SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report: August 26, 2003
Franklin Wireless Corp.
(Exact name of the Company as specified in its charter)
California 0-11616 95-3733534
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
9565 Waples St., Suite 250
San Diego, CA 92121
(Address of principal executive offices)
The Company's telephone number, including area code: (858) 320-0567
733 Lakefield Road,
Westlake Village California, 91361
(Former name or former address, if changed since last report)
Item 7. Financial Statements and Exhibits
(a) Financial statements of businesses acquired.
Attached are audited financial statements of Accetio, Inc., a
California corporation, for the years ended December 31, 2002
and 2001.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Franklin Wireless Corp.,
a California corporation
By: /s/ O.C. Kim
-----------------------------
President
Date: January 14, 2004
ACCETIO, INC.
and
SUBSIDIARY
___________________________________
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
WITH
INDEPENDENT AUDITORS' REPORT
F-1
ACCETIO, INC. AND SUBSIDIARY
DECEMBER 31, 2002
CONTENTS PAGE
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT F-3
FINANCIAL STATEMENTS:
Consolidated Balance Sheet F-4
Consolidated Statement of Income F-6
Consolidated Statement of Changes in Stockholders' Equity F-7
Consolidated Statement of Cash Flows F-8
Notes to Consolidated Financial Statements F-9
F-2
KIM & LEE
CORPORATION
-----
Certified Public Accountants
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Accetio, Inc.
San Diego, California
We have audited the accompanying consolidated balance sheet of Accetio, Inc. and
subsidiary as of December 31, 2002 and the related consolidated statements of
income and retained earnings 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 audits.
We conducted our audits 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 consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated 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, based on our audit, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
positions of Accetio, Inc. and subsidiary as of December 31, 2002, and the
results of its operations, changes in stockholders' equity and its cash flows
for the year then ended in conformity with accounting principles generally
accepted in the United States of America.
San Diego, California
October 30, 2003
/S/ Kim & Lee
F-3
ACCETIO, INC. AND SUBSIDIARY
Consolidated Balance Sheet
December 31, 2002
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash (Note 1) $ 959,017
Advance to employees 50,556
Advance to supplier 100,000
Taxes refundable 26,747
------------
Total current assets 1,136,320
PROPERTY AND EQUIPMENT (Note 1)
Machinery and equipment 187,560
Software 56,152
Office equipment 92,331
Furniture and Fixture 8,712
------------
344,755
Less: Accumulated depreciation (55,441)
------------
Net property and equipment 289,314
OTHER ASSETS 128,061
Intangibles (Note 1)
Security deposit 87,946
------------
Total other assets 216,007
------------
Total assets $ 1,641,641
============
(Continued)
See the auditors' report and the accompanying notes to the
consolidated financial statements
F-4
ACCETIO, INC. AND SUBSIDIARY
Consolidated Balance Sheet
December 31, 2002
- --------------------------------------------------------------------------------
(Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 317,740
Payroll taxes payable 23,894
Customer deposits (Note 1& 7) 1,001,400
Accrued liabilities 59,494
------------
Total liabilities 1,402,528
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY (Note 3)
Common stock, no par value;
20,000,000 shares authorized;
12,000,000 shares issued and outstanding 120,000
Series A Convertible Preferred stock, no par value;
20,000,000 authorized; 4,748,931 shares issued
and outstanding 1,709,615
Stock subscription receivable (43,850)
Accumulated deficit (1,546,652)
------------
Total stockholders' equity 239,113
------------
Total liabilities and stockholders' equity $ 1,641,641
============
See the auditors' report and the accompanying notes to the
consolidated financial statements
F-5
ACCETIO, INC. AND SUBSIDIARY
Consolidated Statement of Income
For the year ended December 31, 2002
- --------------------------------------------------------------------------------
Revenue $ 856,370
Cost of revenue
Materials 207,591
Salaries 771,941
Subcontractors 85,957
Depreciation 64,838
------------
Total cost of revenue 1,130,327
------------
Gross profit (273,957)
General and administrative expenses 895,728
------------
Loss from operations (1,169,685)
Other income (expense):
Net foreign currency transaction loss (1,986)
Loss on disposition of fixed assets (21,191)
Interest income 19,335
