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Exhibit 99.1
xVault, Inc.
Financial Statements
December 31, 1999
(With Independent Auditors' Report Thereon)
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INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
xVault, Inc.:
We have audited the accompanying balance sheet of xVault, Inc. (the Company) as
of December 31, 1999, and the related statement of operations, stockholders'
deficit, and cash flows for the period from January 12, 1999 (inception) to
December 31, 1999. 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.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of xVault, Inc. as of December
31, 1999, and the results of its operations and its cash flows for the period
from January 12, 1999 (inception) to December 31, 1999 in conformity with
generally accepted accounting principles.
June 2, 2000 KPMG LLP
McLean, Virginia
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xVault, Inc.
Balance Sheet
December 31, 1999
<TABLE>
<S> <C>
ASSETS
Current assets
Cash and cash equivalents $ 45,195
Certificate of deposit 53,820
Prepaid expenses 9,750
-------------
Total current assets 108,765
Property and equipment, net 69,182
------------
Total assets $ 177,947
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable $ 75,965
Accrued compensation 13,000
Deferred revenue 18,596
------------
Total current liabilities 107,561
Redeemable common stock, $0.01 par value; 1,552,972 shares issued
and outstanding; redeemable at approximately $0.32 per share 318,359
Stockholders' deficit
Common stock, $0.01 par value; 15,000,000 shares authorized,
8,000,160 shares issued and outstanding 80,002
Additional paid-in capital 714,438
Accumulated deficit (1,042,413)
------------
Total stockholders' deficit (247,973)
------------
Commitments and contingencies (notes 5 and 6)
Total liabilities and stockholders' deficit $ 177,947
============
</TABLE>
See accompanying Notes to Financial Statements.
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xVault, Inc.
Statement of Operations
Period from January 12, 1999 (inception) to December 31, 1999
<TABLE>
<S> <C>
Revenue - software sales $ 82,258
Cost of revenue (83,640)
-----------
Gross loss (1,382)
Operating expenses
Sales and marketing (343,802)
Research and development (567,613)
General and administrative (130,697)
-----------
Total operating expenses (1,042,112)
-----------
Loss from operations (1,043,494)
Interest income 1,081
-----------
Net loss $(1,042,413)
===========
</TABLE>
See accompanying Notes to Financial Statements.
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xVault, Inc.
Statement of Stockholders' Deficit
Period from January 12, 1999 (inception) to December 31, 1999
<TABLE>
<CAPTION>
Additional
Common Stock paid-in Accumulated
Shares Amount capital deficit Total
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 12, 1999 (inception) - $ - $ - $ - $ -
Issuance of 6,496,800 shares of common stock for assets
contributed and services provided 6,496,800 64,968 397,756 - 462,724
Issuance of 1,503,360 shares of common stock for cash 1,503,360 15,034 135,041 - 150,075
Issuance of warrant to purchase 1,827,023 shares of
common stock - - 181,641 - 181,641
Net loss - - - (1,042,413) (1,042,413)
--------- ---------- ---------- ---------- ----------
Balance at December 31, 1999 8,000,160 $ 80,002 $ 714,438 $ (1,042,413) $ (247,973)
========= ========== ========== ========== ===========
</TABLE>
See accompanying Notes to Financial Statements.
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xVault, Inc.
Statement of Cash Flows
Period from January 12, 1999 (inception) to December 31, 1999
<TABLE>
<S> <C>
Cash flows from operations:
Net loss $ (1,042,413)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 18,095
Expenses paid by stockholders 394,470
Changes in operating assets and liabilities:
Prepaid expenses (9,750)
Accounts payable 75,965
Accrued compensation 13,000
Deferred revenues 18,596
------------
Net cash used in operating activities (532,037)
Cash flows used in investing activities:
Purchase of property and equipment (19,023)
Purchase of certificate of deposit (53,820)
------------
Net cash used in investing activities (72,843)
Cash flows used in financing activities:
Proceeds from issuance of common stock 650,075
------------
Net increase in cash and cash equivalents 45,195
Cash and cash equivalents at beginning of year -
------------
Cash and cash equivalents at end of year $ 45,195
------------
Supplemental disclosure of cash flows information
Interest paid $ -
============
Income taxes paid $ -
============
</TABLE>
See accompanying Notes to Financial Statements.
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xVault, Inc.
Notes to Financial Statements
December 31, 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) BUSINESS AND PRINCIPLES OF CONSOLIDATION
xVault, Inc. ("the Company") began operations and was incorporated on
January 12, 1999 and is engaged in the development, production, sale,
maintenance and licensing of software products designed to store and
manage electronic data. The Company is headquartered in Reston,
Virginia and sells its products primarily through distributors and
resellers in the domestic and international markets. The Company
operates in a highly competitive environment subject to rapid
technological change and the emergence of new technology. Rapid
changes in technology could have an adverse impact on the Company's
results of operations and financial condition.
(b) REVENUE RECOGNITION
Revenues are generated from software sales and providing services,
maintenance and technical support, training and installation.
