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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM____________TO___________
COMMISSION FILE NUMBER 0-2027
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
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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
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
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(TITLE OF CLASS)
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 31, 1998, was $24,327,578. There were 38,924,124 shares of Common Stock
outstanding as of March 31, 1998.
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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
enterprise-level multi-biometric software solutions that can be used to secure
access to computer-based information systems. NRI's products incorporate
biometric identification technology which technology identifies individuals
seeking access to valuable information and transactions by electronically
sensing one or more physical characteristics, such as a fingerprint, facial
shape or voice print, creating a unique biometric identifier record from the
captured characteristic, and matching that identifier against a previously
stored identifier record or population of identifier records. Each NRI solution
is designed to work with a number of biometric software algorithms and hardware
devices, thereby affording end-users maximum flexibility in implementing a
complete authentication solution. The Company has designed its software products
to (i) conform to multi-biometric standards, (ii) provide ease of use, (iii)
support multiple computer platforms and off-the-shelf hardware, (iv) deliver
high levels of performance and scalability 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, and (v) reduce the operational costs of
maintaining and supporting identity authentication for enterprise information
systems and applications accessed by geographically dispersed and mobile users.
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, personal identification numbers ("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, advances in computer processing, sensing
technologies and image and signal processing software algorithms have increased
the speed and reduced the cost of implementing biometric identification. 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.
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 is
seeking the right to use other biometric technologies, such as facial
recognition and voice, for use in conjunction with the Company's family of
software products, although there is no assurance that such rights will be
available on satisfactory terms. Any acquisition of such rights may be subject
to the Company obtaining additional financing, which may not be available to the
Company on satisfactory terms.
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
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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 established
reference sites as a means to attract application developers and other value
added resellers to the Company's technology. During 1997 the Company began
selling its NRIdentity software and hardware products to commercial end-users in
the healthcare and financial services industry and signed agreements with
distributors and value added resellers who service these vertical markets. The
Company's objective was to utilize these operational government and commercial
end-user installations to develop a network of reseller organizations possessing
the expertise, infrastructure, and staffing needed to market, sell and support
end-users directly. This indirect sales and support strategy is expected to
allow the Company to more efficiently utilize its technical and marketing
resources by leveraging the expertise, infrastructure, and existing end-user
relationships of its product resellers. Although this strategy has been
implemented successfully by a number of software companies, there is no
assurance that this strategy, or any of the Company's current products or
agreements with resellers, will result in the realization of significant
revenues by the Company.
For the fiscal year ended December 31, 1997, the Company had $1,585,000 in
operating revenues, a $1,570,000 order backlog and an operating loss of
$7,424,000. As of December 31, 1997, the Company has an accumulated deficit of
$43,675,000. The ability of the Company to achieve profitability and continue as
an operating enterprise depends largely on the Company's ability (i) to design,
sell, and support its identification software products and services, (ii) to
hire and retain key employees as the business expands and (iii) obtain capital
to fund operations and growth. There is no assurance that the Company will be
able to accomplish any of the foregoing, or to expand its business.
RECENT DEVELOPMENTS
SALE OF SEAT LICENSES--On March 5, 1998 the Company entered into an
agreement with XL Vision, Inc. ("XL Vision"), a Safeguard Scientific Inc.,
company, to sell a limited number of seat licenses for various NRI products for
an aggregate price of $1.5 million. The Company also entered into a co-marketing
agreement with Who? Vision, Inc. ("Who? Vision"), a subsidiary of XL Vision, to
jointly market NRIdentity products. Who? Vision recently announced the signing
of a four year contract with MAG Technology Co., LTD for the manufacture of 34
million fingerprint sensors.
DEVELOPMENT OF MULTI-BIOMETRIC CAPABLE SOFTWARE PRODUCTS--On March 31, 1998
the Company announced the availability of its suite of multi-biometric software
products. These products include both packaged software solutions and software
developer's kits, all based on a proposed multi-biometric industry standard
known as the Human Authentication Application Programmers' Interface ("HA-API").
The HA-API standard was developed by NRI, under the sponsorship of an agency of
the U.S. Department of Defense. NRI applications utilizing the HA-API standard
can interface with a variety of biometric software algorithms and hardware
offered by companies that also utilize the HA-API standard.
ESTABLISHING MASTER RESELLERS IN VERTICAL MARKETS--On March 27, 1998, the
Company signed a letter of intent with an organization interested in becoming a
master reseller of the Company's products for the healthcare market. Subject to
the completion of a definitive agreement, due diligence by both companies, and
certain third-party consents, the proposed master reseller would purchase seat
licenses and various other NRI products and services for an aggregate price of
approximately $2.9 million in 1998. The Company would also receive a small
ownership interest in the master reseller. Under the terms of the agreement, the
Company would transfer its healthcare end-user and reseller contracts to the
master reseller. There is no assurance that such transaction will be completed
or, if completed, upon what terms the transaction would be completed.
Additionally, the Company has had preliminary discussions with several
organizations regarding other possible vertical marketing relationships.
FACTORS THAT MAY AFFECT FUTURE RESULTS
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, as
amended (the "Exchange Act"), which
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involve certain risks and uncertainties which could cause actual results to
differ materially from those discussed herein. For a discussion of certain risks
associated with the Company and its operations see MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION--FACTORS THAT MAY
AFFECT FUTURE RESULTS included in this annual report.
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 of the individual seeking access.
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 biometric identification technology to secure confidential company
"GroupWare" and team computing environments within departments and across
geographically dispersed locations and to identify individuals involved in
financial or other transactions requiring positive identification. Since network
expansion exponentially increases the number of endpoints that may provide
access or be accessed, the Company believes the need and demand for positive
personal identification and authentication in the enterprise network environment
is also increasing.
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
fingerprint, 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 new sensing
technologies have improved the speed and costs of implementing biometric
identification. 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
available today for use in biometric identification, finger imaging
identification technology has the highest level of proven accuracy 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), (iii) the authentication of
electronic forms through means other than a printed signature, and (iv)
coordination of account relationships within a system (linking an individual to
all of their accounts).
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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 multi-biometric
identification technology. The NRIdentity product line currently consists of the
following:
NRIDENTITY PACKAGED APPLICATIONS, such as Secure Authentication Facility
for Microsoft WINDOWS/registered trademark/ NT ("SAF NT"), Secure Authentication
facility for Microsoft Internet Information Server/registered trademark/ ("SAF
IIS"), and Secure Authentication Facility for Computer Associates
Unicenter/registered trademark/ TNG ("SAF TNG"), provide "out-of-box"
multi-biometric personal identification and authentication. Combined with
scanners and other hardware sensors, packaged applications allow an end user to
easily and inexpensively add biometric identification technology to their
workstation and network server without such user performing any application
development or requiring any special technical expertise. The NRIdentity
Packaged Applications have been redesigned to be compliant with the HA-API
specification thereby making it possible for the Company or its customers to
quickly enhance NRI's software applications with other biometric technologies
that are also HA-API compliant.
NRIDENTITY SOLUTION SETS are a collection of tools for developers which
provide, via standard software "building blocks" (i.e. DLLs, Active X Controls,
etc.), the necessary components to integrate biometric 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.
NRIDENTITY SCANNERS are 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 configured to varying user
environments. Although the Company commenced sales of NRIdentity scanners in the
first quarter of 1997, there is no assurance that the 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 scanners to generate
substantial revenues for the Company.
PRODUCT GOALS--The Company believes 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:
MULTI-BIOMETRIC STANDARD COMPATIBILITY. The Company's software products
have been redesigned to be compliant with the HA-API specification developed by
the Company under a contract with an agency of the U.S. Department of Defense
and currently published as a proposed industry standard multi-biometric
application programmers' interface ("API"). The implementation of the HA-API
specification, as an element of the Company's software, permits the logical
segregation of the higher level application functionality from the underlying
biometric technology. This open standards based approach provides a facility for
future rapid integration of a wide range of emerging biometric hardware and
software technologies into the Company's software products and gives the
Company's customers a choice of biometric sensors and software algorithms that
address their specific information security requirements, thereby enhancing the
value of the Company's Packaged Application and Solution Set software products
in the market.
EASE-OF-USE. The Company's packaged applications provide identity
authentication for workstation access, network access, workstation "unlocking"
via secured screen savers, and access control to protected Internet or intranet
Web pages. The Company's software solution sets provide simple library function
calls or user prompts to capture, evaluate, process, and match biometric
characteristics.
MULTI-PLATFORM SUPPORT. The Company's software is designed to operate on
most popular computer platforms, including Microsoft WINDOWS/registered
trademark/ 95, and NT, and numerous versions of the UNIX/registered trademark/
operating system.
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OFF-THE-SHELF HARDWARE. The Company's software supports numerous commercial
off-the-shelf frame grabbers and finger image scanner peripherals, including
products manufactured by Key Tronic Corporation ("Key Tronic"), Veridicom Inc.,
Cross Check Corporation, Who? Vision, Identix Inc., and Identicator Technology.
The Company's software supports numerous commercial off-the-shelf microphones
and video camera peripherals that enable speaker verification and facial
recognition biometric technologies to function including those manufactured by
Connectix, Videolabs Inc., and Labtec Inc.
HIGH PERFORMANCE AND SCALABILITY. The Company's products are designed for
the rapid capture and processing of biometric information. Matching can be
performed on a one-to-one basis or against populations of hundreds of thousands
of biometric identifier records in a database depending on the specific
biometric technology utilized.
HIGH LEVEL OF SECURITY. The Company's products are designed to provide a
higher level of security than the Company believes is currently available from
passwords or token based identity authentication solutions that can be easily
forgotten, lost or transferred from person to person.
