MK SECURE SOLUTIONS LTD. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTITY)
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
MK SECURE SOLUTIONS LTD. AND SUBSIDIARIES
(A Development Stage Entity)
C O N T E N T S
Page(s)
-------------
Independent Auditors' Report F2
Consolidated Balance Sheet F3
Consolidated Statement of Operations F4
Consolidated Statement of Comprehensive Loss F5
Consolidated Statement of Cash Flows F6
Consolidated Statement of Shareholders' Deficit F7
Notes to Financial Statements F9
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
MK Secure Solutions Ltd.
Road Town, Tortola, British Virgin Islands
We have audited the accompanying consolidated balance sheet of MK Secured
Solutions Ltd. and subsidiaries as of December 31, 2003, and the related
consolidated statements of operations, comprehensive loss, shareholders' deficit
and cash flows for the period March 11, 2003 (date of inception) through
December 31, 2003. 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 consolidated financial position of MK Secure
Solutions Ltd. and subsidiaries as of December 31, 2003 and the consolidated
results of its operations, comprehensive loss, shareholders' equity, and cash
flows for the period March 11, 2003 (date of inception) through December 31,
2003, in conformity with accounting principles generally accepted in the United
States of America.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 3 to the financial
statements, the Company has incurred net losses since inception. Also, the
Company has not recognized any revenue and does not have sufficient funds to
execute its business plan. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans regarding
those matters are also described in Note 3. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
L J SOLDINGER ASSOCIATES LLC
Deer Park, Illinois
April 25, 2004
F-2
MK SECURE SOLUTIONS LTD. AND SUBSIDIARIES
(A Development Stage Entity)
Consolidated Balance Sheet
December 31, 2003
ASSETS
------
Current Assets
Cash $ 68,282
Prepaid assets 13,262
------------------
Total Current Assets 81,544
Property and equipment, net 34,816
------------------
Total Assets $ 116,360
==================
LIABILITIES AND SHAREHOLDERS' DEFICIT
-------------------------------------
Current Liabilities
Short-term loan payable - related party $ 61,660
Accrued liabilities 203,728
------------------
Total Current Liabilities 265,388
------------------
Commitments and Contingencies
Shareholders' Deficit
B Preference shares $0.01 par, 150,000 shares authorized, 68,247
issued and outstanding, liquidation preference $341,235 682
A Preference shares $0.01 par, 150,000 shares authorized, 94,387
issued and outstanding 944
Common shares $0.01 par 4,700,000 shares authorized, 56,316
issued and outstanding 563
Additional paid-in capital 1,997,187
Accumulated foreign exchange translation adjustment 9,251
Deficit accumulated during the development stage (2,157,655)
------------------
Total Shareholders' Deficit (149,028)
------------------
Total Liabilities and Shareholders' Deficit $ 116,360
==================
See notes to consolidated financial statements.
F-3
MK SECURE SOLUTIONS LTD. AND SUBSIDIARIES
(A Development Stage Entity)
Consolidated Statement of Operations
March 11 (Inception) to December 31, 2003
Revenues $ -
Operating Expenses
Software development and other compensation 1,613,327
Consulting fees - related party 107,505
Legal and professional fees 227,446
Other selling, general and administrative 210,541
------------------
Total Operating Expenses 2,158,819
------------------
Loss from Operations (2,158,819)
Interest Income 753
------------------
Loss Before Minority Interest (2,158,066)
Minority Interest in Losses of Subsidiaries 411
------------------
Net Loss $ (2,157,655)
==================
Basic and Diluted Loss Per Share $ (75.06)
==================
Weighted Average Shares Outstanding 28,745
==================
See notes to consolidated financial statements.
F-4
MK SECURE SOLUTIONS LTD. AND SUBSIDIARIES
(A Development Stage Entity)
Consolidated Statement of Comprehensive Loss
March 11 (Inception) to December 31, 2003
Net Loss $ (2,157,655)
Foreign Currency Translation Adjustments 9,251
------------------
Comprehensive Loss $ (2,148,404)
==================
See notes to consolidated financial statements.
