February 2000 and $3.0 million due May 2001 after satisfaction of
possible working capital adjustments or indemnification obligations. In
addition, Cayenta paid approximately $3.4 million to reduce the outstanding
indebtedness of the Company. The Company entered into agreements with its option
and warrant holders pursuant to which all options and warrants of the Company
were terminated concurrently with the closing of the acquisition.
F-26
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Assist Cornerstone Technologies, Inc.
We have audited the accompanying balance sheets of Assist Cornerstone
Technologies, Inc. as of December 31, 1998 and 1997, and the related statements
of operations, shareholders' equity (deficit), and cash flows for each of the
three years in the period ended December 31, 1998. 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 generally accepted auditing
standards. 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 financial position of Assist Cornerstone
Technologies, Inc. at December 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
[SIGNATURE]
May 28, 1999, except for
Note 9, as to which the date
is September 22, 1999.
F-27
<PAGE>
ASSIST CORNERSTONE TECHNOLOGIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -----------------------
1999 1998 1997
-------------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 412,692 $ 741,701 $ 764,488
Accounts receivable, less allowance of $207,809
(unaudited) at September 30, 1999, $160,392 in 1998 and
$143,338 in 1997........................................ 2,626,812 2,813,220 2,573,775
Prepaid expenses.......................................... 171,289 77,328 27,220
Deferred income taxes..................................... 128,000 128,000 --
Other receivables......................................... 81,184 107,277 75,719
----------- ---------- ----------
Total current assets........................................ 3,419,977 3,867,526 3,441,202
Property and equipment:
Office furniture and equipment............................ 316,247 312,447 315,198
Leasehold improvements.................................... 45,122 45,122 45,123
Computer equipment........................................ 499,209 369,647 350,044
----------- ---------- ----------
860,578 727,216 710,365
Less accumulated depreciation............................. (567,767) (445,556) (338,222)
----------- ---------- ----------
Net property and equipment.................................. 292,811 281,660 372,143
Loan fees, net of accumulated amortization of $80,296 in
1998 and $26,346 in 1997.................................. 260,159 298,853 334,803
Intangible asset, net of accumulated amortization of
$225,000 in 1998 and $75,000 in 1997...................... 0 75,000 225,000
----------- ---------- ----------
$ 3,972,947 $4,523,039 $4,373,148
=========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 1,218,837 $ 928,770 $ 860,048
Accrued liabilities....................................... 338,129 397,353 282,795
Deferred revenue.......................................... 507,547 989,763 647,762
Taxes payable............................................. -- -- 132,821
Deferred income taxes..................................... 107,000 -- 159,000
Current portion of capital leases......................... 80,461 74,490 67,212
Current portion of notes payable to related parties....... 107,010 160,000 --
----------- ---------- ----------
Total current liabilities................................... 2,358,984 2,550,376 2,149,638
Long-term portion of capital leases......................... 79,908 142,243 218,836
Notes payable to related parties............................ 2,326,830 1,845,617 1,892,333
Deferred income taxes....................................... -- 107,000 --
Other long-term liabilities................................. 117,457 151,558 --
Commitments and contingencies
Redeemable preferred stock:
Preferred stock, issuable in series, $.001 par value,
12,000 shares authorized; $100 per share liquidation
value:
Series A, redeemable preferred stock, 7,000 shares
authorized; 6,200 shares issued and outstanding in
1998 and 1997 (redemption value of $685,100).......... 197,963 197,963 65,992
Series B, redeemable preferred stock, 5,000 shares
authorized; 5,000 shares issued and outstanding in
1998 and 1997 (redemption value of $500,000).......... 107,148 107,148 35,719
Shareholders' equity (deficit):
Common stock, $.001 par value, 20,000,000 shares
authorized; 4,654,145 (unaudited) shares issued as of
September 30, 1999, 4,642,787 shares issued in 1998 and
4,662,542 shares in 1997................................ 4,654 4,643 4,663
Additional paid-in-capital................................ 9,471 -- 199,642
Accumulated deficit....................................... (1,229,468) (583,509) (193,675)
----------- ---------- ----------
Total shareholders' (deficit) equity........................ (1,215,343) (578,866) 10,630
----------- ---------- ----------
$ 3,972,947 $4,523,039 $4,373,148
=========== ========== ==========
</TABLE>
SEE ACCOMPANYING NOTES.
F-28
<PAGE>
ASSIST CORNERSTONE TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31
------------------------ ---------------------------------------
1999 1998 1998 1997 1996
----------- ---------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Licenses..................... $ 1,831,172 $1,737,438 $ 2,392,583 $ 2,105,301 $ 979,141
Service and support.......... 4,585,366 3,198,204 4,604,541 3,399,074 3,386,197
Hardware..................... 3,168,424 3,133,083 4,525,538 5,418,202 2,968,239
----------- ---------- ----------- ----------- -----------
Total revenues................. 9,584,962 8,068,725 11,522,662 10,922,577 7,333,577
Operating expenses:
Cost of license revenue...... 355,272 346,338 498,031 527,082 179,174
Cost of service and support
revenue.................... 2,475,991 2,035,608 2,734,878 2,498,159 2,466,812
Cost of hardware revenue..... 2,764,945 2,750,342 3,684,431 4,519,858 2,254,561
General and administrative... 2,749,837 2,347,870 2,499,123 1,921,569 1,581,882
Sales and marketing.......... 1,298,699 824,911 1,978,027 1,588,379 1,063,893
Research and development..... 440,578 272,866 396,965 139,144 136,280
----------- ---------- ----------- ----------- -----------
10,085,322 8,577,935 11,791,455 11,194,191 7,682,602
----------- ---------- ----------- ----------- -----------
Loss from operations........... (500,360) (509,210) (268,793) (271,614) (349,025)
Other income (expense):
Interest income.............. 88,095 32,819 29,690 35,052 18,418
Interest expense............. (233,694) (234,837) (318,716) (200,939) (21,672)
Cumulative effect of change
in taxable status of
entity..................... -- -- -- (236,000) --
----------- ---------- ----------- ----------- -----------
Loss before income taxes....... (645,959) (711,228) (557,819) (673,501) (352,279)
Income tax benefit
(expense).................. -- 207,725 179,794 (76,000) --
----------- ---------- ----------- ----------- -----------
Net loss....................... (645,959) (503,503) (378,025) (749,501) (352,279)
Accretion of:
Series A preferred stock..... -- (98,978) (131,971) (65,986) --
Series B preferred stock..... -- (53,572) (71,429) (35,714) --
----------- ---------- ----------- ----------- -----------
Net loss applicable to common
shareholders................. $ (645,959) $ (656,053) $ (581,425) $ (851,201) $ (352,279)
=========== ========== =========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES.
F-29
<PAGE>
ASSIST CORNERSTONE TECHNOLOGIES, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
----------- -------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996........ 8,500,000 $ 2,000 $ -- $ 1,500,421 $ 1,502,421
Net loss........................ -- -- -- (352,279) (352,279)
Distributions to Shareholders... -- -- -- (30,000) (30,000)
----------- ------- ----------- ----------- -----------
Balances at December 31, 1996..... 8,500,000 2,000 -- 1,118,142 1,120,142
Issuance of common stock........ 97,112 97 43,403 -- 43,500
Issuance of common stock upon
exercise of preemptive
right......................... 315,430 315 (215) -- 100
Adjustment to par value for
stock split................... -- 6,501 (6,501) -- --
Issuance of Series A preferred
stock......................... -- -- 619,994 -- 619,994
Issuance of Series B preferred
stock......................... -- -- 499,995 -- 499,995
Issuance of warrant to purchase
2,166,377 common shares....... -- -- 198,100 -- 198,100
Shares acquired in shareholder
buyout........................ (4,250,000) (4,250) (1,053,434) (562,316) (1,620,000)
Accretion of Series A preferred
stock......................... -- -- (65,986) -- (65,986)
Accretion of Series B preferred
stock......................... -- -- (35,714) -- (35,714)
Net loss........................ -- -- -- (749,501) (749,501)
----------- ------- ----------- ----------- -----------
Balances at December 31, 1997..... 4,662,542 4,663 199,642 (193,675) 10,630
Issuance of common stock for
services...................... 43,331 43 13,886 -- 13,929
Issuance of warrant to purchase
100,000 common shares......... 18,000 -- 18,000
Shares acquired in shareholder
buyout........................ (63,086) (63) (39,937) -- (40,000)
Accretion of Series A preferred
stock......................... -- -- (131,971) -- (131,971)
Accretion of Series B preferred
stock......................... -- -- (59,620) (11,809) (71,429)
Net loss........................ -- -- -- (378,025) (378,025)
----------- ------- ----------- ----------- -----------
Balances at December 31, 1998..... 4,642,787 $ 4,643 $ -- $ (583,509) $ (578,866)
=========== ======= =========== =========== ===========
The following information is
unaudited:
Issuance of common stock........ 11,358 11 9,471 -- 9,482
Net loss........................ (645,959) (645,959)
----------- ------- ----------- ----------- -----------
Balances at September 30, 1999.... 4,654,145 $ 4,654 $ 9,471 $(1,229,468) $(1,215,343)
=========== ======= =========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES.
