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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-20270
THE NATIONAL REGISTRY INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 95-4346070
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2502 ROCKY POINT DRIVE, SUITE 100, TAMPA, FLORIDA 33607
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (813) 636-0099
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01
par value per share
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ].
The aggregate market value of the voting stock held by non-affiliates
of the registrant, based upon the average bid and asked prices of such stock on
March 27, 1997, was $48,279,929. There were 34,286,005 shares of Common Stock
outstanding as of March 27, 1997.
Total number of pages:55 Exhibit Index begins on page:31
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PART I
Item 1. BUSINESS
GENERAL
The National Registry Inc., a Delaware corporation organized on October
23, 1991 ("NRI" or the "Company"), designs, develops, markets and supports open
client/server software and hardware products that can be used to secure access
to computer-based information systems. NRI's products incorporate biometric
identification technology which identifies individuals seeking access to
valuable information and transactions by electronically scanning the image of
their finger tip, creating a unique identifier from that image, and matching the
identifier against a previously stored identifier or population of identifiers.
The Company has designed its products to (i) deliver high levels of performance,
ease-of-use, and a higher level of security than the Company believes is
currently available from password or token based identity authentication
solutions that can be easily forgotten, lost, or transferred from person to
person, (ii) reduce the operational costs of maintaining and supporting identity
authentication for enterprise information systems and applications accessed by
geographically dispersed and mobile users, and (iii) interface with a variety of
operating systems and hardware platforms to enable enterprise-wide client/server
security coverage. In the fourth quarter of 1996, the Company began shipping its
first generation of developers tools (the "NRIdentity(TM) Solution Sets") to
meet the enterprise security needs of its customers.
In recent years, the number of approved information systems users and
access points, from both mobile and desktop workstations, have increased
dramatically making it more difficult to prevent unauthorized access to
sensitive financial data, medical records, personnel files, customer lists,
marketing plans, product designs, and other confidential information. Protecting
such information and authenticating the identity of approved users has become a
growing and costly problem for business and other enterprises and continues to
be identified by information professionals as a priority in systems design. The
process of identity authentication typically requires an individual to present
for comparison one or more of the following factors: (i) something known, such
as a password, PIN, or mother's maiden name, (ii) something carried, such as a
token, card, or key, or (iii) something physical, such as a face, voice, or
other biological characteristic. Comparison of biological characteristics, also
known as biometric identification, has historically been the most reliable and
accurate of the three factors, but has also been the most difficult and costly
to implement in a fully automated environment. However, recent advances in
optical scanning technologies and image processing software algorithms have
increased the speed and reduced the cost of implementing finger image based
biometric identification and the Company believes that individuals and
organizations will increasingly use this method of identity authentication to
enhance the security of information systems, secure business-to-business and
business-to-consumer transactions, and enable the growth of electronic commerce
and other electronic services.
3
The Company believes that the proprietary technology, products and
systems licensed to it and/or developed by it, if successfully exploited, may
provide it with certain advantages over certain other commercially available
technologies. See "-- Licensed Technology" and "-- Competition." In addition to
the finger imaging identification technology currently licensed to it, the
Company may from time to time seek to obtain the right to use other similar
technologies, although there is no assurance that such rights will be available
on satisfactory terms. Any such acquisition may be subject to the Company
obtaining additional financing, which may not be available to the Company on
satisfactory terms.
The Company has developed and patented a state-of-the-art proprietary
finger image scanner technology which it has subsequently licensed to Key Tronic
Corporation ("Key Tronic") in December 1995, for the development, manufacture,
and marketing of computer keyboards and other computer attached desktop
peripheral devices incorporating such technology.
During the latter portion of 1996, the Company transitioned out of the
developmental stage which stage had been characterized by the development of
products by the Company and by the testing and installation of custom
applications for state and local government welfare administration. These
installations showcased the use of finger imaging identification technology in
an operational end user environment and developed marketable reference sites in
order to attract application developers to the Company's technology. The Company
is currently in discussions with a number of commercial enterprises in
connection with potential sales of its NRIdentity series software and scanner
products. No assurance can be given that any discussions with prospective
purchasers of the Company's products or services will result in the realization
of revenues by the Company.
For the fiscal year ended December 31, 1996, the Company had $2,305,000
in operating revenues and an operating loss of $7,340,000. As of December 31,
1996, the Company has an accumulated deficit of $33,019,000. The ability of the
Company to achieve profitability and sustain as an operating enterprise depends
largely on the Company's ability (i) to design, sell, and support its
identification software products and services and (ii) to hire and retain key
employees as the business expands. There is no assurance that the Company will
be able to accomplish either of the foregoing, or to expand its business.
RECENT DEVELOPMENTS
FINANCING TRANSACTION - On February 6, 1997, the Company completed an equity
financing pursuant to which NRI issued an aggregate of 350,000 shares of NRI
Series C Preferred Stock, $.01 par value per share (the " Series C Preferred
Stock") to two accredited investment funds for a gross cash purchase price of $7
million before commissions and expenses.
Shares of Series C Preferred Stock are convertible at the option of the
holder thereof into shares of NRI common stock, $.01 par value per share (the
"Common Stock"), at the lesser of (i) $2.375 per share or (ii) 82.5% of a
floating price equal to the average closing bid price of the Common Stock for
the five trading days immediately preceding the date of conversion. The Series C
Preferred Stock is convertible, as to one-third of such shares, at any time
after 121 days after the closing date, as to an additional one-third of such
shares, beginning 151 days after the closing date and, as to the remaining
shares, beginning 181 days after the closing date. All shares of Series C
Preferred Stock issued and outstanding as of February 4, 2000 will automatically
be converted into shares of Common Stock. The Company may redeem the Series C
Preferred Stock at any time based upon a formula relating to the then applicable
conversion
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price. In addition, as part of such transaction, the Company issued to such
accredited investment funds warrants to purchase, within five years of the date
of closing, up to 400,000 shares of Common Stock at an exercise price of $2.6125
per share, subject to certain adjustments from time to time.
On March 17, 1997 the Company filed a registration statement to
register certain shares of Common Stock issuable upon conversion of certain
shares of Series C Preferred Stock, certain shares of Common Stock held by
certain selling stockholders named in such registration statement and certain
shares of Common Stock issuable upon the exercise of certain warrants. The
Company has agreed to use its reasonable best efforts to cause the registration
statement covering the shares of Common Stock issuable upon conversion of the
Series C Preferred Stock to become effective on or prior to June 5, 1997. The
sale or perception of the availability for public sale of such shares could have
an adverse impact on the price of the Common Stock and/or upon the market, if
any, for the Common Stock.
PILOT APPLICATION - On February 20, 1997 the Company entered into an agreement
with the Mayo Foundation for Medical Education and Research (Mayo Clinic
Jacksonville) to develop and implement a "proof of concept" pilot application
which utilizes NRI's finger imaging hardware and software technology to protect
the confidentiality of patients' electronic clinical records while displayed on
monitors in public locations. In addition the application authenticates the
identity of the person accessing the information, ensuring that such person is
authorized for such access. The pilot application has been installed and is
being evaluated at three separate, networked locations and is being utilized by
approximately 100 users.
FORWARD-LOOKING STATEMENTS
Except for the historical information contained herein, certain of the
matters discussed in this annual report are "forward-looking statements" as
defined in Section 21E of the Securities Exchange Act of 1934 which involve
certain risks and uncertainties which could cause actual results to differ
materially from those discussed herein. Such risks and uncertainties include,
but are not limited to, the Company's limited operating history and substantial
accumulated net losses, the Company's need for additional funds, technological
and market uncertainty, competition, the Company's dependence upon a software
licensor, the Company's dependence on patents and other proprietary rights,
control of the Company, the possibility of liquidation or bankruptcy of the
Company, NASDAQ SmallCap Market eligibility and maintenance requirements, the
possible delisting of the Company's Common Stock from the NASDAQ SmallCap
Markets if maintenance requirements are not met, shares of the Company's capital
stock eligible for future public sale, the limited liquidity of the Common
Stock, and the market price volatility of the Common Stock. See the Company's
registration statement on Form S-3 (Registration No. 333-23467), filed with the
Securities and Exchange Commission (the "SEC") on March 17, 1997, and the
Company's periodic reports and other documents filed with the SEC, including
this annual report, for further discussions of these and other risks and
uncertainties applicable to the Company and its business.
MARKET OVERVIEW
Individuals and organizations are becoming increasingly concerned about
the security of information maintained on personal computers, the Internet, and
enterprise-wide systems. A number of technologies and strategies have been
developed to address the growing concern for secure information, including
without limitation, secure identification cards or tokens, digital certificates,
new encryption methods, firewalls and single sign-on applications. However, each
of these new technologies and strategies are dependent upon the most critical
and vulnerable component of the security process: positive personal
identification and authentication.
As an increasing number of organizations provide their employees with
access to their enterprise network and the Internet from their desktops, home
offices, and mobile computing terminals, an opportunity is emerging for
companies providing internal information systems and enterprise applications to
utilize finger imaging identification technology to secure confidential
5
company, "groupware", and team computing environments within departments and
across geographically dispersed locations. Since network expansion geometrically
increases the number of endpoints that may provide access or be accessed, the
Company believes that the need and demand for positive personal identification
and authentication in the enterprise network environment is also increasing at a
rapid rate.
BIOMETRIC IDENTIFICATION
A variety of methods are in use today to authenticate an individual's
identity for access privileges. Typically, these methods require an individual
to present for comparison one or more of the following factors: (i) something
known, such as a password, PIN, or mother's maiden name; (ii) something carried,
such as a token, card, or key; or (iii) something physical, such as a face,
voice, or other biological characteristic. Comparison of biological
characteristics, also known as biometric identification, has historically been
the most reliable and accurate of the three factors, but has also been the most
difficult and costly to implement in a fully automated environment. However,
recent advances in computer processing and optical scanning technologies have
improved the speed and costs of implementing biometric identification and the
Company believes that as costs continue to decrease individuals and
organizations will increasingly use this method of identity authentication to
enhance the security of information systems, secure business-to-business and
business-to-consumer transactions, and enable the growth of electronic commerce
and other electronic services because of its level of reliability and accuracy.
