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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A/A
[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)
4667 Mac Arthur Blvd. Suite 400
Newport Beach, California
- ----------------------------- 92660
(Address of principal executive offices) -----
(Zip Code)
Registrant's telephone number, including area code: (714) 851-4300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Common Stock, $0.01 par value
-----------------------------
(title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to the
filing requirements for at least the past 90 days.
Yes_______ No ___X____
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 20,
1997 was 614,234,838. The approximate aggregate market value of the voting
stock held by non-affiliates of the registrant based on informal trading
average $.0085 of the high and low prices as of June 20, 1997 was
$5,220,996.14.
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Table of Contents
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Part I. Page
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Item 1: Business....................................................... 3
Item 2: Property....................................................... 13
Item 3: Legal Proceedings.............................................. 13
Item 4: Submission of Matters to a Vote of Security Holders............ 14
Part II
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Item 5: Market for the Company's Common Stock and Related
Stockholder Matters.................................................... 15
Item 6: Management's Discussion and Analysis of Financial
Condition and Results of Operation..................................... 16
Item 7: Financial Statements........................................... 20
Item 8: Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................................... 20
Part III
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Item 9: Directors and Executive Officers of the Company................ 21
Item 10: Executive Compensation........................................ 22
Item 11: Security Ownership of Certain Beneficial Owners
and Management and Potential Change in Control......................... 22
Item 12: Certain Relationships and Related Transactions................ 23
Part IV
Item 13: Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.................................................... 23
Signatures............................................................. 25
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PART I
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ITEM 1: BUSINESS
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Current Material Developments
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In May, 1996, the Securities and Exchange Commission ("SEC") filed a civil
action in the United States District Court, Central District of California (the
"Complaint") against Comparator Systems Corporation ("CSC" or the "Company") and
three of its officers, Robert Reed Rogers ("Rogers"), Scott Hitt ("Hitt") and
Gregory Armijo ("Armijo") alleging that Rogers, Hitt and Armijo had caused CSC
to issue materially false and misleading financial statements for the fiscal
years ending June 30, 1994 and June 30, 1995 and the first three quarters of
fiscal year 1996 by grossly inflating the Company's assets and that the
Company's recognition of assets did not conform to Generally Accepted Accounting
Principles ("GAAP") rendering CSC's financial statements as set forth in its
Annual Reports on Form 10-K for fiscal years 1994 and 1995, its Quarterly
Reports on Form 10-Q from the first fiscal quarter of 1996 through the third
fiscal quarter of 1996, and as incorporated in a private placement memorandum
used in connection with the offer and sale of CSC common stock from at least
July 1, 1994 to January 1, 1996, materially false and misleading. The Complaint
further alleged that Rogers, Hitt and Armijo made materially false and
misleading statements to investors and prospective investors concerning CSC's
technology, including claims that CSC owned certain patents and licenses that in
fact it did not own; that from at least January 1, 1992, in public filings, in
private placement memoranda, and in letters, demonstrations and other
communications to investors and potential investors, Rogers, Hitt and Armijo
falsely represented that CSC was actively engaged in research and development
toward producing commercially competitive fingerprint identification technology
when in fact CSC was engaged in no substantial business activities other than
the sale of stock to investors; that, among their misrepresentations, Rogers,
Hitt & Armijo represented that CSC had developed a new generation of its
fingerprint identification technology with substantial market potential when, in
fact, Rogers and Hitt had merely stolen a prototype of a fingerprint
identification device developed by individuals not associated with CSC, and
presented it as CSC's technology, protected by CSC's patents; that on the basis
of the above misrepresentations and additional misrepresentations and material
omissions, subsequent to July 1, 1993 Rogers, Hitt and Armijo fraudulently
obtained for CSC at least 2.9 million dollars in proceeds from the sale of CSC
common stock to individual investors; and, in addition, during the period when
CSC's public filings and its statements to investors concerning its financial
operations and its purported technology and business relationships were
materially false and misleading, Rogers, Hitt and Armijo caused at least ten
million shares of CSC's common stock to be issued to each of them, and at least
Hitt and Armijo sold substantial amounts of that stock to the public.
Depositions of the Company's officers and employees relating to the SEC
Complaint were initiated on June 18, 1996. On June 28, 1996, Mr. Floegel
resigned as President and a Director of CSC. On July 5, 1996, Mr. Armond
Schroeder, President of CSC's subsidiary, International Financial Systems, Inc.
("IFS"), was appointed to serve as President of CSC. On August 9, 1996, Mr. Eli
Buchalter, CSC's auditor since 1989, notified the Company that certain
information had come to his attention subsequent to his September 20, 1995
report that he believed might materially affect the financial amounts and
disclosures set forth in his
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report, and that accordingly, he was withdrawing his opinion on CSC's financial
statements for June 30, 1995. He requested that all persons known by the Company
to be holders of the June 30, 1995 financial statements be notified to return
them to the Company and to not place any further reliance on the statements. On
August 14, 1996, the Buchalter Accountancy Corp. resigned as the Company's
auditor. On September 24, 1996, the Company retained the firm of Farber & Hass
as its new auditor. For further detail concerning the resignation of the
Buchalter Accountancy Corp. refer to "ITEM 8: CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE."