REDUCED OPERATIONAL COSTS. The Company's products are designed to reduce
the operational costs of maintaining and supporting identity authentication for
enterprise information systems and applications accessed by geographically
dispersed and mobile users.
MARKETING AND DISTRIBUTION
The Company uses a variety of indirect sales and marketing techniques in an
attempt to stimulate demand for its products and services. The Company markets
its products into vertical markets (i.e. healthcare, government and banking)
primarily through value added resellers ("VARs"), independent software vendors
("ISVs"), integrators, and strategic alliance partners. The Company markets its
products into horizontal network security markets primarily through
distributors, value added distributors ("VADs"), resellers, original equipment
manufacturers ("OEMs") and strategic alliance partners. 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 indirect distribution channels
worldwide. The Company's indirect distribution efforts consist of a small sales
force that support the Company's channel partners by geographic region and
vertical markets. The Company has designed its distribution strategy to address
what it believes are the particular requirements of its target customers.
However, there is no assurance that such an objective or material levels of
sales will be achieved. The Company's direct distribution efforts are limited to
a home page on the Internet and indirect sales force coverage of selected
end-user accounts where suitable channel partners have not yet been identified.
There is no assurance that the Company will be able to successfully market or
distribute, directly or indirectly, its products. The following is an outline of
some of the marketing techniques and distribution strategies being utilized by
the Company:
COMPUTER VENDORS/OEMS--The Company is working directly or jointly with
strategic partners, including Key Tronic and Who? Vision, to provide the
Company's software product line to the identified target markets through major
computer and peripheral vendors. The Company believes that certain of its
strategic partners already have established relationships with several of these
target organizations
VARS, ISVS, RESELLERS, DISTRIBUTORS AND SYSTEM INTEGRATORS--The Company
has begun a program to utilize indirect sales channels such as VARs, ISVs,
distributors, system integrators and other resellers and expects to
increasingly utilize such resellers to leverage the market expertise and direct
and indirect sales forces of those companies. 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 VARs, ISVs resellers, distributors and
system integrators or their inability
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to penetrate their respective market segment, could materially adversely affect
the Company's business, operating results, condition (financial or otherwise)
or prospects.
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.
STRATEGIC RELATIONSHIPS
As a means to try to accelerate the acceptance of the Company's products
and to facilitate the adoption of biometric identification technology in the
commercial marketplace, the Company has developed and is continuing to develop
strategic relationships with certain leading technology and transaction
providers. The Company intends to rapidly disseminate its products and services
through multiple indirect distribution channels worldwide. However, there is 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 with which Company has either established strategic relationships
with or with whom the Company is exploring the possibility of entering into such
relationship:
FINANCIAL SERVICE 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/trademark/ customer service system for banking.
INFORMATION SYSTEM PROVIDERS--The Company is pursuing relationships with
leading healthcare information system providers, system integration firms 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. The Company also signed
agreements with Scott and White Hospital in Temple, Texas and Mayo Clinic in
Scottsdale, Arizona for the purchase and installation of Company products. The
Company has recently signed a letter of intent with a potential master reseller
of the Company's products for the healthcare market. Subject to the completion
of a definitive agreement, due diligence by both companies, and certain third
party consents, the proposed master reseller would commit to an initial purchase
of seat licenses and various other NRI products and services for an aggregate
price of approximately $2.9 million in 1998. The Company would also receive a
small ownership interest in the master reseller. Under the terms of the
agreement, the Company would transfer its healthcare end-user and reseller
contracts to the master reseller. There is no assurance that such transaction
will be completed or, if completed, upon what terms the transaction would be
completed. Additionally, the Company has had preliminary discussions with
several organizations regarding other possible vertical marketing relationships.
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.
("Cogent"), one of the world's leading providers of Automated Finger Image
Systems ("AFIS") for law enforcement and a supplier of AFIS technology to the
British Home Office and U.S. Immigration and Naturalization Service and
Veridicom, Inc., a biometric technology venture company that was recently formed
from Lucent Technologies.
XL VISION, INC. AND WHO? VISION, INC.--On March 5, 1998 the Company entered
into an agreement with XL Vision to sell a limited number of seat licenses for
various NRI products for an aggregate price of $1.5 million. The Company also
entered into a co-marketing agreement with Who? Vision to jointly market
NRIdentity and Who? Vision products.
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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 entities involved in
the financial services businessess. 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
information technology to banks, credit unions and financial institutions in the
United States and internationally. To date the largest sale through Unisys was
to Western Bank in Puerto Rico. This installation began in the fourth quarter of
1997 and is expected to be completed in the second quarter of 1998.
KEY TRONIC CORPORATION--On December 14, 1995, the Company 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's
production scanners became commercially available during the early 1997. There
is no assurance that the Company's products will be accepted commercially, or
that Key Tronic will be able to 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.
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
healthcare 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 31, 1998, the Company and BCBSNJ have
each loaned $60,000 to BIOMETRx to fund preliminary organizational and
development activities. As of March 31, 1998, 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, condition (financial or otherwise)
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 or transactions.
LICENSED TECHNOLOGY
COGENT SYSTEMS LICENSE AGREEMENT--In April 1992, the Company was granted a
seven and one-half year world-wide (i) exclusive license to all commercial
applications of Cogent finger imaging identification technology and (ii) a
non-exclusive license for most governmental applications (including control of
welfare fraud), subject to certain rights of earlier termination. Cogent
excluded the law enforcement market from the Company's license and may 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
royalties generally based on the Company's revenues from the licensed
technology, subject to minimum semi-annual payments of $250,000. In addition,
Cogent also has agreed during the term of the license to
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provide technical assistance to the Company in its utilization, enhancement and
development of the Cogent finger imaging identification technology.
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
Cogent 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 is 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 became
nonexclusive after April 1, 1997. As of such date, the Company believes that it
has the right of first refusal on any commercial utilization of the Cogent
technology and that it retains exclusive rights in the following commercial
markets and possibly 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
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) as required
under the terms of the agreement, the Company stands to lose its exclusivity in
those markets.
VERIDICOM LICENSE AGREEMENT--On December 8, 1997 the Company was granted a
perpetual world-wide non-exclusive license to Veridicom's finger imaging based
software algorithm. In consideration of such license, the Company has agreed to
pay royalties generally based on the Company's revenues from the licensed
technology, subject to a minimum royalty amount of $250,000 during 1998 and
$500,000 during 1999. However, the Company has the option of canceling the
agreement in June 1998 with a payment of $75,000.
WHO? VISION LICENSE AGREEMENT--On March 5, 1998 the Company entered into
an agreement with Who? Vision which grants NRI a license to Who? Vision's
finger imaging software algorithms without an annual minimum royalty
requirement and allows NRI to re-sell Who? Vision hardware products world-wide.
RESELLER LICENSE AGREEMENTS--The Company has entered into certain
technology reseller license agreements with suppliers of HA-API compliant
biometric software algorithms and hardware that can be utilized with the
Company's software products. As of April 3, 1998, the Company had reseller
agreements with Key Tronic, Keyware Technologies, ITT Industries, Inc., and
Visionics Corporation.
LICENSED TECHNOLOGY FUNCTIONALITY--Biometric identification software
algorithms and hardware products typically perform biometric data
capture/processing, matching and search functions. Most of these algorithms
represent a software solution that runs on generally available computer
hardware including mainframes, servers, workstations and a growing list of
storage devices including smartcards, optical cards and bar-code cards. The
licensed finger image identification algorithms provided by Cogent are
representative of a one-to-one and one-to-many finger imaging based biometric
algorithms that 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,
8
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 biometric identification requirements of a wide range of potential
products and services. The Company refines its use of the Licensed Technology
on a continuing basis and explores and evaluates 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.
COMPETITION
Although the Company believes that the licensed technology is among the
most advanced available, to the Company's knowledge, the following companies
also have developed software products that utilize finger imaging
identification technology and are active in the United States: Digital
Biometrics Inc., Sony Corporation, Digital Persona, Inc., Mytec, Inc., SAC,
American Biometric Company, Identix Inc., Identicator Technologies, Inc., and
Printrak International Inc. as well as companies utilizing other biometric
technologies which may compete with the licensed technology including eye
retina blood vessel patterns, hand geometry, speech recognition, facial
recognition and signature analysis. The Company believes that finger imaging
identification technology is the most accurate and expects the cost of hardware
associated with finger imaging to decrease substantially during the next year.
However, the Company also recognizes that other biometric technologies may
complement finger imaging and may be more appropriate in certain environments
or conditions or for certain individuals. Therefore, it is currently the
Company's strategy to offer its customers the option of utilizing other
biometric technologies, singly or in combination with finger imaging under the
framework of the Company's software products in recognition that other
biometric technologies may complement finger imaging, under the framework of
the Company's software products.
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
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
the Company will be able to
9
compete effectively with competitors that may introduce lower cost biometric and
non-biometric hardware and software technologies. Because most of the Company's
rights to applications of the licensed technology are not exclusive, the Company
expects to experience competition from other products and services incorporating
the licensed technology.
PATENTS AND TRADEMARKS
The Company has no rights, other than pursuant to its license of rights, to
any patents or other intellectual property to any biometric software algorithms
and believes the competitive nature of its industry makes any patents and patent
applications of its licensors important to the Company. Cogent, for example, has
had certain patent applications rejected and there is no assurance that any
patents will be issued to Cogent, or any of the Company's other licensors, or
that any issued patents, or any patents applied for, will prove enforceable, or
that the Company will derive any competitive advantage therefrom.
