As filed with the Securities and Exchange Commission on June 6, 2006
Registration No. 333-124313
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
POST EFFECTIVE AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
SYSCAN IMAGING, INC.
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(Name of small business issuer in its charter)
Delaware 3679 59-3134518
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(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
1772 Technology Drive
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San Jose, California 95110
(408) 436-9888
(Address and telephone number of principal executive offices)
Darwin Hu.
1772 Technology Drive
San Jose, California 95110
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(408) 436-9888
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(Name, address and telephone number of agent for service)
Copies to:
Jody R. Samuels, Esq.
Richardson & Patel LLP
The Chrysler Building
405 Lexington Avenue, 26th Floor
New York, New York 10174
(212) 907-6686
Approximate date of proposed sale to the public: As soon as practicable, after
this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. |X|
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS PROPOSED PROPOSED MAXIMUM AMOUNT OF
OF SECURITIES AMOUNT TO BE MAXIMUM AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED OFFERING PRICE OFFERING FEE
PER UNIT PRICE
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common stock, par value $0.01 per share, 2,144,750 shares(1) $1.00 (2) $2,144,750 $252.44
underlying preferred stock
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common stock, par value $0.01 per share, 932,500 shares(1) $2.00 (2) $1,865,000 $219.52
underlying warrants
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common stock, par value $0.01 per share, 186,500 shares(1) $1.00 (2) $186,500 $21.96
underlying warrants
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TOTAL 3,263,750 shares(1) $4,196,250 $493.92(3)
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(1) The Registrant has completed a private placement to accredited investors
of units consisting of shares of the Registrant's Series A Convertible
Preferred Stock and Warrants to purchase shares of the Registrant's
Common Stock (the "Private Placement"). The Registrant is registering for
resale (i) 1,865,000 shares of Common Stock issuable upon conversion of
shares of the Series A Convertible Preferred Stock, (ii) 279,750 shares
of Common Stock, representing the Registrant's estimate of the maximum
number of shares of Common Stock issuable upon conversion of accrued
dividends on the shares of Series A Convertible Preferred Stock, (iii)
932,500 shares of Common Stock issuable upon exercise of the Common Stock
Purchase Warrants issued to the purchasers in the Private Placement, and
(iv) 186,500 shares of Common Stock issuable upon the exercise of the
Common Stock Purchase Warrants issued to the placement agent in the
Private Placement. Pursuant to Rule 416 under the Securities Act, the
shares being registered hereunder include such indeterminate number of
shares of Common Stock as may be issuable with respect to the shares
being registered hereunder as a result of stock splits, stock dividends
or similar transactions affecting the shares to be offered by the selling
shareholders..
(2) Represents the higher of: (i) the exercise prices of the convertible
security and (ii) the offering price of securities of the same class as
the common stock underlying the convertible security calculated in
accordance with Rule 457(c) under the Securities Act, for the purpose of
calculating the registration fee pursuant to Rule 457(g) under the
Securities Act.
(3) All of which registration fee has previously been paid.
The Registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act or until the registration statement shall become effective on
such date as the Securities and Exchange Commission, acting pursuant to said
Section 8(a), may determine.
SYSCAN IMAGING, INC.
3,013,750 SHARES OF COMMON STOCK
This prospectus relates to the public offering of up to 3,013,750
shares of our common stock, par value $0.001 per share, for sale by the selling
stockholders for their own account. These shares include up to 1,615,000 shares
of common stock issuable upon conversion of the Series A Convertible Preferred
Stock, 279,750 shares of common stock issuable as a result of the conversion of
accrued dividends on the shares of Series A Convertible Preferred Stock and up
to 1,119,000 shares of common stock issuable upon the exercise of warrants. We
will pay the expenses of registering these shares.
Our common stock is quoted on the NASD's Over the Counter Bulletin
Board (OTCBB) under the symbol "SYII". On May 24, 2006, the closing sales price
for the common stock on the OTCBB was $1.00 per share.
To the extent they wish to sell their shares of our common stock as
provided for herein, the selling stockholders may offer and sell such shares on
a continuous or delayed basis in the future. These sales may be conducted in the
open market or in privately negotiated transactions and at market prices, fixed
prices or negotiated prices. We will not receive any of the proceeds from the
sale of the shares of common stock owned by the selling stockholders, but we
will receive funds from the exercise of their warrants upon exercise. Any such
proceeds will be used by us for working capital and general corporate purposes.
Prospective investors should read this prospectus and any amendment or
supplement hereto together with additional information described under the
heading "Available Information."
Our principal executive offices are located at 1772 Technology Drive,
San Jose, California 95110. Our telephone number is (408) 436-9888.
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AN INVESTMENT IN THE SHARES OF OUR COMMON STOCK BEING OFFERED BY THIS
PROSPECTUS INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD READ THE "RISK FACTORS"
SECTION BEGINNING ON PAGE 4 BEFORE YOU DECIDE TO PURCHASE ANY SHARES OF OUR
COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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The date of this prospectus is , 2006.
TABLE OF CONTENTS
PAGE
Prospectus Summary...........................................................1
Risk Factors.................................................................4
Note On Forward Looking Statements..........................................12
Business....................................................................13
Use of Proceeds.............................................................23
Selling Stockholders........................................................23
Plan of Distribution........................................................28
Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(A) of the Exchange Act...........................30
Security Ownership of Management............................................33
Description of Securities...................................................35
Management's Discussion and Analysis or Plan of Operation...................40
Certain Relationships and Related Transactions..............................54
Market for Comon Equity and Related Stockholder Matters.....................54
Executive Compensation......................................................54
Financial Statements........................................................64
Legal Matters...............................................................64
Experts.....................................................................64
Available Information.......................................................64
You should rely only upon the information contained in this prospectus
and the registration statement of which this prospectus is a part. We have not
authorized any other person to provide you with different information. If anyone
provides you with different or inconsistent information, you should not rely on
it. We are not making an offer to sell these securities in any jurisdiction
where the offer or sale is not permitted. You should assume the information
appearing in this prospectus is accurate only as of the date on the front cover
of this prospectus. Our business, financial condition, results of operations and
prospects may have changed since that date. This prospectus is based on
information provided by us and other sources that we believe are reliable. We
have summarized certain documents and other information in a manner we believe
to be accurate, but we refer you to the actual documents for a more complete
understanding of what we discuss in this prospectus. In making an investment
decision, you must rely on your own examination of our business and the terms of
the offering, including the merits and risks involved.
As previously reported on Form 8-K filed on June 6, 2006, the Staff of
the Securities and Exchange Commission (SEC) reviewed the Company's financial
statements and related disclosures contained within Form 10-KSB for the year
ended December 31, 2005 and Form 10-QSB for the quarter ended March 31, 2006 and
responded with inquires and requests for supplemental information in a letter
dated May 24, 2006. The officers of Syscan discussed all issues identified in
the Staff's letter with the Company's independent registered public accounting
firm and legal counsel. Subsequent to such discussions, the Company responded to
all the SEC's inquires and requests for additional information in a letter dated
June 1, 2006. We have verbal confirmation that the SEC is reviewing the
Company's response letter. Because the review is currently in process, for
accuracy purposes, the financial information included in this filing has not
been updated to reflect any potential amendments that may be required as a
result of the SEC's comment letter.
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED IN THIS
PROSPECTUS. THIS SUMMARY DOES NOT CONTAIN ALL OF THE INFORMATION YOU SHOULD
CONSIDER BEFORE INVESTING IN THE SECURITIES. BEFORE MAKING AN INVESTMENT
DECISION, YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE RISK
FACTORS SECTION, THE FINANCIAL STATEMENTS AND THE NOTES TO THE FINANCIAL
STATEMENTS. IN THIS PROSPECTUS AND ANY AMENDMENT OR SUPPLEMENT HERETO, UNLESS
OTHERWISE INDICATED, THE TERMS "SYSCAN IMAGING, INC.", "SYII", "WE", "US", AND
"OUR" REFER AND RELATE TO SYSCAN IMAGING, INC. AND ITS CONSOLIDATED
SUBSIDIARIES.
OUR BUSINESS
We are in the business of developing, designing and delivering imaging
technology solutions. We currently have 14 issued patents held by us, all of
which are U.S. patents. Our technology is also covered by 5 issued patents in
Taiwan. We also have 5 patent applications currently pending with the US Patent
& Trademark Office, 3 of which relate to image display technology and 2 of which
relate to image scanning. Our approach to research and development (R&D) is
focused on creating new deliverable and marketable technologies. We sell our
products to clients throughout the world, including the United States, Canada,
Europe, South America, Australia and Asia. We intend to expand our business and
product offerings into the much larger image display market where we intend to
leverage our experience and expertise. We also believe that we may benefit from
a level of transfer of technologies from image capture to image display.
Our wholly-owned operating subsidiary, Syscan, Inc. ("SI"), was
incorporated on May 1, 1995, under the laws of the State of California and is
headquartered in San Jose with additional strategic offices in Arnhem (the
Netherlands) and Hong Kong. Our majority stockholder is Syscan Imaging Limited,
which is wholly-owned by Syscan Technology Holdings Limited. Syscan Technology
Holdings Limited is a publicly-held company incorporated in Bermuda whose shares
are listed on The Growth Enterprise Market of the Stock Exchange of Hong Kong
Limited.
Our strategy is to expand our image capture product line and technology
while leveraging our assets in other areas of the imaging industry. We are
actively shipping six categories of image capture products under several "house
brands" or their OEM counterparts versus five categories in 2004. The
introduction of the A4 duplex scanners (DocketPORT) in the third quarter created
a broader base of products. This new category quickly contributed over 7% of
unit sales in 2005, despite its mid-year introduction. The A4 simplex scanner
(TravelScan) category represented approximately 19% of our sales during the year
ended December 31, 2005, a decrease from 2004 (21%) of approximately 2%. The A6
simplex scanners that are widely used for capturing images of bank checks,
drivers licenses and various identification cards, represented the largest unit
sales in 2005 at 54%. This represented an increase of 8.1% over 2004 unit sales.
The A5 security document scanner experienced a 3% increase in unit sales in 2005
to 3% from less than 1% in 2004. Our fifth scanner product category,
representing approximately 15% of our sales ending the 12 months ended December
31, 2005, is the A8 business card reader scanner. In 2004 the A8 scanner
category represented approximately 21% of our sales, so we experienced a net
reduction in this category of 6%.
In addition to the finished scanner product line, we also design,
configure and sell the Contact Image Sensor (CIS) Modules that we use in our
products separately as an OEM component to manufacturers. This CIS business
represented approximately 5% of our overall sales during 2005, a decrease of 5%
from the previous year (2004 - 10%).
-1-
We intend to expand our image capture product line with 7 new products
in 2006. These new products are being introduced as both Syscan branded and OEM/
VAR branded products launch. Many of these new scanners are being driven by
increased market demand for faster and easier-to-use products. They will also
concentrate more on the identity-security and financial transaction market
needs.
Over the past twelve months we have begun focusing our sales and
marketing efforts substantially towards the vertical markets such as the Value
Added Reseller (VAR) and small-office-home-office (SOHO) markets. We believe
focusing on these markets is the most effective way to showcase our
technological capabilities and manufacturing efficiencies, while enabling us to
maintain higher margins, and require fewer resources than working directly with
the mass retailers.
While we continue to grow our presence in image capture technology, we
have begun creating, through acquisition and research and development, new
technology solutions for the substantially larger, image display market. More
specifically we are creating products and technologies to accent and enhance the
HDTV television market. Our first image display product is expected to be
available for delivery during the first quarter of 2007. We believe that these
HDTV products will provide advanced image quality at a highly competitive price
point, creating a value point product.
In addition to future products and technologies in various stages of
research and development, one of our objectives is to acquire companies in the
image capture and display industry that could compliment our business model,
improve our competitive positioning and expand our offerings to the marketplace,
all of which there can be no assurance. In identifying potential acquisition
candidates we will seek to acquire companies with varied distribution channels,
rich intellectual property (IP) and high caliber engineering personnel.
We intend to finance our research and development, commercialization
and distribution efforts and our working capital needs primarily through cash
flow generated from operations, our line of credit and through funding from
other sources, including debt financing and equity financing. While there can be
no assurance that such sources will provide adequate funding for our operations,
management believes such sources will be available to us.
Our principal executive offices are located at 1772 Technology Drive,
San Jose, California 95110 and our phone number (408) 436-9888.
SERIES A PREFERRED STOCK FINANCING
On March 15, 2005, we sold $1.865 million of our Series A Preferred
Stock to accredited investors. Net proceeds from the financing will be used for
marketing and sales, research and development opportunities and for general
working capital purposes.
The Series A Preferred Stock is convertible into shares of our common
stock at a conversion price of $1.00 per share and each holder is entitled to
receive interest at a rate of 5.0% per annum. In connection with the financing,
we also issued to the selling stockholders common stock purchase warrants to
purchase up to 932,500 shares of our common stock at a price equal to $2.00 per
share. Starboard Capital Markets, LLC, an NASD member firm, acted as placement
agent in the sale of our Series A Preferred Stock and received a cash commission
of $186,500 and warrants to purchase up to 186,500 shares of our common stock at
an exercise price of $1.00 per share.
We have agreed, pursuant to a registration rights agreement, to
register the shares of common stock underlying the Series A Preferred Stock and
warrants, and are fulfilling our agreement by filing the registration statement
of which this prospectus is a part with the Securities and Exchange Commission.
-2-
THE OFFERING
Outstanding Common Stock 24,592,092 shares as of May 24, 2006.
Common Stock Offered Up to 3,013,750 shares of common stock, including up to 1,615,000
shares of common stock issuable upon conversion of the Series A
Preferred Stock, 279,750 shares of common stock issuable as a result
of the conversion of accrued dividends on the shares of Series A
Convertible Preferred Stock, up to 932,500 shares of common stock
issuable upon the exercise of warrants, which warrants have an
exercise price of $2.00 per share, and up to 186,500 shares of common
stock issuable upon the exercise of warrants, which have an exercise
price of $1.00 per share.
Proceeds We will not receive any proceeds from the sale of the common stock
issuable upon conversion of the Series A Preferred Stock that may be
sold pursuant to this prospectus. We will, however, receive proceeds
upon the exercise of the warrants which, if all such warrants are
exercised in full, would be $2,051,500. The selling stockholders are
under no obligation to exercise their warrants. Proceeds, if any,
received from the exercise of warrants will be used for general
corporate purposes.
Risk Factors The securities offered hereby involve a high degree of risk. See "Risk
Factors."
OTC Bulletin Board Symbol SYII
[remainder of page intentionally left blank]
-3-
RISK FACTORS
AN INVESTMENT IN OUR SECURITIES IS EXTREMELY RISKY. YOU SHOULD
CAREFULLY CONSIDER THE FOLLOWING RISKS, IN ADDITION TO THE OTHER INFORMATION
PRESENTED IN THIS PROSPECTUS BEFORE DECIDING TO PURCHASE OUR SECURITIES. IF ANY
OF THE FOLLOWING RISKS ACTUALLY MATERIALIZE, OUR BUSINESS AND PROSPECTS COULD BE
SERIOUSLY HARMED, THE PRICE AND VALUE OF OUR SECURITIES COULD DECLINE AND YOU
COULD LOSE ALL OR PART OF YOUR INVESTMENT.
RISKS RELATING TO OUR BUSINESS
BECAUSE WE DEPEND ON A SMALL NUMBER OF KEY CUSTOMERS, OUR BUSINESS COULD BE
ADVERSELY AFFECTED IF WE FAIL TO RETAIN THESE CLIENTS AND/OR OBTAIN NEW CLIENTS
AT A LEVEL SUFFICIENT TO SUPPORT OUR OPERATIONS AND/OR BROADEN OUR CLIENT BASE.
During the year ended December 31, 2005 four of our customers accounted
for approximately 79% of total revenues. During the year ended December 31,
2004, four of our customers accounted collectively for approximately 78% of
total revenues. The loss of any of our largest clients could have a material
adverse effect on our business.
FOR THE YEAR ENDED DECEMBER 31, 2005 WE SUFFERED A NET LOSS AND WE MAY CONTINUE
TO INCUR LOSSES FOR THE FORESEEABLE FUTURE.
During the fiscal year ended December 31, 2005, we had an increase in
revenues but we sustained an operating loss and cannot be sure that we will
again operate profitably in the future. During the fiscal year ended December
31, 2005, our revenues increased by $1.79 million (29.5%) from $6.06 million for
the year ended December 31, 2004 to $7.85 million for the year ended December
31, 2005. In addition, we had a net loss of $2,728,464 for the year ended
December 31, 2005, as compared to net loss of $179,866 for the year ended
December 31, 2004.
WE OUTSOURCE THE MANUFACTURING OF OUR IMAGE SCANNING PRODUCTS TO SYSCAN
TECHNOLOGY HOLDINGS LIMITED (STH), THE PARENT COMPANY OF OUR MAJORITY
SHAREHOLDER, AND IF THE OPERATIONS STH ARE INTERRUPTED OR IF OUR ORDERS EXCEED
THE MANUFACTURING CAPABILITIES OF STH, WE MAY NOT BE ABLE TO DELIVER OUR
PRODUCTS TO CUSTOMERS ON TIME.
We currently utilize the manufacturing services of STH the parent
company of our majority stockholder to manufacture all of our current products.
STH serves as the exclusive manufacturer of all current and future image capture
products to be produced by us, although there is no written agreement between us
and STH. STH operates a single facility and if our customers place orders for
large quantities of our products, or if STH's other customers place large orders
of products, may not be able to produce our products in sufficient quantities.
In addition, if the operations of STH were halted or restricted, even
temporarily, or they are unable to fulfill large orders, we could experience
business interruption, increased costs, damage to our reputation and loss of our
customers. Although we have the right to utilize other manufacturers at any
time, identifying and qualifying a new manufacturer to replace STH as the
manufacturer of our products could take several months during which time, we
would likely lose customers and our revenues could be materially delayed and/or
reduced.
BECAUSE OF OUR RELATIONSHIP WITH STH, CONFLICTS OF INTEREST MAY ARISE BETWEEN US
AND STH.
Our majority stockholder is a wholly-owned subsidiary of STH and our
Chairman of the Board and Chief Executive Officer was formerly an officer of STH
and beneficially owns approximately 5.33% of STH's outstanding capital stock. In
addition, Darwin Hu our Chairman and Chief Executive Officer serves as a
director of our majority stockholder Syscan Imaging Limited, which is
wholly-owned by STH. This could create, or appear to create, potential conflicts
of interest when members of our senior management are faced with decisions that
could have different implications for us and for STH. For example, conflicts of
interest could arise between us and STH in various areas such as fundraising,
competing for new business opportunities, and other areas. In addition, STH
serves as the exclusive manufacturer of our products. No assurance can be given
-4-
as to how potentially conflicted members of our management team will evaluate
their fiduciary duties to us and our majority stockholder, respectively, or how
such individuals will act under such circumstances. Furthermore, the appearance
of conflicts, even if such conflicts do not materialize, might adversely effect
the public's perception of us.
WE DEPEND ON A LIMITED NUMBER OF SUPPLIERS FOR OUR COMPONENTS AND RAW MATERIALS
AND ANY INTERRUPTION IN THE AVAILABILITY OF THESE COMPONENTS AND RAW MATERIALS
USED IN OUR PRODUCT COULD REDUCE OUR REVENUES.
We rely on a limited number of suppliers for the components and raw
materials used in our image scanning products. Although there are many suppliers
for each of our component parts and raw materials, we are dependent on a single
or limited number of suppliers for many of the significant components and raw
materials. This reliance involves a number of significant risks, including:
- unavailability of materials and interruptions in delivery of
components and raw materials from our suppliers;
- manufacturing delays caused by such unavailability or interruptions in
delivery; and
- fluctuations in the quality and the price of components and raw
materials.
We do not have any long-term or exclusive purchase commitments with any
of our suppliers. Our failure to maintain existing relationships with our
suppliers or to establish new relationships in the future could also negatively
affect our ability to obtain our components and raw materials used in our
products in a timely manner. If we are unable to obtain ample supply of product
from our existing suppliers or alternative sources of supply, we may be unable
to satisfy our customers' orders which could reduce our revenues and adversely
affect our relationships with our customers
OUR BUSINESS COULD BE ADVERSELY AFFECTED IF WE FAIL TO ADAPT TO EMERGING AND
EVOLVING MARKETS.
The markets for our products are changing rapidly and evolving and,
therefore, the ultimate level of demand for our products is subject to
substantial uncertainty. Most of our historic revenue was generated from selling
image scanning products only. We expect that our future revenues will be
generated by the sale of image scanning and image display products. We intend to
expend significant resources towards developing our image display products. Any
significant decline in demand for image scanning and/or image display products
could materially and adversely affect our business and prospects.
IF WE SHOULD EXPERIENCE RAPID GROWTH, SUCH GROWTH COULD STRAIN OUR MANAGERIAL
AND OPERATIONAL RESOURCES, WHICH COULD ADVERSELY AFFECT OUR BUSINESS.
Any rapid growth that we may experience would most likely place a
significant strain on our managerial and operational resources. If we continue
to acquire other companies, we will be required to manage multiple relationships
with various clients, strategic partners and other third parties. Further growth
(organic or by acquisition) or an increase in the number of strategic
relationships may increase this strain on existing managerial and operational
resources, inhibiting our ability to achieve the rapid execution necessary to
implement our growth strategy without incurring additional corporate expenses.
WE DEPEND ON OUR MANAGEMENT. IF WE FAIL TO RETAIN KEY PERSONNEL, OUR BUSINESS
COULD BE ADVERSELY AFFECTED.
There is intense competition for qualified personnel in the areas in
which we operate. The loss of existing personnel or the failure to recruit
additional qualified managerial, technical and sales personnel, as well as
expenses in connection with hiring and retaining personnel could adversely
affect our business. We also depend upon the performance of our executive
officers and key employees in particular, Messrs. Darwin Hu and William Hawkins.
Although we intend to enter into employment agreements with each of Messrs. Hu
and Hawkins, the loss of either of these individuals could have a material
adverse effect upon us. In addition, we have not obtained "key man" life
insurance on the lives of either Messrs. Hu or Hawkins.
-5-
We will need to attract, train and retain more employees for
management, engineering, research and development, sales and marketing and
support positions. As noted above, competition for qualified employees,
particularly engineers and research and development personnel, continues to be
intense. Consequently, we may not be able to attract, train and retain the
personnel we need to continue to offer our products to current and future
customers in a cost effective manner, if at all.
IF WE FAIL TO RAISE CAPITAL THAT WE MAY NEED TO SUPPORT AND INCREASE OUR
OPERATIONS, OUR BUSINESS COULD BE ADVERSELY AFFECTED.
Our future capital uses and requirements will depend on numerous factors,
including:
- the extent to which our products gain market acceptance;
- the level of revenues from current and future products;
- the expansion of operations;
- the costs and timing of product developments and sales and marketing
activities;
- the costs related to acquisitions of technology or businesses; and
- competitive developments.
We may require additional capital in order to continue to support and
increase our sales and marketing efforts, continue to expand and enhance the
products we offer to current and future customers and fund potential
acquisitions. This capital may not be available on terms acceptable to us, if at
all. In addition, we may be required to spend greater-than-anticipated funds if
unforeseen difficulties arise in the course of these or other aspects of our
business. As a consequence, we will be required to raise additional capital
through public or private equity or debt financings, collaborative
relationships, bank facilities or other arrangements. We cannot assure you that
such additional capital will be available on terms acceptable to us, if at all.
Any additional equity financing is expected to be dilutive to our stockholders,
and debt financing, if available, may involve restrictive covenants and
increased interest costs. Our inability to obtain sufficient financing may
require us to delay, scale back or eliminate some or all of our expansion
programs or to limit the marketing of our products. This could have a material
and adverse effect on our business.
WE HAVE NOT PAID DIVIDENDS IN THE PAST AND DO NOT EXPECT TO PAY DIVIDENDS IN THE
FUTURE, AND ANY RETURN ON INVESTMENT MAY BE LIMITED TO THE VALUE OF YOUR STOCK.
We have never paid any cash dividends on our common stock and do not
anticipate paying any cash dividends on our common stock in the foreseeable
future and any return on investment may be limited to the value of your stock.
We plan to retain any future earnings to finance growth.
OUR MAJORITY STOCKHOLDER, SYSCAN IMAGING LIMITED, AND ITS PARENT COMPANY STH OWN
AND CONTROL A SIGNIFICANT NUMBER OF THE OUTSTANDING SHARES OF OUR COMMON STOCK
AND WILL CONTINUE TO HAVE SIGNIFICANT OWNERSHIP OF OUR VOTING SECURITIES FOR THE
FORESEEABLE FUTURE.
Syscan Imaging Limited, our majority stockholder, and STH its parent
company, beneficially own approximately 76.3% of our outstanding common stock.
As a result, these entities will have the ability to control our affairs and
business, including the election of directors and subject to certain
limitations, approval or preclusion of fundamental corporate transactions. This
concentration of ownership of our common stock may:
- delay or prevent a change in the control;
- impede a merger, consolidation, takeover or other transaction
involving us; or
- discourage a potential acquirer from making a tender offer or
otherwise attempting to obtain control of us.
-6-
THE AUTHORIZATION AND ISSUANCE OF "BLANK CHECK" PREFERRED STOCK COULD HAVE AN
ANTI-TAKEOVER EFFECT DETRIMENTAL TO THE INTERESTS OF OUR STOCKHOLDERS.
Our certificate of incorporation allows the Board of Directors to issue
preferred stock with rights and preferences set by our board without further
stockholder approval. The issuance of shares of this "blank check preferred"
under particular circumstances could have an anti-takeover effect. For example,
in the event of a hostile takeover attempt, it may be possible for management
and the board to endeavor to impede the attempt by issuing shares of blank check
preferred, thereby diluting or impairing the voting power of the other
outstanding shares of common stock and increasing the potential costs to acquire
control of us. Our Board of Directors has the right to issue blank check
preferred without first offering them to holders of our common stock, as the
holders of our common stock have no preemptive rights.
WE MAY NOT BE ABLE TO COMPLY WITH THE SARBANES-OXLEY ACT.
The enactment of the Sarbanes-Oxley Act in July 2002 created a
significant number of new corporate governance requirements and additional
requirements may be enacted in the future. Although we expect to implement the
requisite changes to become compliant with existing and new requirements when
they do apply to us, we may not be able to do so, or to do so in a timely
manner.
RISKS RELATED TO OUR INTELLECTUAL PROPERTY AND TECHNOLOGY
UNAUTHORIZED USE OF OUR PROPRIETARY TECHNOLOGY AND INTELLECTUAL PROPERTY WILL
ADVERSELY AFFECT OUR BUSINESS AND RESULTS OF OPERATIONS.
Our success and competitive position depend in large part on our
ability to obtain and maintain intellectual property rights protecting our
products. We currently and may in the future rely on a combination of patents,
copyrights, trademarks, service marks, trade secrets, confidentiality provisions
and licensing arrangements to establish and protect our intellectual property
and proprietary rights. Unauthorized parties may attempt to copy aspects of our
products or to obtain, license, sell or otherwise use information that we regard
as proprietary. Policing unauthorized use of our products is difficult and we
may not be able to protect our technology from unauthorized use. Additionally,
our competitors may independently develop technologies that are substantially
the same or superior to ours and that do not infringe our rights. In these
cases, we would be unable to prevent our competitors from selling or licensing
these similar or superior technologies. In addition, the laws of some foreign
countries do not protect our proprietary rights to the same extent as the laws
of the United States.
Third parties have claimed and may claim in the future that we are
infringing their intellectual property, and we could be exposed to significant
litigation or licensing expenses or be prevented from selling our products if
such claims are successful. From time to time, we are subject to claims that we
or our customers may be infringing or contributing to the infringement of the
intellectual property rights of others. We may be unaware of intellectual
property rights of others that may cover some of our technologies and products.
If it appears necessary or desirable, we may seek licenses for these
intellectual property rights. However, we may not be able to obtain licenses
from some or all claimants, the terms of any offered licenses may not be
acceptable to us, and we may not be able to resolve disputes without litigation.
Any litigation regarding intellectual property could be costly and
time-consuming and could divert the attention of our management and key
personnel from our business operations. In the event of a claim of intellectual
property infringement, we may be required to enter into costly royalty or
license agreements. Third parties claiming intellectual property infringement
may be able to obtain injunctive or other equitable relief that could
effectively block our ability to develop and sell our products.
THE MARKETS IN WHICH WE OPERATE ARE HIGHLY COMPETITIVE AND RAPIDLY CHANGING, AND
WE MAY BE UNABLE TO COMPETE SUCCESSFULLY.
There are a number of companies that develop or may develop products
that compete in our targeted markets; however, currently there is no single
company that competes with us in all of our product areas. The individual
markets in which we compete are highly competitive, and are subject to rapid
technological change. Within image capture, we compete directly with Plustek,
Mustek and Silitek. Within Image Display, we will compete with Sony, Samsung,
Sharp, Sanyo and Phillips. In image scanning, we compete with numerous
companies, some of which are our private label partners. In addition, a number
of smaller companies in both image scanning and image display technologies are
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in some markets competitive with our solutions. Current and potential
competitors have established, or may establish, cooperative relationships among
themselves or with third parties to increase the ability of their technologies
to address the needs of our prospective customers. Most of our competitors in
each of the markets in which we compete have significantly greater financial,
technical and marketing resources than us. These competitors may be able to
respond more rapidly than we can to new or emerging technologies or changes in
customer requirements. They may also devote greater resources to the
development, promotion and sale of products than we do.
The market for image scanning and image display products is rapidly
evolving. Significant technological changes could render our products obsolete.
We must adapt to this rapidly changing market by continually improving the
functionality and features of our products to meet clients' needs. If we are
unable to develop new products and enhance functionalities or technologies to
adapt to these changes in a cost-effective and timely manner, our business could
be materially and adversely affected.
RISKS RELATING TO ACQUISITIONS
ANY ACQUISITIONS WE MAKE COULD RESULT IN DILUTION TO OUR EXISTING SHAREHOLDERS
AND COULD BE DIFFICULT TO INTEGRATE WHICH COULD CAUSE DIFFICULTIES IN MANAGING
OUR BUSINESS, RESULTING IN A DECREASE THE VALUE OF YOUR INVESTMENT.
We believe that we will need to make strategic acquisitions of other
businesses in order to achieve growth and profitability. Evaluating acquisition
targets is difficult and acquiring other businesses involves risk. Our
consummation of the acquisition of other businesses would subject us to a number
of risks, including the following:
- difficulty in integrating the acquired operations and retaining
acquired personnel;
- limitations on our ability to retain acquired sales and distribution
channels and customers;
- diversion of management's attention and disruption of our ongoing
business; and
- limitations on our ability to incorporate acquired technology and
rights into our product offerings and maintain uniform standards,
controls, procedures and policies.
Furthermore, we may incur indebtedness or issue equity securities to
pay for future acquisitions. The issuance of equity or convertible debt
securities would be dilutive to our then existing shareholders.
RISKS RELATING TO OUR COMMON STOCK
IN THE EVENT THE SEC REVIEWS OUR FORM 10-KSB AND CONSOLIDATED FINANCIAL
STATEMENTS INCLUDED THEREIN, IT MAY BE DETERMINED THAT INFORMATION DISCLOSED
THEREIN MUST BE AMENDED.
