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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, 1996 0-8951
COMPARATOR SYSTEMS CORPORATION
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(Name of small business issuer in its charter)
Colorado 95-3151060
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
4350 Von Karman Ave., Ste. 180
Newport Beach, California 92660
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(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: None
Common Stock, $0.01 par value
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(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 No X
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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: $357,939
The number of shares of Registrant's common stock outstanding as of June 30,
1996 was 610,334,838. The approximate aggregate market value of the voting
stock held by non-affiliates of the registrant based on the Pink Sheets average
($0.02) of the high and low prices as of January 15, 1997 was $12,206,696.
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Table of Contents
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Part I. Page
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Item 1: Business............................................ 1
Item 2: Property............................................ 11
Item 3: Legal Proceedings................................... 11
Item 4: Submission of Matters to a Vote of Security Holders. 13
Part II.
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Item 5: Market for the Company's Common Stock and Related
Stockholder Matters................................ 13
Item 6: Management's Discussion and Analysis of Financial
Condition and Results of Operation............... 14
Item 7: Financial Statements............................... 19
Item 8: Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.............. 19
Part III.
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Item 9: Directors and Executive Officers of the Company.... 20
Item 10: Executive Compensation............................. 21
Item 11: Security Ownership of Certain Beneficial Owners
and Management and Potential Change in Control... 21
Item 12: Certain Relationships and Related Transactions..... 22
Part IV.
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Item 13: Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.............................. 22
Signatures...................................................... 24
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PART I
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ITEM 1: BUSINESS
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History
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Comparator Systems Corporation (CSC) 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. 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 corporation nearly 20 years ago, the Company is still in a development stage
and has yet to achieve operational profitability.
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 the Company's 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 were 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.
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
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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.
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 the new fingerprint technology 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 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 markets 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, and to threaten to take CSC's fingerprint comparison
product to the market themselves if not paid. On October 23-25, 1995
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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 its Comparator 5000 Series fingerprint comparison
products. 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 its plans to formally introduce the 5000
Series to the market at the CardTech/SecurTech Exhibition to be held in Atlanta
May 14-16, 1996.
As a result of the Company attending MILIPOL '95, the current generation of
fingerprint comparison /verification products was completed.
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 Company obtained a judgement 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 judgement 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 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 its
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 in the Pink Sheets. 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 Robert R. Rogers et al.
in the Superior Court of the State of California, County of Orange, by attorneys
representing shareholders who
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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.
On May 31, 1996 the Securities and Exchange Commission (SEC) filed a civil
action in the United States District Court , Central District of California
against the Company and three of its officers, Robert Reed Rogers, Scott Hitt,
and Gregory Armijo, defendants. A temporary restraining order was obtained
enjoining the defendants as detailed in Civil Action No. 96-3856 LGB (Jgx). The
SEC complaint alleged that the defendants 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; that the recognition of assets that did
not conform to Generally Accepted Accounting Principles ("GAAP") rendered 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; 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 it in fact 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, defendants 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 the defendants represented that CSC had
developed a new generation of its fingerprint identification technology with
substantial market potential when, in fact, defendants Rogers and Hitt had
merely stolen a prototype of a fingerprint identification device developed by
individuals not associated with CSC, presented it as CSC's technology, protected
by CSC patents; that on the basis of the above misrepresentations and additional
misrepresentations and material omissions, between July 1, 1993 and the present
defendants fraudulently obtained through 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 purported technology and business relationships were
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 lawsuit
were initiated on June 18, 1996. On June 28, 1996, Mr. Floegel resigned as
president and director of CSC. On July 5, 1996, Mr. Armond Schroeder, president
of CSC's subsidiary IFS, was appointed to serve as president of CSC.
Subsequent to May 31, 1996 the Company experienced an increasingly-critical
shortage of working capital, with priority for funds usage being given to legal
fees and essential Company survival expenses other than salaries. CSC has been
unable to proceed with the marketing of its new product
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line, and most prospective customers have backed away, citing the SEC
litigation. CSC was also unable to continue to provide necessary working
capital to its subsidiary IFS, and its operations have been cut back
substantially.
On September 19, 1996, SEC announced that CSC, Mr. Rogers and Mr. Armijo had
entered into settlement agreements providing that they would consent to a
permanent injunction without admitting or denying the allegations in the SEC
complaint. The final judgement of permanent injunction and other relief against
CSC enjoined the Company from any acts alleged in the SEC complaint; enjoined
CSC from future violations of Section 17(a) of the Securities Act of 1933,
Section 10(b) of the Securities Act of 1934 (the "'34 Act"), and Rule 10b-5
thereunder, Sections 13(a) and 13(b)(2)(A) and (B) of the '34 Act and Rules 13a-
1, 13a-13, and 12b-20; prohibited CSC from transferring any corporate funds or
assets to or for the benefit of Scott Hitt; required CSC to prohibit Robert Reed
Rogers, Gregory Armijo and Scott Hitt from acting as officers or directors of
CSC; and permitted CSC to retain Mr. Rogers and Mr. Armijo as consultants to the
Company with restrictions on the length of time and the gross compensation to be
paid to them. Mr. Hitt, having lived in Malaysia since 1992, was not
represented in the matter and has reached no settlement agreement with the SEC.
Mr. Rogers retired and Mr. Armijo resigned his position with the Company on
September 19, 1996.
Ms. Marianne Bedford and Mr. Donald Levering were appointed to CSC's board of
directors to fill the vacancies created. On December 4, 1996 Mr. Schroeder
resigned as President and CEO of CSC, citing the Company's continued inability
to pay him, and Ms. Marianne Bedford was appointed Chairman of the Board and CEO
of the Company.
Refer to ITEM:8 Changes In And Disagreement With Accountants On Accounting And
Financial Disclosure elsewhere in this report regarding the resignation of CSC's
auditor on August 14, 1996.
General Business
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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
under development, termed by CSC the Comparator 5000 series, is intended to
replace and supercede an analog electro-optical fingerprint comparison system
that the Company designed, developed, manufactured, marketed and sold in the
1980's. Although no benchmark data has yet been obtained on the new product
line, CSC considers the product functionally ready for sale to customers who are
willing to accept it without such statistical performance data. As of this
filing date, CSC as yet has no benchmarks for its technology and no product
revenues. The Company cannot be certain that it can market its hardware
products profitability and gain market acceptance.
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CSC, through IFS, a wholly-owned subsidiary, produces, markets and supports
English language and Spanish language operating and accounting systems for use
by financial institutions such as credit unions. Its products are designed with
the flexibility to conform to each financial institution's requirements, and the
simplicity to make them easy to implement, use and maintain IFS is a Master
Developer of State Of The Art's MAS 90 Accounting Software. As a Master
Developer, IFS provides custom modifications of this software to meet the
individual needs of its customers. All modules of the MAS 90 software are
available in both English and Spanish. IFS has a wholly-owned subsidiary in
Honduras, Sistemas Financieros Internationales, which focuses on Latin American
business opportunities. Since the acquisition of International Financial
Systems and Sistemas Financieros Internatioales the Company has not realized
profitability from either entity.
