<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): FEBRUARY 25, 2000
THE TITAN CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 1-6035 95-2588754
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
</TABLE>
<TABLE>
<S> <C>
3033 SCIENCE PARK ROAD, SAN DIEGO, CALIFORNIA 92121
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (858) 552-9500
<PAGE>
The Titan Corporation (the "Registrant") hereby amends the following items,
financial statements, exhibits or other portions of its Current Report on
Form 8-K filed March 9, 2000, as follows:
Item 7. Financial Statements and Exhibits
(a) Financial Statements of Businesses Acquired. The Registrant herewith
files the following financial statements of Advanced Communication
Systems, Inc. ("ACS"): (1) the audited consolidated balance sheets of
ACS as of September 30, 1998 and 1999 and the audited consolidated
statements of operations and changes in financial position for each
of the three years in the period ended September 30, 1999, filed
herein as Exhibit 99.2, and (2) the unaudited consolidated balance
sheet of ACS as of December 31, 1999 and the unaudited consolidated
statements of operations and changes in financial position for the
quarterly period ended December 31, 1999, filed herein as Exhibit
99.3.
(b) Pro Forma Financial Information.
Pro Forma Combined Statements of Operations for the years ended
December 31, 1999, 1998 and 1997.
Pro Forma Combined Balance Sheet as of December 31, 1999.
Notes to Pro Forma Financial Statements
The Registrant also files herewith as Exhibits 99.4, 99.5 and 99.6 the
historical financial statements of the following companies whose financial
results are reflected in the foregoing pro forma financial statements: JB
Systems, Inc. (d.b.a. Mainsaver), Assist Cornerstone Technologies, Inc., and SFG
Technologies Inc.
2
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The accompanying unaudited pro forma condensed combined financial statements
should be read in conjunction with the notes to consolidated financial
statements contained in our Annual Report on Form 10-K for the year ended
December 31, 1999, the notes to the consolidated financial statements contained
herein as exhibit 99.2 of Advanced Communication Systems, Inc. ("Advanced
Communication Systems") for the year ended September 30, 1999 and the notes to
the financial statements of JB Systems, Inc. ("Mainsaver"), Assist Cornerstone
Technologies, Inc. ("Assist") and SFG Technologies, Inc. ("SFG Technologies").
We refer to Mainsaver, Assist and SFG Technologies hereinafter as the "acquired
companies."
The following unaudited pro forma combined balance sheet and unaudited pro
forma condensed combined statements of operations have been prepared to
illustrate the estimated effects of the acquisitions of Advanced Communication
Systems and the acquired companies, for balance sheet purposes as of
December 31, 1999, and for statement of operations purposes for the years ended
December 31, 1999, 1998 and 1997. The operating results for Transnational
Partners are included in our operating results for the year ended December 31,
1999. The operating results of Mainsaver, Assist and SFG Technologies from the
dates of acquisition through December 31, 1999 are included in our operating
results for the year ended December 31, 1999. The unaudited pro forma condensed
combined statements of operations for 1999 combine our revenues and expenses for
the year ended December 31, 1999 with the revenues and expenses of Advanced
Communication Systems for the year ended September 30, 1999 and with the
acquired companies' revenues and expenses from January 1, 1999 through the dates
of acquisition in November and December 1999. The unaudited pro forma condensed
combined statements of operations for 1998 and 1997 combine our revenues and
expenses for the years ended December 31, 1998 and 1997 with the revenues and
expenses of Advanced Communication Systems for the years ended September 30,
1998 and 1997.
The unaudited pro forma adjustments are based upon available information and
upon certain assumptions that we believe are reasonable in the circumstances.
The unaudited pro forma condensed combined statements of operations include the
recurring items which are directly attributable to acquisitions, such as
amortization of additional goodwill, increase in interest expense and the
related tax effects thereof. The unaudited pro forma combined balance sheet
gives effect to the acquisition of Advanced Communication Systems and the
acquired companies as if they had occurred on December 31, 1999. The unaudited
pro forma condensed combined statements of operations give effect to the
acquisition of Advanced Communication Systems as if it had occurred on
January 1, 1997, and give effect to the acquisitions of the acquired companies
as if they had occurred on January 1, 1999. The unaudited pro forma combined
statements do not purport to represent what our 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 our financial position or results of operations for any future date or
period.
3
<PAGE>
THE TITAN CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS PRO FORMA
TITAN ACS (NOTE 4) COMBINED MAINSAVER ASSIST
-------- -------- ----------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
REVENUES $406,551 $218,252 $ -- $624,803 $ 6,698 $11,869
Costs and expenses:
Cost of revenues................................ 314,369 147,667 -- 462,036 1,835 6,265
Selling, general and administrative expense..... 46,583 53,736 100,319 5,526 5,915
Research and development expense................ 6,690 -- -- 6,690 1,004 612
Special acquisition related charges and other... (28,880) 6,534 -- (22,346) -- --
-------- -------- ------ -------- ------- -------
Total costs and expenses...................... 338,762 207,937 -- 546,699 8,365 12,792
-------- -------- ------ -------- ------- -------
Operating profit (loss)........................... 67,789 10,315 -- 78,104 (1,667) (923)
Interest expense.................................. (9,633) (4,492) -- (14,125) (383) (454)
Interest income................................... 1,027 160 -- 1,187 -- --
-------- -------- ------ -------- ------- -------
Income (loss) from continuing operations before
income taxes.................................... 59,183 5,983 -- 65,166 (2,050) (1,377)
Income tax provision.............................. 21,983 2,402 -- 24,385 -- (138)
-------- -------- ------ -------- ------- -------
Income (loss) from continuing operations before
cumulative effect of change in accounting
principle, net.................................. $ 37,200 $ 3,581 $ -- $ 40,781 $(2,050) $(1,239)
======== ======== ====== ======== ======= =======
Basic earnings per share:
Income from continuing operations............... $ 0.93 $ 0.41 $ -- $ 0.90 $ -- $ --
======== ======== ====== ======== ======= =======
Weighted average shares......................... 39,318 8,680 (3,346)(e) 44,652 -- --
======== ======== ====== ======== ======= =======
Diluted earnings per share:
Income from continuing operations............... $ 0.81 $ 0.41 $ -- $ 0.80 $ -- $ --
======== ======== ====== ======== ======= =======
Weighted average shares......................... 46,032 8,803 (3,469)(e) 51,366 -- --
======== ======== ====== ======== ======= =======
<CAPTION>
PRO FORMA
ADJUSTMENTS PRO FORMA
SFG (NOTE 4) COMBINED
-------- ----------- ----------
<S> <C> <C> <C>
REVENUES $6,749 $ -- $650,119
Costs and expenses:
Cost of revenues................................ 1,348 -- 471,484
Selling, general and administrative expense..... 3,234 2,537(b) 117,531
Research and development expense................ 2,245 -- 10,551
Special acquisition related charges and other... -- -- (22,346)
------ ------- --------
Total costs and expenses...................... 6,827 2,537 577,220
------ ------- --------
Operating profit (loss)........................... (78) (2,537) 72,899
Interest expense.................................. (337) (4,241)(c) (19,540)
Interest income................................... -- -- 1,187
------ ------- --------
Income (loss) from continuing operations before
income taxes.................................... (415) (6,778) 54,546
Income tax provision.............................. -- (1,484)(d) 22,763
------ ------- --------
Income (loss) from continuing operations before
cumulative effect of change in accounting
principle, net.................................. $ (415) $(5,294) $ 31,783
====== ======= ========
Basic earnings per share:
Income from continuing operations............... $ -- $ -- $ 0.70
====== ======= ========
Weighted average shares......................... -- -- 44,652
====== ======= ========
Diluted earnings per share:
Income from continuing operations............... $ -- $ -- $ 0.61
====== ======= ========
Weighted average shares......................... -- -- 51,366
====== ======= ========
</TABLE>
4
<PAGE>
THE TITAN CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS PRO FORMA
TITAN ACS (NOTE 4) COMBINED
-------- -------- ----------- ----------
<S> <C> <C> <C> <C>
REVENUES $303,428 $107,752 $ -- $411,180
Costs and expenses:
Cost of revenues.......................................... 232,041 69,847 -- 301,888
Selling, general and administrative expense............... 37,553 28,834 -- 66,387
Research and development expense.......................... 5,590 -- -- 5,590
Special acquisition related charges and other............. 9,891 -- -- 9,891
-------- -------- ------- --------
Total costs and expenses................................ 285,075 98,681 -- 383,756
-------- -------- ------- --------
Operating profit............................................ 18,353 9,071 -- 27,424
Interest expense............................................ (7,377) (1,918) -- (9,295)
Interest income............................................. 392 82 -- 474
-------- -------- ------- --------
Income from continuing operations before income taxes....... 11,368 7,235 -- 18,603
Income tax provision........................................ 4,155 2,861 -- 7,016
-------- -------- ------- --------
Income from continuing operations before cumulative effect
of change in accounting principle, net.................... $ 7,213 $ 4,374 $ -- $ 11,587
======== ======== ======= ========
Basic earnings per share:
Income from continuing operations......................... $ 0.18 $ 0.61 $ -- $ 0.27
======== ======== ======= ========
Weighted average shares................................. 34,895 7,221 (1,887)(e) 40,229
======== ======== ======= ========
Diluted earnings per share:
Income from continuing operations......................... $ 0.18 $ 0.60 $ -- $ 0.26
======== ======== ======= ========
Weighted average shares................................. 36,177 7,326 (1,992)(e) 41,511
======== ======== ======= ========
</TABLE>
5
<PAGE>
THE TITAN CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS PRO FORMA
TITAN ACS (NOTE 4) COMBINED
-------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues............................................ $275,923 $52,194 $ -- $328,117
Costs and expenses:
Cost of revenues.................................. 216,553 37,687 -- 254,240
Selling, general and administrative expense....... 36,731 11,128 -- 47,859
Research and development expense.................. 7,466 -- -- 7,466
Special acquisition related charges and other..... 6,600 1,910 -- 8,510
-------- ------- ------ --------
Total costs and expenses........................ 267,350 50,725 -- 318,075
-------- ------- ------ --------
Operating profit.................................... 8,573 1,469 -- 10,042
Interest expense.................................... (6,643) (136) -- (6,779)
Interest income..................................... 872 153 -- 1,025
-------- ------- ------ --------
Income from continuing operations before income
taxes............................................. 2,802 1,486 -- 4,288
Income tax provision................................ 4,184 (250) -- 3,934
-------- ------- ------ --------
Income (loss) from continuing operations before
cumulative effect of change in accounting
principle, net.................................... $ (1,382) $ 1,736 $ -- $ 354
======== ======= ====== ========
Basic earnings per share:
Income (loss) from continuing operations.......... $ (0.07) $ 0.40 $ -- $ (0.01)
======== ======= ====== ========
Weighted average shares......................... 33,094 4,306 1,028(e) 38,428
======== ======= ====== ========
Diluted earnings per share:
Income (loss) from continuing operations.......... $ (0.07) $ 0.40 $ -- $ (0.01)
======== ======= ====== ========
Weighted average shares......................... 33,094 4,352 982(e) 38,428
======== ======= ====== ========
</TABLE>
6
<PAGE>
THE TITAN CORPORATION
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
TITAN ACS (NOTE 4) PRO FORMA
-------- -------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................... $ 11,749 $ 979 $ -- $ 12,728
Accounts receivable, net................................ 151,771 69,817 -- 221,588
Inventories............................................. 14,708 720 -- 15,428
Prepaid expenses and other.............................. 8,102 1,888 -- 9,990
Deferred income taxes................................... 13,318 (2,979) 3,345(a) 16,663
-------- -------- ------- --------
Total current assets.................................. 199,648 73,404 3,345 276,397
Property and equipment, net............................. 35,361 8,690 -- 44,051
Goodwill, net........................................... 149,635 71,174 -- 220,809
Other assets............................................ 20,935 422 -- 21,417
Net assets of discontinued operations................... 557 -- -- 557
-------- -------- ------- --------
Total assets.......................................... $406,196 $153,690 $ 3,345 $563,231
======== ======== ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit.......................................... $ 10,035 $ -- $ -- $ 10,035
Accounts payable........................................ 38,987 4,924 -- 43,911
Acquisition debt........................................ 4,800 -- -- 4,800
Current portion of long-term debt....................... 3,704 757 -- 4,461
Income taxes payable.................................... 9,119 -- -- 9,119
Accrued compensation and benefits....................... 17,873 -- -- 17,873
Other accrued liabilities............................... 30,490 41,214 -- 71,704
Net liabilities of discontinued operations.............. 7,142 -- -- 7,142
-------- -------- ------- --------
Total current liabilities............................. 122,150 46,895 -- 169,045
-------- -------- ------- --------
Line of credit.......................................... 129,187 52,565 -- 181,752
Long-term debt.......................................... 8,556 358 11,150(a) 20,064
Other non-current liabilities........................... 30,205 1,711 -- 31,916
Minority interests...................................... 5,350 -- -- 5,350
STOCKHOLDERS' EQUITY:
Preferred stock:
Cumulative convertible................................ 695 -- -- 695
Series A junior participating......................... -- -- -- --
Common stock............................................ 454 115 -- 569
Capital in excess of par value.......................... 105,030 43,416 -- 148,446
Deferred compensation................................... (738) -- -- (738)
Retained earnings....................................... 7,976 8,930 (7,805)(a) 9,101
Cumulative foreign currency translation adjustment...... (33) -- -- (33)
Treasury stock.......................................... (2,636) (300) -- (2,936)
-------- -------- ------- --------
Total stockholders' equity............................ 110,748 52,161 (7,805) 155,104
-------- -------- ------- --------
Total liabilities and stockholders' equity............ $406,196 $153,690 $ 3,345 $563,231
======== ======== ======= ========
</TABLE>
7
<PAGE>
THE TITAN CORPORATION
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
Cayenta, Inc. ("Cayenta"), a majority owned subsidiary of The Titan
Corporation ("Titan"), acquired substantially all of the assets and liabilities
of Transnational Partners in January 1999. Thereafter, Cayenta acquired
Mainsaver in November 1999, and Assist and SFG Technologies in December 1999.
(See Note 3--The Acquired Companies). On December 9, 1999, we entered into an
agreement to acquire Advanced Communication Systems, in a stock transaction to
be accounted for as a pooling of interests, which was consummated on
February 25, 2000.
2. BASIS OF PRESENTATION
The accompanying unaudited pro forma condensed combined consolidated
financial statements are based on adjustments to our historical consolidated
financial statements to give effect to the acquisitions described in Note 3
below and the acquisition of Advanced Communication Systems. The pro forma
condensed combined statements of operations assume the acquisitions were
consummated as of the beginning of the periods presented. The pro forma
condensed combined statements of operations are not necessarily indicative of
results that would have occurred if the acquisitions had 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 SEC. The pro forma
condensed combined financial statements should be read in conjunction with the
historical consolidated financial statements of Titan and Advanced Communication
Systems and the historical financial statements of the acquired companies.
The information in the unaudited pro forma condensed combined statements of
operations for the year ended December 31, 1999 has been derived from (i) the
audited consolidated statement of operations of Titan, for the year ended
December 31, 1999, the audited consolidated statement of operations of Advanced
Communication Systems for the year ended September 30, 1999, and the audited
statements of operations for Mainsaver, Assist and SFG Technologies for the
period from January 1, 1999 through their respective dates of acquisition in
November and December 1999 (which statements are included in the consolidated
financial statements of each of Mainsaver, Assist and SFG Technologies for those
respective periods). The information in the unaudited pro forma condensed
combined statements of operations for the years ended December 31, 1998 and 1997
were derived from (i) our audited consolidated statement of operations for the
years ended December 31, 1998 and 1997 and the (ii) audited consolidated
statement of operations of Advanced Communication Systems for the years ended
September 30, 1998 and 1997.
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 generally
accepted accounting principles relative to SFG Technologies.
8
<PAGE>
THE TITAN CORPORATION
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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:
THE ACQUIRED COMPANIES
TRANSNATIONAL PARTNERS. In January 1999, Cayenta acquired substantially all
of the assets of Transnational Partners, an enterprise application integration
consulting company. Cayenta acquired these assets for an initial installment of
$7.0 million in cash and 2,345,000 shares of Cayenta's convertible preferred
stock. Cayenta paid an additional $2.8 million note that was issued as part of
its acquisition of Transnational Partners, plus 7% interest thereon, in February
2000. Acquisition goodwill of $12.3 million is being amortized on a
straight-line basis over 30 years.
MAINSAVER. In November 1999, Cayenta acquired Mainsaver, an enterprise
asset management company. Cayenta 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 March 2000 and $3.0 million is due in May 2001,
after satisfaction of possible working capital adjustments or indemnification
obligations. In addition, Cayenta paid approximately $3.4 million to reduce
outstanding indebtedness of Mainsaver.
ASSIST CORNERSTONE. In December 1999, Cayenta acquired Assist, an
e-commerce solutions and software company. Cayenta acquired Assist for 516,000
shares of its 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 was due and paid in March 2000 and $1.3 million is due in
June 2001, after satisfaction of possible working capital adjustments or
indemnification obligations. In addition, Cayenta paid approximately
$3.2 million to retire outstanding indebtedness of Assist 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. Cayenta acquired SFG Technologies for $11.6 million in cash,
of which $9.5 million was paid at the closing. Of the approximately
$2.0 million placed into escrow at the closing, approximately $500,000 was due
and paid in March 2000 and $1.5 million is due in June 2001, after satisfaction
of possible working capital adjustments or indemnification obligations. In
addition, Cayenta 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 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.