In October 1997, the American Institute of Certified Public
Accountants ("AICPA") issued Statement of Position ("SOP") No. 97-2,
Software Revenue Recognition. Subsequently, in March 1998 and December
1998, the AICPA issued SOP 98-4 and SOP 98-9, respectively, which
defer until the Company's fiscal year beginning January 1, 2000, the
application of several paragraphs and examples in SOP 97-2 that limit
the definition of vendor specific objective evidence ("VSOE") for
determining fair value of various elements in a multiple element
arrangement. The provisions of SOP 97-2, SOP 98-4, and SOP 98-9 have
been applied to transactions entered into beginning January 1, 1999.
Software sales consist of fees for the Company's software products.
The Company sells its software products primarily through distributors
and resellers. The Company recognizes revenue upon installation of the
product at the customer's site when collectibility of the fee is
deemed probable. Revenues from maintenance and technical support,
which consists of unspecified when-and-if-available product updates
and customer telephone support, are recognized ratably over the term
of the service period. Revenues from training and installation are
recognized as the services are provided.
Deferred revenue consists of amounts received from customers in
advance of revenue recognized for maintenance and technical support
services.
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xVault, Inc.
Notes to Financial Statements
December 31, 1999
(continued)
(c) SOFTWARE DEVELOPMENT COSTS
Software development costs are accounted for 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. Under SFAS No. 86, capitalization of software development
costs begins upon the establishment of technological feasibility,
subject to net realizable value considerations. To date, the period
between achieving technological feasibility and the general
availability of such software has been short; therefore software
development costs qualifying for capitalization have been immaterial.
Accordingly, the Company has not capitalized any software development
costs and has charged all such costs to research and development
expense. Research and development costs are expensed as incurred.
(d) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of 90 days or less to be cash equivalents. The
carrying values of cash equivalents approximate fair values. Cash
equivalents include money market funds.
(f) PROPERTY AND EQUIPMENT
Depreciation is provided in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives,
on a straight-line basis. The estimated service lives used in
determining depreciation are three years for computer hardware and
software. Leasehold improvements are amortized over the shorter of the
useful life of the asset or the lease term.
(g) RECOVERY OF LONG-LIVED ASSETS
The Company's policy is to review its long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying
amount may not be recoverable. The Company recognizes an impairment
loss when the sum of the expected future undiscounted cash flows is
less than the carrying amount of the asset. The measurement of the
impairment losses to be recognized is based upon the difference
between the fair value and the carrying amount of the assets.
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xVault, Inc.
Notes to Financial Statements
December 31, 1999
(continued)
(i) INCOME TAXES
The Company has elected to be treated as an S corporation under the
provisions of the Internal Revenue Code. Under those provisions, the
Company does not pay federal or state corporate income taxes on its
taxable income. Instead, the stockholders are liable for federal and
state income taxes on the Company's taxable income.
(j) CERTIFICATE OF DEPOSIT
The Company's certificate of deposit has a contractual maturity of
less than 12 months and is being reported at historical cost, which
approximates fair value.
(k) 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, disclosure of contingent assets and liabilities at the
date of the financial statements, and reported amounts of revenues and
expenses during the period. Actual results could differ from these
estimates.
(l) STOCK-BASED COMPENSATION
The Company accounts for equity-based compensation arrangements in
accordance with the provisions of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations, and complies with the disclosure provisions
of SFAS No. 123, "Accounting for Stock-Based Compensation." Under APB
Opinion No. 25, compensation expense is based upon the difference, if
any, on the date of grant, between the fair value of the Company's
stock and the exercise price. All equity-based awards to non-employees
are accounted for at their fair value in accordance with SFAS No. 123.
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xVault, Inc.
Notes to Financial Statements
December 31, 1999
(continued)
(2) PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1999 consists of the following:
<TABLE>
<S> <C>
Computer hardware and software $ 85,444
Leasehold improvements 1,833
----------------
87,277
Less - accumulated depreciation and amortization (18,095)
----------------
Property and equipment, net $ 69,182
================
</TABLE>
(3) LINE OF CREDIT
At December 31, 1999, the Company had a $50,000 line of credit with a
bank. Borrowings under the line of credit are due on demand and must be
paid in full by December 31, 2000. The line of credit is collateralized by
the Company's time savings accounts and certificates of deposit and
guaranteed by a stockholder of the Company. At December 31, 1999, the
Company did not have an outstanding balance on the line of credit.
Interest on the line of credit accrues at the bank's prime rate plus 1
percent.
(4) LEASES
The Company is obligated under operating leases for office space and
equipment. Future minimum lease payments under noncancelable operating
leases as of December 31, 1999 are approximately as follows:
<TABLE>
<S> <C>
2000 $ 51,500
2001 31,400
2002 3,100
2003 2,600
=================
$ 88,600
=================
</TABLE>
Rent expense for operating leases was approximately $52,100 for the period
from January 12, 1999 (inception) through December 31, 1999.
