Exhibit 99.1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders
CSI Business Finance, Inc.
Houston, Texas
We have audited the accompanying balance sheet of CSI Business Finance, Inc. as
of December 31, 2004 and the related statements of operations, changes in
shareholders' equity, and cash flows for the period from October 22, 2004
(Inception) to December 31, 2004. 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 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 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 CSI Business Finance, Inc. as
of December 31, 2004 and the results of its operations and its cash flows for
the for the period from October 22, 2004 (Inception) to December 31, 2004 in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Thomas Leger & Co., L.L.P.
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Thomas Leger & Co., L.L.P.
Houston, Texas
March 16, 2005
CSI BUSINESS FINANCE, INC.
BALANCE SHEET
DECEMBER 31, 2004
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ASSETS
CURRENT ASSETS
Accounts receivable, other $ 23,180
Minimum lease payments receivable 129,468
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Total current assets 152,648
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NONCURRENT ASSETS
Minimum lease payments receivable 269,726
Intangible assets, net 33,367
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Total noncurrent assets 303,093
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TOTAL ASSETS $ 455,741
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Unearned income $ 70,499
Advances from parent 117,518
---------
Total current liabilities 188,017
---------
NONCURRENT LIABILITIES, Unearned income 68,620
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COMMITMENTS AND CONTINGENCIES --
SHAREHOLDERS' EQUITY
Preferred stock, 1,000 shares authorized, $0.01 par value:
Series A cumulative preferred stock, par value $0.01, 500
shares authorized, 200 shares issued and outstanding,
dividend of $10.00 per share per month, aggregated
liquidation and redemption value of $240,000 2
Common stock, par value $0.01, 9,000 shares
authorized, 1,000 shares issued and outstanding 10
Additional paid-in-capital 200,988
Retained deficit (1,896)
---------
Total shareholders' equity 199,104
---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 455,741
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The accompanying notes are an integral part of these financial statements.
CSI BUSINESS FINANCE, INC.
STATEMENT OF OPERATIONS FOR THE PERIOD FROM
OCTOBER 22, 2004 (INCEPTION) TO DECEMBER 31, 2004
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REVENUE
Lease income $ 6,653
OPERATING EXPENSES
Amortization 953
Professional fees 2,825
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Total expenses 3,778
-------
Income before provision for income taxes 2,875
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INCOME TAX PROVISION
Current income tax expense 771
Deferred income tax expense --
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Total income tax expense 771
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NET INCOME 2,104
Preferred dividends paid 4,000
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INCOME APPLICABLE TO COMMON SHARES $(1,896)
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Net Loss Per Share-Basic and Diluted: $ (1.90)
=======
Weighted average number of shares outstanding during the
year--basic and diluted 1,000
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The accompanying notes are integral part of these financial statements.
CSI BUSINESS FINANCE, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM OCTOBER 22, 2004 (INCEPTION) TO DECEMBER 31, 2004
================================================================================
Additional Total
Preferred Stock Common Stock Paid-in Retained Shareholder's
Shares Amount Shares Amount Capital Deficit Equity
--------- --------- --------- --------- --------- --------- ---------
Balance, October 22, 2004 -- $ -- -- $ -- $ -- $ -- $ --
Issuance of common stock -- -- 1,000 10 990 -- 1,000
Issuance of preferred stock 200 2 -- -- 199,998 -- 200,000
Preferred dividends paid -- -- -- -- -- (4,000) (4,000)
Net income -- -- -- -- -- 2,104 2,104
--------- --------- --------- --------- --------- --------- ---------
Balance, December 31, 2004 200 $ 2 1,000 $ 10 $ 200,988 $ (1,896) $ 199,104
========= ========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of these financial statements.
CSI BUSINESS FINANCE, INC.
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM OCTOBER 22, 2004 (INCEPTION)
TO DECEMBER 31, 2004
================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,104
Adjustment to reconcile net income to net cash
used in operating activities:
Amortization 953
Non cash expenses 3,596
Non cash revenues (6,653)
---------
Net cash provided by operating activities --
---------
NET CHANGE IN CASH --
CASH, BEGINNING OF PERIOD --
---------
CASH, END OF YEAR $ --
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SUPPLEMENTAL INFORMATION
Interest paid $ --
Taxes paid $ --
Preferred dividends paid by charge to parent
intercompany account $ 4,000
Preferred stock issued:
For minimum lease payment receivable from parent $ 200,000
Common stock issued:
For minimum lease payment receivable from parent $ 1,000
The accompanying notes are an integral part of these financial statements.
CSI BUSINESS FINANCE, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004
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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Organization
CSI Business Finance, Inc. (the "Company"), was incorporated in Texas on October
22, 2004 for the purpose of engaging in equipment leasing activities. The
financial statements of the Company include its results of operations for the
period from October 22, 2004 (Inception) to December 31, 2004. The Company
finances equipment leases for companies, primarily in Texas. The Company is a
wholly owned subsidiary of Corporate Strategies, Inc. (the "parent" company).