9
<PAGE>
THE TITAN CORPORATION
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. ADJUSTMENTS TO HISTORICAL FINANCIAL STATEMENTS
The following pro forma adjustments have been made to the historical balance
sheet and the historical condensed statements of operations as if the
acquisition of Advanced Communication Systems were consummated at December 31,
1999 and as of the beginning of the periods presented, respectively:
BALANCE SHEET
Advanced Communication Systems Acquisition:
(a) To reflect the impact of estimated direct transaction costs of the
acquisition of Advanced Communication Systems and estimated employee
retention and termination costs of approximately $11.2 million. These
transaction costs consist primarily of investment banking fees, costs of
filings with regulatory agencies, and accounting, legal, financial printing
and other related costs, net of taxes.
STATEMENTS OF OPERATIONS
1999 Acquisitions:
(b) To reflect incremental amortization (on a straight-line basis over
20 years) of goodwill related to the purchase of Mainsaver, Assist and SFG
Technologies.
(c) To reflect incremental interest expense on advances under our line
of credit to fund the cash portion of the purchase prices of the
Transnational Partners acquisition and of the purchases of Mainsaver, Assist
and SFG Technologies and to reflect interest expense related to holdback
amounts for the Mainsaver, Assist and SFG Technologies acquisitions.
(d) To reflect (i) the change in income taxes related to pro forma
adjustments.
Advanced Communication Systems Acquisition:
(e) The unaudited pro forma combined net income (loss) per common share
is based upon the weighted average number of common and equivalent shares of
our common stock outstanding for each period at the exchange ratio of .5677
of a share of our common stock for each share of Advanced Communication
Systems common stock, assuming 9,394,000 shares of Advanced Communication
Systems common stock issued and outstanding, which amount includes common
stock to be issued and outstanding stock options. The effect of the assumed
conversion of our convertible subordinated debentures was antidilutive for
all periods presented.
NON-RECURRING CHARGES
Non-recurring charges represent special acquisition related charges, plus
certain costs incurred by DBA Systems, Inc. in 1997 related to the write-down of
certain assets impaired in 1997, and costs incurred by Mainsaver in connection
with its 1998 leveraged recapitalization.
10
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- --------------------- -----------
<C> <S>
2.1 Agreement and Plan of Merger, dated as of December 9, 1999,
as amended as of January 20, 2000, among the Registrant
Merger Sub and ACS (incorporated by reference to
Exhibit 2.1 to the Registrant's Registration Statement on
Form S-4 (No. 333-95245)) Previously filed.
23.1* Consent of Arthur Andersen LLP, Independent Public
Accountants, with respect to the audited financial
statements of Advanced Communication Systems, Inc. filed as
part of this Form 8-K/A.
23.2* Consent of Arthur Andersen LLP, Independent Public
Accountants, with respect to the audited financial
statements of JB Systems, Inc. filed as part of this Form
8-K/A.
23.3* Consent of Ernst & Young LLP, Independent Auditors, with
respect to the audited financial statements of Assist
Cornerstone Technologies, Inc. filed as part of this Form
8-K/A.
23.4* Consent of KPMG LLP, Independent Public Accountants, with
respect to the audited financial statements of SFG
Technologies, Inc. filed as part of this Form 8-K/A.
99.1 Press Release dated February 28, 2000. Previously filed.
99.2* Audited Financial Statements of Advanced Communication
Systems, Inc. as of and for the period ended September 30,
1999 and September 30, 1998.
99.3* Unaudited Financial Statements of Advanced Communication
Systems, Inc. as of and for the quarter ended December 31,
1999.
99.4* Financial Statements of JB Systems, Inc. d.b.a. Mainsaver.
99.5* Financial Statements of Assist Cornerstone Technologies,
Inc.
99.6* Financial Statements of SFG Technologies, Inc.
</TABLE>
- ------------------------
* Filed herewith.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
<TABLE>
<S> <C> <C>
THE TITAN CORPORATION
By: /s/ NICHOLAS J. COSTANZA
-----------------------------------------
Nicholas J. Costanza
Senior Vice President and
General Counsel
</TABLE>
Date: April 17, 2000
12
<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 November 12, 1999 related to the financial statements of Advanced
Communication Systems, Inc. (the "Company") included in this Form 8-K/A of
the Titan Corporation. It should be noted that we have not audited
any financial statements of the Company subsequent to September 30, 1999
or performed any audit procedures subsequent to the date of our report.
ARTHUR ANDERSEN LLP
Vienna, Virginia
April 17, 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 February
4, 2000 related to the financial statements of JB Systems, Inc. (d.b.a.
Mainsaver) included in this Form 8-K/A of The Titan Corporation. It should be
noted that we have not audited any financial statements of the Company
subsequent to October 31, 1999 or performed any audit procedures subsequent
to the date of our report.
ARTHUR ANDERSEN LLP
San Diego, California
April 17, 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,
333-90133, and 333-90139, as amended, as applicable), of our report dated
February 11, 2000, with respect to the financial statements of Assist
Cornerstone Technologies, Inc. for the period ended December 12, 1999,
included in the Form 8-K/A of The Titan Corporation dated April 17, 2000.
/s/ Ernst & Young LLP
Salt Lake City, Utah
April 10, 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 January 31,
2000, with respect to the consolidated balance sheets of SFG Technologies
Inc. as at December 21, 1999 and December 31, 1998 and the consolidated
statements of operations, deficit, and cash flows for the period from January
1, 1999 to December 21, 1999, the eight months ended December 31, 1998 and
the years ended April 30, 1998 and 1997, included in this Form 8K/A of The
Titan Corporation.
/s/ KPMG, LLP
Chartered Accountants
Vancouver, Canada
April 12, 2000
<PAGE>
EXHIBIT 99.2
ADVANCED COMMUNICATION SYSTEMS, INC.
Index to Audited Financial Statements
<TABLE>
<S> <C>
Report of Independent Public Accountants....................................... F-2
Consolidated Balance Sheets as of September 30, 1999 and 1998.................. F-3
Consolidated Statements of Operations for the Years Ended September 30, 1999,
1998 and 1997.................................................................. F-4
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended September 30, 1999, 1998 and 1997.................................. F-5
Consolidated Statements of Cash Flows for the Years Ended September 30, 1999,
1998 and 1997................................................................. F-7
Notes to Consolidated Financial Statements..................................... F-8
SCHEDULE:
Schedule II -- Valuation and Qualifying Accounts............................... F-21
</TABLE>
Schedules not listed above have been omitted because they are not applicable
or the information required to be set forth therein is included in the
financial statements or notes thereto.
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS OF ADVANCED COMMUNICATION SYSTEMS, INC.:
We have audited the accompanying consolidated balance sheets of Advanced
Communication Systems, Inc. (a Delaware corporation) and subsidiaries as of
September 30, 1999 and 1998, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for each of the three
years in the period ended September 30, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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 Advanced Communication Systems,
Inc. and subsidiaries as of September 30, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended September 30, 1999, in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
VIENNA, VIRGINIA
NOVEMBER 12, 1999
F-2
<PAGE>
ADVANCED COMMUNICATION SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30
-----------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 1,615 $ 2,457
Contract receivables, net.................................. 67,834 54,059
Other receivables.......................................... 1,617 374
Prepaid expenses........................................... 1,279 958
Inventories................................................ 932 583
-------- --------
Total current assets.................................... 73,277 58,431
-------- --------
Property and equipment, net................................ 7,908 8,044
Other assets:
Software development costs, net............................ -- 3,186
Intangibles, net........................................... 61,603 49,726
Other non-current assets................................... 414 348
-------- --------
Total other assets...................................... 62,017 53,260
-------- --------
Total assets......................................... $143,202 $119,735
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.......................... $ 87 $ 87
Obligations under capital leases........................... 877 1,100
Accounts payable........................................... 5,773 9,577
Accrued expenses and other current liabilities............. 27,789 22,772
Billings in excess of revenue.............................. 1,182 1,208
Deferred profit............................................ 5,319 --
Income taxes payable....................................... 738 1,104
Deferred income tax liability.............................. 2,317 1,059
-------- --------
Total current liabilities............................... 44,082 36,907
Obligations under capital leases - long-term............... 420 523
Deferred income tax liability - long-term.................. 1,226 858
Long-term debt............................................. 47,580 36,564
-------- --------
Total liabilities....................................... 93,308 74,852
-------- --------
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized, no shares issued and outstanding............. -- --
Common stock, $.01 par value, 40,000,000 shares authorized,
11,450,000 shares issued at September 30, 1999 and 1998.. 115 115
Paid-in capital............................................ 42,511 41,105
Retained earnings.......................................... 7,578 3,991
Less - Treasury stock, 2,701,513 shares at September 30,
1999 and 2,854,887 shares at September 30, 1998.......... (310) (328)
-------- --------
Total stockholders' equity............................. 49,894 44,883
-------- --------
Total liabilities and stockholders' equity........... $143,202 $119,735
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
ADVANCED COMMUNICATION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30
--------------------------------------
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Revenues............................................ $218,252 $107,752 $52,194
Direct costs........................................ 147,667 69,847 37,687
Indirect, general and administrative expenses....... 53,863 28,834 11,128
Provision for doubtful accounts..................... 2,514 -- --
Write-off of capitalized software development costs
(Note 7)........................................... 3,893 -- --
Write-off of acquired in-process R & D costs
(Note 4)........................................... -- -- 1,910
--------- -------- -------
Income from operations.............................. 10,315 9,071 1,469
Interest expense.................................... (4,492) (1,918) (136)
Other income, net................................... 160 82 153
--------- -------- -------
Income before taxes................................. 5,983 7,235 1,486
Provision (benefit) for income taxes................ 2,402 2,861 (250)
--------- -------- -------
Net income.......................................... $ 3,581 $ 4,374 $ 1,736
--------- -------- -------
Net income per share-basic.......................... $ 0.41 $ 0.61 $ 0.40
--------- -------- -------
Net income per share-diluted........................ $ 0.41 $ 0.60 $ 0.40
--------- -------- -------
Weighted average shares outstanding-basic........... 8,680 7,221 4,306
--------- -------- -------
Weighted average shares outstanding-diluted......... 8,803 7,326 4,352
--------- -------- -------
Pro forma statements of operations data:
(unaudited - Note 2)
Income before taxes as reported..................... $ 1,486
Pro forma income tax provision...................... 571
-------
Pro forma net income................................ $ 915
-------
Pro forma net income per share-basic................ $ 0.20
-------
Pro forma net income per share-diluted.............. $ 0.19
-------
Pro forma weighted average shares outstanding-basic. 4,682
-------
Pro forma weighted average shares outstanding-diluted 4,729
--------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
ADVANCED COMMUNICATION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
---------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS
---------- ------ ------- --------
<S> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1996............... 6,750,000 67 16,506 4,520
Net income.................................. -- -- -- 1,736
Sale of common stock........................ 2,225,000 23 14,341 --
Sale of treasury stock...................... -- -- -- --
Purchase of treasury stock.................. -- -- -- --
Stockholder distributions................... -- -- -- (6,625)
Translation adjustment...................... -- -- -- (13)
Cancellation of stock repurchase
agreements................................ -- -- (16,438) --
---------- ---- ------- ------
BALANCE AT SEPTEMBER 30, 1997............... 8,975,000 90 14,409 (382)
Net income.................................. -- -- -- 4,374
Sale of common stock........................ 2,000,000 20 22,627 --
Common stock issued for acquisition......... 475,000 5 3,295 --
Exercise of stock options and purchases
under the Employee Stock Purchase Plan...... -- -- 589 --
Tax benefit attributable to the exercise
of non-qualified stock options............ -- -- 185 --
Translation adjustment...................... -- -- -- (1)
---------- ---- ------- ------
BALANCE AT SEPTEMBER 30, 1998............... 11,450,000 115 41,105 3,991
Net income.................................. -- -- -- 3,581
Exercise of stock options and purchases
under the Employee Stock Purchase Plan...... -- -- 1,262 --
Tax benefit attributable to the exercise
of non-qualified stock options............ -- -- 144 --
Translation adjustment...................... -- -- -- 6
---------- ---- ------- ------
BALANCE AT SEPTEMBER 30, 1999............... 11,450,000 $115 $42,511 $7,578
========== ==== ======= ======
</TABLE>
<TABLE>
<CAPTION>
ADJUSTMENT
FOR
REDEMPTION
VALUE GREATER
THAN AMOUNTS
PAID IN BY TREASURY
STOCKHOLDERS STOCK TOTAL
------------ -------- -------
<S> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1996 .......... (16,438) (280) 4,375
Net income ............................. -- -- 1,736
Sale of common stock ................... -- -- 14,364
Sale of treasury stock ................. -- 57 57
Purchase of treasury stock ............. -- (66) (66)
Stockholder distributions .............. -- -- (6,625)
Translation adjustment ................. -- -- (13)
Cancellation of stock repurchase
agreements............................ 16,438 -- --
------- ----- -------
BALANCE AT SEPTEMBER 30, 1997 .......... -- (289) 13,828
Net income ............................. -- -- 4,374
Sale of common stock ................... -- -- 22,647
Common stock issued for acquisition .... -- -- 3,300
Exercise of stock options and purchases
under the Employee Stock Purchase Plan.. -- (39) 550
Tax benefit attributable to the exercise
of non-qualified stock options ....... -- -- 185
Translation adjustment ................. -- -- (1)
------- ----- -------
F-5
<PAGE>
BALANCE AT SEPTEMBER 30, 1998 .......... -- (328) 44,883
Net income ............................. -- -- 3,581
Exercise of stock options and purchases
under the Employee Stock Purchase Plan.. -- 18 1,280
Tax benefit attributable to the exercise
of non-qualified stock options ....... -- -- 144
Translation adjustment ................. -- -- 6
------- ----- -------
BALANCE AT SEPTEMBER 30, 1999 ........... $ -- $(310) $49,894
======== ===== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
ADVANCED COMMUNICATION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
-----------------------------------------
1999 1998 1997
--------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................................. $ 3,581 $ 4,374 $ 1,736
Adjustments to reconcile net income to net cash
(used in) provided by operating activities--
Depreciation and amortization........................... 3,804 2,264 471
Provision for doubtful accounts......................... 2,514 -- --
Write-off of capitalized software development costs..... 3,893 -- --
Deferred tax liability.................................. 1,626 1,078 (238)
Reduction of deferred profit............................ (1,024) -- --
Write-off of acquired in-process R & D costs............ -- -- 1,910
Changes in assets and liabilities:
Contract receivables................................ (15,062) (9,579) (9,414)
Other receivables................................... (1,624) (157) (303)
Income taxes receivable............................. -- 529 (636)
Prepaid expenses.................................... (321) 532 (84)
Inventories......................................... (349) (39) (182)
Other assets........................................ (60) 40 (80)
Accounts payable.................................... (3,793) (1,459) 715
Accrued expenses and other current liabilities...... 4,251 2,242 4,983
Billings in excess of revenue....................... (26) 606 (502)
Income taxes payable................................ (372) 1,165 --
------- ------ ------
Net cash (used in) provided by operating
activities...................................... (2,962) 1,596 (1,624)
------- ------ ------
Cash flows from investing activities:
Acquisitions, net of cash acquired.......................... (1,974) (54,175) (4,438)
Purchases of property and equipment......................... (1,906) (2,492) (678)
Capitalized software development costs...................... (707) (2,339) (626)
Contingent purchase price payment........................... (5,000) -- --
Collection of notes receivable -- stockholders.............. -- -- 443
------- ------ ------
Net cash used in investing activities............. (9,587) (59,006) (5,299)
------- ------ ------
Cash flows from financing activities:
Net proceeds from the sale of common stock.................. -- 22,647 14,364
Net borrowings (repayments)................................. 16 (884) --
Net borrowings (repayments) under line of credit............ 10,971 35,000 (2,701)
Deferred financing costs.................................... (234) (45) --
Net repayments of obligations under capital leases.......... (326) (145) --
Exercise of stock options and purchases under the ESPP...... 1,280 550 57
Stockholder distributions................................... -- -- (3,164)
Purchase of treasury stock.................................. -- -- (66)
------- ------ ------
Net cash provided by financing activities......... 11,707 57,123 8,490
------- ------ ------
Net (decrease) increase in cash............................. (842) (287) 1,567
Cash and cash equivalents, beginning of period.............. 2,457 2,744 1,177
------- ------ ------
Cash and cash equivalents, end of period.................... $ 1,615 $ 2,457 $ 2,744
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-7
<PAGE>
ADVANCED COMMUNICATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION:
Advanced Communication Systems, Inc. (the "Company") was incorporated in 1987 in
the state of Delaware. The Company provides communications, information systems
and applied technology, predominantly to U.S. government agencies and to a
lesser extent commercial and international customers. In August 1997, the
Company acquired RF Microsystems, Inc. ("RFM"), a provider of technical and
engineering services to the Department of Defense in the areas of
communications, navigation, electronic warfare and digital signal systems. In
fiscal 1998, the Company acquired Integrated Systems Control, Inc. ("ISC"), a
satellite communication engineering company, Advanced Management Incorporated
("AMI"), a provider of a wide range of information technology services and
SEMCOR, Inc. ("SEMCOR"), a provider of technical and engineering services in the
areas of communication services, information and applied technology. In fiscal
1999, the Company acquired Program Support Associates, Inc. ("PSA"). PSA
develops, installs and supports online, real time financial management
information systems primarily to the Department of Defense.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Advanced
Communication Systems, Inc. and its wholly owned subsidiaries. All material
intercompany accounts and transactions have been eliminated.
