-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OFwFCr++G44SKvlS+F2DomaHv6TcpZD0OI2mZFpRnkD+DVeHPc+L2fMpRbp+6Lv5 saeLA4CmQMjXnma8W/kTjw== 0000909012-07-000634.txt : 20070403 0000909012-07-000634.hdr.sgml : 20070403 20070403153619 ACCESSION NUMBER: 0000909012-07-000634 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20061231 FILED AS OF DATE: 20070403 DATE AS OF CHANGE: 20070403 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SYSVIEW TECHNOLOGY, INC. CENTRAL INDEX KEY: 0001096857 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 900251401 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-27773 FILM NUMBER: 07744043 BUSINESS ADDRESS: STREET 1: 1772 TECHNOLOGY DRIVE CITY: SAN JOSE STATE: CA ZIP: 95110 BUSINESS PHONE: 408-436-9888 MAIL ADDRESS: STREET 1: 1772 TECHNOLOGY DRIVE CITY: SAN JOSE STATE: CA ZIP: 95110 FORMER COMPANY: FORMER CONFORMED NAME: SYSCAN IMAGING INC DATE OF NAME CHANGE: 20040406 FORMER COMPANY: FORMER CONFORMED NAME: BANKENGINE TECHNOLOGIES INC DATE OF NAME CHANGE: 20010321 FORMER COMPANY: FORMER CONFORMED NAME: ZEE INC DATE OF NAME CHANGE: 19991014 10KSB 1 t303316.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB |X| ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006 |_| TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER: 000-25839 SYSVIEW TECHNOLOGY, INC. (Name of small business issuer in its charter) DELAWARE 59-3134518 (State or other jurisdiction of (I.R.S.Employer incorporation or organization) Identification Number) 1772 TECHNOLOGY DRIVE SAN JOSE, CALIFORNIA 95110 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, ZIP CODE) 408-436-9888 EXT. 207 (ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE) Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $0.001 PER SHARE Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. |X| Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes |_| No |X| Issuer's revenues for its most recent fiscal year were $12,469,000. The aggregate market value of the issuer's Common Stock held by non-affiliates (5,368,578 shares) was approximately $4,026,434, based on the average closing bid and ask price of $0.75 for the Common Stock on March 15, 2007. As of March 30, 2007, there were outstanding 21,542,092 shares of the issuer's Common Stock, par value $0.001. Transitional Small Business Disclosure Format (check one): Yes |_| No |X| - -------------------------------------------------------------------------------- DOCUMENTS INCORPORATED BY REFERENCE None FORWARD LOOKING STATEMENTS Some of the statements under "Management's Discussion and Analysis of Financial Condition or Plan of Operations," and "Description of Business" in this Annual Report on Form 10-KSB are forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as "may," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "proposed," "intended," or "continue" or the negative of these terms or other comparable terminology. You should read statements that contain these words carefully, because they discuss our expectations about our future operating results or our future financial condition or state other "forward-looking" information. There may be events in the future that we are not able to accurately predict or control. Before you invest in our securities, you should be aware that the occurrence of any of the events described in this Annual Report could substantially harm our business, results of operations and financial condition, and that upon the occurrence of any of these events, the trading price of our securities could decline and you could lose all or part of your investment. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, growth rates, levels of activity, performance or achievements. We are under no duty to update any of the forward-looking statements after the date of this Annual Report to conform these statements to actual results. -2- PART I ITEM 1. DESCRIPTION OF BUSINESS OVERVIEW Sysview Technology, Inc. (referred to herein as "we", "us", "our", "Sysview" or "Company"), a Delaware corporation, develops, designs and delivers various imaging technology solutions to all types and sizes of enterprises including governmental agencies, large corporations, small corporations, small office-home offices ("SOHO"), professional practices as well as consumers (referred to herein collectively as "Enterprises") . We are a market-leader in providing USB-powered scanning solutions to a wide variety of industries and market applications. Our patented and proprietary page-imaging devices facilitate the way information is stored, shared and managed in both business and personal use. In addition, Sysview is involved in the research and development of certain technologies related to the field of high definition ("HD") display. While currently all of our revenues are derived from our image scanning products, we recognize HD display as a significant future market opportunity for us. Syscan, Inc., our wholly-owned subsidiary, was incorporated in California in 1995 to develop and manufacture a new generation of contact image sensors ("CIS") that are complementary metal-oxide-silicon ("CMOS") imaging sensor devices. During the late 1990s, we established many technical milestones and were granted numerous patents for our linear imaging technology. Our patented CIS and mobile imaging scanner technology provides high quality images at extremely low power consumption levels allowing us to deliver compact scanners in a form ideally suited for laptop or desktop computer users who need a small light weight device to scan or fax documents. In 2002, we began investigating potential transfer of areas of our image scanning technology and know-how to the enhancement of certain HD display technologies. Since then we have expanded our HD display initiative through acquisition, exclusive licensing and the addition of key personnel. Our business model was developed and continues to evolve around intellectual property ("IP") driven products sold primarily to original equipment manufacturers ("OEM"), private label brands and value added resellers ("VAR"). Our image scanning products can be found in a variety of applications, including but not limited, to the following: o Document and information management; o Identification card scanners; o Passport security scanners; o Bank note and check verification; o Business card readers; o Barcode scanning; and o Optical mark readers used in lottery terminals. In the past ten years we have grown to be one of the largest manufacturers of page-fed scanning devices worldwide and we sell to several major brand companies including VISIONEER, PENTAX, CARDSCAN, AMBIR TECHNOLOGY, DIGIMARC, BANKSERV and OMRON. Our vertically integrated design and manufacturing business model allows our customers to introduce new products to the market quickly and efficiently. CURRENT MARKET OPPORTUNITIES, STRATEGIES AND PRODUCTS In the past decade, information management, including how information is retrieved, stored, shared and disseminated, has become increasingly important, and in many instances critical, for all Enterprises worldwide. Confronted by exponentially increasing information through more and more channels, Enterprises employ a variety of resources for managing information. Our document/image-capture products can help transform business-critical information from paper, faxed and electronic forms, documents and transactions into a manageable digital format. Our solutions can manage the processing of millions of forms, documents and transactions annually, converting their content into information that is usable in database, document, content and other information management systems. We believe that our document/image-capture products enable organizations to reduce operating costs, obtain higher information accuracy rates and speed processing times. -3- Our document/image-capture solutions offer Enterprises a cost-effective and accurate alternative to manual data entry, a traditional approach that is typically a labor intensive, time consuming and costly method of managing the input of information into the Enterprise. Organizations can utilize our solutions to capture and store information electronically, and extract the meaningful content or data in a way that preserves the data's accuracy. As a result, we believe there is significant growth opportunity for our solutions to help simplify the way Enterprises manage information as well as other business applications. Currently, all of our revenue is generated from sales of our document/image-capture products and is as follows (IN THOUSANDS): YEAR OVER YEAR GROWTH ----------------------------- YEAR ENDED NET REVENUE DOLLARS PERCENTAGE - --------------------------------------------------------------------------- December 31, 2006 $ 12,469 $4,621 59% December 31, 2005 7,848 1,790 30 December 31, 2004 6,058 na na Our document/image-capture product revenue has experienced quarter over quarter increases during the last 22 out of the 24 most recent quarters. We offer several different image scanning product groups to meet the diverse needs of our customers. Although all our products are based on the same patented and proprietary technology, our product groups vary from one another by features and configurations. Our most popular product groups include our DocketPORT and TravelScan line of products. DOCKETPORT Our DocketPORT product group is our fourth generation of compact document/image-capture devices. Specific features of this product group include: o High Speed-Universal Serial Bus ("USB") powered; o Several models capable of true duplex scans (both sides of a two-sided document at once); o 600 dots per inch ("DPI") optical resolution; o Minimal power consumption; o Extremely lightweight; o Restriction of Hazardous Substance ("RoHS") and Waste Electrical and Electronic Equipment ("WEEE") compliant; o Internal 48-bit analog-to-digital conversion for three-color channels (red, green and blue); o No power adapter required; and o Scans any size document from business cards to legal size documents. TRAVELSCAN Our TravelScan products are the ideal document management devices for busy professionals and executives. These lightweight and convenient scanners are powered using only the USB port, an exclusive Syscan patent. Our TravelScan products can be conveniently carried alongside laptops and requires a minimal footprint in your work area. These products enable users to fax, email and organize all business documents with the "touch of a button." Specific features include: o Full-Speed USB powered; o 600 dots per inch ("DPI") optical resolution; o Minimal power consumption; o Extremely lightweight; and o RoHS and WEEE compliant. SALES, MARKETING AND DISTRIBUTION Our sales and marketing efforts are designed to serve our direct customer base, rather than the end user of our products. We market and sell our products both domestically and internationally through a global network of more than 40 independent distributors and channel partners in North America, Europe and Asia. We select these independent entities based on their ability to provide effective field sales, marketing communications and technical support to our targeted markets. In addition, our products are sold through several retail and web-based channels. -4- COMPETITION We had several direct competitors to our document/image-capture products, in major worldwide markets (North America, Europe and Asia) during the year ended December 31, 2006. These competitors, in general, pay us a royalty fee for the use of our intellectual property. To maintain our competitive advantage we maintain a high level of investment in research and development and focus on factory efficiency allowing us to provide superior time-to-market product cycles with the goal of manufacturing and delivering products to customers virtually defect free. We believe that our competitive strengths include: o Patented and proprietary-based products; o Favorable and well established reputation, experience and presence in the USB-powered document/image-capture devices market; o Superior customer relationships that allow us to identify and work closely with customers to meet market demands; o Vertical integration design and manufacturing business model which reduces the time to introduce a new or improved product to the market; o Broad distribution channels; and o Product quality and performance. MANUFACTURING AND RAW MATERIAL SUPPLY MANUFACTURING. We purchase the majority of our finished scanner imaging products from Syscan Lab Limited ("SLL"), a wholly-owned subsidiary of Syscan Technology Holdings Limited ("STH"), the parent company of our majority stockholder. Our Chairman and CEO, Darwin Hu, was formerly the CEO of STH. He resigned from STH effective December 2004. See Part III, "Item 12: Certain Relationships and Related Transactions, and Director Independence." We purposely limit the manufacturing of our product to SLL as this gives us better control over both the quality of our product and the price we pay for the product. We have established a pricing agreement with SLL, which is negotiated periodically. From the early stages of product design and development, Sysview engineers worked closely with SLL's production team to ensure optimal and cost effective manufacturing. The strategy of using only one subcontract manufacturer could be disadvantageous if SLL becomes unable or unwilling to provide products to us in a timely manner. If this happens, we estimate it would take us approximately six months to establish a new subcontract manufacturer. To mitigate this exposure, we provide most of the critical components and tooling required to manufacture our products. RAW MATERIALS. SLL purchases the raw materials, parts and components with the exception of the critical components as discussed above, which we provide. A limited number of components included in our products are obtained from a single supplier or a small group of suppliers. We have some controller chips that are sole-sourced, as they are specialized devices that can effectively control the cost of our product. We do not have any long-term or exclusive purchase commitments with any of our suppliers. Where possible, we work with secondary suppliers to qualify additional sources of supply. To reduce the risk associated with using a sole supplier, we attempt to maintain strategic inventories of these sole-sourced components. To date we have been able to obtain adequate supplies of the components used in the production of our documents/image-capture products in a timely manner from existing sources. If in the future we are unable to obtain sufficient quantities of required materials, components or subassemblies, or if such items do not meet our quality standards, delays or reductions in product shipments could occur which could harm our business, financial condition and results of operations. -5- CUSTOMERS A small number of customers have historically accounted for a substantial portion of our net revenue. Sales to our four largest customers represented 81% and 79% of our net sales during the years ended December 31, 2006 and 2005, respectively. See Note 1 included in Part II, "Item 7: Financial Statements." We expect that our largest customers will continue to account for a substantial portion of our net sales for the foreseeable future. Our largest customer rankings and respective contributions to our net sales have varied and will likely continue to vary from period to period. We typically sell products pursuant to purchase orders that customers can generally defer without incurring a significant penalty. Currently we do not have agreements with any of our key customers that contain long-term commitments to purchase specified volumes of our products. We believe that maintaining and continuing to strengthen customer relationships will play an important role in maintaining our leading position in the document/image-capture market. INTELLECTUAL PROPERTY While the success of our business depends more on such factors as our employees' technical expertise and innovative skills, the success of our business also relies on our ability to protect our proprietary technology. Accordingly, we seek to protect our intellectual property rights in a variety of ways. Obtaining patents on our innovative technologies is one such way. As of December 31, 2006, we have fourteen patents issued in the United States and five patents issued in Taiwan. Additionally, we have five patents currently pending with the United States Patent and Trademark Office, four relate to our HD display technology and one relates to our document/image-capture technology. Our patents do not begin to expire until 2017. As of December 31, 2006, we had five domestic patent applications pending, four relating to our HD display technologies and one relating to our document/image scanning technology. Another way we seek to protect our proprietary technology and other proprietary rights is by requiring our employees and contractors to execute confidentiality and invention assignment agreements in order to protect our proprietary technology and other proprietary rights. We also rely on employee and third-party nondisclosure agreements and other intellectual property protection methods, including proprietary know-how, to protect our confidential information and our other intellectual property. COMPLIANCE WITH ENVIRONMENTAL, HEALTH, AND SAFETY REGULATIONS In July 2006, the European Union ("EU") began requiring all electronics products sold within the EU to be RoHS compliant pursuant to the European Directive 2002/95/EC. Beginning in January 2006, all our products are RoHS compliant. RESEARCH AND DEVELOPMENT As of December 31, 2006, our research and development staff consisted of twenty-five employees and full-time contractors. Seventeen are located in the United States and eight are located internationally. Our international workforce facilitates our global focus and is generally less costly to maintain than our domestic workforce. We have historically devoted a significant portion of our financial resources to research and development programs, both to our current products and our future products, and we expect to continue to allocate significant resources to these efforts. The majority of our research and development efforts are focused on our future HD display products. Our research and development expenses for the years ended December 31, 2006 and 2005 were $3,084,000 and $952,000, respectively. To date, all research and development costs have been expensed as incurred. 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 customers. We intend to continue to develop our technology and innovative products to meet customer demands. FUTURE MARKET OPPORTUNITIES, STRATEGIES AND PRODUCTS We intend to leverage our experience, expertise and current technology in the document/image-capture market by expanding our business to the HD display market, which is deemed to be a much larger market. The following discussion explains why we think expanding our business into the HD display market has opportunity for us. -6- Until the year 2001, home television technology did not change much and relied almost exclusively on Cathode Ray Tube ("CRT") technology. This technology provided good quality pictures, given the signal limitations of broadcasters and cable operators. But the weight and size of the technology limited the screen size to approximately 40 inches. Given the relatively new introduction of high definition television ("HDTV") and content, both consumer and commercial markets have dramatically increased the demand for larger HD capable screen sizes. In response to this demand, various types of liquid crystal display ("LCD"), plasma display panel ("PDP"), rear projection digital light processing ("DLP") and liquid crystal on silicon ("LCOS") models have been introduced to the marketplace. These technologies have addressed the larger screen size issue and in some cases achieved HDTV quality standards, but current models continue to be cost prohibitive for the average consumer. We recognize that the television display market is in the process of a major transition driven by the increased availability of HD content and consumer demand for larger screen sizes. We believe the transition has started and will continue into the foreseeable future. Currently, there are approximately 30 companies (tier one and tier two suppliers) competing in the large screen TV market worldwide, each is faced with the challenge of delivering large screen HD products at competitive prices all while generating a profit. Current market offerings consist of flat panel technologies LCD and PDP and two forms of rear projection technology LCOS and DLP. The prevailing technologies will be the ones that crack the price to size and performance ratio. We believe that flat panel LCD and rear projection LCOS technologies will prevail. LCD pricing continues to fall and has advantages over PDP, although we believe that neither has the ability in the foreseeable future to achieve the low manufacturing costs of rear projection models. There are arguments for both LCOS and DLP as potential prevailing technology in the rear projection category. We believe that our proprietary LCOS HD display components currently under development will meet and eventually exceed the current quality standards of HD. More importantly it is our goal to deliver the critical components at a significantly reduced cost. We are in the late stage development of our LCOS HD products. We hope to achieve superior visual performance and resolution at a significant value in large screen format HD displays at a significant value and use this technology to further develop derivative products. EMPLOYEES As of December 31, 2006, we employed 36 people on a full-time basis, 23 in the United States and 13 internationally. Of the total, 25 were in product research and development, 4 in sales and marketing and 7 in general 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. 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 room at 100 F Street, N.E., Washington, D.C. 20549. 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 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 1772 Technology Drive San Jose, California 95110 or call 1-408-436-9888 ext. 207. Additionally, many reports and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on our website at www.sysviewtech.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Information on our website and other information that can be accessed through our website are not part of this report. -7- RISK FACTORS RISKS RELATING TO OUR BUSINESS A SIGNIFICANT PERCENTAGE OF OUR REVENUE IS DERIVED FROM SALES TO A FEW LARGE CUSTOMERS, AND IF WE ARE NOT ABLE TO RETAIN THESE CUSTOMERS, OR THEY RESCHEDULE, REDUCE OR CANCEL ORDERS, OR DELAY OR DEFAULT ON PAYMENTS, OUR REVENUES WOULD BE REDUCED AND OUR FINANCIAL CONDITION AND CASH FLOWS WOULD SUFFER. Sales to our four largest customers represented 81% and 79% of net sales during the year ended December 31, 2006 and 2005, respectively. We expect that our largest customers will continue to account for a substantial portion of our net sales for the foreseeable future. None of our customers are obligated to purchase a minimum number of our products in the aggregate or during any particular period. We cannot provide assurance that any of our customers will continue to purchase our products at past or current levels. THE COMPANY HAS EXPERIENCED A HISTORY OF RECURRING OPERATING LOSSES AND MAY CONTINUE TO INCUR LOSSES FOR THE FORESEEABLE FUTURE. Our net losses totaled $5,948,000 and $2,039,000 for the years December 31, 2006 and 2005, respectively. Our accumulated deficit as of December 31, 2006 was $28,705,000. We cannot provide assurance that we can achieve profitability in the future. Additionally, these conditions raise substantial doubt as to our ability to continue as a going concern. WE SUBCONTRACT THE MANUFACTURING OF OUR IMAGE-CAPTURE PRODUCTS TO ONE COMPANY. If our manufacturer (see Part III, "Item 12: Certain Relationships and Related Transactions, and Director Independence") becomes unable or unwilling to provide products to us in a timely manner, we may not be able to deliver our products to customers on time, which could increase our costs, damage our reputation or result in the loss of our customers. Although we have the right to utilize other manufacturers at any time, identifying and qualifying a new manufacturer to replace our current manufacturer could take several months. WE DEPEND ON A LIMITED NUMBER OF SUPPLIERS TO PROVIDE THE COMPONENTS AND RAW MATERIALS NECESSARY TO MANUFACTURE OUR PRODUCTS AND ANY INTERRUPTION IN THE AVAILABILITY OF THESE COMPONENTS AND RAW MATERIALS USED IN OUR PRODUCT COULD REDUCE OUR REVENUES. Although many alternative suppliers exist, we rely on a single or limited number of suppliers for many of the significant components and raw materials required to manufacture our document/image-capture products. This reliance leads to a number of significant risks, including: o Unavailability of materials and interruptions in delivery of components and raw materials from our suppliers; o Manufacturing delays caused by such unavailability or interruptions in delivery; and o 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. Failure to maintain existing relationships with our current suppliers or to establish new supplier relationships in the future, could negatively affect our ability to obtain necessary components and raw materials in a timely manner. If we are unable to obtain ample supply of materials from our existing suppliers or alternative supply sources, we may be unable to satisfy our customers' orders, which could reduce our revenues and adversely affect relationships with our customers. OUR EXECUTIVE OFFICERS AND KEY PERSONNEL ARE CRITICAL TO OUR BUSINESS AND THE LOSS OF THEIR SERVICES COULD ADVERSELY AFFECT OUR BUSINESS. Our success depends to a significant degree upon the continuing contributions of our key executive officers and managers. Although we have employment agreements with most of these individuals, we cannot guarantee that we can retain these individuals. In addition, we have not obtained "key man" life insurance on the lives of any of the members of our management team. -8- WE MAY NOT BE ABLE TO ATTRACT NEW QUALIFIED EMPLOYEES. 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 could adversely affect our business. As we grow, we will need to attract, train and retain more employees for management, engineering, research and development, sales and marketing and support positions. And the 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: o The extent to which our products gain market acceptance; o The level of revenues from current and future products; o The expansion of operations; o The costs and timing of product development and sales and marketing activities; o The costs related to acquisitions of technology or businesses; and o Competitive developments. We may require additional capital to support and increase our sales and marketing efforts, expand and enhance our current and future product offerings 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 may be required to raise additional capital through public or private equity or debt financings, collaborative relationships, bank facilities or other arrangements. We cannot give assurance 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 limit the marketing of our products. This could have a material and adverse effect on our business. OUR MAJORITY STOCKHOLDER, SYSCAN IMAGING LIMITED, OWNS AND CONTROLS 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, beneficially owns approximately 75.1% of our outstanding common stock as of March 30, 2007. As a result, they 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: o Delay or prevent a change in the control; o Impede a merger, consolidation, takeover or other transaction involving us; or o Discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of our Company. 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. Under particular circumstances, the issuance of these "blank check preferred" shares 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 impede the attempt by issuing blank check preferred shares, thereby diluting or impairing the voting power of the other outstanding shares of common stock and increasing the potential costs to acquire control of our Company. Our Board of Directors has the right to issue blank check preferred shares without first offering them to holders of our common stock, as the holders of our common stock have no preemptive rights. -9- 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 and extremely costly corporate governance requirements and additional requirements may be enacted in the future. Although we intend to implement the requisite changes to become compliant with existing and new requirements that apply to our Company, we may not be able to do so in a timely manner, or at all. Additionally, we may incur significant expense implementing and maintaining our compliance with the Sarbanes-Oxley Act. WE ARE IN VIOLATION OF OUR LINE OF CREDIT DEBT COVENANTS. We were not in compliance with all of our line of credit debt covenants at December 31, 2006. And we remain out of compliance through the date of this filing. The lender waived our violations through December 31, 2006. And although we are currently working with the lender to extend the waiver, the lender has not agreed to waive any debt covenant violations subsequent to December 31, 2006. If we cannot successfully extend the waiver, our interest expense will increase from prime plus 0.5% to prime plus 5.5% effective January 1, 2007. 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 to protect 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 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 without infringing 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 or 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. OUR FUTURE TARGET MARKET FOR OUR HD DISPLAY PRODUCTS IS HIGHLY COMPETITIVE AND RAPIDLY CHANGING, AND WE MAY BE UNABLE TO COMPETE SUCCESSFULLY. The market in which we plan to sell our future HD display products is extremely competitive and we will compete against many well established companies, including many OEMs who have substantially greater financial and other resources than we do. Additionally, the entire market for our HD display product is empirically facing a trend of declining gross margin resulting from emerging global markets and competition. The market for HD display products is rapidly evolving and significant technological changes could render our future products obsolete before we successfully deploy them. We intend to mitigate the inherent risk in this rapidly changing market by continually improving the functionality and features of our products to meet customers' 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. -10- 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 AND RESULT IN A DECREASE TO THE VALUE OF YOUR INVESTMENT. We believe that we may 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. The acquisition of other businesses could subject us to a number of risks, including the following: o Difficulty in integrating the acquired operations and retaining acquired personnel; o Limitations on our ability to retain acquired sales distribution channels and customers; o Diversion of management's attention and disruption of our ongoing business; and o 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 THE LIMITED PRIOR PUBLIC MARKET AND TRADING MARKET MAY CAUSE POSSIBLE VOLATILITY IN OUR STOCK PRICE. To date, there has only been a limited public market for our securities and there can be no assurance that we can attain an active trading market for our securities. Our common stock trades on the Over The Counter Bulletin Board ("OTCBB"), which is an unorganized, inter-dealer, over-the-counter market that provides significantly less liquidity than NASDAQ and the national securities exchange. 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. Moreover, in recent years, the overall market for securities 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: o Quarterly variations in operating results and achievement of key business metrics; o Changes in earnings estimates by securities analysts, if any; o Any differences between reported results and securities analysts' published or unpublished expectations; o Announcements of new products by us or our competitors; o Market reaction to any acquisitions, joint ventures or strategic investments announced by us or our competitors; o Demand for our products; o Shares sold pursuant to Rule 144 or upon exercise of warrants and options or conversion of Series A Preferred Stock or Series B Preferred Stock; and o 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 AND DELAYS IN CONNECTION WITH THE AVAILABILITY OF QUOTES AND ORDER INFORMATION ON THE OTCBB. The OTCBB executes trades and quotations using a manual process and cannot guarantee the market information for securities. In some instances, quote information, or even firm quotes, may not be available. The OTCBB's manual execution process may delay order processing and as a result, a limit order may fail to execute or a market order may execute at a significantly different price due to intervening price fluctuations. Trade execution, execution reporting and legal trade confirmation delivery may be delayed significantly. Consequently, one may not be able to sell shares of our common stock at the optimum trading prices. -11- PENNY STOCK REGULATIONS MAY IMPOSE CERTAIN RESTRICTIONS ON MARKETABILITY OF OUR SECURITIES. The Commission 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 governed by these rules, the broker-dealer must make a special suitability determination for the purchase of such securities, must obtain the purchaser's written consent to the transaction, and must deliver to the purchaser a SEC-mandated, penny stock risk disclosure document, all prior to the purchase. 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 may affect the price at which investors can sell such shares. Investors should be aware that the market for penny stocks has suffered in recent years from patterns of fraud and abuse, according to the Commission. Such patterns include: o Control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; o Manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; o "Boiler room" practices involving high pressure sales tactics and unrealistic price projections by inexperienced sales persons; o Excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and o 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, the security's market price may become increasingly volatile and price movement may outpace the ability to deliver accurate quote information. Due to lower trading volumes of our common stock, there may be a lower likelihood that one's orders for our common stock will be 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. As mentioned earlier in this document, the OTCBB executes trades using a manual process, which could cause delays in order processing and reporting, and could hamper one's ability to cancel or edit one's order. Consequently, selling shares of our common stock at the optimum trading prices may be impossible. -12- 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 our common stock on the OTCBB if the stock must be sold immediately. Further, purchasers of our common stock may incur an immediate "paper" loss due to the price spread. Moreover, dealers may not have a bid price for our common stock on the OTCBB. Due to the foregoing factors, demand for our common stock on the OTCBB may be decreased or eliminated. 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 December 31, 2006, there were 24,642,092 and 24,142,092 shares of common stock issued and outstanding, respectively. 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 or our Series B Preferred Stock. As of December 31, 2006, we had the following common shares reserved for future issuance: Conversion of Series A Preferred Stock 1,565,000 Maximum Dividend Shares on the Conversion of Series A Preferred Stock 273,159 Conversion of Series B Preferred Stock 1,150,000 Stock options outstanding 4,890,000 Warrants outstanding 1,794,000 ----------------- TOTAL 9,672,159 ================= The above table does not include 2,310,000 and 1,500,000 shares that are reserved pursuant to our 2002 Amended and Restated Stock Option Plan and our 2006 Stock Option Plan, respectively, for options that are available for future grant. To the extent that options or warrants are exercised, or the preferred stock holders elect to convert their preferred shares to common shares, 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. While we have no present plans to issue any shares of preferred stock other than the Series A Preferred Stock and the Series B Preferred Stock, our Board of Directors has the authority (as previously discussed), 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 above table does not include any future issuance of preferred stock. The issuance of any of such series of preferred stock will cause further dilution to holders of our 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. -13- 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. -14- ITEM 2. DESCRIPTION OF PROPERTY At December 31, 2006 details of our property were as follows:
TOTAL SQUARE LOCATION LEASE EXPIRATION FOOTAGE PRIMARY USAGE San Jose, CA November 2008 10,700 Corporate headquarters, research and development lab San Jose, CA Month to month 2,300 Inventory management and distribution Arnhem, Netherlands Month to month 250 Field service and sales office Arnhem, Netherlands Month to month 1,400 Inventory management and distribution Brisbane, Australia Month to month 1,100 Inventory management and distribution Shenzhen, China Month to month 2,100 Inventory management and distribution
We believe our properties are adequate for our current needs and will be sufficient to serve the needs of our operations for the foreseeable future. ITEM 3. LEGAL PROCEEDINGS We are subject to various legal proceedings from time to time in the ordinary course of business, none of which is required to be disclosed under this Item 3. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter the year ended December 31, 2006. -15- PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION Our common stock is listed on the Over-The-Counter Bulletin Board ("OTCBB"). From April 2, 2004 through June 26, 2006, our shares of common stock were quoted under the symbol "SYII." Effective June 27, 2006, in connection with the name change from "Syscan Imaging, Inc." to "Sysview Technology, Inc.," the Company's shares of common stock are quoted under the symbol "SYVT." The following table sets forth the range of high and low sales prices for the Company's common stock for the periods indicated: HIGH LOW ---------- --------- Fiscal 2006: 1st Quarter $0.80 $0.55 2nd Quarter 1.55 0.65 3rd Quarter 1.49 0.75 4th Quarter 0.85 0.45 Fiscal 2005: 1st Quarter $3.25 $1.20 2nd Quarter 1.30 0.53 3rd Quarter 1.15 0.30 4th Quarter 0.98 0.35 Such prices represent quotations between dealers, without dealer markup, markdown or commissions, and may not represent actual transactions. RECORD HOLDERS As of March 30, 2007, there were 21,542,092 shares of common stock issued and outstanding, held by approximately 364 holders of record as indicated on the records of the Company's transfer agent. DIVIDENDS COMMON STOCK. The Company has not declared or paid dividends on its common stock to date and intends to retain any earnings for use in the business for the foreseeable future. PREFERRED STOCK. The holders of our Series A 5% cumulative convertible preferred stock ("Series A Stock") are entitled to receive dividends at a rate of five percent per year. Dividends are payable in cash, by accretion of the Series A Stock 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 Series A Stock or to pay for dividends in cash or in shares of common stock, is at the Company's discretion. The Series B Preferred stock does not pay dividends. To date, the Company has not paid any cash dividends on its Series A Stock and has chosen to accrete dividends to the stated value of the Series A Stock. -16- EQUITY COMPENSATION PLAN INFORMATION The following table sets forth certain information, as of December 31, 2006, concerning shares of common stock authorized for issuance under the Company's existing equity compensation plans.