Other expenses (6,729)
------------
Total other income (expenses) (10,571)
------------
Net loss before income taxes (1,180,256)
Provision for income taxes (Note 4) 800
------------
Net loss $(1,181,056)
============
See the auditors' report and the accompanying notes to the
consolidated financial statements
F-6
ACCETIO, INC. AND SUBSIDIARY
Consolidated Statement of Changes in Stockholders' Equity
For the year ended December 31, 2002
- -------------------------------------------------------------------------------------------------
Accumulated
Deficit and
Common Preferred other Total
Stock Stock Comprehensive Shareholders
Amount Amount Income Equity
------------ ------------ ------------ ------------
Balance,
December 31, 2001 $ 120,000 $ 600,000 $ (359,518) $ 360,482
Preferred Stock issued in
2002 -- 1,109,615 - 1,109,615
Subscription receivable (43,850) -- -- (43,850)
Comprehensive
income (loss)
Net loss -- -- -- (1,181,056)
Foreign currency
translation adjustment -- -- -- (6,078)
------------ ------------ ------------ ------------
Balance,
December 31, 2002 $ 76,150 $ 1,709,615 $ (359,518) $ 239,113
============ ============ ============ ============
See the auditors' report and the accompanying notes to the
consolidated financial statements
F-7
ACCETIO, INC. AND SUBSIDIARY
Consolidated Statement of Cash Flows
December 31, 2002
- --------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Income (loss) from operations $(1,181,056)
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation 67,379
Loss on disposition of fixed assets 21,191
(Increase) Decrease in:
Loans to employee (50,556)
Advance to supplier (100,000)
Taxes refundable (26,747)
Security deposit (87,946)
Other current assets 440
Increase (Decrease) in:
Accounts payable 317,740
Customer deposits 1,001,400
Accrued liabilities 14,750
------------
Net cash used in operating activities (23,405)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (356,355)
Increase in intangibles (116,408)
------------
Net cash used in investing Activities (472,763)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock 1,109,615
Proceeds from stock subscription receivable 76,150
------------
Net cash provided by financing activities 1,185,765
------------
Effect of exchange rate changes (6,078)
Net increase in cash 683,519
Cash, beginning of year 275,498
------------
Cash, end of year $ 959,017
============
SUPPLEMENTAL INFORMATION
Cash paid during the year for:
Incomes taxes
$ 800
============
See the auditors' report and the accompanying notes to the
consolidated financial statements
F-8
ACCETIO, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002
- --------------------------------------------------------------------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of the Accetio, Inc.
("Accetio" or "the Company") is presented to assist in understanding
the Company's financial statements. The financial statements and notes
are representations of the Company's management, who is responsible for
their integrity and objectivity.
Organization
------------
Accetio, Inc., incorporated in the State of California on April 23,
2001, is engaged in development and sales of broad line of cellular
phones and software products.
In March, 2002, the Company established ARG, Inc., a wholly owned
subsidiary ("Subsidiary"), in Seoul, Korea to provide the Company with
research and development services.
Basis of Presentation
---------------------
The accompanying consolidated financial statements of Accetio include
the accounts of the Company and its wholly owned subsidiary in Korea.
All significant inter-company balances and transactions have been
eliminated in consolidation. In the opinion of management, the
consolidated financial statements reflect all normal and recurring
adjustments which are necessary for a fair presentation of the
Company's financial position, results of operations and cash flows as
of the dates and for the periods presented.
Cash and Cash Equivalents
-------------------------
The Company considers all money market funds and highly liquid
financial instruments with original maturities of three months or less
to be cash equivalents.
The Company maintains its cash in bank accounts which, at times, may
exceed federally insured limits. The Company has not experienced any
losses in such accounts. Management believes they are not exposed to
any significant risk on their cash balances
Allowance for Doubtful Accounts
-------------------------------
An allowance for doubtful accounts is computed under the allowance
method, based upon and management's estimates of uncollectible
accounts. The company does not have any accounts receivable at
year-end; accordingly, no allowance for doubtful accounts is required.
