Exhibit 99.1
ICOP DIGITAL, INC.
And
SUBSIDIARY
Consolidated Financial Statements
December 31, 2002
(with Independent Auditors' Report)
ICOP DIGITAL, INC.
Index to Consolidated Financial Statements
Page
-----------------
Report of Independent Auditors................................. F-2
Consolidated Balance Sheets at December 31, 2002 and
September 30, 2003 (unaudited)............................ F-3
Consolidated Statements of Operations from May 24, 2002
(inception) through December 31, 2002, and for the nine
months ended September 30, 2003 (unaudited)............... F-4
Consolidated Statement of Changes in Shareholders' Equity
from May 24, 2002 (inception) through December 31,
2002, and for the nine months ended September 30,
2003 (unaudited).......................................... F-5
Consolidated Statements of Cash Flows from May 24, 2002
(inception) through December 31, 2002, and for the nine
months ended September 30, 2003 (unaudited)............... F-6
Notes to Consolidated Financial Statements..................... F-7
F-1
Independent Auditors' Report
The Board of Directors
ICOP Digital, Inc. and subsidiary:
We have audited the accompanying consolidated balance sheet of ICOP Digital,
Inc. and subsidiary as of December 31, 2002, and the related consolidated
statements of operations, changes in shareholders' equity (deficit), and cash
flows for the period from May 24, 2002 (inception) through ended December 31,
2002. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of ICOP Digital, Inc.
and subsidiary as of December 31, 2002, and the results of their operations and
their cash flows for the period from May 24, 2002 (inception) through ended
December 31, 2002 in conformity with accounting principles generally accepted in
the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's significant operating losses since inception
raises substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Cordovano and Harvey, P.C.
Cordovano and Harvey, P.C.
Denver, Colorado
August 29, 2003
F-2
ICOP DIGITAL, INC.
Consolidated Balance Sheets
December 31, September 30,
2002 2003
------------ -------------
(Unaudited)
Assets
Current assets:
Cash....................................................... $ 20,782 $ 101,010
Accounts receivable........................................ -- 524,873
Employee advances.......................................... 5,626 33,499
Inventories, at cost....................................... -- 567,455
Prepaid expenses........................................... -- 48,136
Prepaid royalties.......................................... -- --
------------ -------------
Total assets liabilities........................ 26,408 1,274,973
Property and equipment, less accumulated depreciation of
$5,352 and $26,478 (unaudited), respectively (Note 1)...... 38,992 103,603
Other assets:
Goodwill................................................... -- 672,283
Deposits................................................... 3,000 3,000
------------ -------------
$ 68,400 $ 2,053,860
============ =============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities................... $ 71,667 $ 1,807,099
Unearned revenue -- 416,845
Notes payable - Related party (Note 2)..................... -- 41,033
Notes payable (Note 5)..................................... 77,813 646,912
Accrued interest payable (Note 5).......................... 335 6,100
------------ -------------
Total current liabilities.................... 149,815 2,917,989
------------ -------------
Shareholders' equity (Note 8):
Preferred stock, $.01 par value; 5,000,000 shares
authorized, -0- and -0- (unaudited) shares issued
and outstanding, respectively........................... -- --
Common stock, $.01 par value; 50,000,000 shares
authorized, 11,870,000 and 14,039,500 (unaudited)
shares issued and outstanding, respectively............. 118,700 140,395
Additional paid-in capital................................. 337,500 2,485,305
Retained deficit........................................... (537,615) (3,489,829)
------------ -------------
Total shareholders' equity................... (81,415) (864,129)
------------ -------------
$ 68,400 $ 2,053,860
============ =============
See accompanying notes to consolidated financial statements
F-3
ICOP DIGITAL, INC.
