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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission File No.: 001-15465
INTELLI-CHECK, INC.
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(Name of small business issuer as specified in its charter)
Delaware 11-3234779
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
246 Crossways Park West, Woodbury, New York 11797
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(address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 992-1900
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Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.001 par value
-----------------------------
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act: None
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 such 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 the 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. _____
Indicated by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes |_| No |X|
State the aggregate market value of the voting and non-voting stock held by
non-affiliates of the Issuer: $ 39,359,618 (based upon the closing price of
Issuer's Common Stock, $.001 par value, as of March 25, 2004).
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.
Common Stock, $.001 Par Value 10,155,118
----------------------------- ----------
(Title of Class) (No. of Shares Outstanding at March 25, 2004)
DOCUMENTS INCORPORATED BY REFERENCE: NONE
TABLE OF CONTENTS
PART I
1. Business 3
2. Description of Property 14
3. Legal Proceedings 14
4. Submission of Matters to a Vote of Security Holders 15
PART II
5. Market for Common Equity and Related Stockholder Matters 16
6. Selected Financial Data 17
7. Management's Discussion and Analysis 17
7a. Quantitative and Qualitative Disclosures About Market Risks 24
8. Financial Statements and Supplementary Data 24
9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure 24
9a. Controls and Procedures 24
PART III
10. Directors and Executive Officers 25
11. Executive Compensation 28
12. Security Ownership of Certain Beneficial Owners and Management 30
13. Certain Relationships and Related Transactions 31
14. Principal Accountant and Fees 32
15. Exhibits and Reports on Form 8-K 32
2
ITEM 1. BUSINESS
OVERVIEW
We were originally incorporated in the state of New York in 1994. In
August 1999, we reincorporated in Delaware. We have developed and are currently
marketing an advanced document verification system to enable a user to detect
altered and tampered identification cards and to address problems such as:
o COMMERCIAL FRAUD - which may lead to economic losses to
merchants from check cashing, debit and credit card and other
types of fraud such as identity theft which principally
utilizes fraudulent identification cards as proof of identity;
o UNAUTHORIZED ACCESS - by verifying identification, our systems
and software are designed to increase security and deter
terrorism at airports, shipping ports, rail and bus terminals,
military installations, high profile buildings and
infrastructure where security is a concern; and
o UNDERAGE ACCESS TO AGE RESTRICTED PRODUCTS AND SERVICES - by
verifying identification, our systems and software are
designed to determine the customer's age and validity of the
identification card to detect and prevent the use of
fraudulent identification for the purchase of alcohol, tobacco
and other age-restricted products and services and to reduce
the risk to the retailer of substantial monetary fines,
criminal penalties and the potential for license revocation
for sale of age-restricted products to minors.
o INEFFICIENCIES ASSOCIATED WITH MANUAL DATA ENTRY - by reading
encoded data contained in the bar code and magnetic stripe of
an identification card with a quick swipe or scan of the card,
where permitted by law, customers are capable of accurately
and instantaneously inputting information into forms,
applications and the like without the errors associated with
manual data entry.
OUR PRODUCTS AND SERVICES
ID-Check(TM) technology
Our patented ID-Check(TM) technology is our advanced document verification
software. ID-Check is contained in our ID- Check 1400 terminals, as well as
other software products, and is capable of reading in one swipe or scan the
encoded data contained on U.S. and Canadian driver licenses, state issued
identification cards and military IDs that, in most cases, comply with the
standards of the American Association of Motor Vehicle Administrators (AAMVA),
the American National Standards Institute (ANSI) and the International Standards
Organization (ISO).
C-Link(R) software
Our C-Link(R) software, which is our networkable data management software,
works in conjunction with the ID-Check terminal where permitted by law. It
allows the user to instantly view data for further verification and archives it
into a personal computer. C-Link(R) can be used on a stand alone personal
computer or network environment. It contains features such as alerts, watch
lists, and recurring entry.
ID-Check SDK
Our software product, ID-Check SDK, formerly called IDN-DLL is designed
for software developers that wish to incorporate ID-Check technology into their
applications, contains our proprietary technology, as well as a device
controller, and is capable of reading the smart chip contained in the military
common access card, or CAC. We currently have six license agreements executed
with third parties for integration and sub-licensing of our software
applications.
IDC-1400
The original product we designed and developed, the IDC-1400, is based on
our ID-Check(TM) technology. Effective as of July 2003, our manufacturer
discontinued manufacturing the IDC-1400 terminal. However, we are offering this
product for sale until current inventory is sold and we intend to replace it
with new software solutions compatible with the new data collection module, or
DCM that are capable of operating on multiple hardware platforms.
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NEW PRODUCTS AND SERVICES
ID-Check(R) PC and ID-Check(R) PDA.
Two new software solutions, ID-Check(R) PC and ID-Check(R) PDA, are
designed to replicate the features of ID-Check and to be platform-independent
and compatible with stationary and mobile hardware applications. ID-Check(R) PC
is designed to read the smart chip contained in the CAC. The ID-Check (R) PC
solution is ready to be introduced into the marketplace. The ID-Check (R) PDA
solution is currently in development.
Next Version of C-Link(R).
The next version of C-Link(R) will contain all of the features of the
current C-Link(R). It will be capable of functioning with either our IDC-1400
terminals or our data collection module (DCM), and will also be designed to read
the smart chip contained on the military CAC.
Data Collection Module.
ID-Check(R) PC, ID-Check(R) PDA and the next version of C-Link(R) are all
designed for use with our new data collection module, or DCM, a compact,
self-contained two-dimensional bar code and magnetic stripe reader. The DCM
enables our new software applications to be used on a variety of commercially
available data processing devices, including PDAs, Tablets, Laptops, Desktops
and Point-of-Sale Computers. As a result of these new product introductions, we
believe that our targeted markets will enjoy pricing efficiencies and more
flexible and versatile technology options, thereby negating the need to replace
the IDC-1400 platform.
UPGRADE CAPABILITY
Our software requires periodic updates as states and provinces that did
not previously conform to AAMVA standards begin to store electronically readable
information on their driver licenses and as states and provinces adjust or
modify the format of their electronically stored information. Our technology,
which can be used to instantly upgrade the terminal by simply scanning an
encrypted upgrade card through the ID Check terminal or downloading it from our
website through a personal computer is included in the purchase price of the
ID-Check terminal and our software solutions, ID-Check(R) PC and ID-Check(R)
PDA, for the first year after purchase. We have sold upgrade packages for the
period commencing after the first year of purchase. Each upgrade package is
designed to work only with a specific terminal, which is identified by a unique
serial number. We have developed a secure way of delivering upgrades through the
Internet for our IDC-1400 terminals.
