EXHIBIT 99.1
SECURESOFT SYSTEMS, INC.
Financial Statements
December 31, 2002 and 2001
C O N T E N T S
Independent Auditors' Report .......................................... 3
Balance Sheet ......................................................... 4
Statement of Operations ............................................... 5
Statement of Stockholders' Equity ..................................... 6
Statement of Cash Flows ............................................... 7
Notes to the Financial Statements ..................................... 8
2
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
SecureSoft Systems, Inc.
Carlsbad, CA
We have audited the accompanying balance sheets of SecureSoft Systems, Inc. as
of December 31, 2002 and 2001 and the related statements of operations,
stockholders' equity 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 generally accepted auditing standards
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 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, the financial statements referred to above present fairly, in
all material respects, the financial position of SecureSoft Systems, Inc. as of
December 31, 2002 and 2001, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2, the Company
has a negative current ratio and a lack of working capital which raises
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to those matters are also described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Chisholm & Associates
North Salt Lake, Utah
February 6, 2003
3
SECURESOFT SYSTEMS, INC.
Balance Sheets
ASSETS
December 31,
2002 2001
----------- -----------
Current Assets
Cash $ 23,594 $ 63,334
Accounts Receivable 17,300 15,000
Advances - Related Party 35,000 35,000
Inventory 5,244 --
----------- -----------
Total Current Assets 81,138 113,334
Equipment, Net 19,226 14,935
Other Assets
Software Development Costs, Net 170,298 103,054
Deposits 8,345 --
----------- -----------
Total Other Assets 178,643 103,054
----------- -----------
Total Assets $ 279,007 $ 231,323
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable $ 109,910 $ 104,978
Accrued Expenses 531,254 573,596
Current Portion of Long-Term Debt 195,032 166,507
----------- -----------
Total Current Liabilities 836,196 845,081
Long-Term Liabilities
Notes Payable 72,500 72,500
Notes Payable - Related Party 2,532 14,007
Convertible Debentures 120,000 80,000
Less: Current Portion of Long-Term Debt (195,032) (166,507)
----------- -----------
Total Long-Term Liabilities -- --
----------- -----------
Total Liabilities 836,196 845,081
----------- -----------
Stockholders' Equity
Common Stock, Authorized 20,000,000 Shares, $.001 Par Value,
Issued and Outstanding 14,622,197 14,622 14,622
Additional Paid in Capital 2,023,222 2,023,222
Retained Earnings (Deficit) (2,595,033) (2,651,602)
----------- -----------
Total Stockholders' Equity (557,189) (613,758)
----------- -----------
Total Liabilities and Stockholders' Equity $ 279,007 $ 231,323
=========== ===========
The accompanying notes are an integral part of these financial statements.
4
SECURESOFT SYSTEMS, INC.
Statements of Operations
For the Year Ended
December 31,
---------------------------------
2002 2001
------------ ------------
Revenues $ 2,499,843 $ 549,900
Cost of Sales 231,646 93,285
------------ ------------
Gross Profit (Loss) 2,268,197 456,615
------------ ------------
Operating Expenses
General & Administrative 2,167,337 1,533,147
------------ ------------
Total Operating Expenses 2,167,337 1,533,147
------------ ------------
Net Operating Income (Loss) 100,860 (1,076,532)
------------ ------------
Other Income(Expense)
Interest Income 43 10
Interest Expense (43,774) (8,756)
Other Income (Expense) 240 1,122
------------ ------------
Total Other Income(Expense) (43,491) (7,624)
------------ ------------
Income (Loss) Before Income Taxes 57,369 (1,084,156)
Income Tax Expense 800 800
------------ ------------
Net Income (Loss) $ 56,569 $ (1,084,956)
============ ============
Net Income (Loss) Per Share $ 0.00 $ (0.08)
============ ============
Weighted Average Shares Outstanding 14,622,197 14,398,281
============ ============
The accompanying notes are an integral part of these financial statements.
5
SECURESOFT SYSTEMS, INC.