On September 19 1996, the SEC announced that CSC, Rogers and Armijo had
consented to a permanent injunction and other relief, without admitting or
denying the allegations in the SEC Complaint, enjoining CSC, Rogers and Armijo
from future violations of Section 17(a) of the Securities Act of 1933, Section
10(b) of the Securities Exchange Act of 1934 (the "1934 Act"), and Rule 10b-5
thereunder, Sections 13(a) and 13(b)(2)(A) and (B) of the 1934 Act and Rules
13a-1, 13a-13, and 12b-20; prohibiting CSC from transferring any corporate funds
or assets to or for the benefit of Hitt; requiring CSC to prohibit Rogers,
Armijo and Hitt from acting as officers or directors of CSC; and permitting CSC
to retain Rogers and Armijo as consultants to the Company with restrictions on
the length of time and gross compensation to be paid to them. Hitt, having
lived in Malaysia since 1992, was not represented in the matter and has reached
no settlement agreement with the SEC. As a result of the entry of the permanent
injunction, Rogers retired and Armijo resigned his position with the Company on
September 19, 1996.
Concurrent with the entry of the permanent injunction, Mr. Schroeder became
Chairman of the Board and Ms. Marianne Bedford ("Bedford") and Mr. Donald
Levering ("Levering") were appointed to CSC's Board of Directors to fill the
remaining vacancies created by the entry of the permanent injunction. On
December 4, 1996, Mr. Schroeder resigned as Chairman of the Board, President and
Chief Executive Officer of CSC, citing the Company's continued inability to pay
him, and Bedford was appointed Chairman of the Board and Chief Executive Officer
of the Company. On March 21, 1997, Bedford resigned her positions with CSC
citing among other matters, her opinion as to the inability of the Company to
implement changes needed for its survival and viability. On June 2, 1997, Mr.
Levering, the sole remaining Director of the Company, appointed Thomas C.
Hanscome ("Hanscome") and John D. Hinterleitner ("Hinterleitner") to the Board
of Directors. The Board of Directors then appointed Hanscome to the positions
of Chairman of the Board, Chief Executive Officer and President of the Company
and Hinterleitner as the Company's Executive Vice President. Hinterleitner was
also appointed the Company's Secretary and Treasurer, replacing Celeste Sim who
resigned as Secretary of the Company on June 2, 1997.
Subsequent to the SEC's filing of its Complaint, the Company has experienced an
increasingly-critical shortage of working capital, with priority for the usage
of its very limited funds being given to legal fees and essential Company
survival expenses other than salaries. Indeed, it does not presently have
sufficient cash assets, without the borrowing of funds from third parties, to
pay the costs of legal counsel retained for the continued representation of the
Company in the above-described SEC litigation and for needed advice and
assistance in compliance with the disclosure and reporting requirements of the
1934 Act. As a result, the Company's business operations, at present, are
essentially dormant with approximately $4,500 in funds available for operations
as of June 20, 1997. In addition, the Company has vacated its previous business
offices and is now utilizing, on a month-to-month basis, a 180 square foot
executive suite, at 4667 Mac
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Arthur Boulevard, Suite 400, Newport Beach, California 92660, at a monthly
rental of $576. Apart from the officers referred to above, the Company has no
paid employees. The Company is not presently selling any products nor does it
have the components to manufacture or produce products.
Despite these extremely adverse operational and financial conditions, the
current Board of Directors believes the Company could continue in business if it
were able to raise additional capital of at least $125,000, which would be
utilized primarily to enable the Company to confirm its legal rights to the
Comparator 5000 fingerprint comparison device referred to under "ITEM 1:
BUSINESS - HISTORY" below. THE MANAGEMENT OF THE COMPANY IS AWARE, HOWEVER, AND
ACKNOWLEDGES HEREIN, THAT THERE ARE PRESENTLY SIGNIFICANT LEGAL ISSUES AS TO THE
OWNERSHIP RIGHTS, THAT THE COMPANY MAY HAVE TO THE TECHNOLOGY IN THE COMPARATOR
5000 DEVICE. WHILE THE COMPANY BELIEVES THAT THE FACTS RELATING TO THE
DEVELOPMENT OF THE COMPARATOR 5000 TECHNOLOGY WILL ULTIMATELY SUPPORT COMPANY
CLAIMS TO ITS RIGHTS TO THIS FINGERPRINT COMPARISON DEVICE, CERTAIN FORMER
CONSULTANTS AND EMPLOYEES OF THE COMPANY DISPUTE THIS CLAIM AND CONTINUE THEIR
CLAIM TO THE OWNERSHIP OF THIS DEVICE AND THE RELATED TECHNOLOGY. IN ADDITION,
THE STAFF OF THE SEC IN THE CURRENT LEGAL PROCEEDINGS HAS EXPRESSED CONCERNS
WITH THE COMPANY'S CLAIMS TO OWNERSHIP RIGHTS IN THE COMPARATOR 5000 TECHNOLOGY.
ACCORDINGLY, INVESTORS ARE CAUTIONED THAT EVEN IF THE COMPANY WERE SUCCESSFUL IN
RAISING ADDITIONAL CAPITAL, OF WHICH THERE CAN BE NO ASSURANCE, THERE ARE
SIGNIFICANT LEGAL ISSUES RELATING TO OWNERSHIP RIGHTS IN THE COMPARATOR 5000
TECHNOLOGY THAT WILL ULTIMATELY HAVE TO BE RESOLVED FAVORABLY TO THE COMPANY, IN
ORDER FOR THE COMPANY TO RECOMMENCE BUSINESS OPERATIONS AND TO HAVE ANY
OPPORTUNITY TO BECOME FINANCIALLY VIABLE.