The SEC has not in the past reviewed our annual or quarterly financial
statements. In the event that the SEC determines to review our financial
statements the SEC Staff may determine that information contained therein must
be modified, removed or amended, in whole or in part, including but not limited
to, certain accounting issues and treatments, which could result in the
restatement and/or adjustment of our financial statements for the years ended
December 31, 2005 and December 31, 2004. In the event we are required to make
any such modifications, removals or amendments, including but not limited to,
accounting adjustments, reclassifications and/or write-downs of a material
amount of our assets, we may be in violation of certain financial covenants
under our credit facility, our results of operations for the restated periods
could be materially adversely affected and our financial condition could be
adversely affected.
THE LIMITED PRIOR PUBLIC MARKET AND TRADING MARKET MAY CAUSE POSSIBLE VOLATILITY
IN OUR STOCK PRICE.
There has only been a limited public market for our securities and
there can be no assurance that an active trading market in our securities will
be maintained. The Over The Counter Bulletin Board (OTCBB) is an unorganized,
inter-dealer, over-the-counter market which provides significantly less
liquidity than NASDAQ and the national securities exchange, and quotes for
securities quoted on the OTCBB are not listed in the financial sections of
newspapers as are those for NASDAQ and the national securities exchange. In
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addition, the overall market for securities in recent years has experienced
extreme price and volume fluctuations that have particularly affected the market
prices of many smaller companies. The trading price of our common stock is
expected to be subject to significant fluctuations including, but not limited
to, the following:
- quarterly variations in operating results and achievement of key
business metrics;
- changes in earnings estimates by securities analysts, if any;
- any differences between reported results and securities analysts'
published or unpublished expectations;
- announcements of new products by us or our competitors;
- market reaction to any acquisitions, joint ventures or strategic
investments announced by us or our competitors;
- demand for our products;
- shares being sold pursuant to Rule 144 or upon exercise of warrants
and options or conversion of Series A Preferred Stock; and
- general economic or stock market conditions unrelated to our operating
performance.
These fluctuations, as well as general economic and market conditions,
may have a material or adverse effect on the market price of our common stock.
THERE ARE LIMITATIONS IN CONNECTION WITH THE AVAILABILITY OF QUOTES AND ORDER
INFORMATION ON THE OTCBB.
Trades and quotations on the OTCBB involve a manual process and the
market information for such securities cannot be guaranteed. In addition, quote
information, or even firm quotes, may not be available. The manual execution
process may delay order processing and intervening price fluctuations may result
in the failure of a limit order to execute or the execution of a market order at
a significantly different price. Execution of trades, execution reporting and
the delivery of legal trade confirmation may be delayed significantly.
Consequently, one may not able to sell shares of our common stock at the optimum
trading prices.
THERE ARE DELAYS IN ORDER COMMUNICATION ON THE OTCBB.
Electronic processing of orders is not available for securities traded
on the OTCBB and high order volume and communication risks may prevent or delay
the execution of one's OTCBB trading orders. This lack of automated order
processing may affect the timeliness of order execution reporting and the
availability of firm quotes for shares of our common stock. Heavy market volume
may lead to a delay in the processing of OTCBB security orders for shares of our
common stock, due to the manual nature of the market. Consequently, one may not
able to sell shares of our common stock at the optimum trading prices.
PENNY STOCK REGULATIONS MAY IMPOSE CERTAIN RESTRICTIONS ON MARKETABILITY OF OUR
SECURITIES.
The SEC has adopted regulations which generally define a "penny stock"
to be any equity security that has a market price (as defined) of less than
$5.00 per share or an exercise price of less than $5.00 per share, subject to
certain exceptions. As a result, our shares of common stock are subject to rules
that impose additional sales practice requirements on broker-dealers who sell
such securities to persons other than established clients and "accredited
investors". For transactions covered by these rules, the broker-dealer must make
a special suitability determination for the purchase of such securities and have
received the purchaser's written consent to the transaction prior to the
purchase. Additionally, for any transaction involving a penny stock, unless
exempt, the rules require the delivery, prior to the transaction, of a risk
disclosure document mandated by the SEC relating to the penny stock market. The
broker-dealer must also disclose the commission payable to both the
broker-dealer and the registered representative, current quotations for the
securities and, if the broker-dealer is the sole market maker, the broker-dealer
must disclose this fact and the broker-dealer's presumed control over the
market. Finally, monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. Consequently, the "penny stock" rules may
restrict the ability of broker-dealers to sell our shares of common stock and
may affect the ability of investors to sell such shares of common stock in the
secondary market and the price at which such investors can sell any of such
shares.
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Investors should be aware that, according to the SEC, the market for
penny stocks has suffered in recent years from patterns of fraud and abuse. Such
patterns include:
- control of the market for the security by one or a few broker-dealers
that are often related to the promoter or issuer;
- manipulation of prices through prearranged matching of purchases and
sales and false and misleading press releases;
- "boiler room" practices involving high pressure sales tactics and
unrealistic price projections by inexperienced sales persons;
- excessive and undisclosed bid-ask differentials and markups by selling
broker-dealers; and
- the wholesale dumping of the same securities by promoters and
broker-dealers after prices have been manipulated to a desired level,
along with the inevitable collapse of those prices with consequent
investor losses.
Our management is aware of the abuses that have occurred historically
in the penny stock market.
THERE IS A RISK OF MARKET FRAUD.
OTCBB securities are frequent targets of fraud or market manipulation.
Not only because of their generally low price, but also because the OTCBB
reporting requirements for these securities are less stringent than for listed
or NASDAQ traded securities, and no exchange requirements are imposed. Dealers
may dominate the market and set prices that are not based on competitive forces.
Individuals or groups may create fraudulent markets and control the sudden,
sharp increase of price and trading volume and the equally sudden collapse of
the market price for shares of our common stock.
THERE IS LIMITED LIQUIDITY ON THE OTCBB.
When fewer shares of a security are being traded on the OTCBB,
volatility of prices may increase and price movement may outpace the ability to
deliver accurate quote information. Due to lower trading volumes in shares of
our common stock, there may be a lower likelihood of one's orders for shares of
our common stock being executed, and current prices may differ significantly
from the price one was quoted by the OTCBB at the time of one's order entry.
THERE IS A LIMITATION IN CONNECTION WITH THE EDITING AND CANCELING OF ORDERS ON
THE OTCBB.
Orders for OTCBB securities may be canceled or edited like orders for
other securities. All requests to change or cancel an order must be submitted
to, received and processed by the OTCBB. Due to the manual order processing
involved in handling OTCBB trades, order processing and reporting may be
delayed, and one may not be able to cancel or edit one's order. Consequently,
one may not able to sell shares of our common stock at the optimum trading
prices.
INCREASED DEALER COMPENSATION COULD ADVERSELY AFFECT THE STOCK PRICE.
The dealer's spread (the difference between the bid and ask prices) may
be large and may result in substantial losses to the seller of shares of our
common stock on the OTCBB if the stock must be sold immediately. Further,
purchasers of shares of our common stock may incur an immediate "paper" loss due
to the price spread. Moreover, dealers trading on the OTCBB may not have a bid
price for shares of our common stock on the OTCBB. Due to the foregoing, demand
for shares of our common stock on the OTCBB may be decreased or eliminated.
-10-
ADDITIONAL AUTHORIZED SHARES OF OUR COMMON STOCK AND PREFERRED STOCK AVAILABLE
FOR ISSUANCE MAY ADVERSELY AFFECT THE MARKET.
We are authorized to issue 50,000,000 shares of our common stock. As of
May 12, 2006, there were 24,592,092 shares of common stock issued and
outstanding. However, the total number of shares of our common stock issued and
outstanding does not include shares reserved in anticipation of the exercise of
options or warrants or the conversion of our Series A Preferred Stock. As of
April 15, 2006, we had outstanding 16,150 shares of Series A Preferred Stock,
stock options and warrants to purchase approximately 9,978,419 shares of our
common stock, the exercise or conversion prices of which range between $0.01 and
$2.50 per share, and we have reserved shares of our common stock for issuance in
connection with the potential exercise thereof. Of the reserved shares, a total
of 1,810,000 shares are currently reserved for issuance in connection with our
2002 Stock Option Plan, of which options to purchase an aggregate of 1,810,000
shares have been issued under the plan. A significant number of such options and
warrants contain provisions for cashless exercise. To the extent such options or
warrants are exercised, the holders of our common stock will experience further
dilution. In addition, in the event that any future financing should be in the
form of, be convertible into or exchangeable for, equity securities, and upon
the exercise of options and warrants, investors may experience additional
dilution.
The exercise of the outstanding derivative securities will reduce the
percentage of common stock held by our stockholders. Further, the terms on which
we could obtain additional capital during the life of the derivative securities
may be adversely affected, and it should be expected that the holders of the
derivative securities would exercise them at a time when we would be able to
obtain equity capital on terms more favorable than those provided for by such
derivative securities. As a result, any issuance of additional shares of common
stock may cause our current stockholders to suffer significant dilution which
may adversely affect the market.
In addition to the above-referenced shares of common stock which may be
issued without stockholder approval, we have 2,000,000 shares of authorized
preferred stock, the terms of which may be fixed by our Board of Directors. We
currently have 60,000 shares of Series A Preferred Stock authorized, 16,150 of
which are issued and outstanding. While we have no present plans to issue any
shares of preferred stock other than the Series A Preferred Stock, our Board of
Directors has the authority, without stockholder approval, to create and issue
one or more series of such preferred stock and to determine the voting, dividend
and other rights of holders of such preferred stock. The issuance of any of such
series of preferred stock may have an adverse effect on the holders of common
stock.
SHARES ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT THE MARKET.
From time to time, certain of our stockholders may be eligible to sell
all or some of their shares of common stock by means of ordinary brokerage
transactions in the open market pursuant to Rule 144, promulgated under the
Securities Act of 1933 (Securities Act), subject to certain limitations. In
general, pursuant to Rule 144, a stockholder (or stockholders whose shares are
aggregated) who has satisfied a one-year holding period may, under certain
circumstances, sell within any three-month period a number of securities which
does not exceed the greater of 1% of the then outstanding shares of common stock
or the average weekly trading volume of the class during the four calendar weeks
prior to such sale. Rule 144 also permits, under certain circumstances, the sale
of securities, without any limitation, by our stockholders that are
non-affiliates that have satisfied a two-year holding period. Any substantial
sale of our common stock pursuant to Rule 144 or pursuant to any resale
prospectus may have material adverse effect on the market price of our
securities.
DIRECTOR AND OFFICER LIABILITY IS LIMITED.
As permitted by Delaware law, our certificate of incorporation limits
the liability of our directors for monetary damages for breach of a director's
fiduciary duty except for liability in certain instances. As a result of our
charter provision and Delaware law, stockholders may have limited rights to
recover against directors for breach of fiduciary duty. In addition, our
certificate of incorporation provides that we shall indemnify our directors and
officers to the fullest extent permitted by law.
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NOTE ON FORWARD LOOKING STATEMENTS
Certain statements contained in this prospectus constitute
"forward-looking statements" as that term is defined under the Private
Securities Litigation Reform Act of 1995 and releases issued by the Securities
and Exchange Commission and within the meaning of Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act of 1934, as amended, or the
Exchange Act. The words "believe," "expect," "anticipate," "intend," "estimate,"
"plan" and other expressions which are predictions of or indicate future events
and trends and which do not relate to historical matters identify
forward-looking statements. Reliance should not be placed on forward-looking
statements because they involve known and unknown risks, uncertainties and other
factors, which may cause our actual results, performance or achievements to
differ materially from anticipated future results, performance or achievements
expressed or implied by such forward-looking statements. Factors that could
cause actual results to differ materially from those expressed or implied by
such forward-looking statements include, among other things, those listed under
"Risk Factors" and elsewhere in this prospectus.
We operate in a very competitive and rapidly changing environment. New
risks emerge from time to time and it is not possible for our management to
predict all risks, nor can we assess the impact of all risks on our business or
the extent to which any risk, or combination of risks, may cause actual results
to differ from those contained in any forward-looking statements. All
forward-looking statements included in this prospectus are based on information
available to us on the date of this prospectus. Except to the extent required by
applicable laws or rules, we undertake no obligation to publicly update or
revise any forward-looking statement, whether as a result of new information,
future events or otherwise. All subsequent written and oral forward-looking
statements attributable to us or persons acting on our behalf are expressly
qualified in their entirety by the cautionary statements contained throughout
this prospectus.
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BUSINESS
GENERAL
Syscan Imaging, Inc. (referred to herein as "we", "us", "our", "Syscan"
or "Company") through our wholly-owned operating subsidiaries develops, designs
and delivers various imaging technology solutions to the corporate/enterprise,
small office-home office (SOHO), professional practice and consumer markets. We
are the market-leader in providing, USB powered, scanning solutions to a wide
variety of industries and market applications. Our proprietary page-imaging
devices facilitate the way information is stored, shared and managed in both
business and personal use. We market and distribute our products indirectly
through a global network of Original Equipment Manufacturers (OEM), private
label business channels, system integrators, value-added resellers (VAR's), and
distributors. Our products may be viewed on our website at www.syscaninc.com. We
believe that the value of our mobile image scanning solutions is best realized
in vertical markets that are information and process intensive, such as
healthcare, document security, financial services, legal and government.
We have always developed our business model around intellectual
property (IP) driven products sold primarily to OEM's, Private Label brands and
VAR's. In keeping with this business model, our wholly owned subsidiary Sysview
Technologies, Inc. is currently in the process of developing multiple new
technologies related to the High Definition TV (HDTV) market, including an
innovative line of large format (42-60 inches) high definition television
products that incorporate liquid crystal on silicon (LCoS) rear projection
display technology (RPDT). Our core engineering-to-manufacturing experience and
resources lend themselves to developing this new technology. Going forward we
plan on leveraging certain patents and inventions related to RPDT to forge
industry relationships and market channels.
Our world-wide corporate headquarters and logistics center is currently
located at 1772 Technology Drive, San Jose, California 95110. We have additional
offices and warehousing facilities in The Netherlands and Southern China. Our
Annual Reports on Form 10-KSB, Quarterly Reports on Form 10-QSB, Proxy
Statements relating to our annual meetings of stockholders, Current Reports on
Form 8-K and amendments to these reports are available free of charge on our
website at www.syscaninc.com, as well as from the SEC's website at www.sec.gov.
BACKGROUND
Our wholly-owned subsidiary, Syscan Inc., was founded in Silicon Valley
in 1995 to develop and manufacture a new generation of CIS (Contact Image
Sensors) that are CMOS-Complimentary Metal Oxide Silicon imaging sensor devices.
During the late 1990's, we established many technical milestones and were
granted numerous patents based on our linear imaging technology (Contact Image
Sensors). Our patented CIS and mobile imaging scanner technology provides very
high quality images but at extremely low power consumption, allowing us to
deliver very compact scanners in a form ideally suited for the laptop computer
users or desktop computer users who need a small "footprint", light weight
device to scan and/or fax documents.
This "enabling" technology is found in a variety of applications such
as document management, ID card and passport security scanners, bank note/check
verification, business card readers, scanning bar codes and optical mark readers
used in lottery terminals. In the past ten years we have grown to be one of the
largest OEM - VAR - private label manufacturers of page-fed scanning systems and
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contact image sensor modules for several hundred companies including major
brands such as VISIONEER, PENTAX, CARDSCAN, DATACOLOR, DIGIMARC, SCANSOFT,
NORTEK and OMRON. Our vertically integrated design and manufacturing model
allows rapid time-to-market for these leading companies. Our manufacturing is
completed in China by a wholly-owned subsidiary of the parent company of our
majority stockholder, which provides a low-cost manufacturing base for these
industrial and consumer products.
MARKET OPPORTUNITIES
IMAGE CAPTURE TECHNOLOGY
In the past decade, information has become an increasingly important
source of capital for businesses and enterprises, and the speed and
sophistication of information exchange is often a defining characteristic of the
most successful entities worldwide. Many organizations define their strategy,
assess their ability to compete and manage their customer relationships based on
the quality, diversity and availability of their information products, services
and resources. The medium and optimal format for vital business information is
wide and varied, and includes paper, electronic files and Web content.
Confronted by exponentially increasing information through more and
more channels, consumers and business personnel employ a variety of resources
for retrieving information, conducting transactions and performing their jobs.
The Internet and related corporate infrastructure have emerged as a powerful
global communications network and channel for business. These electronic systems
have fundamentally changed the way organizations and consumers obtain
information, communicate, purchase goods and conduct business.
Businesses around the world share a common motivation to improve
operating efficiency and enhance customer service. Customer satisfaction,
employee productivity and company operating results can often be linked to an
organization's ability to effectively manage, utilize and communicate
information.
We believe there is a significant opportunity for our solutions to help
simplify the way people access, share, manage and use information in business
and in daily life. Our strategy is to deliver premier, comprehensive imaging
technologies. Our imaging solutions eliminate the need to manually reproduce
documents, automate the integration of documents into business systems, and
enable the use of electronic documents and forms over the Internet, through
mobile faxing and other business applications. Our products and technologies
deliver a measurable return on investment to our customers.
OUR IMAGE CAPTURE MARKET SOLUTION
As the current leading manufacturer of USB powered imaging devices, we
set out in late 2004 to create a new opportunity within our own dominated
market. We found through our existing sales channels that there was a growing
demand for duplex page imaging products that allowed the end-user to scan both
sides of a document simultaneously. The overall growth of this market is being
propelled by paper conservation cycles that require two-sided printing of
official documents and forms. The added availability of duplex printers in the
office and home has accelerated the demand for duplex imaging devices. Our
introduction in June of 2005, of the world's first duplex image capture device
under 2 pounds in weight, allow users to incorporate two-sided images and
documents into digital applications, systems and devices. Our new duplex
products highly automate the document capture process and help enterprises,
professionals and consumers increase productivity, reduce costs and save time.
We plan to substantially expand our product offerings in the duplex imaging
scanning market and plan to further expand our business to include a wider base
of software development tools for our existing patented products used throughout
the image capture market.
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IMAGE DISPLAY TECHNOLOGY
Until the year 2001, home televisions have changed very little relying
(almost) exclusively on the Cathode Ray Tube (CRT). This technology provided a
good quality picture, based on the broadcasting (and cable operators) signal
limitations, but weight and size limited the screen size to around forty (40)
inches. With the relatively new introduction of high definition television
(HDTV) the consumer (and commercial) markets are dramatically increasing the
demand for larger screen sizes in order to bring the movie theater experience
into the home. In response to this demand various types of liquid crystal
display (LCD) and plasma display panel (PDP) models have been introduced to the
marketplace. These LCD and PDP models solved the screen size issue, but the
picture quality could not achieve the HDTV standard of 1080 active lines (1080p)
and the comparatively high pricing versus CRT models allowed them limited
consumer market penetration.
To date PDP technology has been the leader in delivering a price
performance value in the larger format screen sizes typically 42" and up. In the
past year, Digital Light Processing(TM) (DLP) by Texas Instruments has emerged
as the strongest challenger to PDP products, typically offering 720p picture
resolution, acceptable brightness characteristics and generally a price tag 20%
- 30% below comparable PDP products. Plasma technology continues to be
vulnerable to both the LCD and DLP formats as the size and performance to price
ratios converge. We recognize that the television display market is in the
process of a major transition, as several technologies challenge plasma
technology as the dominant force in large format displays. We believe the
transition will happen over the next 12-24 months as the major (tier 1)
competitors "hedge" with product lines that include the top 2 or 3 technologies.
The current top eight leaders (Samsung, Sony, Sanyo, Toshiba, LG, SAMPO,
Panasonic and Hitachi) compete under the different brand names but are
frequently in collaboration with each other as well as regional brands in the
international markets. The local brand - private label (tier 2) competitors add
another 15-20 competitors to the marketplace. In short, there are roughly 30
different competitors worldwide in the large format TV market worldwide. Several
of the major suppliers have already announced introduction of "true" 1080p HDTV
technology, but they struggle with the reality that plasma, LCD and DLP
technology still have difficulty achieving the price performance ratio being
demanded by the consumer market.
OUR DISPLAY MARKET SOLUTION
While continuing R&D on multiple HDTV technology solutions, in October
of 2005, Syscan expanded its Sysview HDTV display technology group through the
purchase of Nanodisplay Inc., the holder of key intellectual property related to
LCoS (liquid crystal on silicon) HDTV technology. Nanodisplay has multiple
patents pending surrounding its proprietary methods and technologies that
utilize CNT (Carbon Nanotube) technology and advanced assemblage and integration
processes. Nanodisplay is in late stage research and development for the
production of an advanced high yield LCoS chip with true 1080P resolution. Upon
completion of this innovative LCoS technology, of which there can be no
assurance, it is expected that technology upgrades to even greater resolutions
are likely possible at an accelerated pace. Our ultimate goal is to achieve
superior visual performance and resolution at a significant value in large
screen format HDTV's.
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Nanodisplay co-founder Dr. Gihong Kim brings a tremendous amount of
experience to Syscan and Sysview alike. Dr. Kim has been a research and
development engineer in the field of semiconductor materials, process
integration and devices, for the majority of his career. He attributes the
genesis of his solutions to solving key LCoS challenges and limitations to his
involvement with LCoS since the technologies initial R&D stages. To his credit
Dr. Kim has over 20 patents issued and has had 13 papers published in the field
of semiconductor technology.
Since the strategic acquisition of Nanodisplay, we have carefully
established market entry points that will allow this emerging (LCoS) technology
to achieve the anticipated price performance ratio within 12 months, potentially
eclipsing market share held by the current leading technologies in the large
format HDTV arena, of which there can be no assurance. It is also expected that
relationships resulting from our LCoS technology initiative will benefit our
pending LED backlighting solution for LCD panels as well as our ITV (Intelligent
TV) technology still in the R&D phase.
OUR COMPETITIVE STRENGTHS
CORE TECHNOLOGY ASSETS. In recent years, we have developed and acquired
technology assets, intellectual property and industry expertise in both the
image capture and image display markets. We believe a significant investment in
capital and time would be necessary for competitors to replicate our current
capabilities. We continue to invest in the advancement of our technologies to
maintain our market leading positions as well to develop new markets/products.
As of December 31, 2005, we had 17 (63%) full-time employees involved in the
research and development of our products and our technologies that continue to
add to the existing issued patents that we hold in the U.S. and Foreign
territories.
BROAD DISTRIBUTION CHANNELS. We maintain an extensive network of distribution
channels to address the needs of specific markets such as financial, legal,
healthcare and government. We believe that our extensive channel relationships
increase the difficulty for competitors to develop a similar channel network and
make it difficult for our products to be displaced. In addition, our
far-reaching channel network enables us to introduce new products quickly and
effectively throughout the global marketplace.
LEADING MARKET SHARE. We continue to be the manufacturing leader in USB powered
image capture devices. Our customers tend to look to established, experienced
vendors when making product selections and as the established manufacturer in
our markets, we believe we can target and win more partnership arrangements and
new customers than our competition.
INTERNATIONAL FOCUS. Our international experience and diverse heritage allow us
to efficiently compete on a global basis. We have established effective bases of
operations in the USA, European Union and Asia Pacific. We recognize cultural
and language benefits in both manufacturing, warehousing and time-to-market
sales.
OUR STRATEGY
PURSUE HIGH GROWTH MARKETS IN IMAGE SCANNING. We intend to leverage our
technologies and market leadership to expand our opportunities in mobile and
other markets. We also intend to pursue emerging opportunities to use our
technology within consumer devices, and other wide spread devices. To expand our
position in mobile image capture, we intend to continue to introduce new
versions of our products and applications; complete new license agreements with
customers and partners that will resell our technologies; and make strategic
acquisitions that we believe complement our existing solutions and resources in
various evolving markets.
-16-
EXPAND IMAGE SCANNING SOLUTIONS. We intend to enhance the value of our imaging
scanning solutions for enterprises to address the proliferation of security
related applications, the expanded use of content management systems, and the
widespread adoption of networked multifunction and digital image scanning
devices. We intend to introduce new products or new versions of existing
products to take advantage of these growth opportunities. We also plan to
enhance our software development toolkits so our technologies can be integrated
with more third-party solutions.
FOCUS ON SPECIFIC VERTICAL MARKETS. We intend to focus our marketing and sales
resources to generate demand and deliver solutions in specific vertical markets.
The value of our solutions is best realized in vertical markets that are
information and process intensive, such as healthcare, telecommunications,
financial services, legal and government. In addition, we intend to offer custom
versions of certain applications and products for specific vertical markets such
as medical, legal and utilities.
EXPAND WORLDWIDE CHANNELS. We intend to expand our global channel network and
build upon our existing distribution channels, especially in Europe, Asia and
Latin America. In particular, we intend to replicate our successful North
American value-added reseller channel in Europe. Along these lines, we intend to
add sales employees in different geographic regions and launch programs and
events to help recruit new partners for our channel network.
PURSUE STRATEGIC ACQUISITIONS. We will selectively pursue strategic acquisitions
of companies in the image capture and display industry that could compliment our
business model, improve our competitive positioning and expand our offerings to
the marketplace, of which there can be no assurance. In identifying potential
acquisition candidates we will seek to acquire companies with varied
distribution channels, rich intellectual property (IP) and high caliber
engineering personnel.
Over the past twelve months we have begun focusing our sales and
marketing efforts substantially towards the vertical markets such as the Value
Added Reseller (VAR) and small-office-home-office (SOHO) markets. We believe
focusing on these markets is the most effective way to showcase our
technological capabilities and manufacturing efficiencies, while enabling us to
maintain higher margins, and require fewer resources than working directly with
the mass retailers.
For the HDTV market, we are currently concentrating our efforts and
investment towards the completion and mass market delivery of the Nanodisplay
LCoS HDTV solution. Although there can be no assurances, we intend to initiate a
relationship in the near future with a partner that may allow us to provide a
proprietary low cost light engine component which would be used to drive the
Nanodisplay imager/chip. We believe that by co-designing and combining these two
critical components we will be able to deliver a complete, low cost high
performance, LCoS solution to the market. Separately, we also recognize that
there are other viable non-TV applications for the Nanodisplay LCoS imager and
expect to explore those possibilities.
Beyond our LCoS initiative we continue development of an LCD product
that uses RGB (red, green, and blue) LED's controlled sequentially as an
alternative longer life backlight source with visual performance benefits. Most
of our LCD HDTV strategy is leveraged on core technologies and market synergy
that we established in the image capture (scanning) market since our scanner
devices utilize LED's as a light source, and the precise control of this light
source is a critical capability in the performance and ultimate market success
of this new technology. It is not expected that there will be mass acceptance of
-17-
variations of this technology until late 2007. In order to meet the competitive
requirements, we believe that we will need a collaborator (or partner) that has
significant experience in the FPD panel design and tooling. A partner will also
reduce the time-to-market and overall risk associated with entry into the
marketplace.
PRODUCTS
IMAGE SCANNING PRODUCTS
TRAVELSCAN, DOCKETPORT & OEM BRANDS
In 2005 we shipped six categories of image capture products under
several "house brands" or their OEM counterparts versus five categories in 2004.
The introduction of the A4 duplex scanners (DocketPORT) in the third quarter
created a broader base of products. This new category quickly contributed over
7% of unit sales in 2005, despite its mid-year introduction. The A4 simplex
scanner (TravelScan) category represented approximately 19% of our sales during
the year ended December 31, 2005, a decrease from 2004 (21%) of approximately
2%. The A6 simplex scanners that are widely used for capturing images of bank
checks, drivers licenses and various identification cards, represented the
largest unit sales in 2005 at 54%. This represented an increase of 8.1% over
2004 unit sales. The A5 security document scanner experienced a 3% increase in
unit sales in 2005 to 3% from less than 1% in 2004. Our fifth scanner product
category, representing approximately 15% of our sales ending the 12 months ended
December 31, 2005, is the A8 business card reader scanner. In 2004 the A8
scanner category represented approximately 21% of our sales, so we experienced a
net reduction in this category of 6%.
CONTACT IMAGE SENSOR (CIS) MODULES
In addition to the finished scanner product line, we also design,
configure and sell the Contact Image Sensor (CIS) Modules that we use in our
products and separately as an OEM component to other manufacturers. This CIS
business represented approximately 5% of our overall sales during 2005, a
decrease of 5% from the previous year (2004 - 10%).
PRODUCTS IN DEVELOPMENT
We have an aggressive product development program currently in place to
add 7 new products in 2006. These new products are being introduced as both
Syscan branded and OEM/ VAR branded products. Many of these new scanners are
being driven by increased market demand for duplex, faster and easier-to-use
products. They will also concentrate more on the identity-security and financial
transaction market needs.
IMAGE DISPLAY PRODUCTS
SYSVIEW TECHNOLOGY
During 2005 we saw the establishment of SysView Technology Inc., a
wholly owned subsidiary of ours that is focused on introducing breakthrough
price-performance technology in the HDTV display market. As part of this
objective, we acquired Nanodisplay Inc. in October 2005. Nanodisplay is a
leading designer of LCoS HDTV technology and we believe that the acquired
technology and personnel will contribute significantly to our efforts in the
display market. We also intend to enter into a relationship that will provide us
-18-
with a proprietary light engine technology focused on performance value. The
light engine is the optics component that actually projects the image that the
chip (Nanodisplay) creates. We believe that it is important that both of these
technologies be vertically integrated and co-designed in order to offer the best
and most cost-effective complete solution.
In addition we are in various stages of development on two other HDTV
initiatives. The first is the design and implementation of a unique backlighting
system for large format LCD screens. Through the use of RGB (red, green and
blue) LED's we will attempt to replace the current industry standard CCFL (cold
cathode florescent light). The expected end result is both extended product life
and enhanced visual performance. The ultimate success of this technology is
based on the ability to sequentially manage the timing of the independent
colored LED's appropriately. We believe that we have a unique understanding of
this process as it is used in our patented mobile image scanning devices.
We are also currently investing in the R&D of what we call ITV or intelligent
TV. We believe that the step will ultimately become less passive and more
interactive. To that end we are working on a host of hardware and software
applications that would allow for that interactivity. Our goal is to deliver the
hardware component of this technology at a price that would allow for it to be
transparently included in new TV's. We also recognize the importance of making
the technology seamless and simple to use. Tivo is an example of how the
consumer is beginning to accept the idea of greater functionality in their TV.
SALES, DISTRIBUTION AND FULFILLMENT
We market and distribute our products indirectly through a global
network of OEM's, system integrators, value-added resellers and regional
distributors.
We have established relationships with more than 32 channel partners,
including leading system vendors, value-added resellers and regional
distributors. In addition our products are sold through a variety of retail and
web-based channels.
MANUFACTURING
All of our products are currently manufactured by a subsidiary of
Syscan Technology Holdings (STH), the parent company of our majority
stockholder. We and STH have established an internal-pricing agreement that is
updated on a semi-annual basis. STH serves as the exclusive manufacturer of all
current and future image capture products to be produced by us. We believe, for
quality control and pricing reasons that this type of relationship is more
favorable than could be attained from unaffiliated third-parties. We purchase
and provide STH with critical parts and components necessary to manufacture our
products.
STH warrants the products it manufactures for us against defects in
material and workmanship for a period of 18 months after the completion of
manufacture. After such 18 month period, STH has agreed to provide repair
services for the products to us at its customary hourly repair rate plus the
cost of any parts, components or items necessary to repair the products.