BACKGROUND ON IDENTIFICATION DOCUMENTATION
Driver license
The driver license is the most widely used form of government issued photo
identification. We believe the driver license has become a de facto
identification card. In addition to its primary function, the driver license is
used to verify identity for social services, firearm sales, check cashing,
credit card use and other applications. There are approximately 228 million
driver licenses in circulation in the U.S. and Canada. Our technology can read
the data encoded on all licenses that in most cases comply with the
AAMVA/ANSI/ISO standards, which we believe is over 175 million of those issued
at the current time. Currently, forty-eight States, the District of Columbia,
and eight Canadian Provinces encode their licenses. We believe that the number
of readable licenses will continue to grow as the remaining two States and five
Canadian Provinces that have not yet encoded their license begin to encode and
jurisdictions that have recently begun to encode complete their rotations.
Non-driver identification card
Although many people do not have a driver license, many jurisdictions that
use American Association of Motor Vehicle Administrators (AAMVA) compliant
driver licenses offer other identification cards that may contain encoded
information. These identification cards, as well as military ID's, are
fundamentally identical to driver licenses. Because driver licenses are the most
widely used form of legally acceptable government documentation, we will refer
to all these types of legally acceptable governmental identification documents
as "driver licenses." Our ID-Check software is equally capable of performing its
function with all of these types of government identification.
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REGULATION OF RETAILERS OF TOBACCO PRODUCTS AND ALCOHOLIC BEVERAGES
In an effort to combat the problems of underage drinking and smoking, the
federal government and many states and Canadian provinces have enacted laws
requiring businesses that sell age-restricted products to verify the
identification cards of potential customers to determine that they are of legal
age to purchase these products. These laws impose stringent penalties for
violations. For example, new federal regulations have been enacted that place a
greater burden on retailers to prevent the sale of tobacco products to minors.
Clerks are required to check the photo ID of anyone trying to purchase tobacco
products who appears to be under the age of 27, and the retailer of alcoholic
products who sells to an underage person could face potential fines, suspension
of its license and the potential outright revocation of its license to sell
alcoholic beverages. Additionally, in states where enacted, dram shop laws allow
a person who is injured by any obviously intoxicated person to file a claim for
relief for fault against any person who knowingly sells alcoholic beverages to a
person less than 21 years of age. As a result of law enforcement efforts and
regulatory penalties, we believe retailers that sell alcohol and tobacco, such
as liquor stores, bars and convenience stores, are facing increasing pressure to
accurately verify the age of their customers.
CURRENT CHALLENGES ASSOCIATED WITH VERIFYING IDENTIFICATION DOCUMENTS
The high-tech revolution has created a major problem for those who rely on
identification documents. In an age where scanners, computers and color printers
are commonplace, fake ID's of the highest quality are easily obtainable from a
number of locations including college campuses and from thousands of sites on
the Internet. These fakes appear so real, even law enforcement agencies have
encountered difficulty distinguishing them from legally issued documents.
Additionally, these high-tech devices have the ability to easily alter properly
issued ID's. Therefore, anyone can gain access to a false identity that gives
them the ability, in a commercial transaction, to present fake and stolen credit
cards or checks that are supported by false identification. Additionally,
starting with only a fraudulent driver license, an individual may be able to
create multiple identities, commit fraud, buy age restricted products such as
alcohol and tobacco while underage, evade law enforcement and engage in other
criminal activities, such as:
o committing identity theft;
o improperly boarding airplanes;
o committing credit card, debit card and check cashing fraud;
o unlawfully obtaining welfare or other government benefits;
o committing refund fraud,
o committing pharmacy fraud, including false narcotic prescriptions,
o gaining entrance to high profile buildings and sensitive
infrastructures, such as nuclear facilities;
o illegally purchasing firearms;
o purchasing age restricted products such as alcohol and tobacco while
under age;
o committing employee fraud, including employee theft and payroll
theft; and
o engaging in medical fraud.
Given the ease with which identification can be falsified, simply looking
at a driver license may not be sufficient to verify age or identity and
determine whether or not it is fraudulent. Since merchants are facing
significant economic losses due to these frauds, what is needed is a document
verification system which can accurately read the electronically stored
information. We possess a patented software application technology that provides
an analysis of all the data contained on these documents by reading and
comparing the information encoded on the tracks of the magnetic stripe or bar
code on the driver license against known standards.
ID-CHECK SOLUTIONS AND BENEFITS
We believe that ID-Check and our family of software solutions contain the
most advanced, reliable and effective technology, which provides users with an
easy, reliable, and cost-effective method of document and age verification. We
have received encoding formats from most jurisdictions that conform to AAMVA
standards. This information, combined with our patented technology, enables the
ID Check software as well as our ID-Check(R) PC and ID-Check(R) PDA software to
read, decode and process the information electronically stored on driver
licenses. As jurisdictions and AAMVA change their documents and guidelines, we
believe our software, together with our programmable terminal, can be adapted to
these changes.
5
ID Check terminals do not require a connection to a central database to
operate, thus negating privacy concerns. Our terminals have the ability to
operate add-on peripherals such as printers, bar code scanners, fingerprint
readers and other devices. Additionally, our terminals and our new software
solutions utilizing our DCM can communicate with personal computers, which could
enhance the functionality of these products and potentially create the
opportunity for sales of other software products by us.
The ID Check process is quick, simple and easy to use. After matching the
(driver license) photograph to the person presenting the document for
identification, the user simply swipes the driver license through the ID-Check
terminal if the card has a magnetic stripe or scans it if it has a bar code. The
terminal quickly determines if the document:
o is valid;
o has been altered or tampered with;
o has expired; and
o has a date of birth equal to or greater than the legal age to
purchase age restricted products, such as alcohol and tobacco,
in the retailer's location.
Then, the terminal will automatically:
o respond to the user by displaying the results in words on the
terminal's screen;
o save information that is permissible by law to the terminal's
own memory;
o print a record of the transaction including the results on a
roll of paper similar to that used in cash registers, if an
optional printer has been installed; and
o send the results to a personal computer which has Microsoft
Windows 95/98/ME/NT/2000/XP ("PC") for permanent storage when
used in conjunction with our software, which simplifies record
keeping by downloading comprehensive ID-Check due diligence
data into a personal computer, where permitted by law. This
provides a merchant with secure back-up files that include
individual and cumulative transaction records.
STRATEGY
Our objective is to be a leading provider of identity verification
technology systems and software in the age verification, commercial fraud
protection and access control markets. Key elements of our strategy are as
follows:
Expand Marketing Relationships with Trade Associations and Public Interest
Groups. We are marketing our systems and software to members of The American
Association of Airport Executives (AAAE), the largest professional organization
for airports in the world, Credit Union National Association (CUNA), the premier
trade association for credit unions, and Mothers Against Drunk Driving (MADD),
one of the highest profile public interest groups. We intend to continue to
expand our relationships with trade associations and public interest groups that
can help expand our customer base.
Develop Additional Strategic Alliances with Providers of Security
Solutions. We have entered into strategic alliances with Bioscrypt Inc., Identix
Corporation, Ultra-Scan Inc., biometric companies; E-Certify, an information
security company; Lenel Systems International, a provider of integrated security
solutions; and Northrop Grumman Mission Systems, an integrator in the defense
industry, to utilize our systems and software as the proposed or potential
enrollment application for their technologies and to jointly market these
security applications. We believe these relationships will broaden our marketing
reach through their sales efforts and we intend to develop additional strategic
alliances with additional providers of security solutions.
