UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to ________________
Commission file number 0-17020
Sensar Corporation
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(Exact name of registrant as specified in its charter)
Nevada 87-0429944
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
50 West Broadway, Suite 501, Salt Lake City, Utah 84101
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (801) 350-0587
Securities registered under section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
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Securities registered under section 12(g) of the Act:
Common Stock, Par Value $0.001
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes[X] No[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not 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-K or any
amendment to this Form 10-K. [ ]
As of March 27, 2000, there were 6,545,746 shares of the Issuer's
common stock, par value $0.001, issued and outstanding. The aggregate market
value of the Issuer's voting stock held by nonaffiliates of the Issuer was
approximately $360,000,000, computed at the closing quotation for the Issuer's
common stock of $60 as of March 27, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and
the part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document
is incorporated: (1) any annual report to security holders; (2) any proxy or
information statement; and (3) any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes. None.
<PAGE>
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TABLE OF CONTENTS
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Item Number and Caption Page
----------------------- ----
PART I
------
1. Business............................................................ 3
2. Properties.......................................................... 8
3. Legal Proceedings................................................... 8
4. Submission of Matters to a Vote of Security Holders................. 8
PART II
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5. Market for Registrant's Common Equity and Related Stockholder
Matters............................................................. 9
6. Selected Financial Data.............................................10
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations...............................................11
8. Financial Statements and Supplementary Data.........................14
9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure............................................14
PART III
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10. Directors and Executive Officers of the Registrant..................15
11. Executive Compensation..............................................17
12. Security Ownership of Certain Beneficial Owners and Management......22
13. Certain Relationships and Related Transactions......................23
PART IV
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14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....25
SIGNATURES...................................................................27
2
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PART I
ITEM 1. BUSINESS
FORWARD LOOKING STATEMENTS
This report on Form 10-K contains certain forward looking statements
and information relating to the Company and its proposed merger with
Net2Wireless Corporation. These forward looking statements are not based on
historical facts, but reflect the Company's current expectations concerning
future results and events. Such statements generally describe the objectives,
goals, and plans of the Company and are not intended to be accurate descriptions
of the future. The proposed merger with Net2Wireless Corporation is subject to a
number of conditions, including approval by the shareholders of both the Company
and Net2Wireless Corporation, the Company eliminating any liabilities it may
have other than up to $50,000 in current liabilities, and the satisfaction of a
number of standard closing conditions, that may or may not be met. The potential
products and services of Net2Wireless are still in the development stage and
have not yet been tested in a commercial setting. Consequently, the proposed
business of Net2Wireless has not advanced beyond research and development. The
proposed business and potential products and services of Net2Wireless are
subject to the substantial risks associated with new market introductions,
including the ability of Net2Wireless to successfully develop commercial
products based on its technology, the ability of Net2Wireless to address
technical and manufacturing problems in producing new products, favorable market
acceptance of any products produced, the ability of Net2Wireless to obtain a
price for its products and services sufficient for it to make a profit,
Net2Wireless' ability to enter into favorable strategic alliances, joint
ventures, or other collaborative arrangements with established industry
partners, the success of the marketing efforts of Net2Wireless, the ability of
Net2Wireless to successfully protect its intellectual property to prevent
competitors from benefiting from the technology, the ability of Net2Wireless to
compete with larger, more established entities, and the ability of Net2Wireless
to obtain the necessary financing to successfully complete its goals. In
addition, Net2Wireless proposes to conduct business and develop products for a
market that is only just emerging. There may not be significant consumer demand
for some or all of the proposed products and services of Net2Wireless
Corporation. One or more of the factors listed above, or other factors or
influences that may develop in the future or that may currently seem
inconsequential, may change the actual results of the Company significantly from
those described in the forward looking statements. The Company does not intend
to update these forward looking statements, except as may occur in the regular
course of its periodic reporting obligations.
OVERVIEW
Sensar Corporation (the "Company") was historically engaged in the
design, development, manufacturing, and marketing of analytical scientific
instrumentation. In November 1997, the board of directors, due in part to missed
product deadlines and significant ongoing operating losses, replaced the
existing executive management of the Company. Andrew C. Bebbington was retained
as the new chief executive officer of the Company and undertook an immediate
evaluation of all aspects of the Company's operations, including manufacturing,
research and development, sales and marketing approaches, product options,
personnel and management, contractual arrangements, and overall cost structure.
As a result of recommendations by Mr. Bebbington in December 1997, the board of
directors approved significant restructuring steps and certain changes in the
strategic direction of the Company.
3
<PAGE>
Goals and targets were then established for each of the remaining
business lines for 1998. Executive management continued to monitor each of the
technologies in the Company's portfolio, measure developments against budgeted
goals, and institute cost-cutting measures in order to reduce the substantial
losses being suffered by the Company at that time. Sales of the Company's
products did not meet budgeted expectations and, despite the cost-cutting
measures taken, the Company continued to suffer significant losses, although at
a reduced rate. As a result of these ongoing losses and the continuing decline
in the market price for the Company's common stock, the Company was unable to
attract outside financing on terms acceptable to it and was forced to consider
the sale of a portion of its assets to fund its cash requirements.
During 1998, new management had continued to invest in product
development in the acoustic instrumentation business, while at the same time
implementing cost-cutting measures and imposing operational discipline. As a
result, a significant improvement in the performance of the acoustics business
based on year-to-year comparisons was obtained. This improvement permitted the
Company to identify and negotiate an agreement with a purchaser of the acoustics
business. A definitive agreement concerning this transaction was signed November
30, 1998 and, following the approval of the stockholders at a special meeting
held March 18, 1999, was completed March 31, 1999. At about the same time, the
Company decided to terminate its development work involving its supercritical
fluid chromatography instruments. This minor line of business was sold to a
group of former employees, none of whom were members of executive management.
Shortly thereafter, in July 1999, the Company completed the sale of its real
property to the purchaser of the acoustic instrumentation business.
The Company used a portion of the proceeds from the sale of its
acoustic instrumentation business to retire the remaining 1998 Series A
Preferred Stock then outstanding. This preferred stock had a floating conversion
feature based on the trading price for the common stock that became
disadvantageous to the common stockholders as the Company's stock price
continued to decline. Some of the remaining proceeds of the sale of the acoustic
instrumentation business were used to attempt the finalization of the Company's
Jaguar mass spectrometer products.
During the end of 1998 and the early part of 1999, the trading price of
the Company's common stock continued to decline to well below the minimum price
required for continued listing on the Nasdaq National Market, which is $1.00 per
share. Consequently, at the March 18, 1999 stockholders meeting, the board of
directors proposed, and received stockholder approval for, a consolidation of
the issued and outstanding stock of the Company.
At the same time, the Company had scheduled a hearing with Nasdaq
concerning an earlier letter that had been sent to the Company indicating
Nasdaq's intent to terminate the listing of the common stock on the Nasdaq
National Market System. While it was hoped that the consolidation of the
outstanding stock would increase the stock price above the $1.00 minimum, the
Company was also temporarily below the $5 million public float requirement and
Nasdaq expressed concern about the Company's ability to continue to meet the net
tangible asset requirement for the Nasdaq National Market System in light of its
limited revenues and history of significant ongoing operating losses. At the
NASD hearing, the Company and the NASD negotiated a resolution pursuant to which
the Company's common stock would be moved from the Nasdaq National Market System
to the Nasdaq SmallCap System and would continue to be listed there provided
that the consolidation resulted in a market price in excess of the $1.00 per
share minimum.
4
<PAGE>
As a result of the array of business and financial issues confronting
the Company, it did not have access to traditional sources of financing
necessary to continue its development of its mass spectrometry and CrossCheck
technologies. Consequently, Mr. Bebbington and the board of directors began to
engage in conversations about his willingness to continue as the chief executive
officer of the Company. The outside members of the board of directors also
indicated their unwillingness to remain on the board in the absence of Mr.
Bebbington's continued participation.
At this time, Howard S. Landa met with Mr. Bebbington and proposed a
wholesale change in management and the board of directors. Mr. Landa was at that
time a senior partner of Kruse, Landa & Maycock, L.L.C., outside legal counsel
to the Company. As a result of this relationship, the Company retained the
services of an independent legal firm and convened a special meeting of the
board of directors to consider Mr. Landa's proposal.
On April 21, 1999, the then current directors of the Company resigned
and a newly elected board of directors was appointed. Concurrently, Mr. Landa
was appointed as the new chief executive officer of the Company and Mr.
Bebbington resigned, although he agreed to continue to provide transitional
services as a consultant to the Company. The new board of directors immediately
implemented a consolidation of the outstanding stock on the basis of one share
for each five shares previously outstanding, arranged for a $1 million equity
financing, and approved the execution of agreements to investigate the potential
acquisition of two start-up internet entities. While these investigations did
not lead to an acquisition, it was the beginning of the Company's aggressive
search for an acquisition that could potentially provide value to the
stockholders of the Company.
Under an agreement put in place while Mr. Bebbington was the chief
executive officer of the Company, the Company had granted distribution rights to
its Jaguar mass spectrometer products to a Japanese firm engaged in the
scientific instrumentation business. The obligation to market the instruments
was subject to the testing and acceptance of those instruments by the
distributor. Delivery of the initial instruments was delayed because of
manufacturing problems, and ultimately the Company agreed to deliver the first
six instruments by June 30, 1999. When the manufacturing team failed to deliver
any instruments acceptable to the distributor by that date, the board of
directors reclassified the Jaguar mass spectrometer operations as assets held
for sale and renewed the Company's efforts to negotiate a transaction with a
potential buyer of this technology. These efforts lead to a sale to a
privately-held corporation engaged in the scientific instrumentation business,
of the Jaguar mass spectrometer technology in August 1999. At the same time, the
Company abandoned the CrossCheck technology that it had held under a license
agreement, and returned this technology to the holder of the patent. The Company
also sold its residual interest in airport noise monitoring software. The
business based on this software had been sold to a third party in 1995.
Subsequent to the new management team assuming operational control in
April 1999, the Company actively began searching for an acquisition, focusing in
the high technology, internet arena. The Company reviewed a number of businesses
and business plans during this period. While some of the investigations lead to
letters of intent, and the Company did make two small minority interest
investments in other companies, none of the investigations and negotiations
resulted in the execution of a material agreement until the fall of 1999.
5
<PAGE>
In September 1999, the Company entered into negotiations and signed a
letter of intent to acquire a wireless communications technology that ultimately
led to the execution of an agreement with Net2Wireless Corporation
("Net2Wireless") on December 8, 1999, that was subsequently amended on January
4, 2000, and March 21, 2000 (the "Reorganization Agreement").
NET2WIRELESS CORPORATION
General
Net2Wireless is a privately-held Delaware corporation with a research
and development subsidiary located in Israel. Net2Wireless maintains a website
at www.net2w.com. Net2Wireless is developing technology which is intended to
enable and enhance a wide variety of wireless communication services. The goal
of Net2Wireless is to permit the following services to be provided to cellular
subscribers carrying wireless devices such as palm computers, personal digital
assistants, and cellular phones:
(a) browsing the internet through standard websites and
using standard browsers;
(b) transmission of live video over the 9600 bps wireless
link to the wireless device;
(c) providing instant messaging with full graphics
support;
(d) providing messaging services (e-mail, voice mail,
fax, etc.); and
(e) providing full graphics applications with network
based storage.
Net2Wireless currently has an installation at Partner Communications
Company, Ltd., the third largest cellular carrier in Israel, which is conducting
a beta-site test of the Net2Wireless products. Net2Wireless' products and
services are still in development, and there can be no assurance that
Net2Wireless will be successful in achieving its goals.
Net2Wireless recently completed a private placement for gross proceeds
of approximately $29 million to provide funding for its ongoing research and
development efforts and the expansion of its work force.
PROPOSED MERGER
The Reorganization Agreement provides for the merger of Net2Wireless
with and into the Company in exchange for the issuance of 18,295,060 shares of
common stock and the assumption of options and warrants to acquire 14,766,649
shares of common stock. Such warrants and options have a weighted average
exercise price of $2.03 per share. In addition, the Company will issue 1,000,000
shares to certain individuals involved in introducing the two entities.
Under the terms of the Reorganization Agreement, the Company agreed to
advance Net2Wireless up to $2 million prior to the merger to assist it in
meeting its ongoing development and growth expenses. The Company advanced
$500,000 of this amount to Net2Wireless in February 2000. Net2Wireless has
recently completed a private placement of its securities which resulted in gross
proceeds to it of approximately $29 million. The Company does not know if
Net2Wireless will request that the additional $1.5 million be advanced prior to
the merger, but it may do so.
6
<PAGE>
The Reorganization Agreement requires the Company to have a minimum
amount of cash and collectible notes receivable and no liabilities at closing,
other than current accounts payable not to exceed $50,000. In order to meet the
requirement with respect to the elimination of liabilities, the Company has
provided for the termination of its deferred compensation plan and the executive
employment agreement with Mr. Landa, the assumption of the lease to which it is
currently a party, and the indemnification of the Company by Mr. Landa with
respect to pending litigation. See "CERTAIN RELATIONSHIPS AND RELATED
TRNSACTIONS."
Additional shares of common stock may be issued to the Net2Wireless
stockholders in the event that the net cash held by the Company at the closing
of the merger, as defined in the Agreement, plus all amounts collected on the
note receivables held by the Company within 60 days of the due date of such
receivables, is less than $4.45 million. The number of additional shares to be
issued will be determined by dividing any shortfall by $1.86. These contingent
shares will be delivered to former Net2Wireless stockholders within 10 business
days of the final determination of the number of shares. At December 31, 1999,
the Company had $5.0 million of net cash under the definition used in the
Reorganization Agreement, assuming the full collection of all short-term
receivables. At March 27, 2000, the Company had cash of approximately $4,330,000
and the note receivable from Net2Wireless of $500,000 with current liabilities
of approximately $50,000. In addition, the Company had notes receivable from
other parties of approximately $1,370,000. The Company has not received any
notice that such receivables are subject to any claim or offset, and currently
expects these amounts to be collected in due course. Consequently, the Company
does not anticipate that additional shares will be issued under these
provisions.