Revenue Recognition and Finance Lease
Lease agreements, under which the Company recovers substantially all its
investment from the minimum lease payments are accounted for as finance leases.
At lease commencement, the Company records a minimum lease payment receivable
and unearned lease income. The remaining unearned income is recognized as
revenue over the term of receivables using the interest method.
At December 2004, a summary of the installments due on minimum lease payments
receivable is as follows:
2005 $ 129,468
2006 129,468
2007 129,468
2008 10,790
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$ 399,194
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosure. Accordingly, actual results
could differ from those estimates.
Concentrations Of Credit Risk
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash balances and lease payment receivable.
The Company maintains its cash accounts in a high quality FDIC insured bank in
Texas. The Company's cash account was opened subsequent to year end. The Company
performs on going credit evaluations to ensure collections and minimize losses.
At December 31, 2004, the Company had one finance lease.
CSI BUSINESS FINANCE, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004
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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
short-term securities purchased with maturity of three months or less to be cash
equivalents.
Accounts Receivable, Other
Accounts receivable, other, is a receivable for the proceeds from the sale of
certain leases and was collected subsequent to year end.
Intangible Assets
In November 2004, the Company purchased from an existing leasing company its
client list and the residual value in certain leases for $57,500. The leases
were sold in January 2005,+ for approximately $23,000 which was the value
assigned to the leases at December 31, 2004. The remaining purchase price of
$34,320 was assigned to the client list. This intangible asset is being
amortized over its estimated useful life of three years. The reserve for
amortization at December 31, 2004 is $953.
Income Taxes
The Company accounts for income taxes under SFAS No. 109, "Accounting for Income
Taxes," which requires an asset and liability approach to financial accounting
and reporting for income taxes. The difference between the financial statement
and tax basis of assets and liabilities is determined annually. Deferred income
tax assets and liabilities are computed for those differences that have future
tax consequences using the currently enacted tax laws and rates that apply to
the periods in which they are expected to affect taxable income. Valuation
allowances are established, if necessary, to reduce the deferred tax asset to
the amount that will assure full realization. Income tax expense is the current
tax payable or refundable for the period plus or minus the net change in the
deferred tax assets and liabilities.
All of the Company's operations are included in the consolidated tax return of
its parent. For financial statement purposes income taxes are accounted for as
if the Company filed a separate tax return. Income taxes currently payable or
refundable are recorded as an offset to the intercompany account.
CSI BUSINESS FINANCE, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004
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2. SHAREHOLDERS' EQUITY
Preferred stock
The Company has authorized 1,000 shares of $0.01 par value preferred stock. The
board of directors has the power, without further action by the holders of
common stock, to designate the relative rights and preferences of the Company's
preferred stock, when and if issued. Such rights and preferences could include
preferences as to liquidation, redemption and conversion rights, voting rights,
dividends or other preferences, over shares of common stock. The shares of
preferred stock of any one series shall be identical with the other shares in
the same series in all respects except as to the dates from and after which
dividends thereon shall accumulate, if cumulative. The board of directors may,
without further action by the stockholders of the Company, issue shares of
preferred stock that it has designated. The rights of holders of the common
stock will be subject to, and may be adversely affected by or diluted by, the
holders of preferred stock.
Series A preferred stock
The Company has issued 200 shares of Series A cumulative preferred stock at
December 31, 2004 in exchange for $200,000 contributed from its parent company.
Each share of Series A cumulative preferred stock is non-voting, bears a
dividend of $10.00 per share per month, and is entitled to a liquidation and/or
redemption price of $1,200 per share plus any accrued but unpaid dividends on
proceeds. Redemption is at the option of the Company.
Common stock
The Company is authorized to issue 9,000 shares of common stock. The Company
issued 1,000 shares of common stock to its parent company in 2004 at a price of
$1.00 per share.
3. RELATED PARTY TRANSACTIONS
Through December 31, 2004, all balance sheets and income statement transactions
have flowed through the parent's intercompany account.
4. INCOME TAXES
The following table sets forth a reconciliation of the statutory federal income
tax for the period from inception to December 31, 2004:
Income before income taxes $ 2,875
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Income tax computed at statutory rates $ 431
Increase in valuation allowance 340
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Current tax expense $ 771
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CSI BUSINESS FINANCE, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2004
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Deferred Income Taxes
The tax effects of the temporary differences between financial statement income
and taxable income are recognized as a deferred tax asset and liability.
Significant components of the deferred tax asset and liability as of December
31, 2004 are as follows:
Deferred tax asset
Intangible tax basis difference $ 340
Valuation allowance (340)
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Net deferred tax asset $ --
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5. CONTINGENCIES
In November 2004, the Company entered into a two year employment agreement which
commences February 1, 2005 with the president of the Company. The agreement
provides for certain fringe benefits and performance and incentive bonuses as
defined in the agreement and may be terminated with three months compensation
paid to the President, if in the Company's sole opinion, the economics of the
contract is not satisfactory.