History
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The Company was founded to develop and market fingerprint comparison systems
designed to verify people's identities. The Company was incorporated in
California on July 12, 1976. On October 12, 1978 a Colorado corporation of the
same name was incorporated, and on January 12, 1979 the California corporation
was merged into the Colorado corporation, which survives today. CSC has been
engaged in research and development, and in the intermittent manufacture and
marketing of fingerprint-based identity verification systems since its initial
public offering in 1979. Notwithstanding its incorporation nearly 20 years ago,
and sales of the ID 1 in the 1980's the Company is currently in a development
stage, has yet to achieve operational profitability, and as discussed above,
presently is essentially inactive and in need of significant additional capital
if it is to have any possibility to continue in business.
In the 1980's CSC introduced and marketed its first-generation fingerprint
comparison system, the Comparator Model ID-1, to the law enforcement market.
That device was used primarily by jails and prisons to verify that the right
prisoners were being released. Model ID-1 systems were in use in correctional
facilities since 1984, and have performed accurately and reliably, and not one
error by a Model ID-1 has ever been reported by a law enforcement customer. The
ID-1, however, was an electro-optical analog device that required an attendant
to operate it, and the use of hard-copy inked fingerprints.
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CSC was not successful in selling the ID-1 to commercial customers, who wanted
"live-scan" fingerprint capture and comparison, digital storage and retrieval
and unattended operation. The Company was unable to achieve self-supporting
sales to law enforcement customers alone, and therefore initiated further
research to develop a digital system.
Developments relating to the Company in the past three years have been as
follows. In July 1993 CSC entered into agreements with Malaysian investors to
establish a joint venture company in Kuala Lumpur, Malaysia, to complete
development of, and to manufacture new digital fingerprint comparison products.
The Malaysian investors agreed to invest approximately $4,000,000 in the
Malaysian joint-venture company, and they also subscribed to purchase
approximately $18,000,000 of CSC's common stock. Ten percent of the agreed-upon
investment was paid-in through a private placement of CSC's restricted stock in
October 1993.
In November 1993 it was discovered that Karen Kay Churchill, the Company's then
vice president and corporate secretary, and an employee of eight years standing,
while managing CSC's US offices for the prior two years, had improperly issued
an estimated $747,778.40 of CSC's stock to herself, her family, and her friends
and had misapplied an estimated $81,613.21 of Company funds to satisfy her
personal obligations.
In January 1994 Ms. Churchill's services were terminated. In late January 1994
a prototype fingerprint comparison device that had been loaned to CSC in October
1991 by VVL, a Scottish company for CSC to market test, was found to be in
storage on the Company's premises. On February 1, 1994 CSC shipped the unit back
to Scotland, approximately two years later than originally agreed, with its
apologies and with funds to cover costs incurred by VVL due to the long delay.
CSC had signed an agreement in September 1991 with VVL, that called for CSC to
market test the VVL design, and if the market testing proved positive, to enter
into negotiations for a further agreement under which either VVL might
manufacture the product for CSC to sell under private label, or alternatively
CSC might manufacture the device under license from VVL. The relationship
between the companies never proceeded beyond the market testing that CSC
conducted in 1991 and early 1992. The VVL prototype fingerprint comparison is
alleged in the SEC Complaint to have been stolen by the Company and to have been
presented to the public as the Company's technology, protected by CSC's Patents.
In March 1994, after completing an accounting and causing it to be reviewed by
two independent auditors, the Company filed a criminal complaint against Ms.
Churchill with the Irvine, California Police Department, and the Company also
notified the public, its shareholders and the Malaysian investors of the
situation. The Malaysian investors declined to proceed further with their
financial commitments to CSC, and in May 1994 CSC's Malaysian joint venture
company ceased operations. In August, 1994 CSC completed the relocation of the
last of its engineers and scientists back to the United States. During this
period CSC acquired all of the shares of Wira Asset Management Sdn Bhd, an
inactive Malaysian corporation, with the intention of using Wira as its
marketing base for the Southeast Asian market, when the Company was capable of
selling its new product line. The loss of the Malaysian funding, which had taken
almost two years to arrange, was financially crippling to CSC, and the Company
immediately began the search for replacement major financing, which has not to
date been accomplished.
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In 1994, CSC continued development of fingerprint technology initiated in
Malaysia in 1992, in California at a much reduced rate due to limited working
capital. CSC covered some of its capital needs through private placements of
its restricted stock to its shareholders. CSC's engineers, now working as
consultants to the Company rather than employees, began to cover some of their
own costs in the continued development of the digital fingerprint comparison
technology that CSC had originated in Malaysia in 1992. In June 1995 CSC
retained the services of Mr. Richard E. Floegel, who had previously been vice
president operations of a subsidiary of Hitachi Imaging Products, as CSC's
president and chief operating officer.
In October 1995 CSC established International Financial Systems, Inc. (IFS), a
wholly-owned subsidiary engaged in the business of developing hardware/software
operating and accounting systems and marketing them to financial institutions
such as credit unions. IFS was established by CSC with the acquisition of
hardware from a bankrupt predecessor company, and the acquisition of software
from the developer. In November 1995, IFS established a subsidiary in Honduras,
where it began to market a Spanish language version of its credit union
operating systems.