On completion of the merger, the current shareholders of Net2Wireless
will hold approximately 65% of the outstanding common stock of the Company and
warrants and options that will permit them to increase their ownership to
approximately 77% of the Company on exercise. In addition the current directors
and officers of the Company will resign and nominees of Net2Wireless will be
appointed in their place. As a result, the current shareholders and management
of Net2Wireless will control the Company subsequent to the merger.
Completion of the merger is subject to the approval of the transaction
by the shareholders of both the Company and Net2Wireless and the satisfaction of
additional standard closing conditions. If the merger is completed, the
corporate domicile of the Company will be moved from Nevada to Delaware and its
name will be changed to "Net2Wireless Corporation."
Employees
The Company currently has two employees, Mr. Landa, the chief executive
officer of the Company, and his assistant.
7
<PAGE>
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ITEM 2. PROPERTIES
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The Company sold its administrative and manufacturing facilities in
Provo, Utah, to PCB during 1999 in connection with the sale of its acoustics
instrumentation business.
Until recently, the Company leased 1,692 square feet of space at 50
West Broadway, Suite 501, Salt Lake City, Utah 84101, for monthly lease payments
of $2,256 under the terms of a three-year lease. As of March 1, 2000, this lease
was assumed by Mr. Landa, the chief executive officer of the Company, as
required by the terms of the agreement with Net2Wireless. Mr. Landa has agreed
to permit the Company to continue to use the facilities on a rent-free basis
pending the closing of the proposed merger with Net2Wireless. See "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS."
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ITEM 3. LEGAL PROCEEDINGS
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On September 28, 1999, an action entitled Edgar Lee, et al. v. Sensar
Corporation was filed in the Fourth Judicial District Court in Utah County,
Utah, Civil No. 990403473. The action was brought by several former employees of
the Company, seeking the payment of a bonus based on the successful completion
of the sale of certain of the Company's assets, technologies, and/or businesses.
The Company does not believe the employees are entitled to such a bonus, has
filed a motion to dismiss a portion of the claims, and intends to vigorously
defend its position. Mr. Landa has agreed to indemnify the Company against all
future costs or liabilities associated with this litigation after March 1, 2000,
under the provisions of the indemnification agreement contemplated by the
Reorganization Agreement. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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During the three months ended December 31, 1999, the Company did not
hold a shareholders' meeting and no matters were submitted to a vote of the
security holders of the Company, through the solicitation of proxies or
otherwise.
8
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PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
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The Company's common stock is traded on the Nasdaq SmallCap Market
under the trading symbol "SCII." The following table sets forth high and low
closing sale prices for the Company's common stock as reported on Nasdaq for the
periods indicated. Such quotations do not include retail markups, markdowns,
commissions, or other adjustments. All amounts have been adjusted to give effect
to the 1:5 consolidation of the outstanding common stock of the Company
effective May 3, 1999 and the 2:1 forward split of the outstanding common stock
effective January 17, 2000.
The following table sets forth the approximate range of high and low
closing sale prices for the common stock of the Company during the periods
indicated.
Quarter Ended High Bid Low Bid
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March 31, 1998 $ 9.219 $ 5.781
June 30, 1998 $ 7.969 $ 4.375
September 30, 1998 $ 5.000 $ 1.094
December 31, 1998 $ 1.484 $ 0.625
March 31, 1999 $ 1.094 $ 0.703
June 30, 1999 $ 3.594 $ 0.859
September 30, 1999 $ 2.797 $ 1.500
December 31, 1999 $ 34.250 $ 2.094
On March 27, 2000, the last reported sales price for the Company's
common stock as reported by Nasdaq was $60.
On March 27, 2000, the Company had approximately 285 stockholders of
record.
The Company has not paid dividends with respect to its common stock.
There are no restrictions on the declaration or payment of dividends in the
articles of incorporation or bylaws of the Company or in any of its contractual
agreements, other than under the Reorganization Agreement for the period the
merger is pending. However, it is anticipated that any potential earnings of the
Company and, subsequent to the merger, the combined company, will be retained
for working capital and investment in the growth and expansion of business
operations. Consequently, it is not anticipated that the Company, before or
after the proposed merger, will pay dividends in the foreseeable future.
9
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ITEM 6. SELECTED FINANCIAL DATA
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CERTAIN FINANCIAL DATA
The following statement of operations and balance sheet data as of and
for the periods ended December 31, 1999, 1998, and 1997, 1996, and June 30, 1996
and 1995, were derived from the Consolidated Financial Statements of the
Company. In January 1997, the Company changed its fiscal year end from June 30
to December 31 effective December 31, 1996. The Consolidated Financial
Statements of the Company for the fiscal year ended December 31, 1999, 1998, and
1997, for the six months ended December 31, 1996, and for the fiscal years ended
June 30, 1996 and 1995, have been audited by independent certified public
accountants. The selected financial data below should be read in conjunction
with the Consolidated Financial Statements of the Company and the notes thereto
and "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS."
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
Year Ended December 31, December June 30,
----------------------------------------------- 31, -----------------------------
1999 1998 1997 1996 1996(2) 1995(3)
------------ ----------- ------------ ----------- ----------- ----------
Statement of Operations
Data(1):
<S> <C> <C> <C> <C> <C> <C>
Revenues: $ 147,944 $ 137,814 $ 140,870 $ 59,638 $ 12,320 $ 7,302
============ =========== ============ =========== =========== ==========
Income (loss) from
continuing operations $(11,995,158) $(1,221,025) $ (2,324,262) $ (326,242) $ (463,637) $ (510,863)
Income (loss) from
discontinued operations 22,528 (5,702,419) (12,493,549) (1,317,678) (1,242,611) 199,246
Gain on sale of
discontinued operations 3,268,250 - - - - -
------------ ----------- ------------ ----------- ----------- ----------
Net loss $(8,704,380) $(6,923,444) $(14,817,811) $(1,643,920) $(1,706,248) $ (311,617)
============ =========== ============ =========== =========== ==========
Basic earnings
(loss) per common
shares from
continuing operations $ (2.11) $ (0.51) $ (0.51) $ (0.08) $ (0.16) $ (0.21)
Basic earnings (loss)
per common share from
discontinued operations 0.58 (1.12) (2.71) (0.32) (0.38) 0.08
------------ ----------- ------------ ----------- ----------- ----------
Basic earnings
(loss) per common
share $ (1.53) $ (1.63) $ (3.22) $ (0.40) $ (0.54) $ (0.13)
============ =========== ============ =========== =========== ==========
Weighted average
common shares
outstanding 5,693,514 5,073,463 $ 4,603,080 4,164,328 3,255,489 2,440,397
Balance Sheet Data:
Working capital $ 5,034,089 $ 4,038,840 $ 6,784,305 $15,584,953 $15,737,295 $6,549,131
Total assets $ 5,568,839 $ 4,317,769 $ 7,104,476 $15,716,524 $16,032,158 $6,827,550
Long-term liabilities
and deferred gain $ 5,542,040 $ - $ - $ - $ 45,792 $ 134,354
Stockholders' equity
(deficit) $ (154,959) $ 4,049,572 $ 6,853,003 $15,591,513 $15,661,097 $6,415,511
Cash dividends declared
per common share $ - $ - $ - $ - $ - $ -
</TABLE>
(footnotes contained on following page)
10
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(1) During the year ended December 31, 1999, the Company discontinued the
operations of its analytical instrumentation business. The results of these
operations have been segregated from continuing operations for all periods
presented.
(2) Effective October 27, 1995, the Company acquired Sensar Instruments, Inc.
(formerly Sensar Corporation), in a transaction accounted for as a
purchase.
(3) During the year ended June 30, 1995, the Company discontinued the
operations of its airport noise monitoring business. The results of these
operations have been segregated from continuing operations for all periods
presented.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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The following discussion should be read in conjunction with the
consolidated financial statements and related notes contained herein.
OVERVIEW
During the year ended December 31, 1999, the Company completed the sale
or disposition of its various product lines and technologies. The principal
transactions were:
o The completion of the sale of the assets of the acoustic and
vibration product line to PCB Group, Inc. ("PCB") in March
1999;
o The sale of the Company's real estate to PCB in July 1999;
o The sale of the assets associated with the Jaguar mass
spectrometer product line to LECO Corporation in August 1999;
and
o The discontinuance of continued research and development with
respect to the CrossCheck technology in August 1999.
The results of operations and cash flows associated with the foregoing
have been accounted for and segregated as discontinued operations in the
accompanying consolidated financial statements. All periods have been restated
to reflect the treatment of these operations as discontinued.
In conjunction with the disposition of its historical operations, the
Company undertook a search for a suitable business or technology to acquire,
which led to the execution of an agreement with Net2Wireless Corporation on
December 8, 1999. The Company was able to negotiate the agreement with
Net2Wireless in part because of its strong liquidity position resulting from the
previous asset sales. At December 31, 1999, the Company had current assets of
$5,215,847, primarily consisting of cash and short-term notes receivable, and
current liabilities of $181,758. At March 27, 2000, the Company had current
assets of approximately $6,200,000 and current liabilities of approximately
$50,000.
11
<PAGE>
RESULTS OF OPERATIONS
Comparison of Years Ended December 31, 1999 and 1998
Revenues
With the disposition of the assets of its historical operations, the
Company's sole source of revenue from continuing operations was interest income
of $147,944 for 1999 and $137,814 for 1998 earned on temporary cash investments
and notes receivable.
Costs and Expenses
General and administrative expenses associated with continuing
operations increased from $708,890 for the year ended December 31, 1998, to
$893,416 for the year ended December 31, 1999. The increase was principally
related to increases of approximately $99,000 for legal fees and $27,000 in
travel costs associated primarily with the due diligence review of various
potential candidates for business transactions.
During the year ended December 31, 1999, the Company recorded non-cash
compensation related to stock options of $5,885,833. The principal element of
this charge, $5,618,740, relates to stock options to acquire 240,000 shares
granted to management that have a cashless exercise provision. Generally
accepted accounting principles require that compensation be recorded for stock
options with such provisions. The amount of compensation is equal to the change
in the stock price above the exercise price. Additionally, the Company has
recorded non-cash compensation expense during 1999 of $267,093 for the fair
value of stock options granted to certain non-employees to acquire an aggregate
of 270,000 shares of common stock.
During 1999, the Company also recorded a non-cash deferred compensation
expense of $5,342,040 for the accrual of amounts earned under a deferred
compensation plan established in 1999. This plan created an unfunded deferred
compensation pool based on specified percentages of the Company's net income and
increases in market capitalization. As of December 31, 1999, the entire amount
of the deferred compensation pool is attributable to the increase in market
capitalization of the Company. See "EXECUTIVE COMPENSATION: Deferred
Compensation Plan" and Note E to the Consolidated Financial Statements of the
Company for additional information about this plan.
The Company has also recorded a net credit of $31,663 for unusual items
during the year ended December 31, 1999. This credit principally consists of a
recovery of approximately $145,000 on notes receivable from the exercise of
stock options which were previously reserved, net of a termination benefit paid
to the former chief executive officer of $125,000.
12
<PAGE>
Comparison of Years Ended December 31, 1998 and 1997
Revenues
With the disposition of the assets of its historical operations, the
Company's sole source of revenue from continuing operations was interest income
of $137,814 for 1998 and $140,870 for 1997 earned on temporary cash investments
and notes receivable.
Costs and Expenses
General and administrative expenses associated with continuing
operations decreased from $1,081,168 for the year ended December 31, 1997, to
$708,890 for the year ended December 31, 1998. The decrease of $372,278 was
principally related to a reduction of approximately $408,000 for professional
services, consulting, and certain other outside service costs that resulted due
to a change in general corporate objectives from obtaining funding and seeking
to acquire technologies to internal research and development and the operation
of the Company's business.
The Company recorded unusual charges associated with continuing
operations of $649,949 for 1998 compared to $1,383,964 for 1997. In 1998, the
unusual charges were principally composed of (1) an allowance of approximately
$165,000 for a receivable from a former chief executive officer of the Company
for withholding taxes paid by the Company on his behalf, the collectibility of
which was then in doubt; and (2) an allowance of $400,000 against certain notes
from former executive officers arising from the exercise of stock options, the
collectibility of which was then uncertain due to the decline in the price of
the Company's stock. In 1997, the unusual items related to the termination costs
for former executive officers of the Company arising out of the restructuring of
the Company in November 1997 and paid to the former officers in the form of cash
and common stock.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company had total current assets of
$5,215,847, including cash and cash equivalents of $3,735,115. The Company had
total current liabilities of $181,758 at December 31, 1999, resulting in working
capital of $5,034,089.
The Company's primary source of cash for the year ended December 31,
1999, was the net cash provided by the sale of discontinued operations of
approximately $5.6 million. The Company's primary uses of cash for the year
ended December 31, 1999, was net cash used in operations of $1,089,815 and
$3,071,437 used to redeem the Company's remaining 1998 Series A Preferred Stock.
Management believes that the current cash balances are more than
sufficient to meet the existing commitments of the Company for the next fiscal
year.
YEAR 2000
With the sale or disposal of its historical product lines and
associated assets, the Company currently has no information systems, customers,
or suppliers on which it is dependent. The Company has obtained assurances from
its banking institution that it is Year 2000 compliant. Accordingly, the Company
expects no future costs to be incurred on Year 2000 issues.