NUMBER OF SECURITIES REMAINING AVAILABLE NUMBER OF WEIGHTED AVERAGE FOR FUTURE ISSUANCE SECURITIES TO BE EXERCISE PRICE UNDER EQUITY ISSUED UPON OF OUTSTANDING COMPENSATION PLANS EXERCISE OF OPTIONS, (EXCLUDING OUTSTANDING WARRANTS AND SECURITIES OPTIONS, RIGHTS REFLECTED IN COLUMN WARRANTS AND (A)) RIGHTS (B) (C) (A) ---------------- ---------------- --------------------- Equity compensation plans approved by security holders 890,000 $0.92 3,810,000 Equity compensation plans not approved by security holders 4,000,000 0.01 - ---------------- ---------------- --------------------- Total 4,890,000 $0.18 3,810,000 ================ ================ =====================
2002 AMENDED AND RESTATED STOCK OPTION PLAN On June 23, 2006 at our stockholders' annual meeting, our stockholders approved the adoption of the 2002 Amended and Restated Stock Option Plan ("2002 Plan"). Currently the plan is administered by our Board of Directors. The 2002 Plan generally provides for the grant of either qualified or nonqualified stock options to officers, employees, directors and consultants at not less than 85% of the fair market value of our common stock as of the grant date. The 2002 Plan provides that vested options may generally be exercised for three months after termination of employment and for 12 months after termination of employment as a result of death or disability. If the Company liquidates, optionees will be notified at least 30 days prior to the proposed dissolution or liquidation to give optionees time to exercise any vested options. To the extent not previously exercised, all options will terminate immediately prior to the consummation of such proposed action. However, the plan administrator can, under its sole discretion, may permit exercise of any options prior to their termination, even if such options were not otherwise exercisable. In the event of our change in control (including our merger with or into another corporation, or sale of substantially all our assets), the 2002 Plan provides that each outstanding option will fully vest and become exercisable. The maximum number of options that can be granted under the 2002 Plan is 3,200,000. As of December 31, 2006, options to purchase 2,310,000 common shares were available for future grant. 2006 STOCK OPTION PLAN On June 23, 2006 at our stockholders' annual meeting, our stockholders approved the adoption of the 2006 Stock Option Plan ("2006 Plan"). Currently the plan is administered by our Board of Directors. The 2006 Plan generally provides for the grant of either qualified or nonqualified stock options to officers, employees, directors and consultants at not less than 85% of the fair market value of our common stock as of the grant date. The 2006 Plan provides that vested options may generally be exercised for three months after termination of employment and for 12 months after termination of employment as a result of death or disability. If the Company liquidates, optionees will be notified at least 30 days prior to the proposed dissolution or liquidation to give optionees time to exercise any vested options. To the extent not previously exercised, all options will terminate immediately prior to the consummation of such proposed action. However, the plan administrator can, under its sole discretion, may permit exercise of any options prior to their termination, even if such options were not otherwise exercisable. In the event of our change in control (including our merger with or into another corporation, or sale of substantially all our assets), the 2006 Plan provides that each outstanding option will fully vest and become exercisable. The maximum number of options that can be granted under the 2006 Plan is 1,500,000. As of December 31, 2006, options to purchase 1,500,000 common shares were available for future grant. -17- RECENT SALES OF UNREGISTERED SECURITIES During the year ended December 31, 2006, we did not issue any securities that were not registered under the Securities Act of 1933, as amended (the "Securities Act") except as disclosed in previous SEC filings. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS There were no repurchases of equity securities by the issuer or affiliated purchasers during the fourth quarter of the year ended December 31, 2006. -18- ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION The following discussion should be read in conjunction with other sections of this Form 10-KSB including Part 1, "Item 1: Business" and Part II, "Item 7: Financial Statements." Various sections of management's discussion and analysis ("MD&A") contain 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 due to factors discussed in this report, 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. Our MD&A is provided as a supplement to our audited financial statements to help provide an understanding of our financial condition, changes in financial condition and results of operations. The MD&A section is organized as follows: o OVERVIEW. This section provides a general description of the Company's business, as well as recent developments that we believe are important in understanding our results of operations as well as anticipating future trends in our 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, expenses, and the related disclosure of contingent assets and liabilities. o RESULTS OF OPERATIONS. This section provides an analysis of our results of operations for the year ended December 31, 2006 ("Fiscal 2006") compared to the year ended December 31, 2005 ("Fiscal 2005"). A brief description of certain aspects, transactions and events is provided, 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 year ended December 31, 2006. OVERVIEW We are in the business of designing, developing and delivering imaging technology solutions. We currently have fourteen patents issued in the United States and five patents issued in Taiwan. Additionally, we have five patents currently pending with the United States Patent and Trademark Office, four relate to our high definition ("HD") display technology and one relates to our document/image-capture technology. We focus our research and development toward new deliverable and marketable technologies. We sell our products to customers throughout the world, including the United States, Canada, Europe, South America, Australia and Asia. We intend to leverage our experience, expertise and current technology in the document/image-capture market by expanding our business to the HD display market, which is deemed to be a much larger market. Our strategy is to expand our document/image-capture product line and technology while leveraging our assets in other areas of the imaging industry. We are actively shipping six groups of image-capture products and have expanded our product offerings to include six new products during Fiscal 2006. During the first three months of Fiscal 2006, we introduced two new products under our Original Equipment Manufacturers' ("OEM") brand names and two new products under the DocketPORT brand name. During the third quarter of Fiscal 2006 we introduced two additional products through two different OEM customers. Our expanded product line is in response to the increased market demand for faster and easier-to-use products as well as increased security to meet the growing need for information protection, including identity and financial transaction protection. In addition to expanding our image-capture product line, we actively pursue the acquisition of technology and companies in the document/image-capture and display industry to complement our business model, improve our competitive positioning and further expand our product offerings. CRITICAL ACCOUNTING POLICIES The methods, estimates and judgments we use in applying our accounting policies have a significant impact on the results we report in our financial statements, which we discuss under the heading "Results of Operations" following this section of our MD&A. Some of our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Our most critical accounting estimates include the assessment of recoverability of long-lived assets and intangible assets, which impacts operating expenses when we impair assets or accelerate their amortization or depreciation. -19- 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, optical image chips and other optoelectronic products. Revenue is recognized when the product is shipped or delivered and the risks, rewards and title of ownership have transferred to the customer. We recognize some shipping and handling fees as revenue, and the related expenses as a component of cost of sales. All internal handling charges are included with selling and marketing expense. Historically, sales returns have not been significant. As such, we do not record a reduction to revenue for estimated product returns in the same period that the related revenue is recorded. INVENTORY AND WARRANTY RESERVES We establish inventory reserves for estimated obsolescence or unmarketable inventory in an amount equal to the difference between the cost of inventory and its estimated realizable value based upon assumptions about future demand and market conditions. If actual demand and market conditions are less favorable than those projected by management, additional inventory reserves could be required. As of December 31, 2006, we had no inventory reserve. Currently, we purchase the majority of our finished scanner imaging products from Syscan Lab Limited ("SLL"), a wholly-owned subsidiary of Syscan Technology Holdings Limited ("STH"), the parent company of our majority stockholder. SLL 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, SLL provides product repair services for us at its customary hourly repair rate plus the cost of any parts, components or items necessary to repair the products. As a result of the product warranty provided by SLL, Sysview does not record a product warranty reserve. RELATED-PARTY TRANSACTIONS We have significant related-party transactions and agreements, which we believe have been accounted for at fair value. We utilized our best estimate of the value of these transactions and agreements. Had alternative assumptions been used, the values obtained may have been different. RELATED-PARTY PURCHASES The Company purchases the majority of its finished scanner imaging products from SLL as discussed above. Our Chairman and CEO, Darwin Hu, was formerly the CEO of STH. He resigned from STH effective December 2004. Purchases from SLL totaled $8,620,000 during Fiscal 2006 and $4,915,000 during Fiscal 2005. All purchases from SLL were carried out in the normal course of business. As a result of these purchases, the Company was liable to SLL for $952,000 and $203,000 at December 31, 2006 and 2005, respectively. RELATED-PARTY LOANS In the normal course of business, we made interest-free loans to several related parties for the purpose of purchasing capital equipment, including tooling equipment required to manufacture our product. These loans totaled $2,606,000 at December 31, 2006 and 2005. During the fourth quarter of Fiscal 2006, we booked an allowance of $2,606,000 to fully reserve amounts due from related parties as it became apparent to management that such parties may not have the financial resources to repay amounts due. On March 21, 2007, we entered into an agreement with Syscan Technology Holdings, LTD whereby we agreed to forego any further collections efforts, including legal action, in exchange for the cancellation of 2,600,000 shares of our common stock beneficially owned by Syscan Technology Holdings, LTD. In addition, both parties mutually agreed to release and discharge any and all claims that each may have against the other party. -20- INTANGIBLE AND LONG-LIVED ASSETS We evaluate our intangible and long-lived assets for impairment annually or more frequently if we believe indicators of impairment exist. Significant management judgment is required during the evaluation, including in the forecasts of future operating results. The estimates we have used are consistent with the plans and estimates that we use to manage our business. It is possible, however, that the plans and estimates used may be incorrect. If our actual results, or the plans and estimates used in future impairment analyses, are lower than the original estimates used to assess the recoverability of these assets, we could incur additional impairment charges. During the fourth quarter of Fiscal 2006, we performed an annual review of our identified intangible assets. Based on this review, we reclassified our intangible assets from non-amortizing to amortizing intangible assets. As a result, we booked $555,000 of intangible asset amortization expense, which is included with research and development expenses, during the fourth quarter of Fiscal 2006. Additionally, we recorded an impairment charge of $838,000 related to our long-term investment during that same period, which was also a result of our annual review of asset impairment. For further discussion, see "Note 3: Related-Party Transactions" and "Note 6: Business Acquisition and Intangible Assets" in Part II, Item 7 of this Form 10-KSB. INCOME TAXES We utilize the liability method of accounting for income taxes. Deferred income tax assets and liabilities are calculated as the difference between the financial statements and tax basis 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. We record a valuation allowance to reduce our deferred tax assets to the amount that we believe is more likely than not to be realized. In assessing the need for a valuation allowance, we consider all positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and recent financial performance. The application of tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax laws themselves are subject to change as a result of changes in fiscal policy, changes in legislation, evolution of regulations and court rulings. Therefore, the actual income taxes may be materially different from our estimates. As a result of our analysis, we concluded that a full valuation allowance against our net deferred tax assets is appropriate at December 31, 2006. CONTINGENCIES From time to time, we are involved in disputes, litigation and other legal proceedings. We record a charge equal to at least the minimum estimated liability for a loss contingency when both of the following conditions are met: (i) information available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements and (ii) the range of loss can be reasonably estimated. However, the actual liability in any such litigation may be materially different from our estimates, which could result in the need to record additional costs. Currently, we have no outstanding legal proceedings or claims, which require a loss contingency. ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY We account for our Series A 5% cumulative convertible preferred stock ("Series A Stock") and our Series B convertible preferred stock ("Series B Stock") pursuant to Statement of Financial Accounting Standards ("SFAS") "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES" ("SFAS 133") and the Emerging Issues Task Force ("EITF") Abstract 00-19, "ACCOUNTING FOR DERIVATIVE FINANCIAL INSTRUMENTS" ("EITF 00-19"). Accordingly, the embedded conversion feature associated with our Series A Stock and related warrants and our Series B Stock and related warrants have been determined to be derivative instruments. The fair value of these derivative instruments, as determined by applying the Black-Scholes valuation model, is adjusted quarterly. The Black-Scholes valuation model requires the input of highly subjective assumptions, including the expected stock price volatility. Additionally, although the Black-Scholes model meets the requirements of SFAS 133, the fair values generated by the model may not be indicative of the actual fair values of our Series A Stock and Series B Stock as our derivative instruments have characteristics significantly different from traded options. -21- RESULTS OF OPERATIONS The following table summarizes certain aspects of our results of operations for Fiscal 2006 compared to Fiscal 2005 (IN THOUSANDS):
FISCAL 2006 FISCAL 2005 $ CHANGE % CHANGE ----------- ----------- ---------- --------- Net sales $ 12,469 $ 7,848 $ 4,621 59% Cost of sales 8,221 4,989 3,232 65 As a percentage of sales 66% 64% Selling and marketing expense 1,240 1,037 203 20 General and administrative expense 5,361 2,918 2,443 84 Research and development expense 3,084 951 2,133 224 Impairment of long-term asset 838 -- NM NM Total other income (expense) 1,079 557 NM NM Dividend on 5% convertible preferred stock and accretion of preferred (749) (546) NM NM stock redemption value Net loss available to common 5,948 2,039 3,909 192 Stockholders NM = Not Meaningful
NET SALES The significant increase in net sales was attributable in large part to our increased product offerings. We introduced our duplex scanners (DocketPORT) near the end of the third quarter of Fiscal 2005, which created a broader base of products. Sales of our duplex scanners were approximately $1,936,000 during Fiscal 2006 as compared to $674,000 for Fiscal 2005. Our largest customer significantly expanded its distribution channels during Fiscal 2006, which resulted in a substantial increase to our revenue during Fiscal 2006 as compared to Fiscal 2005. To a lesser extent, our net sales were positively impacted by our gradual trending towards our Value Added Reseller ("VAR") distribution channels and the growth in the small office home office ("SOHO") markets, which is a result of our efforts to appeal to customers in these sales channels. During both Fiscal 2006 and Fiscal 2005, our average selling price remained stable as a result of the proprietary nature of our products and the minimal impact of direct competition to our products. Sales to our four largest customers represented 81% and 79% of net sales during Fiscal 2006 and Fiscal 2005, respectively. We expect that our largest customers will continue to account for a substantial portion of our net sales for the foreseeable future. The identities of our largest five (5) customers and their respective contributions to our net sales have varied and will likely continue to vary from period to period. Although we expect net sales to increase as we continue to expand our business and offer additional products in the document/image-capture market and expand to the HD display market, there can be no assurance that our net sales will increase. COST OF SALES, INCLUDING GROSS PROFIT Cost of sales includes all direct product costs and services related to the delivery our products, and to a lesser extent engineering services and software royalties. Cost of sales increased in absolute dollars as a result of the increased net sales during Fiscal 2006 as compared to Fiscal 2005. Cost of sales as a percentage of net sales remained for the most part constant as a result of the stability of our average selling price and related material cost used to manufacture our products. We expect our gross profit percentage to remain for the most part constant for the foreseeable future. -22- SELLING AND MARKETING EXPENSE Selling and marketing expense consists primarily of compensation costs, including stock-based compensation, of employees engaged in the sales, marketing and customer account management functions. To a lesser extent, these expenses also include market development and promotional costs provided to our retail distributions channels, tradeshows, website support, warehousing, logistics and certain sales representative fees. The increase during Fiscal 2006 as compared to Fiscal 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. Overall, we expect selling and marketing expenses to increase as we continue to expand our marketing efforts and the number of products we offer in both image scanning and HD display. GENERAL AND ADMINISTRATIVE EXPENSE General and administrative expense consists primarily of costs associated with our executive, financial, human resources and information services functions, including stock-based compensation, facilities-related expenses and outside professional services such as legal and accounting. The increase in general and administrative expenses during Fiscal 2006 as compared to Fiscal 2005 was a result of recording a $2,606,000 allowance against amounts due from related parties as it became apparent to management during the fourth quarter of Fiscal 2006 that such parties may not have the financial resources to repay amounts due. See "Note 12: Subsequent Events" in Part II, Item 7 of this Form 10-KSB. Other increases to our general and administrative expenses during Fiscal 2006 as compared to Fiscal 2005 were attributable to increased personnel costs to support our expanding business and related infrastructure and the increased expenses associated with maintaining our public company status. The increase was somewhat offset by the decrease from our stock-based compensation cost (a non-cash charge) as a result of granting stock options to certain executives and key employees at less than fair market value on the grant date during 2005 and adopting SFAS 123(R). See "Note 4: Employee Equity Incentive Plans" in Part II, Item 7 of this Form 10-KSB. Stock-based compensation cost was $1,015,000 during Fiscal 2006 as compared to $1,407,000 during Fiscal 2005. We anticipate that general and administrative expenses will continue to increase over the long term 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 compensation costs, including stock-based compensation, 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 significantly increased during Fiscal 2006 as compared to Fiscal 2005 as a result of an increase in the number of employees engaged in research and development activities, resulting from both direct hiring and acquisitions. Additionally, during the fourth quarter of Fiscal 2006, we had a one-time amortization of our research and development-related intangible assets that totaled $555,000 during Fiscal 2006. There was no amortization of intangible assets during Fiscal 2005. As of December 31, 2006 all research and development-related intangible assets were fully amortized. The majority of our research and development expenses during Fiscal 2006 were directly attributable to our future products which include HD display. See Part I "Item 1: Business - Future Market Opportunities, Strategies and Products." We anticipate that research and development expense will continue to increase over the long term as we enhance existing products and develop new products as part of our continued efforts to invest in the future. IMPAIRMENT OF LONG-TERM ASSET Our 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 infrared sensors and CMOS sensors. During all periods covered in this filing, we owned 16.1% of CMOS and accounted for the investment using the cost method of accounting. As we performed our annual review of long-lived assets, we perceived indicators of the investment's value. As such, during Fiscal 2006 we recorded an impairment charge of $838,000 related to our investment in CMOS. We believe the long-term investment's new cost basis of $160,000 is reflective of the long-term investment's underlying value at December 31, 2006. -23- TOTAL OTHER INCOME (EXPENSE) Other income (expense) for Fiscal 2006 and Fiscal 2005 was mainly attributable to the $1,421,000 and $1,112,000, respectively, decrease in the fair value of the liability for derivative contracts associated with our Series A Stock and related warrants and Series B Stock and related warrants. Pursuant to SFAS 133 and EITF 00-19, the decrease in the fair value of the liability for derivative contracts is included as other income in our consolidated statements of operations. The remaining other income (expense) during Fiscal 2006 was a result of issuing our Series B Stock as follows: o Cash paid for issuance costs of $88,000 in connection with our offering; and o A non-cash charge of $173,000 representing the fair value of 100,000 warrants issued to the placement agent for the sale of the stock. The remaining other income (expense) during Fiscal 2005 was a result of issuing our Series A Stock as follows: 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 stock. DIVIDEND ON SERIES A STOCK AND ACCRETION OF PREFERRED STOCK REDEMPTION VALUE During Fiscal 2006, accretion on our preferred stock, both Series A and Series B, totaled approximately $668,000. During Fiscal 2005, accretion on our Series A Stock was approximately $468,000. The increase in accretion of preferred stock during Fiscal 2006 as compared to Fiscal 2005 was attributable to the sale of our Series B Stock during the third quarter of Fiscal 2006. Series A Stock dividends were $81,000 and $78,000 during Fiscal 2006 and Fiscal 2005, respectively. LIQUIDITY AND CAPITAL RESOURCES At December 31, 2006, our principal sources of liquidity included cash and cash equivalents of $1,333,000 and unused borrowing capacity of $1,487,000 under our bank line of credit. We had no significant cash outlays during Fiscal 2006. OPERATING ACTIVITIES Cash used by operating activities during Fiscal 2006 was primarily attributable to our net loss, as adjusted for non-cash items such as stock-based compensation cost associated with issuing stock options, impairment of long-term investment, allowance for doubtful accounts, changes in our derivative instruments and the accretion of our convertible preferred stock. Additional uses of cash included an increase in trade receivables resulting from the significant increase in product sales during the last quarter of Fiscal 2006 and an increase in inventory as we anticipate this growth in sales to continue. Sources of operating cash include an increase in accounts payable, both our trade payables and our trade payables to related parties, as a result of managing our working capital and the normal fluctuation and timing of purchases. As we have had to ramp up inventory purchases to meet the increased demand for our products, our cash was somewhat constrained during Fiscal 2006. During Fiscal 2005, cash used by operations resulted from funding our net loss, adjusted for non-cash items such as stock-based compensation cost associated with issuing stock options, changes in our derivative instruments and convertible preferred stock and changes to 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. INVESTING ACTIVITIES During Fiscal 2006, cash used in investing activities was solely attributable to the purchase of capital equipment and licensed technology used in the research and development process. During Fiscal 2005, the majority of cash used in investing activities was attributable to the purchase of capital equipment. To a lesser extent we used cash during Fiscal 2005 to purchase a company to facilitate our HD display research and development efforts. -24- FINANCING ACTIVITIES On August 8, 2006, we sold $1,150,000 of our Series B Stock. Net proceeds of this offering after payment of related commissions, fees and other expenses were approximately $1,062,000. We intend to use the proceeds for sales, marketing, research and development and for working capital and general corporate purposes. During Fiscal 2005, cash provided by financing activities was a result of selling $1,865,000 of our Series A Stock, which was somewhat offset by advances of $341,000 made to related parties during the ordinary course of business and loan activity under our bank line of credit, which was used to help fund working capital requirements, as necessary. CASH AND WORKING CAPITAL REQUIREMENTS As previously discussed, we plan to continue increasing our presence in the document/image-capture market and expand our operations into the HD display market, which may require additional capital. Additionally, we may seek to expand our operations through acquisitions of companies in the document/image-capture and HD 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 the aforementioned funds raised through the sale of our Series B Stock, 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, or a combination thereof, 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 December 31, 2006, and the effect such obligations are expected to have on our liquidity and cash flows in future periods (IN THOUSANDS):
LESS THAN ONE - THREE THREE - FIVE TOTAL ONE YEAR YEARS YEARS --------- ---------- ------------ ------------ Line of credit (1) $ 1,013 $ 1,013 $ -- $ -- Operating lease obligations 512 261 250 1 Consulting agreement (2) 90 90 -- -- --------- ---------- ------------ ------------ Total contractual cash obligations $ 1,615 $ 1,364 $ 250 $ 1 ========= ========== ============ ============
