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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(X) ANNUAL REPORT UNDER SECTION 13 OR 15(d)OF THE SECURITIES
EXCHANGE ACT OF 1934
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended: Commission file number:
June 30, 1997 0-8951
COMPARATOR SYSTEMS CORPORATION
(Name of small business issuer in its charter)
Colorado 95-3151060
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
4667 Mac Arthur Blvd. Suite 400
Newport Beach, California 92660
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714) 851-4300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
(title of class)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Registrant was required to file such reports),
and (2) has been subject to the filing requirements for at least the
past 90 days.
Yes /X/ No / /
Check if there is no disclosure of delinquent filers in response
to Item 405 of Regulation S-B contained in this form, and no disclosure
will be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III
of this Form 10-KSB or any amendment to this Form 10-KSB. /X/
State issuer's revenues for its most recent fiscal year: None
The number of shares of Registrant's common stock outstanding as of
September 15, 1997 was 614,234,838. The approximate aggregate market
value of the voting stock held by non-affiliates of the registrant
based on informal trading average $.0075 of the high and low prices as
of September 15, 1997 was $4,606,761.
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TABLE OF CONTENTS
PART I. Page
Item 1: Business 3
Item 2: Property 18
Item 3: Legal Proceedings 18
Item 4: Submission of Matters to a Vote of
Security Holders 20
PART II.
Item 5: Market for the Company's Common Stock and
Related Stockholder Matters 20
Item 6: Management's Discussion and Analysis of
Financial Condition and Results of Operation 22
Item 7: Financial Statements 25
Item 8: Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 25
PART III.
Item 9: Directors and Executive Officers of the Company 25
Item 10: Executive Compensation 27
Item 11: Security Ownership of Certain Beneficial
Owners and Management and Potential Change
in Control 29
Item 12: Certain Relationships and Related Transactions 30
PART IV.
Item 13: Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 30
Signatures 32
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PART I
ITEM 1: BUSINESS
Current Material Developments
In May 1996, the Securities and Exchange Commission ("SEC") filed
a civil action in the United States District Court, Central
District of California (the "Complaint") against Comparator
Systems Corporation ("CSC" or the "Company") and three of its
officers, Robert Reed Rogers ("Rogers"), Scott Hitt ("Hitt") and
Gregory Armijo ("Armijo"), alleging that Rogers, Hitt and Armijo
had caused CSC to issue materially false and misleading financial
statements for the fiscal years ending June 30, 1994 and June 30,
1995 and the first three quarters of fiscal year 1996 by grossly
inflating the Company's assets and that the Company's recognition
of assets did not conform to Generally Accepted Accounting
Principles ("GAAP") rendering CSC's financial statements as set
forth in its Annual Reports on Form 10-K for fiscal years 1994
and 1995, its Quarterly Reports on Form 10-Q from the first
fiscal quarter of 1996 through the third fiscal quarter of 1996,
and as incorporated in a private placement memorandum used in
connection with the offer and sale of CSC common stock from at
least July 1, 1994 to January 1, 1996, materially false and
misleading. The Complaint further alleged that Rogers, Hitt and
Armijo made materially false and misleading statements to
investors and prospective investors concerning CSC's technology,
including claims that CSC owned certain patents and licenses
that, in fact, it did not own; that from at least January 1,
1992, in public filings, in private placement memoranda, and in
letters, demonstrations and other communications to investors and
potential investors, Rogers, Hitt and Armijo falsely represented
that CSC was actively engaged in research and development toward
producing commercially competitive fingerprint identification
technology when, in fact, CSC was engaged in no substantial
business activities other than the sale of stock to investors;
that, among their misrepresentations, Rogers, Hitt & Armijo
represented that CSC had developed a new generation of its
fingerprint identification technology with substantial market
potential when, in fact, Rogers and Hitt had merely stolen a
prototype of a fingerprint identification device developed by
individuals not associated with CSC and presented it as CSC's
technology, protected by CSC's patents; that on the basis of the
above misrepresentations and additional misrepresentations and
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material omissions, subsequent to July 1, 1993, Rogers, Hitt and
Armijo fraudulently obtained for CSC at least 2.9 million dollars
in proceeds from the sale of CSC common stock to individual
investors; and, in addition, during the period when CSC's public
filings and its statements to investors concerning its financial
operations and its purported technology and business
relationships were materially false and misleading, Rogers, Hitt
and Armijo caused at least ten million shares of CSC's common
stock to be issued to each of them, and at least Hitt and Armijo
sold substantial amounts of that stock to the public.
Depositions of the Company's officers and employees relating to
the SEC Complaint were initiated on June 18, 1996. On June 28,
1996, Mr. Floegel resigned as President and a Director of CSC.
On July 5, 1996, Mr. Armond Schroeder, President of CSC's
subsidiary, International Financial Systems, Inc. ("IFS"), was
appointed to serve as President of CSC. On August 9, 1996, Mr.
Eli Buchalter, CSC's auditor since 1989, notified the Company
that certain information had come to his attention subsequent to
his September 20, 1995 report that he believed might materially
affect the financial amounts and disclosures set forth in his
report, and that accordingly, he was withdrawing his opinion on
CSC's financial statements for June 30, 1995. He requested that
all persons known by the Company to be holders of the June 30,
1995 financial statements be notified to return them to the
Company and to not place any further reliance on the statements.
On August 14, 1996, the Buchalter Accountancy Corp. resigned as
the Company's auditor. On September 24, 1996, the Company
retained the firm of Farber & Hass as its new auditor. For
further detail concerning the resignation of the Buchalter
Accountancy Corp., refer to "ITEM 8: CHANGES IN AND DISAGREE-
MENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE."
On September 19, 1996, the SEC announced that CSC, Rogers and
Armijo had consented to a permanent injunction and other relief,
without admitting or denying the allegations in the SEC
Complaint, enjoining CSC, Rogers and Armijo from future
violations of Section 17(a) of the Securities Act of 1933,
Section 10(b) of the Securities Exchange Act of 1934 (the "1934
Act"), and Rule 10b-5 thereunder, Sections 13(a) and 13(b)(2)(A)
and (B) of the 1934 Act and Rules 13a-1, 13a-13, and 12b-20;
prohibiting CSC from transferring any corporate funds or assets
to or for the benefit of Hitt; requiring CSC to prohibit Rogers,
Armijo and Hitt from acting as officers or directors of CSC; and
permitting CSC to retain Rogers and Armijo as consultants to the
Company with restrictions on the length of time and gross
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compensation to be paid to them. Hitt, having lived in Malaysia
since 1992, was not represented in the matter and has reached no
settlement agreement with the SEC. As a result of the entry of
the permanent injunction, Rogers retired and Armijo resigned his
position with the Company on September 19, 1996.
Concurrent with the entry of the permanent injunction, Mr.
Schroeder became Chairman of the Board and Ms. Marianne Bedford
("Bedford") and Mr. Donald Levering ("Levering") were appointed
to CSC's Board of Directors to fill the remaining vacancies
created by the entry of the permanent injunction. On December 4,
1996, Mr. Schroeder resigned as Chairman of the Board, President
and Chief Executive Officer of CSC, citing the Company's
continued inability to pay him, and Bedford was appointed
Chairman of the Board and Chief Executive Officer of the Company.
On March 21, 1997, Bedford resigned her positions with CSC citing
among other matters, her opinion as to the inability of the
Company to implement changes needed for its survival and
viability. On June 2, 1997, Mr. Levering, the sole remaining
Director of the Company, appointed Thomas C. Hanscome
("Hanscome") and John D. Hinterleitner ("Hinterleitner") to the
Board of Directors. The Board of Directors then appointed
Hanscome to the positions of Chairman of the Board, Chief
Executive Officer and President of the Company and Hinterleitner
as the Company's Executive Vice President. Hinterleitner was
also appointed the Company's Secretary and Treasurer, replacing
Celeste Sim who resigned as Secretary of the Company on June 2,
1997.
Subsequent to the SEC's filing of its Complaint, the Company has
experienced an increasingly critical shortage of working capital,
with priority for the usage of its very limited funds being given
to legal fees and essential Company survival expenses other than
salaries. Indeed, it does not presently have sufficient cash
assets, without the borrowing of funds from third parties, to pay
the costs of legal counsel retained for the continued
representation of the Company in the above-described SEC
litigation and for needed advice and assistance in compliance
with the disclosure and reporting requirements of the 1934 Act.
As a result, the Company's business operations, at present, are
essentially dormant with approximately $3,500 in funds available
for operations as of September 15, 1997. In addition, the
Company has vacated its previous business offices and is now
utilizing, on a month-to-month basis, a 180 square-foot executive
suite, at 4667 Mac Arthur Boulevard, Suite 400, Newport Beach,
California 92660, at a monthly rental of $625. Apart from the
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officers referred to above, the Company has no paid employees.
The Company is not presently selling any products nor does it
have the components to manufacture or produce products.
Despite these extremely adverse operational and financial
conditions, the current Board of Directors believes the Company
could continue in business if it were able to raise additional
capital of at least $125,000, which would be utilized primarily
to enable the Company to confirm its legal rights to the
Comparator 5000 fingerprint comparison device referred to under
"ITEM 1: BUSINESS - History" below. In addition, the Company's
Management believes it will need approximately $375,000 to
establish its rights to, and implement an initial sales and
marketing plan for technology that the company had developed
prior to the Comparator 5000. THE MANAGEMENT OF THE COMPANY IS
AWARE, HOWEVER, AND ACKNOWLEDGES HEREIN, THAT THERE ARE PRESENTLY
SIGNIFICANT LEGAL ISSUES AS TO THE OWNERSHIP RIGHTS THAT THE
COMPANY MAY HAVE TO THE TECHNOLOGY IN THE COMPARATOR 5000 DEVICE,
AND POSSIBLY TO ANY OTHER TECHNOLOGY CLAIMED BY THE COMPANY.
WHILE THE COMPANY BELIEVES THAT THE FACTS RELATING TO THE
DEVELOPMENT OF THE COMPARATOR 5000 TECHNOLOGY AND CERTAIN OTHER
TECHNOLOGY WILL ULTIMATELY SUPPORT COMPANY CLAIMS TO ITS RIGHTS
TO THIS TECHNOLOGY, CERTAIN FORMER CONSULTANTS AND EMPLOYEES OF
THE COMPANY DISPUTE THESE CLAIMS AND CONTINUE THEIR CLAIM TO THE
OWNERSHIP OF THE COMPARATOR 5000 AND THE RELATED TECHNOLOGY. IN
ADDITION, THE STAFF OF THE SEC IN THE CURRENT LEGAL PROCEEDINGS
HAS EXPRESSED CONCERNS WITH THE COMPANY'S CLAIMS TO OWNERSHIP
RIGHTS IN THE COMPARATOR 5000 TECHNOLOGY AS WELL AS ANY OTHER
TECHNOLOGY CLAIMED BY THE COMPANY. ACCORDINGLY, INVESTORS ARE
CAUTIONED THAT EVEN IF THE COMPANY WERE SUCCESSFUL IN RAISING
ADDITIONAL CAPITAL, OF WHICH THERE CAN BE NO ASSURANCE, THERE ARE
SIGNIFICANT LEGAL ISSUES RELATING TO OWNERSHIP RIGHTS IN THE
COMPARATOR 5000 TECHNOLOGY, AND ANY OTHER TECHNOLOGY CLAIMED TO
HAVE BEEN DEVELOPED BY THE COMPANY, THAT WILL ULTIMATELY HAVE TO
BE RESOLVED FAVORABLY TO THE COMPANY, IN ORDER FOR THE COMPANY TO
RECOMMENCE BUSINESS OPERATIONS AND TO HAVE ANY OPPORTUNITY TO
BECOME FINANCIALLY VIABLE.
