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Exhibit 99.1
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Promptus Communications, Inc.:
We have audited the accompanying balance sheet of the Network Access Card (NAC)
Business (the Company) of Promptus Communications, Inc. (see Note 1)(a Rhode
Island corporation and majority-owned subsidiary of GTI Corporation) as of
December 31, 1996, and the related statements of operations, intercompany
investment 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.
The financial statements referred to above have been prepared in connection with
the proposed acquisition of certain assets and liabilities of the Company by
VideoServe, Inc., as described in Note 1 to the financial statements. In the
event such sale is not consummated, the Company is dependent on financial
support from GTI Corporation in order to continue operating as a going concern.
The financial statements do not include any adjustments that might result should
the Company not be acquired or should the Company be unable to continue as a
going concern.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the NAC Business of Promptus
Communications, Inc. as of December 31, 1996, and the results of its operations
and its cash flows for year then ended, in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
Boston, Massachusetts
February 12, 1997
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PROMPTUS COMMUNICATIONS, INC.
NETWORK ACCESS CARD BUSINESS
BALANCE SHEET--DECEMBER 31, 1996
ASSETS
Current Assets:
Accounts receivable, net of reserve of approximately $5,000 $2,509,311
Inventories 1,225,983
Prepaid expenses 22,141
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Total current assets 3,757,435
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PROPERTY AND EQUIPMENT, AT COST:
Equipment 1,055,221
Software 299,512
Furniture and fixtures 71,168
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1,425,901
Less--Accumulated depreciation 585,337
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840,564
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OTHER ASSETS, NET OF ACCUMULATED AMORTIZATION OF
APPROXIMATELY $8,000 17,083
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$4,615,082
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LIABILITIES AND INTERCOMPANY INVESTMENT
CURRENT LIABILITIES:
Accounts payable $ 688,773
Accrued expenses 169,029
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Total current liabilities 857,802
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COMMITMENTS (Note 2)
INTERCOMPANY INVESTMENT 3,757,280
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$4,615,082
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The accompanying notes are an integral part of these financial statements.
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PROMPTUS COMMUNICATIONS, INC.
NETWORK ACCESS CARD BUSINESS
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
NET SALES $11,900,764
COST OF SALES 5,779,371
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Gross profit 6,121,393
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OPERATING EXPENSES:
Sales and marketing 2,506,505
Research, development and engineering 2,272,403
General and administrative 986,819
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Total operating expenses 5,765,727
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Income from operations 355,666
INTEREST EXPENSE 49,712
-----------
Income before provision for income taxes 305,954
PROVISION FOR INCOME TAXES 162,279
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Net income $ 143,675
===========
The accompanying notes are an integral part of these financial statements.
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PROMPTUS COMMUNICATIONS, INC.
NETWORK ACCESS CARD BUSINESS
STATEMENT OF INTERCOMPANY INVESTMENT
FOR THE YEAR ENDED DECEMBER 31, 1996
BALANCE, DECEMBER 31, 1995 $2,528,250
Net income 143,675
Advances from Parent Company 1,085,355
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BALANCE, DECEMBER 31, 1996 $3,757,280
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The accompanying notes are an integral part of these financial statements.
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PROMPTUS COMMUNICATIONS, INC.
NETWORK ACCESS CARD BUSINESS
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 143,675
Adjustments to reconcile net income to net cash used in operating activities--
Depreciation and amortization 91,646
Changes in current assets and current liabilities--
Accounts receivable (849,107)
Inventories (102,116)
Prepaid expenses 60,548
Accounts payable (84,825)
Accounts expenses 36,429
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Net cash used in operating activities (703,750)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (356,605)
Increase in other assets (25,000)
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Net cash used in investing activities (381,605)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from Parent Company 1,085,355
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Net cash provided by financing activities 1,085,355
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NET CHANGE IN CASH $ -
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The accompanying notes are an integral part of these financial statements.
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PROMPTUS COMMUNICATIONS, INC.
NETWORK ACCESS CARD BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
The Network Access Card (NAC) Business (the Company) is a segment of
Promptus Communications, Inc. (Promptus), which was incorporated on
February 13, 1989 to develop and market a family of products that integrate
the latest advances in communications technology to provide cost-effective
communications solutions utilizing switched digital networks and services.
Promptus is a majority-owned subsidiary of GTI Corporation (Parent
Company), which owns approximately 72% of Promptus.
The Company is subject to a number of risks similar to other emerging
technology-based companies. Principal among these risks are the successful
marketing of its products, competition from larger companies, the ability
to obtain adequate financing to fund future operations and dependence on
key individuals.
The accompanying financial statements were prepared in connection with the
proposed acquisition of certain assets and liabilities of the Company by
VideoServer, Inc. (VideoServer). In the event such sale is not consummated,
the Company is dependent on financial support from GTI Corporation in order
to continue operating as a going concern. The financial statements do not
include any adjustments that might result should the Company not be
acquired or should the Company be unable to continue as a going concern.
The Company has entered into an agreement with VideoServer to sell certain
of its assets and liabilities for a purchase price of $14,500,000 in cash
and $7,500,000 payable in shares of VideoServer common stock. The Company
expects this transaction to be consummated in March 1997.
The balance sheet reflects the allocation of certain assets and liabilities
relating to the NAC Business to be acquired by VideoServer in connection
with the proposed acquisition referred to above.
The statement of operations reflects net sales attributable to the Company
based on a detailed analysis of invoices for sales during the year. The
statement of operations also reflects allocations for the costs of shared
facilities and certain administrative services. Such costs and expenses
have been allocated to the Company based on actual usage or other methods
that approximate actual usage. Management believes that the allocation
methods are reasonable and that allocated net sales, costs and expenses
approximate what such amounts would have been if the Company had operated
on a stand-alone basis.