Strengthen Sales and Marketing Efforts. We intend to capitalize on the
growth in demand for age and document verification by continuing to market and
support our systems and software. We have recently re-organized our sales and
marketing staff to better reach our targeted markets by dividing the United
States territory into three regions covered by a regional sales manager and by
appointing a director of strategic business development to concentrate on
developing partnerships and licensing arrangements, and a director of corporate
and government sales to concentrate on major commercial and government accounts.
6
Enter into Additional Licensing Agreements. We intend to continue to
license our software for use with a customer's system. We are currently
licensing our IDN-SDK and C-Link(R) software products for Windows and Windows CE
platforms and intend to similarly license our ID-Check(R) PC and ID-Check(R) PDA
software solutions. Our software is intended to be used with a compatible
hardware device. We have entered into six (6) licensing agreements to date.
Protect Intellectual Property. We intend to strongly protect our
intellectual property portfolio in order to preserve value and obtain favorable
settlements where warranted. For example, in February 2003, we filed suit
against CardCom, Inc. d/b/a CardCom Technology, Inc. claiming that CardCom had
infringed one of our patents. Subsequently, we entered into a patent licensing
agreement with CardCom effective March 2003 which provides for a non-exclusive
three year license in connection with the manufacture, use and sale of CardCom's
age verification products in the United States and Canada. We also have filed a
patent infringement lawsuit against Tricom Card Technologies, Inc. in July 2003.
OUR REVENUE SOURCES
We derive our revenue from the following sources:
o Sales of our systems by our own direct sales force and marketing
partners;
o Royalties and licensing fees from licensing our patented technology
to third parties;
o Revenue sharing and marketing arrangements through strategic
alliances and partnerships; and
o Sale of software upgrades and extended maintenance programs.
OUR TARGET MARKETS
The use of false identification cards, primarily driver licenses and
non-driver identification cards, to engage in commercial fraud, to gain access
to unauthorized areas and to gain entry to, or purchase products from,
establishments that sell age-restricted items, is prevalent. Given the ease with
which identification can be falsified, we believe that simply looking at a
driver's license may not be sufficient to verify age or identity and determine
whether or not such identification card is fraudulent. Since merchants are
facing significant economic losses due to these frauds, we believe that what
they need is a document verification system, which can accurately read the
electronically stored information. We target the markets that would most benefit
from our systems and software. Those target markets include:
Commercial fraud protection
- Banks and other financial institutions
- Credit unions
- Credit card issuers
- Check cashing services
- Pharmacies
- Auto dealerships and rental car agencies
- Casino cage operations
- Mass merchandisers and retailers
- Hospitals, medical facilities and health plans
- Lodging Industry
Access control
- Airports and airlines
- Departments of Motor Vehicles
- Prisons
- Law enforcement agencies
- Notable buildings
- Court houses
- Nuclear facilities
- Oil refineries and storage facilities
- Military establishments
- College Campuses
- Department of Homeland Security
- Bus, rail and port facilities
7
Age verification market
- Bars and night clubs
- Convenience stores
- Grocery chains
- Restaurants
- Stadiums and arenas
- Casinos and gaming establishments
- Sellers of sexually explicit material
- Firearm dealers
CURRENT CUSTOMERS
We have generated revenues from our customers from the sale of systems,
licensing of software and sale of software upgrades. The following
representative customers are using our systems and software for commercial fraud
protection:
o MGM Grand
o Caesar's Palace
o Foxwoods Resorts and Casino
o Comerica Bank
o The Cooperative Bank
o Mohegan Sun Resort Casino
The following representative customers are using our systems and software
for access control:
o JFK Airport in New York, O'Hare International Airport in
Chicago and Reagan National Airport in Washington DC
o American Stock Exchange
o Fort Sam Houston and Fort Hood
o New York, Vermont and Delaware Department of Motor Vehicles
o Port Authority of New York and New Jersey
o United States Supreme Court
The following representative customers are using our systems and software
for age verification:
o U.S. Smokeless Tobacco, Co.
o Sunoco
o Exxon/Mobil franchisees
o Darden Restaurants
o Houston's Restaurants
o Anton Airfoods, Inc.
MARKETING AND DISTRIBUTION
Our objective has been to become the leading developer and distributor of
document and age verification products. To date, our marketing efforts have been
through direct sales by our sales and marketing personnel, through resellers and
license agreements. We are marketing our age verification products through
direct marketing approaches such as targeted mailings, web seminars, a small
number of select trade shows and well known public interest and trade
associations, such as the Credit Unions of North America (CUNA), the American
Association of Airport Executives (AAAE) and Mothers Against Drunk Driving
(MADD).
We generate revenues from the sale or lease of ID-Check terminals, the
sale of C-Link(R) software, the sale and licensing of our patented software to
third parties, annual jurisdictional upgrades and from our software and hardware
warranty programs. We also expect to generate revenues from various new software
solutions.
Our patented ID-Check software is Microsoft Certified and can run on a
variety of Windows and Windows CE platforms in addition to devices such as
credit card terminals. We plan to market our newly introduced ID-Check(R) PC and
ID-Check(R) PDA solutions to the government, airlines, airports, high profile
buildings and high profile buildings or infrastructure, mass merchandisers,
grocery, convenience and pharmacy chains, casinos and banks. The ID-Check reader
known as the DCM (data capture module) has a "bundled with software" suggested
retail price of approximately $1,100.00. Our self-contained or stand alone
offering, the model 1400 has a suggested retail price of approximately
$2,000.00, including our Q-Link or C-Link software and upgrades for the first
year after purchase.
8
We have developed a comprehensive marketing plan to build customer awareness and
develop brand recognition in our target markets. We promote the advantages and
ease of use of our products through:
o Endorsements by nationally known public interest groups and
trade associations;
o Trade publications;
o Trade shows;
o Direct mail;
o Web seminars, as well as our own website;
o Various conventions and industry specific seminars.
As we gain market acceptance for our ID-Check technology, we intend to develop
and market other related software applications.
We further intend to add qualified "value added" remarketers that are
capable of reaching smaller customers. We believe this represents the most
cost-effective way to reach numerous "mom and pop" establishments in North
America involved in the sale of age restricted products. Furthermore, in order
to broaden our sales "reach" into existing and new markets, we will continue to
enter into selective agreements with proven application solution providers,
system integrators, resellers and independent sales representatives. Basically,
we are in the process of revamping our entire distribution network to provide us
with greater effectiveness.
COMPETITION
We compete in a market that is relatively new, intensely competitive, and
rapidly changing. Unless a device can read, decode and analyze all of the
information legally permitted to be analyzed which is electronically stored on a
driver license, the user may not obtain accurate and reliable confirmation that
a driver license is valid and has not been altered or tampered with. We are
aware of several companies, including Card Com, Tri Com Technologies, Positive
Access, ID Logix and Legal Age that are currently offering products that
electronically read and calculate age from a driver license. We have tested and
compared some of these products to ID-Check and believe that our product is
superior in quality and functionality. We believe that units, which cannot read
barcodes, are at a significant disadvantage because thirty-eight (38) states and
four (4) Canadian provinces currently utilize barcodes to encode their driver
licenses, in addition to all U.S. military ID's and uniformed services cards. In
addition, some of these other product cannot connect to a personal computer or
use a printer.
