Back to GetFilings.com
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
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 No. 0-17020
SENSAR CORPORATION
(Exact name of registrant as specified in charter)
Nevada 82-0429944
---------------------------- -----------------------
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
136 East South Temple, Suite 2325
Salt Lake City, Utah 84111
(801) 350-0587
(Address of principal executive offices and telephone number)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001 per share
----------------------------------------
(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, 2001, there were 6,562,546 shares of the Registrant's common
stock, par value $0.001, issued and outstanding. The aggregate market value of
the Registrant's voting stock held by nonaffiliates of the Registrant was
approximately $6,134,000, computed at the closing quotation for the Registrant's
common stock of $0.9375 as of March 27, 2001.
================================================================================
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Item Number and Caption Page
PART I
1. Business............................................................. 2
2. Properties........................................................... 13
3. Legal Proceedings.................................................... 13
4. Submission of Matters to a Vote of Security Holders.................. 13
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters 14
6. Selected Financial Data.............................................. 15
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................ 16
7a. Quantitative and Qualitative Disclosures About Market Risk........... 19
8. Financial Statements and Supplementary Data.......................... 19
9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure................................................. 19
PART III
10. Directors and Executive Officers of the Registrant................... 20
11. Executive Compensation............................................... 22
12. Security Ownership of Certain Beneficial Owners and Management....... 25
13. Certain Relationships and Related Transactions....................... 27
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..... 28
SIGNATURES................................................................. 31
PART I
- --------------------------------------------------------------------------------
ITEM 1. BUSINESS
- --------------------------------------------------------------------------------
This report on Form 10-K contains certain forward looking statements and
information relating to the Company. 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 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. The Company's prior operations included the development,
manufacturing and marketing of acoustics instrumentation, development involving
supercritical fluid chromatography instruments and the development of mass
spectrometer products.
The Company experienced losses in each year of its operations, and these
losses became more significant in 1997. The Company continued to experience
significant losses during 1998, despite cost-cutting measures, and sales of the
Company's products did not meet expectations. As a result of ongoing losses, the
Company was unable to attract new financing to fund its operations, and the
Company was forced to consider the sale of a portion of its assets to fund its
cash requirements.
During 1999, the Company sold substantially all of its assets relating to
its prior operations and abandoned certain development projects. The Company
sold its acoustics instrumentation business in March 1999 and agreed not to
compete in this business. About this same time, the Company decided to terminate
its development work involving 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. In July 1999, the Company completed
the sale of its real property to the purchaser of the acoustic instrumentation
business. In August 1999, the Company sold its Jaguar mass spectrometer
technology to a privately-held corporation, and also sold a residual interest in
an airport noise monitoring software technology, which the Company had sold to a
third party in 1995.
The Company also instituted significant changes to the Company's
management in 1999. In April 1999, Andrew C. Bebbington resigned as chief
executive officer, all of the directors of the Company resigned, and a new board
of directors was appointed. Howard S. Landa was appointed as the new chief
executive officer of the Company and Mr. Bebbington agreed to continue to
provide transitional services as a consultant to the Company. The new board of
directors initiated an aggressive search for a potential acquisition to provide
value to the shareholders of the Company.
2
Net2Wireless Transaction
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") relating to a proposed merger between the Company and
Net2Wireless. During the remainder of 1999 and most of 2000, the Company and
Net2Wireless worked to obtain the necessary regulatory approvals and satisfy the
other conditions precedent to the proposed merger. A joint meeting of the
shareholders of the Company and Net2Wireless was scheduled for December 5, 2000
to approve the proposed merger.
In connection with its review of the listing application for the combined
company, the staff of the Nasdaq Stock Market raised concerns in November 2000
about the proposed merger between the Company and Net2Wireless. Although the
Company and Net2Wireless attempted to resolve these concerns, the Nasdaq staff
ultimately informed the Company, on December 1, 2000, that it would deny the
listing application for the combined company and institute delisting proceedings
if the merger were consummated.
Due to the position of the Nasdaq staff and uncertainties regarding the
Company's obtaining the required votes to approve the proposed merger, the
Company and Net2Wireless entered into an agreement as an alternative to the
proposed merger, on December 4, 2000. Under the terms of the alternative
arrangement, the Company received 3,000,000 shares of common stock of
Net2Wireless and a warrant to acquire an additional 1,000,000 shares at an
exercise price of $10.00 per share. Net2Wireless was released from any
obligation to repay a loan of $500,000 advanced by the Company in February 2000
and the related accrued interest of $33,534, and both parties were released from
any further obligations under the merger agreement. In addition, the Company
paid $1,500,000 to Net2Wireless in additional consideration for the shares
acquired by the Company. The shares acquired by the Company represented
approximately 14.1% of the outstanding capital stock of Net2Wireless on December
4, 2000.
Current Business of the Company
Following the termination of the proposed merger between the Company and
Net2Wireless, the assets of the Company consisted primarily of cash and its
equity interest in Net2Wireless. The Company initiated a search for additional
investment opportunities in order to provide further value to the Company's
shareholders.
On January 17, 2001, the Company announced the resignations of Howard S.
Landa and Brian B. Lewis and the appointment of Steven P. Strasser as Chief
Executive Officer of the Company. On January 18, 2001, the board of directors of
the Company elected Andrew C. Bebbington to the board of directors and appointed
Mr. Bebbington as Chief Operating Officer. The Company's newly constituted board
of directors adopted a policy and initiated a strategy of making additional
minority investments in private companies. Pursuant to the Company's strategy,
the Company is seeking to achieve value for its shareholders principally by
making investments in equity and equity-oriented securities issued by
privately-owned companies in transactions negotiated directly with such
companies ("Portfolio Companies").
The Company is principally seeking to make investments in technology
companies; however, the Company will consider opportunities in non-technology
markets as well. The Company's investments will consist primarily of equity
securities, such as common stock or preferred stock, or debt combined with
warrants, options or other rights to acquire common or preferred stock. The
Company considers a number of factors before making investments in Portfolio
Companies, including strength of management,
3
market positioning, and future liquidity. Current income is not a significant
factor in the Company's selection of Portfolio Companies.
As part of the Company's strategy of making minority investments in
private companies, the Company must comply with the Investment Company Act of
1940 (the "Investment Company Act"). The Company is attempting to qualify as a
business development company under the Investment Company Act; however, the
Company does not currently meet all of the requirements for a business
development company election. Specifically, the Company will need to cancel or
otherwise negotiate the termination of substantially all of its outstanding
stock options and, subject to shareholder approval, grant new options in
compliance with the requirements of the Investment Company Act applicable to
business development companies. Further, the current percentage of the Company's
assets invested in qualifying assets may not be sufficient to allow the Company
to become a business development company, or the Company may need to increase
the percentage of its assets invested in qualifying assets in order to maintain
a business development company election.
The Company has had preliminary discussions with the staff of the
Securities and Exchange Commission (the "SEC") regarding the issues that need to
be addressed in order for the Company to make an election to become a business
development company. The Company is also considering whether to request formal
guidance from the SEC with respect to certain requirements of the Investment
Company Act as they would apply to the Company's election to become a business
development company. If the Company is able to satisfactorily resolve these
issues, the Company intends to promptly file an election to become a business
development company. If the Company is unable to meet the requirements for a
business development company, it may be necessary for the Company to register as
an investment company under the Investment Company Act. Registered investment
companies are subject to restrictions and regulations that are significantly
more burdensome than those applicable to business development companies. As a
result, it may not be practical for the Company to register as an investment
company, and it may be necessary for the Company to dispose of its investments
or take other actions necessary to ensure compliance with the Investment Company
Act. If the Company is unable to become a business development company and does
not register as an investment company, the Company will have to abandon its
strategy of making minority investments in private companies and either acquire
an operating business or liquidate its assets.
Investment Practices
Substantially all of the net assets of the Company are invested or are
intended to be invested in securities of Portfolio Companies. Substantially all
amounts not invested in securities of Portfolio Companies are invested in
short-term, highly liquid investments providing, in the opinion of management of
the Company, safety of principal.
The Company's investments in portfolio securities are structured in
private transactions negotiated directly with the owner or issuer of the
securities acquired. The Company is attempting to reduce certain risks inherent
in private equity-oriented investments by investing in a portfolio of companies
involved in different industry sectors. At March 27, 2001, the Company has
investments in only two Portfolio Companies, however, and the Company has
limited funds with which to make additional investments. As a result, unless the
Company raises additional capital for new investments, each of the Company's
investments will account for a significant percentage of the Company's net
assets. Therefore, if the value of any of the Company's investments
deteriorates, the Company could be adversely affected.
4
Investment Identification and Evaluation
Investment opportunities are identified for the Company by management.
Investment proposals, however, come to the Company from many other sources, and
may include unsolicited proposals from the public and from referrals from banks,
lawyers, other accountants and other members of the financial community.
Prospective investments are evaluated by management based upon criteria
that may be modified from time to time. The criteria being used by management in
determining whether to make an investment in a prospective company include: the
presence or availability of a strong management team; favorable industry and
competitive dynamics; and markets characterized by rapid growth and new product
adaptation. Prior to committing funds to an investment opportunity, due
diligence is conducted to assess the prospects and risks of the potential
investment.
The Company structures the terms of a proposed investment, including the
purchase price, the type of security to be purchased and the future involvement
of the Company and affiliates in the Portfolio Company's business. Private
equity investors often assist their portfolio companies with various aspects of
their business. The Company provides guidance and management assistance to its
Portfolio Companies with respect to such matters as budgets, profit goals,
business and financing strategy, management additions or replacements and plans
for liquidity events for portfolio investors.
Current Portfolio Companies
Jigami Corporation (formerly Net2Wireless)
Jigami Corporation ("Jigami") is a privately-held Delaware corporation
that operates a research and development facility in Israel. Jigami develops
technology intended to enable and enhance a wide variety of wireless
communication services. Jigami's 3Gate(TM) product offers digital cellular
operators the ability to include attractive 3G value-added services to their
existing portfolio of subscriber services and deliver rich content-based
services to wireless devices over existing infrastructures. Jigami's JIGAMI
mB(TM) product allows enterprises to securely extend their corporate networks to
authorized mobile employees.
At December 31, 2000, the Company's investment in Jigami, recorded at
$2,033,534, consisted of 3,000,000 shares of common stock. The Company also
holds a warrant to acquire an additional 1,000,000 shares of common stock at an
exercise price of $10.00 per share. The warrant expires on December 31, 2003.
Like many early stage companies, Jigami must raise additional financing in
order to fund its operations. In light of current market conditions, it is
uncertain whether sufficient financing will be available to Jigami, and the
terms of any such financing could be based on a valuation lower than that
reflected by the recorded amount of the Company's investment. The Company
intends to monitor Jigami's financing efforts to determine whether any
adjustment should be made to the recorded amount of the Company's investment.
Nex2, LLC
Nex2, LLC ("Nex2") is a Utah limited liability company developing the
technology and business to act as a clearing house for personal health
information received from Pharmaceutical Benefits Managers ("PBMs"), with the
consent of individuals, for use by life insurance companies for determining
5
risks in underwriting life insurance policies. Nex2 is in the process of
completing the development of the technology for capturing the data from the
PBMs, and this technology is scheduled to be beta tested with a limited number
of life insurance companies in 2001. Nex2 has also entered into a number of
contracts with PBMs, most notably Merk-Medco and AdvancePCS, to acquire personal
data. Nex2 expects to make its product available to life insurance companies
approximately three months after the beta testing is complete.
The Company completed its investment in Nex2 on January 22, 2001. The
Company acquired 249,700 Investor Units and 300 Voting Units for an aggregate
purchase price of $750,000. The Units were acquired directly from Nex2 and
represent approximately 1.9% of the outstanding Units of Nex2.