NET INCOME PER COMMON SHARE
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share." This statement
replaces the previously reported primary and fully diluted net income per share
with basic and diluted net income per share. Unlike primary net income per
share, basic net income per share excludes any dilutive effects of stock
options. Diluted net income per share is similar to the previously reported
fully diluted net income per share. All net income per share amounts have been
restated to conform to SFAS No. 128. No reconciling items existed between the
net income used for basic and diluted net income per share. The only reconciling
item between the shares used for basic and diluted net income per share related
to outstanding stock options.
PRO FORMA NET INCOME PER SHARE (UNAUDITED)
Prior to June 25, 1997, the Company elected to be treated as an S corporation
and was not subject to federal and certain state income taxes. The pro forma
statement of operations data reflects federal and state income taxes at
applicable rates as if the Company had not elected S corporation status for the
period indicated. Pro forma net income per share has been computed by dividing
pro forma net income by the pro forma weighted average number of common shares
outstanding during the period.
The pro forma weighted average shares outstanding is based on: (i) the weighted
average shares outstanding during the period assuming the dilutive effect of all
options outstanding for diluted pro forma net income per share and (ii) the
assumed sale of a sufficient number of shares of the Company's common stock
necessary to fund the distribution of all undistributed S corporation earnings
in excess of the preceding twelve months earnings, through the date of the
offering.
MANAGEMENT'S USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make
F-8
<PAGE>
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.
SUPPLEMENTAL STATEMENTS OF CASH FLOWS DATA
The Company paid income taxes in the amount of approximately $1,193,000,
$198,000 and $608,000 and interest expense of approximately $4,318,000,
$1,925,000 and $136,000 during the fiscal years ended September 30, 1999, 1998
and 1997, respectively. The Company acquired all of the outstanding shares of
ISC in exchange for 475,000 shares of the Company's Common Stock in fiscal 1998.
(See Note 4).
REVENUE RECOGNITION
The Company provides services, primarily to the U.S. government, on a
contractual basis. Revenue on cost plus fixed fee contracts is recognized to the
extent of costs incurred plus a proportionate amount of fees earned. Revenue on
time and materials contracts is recognized at the contractual rates as labor
hours and direct expenses are incurred. Revenue on fixed price contracts is
recognized on the percentage-of-completion method based on costs incurred in
relation to total estimated costs. Anticipated contract losses are recognized as
soon as they become known and estimable.
The Company also provides off-the-shelf hardware and software products to the
U.S. government under the GSA Schedule Contract and to commercial companies.
Related revenue is recognized when products are shipped or when customers have
accepted the products, depending on contractual terms.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to significant
concentrations of credit risk consist of cash and cash equivalents and contract
receivables. The Company maintains cash and cash equivalents in a high credit
quality financial institution. The credit risk with respect to contract
receivables is mitigated because the majority of the Company's contract
receivables are due from agencies of the U.S. government, and non-government
receivables are comprised of relatively small amounts due from a diverse
customer base.
For the years ended September 30, 1999, 1998 and 1997, approximately
$198,966,000, $97,463,000, and $48,284,000, respectively, of the Company's
revenues were derived from contracts or subcontracts funded by the U.S.
government, most of which were funded by the Department of Defense. Government
contracts can be terminated at any time by the government without cause, are
subject to competitive rebidding process upon expiration, require compliance
with various contract procurement regulations and are subject to audit by the
Defense Contract Audit Agency and other government auditors.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include short-term investments with original
maturities of three months or less.
INVENTORIES
Inventories consisting of computer and communications hardware, that are used in
the completion of contractual obligations, are stated at the lower of cost or
market. Cost is determined using the average cost method.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are depreciated over their
estimated useful lives, five to seven years, primarily using the straight-line
method. One of the Company's subsidiaries uses an accelerated method and will
adopt the straight-line method in
F-9
<PAGE>
fiscal 2000. Leasehold improvements are amortized on a straight-line basis
over the shorter of the useful life of the asset or the lease terms.
Buildings are depreciated over forty years on a straight-line basis.
SOFTWARE DEVELOPMENT COSTS
In compliance with SFAS No. 86, Accounting for the Costs of Computer Software to
be Sold, Leased or Otherwise Marketed, certain software development costs are
capitalized in the accompanying balance sheets. Capitalization of software
development costs begins upon the establishment of technological feasibility.
Capitalization ceases and amortization of capitalized costs begins when the
software product is commercially available for general release to customers.
Amortization of capitalized software development costs is computed using the
straight-line method over the remaining estimated economic life of the product,
not to exceed five years. (See Note 7)
RESEARCH AND DEVELOPMENT EXPENSES
The Company expenses research and development costs as they are incurred.
Research and development expenses for all periods presented were not material
except for acquired in-process research and development costs (See Note 4).
INTANGIBLE ASSETS
INTANGIBLE ASSETS, NET OF ACCUMULATED AMORTIZATION, CONSISTS OF THE FOLLOWING:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------- AMORTIZATION
1999 1998 PERIOD
------- ------- ------------
<S> <C> <C> <C>
Goodwill................ $57,586 $45,687 5 -- 40 years
Customer lists.......... 3,673 3,929 16 years
Debt financing costs.... 344 110 2 years
------- -------
$61,603 $49,726
======= =======
</TABLE>
Debt financing costs represents fees and other costs incurred in connection with
the issuance of long term debt. These costs are amortized to interest expense
over the term of the related debt using the effective interest rate method.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets, including software development costs
and property and equipment, for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be fully
recoverable. To determine recoverability of its long-lived assets, the Company
evaluates the probability that future undiscounted net cash flows, without
interest charges, will be less than the carrying amount of the assets. The
Company has determined that as of September 30, 1999 and 1998, there has been no
impairment in the carrying value of long-lived assets, with the exception of the
write-off related to software development costs of approximately $3,893,000
discussed in Note 7.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments are defined as cash, evidence of an ownership interest in
an entity, or a contract that imposes an obligation to deliver cash or other
financial instruments to a second party. The carrying amounts of current assets
and current liabilities in the accompanying financial statements approximate
fair value due to the short maturity of these instruments. The carrying amount
of long-term debt approximates fair value based on borrowing rates currently
available to the Company for bank loans with similar terms and maturities.
INCOME TAXES
From October 1, 1989 through June 25, 1997, the Company elected to be treated as
an S corporation and was not subject to federal
F-10
<PAGE>
and certain state income taxes. As a result, no provision for federal and
state income taxes has been included in the historical statements of
operations prior to June 25, 1997. On June 25, 1997, in connection with the
initial public offering, the S corporation status was terminated, thereby
subjecting future income of the Company to federal and state income taxes.
Subsequent to June 25, 1997, the Company has provided for federal and state
income taxes in the statements of operations at the effective tax rates.
RECLASSIFICATION
Certain prior period amounts have been reclassified to conform with the current
year's presentation.
3. OFFERINGS OF COMMON STOCK AND DISTRIBUTIONS TO STOCKHOLDERS:
In July 1997, the Company consummated the initial public offering of its common
stock (the "Initial Public Offering"), selling 2,225,000 shares of common stock,
including the underwriter's overallotment option of 375,000 shares, for $7.50
per share. The Initial Public Offering resulted in net proceeds to the Company
of approximately $14,400,000 after deducting underwriters discounts and offering
expenses payable by the Company. In connection with the Initial Public Offering,
the Company terminated its S corporation election and made distributions to the
pre-Initial Public Offering stockholders of its undistributed S corporation
earnings of approximately $6,600,000.
In May 1998, the Company consummated a public offering of 2,000,000 shares of
its common stock for $12.375 per share. The offering resulted in net proceeds to
the Company of approximately $22,600,000 after deducting underwriting discounts
and offering expenses payable by the Company. The majority of the proceeds was
used to pay the outstanding debt incurred in the acquisition of AMI (See Note
4).
4. ACQUISITIONS:
RF MICROSYSTEMS, INC.
In August 1997, the Company acquired all of the outstanding common stock of RFM
for cash consideration of $5,000,000. The acquisition has been accounted for as
a purchase, and the financial results of RFM have been included in the results
of operations from the date of acquisition. The total purchase price has been
allocated to the acquired assets and liabilities assumed at their estimated fair
values in accordance with the provisions of Accounting Principles Board Opinion
No. 16. The excess of the purchase price over the net assets acquired is being
carried as goodwill, in the amount of $1,698,000, which is being amortized over
its estimated useful life of 15 years. The consolidated statement of operations
includes a $1,910,000 charge, based on a third-party appraisal, taken at the
time of the acquisition for acquired in-process research and development costs
related to acquired technology that has not reached technological feasibility
and that has no alternative future use.
INTEGRATED SYSTEMS CONTROL, INC.
In November 1997, the Company acquired all of the outstanding shares of ISC in
exchange for 475,000 shares of the Company's common stock. The acquisition has
been accounted for as a purchase and accordingly the total purchase price has
been allocated to acquired assets and liabilities assumed at their estimated
fair values. The excess of the purchase price over the net assets acquired is
being carried as goodwill, in the amount of approximately $1,428,000, which is
being amortized over its estimated useful life of 30 years.
ADVANCED MANAGEMENT INCORPORATED
In February 1998, the Company acquired all of the outstanding shares of AMI for
$19,500,000 in cash and additional contingent payments for each of two
consecutive twelve month periods following the closing date of the acquisition
up to a maximum of $5,250,000 for each period. AMI did not achieve the financial
goals required for the first twelve-month period and management believes it is
unlikely that AMI will achieve the financial goals for the second twelve-month
period ending January 31, 2000. The
F-11
<PAGE>
acquisition has been accounted for as a purchase, and accordingly, the
purchase price has been allocated to the acquired assets and liabilities
assumed at their estimated fair values. The excess of the purchase price over
the net assets acquired is being carried as intangible assets, including
goodwill and customer lists, in the amounts of approximately $12,648,000 and
$4,100,000, respectively, which is being amortized over their estimated
useful lives of 40 and 16 years, respectively.
SEMCOR, INC.
In June 1998, the Company acquired all of the outstanding shares of SEMCOR for a
preliminary purchase price of $38,100,000 in cash and additional contingent
payments based on the achievement of certain financial goals for the six-month
period ending December 31, 1998, up to a maximum of $5,000,000 and for the
twelve-month period ending December 31, 1999, up to a maximum of $10,000,000.
SEMCOR successfully achieved the financial goals for the six-month period ended
December 31, 1998, as outlined in the stock purchase agreement, and accordingly
the selling shareholders were paid the maximum of $5,000,000 in February 1999.
The Company believes that a substantial portion of the second contingent payment
that is due in February 2000, will be payable to the selling shareholders. The
acquisition has been accounted for as a purchase, and accordingly the
preliminary purchase price has been allocated to the acquired assets and
liabilities assumed at their estimated fair values, based on a third-party
appraisal. In connection with the final determination of the fair value of
assets acquired and pursuant to the provisions of Accounting Principles Board
Opinion No. 16, the Company has valued acquired contracts in process at contract
price, minus the estimated costs to complete and an allowance for the normal
industry profit on its effort to complete such contracts, which amounted to
$6,343,000. Effective April 1, 1999, this adjustment has been reflected in the
accompanying balance sheet as an increase to goodwill and a corresponding
increase to deferred profit. The Company recognized approximately $1,024,000 as
a reduction of costs in fiscal 1999, with the remaining $5,319,000 to be
recorded as a reduction of costs in future periods as work on certain contracts
is performed. The excess of the preliminary purchase price and the first
contingent payment over the net assets acquired is being carried as goodwill, in
the amount of $41,784,000, and is being amortized over its estimated useful life
of 40 years. The amount to be paid for the second contingent payment will be
recorded on the measurement date of December 31, 1999, as additional goodwill.
PROGRAM SUPPORT ASSOCIATES, INC.
In September 1999, the Company acquired all of the outstanding shares of PSA for
$2,300,000 in cash, of which $662,000 is included in accrued expenses at
September 30, 1999, and additional contingent payments, up to $1,000,000, upon
the achievement of certain financial goals during the period commencing January
1, 2000, and ending December 31, 2000. The acquisition has been accounted for as
a purchase, and accordingly, the total purchase price has been allocated to the
acquired assets and liabilities assumed at their estimated fair values. The
excess of the purchase price over the net assets acquired is being carried as
goodwill, in the amount of approximately $1,942,000, which will be amortized
over 20 years.
The following unaudited pro forma summary presents information as if each
acquisition had occurred at the beginning of the fiscal year preceding the
period in which the acquisition was consummated. The pro forma information does
not necessarily reflect the results that would have occurred nor is it
necessarily indicative of future results of operations of the combined
companies.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
-----------------------------------
1999 1998 1997
-------- ------- --------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues................................ $223,065 $190,596 $181,446
Net income.............................. $ 3,783 $ 4,614 $ 3,005
Net income per share -- basic........... $ 0.44 $ 0.64 $ 0.58
Net income per share -- diluted......... $ 0.43 $ 0.63 $ 0.57
</TABLE>
F-12
<PAGE>
5. CONTRACT RECEIVABLES:
CONTRACT RECEIVABLES CONSIST OF THE FOLLOWING:
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------
1999 1998
------- ------
(IN THOUSANDS)
<S> <C> <C>
U.S. government:
Amounts billed........................... $25,625 $22,088
Recoverable costs and accrued profit on
progress completed; not billed......... 38,422 27,777
------- -------
Subtotal............................ 64,047 49,865
------- -------
Commercial customers:
Amounts billed........................... 3,513 4,469
Recoverable costs and accrued profit on
progress completed; not billed......... 1,235 864
------- -------
Subtotal............................ 4,748 5,333
------- -------
Less allowance for doubtful accounts........ 961 1,139
------- -------
Total............................. $67,834 $54,059
======= =======
</TABLE>
In fiscal 1999, the Company incurred a charge for an uncollected receivable from
the Australian Navy in the amount of approximately $1,800,000. The receivable
was related to the development and installation of RANSALTS, a SALTS-type
product.
6. PROPERTY AND EQUIPMENT:
PROPERTY AND EQUIPMENT CONSIST OF THE FOLLOWING:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Land........................................ $ 1,231 $ 1,231
Buildings................................... 1,946 1,946
Furniture and equipment..................... 10,232 9,411
Equipment under capital leases.............. 3,470 4,366
Leasehold improvements...................... 294 305
------- -------
17,173 17,259
Less accumulated depreciation and
amortization.............................. 9,265 9,215
------- -------
Total property and equipment, net........... $ 7,908 $ 8,044
======= =======
</TABLE>
7. SOFTWARE DEVELOPMENT COSTS:
SOFTWARE DEVELOPMENT COSTS CONSIST OF THE FOLLOWING:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Cost........................................ $ 4,357 $ 3,650
Less accumulated amortization............... (464) (464)
Less write-off.............................. (3,893) --
------- -------
Total software development costs, net....... $ -- $ 3,186
======= =======
</TABLE>
Software development costs capitalized were $707,000, $2,339,000 and $626,000 in
the years ended September 30, 1999, 1998 and 1997, respectively. Amortization
expense for the years ended September 30, 1999, 1998 and 1997 was approximately
$-0-, $103,000 and $137,000 respectively.
In 1999, the Company discontinued development of its SALTS related software
products, and accordingly, the results of operations for the year ended
September 30, 1999, includes a one-time charge of approximately $3,893,000 in
capitalized SALTS software
F-13
<PAGE>
development costs.
8. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES CONSIST OF THE FOLLOWING:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accrued salaries, benefits and related
taxes.................................... $ 5,695 $ 7,098
Accrued vacation........................... 3,663 3,243
Accrued bonuses............................ 1,320 763
Accrued subcontractor and other direct
costs.................................... 14,465 8,841
Accrued acquisition costs.................. 763 744
Provision for loss contracts............... 683 1,391
Other accrued expenses and current
liabilities.............................. 1,200 692
------- -------
$27,789 $22,772
======= =======
</TABLE>
9. RELATED-PARTY TRANSACTIONS:
In 1993, the Company entered into a ten-year lease with a real estate management
company ("10089 Management") to lease its headquarters facility. The owners of
10089 Management include the principal stockholders of the Company. The lease
was scheduled to expire on August 31, 2003 and required rental payments of
approximately $29,000 per month, increased annually based on the Consumer Price
Index. In July 1999, the facility was sold to a non-affiliated third party from
whom the Company currently leases the facility.
The Company also provided management services for 10089 Management at no cost.
Included in other receivables at September 30, 1998, was $88,000 due from 10089
Management for reimbursable operating expenses paid for by the Company.
10. LONG-TERM DEBT:
LONG-TERM DEBT CONSISTS OF THE FOLLOWING:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Line of credit:
$60,000,000 line of credit with a commercial
bank expiring February 28, 2002.............. $46,000 $35,000
$400,000 line of credit with a commercial bank,
interest at Prime plus 1%, due on demand..... 50 --
Notes payable:
Note payable to bank, interest at 9.9%, due
February 2005, secured by a First Deed of
Trust on an office building................ 951 964
Note payable to Urban Business Development
Corporation, interest at 8.575%, due January
2015, guaranteed by the Small Business
Administration and secured by a Second
Deed of Trust on an office building...... 666 687
------- -------
47,667 36,651
Less current maturities..................... 87 87
------- -------
$47,580 $36,564
======= =======
</TABLE>
The aggregate maturities of long-term debt in each of the next five fiscal years
is as follows (in thousands): $87 in 2000; $41 in 2001; $46,045 in 2002; $48 in
2003; $55 in 2004 and $1,390 thereafter.