(1) We have a line of credit agreement ("LOC Agreement") to borrow up to $2,500,000, bearing interest at the rate of prime (8.25% at December 31, 2006) plus 0.5%, which is secured by all our assets. Interest payments are due monthly and all unpaid interest and principal was originally due in full on October 30, 2006. On December 18, 2006, we extended the loan ("Extended Agreement") with the same terms, for 12 months. The new maturity date is October 30, 2007. Upon certain events of default, the default variable interest rate increases to prime plus 5.5%. We had $1,487,000 available for use at December 31, 2006. At December 31, 2006, Sysview was not in compliance with all of the Extended Agreement debt covenants. Pursuant to a waiver letter from the lender dated March 28, 2007, the lender agreed to forbear from exercising its rights and remedies with respect to existing defaults under the Extended Agreement from the date of the Extended Agreement through December 31, 2006. Additionally, Sysview has remained out of compliance with the Extended Agreement debt covenants through the date of this filing. Although Sysview is currently working with the lender to extend the waiver, the lender has not agreed to waive any debt covenant violations subsequent to December 31, 2006. (2) We have an agreement for investor relations services for a term of one year beginning January 1, 2007, payable monthly as follows: (i) $5,000 for January, February and March; (ii) $7,500 for April, May and June; (iii) $8,500 for July, August and September; and (iv) $9,000 for October, November, and December. Additionally, we agreed to pay the consultant 90,000 warrants with an exercise price of $0.65 per share, expiring in three years, with immediate vesting on January 1, 2007, and exercisable at the rate of 7,500 the first day of each month during calendar 2007. The warrants will not be registered under federal or state securities laws. -25- OFF-BALANCE SHEET ARRANGEMENTS At December 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(c)(2) of SEC Regulation S-B. 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 December 31, 2006, to the best of our knowledge, no known trends or demands, commitments, events or uncertainties existed, except as described in "Note 10: Commitments and Contingencies" in Part II, Item 7 of this Form 10-KSB, which are likely to have a material effect on our liquidity. ITEM 7. FINANCIAL STATEMENTS The information required by Item 7 is included herein Appendix A beginning at page F-1. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 8A. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as of the end of the period covered by this report (the "Evaluation Date"). Based upon the evaluation, our principal executive officer and principal financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective. Disclosure controls are controls and procedures designed to reasonably ensure that information required to be disclosed in our reports filed under the Exchange Act, such as this report, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure controls include controls and procedures designed to reasonably ensure that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure. CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING There were no changes in our internal controls over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. ITEM 8B. OTHER INFORMATION None. -26- PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth the names, ages, years elected and principal offices and positions of our current directors and executive officers as of March 30, 2007. NAME YEAR FIRST AGE OFFICE ELECTED AS OFFICER OR DIRECTOR - -------------------------------------------------------------------------------- Darwin Hu 2004 54 Chief Executive Officer and Chairman William Hawkins 2004 51 Chief Operating Officer, Acting Chief Financial Officer and Secretary David Clark 2004 38 Senior VP of Business Development Lawrence Liang 2004 70 Director None of the members of the Board of Directors or executive officers of the Company are related to one another. Each year the stockholders elect the members of our Board of Directors. We do not have a standing nominating committee. There were no changes in procedures for nominating Sysview directors during the year ended December 31, 2006. 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 positions in the areas of 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, California. 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 with a concentration in Management of Technology from Johns Hopkins University. DAVID CLARK has been our Senior VP of Business Development since July 2004. Mr. Clark has served as a director since July 15, 2004. From June 2001 to July 2004 Mr. Clark actively invested in and consulted to a diverse group of companies and was involved in land development. Mr. Clark was President and CEO of Homebytes.com from November 1998 through May 2001, where he was primarily responsible for raising in excess of $25 million dollars from investors including America Online, FBR Technology Venture Partners, PNC Bank, and Bank of America as well as the acquisition of a key competitor of the company. Prior thereto Mr. Clark was the President of distribution and a director of Take Two Interactive (NASDAQ:TTWO). This position resulted from TTWO's acquisition of Inventory Management Systems, Inc. (I.M.S.I.), which Mr. Clark co-founded and served as President. Prior to co-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. LAWRENCE LIANG has been a director since April 2, 2004. Since 1984, Mr. Liang has held various positions including President and Vice President of Genoa Systems Corporation (a graphics company that developed the flicker free and true color technologies in the late 1980s), President of Telecom Marketing (a marketing consultant for telecommunications infrastructure) and President of Cwaves Technology (a wireless LAN/WAN company). Mr. Liang also worked for IBM's Technology Component Division developing semiconductor products and RISC CPU Instruction sets. Mr. Liang 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. -27- SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers, as well as persons who own more than 10% of a registered class of our equity securities, to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in beneficial ownership. Directors, executive officers, and greater than 10% shareholders are required by Securities and Exchange Commission regulation to furnish us with copies of all Section 16(a) forms they 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, we believe all Forms 3, 4 and 5 were timely filed with the SEC by such reporting persons during the year ended December 31, 2006. CODE OF ETHICS Our Board of Directors adopted a Code of Ethics applicable to all 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 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 five 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. Our Code of Ethics, which was originally adopted on March 28, 2005, is incorporated by reference at Exhibit 14.1. INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS None of our executive officers or directors has had any bankruptcy petition filed by or against any business of which such officer or director was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time. None of our executive officers or directors have been convicted in a criminal proceeding or are subject to a pending criminal proceeding, excluding traffic violations or similar misdemeanors, nor have they been a party to any judicial or administrative proceeding during the past five years, except for matters that were dismissed without sanction or settlement, that resulted in a judgment, decree or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws, or a finding of any violation of federal or state securities laws. BOARD OF DIRECTORS MEETINGS AND SUBCOMMITTEES MEETINGS Our Board of Directors held one meeting during the year ended December 31, 2006. All members, that were members on March 30, 2007 as named above, of our Board of Directors attended (i) our Annual Meeting of Shareholders and (ii) more than 75% of our Board of Directors' meeting held during the year ended December 31, 2006. We had two additional directors at the time we held our Annual Meeting of Shareholders, who are no longer members of our Board of Directors, which did not attend. AUDIT COMMITTEE AND FINANCIAL EXPERT Our Board of Directors does not have a separate audit committee. The Board has determined that it does not have a member of its Board that qualifies as an "audit committee financial expert" as defined in Item 401(e) of Regulation S-B, and is "independent" as the term is used in Item 7(d)(3)(iv) of Schedule 14A under the Securities Exchange Act of 1934, as amended. We believe that the members of our Board of Directors are collectively capable of analyzing and evaluating our financial statements and understanding internal controls and procedures for financial reporting. However, the Company is considering appointing an independent qualified financial expert as well as an additional independent professional to its Board of Directors in order to strengthen and improve its internal disclosure controls and procedures. -28- COMPENSATION COMMITTEE As all our executive officers are currently under employment agreements, we do not have a separate compensation committee. At this point, we do not intend to establish a separate compensation committee as this function will be performed by our full Board of Directors. NOMINATING COMMITTEE We do not currently have a separate nominating committee as this function is performed by our full Board of Directors. SHAREHOLDER COMMUNICATION We communicate regularly with shareholders through press releases, as well as annual and quarterly reports. Our investor relations department and Corporate Secretary address investor concerns on an on-going basis. We may also address such concerns through our website at WWW.SYSVIEWTECH.COM. Interested parties, including shareholders and other security holders, may communicate directly with our Board of Directors or with individual directors by writing to the Corporate Secretary at 1772 Technology Drive, San Jose, California 95110 or call 1-408-436-9888 ext. 207. 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 Part II, "Item 5: Market for Common Equity and Related Stockholder Matters." -29- ITEM 10. EXECUTIVE COMPENSATION SUMMARY COMPENSATION The following table sets forth, for the years indicated, all compensation awarded to, paid to or earned by the following type of executive officers for the year ended December 31, 2006: (i)individuals who served as, or acted in the capacity of, our principal executive officer for the year ended December 31, 2006; 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 $100,000 with respect to the years ended December 31, 2006 and 2005 and who were employed by us at December 31, 2006.
SUMMARY COMPENSATION TABLE (1) ALL OTHER TOTAL SALARY COMPENSATION (2) COMPENSATION ($) NAME AND PRINCIPAL POSITION YEAR ($) ($) --------------------------------------------------------------- ------------------------------------- Darwin Hu, Chief Executive Officer 2006 200,000 7,292 207,292 and Chairman William Hawkins, Chief Operating Officer, 2006 160,000 6,133 166,133 Acting Chief Financial Officer and Secretary David Clark, Senior VP of Business 2006 150,000 -- 150,000 Development - --------------------- (1) None of the above named executives received any bonus, stock awards, option awards, non-equity compensation, nonqualified deferred compensation earnings or any other type of compensation except as specifically listed above. (2) Represents the Company's match on the named executives' 401(k) contribution.
OPTION/SAR GRANTS IN LAST FISCAL YEAR No stock options or stock appreciation rights were granted to any executive officer or director during the year ended December 31, 2006. OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END The following table sets forth certain information regarding stock options at December 31, 2006 by the named executive officers.
OUTSTANDING EQUITY AWARDS TABLE (1) OPTION AWARDS --------------------------------------------------------------------- NUMBER OF SECURITIES UNDERLYING UNEXERCISED OPTIONS -------------------------------- NAME AND PRINCIPAL POSITION EXERCISABLE UNEXERCISABLE EXERCISE PRICE EXPIRATION DATE - ------------------------------------------------------------ ------------------------------------ Darwin Hu 1,000,000 500,000 $0.01 4/26/2012 Chief Executive Officer and Chairman William Hawkins 666,667 333,333 $0.01 4/26/2012 Chief Operating Officer, Acting Chief Financial Officer and Secretary David Clark 533,333 266,667 $0.01 4/26/2012 Senior VP of Business Development (1) No named executive has any stock awards outstanding at December 31, 2006.
-30- LONG-TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR No long-term incentives were awarded to any executive officer or director during the year ended December 31, 2006. COMPENSATION OF DIRECTORS The members of our Board of Directors did not receive any type of compensation from us during the year ended December 31, 2006. EMPLOYMENT CONTRACTS In April 2005, we entered into an employment agreement with Mr. Darwin Hu pursuant to which he agreed to 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. The entire employment agreement with Mr. Hu is incorporated by reference at Exhibit 10.5. In April 2005, we entered into an employment agreement with Mr. William Hawkins pursuant to which he agreed to 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. The entire employment agreement with Mr. Hawkins is incorporated by reference at Exhibit 10.6. In April 2005, we entered into an employment agreement with Mr. David Clark pursuant to which he agreed to serve as our Senior VP 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. The entire employment agreement with Mr. Clark is incorporated by reference at Exhibit 10.7. REPORT ON REPRICING OF OPTIONS/SARS We did not re-price any options during the year ended December 31, 2006. We have not granted any SARs to date. -31- ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The following table sets forth, as of March 30, 2007, 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 March 30, 2007 there were 21,542,092 shares of our common stock outstanding.
NUMBER OF COMMON SHARES BENEFICIALLY PERCENTAGE OF COMMON OWNED (1) SHARES BENEFICIALLY NAME AND ADDRESS OF BENEFICIAL OWNER OWNED ------------------------------------------------- ---------------------- --------------------- Syscan Imaging Limited (2) 16,173,514 75.1% Unit C, 21st Floor, 9-23 Shell Street North Point , Hong Kong Directors and Executive Officers: c/o Sysview Technolgy, Inc 1772 Technology Drive San Jose, CA 95110 Darwin Hu (3) 1,683,333 7.2 William Hawkins(4) 1,133,333 5.0 David Clark(5) 983,333 4.4 Lawrence Liang(6) 26,666 * All directors and executive officers as a group 3,826,665 15.1 (consisting of 4 persons) - ----------------------------------- * Less than one percent. (1) 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. (2) The sole shareholder of Syscan Imaging Limited is Syscan Technology Holdings Limited ("STH"), a publicly-held company whose shares are listed on The Growth Enterprise Market of the Stock Exchange of Hong Kong Limited. (3) Includes shares of common stock issuable upon the exercise of options that are either vested or will vest within 60 days from the date hereof. Does not include 366,667 shares of common stock underlying options that are not exercisable within the next 60 days. (4) Includes shares of common stock issuable upon the exercise of options that are either vested or will vest within 60 days from the date hereof. Does not include 266,667 shares of common stock underlying options that are not exercisable within the next 60 days. (5) Includes (i) 50,000 shares of common stock and (ii) 983,000 shares of common stock issuable upon the exercise of options that are either vested or will vest within 60 days from the date hereof. Does not include 266,667 shares of common stock underlying options that are not exercisable within the next 60 days. (6) Includes shares of common stock issuable upon the exercise of options that are either vested or will vest within 60 days from the date hereof. Does not include 53,334 shares of common stock underlying options that are not exercisable within the next 60 days.
-32- ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE We entered into the following transactions during the year ended December 31, 2006 required to be reported under Item 404 of Regulation S-B ("Item 404"): MANUFACTURING OF OUR PRODUCT We purchase the majority of our finished scanner imaging products from Syscan Lab Limited ("SLL"), a wholly-owned subsidiary of Syscan Technology Holdings Limited ("STH"), the parent company of our majority stockholder. Our Chairman and CEO, Darwin Hu, was formerly the CEO of STH. He resigned from STH effective December 2004. Purchases from SLL totaled $8,620,000 for the year ended December 31, 2006 and $4,915,000 during the year ended December 31, 2005. All purchases from SLL were carried out in the normal course of business. We have established a pricing agreement with SLL, which is negotiated semi-annually. We believe the quality of the product as well as the price we pay for the product is far more favorable to us than we could attain from an unrelated manufacturer. As a result of these purchases, the Company was liable to SLL for $952,000 and $203,000 at December 31, 2006 and 2005, respectively. RELATED-PARTY LOANS In the normal course of business, the Company entered into several interest-free loans to related parties for the purpose of purchasing capital equipment, including tooling required for the manufacture of our product, as follows: Year Ended December 31, 2006 $ -- Year Ended December 31, 2005 341,000 Prior to December 31, 2004 2,265,000 ---------------- TOTAL DUE AT DECEMBER 31, 2006 $2,606,000 ================ As of December 31, 2006, such loans were fully reserved. On March 21, 2007, we entered into an agreement with Syscan Technology Holdings, LTD whereby we agreed to forego any further collections efforts, including legal action, in exchange for the cancellation of 2,600,000 shares of our common stock beneficially owned by Syscan Technology Holdings, LTD. In addition, both parties mutually agreed to release and discharge any and all claims that each may have against the other party. -33- ITEM 13. EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT METHOD OF FILING - --------------- --------------------------------------------- --------------------------------------------- 2.1 Share Exchange Agreement Incorporated by reference to Exhibit 99.1 to Form 8-K dated April 19, 2004 3.1 Certificate of Incorporation, dated Incorporated by reference to Exhibit 3.1 on February 15, 2002 Form 10-KSB dated March 31, 2005 3.2 Certificate of Amendment to the Company's Incorporated by reference to Exhibit 3.2 on Certificate of Incorporation dated March Form 10-KSB dated March 31, 2005 19, 2004 3.3 Certificate of Designation of Preferences, Incorporated by reference to Exhibit 10.4 Rights and Limitations of Series A Stock as on Form 8-K dated March 21, 2005 filed with the Secretary of State of the State of Delaware on March 15, 2005 3.4 Amended and Restated Bylaws Incorporated by reference to Exhibit 3.4 on Form 10-KSB dated March 31, 2005 3.5 Certificate of Amendment to the Company's Incorporated by reference to Exhibit 3.5 on Certificate of Incorporation dated June 23, Form 10-QSB dated August 21, 2006 2006 3.6 Certificate of Designation of Preferences, Incorporated by reference to Exhibit 10.4 Rights and Limitations of Series B Stock as on Form 8-K dated August 14, 2006 filed with the Secretary of State of the State of Delaware on June 10, 2006 10.1 Form of Series A Convertible Preferred Incorporated by reference to Exhibit 10.1 Stock and Common Stock Warrant Purchase on Form 8-K dated March 21, 2005 Agreement entered into by and between the Company and the purchasers 10.2 Form of Common Stock Purchase Warrant Incorporated by reference to Exhibit 10.2 on Form 8-K dated March 21, 2005 10.3 Form of Registration Rights Agreement Incorporated by reference to Exhibit 10.3 on Form 8-K dated March 21, 2005 10.4 2002 Amended and Restated Stock Option Plan Incorporated by reference to Exhibit 10.4 on Form 10-KSB dated March 31, 2005 10.5 Employment Agreement entered between the Incorporated by reference to Exhibit 10.5 Company and Darwin Hu on April 26, on Form 8-K dated May 2, 2005 2005 10.6 Employment Agreement entered between the Incorporated by reference to Exhibit 10.6 Company and William Hawkins on April 26, on Form 8-K dated May 2, 2005 2005 10.7 Employment Agreement entered between the Incorporated by reference to Exhibit 10.7 Company and David P. Clark on April 26, 2005 on Form 8-K dated May 2, 2005 10.8 2006 Stock Option Incorporated by reference to Exhibit 10.8 Plan on Form 10-QSB dated August 21, 2006 -34- EXHIBIT NUMBER DESCRIPTION OF EXHIBIT METHOD OF FILING - --------------- --------------------------------------------- --------------------------------------------- 10.9 Form of Series B Convertible Preferred Incorporated by reference to Exhibit 10.1 Stock and Common Stock Warrant Purchase on Form 8-K dated August 14, 2006 Agreement entered into by and between the Company and the purchasers 10.10 Form of Common Stock Purchase Incorporated by reference to Exhibit 10.2 Warrant on Form 8-K dated August 14, 2006 10.11 Form of Registration Rights Incorporated by reference to Exhibit 10.3 Agreement on Form 8-K dated August 14, 2006 10.12 Lease Agreement by and between the Company Filed herewith and Airport II Property Management, LLC dated August 9, 2006 14.1 Code of Ethics adopted by the Company's Incorporated by reference to Exhibit 14.1 Board of Directors on March 28, on Form 10-KSB dated March 31, 2005 2005 21 List of Subsidiaries Filed herewith 31.1 Certification Pursuant to Section 302 of Filed herewith the Sarbanes-Oxley Act - Darwin Hu 31.2 Certification Pursuant to Section 302 of Filed herewith the Sarbanes-Oxley Act - William Hawkins 32.1 Certifications Pursuant to Section 906 of Filed herewith the Sarbanes-Oxley Act - Darwin Hu 32.2 Certifications Pursuant to Section 906 of Filed herewith the Sarbanes-Oxley Act - William Hawkins
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The following table is a summary of the fees billed for the audit and other services provided by our independent registered public accounting firm, Clancy and Co., P.L.L.C. ("Clancy"): YEAR ENDED FEE CATEGORY YEAR ENDED DECEMBER 31, DECEMBER 31, 2006 2005 ------------------- ------------------ ----------------- Audit fees $67,185 $45,650 Audit-related fees -- -- Tax fees 3,200 -- All other fees -- -- AUDIT FEES. Consists of fees billed for professional services rendered for the audit and restatement of our consolidated financial statements and review of our interim consolidated financial statements included in quarterly reports and services that are normally provided by Clancy in connection with statutory and regulatory filings or engagements, including Registrations Statements on Form SB-2 and post-effective amendments to previously filed registration statements. AUDIT-RELATED FEES. Consists of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our consolidated financial statements and are not reported under "Audit fees." These services include employee benefit plan audits, accounting consultations in connection with acquisitions, attest services that are not required by statute or regulation, and consultations concerning financial accounting and reporting standards. TAX FEES. Consists of fees billed for professional services for tax compliance, tax advice, and tax planning. These services include assistance regarding federal, state and international tax compliance, tax audit defense, mergers and acquisitions, and international tax planning. ALL OTHER FEES. No other fees have been billed for products and services billed by our accountants. -35- POLICY RELATED TO BOARD OF DIRECTORS PRE-APPROVAL OF AUDIT AND PERMISSIBLE NON-AUDIT SERVICES OF INDEPENDENT REGISTERED ACCOUNTING FIRM. As we do no currently have an audit committee, our Board of Directors has a policy of pre-approving all audit and permissible non-audit services provided by the independent auditors. These services may include audit services, audit-related services, tax services, and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. The independent auditors and management are required to periodically report to the Board of Directors regarding the extent of services provided by the independent auditors in accordance with this pre-approval, and the fees for the services performed to date. The Board of Directors may also pre-approve particular services on a case-by-case basis. -36- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SIGNATURE TITLE DATE /S/ DARWIN HU - ------------- Darwin Hu, Chief Executive Officer April 3, 2007 Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons in the capacities and on the dates indicated. SIGNATURE TITLE DATE /S/ DARWIN HU Chairman and Chief Executive Officer April 3, 2007 - ---------------------- Darwin Hu, /S/ WILLIAM HAWKINS Chief Operating Officer, April 3, 2007 - ---------------------- Acting Chief Financial Officer William Hawkins and Secretary /S/DAVID CLARK Senior VP of Business April 3, 2007 - ---------------------- Development and Director David Clark /S/ LAWRENCE LIANG Director April 3, 2007 - ---------------------- Lawrence Liang -37- APPENDIX - A ITEM 7. FINANCIAL STATEMENTS INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE Financial Statements: Report of Independent Registered Public Accounting Firm................. F-2 Consolidated Balance Sheets as of December 31, 2006 and 2005............ F-3 Consolidated Statements of Operations for the years ended December 31, 2006 and 2005...................................... F-4 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2006 and 2005...................................... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 2006 and 2005..................................... F-6 Notes to Consolidated Financial Statements.............................. F-7 F-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Sysview Technology, Inc. We have audited the accompanying consolidated balance sheets of Sysview Technology, Inc. and subsidiaries (the "Company") as of December 31, 2006 and 2005, and the related consolidated statements of operations, stockholders' equity, and cash flows for the years ended December 31, 2006 and 2005. These 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 audits. We conducted our audits 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 financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sysview Technology, Inc. and subsidiaries as of December 31, 2006 and 2005, and the consolidated results of their operations and their cash flows for the years ended December 31, 2006 and 2005, in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has incurred substantial net losses in recent years resulting in an accumulated deficit. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /S/ CLANCY AND CO., P.L.L.C. - ---------------------------- Clancy and Co., P.L.L.C. Scottsdale, Arizona March 29, 2007 F-2
SYSVIEW TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) DECEMBER 31, -------------------- 2006 2005 -------- -------- ASSETS Current assets: Cash and cash equivalents $ 1,333 $ 1,426 Trade receivables 1,813 1,285 Inventories 1,642 751 Prepaid expenses and other current assets 73 319 -------- -------- TOTAL CURRENT ASSETS 4,861 3,781 Fixed assets, net 108 167 Intangible assets, net -- 555 Due from related parties, net -- 2,606 Long-term investment 160 998 -------- -------- TOTAL ASSETS $ 5,129 $ 8,107 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Bank line and letter of credit $ 1,013 $ 1,013 Trade payables to related parties 952 203 Trade payables 198 259 Other payables and accruals 506 185 Accrued dividends on Series A 5% cumulative convertible stock preferred stock 152 71 -------- -------- TOTAL CURRENT LIABILITIES 2,821 1,731 Liability under derivative contracts 229 503 -------- -------- TOTAL LIABILITIES 3,050 2,234 Commitments and contingencies (Note 10) Convertible preferred stock, $.001 par value, 2,000 authorized: Series A 5% cumulative convertible preferred stock, 16 shares 957 468 issued and outstanding at December 31, 2006 and December 31, 2005; liquidation value of $1,565 and $1,615 at December 31, 2006 and December 31, 2005, respectively Series B convertible preferred stock, 11.5 shares issued and 152 -- outstanding at December 31, 2006, liquidation value of $1,150 Stockholders' equity: Common stock $.001par value, 50,000 authorized, 24,642 shares issued and 24,142 outstanding at December 31, 2006 24 24 and 24,592 shares issued and 24,092 outstanding at December 31, 2005 (500 shares held in escrow) Additional paid-in capital 29,651 28,138 Accumulated deficit (28,705) (22,757) -------- -------- TOTAL STOCKHOLDERS' EQUITY 970 5,405 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,129 $ 8,107 ======== ======== The accompanying notes are an integral part of these consolidated financial statements.