Since STH is the primary manufacturer of all of our current
products, if the operations of STH are interrupted or if our orders or orders of
other STH clients exceed the manufacturing capabilities of STH, STH may not be
able to deliver our products to us on time and we may not be able to deliver our
products to our customers on time, which could adversely affect our business,
reduce our revenues and significantly harm our relationship with our customers.
We have the right at anytime to engage third parties to manufacture some or all
of our products.
-19-
We believe that it could take approximately three to six months to secure
a third-party manufacturer to supplement STH's manufacturing capabilities and
approximately six to twelve months to replace STH as our sole manufacturer.
Although we believe that there are a number of third-party manufacturers (other
than STH) available to us, there can be no assurances that we would be able to
secure another manufacturer on terms favorable to us, or at all, or how long it
would take us to secure such manufacturing.
SUPPLIERS
All of the raw materials, parts, components and other items that are
required to manufacture our products are purchased by us. We rely on a single or
limited number of suppliers for such raw materials, parts, components and other
items. Although there are many suppliers for each of these raw materials, parts,
components and other items, we are dependent on a limited number of suppliers
for many of the significant raw materials and components. We do not have any
long-term or exclusive purchase commitments with any of such suppliers. Our
failure to maintain existing relationships with our suppliers or to establish
new relationships in the future could also negatively affect our ability to
obtain the raw materials and components used in the manufacture of our products
in a timely manner. If we are unable to obtain ample supply of product from our
existing suppliers or alternative sources of supply, we may be unable to satisfy
our customers' orders which could reduce our revenues and adversely affect our
relationship with our customers.
PROPRIETARY TECHNOLOGY
We exploit our proprietary technology, trade secrets, know-how,
continuing technological innovations and licensing opportunities to maintain our
competitive position. We rely on patent law, copyright law, trade secret laws,
secrecy, technical measures, licensee agreements and non-disclosure agreements
to protect our technology, trade secrets and other proprietary rights. Our
policy is to file patent applications to protect technology, inventions and
improvements that are important to the development of our business, to maintain
a technological advantage over our competitors and to in some cases generate
licensing revenue. In this regard, we have obtained patents that directly relate
to our products. Our mobile imaging scanning technologies are covered by
numerous patents and patent applications owned by us. We currently have 25
issued (granted) patents, 16 of which are U.S. patents and 9 issued in foreign
jurisdictions. We currently have 5 pending patents, of which 4 are related to
image display technologies and 1 related to image scanning. These patents expire
on various dates between 2017 and 2022.
We require our employees to execute confidentiality and invention
assignment agreements in order to protect our proprietary technology and other
proprietary rights. We also rely on trade secrets and proprietary know-how to
protect our proprietary rights.
RESEARCH AND DEVELOPMENT
The market for our products and services is characterized by rapid
technological change, frequent new product introductions and enhancements,
evolving industry standards, and rapidly changing client requirements. As a
result, we believe that our future growth is highly dependent on the timely and
efficient introduction of new and updated products and technology. As of
December 31, 2005, we employed or directly contracted 14 people in research and
development, 4 of whom are located in international locations. Our employees
based in overseas facilities extend our global focus while often lowering our
overall cost of research and development. To promote efficiency in our research
and development efforts, we have organized the effective use of global
development teams and a comprehensively integrated development process. In
addition, we have developed and refined our time-to-market process, which
contributes to cost-effective resource management while promoting technology
sharing across programs.
-20-
Our future success will depend in part on our ability to anticipate
changes, enhance our current products, develop and introduce new products that
keep pace with technological advancements and address the increasingly
sophisticated needs of our clients. Our research and development expenses for
the twelve months ending December 31, 2005 and the twelve months ended December
31, 2004 were $866,102 and $528,417, respectively. We expect that we will
continue to commit significant resources to research and development in the
future, specifically with respect to the HDTV market. To date we have not
capitalized any research and development expenses and all costs have been
expensed as incurred.
INTERNATIONAL OPERATIONS
Our international operations include research and development, customer
support and sales and marketing. Our international research and development is
conducted in the US and China. Additionally sales and support offices are
located in the US, the Netherlands, Korea and China to support our current
international customers and to expand our international revenue opportunities.
Geographic revenue classification is based on the country in which the
sale is invoiced. Revenue for the twelve months ended December 31, 2005 was 87%
in North America, 9% in Asia and 4% in the European market. This is compared to
the 2004 geographic sales of 96% in North America, 2% in Asia and 2% in Europe.
Additional financial information relating to foreign and domestic sales
and operations for each of the twelve months ended December 31, 2005 and the
year ended in the period ended December 31, 2004 is set forth in Note 1, "
Geographic Sales and Significant Customers," of the Notes to Consolidated
Financial Statements.
COMPETITION
There are very few companies that have products that directly compete
in America, against our page-fed scanner markets. There are however, several
companies that sell competitive products in the European market where the
enforcement of our patents is considerably more difficult. There is currently no
single company that competes with us in all of our product areas. Within Image
Display, we will compete with Sony, Samsung, Sharp, Sanyo and LG. Our HDTV
products could compete with some of these companies' products, however, we
intend to enter into OEM and private label relationships with some of those
competitors. In addition, there are several smaller vertically positioned
companies in the image display technologies that may be competitive with our
solutions. Current and potential competitors have established, or may establish,
cooperative relationships among themselves or with third parties to increase the
ability of their technologies to address the needs of our prospective customers.
Most of our competitors in each of the markets in which we compete have
significantly greater financial, technical and marketing resources than us.
These competitors may be able to respond more rapidly than we can to new or
emerging technologies or changes in customer requirements. They may also devote
greater resources to the development, promotion and sale of products than we do.
-21-
EMPLOYEES
As of December 31, 2005, we employed 26 people on a full-time basis, 17
in the United States and 9 internationally. Of the total, 14 were in product
research and development, 4 in sales and marketing, 2 in operations and support,
and 6 in finance and administration. None of our employees located in the United
States or internationally are represented by unions or collective bargaining
agreements. We have experienced no work stoppages and believe that our employee
relations are good. We have utilized the services of consultants, third-party
developers, and other vendors in our sales, development, manufacturing
activities and finance and administration functions.
AVAILABLE INFORMATION
We file annual, quarterly and current reports, proxy statements and
other information with the Securities and Exchange Commission. You may read and
copy any document we file with the Commission at the Commission's public
reference rooms at 100 F Street, N.E., Washington, D.C. 20549, 233 Broadway, New
York, New York 10279, and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. Please call the Commission at 1-800-SEC-0330 for
further information on the public reference rooms. Our Commission filings are
also available to the public from the Commission's Website at
"http://www.sec.gov." We make available free of charge our annual, quarterly and
current reports, proxy statements and other information upon request. To request
such materials, please contact our Corporate Secretary at our address as set
forth above.
We maintain a Website at "http://www.syscaninc.com" (this is not a
hyperlink, you must visit this website through an internet browser). Our Website
and the information contained therein or connected thereto are not incorporated
into this Prospectus.
DESCRIPTION OF PROPERTY
Our corporate headquarters are located at 1772 Technology Drive, San
Jose, CA 95110, where we operate under a lease agreement expiring in November
2007. Our offices contain 6,800 square feet of office space and our monthly
rental expense is approximately $12,000. We also maintain a sales office in the
Netherlands at IJsselburcht 3, Lorentz Building, Suite 201, 6825 BS Arnhem,
Netherlands. The lease is on a month-to-month basis at a monthly rate of $480.
We believe that our current facilities are adequate for our current
operations.
LEGAL PROCEEDINGS
Syscan, Inc., the Company's wholly-owned subsidiary, filed a lawsuit
captioned Syscan v. PPL (Case No. C03-02367 VRW) in United States District
Court, Northern District of California in San Francisco. Syscan alleges claims
against Portable Peripheral Co., Ltd., Image Recognition Integrated Systems,
Inc., Cardreader Inc., and Targus, Inc. for patent infringement. Syscan is
claiming that its various A-6 and A-8 mobile scanners sold by defendants in US
have infringed upon its patents including US Patent Nos. 6,054,707 (Portable
Scanners Capable of Scanning both Opaque and Transparent Materials), 6,275,309
(Lightweight Mobile Scanners) and 6,459,506 Lightweight Dual-mode Mobile Scanner
Powered from a Universal Serial Bus Port). Syscan is seeking: (1) a temporary
restraining order, preliminary injunction and permanent injunction against
defendants, restraining defendants from patent infringement and unfair
competition; (2) treble damages due to defendants' willful infringement; (3)
punitive damages; (4) accounting of unjust enrichment by defendants, resulting
from defendants' unfair competition; and (5) attorney's fees and costs.
-22-
The defendants are jointly represented by PPL's counsel. PPL has
initiated counterclaims against Syscan for patent invalidity. This case is
currently pending for claim construction. Syscan intends to continue this case
unless a reasonable settlement amount from defendants or a licensing agreement
to the satisfaction of Syscan is entered. Syscan has not yet been able to
quantify its damage claim against PPL. Syscan intends to vigorously pursue this
claim and denies PPL's counterclaim of patent invalidity.
Syscan is suing the aforesaid defendants for patent infringement.
Specifically, Syscan is claiming that its various A-6 and A-8 mobile scanners
sold by defendants in the US have infringed upon Syscan's US Patent No.
#6,054,707 (Portable Scanners Capable of Scanning both Opaque and Transparent
Materials), #6,275,309 (Lightweight Mobile Scanners), and #6,459,506
(Lightweight Dual-mode Mobile Scanner Powered from a Universal Serial Bus Port).
The complaint was filed on May 20, 2003, and claim construction was heard on
October 14, 2005. The court rendered a claim construction order on March 27,
2006, and Syscan has filed a motion for reconsideration for certain claim terms
construction that are believed to be erroneous. The motion has been set for
hearing and oral argument on June 29, 2006.
Syscan expects to continue litigating this case unless a reasonable
settlement from the defendants is offered or a licensing agreement to the
satisfaction of Syscan is entered.
Other than as disclosed above, we are not a party to any material
legal proceedings. We from time to time experience routine litigation in the
normal course of our business. We do not believe that any pending litigation
will have a material adverse effect on our financial condition, results of
operations or cash flows.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the shares of
common stock issuable upon conversion of the Series A Preferred Stock by the
selling stockholders. If and when all of the warrants held by the selling
stockholders are exercised, we will receive the proceeds from the exercise of
those warrants. If these warrants are exercised in full, we may receive up to
$2,051,500, which we intend to use for working capital and other general
corporate purposes.
SELLING STOCKHOLDERS
Up to an aggregate of 3,013,750 shares of common stock may be offered
under this prospectus consisting of up to (i) 1,615,000 shares of common stock
issuable upon conversion of Series A Preferred Stock, (ii) 279,750 shares of
Common Stock, representing our estimate of the maximum number of shares of
Common Stock issuable upon conversion of accrued dividends on the shares of
Series A Convertible Preferred Stock, and (iii) up to 1,119,000 shares of common
stock issuable upon the exercise of warrants.
All proceeds of this offering will be received by the selling
stockholders for their own account. We may receive proceeds in connection with
the exercise of the warrants, the underlying shares associated with which may,
in turn, be sold by the selling stockholders. As used in this prospectus, the
term "selling stockholder" includes the selling stockholders listed below and
their transferees, assignees, pledgees, donees or other successors.
-23-
On March 15, 2005, we consummated the sale of 18,650 shares of our
Series A Preferred Stock for gross proceeds of $1,865,000. The Series A
Preferred Stock bears interest at a rate equal to 5% per annum. The Series A
Preferred Stock is convertible, under certain conditions, into shares of our
common stock at a price equal to $1.00 per share. In connection with the
financing, we also issued to the purchasers of the Series A Preferred Stock
common stock purchase warrants to purchase up to 932,500 shares of our common
stock at a price equal to $2.00 per share. We also issued an aggregate of
186,500 warrants to Starboard Capital Markets, LLC and its affiliates, to
purchase common stock at a price equal to $1.00 per share, as compensation for
its services as placement agent in our Series A Preferred Stock offering. For
its services as placement agent in our Series A Preferred Stock offering,
Starboard Capital Markets, LLC received a ten percent (10%) cash commission and
warrants to purchase up to ten percent (10%) of the number of shares of common
stock into which the Series A Preferred Stock sold in the offering was initially
convertible, at an exercise price equal to the initial conversion price of the
Series A Preferred Stock. Of the 186,500 warrants to which Starboard Capital
Markets, LLC was entitled to receive as compensation for its placement agent
services, it allocated an aggregate of 139,875 warrants to two of its registered
representatives: Michael Hamblett (93,250 warrants) and Anthony Spatacco (46,625
warrants). Each of Messrs. Hamblett and Spatacco acquired the warrants in their
ordinary course of business and at the time of their acquisition of the warrants
they did not have any agreements, understandings or arrangements with any other
persons, either directly or indirectly, to dispose of the warrants or the shares
of common stock issuable upon exercise of the warrants.
The following table sets forth, to our knowledge, certain information
about the selling stockholders as of the date of this prospectus. None of the
selling stockholders, other than Starboard Capital Markets, LLC, is a registered
broker-dealer
Beneficial ownership is determined in accordance with Rule 13d-3
promulgated by the Securities and Exchange Commission, and generally includes
voting or investment power with respect to securities. In computing the number
of shares beneficially owned by the holder and the percentage ownership of the
holder, shares of common stock issuable upon conversion of the note and upon
exercise of the warrant held by the holder that are currently convertible or are
exercisable within 60 days after the date of the table are deemed outstanding.
The percent of beneficial ownership for the selling stockholder is
based on 24,592,092 shares of common stock outstanding as of the date hereof.
Shares of common stock subject to warrants, options and other convertible
securities that are currently exercisable or exercisable within 60 days of the
date hereof, are considered outstanding and beneficially owned by a selling
stockholder who holds those warrants, options or other convertible securities
for the purpose of computing the percentage ownership of that selling
stockholder but are not treated as outstanding for the purpose of computing the
percentage ownership of any other stockholder.
The following table sets forth information as of that date regarding
beneficial ownership of our common stock by each of the selling stockholders
before and immediately after the offering. Actual ownership of the shares is
subject to conversion of the Series A Preferred Stock and exercise of the
warrants.
The shares of common stock being offered under this prospectus may be
offered for sale from time to time during the period the registration statement
of which this prospectus is a part remains effective, by or for the account of
the selling stockholders.
After the date of effectiveness of the registration statement of which
this prospectus is a part, the selling stockholders may have sold or
transferred, in transactions covered by this prospectus or in transactions
exempt from the registration requirements of the Securities Act, some or all of
its common stock. Information about the selling stockholders may change over
time.
-24-
Any changed information will be set forth in an amendment to the
registration statement or supplement to this prospectus, to the extent required
by law.
NAME POSITION, NUMBER OF SHARES NUMBER OF TOTAL NUMBER OF NUMBER OF PERCENTAGE TO
OFFICE OR OF COMMON STOCK, SHARES NUMBER OF SHARES TO SHARES TO BE
OTHER NOT INCLUDING REPRESENTED BY SHARES OF BE OFFERED BE OWNED BENEFICIALLY
MATERIAL SHARES ISSUABLE ON PREFERRED STOCK COMMON FOR THE AFTER OWNED AFTER
RELATIONSHIP CONVERSION OF AND WARRANTS, STOCK ACCOUNT OF THIS THIS OFFERING
WITH US PREFERRED STOCK OR BENEFICIALLY BENEFICIALLY THE SELLING OFFERING (2)
DURING PAST WARRANTS, OWNED OWNED STOCKHOLDER(1) (2)
THREE YEARS BENEFICIALLY OWNED
Iron Horse Capital None -0- 12,500 12,500 12,500 -0- -0-
LLC (3)
Maloney & Company, None -0- 37,500 37,500 37,500 -0- -0-
LLC (4)
Gordon Gregoretti None -0- 12,500 12,500 12,500 -0- -0-
(5)
Whalehaven Capital None -0- 600,000 600,000 600,000 -0- -0-
Fund (6)
Basso Multi-Strategy None -0- 877,500 877,500 877,500 -0- -0-
Holding Fund Ltd. (7)
Basso Private None -0- 247,500 247,500 247,500 -0- -0-
Opportunity Holding
Fund Ltd. (8)
AJW Partners, None -0- 16,000 16,000 16,000 -0- -0-
LLC (9)
AJW Qualified None -0- 37,000 37,000 37,000 -0- -0-
Partners, LLC (10)
AJW Offshore None -0- 45,000 45,000 45,000 -0- -0-
LTD (11)
New Millenium None -0- 2,000 2,000 2,000 -0- -0-
Capital Partners
II, LLC (12)
Gerard Caviston None -0- 37,500 37,500 37,500 -0- -0-
(13)
Enable Growth None -0- 600,000 600,000 600,000 -0- -0-
Partners (14)
Michael Hamblett (14) -0- 93,250 93,250 93,250 -0- -0-
(15)
Anthony Spatacco (15) -0- 46,625 46,625 46,625 -0- -0-
(16)
Starboard Capital (16) -0- 46,625 46,625 46,625 -0- -0-
Markets, LLC (17)
Sean F. Moran None -0- 22,500 22,500 22,500 -0- -0-
(18)
------------------
* Less than one percent.
(1) Does not include the shares potentially issuable to each selling
shareholder as a result of the conversion of accrued dividends on the
shares of Series A Preferred Stock. Such dividends accrue on a daily basis
from the date of issuance of the shares of Series A Preferred Stock at an
annual rate of 5%. At our election, we may elect to pay such dividends in
cash or in shares of our Common Stock. The actual number of shares to be
issued cannot be determined until the conversion date.
(2) Assumes that all shares of common stock offered in this prospectus and
otherwise beneficially owned will be sold.
(3) The address for Iron Horse Capital LLC is 429 Corber Street, New Canaan, CT
06840. Kevin Arnone, the managing member of Iron Horse Capital LLC, has
voting and investment power over the shares held by Iron Horse Capital LLC.
The number of shares being registered for Iron Horse Capital LLC includes
12,500 shares issuable upon the exercise of warrants.
-25-
(4) The address for Maloney & Company, LLC is 762 Boston Post Road, Madison, CT
06443. Michael J. Maloney, a member of Maloney & Company, LLC has voting
and investment power over the shares held by Maloney & Company, LLC. The
number of shares being registered for Maloney & Company, LLC includes
25,000 shares issuable upon the conversion of preferred stock and 12,500
shares issuable upon the exercise of warrants.
(5) The number of shares being registered for Mr. Gregoretti includes 12,500
shares issuable upon the exercise of warrants.
(6) The address for Whalehaven Capital Fund Limited is 3rd Floor, 14
Par-La-Ville Road, P.O. Box HM 1027, Hamilton HMDX Bermuda. Evan
Schemenauer, Arthur Jones and Jennifer Kelly share voting and investment
power over the shares held by Whalehaven Capital Fund Limited. The number
of shares being registered for Whalehaven Capital Fund Limited includes
400,000 shares issuable upon the conversion of preferred stock and 200,000
shares issuable upon the exercise of warrants.
(7) The address for Basso Multi-Strategy Holding Fund Ltd. is 1266 East Main
Street, Stamford, CT 06902. Howard I. Fischer is a managing member of the
general partner of the investment manager of Basso Multi-Strategy Holding
Fund Ltd. and has voting and investment control over the shares held by
Basso Multi-Strategy Holding Fund Ltd. Mr. Fischer disclaims beneficial
ownership over the shares owned by Basso Multi-Strategy Holding Fund Ltd.
The number of shares being registered for Basso Multi-Strategy Holding Fund
Ltd. includes 585,000 shares issuable upon the conversion of preferred
stock and 292,500 shares issuable upon the exercise of warrants.
(8) The address for Basso Private Opportunity Holding Fund Ltd. is 1266 East
Main Street, Stamford, CT 06902. Howard I. Fischer is a managing member of
the general partner of the investment manager of Basso Private Opportunity
Holding Fund Ltd. and has voting and investment control over the shares
held by Basso Private Opportunity Holding Fund Ltd. Mr. Fischer disclaims
beneficial ownership over the shares owned by Basso Private Opportunity
Holding Fund Ltd. The number of shares being registered for Basso Private
Opportunity Holding Fund Ltd. includes 165,000 shares issuable upon the
conversion of preferred stock and 82,500 shares issuable upon the exercise
of warrants.
(9) The address for AJW Partners LLC is c/o The NIR Group, 1044 Northern
Boulevard, Suite 302, Roslyn, NY 11576. Corey Ribotsky has voting and
investment control over the shares held by AJW Partners LLC. The number of
shares being registered for AJW Partners LLC includes 16,000 shares
issuable upon the exercise of warrants.
(10) The address for AJW Qualified Partners LLC is c/o The NIR Group, 1044
Northern Boulevard, Suite 302, Roslyn, NY 11576. Corey Ribotsky has voting
and investment control over the shares held by AJW Qualified Partners LLC.
The number of shares being registered for AJW Qualified Partners LLC
includes 37,000 shares issuable upon the exercise of warrants.
(11) The address for AJW Offshore LTD is c/o The NIR Group, 1044 Northern
Boulevard, Suite 302, Roslyn, NY 11576. Corey Ribotsky has voting and
investment control over the shares held by AJW Offshore LTD. The number of
shares being registered for AJW Offshore LTD includes 45,000 shares
issuable upon the exercise of warrants.
(12) The address for New Millenium Capital Partners II, LLC is c/o The NIR
Group, 1044 Northern Boulevard, Suite 302, Roslyn, NY 11576. Corey Ribotsky
has voting and investment control over the shares held by New Millenium
Capital Partners II, LLC. The number of shares being registered for
Millenium Capital Partners II, LLC includes 2,000 shares issuable upon the
exercise of warrants.
(13) The number of shares being registered for Mr. Caviston includes 25,000
shares issuable upon the conversion of preferred stock and 12,500 shares
issuable upon the exercise of warrants.
(14) The address for Enable Growth Partners is One Ferry Bldg., Suite 255, San
Francisco, CA 94111. Mitch Levine, the managing partner of Enable Growth
Partners, has voting and investment control over the shares held by Enable
Growth Partners. The number of shares being registered for Enable Growth
Partners includes 400,000 shares issuable upon the conversion of preferred
stock and 200,000 shares issuable upon the exercise of warrants.
(15) Mr. Hamblett is a registered representative with Starboard Capital Markets,
LLC, an NASD member firm. Mr. Hamblett's address is c/o Starboard Capital
Markets, LLC, 736 Boston Post Road, Madison, CT 06443. The number of shares
being registered for Mr. Hamblett includes 93,250 shares issuable upon the
exercise of warrants.
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(16) Mr. Spatacco is a registered representative with Starboard Capital Markets,
LLC, an NASD member firm. Mr. Spatacco's address is c/o Starboard Capital
Markets, LLC, One Logan Square, Suite 2650, Philadelphia, PA 19103. The
number of shares being registered for Mr. Spatacco includes 46,625 shares
issuable upon the exercise of warrants.
(17) Starboard Capital Markets, LLC acted as our placement agent in connection
with the sale of the Series A Preferred Stock and Warrants sold by us in
the Series A Preferred Stock offering. Starboard Capital Markets, LLC
received the shares of our common stock in the ordinary course of their
business and at the time that they received the shares of our common stock
had no agreements, understandings, directly or indirectly, with any person
to distribute the securities. Starboard Capital Markets, LLC's address is
One Logan Square, Suite 2650, Philadelphia, PA 19103. James Dotzman, a
managing director of Starboard Capital Markets, LLC, has voting and
investment control over the shares held by Starboard Capital Markets, LLC.
The number of shares being registered for Starboard Capital Markets, LLC
includes 46,625 shares issuable upon the exercise of warrants.
(18) The number of shares being registered for Mr. Moran includes 15,000 shares
issuable upon the conversion of preferred stock and 7,500 shares issuable
upon the exercise of warrants.
The selling stockholders and we are not making any representation that
any shares covered by the prospectus will or will not be offered for sale or
resale. The selling stockholders reserve the right to accept or reject, in whole
or in part, any proposed sale of shares. The shares offered by this prospectus
may be offered from time to time by the selling stockholder named above.
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PLAN OF DISTRIBUTION
Selling stockholders may offer and sell, from time to time, the shares
of our common stock covered by this prospectus. The term selling stockholders
includes donees, pledgees, transferees or other successors-in-interest selling
securities received after the date of this prospectus from a selling stockholder
as a gift, pledge, partnership distribution or other non-sale related transfer.
The selling stockholders will act independently of us in making decisions with
respect to the timing, manner and size of each sale. Sales may be made on one or
more exchanges or in the over-the-counter market or otherwise, at prices and
under terms then prevailing or at prices related to the then current market
price or in negotiated transactions. The selling stockholders may sell their
securities by one or more of, or a combination of, the following methods:
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its own account pursuant to this prospectus;
o ordinary brokerage transactions and transactions in which the broker
solicits purchasers;
o block trades in which the broker-dealer so engaged will attempt to
sell the securities as agent but may position and resell a portion of
the block as principal to facilitate the transaction;
o an over-the-counter distribution in accordance with the rules of the
NASDAQ National Market;
o in making short sales or in transactions to cover short sales;
o in put or call option transactions relating to the shares;
o in privately negotiated transactions; and
o in options, swaps or derivatives transactions.
The selling stockholders may effect these transactions by selling
shares directly to purchasers or to or through broker-dealers, which may act as
agents or principals. These broker-dealers may receive compensation in the form
of discounts, concessions or commissions from the selling stockholders and/or
the purchasers of shares for whom such broker-dealers may act as agents or to
whom they sell as principals, or both (which compensation as to a particular
broker-dealer might be in excess of customary commissions). The selling
stockholders have advised us that they have not entered into any agreements,
understandings or arrangements with any underwriters or broker-dealers regarding
the sale of their securities.
To the extent required, we may amend or supplement this prospectus to
describe a specific plan of distribution. In connection with distributions of
the securities or otherwise, the selling stockholders may enter into hedging
transactions with broker-dealers or other financial institutions. In connection
with those transactions, broker-dealers or other financial institutions may
engage in short sales of shares of our common stock in the course of hedging the
positions they assume with selling stockholders. The selling stockholders may
also sell shares of our common stock short and redeliver the securities to close
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out their short positions. The selling stockholders may also enter into option
or other transactions with broker-dealers or other financial institutions that
require the delivery to the broker-dealer or other financial institution of
securities offered by this prospectus, which securities the broker-dealer or
other financial institution may resell pursuant to this prospectus, as
supplemented or amended to reflect the transaction. The selling stockholders may
also loan or pledge securities to a broker-dealer or other financial
institution, and, upon a default, the broker-dealer or other financial
institution, may affect sales of the loaned or pledged securities pursuant to
this prospectus, as supplemented or amended to reflect the transaction.
The selling stockholders may also sell shares under Rule 144 under
the Securities Act, if available, rather than under this prospectus. In
effecting sales, broker-dealers or agents engaged by the selling stockholders
may arrange for other broker-dealers to participate. Broker-dealers or agents
may receive commissions, discounts or concessions from the selling stockholders
in amounts to be negotiated immediately prior to the sale.
In offering the securities covered by this prospectus, the selling
stockholders and any broker-dealers who execute sales for the selling
stockholders may be treated as "underwriters" within the meaning of the
Securities Act in connection with sales. Any profits realized by the selling
stockholders and the compensation of any broker-dealer may be treated as
underwriting discounts and commissions.
The selling stockholders and any other person participating in a
distribution will be subject to the Securities Exchange Act of 1934 (Exchange
Act). The Exchange Act rules include, without limitation, Regulation M, which
may limit the timing of purchases and sales of any of the securities by the
selling stockholders and other participating persons. In addition, Regulation M
may restrict the ability of any person engaged in the distribution of the
securities to engage in market-making activities with respect to the particular
security being distributed for a period of up to five business days prior to the
commencement of the distribution. This may affect the marketability of the
securities and the ability of any person or entity to engage in market-making
activities with respect to the securities. We have informed the selling
stockholders that the anti-manipulation rules of the SEC, including Regulation M
promulgated under the Exchange Act, may apply to their sales in the market.
We will make copies of this prospectus available to the selling
stockholders for the purpose of satisfying the prospectus delivery requirements
of the Securities Act. The selling stockholders may indemnify any broker-dealer
that participates in transactions involving the sale of the securities against
certain liabilities, including liabilities arising under the Securities Act. We
have agreed to indemnify the selling stockholders and the selling stockholders
have agreed to indemnify us against certain liabilities in connection with the
offering of the shares, including liabilities arising under the Securities Act.
At the time a particular offer of securities is made, if required, a
prospectus supplement will be distributed that will set forth the number of
securities being offered and the terms of the offering, including the name of
any underwriter, dealer or agent, the purchase price paid by any underwriter,
any discount, commission and other item constituting compensation, any discount,
commission or concession allowed or re-allowed or paid to any dealer, and the
proposed selling price to the public.
We are paying all expenses and fees in connection with the registration of
the shares. The selling stockholders will bear all brokerage or underwriting
discounts or commissions paid to broker-dealers in connection with the sale of
their shares.
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DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The following table sets forth the names and ages our current directors
and executive officers, the principal offices and positions with us held by each
person and the date such person became a director or executive officer. Each
year the stockholders elect the members of our Board of Directors.
Our directors and executive officers are as follows:
-------------------------- ----------------------- ------- -----------------------------------------------
NAME YEAR FIRST ELECTED AS AGE POSITION(S) HELD
AN OFFICER OR DIRECTOR
-------------------------- ----------------------- ------- -----------------------------------------------
Darwin Hu 2004 53 President, Chief Executive Officer and
Chairman
-------------------------- ----------------------- ------- -----------------------------------------------
William Hawkins 2004 50 Chief Operating Officer, Acting Chief
Financial Officer and Secretary
-------------------------- ----------------------- ------- -----------------------------------------------
David Clark 2004 38 Senior Vice President of Business Development
and Director
-------------------------- ----------------------- ------- -----------------------------------------------
Peter Mor 2004 56 Director
-------------------------- ----------------------- ------- -----------------------------------------------
Lawrence Liang 2004 70 Director
-------------------------- ----------------------- ------- -----------------------------------------------
There are no family relationships between any director, executive officer, or
person nominated or chosen to become a director or executive officer. DARWIN HU
became our Chairman, President and Chief Executive Officer on April 2, 2004, in
connection with our acquisition of Syscan, Inc. Prior thereto, Mr. Hu was the
President and Chief Executive Officer of Syscan, Inc., our wholly-owned
subsidiary. Mr. Hu has over 21 years of experience in the high-tech industry and
has held various management related positions within organizations related to
color graphic imaging input scanning, display output and imaging communication
product development, manufacturing and sales and marketing. Before joining
Syscan, Inc. in April 1998, Mr. Hu held senior management positions at Microtek,
Xerox, OKI, AVR, DEST, Olivetti and Grundig. Mr. Hu holds a bachelor's degree in
Engineering Science from National Cheng-Kung University, Taiwan, and a master's
degree in Computer Science and Engineering from California State University,
Chico, USA.