LINES OF CREDIT
F-14
<PAGE>
In February 1998, the Company entered into a line of credit arrangement,
consisting of two credit facilities aggregating $35,000,000, with a commercial
bank, refinancing the Company's then-existing line of credit and the outstanding
commercial bank debt of ISC. The Company's subsidiary, ISC, had three notes
payable totaling approximately $1,671,000 at the date of acquisition, secured by
accounts receivable, equipment and other assets, which were repaid using the
above mentioned facility in February 1998. The credit facility was also used to
finance the acquisition of AMI and to provide for the working capital needs of
the Company. The first facility, in an amount up to $15,000,000, may be used to
finance acquisitions, working capital, and other corporate purposes, and bears
interest at either the bank's prime rate or at a London interbank offered rate
("LIBOR") for one, two or three month periods, plus a percentage, not more than
2.2%, which depends on the Company's historical performance. The second
facility, in an amount up to $20,000,000, may be used to finance acquisitions,
and bears interest at either the bank's prime rate or at a LIBOR rate plus a
percentage, not more than 2.45%, which depends on the Company's historical
financial performance. The credit agreement contains various covenants requiring
the Company and its subsidiaries, on a consolidated basis, to maintain certain
financial ratios, including, funded debt to earnings before interest,
depreciation, income taxes and amortization ("EBITDA"), EBITDA coverage ratio
and minimum net worth and prohibits the payment of dividends.
In June 1998, the line of credit arrangement was increased to $45,000,000, from
$35,000,000, to finance the acquisition of SEMCOR and to provide for the working
capital needs of the Company. This credit arrangement was subject to similar
terms and conditions as the original arrangement that was entered into in
February 1998.
In February 1999, the line of credit arrangement was increased to $60,000,000 to
finance the additional contingent payment to the selling shareholders of SEMCOR
and to provide for the working capital needs of the Company. This credit
arrangement was subject to similar terms and conditions as the original
arrangement that was entered into in February 1998.
Subsequent to year-end, the Company and the commercial bank executed an
amendment to the line of credit arrangement that restated the definition of
EBITDA to exclude $4,800,000 in calculating the funded debt to EBITDA financial
covenant with respect to any fiscal period from September 30, 1999, through and
including June 30, 2000. As of September 30, 1999, $58,400,000 was available on
this credit arrangement and the outstanding balance was $46,000,000 with an
additional $3,800,000 in standby letters of credit.
In September 1999, the Company acquired PSA, and as a result, assumed its
liabilities that, in part, consisted of $50,000 outstanding under a line of
credit. This credit arrangement with a commercial bank, in the amount of
$400,000, bears interest at the bank's prime rate plus one percent and is due on
demand.
At September 30, 1999, and 1998, the Company had $46,050,000 and $35,000,000,
respectively, outstanding under these arrangements. For the years ended
September 30, 1999, 1998 and 1997, interest expense under these credit
facilities was approximately $3,803,000, $1,410,000 and $136,000, respectively,
at weighted average interest rates of 8.16%, 8.10% and 8.75%, respectively.
11. INCOME TAXES:
Following the completion of the Offering, the Company became subject to federal
and state income taxes. The following audited information for the years ended
September 30, 1999 and 1998, and the unaudited pro forma information for the
year ended September 30, 1997, has been determined based on the provisions of
SFAS No. 109. The September 30, 1997, information reflects income tax expense
(benefit) that the Company would have incurred had it been subject to federal
and state income taxes. The income tax provision for the years ended September
30, 1999 and 1998, are based on actual amounts as the Company was subject to
federal and state income taxes for both years.
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30
---------------------------------------------------
1999 1998 1997 (PRO FORMA)
------------- ------------- ------------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Income tax provision
(benefit)
Current
Federal.................. $391 $1,359 $521
State.................... 803 440 75
Deferred................... 1,208 1,062 (25)
------ ------ ----
$2,402 $2,861 $571
====== ====== ====
</TABLE>
The provision for income taxes results in effective rates that differ from the
federal statutory rate as follows:
F-15
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30
-------------------
1999 1998 1997 (PRO FORMA)
------- ------ ----------------
(UNAUDITED)
<S> <C> <C> <C>
Statutory federal income tax rate...... 34.0% 34.0% 34.0%
State income taxes, net of federal tax
benefit............................... 6.4 5.8 4.9
Other.................................. (0.3) (0.3) (0.5)
---- ---- ----
40.1% 39.5% 38.4%
==== ==== ====
</TABLE>
The Company had net operating loss carryforwards of approximately $1,007,000, as
of September 30, 1997, that were fully utilized in 1998.
THE COMPONENTS OF THE NET DEFERRED TAX LIABILITIES ARE AS FOLLOWS:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------
1999 1998
----------- ----------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets
Acquired in-process R & D
write-off.................... $ 659 $ 711
Cash to accrual adjustment...... 423 846
Accrued vacation................ 1,258 828
Reserves........................ 318 208
Accrued bonus................... 339 161
Other........................... 216 87
------ ------
3,213 2,841
------ ------
Deferred tax liabilities
Unbilled receivables.............. (4,309) (2,332)
Cash to accrual adjustment........ (456) (879)
Capitalized software development
costs.......................... - (1,217)
Amortization...................... (1,303) (250)
Acquired contracts in process..... (379) -
Other............................. (309) (80)
------ ------
(6,756) (4,758)
------ ------
Total deferred tax liability........ $(3,543) $(1,917)
======= =======
</TABLE>
12. STOCKHOLDERS' EQUITY:
RECAPITALIZATION AND STOCK SPLIT
On May 5, 1997, the Company amended and restated its Certificate of
Incorporation to increase the number of authorized shares to 40,000,000 shares
of Common Stock, par value $.01 per share, and 1,000,000 shares of Preferred
Stock, par value $.01 per share. In June 1997, the Board of Directors approved a
stock dividend having the effect of a 6,750-for-1 stock split of the Common
Stock, which was paid to the stockholders effective June 25, 1997. The change in
the Company's Common Stock for the stock dividend has been given retroactive
effect for all periods presented.
STOCK REDEMPTION AGREEMENTS
All of the outstanding shares of common stock and options, upon exercise, were
subject to Stock Redemption Agreements. Under certain circumstances, the Company
was required to buy back the stock at a price equal to fair value, as determined
by the Board of Directors. Adjustment for redemption value greater than amounts
paid in by stockholders represents the change in the redemption value per share
of outstanding Common Stock in each period. The redemption value per share,
based on the fair market value, was $4.44 as of September 30, 1996. The Stock
Redemption Agreements were terminated in connection with the initial public
offering and the corresponding accretion was removed. All treasury stock
purchases were a result of the provisions of these Stock Redemption Agreements.
STOCK PLANS AND AGREEMENTS
F-16
<PAGE>
The 1997 Stock Incentive Plan of the Company (the "1997 Plan") was adopted by
the Company's Board of Directors effective March 1997 and by the Company's
stockholders on March 25, 1997. The Company may grant options, stock
appreciation rights, "performance" awards and restricted and unrestricted stock
(collectively, the "Awards") to purchase up to 450,000 shares of common stock,
plus additional annual amounts to participants in the Plan as prescribed in the
Amendment to the 1997 Stock Incentive Plan. In 1999, the Company's stockholders
approved an amendment to the 1997 Plan, that provided for automatic increases in
the number of shares reserved for issuance thereunder effective on the first
trading day of each of January 1999 and 2000. This amendment provides that the
Plan shall increase by a number of shares equal to the lesser of (i) two percent
(2%) of the total number of shares of the Company's common stock issued and
outstanding on the last trading day of the preceding December or (ii) 400,000
shares. (Such number shall be subject to adjustment by the Company's Board of
Directors under the terms of the Plan to take into account the effect of
extraordinary corporate transactions such as reorganization, merger,
consolidation, recapitalization, restructuring or other distribution, stock
split, spin-off or sale of substantially all of the Company's assets). The
additional amount reserved for issuance effective January 1, 1999, was 172,524
shares. The 1997 Plan has a term of 10 years. Options granted under the 1997
Plan can have an exercise period of up to 10 years. The 1997 Plan provides for
the grant of stock options to directors, employees (including officers) and
consultants of the Company and its subsidiaries. Pursuant to the 1997 Plan,
options may be incentive stock options within the meaning of Section 422 of the
Code or nonstatutory stock options, although incentive stock options may be
granted only to employees. All incentive stock options are nontransferable other
than by will or the laws of descent and distribution. At September 30, 1999 and
1998, 111,266 shares and 41,900 shares, respectively, were available for grant
under this plan.
The 1996 Stock Incentive Plan of the Company (the "1996 Plan") was adopted by
the Company's Board of Directors and approved by the Company's stockholders
effective July 1996. The Company may grant options, stock appreciation rights,
"performance" awards and restricted and unrestricted stock (collectively, the
"Awards") to purchase up to 337,500 shares of common stock to participants in
the 1996 Plan. The 1996 Plan has a term of 10 years. Options granted under the
1996 Plan can have an exercise period of up to 10 years. The 1996 Plan provides
for the grant of stock options to directors, employees (including officers) and
consultants of the Company and its subsidiaries. Pursuant to the 1996 Plan,
options may be incentive stock options within the meaning of Section 422 of the
Code or nonstatutory stock options, although incentive stock options may be
granted only to employees. All incentive stock options are nontransferable other
than by will or the laws of descent and distribution. At September 30, 1999 and
1998, 49,775 shares and 24,250 shares, respectively, were available for grant
under the 1996 Plan.
The Company's Employee Stock Purchase Plan (the "ESPP") was adopted by the Board
of Directors in March 1998. A total of 325,000 shares of common stock have been
reserved for issuance under the ESPP. Eligible employees may purchase a limited
number of shares of the Company's stock at 90% of the market value at certain
plan-defined dates. The ESPP automatically terminates on the earlier of March
31, 2008 or the issuance of the maximum number of shares available under the
ESPP. At September 30, 1999 and 1998, 98,076 shares and 6,280 shares,
respectively, were issued under the ESPP. Pursuant to the terms of the Merger
Agreement with The Titan Corporation (See Note 15), the ESPP will be suspended
after December 31, 1999.
In 1993, the Board of Directors granted options to purchase 101,250 shares of
common stock to various employees. The employees were fully vested in the
options upon granting, and the options expire on the earlier of January 1, 1998
or termination of employment. As of September 30, 1999, 1998 and 1997, none of
these options was exercisable. All sales of treasury stock were a result of the
exercise of options and stock issued under the Employee Stock Purchase Plan.
THE FOLLOWING TABLE SUMMARIZES THE ACTIVITY OF ALL THE COMPANY'S STOCK OPTIONS:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER EXERCISE PRICE EXERCISE PRICE
OF SHARES PER SHARE PER SHARE
--------- -------------- --------------
<S> <C> <C> <C>
Shares under option, September 30,
1996......................... 229,500 0.70 - 4.44 3.12
Options granted................. 115,000 6.50 6.50
Options granted................. 108,800 7.50 - 9.875 8.10
Options exercised............... (81,000) 0.70 0.70
Options forfeited............... (13,500) 4.44 4.44
------- -------------- -----
Shares under option, September 30,
1997......................... 358,800 0.70 - 9.875 6.21
Options granted................. 391,800 8.875 - 14.375 11.06
Options exercised............... (83,833) 4.44 - 7.50 5.79
Options forfeited............... (30,250) 4.44 - 12.125 4.69
------- -------------- -----
Shares under option, September 30,
1998......................... 636,517 4.44 - 14.375 9.30
Options granted................. 165,975 8.50 - 11.75 11.41
Options exercised............... (61,578) 4.44 - 11.375 7.01
F-17
<PAGE>
Options forfeited............... (87,342) 4.44 - 11.375 10.85
------- -------------- -----
Shares under option, September 30,
1999............................... 653,572 $4.44 - 14.375 $9.85
======= ============== =====
</TABLE>
Options outstanding at September 30, 1999 had a weighted average remaining
contractual life of 6.7 years. The fair value per share of all options issued in
1999, estimated on the date of grant using the Black-Scholes option pricing
model, is $6.19.
The Company adopted the disclosure requirements of SFAS No. 123, Accounting for
Stock-Based Compensation, effective for the Company's September 30, 1997
financial statements. The Company applies Accounting Principles Board Opinion
No. 25 and related interpretations in accounting for its stock plans. No
compensation cost has been recognized for its stock plans based on the intrinsic
value of the stock options at date of grant (i.e., the difference between the
exercise price and the fair value of the common stock). Had compensation cost
for the Company's stock-based compensation plans been determined based on the
fair value at the grant dates under those plans consistent with the method of
FASB Statement 123, the Company's net income and net income per share would have
been reduced to the amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
-----------------------------------------
1999 1998 1997 (PRO FORMA)
---------- ---------- ------------------
(UNAUDITED)
<S> <C> <C> <C>
Net income (in thousands) --
As reported......................... $3,581 $4,374 $ 915
SFAS No. 123 pro forma.............. $3,000 $3,891 $ 826
Net income per share --
As reported -- basic................ $ 0.41 $ 0.61 $0.20
SFAS No. 123 pro forma -- basic..... $ 0.35 $ 0.54 $0.18
As reported -- diluted.............. $ 0.41 $ 0.60 $0.19
SFAS No. 123 pro forma -- diluted... $ 0.34 $ 0.53 $0.17
</TABLE>
The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:
<TABLE>
<CAPTION>
SEPTEMBER 30
------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Expected Dividend Yield..... 0.0% 0.0% 0.0%
Risk-Free Interest Rate..... 5.3% 4.5% 6.4%
Expected Volatility......... 44.0% 58.7% 57.6%
Expected Life (in years).... 7.0 8.0 7.5
</TABLE>
13. COMMITMENTS:
LEASE COMMITMENTS
The Company has entered into a master leasing agreement in which the Company
sells computer equipment at the original purchase price to a leasing company and
then leases the equipment back. There have been no gains or losses associated
with these sales/leasebacks. All leases related to this master leasing agreement
have been accounted for as capital leases. As of September 30, 1999 and 1998 the
Company recorded approximately $1,297,000 and $1,623,000, respectively, for
obligations under capital leases.
The Company leases office space and equipment under various operating and
capital lease agreements expiring through June 2004. Most leases include a
provision for annual rent adjustments based on changes in various economic
indices. Future minimum lease payments under noncancelable operating leases as
of September 30, 1999, were as follows:
<TABLE>
<CAPTION>
YEAR ENDED OPERATING CAPITAL
SEPTEMBER 30, LEASES LEASES
--------------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C>
2000................... $ 4,560 $ 973
2001................... 4,045 450
2002................... 2,608 --
2003................... 1,291 --
2004................... 295 --
Less interest.......... -- (126)
---------- ---------
Total........... $ 12,799 $ 1,297
========== =========
</TABLE>
During 1993, the Company entered into a lease agreement for office space with a
related party which includes the principal
F-18
<PAGE>
stockholders of the Company (See Note 9). For the years ended September 30,
1999, 1998 and 1997, rent expense related to this lease totaled $280,000,
$336,000 and $257,000, respectively. Amounts representing aggregate rent
expense on all operating leases, excluding the related party lease, totaled
$3,257,000, $2,426,000 and $1,066,000 for the years ended September 30, 1999,
1998 and 1997, respectively.
PROFIT-SHARING PLAN
The Company provides a profit-sharing plan (401(k) plan) which covers
substantially all employees. Under the terms of the plan, the Company may
make discretionary profit-sharing contributions and discretionary matching
contributions, each determined annually by the Board of Directors.
Contributions charged to expense for the years ended September 30, 1999, 1998
and 1997, were $1,843,000, $860,000 and $236,000, respectively.
LITIGATION
In August 1999, the Company filed an action against the McGraw-Hill
Companies, Inc. ("McGraw-Hill") in the United States District Court for the
District of New Jersey (the "New Jersey Action"), seeking recovery of
approximately $186,000 in fees for services performed pursuant to certain
contracts. McGraw-Hill has threatened to file a counterclaim against the
Company seeking recovery of $500,000, on allegations that the Company
negligently designed certain software for McGraw-Hill, which negligence
caused significant problems to McGraw-Hill customers. The Company files its
answer to the counterclaim in December 1999, and it believes that it has a
meritorious defense to the counterclaims and intends to conduct a vigorous
defense.
The Company is from time to time involved in litigation incidental to the
conduct of its business. The Company currently is not a party to any legal
proceedings, other than the action referred to above, and, in the opinion of
management the amount of ultimate liability or recovery with respect to such
actions will not materially affect the financial position or results of
operations of the Company.
14. SEGMENT REPORTING
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 131, Disclosure about Segments of an Enterprise and
Related Information. SFAS No. 131 requires publicly-held companies to report
financial and other information about key revenue-producing segments of the
entity for which such information is available and is utilized by the chief
operating decision-maker in deciding how to allocate resources and in
assessing performance. SFAS No. 131 permits operating segments to be
aggregated if they have similar products and services, customers, methods of
distribution, and belong to the same regulatory environment.
