CONNECTIVITY, INC.
FINANCIAL STATEMENTS
AND INDEPENDENT AUDITORS' REPORT
YEAR ENDED DECEMBER 31, 2001
CONNECTIVITY, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 2001
TABLE OF CONTENTS
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PAGE
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INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS:
Balance Sheet 2
Statement of Income and Accumulated Deficit 3
Statement of Cash Flows 4
Notes to Financial Statements 5-9
INDEPENDENT AUDITORS' REPORT
Board of Directors
Connectivity, Inc.
Lauderhill, Florida
We have audited the accompanying balance sheet of Connectivity, Inc. as of
December 31, 2001, and the related statements of operations and accumulated
deficit and cash flows, for the year 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 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 Connectivity, Inc. as of
December 31, 2001, and the results of its operations and cash flows for the year
then ended in conformity with accounting principles generally accepted in the
United States of America.
SHELDON, RIBOTSKY & LEVINE, P.A.
Certified Public Accountants
February 14, 2003
North Miami, Florida
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CONNECTIVITY, INC.
BALANCE SHEET
DECEMBER 31, 2001
A S S E T S
CURRENT ASSETS:
Cash $ 2,624
Accounts receivable 34,355
Inventories 39,832
Investments 2,000
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Total current assets 78,811
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PROPERTY AND EQUIPMENT, Net 29,706
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$ 108,517
=========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Line of credit $ 19,100
Accounts payable 21,022
Short-term financing arrangements 54,057
Financing arrangements with affiliated entities 200,442
Current portion of long-term debt 4,136
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Total current liabilities 298,757
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LONG TERM DEBT
Notes payable 2,637
Capital leases 426
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3,063
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Common stock, $1 par value; 7,500 shares authorized;
3,660 shares issued and outstanding 3,660
Additional paid in capital 64,654
Stockholders' deficit (261,617)
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TOTAL STOCKHOLDERS' DEFICIT (193,303)
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$ 108,517
=========
The accompanying notes are an integral part of these financial statements
2
CONNECTIVITY, INC.
STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 2001
REVENUE
Product sales $ 902,014
Commissions 37,500
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939,514
COST OF REVENUES 563,742
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GROSS PROFIT 375,772
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Salaries and benefits 98,850
Commissions 114,050
Office expense 45,060
Rent 20,352
Advertising 26,943
Repairs and maintenance 4,253
Travel 16,869
Depreciation 9,466
Professional fees 2,618
Interest and factor fees 45,293
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383,754
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LOSS BEFORE INCOME TAXES (7,982)
PROVISION FOR INCOME TAXES --
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NET LOSS (7,982)
ACCUMULATED DEFICIT - BEGINNING OF YEAR (253,635)
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ACCUMULATED DEFICIT - END OF YEAR $(261,617)
=========
The accompanying notes are an integral part of these financial statements
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CONNECTIVITY, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2001
OPERATING ACTIVITIES:
Net loss $ (7,982)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation 9,466
Changes in assets and liabilities:
Accounts receivable (11,722)
Inventories (28,130)
Accounts payable (19,720)
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Net cash (used) by operating activities (58,088)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (9,966)
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Net cash (used) by investing activities (9,966)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments in short-term financing arrangements (54,513)
Proceeds from short-term financing arrangements 79,026
Proceeds from financing arrangements with affiliated entities 40,815
Proceeds from notes payable 4,540
Principal payments on notes payable and capital lease obligations (28,897)
Issuance of common stock 30,000
Investment in affiliated entity (2,000)
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Net cash provided by financing activities 68,971
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NET INCREASE IN CASH 917
CASH - BEGINNING OF YEAR 1,707
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CASH - END OF YEAR $ 2,624
========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID FOR INTEREST $ 45,293
========
NOTE PAYABLE CONVERTED INTO COMMON STOCK $ 30,000
========
The accompanying notes are an integral part of these financial statements.
