EX-99.1 2 v022782_ex99-1.txt EXHIBIT 99.1 CRATOS TECHNOLOGY SOLUTIONS INC. FINANCIAL STATEMENTS FOR THE YEARS ENDED OCTOBER 31, 2004 AND 2003 CRATOS TECHNOLOGY SOLUTIONS INC. FINANCIAL STATEMENTS FOR THE YEARS ENDED OCTOBER 31, 2004 AND 2003 CONTENTS ================================================================================ INDEPENDENT AUDITORS' REPORT 2 FINANCIAL STATEMENTS Balance Sheets 3 Statements of Operations and Deficit 4 Statements of Cash Flows 5 Summary of Significant Accounting Policies 6 Notes to Financial Statements 8 ================================================================================ INDEPENDENT AUDITORS' REPORT -------------------------------------------------------------------------------- To the Shareholders of CRATOS Technology Solutions Inc. We have audited the accompanying balance sheets of CRATOS Technologies Solutions Inc. as of October 31, 2004 and 2003 and the statements of operations and deficit, and cash flows for the years 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 audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 CRATOS Technologies Solutions Inc. at October 31, 2004 and 2003, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. /s/ BDO Dunwoody LLP Chartered Accountants Toronto, Ontario July 15, 2005 2 ============================================================================= CRATOS TECHNOLOGY SOLUTIONS INC. BALANCE SHEETS OCTOBER 31 2004 2003 ----------------------------------------------------------------------------- ASSETS CURRENT Cash $ 149,127 $ 154,124 Trade accounts receivable (net of allowance for doubtful accounts of $0 in 2004 and 2003) 803,700 876,086 Accrued receivables (note 2) -- 760,000 Income taxes recoverable 148,762 0 Prepaid expenses and other current assets 53,372 23,933 ----------------------- 1,154,961 1,814,143 CAPITAL ASSETS (Note 1) 213,860 244,312 ----------------------- $1,368,821 $2,058,455 ============================================================================= LIABILITIES AND SHAREHOLDERS' DEFICIT CURRENT Accounts payable and accrued liabilities (Note 3) $1,872,972 $1,328,219 Rebate accrual (Note 4) 757,161 297,275 Due to related parties (Note 5) 574,541 620,600 ----------------------- 3,204,674 2,246,094 ----------------------- SHAREHOLDERS' DEFICIT Common Stock, 100 shares authorized and outstanding 100 100 Deficit (1,835,953) (187,739) ----------------------- (1,835,853) (187,639) ----------------------- $1,368,821 $2,058,455 ============================================================================= The accompanying summary of significant accounting policies and notes are an integral part of these financial statements. 3 ============================================================================== CRATOS TECHNOLOGY SOLUTIONS INC. STATEMENTS OF OPERATIONS AND DEFICIT FOR THE YEARS ENDED OCTOBER 31 2004 2003 ------------------------------------------------------------------------------ REVENUE $ 3,391,889 $ 7,840,534 COST OF REVENUE 2,920,033 5,099,147 -------------------------- GROSS PROFIT 471,856 2,741,387 EXPENSES Contractors 292,875 437,635 Travel 420,594 570,054 Management fees -- 595,339 Office and general 133,713 209,850 Loss on advance to related party (Note 5) 962,725 865,480 Bad Debt Recovery -- (194,044) Communications 70,834 91,085 Facilities 308,081 83,192 Depreciation 59,141 90,071 Professional fees 53,433 22,445 Marketing 10,847 35,406 Foreign exchange loss 50,606 99,278 -------------------------- 2,362,849 2,905,791 -------------------------- LOSS BEFORE INCOME TAXES (1,890,993) (164,404) PROVISION FOR (RECOVERY OF) INCOME TAXES (Note 7) (242,779) 194,532 -------------------------- NET LOSS FOR THE YEAR (1,648,214) (358,936) RETAINED EARNINGS (DEFICIT), beginning of year (187,739) 171,197 -------------------------- DEFICIT, end of year ($1,835,953) ($ 187,739) ============================================================================== The accompanying summary of significant accounting policies and notes are an integral part of these financial statements. 4
====================================================================================== CRATOS TECHNOLOGY SOLUTIONS INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED OCTOBER 31 2004 2003 -------------------------------------------------------------------------------------- CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES Net loss for the year ($1,648,214) (358,936) Adjustments to reconcile net income to cash provided by (used in) operating activities: Depreciation 59,141 90,071 Loss on advance from related party 962,725 865,480 Changes in non-cash working capital balances Accounts receivable 72,386 325,322 Accrued receivables 760,000 (760,000) Taxes recoverable (148,762) -- Prepaid expenses and other current assets (29,439) 11,146 Accounts payable and accrued liabilities 544,753 (111,540) Rebate payable 459,886 343,973 Related parties (46,059) 592,780 -------------------------- 986,417 998,296 -------------------------- INVESTING ACTIVITIES Acquisition of capital assets (28,689) (211,541) Payment to related parties (962,725) (865,480) -------------------------- (991,414) (1,077,021) -------------------------- DECREASE IN CASH DURING THE YEAR (4,997) (78,725) CASH, beginning of year 154,124 232,849 -------------------------- CASH, end of year $ 149,127 $ 154,124 ====================================================================================== The accompanying summary of significant accounting policies and notes are an integral part of these financial statements.
