RAPIDTRON, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 2002
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report for the Year Ended December 31, 2002 . . F-1
Independent Auditors' Report for the Year Ended December 31, 2001 . . F-2
Balance Sheets as of December 31, 2002 and March 31, 2003 (Unaudited) F-4
Statements of Operations for the Years Ended December 31, 2002 and
2001, and for the Three-Months Ended March 31, 2003 (Unaudited)
and 2002 (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . F-5
Statements of Stockholders' Deficit for the Years Ended
December 31, 2002 and 2001 . . . . . . . . . . . . . . . . . . . . . F-7
Statements of Cash Flows for the Years Ended December 31, 2002 and
2001, and for the Three-Months Ended March 31, 2003 (Unaudited)
and 2002 (Unaudited . . . . . . . . . . . . . . . . . . . . . . . . . F-8
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . F-10
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Rapidtron, Inc.
We have audited the accompanying balance sheet of Rapidtron, Inc. (the
"Company") as of December 31, 2002, and the related statements of operations,
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 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 Rapidtron, Inc. 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 that the
Company will continue as a going concern. As of December 31, 2002, the Company
has a working capital deficit of approximately $1,619,000, recurring losses from
operations, an accumulated deficit of approximately $1,481,000 and has generated
an operating cash flow deficit of $549,000 for the year then ended. As discussed
in Note 1 to the financial statements, additional capital will be necessary to
fund the Company's long-term operations. These conditions, among others, raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans regarding these matters are also described in Note 1. The
accompanying financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Squar, Milner, Reehl & Williamson, LLP
May 16, 2003
Newport Beach, California
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Rapidtron, Inc.
We have audited the accompanying statements of operations, shareholders' equity,
and cash flows of Rapidtron, Inc. for the year ended 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 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 results of operations and cash flows of Rapidtron,
Inc. for the year ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America.
/s/ Kushner, Smith, Joanou & Gregson, LLP
Irvine, California
November 25, 2002
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RAPIDTRON, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 2002 AND MARCH 31, 2003 (UNAUDITED)
================================================================================
(UNAUDITED)
DECEMBER 31, MARCH 31,
2002 2003
------------ ------------
ASSETS
CURRENT ASSETS
Cash $ 10,835 $ 1,545
Accounts receivable, net 79,159 43,126
Inventory 252,436 247,878
Prepaid expenses and other current assets 73,911 63,124
------------ ------------
416,341 355,673
PROPERTY AND EQUIPMENT, NET 13,070 13,135
DEPOSITS AND OTHER ASSETS 13,901 17,623
------------ ------------
$ 443,312 $ 386,431
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 866,408 $ 701,112
Accrued liabilities 176,203 176,872
Due to related party 168,175 210,905
Loans due to related parties 820,923 1,239,560
Obligations under capital lease 3,559 3,317
------------ ------------
2,035,268 2,331,766
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Preferred stock, par value $0.001 per share;
5,000,000 shares authorized; no shares issued or
outstanding - -
Common stock, par value $0.001 per share;
20,000,000 shares authorized; 10,120,000 and
10,248,000 (unaudited) shares issued at December
31, 2002 and March 31, 2003, respectively;
9,924,000 and 10,052,000 (unaudited) shares
outstanding at December 31, 2002 and March 31,
2003, respectively 10,120 10,248
Additional paid-in capital 74,865 138,737
Treasury stock; 196,000 common shares at cost (196,000) (196,000)
Accumulated deficit (1,480,941) (1,898,320)
------------ ------------
(1,591,956) (1,945,335)
------------ ------------
$ 443,312 $ 386,431
============ ============
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Page F-4
The accompanying notes are an integral part of these financial statements
====================================================================================================
RAPIDTRON, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001,
AND FOR THE THREE-MONTHS ENDED MARCH 31, 2003 (UNAUDITED) AND 2002 (UNAUDITED)
====================================================================================================
(UNAUDITED)
-------------------------
THREE- THREE-
MONTHS MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
2002 2001 2003 2002
--------------- ------------- ------------- ----------
NET SALES $ 1,685,266 $ 259,888 97,499 $ 27,207
COST OF GOODS SOLD 771,683 272,301 44,352 62,253
--------------- ------------- ------------- ----------
GROSS PROFIT (LOSS) 913,583 (12,413) 53,147 (35,046)
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 1,348,748 524,579 425,632 273,862
--------------- ------------- ------------- ----------
LOSS FROM OPERATIONS (435,165) (536,992) (372,485) (308,908)
OTHER INCOME (EXPENSE)
Interest income 6,854 12,889 - -
Interest expense (32,677) (10,620) (22,354) (3,072)
Realized foreign exchange loss, net (2,785) - (18,156) (4,449)
Unrealized foreign exchange loss (22,663) - (4,384) -
--------------- ------------- ------------- ----------
(51,271) 2,269 (44,894) (7,521)
--------------- ------------- ------------- ----------
INCOME BEFORE PROVISION FOR INCOME
TAXES (486,436) (534,723) (417,379) (316,429)
PROVISION FOR INCOME TAXES 1,662 800 - 800
--------------- ------------- ------------- ----------
(continued)
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Page F-5
The accompanying notes are an integral part of these financial statements
====================================================================================================
RAPIDTRON, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001,
AND FOR THE THREE-MONTHS ENDED MARCH 31, 2003 (UNAUDITED) AND 2002 (UNAUDITED)
====================================================================================================
(UNAUDITED)
-------------------------