The Market
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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.
CSC operates in the identity verification market. The Company's existing
products which is still in development, is expected to be able to 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
* 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
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CSC has specialized since its founding in the development of identity
verification systems. These are access control/transaction control systems used
too 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.
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
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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 avoid
costly and time consuming training procedures for new technologies. Currently,
the Company does not have the financial and human resources to participate in
extended 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 has 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 has 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 its
products, 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, its management has over the past year developed a growth
and marketing
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strategy designed to expand the Company's domestic product and customer base.
IFS's subsidiary in Honduras, was established to conduct sales of its products
in Central America Coupled with this office, which addresses a virtually
untapped market, it is believed that the Company can effectively compete with
the smaller specialty systems integrators who are the major competitors in IFS's
targeted market segments. Sales of IFS's 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 at this point confident that it will be able to finance the recruiting and
training of new sales personnel, or to resume domestic sales growth.
IFS is currently in the process of translating MAS 90 accounting software into a
Spanish version. When this task is completed, the Latin American office will be
able to hold seminars for accounting firms, to secure additional business
partners to be the front line sales force. This product was scheduled to be
available for demonstration in the third quarter of 1996, however the Company's
inability to finance additional programmers has resulted in delays. The Company
cannot at the present time be certain that it can deliver a completed Spanish
version of the MAS 90 software application to generate future revenues. To date
its Honduran subsidiary has not reached a level of sales sufficient to support
itself. The parent company has recently been unable to finance the shortfall,
and the ultimate ability of the Honduran subsidiary to become self-supporting
without additional financial assistance is presently unknown.
Competition
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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
these manufacturers represent potential, but not immediate competition.
The market for Identity Verification Systems, in which CSC participates, 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 firms such as CSC for this technology. Among
the others the Company
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now counts several significant competitors that are becoming well-established
and have significantly greater resources, financial and otherwise, than has CSC.
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 CSC's technology. 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 its own products, 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 with its products, but
believes that the most significant competitive factors in the field are and will
be accuracy, price, ease of operation, reliability and non-invasiveness. The
Company believes that it is in a position to compete effectively with respect to
these factors. Name recognition may also be significant, and although the names
of the Company's competitors have until recently been better known than that of
the Company, the reputation of the Comparator product has credibility,
particularly in the law enforcement community, whose endorsement the Company
feels will be valuable as it enters other markets. Nevertheless, CSC cannot be
assured that it will be able to compete effectively due to its current financial
weakness, and its uncertain prospects for obtaining financing needed to proceed
to the market with products that have all of the qualifications needed for
customer acceptance.
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 bench marks 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.
Patents, Copyright, Purchase Fee
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The performance of the Company will depend on the success of its original core
product line of proprietary automated fingerprint identity comparison/
verification systems, as well as operating and accounting systems for financial
institutions.
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In April 1996 the Company negotiated a final payment purchase agreement 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 of
this agreement called for payments of cash and shares of CSC stock. Subsequent
to May 31, 1996, completing payment under 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 renegotiated agreement. Failure
of the Company to perform its financial commitments may result in CSC losing
control of the technology which would have a material adverse impact on the
Company.
With regard to IFSI, in September, 1995, CSC purchased the software that is now
used by IFS in its business of marketing operating systems to financial
institutions. The purchase price of $150,000 was paid in restricted shares of
CSC common stock in the amount of 4,800,000 shares issued to Armond J.
Schroeder, the owner of the software.
Research and Development
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Since the inception of research and development on the first generation of
product that has evolved directly 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, $34,357 was expended and during the fiscal year ending June 30, 1996,
$238,053 was expended. These expenditures did not include bench mark testing,
which has not yet been accomplished, and the Company is not certain to continue
with additional research and development funds.
Employees
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As of December 31, 1996, the Company had 17 full-time employees, 1 part-time
clerical assistant and 1 management consultant. During the reporting period
ending June 30, 1996 the Company had 30 full-time and 2 occasional employees.
Their responsibilities included the following: 3 clerical, 1 accountant, 4
engineer/consultant research & development, 2 investment relations, 7 sales &
marketing, 5 executives and 10 software application & support. None of the
Company's employees are represented by labor union, and the Company believes it
generally had good relations with its employees. As a result of the Company's
inability to meet its financial obligations and to obtain timely funding, 4
employees and 1 consultant remain at this date. The Company acknowledges that
10
<PAGE>
many of the employees resigned due its inability to meet payroll obligations.
ITEM 2: DESCRIPTION OF PROPERTY
- --------------------------------
(a) The Company's main facility and headquarters is leased office/engineering
space with approximately 5,900 square feet, located in Newport Beach,
California. The Company's lease agreement is under a five year term with a
average annual rental of $71,004 beginning October 1993. As of the date of this
filing, the Company recently renegotiated its current lease agreement for a six
month term with monthly savings of $3,800 per month. There can be no assurances
that the Company will be able to meet its financial obligations.
(b) During fiscal 1995, the Company opened the Alaska technical support
office. The office is approximately 500 square feet. The lease is a one year
term, expiring September 1996, with approximate costs of $700 per month. The
office is intended to support the Company's financial software and support
services for International Financial Systems, both in the U.S. and in Latin
America. As of the date of this filing, the Alaska office lease agreement will
expire in the next ten (10) days.
(c) During fiscal 1995, the Company opened an offices in Honduras for Sistemas
Financieros Internationales that provides sales, installation, training and
support of Spanish versions of the IFS software throughout Latin America. The
office is approximately 500 square feet with five employees that provide the
customer with the following services: custom programming, training, consulting,
technical support and system updates.
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 plantiff to be set in June 1997. 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 County of
Orange. We are currently engaged in of settlement of the suit. Adverse
11
<PAGE>
outcome of this lawsuit would have a material adverse impact against the
Company.
A lawsuit case number 760916, Christine L. Baker vs Comparator Systems
Corporation and related cross action, the former Controller of the Company
alleging payment of unpaid balances due to her in the Superior Court of the
State of California for the County of Orange. We are currently engaged in of
settlement of the suit. Adverse outcome of this lawsuit would have a material
adverse impact against the Company.
A lawsuit case number 759151, The Reubens Group and SFPL Hideaway vs
Comparator Systems Corporation in June 1996 alleging damages in excess of
$5,000,000 in the Superior Court of the State of California for the County of
Orange. We are currently engaged in of settlement of the suit. 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 can be crossed referenced to Item 1: Business.
