Exhibit 99.2
FUSEPOINT INC.
Condensed Consolidated Balance Sheet
(Expressed in Canadian dollars)
| Unaudited March 31, 2010 | December 31, 2009 | |||||||
Assets | ||||||||
Current Assets: | ||||||||
Cash | $ | 8,678,485 | $ | 8,759,168 | ||||
Trade accounts receivable, less allowance for doubtful accounts of $36,408 (2009-$10,408) | 4,080,364 | 5,066,361 | ||||||
Prepaid expenses and deposits | 1,028,219 | 1,055,237 | ||||||
Other assets | 205,119 | 376,605 | ||||||
Work in process | 139,381 | 88,989 | ||||||
| 14,131,568 | 15,346,360 | |||||||
Restricted cash (note 2) | 967,543 | 997,753 | ||||||
Other assets | 903,765 | 404,200 | ||||||
Intangible assets | 451,167 | 600,271 | ||||||
Property, plant and equipment (note 3) | 15,562,295 | 14,829,528 | ||||||
Goodwill | 1,885,184 | 1,885,184 | ||||||
Deferred income taxes | 3,750,000 | 3,750,000 | ||||||
| $ | 37,651,522 | $ | 37,813,296 | |||||
Liabilities and Shareholders’ Equity | ||||||||
Current liabilities: | ||||||||
Trade accounts payable | $ | 921,954 | $ | 924,293 | ||||
Accrued liabilities (note 4) | 2,593,430 | 3,098,689 | ||||||
Income taxes payable | — | 304,955 | ||||||
Deferred revenue | 777,692 | 989,160 | ||||||
Current portion of capital lease obligations (note 5) | 2,547,046 | 2,287,744 | ||||||
Current portion of deferred gain on sale of property (note 6) | 830,339 | 830,339 | ||||||
| 7,670,461 | 8,435,180 | |||||||
Deferred revenue | 998,999 | 993,048 | ||||||
Capital lease obligations (note 5) | 4,610,257 | 4,941,513 | ||||||
Deferred gain on sale of property (note 6) | 8,334,445 | 8,542,030 | ||||||
Warrants liability | 651,161 | 651,161 | ||||||
Total liabilities | 22,265,323 | 23,562,932 | ||||||
Shareholders’ equity (note 7): | ||||||||
Series A convertible preferred stock, par value of $0.001 per share 40,000,000 authorized (2009- 40,000,000) 31,828,684 outstanding (2009- 31,828,684) redeemable at the option of the holder for $51,828,618 (2009-$52,706,885) | 43,484,335 | 43,484,335 | ||||||
Common stock, par value of $0.001 per share 220,000,000 authorized (2009- 220,000,000) 147,992,737 outstanding (2009- 147,984,001) | 10,806,090 | 10,806,081 | ||||||
Additional paid in capital | 639,663 | 639,367 | ||||||
Deficit | (39,543,889 | ) | (40,679,419 | ) | ||||
| 15,386,199 | 14,250,364 | |||||||
Commitments (note 11) | ||||||||
Subsequent event (note 13) | ||||||||
| $ | 37,651,522 | $ | 37,813,296 | |||||
See accompanying Notes to Unaudited Consolidated Financial Statements.
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FUSEPOINT INC.
Condensed Consolidated Statement of Income
(Expressed in Canadian dollars)
| Unaudited Three Months Ended March 31, | ||||||||
| 2010 | 2009 | |||||||
Revenue | $ | 12,322,109 | $ | 11,839,525 | ||||
Expenses: | ||||||||
Cost of operations | 6,788,834 | 6,112,563 | ||||||
Selling, general and administrative | 2,743,655 | 2,526,876 | ||||||
Amortization | 1,388,077 | 1,650,005 | ||||||
Financing costs | 246,154 | 216,933 | ||||||
Other income | 4,615 | 16,566 | ||||||
Foreign exchange gain | (63,936 | ) | (31,851 | ) | ||||
| 11,107,399 | 10,491,092 | |||||||
Income before income taxes | 1,214,710 | 1,348,433 | ||||||
Income taxes (recovery): | 79,180 | (529,673 | ) | |||||
| 79,180 | (529,673 | ) | ||||||
Net income | $ | 1,135,530 | $ | 1,878,106 | ||||
See accompanying Notes to Unaudited Consolidated Financial Statements.