The Company believes that of the various biological characteristics
that are available today for use in biometric identification, finger imaging
identification technology has the highest combination of proven accuracy,
acceptability, and affordability for both one-to-one matching (one-to-one
matching answers the question "is this person who they claim to be") and
one-to-many matching (one-to-many matching answers the question "is this person
someone who already is contained in the database"). When implemented in an
operating system or application, these two matching functions are able to
address the full spectrum of identification requirements found in the
information technology marketplace including: (i) the prevention of identity
theft (assuming another person's identity), (ii) the detection of individuals
using multiple identities (aliases), and (iii) the coordination of account
relationships within a system (linking an individual to all of their accounts).
PRODUCTS
CURRENT PRODUCTS - The objective of the NRIdentity products is to provide the
commercial marketplace with complete, end-to-end solutions for positive personal
identification and authentication employing finger imaging identification
technology. The NRIdentity product line currently consists of the following:
NRIDENTITY PERSONAL AUTHENTICATION SCANNER SERIES ("PASS") delivers a selection
of finger image capture devices that the Company believes have the size,
ease-of-use and price required by the commercial marketplace. These hardware
components employ standard open system interfaces and are modular so they can be
6
configured to varying user environments. Although the Company commenced sales of
PASS scanners in the first quarter of 1997, there is no assurance that the PASS
scanners will be accepted commercially or that the Company will be able to
manufacture (or cause to be manufactured), market or sell significant quantities
of PASS scanners to generate substantial revenues for the Company.
NRIDENTITY PACKAGED APPLICATIONS provide "out-of-box" finger image personal
identification and authentication. Combined with PASS scanners, packaged
applications allow an end user to easily and inexpensively add finger imaging
indentification technology to their workstation and server without such user
performing any application development or requiring any special technical
expertise.
NRIDENTITY SOLUTION SETS are a collection of tools for developers which provide,
via standard software "building blocks," the necessary components to integrate
finger image based identification technology into a customized user application.
These software components are written in industry standard C and C++ programming
languages using an object-oriented methodology and are implemented in an open
architecture client/server model to allow developers freedom to select the
development tool and database of their choice.
PRODUCT GOALS - The Company believes that it has designed its NRIdentity line of
products to meet the needs of the commercial marketplace by designing such
products in an attempt to provide the following features and functionality:
EASE-OF-USE. The Company's software solution sets provide simple library
function calls or user prompts to capture, evaluate, process, and match scanned
finger images. The Company's packaged applications provide identity
authentication for screen savers, data file access, and program access.
HIGH PERFORMANCE AND SCALABILITY. The Company's products are designed for the
rapid capture and processing of finger image information. Matching can be
performed on a one-to-one basis or against populations of hundreds of thousands
of images in a database.
MULTI-PLATFORM SUPPORT. The Company's software is designed to operate on most
popular computer platforms, including Microsoft WINDOWS(R) 3.1, 95, and NT, and
numerous versions of the UNIX(R) operating system.
OFF-THE-SHELF HARDWARE. The Company's software supports numerous frame grabbers
and scanner peripherals, including those manufactured by Identix, Inc.,
Identicator Technology, and Key Tronic.
SUPPORT INDUSTRY STANDARDS. The Company's software products accept data
collected from a number of live scan devices consistent with industry standards
for image capture format and data exchange protocols. These standards were
developed by the Federal Bureau of Investigation (FBI) for interchange of
electronic fingerprints between law enforcement automated fingerprint
identification systems (AFIS). While there currently is no commerical industry
standard, the Company believes that its software can accept data collected from
all currently available image capture hardware.
7
MARKETING AND DISTRIBUTION
The Company uses a variety of marketing techniques in an attempt to stimulate
demand for its products and services. These programs are being developed with
resellers and original equipment manufacturers ("OEMs") to take advantage of
their complementary marketing capabilities. The marketing goals of these efforts
are to identify potential buyers of the Company's products, create awareness of
the Company's product offerings, and generate leads for follow-on sales. The
Company's goal is to achieve significant order volume by rapidly disseminating
its products through multiple distribution channels worldwide. However, there is
no assurance that such an objective will be achieved. The Company has designed
its distribution strategy to address what it believes are the particular
requirements of its target customers. The Company's direct distribution efforts
consist of a direct sales force and home page on the Internet. The Company's
products are distributed indirectly through systems integrators, value added
resellers ("VARs") and other resellers. The following is an outline of some of
the marketing techniques and distribution strategies being utilized by the
Company:
INTERNET MARKETING - The Company operates a WEB server home page
(http://www.nrid.com) which provides marketing and corporate information, news
about the Company, and a variety of product and technical support information.
The Company currently intends to expand its Internet operations to include sales
and distribution of products directly to end users through its World Wide Web
Site.
LINE OF BUSINESS MARKETING - The Company focuses its direct marketing efforts on
decision makers in the information technology industry with medium to large-size
enterprises. The Company's primary target industries are health care, financial
services, transaction processing, governmental and commercial intranet and
"extranet" users. The Company currently employs eight marketing people who
target these customers through direct sales, trade shows, and industry
referrals. The Company plans to expand its activities in direct marketing and
indirect marketing through resellers and OEMs in conjunction with its joint
marketing programs with strategic partners. See "-Strategic Relationships."
DIRECT SALES - The Company's direct sales force targets primarily
medium-to-large sized organizations, including companies involved in financial
services, health care, transaction processing, and governmental and commercial
interest and "intranet" users. The Company believes that these organizations are
the most concerned about confidentiality, privacy, and transaction security. In
addition, these organizations have a substantial installed base of user PC's and
private networks for their internal enterprise applications. In certain
instances, the Company's direct sales force works with complementary hardware
OEMs, VARs, Internet services providers ("ISPs"), and systems integrators to
deliver complete solutions for major customers.
COMPUTER VENDORS (OEMs) - The Company is working directly or jointly with
strategic partners, including Key Tronic, to provide the Company's complete
hardware and software product line to the identified target markets through
major computer vendors. The Company believes that certain of its strategic
partners already have established relationships with several of these target
organizations
VARS, ISPS, AND SYSTEMS INTEGRATORS - Until recently the Company has sold its
products only through direct sales. The Company has started to utilize VARs,
ISPs, systems integrators and other resellers and expects to increasingly
utilize such resellers, including utilizing direct and indirect sales forces of
strategic partners. In some cases the Company has granted exclusive distribution
rights which are limited by territory and in duration. Consequently, the Company
may be adversely affected should any such reseller fail to adequately penetrate
its market segment. The inability to recruit, manage, and retain important
resellers, or their inability to penetrate their respective market segment,
could materially adversely affect the Company's business, operating results,
financial condition or prospects.
STRATEGIC RELATIONSHIPS
As a means to try to accelerate the acceptance of the Company's products and to
facilitate the adoption of finger imaging identification technology in the
commercial marketplace, the Company has developed and is continuing to attempt
to develop strategic relationships with certain leading technology,
infrastructure, and transaction providers. The Company intends to rapidly
disseminate its products and services through multiple distribution channels
worldwide. However, there can be no assurance that the Company will be able to
so market its products and services or that such an objective will be achieved.
The following is a list of the types of providers that the Company has either
established strategic relationships with or with whom the Company is exploring
the possibility of entering into such relationship:
INFRASTRUCTURE PROVIDERS - The Company has developed and intends to continue to
develop strategic relationships with leading telecommunications companies and
access providers for
8
virtual private networks, the Internet, and corporate Intranets. For example,
LDDS WorldCom's GridNet subsidiary is marketing NRI's client and server software
as a security option for its corporate Intranet customers.
FINANCIAL SERVICES PROVIDERS - The Company is pursuing relationships with
leading banks and transaction processing companies interested in providing
enhanced customer service and security in financial services. For example,
Unisys Corporation ("Unisys") incorporates NRI's client and server software in
its Navigator(TM) customer service system for banking.
HEALTH CARE PROVIDERS - The Company is pursuing relationships with leading
health care insurers, providers, and other organizations interested in securing
electronic medical records and transactions, improving customer service, and
authenticating providers identities in paperless environments. For example, the
Company has developed a packaged software application, in conjunction with the
Mayo Foundation for Medical Education and Research (Mayo Clinic Jacksonville),
which it believes satisfies these objectives in a cost effective manner.
TECHNOLOGY PROVIDERS - The Company has entered into and intends to further
pursue selected hardware and software technology licenses and partnerships to
improve the NRIdentity product line and ensure compatibility with other
complementary, leading technologies and tools. For example, the Company's
software products incorporate algorithms developed by Cogent Systems, Inc. (the
"Software Licensor"), one of the world's leading providers of AFIS for law
enforcement and a supplier of AFIS technology to the British Home Office and
U.S. Immigration and Naturalization Service.
KEY TRONIC CORPORATION - On December 14, 1995, the Company announced that it had
entered into a developmental joint venture agreement with Key Tronic, a
manufacturer of computer keyboards, pursuant to which the Company licensed
certain technology and know-how relating to its finger imaging scanners to Key
Tronic for the development, manufacture and marketing of computer keyboards and
other computer attached desktop peripheral devices incorporating such
technology. The Company intends to utilize Key Tronic's infrastructure for the
sales, distribution, and support of the Company's packaged software products to
United States-based OEMs and reseller channels. The first prototype scanner
products were successfully developed and demonstrated in November 1996 at the
fall COMDEX trade show in Las Vegas, Nevada. Although the Company's production
scanners became commercially available during the first quarter of 1997, there
is no assurance that the Company's products will be accepted commercially or
that Key Tronic will be able to manufacture, market, or sell significant
quantities of keyboards or peripheral scanners incorporating the Company's
finger imaging identification technology to generate substantial revenues for
the Company.
UNISYS CORPORATION - On January 31, 1996, the Company announced a joint
marketing agreement with Unisys to offer integrated information solutions that
incorporate NRI finger imaging identification technology to financial markets.
Under the terms of the agreement, Unisys will offer NRIdentity Solution Sets as
part of its software applications for financial institutions. Unisys supplies
computers, software, and other
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information technology to banks, credit unions and financial institutions in the
United States and internationally.
BLUE CROSS AND BLUE SHIELD OF NEW JERSEY - On May 24, 1994, the Company, Blue
Cross and Blue Shield of New Jersey, Inc. ("BCBSNJ"), and a wholly owned
subsidiary of BCBSNJ entered into a Stockholders Agreement (the "Stockholders
Agreement") pursuant to which the parties agreed to form a corporation
jointly-owned by the Company and such BCBSNJ subsidiary, BIOMETRx Inc.
