EXHIBIT 99.1
INFOWORKSPACE
(A PRODUCT LINE OF THE ELECTRONIC SYSTEMS
DIVISION OF GENERAL DYNAMICS GOVERNMENT
SYSTEMS CORPORATION)
Financial Statements
as of December 31, 2000 and 1999
Together with Auditors' Report
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Management of Electronic Systems Division of
General Dynamics Government Systems Corporation:
We have audited the accompanying balance sheets of the InfoWorkSpace license and
maintenance product line (Note 1) of the Electronic Systems Division of General
Dynamics Government Systems Corporation (the IWS Product Line) as of December
31, 2000 and 1999 and the related statements of operations, net parent
investment and cash flows for the year ended December 31, 2000 and for the
period from September 1, 1999 through December 31, 1999. We have also audited
the accompanying statements of operations, net parent investment and cash flows
of the InfoWorkSpace license and maintenance product line of the Electronic
Defense Systems Division of GTE Government Systems Corporation (the Predecessor)
for the period from January 1, 1999 through August 31, 1999. These financial
statements are the responsibility of the IWS Product Line'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
audits 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 the IWS Product Line as of
December 31, 2000 and 1999 and the results of its operations and its cash flows
for the year ended December 31, 2000 and for the period from September 1, 1999
through December 31, 1999 and the results of operations and cash flows of the
Predecessor for the period from January 1, 1999 through August 31, 1999, in
conformity with accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Boston, Massachusetts
May 18, 2001
INFOWORKSPACE
Balance Sheets
MARCH 27, DECEMBER 31, DECEMBER 31,
ASSETS 2001 2000 1999
(UNAUDITED)
Current Assets:
Accounts receivable $ 456,000 $ 515,000 $ 488,000
Prepaid license fees - 52,000 1,000
--------------- --------------- ---------------
Total current assets 456,000 567,000 489,000
Property and Equipment, net 155,000 181,000 153,000
Goodwill, net 683,000 733,000 933,000
--------------- --------------- ---------------
Total assets $ 1,294,000 $ 1,481,000 $ 1,575,000
=============== =============== ===============
LIABILITIES AND NET PARENT INVESTMENT
Current Liabilities:
Accrued payroll and employee benefits $ 98,000 $ 163,000 $ 118,000
Deferred revenue 1,077,000 107,000 104,000
--------------- --------------- ---------------
Total current liabilities 1,175,000 270,000 222,000
Commitments and Contingencies (Note 9)
Net Parent Investment 119,000 1,211,000 1,353,000
--------------- --------------- ---------------
Total liabilities and net
parent investment $ 1,294,000 $ 1,481,000 $ 1,575,000
=============== =============== ===============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
INFOWORKSPACE
Statements of Operations
-----------------THE IWS PRODUCT LINE ------------------------------ PREDECESSOR
SEPTEMBER 1, JANUARY 1,
THREE MONTHS ENDED YEAR ENDED 1999 THROUGH 1999 THROUGH
MARCH 27, MARCH 31, DECEMBER 31, DECEMBER 31, AUGUST 31,
2001 2000 2000 1999 1999
(UNAUDITED)
Revenues:
License revenues $ 93,000 $ - $ 223,000 $ 483,000 $ 2,224,000
Service revenues 242,000 60,000 857,000 147,000 610,000
--------------- --------------- --------------- --------------- ---------------
Total revenues 335,000 60,000 1,080,000 630,000 2,834,000
--------------- --------------- --------------- --------------- ---------------
Cost of Revenues:
Cost of license revenues 89,000 - 211,000 280,000 1,279,000
Cost of service revenues 87,000 18,000 315,000 95,000 243,000
--------------- --------------- --------------- --------------- ---------------
Total cost of revenues 176,000 18,000 526,000 375,000 1,522,000
--------------- --------------- --------------- --------------- ---------------
Gross profit 159,000 42,000 554,000 255,000 1,312,000
--------------- --------------- --------------- --------------- ---------------
Operating Expenses:
Research and development 305,000 844,000 2,856,000 852,000 1,409,000
Sales and marketing 22,000 59,000 250,000 31,000 62,000
General and administrative 1,398,000 996,000 4,747,000 1,584,000 2,725,000
--------------- --------------- --------------- --------------- ---------------
Total operating expenses 1,725,000 1,899,000 7,853,000 2,467,000 4,196,000
--------------- --------------- --------------- --------------- ---------------
Loss before income tax
benefit (1,566,000) (1,857,000) (7,299,000) (2,212,000) (2,884,000)
Income Tax Benefit (590,000) (700,000) (2,752,000) (834,000) (1,087,000)
