SRC TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
AND INDEPENDENT AUDITORS' REPORT
YEAR ENDED DECEMBER 31, 2002
SRC TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
TABLE OF CONTENTS
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PAGE
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INDEPENDENT AUDITORS' REPORT 1
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheet 2
Consolidated Statement of Income and Accumulated Deficit 3
Consolidated Statement of Changes In Stockholders' Deficit 4
Consolidated Statement of Cash Flows 5
Consolidated Notes to Financial Statements 6-10
INDEPENDENT AUDITORS' REPORT
Board of Directors
SRC Technologies, Inc. and Subsidiary
Lauderhill, Florida
We have audited the accompanying consolidated balance sheet of SRC Technologies,
Inc. and Subsidiary as of December 31, 2002, and the related consolidated
statements of operations changes in stockholders' 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 consolidated
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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of SRC Technologies,
Inc. and Subsidiary as of December 31, 2002, 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.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company has suffered recurring losses from operations which
raises substantial doubt about its ability to continue as a going concern.
Management's plans regarding those matters are also described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
SHELDON, RIBOTSKY & LEVINE, P.A.
Certified Public Accountants
February 14, 2003
North Miami, Florida
SRC TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2002
A S S E T S
CURRENT ASSETS:
Cash $ 12,669
Accounts receivable 70,711
Inventories 69,186
Prepaid expenses 7,725
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Total current assets 160,291
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PROPERTY AND EQUIPMENT, Net 83,753
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$ 244,044
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Line of credit $ 19,088
Accounts payable 28,049
Short-term financing arrangements 50,859
Financing arrangements with affiliated entities 394,951
Current portion of long-term debt 12,863
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Total current liabilities 505,810
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LONG TERM DEBT
Notes payable 37,230
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Common stock, $.001 par value; 100,000,000 shares
authorized; 9,247,938 shares issued and outstanding 9,248
Additional paid in capital 103,655
Stockholders' deficit (411,899)
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TOTAL STOCKHOLDERS' DEFICIT (298,996)
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$ 244,044
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The accompanying notes are an integral part of these financial statements
2
SRC TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2002
REVENUE
Product sales $ 1,265,137
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COST OF REVENUES 770,470
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GROSS PROFIT 494,667
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Salaries and benefits 303,649
Commissions 130,825
Office expense 51,822
Rent 8,515
Advertising 15,367
Repairs and maintenance 7,374
Travel 17,749
Depreciation 13,874
Professional fees 15,602
Interest and factor fees 36,888
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601,665
LOSS BEFORE INCOME TAXES (106,988)
PROVISION FOR INCOME TAXES --
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NET LOSS $ (106,998)
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The accompanying notes are an integral part of these financial statements
3
SRC TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 2002
Additional Total
Common Stock Paid In Accumulated Stockholders'
Shares Amount Capital Deficit Deficit
------------------------------- ------------ ------------ ------------
Balance, January 1, 2002 $ 6,991,750 $ 6,992 $ -- $ (43,284) $ (36,292)
Proceeds from sales of common
shares 750,000 750 9,250 -- 10,000
Common shares issued in exchange
for cancellation of indebtedness 1,250,000 1,250 36,347 -- 37,597
Common shares issued in
connection with acquisition of
Connectivity, Inc. 28,000,000 28,000 30,314 (261,617) (203,303)
Common stock 4 for 1 reverse
split (18,752,063) (27,744) 27,744 -- --
Net income for the year ended
December 31, 2002 -- -- -- (106,998) (106,998)
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Balance, December 31, 2002 $ 9,247,937 $ 9,248 $ 103,655 $ (411,899) $ (298,996)
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The accompanying notes are an integral part of these financial statements
4
SRC TECHNOLOGIES, INC. AND SUBSIDIARY
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2002
OPERATING ACTIVITIES:
Net loss $(106,998)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation 13,874
Changes in assets and liabilities:
Accounts receivable (41,356)
Inventories (29,354)
Prepaid expenses (7,725)
Accounts payable (322)
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Net cash (used) by operating activities (171,881)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (67,921)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on short-term financing arrangements (66,334)
Proceeds from short-term financing arrangements 62,699
Proceeds from financing arrangements with affiliated entities 194,509
Proceeds from notes payable 54,693
Principal payments on notes payable and capital lease obligations (35,317)
Issuance of common stock 39,597
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Net cash provided by financing activities 249,847
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NET INCREASE IN CASH 10,045
CASH - BEGINNING OF YEAR 2,624
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CASH - END OF YEAR $ 12,669
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID FOR INTEREST $ 36,888
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COMMON STOCK ISSUED FOR CANCELLATION OF INDEBTEDNESS $ 37,597
=========
The accompanying notes are an integral part of these financial statements.