The Company's revenues are derived predominately from the U.S. Government
through long-term cost reimbursement, fixed-price or time and materials
contracts. The Company's operating margin is affected by the mix of contract
types. These contracts are administered and executed under the Federal
Acquisition Regulations. The Company makes vertical market disclosures such
as, communication services, information systems and aerospace services. The
chief operating decision-maker does not allocate resources and does not
assess the performance by the above classifications. The Company manages on a
contract by contract basis. Accordingly, the Company's government contracts
are considered to be one reportable operating segment.
15. SUBSEQUENT EVENTS
AGREEMENT AND PLAN OF MERGER
On December 9, 1999, the Company entered into a definitive agreement to merge
with The Titan Corporation ("Titan", NYSE: TTN) in a tax-free exchange of
Titan common stock for the Company's common stock at an approximate value
ranging from $18 to $22 per the Company's common share. The transaction has
been approved by the board of directors of both companies and is subject to
the Company's shareholder and regulatory approval.
F-19
<PAGE>
EXECUTIVE RETIREMENT PLAN
On October 25, 1999, the Board of Directors approved an executive retirement
plan which is intended to be an unfunded plan for purposes of providing
deferred compensation to a select group of management or highly compensated
employees. An employee shall become a participant under this plan upon
approval of the Compensation Committee following recommendation by the Chief
Executive Officer of the Company. The Chief Executive Officer is currently
the only participant in the plan and is eligible to receive, upon his
retirement, approximately one year of salary of $350,000.
F-20
<PAGE>
ADVANCED COMMUNICATION SYSTEMS, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OTHER END OF
DESCRIPTION OF PERIOD CHARGES ACCOUNTS(1) DEDUCTIONS PERIOD
------------------------------ ----------- --------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Year ended September 30, 1999:
Allowance for doubtful
accounts.................... $1,139 $2,514 $ -- ($2,692) $ 961
Year ended September 30, 1998:
Allowance for doubtful
accounts.................... $ -- $ -- $1,917 ($778) $1,139
Year ended September 30, 1997:
Allowance for doubtful
accounts.................... $ -- $ -- $ -- $ -- $ --
</TABLE>
(1) Represents amounts that were charged to the allowance for doubtful accounts
as a result of purchase accounting and the allocation of the purchase price
to the acquired assets and liabilities at their fair values.
F-21
<PAGE>
EXHIBIT 99.3
ADVANCED COMMUNICATION SYSTEMS, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
<TABLE>
<S> <C>
Condensed Consolidated Balance Sheets as of December 31, 1999
and September 30, 1999 F-2
Condensed Consolidated Statements of Operations for the Three
Months Ended December 31, 1999 and 1998 F-3
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended December 31, 1999 and 1998 F-4
Notes to Condensed Consolidated Financial Statements F-5
</TABLE>
F-1
<PAGE>
ADVANCED COMMUNICATION SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 979 $ 1,615
Contract receivables 68,962 67,834
Other receivables 855 1,617
Deferred costs 969 -
Prepaid expenses 693 1,279
Income taxes receivable 226 -
Inventories 720 932
-------- --------
Total current assets 73,404 73,277
-------- --------
Property and equipment, net 8,690 7,908
Other assets:
Intangibles, net 71,174 61,603
Other non-current assets 422 414
-------- --------
Total other assets 71,596 62,017
-------- --------
Total assets $153,690 $143,202
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 43 $ 87
Obligations under capital lease 714 877
Accounts payable 4,924 5,773
Accrued expenses and other current liabilities 32,775 27,789
Billings in excess of revenue 532 1,182
Deferred profit 4,930 5,319
Income taxes payable - 738
Deferred income tax liability 2,977 2,317
-------- --------
Total current liabilities 46,895 44,082
Obligations under capital lease - long-term 358 420
Deferred income tax liability - long-term 1,711 1,226
Long-term debt 52,565 47,580
-------- --------
Total liabilities 101,529 93,308
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized,
no shares issued and outstanding - -
Common stock, $.01 par value, 40,000,000 shares authorized, 11,450,000 shares
issued at December 31, 1999 and September 30, 1999 115 115
Paid-in-capital 43,416 42,511
Retained earnings 8,930 7,578
Less - Treasury stock, 2,613,748 shares at December 31, 1999 and
2,701,513 shares at September 30, 1999 (300) (310)
Total stockholders' equity 52,161 49,894
-------- --------
Total liabilities and stockholders' equity $153,690 $143,202
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-2
<PAGE>
ADVANCED COMMUNICATION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
--------------------------------
1999 1998
-------------- -------------
<S> <C> <C>
Revenues.............................. $46,255 $47,222
Direct costs.......................... 30,031 31,893
Indirect, general and administrative
expenses.............................. 12,549 12,373
------- ------
Income from operations................ 3,675 2,956
Other expense, net.................... (1,380) (847)
------- ------
Income before taxes................... 2,295 2,109
Income tax expense.................... 943 836
------- ------
Net income............................ $ 1,352 $ 1,273
======= =======
Net income per share - basic.......... $ 0.15 $ 0.15
======= =======
Net income per share - diluted........ $ 0.15 $ 0.15
======= =======
Weighted average shares outstanding -
basic................................. 8,778 8,620
======= =======
Weighted average shares outstanding -
diluted............................... 8,926 8,708
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-3
<PAGE>
ADVANCED COMMUNICATION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
-------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Cash flow from operating activities:
Net income $ 1,352 $ 1,273
Adjustments to reconcile net income to net cash
used in operating activities-
Depreciation and amortization 934 876
Reserve for doubtful accounts 400 -
Deferred tax provision 1,145 833
Reduction of deferred revenue (389) -
Loss on sale of subsidiary 167 -
Changes in assets and liabilities:
Contract receivables (1,588) (7,838)
Other receivables 756 (318)
Prepaid expenses 586 (154)
Inventories 212 83
Other assets (31) 23
Accounts payable (812) (3,247)
Accrued expenses and other current
liabilities (5,983) (2,140)
Billings in excess of revenue (650) (312)
Income taxes payable (700) (342)
------- --------
Net cash used in operating
activities (4,601) (11,263)
------- --------
Cash flows from investing activities:
Purchases of property and equipment (1,308) (601)
Capitalized software development costs - (463)
------- --------
Net cash used in investing
activities (1,308) (1,064)
------- --------
Cash flows from financing activities:
Net borrowings repaid (59) (8)
Net borrowings under line of credit 5,000 12,000
Repayments of obligations under capital leases (225) (543)
Sales of treasury stock 557 227
------- --------
Net cash provided by financing
activities 5,273 11,676
------- --------
Net decrease in cash (636) (651)
Cash and cash equivalents, beginning of period 1,615 2,457
------- --------
Cash and cash equivalents, end of period $ 979 $ 1,806
======= ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-4
<PAGE>
ADVANCED COMMUNICATION SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated balance sheet as of December 31, 1999
and the statements of operations and cash flows for all periods presented
have been prepared by Advanced Communication Systems, Inc. ("the Company"),
and have not been audited. These financial statements, in the opinion of
management, include all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the financial position,
results of operations and cash flows for all periods presented. These
condensed consolidated financial statements should be read in conjunction
with the financial statements and notes thereto for the fiscal year ended
September 30, 1999 included in the Company's Annual Report on Form 10-K.
Interim operating results are not necessarily indicative of operating results
for the full year.
2. MANAGEMENT'S 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
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
3. RECLASSIFICATION
Certain prior year amounts have been reclassified to conform to the current
period's presentation.
4. SUPPLEMENTAL STATEMENTS OF CASH FLOWS DATA
The Company paid income taxes of approximately $489,000 and $339,000 and
interest of approximately $1,264,000 and $884,000 in the three-month periods
ended December 31, 1999 and 1998, respectively.
The following are non-cash transactions for the three-month periods ended
December 31, 1999 and 1998.
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
---- ----
(IN THOUSANDS)
<S> <C> <C>
Deferred merger costs $ 969 $ -
Contingent payment - SEMCOR selling
shareholders $10,000 $ 5,000
Tax effect of stock option exercises $ 358 $ -
</TABLE>
F-5
<PAGE>
5. ACQUISITION AND DIVESTITURE
In June 1998, the Company acquired all the outstanding shares of SEMCOR, Inc.
("SEMCOR") for a preliminary purchase price of $38,100,000 in cash and
additional contingent payments based on the achievement of certain financial
goals for the six-month period ended December 31, 1998, up to a maximum of
$5,000,000, and the twelve-month period ending December 31, 1999, up to a
maximum of $10,000,000. SEMCOR successfully achieved the financial goals for the
six-month ended December 31, 1998 as outlined in the stock purchase agreement
and accordingly the selling shareholders were paid the maximum of $5,000,000 in
February 1999. Additionally, SEMCOR achieved the financial goals for the
twelve-month period ended December 31, 1999, and accordingly the selling
shareholders earned the maximum $10,000,000. The excess of the preliminary
purchase price and the contingent payments over the net assets acquired is being
carried as goodwill in the amount of $51,784,000, and is being amortized over
its estimated useful life of 40 years.
In connection with the final determination of the fair value of assets acquired
and pursuant to the provisions of Accounting Principles Board Opinion No. 16,
the Company has valued acquired contracts in process at the contract price,
minus the estimated costs to complete and an allowance for the normal industry
profit on its effort to complete such contracts, which amounted to $6,343,000.
Effective April 1, 1999, this adjustment has been reflected in the accompanying
balance sheet as an increase to goodwill and a corresponding increase to
deferred profit. The Company recognized approximately $388,000 as a reduction of
costs in the three months ended December 31, 1999, with the remaining $4,930,000
to be recorded as a reduction of costs in future periods as work on certain
contracts is performed.
In October 1999, the Company sold its 100% interest in its U.K. subsidiary,
Fairfax Communications, Ltd. for $30,000 in cash, resulting in a loss of
approximately $167,000. This loss is reflected in the statement of operations
for the three month period ended December 31, 1999.
6. CONTRACT RECEIVABLES
CONTRACT RECEIVABLES CONSIST OF THE FOLLOWING:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 1999
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
U.S. government:
Amounts billed........................... $26,204 $25,625
Recoverable costs and accrued profit on
progress completed; not billed........... 38,278 38,422
------- -------
Subtotal............................. 64,482 64,047
------- -------
Commercial customers:
Amounts billed........................... 3,847 3,513
Recoverable costs and accrued profit on
progress completed; not billed........... 2,006 1,235
------- -------
Subtotal............................. 5,853 4,748
------- -------
Less allowance for doubtful accounts.......... 1,373 961
------- -------
Total................................ $68,962 $67,834
======= =======
</TABLE>
F-6
<PAGE>
7. LONG-TERM DEBT
LONG-TERM DEBT CONSISTED OF THE FOLLOWING:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 1999
------------- -------------
<S> <C> <C>
Lines of credit:
$60,000,000 line of credit, with a commercial bank
expiring February 28, 2002........................... $51,000 $46,000
$400,000 line of credit with a commercial bank, interest
at prime plus 1%, due on demand........................ -- 50
Long-term debt:
Note payable to bank, interest at 9.9%, due February
2005, secured by a First Deed of Trust on an office
building............................................. 947 951
Note payable to Urban Business Development
Corporation, interest at 8.575%, due January 2015,
guaranteed by the Small Business Administration and
secured by a Second Deed of Trust on an office
building............................................... 661 666
------- -------
52,608 47,667
Less current maturities................................ (43) (87)
------- -------
$52,565 $47,580
======= =======
</TABLE>
8. SEGMENT REPORTING
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 131, Disclosure About Segments of an Enterprise and
Related Information. SFAS No. 131 required publicly-held companies to report
financial and other information about key revenue-producing segments of the
entity for which such information is available and is utilized by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. SFAS No. 131 permits operating segments to be aggregated if they
have similar products and services, customers, methods of distribution, and
belong to the same regulatory environment.
The Company's revenues are derived predominately from the U.S. Government
through long-term cost reimbursement, fixed-price or time and materials
contracts that are administered and executed under the Federal Acquisition
Regulations. The Company's operating margin is primarily affected by the mix of
contract types. The Company makes vertical market disclosures such as,
communication services, information systems and aerospace services. The chief
operating decision-maker does not allocate resources and does not assess the
Company's performance by the above classifications. The Company manages on a
contract by contract basis and, accordingly, the Company's government contracts
are considered to be one reportable operating segment.
9. SUBSEQUENT EVENT
On December 9, 1999, the Company entered into a definitive agreement to merge a
subsidiary of The Titan Corporation ("Titan", NYSE: TTN) into the Company in a
tax-free exchange of Titan common stock for the Company's common stock at an
approximate value ranging from $18 to $22 per share of the Company's common
stock. The transaction has been approved by the board of directors of both
companies and is subject to the approval of the Company's stockholders.
A special meeting of the Company's stockholders will be held on February 23,
2000, to vote for the adoption of the merger agreement and approval of the
merger and related transactions.
Included in deferred costs and accrued expenses is $969,000 that represents the
merger costs incurred by the Company as of December 31, 1999. Deferred costs
will be charged to expense upon consummation of the merger.
<PAGE>
EXHIBIT 99.4
JB SYSTEMS, INC.
D/B/A MAINSAVER
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Public Accountants.................... F-2
Statements of Operations.................................... F-3
Statements of Stockholders' Deficit......................... F-4
Statements of Cash Flows.................................... F-5
Notes to Financial Statements............................... F-6
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Cayenta, Inc.:
We have audited the accompanying statements of operations, stockholders'
deficit and cash flows for each of the two years in the period ended December
31, 1998 and for the ten months ended October 31, 1999 of JB Systems, Inc.,
d.b.a. Mainsaver (a California corporation). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows for each of
the two years in the period ended December 31, 1998 and for the ten months ended
October 31, 1999 of JB Systems, Inc. in conformity with accounting principles
generally accepted in the United States.
ARTHUR ANDERSEN LLP
San Diego, California
February 4, 2000
F-2
<PAGE>
JB SYSTEMS, INC.
(D.B.A. MAINSAVER)
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED TEN MONTHS
DECEMBER 31, ENDED
------------------- OCTOBER 31,
1997 1998 1999
-------- -------- -----------
<S> <C> <C> <C>
Revenues.................................................... $6,162 $ 7,218 $ 6,698
Cost of revenues............................................ 2,459 2,387 1,835
------ ------- -------
Gross profit.............................................. 3,703 4,831 4,863
------ ------- -------
Operating expenses:
Selling, general and administrative....................... 2,932 4,892 5,312
Research and development.................................. 778 946 1,004
Depreciation and amortization............................. 274 295 214
------ ------- -------
Total operating expenses................................ 3,984 6,133 6,530
------ ------- -------
Loss from operations........................................ (281) (1,302) (1,667)
Interest expense............................................ 75 165 383
------ ------- -------
Net loss.................................................. $ (356) $(1,467) $(2,050)
====== ======= =======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-3
<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 January 1, 1997............................ 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)
------ ------ -------- -------
Net loss............................................. -- -- (2,050) (2,050)
Issuance of warrants................................. -- 397 -- 397
Balances at October 31, 1999........................... 1,174 $6,197 $(11,404) $(5,207)
====== ====== ======== =======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-4
<PAGE>
JB SYSTEMS, INC.
(D.B.A. MAINSAVER)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED TEN MONTHS
DECEMBER 31, ENDED
------------------- OCTOBER 31,
1997 1998 1999
-------- -------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(356) $(1,467) $(2,050)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 274 295 278
Stock compensation charge............................... 6 -- --
Amortization of debt discount........................... -- -- 83
Loss on disposal of assets.............................. -- 8 --
Changes in operating assets and liabilities:
Accounts receivable, net.............................. 145 (207) (502)
Prepaid expenses and other current assets............. 18 (59) (10)
Accounts payable...................................... (50) 333 656
Accrued expenses...................................... (41) (50) 282
Deferred revenues..................................... 249 (129) 241
Other assets.......................................... -- (79) 118
----- ------- -------
Net cash provided by (used in) operating
activities........................................ 245 (1,355) (904)
----- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (67) (352) (44)
----- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net line of credit borrowings (repayments)................ (200) 1,192 664
Change in bank overdraft.................................. 192 -- (192)
Net (repayments) borrowings on note payable to
stockholder............................................. 404 (502) 600
Repayment of capital lease obligations.................... (59) (73) (124)
Net repayments on long term debt.......................... (502) -- --
Proceeds from issuance of common stock.................... 1 5,800 --
Repurchase of Common Stock................................ (15) -- --
Distributions to stockholders............................. -- (4,701) --
----- ------- -------
Net cash provided by (used in) financing
activities........................................ (179) 1,716 948
----- ------- -------
Net increase (decrease) in cash............................. (1) 9 --
Cash, beginning of year..................................... 16 15 24
----- ------- -------
Cash, end of year........................................... $ 15 $ 24 $ 24
===== ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest................................................ 59 139 301
Income taxes............................................ -- -- 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 --
Acquisition of equipment financed by capital lease
obligations............................................. 32 125 347
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-5
<PAGE>
JB SYSTEMS, INC.
(D.B.A. MAINSAVER)
NOTES TO FINANCIAL STATEMENTS
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, 1997, 1998 or in the ten month period ended October 31, 1999,
respectively. Amortization of capitalized software amounted to $137,000,
$137,000, and $46,000 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 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.
F-6
<PAGE>
JB SYSTEMS, INC.