F-5
MK SECURE SOLUTIONS LTD. AND SUBSIDIARIES
(A Development Stage Entity)
Consolidated Statement of Cash Flows
March 11 (Inception) to December 31, 2003
Cash Flows from Operating Activities
Net loss $ (2,157,655)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 9,785
Stock-based compensation 658,522
Minority interest share in losses of subsidiaries (411)
Increase (decrease) in cash flows due to changes in operating
assets and liabilities:
Prepaid assets (13,262)
Accrued liabilities 203,728
------------------
Net Cash Used in Operating Activities (1,299,293)
------------------
Cash Flows from Investing Activities
Acquisition of property and equipment (44,601)
------------------
Net Cash Used in Investing Activities (44,601)
------------------
Cash Flows from Financing Activities
Proceeds of short-term loans payable - related party 61,660
Issuance of A Preference share capital 22,720
Issuance of B Preference share capital 77,685
Issuance of subsidiary shares to minority interests 411
Issuance of common share capital 1,390,239
Expenditures for offering costs (149,790)
------------------
Net Cash Provided by Financing Activities 1,402,925
------------------
Effect of Exchange Rate Changes on Cash 9,251
------------------
Net Increase in Cash 68,282
Cash, Beginning of period -
------------------
Cash, End of year $ 68,282
==================
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest $ -
==================
Income Tax $ -
==================
See notes to consolidated financial statements.
F-6
MK SECURE SOLUTIONS LTD. AND SUBSIDIARIES
(A Development Stage Entity)
Consolidated Statement of Shareholders' Deficit
March 11 (Inception) to December 31, 2003
B Preference Shares A Preference Shares Common Shares
Minority -------------------- -------------------- --------------------
Interest Shares Amount Shares Amount Shares Amount
------------ ---------- -------- ---------- -------- ---------- --------
Balance at March 11, 2003
(Date of Inception) $ - - $ - - $ - - $ -
Issuance of "founders" shares
at $0.01 per share - - - 86,929 869 - -
Issuance of shares at $5 per share
for $0.01 cash and $4.99 services - 51,104 511 - - - -
Issuance of shares at $5 per share
for cash - 15,219 152 4,544 46 - -
Issuance of shares at $5 per share
for services - 1,924 19 2,914 29 - -
Issuance of shares and warrants at $25
for one share plus 1/2 of a warrant - - - - - 33,060 331
Issuance of shares valued at $19.19
per share for services - - - - - 12,306 123
Issuance of shares and warrants at $50
per share plus 1/2 of a warrant - - - - - 4,900 49
Issuance of shares valued at $38.78
per share for services - - - - - 2,300 23
Issuance of shares and warrants at $85
for one share plus 1/2 of a warrant - - - - - 3,750 37
Consulting fees paid in conjunction
with 2003 share issuances - - - - - - -
Options issued for services - - - - - - -
Issuance of minority interest in
subsidiary 411 - - - - - -
Foreign currency translation
adjustments - - - - - - -
Minority interest in loss (411) - - - - - -
Net loss - - - - - - -
------------ ---------- -------- ---------- -------- ---------- --------
Balance, December 31, 2003 $ - 68,247 $ 682 94,387 $ 944 56,316 $ 563
============ ========== ======== ========== ======== ========== ========
See notes to consolidated financial statements.
F-7
MK SECURE SOLUTIONS LTD. AND SUBSIDIARIES
(A Development Stage Entity)
Consolidated Statement of Shareholders' Deficit
March 11 (Inception) to December 31, 2003
Accumulated Deficit
Foreign Accumulated
Additional Exchange During the
Paid-in Translation Development
Capital Adjustment Stage Total
------------ ------------- ------------- -------------
Balance at March 11, 2003
(Date of Inception) $ - $ - $ - $ -
Issuance of "founders" shares
at $0.01 per share - - - 869
Issuance of shares at $5 per share
for $0.01 cash and $4.99 services 255,520 - - 256,031
Issuance of shares at $5 per share
for cash 98,623 - - 98,821
Issuance of shares at $5 per share
for services 24,139 - - 24,187
Issuance of shares and warrants at $25
for one share plus 1/2 of a warrant 826,169 - - 826,500
Issuance of shares valued at $19.19 per
share for services 236,149 - - 236,272
Issuance of shares and warrants at $50
per share plus 1/2 of a warrant 244,951 - - 245,000
Issuance of shares valued at $38.78 per
share for services 89,193 - - 89,216
Issuance of shares and warrants at $85
for one share plus 1/2 of a warrant 318,713 - - 318,750
Consulting fees paid in conjunction
with 2003 share issuances (149,790) - - (149,790)
Options issued for services 53,520 - - 53,520
Issuance of minority interest in
subsidiary - - - 411
Foreign currency translation
adjustments - 9,251 - 9,251
Minority interest in loss - - - (411)
Net loss - - (2,157,655) (2,157,655)
------------ ------------- ------------- -------------
Balance, December 31, 2003 $ 1,997,187 $ 9,251 $ (2,157,655) $ (149,028)
============ ============= ============= =============
See notes to consolidated financial statements.