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FUSEPOINT INC.
Unaudited Condensed Consolidated Statement of Shareholders’ Equity
(Expressed in Canadian dollars)
| Common | Series A Preferred | Additional paid in capital | Accumulated deficit | Total Shareholders’ equity | ||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||
Balance, December 31, 2009 | 147,984,001 | $ | 10,806,081 | 31,828,684 | $ | 43,484,335 | $ | 639,367 | $ | (40,679,419 | ) | $ | 14,250,364 | |||||||
Issued on exercise of stock options | 8,736 | $ | 9 | — | $ | — | $ | 296 | $ | — | $ | 305 | ||||||||
Net earnings | — | — | — | — | — | 1,135,530 | 1,135,530 | |||||||||||||
Balance, March 31, 2010 | 147,992,737 | $ | 10,806,090 | 31,828,684 | $ | 43,484,335 | $ | 639,663 | $ | (39,543,889 | ) | $ | 15,386,199 | |||||||
See accompanying Notes to Unaudited Consolidated Financial Statements.
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FUSEPOINT INC.
Condensed Consolidated Statement of Cash Flows
(Expressed in Canadian dollars)
| Unaudited Three Months Ended March 31, | ||||||||
| 2010 | 2009 | |||||||
Cash provided by (used in): | ||||||||
Operations: | ||||||||
Net income | $ | 1,135,530 | $ | 1,878,106 | ||||
Items not affecting cash: | ||||||||
Amortization of property, plant and equipment and intangible assets | 1,388,077 | 1,650,005 | ||||||
Recognition of gain on sale of property | (207,585 | ) | (207,585 | ) | ||||
Unrealized foreign exchange gain | (39,377 | ) | (13,172 | ) | ||||
Deferred income taxes | — | (637,500 | ) | |||||
Changes in non-cash working capital items (note 12) | 156,444 | (140,346 | ) | |||||
Increase (decrease) in other assets | (499,565 | ) | 191,761 | |||||
Increase (decrease) in deferred revenue | 5,951 | (294,592 | ) | |||||
| 1,939,475 | 2,426,677 | |||||||
Investments: | ||||||||
Decrease in restricted cash | (7,751 | ) | (33,982 | ) | ||||
Purchase of property, plant and equipment | (1,242,104 | ) | (2,218,961 | ) | ||||
| (1,249,855 | ) | (2,252,943 | ) | |||||
Financing: | ||||||||
Payment of capital lease obligations | (726,258 | ) | (1,407,847 | ) | ||||
Exercise of stock options | 305 | — | ||||||
| (725,953 | ) | (1,407,847 | ) | |||||
Foreign exchange on cash held in a foreign currency | (44,350 | ) | 4,678 | |||||
Decrease in cash and cash equivalents | (80,683 | ) | (1,229,435 | ) | ||||
Cash, beginning of year | 8,759,168 | 5,671,031 | ||||||
Cash, end of period | $ | 8,678,485 | $ | 4,441,596 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid during the year for interest | $ | 238,007 | $ | 216,933 | ||||
Cash received during the year for interest | 4,734 | 15,511 | ||||||
Cash paid during the year for taxes | 397,682 | — | ||||||
See accompanying Notes to Unaudited Consolidated Financial Statements.
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FUSEPOINT INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Three months ended March 31, 2010 and 2009
(Expressed in Canadian dollars)
Fusepoint Inc. (the “Company”) was incorporated on March 10, 1999 under the Canada Business Corporations Act. In 2005, the Company was discontinued in Canada pursuant to Section 188 of the Canada Business Corporations Act and was domesticated into the State of Delaware.