Follow-On Investments
Following its initial investment in a Portfolio Company, the Company may
be requested to make follow-on investments in the portfolio company. Follow-on
investments may be made to take advantage of warrants or other preferential
rights granted to the Company or otherwise to maintain or increase the Company's
position in a successful or promising Portfolio Company. The Company may also be
called upon to provide additional equity or loans needed by a portfolio company
to fully implement its business plans, to develop a new line of business or to
recover from unexpected business problems.
Disposition of Investments
The method and timing of the disposition of the Company's portfolio
investments will be critical to the realization of capital appreciation and to
the minimization of any capital losses. The Company expects to dispose of its
portfolio securities through a variety of transactions, including sales of
portfolio securities in underwritten public offerings, public sales of such
securities and negotiated private sales of such securities to other investors.
The Company bears the costs of disposing of investments to the extent not paid
by a Portfolio Company.
Valuation
The Company's investments do not have a ready market. The Company's
investments are accounted for under the cost method and are carried at the lower
of cost or estimated net realizible value. The Company assesses the need to
record impairment losses on investments if impairment of an investment is
determined to be other than temporary.
If the Company becomes a business development company under the Investment
Company Act, investments in Portfolio Companies will then be carried at fair
market value with the net change in unrealized appreciation or depreciation
included in the determination of net assets. Cost or adjusted cost will be used
to approximate fair value of these investments until significant developments
affecting an investment provide a basis for valuing such investment at an amount
other than cost.
If the Company becomes a business development company, the fair value of
investments for which no market exists, and for which our board of directors
determines that the original cost of the investment is no longer an appropriate
valuation, will be determined on the basis of procedures established in good
faith by the board of directors. Valuations will be based upon such factors as
the financial and/or operating results of the most recent financial period, the
performance of the company relative to planned budgets/forecasts, the issuer's
financial condition and the markets in which it does business, the prices of any
recent transactions or offerings regarding such securities or any proxy
securities, any available analysis, media, or other reports or information
regarding the issuer, or the
6
markets or industry in which it operates, the nature of any restrictions on
disposition of the securities and other analytical data. In the case of
unsuccessful operations, the valuation may be based upon anticipated liquidation
proceedings.
Because of the inherent uncertainty of the valuation of portfolio
securities which do not have readily ascertainable market values, the Company's
estimate of fair value may significantly differ from the fair market value that
would have been used had a ready market existed for the securities. Appraised
values will not reflect brokers' fees or other normal selling costs which might
become payable on disposition of such investments. Investments in companies
whose securities are or become publicly traded, if any, will be valued at their
quoted market price, less a discount to reflect the estimated effects of
restrictions on the sale of such securities ("Valuation Discount"), if
applicable. Short-term investments having maturities of 60 days or less will be
stated at amortized cost, which will approximate fair value. Other fixed income
securities will be stated at fair value. Fair value of these securities will be
determined at the most recent bid or yield equivalent from dealers that make
markets in such securities. The directors will review the valuation policies on
a quarterly basis, or more frequently if deemed necessary, to determine their
appropriateness and may also hire independent firms to review the methodology of
valuation or to conduct an independent valuation.
Factors That May Affect Future Results, The Market Price Of Common Stock, And
The Accuracy Of Forward-Looking Statements
In the normal course of its business, the Company, in an effort to keep
its shareholders and the public informed about the Company's operations and
portfolio of investments, may from time-to-time issue certain statements, either
in writing or orally, that contain or may contain forward-looking information.
Generally, these statements relate to business plans or strategies of the
Company or Portfolio Companies in which it invests, projected or anticipated
benefits or consequences of such plans or strategies, projected or anticipated
benefits of new or follow-on investments made by or to be made by the Company,
or projections involving anticipated purchases or sales of securities or other
aspects of the Company's operating results. Forward-looking statements are not
guarantees of future performance and are subject to risks and uncertainties that
could cause actual results to differ materially. As noted elsewhere in this
report, the Company's operations and portfolio of investments are subject to a
number of uncertainties, risks, and other influences, many of which are outside
the control of the Company, and any one of which, or a combination of which,
could materially affect the results of the Company's operations, the value of
its assets, the market price of its common stock, and whether forward-looking
statements made by the Company ultimately prove to be accurate.
The following discussion outlines certain factors that in the future could
affect the Company's results for 2001 and beyond and cause them to differ
materially from those that may be set forth in any forward-looking statement
made by or on behalf of the Company:
Investment Company Act Compliance
In order to execute its strategy of making minority investments in private
companies, the Company must comply with the Investment Company Act. The Company
is attempting to qualify as a business development company under the Investment
Company Act; however, the Company does not currently meet all of the
requirements for a business development company election. Specifically, the
Company will need to cancel or otherwise negotiate the termination of
substantially all of its outstanding stock options and, subject to shareholder
approval, grant new options in compliance with the requirements of the
Investment Company Act applicable to business development companies. Further,
the current percentage of the Company's assets invested in qualifying assets may
not be sufficient to
7
allow the Company to become a business development company, or the Company may
need to increase the percentage of its assets invested in qualifying assets in
order to maintain a business development company election.
The Company has had preliminary discussions with the staff of the SEC
regarding the issues that need to be addressed in order for the Company to make
an election to become a business development company. The Company is also
considering whether to request formal guidance from the SEC with respect to
certain requirements of the Investment Company Act as they would apply to the
Company's election to become a business development company. If the Company is
able to satisfactorily resolve these issues, the Company intends to promptly
file an election to become a business development company. If the Company is
unable to meet the requirements for a business development company, it may be
necessary for the Company to register as an investment company under the
Investment Company Act. Registered investment companies are subject to
restrictions and regulations that are significantly more burdensome than those
applicable to business development companies. As a result, it may not be
practical for the Company to register as an investment company, and it may be
necessary for the Company to dispose of its investments or take other actions
necessary to ensure compliance with the Investment Company Act. If the Company
is unable to become a business development company and does not register as an
investment company, the Company will have to abandon its strategy of making
minority investments in private companies and either acquire an operating
business or liquidate its assets.
Long-Term Objective
The Company's investment strategy is intended for investors seeking
long-term capital growth. The Company is not meant to provide a vehicle for
those who wish to play short-term swings in the stock market. The portfolio
securities acquired by the Company generally will require several years to reach
maturity and generally will be illiquid. An investment in shares of the Company
should not be considered a complete investment program. Prospective purchasers
should take into account their investment objectives as well as their other
investments when considering the purchase of shares of the Company.
Non-Diversified Status; Number Of Investments
The Company is not limited in the proportion of its assets that may be
invested in the securities of a single issuer. The Company has investments in
only two Portfolio Companies so far, and the Company has limited funds with
which to make additional investments. As a result, unless the Company raises
additional captial for new investments, each of the Company's investments will
account for a significant percentage of the Company's net assets. Due to these
large positions in the securities of a small number of issuers, the Company is
exposed to a greater risk of loss and the market price of the Company's common
stock may fluctuate as a result of changes in the financial condition, the stock
price of, or in the market's assessment of any single portfolio company to a
greater extent than would be the case if it were a "diversified" company holding
numerous investments. If the value of any of the Company's investments
deteriorates, the value of the Company's common stock will be adversely
affected.
8
Lack Of Liquidity Of Portfolio Investments
The portfolio investments of the Company will consist principally of
securities will be subject to restrictions on sale because they were acquired
from the issuer in "private placement" transactions or because the Company is
deemed to be an affiliate of the issuer. Generally, the Company will not be able
to sell these securities publicly without the expense and time required to
register the securities under the Securities Act of 1933 and applicable state
securities laws unless an exemption from such registration requirements is
available. In addition, contractual or practical limitations may restrict the
Company's ability to liquidate its securities in Portfolio Companies since in
many cases the securities of such companies will be privately held and the
Company may own a relatively large percentage of the issuer's outstanding
securities. Sales may also be limited by securities market conditions, which may
be unfavorable for sales of securities of particular issuers or issuers in
particular industries. These limitations on liquidity of the Company's
securities could preclude or delay any disposition of such securities or reduce
the amount of proceeds that might otherwise be realized.
Need For Follow-On Investments In Portfolio Companies
After its initial investment in a Portfolio Company, the Company may be
called upon from time to time to provide additional funds to such company or
have the opportunity to increase its investment in a successful situation, e.g.,
the exercise of a warrant to purchase common stock. There is no assurance that
the Company will make, or have sufficient funds to make, follow-on investments.
Any decision by the Company not to make a follow-on investment or any inability
on its part to make such an investment may have a negative impact on a Portfolio
Company in need of such an investment or may result in a missed opportunity for
the Company to increase its participation in a successful operation and may
dilute the Company's equity interest in or reduce the expected yield on its
investment.
Competition For Investments
The Company encounters competition from other persons or entities with
similar investment objectives. These competitors include venture capital
partnerships, investment partnerships and corporations, small business
investment companies, large industrial and financial companies investing
directly or through affiliates, other business development companies, foreign
investors of various types and individuals. Many of these competitors have
greater financial resources and more personnel than the Company and may be
subject to different and frequently less stringent regulation.
Loss Of Conduit Tax Treatment
The Company does not qualify for conduit tax treatment. Therefore, the
Company will be subject to income tax on its income and gains, and shareholders
will be subject to income tax on distributions. The Company may also be subject
to a 4% excise tax if it fails to distribute a sufficient portion of its net
investment income and net realized capital gains.
Valuation Of Investments
If the Company becomes a business development company, the Company's net
asset value will be based on the value assigned to its portfolio investments.
The value of the Company's investments in securities for which market quotations
are not available will be determined as of the end of each fiscal quarter but
monitored in case there is a significant event requiring a change in valuation
in the interim. Cost will be used to approximate fair value of such investments
until significant developments affecting an investment provide a basis for use
of an appraisal valuation. Thereafter, such portfolio investments
9
will be carried at appraised values as determined at least quarterly. Due to the
inherent uncertainty of the valuation of portfolio securities which do not have
readily ascertainable market values, the Company's estimate of fair value may
significantly differ from the fair value that will be used if a ready market
exists for the securities. At December 31, 2000, 100% of the securities in
portfolio companies held by the Company, representing approximately 40% of the
Company's stockholders' equity, were invested in securities for which market
quotations were not readily available. See "BUSINESS--Valuation".
Possible Volatility Of Stock Price
The market price of the Company's common stock could be subject to
significant fluctuations in response to variations in the value of the Company's
investments in portfolio companies, its quarterly operating results, and other
factors. The market price of the common stock may be significantly affected by
such factors as the announcement of new or follow-on investments in portfolio
companies, the sale or proposed sale of a portfolio investment, the results of
operations or fluctuations in the market prices or appraised value of one or
more of the Company's portfolio companies, changes in earnings estimates by
market analysts, speculation in the press or analyst community and general
market conditions or market conditions specific to particular industries. From
time to time in recent years, the securities markets have experienced
significant price and volume fluctuations that have often been unrelated or
disproportionate to the operating performance of particular companies. These
broad fluctuations may adversely affect the market price of the common stock.
Securities markets are cyclical and the prices of the securities traded in such
markets rise and fall at various times. These cyclical periods may extend over
significant periods of time.
Regulation
The Company is attempting to become a business development company under
the Investment Company Act of 1940. If the Company files an election with the
SEC to become a business development company, it will not be permitted to
withdraw its election without first obtaining the approval of a majority
interest of its shareholders. The following brief description of the Investment
Company Act, as it relates to business development companies, is qualified in
its entirety by reference to the full text of the Investment Company Act and the
rules thereunder.