F-3
SYSVIEW TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) YEAR ENDED DECEMBER 31, ---------------------- 2006 2005 -------- -------- NET SALES $ 12,469 $ 7,848 COST OF SALES 8,221 4,989 -------- -------- GROSS PROFIT 4,248 2,859 OPERATING EXPENSES: Selling and marketing 1,240 1,037 General and administrative 5,361 2,918 Research and development 3,084 951 Impairment of long-term investment 838 -- -------- -------- TOTAL OPERATING EXPENSES 10,523 4,906 -------- -------- OPERATING LOSS (6,275) (2,047) -------- -------- OTHER INCOME (EXPENSE): Change in fair value of derivative instruments 1,421 1,112 Fair value of warrants issued (173) (290) Preferred stock issuance costs (88) (237) Interest income 28 24 Interest expense (92) (57) Loss on disposal of fixed assets and other (17) 5 -------- -------- TOTAL OTHER INCOME (EXPENSE) 1,079 557 -------- -------- Net loss before income taxes (5,196) (1,490) Provision for income taxes 3 3 -------- -------- Net loss (5,199) (1,493) Dividend on Series A and accretion of Series A and Series B preferred stock redemption value (749) (546) -------- -------- NET LOSS AVAILABLE TO COMMON STOCKHOLDERS $ (5,948) $ (2,039) ======== ======== NET LOSS PER COMMON SHARE - BASIC AND DILUTED $ (0.25) $ (0.09) ======== ======== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC AND DILUTED 24,105 23,279 ======== ======== The accompanying notes are an integral part of these consolidated financial statements.
F-4
SYSVIEW TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS) ADDITIONAL TOTAL COMMON STOCK PAID-IN ACCUMULATED STOCKHOLDERS' SHARES AMOUNT CAPITAL DEFICIT EQUITY -------- -------- -------- -------- -------- BALANCES AT DECEMBER 31, 2004 23,110 $ 23 $ 25,478 $(20,718) $ 4,783 Issuance of common stock upon conversion of preferred stock 257 -- 257 -- 257 Issuance of common stock for services rendered 225 -- 157 -- 157 Stock base compensation cost - options -- -- 1,577 -- 1,577 Fair value of warrants issued for payment of preferred stock -- -- 290 -- 290 issuance expenses Common stock issued for acquisition of subsidiary, 1,000,000 500 1 379 -- 380 shares less 500,000 held in escrow Net loss -- -- -- (2,039) (2,039) -------- -------- -------- -------- -------- BALANCES AT DECEMBER 31, 2005 24,092 $ 24 $ 28,138 $(22,757) $ 5,405 -------- -------- -------- -------- -------- Issuance of common stock upon conversion of preferred stock 50 -- 29 -- 29 Stock base compensation cost - options -- -- 1,311 -- 1,311 Fair value of warrants issued for payment of preferred stock -- -- 173 -- 173 issuance expenses Net loss -- -- -- (5,948) (5,948) -------- -------- -------- -------- -------- BALANCES AT DECEMBER 31, 2006 24,142 $ 24 $ 29,651 $(28,705) $ 970 ======== ======== ======== ======== ======== The accompanying notes are an integral part of these consolidated financial statements.
F-5
SYSVIEW TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) YEAR ENDED DECEMBER 31, ----------------------- 2006 2005 ------- ------- OPERATING ACTIVITIES Net loss $(5,948) $(2,039) Adjustments to reconcile net loss to cash used in operating activities Depreciation and amortization 597 31 Common stock issued for services -- 157 Stock base compensation cost - options 1,311 1,577 Change in fair value of derivative instruments (1,421) (1,112) Accretion of Series A and Series B preferred stock redemption value 668 468 Preferred stock issuance expenses paid by issuance of warrants 173 290 Allowance for doubtful accounts 2,606 -- Impairment of long-term investment 838 -- Conversion of Series A preferred stock dividends for common stock -- 7 Loss on disposal of assets 17 7 Changes in operating assets and liabilities: Trade receivables (528) (157) Inventories (891) (255) Prepaid expenses and other current assets 246 (101) Trade payables (61) 197 Trade payables to related parties 749 203 Other payables and accruals 324 65 Accrued dividends on Series A 5% cumulative convertible stock 81 71 ------- ------- CASH USED BY OPERATING ACTIVITIES (1,239) (598) ------- ------- INVESTING ACTIVITIES Cash paid for subsidiary -- (98) Capital expenditures (4) (169) ------- ------- CASH USED BY INVESTING ACTIVITIES (4) (267) ------- ------- FINANCING ACTIVITIES Proceeds from the issuance of preferred stock 1,150 1,865 Net repayments under bank lines of credit -- (100) Advances under bank letters of credit -- 180 Advances to related parties -- (341) ------- ------- CASH PROVIDED BY FINANCING ACTIVITIES 1,150 1,604 ------- ------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (93) 739 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,426 687 ------- ------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,333 $ 1,426 ======= ======= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: CASH PAID DURING THE YEAR FOR: Interest $ 92 $ 57 ======= ======= Income taxes $ 3 $ 3 ======= ======= NON-CASH INVESTING AND FINANCING ACTIVITIES: Conversion of Series A Preferred Stock for Common Stock $ 30 $ 257 ======= ======= The accompanying notes are an integral part of these consolidated financial statements.
F-6 SYSVIEW TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Sysview Technology. Inc. ("Sysview" or "Company") develops, designs and delivers various imaging technology solutions to all types and sizes of enterprises including governmental agencies, large corporations, small corporations, small office-home offices ("SOHO"), professional practices as well as consumers (referred to herein collectively as "Enterprises"). Sysview is a market-leader in providing USB-powered scanning solutions to a wide variety of industries and market applications. The Company's patented and proprietary page-imaging devices facilitate the way information is stored, shared and managed in both business and personal use. In addition, Sysview is involved in the research and development of certain technologies related to the field of high definition ("HD") display. Syscan, Inc., the Company's wholly-owned subsidiary, was incorporated in California in 1995 to develop and manufacture a new generation of contact image sensors ("CIS") that are complementary metal-oxide-silicon ("CMOS") imaging sensor devices. During the late 1990s, the Company established many technical milestones and was granted numerous patents for its linear imaging technology. The Company's patented CIS and mobile imaging scanner technology provides high quality images at extremely low power consumption levels allowing delivery of compact scanners in a form ideally suited for laptop or desktop computer users who need a small light weight device to scan or fax documents. The Company's business model was developed around intellectual property ("IP") driven products sold primarily to original equipment manufacturers ("OEM"), private label brands and value added resellers ("VAR") and can be found in a variety of applications, including but not limited, to the following: o Document and information management; o Identification card scanners; o Passport security scanners; o Bank note and check verification; o Business card readers; o Barcode scanning; and o Optical mark readers used in lottery terminals. BASIS OF FINANCIAL STATEMENTS The consolidated financial statements include the accounts of Sysview and its subsidiaries. All significant intercompany transactions and balances have been eliminated. United States (U.S.) dollar is the functional currency for the Company therefore no translation adjustment recorded through accumulated other comprehensive income (loss). Monetary accounts denominated in non-U.S. currencies, such as cash or payables to vendors, have been re-measured to the U.S. dollar. Gains and losses resulting from foreign currency transactions are included in the results of operations. Certain accounts have been reclassified to conform to the current period presentation. Such reclassifications did not affect total net sales, operating loss or net loss available to common stockholders. LIQUIDITY AND GOING CONCERN The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As shown in the financial statements, during the years ended December 31, 2006 and 2005, the Company incurred net losses of $5,948,000 and $2,039,000, respectively, of which approximately $4,789,000 and $1,425,000, respectively, is attributed to non-cash items. In addition, cash flows used in operations were $1,239,000 and $598,000, respectively, and at December 31, 2006, the Company was not in compliance with all of its Extended Agreement debt covenants. See Notes 10 and 12. These factors raise substantial doubt about the Company's ability to continue as a going concern. F-7 SYSVIEW TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Management believes the Company's ability to continue as a going concern is mitigated because the Company's current sources of liquidity as of February 28, 2007, which include approximately $1,500,000 in cash and cash equivalents, and a $987,000 line of credit available for use under its current line of credit facility, are sufficient to satisfy its cash requirements over the next twelve months. Management also believes that it has the ability to borrow additional funds from third parties such as financial institutions or will be successful in a debt or equity financing that will be sufficient to fund its operations for the next twelve months. Additionally, management will be reviewing all aspects of its business and making adjustments as needed to those considered unprofitable. Therefore, for at least the next twelve months, the Company can continue to operate as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amount and classification of liabilities or any other adjustment that might be necessary should the Company be unable to continue as a going concern. USE OF ESTIMATES The preparation of financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") 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. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of cash and highly liquid investments. Highly liquid investments include debt securities with remaining maturities of three months or less when acquired. They are stated at cost, which approximates market value. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value of cash and cash equivalents, trade receivables and payables, prepaid expenses and other current assets, amounts due to and from related parties, and other payables and accruals approximates fair value due to the short period of time to maturity. 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 December 31, 2006, the Company had consolidated balances of approximately $932,000, 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: YEAR ENDED DECEMBER 31, ---------------------------- 2006 2005 ----------- ------------- Customer A 42% 33% Customer B 14 18 Customer C 13 16 Customer D 12 12 F-8 SYSVIEW TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Trade receivables from these customers totaled $1,652,000 at December 31, 2006. As of December 31, 2006 all the Company's trade receivables were unsecured. The risk with respect to trade receivables is mitigated by credit evaluations performed on customers and the short duration of payment terms extended to customers. CONCENTRATION OF SUPPLIER RISK The Company purchases substantially all its finished scanner imaging products from one vendor that is also a wholly-owned subsidiary of the parent company of our 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. 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 (reversal) is recognized as a component of cost of sales in the period the provision (reversal) occurs. There was no provision recorded at December 31, 2006 or 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 seven 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. INTANGIBLE ASSETS Acquisition-related intangibles include 1.) intellectual property, which has reached technological feasibility, to be integrated into the Company's future products and 2.) technological expertise required to complete the integration. Intangible assets are amortized on a straight-line basis over the periods of benefit. The Company performs an annual review of its identified intangible assets to determine if facts and circumstances exist which indicate that the assets' useful life is shorter than originally estimated or that the assets' carrying amount may not be recoverable. If such facts and circumstances do exist, the Company assesses the recoverability of identified intangible assets by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets. 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. IMPAIRMENT OF LONG-LIVED ASSETS In accordance with Statement of Financial Accounting Standards ("SFAS") 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS ("SFAS 144"), if indicators of impairment exist, the Company assesses the recoverability of the affected long-lived assets by determining whether the carrying value of such assets can be recovered through the undiscounted future operating cash flows. If impairment is indicated, the Company measures the amount of such impairment by comparing the assets' carrying value to the assets' present value of the expected future cash flows. As such, the Company recognized $838,000 of impairment losses during the year ended December 31, 2006. The underlying asset is used in the Company's operations. Therefore, the impairment loss is included with operating expenses on the Company's statement of operations. See Note 7. F-9 SYSVIEW TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS PREFERRED STOCK ACCOUNTING TREATMENT Pursuant to SFAS 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES ("SFAS 133") and the Emerging Issues Task Force ("EITF") EITF 00-19, ACCOUNTING FOR DERIVATIVE FINANCIAL INSTRUMENTS, ("EITF 00-19"), the Company's Series A 5% cumulative convertible preferred stock ("Series A Stock") and related warrants and the Series B Convertible Preferred Stock ("Series B 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 Series A Stock and Series B Stock, respectively. The discounts are being accreted, on a straight-line basis, from the respective issuance date through the respective redemption date adjusted for conversions. Accretion of the preferred stock redemption value, for both Series A and Series B, for the years ended December 31, 2006 and 2005 totaled approximately $668,000 and $468,000, respectively, and is disclosed as a non-operating expense on the Company's consolidated statements of operations. The total decrease in the fair value of the liability for derivative contracts, for both Series A and Series B, totaled approximately $1,421,000 and $1,112,000 for the years ended December 31, 2006 and 2005, respectively, with the offsetting adjustment disclosed as non-operating income on the Company's 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 the Black-Scholes valuation model to estimate fair value of each derivative instrument and the resulting weighted average estimated value of the Series A Stock derivative liability and the Series B Stock derivative liability as of December 31, 2006 and 2005 are as follows: DECEMBER 31, --------------------------- 2006 2005 ------------- ---------- Weighted average estimated values per share $0.13 $0.43 Expected life in years 3.0 3.0 Expected volatility 37.95% 99.77% Expected dividend yield 0% 0% Risk free interest rate 5.17% 4% REVENUE RECOGNITION AND ALLOWANCE FOR DOUBTFUL ACCOUNTS AND RETURNS ALLOWANCES Revenues. Revenues consist of product sales including the sale of 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. Shipping charges billed to customers are included in net sales and the related shipping costs are included in cost of sales. All internal handling charges are included with selling and marketing 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. Allowances, when required, 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, 2006 or 2005 as management believes all of its trade receivables are collectible. RESEARCH AND DEVELOPMENT EXPENSES Research and development costs are expensed as incurred. ADVERTISING COSTS Advertising costs are expensed as incurred and were immaterial for both periods presented. F-10 SYSVIEW TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS EMPLOYEE EQUITY INCENTIVE PROGRAMS 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 THE ACCOUNTING PRINCIPLES BOARD ("APB") APB OPINION 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25"). 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, Sysview 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 year December 31, 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 APB 25), 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 4. INCOME TAXES The Company accounts for income taxes under the liability method of accounting for income taxes in accordance with the provisions of SFAS 109, ACCOUNTING FOR INCOME TAXES, ("SFAS 109"). 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. NET LOSS PER SHARE Basic net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted net 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. As the Company incurred net losses for the years ended December 31, 2006 and 2005, common stock equivalents were excluded from diluted net loss per share as their effect would be anti-dilutive. As a result, for all periods presented, the Company's basic and diluted net loss per share is the same. RECENT ACCOUNTING PRONOUNCEMENTS 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 (loss) 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. Sysview adopted SFAS 154 on January 1, 2006. The adoption had no impact to the Company's consolidated financial position, results of operations or cash flows. F-11 SYSVIEW TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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 evaluating the potential impact this standard may have on its consolidated financial position, cash flows and results of operations, but does not believe the impact of the adoption will be material. In June 2006, the FASB issued Interpretation 48, ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES -- AN INTERPRETATION OF FASB STATEMENT NO. 109 ("FIN 48"), which clarifies the accounting for uncertainty in tax positions. This Interpretation requires that the Company recognize in its financial statements the impact of a tax position if that position will more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective for the Company on January 1, 2007, with the cumulative effect of the change in accounting principle, if any, recorded as an adjustment to opening retained earnings. The Company does not expect there to be any significant impact of adopting FIN 48 on its consolidated financial position, cash flows and results of operations. In September 2006, the FASB issued SFAS 157, FAIR VALUE MEASUREMENTS ("SFAS 157"), which provides guidance about how to measure assets and liabilities that use fair value. SFAS 157 will apply whenever another US GAAP standard requires (or permits) assets or liabilities to be measured at fair value but does not expand the use of fair value to any new circumstances. This standard also will require additional disclosures in both annual and quarterly reports. SFAS 157 will be effective for financial statements issued for fiscal years beginning after November 15, 2007, and will be adopted by the Company January 1, 2008. The Company is currently evaluating the potential impact this standard may have on its consolidated financial position, cash flows and results of operations, but does not believe the impact of the adoption will be material. In September 2006, the SEC staff issued Staff Accounting Bulletin ("SAB") 108, CONSIDERING THE EFFECTS OF PRIOR YEAR MISSTATEMENTS WHEN QUANTIFYING MISSTATEMENTS IN CURRENT YEAR FINANCIAL STATEMENTS ("SAB 108"). SAB 108 was issued to eliminate the diversity of practice in how public companies quantify misstatements of financial statements, including misstatements that were not material to prior years' financial statements. The Company applied the provisions of SAB 108 to its annual financial statements for the year ending December 31, 2006 included herein. The adoption had no impact to the Company's consolidated financial position, results of operations or cash flows. Other recent accounting pronouncements issued by the FASB (including the 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 2 - SIGNIFICANT FOURTH QUARTER ADJUSTMENTS During the fourth quarter of fiscal year 2006, the Company's management continued to monitor and evaluate the collectibility and potential impairment of its assets, in particular, intangible assets, amounts due from related parties and long-term investments. In connection therewith, the following adjustments were recorded in the fourth quarter: INTANGIBLE ASSETS During the fourth quarter of fiscal year 2006, the Company performed an annual review of its identified intangible assets. Based on this review, Sysview management reclassified its intangible assets from non-amortizing to amortizing intangible assets. As a result, Sysview booked $555,000 of intangible asset amortization expense, which is included with research and development expenses, during the fourth quarter of fiscal year 2006. See Note 6. DUE FROM RELATED PARTIES The Company booked an allowance of $2,606,000 to fully reserve amounts due from related parties as it became apparent to management that such parties may not have the financial resources to repay amounts due. The Company does not plan to continue its collection efforts. See Note 12. F-12 SYSVIEW TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS LONG-TERM INVESTMENT During the fourth quarter, the Company recorded an impairment charge of $838,000 related to its long-term investment. See Note 7. It is management's opinion that these adjustments are properly recorded in the fourth quarter of fiscal year 2006 based upon the facts and circumstances that became available during that period. NOTE 3 - RELATED-PARTY TRANSACTIONS RELATED-PARTY PURCHASES The Company purchases the majority of its finished scanner imaging products from Syscan Lab Limited ("SLL"), a wholly-owned subsidiary of Syscan Technology Holdings Limited ("STH"), the parent company of Sysview' majority stockholder. See Note 1. The Company's Chairman and CEO, Darwin Hu, was formerly the CEO of STH. He resigned from STH effective December 2004. Purchases from SLL totaled $8,620,000 and $4,915,000 for the years ended December 31, 2006 and 2005, respectively. All purchases from SLL were carried out in the normal course of business. As a result of these purchases, the Company was liable to SLL for $952,000 and $203,000 at December 31, 2006 and 2005, respectively. RELATED-PARTY LOANS In the normal course of business, the Company made interest-free loans to several related parties for the purpose of purchasing capital equipment, including tooling equipment required to manufacture the Company's product. These loans totaled $2,606,000 at December 31, 2006 and 2005. As discussed in Note 2, these loans were fully reserved during the fourth quarter of fiscal year 2006. See Note 12. NOTE 4 - EMPLOYEE EQUITY INCENTIVE PLANS STOCK-BASED COMPENSATION Prior to January 1, 2006, Sysview accounted for its stock-based employee compensation plans following the recognition and measurement principles of APB 25 and related interpretations. Accordingly, compensation expense, equal to the difference between the total exercise price and the total fair market value - for awards granted at an exercise price less than fair market value of the underlying common stock on the grant date - was amortized over the vesting period and included in the Consolidated Statement of Operations. Effective January 1, 2006, Syscan adopted the fair value recognition provisions of SFAS 123(R). See Note 1. The following table sets forth the total stock-based compensation expense included in the consolidated statements of operations (IN THOUSANDS): YEAR ENDED DECEMBER 31, --------------------------- 2006 2005 ------------ ----------- Selling and marketing $ 51 $ 85 General and administrative 1,015 1,407 Research and development 245 85 At December 31, 2006, the Company had approximately $863,000 of total unrecognized compensation cost related to unvested stock options. This cost is expected to be recognized over a weighted-average period of approximately 16 months. F-13 SYSVIEW TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS STOCK OPTIONS The Company issues options under two different stock option plans (both approved by shareholders) as well as through employment agreements with key employees, executives and consultants (approved by the board of directors on a case-by-case basis). The following table sets forth, by the respective option plan, certain aspects of the Company's stock options as of December 31, 2006:
OPTION APPROVAL METHOD OPTIONS OUTSTANDING AND OPTIONS AVAILABLE -------------------------------- ----------------------------------------- BOARD OF AVAILABLE BOARD OF DIRECTORS AND FOR FUTURE DESCRIPTION DIRECTORS SHAREHOLDERS TOTAL OUTSTANDING GRANT TOTAL - ----------- --------- ------------ ----- ----------- ----- ----- 2002 Amended and Restated -- 3,200,000 3,200,000 890,000 2,310,000 3,200,000 Stock Option Plan Key Personnel Option 4,000,000 -- 4,000,000 4,000,000 -- 4,000,000 Grants 2006 Stock Option Plan 1,500,00 1,500,000 -- 1,500,000 1,500,000 --------- --------- --------- --------- --------- --------- Total 4,000,000 4,700,000 8,700,000 4,890,000 3,810,000 8,700,000 ========= ========= ========= ========= ========= =========
The following table summarizes stock option activity and related information as of and for the year ended December 31, 2006: WEIGHTED-AVERAGE EXERCISE OPTIONS PRICE ----------- ------------- Outstanding at December 31, 2005 3,760,000 $0.01 Granted 1,190,000 0.69 Exercised - - Cancelled 60,000 1.17 ----------- ------------- Outstanding at December 31, 2006 4,890,000 $0.18 =========== ============= The following table summarizes all options outstanding and exercisable by price range as of December 31, 2006:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------------------------------- -------------------------------- WEIGHTED-AVERAGE RANGE OF REMAINING WEIGHTED-AVERAGE WEIGHTED-AVERAGE EXERCISE PRICES NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE ------------------ --------------- ---------------- ------------- --------------- ------------- $0.01 4,000,000 5.32 $0.01 2,666,666 $0.01 $0.65 - $1.01 890,000 9.38 $0.92 57,500 $0.65
F-14 SYSVIEW TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 - FIXED ASSETS Fixed assets are summarized as follows (IN THOUSANDS): DECEMBER 31, ------------------------------ 2006 2005 ------------ -------------- Computer and office equipment $ 37 $62 Furniture and fixtures 3 3 Tooling and product design 127 137 ------------ -------------- 167 202 Less: accumulated depreciation (59) (35) ------------ -------------- $108 $167 ============ ============== Total fixed asset depreciation expense totaled $42,000 and $31,000 for the years ended December 31, 2006 and 2005, respectively NOTE 6 - BUSINESS ACQUISITION AND INTANGIBLE ASSETS The Company's intangible assets were recorded primarily as a result of the acquisition of Nanodisplay, Inc ("Nano") in November 2005. Nano was purchased to facilitate the Company's anticipated entry into the display market as Nano was a leading designer of liquid crystal on silicon ("LCOS") HDTV technology and maintained a workforce with the technical expertise required to integrate Nano's technology into the Company's technology. The aggregate purchase price was $478,000 including $98,000 of cash and 1,000,000 shares of common stock (500,000 shares were not valued at the acquisition date because they were, and still are as of December 31, 2006, held in escrow until certain milestones and conditions are met) valued at $380,000, calculated using the average market price of the Company's common shares for one week before and one week after the terms of the agreement were finalized. Nano's financial information is incorporated into the consolidation of the Company effective November 17, 2005, the effective date of the merger. The following represents the PRELIMINARY allocation of the purchase price at December 31, 2005 (IN THOUSANDS): Fixed assets $ 5 Goodwill 542 --------- Total assets acquired 547 Accounts payable and accrued liabilities (69) --------- Fair value of net assets acquired $ 478 ========= As previously discussed in Note 2, management performed an annual review of its identified intangible assets during the fourth quarter of fiscal year 2006. In connection with this review, Sysview management completed its final analysis, which included re-assessing its preliminary allocation of the Nano purchase price, and determining that the purchase price was more accurately allocated to developed technology and technological expertise required to integrate the developed technology into the Company's technology. Therefore, the Company finalized the purchase price allocation at December 31, 2006 as follows (IN THOUSANDS): F-15 SYSVIEW TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Fixed assets $ 5 Developed technology (estimated useful life of one year) 463 Technical integration expertise (estimated useful life of one 79 year) ---------- Total assets acquired 547 Accounts payable and accrued liabilities (69) ---------- Fair value of net assets acquired $ 478 ========== Amortization of intangible assets, included in research and development expenses, totaled $555,000 for the year ended December 31, 2006. There was no amortization of intangible assets for the year ended December 31, 2005. After management's review and reallocation of intangible assets performed in the fourth quarter of fiscal year 2006, the following summarizes the components of intangible assets (IN THOUSANDS):
AS OF DECEMBER 31, 2006 AS OF DECEMBER 31, 2005 ------------------------------------ ----------------------------------------- Accumulated Accumulated Gross Amortization Net Gross Amortization Net Life -------- --------------- ----- --------- --------------- --------- --------- Developed technology $463 $(463) $ - $463 $ - $463 1 Year Technical integration expertise 79 (79) - 79 - 79 1 Year Other 13 (13) - 13 - 13 1 Year -------- --------------- ----- --------- --------------- --------- Total $555 $(555) $ - $555 $ - $555 ======== =============== ===== ========= =============== =========