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CONNECTIVITY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS - Connectivity, Inc. ("the Company"), incorporated
on May 28, 1997 in the State of Florida, is a marketing and sales
company for wireless call boxes and call box networks that employ
radio technology to provide two way voice or voice and visual
communication between the call box user and the monitor. The wireless
call boxes are sold direct or through authorized re-sellers to a range
of industries including education, transportation, corporate,
military, manufacturing and recreation. The Company, which is
headquartered in Lauderhill, Florida, purchases substantially all of
its wireless call boxes from Econo-Comm, Inc. d/b/a Mobile
Communications ("Mobile"), a company affiliated through common
management (See Notes 7 and 8)
BUSINESS COMBINATIONS - On May 30, 2002 the Company was acquired by
SRC Technologies, Inc. (SRC) in a stock for stock tax free exchange
and the Company became a 100% owned subsidiary of SRC.
On October 17, 2002 SRC signed a letter of intent to be acquired by
Career Engine Network, Inc. ( a publicly held company) in which SRC
would become a 100% wholly owned subsidiary.
USE OF ESTIMATES - The preparation of financial statements requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
BAD DEBTS - The Company accounts for bad debts using the direct
write-off method which management believes does not materially differ
from the allowance method.
SALES OF ACCOUNTS RECEIVABLE - The Company records losses from the
sale of accounts receivable that represent the difference between the
fair value of the account receivable sold and the proceeds received
from the sale. Generally, the party purchasing the accounts receivable
(the "Purchaser") holds in escrow a portion of the sales proceeds
until the accounts receivable are collected and adjusts the purchase
price based on the collection period over thirty days. The Company
reports escrow balances with the Purchaser in accounts receivable. The
Company estimates the fair value of escrow balances based on the value
expected to be realized, which is the balance in escrow less estimated
adjustments for collection periods over thirty days (See Note 8).
INVENTORIES - The Company's inventories consist of stanchions on which
the wireless call boxes are mounted prior to installation and various
accessories used to power and secure the wireless call boxes at the
prescribed installation locations. Inventories are stated at the lower
of cost, using the specific identification or first-in, first-out
method, or market.
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CONNECTIVITY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Major renewals or betterments are capitalized, while maintenance and
repairs that do not improve or extend the useful lives of the assets
are charged to expense as incurred. Costs related to the initial
design and implementation of the Company's Internet web page have been
capitalized, while the costs of web page maintenance are expenses as
incurred. Assets are depreciated over their estimated useful lives
using the straight-line method. The estimated useful lives are as
follows:
Office equipment 5-7 Years
Furniture and fixtures 7-10 Years
Internet web page and software 3 Years
Installation equipment 5-10 Years
The Company records impairment losses on property and equipment used
in operations when events and circumstances indicate that the assets
might be impaired and the undiscounted cash flows estimated to be
generated by those assets are less than the carrying amounts of those
assets.
STARTUP ACTIVITIES - Costs associated with the organization and
start-up activities of the Company are expenses as incurred.
SHORT-TERM FINANCING ARRANGEMENTS - The Company accounts for credit
card obligations as short-term financing arrangements. The obligations
require minimum monthly payments that are based on approximately 3% of
the outstanding balance and interest accrued on the outstanding
balances at rates ranging from 10.5% to 25%.
FINANCING ARRANGEMENTS WITH AFFILIATED ENTITIES - Mobile, which
manufactures the wireless call boxes sold by the Company, has offered
extended terms of credit to the Company for the purchase of wireless
call boxes. The extension of credit terms was provided to finance
marketing and start-up costs of the Company. Because the credit terms
with Mobile have not been reduced to a written agreement, the Company
reports the amount payable to Mobile as a current liability.
REVENUE RECOGNITION - The Company recognizes revenue from the sale of
a product upon installation or delivery to the customer, depending on
the terms of the underlying sales agreement.
INVESTMENT - During 2001 the company purchased 40,000 shares of
Southern Dragon, Inc., the company that acquired Connectivity during
2002 (See Note 1) for $2,000 and is carried at fair value.
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CONNECTIVITY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
INCOME TAXES - Income taxes are estimated for the tax effects of
transactions reported in the financial statements and consist of taxes
currently payable plus deferred taxes related primarily to differences
between the financial reporting basis and income tax basis of assets
and liabilities. Deferred tax assets and liabilities represent future
tax consequences of those differences, which will either be taxable or
deductible when the assets and liabilities are recovered or settled.
