Knowledge Foundations, Inc.
(A Development Stage Company)
Financial Statements
For The Period April 6, 2000 (Date of Inception)
Through June 30, 2000
with
Independent Auditors' Report Thereon
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Knowledge Foundations, Inc.
We have audited the accompanying balance sheet of Knowledge Foundations,
Inc., (a development stage company) (the "Company") as of June 30, 2000, and
the related statements of operations, stockholders' deficit and cash flows
for the period April 6, 2000 (date of inception) through 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 audit.
We conducted our audit 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 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 the Company as of June 30,
2000, and the results of their operations and their cash flows for the period
April 6, 2000 (date of inception) through June 30, 2000 in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the accompanying
financial statements, the Company is a development stage company which has
experienced significant losses since inception with no significant revenues.
These factors, and other factors discussed in Note 1 to the financial
statements raise substantial doubt about the ability of the Company to
continue as a going concern. Management's plans in regard to these matters
are described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
CORBIN & WERTZ
Irvine, California
August 2, 2000
<PAGE>
<TABLE>
Knowledge Foundations, Inc.
(A Development Stage Company)
Balance Sheet
ASSETS June 30, 2000
<S> <C>
Current assets:
Cash $182,503
Prepaid expenses 8,340
Other assets 562
---------------
Total current assets 191,405
Property and equipment, net of accumulated
depreciation of $154 2,622
---------------
$ 194,027
===============
</TABLE>
<TABLE>
LIABILITIES AND STOCKHOLDERS' DEFICIT
<S> <C>
Current liabilities:
Accounts payable $ 15,345
Due to related parties 3,000
Payroll taxes payable 2,398
Accrued interest 4,867
-----------------
Total current liabilities 25,610
Convertible subordinated note payable 300,000
-----------------
Total liabilities 325,610
-----------------
Commitments and contingencies
Stockholders' deficit:
Common stock, $0.0001par value; 100,000,000 shares authorized;
33,618,500 shares issued and outstanding 3,362
Deficit accumulated during the development stage (134,945)
---------------
Total stockholders' deficit (131,583)
---------------
$ 194,027
===============
</TABLE>
<PAGE>
<TABLE>
Knowledge Foundations, Inc.
(A Development Stage Company)
Statement of Operations
April 6, 2000
(Date of Inception)
Through
June 30, 2000
<S> <C>
Net revenues $-
Operating expenses:
Auto 692
Computer 1,151
Depreciation 154
Fees and licenses 100
Insurance 1,750
Professional fees 37,005
Meals and entertainment 461
Office supplies 2,047
Outside services 22,000
Payroll 54,050
Payroll taxes 4,140
Reference materials 1,251
Rent 3,000
Telephone 1,395
Travel 1,636
-----------
Total operating expenses 130,832
-----------
Other income (expenses):
Interest income 754
Interest expense (4,867)
-----------
(4,113)
-----------
Net loss $ (134,945)
==========
Net loss available to common stockholders per
common share $ (0.01)
==========
Weighted average number of common shares
outstanding 33,618,500
==========
</TABLE>
<PAGE>
<TABLE>
Knowledge Foundations, Inc.
(A Development Stage Company)
Statement of Stockholders' Deficit
For The Period April 6, 2000 (Date of Inception)
Through June 30, 2000
Deficit
Accumulated
Additional During The Total
Common Stock Paid-in Development Stockholders
Shares Amount Capital Stage Equity
<S> <C> <C> <C> <C> <C>
Balance, April 6,
2000
(date of - - - - -
inception)
Sale of 33,618,500
shares of
common stock at
$0.0001 per
share on April
6, 2000,
net of offering
costs of $0 33,618,500 3,362 - - 3,362
Net loss - - - (134,945) (134,945)
----------- ------ -------- ---------- -----------
Balance, June 30,
2000 33,618,500 3,362 - (134,945) (131,583
========== ======= ======== ========== ===========
</TABLE>
<PAGE>
<TABLE>
Knowledge Foundations, Inc.