WILLIAM HAWKINS became our Chief Operating Officer and Secretary on April 2,
2004, in connection with our acquisition of Syscan, Inc. On April 1, 2005 he
became our interim Chief Financial Officer, after the departure of our former
CFO. Mr. Hawkins has held various management positions at Syscan, Inc., the
Company's wholly-owned subsidiary, since 1999, including V.P. of Sales and
Marketing, President and General Manager Syscan Imaging Group. Prior thereto,
Mr. Hawkins' product focus has been primarily in the imaging systems and
computer peripheral markets, including senior positions with General Electric
(UK), Kaman Aerospace, British Aerospace Engineering, Gartner Research and Per
Scholas. Mr. Hawkins received a bachelor's degree in physics from the University
of Maryland in 1978 and an MBA from Johns Hopkins University in Management of
Technology Concentration (MOT).
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DAVID CLARK has been our Senior Vice President of Business Development and a
director since July 15, 2004. In July 2005, Mr. Clark was appointed President of
Sysview Technology Inc., our wholly owned subsidiary. From October, 2003 to
July, 2004 Mr. Clark was President of Nautical Vision, Inc. a market specific
image display company where he created and implemented the company's business
plan which involved product sourcing, sales and marketing and general
management. From June, 2001 to October, 2003, Mr. Clark actively invested in and
consulted to a diverse group of companies in addition to being involved in
residential development. Mr. Clark was President and CEO of Homebytes.com from
November, 1998 to May of 2001, where he was primarily responsible for raising in
excess of twenty five million dollars in funding from investors including
America Online, FBR Technology Venture Partners, PNC Bank, and Bank of America,
as well as being instrumental in the acquisition of a key competitor of
Homebytes.com. Prior thereto Mr. Clark was the head of distribution and a
director of Take Two Interactive (NASDAQ:TTWO) which was a result of TTWO's
acquisition of Inventory Management Systems, Inc. (I.M.S.I.), of which Mr. Clark
was a co-founder and President. Prior to founding I.M.S.I., Mr. Clark held
various management positions with Acclaim Entertainment (NASDAQ:AKLM), and the
Imagesoft division of SONY Music (NYSE:SNE). Mr. Clark received a B.S. in
Business from the State University of New York at Binghamton in 1990.
PETER MOR has been a director since April 2, 2004. Mr. Mor has been the Senior
Vice President of Engineering & Operations of Focus Enhancements since February
1, 2005. Prior to joining Focus Enhancements, Mr. Mor served as a Vice President
of Engineering of SONY Corp. from July 23, 1999 to January 31, 2005 where he is
responsible for research and development of SONY's VAIO Notebook and Desktop
PCs, accessories and web based network services. Prior thereto, Mr. Mor has
extensive experience in engineering, operations and manufacturing, as well as
off-shore manufacturing, international outsourcing and procurement and ODM
management. Prior to joining SONY Corp., since 1980 Mr. Mor held various senior
positions with AMAX Engineering, AVR Technologies, Fujitsu Computer Products of
America, XEROX and QUME. Mr. Mor holds a master's degree in Computer Science
from the University of Oregon and a bachelor's degree in Electrical Engineering
from National Cheng-Kung University, Taiwan.
LAWRENCE LIANG has been a director since April 2, 2004. Since 1984 Mr. Liang has
been the President and Vice President of Genoa Systems Corporation, a graphics
company that developed the flicker free and true color technologies in the late
1980's, the President of Telecom Marketing, a marketing consultant for
telecommunications infrastructure, and the President of Cwaves Technology, a
wireless LAN/WAN company. Mr. Liang has also worked for IBM's Technology
Component Division to help develop semiconductor products and RISC CPU
Instruction sets. Mr. Liang also spent five years in IBM's Disk Drive division
in Silicon Valley where he held various management positions. Mr. Liang holds a
master's degree in Applied Mathematics from the City University of New York.
BOARD COMMITTEES
Our board of directors does not currently have any committees. We
intend to establish an audit committee which we expect will be comprised of a
majority of our independent directors.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires that our directors and executive officers and persons who beneficially
own more than 10% of our common stock (referred to herein as the "reporting
persons") file with the SEC various reports as to their ownership of and
activities relating to our common stock. Such reporting persons are required by
the SEC regulations to furnish us with copies of all Section 16(a) reports they
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file. Based solely upon a review of copies of Section 16(a) reports and
representations received by us from reporting persons, and without conducting
any independent investigation of our own, in 2005, we believe all Forms 3, 4 and
5 were timely filed with the SEC by such reporting persons.
CODE OF ETHICS
Our Board of Directors has adopted a Code of Ethics which is applicable
to all of our chief executive officers, senior financial officers and members of
our board of directors, including our principal executive officer and principal
financial officer, principal accounting officer or controller, or other persons
performing similar functions.
Any amendment of our Code of Ethics or waiver thereof applicable to
any of our principal executive officer, principal financial officer and
controller, principal accounting officer, directors or persons performing
similar functions will be disclosed on our website within 5 days of the date of
such amendment or waiver. In the case of a waiver, the nature of the waiver, the
name of the person to whom the waiver was granted and the date of the waiver
will also be disclosed.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
For information regarding securities authorized for issuance under
Equity Compensation Plans, and the equity compensation plan information table
see "Market for Common Equity and Related Stockholder Matters."
-32-
SECURITY OWNERSHIP OF MANAGEMENT
AND CERTAIN BENEFICIAL OWNERS
The following table sets forth, as of May 1, 2006, information regarding the
beneficial ownership of our common stock based upon the most recent information
available to us for: (i) each person known by us to own beneficially more than
five (5%) percent of our outstanding common stock, (ii) each of our officers and
directors, and (iii) all of our officers and directors as a group. Unless
otherwise indicated, each of the persons listed below has sole voting and
investment power with respect to the shares beneficially owned by them. As of
May 1, 2006 there were 24,592,092 shares of our common stock outstanding.
NAME AND ADDRESS OF NUMBER OF COMMON SHARES PERCENTAGE OF COMMON SHARES
BENEFICIAL OWNER(1) BENEFICIALLY OWNED(2) BENEFICIALLY OWNED
------------------- --------------------- ------------------
Darwin Hu (3) 1,000,000 3.9%
William Hawkins (4) 666,667 2.6%
David Clark (5) 583,333 2.3%
Peter Mor (6) -0- --
Lawrence Liang (6) -0- --
Syscan Imaging Limited(7) 18,773,514 76.3%
All Directors and Officers
as a group (5 persons)
(3)-(6) 2,250,000 8.3%
* less than one percent
(1) Unless otherwise indicated, the address of each person listed below is c/o
Syscan Imaging, Inc., 1772 Technology Drive, San Jose, California 95110.
(2) Pursuant to the rules and regulations of the Securities and Exchange
Commission, shares of common stock that an individual or group has a right to
acquire within 60 days pursuant to the exercise of options or warrants are
deemed to be outstanding for the purposes of computing the percentage ownership
of such individual or group, but are not deemed to be outstanding for the
purposes of computing the percentage ownership of any other person shown in the
table.
(3) Includes 1,000,000 shares of common stock issuable upon the exercise of
options issued to Mr. Hu in connection with his employment agreement with us.
Does not include 560,000 shares issuable upon the exercise of options granted
pursuant to the Company's Amended and Restated 2002 Stock Option Plan, 280,000
of which are not exercisable within 60 days of the date hereof and all of which
are subject to stockholder approval of the Amended and Restated Stock Option
Plan under which such options were issued. Also does not include 500,000 shares
underlying options issued to Mr. Hu in connection with the execution of his
employment agreement with us, which are not exercisable within 60 days of the
date hereof.
(4) Includes 666,667 shares of common stock issuable upon the exercise of
options issued to Mr. Hawkins in connection with his employment agreement with
us. Does not include 360,000 shares issuable upon the exercise of options
granted pursuant to the Company's Amended and Restated 2002 Stock Option Plan,
180,000 of which are not exercisable within 60 days of the date hereof and all
of which are subject to stockholder approval of the Amended and Restated Stock
Option Plan under which such options were issued. Also does not include 333,333
shares underlying options issued to Mr. Hawkins in connection with the execution
of his employment agreement with us, which are not exercisable within 60 days of
the date hereof.
(5) Includes 50,000 shares of common stock and 533,333 shares of common stock
issuable upon the exercise of options issued to Mr. Clark in connection with his
employment agreement with us. Does not include 400,000 shares issuable upon the
exercise of options granted pursuant to the Company's Amended and Restated 2002
Stock Option Plan, 200,000 of which are not exercisable within 60 days of the
date hereof and all of which are subject to stockholder approval of the Amended
and Restated Stock Option Plan under which such options were issued. Also does
not include 266,667 shares underlying options issued to Mr. Clark in connection
with the execution of his employment agreement with us, which are not
exercisable within 60 days of the date hereof.
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(6) Does not include 80,000 shares issuable upon the exercise of options granted
pursuant to the Company's Amended and Restated 2002 Stock Option Plan, 40,000 of
which are not exercisable within 60 days of the date hereof and all of which are
subject to stockholders approval of the Amended and Restated Stock Option Plan
under which such options were issued.
(7) The sole shareholder of Syscan Imaging Limited is Syscan Technology Holdings
Limited, a publicly-held company whose shares are listed on The Growth
Enterprise Market of The Stock Exchange of Hong Kong Limited. The address for
Syscan Imaging Limited is Unit 808, 8th floor, K. Wah Centre, 191 Java Road,
North Point Hong Kong.
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DESCRIPTION OF SECURITIES
GENERAL
The following description of our capital stock does not purport to be
complete and is subject to and qualified in its entirety by our certificate of
incorporation and bylaws, which are included as exhibits to the registration
statement of which this prospectus forms a part, and by the applicable
provisions of Delaware law.
Our authorized capital stock consists of 50,000,000 shares of common
stock, and 2,000,000 shares of blank-check preferred stock, 60,000 of which have
been designated Series A Preferred Stock. As of the date of this prospectus, our
outstanding capital stock consists of 24,592,092 shares of common stock, $.001
par value and 16,150 shares of Series A Preferred Stock, $.001 par value. These
figures do not include securities to be issued pursuant to our Amended and
Restated 2002 Stock Option Plan.
COMMON STOCK
As of the date of this prospectus, we have 24,592,092 shares of common
stock outstanding, held of record by approximately 359 stockholders. The holders
of common stock are entitled to one vote for each share held of record on all
matters submitted to a vote of the stockholders. Subject to preferential rights
with respect to any outstanding preferred stock, holders of common stock are
entitled to receive ratably such dividends as may be declared by the board of
directors out of funds legally available therefor. In the event of our
liquidation, dissolution or winding up, the holders of common stock are entitled
to share ratably in all assets remaining after payment of liabilities and
satisfaction of preferential rights of any outstanding preferred stock.
Our common stock has no preemptive or conversion rights or other
subscription rights. There are no sinking fund provisions applicable to the
common stock. The outstanding shares of common stock are fully paid and
non-assessable.
PREFERRED STOCK
We have authorized 2,000,000 shares of preferred stock, of which an
aggregate of 60,000 have been designated Series A Preferred Stock and of which
16,150 are outstanding as of the date of this prospectus. During the year ended
December 31, 2005, 250 shares of Series A Preferred Stock were converted into
shares of our common stock. The issuance of preferred stock with voting and
conversion rights may adversely affect the voting power of the holders of common
stock, including voting rights, of the holders of common stock. In certain
circumstances, such issuance could have the effect of decreasing the market
price of the common stock. Notwithstanding the broad discretion granted to our
Board of Directors with respect to designating the terms and conditions of any
series of preferred stock, our Board of Directors has agreed to refrain from
issuing shares of preferred stock, unless such designation and issuance are
approved by a majority of our independent directors who do not have an interest
in the transactions and who have access to and consulted with (at our expense)
our counsel or counsel of their choosing.
-35-
SERIES A PREFERRED STOCK
In March 2005, we sold an aggregate of 18,650 shares of our Series A
Preferred Stock, 2,500 of which were converted into shares of our common stock
during the year ended December 31, 2005, the material terms of which are
described below:
PREFERRED STOCK CONVERSION RIGHTS. All or any portion of the stated
value of Preferred Stock outstanding may be converted into common stock at
anytime by the purchasers. The initial fixed conversion price of the preferred
stock is $1.00 per share ("CONVERSION PRICE"). The Conversion Price is subject
to anti-dilution protection adjustments, on a full ratchet basis, at anytime
that the preferred stock is outstanding and prior to the effective date of the
registration statement required to be filed pursuant to the Registration Rights
Agreement, upon our issuance of additional shares of common stock, or securities
convertible into common stock, at a price that is less than the then Conversion
Price.
DIVIDENDS. The Preferred Stock accrues dividends at a rate of 5% per
annum, payable semiannually on July 1 and January 1 in cash, by accretion of the
stated value or in shares of common stock. Subject to certain terms and
conditions, the decision whether to accrete dividends to the stated value of the
Preferred Stock or to pay for dividends in cash or in shares of common stock,
shall be at our discretion.
REDEMPTION. On March 15, 2008 (the "REDEMPTION DATE"), all of the
outstanding Preferred Stock shall be redeemed for a per share redemption price
equal to the stated value on the Redemption Date (the "REDEMPTION PRICE"). The
Redemption Price is payable by us in cash or in shares of common stock at our
discretion and shall be paid within five trading days after the Redemption Date.
In the event we elect to pay all or some of the Redemption Price in shares of
common stock, the shares of common stock to be delivered to the purchasers shall
be valued at 85% of the fifteen-day volume weighted average price of the common
stock on the Redemption Date.
RIGHT TO COMPEL CONVERSION. If, on any date after March 15, 2006, (A)
the closing market price per share of our common stock for ten (10) consecutive
trading days equals at least $4.00 (subject to adjustment for certain events),
and (B) the average reported daily trading volume during such ten-day period
equals or exceeds 100,000 shares, then we shall have the right, at our option,
to convert, all, but not less than all, of the outstanding shares of Preferred
Stock at the Conversion Price; provided that there shall be an effective
registration statement covering the resale of the shares of common stock
underlying the preferred stock at all times during such 10-day period and during
the 30-day notice period to the holders thereof.
RESTRICTIONS ON CONVERSION OF PREFERRED STOCK. No holder of our
Preferred Stock is entitled to receive shares upon payment of dividends on the
Preferred Stock, or upon conversion of the Preferred Stock held by such holder
if such receipt would cause such holder to be deemed to beneficially own in
excess of 4.999% of the outstanding shares of our common stock on the date of
issuance of such shares (such provision may be waived by such holder upon 61
days prior written notice to us). In addition, no individual holder is entitled
to receive shares upon payment of dividends on the Preferred Stock, or upon
conversion of the Preferred Stock held by such holder if such receipt would
cause such holder to be deemed to beneficially own in excess of 9.999% of the
outstanding shares of our common stock on the date of issuance of such shares
(such provision may be waived by such holder upon 61 days prior written notice
to us).
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REGISTRATION RIGHTS. Pursuant to the terms of a Registration Rights
Agreement between us and the holders of the preferred stock, we are obligated to
file a registration statement on Form SB-2 registering the resale of shares of
our common stock issuable upon conversion of the preferred stock and exercise of
the warrants. We are required to file the registration statement on or before
April 24, 2005 and have the registration statement declared effective on or
before July 13, 2005. If the registration statement is not declared effective
within the timeframe described, or if the registration is suspended other than
as permitted in the Registration Rights Agreement, we will be obligated to pay
each holder a fee equal to 1.0% of such holders purchase price of the Preferred
Stock during the first 90 days, and 2.0% for each 30 day period thereafter (pro
rated for partial periods), that such registration conditions are not satisfied.
RIGHT OF FIRST REFUSAL. Subject to certain conditions, we have granted
the holders a right of first refusal, for a period until one (1) year from the
effective date of the registration statement required to be filed in connection
with the purchase of the Preferred Stock, to participate in any subsequent
financing that we conduct.
VOTING RIGHTS. Holders of the Preferred Stock shall have no voting
rights. However, so long as any shares of Preferred Stock are outstanding, we
shall not, without the affirmative vote of the holders of a majority of the
shares of the Preferred Stock then outstanding, (a) alter or change adversely
the powers, preferences or rights given to the Preferred Stock or alter or amend
the Series A Certificate of Designation, (b) authorize or create any class of
stock ranking as to dividends or distribution of assets upon a liquidation
senior to or otherwise PARI PASSU with the Preferred Stock, (c) amend our
certificate or articles of incorporation or other charter documents so as to
affect adversely any rights of the holders of the Preferred Stock, (d) increase
the authorized number of shares of Preferred Stock, or (e) enter into any
agreement with respect to the foregoing.
LIQUIDATION PREFERENCE. Upon our liquidation, dissolution or winding
up, whether voluntary or involuntary (a "Liquidation"), the holders of the
Preferred Stock shall be entitled to receive out of our assets, whether such
assets are capital or surplus, for each share of Preferred Stock an amount equal
to the stated value per share before any distribution or payment shall be made
to the holders of any of our securities with rights junior to the Preferred
Stock, and if our assets shall be insufficient to pay in full such amounts, then
the entire assets to be distributed to the holders of the Preferred Stock shall
be distributed among such holders ratably in accordance with the respective
amounts that would be payable on such shares if all amounts payable thereon were
paid in full.
ANTI-DILUTION. Holders of the Preferred Stock are entitled to full
ratchet anti-dilution protection for issuances of common stock or common stock
equivalents, prior to the effective date of the registration statement covering
the resale of the shares of common stock underlying the Preferred Stock, at less
than the Conversion Price. Holders of Preferred Stock also have standard
anti-dilution protection for splits, dividends, subdivisions, distributions,
reclassifications and combinations of our common stock.
WARRANTS
We have outstanding warrants to purchase an aggregate of up to
1,119,000 shares of our Common stock. 932,500 of such warrants are exercisable
at $2.00 per share and 186,500 of such warrants are exercisable at $1.00 per
share, all of which were issued in connection with our Series A Preferred Stock
financing. The warrants are exercisable through March 15, 2010 and must be
exercised by the payment of cash, except if there is no effective registration
statement covering the resale of the shares of Common stock underlying the
warrants, a holder may exercise their warrants on a cashless basis.
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Holders of the warrants are entitled to full ratchet anti-dilution
protection for issuances of common stock or common stock equivalents, prior to
the effective date of the registration statement covering the resale of the
shares of common stock underlying the Preferred Stock, at less than the exercise
price of such warrants. Holders of warrants also have standard anti-dilution
protection for splits, dividends, subdivisions, distributions, reclassifications
and combinations of our common stock.
None of the individual holders of the Warrants are entitled to exercise
any such Warrant held by them, if such exercise would cause such holder to be
deemed to beneficially own in excess of 4.999% of the outstanding shares of our
Common stock on the date of issuance of such shares.
ANTI-TAKEOVER LAW
We are subject to Section 203 of the Delaware General Corporation Law,
which restricts certain transactions and business combinations between a
corporation and an "interested stockholder" (as defined in Section 203) owning
15% or more of the corporation's outstanding voting stock, for a period of three
years from the date the stockholder becomes an interested stockholder. Subject
to certain exceptions, unless the transaction is approved by the board of
directors and the holders of at least two-thirds of our outstanding voting stock
(excluding shares held by the interested stockholder), Section 203 prohibits
significant business transactions such as a merger with, disposition of assets
to, or receipt of disproportionate financial benefits by the interested
stockholder, or any other transaction that would increase the interested
stockholder's proportionate ownership of any class or series of the
corporation's stock. The statutory ban does not apply if, upon consummation of
the transaction in which any person becomes an interested stockholder, the
interested stockholder owns at least 85% of the outstanding voting stock of the
corporation (excluding shares held by persons who are both directors and
officers or by certain employee stock plans).
TRANSFER AGENT AND REGISTRAR
Interwest Transfer Company is the transfer agent for our common stock.
The address for Interwest Trust Company is 1981 East Murray Holladay Road, Salt
Lake City, Utah 84117.
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DISCLOSURE OF COMMISSION POSITION OF INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES
Our certificate of incorporation provides that all our directors,
officers, employees and agents shall be entitled to be indemnified by us to the
fullest extent permitted under the Delaware General Corporation Law, provided
that they acted in good faith and that they reasoned their conduct or action was
in, or not opposed to, the best interest of our company.
Our Bylaws provide for indemnification of our officers, directors and
others who become a party to an action on our behalf by us to the fullest extent
not prohibited under the Delaware General Corporation Law. Further, we maintain
officer and director liability insurance.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers, and controlling persons
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment of expenses incurred or paid by a director, officer or controlling
person in a successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, we will, unless in the opinion of our counsel the matter has
been settled by controlling precedent, submit to the court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED FINANCIAL
STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS. THIS
DISCUSSION AND ANALYSIS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS,
UNCERTAINTIES AND ASSUMPTIONS. THE ACTUAL RESULTS MAY DIFFER MATERIALLY FROM
THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN
FACTORS, INCLUDING, BUT NOT LIMITED TO, THOSE WHICH ARE NOT WITHIN OUR CONTROL.
Management's discussion and analysis of financial condition and results of
operations (MD&A) is provided as a supplement to the accompanying consolidated
financial statements and footnotes to help provide an understanding of our
financial condition, changes in financial condition and results of operations.
The MD&A is organized as follows:
o OVERVIEW. This section provides a general description of our business,
as well as recent developments that we believe are important in
understanding the results of operations and to anticipate future
trends in those operations.
o CRITICAL ACCOUNTING POLICIES. This section provides an analysis of the
significant estimates and judgments that affect the reported amounts
of assets, liabilities, revenues and expenses, and related disclosure
of contingent assets and liabilities.
o RESULTS OF OPERATIONS. This section provides an analysis of our
results of operations for the three months ended March 31, 2006
compared to the same period in 2005 and the year ended December 31,
2005 compared to the same period in 2004. A brief description is
provided of transactions and events, including related party
transactions that impact the comparability of the results being
analyzed.
o LIQUIDITY AND CAPITAL RESOURCES. This section provides an analysis of
our financial condition and cash flows as of and for the quarter ended
March 31, 2006 and for the year ended December 31, 2005.
The following management's discussion and analysis should be read in
conjunction with our consolidated unaudited financial statements for the three
months ended March 31, 2006 and 2005, the consolidated audited financial
statements for the fiscal years ended December 31, 2005 and 2004 and related
notes to those financial statements.
OVERVIEW
Management's Discussion and Analysis (MD&A) contains statements that
are forward-looking. These statements are based on current expectations and
assumptions that are subject to risks and uncertainties. Actual results could
differ materially because of factors discussed in this prospectus, as well as
factors not within our control. We undertake no duty to update any
forward-looking statement to conform the statement to actual results or changes
in our expectations.
We are in the business of developing, designing and delivering imaging
technology solutions. We currently have 14 issued patents held by us, all of
which are U.S. patents. Our technology is also covered by 5 issued patents in
Taiwan. We also have 5 patent applications currently pending with the US Patent
& Trademark Office, 3 of which relate to image display technology and 2 of which
relate to image scanning. Our approach to research and development (R&D) is
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focused on creating new deliverable and marketable technologies. We sell our
products to clients throughout the world, including the United States, Canada,
Europe, South America, Australia and Asia. We intend to expand our business and
product offerings into the much larger image display market where we intend to
leverage our experience and expertise. We also believe that we may benefit from
a level of transfer of technologies from image capture to image display.
Our wholly-owned operating subsidiary, Syscan, Inc. ("SI"), was
incorporated on May 1, 1995, under the laws of the State of California and is
headquartered in San Jose with additional strategic offices in Arnhem (the
Netherlands) and Hong Kong. Our majority stockholder is Syscan Imaging Limited,
which is wholly-owned by Syscan Technology Holdings Limited. Syscan Technology
Holdings Limited is a publicly-held company incorporated in Bermuda whose shares
are listed on The Growth Enterprise Market of The Stock Exchange of Hong Kong
Limited.
Our strategy is to expand our image capture product line and technology
while leveraging our assets in other areas of the imaging industry. We are
actively shipping six categories of image capture products under several "house
brands" or their OEM counterparts versus five categories in 2004. The
introduction of the A4 duplex scanners (DocketPORT) in the third quarter created
a broader base of products. This new category quickly contributed over 7% of
unit sales in 2005, despite its mid-year introduction. The A4 simplex scanner
(TravelScan) category represented approximately 19% of our sales during the year
ended December 31, 2005, a decrease from 2004 (21%) of approximately 2%. The A6
simplex scanners that are widely used for capturing images of bank checks,
drivers' licenses and various identification cards, represented the largest unit
sales in 2005 at 54%. This represented an increase of 8.1% over 2004 unit sales.
The A5 security document scanner experienced a 3% increase in unit sales in 2005
to 3% from less than 1% in 2004. Our fifth scanner product category,
representing approximately 15% of our sales ending the 12 months ended December
31, 2005, is the A8 business card reader scanner. In 2004 the A8 scanner
category represented approximately 21% of our sales, so we experienced a net
reduction in this category of 6%.
In addition to the finished scanner product line, we also design,
configure and sell the Contact Image Sensor (CIS) Modules that we use in our
products separately as an OEM component to manufacturers. This CIS business
represented approximately 5% of our overall sales during 2005, a decrease of 5%
from the previous year (2004 - 10%).
We intend to expand our image capture product line with 7 new products
in 2006. These new products are being introduced as both Syscan branded and OEM/
VAR branded products launch. Many of these new scanners are being driven by
increased market demand for faster and easier-to-use products. They will also
concentrate more on the identity-security and financial transaction market
needs.
Over the past twelve months we have begun focusing our sales and
marketing efforts substantially towards the vertical markets such as the Value
Added Reseller (VAR) and small-office-home-office (SOHO) markets. We believe
focusing on these markets is the most effective way to showcase our
technological capabilities and manufacturing efficiencies, while enabling us to
maintain higher margins, and require fewer resources than working directly with
the mass retailers.
While we continue to grow our presence in image capture technology, we
have begun creating, through acquisition and research and development, new
technology solutions for the substantially larger, image display market. More
specifically we are creating products and technologies to accent and enhance the
HDTV television market. Our first image display product is expected to be
available for delivery during the first quarter of 2007. We believe that these
HDTV products will provide advanced image quality at a highly competitive price
point, creating a value point product.
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In addition to future products and technologies in various stages of
research and development, one of our objectives is to acquire companies in the
image capture and display industry that could compliment our business model,
improve our competitive positioning and expand our offerings to the marketplace,
all of which there can be no assurance. In identifying potential acquisition
candidates we will seek to acquire companies with varied distribution channels,
rich intellectual property (IP) and high caliber engineering personnel.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis is based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, we evaluate our estimates,
including those related to revenue recognition, accounts receivable and
allowance for doubtful accounts, inventories, intangible and long-lived assets,
and income taxes. We base our estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.
An accounting policy is deemed to be critical if it requires an accounting
estimate to be made based on assumptions about matters that are highly uncertain
at the time the estimate is made, and if different estimates that reasonably
could have been used or changes in the accounting estimate that are reasonably
likely to occur could materially change the financial statements. We believe the
following critical accounting policies reflect our more significant estimates
and assumptions used in the preparation of our consolidated financial
statements:
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
and the risks and rewards of ownership have transferred to the customer. We
recognize 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.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
We present accounts receivable, net of allowances for doubtful
accounts, 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 our customer base. We review a customer's
credit history before extending credit. If the financial condition of our
customers were to deteriorate, resulting in an impairment of their ability to
make payments, additional allowances may be required. In the event that our
trade receivables became uncollectible after exhausting all available means of
collection, we would be forced to record additional adjustments to receivables
to reflect the amounts at net realizable value. The effect of this entry would
be a charge to income, thereby reducing our net profit. Although we consider the
likelihood of this occurrence to be remote based on past history and the current
status of our accounts, there is a possibility of this occurrence.
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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. Our
inventory purchases and commitments are made in order to build inventory to meet
future shipment schedules based on forecasted demand for our products. We
perform a detailed assessment of inventory for each period, which includes a
review of, among other factors, demand requirements, product life cycle and
development plans, component cost trends, product pricing and quality issues.
Based on this analysis, we record adjustments to inventory for excess,
obsolescence or impairment, when appropriate, to reflect inventory at net
realizable value. Revisions to our inventory adjustments may be required if
actual demand, component costs or product life cycles differ from our estimates.
In the event we were unable to sell our products, the demand for our products
diminished, other competitors offered similar or better technology, and/or the
product life cycles deteriorated causing quality issues, we would be forced to
record an adjustment to inventory for impairment or obsolescence to reflect
inventory at net realizable value. The effect of this entry would be a charge to
income, thereby reducing our net profit. Although we consider the likelihood of
this occurrence to be remote based on our forecasted demand for our products,
there is a possibility of this occurrence.
INTANGIBLE AND LONG-LIVED ASSETS
We evaluate our intangible assets and long-lived assets, which
represent goodwill, long-term investments, and fixed assets, for impairment
annually and when circumstances indicate the carrying value of an asset may not
be recoverable. 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 would be charged to operations. We do not believe
any impairment exists for any of these types of assets as of December 31, 2005.
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.
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CONTINGENCIES
Currently, there are no outstanding legal proceedings or claims, other
than that disclosed in Note 7 of the Consolidated Financial Statements. The
outcomes of potential legal proceedings and claims brought against us are
subject to significant uncertainty. SFAS 5, ACCOUNTING FOR CONTINGENCIES,
requires that an estimated loss from a loss contingency such as a legal
proceeding or claim should be accrued by a charge to income if it is probable
that an asset has been impaired or a liability has been incurred and the amount
of the loss can be reasonably estimated. Disclosure of a contingency is required
if there is at least a reasonable possibility that a loss has been incurred. In
determining whether a loss should be accrued we evaluate, among other factors,
the degree of probability of an unfavorable outcome and the ability to make a
reasonable estimate of the amount of loss. Changes in these factors could
materially impact our financial position or results of operations.
ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH
LIABILITIES AND EQUITY
The Company accounts for its 5% Series A Convertible Preferred Stock
pursuant to SFAS 133 and EITF Abstract No. 00-19. Accordingly, the embedded
conversion feature associated with the 5% Convertible Preferred Stock and the
warrants issued to the 5% Convertible Preferred Stock purchasers have been
determined to be derivative instruments. The fair value of these derivative
instruments has been recorded as a liability on the consolidated balance sheet
with the corresponding amount recorded as a discount to the 5% Convertible
Preferred Stock. Such discount is being accreted from the date of issuance to
the redemption date of the 5% Convertible Preferred Stock. The change in the
fair value of the liability for derivative contracts is calculated at each
balance sheet date and the change is credited to other income/(expense) in the
consolidated statements of operations.
The 5% Convertible Preferred Stock is Mandatorily Redeemable Preferred
Stock as defined by SFAS 150 "ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH
CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY", and would also qualify as
"Preferred Stocks Subject to Mandatory Redemption Requirements or Whose
Redemption is Outside the Control of the Issuer" as defined by Accounting Series
Release ("ASR") No. 268 - "REDEEMABLE PREFERRED STOCKS". The conversion feature
associated with the 5% Convertible Preferred Stock is not a non-substantive or
minimal feature and therefore the provisions of ASR No. 268 have been applied in
classifying the 5% Convertible Preferred Stock separate from stockholders'
equity.