F-30
<PAGE>
ASSIST CORNERSTONE TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
--------------------- ---------------------------------
1999 1998 1998 1997 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss....................................... $(645,959) $(503,503) $(378,025) $(749,501) $(352,279)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization.............. 122,211 227,844 309,121 217,664 98,707
Amortization of loan fees.................. -- -- 53,950 26,346 --
Amortization of rental fees................ -- -- 3,789 -- --
Accretion on note payable to related party
for warrant.............................. -- -- 28,284 15,333 --
Provision for bad debts.................... -- -- 219,153 9,023 --
Common stock issued for services........... -- -- 13,929 -- --
Deferred income taxes...................... -- -- (180,000) 159,000 --
Change in operating assets and liabilities:
Accounts receivable...................... 186,407 341,391 (458,598) (300,669) (305,517)
Prepaid expenses and other receivables... (67,867) (80,250) (81,666) (43,339) 109,596
Accounts payable......................... 290,067 288,423 68,722 286,404 397,603
Accrued liabilities and other............ 47,785 81,503 106,980 19,779 100,571
Deferred revenue......................... (482,216) (102,438) 342,001 349,047 58,745
Income taxes payable..................... -- (349,158) (132,821) 132,821 --
--------- --------- --------- --------- ---------
Net cash (used in) provided by operating
activities................................... (549,572) (96,188) (85,181) 121,908 107,426
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment............ (19,668) (31,537) (68,638) (62,679) (106,996)
Proceeds from sale of property and equipment... -- -- -- -- 5,054
Addition of intangible asset................... -- -- -- (300,000) --
--------- --------- --------- --------- ---------
Net cash used in investing activities.......... (19,668) (31,537) (68,638) (362,679) (101,942)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes to related parties......... 460,000 160,000 160,000 -- --
Principal payments on notes to related
parties...................................... -- -- (75,000) (25,000) --
Net proceeds from issuance of debt............. -- -- -- 1,638,851 --
Proceeds from borrowings under line of
credit....................................... -- -- -- -- 200,000
Principal payments on line of credit........... -- -- -- (200,000) (160,000)
Net proceeds from lease buyout................. -- -- 155,347 -- --
Principal payments on capital lease
obligations.................................. (229,251) (99,919) (69,315) (61,182) (35,462)
Net proceeds from issuance of common stock..... 9,482 -- -- 43,600 --
Proceeds from issuance of preferred stock...... -- -- -- 500,000 --
Issuance of warrant............................ -- -- -- 100 --
Shareholder buyout............................. -- (35,000) (40,000) (900,000) --
Distributions to shareholders.................. -- -- -- -- (30,000)
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing
activities................................... 240,231 25,081 131,032 996,369 (25,462)
--------- --------- --------- --------- ---------
Net (decrease) increase in cash................ (329,009) (102,644) (22,787) 755,598 (19,978)
Cash at beginning of year...................... 741,701 764,488 764,488 8,890 28,868
--------- --------- --------- --------- ---------
Cash at end of period.......................... $ 412,692 $ 661,844 $ 741,701 $ 764,488 $ 8,890
========= ========= ========= ========= =========
</TABLE>
SEE ACCOMPANYING NOTES.
F-31
<PAGE>
ASSIST CORNERSTONE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Assist Cornerstone Technologies, Inc., (the Company) is a Utah Corporation
formed in December 1987. The Company develops financial accounting software
designed to run on the IBM AS/400. The Company has a working relationship with
IBM, which includes the remarketing of IBM hardware. The Company generates
revenue from four primary sources: license fees, consulting services, software
support agreements, and hardware resales.
The Company employs a direct sales force with salespersons located in
California, Florida, Illinois, and Utah.
On June 11, 1997 the Company entered into a series of transactions, the net
effect of which was a recapitalization of the Company. The Company received
$2,500,100 from an outside group of investors. Of this total, $2,000,000 was
received in exchange for a promissory note (Note 4) bearing interest at twelve
percent and due in seven years; $500,000 was received in exchange for 5,000
shares of Series B Non-Cumulative Non-Voting Redeemable Preferred Stock; and,
$100 was received for 2,166,377 warrants convertible into common stock at zero
cost.
The Company used a portion of the proceeds to repurchase 4,250,000 shares of
common stock from a selling shareholder and also paid a portion of the proceeds
as consideration for a non-compete agreement. The selling shareholder received
additional consideration in the form of a $100,000 note payable and 6,200 shares
of Series A Cumulative Convertible Redeemable Exchangeable Non-Voting Preferred
Stock.
2. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with general accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts in the financial statements and the accompanying
notes. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year presentation.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of cash and accounts receivable. Risks
associated with cash are mitigated by banking with creditworthy institutions.
The Company sells its products to distributors and end users. To reduce credit
risk, management performs periodic credit evaluations of its customers'
financial condition and requires deposits from new customers. The Company
maintains reserves for potential credit losses, but historically has not
experienced any significant losses related to end users or distributors.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation and amortization are determined using the straight-line method over
the estimated useful lives of the assets ranging from three to ten years. Assets
acquired pursuant to capital lease obligations are amortized over the assets'
estimated useful lives. Maintenance and repairs are expensed as incurred.
F-32
<PAGE>
ASSIST CORNERSTONE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS
Intangible assets consist of a non-compete agreement that is stated at cost.
Amortization is calculated on the straight-line method, a rate based on an
estimated useful life of two years.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards (SFAS)
No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS TO BE DISPOSED OF,
the Company reviews long-lived and intangible assets for impairment whenever
events or circumstances indicate the carrying value of an asset may not be
recoverable.
DEFERRED REVENUE
Service revenue is deferred and recognized ratably over the term of the
service contracts, on a straight-line basis. Costs for work performed under the
service contracts are charged to operations as incurred.
INCOME TAXES
The Company was an S Corporation from inception through June 11, 1997 and
therefore did not compute a federal or state income tax provision under current
tax laws. Shareholders were taxed on their share of the Company's income while
the Company was an S Corporation. From June 12, 1997 forward the Company will
operate as a C Corporation. The 1997 tax provision on the financial statements
reflects the cumulative effect of changing from an S corporation and also
provides for the period the Company was a C Corporation.
The Company uses an asset and liability approach to account for income taxes
which requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between the financial
statement carrying amount and the tax bases of assets and liabilities and net
operating loss and tax credit carry forwards.
STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB 25) and related
Interpretations in accounting for its employee stock options rather than
adopting the alternative fair value accounting provided for under
FASB Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION (SFAS 123).
Under APB 25, because the exercise price of the Company's stock options equals
the market price of the underlying stock on the date of grant, no compensation
expense is recognized.
REVENUE RECOGNITION
Revenue from license fees is recognized after a signed contract has been
secured and the software has been delivered. Installation of the software and
employee training are the responsibilities of each customer.
Support revenue is recognized ratably over the life of the support contract,
which is generally one year. Service revenue from consulting and custom
programming is recognized as the services are
F-33
<PAGE>
ASSIST CORNERSTONE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
performed. The associated costs are included in the cost of service and support
revenue. Hardware revenue is recognized on the date IBM ships the hardware to
the customer with the associated costs included in cost of hardware revenue.
RESEARCH AND DEVELOPMENT
Research and development expenditures are charged to operations as incurred.
Statement of Financial Accounting Standards ("SFAS") No. 86, ACCOUNTING FOR THE
COSTS OF COMPUTER SOFTWARE TO BE SOLD, LEASED OR OTHERWISE MARKETED, requires
capitalization of certain software development costs subsequent to the
establishment of technological feasibility.
Based on the Company's product development process, technological
feasibility is established upon completion of a working model. Costs incurred by
the Company between completion of the working model and the point at which the
product is ready for general release have been insignificant.
ADVERTISING COSTS
Advertising costs are expensed during the year in which they are incurred.
Advertising costs were $51,234, $14,736, and $33,184 respectively for years
ended December 31, 1998, 1997 and 1996.
Advertising costs for the unaudited periods ended September 30, 1999 and
1998 were $246,971 and $43,167, respectively.
COMPREHENSIVE INCOME
In 1998, the Company adopted SFAS No. 130, REPORTING COMPREHENSIVE INCOME,
which is effective for fiscal years beginning after December 15, 1997. SFAS
No. 130 requires that all items that are recognized under accounting standards
as components of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial statements. The items
of other comprehensive income that are typically required to be displayed are
foreign currency items, minimum pension liability adjustments, and unrealized
gains and losses on certain investments in debt and equity securities. There
were no items of other comprehensive income in 1998 or prior.
F-34
<PAGE>
ASSIST CORNERSTONE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosures of cash flow information were as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED DECEMBER 31,
SEPTEMBER 30, ------------------------------
1999 1998 1997 1996
------------- -------- -------- --------
(UNAUDITED)
-------------
<S> <C> <C> <C> <C>
Cash paid for:
Interest........................ $190,881 $288,075 $185,606 $ 21,672
Income taxes.................... -- -- 24,000 --
SCHEDULE OF NON CASH INVESTING AND
FINANCING ACTIVITIES
Issuance of warrant(s) in
connection with $160,000 note
in 1998 and $2,000,000 note in
1997.......................... -- 18,000 198,000 --
Issuance of note in shareholder
buyout........................ -- -- 100,000 --
Property and equipment acquired
under capital lease........... -- -- -- 344,781
</TABLE>
3. COMMITMENTS AND CONTINGENCIES
The Company entered into a $345,000, sixty month lease agreement in
September 1996. The agreement was used to acquire furniture, a phone system, and
computer equipment for the new leased facilities and is collateralized by this
equipment. The ownership of the equipment passes to the Company at the end of
the lease period. The lease carries an annual interest rate of 10.4%. Annual
lease payments total $93,746.
The Company entered into a sixty month lease agreement in October 1995. The
Company acquired leasehold improvements valued at $20,255, and the lease is
collateralized by these improvements.