(b) Judgments
The following judgments against the Company as at June 30, 1996 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 judgement of $66,341.26, case number
64356, Rusty Pelican Restaurants, Inc. vs Swiss Pacific Group, S.A., et al but
agreed upon as $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 updated.
The Company was a judgment debtor in 26 cases in which judgment against the
Company had become final, with an aggregate unsatisfied judgment debt of
$285,526 and accrued interest of $171,353. The Company believes that 25 cases
had expired due to the statute of limitations.
12
<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 deleted from NASDAQ on June
12, 1996. It has since been trading informally on the Pink Sheets. For the
period beginning July 1, 1994 and ending May 8, 1996, the approximate high and
low inter-dealer bid quotations were as set forth below. The source of such
quotation data is the National Quotation Bureau, 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 (Pink Sheets) 0.03000 0.00500
</TABLE>
(b) The approximate number of record holders of the Company's common stock
at December 1996 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.
13
<PAGE>
Recent Sales of Unregistered Securities
The common stock of the Company sold within the past three years without
registering the securities under the Securities Act:
<TABLE>
<CAPTION>
Number of
shares Amount
----------- ----------
<S> <C> <C>
Fiscal Year June 30, 1994 Issuance of shares for:
Salaries 37,002,828 $ 615,570
Services 12,779,683 582,437
Cash 23,422,368 1,953,092
Debt 19,393,157 317,886
Investment 5,000,000 500,000
Improper Issue 6,301,983 87,059
----------- ----------
103,900,019 $4,056,044
----------- ----------
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 for but not issued 136,578
----------- ----------
45,990,135 $1,525,661
</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.
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 1997, and is now informally traded in the Pink Sheets.
CSC has two wholly-owned subsidiaries, IFS and SFI, which compete in the
development, marketing, integration, installation and support of hardware and
software operating and accounting systems for financial institutions such as
credit unions.
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
and it continues to operate at a loss today. For the period ending December 31,
1996, CSC is still considered a research and development company since it has as
yet generated no revenue from the sale of its current fingerprint comparison
technology. At this time there can be no assurances that the Company will be
able to achieve profitability, or be successful in bringing its current products
to market, or establishing market acceptance for these products if it is
successful in bringing them to market.
The Company today requires additional financial resources to complete payment of
amounts owed for completion of development engineering on its new fingerprint
identification products, to reducte of current debt, to cover sales and
marketing expenses in connection with the introduction to the market of its
latest generation of fingerprint comparison/verification products, to pay
salaries to its limited staff of remaining employees, and to permit expansion of
staff and facilities needed to function effectively as a going concern.
Although they have generated sales, CSC's subsidiaries have not met their income
projections for the fiscal year ending June 30, 1996, or subsequently.
Additional funds are required to support their current operations as well as to
upgrade their present software products in order to enhance their competitive
position in the marketplace. For example, additional financial resources must
be devoted to completion of the rewriting of software applications required to
make them more user-friendly and to accommodate the new millennium system date
requirements. With this in mind, there can be no assurance that the subsidiaries
will achieve profitability, or will be successful in sustaining the market for
their current products, or be successful in introducing new products to the
market.
PLAN OF OPERATION
- -----------------
The Company's plans to market its new fingerprint comparison products were
interrupted in May 1996, and following immediate financial stabilization, CSC
must update and begin implemention of its 1996 plans. There can be no assurance
that the company will be able to do so.
14
<PAGE>
The Company's subsidiary IFS is a software developer and systems integrator. The
company has a suite of proprietary software that supports the operation of
credit unions. This software is installed in its present customer base of 18
credit unions in the U.S. and a Spanish version of the software is installed in
30 financial institutions in Latin America. In addition to the credit union
software, IFS has a suite of general accounting software that supports the
operation of small to medium sized businesses. This software includes all of the
accounting needed to support the operations of companies in the distribution
industry.
IFS has a Master Developer's License from State Of The Art, Inc. for a variety
of accounting applications. This software is being used as the basis for
development of new systems in English and Spanish. IFS hopes to increase the
scope of its financial software to include all types of financial institutions
and integration of its current products into the State Of The Art products.
Since the acquisition of IFS, the Company's total revenues were $357,939 in
fiscal 1996, however after expenses the Company reported a loss of $144,418 on
IFS operations.
The Company's plan of operations for the next two months includes attempting to
build a foundation of financial stability for CSC and its subsidiaries. The
Company's cash resources have been and are presently deficient as of the date of
filing of this report. CSC's primary sources of cash as of this filing resulted
from borrowings and operating revenues of IFS and SFI application software and
hardware sales and support services in the U.S. and Latin America, private
placements of CSC shares prior to May 31, 1996, and loans from officers and
employees subsequently.
As of the date of this filing, the Company requires immediate additional funds
in order to facilitate making final payments on its technology as discussed in
the section Patents, Copyrights, Technology Payments in the General Business
section. The future success of the Company, and, in fact, its very survival
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.
The short-term funds the Company needs immediately would be disbursed to
accomplish the following:
* Make final payment to complete ownership of clear title to the
Company's new fingerprint comparison technology.
* Make payments to reduce short-term debt.
* Fully cover the Company's normal monthly operating expenses.
* Fill the immediate clerical and support staffing requirements to
facilitate the conduct of daily business operations.
15
<PAGE>
* Permit the Company to focus on creating a revised Business Plan to
facilitate the Company's plans to raise longer- range financing. The
revised Business Plan will include the Company's strategy to bring
its current products to market, and future requirements to invest
in research and development. There are no assurances that
the Company will be able to achieve the above noted results.
* Implement a review process to evaluate and act on the potential
sales and profitability of its subsidiaries IFS and SFI. As of the
date of this filing, the Company remains with a handful of
employees, there are no assurances that the Company will be able to
achieve a positive result.
The Officers and Director of the Company will immediately address a revised
business plan for the
16
<PAGE>
next twelve months of operations when 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 successful in
bringing its products to market or developing a market for its products.
RESULTS OF OPERATIONS
- ---------------------
Loss from operations for the fiscal year ended June 30, 1996 were $1,994,084 and
represented a decrease of $146,776 or 7% over the restated fiscal year 1995 loss
of operations of $2,2140,860. This rate decrease in fiscal 1996 over 1995 were
attributable to the acquisition of IFS and SFI described in the Item 1:
"History" and "General Business" sections.
The net loss for the fiscal year ended June 30, 1996 decreased slightly 4% to
$81,120 as compared to $2,183,433 in the restated fiscal year 1995.
General and administrative expenses in fiscal 1996 decreased 20% to $407,266 as
compared to $2,2022,648 in restated fiscal 1995. Expenditures in this category
continued to focus on salaries and general business operations.
Interest 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, subject to valuation risk principally consisting of
cash, receivables, accounts payable and accrued expenses) also approximates fair
market value.