13
<PAGE>
INFLATION AND ENVIRONMENTAL REGULATION
The Company's operations have not been, and in the near term are not
expected to be, materially affected by inflation or changing prices.
The Company does not believe that any recently enacted or presently
proposed environmental legislation will have a material adverse effect on its
results of operations.
--------------------------------------------------------------------------------
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
--------------------------------------------------------------------------------
The financial statements and supplementary data are set forth
immediately following the signature page.
--------------------------------------------------------------------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
--------------------------------------------------------------------------------
The Company and its current auditors have not disagreed on any items of
accounting treatment or financial disclosure.
14
<PAGE>
PART III
--------------------------------------------------------------------------------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------------------------------------
Set forth below is the name and age of each executive officer and
director of the Company, together with all positions and offices of the Company
held by each and the term of office and the period during which each has served:
Position and Director and/or
Name Age Office Held Executive Officer Since
---- --- ----------- -----------------------
Howard S. Landa 52 CEO and Chairman
of the Board April 21, 1999
Brian B. Lewis 52 Director April 21, 1999
Steven P. Strasser 50 Director April 21, 1999
Mickey Hale 52 Director May 5, 1999
A director's regular term is for a period of three years or until his
successor is duly elected and qualified. The terms of the board are staggered so
that one-third of the board is subject to election at each annual shareholders'
meeting. The current term of Howard S. Landa expires at the 2001 annual meeting;
the current terms of Brian B. Lewis, Steven P. Strasser, and Mickey Hale expire
at the 2002 annual meeting. On completion of the proposed merger with
Net2Wireless, the current officers and directors of the Company will resign in
favor of nominees of Net2Wireless.
There is no family relationship among the current directors and
executive officers. The following sets forth brief biographical information for
each director and executive officer of the Company.
Howard S. Landa, age 52, was appointed as a director and chairman of
the board of the Company on April 21, 1999. Mr. Landa was a founder of Kruse,
Landa & Maycock, L.L.C. in 1978. Mr. Landa spent his professional career
specializing in corporate acquisitions, taxation, the infusion of new capital,
and management advice. Mr. Landa has taken a leave of absence from his former
firm in order to dedicate his full business time to the Company. Mr. Landa
received his juris doctorate from Hastings College of Law, University of
California, in 1973 and an LL.M. in taxation from New York University in 1974.
Brian B. Lewis, age 52, was appointed as a director of the Company on
April 21, 1999. Mr. Lewis is an attorney and a founder of the law offices of
Brian B. Lewis. Mr. Lewis has extensive experience in advising start-up,
emerging, financially distressed, and growth companies. Mr. Lewis has previous
management experience serving as interim chief executive officer and general
counsel to Honey Hill Farms, Inc., in 1991-1992 and interim president and
general counsel of Ahead Technology, Inc., in 1989-1991. Mr. Lewis currently
serves on the board of directors of Plato Labs, Inc., Surface Solutions Products
Group, Inc., and Florentine Restaurant Group, Inc. Mr. Lewis received his
bachelor of science
15
<PAGE>
degree in industrial management from San Jose State University in 1969 and his
juris doctorate from Hastings College of Law, University of California, in 1973.
Steven P. Strasser, age 50, was appointed as a director of the Company
on April 21, 1999. Since 1987, Mr. Strasser has been engaged in stock and
venture capital investments on his own behalf. Mr. Strasser served as
co-chairman of Modula Computer from 1980 to 1987. Prior to that time, Mr.
Strasser was involved in investment banking first with Edwards & Handley and
then with J. Franklin Investments. Mr. Strasser received his bachelor of science
degree in economics from the University of Utah in 1970 and a masters of
business administration from Columbia University in 1972.
Mickey Hale, age 52, was appointed as a director of the Company on May
5, 1999. Ms. Hale has been president and chief executive officer of Imperial
Development Corporation and related travel services and real estate entities
since 1990. Ms. Hale was an investment advisor at Shearson Lehman Brothers from
1987-1990 and served in the same capacity at Paine Webber from 1980-1987.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's directors and executive officers, and persons who own
more than 10% of a registered class of the Company's equity securities to file
with the Securities and Exchange Commission initial reports of ownership and
reports of changes in ownership of equity securities of the Company. Officers,
directors, and greater than 10% shareholders are required to furnish the Company
with copies of all Section 16(a) forms they file.
Other than the report on Form 4 of Jeffrey Cohen, formerly the chief
operating officer of the Company, for the month of November, 1999, which was
filed in mid-December, 1999, the Company believes that all reports required by
Section 16(a) for transactions in 1999 have been timely filed.
16
<PAGE>
--------------------------------------------------------------------------------
ITEM 11. EXECUTIVE COMPENSATION
--------------------------------------------------------------------------------
The following table sets forth the annual and long-term compensation
awarded to, earned by, or paid to the chief executive officer and the other
executive officer of the Company who received compensation in excess of $100,000
for the periods indicated.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
-----------------------------------
Annual Compensation Awards Payouts
-------------------------------- ------------------------- --------- ---------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Securities
Annual Restricted Underlying All Other
Compen- Stock Options/ LTIP Compen-
Name and Salary Bonus sation(1) Award(s) SARs Payouts sation
Principal Position Year ($) ($) ($) ($) (#) ($) ($)
---------------------------- ------------ ---------- ---------- ---------- ----------- ------------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Howard S. Landa, CEO 12/31/99(2) $66,585 $0 $0 $0 1,000,000(10) $0 $3,908,810(8)
and Chairman of the
Board
Andrew C. Bebbington, 12/31/99(3) $175,631 $50,000 $2,316 $0 750,000(3) $0 $125,000(9)
Former CEO and 12/31/98 $250,000 $100,000 $6,569 $0 400,000(7) $0 $53,303(6)
Chairman of the Board 12/31/97(4) $31,250 $0 $575 $0 400,000(7) $0 $0
Jeffrey S. Cohen, 12/31/99 $83,060 $30,000 $6,948 $0 40,000 $0 $70,000(9)
Former Chief $29,238(6)
Operating Officer and 12/31/98(5) $128,333 $45,000 $6,001 $0 120,000 $0 $14,577(6)
Director
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-------------------------
(1) These amounts reflect the benefit to the named executive officers of
amounts paid by the Company for health, disability, and life insurance.
(2) Mr. Landa accepted the positions of chief executive officer and a member of
the board of directors effective April 21, 1999. Mr. Landa was not
previously an employee of the Company. The foregoing table reflects amounts
paid, awarded, or accrued for Mr. Landa from April 21, 1999, to December
31, 1999.
(3) Mr. Bebbington resigned his position with the Company April 21, 1999. The
amounts shown for 1999 include payments of $98,714 made to Mr. Bebbington
as a consultant subsequent to his resignation and options to acquire
650,000 shares of common stock granted to Mr. Bebbington in November 1999.
(4) Mr. Bebbington accepted the positions of chief executive officer and a
member of the board of directors effective November 17, 1997. Mr.
Bebbington was not previously an employee of the Company. The 1997 amounts
in the foregoing table reflect amounts paid, awarded, or accrued for Mr.
Bebbington from November 17, 1997, to December 31, 1997.
(5) Mr. Cohen accepted the positions of chief operating officer and a member of
the board of directors effective February 2, 1998. Mr. Cohen was not
previously an employee of the Company. The 1998 amounts in the foregoing
table reflect amounts paid, awarded, or accrued for Mr. Cohen from February
2, 1998, to December 31, 1998.
(6) These amounts reflect amounts paid by the Company to, or on behalf of, the
named executive officers for relocation costs in conjunction with their
employment by the Company.
(7) In 1997, as part of his employment by the Company, Mr. Bebbington was
granted an option to acquire 400,000 shares of common stock. In March 1998,
the option granted in 1997 was terminated in favor of an option to acquire
400,000 shares of common stock with modified provisions for vesting and
exercise prices.
17
<PAGE>
(8) This amount represents Mr. Landa's share of the deferred compensation pool
accrued for 1999. As described in Note (10) below, Mr. Landa will forfeit
his interest in this plan if the 800,000 options subject to stockholder
approval are approved.
(9) This amount represents severance payments made to these former officers.
(10) Of these options granted, 800,000 are subject to stockholder approval. If
approved by the stockholders, Mr. Landa has agreed to forfeit his interest
in the deferred compensation plan described in Note (8) above.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth information respecting all individual
grants of options made during the last completed fiscal year to the named
executive officers of the Company.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g)
% of Total
Number of Options/SARs
Securities Granted to
Underlying Employees Exercise or
Options/SARs During Base Price Expiration
Name Granted (#) Fiscal Year ($/share) Date 5%($) 10%($) 0%
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Howard S. Landa 1,000,000 55.9% (1) (1) $1,831,188 $ 2,235,000 $1,100,000
Andrew C. Bebbington 750,000 41.9% (3) (3) $1,431,961 $ 1,732,969 $1,031,250
Jeffrey S. Cohen 40,000 2.2% (2) (2) $ 35,763 $ 53,100 $ 0
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-------------------------
(1) Options to acquire 200,000 shares of common stock expire April 27, 2002,
and are 50% exercisable at $1.50 per share and 50% exercisable at $2.50 per
share. The remaining options to acquire 800,000 shares are exercisable at
$2.00 per share, expire November 16, 2001, and are subject to shareholder
approval.
(2) These options to acquire 40,000 shares of common stock have been exercised,
but originally would have expired April 27, 2002. These options were 50%
exercisable at $1.50 per share and 50% exercisable at $2.50 per share.
(3) Options to acquire 100,000 and 650,000 shares of common stock were granted
in April and November 1999, respectively, in conjunction with Mr.
Bebbington acting as a consultant to the Company. The options to acquire
100,000 shares are 50% exercisable at $1.50 per share (exercised in 1999)
and 50% exercisable at $2.50 per share (expire April 27, 2002). The options
to acquire 650,000 shares are exercisable at $2.00 per share, expire
November 16, 2001, and are subject to shareholder approval.
18
<PAGE>
The following table sets forth the information concerning the options
exercised by the named executive officer during the year ended December 31,
1999, and the value of unexercised options as of December 31, 1999.
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARs at
FY End (#) FY End ($)
Shares Acquired Exercisable/ Exercisable/
Name on Exercise (#) Value Realized ($) Unexercisable Unexercisable
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Howard S. Landa 0 $0 200,000/800,000 $5,550,000/$22,200,000
Andrew C. Bebbington 50,000 $518,748 50,000/650,000 $1,362,500/$18,037,500
Jeffrey S. Cohen 40,000 $68,750 0/0 $0/$0
</TABLE>
EXECUTIVE EMPLOYMENT AGREEMENTS
The Company has an employment contract with Howard S. Landa with an
initial term through December 31, 2002, that provides for monthly compensation
of $8,000. This employment agreement will terminate on completion of the
proposed merger with Net2Wireless. The Company does not have an employment
agreement with any other person.
DEFERRED COMPENSATION PLAN
The Company adopted a deferred compensation plan on June 24, 1999, when
the strategy to identify potential acquisitions was being implemented. Under the
terms of the plan, Mr. Landa has a 30% interest in the compensation pool, the
outside directors were each granted a 3% interest, and consultants to the
Company were granted a 2% interest.
The deferred compensation pool consists of two components: (a) an
increasing percentage of 3% to 7-1/2% of the net income of the Company
subsequent to March 31, 1999, in excess of $2 million, excluding gains on the
sale of the technologies then held by the Company and excluding compensation
charges related to the granting of options, but including 75% of any net
unrealized gain on investments made by the Company in marketable securities
subsequent to March 31, 1999; and (b) an amount equal to 7-1/2% of any increase
in the market capitalization of the Company above $13.4 million that is in
excess of 150% of the increase in the Russell 2000 Index over the same period.
The maximum amount permitted to be included in the compensation pool under these
two components is $25 million and $50 million, respectively. The deferred
compensation pool is fixed at December 31, 2002, or, if sooner, on any change of
control, such as the proposed merger with Net2Wireless. In the event of a change
of control, the deferred compensation pool may not be less than $5 million. The
pool is required to be paid in cash unless payment in stock of the Company has
been approved by the shareholders, which has not occurred.
19
<PAGE>
While the Company has not realized income to date sufficient to affect
the compensation pool, the increase in market capitalization of the Company as
of March 27, 2000, giving effect to the proposed merger, would result in a
compensation pool in excess of the $50 million limitation provided by the terms
of the deferred compensation plan. Under the terms of the Reorganization
Agreement with Net2Wireless, the Company is obligated to eliminate the cash
liability associated with the deferred compensation plan as a condition to the
closing of the proposed merger. Each of the holders of interests in the deferred
compensation plan has agreed to relinquish their interest on stockholder
approval of options granted to them by the board of directors. See "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS."
COMPENSATION OF DIRECTORS
The Company compensates its outside directors for service on the board
of directors by payment of $1,000 for each board meeting attended and
reimbursement of expenses incurred in attending board meetings. The Company does
not separately compensate its board members who are also employees of the
Company for their service on the board. Each of the members of the board
received an option to acquire 200,000 shares of stock at a weighted average
exercise price of $2.00 per share at the time they became a director. In
addition, each of the non-executive directors were awarded an option to acquire
50,000 shares of stock at an exercise price of $2.00 in November 1999. Each of
the three non-executive directors holds a 3% interest in the Company's deferred
compensation plan. These individuals have agreed to waive their rights in the
deferred compensation plan if the options previously granted to them are
approved by the shareholders of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
The Company does not have a compensation committee. The entire board,
other than the particular individual executive officer involved, participates in
the setting of compensation for senior management.
Report on Executive Compensation
Management compensation is overseen by the board of directors of the
Company, which consists of one member of senior management, Howard S. Landa, and
three outside directors who are not employees of the Company.