("BIOMETRx"), for the purpose of marketing certain finger imaging identification
software (the "Licensed Technology") to certain markets, including the health
care industry nationwide and to certain government agencies in New Jersey. The
Company and BCBSNJ each agreed to loan up to $300,000 to BIOMETRx for working
capital purposes. Through March 27, 1997, the Company and BCBSNJ have each
loaned $60,000 to BIOMETRx to fund preliminary organizational and development
activities. As of March 27, 1997, BIOMETRx has not commenced operations, and
management has determined to delay commencement of activities pending further
review of the applicable market requirements and demands.
The Company plans to expand its business development and marketing
organization as revenues increase. However, there is no assurance that revenues
will increase, that such internal expansion will be successfully completed, that
the cost of such expansion will not exceed revenues generated, or that the
Company's sales and marketing organization will be able to successfully compete
against its current or potential competitors. The Company's inability to
effectively manage its internal expansion could have a materiel adverse effect
on the Company's business, operating results, financial condition or prospects.
There is no assurance that the Company's existing or future strategic
relationships or marketing and distribution strategy will lead to, or accelerate
the acceptance of the Company's products or facilitate the adoption of finger
imaging identification technology in the commercial marketplace, or that the
Company will be able to pursue or develop further relationships with other
providers of technology, infrastructure, or transactions.
LICENSED TECHNOLOGY
LICENSE AGREEMENT - In April 1992, under the terms of a license agreement (the
"License Agreement"), the Software Licensor granted to the Company a seven and
one-half year exclusive license to all commercial applications of the Software
Licensor's finger imaging identification technology and non-exclusive rights to
the Licensed Technology for most governmental applications (including control of
welfare fraud), subject to certain limited rights of earlier termination. The
Company has no rights under the License Agreement to the law enforcement
applications of the Licensed Technology. Pursuant to the terms of the License
Agreement, the Software Licensor retained the right to also market and develop
finger imaging identification systems for all governmental applications,
including, among others, control of welfare fraud and law enforcement. In
consideration of the license, the Company has agreed to pay the Software
Licensor royalties generally based on the Company's revenues, subject to minimum
semi-annual payments. In addition, the Software Licensor also has agreed during
the term of the License Agreement to provide technical assistance to the Company
in its utilization, enhancement and development of the Software Licensor's
finger imaging identification technology.
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On March 10, 1994, the Company entered into a ten year extension,
continuing until October 1, 2009, of the term of the License Agreement, provided
that the Company makes a $10 million cash payment (the "Extension Payment") to
the Software Licensor on or prior to October 1, 1999, in addition to ongoing
licensing fees. In the event the Company does not make the Extension Payment on
or prior to October 1, 1999, the License Agreement will expire on October 1,
1999. There can be no assurance that the Company will be able to make the
Extension Payment. Regardless of whether the Extension Payment is made, pursuant
to the License Agreement, certain exclusive rights with respect to commercial
markets which the Company has failed to enter as of April 1, 1997 may become
nonexclusive at any time after April 1, 1997 upon five days' written notice by
the Software Licensor to the Company. As of March 27, 1997, the Company believes
that it has entered into the following commercial markets, among possible
others:
MARKET SIC CODE GROUP
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Commercial Bank; Credit Unions 60
Health Services 80
Business Consulting 87
Computer & Data Processing Services 73
Computer & Office Equipment Manufacturing 35
Insurance Carrier 63
To the extent the Company fails to enter into any additional commercial
markets or in the event it is determined that the Company in fact did not enter
into any of the above commercial markets (including any segment thereof) within
the meaning of the License Agreement, the Company stands to lose its exclusivity
in those markets, which loss of exclusivity could materially and adversely
affect the Company's future prospects. There can be no assurance the Company
will enter into any additional commercial markets.
Upon the termination of the License Agreement (whether as a result of
an event of default or expiration of the license period on October 1, 1999 or
October 1, 2009, if the Company makes the Extension Payment on or prior to
October 1, 1999), the Company would lose the right to use the Licensed
Technology. Any such loss of the Licensed Technology would substantially impair
(if not entirely preclude) the Company's ability to continue to conduct its
business unless the Company was able to make arrangements to obtain alternative
technology from another source, as to which there can be no assurance.
11
LICENSED TECHNOLOGY - The Licensed Technology consists of certain rights to
finger image processing, pattern matching and search algorithms. These
algorithms represent a software solution that runs on generally available
computer hardware. The licensed finger image identification algorithms perform
the following functions:
IMAGE PRE-PROCESSING - Enhances fingerprint images by clearly differentiating
ridges and valleys and locating and extracting ridge endings and bifurcations
(each such ridge ending and bifurcation is called a "point of interest" or
"minutia"). This process accepts gray scale image inputs of finger images,
either from live-scan cameras or flatbed scanners which scan inked images on
paper, and uses "fuzzy mathematics" to clearly assign pixels to either ridge
lines or valleys. The output of the process results in an enhanced finger image,
consisting of the ridge lines of the finger that can be evaluated by the
extraction and encoding process.
EXTRACTION AND ENCODING - Locates and identifies the core of a finger image and
surrounding minutiae. The automated finger imaging identification technology
licensed by the Company evaluates the image and encodes a pattern description of
the core and relative positions of the surrounding minutiae. This process
evaluates the quality of the encoded finger image and creates a standard finger
image minutiae record ("Finger Image Minutiae Record") output that can be stored
in a database and compared by the pattern matching process ("Pattern Matching
Process") or searched by the search process ("Search Process").
PATTERN MATCHING - Provides a Pattern Matching Process which will score the
similarity of the Finger Image Minutiae Records, providing highly reliable
finger image identification.
SEARCH - Provides a fast database pattern matching process that compares the
Finger Image Minutiae Record of a specific person against the database
containing the stored Finger Image Minutiae Records of all enrollees. The Search
Process determines whether there exists any similar Finger Image Minutiae Record
in the database and if so, uses the Pattern Matching algorithm on each to
determine the best identity of the specific person.
These essentially stand-alone processes can be integrated with a
variety of computer hardware environments and re-deployed in many different ways
to satisfy the finger image identification requirements of a wide range of
potential products and services. The Company refines the Licensed Technology on
a continuing basis. The Company also explores and evaluates on a continuing
basis other biometric technologies, including other finger imaging
identification technologies, with a view towards licensing any such other
advanced biometric technologies it deems appropriate and beneficial, although
there is no assurance that such rights will be available on satisfactory terms.
The Licensed Technology can be operated on mainframe computers, computer
workstations and on personal computer platforms and the Company has integrated
its finger imaging identification technology with, and is capable of storing,
retrieving and matching Finger Image Minutiae Records in, from and against, as
the case may be, most existing forms of personal identification cards, including
smart cards, optical cards and bar coded cards.
12
COMPETITION
Although the Company believes that the Licensed Technology is among the
most advanced available, to the best of the Company's knowledge, the following
companies also have automated finger imaging identification technology and are
active in the United States: Digital Biometrics Inc., Fingermatrix Inc., Identix
Inc., NEC Technologies, Inc., North American Morpho Systems Inc. and Printrak
International Inc. Other biometric technologies which may compete with the
Licensed Technology include identification by eye retina blood vessel patterns,
hand geometry and signature analysis. The Company believes finger imaging
identification technology has the advantage of being reliable, having relatively
high accuracy levels, being easy to use, being relatively inexpensive and may
have the highest degree of social acceptance of currently available biometric
technologies. The Company is aware of several other companies with significantly
greater resources that have produced or are developing biometric identification
hardware and software that may be competitive with the Company's including TRW,
Inc., Thompson CSF, and National Semi-Conductor Corporation.
In addition, the Company will face competition from non-biometric
technologies such as traditional key, card and surveillance systems in the
facilities access control market. In applications such as controlled access to
computers, automated teller machines and electronic funds transfers, the Company
will face competition from technologies relying on personal identification
numbers. In competing with these non-biometric products, the Company believes
that the most important competitive issue will be the trade-off between the
additional security and fraud prevention capabilities provided by positive
personal identification versus the cost of installation. There is no assurance
that Company will be able to compete effectively with competitors that may
introduce lower cost biometric and non-biometric hardware and software
technologies.
PATENTS AND TRADEMARKS
Pursuant to the License Agreement, the Company has licensed from the
Software Licensor, on a worldwide exclusive basis, all commercial applications
of the Licensed Technology and, on a worldwide non-exclusive basis,
governmental applications of the Licensed Technology other than those relating
to law enforcement. The Company has no rights, other than pursuant to its
license of rights, to any patents or other intellectual property of the Software
Licensor. The Company believes that the competitive nature of its industry
makes any patents and patent applications to which the Software Licensor has
rights important to the Company. However, the Software Licensor has recently had
certain patent applications rejected and there is no assurance that any patents
will be issued to the Software Licensor, or that any issued patents, or any
patents applied for, will prove enforceable, or that the Company will derive any
competitive advantage therefrom. Because the Company's rights to governmental
applications of the Licensed Technology are not exclusive, the Company may
experience competition in this area from other products and services
incorporating the Licensed Technology.
On October 28, 1994, the Company filed two patent applications in
connection with the ergonomic design and optical system used in its Microreader
optical reader system, both of which include allowed claims. On October 27,
1995, corresponding international patent applications were filed for the October
1994 patent applications. On August 18, 1996 and
13
January 12, 1997, the Company's two patent applications were granted. While the
Company believes that having such patents should give the Company a competitive
advantage, there is no assurance that a competitive advantage will exist because
of such patents. In the event the Company is unable to enforce or protect such
patents, as to which there can be no assurance, it could lose certain
competitive advantages, if any, it may have in connection with the scanner line.
The Company also relies on unpatented know-how, trade secrets and
continuing research and development. As a result, the Company may not have any
protection from other parties who independently develop the same know-how and
trade secrets. Proprietary protection of the Company's products and services may
be important to its business, and the Company's failure or inability to maintain
such protection could have a material adverse affect on the Company's business,
financial condition, results of operations and prospects. Moreover, while the
Company does not believe that the production and sale of the Company's proposed
products or services infringe on rights of third parties, if such is not the
case, failure to obtain needed licenses from such third parties could have a
material adverse effect on the Company's ability either to complete the
development of certain products or services or to arrange for their production
and marketing. Failure to obtain any such licenses could adversely impact the
Company's results of operations.