Consolidated Statements of Operations
May 24,
2002
(Inception) Nine Months
Through Ended
December 31, September 30,
2002 2003
------------ -------------
(Unaudited)
Sales.......................................................... $ -- $ 3,163,562
Cost of sales.................................................. -- 2,574,124
------------ -------------
Gross profit............................... -- 589,439
------------ -------------
Operating expenses:
Stock-based compensation (Note 8):
Public relations services............................... 100,000 --
Design services......................................... -- --
Selling, general and administrative........................ 258,429 1,373,775
Research and development................................... 178,003 2,130,529
Other...................................................... -- --
------------ -------------
Total operating expenses................... 536,432 3,504,304
------------ -------------
Loss from operations....................... (536,432) (2,914,865)
Interest income................................................ -- --
Interest expense............................................... (1,183) (39,902)
------------ -------------
Loss before income taxes................... (537,615) (2,954,767)
Income tax provision (Note 7).................................. -- 2,553
------------ -------------
Net loss................................... $ (537,615) $ (2,952,214)
============ =============
Basic and diluted loss per share............................... $ (0.07) (0.22)
------------ -------------
Basic and diluted weighted average
common shares outstanding.................................. 7,341,944 13,167,013
============ =============
See accompanying notes to consolidated financial statements
F-4
ICOP DIGITAL, INC.
Consolidated Statement of Changes in Shareholders' Equity
Preferred Stock Common Stock Additional
----------------------------- -------------------------------- Paid-in Retained
Shares Par Value Shares Par Value Capital Deficit Total
------------- ------------- --------------- --------------- -------------- -------------- ---------------
Balance at May 24, 2002 (inception).................... -- $ -- -- $ -- $ -- $ -- $ --
June to August 2002, shares sold in private
placement offering ($.01/share) (Note 8)........... -- -- 10,620,000 106,200 -- -- 106,200
September 2002, shares sold in private
placement offering ($.10/share) (Note 8)........... -- -- 1,000,000 10,000 90,000 -- 100,000
October to November 2002, shares sold in private
placement offering ($1.00/share) (Note 8).......... -- -- 150,000 1,500 148,500 -- 150,000
December 2002, shares issued in exchange for
public relations services ($1.00/share) (Note 8)... -- -- 100,000 1,000 99,000 -- 100,000
Net loss for the period ended December 31, 2002........ -- -- -- -- -- (537,615) (537,615)
------------- ------------- --------------- --------------- -------------- -------------- ---------------
Balance at December 31, 2002........................... -- -- 11,870,000 118,700 337,500 (537,615) (81,415)
January to June 2003, shares sold in private
placement offering ($1.00/share) (Note 8)
(unaudited)........................................ -- -- 1,408,500 14,085 1,394,415 -- 1,408,500
February 2003, shares issued in exchange for
equipment installation services ($1.00/share)
(Note 8) (unaudited)............................... -- -- 11,000 110 10,890 -- 11,000
February 2003, shares issued in exchange for
design services ($1.00/share) (Note 8) (unaudited). -- -- 50,000 500 49,500 -- 50,000
February 2003, shares issued to acquire McCoy's
Lawline ($1.00/share) (Note 1) (unaudited)......... -- -- 700,000 7,000 693,000 -- 700,000
Net loss for the nine months ended
September 30, 2003 (unaudited)..................... -- -- -- -- -- (2,952,214) (2,952,214)
------------- ------------- --------------- --------------- -------------- -------------- ---------------
Balance at September 30, 2003 (unaudited).............. -- $ -- 14,039,500 $ 140,395 $ 2,485,305 $ (3,489,829) $ (864,129)
============= ============= =============== =============== ============== ============== ===============
See accompanying notes to consolidated financial statements
F-5
ICOP DIGITAL, INC.