PRO FORMA INFORMATION (UNAUDITED) Nano's actual results of operations are included in the consolidated financial statements from the date of acquisition. The Company's unaudited pro forma statement of operations data set forth below (IN THOUSANDS, EXCEPT PER SHARE DATA) gives effect to this acquisition using the purchase method as if Nano was purchased on January 1, 2005. This pro forma information is presented for illustrative purposes only and is not necessarily indicative of the combined financial position or results of operations for future periods or the financial position or result of operations that would have been realized had the acquisition occurred on January 1, 2005. 2006 2005 ---------------- ------------------ Net sales $ 12,469 $ 7,848 Net loss (4,991) (3,349) Basic and diluted net loss per share $ (0.21) $ (0.14) NOTE 7 - 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 infrared sensors and CMOS sensors. During all periods presented, the Company owned 16.1% of CMOS and accounted for the investment using the cost method of accounting. As previously discussed in Note 2, the Company recorded an impairment charge of $838,000 related to its investment in CMOS. The Company's management and directors are of the opinion that the long-term investment's new cost basis of $160,000 is reflective of the long-term investment's underlying value at December 31, 2006. NOTE 8 - EQUITY COMMON STOCK ACTIVITY During the year ended December 31, 2006 the Company issued 50,000 shares of common stock for the conversion of 500 shares of Series A Stock as discussed below. F-16 SYSVIEW TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS PREFERRED STOCK ACTIVITY SERIES A 5% CUMULATIVE CONVERTIBLE PREFERRED STOCK INITIAL ISSUANCE AND ACTIVITY 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 Stock along with warrants, expiring five years from the date of issuance, to purchase additional shares of the Company's common stock. The Series A Stock has no voting rights. The Series A 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 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. 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. At the time of issuance, total common stock issuable upon conversions of the underlying Series A Stock and related warrants follows: Series A Stock (1) 1,865,000 Maximum accrued dividends on the shares of Series A 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 anti-dilution provisions. (2) Convertible at $2.00 per share, subject to anti-dilution provisions. During the year ended December 31, 2006, $50,000 of Series A Stock (500 shares) were converted into 50,000 shares of common stock. SERIES A STOCK DIVIDENDS The Company's Series A 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 Series A 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 cash dividends. During the years ended December 31, 2006 and 2005, Series A Stock dividends were approximately $81,000 and $78,000, respectively, and recorded as a non-operating expense on the Company's statement of operations. F-17 SYSVIEW TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SERIES B CONVERTIBLE PREFERRED STOCK On August 8, 2006, the Company completed a private placement with a group of accredited investors for the sale of 11,500 shares of the Company's Series B Stock along with warrants, expiring three years from the date of issuance, to purchase additional shares of the Company's stock. Pursuant to a registration rights agreement (as discussed below), the Company filed a Form SB-2 on October 11, 2006, with the Securities and Exchange Commission ("SEC"), to register the shares of common stock issuable upon conversion of the Series B Stock and upon exercise of the warrants. The SEC declared the SB-2 effective on January 18, 2007. At the time of issuance, total common stock issuable upon conversions of underlying Series B Stock and related warrants follows: Series B Stock (1) 1,150,000 Warrants issued to purchasers in private placement (2) 575,000 Warrants issued to placement agent in the private placement (2) 100,000 ------------- 1,825,000 ============= (1) Convertible at $1.00 per share, subject to anti-dilution provisions. (2) Convertible at $1.50 per share, subject to anti-dilution provisions. The Series B Stock was priced at $100 per share and the Company received proceeds of $1,150,000 less offering costs and expenses. Starboard Capital Markets, LLC, a NASD member firm, acted as placement agent in the sale for which it received $80,000 in commissions and 100,000 warrants to purchase shares of the Company's common stock at an exercise price equal to $1.50 per share. The fair value of these warrants totaled $26,000 and such amount was charged to other income (expense) and credited to additional paid-in capital during the year ended December 31, 2006. The material terms of the Series B Stock are as follows: SERIES B STOCK CONVERSION RIGHTS. All or any portion of the stated value of the Series B Stock outstanding may be converted into common stock at anytime by the investors. The initial fixed conversion price of the Series B Stock is $1.00 per share ("Conversion Price"). The Conversion Price is subject to anti-dilution protection adjustments, on a full ratchet basis, until the date that is twelve months from the effective date of the Registration Statement required to be filed pursuant to the Registration Rights Agreement, upon the Company's issuance of additional shares of common stock, or securities convertible into common stock, at a price that is less than the then Conversion Price. REDEMPTION. On August 7, 2009 ("Redemption Date"), all of the outstanding Series B Stock shall be redeemed for a per share redemption price equal to the stated value on the Redemption Date ("Redemption Price"). The Redemption Price is payable by the Company in cash or in shares of common stock at the Company's discretion and shall be paid within five trading days after the Redemption Date. In the event the Company elects to pay all or some of the Redemption Price in shares of common stock, the shares of common stock to be delivered to the Investors 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 August 7, 2007, (A) the closing market price for a share of the Company's common stock for ten 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 the Company shall have the right, at its option, to convert, all, but not less than all, of the outstanding shares of the Series B Stock at the Conversion Price; provided that the Registration Statement shall be effective at all times during such 10-day period and during the 30-day notice period to the Investors. WARRANT TERMS. The Warrants grant Investors the right to purchase up to an aggregate of 575,000 shares of common stock of the Company at an exercise price of $1.50 per share. The Warrants expire on August 7, 2009 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, at which time an investor may exercise their Warrants on a cashless basis. RESTRICTIONS ON CONVERSION OF SERIES B STOCK AND EXERCISE OF WARRANTS. No holder of the Series B Stock is entitled to receive shares upon conversion of the Series B 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 the Company's common stock on the date of issuance of such shares (this provision may be waived upon 61 days prior written notice to the Company). In addition, no individual holder is entitled to receive shares upon conversion of the Series B Stock if the transaction causes such holder to beneficially own in excess of 9.999% of the outstanding shares of the Company's common stock on the date of issuance of such shares (this provision may be waived upon 61 days prior written notice to the Company). F-18 SYSVIEW TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS None of the individual holders of the Series B warrants are entitled to exercise any warrant held by them, if the exercise causes the holder 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. REGISTRATION RIGHTS. Pursuant to the terms of a Registration Rights Agreement between the investors and the Company, the Company was obligated to file a registration statement on Form SB-2 (which was filed on October 11, 2006) registering the resale of shares of the Company's common stock issuable upon conversion of the Series B Stock and exercise of the related warrants. The Company was required to file the registration statement within 60 days following August 8, 2006 and to have the registration statement declared effective by December 6, 2006, which is 120 days following August 8, 2006. If the registration statement was not timely filed, or declared effective within the timeframe described, or if the registration is suspended other than as permitted, in the Registration Rights Agreement, the Company will be obligated to pay each Investor a fee equal to one percent of such investor's purchase price of the Series B Stock for each 30 day period thereafter (pro rated for partial periods), that such registration conditions are not satisfied, up to a maximum of 12 months. Because the SEC did not declare the SB-2 effective until January 18, 2007, the Company accrued $10,000, included in general and administrative expense, for damages during the year ended December 31, 2006. RIGHT OF FIRST REFUSAL. Subject to certain conditions, the Company has granted the investors a right of first refusal, for a period of one year from the effective date of the registration statement required to be filed in connection with this transaction, to participate in any subsequent financing that the Company conducts. VOTING RIGHTS. Holders of the Series B Stock shall have no voting rights. However, so long as any shares of Series B Stock are outstanding, the Company shall not, without the affirmative vote of the holders of a majority of the shares of the Series B Stock then outstanding, (a) alter or change adversely the powers, preferences or rights given to the Series B Stock or alter or amend the Series B 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 Series B Stock, (c) amend its certificate or articles of incorporation or other charter documents so as to affect adversely any rights of the holders of the Series B Stock, (d) increase the authorized number of shares of the Series B Stock, or (e) enter into any agreement with respect to the foregoing. LIQUIDATION PREFERENCE. Upon any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, and subject to the rights of the holders of Series A Stock, the holders of the Series B Stock shall be entitled to receive out of the assets of the Company, whether such assets are capital or surplus, for each share of Series B Stock an amount equal to the stated value per share before any distribution or payment shall be made to the holders of any securities of the Company with rights junior to the Series B Stock, and if the assets of the Company shall be insufficient to pay in full such amounts, then the entire assets to be distributed to the holders of the Series B 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. NOTE 9 - INCOME TAX 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 current periods. 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 realization of 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 by approximately $1,029,000 and $596,000 during the years ended December 31, 2006 and 2005, respectively. F-19 SYSVIEW TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2006, the Company has available net operating loss carryforwards for federal and state income tax purposes of approximately $22,200,000 and $19,700,000 which expire principally through 2026 and 2011, 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: 2006 2005 ------------- ------------ U.S. and California statutory rate (%) (43.0) (43.0) Change in valuation allowance 43.0 43.0 ------------- ------------ - - ============= ============ The net deferred income tax asset consisted of the following: 2006 2005 ------------ ------------ Deferred tax assets Federal net operating loss carryforwards $ 7,791,000 $ 6,975,000 State net operating loss carryforwards 1,746,000 1,540,000 Capitalized R&D Expenses 932,000 932,000 Tax credit carryforwards 708,000 708,000 ------------ ------------ 11,177,000 10,155,000 Less valuation allowance 11,177,000 10,148,000 ------------ ------------ -- 7,000 Deferred tax liability Excess tax over book depreciation -- (7,000) ------------ ------------ Net deferred income tax asset $ -- $ -- ============ ============ NOTE 10 - COMMITMENTS AND CONTINGENCIES OPERATING LEASES The Company is committed under various non-cancelable operating leases which extend through November 2011. As of December 31, 2006, future minimum rental commitments are as follows (IN THOUSANDS): FUTURE YEAR ENDING MINIMUM LEASE DECEMBER 31, PAYMENTS ----------------- --------------- 2007 $ 261 2008 248 2009 1 2010 1 2011 1 --------------- Total $512 =============== BANK LINE OF CREDIT The Company has a line of credit agreement ("LOC Agreement") to borrow up to $2,500,000, bearing interest at the rate of prime (8.25% at December 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 was originally due in full on October 30, 2006. On December 18, 2006, Sysview extended the loan ("Extended Agreement"), with the same terms, for 12 months. The new maturity date is October 30, 2007. Upon certain events of default, the default variable interest rate increases to prime plus 5.5%. The Company had $1,487,000 available for use at December 31, 2006. F-20 SYSVIEW TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At December 31, 2006, Sysview was not in compliance with all of the Extended Agreement debt covenants. Pursuant to a waiver letter from the lender dated March 28, 2007, the lender agreed to forbear from exercising its rights and remedies with respect to existing defaults under the Extended Agreement from the date of the Extended Agreement through December 31, 2006. See Notes 1 and 12. 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 December 31, 2006 termination payments totaling $490,000 remain in effect. CONSULTING AGREEMENT The Company entered into an Investor Relations Consulting Agreement dated December 5, 2006, for a term of one year beginning January 1, 2007, payable monthly as follows: (i) $5,000 for January, February and March; (ii) $7,500 for April, May and June; (iii) $8,500 for July, August and September; and (iv) $9,000 for October, November, and December. Additionally, the Company agreed to pay the consultant 90,000 warrants with an exercise price of $0.65 per share, expiring in three years, with immediate vesting on January 1, 2007, and exercisable at the rate of 7,500 the first day of each month during calendar 2007. The warrants will not be registered under federal or state securities laws. LITIGATION, CLAIMS AND ASSESSMENTS 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. SERIES A PREFERRED STOCK REGISTRATION RIGHTS AGREEMENT In connection with the issuance of Series A Preferred Stock, the Company executed a registration rights agreement ("Agreement") with the purchasers thereof under which the Company agreed to register the common shares underlying the Series A 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 Series A 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, which was originally declared effective by the SEC on July 7, 2005, became ineffective April 30, 2006. The Company updated the original registration statement by filing amendments on June 6, 2006 and August 22, 2006, and the SEC declared the registration effective September 15, 2006. As a result, the Company accrued $145,000, included in general and administrative expense, for damages during the year ended December 31, 2006. NOTE 11 - SEGMENT AND GEOGRAPHIC INFORMATION SEGMENT INFORMATION Sysview 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"). F-21 GEOGRAPHIC INFORMATION During the years ended December 31, 2006 and 2005, Sysview 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): YEAR ENDED DECEMBER 31, ----------------------------- 2006 2005 ------------- ------------- U.S. $ 11,677 $ 6,828 Asia 405 706 Europe and other 387 314 ------------- ------------- $ 12,469 $ 7,848 ============= ============= Substantially all Sysview's identifiable assets are located in the U.S. NOTE 12 - SUBSEQUENT EVENTS COMMON STOCK TRANSACTIONS On March 21, 2007, the Company entered into an agreement with Syscan Technology Holdings, LTD whereby the Company agreed to forego any further collections efforts, including legal action, in exchange for the cancellation of 2,600,000 shares of the Company's common stock beneficially owned by Syscan Technology Holdings, LTD. In addition, both parties mutually agreed to release and discharge any and all claims that each may have against the other party. The Company's transfer agent cancelled the shares on March 29, 2007 LINE OF CREDIT As previously discussed in Note 10, Sysview was not in compliance with all of the Extended Agreement debt covenants at December 31, 2006. The Company has remained out of compliance with the Extended Agreement debt covenants through the date of this filing. Although the Company is currently working with the lender to extend the waiver, the lender has not agreed to waive any debt covenant violations subsequent to December 31, 2006. The Company had $987,000 available for use at March 29, 2007. STOCK OPTION GRANTS On March 28, 2007, the Board of Directors approved the issuance of 3,036,000 options to purchase the Company's common stock for employees and directors. One third of the options vested immediately, one third vest on March 28, 2008 and one third vest on March 28, 2009. F-22 EX-10.12 2 ex10-12.txt AIRPORT II PROPERTY MANAGEMENT, LLC FULL SERVICE LEASE 1. BASIC LEASE PROVISIONS ("BASIC LEASE PROVISIONS") 1.1 PARTIES: This Lease, dated for reference purposes only, August 9, 2006, is made by and between AIRPORT II PROPERTY MANAGEMENT, LLC (herein called "Lessor") and SYSVIEW TECHNOLOGY (herein called "Lessee"). 1.2 PREMISES: Suite Number 1772 AND 178, consisting of approximately 10,682 RENTABLE SQUARE FEET AND 8,759 USEABLE SQUARE FEET, more or less, as defined in paragraph 2 (the "Premises"). An 18% load is included in the total approximate square feet. 1.3 BUILDING: Commonly described as being located at 1798 Technology Drive in the City of San Jose, County of Santa Clara, and State of California and as defined in paragraph 2. 1.4 USE: General office use and related legal uses, subject to paragraph 6. 1.5 TERM: Two years commencing on DECEMBER 1, 2006 ("Commencement Date") and ending NOVEMBER 30, 2008 ("Termination Date"), as defined in paragraph 3. 1.6 BASE RENT: Shall be payable on the first day of each month in accordance with paragraphs 1.7 and 4.1 herein. 1.7 BASE RENT SCHEDULE: 12/01/06 TO 11/30/07: $21,364.00 PER MONTH ($2.00 PER SQUARE FOOT) 12/01/07 TO 11/30/08: $21,898.10 PER MONTH ($2.05 PER SQUARE FOOT) 1.8 OPERATING EXPENSES SCHEDULE: 12/01/06 TO 11/30/07: $257.00 PER MONTH 12/01/07 TO 11/30/08: $534.10 PER MONTH 1.9 BASE RENT AND OTHER MONIES PAID UPON EXECUTION: (A) BASE RENT: $21,364.00 (B) OPERATING EXPENSES: $257.00 (C) SECURITY DEPOSIT: $10,243.20 (22,432.20 LESS $12,189.00 ON FILE) (D) OTHER: $0 *See sections 54 and 55. (E) TOTAL DUE UPON EXECUTION OF THIS LEASE: $10,243.20 1.10 BUSINESS HOURS FOR THE BUILDING: 7:00 a.m. to 7:00 p.m. Monday through Friday (except Building Holidays). 2. PREMISES, PARKING AND COMMON AREAS: 2.1 PREMISES: The Premises are a portion of a building, herein sometimes referred to as the "Building" identified in paragraph 1.3 of the Basic Lease Provisions "Building" shall include adjacent parking structures used in connection therewith The Premises, the Building, the Common Areas, the land upon which the same are located, along with all other buildings and improvements thereon or thereunder, are herein collectively referred to as the "Office Building Project". Lessor hereby leases to Lessee and Lessee leases from Lessor for the term, at the rental rate, and upon all of the conditions set forth herein, the real property referred to in the Basic Lease Provisions, paragraph 1.2, as the "Premises", including rights to the Common Areas as hereinafter specified. Lessee agrees that Lessee has been given a full and fair opportunity to determine and confirm the square footage of the Premises and further agrees that the square footage referenced in the Basic Lease Provisions, paragraph 1.2, is conclusively deemed accurate. 2.2 VEHICLE PARKING: So long as Lessee is not in default, and subject to the rules and regulations attached hereto, and as established by Lessor from time to time, Lessee shall be entitled to rent and use n/a (#) unreserved parking spaces in the Office Building Project. There shall be no overnight parking. 1 (A) If Lessee commits, permits or allows any of the prohibited activities described in the Lease or the rules then in effect, then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove or tow away the vehicle involved and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor. 2.3 COMMON AREAS - DEFINITION. The term "Common Areas" is defined as all areas and facilities outside the Premises and within the exterior boundary line of the Office Building Project that are provided and designated by Lessor from time to time for the general non-exclusive use of Lessor, Lessee and of other lessees of the Office Building Project and their respective employees, suppliers, shippers, customers and invitees, including, but not limited to, common entrances, lobbies, corridors, stairways and stairwells, public restrooms, elevators, escalators, parking areas to the extent not otherwise prohibited by this Lease, loading and unloading areas, trash areas, roadways, sidewalks, walkways, parkways, ramps, driveways, landscaped areas and decorative walls, but shall not have any right to the roof, the exterior walls, the area above the dropped ceilings, or the utility raceways of the building containing the Premises or to any other building in the Office Building Project. 2.4 COMMON AREAS - RULES AND REGULATIONS. Lessee agrees to abide by and conform to the rules and regulations attached hereto as Exhibit 'A' with respect to the Office Building Project and Common Areas, and to cause its employees, suppliers, shippers, customers and invitees to so abide and conform. Lessor or such other person(s) as Lessor may appoint shall have the exclusive control and management of the Common Areas and shall have the right from time to time to modify, amend and enforce said rules and regulations. Lessor shall not be responsible to Lessee for the non-compliance with said rules and regulations by other lessees, their agents, employees and invitees of the Office Building Project. 2.5 COMMON AREAS - CHANGES. Lessor shall have the right, in Lessor's sole discretion, from time to time: (A) To make changes to the Building interior and exterior and Common Areas, including, without limitation, changes in the location, size, shape, number, and appearance thereof, including but not limited to the lobbies, windows, stairways, air shafts, elevators, escalators, restrooms, driveways, entrances, parking spaces, parking areas, loading and unloading areas, ingress, egress, direction of traffic, decorative walls, landscaped areas and walkways; provided, however, Lessor shall at all time provide the parking facilities required by applicable law: (B) To close temporarily any of the Common Areas for maintenance purposes so long a reasonable access to the Premises remains available; (C) To designate other land and improvements outside the boundaries of the Office Building Project to be a part of the Common Areas, provided that such other land and improvements have a reasonable and functional relationship to the Office Building Project; (D) To add additional buildings and improvements to the Common Areas: (E) To use the Common Areas while engaged in making additional improvements, repairs or alterations to the Office Building Project, or any portion thereof: (F) To do and perform such other act and make such other changes in, to or with respect to the Common Areas and Office Building Project as Lessor may, in the exercise of sound business judgment deem to be appropriate. 3. TERM. 3.1 TERM. The term Commencement Date and Termination Date of this Lease shall be as specified in paragraph 1.5 of the Basic Lease Provisions. 3.2 DELAY IN POSSESSION. Notwithstanding said Commencement Date, if for any reason Lessor cannot deliver possession of the Premises to Lessee on said date and subject to paragraph 32(b), Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease or the obligations of Lessee hereunder or extend the term hereof; but, in such case, Lessee shall not be obligated to pay rent or perform any other obligation of Lessee under the terms of this Lease, except as may be otherwise provided in this Lease, until possession of the Premises is tendered to Lessee, as hereinafter defined; provided, however, that if Lessor shall not have delivered possession of the Premises within sixty (60) days following said Commencement 2 Date, as the same may be extended under the terms of a Work Letter executed by Lessor and Lessee, Lessee may, at Lessee's option by notice in writing to Lessor, within ten (10) days thereafter, cancel this Lease, in which event the parties shall be discharged from all obligations hereunder, provided however that as to Lessee's obligations, Lessee first reimburses Lessor for all costs incurred for Non-Standard improvements and as to Lessor's obligations, Lessor shall return any money previously deposited by Lessee (less any offsets due Lessor for Non-Standard Improvements); and provided further that if such written notice by Lessee is not received by Lessor within said ten (10) day period, Lessee's right to cancel this Lease hereunder shall terminate and be of no further force and effect. (A) POSSESSION TENDERED - DEFINED. Possession of the Premises shall be deemed tendered to Lessee ("Tender of Possession") when (1) the improvements to be provided by Lessor under this Lease are substantially completed, (2) the Building utilities are ready for use in the Premises, and (3) Lessee has reasonable access to the Premises. (B) DELAYS CAUSED BY LESSEE. There shall be no abatement of rent, and the sixty (60) day period following the Commencement Date before which Lessee's right to cancel this Lease accrues under paragraph 3.2, shall be deemed extended to the extent of any delays caused by acts or omissions of Lessee, Lessee's agents, employees and contractors. 3.3 EARLY POSSESSION. If Lessee occupies the Premises prior to said Commencement Date, such occupancy shall be subject to all provisions of this Lease, such occupancy shall not change the termination date, and Lessee shall not pay rent for such early occupancy. 3.4 UNCERTAIN COMMENCEMENT. In the event commencement of the Lease term is defined as the completion of the improvements, Lessee and Lessor shall execute an amendment to this Lease establishing the date of Tender of Possession (as defined in paragraph 3.2(a) or the actual taking of possession by Lessee, whichever first occurs, as the Commencement Date. 3.5 LESSEE COMPLIANCE. Lessor shall not be required to tender possession of the Premises to Lessee until Lessee complies with its obligation to provide evidence of insurance (Paragraph 8.3). Pending delivery of such evidence, Lessee shall be required to perform all of its obligations under this Lease from and after the Commencement Date, including the payment of Rent, notwithstanding Lessor's election to withhold possession pending receipt of such evidence of insurance. Further, if Lessee is required to perform any other conditions prior to or concurrent with the Commencement Date, the Commencement Date shall occur but Lessor may elect to withhold possession until such conditions are satisfied. 4. RENT. 4.1 BASE RENT. Subject to adjustment as provided in paragraph 1.7 and except as may be otherwise expressly provided in this Lease, Lessee shall pay to Lessor the Base Rent for the Premises set forth in paragraph 1.7 of the Basic Lease Provisions, without offset or deduction. Lessee shall pay Lessor upon execution hereof the advance Base Rent described in paragraph 1.8 of the Basic Lease provisions. Rent for any period during the term hereof which is for less than one month shall be prorated based upon the actual number of days of the calendar month involved. Rent shall be payable in lawful money of the United States to Lessor at the address stated herein or to such other persons or at such other places as Lessor may designate in writing 4.2 OPERATING EXPENSES. Lessee shall pay to Lessor, in addition to Base Rent, the amount set forth in paragraph 1.9 of the Basic Lease Provisions, as fixed Operating Expenses, without offset or deduction, and payable on the first day of each month in the manner described in paragraph 4.1. 5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof the Security Deposit as security for Lessee's faithful performance of its obligations under this Lease. If Lessee fails to pay Rent, or otherwise Defaults under this Lease, Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount due Lessor, including late charges, or to reimburse or compensate Lessor for any liability, expense, loss or damage which Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or any portion of said Security Deposit, Lessee shall within ten (10) days after written request therefor deposit monies with Lessor sufficient to restore said Security Deposit to the full amount required by this Lease. If the Base Rent increases during the term of this Lease, Lessee shall, upon written request from Lessor, deposit additional monies with Lessor so that the total amount of the Security Deposit shall at all times bear the same proportion to the increased Base Rent as the initial Security Deposit bore to the Initial Base Rent. Should the Use (Paragraph 1.4) be amended to accommodate a material change in the business of Lessee or to accommodate a sublessee or assignee, Lessor shall have the right to increase the Security Deposit to the extent necessary, in Lessor's reasonable judgment, to account for any increased wear 3 and tear that the Premises may suffer as a result thereof. If a change in control of Lessee occurs during this Lease and following such change the financial condition of Lessee is, in Lessor's reasonable judgment, significantly reduced, Lessee shall deposit such additional monies with Lessor as shall be sufficient to cause the Security Deposit to be at a commercially reasonable level based on said change in financial condition. Lessor shall not be required to keep the Security Deposit separate from its general accounts. Within fourteen (14) days after the expiration or termination of this Lease, if Lessor elects to apply the Security Deposit only to unpaid Rent, and otherwise within thirty (30) days after the Premises have been vacated pursuant to Paragraph 7.2(b) below, Lessor shall return that portion of the Security Deposit not used or applied by Lessor. No part of the Security Deposit shall be considered to be held in trust, to bear interest or to be prepayment for any monies to be paid by Lessee under this Lease. It is specifically understood that Lessee shall have no right at any time to apply said Security Deposit, or any portion thereof, to any of its Rent obligations (including its last month's Rent) or to any other sums due and payable by Lessee under this Lease. 6. USE. 6.1 USE. The Premises shall be used and occupied only for the Use specified in Paragraph 1.4, or any other legal use which is reasonably comparable thereto, and for no other purpose. Lessee shall not use or permit the use of the Premises in a manner that is unlawful, creates damage, waste or a nuisance, or that disturbs owners and/or occupants of, or causes damage to neighboring properties. Lessor shall not unreasonably withhold or delay its consent to any written request for a modification of the Use, so long as the same will not impair the structural integrity of the improvements on the Premises or the mechanical or electrical systems therein, or is not significantly more burdensome to the Premises. If lessor elects to withhold consent, Lessor shall within five (5) business days after such request give written notification of same, which notice shall include an explanation of Lessor's objections to the change in use. 6.2 COMPLIANCE. (A) Lessor warrants to Lessee that the Premises, in the state existing on the date that the Lease term commences, but without regard to alterations or improvements made by Lessee or the use for which Lessee will occupy the Premises, do not violate any covenants or restrictions of record in effect on such Lease term Commencement Date. In the event it is determined that this warranty has been violated, then it shall be the obligation of the Lessor, after written notice from Lessee, to promptly, at Lessor's sole cost and expense, rectify any such violation. In the event Lessee does not give to Lessor written notice of the violation of this warranty within six (6) months from the date that the Lease term commences, the correction of same shall be the obligation of the Lessee at Lessee's sole cost The warranty contained in this paragraph 6.2(a) shall be of no force or effect if, prior to the date of this Lease, Lessee was an owner or occupant of the Premises and, in such event, Lessee shall correct any such violation at Lessee's sole cost. (B) Except as provided in paragraph 6.2(a), Lessee shall, at Lessee's expense, promptly comply with all applicable statutes (including Americans with Disabilities Act and O.S.H.A.), ordinances, rules, regulations, orders, covenants and restrictions of record, and requirements of any fire insurance underwriters or rating bureaus, now in effect or which may hereafter come into effect, whether or not they reflect a change in policy from that now existing, during the term or any part of the term hereof, relating in any manner to the Premises and the occupation and use by Lessee of the Premises. Lessee shall conduct its business in a lawful manner and shall not use or permit the use of the Premises or the Common Area in any manner that will tend to create waste or a nuisance or shall tend to disturb other occupants of the Office Building Project. 