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EXHIBIT 99.2
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Performance Computing, Inc.:
We have audited the accompanying balance sheets of Performance Computing, Inc.
as of December 31, 1994 and 1995, and the related statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. 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, such financial statements present fairly, in all material
respects, the financial position of Performance Computing, Inc. as of December
31, 1994 and 1995, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.
Deloitte & Touche LLP
Costa Mesa, California
May 1, 1996
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PERFORMANCE COMPUTING, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1994 AND 1995
- -------------------------------------------------------------------------------
1994 1995
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 40,156 $ 45,352
Accounts receivable, net of allowances for
doubtful accounts of $178,647 (1994)
and $234,857 (1995) 43,732 190,985
Prepaid expenses and other current assets 33,162 18,785
-------- --------
Total current assets 117,050 255,122
EQUIPMENT AND IMPROVEMENTS, net (Note 2) 86,787 73,604
-------- --------
$203,837 $328,726
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 44,876 $ 58,478
Accrued payroll, taxes and benefits 48,765 133,176
Deferred tax liability (Note 4) 2,000 7,000
-------- --------
Total current liabilities 95,641 198,654
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY:
Common stock, no par value;
500 shares authorized
150 shares issued and outstanding 3,000 3,000
Retained earnings 105,196 127,072
-------- --------
Total stockholders' equity 108,196 130,072
-------- --------
$203,837 $328,726
======== ========
See notes to financial statements.
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PERFORMANCE COMPUTING, INC.
STATEMENTS OF OPERATIONS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1995
- ------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------
1993 1994 1995
---------- ---------- ----------
NET REVENUES $2,102,125 $2,424,931 $2,067,283
COSTS AND EXPENSES:
Cost of sales and services 1,803,312 1,871,789 944,260
Selling and marketing 159,116 218,375 349,374
Research and development 111,381 311,965 449,196
General and administrative 47,734 93,590 306,000
---------- ---------- ----------
Total costs and expenses 2,121,543 2,495,719 2,048,830
---------- ---------- ----------
OPERATING INCOME (LOSS) (19,418) (70,788) 18,453
OTHER INCOME, net 1,652 15,189 8,423
---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAX
EXPENSE (BENEFIT) (17,766) (55,599) 26,876
INCOME TAX EXPENSE (BENEFIT) (Note 4) (3,300) (8,300) 5,000
----------- ---------- ----------
NET INCOME (LOSS) $ (14,466) $ (47,299) $ 21,876
========== ========== ==========
See notes to financial statements.
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PERFORMANCE COMPUTING, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1995
- ------------------------------------------------------------------------------
COMMON STOCK
------------------ RETAINED
SHARES AMOUNT EARNINGS TOTAL
------- ------- --------- --------
BALANCE, January 1, 1993 150 $3,000 $166,961 $169,961
Net loss (14,466) (14,466)
---- ------ -------- --------
BALANCE, December 31, 1993 150 3,000 152,495 155,495
Net loss (47,299) (47,299)
---- ------ -------- --------
BALANCE, December 31, 1994 150 3,000 105,196 108,196
Net income 21,876 21,876
---- ------ -------- --------
BALANCE, December 31, 1995 150 $3,000 $127,072 $130,072
=== ====== ======== ========
See notes to financial statements.
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PERFORMANCE COMPUTING, INC.
STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1995
- ------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------
1993 1994 1995
-------- -------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (14,466) $(47,299) $ 21,876
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 21,930 40,022 44,147
Deferred income taxes (9,000) (10,000) 5,000
Provision for doubtful accounts receivable 61,093 74,774 56,210
Change in:
Accounts receivable, net (76,383) 54,446 (203,463)
Prepaid expenses and other current assets (6,931) (20,512) 14,377
Accounts payable and accrued liabilities 75,914 (18,242) 98,013
--------- -------- ---------
Net cash provided by operating activities 52,157 73,189 36,160
CASH FLOWS FROM INVESTING ACTIVITIES -
Capital expenditures (51,168) (66,217) (30,964)
--------- -------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 989 6,972 5,196
CASH AND CASH EQUIVALENTS, beginning of year 32,195 33,184 40,156
--------- -------- ---------
CASH AND CASH EQUIVALENTS, end of year $ 33,184 $ 40,156 $ 45,352
========= ======== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION-
Cash paid during the year for income taxes $ 8,400 $ 4,000 $ -
========= ======== =========
See notes to financial statements.
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PERFORMANCE COMPUTING, INC.
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1995
- ------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business - Performance Computing, Inc. (the Company)
provides customized software development services on a contract basis.
The Company also develops, manufactures and distributes personal
computer-based video teleconferencing products. Substantially all of
the Company's revenues through December 31, 1995 relate to contract
services.
Cash Equivalents - Cash equivalents are considered to be highly-liquid
investments with initial maturities of three months or less.
Accounts Receivable - The Company sells its products and services
principally in the United States. The Company performs ongoing credit
evaluations of its customers and generally does not require collateral.
The Company maintains reserves for potential credit losses, and those
losses have been within management's expectations.