F-8
MK SECURE SOLUTIONS LTD. AND SUBSIDIARIES
(A Development Stage Entity)
Notes to Consolidated Financial Statements
1. NATURE OF BUSINESS
MK Secure Solutions Ltd. is a holding company incorporated on March
11, 2003 under the laws of the British Virgin Islands. It conducts its
principal administrative, research and development operations in the United
Kingdom through a wholly - owned subsidiary and conducts additional
operations through a 60% owned subsidiary in Singapore. Sales and marketing
efforts are conducted from offices in those countries. MK Secure Solutions
Ltd. and its majority owned subsidiaries (collectively, "Group" or
"Company") seeks to eventually sell in most of the world.
The Group designs, develops, and intends to sell and support an
integrated software product MAILKEY MESSAGE MANAGER that is a multi-device,
multi-message platform that allows network administrators and network
operators to protect their individual users through filtration from
unwanted electronic mail.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Company's financial statements are prepared on the accrual basis
of accounting in accordance with accounting principles generally accepted
in the United States of America, and have been presented on a going concern
basis which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business.
Since the inception of the Company, management has been in the process
of designing and developing its products, raising capital, hiring personnel
and obtaining customers. Accordingly, the Company is a development stage
enterprise, as defined in Statement of Financial Accounting Standards
("SFAS") No. 7, Accounting and Reporting for Development Stage Enterprises.
Under SFAS No. 7, certain additional financial information is required to
be included in the financial statements for the period from inception of
the Company to the current balance sheet.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and the accompanying notes. Actual
results could differ from those estimates.
REVENUE RECOGNITION
As of the balance sheet date, the Group had not delivered products or
provided services to customers. The Company will recognize revenue in
accordance with Statement of Position ("SOP") 97-2 - SOFTWARE REVENUE
RECOGNITION, and Statement of Position 98-9 - MODIFICATION OF SOP 97-2,
SOFTWARE REVENUE RECOGNITION, WITH RESPECT TO CERTAIN TRANSACTIONS to its
specific business.
F-9
MK SECURE SOLUTIONS LTD. AND SUBSIDIARIES
(A Development Stage Entity)
Notes to Consolidated Financial Statements
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
CONSOLIDATION
The consolidated financial statements include the financial position
and results of MK Secure Solutions Ltd., its 100%-owned subsidiary, MK
Secure Solutions (UK), Ltd. and its 60%-owned subsidiary, Mailkey Asia PTE,
Ltd. The consolidated financial statements exclude all intercompany
balances and transactions. The losses of subsidiaries are allocated to the
minority interests to the extent of their equity capital. Losses in excess
of minority interest equity are charged to The Group.
RESEARCH AND DEVELOPMENT
The Group accounts for its software development costs in accordance
with SFAS No. 86 - "ACCOUNTING FOR THE COST OF COMPUTER SOFTWARE TO BE
SOLD, LEASED, OR OTHERWISE MARKETED" ("SFAS 86"). Under SFAS No. 86,
software development costs are expensed as incurred until management
determines that the software is technologically feasible as evidenced by
detailed program designs or by a working model. Capitalization ceases when
the products are available for general release to customers, at which time
amortization of the capitalized costs will begin. Amortization for the
period will be computed using the greater of (a) the ratio of the product's
current gross revenues to the total of current gross revenues and
management's estimate of future gross revenues or (b) the straight-line
method computed by dividing the remaining unamortized capitalized cost by
the estimated remaining economic life of the product. At each balance sheet
date, the unamortized capital costs are compared to the net realizable
value. The amount of capitalized costs which exceed the net realizable
value is written off.
Research and development costs relating principally to the design and
development of products are expensed as occurred.