5 ================================================================================ CRATOS TECHNOLOGY SOLUTIONS INC. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES OCTOBER 31, 2004 AND 2003 -------------------------------------------------------------------------------- NATURE OF BUSINESS CRATOS Technology Solutions Inc. (the "Company"), a company incorporated under the laws of Ontario, is a solutions-oriented organization specializing in international banking and financial transaction processing. The majority of the Company's customers specialize in card products such as Visa(R), MasterCard(R), Eurocard, Smart cards, Debit cards, Credit cards, Store cards, Private label cards, and Loyalty-based products. BASIS OF PRESENTATION These financial statements are expressed in Canadian dollars and are prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP"). Certain prior year amounts have been reclassified to conform to current year presentation. USE OF ESTIMATES The Company's financial statements are prepared in accordance with U.S. GAAP. The preparation of the financial statements in accordance with U.S. GAAP necessarily requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to revenues, bad debts, income taxes, rebates and contingencies. The Company bases its estimates on historical experience and on various other assumptions that are believed at the time to be reasonable under the circumstances. Under different assumptions or conditions, the actual results will differ, potentially materially, from those previously estimated. Many of the conditions impacting these assumptions and estimates are outside of the Company's control. CAPITAL ASSETS Capital assets are stated at cost and are depreciated on a straight-line basis over the estimated useful lives of the related assets. Gains and losses upon asset disposals are taken into income in the year of disposition. The following represents the estimated lives of the capital assets: Furniture and equipment - 5 years Computer hardware - 3 years Computer software - 3 years Vehicles - 5 years Leasehold improvements - Shorter of term of lease and estimated life 6 ================================================================================ CRATOS TECHNOLOGY SOLUTIONS INC. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES OCTOBER 31, 2004 AND 2003 -------------------------------------------------------------------------------- REVENUE RECOGNITION Revenues consist of services revenues from consulting contracts and integration services contracts. Service revenues from fixed contracts are recognized under the percentage of completion method, using a methodology that accounts for costs incurred under the contract in relation to the total estimated costs under the contract, after providing for any anticipated losses under the contract. All other service revenue is earned on a time and materials basis, and therefore is recognized in the period in which the services are performed. INCOME TAXES The Company accounts for income taxes under the asset and liability method that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and tax basis of assets and liabilities. Effects of changes in tax rates are recognized in the period that includes the enactment date. The Company provides a valuation allowance on net deferred tax assets when it is more likely than not that such assets will be realized. SIGNIFICANT CUSTOMER AND VENDOR The Company performs ongoing credit evaluations of its customers' financial condition and generally does not require collateral. The Company maintains allowances for potential losses, and to date, such actual losses have been within management's expectations. A single customer accounted for 94% of the Company's revenue during the year ended October 31, 2004 and 79% during the year ended October 31, 2003. This same customer accounted for 96% of the Company's accounts receivable balance at October 31, 2004 and 85% of the Company's accounts receivable balance as at October 31, 2003. In addition, the Company uses consultants to deliver service contracts for its customers. These consultants are procured primarily through one significant consulting agency. Amounts recorded in the Company's Statements of Operations as cost of revenues almost exclusively represent consulting services incurred through this significant vendor. FINANCIAL INSTRUMENTS Carrying amounts of certain of the Company's financial instruments including cash, accounts receivable, accounts payable, amounts due to related parties, and accrued liabilities and rebates payable approximate fair value due to their short maturities. IMPAIRMENT OF LONG-LIVED ASSETS Impairment losses are recorded on assets to be held and used by the Company when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of the assets. When an impairment loss is required for assets to be held and used by the Company, the related assets are adjusted to their estimated fair value. Fair value represents the amount at which an asset could be bought or sold in a current transaction between willing parties that is other than a forced or liquidation sale. The estimation process involved in determining if assets have been impaired and in the determination of fair value is inherently uncertain because it requires estimates of current market yields as well as future events and conditions. Such future events and conditions include economic and market conditions, as well as availability of suitable financing to find acquisitions and development activities. The realization of the Company's revenue producing assets is dependent upon future uncertain events and conditions, and accordingly, the actual timing and amounts realized by the Company may be materially different from their estimated value. ALLOWANCE FOR DOUBTFUL ACCOUNTS The Company evaluates its need for an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. An allowance is maintained for 100% of all accounts deemed to be uncollectible. The Company has not historically required an allowance for doubtful accounts as its customers are large corporations where credit concerns are not an issue. The Company does not have a history of non-collection of accounts receivable. 