Equipment and Improvements - Equipment and improvements are stated at
cost. Depreciation is computed using the straight-line method based on
the estimated useful lives of the assets, generally ranging from three
to seven years. Leasehold improvements are amortized using the
straight-line method over the shorter of the estimated useful life of
the asset or the lease term.
Revenue Recognition - The Company recognizes revenues from software
development contracts as services are performed. The Company recognizes
revenues from video teleconferencing products and technology as such
products are shipped or as licensing agreements are entered into with
customers.
Income Taxes - The Company accounts for income taxes under Statement of
Financial Accounting Standards No. 109 (SFAS 109), Accounting for Income
Taxes. This statement requires the recognition of deferred tax assets
and liabilities for the future consequences of events that have been
recognized in the Company's financial statements or tax returns. The
measurement of the deferred items is based on enacted tax laws. In the
event the future consequences of differences between financial reporting
bases and the tax bases of the Company's assets and liabilities result
in a deferred tax asset, SFAS 109 requires an evaluation of the
probability of being able to realize the future benefits indicated by
such asset. A valuation allowance related to a deferred tax asset is
recorded when it is more likely than not that some portion or all of the
deferred tax asset will not be realized.
Software Development Costs - Software development costs incurred in the
research and development of new software products and enhancements to
existing software products are expensed as incurred until technological
feasibility has been established. The Company considers technological
feasibility to be established when all planning, designing, coding and
testing has been completed according to design specifications.
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PERFORMANCE COMPUTING, INC.
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1995 (CONTINUED)
- ------------------------------------------------------------------------------
After technological feasibility is established, any additional costs are
capitalized. Through December 31, 1995, software has been substantially
completed concurrently with the establishment of technological
feasibility, and accordingly, no costs have been capitalized to date.
Fair Value of Financial Instruments - Pursuant to SFAS No. 107,
Disclosures about Fair Value of Financial Instruments, the Company is
required to estimate the fair value of all financial instruments
included on its balance sheet at December 31, 1995. The Company
considers the carrying value of such amounts in the financial statements
to approximate their fair value due to: (1) the relatively short period
of time between origination of the instruments and their expected
realization, (2) interest rates which approximate current market rates,
or (3) the overall immateriality of the amounts.
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 years. Actual
results could differ from those estimates.
2. EQUIPMENT AND IMPROVEMENTS
Equipment and improvements consist of the following:
DECEMBER 31,
-----------------------
1994 1995
-------- ---------
Machinery and equipment $140,045 $ 171,009
Vehicles 27,270 27,270
Office furniture and fixtures 2,400 2,400
--------- ---------
169,715 200,679
Less accumulated depreciation and amortization (82,928) (127,075)
--------- ---------
$ 86,787 $ 73,604
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PERFORMANCE COMPUTING, INC.
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1995 (CONTINUED)
- ------------------------------------------------------------------------------
3. MAJOR CUSTOMERS
Sales to individual customers or customers under common control which
amounted to more than 10% of the Company's net revenues in the year
indicated were as follows:
DECEMBER 31,
----------------------------------------
CUSTOMER 1993 1994 1995
-------- ---------- ---------- ----------
1 $1,164,008 $1,037,239 $ 293,495
2 348,998 574,714 321,206
3 396,436
4 214,963
---------- ---------- ----------
$1,513,006 $1,611,953 $1,226,100
========== ========== ==========
The Company has historically derived a significant portion of its
revenues from a relatively small number of customers. A decision by a
significant customer to substantially decrease or delay purchases from
the Company or the Company's inability to collect receivables from these
customers could have a material adverse effect on the Company's
financial condition and results of operations.
4. INCOME TAXES
A summary of income tax expense (benefit) is as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------
1993 1994 1995
------- -------- ------
Current $ 5,700 $ 1,700 $ -
Deferred (9,000) (10,000) 5,000
------- -------- ------
$(3,300) $ (8,300) $5,000
======= ======== ======
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PERFORMANCE COMPUTING, INC.
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1995 (CONTINUED)
- ------------------------------------------------------------------------------
A reconciliation of the effective tax rate from the federal statutory
tax rate (35%) is as follows:
DECEMBER 31,
------------------------------------
1993 1994 1995
------- ------- --------
Income tax (benefit) expense
at federal statutory rate $(6,200) $(19,500) $ 9,400
Surtax exemption and other 2,900 11,200 (4,400)
------- -------- --------
$(3,300) $ (8,300) $ 5,000
======= ======== ========
The Company's net deferred tax liability consists primarily of accrual
to cash differences at December 31, 1994 and 1995.
5. COMMITMENTS AND CONTINGENCIES
Leases - The Company has a noncancelable operating lease for its
operating facility. Future minimum rental commitments consist of the
following:
Year ending December 31:
1996 $48,991
1997 8,165
-------
$57,156
=======
Total rent expense was $19,875, $47,514 and $50,559 for the years ended
December 31, 1993, 1994 and 1995, respectively.
6. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) Plan (the Plan) for all employees meeting
minimum service requirements. There are no Company contributions to the
Plan.
7. SUBSEQUENT EVENTS
Effective March 14, 1996, the Company's stockholders entered into an
agreement to sell all of the outstanding common shares of Performance
Computing, Inc. (PCI) to Smith Micro Software, Inc. (Smith Micro).
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