(D.B.A. MAINSAVER)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 undiscounted cash flows is
less than the carrying amount of the asset, the Company recognizes an impairment
loss. The amount of the impairment loss is calculated as the difference between
the carrying value of the asset and the present value of the expected future
cash flows.
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
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 to $1.4 million, which has been recorded as a $600,000
reduction in note payable to stockholder and repurchase of common stock in the
accompanying financial statements.
F-7
<PAGE>
JB SYSTEMS, INC.
(D.B.A. MAINSAVER)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. RECAPITALIZATION (CONTINUED)
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
$757,000 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 12.)
Sources and uses of cash in connection with the Recapitalization are
summarized below:
<TABLE>
<S> <C>
Sources of cash:
Newco common stock issued................................. $5,043,000
Purchase option agreement................................. 757,000
----------
$5,800,000
==========
Uses of cash:
Payment to founder........................................ $1,924,000
Payment to minority stockholders.......................... 2,326,000
Repayment of debt and accrued interest.................... 772,000
Transaction costs......................................... 421,000
Remaining cash............................................ 357,000
----------
$5,800,000
==========
</TABLE>
4. 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% (9% at
October 31, 1999). 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.
5. NOTES PAYABLE TO STOCKHOLDERS
At December 31, 1996, the Company had a note payable to an
officer/stockholder in the amount of $45,000 with interest payable quarterly at
8% and principal due on demand. Additionally, the Company had a note payable to
an officer/stockholder of $457,000, due in monthly installments of $11,000
including interest at 11.25%, maturing September 2002. Both of these notes were
extinguished in connection with the recapitalization (see Note 3).
On August 18, 1999, the Company entered into a Convertible Subordinated Loan
Agreement whereby a total of $600,000 was loaned to the Company by its
stockholders in amounts proportionate to their respective ownership percentages.
The loans are payable in $100,000 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.
F-8
<PAGE>
JB SYSTEMS, INC.
(D.B.A. MAINSAVER)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. NOTES PAYABLE TO STOCKHOLDERS (CONTINUED)
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. The agreement also provides that, upon
repayment of the loans, the Company will issue the stockholders 59,000 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 $397,000 as of August 1999 and has recorded related
amortization of $83,000 in the ten month period ended October 31, 1999.
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 $500,000 in
connection with Cayenta's acquisition of the Company (see Note 12).
6. INCOME TAXES
As of October 31, 1999, the Company had net operating loss carryforwards of
approximately $3.6 million and $1.5 million 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 2011, 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 regarding realization of the deferred tax asset, management has
provided a full valuation allowance against the net deferred tax asset.
7. COMMITMENTS
The Company leases its facilities under operating leases that require
minimum monthly payments of $24,000, as well as payment of all property taxes,
insurance and other costs. In addition, the Company leases certain office
equipment under operating leases through August 2001.
Property under capital leases at October 31, 1999 consists primarily of
computer and office equipment. Total cost of property under capital leases was
$658,000 at October 31, 1999. Accumulated depreciation related to property under
capital leases was $334,000 at October 31, 1999.
F-9
<PAGE>
JB SYSTEMS, INC.
(D.B.A. MAINSAVER)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS (CONTINUED)
Future minimum rentals under capital and operating leases as of October 31,
1999 are approximately as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
--------- ---------
<S> <C> <C>
1999 (November and December)........................... $ 31,000 $ 51,000
2000................................................... 169,000 179,000
2001................................................... 144,000 6,000
2002................................................... 105,000 --
2003................................................... 75,000 --
2004................................................... 10,000 --
--------- --------
Total future minimum lease payments.................... 534,000 $236,000
========
Less amount representing interest...................... (96,000)
---------
Present value of minimum lease payments................ 438,000
Current portion of capital lease obligations........... (129,000)
---------
Long-term capital lease obligations.................... $ 309,000
=========
</TABLE>
8. 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 $80,000. Employees with annual incomes
of $80,000 or more do not receive matching contributions from the Company.
Company contributions to the Plan were $14,000, $36,000 and $46,000 during the
years ended December 31, 1997, 1998 and for the ten months ended October 31,
1999, respectively.
9. 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. Up to 141,000 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 118,000 and
14,000 stock options during the year ended 1998 and the ten month period ended
October 31, 1999, respectively, with an exercise price of $6.31 per share. No
options are exercisable at October 31, 1999.
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
F-10
<PAGE>
JB SYSTEMS, INC.
(D.B.A. MAINSAVER)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. STOCK OPTIONS (CONTINUED)
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.
10. 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 $8,000 plus
out-of-pocket expenses, and will continue until the occurrence of certain events
as defined in the agreement. Additionally, the Company paid a $50,000
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 $17,000 per month, plus
benefits and out-of-pocket expenses, for one year.
11. 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 $650,000. 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.
12. EVENTS SUBSEQUENT TO DECEMBER 31, 1998
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,
$500,000 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-11
<PAGE>
EXHIBIT 99.5
ASSIST CORNERSTONE TECHNOLOGIES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors.............................. F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statements of Stockholders' Equity.......................... F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<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 12, 1999 and December 31, 1998, and the
related statements of operations, shareholders' equity (deficit), and cash flows
for the period ended December 12, 1999 and each of the two 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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Assist Cornerstone
Technologies, Inc. at December 12, 1999 and December 31, 1998, and the results
of its operations and its cash flows for the period ended December 12, 1999 and
for each of the two years in the period ended December 31, 1998 in conformity
with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Salt Lake City, Utah
February 11, 2000
F-2
<PAGE>
ASSIST CORNERSTONE TECHNOLOGIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 12, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 558,703 $ 741,701
Accounts receivable, less allowance of $215,991 in 1999,
$160,392 in 1998........................................ 2,388,948 2,813,220
Prepaid expenses.......................................... 290,664 77,328
Deferred income taxes..................................... 158,918 128,000
Other receivables......................................... 43,253 107,277
----------- ----------
Total current assets........................................ 3,440,486 3,867,526
Property and equipment:
Office furniture and equipment............................ 316,247 312,447
Leasehold improvements.................................... 45,122 45,122
Computer equipment........................................ 524,049 369,647
----------- ----------
885,418 727,216
Less accumulated depreciation............................. (603,918) (445,556)
----------- ----------
Net property and equipment.................................. 281,500 281,660
Loan fees, net of accumulated amortization of $131,888 in
1999 and $80,296 in 1998.................................. 247,261 298,853
Intangible asset, net of accumulated amortization of
$225,000 in 1998.......................................... -- 75,000
----------- ----------
$ 3,969,247 $4,523,039
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 1,740,912 $ 928,770
Accrued liabilities....................................... 646,871 397,353
Deferred revenue.......................................... 318,587 989,763
Current portion of capital leases......................... 87,955 74,490
Current portion of notes payable to related parties....... 160,000 160,000
----------- ----------
Total current liabilities................................... 2,954,325 2,550,376
Long-term portion of capital leases......................... 59,588 142,243
Notes payable to related parties............................ 2,300,000 1,845,617
Deferred income taxes....................................... -- 107,000
Other long-term liabilities................................. 106,091 151,558
Commitments and contingencies
Redeemable preferred stock:
Preferred stock, issuable in series, $.001 par value,
12,800 shares authorized; $100 per share liquidation
value:
Series A, redeemable preferred stock, 6,200 shares
authorized; 6,200 shares issued and outstanding in 1999
and 1998 (redemption value of $706,800)................ 706,800 197,963
Series B, redeemable preferred stock, 6,600 shares
authorized; 5,000 shares issued and outstanding in 1999
and 1998 (redemption value of $500,000)................ 500,000 107,148
Shareholders' equity (deficit):
Common stock, $.001 par value, 20,000,000 shares
authorized; 4,661,645 shares issued in 1999, 4,642,787
shares issued in 1998................................... 4,662 4,643
Additional paid-in-capital................................ -- --
Accumulated deficit....................................... (2,662,219) (583,509)
----------- ----------
Total shareholders' equity (deficit)........................ (2,657,557) (578,866)
----------- ----------
$ 3,969,247 $4,523,039
=========== ==========
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
ASSIST CORNERSTONE TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED DECEMBER 31
DECEMBER 12, -------------------------
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Revenues:
Licenses............................................ $ 2,253,900 $ 2,392,583 $ 2,105,301
Service and support................................. 6,068,965 4,604,541 3,399,074
Hardware............................................ 3,545,720 4,525,538 5,418,202
----------- ----------- -----------
Total revenues........................................ 11,868,585 11,522,662 10,922,577
Operating expenses:
Cost of license revenue............................. 425,090 498,031 527,082
Cost of service and support revenue................. 2,925,664 2,734,878 2,498,159
Cost of hardware revenue............................ 2,914,199 3,684,431 4,519,858
General and administrative.......................... 3,255,337 2,499,123 1,921,569
Sales and marketing................................. 2,659,657 1,978,027 1,588,379
Research and development............................ 611,988 396,965 139,144
----------- ----------- -----------
12,791,935 11,791,455 11,194,191
----------- ----------- -----------
Loss from operations.................................. (923,350) (268,793) (271,614)
Other income (expense):
Interest income..................................... 26,398 29,690 35,052
Interest expense.................................... (480,334) (318,716) (200,939)
Cumulative effect of change in taxable status of
entity............................................ -- -- (236,000)
----------- ----------- -----------
Loss before income taxes.............................. (1,377,286) (557,819) (673,501)
Income tax benefit (expense)........................ 137,918 179,794 (76,000)
----------- ----------- -----------
Net loss.............................................. (1,239,368) (378,025) (749,501)
Accretion of:
Series A preferred stock............................ (508,837) (131,971) (65,986)
Series B preferred stock............................ (392,852) (71,429) (35,714)
----------- ----------- -----------
Net loss applicable to common shareholders............ $(2,141,057) $ (581,425) $ (851,201)
=========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<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>
Balances at January 1, 1997............ 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)
Issuance of common stock for
services........................... 3,056 3 7,497 -- 7,500
Issuance of common stock upon
exercise of stock options.......... 15,802 16 9,465 -- 9,481
Issuance of warrant to purchase
186,192 common shares.............. -- -- 42,824 -- 42,824
Issuance of warrant to purchase
256,126 common shares.............. -- -- 2,561 -- 2,561
Accretion of Series A preferred
stock.............................. -- -- (62,347) (446,490) (508,837)
Accretion of Series B preferred
stock.............................. -- -- -- (392,852) (392,852)
Net loss............................. -- -- -- (1,239,368) (1,239,368)
---------- ------- ----------- ----------- -----------
Balances at December 12, 1999.......... 4,661,645 $ 4,662 $ -- $(2,662,219) $(2,657,557)
========== ======= =========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
ASSIST CORNERSTONE TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
PERIOD ENDED 31,
DECEMBER 12, ---------------------
1999 1998 1997
------------ --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................... $(1,239,368) $(378,025) $(749,501)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization........................... 233,362 309,121 217,664
Amortization of loan fees............................... 51,592 53,950 26,346
Amortization of rental fees............................. 45,467 3,789 --
Accretion on note payable to related party for
warrant............................................... 156,944 28,284 15,333
Warrant issued for services............................. 42,824 -- --
Provision for bad debts................................. 66,895 219,153 9,023
Common stock issued for services........................ 7,500 13,929 --
Deferred income taxes................................... (137,918) (180,000) 159,000
Change in operating assets and liabilities:
Accounts receivable................................... 357,377 (458,598) (300,669)
Prepaid expenses and other receivables................ (149,312) (81,666) (43,339)
Accounts payable...................................... 812,142 68,722 286,404
Accrued liabilities and other long-term liabilities... 158,584 106,980 19,779
Deferred revenue...................................... (671,176) 342,001 349,047
Income taxes payable.................................. -- (132,821) 132,821
----------- --------- ---------
Net cash (used in) provided by operating activities......... (265,087) (85,181) 121,908
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment......................... (158,202) (68,638) (62,679)
Addition of intangible asset................................ -- -- (300,000)
----------- --------- ---------
Net cash used in investing activities....................... (158,202) (68,638) (362,679)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes to related parties...................... 460,000 160,000 --
Principal payments on notes to related parties.............. (160,000) (75,000) (25,000)
Proceeds from short-term financing.......................... 118,906 -- --
Payments on short-term financing............................ (118,906) -- --
Net proceeds from issuance of debt.......................... -- -- 1,638,851
Principal payments on line of credit........................ -- -- (200,000)
Net proceeds from lease buyout.............................. -- 155,347 --
Principal payments on capital lease obligations............. (69,190) (69,315) (61,182)
Net proceeds from issuance of common stock.................. 9,481 -- 43,600
Proceeds from issuance of preferred stock................... -- -- 500,000
Issuance of warrant......................................... -- -- 100
Shareholder buyout.......................................... -- (40,000) (900,000)
----------- --------- ---------
Net cash provided by financing activities................... 240,291 131,032 996,369
----------- --------- ---------
Net (decrease) increase in cash............................. (182,998) (22,787) 755,598
Cash at beginning of year................................... 741,701 764,488 8,890
----------- --------- ---------
Cash at end of period....................................... $ 558,703 $ 741,701 $ 764,488
=========== ========= =========
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<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 three primary sources: license fees, consulting services and
software support, and hardware resales.
The Company is developing an e-commerce solution based on its current
developed technology.
The Company employs a direct sales force with salespersons located in
California, Florida, Illinois, Utah, Georgia, Washington, Maryland, Texas and
Massachusetts.
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 to 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.
SEGMENT INFORMATION
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." This
statement establishes standards for the way companies report information about
operating segments in financial statements. It also establishes
F-7
<PAGE>
ASSIST CORNERSTONE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
standards for related disclosures about products and services, geographic areas,
and major customers. In accordance with the provisions of SFAS No. 131, the
Company has determined that it does not currently have any separately reportable
operating segments. Revenues from foreign operations have been insignificant.
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.
Leasehold improvements are amortized over the shorter of the estimated lives or
the remaining lease term. Maintenance and repairs are expensed as incurred.
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. The asset was fully depreciated by
December 12, 1999.
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. In evaluating whether an impairment exists, the Company compares
the carrying value of the asset to the estimated undiscounted future cash flows.
If an impairment is deemed to exist, the asset's carrying value is adjusted to
the present value of its estimated future cash flows.
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 prior to that date. 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 has operated 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.
F-8
<PAGE>
ASSIST CORNERSTONE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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.
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 performed. No accrual for losses
on fixed price contracts was made at period end, as management believes that
expected future costs do not exceed anticipated future revenues. 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 in the period in which they are incurred.
Advertising costs were $275,272, $51,234 and $14,736, respectively for the
period ended December 12, 1999 and for the years ended December 31, 1998 and
1997.
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,
F-9
<PAGE>
ASSIST CORNERSTONE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 1999 or prior.
INTERNALLY DEVELOPED SOFTWARE
In March 1998, the Accounting Standards Executive Committee issued Statement
of Position 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use. SOP 98-1 requires all costs related to the
development of internal use software other than those incurred during the
application development stage to be expensed as incurred. Costs incurred during
the application development stage are required to be capitalized and amortized
over the estimated useful life of the software. The Company adopted SOP 98-1 on
January 1, 1999 and the costs eligible for capitalization have been
insignificant to date.
SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosures of cash flow information were as follows:
<TABLE>
<CAPTION>
PERIOD YEAR ENDED DECEMBER
ENDED 31,
DECEMBER12, -------------------
1999 1998 1997
----------- -------- --------
<S> <C> <C> <C>
Cash paid for:
Interest.................................. $296,760 $288,075 $185,606
Income taxes.............................. -- -- 24,000
SCHEDULE OF NON CASH INVESTING AND FINANCING
ACTIVITIES
Issuance of warrant(s) in connection with
$300,000 note in 1999, $160,000 note in
1998 and $2,000,000 note in 1997........ 2,561 18,000 198,000
Issuance of warrant(s) in connection with
obtaining a binding financing commitment
in 1999................................. 42,824 -- --
Issuance of note in shareholder buyout.... -- -- 100,000
</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 a non-cancellable 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
F-10
<PAGE>
ASSIST CORNERSTONE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 accrued 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 $166,000
for the period ended December 12, 1999 and $161,000 and $157,000 for the years
ended December 31, 1998 and 1997, respectively.
The following summarizes the future minimum lease payments required under
non-cancellable leases with initial terms greater than one year as of
December 12, 1999:
<TABLE>
<CAPTION>
OPERATING
YEAR ENDING DECEMBER 31 CAPITAL LEASES LEASE
- ----------------------- -------------- ----------
<S> <C> <C>
2000........................................................ $ 99,431 $ 207,993
2001........................................................ 66,521 201,856
2002........................................................ -- 201,856
2003........................................................ -- 201,856
2004........................................................ -- 67,285
Thereafter.................................................. -- --
-------- ----------
Total....................................................... 165,952 $ 880,846
==========
Amount representing interest................................ (18,409)
--------
Present value of minimum payments........................... 147,543
Current portion of capital leases........................... (87,955)
--------
Long-term portion of capital leases......................... $ 59,588
========
</TABLE>
Furniture and equipment includes assets recorded under capital leases of
approximately $328,950 at December 12, 1999 and December 31, 1998. Accumulated
depreciation on assets recorded under capital leases was $270,080 at
December 12, 1999 and $192,914 at December 31, 1998.
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.
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 certain events occur. The note was due in one year and carried
an interest rate of ten percent with interest due monthly. This note was paid on
March 26, 1999.
