REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Ibex Technologies, Inc.
We have audited the accompanying balance sheets of Ibex Technologies, Inc. as of
December 31, 1995 and 1994, and the related statements of operations, changes in
shareholders' equity and cash flows for the years 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 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 Ibex Technologies, Inc. as of
December 31, 1995 and 1994, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
Sacramento, California
July 31, 1996, except as to Note 14,
which the date is August 16, 1996
F-25
IBEX TECHNOLOGIES, INC.
BALANCE SHEETS
as of December 31, 1995 and 1994
1995 1994
---- ----
ASSETS
Current assets:
Cash $ 138,194 $ 89,815
Accounts receivable, net of allowance for doubtful accounts of $14,603 and
$21,527 in 1995 and 1994, respectively, and allowance for sales returns
of $30,000 and $45,158 in 1995 and 1994, respectively
542,757 583,501
Inventories 41,030 43,835
Prepaid income taxes 44,657
Prepaid expenses and other current assets 34,346 25,840
Deferred income taxes 71,086 74,007
--------- ---------
Total current assets 872,070 816,998
Property and equipment, net 114,027 116,991
--------- ---------
Total assets $ 986,097 $ 933,989
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank line of credit $ -- $ 27,700
Notes payable 75,000 --
Accounts payable 49,237 39,327
Accrued liabilities 14,052 15,501
Income taxes payable -- 108,682
Accrued wages -- 23,776
Accrued vacation 43,499 32,581
Deferred revenue 97,387 70,374
--------- ---------
Total current liabilities 279,175 317,941
Deferred income taxes 6,580 8,161
--------- ---------
Total liabilities 285,755 326,102
--------- ---------
Commitments (Note 4)
Preferred stock, no par value:
Authorized: 5,000,000 shares
Issued and outstanding: 48,035 shares in 1995 and 1994
(liquidation preference of $300,219) 300,219 300,219
Common stock, no par value:
Authorized: 10,000,000 shares
Issued and outstanding: 138,016 in 1995 and 132,150 shares in 1994 89,574 56,250
Retained earnings 310,549 251,418
--------- ---------
Total shareholders' equity 700,342 607,887
--------- ---------
Total liabilities and shareholders' equity $ 986,097 $ 933,989
========= =========
The accompanying notes are an integral part of these financial statements.
F-26
IBEX TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
for the years ended December 31, 1995 and 1994
1995 1994
Net sales $ 3,091,397 $ 2,707,822
Cost of sales 731,904 691,058
-------------- --------------
Gross profit 2,359,493 2,016,764
-------------- --------------
Operating expenses:
Research and development 647,654 431,782
Sales and marketing 1,391,073 988,295
General and administrative 262,297 255,734
-------------- --------------
Total operating expenses 2,301,024 1,675,811
-------------- --------------
Operating income 58,469 340,953
Other income (expense), net (4,276) (8,322)
-------------- --------------
Income before provision for income taxes 54,193 332,631
Provision (benefit) for income taxes (4,938) 120,798
-------------- --------------
Net income $ 59,131 $ 211,833
============== ==============
F-27
IBEX TECHNOLOGIES, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
for the years ended December 31, 1995 and 1994
The accompanying notes are an integral part of these financial statements.
Preferred Stock Common Stock
----------------------- ----------------------
Retained
Shares Amount Shares Amount Earnings Total
-------- ---------- -------- --------- --------- ----------
Balances, January 1, 1994 48,035 $ 300,219 132,150 $ 56,250 $ 39,585 $ 396,054
Net income -- -- -- -- 211,833 211,833
-------- --------- -------- -------- -------- ---------
Balances, December 31, 1994 48,035 300,219 132,150 56,250 251,418 607,887
Issuance of common stock -- -- 5,866 33,324 -- 33,324
Net income -- -- -- -- 59,131 59,131
-------- --------- -------- -------- -------- ---------
Balances, December 31, 1995 48,035 $ 300,219 138,016 $ 89,574 $310,549 $ 700,342
-------- --------- -------- -------- -------- ---------
F-28
IBEX TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
for the years ended December 31, 1995 and 1994
The accompanying notes are an integral part of these financial statements.
