EXHIBIT 99.2
SYSCAN, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Independent Auditors' Report.................................................2
Consolidated Balance Sheets..................................................3
Consolidated Statements of Operations........................................4
Consolidated Statements of Changes in Stockholders' Equity...................5
Consolidated Statements of Cash Flows........................................6
Notes to Consolidated Financial Statements................................7-14
1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Syscan, Inc.
We have audited the accompanying consolidated balance sheets of Syscan, Inc., a
California Corporation, and Subsidiaries (the "Company") as of December 31, 2003
and 2002, and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company as of December 31, 2003 and 2002, and the consolidated results of its
operations and its cash flows for the periods indicated, in conformity with
generally accepted accounting principles in the United States of America.
/s/ Clancy and Co., P.L.L.C.
Clancy and Co., P.L.L.C.
Phoenix, Arizona
February 29, 2004
SYSCAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
ASSETS 2003 2002
- ------------------------------------------------------------- ----------------- ----------------
Current assets
Cash and cash equivalents $ 1,019,822 $ 333,611
Trade receivables, net 2,099,282 910,066
Inventories (Note 3) 199,550 158,794
Prepayments and other current assets 10,816 39,893
Due from related parties (Note 2) 2,514,612 2,850,146
----------------- ----------------
Total current assets 5,844,082 4,292,510
Fixed assets, net (Note 4) 10,816 17,731
Other assets
Intangible assets 13,493 13,493
Long-term investment (Note 6) 997,692 597,692
----------------- ----------------
Total other assets 1,011,185 611,185
----------------- ----------------
TOTAL ASSETS $ 6,866,083 $ 4,921,426
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities
Trade payables $ 25,646 $ 7,452
Other payables and accruals (Note 5) 386,830 70,577
Due to related parties (Note 2) 1,491,051 716,073
----------------- ----------------
Total current liabilities 1,903,527 794,102
Commitments and contingencies (Notes 9 and 11) - -
Stockholders' equity
Common stock: no par value; 10,000 shares authorized and
1,000 shares issued and outstanding 25,501,373 25,501,373
Accumulated deficit (20,538,817) (21,374,049)
----------------- ----------------
Total stockholders' equity 4,962,556 4,127,324
----------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,866,083 $ 4,921,426
================= ================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
FINANCIAL STATEMENTS.
3
SYSCAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31
2003 2002
----------------- ----------------
NET SALES $ 7,456,782 $ 1,983,551
COSTS OF SALES 5,089,453 1,329,352
----------------- ----------------
GROSS PROFIT (LOSS) 2,367,329 654,199
OPERATING EXPENSES
Selling and marketing expenses 635,966 603,953
General and administrative expenses 625,156 506,788
Research and development expenses 799,825 307,862
----------------- ----------------
Total operating expenses 2,060,947 1,418,603
----------------- ----------------
OPERATING EARNINGS (LOSS) 306,382 (764,404)
Other income (Note 7) 529,650 255,154
----------------- ----------------
NET EARNINGS (LOSS) BEFORE TAXES 836,032 (509,250)
PROVISION FOR INCOME TAXES (NOTE 8) 800 800
----------------- ----------------
NET EARNINGS (LOSS) $ 835,232 $ (510,050)
================= ================
EARNINGS (LOSS) PER SHARE $ 835.23 $ (510.05)
================= ================
WEIGHTED AVERAGE SHARES OUTSTANDING 1,000 1,000
================= ================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
FINANCIAL STATEMENTS.
4
SYSCAN, INC. AND SUBISIDARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31
COMMON COMMON
STOCK STOCK ACCUMULATED
(SHARES) (AMOUNT) DEFICIT TOTAL
------------- ---------------- --------------------- ------------------
Balance, December 31, 2001 1,000 $25,501,373 $ (20,863,999) $ 4,637,374
Net loss - - (510,050) (510,050)
------------- ---------------- --------------------- ------------------
Balance, December 31, 2002 1,000 25,501,373 (21,374,049) 4,127,324
Net earnings - - 835,232 835,232
------------- ---------------- --------------------- ------------------
Balance, December 31, 2003 1,000 $25,501,373 $ (20,538,817) $ 4,962,556
============= ================ ===================== ==================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
FINANCIAL STATEMENTS.