PROPERTY AND EQUIPMENT
Property and equipment, consisting of furniture, fixtures and
equipment, are stated at cost less accumulated depreciation. Depreciation
is provided by the straight-line methods over the estimated useful lives of
three to five years.
INCOME TAXES
Each corporation within the Group files its own separate corporate tax
returns. Income taxes are recorded in the period in which the related
transactions are recognized in the financial statements, net of valuation
allowances, which have been recorded against deferred tax assets. Deferred
tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Net deferred tax assets and liabilities are recognized for
future tax benefits such as net operating loss and credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on the
deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date. A valuation
reserve has been recorded against deferred tax assets because management
has determined it is more likely than not that the deferred tax assets will
not be realized.
F-10
MK SECURE SOLUTIONS LTD. AND SUBSIDIARIES
(A Development Stage Entity)
Notes to Consolidated Financial Statements
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
LOSS PER SHARE
Loss per common share is calculated in accordance with Statement of
Financial Accounting Standards No. 128, Earnings Per Share ("FAS 128").
Basic loss per common share is computed based upon the weighted average
number of shares of common stock outstanding for the period and excludes
any potential dilution. Shares associated with the 162,634 preference
shares, 17,807 stock options, and 20,855 warrants that were outstanding at
December 31, 2003 were not included because their inclusion would be
antidilutive (i.e., reduce the net loss per share).
STOCK-BASED COMPENSATION
The Group follows the provisions of SFAS No. 123 -"ACCOUNTING FOR
STOCK BASED COMPENSATION." As permitted under SFAS No. 123, the Group has
continued to utilize APB 25 "Accounting For Stock Issued To Employees", and
related interpretations, in accounting for its stock-based compensation to
employees and directors. Had compensation expense for the period from March
11, 2003 to December 31, 2003 been determined under the fair value
provisions of SFAS No. 123, as amended by SFAS No. 148 - "AN ACCOUNTING FOR
STOCK BASED COMPENSATION - TRANSITION AND DISCLOSURE - AN AMENDMENT OF SFAS
123," the Group net loss and net loss per share would have differed as
follows:
2003
----------------
Net loss, as reported $ (2,157,655)
Add: Stock-based employee compensation expense included
in reported net income determined under APB No. 25,
net of related tax effects 53,520
Deduct: Total stock-based employee compensation expense
determined under fair-value-based method for all awards,
net of related tax effects (76,412)
----------------
Pro forma net income $ (2,180,547)
----------------
Earnings per share:
Basic and diluted - as reported $ (75.06)
Basic and diluted - pro forma $ (75.85)
These pro forma amounts may not be representative of future
disclosures since the estimated fair value of stock options is amortized to
expense over the vesting period and additional options may be issued in
future years. The estimated fair value of each option granted was
calculated using the Black-Scholes option pricing model. The following
summarizes the weighted average of the assumption used in the model.
2003
--------------
Risk free rate 3.1%
Expected years until exercise 5
Expected stock availability 150%
Dividend yield -
F-11
MK SECURE SOLUTIONS LTD. AND SUBSIDIARIES
(A Development Stage Entity)
Notes to Consolidated Financial Statements
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
FOREIGN CURRENCY TRANSLATION
The Group's functional currency is the UK Pound Sterling. The Group's
reporting currency is the US dollar. All assets and liabilities recorded in
the functional currency have been translated at exchange rates in effect at
each balance sheet date. Revenue, expenses and cash flows have been
translated at the weighted-average exchange rates for the period. The
resulting adjustments have been charged or credited directly to foreign
exchange translation adjustments in the statement of "other comprehensive
loss".
COMPREHENSIVE LOSS
The Company has included a statement of comprehensive loss in
accordance with SFAS No. 130, "Reporting Comprehensive Income". SFAS No.
130 requires the reporting of comprehensive income, or loss, in addition to
net loss from operations. Comprehensive income is a more inclusive
financial reporting methodology that includes disclosures of certain
financial information that historically has not been recognized in the
calculation of net income. As of December 31, 2003, the Company's
comprehensive loss consists of foreign currency translation adjustments.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of prepaid assets and accrued expenses approximates
fair value due to the relatively short maturity of these instruments.