The Company is a provider of application and infrastructure managed solutions for enterprises that conduct mission-critical business on the Internet. The Company’s solutions include data centres, network infrastructure, systems monitoring and management, and full application management. The Company’s customers are not concentrated in any one industry. The Company is not dependent on any one supplier. Substantially all of the revenue is generated from customers in Canada.
1. Basis of presentation and significant accounting policies:
These accompanying interim condensed consolidated financial statements are unaudited. These statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. Accordingly they do not include all the disclosures required by U.S GAAP for financial statements. In the opinion of management, all adjustments necessary for a fair representation of the financial statements for these interim periods have been included. The results of operations for the three months ended March 31, 2010 and March 31, 2009 are not necessarily indicative of the results expected for the remainder of the fiscal year ending December 31, 2010.
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries (collectively, the Company). All intercompany balances and transactions have been eliminated.
The preparation of consolidated interim condensed financial statements 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 consolidated financial statements and the reported amounts of revenues and expenses during the year. Actual results could differ from those estimates.
Significant items subject to such estimates and assumptions include allowance for doubtful accounts, valuation of goodwill, useful lives and recoverable amounts for property, plant and equipment and intangibles, value of options for stock-based compensation, value of warrants liability, valuation allowance for deferred tax assets and guarantees.
These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2009.
2. Restricted cash:
To satisfy contractual obligations related to premises lease agreements, the lessor keeps certain amounts invested in term deposits as restricted cash which is held in U.S. funds in the amount of approximately $891,458 U.S. and $890,345 U.S. as of March 31, 2010 and December 31, 2009, respectively. Restricted cash is recorded at cost, plus accrued interest which approximates fair value. Amounts are released from restricted cash annually by the lessor, based on achievement of certain financial covenants. During the three months ended March 31, 2010, there were no releases of restricted cash.
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The Company has provided a deposit held as collateral in the amount of $62,000 in a long-term guaranteed investment certificate, bearing interest at 0.0010% per annum, maturing May 12, 2010 to satisfy contractual obligations with a utilities service provider.
3. Property, plant and equipment:
| March 31, 2010 | December 31, 2009 | |||||||||||||||||
| Cost | Accumulated amortization | Net book value | Cost | Accumulated amortization | Net book value | |||||||||||||
Leasehold improvements | $ | 13,901,318 | $ | 6,244,445 | $ | 7,656,873 | $ | 12,714,071 | $ | 5,925,627 | $ | 6,788,444 | ||||||
Computer | 12,656,951 | 12,182,087 | 474,864 | 12,624,090 | 12,128,331 | 495,759 | ||||||||||||
Computer software | 2,086,018 | 1,713,629 | 372,389 | 2,086,018 | 1,663,700 | 422,318 | ||||||||||||
Furniture and fixtures | 327,436 | 290,617 | 36,819 | 318,310 | 287,545 | 30,765 | ||||||||||||
Office equipment | 138,801 | 116,482 | 22,319 | 125,931 | 115,136 | 10,795 | ||||||||||||
Equipment under capital lease | 17,084,619 | 10,085,588 | 6,999,031 | 16,354,983 | 9,273,536 | 7,081,447 | ||||||||||||
| $ | 46,195,143 | $ | 30,632,848 | $ | 15,562,295 | $ | 44,223,403 | $ | 29,393,875 | $ | 14,829,528 | |||||||
Amortization of property, plant and equipment for the three months ended March 31, 2010 and March 31, 2009 was $1,238,973 and $1,445,505, respectively, including amortization of assets under capital leases of $812,053 and $849,250 for the respective periods.
4. Deferred rent:
The Company records rent expense for premises leases on a straight-line basis over the lease term. At March 31, 2010 and December 31, 2009, deferred rent liability amounts to $1,096,706 and $1,091,657, respectively, which was included in accrued liabilities.