RESULTS OF OPERATIONS
The following table summarizes certain aspects of our results of operations for
the three months ended March 31, 2006 compared to the three months ended March
31, 2005 (IN THOUSANDS):
THREE MONTHS MARCH 31, CHANGE
---------------------- ----------------
2006 2005 $ %
---- ---- ----- -----
Net sales $ 2,438 $ 1,708 $ 730 43%
Cost of sales 1,616 1,104 512 46
As a percentage of sales
66% 65%
Selling and marketing expense 281 152 129 85
General and administrative expense 337 296 41 14
Research and development expense 384 176 208 118
Total other income (expense) 11 557 NM NM
Dividend on 5% convertible preferred (148) (27) NM NM
stock and accretion of preferred
stock redemption value
NM = Not Meaningful
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NET SALES
The significant increase in net sales was attributable to our increased
product offerings. We introduced our duplex scanners (DocketPORT) in the third
quarter of fiscal 2005, which created a broader base of products. Approximately
$446,000 of our increased revenue was attributable to sales of our duplex
scanners. To a lesser extent, our net sales were positively impacted by our
gradual trending towards the VAR and small office home office ("SOHO") markets,
which is a result of our efforts to appeal to customers in these sales channels.
Sales to our four largest customers represented 82% and 90% in the
three months ended March 31, 2006 and 2005, respectively. We expect that our
largest customers will continue to account for a substantial portion of our net
sales in the remainder of fiscal 2006 and for the foreseeable future. The
identities of our largest customer and their respective contributions to our net
sales have varied and will likely continue to vary from period to period.
We expect net sales to increase as we continue to offer additional
products in the image display market and expand to the image display market.
COST OF SALES, INCLUDING GROSS PROFIT
Cost of goods sold ("COGS") includes all direct costs related to the
transfer of scanners, imaging modules and services related to the delivery of
those items manufactured in China, and to a lesser extent engineering services
and software royalties. COGS increased in absolute dollars as a result of the
increased net sales during the three months ended March 31, 2006 as compared to
the three months ended March 31, 2005. COGS as a percentage of net sales
remained fairly constant as a result of the stability of our average selling
price and related material cost used to manufacture our products. We expect this
trend to continue for the foreseeable future.
During the three months ended March 31, 2006 and 2005, we purchased
$1,409,000 and $1,266,000, respectively, which represents a significant portion
of our cost of sales, from one vendor that is also a subsidiary of our majority
stockholder. If this vendor became unable to provide materials in a timely
manner and we were unable to find alternative vendors, our business, operating
results and financial condition would be materially adversely affected.
SELLING AND MARKETING EXPENSE
Selling and marketing expenses consist primarily of salaries and
related costs of employees engaged in the sales, marketing and customer account
management functions and to a lesser extent market development and promotional
funds for our retail distributions channels, tradeshows, website support,
warehousing, logistics and certain sales representative fees. The increase
during the three months ended March 31, 2006 as compared to the three months
ended March 31, 2005 is primarily attributable to the increased staff and
related marketing activities to support our expanding products offerings and the
addition of direct sales personnel in Europe and Asia. We expect selling and
marketing expenses to increase as we continue to expand our marketing efforts
and the number of products we offer.
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GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense consists primarily of costs
associated with our executive, financial, human resources and information
services functions, facilities-related expenses and outside professional
services such as legal and accounting. The increase was a result of increased
personnel costs to support our expanding business and related infrastructure and
the increased expenses associated with maintaining our public company status. We
expect general and administrative expenses to increase somewhat as our business
continues to grow and the costs associated with being a public company continue
to increase as a result of our required reporting requirements, including but
not limited to expenses incurred to comply with the Sarbanes-Oxley Act of 2002.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expense consists primarily of salaries and
related costs of employees engaged in product research, design and development
activities, compliance testing, documentation, prototypes and expenses
associated with transitioning the product to production. Research and
development expense increased during the three months ended March 31, 2006 as
compared to March 31, 2005 as we continue to focus on key product development
areas. We expect research and development expenses to increase as we continue to
invest in the future and strengthen our intellectual property position within
our highly competitive market.
TOTAL OTHER INCOME (EXPENSE)
Other income (expense) for the three months ended March 31, 2006 was
mainly attributable to the following:
o Other expense: Stock-based compensation cost of $192,000, which
represents a non-cash charge to our statement of operations as a result
of adopted the fair value recognition provisions of SFAS 123(R). See
"Notes to Financial Statements Note 2."
o Other income: A $208,000 decrease in the fair value of our derivative
instruments associated with our 5% Convertible Series A Preferred
Stock.
During the three months ended March 31, 2005 our other income (expense)
was a result of issuing our 5% Convertible Preferred Stock as follows:
o The $1,086,000 change in value of our derivative instruments
associated with our 5% Convertible Series A Preferred Stock from the
date of issuance, March 15, 2005 through March 31, 2005;
o Cash paid for issuance costs of $237,000 in connection with our
offering; and
o A non-cash charge of $290,000 representing the fair value of 186,500
warrants issued to the placement agent for the sale of the preferred
stock.
DIVIDEND ON 5% CONVERTIBLE PREFERRED STOCK AND ACCRETION OF PREFERRED STOCK
REDEMPTION VALUE
During the three months ended March 31, 2006 dividends and accretion on
our 5% Convertible Series A Preferred Stock were approximately $20,000 and
$128,000, respectively. As our 5% Convertible Series A Preferred Stock was
issued at the end of the March 2005, we did not accrue any dividends and our
accretion was only $27,000 during the three months ended March 31, 2005.
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TWELVE MONTHS ENDED DECEMBER 31, 2005 COMPARED TO DECEMBER 31, 2004
REVENUE
During the fiscal year ended December 31, 2005, our revenues increased
by $1.79 million (29.5%) from $6.06 million for the year ended December 31, 2004
to $7.85 million for the year ended December 31, 2005.
Scanner products and imaging modules comprised approximately 99% of our
revenues during each of these periods. Our revenue mix has been gradually
trending towards the Value Added Reseller (VAR) and small office home office
(SOHO) markets, which is a result of our efforts to appeal to customers in these
sales channels. During the year ended December 31, 2005 four of our customers
accounted for approximately 79% of total revenues. During the year ended
December 31, 2004, these same four customers accounted collectively for
approximately 78% of total revenues. The loss of any of our largest clients
could have a material adverse effect on our business.
COST OF SALES
Cost of goods sold (COGS) includes all direct costs related to the
transfer of scanners, imaging modules and services related to the delivery of
those items manufactured in China. A relatively small percentage (< 2%) of COGS
is due to engineering services and (< 6%) of COGS is due to software royalties
paid by us. COGS was approximately 63.6% for the year ended December 31, 2005
compared to 68.8% for the same period in 2004. COGS decreased as a percentage of
revenues for the year ended December 31, 2005 as compared to the same period in
2004 primarily as a result of greater gross margins and better pricing
elasticity than projected. We anticipate that our COGS may remain at the current
level during 2006 as a result of "flat" unit sales prices and stable material
costs.
GROSS PROFIT
Gross profit increased to $2,859,389 or 36.4% of net revenues for the
year ended December 31, 2005 from $1,890,681 or 31.2% of net revenues for the
same period in 2004. This increase in gross profit is primarily a result of
increased revenue and increased margins realized with our new products. We
anticipate that our gross profit margins may continue to increase during 2006,
as we discontinue older and less-profitable products.
SELLING AND MARKETING
Selling and marketing expenses include payroll, employee benefits and
other costs associated with sales, marketing and account management personnel.
Other direct selling and marketing costs include market development funds and
promotions (retail channels only), tradeshows, website support costs,
warehousing, logistics and certain sales representative fees. Selling and
marketing expenses increased to $951,990 for the year ended December 31, 2005
from $745,557 for the same period in 2004, an increase of $206,433 or
approximately 27.7%. The increase during the year ended December 31, 2005 is
primarily attributable to changes in staffing and marketing activities related
to the display imaging group and the addition of direct sales personnel in
Europe and Asia.
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GENERAL AND ADMINISTRATIVE
General and administrative costs include accounting, legal,
administrative personnel and other headcount-related costs associated with the
facilities and certain human resources, as well as other professional and
administrative fees. General and administrative expenses increased to $1,511,252
for the year ended December 31, 2005 from $824,286 for the same period in fiscal
2004, an increase of $686,966 or approximately 83.3%. The increase for the year
ended December 31, 2005 is primarily attributable to the additional cost of
outside fees incurred in connection with our public listing compliance expenses
costs incurred related to our image display subsidiary.
Research and Development (R&D) costs include payroll, employee
benefits, and other headcount-related costs associated with the product design,
development, compliance testing, documentation and transition to production. R&D
expenses increased to $866,102 for the year ended December 31, 2005 from
$528,417 for the same period in fiscal 2004, an increase of $337,685 or
approximately 64%. This significant increase for the year ended December 31,
2005 is primarily attributable to engineering staff and expenditures for the
image display products. We believe that this investment is necessary to
establish a strong intellectual property (IP) position within this highly
competitive market.
OTHER INCOME (EXPENSE)
Our other income (expense) for the year ended December 31, 2005 was
($2,255,277) compared to $28,513 during the same period of 2004.
Other expense for 2005 consisted mainly of the following items:
(i) Stock-based compensation cost of $2,812,000 represents a non-cash charge to
our statement of operations as a result of granting certain options to certain
consultants, executive officers and key employees at less than the fair market
value on the date of grant.
(ii) Change in fair value of derivative instruments of ($1,112,005) represent a
non-cash entry for the change in the fair value of the Company's 5% Series A
Preferred Stock (derivative instrument) from the acquisition date to December
31, 2005.
(iii) In connection with the sale of the Company's 5% Series A Convertible
Preferred Stock, the paid issuance costs of $236,500 and recorded a non-cash
charge for the fair value of 186,500 warrants issued to the placement agent for
the sale of the preferred stock. The fair value of these warrants totaled
$290,000. Total issuance costs of $526,500 were charged to other expense during
2005.
Other income in 2004 primarily consisted of the sale of certain inventory items
previously considered not-sellable.
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS
Net loss available to common stockholders for the year ended December
31, 2005 was $3,273,899 versus net loss of $179,866 during the same period in
2004. The increase in net loss was primarily the result of (i) costs incurred
and non-cash accounting entries in connection with the sale of our 5% Series A
Preferred Stock and. (ii) compensatory cost recorded for the grant of stock
options at less than fair market value.
-48-
RELATED PARTY TRANSACTIONS
We purchase significantly all of our finished scanner imaging products
from the parent company of our majority stockholder, Syscan Technology Holdings
Limited ("STH"). Our Chairman and CEO, Darwin Hu, was formerly the CEO of STH,
and beneficially owns approximately 5.33% of the issued and outstanding capital
stock of STH. The following is a summary of significant related party
transactions, which were carried out in the normal course of the Company's
business, during the years ended December 31, 2005 and 2004:
The following is a summary of significant related party purchases from
entities that are wholly-owned subsidiaries of STH. The transactions were
carried out in the normal course of our business.
2005 2004
------------- -------------
SYSCAN Intervision Limited,
a wholly-owned subsidiary of $4.915M $3.825M
STH (purchases)
============= =============
SYSCAN Optoelectronics Technology
(Shenzhen) Company Limited, a
wholly-owned subsidiary of STH
(purchases) -- $0.520M
============= =============
Amounts due to/from related parties are unsecured, interest-free and repayable
on demand and consisted of the following:
Due from STH $345,998
Due from Majority Stockholder $100,000
Due from various subsidiaries
wholly-owned by STH $1,956,522
----------
$2,402,520
==========
LIQUIDITY AND CAPITAL RESOURCES
MARCH 31, 2006
At March 31, 2006, our principal sources of liquidity included cash and
cash equivalents of $1,040,000 and unused borrowing capacity of $1,487,000 under
our bank line of credit. We had no significant cash outlays during the three
months ended March 31, 2006.
Operating activities: Cash used by operating activities during the
three months ended March 31, 2006 was primarily to fund our net loss, as
adjusted for non-cash items such as stock-based compensation associated with
issuing options and changes in our derivative instruments and convertible
preferred stock. Additional uses of cash included an increase in our trade
receivables offset by an increase in our trade payables. The increased
receivables are a result of the dramatic increase in sales. As we have had to
ramp up inventory purchases to meet the increased demand for our products, our
cash was somewhat constrained during the three months ended March 31, 2006.
During the three months ended March 31, 2005, cash used by operations resulted
from funding our net loss and increased trade receivables and inventories. We
expect future cash provided (used) by operating activities to fluctuate,
primarily as a result of fluctuations in our operating results, timing of
product shipments, trade receivables collections, inventory management and
timing of vendor payments.
-49-
Investing activities: For both the three months ended March 31, 2006
and 2005, cash used in investing activities was attributable to the purchase of
capital equipment.
Financing activities: For the three months ended March 31, 2006, cash
provided by financing activities was a result of payments from related party
receivables. For the three months ended March 31, 2005, cash provided by
financing activities was a result of issuing our 5% Convertible Preferred Stock,
which resulted in a cash inflow of $1,618,000, net of issuance costs. All
advances to and repayments from related parties during the three months ended
March 31, 2006 and 2005 were made in the ordinary course of business
CASH AND WORKING CAPITAL REQUIREMENTS
As previously discussed, we plan to continue increasing our presence in
the image capture market and expand our operations into the image display area,
which may require additional capital. Additionally, we may seek to expand our
operations through acquisitions of companies in the image capture and display
industry that we believe could complement our business model, improve our
competitive positioning and expand our product offerings.
Considering current cash reserves and other sources of liquidity,
including our bank line of credit and borrowing from related parties, management
believes that the Company will have sufficient sources of financing to continue
its normal operations through at least the next twelve months. However, our
business expansion plans may require additional capital through either the
incurrence of debt or the issuance of equity securities, depending on the
prevailing market and other conditions. There is no assurance that such
additional funds will be available for us to finance our expansion plans.
Furthermore, there is no assurance the net proceeds from any successful
financing arrangement will be sufficient to cover cash requirements as we expand
our business operations.
CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations at March 31,
2006, and the effect such obligations are expected to have on our liquidity and
cash flows in future periods (IN THOUSANDS):
ONE - THREE -
LESS THAN THREE FIVE
TOTAL ONE YEAR YEARS YEARS
----- -------- ----- -----
Line of credit (1) $1,013 $1,013 $ -- $ --
Operating lease obligations 249 146 102 1
------ ------ ------ ------
Total contractual cash $1,262 $1,159 $ 102 $ 1
obligations
====== ====== ====== ======
(1) We have a line of credit up to $2,500,000, bearing interest at the rate of
prime (7.75% at March 31, 2006) plus 0.5% and secured by all our assets.
Interest payments are due monthly and all unpaid interest and principal is due
in full on October 30, 2006.
-50-
OFF-BALANCE SHEET ARRANGEMENTS
At March 31, 2006, we did not have any relationship with unconsolidated
entities or financial partnerships, which other companies have established for
the purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes as defined in Item 303(a)(4)(ii) of SEC
Regulation S-K. Therefore, we are not materially exposed to any financing,
liquidity, market or credit risk that could arise if we had engaged in such
relationships.
TRENDS
As of March 31, 2006, to the best of our knowledge, no known trends or
demands, commitments, events or uncertainties, except as described in "Notes to
Financial Statements Note 9 - Commitments and Contingencies" existed, which are
likely to have a material effect on our liquidity.
DECEMBER 31, 2005
Cash and cash equivalents were approximately $1.4 million as of
December 31, 2005 compared to approximately $686,000 as of December 31, 2004, an
increase of approximately 104%. Working capital at December 31, 2005 was
approximately $4.6 million as compared to approximately $3.7 million at December
31, 2004, an increase of approximately 24%. The increase in cash and working
capital is primarily attributable cash received in connection with the sale of
our 5% Series A Preferred stock, better cash-flow management and inventory
"turn" time.
Operating Activities: Net cash flows used in operating activities
was $801,248 and $26,009 for the years ended December 31, 2005 and 2004,
respectively. Net cash used in operating activities for 2005 primarily reflects
net loss adjusted by (i) non-cash accounting entries in connection with the sale
of our 5% Series A Preferred Stock, (ii) increases in inventory levels as we
built up inventories to respond to forecasted demand for our products from the
prior year's fourth quarter, and (iii) increase in sales over the prior year.
Net cash used in operating activities for 2004 primarily reflects net
loss adjusted for a reversal of provision for slow-moving inventories by a
decrease in trade receivables resulting from cash collections and increases in
inventory levels as we built up inventories to respond to forecasted demand for
our products from the prior year's fourth quarter.
Investing Activities: Net cash flows used in investing activities for
2005 primarily consisted of cash paid for capital expenditures and the
acquisition of a subsidiary. Cash flows from investing activities in 2004 were
minimal.
Financing Activities: Net cash flows provided by financing activities
for 2005 primarily consisted of $1,865,000 cash received from the sale of our 5%
Series A Convertible Preferred Stock. Other cash flows from financing activities
for 2005 and 2004 consisted of advances/repayments under our line of credit
totaling to fund working capital and funds advanced under a letter(s) of credit
for goods shipped on account. For both periods presented, advances to and/or
repayments from related party receivables and payables were made in the ordinary
course of business.
We have financed our activities primarily with cash flows from
operations, borrowings under our credit facilities, and the sale of our 5%
Series A Convertible Preferred Stock. We have a $2,500,000 bank line of credit,
which bears interest at prime plus .5%, which is secured by all of our general
business assets. The subject bank line of credit had $1,486,964 available for
use as of December 31, 2005. In order to implement our growth strategy and
expansion into the image display area, additional funds will be required.
-51-
Our plans for the next twelve months include continuing to increase our
presence in the image capture market, heavily investing our resources into the
image display market and adding future products and technologies to our current
product offerings. Additionally, we intend to seek to identify acquisition
candidates in the image capture and display industry that we believe could
compliment our business model, improve our competitive positioning and expand
our offerings to the marketplace, of which there can be no assurance. In
identifying potential acquisition candidates, we will seek to acquire companies
with varied distribution channels, rich intellectual property (IP) and high
caliber engineering personnel.
To finance our business expansion plans, we plan to aggressively pursue
additional sources of funds, the form of which will vary depending on the
prevailing market and other conditions, and may include the issuance and sale of
debt or equity securities. However, there is no assurance that such additional
funds will be available for us to finance our expansion plans. Furthermore,
there is no assurance the net proceeds from any successful financing arrangement
will be sufficient to cover cash requirements as we expand our business
operations.
CONCENTRATION OF CREDIT RISK
Concentration of credit risk for cash held at banks
We maintain cash balances at several banks. Accounts at each
institution are insured by the Federal Deposit Insurance Corporation up to
$100,000. As of December 31, 2005, the Company had consolidated balances of
approximately $920,000, which were not guaranteed by FDIC. The Company has not
experienced any losses in such accounts and believes the exposure is minimal.
Concentration of credit risk due to geographic sales and significant customers
We operate in a single industry segment - scanner and fax modules. We
market our products in the United States, Europe and the Asia Pacific region
through our sales personnel and independent sales representatives.
Our geographic sales as a percent of total revenue were as follows for
the years ended December 31st :
2005 2004
---------------- --------------
United States 87% 96%
Asia Pacific 9% 2%
Europe and others 4% 2%
Sales to major customers as a percentage of total revenues were as follows for
the years ended December 31st :
2005 2004
---------------- --------------
Customer A 33% 38%
Customer B 18% 16%
Customer C 16% 15%
Customer D 12% 9%
Concentration of credit risk due to accounts receivable
-52-
Financial instruments that potentially subject us to a concentration
of credit risk consist primarily of trade receivables. Our customers are
concentrated in the industrial/consumer electronics channels and with major
original equipment manufacturers. As of December 31, 2005, the concentration was
approximately 92.5% (3 customers). The loss of any of these customers could have
a material adverse effect on our results of operations, financial position and
cash flows.
Concentration of credit risk due to significant vendors
For each of the years ended December 31, 2005 and 2004, our
purchases have primarily been concentrated with the wholly-owned subsidiary of
our majority stockholder. If this vendor was unable to provide materials in a
timely manner and we were unable to find alternative vendors, our business,
operating results and financial condition would be materially adversely
affected.
Concentration of credit risk due to product sales
We had 3 different product categories in 2005 and 4 different
products in 2004 that each accounted for more than 10% of sales. If any of these
products were to become obsolete or unmarketable and we were unable to
successfully develop and market alternative products, our business, operating
results and financial condition could be adversely affected.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any transactions, agreements or other contractual
arrangements that constitute off-balance sheet arrangements.
CONTRACTUAL OBLIGATIONS
Our Contractual Obligations and Commercial Commitments are detailed
below:
---------------------------- ------------------------------------------------------------------------
Contractual
Obligations Payments Due by Period (rounded)
---------------------------- ------------------------------------------------------------------------
Less
Than 1 1-3 4 - 5 After 5
Total Year Years Years Years
---------------------------- ---------- ---------- ---------- ------------- ---------------
Line/letter of credit (1) $1,013,000 $1,103,000 -- -- --
---------------------------- ---------- ---------- ---------- ------------- ---------------
Operating Leases ((2)) $ 274,000 $ 139,000 $ 135,000 -- --
---------------------------- ---------- ---------- ---------- ------------- ---------------
Total Cash Contractual
Obligations
$1,287,000 $1,152,000 $ 135,000 -- --
---------------------------- ---------- ---------- ---------- ------------- ---------------
(1) Line of credit/letter of credit - We have a line of credit to borrow up to
$2,500,000, bearing interest at the rate of prime (7.25% at December 31, 2005)
plus 0.5%, (7.25% at December 31, 2005) and secured by all of our assets.
Interest payments are due monthly and all unpaid interest and principal is due
in full on October 30, 2006. Upon certain events of defaults as more fully
described in the agreement, the default variable interest rate increases to
prime plus 5.5%. We had $1,486,964 available for use at December 31, 2005. We
issue letters of credit in the normal course of business. The total amount
available can never be more than the face amount of all advances under bank line
of credit or letters of credit outstanding.
(2) Operating leases - We are committed under various non-cancelable operating
leases which expire through November 2007. Future minimum rental commitments are
as follows: 2006-$139,000 and 2007-$135,000. Rent expense charged to operations
was approximately $131,000 for 2005 (2004: $99,000).
-53-
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MANUFACTURING
All of our products are manufactured by Syscan Technology Holdings
(STH), the parent company of our majority stockholder. We and STH have
established an internal-pricing agreement that is updated on a semi-annual
basis. STH currently serves as the manufacturer of all current image capture
products produced by us. We believe, for quality control and pricing reasons,
that this type of relationship is more favorable then could be attained from
unaffiliated third-parties. We purchase and provide STH with critical parts and
components necessary to manufacture our products.
We purchase significantly all of our finished scanner imaging products
from the parent company of our majority stockholder, Syscan Technology Holdings
Limited ("STH"). Our Chairman and CEO, Darwin Hu, was formerly the CEO of STH,
and beneficially owns approximately 5.33% of the issued and outstanding capital
stock of STH. The following is a summary of significant related party
transactions, which were carried out in the normal course of the Company's
business, during the years ended December 31, 2005 and 2004:
The following is a summary of significant related party purchase transactions,
which were carried out in the normal course of the Company's business:
2005 2004
------------- ------------
SYSCAN Intervision Limited, $4.915M $3.825M
a wholly-owned subsidiary of
STH (purchases)
============= ============
SYSCAN Optoelectronics -- $0.520M
Technology (Shenzhen) Company
Limited, a wholly-owned subsidiary
of STH (purchases)
============= ============
Amounts due to/from related parties are unsecured, interest-free and repayable
on demand and consisted of the following:
Due from STH $345,998
Due from Majority Stockholder $100,000
Due from various subsidiaries wholly-owned by STH $1,956,522
-------------
$2,402,520
=============
-54-
In April 2005 we entered into employment agreements with each of Darwin
Hu, our Chief Executive Officer, William Hawkins, our Chief Operating Officer
and Acting Chief Financial Officer, and David Clark, our Senior Vice President
of Business Development. In connection therewith we granted options to each of
Messrs. Hu, Hawkins and Clark to purchase 1,500,000, 1,000,000 and 800,000
shares of our common stock, respectively, at an exercise price of $0.01 per
share. Such options shall vest one-third on the execution date of the employment
agreement, one-third on April 3, 2006 and one-third on April 2, 2007. Pursuant
to such employment agreements, each of Messrs. Hu, Hawkins and Clark shall be
entitled to receive annual salaries of $200,000, $160,000 and $150,000,
respectively.
Other than those described above, we have no material transactions
which involved or are planned to involve a direct or indirect interest of a
director, executive officer, greater than 5% stockholder or any family member of
such parties.
We believe that all of the transactions set forth above were made on
terms no less favorable to us than could have been obtained from unaffiliated
third parties. All future transactions between us and our officers, directors
and principal shareholders and their affiliates will be on terms no less
favorable than could be obtained from unaffiliated third parties and will be
approved by the independent members of our board of directors.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION.
Our common stock has been listed and quoted on the OTC Bulletin Board
since December 1998. From January 1, 2003 through April 1, 2004 our common stock
traded under the symbol "BKET" and since April 2, 2004 under the symbol "SYII".
All prices reflected herein have been adjusted to reflect the 1-for-10 reverse
split of our common stock that was effected on April 2, 2004.
The following chart sets forth the high and low sale prices for each
quarter during the fiscal years ended December 31, 2004 and 2005, respectively,
and the first quarter ended March 31, 2006. Such prices represent quotations
between dealers, without dealer markup, markdown or commissions, and may not
represent actual transactions.
HIGH LOW
---- ---
2004 BY QUARTER
January 1 - March 31 $ 4.20 $ 0.70
April 1 - June 30 $ 4.75 $ 1.10
July 1 - September 30 $ 4.26 $ 1.40
October 1 - December 31 $ 4.10 $ 2.05
2005 BY QUARTER
January 1 - March 31 $ 3.25 $ 1.20
April 1 - June 30 $ 1.30 $ 0.53
July 1 - September 30 $ 1.15 $ 0.30
October 1 - December 31 $ 0.98 $ 0.35
On May 16, 2006, the closing sale price for shares of our common stock
in the over-the-counter market, as reported by NASD's OTCBB was $1.20.
No prediction can be made as to the effect, if any, that future sales
of shares of our common stock or the availability of our common stock for future
sale will have on the market price of our common stock prevailing from
time-to-time. Sales of substantial amounts of our common stock in the public
market could adversely affect the prevailing market price of our common stock.
-55-
RECORD HOLDERS
As of the date hereof there were 359 record holders of our common
stock. As of the date hereof there were 24,592,092 shares of common stock issued
and outstanding.
DIVIDENDS
We have not paid dividends on our common stock in the past and do not
anticipate doing so in the foreseeable future. We currently intend to retain
future earnings, if any, to fund the development and growth of our business. The
holders of our Series A Preferred Stock are entitled to receive dividends at a
rate of 5% per annum, payable in cash or shares of our common stock, on a
cumulative basis.
EQUITY COMPENSATION PLAN INFORMATION
---------------------------- --------------------------------- ----------------------- ------------------------------
Number of securities to be Weighted average Number of securities
issued upon exercise of exercise price of remaining available for
outstanding options, warrants outstanding options, future issuance under equity
and rights warrants and rights compensation plans
(excluding securities
reflected in column (a))
(a) (b) (c)
---------------------------- --------------------------------- ----------------------- ------------------------------
Equity compensation plans 200,000 $2.00 -0-
approved by security
holders
---------------------------- --------------------------------- ----------------------- ------------------------------
Equity compensation plans 7,129,000 $0.857 990,000
not approved by security
holders
---------------------------- --------------------------------- ----------------------- ------------------------------
Total 7,329,000 $0.888 990,000
---------------------------- --------------------------------- ----------------------- ------------------------------
-56-
EXECUTIVE COMPENSATION
The following table sets forth, for the fiscal years indicated, all
compensation awarded to, paid to or earned by the following type of executive
officers for the fiscal years ended December 31, 2003, 2004 and 2005: (i)
individuals who served as, or acted in the capacity of, our principal executive
officer for the fiscal year ended December 31, 2005; and (ii) our other most
highly compensated executive officers, who together with the principal executive
officer are our most highly compensated officers whose salary and bonus exceeded
$100,000 with respect to the fiscal years ended December 31, 2005, 2004 and 2003
and who were employed by us at the end of fiscal year 2005.
SUMMARY COMPENSATION TABLE*
LONG TERM COMPENSATION
ANNUAL COMPENSATION AWARDS PAYOUTS
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OTHER ANNUAL RESTRICTED SECURITIES LTIP ALL OTHER
COMPENSATION STOCK UNDERLYING PAYOUTS COMPENSATION
AWARD(S) OPTIONS/SARS
-----------------------------------------------------------------------------------------------------------------------------------
($) ($) ($) ($) (#) ($) ($)
Darwin Hu, Chief Executive 2005 200,000 -- -- -- 1,500,000(1) -- --
Officer and Chairman.
2004 200,000 -- -- -- -- -- --
2003 200,000 -- -- -- -- -- --
William Hawkins 2005 160,000 -- -- -- 1,000,000(2) -- --
Chief Operating Officer,
Acting Chief Financial
Officer and Secretary.
2004 160,000 -- -- -- -- -- --
2003 160,000 -- -- -- -- -- --
David Clark 2005 150,000 -- -- -- 800,000(3) -- --
Senior Vice President of 2004 68,750
Business Development.
-- -- -- -- -- --
-------------------------
* Salary reflects total compensation paid to these executives (both before and
after the merger described in Item 1).
(1) As of the date hereof, 1,000,000 of such options have vested.
(2) As of the date hereof, 666,667 of such options have vested.
(3) As of the date hereof, 533,333 of such options have vested.
-57-
OPTION GRANTS IN FISCAL 2005
The following table sets forth certain information regarding stock options
held as of December 31, 2005 by the named executive officers.
Number of
Securities % of Total Granted
Underlying to Employees in Exercise Expiration
Options Fiscal Year Price ($/Sh) Date
Name and Principal Position Granted
------------------------------------------------------------------------------------------------------------------
Darwin Hu 1,500,000 35.4% $.01 April 26,
President and Chief Executive Officer 2012
William Hawkins 1,000,000 16.4% $.01 April 26,
Chief Operating Officer, Acting Chief 2012
Financial Officer and Secretary
David Clark 800,000 18.9% $.01 April 26,
Senior Vice President of Business 2012
Development
AGGREGATE OPTIONS EXERCISEABLE IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
OPTIONS AT DECEMBER 31, 2005 AT DECEMBER 31, 2005 (1)
---------------------------- ------------------------
NAME AND PRINCIPAL POSITION EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
--------------------------- ----------- ------------- ----------- -------------
Darwin Hu 500,000 1,560,000 $ 305,000 $ 610,000
President, Chief Executive Officer
and Chairman of the Board
William Hawkins 333,333 1,026,666 $ 203,333 $ 406,666
Chief operating Officer, Acting Chief
Financial Officer and Secretary.
David Clark 266,666 933,334 $ 162,666 $ 325,333
Vice President of Business Development
-------------------------------------
(1) As of December 31, 2005, the market value of a share of common stock was
$0.62.
No shares were exercised by named executive officers in fiscal year ended
December 31, 2005.