The Company has registered certain service marks and trademarks with
the United States Patent and Trademark office. However, the Company has not
registered certain of the various trademarks and trade names which it uses with
the United States Patent and Trademark Office nor in any foreign government
trademark offices. With respect to unregistered trademarks, the Company intends
to accompany the use of such trademarks with the Company's name to indicate the
origin of the products to which they are applied, to distinguish them from the
products of competitors and to build goodwill in such trademarks. Certain rights
are, however, protected under the provisions of the Lanham Act and under state
law in respect to unregistered or common law trademarks.
EMPLOYEES
As of March 27, 1997, the Company has 44 full-time employees and
consultants. From time to time the Company has also hired additional consultants
for specific assignments, and intends to continue this practice in the future.
None of its employees are represented by a labor union. Management believes that
the future success of the Company will depend in part on its ability to retain
its existing technical and other personnel and to attract and retain other
qualified employees. The Company believes that its relationship with its
employees is good.
14
Item 2. PROPERTIES.
The Company leases its current principal executive offices and research
and development facilities which consist of approximately 7,500 square feet
located at 2502 Rocky Point Drive, Tampa, Florida 33607.
The Company also leases office space for its sales and marketing and
technical personnel in Seattle, Washington, Bowie, Maryland and Trenton, New
Jersey.
Item 3. LEGAL PROCEEDINGS.
A complaint was served on the Company on February 13, 1997 with respect
to a cause of action brought by International Interest Group, Inc. ("IIG") in
Los Angeles Superior Court (the "Suit"). The Suit asserts claims for breach of
contract, quantum meruit, unjust enrichment, breach of the implied covenant of
good faith and fair dealing and fraud and seeks an accounting, specific
performance, injunctive and declaratory relief and damages of an unspecified
amount. The damages asserted by the plaintiff are alleged to be in excess of
$1,000,000 for each of six different causes of action. IIG asserts such claims
in connection with a letter agreement pursuant to which it agreed to assist the
Company in locating candidates which would participate with the Company in
developing commercial applications for the Company's technology and/or provide
assistance to develop such technology or to provide financing. IIG asserts,
among other things, that it located such a candidate and that it is due certain
compensation in accordance with such letter agreement.
On or about March 17, 1997, the Company filed a Motion for Stay or
Dismissal of the Suit and a Motion to Compel Arbitration in connection with
the Suit. Given the early stage of the proceeding, it is not possible to
establish a probable outcome, but the Company believes it has meritorious
defenses to the asserted claims. The Company intends to vigorously defend
itself. Additionally, the plaintiff has contacted the Company to discuss
potential settlement.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
None.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
There is presently a limited public trading market for the Common
Stock. The Common Stock has been listed on the NASDAQ SmallCap Market since
April 27, 1993 (NASDAQ: NRID). The following table sets forth the range of high
and low closing bid quotations for the Common Stock as reported on the NASDAQ
SmallCap Market for each full quarterly period from January 1, 1995 through
December 31, 1996 and for the period January 1, 1997 through March 27, 1997.
Such quotations represent prices between dealers without adjustment for retail
markups, markdowns or commissions, and may not necessarily represent actual
transactions.
15
COMMON STOCK BID PRICE
----------------------
HIGH Low
---- ---
1995
- - ----
First Quarter 3 15/16
Second Quarter 3 1-11/16
Third Quarter 2-21/32 1-3/8
Fourth Quarter 2-15/16 2
1996
- - ----
First Quarter 2-31/32 1-21/32
Second Quarter 2-11/32 1-1/2
Third Quarter 1-13/16 5/8
Fourth Quarter 3-1/4 1-1/16
1997
- - ----
First Quarter (through 1-13/16 1-3/8
March 27, 1997)
As indicated in the preceding paragraph, there has been only a limited
public market for the outstanding Common Stock and the market price for the
Common Stock does not necessarily reflect the value of the Company. There is no
assurance that a viable public market for such shares will develop in the future
or, if one develops, such a public market will continue to exist.
On March 27, 1997, the closing bid price of the Common Stock as
reported on the NASDAQ SmallCap Market was $1-23/32. As of March 27, 1997 there
were approximately 246 record holders of Common Stock.
Since its incorporation, the Company has not paid or declared dividends
on the Common Stock, nor does it intend to pay or declare cash dividends on its
Common Stock in the foreseeable future.
16
Item 6. SELECTED FINANCIAL DATA (in thousands except per share data).
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------
Summary Statement of 1996 1995 1994 1993 1992
Operations Data
- - -----------------------------------------------------------------------------------------------------------------------
Revenue $ 2,305 $ 401 -- -- --
Net loss ($7,340) ($5,070) ($7,006) ($6,050) ($6,728)
Net loss per common share ($0.26) ($0.22) ($0.37) ($.33) ($0.45)
Weighted average number of
common shares 28,077 23,238 19,093 18,489 15,021
AT DECEMBER 31,
Summary Balance --------------------------------------------------------------------------------
Sheet Data 1996 1995 1994 1993 1992
- - -----------------------------------------------------------------------------------------------------------------------
Total assets $2,832 $1,600 $1,701 $6,632 $6,738
Total liabilities 1,348 510 273 186 397
Stockholders' equity 1,484 1,090 1,428 6,446 6,341
- - ----------
(1) On February 6, 1997, the Company completed an equity financing of
Series C Preferred Stock which raised $7.0 million before commissions and
expenses (estimated at approximately $495,000 in the aggregate). See "Item 1.
Business--Recent Developments."
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OPERATIONS.
RESULTS OF DEVELOPMENT ACTIVITIES
The Company incurred net losses for the fiscal years 1996, 1995 and
1994 of $7.3 million, $5.1 million, and $7.0 million, respectively, due to its
startup efforts in developing and marketing its finger imaging identification
software and processing capability. In the fiscal year ended December 31, 1996,
the Company achieved its first significant operating revenue, generating $2.3
million from the sale of its welfare fraud control systems and related services.
The following discussion presents certain changes in revenue and
operating expenses of the Company which have occurred between fiscal years 1996,
1995 and 1994 and should be read in conjunction with the Company's Financial
Statements and Summary Financial Data included elsewhere herein.
17
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31,
1995
REVENUES AND COST OF REVENUES
Revenues for the fiscal year ended December 31, 1996 increased by $1.9
million over revenues for the fiscal year ended December 31, 1995 due to the
installation of welfare fraud control systems for the states of Connecticut and
New Jersey. Revenues from Suffolk and Nassau counties, each in the state of New
York, and the state of New York continue to generate a small amount of revenue
as part of long-term service agreements. The Connecticut installation, where the
Company is a subcontractor to a direct service provider, includes a service
commitment through 2000. The New Jersey contract, which was extended in January
1997, will expire in January 1998, if not renewed prior to that date; the
Suffolk and Nassau county contracts will also expire in January 1998, if not
renewed prior to that date.
Cost of revenues for the fiscal year ended December 31, 1996 increased
by $1.0 million over cost of revenues for the same period in 1995 as a result of
the increased costs of the new installations in Connecticut and New Jersey. Cost
of revenues includes direct installation costs, software customization costs,
ongoing technical support and amortization of hardware acquired by the Company
on behalf of its customers.
OPERATING EXPENSES
Operating expenses for the fiscal year ended December 31, 1996
increased by $3.2 million over operating expenses for the same period in 1995.
The $3.2 million increase was comprised of a $1.8 million increase in selling
and marketing expenses, a $332,000 increase in product development expenses and
a $1.1 million increase in general and administrative expenses.
CHANGES IN OPERATING EXPENSES
-----------------------------
(IN THOUSANDS, EXCEPT %)
$ %
CHANGE CHANGE
------ ------
Selling and marketing $1,823 112%
Product development 332 16
General and administrative 1,096 68
-----
$3,251 62%
====== ===
SELLING AND MARKETING
The increase in selling and marketing expenses is primarily due to a
$1.4 million increase in employee and consulting expenses and a $322,000
increase in related travel, due to the Company's increased selling and marketing
efforts in an attempt to establish and develop commercial relationships through
which it can distribute its products.
18
CHANGES IN CERTAIN SELLING
AND MARKETING EXPENSES
----------------------
(IN THOUSANDS, EXCEPT %)
$ %
CHANGE CHANGE
Employee and consulting $1,387 148%
Rent 55 198
Travel 322 139
Advertising and promotions 59 171
------ -----
$1,823 112%
====== =====
The Company expects these expenses to increase as it continues to sell
and market its products and services and develop commercial relationships.
PRODUCT DEVELOPMENT
The increase in product development expenses was primarily due to an
increase in consulting fees for outside consultants utilized in connection with
the Company's development efforts. While the Company has completed the
development of certain of its products, it expects to continue to incur product
development costs, at least in the short term, as it continues to develop
additional products and to enhance existing products.
GENERAL AND ADMINISTRATIVE
The $1.1 million increase in general and administrative expenses was
primarily due to a $300,000 increase in legal and professional fees, a $111,000
increase in employee expenses and related travel, a $150,000 increase in
advertising expense, a $64,000 increase in depreciation expense and other
general increases due to the Company's increased level of operations.
As a result of the increased expenses set forth above, the net loss for
the fiscal year ended December 31, 1996 increased by $2.2 million over the net
loss for the fiscal year ended December 31, 1995.
19
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31,
1994
REVENUES AND COST OF REVENUES
Revenues for the fiscal year ended December 31, 1995 were $401,000.
There were no revenues in 1994. Revenues increased due to the installation of
welfare fraud control systems in Suffolk and Nassau counties in the State of New
York in the first quarter of 1995 and another welfare fraud control system in
the state of New Jersey in August 1995. The New Jersey contract, which was
extended in January 1997, will, by its terms, expire, if not renewed, in January
1998; the Suffolk and Nassau contracts will, by their terms, also expire, if not
renewed, in January 1998.
Cost of revenues for the fiscal year ended December 31, 1995 was
$274,000. There was no cost of revenues in 1994 due to lack of sales. Cost of
revenues consists of amortization of the following: hardware acquired by the
Company on behalf of customers, software, installation costs, including software
development costs over the term of the contracts and ongoing technical support.
OPERATING EXPENSES
Operating expenses for the year ended December 31, 1995 decreased over
the same period in 1994 by $1,830,000, or 35%. The decrease from 1995 to 1994
was primarily due to corporate-wide reductions in employee and
consulting-related expenses and related overhead and reductions in depreciation
expense.
The Company expects operating expenses to increase during fiscal year
1996 by at least 20% (and potentially at a significantly greater level) over
fiscal year 1995, primarily due to increased employee and consulting expenses as
it hires the personnel required to solicit and implement systems sales as well
as develop its products and applications.