The Company has experienced significant operating losses and has a negative
working capital amounting to approximately $2,400,000. 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,
1996, were funds generated through the wholly-owned subsidiaries IFS and SFI
through operations, of $357,939, loans, and the sale of private placement
shares. The Company currently lacks sufficient capital resources to satisfy near
term and long term capital needs.
Subsequent to the date of this filing, and the filing of the Company's 1995
10-K, information became available which affected the valuation of a substantial
portion of its assets as at June 30, 1995. During August 1996, the Company filed
a Form 8-K advising shareholders and readers that significant adjustments to the
1995 financial statements may be required and that those adjustments
17
<PAGE>
may be material. The following assets and liabilities were corrected as
indicated in Item 7 Financial Statements:
Accounts Receivable. The accounts receivable amount of $744,979 was removed from
the Company's books due to the financial inability of the Company to pursue
collection at this time. The Company's decision is to remove the asset at this
time because it is also not confident of the collectability of the debt. See
Item 1: Business under History elsewhere in this report.
Deposits. Deposits in the amount of $108,331 were the result of the Company's
investment in a software product which is not currently being pursued. The
reason for the abandonment of the product was lack of sufficient working
capital.
Prepaid Fees. The prepaid expenses of $616,000 represent fees paid to a
consultant from which no sales have resulted, and bonuses to key executives of
the Company which are now considered as compensation in 1993.
Investments. The investments of $1,231,626 was the Company's conservative
approach to remove assets from the balance sheet because of the
inability to raise the capital needed to pursue them.
Notes Receivable and Accrued Interest. The notes receivable and the accrued
interest in the amount of $89,931 was removed from the Company's books due to
the potential uncollectability of the debt.
Inventories. The Company's conservative approach was to write-off inventories
in the amount $79,054 because they relate to products not currently in
production.
Property and Equipment. The property and equipment amount of $324,830 was
removed from the Company's books based on the determination that they should be
expensed as research and development costs at this time.
Patents and Licenses. The patents and license amount of $2,665,280 was removed
from the Company's books because the Company had not paid current maintenance
fees, or they were fully amortized as at the date of this filing. Licenses
included agreements relating to earlier product patents, now expired.
Deposits and Prepaid Expenses. Notes receivable in the amount of $89,931 was
removed from the Company's books due to the financial constraints placed on the
Company at the time of filing relative to pursuing collection of the debt.
18
<PAGE>
ITEM 7: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The following financial information for the Registrant for the fiscal years
ended June 30, 1996 and 1995 is filed as part of this report.
Index to Audited Financial Statements:
- -------------------------------------
Independent Auditors' Report F-1
Consolidated Financial Statements:
Consolidated Balance Sheets at June 30, 1996 and 1995 F-3
For the years ended June 30, 1996 and 1995
Consolidated Statement of Operations F-5
Consolidated Statement of Shareholders' Deficit F-6
Consolidated Statement of Cash Flows F-8
Notes to Financial Statements F-9
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
- --------------------
On August 14, 1996 the Company filed a Form 8-K reporting that 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 the date of his
report of September 20, 1995, that he believed might materially affect the
financial amounts and disclosures, that 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 those
statements. The Company used its best efforts to comply with his request. On
August 14, 1996 the Buchalter Accountancy Corp. resigned as the Company's
auditor. No report of Mr. Buchalter on the financial statements of the Company
contained an adverse opinion or a disclaimer of opinion or was qualified or
modified as to uncertainty, audit scope or procedure. On September 24, 1996 the
Company was able to retain the firm of Farber & Hass as its new auditor.
19
<PAGE>
PART III
ITEM 9: DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
- --------------------------------------------------------
As of December 30, 1996 the following were the directors and executive
officers of the Company:
<TABLE>
<CAPTION>
Name Position Age Director since Officer since
---- -------- --- -------------- -------------
<S> <C> <C> <C> <C>
Marianne Bedford Chairperson 48 September 1996 December 1996
Donald Levering Director 53 September 1996
Celeste Sim Corporate Secretary 37 August 1996
</TABLE>
During the year, 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
4th 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 but
remained as Consultants to the Company. Mr. Armijo however has since left the
company. See Item 3, Legal Proceeding, and Item 1, Business, History.
The following key employees are expected to make significant contributions
to the business of the Company are:
Ms. Marianne Bedford had been with the Company since March 1996 and now
holds the position of Chairperson. She was Financial Associate with Price
Waterhouse, Regional Sales & Marketing Manager with Maytag Company Ltd, Major
Accounts Manager with Hewlett-Packard, Sales Director with TKM Ltd, Branch Sales
Director with Dexel Corp, Branch Manager with Nissi Corp and Consultant with
Olympic Entertainment Group, Inc. as public relations on various networks such
as KABC and Trinity Broadcast Network.
Mr. Donald Levering had been with the Company since 1994 has gained over
twenty-five years of experience in sales and marketing in the consumer goods and
automotive field. His past involvement in the industry was with Biometric
Technology as Vice President. He holds a teaching credential in industrial and
business management and teaches at Long Beach City College.
Ms. Celeste Sim joined the Company as Manager of Finance in January 1994
and now holds the position of Controller and Corporate Secretary. Previously she
was Director of Finance & Administration of Comparator Systems Malaysia Sdn Bhd.
Prior to that Ms. Sim was Acting General Manager of ESCO Technologies (M) Sdn
Bhd, Finance Manager of Chuaco Securities Sdn Bhd, Chief Administrator of
Limbang Trading Sdn Bhd, Accountant with Howard Presky & Company, Senior Tax
Accountant with H.R.M. Sdn Bhd and Accountant with Peat Marwick Tax Services Sdn
Bhd. She is also the wife of Robert Reed Rogers, the former Chairman and CEO of
the Company.
20
<PAGE>
ITEM 10: EXECUTIVE COMPENSATION
- --------------------------------
The following table sets forth certain information concerning annual, long
term and other compensation received during the last three fiscal years and to
be received by (i) the 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:
<TABLE>
<CAPTION>
Name and Principal Fiscal Long Term
Position Year Salary Bonus Compensation All 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
President, CEO 1994 125,000 N/A N/A N/A
Richard E. Floegel
President, COO 1996 $110,000 $55,000 N/A N/A
</TABLE>
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.
During the fiscal year ended June 30, 1994, 37,002,828 shares were issued
to reduce total salaries accrued of employees by $615,570.
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 December 31, 1996. Unless otherwise indicated, all persons have
voting and investment power over the shares listed as beneficially owned by them
in the table.
Name of Beneficial Owner Number of Shares Owned Percentage of Class Owned
- ------------------------ ---------------------- -------------------------
None N/A N/A
21
<PAGE>
Security Ownership of Management
- --------------------------------
The following table shows the ownership of common stock by directors, and
all directors and executive as a group, as of December 31, 1996. The
percentages given under "Percentage of Class Owned" are based on a total of
614,234,838 shares outstanding. Unless otherwise indicated, all persons having
voting and investment power over the shares listed as beneficially owned by them
in the table.