A business development company must be operated for the purpose of
investing in the securities of certain present and former "eligible portfolio
companies" or certain bankrupt or insolvent companies and must make available
significant managerial assistance to portfolio companies. An eligible portfolio
company generally is a company that (i) is organized under the laws of, and has
its principal place of business in, any state or states, (ii) is not an
investment company and (iii) (a) does not have a class of securities registered
on an exchange or included in the Federal Reserve Board's over-the-counter
margin list, (b) is actively controlled by the business development company
acting either alone or as part of a group acting together, and an affiliate of
the business development company is a member of the portfolio company's board of
directors or (c) meets such other criteria as may be established by the SEC.
Control is presumed to exist where the business development company owns more
than 25% of the outstanding voting securities of a portfolio company.
"Making available significant managerial assistance" is defined under the
Investment Company Act to mean (i) any arrangement whereby a business
development company, through its directors, officers or employees, offers to
provide and, if accepted, does provide significant guidance and counsel
concerning the management, operations or business objectives or policies of a
portfolio company or (ii) the exercise of a controlling influence over the
management or policies of a portfolio company by the business development
company acting individually or as part of a group of which the business
10
development company is a member acting together which controls such company
("Managed Company"). A business development company may satisfy the requirements
of clause (i) with respect to a portfolio company by purchasing securities of
such a company as part of a group of investors acting together if one person in
such group provides the type of assistance described in such clause. However,
the business development company will not satisfy the general requirement of
making available significant managerial assistance if it only provides such
assistance indirectly through an investor group. A business development company
need only extend significant managerial assistance with respect to portfolio
companies which are treated as Qualifying Assets (as defined below) for the
purpose of satisfying the 70% test discussed below.
The Investment Company Act prohibits or restricts a business development
company from investing in certain types of companies, such as brokerage firms,
insurance companies, investment banking firms and investment companies.
Moreover, the Investment Company Act limits the type of assets that a business
development company may acquire to "Qualifying Assets" and certain assets
necessary for its operations (such as office furniture, equipment and
facilities) if, at the time of the acquisition, less than 70% of the value of
the business development company's total assets consists of Qualifying Assets.
Qualifying Assets include (i) securities of companies that were eligible
portfolio companies at the time that the business development company acquired
their securities; (ii) securities of companies that are actively controlled by
the business development company; (iii) securities of bankrupt or insolvent
companies that are not otherwise eligible portfolio companies; (iv) securities
acquired as follow-on investments in companies that were eligible portfolio
companies at the time of the business development company's initial acquisition
of their securities but are no longer eligible portfolio companies, provided
that the business development company has maintained a substantial portion of
its initial investment in such companies; (v) securities received in exchange
for or distributed on or with respect to any of the foregoing; and (vi) cash
items, government securities and high-quality, short-term debt. The Investment
Company Act also places restrictions on the nature of the transactions in which,
and the persons from whom, securities can be purchased in order for such
securities to be considered Qualifying Assets. As a general matter, Qualifying
Assets may only be purchased from the issuer or an affiliate in a transaction
not constituting a public offering. A business development company may not
purchase any security on margin, except such short-term credits as are necessary
for the clearance of portfolio transactions, or engage in short sales of
securities.
A business development company is permitted by the Investment Company Act,
under specified conditions, to issue multiple classes of senior debt and a
single class of preferred stock senior to the common stock if its asset
coverage, as defined in the Investment Company Act, is at least 200% after the
issuance of the debt or the senior shareholders' interests. In addition,
provisions must be made to prohibit any distribution to common shareholders or
the repurchase of any shares unless the asset coverage ratio is at least 200% at
the time of the distribution or repurchase.
A business development company generally may sell its securities at a
price that is below the prevailing net asset value per share only upon the
approval of the policy by shareholders holding a majority of the shares issued
by the business development company, including a majority of shares held by
nonaffiliated shareholders. The business development company may, in accordance
with certain conditions established by the SEC, sell shares below net asset
value in connection with the distribution of rights to all of its shareholders.
The business development company may also issue shares at less than net asset
value in payment of dividends to existing shareholders. Shareholders of a
closed-end business development company have no right to present their shares to
the business development company for redemption.
11
Many of the transactions involving a business development company and its
affiliates (as well as affiliates of such affiliates) require the prior approval
of a majority of the independent directors and a majority of the independent
directors having no financial interest in the transactions. However, certain
transactions involving closely affiliated persons of a business development
company would require the prior approval of the SEC. In general (a) any person
who owns, controls or holds with power to vote more than 5% of the outstanding
shares, (b) any director or executive officer and (c) any person who directly or
indirectly controls, is controlled by or is under common control with such
person, must obtain the prior approval of a majority of the independent
directors and, in some situations, the prior approval of the SEC, before
engaging in certain transactions involving a business development company or any
company controlled by the business development company. In accordance with the
Investment Company Act, a majority of the directors must be persons who are not
"interested persons" as defined in such act. Except for certain transactions
which must be approved by the independent directors, the Investment Company Act
generally does not restrict transactions between a business development company
and its portfolio companies.
Employees
The Company currently has two employees, Mr. Strasser, the chief executive
officer of the Company, and Mr. Bebbington, the chief operating officer of the
Company.
12
- --------------------------------------------------------------------------------
ITEM 2. PROPERTIES
- --------------------------------------------------------------------------------
Prior to March 1, 2000, 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, then chief executive officer of the
Company, as required by the terms of the proposed merger agreement with
Net2Wireless. As part of his consideration, Mr. Landa agreed to permit the
Company to continue to use the facilities pending the closing of the proposed
merger with Net2Wireless. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
Commencing February 15, 2001, the Company relocated to 136 East South
Temple, Suite 2325, Salt Lake City, Utah 84111. The Company has leased 1,146
square feet of office space through August 30, 2002. In exchange for a discount,
the Company prepaid the lease obligation for the entire term in the amount of
$28,082.
- --------------------------------------------------------------------------------
ITEM 3. LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------
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. The
Company filed a motion to dismiss a portion of the claims (which was granted in
part to dismiss a claim for certain penalties), and intends to vigorously defend
its position. Mr. Landa 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 originally contemplated under the
proposed merger agreement with Net2Wireless. See "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS."
- --------------------------------------------------------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- --------------------------------------------------------------------------------
A special meeting of the stockholders of the Company was held on December
5, 2000. The first item of consideration was a proposal to approve the adoption
of a Stock Option Plan covering up to 6,000,000 shares of common stock of the
Company, with the votes tabulated as follows: 2,684,466 for, 339,613 against,
and 103,708 abstaining. The second item of consideration was a proposal to
ratify certain options granted to management, directors and consultants to
acquire up to 2,200,000 shares of common stock of the Company, with the votes
tabulated as follows: 5,817,013 for, 391,277 against, and 70,626 abstaining. The
two other items that had been proposed for consideration at this meeting, the
approval of the proposed merger of the Company with Net2Wireless Corporation and
the change of the name and corporate domicile of the Company, were withdrawn
from consideration. See "BUSINESS: Net2Wireless Transaction."
13
PART II
- --------------------------------------------------------------------------------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
- --------------------------------------------------------------------------------
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. 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.
Quarter Ended High Low
------------- ------- -------
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
March 31, 2000 $79.688 $22.625
June 30, 2000 $41.500 $10.000
September 30, 2000 $30.438 $16.063
December 31, 2000 $18.750 $ 0.438
On March 27, 2001, the last reported sales price for the Company's common
stock as reported by Nasdaq was $0.9375. On March 27, 2001, the Company had
approximately 270 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. However, it is anticipated that any potential earnings of the
Company will be retained for working capital and investments. Consequently, it
is not anticipated that the Company will pay dividends in the foreseeable
future.
14
- --------------------------------------------------------------------------------
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------------------------------------------------------
CERTAIN FINANCIAL DATA
The following statement of operations and balance sheet data as of and for
the periods ended December 31, 2000, 1999, 1998, 1997 and 1996, and June 30,
1996, 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 years ended December 31, 2000, 1999, 1998, and 1997, for
the six months ended December 31, 1996, and for the fiscal year ended June 30,
1996, 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."
Year Ended December 31, Six Months
-------------------------------------------------------- Ended Year Ended
December 31, June 30
2000(2) 1999(2) 1998 1997 1996 1996(3)
------- ------- ---- ---- ---- -------
Statement of Operations
Data(1):
Revenues: $ 359,405 $ 147,944 $ 137,814 $ 140,870 $ 59,638 $ 12,320
============ ============ ============ ============ ============ ============
Income (loss) from
continuing operations $ 4,067,977 $(11,995,158) $ (1,221,025) $ (2,324,262) $ (326,242) $ (463,637)
Income (loss) from
discontinued operations -- 22,528 (5,702,419) (12,493,549) (1,317,678) (1,242,611)
Gain on sale of
discontinued operations 224,075 3,268,250 -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Net income (loss) $ 4,292,052 $ (8,704,380) $ (6,923,444) $(14,817,811) $ (1,643,920) $ (1,706,248)
============ ============ ============ ============ ============ ============
Basic income
(loss) per common
shares from
continuing operations $ 0.62 $ (2.11) $ (0.51) $ (0.51) $ (0.08) $ (0.16)
Basic income (loss)
per common share from
discontinued operations 0.04 0.58 (1.12) (2.71) (0.32) (0.38)
------------ ------------ ------------ ------------ ------------ ------------
Basic income
(loss) per common
share $ 0.66 $ (1.53) $ (1.63) $ (3.22) $ (0.40) $ (0.54)
============ ============ ============ ============ ============ ============
Weighted average
common shares
outstanding 6,536,352 5,693,514 5,073,463 $ 4,603,080 4,164,328 3,255,489
Balance Sheet Data:
Working capital $ 3,251,870 $ 5,034,089 $ 4,038,840 $ 6,784,305 $ 15,584,953 $ 15,737,295
Total assets $ 5,349,509 $ 5,568,839 $ 4,317,769 $ 7,104,476 $ 15,716,524 $ 16,032,158
Long-term liabilities
and deferred gain $ 200,000 $ 5,542,040 $ -- $ -- $ -- $ 45,792
Stockholders' equity
(deficit) $ 5,085,404 $ (154,959) $ 4,049,572 $ 6,853,003 $ 15,591,513 $ 15,661,097
Cash dividends declared
per common share $ -- $ -- $ -- $ -- $ -- $ --
(footnotes contained on following page)
15
- ----------
(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) During the year ended December 31, 1999, the Company recognized total
non-cash expenses of $11,227,873 ($1.97 per share) in the statement of
operations related to compensation expense for stock options and deferred
compensation expense that principally resulted from an increase in the
price of the common stock of the Company. During the year ended December
31, 2000, due to the decline in the price of the common stock, the Company
recognized non-cash credits (resulting in increased net income) primarily
from the reversal of previously-recorded compensation expense for stock
options and deferred compensation expense in the total amount of
$5,523,532 ($0.84 per share). See Notes C and H to the Consolidated
Financial Statements for a more detailed explanation of these charges and
credits.
(3) Effective October 27, 1995, the Company acquired Sensar Instruments, Inc.
(formerly Sensar Corporation), in a transaction accounted for as a
purchase.
- --------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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 results of
operations and cash flows associated with these products and technologies 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. Although the
acquisition of Net2Wireless did not occur, the Company did acquire an equity
interest in Net2Wireless in December 2000. In January 2001, the Company acquired
a small equity interest in Nex2, LLC. The Company is attempting to qualify as a
business development company under the Investment Company Act of 1940 and
intends to make additional investments in other companies, if permitted.
RESULTS OF OPERATIONS
Comparison of Years Ended December 31, 2000 and 1999
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 $359,405 for 2000 and $147,944 for 1999 earned on temporary cash investments
and notes receivable.