The Company entered into an operating lease with a related party for its new
headquarters in May 1996. Beginning November 1, 1998, the Company agreed to
modify the lease. In exchange for consideration received of $155,347, the
Company agreed to a monthly rent increase of $4,205 through the remaining term
of the lease. The consideration received has been capitalized and is being
offset against future rent expense on a straight-line basis over the remaining
initial lease term. The lease runs through April 30, 2004, and contains an
option to renew the lease for two, successive five year periods. The Company may
exercise the option at any time. The lease requires future annual payments of
$201,856. The Company entered into two other facilities leases in 1997. One
lease is for a sales office in Illinois, and the other is for a sales office in
Southern California. Both leases are on a month to month basis. Rent expense was
approximately $161,000, $157,000 and $127,148 for 1998, 1997 and 1996,
respectively. Rent expense was approximately $132,000 and $120,000 for the
unaudited nine months ended September 30, 1999 and 1998, respectively.
F-35
<PAGE>
ASSIST CORNERSTONE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The following summarizes the future minimum lease payments required under
leases with initial terms greater than one year as of December 31, 1998:
<TABLE>
<CAPTION>
OPERATING
YEAR ENDING DECEMBER 31 CAPITAL LEASES LEASE
- ----------------------- -------------- ----------
<S> <C> <C>
1999........................................................ $ 93,746 $ 222,899
2000........................................................ 92,483 207,993
2001........................................................ 66,521 201,856
2002........................................................ -- 201,856
2003........................................................ -- 201,856
Thereafter.................................................. -- 67,285
-------- ----------
Total....................................................... 252,750 1,103,745
Amount representing interest................................ (36,017)
--------
Present value of minimum payments........................... 216,733
Current portion of capital leases........................... (74,490)
--------
Long-term portion of capital leases......................... $142,243
========
</TABLE>
Furniture and equipment includes assets recorded under capital leases of
approximately $243,632 at December 31, 1998 and 1997. Accumulated depreciation
on assets recorded under capital leases was $192,914 and $115,749 at
December 31, 1998 and 1997. Furniture and equipment assets under capital leases
totaled $243,632 (unaudited) as of September 30, 1999. Accumulated depreciation
on assets recorded under capital leases was $266,993 (unaudited) as of
September 30, 1999.
The Company is involved in various legal proceedings which arise from time
to time in connection with the conduct of the Company's business. In the opinion
of management, such proceedings will not have a material adverse effect on the
Company's financial condition, results of operations, or cash flows.
4. DEBT FINANCING
On June 11, 1997 the Company issued a $2,000,000 Note to an outside group of
investors. The Note is due in seven years and carries an interest rate of twelve
percent. Interest is due monthly with principal payments due quarterly over the
final three years of the Note. The Note is secured by all tangible and
intangible assets of the Company. The Company has various financial covenants
that it must conform to under the terms of the Note.
At December 31, 1998 the Company was in violation of certain loan covenants
under the debt agreement (see Note 9).
On February 13, 1998 the Company issued a $160,000 secured convertible
promissory note to an outside group of investors with a warrant to purchase up
to 100,000 common shares at $.45 per share. The note is convertible at any time
into 1,600 Series B preferred shares, subject to certain adjustments. In
addition, the Company will issue a warrant to purchase 257,341 common shares at
$.45 per share, if the outside group of investors converts the note to Series B
preferred shares. The note is due in one year and carries an interest rate of
ten percent. Interest is due monthly. Interest payments on the notes totaled
$172,111 (unaudited) for the nine months ended September 30, 1999.
Interest payments on the Notes totaled $252,000 and $134,667 for the years
ended December 31, 1998 and 1997, respectively.
F-36
<PAGE>
ASSIST CORNERSTONE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. REDEEMABLE PREFERRED STOCK
On June 9, 1997 the Company authorized a total of 12,000 shares of
Redeemable Preferred Stock, with a par value per share of $0.001 and a
liquidation value per share of $100. The Redeemable Preferred Stock is issuable
in series consisting of 7,000 shares of Series A 7% Cumulative Convertible
Redeemable Exchangeable Non-Voting preferred stock (Series A Preferred) and
5,000 shares of Series B 8% Non-Cumulative Non-Voting Redeemable preferred stock
(Series B Preferred).
In exchange for $100 and in connection with the recapitalization, the
Company issued a warrant convertible into 2,166,377 shares of common stock at
zero cost. An additional $500,000 was received in exchange for 5,000 shares of
Series B Preferred. The holder of the Series B Preferred and warrant is entitled
to designate two of the five directors to the Company's Board of Directors. The
Series B Preferred is mandatorily redeemable upon maturity, prepayment or
mandatory prepayment of the Note (See Note 4). Accretion totaling $71,429 and
$35,714 have been recorded in the accompanying balance sheets for the years
ended December 31, 1998 and 1997, respectively, as an increase to the value of
the Series B Preferred stock to reflect the redemption provision.
In June 1997, the Company used a portion of the proceeds from the
recapitalization to repurchase 4,250,000 shares of common stock from a selling
shareholder and also paid a portion of the proceeds as consideration for a
non-compete agreement. The selling shareholder received additional consideration
in the form of a $100,000 note payable (none of which remains outstanding at
December 31, 1998) issued by the Company and 6,200 shares of Series A Preferred
stock. The Series A Preferred stock is convertible on a share-for-share basis
into common stock at $1.50 per share. The Series A Preferred stock is
mandatorily redeemable if the Note is still outstanding at the end of the 85(th)
month from the original issue date. The preferred shares, however, cannot be
redeemed if the Note is in default or redemption of the preferred shares would
cause the Note to be in default or cause a reduction in the Company's capital to
less than the amount of capital required by law. At December 31, 1998 and 1997,
the Company accreted $131,971 and $65,986, respectively, relating to the
Series A preferred shares.
6. SHAREHOLDERS' EQUITY
In March 1997, the Company authorized a 425 for one forward stock split. All
share amounts have been retroactively adjusted to reflect the forward stock
split.
At December 31, 1998, the Company had reserved 5,940,319 shares of common
stock for future issuance, including 413,333 shares reserved for the conversion
of Series A Preferred, 2,719,275 shares for exercise of warrants, and 2,807,711
shares for the exercise of stock options.
On June 9, 1997 the Company changed the par value per share of the Common
Stock from $0.0002 to $0.001 and increased the number of authorized shares of
the Company's Common Stock from 10,000,000 shares to 20,000,000 shares
In 1997, a former shareholder exercised his preemptive right to purchase
5 percent of the Company's common stock for $100, which resulted from the sale
of ten percent or more of the then outstanding stock.
STOCK OPTION PLAN
On March 1, 1996, the Board of Directors adopted an employee stock option
plan which authorized 1,000,000 common shares for issuance under the provisions
of the plan. The stock option plan was subsequently amended to increase the
authorized number of common shares issuable to 2,807,711. In 1996 the Company
granted 740,500 options to employees and 3,000 options to a
F-37
<PAGE>
ASSIST CORNERSTONE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. SHAREHOLDERS' EQUITY (CONTINUED)
consultant. During 1997, 410,830 options were granted to Company personnel and
31,602 shares were issued to an outside consultant. The options issued to
Company personnel vest three or four years from the date of grant and expire no
more than ten years from the date of grant.
A summary of stock option activity, and related information for the years
ended December 31, 1996, 1997 and 1998 follows:
<TABLE>
<CAPTION>
OUTSTANDING STOCK
OPTIONS
SHARES --------------------- WEIGHTED-
AVAILABLE NUMBER OF PRICE PER AVERAGE
FOR GRANT SHARES SHARE EXERCISE PRICE
--------- --------- --------- --------------
<S> <C> <C> <C> <C>
March 1, 1996.................................... 1,000,000 -- -- --
Options granted................................ (743,500) 743,500 $ .60 $.60
Options canceled............................... 17,000 (17,000) $ .60 $.60
--------- ---------
Balance at December 31, 1996..................... 273,500 726,500 $ .60 $.60
Additional authorization....................... 1,807,711 -- -- --
Options granted................................ (442,432) 442,432 $.45-.60 $.58
Options canceled............................... 249,477 (249,477) $ .60 $.60
--------- ---------
Balance at December 31, 1997..................... 1,888,256 919,455 $.45-.60 $.60
Options granted................................ (207,900) 207,900 $ .45 $.45
--------- ---------
Balance at December 31, 1998..................... 1,680,356 1,127,355 $.45-.60 $.51
========= =========
Exercisable at December 31, 1998................. 228,139 $ .45 $.45
=========
</TABLE>
The weighted average fair value of options granted for the years ended
December 31, 1998, 1997 and 1996 was $.18, $.18 and $.15, respectively. The
weighted average remaining contractual life of the options outstanding and
options exercisable at December 31, 1998 was 8.5 years.
Pro forma information regarding net income (loss) is required by SFAS 123,
and has been determined as if the Company had accounted for its employee stock
options under the fair value method. The fair value of these options was
estimated at the date of grant using a Minimum Value option pricing model with
the following weighted average assumptions for 1998, 1997 and 1996,
respectively: risk-free interest rate of 5.0; dividend yield of 0%; and a
weighted-average expected life of the option of 10 years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting period. Because the effect of
SFAS No. 123 is prospective, the initial impact on pro forma net loss may not be
representative of compensation expense in future years.
For the years ended December 31, 1998, 1997 and 1996, pro forma net loss was
approximately $343,000, $805,000 and $374,074, respectively.
