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EXHIBIT 99.1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
AirSoft, Inc.:
We have audited the accompanying balance sheets of AirSoft, Inc. as of December
31, 1995 and 1994, 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
statements 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 AirSoft, Inc. as of December 31, 1995 and
1994, 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.
/s/ Deloitte & Touche, LLP
March 28, 1996
(June 16, 1996 as to Note 8)
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AIRSOFT, INC.
BALANCE SHEETS
DECEMBER 31,
-----------------------------
1995 1994
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents .......................................... $ 849,767 $ 2,638,010
Accounts receivable (no allowance for
doubtful accounts in 1995 and 1994) .............................. 2,308,883 31,189
Prepaid expenses and other current assets ........................... 14,713 22,030
----------- -----------
Total current assets ........................................... 3,173,363 2,691,229
Property and equipment, net .......................................... 111,169 80,595
Other assets ......................................................... -- 23,453
----------- -----------
Total ................................................................ $ 3,284,532 $ 2,795,277
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................... $ 80,774 $ 118,268
Accrued expenses ................................................... 232,067 43,045
Deferred revenue ................................................... 2,305,328 --
----------- -----------
Total current liabilities .................................... 2,618,169 161,313
----------- -----------
Stockholders' equity:
Convertible preferred stock - $.001 par value;
authorized, 7,000,000 shares; 6,739,514 shares
outstanding, liquidation value of $4,544,050 ...................... 4,486,127 4,486,127
Common stock - $.001 par value; authorized,
23,000,000 shares; 5,012,500 and 5,000,000
shares outstanding in 1995 and 1994, respectively ................ 486,667 481,667
Accumulated deficit ................................................ (4,306,431) (2,333,830)
----------- -----------
Total stockholders' equity ................................... 666,363 2,633,964
----------- -----------
Total ................................................................ $ 3,284,532 $ 2,795,277
=========== ===========
See notes to financial statements.
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AIRSOFT, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
-------------------------------------------
1995 1994 1993
---------- ---------- ---------
Product sales.......................... $ 859,736 $ 86,720 $ 3,361
---------- ---------- ---------
Costs and expenses:
Cost of sales....................... 35,327 15,632 -
Research and development............ 1,176,450 773,406 280,989
Sales and marketing................. 1,050,930 873,172 85,634
General and administrative.......... 635,922 301,569 129,681
---------- ---------- ---------
Total costs and expenses...... 2,898,629 1,963,779 496,304
---------- ---------- ---------
Operating loss......................... (2,038,893) (1,877,059) (492,943)
Other income........................... 66,292 36,172 -
---------- ---------- ---------
Net loss............................... ($1,972,601) ($1,840,887) ($492,943)
========== ========== =========
Net loss per common share.............. $ (0.39) $ (0.37) $ (0.12)
========== ========== =========
Shares used in computation............. 5,012,500 5,000,000 4,265,753
---------- ---------- ---------
See notes to financial statements.
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AIRSOFT, INC.
- -------------------------------------------------------------------------------
STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1995, 1994 and 1993
Convertible
Preferred Stock Common Stock
-------------------------- ---------------------------
Shares Amount Shares Amount
---------- ----------- ---------- ----------
Issuance of common stock at $.01 per share
for technology and notes................................. 3,166,667 $ 31,667
Issuance of common stock at $.15 to $.40
per share for cash and notes............................. 1,833,333 450,000
Notes receivable, exchanged for consulting services........
Net loss...................................................
---------- ----------- --------- ---------
BALANCES, December 31, 1993................................ -- -- 5,000,000 481,667
Issuance of Series A convertible
preferred stock at $.5286 per share for
cash, net of issuance costs of $23,033................... 2,885,000 $1,501,978
Issuance of Series B convertible
preferred stock at $.7822 per share for
cash, net of issuance costs of $30,853................... 3,854,514 2,984,149
Collection of notes receivable.............................
Net loss...................................................
---------- ----------- --------- ---------
BALANCES, December 31, 1994................................ 6,739,514 4,486,127 5,000,000 481,667
Issuance of common stock at $.40 per share for cash........ 12,500 5,000
Net loss...................................................