THREE- THREE-
MONTHS MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
2002 2001 2003 2002
--------------- ------------- ------------- ----------
NET LOSS $ (488,098) $ (535,523) $ (417,379) (317,229)
=============== ============= ============ ===========
BASIC AND DILUTED NET LOSS PER COMMON
SHARE $ (0.05) $ (0.05) (0.04) (0.03)
=============== ============= ============ ===========
BASIC AND DILUTED WEIGHTED AVERAGE
NUMBER OF COMMON SHARES OUTSTANDING 10,118,000 10,120,000 10,051,000 10,120,000
=============== ============= ============ ===========
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Page F-6
The accompanying notes are an integral part of these financial statements
==========================================================================================================
RAPIDTRON, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
==========================================================================================================
COMMON STOCK TREASURY STOCK ADDITIONAL
-------------------- ------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
----------- ------- ------- ---------- -------- ------------ ------------
BALANCE -
DECEMBER 31, 2000 10,120,000 $10,120 - $ - $ 74,865 $ (457,320) $ (372,335)
Net loss - - - - - (535,523) (535,523)
----------- ------- ------- ---------- -------- ------------ ------------
BALANCE -
DECEMBER 31, 2001 10,120,000 10,120 - - 74,865 (992,843) (907,858)
Shares retuned to
Company to settle
note receivable from
stockholder at $1.00
per share (196,000) - 196,000 (196,000) - - (196,000)
Net loss - - - - - (488,098) (488,098)
----------- ------- ------- ---------- -------- ------------ ------------
BALANCE -
DECEMBER 31, 2002 9,924,000 $10,120 196,000 $(196,000) $ 74,865 $(1,480,941) $(1,591,956)
=========== ======= ======= ========== ======== ============ ============
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Page F-7
The accompanying notes are an integral part of these financial statements
====================================================================================================================
RAPIDTRON, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001,
AND FOR THE THREE-MONTHS ENDED MARCH 31, 2003 (UNAUDITED) AND 2002 (UNAUDITED)
====================================================================================================================
(UNAUDITED)
---------------------------
THREE- THREE-
YEAR ENDED YEAR ENDED MONTHS MONTHS
DECEMBER 31, DECEMBER 31, ENDED MARCH ENDED MARCH
2002 2001 31, 2003 31, 2002
-------------- -------------- -------------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (488,098) $ (535,523) $ (417,379) (317,229)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation 6,060 423 1,732 896
Unrealized foreign exchange loss 22,663 - 4,384 -
Changes in operating assets and liabilities:
Accounts receivable (76,624) (9,172) 36,033 9,172
Inventory (208,974) (43,462) 4,558 (258,797)
Prepaid expenses and other current assets (50,523) (23,388) 10,787 (144,441)
Deposits and other assets (1,521) (12,380) (3,722) (250,000)
Accounts payable 608,641 180,917 (169,680) 110,360
Accrued liabilities 112,209 37,661 64,669 5,001
Customer deposits - - - 1,372,053
Due to related party (472,599) 255,281 42,730 (517,600)
-------------- -------------- -------------- ----------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (548,766) (149,643) (425,888) 9,415
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (13,613) (888) (1,797) (9,881)
Loan to stockholder - (84,139) - -
-------------- -------------- -------------- ----------
NET CASH USED IN INVESTING ACTIVITIES (13,613) (85,027) (1,797) (9,881)
(continued)
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Page F-8
The accompanying notes are an integral part of these financial statements
===========================================================================================================
RAPIDTRON, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001,
AND FOR THE THREE-MONTHS ENDED MARCH 31, 2003 (UNAUDITED) AND 2002 (UNAUDITED)
===========================================================================================================
(UNAUDITED)
------------------------
THREE- THREE-
YEAR ENDED YEAR ENDED MONTHS MONTHS
DECEMBER 31, DECEMBER 31, ENDED MARCH ENDED MARCH
2002 2001 31, 2003 31, 2002
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from loans due to related parties 603,100 240,865 420,000 10,000
Principal payment of loans due to related parties (35,542) - (1,363) (1,408)
Principal payment of capital lease obligations (869) (124) (242) (198)
----------- ----------- ----------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 566,689 240,741 418,395 8,394
----------- ----------- ----------- ----------
NET INCREASE (DECREASE) IN CASH 4,310 6,071 (9,290) 7,928
CASH - beginning of period 6,525 454 10,835 6,525
----------- ----------- ----------- ----------
CASH - end of period $ 10,835 $ 6,525 1,545 14,453
=========== =========== =========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the period for:
Income taxes $ 1,662 $ 800 $ - $ -
=========== =========== =========== ==========
Interest $ 9,891 $ 10,620 945 $ 1,040
=========== =========== =========== ==========
Non-cash investing and financing activities:
Treasury stock received to settle loan to stockholder $ 196,000 $ - $ - $ -
=========== =========== =========== ==========
Equipment acquired via capital lease $ - $ 4,552 $ - $ -
=========== =========== =========== ==========
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Page F-9
The accompanying notes are an integral part of these financial statements
================================================================================
RAPIDTRON, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
================================================================================
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Rapidtron, Inc. (the "Company") was incorporated in the State of Delaware in
January 2000, and is headquartered in Costa Mesa, California. The Company
provides Radio Frequency ("RF") Smart access control and ticketing/membership
systems (the "System") to the fitness, ski, entertainment and transportation
industries in North America. The System facilitates rapid operator-free entry
and exit through automated turnstiles or portals and optional hands-free entry.