F-38
<PAGE>
ASSIST CORNERSTONE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. SHAREHOLDERS' EQUITY (CONTINUED)
WARRANTS
In connection with the issuance of a $2,000,000 Note to a related party, the
Company issued a warrant to purchase 2,166,377 shares of the Company's common
stock at zero cost. Each warrant is exercisable for a period of ten years from
the date of the closing of the Note. In addition, at closing, the Company issued
a warrant to acquire an additional 373,576 for $.10 per share to one individual
In June 1997 the Company also issued a warrant for services provided to
purchase 79,322 shares of common stock at $.10 per share.
In February 1998, the Company issued a warrant to purchase 100,000 common
shares at $.45 per share in connection with the issuance of a secured promissory
note for $160,000 to a related party. In conjunction with the issuance of the
warrant, the Company capitalized additional expense of $18,000 to loan fees in
the accompanying balance sheet. The warrant expires one year from the date of
issuance.
7. BENEFIT PLAN
The Company has a 401(k) savings plan that covers substantially all
full-time employees. Under the terms of the plan, the Company provides no match
of employee contributions. Employees are eligible for participation after one
month of service. The Company's administrative expenses relating to the 401(k)
plan were $4,744, $5,230 and $3,977 for 1998, 1997 and 1996, respectively.
8. INCOME TAXES
The provision for income taxes is computed for the period June 11, 1997
(when the Company converted from Subchapter S to Subchapter C status) to
December 31, 1998 and consists of the following:
<TABLE>
<CAPTION>
1998 1997
--------- --------
<S> <C> <C>
Current taxes:
Federal.............................................. $ -- $127,000
State................................................ -- 26,000
Deferred taxes:
Federal.............................................. (164,000) (70,000)
State................................................ (16,000) (7,000)
--------- --------
$(180,000) $ 76,000
========= ========
</TABLE>
F-39
<PAGE>
ASSIST CORNERSTONE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
Deferred income taxes are provided for temporary differences in recognizing
certain income and expense items for financial and tax reporting purposes.
Significant components of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts..................... $ 60,000 $ 53,000
Accrued liabilities and other....................... 80,000 42,000
Covenant not to compete............................. 73,000 24,000
--------- ---------
Total deferred assets................................. 213,000 119,000
Deferred tax liabilities:
Change from Cash to Accrual......................... (155,000) (232,000)
Depreciation........................................ (24,000) (32,000)
Other............................................... (13,000) (14,000)
--------- ---------
Total deferred liabilities............................ (192,000) (278,000)
--------- ---------
Net deferred tax asset (liability).................... $ 21,000 $(159,000)
========= =========
</TABLE>
9. SUBSEQUENT EVENTS
In May of 1999 the Company extended the $160,000 secured promissory note to
May 12, 2000 under substantially similar terms.
In July of 1999 the Company signed an accounts receivable purchase agreement
with Silicon Valley Bank authorizing availability of up to $1,000,000 from
receivable balances less than 90 days past due to be purchased by Silicon Valley
Bank. Interest is charged at prime plus 4% and the agreement is effective for
1 year.
On September 22, 1999 the Company issued a note to a shareholder for cash of
$300,000. The Company agreed to a repayment schedule to coincide with the
original loan agreement for $2,000,000 (see Note 4). As part of the agreement
the shareholder agreed to subordinate its security position to Silicon Valley
Bank, waive the original loan covenants under the $2,000,000 loan agreement and
modify the loan covenants. The Company is in compliance with the modified loan
covenants.
F-40
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS OF
SFG TECHNOLOGIES INC.
(EXPRESSED IN U.S. DOLLARS)
EIGHT MONTHS ENDED DECEMBER 31, 1998
YEARS ENDED APRIL 30, 1998, 1997 AND 1996
F-41
<PAGE>
AUDITORS' REPORT
To the Board of Directors
SFG Technologies Inc.
We have audited the consolidated balance sheets of SFG Technologies Inc. as
at December 31, 1998 and April 30, 1998 and the consolidated statements of
operations, deficit and cash flows for the eight months ended December 31, 1998
and the years ended April 30, 1998, 1997 and 1996. 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 Canadian generally accepted
auditing standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance 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.
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 April 30, 1998 and the results of its operations and cash flows for the
eight months ended December 31, 1998 and the years ended April 30, 1998, 1997
and 1996 in accordance with Canadian generally accepted accounting principles.
Significant measurement differences between Canadian and United States
accounting principles as they affect these consolidated financial statements are
explained and quantified in note 16.
KPMG LLP
Chartered Accountants
Vancouver, Canada
June 22, 1999, except as
to note 13 which is as of
November 26, 1999
F-42
<PAGE>
SFG TECHNOLOGIES INC.
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, APRIL 30,
1999 1998 1998
------------- ------------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ -- $ 331,709 $ 96,908
Accounts receivable...................................... 2,638,755 2,320,197 1,433,429
Investment tax credits receivable........................ 159,792 195,338 195,338
Prepaid expenses......................................... 130,215 64,766 60,190
----------- ----------- -----------
2,928,762 2,912,010 1,785,865
Capital assets (note 4).................................... 693,602 535,856 605,493
Investment................................................. 128,104 130,225 130,225
----------- ----------- -----------
$ 3,750,468 $ 3,578,091 $ 2,521,583
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities:
Bank indebtedness (note 6)............................... $ 947,389 $ 1,084,126 $ 1,119,937
Accounts payable and accrued liabilities................. 1,265,964 1,150,286 1,255,263
Current portion of long-term debt (note 8)............... 313,176 318,454 432,999
Current portion of obligations under capital leases (note
9)..................................................... 86,960 161,777 137,165
Current portion of deferred revenue (note 7)............. 1,995,615 1,462,142 1,263,317
----------- ----------- -----------
4,609,104 4,176,785 4,208,681
Deferred revenue (note 7).................................. 386,434 435,238 --
Long-term debt (note 8).................................... 3,110,046 3,184,209 2,329,435
Obligations under capital leases (note 9).................. 118,210 39,125 141,800
----------- ----------- -----------
8,223,794 7,835,357 6,679,916
Shareholders' deficiency:
Share capital (note 10).................................. 2,981,348 3,013,364 3,020,381
Deficit.................................................. (7,582,330) (7,398,286) (7,304,757)
Foreign currency translation account..................... 127,656 127,656 126,043
----------- ----------- -----------
(4,473,326) (4,257,266) (4,158,333)
Commitments (notes 10(b), 10(e) and 12)
Subsequent event (note 13)
Uncertainty due to the Year 2000 Issue (note 15)
----------- ----------- -----------
$ 3,750,468 $ 3,578,091 $ 2,521,583
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-43
<PAGE>
SFG TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(EXPRESSED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED EIGHT MONTHS
SEPTEMBER 30, ENDED YEARS ENDED APRIL 30,
----------------------- DECEMBER 31, -------------------------------------
1999 1998 1998 1998 1997 1996
---------- ---------- ------------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues....................... $4,960,773 $4,001,276 $3,604,916 $ 3,533,514 $7,188,855 $7,333,592
Cost of sales.................. 219,384 354,687 360,498 465,312 674,341 1,320,201
---------- ---------- ---------- ----------- ---------- ----------
Gross profit................... 4,741,389 3,646,589 3,244,418 3,068,202 6,514,514 6,013,391
Costs and expenses:
Selling, general and
administrative expenses.... 4,113,419 2,310,918 1,968,633 3,520,889 4,457,269 3,959,947
Research and development..... 596,856 1,241,462 1,117,714 2,513,268 2,153,130 1,482,444
Write-down of deferred
software development costs
(note 5)................... -- -- -- 2,653,486 -- --
Gain on sale of division
(note 14).................. -- -- -- -- (424,366) --
---------- ---------- ---------- ----------- ---------- ----------
4,710,275 3,552,380 3,086,347 8,687,643 6,186,033 5,442,391
---------- ---------- ---------- ----------- ---------- ----------
Operating profit (loss)........ 31,114 94,209 158,071 (5,619,441) 328,481 571,000
Interest expense............... 215,158 228,634 217,905 366,412 203,501 97,988
---------- ---------- ---------- ----------- ---------- ----------
Income (loss) before income tax
expense...................... (184,044) (134,425) (59,834) (5,985,853) 124,980 473,012
Income tax benefit (expense)
(note 11).................... -- -- -- 397,445 (29,995) (179,667)
---------- ---------- ---------- ----------- ---------- ----------
Net income (loss).............. $ (184,044) $ (134,425) $ (59,834) $(5,588,408) $ 94,985 $ 293,345
========== ========== ========== =========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-44
<PAGE>
SFG TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF DEFICIT
(EXPRESSED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED EIGHT MONTHS
SEPTEMBER 30, ENDED YEARS ENDED APRIL 30,
------------------------- DECEMBER 31, ---------------------------------------
1999 1998 1998 1998 1997 1996
----------- ----------- ------------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Deficit, beginning of
period............. $(7,398,286) $(6,759,761) $(7,304,757) $(1,686,037) $(1,694,303) $(1,985,551)
Premium on redemption
of shares (note
10(f))............. -- -- (33,695) (30,312) (86,719) --
Dividends............ -- -- -- -- -- (2,097)
Net income (loss).... (184,044) (134,425) (59,834) (5,588,408) 94,985 293,345
----------- ----------- ----------- ----------- ----------- -----------
Deficit, end of
period............. $(7,582,330) $(6,894,186) $(7,398,286) $(7,304,757) $(1,686,037) $(1,694,303)
=========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-45
<PAGE>