Compensation Philosophy. The board of directors recognizes the need to
attract and retain qualified executives with appropriate experience. During
1999, the Company was seeking to sell its existing technologies and identify a
suitable acquisition which had the potential for increasing stockholder value.
The compensation package reflected this challenging environment by establishing
a low base-line salary for the chief executive officer and adopting a deferred
compensation plan with benefits tied to the achievement of pre-determined profit
targets and increases in stockholder value measured by the market capitalization
of the Company.
Chief Executive Compensation. The Company has entered into an
employment contract with Mr. Landa with an initial term through December 31,
2002, providing for annual compensation of $96,000.
20
<PAGE>
Deferred Compensation Pool and Stock Options. Mr. Landa was granted a
30% interest in the Company's deferred compensation plan. This plan provides for
compensation based on Company earnings subsequent to March 31, 1999, in excess
of $2 million dollars and increases in the market capitalization of the Company
in excess of 150% of the increase in the Russell 2000 Index.
Options to acquire 1,000,000 shares of common stock have been granted
to Mr. Landa at exercise prices of $1.50 for 100,000 shares, $2.50 for 100,000
shares and $2.00 for 800,000 shares. 800,000 of these options are subject to
shareholder approval. A portion of these options were granted to Mr. Landa in
exchange for his agreement to relinquish his interest in the deferred
compensation pool on stockholder approval of the options.
Review of Performance. Mr. Landa joined the Company with the goal of
seeking a suitable acquisition and increasing stockholder value. The board of
directors believes the compensation of the chief executive officer is fair and
reasonable for both the officer and the shareholders of the Company.
Board of Directors:
Howard S. Landa
Brian B. Lewis
Steven P. Strasser
Mickey Hale
21
<PAGE>
--------------------------------------------------------------------------------
ITEM 12. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------------------------
The table below sets forth information as to each person owning of
record or who was known by the Company to own beneficially more than 5% of the
common stock of issued and outstanding stock as of March 27, 2000, and
information as to the ownership of the Company's common stock by each of its
directors and by the directors and executive officers as a group. Except as
otherwise indicated, all shares are owned directly, and the persons named in the
table have sole voting and investment power with respect to shares shown as
beneficially owned by them.
<TABLE>
<CAPTION>
Name and Address Nature of Number of
of Beneficial Owners(1) Ownership Shares Owned Percent(2)
----------------------------------------- -------------------- ------------------ -----------
Principal Stockholder
---------------------
<S> <C> <C> <C>
S.A.C. Capital Advisors(3) Common Stock 443,600 6.8%
Directors
---------
Howard S. Landa Common Stock(4) 56,076 0.9%
Options(5) 1,000,000 13.3%
------------------
Total 1,056,076 14.0%
Brian B. Lewis Common Stock(6) 9,000 0.1%
Options(7) 250,000 3.7%
------------------
Total 259,000 3.8%
Steven P. Strasser Common Stock 12,500 0.2%
Options(7) 250,000 3.7%
------------------
------------------
Total 262,500 3.9%
Mickey Hale Common Stock 16,700 0.3%
Options(7) 250,000 3.7%
------------------
------------------
Total 266,700 3.9%
All Executive Officers and Common Stock 94,276 1.4%
Directors as a Group (four persons) Options 1,750,000 21.1%
------------------
Total 1,844,276 22.2%
</TABLE>
-------------------------
(1) Except as otherwise indicated, to the best knowledge of the Company, all
stock is owned beneficially and of record by the indicated person, and each
shareholder has sole voting and investment power.
(2) The percentages shown are based on 6,545,746 shares of common stock of the
Company issued and outstanding as of March 27, 2000. The percentages shown
for options assume the exercise of all options held solely by that
individual and a corresponding increase in the issued and outstanding
common stock. The percentage shown for total holdings assumes the exercise
of all options held by the individual and a corresponding increase in the
issued and outstanding common stock.
(3) These shares are held jointly with S.A.C. Capital Associates, LLC, and
Steven A. Cohen.
22
<PAGE>
(4) These shares are held by the spouse and children of Mr. Landa and a limited
liability company in which Mr. Landa is a minority owner. Mr. Landa denies
direct beneficial ownership and control of these shares.
(5) Options to acquire 800,000 shares have been approved by the board of
directors, but are subject to the further approval of the shareholders of
the Company.
(6) These shares are held on behalf of the children of Mr. Lewis.
(7) These options are subject to the further approval of the shareholders of
the Company.
--------------------------------------------------------------------------------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------------------------------------
In connection with the change of management of the Company in April,
1999, Andrew C. Bebbington, the former chief executive officer, resigned. Mr.
Bebbington and Jeffrey S. Cohen, the then chief operating officer, agreed to
terminate their former employment agreements in exchange for cash payments and
in the case of Mr. Bebbington, a consulting agreement, and in the case of Mr.
Cohen, a new employment agreement. Under the terms of the consulting agreement,
Mr. Bebbington was retained as the chief consultant of the Company through
December 31, 1999, at a rate of $10,000 per month. Mr. Cohen continued to
provide services as chief operating officer through December 31, 1999, also at a
rate of $10,000 per month, although the Company was reimbursed for one-half of
this cost by PCB because Mr. Cohen also provided transitional services to it.
Mr. Bebbington received an initial cash payment of $125,000 and a bonus at
December 31, 1999, of $50,000. Mr. Cohen received an initial cash payment of
$70,000 and a bonus at December 31, 1999, of $30,000. Mr. Bebbington has
continued as a consultant to the Company subsequent to December 31, 1999.
The current chief executive officer and all members of the board of
directors received options when they were appointed in April and May 1999. Each
of these individuals received additional options in November, 1999. In addition,
each of them is a beneficiary of the deferred compensation plan adopted by the
Company in June, 1999. See "EXECUTIVE COMPENSATION."
The Company has entered into an indemnification agreement with Howard
S. Landa. Under that agreement, Mr. Landa has agreed to indemnify the Company
for any costs arising out of the litigation, Edgar Lee, et al. v. Sensar
Corporation, subsequent to March 1, 2000, including costs of defense and the
payment of any settlement or judgment. Under the terms of the indemnification
agreement, the Company has agreed to transfer to Mr. Landa the assets held by
the Company's subsidiary, Eagle Lake Ventures, Inc., including the right to use
that name. These assets had a book value of $352,992 at December 31, 1999, and
include two minority investments in unrelated companies, with a total combined
cost to the Company of $325,000. In addition, Mr. Landa agreed to assume the
lease for the office space located at 50 West Broadway, Suite 501, Salt Lake
City, Utah. Mr. Landa will receive miscellaneous office furniture and other
fixed assets located at that office. Finally, Mr. Landa has agreed to make any
space that the Company would like to have at the Salt Lake City office available
prior to the merger at no charge and thereafter, for a period of one year
subsequent to the closing of the merger, at a cost of $1.00 per month. This
agreement was approved by the board of directors of the Company but was not
negotiated at arms-length. Because of the contingent nature of the litigation
and the inability of the parties to currently predict the outcome, it is
uncertain what the cost would have been to the Company to obtain similar
benefits from an unrelated third-party.
23
<PAGE>
In addition to the indemnification agreement, Mr. Landa agreed to
terminate the unexpired term of his employment agreement with the Company, to
provide 100 hours of transitional services without charge to the Company and to
forego his 30% interest in the compensation pool under the terms of a deferred
compensation plan approved by the board of directors of the Company in June,
1999. The 41% interest granted to Mr. Landa and others had a value of $5,342,040
as of December 31, 1999, as reflected on the balance sheet of the Company. As of
March 27, 2000, this pool, assuming the completion of the proposed merger with
Net2Wireless, would exceed the $50 million limitation set forth in the plan. On
November 16, 1999, Mr. Landa was granted an option to acquire 800,000 shares of
stock at $2.00 per share. The termination of Mr. Landa's interest in the
deferred compensation plan is contingent upon the approval by the stockholders
of this option.
Each of the directors, other than Mr. Landa, received an option to
acquire 50,000 shares of common stock at an exercise price of $2.00 per share on
November 16, 1999. Each of the directors has agreed to forgo their 3% interest
in the deferred compensation plan, subject only to the approval by the
stockholders of these options and the options for 200,000 shares that were
granted at the time that each of these individuals became a member of the board
of directors in April and May, 1999.
24
<PAGE>
PART IV
--------------------------------------------------------------------------------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
--------------------------------------------------------------------------------
FINANCIAL STATEMENTS AND SCHEDULES
The financial statements, including the index to the financial
statements, are included immediately following the signatures to this report.
<TABLE>
<CAPTION>
EXHIBITS
SEC
Exhibit Reference
No. No. Title of Document Location
--- --- ----------------- --------
<S> <C> <C> <C>
1 (3) Articles of Incorporation, as amended Exhibit to report on
November 3, 1987 Form 10-K for the year
ended June 30, 1988*
2 (3) Certificate of Amendment to the Exhibit to report on
Articles of Incorporation Form 10-K for the year
filed July 3, 1989 ended June 30, 1989*
3 (3) Designation of Rights, Privileges, and Registration Statement
Preferences of 1995 Series Preferred Stock filed on Form SB-2,
Exhibit 3, SEC File
No. 33-59963*
4 (3) Designation of Rights, Privileges, and Exhibit to report on
Preferences of 1998 Series A Preferred Stock Form 8-K dated
February 13, 1998*
5 (3) Bylaws Registration Statement
filed on Form S-18,
Exhibit 5, SEC File
No. 33-3365-D*
6 (10) Agreement by and among Sensar Exhibit to report on
Corporation and Net2Wireless, Inc., Form 10-K for the year
dated December 8, 1999 ended December 31, 1999*
7 (10) First Amendment to Agreement by and Exhibit to report on
between Sensar Corporation and Form 10-K for the year
Net2Wireless, Inc., dated January 4, 2000 ended December 31, 1999*
8 (10) Second Amendment to Agreement by and Exhibit to report on
between Sensar Corporation and Form 10-K for the year
Net2Wireless Corporation (formerly ended December 31, 1999*
Net2Wireless, Inc.), dated March 21, 2000
25
<PAGE>
<CAPTION>
SEC
Exhibit Reference
No. No. Title of Document Location
--- --- ----------------- --------
<S> <C> <C> <C>
9 (10) Executive Employment Agreement of Exhibit to report on
Howard S. Landa effective Form 10-Q for the
April 22, 1999 quarter ended
June 30, 1999*
10 (10) Deferred Compensation Plan Exhibit to report on
Adopted by the Board of Directors Form 10-K for the year
Effective May 1, 1999 ended December 31, 1999*
11 (10) 1997 Stock Option and Award Plan Exhibit to report on
Form 10-Q for the
quarter ended
March 31, 1997*
12 (10) Asset Purchase Agreement by and among Exhibit "A" to Proxy
PCB Group, Inc., Beehive Acquisition Corp., Statement dated
LarsonoDavis Incorporated, and LarsonoDavis February 16, 1999*
Laboratories, dated November 30, 1998, and Exhibit to report
as amended February 16, 1999, and on Form 10-K for the
March 31, 1999 year ended
December 31, 1998*
13 (10) Asset Purchase Agreement between Exhibit to report on
Sensar Instruments, Inc., Sensar Form 8-K dated
Corporation, and LECO Corporation, August 19, 1999*
dated August 19, 1999
14 (10) Form of Market Stand Off and Exhibit to report on
Redemption Agreement by and between Form 10-K for the
LarsonoDavis Incorporated and Investors year ended
of 1998 Series A Preferred Stock, December 31, 1998*
dated January, 1999
15 (21) Subsidiaries of LarsonoDavis Incorporated Exhibit to report on
Form 10-KSB for the
year ended
June 30, 1996*
16 (23) Consent of Grant Thornton LLP This Filing
17 (27) Financial Data Schedule Exhibit to report on
Form 10-K for the year
ended December 31, 1999*
----------------------
</TABLE>
*Incorporated by reference
REPORTS ON FORM 8-K
During the last quarter of the fiscal year ended December 31, 1999, the
Company filed three reports on Form 8-K, dated October 7, 1999, October 12,
1999, and December 14, 1999. Subsequent to December 31, 1999, the Company has
filed three reports on Form 8-K, dated January 4, 2000, January 5, 2000, and
March 16, 2000, respectively.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Company has caused this report to be
signed on its behalf by the undersigned, hereunto duly authorized.
SENSAR CORPORATION
Dated: September 29, 2000 By /s/ Howard S. Landa
----------------------
Howard S. Landa, CEO and Chairman
of the Board (Chief Executive
Officer and Principal Financial
and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Company and in the capacities and on the dates indicated:
Dated: September 29, 2000 By /s/ Howard S. Landa
----------------------
Howard S. Landa, Director
Dated: September 29, 2000 By /s/ Brian B. Lewis
---------------------
Brian B. Lewis, Director
Dated: September 29, 2000 By /s/ Steven P. Strasser
-------------------------
Steven P. Strasser, Director
Dated: September 29, 2000 By /s/ Mickey Hale
------------------
Mickey Hale, Director
27
<PAGE>
SENSAR CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Consolidated Financial Statements:
Report of Grant Thornton LLP, Independent Certified Public Accountants on
the December 31, 1999, 1998 and 1997 financial statements F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-3
Consolidated Statements of Operations and Comprehensive Loss
for the Years Ended December 31, 1999, 1998 and 1997 F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the Years Ended December 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997 F-7
Notes to Consolidated Financial Statements F-9
Financial Statement Schedules:
All financial statement schedules are omitted because they are not applicable or
because the required information is contained in the Consolidated Financial
Statements or the Notes thereto.