6.3 CONDITION OF PREMISES. (A) Lessee warrants to Lessor that Lessee has conducted a thorough inspection of the Premises including, without limitation, the plumbing, lighting, air conditioning, and heating system, and Lessee accepts the Premises in the condition existing on the Commencement Date. 4 (B) Except as otherwise provided in this Lease, Lessee hereby accepts the Premises and the Office Building Project in their condition existing as of the Lease Commencement Date or the date that Lessee takes possession of the Premises, whichever is earlier, subject to all applicable zoning, municipal, county and state laws, ordinances and regulations governing and regulating the use of the Premises, and any easements, covenants or restrictions of record, and accepts this Lease subject thereto and to all matters disclosed thereby and by any exhibits attached hereto. Lessee acknowledges that it has satisfied itself by its own independent investigation that the Premises are suitable for its intended use, and that neither Lessor nor Lessor's agent or agents has made any representation or warranty as to the present or future suitability of the Premises, Common Areas or Office Building Project for the conduct of Lessee's business. 6.4 WASTE NUISANCE. Lessee shall not use the premises in any manner that will constitute waste, nuisance, or unreasonable annoyance (including, without limitation, unreasonable noise, the use of loudspeakers or sound or light apparatus that can be heard or seen outside the Premises) to other tenants in the Building or occupants of neighboring properties. Lessee shall not use the Premises for vehicle repair, sleeping, washing clothes, cooking, or the preparation, manufacturing or mixing of anything that might emit any odor or objectionable noises or lights into the Building or onto neighboring properties. 7. MAINTENANCE, REPAIRS, ALTERATIONS AND COMMON AREA SERVICES. 7.1 LESSOR'S OBLIGATIONS. Lessor shall keep the Office Building Project, including the Premises, interior and exterior walls, roof and Common Areas, whether used exclusively for the Premises or in common with other Premises, in good condition and repair; provided, however, Lessor shall not be obligated to paint, repair or replace wall coverings, or to repair or replace any improvements that are not ordinarily a part of the Building. Except as provided in paragraph 9.5, there shall be no abatement of rent or liability of Lessee on account of any injury or interference with Lessee's business with respect to any improvements, alterations or repairs made by Lessor to the Office Building Project or any part thereof. Lessee expressly waives the benefits of any statute now or hereafter in effect which would otherwise afford Lessee the right to make repairs at Lessor's expense or to terminate this Lease because of Lessor's failure to keep the Premises in good order, condition and repair. 7.2 LESSEE'S OBLIGATIONS. (A) Notwithstanding Lessor's obligation to keep the Premises in good condition and repair, Lessee shall be responsible for payment of the cost thereof to Lessor as additional rent for that portion of the cost of any maintenance and repair of the Premises, or any equipment (wherever located) that serves only Lessee or the Premises, to the extent such cost is attributable to causes beyond normal wear and tear. Lessee shall be responsible for the cost of painting, repairing or replacing wall coverings, and to repair or replace any Premises improvements that are not ordinarily a part of the Building. Lessor may, at its option, upon at least twenty (20) days prior notice to Lessee, perform such maintenance or repair at Lessee's cost that is otherwise Lessee's responsibility hereunder. During such twenty (20) day period Lessee may inform Lessor of its intention to perform such maintenance or repair on its own and Lessor shall not have any right to perform such maintenance or repair, except if Lessee does not perform such maintenance or repair within thirty (30) days thereof. (B) On the last day of the term hereof, or on any sooner termination, Lessee shall surrender the Premises to Lessor in the same condition as received, ordinary wear and tear excepted, clean and free of debris. Any damage or deterioration of the Premises shall not be deemed ordinary wear and tear if the same could have been prevented by good maintenance practices by Lessee. Lessee shall repair all penetrations and damage (including markings to walls and stains in carpet). Lessee shall repair any damage to the Premises occasioned by the installation or removal of Lessee's trade fixtures, alterations, furnishings and equipment. Except as otherwise stated in this Lease, Lessee shall leave the air lines, power panels, electrical distribution systems, lighting fixtures, air conditioning, window coverings, wall coverings, carpets, wall paneling, ceilings and plumbing on the Premises in the same good operating condition as they were at the commencement of the Lease, ordinary wear and tear excepted. Should Lessee fail to surrender the Premises in the condition described herein, it is agreed and understood that Lessor may elect to deem the lease as a holdover lease pursuant to Paragraph 25 herein and Lessee shall pay rent at the rate set forth in such Paragraph 25. 5 7.3 ALTERATIONS AND ADDITIONS. (A) Lessee shall not, without Lessor's prior written consent, make any alterations, improvements, additions, Utility Installations or repairs in, on or about the Premises, or the Office Building Project. As used in this paragraph 7.3, the term "Utility Installation" shall mean carpeting, window and wall coverings, power panels, electrical distribution systems, lighting fixtures, air conditioning, plumbing, and telephone and telecommunication wiring and equipment. At the expiration of the term, Lessor may elect ownership or require the removal of any or all of said alterations, improvements, additions or Utility Installations, and the restoration of the Premises and the Office Building Project to their prior condition, at Lessee's expense. Should Lessor permit Lessee to make its own alterations, improvements, additions or Utility Installations, Lessee shall use only such contractor as has been expressly approved by Lessor, which approval shall not be unreasonable withheld or delayed, and Lessor may require Lessee to provide Lessor, at Lessee's sole cost and expense, a lien and completion bond in an amount equal to one and one-half times the estimated cost of such improvements, to insure Lessor against any liability for mechanic's and materialmen's liens and to insure completion of the work. Should Lessee make any alterations, improvements, additions or Utility Installations without the prior approval of Lessor, or use a contractor not expressly approved by Lessor, Lessor may, within twenty (20) days of discovery of any such condition, require that Lessee remove any part or all of the same, provided such alterations, improvements, additions or Utility Installations are deemed to be hazardous in the reasonable discretion of Lessor. (B) Any alterations, improvements, additions or Utility Installations in or about the Premises or the Office Building Project that Lessee shall desire to make shall be presented to Lessor in written form, with proposed detailed plans. If Lessor shall give its consent to Lessee's making such alterations, improvements, additions or Utility Installations, the consent shall be deemed conditioned upon Lessee acquiring a permit to do so from the applicable governmental agencies, if required, furnishing a copy thereof to Lessor prior to the commencement of the work, and material compliance by Lessee with all conditions of said permit in a prompt and expeditious manner. (C) Lessee shall pay, when due, all proper claims for labor or materials furnished or alleged to have been furnished to or for Lessee or for use in the Premises, which claims are or may be secured by any mechanic's or materialmen's lien against the Premises, the Building or the Office Building Project, or any interest therein. (D) Lessee shall give Lessor not less than ten (10) days notice prior to the commencement of any work in the Premises by Lessee, and Lessor shall have the right to post notices of non-responsibility in or on the Premises or the Building as provided by law. If Lessee shall, in good faith, contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense, defend itself and Lessor against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof against the Lessor or the Premises, the Building or the Office Building Project, upon the condition that if Lessor shall require, Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to such contested lien claim or demand indemnifying Lessor against liability for the same and holding the Premises, the Building and the Office Building Project free from the effect of such lien or claim. In addition, Lessor may require Lessee to pay Lessor's reasonable attorneys' fees and costs in participating in such action if Lessor shall decide it is to Lessor's best interest so to do. (E) All alterations, improvements, additions and Utility Installations (whether or not such Utility Installations constitute trade fixtures of Lessee), which may be made to the Premises by Lessee, including but not limited to, floor coverings, paneling, doors, drapes, built-ins, moldings, sound attenuation, and lighting and telephone or communication systems, conduit, wiring and outlets, shall be made and done in a good and workmanlike manner and of good and sufficient quality and materials and shall be the property of Lessor and remain upon and be surrendered with the Premises at the expiration of the Lease term, unless Lessor requires their removal pursuant to paragraph 7.3(a). Provided Lessee is not in default, notwithstanding the provisions of this paragraph 7.3(e), Lessee's personal property and equipment, other than that which is affixed to the Premises so that it cannot be removed by Lessee subject to the provisions of paragraph 7.2. 6 (F) Lessee shall provide Lessor with as-built plans and specifications for any alterations, improvements, additions or Utility Installations. 7.4 UTILITY ADDITIONS. Lessor reserves the right to install new or additional utility facilities throughout the Office Building Project for the benefit of Lessor or Lessee, or any other lessee of the Office Building Project, including, but not by way of limitation, such utilities as plumbing, electrical systems, communication systems, and fire protection and detection systems, so long as such installations do not unreasonably interfere with Lessee's use of the Premises. 8. INSURANCE; INDEMNITY. 8.1 LIABILITY INSURANCE. (A) CARRIED BY LESSEE. Lessee shall obtain and keep in force a Commercial General Liability Policy of Insurance protecting Lessee and Lessor as an additional insured against claims for bodily injury, personal injury and property damage based upon or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $2,000,000 per occurrence with an "ADDITIONAL INSURED-MANAGERS AND LESSORS OF PREMISES Endorsement" and contain the "AMENDMENT OF THE POLLUTION EXCLUSION ENDORSEMENT" for damage caused by heat, smoke or fumes from a hostile fire. The Policy shall not contain any Insured exclusions as between Insured persons or organizations, but shall include coverage for liability assumed under this Lease as an "insured contract" for the performance of Lessee's indemnity obligations under this Lease. The limits of said insurance shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance carried by Lessee shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only. (B) CARRIED BY LESSOR. All insurance maintained by Lessor shall be for the sole benefit of Lessor and under Lessor's sole control. (1) PROPERTY INSURANCE. Lessor agrees to maintain property insurance insuring the Building against damage or destruction due to risks including fire, vandalism and malicious mischief in an amount not less than the replacement cost thereof in the form and with deductibles and endorsements as selected by Lessor At its election, Lessor may instead obtain "All Risk" coverage, and may also obtain earthquake, pollution, and/or flood insurance in amounts selected by Lessor. (2) OPTIONAL INSURANCE. Lessor, at Lessor's option, may also carry insurance against loss of rent, in an amount equal to the amount of Base Rent and Additional Rent that Lessor could be required to abate to all Building tenants in the event of condemnation, damage or destruction for a period of twelve (12) months. Lessor may also carry such other insurance, as Lessor may deem prudent or advisable, including, without limitation, liability insurance in such amounts and on such terms, as Lessor shall determine. Lessor shall not be obligated to insure any furniture, machinery, goods, inventory or supplies which Tenant may keep or maintain in the Premises, or any leasehold improvements, additions or alterations within the Premises. (C) ADJACENT PREMISES. If the Premises are part of a larger building, or of a group of buildings owned by Lessor which are adjacent to the Premises, the Lessee shall pay for any increase in the premiums for the property insurance of such building or buildings if said increase is caused by Lessee's acts, omissions, use or occupancy of the Premises. 8.2 LESSEE'S PROPERTY/BUSINESS INTERRUPTION INSURANCE. (A) PROPERTY DAMAGE. Lessee shall obtain and maintain insurance coverage on all of Lessee's personal property, Trade Fixtures, and Lessee Owned Alterations and Utility Installations. Such insurance shall be full replacement cost coverage with a deductible of not to exceed $1,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property, Trade Fixtures and Lessee Owned Alterations and Utility Installations. Lessee shall provide Lessor with written evidence that such insurance is in force. 7 (B) BUSINESS INTERRUPTION. Lessee shall obtain and maintain loss of income and extra expense insurance in amounts as will reimburse Lessee for direct or indirect loss of earnings attributable to all perils commonly insured against by prudent lessees in the business of Lessee or attributable to prevention of access to the Premises as a result of such perils. (C) NO REPRESENTATION OF ADEQUATE COVERAGE. Lessor makes no representation that the limits or forms of coverage of insurance specified herein are adequate to cover Lessee's property, business operations or obligations under this Lease. 8.3 INSURANCE POLICIES. Insurance required herein shall be by companies duly licensed or admitted to transact business in the state where the Premises are located, and maintaining during the policy term a "General Policyholders Rating" of at least A-, V, as set forth in the most current issue of "Best's Insurance Guide" or such other rating as may be required by a Lender. Lessee shall not do or permit to be done anything that invalidates the required insurance policies. Lessee shall, prior to the Start Date, deliver to Lessor certified copies of policies of such insurance or certificates evidencing the existence and amounts of the required insurance. No such policy shall be cancelable or subject to modification except after thirty (30) days prior written notice to Lessor. Lessee shall, at least thirty (30) days prior to the expiration of such policies, furnish Lessor with evidence of renewals or "insurance binders" evidencing renewal thereof, or Lessor may order such insurance and charge the cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. Such policies shall be for a term of at least one year, or the length of the remaining term of this Lease, whichever is less. 8.4 WAIVER OF SUBROGATION. Without affecting any other rights or remedies, Lessee and Lessor each hereby release and relieve the other, and waive their entire right to recover damages against the other, for loss of or damage to its property arising out of or Incident to the perils required to be insured against herein The effect of such releases and waivers is not limited by the amount of insurance carried or required, or by any deductibles applicable hereto. The Parties agree to have their respective property damage insurance carriers waive any right to subrogation that such companies may have against Lessor or Lessee, as the case may be, so long as the insurance is not invalidated thereby. 8.5 INDEMNITY. Except for Lessor's gross negligence or willful misconduct, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, Lessor's master or ground lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, liens, judgments, penalties, attorneys' and consultants' fees, expenses and/or liabilities arising out of, involving, or in connection with the use and/or occupancy of the Premises by Lessee. If any action or proceeding is brought against Lessor by reason of any of the foregoing matters, Lessee shall upon notice defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be defended or indemnified. 8.6 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable for injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee's employees, contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water/moisture intrusion, mold or rain, or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, HVAC or lighting fixtures, or from any other cause, whether the said injury or damage results from conditions arising upon the Premises or upon other portions of the Building of which the Premises are a part, or from other sources or places, as a result of Lessor's active or passive negligence. Lessor shall not be liable for any damages arising from any act or neglect of any other tenant of Lessor. Notwithstanding Lessor's negligence (active or passive) or breach of this Lease, Lessor shall under no circumstances be liable for injury to Lessee's business or for any loss of income or profit therefrom. 9. DAMAGE OR DESTRUCTION. 9.1 DEFINITIONS. (A) "Premises Damage" shall mean if the Premises are damaged or destroyed to any extent. 8 (B) "Premises Building Partial Damage" shall mean if the Building of which the Premises are a part is damaged or destroyed to the extent that the cost to repair is less than fifty percent (50%) of the then Replacement Cost of the building. (C) "Premises Building Total Destruction" shall mean if the Building of which the Premises are a part is damaged or destroyed to the extent that the cost to repair is fifty percent (50%) or more of the then Replacement Cost of the Building. (D) "Office Building Project Buildings" shall mean all of the buildings on the Office Building Project site. (E) "Office Building Project Buildings Total Destruction" shall mean if the Office Building Project Buildings are damaged or destroyed to the extent that the cost of repair is fifty percent (50%) or more of the then Replacement Cost of the Office Building Project Buildings. (F) "Insured Loss" shall mean damage or destruction that was caused by an event required to be covered by the insurance described in paragraph 8. The fact than an Insured Loss has a deductible amount shall not make the loss an uninsured loss. (G)"Replacement Cost" shall mean the amount of money necessary to be spent in order to repair or rebuild the damaged area to the condition that existed immediately prior to the damage occurring, excluding all improvements made by Lessee, other than those installed by Lessor at Lessee's expense. 9.2 PREMISES DAMAGE; PREMISES BUILDING PARTIAL DAMAGE. (A) INSURED LOSS: Subject to the provisions of paragraphs 9.4 and 9.5, if at any time during the term of this Lease there is damage which is an Insured Loss and which falls into the classification of either Premises Damage or Premises Building Partial Damage, then Lessor shall, as soon as reasonably possible and to the extent the required materials and labor are readily available through usual commercial channels, at Lessor's expense repair such damage (but not Lessee's fixtures, equipment or tenant improvements originally paid for by Lessee) to its condition existing at the time of the damage, and this Lease shall continue in full force and effect. (B) UNINSURED LOSS: Subject to the provisions of paragraphs 9.4 and 9.5, if at any time during the term of this Lease there is damage which is not an Insured Loss and which falls within the classification of Premises Damage or Premises Building Partial Damage, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense), which damage prevents Lessee from making any substantial use of the Premises, Lessor may at Lessor's option either (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after the date of the occurrence of such damage of Lessor's intention to cancel and terminate this Lease as of the date of the occurrence of such damage, in which event this Lease shall terminate as of the date of the occurrence of such damage. 9.3 PREMISES BUILDING TOTAL DESTRUCTION; OFFICE BUILDING PROJECT BUILDINGS TOTAL DESTRUCTION. Subject to the provisions of paragraphs 9.4 and 9.5, if at any time during the term of this Lease there is damage, whether or not it is an Insured Loss, which falls into the classification of either (i) Premises Building Total Destruction, or (ii) Office Building Project Buildings Total Destruction, then Lessor may at Lessor's option either (i) repair such damage or destruction as soon as reasonably possible at Lessor's expense (to the extent the required materials are readily available through usual commercial channels) to its conditions existing at the time of the damage, but not Lessee's fixtures, equipment or tenant improvements, and this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after the date of occurrence of such damage of Lessor's intention to cancel and terminate this Lease, in which case this Lease shall terminate as of the date of the occurrence of such damage. 9 9.4 DAMAGE NEAR END OF TERM. (A) Subject to paragraph 9.4(b), if at any time during the last twelve (12) months of the term of this Lease there is substantial damage to the Premises, Lessor may at Lessor's option cancel and terminate this Lease as of the date of occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within 30 days after the date of occurrence of such damage. If at any time during the last twelve (12) months of the term of this Lease there is substantial damage to the Premises, Lessee may at Lessee's option cancel and terminate this Lease as of the date of occurrence of such damage by giving written notice to Lessor of Lessee's election to do so within thirty (30) days after the occurrence of such damage, and Lessee shall not be liable for any additional rent after such termination date. (B) Notwithstanding paragraph 9.4(a), in the event that Lessee has an option to extend or renew this Lease, and the time within which said option may be exercised has not yet expired, Lessee shall exercise such option, if it is to be exercised at all, no later than twenty (20) days after the occurrence of an Insured Loss falling within the classification of Premises Damage during the last twelve (12) months of the term of this Lease. If Lessee duly exercises such option during said twenty (20) day period, Lessor shall, at Lessor's expense, repair such damage, but not Lessee's fixtures, equipment or tenant improvements, as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option during said twenty (20) day period, then Lessor may at Lessor's option terminate and cancel this Lease as of the expiration of said twenty (20) day period, notwithstanding any term or provision in the grant of option to the contrary. 9.5 ABATEMENT OF RENT; LESSEE'S REMEDIES. (A) In the event Lessor repairs or restores the Building or Premises pursuant to the provisions of this paragraph 9, and any part of the Premises is not usable (including loss of use due to loss of access or essential services), the rent payable hereunder (including Operating Expenses) for the period during which such damage, repair or restoration continues shall be abated, provided (i) the damage was not the result of the negligence of Lessee, and (ii) such abatement shall only be to the extent the operation and profitability of Lessee's business as operated from the Premises is adversely affected . Except for said abatement of rent, if any, Lessee shall have no claim against Lessor for any damage suffered by reason of any such damage, destruction, repair or restoration. (B) If Lessor shall be obligated to repair or restore the Premises or the Building under the provisions of this Paragraph 9 and shall not commence such repair or restoration within ninety (90) days after such occurrence, or if Lessor shall not complete the restoration and repair within six (6) months after such occurrence, Lessee may at Lessee's option cancel and terminate this Lease by giving Lessor written notice of Lessee's election to do so at any time prior to the commencement or completion, respectively, of such repair or restoration. In such event this Lease shall terminate as of the date of such notice. (C) Lessee agrees to cooperate with Lessor in connection with any such restoration and repair, including but not limited to the approval and/or execution of plans and specifications required. 9.6 TERMINATION-ADVANCE PAYMENTS. Upon termination of this Lease pursuant to this paragraph 9, an equitable adjustment shall be made concerning advance rent and any advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessor so much of Lessee's security deposit as has not theretofore been applied by Lessor. 9.7 WAIVER. Lessor and Lessee waive the provisions of any statute that relates to termination of leases when leased property is destroyed and agree that such event shall be governed by the terms of this Lease. 10. [INTENTIONALLY LEFT BLANK] 11. UTILITIES. 11.1 SERVICES PROVIDED BY LESSOR. Lessor shall provide heating, ventilation, air conditioning, and janitorial service as reasonably required, reasonable amounts of electricity for normal lighting and office machines during the days/hours set forth in subparagraph 11. 3, water for reasonable and normal drinking and lavatory use, and replacement light bulbs and/or florescent tubes and ballasts for standard overhead fixtures. In the event the cost of electricity for any single month(s) during the term of the Lease exceeds the cost of electricity for the same month of the preceding year by fifteen percent (15%), then such cost of electricity exceeding the fifteen percent (15%) shall be paid by Lessee in conjunction with and in the same manner as Base Rent. 10 11.2 SERVICES EXCLUSIVE TO LESSEE. Lessee shall pay for all water, gas, heat, light, power, telephone and other utilities and services specially or exclusively supplied and/or metered exclusively to the Premises or to Lessee, together with any taxes thereon. If any such services are not separately metered to the Premises, Lessee shall pay at Lessor's option a reasonable proportion to be determined by Lessor of all charges jointly metered with other premises in the Building. 11.3 HOURS OF SERVICE. Said services and utilities shall be provided Monday through Friday, 7:00 a.m. to 7:00 p.m. "Standard Usage" is four (4) watts per square foot (based on "rentable" square footage) per hour excluding general building HVAC during hours of service. All usage of services and utilities on days or hours other than Monday through Friday, 7:00 a.m. to 7:00 p.m. shall be defined as "After Hours Usage." Lessee agrees to pay Lessor, as additional rent, the sum of $15.00 per hour billed in increments of one (1) hour for all After Hour standard usage of services and utilities. Charges for such After Hour usages shall be reflected in the monthly statement to Lessee and shall be paid each month in conjunction with base rent pursuant to paragraph 4.1. 11.4 EXCESS USAGE BY LESSEE. Lessee shall not make connection to the utilities except by or through existing outlets and shall not install or use machinery or equipment in or about the Premises that uses excess water, lighting or power, or suffer or permit any act that causes extra burden upon the utilities or services, including but not limited to security services, over Standard Usage for the Office Building Project. Lessor shall require Lessee to reimburse Lessor for any excess expenses or costs that may arise out of a breach of this subparagraph by Lessee. Lessor may, in its sole discretion, install at Lessee's expense supplemental equipment and/or separate metering applicable to Lessee's excess usage or loading. It is agreed and understood that all costs (including, without limitation, costs incurred in determining excess usage) incident to excess usage shall be paid by Lessee. 11.5 INTERRUPTIONS. There shall be no abatement of rent and Lessor shall not be liable in any respect whatsoever for the inadequacy, stoppage, interruption or discontinuance of any utility or service due to riot, strike, labor dispute, breakdown, accident, repair or other cause beyond Lessor's reasonable control or in cooperation with governmental request or directions. 12. ASSIGNMENTS AND SUBLETTING. 12.1 LESSOR'S CONSENT REQUIRED. (A) Lessee shall not voluntarily or by operation of law assign, sublet, transfer, mortgage or encumber all or any part of Lessee's interest in this Lease or in the Premises without Lessor's prior written consent. Any such assignment, sublet, transfer, mortgage, encumbrance or change in control of Lessee is hereafter collectively referred to as "ASSIGNMENT OR SUBLETTING." (B) An Assignment or Subletting without written consent shall, at Lessor's option, be a Default curable after notice per Paragraph 13.1(c), or a noncurable Breach without the necessity of any notice and grace period. If Lessor elects to treat such unapproved Assignment or Subletting as a noncurable Breach, Lessor may either (i) terminate this Lease, or (ii) upon thirty (30) days written notice, increase the monthly Base Rent to one hundred ten percent (110%) of the then current monthly base rent being paid by Lessee. Further, in the event of such Breach and rental adjustment (i) the purchase price of any option to purchase the Premises held by Lessee shall be subject to similar adjustment to one hundred ten percent (110%) of the price previously in effect and (ii) all fixed and non-fixed rental adjustments scheduled during the remainder of the Lease term shall be increased to One Hundred Ten Percent (110%) of the current market rent for new leases. (C) Lessor and Lessee hereby acknowledge that Lessor's disapproval of any proposed Assignment or Subletting pursuant to Paragraph 12 shall be deemed reasonably withheld if based upon any reasonable factor, including, without limitation, any or all of the following factors: (I) The proposed Assignment or Subletting would result in more than two subleases of portions of the Premises being in effect at any one time during the Term; 11 (II) The net effective rent payable by the Assignee or Sublessee (adjusted on a rentable square foot basis) is less than the net effective rent then being quoted by Lessor for new leases in the Building for comparable size space for a comparable period of time, provided there is then currently available rental space in the Building; (III) The proposed Assignee or Sublessee is an existing tenant of the Project or is negotiating with Lessor (or has negotiated with Lessor in the last six (6) months) for space in the Project, provided there is then currently available rentable space in the Building of comparable size for a comparable period of time; (IV) The proposed Assignee or Sublessee is a governmental entity; (V) The portion of the Premises to be assigned or sublet is irregular in shape with inadequate means of ingress and egress; (VI) The use of the Premises by the Assignee or Sublessee; (AA) Is not permitted by the use provisions hereof; or (BB) Violates any exclusive use granted by Lessee to another tenant in the Building; (VII) The Assignment or Subletting would likely result in a significant increase in the use of the parking areas or Common Areas by the Assignee's or Subtenant's employees or visitors, and/or significantly increase the demand upon utilities and services to be provided by Lessor to the Premises; (VIII) The Assignee or Sublessee does not have the financial capacity to fulfill the obligations imposed by the Assignment or Subletting; (IX) The Assignee or Sublessee is not in Lessee's reasonable opinion of reputable or good character; or (X) Lessee is in default or breach under this Lease as defined in Paragraph 13.1. 