3. GOING CONCERN
The accompanying financial statements have been prepared assuming that
the Group will continue as a going concern. The Group incurred a net loss
of $2,157,655 with no net revenue during the period March 11 (inception) to
December 31, 2003, and, as of that date, had a shareholders' deficit of
$149,028. Those conditions raise substantial doubt about the Group's
ability to continue as a going concern. The financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
Management is seeking to arrange additional financing and expects that
if secured the Group will be able to continue implementing its business
plan and developing its software. In this regard, as described in Note 13,
the Group has secured bridge financing which, if not converted to equity,
would have to be repaid in July 2004. Management expects that this will, at
the very least, supply needed funds until appropriate equity capital is
obtained. Management also believes that there is a high likelihood that the
bridge lenders will convert a substantial portion of their loans to equity.
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31,
2003:
Office equipment $ 13,652
Computer equipment 30,949
----------------
44,601
Less: Accumulated depreciation 9,785
----------------
$ 34,816
================
F-12
MK SECURE SOLUTIONS LTD. AND SUBSIDIARIES
(A Development Stage Entity)
Notes to Consolidated Financial Statements
5. SHORT-TERM LOAN PAYABLE--RELATED PARTY
The short-term loan payable from a related party represents an advance
from a company controlled by a family member of one of the Group's
directors. The loan has a maximum borrowing amount of 50,000 pounds
Sterling ($89,505 at December 31, 2003) of which 35,500 pounds ($61,660 at
December 31, 2003) was outstanding at December 31, 2003 and bears interest
at the base rate of Barclays Bank + 1% (4.75% at December 31, 2003). The
due date of the note is dependent on the date of certain capitalization
provisions as defined in the document and was originally scheduled to be
repaid May 31, 2004. However, in 2004 the due date was extended to
September 30, 2004.
6. PREFERENCE SHARES
A Preference shares are identical to common shares in all respects
except that the holder has 10 votes for each A Preference share rather than
the one vote assigned to each Ordinary share.
B Preference shares are identical to Ordinary shares in all respects
except that upon liquidation, the assets distributed will be applied in
priority to the holders of the B Preference shares over other shareholders
to the extent of amounts paid or credited as paid on the B Preference
shares.
7. WARRANTS
As of December 31, 2003, there were 20,855 warrants outstanding. Each
warrant entitles the holder to purchase one common share at any time
through October 31, 2005. 4,325 warrants have an exercise price of $100 and
16,530 have an exercise price of $50.
8. COMMITMENTS
As of December 31, 2003, the Group had commitments under operating
leases that require minimum payment of $70,603 during 2004. Rent expense
for the period March 11 (inception) through December 31, 2003 was $64,734.
9. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities
reflected on the financial statements and the amounts used for income tax
purposes and net operating loss carryforwards. The tax effects of temporary
differences and net operating loss carryforwards that give rise to
significant portions of the deferred tax assets recognized as of December
31, 2003 are presented below:
2003
---------------
Deferred tax assets:
Principally, net operating loss carryforward $ 650,000
---------------
Less: valuation allowance (650,000)
---------------
Total deferred tax assets $ -
===============
F-13
MK SECURE SOLUTIONS LTD. AND SUBSIDIARIES
(A Development Stage Entity)
Notes to Consolidated Financial Statements
9. INCOME TAXES (continued)
Income tax (expense) benefit for the year ended December 31, 2003
consisted of the following:
2003
-------------------
Deferred:
Increase in tax benefit of net
operating loss carryforward 650,000
(Increase) in valuation allowance (650,000)
-------------------
Total deferred tax assets $ -
===================
The Company has loss carryforwards of approximately $2,150,000 as of
December 31, 2003 that may be offset against future taxable income. This
carryforward has no expiration. Management has determined that realization
of deferred tax assets is less likely than not and accordingly has
established a valuation allowance of $650,000 at December 31, 2003.
The following table presents the principal reasons for the difference
between the Company's effective tax rates and the United Kingdom statutory
income tax rate.