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xVault, Inc.
Notes to Financial Statements
December 31, 1999
(continued)
(5) CAPITAL STOCK
The Company was incorporated in the state of Virginia on January 12, 1999,
and reincorporated in the state of Delaware on May 17, 1999. The Company
has the authority to issue 15,000,000 shares of common stock with a par
value of $0.01 ("Common Stock").
In May 1999, the Company issued 6,496,800 shares of Common Stock to the
founders of the Company. The shares were issued in lieu of repayment by
the Company of approximately $395,000 in expenses paid by the
stockholders, and for equipment contributed to the Company with an
estimated fair value of approximately $68,000.
In July 1999, the Company issued 1,503,360 shares of Common Stock for
approximately $150,000.
Redeemable Common Stock and Warrant
During October 1999, the Company issued 1,552,972 shares of Redeemable
Common Stock and an investor warrant to purchase an additional 1,827,023
shares of Common Stock for approximately $500,000. Shares under the
warrant can be purchased at an exercise price of approximately $0.27 per
share. The warrant becomes exercisable after February 2000 (see note 8).
The stockholder shall have the right to sell back to the Company the
1,552,972 shares of Common Stock at a price of approximately $0.32 per
share (the "Put Right"). The Put Right shall become exercisable at any
time upon (a) the Company's failure to achieve positive earnings before
taxes for any three of four consecutive quarters, commencing with the
first quarter of 2000, or (b) the failure of the Company to cure a
material breach of certain covenants as defined in the investment
agreement, which failure to cure continues for sixty days following
notification from the investor.
The Company has allocated approximately $318,000 to the 1,552,972 shares
of Redeemable Common Stock, which is included between debt and
stockholders' deficit in the accompanying balance sheet, and approximately
$182,000 to the warrant to purchase an additional 1,827,023 shares of
Common Stock, which is included in stockholders' deficit in the
accompanying balance sheet.
The ability to exercise the warrant to purchase Common Stock and the Put
Right terminate upon liquidation of the Company or upon the closing of an
initial public offering.
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xVault, Inc.
Notes to Financial Statements
December 31, 1999
(continued)
(6) STOCK OPTION PLAN
Effective September 30, 1999, the Company adopted the 1999 Equity
Incentive Plan ("the Stock Plan"). Xvault, Inc. has reserved up to 800,000
shares for issuance under the Stock Plan. All of the Company's employees,
officers, directors, consultants, and advisors are eligible to be granted
options under the Stock Plan. The exercise price and duration of the
option are determined by the Board at the date of grant. The options
generally vest ratably over a period of 4 years, and generally expire in
10 years. During 1999, all options were granted to employees and directors
of the Company.
The following table summarizes option activity for the year ended December
31, 1999:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
---------------- ----------------
<S> <C> <C>
Options outstanding at January 1, 1999 -- $ --
Options granted 337,500 0.25
Options exercised -- --
Options forfeited/expired -- --
---------------- ----------------
Options outstanding at December 31, 1999 337,500 $ 0.25
================ ================
</TABLE>
At December 31, 1999, the weighted average remaining contractual life of
the outstanding options was 9.8 years, and there were no options
exercisable. There were 462,500 options available for grant at December
31, 1999.
The per share weighted average fair value of the options granted during
1999 was $0.05. The fair value of the option grant is estimated on the
date of grant, using the Black-Scholes options-pricing model with the
following weighted average assumptions (excluding volatility): average
dividend yield of 0, expected life of 4 years, and risk free interest rate
of 5.5%.
The options granted by the Company during 1999 are subject to approval by
the Board of Directors. The Company is applying APB Opinion No. 25 to the
options. The final measurement date for measuring compensation expense
associated with the options will be the date in which the Board of
Directors approves the option grants. There was no material estimated
compensation expense to record during 1999 as the estimated fair value of
the common stock approximated the exercise price of the options.
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xVault, Inc.
Notes to Financial Statements
December 31, 1999
(continued)
SFAS No. 123 requires pro forma net income (loss) disclosures as if the
Company had accounted for its stock options granted under the fair value
method prescribed by that statement. Had the Company used the fair value
methodology for determining compensation expense, the net loss for 1999
would not have been materially different.
(7) MAJOR CUSTOMERS
The Company's principal business activities consist of developing
technology solutions and selling its products through distributors and
resellers in the domestic and international markets. All of the 1999
revenues were earned through sales of its products to one distributor. The
Company entered into a contract with this distributor to supply them with
the Company's software products and services throughout North America.
(8) SUBSEQUENT EVENTS
Subsequent to year-end, the warrant to purchase 1,827,023 shares of Common
Stock was exercised by the stockholder resulting in proceeds of $500,000
to the Company (see note 5).
On April 25, 2000 all issued and outstanding shares of Common Stock of the
Company were sold to OTG Software, Inc. for approximately $1.75 million in
cash and 160,000 shares of OTG Software, Inc. common stock.
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