Year Ended December 31,
-----------------------------
1995 1994
---- ----
Cash flows from operating activities:
Net income $ 59,131 $ 211,833
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 36,596 25,591
Deferred tax provision 1,340 (17,964)
Loss on disposition of property and equipment 12,488 --
Allowance for doubtful accounts and sales returns (22,082) 36,675
Research and development expenses paid by issuance of stock and a note 177,969 --
Changes in assets and liabilities:
Accounts receivable 62,826 (281,876)
Inventories 2,805 (29,587)
Prepaid taxes (44,657) 150
Prepaid expenses and other current assets (8,506) (12,957)
Accounts payable 9,910 (13,166)
Income tax payable (108,682) 100,038
Accrued liabilities (1,449) 14,129
Accrued wages (23,776) 23,776
Accrued vacation 10,918 11,936
Deferred revenue 27,013 50,560
------------ -----------
Net cash provided by operating activities 191,844 119,138
------------ -----------
Cash flows from investing activities:
Acquisition of property and equipment (46,120) (53,661)
------------ -----------
Net cash used in investing activities (46,120) (53,661)
------------ -----------
Cash flows from financing activities:
Repayment of notes payable (75,000) --
Proceeds from bank lines of credit 102,000 --
Repayment of bank line of credit (129,700) --
Proceeds from issuance of common stock 5,355 --
------------ -----------
Net cash provided by (used in) financing activities (97,345) --
------------ -----------
Net increase in cash 48,379 65,477
Cash at beginning of period 89,815 24,338
------------ -----------
Cash at end of period $ 138,194 $ 89,815
============ ===========
Supplemental information:
Cash paid during the period for:
Interest $ 7,721 $ 3,682
Income taxes 147,071 38,724
Noncash activities:
Issuance of a note and common stock for purchase of development rights
for a software product 177,969
Sales of software products in exchange for computer software,
marketing, advertising and telephone services 59,054 23,531
F-29
IBEX TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
1. Business and Organization of the Company:
Ibex Technologies, Inc. (the Company) designs, develops, and markets
fax-on-demand software systems. The Company distributes its products
primarily through its direct sales force, master distributors and various
value-added resellers to end users and service providers in North America,
Europe and Asia.
2. Summary of Significant Accounting Policies:
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.
Certain Risks and Concentrations
Financial instruments that potentially subject the Company to
concentrations of credit risks comprise, principally, cash and trade
accounts receivable. At December 31, 1995, the Company had on deposit
approximately $222,000, including amounts representing outstanding checks,
at an established financial institution and has not experienced any losses
relating to its bank deposits. These deposits are federally insured to the
extent of $100,000.
Ongoing customer credit evaluations are performed by the Company, and
collateral is not required. The Company maintains allowances for potential
returns and credit losses, and such returns and losses have generally been
within management's expectations. One customer accounted for 42% and 12% of
accounts receivable and sales at December 31, 1995. Two customers accounted
for 39% of accounts receivable at December 31, 1994.
F-30
IBEX TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
2. Summary of Significant Accounting Policies, continued:
The Company's products include components subject to rapid technological
change. Significant technological change could adversely affect the
Company's operating results and subject the Company to returns of product
and inventory losses. While the Company has ongoing programs to minimize
the adverse effect of such changes and consider technological change in
estimating its allowances, such estimates could change in the future.
Inventories
Inventories are stated at the lower of cost (first-in, first-out basis) or
market.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is provided using the straight-line method over
the estimated useful lives of the respective assets, generally five to ten
years.
Software Production Costs
Costs related to the conceptual formulation and design of software products
are expensed as research and development while costs incurred subsequent to
establishing technological feasibility of software products are capitalized
until general release of the product. Generally, technological feasibility
is established upon completion of a working model. Costs incurred
subsequent to such point have not been significant in 1995 or 1994, and all
such costs have been expensed.
Revenue Recognition
Product revenue is recognized upon shipment provided no significant vendor
obligations remain and collection of the resulting receivable is deemed
probable by management. Provisions for estimated product returns are
recorded at the time products are shipped. Revenue earned on service
contracts is recognized proratably over the term of the contract.
Advertising Costs
Advertising costs, included in sales and marketing expenses, are expensed
as incurred and were $223,630 and $178,291 in 1995 and 1994, respectively.
F-31
2. Summary of Significant Accounting Policies, continued:
Foreign Currency Translation
Foreign currency gains and losses related to international sales, which
have not been material, are reported in the statement of operations.
Income Taxes
The Company uses the liability method of accounting for income taxes.