5
SYSCAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
2003 2002
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) $ 835,232 $ (510,050)
Adjustments to reconcile net earnings (loss) to net cash
flows used in operating activities
Depreciation 7,938 18,201
Provision for doubtful accounts 23,560 17,618
Provision (write-back) of slow-moving inventories (408,034) (252,122)
Negative goodwill acquired in acquisition (18,262) -
Changes in assets and liabilities
(Increase) decrease trade receivables (1,212,776) (927,684)
(Increase) decrease in inventories 367,278 257,324
(Increase) decrease in other current assets 29,077 43,550
(Increase) decrease in deferred assets - -
Increase (decrease) in trade payables 18,195 (6,681)
Increase (decrease) in other payables and accruals 316,252 (989)
----------------- -----------------
Net cash flows used in operating activities (41,540) (1,360,833)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of a subsidiary (1) 770
Capital expenditures (1,023) -
----------------- -----------------
Net cash flows provided by (used in) investing activities (1,024) 770
CASH FLOWS FROM FINANCING ACTIVITIES
Advances (repayments) - related party payables 393,241 104,117
(Advances) repayments - related party receivables 335,534 1,292,043
----------------- -----------------
Net cash flows provided by financing activities 728,775 1,396,160
----------------- -----------------
Increase in cash and cash equivalents 686,211 36,097
Cash and cash equivalents, beginning of year 333,611 297,514
----------------- -----------------
Cash and cash equivalents, end of year $ 1,019,822 $ 333,611
================= =================
Cash paid for:
Interest - -
Income taxes $ 800 $ 800
================= =================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
FINANCIAL STATEMENTS.
6
SYSCAN, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
NOTE 1-ORGANIAZTION / SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ----------------------------------------------------------------
DESCRIPTION OF BUSINESS
Syscan, Inc. (the "Company") was incorporated on May 1, 1995, under the laws of
the State of California. The Company is headquartered in San Jose, California,
and is principally engaged in the design, development and marketing of Contact
Image Sensor ("CIS") modules for use in personal computer scanners and fax
machines. Its ultimate holding company is SYSCAN Technology Holdings Limited, a
company which is incorporated in Bermuda and its shares are listed on The Growth
Enterprise Market of The Stock Exchange of Hong Kong Limited.
The Company is subject to a number of business risks affecting companies at a
similar stage of development, including competition from companies with greater
resources and alternative technologies, the ability to obtain financing to fund
future operations, dependence on new product introductions in a rapidly changing
technological environment, dependence on a limited number of customers,
dependence on key employees, and the ability to attract and retain additional
qualified personnel to manage the anticipated growth of the Company.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTING METHOD - The Company uses the accrual method of accounting for
financial statement and tax return purposes.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of the Company and its subsidiaries. The results of subsidiaries
acquired or disposed of during the periods presented are consolidated from or to
their effective dates of acquisition or disposal. All significant intercompany
balances and transactions have been eliminated in consolidation.
USE OF ESTIMATES - The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Management makes its best estimate of the ultimate
outcome for these items based on historical trends and other information
available when the financial statements are prepared. Changes in estimates are
recognized in accordance with the accounting rules for the estimate, which is
typically in the period when new information becomes available to management.
Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS - For certain of the Company's financial
instruments, including cash and cash equivalents, trade receivables and
payables, prepaid expenses and other current assets, amounts due to / from
related parties, and other payables and accruals, the carrying amounts
approximate fair values due to their short maturities.
RELATED PARTY TRANSACTIONS - A related party is generally defined as (i) any
person that holds 10% or more of the Company's securities and their immediate
families, (ii) the Company's management, (iii) someone that directly or
indirectly controls, is controlled by or is under common control with the
Company, or (iv) anyone who can significantly influence the financial and
operating decisions of the Company. A transaction is considered to be a related
party transaction when there is a transfer of resources or obligations between
related parties.
7
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid instruments
purchased with an original maturity of three months or less to be cash
equivalents.