Property and Equipment
----------------------
Depreciable assets are recorded at cost. Depreciation is based upon
estimated useful lives of 5 to 7 years, using principally the
straight-line methods.
F-9
ACCETIO, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002
- --------------------------------------------------------------------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Expenditures for maintenance and repairs are charged to income.
Improvement and additions are capitalized. When assets are disposed of,
the cost and accumulated depreciation are eliminated from the related
accounts, and any gain or loss is reflected in current operations.
Translation of Foreign Currency
-------------------------------
The functional currency of the Company's foreign subsidiary is the
local currency. Translation adjustments, amounting $6,078 at December
31, 2002, which result from the process of translating foreign currency
financial statements into U.S. dollars, are included as a component of
accumulated other comprehensive income. Transaction gains and losses,
which have not been material to date, are included in other income in
the accompanying statement of income.
Comprehensive Income
--------------------
Other comprehensive income (loss) includes certain changes in equity
that are excluded from net income (loss), such as, translation
adjustments, unrealized holding gains and losses on available-for-sale
marketable securities and certain derivative instruments. The Company's
other comprehensive income (loss) is composed of foreign currency
translation adjustments.
Income Taxes
------------
The Company accounts for income taxes under the provisions of Statement
of Financial Accounting Standards No. 109, "Accounting for Income
Taxes", which requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that
have been included in the financial statements. This standard requires,
among other things, recognition of future tax benefits, measured by
enacted tax rates attributable to temporary differences between
financial statements and income tax basis of assets and liabilities,
and net operating loss carry-forwards to the extent that realization of
such benefits is more likely than not.
Accounting 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 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 revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
Revenue Recognition
-------------------
The Company recognizes revenues from fixed-price contracts on the
percentage-ofcompletion method, measured by the percentage of cost
incurred to date to estimated total cost for each contract.
F-10
ACCETIO, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002
- --------------------------------------------------------------------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs, and depreciation. Selling, general, and
administrative costs are charged to expense as incurred. Changes in job
performance, job conditions, and estimated profitability may result in
revisions to costs and income, which are recognized in the period in
which the revisions are determined. Changes in estimated job
profitability resulting from job performance, job conditions, contract
penalty provisions, claims, change orders, and settlements, are
accounted for as changes in estimates in the current period.
Revenue, costs, and estimated earnings on an uncompleted contract and
related amount billed as of December 31, 2002 are as follows.
Costs incurred on an uncompleted contract $ 742,700
Estimated cost to complete contract 652,300
---------------
Estimated total cost of contract 1,395,000
Estimated gross profit 105,000
---------------
Contract fixed price 1,500,000
Percentage of completion to date 53.24%
Revenue recognized in current year 798,600
Customer deposit 800,000
Intangibles
-----------
Intangible assets consist of acquired technology and trademark and are
stated at cost or at their impaired value.
Research and Development Costs
------------------------------
Research, development, and engineering costs are expensed in the year
incurred.
Recent Accounting Pronouncements
--------------------------------
The Company has adopted Statements of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets", which is
effective for the Company's intangibles acquired after June 30, 2001.
The Company has also adopted SFAS No. 143, "Accounting for Assets
Retirement Obligations", and SFAS 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets". These statements address financial
accounting and reporting for obligations associated with the retirement
of tangible long- lived assets and the associated asset retirement
costs. Adoption is not expected to have a material effect on the
Company's financial statements.
F-11
ACCETIO, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002
- --------------------------------------------------------------------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
In June 2002, the FASB issued No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS no. 146 addresses the timing
and amount of costs recognized as a result of restructuring and similar
activities. The Company will apply SFAS No. 146 to activities initiated
after December 31, 2002. The adoption of SFAS No. 146 is not expected
to have a material impact on the Company's consolidated statements of
income or financial position.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure." This Statement
amends SFAS No. 123, "Stock-Based Compensation," to provide alternative
methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of SFAS No.
123 to require \prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported
results. The alternative methods of transition of SFAS No. 148 are
effective for fiscal years ended after December 15, 2002. The
disclosure provision of SFAS No. 148 is effective for fiscal years
ending after December 15, 2002.