Statements of Stockholders' Equity (Deficit)
Common Stock Additional Retained
------------------------- Paid-in Earnings
Shares Amount Capital (Deficit)
------ ------ ------- ---------
Balance December 31, 2000 14,037,867 14,038 1,409,306 (1,566,646)
January 2001 - stock issued for
services at $1.00 per share 139,000 139 138,861 --
February 2001 - stock issued for
cash at $1.50 per share 60,330 60 90,440 --
June 2001 - stock issued for
services at $1.00 per share 300,000 300 299,700 --
October 2001 - stock issued for
services at $1.00 per share 85,000 85 84,915 --
Net income (loss) for the period ended
December 31, 2001 -- -- -- (1,084,956)
---------- ------ --------- ----------
Balance, December 31, 2001 14,622,197 14,622 2,023,222 (2,651,602)
Net income (loss) for the year ended
December 31, 2002 -- -- -- 56,569
---------- ------ --------- ----------
Balance, December 31, 2002 14,622,197 $14,622 $2,023,222 $(2,595,033)
========== ======= ========== ===========
The accompanying notes are an integral part of these financial statements.
6
SECURESOFT SYSTEMS, INC.
Statements of Cash Flows
For the Year Ended
December 31,
-----------------------------
2002 2001
--------- -----------
Cash Flows from Operating Activities:
Net Income (Loss) $ 56,569 $(1,084,956)
Adjustments to Reconcile Net Loss to Net Cash
Provided by Operations:
Depreciation & Amortization 51,370 5,719
Stock Issued for Services -- 524,000
Change in Operating Assets and Liabilities:
(Increase) Decrease in:
Accounts Receivable (2,300) 5,000
Inventory (5,244) --
Increase (Decrease) in:
Accounts Payable 4,931 69,249
Accrued Expenses (42,342) 315,996
--------- -----------
Net Cash Provided(Used) by Operating Activities 62,984 (164,992)
Cash Flows from Investing Activities:
Payments for Software Development Costs (109,819) (31,054)
Payments for Deposits (8,345) --
Payments for Equipment (13,086) (10,855)
--------- -----------
Net Cash Provided (Used) by Investing Activities (131,250) (41,909)
Cash Flows from Financing Activities:
Proceeds from Issuance of Common Stock -- 90,500
Proceeds from Issuance of Notes Payable 323,313 365,007
Principal Payments on Notes Payable (294,787) (216,100)
--------- -----------
Net Cash Provided (Used) by Financing Activities 28,526 239,407
--------- -----------
Increase (Decrease) in Cash (39,740) 32,506
Cash and Cash Equivalents at Beginning of Period 63,334 30,828
--------- -----------
Cash and Cash Equivalents at End of Period $ 23,594 $ 63,334
========= ===========
Cash Paid For:
Interest $ 43,517 $ 2,412
========= ===========
Income Taxes $ 800 $ --
========= ===========
Non-Cash Investing and Financing Activities:
Shares Issued for Services $ -- $ 524,000
========= ===========
The accompanying notes are an integral part of these financial statements.
7
SECURESOFT SYSTEMS, INC.
Notes to the Financial Statements
December 31, 2002 and 2001
NOTE 1 - Summary of Significant Accounting Policies
a. Organization
SecureSoft Systems, Inc. (the Company), was organized under the laws
of the State of Delaware in August 1999. The Company is engaged in the
business of developing HIPPA compliance software.
b. Accounting Method
The Company recognizes income and expense on the accrual basis of
accounting.
c. Revenue Recognition
Revenue from the sale of software and consulting is recognized when
an agreement is made, delivery is complete, no significant obligations
remain unfulfilled and collection of the receivable is probable. In
instances where a significant obligation exists, revenue recognition is
delayed until the obligation has been satisfied.
d. Receivables
Accounts receivable is recorded net of an allowance account when
management deems a receivable to be uncollectible. As of December 31, 2002
and 2001, all accounts receivable is deemed to be fully collectible.
e. Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities
of three months or less to be cash equivalents.
f. Inventory
Inventory consists of computer equipment which is held for resale.