History
The Company was founded to develop and market fingerprint
comparison systems designed to verify people's identities. The
Company was incorporated in California on July 12, 1976. On
October 12, 1978 a Colorado corporation of the same name was
incorporated, and on January 12, 1979 the California corporation
was merged into the Colorado corporation, which survives today.
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CSC has been engaged in research and development, and in the
intermittent manufacture and marketing of fingerprint-based
identity verification systems since its initial public offering
in 1979. Notwithstanding its incorporation nearly 20 years ago,
and sales of the ID-1 in the 1980's, the Company is currently in
a development stage, has yet to achieve operational
profitability, and as discussed above, presently is essentially
inactive and in need of significant additional capital if it is
to have any possibility to continue in business.
In the 1980's, CSC introduced and marketed its first-generation
fingerprint comparison system, the Comparator Model ID-1, to the
law enforcement market. That device was used primarily by jails
and prisons to verify that the right prisoners were being
released. Model ID-1 systems were in use in correctional
facilities since 1984 and have performed accurately and reliably,
and not one error by a Model ID-1 has ever been reported by a law
enforcement customer. The ID-1, however, was an electro-optical
analog device that required an attendant to operate it, and the
use of hard-copy inked fingerprints. CSC was not successful in
selling the ID-1 to commercial customers, who wanted "live-scan"
fingerprint capture and comparison, digital storage and retrieval
and unattended operation. The Company was unable to achieve
self-supporting sales to law enforcement customers alone and,
therefore, initiated further research to develop a digital
system.
Developments relating to the Company in the past three years have
been as follows. In July 1993, CSC entered into agreements with
Malaysian investors to establish a joint venture company in Kuala
Lumpur, Malaysia, to complete development of, and to manufacture
new, digital fingerprint comparison products. The Malaysian
investors agreed to invest approximately $4,000,000 in the
Malaysian joint-venture company, and they also subscribed to
purchase approximately $18,000,000 of CSC's common stock. Ten
percent of the agreed-upon investment was paid-in through a
private placement of CSC's restricted stock in October 1993.
In November 1993, it was discovered that Karen Kay Churchill, the
Company's then vice president and corporate secretary, and an
employee of eight years standing, while managing CSC's US offices
for the prior two years, had improperly issued an estimated
$747,778.40 of CSC's stock to herself, her family and her friends
and had misapplied an estimated $81,613.21 of Company funds to
satisfy her personal obligations.
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In January 1994, Ms. Churchill's services were terminated. In
late January 1994 a prototype fingerprint comparison device that
had been loaned to CSC in October 1991 by VVL, a Scottish company
for CSC to market test, was found to be in storage on the
Company's premises. On February 1, 1994, CSC shipped the unit
back to Scotland, approximately two years later than originally
agreed, with its apologies and with funds to cover costs incurred
by VVL due to the long delay. CSC had signed an agreement in
September 1991 with VVL that called for CSC to market test the
VVL design and, if the market testing proved positive, to enter
into negotiations for a further agreement under which either VVL
might manufacture the product for CSC to sell under private
label, or alternatively CSC might manufacture the device under
license from VVL. The relationship between the companies never
proceeded beyond the market testing that CSC conducted in 1991
and early 1992. The VVL prototype fingerprint comparison is
alleged in the SEC Complaint to have been stolen by the Company
and to have been presented to the public as the Company's
technology, protected by CSC's Patents.
In March 1994, after completing an accounting and causing it to
be reviewed by two independent auditors, the Company filed a
criminal complaint against Ms. Churchill with the Irvine,
California, Police Department, and the Company also notified the
public, its shareholders and the Malaysian investors of the
situation. The Malaysian investors declined to proceed further
with their financial commitments to CSC; and, in May 1994, CSC's
Malaysian joint venture company ceased operations. In August,
1994 CSC completed the relocation of the last of its engineers
and scientists back to the United States. During this period.
CSC acquired all of the shares of Wira Asset Management Sdn Bhd,
an inactive Malaysian corporation with the intention of using
Wira as its marketing base for the Southeast Asian market, when
the Company was capable of selling its new product line. The
loss of the Malaysian funding, which had taken almost two years
to arrange, was financially crippling to CSC, and the Company
immediately began the search for replacement major financing,
which has not to date been accomplished.
In 1994, CSC continued development of fingerprint technology
initiated in Malaysia in 1992, in California at a much reduced
rate due to limited working capital. CSC covered some of its
capital needs through private placements of its restricted stock
to its shareholders. CSC's engineers, now working as consultants
to the Company rather than employees, began to cover some of
their own costs in the continued development of the digital
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fingerprint comparison technology that CSC had originated in
Malaysia in 1992. In June 1995, CSC retained the services of Mr.
Richard E. Floegel, who had previously been vice president
operations of a subsidiary of Hitachi Imaging Products, as CSC's
president and chief operating officer.
In October 1995, CSC established International Financial Systems,
Inc. (IFS), a wholly-owned subsidiary engaged in the business of
developing hardware/software operating and accounting systems and
marketing them to financial institutions such as credit unions.
IFS was established by CSC with the acquisition of hardware from
a bankrupt predecessor company and the acquisition of software
from the developer. In November 1995, IFS established a
subsidiary in Honduras, where it began to market a Spanish
language version of its credit union operating systems.
CSC continued to raise limited but inadequate amounts of working
capital through private placements of its restricted stock to its
shareholders. CSC's engineers increasingly expressed
dissatisfaction with the Company's inability to fully pay them
for their work on the development of the pre-production
prototypes of the Comparator 5000 Series fingerprint comparison
products (the "Comparator 5000"), and threatened to take CSC's
fingerprint comparison product to the market themselves if not
paid. On October 23-25, 1995, CSC participated in the annual
North American Data General Users Group (NADGUG) exhibition in
Washington D.C., which was the first public showing of pre-
production prototypes of the Comparator 5000. In its 10-Q report
for the quarter ending September 30, 1995, CSC announced its
plans to attend the MILIPOL 95 Exposition in Paris beginning
November 21, 1995, and CSC demonstrated production prototypes of
the Comparator 5000 at MILIPOL. In its 10-Q reports for the
quarters ending September 30, 1995 and December 31, 1995, CSC
announced plans to formally introduce the Comparator 5000 to the
market at the CardTech/SecurTech Exhibition to be held in Atlanta
May 14-16, 1996. As discussed above (see "ITEM 1: BUSINESS -
Current Material Developments") certain engineers who worked for
the Company on the development of the Comparator 5000 technology
currently claim that they, and not the Company, own the rights to
the Comparator 5000.
In October 1995, CSC filed a civil suit against Ms. Churchill and
33 other defendants relating to the improper and unauthorized
issuance of CSC shares and the misapplication of CSC funds. Ms.
Churchill filed for personal bankruptcy but, on May 30, 1996, the
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Company obtained a judgment against Ms. Churchill from the
Bankruptcy Court for stock and cash with a value of approximately
$512,500. Litigation against other defendants is still
proceeding as the Company is able to pay the legal fees involved.
CSC has not had the funds available to it to attempt collection
from Ms. Churchill of the judgment it holds against her.
CSC's common stock was listed on NASDAQ under the symbol IDID in
February 1990, and typically traded under one million shares per
day, usually at 1/32 bid and 1/16 asked since that time. On
April 29, 1996, a new high of 6,346,801 IDID shares were traded.
On April 30, another 5,163,328 shares were traded, and on May 1,
another 4,417,797 shares were traded, all in the 1/32 bid and
1/16 asked range.
On Friday, May 3, 1996, IDID traded 121,289,774 shares, closing
at 9/32, with a high of 7/16. The NASD called the Company
regarding the unusual trading. The last news release the Company
had issued had been on February 7, 1996, and at the direction of
the NASD, CSC issued a news release on Monday morning, May 6,
regarding its planned May 14 new product introduction of the
Comparator 5000 in Atlanta. On May 6 IDID traded 152,210,964
shares, closing at 1 1/32, with a low of 5/16 and a high of 1
1/16. On Tuesday, May 7, 180,298,533 IDID shares traded,
reaching a high of 1 5/8 before closing at 7/8. On Wednesday,
May 8, 82,794,218 IDID shares were traded, with a high of 7/8 and
a low of 15/32. On May 9, 1996 the NASD halted trading pending
an investigation of the unusual activity, agreeing to resume IDID
trading on Monday, May 13. The SEC then joined the investigation
and the trading halt was extended. CSC proceeded as planned with
the introduction of the Comparator 5000 Series at the Atlanta
CardTech/SecurTech Exposition commencing May 14, 1996. On June
12, 1996 the Company withdrew its stock from NASDAQ, and its
shares commenced trading informally. Refer to "ITEM 5: MARKET
FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS"
elsewhere in this report.
On May 13, 1996 a class action was filed against CSC and Rogers
et al. in the Superior Court of the State of California, County
of Orange, by attorneys representing shareholders who purchased
CSC common stock from May 6, 1996 through May 8, 1996, inclusive,
claiming damages in excess of $300,000,000. Refer to "ITEM 3:
LEGAL PROCEEDINGS" elsewhere in this report.
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On May 31, 1996 the SEC filed its Complaint against the Company
and three of its officers and a temporary restraining order was
issued against the defendants as detailed in Civil Action No.
96-3856 LGB (Jgx). For further detail concerning the SEC
Complaint and the subsequent material events affecting the
Company and its business operations, including the consent of the
Company, Rogers and Armijo to the entry of a permanent injunction
and other ancillary relief, refer to "ITEM 1: BUSINESS - Current
Material Developments" above.
General Business
CSC has been engaged in research and development of a software-
based digital fingerprint comparison system intended to
accurately verify the identities of persons such as credit card
users, check cashers, ATM customers, computer users, surgical
patients, airline passengers and crews, drivers, resident aliens,
patients with health insurance, recipients of welfare benefits,
persons seeking access to military, diplomatic and industrial
secure areas. The digital system that the Company has attempted
to develop, termed by CSC the Comparator 5000 series, has been
intended to replace and supersede an analog electro-optical
fingerprint comparison system that the Company designed,
developed, manufactured, marketed and sold in the 1980's and
which is presently outdated and unmarketable in commercially
acceptable quantities in the US. As of this filing date, the
Company has no statistical performance data on the new product
line. More importantly, there are significant legal issues
relating to the ownership of the Comparator 5000 technology. In
addition without the infusion of additional capital the Company
does not have resources to confirm its rights to the legal
ownership of this technology, which are now claimed to be owned
by former employees and consultants of the Company who worked on
the development of this product. Accordingly, even if the
Comparator 5000 Series is determined to be functionally ready for
sale to customers who are willing to accept it without
statistical performance data, and assuming the product can be
marketed profitably and gain market acceptance, there is a very
significant risk that the Company will not be able to realize any
financial benefit from the marketing of this product.
CSC, through IFS, a wholly-owned subsidiary, has produced,
marketed and supported English language and Spanish language
operating and accounting systems for use by financial
institutions such as credit unions. Its products have been
designed with the flexibility to conform to each financial
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institution's requirements, and the simplicity to make them easy
to implement, use and maintain. IFS has been a Master Developer
of State Of The Art's MAS 90 Accounting Software. As a Master
Developer, IFS has provided custom modifications of this software
to meet the individual needs of its customers. All modules of
the MAS 90 software are available in English and some in Spanish.