We have experienced and expect to continue to experience increased
competition in the age verification market, and have experienced limited
competition from companies in the document verification market. Many of these
companies, particularly in the document verification market, have greater name
recognition, longer operating histories, and significantly greater financial,
technical, marketing, public relations, sales, distribution and other resources.
If any of the Company's competitors were to become the industry standard or were
to enter into or expand relationships with significantly larger companies
through mergers, acquisitions or otherwise, our business and operating results
could be seriously harmed. In addition, potential competitors may bundle their
products or incorporate functionality into existing products in a manner that
discourages users from purchasing our products.
MANUFACTURING
In January 2004, we entered into a two year product supply agreement for
the purchase of input devices and have agreed to a minimum purchase of units
totaling approximately $120,000. These devices, which were private labeled, are
programmed to work in conjunction with our ID-Check(TM) technology.
Until July 2003, our ID-Check hardware terminals were developed and
manufactured by Hand Held Products (HHP), formerly Welch Allyn, Inc. Our
agreement with HHP was terminated in July 2003 due to their decision to
discontinue the manufacture of the IDC-1400 model.
9
INTELLECTUAL PROPERTY
In January 1999, the U.S. Patent and Trademark Office granted us a patent
on our ID-Check software technology. In October 2002, we were granted another
patent relating to our document authentication and age verification technology.
At present, we have another patent application pending in the U.S. Patent and
Trademark Office. These patents cover commercially important aspects of our
capabilities relating to the authentication of a document, such as a driver's
license, along with the verification of the age of an individual associated with
that document. Upon our acquisition of the assets of IDentiScan, we also
received equitable ownership and sole ownership rights to intellectual property,
including other patents and patent applications relating to age verification
technology.
We have also been granted multiple copyrights in the United States, which
are effective in Canada and in other major industrial countries. In addition,
the copyright protection covers software source codes and supporting graphics
relating to the operation of ID-Check and other software products. We also have
several trademarks relating to our company, its product names and logos.
In connection with the sales or licensing of our intellectual property, we
have entered into an agreement with Mr. Kevin Messina, our former Senior
Executive V.P. and Chief Technology Officer, under which we will pay royalties
equal to 0.005% of gross sales from $2,000,000 to $52,000,000 and 0.0025% of
gross sales, in excess of $52,000,000. As of December 31, 2003, total fees
payable under this agreement amounted to $94.
EMPLOYEES
As of March 25, 2004, we had twenty-six full-time employees and one
part-time employee. Four are engaged in executive management, thirteen in
information technology, seven in sales and marketing and three in
administration. We believe our relations with our employees are generally good
and we have no collective bargaining agreements with any labor unions.
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RISK FACTORS
RISKS RELATED TO OUR BUSINESS AND INDUSTRY
WE HAVE INCURRED LOSSES SINCE INCEPTION AND LOSSES MAY CONTINUE, WHICH COULD
RESULT IN A DECLINE IN THE VALUE OF OUR SECURITIES AND A LOSS OF YOUR
INVESTMENT.
We sustained net losses of $5,550,234 and $6,450,943 for the fiscal years
ended December 31, 2002 and December 31, 2003, respectively. We expect to incur
additional expenditures in line with the sales growth of our business. We cannot
assure you that we will achieve operating profits in the future.
WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS.
Our capital requirements have been and will continue to be significant. In
the event that we do not generate meaningful revenue, we would need to raise
additional capital. If we are unable to raise additional capital, we plan to
implement cost saving measures to sustain business activities on a reduced
level. Unplanned acquisition and development opportunities and other
contingencies may arise, which could require us to raise additional capital. If
we raise additional capital through the sale of equity, including preferred
stock, or convertible debt securities, the percentage ownership of our then
existing stockholders will be diluted.
We currently do not have a credit facility or any commitments for
additional financing. We cannot be certain that additional financing, should it
be needed, will be available when and to the extent required. If adequate funds
are not available on acceptable terms, we may be unable to fund our expansion,
develop or enhance our products, or respond to competitive pressures. Such
limitation could have a material adverse effect on our business, financial
condition and results of operations.
WE MAY NOT BE ABLE TO KEEP UP WITH RAPID TECHNOLOGICAL CHANGE. ADVANCES IN
HARDWARE TECHNOLOGY BEFORE WE SELL OUR EXISTING INVENTORY COULD CAUSE US TO TAKE
AN ADJUSTMENT AGAINST INVENTORY.
Our market is characterized by frequent new product announcements and
rapid advancements in hardware technology. Significant technological change
could render our existing technology obsolete. If we are unable to successfully
respond to these developments, or do not respond in a cost-effective way, our
business, financial condition and results of operations will be materially
adversely affected. Furthermore, our inventory consists primarily of ID-Check
System terminals that run our patented software on the IDC-1400 hardware
platform. We periodically evaluate the current market value of our inventory,
taking into account any technological obsolescence that may occur due to
advances in hardware technology and the acceptance of the product in the
marketplace. We determined that an inventory reserve of $990,000 was an
appropriate adjustment to our results of operations for the year ended December
31, 2003. Should we determine in a future period that an adjustment to market
value of the inventory is necessary, we would record such adjustment at that
time, which could have a material adverse effect on our results of operations.
OUR PROPRIETARY SOFTWARE RELIES ON REFERENCE DATA PROVIDED BY GOVERNMENT AND
QUASI-GOVERNMENT AGENCIES. IF THESE GOVERNMENTAL AND QUASI-GOVERNMENT AGENCIES
WERE TO STOP SHARING DATA WITH US, THE UTILITY OF OUR PROPRIETARY SOFTWARE WOULD
BE DIMINISHED IN THOSE JURISDICTIONS AND OUR BUSINESS WOULD BE DAMAGED.
Currently, forty-eight (48) states, eight (8) Canadian provinces and the
District of Columbia, which conform to the guidelines established by certain
organizations responsible for implementing industry standards, cooperate with us
by providing sample identification cards so that we may modify the ID-Check
System terminal and other software products to read and analyze the encoded
information found on such jurisdiction's identification cards. We cannot assure
you that each of these jurisdictions will continue to cooperate with us. In the
event that one or more of these jurisdictions do not continue to provide this
reference data, the utility of our proprietary software may be diminished in
those jurisdictions.
FUTURE GOVERNMENT REGULATION RESTRICTING THE CAPTURE OF INFORMATION
ELECTRONICALLY STORED ON IDENTIFICATION CARDS COULD ADVERSELY AFFECT OUR
BUSINESS.
Our proprietary software products are designed to read and capture
information from identification cards. Currently, those customers located in New
Hampshire, North Carolina and Texas are legally restricted from using this
information for their own use without customer consent. Because issues of
personal privacy continue to be a major topic of public policy debate, it is
possible that in the future additional customers in these and other
jurisdictions may be restricted from capturing this information. Therefore, the
implementation of unfavorable regulations or unfavorable interpretations of
existing regulations by courts or regulatory bodies could require us to incur
significant compliance costs, cause the development of the affected markets to
become impractical and otherwise adversely affect our business, financial
condition and results of operations.