The following table sets forth certain changes in operating expenses,
including the absolute dollar and percentage changes for the year ended December
31, 1995, compared to the year ended December 31, 1994:
CHANGES IN OPERATING EXPENSES
-----------------------------
(IN THOUSANDS, EXCEPT %)
$ %
CHANGE CHANGE
------ ------
Selling and marketing $ 191 13%
Product development (1,058) (34)
General and administrative (963) (38)
------- ----
($1,830) (35)%
======= ====
SELLING AND MARKETING
Selling and marketing expenses for the year ended December 31, 1995
increased $191,000, or 13% over the same period in 1994 due primarily to a
$219,000 increase in employee and consulting expenses, and a $28,000 increase in
related travel, due to the Company's increased selling and marketing efforts in
an attempt to establish and develop commercial relationships through which it
desires to distribute its products. These increases were partially offset by a
decrease in rent due to the closing of the New York office in June 1994.
PRODUCT DEVELOPMENT
Product development expenses for the year ended December 31, 1995
decreased $1,058,000, or 34% over the same period in 1994 due primarily to a
decrease in consulting fees and personnel expense ($784,000), supplies expense
($49,000) and miscellaneous expense ($37,000) related to the development of the
Company's Microreader, and a decrease in depreciation expense of $185,000 due to
disposals and equipment and software purchased in 1992 becoming fully
depreciated.
GENERAL AND ADMINISTRATIVE
For the year ended December 31, 1995, general and administrative
expenses decreased $963,000, or 38% over the same period in 1994 due primarily
to decreases in employee and consulting expense of $890,000 (of which $827,000
relates to non-cash reduction in option and stock gift/issuance expense) and
reductions in travel expense of $52,000.
LIQUIDITY AND CAPITAL RESOURCES
Cash and working capital as of February 28, 1997 were approximately
$5.8 million and $5.7 million, respectively. The increase from December 31, 1996
was due primarily to the receipt in January 1997 of approximately $6.5 million
in net proceeds from a private placement of the Company's Series C Preferred
Stock offset by ongoing net operating expenses.
Cash and working capital as of December 31, 1996 were $914,000 and
$254,000, respectively, as compared to $178,000 and $245,000, respectively, as
of December 31, 1995. The increases were primarily the result of net cash used
in operating activities of $6.0 million and $921,000 in capital expenditures
offset by approximately $7.6 million, in net proceeds from the sale of the
Company's Series B Preferred Stock and Common Stock. The Company estimates its
cash burn rate for the last three months of 1996, before capital expenditures,
to be approximately, $524,000 per month.
Capital expenditures for fiscal 1996 were $921,000. These expenditures
were primarily for computer hardware and software used in development of the
Company's optical reader system and computer equipment to support welfare fraud
control system sales. The Company currently anticipates spending approximately
$500,000 in 1997, primarily on equipment to support continued development of the
Company's hardware and software products, equipment to perform benchmark testing
of the Company's systems and hardware and furniture to support hiring of
additional product development and sales and marketing staff.
On February 6, 1997, the Company completed an equity financing pursuant
to which certain investors purchased from the Company 350,000 shares of Series C
Preferred Stock for an aggregate purchase price of $7.0 million before
commissions and expenses (estimated at approximately $495,000 in the aggregate).
Shares of Series C Preferred Stock are convertible at the option of the holder
thereof into shares of Common Stock at the lesser of (i) $2.375 per share or
(ii) 82.5% of a floating price equal to the average closing bid price of the
Common Stock for the five trading days immediately proceeding the date of
conversion. The Series C Preferred Stock is convertible, as to one-third of such
shares, at any time after 121 days after the closing date, as to an additional
one-third of such shares, beginning 151 days after the closing date and, as to
the remaining shares, beginning 181 days after the closing date. All outstanding
shares of Series C Preferred Stock will automatically convert into Common Stock
on February 4, 2000.
20
The Company may redeem the Series C Preferred Stock at any time based
upon a formula relating to the then applicable conversion price. In addition, as
part of such transaction, the Company issued to such accredited investment
funds, warrants to purchase, within five years of the date of closing, up to
400,000 shares of Common Stock at an exercise price of $2.6125 per share,
subject to certain adjustments from time to time. Any exercise by the Company of
its redemption rights, absent new financing, would adversely impact the
Company's liquidity. The shares of Series C Preferred Stock have no voting
rights except as required by law and have a liquidation preference equal to
their stated value.
On March 17, 1997 the Company filed a registration statement to
register certain shares of Common Stock issuable upon conversion of certain
shares of Series C Preferred Stock, certain shares of Common Stock held by
certain selling stockholders named in such registration statement and certain
shares of Common Stock issuable upon the exercise of certain warrants. The
Company has agreed to use its reasonable best efforts to cause the registration
statement covering the shares of Common Stock issuable upon conversion of the
Series C Preferred Stock to become effective on or prior to June 5, 1997.
On May 24, 1994, the Company, BCBSNJ and a wholly owned subsidiary of BCBSNJ
entered into the Stockholders Agreement pursuant to which the parties agreed to
form BIOMETRx for the purpose of marketing the Company's finger image
identification technology to, among other markets, the health care industry
nationwide and to certain governmental agencies in New Jersey. The Company and
BCBSNJ have each agreed to loan up to $300,000 to BIOMETRx for working capital
purposes. Through March 27, 1997, the Company and BCBSNJ have each loaned
$60,000 to BIOMETRx to fund preliminary organizational and development
activities. As of March 27, 1997, BIOMETRx has not commenced operations, and
management has determined to delay commencement of activities pending further
review of the applicable market requirements and demands. BIOMETRx intends, upon
commencement of the operations thereof, to seek capital from third party
investors. There is no assurance that BIOMETRx will commence operations or, if
it commences operations, when such operations will commence and whether such
operations will be successful in the marketing of any products, services or
systems.
Since its incorporation, the Company has not paid or declared dividends
on the Common Stock, nor does it intend to pay or declare cash dividends on its
Common Stock in the foreseeable future. The Series C Preferred Stock carries a
dividend of 6% per annum, which is cumulative and is payable, at the option of
the Company (subject to certain conditions to the extent payable in shares of
Common Stock) in cash or shares of Common Stock, quarterly in arrears, but in no
event later than the conversion date applicable to such shares of Series C
Preferred Stock.
Management believes that the adequacy of its cash resources will be
dependent on its ability to achieve additional sales and, to the extent
necessary, obtain additional capital to complete the development and marketing
of its finger imaging identification products and services. There can be no
assurance that the Company will be able to complete significant sales of its
products or services during 1997. The Company continues to spend net cash at a
rate of approximately $550,000 per month (excluding capital expenditures) for
the first two months of 1997. The Company believes that
21
its existing working capital, together with cash from anticipated gross margins
from operations and other funding sources, including the possibile sale of
capital stock, will be sufficient to meet its expected working capital needs for
at least the next twelve months assuming revenues for 1997 are at least equal to
the revenues realized in 1996. However, absent a significant increase in sales,
the Company will require additional funds thereafter to continue, among other
things, development, testing and marketing of its finger imaging identification
products and services and to maintain its operations. There is a significant
likelihood that such additional funds will not be available on terms acceptable
to the Company, if at all. It is likely that any such additional infusion of
capital would be in the form of the sale and issuance of additional shares of
Common Stock, which may substantially increase the number of shares of Common
Stock outstanding on a fully-diluted basis. The failure to obtain such
additional funds may cause the Company to cease or curtail operations. Even if
such additional funding is obtained, there can be no assurance that the Company
will be able to complete the developing and testing of its products and services
or, if completed, that it will be able to consummate significant sales of its
products or services.
22
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Financial Statements
PAGE
NO.
---
Report of Independent Certified
Public Accountants................................................... F-1
Balance Sheets as of
December 31, 1996 and December 31, 1995.............................. F-2
Statements of Operations
For each of the three years in the
period ended December 31, 1996 ...................................... F-4
Statements of Stockholders' Equity (Deficit)
For each of the three years in the
period ended December 31, 1996....................................... F-5
Statements of Cash Flows
For each of the three years in the
period ended December 31, 1996....................................... F-8
Notes to Financial Statements.......................................... F-9
23
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Comprising Item 8 of the Annual Report
on Form 10-K to the
SECURITIES AND EXCHANGE COMMISSION
THE NATIONAL REGISTRY INC.
Year Ended December 31, 1994,
Year Ended December 31, 1995,
Year Ended December 31, 1996
24
Report of Independent Certified Public Accountants
Stockholders and Board of Directors
The National Registry, Inc.
We have audited the accompanying balance sheets of The National Registry, Inc.
as of December 31, 1996 and 1995, and the related statements of operations,
stockholders' equity (deficit), and cash flows for each of the three years in
the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The National Registry, Inc. at
December 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996 in conformity
with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Tampa, Florida
March 4, 1997
F-1
THE NATIONAL REGISTRY, INC.
BALANCE SHEETS
DECEMBER 31
1996 1995
------ ------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents $ 914 $ 178
Receivables:
Trade 362 --
Other 98 22
Note--related party -- 60
------ ------
460 82
Inventory -- 143
Prepaid expenses 199 182
Deferred charges 6 159
Other 23 11
------ ------
Total current assets 1,602 755
Equipment:
Computer equipment 2,568 1,848
Office equipment and other 381 215
------ ------
2,949 2,063
Less accumulated depreciation (1,824) (1,323)
------ ------
1,125 740
Investment 105 105
------ ------
Total assets $2,832 $1,600
====== ======
SEE ACCOMPANYING NOTES.
F-2
THE NATIONAL REGISTRY, INC.
BALANCE SHEETS (CONTINUED)
DECEMBER 31
1996 1995
-------- --------
(IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 368 $ 220
Accrued compensation 346 13
Other accrued expenses 367 226
Accrued legal and professional fees 267 51
-------- --------
Total current liabilities 1,348 510
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY Common stock, $.01 par value:
Authorized--75,000,000 shares
Issued and outstanding--34,401,005 and 24,244,253
shares in 1996 and 1995 344 242
Preferred stock, $.01 par value convertible:
Authorized--1,000,000 shares
Issued and outstanding--100,000 shares in 1996
and 1995 (liquidation preference of $100 per share) 1 1
Capital in excess of par value 34,301 26,475
Accumulated deficit (33,019) (25,376)
Unamortized deferred compensation (143) (252)
-------- --------
Total stockholders' equity 1,484 1,090
-------- --------
Total liabilities and stockholders' equity $ 2,832 $ 1,600
======== ========
SEE ACCOMPANYING NOTES.