12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING. (A) Regardless of Lessor's consent, any Assignment or Subletting shall not (i) be effective without the express written assumption by such Assignee or Sublessee of the obligations of Lessee under this Lease; (ii) release Lessee of any obligations hereunder; or (iii) alter the primary liability of Lessee for the payment of Rent or for the performance of any other obligations to be performed by Lessee. (B) Lessor may accept Rent or performance of Lessee's obligations from any person other than Lessee pending approval or disapproval of an Assignment. Neither a delay in the approval or disapproval of such Assignment nor the acceptance of Rent or performance shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for Lessee's Default or Breach. (C) Lessor's consent to any Assignment or Subletting shall not constitute consent to any subsequent Assignment or Subletting. (D) In the event of any Default or Breach by Lessee, Lessor may proceed directly against Lessee, any Guarantors or anyone else responsible for the performance of Lessee's obligations under this Lease, including any Assignee or Sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefore to Lessor, or any security held by Lessor. (E) Each request for consent to an Assignment or Subletting shall be in writing, accompanied by information relevant to Lessor's determination as to the financial and operational responsibility and appropriateness of the proposed Assignee or Sublessee, including but not limited to the intended use and/or required modification of the Premises, if any, together with a fee of $500.00 as consideration for Lessor's considering and processing said request. Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested. 12 (F) Any Assignee of, or Sublessee under, this Lease shall, by reason of accepting such Assignment or entering into such Sublease, be deemed to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said Assignment or Sublease, other than such obligations as are contrary to or inconsistent with provisions of an Assignment or Sublease to which Lessor has specifically consented in writing. 12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The following terms and conditions shall apply to any Subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein: (A) Subject to paragraph 12.4, Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all Rent payable on any Sublease, and Lessor may collect such Rent and apply same toward Lessee's obligations under this Lease; provided, however, that until a Breach shall occur in the performance of Lessee's obligations, Lessee may collect said Rent. Lessor shall not by reason of the foregoing or any Assignment of such sublease, nor by reason of the collection of Rent, be deemed liable to the Sublessee for any failure to Lessee to perform and comply with any of Lessee's obligations to such Sublessee. Lessee hereby irrevocably authorizes and directs any such Sublessee, upon receipt of a written notice from Lessor stating that a Breach exists in the performance of Lessee's obligations under this Lease, to pay to Lessor all Rent due and to become due under the Sublease. Sublessee shall rely upon any such notice from Lessor and shall pay all Rents to Lessor without any obligation or right to inquire as to whether such Breach exists, notwithstanding any claim from Lessee to the contrary. (B) In the event of a Breach by Lessee, Lessor may, at its option, require Sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of the Sublessor under such Sublease from the time of the exercise of said option to the expiration of such Sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such Sublessee to such Sublessor or for any prior Defaults or Breaches by such Sublessor. (C) Any matter requiring the consent of the Sublessor under a Sublease shall also require the consent of Lessor. (D) No Sublessee shall further assign or sublet all or any part of the Premises without Lessor's prior written consent. (E) Lessor shall deliver a copy of any Notice of Default or Breach by Lessee to the Sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice The Sublessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the Sublessee. (F) Lessee and/or Sublessee shall be responsible for paying all costs associated with Subletting and not be entitled to credit such associated costs against rent (or other consideration) payable on any Sublease It is expressly understood and agreed that all rent (or other consideration) payable on any Sublease shall be paid to Lessor without offset or credit. 12.4 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING. It is the intent of the parties hereto that the Lease shall confer upon Lessee only the right to use and occupy the Premises and to exercise such other rights as are conferred upon Lessee by this Lease. The parties agree that this Lease is not intended to have a bonus or enhanced value to Lessee, nor to serve as a vehicle whereby Lessee may profit by a future assignment or sublet of this Lease of a right to use or occupy the Premises as a result of any favorable terms contained herein or any favorable changes in the market for commercial lease space. It is the intent of the parties that any such bonus or enhanced value that may attach to this Lease shall be and remain the exclusive property of the Lessor. In order to carry out this intent, in the event Lessee seeks to assign or transfer its interest in this Lease of the Premises, Lessor shall have the following options which may be exercised at its sole election, without limiting Lessor in the exercise of any other right or remedy at law or equity or under this Lease which Lessor may have by reason of such proposed assignment or sublet. 13 (A) Lessor may terminate this Lease and release Lessee from any further rental obligations thereunder by sending Lessee written notice of such termination within forty -five (45) days after notice of intent to assign or sublet is deemed given by Lessee, provided, however, that Lessee may withdraw its notice of intent by written notice to Lessor at any time within ten (10) days after receipt by Lessee of Lessor's notice of termination, in which event this Lease shall continue in full force and effect. If Lessor elects to terminate this Lease and if Lessee does not withdraw its notice of intent, Lessee shall surrender the Premises pursuant to the terms of this Lease, within sixty (60) days after notice of intent to transfer is deemed given by Lessee and on such date as designated by Lessor. (B) Lessor may, within forty-five (45) days after notice of intent to assign or sublet is deemed given by Lessee, acquire the interest in this Lease and the Premises that Lessee proposed to assign or sublet, on the same terms and conditions as the proposed assignment or sublet. (C) Lessor may consent to the proposed assignment or sublet, provided that as a condition to such consent, Lessor shall have the right to require that any and all rent paid by the assignee tenant or subtenant, including, without limitation, any rent in excess of the rentals to be paid under this Lease shall be paid directly to Lessor at the time and place specified in this Lease. For the purpose of this paragraph, the term "rent" shall include any consideration of any kind received, or to be received from the assignee tenant or subtenant. If such sums are related to Lessee's interest in the Lease or in the Premises, including, without limitation, expense reimbursements or advances, the value of services performed, key money, bonus money and/or payments for Lessee's personal property in excess of the book value of such property. The term "personal property" as used in this paragraph shall include, without limitation, assets, fixtures, inventories, accounts, good will, equipment, furniture, general intangibles, and any capital stock or other equity ownership interest of Lessee. DEFAULTS; BREACH; REMEDIES. 13.1 DEFAULT; BREACH. A "Default" is defined as a failure by the Lessee to comply with or perform any of the terms, covenants, conditions or rules under this Lease. A "Breach" is defined as the occurrence of one or more of the following Defaults, and the failure of Lessee to cure such Default within any applicable grace period. (A) The abandonment of the Premises; or the vacating of the Premises without providing a commercially reasonable level of security, and/or Security Deposit or where the coverage of the property insurance described in Paragraph 8.1 is jeopardized as a result thereof, or without providing reasonable assurances to minimize potential vandalism. (B) The failure of Lessee to make any payment of Rent, Operating Expense, or any Security Deposit required to be made by Lessee hereunder, whether to Lessor or to a third party, when due, to provide reasonable evidence of insurance or surety bond, or to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of ten (10) days following written notice to Lessee by Lessor. (C) The failure by Lessee to provide (i) reasonable written evidence of compliance with Applicable Requirements, (ii) the service contracts, (iii) the rescission of an unauthorized Assignment or Subletting, (iv) a Tenancy Statement, (v) a requested subordination, (vi) evidence concerning any guaranty and/or Guarantor, (vii) any document requested under Paragraph 40 (easements), or (viii) any other documentation or information which Lessor may reasonably require of Lessee under the terms of this Lease, where any such failure continues for a period of ten (10) days following written notice to Lessee by Lessor. (D) A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the attached rules adopted hereunder including, without limitation, Vehicle Parking (Paragraph 2.2), Security Deposit (Paragraph 5), Use (Paragraph 6), Maintenance and Alterations (Paragraphs 7.2, 7.3 and 7.4), Utilities (Paragraph 11), Assignment and Subletting (Paragraph 12), Lessor's Access (Paragraph 32), Hazardous Substances (Paragraph 49), where such Default continues for a period of ten (10) days after written notice to Lessee by Lessor. 14 (E) The occurrence of any of the following events: (i) the making of any general arrangement or assignment for the benefit of creditors; (ii) becoming a "DEBTOR" as defined in 11 U.S.C. Sec. 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within thirty (30) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within thirty (30) days; provided, however, in the event that any provision of this subparagraph (e) is contrary to any applicable law, such provision shall be of no force or effect, and not affect the validity of the remaining provisions. (F) The discovery that any financial statement of Lessee or of any Guarantor given to Lessor was materially false. (G) If the performance of Lessee's obligations under this Lease is guaranteed (i) the death of a Guarantor; (ii) the termination of a Guarantor's liability with respect to this Lease other than in accordance with the terms of such guaranty; (iii) a Guarantor's becoming insolvent or the subject of a bankruptcy filing; (iv) a Guarantor's refusal to honor the guaranty; or (v) a Guarantor's breach of its guaranty obligation on an anticipatory basis, and Lessee's failure, within sixty (60) days following written notice of any such event, to provide written alternative assurance or security, which, when coupled with the then existing resources of Lessee, equals or exceeds the combined financial resources of Lessee and the Guarantors that existed at the time of execution of this Lease. (H) In the event Lessee has one or more additional leases for other premises in the Office Building Project, then it is acknowledged and agreed that a default under such additional lease(s) shall also constitute a default under this Lease. 13.2 REMEDIES. If Lessee fails to perform any of its affirmative duties or obligations, within ten (10) days after written notice (or in case of an emergency, without notice), Lessor may, at its option, perform such duty or obligation on Lessee's behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. The costs and expenses of any such performance by Lessor shall be due and payable by Lessee upon receipt of invoice therefore. If any check given to Lessor by Lessee shall not be honored by the bank upon which it is drawn, Lessor, at its option, may require all future payments to be made by Lessee to be by cashier's check. In the event of a Breach, Lessor may, with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy, which Lessor may have by reason of such Breach: (A) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease shall terminate and Lessee shall immediately surrender possession to Lessor. In such event Lessor shall be entitled to recover from Lessee (i) the unpaid Rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided: and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and that portion of any leasing commission paid by Lessor in connection with this Lease applicable to the unexpired term of this Lease. The worth at the time of award 15 of the amount referred to in provision (iii) of the immediately preceding sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of the District within which the Premises are located at the time of award plus one percent (1%). Efforts by Lessor to mitigate damages caused by Lessee's Breach of this Lease shall waive Lessor's right to recover damages under Paragraph 12.If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding any unpaid Rent and damages as are recoverable therein, or Lessor may reserve the right to recover all or any part thereof in a separate suit. If a notice and grace period required under Paragraph 13.1 were not previously given, a notice to pay rent or quit, or to perform or quit given to Lessee under the unlawful detainer statute shall also constitute the notice required by Paragraph 13.1. In such case, the applicable grace period required by Paragraph 13.1 and the unlawful detainer statute shall run concurrently, and the failure of Lessee to cure the Default within the greater of the two such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this Lease and/or by said statute. (B) Continue this Lease and Lessee's right to possession and recover the Rent as it becomes due, in which event Lessee may sublet or assign, subject only to reasonable limitations, as described in California Civil Code Section 1951.4. Acts of maintenance, efforts to re-let, and/or the appointment of a receiver to protect the Lessor's interests, shall not constitute a termination of the Lessee's right to possession. (C) Pursue any other remedy now or hereafter available under the laws or judicial decisions of the state wherein the Premises are located. The expiration or termination of this Lease and/or the termination of Lessee's right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee's occupancy of the premises. 13.3 INDUCEMENT RECAPTURE. Any agreement for free or abated rent or other charges, or for the giving or paying by Lessor to or for Lessee of any cash or other bonus, inducement or consideration for Lessee's entering into this Lease, all of which concessions are hereinafter referred to as "Inducement Provisions," shall be deemed conditioned upon Lessee's full and faithful performance of all of the terms, covenants and conditions of this Lease. Upon Breach of this Lease by Lessee, any such Inducement Provision shall automatically be deemed deleted from this Lease and of no further force or effect, and any rent, other charge, bonus, inducement or consideration theretofore abated, given or paid by Lessor under such an inducement Provision shall be immediately due and payable by Lessee to Lessor, notwithstanding any subsequent cure of said Breach by Lessee The acceptance by Lessor of rent or the cure of the Breach which initiated the operation of this paragraph shall not be deemed a waiver by Lessor of the provisions of this paragraph unless specifically so stated in writing by Lessor at the time of such acceptance. 13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee of Rent will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges that may be imposed upon Lessor by any Lender. Accordingly, if any Rent shall not be received by Lessor within ten (10) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a one-time late charge equal to six percent (6%) of each such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of such late payment. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's Default or Breach with respect to such overdue amount, nor prevent the exercise of any of the other rights and remedies granted hereunder. 13.5 RETURNED CHECK CHARGES. Lessee hereby acknowledges and agrees that a service charge of $50.00 will be assessed and charged to Lessee for each check that is returned because of insufficient funds. 13.6 NOTICE TO PAY RENT CHARGE. Lessee hereby acknowledges and agrees that a charge of $75.00 will be assessed and charged to Lessee for each Three Day Notice to Pay Rent or Quit (or other termination notice based on Default) served on Lessee. 16 14. CONDEMNATION. If the Premises or any portion thereof or the Office Building Project are taken under the power of eminent domain, or sold under the threat of the exercise of said power (all of which are herein called "condemnation"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs; provided that if so much of the Premises or the Office Building Project are taken by such condemnation as would substantially and adversely affect the operation and profitability of Lessee's business conducted from the Premises, Lessee shall have the option, to be exercised only in writing within thirty (30) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within thirty (30) days after the condemning authority shall have taken possession), to terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the rent shall be reduced in the proportion that the floor area of the Premises taken bears to the total floor area of the Premises, Common Areas taken shall be excluded from the Common Areas usable by Lessee and no reduction of rent shall occur with respect thereto or by reason thereof. Lessor shall have the option in its sole discretion to terminate this Lease as of the taking of possession by the condemning authority, by giving written notice to Lessee of such election within thirty (30) days after receipt of notice of a taking by condemnation of any part of the Premises or the Office Building Project Any award for the taking of all or any part of the Premises or the Office Building Project under the power of eminent domain or any diminution in value of the leasehold or for the taking of the fee, or as severance damages; provided, however, that Lessee shall be entitled to any separate award for loss of or damage to Lessee's trade fixtures, removable personal property and unamortized tenant improvements that have been paid for by Lessee. For that purpose the cost of such improvements shall be amortized over the original term of this Lease excluding any options. In the event that this Lease is not terminated by reason of such condemnation, Lessor shall to the extent of severance damages received by Lessor in connection with such condemnation, repair any damage to the Premises caused by such condemnation except to the extent that Lessee has been reimbursed therefor by the condemning authority. Lessee shall pay any amount in excess of such severance damages required to complete such repair. 15. ESTOPPEL CERTIFICATE. (A) Each party (as "responding party") shall at any time upon not less than ten (10) days prior written notice from the other party ("requesting party") execute, acknowledge and deliver to the requesting party a statement in writing (i) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect) and the date which the rent and other charges are paid in advance, if any, and (ii) acknowledging that there are not, to the responding party's knowledge, any uncured defaults on the part of the requesting party, or specifying such defaults if any are claimed. Any such statement may be conclusively relied upon by any prospective purchaser or encumbrancer of the Office Building Project or of the business of Lessee. (B) At the requesting party's option, the failure to deliver such statement within such time shall be a material default of this Lease by the party who is to respond, without any further notice to such party, or it shall be conclusive upon such party that (i) this Lease is in full force and effect, without modification except as may be represented by the requesting party, (ii) there are not uncured defaults in the requesting party's performance, and (iii) if Lessor is the requesting party, not more than one month's rent has been paid in advance. (C) If Lessor desires to finance, refinance, or sell the Office Building Project, or any part thereof, Lessee hereby agrees to deliver to any lender or purchaser designated by Lessor such financial statements of Lessee as may be reasonably required by such lender or purchaser. Such statements shall include the past three (3) years financial statements of Lessee. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 16. LESSOR'S LIABILITY. The term "Lessor" as used herein shall mean only the owner or owners, at the time in question, of the fee title or a lessee's interest in a ground lease of the Office Building Project. In the event of any transfer of such title or interest, Lessor herein named (and in case of any subsequent transfers then the grantor) shall be relieved from and after the date of such transfer of all liability as respects Lessor's obligations thereafter to be performed, provided that any funds in the hands of Lessor or the then grantor at the time of such transfer, in which Lessee has an interest, shall be delivered to the grantee. The obligations contained in this Lease to be performed by Lessor shall, subject as aforesaid, be binding on Lessor's successors and assigns only during their respective periods of ownership. 17 17. SEVERABILITY. The invalidity of any provision of this Lease as determined by a court of competent jurisdiction shall in no way affect the validity of any other provision hereof. 18. INTEREST ON PAST-DUE OBLIGATIONS. Except as expressly herein provided, any amount due to Lessor not paid when due shall bear interest at the maximum rate then allowable by law or judgments from the date due. Payment of such interest shall not excuse or cure any default by Lessee under this Lease; provided, however, that interest shall not be payable on late charges incurred by Lessee. 19. TIME OF ESSENCE. Time is of the essence with respect to the obligations to be performed under this Lease. 20. ADDITIONAL RENT. All monetary obligations of Lessee to Lessor under the terms of this Lease, including but not limited to late charges, Three-Day Notice charges (Paragraph 13.6), returned check charges, attorney's fees and any other expenses payable by Lessee hereunder shall be deemed to be rent. 20.1 CREDITS TO LESSEE'S ACCOUNT. Lessor shall promptly credit Lessee's account for all payments received from Lessee. Such payments shall be first credited to those sums due under this Lease Agreement, including but not limited to Base Rent, late charges, 3-Day Notice charges (Paragraph 13.6), returned check fees and attorney's fees which were incurred earliest in time (oldest chargeable items). Nothing in this paragraph (including Lessor's acceptance of a partial payment on account balance) shall be construed or constitute a waiver by Lessor of any provision hereof or of any subsequent breach by Lessee of the same or any other provision. 21. INCORPORATION OF PRIOR AGREEMENTS; AMENDMENTS. This Lease contains all agreements of the parties with respect to any matter mentioned herein. No prior or contemporaneous agreement or understanding pertaining to any such matter shall be effective. This Lease may be modified in writing only, signed by the parties in interest at the time of the modification. Except as otherwise stated in this Lease, Lessee hereby acknowledged that neither any cooperating broker on this transaction nor the Lessor nor any employee or agents of any of said persons has made any oral or written warranties or representations to Lessee relative to the condition or use by Lessee of the Premises or the Office Building Project and Lessee acknowledges that Lessee assumes all responsibility regarding the Occupational Safety Health Act and the Americans with Disabilities Act, the legal use and adaptability of the Premises and the compliance thereof with all applicable laws and regulations in effect during the term of this Lease. 22. NOTICES. Any notice required or permitted to be given hereunder shall be in writing and may be given by personal delivery or by certified or registered mail, and shall be deemed sufficiently given if delivered or addressed to Lessee or to Lessor at the address noted below or adjacent to the signature of the respective parties, as the case may be. Mailed notices shall be deemed given upon actual receipt at the address required, or forty-eight hours following deposit in the mail, postage prepaid, whichever first occurs. Either party may by notice to the other specify a different address for notice purposes except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for notice purposes. A copy of all notices required or permitted to be given to Lessor hereunder shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate by notice to Lessee. 23. WAIVERS. No waiver by Lessor of any provision hereof shall be deemed a waiver of any other provision hereof or of any subsequent breach by Lessee of the same or any other provision. Lessor's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to or approval of any subsequent act by Lessee. The acceptance of rent hereunder by Lessor shall not be a waiver of any preceding breach by Lessee of any provision hereof, other than the failure of Lessee to pay the particular rent so accepted, regardless of Lessor's knowledge of such preceding breach at the time of acceptance of such rent. 24. RECORDING. Either Lessor or Lessee shall, upon request of the other, execute, acknowledge and deliver to the other a 'short form' memorandum of this Lease for recording purposes. 18 25. HOLDING OVER. If Lessee, with Lessor's consent, remains in possession of the Premises or any part thereof after the expiration of the term hereof, such occupancy shall be a tenancy as defined by Section 1945 of the California Civil Code with all of the provisions of this Lease pertaining to the obligations of Lessee, except that the rent payable shall be two hundred percent (200%) of the rent payable immediately preceding the termination date of this Lease, and all Options, if any, granted under the terms of this Lease shall be deemed terminated and be of no further effect during said tenancy. 26. BROKERAGE COMMISSIONS: Lessee represents and warrants that Lessee has dealt with no broker or agent other than: none. Lessee agrees to indemnify and hold the Lessor harmless from and against any claims by any broker, agent or other person/entity claiming a commission or other form of compensation by virtue of having dealt with Lessee with regard to this leasing transaction. The provisions of this paragraph shall survive the termination of this Lease. 27. CUMULATIVE DAMAGES. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 28. COVENANTS AND CONDITIONS. Each provision of this Lease performable by Lessee shall be deemed both a covenant and condition. 29. BINDING EFFECT; CHOICE OF LAW. Subject to any provisions hereof restricting Assignment or Subletting by Lessee and subject to the provisions of paragraph 16, this Lease shall bind the parties, their personal representatives, successors and assigns. This Lease shall be governed by the laws of the State where the Office Building Project is located and any litigation concerning this Lease between the parties hereto shall be initiated in the county in which the Office Building Project is located. 30. SUBORDINATION. (A) This Lease, and any Option or right of first refusal granted hereby, at Lessor's option, shall be subordinate to any ground lease, mortgage, deed of trust, or any other hypothecation or security now or hereafter placed upon the Office Building Project and to any and all advances made on the security thereof and to all renewals, modifications, consolidations, replacements and extensions thereof. Notwithstanding such subordination, Lessee's right to quiet possession of the Premises shall not be disturbed if Lessee is not in default and so long as Lessee shall pay the rent and observe and perform all of the provisions of this Lease, unless this Lease is otherwise terminated pursuant to its terms. If any mortgagee, trustee or ground lessor shall elect to have this Lease and any Options granted hereby prior to the lien of its mortgage, deed of trust or ground lease, and shall give written notice thereof to Lessee, this Lease and such Options shall be deemed prior to such mortgage, deed of trust or ground lease, whether this Lease or such Options are dated prior or subsequent to the date of said mortgage, deed of trust or ground lease or the date of recording thereof. (B) Lessee agrees to execute any documents required to effectuate an attornment, subordination, or to make this Lease or any Option granted herein prior to the lien of any mortgage, deed of trust or ground lease, as the case may be. Lessee's failure to execute such documents within ten (10) days after written demand shall constitute a material default by Lessee hereunder without further notice to Lessee or, at Lessor's option, Lessor shall execute such documents on behalf of Lessee and Lessee's attorney-in-fact. Lessee does hereby make, constitute and irrevocably appoint Lessor as Lessee's attorney-in-fact and in Lessee's name, place and stead, to execute such documents in accordance with this paragraph 30(b). 31. ATTORNEY'S FEES. 31.1 If either party brings (or defends) an action to enforce the terms hereof or declare rights hereunder, the prevailing party in any such action, trial or appeal thereon, shall be entitled to its reasonable attorneys' fees to be paid by the losing party as fixed by the court in the same or a separate suit, and whether or not such action is pursued to decision or judgment. 