11
OUR REFOCUSED BUSINESS STRATEGY EXPOSES US TO LONG SALES AND IMPLEMENTATION
CYCLES FOR OUR PRODUCTS.
Our target customers in the commercial fraud protection, access control
and age verification markets include large retailers and government agencies,
which typically require longer sales and implementation cycles for our products
than do our potential customer base solely interested in age verification, such
as restaurant, bar and convenience store operators. The longer sales and
implementation cycles for larger retail companies continue to have an adverse,
impact on the timing of realizing our revenues. In addition, budgetary
constraints and economic slowdowns may also continue to delay purchasing
decisions by these prospective customers. These initiatives have costs
associated with them, and we cannot assure you that they ultimately will prove
successful or result in, an increase to, our revenues or profitability.
In addition, the loss or significant reduction in government spending by
government entities could materially limit our ability to obtain government
contracts. These limitations, if significant, could also have a material adverse
effect on our business, financial condition and results of operations. In
addition, we will need to develop additional strategic relationships with large
government contractors in order to successfully compete for government
contracts. Our inability to develop these strategic relationships may limit our
ability to implement our business strategy.
THE MARKET FOR OUR SYSTEMS AND SOFTWARE IS EVOLVING AND ITS GROWTH IS UNCERTAIN.
Demand and market acceptance for recently introduced and existing systems
and software and sales from such systems and software, are subject to a high
level of uncertainty and risk. Our business may suffer if the market develops
more slowly than anticipated and does not sustain market acceptance.
FAILURE TO MANAGE OUR OPERATIONS IF THEY EXPAND COULD IMPAIR OUR FUTURE GROWTH.
If we are able to expand our operations, particularly through multiple
sales to large retailers and government agencies in the document verification
market, the expansion will place significant strain on our management, financial
controls, operating systems, personnel and other resources. Our ability to
manage future growth, should it occur, will depend to a large extent upon
several factors, including our ability to do the following:
o build and train our sales force;
o establish and maintain relationships with distributors;
o develop customer support systems;
o develop expanded internal management and financial controls adequate
to keep pace with growth in personnel and sales, if they occur; and
o manage the use of third-party manufacturers and suppliers.
If we are able to grow our business but do not manage our growth successfully,
we may experience increased operating expenses, loss of customers, distributors
or suppliers and declining or slowed growth of revenues.
WE ARE SUBJECT TO RISKS ASSOCIATED WITH PRODUCT FAILURE AND TECHNOLOGICAL FLAWS.
Products as complex as those offered by us may contain undetected errors
or result in failures when first introduced or when new versions are released.
Despite vigorous product testing efforts and testing by current and potential
customers, it is possible that errors will be found in a new product or
enhancement after commencement of commercial shipments. The occurrence of
product defects or errors could result in adverse publicity, delay in product
introduction, diversion of resources to remedy defects, loss, of or a delay in
market acceptance, claims by customers against us, or could cause us to incur
additional costs, any of which could adversely affect our business.
12
OUR FAILURE TO PROTECT OUR PROPRIETARY TECHNOLOGY MAY IMPAIR OUR COMPETITIVE
POSITION.
We continue to allocate significant resources to develop new and
innovative technologies which we utilize in our products and systems. We
consider such allocation to be fundamental to our continued success as such
success depends, to a significant degree, upon our ability to provide products
and systems that provide superior functionality and performance compared to
those of our competitors. Accordingly, we must protect our technology from
unauthorized use. This is done by processes aimed at identifying and seeking
appropriate protection for newly developed intellectual property, i.e., patents,
trade, secrets, copyrights and trademarks, as well as policies aimed at
identifying unauthorized use of such property in the marketplace. These
processes include:
o contractual arrangements providing for non-disclosure of proprietary
information;
o maintaining and enforcing issued patents and filing patent
applications on innovative solutions to commercially important
problems;
o protecting our trade secrets;
o protecting our copyrights and trademarks by registration and other
appropriate means,
o establishing internal processes for identifying and appropriately
protecting new and innovative technologies; and
o establishing practices for identifying unauthorized use of our
intellectual property.
While we actively protect our intellectual property, it does not follow
that others will not intentionally or innocently use such intellectual property.
Accordingly, at times we may be required to bring legal proceedings to preclude
such unauthorized use. We are mindful that such measures can be costly and
timing consuming and we undertake such measures only as a last resort.
These policies and practices with respect to our intellectual property
rights do not prevent our competitors from independently developing products
similar or superior to our products and technologies. It merely protects our
property rights created as a result of our allocating significant portions of
our technical and monetary resources. Further, an inability or failure to
protect this property could have a material adverse effect on our future
business and financial condition.
IF OUR FUTURE PRODUCTS INCORPORATE TECHNOLOGIES THAT INFRINGE THE PROPRIETARY
RIGHTS OF THIRD PARTIES, AND WE DO NOT SECURE LICENSES FROM THEM, WE COULD BE
LIABLE FOR SUBSTANTIAL DAMAGES.
We are not aware that our current products infringe the intellectual
property rights of any third parties. We also are not aware of any third party
intellectual property rights that may hamper our ability to provide future
products and services. However, we recognize that the development of our
services or products may require that we acquire intellectual property licenses
from third parties so as to avoid infringement of those parties intellectual
property rights. These licenses may not be available at all or may only be
available on terms that are not commercially reasonable. We recognize that third
parties could make infringement claims against us which, whether or not they are
upheld, could have a negative impact on our business and financial condition,
by:
o consuming substantial time and financial resources;
o diverting the attention of management from growing our business and
managing operations; and
o disrupting product sales and shipments.
If any third party prevails in an action against us for infringement of
its proprietary rights, we could be required to pay damages and either enter
into costly licensing arrangements or redesign our products so as to exclude any
infringing use. As a result, we would incur substantial costs, delays in product
development, sales and shipments, our revenues may decline substantially and we
may not be able to achieve the minimum, necessary growth for our continued
success.
FAILURE TO ATTRACT AND RETAIN MANAGEMENT AND OTHER PERSONNEL MAY DAMAGE OUR
OPERATIONS AND FINANCIAL RESULTS AND CAUSE OUR STOCK PRICE TO DECLINE.
We depend to a significant degree on the skills, experience and efforts of
our executive officers and other key management, technical, finance, sales and
other personnel. Our failure to attract, integrate, motivate and retain existing
or additional personnel could disrupt or otherwise harm our operations and
financial results. Although we have employment agreements with each of Frank
Mandelbaum, our Chairman and Chief Executive Officer, and Edwin Winiarz, our
Senior Vice President - Treasurer and Chief Financial Officer, securing their
employment until December 31, 2004, we do not carry key man life insurance
policies covering any employees. The loss of services of certain of our key
employees, an inability to attract or retain qualified personnel in the future,
or delays in hiring additional personnel could delay the development of our
business and could have a material adverse effect on our business, financial
condition, and results of operations.