5. Capital lease obligations:
The Company is obligated under capital leases covering various computer equipment and leaseholds that expire at various dates over the next five years.
Amortization of assets held under capital leases is included in amortization expense.
Lease payments under capital leases are summarized as follows:
| March 31, 2010 | December 31, 2009 | |||||||
2010 | $ | 2,691,054 | $ | 2,982,885 | ||||
2011 | 3,139,315 | 2,885,683 | ||||||
2012 | 1,150,858 | 1,077,252 | ||||||
2013 | 525,388 | 437,617 | ||||||
2014 | 377,755 | 2,186,619 | ||||||
2015 and thereafter | 1,511,018 | — | ||||||
| 9,395,388 | 9,570,056 | |||||||
Less interest included in capital lease payments (interest rates range from 4.48% to 16.00%) | (2,238,085 | ) | (2,340,799 | ) | ||||
| 7,157,303 | 7,229,257 | |||||||
Less current portion of capital lease obligation | 2,547,046 | 2,287,744 | ||||||
| $ | 4,610,257 | $ | 4,941,513 | |||||
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The total amount of interest incurred on capital leases in the three months ended March 31, 2010 and 2009 was $238,007 and $216,933, respectively, and has been included in financing costs.
6. Sale-leaseback and deferred gain on sale of property:
In 2006 the Company entered into a sale-leaseback agreement for the sale of its property at 6800 Millcreek Drive, Mississauga for cash proceeds after selling expenses of $17,395,377, resulting in a gain of $12,455,088. Pursuant to the agreement, the Company entered into a 15-year operating lease for the property for the period April 13, 2006 to April 12, 2021. The gain on sale has been deferred and is amortized into income as a reduction of rent expense over the term of the lease.
Rent expense included in cost of operations and selling, general and administrative for the three months ended March 31, 2010 and 2009 was $757,603 and $831,338, respectively, which was reduced in each period by the recognition of $207,585 of the gain on sale of property.
7. Shareholders’ equity:
Series A preferred stock:
The Company has elected to reflect the Series A redeemable preferred stock as equity and not to follow FASB ASC Subtopic 480.10.599 (Emerging Issues Task Force InterpretationD-98: Classification and Measurement of Redeemable Securities) as it is not required for privately owned companies.
The Series A preferred stock are convertible at the option of the holder at any point in time, into common stock on the basis of the ratio that results from dividing (i) the Series A purchase price by (ii) the conversion price of the Series A preferred stock at the time of conversion.
As of March 31, 2010, cumulative unpaid dividends compounded at an annual rate of 7% amounted to $19,497,041 ($19,193,780 U.S.) and at December 31, 2009 $19,254,938 ($18,320,588 U.S.) which have not been accrued in these financial statements.
As at March 31, 2010, the aggregate redemption amount including the stated amount and unpaid dividends was $51,828,618 ($51,022,464 U.S.) and at December 31, 2009 was $52,706,885 ($50,149,272 U.S.), converted at exchange rates prevailing at the balance sheet date.
8. Stock-based compensation plan:
Under the Company’s Stock Option Plan, the Company may grant options to its directors, officers, employees, independent contractors and consultants. The exercise price of each option is in U.S. dollars and is equal to the amount designated in the individual agreement and the options expire within 10 years. Options granted to employees vest on a straight-line basis every three months over a three-year period. Options granted to directors and senior executives vest 25% to 50% after one year, with the balance every three months over a two to three year period thereafter. The options are not transferable and may only be exercised by the optionee.