As of December 31, 2005, options to purchase a total of 2,210,000 shares of
common stock were granted under our 2002 Amended and Restated Stock option Plan,
at exercise prices of $0.65 to $2.00 per share. One-fourth of the options
granted vest on the first anniversary, one-fourth of the options granted vest on
the second anniversary, one-fourth of the options granted vest on the third
anniversary and one-fourth of the options vest on the fourth anniversary. The
options expire on the ten year anniversary of their grant date. All options
described above have been issued pursuant to the 2002 Amended and Restated Stock
Option Plan described below.
-58-
2002 AMENDED AND RESTATED STOCK OPTION PLAN
DESCRIPTION OF THE 2002 PLAN
THE PURPOSE OF THE 2002 PLAN
The purpose of the 2002 Plan is to provide additional incentive to our
directors, officers, employees and consultants to us who are primarily
responsible for our management and growth. Each option shall be designated at
the time of grant as either an incentive stock option (an "ISO") or as a
non-qualified stock option (a "NQSO").
Each option shall be designated at the time of grant as either an
incentive stock option (an "ISO") or a non-qualified stock option (a "NQSO").
The Board of Directors believes that the ability to grant stock options to
employees which qualify for ISO treatment provides an additional material
incentive to certain key employees. The Internal Revenue Code requires that ISOs
be granted pursuant to an option plan that receives shareholder approval within
one year of its adoption. We adopted the 2002 Plan in order to comply with this
statutory requirement and preserve its ability to grant ISOs.
The benefits to be derived from the 2002 Plan, if any, are not
quantifiable or determinable.
ADMINISTRATION OF THE PLAN
The 2002 Plan shall be administered by the Board of Directors, or by
any committee that we may in the future form and to which the Board of Directors
may delegate the authority to perform such functions (in either case, the
"Administrator"). The Board of Directors shall appoint and remove members of the
committee in its discretion in accordance with applicable laws. In the event
that we establish such a committee and are required to comply with Rule 16b-3
under the Exchange Act and Section 162(m) of the Internal Revenue Code (the
"Code"), the committee shall, in the Board of Director's discretion, be
comprised solely of "non-employee directors" within the meaning of said Rule
16b-3 and "outside directors" within the meaning of Section 162(m) of the Code.
Notwithstanding the foregoing, the Administrator may delegate non-discretionary
administrative duties to any of our employees as it deems proper and the Board
of Directors, in its absolute discretion, may at any time and from time to time
exercise any and all rights and duties of the Administrator under the 2002 Plan.
Subject to the other provisions of the 2002 Plan, the Administrator
shall have the authority, in its discretion: (i) to grant options; (ii) to
determine the fair market value of the Common Stock subject to options; (iii) to
determine the exercise price of options granted; (iv) to determine the persons
to whom, and the time or times at which, options shall be granted, and the
number of shares subject to each option; (v) to interpret the 2002 Plan; (vi) to
prescribe, amend, and rescind rules and regulations relating to the 2002 Plan;
(vii) to determine the terms and provisions of each option granted (which need
not be identical), including but not limited to, the time or times at which
options shall be exercisable; (viii) with the consent of the optionee, to modify
or amend any option; (ix) to defer (with the consent of the optionee) the
exercise date of any option; (x) to authorize any person to execute on our
behalf any instrument evidencing the grant of an option; and (xi) to make all
other determinations deemed necessary or advisable for the administration of the
2002 Plan. The Administrator may delegate non-discretionary administrative
duties to any of our employees as it deems proper.
-59-
SHARES OF STOCK SUBJECT TO THE 2002 PLAN
Subject to the conditions outlined below, the total number of shares of
stock which may be issued under options granted pursuant to the 2002 Plan shall
not exceed 200,000 shares of Common Stock, $.001 par value per share. On May 17,
2002, the Company's stockholders approved the adoption of the 2002 Amended and
Restated Stock Option Plan (the "Plan"). Under the Plan, the Company has
reserved 200,000 shares of its common stock to issue to eligible current and
prospective employees, consultants and directors of the Company. In April 2004,
the Board of Directors unanimously approved an amendment to the Plan raising the
number of shares that may be issued under the Plan to 2,200,000. In July 2004
employees were granted options under the Plan to purchase 2,200,000 shares of
the Company's common stock at $2.00 per share, 220,000 of which were cancelled
in May 2005. The options have a term of ten years and beginning July 15, 2005,
vest in equal annual installments of 25% per year over four years. In July 2004,
the Board of Directors unanimously approved an additional amendment to the Plan
raising the number of shares that may be issued under the Plan to 3,200,000. In
December 2005 employees were granted options under the Plan to purchase 230,000
shares of the Company's common stock at $0.65 per share. The number of options
granted to individual directors, officers (who are not also directors) and
others are as follows:
GRANT DATE
JULY 15, 2004
-------------------------
DIRECTORS
Darwin Hu 560,000
David Clark 400,000
Peter Mor 80,000
Lawrence Liang 80,000
OFFICERS
William Hawkins 360,000
OTHERS 730,000
CANCELLED MAY 2005 230,000
-------
Subtotal 1,980,000
GRANT DATE
DECEMBER 8, 2005
OTHERS 230,000
-------
Total 2,210,000
Our stockholders will be asked to ratify the increase in the
authorized number of shares of stock that may be issued under the 2002 Plan at
our June 23, 2006 annual meeting of stockholders.
The number of shares of Common Stock subject to options granted
pursuant to the 2002 Plan may be adjusted under certain conditions. If our stock
changed by reason of a stock split, reverse stock split, stock dividend,
recapitalization, combination or reclassification, appropriate adjustments shall
be made by the Board of Directors in (i) the number and class of shares of stock
subject to the 2002 Plan, and (ii) the exercise price of each outstanding
option; provided, however, that we shall not be required to issue fractional
shares as a result of any such adjustments. Each such adjustment shall be
subject to approval by the Board of Directors in its sole discretion.
-60-
In the event of the proposed dissolution or liquidation of us, the
Administrator shall notify each optionee at least thirty days prior to such
proposed action. To the extent not previously exercised, all options will
terminate immediately prior to the consummation of such proposed action;
provided, however, that the Administrator, in the exercise of its sole
discretion, may permit exercise of any options prior to their termination, even
if such options were not otherwise exercisable. In the event that we merge or
consolidate with or into another corporation or entity in which we do not
survive, or in the event of a sale of all or substantially all of our assets in
which our shareholders receive securities of the acquiring entity or an
affiliate thereof, all options shall be assumed or equivalent options shall be
substituted by the successor corporation (or other entity) or a parent or
subsidiary of such successor corporation (or other entity); provided, however,
that if such successor does not agree to assume the options or to substitute
equivalent options therefor, the Administrator, in the exercise of its sole
discretion, may permit the exercise of any of the options prior to consummation
of such event, even if such options were not otherwise exercisable.
PARTICIPATION
Every person who at the date of grant of an option is an employee of
ours or of any Affiliate (as defined below) of ours is eligible to receive NQSOs
or ISOs under the 2002 Plan. Every person who at the date of grant is a
consultant to, or non-employee director of, us or any Affiliate (as defined
below) of us is eligible to receive NQSOs under the 2002 Plan. The term
"Affiliate" as used in the 2002 Plan means a parent or subsidiary corporation as
defined in the applicable provisions (currently Sections 424(e) and (f),
respectively) of the Code. The term "employee" includes an officer or director
who is an employee of ours. The term "consultant" includes persons employed by,
or otherwise affiliated with, a consultant.
OPTION PRICE
The exercise price of a NQSO shall be not less than 85% of the fair
market value of the stock subject to the option on the date of grant. To the
extent required by applicable laws, rules and regulations, the exercise price of
a NQSO granted to any person who owns, directly or by attribution under the Code
(currently Section 424(d)), stock possessing more than 10% of the total combined
voting power of all of our classes of stock or of any Affiliate (a "10%
Shareholder") shall in no event be less than 110% of the fair market value of
the stock covered by the option at the time the option is granted. The exercise
price of an ISO shall be determined in accordance with the applicable provisions
of the Code and shall in no event be less than the fair market value of the
stock covered by the option at the time the option is granted. The exercise
price of an ISO granted to any 10% Percent Shareholder shall in no event be less
than 110% of the fair market value of the stock covered by the Option at the
time the Option is granted.
TERM OF THE OPTIONS
The Administrator, in its sole discretion, shall fix the term of each
option, provided that the maximum term of an option shall be ten years. ISOs
granted to a 10% Shareholder shall expire not more than five years after the
date of grant. The 2002 Plan provides for the earlier expiration of options in
the event of certain terminations of employment of the holder.
-61-
RESTRICTIONS ON GRANT AND EXERCISE
Except with the express written approval of the Administrator which
approval the Administrator is authorized to give only with respect to NQSOs, no
option granted under the 2002 Plan shall be assignable or otherwise transferable
by the optionee except by will or by operation of law. During the life of the
optionee, an option shall be exercisable only by the optionee.
TERMINATION OF THE 2002 PLAN
The 2002 Plan shall become effective upon adoption by the Board or
Directors; provided, however, that no option shall be exercisable unless and
until written consent of the our shareholders, or approval of our shareholders
voting at a validly called shareholders meeting, is obtained within twelve
months after adoption by the Board of Directors. If such shareholder approval is
not obtained within such time, options granted pursuant to the 2002 Plan shall
be of the same force and effect as if such approval was obtained except that all
ISOs granted pursuant to the 2002 Plan shall be treated as NQSOs. Options may be
granted and exercised under the 2002 Plan only after there has been compliance
with all applicable federal and state securities laws. The 2002 Plan shall
terminate within ten years from the date of its adoption by the Board of
Directors.
TERMINATION OF EMPLOYMENT
If for any reason other than death or permanent and total disability,
an optionee ceases to be employed by us or any of our Affiliates (such event
being called a "Termination"), options held at the date of Termination (to the
extent then exercisable) may be exercised in whole or in part at any time within
three months of the date of such Termination, or such other period of not less
than thirty days after the date of such Termination as is specified in the
Option Agreement or by amendment thereof (but in no event after the expiration
date of the option (the "Expiration Date")); provided, however, that if such
exercise of the option would result in liability for the optionee under Section
16(b) of the Exchange Act, then such three-month period automatically shall be
extended until the tenth day following the last date upon which optionee has any
liability under Section 16(b) (but in no event after the Expiration Date). If an
optionee dies or becomes permanently and totally disabled (within the meaning of
Section 22(e)(3) of the Code) while employed by us or an Affiliate or within the
period that the option remains exercisable after Termination, options then held
(to the extent then exercisable) may be exercised, in whole or in part, by the
optionee, by the optionee's personal representative or by the person to whom the
option is transferred by devise or the laws of descent and distribution, at any
time within twelve months after the death or twelve months after the permanent
and total disability of the optionee or any longer period specified in the
Option Agreement or by amendment thereof (but in no event after the Expiration
Date). "Employment" includes service as a director or as a consultant. For
purposes of the 2002 Plan, an optionee's employment shall not be deemed to
terminate by reason of sick leave, military leave or other leave of absence
approved by the Administrator, if the period of any such leave does not exceed
90 days or, if longer, if the optionee's right to reemployment by us or any
Affiliate is guaranteed either contractually or by statute.
AMENDMENTS TO THE PLAN
The Board of Directors may at any time amend, alter, suspend or
discontinue the 2002 Plan. Without the consent of an optionee, no amendment,
alteration, suspension or discontinuance may adversely affect outstanding
options except to conform the 2002 Plan and ISOs granted under the 2002 Plan to
the requirements of federal or other tax laws relating to ISOs. No amendment,
alteration, suspension or discontinuance shall require Shareholder approval
unless (i) shareholder approval is required to preserve incentive stock option
treatment for federal income tax purposes or (ii) the Board of Directors
otherwise concludes that shareholder approval is advisable.
-62-
TAX TREATMENT OF THE OPTIONS
Under the Code, neither the grant nor the exercise of an ISO is a
taxable event to the optionee (except to the extent an optionee may be subject
to alternative minimum tax); rather, the optionee is subject to tax only upon
the sale of the Common Stock acquired upon exercise of the ISO. Upon such a
sale, the entire difference between the amount realized upon the sale and the
exercise price of the option will be taxable to the optionee. Subject to certain
holding period requirements, such difference will be taxed as a capital gain
rather than as ordinary income. Optionees who receive NQSOs will be subject to
taxation upon exercise of such options on the spread between the fair market
value of the Common Stock on the date of exercise and the exercise price of such
options. This spread is treated as ordinary income to the optionee, and we are
permitted to deduct as an employee expense a corresponding amount. NQSOs do not
give rise to a tax preference item subject to the alternative minimum tax.
EMPLOYMENT AGREEMENTS
The independent members of our board of directors have approved the
terms of each of the employment agreements described below.
In April 2005, we entered into an employment agreement with Mr. Darwin
Hu pursuant to which he will serve as our President and Chief Executive Officer.
The agreement provides for an initial term of three years, an annual salary to
Mr. Hu of $200,000 and an annual bonus to be determined by our board of
directors. In connection with the agreement, Mr. Hu was issued non-qualified
options to purchase up to 1,500,000 shares of our common stock at an exercise
price of $0.01 per share. One-third of the options vested immediately upon the
execution of the employment agreement, one-third vested on April 3, 2006 and
one-third shall vest on April 2, 2007. The agreement also provides for the
executive's ability to participate in our health insurance program. In the event
that Mr. Hu's employment is terminated other than with good cause, he will
receive a payment of the lesser of his then remaining salary due pursuant to the
employment agreement or six months of base salary at his then current annual
salary.
In April 2005, we entered into an employment agreement with Mr. William
Hawkins pursuant to which he will serve as our Chief Operating Officer. The
agreement provides an initial term of three years, an annual salary to Mr.
Hawkins of $160,000 and an annual bonus to be determined by our board of
directors. In connection with the agreement, Mr. Hawkins was issued
non-qualified options to purchase up to 1,000,000 shares of our common stock at
an exercise price of $0.01 per share. One-third of the options vested
immediately upon the execution of the employment agreement, one-third vested on
April 3, 2006 and one-third shall vest on April 2, 2007. The agreement also
provides for the executive's ability to participate in our health insurance
program. In the event that Mr. Hawkins' employment is terminated other than with
good cause, he will receive a payment of the lesser of his then remaining salary
due pursuant to the employment agreement or six months of base salary at his
then current annual salary.
In April 2005, we entered into an employment agreement with Mr. David
Clark pursuant to which he will serve as our Senior Vice President of Business
Development. The agreement provides for an initial term of three years, an
annual salary to Mr. Clark of $150,000 and an annual bonus to be determined by
our board of directors. In connection with the agreement, Mr. Clark was issued
non-qualified options to purchase up to 800,000 shares of our common stock at an
exercise price of $0.01 per share. One-third of the options vested immediately
upon the execution of the employment agreement, one-third vested on April 3,
2006 and one-third shall vest on April 2, 2007. The agreement also provides for
the executive's ability to participate in our health insurance program. In the
event that Mr. Clark's employment is terminated other than with good cause, he
will receive a payment of the lesser of his then remaining salary due pursuant
to the employment agreement or six months of base salary at his then current
annual salary.
-63-
FINANCIAL STATEMENTS
See Financial Statements beginning on Page F-1.
LEGAL MATTERS
The law firm of Richardson & Patel LLP, of New York, New York, is
passing on the validity of our common stock. A partner of the firm beneficially
owns 16,667 shares of our common stock, which shares were issued to such partner
in exchange for legal services rendered when such partner was employed by a
prior law firm.
EXPERTS
The financial statements for the years ended December 31, 2005 and 2004
included in this prospectus have been included in reliance on the report of
Clancy and Co., P.L.L.C., independent registered public accounting firm, given
on the authority of said firm as experts in auditing and accounting.
AVAILABLE INFORMATION
We file annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission. You may read and
copy any document we file at the Commission's public reference rooms at 100 F
Street, N.E., Washington, D.C. 20549. You may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. We
also make available free of charge our annual, quarterly and current reports,
proxy statements and other information upon request. To request such materials,
please contact William Hawkins at 1772 Technology Drive, San Jose, California
95110. Additionally, please note that we file our SEC reports electronically.
The SEC maintains an Internet site that contains reports, proxy and information
statements, and other information regarding issuers that file electronically
with the SEC at http://www.sec.gov. Our Internet address is
HTTP://WWW.SYSCANINC.COM. Our website and the information contained therein or
connected thereto are not incorporated into this prospectus.
We have filed with the Commission post-effective amendment #1 to a
registration statement (which contains this prospectus) on Form SB-2 under the
Securities Act relating to the common stock being offered pursuant to this
prospectus. This prospectus does not contain all of the information set forth in
the registration statement and the exhibits and schedules to the registration
statement. Please refer to the registration statement and its exhibits and
schedules for further information with respect to us and the common stock.
Statements contained in this prospectus as to the contents of any contract or
other document are not necessarily complete and, in each instance, we refer you
to the copy of that contract or document filed as an exhibit to the registration
statement. You may read and obtain a copy of the registration statement and its
exhibits and schedules from the SEC.
[remainder of page intentionally left blank]
-64-
SYSCAN IMAGING, INC.
Consolidated Balance Sheet as of March 31, 2006 F-1
Consolidated Statements of Operations for the
three months ended March 31, 2006 and 2005 F-2
Consolidated Statements of Cash Flows for the three months
ended March 31, 2006 and 2005 F-3
Condensed Notes to Consolidated Financial Statements F-4
Report of Independent Registered Public Accounting Firm -
Clancy and Co., P.L.L.C. F-11
Consolidated Balance Sheet as of December 31, 2005 F-12
Consolidated Statements of Operations for the years ended
December 31, 2005 and 2004 F-13
Consolidated Statement of Stockholders' Equity for the years ended
December 31, 2005 and 2004 F-14
Consolidated Statements of Cash Flows for the years ended
December 31, 2005 and 2004 F-15
Notes to Consolidated Financial Statements F-16
F-1
SYSCAN IMAGING, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
2006 2005
-------- --------
ASSETS (Unaudited) (Audited)
Current assets:
Cash and cash equivalents $ 1,040 $ 1,426
Trade receivables 1,715 1,285
Inventories 617 751
Prepaid expenses and other current assets 402 319
Due from related parties 1,954 2,403
-------- --------
Total current assets 5,728 6,184
Fixed assets, net 160 167
Goodwill 555 555
Long-term investment 998 998
-------- --------
Total assets $ 7,441 $ 7,904
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank line and letter of credit $ 1,013 $ 1,013
Trade payables and other accrued expenses 167 445
Accrued dividends on 5% convertible preferred stock 91 71
-------- --------
Total current liabilities 1,271 1,529
Other liabilities
Liability under derivative contracts 295 503
-------- --------
Total liabilities 1,566 2,032
Commitments and contingencies
5% Convertible preferred stock $.001 par value, 2,000 authorized, 596 468
16 shares issued and outstanding, liquidation value of $16,150
Stockholders' equity:
Common stock $.001par value, 50,000 authorized, 24,592 shares issued
and 24,092 shares outstanding (500 shares held in escrow) 24 24
Additional paid-in capital 29,565 29,373
Accumulated deficit (24,310) (23,993)
-------- --------
Total stockholders' equity 5,279 5,404
-------- --------
Total liabilities and stockholders' equity $ 7,444 $ 7,904
======== ========
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
F-2
SYSCAN IMAGING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
MARCH 31,
--------------------
2006 2005
-------- --------
(restated)
Net sales $ 2,438 $ 1,708
Cost of sales 1,616 1,104
-------- --------
Gross profit 822 604
Operating expenses:
Selling and marketing 281 152
General and administrative 337 296
Research and development 384 176
-------- --------
Total operating expenses 1,002 624
-------- --------
Operating loss (180) (20)
-------- --------
Other income (expense):
Fair value of warrants issued -- (290)
Preferred stock issuance costs -- (237)
Stock-based compensation cost - options (192) --
Change in fair value of derivative instruments 208 1,086
Other (5) (2)
-------- --------
Total other income (expense) 11 557
-------- --------
Net earnings (loss) before income taxes (169) 537
Provision (benefit) for income taxes --
1
-------- --------
Net earnings (loss) (169) 536
Dividend on 5% convertible preferred stock and
accretion of preferred stock redemption value (148) (27)
-------- --------
Net earnings (loss) available to common stockholders $ (317) $ 509
======== ========
Net earnings (loss) per common share - basic and diluted: $ (0.01) $ 0.02
======== ========
Weighted average common shares outstanding - basic and diluted 24,092 23,111
======== ========
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
F-3
SYSCAN IMAGING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
-------------------
2006 2005
------- -------
(restated)
OPERATING ACTIVITIES
Net earnings (loss) available to common stockholders $ (317) $ 509
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation expense 11 1
Stock-based compensation cost - options 192 --
Preferred stock issuance expenses paid by issuance of warrants -- 290
Change in fair value of derivative instruments (208) (1,086)
Dividend on 5% convertible preferred stock and accretion of
preferred stock redemption value 128 27
Changes in operating assets and liabilities:
Trade receivables (430) (361)
Inventories 134 (141)
Prepaid expenses and other current assets (83) 83
Accrued dividends on 5% convertible preferred stock 20 --
Trade payables and other current liabilities (278) (59)
------- -------
Cash used by operating activities (831) (737)
------- -------
INVESTING ACTIVITIES:
Capital expenditures (4) (112)
------- -------
Cash used by investing activities (4) (112)
------- -------
FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock -- 1,855
Advances/repayments - related parties 449 108
------- -------
Cash provided by financing activities 449 1,963
------- -------
Net increase (decrease) in cash and cash equivalents (386) 1,114
Cash and cash equivalents at beginning of period 1,426 687
------- -------
Cash and cash equivalents at end of period $ 1,040 $ 1,801
======= =======
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
F-4
SYSCAN IMAGING, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
NOTE 1 - BACKGROUND AND BASIS OF PRESENTATION
BACKGROUND
Syscan Imaging, Inc., (referred to herein as "Syscan" or the "Company")
develops, designs and delivers various imaging technology solutions to the
corporate/enterprise, small office-home office (SOHO), professional practice and
consumer markets. Syscan 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 scanners and fax machines. Syscan's
manufacturing is completed at an affiliated China-based facility, which provides
a low-cost manufacturing base for these industrial and consumer products. See
Note 3. Syscan's products are ideally suited for the mobile computer user who
needs to scan and/or fax documents while away from the office.
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of Syscan have been prepared in accordance with accounting principles generally
accepted in the United States for interim financial information and the
instructions to Form 10-QSB and Article 10 of Regulation S-X. Accordingly, they
do not include all information and disclosures necessary for a presentation of
our financial position, results of operations, and cash flows in conformity with
accounting principles generally accepted in the United States.
In the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows for all periods presented have
been made. Preparing financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities, revenue
and expenses. Actual results may differ from these estimates. The results of
operations for the period ended March 31, 2006 are not necessarily indicative of
the operating results that may be expected for the entire year ending December
31, 2006. The interim financial statements should be read in conjunction with
the financial statements in the Company's Annual Report on Form 10-KSB for the
year ended December 31, 2005, filed with the Securities and Exchange Commission
on April 17, 2006.
The consolidated financial statements include the accounts of Syscan
and its subsidiaries. All significant intercompany transactions and balances
have been eliminated.
Certain accounts have been reclassified to conform to the current
period's presentation.
NOTE 2 - RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") 123-R, SHARE-BASED
PAYMENT ("SFAS 123(R)"). SFAS 123(R) replaces SFAS 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, and supersedes APB Opinion 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES. SFAS 123(R) requires, among other things, that all
share-based payments to employees, including grants of stock options, be
measured based on their grant-date fair value and recognized as expense.
Effective January 1, 2006, Syscan adopted the fair value recognition provisions
of SFAS 123(R) using the modified prospective application method. Under this
transition method, compensation expense recognized for the quarter March 31,
F-5
SYSCAN IMAGING, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
2006, includes the applicable amounts of: (a) compensation expense of all
stock-based payments granted prior to, but not yet vested as of January 1, 2006
(based on the grant-date fair value estimated in accordance with the original
provisions of SFAS 123 and previously presented in pro forma footnote
disclosures), and (b) compensation expense for all stock-based payments granted
subsequent to January 1, 2006 (based on the grant-date fair value estimated in
accordance with the new provisions of SFAS 123(R)). Results for periods prior to
January 1, 2006, have not been restated. See Note 6.
On June 7, 2005, the FASB issued Statement 154, ACCOUNTING CHANGES AND
ERROR CORRECTIONS, A REPLACEMENT OF APB OPINION 20 AND FASB STATEMENT 3, ("SFAS
154"). SFAS 154 changes the requirements for the accounting for and reporting of
a change in accounting principle. Previously, most voluntary changes in
accounting principles were required recognition via a cumulative effect
adjustment within net income of the period of the change. SFAS 154 requires
retrospective application to prior periods' financial statements, unless it is
impracticable to determine either the period-specific effects or the cumulative
effect of the change. SFAS 154 is effective for accounting changes made in
fiscal years beginning after December 15, 2005. Syscan adopted SFAS 154 on
January 1, 2006. The adoption had an impact to the Company's consolidated
financial position, results of operations or cash flows. See Note 11.
In February 2006, the FASB issued SFAS 155, ACCOUNTING FOR CERTAIN
HYBRID FINANCIAL INSTRUMENTS - AN AMENDMENT OF FASB STATEMENTS 133 AND 140,
("SFAS 155"). SFAS will be effective for the Company beginning January 1, 2007.
The statement permits interests in hybrid financial instruments that contain an
embedded derivative that would otherwise require bifurcation, to be accounted
for as a single financial instrument at fair value, with changes in fair value
recognized in earnings. This election is permitted on an
instrument-by-instrument basis for all hybrid financial instruments held,
obtained, or issued as of the adoption date. The Company is currently assessing
the impact of the statement.
Other recent accounting pronouncements issued by the FASB (including
its Emerging Issues Task Force ("EITF")), the American Institute of Certified
Public Accountants ("AICPA"), and the SEC did not or are not believed by
management to have a material impact on the Company's present or future
financial statements.
NOTE 3 - RELATED PARTY TRANSACTIONS
The Company purchases the majority of its finished scanner imaging
products from the parent company of its majority stockholder, Syscan Technology
Holdings Limited ("STH"). See Note 5. The Company's Chairman and CEO, Darwin Hu,
was formerly the CEO of STH, and beneficially owns approximately 5.33% of the
issued and outstanding capital stock of STH.
During the three months ended March 31, 2006 and 2005, related party
purchases from entities that are wholly-owned subsidiaries of STH were
$1,409,000 and $1,266,000, respectively. The purchases were carried out in the
normal course of business.
The following table is a summary of unsecured, interest-free and
payable upon demand, amounts due from affiliated entities as of March 31, 2006
(IN THOUSANDS):
STH wholly-owed subsidiaries $1,508
STH 346
Syscan's majority stockholder 100
------------
$1,954
============
F-6
SYSCAN IMAGING, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
NOTE 4 - CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments that subject the Company to credit risk are cash
balances maintained in excess of federal depository insurance limits and trade
receivables.
CASH AND CASH EQUIVALENTS
The Company maintains cash balances at several banks. Accounts at each
institution are insured by the Federal Deposit Insurance Corporation ("FDIC") up
to $100,000. As of March 31, 2006, the Company had consolidated balances of
approximately $646,000, which were not guaranteed by FDIC. The Company has not
experienced any losses in such accounts and believes the exposure is minimal.
MAJOR CUSTOMERS AND TRADE RECEIVABLES
A relatively small number of customers account for a significant
percentage of the Company's sales. The percentage of sales derived from
significant customers is as follows:
THREE MONTHS ENDED
MARCH 31,
---------------------------
2006 2005
------------ -----------
Customer A 37% 51%
Customer B 36 25
Customer C 9 14
Trade receivables from these customers totaled $1,592,000 at March 31,
2006. As of March 31, 2006 all the Company's trade receivables were unsecured.
NOTE 5 - CONCENTRATION OF SUPPLIER RISK
The Company purchases substantially all its finished scanner imaging
products from one vendor that is also a subsidiary of the Company's majority
stockholder. See Note 3. If this vendor became 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 would be
materially adversely affected.
F-7
SYSCAN IMAGING, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
NOTE 6 - EMPLOYEE EQUITY INCENTIVE PLANS
STOCK-BASED COMPENSATION
Syscan has several stock-based employee compensation plans, which are more
fully described in the 2005 Annual Report on Form 10-KSB. Prior to January 1,
2006, Syscan accounted for awards granted under those plans following the
recognition and measurement principles of APB 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, and related interpretations. Accordingly, compensation expense was
recognized for awards granted at an exercise price less than fair market value
of the underlying common stock on the date of grant. There were no awards during
the three months ended March 31, 2005. Effective January 1, 2006, Syscan adopted
the fair value recognition provisions of SFAS 123(R). See Note 2. The amount of
stock-based compensation expense recognized during the three months ended March
31, 2006 was $192,000.
STOCK OPTIONS
The Company has 2,210,000 options granted under the 2002 Stock Option Plan
that are subject to stockholder approval at the next annual or special meeting
of stockholders, which has not been obtained as of the date of this quarterly
filing and are not included in the following table, which summarizes stock
option activity and related information through March 31, 2006:
WEIGHTED-
AVERAGE
EXERCISE
OPTIONS PRICE
---------- ----------
Outstanding at December 31, 2005 3,760,000 $ 0.03
Granted 300,000 0.01
Exercised -- --
Cancelled -- --
--------- --------
Outstanding at March 31, 2006 4,060,000 $ 0.03
========= ========
The following table summarizes all options outstanding and exercisable by
price range as of March 31, 2006:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- --------------------------------
WEIGHTED-AVERAGE
REMAINING WEIGHTED-AVERAGE WEIGHTED-AVERAGE
RANGE OF CONTRACTUAL EXERCISE EXERCISE
EXERCISE PRICES NUMBER LIFE (YEARS) PRICE NUMBER PRICE
OUTSTANDING EXERCISABLE
----------------- --------------- ---------------- ------------- --------------- -------------
$0.01 4,000,000 6.00 $0.01 1,333,333 $0.01
$0.90 - $2.50 60,000 0.75 $1.17 60,000 $1.17
NOTE 7 - BASIC AND DILUTED NET EARNINGS (LOSS) PER SHARE
Basic net earnings (loss) per share is computed by dividing net
earnings (loss) by the weighted average number of shares of common stock
outstanding during the period. Diluted net earnings (loss) per share is computed
by dividing net loss by the weighted average number of shares of common stock
and common stock equivalents outstanding during the period. Common stock
equivalents were not considered in calculating diluted net loss per common share
for the three months ended March 31, 2006 as their effect would be
anti-dilutive. Common stock equivalents were considered in calculating diluted
net earnings per common share for the three months ended March 31, 2005, but had
no impact on net earnings per share. As a result, for all periods presented, the
Company's basic and diluted net earnings (loss) per share is the same.
F-8
SYSCAN IMAGING, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
NOTE 8 - EQUITY
COMMON STOCK ACTIVITY
There was no common stock activity during the three months ended March
31, 2006.
PREFERRED STOCK ACTIVITY
There was no preferred stock activity during the three months ended
March 31, 2006.
PREFERRED STOCK DIVIDENDS
The Company's 5% Convertible Preferred Stock accrues cumulative
dividends at a rate of five percent per annum, payable semiannually on July 1
and January 1. Dividends are payable in cash, by accretion of the stated value
or in shares of common stock. Subject to certain terms and conditions, the
decision whether to accrete dividends to the stated value of the Preferred Stock
or to pay for dividends in cash or in shares of common stock, is at the
Company's discretion. To date, the Company has not paid any dividends. During
the three months ended March 31, 2006, preferred stock dividends were
approximately $20,000 and recorded as a non-operating expense on the Company's
statement of operations.