(A Development Stage Company)
Statement of Cash Flows
April 6, 2000
(Date of
Inception)
Through
June 30, 2000
<S> <C>
Cash flows from operating activities:
Net loss $ (134,945)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation 154
Changes in operating assets and liabilities:
Prepaid expenses (8,340)
Other assets (562)
Accounts payable 15,345
Due to related parties 3,000
Payroll taxes payable 2,398
Accrued interest 4,867
----------------
Net cash used in operating activities (118,083)
----------------
Cash flows used in investing activities:
Purchases of equipment (2,776)
---------------
Cash flows from financing activities:
Principal borrowing on convertible subordinated note 300,000
Proceeds from the sale of common stock 3,362
----------------
Net cash provided by financing activities 303,362
----------------
Net change in cash 182,503
Cash at beginning of period -
----------------
Cash at end of period $ 182,503
================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 4,867
================
Cash paid during the period for income taxes $ -
================
</TABLE>
<PAGE>
Knowledge Foundations, Inc.
(A Development Stage Company)
Notes to Financial Statements
For The Period April 6, 2000 (Date of Inception)
Through June 30, 2000
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Organization and Operations
Knowledge Foundations, Inc. (a development stage company) ("Company"), was
incorporated on April 6, 2000 according to the laws of Delaware. The Company
has been in the development stage since its inception. During the
development stage, the Company is primarily engaged in raising capital,
obtaining financing, developing its knowledge-based computing technology,
advertising and marketing the Company, and administrative functions. The
Company intends to produce a knowledge-based operating system, related tools
and applications, and system integration services delivered to every
potential application area. The Company's primary target markets primarily
are knowledge owners, publishers, large commercial corporations, government
agencies and end-users.
Risks and Uncertainties
The Company is a start-up company subject to the substantial business risks
and uncertainties inherent to such an entity, including the potential risk of
business failure.
The accompanying financial statements have been prepared on the basis of a
going concern, which contemplates the realization of assets and liquidation
of liabilities in the normal course of business.
The Company has a loss of $134,945 for the period from April 6, 2000 (date of
inception) through June 30, 2000 and a stockholders' deficit of $131,583 as
of June 30, 2000. Management is pursuing financing initiatives that would
enhance the development of the Company's products and provide sufficient
capital for marketing. Currently, the Company is in negotiations to be
purchased by a public entity whose intent is to provide sufficient equity
financing. However, there is no assurance the Company will be able to obtain
the sufficient equity financing or generate sufficient revenues on terms
satisfactory to the Company.
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 reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements, as
well as the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
<PAGE>
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES,
continued
Organizational Costs
The Company adopted Statement of Position No. 98-5 ("SOP 98-5"), "Reporting
the Costs of Start-Up Activities." SOP 98-5 requires that all non-
governmental entities expense the cost of start-up activities, including
organizational costs as those costs are incurred. The effect of this
pronouncement is reflected in the accompanying financial statements.
Fair Value of Financial Instruments
Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards No. 107 ("SFAS 107"), "Disclosures About Fair Value of
Financial Instruments." SFAS 107 requires disclosure of fair value
information about financial instruments when it is practicable to estimate
that value. The carrying amount of the Company's cash and cash equivalents,
marketable securities, trade payables and accrued expenses approximates their
estimated fair values due to the short-term maturities of those financial
instruments.
Customer Concentration
Management's intention is that the Company will not be dependent on any
single customer or group of customers for a significant portion of its annual
sales. The Company's customer base will change on a continuous basis as new
customers are added or removed.
Concentration of Credit Risk
Cash balances are maintained at a financial institution. Accounts at this
bank are insured by the Federal Deposit Insurance Corporation ("FDIC") up to
$100,000. As of June 30, 2000, the Company maintained certain cash balances
that were in excess of the FDIC limit.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over an estimated useful life of three years.
Depreciation expense for the period April 6, 2000 (date of inception) through
June 30, 2000 was $154.
<PAGE>
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES,
continued
Betterments, renewals, and extraordinary repairs that extend the lives of the
assets are capitalized; other repairs and maintenance charges are expensed as
incurred. The cost and related accumulated depreciation applicable to assets
retired are removed from the accounts, and the gain or loss on disposition is
recognized in current operations.
Income Taxes
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes." Under SFAS
109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. 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. A valuation
allowance is provided for significant deferred tax assets when it is more
likely than not that such assets will not be recovered.
Revenue Recognition
The Company will recognize revenue during the month in which services are
provided.