Consolidated Statements of Cash Flows
May 24,
2002
(Inception) Nine Months
Through Ended
December 31, September 30,
2002 2003
-------------- ---------------
(Unaudited)
Cash flows from operating activities:
Net loss.................................................... $ (537,615) $ (2,952,214)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation 5,352 17,435
Stock-based compensation (Notes 1 and 8).............. 100,000 50,000
Changes in operating liabilities:
Increase in accounts receivable, inventory
and prepaid expenses............................ (5,626) 29,462
Increase in accounts payable and
accrued liabilities............................. 72,002 1,096,321
-------------- ---------------
Net cash used in
operating activities................... (365,887) (1,758,997)
-------------- ---------------
Cash flows from investing activities:
Purchases of property and equipment......................... (44,344) (51,765)
Deposits.................................................... (3,000) --
Net cash used in
investing activities................... (47,344) (51,765)
-------------- ---------------
Cash flows from financing activities:
Proceeds from issuance of notes payable..................... -- 500,000
Principal payments on notes payable......................... 77,813 (17,511)
Proceeds from the sale of common stock...................... 356,200 1,408,500
-------------- ---------------
Net cash provided by
financing activities................... 434,013 1,890,989
-------------- ---------------
Net change in cash..................... 20,782 80,228
Cash, beginning of period....................................... -- 20,782
-------------- ---------------
Cash, end of period............................................. $ 20,782 $ 101,010
============== ===============
Supplemental disclosure of cash flow information:
Income taxes................................................ $ -- $ --
============== ===============
Interest.................................................... $ 848 $ 34,131
============== ===============
Non-cash investing and financing transactions:
Equipment acquired with stock............................ $ -- $ 11,000
============== ===============
See accompanying notes to consolidated financial statements
F-6
ICOP DIGITAL, INC.
Notes to Consolidated Financial Statements
Note 1: Nature of Operations and Summary of Significant Accounting Policies
Operations and Recent Business Combination
ICOP Digital, Inc. ("ICOP"), incorporated in May 2002 in Nevada, is engaged in
the design, development and marketing of an in-car video recorder system for use
in the law enforcement industry. ICOP's administrative offices are located in
Overland Park, Kansas, its design facilities are located in Olathe, Kansas and
its manufacturing facility is located in Tokyo, Japan.
In February 2003, ICOP purchased all of the issued and outstanding common stock
of McCoy's Law Line, Inc. ("McCoy's"). The primary reason for the purchase was
to permit ICOP and its subsidiary, McCoy's (the "Company"), to sell and
distribute law enforcement-related products in addition to its in-car digital
video recorded system. The results of McCoy's operations have been included in
accompanying consolidated financial statements from that date.
McCoy's is engaged in the business of distributing radar guns, radar trailers,
speed signs, in-car video systems, alcohol breath testers and other law
enforcement equipment to federal, state and local law enforcement agencies and
sheriffs' departments throughout the United States. However, these products may
be sold both within the United States and abroad. In addition, McCoy's assembles
a line of speed trailers and signs which it sells through the distributorship.
The purchase price was $700,000 (unaudited). Consideration was 700,000 shares of
ICOP common stock valued at $1.00 per share (unaudited). The value of $1.00 per
share was determined by the Company's Board of Directors based on
contemporaneous stock sales to unrelated third parties. The book value of
McCoy's assets and liabilities on the purchase date were stepped up to fair
value. As a result, the purchase was recorded based on the values exchanged. The
purchase price exceeded the fair value of the identifiable assets by $672,283
(unaudited). This amount is reflected as an asset, goodwill, in the accompanying
consolidated financial statements. Goodwill will be screened for potential
impairment annually or sooner if necessary.
McCoy's offices are located in Chanute, Kansas.
F-7
ICOP DIGITAL, INC.
Notes to Consolidated Financial Statements
The following table summarizes the estimated fair values of McCoy's major assets
and liabilities at the purchase date:
Current assets....................... $ 1,439,791
Property and equipment, net.......... 19,282
Goodwill............................. 672,283
-------------
Total assets purchased 2,131,356
-------------
Current liabilities.................. 476,913
Notes payable and accrued interest... 127,643
Unearned income...................... 826,800
-------------
Total liabilities assumed 1,431,356
-------------
Net assets acquired $ 700,000
=============
The following pro forma information summarizes the combined results of ICOP and
McCoy's as if the acquisition had occurred at the beginning of 2002:
Pro Forma Information
(Unaudited)
Net sales............................ $ 4,832,965
Cost of sales........................ 3,789,482
-------------
Gross profit 1,043,483
Operating expenses................... (1,527,052)
Interest expense..................... (66,919)
Income tax benefit................... 2,575
-------------
Net loss $ (547,913)
=============
Principles of Consolidation
The consolidated financial statements include the accounts of ICOP and McCoy's
(together, the "Company"). Intercompany transactions and balances have been
eliminated in the consolidation.