CSC continued to raise limited but inadequate amounts of working capital through
private placements of its restricted stock to its shareholders. CSC's engineers
increasingly expressed dissatisfaction with the Company's inability to fully pay
them for their work on the development of the pre-production prototypes of the
Comparator 5000 Series fingerprint comparison products (the "Comparator 5000"),
and threatened to take CSC's fingerprint comparison product to the market
themselves if not paid. On October 23-25, 1995 CSC participated in the annual
North American Data General Users Group (NADGUG) exhibition in Washington D.C.,
which was the first public showing of pre-production prototypes of the
Comparator 5000. In its 10-Q report for the quarter ending September 30, 1995
CSC announced its plans to attend the MILIPOL '95 Exposition in Paris beginning
November 21, 1995, and CSC demonstrated production prototypes of the Comparator
5000 at MILIPOL. In its 10-Q reports for the quarters ending September 30, 1995
and December 31, 1995, CSC announced plans to formally introduce the Comparator
5000 to the market at the CardTech/SecurTech Exhibition to be held in Atlanta
May 14-16, 1996. As discussed above (see "Item I: BUSINESS - CURRENT MATERIAL
DEVELOPMENTS") certain engineers who worked for the Company on the development
of the Comparator 5000 technology currently claim that they and not the Company
own the rights to the Comparator 5000.
In October 1995 CSC filed a civil suit against Ms. Churchill and 33 other
defendants relating to the improper and unauthorized issuance of CSC shares and
the misapplication of CSC funds. Ms. Churchill filed for personal bankruptcy,
but on May 30, 1996 the Company obtained a judgment against Ms. Churchill from
the Bankruptcy Court for stock and cash with a value of approximately $512,500.
Litigation against other defendants is still proceeding as the Company is able
to pay the legal fees involved. CSC has not had the funds available to it to
attempt collection from Ms. Churchill of the judgment it holds against her.
CSC's common stock was listed on NASDAQ under the symbol IDID in February 1990,
and typically traded under one million shares per day, usually at 1/32 bid and
1/16 asked since that time. On April 29, 1996, a new high of 6,346,801 IDID
shares were traded. On April 30, another 5,163,328 shares were traded, and on
May 1, another 4,417,797 shares were traded, all in the 1/32 bid and 1/16 asked
range.
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On Friday, May 3, 1996 IDID traded 121,289,774 shares, closing at 9/32, with a
high of 7/16. The NASD called the Company regarding the unusual trading. The
last news release the Company had issued had been on February 7, 1996, and at
the direction of the NASD, CSC issued a news release on Monday morning, May 6,
regarding its planned May 14 new product introduction of the Comparator 5000 in
Atlanta. On May 6 IDID traded 152,210,964 shares, closing at 1 1/32, with a low
of 5/16 and a high of 1 1/16. On Tuesday, May 7, 180,298,533 IDID shares
traded, reaching a high of 1 5/8 before closing at 7/8. On Wednesday, May 8,
82,794,218 IDID shares were traded, with a high of 7/8 and a low of 15/32. On
May 9, 1996 the NASD halted trading pending an investigation of the unusual
activity, agreeing to resume IDID trading on Monday, May 13. The SEC then joined
the investigation and the trading halt was extended. CSC proceeded as planned
with the introduction of the Comparator 5000 Series at the Atlanta
Cardtech/SecurTech Exposition commencing May 14, 1996. On June 12, 1996 the
Company withdrew its stock from NASDAQ, and its shares commenced trading
informally. Refer to ITEM: 5 "MARKET FOR THE COMPANY'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS" elsewhere in this report.
On May 13, 1996 a class action was filed against CSC and Rogers et al. in the
Superior Court of the State of California, County of Orange, by attorneys
representing shareholders who purchased CSC common stock from May 6, 1996
through May 8, 1996, inclusive, claiming damages in excess of $300,000,000.
Refer to ITEM: 3, "LEGAL PROCEEDINGS" elsewhere in this report.
On May 31, 1996 the SEC filed its Complaint against the Company and three of
its officers and a temporary restraining order was issued against the
defendants as detailed in Civil Action No. 96-3856 LGB (Jgx). For further detail
concerning the SEC Complaint and the subsequent material events affecting the
Company and its business operations, including the consent of the Company,
Rogers and Armijo to the entry of a permanent injunction and other ancillary
relief, refer to "Item I: Current Material Developments", above.
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
that the Company has attempted to develop, termed by CSC the Comparator 5000
series, has been intended to replace and supersede an analog electro-optical
fingerprint comparison system that the Company designed, developed,
manufactured, marketed and sold in the 1980's and which is presently outdated
and unmarketable in commercially acceptable quantities in the US. As of this
filing date, the Company has no statistical performance data on the new product
line. More importantly, there are significant legal issues relating to the
ownership of the Comparator 5000 technology. In addition without the infusion of
additional capital the Company does not have resources to confirm its rights to
the legal ownership of this technology, which are now claimed to be owned by
former employees and consultants of the Company who worked on the development of
this product. Accordingly, even if the Comparator 5000 Series is determined to
be functionally ready for sale to customers who are willing to accept it without
statistical performance data, and assuming the product can be marketed
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profitably and gain market acceptance, there is a very significant risk that the
Company will not be able to realize any financial benefit from the marketing of
this product.