CONCENTRATION OF CREDIT RISK FOR CASH HELD AT BANKS - The Company maintains cash
balances at several banks. Accounts at each institution are insured by the
Federal Deposit Insurance Corporation up to $100,000.
CONCENTRATION OF CREDIT RISK DUE TO GEOGRAPHIC SALES AND SIGNIFICANT CUSTOMERS -
The Company operates in a single industry segment - scanner and fax modules. The
Company markets its products in the United States, Europe and the Asia Pacific
region through its sales personnel and independent sales representatives.
The Company's geographic sales as a percent of total revenue are as follows:
2003 2002
---------------- --------------
United States 80% 95%
Asia Pacific 13% 1%
Europe and others 7% 4%
Sales to major customers, as a percentage of total revenues, are as follows:
2003 2002
---------------- -----------
A 41% 57%
CONCENTRATION OF CREDIT RISK - Financial instruments that potentially subject
the Company to a concentration of credit risk consist primarily of trade
receivables. The Company's customers are concentrated in the personal computer
industry, motherboard manufacturers and original equipment manufacturers. As of
December 31, 2003 and 2002, the concentration was approximately 82% (5
customers) and 71% (1 customer), respectively. The loss of any of these
customers could have a material adverse effect on the Company's results of
operations, financial position and cash flows.
CONCENTRATION OF CREDIT RISK DUE TO SIGNIFICANT VENDORS - For the years ended
December 31, 2003 and 2002, the Company's purchases have primarily been
concentrated with three vendors that are fellow subsidiaries of the Company. If
these vendors were unable to provide materials in a timely manner and the
Company was unable to find alternative vendors, the Company's business,
operating results and financial condition could be adversely affected.
INVENTORIES - Inventories consist of finished goods, which are stated at the
lower of cost or net realizable value, with cost computed on a first-in,
first-out basis. Provision is made for obsolete, slow-moving or defective items
where appropriate. The amount of any provision of inventories is recognized as
an expense in the period the provision occurs. The amount of any reversal of any
provision is recognized as other income in the period the reversal occurs.
FIXED ASSETS - Fixed assets, stated at cost, are depreciated over the estimated
useful lives of the assets using the straight-line method over periods ranging
from three to ten years. Significant improvements and betterments are
capitalized. Routine repairs and maintenance are expensed when incurred. Gains
and losses on disposal of fixed assets are recognized in the statement of
operations based on the net disposal proceeds less the carrying amount of the
assets.
8
LONG-LIVED ASSETS - Long-lived assets, such as fixed assets, are reviewed for
impairment when circumstances indicate the carrying value of an asset may not be
recoverable. For assets that are to be held and used, an impairment loss is
recognized when the estimated undiscounted cash flows associated with the asset
or group of assets is less than their carrying value. If impairment exists, an
adjustment is made to write the asset down to its fair value, and a loss is
recorded as the difference between the carrying value and fair value. Fair
values are determined based on quoted market values, discounted cash flows or
internal and external appraisals, as applicable. Assets to be disposed of are
carried at the lower of carrying value or estimated net realizable value.
LONG-TERM INVESTMENTS - Long-term investments are carried at cost less provision
for any impairment in value. Income from long-term investments is accounted for
to the extent of dividends received or receivable. Upon disposal of investments,
any profit and loss thereon is accounted for in the statement of operations.
REVENUE RECOGNITION - Revenues consist of sales of merchandise including optical
image capturing devices, modules of optical image capturing devices, and chips
and other optoelectronic products. Revenue is recognized when the product is
shipped, net of an allowance for estimated returns and exclusion of value-added
tax, and the risks and rewards of ownership have transferred to the customer.
The Company recognizes shipping and handling fees as revenue, and the related
expenses as a component of cost of sales. All internal handling charges are
charged to selling, general and administrative expenses.
ALLOWANCE FOR DOUBTFUL ACCOUNTS AND RETURN ALLOWANCES - The Company presents
accounts receivable, net of allowances for doubtful accounts and returns, to
ensure accounts receivable are not overstated due to uncollectibility. The
allowances are calculated based on detailed review of certain individual
customer accounts, historical rates and an estimation of the overall economic
conditions affecting the Company's customer base. The Company reviews a
customer's credit history before extending credit. If the financial condition of
its customers were to deteriorate, resulting in an impairment of their ability
to make payments, additional allowances may be required. Allowance for doubtful
accounts at December 31, 2003 and 2002 was $86,780 and $63,220, respectively.