---------- ----------- --------- ---------
BALANCES, December 31, 1995................................ 6,739,514 $4,486,127 5,012,500 $486,667
========== =========== ========= =========
Notes
Receivable
from Accumulated
Stockholders Deficit Total
------------ ------------ -----
Issuance of common stock at $.01 per share
for technology and notes................................. $ (7,619) $ 24,048
Issuance of common stock at $.15 to $.40
per share for cash and notes............................. (62,272) 125,000
Notes receivable, exchanged for consulting services........ 6,352 6,352
Net loss................................................... $ (492,943) (492,943)
--------- ----------- -----------
BALANCES, December 31, 1993................................ (63,539) (492,943) (74,815)
Issuance of Series A convertible
preferred stock at $.5286 per share for
cash, net of issuance costs of $23,033................... 1,501,978
Issuance of Series B convertible
preferred stock at $.7822 per share for
cash, net of issuance costs of $30,853................... 2,984,149
Collection of notes receivable............................. 63,539 63,539
Net loss................................................... (1,840,887) (1,840,887)
--------- ----------- -----------
BALANCES, December 31, 1994................................ -- (2,333,830) 2,633,964
Issuance of common stock at $.40 per share for cash........ 5,000
Net loss................................................... (1,972,601) (1,972,601)
--------- ----------- -----------
BALANCES, December 31, 1995................................ $ -- $(4,306,431) $ 666,363
========= =========== ===========
See notes to financial statements.
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AIRSOFT, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-------------------------------------------
1995 1994 1993
----------- ----------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................ $(1,972,601) $(1,840,887) $(492,943)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation................................. 51,290 21,533 5,233
Loss on disposal of property................. 28,785 -- --
Technology acquired through issuance of
common stock expensed..................... -- -- 24,048
Notes receivable exchanged for consulting
services.................................. -- -- 6,352
Changes in assets and liabilities:
Accounts receivable....................... (2,277,694) (31,189) --
Prepaid expenses and other assets......... 30,770 (32,015) (13,468)
Accounts payable.......................... (37,494) 66,160 52,108
Accrued expenses.......................... 189,022 (38,892) 81,937
Deferred revenue.......................... 2,305,328 -- --
----------- ------------ ---------
Net cash used in operating activities.. (1,682,594) (1,855,290) (336,733)
----------- ------------ ---------
CASH FLOWS FROM INVESTING ACTIVITIES --
Purchases of property and equipment............. (110,649) (71,541) (35,820)
----------- ------------ ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock.......... 5,000 -- 387,728
Proceeds from issuance of preferred stock....... -- 4,486,127 --
Collection of notes receivable.................. -- 63,539 --
----------- ------------ ---------
Net cash provided by financing
activities.......................... 5,000 4,549,666 387,728
----------- ------------ ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS..................................... (1,788,243) 2,622,835 15,175
CASH AND CASH EQUIVALENTS:
Beginning of year............................... 2,638,010 15,175 --
----------- ----------- ---------
End of year..................................... $ 849,767 $ 2,638,010 $ 15,175
=========== =========== =========
NONCASH FINANCING ACTIVITIES --
Issuance of common stock for notes receivable... $ -- $ -- $ 69,891
=========== =========== =========
See notes to financial statements.
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AIRSOFT, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1. FORMATION AND BUSINESS AND NATURE OF OPERATIONS
The Company was incorporated on January 5, 1993. The Company develops,
markets, sells and supports remote access acceleration software
(Powerburst) for dial-in computer system networks. Powerburst,
accounting for the majority of the Company's revenue to date,
accelerates a wide range of applications, including e-mail products,
file-system-based databases, spreadsheets and word processors, over
remote node servers to help customers increase productivity and lower
telecommunication and remote node equipment costs. The principal market
for Powerburst has been North America.
2. SIGNIFICANT ACCOUNTING POLICIES
Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that effect reported amounts of assets,
liabilities, revenues and expenses as of the dates and for the periods
presented. Actual results could differ from those estimates.
Concentrations of Credit Risk - Financial instruments which potentially
subject the Company to concentration of credit risk consist of cash and
cash equivalents and accounts receivable. Cash and cash equivalent
balances consist of deposits and money market funds held with local U.S.
commercial banks.
The Company performs credit evaluations of its customers and generally
does not require collateral on accounts receivable as the majority of
the Company's customers are large, well established U.S. companies. One
customer accounted for 97% and 61% of the accounts receivable balance
and product sales, respectively, at December 31, 1995. Additionally, one
other customer accounted for approximately 21% of product sales at
December 31, 1995. At December 31, 1994, another customer represented
55% and 20% of accounts receivable and product sales, respectively.
Property and Equipment - Property and equipment are stated at cost and
depreciated on a straight-line basis over the estimated useful lives of
the related assets, generally three years.