<PAGE F-1>
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Sensar Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of Sensar
Corporation and Subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations and comprehensive loss, stockholders'
equity (deficit), and cash flows for each of the three years in the period ended
December 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Sensar Corporation
and Subsidiaries as of December 31, 1999 and 1998, and the consolidated results
of their operations and their consolidated cash flows each of the three years in
the period ended December 31, 1999, in conformity with generally accepted
accounting principles.
/s/ Grant Thornton LLP
Grant Thornton LLP
Salt Lake City, Utah
January 21, 2000 (except for Notes
K and N, as to which the date is
March 23, 2000)
<PAGE F-2>
<TABLE>
<CAPTION>
Sensar Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
-------------------------
1999 1998
------------- ----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 3,735,115 $ 694,959
Notes receivable (Note B) 1,455,134 120,000
Other current assets 25,598 609
Net assets of discontinued operations (Note B) - 3,491,469
------------- ----------
Total current assets 5,215,847 4,307,037
OFFICE EQUIPMENT AND FURNISHINGS,
net of accumulated depreciation 27,992 10,732
INVESTMENTS (Note D) 325,000 -
------------- ----------
$ 5,568,839 $4,317,769
============= ==========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
December 31,
-------------------------
1999 1998
------------- ----------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 31,438 $ 125,742
Accrued liabilities 150,320 142,455
------------ ------------
Total current liabilities 181,758 268,197
LONG-TERM LIABILITIES AND DEFERRED GAIN
Deferred compensation (Note E) 5,342,040 -
Deferred gain 200,000 -
------------ ------------
Total liabilities and deferred gain 5,723,798 268,197
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes C, E and K) - -
STOCKHOLDERS' EQUITY (DEFICIT)
(Notes C, G, H, J and N)
Preferred stock, $.001 par value; authorized
10,000,000 shares; issued and outstanding
zero shares at December 31, 1999 and
3,039.95 shares at December 31, 1998 - 3
Common stock, $.001 par value; authorized
290,000,000 shares; issued and outstanding
6,326,038 shares at December 31, 1999 and
5,228,366 shares at December 31, 1998 6,326 5,228
Additional paid-in capital 34,850,817 30,701,333
Accumulated deficit (35,012,102) (26,282,308)
Notes receivable from exercise of options - (374,684)
------------ ------------
Total stockholders' equity (deficit) (154,959) 4,049,572
------------- ------------
$ 5,568,839 $ 4,317,769
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE F-3>
<TABLE>
<CAPTION>
Sensar Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
Year ended December 31,
------------------------------------------
1999 1998 1997
------------ ----------- -------------
<S> <C> <C> <C>
Revenues
Interest income $ 147,944 $ 137,814 $ 140,870
------------ ----------- ------------
Costs and expenses
General and administrative 893,416 708,890 1,081,168
Compensation expense for stock options (Note J) 5,885,833 - -
Deferred compensation expense (Note E) 5,342,040 - -
Unusual charges (credits), net (Note M) (31,663) 649,949 1,383,964
Interest expense 31,811 - -
Other 21,665 - -
------------ ----------- ------------
12,143,102 1,358,839 2,465,132
------------ ----------- ------------
Loss from continuing operations
before income taxes (11,995,158) (1,221,025) (2,324,262)
Income taxes (Note F) - - -
------------ ----------- ------------
Loss from continuing operations (11,995,158) (1,221,025) (2,324,262)
Gain on sale of discontinued operations (Note B) 3,268,250 - -
Income (loss) from discontinued operations (Note B) 22,528 (5,702,419) (12,493,549)
------------ ----------- ------------
Net loss (8,704,380) (6,923,444) (14,817,811)
Other comprehensive income - foreign
currency translation adjustments - (64,512) (15,848)
------------ ----------- ------------
Comprehensive loss $ (8,704,380) $(6,987,956) $(14,833,659)
============ =========== ============
Loss per common share (Note I)
Continuing operations
Basic and diluted $ (2.11) $ (0.51) $ (0.51)
Discontinued operations
Basic and diluted $ 0.58 $ (1.12) $ (2.71)
Net loss
Basic and diluted $ (1.53) $ (1.63) $ (3.22)
Loss from continuing operations applicable
to common stock $(12,020,572) $(2,567,588) $ (2,339,262)
Weighted average common and
common equivalent shares outstanding
Basic and diluted 5,693,514 5,073,463 4,603,080
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE F-4>
<TABLE>
<CAPTION>
Sensar Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years ended December 31, 1999, 1998 and 1997
Preferred stock Common stock Additional
------------------------ ------------------------- paid-in Accumulated
Shares Amount Shares Amount capital deficit
---------- ---------- ---------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balances at
January 1, 1997 200,000 $ 200 4,287,116 $ 4,287 $20,005,806 $ (4,418,780)
Shares issued for services
rendered (Note H) - - 21,940 22 262,137 -
Shares issued upon exercise
of options (Note J) - - 87,052 87 115,538 -
Shares surrendered in payment
of advance (Note H) - - (696) (1) (9,999) -
Shares purchased under
employee stock purchase
plan (Note J) - - 6,163 6 83,995 -
Shares issued upon exercise
of warrants (Note J) - - 345,045 345 4,497,034 -
Shares issued to former
executives (Note J) - - 80,000 80 1,149,920 -
Conversion of preferred
stock (Note G) (200,000) (200) 23,537 24 176 -
Adjustment for translation
of foreign currency - - - - - -
Preferred dividends - - - - - (15,000)
Net loss for the year - - - - - (14,817,811)
---------- ------ ---------- ---------- ---------- -----------
Balances at
December 31, 1997 - - 4,850,157 4,850 26,104,607 (19,251,591)
Shares issued for services
rendered (Note H) - - 19,499 19 148,294 -
Shares issued upon exercise
of options (Note J) - - 110,546 111 726,079 -
Shares purchased under
employee stock purchase
plan (Note J) - - 29,273 29 81,143 -
Shares issued upon exercise
of warrants (Note J) - - 29,634 30 359,794 -
Shares issued in private
placement (Note G) 3,500.00 3 - - 3,281,605 -
Conversion of preferred
stock (Note G) (460.05) - 189,257 189 (189) -
Collection of and allowance
on notes receivable from
exercise of options
(Note J) - - - - - -
Adjustment for translation
of foreign currency - - - - - -
Preferred dividends - - - - - (107,273)
Net loss for the year - - - - - (6,923,444)
---------- ------ ---------- ---------- ---------- -----------
Balances at
December 31, 1998 3,039.95 3 5,228,366 5,228 30,701,333 (26,282,308)
Shares issued upon exercise
of options (Note J) - - 105,880 106 (106) -
Shares issued upon exercise
of warrants (Note J) - - 411,764 412 231,967 -
Conversion of preferred
stock (Note G) (101.20) - 128,032 128 (128) -
Collection of and allowance
on notes receivable from
exercise of options
(Note J) - - - - - -
Shares issued in private
placement (Note H) - - 500,000 500 986,105 -
Redemption of preferred
stock (Note G) (2,938.75) (3) - - (2,938,747) -
Conversion of debenture
(Note H) - - 17,778 18 39,982 -
Settlement of litigation
(Note J) - - (65,782) (66) (86,312) -
Capital contribution for
compensation from
stock option grants
(Note J) - - - - 5,885,833 -
Capital contribution for
beneficial conversion
feature - - - - 30,890 -
Preferred dividends - - - - - (25,414)
Net loss for the year - - - - - (8,704,380)
---------- ------ ---------- ---------- ---------- -----------
Balances at
December 31, 1999 - $ - 6,326,038 $ 6,326 $34,850,817 $(35,012,102)
========== ======= ========== ========== =========== ============
</TABLE>
(Continued)
<PAGE F-5>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) - CONTINUED
Years ended December 31, 1999, 1998 and 1997
(Continued)
Notes Accumulated
receivable other
from comprehensive
exercise income
of options (loss) Total
------------- ------------- -------------
<S> <C> <C> <C>
Balances at
January 1, 1997 $ - $ 80,360 $ 15,671,873
Shares issued for services
rendered (Note H) - - 262,159
Shares issued upon exercise
of options (Note J) (69,375) - 46,250
Shares surrendered in
payment of advance (Note H) - - (10,000)
Shares purchased under
employee stock purchase
plan (Note J) - - 84,001
Shares issued upon exercise
of warrants (Note J) - - 4,497,379
Shares issued to former
executives (Note J) - - 1,150,000
Conversion of preferred
stock (Note G) - - -
Adjustment for translation
of foreign currency - (15,848) (15,848)
Preferred dividends - - (15,000)
Net loss for the year - - (14,817,811)
--------- --------- ------------
Balances at
December 31, 1997 (69,375) 64,512 6,853,003
Shares issued for services
rendered (Note H) - - 148,313
Shares issued upon exercise
of options (Note J) (726,190) - -
Shares purchased under
employee stock purchase
plan (Note J) - - 81,172
Shares issued upon exercise
of warrants (Note J) - - 359,824
Shares issued in private
placement (Note G) - - 3,281,608
Conversion of preferred
stock (Note G) - - -
Collection of and allowance
on notes receivable from
exercise of options
(Note J) 420,881 - 420,881
Adjustment for translation
of foreign currency - (64,512) (64,512)
Preferred dividends - - (107,273)
Net loss for the year - - (6,923,444)
--------- --------- ------------
Balances at
December 31, 1998 (374,684) - 4,049,572
Shares issued upon exercise
of options (Note J) - - -
Shares issued upon exercise
of warrants (Note J) - - 232,379
Conversion of preferred
stock (Note G) - - -
Collection of and allowance
on notes receivable from
exercise of options
(Note J) 265,371 - 265,371
Shares issued in private
placement (Note H) - - 986,605
Redemption of preferred
stock (Note G) - - (2,938,750)
Conversion of debenture
(Note H) - - 40,000
Settlement of litigation (Note J) 109,313 - 22,935
Capital contribution for
compensation from
stock option grants
(Note J) - - 5,885,833
Capital contribution for
beneficial conversion
feature - - 30,890
Preferred dividends - - (25,414)
Net loss for the year - - (8,704,380)
--------- --------- ------------
Balances at
December 31, 1999 $ - $ - $ (154,959)
========= ========= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE F-6>
<TABLE>
<CAPTION>
Sensar Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
-----------------------------------------
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities
Loss from continuing operations $(11,995,158) $(1,221,025) $(2,324,262)
Adjustments to reconcile loss from continuing
operations to net cash used in continuing operations
Depreciation 6,385 2,475 4,294
Compensation expense for stock options (Note J) 5,885,833 - -
Deferred compensation expense (Note E) 5,342,040 - -
Stock issued in payment of compensation - 46,338 1,188,041
Interest expense from beneficial conversion feature 30,890 - -
Provision for (recovery of) impairment losses (157,239) 621,549 -
Changes in assets and liabilities
Other current assets (24,989) 26,886 (84,218)
Accounts payable (94,304) (35,614) 97,871
Accrued liabilities 112,138 57,201 69,520
------------ ----------- -----------
Net cash used in
continuing operations (894,404) (502,190) (1,048,754)
Net cash used in
discontinued operations (195,411) (2,207,682) (4,073,303)
------------ ----------- -----------
Net cash used in
operating activities (1,089,815) (2,709,872) (5,122,057)
------------ ----------- -----------
Cash flows from investing activities
Purchase of office equipment and furnishings (23,645) (9,022) (200)
Collection of notes receivable 365,411 - -
Issuance of note receivable (35,000) - -
Increase in investments (325,000) - -
------------ ----------- -----------
Net cash used in investing activities of
continuing operations (18,234) (9,022) (200)
Net cash provided by (used in) sale of
discontinued operations and other investing
activities of discontinued operations 5,566,491 37,495 (854,011)
------------ ----------- -----------
Net cash provided by (used in)
investing activities 5,548,257 28,473 (854,211)
------------ ----------- -----------
</TABLE>
<PAGE F-7>
<TABLE>
<CAPTION>
Sensar Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Year ended December 31,
-----------------------------------------
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Cash flows from financing activities
Net proceeds from issuance of common
stock and exercise of options and warrants 1,628,984 3,743,485 4,627,630
Redemption of preferred stock (3,071,437) - -
Preferred dividends paid - - (15,000)
Proceeds from issuance of convertible debenture 40,000 - -
------------ ----------- -----------
Net cash provided by (used in) financing
activities of continuing operations (1,402,453) 3,743,485 4,612,630
Net cash used in financing activities of
discontinued operations (15,833) (1,515,088) (104,583)
------------ ----------- -----------
Net cash provided by (used in)
financing activities (1,418,286) 2,228,397 4,508,047
------------ ----------- -----------
Effect of exchange rates on cash - (64,512) (15,848)
Net increase (decrease) in cash and cash equivalents 3,040,156 (517,514) (1,484,069)
------------ ----------- -----------
Cash and cash equivalents at beginning of year 694,959 1,212,473 2,696,542
------------ ----------- -----------
Cash and cash equivalents at end of year $ 3,735,115 $ 694,959 $ 1,212,473
============ ========== ===========
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 29,839 $ 146,510 $ 299,438
Income taxes - - -
Significant noncash investing and financing activities
Acquisition of equipment through long-term obligations $ - $ - $ 326,960
Notes receivable issued in exercise of stock options - 726,190 69,375
Conversion of debenture into common stock 40,000 - -
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE F-8>
Sensar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows.
1. Business activity and principles of consolidation
Sensar Corporation (formerly Larson-Davis Incorporated) (the Company) was
primarily engaged in the design, development, manufacture, and marketing of
analytical instruments. The Company has sold or otherwise disposed of all
product lines of this business (Note B) and has no current operations. The
accompanying consolidated financial statements of the Company include the
accounts of the Company and its wholly-owned subsidiaries; SECO, Inc. (formerly
Larson-Davis Laboratories Corporation), Sensar Instruments, Inc. (formerly
Sensar Corporation), Eagle Lake Ventures, Inc., and Larson Davis Ltd. (a UK
Corporation). All subsidiaries except Eagle Lake Ventures, Inc. are inactive at
December 31, 1999. All significant intercompany transactions and accounts have
been eliminated in consolidation.