The Company has two patents in connection with the ergonomic design and
optical system used in its Microreader optical reader system, both of which
include allowed claims. While the Company believes 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 31, 1998, the Company had 33 full-time employees compared to 44
as of March 27, 1997. The reduction in staffing was implemented during the third
and fourth quarter of 1997 to reduce the Company's overhead as it transitioned
from a direct sales model for integration services for governmental applications
to an indirect sales model for packaged software products for commercial
applications. It is anticipated that additional employees will be required to
develop, market, and support the Company's products if revenue growth is to be
achieved during 1998. However, there is no assurance that such additional
employees can be hired, or that if hired, the Company will be able to achieve
such revenue growth. 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
10
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.
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, Reston, Virginia and Trenton, New
Jersey.
ITEM 3. LEGAL PROCEEDINGS.
The Company is currently the defendant in a lawsuit filed by IIG on
February 13, 1997. IIG has asserted multiple claims which include breach of
contract, quantum meruit, unjust enrichment, breach of the implied convenant of
good faith and fair dealing and fraud and seeks an accounting, specific
performance, injunctive and declaratory relief and damages. On April 3, 1998,
the Company reached a preliminary settlement of such lawsuit. This settlement
includes a $300,000 cash payment by the Company, the issuance to IIG of 250,000
shares of the Company's Common Stock, $.01 par value per share (the "Common
Stock"), and the granting to IIG of an option to purchase 150,000 shares of
Common Stock at an exercise price of $0.625, the closing bid price of the Common
Stock on the Nasdaq SmallCap Market on April 3, 1998. While the Company believes
the settlement will be consummated, there is no assurance that such settlement
will be consummated or what will be the terms of such settlement, if any. The
court has set a trial date for July 1998 in the event the settlement does not
occur.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
None.
11
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). On February 27, 1998, the Company received notice from the
Nasdaq that the Company was not in compliance with the minimum bid price
maintenance requirement. The notice stated that if the Company was not in
compliance as of May 28, 1998, the Common Stock would be subject to delisting
from the SmallCap Market. The Company has called a meeting of its stockholders
for May 12, 1998, at which time the stockholders will be asked to approve, among
other things, a reverse stock split of the Common Stock in order to place the
Company in compliance with the minimum bid price maintenance requirement.
The following table sets forth the range of high and low closing bid
quotations for the Common Stock as reported on the SmallCap Market for each full
quarterly period from January 1, 1996 through December 31, 1997 and for the
period January 1, 1998 through March 31, 1998. Such quotations represent prices
between dealers without adjustment for retail markups, markdowns or commissions,
and may not necessarily represent actual transactions.
COMMON STOCK BID
PRICE
------------------
HIGH LOW
-------- -------
1996
First quarter .................................. 231/32 121/32
Second Quarter ................................. 211/32 11/2
Third Quarter .................................. 113/16 5/8
Fourth Quarter ................................. 31/4 11/16
1997
First Quarter .................................. 13/16 13/8
Second Quarter ................................. 127/32 17/32
Third Quarter .................................. 115/32 7/8
Fourth Quarter ................................. 5/16 1/4
1998
First Quarter (through March 31, 1998) ......... 29/32 5/16
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 31, 1998, the closing bid price of the Common Stock as reported
on the SmallCap Market was $0.625. As of March 31, 1998 there were
approximately 6,530 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.
12
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
SUMMARY STATEMENT OF OPERATIONS DATA
Revenue .............................................. $ 1,585 $ 2,305 $ 401 -- --
Net loss ............................................. $ (7,424) $ (7,340) $ (5,070) $ (7,006) $ (6,050)
Preferred stock deemed dividend ...................... $ 1,470 $ 1,412 -- -- --
Preferred stock dividend ............................. $ 350 $ 303 -- -- --
Net loss attributable to common stockholders ......... $ (9,244) $ (9,055) $ (5,070) $ (7,006) $ (6,050)
Net loss per common share ............................ $ (0.26) $ (0.32) $ (0.22) $ (0.37) $ (0.33)
Weighted average number of common shares ............. 35,247 28,077 23,238 19,093 18,489
SUMMARY BALANCE SHEET DATA
Total assets ......................................... $ 2,578 $ 2,832 $ 1,600 $ 1,701 $ 6,632
Total liabilities .................................... $ 1,807 $ 1,348 $ 510 $ 273 $ 186
Stockholders' equity ................................. $ 771 $ 1,484 $ 1,090 $ 1,428 $ 6,446
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATING ACTIVITIES
The Company incurred net operating losses for the fiscal years 1997, 1996
and 1995 of approximately $7.4 million, $7.3 million and $5.1 million,
respectively, due primarily to its startup efforts in developing and marketing
its finger imaging identification software and processing capability. In the
fiscal year ended December 31, 1997, the Company began selling its NRIdentity
software and hardware products. These sales and continuing revenues from the
states of Connecticut and New Jersey totaled approximately $1.6 million.
The following discussion presents certain changes in revenue and operating
expenses of the Company which have occurred between fiscal years 1997, 1996 and
1995 and should be read in conjunction with the Company's Financial Statements
and Summary Financial Data included elsewhere herein.
13
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
REVENUES AND COST OF REVENUES
Revenues for the fiscal year ended December 31, 1997 decreased by
approximately $720,000 from revenues for the fiscal year ended December 31, 1996
due to the decrease in revenues associated with the welfare fraud control
systems for the states of Connecticut and New Jersey. 1996 revenue included
revenue from the installation of the welfare fraud control systems in
Connecticut and New Jersey, while the only revenue associated with these
contracts during 1997 was for on-going maintenance of the systems. 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 June 1998, if not
renewed prior to that date.
Cost of revenues for the fiscal year ended December 31, 1997 decreased by
approximately $550,000 compared to cost of revenues for the same period in 1996
primarily as a result of the lack of installation costs related to the
Connecticut and New Jersey contracts. Cost of revenues associated with sales of
NRIdentity software and hardware include media costs and direct hardware costs.
Cost of revenues associated with on-going maintenance contracts and service
includes labor and overhead associated with software customization, 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, 1997 decreased by
approximately $76,000 compared to operating expenses for the same period in
1996. The decrease was comprised of a decrease of approximately $565,000 in
selling and marketing expenses offset by an increase of approximately $36,000 in
product development expenses and an increase of approximately $453,000 in
general and administrative expenses.
CHANGES IN OPERATING
EXPENSES
$(000S) % CHANGE
--------- ------------
Selling and marketing .............. $ (565) (16)%
Product development ................ 36 2
General and administrative ......... 453 17
------ ---
$ (76) (1)%
====== =====
SELLING AND MARKETING
The decrease in selling and marketing expenses is primarily due to a
decrease of approximately $684,000 in employee and consulting expenses. This
decrease was partially offset by an increase in advertising and other expenses
of approximately $128,000. The decrease in employee and consulting expenses is
due primarily to the Company's decision to curtail efforts in Canada and
eliminate expenditures in areas identified as being outside of the Company's
current strategic focus on indirect selling and marketing of commercial software
products. As part of such efforts, the Company eliminated a portion of its sales
and marketing staff shifting such efforts to certain of the Company's strategic
partners.
14
CHANGES IN CERTAIN
SELLING
AND
MARKETING EXPENSES
-----------------------
$(000S) % CHANGE
--------- -----------
Employee and consulting ............ $ (684) (34)%
Rent ............................... (26) (7)
Travel ............................. (27) (60)
Advertising and promotions ......... 119 45
Other .............................. 53 7
------ -----
$ (565) (16)%
====== =====
The Company expects that selling and marketing expenses will increase if
sales of the Company's products increase.
PRODUCT DEVELOPMENT
Product development costs remained consistent with the prior year. The
Company expects to continue to incur product development costs as it continues
to develop additional products and enhance existing products.
GENERAL AND ADMINISTRATIVE
The increase of approximately $453,000 in general and administrative
expenses was primarily due to the proposed settlement cost of approximately
$450,000 related to the IIG lawsuit. See ITEM 3. LEGAL PROCEEDINGS. The Company
expects general and administrative expenses to decline during 1998 due to the
reduction in legal expenses related to the IIG settlement. However, operational
general and administrative expenses may increase if sales of the Company's
products increase.
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
approximately $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, continued 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 June 1998, if not renewed prior to that date. The Suffolk and Nassau
county contracts ended in late 1996.
Cost of revenues for the fiscal year ended December 31, 1996 increased by
approximately $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
approximately $3.2 million over operating expenses for the same period in 1995.
The increase of approximately $3.2 million was comprised of an increase of
approximately $1.8 million in selling and marketing expenses, an increase of
approximately $332,000 in product development expenses and an increase of
approximately $1.1 million in general and administrative expenses.
15
CHANGES IN OPERATING
EXPENSES
---------------------
$(000S) % 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 was primarily due to an
increase of approximately $1.4 million in employee and consulting expenses and
an increase of approximately $322,000 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 could distribute its products.
CHANGES IN CERTAIN
SELLING AND
MARKETING EXPENSES
---------------------
$(000S) % CHANGE
--------- ---------
Employee and consulting ............ $1,387 148%
Rent ............................... 55 198
Travel ............................. 322 139
Advertising and promotions ......... 59 171
------ ---
$1,823 112%
====== ===
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 as it continues to develop additional products and to enhance
existing products.
GENERAL AND ADMINISTRATIVE
The increase of approximately $1.1 million in general and administrative
expenses was primarily due to a an increase of approximately $300,000 in legal
and professional fees, an increase of approximately $111,000 in employee
expenses and related travel, an increase of approximately $150,000 in
advertising expense, an increase of approximately $64,000 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 approximately $2.2 million
over the net loss for the fiscal year ended December 31, 1995.