IFS has a wholly-owned subsidiary in Honduras, SFI, which was
organized for the purpose of focusing on Latin American business
opportunities. Since the acquisition of IFS and SFI the Company
has not realized profitability from either entity. At this time
the operations of IFS and SFI have been abandoned and the Company
has no present plans to pursue reactivating these subsidiaries.
The Market
Fingerprint comparison is used for both identity verification and
for identification, but the systems used are different from each
other. Identity verification requires the person being
identified to lay claim to an identity (e.g. by entering a
passcode or presenting an identification card), giving the system
a binary choice of either accepting or rejecting the person's
claim (a "one-to-one" search). This methodology lends itself to
a wide range of applications such as access control, in which the
subject must be present to be recognized. Identification, on the
other hand, requires that the system search through stored sets
of characteristics of an unknown individual being presented (a
"one-to-many" search), a much more memory-demanding and time-
consuming task. Identification technology is employed primarily
for law enforcement, since unknown persons who are not present
may need to be identified based on prints left at a crime scene.
The systems employed for identification are termed AFIS, or
automated fingerprint identification systems. AFIS systems
generally excel at rapid data processing, but are unable to make
an exact identification comparison, requiring the employment of
fingerprint technicians to make the final comparison from a list
of possibilities presented by the AFIS.
Since 1990 CSC has endeavored to operate in the identity
verification market with products which are in production
prototypes stage, that can address numerous identity
verification applications. These applications exist whenever one
or another of multiple parties are required to prove or verify
their identity. Typical applications include:
- Welfare benefits
- Social Security/Provident Fund Benefits
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- National identification cards
- Passports, resident alien identification cards
- Drivers licenses
- Restricted area access
- Electronic or data access
- Patient ID, drug access control
- Employee time and attendance verification
- Credit and debit cards
CSC has concentrated its endeavors since its founding in the
development of identity verification systems. These are access
control/transaction control systems used to verify whether a new
entry matches an existing record. A finger is scanned and the
collected data is compared with data stored in system memory or
on a card. No search is normally performed, since the task of
these systems is to perform only one-to-one comparison, allowing
an individual access to an area or an electronic system if a
scanned finger matches the individual's stored finger data. The
model ID 1 which was previously marketed by the Company in the
1980s is no longer marketed. The Comparator 5000 series is the
only potential Company product still in production prototype
stage, and, as discussed above, is currently the subject of
dispute as to its ownership.
Until several years ago relatively few identity verification
systems had been sold by any company in the Biometrics Industry.
Previously, industry sales in this market had been minimal, with
the market not "leaping forward" as had been anticipated at least
ten years ago by industry observers. It is the Company's belief
that this situation was not entirely the result of undeveloped
demand, but also of the lack of availability on the market of
identity verification systems that could meet the market's needs
for accuracy, repeatability and cost-effectiveness.
Distribution
The Company believes the sale of biometric identification devices
through the primary distribution channels direct, systems
integrators, original equipment manufacturers, value-added
resellers - vary depending on the technology, the application and
the magnitude of the contract. First-time sales of products are
often subject to a competitive bidding process, in which the
lowest cost provider of equipment that meets certain
specifications will often secure the contract. Additional
purchases are often based on compatibility with existing systems
to avoid difficulties with regard to system integration and to
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avoid costly and time consuming training procedures for new
technologies. Currently, the Company does not have the financial
and human resources to participate in competitive bid procedures.
Large system sales cycles may also be unpredictable due to
reliance on state and local governing bodies to allocate
resources and complete lengthy reviews and approval processes.
CSC had planned to distribute its fingerprint comparison products
within the United States direct to large accounts through Company
sales employees or through systems integrators or value added
resellers or to original equipment manufacturers as appropriate,
and to smaller accounts through dealers and distributors
specializing in each market segment. The Company was engaged in
negotiations with members of all of these categories of
distribution channels prior to May 31, 1996, although several of
CSC's former distributors withdrew following institution of the
SEC lawsuit against the Company. CSC had planned to distribute
its biometric products in foreign countries through original
equipment manufacturers, systems integrators and/or foreign
distributors. Although the Company has received inquiries from
other countries regarding the Comparator 5000 Series, even if it
were to raise additional capital and to be able to successfully
resolve its legal rights to the Comparator Technology, there can
be no assurance that CSC will be able to produce foreign sales,
or be successful, or that it will be able to cover the costs of
product demonstrations, overseas travel, and other selling
expense that may be involved in making such sales.
With respect to IFS, sales of its products have in the past been
carried out by its employees. As of December 31, 1996, the key
employees responsible for US sales have left the Company due to
its inability to pay them. The Company is not presently able to
finance the recruiting and training of new sales personnel, or to
resume domestic sales activities and, accordingly, has
discontinued the operations of these subsidiaries and presently
has no plans for its reactivating.
IFS had previously begun the process of translating its MAS 90
Accounting Software into a Spanish version for use by its
Honduran subsidiary. With the loss of the Company's personnel
and the lack of cash assets the Company cannot deliver a
completed Spanish version of the MAS 90 software application to
generate future revenues. As the Honduran subsidiary has never
reached a level of sales sufficient to support itself, the
Company has discontinued the operations of this subsidiary and
presently has no plans for its activation.
14
<PAGE>
Competition
As the Company is not currently engaged in any substantive
business activities and does not have any material cash assets,
the following discussion, at present, is essentially theoretical
and is only relevant if the Company should subsequently raise
sufficient capital to resolve its legal issues with respect to
the ownership of the Comparator 5000 technology and be able to
recommence its business activities. In addition, investors
should consider these financial/operational problems, even if
satisfactorily resolved, together with the Company's current
legal problems involving the SEC's enforcement of the Federal
Securities Laws, in evaluating the likelihood of the Company
being able to ultimately successfully proceed in the marketing of
products that have the qualifications needed for customer
acceptance.
Although for many years only a handful of companies worldwide
were active in the field of Biometrics, there are currently an
increasing number of companies involved, or likely to become
involved in identification and identity verification.
The three largest of the known fingerprint systems producers
serve the Criminal Justice/Forensic System market, producing
specialized dedicated "AFIS" (Automated Fingerprint
Identification System) computers, costing from $1,000,000 to over
$30,000,000, designed to accelerate the processing by law
enforcement agencies of fingerprint comparisons of unknown
persons with computerized fingerprint files. This is not a
market in which the Company participates, and therefore these
manufacturers are not relevant from a competitive perspective.
The market for Identity Verification Systems, in which CSC has
attempted to participate, is separate and distinct from the AFIS
market, and was until recently mainly a potential market, with
limited actual industry sales. In the Company's opinion, this
was due in part to the fact that reliable, accurate and cost
effective biometric identification systems were not available to
prospective users, and in part to perceived public resistance to
the use of fingerprint identification. In the past several years
this market has begun to expand rapidly, and a growing number of
firms is believed to be in the business of developing or
attempting to market fingerprint identification systems. The
largest of these firms, however, are systems integrators that do
not themselves possess biometric identification systems, and must
subcontract with other firms for this technology. Among the
15
<PAGE>
others the Company now counts several significant competitors
that are becoming well-established. The current producers of
AFIS systems also may represent potential significant
competition, and there are perhaps twenty relatively new research
labs or emerging companies that are in various stages of research
or product development.
Firms other than CSC that have pursued the development of
Identity Verification Systems typically employ some form of
"minutiae" technology to digitize and store fingerprint details
for later retrieval and comparison with real-time fingerprints.
To the best of the Company's knowledge none has the potential
accuracy capability of the Comparator 5000. CSC, in contrast to
its competitors, does not employ minutiae comparison, but rather
employs proprietary image processing comparison technology for
comparing entire fingerprints with each other. Based on such
information as it has, the Company believes that certain features
of the Comparator 5000 Series product line, including durability,
simplicity, and, above all, high accuracy, constitute significant
competitive advantages.
There are also several firms producing identification devices
based on other biometric methods such as signature dynamics, hand
geometry, retinal vasculature or voice characteristics of the
person to be identified. The Company does not know whether such
devices may ultimately be competitive, but believes that the most
significant competitive factors in the field are and will be
accuracy, price, ease of operation, reliability and non-
invasiveness. Name recognition may also be significant, and
many of the Company's competitors may be better known than the
Company.
Given growing competition for market share, the Company cannot be
certain that it will achieve profitability, or be successful in
bringing its products to market, or developing a market
acceptance for its products. Research and development will
continue to be an expense to the Company as products are
released. Most technology firms in this arena will be steadily
working to improve their software and hardware solutions to allow
for greater searching and matching capacity at lower price
points. Since CSC has no statistical performance data for its
current technology and no product revenues, the Company cannot be
assured that it can compete effectively, or at all, or that its
products will gain market acceptance.
16
<PAGE>
Patents, Copyright, Purchase Fee
Assuming the Company is able to raise needed capital and
successfully resolve the issues described herein relating to
ownership of the Comparator 5000 technology, and certain other
technology referred to below, the performance of the Company will
depend on the success of the Comparator 5000 product line and
other products, if any, developed based on the Company's other
technology.
In April 1996, the Company negotiated terms with its
consultant/engineers, to secure for itself all intellectual
property rights, including patent rights and software copyrights
for the fingerprint identification technology underlying the
Comparator 5000 series. The terms called for payments of cash
and shares of CSC stock. Subsequent to May 31, 1996, completing
the terms of the agreement was delayed until the SEC injunction
against the Company was addressed.
In late October 1996, final payment negotiations for the
fingerprint comparison technology were resumed with the
engineers. To date, the Company has been unable to perform its
financial obligations under the re-negotiated terms. Failure of
the Company to perform its financial commitments and reach a
definitive agreement with the consultants/engineers may result in
CSC losing control of the technology which Management believes
could result in the permanent cessation of the Company's
marketing of the Comparator 5000.
It is the opinion of Management that the technologies developed
prior to, and the basis of, the Comparator 5000 device can be
integrated into a commercially marketable form. This will
require adaptations of the prototype hardware and software and
physical configuration separate from the Comparator 5000. The
Company believes that the inclusion of data storage features
should produce a product that has a market and demand.
Management has reviewed the prior technologies and believes that
if the Company is able to raise approximately $500,000 in
additional capital, it should be able to not only resolve its
legal rights to the Comparator 5000 and the prior technology, but
be able to establish and implement an initial sales and marketing
plan for these technologies.
Research and Development
Since the inception of research and development on the first
17
<PAGE>
generation of product that has evolved into the Comparator 5000
series, CSC has spent $750,194 in research and development
related expenses to achieve the present technology generation.
Of this amount, during the fiscal year ending June 30, 1995,
$36,357 was expended and during the fiscal year ending June 30,
1996, $128,336 was expended. These expenditures did not include
benchmark testing, which has not yet been accomplished. No money
was spent for research and development during the fiscal year
ended June 30, 1997 and the Company presently does not have any
funds to continue with needed additional research and development
expenditures, nor is it able to pay previously incurred expenses
owing to third parties, employees/consultants for their services
in connection with the development of the Comparator 5000
technology.
Employees
As the date of this filing, other than the two individuals who
were elected to serve as officers of the Company, the Company
does not have any paid employees. For further detail, refer to
"ITEM 9: DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY."
ITEM 2. DESCRIPTION OF PROPERTY
Because of the lack of funds the Company has had to vacate its
headquarters in Newport Beach, California which consisted of
approximately 5,900 square feet of offices. At present, the
Company's only facility is a 180 square foot full service
executive suite in Newport Beach which is leased on a month-to-
month basis at a monthly cost of approximately $625.