The accompanying statement of intercompany investment reflects the
resulting equity of the Company as of December 31, 1995, after all assets
and liabilities of the Company were carved out of the Promptus consolidated
balance sheet. The advances from Parent Company in the accompanying
statement of intercompany investment reflect amounts that would have been
advanced by Parent Company during the year to fund current operating and
investing activities if the Company had operated on a stand-alone basis.
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PROMPTUS COMMUNICATIONS, INC.
NETWORK ACCESS CARD BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Continued)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
The financial information included herein may not necessarily reflect the
financial position, results of operations or cash flows of the Company in
the future or what the financial position, results of operations or cash
flows would have been had it been a separate, stand-alone company
throughout the year presented.
The accompanying financial statements reflect the application of certain
accounting policies as described in this note and elsewhere in the notes to
financial statements.
(a) 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.
(b) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market and consist of the following at December 31, 1996:
Raw materials $ 112, 901
Work-in-process 53, 338
Finished goods 1,059,744
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$1,225,983
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Work-in-process and finished goods inventories include materials,
subassembly costs and manufacturing overhead.
(c) Depreciation and Amortization
The Company provides for depreciation using the straight-line method
by charges to operations in amounts that allocate the cost of the
assets over their estimated useful lives as follows:
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PROMPTUS COMMUNICATIONS, INC.
NETWORK ACCESS CARD BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Continued)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
(c) Depreciation and Amortization (Continued)
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
Equipment 1-1/2 - 5 Years
Software 5 Years
Furniture and fixtures 5 Years
Organization expenses, which are included in other assets, are being
amortized using the straight-line method over five years.
(d) Asset Carrying Values
The Company applies Statement of Financial Accounting Standards (SFAS)
No.121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets To Be Disposed Of. SFAS No. 121 requires the
Company to continually evaluate whether events and circumstances have
occurred that indicate that the estimated remaining useful life of
long-lived assets may warrant revision or that the carrying value of
these assets may be impaired. To compute whether assets have been
impaired, the estimated gross cash flows for the estimated remaining
useful life of the assets are compared to the carrying value. To the
extent that the gross cash flows are less than the carrying value, the
assets are written down to the estimated fair value of the asset. The
application of this standard did not have a material effect on the
Company's financial position or results of operations.
(e) Revenue Recognition
Revenue is recognized upon product shipment. Revenue on units shipped
for evaluation are recognized upon customer acceptance at the
completion of the evaluation period.
(f) Income Taxes
The Company applies the provisions of SFAS No. 109, Accounting for
Income Taxes. Under the liability method specified by SFAS No. 109, a
deferred tax asset or liability is determined based on the difference
between the financial statement and tax bases of assets and
liabilities, as measured by the enacted tax rates assumed to be in
effect when these differences reverse.
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PROMPTUS COMMUNICATIONS, INC.
NETWORK ACCESS CARD BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Continued)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
(f) Income Taxes (Continued)
The Company's 1996 operations will be included in the income tax
returns of Promptus, a C Corporation that incurred a loss in 1996 for
both book and tax purposes. The provision reflected in the
accompanying statement of operations was calculated as if the Company
had operated on a stand-alone basis during the year and applies the
principles of SFAS No. 109. The Company has included its income tax
liability as a component of proceeds from Parent Company in the
accompanying statement of intercompany investment.
(g) Software Development Costs
The Company capitalizes certain software development costs in
accordance with SFAS No. 86, Accounting for the Costs of Computer
Software To Be Sold, Leased or Otherwise Marketed. The Company
capitalized software development costs of approximately $25,000 in
1996, which are included in other assets in the accompanying balance
sheet. The Company amortizes such costs over the shorter of three
years or the product's expected life. Amortization of capitalized
software development costs charged to operations was approximately
$8,000 in 1996.
(2) LEASE COMMITMENTS
The accompanying statement of operations includes an allocation of expense
relating to certain leases (primarily facility leases) to be assumed by the
remaining segment of Promptus upon the closing of the proposed acquisition
referred to in Note 1.
In connection with the proposed acquisition, VideoServer has agreed to the
assumption of certain operating and capital leases from Promptus. Future
minimum rental commitments under the leases to be assumed by VideoServer as
of December 31, 1996 are as follows:
YEAR AMOUNT
1997 $ 49,119
1998 48,921
1999 47,987
2000 19,959
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$165,986
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PROMPTUS COMMUNICATIONS, INC.
NETWORK ACCESS CARD BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Continued)
(3) SIGNIFICANT CUSTOMERS
During 1996, the Company had two customers that comprised approximately 57%
of total sales. Sales to VideoServer comprised approximately 19% of total
sales during 1996. The same two customers accounted for approximately
$712,400 of total accounts receivable as of December 31, 1996. VideoServer
owed the Company approximately $575,700 as of December 31, 1996.
(4) EMPLOYEE SAVINGS AND INVESTMENT PLAN
The Company participates in the Parent Company's 401(k) Plan (the Plan).
The Plan covers all employees who have met certain eligibility
requirements, as defined, and allows for voluntary contributions for
eligible employees.
The Company, in its discretion, may match employee contributions, which are
limited under the Internal Revenue Code. The Company may also make
discretionary contributions out of current or accumulated net profits.
Company contributions vest over five years. During 1996, the Company
contributed approximately $55,000 under the matching feature of the Plan.
The Company did not make any discretionary contributions to the Plan out of
current or accumulated net profits during 1996.