13
CHANGES IN ACCOUNTING STANDARDS OR OUR ACCOUNTING POLICY RELATING TO STOCK-BASED
COMPENSATION MAY NEGATIVELY AFFECT OUR OPERATING RESULTS.
We currently are not required to record stock-based compensation charges
if the employee's stock option exercise price equals or exceeds the deemed fair
value of our common stock at the date of grant and the award has not been
modified. However, several companies have recently elected to change their
accounting policies and begun to record the fair value of stock options as an
expense. In addition, we understand that discussions of potential changes to
applicable accounting standards are ongoing. If the standards for accounting for
stock-based compensation change, or if we elect to change our accounting policy,
then the amount of our operating expenses could increase and our operating
results could be adversely affected.
OUR SHARE PRICE MAY BE VOLATILE AND COULD DECLINE SUBSTANTIALLY
The market price of our common stock, like the price of shares of
technology companies generally, has been and may continue to be volatile. From
January 1, 2002 to March 24, 2004, the closing bid price of our common stock has
varied from a high of $19.45 to a low of $2.10 per share, as reported on the
American Stock Exchange. Many factors may cause the market price for our common
stock to decline, including:
o shortfalls in revenues, cash flows or continued losses from
operations;
o conversions of preferred stock into common stock; delays in
development or roll-out of any of our products;
o announcements by one or more competitors of new product acquisitions
or technological innovations; and
o unfavorable outcomes from outstanding litigation.
In addition, the stock market experiences extreme fluctuations in price
and volume that particularly affect the market price of shares of emerging
technology companies, such as ours. These price and volume fluctuations are
often unrelated or disproportionate to the operating performance of the affected
companies. Because of this volatility, we may fail to meet the expectations of
our shareholders or of securities analysts and our stock price could decline as
a result. Declines in our stock price for any reason, as well as broad-based
market fluctuations or fluctuations related to our financial results or other
developments, may adversely affect your ability to sell your shares at a price
equal to or above the price at which you purchased them. Decreases in the price
of our common stock may also lead to de-listing of our common stock.
RISKS RELATED TO ARTHUR ANDERSEN LLP
THE ABSENCE OF ARTHUR ANDERSEN LLP'S CONSENT TO THE USE OF ITS OPINION MAY LIMIT
THE REMEDIES AVAILABLE TO STOCKHOLDERS.
Our inability to obtain Arthur Andersen LLP's consent to the use of its
opinion for our financial statements for the 2001 year and the absence of a
signed opinion may limit the remedies available to you since your claims against
Arthur Andersen LLP under the Securities Act of 1933, as amended, based on these
financial statements may be limited. Moreover, even if claims against Arthur
Andersen LLP are permitted, Arthur Andersen LLP may not have the financial
resources to satisfy any judgment. In addition, notwithstanding that we have not
filed the written consent of Arthur Andersen, LLP, our directors and officers
may still be able to establish a due diligence defense to any claim relating to
those financial statements on the basis that they were made on the authority of
our expert which could limit your ability to assert a claim against them.
ITEM 2. DESCRIPTION OF PROPERTY
Our executive offices are currently located in Woodbury, New York, where
we occupy approximately 9,700 square feet of leased space pursuant to a lease
expiring on December 31, 2010. In March 2002, we signed a two year lease in
Connecticut to operate our IDentiScan division, which expired on March 1, 2004.
Payments under these leases were $208,100 for 2001, $242,083 for 2002, $252,386
for 2003 and will be $1,884,640 for the remaining years of the leases.
ITEM 3. LEGAL PROCEEDINGS
A class action lawsuit was filed in October 2001 on behalf of
short-sellers of our stock, who allegedly suffered losses because of the rise in
the price of our stock, in the United States District Court for New Jersey. The
class action suit was amended in November 2001 and became an individual action.
In July 2002, we filed a motion to dismiss the lawsuit. In July 2003 the court
granted our motion to dismiss the lawsuit. However, it did allow the Plaintiff
to replead some of the claims. The Plaintiff had filed an amended complaint
pertaining to certain of the pleadings. In December 2003, the Company agreed to
a settlement with the Plaintiff and the Plaintiff withdrew their amended lawsuit
with prejudice. The settlement did not affect our results of operations, balance
sheet or financial condition.
14
A demand for arbitration was brought by Early Bird Capital Inc. in January
2002, seeking issuance of warrants with registration rights pursuant to the
terms of a Financial Advisory and Investment Banking Agreement dated in August
2000. On April 9, 2003, we received notification from the American Arbitration
Association that it had awarded Early Bird Capital $921,730 on the settlement of
their demand for arbitration. We had filed with the New York State Supreme Court
an application for setting aside the confirmation of the award. On October 14,
2003, the court confirmed the award with interest at a rate of 9% per annum
beginning April 9, 2003. We recorded a charge of $921,730 in our Statements of
Operations for the three month period ending March 31, 2003. We secured a one
year letter of credit for the full amount of the charge along with interest
totaling $1,004,686 until April 9, 2004 in the form of a certificate of deposit.
On March 8, 2004, we paid $950,000 to Early Bird Capital as full settlement in
this matter.
On August 1, 2003, we filed a summons and complaint against TriCom Card
Technologies, Inc. alleging infringement on our patent and seeking injunctive
and monetary relief. On October 23, 2003, we amended our complaint to include
infringement on an additional patent.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of our fiscal year ended December 31, 2003 there
were no matters submitted to a vote of security holders.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Our common stock is traded on the American Stock Exchange under the
symbol "IDN." The following table indicates high and low sales quotations for
the periods indicated based upon information supplied by AMEX.
LOW HIGH
--- ----
2002
First Quarter $11.30 $18.19
Second Quarter $4.85 $15.75
Third Quarter $2.10 $5.90
Fourth Quarter $2.90 $9.87
2003
First Quarter $6.35 $8.44
Second Quarter $5.80 $7.66
Third Quarter $6.70 $11.85
Fourth Quarter $6.30 $7.32
2004
January $7.00 $8.00
February $6.52 $7.32
March (March 1 through March 25) $3.90 $6.71
(b) Number of Holders of Common Stock. The number of holders of record of
our Common Stock on March 25, 2004 was 64, which does not include individual
participants in security position listings.
(c) Dividends. There were no cash dividends or other cash distributions
made by us during the fiscal year ended December 31, 2003. Future dividend
policy will be determined by our Board of Directors based on our earnings,
financial condition, capital requirements and other then existing conditions. It
is anticipated that cash dividends will not be paid to the holders of our common
stock in the foreseeable future.