Deferred income taxes are recorded based on the difference between
financial statement and income tax bases of assets and liabilities and
available loss or credit carry forwards.
Recent Pronouncements
During March 1995, the Financial Accounting Standards Board issued
Statement No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," which requires the
Company to review for impairment of long-lived assets, certain identifiable
intangibles, and goodwill related to those assets whenever events or
changes in circumstances indicate that the carrying amount of an asset
might not be recoverable. In certain situations, an impairment loss would
be recognized. SFAS 121 will become effective for the Company's year ending
December 31, 1996. The Company has studied the implications of SFAS 121
and, based on its initial evaluation, does not expect it to have a material
impact on the Company's financial condition or results of operations.
During October 1995, the Financial Accounting Standards Board issued
Statement No. 123 (SFAS 123), "Accounting for Stock-Based Compensation"
which establishes a fair value based method of accounting for stock-based
compensation plans and requires additional disclosures for those companies
who elect not to adopt the new method of accounting. The Company intends to
continue to account for employee purchase rights and stock options under
APB Opinion No. 25, "Accounting for Stock Issued to Employees" and will be
required to provide additional disclosures in the financial statements for
the year ended December 31, 1996.
F-32
IBEX TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
3. Property and Equipment:
December 31,
-----------------------------
1995 1994
---- ----
Purchased software $ 9,592 $ 36,887
Computer equipment 131,873 119,240
Office equipment 41,586 20,911
------------ -----------
183,051 177,038
Less accumulated depreciation 69,024 60,047
------------ -----------
$ 114,027 $ 116,991
============ ===========
4. Commitments
The Company leases its facilities and office equipment under operating
leases with initial or remaining noncancelable lease terms in excess of one
year. Future minimum payments under noncancelable operating leases as of
December 31, 1995, are as follows:
1996 $ 70,680
1997 33,416
1998 4,236
1999 503
Rent expense, including the facility lease and equipment rental, was
approximately $51,000 and $35,000 for 1995 and 1994, respectively.
5. Bank Line of Credit:
The Company has a $250,000 line of credit which expired on July 26, 1996.
Borrowings under this line of credit agreement are collateralized by all
inventory of the Company and bear interest at the bank's prime rate plus 2%
(10.50% at December 31, 1995). As of and during the year ended December 31,
1995, there were no borrowings under this line of credit agreement. The
line of credit agreement contains certain financial covenants including
minimum levels of tangible net worth, working capital and debt service
ratios.
F-33
6. Notes Payable:
In 1995, the Company purchased exclusive license and development rights for
a software product, in exchange for 4,475 shares of its common stock at an
estimated fair value of $27,969 and a non-interest bearing note payable for
$150,000. The note, which is not collateralized, is payable in installments
of $25,000, with the first payment due on March 17, 1995, the second
payment due July 1, 1995 and quarterly thereafter.
7. Preferred Stock:
The Company has 5,000,000 shares of no par value preferred stock
authorized. As of December 31, 1995 and 1994, 48,035 shares are issued and
outstanding. The preferred stock is convertible into common stock (by
formula) (i) at the option of the preferred stockholder at any time after
the date of issuance, or (ii) automatically in the case of a public
offering of not less than $8,000,000. The preferred stock provides for
non-cumulative preferential dividends of $.50 per year, and additional
dividends may be declared by the Board of Directors. The holders of
preferred stock are entitled to vote, and have the number of votes equal to
the number of common shares into which their shares are convertible. The
preferred shares have liquidation preference for $6.25 per share, and are
entitled to participate in the distribution of the remaining assets of the
Company.
8. Stock Option Plan:
In August 1996, the Board of Directors and the shareholders of the Company
ratified the 1992 Stock Option Plan which reserves a maximum of 20,000
shares of authorized but unissued common stock for the issuance upon
exercise of nonstatutory stock options granted to employees, non-employee
directors and consultants of the Company. The options are issued at fair
market value as determined by the Board of Directors. The vesting period
and exercise term are determined by the Board of Directors at the time the
options are granted. The options outstanding at December 31, 1995 vest over
a three-year period, have an exercise term of ten years, and exercise
prices between $3.85 and $13.75 per share.