The Company incorporates "Smart Card" debit/credit technology for retail
purchases and promotional/loyalty programs. The System is versatile and utilizes
either read-write RF Smart cards or bar code paper tickets. This dual capability
allows a venue to issue and re-issue numerous types and durations of access
privilege cards. Its open architecture allows for an easy interface with
existing back office software.
Subsequent to December 31, 2002, the Company completed a reverse merger with a
publicly traded "shell" company (see Note 8). Effective May 8, 2003, the merged
entity trades on the Over the Counter Bulletin Board under the symbol "RPDT.OB".
The accompanying unaudited financial statements as of and for the three-months
ended March 31, 2003 and 2002 have been prepared in accordance with accounting
principles generally accepted in the United States of America ("GAAP") for
interim financial statements. Accordingly, these financial statements do not
include certain information and footnotes required by GAAP for complete
financial statements. However, the accompanying unaudited financial statements
contain all adjustments (consisting of only normal recurring accruals), which,
in the opinion of management, are necessary in order to fairly present the
financial statements in accordance with GAAP. The results of operations for
interim periods are not necessarily indicative of the results to be expected for
the full year. These financial statements should be read in conjunction with
the Company's audited financial statements, and notes thereto, which are
included herein.
GOING CONCERN AND LIQUIDITY CONSIDERATIONS
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern, which contemplates, among other things, the
realization of assets and satisfaction of liabilities in the normal course of
business. As of December 31, 2002, the Company has a working capital deficit of
approximately $1,619,000, recurring losses from operations, an accumulated
deficit of approximately $1,481,000 and has generated an operating cash flow
deficit of $549,000 for the year then ended. The Company intends to fund
operations through increased sales and debt and equity financing arrangements,
which may be insufficient to fund its capital expenditures, working capital and
other cash requirements for the year ending December 31, 2003.
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Page F-10
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RAPIDTRON, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
================================================================================
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
GOING CONCERN AND LIQUIDITY CONSIDERATIONS (continued)
Thereafter, the Company will be required to seek additional funds to finance its
long-term operations. The successful outcome of future activities cannot be
determined at this time, and there is no assurance that if achieved, the Company
will have sufficient funds to execute its intended business plan or generate
positive operating results.
In response to these problems, management has planned the following actions:
- Subsequent to year-end, the Company completed a reverse merger (see
Note 8), which is expected to generate approximately $1,600,000 in
cash proceeds, primarily through the sale of debt.
- Subsequent to year-end, loans to related parties totaling $430,000 at
December 31, 2002, were converted to equity at the rate of $1.00 per
share (see Note 8).
- Management intends to raise additional funds through future private
placement offerings.
- Management expects its increased marketing efforts to result in future
sales increases. There can be no assurances, however, that
management's expectations of future sales will be realized.
These factors, among others, raise substantial doubt about the Company's ability
to continue as a going concern. The accompanying financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
USE OF 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 years. Significant estimates made by management include,
among others, provision for losses on accounts receivable, realization of
inventory and long-lived assets, and the valuation allowance for deferred tax
assets. Actual results could differ from those estimates.
CONCENTRATIONS
Financial instruments that may subject the Company to credit risk include
uninsured cash-in-bank balances. At times, the Company's bank balance may
exceed the amount insured by the Federal Deposit Insurance Corporation.
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Page F-11
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RAPIDTRON, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
================================================================================
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
CONCENTRATIONS (continued)
The Company grants credit to customers and requires collateral on a case-by-case
basis. The Company's ability to collect receivables is affected by economic
fluctuations in the geographic areas served by the Company. Reserves for
uncollectible amounts are provided, based on past experience and a specific
analysis of the accounts, which management believes are sufficient. Management
has provided an allowance for doubtful accounts of $5,000 at December 31, 2002.
