<PAGE> 1
EXHIBIT 99.1
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
of Transaction Verification Systems, Inc.
We have audited the accompanying balance sheets of Transaction Verification
Systems, Inc. (a wholly owned subsidiary of Orion Technologies, Inc.) (the
Company) as of June 30, 2000 and 1999, and the related statements of operations,
stockholder's equity, and cash flows for each of the two years in the period
ended June 30, 2000. 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. 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 present fairly, in all material
respects, the financial position of Transaction Verification Systems, Inc. as of
June 30, 2000 and 1999, and the results of their operations and their cash flows
for each of the two years in the period ended June 30, 2000 in conformity with
generally accepted accounting principles.
As explained in Note 2 to the financial statements, all the issued and
outstanding capital stock of the Company was acquired by Orion Technologies,
Inc. on June 30, 2000.
/s/ Grant Thornton, LLP
Vienna, Virginia
August 08, 2000
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<PAGE> 2
TRANSACTION VERIFICATION SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, June 30,
2000 1999
---- ----
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equilivants 2,403 14,274
Accounts receivable, net of allowance of $ 11,997 and $0
at June 30, 2000 and 1999, respectively 178,815 283,817
Inventory 247,225 225,993
Prepaid expenses and other current assets 16,005 7,597
-------- --------
Total Current Assets 444,448 531,681
Property and equipment, net 25,728 32,234
Intangible and other assets, net of accumulated amortization of
$40,785 and $19,506 at June 30, 2000 and 1999, respectively 72,167 93,447
-------- --------
542,343 657,362
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable 135,459 133,103
Accrued expenses 68,320 72,587
Bank line of credit 40,000 --
Current maturities of long term debt 40,212 34,851
-------- --------
Total Current Liabilities 283,991 240,541
Long-term debt, net of current portion 109,539 149,751
Commitments and contingencies -- --
Stockholders' Equity:
Preferred stock, $10.00 par value, 25,000 shares
authorized, of which 20,000 were issued and outstanding
at June 30, 2000 and June 30, 1999 200,000 200,000
Common stock, $0.05 par value, 1,000,000 shares
authorized, 546,380 and 478,530 shares issued and
outstanding at June 30, 2000 and 1999, respectively 27,321 23,928
Additional paid in capital 21,075 24,468
Retained (deficit) earnings (99,583) 18,674
-------- --------
Total Stockholders' Equity 148,813 267,070
-------- --------
542,343 657,362
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 3
TRANSACTION VERIFICATION SYSTEMS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended June 30,
-------------------------------
2000 1999
---- ----
<S> <C> <C>
Product sales, net 2,082,409 2,203,444
Cost of goods sold 1,065,085 1,135,976
----------- -----------
Gross profit 1,017,324 1,067,468
Operating expenses:
Sales and marketing 442,820 389,593
Engineering 120,179 120,179
General and administrative 526,782 519,604
----------- -----------
(Loss) income from operations (72,457) 37,899
Interest and other expense, net (31,167) (25,723)
----------- -----------
Net (loss) income before income taxes (103,624) 12,176
Income tax (benefit) expense (2,435) 2,435
----------- -----------
Net (loss) income (101,189) 9,741
Preferred stock dividends (17,068) (15,568)
----------- -----------
Net loss available to common shareholders (118,257) (5,827)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 4
TRANSACTION VERIFICATION SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
-----------------------------------------
ADDITIONAL TOTAL
PAR PAR PAID IN RETAINED STOCKHOLDERS'
SHARES VALUE SHARES VALUE CAPITAL EARNINGS EQUITY
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1998 22,500 $ 225,000 631,416 $31,572 $ 109,329 $ 24,501 $390,402
Repurchase of capital stock (2,500) (25,000) (152,886) (7,644) (89,373) (122,017)
Stock option grants 4,512 4,512
Dividends on preferred stock (15,568) (15,568)
Net income 9,741 9,741
-----------------------------------------------------------------------------------------
Balance, June 30, 1999 20,000 200,000 478,530 23,928 24,468 18,674 267,070
Conversion of stock
options into common stock 67,850 3,393 (3,393)
Dividends on preferred stock (17,068) (17,068)
Net loss (101,189) (101,189)
-----------------------------------------------------------------------------------------
Balance, June 30, 2000 20,000 $ 200,000 546,380 $27,321 $ 21,075 $ (99,583) $148,813
=========================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements
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<PAGE> 5
TRANSACTION VERIFICATION SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income (101,189) $ 9,741
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization 34,286 26,241
Stock option grants -- 4,512
Allowance for doubtful accounts 11,997 --
Changes in operating assets and liabilities
Decrease in accounts receivables 93,005 53,450
Increase in inventory (21,232) (15,923)
(Increase) decrease in other assets (8,408) 5,370
Increase in accounts payable 2,356 17,241
Decrease in accrued expenses (4,267) (23,393)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,548 77,239
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (6,500) (8,906)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings (repayments) under line of credit agreement, net 40,000 (15,000)
Repayment of notes payable (34,851) (25,458)
Preferred stock dividends paid (17,068) (15,568)
Repurchase of shares of preferred and common stock -- (18,352)
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES (11,919) (74,278)
--------- ---------
Net change in cash and cash equivalents (11,871) (6,045)
Cash at beginning of year 14,274 20,319
--------- ---------
Cash at end of year 2,403 $ 14,274
========= =========
Supplemental Disclosures of Cash Flow Information
Cash payments for interest 31,390 $ 25,987
========= =========
Cash payments for taxes 8,709 $ --
========= =========
Supplemental Noncash Financing Activities
Repurchase of common stock in exchange for notes payable $ -- $ 103,664
========= =========
Intangible asset received in exchange for note payable $ -- $ 149,970
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE> 6
TRANSACTION VERIFICATION SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Transaction Verification Systems, Inc. (the "Company") was formed in April 1981
as a Delaware corporation. On June 30, 2000, the Company merged with and into
Hancock Holdings, Inc, a wholly owned subsidiary of Orion Technologies, Inc.