F-3
THE NATIONAL REGISTRY, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31
1996 1995 1994
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
Revenue $ 2,305 $ 401 $ --
Cost of revenue 1,292 274 --
-------- -------- --------
Gross profit (loss) 1,013 (127) --
Operating expenses:
Selling and marketing 3,445 1,622 1,431
Product development 2,388 2,056 3,114
General and administrative 2,697 1,601 2,564
-------- -------- --------
Total operating expenses 8,530 5,279 7,109
Other income:
Interest income 177 82 103
-------- -------- --------
Net loss $ (7,340) $ (5,070) $ (7,006)
======== ======== ========
Net loss per common share $ (0.26) $ (0.22) $ (0.37)
======== ======== ========
Weighted average number of shares
outstanding 28,077 23,238 19,093
======== ======== ========
SEE ACCOMPANYING NOTES.
F-4
THE NATIONAL REGISTRY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
CAPITAL UNAMORTIZED
COMMON STOCK PREFERRED STOCK IN EXCESS ACCUMULATED DEFERRED
SHARES AMOUNT SHARES DEFICIT OF PAR DEFICIT COMPENSATION TOTAL
------- ------ ------ ------- --------- ----------- ------------ ------
Balance at December 31, 1993 18,624 186 100 1 20,729 (13,300) (1,170) 6,446
Issuance of common
stock, net of offering
costs, on August 5, 377 4 -- -- 747 -- -- 751
1994 at $2.00/share
Cancellation of
compensatory stock -- -- -- -- (784) -- 370 (414)
options
Stock gifted by -- -- -- -- 195 -- -- 195
principal stockholder
Expense related to stock
option plans -- -- -- -- -- -- 563 563
Issuance of common stock
upon exercise of stock
options at $2.25/share 8 -- -- -- 16 -- -- 16
Issuance of common stock
upon exercise of stock
options at $.01/share 450 4 -- -- -- -- -- 4
Issuance of common stock
upon exercise of 150 2 -- -- 73 -- -- 75
warrants at $.50/share
Issuance of common stock
as compensation -- -- -- -- 183 -- -- 183
Issuance of common stock
upon exercise of stock
options at $.00/share 155 2 -- -- 613 -- -- 615
Net loss -- -- -- -- -- (7,006) -- (7,006)
------ --- --- -- ------ ------- ------ ------
Balance at December 31, 1994 19,763 198 100 1 21,772 (20,306) (237) 1,428
SEE ACCOMPANYING NOTES.
F-5
THE NATIONAL REGISTRY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
CAPITAL UNAMORTIZED
COMMON STOCK PREFERRED STOCK IN EXCESS ACCUMULATED DEFERRED
SHARES AMOUNT SHARES AMOUNT OF PAR DEFICIT COMPENSATION TOTAL
------ ------ ------- ------ --------- ----------- ------------ -------
Balance at December 31, 1994 19,763 198 100 1 21,772 (20,306) (237) 1,428
Issuance of common stock 150 1 -- 1 (1) -- -- --
at no cost
Issuance of common stock,
net of offering costs,
at $1.00 per share 4,000 40 -- -- 3,928 -- -- 3,968
Cancellation of compensatory
stock options -- -- -- -- (125) -- 106 (19)
Granting of compensatory
stock options -- -- -- -- 372 -- (372) --
Repricing of compensatory
stock options -- -- -- -- 74 -- (74) --
Expense related to stock
option plans -- -- -- -- -- -- 325 325
Issuance of common stock
upon exercise of stock
options at $1.50 per share 306 3 -- -- 455 -- -- 458
Issuance of common stock
upon exercise of stock
options at $.01 per share 25 -- -- -- -- -- -- --
Net loss -- -- -- -- -- (5,070) -- (5,070)
------ --- --- -- ------ ------- ---- ------
Balance at December 31, 1995 24,244 242 100 1 26,475 (25,376) (252) 1,090
SEE ACCOMPANYING NOTES.
F-6
THE NATIONAL REGISTRY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
CAPITAL UNAMORTIZED
COMMON STOCK PREFERRED STOCK IN EXCESS ACCUMULATED DEFERRED
SHARES AMOUNT SHARES AMOUNT OF PAR DEFICIT COMPENSATION TOTAL
------- ------ ------- ------ --------- ----------- ------------ -------
Balance at December 31, 1995 24,244 $242 100 $1 $26,475 $(25,376) $(252) $ 1,090
Issuance of Series B
preferred stock, net of
offering costs, at -- -- 1 -- 7,280 -- -- 7,280
$10,000 per share
Dividend on Series B
preferred stock at 8% -- -- -- -- 303 (303) -- --
Conversion of Series B
preferred stock to
common stock at various 9,927 100 (1) -- (100) -- -- --
exchange rates
Expense related to stock
option plans -- -- -- -- -- -- 109 109
Issuance of common stock
upon exercise of stock
options at $1.50 per 230 2 -- -- 343 -- -- 345
share
Net loss -- -- -- -- -- (7,340) -- (7,340)
------- ---- --- -- ------- -------- ----- --------
Balance at December 31, 1996 34,401 $344 100 $1 $34,301 $(33,019) $(143) $ 1,484
======= ==== === == ======= ======== ===== ========
SEE ACCOMPANYING NOTES.
F-7
THE NATIONAL REGISTRY, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
1996 1995 1994
---------------------------------
(IN THOUSANDS)
CASH USED IN OPERATING ACTIVITIES
Net loss $(7,340) $(5,070) $(7,006)
Adjustments to reconcile net loss to net
cash used in operating activities:
Compensation applicable to stock option 109 306 764
grants
Compensation applicable to stock gift
by principal stockholder -- -- 195
Compensation applicable to Phoenix -- -- 183
stock grant
Depreciation 536 525 647
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Receivables (378) (22) (60)
Inventory 143 (143) 32
Prepaid expense (17) (29) 22
Deferred charges 153 (159) --
Other assets (12) 20 18
Increase (decrease) in liabilities:
Accounts payable 148 151 87
Accrued expenses 690 86 --
------- ------- -------
Net cash used in operating activities (5,968) (4,335) (5,118)
CASH USED IN INVESTING ACTIVITIES
Purchase of equipment (921) (453) (475)
Increase in investments -- (105) --
------- ------- -------
Net cash used in investing activities (921) (558) (475)
CASH PROVIDED BY FINANCING ACTIVITIES
Proceeds from issuance of preferred stock 7,280 -- --
Proceeds from issuance of common stock 345 4,426 846
------- ------- -------
Net cash provided by financing activities 7,625 4,426 846
------- ------- -------
Net increase (decrease) in cash 736 (467) (4,747)
Cash and cash equivalents at beginning of 178 645 5,392
period
------- ------- -------
Cash and cash equivalents at end of period $ 914 $ 178 $ 645
======= ======= =======
SEE ACCOMPANYING NOTES.
F-8
THE NATIONAL REGISTRY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. THE COMPANY
Prior to 1996, the Company was a development stage company. As a result of the
operating revenues generated in 1996, management no longer considers the Company
to be a development stage company. The Company's objective is to be a leading
provider of electronic identification products and services utilizing biometric
identification technology. The Company is in the process of developing and
marketing various identification products and services using finger imaging
identification technology. Biometric identification technology analyzes and
measures certain biological characteristics of an individual, such as a
fingerprint or voiceprint, to create a unique identifier which can be
electronically stored and retrieved to positively identify that individual. The
Company believes that biometric identification technology provides a more
reliable means of identification and, therefore, greater security than
nonbiometric methods which currently rely upon cards, keys, passwords, or
personal information to identify an individual. These nonbiometric identifiers
can be lost, stolen, duplicated, transferred or discovered by unauthorized
persons.
Completion of negotiations of contracts, retention of key employees and
consultants, and the Company's ability to finance future development by raising
additional capital, if necessary, are factors that may impact the Company's
operations beyond 1996.
With the proceeds from the sale of Series C Preferred Stock on February 6, 1997
(see Note 9) the Company believes it has cash, together with cash from
anticipated gross margins from operations and other funding sources, including
the possibile sale of capital stock, sufficient to meet its expected working
capital needs for at least the next twelve months assuming revenues for 1997 are
at least equal to the revenues realized in 1996. The Company has prepared an
analysis of its anticipated cash flows for 1997 and has controls in place,
including a periodic review by its Executive Committee of actual versus budgeted
operations, which it believes will help assure that its resources are used in
accordance with the guidelines set forth in the Company's budget.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION AND DEFERRED CHARGES
Operating revenue is primarily derived from the lease of Company installed
equipment and software as well as ongoing maintenance of the equipment and
software. The Company recognizes lease revenue ratably over the term of the
leases which generally are one to three years. The Company capitalizes the costs
associated with installation of the equipment and software as deferred charges.
These costs are amortized ratably over the life of the related lease. The cost
of the
F-9
THE NATIONAL REGISTRY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
equipment is amortized to cost of sales over the term of the lease which is
generally its estimated useful life. Royalty fees are charged to cost of
revenues as incurred.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
PREPAID EXPENSE
Prepaid expense consists primarily of royalty fees paid to Cogent Systems, Inc.
(see Note 4).
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
INVENTORIES
The Company purchases computer hardware and software in connection with the
installation of its finger image products. Inventories are stated at cost not in
excess of realizable values.
EQUIPMENT
Equipment is recorded at cost. Depreciation is provided on the straight-line
basis over the following estimated service lives:
YEARS
-------
Computer equipment 3
Office equipment and other 3 to 10
Depreciation expense was $536,000 in 1996, $525,000 in 1995 and $647,000 in
1994.
F-10
THE NATIONAL REGISTRY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 109, ACCOUNTING FOR INCOME TAXES, and has applied this method of
accounting for income taxes for all periods presented.
STOCK OPTION ACCOUNTING
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION
(FAS 123), effective for accounting years beginning after December 15, 1995. FAS
123 provides alternatives for the methods used by entities to record
compensation expense associated with its stock-based compensation plans.
Additionally, FAS 123 provides further guidance on the disclosure requirements
relating to stock-based compensation plans. The Company has elected to follow
Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES (APB 25), and related interpretations in accounting for its stock
option grants.
NET LOSS PER COMMON SHARE
Net loss per common share was computed by dividing net loss by the weighted
average number of common shares outstanding during the period. Common stock
equivalents, relating to convertible Series A Preferred Stock and exercise of
certain stock options and warrants were not included in this calculation due to
their anti-dilutive effect.
FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash equivalents, accounts
receivable, notes receivable, investment and accounts payable. The fair value of
these instruments approximates their carrying value.
RECLASSIFICATIONS
Certain amounts in the prior year financial statements have been reclassified to
conform to the 1996 presentation.
F-11
THE NATIONAL REGISTRY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. STOCK OPTIONS
The Company has an employee stock incentive plan (the SIP) for officers,
directors and key employees under which 2,241,500 shares of common stock were
reserved for issuance as of December 31, 1996. In addition, the Company has
granted, outside of the SIP, options to purchase an aggregate of 301,000 shares
to certain employees. Options currently granted by the Company generally vest
over a three to five-year period.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB 25), and related Interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION, requires use of option valuation models
that were not developed for use in valuing employee stock options. Under APB 25,
if the exercise price of the Company's employee stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized.
Certain previously granted options had exercise prices that were less than the
market price of the underlying stock and the Company has recorded compensation
expense for these options. Compensation related to stock options is measured at
the grant date. The difference between market value of the options, at time of
issuance, and their exercise price is charged to stockholders' equity, as
unamortized deferred compensation, and amortized to expense over the options'
vesting periods. The Company has recognized $109,000, $325,000 and $764,000 as
compensation expense in 1996, 1995 and 1994, respectively, relating to
compensatory options.
The Company accounts for stock option cancellations by reversing, in the year
canceled, amounts recognized as expense in previous years and reducing capital
in excess of par value. The Company also reduces deferred compensation expense
and capital in excess of par value by the amount of the remaining unamortized
deferred compensation expense which relate to the canceled stock options. As a
result of the cancellations in 1995, the Company recorded a reduction in
previously expensed compensation of $19,000 and reduced unamortized deferred
compensation by $106,000. There was no impact in 1996 or 1994.
Pro forma information regarding net income and earnings per share as required by
Statement 123 has been determined as if the Company has accounted for its
employee stock options granted subsequent to December 31, 1994 under the fair
value method of that Statement. The fair value for these options was estimated
at the date of grant using a Black-Scholes option pricing model
F-12
THE NATIONAL REGISTRY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. STOCK OPTIONS (CONTINUED)
with the following weighted-average assumptions for 1996 and 1995, respectively:
risk-free interest rates of 6.5% and 6%; no dividends; volatility factors of the
expected market price of the Company's common stock of 1.098 and 1.036 and a
weighted-average expected life of the option of 4.5 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which 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. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
In connection with various successful efforts to raise capital, the Company
granted 300,000 and 2,500,000 options to various investment bankers in 1996 and
1995, respectively. As these options were granted to non-employees and are
considered an additional offering cost, they have been excluded from the pro
forma net loss and weighted average fair value calculations below.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows
1996 1995
-------- --------
(IN THOUSANDS)
Pro forma net loss $(7,879) $(5,769)
Pro forma loss per share $(.28) $(.25)
F-13
THE NATIONAL REGISTRY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. STOCK OPTIONS (CONTINUED)
A summary of the Company's stock option activity, and related information for
the years ended December 31 follows:
1996 1995 1994
-----------------------------------------------------------------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
OPTIONS AVERAGE OPTIONS AVERAGE OPTIONS AVERAGE
(000) EXERCISE PRICE (000) EXERCISE PRICE (000) EXERCISE PRICE
-----------------------------------------------------------------------------------
Outstanding--beginning of 4,324 $1.48 2,646 $2.44 4,406 $2.04
year
Granted 791 1.11 3,719 1.66 150 1.50
Exercised (230) 1.50 (330) 1.39 (613) 1.04
Canceled/expired (7) 2.25 (1,711) 2.40 (1,297) 2.46
----- ------ ------
Outstanding-end of year 4,876 $1.42 4,324 $1.48 2,646 $2.44
===== ====== ======
Exercisable at end of year 3,274 $2.14 2,941 $1.49 1,497 $2.40
===== ====== ======
Weighted-average fair
value of options $.87 $1.59 N/A
granted during the
year
Exercise prices for options outstanding as of December 31, 1996 ranged from $.01
to $3.75. The weighted-average remaining contractual life of those options is
eight years.
On March 9, 1995, in consideration for services rendered on behalf of the
Company, the Company agreed to lower the exercise price on unexercised stock
options to purchase up to 791,000 shares of common stock issued to employees of
the Company under the Company's Employee Stock Option Plan. As a result of this
action, the Company recorded an additional $74,000 of unamortized deferred
compensation during 1995. The vesting schedules of such stock options remained
unchanged.
On March 14, 1995, in connection with RMS Limited Partnership's (RMS) purchase
of 4,000,000 shares of common stock from the Company (See Note 7), (i) Messrs.
Forstmann and Abu-Zayyad agreed to cancel the 500,000 vested stock options
previously granted by Mr. Forstmann to Mr. Abu-Zayyad, (ii) the Company and Mr.
Forstmann agreed to cancel the 500,000 stock options previously granted by the
Company to Mr. Forstmann, and (iii) the Company and Mr. Abu-Zayyad amended the
agreement relating to the options previously granted by the Company to Mr.
Abu-Zayyad, increasing the number of vested options from 500,000 to 1,000,000.
These options expired unexercised in September 1995.
F-14
THE NATIONAL REGISTRY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. TECHNOLOGY LICENSE
The Company maintains a license agreement (the "License Agreement") with Cogent
Systems, Inc., the licensor of certain finger imaging identification technology
(the "Software Licensor"), pursuant to which the Software Licensor grants the
Company exclusive license to all commercial applications of the Software
Licensor's finger imaging identification technology and nonexclusive rights for
most governmental applications, subject to certain rights of early termination,
until October 2009. Pursuant to the License Agreement royalties are generally
based on revenues of the Company, subject to a minimum annual royalty payment of
$500,000 per year, through October 1, 2009. In order for the Company to maintain
the License Agreement beyond October 1, 1999, the Company will also be obligated
to pay the Software Licensor a fee of $10 million on or before October 1, 1999.
Royalties under this License Agreement are charged to Selling and Marketing
expense and were $623,000 and $500,000 for 1996 and 1995, respectively.
5. INCOME TAXES
As of December 31, 1996, the Company had net operating loss carryforwards of
approximately $14,483,000 for federal income tax purposes which expire at
various dates through 2011. The difference between the net operating loss
carryforward for federal income tax purposes and the deficit accumulated for
financial reporting arises primarily from temporary differences associated with
the Company's start-up expenses which were capitalized for income tax purposes
and, beginning January 1995, are being ratably amortized to expense over a
60-month period.
These temporary differences and net operating loss carryforwards give rise to a
deferred tax asset of $9,104,000 and $9,411,000 as of December 31, 1996 and
1995, respectively, based on a combined federal and state statutory rate of
37.7%. Due to the uncertainty of achieving taxable income sufficient to realize
the deferred tax asset, a valuation allowance of $9,104,000 and $9,411,000 was
recorded as of December 31, 1996 and 1995, respectively, which fully offset the
deferred tax asset.
If all options currently outstanding were to be exercised, a change in ownership
would occur which could limit the future deductibility of the net operating loss
carryforwards.
F-15
THE NATIONAL REGISTRY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY
The holders of common stock are entitled to receive ratably such dividends, if
any, as may be declared by the Board of Directors out of funds legally available
for the payment of dividends. In the event of liquidation, dissolution or
winding up of the Company, the holders of common stock are entitled to share
ratably in all assets of the Company remaining after provision for payment of
liabilities and after holders of the preferred stock receive a liquidation
preference of $100 per share.
The Series A Preferred Stock is convertible at the option of the holder and will
automatically be converted into 6,336,154 shares of common stock, or
approximately 15.5% of the common stock of the Company (after giving effect to
such conversion), upon the satisfaction of certain conditions. The Series A
Preferred Stock and, when issued, the common stock, is subject to an irrevocable
proxy in favor of J. Anthony Forstmann, which shall terminate, for among other
reasons, on the date Mr. Forstmann and the members of his family in the
aggregate cease to control greater than 20% of the voting power of the capital
stock entitled to vote in the election of directors of the Company.
The holders of the Series A Preferred Stock shall not be entitled to vote on any
matters submitted to the stockholders of the Company, except as required by
applicable law. Through December 31, 1996, no dividends have been declared for
this preferred stock. Under the preferred stock purchase agreement, the
stockholder has the right of first refusal to purchase a pro rata share of any
new stock issuances for a period of five years.
On August 5, 1994, the Company issued 376,700 shares of common stock to three
foreign investors pursuant to an offering under Regulation S promulgated under
the Securities Act of 1933, as amended, at a purchase price of $2.00 per share
net of all expenses of the offering resulting in net proceeds of $751,000 (the
"Financing"). In connection with the Financing, the Company issued to Sands
Brothers & Co., Inc., the placement agent involved in the Financing (the
"Placement Agreement"), warrants to purchase 37,600 shares of common stock at an
exercise price of $3.60 per share. Such warrants are exercisable at any time and
expire on August 5, 1997. The Company has also agreed to certain registration
rights with respect to the warrants issued in connection with the Financing.
Because the Company failed to file a registration statement with respect to the
shares underlying such warrants, as required under the agreement governing the
registration rights, the Placement Agent was issued warrants to purchase an
additional 37,600 shares of common stock, having the same terms as described
above.
F-16
THE NATIONAL REGISTRY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
On October 5, 1994, J. Anthony Forstmann, majority stockholder, gifted 165,000
shares of his common stock to a consultant of the Company in lieu of cash
compensation. The Company recorded $195,000, the market value on the date of
gift, as noncash compensation expense with a corresponding increase to capital
in excess of par value.
In connection with various efforts to raise capital, none of which were
consummated, on October 11, 1994, the Company granted 150,000 shares of the
Company's common stock to Phoenix Partners, an investment banking firm, at no
cost, in lieu of cash compensation. In 1994, the Company recorded $183,000, the
market value on that date, as noncash compensation expense with a corresponding
increase to capital in excess of par value and common stock. These shares were
issued on February 13, 1995.
On March 14, 1995, RMS acquired, for a cash purchase price of $4.0 million,
4,000,000 shares of common stock and an option to acquire up to 1,500,000 shares
of common stock, which option is currently exercisable, at the following
exercise prices: 600,000 shares at $1.00 per share, 300,000 shares at $1.50 per
share, 300,000 shares at $2.00 per share and 300,000 shares at $2.50 per share.