Although management expects to collect amounts due, actual collections may
differ from the estimated amounts.
At December 31, 2002, four customers accounted for substantially all of net
accounts receivable. One customer accounted for approximately 81% of net sales
during the year ended December 31, 2002, and no other customer accounted for
more than 10% of net sales for the year then ended. For the year ended December
31, 2001, no customer accounted for more than 10% of net sales.
Effective May 1, 2000, the Company entered into an exclusive distribution
agreement with Axess AG ("Axess"), an Austrian company, where the Company would
sell, primarily to the North American market, access control devices developed
and manufactured by Axess. The Company purchases substantially all of its
inventory from Axess.
RISKS AND UNCERTAINTIES
The Company operates in an emerging industry that is subject to market
acceptance and technological change. The Company's operations are subject to
significant risks and uncertainties, including financial, operational,
technological and other risks associated with operating an emerging business,
including the potential risk of business failure.
INVENTORY
Inventory is stated at the lower of cost (first-in, first-out) or market and is
primarily comprised of finished goods. Market is determined by comparison with
recent sales or net realizable value. Such net realizable value is based on
management's forecasts for sales of the Company's products or services in the
ensuing years. Should the demand for the Company's products prove to be
significantly less than anticipated, the ultimate realizable value of the
Company's inventory could be substantially less than amounts shown in the
accompanying balance sheet.
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Page F-12
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RAPIDTRON, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
================================================================================
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is provided on the straight-line method over the
estimated useful lives of the respective assets, generally three years.
Equipment under capital lease obligations are capitalized at the lesser of their
estimated fair market value or the present value of the minimum lease payments,
and are depreciated over the shorter of the estimated useful life or the term of
the related lease. 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 sold or retired are removed from the accounts, and the gain
or loss on disposition is recognized in current operations.
IMPAIRMENT OF LONG-LIVED ASSETS
In July 2001, the Financial Accounting Statements Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." SFAS No. 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. SFAS No. 144 requires that
long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that their carrying amounts may not be recoverable. If
the cost basis of a long-lived asset is greater than the projected future
undiscounted net cash flows from such asset (excluding interest), an impairment
loss is recognized. Impairment losses are calculated as the difference between
the cost basis of an asset and its estimated fair value.
SFAS No. 144 also requires companies to separately report discontinued
operations and extends that reporting to a component of an entity that either
has been disposed of (by sale, abandonment, or in a distribution to
stockholders) or is classified as held for sale. Assets to be disposed are
reported at the lower of the carrying amount or fair value less costs to sell.
The Company adopted SFAS No. 144 on January 1, 2002. The provisions of this
statement for assets held for sale or other disposal are generally required to
be applied prospectively after the adoption date to any newly initiated
commitment to a plan to sell such assets by management. As a result, the Company
cannot determine the potential effects that adoption of SFAS No. 144 will have
on the financial statements with respect to future disposal decisions, if any.
As of December 31, 2002, management has determined that no such impairment
exists and therefore, no adjustments have been made to the carrying values of
long-lived assets. There can be no assurance, however, that market conditions
will not change or demand for the Company's products will continue which could
result in impairment of long-lived assets in the future.
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Page F-13
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RAPIDTRON, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
================================================================================
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
REVENUE RECOGNITION
Revenues are recognized when all of the following criteria have been met:
persuasive evidence for an arrangement exists; delivery has occurred; the fee is
fixed or determinable; and collectibility is reasonably assured. Generally,
this occurs upon shipment of product. Installation revenues are generally
recorded upon completion of services.
FOREIGN CURRENCY TRANSACTIONS
The Company records all transactions with its foreign supplier, Axess (see
above), in accordance with SFAS No. 57, "Foreign Currency Translation." All
invoices received from Axess are denominated in Euros. When an invoice is
received, the Company translates these amounts to US Dollars at the exchange
rate effective on the invoice date. If the exchange rate changes between the
time of purchase and the time actual payment is made, a foreign exchange gain or
loss results. No significant realized exchange gains or losses were recorded
for the years ended December 31, 2002 and 2001.
Additionally, the Company computes a foreign exchange gain or loss at each
balance sheet date on all recorded foreign transactions that have not been
settled. The difference between the exchange rate that could have been used to
settle the transaction at the date it occurred (the invoice date), and the
exchange rate at the balance sheet date, is the unrealized gain or loss
recognized in current net income. At December 31, 2002, the Company recorded an
unrealized exchange loss of approximately $23,000. No significant unrealized
exchange gains or losses were recorded at December 31, 2001.
ADVERTISING
The Company expenses the cost of advertising when incurred. Advertising expenses
are included in selling, general and administrative expenses in the accompanying
statements of operations and approximated $82,000 and $15,000 for the years
ended December 31, 2002 and 2001, respectively.