16
Costs and Expenses
General and administrative expenses associated with continuing operations
increased from $893,416 for the year ended December 31, 1999, to $1,458,810 for
the year ended December 31, 2000. The increase was principally related to
increases of approximately $229,000 for legal and accounting fees, $109,000 in
travel costs and $203,000 for proxy printing, mailing and solicitation costs
associated primarily with the Net2Wireless transaction.
During the year ended December 31, 2000, the Company recorded a net credit
of $181,492 related to compensation for stock options. This net credit is
composed of three elements: (1) a credit of $1,200,000 related to the stock
option to acquire 200,000 shares granted to the chief executive officer in 1999
that had a cashless exercise provision, (2) a charge of $868,508 for an option
to acquire 650,000 shares approved by shareholders for the Company's chief
consultant and (3) a charge of $150,000 for options approved by shareholders for
directors where the market price of the common stock exceeded the exercise price
on the date of shareholder approval. The cashless exercise feature of the option
to the chief executive officer was eliminated at the end of June 2000 as the
result of the third amendment to the agreement between the Company and
Net2Wireless. Generally accepted accounting principles require that compensation
be recorded for the amount of the change in the value of the common stock
underlying options with such provisions. Likewise, if the price of the stock
declines during the period, compensation is reduced by the amount of the
decrease in the value of the stock underlying the options, but not in excess of
the cumulative compensation recorded since the grant date. The amount of the
reduction in compensation is equal to the decrease in the stock price during the
period that the cashless feature was in effect, multiplied by the 200,000
shares. The charge for options granted to the Company's chief consultant is
based on the fair value of the option as computed under the Black-Scholes model.
The charge for options granted to directors is equal to the difference between
the market value of the underlying common stock and the exercise price of the
options, multiplied by 300,000 shares.
During the year ended December 31, 2000, the Company recorded a reduction
in non-cash deferred compensation expense of $5,342,040 for the decrease during
the year in 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. On December 5, 2000, the deferred compensation plan was
terminated and the participants in the plan abandoned their interest in the plan
with the shareholder approval of options previously granted to the participants.
With the decrease in the market capitalization as a result of the decline in the
price of the Company's common stock between December 31, 1999 and December 5,
2000, the total amount of the deferred compensation pool declined to zero.
Accordingly, the Company reversed the entire deferred compensation liability in
the year ended December 31, 2000 and recorded a corresponding credit in the
statement of operations. See Note C to the Consolidated Financial Statements of
the Company for additional information about this plan.
During the year ended December 31, 2000, the Company recorded an unusual
charge of $356,150 in connection with an agreement entered into with the chief
executive officer whereby he agreed to indemnify the Company with respect to
pending litigation. In exchange for his indemnification, the Company distributed
to him certain investments with a book value of $325,000 and office equipment
and furnishings with a carrying value of $31,150. See "LEGAL PROCEEDINGS" and
Note J to the Consolidated Financial Statements of the Company for additional
information about this indemnification.
As a result of the non-cash credits recognized during the year ended
December 31, 2000, primarily for the reversal of previously recorded
compensation expense for stock options and deferred
17
compensation expense as described above, the Company reported income from
continuing operations of $4,067,977 ($0.62 per share) rather than a loss of
$1,455,555 ($0.22 per share), a difference of $5,523,532 ($0.84 per share). As a
result of the non-cash charges recognized during the year ended December 31,
1999 for compensation expense for stock options and deferred compensation
expense as described above, the Company reported a loss from continuing
operations of $11,995,158 ($2.11 per share) rather than a loss of $767,285
($0.14 per share), a difference of $11,227,873 ($1.97 per share).
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.
The Company also recorded a net credit of $31,663 for unusual items during
the year ended December 31, 1999. This credit principally consisted 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.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2000, the Company had total current assets of $3,315,975,
including cash and cash equivalents of $3,248,505. The Company had total current
liabilities of $64,105 at December 31, 2000, resulting in working capital of
$3,251,870.
18
The Company's primary source of cash for the year ended December 31, 2000,
was cash collected on notes receivable of $1,419,589. The Company's primary uses
of cash for the year ended December 31, 2000, were net cash used in operations
of $1,278,572 and the investment in Net2Wireless of $2,000,000 (including the
conversion of a note receivable of $500,000).
The Company has limited funds available with which to make additional
investments. In addition, the Company believes it would be difficult to raise
additional capital at this time. As a result, the Company will have limited
ability to make investments in new portfolio companies or follow on investments
in existing portfolio companies. Further, while management believes that the
Company's current cash balances are more than sufficient to meet the existing
commitments of the Company for at least the next fiscal year, additional
investments by the Company could reduce the amounts available to fund future
salaries and other operating expenses of the Company. Due to the illiquid nature
of minority investments in private companies, the Company may not be able to
sell its investments in portfolio companies, if necessary, to obtain working
capital, and the Company may need to seek alternative financing sources to fund
operations. There can be no assurance that the Company will be able to obtain
this financing if it is needed.
- --------------------------------------------------------------------------------
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------------------
Concentrations of market risk exist with respect to equity investments in
companies which are subject to significant business and financial risk usual to
companies in early stages of development. Such investments are generally
long-term in nature and there is generally no ready market for such investments,
as they are closely held and are not publicly traded. The Company currently
records these investments at the lower of cost or net realizable value. This
method of accounting does not result in increases or decreases in the carrying
value of these investments in response to changes in market prices.
The Company does not have any derivative instruments, commodity
instruments, or other financial instruments for trading or speculative purposes,
nor is it presently at risk for changes in foreign currency exchange rates.
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
Not applicable.
19
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:
Director and/or
Name Age Position and Office Held Executive Officer Since
-------------------- --- ------------------------ -----------------------
Steven P. Strasser 52 Chief Executive Officer April 21, 1999
and Director
Mickey Hale 53 Secretary and Director May 5, 1999
Andrew C. Bebbington 40 Chief Operating Officer January 18, 2001
and Director
Simon J. Constantine 42 Director January 24, 2001
A director's regular term is for a period of three years or until his or
her 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 Andrew C. Bebbington expires at the
2001 annual meeting; the current terms of Steven P. Strasser and Mickey Hale
expire at the 2002 annual meeting; and the current term of Simon J. Constantine
expires at the 2003 annual meeting.
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.
Steven P. Strasser, age 52, was appointed a director of the Company on
April 21, 1999 and Chief Executive Officer on January 16, 2001. 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 53, was appointed a director of the Company on May 5,
1999 and Secretary on January 18, 2001. 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.
Andrew C. Bebbington, age 40, was appointed a director of the Company and
Chief Operating Officer on January 18, 2001. Mr. Bebbington served as President
of the Company from November 1997 until April 1999, and as a consultant to the
Company from April 1999 until his appointment as Chief
20
Operating Officer. Mr. Bebbington was formerly president of Neslab Instruments
Inc. for a period of six years, as well as serving on the board of directors of
Life Sciences International plc until its purchase by Thermo Electron, Inc., in
March 1997. Prior to this position, Mr. Bebbington served as business
development director of Life Sciences for a period of four years, during which
time he was responsible for coordinating Life Sciences' rapid expansion through
acquisition. Mr. Bebbington is a graduate of the London School of Economics and
a Chartered Accountant. Mr. Bebbington served in the KPMG consulting practice,
specializing in mergers, acquisitions and other strategic and financial planning
activities.
Simon J. Constantine, age 42, was appointed a director of the Company on
January 24, 2001. Mr. Constantine has been Executive Chairman of Auto Online
Limited since 1999. Mr. Constantine has made a number of venture capital
investments on his own behalf since 1997. From 1987 to 1997, Mr. Constantine
served in multiple positions with Life Sciences International plc, including
Finance Director, Acquisitions and Finance Director, and Chief Operating Officer
- - Europe and Asia Pacific. He has also been a director of Bioquell plc since
1999. From 1992 through 1995, Mr. Constantine was a member of the Listing Policy
Committee and the Quotations Committee of the London Stock Exchange. Mr.
Constantine holds a degree in mathematics from Oxford University and is a
Chartered Accountant. Mr. Constantine was also employed in the KPMG consulting
practice specializing in acquisitions and other strategic and financial planning
services.
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.
Based solely upon a review of the copies of such forms furnished to the
Company and written representations from certain reporting persons, the Company
believes that during 2000 all persons subject to the reporting requirements of
Section 16(a) filed the required reports on a timely basis, except that a Form 5
was filed late by Brian B. Lewis, a Form 3 was filed late by Andrew C.
Bebbington, and a Form 3 was filed late by Simon J. Constantine.
21
- --------------------------------------------------------------------------------
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 of the Company,
who is referred to as the "named executive officer". No other executive officer
of the Company received compensation in excess of $100,000 for the periods
indicated.
SUMMARY COMPENSATION TABLE
Long Term Compensation
---------------------------------
Annual Compensation Awards Payouts
----------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Securities
Annual Restricted Underlying All Other
Compen- Stock Options/ LTIP Compen-
Name and Salary Bonus sation(1) Award(s) SARs Payouts sation
Principal Position Year ($) ($) ($) ($) (#) ($) ($)
- ----------------------------------------------------------------------------------------------------------------------------
Howard S. Landa 12/31/00(2) $88,000 $0 $3,985 $0 0 $0 $(3,908,810)(3)
CEO and 12/31/99(2) $66,585 $0 $ 0 $0 1,000,000(4) $0 $ 3,908,810 (3)
Chairman of
the Board until
January 16, 2001
- ----------------------------------------------------------------------------------------------------------------------------
- ----------
(1) These amounts reflect the benefit to the named executive officer of
amounts paid by the Company for health 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, 2000. Mr. Landa resigned as chief executive officer and from
the board of directors on January 16, 2001. With his resignation, Mr.
Landa waived his rights to options to acquire 500,000 shares of common
stock at $2.00 per share. Steven P. Strasser was appointed chief executive
officer on January 16, 2001. Mr. Strasser will be paid $96,000 per year
and received options to acquire 250,000 shares of common stock at $2.00
per share.
(3) This 1999 amount represents Mr. Landa's share of the deferred compensation
pool accrued during the year ended December 31, 1999. With the decrease in
market capitalization between December 31, 1999 and December 5, 2000,
amounts previously accrued under the deferred compensation plan were
reversed. As described in Note (4) below, Mr. Landa forfeited his interest
in this plan on December 5, 2000 when options to acquire 800,000 shares of
common stock were approved by shareholders.
(4) Of these options granted, 800,000 were subject to stockholder approval,
which approval was sought and obtained on December 5, 2000. With this
approval by the stockholders, Mr. Landa forfeited his interest in the
deferred compensation plan described in Note (3) above. Upon his
resignation as chief executive officer and a director of the Company on
January 16, 2001, Mr. Landa waived his rights to options to acquire
500,000 shares of common stock as disclosed in Note (2) above.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
There were no stock options or stock appreciation rights granted by the
Company during the year ended December 31, 2000. Certain options that were
granted in November 1999 (and reported in Item 11
22
on Form 10-K for the year ended December 31, 1999) were approved by shareholders
at a special meeting on December 5, 2000.
The following table sets forth the information concerning the options
exercised by the named executive officer during the year ended December 31,
2000, and the value of unexercised options as of December 31, 2000.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Shares Options/SARs at Options/SARs at
Acquired FY End (#) FY End ($)
on Exercise Value Exercisable/ Exercisable/
Name (#) Realized ($) Unexercisable Unexercisable
- --------------------------------------------------------------------------------
Howard S. Landa 0 $0 1,000,000/0 $0/$0
At December 31, 2000, the Company had options outstanding to acquire
2,495,256 shares of common stock at a weighted-average exercise price of $2.25,
all of which are exercisable.