SFG TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(EXPRESSED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED EIGHT MONTHS
SEPTEMBER 30, ENDED YEAR ENDED APRIL 30,
---------------------- DECEMBER 31, ---------------------------------------
1999 1998 1998 1998 1997 1996
--------- ---------- ------------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................... $(184,044) $ (134,425) $ (59,834) $(5,588,408) $ 94,985 $ 293,345
Items not involving cash:
Amortization............................ 150,379 198,289 100,877 197,545 1,479,420 857,981
Gain on sale of division................ -- -- -- -- (424,366) --
Loss on sale of asset................... -- -- -- -- 12,243 --
Common stock issued in exchange for
services.............................. -- -- -- 19,534 -- --
Write-down of deferred software
development costs..................... -- -- -- 2,653,486 -- --
Deferred income taxes................... -- -- -- (390,587) 29,477 275,427
Changes in non-cash operating working
capital:
Accounts receivable................... (318,560) (1,162,459) (886,768) 386,758 (527,753) (761,021)
Investment tax credits receivable..... 35,546 -- -- 503,105 (140,855) (253,022)
Prepaid and other expenses............ (63,328) (75,460) (4,576) 43,886 (31,639) (47,147)
Deferred software development costs... -- -- -- -- (1,763,335) (1,121,344)
Accounts payable and accrued
liabilities......................... 115,678 (396,154) (104,977) (404,731) 55,912 505,161
Deferred revenue...................... 484,671 407,425 634,063 (133,647) (576,982) 533,576
--------- ---------- --------- ----------- ----------- -----------
Net cash provided by (used in) operating
activities.............................. 220,342 (1,162,784) (321,215) (2,713,059) (1,792,893) 282,956
Cash flows from investing activities:
Purchase of capital assets................ (308,122) (12,088) (31,240) (106,423) (569,597) (347,674)
Disposal of capital assets................ -- -- -- -- 4,964 --
Proceeds from sale of investments......... -- -- -- -- 210,224 --
--------- ---------- --------- ----------- ----------- -----------
Net cash used in investing activities..... (308,122) (12,088) (31,240) (106,423) (354,409) (347,674)
Cash flows from financing activities:
Bank indebtedness......................... -- -- (35,811) 885,321 234,616 --
Proceeds from issuance of long-term
debt.................................... -- 1,170,351 893,191 2,663,509 453,789 --
Repayment of long-term debt............... (216,178) -- (152,962) (498,112) (55,803) (136,564)
Obligations under capital leases.......... (27,751) 4,521 (78,063) (100,869) 140,560 118,263
Issue of common and preferred shares...... -- -- 346 (100,098) 1,240,936 162,781
Redemption of common and preferred
shares.................................. -- -- (41,058) (30,312) (225,429) (119,659)
Dividends paid............................ -- -- -- -- -- (2,097)
--------- ---------- --------- ----------- ----------- -----------
Net cash provided by financing
activities.............................. (243,929) 1,174,872 585,643 2,819,439 1,788,669 22,724
Net effect of foreign exchange rate changes
on cash................................... -- -- 1,613 96,951 (142) (104,367)
--------- ---------- --------- ----------- ----------- -----------
Increase (decrease) in cash and cash
equivalents............................... (331,709) -- 234,801 96,908 (358,775) (146,361)
Cash and cash equivalents, beginning of
period.................................... 331,709 -- 96,908 -- 358,775 505,136
--------- ---------- --------- ----------- ----------- -----------
Cash and cash equivalents, end of period.... -- -- $ 331,709 $ 96,908 $ -- $ 358,775
========= ========== ========= =========== =========== ===========
Supplemental disclosure of cash flow
information:
Cash paid during the period for taxes..... $ -- $ -- $ -- $ -- $ -- $ --
Cash paid during the period for
interest................................ $ 215,158 $ 228,634 142,592 366,412 203,501 97,988
Supplemental disclosure of non-cash
financing activities:
Common stock issued in exchange for
services................................ $ -- $ -- $ -- $ 19,534 $ -- $ --
Common stock issued in exchange for
redeemable
preferred stock......................... $ -- $ -- -- -- 759,256 --
</TABLE>
See accompanying notes to financial statements.
F-46
<PAGE>
SFG TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS)
EIGHT MONTHS ENDED DECEMBER 31, 1998
YEARS ENDED APRIL 30, 1998, 1997 AND 1996
1. GENERAL:
SFG Technologies Inc. ("SFG" or the "Company") is a private company
incorporated under the Canada Business Corporations Act. Its principal business
activity is developing and marketing computing software for the utilities and
public sector markets.
2. SIGNIFICANT ACCOUNTING POLICIES:
(A) PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the financial statements of
SFG Technologies Inc. and its wholly-owned subsidiaries Nissi Technologies
(U.S.A.) Inc. ("Nissi"), SFG Technologies (U.S.) Inc., SFG Technologies Limited
and SFG Technologies Pty Limited. All material intercompany transactions and
balances have been eliminated.
(B) CASH AND CASH EQUIVALENTS:
Cash and cash equivalents have terms of maturity at the date of acquisition
of not more than three months.
(C) REVENUE RECOGNITION:
The Company generates and recognizes revenue as follows:
(I) SOFTWARE LICENCE FEES:
The Company licences Nissi and SFG products to customers under perpetual
software licence agreements. Generally, revenue from software licence fees
is recognized upon delivery and implementation of the software. If any
portion of the cash has not been collected, the respective portion of the
revenue deferred until collection is complete.
Software licence fees from contracts involving significant production,
modification or customization of software are recognized as revenue using
the completed contract method. Contracts are considered complete when
customer acceptance of the software is obtained.
(II) PROFESSIONAL SERVICES:
The Company provides consulting and implementation services to its
customers. Revenues from these services are recognized as the services are
performed in accordance with contract terms.
(III) MAINTENANCE:
Maintenance agreements generally call for the Company to provide
technical support and certain systems updates to customers. Revenue is
recognized proportionately over the maintenance period, typically one year.
F-47
<PAGE>
SFG TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS) (CONTINUED)
EIGHT MONTHS ENDED DECEMBER 31, 1998
YEARS ENDED APRIL 30, 1998, 1997 AND 1996
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
(IV) SOFTWARE MODIFICATIONS:
The Company provides updates to software licensed to customers. Revenues
from these services are recognized as the services are performed in
accordance with contract terms.
(V) HARDWARE SALES:
Hardware sales are recognized as revenue upon delivery of the hardware
to customer locations.
(D) RESEARCH AND DEVELOPMENT COSTS:
The Company expenses research costs as incurred. Development costs are
deferred if they meet certain specified and stringent criteria; otherwise they
are expensed as incurred. At December 31, 1998, there are no deferred
development costs.
(E) CAPITAL ASSETS:
Capital assets are recorded at historical cost less applicable investment
tax credits and accumulated amortization. Amortization is computed using the
declining balance method over their estimated useful lives at the following
annual rates:
<TABLE>
<CAPTION>
CAPITAL ASSETS RATE
- -------------- ---------
<S> <C>
Automotive equipment........................................ 30%
Computer equipment.......................................... 30% - 40%
Office equipment............................................ 15% - 20%
</TABLE>
Leasehold improvements are amortized on a straight-line basis over the term
of the lease.
(F) INVESTMENT TAX CREDITS:
Investment tax credits are accounted for using the cost reduction method
whereby the benefit of the credits is recognized as a reduction to the carrying
value of the related asset or expenditure.
(G) INCOME TAXES:
The Company follows the tax allocation method of accounting for income taxes
under which deferred income taxes are recognized for the difference in the
timing of recognition of transactions in income for accounting and income tax
purposes. The major timing differences relate primarily to fixed assets and
research and development expenditures.
(H) FOREIGN CURRENCY TRANSLATION:
The Canadian dollar is the functional currency of the Company and its
subsidiaries. Monetary assets and liabilities denominated in a foreign currency
have been translated into Canadian dollars at rates of exchange in effect at the
balance sheet date. Other assets and revenue and expense items are
F-48
<PAGE>
SFG TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS) (CONTINUED)
EIGHT MONTHS ENDED DECEMBER 31, 1998
YEARS ENDED APRIL 30, 1998, 1997 AND 1996
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
translated at rates prevailing when they were acquired or incurred. Exchange
gains and losses arising on translation of assets and liabilities denominated in
foreign currencies are included in income.
For U.S. dollar reporting purposes, the balance sheet amounts have been
translated at the exchange rate in effect at the end of December 31, 1998, and
the income statement amounts have been translated at the average exchange rate
for the eight month period ended December 31, 1998. Differences arising on
translation have been recorded on the balance sheet in shareholder's deficiency.
(I) USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Significant areas requiring the use of management estimates relate to the
valuation of accounts and investment tax credit receivable. Actual amounts may
differ from those estimates.
(J) INVESTMENT:
Investment is carried at cost. Income from the investment is recognized as
receivable.
3. FINANCIAL INSTRUMENTS:
(A) FAIR VALUE:
Carrying amounts of certain of the Company's financial instruments,
including accounts receivable, bank indebtedness and accounts payable and
accrued liabilities, approximate fair value due to their short-term maturities.
Based on borrowing notes available to the Company for loans with similar terms,
the carrying value of its long-term debt approximates fair value.
(B) FOREIGN EXCHANGE RISK:
Foreign exchange risk reflects the risk that the Company's earnings will
decline due to fluctuations in exchange rates. As payments on contracts billed
in United States dollars are due in the short-term the Company has determined
there is no significant exposure to its reported assets due to foreign exchange
fluctuations. At December 31, 1998, the Company does not have foreign exchange
hedges in place.