SHIPPING AND HANDLING COSTS
Shipping and handling costs are included in cost of goods sold in the
accompanying statements of operations in accordance with Emerging Issues Task
Force ("EITF") No. 00-10, "Accounting for Shipping and Handling Fees and Costs."
Freight costs for the years ended December 31, 2002 and 2001 were not
significant.
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Page F-14
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RAPIDTRON, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
================================================================================
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
SOFTWARE DEVELOPMENT COSTS
The Company develops software to allow its products to interface with existing
back office software used by its customers. Software development costs are
charged to expense as incurred in accordance with SFAS No. 86, "Accounting for
the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed."
Software development costs approximated $149,000 for the year ended December 31,
2002. There were no significant software development costs during the year
ended December 31, 2001.
INCOME TAXES
Income taxes are accounted for using the asset and liability method. 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 and operating
loss and tax credit carryforwards. 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. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date. A
valuation allowance is provide for significant deferred tax assets when it is
more likely than not that such assets will not be recovered.
STOCK BASED COMPENSATION
The Company accounts for stock-based compensation issued to employees using the
intrinsic value method as prescribed by Accounting Principles Board Opinion No.
25 "Accounting for Stock Issued to Employees" ("APB 25"). Under the intrinsic
value method, compensation is the excess, if any, of the fair value of the stock
at the grant date or other measurement date over the amount an employee must pay
to acquire the stock. Compensation, if any, is recognized over the applicable
service period, which is usually the vesting period. The Financial Accounting
Standards Board ("FASB") has issued SFAS No. 123 "Accounting for Stock-Based
Compensation", as amended by SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123" and interpreted by FASB Interpretation No. ("FIN") 44, "Accounting for
Certain Transactions Involving Stock Compensation, an Interpretation of APB 25."
This standard, if fully adopted, changes the method of accounting for all
stock-based compensation to the fair value method. For stock options and
warrants, fair value is determined using an option pricing model that takes into
account the stock price at the grant date, the exercise price, the expected life
of the option or warrant and the annual rate of quarterly dividends.
Compensation expense, if any, is recognized over the applicable service period,
which is usually the vesting period.
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Page F-15
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RAPIDTRON, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
================================================================================
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
STOCK BASED COMPENSATION (continued)
The adoption of the accounting methodology of SFAS No. 123 for employees is
optional and the Company has elected to continue accounting for stock-based
compensation issued to employees using APB 25; however, pro forma disclosures,
as if the Company adopted the cost recognition requirements under SFAS No. 123,
are required to be presented.
At December 31, 2002, the Company had no stock-based compensation plans, but had
granted options to certain employees (see Note 5). The Company accounts for such
grants under the recognition and measurement principles of APB 25, and related
Interpretations. No stock-based employee compensation cost is reflected in net
loss, as all options granted had an exercise price equal to the estimated market
value of the underlying common stock on the date of grant. Had the Company
applied the fair value recognition provisions of SFAS No. 123 to stock-based
employee compensation, there would have been no material change to net loss or
loss per share at December 31, 2002 and 2001.
COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income," establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. For the years ended December 31, 2002
and 2001, the Company had no items of other comprehensive income. Therefore,
net loss equals comprehensive loss for the years ended December 31, 2002 and
2001.
EARNINGS PER SHARE
The Company computes net loss per common share using SFAS No. 128 "Earnings Per
Share." Basic loss per common share is computed based on the weighted average
number of shares outstanding for the period. Diluted loss per share is computed
by dividing net loss by the weighted average shares outstanding assuming all
dilutive potential common shares were issued. There were no dilutive potential
common shares at December 31, 2002 and 2001 (see Note 5). Because the Company
has incurred net losses and has no potentially dilutive common shares, basic and
diluted loss per share are the same. Additionally, for purposes of calculating
diluted loss per share, there were no adjustments to net loss.
TREASURY STOCK
The Company accounts for acquisitions of treasury stock under the cost method.
Treasury stock is recorded as a separate component of stockholders' equity at
cost, and paid-in capital accounts are not adjusted until the time of sale,
retirement or other disposition.
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Page F-16
================================================================================
RAPIDTRON, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
================================================================================
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
SEGMENTS OF A BUSINESS
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," changed the way public companies report information about segments
of their business 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 statements of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
Significant recent accounting pronouncements include:
ADOPTION/
PRONOUNCEMENT TITLE EFFECTIVE DATE
- ------------- -------------------------------------------- ---------------
SFAS No. 141 Business Combinations January 1, 2002
SFAS No. 142 Goodwill and Other Intangible Assets January 1, 2002
SFAS No. 143 Accounting for Asset Retirement Obligations January 1, 2003
SFAS No. 145 Rescission of FASB Statements No. 4, 44, and May 15, 2002
64, Amendment of FASB Statement No. 13,
and Technical Corrections
SFAS No. 146 Accounting for Costs Associated with Exit or January 1, 2003
Disposal Activities
SFAS No. 148 Accounting for Stock-Based Compensation - December 31,
Transition and Disclosure, an amendment of 2002
FASB Statement No. 123
FIN 45 Guarantor's Accounting and Disclosure December 31,
Requirements for Guarantees, Including 2002
Indirect Guarantees of Indebtedness of
Others - an Interpretation of FASB
Statements No. 5, 57, and 107 and Rescission
of FASB Interpretation No. 34
<FN>
Other recent accounting pronouncements are discussed elsewhere in these notes to
the financial statements. In the opinion of management, recent accounting
pronouncements did not or will not have a material affect on the financial
statements.