YEAR 2000 EXPOSURE
The Company is currently working to resolve the potential impact of the
year 2000 on the processing of date-sensitive information by the Company's
computerized information systems. The year 2000 problem is the result of
computer programs being written using two digits (rather than four) to define
the applicable year. Any of the Company's programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than 2000,
which could result in miscalculations or system failures. Based on preliminary
information, costs of addressing potential problems are not currently expected
to have a material adverse impact on the Company's business condition,
financial or otherwise, results of operations, prospects and cash flows in
future periods. However, if the Company, its customers or vendors are unable to
resolve such processing issues in a timely manner, it could result
16
in a material financial risk. Accordingly, the Company plans to devote the
necessary resources, if any, to resolve all significant year 2000 issues in a
timely manner.
NEW STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 129, DISCLOSURE OF INFORMATION ABOUT AN
ENTITY'S CAPITAL STRUCTURE (SFAS 129), effective for accounting years ending
after December 15, 1997. Its adoption does not have a significant effect on the
Company's financial statements.
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income",
which is effective for fiscal years beginning after December 15, 1997. SFAS No.
130 establishes standards for the reporting and display of comprehensive income
and its components in a full set of general-purpose financial statements.
Although SFAS No. 130 only impacts display as opposed to actual amounts
recorded, it represents a change in financial reporting. Management has not
completed its review of SFAS No. 130, but does not anticipate that the adoption
of this statement will have a significant impact on the Company's reported
earnings.
In June 1997, FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information", which is effective for fiscal years
beginning after December 15, 1997. SFAS No. 131 establishes standards for the
way public enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. Management has not completed its review of
this statement, but does not anticipate that the adoption of the statement will
have a significant effect on the Company's reported segments.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) No. 97-2, SOFTWARE REVENUE RECOGNITION, which
changes the requirements for revenue recognition effective for transactions
entered into beginning in January 1, 1998. The Company has not assessed what the
impact of SOP No. 97-2 will be on its 1998 financial statements.
LIQUIDITY AND CAPITAL RESOURCES
Cash as of March 31, 1998 was approximately $424,000. Cash and working
capital (deficit) as of February 28, 1998 were approximately $184,000 and
$(960,000), respectively. The decrease from December 31, 1997 was due primarily
to net operating expenses. This decrease was partially offset by a $250,000 loan
received from XL Vision in February 1998. This loan was related to the XL Vision
license agreement and was forgiven on March 5, 1998, the closing date of the
transaction. The Company received an additional $1,000,000 during March 1998 and
expects to receive $250,000 in April 1998 pursuant to this agreement.
Cash and working capital (deficit) as of December 31, 1997 were
approximately $298,000 and $(386,000), respectively, as compared to
approximately $914,000 and $254,000, respectively, as of December 31, 1996. The
decreases were primarily the result of net cash used in operating activities of
approximately $6.5 million and $610,000 in capital expenditures offset by
approximately $6.4 million in net proceeds from the sale of the Company's Series
C Preferred Stock in February of 1997. The Company's net cash expenditure rate
for the last three months of 1997, before capital expenditures of approximately
$148,000, to be approximately, $278,000 per month.
Capital expenditures for fiscal 1997 were approximately $610,000. These
expenditures were primarily for computer hardware and software used in
development, sales and marketing of the Company's NRIdentity software and
hardware products. The Company currently anticipates spending approximately
$100,000 in 1998, primarily on equipment to support continued development of the
Company's hardware and software products and equipment to perform benchmark
testing of the Company's systems.
17
On February 6, 1997, the Company completed an equity financing (the "Series
C Preferred Stock Private Placement") pursuant to which two accredited
investment funds purchased an aggregate of 350,000 shares of the Company's
Series C Preferred Stock, $.01 par value per share (the "Series C Preferred
Stock"), for an aggregate purchase price of $7 million before commissions and
expenses which totaled approximately $613,000. The Series C Preferred Stock
carries a six percent per annum accretion which the Company treated as a
dividend resulting in a charge to accumulated deficit and a credit to capital in
excess of par value. The Company recorded accretion of approximately $350,000
during 1997.
All 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. All shares of Series C Preferred Stock issued and outstanding as of
February 4, 2000 will be converted automatically into shares of Common Stock.
During 1997, 90,250 shares of Series C Preferred Stock were converted into
3,363,915 shares of Common Stock, including 140,653 shares attributable to
accrued dividends. The Company may redeem the Series C Preferred Stock at any
time based upon a formula relating to the then applicable conversion price or
under certain other circumstances. 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 plus
accrued and unpaid dividends. As part of the Series C Preferred Stock Private
Placement, the Company issued to such accredited investment funds, warrants to
purchase 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 warrants expire
five years after the date of closing.
In connection with the Series C Preferred Stock Private Placement, the
Company also issued warrants to purchase an aggregate of 140,000 shares of
Common Stock at an exercise price of $2.6125 per share to certain finders. Of
such warrants, warrants to purchase up to 70,000 shares are exerciseable through
February 4, 2000, with the remaining warrants being exercisable through February
4, 2002. The Company has also agreed to certain registration rights with respect
to these warrants.
On March 17, 1997, the Company filed a registration statement with the SEC
to register certain shares of Common Stock issuable upon conversion of the
Series C Preferred Stock, shares of Common Stock held by certain selling
stockholders named in the registration statement and shares of Common Stock
issuable upon the exercise of certain options and warrants. On May 23, 1997 the
registration statement was declared effective by the SEC.
On May 24, 1994, the Company, Blue Cross Blue Shield of New Jersey, Inc.
("BCBSNJ") and a wholly owned subsidiary of BCBSNJ entered into that certain
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 the Company's finger image
identification technology to, among other markets, the healthcare 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 31, 1998, the Company and BCBSNJ have each loaned
$60,000 to BIOMETRX to fund preliminary organizational and development
activities. As of March 31, 1998, BIOMETRX has not commenced operations, and
management has determined to delay commencement of activities pending further
review of the applicable market requirements and demands. 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 systems, services, or products.
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) in cash or shares of Common Stock,
quarterly in
18
arrears, but in no event later than the conversion date applicable to such
shares of Series C Preferred Stock. During 1997, the Company issued 140,653
shares of Common Stock as dividends related to the Series C Preferred Stock.
The Company expended net cash at a rate of approximately $6.5 million, not
including capital expenditures of approximately $610,000, during 1997. In an
effort to reduce the Company's net cash expenditure rate, the Company began
implementing a plan to reduce operating expenses in September 1997. This plan
included closing certain corporate facilities outside its Tampa headquarters and
reducing the number of employees. While the Company does not believe it to be
the case, it is possible that the implementation of the cost reduction program
may have a negative impact on sales.
The Company expended net cash at a rate of approximately $182,000 per month
during the first two months of 1998. As a means to manage its cash flow, the
Company delayed payments to its vendors. If the Company had paid its vendors in
a timely manner, the net cash expenditure rate would have been approximately
$350,000 for such two month period. As of March 31, 1998, the Company had
established a payment schedule with its largest vendor. Cash as of March 31,
1998 was approximately $424,000. Based on the preliminary settlement of the IIG
lawsuit, the Company is committed to an immediate cash payment of $300,000.
Additionally, the Company is committed during April 1998 to a $250,000 payment
related to its licensing agreement with Cogent. Without an immediate infusion of
cash the Company will be out of cash by the middle of April 1998. Accordingly,
the audit opinion issued in connection with the Company's 1997 financial
statements (included in this annual report) contains a going concern
qualification. The Company expects to receive a payment of approximately
$250,000 from XL Vision on or about April 20, 1998. The Company is currently
searching for additional financing solutions that enables it to fulfill its
short-term obligations. However, there is no assurance that the Company will be
able to secure short-term financing or whether the terms of any such financing
will be acceptable to the Company. Even if the Company is able to address its
short-term cash needs, the Company believes that its existing working capital,
together with anticipated cash flows from sales from current contracts,
continuation of the Company's operating expense reduction plan and the reduction
of capital expenditures will be insufficient to meet its expected working
capital needs through the remainder of 1998. Absent a significant increase in
sales, which itself may require a significant increase in working capital, the
Company will require significant additional funds during 1998 to continue its
operations. As described earlier, the Company has entered into a letter of
intent to sell certain software licenses and various services for approximately
$2.9 million to a master reseller. While the Company hopes that the consummation
of such transaction, as to which there is no assurance, will address the
Company's immediate cash flow requirements, the Company is reviewing the options
available to it to obtain additional financing. These options include, but are
not limited to, the sale and issurance of stock, the sale and issuance of debt,
the sale of certain assets of the Company and entering into an additional
strategic relationship or relationships to either obtain the needed funding or
to create what the Company believes would be a better opportunity to obtain such
funds. It is very possible that any such additional infusion of capital would be
in the form of the sale and issuance of additional shares of Common Stock or
securities that are convertible into Common Stock, which would substantially
increase the number of shares of Common Stock outstanding on a fully-diluted
basis. However, there is a significant likelihood that additional funding or
strategic relationships will not be available on terms acceptable to the
Company, if at all. The failure to obtain such additional funds would cause the
Company to cease or curtail operations. Even if such additional funding is
obtained, there is no assurance that the Company will be able to generate
significant sales of its products or services, or, if the Company is able to
consummate significant sales, that any such sales would be profitable.
FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to other information contained in this annual report, the
following factors, among others, sometimes have affected, and in the future
could affect the Company's actual results and could cause future results to
differ materially from those expressed in any forward looking statements made by
or on behalf of the Company. Factors that could cause future results to differ
from expectations include, but are not limited to the following: the Company's
limited operating history and substantial
19
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 Market
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.