--------------- --------------- --------------- --------------- ---------------
Net loss $ (976,000) $ (1,157,000) $ (4,547,000) $ (1,378,000) $ (1,797,000)
=============== =============== =============== =============== ===============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
INFOWORKSPACE
Statements of Net Parent Investment
NET PARENT
PREDECESSOR INVESTMENT
Balance, December 31, 1998 $ 404,000
Net loss (1,797,000)
Net transfer from parent 1,778,000
---------------
Balance, August 31, 1999 385,000
THE IWS PRODUCT LINE
Adjustment for new basis of accounting 996,000
Net loss (1,378,000)
Net transfer from parent 1,350,000
---------------
Balance, December 31, 1999 1,353,000
Net loss (4,547,000)
Net transfer from parent 4,405,000
---------------
Balance, December 31, 2000 1,211,000
Net loss (UNAUDITED) (976,000)
Net transfer to parent (UNAUDITED) (116,000)
---------------
Balance, March 27, 2001 (UNAUDITED) $ 119,000
===============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
INFOWORKSPACE
Statements of Cash Flow
-----------------THE IWS PRODUCT LINE ------------------------ PREDECESSOR
SEPTEMBER 1, JANUARY 1,
THREE MONTHS ENDED YEAR ENDED 1999 THROUGH 1999 THROUGH
MARCH 27, MARCH 31, DECEMBER 31, DECEMBER 31, AUGUST 31,
2001 2000 2000 1999 1999
(UNAUDITED)
Operating Activities:
Net loss $ (976,000) $ (1,157,000) $ (4,547,000) $ (1,378,000) $ (1,797,000)
Adjustments to reconcile net loss to
net cash used in operating activities-
Income tax benefit (590,000) (700,000) (2,752,000) (834,000) (1,087,000)
Depreciation and amortization 76,000 69,000 279,000 81,000 34,000
Changes in operating assets and
liabilities-
Accounts receivable 59,000 312,000 (27,000) (7,000) 67,000
Prepaid license fees 52,000 (23,000) (51,000) (1,000) 7,000
Accrued payroll and employee
benefits (65,000) (20,000) 45,000 (53,000) 40,000
Deferred revenue 970,000 (38,000) 3,000 33,000 (37,000)
------------- ------------- ------------- ------------- -------------
Net cash used in operating
activities (474,000) (1,557,000) (7,050,000) (2,159,000) (2,773,000)
------------- ------------- ------------- ------------- -------------
Investing Activities:
Purchases of property and equipment - (75,000) (107,000) (25,000) (92,000)
------------- ------------- ------------- -------------- -------------
Net cash used in investing
activities - (75,000) (107,000) (25,000) (92,000)
------------- ------------- ------------- ------------- -------------
Financing Activities:
Transfer from parent 474,000 1,632,000 7,157,000 2,184,000 2,865,000
------------- ------------- ------------- ------------- -------------
Net cash provided by
financing activities 474,000 1,632,000 7,157,000 2,184,000 2,865,000
------------- ------------- ------------- ------------- -------------
Net Change in Cash and Cash Equivalents - - - - -
Cash and Cash Equivalents, beginning of
period - - - - -
------------- ------------- ------------- ------------- -------------
Cash and Cash Equivalents, end of period $ - $ - $ - $ - $ -
============= ============= ============= ============= =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
(1) ORGANIZATION AND DESCRIPTION OF BUSINESS
InfoWorkSpace (IWS) operated as a business line of the Electronic Systems
Division (GDES or the Parent) of General Dynamics Government Systems
Corporation (GDGSC), a Delaware corporation, which, in turn, is a wholly
owned subsidiary of General Dynamics Corporation (General Dynamics) based
in Falls Church, Virginia. On March 27, 2001, GDES completed the sale of
the software license and maintenance portion of the IWS business (the IWS
Product Line) to Ezenia! Inc. (Ezenia) while retaining the rights to
service the contracts GDES holds with government organizations. The
accompanying financial statements reflect the software and maintenance
portion of the IWS business line.
The IWS Product Line develops and provides Web-based collaborative software
to users within commercial and government organizations to build and
organize virtual workgroups. The IWS software provides a secure
collaboration work environment where users can build online meeting places,
organized into virtual buildings, floors and rooms where they can meet and
collaborate on projects in real-time.
On September 1, 1999, General Dynamics acquired GDGSC, formerly known as
GTE Government Systems Corporation, from GTE Corporation (GTE). Prior to
this acquisition, the IWS Product Line operated as the software license and
maintenance business line of the Electronic Defense Systems Division of GTE
Government Systems Corporation (the Predecessor).