2003
-------------------
United Kingdon statutory income tax 30%
Income tax (benefit) at statutory rate $ (650,000)
Increase (decrease) in valuation
allowance for deferred income tax
benefit 650,000
--------------------
Income tax expense $ -
====================
Effective income tax rate 0%
====================
10. STOCK OPTIONS
Stock option activity during the periods indicated is as follows:
Weighted-
Number of Average
Shares Exercise Price
-------------- --------------
Balance at March 11, 2003
(inception) - $ -
Granted 17,807 52
Cancelled - -
Exercised - -
-------------- --------------
Balance at December 31, 2003 17,807 $ 52
============== ==============
F-14
MK SECURE SOLUTIONS LTD. AND SUBSIDIARIES
(A Development Stage Entity)
Notes to Consolidated Financial Statements
10. STOCK OPTIONS (continued)
The following table summarizes information about stock options
outstanding as of December 31, 2003:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------- ---------------------------------
Number of
Outstanding Weighted Weighted Number Weighted
Range of Shares at Average Average Exercisable at Average
Exercise December 31, Remaining Exercise December 31, Exercise
Prices 2003 Contract Life Price 2003 Price
------------------- ------------------ --------------- --------------- -------------- --------------
$ 12.50 -
$ 85.00 17,807 2.8 years $ 52 8,000 $ 12.50
11. INTELLECTUAL PROPERTY
During 2002 and 2003, a Director applied for multiple patents through
the United Kingdom Patent Office for various proprietary applications of
the Company's products. Under the terms of an assignment agreement, the
patent rights, title and interest therein have been assigned to the
Company.
12. SIMPLIFICATION OF CAPITAL STRUCTURE
During 2003, the Company decided to simplify its capital structure.
For all classes of stock issued or issuable, the number of shares and
warrants issued was adjusted at a rate of one for one hundred from the
shares and warrants that were originally to be issued. All shares
references in these financial statements reflect this simplification.
13. SUBSEQUENT EVENTS
The Group is in the process of obtaining bridge loans. During January
1 through May 31, 2004, the Group borrowed $650,000 though this process.
These loans are to be repaid or converted by July 31, 2004 and bear
interest at an annualized rate of 10%. The loan holders have the right at
any time through June 30, 2004, to convert their loan principal into common
shares at a rate of $85 per share. As additional consideration for each
loan unit which consisted of a loan of $50,000, the lenders were granted
500 warrants. Each warrant entitled the holder to purchase one common share
at an exercise price of $100 per share at any time through to October 31,
2005. Two amendments to the bridge loan agreement were executed in March
2004. Pursuant to the amendments, (i) the conversion price of the loans was
reduced to $.85 and (ii) the number of warrants each lender had was
increased by a factor of 100 and the exercise price was reduced from $100
per share to $1 per share. These amendments were executed in anticipation
of the new capital structure of the Group after the acquisition noted
below.
On March 25, 2004, pursuant to an Agreement and Plan of Merger, dated
February 20, 2004 and amended March 23, 2004, between Global Diversified
Acquisition Corp. ("GDAC"), G.D. Acquisition Corp. ("GD Corp"), a
subsidiary of GDAC, MK Secure Solutions, Ltd. ("MKSS") and Westvale
Consultants, Ltd.
F-15
MK SECURE SOLUTIONS LTD. AND SUBSIDIARIES
(A Development Stage Entity)
Notes to Consolidated Financial Statements
13. SUBSEQUENT EVENTS (continued)
("Westvale"), a principal shareholder of MKSS, GD Corp was merged with and
into MKSS, with MKSS remaining as the surviving entity and becoming a
wholly-owned subsidiary of GDAC.
Pursuant to the terms of the merger agreement,
(i) GDAC issued 26,246,000 shares of its common stock to the holders
of MKSS's capital stock, in exchange for all of the issued and
outstanding shares of MKSS's capital stock, representing
approximately 94% of the then total issued and outstanding stock
of GDAC.
(ii) GDAC's incumbent board members agreed to resign as directors of
GDAC.
(iii) MKSS received the right to appoint new members to GDAC's board .
(iv) All of the MKSS outstanding warrants, options and loan units
were exchanged for options, warrants and loan units and the
strike prices for the individual options, warrants and loan
units were adjusted at a rate of one for one hundred.
As a result of the terms of the merger agreement as stated above, the
merger is deemed to have involved a change in control of GDAC. The
combination of the Company and GDAC will be treated as a recapitalization
of the Company. GDAC will be the legal acquirer in the merger. The Company
will be the accounting acquirer since their shareholders acquired a
majority ownership interest in GDAC. Consequently, the financial statements
of the Company will become those of GDAC.
F-16