1
EXHIBIT 99.1
INVINCIBLE TECHNOLOGIES CORPORATION
FINANCIAL STATEMENTS
AS OF MARCH 31, 1998
TOGETHER WITH AUDITORS' REPORT
2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Invincible Technologies Corporation:
We have audited the accompanying balance sheet of Invincible Technologies
Corporation (a Delaware corporation) as of March 31, 1998, and the related
statements of operations, redeemable preferred stock and stockholders' deficit
and cash flows for the year then ended. 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 audit.
We conducted our audit 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 audit provides 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 Invincible Technologies
Corporation as of March 31, 1998, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
Boston, Massachusetts
October 20, 1998
2
3
INVINCIBLE TECHNOLOGIES CORPORATION
BALANCE SHEET
(In thousands, except share data)
ASSETS
MARCH 31,
1998
CURRENT ASSETS:
Cash $ 399
Accounts receivable, less reserves of $165 2,062
Inventories 977
Other 280
-------
Total current assets 3,718
-------
PROPERTY AND EQUIPMENT, AT COST:
Computers and manufacturing equipment 1,405
System spares 276
Furniture and fixtures 95
Leasehold improvements 123
-------
1,899
Less--Accumulated depreciation 902
-------
997
-------
OTHER ASSETS 85
-------
Total assets $ 4,800
=======
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Notes payable to bank $ 1,725
Accounts payable 2,206
Accrued expenses 1,696
-------
Total current liabilities 5,627
-------
COMMITMENTS (Note 4)
REDEEMABLE PREFERRED STOCK:
Redeemable convertible preferred stock, Series C, $.01 par value-
Authorized--1,646,676 shares
Issued and outstanding--1,639,948 shares (preference in liquidation of 4,163
$4,215,000)
Redeemable convertible preferred stock, Series B, $.01 par value-
Authorized--1,100,000 shares
Issued and outstanding--1,000,000 shares (preference in liquidation of 1,475
$1,500,000)
STOCKHOLDERS' DEFICIT:
Common stock, $.01 par value-
Authorized--10,000,000 shares
Issued and outstanding--5,625,000 shares 56
Additional paid-in capital 883
Accumulated deficit (7,400)
Treasury shares, at cost, 413,750 common shares (4)
-------
Total stockholders' deficit (6,465)
-------
Total liabilities and stockholders' deficit $ 4,800
=======
The accompanying notes are an integral part of these financial statements.
3
4
INVINCIBLE TECHNOLOGIES CORPORATION
STATEMENT OF OPERATIONS
(In thousands, except share data)
YEAR ENDED
MARCH 31,
1998
REVENUES $ 14,312
COST OF REVENUES 9,713
---------
Gross margin 4,599
---------
OPERATING EXPENSES:
Selling and marketing 4,590
General and administrative 2,551
Research and development 846
Nonrecurring charge (Note 3) 799
---------
8,786
---------
Loss from operations (4,187)
INTEREST EXPENSE, NET (165)
---------
Net loss $ (4,352)
=========
BASIC AND DILUTED NET LOSS PER SHARE $ (.77)
=========
BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 5,625,000
=========
The accompanying notes are an integral part of these financial statements.
4
5
INVINCIBLE TECHNOLOGIES CORPORATION
STATEMENT OF REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
(In thousands, except share data)
REDEEMABLE PREFERRED STOCK
SERIES C REDEEMABLE SERIES B REDEEMABLE COMMON STOCK ADDITIONAL
CONVERTIBLE CONVERTIBLE PAID-IN CAPITAL
PREFERRED STOCK PREFERRED STOCK
NUMBER OF $.01 PAR NUMBER OF $.01 PAR NUMBER OF $.01 PAR
SHARES VALUE SHARES VALUE SHARES VALUE
BALANCE, MARCH 31, 1997 1,639,948 $ 4,163 1,000,000 $ 1,475 5,625,000 $ 56 $ 883
--------- --------- --------- --------- --------- --------- ---------
Net loss -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
BALANCE, MARCH 31, 1998 1,639,948 $ 4,163 1,000,000 $ 1,475 5,625,000 $ 56 $ 883
========= ========= ========= ========= ========= ========= =========
STOCKHOLDERS' DEFICIT
ACCUMULATED TREASURY STOCK TOTAL
DEFICIT STOCKHOLDERS'
DEFICIT
NUMBER OF $.01 PAR
SHARES VALUE
BALANCE, MARCH 31, 1997 $ (3,048) (413,750) $ (4) $ (2,113)
--------- --------- --------- ---------
Net loss (4,352) -- -- (4,352)
--------- --------- --------- ---------
BALANCE, MARCH 31, 1998 $ (7,400) (413,750) $ (4) $ (6,465)
========= ========= ========= =========
The accompanying notes are an integral part of these financial statements.