PREFERRED STOCK ACCOUNTING TREATMENT
Pursuant to SFAS 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES" ("SFAS 133") and EITF Abstract No. 00-19, "ACCOUNTING FOR
DERIVATIVE FINANCIAL INSTRUMENTS" ("EITF 00-19"), the Company's 5% Convertible
Preferred Stock and related warrants, are deemed derivative instruments as a
result of the embedded conversion feature. Accordingly, the fair value of these
derivative instruments has been recorded in the Company's consolidated balance
sheet as a liability with the corresponding amount as a discount to the 5%
Convertible Preferred Stock. The discount is being accreted from the issuance
date, March 15, 2005, through the redemption date, March 15, 2008, adjusted for
conversions. Accretion of the preferred stock redemption value for the three
months ended March 31, 2006 was approximately $128,000 and is disclosed as a
non-operating expense on the Company's consolidated statement of operations. The
decrease in the fair value of the liability for derivative contracts totaled
approximately $208,000 for the three months ended March 31, 2006 and is included
with other income (expense) in the consolidated statements of operations. See
Note 11.
The Company computes fair value of these derivatives using the
Black-Scholes valuation model. The Black-Scholes model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. The Company's derivative instruments have characteristics
significantly different from traded options, and the input assumptions used in
the model can materially affect the fair value estimate. The assumptions used in
this model to estimate fair value of each derivative instrument and the
resulting value of the derivative liability as of March 31, 2006 are as follows:
F-9
SYSCAN IMAGING, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
EMBEDDED
CONVERSION
FEATURE
ASSOCIATED WITH
THE 5%
CONVERTIBLE
WARRANTS WARRANTS PREFERRED STOCK
------------ ------------- -------------------
Exercise/conversion Price $ 1.00 $ 2.00 $ 1.00
Fair value of the Company's common stock $ 0.78 $ 0.78 $ 0.78
Expected life in years 3.0 3.0 3.0
Expected volatility 42% 42% 42%
Expected dividend yield 0% 0% 0%
Risk free interest rate 5% 5% 5%
Calculated fair value per share $ 0.46 $ 0.19 $ 0.46
NOTE 9 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company is committed under various non-cancelable operating leases
which extend through November 2011. Future minimum rental commitments are as
follows:
FUTURE
MINIMUM LEASE
YEAR ENDING PAYMENTS
MARCH 31,
---------------- ---------------
2007 $ 146
2008 100
2009 1
2010 1
2011 1
---------------
Total $249
===============
BANK LINE OF CREDIT
The Company has a line of credit to borrow up to $2,500,000, bearing
interest at the rate of prime (7.75% at March 31, 2006) plus 0.5% and secured by
all of the assets of the Company. Interest payments are due monthly and all
unpaid interest and principal is due in full on October 30, 2006. Upon certain
events of defaults as more fully described in the agreement, the default
variable interest rate increases to prime plus 5.5%. The Company had $1,487,000
available for use at March 31, 2006.
EMPLOYMENT AGREEMENTS
The Company maintains employment agreements with its executive officers
which extend through 2008. The agreements provide for a base salary, annual
bonus to be determined by the Board of Directors, termination payments, stock
options, non-competition provisions, and other terms and conditions of
employment. In addition, the Company maintains employment agreements with other
key employees with similar terms and conditions. As of March 31, 2006
termination payments totaling $352,000 remain in effect.
LITIGATION, CLAIMS AND ASSESSMENTS
On May 20, 2003, Syscan, Inc., the Company's wholly-owned subsidiary,
filed a lawsuit named SYSCAN, INC. V. PORTABLE PERIPHERAL CO., LTD. ("PPL"),
IMAGING RECOGNITION INTEGRATED SYSTEMS, INC., CARDREADER INC. AND TARGUS INC.
(Case No. C03-02367 VRW) in United States District Court, Northern District of
California. Syscan alleges claims against the above-mentioned parties for patent
infringement of patent nos. 6,054,707, 6,275,309 and 6,459,506, and unfair
competition. Syscan expects to continue the case unless a reasonable settlement
amount from the defendants or a licensing agreement to the satisfaction of
Syscan is entered.
F-10
SYSCAN IMAGING, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
Syscan is seeking: (1) a temporary restraining order, preliminary
injunction and permanent injunction against defendants, restraining defendants
from patent infringement and unfair competition; (2) treble damages due to
defendants' willful infringement; (3) punitive damages; (4) accounting of unjust
enrichment by defendants, resulting from defendants' unfair competition; and (5)
attorney's fees and costs.
The defendants are jointly represented by PPL's counsel. PPL has
initiated counterclaims against Syscan for patent invalidity. Syscan has not yet
been able to quantify its damage claim against PPL. Syscan intends to vigorously
pursue this claim and denies PPL's counterclaim of patent invalidity.
There was a hearing in the Northern District of California on October
14, 2005, in which arguments were presented to the court on the patent validity.
The court rendered a claim construction order on March 27, 2006 and the Company
has filed a motion for reconsideration for certain claim terms construction that
are believed to be erroneous. The motion has been set for hearing and oral
argument on June 29, 2006. The Company expects to continue this case unless a
reasonable settlement amount from defendants or a licensing agreement to the
satisfaction of the Company is entered.
The Company experiences routine litigation in the normal course of its
business and does not believe that any pending litigation will have a material
adverse effect on the Company's financial condition, results of operations or
cash flows.
CONVERTIBLE PREFERRED STOCK REGISTRATION RIGHTS AGREEMENT
In connection with the issuance of 5% Convertible Preferred Stock, the
Company executed a Registration Rights Agreement (the "Agreement") with the
purchasers thereof under which the Company agreed to register the common shares
underlying the 5% Convertible Preferred Stock and related warrants. The
Agreement provides for liquidated damages in the event the registration
statement is not maintained continuously effective for a period of two years
following the March 15, 2005 closing date. The liquidated damages total an
amount equal to one percent (pro-rated for partial months) of the purchase price
of the 5% Convertible Preferred Stock for each thirty day period effectiveness
of a registration statement is not maintained and two percent for each thirty
day period the registration statement ceases to remain effective. This
registration was declared effective by the SEC on July 7, 2005, and remains
effective as of the date of this filing. As such, there is no liquidated damages
liability recorded on the Company's balance sheet at March 31, 2006.
NOTE 10 - SEGMENT AND GEOGRAPHIC INFORMATION
SEGMENT INFORMATION
Syscan operates in one segment, the design, development and delivery of
various imaging technology solutions, most notably scanners, as defined by SFAS
131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION ("SFAS
131").
GEOGRAPHIC INFORMATION
During the three months March 31, 2006 and 2005, Syscan recorded net
sales throughout the U.S., Asia and Europe as determined by the final
destination of the product. The following table summarizes total net sales
attributable to significant countries (IN THOUSANDS):
THREE MONTHS MARCH 31,
-------------------------------
2006 2005
-------------------------------
U.S. $ 2,221 $
1,675
Asia 118 7
Europe and other 99 26
-------------------------------
$ 2,438 $ 1,708
===============================
F-11
SYSCAN IMAGING, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
Substantially all Syscan's identifiable assets are located in the U.S.
NOTE 11 - RESTATEMENT OF MARCH 31, 2005 INTERIM RESULTS FOR CORRECTION OF AN
ERROR
The financial statements for the three months ended March 31, 2005 have been
restated to account for the Company's 5% Convertible Preferred Stock pursuant to
SFAS 133 and EITF 00-19 (See Note 8) from the issuance date, March 15, 2005
through March 31, 2005. As a result, the fair value of these derivative
instruments has been recorded as a liability on the consolidated balance sheet
with the corresponding amount recorded as a discount to the 5% Convertible
Preferred Stock at March 31, 2005. The discount was accreted from the date of
issuance, March 15, 2005 through March 31, 2005. The following table presents
the impact of the restatement adjustments on the Company's previously reported
March 31, 2005 results on a condensed basis (IN THOUSANDS, EXCEPT PER SHARE
DATA):
AS OF OR FOR THE THREE MONTHS ENDED MARCH 31, 2005
------------------------ -- ----------------------------
AS PREVIOUSLY REPORTED AS RESTATED
------------------------- ----------------------------
STATEMENT OF OPERATIONS:
Net sales $1,708 $1,708
Gross profit 604 604
Total operating expenses 624 624
Total other income (expense) (2) 557
Net earnings (loss) available to common (22) 509
stockholders
BALANCE SHEET:
Total assets $7,366 $7,366
Total current liabilities 988 988
Total liabilities 988 1,756
Total stockholders' equity 6,378 5,610
STATEMENT OF CASHFLOWS:
Cash used by operating activities $(500) $(737)
Cash used by investing activities (112) (112)
Cash provided by financing activities 1,726 1,963
F-12
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Syscan Imaging, Inc.
We have audited the accompanying consolidated balance sheet of Syscan
Imaging, Inc. (a Delaware Corporation) and Subsidiaries (the "Company") as of
December 31, 2005, and the related consolidated statements of operations,
changes in stockholders' equity, and cash flows for the years ended December 31,
2005 and 2004. 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 the standards of the Public
Company Accounting Oversight Board (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 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 consolidated financial position of
the Company as of December 31, 2005, and the consolidated results of its
operations and its cash flows for the years ended December 31, 2005 and 2004, 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.
Scottsdale, Arizona
April 12, 2006
F-13
SYSCAN IMAGING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2005
ASSETS
--------------------------------------------------------------------------------
Current assets
Cash and cash equivalents $ 1,426,138
Trade receivables, net 1,284,766
Inventories 751,228
Prepayments, deposits and other current assets 319,270
Due from related parties 2,402,520
------------
Total current assets 6,183,922
Fixed assets, net 167,219
Other assets
Goodwill 555,485
Long-term investment 997,692
------------
Total other assets 1,553,177
------------
TOTAL ASSETS $ 7,904,318
============
LIABILITIES AND STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------
Current liabilities
Bank line of credit $ 833,036
Letter of credit 180,000
Trade payables 259,365
Other payables and accruals 185,699
Accrued dividends on 5% convertible preferred stock 71,155
------------
Total current liabilities 1,529,255
Other liabilities
Liability under derivative contracts 502,995
------------
Total liabilities 2,032,250
Commitments and contingencies
5% Convertible preferred stock, $0.001 par value,
2,000,000 shares authorized, 16,150 shares
issued and outstanding, liquidation
value of $16,150,000 467,699
Stockholders' equity
Common stock: $0.001 par value; 50,000,000
shares authorized; 24,592,092 shares issued
and 24,092,092 shares outstanding
[escrow = 500,000 shares] 24,092
Additional paid- in capital 29,372,859
Accumulated deficit (23,992,582)
------------
------------
Total stockholders' equity 5,404,369
------------
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,904,318
============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-14
SYSCAN IMAGING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31
2005 2004
------------ ------------
NET SALES $ 7,848,007 $ 6,057,821
COSTS OF SALES 4,988,618 4,167,140
------------ ------------
GROSS PROFIT 2,859,389 1,890,681
OPERATING EXPENSES
Selling and marketing expenses 951,990 745,557
General and administrative expenses 1,511,252 824,286
Research and development expenses 866,102 528,417
------------ ------------
Total operating expenses 3,329,344 2,098,260
------------ ------------
OPERATING LOSS (469,955) (207,579)
Other income (expense)
Stock-based compensation cost - options (2,812,000) --
Change in fair value of derivative instruments 1,112,005 --
Fair value of warrants issued (290,000) --
Preferred stock issuance costs (236,500) --
Interest income 23,642 5,966
Write back of provision for bad debts -- 41,178
Other income - exchange gain 4,673 8,613
Loss on disposal of fixed assets -- (15,623)
Interest expense (57,097) (11,621)
------------ ------------
Total other income (expense) (2,255,277) 28,513
------------ ------------
NET LOSS BEFORE PROVISION FOR INCOME TAXES (2,725,232) (179,066)
Provision for income taxes 3,232 800
------------ ------------
NET LOSS (2,728,464) (179,866)
Dividend on 5% convertible preferred stock and accretion of
preferred stock redemption value (545,435) --
------------ ------------
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS $ (3,273,899) $ (179,866)
============ ============
BASIC AND DILUTED LOSS PER SHARE $ (0.14) $ (0.01)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 23,279,389 22,599,454
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-15
SYSCAN IMAGING, INC. AND SUBISIDARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2005 AND 2004
COMMON COMMON ADDITIONAL
STOCK STOCK PAID IN ACCUMULATED
(SHARES) (AMOUNT) CAPITAL DEFICIT TOTAL
--------------------------------------------------------------------------
--------------------------------------------------------------------------
BALANCE - DECEMBER 31, 2003 21,082,935 21,083 $ 25,480,290 $(20,538,817) $ 4,962,556
--------------------------------------------------------------------------
Recapitalization to effect reverse
acquisition 2,027,580 2,027 (2,027) -- --
Net loss -- -- (179,866) (179,866)
--------------------------------------------------------------------------
BALANCE - DECEMBER 31, 2004 23,110,515 25,478,263 (20,718,683) 4,782,690
23,110
--------------------------------------------------------------------------
Common stock issued for Series A
preferred stock conversions 256,581 257 256,324 -- 256,581
Issuance of common stock for services
rendered 224,996 225 156,772 -- 156,997
Stock-based compensation cost - options
-- -- 2,812,000 -- 2,812,000
Fair value of warrants issued for
payment of preferred stock issuance
expenses -- -- 290,000 -- 290,000
Common stock issued for acquisition
of subsidiary, 1,000,000 shares
less 500,000 held in escrow
per agreement
500,000 500 379,500 -- 380,000
Net loss -- -- -- (3,273,899) (3,273,899)
--------------------------------------------------------------------------
BALANCE - DECEMBER 31, 2005 24,092,092 $ 24,092 $ 29,372,859 $(23,992,582) $ 5,404,369
============================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-16
SYSCAN IMAGING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(3,273,899) $ (179,866)
----------- -----------
Adjustments to reconcile net loss to net cash flows used in operating
activities
Depreciation 31,303 3,279
Loss on disposal of fixed assets -- 9,861
Common stock issued for services 156,997 --
Stock-based compensation cost - options 2,812,000 --
Fair value adjustment to liabilities under derivative contracts (1,112,005) --
Accretion of 5% convertible preferred stock redemption value 467,699 --
Preferred stock issuance expenses paid by issuance of warrants 290,000 --
Conversion of Series A preferred stock dividends for common stock 6,581 --
Write back of provision for doubtful accounts -- 41,178
Changes in assets and liabilities
(Increase) decrease trade receivables (156,893) 930,231
(Increase) decrease in inventories (254,548) (297,130)
(Increase) decrease in other current assets (101,130) (207,325)
Increase (decrease) in trade payables 197,060 36,661
Increase (decrease) in other payables and accruals 135,587 (362,898)
----------- -----------
Net cash flows used in operating activities (801,248) (26,009)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash acquired in reverse acquisition -- 28,288
Cash paid for subsidiary (97,896) --
Capital expenditures (169,588) (26,309)
----------- -----------
Net cash flows provided by (used in) investing activities (267,484) 1,979
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issuance of preferred stock 1,865,000 --
Advances under bank line of credit 150,000 700,000
Repayments under bank lines of credit (250,000) --
Advances under bank letters of credit 180,000 233,036
Advances / repayments - related party amounts (137,533) (1,241,425)
----------- -----------
Net cash flows provided by (used in) financing activities 1,807,467 (308,389)
----------- -----------
Increase (decrease) in cash and cash equivalents 738,735 (332,419)
Cash and cash equivalents, beginning of year 687,403 1,019,822
----------- -----------
----------- -----------
Cash and cash equivalents, end of year $ 1,426,138 $ 687,403
=========== ===========
Cash paid for:
Interest $ 57,097 $ 11,621
=========== ===========
Income taxes $ 3,232 $ 800
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-17
SYSCAN IMAGING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
2005 2004
---------- ----------
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued for services $ 156,997 --
Stock-based compensation cost - options $2,812,000 --
Proceeds from issuance of 5% Convertible Preferred Stock to Liability under
Derivative Contracts $1,865,000 --
Conversion of Series A Preferred Stock for Common Stock $ 256,581 --
Preferred stock issuance expenses paid by issuance of warrants $ 290,000 --
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-18
SYSCAN IMAGING, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
================================================================================
NOTE 1 - BACKGROUND, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
BACKGROUND
Syscan Imaging, Inc., (referred to herein as "Syscan" or the
"Company") develops, designs and delivers various imaging technology solutions
to the corporate/enterprise, small office-home office (SOHO), professional
practice and consumer markets. Syscan 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 scanners and fax machines. Syscan's
manufacturing is completed at an affiliated China-based facility, which provides
a low-cost manufacturing base for these industrial and consumer products.
Syscan's products are ideally suited for the mobile computer user who needs to
scan and/or fax documents while away from their office.
On April 2, 2004, Syscan Imaging, Inc. (formerly known as
"BankEngine Technologies, Inc." and referred to herein as the "Company")
completed its acquisition of 100% of the issued and outstanding capital stock of
Syscan, Inc. pursuant to a Share Exchange Agreement ("Agreement") dated March
29, 2004, in exchange for 20,859,459 shares of the Company's common stock.
Pursuant to the Agreement, the sole stockholder of Syscan, Inc., Syscan Imaging
Limited, received 18,773,514 post-reverse split shares of the Company's common
stock in exchange for all of the issued and outstanding capital stock of Syscan,
Inc. In connection with the issuance of the Company's common stock to Syscan
Imaging Limited, Syscan Imaging Limited beneficially became the owner of 81.2%
of the issued and outstanding securities of the Company. 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.
BASIS OF PRESENTATION
As a result of the reverse acquisition, the financial statements of the Company
become those of Syscan and thus, the consolidated financial statements of the
Company represent the activities of its 100% owned subsidiary, Syscan and the
Company's other wholly-owned subsidiaries. Although the Company is the legal
acquirer, Syscan will be treated as having acquired the Company for accounting
purposes and all of the operations reported represent the historical financial
statements of Syscan and the Company's other wholly-owned subsidiaries.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 inter-company
balances and transactions have been eliminated in consolidation.
F-19
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.
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 - Credit risk represents the accounting loss that
would be recognized at the reporting date if counterparties failed completely to
perform as contracted. Concentrations of credit risk (whether on or off balance
sheet) that arise from financial instruments exist for groups of customers or
counterparties when they have similar economic characteristics that would cause
their ability to meet contractual obligations to be similarly affected by
changes in economic or other conditions are described below.
Financial instruments that subject the Company to credit risk are cash balances
maintained in excess of federal depository insurance limits and accounts
receivable with no collateral or security. The Company maintains cash balances
at several banks. Accounts at each institution are insured by the Federal
Deposit Insurance Corporation ("FDIC") up to $100,000. As of December 31, 2005,
the Company had consolidated balances of approximately $920,000, which were not
guaranteed by FDIC. The Company has not experienced any losses in such accounts
and believes the exposure is minimal. As of December 31, 2005, all the Company's
receivables were unsecured.
Other potential areas that potentially expose the Company to a concentration of
credit risk are as follows:
GEOGRAPHIC SALES AND SIGNIFICANT CUSTOMERS - The Company operates in a single
industry segment that being 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:
2005 2004
--------------- --------------
United States 87% 96%
Asia Pacific 9% 2%
Europe and others 4% 2%
F-20
Sales to major customers, as a percentage of total revenues, are as follows:
2005 2004
---------------- ---------------
Customer A 33% 38%
Customer B 18% 16%
Customer C 16% 15%
Customer D 12% 9%
TRADE RECEIVABLES - The Company's customers are concentrated in the
industrial/consumer electronics channels and with major original equipment
manufacturers. As of December 31, 2005, the concentration was approximately
92.5% (3customers). The loss of any of these customers could have a material
adverse effect on the company results of operations, financial position and cash
flows.
SIGNIFICANT VENDORS - For the years ended December 31, 2005 and 2004, the
Company's purchases of finished scanner imaging products have primarily been
concentrated with one vendor that is a subsidiary of the Company's majority
stockholder. If this vendor was 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 would be materially adversely
affected.
PRODUCT SALES - The Company had 3 (2004: 4) different product categories in 2005
that each accounted for more than 10% of sales. If any of these products were to
become obsolete or unmarketable and the Company was unable to successfully
develop and market alternative products, 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. There
was no provision recorded at December 31, 2005.
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. Depreciation expense charged to operations in 2005 was $31,303 (2003:
$3,279).
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.
F-21
REVENUE RECOGNITION - Revenues consist of product sales 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
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
trade receivables, net of allowances for doubtful accounts and returns, to
ensure trade receivable are not overstated due to uncollectibility. The
allowances are calculated based on detailed review of certain individual
customer accounts 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. There was no allowance for doubtful
accounts at December 31, 2005, as management believes all of its trade
receivables are collectible.
RESEARCH AND DEVELOPMENT EXPENSES - Research and development costs are expensed
as incurred and amounted to $866,102 in 2005 (2004: $528,417).
ADVERTISING COSTS - Advertising costs are expensed as incurred and were
immaterial for both periods presented.
INCOME TAXES - The Company accounts for income taxes under the liability method
of accounting for income taxes in accordance with the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
Current income tax expense or benefit is the amount of income taxes expected to
be payable or refundable for the current year. A deferred income tax asset or
liability is computed for the expected future impact of differences between the
financial reporting and tax basis of assets and liabilities and for the expected
future tax benefit to be derived from tax credits and loss carryforwards.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not 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, but assessed
annually for indicators of impairment.
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 Company's 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.
F-22
EARNINGS PER SHARE - Basic earnings or loss per share ("EPS") is calculated
using net earnings or loss (numerator) divided by the weighted-average number of
shares outstanding (denominator) during the reporting period. Diluted EPS is
based on the weighted average number of common shares outstanding and dilutive
common stock equivalents. All EPS amounts in the financial statements are basic
EPS, as defined by SFAS No. 128, "Earnings Per Share." Diluted EPS does not
differ materially from basic EPS for all periods presented. Convertible
securities that could potentially dilute basic earnings per share in the future
such as options and warrants are not included in the computation of diluted EPS
because to do so would be antidilutive. All per share and per share information
are adjusted retroactively to reflect stock splits and changes in par value.
STOCK-BASED COMPENSATION - The Company accounts for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Compensation
cost for stock options, if any, is measured as the excess of the quoted market
price of the Company's stock at the date of grant over the amount an employee
must pay to acquire the stock. SFAS No.123, "Accounting for Stock-Based
Compensation," established accounting and disclosure requirements using a
fair-value-based method of accounting for stock-based employee compensation
plans. The Company has elected to remain on its current method of accounting as
described above, and has adopted the disclosure requirements of SFAS No. 123. In
December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, amending FASB No. 123, and "Accounting
for Stock-Based Compensation". This statement amends Statement No. 123 to
provide alternative methods of transition for an entity that voluntarily changes
to the fair value based method of accounting for stock-based employee
compensation. See Note 5 for a description of the stock-based compensation plan.
The weighted average fair value on the date of grant was $0.7695 for those
options granted in 2005. The fair value of each option grant is estimated on the
date of grant using the Black-Scholes Option pricing model with the following
weighted-average assumptions: dividend yield of 0%, expected volatility of 144%,
risk-free interest rate of 5%, and expected life of two years. For 2004, the
estimated fair value of the options on the date of grant using the Black-Scholes
option pricing model was based on a risk free interest rate of 1.91%, an
expected volatility of 100%, an expected life of 2 years and no dividend yield.
Had compensation expense for the Company's stock-based compensation plans been
determined under SFAS No. 123, based on the fair market value at the grant
dates, the Company's pro forma net earnings and pro forma net earnings per share
would have been reflected as follows for the years ended December 31:
2005 2004
-------------------------------
Net loss available to common
stockholders, as reported $(3,273,899) $ (179,866)
Less: stock-based compensation cost,
net of tax (2,992,045) (3,824)
-------------------------------
Pro forma net loss $(6,265,944) $ (183,690)
===============================
Basic and diluted net loss per share
As reported $ (0.14) $ (0.01)
Pro forma $ (0.27) $ (0.01)
RECENT ACCOUNTING PRONOUNCEMENTS - The Financial Accounting Standards Board
issued the following new accounting pronouncements:
In December 2004, the FASB issued SFAS No. 123 (Revised 2004) "Share-Based
Payment" ("SFAS No. 123R"). SFAS No. 123R addresses all forms of share-based
payment ("SBP") awards, including shares issued under employee stock purchase
plans, stock options, restricted stock and stock appreciation rights. SFAS No.
123R will require the Company to expense SBP awards with compensation cost for
SBP transactions measured at fair value. On March 29, 2005, the SEC issued Staff
Accounting Bulletin (SAB) 107 which expresses the views of the SEC regarding the
interaction between SFAS No. 123R and certain SEC rules and regulations and
provides the SEC's views regarding the valuation of share-based payment
arrangements for public companies. In April 2005, the SEC issued a release which
amends the compliance dates for SFAS No. 123R. We expect the adoption of SFAS
No. 123R and SAB 107 to have a material impact on the Company's financial
statements.
F-23
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections". SFAS No. 154 replaces APB Opinion No. 20 "Accounting Changes" and
SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements". SFAS
No. 154 requires retrospective application to prior periods' financial
statements of changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change. We do not expect the adoption of SFAS No. 154 to have any impact on the
Company's financial statements.
Reclassifications and adjustments - Certain prior period amounts have been
reclassified to conform to the current period presentation.
NOTE 2 - RELATED PARTY TRANSACTIONS
The Company purchases significantly all of its finished scanner imaging products
from the parent company of its majority stockholder, Syscan Technology Holdings
Limited ("STH"). The Company's Chairman and CEO, Darwin Hu, was formerly the CEO
of STH, and beneficially owns approximately 5.33% of the issued and outstanding
capital stock of STH.
The following is a summary of significant related party purchases from entities
that are wholly-owned subsidiaries of STH. The transactions were carried out in
the normal course of the Company's business.
2005 2004
---------------- -----------------
SYSCAN Intervision Limited,
a wholly-owned subsidiary of $4.915M $3.825M
STH (purchases)
================= ================
SYSCAN Optoelectronics Technology
(Shenzhen) Company Limited,
a wholly-owned subsidiary of -- $0.520M
STH (purchases)
================= ================
Amounts due from related parties are unsecured, interest-free and repayable on
demand and consisted of the following:
Due from STH $ 345,998
Due from Majority Stockholder
100,000
Due from various subsidiaries wholly-owned by STH 1,956,522
---------------
$ 2,402,520
===============
F-24
NOTE 3 - FIXED ASSETS, NET
Fixed assets consist of the following:
Computer and office equipment $ 62,286
Furniture and fixtures 2,565
Tooling and product design 137,018
---------------
201,869
Less: accumulated depreciation 34,650
---------------
$ 167,219
===============
NOTE 4 - LONG-TERM INVESTMENT
Long-term investment consists 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
management and directors are of the opinion that the underlying value of the
long-term investment is not less than the carrying value at December 31, 2005.
NOTE 5 - STOCKHOLDERS' EQUITY
COMMON STOCK
THE COMPANY HAD THE FOLLOWING EQUITY ACTIVITY DURING 2005:
o issuance of 224,996 shares of restricted common stock for investor
relations services valued at the fair market value of the services
rendered;
o issuance of 256,581 shares of common stock for the conversion of 2,500
shares of Series A preferred stock; and
o issuance of 1,000,000 shares of common stock for the acquisition of
Nanodisplay, Inc., 500,000 of which are held in escrow by the Company
pending certain milestones to be met per the acquisition agreement.
These shares have been accounted for as issued, but not outstanding.
(Note 8)
In connection with investor relations services rendered for common
stock issued, the Company overpaid a consultant $30,000. The Company also has
ended its relationship with the consultant due to non-performance. The
consultant has agreed to repay the $30,000 overpayment by December 1, 2006 and
return 75,000 shares. As of the date of issuance of these financial statements,
both remain outstanding. The shares are reflected as issued since they are
outstanding and no receivable has been set up for the repayment since it is
uncertain whether or not repayment will occur. Neither has a material effect on
the overall financial statement presentation.
THE COMPANY HAD THE FOLLOWING EQUITY ACTIVITY DURING 2004:
On April 2, 2004, the Company completed its acquisition of 100% of the
issued and outstanding capital stock of Syscan pursuant to an Agreement dated
March 29, 2004, in exchange for 20,859,459 shares of the Company's common stock.
As part of the reorganization of the Company on April 2, 2004, the common shares
of the Company were subject to a reverse split of 1 share for each 10 shares
outstanding.
F-25
Immediately prior to the Agreement, the Company had 2,027,580 shares of
common stock issued and outstanding. The acquisition was accounted for as
recapitalization of Syscan because the shareholders of Syscan controlled the
Company after the acquisition. Syscan was treated as the acquiring entity for
accounting purposes and the Company was the surviving entity for legal purposes.
The combined company is considered to be a continuation of the operations of
Syscan. The issued and outstanding common stock of Syscan prior to the
completion of the acquisition was restated to reflect the 21,082,935 common
stock issued by the Company.
PREFERRED STOCK
PREFERRED STOCK AUTHORIZED, RIGHTS AND PREFERENCES
The Company has authorized 2,000,000 shares of preferred stock,
$0.001 par value and the Company's Board of Directors has authorized 60,000
shares to be designated as Series A Preferred Stock. The Company filed a
certificate of designation for the 5% Convertible Preferred Stock with the
Delaware Secretary of State on March 15, 2005. This filing constituted an
amendment to the Company's certificate of incorporation, designating the terms,
rights and preferences of a new series of preferred stock of the Company as
follows:
PREFERRED STOCK CONVERSION RIGHTS
All or any portion of the stated value of Preferred Stock
outstanding may be converted into common stock at anytime by the purchasers. The
initial fixed conversion price of the preferred stock is $1.00 per share
("Conversion Price"). The Conversion Price is subject to anti-dilution
protection adjustments, on a full ratchet basis, at anytime that the preferred
stock is outstanding and prior to the effective date of the registration
statement required to be filed pursuant to the Registration Rights Agreement,
upon our issuance of additional shares of common stock, or securities
convertible into common stock, at a price that is less than the then Conversion
Price.
DIVIDENDS
The Preferred Stock accrues dividends at a rate of 5% per annum,
payable semiannually on July 1 and January 1 in cash, by accretion of the stated
value or in shares of common stock. Subject to certain terms and conditions, the
decision whether to accrete dividends to the stated value of the Preferred Stock
or to pay for dividends in cash or in shares of common stock, shall be at our
discretion.
REDEMPTION
On March 15, 2008 (the "Redemption Date"), all of the outstanding
Preferred Stock shall be redeemed for a per share redemption price equal to the
stated value on the Redemption Date (the "Redemption Price"). The Redemption
Price is payable by us in cash or in shares of common stock at our discretion
and shall be paid within five trading days after the Redemption Date. In the
event we elect to pay all or some of the Redemption Price in shares of common
stock, the shares of common stock to be delivered to the purchasers shall be
valued at 85% of the fifteen-day volume weighted average price of the common
stock on the Redemption Date.