CSC, through IFS, a wholly-owned subsidiary, has produced, marketed and
supported English language and Spanish language operating and accounting systems
for use by financial institutions such as credit unions. Its products have been
designed with the flexibility to conform to each financial institution's
requirements, and the simplicity to make them easy to implement, use and
maintain. IFS has been a Master Developer of State Of The Art's MAS 90
Accounting Software. As a Master Developer, IFS has provided custom
modifications of this software to meet the individual needs of its customers.
All modules of the MAS 90 software are available in English and some in Spanish.
IFS has a wholly-owned subsidiary in Honduras, SFI, which was organized for the
purpose of focusing on Latin American business opportunities. Since the
acquisition of IFS and SFI the Company has not realized profitability from
either entity.
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.
Since 1990 CSC has endeavored to operate in the identity verification market
with products which are in production prototypes stage, that can address
numerous identity verification applications. These applications exist whenever
one or another of multiple parties are required to prove or verify their
identity. Typical applications include:
* Welfare benefits
* Social Security/Provident Fund Benefits
* 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 concentrated its endeavors since its founding in the development of
identity verification systems. These are access control/transaction control
systems used to verify whether a new entry matches an existing record. A finger
is scanned and the collected data is compared with data stored in system memory
or on a card. No search is normally performed, since the task of these systems
is to perform only one-to-one comparison, allowing an individual access to an
area or an electronic system if a scanned finger matches the individual's stored
finger data. The model ID 1 which was previously marketed by the Company in
the 1980s is no longer marketed. The Comparator 5000 series is the only
potential Company product still in production prototype stage, and, as
discussed above, is currently the subject of dispute as to its ownership.
Until several years ago relatively few identity verification systems had been
sold by any company in the Biometrics Industry. Previously, industry sales in
this market had been minimal, with the market not "leaping forward" as had been
anticipated at least ten years ago by industry observers. It is the Company's
belief that this situation was not entirely the result of undeveloped demand,
but also of the lack of availability on the market of identity verification
systems that could meet the market's needs for accuracy, repeatability and cost-
effectiveness.
Distribution
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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
competitive bid procedures. Large system sales cycles may also be unpredictable
due to reliance on state and local governing bodies to allocate resources and
complete lengthy reviews and approval processes.
CSC had planned to distribute its fingerprint comparison products within the
United States direct to large accounts through Company sales employees or
through systems integrators or value added resellers or to original equipment
manufacturers as appropriate, and to smaller accounts through dealers and
distributors specializing in each market segment. The Company was engaged in
negotiations with members of all of these categories of distribution channels
prior to May 31, 1996, although several of CSC's former distributors withdrew
following institution of the SEC lawsuit against the Company. CSC had planned
to distribute its biometric products in foreign countries through original
equipment manufacturers, systems integrators and/or foreign distributors.
Although the Company has received inquiries from other countries regarding the
Comparator 5000 Series, even if it were to raise additional capital and to be
able to successfully resolve its legal rights to the Comparator Technology,
there can be no assurance that CSC will be able to produce foreign sales, or be
successful, or that it will be able to cover the costs of product
demonstrations, overseas travel, and other selling expense that may be involved
in making such sales.
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With respect to IFS, sales of its products have in the past been carried out by
its employees. As of December 31, 1996, the key employees responsible for US
sales have left the Company due to its inability to pay them. The Company is not
at this point confident that it will be able to finance the recruiting and
training of new sales personnel, or to resume domestic sales activities.
IFS had previously begun the process of translating its MAS 90 Accounting
Software into a Spanish version for use by its Honduran subsidiary. With the
loss of the Company's personnel and the lack of cash assets the Company cannot
deliver a completed Spanish version of the MAS 90 software application to
generate future revenues. As the Honduran subsidiary has never reached a
level of sales sufficient to support itself, the Company has discontinued the
operations of this subsidiary.
Competition
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As the Company is not currently engaged in any substantive business activities
and does not have any material cash assets, the following discussion, at
present, is essentially theoretical and is only relevant if the Company should
subsequently raise sufficient capital to resolve its legal issues with respect
to the ownership of the Comparator 5000 technology and be able to recommence its
business activities. In addition, investors should consider these
financial/operational problems, even if satisfactorily resolved, together with
the Company's current legal problems involving the SEC's enforcement of the
Federal Securities Laws, in evaluating the likelihood of the Company being able
to ultimately successfully proceed in the marketing of products that have the
qualifications needed for customer acceptance. Although for many years only a
handful of companies worldwide were active in the field of Biometrics, there are
currently an increasing number of companies involved, or likely to become
involved in identification and identity verification.
The three largest of the known fingerprint systems producers serve the Criminal
Justice/Forensic System market, producing specialized dedicated "AFIS"
(Automated Fingerprint Identification System) computers, costing from $1,000,000
to over $30,000,000, designed to accelerate the processing by law enforcement
agencies of fingerprint comparisons of unknown persons with computerized
fingerprint files. This is not a market in which the Company participates, and
therefore these manufacturers are not relevant from a competitive perspective.
The market for Identity Verification Systems, in which CSC has attempted to
participate, is separate and distinct from the AFIS market, and was until
recently mainly a potential market, with limited actual industry sales. In the
Company's opinion, this was due in part to the fact that reliable, accurate and
cost effective biometric identification systems were not available to
prospective users, and in part to perceived public resistance to the use of
fingerprint identification. In the past several years this market has begun to
expand rapidly, and a growing number of firms is believed to be in the business
of developing or attempting to market fingerprint identification systems. The
largest of these firms, however, are systems integrators that do not themselves
possess biometric identification systems, and must subcontract with other firms
for this technology. Among the others the Company now counts several
significant competitors that are becoming well-established. The current
producers of AFIS systems also may represent potential significant competition,
and there are perhaps twenty relatively new research labs or emerging companies
that are in various stages of research or product development.