The Company does not believe that any of these recent accounting
pronouncements will have a material impact on their financial position
of result of operations.
NOTE 2: STOCK OPTION PLAN
The Company's Stock Option Plan authorizes the granting of stock
options to its employees, consultants, and directors for up to
1,500,000 shares of common stock. Options granted under the Plan may be
either incentive stock options or nonqualified stock options. Incentive
stock options ("ISO") may be granted only to company employees
(including officers and directors who are also employees). Nonqualified
stock options ("NSO") may be granted to Company employees and
consultants.
Options under the Plan may be granted for periods of up to ten years.
The exercise price of each option shall be established in the
discretion of the Board; provided, however, that (a) the exercise price
per share for an ISO shall be not less than the estimated Fair Market
Value of a share of Stock on the effective date of grant of the option,
(b) the exercise price per share for NSO shall not be less than 85% of
the estimated fair market value of the shares on the date of grant, and
(c) the exercise price of an option granted to a 10% or more
shareholder shall not be less than 110% of the estimated fair value of
the shares on the date of grant. No stock options are outstanding as of
December 31, 2002.
NOTE 3: CONVERTIBLE REDEEMABLE PREFERRED STOCK
In January 2002, the Company issued 3,082,264 shares of Series A
redeemable convertible preferred stock at $0.36 per share for total
cash proceeds of $1,109,615.
F-12
ACCETIO, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002
- --------------------------------------------------------------------------------
NOTE 3: CONVERTIBLE REDEEMABLE PREFERRED STOCK, CONTINUED
Conversion
----------
Each share of Series A Preferred stock is convertible into shares of
common stock. The conversion rate at December 31, 2002 was one-for-one.
The Series A preferred stock will automatically convert to common stock
upon the closing of a public offering of the Company's common stock
involving aggregate proceeds of at least $10,000,000. In addition, the
Series A preferred stock will automatically convert to common stock
upon the written election of majority of the outstanding Series A
preferred stockholders.
Dividends
---------
The holders of the Series A preferred stock are entitled to receive
dividends when and if declared by the Board of Directors. Dividends on
Series A preferred stock are in preference to and prior to any payment
of any dividend on common stock and are not cumulative. As of December
31, 2002, no dividend has been declared.
Redemption
----------
On or after December 31, 2004, the Company, at the written election of
any holder of the Series A preferred stock, is required to redeem all
or any portion of the shares of Series A preferred stock held by such
holder at a redemption price of $1.00 per share plus all declared and
unpaid dividends thereon.
Liquidation preference
----------------------
In the event of any liquidation, dissolution or winding up of the
Company, the holders of the Series A redeemable convertible preferred
stock are entitled to receive prior to, and in preference to, any
distribution to the common stockholders, an amount equal to the greater
of $1.00 per share plus accrued but unpaid dividends, or such amount
per share as would have been payable had all shares of the Series A
redeemable convertible preferred stock been converted to common stock
immediately prior to such event of liquidation, dissolution or winding
up.
Voting rights
-------------
Each Series A preferred stockholder is entitled to the number of votes
equal to the number of shares of common stock into which such holder's
shares are convertible.
NOTE 4: UNUSED AVAILABLE LINE OF CREDIT
The Company has two bank lines of credit of $300,000 and $50,000, both
matures on September 30, 2003. There are no amounts outstanding under
these lines of credit at December 31, 2002. This line of credit is
secured by Company's $300,000 certificate of deposit and bears interest
at the bank's prime rate (4.75% as of December 31, 2002) plus 0.75 and
1.5, respectively.
F-13
ACCETIO, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2002
- --------------------------------------------------------------------------------
NOTE 5: PROVISION FOR INCOME TAXES
The income tax provisions for the year ended December 31, 2002 are
summarized as follows:
Federal income taxes
-
State income taxes 800
Subsidiary income taxes -
---------
Total 800
=========
The Company has deferred tax assets of approximately $300,000 resulting
primarily from net operating loss at December 31, 2002. However, a
valuation allowance was established to reduce the deferred tax assets
to zero. 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 those
temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, the projected future
taxable income and tax planning strategies in making this assessment.