EXECUTIVE EMPLOYMENT AGREEMENTS
The Company had an employment contract with Howard S. Landa with an
initial term through December 31, 2002, that provided for monthly compensation
of $8,000. On January 16, 2001, the Company entered into a Transition Agreement
with Mr. Landa and the remaining members of the board of directors. Under this
agreement, Mr. Landa resigned as chief executive officer and from the board of
directors of the Company, and waived his rights to options to acquire 500,000
shares of common stock. Under the transition agreement, Steven P. Strasser was
appointed chief executive officer of the Company. Andrew C. Bebbington was
appointed chief operating officer of the Company and to the board of directors
on January 18, 2001.
In connection with their appointments, the Company entered into employment
agreements with Mr. Strasser and Mr. Bebbington. These agreements have initial
terms that expire January 14, 2002, but renew automatically so there is always
an unexpired one-year term. The employment agreements require the employee to
devote such time, attention, and services as may be required to perform
faithfully the duties assigned by the board of directors, although the
agreements do not anticipate that such duties will require the executive's full
business time. The agreements prohibit the executive from competing in any
fashion with the Company during the term of the agreement and for one year
subsequent to termination, and prohibit disclosure or use by the executive of
trade secrets or other confidential information of the Company for a period of
three years subsequent to termination.
The employment agreements provide for annual compensation of $96,000 and
$144,000 for the CEO and COO, respectively, plus normal benefits for vacation,
sick leave, and health, medical, and disability insurance.
In connection with his appointment, Mr. Strasser received options to
acquire 250,000 shares of common stock with an exercise price of $2.00 per
share. In connection with his employment agreement, Mr. Bebbington waived his
right to options to acquire 150,000 shares of common stock with an exercise
23
price of $2.00 per share. Mr. Bebbington continues to hold options to purchase
503,056 shares of common stock with a weighted-average exercise price of $2.00
per share.
In the event that the executive is disabled or dies during the term of his
employment agreement, he is entitled to his base salary for a period of 90 days.
The employment agreements can be terminated by the Company for cause by showing
that the executive has materially breached the terms of the employment
agreement, that the executive, in the reasonable determination of the board of
directors, has been grossly negligent or engaged in material willful or gross
misconduct in the performance of his duties, or that the executive has committed
or been convicted of fraud, embezzlement, theft, dishonesty, or other criminal
conduct against the Company. On the sale or transfer of all or substantially all
of the assets of the Company, the merger of the Company into another entity, the
termination of the business of the Company, a change in control of the Company,
or the continued breach by the Company of the employment agreement after 20 days
written notice, the executive has the right to terminate the employment
agreement. In the event of a termination of the employment agreement other than
by the Company for cause, the executive will receive an amount equal to the
amount of salary that would otherwise accrue to the executive during the
remaining employment period, a one-year period.
The Company agrees to indemnify the executives and hold them harmless from
liability for acts or decisions made by the executive in connection with
providing services to the Company to the greatest extent permitted by law. The
Company has an obligation to use its best efforts to obtain officer's and
director's insurance covering the executive. Each of the executives agree to
indemnify the Company and hold it harmless from liabilities arising from their
acts or omissions in violation of their duties under the employment agreements
that constitute fraud, gross negligence, or willful and knowing violations.
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 received 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 consisted 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 was to be fixed at December 31, 2002, or, if sooner, on any
change of control. In the event of a change of control, the deferred
compensation pool was not to be less than $5 million. The pool was required to
be paid in cash unless payment in stock of the Company has been approved by the
shareholders. Each of the holders of interests in the deferred compensation plan
agreed to relinquish their interest in the plan upon stockholder approval of
options granted to them by the board of directors. On December 5, 2000 at a
special meeting of stockholders, those options were approved by shareholders.
The deferred compensation plan was terminated, and the participants abandoned
their interests in the plan.
24
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 have received
options to acquire shares of stock at a weighted-average exercise price of $2.00
per share.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
The Company did not have a compensation committee during the year ended
December 31, 2000. The entire board, other than the particular individual
executive officer involved, participated in the setting of compensation for
senior management. On February 8, 2001, a compensation committee was formed
consisting of Mr. Strasser, Ms. Hale, and Mr. Constantine.
- --------------------------------------------------------------------------------
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
Company's outstanding common stock as of March 27, 2001, and information as to
the ownership of the Company's common stock by each director and named executive
officer 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.
25
Name and Address Nature of Number of
of Beneficial Owners(1) Ownership Shares Owned Percent(2)
-------------------------- -------------- ------------- ----------
Named Executive Officer
Howard S. Landa(3) Common stock(4) 56,076 0.9%
Options 500,000 7.1%
-------------
Total 556,076 7.9%
Directors
Steven P. Strasser Common stock 0 0.0%
Options 500,000 7.1%
-------------
Total 500,000 7.1%
Mickey Hale Common stock 12,500 0.2%
Options 190,000 2.8%
-------------
Total 202,500 3.0%
Andrew C. Bebbington Common stock 0 0.0%
Options 503,056 7.1%
-------------
Total 503,056 7.1%
Simon J. Constantine Common stock(5) 7,600 0.1%
Options 150,000 2.2%
-------------
Total 157,600 2.3%
All Executive Officers and Common stock 20,100 0.3%
Directors as a Group Options 1,343,056 17.0%
(four persons) -------------
Total 1,363,156 17.2%
- ----------
(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 6,562,546 shares of common stock of the
Company issued and outstanding as of March 27, 2001. 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) Mr. Landa resigned as chief executive officer and from the board of
directors on January 16, 2001.
(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 disclaims direct beneficial ownership and control of these shares.
(5) These shares are beneficially owned by Mr. Constantine's spouse. Mr.
Constantine disclaims beneficial ownership and control of these shares.
26
- --------------------------------------------------------------------------------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------------------------------
In anticipation of the proposed merger with Net2Wireless, which required
that the Company's liabilities not exceed $50,000, the Company entered into an
indemnification agreement with Howard S. Landa. Under that agreement, Mr. Landa
agreed to indemnify the Company for any costs arising out of an action entitled,
Edgar Lee, et al. v. Sensar Corporation, filed in the Fourth Judicial District
Court in Utah County, Utah, Civil No. 990403473, 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 transferred to Mr. Landa
the assets held by the Company's subsidiary, Eagle Lake Ventures, Inc.,
including the right to use that name, plus certain office furniture and
equipment. These assets had a book value of $356,150 at the date of transfer,
and included 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. Finally, Mr. Landa agreed to make any space that the
Company would like to have at the Salt Lake City office available prior to the
planned merger at no charge and thereafter, for a period of one year subsequent
to the closing of the planned merger with Net2Wireless, 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.
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 the deferred
compensation plan approved by the board of directors of the Company in June
1999, contingent upon approval by the stockholders of Mr. Landa's option to
acquire 800,000 shares of common stock at $2.00 per share. That approval was
sought and obtained on December 5, 2000.
27
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.
EXHIBITS
SEC
Exhibit Reference
No. No. Title of Document Location
--- --- ----------------- --------
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-4,
Exhibit 3.5, SEC File
No. 333-34298*
6 (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*
7 (10) Deferred Compensation Plan Exhibit to report on
Adopted by the Board of Directors Form 10-K for the
Effective May 1, 1999 year ended
December 31, 1999*
28
SEC
Exhibit Reference
No. No. Title of Document Location
--- --- ----------------- --------
8 (10) 1997 Stock Option and Award Plan Exhibit to report on
Form 10-Q for the
quarter ended
March 31, 1997*
9 (10) Asset Purchase Agreement by and among Exhibit "A" to Proxy
PCB Group, Inc., Beehive Acquisition Corp., Statement dated
Larson-Davis Incorporated, and Larson-Davis 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*
10 (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
11 (10) Form of Market Stand Off and Exhibit to report on
Redemption Agreement by and between Form 10-K for the
Larson-Davis Incorporated and Investors year ended of
1998 Series A Preferred Stock, December 31, 1998*
dated January, 1999
12 (10) Release Agreement between Sensar Exhibit to report on
Corporation and Net2Wireless Form 8-K dated
Corporation dated December 4, 2000 December 4, 2000*
13 (10) Employment Agreement between This filing
Sensar Corporation and
Steven P. Strasser
14 (10) Employment Agreement between This filing
Sensar Corporation and
Andrew C. Bebbington
15 (10) 2000 Stock Option Plan Exhibit to Registration
Statement on Form
S-4 SEC File No.
333-34298*
16 (21) Subsidiaries of LarsonoDavis Incorporated Exhibit to report on
Form 10-KSB for the
year ended
June 30, 1996*
17 (23) Consent of Grant Thornton LLP This Filing
- ----------
*Incorporated by reference
29
REPORTS ON FORM 8-K
During the last quarter of the fiscal year ended December 31, 2000, the
Company filed seven reports on Form 8-K, dated October 5, 2000, October 16,
2000, November 8, 2000, November 22, 2000, December 4, 2000, December 4, 2000
and December 5, 2000, respectively. Subsequent to December 31, 2000, the Company
has filed one report on Form 8-K, dated January 22, 2001.
30
- --------------------------------------------------------------------------------
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: March 30, 2001 By /s/ Steven P. Strasser
---------------------------------------------
Steven P. Strasser, Chief Executive 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: March 30, 2001 By /s/ Steven P. Strasser
---------------------------------------------
Steven P. Strasser, Chief Executive Officer
and Director
(Principal Executive Officer)
Dated: March 30, 2001 By /s/ Andrew C. Bebbington
---------------------------------------------
Andrew C. Bebbington, Chief Operating
Officer and Director
(Principal Financial and Accounting Officer)
Dated: March 30, 2001 By /s/ Mickey Hale
---------------------------------------------
Mickey Hale, Director
Dated: March 30, 2001 By /s/ Simon J. Constantine
---------------------------------------------
Simon J. Constantine, Director
31
Sensar Corporation and Subsidiaries
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Consolidated Financial Statements:
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets as of December 31, 2000 and 1999 F-3
Consolidated Statements of Operations and Comprehensive Income (Loss)
for the Years Ended December 31, 2000, 1999 and 1998 F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the Years Ended December 31, 2000, 1999 and 1998 F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 1999 and 1998 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.
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, 2000 and 1999, and the related
consolidated statements of operations and comprehensive income (loss),
stockholders' equity (deficit), and cash flows for each of the three years in
the period ended December 31, 2000. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our 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, 2000 and 1999, and the consolidated results
of their operations and their consolidated cash flows for each of the three
years in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America.
/s/ Grant Thornton LLP
Salt Lake City, Utah
February 12, 2001
F-2
Sensar Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
------------------------------
2000 1999
------------- -------------
CURRENT ASSETS
Cash and cash equivalents $ 3,248,505 $ 3,735,115
Notes receivable (Note K) - 1,455,134
Other current assets 67,470 25,598
------------- -------------
Total current assets 3,315,975 5,215,847
OFFICE EQUIPMENT AND FURNISHINGS,
net of accumulated depreciation - 27,992
INVESTMENTS (Notes B and I) 2,033,534 325,000
------------- -------------
$ 5,349,509 $ 5,568,839
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 51,105 $ 31,438
Accrued liabilities 13,000 150,320
------------- -------------
Total current liabilities 64,105 181,758
LONG-TERM LIABILITIES AND DEFERRED GAIN
Deferred compensation (Note C) - 5,342,040
Deferred gain (Note K) 200,000 200,000
------------- -------------
TOTAL LIABILITIES AND DEFERRED GAIN 264,105 5,723,798
------------- -------------
CONTINGENT LIABILITY (Note I) - -
STOCKHOLDERS' EQUITY (DEFICIT) (Notes E, F, H and M)
Preferred stock, $.001 par value; authorized
10,000,000 shares; issued and outstanding
zero shares - -
Common stock, $.001 par value; authorized
290,000,000 shares; issued and outstanding
6,562,546 shares at December 31, 2000 and
6,326,038 shares at December 31, 1999 6,563 6,326
Additional paid-in capital 35,798,891 34,850,817
Accumulated deficit (30,720,050) (35,012,102)
------------- -------------
Total stockholders' equity (deficit) 5,085,404 (154,959)
------------- -------------
$ 5,349,509 $ 5,568,839
============= =============
The accompanying notes are an integral part of these financial statements.