LIMITED OPERATING HISTORY, SUBSTANTIAL ACCUMULATED NET LOSSES
From its commencement of business in October 1991, the Company has been
principally engaged in organizational, development and marketing activities.
Through December 31, 1997, the Company has reported an accumulated net loss of
approximately $43,675,000 and has had only limited revenues. The Company has
incurred additional losses from December 31, 1997 to date. There is no assurance
that the Company will be able to achieve significant revenues or any net income
in the future.
NEED FOR ADDITIONAL FUNDS
As of February 28, 1998, the Company's cash balance and working capital
(deficit) were approximately $184,000 and $(960,000) and its cash balance as of
March 31, 1998 was approximately $424,000, respectively. The Company's working
capital improved during the month of March due to the receipt of $1 million in
cash from the sale of licenses to a customer. 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 biometric identification products
and services. There is no assurance that the Company will be able to complete
significant sales of its products or services or obtain such additional capital
during 1998. The Company spent net cash at a rate of approximately $278,000 per
month (before capital expenditures of approximately $148,000) for the last three
months of 1997 and $182,000 per month for the first two months of 1998. As a
means to manage its cash flow, the Company delayed payments to its vendors. If
the Company had paid its vendors in a timely manner, the net cash expenditure
rate would have been approximately $350,000 for such two month period. As of
March 31, 1998, the Company had established a payment schedule with its largest
vendor. The net cash expenditure rate will increase depending upon operational
decisions made by management in its sole discretion. Absent a significant
increase in sales, the Company will require additional funds to maintain
operations and continue, among other things, development, testing and marketing
of its biometric identifications products and services. Based on a preliminary
settlement of the IIG lawsuit, the Company is committed to an immediate cash
payment of $300,000. Additionally, the Company is committed during April 1998 to
a $250,000 payment related to its licensing agreement with Cogent. Without an
immediate infusion of cash the Company will be out of cash by the middle of
April 1998. The Company expects to receive a payment of approximately $250,000
from XL Vision on or about April 20, 1998. The Company is currently searching
for additional financing solutions that enable it to fulfill its short-term
obligations. There is a significant likelihood that such additional funds will
not be available on terms acceptable to the Company, if at all. It is very
possible that any such additional infusion of capital would be in the form of
the sale and issuance of additional shares of Common Stock, or securities
convertible into Common Stock, which may substantially increase the number of
shares of Common Stock outstanding on a fully-diluted basis. The faiure to
obtain such additional funds may cause the Company to cease or curtail
operations. Even if such additional funding is obtained, there is 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 or, if the Company is able to
consummate significant sales, that any such sales would be profitable.
NASDAQ SMALLCAP MARKET ELIGIBILITY AND MAINTENANCE REQUIREMENTS;
POSSIBLE DELISTING OF SECURITIES FROM THE NASDAQ SMALLCAP MARKET
The Board of Governors of the National Association of Securities Dealers,
Inc. ("NASD") has established certain standards for the continued listing of a
security on the SmallCap Market. The
20
maintenance standards require, among other things, that an issuer have total
assets of at least $2 million and market value of public float of at least $1
million and that the minimum bid price for the listed securities be $1.00 per
share. A deficiency in either the market value of the public float or the bid
price maintenance standard will be deemed to exist if the issuer fails the
individual stated requirement for thirty consecutive business days. Upon such
failure, the issuer shall be notified promptly and shall have a period of ninety
calendar days from such notification to achieve compliance. Compliance can be
achieved by meeting the applicable standard for a minimum of 10 consecutive
business days during the ninety day compliance period. On February 27, 1998 the
Company received notice from the Nasdaq Stock Market, Inc. that the Company's
security is not in compliance with such minimum bid price requirement. As a
result, the Company has been provided ninety calendar days, which expires May
28, 1998, in order to regain compliance with this standard. If the Common Stock
does not regain compliance, by trading at or above the minimum $1 requirement
for at least 10 consecutive trade days, the Common Stock could be delisted from
the SmallCap Market and quotations would no longer be available on Nasdaq. If
the Common Stock were excluded from the SmallCap Market, it would adversely
affect the prices of such securities and the ability of holders to sell them.
The Company has called a meeting of its stockholders for May 12, 1998, at which
time the stockholders will be asked to approve, among other things, a reverse
stock split of the Common Stock in order to place the Company in compliance with
such minimum bid price maintenance requirement.
IIG LAWSUIT
The Company is currently the defendant in a lawsuit filed by IIG on
February 13, 1997. IIG has asserted multiple claims which include breach of
contract, quantum meruit, unjust enrichment, breach of implied convenant of good
faith and fair dealing and fraud and seeks an accounting, specific performance,
injunctive and declatory relief and damages. On April 3, 1998, the Company
reached a preliminary settlement of such lawsuit. This settlement includes a
$300,000 cash payment by the Company, the issuance to IIG of 250,000 shares of
the Common Stock and the granting to IIG of an option to purchase 150,000 shares
of Common Stock at an exercise price of $0.625, the closing bid price of the
Common Stock on the Nasdaq SmallCap Market on April 3, 1998. While the Company
believes the settlement will be consummated, there is no assurance that such
settlement will be consummated or what will be the actual terms of such
settlement, if any. If the lawsuit is not settled, the Company would be forced
to defend itself. While the Company believes it has meritorious defenses to the
asserted claims, it cannot predict the outcome or estimate the loss. If the
plaintiffs were to be successful in such litigation, such a result could have a
material impact on the Company and its business condition (financial or
otherwise) or results of operations.
TECHNOLOGICAL AND MARKET UNCERTAINTY
The development and marketing of the Company's products and services may be
impeded by problems relating to the development, production, distribution or
marketing of its products and services, which problems may be beyond the
financial and technical abilities of the Company to solve. Technology employed
in biometric identification is subject to rapid change, and more advanced or
alternate technology employed by competitors, currently or in the future, and
not available to the Company could give such competitors a significant advantage
over the Company. In addition, concerns about unauthorized (including
government) access to private information may impede market acceptance of
biometric identification systems. Further, there is no assurance that products
and services developed by competitors of the Company will not significantly
limit the potential market for the Company's products and services or render the
Company's products and services obsolete. Finally, there is no assurance that
laws, rules or regulations will not be adopted in such a manner as will
materially adversely affect the Company.
COMPETITION
The Company is attempting to enter a highly competitive business which is
dominated by more traditional identification techniques (such as cards, keys,
passwords and personal information). A
21
number of companies also have automated finger image identification technology
and have sold systems incorporating such technology in the United States. In
addition, the Company is aware of several other companies which produce or are
developing other biometric technologies which may compete with the Cogent
technology (or other technologies utilized by the Company). Such technologies
include identification by eye retina blood vessel patterns, hand geometry and
signature analysis. The Company's products and services compete with companies
which may have substantially greater resources than the Company and are better
equipped than the Company. There is no assurance that the Company will be able
to compete successfully against other parties or technologies.
DEPENDENCE UPON SOFTWARE LICENSORS
The Company has acquired certain rights to certain biometric identification
software (the "Licensed Technology") under agreements with software algorithm
suppliers that may be terminated in the event the Company fails to pay license
fees (including minimum specified payments) or commits any other material breach
of any covenant of such agreements. Under the terms of the license agreement
with Cogent, the Company was granted a worldwide exclusive license, commencing
April 1, 1992 and expiring October 1, 1999, to all commercial applications of
the Cogent's finger image identification technology and worldwide non-exclusive
rights to Cogent's finger image identification technology for governmental
applications, other than those relating to law enforcement, with respect to
which no rights were granted to the Company. The expiration of such license
agreement will be extended until October 1, 2009, provided that the Company
makes a $10 million cash payment to Cogent on or prior to October 1, 1999 (the
"Extension Payment"), in addition to paying ongoing licensing fees. Although the
Company was not in default under such agreement as of the date hereof, there is
no assurance that such defaults will not occur in the future or that the Company
will make the Extension Payment.
Regardless of whether the Extension Payment is made, pursuant to the Cogent
agreement, certain exclusive rights with respect to commercial markets the
Company had not entered into as of April 1, 1997 became nonexclusive as of such
date.
For commercial markets the Company had not entered into as of April 1,
1997, including any segment thereof, described above in BUSINESS--LICENSED
TECHNOLOGY as required under the terms of the agreement, the Company stands to
lose its exclusivity in those markets and upon the termination of the Agreement
(whether as a result of an event of default or expiration of the license period,
if the Company does not make the Extension Payment on or prior to October 1,
1999), the Company would lose all of its rights to use Cogent's technology which
could substantially impair the Company's ability to continue to offer finger
imaging based one to many matching on unlimited population sizes unless the
Company was able to make arrangements to obtain alternative technology from
another source, as to which there is no assurance.
Any 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.
CONTROL OF THE COMPANY
As of March 31, 1998, J. Anthony Forstmann and RMS Limited Partnership, a
Nevada limited partnership controlled by Roy M. Speer ("RMS"), beneficially own
approximately 16.0% and 10.3% of the Common Stock, respectively. Mr. Forstmann
and RMS are parties to a certain stockholders' voting agreement pursuant to
which they agreed to vote certain shares for directors nominated by the other,
and not to vote in favor of certain specified actions unless mutually agreed to
by Mr. Forstmann and RMS. Accordingly, such persons, acting together, are in a
position immediately to exercise significant control over the general affairs of
the Company, to control the vote on any matters presented to stockholders and
direct the business and policies of the Company.
22
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 1998 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, 1998.