(d) Recent Sales of Unregistered Securities
On March 27, 2003, pursuant to a Securities Purchase Agreement, we sold
30,000 shares of our Series A 8% Convertible Redeemable Preferred Stock, par
value $.01 per share, for $3,000,000 before expenses to Gryphon Master Fund,
L.P. Each share of Preferred Stock entitled the holder to receive dividends of
8% per annum and is currently convertible into 15.1515 shares of our common
stock for a total of 454,545 shares of common stock. Additionally, the investors
were issued five year warrants to purchase 113,636 shares of common stock at an
exercise price of $6.78. Dividend payments of $120,000 in cash are due
semi-annually beginning September 30, 2003 and, accordingly, we paid $122,958 on
September 30, 2003. In connection with this financing, we paid agent fees of
$150,000 and issued warrants and options to purchase 8,854 shares of common
stock at a price of $6.78. Shares of Preferred Stock are convertible at the
option of Gryphon Master Fund, L.P at any time prior to redemption. We may
redeem any or all of the Preferred Stock at any time after one year from the
closing date at a cash redemption price of $100 per share, providing the volume
weighted average price of our Common Stock for 20 out of 30 consecutive trading
days exceeds $13.20 per share. We must redeem all of the Preferred Stock
outstanding on the fifth anniversary of the closing date at a redemption price,
in cash, equal to the purchase price of the Preferred Stock. A registration
statement covering the common stock issuable upon conversion of the preferred
stock and exercise of the warrants was declared effective in June 2003.
16
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data presented under the captions
"Statement of Operations Data" and "Balance Sheet Data" as of the end of each of
the five years ended December 31, 2003, are derived from the financial
statements of Intelli-Check, Inc. The financial statements for fiscal years
ended December 31, 1999 through December 31, 2001 were audited by Arthur
Andersen LLP, independent public accountants and the financial statements for
the fiscal years ended December 31, 2002 and 2003 have been audited by Grant
Thornton, LLP independent certified public accountants. The selected financial
data should be read in conjunction with the financial statements as of December
31, 2003 and 2002 and for each of the three years in the period ended December
31, 2003, the accompanying notes and the report of independent public
accountants thereon, which are included elsewhere in this Form 10-K.
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------
1999 2000 2001 2002 2003
------- ------- ------- ------- -------
(In thousands)
STATEMENT OF OPERATIONS DATA:
Revenue $ 29 $ 343 $ 886 $ 1,139 $ 1,236
Loss from operations (2,263) (3,379) (4,090) (5,936) (5,537)
Net Loss (2,299) (3,133) (3,963) (5,550) (6,451)
Net loss per common share - basic and
diluted (0.45) (0.47) (0.52) (0.64) (0.74)
Common shares used in computing per share
amounts - basic and diluted 5,080 6,648 7,911 8,686 9,218
AS OF DECEMBER 31,
-----------------------------------------------------------
1999 2000 2001 2002 2003
------- ------- ------- ------- -------
(In thousands)
BALANCE SHEET DATA:
Cash and cash equivalents 6,381 4,092 4,061 1,911 3,307
Working capital 6,038 5,920 5,303 2,634 8,350
Total assets 7,208 7,940 8,423 5,415 10,732
Stockholders equity 6,325 6,633 7,030 3,873 6,901
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Our company was formed in 1994 to address a growing need for a reliable
document and age verification system to detect fraudulent driver licenses and
other widely accepted forms of government-issued identification documents. Our
sales through September 30, 2000 were minimal since through 1998 we had
previously produced only a limited pre-production run of our product for testing
and market acceptance. In late 1999, we received a limited number of ID-Check
terminals, which were then available for sale. Shortly thereafter, these
terminals were returned to the manufacturer to be upgraded to contain an
advanced imager/scanner, which allowed our software to read the encoding at that
time on over 50 jurisdictions as opposed to 32 jurisdictions on the original
scanner. During the fourth quarter of 2000, we experienced a material increase
in sales as a result of product availability and entering into marketing and
distributor agreements with resellers. During 2001 and through the quarter ended
September 30, 2003, sales were limited due to the refocus of our marketing
efforts towards larger customers in the retail market, in which the sales cycle
normally requires an extended time frame to allow for multiple meetings,
presentations and a test period. We believe that during these periods this sales
cycle was further extended by the then downturn in the economy, whereby
decisions for capital expenditures were delayed. However, after the tragic
events that occurred on September 11, 2001, we believe there has been a
significant increase in awareness of our technology to help improve security
across many industries, including airlines, rail transportation and high profile
buildings and facilities, which we believe should enhance future demand for our
technology. We have also begun to market to various government and state
agencies, which have long sales cycles including extended test periods. Since
inception, we have incurred significant losses and negative cash flow from
operating activities and, as of December 31, 2003, we had an accumulated deficit
of $27,019,110. We will continue to fund operating and capital expenditures from
proceeds that we received from our recent financing and our secondary offering.
In view of the rapidly evolving nature of our business and our limited operating
history, we believe that period-to-period comparisons of revenues and operating
results are not necessarily meaningful and should not be relied upon as
indications of future performance.
17
Our ID-Check's unique technology that provides the ability to verify the
validity of military ID's, driver licenses and state issued non-driver ID cards
that contain magnetic stripes or bar codes that conform to AAMVA/ANSI/ISO
standards, enables us to target three distinct markets. The original target
market was focused on resellers of age-restricted products, such as alcohol and
tobacco, where the proliferation of high-tech fake IDs expose merchants to fines
and penalties for the inadvertent sale of these products to underage purchasers.
We now target commercial fraud, which includes identity theft and our technology
is designed to help prevent losses from these frauds. We believe that the tragic
events that occurred on September 11, 2001 have created increased awareness of
our technology in security applications involving access control. As a result of
its applicability in these markets, we have sold our products to some of the
largest companies in the gaming industry, a state port authority, military
establishments, airports, nuclear power plants and high profile buildings and
have successfully completed tests of our technology in one of the largest mass
merchandisers in the United States and a large quasi-government department. We
currently are testing our products with some large public companies and in
several locations in a large population State. We have entered into strategic
alliances with Bioscrypt Inc., Identix Corporation and Ultra-Scan Inc.,
biometric companies; E-Certify, an information security company; Lenel Systems
International, a provider of integrated security solutions; and Northrop Grumman
Mission Systems, an integrator in the defense industry, to utilize our systems
and software as the proposed or potential enrollment application for their
technologies and to jointly market these security applications. In addition, we
have recently executed agreements with some high profile organizations to
promote the use of our technology and our products, such as Credit Union
National Association (CUNA), Mothers Against Drunk Driving (MADD) and the
American Association of Airport Executives (AAAE). We believe these
relationships have broadened our marketing reach through their sales efforts and
we intend to develop additional strategic alliances with additional high profile
organizations and providers of security solutions.
We have developed additional software products that utilize our patented
software technology. Our newly introduced software solutions, ID-Check(R) PC and
ID-Check(R) PDA, which replicate the features of ID-Check, are designed to be
platform-independent and compatible with both stationary and mobile hardware
applications. Another new application is the next version of C-Link(R), the
company's net workable data management software. Additionally, ID-Check(R) PC
and the next release of C-Link are designed to read the smart chip contained on
the military Common Access Card (CAC). These products are all designed for use
with Intelli-Check's new (DCM), a compact, self-contained two-dimensional bar
code and magnetic stripe reader. The DCM enables the new software applications
to be used on a variety of commercially available data processing devices,
including PDAs, Tablets, Laptops, Desktops and Point-of-Sale Computers,
therefore negating the need to replace the IDC-1400 platform. Our C-Link(R)
software product, which runs on a personal computer and was created to work in
conjunction with the ID-Check unit allows a user to instantly view the encoded
data for further verification, to analyze the data and to generate various
reports where permitted by law. To date, we have entered into five licensing
agreements and are in discussions with additional companies to license our
software to be utilized within other existing systems. The revenue received from
such licensing agreements has not been significant through the period ended
December 31, 2003.