7 ================================================================================ CRATOS TECHNOLOGY SOLUTIONS INC. NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2004 AND 2003 -------------------------------------------------------------------------------- 1. CAPITAL ASSETS 2004 2003 --------------------------------------------------- ACCUMULATED Accumulated COST DEPRECIATION Cost Depreciation Furniture and equipment $192,160 $ 57,062 $189,528 $ 23,616 Computer hardware 133,585 98,237 133,585 80,589 Computer software 129,983 103,926 103,926 103,147 Vehicles 27,569 11,165 27,569 4,136 Leasehold improvements 1,862 909 1,862 670 --------------------------------------------------- 485,159 271,299 456,470 212,158 --------------------------------------------------- Net book value $213,860 $244,312 ========================================= -------------------------------------------------------------------------------- 2. ACCRUED RECEIVABLES Accrued receivables represent amounts due from customers for work performed which has not yet been invoiced. -------------------------------------------------------------------------------- 3. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES 2004 2003 -------------------------- Accounts payable $1,843,330 $1,213,265 Accrued liabilities 29,642 6,993 Income taxes payable -- 107,961 -------------------------- $1,872,972 $1,328,219 ========================== -------------------------------------------------------------------------------- 4. REBATE ACCRUAL The Company has instituted a rebate program for its major customer which entitles the customer to earn credits which can be used to offset fees relating to future work performed by the Company. The customer earns rebates provided they remit payment to the Company for work performed within a specified timeframe. These rebates can be applied to work performed in the following calendar year, at a prescribed rate. If the rebates are not utilized within the following calendar year, they expire with no value to the customer. The accrual recorded by the Company as of October 31, 2004 and 2003 represents management's best estimates of these future liabilities, using all available information including the Company's historical redemption rate for this program. -------------------------------------------------------------------------------- 5. RELATED PARTY TRANSACTIONS During fiscal 2004 and fiscal 2003, the Company received services from companies controlled by the Company's shareholders in amounts totaling $521,000 and $1,414,000 respectively. As of October 31, 2004 and 2003, amounts due to these companies in respect of these services, along with services provided in prior years, amounted to $574,541 and $620,600 respectively. The Company has loaned amounts to Cratos Integrated Inc. ("Integrated") Integrated is a company controlled by the shareholders of the Company. These amounts were repayable on demand and carried no fixed repayment terms or interest. Due to the financial condition of Integrated, these amounts have been deemed not to be recoverable, and as a result amounts totaling $962,725 and $865,480 in 2004 and 2003 respectively have been charged to the Statement of Operations as loss on advance to related party. 8 ================================================================================ CRATOS TECHNOLOGY SOLUTIONS INC. NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2004 AND 2003 -------------------------------------------------------------------------------- 6. COMMITMENTS AND CONTINGENCIES The Company has entered into operating leases for premises with minimum annual payments as follows. 2005 $ 272,004 2006 273,337 2007 288,000 2008 289,333 Thereafter 582,659 ---------- $1,705,333 ========== The Company is subject to legal proceedings and claims, either asserted or unasserted, that arise in the ordinary course of business. While the outcome of these proceedings and claims cannot be predicted with certainty, management does not believe that the outcome of any of these legal matters will have a material adverse effect on its consolidated financial position, results of operations or cash flows. -------------------------------------------------------------------------------- 7. INCOME TAXES The Company operates in Canada and consequently its taxable income is subject to tax at a statutory rate of approximately 36%. A reconciliation of the combined Canadian federal and provincial income tax rate with the Company's effective income tax rate is as follows: 2004 2003 ------------------------- Expected statutory rate 36.00% 36.00% Expected provision for income taxes $ (680,757) $ (59,185) Loss on loan foregiveness to related party 173,290 155,786 Change in valuation allowance 173,291 155,786 Impact of small business tax rate 91,397 (57,855) ------------------------- Income taxes $ (242,779) $ 194,532 ========================= The Company's entire provision for income taxes in both the years ended October 31, 2004 and 2003 were current taxes payable. 