ITEM 11. EXECUTIVE COMPENSATION.
Information concerning directors and officers of the Company is included in
the definitive Proxy Statement for the Company's 1998 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, 1998.
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 1998 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, 1998.
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.
(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.
23
(b) Reports on Form 8-K
During the fourth quarter of 1997, the Company filed no reports on Form
8-K.
(c) Exhibits
EXHIBIT
NO. DESCRIPTION
- -------- -------------------------------------------------------------------------------------------------
3.1 Articles of Incorporation, as amended to date, of the Company(incorporated by reference to
Exhibit 3.1 of theCompany'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).
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 1, 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).
24
EXHIBIT
NO. DESCRIPTION
- ---------- -------------------------------------------------------------------------------------------
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
REGISTERED MARKS
The following registered marks of other companies appear in this annual
report: WINDOWS/registered trademark/ 95, WINDOWS/registered trademark/ NT,
Unicenter/registered trademark/, and UNIX/registered trademark/. These and any
other product brand names are the property of their respective owners.
25
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: April 9, 1998
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.
SIGNATURES TITLE DATE
- ------------------------------------ ------------------------------------ --------------
/s/ JOHN L. GUSTAFSON President, Chief Executive Officer April 9, 1998
- ---------------------------- and Director (Principal Executive
John L. Gustafson Officer)
/s/ DAVID E. BROGAN Chief Financial Officer (Principal April 9, 1998
- ---------------------------- Financial Officer
David E. Brogan
/s/ JAMES P. PORTERFIELD III Controller (Principal Accounting April 9, 1998
- ---------------------------- Officer)
James M. Porterfield III
/s/ JEFFREY P. ANTHONY Director April 9, 1998
- ---------------------------
Jeffrey P. Anthony
/s/ FRANK M. DEVINE Director April 9, 1998
- ---------------------------
Frank M. Devine
/s/ J. ANTHONY FORSTMANN Director April 9, 1998
- ---------------------------
J. Anthony Forstmann
Director
- ---------------------------
Donald C. Klosterman
Director
- ---------------------------
Don M. Lyle
/s/ ROBERT J. ROSENBLATT Director April 9, 1998
- ---------------------------
Robert J. Rosenblatt
/s/ FRANCIS R. SANTEGELO Director April 9, 1998
- ---------------------------
Francis R. Santegelo
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS
PAGE
NUMBER
-------
Report of Independent Certified Public Accountants ..................... F-1
Balance Sheets as of December 31, 1997 and December 31, 1996 ........... F-2
Statements of Operations
for each of the three years in the period ended December 31, 1997 .... F-4
Statements of Stockholders' Equity (Deficit)
for each of the three years in the period ended December 31, 1997 .... F-5
Statements of Cash Flows
for each of the three years in the period ended December 31, 1997 .... F-8
Notes to Financial Statements .......................................... F-9
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, 1997 and 1996, and the related statements of operations,
stockholders' equity (deficit), and cash flows for each of the three years in
the period ended December 31, 1997. 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, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that The
National Registry, Inc. will continue as a going concern. As more fully
described in Note 9, the Company has incurred operating losses during each of
the years since inception, has a working capital deficit of $386,000 at December
31, 1997 and has obtained no additional financing. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the outcome of this
uncertainty.
Ernst & Young LLP
Tampa, Florida
March 27, 1998, except for Note 10 as to which the date is April 3, 1998
F-1
THE NATIONAL REGISTRY INC.
BALANCE SHEETS
DECEMBER 31,
-----------------------
1997 1996
----------- -----------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents ................... $ 298 $ 914
Receivables:
Trade net of allowance for doubtful accounts
of $30,000 and $0, respectively ......... 450 362
Other ...................................... 22 98
-------- --------
472 460
Inventory ................................... 362 --
Prepaid expenses ............................ 272 199
Other ....................................... 17 29
-------- --------
Total current assets ......................... 1,421 1,602
Equipment:
Computer equipment .......................... 3,031 2,568
Office equipment and other .................. 415 381
-------- --------
3,446 2,949
Less accumulated depreciation ............... (2,394) (1,824)
-------- --------
1,052 1,125
Investment ................................... 105 105
-------- --------
Total assets ................................. $ 2,578 $ 2,832
======== ========
See accompanying notes.
F-2
THE NATIONAL REGISTRY INC.
BALANCE SHEETS--(CONTINUED)
DECEMBER 31,
-------------------------
1997 1996
------------ ------------
(IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................................ $ 677 $ 368
Accrued compensation ............................................................ 163 346
Other accrued expenses .......................................................... 127 367
Accrued settlement costs ........................................................ 450 --
Accrued legal and professional fees ............................................. 216 267
Deferred revenue ................................................................ 174 --
--------- ---------
Total current liabilities ........................................................ 1,807 1,348
Commitments and contingencies
STOCKHOLDERS' EQUITY
Common stock, $.01 par value:
Authorized--75,000,000 shares; issued and outstanding--
38,134,655 and 34,401,005 shares in 1997 and 1996 ........................... 381 344
Preferred stock, $.01 par value convertible:
Authorized--1,000,000 shares; issued and outstanding:
Series A--Liquidation preference $100 per share, 100,000 shares issued and
outstanding as of December 31, 1997 and December 31, 1996 .................. 1 1
Series C--Liquidation preference $20 per share, 259,750 and 0 shares issued
and outstanding as of December 31, 1997 and 1996, respectively ............. 3 --
Capital in excess of par value .................................................. 44,090 35,713
Accumulated deficit ............................................................. (43,675) (34,431)
Unamortized deferred compensation ............................................... (29) (143)
--------- ---------
Total stockholders' equity ....................................................... 771 1,484
--------- ---------
Total liabilities and stockholders' equity ....................................... $ 2,578 $ 2,832
========= =========
See accompanying notes.
F-3
THE NATIONAL REGISTRY INC.
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995
------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Post Contract Services (PCS) revenue .................. $ 535 $ -- $ --
Net product and service revenue ....................... 1,050 2,305 401
-------- -------- --------
Total revenue ........................................ 1,585 2,305 401
Cost of PCS revenue ................................... 356 -- --
Cost of net product and service revenue ............... 388 1,292 274
-------- -------- --------
Total cost of revenue ................................ 744 1,292 274
Gross profit (loss) ................................... 841 1,013 127
Operating expenses:
Selling and marketing ................................ 2,880 3,445 1,622
Product development .................................. 2,424 2,388 2,056
General and administrative ........................... 3,150 2,697 1,601
-------- -------- --------
Total operating expenses .............................. 8,454 8,530 5,279
Other income:
Interest income ...................................... 148 177 82
Other income ......................................... 41 -- --
-------- -------- --------
Net loss .............................................. $ (7,424) $ (7,340) $ (5,070)
Preferred stock deemed dividend ....................... 1,470 1,412 --
Preferred stock dividend .............................. 350 303 --
-------- -------- --------
Net loss attributable to common stockholder ........... $ (9,244) $ (9,055) $ (5,070)
======== ======== ========
Net loss per common share, basic and diluted .......... $ (0.26) $ (0.32) $ (0.22)
======== ======== ========
Weighted average number of shares outstanding ......... 35,247 28,077 23,238
======== ======== ========
See accompanying notes.
F-4
THE NATIONAL REGISTRY INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
COMMON STOCK PREFERRED STOCK
----------------- -----------------
SHARES AMOUNT SHARES AMOUNT
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Balance at December 31, 1994 ..................... 19,763 $198 100 $ 1
Issuance of common stock at no cost ............. 150 1 -- --
Issuance of common stock, net of offering
costs, at $1.00 per share ..................... 4,000 40 -- --
Cancellation of compensatory
stock options ................................. -- -- -- --
Granting of compensatory stock options .......... -- -- -- --
Repricing of compensatory stock options ......... -- -- -- --
Expense related to stock option plans ........... -- -- -- --
Issuance of common stock upon exercise of
stock options at $1.50 per share .............. 306 3 -- --
Issuance of common stock upon exercise of
stock options at $.01 per share ............... 25 -- -- --
Net loss ........................................ -- -- -- --
------ ---- --- ---
Balance at December 31, 1995 ..................... 24,244 242 100 1
====== ==== === ===
CAPITAL UNAMORTIZED
IN EXCESS ACCUMULATED DEFERRED
OF PAR DEFICIT COMPENSATION TOTAL
------------- ------------- ------------- -----------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Balance at December 31, 1994 ..................... $21,772 $ (20,306) $ (237) $ 1,428
Issuance of common stock at no cost ............. (1) -- -- --
Issuance of common stock, net of offering
costs, at $1.00 per share ..................... 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 .............. 455 -- -- 458
Issuance of common stock upon exercise of
stock options at $.01 per share ............... -- -- -- --
Net loss ........................................ -- (5,070) -- (5,070)
-------- --------- ------ ---------
Balance at December 31, 1995 ..................... 26,475 (25,376) (252) 1,090
======== ========= ====== =========
See accompanying notes.