RESEARCH AND DEVELOPMENT EXPENSES - Research and development costs are expensed
as incurred and amounted to $799,825 in 2003 and $307,862 in 2002.
ADVERTISING COSTS - Advertising costs are expensed as incurred and amounted to
$10,364 in 2003 and $64,633 in 2002.
INCOME TAXES - The Company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards ("SFAS" No. 109), "Accounting for
Income Taxes," whereby deferred income tax assets and liabilities are computed
for differences between the financial statements and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future,
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary, to reduce deferred income tax assets to the amount
expected to be realized.
INTANGIBLE ASSETS - Intangible assets represents goodwill arising from the
excess of the purchase consideration over the fair value of the net assets at
the date of acquisition of subsidiaries. Goodwill arising in a business
combination initiated after June 30, 2001 is not amortized. Negative goodwill is
charged to the statement of operations as the carrying amount of the asset
cannot be reduced to below zero. The amount was immaterial to the financial
statements as a whole.
9
COMPREHENSIVE INCOME - The Company includes items of other comprehensive income
by their nature in a financial statement and displays the accumulated balance of
other comprehensive income separately in the equity section of the balance
sheet.
FOREIGN CURRENCY TRANSLATION - The reporting currency used in the preparation of
these consolidated financial statements is U.S. dollars. Local currencies are
the functional currencies for the Companies subsidiaries. For the purpose of
consolidation, assets and liabilities of subsidiaries with functional currencies
other than U.S. dollars are translated into U.S. dollars at the applicable rates
of exchange in effect at the balance sheet date and income and expense items are
translated into U.S. dollars at the average applicable rates during the year.
Translation gains and losses resulting from fluctuations in exchange rates are
recorded as a separate component of other comprehensive income within
stockholders' equity as cumulative translation adjustments. Gains and losses
resulting from foreign currency transactions are included in results of
operations.
EARNINGS PER SHARE - Basic earnings per share ("EPS") are calculated using net
earnings (numerator) divided by the weighted-average number of shares
outstanding (denominator) during the reporting period. All per share amounts in
these financial statements are basic earnings or loss per share.
RECENT ACCOUNTING PRONOUNCEMENTS - The Financial Accounting Standards Board
issued the following new accounting pronouncements during 2003:
Interpretation No. 46 "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51" (FIN 46). FIN 46 requires certain variable
interest entities to be consolidated by the primary beneficiary of the entity if
the equity investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. FIN 46 is effective for all new variable interest
entities created or acquired after January 31, 2003. For variable interest
entities created or acquired prior to February 1, 2003, the provisions of FIN 46
must be applied for the first interim or annual period beginning after June 15,
2003. FIN 46 does not have any impact on the financial position or results of
operations of the Company.
In April 2003, the FASB issued SFAS No. 149, "Accounting for Amendment of
Statement 133 on Derivative Instruments and Hedging Activities," which amends
and clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. This Statement is generally effective for
contracts entered into or modified after June 30, 2003, and all provisions
should be applied prospectively. This statement does not affect the Company.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity," which
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). This Statement is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. It is to be implemented by reporting the cumulative effect
of a change in an accounting principle for financial instruments created before
the issuance date of the Statement and still existing at the beginning of the
interim period of adoption. Restatement is not permitted. This statement does
not affect the Company.