Earnings Per Share
The Company has adopted Statement of Financial Accounting Standards No. 128
("SFAS 128"), "Earnings Per Share." Under SFAS 128, basic earnings per share
is computed by dividing income available to common stockholders by the
weighted-average number of common shares assumed to be outstanding during the
period of computation. Diluted earnings per share is computed similar to
basic earnings per share except that the denominator is increased to include
the number of additional common shares that would have been outstanding if
the potential common shares had been issued and if the additional common
shares were dilutive. Because the Company has incurred net losses, basic and
diluted loss per share are the same as additional potential common shares
would be anti-dilutive.
Comprehensive Income
The Company has adopted Statement of Financial Accounting Standards No. 130
("SFAS 130"), "Reporting Comprehensive Income." SFAS 130 establishes
standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. SFAS 130
had no impact on the accompanying financial statements.
<PAGE>
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES,
continued
Segments of Business
The Company has adopted Statement of Financial Accounting Standards No. 131
("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information" was issued. SFAS 131 changes the way public companies report
information about segments of their business in their annual financial
statements and requires them to report selected segment information in their
quarterly reports issued to stockholders. It also requires entity-wide
disclosures about the products and services an entity provides, the material
countries in which it holds assets and reports revenues and its major
customers. The Company currently operates in one segment, as disclosed in
the accompanying statement of operations.
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of June 30, 2000:
Computer equipment & software $ 1,807
Office equipment 969
2,776
Less accumulated depreciation (154)
$ 2,622
Depreciation expense for the period April 6, 2000 (date of inception) through
June 30, 2000 was $154.
NOTE 3 - CONVERTIBLE SUBORDINATED NOTE PAYABLE
The unsecured convertible subordinated note payable (the "Note") bears
interest at 8% per annum which is paid semi-annually in arrears and the
principal matures on April 18, 2003. If an equity financing event occurs
where the Company issues common stocks or preferred stocks to one or more
unrelated third parties in exchange for at least an aggregate of $3,000,000
or if the Company merges into a publicly traded company and the shareholders
of the Company own eighty percent (80%) of the Company on a fully diluted
basis after the merger, the holder of this note has the right to convert all
or any portion of the outstanding principal amount of this Note into a stated
number of shares computed by dividing such principal amount by the conversion
price per share offered in the equity financing. In the event the equity
financing involves an merger transaction, the conversion price shall be $1.00
per share.
<PAGE>
NOTE 4 - STOCKHOLDERS' EQUITY
Common Stock
From the Company's date of inception April 6, 2000 (date of inception)
through June 30, 2000, the Company had issued an aggregate of 33,618,500
shares of common stock for $3,362.
NOTE 5 - RELATED PARTIES
As of June 30, 2000, the Company had a liability of $3,000 due to one of the
owners for renting portion of his residence used as the Company's office for
the period of April 6, 2000 through June 30, 2000. This amount is non-
interest bearing.
NOTE 6 - INCOME TAXES
The tax effects of temporary differences that give rise to deferred taxes at
June 30, 2000 are as follows:
Deferred tax asset:
Net operating loss carryforward $ 54,000
Total gross deferred tax asset 54,000
Less valuation allowance (54,000)
Net deferred tax asset $ -
No current provision for income taxes for the period ended June 30, 2000 is
required, except for minimum state taxes, since the Company incurred losses
during the period.
As of June 30, 2000, the Company had net operating loss carryforwards of
approximately $135,000 for both federal and state income tax reporting
purposes, which expire in June 2019 and June 2004, respectively.
Management cannot determine if it is more likely than not that the deferred
tax asset will not be utilized and as such has recorded a valuation
allowance.
<PAGE>
NOTE 7 - COMMITMENT
Royalty Agreement
The Company has entered into an agreement with regard to royalty fees between
the Company and one of its officers. In this agreement rights relative to
certain software designs have been assigned to the Company. The officer will
receive royalties ranging from 2% to 5% on net sales of such software designs
sold to others or deployed by the Company in a project for third parties.
Employment Agreements
The Company has four-year employment agreements with each of its three
employees. The agreements, which will expire on March 31, 2004, provided
each employee for a base salary of approximate $10,000 per month.
NOTE 8 - CONTINGENCY
The Company currently has a claim filed against them by a consultant over
consideration with regard to a finders fee for potential equity financing.
The Company believes that neither the merit or future outcome of such a claim
nor potential damages is readily determinable as of June 30, 2000 and
therefore has not accrued any liability in the accompanying financial
statements.