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements reflect the financial position and
results of operations of the IWS Product Line on a standalone basis. The
revenues and expenses specifically identifiable to the IWS Product Line and
allocated amounts of common expenses, primarily based on headcount or
payroll dollars, incurred by the Parent in operating the IWS license and
maintenance business have been included in the accompanying financial
statements.
UNAUDITED INTERIM FINANCIAL INFORMATION
The financial statements as of March 27, 2001 and for the three months
ended March 27, 2001 and March 31, 2000 are unaudited but, in the opinion
of the IWS Product Line's management, include all adjustments, consisting
of normal, recurring adjustments, necessary for a fair presentation of the
financial position and of the results of operations for the respective
interim periods. The results of operations for the interim periods are not
necessarily indicative of results to be expected for any other interim
periods or for the entire year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities, and disclosures of contingent assets and liabilities, at the
date of the financial statements and the reported amount of revenues and
expenses during the reporting period. Actual amounts could differ
materially from those estimates.
REVENUE RECOGNITION
The IWS Product Line derives its revenues from sale and support of software
licenses of the IWS product. Revenues derived from the sale of perpetual
software licenses are recognized in accordance with the American Institute
of Certified Public Accountants' Statement of Position (SOP) 97-2, SOFTWARE
REVENUE RECOGNITION, as amended by SOP 98-9, MODIFICATION OF SOP 97-2,
SOFTWARE REVENUE RECOGNITION, WITH RESPECT TO CERTAIN TRANSACTIONS. Under
SOP 97-2, software license revenues are recognized upon execution of a
contract and delivery of software, provided that the license fee is fixed
and determinable, no significant production, modification or customization
of the software is required and collection is considered probable by
management. Revenues under
multiple-element arrangements, which typically include software products
and maintenance sold together, are allocated to each element using the
residual method in accordance with SOP 98-9. Service revenues, derived from
subscription license agreements, including arrangements that require the
IWS Product Line to host the software, or customer maintenance agreements
entered into in connection with initial perpetual license sales and
subsequent renewals, are recognized ratably over the term of the service
period.
CONCENTRATIONS OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
The IWS Product Line has no significant off-balance-sheet or concentration
of credit risk exposure. The IWS Product Line sells its products and
services primarily through the Parent to government agencies and therefore
does not believe that it has accounts receivable collection risk.
CASH AND CASH EQUIVALENTS
The Parent manages cash on an enterprise basis and does not maintain cash
balances at the operating unit level. Therefore, cash or cash equivalents
of the IWS Product Line's operations are not reflected in the accompanying
balance sheets.
PROPERTY AND EQUIPMENT
Property and equipment consists of computer equipment and is stated at
cost, net of accumulated depreciation. At the completion of General
Dynamics' acquisition of the Predecessor on September 1, 1999 (Note 3), the
property and equipment was recorded at fair value in accordance with
Accounting Principles Board (APB) Opinion No. 16, BUSINESS COMBINATIONS.
Property and equipment is depreciated using the straight-line or
double-declining methods over their estimated useful lives, from three to
six years.
SOFTWARE DEVELOPMENT COSTS
In accordance with Statement of Financial Accounting Standards (SFAS) No.
86, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE TO BE SOLD, LEASED OR
OTHERWISE MARKETED, capitalization of software development costs begins
upon the establishment of technological feasibility. Costs to establish the
technological feasibility of software products are expensed as incurred.
Costs incurred subsequent to the establishment of technological feasibility
and prior to the general release of the products are capitalized.
Capitalized costs are amortized over the estimated economic life of the
related products. There were no capitalized software development costs at
December 31, 2000 or 1999.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The IWS Product Line's financial instruments consist of accounts receivable
and accrued payroll and employee benefits. The carrying amount of these
instruments at December 31, 2000 and 1999 approximates their fair value due
to their short-term nature.
GOODWILL
The excess of cost over the fair value of net assets of acquired companies
is recorded as goodwill and amortized using the straight-line method over
five years. Accumulated amortization was $267,000 and $67,000 at December
31, 2000 and 1999, respectively. The IWS Product Line assesses the future
useful life of this asset whenever events or changes in circumstances
indicate that the current useful life has diminished. The IWS Product Line
considers the future undiscounted cash flows of the acquired businesses in
assessing the recoverability of this asset. If impairment is indicated, any
excess of carrying value over fair value is recorded as a loss.
DEFERRED REVENUE
Deferred revenue represents amounts received from customers under
maintenance or subscription license agreements or for software license
sales in advance of revenue recognition.
INCOME TAXES
The results of operations of the IWS Product Line and the Predecessor were
included in the consolidated federal and state tax returns of General
Dynamics and GTE, respectively. The consolidated amount of current and
deferred tax expense (benefit) of the group that filed the consolidated tax
return has been allocated and reflected in the accompanying financial
statements using the pro rata method.