5
6
INVINCIBLE TECHNOLOGIES CORPORATION
STATEMENT OF CASH FLOWS
(In thousands)
YEAR ENDED
MARCH 31,
1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,352)
Adjustments to reconcile net loss to net cash used for operating activities-
Depreciation 432
Nonrecurring charge 799
Changes in current assets and liabilities-
Accounts receivable 1,387
Inventories 312
Other assets (147)
Accounts payable 572
Accrued expenses 927
-------
Net cash used for operating activities (70)
-------
CASH FLOWS USED FOR INVESTING ACTIVITIES:
Purchases of property and equipment (1,009)
-------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of notes payable to bank (4,115)
Proceeds from notes payable to bank 5,040
-------
Net cash provided by financing activities 925
-------
NET DECREASE IN CASH (154)
CASH, BEGINNING OF YEAR 553
-------
CASH, END OF YEAR $ 399
=======
The accompanying notes are an integral part of these financial statements.
6
7
INVINCIBLE TECHNOLOGIES CORPORATION
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998
(In thousands, except per share data)
(1) OPERATIONS
Invincible Technologies Corporation (the Company) was incorporated in
Delaware on March 5, 1993 to design, integrate, manufacture, market and
support high-performance storage and server products primarily for open
systems utilizing midrange computers, wide area networks and local area
networks.
The Company is subject to a number of risks similar to those of other
companies in the same stage of development. Principal among these risks
are the ability to obtain adequate financing, dependence on key
individuals, successful development, manufacturing and marketing of its
products and competition from other products and companies.
The Company was acquired by Procom Technology, Inc. (Procom) on June 24,
1998 (see Note 10).
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market and consist of the following:
MARCH 31,
1998
Raw materials $546,000
Work-in-process 78,000
Finished goods 353,000
--------
$977,000
========
(b) Depreciation
The Company provides for depreciation using the straight-line method
by charges to operations in amounts estimated to allocate the cost of
these assets over their useful lives, as follows:
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
Computers and manufacturing equipment 3-5 years
System spares 3 years
Furniture and fixtures 5 years
8
INVINCIBLE TECHNOLOGIES CORPORATION
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998
(In thousands, except per share data)
(Continued)
Leasehold improvements are amortized over the term of the lease or
the useful life of the asset, whichever is shorter.
(c) Revenue Recognition
The Company recognizes revenue upon shipment of products. A provision
is made at that time for estimated warranty costs to be incurred.
(d) Concentration of Credit Risk
Statement of Financial Accounting Standards (SFAS) No. 105,
Disclosure of Information About Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations
of Credit Risk, requires disclosure of any significant
off-balance-sheet and credit risk concentrations.
Financial instruments that potentially subject the Company to
concentrations of credit risk are principally accounts receivable. A
significant portion of the Company's business activity is with
customers whose ability to meet their financial obligations is
dependent on domestic economic conditions. To reduce credit risk, the
Company routinely assesses the financial strengths of its customers
(see Note 8).
(e) Stock-Based Compensation
Effective April 1, 1996, the Company adopted the provisions of SFAS
No. 123, Accounting for Stock-Based Compensation. The Company has
elected to continue to account for stock options at intrinsic value
under Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, with disclosure of the effects of fair
value accounting on net income on a pro forma basis (see Note 6).
(f) Management 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 may
differ from those estimates.
8
9
INVINCIBLE TECHNOLOGIES CORPORATION
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998
(In thousands, except per share data)
(Continued)
(g) Impairment of Long-Lived Assets
The Company follows the provisions of SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets To Be
Disposed Of. SFAS No. 121 addresses accounting and reporting
requirements for impairment of long-lived assets based on their fair
market values. Upon evaluating the realizability of its property and
equipment, a write-down of certain fixed assets occurred in fiscal
1998 (see Note 3).