ITEM 3: LEGAL PROCEEDINGS
(a) Pending Proceedings
A class action lawsuit, case number 763689, Eric Aafedt, et al.,
on Behalf of Themselves and All Others Similarly Situated vs.
Robert R. Rogers, et al in May 13, 1996 by shareholders who
purchased CSC common stock from May 6, 1996 to May 8, 1996
inclusive, claiming damages in excess of $300,000,000 in the
Superior Court of the State of California for the County of
Orange. The Company will defend its position; however, there can
be no assurance that the Company will be successful in its
defense of this lawsuit. A trial date has been requested by the
18
<PAGE>
plaintiff but to date no trial date has been set. Adverse
outcome of this lawsuit would have a material adverse impact
against the Company.
A lawsuit, case number 747725, Gary Wykidal vs. Comparator
Systems Corporation, the former SEC lawyer for the Company,
alleging unpaid legal fees, and the Company filed a cross-
complaint alleging legal malpractice in rendering legal services
in the Superior Court for the State of California for the County
of Orange. Adverse outcome of this lawsuit would have a material
adverse impact against the Company.
The Securities and Exchange Commission filed a civil action
against the Company on May 31, 1996, which can be cross-
referenced to "ITEM 1: BUSINESS."
(b) Judgments
The following judgments against the Company at June 30, 1997 are:
The Company had fully paid the judgment C 466940 dated 8/6/85 by
City National Bank vs. Comparator Systems Corp., et al. in the
Los Angeles Superior Court, Central District. However, a
judgment against the Company for $83,262.41 was refiled on
6/30/94. No provision was made for this amount in the books.
The Company will defend its position; however, there can be no
assurance that the Company will be successful in its defense of
this lawsuit. Adverse outcome of this lawsuit would have a
material adverse impact against the Company.
The Company had paid $27,000 on a judgment of $66,341.26, case
number 64356, Rusty Pelican Restaurants, Inc. vs. Swiss Pacific
Group, S.A., et al. but agreed upon $45,000, with $18,000
remaining. Since May 1996, the Company had been in negotiation
to try its best to settle the remaining balance.
The Company had been issued Certificates of Release of Federal
Tax Lien by the IRS. However, the filing records of the
Secretary of State of California have yet to be updated.
The Company was a judgment debtor in 26 cases in which judgment
against the Company has become final, with an aggregate
unsatisfied judgment debt of $295,036 and accrued interest of
$201,168. The Company believes that 25 cases had expired due to
the statute of limitations.
19
<PAGE>
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5: MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
(a) The Company's common stock, symbol IDID, was traded over
the counter on NASDAQ until trading was halted on May 9, 1996 and
delisted from NASDAQ on June 12, 1996. It has since been trading
only informally, and accordingly, no regular public trading
quotations in the Company's common stock have been available to
the Company. For the period beginning July 1, 1994 and ending
June 30, 1996, the approximate high and low inter-dealer bid
quotations were as set forth below. The source of such quotation
data is the National Association of Securities Dealers, Inc.,
Such prices are without retail markup, markdown or commission and
may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
Quarter/Period Ended High Bid Low Bid
<s) <C> <C>
September 30, 1994 0.03125 0.03125
December 31, 1994 0.03125 0.03125
March 31, 1995 0.03125 0.03125
June 30, 1995 0.03125 0.03125
September 30, 1995 0.03125 0.03125
December 31, 1995 0.03125 0.03125
March 31, 1996 0.03125 0.03125
May 8, 1996 0.87500 0.46875
June 30, 1996 1.62500 0.00500
</TABLE>
(b) The approximate number of record holders of the Company's
common stock at September 15, 1997 was 8,900.
(c) The Company has never declared or paid any cash dividends
on its common stock. The Company currently intends to retain
future earnings, if any, to finance the growth and development of
its business. The future dividend policy will depend upon a
number of factors, including future earnings, capital
requirements and the financial condition of the Company.
20
<PAGE>
Recent Sales of Unregistered Securities
<TABLE>
The common stock of the Company sold within the past three years
without registering the securities under the Securities Act:
<CAPTION>
Number of
Shares Amount
<S> <C> <C>
Fiscal Year June 30, 1995
Issuance of shares for:
Salaries 24,596,273 $ 721,323
Services 5,595,749 138,296
Cash 22,971,097 599,483
Debt 797,097 14,501
Stock Cancellation (2,728,984) (51,621)
----------- ----------
51,231,232 $1,421,982
Fiscal Year June 30, 1996
Issuance of shares for:
Services 18,619,422 $ 552,976
Cash 27,370,713 836,107
Common Stock subscribed but
not issued 136,518
----------- ----------
45,990,135 $1,525,601
Fiscal Year June 30, 1997
Issuance of shares for:
Common Stock converted 3,900,000
----------- ----------
TOTAL 101,121,367 $2,947,583
</TABLE>
All the above common stock sold for cash are through private
placement for prices ranging from $0.03 to $0.10. The proceeds
from funds received as a result of its private placement have
been used to defray costs of US operations, including product
research and development, market testing and preparation for
initiating full-scale marketing efforts upon availability of
marketable product. For its private placements, the Company has
relied on various exemptions from registration under a variety of
securities laws, including the private placement exemption under
Regulation D and Section 4(2) of the Securities Act.
21
<PAGE>
ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
Overview
The Company was founded in 1976, and is one of the pioneers in
the field of Biometrics, employing fingerprint comparison
technology to verify people's identities. CSC is a publicly-
traded company with approximately 13,000 shareholders. Its
common stock was traded on the National Association of Security
Dealers Automated Quotation system (NASDAQ) under the symbol IDID
from February 1990 to June 1996, and is now informally traded.
The operations of CSC's two wholly-owned subsidiaries, IFS and
SFI, have been abandoned due to a lack of operating capital. As
of the date of this filing the business operations of CSC have
essentially ceased because of the lack of operating funds and the
Company does not have any full-time paid employees.
CSC has since its inception been engaged mainly in research and
development, with limited revenues produced from sales in the
1980s of its first-generation fingerprint comparison system, the
Comparator Model ID-1. The Company was unable to produce
sufficient revenues from sales of the Model ID-1 to cover its
costs. The Company today requires additional financial resources
to complete payment of amounts owed for completion of development
engineering on its new fingerprint identification products and to
resolve current issues as to the ownership of these products, to
reduce current debt, to pay salaries for the hiring of Company
personnel and to provide working capital needed to enable the
Company to recommence its business and to provide facilities
needed for the Company to function as a going concern.
Plan of Operation
The Company's plans to market fingerprint comparison products
were interrupted in May 1996, and as a result the Company has
expended all of its available cash resources. As of the date of
this filing, the Company had approximately $3,500 in funds
available for operations. Unless the Company is able to raise a
minimum of $500,000 in additional capital within the next several
months, the current cessation of the Company's business will
become permanent. There can be no assurance that the Company
will be able to raise this needed capital.
22
<PAGE>
As of the date of this filing, the Company requires significant
immediate additional funds in order to facilitate the resolution
of current legal issues relating to the ownership of the
technology discussed in the General Business section of this
report. As indicated elsewhere in this report, the very survival
of the Company hinges on its ability to raise additional funds in
the immediate future. Financial difficulties have not been
uncommon in the history of the Company and there can be no
assurance that it will be able to raise the capital it now needs,
or that such capital will ultimately enable the Company to
commence any profitable business operations.
The short-term funds the Company needs immediately would be
disbursed to accomplish the following:
- - Make final payments to confirm ownership of the Company's
new fingerprint comparison technology.
- - Make payments to reduce short-term debt.
- - Resolve outstanding legal issues concerning the technology.
- - Fill the immediate clerical and support staffing
requirements to facilitate the conduct of daily business
operations.
- - Adapt, and modify prior generation technology and integrate
with unique data storage ability to facilitate the
development and implementation of an initial sales and
marketing plan.
- - Permit the Company to focus on creating a revised Business
Plan to facilitate the Company's plans to raise longer-range financing.
- - Fully cover the Company's normal monthly operating
expenses.
The Officers and Directors of the Company will immediately
address a revised business plan for the next twelve months of
operations if short-term capital becomes available to meet the
above listed requirements. It should be noted that there can be
no assurances that the Company will achieve profitability, or be
23
<PAGE>
successful in bringing its products to market or developing a
market for its products or indeed be able to obtain the necessary
funds to continue in business.
Results of Operations
The loss from operations for the fiscal year ended June 30, 1997
was $748,872, which represented a decrease of $1,245,212 or 62%
over the fiscal year 1996 loss of operations of $1,994,084. The
decrease was due to the abandonment of IFS and SFI and the
resulting reclassification of their revenues and expenses in 1997
to "discontinued operations." In addition, the lack of adequate
capital resulted in the termination of its employees and the
shut-down of operations in early 1997.
General and administrative expenses in fiscal 1997 decreased 69%
to $508,390 as compared to $1,615,382 in fiscal 1996.
Expenditures in this category continued to focus on salaries and
general business operations and reflects the reduction operations
throughout fiscal 1997.
The Company has experienced significant operating losses and has
a negative working capital amounting to approximately $4,071,000
as of June 30, 1997, and has $3,500 in funds available for
operations. At this time, there is significant uncertainty
regarding whether the Company will survive as a going concern.
The financial statements have been prepared assuming the Company
will continue to operate which contemplates the realization of
assets and the settlements of liabilities in the normal course of
business. At the date of this filing, no adjustment has been
made to the recorded amount of assets or the recorded amount or
classification of liabilities.
Financial Position, Capital Resources and Liquidity
The Company's primary sources of cash during the fiscal year
ended June 30, 1997, were funds generated through the
discontinued operations of its wholly-owned subsidiaries IFS and
SFI of approximately $242,000, and additional loans. The Company
currently lacks sufficient capital resources to satisfy near-term
and long- term capital needs and, at present, has temporarily
discontinued business operations.
24
<PAGE>
ITEM 7: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial information for the Registrant for the
fiscal years ended June 30, 1997 and 1996 is filed as part of
this report.
Index to Audited Financial Statements: Page
Independent Auditors' Report 34
Financial Statements:
Balance Sheets at June 30, 1997 and 1996 36
For the years ended June 30, 1997 and 1996
Statements of Operations 38
Statements of Shareholders' Deficit 39
Statements of Cash Flows 40
Notes to Financial Statements 41
All other schedules are omitted since the required information is
not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the
Financial Statements and noted thereto.
ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
NONE
PART III
ITEM 9: DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
As of June 30, 1997, the following were the directors and executive
officers of the Company:
25
<PAGE>
<TABLE>
<CAPTION>
NAME POSITION AGE
<S> <C> <C>
Thomas C. Hanscome Chairman, CEO 54
and President
Donald Levering Director 53
John D. Hinterleitner Corporate Secretary, CFO 43
and Executive Vice President
<CAPTION>
DIRECTOR OFFICER
SINCE SINCE
<S> <C> <C>
Thomas C. Hanscome June 1997 June 1997
Donald Levering September 1996
John D. Hinterleitner June 1997 June 1997
</TABLE>
During the year, Ms. Marianne Bedford resigned as Chairperson and
CEO of the Company on March 21 after less than 12 months with the
Company. Mr. Richard E. Floegel resigned as President and
Director on June 28, 1996 after 13 months with the Company. Mr.