2. Depreciation
Office equipment and furnishings are stated at cost. Depreciation is provided in
amounts sufficient to relate the cost of depreciable assets to operations over
estimated service lives of three to five years. The straight-line method of
depreciation is followed for financial reporting purposes and accelerated
methods are used for income tax purposes.
3. Income taxes
The Company utilizes the liability method of accounting for income taxes. Under
the liability method, deferred tax assets and liabilities are determined based
on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. An allowance against
deferred tax assets is recorded when it is more likely than not that such tax
benefits will not be realized.
4. Cash and cash equivalents
For purposes of the financial statements, the Company considers all highly
liquid debt instruments with an original maturity of three months or less when
purchased to be cash equivalents.
<PAGE F-9>
Sensar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
5. Net loss per common share
The Company follows the provisions of Statement of Financial Accounting
Standards No. 128 "Earnings Per Share" (SFAS No. 128). SFAS No. 128 requires the
presentation of basic and diluted EPS. Basic EPS are calculated by dividing
earnings (loss) available to common shareholders by the weighted average number
of common shares outstanding during each period. Diluted EPS are similarly
calculated, except that the weighted average number of common shares outstanding
includes common shares that may be issued subject to existing rights with
dilutive potential.
6. Concentrations of credit risk
The Company's financial instruments that are exposed to concentration of credit
risk consist primarily of cash equivalents and notes receivable. The Company
maintains its cash and cash equivalents principally at one major financial
institution. Cash equivalents are invested through a daily repurchase agreement
with the financial institution. The agreement provides for the balance of
available funds to be invested in an undivided interest in one or more direct
obligations of, or obligations that are fully guaranteed as to principal and
interest by, the United States Government, or an agency thereof. These
securities are not a deposit and are not insured by the Federal Deposit
Insurance Corporation.
At December 31, 1999, approximately $1 million of the total notes receivable is
owed by one debtor and arose out of the sale of the Jaguar product line.
Although the note is unsecured, the Company reviewed the credit worthiness of
the note holder and believes that the balance is fully collectible.
7. Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect reported amounts of assets, liabilities, revenues and expenses during the
reporting period. Estimates also affect the disclosure of contingent assets and
liabilities at the date of the financial statements. Actual results could differ
from these estimates.
8. Fair value of financial instruments
The estimated fair value of financial instruments is not presented because, in
management's opinion, the carrying amounts and estimated fair values of
financial instruments in the accompanying consolidated balance sheets are not
materially different due to the short period of time to maturity of the
financial instruments.
<PAGE F-10>
Sensar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
9. Stock options
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options rather than adopting the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123). For options granted to
employees that do not qualify for fixed plan accounting (i.e., options with
cashless exercise provisions) under APB 25, the Company recognizes compensation
expense equal to the change in the stock price above the exercise price. For
options granted for services from non-employees, the Company follows the
provisions of SFAS 123 and records compensation expense equal to the fair value
of options granted.
NOTE B - DISCONTINUED OPERATIONS
Historically, the Company developed and marketed various products in one
industry segment, analytical instrumentation. These historical product lines
were sold or otherwise disposed of as follows:
1. During 1998, the Company sold its supercritical fluid chromatography (SFC)
product and abandoned its TOF2000 mass spectrometer product. The SFC product was
not significant to the operations of the Company. With the abandonment of the
TOF2000 product, the Company recognized an unusual charge of $2,458,004
principally related to write off of intangible assets and a charge to cost of
sales of $490,882 for the write off of inventory.
2. At March 31, 1999, the Company sold the assets and operations associated with
its acoustics division to PCB Group, Inc. (PCB), except for certain real estate,
which was sold to PCB in July 1999. The Company received gross cash proceeds of
approximately $5.3 million, a note for $500,000, and the assumption or payoff of
approximately $1.7 million of liabilities. The note bears interest at 7.28
percent and is payable at $22,450 per month with the balance due April 2000.
3. The Jaguar mass spectrometer assets and operations were sold to LECO
Corporation (LECO) in August 1999. The Company received proceeds of
approximately $1.8 million, consisting of cash of approximately $800,000 (net of
certain expenses, payments, and third quarter losses, but without deductions for
losses incurred prior to June 30 or the delivery of two Jaguar units to Brigham
Young University at no charge), and a non-interest bearing note with a carrying
value of $1,000,000 (interest imputed at 6.92 percent). The note is due August
2000 and is not collateralized. The Company recognized a gain of approximately
$416,000 on the sale.
4. The CrossCheck technology was returned to Brigham Young University and the
associated license agreement was terminated during the quarter ended September
30, 1999. The Company recognized a loss of approximately $76,000 from the
disposal of this technology.
<PAGE F-11>
Sensar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE B - DISCONTINUED OPERATIONS - CONTINUED
5. In August 1999, the right to receive royalty payments on the ANOMS
intellectual property was assigned to Lochard Pty Ltd for installment payments
totaling $200,000 to be received between August 1999 and February 2000, plus
contingent payments based upon future performance. The Company recognized a gain
of approximately $189,000 on the transaction.
The analytical instrumentation operations of the Company have been accounted for
as discontinued operations, and accordingly, these assets and liabilities have
been segregated as "net assets of discontinued operations" in the accompanying
consolidated balance sheets. The results of operations and cash flows associated
with these assets and liabilities are segregated and reported as discontinued
operations in the accompanying consolidated statements of operations and cash
flows. All periods presented have been restated to reflect the discontinued
operations. Information related to the discontinued operations of the analytical
instrumentation business is set forth below:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------
1999 1998 1997
------------ ----------- ------------
<S> <C> <C> <C>
Net sales $ 1,763,711 $ 8,729,192 $ 8,313,328
Costs and operating expenses:
Cost of sales (970,730) (5,241,186) (6,074,883)
Research and development (653,605) (2,919,945) (4,860,993)
Selling, general and administrative (833,608) (3,346,298) (4,938,114)
Unusual credits (charges), net 537,258 (2,786,784) (4,553,391)
------------ ------------ ------------
Operating loss (156,974) (5,565,021) (12,114,053)
Other expense, net (70,470) (137,398) (379,496)
Less loss subsequent to measurement
date of June 30, 1999 charged against gain on disposition
249,972 - -
------------ ------------ ------------
Income (loss) from discontinued operations
$ 22,528 $ (5,702,419) $(12,493,549)
============ ============ ============
</TABLE>
<PAGE F-12>
Sensar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE B - DISCONTINUED OPERATIONS - CONTINUED
Unusual credits (charges), net is comprised of the following:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------
1999 1998 1997
---------- ------------ ------------
<S> <C> <C> <C>
Termination payments to personnel of
discontinued operations and other
related costs $(129,000) - (87,906)
Provision for costs and estimated losses on
the discontinuance of the TOF2000 and
SFC products and closure of machine
shop 106,330 (351,626) -
Settlement, net of expenses 466,765 - -
Writedowns of assets:
TOF2000 - (2,458,004) -
Long-term contractual arrangement - - (2,556,903)
ENOMS and other intangibles - - (1,649,373)
U.K. property and equipment - - (75,878)
Other 93,163 22,846 (183,331)
--------- ----------- -----------
$ 537,258 $(2,786,784) $(4,553,391)
========= =========== ===========
</TABLE>
Net assets of discontinued operations consist of the following elements at
December 31, 1998 (none at December 31, 1999):
<TABLE>
<CAPTION>
<S> <C>
Trade accounts receivable, net $1,681,755
Inventories 2,046,871
Other current assets 93,160
Property and equipment, net 1,316,516
Assets under capital lease obligations, net 202,026
Intangible assets, net 322,779
Accounts payable (412,379)
Accrued liabilities (779,228)
Long-term debt (682,982)
Capital lease obligations (297,049)
----------
Total $3,491,469
==========
</TABLE>
<PAGE F-13>
Sensar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE C - CHANGE IN EXECUTIVE MANAGEMENT
Effective April 21, 1999, the then current members of the board of directors of
the Company resigned and a new board and chief executive officer were appointed.
The Company entered into an employment agreement with a new chief executive
officer which provides for annual compensation of $96,000. The term of the
employment agreement is through December 31, 2002, but renews automatically such
that there is always one year remaining under the agreement. In the event this
agreement is terminated, other than for cause, the Company is required to pay
the chief executive officer the greater of the amount of salary remaining under
the term of the contract or the salary for a one-year period.
In connection with the appointment of the new chief executive officer, he was
granted an option to acquire 200,000 shares of common stock, half of which is
exercisable at $1.50 per share and the other half at $2.50 per share. The option
is immediately exercisable, expires three years after grant, and has a cashless
exercise provision.
Under the employment agreements of the former chief executive officer and former
chief operating officer, each had the right to terminate his employment
agreement for cause with the sale of the assets of the acoustics division (Note
B) and to receive compensation equal to his base salary remaining under his
employment agreement, which would have been approximately $560,000 in the
aggregate for the two officers. In lieu of this payment the new board of
directors negotiated a termination benefit of $195,000 in the aggregate
(recorded as unusual charges) and consulting/employment arrangements whereby the
former chief executive officer would provide transitional consulting services to
the Company and the former chief operating officer would continue as the chief
operating officer of the Company to supervise the ongoing operations of the
Company in exchange for monthly compensation of $10,000 each and aggregate
options to acquire 140,000 shares of common stock, half of which were
exercisable at $1.50 per share and the other half at $2.50 per share.
NOTE D - INVESTMENTS
The Company invested $150,000 in PayStation.com, Inc. (PayStation) in the form
of $75,000 for a convertible promissory note and $75,000 for 15,000 shares of
convertible preferred stock, representing 2.5 percent of the offering.
PayStation has repaid the promissory note, leaving a balance of $75,000 as the
Company's investment. PayStation is an internet-based company that has the
capability to deliver internet-based financial services to consumers who prefer
to pay bills through the internet. The Company's investment in PayStation is
accounted for under the cost method of accounting.
The Company also participated in the second round funding of Durect Corporation
(Durect), a pioneer in drug therapy treatments, employing subcutaneous delivery
technology and paid $250,000 for preferred stock convertible into approximately
1 percent of Durect. The Company's investment in Durect is accounted for under
the cost method of accounting.
<PAGE F-14>
Sensar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE E - DEFERRED COMPENSATION PLAN
On June 24, 1999, the board adopted a deferred compensation plan to provide
long-term incentive compensation to the members of the board and certain other
consultants or members of management. The plan establishes an unfunded deferred
compensation pool, based on specified percentages of the Company's net income
and increases in its market capitalization. No earnings compensation will be
paid into the pool until the cumulative net income from the operations under the
new board has exceeded $2,000,000 and no amounts will be paid for increases in
market capitalization unless the increase in market capitalization exceeds 150
percent of any increase in the Russell 2000 Index (with appropriate adjustments
for additional capital infusions or acquisitions). The chief executive officer,
received an initial 30 percent ownership in the pool and may grant the other 70
percent to persons other than himself and his family. To date, he has granted a
total of 11 percent to others. On December 31, 2002, amounts due, if any, will
be paid out to the participants. However, in the event of a change of control of
the Company, as defined in the agreement, or in the event the deferred
compensation plan is terminated by the board of directors, a distribution of the
deferred compensation pool will be required. In either of these two events, the
amount of the distribution would be equal to the amount in the deferred
compensation pool or $5 million, whichever is greater. Additionally, in the
event the employment agreement of the chief executive officer is terminated,
other than for cause, he is entitled to his share of the deferred compensation
pool, but not less than $1.5 million. In connection with the planned acquisition
of Net2Wireless discussed in Note N to the financial statements, the deferred
compensation plan would be terminated and the participants in the plan would
abandon their interest in the plan subject only to shareholder approval of
options previously granted to the participants.
Deferred compensation expense is measured based on the changes in factors which
determine the amount of the deferred compensation pool, which to date has solely
been the change in market capitalization of the Company's common stock. For the
year ended December 31, 1999, the Company recognized deferred compensation
expense of $5,342,040 representing the current amount of the deferred
compensation pool multiplied by 41 percent for the interests granted through
December 31, 1999.
<PAGE F-15>
Sensar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE F - INCOME TAXES
The income tax expense (benefit) reconciled to the tax computed at the statutory
federal rate of 34 percent is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Income taxes (benefit) at statutory rate $(2,959,489) $(2,353,971) $(5,038,056)
State income taxes (benefit)
net of federal tax effect (287,245) (228,474) (488,988)
Amortization of acquired technology - 900,420 60,797
Settlement with former directors 33,723 70,427 165,750
Operating losses with no current tax benefit 3,199,056 1,605,535 5,292,150
Other, net 13,955 6,063 8,347
----------- ----------- -----------
Income tax expense $ - $ - $ -
=========== =========== ===========
</TABLE>
Deferred income tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1999 1998
------------- -------------
<S> <C> <C>
Deferred tax assets
Benefit of net operating loss carryforwards $ 8,340,728 $ 7,831,621
Compensation expense for stock options 2,141,656 -
Deferred compensation expense 1,992,581 -
Capitalized software development costs and
amortization of intangible assets 257,383 796,526
Inventory allowances - 376,365
Accrued liabilities 34,664 113,199
Allowance for doubtful accounts 27,043 256,287
Other, net 4,364 4,345
------------- -------------
12,798,419 9,378,343
Less valuation allowance (12,798,310) (9,373,873)
------------- -------------
109 4,470
Deferred tax liabilities
Depreciation of property and equipment (109) (4,470)
------------- -------------
Net deferred tax asset $ - $ -
============= =============
</TABLE>
<PAGE F-16>
Sensar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE F - INCOME TAXES - CONTINUED
The Company has sustained net operating losses in each of the periods presented.