(h) Net Loss Per Share
In March 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 128, Earnings per Share. This statement established
standards for computing and presenting net income (loss) per share.
This statement is effective for years ending after December 15, 1997.
Basic net loss per share was determined by dividing net loss by the
weighted average common shares outstanding during the period. Diluted
net loss per share was determined by dividing net loss by diluted
weighted average shares outstanding. Diluted weighted average shares
reflects the dilutive effect, if any, of common equivalent shares,
which includes common stock options and convertible preferred stock.
Options to purchase a total of 569,500 common shares and 2,639,948
shares of common stock issuable upon the conversion of the 2,639,948
shares of Series B and C Redeemable Convertible Preferred Stock have
been excluded from the computation of diluted weighted average shares
outstanding, as they are antidilutive. Accordingly, there is no
difference between basic and diluted weighted average shares
outstanding.
(i) Statements of Cash Flows Supplemental Information
Cash paid for interest during the year ended March 31, 1998 was
approximately $152,000.
(3) NONRECURRING CHARGE
During the year ended March 31, 1998, the Company ceased the development
of certain proprietary fault tolerant and high availability client server
and software products. As a result of the change in focus, the Company
recorded a write-down of approximately $799 of certain fixed assets
associated with the development efforts. Additionally, approximately
$1,250 of inventory was written off which is included in cost of goods
sold in the accompanying statement of operations.
9
10
INVINCIBLE TECHNOLOGIES CORPORATION
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998
(In thousands, except per share data)
(Continued)
(4) OPERATING LEASES
The Company leases its corporate headquarters, field sales offices and
certain office equipment under operating leases expiring at various dates
through 2001. Approximate future minimum lease payments under these
agreements are as follows:
FISCAL YEAR ENDED AMOUNT
1999 $211,000
2000 152,000
2001 148,000
--------
$511,000
========
Rent expense for the year ended March 31, 1998 was approximately $225,000.
(5) PREFERRED STOCK
The Series B Redeemable Convertible Preferred stockholders (Series B
Preferred stockholders) and the Series C Redeemable Convertible Preferred
stockholders (Series C Preferred stockholders) have the following rights
and privileges:
VOTING
The Series B and Series C Redeemable Convertible Preferred
stockholders will vote with all other stockholders as a single
class on matters, with one vote for each share held. Upon the
occurrence of certain events, as defined, the Series B and Series C
Preferred stockholders will vote as a separate class.
CONVERSION
Each share of outstanding Series B and Series C Redeemable
Convertible Preferred Stock is convertible at any time into one
share of common stock. The conversion of the Series B Redeemable
Convertible Preferred Stock is automatic upon the closing of an
initial public offering of the Company's common stock resulting in
gross proceeds of at least $7,000,000 and a price of at least $3.75
per share. The conversion of the Series C Redeemable Convertible
Preferred Stock is automatic upon the closing of an initial public
offering of the Company's common stock resulting in the gross
proceeds of at least $10,000,000 and a price of at least $6.43 per
share.
10
11
INVINCIBLE TECHNOLOGIES CORPORATION
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998
(In thousands, except per share data)
(Continued)
LIQUIDATION
In the event of liquidation, the Series B and Series C Preferred
stockholders shall be paid $1.50 and $2.57 per share, respectively,
plus a portion of any remaining distributions, as defined. The
Series B and Series C Preferred stockholders have preference and
priority over common stockholders and pari passu with each other.
DIVIDENDS
The holders of the Series B and Series C Redeemable Convertible
Preferred Stock shall be entitled to receive dividends if and when
declared by the Board of Directors.
REDEMPTION
At their option, Series B and Series C Preferred stockholders may
have all of their outstanding shares redeemed by the Company for
cash on or after December 30, 2001. The holders of Series B and
Series C Redeemable Convertible Preferred Stock shall be paid an
amount per share equal to the greater of the then fair market value
per share or the original purchase price plus all dividends
declared but unpaid at the redemption date.
(6) STOCK OPTION PLAN
The Board of Directors has approved the 1994 and 1996 Stock Option Plans
(the Plans), pursuant to which options to purchase up to 1,820,000 shares
of common stock may be granted to directors, officers and other employees
of, and consultants or advisers to, the Company. Incentive stock options
may be granted under the Plans at a price not less than the fair market
value on the date of grant. Options granted under the Plans vest over
various periods and expire no later than 10 years from the date of grant.