F-3
Sensar Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
Year ended December 31,
----------------------------------------------
2000 1999 1998
------------ ------------- -------------
Revenues
Interest income $ 359,405 $ 147,944 $ 137,814
------------ ------------- -------------
Costs and expenses
General and administrative 1,458,810 893,416 708,890
Compensation expense for stock options (Note H) (181,492) 5,885,833 -
Deferred compensation expense (Note C) (5,342,040) 5,342,040 -
Unusual charges (credits), net (Note J) 356,150 (31,663) 649,949
Interest expense - 31,811 -
Other - 21,665 -
------------ ------------- -------------
(3,708,572) 12,143,102 1,358,839
------------ ------------- -------------
Income (loss) from continuing operations
before income taxes 4,067,977 (11,995,158) (1,221,025)
Income taxes (Note D) - - -
------------ ------------- -------------
Income (loss) from continuing operations 4,067,977 (11,995,158) (1,221,025)
Gain on sale of discontinued operations (Note K) 224,075 3,268,250 -
Income (loss) from discontinued operations (Note K) - 22,528 (5,702,419)
------------ ------------- -------------
Net income (loss) 4,292,052 (8,704,380) (6,923,444)
Other comprehensive income - foreign
currency translation adjustments - - (64,512)
------------ ------------- -------------
Comprehensive income (loss) $ 4,292,052 $ (8,704,380) $ (6,987,956)
============ ============= =============
Income (loss) per common share (Note G)
Continuing operations
Basic and diluted $ 0.62 $ (2.11) $ (0.51)
Discontinued operations
Basic and diluted $ 0.04 $ 0.58 $ (1.12)
Net income (loss)
Basic and diluted $ 0.66 $ (1.53) $ (1.63)
Income (loss) from continuing operations applicable
to common stock $ 4,067,977 $(12,020,572) $ (2,567,588)
Weighted average common and
common equivalent shares outstanding
Basic and diluted 6,536,352 5,693,514 5,073,463
The accompanying notes are an integral part of these financial statements.
F-4
Sensar Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years ended December 31, 2000, 1999 and 1998
Notes
receivable
Preferred stock Common stock Additional from
--------------------- ------------------------ paid-in Accumulated exercise
Shares Amount Shares Amount capital deficit of options
--------- -------- ----------- --------- ----------- ------------- -------------
Balances at January 1, 1998 - $ - 4,850,157 $ 4,850 $26,104,607 $(19,251,591) $ (69,375)
Shares issued for services
rendered (Note F) - - 19,499 19 148,294 - -
Shares issued upon exercise
of options (Note H) - - 110,546 111 726,079 - (726,190)
Shares purchased under
employee stock purchase
plan (Note H) - - 29,273 29 81,143 - -
Shares issued upon exercise
of warrants (Note H) - - 29,634 30 359,794 - -
Shares issued in private
placement (Note E) 3,500.00 3 - - 3,281,605 - -
Conversion of preferred
stock (Note E) (460.05) - 189,257 189 (189) - -
Collection of and allowance
on notes receivable from
exercise of options (Note H) - - - - - - 420,881
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) (374,684)
Shares issued upon exercise
of options (Note H) - - 105,880 106 (106) - -
Shares issued upon exercise
of warrants (Note H) - - 411,764 412 231,967 - -
Conversion of preferred
stock (Note E) (101.20) - 128,032 128 (128) - -
Collection of and allowance
on notes receivable from
exercise of options (Note H) - - - - - - 265,371
Shares issued in private
placement (Note F) - - 500,000 500 986,105 - -
Redemption of preferred
stock (Note E) (2,938.75) (3) - - (2,938,747) - -
Conversion of debenture
(Note F) - - 17,778 18 39,982 - -
Settlement of litigation
(Note H) - - (65,782) (66) (86,312) - 109,313
Capital contribution for
compensation from stock
option grants (Note H) - - - - 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) $ -
Accumulated
other
comprehensive
income
(loss) Total
------------ ------------
Balances at January 1, 1998 $ 64,512 $ 6,853,003
Shares issued for services
rendered (Note F) - 148,313
Shares issued upon exercise
of options (Note H) - -
Shares purchased under
employee stock purchase
plan (Note H) - 81,172
Shares issued upon exercise
of warrants (Note H) - 359,824
Shares issued in private
placement (Note E) - 3,281,608
Conversion of preferred
stock (Note E) - -
Collection of and allowance
on notes receivable from
exercise of options (Note H) - 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 - 4,049,572
Shares issued upon exercise
of options (Note H) - -
Shares issued upon exercise
of warrants (Note H) - 232,379
Conversion of preferred
stock (Note E) - -
Collection of and allowance
on notes receivable from
exercise of options (Note H) - 265,371
Shares issued in private
placement (Note F) - 986,605
Redemption of preferred
stock (Note E) - (2,938,750)
Conversion of debenture
(Note F) - 40,000
Settlement of litigation
(Note H) - 22,935
Capital contribution for
compensation from stock
option grants (Note H) - 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)
(Continued)
F-5
Sensar Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) - CONTINUED
Years ended December 31, 2000, 1999 and 1998
Notes
receivable
Preferred stock Common stock Additional from
--------------------- ------------------------ paid-n Accumulated exercise
Shares Amount Shares Amount capital deficit of options
---------- -------- ----------- ---------- ----------- ------------ ------------
Balances at
December 31, 1999 - $ - 6,326,038 $ 6,326 $34,850,817 $(35,012,102) $ -
Shares issued upon
exercise of options
(Note H) - - 220,911 221 1,150,690 - -
Shares issued upon
exercise of warrants
(Note H) - - 2,800 3 3,497 - -
Shares issued for
compensation (Note F) - - 14,000 14 10,923 - -
Capital contribution for
compensation from stock
option grants (Note H) - - - - (181,492) - -
Shares cancelled to
satisfy note receivable - - (1,203) (1) (35,544) - -
Net income for the year - - - - - 4,292,052 -
---------- -------- ----------- ---------- ----------- ------------ ------------
Balances at
December 31, 2000 - $ - 6,562,546 $ 6,563 $35,798,891 $(30,720,050) $ -
========== ======== =========== ========== =========== ============ ============
Accumulated
other
comprehensive
income
(loss) Total
------------ ------------
Balances at
December 31, 1999 $ - $ (154,959)
Shares issued upon
exercise of options
(Note H) - 1,150,911
Shares issued upon
exercise of warrants
(Note H) - 3,500
Shares issued for
compensation (Note F) - 10,937
Capital contribution for
compensation from stock
option grants (Note H) - (181,492)
Shares cancelled to
satisfy note receivable - (35,545)
Net income for the year - 4,292,052
------------ ------------
Balances at
December 31, 2000 $ - $ 5,085,404
============ ============
The accompanying notes are an integral part of these financial statements.
F-6
Sensar Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
-----------------------------------------------------
2000 1999 1998
------------- ------------- -------------
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities
Income (loss) from continuing operations $ 4,067,977 $ (11,995,158) $ (1,221,025)
Adjustments to reconcile income (loss) from continuing
operations to net cash used in continuing operations
Depreciation 2,955 6,385 2,475
Compensation expense for stock options (Note H) (181,492) 5,885,833 -
Deferred compensation expense (Note C) (5,342,040) 5,342,040 -
Stock issued in payment of compensation 10,937 - 46,338
Indemnity costs 356,150 - -
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 (75,406) (24,989) 26,886
Accounts payable 19,667 (94,304) (35,614)
Accrued liabilities (137,320) 112,138 57,201
-------------- ------------- -------------
Net cash used in
continuing operations (1,278,572) (894,404) (502,190)
Net cash used in
discontinued operations - (195,411) (2,207,682)
-------------- ------------- -------------
Net cash used in
operating activities (1,278,572) (1,089,815) (2,709,872)
-------------- ------------- -------------
Cash flows from investing activities
Purchase of office equipment and furnishings (11,681) (23,645) (9,022)
Proceeds from sale of office equipment and furnishings 5,568 - -
Collection of notes receivable 1,419,589 365,411 -
Issuance of notes receivable (500,000) (35,000) -
Increase in investments (1,500,000) (325,000) -
-------------- ------------- -------------
Net cash used in investing activities of
continuing operations (586,524) (18,234) (9,022)
Net cash provided by sale of discontinued
operations and other investing activities of
discontinued operations 224,075 5,566,491 37,495
-------------- ------------- -------------
Net cash provided by (used in)
investing activities (362,449) 5,548,257 28,473
-------------- ------------- -------------
(Continued)
F-7
Sensar Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Year ended December 31,
--------------------------------------------------
2000 1999 1998
--------------- ------------- -------------
Cash flows from financing activities
Net proceeds from issuance of common
stock and exercise of options and warrants 1,154,411 1,628,984 3,743,485
Redemption of preferred stock - (3,071,437) -
Proceeds from issuance of convertible debenture - 40,000 -
--------------- ------------- -------------
Net cash provided by (used in) financing
activities of continuing operations 1,154,411 (1,402,453) 3,743,485
Net cash used in financing activities of
discontinued operations - (15,833) (1,515,088)
--------------- ------------- -------------
Net cash provided by (used in)
financing activities 1,154,411 (1,418,286) 2,228,397
--------------- ------------- -------------
Effect of exchange rates on cash - - (64,512)
--------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents (486,610) 3,040,156 (517,514)
Cash and cash equivalents at beginning of year 3,735,115 694,959 1,212,473
--------------- ------------- -------------
Cash and cash equivalents at end of year $ 3,248,505 $ 3,735,115 $ 694,959
=============== ============= =============
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ - $ 29,839 $ 146,510
Income taxes - - -
Significant noncash investing and financing activities
Conversion of note receivable and accrued interest into investment $ 533,534 $ - $ -
Notes receivable issued in exercise of stock options - - 726,190
Note receivable satisfied through cancellation of common stock 35,545 - -
Conversion of debenture into common stock - 40,000 -
The accompanying notes are an integral part of these financial statements.
Sensar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31 2000, 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 (the Company) was formerly engaged in one industry
segment; the design, development, manufacture, and marketing of analytical
instruments. The Company has sold or otherwise disposed of all product
lines of this business (Note K) and has no current operations. The Company
is currently assessing its future operating strategy and potential
industry segments. The accompanying consolidated financial statements of
the Company include the accounts of the Company and its wholly-owned
subsidiaries. All subsidiaries are inactive at December 31, 2000. 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.
F-9
Sensar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31 2000, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
5. Investments
The Company has no investments that have a ready market. The Company's
investments are accounted for under the cost method, and are carried at
the lower of cost or estimated net realizable value. The Company assesses
the need to record impairment losses on investments if impairment of an
investment is determined to be other than temporary.
6. Income (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 income (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.
7. Business and credit risk
The Company's financial instruments that are exposed to concentration of
business and credit risk consist primarily of cash equivalents and its
investment in Net2Wireless Corporation. 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.
As described in Note B, the Company owns approximately 14.1 percent of
Net2Wireless Corporation, a privately-held company. The Company's
investment in Net2Wireless represents approximately 38 percent of the
Company's assets at December 31, 2000.
8. Use of estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect 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.
F-10
Sensar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31 2000, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
9. 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.