F-34
8. Stock Option Plan, continued:
The following options were granted and exercised during the years ended
December 31, 1995 and 1994:
Balance at January 1, 1994 8,563
Granted:
Exercise price of $6.25 3,200
----------
Balance at December 31, 1994 11,763
Granted:
Exercise price of $6.25 2,500
Exercise price of $13.75 300
Exercised at $3.85 per share (1,391)
----------
Balance at December 31, 1995 13,172
=========
The following options were outstanding at December 31, 1995 and 1994:
1995 1994
---- ----
Vested:
Exercise price of $3.85 4,172 5,563
Exercise price of $6.25 3,398 1,332
Nonvested:
Exercise price of $6.25 5,302 4,868
Exercise price of $13.75 300
---------- ----------
Total options outstanding at
December 31 13,172 11,763
========== ==========
F-35
9. Income Taxes:
The income tax provision consists of the following:
Year ended December 31,
-----------------------
1995 1994
---- ----
Current tax expense (benefit):
Federal $ (4,113) $ 109,204
State (2,165) 29,558
Deferred tax expense (benefit) 1,340 (17,964)
----------- ------------
$ (4,938) $ 120,798
=========== ============
A reconciliation between the Company's effective rate and the federal
statutory rate is as follows:
Year ended December 31,
-----------------------------
1995 1994
---- ----
Federal tax at statutory rate 34.0 % 34.0 %
Permanent difference due to non-
deductible expenses 9.9 1.3
State taxes, net of federal benefit (6.1) 6.1
Research and development credits (29.1) (6.8)
Other 1.2 1.7
Effect of graduated tax rates (19.0) --
---------- -----------
(9.1) % 36.3 %
========== ===========
F-36
9. Income Taxes, continued:
The components of the net deferred tax assets and liabilities are as
follows:
1995 1994
---- ----
Accounts receivable allowances $ 19,313 $ 28,871
Deferred revenue 42,169 30,472
Other liabilities 14,393 10,525
State income taxes -- 4,139
----------- ------------
Total deferred tax assets $ 75,875 $ 74,007
=========== ============
Depreciation $ 6,580 $ 8,161
State income taxes 4,789 --
----------- ------------
Total deferred tax liabilities $ 11,369 $ 8,161
=========== ============
It is management's opinion that the deferred tax assets will be realized
through operations and that no valuation allowance is necessary.
10. Major Customers and Segment Information:
The Company operates in one industry segment and develops, markets and
supports network enhancement products.
The Company's export revenues are all denominated in U.S. dollars, and are
summarized as follows:
Year ended December 31,
-----------------------------
1995 1994
---- ----
Europe $ 361,953 $ 110,649
Asia 117,474 --
Canada 438,290 570,698
----------- ------------
$ 917,717 $ 681,347
=========== ============
F-37
11. Contingency:
The Company is a defendant in a legal action. While the outcome cannot be
determined at this time, management is of the opinion that the liability,
if any, resulting from this legal action will not have a material effect on
the Company's financial position, results of operations or cash flows.
12. Fair Value of Financial Instruments:
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to
estimate that value:
Cash
The carrying amount approximates fair value.
Accounts Receivable
The carrying value of the Company's receivables is assumed to approximate
fair value due to their short-term maturities.
Notes Payable
The Company's notes payable consists of a non-interest bearing note payable
to another software company. There is no established market and it is not
practicable to estimate the fair value of this financial instrument.
13. Non-Monetary Transactions:
The Company supplies its software at the current list price to customers in
exchange for computer software, marketing, advertising and telephone
services. Total revenue recorded in exchange for a corresponding value of
services received during the years amounted to $59,054 and $23,531 in 1995
and 1994, respectively.
F-38
14. Subsequent Events:
On August 12, 1996, the Company entered into an agreement to merge with
another company. Pursuant to the terms of the merger agreement, each share
of common and preferred stock of the Company will be converted into common
stock of Castelle, a manufacturer of fax and print server devices, based
upon a formula using the market price for Castelle at the date of closing.
F-39
IBEX TECHNOLOGIES, INC.