F-11
<PAGE>
ASSIST CORNERSTONE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. DEBT FINANCING (CONTINUED)
In May of 1999 the Company issued an additional $160,000 secured convertible
promissory note to the same outside group of investors with substantially the
same terms as documented above except new warrants were not issued but the
warrants issued above were extended. The note is due May 12, 2000 and carries an
interest rate of ten percent.
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
one year. The Company borrowed approximately $118,900 during the period ended
December 12, 1999 and repaid all borrowings prior to December 12, 1999.
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
repayment schedule for the $2,000,000 loan discussed above. 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.
Interest payments on the Notes totaled $263,468, $252,000 and $134,667 for
the period ended December 12, 1999 and the years ended December 31, 1998 and
1997, respectively.
5. REDEEMABLE PREFERRED STOCK
On June 9, 1997 the Company authorized a total of 12,800 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 6,200 shares of Series A 7% Cumulative Convertible
Redeemable Exchangeable Non-Voting preferred stock (Series A Preferred) and
6,600 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 $392,852,
$71,429 and $35,714 have been recorded for the period ended December 12, 1999
and 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. For the period ended
F-12
<PAGE>
ASSIST CORNERSTONE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. REDEEMABLE PREFERRED STOCK (CONTINUED)
December 12, 1999 and the years ended December 31, 1998 and 1997, the Company
accreted $508,837 $131,971 and $65,986, respectively, relating to the Series A
preferred shares.
6. SHAREHOLDERS' EQUITY (DEFICIT)
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 12, 1999, the Company had reserved 7,291,650 shares of common
stock for future issuance, including 413,333 shares reserved for the conversion
of Series A Preferred, 4,070,606 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 $100, which resulted from the sale
of ten percent or more of the then outstanding stock.
STOCK OPTION PLAN
On March 1, 1996, the Board of Directors adopted an employee stock option
plan which authorized 1,000,000 common shares for issuance under the provisions
of the plan. The stock option plan was subsequently amended to increase the
authorized number of common shares issuable to 2,807,711. During 1997, 410,830
options were granted to Company personnel and 31,602 options were issued to an
outside consultant. The stock options issued to the outside consultant were
granted at their deemed fair value ($.45). The options were valued at
approximately $6,200 using the Black-Scholes option valuation model. For the
year ended December 31, 1998 the company granted 207,900 options to employees.
For the period ended December 12, 1999, the Company granted 1,186,250 options of
which 530,000 were to board members and 656,250 were to employees. 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.
F-13
<PAGE>
ASSIST CORNERSTONE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. SHAREHOLDERS' EQUITY (DEFICIT) (CONTINUED)
A summary of stock option activity, and related information for the period
ended December 12, 1999 and the years ended December 31, 1998 and 1997 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>
Balance at January 1, 1997...................... 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
Options granted................................. (1,186,250) 1,186,250 $.45-1.00 $.99
Options canceled................................ 900,559 (900,559) $.45-1.00 $.61
---------- ---------
Balance at December 12, 1999.................... 1,394,665 1,413,046 $.45-1.00 $.86
========== =========
Exercisable at December 12, 1999................ 1,162,816 $.45-1.00 $.62
=========
</TABLE>
The weighted average fair value of options granted for the period ended
December 12, 1999 was $.39 and for the years ended December 31, 1998 and 1997
was $.18 and $.18, respectively. The weighted average remaining contractual life
of the options outstanding and options exercisable at December 12, 1999 was
8.9 years and 7.4 years, respectively.
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 the period ended December 12,
1999 and for the years ended December 31, 1998 and 1997, 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 period ended December 12, 1999 and the years ended December 31, 1998
and 1997, pro forma net loss was approximately $1,512,282, $343,000 and
$805,000, respectively.
Prior to December 12, 1999, all individuals holding stock options entered
into a "stock options exercise agreement," whereby stock options became fully
vested, or an "agreement to terminate the options," whereby the stock options
are exchanged for cash, contingent upon an acquisition of the Company.
F-14
<PAGE>
ASSIST CORNERSTONE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. SHAREHOLDERS' EQUITY (DEFICIT) (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 expired one year from the date of
the debt issuance but was extended with additional borrowings the next month.
On April 29, 1999, the Company entered into an agreement for services to be
provided and granted a warrant to purchase 837,864 shares of common stock at an
exercise price of $1.00. At the signing of the agreement 186,192 warrants to
purchase common stock vested. The remaining warrants vest as certain events take
place, which had not occurred at December 12, 1999.
During the period ended December 12, 1999, the Company issued additional
warrants to purchase common stock to a related party, in conjunction with
providing additional financing for the Company. These consisted of a contingent
warrants to purchase 257,341 shares of common stock with an exercise price of
$.45 and warrants to purchase 256,126 shares of common stock with an exercise
price of $1.00.
Warrants to purchase 3,161,593 and 2,719,275 shares of common stock were
outstanding at December 12, 1999 and December 31, 1998, respectively, with
contingent warrants to purchase 909,013 shares of common stock outstanding at
December 12, 1999.
F-15
<PAGE>
ASSIST CORNERSTONE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 was $3,532 for the period ended December 12, 1999 and $4,744 and $5,230 for
the years ended December 31, 1998 and 1997, 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 12, 1999 and consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED
PERIOD ENDED DECEMBER 31,
DECEMBER 12, --------------------
1999 1998 1997
------------ --------- --------
<S> <C> <C> <C>
Current taxes:
Federal.................................. $ -- $ -- $127,000
State.................................... -- -- 26,000
Deferred taxes:
Federal.................................. (120,394) (164,000) (70,000)
State.................................... (17,524) (16,000) (7,000)
--------- --------- --------
$(137,918) $(180,000) $ 76,000
========= ========= ========
</TABLE>
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>
YEARS ENDED
PERIOD ENDED DECEMBER 31,
DECEMBER 12, --------------------
1999 1998 1997
------------ -------- ---------
<S> <C> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts.......... $105,000 $ 60,000 $ 53,000
Accrued liabilities and other............ 70,000 80,000 42,000
Covenant not to compete.................. -- 73,000 24,000
Net operating loss carryforward and
carryback.............................. 369,000 -- --
-------- -------- ---------
Total deferred assets...................... 544,000 213,000 119,000
Deferred tax liabilities:
Change from Cash to Accrual.............. (77,000) (155,000) (232,000)
Depreciation............................. (1,000) (24,000) (32,000)
Other.................................... (3,000) (13,000) (14,000)
-------- -------- ---------
Total deferred liabilities................. (81,000) (192,000) (278,000)
-------- -------- ---------
Net deferred tax asset (liability)......... $463,000 $ 21,000 $(159,000)
======== ======== =========
</TABLE>
F-16
<PAGE>
ASSIST CORNERSTONE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
A valuation allowance is required by SFAS 109 if, based on the weight of the
available evidence, it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The need for the valuation allowance
is evaluated periodically by management. Based on available evidence, including
operating losses over the prior three years, management concluded that a
valuation allowance of $304,000 was necessary at December 12, 1999, to partially
offset the net deferred tax asset.
9. SUBSEQUENT EVENTS
On December 7, 1999, the Company signed a Stock Exchange and Stock Purchase
Agreement. This agreement entitles the selling shareholders to exchange their
common stock in the company for cash and stock in Cayenta, Inc. (Cayenta).
On December 13, 1999, the sale of the Company to Cayenta became effective.
Cayenta acquired the Company for 516,458 shares of Cayenta's Class A Common
Stock and approximately $12.9 million in cash, of which $9.9 million was paid at
the closing. Cayenta also paid approximately $3.2 million to retire outstanding
indebtedness with accrued interest and redeem all of the Company's outstanding
preferred stock.
In conjunction with the acquisition, the Company purchased 456,842 stock
options for $687,583 and the remaining stock options became fully vested and
were exercised into 956,204 shares of the Company's common stock. All warrants
were exercised into 4,707,606 shares of Assist common stock. All Assist common
shares issued and outstanding were exchanged for cash and stock in Cayenta.
F-17
<PAGE>
EXHIBIT 99.6
SFG TECHNOLOGIES INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Auditors' Report............................................ F-2
Consolidated Balance Sheets................................. F-3
Consoldiated Statements of Operations....................... F-4
Consolidated Statements of Deficit.......................... F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consoldiated Financial Statements.................. F-7
</TABLE>
F-1
<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 21, 1999 and December 31, 1998 and the consolidated statements of
operations, deficit and cash flows for the period from January 1, 1999 to
December 21, 1999, the eight months ended December 31, 1998 and the years ended
April 30, 1998 and 1997. 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 21,
1999 and December 31, 1998 and the results of its operations and cash flows for
the period from January 1, 1999 to December 21, 1999, the eight months ended
December 31, 1998 and the years ended April 30, 1998 and 1997 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
January 31, 2000
F-2
<PAGE>
SFG TECHNOLOGIES INC.
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 21, DECEMBER 31,
1999 1998
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 277,094 $ 331,709
Accounts receivable....................................... 1,826,428 1,511,403
Investment tax credits receivable......................... 143,748 195,338
Prepaid expenses.......................................... 139,670 64,766
----------- -----------
2,386,940 2,103,216
Capital assets (note 4)..................................... 655,988 535,856
Investment.................................................. 67,705 130,225
Deferred charges.......................................... 289,776 --
----------- -----------
$ 3,400,409 $ 2,769,297
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities:
Bank indebtedness (note 6)................................ $ 1,029,113 $ 1,084,126
Accounts payable and accrued liabilities.................. 1,732,540 1,150,286
Current portion of deferred revenue (note 7).............. 860,237 653,348
Current portion of long-term debt (note 8)................ 185,119 318,454
Current portion of obligations under capital leases (note
9)...................................................... 106,047 161,777
----------- -----------
3,913,056 3,367,991
Deferred revenue (note 7)................................... 457,597 435,238
Long-term debt (note 8)..................................... 1,766,995 3,184,209
Obligations under capital leases (note 9)................... 56,971 39,125
----------- -----------
6,194,619 7,026,563
Shareholders' deficiency:
Share capital (note 10)................................... 5,063,248 3,013,364
Deficit................................................... (7,813,556) (7,398,286)
Foreign currency translation account...................... (43,902) 127,656
----------- -----------
(2,794,210) (4,257,266)
Commitments (note 12)
Subsequent event (notes 8, 10(b), (c), and 13)
Year 2000 Issue (note 15)
----------- -----------
$ 3,400,409 $ 2,769,297
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE>
SFG TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(EXPRESSED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, EIGHT MONTHS
1999 TO ENDED YEARS ENDED APRIL 30,
DECEMBER 21, DECEMBER 31, ------------------------
1999 1998 1998 1997
------------ ------------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues............................................. $6,749,060 $3,604,916 $ 3,533,514 $7,188,855
Cost of sales........................................ 1,347,834 613,963 783,415 1,240,885
---------- ---------- ----------- ----------
Gross profit......................................... 5,401,226 2,990,953 2,750,099 5,947,970
Costs and expenses:
Selling, general and administrative................ 3,233,555 1,695,256 3,931,291 4,494,763
Research and development........................... 2,245,363 1,137,626 1,784,763 1,549,092
Write-down of deferred software development costs
(note 5)......................................... -- -- 2,653,486 --
Gain on sale of division (note 14)................. -- -- -- (424,366)
---------- ---------- ----------- ----------
5,478,918 2,832,882 8,369,540 5,619,489
---------- ---------- ----------- ----------
Operating profit (loss).............................. (77,692) 158,071 (5,619,441) 328,481
Interest expense..................................... 337,578 217,905 366,412 203,501
---------- ---------- ----------- ----------
Income (loss) before income tax expense.............. (415,270) (59,834) (5,985,853) 124,980
Income tax benefit (expense) (note 11)............... -- -- 397,445 (29,995)
---------- ---------- ----------- ----------
Net income (loss).................................... $ (415,270) $ (59,834) $(5,588,408) $ 94,985
========== ========== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
SFG TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF DEFICIT
(EXPRESSED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, EIGHT MONTHS
1999 TO ENDED YEARS ENDED APRIL 30,
DECEMBER 21, DECEMBER 31, -------------------------
1999 1998 1998 1997
------------ ------------- ----------- -----------
<S> <C> <C> <C> <C>
Deficit, beginning of period............... $(7,398,286) $(7,304,757) $(1,686,037) $(1,694,303)
Premium on redemption of shares
(note 10(d))............................. -- (33,695) (30,312) (86,719)
Net income (loss).......................... (415,270) (59,834) (5,588,408) 94,985
----------- ----------- ----------- -----------
Deficit, end of period..................... $(7,813,556) $(7,398,286) $(7,304,757) $(1,686,037)
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
SFG TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(EXPRESSED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, EIGHT MONTHS
1999 TO ENDED YEARS ENDED APRIL 30,
DECEMBER 21, DECEMBER 31, -------------------------
1999 1998 1998 1997
------------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ (415,270) $ (59,834) $(5,588,408) $ 94,985
Items not involving cash:
Amortization............................................ 213,610 100,877 197,545 1,479,420
Gain on sale of division................................ -- -- -- (424,366)
Loss on sale of asset................................... 37,592 -- -- 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
Changes in non-cash operating working capital:
Accounts receivable................................... (315,025) (77,974) 386,758 (527,753)
Investment tax credits receivable..................... 51,590 -- 503,105 (140,855)
Prepaid expenses...................................... (74,904) (4,576) 43,886 (31,639)
Deferred software development costs................... -- -- -- (1,763,335)
Accounts payable and accrued liabilities.............. 582,254 (104,977) (404,731) 55,912
Deferred revenue...................................... 229,248 (174,731) (133,647) (576,982)
---------- --------- ----------- -----------
Net cash provided by (used in) operating activities....... 309,095 (321,215) (2,713,059) (1,792,893)
Cash flows from investing activities:
Purchase of capital assets................................ (402,416) (31,240) (106,423) (569,597)
Disposal of capital assets................................ 31,082 -- -- 4,964
Proceeds from sale of investment.......................... -- -- -- 210,224
Investment................................................ 62,520 -- -- --
---------- --------- ----------- -----------
Net cash used in investing activities..................... (308,814) (31,240) (106,423) (354,409)
Cash flows from financing activities:
Bank indebtedness......................................... (55,013) (35,811) 885,321 234,616
Proceeds from issuance of long-term debt.................. 438,390 893,191 2,663,509 453,789
Repayment of long-term debt............................... (91,925) (152,962) (498,112) (55,803)
Obligations under capital leases.......................... (37,884) (78,063) (100,869) 140,560
Issue of common shares for cash........................... 234,117 346 (100,098) 1,240,936
Redemption of common and preferred shares................. (81,247) (41,058) (30,312) (225,429)
Deferred charges.......................................... (289,776) -- -- --
---------- --------- ----------- -----------
Net cash provided by financing activities................. 116,662 585,643 2,819,439 1,788,669
Net effect of foreign exchange rate changes on cash......... (171,558) 1,613 96,951 (142)
---------- --------- ----------- -----------
Increase (decrease) in cash and cash equivalents............ (54,615) 234,801 96,908 (358,775)
Cash and cash equivalents, beginning of period.............. 331,709 96,908 -- 358,775
---------- --------- ----------- -----------
Cash and cash equivalents, end of period.................... $ 277,094 $ 331,709 $ 96,908 $ --
========== ========= =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for taxes..................... $ -- $ -- $ -- $ --
Cash paid during the period for interest.................. $ 96,506 142,592 366,412 203,501
Supplemental disclosure of non-cash financing activities:
Common stock issued in exchange for services.............. $ -- $ -- $ 19,534 $ --
Common stock issued in exchange on debt conversion........ $1,897,014 -- -- --
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
SFG TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS)
PERIOD FROM JANUARY 1, 1999 TO DECEMBER 21, 1999
EIGHT MONTHS ENDED DECEMBER 31, 1998
YEARS ENDED APRIL 30, 1998 AND 1997
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 Inc., and SFG Technologies Limited.
All material intercompany transactions and balances have been eliminated.
(B) CASH AND CASH EQUIVALENTS:
Cash and cash equivalents are highly liquid investments having 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 software products to customers under perpetual
software licence agreements. The Company has two types of sales related to
licence fees.
Software licence fees from contracts that do not require significant
production, modification or customization are recognized when software is
delivered and implemented if persuasive evidence of an arrangement and customer
acceptance exists, collection is probable and the fees are fixed or
determinable.
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.
Cash received in advance of meeting the revenue recognition criteria is
recorded as deferred revenue.
(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.
F-7
<PAGE>
SFG TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS) (CONTINUED)
PERIOD FROM JANUARY 1, 1999 TO DECEMBER 21, 1999
EIGHT MONTHS ENDED DECEMBER 31, 1998
YEARS ENDED APRIL 30, 1998 AND 1997
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
(III) MAINTENANCE:
Maintenance agreements generally require that the Company provide
technical support and certain systems updates to customers. Revenue is
recognized proportionately over the maintenance period, typically one year.
(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 21, 1999, no development costs have been
deferred.