10. 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 nonemployees, the Company follows the provisions of SFAS 123 and
records compensation expense equal to the fair value of options granted.
11. Recent accounting pronouncements
There are no recent accounting pronouncements that have been issued, but
are not yet effective, that apply to the Company.
NOTE B - INVESTMENTS
During 1999, the Company entered into an Agreement with Net2Wireless
Corporation, that gave the Company the right to acquire Net2Wireless in
exchange for the issuance of 18,295,060 shares of the Company's common
stock. Net2Wireless is a privately-held startup company that is developing
wireless internet communication, including multimedia applications. As
part of the agreement, the Company agreed to provide Net2Wireless with
short-term financing of up to $2 million, of which $500,000 was advanced
in February 2000. The advance bore interest at 8 percent per annum and was
due on or before December 31, 2000.
F-11
Sensar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31 2000, 1999 and 1998
NOTE B - INVESTMENTS - CONTINUED
A stockholders' meeting was set for December 5, 2000, at which the merger
with Net2Wireless was to be voted upon. On December 4, 2000, when it had
become clear that the Company would not obtain the required vote from its
stockholders to approve the proposed merger with Net2Wireless (and in
light of certain other developments with Nasdaq related to the uncertainty
of continued listing of the Company by Nasdaq in the event of completion
of the merger), the Company entered into a Release Agreement with
Net2Wireless to terminate the prior Agreement to merge with Net2Wireless.
In connection with the Release Agreement, Net2Wireless agreed to issue the
Company 3,000,000 shares of its common stock and a warrant to acquire an
additional 1,000,000 shares of common stock in exchange for the payment of
$1.5 million and the forgiveness of the advance in February 2000 of
$500,000, plus accrued interest of $33,534. The warrant is exercisable at
any time prior to December 31, 2003 at an exercise price of $10 per share.
The Company's investment in Net2Wireless represents approximately 14.1
percent of the outstanding stock of Net2Wireless and is accounted for
under the cost method of accounting. Net2Wireless has now changed its name
to Jigami Corporation.
In 1999, 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 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 was 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 one percent of Durect.
The Company's investment in Durect was accounted for under the cost method
of accounting. As described in Note J, the Company's investments in
PayStation and Durect were transferred to the then chief executive officer
in 2000 as part of the consideration for his agreement to indemnify the
Company against certain litigation.
F-12
Sensar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31 2000, 1999 and 1998
NOTE C - 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 established
an unfunded deferred compensation pool, based on specified percentages of
the Company's net income and increases in its market capitalization. No
earnings compensation would 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 would 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 then chief executive officer
received an initial 30 percent ownership in the pool and an additional 11
percent was granted to others. As discussed in Note H to the financial
statements, the deferred compensation plan was terminated and the
participants in the plan abandoned their interest in the plan with the
shareholder approval on December 5, 2000 of options previously granted to
the participants.
Deferred compensation expense was measured based on the changes in factors
which determined the amount of the deferred compensation pool, which was
solely 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 total amount of the
deferred compensation pool at December 31, 1999 multiplied by 41 percent
for the interests granted through December 31, 1999. With the decrease in
the Company's market capitalization as a result of the decline in the
price of the Company's common stock between December 31, 1999 and December
5, 2000, the total amount of the deferred compensation pool had declined
to zero. Accordingly, the Company reversed the entire deferred
compensation liability in the year ended December 31, 2000 and recorded a
corresponding credit in the statement of operations.
F-13
Sensar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31 2000, 1999 and 1998
NOTE D - INCOME TAXES
The income tax expense (benefit) reconciled to the tax computed at the
statutory federal rate of 34 percent is as follows:
Year ended December 31,
----------------------------------------------------
2000 1999 1998
-------------- -------------- --------------
Income taxes (benefit) at statutory rate $ 1,459,298 $ (2,959,489) $ (2,353,971)
State income taxes (benefit)
net of federal tax effect 175,407 (287,245) (228,474)
Stock option compensation 346,293 - -
Amortization of acquired technology - - 900,420
Settlement with former directors - 33,723 70,427
Valuation allowance changes affecting the provision for
income taxes (1,982,634) 3,199,056 1,605,535
Other, net 1,636 13,955 6,063
-------------- -------------- --------------
Income tax expense $ - $ - $ -
============== ============== ==============
Deferred income tax assets and liabilities are as follows:
December 31,
-----------------------------------
2000 1999
--------------- ---------------
Deferred tax assets
Benefit of net operating loss carryforwards $ 10,718,367 $ 8,340,728
Compensation expense for stock options - 2,141,656
Deferred compensation expense - 1,992,581
Capitalized software development costs and
amortization of intangible assets 209,880 257,383
Deferred gain 74,600 74,600
Accrued liabilities 4,849 34,664
Allowance for doubtful accounts - 27,043
Other, net 4,364 4,364
--------------- ---------------
11,012,060 12,873,019
Less valuation allowance (11,012,060) (12,872,910)
--------------- ---------------
- 109
Deferred tax liabilities
Depreciation of property and equipment - (109)
--------------- ---------------
Net deferred tax asset $ - $ -
=============== ===============
F-14
Sensar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31 2000, 1999 and 1998
NOTE D - INCOME TAXES - CONTINUED
Historically, the Company has sustained net operating losses. As of
December 31, 2000, the Company had net operating loss carryforwards for
tax reporting purposes of approximately $28 million expiring in various
years through 2020. Utilization of approximately $3.1 million 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. Only a portion of the net operating loss carryforward is
attributable to operating activities. The remainder is attributable to tax
deductions related to the exercise of stock options. 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.
The valuation allowance for deferred tax assets decreased by $1,860,850
during the year ended December 31, 2000. The decrease was principally due
to the reversal of temporary differences related to compensation
previously recorded for stock options and under the deferred compensation
plan and the utilization of operating loss carryforwards relating to book
taxable income, net of an increase in net operating loss carryforwards
related to the exercise of stock options which will result in future tax
deductions. The increase in the deferred tax asset relating to the
exercise of stock options is approximately $1,655,500 in 2000 and $231,000
in 1999 (none in 1998), and will be credited to paid in capital when
realized.
NOTE E - 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.
F-15
Sensar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31 2000, 1999 and 1998
NOTE E - PREFERRED STOCK - CONTINUED
1998 Series A Preferred Stock - continued
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.
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 K), to reacquire and cancel 100 percent of the
remaining 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.
NOTE F - 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.
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.
F-16
Sensar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31 2000, 1999 and 1998
NOTE F - COMMON STOCK - CONTINUED
During the years ended December 31, 2000 and 1998, the Company issued
14,000 shares and 19,499 shares, respectively, of common stock valued at
$0.78 for the year ended December 31, 2000 and at prices ranging from
$5.75 to $11.58 per share for the year ended December 31, 1998, for
services rendered.
NOTE G - INCOME (LOSS) PER COMMON SHARE
The following data show the amounts used in computing income (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 E). 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 loss per common share.
Year ended December 31,
-------------------------------------------------
2000 1999 1998
--------------- --------------- --------------
Income (loss) from continuing operations $ 4,067,977 $ (11,995,158) $ (1,221,025)
Dividends on preferred stock - (25,414) (107,273)
Imputed dividend from beneficial
conversion feature - - (1,239,290)
------------- -------------- --------------
Income (loss) from continuing operations applicable to
common stock $ 4,067,977 $ (12,020,572) $ (2,567,588)
============= ============== ==============
F-17
Sensar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31 2000, 1999 and 1998
NOTE G - INCOME (LOSS) PER COMMON SHARE - CONTINUED
Year ended December 31,
----------------------------------------------------
2000 1999 1998
--------------- ------------- --------------
Common shares outstanding during the entire
year 6,326,038 5,228,366 4,850,157
Weighted average common shares issued
during the year 210,314 465,148 223,306
--------------- ------------- --------------
Weighted average number of common shares
used in basic EPS 6,536,352 5,693,514 5,073,463
Dilutive effect of stock options
and warrants - - -
--------------- ------------- --------------
Weighted average number of common shares
and dilutive potential common stock used in
diluted EPS 6,536,352 5,693,514 5,073,463
=============== ============= ==============
None of the options and warrants that were outstanding, as described in
Note H, were included in the computation of diluted EPS because the market
price of the underlying stock was less than the exercise price at December
31, 2000 and because the years ended December 31, 1999 and 1998 were loss
years and to do so would have been anti-dilutive.
NOTE H - 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 or available for grant under
five 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); the
1987 Stock Option Plan (the 1987 Employee Plan); and the 2000 U.S. Stock
Option Plan (the 2000 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, 2000, 1999 and 1998
and changes during the years then ended is presented in the table below:
F-18
Sensar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31 2000, 1999 and 1998
NOTE H - STOCK OPTIONS AND WARRANTS - CONTINUED
1. Stock-based compensation plans - continued
Year ended December 31,
-------------------------------------------------------------------------------------
2000 1999 1998
-------------------------- -------------------------- --------------------------
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Shares price Shares price Shares price
------------ ----------- ----------- ----------- ----------- -----------
Outstanding at beginning
of year 524,932 $5.17 924,990 $10.53 1,014,736 $13.55
Granted 2,200,000 2.00 560,000 2.05 704,000 9.95
Exercised (220,913) 6.71 (105,880) 1.61 (110,546) 6.58
Forfeited (8,763) 3.43 (830,178) 9.44 (130,400) 12.88
Canceled - - (24,000) 7.34 (552,800) 15.55
------------ ----------- -----------
Outstanding at end
of year 2,495,256 $2.25 524,932 $ 5.17 924,990 $10.53
============ =========== ===========
Exercisable at
end of year 2,495,256 $2.25 515,144 $ 5.03 482,994 $10.20
============ =========== ===========
The weighted-average fair value of each option grant is $1.34, $0.89 and
$2.88 for the years ended December 31, 2000, 1999 and 1998, 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, 2000, 1999 and 1998,
respectively: risk-free interest rates of 5.7 percent, 5.1 percent, and
5.5 percent; expected dividend yields of zero for all periods; expected
lives of 1.0, 2.5, and 5.4 years; and expected volatility of 190 percent,
114 percent, and 46 percent.
A summary of the status of the options outstanding under the Company's
stock option plans and employment agreements at December 31, 2000 is
presented below:
Weighted-
average Weighted Weighted
remaining average average
Number contractual exercise Number exercise
Range of exercise prices outstanding life (years) price exercisable price
------------------------ ------------- --------------- ------------ -------------- --------
$ 1.50 - $ 2.00 2,000,000 1.77 $ 1.90 2,000,000 $ 1.90
$ 2.01 - $ 3.00 453,056 1.24 2.50 453,056 2.50
$ 3.01 - $ 17.50 42,200 0.77 15.87 42,200 15.87
------------- --------------
$ 1.50 - $ 17.50 2,495,256 1.65 $ 2.25 2,495,256 $ 2.25
============= ==============
F-19
Sensar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31 2000, 1999 and 1998
NOTE H - STOCK OPTIONS AND WARRANTS - CONTINUED
1. Stock-based compensation plans - continued
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 in 1999 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.
A new chief executive officer was appointed in April 1999. 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 of 1999,
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 were
subject to shareholder approval, which approval was sought and obtained on
December 5, 2000. For accounting purposes, these options to acquire
600,000 shares of common stock are deemed to have been granted in the year
ended December 31, 2000. Additionally in 1999, options to acquire an
aggregate of 360,000 shares of common stock were 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 initially had cashless exercise provisions.