11
<PAGE>
Firms other than CSC that have pursued the development of Identity Verification
Systems typically employ some form of "minutiae" technology to digitize and
store fingerprint details for later retrieval and comparison with real-time
fingerprints. To the best of the Company's knowledge none has the potential
accuracy capability of the Comparator 5000. CSC, in contrast to its
competitors, does not employ minutiae comparison, but rather employs proprietary
image processing comparison technology for comparing entire fingerprints with
each other. Based on such information as it has, the Company believes that
certain features of the Comparator 5000 Series product line , including
durability, simplicity, and, above all, high accuracy, constitute significant
competitive advantages.
There are also several firms producing identification devices based on other
biometric methods such as signature dynamics, hand geometry, retinal vasculature
or voice characteristics of the person to be identified. The Company does not
know whether such devices may ultimately be competitive, but believes that the
most significant competitive factors in the field are and will be accuracy,
price, ease of operation, reliability and non-invasiveness. Name recognition may
also be significant, and many of the Company's competitors may be better known
than the Company.
Given growing competition for market share, the Company cannot be certain that
it will achieve profitability, or be successful in bringing its products to
market, or developing a market acceptance for its products. Research and
development will continue to be an expense to the Company as products are
released. Most technology firms in this arena will be steadily working to
improve their software and hardware solutions to allow for greater searching and
matching capacity at lower price points. Since CSC has no statistical
performance data for its current technology and no product revenues, the Company
cannot be assured that it can compete effectively, or at all, or that its
products will gain market acceptance.
Patents, Copyright, Purchase Fee
- --------------------------------
Assuming the Company is able to raise needed capital and successfully resolve
the issues described herein relating to ownership of the Comparator 5000
technology, the performance of the Company will depend primarily on the
success of this product line.
In April 1996, the Company negotiated terms with its consultant/engineers, to
secure for itself all intellectual property rights, including patent rights and
software copyrights for the fingerprint identification technology underlying the
Comparator 5000 series. The terms called for payments of cash and shares of CSC
stock. Subsequent to May 31, 1996, completing the terms of the agreement was
delayed until the SEC injunction against the Company was addressed.
In late October 1996, final payment negotiations for the fingerprint comparison
technology were resumed with the engineers. To date, the Company has been unable
to perform its financial obligations under the re-negotiated terms. Failure of
the Company to perform its financial commitments and reach a definitive
agreement with the consultants/engineers may result in CSC losing control of the
technology which Management believes could result in the permanent cessation of
the Company's marketing of the Comparator 5000.
12
<PAGE>
With regard to IFS, in September, 1995, CSC purchased the software that has been
used by IFS in its business of marketing operating systems to financial
institutions. The purchase price was $150,000 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
- ------------------------
Since the inception of research and development on the first generation of
product that has evolved into the Comparator 5000 series, CSC has spent $750,194
in research and development related expenses to achieve the present technology
generation. Of this amount, during the fiscal year ending June 30, 1995, $36,357
was expended and during the fiscal year ending June 30, 1996, $128,336 was
expended. These expenditures did not include bench mark testing, which has not
yet been accomplished. The Company presently does not have any funds to continue
with needed additional development expenditures, nor is it able to pay
previously incurred expenses owing to third parties, employees/consultants for
their services in connection with the development of the Comparator 5000
technology.
Employees
- ---------
As the date of this filing, other than the two individuals who were elected to
serve as officers of the Company, the Company does not have any paid employees.
For further detail, refer to "ITEM 9: DIRECTORS AND EXECUTIVE OFFICERS OF THE
COMPANY".
ITEM 2. DESCRIPTION OF PROPERTY
- -------------------------------
Because of the lack of funds the Company has had to vacate its headquarters in
Newport Beach, California which consisted of approximately 5,900 square feet of
offices. At present, the Company's only facility is a 180 square foot full
service executive suite in Newport Beach which is leased on a month to month
basis at a monthly cost of approximately $625.
ITEM 3: LEGAL PROCEEDINGS
- --------------------------
(a) Pending Proceedings
A class action lawsuit, case number 763689, Eric Aafedt, et al., on Behalf
of Themselves and All Others Similarly Situated vs. Robert R. Rogers, et al in
May 13, 1996 by shareholders who purchased CSC common stock from May 6, 1996 to
May 8, 1996 inclusive, claiming damages in excess of $300,000,000 in the
Superior Court of the State of California for the County of Orange. The Company
will defend its position, however, there can be no assurance that the Company
will be successful in its defense of this lawsuit. A trial date has been
requested by the plaintiff 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
13
<PAGE>
legal malpractice in rendering legal services, in the Superior Court for the
State of California for County of Orange. 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. 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 judgment 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 has 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.
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.
14
<PAGE>
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. 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.
Quarter/Period Ended High Bid Low Bid
- --------------------------------------------------
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 0.03000 0.00500
September 20, 1996 _______ ______
December 31, 1997 _______ ______
March 31, 1997 _______ ______
June 20, 1997 _______ ______
(b) The approximate number of record holders of the Company's common stock
at June 20, 1997 was 8,900.