Option activity for the year ended March 31, 1998 is summarized as
follows:
WEIGHTED
NUMBER OF AVERAGE
OPTIONS EXERCISE PRICE
Outstanding, March 31, 1997 875,915 $ .96
Granted 555,500 1.71
Cancelled (861,915) (1.54)
---------
Outstanding, March 31, 1998 569,500 .80
=========
Exercisable, March 31, 1998 447,825 .66
=========
11
12
INVINCIBLE TECHNOLOGIES CORPORATION
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998
(In thousands, except per share data)
(Continued)
Had compensation cost for the Plans been determined using the fair value
method, the Company's net loss would have been increased to the following
pro forma amounts:
1998
Net Loss-
As reported $(4,352)
Pro forma $(4,369)
Net Loss Per Share-
As reported $ (.77)
Pro forma $ (.77)
Consistent with SFAS 123, pro forma net losses have not been calculated
for options granted prior to April 1, 1995. Pro forma compensation cost
may not be representative of that to be expected in future years.
The weighted average fair value of options granted during 1998 was $0.43.
The value was estimated on the date of grant using the minimum value
approach with the following assumptions used for grants in 1998: risk-free
interest rates at 6%, expected lives of 5 years and dividend yield of 0.
The weighted average remaining contractual life was 7.15 years and the
range of exercise price was $.50 to $1.71 at March 31, 1998.
(7) INCOME TAXES
The Company provides for income taxes under the liability method in
accordance with SFAS No. 109, Accounting for Income Taxes. Under the
provisions of SFAS No. 109, the Company recognizes a current tax liability
or asset for current taxes payable or refundable, and a deferred tax
liability or asset for the estimated future effects of temporary
differences between the carrying value of assets and liabilities for
financial reporting and tax reporting purposes, to the extent they are
realizable.
The approximate effect of each type of temporary difference and
carryforward as of March 31, 1998 is as follows:
Nondeductible reserves $ 410
Net operating loss
carryforwards 2,360
Tax depreciation in excess of
book (64)
Valuation allowance (2,706)
-------
$ -
=======
12
13
INVINCIBLE TECHNOLOGIES CORPORATION
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998
(In thousands, except per share data)
(Continued)
The deferred tax assets have been reduced by a valuation allowance, as
they do not satisfy the recognition criteria set forth in SFAS No. 109.
The difference between the effective tax rate and the statutory federal
tax rate is as follows:
Net loss at statutory rate $(1,430) (34%)
Impact of state taxes (240) (6%)
Increase in valuation
allowance 1,646 39%
Other 24 1%
------- --
$ -- 0%
======= ==
At March 31, 1998, the Company has available, subject to review and
possible adjustment, a net operating loss carryforward of approximately
$5,900. The carryforward may be used to offset future taxable income, if
any, and expires beginning in 2009. The Internal Revenue Code contains
provisions that may limit the net operating loss carryforward available to
be used in any given year in the event of significant changes in ownership
interest.
(8) SIGNIFICANT CUSTOMERS
During 1998, one customer (an end user) accounted for approximately 21% of
revenue. This customer's accounts receivable balance represented
approximately 19% of gross accounts receivable. Another two customers also
accounted for an additional 22% of gross accounts receivable.
(9) REVOLVING NOTE PAYABLE
The Company has a revolving note payable agreement (the revolver) with a
bank whereby the Company may borrow up to $3,000,000. Borrowings under the
revolver accrue interest at the bank's prime rate (8.75% at March 31,
1998) plus .5%, and are secured by certain assets of the Company. The
revolver expired on September 1, 1998. In addition, the Company is subject
to certain financial and operating covenants defined in the revolver. As
of March 31, 1998, the Company was out of compliance with certain of these
covenants.
(10) ACQUISITION OF COMPANY
In June 1998, substantially all of the assets and liabilities of the
Company were acquired by Procom (see Note 1). The transaction was
accounted for under the purchase method of accounting. The purchase price
consisted approximately of $1,000 in cash, and the assumption of
liabilities totaling approximately of $4,700, including the notes payable
to the bank. Procom has determined that $1.7 million of the purchase price
was related to the Company's research and development efforts which had
not attained technological feasibility, and for which no alternative
future use was expected.
13