Armond J. Schroeder was appointed CEO, Director and President on
July 5, 1996 and resigned on December 4, 1996. He declared
personal and business bankruptcy in June 1995.
Pursuant to the settlement agreement on September 18, 1996 with
the SEC, Mr. Robert Reed Rogers and Mr. Gregory A. Armijo
resigned their positions as directors and executive officers of
the Company but remained as Consultants to the Company. Mr.
Rogers and Mr. Armijo have since left the Company and are no
longer providing any consulting services to the Company. See
"ITEM 3: LEGAL PROCEEDING," and "ITEM 1: BUSINESS - History."
Mr. Donald Levering had been with the Company since 1994 and has
over twenty-five years of experience in sales and marketing in
the consumer goods and automotive field. He holds a teaching
credential in industrial and business management and teaches at
Long Beach City College.
26
<PAGE>
As of June 2, 1997 Thomas C. Hanscome, age 54, and John D.
Hinterleitner, age 43, were appointed to the Board of Directors.
Mr. Hanscome was also appointed Chairman of the Board, Chief
Executive Officer and President of the Company. Mr.
Hinterleitner was also appointed to be the Company's Executive
Vice President and CFO and to replace Ms. Celeste Sim as the
Company's Secretary. The following are the business backgrounds
of Messrs. Hanscome and Hinterleitner.
Mr. Hanscome joined the Company in June of 1997. Mr. Hanscome
has over 30 years of business experience as a corporate
executive, business owner. Mr. Hanscome holds a General
Securities (series 7) and a General Securities Principal (series
24) license with the NASD (not currently active). In his
capacity as marketing representative he has participated in the
sale of over $100,000,000 in investments securities in both
public and private limited partnerships since 1983. In addition
Mr. Hanscome has been engaged in corporate financing, sales,
marketing, and manufacture of industrial and consumer products.
Mr. John D. Hinterleitner joined the Company in June 1997. Mr.
Hinterleitner has been engaged in the operation of his own
companies as a principal, sole proprietor, and partner. His
endeavors have primarily been focused on Real Estate development,
Finance, and Energy Development projects. His activities include
a strong background in marketing and sales, investor relations,
and interfacing all aspects of business development.
ITEM 10: EXECUTIVE COMPENSATION
The following table sets forth certain information concerning
annual, long term and other compensation received during the
three fiscal years ended June 30, 1997, by officers of the
Company, and compensation received and to be received by (i) the
current Chief Executive Officer of the Company, and (ii) the
Company's four most highly compensated executive officers whose
annual salary and bonus compensation exceeded $100,000:
27
<PAGE>
<TABLE>
<CAPTION>
Long
Term
Name and Principal Fiscal Compen- All
Position Year Salary Bonus sation Other
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Robert Reed Rogers
CEO 1996 $125,000 N/A N/A N/A
President, CEO 1995 $125,000 N/A N/A N/A
Richard E. Floegel 1996 $110,000 $55,000 N/A N/A
President, CEO
Armond J. Schroeder 1997 $ 19,935 N/A N/A $52,846
President, CEO
Marianne Bedford 1997 $ 9,830 N/A N/A N/A
President, CEO
Thomas C. Hanscome
President, CEO 1997 $ 12,500(1) (1) N/A N/A
John D. Hinterleitner
Secretary, CFO 1997 $ 10,000(2) (2) N/A N/A
<FN>
(1) For consideration of accepting employment, in addition
to an annual salary of $150,000, the board granted Mr. Hanscome
the right to receive shares of the Company's Common stock at the
rate of 1,000,000 shares per month for months one through six,
2,000,000 shares per month for months seven through twelve and
3,000,000 shares per month for months thirteen through eighteen.
Salary for 1997 has been accrued and not yet paid.
(2) For consideration of accepting employment, in addition
to an annual salary of $120,000 the board granted Mr.
Hinterleitner the right to receive shares of the Company's Common
stock at the rate of 500,000 shares per month for months one
through six, 1,000,000 shares per month for months seven through
twelve and 1,500,000 shares per month for months thirteen through
eighteen. Salary for 1997 has been accrued and not yet paid.
</FN>
</TABLE>
During the fiscal year ended June 30, 1997 no shares were issued.
28
<PAGE>
During the fiscal year ended June 30, 1996, 4,583,333 shares were
issued to reduce the cost of services provided by the President,
Richard E Floegel, by $137,500. No shares were issued to reduce
accrued salaries of employees.
During the fiscal year ended June 30, 1995, 24,596,273 shares
were issued to reduce accrued salaries of employees by $721,323.
ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND POTENTIAL CHANGE IN CONTROL
Security Ownership of Certain Beneficial Owners.
The following table shows the ownership of common stock by
persons other than members of management owning more than 5% of
the 614,234,838 outstanding shares as of September 15, 1997.
Unless otherwise indicated, all persons have voting and
investment power over the shares listed as beneficially owned by
them in the table.
<TABLE>
<CAPTION>
Number of Shares Percentage of
Name of Beneficial Owner Owned Class Owned
<S> <C> <C>
Robert Reed Rogers and
Celeste Sim* 79,783,374 13.5%
<FN>
* Includes 30,667,775 shares jointly owned with Celeste Sim,
his wife, and 3,405,450 shares owned by Celeste Sim.
</FN>
</TABLE>
Security Ownership of Management
The following table shows the ownership of common stock by
directors, and all directors and executives as a group, as of
September 15, 1997. The percentages given under "Percentage of
Class Owned" are based on a total of 614,234,838 shares
outstanding. Unless otherwise indicated, all persons have
voting and investment power over the shares listed as
beneficially owned by them in the table.
29
<PAGE>
<TABLE>
<CAPTION>
Number of Percentage of
Name of Beneficial Owner Shares Owned Class Owned
- ----------------------------------------------------------------
<S> <C> <C>
Donald Levering 4,921,281 0.80%
Thomas C. Hanscome 5,150,000(1) 0.83%
John D. Hinterleitner 2,550,000(2) 0.42%
All directors and officers
as a group 12,621,281 2.05%
<FN>
(1) Includes 5,000,000 shares of common stock entitled to
receive pursuant to employment agreement, for further
detail see "ITEM 10: EXECUTIVE COMPENSATION" above.
(2) Includes 2,500,000 shares of common stock entitled to
receive pursuant to employment agreement, for further
detail see "ITEM 10: EXECUTIVE COMPENSATION" above.
</FN>
</TABLE>
ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Item 10 above with respect to the salary to be paid and the
shares of the Company's common stock to be issued to Messrs.
Hanscome and Hinterleitner in consideration of their agreement to
serve as officers of the Company.
PART IV
ITEM 13: EXHIBITS AND REPORTS ON FORM 8-K
Exhibits Description
3.1 Articles of Incorporation of the Company dated October
12, 1978 (1)
Amendment to Articles of Incorporation of the Company
dated February 1, 1989 and dated December 31, 1989 (2).
3.2 By-Laws of the Company as amended (3)
10.1 Consulting Agreement between CSC and T.H.E. Investment
Specialists International dated March 26, 1997.
10.2 Employment Agreement between CSC and Thomas C. Hanscome
dated July 10, 1997.
10.3 Employment Agreement between CSC and John D.
Hinterleitner dated July 10, 1997.
30
<PAGE>
1. Previously filed as an exhibit to the Company's Registration
Statement on Form S-2 (Commission file no. 2-63154) and
incorporated herein by reference.
2. Previously filed as an exhibit to the Company's Form 10Q for
Quarter ended March 31, 1989 and Form 10Q for the Quarter
ended December 31, 1989 and incorporated herein by
reference.
3. Previously filed as an exhibit number 3d. to the Company's
Form 10K for the year ended June 30, 1987.
Reports on Form 8-K
(1) The Company filed a Current Report on Form 8-K dated
July 5, 1996, with respect to the appointment of Mr. Armond J.
Schroeder as President and CEO, the judgment against Ms.
Churchill in the United States Bankruptcy Court in San Diego,
California, and the retirement of Mr. Robert Reed Rogers.
(2) The Company filed a Current Report on Form 8-K dated
August 14, 1996, with respect to the resignation and withdrawal
of opinion on the Financial Statements for the year ended June
30, 1995 of the auditor, Eli Buchalter Accountancy Corp.
(3) The Company filed a Current Report on Form 8-K dated
September 18, 1996, with respect to the settlement of Civil
Action No. 96-3856(JGx)(LGB), with the Securities and Exchange
Commission, the retirement of Mr. Robert Reed Rogers and
resignation of Mr. Gregory Armijo and the appointment of Ms
Celeste Sim as Secretary and the appointment of Ms. Marianne
Bedford and Mr. Donald Levering as directors.
(4) The Company filed a Current Report on Form 8-K dated
December 16, 1996, with respect to the resignation of Armond J.
Schroeder as President and Director and appointment of Ms.
Marianne Bedford as Chairperson to the Board.
(5) The Company filed a Current Report on Form 8-K dated
April 3, 1997, with respect to the resignation of Marianne
Bedford as President Chairperson and CEO.
31
<PAGE>
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the
Securities Exchange Act of 1934, the Company had duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
COMPARATOR SYSTEMS CORPORATION
By: /s/ Thomas C. Hanscome Date: October 10, 1997
------------------------- ----------------
Thomas C. Hanscome,
Chief Executive Officer, and
President
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on
behalf of the Company and in the capacities on the dates
indicated
By: /s/ Thomas C. Hanscome Date: October 10, 1997
------------------------- ----------------
Thomas C. Hanscome
Chairman of the Board
(Chief Executive Officer)
By: /s/ John D. Hinterleitner Date: October 10, 1997
------------------------- ----------------
John D. Hinterleitner
Director, Treasurer and Secretary
(Chief Financial Officer)
By: /s/Donald R. Levering Date: October 10, 1997
------------------------- ----------------
Donald R. Levering
Director
32
COMPARATOR SYSTEMS
CORPORATION
Financial Statements
For the Years Ended
June 30, 1997 and 1996
and Independent Auditors' Report
33
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Comparator Systems Corporation:
We have audited the accompanying balance sheets of Comparator
Systems Corporation (the "Company") as of June 30, 1997 and 1996
and the related statements of operations, shareholders' deficit
and cash flows for the years 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.
Except as discussed in the following paragraph, we conducted our
audits in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audits 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.
We were unable to obtain sufficient evidence supporting the
results of operations of the Company's foreign subsidiary which
was abandoned in March 1997. In addition, as discussed in Note
4 to the financial statements, the Company is a defendant in a
class-action lawsuit. The ultimate outcome of this lawsuit
cannot presently be determined. Accordingly, no provision for
any liabilities that may result upon adjudication has been made
in the accompanying financial statements.
In our opinion, except for the effects of such adjustments, if
any, as might have been determined to be necessary had we been
able to examine evidence regarding the records of the foreign
subsidiary and determine the ultimate outcome of the lawsuit,
the financial statements referred to above present fairly, in
all material respects, the financial position of the Company at
June 30, 1997 and 1996 and the results of its operations and its
cash flows for the years then ended in conformity with generally
accepted accounting principles.