(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
F-8
<PAGE>
SFG TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS) (CONTINUED)
PERIOD FROM JANUARY 1, 1999 TO DECEMBER 21, 1999
EIGHT MONTHS ENDED DECEMBER 31, 1998
YEARS ENDED APRIL 30, 1998 AND 1997
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
income for accounting and income tax purposes. The major timing differences
relate primarily to capital 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 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 as at
December 21, 1999 have been translated at the exchange rate in effect at the end
of December 21, 1999, and the income statement amounts for the period from
January 1, 1999 to December 21, 1999 have been translated at the average
exchange rate for the period. Differences arising on translation have been
recorded on the balance sheet in the foreign currency translation account in
shareholders' deficiency. The balance sheet amounts as at December 31, 1998 have
been translated at the exchange rate in effect at the end of December 31, 1998,
and the income statement amounts for the eight month period ended December 31,
1998 and the years ended April 30, 1998 and 1997 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
the foreign currency translation account in shareholders' 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 credits receivable. Actual amounts may
differ from those estimates.
(J) INVESTMENT:
Investment is carried at the lower of cost and estimated fair value. Income
from the investment is recognized as receivable.
(K) DEFERRED CHARGES:
Deferred charges represent professional fees relating to the purchase of the
Company's shares by Cayenta, Inc. on December 22, 1999 (see note 13).
F-9
<PAGE>
SFG TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS) (CONTINUED)
PERIOD FROM JANUARY 1, 1999 TO DECEMBER 21, 1999
EIGHT MONTHS ENDED DECEMBER 31, 1998
YEARS ENDED APRIL 30, 1998 AND 1997
3. FINANCIAL INSTRUMENTS:
(A) FAIR VALUE:
Carrying amounts of certain of the Company's financial instruments,
including cash and cash equivalents accounts receivable, bank indebtedness and
accounts payable and accrued liabilities, approximate fair value due to their
short-term maturities or ability for prompt liquidation. Based on borrowing
notes available to the Company for loans with similar terms, management
estimates 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 21, 1999, 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.
4. CAPITAL ASSETS:
<TABLE>
<CAPTION>
ACCUMULATED NET BOOK
DECEMBER 21, 1999 COST AMORTIZATION VALUE
- ----------------- ---------- ------------ --------
<S> <C> <C> <C>
Automotive equipment....................... $ 40,702 $ 6,014 $ 34,688
Computer equipment......................... 1,546,140 1,109,752 436,388
Office equipment........................... 380,369 224,163 156,206
Leasehold improvements..................... 53,299 24,593 28,706
---------- ---------- --------
$2,020,510 $1,364,522 $655,988
========== ========== ========
<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
========== ========== ========
</TABLE>
F-10
<PAGE>
SFG TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS) (CONTINUED)
PERIOD FROM JANUARY 1, 1999 TO DECEMBER 21, 1999
EIGHT MONTHS ENDED DECEMBER 31, 1998
YEARS ENDED APRIL 30, 1998 AND 1997
4. CAPITAL ASSETS: (CONTINUED)
Included in automotive, computer and office equipment are assets under
capital leases with a cost of $1,096,790 (December 31, 1998--$1,228,355) and
accumulated amortization of $909,027 (December 31, 1998--$890,257).
5. DEFERRED SOFTWARE DEVELOPMENT COSTS:
In years prior to 1998, the Company had in accordance with the accounting
policy described in note 2(d), deferred development costs related to certain
software products. As set out in note 16, such costs were expensed as incurred
for United States accounting purposes.
During the year ended April 30, 1998, criteria related to the availability
of sufficient resources to continue development was no longer met. Accordingly,
in the year ended April 30, 1998, the Company wrote-off all deferred software
development costs as recoverability of the costs was no longer reasonably
ensured.
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 2.25% and is secured by a general security agreement.
Subsequent to December 21, 1999, the loan facility was repaid.
7. DEFERRED REVENUE:
<TABLE>
<CAPTION>
DECEMBER 21, DECEMBER 31,
1999 1998
------------ -------------
<S> <C> <C>
Deferred maintenance................................ $1,317,834 $ 1,088,586
Less current portion................................ (860,237) (653,348)
---------- -----------
$ 457,597 $ 435,238
========== ===========
</TABLE>
F-11
<PAGE>
SFG TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS) (CONTINUED)
PERIOD FROM JANUARY 1, 1999 TO DECEMBER 21, 1999
EIGHT MONTHS ENDED DECEMBER 31, 1998
YEARS ENDED APRIL 30, 1998 AND 1997
8. LONG-TERM DEBT:
<TABLE>
<CAPTION>
DECEMBER 21, DECEMBER 31,
1999 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................... $ 159,783 $ 192,000
Bank demand loan, maturing March 2002, bearing interest at
prime plus 2.0% per annum payable monthly, principle
repayable monthly in the amount of $10,516, secured by
SR&ED refund.............................................. 220,329 280,037
Promissory notes including accrued interest of $88,397
(December 1998--$44,387), 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........ 1,085,689 1,672,203
Promissory notes including accrued interest of $33,727
(December 1998--$29,626), 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............... 169,137 420,302
Promissory notes, bearing interest at 13.0% per annum....... -- 651,126
Promissory notes, including accrued interest of $2,963
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................................. 172,225 162,782
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.................... 138,338 120,619
Other....................................................... 6,613 3,594
---------- ----------
1,952,114 3,502,663
Less current portion........................................ (185,119) (318,454)
---------- ----------
$1,766,995 $3,184,209
========== ==========
</TABLE>
On November 26, 1999, the Company converted 1,897,014 of promissory notes,
owing to Working Opportunity Fund (EVCC) Ltd., SCC Canada Inc., Ventures West
III--Canada Limited Partnership, and Discovery Enterprises Inc. into Class B
preferred shares (see note 10(b)) at a price of $0.05 (Canadian) per share and
Class C preferred shares (see note 10(b)) at a price of $100 (Canadian) per
share.
F-12
<PAGE>
SFG TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS) (CONTINUED)
PERIOD FROM JANUARY 1, 1999 TO DECEMBER 21, 1999
EIGHT MONTHS ENDED DECEMBER 31, 1998
YEARS ENDED APRIL 30, 1998 AND 1997
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>
2000........................................................ $ 185,119
2001........................................................ 184,658
2002........................................................ 1,443,998
2003........................................................ --
2004 and thereafter......................................... 138,339
----------
$1,952,114
==========
</TABLE>
Subsequent to December 21, 1999, $1,658,550 of debt outstanding was repaid.
9. OBLIGATIONS UNDER CAPITAL LEASES:
The Company has commitments under capital leases as follows:
<TABLE>
<S> <C>
2000........................................................ $ 113,510
2001........................................................ 43,216
2002........................................................ 11,340
2003........................................................ 6,211
---------
174,277
Less interest imputed at rates between 9% and 15%........... (11,259)
---------
163,018
Less current portion........................................ (106,047)
---------
$ 56,971
=========
</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 C, voting, retractable, redeemable
Unlimited preferred shares, Class F, non voting, redeemable
F-13
<PAGE>
SFG TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS) (CONTINUED)
PERIOD FROM JANUARY 1, 1999 TO DECEMBER 21, 1999
EIGHT MONTHS ENDED DECEMBER 31, 1998
YEARS ENDED APRIL 30, 1998 AND 1997
10. SHARE CAPITAL: (CONTINUED)
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.
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 A, Class B and Class C preferred shares are retractable any time after
July 30, 2002 and under certain other instructions.
Class A, Class B and Class C 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(d)).
(B) ISSUED:
<TABLE>
<CAPTION>
NUMBER OF
SHARES AMOUNT
----------- ----------
<S> <C> <C>
Class A common shares:
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
Shares issued for cash on exercise of options (see
below).................................................. 6,900,000 234,117
----------- ----------
Balance at December 21, 1999.............................. 6,941,194 289,464
----------- ----------
Class B common shares:
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.................................... 271,673 1,322,337
----------- ----------
Balance at April 30, 1997, 1998 and December 31, 1998..... 1,979,373 2,669,372
Shares issued pursuant to price adjustment options (see
below).................................................. 759,037 --
----------- ----------
Balance at December 21, 1999.............................. 2,738,410 $2,669,372
</TABLE>
F-14
<PAGE>
SFG TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS) (CONTINUED)
PERIOD FROM JANUARY 1, 1999 TO DECEMBER 21, 1999
EIGHT MONTHS ENDED DECEMBER 31, 1998
YEARS ENDED APRIL 30, 1998 AND 1997
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................................................... 20,000,000 1
----------- ----------
Balance at December 31, 1998.............................. 20,000,000 1
Shares redeemed for cash.................................. (20,000,000) (1)
Balance at December 21, 1999.............................. -- --
----------- ----------
Total common shares, December 21, 1999...................... 9,679,604 $2,958,836
----------- ----------
Class B preferred shares:
Balance at December 31, 1998.............................. -- --
Shares issued on debt conversion (note 8)................. 20,000,000 677,048
----------- ----------
Balance at December 21, 1999.............................. 20,000,000 677,048
----------- ----------
Class C preferred shares:
Balance at April 30, 1996, 1997, 1998 and December 31,
1998.................................................... -- --
Shares issued on debt conversion (note 8)................. 18,019 1,219,966
----------- ----------
Balance at December 21, 1999.............................. 18,019 1,219,966
Class F preferred shares:
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
Shares redeemed for cash.................................. (120,000) (81,246)
Balance at December 21, 1999.............................. 323,300 207,398
----------- ----------
Class Z preferred shares:
Balance at April 30, 1996................................. 302,500 759,256
Shares redeemed in exchange for Class B common shares..... (302,500) (759,256)
Balance at April 30, 1997 and 1998, December 31, 1998 and
December 31, 1999....................................... -- --
----------- ----------
Total preferred shares, December 21, 1999................... 20,341,319 2,104,412
----------- ----------
Total common and preferred shares........................... $5,063,248
=========== ==========
</TABLE>
F-15
<PAGE>
SFG TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS) (CONTINUED)
PERIOD FROM JANUARY 1, 1999 TO DECEMBER 21, 1999
EIGHT MONTHS ENDED DECEMBER 31, 1998
YEARS ENDED APRIL 30, 1998 AND 1997
10. SHARE CAPITAL: (CONTINUED)
Share purchase options for 6,900,000 Class A common shares were exercised by
option holders on December 21, 1999. Included as cash and cash equivalents at
December 21, 1999 is funds held in trust, related to the exercise, that were
released from escrow on December 22, 1999.
Pursuant to a anti-dilution clause relating to equity financing, of a prior
year, 759,037 Class B common shares were issued in the period ended
December 21, 1999.
(C) WARRANTS:
At December 21, 1999, 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. Subsequent to December 21, 1999, these warrants
were exercised.
(D) PREMIUM ON REDEMPTION OF SHARES:
The Company records the excess of the purchase price over the par value of
shares redeemed as a charge against retained earnings.
11. INCOME TAXES:
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, EIGHT MONTHS
1999 TO ENDED YEARS ENDED APRIL 30,
DECEMBER 21, DECEMBER 31, -----------------------
1999 1998 1998 1997
------------ ------------- ---------- ----------
<S> <C> <C> <C> <C>
Current......................... $ -- $ -- $ -- $ --
Deferred........................ -- -- 397,445 (29,995)
---- ---- -------- --------
$ -- $ -- $397,445 $(29,995)
==== ==== ======== ========
</TABLE>
At December 21, 1999, the Company has Canadian non-capital losses carried
forward of approximately $1,250,000 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, 2002........................................... $ 750,000
2005............................................ 500,000
----------
$1,250,000
==========
</TABLE>
As a result of the acquisition on December 22, 1999, the Canadian
non-capital losses can only be applied to subsequent profits from the sale of
similar products and services.
F-16
<PAGE>
SFG TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS) (CONTINUED)
PERIOD FROM JANUARY 1, 1999 TO DECEMBER 21, 1999
EIGHT MONTHS ENDED DECEMBER 31, 1998
YEARS ENDED APRIL 30, 1998 AND 1997
12. COMMITMENTS:
At December 21, 1999, the Company was committed to the following operating
lease payments for premises and equipment:
<TABLE>
<S> <C>
2000........................................................ $ 236,181
2001........................................................ 188,489
2002........................................................ 129,422
----------
$ 554,092
==========
</TABLE>
13. SUBSEQUENT EVENTS:
(a) Capital stock purchase:
On December 22, 1999 more than 99% of the common shares of the Company
outstanding at December 21, 1999 was acquired by Cayenta, Inc.
(b) Share redemption:
On December 22, 1999, the remaining balance of Class B, Class C and Class F
preferred shares in the amounts of $677,048, $1,219,966 and $207,398,
respectively, were redeemed for cash.
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 and revenues of $498,636.
The gain on sale of division comprises:
<TABLE>
<CAPTION>
<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 the division................................ $424,366
========
</TABLE>
F-17
<PAGE>
SFG TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS) (CONTINUED)
PERIOD FROM JANUARY 1, 1999 TO DECEMBER 21, 1999
EIGHT MONTHS ENDED DECEMBER 31, 1998
YEARS ENDED APRIL 30, 1998 AND 1997
15. 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 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 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 which were capitalized
during the year ended April 30, 1997 would have been expensed as incurred
under U.S. accounting principles. As such, deferred software development
costs of $1,010,094 which were amortized during the year ended April 30,
1997 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
earnings 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 period
from January 1, 1999 to December 21, 1999 and the eight months ended
December 31, 1998 and the years ended April 30, 1998 and 1997 are options
and warrants to acquire common shares and preferred shares convertible into
common shares, as their effects would be anti-dilutive.
F-18
<PAGE>
SFG TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS) (CONTINUED)
PERIOD FROM JANUARY 1, 1999 TO DECEMBER 21, 1999
EIGHT MONTHS ENDED DECEMBER 31, 1998
YEARS ENDED APRIL 30, 1998 AND 1997
16. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES: (CONTINUED)
(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 21, 1999, the gross deferred tax asset
amount relating to a non-capital loss carry forward was $517,500 which is
reduced by a valuation allowance of $517,500 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
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.
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. The Company grants stock options having exercise prices
based on the market price at the date of grants. Accordingly, under the
intrinsic value method, no stock-based compensation expense has resulted for
the period from January 1, 1999 to December 21, 1999, for the eight month
period ended December 31, 1998 and the years ended April 30, 1998 and 1997
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 B, C, and F preferred shares would be
presented outside of shareholders' equity.
F-19
<PAGE>
SFG TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS) (CONTINUED)
PERIOD FROM JANUARY 1, 1999 TO DECEMBER 21, 1999
EIGHT MONTHS ENDED DECEMBER 31, 1998
YEARS ENDED APRIL 30, 1998 AND 1997
16. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES: (CONTINUED)
(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 21, 1999 DECEMBER 31, 1998
----------------------- -----------------------
CDN GAAP US GAAP CDN GAAP US GAAP
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Class B redeemable preferred
shares...................... $ -- $ 677,048 $ -- $ --
Class C redeemable preferred
shares...................... -- 1,219,966 -- --
Class F redeemable preferred
shares--current portion..... -- 207,398 -- 166,819
Class F redeemable preferred
shares--net of current
portion..................... -- -- -- 121,825
Shareholders' equity:
Share capital............... 5,063,248 -- 3,013,364 --
Class A common stock, issued
and outstanding 6,941,194
and 41,194................ -- 289,464 -- 55,347
Class B common stock, issued
and outstanding 2,738,410
and 1,979,373............. -- 2,669,372 -- 2,669,372
Class X common stock, issued
and outstanding nil and
20,000,000................ -- -- -- 1
</TABLE>
F-20
<PAGE>
SFG TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN U.S. DOLLARS) (CONTINUED)
PERIOD FROM JANUARY 1, 1999 TO DECEMBER 21, 1999
EIGHT MONTHS ENDED DECEMBER 31, 1998
YEARS ENDED APRIL 30, 1998 AND 1997
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>
PERIOD FROM
JANUARY 1, EIGHT MONTHS
1999 TO ENDED YEARS ENDED APRIL 30,
DECEMBER 21, DECEMBER 31, -------------------------
1999 1998 1998 1997
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net income (loss) under Canadian GAAP...... $ (415,270) $ (59,834) $(5,588,408) $ 94,985
Less deferred software development costs
capitalized.............................. -- -- -- (2,153,130)
Add deferred software development costs
amortized................................ -- -- -- 1,010,094
Add write-down of software development
costs.................................... -- -- 2,653,486 --
----------- ----------- ----------- -----------
Loss determined under United States GAAP... (415,270) (59,834) (2,934,922) (1,048,051)
Premium on redemption of shares............ -- (33,695) (30,312) (86,719)
----------- ----------- ----------- -----------
Loss available to common shareholders
determined under United States GAAP...... $ (415,270) $ (93,529) $(2,965,234) $(1,134,770)
=========== =========== =========== ===========
Weighted average number of shares
outstanding, United States GAAP.......... 22,070,547 16,084,028 2,002,344 1,509,658
=========== =========== =========== ===========
Net loss per share under United States
GAAP..................................... $ (0.02) $ -- $ (1.48) $ (0.75)
=========== =========== =========== ===========
</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), and changes in
its foreign currency translation account as follows:
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, EIGHT MONTHS
1999 TO ENDED YEARS ENDED APRIL 30,
DECEMBER 21, DECEMBER 31, -------------------------
1999 1998 1998 1997
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net income (loss) under United States
GAAP..................................... $ (415,270) $ (59,834) $(2,934,922) $(1,048,051)
Foreign currency translation account....... (171,558) 1,613 96,951 (142)
----------- ----------- ----------- -----------
Comprehensive loss......................... $ (586,828) $ (58,221) $(2,837,971) $(1,048,193)
=========== =========== =========== ===========
</TABLE>
F-21