Deferred taxes may also be recognized for operating losses that are
available to offset future taxable income. Deferred taxes are adjusted
for changes in tax laws and tax rates when those changes are enacted.
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which the temporary
differences become deductible. Management considers the reversal of
any deferred tax liabilities, projected future taxable income and tax
planning strategies in making this assessment. Valuation allowances
are established, when necessary, to reduce the deferred tax assets to
the amount expected to be realized.
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 2001:
Office equipment $ 21,877
Furniture and fixtures 13,107
Internet web page and software 13,000
Installation equipment 5,126
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53,110
Less accumulated depreciation (23,404)
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$ 29,706
=========
NOTE 3 - NOTE PAYABLE
The Company's note payable consist of the following at December 31,
2001:
A note payable with a financial institution dated July 2, 2001. The
note, which accrued interest at 14% interest per annum, is payable in
monthly installments of principal and interest of $156. The note is
collateralized with certain installation equipment.
4,021
Less current portion 1,384
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$ 2,637
=========
(Continued)
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CONNECTIVITY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 3 - NOTE PAYABLE - (CONTINUED)
Scheduled maturities of the long-term portion of notes payable at
December 31, 2001 are as follows:
December 31,
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2002 $ 1,384
2003 1,596
2004 1,041
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$ 4,021
NOTE 4 - CAPITAL LEASE OBLIGATIONS
The Company leases certain office equipment under various capital
lease agreements. The total cost and accumulated depreciation of
equipment under these capital leases was $10,185 and $5,196,
respectively, at December 31, 2001. Depreciation of the leased
equipment is charged against operations and included in the reported
depreciation expense. The minimum monthly payment under these capital
lease agreements is $406. Future minimum lease payments under these
capital leases are as follows:
December 31, Interest Principal
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2002 $ 470 $ 2,752
2003 22 426
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$ 492 $ 3,179
======== =========
NOTE 5 - INCOME TAXES
Deferred income taxes are primarily the result of unused operating
loss carryforwards that may be applied against future taxable income
and the reporting of tax basis versus book value on certain assets and
liabilities and the accruing of certain expenses differently for
income tax purposes versus financial reporting purposes. The Company
has net operating loss carryforwards of approximately $32,402 that
expire in 2019 and 2020. The tax effects of temporary differences that
give rise to deferred taxes are as follows at December 31, 2001:
Deferred tax assets:
Net operating loss carryforwards $ 4,860
Valuation allowance 4,860
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$ -
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(Continued)
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CONNECTIVITY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 6 - OPERATING LEASE COMMITMENTS
The Company leases office space under a month to month agreement for
monthly rent of $1,696.
NOTE 7 - TRANSACTIONS WITH AFFILIATES
The Company purchases its wireless call boxes from Mobile, an entity
affiliated with the Company through common management. During the year
ended December 31, 2001, the Company purchased wireless call boxes
from Mobile totaling approximately $477,000. Additionally, the Company
earned $37,500 in commissions for generating sales of wireless call
boxes on behalf of Mobile. Commissions earned by the Company are
applied against the balance payable to Mobile, which was $200,442 at
December 31, 2001 (See Note 8).
NOTE 8 - RISKS AND CONTINGENCIES
The Company purchases the wireless call boxes that Mobile manufactures
under an agreement that provides the Company an exclusive right to
sell, distribute, market and lease the wireless call boxes. The
agreement contains annual renewal options that are contingent upon
certain provisions and unit volumes. The Company has not met the unit
volumes required by the agreement, however, Mobile has continued to
provide the Company with the exclusive rights provided in the
agreement. A patent, recorded in the name of Mobile's president, on
certain radio technologies used in the wireless call boxes positions
Mobile as the sole source for the wireless call boxes currently
marketed and sold by the Company.
NOTE 9 - LINE OF CREDIT
The Company secured a $20,000 line of credit with a financial
institution. The line carries interest at prime plus 1 percent. At
December 31, 2001 the Company owed $19,100 on this line of credit.
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