(C) CREDIT RISK:
Credit risk reflects the risk that the Company may be unable to recover
contractual receivables. The Company has a significant number of individual
contracts and no one contract represents a concentration of credit risk. In
addition, the Company employs established credit approval practices to further
mitigate this risk.
F-49
<PAGE>
SFG TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS) (CONTINUED)
EIGHT MONTHS ENDED DECEMBER 31, 1998
YEARS ENDED APRIL 30, 1998, 1997 AND 1996
4. CAPITAL ASSETS:
<TABLE>
<CAPTION>
ACCUMULATED NET BOOK
SEPTEMBER 30, 1999 COST AMORTIZATION VALUE
- ------------------ ---------- ------------ --------
<S> <C> <C> <C>
Automotive equipment....................... $ 54,644 $ 21,085 $ 33,559
Computer equipment......................... 1,372,814 961,606 411,208
Office equipment........................... 441,134 229,410 211,724
Leasehold improvements..................... 97,809 60,698 37,111
---------- ---------- --------
$1,966,401 $1,272,799 $693,602
========== ========== ========
<CAPTION>
ACCUMULATED NET BOOK
DECEMBER 31, 1998 COST AMORTIZATION VALUE
- ----------------- ---------- ------------ --------
<S> <C> <C> <C>
Automotive equipment....................... $ 22,131 $ 20,676 $ 1,455
Computer equipment......................... 1,324,154 990,404 333,750
Office equipment........................... 384,962 222,774 162,188
Leasehold improvements..................... 97,730 59,267 38,463
---------- ---------- --------
$1,828,977 $1,293,121 $535,856
========== ========== ========
<CAPTION>
ACCUMULATED NET BOOK
APRIL 30, 1998 COST AMORTIZATION VALUE
- -------------- ---------- ------------ --------
<S> <C> <C> <C>
Automotive equipment....................... $ 22,131 $ 20,308 $ 1,823
Computer equipment......................... 1,280,548 897,358 383,190
Office equipment........................... 397,748 222,253 175,495
Leasehold improvements..................... 97,308 52,323 44,985
---------- ---------- --------
$1,797,735 $1,192,242 $605,493
========== ========== ========
</TABLE>
Included in automotive, computer and office equipment are assets under
capital leases with a cost of $1,228,355 (April 30, 1998--$1,202,659) and
accumulated amortization of $890,257 (April 30, 1998--$808,164).
5. DEFERRED SOFTWARE DEVELOPMENT COSTS:
The Company wrote-off all deferred software development costs in the year
ended April 30, 1998 as recoverability of the costs was not reasonably assured.
6. BANK INDEBTEDNESS:
The Company has an operating loan facility with a credit limit of
approximately $1,500,000 (Canadian). The facility is due on demand, bears
interest at prime plus 1% and is secured by a general security agreement. At
December 31, 1998 the Company was under negotiations with the bank to
restructure its loan facility and, accordingly, indicated that they would not
require immediate payment of the loan facility.
F-50
<PAGE>
SFG TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS) (CONTINUED)
EIGHT MONTHS ENDED DECEMBER 31, 1998
YEARS ENDED APRIL 30, 1998, 1997 AND 1996
7. DEFERRED REVENUE:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, APRIL 30,
1999 1998 1998
------------- ------------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred maintenance................... $2,382,051 $ 1,897,380 $ 1,263,317
Less current portion................... (1,995,617) (1,462,142) (1,263,317)
---------- ----------- -----------
$ 386,434 $ 435,238 $ --
========== =========== ===========
</TABLE>
8. LONG-TERM DEBT:
<TABLE>
<CAPTION>
DECEMBER 31, APRIL 30,
1998 1998
------------- ----------
<S> <C> <C>
Bank term loan, maturing December 2001, bearing interest at
prime plus 1.25% per annum payable monthly, principle
repayable in 30 equal installments beginning July 1999,
secured by a general security agreement................... $ 192,000 $ 192,000
Bank demand loan, maturing March 2002, bearing interest at
prime plus 2.0% per annum payable monthly, principle
repayable upon receipt of SR&ED refunds, secured by SR&ED
refund.................................................... 280,037 433,000
Promissory notes including accrued interest of $44,387
(April 1998--$nil), maturing July 2002, bearing interest
at 5.0% until July 1999 and 13.0% per annum, thereafter,
payable monthly in arrears beginning July 1999, secured by
a general security agreement.............................. 1,672,203 1,627,816
Promissory notes including accrued interest of $29,626
(April 1998--$nil), maturing July 2002, bearing interest
at 13.0% per annum payable monthly, secured by a general
security agreement, convertible into Class A preferred
shares at $2 (Canadian) per share......................... 420,302 390,676
Promissory notes, bearing interest at 13.0% per annum
payable in event of agreement default, principal payable
July 30, 2002 or in event of agreement default; secured by
a general security agreement, convertible into Class A
preferred shares at $0.05 (Canadian) per share. 20,000
Class X common shares have been issued for each $651 of
promissory notes (see note 10(b)) and are cancellable upon
each $651 conversion of promissory notes.................. 651,126 --
Promissory notes, maturing July 2002, bearing interest at
12.0% per annum payable monthly in arrears beginning
July 1999 or in event of agreement default, secured by a
general security agreement, convertible into Class B
preferred shares at $100 (Canadian) per share............. 162,782 --
Shareholder loan, bearing interest at prime plus 1.0% per
annum, no specific terms of repayment, unsecured,
shareholder has indicated that payment will not be
demanded within the next twelve months.................... 120,619 115,348
Other....................................................... 3,594 3,594
---------- ----------
3,502,663 2,762,434
Less current portion........................................ (318,454) (432,999)
---------- ----------
$3,184,209 $2,329,435
========== ==========
</TABLE>
F-51
<PAGE>
SFG TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS) (CONTINUED)
EIGHT MONTHS ENDED DECEMBER 31, 1998
YEARS ENDED APRIL 30, 1998, 1997 AND 1996
8. LONG-TERM DEBT: (CONTINUED)
The minimum aggregate amounts of principal payments required in each of the
next five years, assuming that the shareholder loan is not repaid, are as
follows:
<TABLE>
<S> <C>
1999........................................................ $ 318,454
2000........................................................ 76,833
2001........................................................ 76,833
2002........................................................ 2,906,414
2003........................................................ --
----------
$3,378,534
==========
</TABLE>
Subsequent to December 31, 1998, $1,762,991 in promissory notes were
converted into preferred shares (see note 13).
9. OBLIGATIONS UNDER CAPITAL LEASES:
The Company has commitments under capital leases as follows:
<TABLE>
<S> <C>
1999........................................................ $ 175,968
2000........................................................ 36,654
2001........................................................ 3,516
---------
216,138
Less interest imputed at rates between 9% and 15%........... (15,236)
---------
200,902
Less current portion........................................ (161,777)
---------
$ 39,125
=========
</TABLE>
10. SHARE CAPITAL:
(A) AUTHORIZED:
Unlimited common shares, Class A, non voting, no par value
Unlimited common shares, Class B, voting, no par value
Unlimited common shares, Class X, voting, no par value, non participating
Unlimited preferred shares, Class A, voting, convertible, retractable,
redeemable
Unlimited preferred shares, Class B, voting, convertible, retractable,
redeemable
Unlimited preferred shares, Class F, non voting, redeemable
Each Class A and Class B preferred share is convertible into one Class B
common share at the option of the holder and is entitled to one vote.
F-52
<PAGE>
SFG TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS) (CONTINUED)
EIGHT MONTHS ENDED DECEMBER 31, 1998
YEARS ENDED APRIL 30, 1998, 1997 AND 1996
10. SHARE CAPITAL: (CONTINUED)
Dividends are provided at the discretion of the directors of the Company.
Only Class A and Class B common shareholders and Class A and Class B
preferred shareholders are entitled to dividends.
Class X common shares are cancellable upon promissory note conversion (see
note 8).
Class A and Class B preferred shares are retractable any time after July 30,
2002 and under certain other instructions.
Class A and Class B preferred shares are redeemable at the Company's option
at any time, in whole or in part, after July 1, 2002 at the issue price plus
any unpaid dividends.
Class F preferred shares are redeemable at the Company's option at $1
(Canadian) per share (see note10(e)).