F-5
THE NATIONAL REGISTRY INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
COMMON STOCK PREFERRED STOCK
----------------- -----------------
SHARES AMOUNT SHARES AMOUNT
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Balance at December 31, 1995 .................. 24,244 242 100 1
Issuance of Series B preferred stock, net of
offering costs, at $10,000 per share ....... -- -- 1 --
Dividend on Series B preferred stock
at 8% ...................................... -- -- -- --
Series B preferred stock deemed dividend ..... -- -- -- --
Conversion of Series B preferred stock to
common stock at various exchange rates ..... 9,927 100 (1) --
Expense related to stock option plans ........ -- -- -- --
Issuance of common stock upon exercise of
stock options at $1.50 per share ........... 230 2 -- --
Net loss ..................................... -- -- -- --
------ --- ---- --
Balance at December 31, 1996 .................. 34,401 344 100 1
====== === ==== ==
CAPITAL UNAMORTIZED
IN EXCESS ACCUMULATED DEFERRED
OF PAR DEFICIT COMPENSATION TOTAL
----------- ------------- ------------- -----------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Balance at December 31, 1995 .................. 26,475 (25,376) (252) 1,090
Issuance of Series B preferred stock, net of
offering costs, at $10,000 per share ....... 7,280 -- -- 7,280
Dividend on Series B preferred stock
at 8% ...................................... 303 (303) -- --
Series B preferred stock deemed dividend ..... 1,412 (1,412) -- --
Conversion of Series B preferred stock to
common stock at various exchange rates ..... (100) -- -- --
Expense related to stock option plans ........ -- -- 109 109
Issuance of common stock upon exercise of
stock options at $1.50 per share ........... 343 -- -- 345
Net loss ..................................... -- (7,340) -- (8,752)
------ ------- ---- ------
Balance at December 31, 1996 .................. 35,713 (34,431) (143) 1,484
====== ======= ==== ======
See accompanying notes.
F-6
THE NATIONAL REGISTRY INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
COMMON STOCK PREFERRED STOCK
----------------- -----------------
SHARES AMOUNT SHARES AMOUNT
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Balance at December 31, 1996 .................. 34,401 344 100 1
Issuance of Series C preferred stock, at $20
per share, net of offering costs ........... -- -- 350 4
Issuance of common stock warrants ............ -- -- -- --
Dividend on Series C preferred stock
at 6% ...................................... -- -- -- --
Series C preferred stock deemed dividend ..... -- -- -- --
Conversion of Series C preferred stock to
common stock at various exchange rates ..... 3,364 33 (90) (1)
Expense related to stock option plans ........ -- -- -- --
Cancellation of compensatory
stock options .............................. -- -- -- --
Issuance of common stock upon exercise of
stock options at various prices ............ 82 1 -- --
Issuance of common stock for services
performed .................................. 288 3 -- --
Net loss ..................................... -- -- -- --
------ --- --- ----
Balance at December 31, 1997 .................. 38,135 $381 360 $ 4
====== ==== === ======
CAPITAL UNAMORTIZED
IN EXCESS ACCUMULATED DEFERRED
OF PAR DEFICIT COMPENSATION TOTAL
----------- ------------- ------------- -----------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Balance at December 31, 1996 .................. 35,713 (34,431) (143) 1,484
Issuance of Series C preferred stock, at $20
per share, net of offering costs ........... 5,723 -- -- 5,727
Issuance of common stock warrants ............ 660 -- -- 660
Dividend on Series C preferred stock
at 6% ...................................... 350 (350) -- --
Series C preferred stock deemed dividend ..... 1,470 (1,470) -- --
Conversion of Series C preferred stock to
common stock at various exchange rates ..... (32) -- -- --
Expense related to stock option plans ........ -- -- 94 94
Cancellation of compensatory
stock options .............................. (125) -- 20 (105)
Issuance of common stock upon exercise of
stock options at various prices ............ 10 -- -- 11
Issuance of common stock for services
performed .................................. 321 -- -- 324
Net loss ..................................... -- (7,424) -- (7,424)
------ ------- ---- ------
Balance at December 31, 1997 .................. $44,090 $ (43,675) $ (29) $ 771
======= ========= ====== =========
See accompanying notes.
F-7
THE NATIONAL REGISTRY, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995
------------ ------------ ------------
(IN THOUSANDS)
CASH USED IN OPERATING ACTIVITIES
Net loss .................................................................. $ (7,424) $ (7,340) $ (5,070)
Adjustments to reconcile net loss to net cash used in operating activities:
Compensation (benefit) applicable to stock option grants ................. (11) 109 306
Depreciation ............................................................. 649 536 525
Gain on sale of fixed assets ............................................. (41) -- --
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Receivables ............................................................ (12) (378) (22)
Inventory .............................................................. (362) 143 (143)
Prepaid expenses ....................................................... (73) (17) (29)
Other assets ........................................................... 12 141 (139)
Increase (decrease) in liabilities:
Accounts payable ....................................................... 309 148 151
Accrued expenses ....................................................... (474) 690 86
Accrued settlement costs ............................................... 450 -- --
Issuance of common stock for services .................................. 324 -- --
Deferred revenue ....................................................... 174 -- --
-------- -------- --------
Net cash used in operating activities ..................................... (6,479) (5,968) (4,335)
CASH USED IN INVESTING ACTIVITIES
Purchase of equipment ..................................................... (610) (921) (453)
Proceed from the sale of fixed assets ..................................... 75 -- --
Increase in investments ................................................... -- -- (105)
-------- -------- --------
Net cash used in investing activities ..................................... (535) (921) (558)
CASH PROVIDED BY FINANCING ACTIVITIES
Proceeds from issuance of preferred stock ................................. 6,387 7,280 --
Proceeds from issuance of common stock .................................... 11 345 4,426
-------- -------- --------
Net cash provided by financing activities ................................. 6,398 7,625 4,426
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ...................... (616) 736 (467)
Cash and cash equivalents at beginning of period .......................... 914 178 645
-------- -------- --------
Cash and cash equivalents at end of period ................................ $ 298 $ 914 $ 178
======== ======== ========
See accompanying notes.
F-8
THE NATIONAL REGISTRY, INC.
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY
During the latter portion of 1996, the Company transitioned out of the
developmental stage 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. During 1997 the Company began selling
its NRIdentity software and hardware products commercially. 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 non-biometric identifiers can be lost, stolen, duplicated,
transferred or discovered by unauthorized persons.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
During 1997 operating revenue was derived from the sale of the Company's
NRIdentity software and hardware, the performance of programming and integration
services and postcontract customer support (PCS). During 1996 and 1995 operating
revenue was derived from the installation and lease of Company installed welfare
fraud systems in the states of Connecticut, New Jersey and New York. In
accordance with the American Institute of Certified Public Accountants Statement
of Position No. 91-1, SOFTWARE REVENUE RECOGNITION, the Company recognizes
revenue on sales when the product is shipped and programming and integration
services are performed, provided no significant obligations remain and
collection of the receivable is deemed probable. PCS revenue is deferred and
recognized ratably over the life of the service period of the related contract.
Revenue associated with the lease of hardware is recognized ratably over the
term of the lease.
MAJOR CUSTOMERS
In fiscal 1997, the Company had three customers that accounted for 12%, 21%
and 18%, respectively, of total revenues. Two of these were PCS customers that
accounted for approximately 33% of total revenues. In fiscal 1996, these
customers accounted for 48%, 39% and 0%, respectively, of total revenues. In
fiscal 1995, these customers accounted for 84%, 0% and 0% of total revenues. The
Company had one other customer that accounted for 11% of total revenue during
1995. There was no PCS revenue in 1996 or 1995.
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) and insurance premiums.
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.
F-9
THE NATIONAL REGISTRY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED
INVENTORY
Inventory is comprised of computer hardware and software purchased in
connection with the installation of the Company's biometric products. Inventory
is stated at the lower of cost on a first-in, first-out basis or market.
EQUIPMENT
Equipment is recorded at cost. Depreciation is provided using the
straight-line method over the following estimated useful lives of the assets:
YEARS
--------
Computer equipment ................. 1 to 3
Office equipment and other ......... 3 to 10
Depreciation expense was $649,000 in 1997, $536,000 in 1996 and $525,000 in
1995.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising expense
was approximately $443,000, $428,000 and $36,000 in 1997, 1996 and 1995,
respectively.
INCOME TAXES
Income taxes are accounted for under the liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rate is recognized in income in the period that includes the enactment date.
STOCK OPTION ACCOUNTING
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, and provides the
disclosure requirements relating to stock-based compensation plans required by
Statement of Financial Accounting Standards (SFAS) No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION.
NET LOSS PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 128 "Earnings Per Share". SFAS No. 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share. All earnings per share amounts for all periods presented have been
restated to conform to SFAS No. 128 requirements.
Net loss per common share was computed by dividing the net loss
attributable to common stockholders by the weighted average number of common
shares outstanding during the period.
F-10
THE NATIONAL REGISTRY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Common stock equivalents, relating to convertible Series A preferred stock,
convertible Series C preferred stock and exercise of certain stock options and
warrants were not included in this calculation due to their antidilutive effect.
FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash equivalents, accounts
receivable, investment and accounts payable. The fair value of these instruments
approximates their carrying value.
RECLASSIFICATIONS
Certain amounts in the 1996 and 1995 financial statements have been
reclassified to conform to the 1997 presentation.
IMPACT OF RECENTLY ISSUED PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 29, DISCLOSURE OF INFORMATION ABOUT AN
ENTITY'S CAPITAL STRUCTURE (SFAS 129), effective for accounting years ending
after December 15, 1997. Its adoption does not have a significant effect on the
Company's financial statements.
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income",
which is effective for fiscal years beginning after December 15, 1997. SFAS No.
130 establishes standards for the reporting and display of comprehensive income
and its components in a full set of general-purpose financial statements.
Although SFAS No. 130 only impacts display as opposed to actual amounts
recorded, it represents a change in financial reporting. Management has not
completed its review of SFAS No. 130, but does not anticipate that the adoption
of this statement will have a significant impact on the Company's financial
statements.