Revenue Recognition - The Company recognizes product sales upon shipment
provided that any remaining obligations are insignificant and collection
is probable. Insignificant vendor obligations are accrued and charged to
cost of product sales. Revenue from customer support contracts and from
contracts with customer support bundled with the software license is
recognized ratably over the contract period, which is typically one
year. Unearned amounts are recorded as deferred revenue.
Research and Development - Development costs incurred for the research
and development of new software products and enhancements to existing
software products are expensed as incurred until technological
feasibility is established. After technological feasibility is
established, any additional costs are capitalized. Such costs are stated
at the lower of cost or net realizable value. Since net realizable value
and economic life of the Company's products are not currently
determinable, all development costs have been expensed as incurred to
date.
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Income Taxes - Deferred taxes are accounted for using the asset and
liability approach. Deferred income taxes reflect the tax effects of
temporary differences between the carrying amount of assets and
liabilities for financial reporting purposes and the amounts used for
income tax purposes, as well as tax credit carryforwards, net of
valuation allowance to reduce deferred tax assets to amounts that are
more likely than not to be realizable.
Fair Value of Financial Instruments - Statement of Financial Accounting
Standards (SFAS) No. 107, "Disclosures about Fair Value of Financial
Instruments," requires the disclosure of fair value information about
both on and off balance sheet financial instruments where it is
practicable to estimate the value. The Company believes that the
carrying amount reported in the balance sheet for financial instruments
at December 31, 1995 approximates fair value.
Recently Issued Accounting Pronouncements - The Company is required to
adopt SFAS No. 123, "Accounting for Stock-Based Compensation," in fiscal
1996. SFAS No. 123 establishes accounting and disclosure requirements
using a fair value method of accounting for stock-based employee
compensation plans. Under SFAS No. 123, the Company may either adopt the
new fair value based accounting method or continue the intrinsic value
based method and provide pro forma disclosures of net income as if the
accounting provisions requirements of SFAS No. 123 had been adopted. The
Company plans to adopt only the disclosure requirements of SFAS No. 123;
therefore, such adoption will have no effect on the Company's
consolidated operations or cash flows.
Reclassifications - Certain reclassifications have been made to the 1994
and 1993 amounts to conform with the 1995 presentation.
Net loss per common share is computed using the weighted average number
of common shares outstanding. Because there was a net loss in each year
presented, common stock equivalents (none in 1993, 3,684,022 in 1994 and
6,854,514 in 1995) were not included in the calculation of net loss per
share as their impact would be anti-dilutive.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
1995 1994
------------ ------------
Furniture and fixtures......................... $ 31,899 $ 13,289
Office equipment............................... 157,326 94,072
-------- --------
189,225 107,361
Accumulated depreciation....................... (78,056) (26,766)
-------- --------
Property and equipment, net.................... $111,169 $ 80,595
======== ========
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4. STOCKHOLDERS' EQUITY
Convertible Preferred Stock
Convertible preferred stock consists of the following:
Shares
---------------------------
Designated Outstanding Amount
---------- ----------- ----------
Series A 2,885,000 2,885,000 $1,501,978
Series B 4,115,000 3,854,514 2,984,149
---------- ----------- ----------
Total 7,000,000 6,739,514 $4,486,127
========== =========== ==========
Significant terms of the convertible preferred stock are as follows:
* Each share is convertible into one share of common stock. Such
shares will be converted automatically upon an underwritten
public offering of the Company's common stock meeting certain
criteria.
* Each share has the right to one vote for each share of common stock
into which such stock is convertible. Preferred shareholders are
entitled to elect one member of the Company's directors.
* In the event of liquidation, dissolution or winding up of the Company,
shareholders are entitled to receive $.5286 per share for Series A
and $.7822 per share for Series B (subject to adjustment for events
of dilution) plus all declared but unpaid dividends, prior to any
distribution to the common shareholders (no dividends have been
declared through December 31, 1995).
* Dividends may be declared at the discretion of the Board of Directors
and are noncumulative. Dividends of $.04 per share for Series A
and $.055 per share for Series B must be declared and paid prior
to any dividends on common stock.
Common Stock
The Company has the right to repurchase 782,807 shares of common stock,
at the original purchase price, previously sold to employees and directors
under stock purchase agreements. This right expires over a four-year period.