<TABLE>
<CAPTION>
Name of Beneficial Owner Number of Shares Owned Percentage of Class Owned
- ------------------------ ---------------------- --------------------------
<S> <C> <C>
Celeste Sim* 34,073,228 5.54%
Donald Levering 4,921,281 0.80%
Marianne Bedford** -0- -0-
----------- -----
All directors and officers
as a group 38,994,509 6.34%
</TABLE>
*Includes 3,405,450 shares owned by Celeste Sim and 30,667,778 shares jointly
owned with Robert Reed Rogers
**An option to receive 5,000,000 common shares of the Company's stock
ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
During the fiscal year ended June 30, 1995, the Company issued to its
officers shares of its common stock in cancellation of accrued and unpaid
salaries. The dollar balance represents unpaid salary accounts at June 30,
1995.
<TABLE>
<S> <C> <C>
Robert Reed Rogers 13,339,847 -0-
Gregory Armijo 3,257,404 $7,357
</TABLE>
During the fiscal year ended June 30, 1996, the Company issued to one of
its officers shares of its common stock in cancellation of accrued and unpaid
services. The dollar balance represents overpayment of service fees at June 30,
1996.
Richard E. Floegel 4,583,333 $21,038
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 Bill of Sale between Comparator Systems Corporation(CSC) and Armond J.
Schroeder dated
22
<PAGE>
September 20, 1995.
10.2 Consulting agreement between CSC and Robert Reed Rogers dated September
19, 1996
16.0 Letter on change in certifying accountant of Eli Buchalter Accountancy
Corp dated August 14, 1996 (4).
21.0 Subsidiaries of the registrant (5).
___________________________
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.
4. Previously filed on the Reports on Form 8-K dated August 14, 1996 and
incorporated herein by reference.
5. Previously filed on the Report on Form 8-K dated September 28, 1995 and
incorporated herein by reference.
Reports on Form 8-K
(1) The Company filed a Current Report on Form 8-K dated August 3, 1995,
with respect to the appointment of Mr. Richard E. Floegel to the
Board of Directors.
(2) The Company filed a Current Report on Form 8-K dated September 28,
1995, with respect to the acquisition of International Financial
Systems, Inc.
(3) The Company filed a Current Report on Form 8-K dated June 20, 1996,
with respect to the resignation of Mr. Richard E. Floegel as
President and COO effective June 28, 1996.
(4) 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.
(5) 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.
(6) 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.
(7) 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.
23
<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/ MARIANNE BEDFORD
-----------------------------
Marianne Bedford, Chairman Date: January 15, 1997
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 and on the dates indicated.
By: /s/ MARIANNE BEDFORD Date: January 15, 1997
-----------------------------
Marianne Bedford
Chairman of the Board
By: /s/ CELESTE SIM Date: January 15, 1997
-----------------------------
Celeste Sim
Corporate Secretary
24
<PAGE>
COMPARATOR SYSTEMS CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
JUNE 30, 1996 AND 1995
AND INDEPENDENT AUDITORS' REPORT
<PAGE>
COMPARATOR SYSTEMS CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INDEPENDENT AUDITORS' REPORT 1-2
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets,
June 30, 1996 and 1995 3-4
Consolidated Statements of Operations
for the Years Ended June 30, 1996 and 1995 5
Consolidated Statements of Shareholders' Deficit
for the Years Ended June 30, 1996 and 1995 6-7
Consolidated Statements of Cash Flows
for the Years Ended June 30, 1996 and 1995 8
Notes to Financial Statements 9-12
</TABLE>
________________________________________________________________________________
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Comparator Systems Corporation:
We have audited the accompanying consolidated balance sheets of Comparator
Systems Corporation (the "Company") as of June 30, 1996 and 1995 and the related
consolidated 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 audit.
Except as discussed in the following paragraph, we conducted our audit in
accordance with generally accepted auditing standards. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
We were unable to obtain sufficient evidence supporting the financial position
and results of operations of the Company's foreign subsidiary. The net assets
and net loss at June 30, 1996 of the foreign subsidiary are approximately $6,300
and $8,900, respectively.
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, the financial statements
referred to above present fairly, in all material respects, the financial
position of the Company at June 30, 1996 and 1995 and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As 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.
October 31, 1996
<PAGE>
COMPARATOR SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 AND 1995
- ----------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
--------- ----------
(RESTATED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 42,980 $ 34,871
Other receivables (net of allowance
for doubtful accounts of $831,017
and $781,479, respectively) 30,675 22,744
Prepaid expenses and other current assets 9,355 15,693
--------- ---------
Total current assets 83,010 73,308
--------- ---------
PROPERTY AND EQUIPMENT:
Machinery and equipment 141,320 121,996
Furniture and fixtures 77,904 42,476
Tooling and molds 74,998 74,998
--------- ---------
Total property and equipment 294,222 239,470
Less accumulated depreciation (217,662) (210,792)
--------- ---------
Property and equipment, net 76,560 28,678
--------- ---------
DEPOSITS 29,305 38,314
--------- ---------
TOTAL ASSETS $ 188,875 $ 140,300
========= =========
</TABLE>
(Continued)
2
<PAGE>
COMPARATOR SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS - Continued
JUNE 30, 1996 AND 1995
- -------------------------------------------
<TABLE>
<CAPTION>
1996 1995
------------ ------------
(RESTATED)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Judgements and claims $ 296,536 $ 323,536
Notes payable 529,422 369,556
Accrued salaries and taxes 1,035,782 726,752
Accrued expenses 471,590 428,459
Accrued interest 418,002 357,804
Notes payable to officers 412,374 322,374
Accrued expenses due to officers 113,580 147,293
Deferred income 23,715
------------ ------------
Total current liabilities 3,301,001 2,675,774
------------ ------------
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;
610,334,838 shares and 564,344,703
shares issued and outstanding at
June 30, 1996 and 1995, respectively 6,103,350 5,643,448
Common stock subscribed 136,578
Additional paid-in-capital 18,582,759 17,653,578
Retained earnings (deficit) (27,934,813) (25,832,500)
------------ ------------
Total shareholders' deficit (3,112,126) (2,535,474)
------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' DEFICIT $ 188,875 $ 140,300
============ ============
</TABLE>
See accompanying notes to financial statements.