(B) ISSUED:
<TABLE>
<CAPTION>
NUMBER OF
SHARES AMOUNT
---------- ----------
<S> <C> <C>
Class A common shares:
Balance at April 30, 1995................................. 68,900 $ 39,923
Shares redeemed for cash.................................. (1,850) (5,712)
---------- ----------
Balance at April 30, 1996................................. 67,050 34,211
Shares redeemed for cash.................................. (22,650) (8,486)
---------- ----------
Balance at April 30, 1997................................. 44,400 25,725
Shares issued for cash.................................... 8,231 22,374
Shares issued for services rendered....................... 3,614 19,534
Shares redeemed for cash.................................. (7,205) (5,268)
---------- ----------
Balance at April 30, 1998................................. 49,040 62,365
Shares issued for cash.................................... 133 345
Shares redeemed for cash.................................. (7,979) (7,363)
---------- ----------
Balance at December 31, 1998.............................. 41,194 55,347
---------- ----------
Class B common shares:
Balance at April 30, 1995................................. 1,460,480 506,398
Shares redeemed for nil consideration..................... (79,000) --
Shares issued for cash.................................... 23,720 81,391
---------- ----------
Balance at April 30, 1996................................. 1,405,200 587,779
Shares issued in exchange for Class Z preferred shares.... 302,500 759,256
Shares issued for cash.................................... 240,973 1,240,937
Shares issued for cash.................................... 30,700 81,400
---------- ----------
Balance at April 30, 1997, 1998 and December 31, 1998..... 1,979,373 2,669,372
---------- ----------
</TABLE>
F-53
<PAGE>
SFG TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS) (CONTINUED)
EIGHT MONTHS ENDED DECEMBER 31, 1998
YEARS ENDED APRIL 30, 1998, 1997 AND 1996
10. SHARE CAPITAL: (CONTINUED)
<TABLE>
<CAPTION>
NUMBER OF
SHARES AMOUNT
---------- ----------
<S> <C> <C>
Class X common shares:
Balance at April 30, 1995, 1996, 1997 and 1998............ -- --
Shares issued in conjunction with issuance of promissory
notes (see note 8)...................................... 20,000,000 1
---------- ----------
Balance at December 31, 1998.............................. 20,000,000 1
---------- ----------
Total common shares, December 31, 1998...................... 22,020,567 $2,724,720
---------- ----------
Class D preferred shares:
Balance at April 30, 1995................................. 15,000 $ 9,767
Shares redeemed in exchange for cash...................... (15,000) (9,767)
---------- ----------
Balance at April 30, 1996, 1997 and 1998 and December 31,
1998.................................................... -- --
---------- ----------
Class F preferred shares:
Balance at April 30, 1995................................. 983,300 640,253
Shares redeemed for cash.................................. (160,000) (104,181)
---------- ----------
Balance at April 30, 1996................................. 823,300 536,072
Shares redeemed for cash.................................. (200,000) (130,225)
---------- ----------
Balance at April 30, 1997................................. 623,300 405,847
Shares redeemed for cash.................................. (180,000) (117,203)
---------- ----------
Balance at April 30, 1998 and December 31, 1998........... 443,300 288,644
---------- ----------
Class Z preferred shares:
Balance at April 30, 1995 and 1996........................ 302,500 759,256
Shares redeemed in exchange for Class B common stock...... (302,500) (759,256)
---------- ----------
Balance at April 30, 1997 and 1998 and December 31,
1998.................................................... -- --
---------- ----------
Total common and preferred shares........................... $3,013,364
========== ==========
</TABLE>
Pursuant to a price adjustment clause relating to previous equity financing
an additional 759,037 Class B common shares are required to be issued at
April 30, 1998. As at December 31, 1998, these shares have not been issued.
(C) STOCK OPTION PLAN:
Certain employees and directors of the Company hold options to purchase
Class A non-voting shares. At December 31, 1998, 121,377 options were
outstanding at exercise prices ranging between $4 (Canadian) to $7 (Canadian)
per share, expiring on April 30, 2006. At December 31, 1998, the Company was
committed to issue an additional 6,900,000 options at a price of $0.05
(Canadian) per share, which options will expire ten years from date of issuance.
F-54
<PAGE>
SFG TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS) (CONTINUED)
EIGHT MONTHS ENDED DECEMBER 31, 1998
YEARS ENDED APRIL 30, 1998, 1997 AND 1996
10. SHARE CAPITAL: (CONTINUED)
(D) WARRANTS:
At December 31, 1998, 74,534 warrants were outstanding that entitle the
holders to purchase one Class B common share at a price of $0.01 (Canadian) per
share prior to July 30, 2002.
(E) SHARE REDEMPTIONS:
The Company, pursuant to an agreement for the redemption of all Class F
preferred shares, is required to make monthly payments of $13,902 beginning
July 1, 1999 and ending March 1, 2001.
(F) PREMIUM ON REDEMPTION OF SHARES:
The Company records the excess of purchase price over par value of shares as
a premium on redemption of shares.
11. INCOME TAXES:
<TABLE>
<CAPTION>
EIGHT MONTHS
ENDED YEARS ENDED APRIL 30,
DECEMBER 31, -------------------------------
1998 1998 1997 1996
------------- -------- -------- ---------
<S> <C> <C> <C> <C>
Current........................... $ -- $ -- $ -- $ (490)
Deferred.......................... -- 397,445 (29,995) (179,177)
---- -------- -------- ---------
$ -- $397,445 $(29,995) $(179,667)
==== ======== ======== =========
</TABLE>
The Company has non-capital losses carried forward of approximately $846,126
which are available to reduce taxable income of future years, the benefit of
which has not been recorded in the accounts and which expire as follows:
<TABLE>
<S> <C>
December 31, 2004........................................... $651,126
2012............................................ 195,000
--------
$846,126
========
</TABLE>
12. COMMITMENTS:
At December 31, 1998, the Company was committed to the following operating
lease payments for premises and equipment:
<TABLE>
<S> <C>
1999........................................................ $ 377,002
2000........................................................ 418,023
2001........................................................ 344,446
2002........................................................ 223,987
----------
$1,363,458
==========
</TABLE>
F-55
<PAGE>
SFG TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS) (CONTINUED)
EIGHT MONTHS ENDED DECEMBER 31, 1998
YEARS ENDED APRIL 30, 1998, 1997 AND 1996
13. SUBSEQUENT EVENT:
On November 26, 1999, the Company converted $1,824,378 of promissory notes,
owing to Working Opportunity Fund (EVCC) Ltd., SCC Canada Inc., Ventures West
III--Canada Limited Partnership, and Discovery Enterprises Inc. into preferred
shares. Of the notes converted, $651,126 were converted into Class B preferred
shares (see note 10(a)) at a price of $0.05 (Canadian) per share and $1,173,258
were converted into Class C preferred shares at a price of $100 (Canadian) per
share. Class C preferred shares are voting, retractable, and redeemable. In
addition, all Class X common shares outstanding (see note 10(b)) were cancelled.
Of the promissory notes converted, $1,762,991 were outstanding at
December 31, 1998. The balances were issued subsequent to December 31, 1998.
The following debt outstanding at December 31, 1998 would have been
converted:
<TABLE>
<S> <C>
Promissory notes, maturing July 2002, bearing interest at
5.0% until July 1999 and 13.0% thereafter................. $ 668,881
Promissory notes, maturing July 2002, bearing interest at
13.0%..................................................... 931,328
Promissory notes, maturing July 2002, bearing interest at
12.0%..................................................... 162,782
----------
$1,762,991
==========
</TABLE>
The following pro forma balance sheet presents the position of the Company
as if the debt conversion had occurred on December 31, 1998:
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, PRO FORMA DECEMBER 31,
1998 ADJUSTMENTS 1998
------------- ----------- -------------
<S> <C> <C> <C>
Assets:
Current.............................. $ 2,912,009 $ -- $ 2,912,009
Non-current.......................... 666,082 -- 666,082
----------- ----------- -----------
$ 3,578,091 $ -- $ 3,578,091
=========== =========== ===========
Liabilities:
Current.............................. $ 4,176,784 $ -- $ 4,176,784
Non-current--Long-term debt.......... 3,184,209 (1,762,991) 1,421,218
--Other.................... 474,364 -- 474,364
----------- ----------- -----------
7,835,357 (1,762,991) 6,072,366
Shareholders' equity:
Share capital........................ 3,013,364 1,762,991 4,776,355
Deficit and cumulative translation
account............................ (7,270,630) -- (7,270,630)
----------- ----------- -----------
(4,257,266) 1,762,991 (2,494,275)
----------- ----------- -----------
$ 3,578,091 $ -- $ 3,578,091
=========== =========== ===========
</TABLE>
F-56
<PAGE>
SFG TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS) (CONTINUED)
EIGHT MONTHS ENDED DECEMBER 31, 1998
YEARS ENDED APRIL 30, 1998, 1997 AND 1996
14. SALE OF DIVISION:
On April 30, 1997 the Company disposed of the net assets and operations of
its Govern division for proceeds of $340,449 which includes $130,225 of
preferred shares of the purchaser.
For the year ended April 30, 1997, the division incurred an operating loss
of $118,337 (1996--income of $125,726) and revenues of $498,636
(1996--$592,104).
The gain on sale of division comprises:
<TABLE>
<S> <C>
Cash proceeds............................................... $210,224
Preferred shares............................................ 130,225
--------
Net proceeds................................................ 340,449
Net assets sold:
Accounts receivable....................................... (33,877)
Deferred revenue.......................................... 118,106
Fixed assets.............................................. (10,251)
Contract.................................................. 9,939
--------
83,917
--------
Gain on sale of division.................................... $424,366
========
</TABLE>
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
December 31, 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.
16. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES:
These consolidated financial statements have been prepared in accordance
with Canadian generally accepted accounting principles ("GAAP") in Canada, of
which conform, in all material respects, with those in the United States except
as described below:
(A) RESEARCH AND DEVELOPMENT:
For United States GAAP purposes, Statement of Financial Accounting Standards
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed," provides for the capitalization of certain software
development costs after technological feasibility of the software is
established. Under the Company's current practice of developing new products and
F-57
<PAGE>
SFG TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS) (CONTINUED)
EIGHT MONTHS ENDED DECEMBER 31, 1998
YEARS ENDED APRIL 30, 1998, 1997 AND 1996
16. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES: (CONTINUED)
enhancements, the technological feasibility of the underlying software is not
established until substantially all product development is complete, including
the development of a working model. No such costs have been capitalized as their
impact would not be material.