34
<PAGE>
The accompanying financial statements have been prepared
assuming that 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 and has a net capital
deficiency that raises substantial doubt about the Company's
ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 5. The
financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/Farber & Hass
--------------------
Farber & Hass
Oxnard, California
September 23, 1997
35
<PAGE>
COMPARATOR SYSTEMS CORPORATION
<TABLE>
BALANCE SHEETS
JUNE 30, 1997 AND 1996
- -----------------------------------------------------------------------
<CAPTION>
1997 1996
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 2,523 $ 42,980
Other receivables (net of allowance
for doubtful accounts $831,017) 14,744 30,675
Prepaid expenses and other current assets 9,355
--------- ---------
Total current assets 17,267 83,010
PROPERTY AND EQUIPMENT:
Machinery and equipment 139,551 141,320
Furniture and fixtures 60,117 77,904
Tooling and molds 74,998 74,998
--------- ---------
Total property and equipment 274,666 294,222
Less accumulated depreciation (254,666) (217,662)
--------- ---------
Property and equipment, net 20,000 76,560
DEPOSITS 29,305
--------- ---------
TOTAL ASSETS $ 37,267 $ 188,875
</TABLE>
(Continued)
36
<PAGE>
COMPARATOR SYSTEMS CORPORATION
<TABLE>
BALANCE SHEETS - Continued
JUNE 30, 1997 AND 1996
- -----------------------------------------------------------------------
<CAPTION>
1997 1996
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Judgements and claims $ 295,036 $ 296,536
Notes payable 1,181,962 941,796
Accrued salaries and taxes 1,363,568 1,035,782
Accrued expenses 634,651 364,763
Accrued interest 577,114 524,889
Accrued expenses due to officers 35,800 113,580
Deferred income 23,715
------------ ------------
Total current liabilities 4,088,131 3,301,061
SHAREHOLDERS' DEFICIT:
Preferred stock - par value $5.00 per
share, 50,000,000 shares authorized,
no shares issued
Common stock - par value $.01 per share,
750,000,000 shares authorized;
614,234,838 shares and 610,334,838
shares issued and outstanding at
June 30, 1997 and 1996, respectively 6,142,350 6,103,350
Common stock subscribed 136,518
Additional paid-in-capital 18,680,277 18,582,759
Retained earnings (deficit) (28,873,491) (27,934,813)
------------ ------------
Total shareholders' deficit (4,050,864) (3,112,186)
TOTAL LIABILITIES AND
SHAREHOLDERS' DEFICIT $ 37,267 $ 188,875
</TABLE>
See accompanying notes to financial statements.
37
<PAGE>
COMPARATOR SYSTEMS CORPORATION
<TABLE>
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1997 AND 1996
- -----------------------------------------------------------------------
<CAPTION>
1997 1996
<S> <C> <C>
REVENUES $ 357,939
OPERATING EXPENSES:
General and administrative $ 508,390 1,615,382
Marketing 355,405
Research and development 128,336
Professional fees 240,482 252,900
----------- -----------
Total operating expenses 748,872 2,352,023
LOSS FROM OPERATIONS (748,872) (1,994,084)
OTHER INCOME (EXPENSE):
Interest expense (115,190) (115,421)
Other income, net 98,526 7,992
----------- -----------
Total other expense, net (16,664) (107,429)
LOSS BEFORE PROVISION FOR INCOME TAXES (765,536) (2,101,513)
PROVISION FOR INCOME TAXES 800 800
----------- -----------
LOSS FROM CONTINUING OPERATIONS (766,336) (2,102,313)
LOSS FROM DISCONTINUED OPERATIONS (172,342)
----------- -----------
NET LOSS $ (938,678) $(2,102,313)
LOSS PER SHARE:
Loss from continuing operations $ (0.001) $ (0.004)
Net loss $ (0.002) $ (0.004)
Weighted average shares outstanding 614,234,838 583,904,900
</TABLE>
See accompanying notes to financial statements.
38
<PAGE>
COMPARATOR SYSTEMS CORPORATION
<TABLE>
STATEMENTS OF SHAREHOLDERS' DEFICIT
FOR THE YEARS ENDED JUNE 30, 1997 AND 1996
<CAPTION>
- -----------------------------------------------------------------------------
COMMON STOCK Stock Additional
Number of $0.01 Sub- Paid-in
Shares Par Value scribed Capital
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE AT JUNE 30, 1995 564,344,703 $5,643,448 $17,653,578
ISSUANCE OF SHARES FOR:
Services 18,619,422 186,195 366,781
Cash 27,370,713 273,707 562,400
COMMON STOCK SUBSCRIBED $136,518
NET LOSS
- -----------------------------------------------------------------------------
BALANCE AT JUNE 30, 1996 610,334,838 6,103,350 136,518 18,582,759
ISSUANCE OF SHARES 3,900,000 39,000 (136,518) 97,518
NET LOSS
- -----------------------------------------------------------------------------
BALANCE AT JUNE 30, 1997 614,234,838 $6,142,350 $ -0- $18,680,277
<CAPTION>
- -----------------------------------------------------------------------------
Total Shareholders'
Deficit Equity (Deficit)
- -----------------------------------------------------------------------------
<S> <C> <C>
BALANCE AT JUNE 30, 1995 $(25,832,500) $(2,535,474)
ISSUANCE OF SHARES FOR:
Services 552,976
Cash 836,107
COMMON STOCK SUBSCRIBED 136,518
NET LOSS (2,102,313) (2,102,313)
- -----------------------------------------------------------------------------
BALANCE AT JUNE 30, 1996 (27,934,813) (3,112,186)
ISSUANCE OF SHARES
NET LOSS (938,678) (938,678)
- -----------------------------------------------------------------------------
BALANCE AT JUNE 30, 1997 $(28,873,491) $(4,050,864)
</TABLE>
See accompanying notes to financial statements.
39
<PAGE>
COMPARATOR SYSTEMS CORPORATION
<TABLE>
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1997 AND 1996
- -------------------------------------------------------------------------
<CAPTION>
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (938,678) $(2,102,313)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 56,560 26,290
Provisions for doubtful accounts 86,038
Issuances of common stock for services
and salaries 552,976
Forgiveness of debt and interest (117,442)
Changes in operating assets and
liabilities:
Other receivables 15,931 (93,969)
Prepaid expenses and other assets 38,660 15,347
Accrued expenses 628,792 351,646
Deferred income (23,715) 23,715
----------- -----------
Net cash used by operating activities (339,892) (1,140,270)
CASH FLOWS USED BY INVESTING ACTIVITIES -
Capital expenditures (74,172)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 972,685
Increase in borrowings 299,435 251,399
Repayment of borrowings (1,533)
----------- -----------
Net cash provided by financing activities 299,435 1,222,551
NET INCREASE (DECREASE) IN CASH (40,457) 8,109
CASH, BEGINNING OF YEAR 42,980 34,871
----------- -----------
CASH, END OF YEAR $ 2,523 $ 42,980
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for interest $ -0- $ -0-
Cash paid for taxes $ -0- $ 800
</TABLE>
During 1996, the Company issued 18,619,422 shares for salaries, services and
debt valued at $552,976.
See accompanying notes to financial statements.
40
<PAGE>
COMPARATOR SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS
- ----------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Activity - Comparator Systems Corporation
("Comparator" or the "Company") was organized to market and
integrate, through licensing and manufacturing rights,
technology for a fingerprint comparison/verification system
solution. The Company's wholly-owned subsidiaries,
International Financial Systems, Inc. ("IFSI") and Systems
Financial International ("SFI") (Honduras) were abandoned
in the first quarter of 1997 (see Note 2).
Pervasiveness 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 disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
Fair Value of Financial Instruments - Based on borrowing
rates currently available to the Company for bank loans
with similar terms and maturities, the fair value of the
Company's debt approximates the carrying value.
Furthermore, the carrying value of all other financial
instruments potentially subject to valuation risk
(principally consisting of cash, receivables, accounts
payable and accrued expenses) also approximates fair value.
Operating Segment Information - The Company predominantly
operates in one industry segment, fingerprint
comparison/verification systems. Substantially all of the
Company's assets and employees are in one location in the
Company's headquarters in Newport Beach, California.
Property and Equipment - Property and equipment are stated
at cost. Based on management's estimate of the remaining
useful life of its property and equipment, a charge to
earnings of approximately $17,000 was recorded in the
quarter ended June 30, 1997 to depreciate the remaining
book value to its estimated liquidation value.
41
<PAGE>
Income Taxes - Income taxes are provided based on earnings
reported for financial statement purposes. In accordance
with FASB Statement No. 109, the asset and liability method
requires the recognition of deferred tax liabilities and
assets for the expected future tax consequences of
temporary differences between tax basis and financial
reporting basis of assets and liabilities. Deferred tax
assets represents the net operating loss carryforward of
approximately $23,000,000 (expires at various dates through
2012) available to offset future taxable income. An
allowance has been provided on the balance of deferred tax
assets.
Going Concern - The Company has experienced significant
operating losses and has a negative working capital
amounting to approximately $4,071,000. The financial
statements have been prepared assuming the Company will
continue to operate as a going concern which contemplates
the realization of assets and the settlement of liabilities
in the normal course of business. No adjustment has been
made to the recorded amount of assets or the recorded
amount or classification of liabilities which would be
required if the Company were unable to continue its
operations. As discussed in Note 5, management has
developed an operating plan which they believe will
generate sufficient cash to meet its obligations in the
normal course of business.
Reclassifications - Certain 1996 amounts have been
reclassified in order to conform with 1997 classifications.
2. DISCONTINUED OPERATIONS
During the third fiscal quarter of 1997, the Company had
insufficient funds to support the operations of its wholly-
owned subsidiaries, IFSI and SFI. Management elected to
abandon these subsidiaries in order to focus its efforts in
maintaining the operations of the Company. Revenues from
IFSI totaled approximately $242,000 during the year ended
June 30, 1997. Management believes there are no
significant liabilities relating to these subsidiaries that
have not been accrued as of June 30, 1997.
42
<PAGE>
3. RELATED PARTY TRANSACTIONS
During the period March 26, 1997 through May 31, 1997, the
Company employed a consulting firm owned by an individual
who subsequently became an officer and director of the
Company on June 1, 1997. The firm provided on-going
management and assisted in raising funds to operate the
Company. Total consulting expense incurred during this
period amounted to $50,400, of which $35,800 remains
payable at June 30, 1997. Effective June 1, 1997, the
consulting agreement was terminated.
4. COMMITMENTS AND CONTINGENCIES
The Company leases its office space under a month-to-month
operating lease. Total rent expense for the years ended
June 30, 1997 and 1996 was approximately $67,000 and
$90,000, respectively.
The Company has a class-action lawsuit that is currently
outstanding. Although the ultimate outcome of this suit
cannot be ascertained at this time and liabilities of
indeterminate amounts may be imposed upon the Company, it
is the opinion of management, based on information
currently available, that many of the allegations are
without merit and that the resolution of this suit will not
have a material adverse effect on the consolidated
financial position, results of operations or cash flows of
the Company.
The Company has several judgements and claims that have
been filed by vendors and borrowers. Management has
accrued all judgements and claims and related interest
which it believes are due as of June 30, 1997.
5. MANAGEMENT PLANS AND SUBSEQUENT EVENTS (UNAUDITED)
The Company has minimal revenues and insufficient working
capital to meet its current obligations which raises
substantial doubt about the Company's ability to continue
as a going concern. Management has developed alternative
plans for funding operations which include, but are not
limited to, short-term financing and additional loans or
sale of equity. Through September 30, 1997, the Company
has borrowed approximately $73,000 from stockholders.