________________________________________________________________________
3
<PAGE>
COMPARATOR SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1996 AND 1995
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
------------ ------------
(RESTATED)
<S> <C> <C>
REVENUES $ 357,939 $ -0-
----------- -----------
OPERATING EXPENSES:
General and administrative 1,615,382 2,022,648
Marketing 355,405 81,855
Research and development 128,336 36,357
Professional fees 252,900
----------- -----------
Total operating expenses 2,352,023 2,140,860
----------- -----------
LOSS FROM OPERATIONS (1,994,084) (2,140,860)
----------- -----------
OTHER INCOME (EXPENSE):
Interest expense (115,421) (109,030)
Other income, net 7,992 66,457
----------- -----------
Total other expense, net (107,429) (42,573)
----------- -----------
LOSS BEFORE PROVISION FOR INCOME TAXES (2,101,513) (2,183,433)
PROVISION FOR INCOME TAXES 800
----------- -----------
NET LOSS $(2,102,313) $(2,183,433)
=========== ===========
NET LOSS PER SHARE:
Net loss $ (0.004) $ (0.004)
=========== ===========
Weighted average shares outstanding 583,904,900 525,395,100
=========== ===========
</TABLE>
See accompanying notes to financial statements.
- --------------------------------------------------------------------------------
4
<PAGE>
COMPARATOR SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
FOR THE YEARS ENDED JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Common Stock Total
--------------------------- Common Additional Shareholders'
Number of $0.01 Stock Paid-in Equity
Shares Par Value Subscribed Capital Deficit (Deficit)
------ --------- ---------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JUNE 30,
1994, AS PREVIOUSLY
REPORTED 513,113,471 $ 5,131,136 $16,743,908 $(17,789,036) $ 4,086,008
PRIOR PERIOD
ADJUSTMENT (5,860,031) (5,860,031)
----------- ----------- ---------- ----------- ------------ -----------
BALANCE AT JUNE 30,
1994, RESTATED 513,113,471 5,131,136 16,743,908 (23,649,067) (1,774,023)
ISSUANCE OF SHARES
FOR:
Salaries 24,596,273 245,963 475,360 721,323
Services 5,595,749 55,957 82,339 138,296
Cash 22,971,097 229,711 369,772 599,483
Debt 797,097 7,971 6,530 14,501
Stock cancellation (2,728,984) (27,290) (24,331) (51,621)
NET LOSS (2,183,433) (2,183,433)
----------- ----------- ---------- ----------- ------------ -----------
BALANCE AT JUNE 30,
1995 564,344,703 5,643,448 17,653,578 (25,832,500) (2,535,474)
</TABLE>
(Continued)
5
<PAGE>
COMPARATOR SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT - Continued
FOR THE YEARS ENDED JUNE 30, 1996 AND 1995
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Total
--------------------------- Common Additional Shareholders'
Number of $0.01 Stock Paid-in Equity
Shares Par Value Subscribed Capital Deficit (Deficit)
------ --------- ---------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JUNE 30,
1995 564,344,703 5,643,448 17,653,578 (25,832,500) (2,535,474)
ISSUANCE OF
SHARES FOR:
Services 18,619,422 186,195 366,781 552,976
Cash 27,370,713 273,707 562,400 836,107
COMMON STOCK
SUBSCRIBED $ 136,578 136,578
NET LOSS (2,102,313) (2,102,313)
----------- ----------- ---------- ----------- ------------ -----------
BALANCE AT JUNE 30,
1996 610,334,838 $ 6,103,350 $ 136,578 $18,582,759 $(27,934,813) $(3,112,126)
=========== ============ ========== =========== ============ ===========
</TABLE>
See accompanying notes to financial statements.
________________________________________________________________________________
6
<PAGE>
COMPARATOR SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
------------ ------------
(RESTATED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,102,313) $(2,183,433)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 26,290 8,424
Provisions for doubtful accounts 86,038 16,000
Issuances of common stock for services
and salaries 552,976 859,619
Changes in operating assets and
liabilities:
Other receivables (93,969) 2,447
Prepaid expenses and other assets 15,347 9,566
Accrued expenses 351,646 756,440
Deferred income 23,715
----------- -----------
Net cash used by operating activities (1,140,270) (530,937)
----------- -----------
CASH FLOWS USED BY INVESTING ACTIVITIES -
Capital expenditures (74,172) (36,357)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 972,685 599,483
Increase in borrowings 251,399
Repayment of borrowings (1,533)
----------- -----------
Net cash provided by financing activities 1,222,551 599,483
----------- -----------
NET INCREASE IN CASH 8,109 32,189
CASH, BEGINNING OF YEAR 34,871 2,682
----------- -----------
CASH, END OF YEAR $ 42,980 $ 34,871
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for interest $ -0- $ -0-
Cash paid for taxes $ 800 $ -0-
</TABLE>
During 1996 and 1995, the Company issued 18,619,422 and 30,989,119 shares for
salaries, services and debt valued at $552,976 and $874,120, respectively.
See accompanying notes to financial statements.
________________________________________________________________________
7
<PAGE>
COMPARATOR SYSTEMS CORPORATION
NOTES TO CONSOLIDATED 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) provide consulting services and installation of
accounting software systems.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements of the
Company include the accounts of Comparator and its wholly-owned
subsidiaries. All significant intercompany balances and transactions are
eliminated in consolidation.
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 two
industry segments, fingerprint comparison/verification systems and software
consulting. 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.
Depreciation is provided under the straight-line method over their
respective useful lives, which range from 5 to 7 years.
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
8
<PAGE>
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 2011) 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 $2,400,000.
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.
2. RESTATEMENT OF PRIOR YEARS FINANCIAL STATEMENTS AND PRIOR PERIOD ADJUSTMENT
Subsequent to the filing of its 1995 10-K, the Company and its prior
auditor became aware of information which affected the valuation of a
substantial portion of its assets at June 30, 1995. During August 1996,
the Company filed a Form 8-K advising that (1) the prior auditor was
withdrawing his opinion on the 1995 financial statements, (2) the prior
auditor had resigned as the Company's independent auditor, (3) shareholders
and readers of the 1995 financial statements were to place no further
reliance on these statements, and (4) adjustments to correct the 1995
financial statements may be required and that those adjustments may be
material.