At December 31, 1995, the Company had reserved shares of common stock for
issuance as follows:
Conversion of outstanding preferred stock.............. 6,739,514
Issuance under stock option plan....................... 2,030,063
---------
Total.................................................. 8,769,577
=========
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Stock Option Plan
The Company's stock option plan authorized the issuance of incentive stock
options (ISO) and nonstatutory stock options (NSO) to purchase up to 1,692,563
shares of common stock. ISO's may be granted at prices not less than the fair
market value at the date of grant (85% of fair market value for an NSO), or,
110% in the case of a shareholder owning ten percent or more of the Company's
outstanding stock. Options become exercisable in installments (generally
ratably over four years) and expire ten years from the date of grant.
Activity under this plan is as follows:
Outstanding Stock Options
Outstanding
Stock Options
------------------------
Shares Number Price
Available of Shares Per Share
--------- --------- ----------
Reserved for issuance .............................. 851,311
Granted ............................................ (120,000) 120,000 $.30
-------- ---------
Balances, December 31, 1993 ........................ 731,311 120,000 .30
Additional shares reserved for issuance ............ 841,252
Granted ............................................ (638,500) 638,500 .40
Canceled ........................................... 60,000 (60,000) .40
-------- ---------
Balances, December 31, 1994 ........................ 994,063 698,500 .30 - .40
-------- ---------
Granted ............................................ (845,872) 845,872 .40
Exercised .......................................... -- (12,500) .40
Canceled ........................................... 180,000 (180,000) .40
-------- ---------
Balances, December 31, 1995 ........................ 328,191 1,351,872 $.30 - .40
======== ========= ==========
At December 31, 1995, options to purchase 176,073 shares of common stock were
exercisable.
Other Stock Options
During 1993, the Company granted to certain key employees options to purchase
650,000 shares of common stock at an exercise price of $.30 per share. Such
options vest over a period of four years. During 1994, 300,000 options were
canceled. Of the remaining 350,000 options outstanding 298,958 were vested at
December 31, 1995.
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5. OPERATING LEASES
The Company leases its facility under an operating lease which expires
in June 1996. The Company also leases various equipment under operating
leases with terms expiring through March 1998. Following is a schedule
of future minimum rental payments under noncancelable operating leases
at December 31, 1995.
Years Ending
December 31,
------------
1996...................................... $44,305
1997...................................... 1,880
1998...................................... 184
-------
Total......................................... $46,369
=======
Rent expense under operating leases was $85,222, $75,942 and $22,192 for
the years ended December 31, 1995, 1994 and 1993, respectively.
6. INCOME TAXES
Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes, and (b) operating losses and tax credit carryforwards.
The tax effects of significant items consisting of the Company's
deferred taxes are as follows:
DECEMBER 31,
-------------------------
1995 1994
----------- ---------
Deferred tax assets:
Net operating loss carryforwards.... $ 1,482,000 $ 836,000
Capitalized research and
development expenses............. 88,000 42,000
Research and development credits.... 110,000 80,000
Other............................... 17,000 9,000
----------- ---------
$ 1,697,000 967,000
Valuation allowance................... (1,697,000) (967,000)
----------- ---------
Total................................. $ -- $ --
=========== =========
The Company provided a valuation allowance in full against the net
deferred income tax assets at December 31, 1995 and 1994 due to
uncertainties regarding the Company's ability to generate sufficient
taxable income to utilize the deferred tax assets. The net increase in
the total valuation allowance for the years ended December 31, 1995 and
1994 was $730,000 and $797,000, respectively.
At December 31, 1995, the Company had federal net operating loss
carryforwards of approximately $4,075,000 which expire through 2010. In
addition, the Company had California net operating loss carryforwards
of approximately $1,600,000 which expire through 2000. The extent to
which the loss carryforwards can be used to offset future taxable income
may be limited in the event of an "ownership change" as defined by the
Internal Revenue Code.
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7. BENEFIT PLAN
Effective January 1, 1995, the Company adopted a 401(k) plan (the
"Plan") to provide retirement benefits for substantially all of its
employees. Each participant in the Plan may elect to contribute up to
15% of their annual compensation to the Plan, subject to statutory
limits. The Company, at its discretion, may make annual contributions to
the Plan. The Company has made no contributions to the Plan through
December 31, 1995.
8. SUBSEQUENT EVENT
On June 17, 1996, all shares of common and preferred stock of the
Company were acquired by Shiva Corporation (Shiva) in exchange for
691,587 shares of Shiva common stock. Subsequent to this date, the
Company is a wholly-owned subsidiary of Shiva.
* * * * *
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