43
<PAGE>
EXHIBIT 10.1
CONSULTING AGREEMENT
T.H.E. Investment Specialists International, a sole
proprietorship, hereinafter referred to as "ISI" and
Comparator Systems Corporation, a Colorado Corporation
hereinafter referred to as "CSC" agree to the following:
- ISI shall act as advisors and consultant to the Board of
Directors of CSC,
- ISI shall, to the best of it's abilities, assist CSC is
the accomplishment of the business of moving the Company
to accomplish it's objectives
- ISI shall act at the direction of the Board to the best
interest of CSC
- ISI will provide without restrictions the services of:
THOMAS C. HANSCOME
and
JOHN D. HINTERLEITNER
These services shall be billed at the rate of One Hundred
Dollars ($100.00) per hour. Payments shall be made upon
approval of the Board and upon submission of statements,
and subject to the availability of funds.
Agreed to this 26 day of March 1997
/S/ Thomas C. Hanscome
-----------------------------
Thomas C. Hanscome
Sole Proprietor
/s/ Donald Levering
-----------------------------
Donald Levering
Director
Comparator Systems Corporation
<PAGE>
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
This Employment agreement (the "Agreement") is made this 9th day of
June, 1997, by and between Comparator Systems Corporation, a Colorado
corporation (the "Company"), and THOMAS C. HANSCOME (the "Employee").
In consideration of the mutual covenants and agreements herein
contained, and in accordance with the authorization of the Board of
Directors of the Company, the Company and the Employee hereby agree as
follows:
1. SERVICES TO BE RENDERED. The Company hereby retains the
Employee to provide services to the Company, and the Employee hereby
agrees to render such services under the terms of this Agreement. The
Employee shall perform the duties of Chairman of the Board, President and
Chief Executive Officer.
2. TERM OF AGREEMENT. Subject to the provisions for termination
hereinafter provided, the term of this Agreement shall be effective
JUNE 1, 1997, until MAY 30, 2000. The parties hereto agree to enter
into good faith negotiations for the purpose of extending the term of
this Agreement on or about 90 days prior to the expiration of the term
hereof, unless, at such time, the agreement has been or is being
terminated.
3. SERVICES. The Employee shall devote time, attention and
ability to the proper and efficient conduct of his duties hereunder.
Except as set forth in Paragraph 10 below, nothing herein shall be
deemed to prevent the employee from serving any other enterprise in any
capacity, nor shall this Agreement be construed as preventing the
Employee from investing his assets in such form or manner as will
require any services on the part of the Employee in the operation and
the affairs of the companies or entities in which such investments are
made.
4. AUTOMOBILE ALLOWANCE. During the term hereof, the Company
shall provide the Employee with a reasonable automobile allowance in
accordance with the allowance schedule for the position filled by the
Employee.
5. COMPENSATION: EXPENSES.
(a) For the services rendered by the Employee during the
term hereof, the Company shall pay to the Employee a base compensation
at an annual rate of: for the period June 1, 1997 to May 30, 1998
$150,000;
1
<PAGE>
for the period June 1, 1998 to May 30, 1999 $200,000; for the period
June 1, 1999 to May 30, 2000 $250,000; or at such higher rate as may be
fixed from time to time by the Board of Directors, payable in equal
bi-monthly installments beginning at the end of the first month. The
Employee shall also be entitled to the additional compensation set
forth in Schedule I hereto and to such bonuses as shall be determined
from time to time by the Board of Directors, in its sole discretion.
(b) The Employee shall be authorized to incur reasonable
expenses incident to the maintenance or promotion of the business of
the Company, such as expenses for entertainment, travel, and similar
items, and shall be reimbursed by the Company for such expenses upon
presentation of a statement of such documented expenditures, in
accordance with the Company's current operating procedure.
6. TERMINATION BY THE COMPANY. During the term of this
Agreement, the Company shall have the following right to terminate this
Agreement, subject to Paragraph 7 below:
(a) TERMINATION FOR CAUSE: The Company shall have the right
to terminate this agreement for cause upon 30 days written notice if
the Employee shall have (i) been proven to have caused the Company to
suffer injury as a result of any fraud or willful or wanton misconduct
of Employee during the course of the performance of, or otherwise
related to his or her duties hereunder, or (ii) been convicted of a
felony.
(b) TERMINATION FOR DISABILITY: The Company shall have the
right to terminate this Agreement upon 30 days written notice if the
Employee shall have been unable, as a result of physical illness or
other incapacity, to substantially perform his or her duties hereunder
for a continuous period of six months or longer.
(c) RESIGNATION: Resignation of the Employee shall
terminate this Agreement.
7. TERMINATION BENEFITS. In the event that this Agreement is
terminated by the Company pursuant to Paragraph 6, the Company shall
pay the Employee or his or her estate the following sums, or the
following consequences shall follow, as the case may be:
(a) If this Agreement is terminated by the Company for cause
pursuant to Paragraph 6(a), then (i) the Company's obligation to
compensate the Employee pursuant to Paragraph 5(a) shall cease as of
the date of termination, and (ii) the Company shall not be required to
reimburse the Employee pursuant to Paragraph 5(b) for expenses incurred
after the date of termination.
(b) If this Agreement is terminated by the Company for
disability pursuant to Paragraph 6(b), the Company shall pay the
Employee a disability benefit at an annual rate of 75% of the
Employee's annual base compensation in effect at the time of
termination pursuant to Paragraph 5(a) (excluding additional
2
<PAGE>
compensation and bonuses), payable in equal monthly installments, such
disability benefit to continue until the earlier to occur of the
expiration of two years after the date of termination or the death of
the Employee.
(c) In the event that the Employee shall die during the term
of this Agreement, the Company agrees to pay to the Employee's widow or
widower, as the case may be, estate, or any other person designated in
writing by the Employee an amount equal to 75% of the Employee's annual
base compensation in effect at the time of death pursuant to paragraph
5(a) (excluding any additional compensation or bonuses). Such payment
shall be made in 6 equal monthly installments.
(d) If this Agreement is terminated by the Company for any
reason other than cause (Paragraph 6(a), or disability (Paragraph 6
(b), or death (Paragraph 6 (d)), the Employee shall be entitled, at his
or her option, to payment of a Sum equal to the aggregate remaining
payments due the Employee pursuant to this Agreement, until expiration
of the term thereof, computed on the basis of the annual base
compensation in effect at the time of termination, determined pursuant
to Paragraph 5(a), (referred to herein as the "Termination Amount"),
payable in a lump sum equal to the discounted present value of the
Termination Amount, using a discount rate equal to the sum of the prime
rate reported in the "Money Rates" column of the Wall Street Journal
(Western Edition) on the date the termination becomes effective,
payable within 30 days after the date on which the termination becomes
effective.
8. VACATION: The Employee shall be entitled to a paid vacation
of four weeks per year, for the first year and thereafter a paid
vacation of six weeks which if unused, may be carried over and accrued
at the election of the Employee. If, upon Employee's termination,
regardless of cause, Employee has accrued vacation which has not been
taken, then Employee shall be paid therefore, at the full compensation
rate then in effect.
9. ADDITIONAL BENEFITS.
(a) The Company agrees to obtain, and to place in effect as
soon a practicable, and to pay for (i) health insurance (including
dental and eye care coverage) for the benefit of the Employee and his
or her immediate dependents, consistent with the coverage provided by
the Company to other employees of the same level, and (ii) term life
insurance, payable to Employee's beneficiary or estate, in an amount
equal to three times the annual compensation as in 5(a).
(b) The Company agrees, subject to Board of Directors
approvals, to provide an annual stock option program for Employee
consistent with that provided to other employees of the same level.
3
<PAGE>
10. CONFIDENTIAL INFORMATION AND COVENANT NOT TO COMPETE.
(a) The Employee hereby agrees that, during the term of this
Agreement and thereafter, he or she will not disclose to any person, or
otherwise use or exploit any of the proprietary or confidential
information or knowledge, including without limitation, trade secrets,
processes, records of research, proposals, reports, methods, processes,
techniques, computer software or programming, customer lists, or
budgets or other financial information, regarding the Company, its
business, properties or affairs obtained by him or her at any time
prior to or subsequent to the execution of this Agreement, except to
the extent required by his performance of assigned duties for the
Company.
(b) Upon termination of this Agreement, the Employee will
deliver to the Company all tangible displays and repositories of trade
secrets, processes, records of research, proposals, reports, memoranda,
methods, processes, techniques, computer software and programming,
customer lists, or budgets or other financial information, and other
materials or records or writings of any other type (including any
copies thereof) made, used or obtained by the Employee in connection
with this Agreement.
(c) The Employee hereby agrees that during the period from
the date hereof through and including one year after the expiration of
the term hereof, he or she will:
(i) neither authorize his or her name to be used by,
(ii) nor engage in or carry on, directly or indirectly,
for himself, as a member of partnership, as a controlling stockholder,
officer or director of a corporation (other that the Company or any
successor of the Company), or as an employee, agent, associate or
consultant of any person, partnership, corporation (other than the
Company or any successor of the Company) or other business entity, any
business in competition with any business carried on or conducted,
directly or indirectly, by the Company prior to the date hereof or
hereafter, in the Counties of Orange or Los Angeles of the State of
California or any other county where business is then carried on or
conducted by the Company.
(d) The Employee agrees that the remedy at law for any
breach by him of any of the covenants and agreements set forth in this
Paragraph 10 will be inadequate and that in the event of such any such
breach, the Company may, in addition to other remedies which may be
available to it at law, obtain injunctive relief prohibiting him
(together with all those persons associated with him) from the breach
of such covenants and agreements.
(e) The parties hereto intend that the covenants and
agreements contained in this Paragraph 10 shall be deemed to include a
series of separate covenants and agreements. If any judicial
proceeding or court shall refuse to enforce all of the separate
covenants deem included in such action, then such unenforceable
4
<PAGE>
covenants shall be deemed eliminated from the provisions hereof for the
purposes of such proceeding to the extent necessary to permit the
remaining separate covenants to be enforced in such proceeding.
11. NOTICES. All Notices and other communications permitted or
required hereunder shall be in writing and shall be deemed to have been
duly given when delivered, or two days after having been mailed by
registered or certified mail, postage prepaid, return receipt
requested:
(a) If to Employee, addressed to him or her at: 92 Corporate
Park Suite C-314, Irvine, CA 92715
(b) If to the Company, addressed to it at: 18552 Mac Arthur
Blvd., Irvine, CA 92715,
or such other address as either party hereto may designate by written
notice to the other 5 pursuant to this Paragraph.
12. THE ENTIRE AGREEMENT. This agreement constitutes and
embodies the full and complete understanding and agreement of the
parties hereto and supersedes all prior understandings or agreements,
oral or written, whether or not related to the subject matter hereof.
IN WITNESS WHEREOF, the parties hereto have executed this
agreement on the day first written above.
COMPARATOR SYSTEMS CORPORATION
/s/ John D. Hinterleitner
- -------------------------------------
John D. Hinterleitner
Its duly authorized
Executive Vice President and
Secretary, Treasurer
EMPLOYEE
/s/ Thomas C. Hanscome
- -------------------------------------
Thomas C. Hanscome
5
<PAGE>
SCHEDULE I
ADDITIONAL COMPENSATION
Employee, by virtue of agreeing to the above employment agreement shall
receive the following shares of stock over the period indicated as a
signing bonus. Said shares to be issued to employee at such time as
the shares are available in the form available, and without cost to the
employee. This signing bonus is to be paid regardless of the
employment status of the employee with the company. This schedule
shall be met as to the time and shares without regard to the current
price of the Company's stock.