F-20
Sensar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31 2000, 1999 and 1998
NOTE H - 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 noncash 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 were
subject to shareholder approval, which approval was sought and obtained on
December 5, 2000. For accounting purposes, these options to acquire
1,600,000 shares of common stock are deemed to have been granted in the
year ended December 31, 2000. With the approval of these options, the
participants in the deferred compensation plan agreed to abandon their
interests in the deferred compensation pool and the board of directors
agreed to terminate the deferred compensation plan (Note C). During the
year ended December 31, 2000, the Company recognized a credit against
previously recorded compensation on the options granted to management with
cashless exercise provisions in the amount of $1,200,000 as a consequence
of the decrease in the price of the Company's common stock through the end
of June 2000 (the date when the cashless exercise provisions of all
options were terminated by management). Additionally, the Company recorded
noncash compensation expense during the year ended December 31, 2000 of
$868,508 for a stock option to acquire 650,000 shares of common stock
approved by shareholders for a nonemployee. This compensation was based on
the fair value of the option using the assumptions discussed earlier in
this Note. Compensation in the amount of $150,000 was recorded for the
remaining options approved by shareholders for management and board
members where the market value of the Company's common stock was more than
the exercise price of the options on December 5, 2000.
F-21
Sensar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31 2000, 1999 and 1998
NOTE H - STOCK OPTIONS AND WARRANTS - CONTINUED
1. Stock-based compensation plans - continued
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 could 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.
Under the 1996 Director Plan, the Company reserved 560,000 shares of
common stock to be granted to directors of the Company. 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. At December 31, 2000, there are options to acquire 30,000 shares of
common stock outstanding under this plan. 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 no
options are outstanding as of December 31, 2000. The 1987 Employee Plan
terminated November 9, 1997.
The 1997 Employee Plan reserved 300,000 shares of common stock for
issuance pursuant to stock options or stock awards granted, all of which
have been exercised or awarded to employees and others as of December 31,
2000, with no further awards or grants available. 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.
The board of directors adopted the 2000 Plan on May 6, 2000 and
shareholders approved the 2000 Plan on December 5, 2000. Under the 2000
Plan, the Company may grant options to acquire up to 6,000,000 shares of
common stock to employees, officers, directors, consultants and others who
perform services for the Company. No options have been granted under the
2000 Plan through December 31, 2000. The 2000 Plan will terminate May 6,
2010, unless terminated earlier by the board of directors.
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 were available under this plan was 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 year ended
December 31, 1998, the employees of the Company purchased 29,273 shares of
common stock for gross proceeds of $81,172. The Stock Purchase Plan
expired December 31, 1998.
F-22
Sensar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31 2000, 1999 and 1998
NOTE H - 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 income (loss) and income (loss)
per common share would have been changed to the pro forma amounts
indicated below:
Year ended December 31,
----------------------------------------------------
2000 1999 1998
-------------- -------------- --------------
Net income (loss) As reported $4,292,052 $(8,704,380) $(6,923,444)
Pro forma (201,005) (3,492,019) (7,337,855)
Income (loss) per
common share As reported $0.66 $(1.53) $(1.63)
Pro forma (0.03) (0.62) (1.79)
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. During
1998, warrants to acquire 29,634 shares of common stock were exercised by
this group of investors and an equal amount of replacement warrants were
granted. Due to the decrease in the market price of the Company's common
stock, warrants to acquire 465,387 shares of common stock were allowed to
expire in November 1998.
F-23
Sensar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31 2000, 1999 and 1998
NOTE H - STOCK OPTIONS AND WARRANTS - CONTINUED
2. Stock warrants - continued
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:
Year ended December 31,
-----------------------------------------------------------------------------------
2000 1999 1998
-------------------------- -------------------------- -------------------------
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Shares price Shares price Shares price
----------- ------------ ----------- ------------ ----------- -----------
Outstanding at
beginning of year 2,800 $1.25 654,680 $17.33 840,067 $17.23
Granted - - 537,130 1.84 309,634 12.28
Exercised (2,800) 1.25 (534,330) 1.84 (29,634) 13.25
Expired - - - - (465,387) 14.03
Canceled - - (654,680) 17.33 - -
----------- ----------- -----------
Outstanding at
end of year - $ - 2,800 $ 1.25 654,680 $17.33
=========== =========== ===========
NOTE I - CONTINGENT LIABILITY
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, filed a motion to dismiss certain
claims (which was granted in part to dismiss the claim for certain
penalties), and intends to vigorously defend its position. Management of
the Company believes that it has substantial defenses to the claims. In
March 2000, the then 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 (Note J). The Company does
not believe that this litigation will have a material impact on the
financial position of the Company. This litigation is set for trial in May
2001.
F-24
Sensar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31 2000, 1999 and 1998
NOTE J - UNUSUAL CHARGES
The Company has incurred the following unusual charges (credits) during
the years covered by the financial statements:
Year Ended December 31,
-----------------------------------------------------
2000 1999 1998
--------------- ------------- ----------------
Indemnification expense $ 356,150 $ - $ -
Termination benefits paid to former executive officer - 125,000 -
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
--------------- ------------- ----------------
$ 356,150 $ (31,663) $ 649,949
=============== ============= ================
In anticipation of the merger with Net2Wireless (Note B) and in order to
eliminate the Company's liabilities other than nominal current
liabilities, the Company entered into an agreement effective March 1, 2000
with the then chief executive officer whereby he agreed to indemnify the
Company with respect to pending litigation and assume the real property
lease to which the Company was a party. As part of his consideration, the
chief executive officer permitted the Company to continue to use the
office space covered by the lease through December 31, 2000. In exchange
for the indemnification and the assumption of the lease in March 2000, the
Company distributed to the then chief executive officer the minority
investment interests held by the Company with a book value of $325,000 and
the office equipment and furnishings located at the Company's Salt Lake
City office with a book value of $31,150. The distribution of assets in
exchange for the indemnification was accounted for as an unusual charge to
continuing operations in the year ended December 31, 2000.
NOTE K - 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
the write off of intangible assets and a charge to cost of sales of
$490,882 for the write off of inventory.
F-25
Sensar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31 2000, 1999 and 1998
NOTE K - DISCONTINUED OPERATIONS - CONTINUED
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 bore interest at
7.28 percent, was payable $22,450 per month, and the balance was
paid in 2000. In conjunction with this sale, the Company has
deferred $200,000 of gain under a non-compete arrangement.
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 was due and
was paid in 2000. The Company recognized a gain of approximately
$416,000 on the sale in 1999.
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 the technology in 1999.
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, plus contingent payments
based upon future performance. The Company received the installment
payments between August 1999 and March 2000, and accepted $120,000
in March 2000 in satisfaction of the contingent payments. The
Company recognized a gain of approximately $189,000 and $120,000 on
this transaction in 1999 and 2000, respectively.
The analytical instrumentation operations of the Company have been
accounted for as discontinued operations. 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. The financial statements for the
years ended December 31, 1999 and 1998 have been restated to reflect the
discontinued operations.
F-26
Sensar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31 2000, 1999 and 1998
NOTE K - DISCONTINUED OPERATIONS - CONTINUED
Information related to the discontinued operations of the analytical
instrumentation business is set forth below:
Year ended December 31,
-----------------------------------
1999 1998
---------------- ----------------
Net sales $ 1,763,711 $ 8,729,192
Costs and operating expenses:
Cost of sales (970,730) (5,241,186)
Research and development (653,605) (2,919,945)
Selling, general and administrative (833,608) (3,346,298)
Unusual credits (charges), net 537,258 (2,786,784)
---------------- ----------------
Operating loss (156,974) (5,565,021)
Other expense, net (70,470) (137,398)
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)
================ ================
Unusual credits (charges), net included in discontinued operations is
comprised of the following:
Year ended December 31,
-----------------------------------
1999 1998
---------------- ----------------
Termination payments to personnel of discontinued operations
and other related costs $ (129,000) $ -
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 -
Writedown of TOF2000 assets - (2,458,004)
Other 93,163 22,846
---------------- ----------------
$ 537,258 $ (2,786,784)
================ ================
F-27
Sensar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31 2000, 1999 and 1998
NOTE L - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data for the years ended December 31, 2000 and 1999
are as follows:
Fiscal Quarters
----------------------------------------------------------------
Year ended December 31, 2000 First Second Third Fourth
---------------------------------------------- ------------ ----------- ----------- -------------
Revenues $ 85,699 $ 97,955 $ 95,027 $ 80,724
Income (loss) from continuing operations (7,490,589) 8,903,724 759,711 1,895,131
Income (loss) from discontinued operations and
gain on sale of discontinued operations 178,875 30,000 15,200 -
Net income (loss) (7,311,714) 8,933,724 774,911 1,895,131
Income (loss) per common share: (1)
Continuing operations:
Basic (1.15) 1.36 0.12 0.29
Diluted (1.15) 1.31 0.11 0.29
Discontinued operations:
Basic 0.02 0.00 0.00 0.00
Diluted 0.02 0.00 0.00 0.00
Net income (loss)
Basic (1.13) 1.36 0.12 0.29
Diluted (1.13) 1.31 0.11 0.29
Fiscal Quarters
----------------------------------------------------------------
Year ended December 31, 1999 First Second Third Fourth
---------------------------------------------- ------------ ------------ ------------ -------------
Revenues $ 4,493 $ 29,624 $ 42,072 $ 71,755
Income (loss) from continuing operations (247,909) (953,274) 87,199 (10,881,174)
Income (loss) from discontinued operations and
gain (loss) on sale of discontinued operations 1,755,374 318,421 1,180,639 16,344
Net income (loss) 1,527,465 (634,853) 1,267,838 (10,864,830)
Income (loss) per common share: (1)
Continuing operations:
Basic (0.05) (0.17) 0.02 (1.83)
Diluted (0.05) (0.17) 0.01 (1.83)
Discontinued operations:
Basic 0.33 0.06 0.20 0.00
Diluted 0.33 0.06 0.20 0.00
Net income (loss)
Basic 0.28 (0.11) 0.22 (1.83)
Diluted 0.28 (0.11) 0.21 (1.83)
- ----------
(1) Income (loss) per common share is computed independently for each of the
quarters presented. Therefore, the sum of the quarterly income (loss) per common
share amounts do not necessarily equal the total for the year.
F-28
Sensar Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31 2000, 1999 and 1998
NOTE M - SUBSEQUENT EVENTS
1. Change in executive management
In January 2001, the Company entered into a Transition Agreement with the
chief executive officer and all of the current board of directors. Under
the agreement, Howard S. Landa, the then chief executive officer, and
Brian B. Lewis, a board member, resigned their positions with the Company
and waived options to acquire an aggregate of 560,000 shares of common
stock at an average exercise price of $2.00 per share. Additionally,
Mickey Hale, a board member, and Andrew Bebbington, the Company's chief
consultant, also waived options to acquire an aggregate of 210,000 shares
of common stock at an average exercise price of $2.00 per share. Steven
Strasser was appointed chief executive officer of the Company and received
options to acquire 250,000 shares of common stock at $2.00 per share. Mr.
Bebbington was appointed to the board of directors of the Company and
named chief operating officer. Mr. Strasser and Mr. Bebbington each
entered into employment agreements with the Company which provide for
aggregate annual compensation of $240,000. The initial terms of the
employment agreements are through January 2002, but renew automatically
such that there is always one year remaining under the agreements.
2. Investment in Nex2, LLC
In January 2001, the Company acquired 249,700 Investor Units and 300
Voting Units (the Units) of Nex2, LLC (Nex2) for an aggregate purchase
price of $750,000. Nex2 is a privately-held company organized in 1999 and
is developing technology to provide electronic access to computer based
medical information, including prescription profiles and other patient
specific information, for use by the insurance industry. The Units
represent approximately 1.9 percent of the outstanding Units of Nex2. The
Company's investment in Nex2 will be accounted for under the cost method
of accounting.
F-29