("Orion") as more fully described in Note 2 below.
The Company is engaged in the design and manufacture of point of sale interface
systems, allowing merchants and retailers to record and monitor their
transactions in order to reduce inventory shrinkage. The Company's systems
record point of sale transactions in real time and allow management to analyze
employee and customer activity through the use of customized software.
Cash Equivalents - The Company considers all highly liquid investments with
original maturities of three months or less at the time of purchase to be cash
equivalents.
Inventory - Inventories are stated at the lower of cost, utilizing the weighted
average out method, or market.
Property and Equipment - Property and equipment are stated at original cost and
are depreciated using an accelerated depreciation method over the estimated
useful lives of the assets, ranging from three to five years. Routine repairs
and maintenance are expensed as incurred.
Intangible Asset - The Company is amortizing the recorded value of its
non-compete agreements with certain former employees using the straight-line
method over the non-compete agreements life of five years.
Revenue Recognition - Product sales revenue is generally recognized upon product
shipment.
Income Taxes - Deferred income taxes result primarily from temporary differences
between financial and tax reporting. Deferred tax assets and liabilities are
determined based on the differences between the financial statement bases and
tax bases of assets and liabilities using enacted tax rates. A valuation
allowance is recorded to reduce a deferred tax asset to that portion that is
expected to more likely than not be realized.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Recently Issued Accounting Standards - In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." The statement requires companies to recognize all
derivatives as either assets or liabilities, with the instruments measured at
fair value. The accounting for changes in fair value and gains or losses depends
on the intended use of the derivative and its resulting designation. The
statement was originally effective for fiscal years beginning
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<PAGE> 7
after June 15, 1999. In July 1999, FASB delayed implementation of this standard
for one year, to June 30, 2000. The Company will adopt SFAS 133 in the first
quarter of 2001. The Company does not expect that the adoption of SFAS No. 133
will have a material impact on its financial statements.
NOTE 2 - MERGER WITH ORION TECHNOLOGIES, INC.
On June 30, 2000, the Company entered into an Agreement and Plan of Merger with
Orion Technologies, Inc., pursuant to which the Company's shareholders exchanged
all of the issued and outstanding shares of Company common stock for 200,300
shares of common stock of Orion.
Each share of Company preferred stock, of which 20,000 shares were issued and
outstanding at the time of the merger, was converted into either the right to
receive a promissory note from Orion in the amount of ten dollars per share, or
upon the holder's providing proper notice to Orion, the right to convert each
share of Company Preferred Stock into 2.5 shares of Orion common stock. Any
holders of Company Preferred Stock who do not elect to receive Orion common
stock will receive a promissory note. The promissory notes bear interest at 8%
annum simple interest, with principal and interest are due and payable on
December 31, 2000, with each note being guaranteed by Orion.
The consideration was determined by arms-length negotiations between the
Company, Orion and Hancock, and was presented to and approved by the directors
of each corporation and the shareholders of the Company.
NOTE 3 - INVENTORY
Inventory consisted of the following June 30, 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Raw materials $ 214,954 $ 218,086
Finished goods 32,271 7,987
---------- ----------
$ 247,225 $ 225,993
========== ==========
</TABLE>
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at June 30, 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Computer and test equipment $ 72,501 $ 66,034
Furniture, fixtures and office equipment 48,946 48,913
---------- ----------
121,447 114,947
Less: Accumulated depreciation 95,719 82,713
---------- ----------
$ 25,728 $ 32,234
========== ==========
</TABLE>
NOTE 5 - BANK LINE OF CREDIT
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<PAGE> 8
The Company has a revolving line of credit of $100,000 that bears interest at
10.5%, is collateralized by the assets of the Company and guaranteed by two
stockholders of the Company. At June 30, 2000 the Company had borrowed $40,000
under this line. No amounts had been borrowed on this line at June 30, 1999.