During months one 1,000,000 shares
through six per month 6,000,000 shares
During months six 2,000,000 shares
through twelve per month 12,000,000 shares
During months twelve 3,00,000 shares
through eighteen per month 18,000,000 shares
6
<PAGE>
EXHIBIT 10.3
EMPLOYMENT AGREEMENT
This Employment agreement (the "Agreement") is made this 9th
day of June, 1997, by and between Comparator Systems Corporation,
a Colorado corporation (the "Company"), and JOHN D. HINTERLEITNER
(the "Employee").
In consideration of the mutual covenants and agreements herein
contained, and in accordance with the authorization of the Board of
Directors of the Company, the Company and the Employee hereby agree
as follows:
1. SERVICES TO BE RENDERED. The Company hereby retains the
Employee to provide services to the Company, and the Employee
hereby agrees to render such services under the terms of this
Agreement. The Employee shall perform the duties of Executive Vice
President, Secretary and Treasurer.
2. TERM OF AGREEMENT. Subject to the provisions for
termination hereinafter provided, the term of this Agreement
shall be effective JUNE 1, 1997, until MAY 30, 2000. The parties
hereto agree to enter into good faith negotiations for the
purpose of extending the term of this Agreement on or about 90
days prior to the expiration of the term hereof, unless, at such
time, the agreement has been or is being terminated.
3. SERVICES. The Employee shall devote time, attention
and ability to the proper and efficient conduct of his duties
hereunder. Except as set forth in Paragraph 10 below, nothing
herein shall be deemed to prevent the employee from serving any
other enterprise in any capacity, nor shall this Agreement be
construed as preventing the Employee from investing his assets in
such form or manner as will require any services on the part of
the Employee in the operation and the affairs of the companies or
entities in which such investments are made.
4. AUTOMOBILE ALLOWANCE. During the term hereof, the
Company shall provide the Employee with a reasonable automobile
allowance in accordance with the allowance schedule for the
position filled by the Employee.
1
<PAGE>
5. COMPENSATION: EXPENSES.
(a) For the services rendered by the Employee during
the term hereof, the Company shall pay to the Employee a base
compensation at an annual rate of: for the period June 1, 1997 to
May 30, 1998 $120,000; for the period June 1, 1998 to May 30,
1999 $160,000; for the period June 1, 1999 to May 30, 2000
$200,000; or at such higher rate as may be fixed from time to
time by the Board of Directors, payable in equal bi-monthly
installments beginning at the end of the first month. The
Employee shall also be entitled to the additional compensation
set forth in Schedule I hereto and to such bonuses as shall be
determined from time to time by the Board of Directors, in its
sole discretion.
(b) The Employee shall be authorized to incur
reasonable expenses incident to the maintenance or promotion of
the business of the Company, such as expenses for entertainment,
travel, and similar items, and shall be reimbursed by the Company
for such expenses upon presentation of a statement of such
documented expenditures, in accordance with the Company's current
operating procedure.
6. TERMINATION BY THE COMPANY. During the term of this
Agreement, the Company shall have the following right to
terminate this Agreement, subject to Paragraph 7 below:
(a) TERMINATION FOR CAUSE: The Company shall have the
right to terminate this agreement for cause upon 30 days written
notice if the Employee shall have (i) been proven to have caused
the Company to suffer injury as a result of any fraud or willful
or wanton misconduct of Employee during the course of the
performance of, or otherwise related to his or her duties
hereunder, or (ii) been convicted of a felony.
(b) TERMINATION FOR DISABILITY: The Company shall have
the right to terminate this Agreement upon 30 days written notice
if the Employee shall have been unable, as a result of physical
illness or other incapacity, to substantially perform his or her
duties hereunder for a continuous period of six months or longer.
(c) RESIGNATION: Resignation of the Employee shall
terminate this Agreement.
7. TERMINATION BENEFITS. In the event that this Agreement
is terminated by the Company pursuant to Paragraph 6, the Company
shall pay the Employee or his or her estate the following sums,
or the following consequences shall follow, as the case may be:
(a) If this Agreement is terminated by the Company for
cause pursuant to Paragraph 6(a), then (i) the Company's
obligation to compensate the Employee pursuant to Paragraph 5(a)
2
<PAGE>
shall cease as of the date of termination, and (ii) the Company
shall not be required to reimburse the Employee pursuant to
Paragraph 5(b) for expenses incurred after the date of
termination.
(b) If this Agreement is terminated by the Company for
disability pursuant to Paragraph 6(b), the Company shall pay the
Employee a disability benefit at an annual rate of 75% of the
Employee's annual base compensation in effect at the time of
termination pursuant to Paragraph 5(a) (excluding additional
compensation and bonuses), payable in equal monthly installments,
such disability benefit to continue until the earlier to occur of
the expiration of two years after the date of termination or the
death of the Employee.
(c) In the event that the Employee shall die during
the term of this Agreement, the Company agrees to pay to the
Employee's widow or widower, as the case may be, estate, or any
other person designated in writing by the Employee an amount
equal to 75% of the Employee's annual base compensation in effect
at the time of death pursuant to paragraph 5(a) (excluding any
additional compensation or bonuses). Such payment shall be made
in 6 equal monthly installments.
(d) If this Agreement is terminated by the Company for
any reason other than cause (Paragraph 6(a), or disability
(Paragraph 6 (b), or death (Paragraph 6 (d)), the Employee shall
be entitled, at his or her option, to payment of a Sum equal to
the aggregate remaining payments due the Employee pursuant to
this Agreement, until expiration of the term thereof, computed on
the basis of the annual base compensation in effect at the time
of termination, determined pursuant to Paragraph 5(a), (referred
to herein as the "Termination Amount"), payable in a lump sum
equal to the discounted present value of the Termination Amount,
using a discount rate equal to the sum of the prime rate reported
in the "Money Rates" column of the Wall Street Journal (Western
Edition) on the date the termination becomes effective, payable
within 30 days after the date on which the termination becomes
effective.
8. VACATION: The Employee shall be entitled to a paid
vacation of two weeks per year, for the first year and thereafter
a paid vacation of three weeks which if unused, may be carried
over and accrued at the election of the Employee. If, upon
Employee's termination, regardless of cause, Employee has accrued
vacation which has not been taken, then Employee shall be paid
therefore, at the full compensation rate then in effect.
3
<PAGE>
9. ADDITIONAL BENEFITS.
(a) The Company agrees to obtain, and to place in
effect as soon a practicable, and to pay for (i) health insurance
(including dental and eye care coverage) for the benefit of the
Employee and his or her immediate dependents, consistent with the
coverage provided by the Company to other employees of the same
level, and (ii) term life insurance, payable to Employee's
beneficiary or estate, in an amount equal to three times the
annual compensation as in 5(a).
(b) The Company agrees, subject to Board of Directors
approvals, to provide an annual stock option program for Employee
consistent with that provided to other employees of the same
level.
10. CONFIDENTIAL INFORMATION AND COVENANT NOT TO COMPETE.
(a) The Employee hereby agrees that, during the term
of this Agreement and thereafter, he or she will not disclose to
any person, or otherwise use or exploit any of the proprietary or
confidential information or knowledge, including without
limitation, trade secrets, processes, records of research,
proposals, reports, methods, processes, techniques, computer
software or programming, customer lists, or budgets or other
financial information, regarding the Company, its business,
properties or affairs obtained by him or her at any time prior to
or subsequent to the execution of this Agreement, except to the
extent required by his performance of assigned duties for the
Company.
(b) Upon termination of this Agreement, the Employee
will deliver to the Company all tangible displays and
repositories of trade secrets, processes, records of research,
proposals, reports, memoranda, methods, processes, techniques,
computer software and programming, customer lists, or budgets or
other financial information, and other materials or records or
writings of any other type (including any copies thereof) made,
used or obtained by the Employee in connection with this
Agreement.
(c) The Employee hereby agrees that during the period
from the date hereof through and including one year after the
expiration of the term hereof, he or she will:
(i) neither authorize his or her name to be used
by,
(ii) nor engage in or carry on, directly or
indirectly, for himself, as a member of partnership, as a
controlling stockholder, officer or director of a corporation
(other that the Company or any successor of the Company), or as
an employee, agent, associate or consultant of any person,
4
<PAGE>
partnership, corporation (other than the Company or any successor
of the Company) or other business entity, any business in
competition with any business carried on or conducted, directly
or indirectly, by the Company prior to the date hereof or
hereafter, in the Counties of Orange or Los Angeles of the State
of California or any other county where business is then carried
on or conducted by the Company.
(d) The Employee agrees that the remedy at law for any
breach by him of any of the covenants and agreements set forth in
this Paragraph 10 will be inadequate and that in the event of
such any such breach, the Company may, in addition to other
remedies which may be available to it at law, obtain injunctive
relief prohibiting him (together with all those persons
associated with him) from the breach of such covenants and
agreements.
(e) The parties hereto intend that the covenants and
agreements contained in this Paragraph 10 shall be deemed to
include a series of separate covenants and agreements. If any
judicial proceeding or court shall refuse to enforce all of the
separate covenants deem included in such action, then such
unenforceable covenants shall be deemed eliminated from the
provisions hereof for the purposes of such proceeding to the
extent necessary to permit the remaining separate covenants to be
enforced in such proceeding.
11. NOTICES. All Notices and other communications
permitted or required hereunder shall be in writing and shall be
deemed to have been duly given when delivered, or two days after
having been mailed by registered or certified mail, postage
prepaid, return receipt requested:
(a) If to Employee, addressed to him or her at: 92
Corporate Park Suite C-314, Irvine, CA 92606
(b) If to the Company, addressed to it at: 92
Corporate Park Suite C-314, Irvine, CA 92606
or such other address as either party hereto may designate by
written notice to the other 5 pursuant to this Paragraph.
12. THE ENTIRE AGREEMENT. This agreement constitutes and
embodies the full and complete understanding and agreement of the
parties hereto and supersedes all prior understandings or
agreements, oral or written, whether or not related to the
subject matter hereof.
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
agreement on the day first written above.
COMPARATOR SYSTEMS CORPORATION
/s/ Thomas C. Hanscome
- --------------------------------
Thomas C. Hanscome
Its duly authorized
President and
Chief Executive Officer
/s/ John D. Hinterleitner
- --------------------------------
John D. Hinterleitner
EMPLOYEE
6
<PAGE>
SCHEDULE I
ADDITIONAL COMPENSATION
Employee, by virtue of agreeing to the above employment agreement
shall receive the following shares of stock over the period
indicated as a signing bonus. Said shares to be issued to
employee at such time as the shares are available in the form
available, and without cost to the employee. This signing bonus
is to be paid regardless of the employment status of the employee
with the company. This schedule shall be met as to the time and
shares without regard to the current price of the Company's
stock.
During months one 500,000 shares
through six per month 3,000,000 shares
During months six 1,000,000 shares
through twelve per month 6,000,000 shares
During months twelve 1,500,000 shares
through eighteen per month 9,000,000 shares
7
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 2,523
<SECURITIES> 0
<RECEIVABLES> 14,744
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 274,666
<DEPRECIATION> 254,666
<TOTAL-ASSETS> 37,267
<CURRENT-LIABILITIES> 4,088,131
<BONDS> 0
0
0
<COMMON> 6,142,350
<OTHER-SE> (10,193,214)
<TOTAL-LIABILITY-AND-EQUITY> 37,267
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 748,872
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 115,190
<INCOME-PRETAX> (765,536)
<INCOME-TAX> 800
<INCOME-CONTINUING> (766,336)
<DISCONTINUED> (172,342)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (938,678)
<EPS-PRIMARY> (.002)
<EPS-DILUTED> (.002)
</TABLE>