There were no deferred tax assets or income tax benefits recorded in the
financial statements for net deductible temporary differences or net operating
loss carryforwards because the likelihood of realization of the related tax
benefits cannot be established. Accordingly, a valuation allowance has been
recorded to reduce the net deferred tax asset to zero and consequently, there is
no income tax provision or benefit for any of the periods presented. The
increase in the valuation allowance was $3,424,437, $1,614,711, and $5,268,566
for the years ended December 31, 1999, 1998, and 1997, respectively.
As of December 31, 1999, the Company had net operating loss carryforwards for
tax reporting purposes of approximately $22,000,000 expiring in various years
through 2014. Utilization of approximately $3,100,000 of the total net operating
loss is dependent on the future profitable operation of Sensar Instruments, Inc.
under the separate return limitation rules and limitations on the carryforward
of net operating losses after a change in ownership. If the planned acquisition
of Net2Wireless discussed in Note N to the financial statements is consummated,
it is expected that the availability of all of the net operating losses will be
substantially restricted because of the change of control and lack of continuity
of business interests.
NOTE G - PREFERRED STOCK
1998 Series A Preferred Stock
In February 1998, the Company completed the private placement of shares of 1998
Series A Preferred Stock (the "Preferred Stock") and warrants to purchase common
stock for gross proceeds of $3,500,000. Of this amount, approximately $549,000
was assigned as the value of the warrants and the balance was assigned as the
value of the Preferred Stock. The Preferred Stock bore an annual dividend of
four percent per annum and had a liquidation preference equal to $1,000 per
share plus all accrued, but unpaid dividends. The Preferred holders voted as a
class with the common stockholders.
The Preferred Stock was convertible at the election of the holders into that
number of shares of common stock calculated by dividing $1,000 plus any accrued
but unpaid dividends, by the lower of (1) $9.00 or (2) 85 percent of the average
closing price of the common stock for the ten trading days preceding the
conversion. During the years ended December 31, 1999 and 1998, holders of 101.20
shares and 460.05 shares of Preferred Stock converted their shares into 128,032
and 189,257 shares of common stock, respectively.
<PAGE F-17>
Sensar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE G - PREFERRED STOCK - CONTINUED
In an attempt to eliminate the potential market disruption of a significant
conversion of the Preferred Stock into common stock, the Company used part of
the proceeds from the sale of the assets of the acoustic division (Note B), to
reacquire and cancel 100 percent of the outstanding shares of Preferred Stock
for approximately $3.07 million, including accrued but unpaid dividends. The
Company agreed to reprice one-half of the associated warrants at $1.25 per share
and to cancel the other half of the warrants.
1995 Series Preferred Stock
During the year ended June 30, 1995, the Company issued 200,000 shares of 1995
Series Preferred Stock in payment of $500,000 of short-term debt. The Preferred
Stock had a liquidation preference equal to $2.50 per share, plus unpaid
dividends. This Preferred Stock paid cumulative dividends at a rate of $0.225
per share per annum, payable monthly. The Preferred Stock was convertible into
common stock at the option of the holder or the option of the Company at the
rate of $7.50 per share divided by an amount equal to the average of the closing
bid prices for the common stock for the twenty consecutive trading days
immediately prior to the date that the holder provided notice of such
conversion. The Preferred Stock was converted, in accordance with the governing
provisions of the designation, into 23,537 shares of common stock effective
April 30, 1997.
NOTE H - COMMON STOCK
At a special meeting of stockholders held on March 18, 1999, a one-for-five
consolidation of the issued and outstanding common stock of the Company was
approved. The board of directors implemented the consolidation of the common
stock effective at the close of business on April 30, 1999. At the close of
business on January 17, 2000, a forward two-for-one stock split became effective
for the issued and outstanding common stock of the Company. All common share and
per common share information included in the accompanying financial statements
has been retroactively restated to reflect the one-for-five consolidation and
the two-for-one forward stock split.
<PAGE F-18>
Sensar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE H - COMMON STOCK - CONTINUED
In May 1999, the Company completed a private placement of 500,000 shares of
common stock at $2.00 per share. The net proceeds to the Company, after
associated expenses, were approximately $987,000. The stock issued was
subsequently registered for resale with the Securities and Exchange Commission.
During 1999, the Company also issued a convertible debenture in the amount of
$40,000, which was converted into 17,778 shares of common stock in December
1999.
During the years ended December 31, 1998 and 1997, the Company issued 19,499
shares and 21,940 shares, respectively, of common stock valued at prices ranging
from $5.75 to $11.58 per share and $8.45 to $33.13 per share, respectively, for
services rendered. During the year ended December 31, 1997, an officer
surrendered 696 shares of common stock in payment of a noninterest-bearing
advance.
NOTE I - EARNINGS (LOSS) PER COMMON SHARE
The following data show the amounts used in computing net loss per common share
from continuing operations, including the effect on net loss for preferred stock
dividends and a beneficial conversion feature associated with preferred stock
and warrants. The following data also show the weighted average number of shares
and rights to acquire shares with dilutive potential. For 1998, loss from
continuing operations applicable to common stock includes a noncash imputed
dividend to the preferred shareholders related to the beneficial conversion
feature on the 1998 Series A Preferred Stock and related warrants (Note G). The
beneficial conversion feature is computed as the difference between the market
value of the common stock into which the Series A Preferred Stock can be
converted and the value assigned to the Series A Preferred Stock in the private
placement. The imputed dividend is a one-time, noncash charge increasing the net
loss per common share.
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Loss from continuing operations $(11,995,158) $ (1,221,025) $ (2,324,262)
Dividends on preferred stock (25,414) (107,273) (15,000)
Imputed dividend from beneficial conversion feature - (1,239,290) -
------------ ------------ ------------
Loss from continuing operations applicable to common stock $(12,020,572) $ (2,567,588) $ (2,339,262)
============ ============ ============
</TABLE>
<PAGE F-19>
Sensar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE I - EARNINGS (LOSS) PER COMMON SHARE - CONTINUED
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Common shares outstanding during the entire year 5,228,366 4,850,157 4,287,116
--------- --------- ---------
Weighted average common shares issued during the year 465,148 223,306 315,964
--------- --------- ---------
Weighted average number of common shares used in basic EPS 5,693,514 5,073,463 4,603,080
Dilutive effect of stock options and warrants - - -
--------- --------- ---------
Weighted average number of common shares and dilutive potential
common stock used in diluted EPS 5,693,514 5,073,463 4,603,080
========= ========= =========
</TABLE>
For the years ended December 31, 1999, 1998 and 1997, none of the options and
warrants that were outstanding, as described in Note J, were included in the
computation of diluted EPS because to do so would have been anti-dilutive.
NOTE J - STOCK OPTIONS AND WARRANTS
1. Stock-based compensation plans
During the periods presented in the accompanying financial statements, the
Company had stock options that were granted under four stock option plans: the
1991 Director Stock Option Plan (the 1991 Director Plan); the 1996 Director
Stock Option Plan (the 1996 Director Plan); the 1997 Stock Option and Award Plan
(the 1997 Employee Plan); and the 1987 Stock Option Plan (the 1987 Employee
Plan). The Company has also granted options under executive employment
agreements.
A summary of the status of the options granted under the Company's stock option
plans and employment agreements at December 31, 1999, 1998, and 1997 and changes
during the years then ended is presented in the table below:
<PAGE F-20>
Sensar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE J - STOCK OPTIONS AND WARRANTS - CONTINUED
1. Stock-based compensation plans - continued
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------------------
1999 1998 1997
--------------------- ---------------------- -----------------------
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Shares price Shares price Shares price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 924,990 $ 10.53 1,014,736 $ 13.55 1,219,936 $ 12.18
--------- ---------- ----------
Granted 560,000 2.05 704,000 9.95 480,800 15.35
Exercised (105,880) 1.61 (110,546) 6.58 (116,000) 6.70
Forfeited (830,178) 9.44 (130,400) 12.88 - -
Canceled (24,000) 7.34 (552,800) 15.55 (570,000) 13.53
-------- -------- ---------
Outstanding at end
of year 524,932 $ 5.17 924,990 $ 10.53 1,014,736 $ 13.55
======== ======== =========
Exercisable at
end of year 515,144 $ 5.03 482,994 $ 10.20 469,742 $ 11.23
======== ======== =========
</TABLE>
The weighted-average fair value of each option grant is $0.89, $2.88 and $7.60
for the years ended December 31, 1999, 1998 and 1997, respectively, and is
estimated on the date of grant using the Black-Scholes option pricing model with
the following weighted-average assumptions used for grants during the years
ended December 31, 1999, 1998 and 1997, respectively: risk-free interest rates
of 5.1 percent, 5.5 percent, and 6.0 percent; expected dividend yields of zero
for all periods; expected lives of 2.5, 5.4, and 5.8 years; and expected
volatility of 114 percent, 46 percent, and 42 percent.
A summary of the status of the options outstanding under the Company's stock
option plans and employment agreements at December 31, 1999 is presented below:
<TABLE>
<CAPTION>
Weighted-
average Weighted- Weighted-
remaining average average
Number contractual exercise Number exercise
Range of exercise prices outstanding life (years) price exercisable price
------------------------ ----------- ------------ --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$1.50 - $2.00 120,000 2.40 $ 1.58 120,000 $ 1.58
$2.01 - $3.00 270,000 1.96 2.50 270,000 2.50
$3.01 - $17.50 134,932 2.56 13.71 125,144 13.78
------- -------
$1.50 - $17.50 524,932 2.28 $ 5.17 515,144 $ 5.03
======= =======
</TABLE>
<PAGE F-21>
Sensar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE J - STOCK OPTIONS AND WARRANTS - CONTINUED
1. Stock-based compensation plans - continued
In January 1996, the Company granted options to three executives under newly
executed employment agreements. The agreements granted options to acquire an
aggregate of 330,000 shares of common stock at an exercise price of $10.625 per
share. The options under the employment agreements vested 20 percent on the
grant date and 20 percent for each year of service thereafter, and would have
expired in January 2006. All of the options granted in 1996 were canceled in
1997.
In 1998 and 1997, two former executives exercised options to acquire 110,546
shares and 12,000 shares, respectively, of common stock in exchange for notes
receivable in the aggregate amount of $726,190 and $69,375, respectively. In
1998, the Company established a reserve of $400,000 against these notes due to
the uncertainty of their collection in light of the decline in the price of the
Company's common stock. During 1999, the Company agreed to accept substantially
all of the proceeds from the sale of the common stock held by one of the former
officers of approximately $438,000 in satisfaction of his notes totaling
$726,190. The note for $69,375 was extinguished as part of a settlement of
litigation against the other former officer.
In conjunction with the 1997 employment of a new chief executive officer, the
Company granted options to acquire 400,000 shares of common stock. The options
were granted at $14.375 per share, but were exercisable at the lower of the
grant price or 80 percent of the trading price on the date of exercise (but not
less than $9.00 per share). During 1998, this option was canceled in favor of an
option to purchase 400,000 shares of common stock at prices ranging from $9.00
to $16.25 per share. During 1998, the Company granted options to acquire 120,000
shares of common stock to a new chief operating officer at prices ranging from
$7.475 to $13.75 per share. All of the foregoing options were forfeited in April
1999 with the resignation of both officers from the board of directors (Note C).
A new chief executive officer was appointed in April 1999 (Note C). In
conjunction with his appointment, the chief executive officer was granted an
option to acquire 200,000 shares of common stock, half of which are exercisable
at $1.50 per share and half at $2.50 per share. During April and May, three new
non-executive directors were appointed to the board. On appointment, each
received an option to acquire 200,000 shares of common stock, half of which are
exercisable at $1.50 per share and half at $2.50 per share. Under Nasdaq
corporate governance rules, these options to acquire 600,000 shares of common
stock are subject to shareholder approval, which approval will be sought at the
next meeting of shareholders. If approved by the shareholders, these options to
acquire 600,000 shares will be considered granted for accounting purposes on the
date of shareholder approval and accounted for accordingly. Additionally,
options to acquire an aggregate of 360,000 shares of common stock have been
granted principally to nonemployees, at prices ranging from $1.50 to $2.50 per
share. All of these options are immediately exercisable, generally expire three
years after grant, and have a cashless exercise provision.
<PAGE F-22>
Sensar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE J - STOCK OPTIONS AND WARRANTS - CONTINUED
1. Stock-based compensation plans - continued
Generally accepted accounting principles require that compensation be recorded
each period for stock options with cashless exercise provisions granted to
management, equal to the change in the stock price above the exercise price. If
the price of the stock declines during the period, a credit is recorded against
previously recorded compensation expense, but not in excess of the cumulative
compensation recorded since the grant date. During the year ended December 31,
1999, the Company recognized $5,618,740 as a non-cash compensation charge as a
consequence of the cashless exercise provisions of the options granted to
management to acquire an aggregate of 240,000 shares. Additionally, the Company
has recorded non-cash compensation expense during the year ended December 31,
1999, of $267,093 for stock options granted to nonemployees to acquire an
aggregate of 270,000 shares of common stock. The compensation expense was based
on the fair value of options granted using the assumptions discussed earlier in
this Note.
In November 1999, the board of directors approved options to acquire an
aggregate of 1,600,000 shares of common stock for $2.00 per share to the chief
executive officer, to the non-executive members of the board of directors, and
to the Company's chief consultant. These grants are subject to shareholder
approval, which approval will be sought at the next meeting of shareholders. If
these options are approved by the shareholders, the participants in the deferred
compensation plan have agreed to abandon their interests in the deferred
compensation pool and the board of directors has agreed to terminate the
deferred compensation plan. If approved by the shareholders, the Company would
record compensation expense as measured under generally accepted accounting
principles on the date of shareholder approval, less the amount of the deferred
compensation liability terminated at that date.