Based on the level of historical taxable income and projections for
future taxable income over the periods in which the deferred tax assets
are deductible, management believes that it is more likely than not
that most of the deferred tax assets will not be realized.
NOTE 6: COMMITMENTS AND CONTINGENCIES
The Company leases its office under 1 year operating lease for $ 3,392
per month. The lease agreements, expiring at May 31, 2003, also require
payment of various expenses incidental to the use of the properties.
NOTE 7: SUBSEQUENT EVENT
On September 12, 2003, the Company has entered a tax free merger with
and into Franklin Telecommunications Corp. in a reorganization pursuant
to Section 368(a)(1)(A) of the Internal Revenue Code, in which the
shareholders of the Company will receive common stock in Franklin
Telecommunications Corp. in exchange for their shares of the Company.
As a result of the merger transaction, the shareholders of Accetio
received 623,644,443 shares of common stock of Franklin
Telecommunications Corp. which represent 80% of the outstanding shares
after giving effect to the merger.
The Company is in the process of selling majority shares of its
subsidiary in Korea, in exchange for a customer deposit of $1,000,000
made on a fixed price contract that has been cancelled.
F-14
ACCETIO, INC.
(A DEVELOPMENT STAGE COMPANY)
_____________________________
FINANCIAL STATEMENTS
DECEMBER 31, 2001
WITH
INDEPENDENT AUDITORS' REPORT
F-15
ACCETIO, INC.
(A DEVELOPMENT STAGE COMPANY)
DECEMBER 31, 2001
- --------------------------------------------------------------------------------
CONTENTS PAGE
INDEPENDENT AUDITORS' REPORT F-17
3
FINANCIAL STATEMENTS:
Balance Sheet F-18
Statement of Income and Retained Earnings F-20
Statement of Cash Flows F-21
Notes to Financial Statements F-22
F-16
KIM & LEE
CORPORATION
-----
Certified Public Accountants
INDEPENDENT AUDITORS' REPORT
To the Board
of Directors
Accetio, Inc.
San Diego,
California
We have audited the accompanying balance sheet of Accetio, Inc. as of December
31, 2001 and the related statements of income and retained earnings and cash
flows for the period from April 23, 2001 of inception) to December 31, 2001.
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 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 audits provide a
reasonable basis for our opinion.
In our opinion, based on our audit, the financial statements referred to above
present fairly, in all material respects, the financial positions of Accetio,
Inc. as of December 31, 2001, and the results of its operations, changes in
stockholders' equity and its cash flows for the period then ended in conformity
with accounting principles generally accepted in the United States of America.
San Diego, California
October 30, 2003
F-17
ACCETIO, INC.
(A DEVELOPMENT STAGE COMPANY)
Balance Sheet
December 31, 2001
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash (Note 1) $ 275,498
Other current assets 440
----------
Total current assets 275,938
PROPERTY AND EQUIPMENT (Note 1)
Office equipment 14,947
Furniture and Fixture 8,712
----------
23,659
Less: Accumulated depreciation (2,130)
----------
Net property and equipment 21,529
OTHER ASSET
Intangible 11,653
----------
Total assets $ 309,120
==========
(Continued)
See the auditors' report and the accompanying notes to the financial statements
F-18
ACCETIO, INC.
(A DEVELOPMENT STAGE COMPANY)
Balance Sheet
December 31, 2001
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Payroll taxes payable $ 24,816
Accrued liabilities 43,822
----------
Total liabilities 68,638
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY (Note 3)
Common stock: no par value;
20,000,000 shares authorized;
12,000,000 shares issued and outstanding 120,000
Series A Convertible Preferred stock, no par value;
20,000,000 authorized; 1,666,66 shares issued
and outstanding 600,000
Stock subscription receivable (120,000)
Accumulated deficit during development stage (359,518)
----------
Total stockholders' equity 240,482
----------
Total liabilities and stockholders' equity $ 309,120
==========
See the auditors' report and the accompanying notes to the financial statements
F-19
ACCETIO, INC.