BALANCE SHEETS
(in thousands)
-----
ASSETS June 30, December 31,
1996 1995
(unaudited)
Current assets:
Cash $ 279 $ 138
Accounts receivable, net of allowance for doubtful accounts of 929 543
$15 in 1996 and 1995
Inventories 36 41
Prepaid income taxes 44 45
Deferred income taxes 65 71
Prepaid expenses and other current assets 5 34
-------------- ----------------
Total current assets 1,358 872
Property plant and equipment, net 126 114
-------------- ----------------
Total assets $ 1,484 $ 986
============== ================
LIABILITIES
Current liabilities:
Notes payable $ 25 $ 75
Accounts payable 135 49
Accrued liabilities 58 14
Income taxes payable 123
Accrued vacation 44 44
Deferred revenue 145 97
-------------- ----------------
Total current liabilities 530 279
Deferred income taxes 30 7
-------------- ----------------
Total liabilities 560 286
SHAREHOLDERS' EQUITY
Preferred stock, no par value:
Authorized: 5,000
Issued and outstanding: 48 in 1996 and 1995 300 300
Common stock, no par value:
Authorized: 10,000 shares
Issued and outstanding: 138 shares in 1996 and 1995 90 90
Retained earnings 534 310
-------------- ----------------
Total shareholders' equity 924 700
-------------- ----------------
Total liabilities and shareholders' equity $ 1,484 $ 986
============== ================
The accompanying notes are an integral part of these financial statements
F-40
IBEX TECHNOLOGIES, INC.
STATEMENTS OF INCOME
(in thousands, except per share data)
6 MONTHS ENDED JUNE 30, 6 MONTHS ENDED JUNE 30,
1996 1995
(unaudited) (unaudited)
Net sales $ 2,075 $ 1,393
Cost of sales 444 355
------------------------------ --------------------------------
Gross profit 1,631 1,038
------------------------------ --------------------------------
Operating expenses:
Research and development 342 418
Sales and marketing 760 660
General and administrative 153 129
------------------------------ --------------------------------
Total operating expenses 1,255 1,207
------------------------------ --------------------------------
Operating income (loss) 376 (169)
Other income (expense), net 10 (5)
------------------------------ --------------------------------
Income (loss)before provision for income taxes 386 (174)
Provision for (benefit from) income taxes 162 (21)
------------------------------ --------------------------------
Net income $ 224 $ (153)
============================== ================================
Net income per share $ 1.11 $ (1.13)
============================== ================================
Shares used in per share calculation 201 135
============================== ================================
The accompanying notes are an integral part of these financial statements
F-41
IBEX TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
6 MONTHS ENDED JUNE 30, 6 MONTHS ENDED JUNE 30,
1996 1995
(unaudited) (unaudited)
Cash flows from operating activities:
Net income (loss) $ 224 $ (153)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 18 18
Deferred tax provision 29
Allowance for doubtful accounts and sales returns (30)
Research and development expenses paid by issuance of 178
stock and a note
Changes in assets and liabilities:
Accounts receivable (386) 156
Inventories 5 23
Prepaid income taxes 1
Prepaid expenses and other current assets 29 (58)
Accounts payable 86 2
Accrued liabilities 44 5
Accrued vacation 6
Income taxes payable 123 (109)
Deferred revenue 48 5
------------------------ --------------------------
Net cash provided by operating activities 221 43
------------------------ --------------------------
Cash flows from investing activities:
Acquisition of property and equipment (30) (29)
Cash flows from financing activities:
Repayment of notes payable (50) (25)
Bank line of credit, net 42
Proceeds from issuance of common stock 6
------------------------ --------------------------
Net cash provided by (used in) financing activities (50) 23
------------------------ --------------------------
Net increase in cash and cash equivalents 141 37
Cash and cash equivalents at beginning of period 138 90
------------------------ --------------------------
Cash and cash equivalents at end of period $ 279 $ 127
======================== ==========================
The accompanying notes are an integral part of these financial statements
F-42
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited financial statements include the accounts of the
Company and have been prepared in accordance with generally accepted
accounting principles. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation of the Company's financial position, results of operations and
cash flows at the dates and for the periods indicated have been included.
The results of operations for the interim period presented are not
necessarily indicative of the results for the year ending December 31,
1996. Because all of the disclosures required by generally accepted
accounting principles are not included in the accompanying consolidated
financial statements, they should be read in conjunction with the audited
consolidated financial statements and related notes included in the
Company's Annual Report.
2. Net Income Per Share
Net income per share is based upon the weighted average number of common
and common equivalent shares outstanding. Common equivalent shares and
options are included in the per share calculation where the effect of their
inclusion would be dilutive.
3. Inventories
Inventories are stated at the lower of cost (which approximates cost on a
first-in, first-out basis) or market.
JUNE 30, DECEMBER 31,
1996 1995
Finished goods $ 36 $ 41
=============== ===================
F-43