10
NOTE 2 - RELATED PARTY TRANSACTIONS
- -----------------------------------
The following is a summary of significant related party purchase transactions,
which were carried out in the normal course of the Company's business:
2003 2002
-------------- ------------
SYSCAN Intervision Limited $ 4,418,415 $ 581,440
============== ============
Shenzhen SYSCAN Technology Company Limited
- $ 460,736
============== ============
SYSCAN Optoelectronics Technology (Shenzhen)
Company Limited - $ 548,116
============== ============
AMOUNTS DUE TO / FROM RELATED PARTIES ARE UNSECURED, INTEREST-FREE AND REPAYABLE
ON DEMAND AND CONSISTED OF THE FOLLOWING:
AMOUNTS DUE FROM RELATED PARTIES: 2003 2002
---------------- ------------
Due from ultimate holding company $ 317,280 $ 313,870
Due from immediate holding company 100,000 100,000
Due from fellow subsidiaries 2,097,332 2,436,276
---------------- ------------
$ 2,514,612 $2,850,146
================ ============
AMOUNTS DUE TO RELATED PARTIES:
Due to fellow subsidiaries $ 1,491,051 $ 716,073
================ ============
NOTE 3 - INVENTORIES
- --------------------
Inventories consist of the following:
2003 2002
------------ ------------
Finished goods $ 199,550 $566,828
Less: provision for obsolete and slow- moving
inventories - 408,034
------------ ------------
$ 199,550 $158,794
============ ============
NOTE 4 - FIXED ASSETS
- ---------------------
Fixed assets consist of the following:
2003 2002
------------- -------------
Machinery $ 211,301 $ 210,278
Furniture and office equipment 686,107 686,107
Computer equipment 183,254 183,254
Leasehold improvements 47,136 47,136
------------- -------------
Total 1,127,798 1,126,775
Less accumulated depreciation 1,116,982 1,109,044
------------- -------------
Net book value $ 10,816 $ 17,731
============= =============
11
Depreciation expense charged to operations was $7,938 in 2003 and $18,201 in
2002.
NOTE 5 - OTHER PAYABLES AND ACCRUALS
- ------------------------------------
Other payables and accruals consist of the following:
2003 2002
------------- ------------
Accrued product-related costs $ 150,000 $ 37,500
Accrued sales commissions and bonus 132,693 -
Accrued professional fees 60,000 8,000
Accrued vacation and sick 9,519 9,519
Other 34,618 15,558
------------- ------------
$ 386,830 $ 70,577
============= ============
NOTE 6 - LONG-TERM INVESTMENT
Long-term investment consist of an equity interest in CMOS Sensor, Inc.
("CMOS"), a California corporation, which is principally engaged in the research
and development of infra-red sensors and CMOS sensors. On June 26, 2002, the
Company acquired 100% equity interest of Syscan Laser Technology Ltd. ("Syscan
Laser") from Syscan Holdings Limited, a fellow subsidiary of the Company, for
total consideration of $1. At the date of acquisition, Syscan Laser held 9.7%
equity interest (representing 750,000 shares purchased at $0.80 per share) in
CMOS. On October 29, 2003, the Company acquired 100% equity interest of
Leadbuilt Technology Limited ("Leadbuilt") from Syscan InterVision Limited, a
fellow subsidiary of the Company, for total consideration of $1. At the date of
acquisition, Leadbuilt held 6.4% (representing 500,000 shares purchased at $0.80
per share) equity interest in CMOS. As a result of both transactions, the
Company increased its equity interest in CMOS from 9.7% to 16.1%. The Company's
directors are of the opinion that the underlying value of the long-term
investment is not less than the carrying value at December 31, 2003 and 2002.
Long-term investment amounted to $997,692 at December 31, 2003 and $597,692 at
December 31, 2002.
NOTE 7 - OTHER INCOME
Other income consists of the following:
2003 2002
------------- ---------------
Interest income $ 12,266 $ 3,032
Write back of provision of inventories 408,034 252,122
Recovery of trade receivables written off 109,350 -
------------- ---------------
$ 529,650 $ 255,154
============= ===============
NOTE 8 - INCOME TAXES
Provision for income taxes for all periods presented represents the minimum
franchise tax due ($800) in the State of California. No provision for Hong Kong
Profits Tax has been made for the periods presented as the Company and its
subsidiaries operating in Hong Kong have no assessable profits during the years
being reported. Hong Kong Profits Tax is calculated at 17.5% (2002: 16%) of the
estimable assessable profit for the year.