(A DEVELOPMENT STAGE COMPANY)
Statement of Income and Retained Earnings
For the period from April 23, 2001 (Date of inception) to December 31, 2001
- --------------------------------------------------------------------------------
Sales $ 32,180
Cost of goods sold:
Purchases 28,640
----------
Total cost of goods sold 28,640
----------
Gross profit 3,540
General and administrative expenses 365,072
----------
Loss from operations (361,532)
Other income (expense):
Interest income 1,934
Other income 80
----------
Total other income 2,014
----------
Net loss before income taxes (359,518)
Provision for income taxes (Note 4) -
----------
Net loss (359,518)
Retained earning, beginning of year -
----------
Accumulated deficit, end of year $(359,518)
==========
See the auditors' report and the accompanying notes to the financial statements
F-20
ACCETIO, INC.
(A DEVELOPMENT STAGE COMPANY)
Statement of Cash Flows
For the period from April 23, 2001 to December 31, 2001
- --------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss from operations $(359,518)
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 2,130
(Increase) Decrease in:
Other assets (12,093)
Increase (Decrease) in:
Payroll taxes payable 24,816
Accrued liabilities 43,822
----------
Net cash used in operating activities (300,843)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (23,659)
----------
Net cash used in investing activities (23,659)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock 600,000
----------
Net cash provided by financing activities 600,000
Cash, beginning of year -
----------
Cash, end of year $ 275,498
==========
SUPPLEMENTAL INFORMATION
Cash paid during the year for:
Incomes taxes -
==========
Interest -
==========
See the auditors' report and the accompanying notes to the financial statements
F-21
ACCETIO, INC.
Notes to Financial Statements
December 31, 2001
- --------------------------------------------------------------------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of the Accetio, Inc.
(the "Company") is presented to assist in understanding the Company's
financial statements. The financial statements and notes are
representations of the Company's management, who is responsible for
their integrity and objectivity.
Organization
------------
The Company was incorporated in the State of California on April 23,
2001. The Company is a development stage entity and is primarily
engaged in development and sales of broad line of cellular phones and
software products.
Cash and Cash Equivalents
-------------------------
The Company considers all money market funds and highly liquid
financial instruments with original maturities of three months or less
to be cash equivalents.
The Company maintains its cash in bank accounts which, at times, may
exceed federally insured limits. The Company has not experienced any
losses in such accounts. Management believes they are not exposed to
any significant risk on their cash balances
Property and Equipment
----------------------
Depreciable assets are recorded at cost. Depreciation is based upon
estimated useful lives of 5 to 7 years, using principally the
straight-line methods.
Expenditures for maintenance and repairs are charged to income.
Improvement and additions are capitalized. When assets are disposed of,
the cost and accumulated depreciation are eliminated from the related
accounts, and any gain or loss is reflected in current operations.
Income Taxes
------------
The Company accounts for income taxes under the provisions of Statement
of Financial Accounting Standards No. 109, "Accounting for Income
Taxes", which requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that
have been included in the financial statements. This standard requires,
among other things, recognition of future tax benefits, measured by
enacted tax rates attributable to temporary differences between
financial statements and income tax basis of assets and liabilities,
and net operating loss carry-forwards to the extent that realization of
such benefits is more likely than not.
Accounting 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 reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date
F-22
ACCETIO, INC.
Notes to Financial Statements
December 31, 2001
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NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from
those estimates.
Research and Development Costs
------------------------------
Research, development, and engineering costs are expensed in the year
incurred.
Recent Accounting Pronouncements
--------------------------------
The Company has adopted Statements of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets", which is
effective for the Company's intangibles acquired after June 30, 2001.
The Company has also adopted SFAS No. 143, "Accounting for Assets
Retirement Obligations", and SFAS 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets". These statements address financial
accounting and reporting for obligations associated with the retirement
of tangible long-lived assets and the associated asset retirement
costs. Adoption is not expected to have a material effect on the
Company's financial statements.