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Page F-17
================================================================================
RAPIDTRON, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
================================================================================
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include cash, accounts receivable, accounts
payable, accrued liabilities, and capital lease obligations. The Company
believes that the fair value of these financial instruments approximates their
carrying amounts based on current market indicators, such as prevailing market
rates and the short-term maturities of these financial instruments. It is not
practical to estimate the fair value of amounts due to related party and loans
due to related parties due to their related party nature.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial statements
in order for them to conform to the current year presentation.
2. PROPERTY AND EQUIPMENT
Property and Equipment consist of the following at December 31, 2002:
Furniture and fixtures $ 5,340
Computer equipment 14,213
----------
19,553
Less accumulated depreciation and amortization (6,483)
----------
$ 13,070
==========
3. RELATED PARTY TRANSACTIONS
DUE TO RELATED PARTY
Equus Marketing and Design, Inc. ("Equus") is a party related to the Company
through commonality of ownership. The Company shares a facility and certain
administrative personnel with Equus (Equus is the lessee of the property and
employer of the personnel). Additionally, Equus provides marketing services to
the Company.
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Page F-18
================================================================================
RAPIDTRON, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
================================================================================
3. RELATED PARTY TRANSACTIONS (continued)
DUE TO RELATED PARTY (continued)
On January 1, 2002, the Company entered into an administrative expenses
agreement and a marketing services agreement with Equus. Such agreements expire
on December 31, 2003. Under the administrative expenses agreement, the Company
is to reimburse Equus monthly for certain costs directly attributable to the
Company plus approximately 30% to 50% of shared costs such as rent, utilities,
certain employees' payroll costs, etc. Management believes that the allocated
amounts are reasonable and at fair market values. For the year ended December
31, 2002, Equus charged the Company approximately $171,000 for administrative
expenses.
During the year ended December 31, 2001, the Company was not under such
agreement, but they reimbursed Equus in a similar manner. Charges to the
Company by Equus for administrative expenses for the year ended December 31,
2001 approximated $114,000.
The marketing services agreement requires a monthly marketing retainer of
$10,000 to be paid to Equus. Subsequent to December 31, 2002, the retainer
amount was reduced to $2,500 per month. Additionally, the Company is billed for
certain other direct advertising and marketing costs. For the years ended
December 31, 2002 and 2001, marketing and advertising expenses charged by Equus
approximated $201,000 and $76,000, respectively.
At December 31, 2002, the Company owed Equus $168,175 for unpaid administrative
and marketing expenses, which is included in due to related party on the
accompanying balance sheet.
LOANS DUE TO RELATED PARTIES
The Company had the following loans due to related parties at December 31, 2002:
Loans due to stockholders, unsecured, accrue interest at
the Prime rate (4.25% at December 31, 2002), due on
demand. $ 100,923
Notes payable to parties involved in the reverse merger
(see Note 8), secured by substantially all assets of the
Company, accrue interest at 10% per annum, due in
May 2003. 430,000
Loan payable to stockholders, unsecured, accrues
interest at the Prime rate plus 2%, due on demand. 140,000
Loan payable to Equus, unsecured, accrues interest at
the Prime rate plus 1%, due on demand. 150,000
----------
$ 820,923
==========
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Page F-19
================================================================================
RAPIDTRON, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
================================================================================
3. RELATED PARTY TRANSACTIONS (continued)
LOANS DUE TO RELATED PARTIES (continued)
Subsequent to December 31, 2002, certain notes payable listed above were
converted to equity in connection with a reverse merger. See Note 8 for more
information.
EQUITY TRANSACTIONS
On December 28, 2002, the Board of Directors of the Company agreed to accept
196,000 shares of the Company's common stock as payment for a promissory note
receivable plus accrued interest due from an employee and stockholder of the
Company. Principal plus interest approximated $196,000 at the time of
settlement. The Company has recorded the related treasury shares at cost of
$196,000 as a reduction to stockholders' equity in the accompanying balance
sheet and statement of stockholders' deficit.
