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
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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
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INDEPENDENT AUDITORS' REPORT
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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
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CRATOS TECHNOLOGY SOLUTIONS INC.
BALANCE SHEETS
OCTOBER 31 2004 2003
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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
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1,154,961 1,814,143
CAPITAL ASSETS (Note 1) 213,860 244,312
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$1,368,821 $2,058,455
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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
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3,204,674 2,246,094
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SHAREHOLDERS' DEFICIT
Common Stock, 100 shares authorized and outstanding 100 100
Deficit (1,835,953) (187,739)
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(1,835,853) (187,639)
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$1,368,821 $2,058,455
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The accompanying summary of significant accounting policies and notes are an
integral part of these financial statements.
3
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CRATOS TECHNOLOGY SOLUTIONS INC.
STATEMENTS OF OPERATIONS AND DEFICIT
FOR THE YEARS ENDED OCTOBER 31 2004 2003
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REVENUE $ 3,391,889 $ 7,840,534
COST OF REVENUE 2,920,033 5,099,147
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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
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2,362,849 2,905,791
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LOSS BEFORE INCOME TAXES (1,890,993) (164,404)
PROVISION FOR (RECOVERY OF) INCOME TAXES (Note 7) (242,779) 194,532
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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)
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The accompanying summary of significant accounting policies and notes are an
integral part of these financial statements.
4
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CRATOS TECHNOLOGY SOLUTIONS INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31 2004 2003
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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
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986,417 998,296
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INVESTING ACTIVITIES
Acquisition of capital assets (28,689) (211,541)
Payment to related parties (962,725) (865,480)
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(991,414) (1,077,021)
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DECREASE IN CASH DURING THE YEAR (4,997) (78,725)
CASH, beginning of year 154,124 232,849
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CASH, end of year $ 149,127 $ 154,124
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The accompanying summary of significant accounting policies and notes are an
integral part of these financial statements.
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CRATOS TECHNOLOGY SOLUTIONS INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OCTOBER 31, 2004 AND 2003
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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
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CRATOS TECHNOLOGY SOLUTIONS INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OCTOBER 31, 2004 AND 2003
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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.
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CRATOS TECHNOLOGY SOLUTIONS INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2004 AND 2003
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1. CAPITAL ASSETS
2004 2003
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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
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485,159 271,299 456,470 212,158
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Net book value $213,860 $244,312
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2. ACCRUED RECEIVABLES
Accrued receivables represent amounts due from customers for work
performed which has not yet been invoiced.
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3. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
2004 2003
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Accounts payable $1,843,330 $1,213,265
Accrued liabilities 29,642 6,993
Income taxes payable -- 107,961
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$1,872,972 $1,328,219
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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.
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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.
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CRATOS TECHNOLOGY SOLUTIONS INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2004 AND 2003
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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
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$1,705,333
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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.
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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
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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)
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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.
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CRATOS TECHNOLOGY SOLUTIONS INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2004 AND 2003
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The primary temporary differences which gave rise to the net deferred tax
assets at October 31, 2004 and 2003 are:
2004 2003
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DEFERRED TAX ASSETS
Capital losses 329,077 155,786
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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.
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CRATOS TECHNOLOGY SOLUTIONS INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2004 AND 2003
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8. SUPPLEMENTAL CASH FLOW DISCLOSURES
2004 2003
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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
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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.
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CRATOS TECHNOLOGY SOLUTIONS INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2004 AND 2003
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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