In June 1997, FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information", which is effective for fiscal years
beginning after December 15, 1997. SFAS No. 131 establishes standards for the
way public enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. Management has not completed its review of
this statement, but does not anticipate that the adoption of the statement will
have a significant effect on the Company's financial statements.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) No. 97-2, SOFTWARE REVENUE RECOGNITION, which
changes the requirements for revenue recognition effective for transactions
entered into beginning in January 1, 1998. The Company has not assessed what the
impact of SOP No. 97-2 will be on its 1998 financial statements.
3. STOCK OPTIONS
The Company has an employee stock incentive plan (the SIP) for officers,
directors and key employees under which 4,700,000 shares were reserved for
issuance as of December 31, 1997. In
F-11
THE NATIONAL REGISTRY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. STOCK OPTIONS--(CONTINUED)
addition, the Company has granted, outside of the SIP, options to purchase an
aggregate of 258,500 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 $94,000, $109,000 and
$325,000 as compensation expense in 1997, 1996 and 1995, 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 1997 and 1995, the Company recorded
a reduction in previously expensed compensation of $105,000 and $19,000,
respectively and reduced unamortized deferred compensation by $20,000 and
$106,000, respectively. There was no impact in 1996.
Pro forma information regarding net loss and loss 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 with the
following weighted-average assumptions for 1997, 1996 and 1995, respectively:
risk-free interest rates of 6.5%, 6.5% and 6.0%; no dividends; volatility
factors of the expected market price of the Company's common stock of 1.063,
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.
F-12
THE NATIONAL REGISTRY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. STOCK OPTIONS--(CONTINUED)
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:
1997 1996 1995
------------ ------------ ------------
(IN THOUSANDS)
Pro forma net loss attributable to common stockholder ......... $ (9,840) $ (9,594) $ (5,769)
Pro forma loss per share ...................................... $ (.28) $ (.34) $ (.25)
A summary of the Company's stock option activity, and related information
for the years ended December 31 follows:
1997 1996 1995
-------------------------- ---------------------------- ---------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
OPTIONS AVERAGE OPTIONS AVERAGE OPTIONS AVERAGE
(000) EXERCISE PRICE (000) EXERCISE PRICE (000) EXERCISE PRICE
--------- ---------------- ----------- ---------------- ----------- ---------------
Outstanding--beginning
of year .......................... 4,876 $ 1.42 4,324 $ 1.48 2,646 $ 2.44
Granted ............................ 243 1.18 791 1.11 3,719 1.66
Exercised .......................... (82) .14 (230) 1.50 (330) 1.39
Canceled/expired ................... (519) 1.72 (7) 2.25 (1,711) 2.40
----- ------- ------
Outstanding--end of year ........... 4,518 $ 1.39 4,876 $ 1.42 4,324 $ 1.48
===== ====== ======
Exercisable at end of year ......... 3,649 $ 1.39 3,274 $ 2.14 2,941 $ 1.49
===== ====== ======
Weighted-average fair value
of options granted during
the year ......................... $ 1.18 $ .87 $ 1.59
Exercise prices for options outstanding as of December 31, 1997 ranged
from $.88 to $2.25. The weighted-average remaining contractual life of those
options is seven 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)
urchase of 4,000,000 shares of common stock from the Company (See Note 6), (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-13
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 image 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 image 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 paid under this agreement are charged to Selling and
Marketing expense and were $500,000, for each of the years ended 1997, 1996 and
1995.
On December 8, 1997 the Company was granted a perpetual world-wide
non-exclusive license to Veridicom's finger imaging based software algorithm. In
consideration of the license, the Company has agreed to pay royalties generally
based on the Company's revenues from the licensed technology, subject to a
minimum amount of $250,000 during 1998 and $500,000 during 1999. However, the
Company has the option of canceling the agreement in June 1998 with a payment of
$75,000.
5. INCOME TAXES
As of December 31, 1997, the Company had net operating loss carryforwards
of approximately $24,557,000 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 approximately $11,872,000 and $9,104,000 as of
December 31, 1997 and 1996, 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
$11,872,000 and $9,104,000 was recorded as of December 31, 1997 and 1996,
respectively, which fully offsets the deferred tax asset.
The future utilization of the tax benefit carryforward items is subject to
an annual limitation when a cumulative change in stock ownership of more than
50% occurs over a three year period. The Company does not believe that such a
change has occurred, but if it has it is possible that taxable income and income
taxes in future years, which would otherwise be offset by net operating losses
and reduced by tax credits, will not be offset or reduced and, therefore, income
tax liabilities will be incurred. The potential tax benefits of these
carryforwards at December 31, 1997 and 1996 of approximately $5,460,000 and
$9,238,000, respectively, have been fully reserved in the financial statements
due to the uncertainty of realization. Tax benefits will be recognized in future
years if and when such benefits are judged to be realizable.
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
F-14
THE NATIONAL REGISTRY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. STOCKHOLDERS' EQUITY--(CONTINUED)
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
convertible Series A preferred stock receive a liquidation preference of $100
per share and the holders of convertible Series C preferred stock receive a
liquidation preference of $20 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 14.2% of the common stock of the Company (after giving effect to
such conversion), upon the satisfaction of certain conditions. Under the Series
A preferred stock purchase agreement, the shareholder has the right of first
refusal to purchase a pro rata share of any new stock issuances for a period of
five years.
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 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.
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.
On February 6, 1997, the Company completed an equity financing (the "Series
C Preferred Stock Private Placement") pursuant to which two accredited
investment funds purchased an aggregate of 350,000 shares of the Company's
Series C Preferred Stock, $.01 par value per share (the "Series C Preferred
Stock"), for an aggregate purchase price of $7 million before commissions and
expenses which totaled approximately $613,000. The Series C Preferred Stock
carries a six percent per annum accretion which the Company treated as a
dividend resulting in a charge to accumulated deficit and a credit to capital in
excess of par value. The Company recorded accretion of $350,000 during 1997. All
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. All shares of Series C Preferred Stock issued and outstanding as of
February 4, 2000 will be converted automatically into shares of Common Stock.
During 1997 90,250 shares of Series C Preferred Stock were converted into
3,363,915 shares of Common Stock, including 140,653 shares attributable to
accrued dividends. The Company may redeem the Series C Preferred Stock at any
time based upon a formula relating to the then applicable conversion price or
under certain other circumstances. 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 of $20 per share plus accrued
dividends.
F-15
THE NATIONAL REGISTRY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. STOCKHOLDERS' EQUITY--(CONTINUED)
In connection with the Series C Preferred Stock Private Placement, the
Company issued to such accredited investment funds, warrants to purchase 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 warrants expire five years
after the date of closing. The value assigned to these warrants was $660,000 and
was estimated using the Black-Scholes valuation model.
In connection with the Series C Preferred Stock Private Placement, the
Company also issued warrants to purchase an aggregate of 140,000 shares of
Common Stock at an exercise price of $2.6125 per share to certain finders. Of
such warrants, warrants to purchase up to 70,000 shares are exerciseable through
February 4, 2000, with the remaining warrants being exercisable through February
4, 2002. The Company has also agreed to certain registration rights with respect
to these warrants.
On March 14, 1995, RMS acquired, for a cash purchase price of $4 million,
4,000,000 shares of common stock and an option to acquire up to 1,500,000 shares
of common stock, which option was execiseable at the following 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 at $2.50 per share. This option expired unexercised
on March 13, 1998. In addition, an option to purchase up to 1,000,000 shares of
common stock was granted by the Company to Francis J. Santangelo, which option
was exercisable, at $1.00 per share. This option was repriced as of March 11,
1998 to $0.78. 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.
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,
- ---------------------
1998 ......... $ 826,000
1999 ......... 10,719,000
2000 ......... 624,000
2001 ......... 592,000
2002 ......... 533,000
-----------
$13,294,000
===========
Rent and lease expense was $272,000, $222,000 and $85,000 for 1997, 1996
and 1995, respectively.
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 1997, 1996 or 1995.
F-16
THE NATIONAL REGISTRY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. GOING CONCERN
The accompanying financial statements have been prepared on a going
concern basis which contemplates the realization of assets and liquidation of
liabilities in the ordinary course of business. The Company incurred net
operating losses of $7,424,000, $7,340,000 and $5,070,000 in 1997, 1996 and
1995, respectively, and used approximately $6,479,000, $5,968,000 and
$4,335,000 of cash in operations in 1997, 1996 and 1995, respectively.
The Company is attempting to raise additional capital through various
means, which may include the issuance of equity and the development of
strategic relationships, to support its operations but, there is no assurance
that sufficient capital will be available to the Company.
Based on the foregoing factors, it is uncertain whether or not the Company
can generate adequate cash flows from operations, or from financing
transactions, to meet its obligations as they become due. In that event, the
Company would be required to seek other alternatives including sale, merger or
discontinuance of operations.
Subsequent to December 31, 1997, the Company entered into a $1.5 million
licensing agreement with XL Vision, Inc., which includes a certain number of
NRIdentity seat licenses and customization services. As of March 27, 1998 the
Company had received $1,250,000 from XL Vision. The remaining $250,000 is due in
April of 1998.
10. LITIGATION
The Company is currently the defendant in a lawsuit filed by IIG on
February 13, 1997. IIG has asserted multiple claims which include 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. The Company reached
a preliminary settlement with IIG on April 3, 1998. This settlement includes a
$300,000 cash payment, the issuance of 250,000 shares of the Company's Common
Stock and an option to purchase 150,000 shares of the Company's Common Stock at
an exercise price of $0.625, the closing price on April 3, 1998. The Company has
accrued approximately $450,000 for the settlement of the lawsuit as of December
31, 1997.
F-17
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
11 Calculation of Loss Per Share
27 Financial Data Schedule