Going Concern
The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. As shown in the accompanying
consolidated financial statements, the Company has suffered significant losses
since inception. This factor, among others, may indicate that the Company will
be unable to continue as a going concern.
Management plans to continue to sell common stock to raise capital for research
and development and operations. Since September 30, 2003, the Company has
received $360,000 from the sale of 360,000 shares of its common stock. In
addition, the Company plans to seek debt financing to
F-8
ICOP DIGITAL, INC.
Notes to Consolidated Financial Statements
support the manufacture and import of its new products as they come to market.
In the longer term, the Company plans to expand its acquired operations,
commence sale of its new products and become profitable. There is no assurance
that the Company's new products will gain market acceptance or that the Company
will attain profitability.
The consolidated financial statements do not include any adjustments relating to
the recoverability and classification of assets and/or liabilities that might be
necessary should the Company be unable to continue as a going concern. The
Company's continuation as a going concern is dependent upon its ability to meet
its obligations on a timely basis, and, ultimately to attain profitability.
Unaudited Interim Financial Information
The interim financial statements of the Company as of September 30, 2003, and
the statements of operations, stockholders' equity (deficit), and cash flows for
the nine months ended September 30, 2003 are unaudited. Certain information and
note disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary for the fair presentation of the
financial position and results of operations and cash flows, have been included
in such unaudited financial statements. The results of operations for the nine
months ended September 30, 2003 are not necessarily indicative of the results to
be expected for the entire year.
Use of Estimates
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid securities with original maturities of
three months or less when acquired to be cash equivalents. There were no cash
equivalents at September 30, 2003 (unaudited) and December 31, 2002.
Fair Value of Financial Instruments
The carrying amounts of financial instruments including cash and cash
equivalents, trade accounts receivable, accounts payable and accrued expenses
approximated fair value because of the immediate or short-term maturity of these
instruments.
Accounts Receivable
The accounts receivable represents amounts due from customers. All amounts are
expected to be collected within one year.
Inventories
Inventories are stated at the lower of cost or market determined by the first-in
first-out method. Inventory consists of materials and supplies and products.
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated using the
straight-line method over the estimated useful lives of the related assets,
generally ranging from three to five years. Property and equipment under capital
leases are stated at the present value of minimum lease payments and are
amortized using the straight-line method over the shorter of the lease term or
the
F-9
ICOP DIGITAL, INC.
Notes to Consolidated Financial Statements
estimated useful lives of the assets. Leasehold improvements are amortized using
the straight-line method over the estimated useful lives of the assets or the
term of the lease, whichever is shorter. The recoverability of property and
equipment is evaluated whenever indicators of impairment are present and the
undiscounted future cash flows estimated to be generated by those assets are
less than the assets' carrying amount. No impairment charges have been recorded
for the nine months ended September 31, 2003 and the period from May 24, 2002
(inception) through December 31, 2002.
Business Combinations and Goodwill
The Company accounts for business combinations under the purchase method of
accounting. Under the purchase method, an asset acquisition is measured on the
basis of the values exchanged. The cost of an entity acquired includes the
direct costs of the combination. Costs of registering and issuing equity
securities are recognized as a reduction of the fair value of the securities.
Out of pocket costs are expensed as incurred and included in general and
administrative costs. The excess of the cost of an acquired entity over the net
of the amounts assigned to assets acquired and liabilities assumed is recognized
as goodwill.
The Company does not amortize goodwill. Instead, the Company tests goodwill for
impairment on an annual basis or more frequently, if warranted. If it is
determined through testing that the carrying amount of goodwill exceeds its fair
value, an impairment loss is recognized in an amount equal to that excess. After
the impairment loss is recognized, the Company adjusts the goodwill to its new
basis. The Company does not subsequently reverse a previous goodwill impairment
loss.
Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes. Statement
No. 109 requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
Revenue Recognition
Sales revenue is recognized upon shipment of the products. Repair fees are
recognized upon completion of the services. Revenues collected in advance are
deferred until recognized in income as earned.