NOTE 2: STOCK OPTION PLAN
The Company's Stock Option Plan authorizes the granting of stock
options to its employees, consultants, and directors for up to
1,500,000 shares of common stock. Options granted under the Plan may be
either incentive stock options or nonqualified stock options. Incentive
stock options ("ISO") may be granted only to company employees
(including officers and directors who are also employees). Nonqualified
stock options ("NSO") may be granted to Company employees and
consultants.
Options under the Plan may be granted for periods of up to ten years.
The exercise price of each option shall be established in the
discretion of the Board; provided, however, that (a) the exercise price
per share for an ISO shall be not less than the estimated Fair Market
Value of a share of Stock on the effective date of grant of the option,
(b) the exercise price per share for NSO shall not be less than 85% of
the estimated fair market value of the shares on the date of grant, and
(c) the exercise price of an option granted to a 10% or more
shareholder shall not be less than 110% of the estimated fair value of
the shares on the date of grant. No stock options are outstanding as of
December 31, 2001.
NOTE 3: CONVERTIBLE REDEEMABLE PREFERRED STOCK
In May 2001, the Company issued 1,666,667 shares of Series A redeemable
convertible preferred stock at $0.36 per share for total cash proceeds
of $600,000.
Conversion
----------
Each share of Series A Preferred stock is convertible into shares of
common stock. The conversion rate at December 31, 2001 was one-for-one.
F-23
ACCETIO, INC.
Notes to Financial Statements
December 31, 2001
- --------------------------------------------------------------------------------
NOTE 3: CONVERTIBLE REDEEMABLE PREFERRED STOCK, CONTINUED
The Series A preferred stock will automatically convert to common stock
upon the closing of a public offering of the Company's common stock
involving aggregate proceeds of at least $10,000,000. In addition, the
Series A preferred stock will automatically convert to common stock
upon the written election of majority of the outstanding Series A
preferred stockholders.
Dividends
---------
The holders of the Series A preferred stock are entitled to receive
dividends when and if declared by the Board of Directors. Dividends on
Series A preferred stock are in preference to and prior to any payment
of any dividend on common stock and are not cumulative. As of December
31, 2001, no dividend has been declared.
Redemption
----------
On or after December 31, 2004, the Company, at the written election of
any holder of the Series A preferred stock, is required to redeem all
or any portion of the shares of Series A preferred stock held by such
holder at a redemption price of $1.00 per share plus all declared and
unpaid dividends thereon.
Liquidation preference
----------------------
In the event of any liquidation, dissolution or winding up of the
Company, the holders of the Series A redeemable convertible preferred
stock are entitled to receive prior to, and in preference to, any
distribution to the common stockholders, an amount equal to the greater
of $1.00 per share plus accrued but unpaid dividends, or such amount
per share as would have been payable had all shares of the Series A
redeemable convertible preferred stock been converted to common stock
immediately prior to such event of liquidation, dissolution or winding
up.
Voting rights
-------------
Each Series A preferred stockholder is entitled to the number of votes
equal to the number of shares of common stock into which such holder's
shares are convertible.
NOTE 4: PROVISION FOR INCOME TAXES
The current income tax provisions for the year ended December 31, 2001
are summarized as follows:
Federal income taxes --
State income taxes --
----------
Total --
==========
F-24
ACCETIO, INC.
Notes to Financial Statements
December 31, 2001
- --------------------------------------------------------------------------------
NOTE 4: PROVISION FOR INCOME TAXES, CONTINUED
The Company has deferred tax assets of approximately $140,000 resulting
primarily from net operating loss at December 31, 2001. However, a
valuation allowance was established to reduce the deferred tax assets to
zero. 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 those temporary differences
become deductible. Management considers the scheduled reversal of
deferred tax liabilities, the projected future taxable income and tax
planning strategies in making this assessment. Based on the level of
historical taxable income and projections for future taxable income over
the periods in which the deferred tax assets are deductible, management
believes that it is more likely than not that most of the deferred tax
assets will not be realized.
NOTE 5: COMMITMENTS AND CONTINGENCIES
The Company leases its office under 1 year operating lease for $ 3,392
per month. The lease agreements, expiring at May 31, 2002, also require
payment of various expenses incidental to the use of the properties.
F-25