In connection with the audit of the 1996 financial statements, the
following assets and liabilities were corrected as of June 30, 1995:
<TABLE>
<S> <C>
Accounts Receivable - Accounts receivable
represents primarily amounts due from prior
employees and a company. Although the Company
has a court judgement for a substantial portion
of the amounts due, based on information
available, it was highly unlikely that such
amounts were collectable. $ (744,979)
Inventories - Inventories represents parts and
materials relative to designs of products that
were no longer being produced or marketed. (79,054)
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
Property and Equipment - Property and equipment
includes certain research and development costs
which should have been expensed as incurred. (324,830)
Patents and Licenses - Patents include several
patents on technology for which either the
maintenance fees were not current or the term
had expired in accordance with the original
agreements. Licenses includes agreements
relative to prior product designs for which
the minimum royalty payments were not current. (2,665,280)
Deposits and Prepaid Expenses - Deposits includes
an investment in a software product for which the
Company elected not to pursue in 1992. (108,331)
Prepaid Fees - Prepaid fees represent a consulting
agreement with a salesman and bonuses to key
executives of the Company. The consulting agreement,
dated in 1991, has resulted in no sales since that
period. The bonuses should have been recorded as
compensation in 1993. (616,000)
Investments - Investments represent equity
investments in companies which have had little or
no activity in recent years or which have been
abandoned. (1,231,626)
Notes Receivable and Accrued Interest - Notes
receivable represents a note receivable from a
former consultant which was due in 1993. (89,931)
-----------
Total adjustment to net assets $(5,860,031)
===========
</TABLE>
3. SIGNIFICANT SALES INFORMATION AND FOREIGN OPERATIONS (Unaudited)
The Company currently operates in two industries, fingerprint
identification and software consulting. No customer accounted for more
than 10% of total revenues in 1996. All sales of SFI were outside the U.S.
10
<PAGE>
The consolidated financial statements include the following information for
Comparator, IFSI and SFI (Honduras):
<TABLE>
<CAPTION>
1996
------------------------------------
Identifiable
Sales Net Loss Assets
- ----------------- -------- ----------- ------------
<S> <C> <C> <C>
COMPARATOR $ -0- $(1,957,895) $ 260,319
IFSI 316,741 (135,546) 80,683
SFI (Honduras) 41,198 (8,872) -0-
ELIMINATIONS -0- -0- (152,127)
-------- ----------- ---------
CONSOLIDATED $357,939 $(2,102,313) $ 188,875
======== =========== =========
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
The Company leases its facility under an operating lease agreement which
expires in November 1998. The aggregate minimum future commitments under
this lease is as follows for the years ending June 30:
<TABLE>
<S> <C>
1997 $ 87,247
1998 88,407
1999 29,469
--------
TOTAL $205,123
========
</TABLE>
Total rent expense for the years ended June 30, 1996 and 1995 was
approximately $90,000 and $78,000, respectively.
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, 1996. The
Company is aware of other claims against it. Based on advice of counsel,
management believes that the ultimate outcome will not have a material
impact on the financial statements of the Company. Accordingly, no amounts
have been accrued relating to such claims.
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
November 30, 1996, the Company's subsidiary, IFSI, has borrowed
approximately $215,000 from related parties. The borrowings are generally
evidenced by notes bearing interest at rates ranging from 5% to 8% and are
due in November 1997.
- --------------------------------------------------------------------------------
11
<PAGE>
Exhibit 10.1
BILL OF SALE
FOR VALUE RECEIVED, and in consideration of the payment of $150,000 payable in
restricted shares of Comparator Systems Corporation's $.01 par value voting
common stock valued at the current market bid price of $.03125 each, a total of
4,800,00 shares, ARMOND J SCHROEDER of 14911 Loch Lomond Lane, Anchorage, AK
99516, ("Seller") hereby sells and transfers unto COMPARATOR SYSTEMS CORPORATION
of 4350 VonKarman Avenue Suite 180, Newport Beach, CA 92660 ("Buyer"), and its
successors and assigns forever, the following described property:
1. The "Xtra" Suite of Accounting Software Source Code along with User
documentation consisting of the following 12 modules: Accounts Payable,
Inventory, Accounts Receivable, Order Processing, Bank Reconciliation, Payroll,
Financial Statements, Purchase Orders, Fixed Assets, Report Writer, General
Ledger, and Sales Analysis. Delivery of the "Xtra" software is evidenced by the
1/4" cartridge tape provided in the UNIX tar format containing the source code
for this system and the user documentation provided on 3.5" DOS diskettes in the
WordPerfect format. The approximate value of the "Xtra" Suite of Accounting
Software Source Code with User documentation, based upon invested capital and
development cost is $1,550,000.00.
2. The Spanish language translation of the following MAS90 software modules:
Library Master, Accounts Payable, Fixed Assets, General Ledger, Bank
Reconciliation, and Postmaster. Delivery of the Spanish language translation of
the MAS90 software is evidenced by the 1/4" cartridge tape provided in the UNIX
tar format containing the source code for the Spanish versions and the
translated User Manuals provided on 3.5" DOS diskettes in the WordPerfect
format. The approximate value of the Spanish language translation of MAS90
software modules, based upon invested capital and development cost is $
300,000.00.
3. The "Project Sagebrush" Computerized Accounting System for credit unions and
other financial institutions, based on MAS90 accounting software modules. This
package is evidenced by documentation provided on 3.5" DOS diskettes in
WordPerfect format and one 1/4" cartridge tape in the tar format containing the
source code for this system. A full description of this system is included in
the functional specification documentation provided. The approximate value of
the "Project Sagebrush" Computerized Accounting System, based upon invested
capital and development cost is $1,250.000.00.
4. The personal computer based video selection and retrieval system for video
stores. This system consists of the programs necessary to provide an in-store
customer self-service kiosk which allows for the selection and retrieval of
information about video tapes, including cast, synopsis, running time, awards,
critic's ratings, format, and other information. This system is comprised of 200
business basic computer programs. The delivery of this system is evidenced by
one 1/4" tape cartridge containing the source code in the UNIX tar format. The
approximate value of the personal computer selection and retrieval systems for
video stores, based upon invested capital and development is $475,000.00.
<PAGE>
5. A proprietary data base system used for the creation and maintenance of
information on video tapes. This system is used to maintain the information
provided to the users of the in-store kiosk. Delivery of this system is
evidenced by on 1/4" tape cartridge containing the source code in the UNIX tar
format. The approximate value of the proprietary data base system, based upon
capital and development cost is $125,000.00.
Seller warrants and represents that it has good title to said property, full
authority to sell and transfer same and that said goods and chattels are being
sold free and clear of all liens, encumbrances, liabilities and adverse claims,
of every nature and description. This transaction is effective as of September
20th, 1995.
/s/ ARMOND J. SCHROEDER
___________________________
Armond J. Schroeder, Seller
September 20, 1995
Comparator Systems Corporation, Buyer
/s/ ROBERT REED ROGERS
_______________________________
Robert Reed Rogers
Chairman
September 20, 1995
<PAGE>
Comparator Systems Corporation
CONSULTING AGREEMENT
This Consulting Agreement (the"Agreement") is made as of this 19th day of
September, 1996, by and between Comparator Systems Corporation, a Colorado
corporation (the"Company"), and Robert Reed Rogers (the "Consultant").