The equipment is stated at the lower of cost or market.
g. Property and Equipment
Property and Equipment consists of the following at December 31,
2002 and 2001:
2002 2001
-------- --------
Computers and Equipment $ 34,740 $ 21,655
Accumulated Depreciation (15,514) (6,720)
-------- --------
Total Property & Equipment $ 19,226 $ 14,935
======== ========
The provision for depreciation is calculated using the straight-line
method over the estimated useful lives of the assets. Depreciation expense
for the periods ended December 31, 2002 and 2001 is $8,795 and $5,719,
respectively.
In accordance with SFAS No. 144, the Company records impairment of
long-lived assets to be held and used or to be disposed of when indicators
of impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the carrying amount. At December
31, 2002 and 2001, no impairments have been recognized.
8
SECURESOFT SYSTEMS, INC.
Notes to the Financial Statements
December 31, 2002 and 2001
NOTE 1 - Summary of Significant Accounting Policies (Continued)
h. Software Development Costs
In accordance with SFAS No. 86, software development costs are
expressed as incurred until technological feasibility has been
established, at which time such costs are capitalized until the product is
available for general release to customers. Capitalized costs are then
amortized on a straight-line basis over the estimated product life, or on
the ratio of current revenues to total projected product revenues,
whichever is greater. Total capitalized software development costs at
December 31, 2002 and 2001 was $212,873 and $103,054, respectively.
Amortization expense for the periods ended December 31, 2002 and 2001 was
$42,575 and $0, respectively. Research and development costs are expressed
as incurred. During 2002 and 2001, there were no research and development
expenses.
i. Provision for Income Taxes
No provision for income taxes has been recorded due to net operating
loss carryforwards totaling approximately $2,595,000 that will be offset
against future taxable income. These NOL carryforwards begin to expire in
the year 2019.
Deferred tax assets and the valuation account is as follows at
December 31, 2002 and 2001:
2002 2001
--------- ---------
Deferred tax asset:
NOL carrryforward $ 882,300 $ 901,545
Valuation allowance (882,300) (901,545)
--------- ---------
Total $ -- $ --
========= =========
j. Stock Options
As permitted by SFAS No. 123, the Company has elected to measure and
record compensation cost relative to stock option costs in accordance with
APB Opinion 25 which requires the Company to make pro forma disclosures of
net income (loss) and basic earnings (loss) per share as if the fair
values of the valuing stock options have been applied.
k. Earnings (Loss) Per Share
The computation of earnings (loss) per share of common stock is
based on the weighted average number of shares outstanding at the date of
the financial statements. Fully dilutive earnings per share has not been
presented because it equals primary earnings per share.
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------------
2002 2001
---- ----
Income (Loss) Numerator $ 56,569 $ (1,084,956)
Shares (Denominator) 14,622,197 14,398,281
----------- ------------
Per Share Amount $ 0.00 $ (0.08)
=========== ============
9
SECURESOFT SYSTEMS, INC.
Notes to the Financial Statements
December 31, 2002 and 2001
NOTE 1 - Summary of Significant Accounting Policies (Continued)
l. Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the
financial statements and expenses during the reporting period. In these
financial statements, assets, liabilities and expenses involve extensive
reliance on management's estimates. Actual results could differ from those
estimates.
m. Financial Instruments
The recorded amounts for financial instruments, including cash
equivalents, receivables, investments, accounts payable and accrued
expenses, and long-term debt approximate their market values as of
December 31, 2002 and 2001. The Company has no investments in derivative
financial instruments.
NOTE 2 - Going Concern
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has
negative working capital and is dependent upon financing to continue
operations. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty. It is management's plan
to continue to increase revenues through additional contracts to provide
services. The Company will also raise funds from investors as needed or
negotiate loan instruments to provide necessary capital.