NOTE 6 - NOTES PAYABLE
Notes payable consisted of the following at June 30, 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Notes payable (1) $ 75,885 $ 91,084
Non-interest bearing notes payable (2) 73,866 93,518
---------- ----------
149,751 184,602
Less: current portion 40,212 34,851
---------- ----------
Long-term portion of notes payable $ 109,539 $ 149,751
========== ==========
</TABLE>
(1) In August 1998, the Company entered into a Severance Agreement with
former shareholders of the Company to acquire to acquire 144,642 shares
of common stock they held in exchange for notes payable totaling
$103,664. These notes are payable in sixty monthly installments of
principal and interest at 14.44% through August 1, 2000.
(2) Also as part of the above Agreement, these former shareholders agreed
to not compete with the Company in exchange for separate consideration
of sixty equal monthly payments of $2,500. The Company recorded this
note, and the intangible asset, at its discounted value, using an
interest rate of 14.44 percent, of $106,397
Future minimum payments of notes payable at June 30, 2000 are as follows:
<TABLE>
<CAPTION>
Fiscal
Year June
30:
-----------
<S> <C>
2001 $ 40,212
2002 46,422
2003 52,881
2004 10,056
------------
$ 149,571
============
</TABLE>
NOTE 7 - STOCKHOLDERS' EQUITY
The Company's preferred stock is non-voting. The preferred stock is redeemable
at the option of the Company by resolution of its board of directors at any time
for $10 per share. In addition, the preferred stockholders are entitled to
receive non-cumulative cash dividends at a prescribed rate per share, payable
semi-annually on the last day of December and June.
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<PAGE> 9
In May 2000, in connection with the acquisition of the Company by Orion,
described in Note 2 above, the Company converted options for the purchase of
96,928 shares of the Company's common stock into 67,850 shares of Company common
stock. Management believes that on the date of conversion of the options into
common stock, that the market price approximated exercise price, and no
compensation expense was recorded. At June 30, 2000, there were no outstanding
options to purchase shares of the Company's capital stock.
In October 1999, the Company re-priced stock options for the purchase of 96,298
shares of its common stock, which represented all of its issued and outstanding
stock options to a new exercise price of $0.71 per share. According to Financial
Accounting Standard Board's Interpretation No. 44 "Accounting for Certain
Transactions Involving Stock Compensation," reductions in the exercise price of
a fixed option award must be accounted for as variable from the date of the
modification to the date the award is exercised, forfeited or expires
unexercised. Under variable accounting, a compensation cost must be recorded
based on the intrinsic value of the award, which is computed as the difference
between the exercise price and the fair value of the Company's common stock on
the date of the re-pricing. Thereafter, an additional compensation cost must be
recorded or reversed based on the difference between the value of the option at
the beginning and the end of the accounting period.
In addition to the repurchase of 144,642 shares of its common stock in August
1998, described in Note 6, the Company repurchased 8,244 shares of its common
stock and 2,500 shares of its preferred stock for a total purchase price of
$30,853 in June 1999.
In August, 1998, in connection with providing personal guarantees for the
Company's line of credit, the Company granted to two officers fully vested
options to purchase 3,112 shares of the Company's common stock for $0.05 per
share. At the time of the grant, the fair market value of the Company's common
stock, as determined by the board of directors was $1.50. The Company recorded
$4,512 of expense representing the difference between the fair market value and
the exercise price on the date of grant.
NOTE 9 - INCOME TAXES
Deferred income taxes reflect the net effects of temporary differences between
the carrying amount of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
Company's deferred tax assets for federal and state income taxes as of June 30,
2000 and 1999 are as follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Net operating loss 19,000 -
Less: valuation allowance (19,000) -
-------- --------
Deferred tax assets $ - $ -
======== ========
</TABLE>
Realization of deferred tax assets is dependent upon future earnings, if any.
The Company has recorded a full valuation allowance against its deferred tax
assets since management believes it is more likely than not that these asset
will not be realized. No income tax benefit has been recorded for all periods
presented because of the valuation allowance.
12
<PAGE> 10
At June 30, 2000, the Company has available, for U.S. income tax purposes, net
operating loss carryforwards of approximately $100,000, which can be used to
offset future taxable income through 2019. There can be no assurance that the
Company will realize the benefit of the net operating loss carryforwards. In
addition, the Company's utilization of its net operating loss carryforward will
be limited pursuant to Internal Revenue Code Section 382, due to cumulative
changes in ownership in excess of 50% within a three year period.
The primary difference in the Company's federal statutory income tax rate and
the Company's effective rate is primarily attributed to the impact of state
income taxes and the recording of a full valuation allowance.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
The Company leases office and manufacturing space and equipment under
non-cancelable operating leases expiring on various dates in 2001. Total rent
expense for all operating leases was approximately $102,000 and $101,000 for the
years ended June 30, 2000 and 1999, respectively. Future minimum lease payments
for non-cancelable operating leases as of June 30, 2000 are approximately
$62,000 in 2001.
NOTE 11 - EMPLOYEE BENEFIT PLAN
In August 1998, the Company established a Simple IRA retirement plan. The Plan
covers substantially all employees. Company matching contributions during the
years ended June 30, 2000 and 1999 were approximately $18,000 and $21,000,
respectively.
13