Sales and Marketing Costs
The Company expenses the cost of advertising and promoting its services as
incurred. Such costs are included in sales and marketing and totaled
approximately $53,888, (unaudited) and $2,818 for the nine months ended
September 30, 2003 and period from May 24, 2002 (inception) through December 31,
2002, respectively.
Financial Instruments and Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash, cash equivalents and accounts receivable.
At December 31, 2002, the fair value of the Company's financial instruments
approximate their carrying value based on their terms and interest rates.
For the nine months ended September 30, 2003 and the period from May 24, 2002
(inception) through December 31, 2002, approximately 13%, (unaudited) and -0-%
respectively, of sales were to
F-10
ICOP DIGITAL, INC.
Notes to Consolidated Financial Statements
one customer. This customer represented approximately -0-% (unaudited) and -0-%
of accounts receivable at both September 30, 2003 and December 31, 2002,
respectively.
For the nine months ended September 30, 2003 and the period from May 24, 2002
(inception) through December 31, 2002, one vendor represented approximately 60%
(unaudited) and -0-% respectively, of the Company's total purchases. The
Company's reliance on certain vendors can be shifted to alternative sources of
supply for products it sells should such changes be necessary.
Stock-based Compensation
The Company accounts for stock-based compensation arrangements in accordance
with Statement of financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," which permits entities to recognize as expense
over the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 allows entities to continue to apply the
provisions of Accounting Principle Board ("APB") Opinion No. 25 and provide pro
forma net earnings (loss) disclosures for employee stock option grants as if the
fair-value-based method defined in SFAS No. 123 had been applied. The Company
has elected to continue to apply the provisions of APB Opinion No. 25 and
provide the pro forma disclosure provisions of SFAS No. 123.
Warranties
Products are warranted against manufacturing defects for a period of one year
commencing at the time of sale.
Recent Accounting Pronouncements
On August 16, 2001, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards (SFAS) SFAS No. 143, Accounting for
Asset Retirement Obligations," which is effective for fiscal years beginning
after June 15, 2002. It requires that obligations associated with the retirement
of a tangible long-lived asset be recorded as a liability when those obligations
are incurred, with the amount of the liability initially measured at fair value.
Upon initially recognizing an accrued retirement obligation, an entity must
capitalize the cost by recognizing an increase in the carrying amount of the
related long-lived asset. Over time, the liability is accreted to its present
value each period, and the capitalized cost is depreciated over the useful life
of the related asset. Upon settlement of the liability, an entity either settles
the obligation for its recorded amount or incurs a gain or loss upon settlement.
Although we have not completed the process of determining the effect of this new
accounting pronouncement, we currently expect that the effect of SFAS No. 143 on
our consolidated financial statements, when it becomes effective, will not be
significant.
In April 2002, the FASB issued Statement No. 145 "Rescission of FASB Statements
No. 4, 44, and 62, Amendment of FASB Statement No. 13, and Technical
Corrections" (SFAS 145). SFAS 145 will require gains and losses on
extinguishments of debt to be classified as income or loss from continuing
operations rather than as extraordinary items as previously required under
Statement of Financial Accounting Standards No. 4 (SFAS 4). Extraordinary
treatment will be required for certain extinguishments as provided in APB
Opinion No. 30. SFAS 145 also amends Statement of Financial Accounting Standards
No. 13 to require certain modifications to capital leases be treated as a
sale-leaseback and modifies the accounting for sub-leases when the original
lessee remains a secondary obligor (or guarantor). SFAS 145 is effective for
financial statements issued after May 15, 2002, and with respect to the impact
of the reporting requirements of changes made to SFAS 4 for fiscal years
beginning after May 15, 2002. The adoption of the applicable provisions of SFAS
145 did not have an effect on our financial statements.
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or
F-11
ICOP DIGITAL, INC.
Notes to Consolidated Financial Statements
Disposal Activities." SFAS 146 nullifies Emerging Issues Task Force Issue No.
94-3 "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS 146 applies to costs associated with an exit activity that
does not involve an entity newly acquired in a business combination or with a
disposal activity covered by SFAS 144. SFAS 146 is effective for exit or
disposal activities that are initiated after December 31, 2002, with earlier
application encouraged. We are currently reviewing SFAS 146 and intend to
implement it no later than January 1, 2003.