A summary of the status of the Company stock option plan is presented below:
| Number of options | |||
Outstanding, December 31, 2009 | 17,689,393 | ||
Granted | 1,225,000 | ||
Exercised | (8,736 | ) | |
Cancelled | (77,700 | ) | |
Outstanding, March 31, 2010 | 18,827,957 | ||
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The Company has determined that the value of common stock on the grant date in first quarter of 2010 was $0.073 (2009 - $0.073) and the fair value of the options at the date of grant for options granted in first quarter of 2010 was approximately $81,000 (2009 – $75,000). This value was estimated using the Black-Scholes option pricing model assuming a risk-free interest rate of 3.43% (2009 – 3.1%), a dividend yield of 0% (2009 - 0%), a volatility of 102.9% (2009 - 104.8%), a weighted average expected life of the options of 10 years and annual rate forfeiture rate of 2%. Volatility is based on similar Companies with publicly traded shares. The Company recorded no stock based compensation expense in the three months ended March 31, 2010 and 2009.
9. Comprehensive income:
The Company has no comprehensive income items other than net income for the periods presented.
10. Guarantees:
In the normal course of business, the Company has entered into agreements that include indemnities in favour of third parties, such as purchase and sale agreements, confidentiality agreements and leasing contracts. These indemnification agreements may require the Company to compensate counterparties for losses incurred by the counterparties as a result of breaches in representation and regulations or as a result of litigation claims or statutory sanctions that may be suffered by the counterparty as a consequence of the transaction or actions of the Company. The terms of these indemnities are not explicitly defined and the maximum amount of any potential reimbursement cannot be reasonably estimated.
The nature of these indemnification agreements prevents the Company from making a reasonable estimate of the maximum exposure due to the difficulties in assessing the amount of liability which stems from the unpredictability of future events and the unlimited coverage offered to counterparties. Historically, the Company has not made any significant payments under such or similar indemnification agreements and therefore no amount has been accrued in the consolidated balance sheet with respect to these agreements. The fair value of the guarantees issued in the current year is not determinable.
11. Commitments:
The Company has several noncancelable operating leases, primarily for premises, that expire over the next fifteen years. These leases generally require the Company to pay all executory costs such as maintenance, property taxes and insurance. Rental payments include minimum rentals plus executory costs.
The Company is committed, under operating leases for premises and has other agreements for service and support for the following minimum future annual payments:
2010 | $ | 2,180,933 | |
2011 | 2,541,408 | ||
2012 | 2,260,708 | ||
2013 | 2,043,857 | ||
2014 | 1,808,336 | ||
Thereafter | 12,517,848 | ||
| $ | 23,353,090 | ||
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12. Statements of cash flows:
Changes in non-cash working capital:
| Three Months Ended March 31, | ||||||||
| 2010 | 2009 | |||||||
Trade accounts receivable | $ | 985,997 | $ | (78,186 | ) | |||
Prepaid expenses and deposits | 27,018 | 854,761 | ||||||
Work in process | (50,392 | ) | 70,887 | |||||
Other assets | 171,486 | (200,568 | ) | |||||
Trade accounts payable | (2,340 | ) | 235,066 | |||||
Accrued liabilities | (458,902 | ) | (1,438,576 | ) | ||||
Income taxes payable | (304,955 | ) | 107,827 | |||||
Deferred revenue | (211,468 | ) | 308,443 | |||||
| $ | 156,444 | $ | (140,346 | ) | ||||
Changes in non-cash financing activities:
Assets under capital lease of $729,636 and $1,108,854 for the three months ended March 31, 2010 and 2009 were acquired when the Company entered into leases for new computer equipment and leasehold improvements.
13. Subsequent event:
On June 16, 2010, the Company was acquired by Savvis, Inc, pursuant to the Agreement and Plan of Merger (the Merger Agreement) dated May 28, 2010. Pursuant to the Merger Agreement, Savvis acquired Fusepoint for $121.0 million in cash, after adjustment for estimated working capital and debt levels. The Company has evaluated subsequent events from the balance sheet date through the date at which the financial statements were available to be issued, July 27, 2010, and determined there were no further subsequent events to disclose.
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