NOTE 3 - Related Party Transactions
During 2002 and 2001 an officer loaned the Company $273,312 and
$25,007, respectively. During 2002 and 2001, the Company paid to the
officer $284,787 and $16,000, respectively. As of December, 2002 and 2001,
the balance of the note payable is $1,032 and $12,507, respectively.
During 2002 and 2001, an officer loaned the Company $0 and $5,000,
respectively. During 2002 and 2001, the Company paid the officer $0 and
$3,500, respectively. As of December 31, 2002 and 2001, the balance of the
note is $1,500 and $0 respectively.
During 2001, former employees loaned the Company $62,500. In 2001,
the former employees were paid $76,600. As of December 31, 2002 and 2001,
the balance of the notes payable is $0.
During 2000, the Company advanced $35,000 to an officer. As of
December 31, 2002 and 2001, the balance of the advance is $35,000.
NOTE 4 - Commitments and Contingencies
In September 2002, the Company committed to an operating lease for
office space. The lease requires a monthly payment of $5,695. The lease
expires in June 2005.
10
SECURESOFT SYSTEMS, INC.
Notes to the Financial Statements
December 31, 2002 and 2001
NOTE 4 - Commitments and Contingencies (Continued)
Future minimum lease payments on operating lease obligations are as
follows at December 31, 2002:
2003 $ 68,340
2004 68,340
2005 34,170
--------
Total Operating Lease Obligations $170,850
========
Rent expense from operating leases at December 31, 2002 and 2001 was
$43,530 and $107,085.
NOTE 5 - Long-Term Liabilities
Long-term liabilities are detailed as follows at December 31, 2002
and 2001:
December 31,
2002 2001
--------- ---------
Notes Payable:
Note payable to an individual, bears interest at
10%, unsecured, payable upon demand $ 72,500 $ 72,500
--------- ---------
Total Notes Payable 72,500 72,500
--------- ---------
Notes Payable Related Party:
Note payable to an officer, bears interest at
10%, unsecured, payable upon demand 1,032 12,507
Note payable to an officer, non-interest
bearing, unsecured, payable upon demand 1,500 1,500
--------- ---------
Total Notes Payable Related Party 2,532 14,007
--------- ---------
Convertible Debentures:
Note payable to a corporation, bears interest at 12%, unsecured,
convertible into common stock at $0.50 per share until maturity;
thereafter price is $0.25 per share, principal due at maturity,
matured March 31, 2002, past due 70,000 80,000
Note payable to a corporation, bears interest at 12%, unsecured,
convertible into common stock at $0.50 per share until maturity;
thereafter price is $0.25 per share, principal due at maturity,
matured December 31, 2002, past due 50,000 --
--------- ---------
Total Convertible Debentures $ 120,000 $ 80,000
--------- ---------
Total Long Term Liabilities $ 195,032 $ 166,507
--------- ---------
Less current portion $(195,032) $(166,507)
--------- ---------
Net Long Term Liabilities $ -- $ --
========= =========
11
SECURESOFT SYSTEMS, INC.
Notes to the Financial Statements
December 31, 2002 and 2001
NOTE 5 - Long Term Liabilities (Continued)
Future minimum principal payments on long term liabilities are as
follows at December 31, 2002:
2003 195,032
2004 --
2005 --
2006 --
2007 --
--------
Total $195,032
========
NOTE 6 - STOCK OPTIONS
In December 2002, the Company granted stock options to qualified
employees. The options expire 5 years from the date of issuance. The
exercise price is $0.50. The total number of options granted was 285,000.
The fair value of the stock options was determined using the Black-Scholes
pricing model with the following assumptions: stock price at grant date of
$0.50, risk free rate of 4.0%, life of 5 years, volatility of 0% with no
dividend yield.
In December 2002, the Company granted stock options to a qualified
employee. The options expire 10 years from the date of issuance. The
exercise price is $0.50. The total number of options granted was 600,000.
The fair value of the stock options was determined using the Black-Scholes
pricing model with the following assumptions: stock price at grant date of
$0.50, risk free rate of 4.0%, life of 10 years, volatility of 0% with no
dividend yield.