In consideration of the mutual covenants and agreements herein contained,
and in accordance with the authorization by the Board of Directors of the
Company, the Company and the Consultant hereby agree as follows:
1. Services to Be Rendered. The Company hereby retains the Consultant
------------------------
to provide services to the Company as an independent contractor, and the
Consultant hereby agrees to render such services, upon the terms and conditions
hereinafter set forth. During the term of this Agreement, the Consultant shall
perform for the Company, among others, the duties of assisting with locating and
negotiating financing, locating and negotiating the acquisition of compatible
technologies, negotiating and settling debt, identifying prospective customers,
negotiating the sale of the Company's products, and advising the Company, as
requested, on other matters, the scope of such duties to be determined from time
to time by the Board of Directors. The Consultant shall be available to render
such services for such period(s) each calendar year as the parties hereto may
mutually agree and shall devote such time to the performance of his duties
hereunder as may be reasonably necessary therefor.
Page 1 of 6
<PAGE>
2. Term of Agreement. Subject to the provisions for termination
------------------
hereinafter provided, the term of this Agreement shall be for six months, from
September 20, 1996 through March 19, 1997. The parties hereto agree to enter
into good faith negotiations prior to the expiration of the term hereof, for the
purpose of extending the term of this Agreement, subject to the need of the
Company for the Consultant's services at that time, and subject to the approval
of the United States District Court, Central District of California, as detailed
in the Consent and Undertakings of Defendant Comparator Systems Corporation,
Civil Action No. 96-3856.
3. Working Facilities. During the term hereof, the Company shall
-------------------
furnish the Consultant with such facilities and services as are suitable to his
role and adequate for the performance of his duties, as determined by the Board
of Directors.
4. Compensation and Expenses.
--------------------------
(a) For the services rendered by the Consultant during the term
hereof, the Company shall pay to the Consultant gross compensation at the rate
of One Hundred Twenty Five Dollars ($125.00) per hour, up to a maximum
compensation of $5,208.34 per month, or at such higher rate or higher number of
hours as may be fixed from time to time by the Board of Directors, subject to
approval of the United States District Court, Central District of California.
(b) The Consultant shall be authorized to incur reasonable
expenses, subject to review and approval by the Company, 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
therefore.
5. Indemnification by the Company. The Company shall indemnify the
------------------------------
Consultant as follows:
(a) The Company shall indemnify the Consultant as a party, or if
he is threatened to be made a party, to any existing, threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he was a director or officer of the
Company, against expenses (including attorneys' fees), judgements, fines
Page 2 of 6
<PAGE>
and amounts paid in settlement, actually and reasonably incurred by Consultant
in connection with such action, suit or proceeding if he acted in good faith and
in a manner he reasonably believed to be in, or not opposed to, the best
interest of the Company, and, with respect to any criminal action or proceeding,
had no reasonable cause to believe his conduct was unlawful. The termination of
any action, suit or proceeding by judgement, order, settlement, conviction or
upon a plea of nolo contendere or its equivalent, shall not of itself create a
presumption that the Consultant did not act in good faith and in a manner he
reasonably believed to be in, not opposed to, the best interest of the Company,
and, with respect to any criminal action or proceeding, had reasonable cause to
believe that his conduct was unlawful.
(b) The Company shall indemnify the Consultant as a party, or if
he is threatened to be made a party, to any existing, threatened, pending or
completed action or suit by or in the right of the Company, to procure a
judgement in its favor by reason of the fact that he was a director or officer
of the Company, against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection with the defense or settlement of such
action or suit, if he acted in good faith and in a manner he reasonably believed
to be in, or not opposed to, the best interest of the Company.
(c) To the extent that the Consultant has been successful on the
merits or otherwise in defense of any action, suit or proceeding referred to in
Sections (a) or (b) of this Paragraph 5, or in defense of any claim, issue or
matter therein, he shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection therewith.
(d) Expenses (including attorneys' fees) incurred in defending a
civil or criminal action, suit or proceeding may be paid by the Company in
advance of the final disposition of such action, suit or proceeding, upon
receipt of an understanding by or on behalf of the Consultant to repay such
amount.
(e) The indemnification provided by this Paragraph 5 shall not be
deemed exclusive of any other rights to which the Consultant may be entitled,
and continues after he shall have ceased to be a director, officer or consultant
of the Company, and shall inure to the benefit of his heirs and personal
representatives.
Page 3 of 6
<PAGE>
6. Termination by the Company. During the term of this Agreement, the
---------------------------
Company shall have the following rights to terminate this Agreement, subject to
Paragraph 7 below:
(a) Termination for Cause: The Company shall have the right to
----------------------
terminate this Agreement upon 10 days written notice if the Board of Directors
shall have determined in good faith, by affirmative vote of a majority of the
directors then in office, voting in person at a meeting of which the Consultant
was given reasonable notice and at which he was provided a reasonable
opportunity to state his position as to why this Agreement should not be
terminated, that the Consultant has (A) acted with gross negligence or in bad
faith or willful or wanton misconduct during the course of the performance of,
or otherwise related to his duties hereunder, (B) materially breached one or
more of the covenants set forth in Paragraph 7 below, or (C) if the Consultant
shall have been convicted of a felony or shall have admitted committing a
felony.
(b) Termination for Disability: The Company shall have the right
---------------------------
to terminate this Agreement upon 30 days written notice if the Consultant shall
have been unable, as a result of physical illness or other incapacity, to
substantially perform his duties hereunder for a continuous period of three
months or longer.
7. Confidential Information and Covenant Not to Compete.
-----------------------------------------------------
(a) The Consultant hereby agrees that, during the term of this
Agreement and thereafter, he 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
programing, customer lists, or budgets or other financial information, regarding
the Company its business, properties or affairs obtained by him 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 Consultant 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 programing, customer lists, or
budgets or other financial information, and other materials or records or
writings of any other type made, used or obtained by the Consultant in
connection with this Agreement.
Page 4 of 6
<PAGE>
(c) The Consultant hereby agrees that during the period from the
date hereof, through and including March 19, 1997, he will:
(i) neither authorize his 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 direct competition with the
fingerprint scanning and comparison business carried on or conducted by the
Company, in any state or other county where business is then carried on or
conducted by the Company.
(d) The Consultant agrees that the remedy at law for any breach by
him of any of the covenants and agreements set forth in this Paragraph 7 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 7 shall be deemed to include a series of separate
covenants and agreements with respect to the business described in Paragraph
7(c) hereof. If any judicial proceeding a court shall refuse to enforce all of
the separate covenants 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.
7. 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 Consultant, addressed to him at: 621 Lido Park Drive,
F-1, Newport Beach, CA 92663,
(b) If to the Company, addressed to it at: 4350 Von Karman Ave.,
Suite 180, Newport Beach, CA, 92660,
Page 5 of 6
<PAGE>
or such other address as the other party hereto may designate by written notice
pursuant to this Paragraph.
8. 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
By:
---------------------------
Armond J. Schroeder
Its duly authorized President
CONSULTANT
/s/ Robert Reed Rogers
-------------------------------
Robert Reed Rogers
Page 6 of 6
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