9 ================================================================================ CRATOS TECHNOLOGY SOLUTIONS INC. NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2004 AND 2003 -------------------------------------------------------------------------------- The primary temporary differences which gave rise to the net deferred tax assets at October 31, 2004 and 2003 are: 2004 2003 ------------------------- DEFERRED TAX ASSETS Capital losses 329,077 155,786 ------------------------- Less, valuation allowance (329,077) (155,786) ------------------------- Net deferred tax asset $ -- $ -- ========================= The Company believes that sufficient uncertainty exists regarding the realization of its deferred tax assets such that a full valuation allowance is required. 10 ================================================================================ CRATOS TECHNOLOGY SOLUTIONS INC. NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2004 AND 2003 -------------------------------------------------------------------------------- 8. SUPPLEMENTAL CASH FLOW DISCLOSURES 2004 2003 ------------------------- Supplemental disclosure of cash flow information: Cash paid during the period for interest $ 6,415 $ 129 Cash paid during the period for taxes $ 25,981 $ 90,824 -------------------------------------------------------------------------------- 9. SUBSEQUENT EVENT Purchase by ActiveCore Technologies Inc. Subsequent to October 31, 2004, the shareholders of Cratos (the "Shareholders") signed a share purchase agreement (the "Share Purchase Agreement") with Activecore Technologies Inc. ("Activecore") a public company whose shares trade on the Nasdaq OTC Bulletin Board, pursuant to which Activecore acquired all of the stock of Cratos in exchange for approximately $2.7 million in cash and common stock of Activecore. This consideration is comprised of cash consideration of $100,000, the issuance of a $100,000 promissory note due in August 2005, and 9,021,030 common shares of Activecore. The per share stock consideration was valued for the purpose of determining the purchase price of the acquisition by using a simple average of the closing trading price of the Company's common shares for two days both before and after this transaction was announced. The share consideration paid by ActiveCore is subject to an adjustment based on whether the Company achieves specified EBITDA targets for the 8 successive quarters following the close of the transaction. If the Company exceeds the targets, then the shareholders could earn up to an additional 400,000 common shares of ActiveCore. If the Company fails to achieve these targets, then the shareholders will be required to contribute up to 400,000 additional shares back to ActiveCore. The purchase price is subject to an adjustment mechanism which will require (i) Activecore to issue additional shares to the Shareholders in the event Cratos' exceeds certain specified financial targets, and (ii) the Shareholders to contribute back to the Activecore's treasury shares in the event Cratos' fails to achieve certain specified financial targets. In addition to the foregoing, Activecore made a cash payment on behalf of Cratos to its primary supplier which equaled all amounts due to such supplier. This supplier will also receive a specified number of bonus shares of Activecore's common stock in consideration for its agreement to (i) enter into renewed agreements which Cratos, and (ii) terminate any existing security agreements between such party and Cratos as well as discharge any registered security and agree to subordinate any future security to that of any senior lender of Activecore. Pursuant to the terms of the Share Purchase Agreement, each of the Shareholders agreed to a contractual lock-up and voting restrictions in respect of the Shares. Specifically, the Shares will be subject to a lock-up in accordance with the following release conditions: (i) 20% of the Shares shall be released on the seventh business day following the closing date; (ii) 40% of the Shares will be released on the first anniversary of the closing date; and (iii) 40% of the Shares will be 11 released on the second anniversary of the Closing Date. Each of the Shareholders have also agreed for a period of two years from the closing date to vote the Shares in support of any recommendation made by the directors and/or management of Activecore at any of its annual or special meetings. Prior to the execution of the Share Purchase Agreement, the Shareholders agreed to forgive all amounts receivable by them from the Company. 12 ================================================================================ CRATOS TECHNOLOGY SOLUTIONS INC. NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2004 AND 2003 -------------------------------------------------------------------------------- Credit Facility On April 30, 2005, Cratos secured a $1.75 million credit facility with a major Canadian bank. Amounts drawn on this facility bear interest at the prime rate plus 1.00% per annum. The facility is secured by a general security agreement against Cratos and by personal guarantees of two principals of Activecore. The margin requirements of the facility restrict borrowing to 85% of effectively assigned and domestic unencumbered trade accounts receivables and insured non-domestic unencumbered trade account receivables. 13