RIGHT TO COMPEL CONVERSION
If, on any date after March 15, 2006, (A) the closing market price
per share of our common stock for ten (10) consecutive trading days equals at
least $4.00 (subject to adjustment for certain events), and (B) the average
reported daily trading volume during such ten-day period equals or exceeds
100,000 shares, then we shall have the right, at our option, to convert, all,
but not less than all, of the outstanding shares of Preferred Stock at the
Conversion Price; provided that there shall be an effective registration
statement covering the resale of the shares of common stock underlying the
preferred stock at all times during such 10-day period and during the 30-day
notice period to the holders thereof.
F-26
RESTRICTIONS ON CONVERSION OF PREFERRED STOCK
No holder of our Preferred Stock is entitled to receive shares upon
payment of dividends on the Preferred Stock, or upon conversion of the Preferred
Stock held by such holder if such receipt would cause such holder to be deemed
to beneficially own in excess of 4.999% of the outstanding shares of our common
stock on the date of issuance of such shares (such provision may be waived by
such holder upon 61 days prior written notice to us). In addition, no individual
holder is entitled to receive shares upon payment of dividends on the Preferred
Stock, or upon conversion of the Preferred Stock held by such holder if such
receipt would cause such holder to be deemed to beneficially own in excess of
9.999% of the outstanding shares of our common stock on the date of issuance of
such shares (such provision may be waived by such holder upon 61 days prior
written notice to us).
REGISTRATION RIGHTS
Pursuant to the terms of a Registration Rights Agreement between us
and the holders of the preferred stock, we were obligated to file a registration
statement on Form SB-2 registering the resale of shares of our common stock
issuable upon conversion of the preferred stock and exercise of the warrants. We
were required to file the registration statement on or before April 24, 2005 and
have the registration statement declared effective on or before July 13, 2005,
which we completed prior to that date. If the registration statement was not
declared effective within the timeframe described, or if the registration was
suspended other than as permitted in the Registration Rights Agreement, we are
obligated to pay each holder a fee equal to 1.0% of such holders purchase price
of the Preferred Stock during the first 90 days, and 2.0% for each 30 day period
thereafter (pro rated for partial periods), that such registration conditions
are not satisfied.
RIGHT OF FIRST REFUSAL
Subject to certain conditions, we have granted the holders a right
of first refusal, for a period until one (1) year from the effective date of the
registration statement required to be filed in connection with the purchase of
the Preferred Stock, to participate in any subsequent financing that we conduct.
VOTING RIGHTS
Holders of the Preferred Stock shall have no voting rights. However,
so long as any shares of Preferred Stock are outstanding, we shall not, without
the affirmative vote of the holders of a majority of the shares of the Preferred
Stock then outstanding, (a) alter or change adversely the powers, preferences or
rights given to the Preferred Stock or alter or amend the Series A Certificate
of Designation, (b) authorize or create any class of stock ranking as to
dividends or distribution of assets upon a liquidation senior to or otherwise
pari passu with the Preferred Stock, (c) amend our certificate or articles of
incorporation or other charter documents so as to affect adversely any rights of
the holders of the Preferred Stock, (d) increase the authorized number of shares
of Preferred Stock, or (e) enter into any agreement with respect to the
foregoing.
F-27
LIQUIDATION PREFERENCE
Upon our liquidation, dissolution or winding up, whether voluntary
or involuntary (a "Liquidation"), the holders of the Preferred Stock shall be
entitled to receive out of our assets, whether such assets are capital or
surplus, for each share of Preferred Stock an amount equal to the stated value
per share before any distribution or payment shall be made to the holders of any
of our securities with rights junior to the Preferred Stock, and if our assets
shall be insufficient to pay in full such amounts, then the entire assets to be
distributed to the holders of the Preferred Stock shall be distributed among
such holders ratably in accordance with the respective amounts that would be
payable on such shares if all amounts payable thereon were paid in full.
ANTI-DILUTION
Holders of the Preferred Stock are entitled to full ratchet
anti-dilution protection for issuances of common stock or common stock
equivalents, prior to the effective date of the registration statement covering
the resale of the shares of common stock underlying the Preferred Stock, at less
than the Conversion Price. Holders of Preferred Stock also have standard
anti-dilution protection for splits, dividends, subdivisions, distributions,
reclassifications and combinations of our common stock.
PREFERRED STOCK ISSUED
On March 15, 2005, the Company completed a private placement with a
group of accredited investors for the sale of 18,650 shares of the Company's 5%
Series A Convertible Preferred Stock along with warrants, expiring five years
from the date of issuance, to purchase additional shares of the Company's stock.
Pursuant to a registration rights agreement (Note 7), the Company has registered
the shares of common stock issuable upon conversion of the Preferred Stock and
upon exercise of the warrants with the Securities and Exchange Commission on
Form SB-2. The Company will not receive any proceeds from any sales made by the
selling stockholders but will pay the expenses of the offering. However, the
Company will receive the proceeds from the exercise of the warrants issued to
the selling stockholders if and when they are exercised. This registration was
declared effective by the SEC on July 7, 2005, and remains effective as of the
date of this filing.
Total common stock issuable upon conversions of the underlying the
preferred stock and warrants follows:
Series A Convertible Preferred stock(1) 1,865,000
Maximum accrued dividends on the shares
of Series A Convertible Preferred stock(1) 279,750
Warrants issued to purchasers in private placement(2) 932,500
Warrants issued to placement agent in the
private placement(1) 186,500
---------
3,263,750
=========
(1) convertible at $1.00 per share, subject to adjustment pursuant to the
anti-dilution provisions
(2) convertible at $2.00 per share, subject to adjustment pursuant to the
anti-dilution provisions
The 5% Series A Convertible Preferred Stock has no voting rights and
ranks ahead of the common stock of the Company upon liquidation of the Company
and with respect to the payment of dividends. The holders are entitled to
receive cumulative dividends at the rate per share of 5% per annum, payable
semi-annually on July 1 and January 1 from the date of original issuance through
the date of redemption or conversion thereof payable in cash, by accretion of
the stated value, or in shares of common stock, the form of which is at the
discretion of the Company.
The 5% Series A Convertible Preferred Stock was priced at $100 per
share and the Company received proceeds of $1,865,000 less offering costs and
expenses. Starboard Capital Markets, LLC, a NASD member firm, acted as placement
agent in the sale of the preferred stock for which it received $186,500 in
commissions and 186,500 warrants to purchase shares of the Company's common
stock at an exercise price equal to $1.00 per share. The fair value of these
warrants totaled $290,000 and such amount was charged to other income/(expense)
and credited to additional paid-in capital during 2005. The Company also
incurred cash expenses totaling $50,000.
F-28
The warrants must be exercised by the payment of cash, except if
there is no effective registration statement covering the resale of the shares
of common stock underlying the warrants, a holder may exercise their warrants on
a cashless basis. Holders of the warrants are entitled to full ratchet
anti-dilution protection for issuances of common stock or common stock
equivalents, prior to the effective date of the registration statement covering
the resale of the shares of common stock underlying the preferred stock, at less
than the exercise price of such warrants. Holders of warrants also have standard
anti-dilution protection for splits, dividends, subdivisions, distributions,
reclassifications and combinations of our common stock. None of the individual
holders of the warrants are entitled to exercise any such warrant held by them,
if such exercise would cause such holder to be deemed to beneficially own in
excess of 4.999% of the outstanding shares of the Company's common stock on the
date of issuance of such shares.
PREFERRED STOCK ACCOUNTING TREATMENT
Pursuant to SFAS 133 and EITF Abstract No. 00-19, the embedded
conversion feature associated with the 5% Convertible Preferred Stock and the
warrants issued to the 5% Convertible Preferred Stock purchasers have been
determined to be derivative instruments. Accordingly, the fair value of these
derivative instruments has been recorded as a liability on the consolidated
balance sheet with the corresponding amount recorded as a discount to the 5%
Convertible Preferred Stock. Such discount is being accreted from the date of
issuance, less conversions, to the redemption date of the 5% Convertible
Preferred Stock and totaled $467,699 for the period from the date of issuance
(March 15, 2005) to December 31, 2005. The change in the fair value of the
liability for derivative contracts totaled $(1,112,005) in 2005 and has been
credited to other income/(expense) in the consolidated statements of operations.
The Company computes fair value of these derivatives using the
Black-Scholes valuation model. The Black-Scholes model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. The Company's derivative instruments have characteristics
significantly different from traded options, and the input assumptions used in
the model can materially affect the fair value estimate. The assumptions used in
this model to estimate fair value of each derivative instrument and the
resulting value of the derivative liability as of December 31, 2005 are as
follows:
Embedded
conversion
feature
associated
with the 5%
Convertible
Warrants Warrants Preferred Stock
-------------------------------------------
Exercise/Conversion Price $ 1.00 2.00 $ 1.00
Fair Value of the Company's Common Stock $ 0.62 0.62 $ 0.62
Expected life in years 4.25 4.25 2.25
Expected volatility 99.77 99.7 % 99.77
Expected dividend yield 0.0 0.00 % 0.0
Risk free rate 4.0 4.0 % 4.0
Calculated fair value per share $ 0.46 0.37 0.31
F-29
The 5% Convertible Preferred Stock is Mandatorily Redeemable Preferred
Stock as defined by SFAS 150 "ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH
CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY", and would also qualify as
"Preferred Stocks Subject to Mandatory Redemption Requirements or Whose
Redemption is Outside the Control of the Issuer" as defined by Accounting Series
Release ("ASR") No. 268 - "REDEEMABLE PREFERRED STOCKS". The conversion feature
associated with the 5% Convertible Preferred Stock is not a non-substantive or
minimal feature and therefore the provisions of ASR No. 268 have been applied in
classifying the 5% Convertible Preferred Stock separate from stockholders'
equity. The Company must redeem any outstanding 5% Convertible Preferred Stock
on March 15, 2008.
PREFERRED STOCK CONVERSIONS
During the third quarter of 2005, $250,000 of Series A Convertible
Preferred Stock (2,500 shares) plus dividend shares of 6,581 were converted into
256,581 shares of common stock. As of December 31, 2005, total Series A 5%
Convertible Preferred Stock outstanding was $1,615,000 or 16,150 shares.
STOCK OPTIONS
BOARD OF DIRECTOR APPROVED STOCK OPTIONS SUBJECT TO SHAREHOLDER APPROVAL AND
OTHER OUTSTANDING OPTIONS
On April 2, 2004, the Company's Board of Directors authorized the
increase in the number of stock options available under the 2002 Stock Option
Plan (the "Plan") from 200,000 to 2,200,000. On July 21, 2004, the Company's
Board of Directors further authorized the increase in the number of stock
options available under the 2002 Stock Option Plan from 2,200,000 to 3,200,000.
The subject increases are subject to stockholder ratification at the next annual
or special meeting of stockholders, which has not been obtained as of the date
this filing.
On April 13, 2004, the Company's Board of Directors authorized an
aggregate of 1,700,000 options under the Plan to certain individuals at $1.50
per share, and expiring through April 2014. These options were canceled by the
Board of Directors on May 7, 2004. On July 21, 2004, the Company's Board of
Directors further authorized an aggregate of 2,200,000 options under the 2002
Stock Option Plan to be issued to certain individuals at $2.00 per share and
expiring through July 2014. During 2005, 220,000 options were canceled and the
Company granted 230,000 options to certain individuals at $0.65, representing
the fair market value on the date of grant and expiring ten years from the date
of grant, bringing total options outstanding to 2,210,000. The grant of the
above options is subject to stockholder ratification of the Company's increase
in the number of stock options available for grant under the Plan. The Company
plans to obtain stockholder approval at its annual or special meeting of
stockholders, which has not yet been scheduled as of the date of this filing.
As part of an employment agreement signed in December 2003, the employee
received 500,000 options to acquire shares of the company at $0.09 per share for
a term of 2 years. Following the restructuring of the Company on April 2, 2004,
and in connection with the 1-for-10 reverse split, the options were re-issued as
50,000 options to acquire shares at $0.90 per share. The Company also issued
100,000 options to its former legal counsel in consideration of services
rendered. The options are exercisable at $0.25 per share for a term expiring
December 2006. These options have been re-issued as 10,000 options to acquire
shares at $2.50 per share following the reverse split in April 2004.
On April 26, 2005, the Company entered into employment agreements with
its executive officers, the terms of which were previously approved by the
independent members of the Company's board of directors. The employment
agreements extend through 2008 and provide for a base salary, annual bonus to be
determined by the Board of Directors, termination payments, stock options,
non-competition provisions, and other terms and conditions of employment. In
addition, the Company maintains employment agreements with other key employees
with similar terms and conditions.
F-30
Total options granted under the agreements with the Company's executive
officers were 3,300,000, exercisable at $0.01 per share. One-third of the
options vest on the date of execution of the employment agreement, one-third
vest on April 3, 2006 and one-third vest on April 2, 2007.
Additionally, the Company issued an aggregate of 400,000 options
exercisable at $0.01 per share to two of its key employees in connection with
the execution of employment agreements with such individuals. One-third of such
options vest on April 26, 2005, one-third vest on April 3, 2006 and one-third
vest on April 2, 2007.
Information about options outstanding and exercisable at December 31,
2005 is summarized below:
----------------------- -------------- ------------------- ------------ -------------- --------------- ------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
RANGE OF EXERCISE NUMBER REMAINING WEIGHTED-AVERAGENUMBER REMAINING WEIGHTED-AVERAGE
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE EXERCISABLE CONTRACTUAL EXERCISE
(YEARS) PRICE LIFE (YEARS) PRICE
----------------------- -------------- ------------------- ------------ -------------- --------------- ------------
$0.01 3,700,000 1.25 $0.01 1,233,333 1.25 $0.01
----------------------- -------------- ------------------- ------------ -------------- --------------- ------------
$0.90-$2.50 60,000 1.00 $1.17 60,000 1.00 $1.17
NOTE 6- INCOME TAXES
Provision for income taxes for all periods presented represents the
minimum franchise tax due, $800 per annum, in the State of California for each
California entity of the consolidated entity and prior years franchise taxes
paid in 2005 for a total of $3,232 (2004: $800). 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.
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 $596,000 (2004: $142,000).
As of December 31, 2005, the Company has available net operating loss
carryforwards for federal and state income tax purposes of approximately
$6,716,000 and $600,000, which expire principally through 2025 and 2015,
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. 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.
THE FOLLOWING TABLE RECONCILES THE STATUTORY RATES TO THE COMPANY'S
EFFECTIVE RATE:
2005 2004
-------------- --------------
U.S. and California statutory rate (%) (43.0) (43.0)
Change in valuation allowance 43.0 43.0
-------------- --------------
- -
============== ==============
F-31
THE NET DEFERRED INCOME TAX ASSET CONSISTED OF THE FOLLOWING:
2005 2004
----------- -----------
Deferred tax assets
Federal net operating loss carryforwards $ 6,716,000 $ 5,633,000
State net operating loss carryforwards 600,000 1,080,000
Capitalized R&D Expenses 932,000 932,000
Tax credit carryforwards 708,000 708,000
----------- -----------
8,956,000 8,353,000
Less valuation allowance 8,949,000 8,353,000
----------- -----------
7,000 2,000
Deferred tax liability
Excess tax over book depreciation (7,000) (2,000)
----------- -----------
Net deferred income tax asset -- --
=========== ===========
NOTE 7- COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company is committed under various non-cancelable operating leases
which expire through November 2007. Future minimum rental commitments are as
follows: 2006-$139,000 and 2007-$135,000. Rent expense charged to operations was
approximately $131,000 for 2005 (2004: $99,000).
BANK LINE OF CREDIT AND LETTERS OF CREDIT
The Company has a line of credit to borrow up to $2,500,000, bearing
interest at the rate of prime (7.25% at December 31, 2005) plus 0.5% and secured
by all of the assets of the Company. Interest payments are due monthly and all
unpaid interest and principal is due in full on October 30, 2006. Upon certain
events of defaults as more fully described in the agreement, the default
variable interest rate increases to prime plus 5.5%. The Company had $1,486,964
available for use at December 31, 2005. The total amount available can never be
more than the face amount of all advances under line of credit and letters of
credit outstanding.
The Company issues letters of credit in the normal course of business.
The amount outstanding as of December 31, 2005, represents one letter of credit
for goods shipped to a related entity, expiring on January 24, 2006. The letter
of credit is secured by all goods and inventory covered by the document.
EMPLOYMENT AGREEMENTS
The Company maintains employment agreements with its executive officers
which extend through 2008. The agreements provide for a base salary, annual
bonus to be determined by the Board of Directors, termination payments, stock
options, non-competition provisions, and other terms and conditions of
employment. In addition, the Company maintains employment agreements with other
key employees with similar terms and conditions.
F-32
LITIGATION, CLAIMS AND ASSESSMENTS
On May 20, 2003, Syscan, Inc., the Company's wholly-owned subsidiary,
filed a lawsuit named SYSCAN, INC. V. PORTABLE PERIPHERAL CO., LTD. ("PPL"),
IMAGING RECOGNITION INTEGRATED SYSTEMS, INC., CARDREADER INC. AND TARGUS INC.
(Case No. C03-02367 VRW) in United States District Court, Northern District of
California. Syscan alleges claims against the above-mentioned parties for patent
infringement of patent nos. 6,054,707, 6,275,309 and 6,459,506, and unfair
competition. Syscan expects to continue the case unless a reasonable settlement
amount from the defendants or a licensing agreement to the satisfaction of
Syscan is entered.
Syscan is seeking: (1) a temporary restraining order, preliminary
injunction and permanent injunction against defendants, restraining defendants
from patent infringement and unfair competition; (2) treble damages due to
defendants' willful infringement; (3) punitive damages; (4) accounting of unjust
enrichment by defendants, resulting from defendants' unfair competition; and (5)
attorney's fees and costs.
The defendants are jointly represented by PPL's counsel. PPL has
initiated counterclaims against Syscan for patent invalidity. Syscan has not yet
been able to quantify its damage claim against PPL. Syscan intends to vigorously
pursue this claim and denies PPL's counterclaim of patent invalidity.
There was a hearing in the Northern District of California on October
14, 2005, in which arguments were presented to the court on the patent validity.
The court rendered a claim construction order on March 27, 2006 and the Company
has filed a motion for reconsideration for certain claim terms construction that
are believed to be erroneous. The motion has been set for hearing and oral
argument on June 29, 2006. The Company expects to continue this case unless a
reasonable settlement amount from defendants or a licensing agreement to the
satisfaction of the Company is entered.
The Company experiences routine litigation in the normal course of its
business and does not believe that any pending litigation will have a material
adverse effect on the Company's financial condition, results of operations or
cash flows.
REGISTRATION RIGHTS AGREEMENT
In connection with the issuance of 5% Convertible Preferred Stock (Note
5, the Company executed a Registration Rights Agreement (the "agreement") with
the purchasers thereof under which the Company agreed to register the common
shares underlying the 5% Convertible Preferred Stock and related warrants. The
agreement provides for liquidated damages in the event a registration statement
is not declared effective by the SEC within 120 days of the March 15, 2005
closing date or if the registration statement is not maintained continuously
effective for a period of two years following the closing date. The liquidated
damages total an amount equal to one percent (pro-rated for partial months) of
the purchase price of the 5% Convertible Preferred Stock for each thirty day
period effectiveness of a registration statement is not maintained and two
percent for each thirty day period the registration statement ceases to remain
effective.
NOTE 8 - BUSINESS ACQUISITION
During the fourth quarter of 2005, the Company acquired Nanodisplay,
Inc., ("Nano") through its wholly-owned subsidiary SysView Technology Inc.,
which focuses on introducing breakthrough price-performance technology in the
high definition television (HDTV) display market. The Company filed the
"Certificate of Merger" effective November 17, 2005. Nanodisplay is a leading
designer of liquid crystal on silicon (LCoS) HDTV technology and the Company
believes that the acquired technology and personnel will contribute
significantly to its efforts in the display market. The aggregate purchase price
was $477,896, including $97,896 of cash and 1,000,000 shares of common stock
(500,000 of which are being held in escrow pursuant to certain terms and
conditions as outlined in the agreement and have not been valued at the
acquisition date) valued at $380,000, which was determined based on the average
market price of the Company's common shares over the 1-week period before and
after the terms of the acquisition were agreed to. Nano's financial information
is incorporated into the consolidation of the Company effective November 17,
2005, the effective date of the merger.
F-33
The estimated fair values of the assets and liabilities acquired are
summarized as follows:
Fixed assets $ 4,948
Goodwill 541,992
------------------
Total assets acquired 546,940
Accounts payable and accrued liabilities 69,042
-------------------
Fair value of net assets acquired $ 477,898
===================
Due to the start-up nature of Nano's operations and its recent
formation (September 27, 2004), it had no sales from inception to the effective
date of the merger and through December 31, 2005. Unaudited pro forma financial
information based on the assumption that the acquisition took place as of
beginning of the period (January 1, 2005), with comparative information for the
immediately preceding period as though the acquisition had been completed at the
beginning of that period follows:
2005 2004
---------------------------------
Net sales $ $
7,848,007 6,057,821
Net loss $ $
3,349,357 280,414
Basic and diluted net loss per share $ $
0.14 0.01
F-34
--------------------------------------------------------------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT.
THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL TO SELL THESE SECURITIES. THE
INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE ON THE DATE OF THIS DOCUMENT.
ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY
KNOWN OR THAT ARE CURRENTLY DEEMED IMMATERIAL MAY ALSO
IMPAIR OUR BUSINESS OPERATIONS. THE RISKS AND
UNCERTAINTIES DESCRIBED IN THIS DOCUMENT AND OTHER RISKS
AND UNCERTAINTIES WHICH WE MAY FACE IN THE FUTURE WILL
HAVE A GREATER IMPACT ON THOSE WHO PURCHASE OUR COMMON
STOCK. THESE PURCHASERS WILL PURCHASE OUR COMMON STOCK AT
THE MARKET PRICE OR AT A PRIVATELY NEGOTIATED PRICE AND
WILL RUN THE RISK OF LOSING THEIR ENTIRE INVESTMENT.
SYSCAN IMAGING, INC.
3,013,750
SHARES OF COMMON STOCK
---------------
PROSPECTUS
----------------
_________________, 2006
--------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our certificate of incorporation provides that all our directors,
officers, employees and agents shall be entitled to be indemnified by us to the
fullest extent permitted under the Delaware General Corporation Law, provided
that they acted in good faith and that they reasoned their conduct or action was
in, or not opposed to, the best interest of our company.
Our Bylaws provide for indemnification of our officers, directors and
others who become a party to an action on our behalf by us to the fullest extent
not prohibited under the Delaware General Corporation Law. Further, we maintain
officer and director liability insurance.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth estimated expenses expected to be incurred
in connection with the issuance and distribution of the securities being
registered. All such expenses will be paid by us.
Securities and Exchange Commission Registration Fee........ $ 493.92
Printing and Engraving Expenses............................ $ 1,000
Accounting Fees and Expenses............................... $ 5,000
Legal Fees and Expenses.................................... $35,000
Blue Sky Qualification Fees and Expenses................... $ -0-
Miscellaneous.............................................. $ 506.08
TOTAL...................................................... $ 42,000.00
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
In the last three years, we sold the following unregistered securities:
On October 24, 2005, we issued an aggregate of 500,000 shares of our
common stock to the former shareholders of Nanodisplay, Inc., a California
corporation, in connection with an Agreement and Plan of Merger and
Reorganization by and among us, Nano Acquisition Corp. (our wholly-owned
subsidiary), Nanodisplay, Inc. and the shareholders of Nanodisplay, Inc.,
pursuant to which we acquired all of the issued and outstanding capital stock of
Nanodisplay, Inc.
On October 6, 2005, we issued 125,000 restricted shares to FG
Management Inc. for public/investor relations services.
During the period from July 1, 2005 through September 30, 2005, we
issued an aggregate of 99,996 restricted shares to Investor Relations Group for
public/investor relations services.
On March 15, 2005, we sold $1,865,000 of our Series A Convertible
Preferred Stock. Starboard Capital Markets, LLC, an NASD member firm, acted as
placement agent in the sale of the Preferred Stock, for which it received
$186,500 in commissions and 186,500 warrants to purchase shares of our common
stock, par value $.001 per share at an exercise price equal $1.00 per share.
II-1
In connection with the financing, we also issued to the purchasers
common stock purchase warrants to purchase up to an aggregate of 932,500 shares
of our Common Stock at an exercise price of $2.00 per share. The Warrants are
exercisable for a period of five years from the date of issuance. We have
agreed, pursuant to a registration rights agreement, to register the shares of
Common Stock issuable upon conversion of the Preferred Stock and upon exercise
of the Warrants with the Securities and Exchange Commission.
In July 2004, we granted options to purchase up to 2,200,000 shares of
our common stock to our officers, directors and employees pursuant to our 2002
Stock Option Plan. The options are exercisable for a period of ten years from
the date of grant at an exercise price of $2.00 per share. The options vest
equally over a four year period beginning in July 2005.
On April 2, 2004, in connection with our acquisition of Syscan, Inc.,
we issued an aggregate of 20,859,459 shares of its common stock to Syscan
Imaging Limited in exchange for 100% of the issued and outstanding common stock
of Syscan, Inc. Syscan Imaging Limited simultaneously transferred 2,085,945
shares of our common stock it was entitled to receive in connection with its
sale of Syscan, Inc. to Emerald Asset Advisors pursuant to a consulting
agreement entered into between the parties, as compensation for Emerald's
services in connection with the acquisition of Syscan, Inc. by us.
On April 2, 2004, we issued a total of 223,476 shares of our $0.001 par
value per share common stock at a value of $1.00 per share to Michael Xirinachs,
a former director of the company, upon the completion of the April 2, 2004,
Share Exchange Agreement acquisition: (i) as settlement of loans payable
totaling $23,476; and (ii) settlement in full of an employment contract signed
in December 2003 for 200,000 post-reverse split common shares.
In February 2004, we sold 50,000 shares of our common stock at purchase
price of $1.00 per share to one accredited investor. We used the proceeds from
this sale for working capital and general corporate purposes.
In December 2003, we issued 10,000 shares of our common stock to Paul
Ankorn (former director) and 10,000 shares of our common stock to William
Campbell (former director) as compensation for serving on our board of
directors.
Other than as specifically set forth above, all of the above offerings
and sales were deemed to be exempt under Section 4(2) of the Securities Act. No
advertising or general solicitation was employed in offering the securities. In
each instance, the offerings and sales were made to a limited number of persons,
who were either (i) accredited investors, (ii) business associates of ours,
(iii) our employees, or (iv) our executive officers or directors. In addition,
the transfer of such securities was restricted by us in accordance with the
requirements of the Securities Act. With respect to the issuances to accredited
investors, in addition to representations by them, we have made independent
determinations that they were accredited or sophisticated investors, capable of
analyzing the merits and risks of their investment, and that they understood the
speculative nature of their investment. With respect to our business associates,
employees and executive officers or directors, in addition to representations by
them, they were provided with detailed information and had access to all
material information about us, and we have made independent determinations that
they were capable of analyzing the merits and risks of their investment, and
that they understood the speculative nature of their investment. Furthermore,
all of the above-referenced persons were provided with access to our filings
with the Securities and Exchange Commission.
II-2
ITEM 27. EXHIBITS AND REPORTS ON FORM 8-K.
The following exhibits are filed with this registration statement.
--------------------------------------------------------------------------------
2.1 Share Exchange Agreement (previously filed as exhibit 99.1 on
Form 8-K dated April 19, 2004).
3.1 Certificate of Incorporation dated February 15, 2002 (previously
filed as exhibit 3.1 on Form 10-KSB dated March 31, 2005).
3.2 Certificate of Amendment to the Company's Certificate of
Incorporation dated March 19, 2004 (previously filed as exhibit
3.2 on Form 10-KSB dated March 31, 2005).
3.3 Certificate of Designation of Preferences, Rights and Limitations
of Series A Preferred Stock as filed with the Secretary of State
of the State of Delaware on March 15, 2005 (previously filed as
exhibit 10.4 on Form 8-K dated March 21, 2005)
3.4 Amended and Restated Bylaws (previously filed as exhibit 3.4 on
Form 10-KSB dated March 31, 2005).
5.1* Opinion of Richardson & Patel, LLP
10.1 Form of Convertible Preferred Stock and Common Stock Warrant
Purchase Agreement entered into by and between the Company and
the purchasers (previously filed as exhibit 10.1 on Form 8-K
dated March 21, 2005).
10.2 Form of Common Stock Purchase Warrant (previously filed as
exhibit 10.2 on Form 8-K dated March 21, 2005).
10.3 Form of Registration Rights Agreement (previously filed as
exhibit 10.3 on Form 8-K dated March 21, 2005).
10.4 2002 Amended and Restated Stock Option Plan (previously filed as
exhibit 10.4 on Form 10-KSB dated March 31, 2005).
10.5 Employment Agreement entered between the Company and Darwin Hu on
April 26, 2005 (previously filed as exhibit 10.5 on Form 8-K
dated May 2, 2005).
10.6 Employment Agreement entered between the Company and William
Hawkins on April 26, 2005 (previously filed as exhibit 10.6 on
Form 8-K dated May 2, 2005).
10.7 Employment Agreement entered between the Company and David Clark
on April 26, 2005 (previously filed as exhibit 10.7 on Form 8-K
dated May 2, 2005). 2.1 Share Exchange Agreement (previously
filed as exhibit 99.1 on Form 8-K dated April 19, 2004).
14 Code of Ethics adopted by the Company's board of directors on
March 28, 2005 (previously filed as exhibit 14 on Form 10-KSB
dated March 31, 2005).
II-3
21 Subsidiaries of the Company (previously filed as exhibit 21 on
Form 10-KSB dated March 31, 2005).
23.1 Consent of Richardson & Patel, LLP (contained in Exhibit 5.1)
23.2* Consent of Clancy and Co., P.L.L.C.
--------------------------------------------------------------------------------
* Filed herewith
ITEM 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Sections 10(a)(3) of the Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement.
Notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate,
the changes in volume and price represent no more than 20 percent
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective
registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement;
(2) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be a
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
(4) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of
the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the small business
issuer of expenses incurred or paid by a director, officer or
controlling person of the small business issuer in the successful
defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
securities being registered, the small business issuer will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-4
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of San
Jose, State of California on June 6, 2006.
SYSCAN IMAGING, INC.
/s/ Darwin Hu
By: ---------------
Name: Darwin Hu
Title: Chairman of the Board
and Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 1 to Registration Statement on Form SB-2 has been signed by the
following persons in the capacities and on the dates stated.
--------------------------- ----------------------------------- ----------------
Person Capacity Date
--------------------------- ----------------------------------- ----------------
/S/ DARWIN HU Chairman and Chief Executive June 6, 2006
------------- Officer
Darwin Hu
/S/ WILLIAM HAWKINS Chief Operating Officer, June 6, 2006
------------------- Principal Accounting Officer,
William Hawkins Acting Chief Financial Officer
and Secretary
/S/ DAVID CLARK Senior Vice President of Business June 6, 2006
--------------- Development and Director
David Clark
_*____________ Director June 6, 2006
--------------
Peter Mor
_*____________ Director June 6, 2006
--------------
Lawrence Liang
*By: DARWIN HU
Darwin Hu, attorney-in fact