5
SRC TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
NOTE 1 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS - SRC Technologies, Inc. (formerly Southern Dragon,
Inc.) is a holding company . Connectivity, Inc. ("the Subsidiary"),
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)
GOING CONCERN - The Company has suffered recurring losses from
operations and has incurred substantial current debt obligations. The
accompanying financial statements have been prepared on a going
concern basis, which contemplates continuing operations, realization
of assets and liquidation of liabilities in the ordinary course of
business. The Company's ability to continue as a going concern is
dependent upon its ability to raise working capital to satisfy its
current debt obligations, to finance its marketing efforts, to
implement its business plan and to generate profits sufficient to meet
its operating and financing obligations. Management believes it can
raise working capital through the proposed business combination
described below or other equity transactions. Accordingly, the
financial statements do not include adjustments relating to the
recoverability of recorded assets or liabilities that might be
necessary should the Company be unable to continue as a going concern.
On May 30, 2002 the Company acquired Connectivity, Inc. in a stock for
stock tax free exchange and Connectivity, Inc. 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).
6
SRC TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
NOTE 1 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial
statements include the accounts of the Company and its subsidiary.
Intercompany transactions and balances have been eliminated in
consolidation.
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.
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.
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 8% 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.
7
SRC TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
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, 2002:
Office equipment $ 26,219
Furniture and fixtures 16,607
Internet web page and software 13,000
Installation equipment 65,205
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121,031
Less accumulated depreciation (37,278)
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$ 83,753
NOTE 3 -NOTE PAYABLE
The Company's notes payable consist of the following at December 31,
2002:
Due Within Due After
One Year One Year
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Note payable with a financial institution dated July 2, 2001. The
note, which accrues 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. $ 1,719 $ 1,041
Note payable to Ford Motor Credit dated January 30, 2002. The
note accrues interest at 4.9% and is payable in monthly
installments of prin- cipal and interest of $1,030. The note is
collateralized with certain installation equipment 11,144 36,189
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$ 12,863 $ 37,230
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8
(Continued)
SRC TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
NOTE 3 -NOTE PAYABLE - (CONTINUED)
Scheduled maturities of the long-term portion of notes payable at
December 31, 2002 are as follows:
December 31,
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2003 $ 12,863
2004 11,865
2005 11,366
2006 11,936
2007 2,063
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$ 50,093
NOTE 4 -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, 2002 the Company owed $19,088 on this line of credit.
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 $411,899 that
expire in 2019 and 2020. The tax effects of temporary differences that
give rise to deferred taxes are as follows at December 31, 2002:
Deferred tax assets:
Net operating loss carryforwards $ 69,700
Valuation allowance 69,700
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$ -
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NOTE 6 -OPERATING LEASE COMMITMENTS
The Company leases office space from Econo-Comm, Inc. (an affiliate)
for an annual rent of $9,540 through September 30, 2005.
The future minimum rent as of December 31, 2002 is:
2003 $ 9,540
2004 9,540
2005 7,155
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$ 26,235
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9
SRC TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
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, 2002, the Company purchased wireless call boxes
from Mobile totaling approximately $656,535 (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 -REVERSE STOCK SPLIT
On June 3, 2002, the Company approved a four for one (4 for 1) reverse
stock split with 100,000,000 shares of authorized stock and changed
the par value to $.001 per share.
10