(c) The Company has never declared or paid any cash dividends on its
common stock. The Company currently intends to retain future earnings, if any,
to finance the growth and development of its business. The future dividend
policy will depend upon a number of factors, including future earnings, capital
requirements and the financial condition of the Company.
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:
Number of
shares Amount
---------------------
15
<PAGE>
<TABLE>
<CAPTION>
<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 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 1996, and is now informally traded. CSC has two wholly-
owned subsidiaries, IFS and SFI, which have competed in the development,
marketing, integration, installation and support of hardware and software
operating and accounting systems for financial institutions such as credit
unions. As of the date of this filing the business operations of CSC, IFS and
SFI have essentially ceased because of the lack of operating funds and the
Company does not have any full time paid employees.
CSC has since its inception been engaged mainly in research and development,
with limited revenues produced from sales in the 1980s of its first-generation
fingerprint comparison system, the Comparator Model ID-1. The Company was unable
to produce sufficient revenues from sales of the Model ID-1 to cover its costs.
The Company today requires additional financial resources to complete payment of
amounts owed for completion of development engineering on its new fingerprint
identification products and to resolve current issues as to the ownership of
these products, to reduce current debt, to pay salaries for the hiring of
Company personnel and to provide working capital needed to enable the Company
16
<PAGE>
to recommence its business and to provide facilities needed for the Company to
function as a going concern.
Although they have generated sales, CSC's subsidiaries have never met their
income projections nor generated positive cash flows. Accordingly, because of
CSC's lack of cash assets, the Company has had to temporarily discontinue the
operations of these subsidiaries. Additional funds are therefore required to
support their operations as well as to upgrade their present software products
in order to enhance their competitive position in the marketplace and to justify
the re-opening of these businesses. 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 be re-opened or that they will ever achieve profitability, or
will be successful in sustaining a market for their products, or be successful
in introducing new products to the market.
PLAN OF OPERATION
- -----------------
The Company's plans to market fingerprint comparison products were interrupted
in May 1996, and as a result the Company has expended all of its available cash
resources. As of the date of this filing the Company had approximately $4,500
in funds available for operations. Unless the Company is able to raise a
minimum of $125,000 in additional capital within the next several months the
current cessation of the Company's business will become permanent. There can be
no assurance that the Company will be able to raise this needed capital.
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.
In the past CSC's primary sources of cash have been 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. As indicated elsewhere in this report the very survival of the Company
hinges on its ability to raise additional funds in the immediate future.
Financial difficulties have not been uncommon in the history of the Company and
there can be no assurance that it will be able to raise the capital it now
needs.
The short-term funds the Company needs immediately would be disbursed to
accomplish the following:
* Make required final payments to confirm ownership of the Company's new
fingerprint comparison technology.
17
<PAGE>
* 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.
* Permit the Company to focus on creating a revised Business Plan to
facilitate the Company's plans to raise longer-range financing.
* Implement a review process to evaluate the profitability of the
wholly-owned subsidiaries IFS and SFI.
The Officers and Directors of the Company will immediately address a revised
business plan for the next twelve months of operations if short term capital
becomes available to meet the above listed requirements. It should be noted that
there can be no assurances that the Company will achieve profitability, or be
successful in bringing its products to market or developing a market for its
products or indeed be able to obtain the necessary funds to continue in
business.
RESULTS OF OPERATIONS
- ---------------------
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 $2,140,860. 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
$2,102,313 as compared to $2,183,433 in the restated fiscal year 1995.
General and administrative expenses in fiscal 1996 decreased 20% to $1,615,382
as compared to $2,022,648 in restated fiscal 1995. Expenditures in this category
continued to focus on salaries and general business operations.
The Company has experienced significant operating losses and has a negative
working capital amounting to approximately $3,200,000 as of June 30, 1996, and
has $4,500 in funds available for operations. At this time, there is significant
uncertainty regarding whether the Company will survive as a going concern. The
financial statements have been prepared assuming the Company will continue to
operate which contemplates the realization of assets and the settlements of
liabilities in the normal course of business. At the date of this filing, no
adjustment has been made to the recorded amount of assets or the recorded amount
or classification of liabilities.
FINANCIAL POSITION, CAPITAL RESOURCES AND LIQUIDITY
- ---------------------------------------------------
The Company's primary sources of cash during the fiscal year ended June 30,
1996, were funds generated through the wholly-owned subsidiaries IFS and SFI
through operations of $357,939, loans and
18
<PAGE>
sale of private placement shares. The Company currently lacks sufficient capital
resources to satisfy near term and long term capital needs and, at present, has
temporarily discontinued business operations.
Subsequent to the date of 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 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 was to remove the asset 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 represents equity investments in
companies which have had little or no activity in recent years due to the
inability to raise the appropriate capital needed to pursue their products and
technology.
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 reduce its inventories
in the amount of $79,054 because they related 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
have been expensed as research and development costs at the 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 full amortized as at the date of this filing. Licenses
included agreements relating to earlier product patents, now expired.
Notes receivable. 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.
19
<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.
PART III
20
<PAGE>
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
as directors and executive officers of the Company but remained as Consultants
to the Company. Mr. Rogers and Mr. Armijo have since left the Company and
are no longer providing any consulting services to the Company. See "Item: 3,
Legal Proceeding", and "Item 1, Business, History".