12
THE NET DEFERRED INCOME TAX ASSET CONSISTED OF THE FOLLOWING:
2003 2002
------------- -------------
Deferred tax assets
Federal net operating loss carryforwards $5,462,214 $5,453,604
State net operating loss carryforwards 1,023,375 1,025,542
Excess book over tax depreciation - -
Capitalized R&D Expenses 1,121,554 1,310,674
Tax credit carryforwards 641,173 650,369
------------- -------------
8,248,316 8,440,189
Less valuation allowance 8,242,668 8,434,414
------------- -------------
5,648 5,775
Deferred tax liability
Excess tax over book depreciation (5,648) (5,775)
------------- -------------
Net deferred income tax asset $ - $ -
============= =============
The Company believes sufficient uncertainty exists regarding the realizability
of the net operating loss carryforwards and other timing differences for the
periods presented. Accordingly, a valuation allowance has been provided for the
entire amount related thereto. The valuation allowance increased (decreased) by
approximately ($192,000) for 2003 and $278,000 for 2002.
As of December 31, 2003, the Company has available net operating loss
carryforwards for federal and state income tax purposes of approximately
$16,000,000 and $11,600,000, which begin to expire in the year 2010 and 2005,
respectively. State net operating loss carryforwards are based on federal net
operating losses, which are limited to certain percentages and carryover periods
based on the year incurred. For taxable years beginning in 2002 and 2003, the
State of California has suspended the net operating loss carryover deduction for
two years for losses incurred before January 1, 2002, and for one year for
losses incurred after January 1, 2002. Pursuant to the Tax Reform Act of 1986,
annual utilization of the Company's net operating loss carryforwards may be
limited if a cumulative change in ownership of more than 50% is deemed to occur
within any three-year period.
NOTE 9 - COMMITMENTS
- --------------------
OPERATING LEASES - The Company is committed under various noncancelable
operating leases which expire through September 2004. Rent expense charged to
operations was approximately $99,000 for 2003 and $92,000 for 2002. Future
minimum rental commitments under noncancelable leases are as follows:
2004-$60,078.
LINE OF CREDIT - The Company has a line of credit to borrow up to $500,000,
bearing interest at the rate of prime plus 1%, and secured by substantially all
of the assets of the Company. Interest payments are due monthly and all unpaid
interest and principal is due in full on December 4, 2004. Upon certain events
of defaults as more fully described in the agreement, the variable interest rate
increases to prime plus 3%. The entire line of credit was available for use as
of December 31, 2003.
13
NOTE 10 - SUPPLEMENTAL CASH FLOW INFORMATION
- --------------------------------------------
Supplemental cash flow information for the years ended December 31, 2003 and
2002 is presented below. The assets and liabilities arising from the acquisition
of the following subsidiaries, Leadbuilt Technology Ltd. (October 29, 2003) and
Syscan Laser Technology Ltd. (June 26, 2002) are as follows:
2003 2002
--------------- -------------
Share of net assets/(liabilities) acquired $ 18,263 $ (13,492)
Purchase consideration 1 1
--------------- -------------
(Negative goodwill) / Positive goodwill (18,262) 13,493
=============== =============
Net assets/(liabilities) acquired $ 400,000 $ 597,692
Long-term investment - 1
Due from a fellow subsidiary - 771
Due to a fellow subsidiary (381,737) (611,956)
--------------- -------------
18,263 (13,492)
(Negative goodwill) / Positive goodwill (18,262) 13,493
--------------- -------------
Cash consideration $ 1 $ 1
=============== =============
Cash consideration paid $ (1) $ (1)
Cash and cash equivalents acquired - 771
--------------- -------------
Net cash (paid) / received $ (1) $ 770
=============== =============
NOTE 11 - LETTER OF INTENT
- --------------------------
On December 18, 2003, the Company entered into a non-binding letter of intent to
merge with BankEngine Technologies Inc. ("BankEngine"), a public company that
trades on the OTCBB. BankEngine has agreed to issue that number of shares of its
common stock to the shareholders of Syscan, Inc. that represents ninety percent
(90%) of BankEngine's outstanding shares of common stock on a post-transaction
basis in exchange for all of the issued and outstanding shares of Syscan. The
acquisition of Syscan, Inc. is subject to approval of BankEngine's board of
directors and continued due diligence and there can be no assurance that the
merger will be consummated in the near future, if at all.
14