Under the 1991 Director Plan, the Company granted options to acquire 12,000
shares of common stock annually to each director. Under this plan, the Company
may grant up to an aggregate of 300,000 options. Options granted under this plan
vested immediately and expired five years after the grant. The 1991 Director
Plan terminated July 1, 1996.
<PAGE F-23>
Sensar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE J - STOCK OPTIONS AND WARRANTS - CONTINUED
1. Stock-based compensation plans - continued
Under the 1996 Director Plan, the Company reserved 560,000 shares of common
stock to be granted to directors of the Company. In 1996, the Company granted
options to each director to acquire 80,000 shares of common stock (for a total
of 400,000 options) at $17.50 per share. Options under the 1996 Director Plan
vested 25 percent on the grant date and 25 percent for each year of service
thereafter and expire five years after their vesting date. Of the options
granted in 1996, options with respect to 240,000 shares were canceled in 1997.
During 1998, options with respect to an additional 120,000 shares were canceled
or forfeited, leaving options for 40,000 shares outstanding at December 31,
1999. The 1996 Director Plan terminated May 9, 1999.
Under the 1987 Employee Plan, as amended in 1994, the Company could grant
options to acquire up to 300,000 shares of common stock, of which options to
acquire 152,923 shares were exercised and no options are outstanding as of
December 31, 1999. The 1987 Employee Plan terminated November 9, 1997.
The 1997 Employee Plan reserves 300,000 shares of common stock for issuance
pursuant to stock options or stock awards granted, of which options to acquire
151,880 shares have been exercised or are outstanding and 105,554 shares have
been awarded to employees and others as of December 31, 1999. Concurrently with
the granting of certain options in 1998, the Company canceled existing options
previously granted to certain employees to purchase 72,800 shares of common
stock at prices ranging from $11.725 to $26.25 per share. Shares awarded
primarily consist of stock issued to former management in November 1997 in
connection with their termination and were recorded at fair value of $1,150,000
on the date of their termination.
The Company adopted the 1997 Employee Stock Purchase Plan (the Stock Purchase
Plan) effective as of February 1, 1997. The maximum number of shares of common
stock which are available under this plan is 40,000 shares. The Stock Purchase
Plan provided an opportunity to the employees of the Company to purchase shares
of common stock in the Company at 85 percent of fair market value on each
offering date. During the years ended December 31, 1998 and 1997, the employees
of the Company purchased 29,273 and 6,163 shares of common stock for gross
proceeds of $81,172 and $84,001, respectively. The Stock Purchase Plan expired
December 31, 1998.
<PAGE F-24>
Sensar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE J - STOCK OPTIONS AND WARRANTS - CONTINUED
1. Stock-based compensation plans - continued
The Company accounts for options granted to management and to the members of the
board of directors under APB 25 and its related interpretations and the opinions
of the Emerging Issues Task Force. Had compensation cost for these plans been
determined based on the fair value of the options at the grant dates for awards
under these plans consistent with the method prescribed by SFAS 123, the
Company's net loss and loss per common share would have been changed to the pro
forma amounts indicated below. The significant decrease in pro forma net loss
for 1999 is principally associated with options to acquire 240,000 shares of
common stock granted to management for which $5,618,750 of compensation was
recorded under APB 25, but for which only $139,212 would have been recorded
under SFAS 123 using the Black-Scholes model.
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------
1999 1998 1997
------------ ----------- -------------
<S> <C> <C> <C> <C>
Net loss As reported $(8,704,380) $(6,923,444) $(14,817,811)
Pro forma (3,492,019) (7,337,855) (16,118,507)
Net loss per common share As reported $ (1.53) $ (1.63) $ (3.22)
Pro forma (0.62) (1.79) (3.50)
</TABLE>
2. Stock warrants
In 1998, in connection with a private placement of the Preferred Stock, the
Company granted warrants to purchase 280,000 shares of common stock at $11.25
per share. In connection with the redemption of the remaining Preferred Stock in
1999, the Company canceled one half of the remaining warrants and reduced the
exercise price of the other half to $1.25 per share.
In conjunction with a private placement of common stock in May 1995, the Company
issued warrants to a group of investors to acquire common stock of the Company.
After that time, the Company issued additional warrants to this group as the
previously outstanding warrants were exercised.
In January 1997, the board of directors approved a reduction in the exercise
price, from $15.625 to $13.25 per share, of certain of these warrants related to
686,333 shares of common stock. In consideration of this reduction, the holders
of the warrants agreed to the early exercise of the warrants which were
otherwise permitted to be exercised until November 1, 1998. The holders agreed
to exercise 307,124 shares on or before January 31, 1997, which exercise
occurred and resulted in gross proceeds to the Company of $4,069,393. This
initial issuance was priced at $15.625 per share and resulted in the issuance of
260,441 shares, with 46,683 shares held in reserve, because the reduced pricing
was contingent upon the timely exercise of the warrants related to all 686,333
shares.
<PAGE F-25>
Sensar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE J - STOCK OPTIONS AND WARRANTS - CONTINUED
2. Stock warrants - continued
The agreement relating to the exercise of the remaining 379,209 warrants was
amended on November 14, 1997. The exercise price remained at $13.25 per share or
an aggregate of $5,024,517 to be paid in ten equal installments commencing
November 15, 1997, and continuing on the day that was five weeks subsequent to
the preceding payment until the full amount was paid. On receipt of each
payment, the Company agreed to issue a certificate representing the stock then
being acquired, calculated at an exercise price of $13.25 per share, and issue a
replacement warrant covering the same number of shares. Additionally, on receipt
of the first payment, the Company agreed to deliver certificates representing
the 46,683 shares held in reserve and to issue replacement warrants for the
307,124 shares, exercised in January 1997, referred to in the previous
paragraph. Replacement warrants had an exercise price of $21.875 per share and
were exercisable at any time through April 16, 2003. In the event that a warrant
holder failed to make one or more payments when due, that portion of the
outstanding warrants that was then due would thereafter have an exercise price
of $15.625 per share and the holder would not be entitled to a replacement
warrant, if and when the outstanding warrant was exercised. Due to the declining
market price of the Company's common stock, this group only exercised 67,555
warrants after the amendment, and the remaining warrants expired in November
1998.
In November 1999, the exercise price of 374,680 warrants and 44,900 warrants
with exercise prices of $21.875 and $11.25, respectively, were reduced to $2.00
per share.
A summary of the status of common stock underlying the warrants issued and
changes during the years is presented in the table below:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------------------------
1999 1998 1997
---------------------- -------------------- --------------------
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Shares price Shares price Shares price
------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 654,680 $17.33 840,067 $17.23 840,067 $15.63
Granted 537,130 1.84 309,634 12.28 345,045 21.88
Exercised (411,764) 1.79 (29,633) 13.25 (345,045) 13.25
Expired - - (465,388) 14.03 - -
Canceled (777,246) 14.91 - - - -
-------- -------- --------
Outstanding at
end of year 2,800 $ 1.25 654,680 $17.33 840,067 $17.23
======== ======== ========
</TABLE>
<PAGE F-26>
Sensar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE K - COMMITMENTS AND CONTINGENCIES
1. Litigation
In September 1999, certain former employees of the Company filed a lawsuit
against the Company seeking damages for non-payment of a bonus arrangement, plus
penalties and attorneys fees. The Company denies that the conditions of the
bonus were met, has filed a motion to dismiss certain claims, and intends to
vigorously defend its position. Management of the Company believes that it has
substantial defenses to the claims and does not believe that the ultimate
outcome of this litigation will have a material impact on the financial position
of the Company. In March 2000, the chief executive officer agreed to indemnify
the Company for all costs and expenses, including any judgments, arising out of
this litigation subsequent to March 1, 2000.
In October 1998, the Company filed suit against Brian G. Larson, a former chief
executive officer, seeking reimbursement of withholding taxes it paid on his
behalf in the amount of $164,826. Mr. Larson filed a counterclaim, which was
subsequently dismissed by the court without prejudice. In June 1999, these
matters were settled by (1) Mr. Larson returning 65,782 shares of common stock
to the Company; (2) Mr. Larson giving the Company a note in the amount of
$35,545; (3) the Company forgiving a note from Mr. Larson in the amount of
$109,313 from the exercise of options; and (4) the Company granting Mr. Larson
an option to acquire 50,000 shares of common stock at $2.50 per share. The
settlement resulted in a net recovery to the Company of $12,035.
2. Operating lease
The Company leases certain office space under an operating lease for $2,256 per
month. At December 31, 1999 the chief executive officer of the Company is a
guarantor on the lease and in March 2000, he assumed responsibility for payment
of the lease through its expiration in September 2002. Minimum future payments
under this non-cancelable operating lease at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ending December 31,
------------------------
2000 $27,343
2001 28,436
2002 21,961
Thereafter -
$77,740
</TABLE>
NOTE L - RELATED PARTY TRANSACTION
The Company entered into a consulting arrangement during 1997, with a
corporation owned and controlled by a former director of the Company who
resigned in April 1998. Under the terms of the arrangement, the corporation
agreed to provide the Company with advisory and consulting services concerning
the commercialization of the technology held by Sensar Instruments, Inc., the
identification of markets for such products, the establishment of marketing
contacts, and the development of an operational plan for the development and
marketing of products based on this technology. Under the arrangements the
Company incurred compensation expense of $95,540 in 1997 (none in 1999 or 1998),
plus the reimbursement of third-party expenses incurred on behalf of the
Company.
<PAGE F-27>
Sensar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE M - UNUSUAL CHARGES
The Company has incurred the following unusual charges (credits) during the
years covered by the financial statements:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------
1999 1998 1997
----------- --------- ---------
<S> <C> <C> <C>
Termination benefits paid to former executive
management $ 125,000 $ - $1,383,964
Write down (recovery) of receivable from former
executive officer and related litigation costs (12,035) 187,492 -
Write down (recovery) of notes receivable and
accrued interest from former executive
management for exercise of stock options (144,628) 456,723 -
Other charges - 5,734 -
--------- -------- ----------
$ (31,663) $649,949 $1,383,964
========= ======== ==========
</TABLE>
NOTE N - AGREEMENT WITH NET2WIRELESS
The Company has entered into an agreement with Net2Wireless Corporation, that
gives the Company the right to acquire Net2Wireless in exchange for the issuance
of 18,295,060 shares of the Company's common stock. Net2Wireless acquired the
wireless division of I.T.E.S Ltd., and is a startup company that is focused on
developing wireless internet communications, including multimedia applications.
In the event of a merger, options and other rights to acquire Net2Wireless stock
then outstanding would be converted into rights to acquire 14,766,649 shares of
the Company's common stock. The number of shares to be issued to the
Net2Wireless stockholders will be increased in the event that the cash held by
the Company at closing, plus all amounts collected on the notes receivable held
by the Company, less all cash liabilities is not at least $4.45 million. The
number of additional shares to be issued will be determined by dividing the
short fall, if any, by $1.86. The Company will also issue 1,000,000 shares to
certain individuals involved in identifying Net2Wireless.
As part of this agreement, the Company has agreed to provide Net2Wireless with
short-term financing of up to $2 million, of which $500,000 was advanced in
February 2000. The advance bears interest at 8 percent per annum and is due in
full on or before September 30, 2000. The financing will be used to allow
further recruitment of technical staff for ongoing development work by
Net2Wireless.
<PAGE F-28>
Sensar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE N - AGREEMENT WITH NET2WIRELESS - CONTINUED
As part of the transaction, the Company has agreed to the following:
1. Maintain a minimum of $4.5 million in cash and notes receivable
(including the advance to Net2Wireless discussed above) with only nominal
current liabilities, not to exceed $50,000;
2. Cause to be exercised all options, to acquire stock of the Company held
by current management and directors; and
3. Have no more than 9,000,000 shares outstanding, including shares subject
to options at the time of closing.
In order to eliminate the Company's liabilities other than nominal current
liabilities, the Company will terminate all employment and consulting
agreements, will terminate its deferred compensation plan, and has entered into
an agreement effective March 1, 2000 with the chairman of the board whereby the
chairman has agreed to indemnify the Company with respect to pending litigation
and assume the real property lease to which the Company is a party. Termination
of the deferred compensation plan and the chief executive officer's employment
agreement are contingent on stockholder approval of options previously granted
by the board of directors to management, non-executive directors, and the chief
consultant.
In exchange for the indemnification and the assumption of the lease in March
2000, the Company distributed to the chairman of the board the minority
investment interests held by the Company with a book value of $325,000 at
December 31, 1999,and the office furniture and equipment located at the
Company's Salt Lake City office with a book value of $27,992 at December 31,
1999. The distribution of assets in exchange for the indemnification will be
accounted for as an unusual charge to continuing operations in the quarter
ending March 31, 2000. The chairman has also agreed to provide 100 hours of
transitional services to the Company to assist new management.
The agreement is subject to the satisfaction of several conditions, including
the approval of the shareholders of the Company and Net2Wireless. The agreement
may be terminated by the mutual consent of the parties, by either party if the
closing has not taken place by December 31, 2000, by either party if there is a
breach by the other party, or by the failure of the Company or Net2Wireless to
receive shareholder approval of the transaction.
It is contemplated that, at closing, the current officers and directors of the
Company will resign and Net2Wireless will appoint new directors and executive
officers of the Company. After the acquisition, the shareholders of Net2Wireless
will own a majority of the common stock of the Company then outstanding.
Accordingly, for financial reporting purposes, the merger will be treated as a
reverse acquisition accounted for as a recapitalization of Net2Wireless.
<PAGE F-29>