Ms. Marianne Bedford joined the Company in March 1996. 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. On
March 21, 1997 Ms. Bedford resigned her position with the Company.
Mr. Donald Levering had been with the Company since 1994 and has over
twenty-five years of experience in sales and marketing in the consumer goods and
automotive field. He holds a teaching credential in industrial and business
management and teaches at Long Beach City College.
Ms Celeste Sim joined the Company as Manager of Finance in July 1994
and was appointed to the position of Controller and Corporate Secretary in
August 1996. 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. On June 2, 1997 Ms. Sim resigned her
offices with the Company.
As of June 2, 1997 Thomas C. Hanscome, age 53, and John D. Hinterleitner, age 43
were appointed to the Board of Directors. Mr. Hanscome was also appointed
Chairman of the Board, Chief Executive Officer and President of the Company. Mr.
Hinterleitner was also appointed to be the Company's Executive Vice President
and Treasure and to replace Ms. Sim as the Company's Secretary. The following
are the business backgrounds of Messrs. Hanscome and Hinterleitner.
21
<PAGE>
Mr. Hanscome joined the Company in June of 1997. Mr. Hanscome has over 30 years
of business experience as a corporate executive, business owner and Mr. Hanscome
holds a General Securities (series 7) and a General Securities Principal (series
24) license with the NASD (not currently active). In his capacity as marketing
representative he has participated in the sale of over $100,000,000 in
investments securities in both public and private limited partnerships since
1983. In addition Mr. Hanscome has been engaged in corporate financing, sales,
marketing, and manufacture of industrial and consumer products.
Mr. John D. Hinterleitner joined the Company in June 1997. Mr. Hinterleitner
has been engaged in the operation of his own companies as a principal, sole
proprietor, and partner. His endeavors have primarily been focused on Real
Estate development, Finance, and Energy Development projects. His activities
include a strong background in marketing and sales, investor relations, and
interfacing all aspects of business development.
ITEM 10: EXECUTIVE COMPENSATION
- --------------------------------
The following table sets forth certain information concerning annual,
long term and other compensation received during the 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:
Name and Principal Fiscal Long Term
Position Year Salary Bonus Compensation All Other
- --------------------------------------------------- ------------ ---------
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
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.
- ------------------------------------------------
22
<PAGE>
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
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.
Name of Beneficial Owner Number of Shares Owned Percentage of Class Owned
- --------------------------------------------------------------------------------
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%
*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 one
of its officers shares of its common stock in cancellation of accrued and unpaid
salaries. The dollar balance represents overpayment of service fees at June
30, 1995.
Richard E. Floegel 4,583,333 $21,038
PART IV
-------
ITEM 13: EXHIBITS AND REPORTS ON FORM 8-K
- ------------------------------------------
Exhibits Description
23
<PAGE>
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 September 20, 1995 (6).
10.2 Consulting agreement between CSC and Robert Reed Rogers dated September
19, 1996 (6).
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.
6. Previously filed on the Report on Form 10-KSB/A dated January 31, 1997 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.
24
<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/ Thoams C. Hanscome Date: June 23, 1997
-----------------------
Thomas C. Hanscome,
Chief Executive Officer, and
President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Company
and in the capacities on the dates indicated
By /s/ Thomas C. Hanscome Date: June 23, 1997
-------------------------
Thomas C. Hanscome
Chairman of the Board
(Chief Executive Officer)
By /s/ John D. Hinterleitner Date: June 23, 1997
-------------------------
John D. Hinterleitner
Director, Treasurer and Secretary
(Chief Financial Officer)
By /s/Donald R. Levering Date: June 23, 1997
---------------------
Donald R. Levering
Director
25
<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
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets,
June 30, 1996 and 1995 2-3
Consolidated Statements of Operations
for the Years Ended June 30, 1996 and 1995 4
Consolidated Statements of Shareholders' Deficit
for the Years Ended June 30, 1996 and 1995 5-6
Consolidated Statements of Cash Flows
for the Years Ended June 30, 1996 and 1995 7
Notes to Financial Statements 8-12
</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 addition, as discussed in Note 4 to the financial
statements, the Company is a defendant in several lawsuits. Several of these
lawsuits are in the early stages of discovery or are being negotiated for
settlement. The ultimate outcome of these lawsuits cannot presently be
determined. Accordingly, no provision for any liabilities that may result upon
adjudication has been made in the accompanying financial statements.
In our opinion, except for the effects of such adjustments, if any, as might
have been determined to be necessary had we been able to examine evidence
regarding the records of the foreign subsidiary and determine the ultimate
outcome of the lawsuits, 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.
/s/ FARBER & HASS
- -----------------
Farber & Hass
Oxnard, California
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 $3,200,000.
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 lawsuits that are currently outstanding. Some
lawsuits are in the early stages of discovery, and management intends to
defend the Company's position should the lawsuits go to trial. Other
lawsuits are currently in negotiation for settlement. Although the ultimate
outcome of these suits cannot be ascertained at this time and liabilities
of indeterminate amounts may be imposed upon the Company, it is the opinion
of management, based on information currently available, that many of the
allegations are without merit and that the resolution of these suits will
not have a material adverse effect on the consolidated financial position,
results of operations or cash flows of the Company.
The Company has several judgements and claims that have been filed by
vendors and borrowers. Management has accrued all judgements and claims
and related interest which it believes are due as of June 30, 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