In February 2002, the Company granted stock options to a qualified
employee. The options expire 10 years from the date of issuance. The
exercise price is $0.50. The total number of options granted was 219,387.
The fair value of the stock options was determined using the Black-Scholes
pricing model with the following assumptions: stock price at grant date of
$0.50, risk free rate of 4.0%, life of 10 years, volatility of 0% with no
dividend yield.
In February 2002, the Company granted stock options to a qualified
non-employee for services. The options expire 4 years from date of
issuance. The exercise price is $0.50 per share. The total number of
options granted was 50,000. The Company valued the options at $0. The fair
value of the stock options was determined using the Black-Scholes pricing
model with the following assumptions: stock price at grant date $0.50,
risk free rate of 4.0%, life of 4 years, volatility of 0% with no dividend
yield.
In October 2001, the Company granted stock options to a qualified
non-employee for services. The options expire 4 years from date of
issuance. The exercise price is $0.50 per share. The total number of
options granted was 80,000. The Company valued the options at $0. The fair
value of the stock options was determined using the Black-Scholes pricing
model with the following assumptions: stock price at grant date $0.50,
risk free rate of 4.0%, life of 4 years, volatility of 0% with no dividend
yield.
12
SECURESOFT SYSTEMS, INC.
Notes to the Financial Statements
December 31, 2002 and 2001
NOTE 6 - STOCK OPTIONS (Continued)
In July 2001, the Company granted stock options to a qualified
non-employee for services. The options expire 4 years from date of
issuance. The exercise price is $1.00 per share. The total number of
options granted was 100,000. The Company valued the options at $0. The
fair value of the stock options was determined using the Black-Scholes
pricing model with the following assumptions: stock price at grant date
$1.00, risk free rate of 4.0%, life of 4 years, volatility of 0% with no
dividend yield.
In July 2001, the Company granted stock options to a qualified employee.
The options expire 5 years from the date of issuance. The exercise price
is $0.50. The total number of options granted was 5,000. The fair value of
the stock options was determined using the Black-Scholes pricing model
with the following assumptions: stock price at grant date of $0.50, risk
free rate of 4.0%, life of 5 years, volatility of 0% with no dividend
yield.
In July 2001, the Company granted stock options to a qualified employee.
The options expire 5 years from the date of issuance. The exercise price
is $1.00. The total number of options granted was 250,000. The fair value
of the stock options was determined using the Black-Scholes pricing model
with the following assumptions: stock price at grant date of $1.00, risk
free rate of 4.0%, life of 5 years, volatility of 0% with no dividend
yield.
In June 2001, the Company granted stock options to a qualified
non-employee for services. The options expire 4 years from date of
issuance. The exercise price is $0.50 per share. The total number of
options granted was 50,000. The Company valued the options at $0.
The fair value of the stock options was determined using the Black-Scholes
pricing model with the following assumptions: stock price at grant date
$0.50, risk free rate of 4.0%, life of 4 years, volatility of 0% with no
dividend yield.
In May 2001, the Company granted stock options to a qualified employee.
The options expire 5 years from the date of issuance. The exercise price
is $0.50. The total number of options granted was 100,000. The fair value
of the stock options was determined using the Black-Scholes pricing model
with the following assumptions: stock price at grant date of $0.50, risk
free rate of 4.0%, life of 5 years, volatility of 0% with no dividend
yield.
In April 2001, the Company granted stock options to qualified employees.
The options expire 5 years from the date of issuance. The exercise price
is $0.50. The total number of options granted was 20,000. The fair value
of the stock options was determined using the Black-Scholes pricing model
with the following assumptions: stock price at grant date of $0.50, risk
free rate of 4.0%, life of 5 years, volatility of 0% with no dividend
yield.
