EX-99.1 2 w43251ex99-1.txt AUDITED FINANCIAL STATEMENTS 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 4 2 TRANSACTION VERIFICATION SYSTEMS, INC. BALANCE SHEETS

The accompanying notes are an integral part of these financial statements. 5 3 TRANSACTION VERIFICATION SYSTEMS, INC. STATEMENTS OF OPERATIONS

The accompanying notes are an integral part of these financial statements. 6 4 TRANSACTION VERIFICATION SYSTEMS, INC. STATEMENTS OF STOCKHOLDERS' EQUITY

The accompanying notes are an integral part of these financial statements 7 5 TRANSACTION VERIFICATION SYSTEMS, INC. STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of these financial statements. 8 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 9 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:

NOTE 4 - PROPERTY AND EQUIPMENT Property and equipment consisted of the following at June 30, 2000 and 1999:

NOTE 5 - BANK LINE OF CREDIT 10 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:

(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:

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. 11 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:

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 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

ORION TECHNOLOGIES INC 8-K/A