31.2 The attorneys' fee award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorneys' fees reasonably incurred in good faith. 19 31.3 In addition to the charges authorized in Section 13.6, Lessor shall be entitled to reasonable attorneys' fees and all other costs and expenses incurred in the preparation and service of notice of default and consultations in connection therewith and any other legal services necessitated by Lessee default, whether or not a legal action is subsequently commenced in connection with such default. 31.4 JURY TRIAL WAIVER. To the extent permitted by law, Lessor and Lessee hereby waive their respective right to trial by jury of any cause of action, claim, counterclaim or cross-complaint in any action, proceeding and/or hearing brought by either Lessor against Lessee or Lessee against Lessor on any matter whatsoever arising out of, or in any way connected with, this lease, the relationship of Lessor and Lessee, Lessee's use or occupancy of the Premises, or any claim of injury or damage, or the enforcement of any remedy under any law, statute, or regulation, emergency or otherwise, now or hereafter in effect. 32. LESSOR'S ACCESS. 32.1 Lessor and Lessor's agents shall have the right to enter the Premises at reasonable times (Monday through Friday, during normal business hours, following twenty-four (24) hours telephonic notice by Lessor or Lessor's agents) for the purpose of inspecting the same, performing any services required of Lessor, showing the same to prospective purchasers, lenders, or lessees, taking such safety measures, erecting such scaffolding or other necessary structures, making such alterations, repairs, improvements or additions to the Premises or the Office Building Project as Lessor may reasonably deem necessary or desirable and the erecting, using and maintaining of utilities, services, pipes and conduits through the Premises and/or other premises. Lessor may at any time place on or about the Premises or the Building any ordinary "For Sale" signs and Lessor may at any time during the last six (6) months of the term hereof place on or about the Premises any ordinary "For Lease" signs. 32.2 All activities of Lessor pursuant to this paragraph shall be without abatement of rent, and Lessor shall not have any liability to Lessee for the same. 32.3 Lessor shall have the right to retain keys to the Premises and to unlock all doors in or upon the Premises other than to files, vaults and safes, and in the case of an emergency to enter the Premises by any reasonably appropriate means, and any such entry shall not be deemed a forceable or unlawful entry or detainer of the Premises or an eviction. Lessee waives any charges for damages or injuries or interference with Lessee's property or business in connection therewith. 33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either voluntarily or involuntarily, an auction upon the premises or the Common Areas without first having obtained Lessor's prior written consent. Notwithstanding anything to the contrary in this Lease, Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to grant such consent. The holding of any auction on the Premises or Common Areas in violation of this paragraph shall constitute a material default of this Lease. 34. SIGNS. Lessee shall not place any sign upon the Premises or the Office Building Project without Lessor's prior written consent. Under no circumstances shall Lessee place a sign on any roof of the Office Building Project. 35. MERGER. The voluntary or other surrender of this Lease by Lessee, or a mutual cancellation thereof, or a termination by Lessor, shall not work a merger, and shall, at the option of Lessor, terminate all or any existing subtenancies or may, at the option of Lessor, operate as an assignment to Lessor of any or all of such subtenancies. 36. CONSENTS. Except for paragraphs 33 (auctions) and 34 (signs) hereof, wherever in this Lease the consent of one party is required to an act of the other party such consent shall not be unreasonably withheld or delayed. 37. GUARANTOR. In the event that there is a guarantor of this Lease, said guarantor shall have the same obligations as Lessee under this Lease. 20 38. OPTIONS. 38.1 DEFINITION. "OPTION" shall mean (a) the right to extend the term of or renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor; (b) the right of first refusal or first offer to lease either the Premises or other property of Lessor; (c) the right to purchase or the right of first refusal to purchase the Premises or other property of Lessor. 38.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. Each option granted to Lessee in this Lease is personal to the original Lessee, and cannot be assigned or exercised by anyone other than said original Lessee and only while the original Lessee is in full possession of the Premises and, if requested by Lessor, with Lessee certifying that Lessee has no intention of thereafter assigning or Subletting. 38.3 MULTIPLE OPTIONS. In the event that Lessor has any multiple options to extend or renew this Lease, a later Option cannot be exercised unless the prior Options have been validly exercised. 38.4 EFFECT OF DEFAULT ON OPTIONS. (A) Lessee shall have no right to exercise an Option (i) during the period commencing with the giving of any notice of Default and continuing until said Default is cured; (ii) during the period of time any Rent is unpaid (without regard to whether notice thereof is given Lessee); (iii) during the time Lessee is in Breach of this Lease; or (iv) in the event that Lessee has been given three (3) or more notices of separate Default, whether or not the Defaults are cured, during the twelve (12) month period immediately preceding the exercise of the Option; (v) becoming a "debtor" as defined in II USC Sec 101 during the term of this Lease. (B) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of paragraph 38.4(a). (C) An Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and prior to the commencement of the extended term, (i) Lessee fails to pay Rent for a period of thir1y (30) days after such Rent becomes due (without any necessity of Lessor to give notice thereof), (ii) Lessor gives to Lessee three (3) or more notices of separate Default during any twelve (12) month period, whether or not the Defaults are cured, or (iii) if Lessee commits a Breach of this Lease. 39. SECURITY MEASURES - LESSOR'S RESERVATIONS. 39.1 Lessee hereby acknowledges that Lessor shall have no obligation whatsoever to provide guard service or other security measures for the Project in the Common Areas; 39.2 Lessee shall not: (A) Use a representation (photographic or otherwise) of the Building or the Office Building Project or their name(s) in connection with Lessee's business; (B) Suffer or permit anyone, except in emergency, to go upon the roof of the Building. 40. EASEMENTS. 40.1 Lessor reserves to itself the right, from time to time, to grant such easements, rights and dedications that Lessor deems necessary or desirable and to cause the recordation of Parcel Maps and restrictions, so long as such easements, rights, dedications, Maps and restrictions do not unreasonably interfere with the use of the Premises by Lessee. Lessee shall sign any of the aforementioned documents upon request of Lessor and failure to do so shall constitute a material default of this Lease by Lessee without the need for further notice to Lessee. 40.2 The obstruction of Lessee's view, air, or light by any structure erected in the vicinity of the Building, whether by Lessor or third parties, shall in no way affect this Lease or impose any liability upon Lessor. 21 41. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any amount or sum of money to be paid by one party to the other under the provisions hereof, the party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment, and there shall survive the right on the part of said party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said party to pay such or any part thereof, said party shall be entitled to recover such sum or so much thereof as it was not legally required to pay under the provisions of this Lease. 42. AUTHORITY. If Lessee is a corporation, trust, or general or limited partnership, Lessee, and each individual executing this Lease on behalf of such entity, represent and warrant that such individual is duly authorized to execute and deliver this Lease on behalf of said entity. If Lessee is a corporation, trust or partnership, Lessee shall, within thirty (30) days after execution of this Lease, deliver to Lessor evidence of such authority satisfactory to Lessor. 43. CONFLICT. Any conflict between the printed provisions, Exhibits or Addendum of this Lease and the typewritten or handwritten provisions, if any, shall be controlled by the typewritten or handwritten provisions. 44. NO OFFER. Preparation of this Lease by Lessor or Lessor's agent and submission of same to Lessee shall not be deemed an offer to Lessee to lease. This Lease shall become binding upon Lessor and Lessee only when fully executed by both parties. 45. LENDER MODIFICATIONS. Lessee agrees to make such reasonable modifications to this Lease as may be reasonably required by an institutional lender in connection with the obtaining of normal financing or refinancing of the Office Building Project. 46. MULTIPLE PARTIES. If more than one person or entity is named as either Lessor or Lessee herein, except as otherwise expressly provided herein, the obligations of the Lessor or Lessee herein shall be the joint and several responsibility of all persons or entities named herein as such Lessor or Lessee, respectively. 47. WORK LETTER. N/A. 48. ATTACHMENTS. Attached hereto are the following documents ("Exhibits") that are incorporated and become part of this Lease: (A) Rules and Regulations (`Exhibit A'). (B) Other (specify): 49. HAZARDOUS SUBSTANCES. 49.1 REPORTABLE USES REQUIRE CONSENT. (A) The term "HAZARDOUS SUBSTANCE" as used in this Lease shall mean any product, substance, or waste whose presence, use, manufacture, disposal, transportation, or release, either by itself or in combination with other materials expected to be on the Premises, is either (i) potentially injurious to the public health, safety or welfare, the environment or the Premises, (ii) regulated or monitored by any governmental authority, or (iii) a basis for potential liability of Lessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substances shall include, but not be limited to, hydrocarbons, petroleums, gasoline, and/or crude oil or any products, by-products or fractions thereof. Lessee shall not engage in any activity in or on the Premises which constitutes a Reportable Use of Hazardous Substances without the express prior written consent of Lessor and timely compliance (at Lessee's expense) with all applicable laws, covenants, or restrictions of record, building codes, regulations and ordinances ("Applicable Requirements"). "Reportable Use" shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, 22 use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with any governmental authority, and/or (iii) the presence at the Premises of a Hazardous Substance with respect to which any Applicable Requirements require that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may use any ordinary and customary materials reasonably required to be used in the normal course of the Use as specified in paragraph 1.4 so long as such use is in compliance with all Applicable Requirements, is not a Reportable Use, and does not expose the Premises or neighboring property to any meaningful risk of contamination or damage or expose Lessor to any liability therefor. In addition, Lessor may condition its consent to any Reportable Use upon receiving such additional assurances as Lessor reasonably deems necessary to protect itself, the public, the Premises and/or the environment against damage, contamination, injury and/or liability, including, but not limited to, the installation (and removal on or before Lease expiration or termination) of protective modifications (such as concrete encasements) and/or increasing the Security Deposit. (B) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance has come to be located in, on, under or about the Premises, other than as previously consented to by Lessor, Lessee shall immediately give written notice of such fact to Lessor, and provide Lessor with a copy of any report, notice, claim or other documentation which it has concerning the presence of such Hazardous Substance. (C) LESSEE REMEDIATION. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under, or about the Premises (including through the plumbing or sanitary sewer system) and shall promptly, at Lessee's expense, take all investigatory and/or remedial action reasonably recommended, whether or not formally ordered or required, for the cleanup of any contamination of, and for the maintenance, security and/or monitoring of the Premises or neighboring properties, that was caused or materially contributed to by Lessee, or pertaining to or involving any Hazardous Substance brought onto the Premises during the term of this Lease, by or for Lessee, or any third party. (D) LESSEE INDEMNIFICATION. Lessee shall indemnify, defend and hold Lessor, its agents, employees, lenders and ground lessor, if any, harmless from and against any and all loss of rents and/or damages, liabilities, judgments, claims, expenses, penalties, and attorneys' and consultants' fees arising out of or involving any Hazardous Substance brought onto the Premises by or for Lessee, or any third party (provided, however, that Lessee shall have no liability under this Lease with respect to underground migration of any Hazardous Substance under the Premises from adjacent properties). Lessee's obligations shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessee, and the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration or termination of this Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Substances, unless specifically so agreed by Lessor in writing at the time of such agreement. (E) LESSOR INDEMNIFICATION. Lessor and its successors and assigns shall indemnify, defend, reimburse and hold Lessee, its employees and lenders, harmless from and against any all environmental damages, including the cost remediation, which existed as a result of Hazardous Substances on the Premises prior to the Commencement Date or which are caused by the gross negligence or willful misconduct of Lessor, its agents or employees. Lessor's obligations, as and when required by the Applicable Requirements, shall include, but not be limited to, the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration or termination of this Lease. (F) INVESTIGATIONS AND REMEDIATIONS. Lessor shall retain the responsibility and pay for any investigations or remediation measures required by governmental entities having jurisdiction with respect to the existence of Hazardous Substances on the Premises prior to the Commencement Date, unless such remediation measure is required as a result of Lessee's use (including "Alterations", as defined in paragraph 7.3(a) (above) of the Premises, In which event Lessee shall be responsible for such payment. Lessee shall cooperate fully in any such activities at the request of Lessor, including allowing Lessor and Lessor's agents to have reasonable access to the Premises at reasonable times in order to carry out Lessor's investigative and remedial responsibilities. 23 (G) LESSOR TERMINATION OPTION. If a Hazardous Substance Condition occurs during the term of this Lease, unless Lessee is legally responsible therefor (in which case Lessee shall make the investigation and remediation thereof required by the Applicable Requirements and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 13), Lessor may, at Lessor's option, either (i) investigate and remediate such Hazardous Substance Condition, if required, as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) if the estimated cost to remediate such condition exceeds twelve ( 12) times the then monthly Base Rent or $100,000, whichever is greater, give written notice to Lessee, within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such Hazardous Substance Condition of Lessor's desire to terminate this Lease as of the date sixty (60) days following the date of such notice. In the event Lessor elects to give a termination notice, Lessee may, within ten (10) days thereafter, give written notice to Lessor of Lessee's commitment to pay the amount by which the cost of the remediation of such Hazardous Substance Condition exceeds an amount equal to twelve (12) times the monthly Base Rent or $100,000, whichever is greater. Lessee shall provide Lessor with said funds or satisfactory assurance thereof within thirty (30) days following such commitment. In such event, this Lease shall continue in full force and effect, and Lessor shall proceed to make such remediation, as soon as reasonably possible after the required funds are available. 49.2 INSPECTION; COMPLIANCE. Lessor and Lessor's consultants shall have the right to enter into Premises at any time, in the case of an emergency, and otherwise at reasonable times, for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease. The cost of any such inspections shall be paid by Lessor, unless a violation of Applicable Requirements or a contamination is found to exist or be imminent, or the inspection is requested or ordered by a governmental authority. In such case, Lessee shall upon request reimburse Lessor for the cost of such inspections, so long as such inspection is reasonably related to the violation or contamination. 50. SALE OF OFFICE BUILDING PROJECT. In the event the Office Building Project is sold to a third party during the term of this Lease, Lessor or Lessor's successor-in-interest shall have the right to terminate this Lease including any "option" as defined in Paragraph 38.1 of this Lease. In the event Lessor elects to terminate this Lease, Lessor shall deliver written notice of such election (the "Termination Notice"). The Termination Notice shall specify that the Lease shall terminate not less than six (6) months following delivery of the Termination Notice. It is agreed and understood that the Termination Date specified in paragraph 1.5 of the Basic Lease Provisions shall be advanced to the date specified in the Termination Notice (but in no event less than six (6) months following delivery of such Termination Notice). 51. "AS IS CONDITION." Lessee shall accept these Premises in their "as is" condition, in clean and good-working order. Lessor shall paint the interior walls of the Premises and clean carpets at Lessor's cost. 52. Lessor must have copy of Insurance Certificate before keys will be given out for this unit. 53. Lessee is responsible for the cost of making Lessee's telephone, DSL and computer related equipment, etc. lines active in Lessee's Premises. Lessee understands that Lessee may use Airport II vendors for this work but Lessee will be billed directly by the vendor used. Airport II assumes no liability for this cost. Airport II will provide data and telephone wiring as described on the floor plan if remodel work is part of this Lease. 54. Lessee will have access to Fitness Center for up to six (6) employees at no charge. 55. Lessor will pay first $30,000.00 of Tenant Improvement Costs (TIC). Lessor and Lessee will evenly split TIC of $30,000.01 to $50,000.00. Lessee will pay 100% of TIC over $50,000.00. 56. All previous leases for 1772 Technology Drive and 1798 Technology Drive, Suite 258 are void. 57. OFAC CERTIFICATION. Lessee certifies that it is not acting, directly or indirectly, for or on behalf of any person, group, entity, or nation named by any Executive Order or the United States Treasury Department as a terrorist, "Specially Designated National and Blocked Person", or other banned or blocked person, entity, nation, or transaction pursuant to any law, order, rule, or regulation that is enforced or administered by the Office of Foreign Assets Control; and it has not executed this Lease, directly or indirectly on behalf of, or instigating or facilitating this Lease, directly or indirectly on behalf of, any such person, group, entity, or nation. Lessee hereby agrees to defend, indemnify, and hold harmless Lessor from and against any and all claims, damages, losses, risks, liabilities, and expenses (including attorney's fees and costs) arising from or related to any breach of the foregoing certification. 24 LESSEE AND LESSOR HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN AND, BY EXECUTION OF THIS LEASE, SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY LESSOR AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES. THE LESSEE IS URGED TO: 1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. 2 RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF THE PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PREMISES, THE STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND THE SUITABILITY OF THE PREMISES FOR LESSEE'S INTENDED USE. LESSOR: LESSEE: Airport II Property Management, LLC Sysview Technology, Inc. By: /s/ Linda A. Filice By: /s/ William Hawkins Address: 1762 Technology Drive Address: 1772 Technology Drive Suite 126 San Jose, CA 95110 San Jose, CA 95110 Telephone: (408) 453-0100 Telephone: (408) 213-3707 Facsimile: (408) 453-0102 Facsimile: (408) 490-2801 EXHIBIT 'A' RULES AND REGULATIONS FOR STANDARD OFFICE LEASE GENERAL RULES 1. Lessee shall not suffer or permit the obstruction of any Common Areas, including driveways, walkways and stairways. 2. Lessor reserves the right to refuse access to any persons Lessor in good faith Judges to be a threat to the safety, reputation, or property of the Office Building Project and its occupants. 3. Lessee shall not make or permit any noise or odors that annoy or interfere with other lessee's or persons having business within the Office Building Project. 4. Lessee shall not keep animals or birds within the Office Building Project, and shall not bring bicycles, motorcycles or other vehicles into areas not designated as authorized for same. 5. Lessee shall not make, suffer or permit litter except in appropriate receptacles for that purpose. 6. Lessee shall not alter any lock or install new or additional locks or bolts. 7. Lessee shall be responsible for the inappropriate use of any toilet rooms, plumbing or other utilities. No foreign substances of any kind are to be inserted therein. 8. Lessee shall not deface the walls, partitions or other surfaces of the Premises or Office Building Project. 9. Lessee shall not suffer or permit any thing in or around the Premises or Building that causes excessive vibration or floor loading in any part of the Office Building Project. 10. Furniture, significant freight and equipment shall be moved into or out of the building only with the Lessor's knowledge and consent, and subject to such reasonable limitations, techniques and timing, as may be designated by Lessor. Lessee shall be responsible for any damage to the Office Building Project arising from any such activity. 11. Lessee shall not employ any service or contractor for services or work to be performed in the Building, except as approved by Lessor. 12. Lessor reserves the right to close and lock the Building on Saturdays, Sundays and legal holidays, and on other days between the hours of 5:00 p.m. and 8:00 a.m. of the following day. If Lessee uses the Premises during such period, Lessee shall be responsible for securely locking any doors it may have opened for entry. 13. Lessee shall return all keys at the termination of its tenancy and shall be responsible for the cost of replacing any keys that are lost. 14. No window coverings, shades or awnings shall be installed or used by Lessee. 15. No Lessee, employee or invitee shall go upon the roof of the Building. 16. Lessee shall not suffer or permit smoking or carrying of lighted cigars or cigarettes in areas reasonably designated by Lessor or by applicable governmental agencies as non-smoking areas. 17. Lessee shall not use any method of heating or air conditioning other than as provided by Lessor. 18. Lessee shall not install, maintain or operate any vending machines upon the Premises without Lessor's written consent. 19. The premises shall not be used for lodging or manufacturing, cooking or food preparation. 25 20. Lessee shall comply with all safety, fire protection and evacuation regulations established by Lessor or any applicable governmental agency. 21. Lessor reserves the right to waive anyone of these rules or regulations, and/or as to any par1icular Lessee, and any such waiver shall not constitute a waiver of any other rule or regulation or any subsequent application thereof to such Lessee. 22. Lessee assumes all risks from theft or vandalism and agrees to keep its Premises locked as may be required. 23. Lessor reserves the right to make such other reasonable rules and regulations as it may from time to time deem necessary for the appropriate operation and safety of the Office Building Project and its occupants. Lessee agrees to abide by these and such rules and regulations. PARKING RULES 1. Parking areas shall be used only for parking by vehicles no longer than full size, passenger automobiles herein called "Permitted Size Vehicles." Vehicles other than Permitted Size Vehicles are herein referred to as "Oversized Vehicles." 2. Lessee shall not permit or allow any vehicles that belong to or are controlled by Lessee or Lessee's employees, suppliers, shippers, customers, or invitees to be loaded, unloaded, or parked in areas other than those designated by Lessor for such activities. 3. Parking stickers or identification devices shall be the property of Lessor and be returned to Lessor by the holder thereof upon termination of the holder's parking privileges. Lessee will pay such replacement charge as is reasonably established by Lessor for the loss of such devices. 4. Lessor reserves the right to refuse the sale of monthly identification devices to any person or entity that willfully refuses to comply with the applicable rules, regulations, laws and/or agreements. 5. Lessor reserves the right to relocate all or a part of parking spaces from floor to floor, within one floor, and/or to reasonably adjacent offsite location(s), and to reasonably allocate them between compact and standard size spaces, as long as the same complies with applicable laws, ordinances and regulations. 6. Users of the parking area will obey all posted signs and park only in the areas designated for vehicle parking. 7. Unless otherwise instructed, every person using the parking area is required to park and lock his own vehicle. Lessor will not be responsible for any damage to vehicles, injury to persons or loss of property, all of which risks are assumed by the party using the parking area. 8. Validation, if established, will be permissible only by such method or methods as Lessor and/or its licensee may establish at rates generally applicable to visitor parking. 9. The maintenance, washing, waxing or cleaning of vehicles in the parking structure or Common Areas is prohibited. 10. Lessee shall be responsible for seeing that all of its employees, agents and invitees comply with the applicable parking rules, regulations, laws and agreements. 11. Lessor reserves the right to modify these rules and/or adopt such other reasonable and non-discriminatory rules and regulations as it may deem necessary for the proper operation of the parking area. Should it become necessary to designate parking stalls based on Lessee's use of the parking area, Lessor reserves the right (at Lessor's sole discretion) to designate certain parking stalls for a particular Lessee's usage with all costs incident to such designation payable by Lessee. 12. Such parking use as is herein provided is intended merely as a license only and no bailment is intended or shall be created hereby. 26 EX-21 3 exh21.txt EXHIBIT 21 LIST OF SUBSIDIARIES The following sets forth a list of subsidiaries and Sysview's ownership percentage as of December 31, 2006: STATE OR OTHER PERCENTAGE OF JURISDICTION OF NAME OF SUBSIDIARY OWNERSHIP INCORPORATION -------------------------------- -------------------- -------------------- Syscan, Inc. 100% California Syscan Laser Technology, Ltd. 100 BVI(1) Corp./HK(2) registered Leadbuilt Technology LTD. 100 BVI(1) Corp./HK(2) registered (1) British Virgin Islands (2) Hong Kong EX-31.1 4 exh31-1.txt EXHIBIT 31.1 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Darwin Hu, certify that: 1. I have reviewed this Form 10-KSB of Sysview Technology, Inc. ("Company") 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report; 4. The Company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the Company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter (the Company's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting; and 5. The Company's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company's auditors and the audit committee of the Company's Board of Directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal control over financial reporting. Date: April 3, 2007 /S/ DARWIN HU ------------- Darwin Hu, Chairman and Chief Executive Officer EX-31.2 5 exh31-2.txt EXHIBIT 31.2 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, William Hawkins, certify that: 1. I have reviewed this Form 10-KSB of Sysview Technology, Inc. ("Company") 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report; 4. The Company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the Company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter (the Company's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting; and 5. The Company's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company's auditors and the audit committee of the Company's Board of Directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal control over financial reporting. Date: April 3, 2007 /S/ WILLIAM HAWKINS ------------------- William Hawkins, Acting Chief Financial Officer and Chief Operating Officer and Secretary EX-32.1 6 exh32-1.txt EXHIBIT 32.1 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. 1350) Pursuant to Section 906 of the Sarbanes-Oxley Act of (18 U.S.C. 1350), the undersigned officer of Sysview Technology, Inc., a Delaware corporation (the "Company"), does hereby certify, to the best of such officer's knowledge and belief, that: (1) The Annual Report on Form 10-KSB for the year ended December 31, 2006 (the "Form 10-KSB") of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Form 10-KSB fairly presents, in all materials respects, the financial condition and results of operations of the Company. Date: April 3, 2007 /S/ DARWIN HU ------------- Darwin Hu, Chairman and Chief Executive Officer This certification shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act, or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act or the Securities Exchange Act. EX-32.2 7 exh32-2.txt EXHIBIT 32.2 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. 1350) Pursuant to Section 906 of the Sarbanes-Oxley Act of (18 U.S.C. 1350), the undersigned officer of Sysview Technology, Inc., a Delaware corporation (the "Company"), does hereby certify, to the best of such officer's knowledge and belief, that: (1) The Annual Report on Form 10-KSB for the year ended December 31, 2006 (the "Form 10-KSB") of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Form 10-KSB fairly presents, in all materials respects, the financial condition and results of operations of the Company. Date: April 3, 2007 /S/ WILLIAM HAWKINS ------------------- William Hawkins, Acting Chief Financial Officer, Chief Operating Officer and Secretary This certification shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act, or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act or the Securities Exchange Act. -----END PRIVACY-ENHANCED MESSAGE-----