Deferred software development costs of $2,153,130 and $1,482,444 which were
capitalized during the years ended April 30, 1997 and 1996, respectively, would
have been expensed as incurred under U.S. accounting principles. As such,
deferred software development costs of $1,010,094 and $586,143 which were
amortized during the years ended April 30, 1997 and 1996, respectively, and the
write-down of deferred software development costs in the year ended April 30,
1998 of $2,653,486 would not have been required.
(B) LOSS PER SHARE:
For United States GAAP purposes, Statement of Financial Accounting Standards
No. 128, "Earnings Per Share," requires the disclosure of basic and diluted
earning per share for each period presented. Basic earnings per share is
computed by dividing the net loss by the weighted average number of all classes
of common shares outstanding during the period. Diluted earnings per share is
computed by dividing the net loss by the weighted average number of all classes
of common and dilutive common equivalent shares outstanding during the period.
Excluded from the computation of diluted earnings per share for the eight
months ended December 31, 1998 and the years ended April 30, 1998, 1997 and 1996
are options to acquire common shares and preferred shares convertible into
common shares, as their effects would be anti-dilutive.
(C) INCOME TAXES:
Under the asset and liability method of United States Statement of Financial
Accounting Standards No. 109 ("FAS 109"), deferred income tax assets and
liabilities are measured using enacted tax rates for the future income tax
consequences attributable to differences between the financial statement
carrying amount of existing assets and liabilities and their respective tax
bases. The application of the provisions of FAS 109 on the Company's balance
sheet would result in no net difference in deferred taxes from that reported
under Canadian GAAP. At December 31, 1998, the gross deferred tax asset amount
relating to a non-capital loss carry forward was $380,757 which is reduced by a
valuation allowance of $380,757 as management does not consider that it is more
likely than not that such assets will be realized in the carry forward period.
(D) STOCK-BASED COMPENSATION:
For United States GAAP purposes, the Company has elected to follow the
disclosure-only provisions under Statement of Financial Accounting Standards No.
123 ("FAS 123"), "Accounting for Stock-Based Compensation", and applies
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and related interpretations in accounting for its
stock-based compensation to employees. As such, the Company's stock-based
compensation is measured based on the intrinsic value of the option on the date
of grant.
F-58
<PAGE>
SFG TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS) (CONTINUED)
EIGHT MONTHS ENDED DECEMBER 31, 1998
YEARS ENDED APRIL 30, 1998, 1997 AND 1996
16. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES: (CONTINUED)
Under the intrinsic value method of APB 25, the stock option compensation is
the excess, if any, of the quoted market value of the stock at the measurement
date of the grant over the amount an optionee must pay to acquire the stock.
Under this method, no stock-based compensation expense has resulted for the
eight month period ended December 31, 1998, and the years ended April 30, 1998,
1997 and 1996, for United States GAAP purposes.
(E) REDEEMABLE PREFERRED SHARES:
For United States GAAP purposes, preferred stock subject to mandatory
redemption requirements or whose redemption is outside the control of the issuer
is required to be presented outside of shareholders' equity. For the periods
presented, the Company's Class F preferred shares are to be presented outside of
shareholders' equity.
(F) SUMMARY OF UNITED STATES GAAP ADJUSTMENTS:
The amounts in the balance sheets that differ from those reported under
Canadian GAAP are as follows.
<TABLE>
<CAPTION>
DECEMBER 31, 1998 APRIL 30, 1998
--------------------- ---------------------
CDN GAAP US GAAP CDN GAAP US GAAP
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Current portion of Class F redeemable preferred
shares.......................................... $ -- $ 166,819 $ -- $ --
Class F redeemable preferred shares, net of
current portion................................. -- 121,825 -- 288,644
Shareholders' equity:
Share capital................................... 3,013,364 -- 3,020,381 --
Class A common stock, issued and outstanding
41,194 and 49,194............................. -- 55,347 -- 62,365
Class B common stock, issued and outstanding
1,979,363 and 1,979,363....................... -- 2,669,372 -- 2,669,372
Class X common stock, issued and outstanding
20,000,000 and nil............................ -- 1 -- --
</TABLE>
F-59
<PAGE>
SFG TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS) (CONTINUED)
EIGHT MONTHS ENDED DECEMBER 31, 1998
YEARS ENDED APRIL 30, 1998, 1997 AND 1996
16. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES: (CONTINUED)
The following table sets forth the effect on the loss for the period and
loss per share:
<TABLE>
<CAPTION>
EIGHT MONTHS
ENDED YEARS ENDED APRIL 30,
DECEMBER 31, ---------------------------------------
1998 1998 1997 1996
------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income (loss) under Canadian GAAP...... $ (59,834) $(5,588,408) $ 94,985 $ 293,345
Less deferred software development costs
capitalized.............................. -- -- (2,153,130) (1,482,444)
Add deferred software development costs
amortized................................ -- -- 1,010,094 586,143
Add write-down of software development
costs.................................... -- 2,653,486 -- --
----------- ----------- ----------- -----------
Loss determined under United States GAAP... $ (59,834) $(2,934,922) $(1,048,051) $ (602,956)
=========== =========== =========== ===========
Weighted average number of shares
outstanding, United States GAAP.......... 16,084,028 2,002,344 1,509,658 1,498,805
=========== =========== =========== ===========
Net loss per share under United States
GAAP..................................... $ (0.004) $ (1.47) $ (0.69) $ (0.40)
=========== =========== =========== ===========
</TABLE>
(G) COMPREHENSIVE LOSS:
For United States GAAP purposes, Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income," establishes standards for reporting
and disclosure of comprehensive income and its components. The Company's
comprehensive income consists of net income (loss), premium on redemption of
shares, and its foreign currency translation adjustment as follows:
<TABLE>
<CAPTION>
EIGHT MONTHS
ENDED YEAR ENDED APRIL 30,
DECEMBER 31, -------------------------------------
1998 1998 1997 1996
------------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Net loss under United States GAAP............ $(59,834) $(2,934,922) $(1,048,051) $(602,956)
Foreign currency translation account......... (1,613) (96,951) 142 104,367
-------- ----------- ----------- ---------
Comprehensive loss........................... $(61,447) $(3,031,873) $(1,047,909) $(498,589)
======== =========== =========== =========
</TABLE>
F-60
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference into the Titan Corporation's previously filed registration statements
(as amended, as applicable) File Numbers 33-4041, 33-9570, 33-12119, 33-15680,
33-37827, 33-56762, 33-65123, 33-83402, 333-07413, 333-10919, 333-10965,
333-30947, 333-57651, 333-66149, 333-47633, 333-66147, 333-67341, 333-68621,
333-90133 and 333-90139 of our report dated December 28, 1999 related to the
financial statements of Transnational Partners II, LLC included in this Form
8-K/A. It should be noted that we have not audited any financial statements of
the Company subsequent to December 31, 1998 or performed any audit procedures
subsequent to the date of our report.
ARTHUR ANDERSEN LLP
San Diego, California
January 24, 2000
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference into the Titan Corporation's previously filed registration statements
(as amended, as applicable) File Numbers 33-4041, 33-9570, 33-12119, 33-15680,
33-37827, 33-56762, 33-65123, 33-83402, 333-07413, 333-10919, 333-10965,
333-30947, 333-57651, 333-66149, 333-47633, 333-66147, 333-67341, 333-68621,
333-90133 and 333-90139 of our report dated December 28, 1999 related to the
financial statements of JB Systems, Inc. (d.b.a. Mainsaver) included in this
Form 8-K/A. It should be noted that we have not audited any financial statements
of the Company subsequent to December 31, 1998 or performed any audit procedures
subsequent to the date of our report.
ARTHUR ANDERSEN LLP
San Diego, California
January 24, 2000
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the registration statements of
The Titan Corporation (File Numbers 33-4041, 33-9570, 33-12119, 33-15680,
33-37827, 33-56762, 33-65123, 33-83402, 333-07413, 333-10919, 333-10965,
333-30947, 333-57651, 333-66149, 333-47633, 333-66147, 333-67341, 333-68621,
333-09133 and 333-90139, as amended, as applicable), of our report dated
May 28, 1999 (except Note 9, as to which the date is September 22, 1999), with
respect to the financial statements of Assist Cornerstone Technologies, Inc. for
the year ended December 31, 1998, included in the Form 8-K/A Amendment Two of
The Titan Corporation dated January 24, 2000. It should be noted that we have
not audited any financial statements of Assist Cornerstone Technologies, Inc.
subsequent to December 31, 1998 or performed any audit procedures subsequent to
the date of our report.
/s/ Ernst & Young LLP
Salt Lake City, Utah
January 21, 2000
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT CHARTERED ACCOUNTANTS
The Board of Directors
SFG Technologies Inc.
We consent to the incorporation by reference into the registration statements
(as amended, as applicable) file Numbers 33-4041, 33-9570, 33-12119, 33-15680,
33-37827, 33-56762, 33-65123, 33-83402, 333-07413, 333-10919, 333-10965,
333-30947, 333-57651, 333-66149, 333-47633, 333-66147, 333-67341, 333-68621,
333-90133 and 333-90139 on Forms S-3, S-3/A or S-8, as applicable in the
circumstances of The Titan Corporation of our report dated June 22, 1999, except
as to note 13 which is as of November 26, 1999, with respect to the consolidated
balance sheets of SFG Technologies Inc. as at December 31, 1998 and April 30,
1998 and the consolidated statements of operations, deficit, and cash flows for
the eight month period ended December 31, 1998 and for each of the years in the
three year period ended April 30, 1998, which report appears in the registration
statement of Form 8-K/A of The Titan Corporation dated January 24, 2000.
KPMG LLP
Chartered Accountants
Vancouver, Canada
January 24, 2000