MANAGEMENT SERVICES AGREEMENT
Effective January 1, 2002, the Company entered into a management services
agreement with Meineke Consulting, LLC ("Meineke"). Under such agreement
Meineke is to provide general management services to the Company until December
31, 2004, unless terminated earlier. The Company is to pay Meineke an annual
base fee in monthly installments. Meineke may also receive incentive bonus
compensation if certain annual earnings increases are met. Fees for the year
ended December 31, 2002 totaled $75,000.
CONSULTING AGREEMENT
The Company has entered into a 36-month consulting services agreement with Lee
Guthrie & Associates ("LGA") to provide sales, marketing, distribution and
business development strategies and assistance. Lee Guthrie, the owner of LGA,
is the Company's Vice President of Fitness Sales. The agreement commenced on
June 1, 2002, and may be terminated by either party with 30 days notice. Such
agreement requires monthly payments of $4,000 plus annual bonuses if certain
targets are met. In addition, the Company granted options to purchase 150,000
shares of the Company's common stock at an exercise price of $1.00 per share
(see Note 5). The Company incurred consulting fees related to this contract
totaling $28,000 during the year ended December 31, 2002. This agreement
replaced a March 3, 2001 agreement with LGA requiring payments of $10,000 per
month. Consulting fees incurred related to this 2001 agreement approximated
$50,000 and $110,000 for the years ended December 31, 2002 and 2001,
respectively.
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Page F-20
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RAPIDTRON, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
================================================================================
3. RELATED PARTY TRANSACTIONS (continued)
COMMITMENTS
Future minimum payments on the Equus marketing agreement, Meineke consulting
agreement, and LGA consulting agreement approximate the following for the years
ending December 31:
2003 $ 213,000
2004 148,000
2005 20,000
----------
$ 381,000
==========
Other related party transactions are discussed elsewhere in these notes to the
financial statements.
4. CAPITAL LEASE OBLIGATIONS
Included in property and equipment (see Note 2) are several computers acquired
under capital leases with costs totaling $4,552 and related accumulated
depreciation of $1,517 at December 31, 2002. The leases accrue interest at an
imputed rate of 19.99%, require principal and interest payments approximating
$140 per month, and expire on various dates through November 2005.
Minimum lease payments under these agreements approximate the following for the
years ending December 31:
2003 $ 1,670
2004 1,670
2005 1,350
--------
4,690
Less imputed interest (1,131)
--------
$ 3,559
========
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Page F-21
================================================================================
RAPIDTRON, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
================================================================================
5. STOCK OPTIONS
In May 2001, the Company granted options to acquire 150,000 shares of the
Company's common stock in connection with the March 3, 2001, LGA consulting
agreement described in Note 3. Such options are exercisable at $1.00 per
common share. Of the total granted, 50,000 vested immediately and the remaining
100,000 vest based on LGA assisting the Company to achieve certain sales
milestones. Such milestones have not been achieved as of December 31, 2002.
The Company has not approved any stock option plan.
A summary of the aggregate stock option activity for the years ended December
31, 2002 and 2001 is presented below, as required by SFAS No. 123:
WEIGHTED
EXERCISE PRICE AVERAGE PRICE
SHARES RANGE PER SHARE
------------- -------------- --------------
Options outstanding -
December 31, 2000 - - $ -
Options granted (May
2001) 150,000 $ 1.00 $ 1.00
Options exercised - - $ -
Options expired or
forfeited - - $ -
-------------
Options outstanding -
December 31, 2002
and 2001 150,000 $ 1.00 $ 1.00
=============
Options exercisable -
December 31, 2002 50,000 $ 1.00 $ 1.00
=============
<FN>
The weighted average grant-date fair value per share of options granted during
2001 was $0.20. Such fair value was estimated by using the minimum value method
of the Black-Scholes stock option pricing model based on the exercise price per
share, the estimated market price of the Company's common stock, and the
weighted-average assumptions set forth below for issuances in the year ended
December 31, 2001:
Expected life 5 Years
Estimated volatility 0%
Risk-free interest rate 4.6%
Dividends None
================================================================================
Page F-22
================================================================================
RAPIDTRON, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
================================================================================
5. STOCK OPTIONS (continued)
In January 2003, the Company granted to certain employees in connection with
employment agreements (see Note 8) options to acquire 1,175,000 shares of the
Company's common stock. Such options were exercisable at $0.50 per share and
vested immediately. However, all outstanding options were cancelled in
connection with the reverse merger described in Note 8. No options had been
exercised prior to the reverse merger.
6. COMMITMENTS AND CONTINGENCIES
The Company may be involved from time to time in various claims, lawsuits,
disputes with third parties, actions involving allegations and incriminations or
breach of contract actions incidental to the normal operations of the business.
The Company is currently not involved in any such litigation that management
believes could have a material adverse impact on its financial position or
results of operations.
7. INCOME TAXES
There is no material income tax expense recorded for the years ended December
31, 2002 and 2001, due to the Company's net losses.