In accordance with SFAS No. 109, ACCOUNTING FOR INCOME TAXES, the IWS
Product Line accounts for income taxes using the liability method. Deferred
tax assets and liabilities are determined based on differences between
financial reporting and income tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when
the differences are expected to reverse.
(3) ACQUISITION BY GENERAL DYNAMICS AND BASIS OF ACCOUNTING
On September 1, 1999, General Dynamics completed the acquisition of GTE
Government Systems Corporation, a subsidiary of GTE. The acquired company
was renamed as General Dynamics Government Systems Corporation, or GDGSC.
The acquisition was accounted as a purchase and goodwill in the amount of
$1 million was allocated and pushed down to the IWS Product Line using the
pro rata method based on estimates of the fair value of the acquired net
assets of the Predecessor. The push down of this goodwill and the other
fair value adjustments of the acquired net assets resulted in a new basis
of accounting as of September 1, 1999.
(4) PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 2000 and
1999:
2000 1999
Computer equipment $ 276,000 $ 169,000
Less--Accumulated depreciation 95,000 16,000
--------------- ---------------
$ 181,000 $ 153,000
=============== ===============
(5) TRANSACTIONS WITH PARENT
GDES operated as a reseller of the IWS Product Line's software products and
maintenance services to end users within certain commercial and government
organizations, including U.S. Defense Department agencies and the U.S.
Intelligence Community. Revenues derived from Parent reseller arrangements
included in the accompanying financial statements reflect a 20% reseller
discount on prices charged to the end customers. For the year ended
December 31, 2000 and the period from September 1, 1999 through December
31, 1999, revenues of $1,024,000 and $623,000, respectively, were derived
from GDES acting as a reseller of the IWS Product Line. For the period from
January 1, 1999 through August 31, 1999, the Predecessor derived
approximately $2,764,000 of its revenues from the Electronic Defense
Systems Division of GTE Government Systems Corporation, which acted as the
reseller of the Predecessor. Accounts receivable at December 31, 2000 and
1999 include approximately $485,000 and $488,000, respectively, from GDES.
(6) STOCK OPTION PLANS
The IWS Product Line and the Predecessor participated in the broad-based
stock option plans that covered certain employees of General Dynamics and
GTE, respectively. Each option granted under these plans conveys the right
to purchase shares of General Dynamics or, under the GTE plan, GTE common
stock at fair market value on the date of the grant. The option plans have
been accounted for by General Dynamics and GTE in accordance with APB
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES and, as such, no
compensation amount has been incurred that should be allocated to the IWS
Product Line or the Predecessor relative to the stock options granted.
(7) EMPLOYEE BENEFITS
Employees of the IWS Product Line and the Predecessor were eligible to
participate in the General Dynamics Corporation Savings and Stock
Investment Plan, a defined contribution plan established pursuant to
Section 401(k) of the Internal Revenue Code (the IRC). Employer matching
contributions charged to expense were approximately $56,000 and $12,000 for
the year ended December 31, 2000 and the period from September 1, 1999
through December 31, 1999, respectively.
Prior to September 1, 1999, the Predecessor participated in the employee
savings plan sponsored by GTE under Section 401(k) of the IRC. Matching
contributions charged to expense by the Predecessor during the period from
January 1, 1999 through August 31, 1999 were approximately $25,000.
The IWS Product Line's and Predecessor's employees also participated in
certain noncontributory defined benefit pension plans and other
postretirement benefit plans sponsored by General Dynamics and, prior to
September 1, 1999, by GTE. The benefits to be paid under these plans are
generally based on years of credited services and level of compensation.
(8) INCOME TAXES
The benefit for income taxes in the accompanying statements of operations
differs from the amounts calculated by applying the statutory federal
income tax rate of 35% due to the net effect of state income taxes. There
were no recorded amounts of tax effects of temporary differences that would
have given rise to any deferred income tax assets or deferred tax
liabilities at December 31, 2000 and 1999.
(9) COMMITMENTS AND CONTINGENCIES
From time to time, the IWS Product Line is subject to various legal
proceedings arising out of the ordinary course of its business. The IWS
Product line does not consider any of such proceedings, individually or in
the aggregate, to be material to its business or likely to result in a
material adverse effect on its results of operations or financial
condition.
(10) SUBSEQUENT EVENT
On March 27, 2001, GDES completed the sale of the IWS Product Line to
Ezenia for cash and common stock of Ezenia totaling approximately $21
million pursuant to an Asset Purchase Agreement dated as of December 28,
2000.