Note 2: Related Party Transactions
McCoy's utilized a facility located in a building owned by a shareholder at
$1,500 per month under a three-year lease that expires in 2006. Rental payments
of $3,000 (unaudited) have been made under the lease as of September 30, 2003.
As of September 30, 2003, $9,000 was due to the shareholder.
Notes payable to related parties consisted of unsecured advances made to the
Company for working capital purposes and accrued interest thereon. The advances
were made under promissory note agreements. Advances and accrued interest under
the notes are due on September 30, 2003. Notes payable to related parties
consisted of the following:
September 30, December 31,
2003 2002
----------------- -----------------
(unaudited)
Note payable to shareholder, 3.5 percent
interest rate, unsecured, due on demand........$ 20,258 $ --
Note payable to shareholder, 3.5 percent
interest rate, unsecured, due on demand........ 20,775 --
----------------- -----------------
$ 41,033 $ --
================= =================
The Company recorded interest expense of $817 (unaudited) and $-0- on these
notes for the nine months ended September 30, 2003 and the period from May 24,
2002 (inception) through December 31, 2002.
Note 3: Inventories
Inventories consisted of the following:
September 30, December 31,
2003 2002
----------------- -----------------
(unaudited)
Product inventory.................................$ 237,315 $ --
Materials and supplies inventory.................. 330,140 --
----------------- -----------------
$ 567,455 --
================= =================
F-12
ICOP DIGITAL, INC.
Notes to Consolidated Financial Statements
Note 4: Line of Credit
McCoy's has a one-year revolving credit line for $650,000 with Community
National Bank (the "Bank"). The credit line renews annually. Borrowings under
the line are secured by substantially all of the assets of McCoy's, and are
guaranteed by an officer of the Company. The credit line bears interest at 6
percent per annum. Amounts outstanding under the line as of September 30, 2003
and December 31, 2002 were $500,000 (unaudited) and $-0-, respectively. The
weighted average interest rate on the period-end balances was 6 percent.
Note 5: Note Payable
Notes payable consisted of the following:
September 30, December 31,
2003 2002
----------------- -----------------
(unaudited)
Note payable to bank, 6 percent
interest rate, unsecured, due on demand........$ 500,000 $ --
Notes payable to bank, 6 percent
interest rate, secured by contracts and
equipment, due $3,965 per month 103,412
Notes payable to company, 10 percent
interest rate, unsecured, due on demand 18,500
Note payable to individual, -0- percent
interest rate, unsecured, due on demand........ 25,000 --
----------------- -----------------
$ 646,912 $ --
================= =================
The Company recorded interest expense of $12,173 (unaudited) and $-0- on the
note for the nine months ended September 30, 2003 and the period from May 24,
2002 (inception) through December 31, 2002.
Note 6: Deferred Revenue
In December 2002, McCoy's collected in advance $1,154,075 for the sale of in-car
video systems to be delivered in 2003, pursuant to a price agreement contract.
The Company defers the revenue until it is earned. The Company recognized
$409,945 (unaudited) and $-0-, respectively, for the nine months ended September
30, 2003 and the period from May 24, 2002 (inception) through December 31, 2002.
As of September 30, 2003 and December 31, 2002, the Company has deferred income
totalling $416,845 (unaudited) and $-0-, respectively.
Note 7: Income taxes
A reconciliation of U.S. statutory federal income tax rate to the effective rate
for the nine months ended September 30, 2003 and the period from May 24, 2002
(inception) through December 31, 2002 are as follows:
F-13
ICOP DIGITAL, INC.
Notes to Consolidated Financial Statements
2003 2002
----------------- -----------------
(unaudited)
U.S. statuatory federal rate....................... 34% 34%
State income tax rate, net of federal benefits..... 3% 3%
Net operating loss (NOL) for which no tax
benefit is currently available.................. -37% -37%
----------------- -----------------
0% 0%
================= =================
At September 30, 2003, deferred taxes consisted of a net tax asset of $1,291,000
(unaudited) due to operating loss carryforwards of $3,490,000 (unaudited), which
was fully allowed for, in the valuation allowance of $1,291,000 (unaudited). The
valuation allowance offsets the net deferred tax asset for which there is no
assurance of recovery. The changes in the valuation allowance for the nine
months ended September 30, 2003 was $1,092,000 (unaudited).