Income tax expense for the years ended December 31, 2002 and 2001 differed from
the amounts computed by applying the U.S. federal income tax rate of 34 percent
for the following reasons:
2002 2001
---------- ----------
Income tax benefit at U.S. federal statutory rates $(165,000) $(182,000)
State income tax benefit (29,000) (32,000)
Valuation allowance for deferred tax asset 194,000 214,000
State and local income taxes, net of federal income
tax effect 1,662 800
---------- ----------
$ 1,662 $ 800
========== ==========
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Page F-23
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RAPIDTRON, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
================================================================================
7. INCOME TAXES (continued)
The Company has a deferred tax asset and like amount of valuation allowance of
approximately $604,000 at December 31, 2002, relating primarily to tax net
operating loss carryforwards. The valuation allowance increased by
approximately $207,000 during the year ended December 31, 2002. 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
temporary differences become deductible. Management considers projected future
taxable income and tax planning strategies in making this assessment. Based upon
the level of historical taxable income and projections for future taxable income
over the periods which the deferred tax assets are deductible, management
believes it is more likely than not the Company will not realize the benefits of
these deductible differences.
As of December 31, 2002, the Company had net operating loss carryforwards of
approximately $1,510,000 and $755,000 available to offset future taxable Federal
and state income, respectively. The federal and state carryforward amounts
expire in varying years through 2023.
In the event the Company were to experience a greater than 50% change in
ownership, as defined in Section 382 of the Internal Revenue Code, the
utilization of the Company's tax net operating loss carryforwards ("NOLs") could
be severely restricted. Further, utilization of the Company's state NOLs for
tax years beginning in 2002 and 2003 will be suspended under provisions of
California law.
8. SUBSEQUENT EVENTS (UNAUDITED)
STOCK ISSUED TO EMPLOYEE
Subsequent to December 31, 2002, the Company issued 128,000 shares of its common
stock to an employee as payment for approximately $64,000 of accrued salaries.
The shares were issued at $0.50 per share.
NOTES PAYABLE TO RELATED PARTIES
Subsequent to December 31, 2002, the Company borrowed $1,020,000 from related
parties under various short-term notes payable bearing interest at rates ranging
from 6% to 10%, with principal and accrued interest due within 2003.
Subsequent to the closing of the reverse merger (see below), $620,000 of these
subsequent notes payable plus notes payable totaling $430,000 that were
outstanding at December 31, 2002 were converted into equity at $1.00 per share.
================================================================================
Page F-24
================================================================================
RAPIDTRON, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
================================================================================
8. SUBSEQUENT EVENTS (UNAUDITED) (continued)
EMPLOYMENT AGREEMENTS
In January 2003, the Company entered into employment agreements with certain
employees. The agreements expire on December 31, 2004 and can only be
terminated prior to such date by either party for "cause", as defined. The
agreements have provisions that include base salary amounts, various benefits,
the granting of stock options (see Note 5), and covenants not to compete. Upon
a resignation of an agreement with cause by the employee or without cause by the
Company, the Company is to immediately pay all accrued compensation, and is to
continue paying the base salary for 12 months following termination. Total
base salaries to be paid to these employees are as follows for the years ending
December 31:
2003 $ 360,000
2004 360,000
$ 720,000
==========
REVERSE MERGER
On May 8, 2003, the Company completed a reverse merger under an Agreement and
Plan of Merger (the "Plan" or "Merger") with The Furnishing Club and subsidiary
("TFC"), a publicly traded "shell" company, in a tax-free share exchange under
section 368(a)(1)(B) of the Internal Revenue Code of 1986, as amended.
Immediately prior to the Merger, TFC had 20,000,000 shares authorized and
19,993,752 shares of common stock issued and outstanding. Pursuant to the
Merger, all of the 10,052,000 issued and outstanding shares of common stock of
the Company were exchanged for 9,600,000 shares of TFC, on a 0.955 to 1 basis.
Concurrent with the closing of the Merger, 13,943,750 shares of common stock of
TFC were canceled. Immediately after the Merger, 15,650,002 shares of common
stock were issued and outstanding.
Immediately after the Merger, the officers and directors of TFC resigned and the
management of the Company took control of such positions, therefore reflecting a
change of control. As a result, the transaction will be recorded as a "reverse
merger" whereby the Company was considered the accounting acquirer as it
retained control of TFC after the merger, however, legally the Company became a
wholly owned subsidiary of TFC after the Merger. In connection with the Merger,
TFC changed its name to Rapidtron, Inc. Since TFC's continuing operations and
balance sheet are insignificant, a pro forma consolidated balance sheet at
December 31, 2002 and consolidated statement of operations for the year then
ended are not presented here.
In connection with the terms of the Merger, all outstanding stock options
(1,325,000 in total) were cancelled. Additionally, subsequent to the Merger,
the Company issued 400,000 shares of its restricted common stock to certain
individuals as finder's fees.
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Page F-25