In April 2001, the Company granted stock options to a qualified
non-employee for services. The options expire 4 years from date of
issuance. The exercise price is $0.50 per share. The total number of
options granted was 30,000. The Company valued the options at $0. The fair
value of the stock options was determined using the Black-Scholes pricing
model with the following assumptions: stock price at grant date $0.50,
risk free rate of 4.0%, life of 4 years, volatility of 0% with no dividend
yield.
13
SECURESOFT SYSTEMS, INC.
Notes to the Financial Statements
December 31, 2002 and 2001
NOTE 6 - STOCK OPTIONS (Continued)
In March 2001, the Company granted stock options to a qualified employee.
The options expire 5 years from the date of issuance. The exercise price
is $0.50. The total number of options granted was 15,000. The fair value
of the stock options was determined using the Black-Scholes pricing model
with the following assumptions: stock price at grant date of $0.50, risk
free rate of 4.0%, life of 5 years, volatility of 0% with no dividend
yield.
In February 2001, the Company granted stock options to a qualified
employee. The options expire 5 years from the date of issuance. The
exercise price is $0.50. The total number of options granted was 50,000.
The fair value of the stock options was determined using the Black-Scholes
pricing model with the following assumptions: stock price at grant date of
$0.50, risk free rate of 4.0%, life of 5 years, volatility of 0% with no
dividend yield.
In January 2001, the Company granted stock options to a qualified
non-employee for services. The options expire 2 years from date of
issuance. The exercise price is $0.50 per share. The total number of
options granted was 300,000. The Company valued the options at $0. The
fair value of the stock options was determined using the Black-Scholes
pricing model with the following assumptions: stock price at grant date
$0.50, risk free rate of 4.0%, life of 2 years, volatility of 0% with no
dividend yield.
In January 2001, the Company granted stock options to a qualified
non-employee for services. The options expire 4 years from date of
issuance. The exercise price is $0.25 per share. The total number of
options granted was 250,000. The Company valued the options at $0. The
fair value of the stock options was determined using the Black-Scholes
pricing model with the following assumptions: stock price at grant date
$0.25, risk free rate of 4.0%, life of 4 years, volatility of 0% with no
dividend yield.
A summary of the option activity follows:
Weighted
Average
Options Exercise
Outstanding Price
----------- -----
Outstanding, January 1, 2001 2,720,000 $0.92
Granted 1,250,000 0.59
Exercised -- --
Canceled/forfeited 1,224,375 0.57
Balances, December 31, 2001 2,745,625 0.92
Outstanding, January 1, 2002 2,745,625 $0.92
Granted 1,154,387 0.50
Exercised -- --
Canceled/forfeited 695,000 1.30
Balances, December 31, 2002 3,205,012 $0.47
Number of Weighted
Options Average Weighted
Outstanding at Remaining Average
Exercise December 31, Contractual Exercise
Prices 2002 Life Price
------ ---- ---- -----
$ 0.25 166,667 0.75 $ 0.25
$ 0.50 2,413,345 0.66 $ 0.50
$ 1.00 100,000 0.63 $ 1.00
$ 1.59 525,000 0.30 $ 1.59
14
SECURESOFT SYSTEMS, INC.
Notes to the Financial Statements
December 31, 2002 and 2001
NOTE 6 - STOCK OPTIONS (Continued)
Proforma Net Income (Loss):
December 31, December 31,
2002 2001
------- -----------
Net income(loss) as reported $56,569 $(1,084,956)
Pro forma net income(loss) 56,569 (1,084,956)
Basic income (loss) per share as reported 56,569 (1,084,956)
Pro forma income (loss) per share 56,569 (1,084,956)
NOTE 7 - Subsequent Event
On April 16, 2003, the Company completed an Agreement and Plan of Share
Exchange with S3I Holdings (formerly Axtion Foods, Inc.) (S3I), a public
California company. Pursuant to the agreement, the Company exchanged all
of their outstanding shares of common stock for 15,702,197 shares of
common stock of S3I. The acquisition has been recorded as a reverse
acquisition whereby the Company is the accounting survivor and S3I is the
legal survivor.
15