At December 31, 2002, deferred taxes consisted of a net tax asset of $199,000,
due to operating loss carryforwards of $538,000, which was fully allowed for, in
the valuation allowance of $199,000. The valuation allowance offsets the net
deferred tax asset for which there is no assurance of recovery. The changes in
the valuation allowance for the period from May 24, 2002 (inception) through
December 31, 2002 was $199,000. Net operating loss carryforwards will expire
through 2022.
The valuation allowance will be evaluated at the end of each year, considering
positive and negative evidence about whether the asset will be realized. At that
time, the allowance will either be increased or reduced; reduction could result
in the complete elimination of the allowance if positive evidence indicates that
the value of the deferred tax asset is no longer impaired and the allowance is
no longer required.
Should the Company undergo an ownership change, as defined in Section 382 of the
Internal Revenue Code, the Company's tax net operating loss carryforwards
generated prior to the ownership change will be subject to an annual limitation
which could reduce or defer the utilization of those losses.
Note 8: Shareholders' equity
Common stock
Each share of common stock is entitled to vote at shareholders meetings.
Cumulative voting is not permitted. Shareholders do not have the preemptive
right to subscribe for additional shares.
Preferred stock
Preferred stock may be issued in series. Designations, preferences, stated
values, rights, qualifications or limitations are to be determined by the Board
of Directors.
Stock Issued for Cash
From June through August, 2002, the Company sold an aggregate of 10,620,000
shares of common stock to founders for a total of $106,200, or $.01 per share.
The shares of common stock were sold in the absence of objectively determinable
values.
In September, 2002, the Company sold an aggregate of 1,000,000 shares of common
stock to founders for a total of $100,000, or $.10 per share. The shares of
common stock were sold in the absence of objectively determinable values.
F-14
ICOP DIGITAL, INC.
Notes to Consolidated Financial Statements
In October 2002, the Company circulated a private offering memorandum relating
to the private offering of up to 2.5 million shares of the $.01 par value common
stock of the Company at $1.00 per share. The securities have not been registered
pursuant to the Securities Act of 1933, as amended (the "ACT"), nor have they
been registered under the securities act of any state. These securities were
offered pursuant to an exemption from registration requirements of the Act and
exemptions from registration provided by applicable state securities laws.
Management of the Company, who were not paid any commission or compensation for
offering or selling the securities, sold the securities.
In April 2003, the Company circulated a second private offering memorandum
relating to the private offering of up to 2 million shares of the $.01 par value
common stock of the Company at $1.00 per share. The securities have not been
registered pursuant to the Securities Act of 1933, as amended (the "ACT"), nor
have they been registered under the securities act of any state. These
securities were offered pursuant to an exemption from registration requirements
of the Act and exemptions from registration provided by applicable state
securities laws. Management of the Company, who were not paid any commission or
compensation for offering or selling the securities, sold the securities.
The Company sold 1,658,500 shares of common stock pursuant to the two offerings
for proceeds of $1,658,500.
Stock Issued for Consideration Other than Cash
In December 2002, the Company issued 100,000 shares of its $.01 par value common
stock for public relations services. The shares were valued by the Board of
Directors at $1.00 per share based upon contemporaneous sales of stock for cash
to unrelated third parties. Because the shares of common stock were not
registered, the stock certificate bears a certain legend regarding
transferability. The Company has recorded compensation expense in the amount of
$100,000.
In February 2003, the Company issued 11,000 and 50,000 shares of its $.01 par
value common stock for equipment installation and design services. The shares
were valued by the Board of Directors at $1.00 per share based upon
contemporaneous sales of stock for cash to unrelated third parties. Because the
shares of common stock were not registered, the stock certificates bear certain
legends regarding transferability. The Company has recorded an asset and
compensation expense in the amounts of $11,000 and $50,000, respectively.
F-15