In addition, an option to purchase up to 1,000,000 shares of common stock was
granted by the Company to Francis J. Santangelo ("Santangelo"), which option is
currently exercisable, at the following exercise prices: 400,000 shares at $1.00
per share, 200,000 shares at $1.50 per share, 200,000 shares at $2.00 per share
and 200,000 shares at $2.50 per share. As part of such transaction, J. Anthony
Forstmann, RMS and Santangelo entered into a stockholders' voting agreement,
dated as of March 14, 1995, pursuant to which Mr. Forstmann and RMS agreed to
vote for a director nominated by the other and not to vote certain shares of
common stock beneficially owned in favor of certain specified stockholder
actions unless mutually agreed upon.
On January 29, 1996, the Company completed an equity financing pursuant to which
certain investors purchased from the Company 800 shares of Series B Preferred
Stock for an aggregate purchase price of $8.0 million before commissions and
expenses (the "Series B Preferred Stock Private Placement"). Shares of Series B
Preferred Stock were convertible at the option of the holder into shares of
common stock, based upon a defined conversion formula. Until conversion, the
Series B Preferred Stock accreted dividends at a rate of 8% per year. Prior to
conversion, the Company accreted dividends of $303,000. As of December 31, 1996,
all holders of Series B Preferred Stock had converted their shares into an
aggregate of 9,927,000 shares of the Company's common stock.
F-17
THE NATIONAL REGISTRY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
In connection with the Series B Preferred Stock Private Placement, the Company
issued to Swartz Investments, LLC, the placement agent involved in the Series B
Preferred Stock Private Placement, warrants to purchase 284,585 shares of common
stock at an exercise price of $2.53 per share. Such warrants are exercisable at
any time and expire on January 29, 2001. The Company has also agreed to certain
registration rights with respect to such warrants.
7. COMMITMENTS AND CONTINGENCIES
The Company leases office space under various non cancelable operating leases
and is committed under a technology license agreement for certain royalty
payments (see Note 4). Future minimum payments under these commitments are as
follows:
YEARS ENDING DECEMBER 31
------------ -----------
1997 $ 641,000
1998 629,000
1999 10,629,000
2000 532,000
2001 500,000
-----------
$12,931,000
===========
Rent and lease expense was $222,000, $85,000 and $120,000 for 1996, 1995 and
1994, respectively.
The Company is a defendant in a lawsuit filed in February 1997. Management of
the Company does not believe that any claims of such lawsuit will have a
material adverse effect on the Company's financial condition or results of
operation.
8. DEFINED CONTRIBUTION RETIREMENT PLAN
The Company offers an employee benefit plan pursuant to Section 401(k) of the
Internal Revenue Code covering substantially all employees. Matching employer
contributions are set at the discretion of the Board of Directors. There were no
contributions made for 1996, 1995 or 1994.
F-18
THE NATIONAL REGISTRY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. SUBSEQUENT EVENTS
On February 6, 1997, the Company completed a new financing pursuant to which two
accredited investment funds purchased from the Company an aggregate of 350,000
shares of Series C Preferred Stock, $.01 par value per share (the "Series C
Preferred Stock"), for a gross cash purchase price of $7 million before
commissions and expenses. Shares of the Series C Preferred Stock are convertible
at the option of the holder into shares of common stock, at the lesser of (i)
$2.375 per share or (ii) 82.5% of a floating price equal to the average closing
bid price of the common stock for the five trading days immediately preceding
the date of conversion. The Series C Preferred Stock is convertible, as to
one-third of such shares, at any time after 121 days after the closing date, as
to an additional one-third of such shares, beginning 151 days after the closing
date and, as to the remaining shares, beginning 181 days after the closing date.
All shares of Series C Preferred Stock issued and outstanding as of February 4,
2000 will automatically convert into shares of common stock. The Company may
redeem the Series C Preferred Stock at any time based on a formula relating to
the then applicable conversion price or under certain other circumstances. In
addition, as part of such transaction, the Company issued to such accredited
investment funds warrants to purchase, within five years of the date of closing,
up to 400,000 shares of common stock at an exercise price of $2.6125 per share,
subject to certain adjustments from time to time. The Company filed a
registration statement for the underlying shares of common stock on March 17,
1997 and agreed to use its reasonable best efforts to cause such registration
statement to become effective on or prior to June 5, 1997.
F-19
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information concerning directors and officers of the Company is
included in the definitive Proxy Statement for the Company's 1997 Annual Meeting
of Stockholders, which is incorporated herein by reference. It is expected that
such Proxy Statement will be filed with the SEC no later than April 30, 1997.
Item 11. EXECUTIVE COMPENSATION.
Information concerning directors and officers of the Company is
included in the definitive Proxy Statement for the Company's 1997 Annual Meeting
of Stockholders, which is incorporated herein by reference. It is expected that
such Proxy Statement will be filed with the SEC no later than April 30, 1997.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
Information concerning directors and officers of the Company is
included in the definitive Proxy Statement for the Company's 1997 Annual Meeting
of Stockholders, which is incorporated herein by reference. It is expected that
such Proxy Statement will be filed with the SEC no later than April 30, 1997.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information concerning directors and officers of the Company is
included in the definitive Proxy Statement for the Company's 1997 Annual Meeting
of Stockholders, which is incorporated herein by reference. It is expected that
such Proxy Statement will be filed with the SEC no later than April 30, 1997.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K.
(a) The following documents are filed as a part of this Annual Report
on Form 10-K:
(1) Financial Statements
The financial statements filed as a part of this report are listed
in the "Index to Financial Statements" at Item 8.
25
(2) Financial Statement Schedules
All schedules have been omitted because they are either not
applicable, not material or the required information has been given in
the financial statements or in notes to the financial statements.
(b) Reports on Form 8-K
During the fourth quarter of 1996, the Company filed no reports on Form
8-K.
(c) Exhibits
26
EXHIBIT
NO. DESCRIPTION
--- -----------
3.1 Articles of Incorporation, as amended to date, of the Company
(incorporated by reference to Exhibit 3.1 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1992).
3.2 By-Laws of the Company (incorporated by reference to Exhibit 3.3 of the
Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1991).
3.3 Certificate of Amendment to Certificate of Incorporation of the Company,
dated as of July 2, 1996.
4.1 Certificate of the Voting Powers, Designations, Preferences, Rights,
Qualifications, Limitations and Restrictions of the Series A Preferred
Stock of the Company (incorporated by reference to Exhibit 4.1 of the
Company's Quarterly Report on Form 10-Q for the period ended March 31,
1997).
4.3 Certificate of Designation, Number, Powers, Preferences and Relative,
Participating, Optional, and Other Special Rights and the
Qualifications, Limitations, Restrictions, and Other Distinguishing
Characteristics of Series C Preferred Stock of the Company (incorporated
by reference to Exhibit 3 of the Company's Report on Form 8-K, dated
February 6, 1997).
10.1 Agreement and Plan of Merger dated as of December 24, 1991 between the
Company, Topsearch and Top Search Merging Corp. (incorporated by
reference to the Company's Report on Form 8-K, dated December 24, 1991).
10.4 License Agreement, dated as of April 1, 1992, by and between Cogent
Systems, Inc. and the Company (confidential treatment requested)
(incorporated by reference to Exhibit 10.1 of the Company's Quarterly
Report on Form 10-Q for the period ended March 31, 1992).
27
10.5 Stock Purchase Agreement, dated as of April 28, 1992, by and between
Home Shopping Network and the Company (incorporated by reference to
Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q for the
period ended March 31, 1992).
10.6 Stock Incentive Plan (incorporated by reference to Exhibit 10.6 of the
Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1992).
10.10 Letter of Intent, dated as of March 9, 1995 (incorporated by reference
from the Exhibits to the Company's Report on Form 8-K, dated March 14,
1995).
10.11 Stock Purchase Agreement, dated as of March 14, 1995, by and among the
Company, RMS Limited Partnership ("RMS") and Francis R. Santangelo
(incorporated by reference from the Exhibits to the Company's Report on
Form 8-K, dated March 14, 1995).
10.12 Stock Option Agreement, dated as of March 14, 1995, by and between the
Company and RMS (incorporated by reference from the Exhibits to the
Company's Report on Form 8-K, dated March 14, 1995).
10.13 Stock Option Agreement, dated as of March 14, 1995, by and between the
Company and Francis R. Santangelo (incorporated by reference from the
Exhibits to the Company's Report on Form 8-K, dated March 14, 1995).
10.14 Stockholders' Voting Agreement, dated as of March 14, 1995, by and
between J. Anthony Forstmann and RMS (incorporated by reference from the
Exhibits to the Company's Report on Form 8-K, dated March 14, 1995).
28
10.17 Convertible Preferred Stock Purchase Agreement, dated as of January 31,
1997, by and among the Company, Clearwater Fund, IV, LLC and JNC
Opportunity Fund Ltd. (incorporated by reference to Exhibit 10.1 of the
Company's Report on Form 8-K, dated February 6, 1997).
10.18 Form of Warrant, dated February 5, 1997 (incorporated by reference to
Exhibit 10.2 of the Company's Report on Form 8-K, dated February 6,
1997).
11 Computation of Earnings Per Share.
23 Consent of Ernst & Young LLP
27 Financial Data Schedule
29
SIGNATURES
Pursuant to the requirements 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.
THE NATIONAL REGISTRY INC.
(Registrant)
Date: March 27, 1997 By: /s/ JOHN L. GUSTAFSON
---------------------
John L. Gustafson
President, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
registrant and on the dates indicated.
Date: March 27, 1997 By: /s/ JOHN L. GUSTAFSON
---------------------
John L. Gustafson
President, Chief Executive
Officer and Director
Date: March 27, 1997 By: /s/ DAVID E. BROGAN
-------------------
David E. Brogan
Chief Financial Officer and
Chief Accounting Officer
Date: March 27, 1997 By: /s/ J. ANTHONY FORSTMANN
------------------------
J. Anthony Forstmann
Director
Date: March 27, 1997 By: /s/ W. LEE SHEVEL
-----------------
W. Lee Shevel
Director
30
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION PAGE NO.
-- ----------- --------
3.3 Certificate of Amendment to Certificate of Incorporation
of the Company, dated as of July 2, 1996.
11 Computation of Earnings Per Share.
23 Consent of Ernst & Young LLP
27 Financial Data Schedule (For SEC use only)
31