CRITICAL ACCOUNTING POLICIES AND THE USE OF ESTIMATES
The preparation of our financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported in
our financial statements and accompanying notes. Actual results could differ
materially from those estimates.
We believe that there are several accounting policies that are critical to
understanding our historical and future performance, as these policies affect
the reported amounts of revenue and the more significant areas involving
management's judgments and estimates. These significant accounting policies
relate to revenue recognition, valuation of inventory and commitments and
contingencies. These policies and our procedures related to these policies are
described in detail below.
REVENUE RECOGNITION
We sell our products directly through our sales force and through
distributors. Revenue from direct sales of our product is recognized upon
shipment to the customer and when title has passed. Our product requires
continuing service or post contract customer support and performance by us;
accordingly, a portion of the revenue pertaining to the service and support is
deferred based on its fair value and recognized ratably over the period in which
the future service, support and performance are provided, which is generally one
year. Currently, with respect to sales to distributors and sales of our
IDentiScan products which we have now discontinued, we do not yet have enough
experience to identify the fair value of each element. Therefore, the full
amount of revenue and related gross margin is deferred and recognized ratably
over the one-year period in which the future service, support and performance
will be provided.
18
During the third quarter of fiscal 2002, we began recognizing sales from
the licensing of our technology to customers. Our licensing products require
continuing service or post contract customer support and performance by us;
accordingly, a portion of the revenue is deferred based on its fair value and
recognized ratably over the period in which the future service, support and
performance are provided, which is generally one year.
During the second quarter of fiscal 2003, we began receiving royalties
from licensing our technology. We will recognize these payments as revenues in
the period they are earned.
INVENTORY VALUATION
Our inventory consists primarily of our ID-Check terminals that run our
patented software. We acquired such inventory in December 1999 and, shortly
thereafter; it was returned to the manufacturer for upgrade and became available
for sale in the fourth quarter of 2000. We periodically evaluate the current
market value of our inventory, taking into account any technological
obsolescence that may occur due to changes in hardware technology and the
acceptance of the product in the marketplace. Even though we have had limited
sales to date, we believe that a sufficient market exists to sell our current
inventory, with margin, over a period of time. We had reserved during the fourth
quarter of 2002 our previously paid deposit of $600,000 towards the purchase of
units that would have been available to be purchased had the outstanding
purchase order not terminated with our manufacturer. Based on ongoing evaluation
of our inventory, we recorded an inventory write down of $990,000 during 2003.
Should we determine in a future period that an adjustment to market value of the
inventory is necessary, we would record such adjustment at that time, which
could have a material adverse effect on our results of operations. The current
terminal is fully capable of running our patented software as it utilizes a
state-of-the-art imager/scanner and magnetic stripe reader.
The above listing is not intended to be a comprehensive list of all of our
accounting policies. In many cases, the accounting treatment of a particular
transaction is specifically dictated by generally accepted accounting
principles, with no need for management's judgment in their application. There
are also areas in which management's judgment in selecting any available
alternative would not produce a materially different result.
RESULTS OF OPERATIONS
COMPARISON OF THE YEAR ENDED DECEMBER 31, 2003 TO THE YEAR ENDED DECEMBER 31,
2002.
REVENUE. Revenue increased $97,024 from $1,138,587 for the year ended
December 31, 2002 to $1,235,611 for the year ended December 31, 2003. Revenues
for the period ended December 31, 2003 consisted of revenue from distributors of
$290,022, revenues from direct sales to customers of $880,423 and royalty income
of $65,165. Sales, which represent shipments of products and contracted
services, decreased 11.7% from $1,326,829 for the year ended December 31, 2002
to $1,172,056 for the year ended December 31, 2003. This slow growth is
primarily as a result of our change in focus to market to large commercial
customers and government agencies which require an extended sales cycle rather
than to smaller customers. This refocus of our marketing efforts will continue
to impact our sales as a result of the extended time frame associated with these
sales cycles. We believe that based upon the results of certain of our recent
marketing tests, recent marketing agreements, the introduction of additional
products in 2004 as well as legislative efforts to enhance security, these
events should result in increased sales opportunities.
GROSS PROFIT. Gross profit, excluding an inventory write down of $990,000,
would have increased by $144,421 from $637,158 for the year ended December 31,
2002 to $781,579 for the year ended December 31, 2003. Our gross profit
excluding the inventory write down of $990,000 as a percentage of revenues would
have increased to 63.3% in the year ended December 31, 2003 from 56% for the
year ended December 31, 2002. Our gross profit percentage was positively
impacted by an increase in revenues from licensing our patented technology at
higher gross margins.
OPERATING EXPENSES. Operating expenses, which consist of selling, general
and administrative and research and development expenses, decreased 18.9% from
$6,573,129 for the year ended December 31, 2002 to $5,328,742 for the year ended
December 31, 2003. Selling expenses, which consist primarily of salaries and
related costs for marketing, decreased 5.9% from $1,437,509 for the year ended
December 31, 2002 to $1,352,274 for the year ended December 31, 2003 primarily
due to a reduction of non-recurring expenses of approximately $123,000 from the
hiring of professional consultants to promote our product and a reduction in
sales demonstration equipment expenses of approximately $19,000, which was
partially offset by an increase in salaries and employee costs of approximately
$34,000 and marketing expenses of approximately $13,000. General and
administrative expenses, which consist primarily of salaries and related costs
for general corporate functions, including executive, accounting, facilities and
fees for legal and professional services, decreased 28.9% from $3,355,549 for
the year ended December 31, 2002 to $2,386,088 for the year ended December 31,
2003, primarily as a result of a reduction of non-recurring fees of
approximately $355,000 incurred in the prior year for the hiring of consultants
primarily relating to the recognized non-cash expense of the granting of options
to this group in the prior year, a decrease of salaries and related expenses of
approximately $12,000, a decrease in miscellaneous and office related expenses
of approximately $36,000 and a decrease in legal and accounting fees of
approximately $568,000 primarily related to the reversal of legal accruals
resulting from the settlement of prior litigation matters, which was partially
offset by an increase in insurance costs of approximately $20,000. Research and
development expenses, which consist primarily of salaries and related costs for
the development of our products, increased 4% from $1,180,071 for the year ended
December 31, 2002 to $1,226,725 for the year ended December 31, 2003 primarily
as a result of additional expenses incurred in the development of our new
products. During the fourth quarter of 2003, we determined that as a result of
discontinuing the selling of IDentiScan products, certain of our intangible
assets with a remaining book value of $363,655 should be written off. During the
fourth quarter of 2002, we recorded a reserve on inventory deposit of $600,000,
which represents the deposit we paid the manufacturer on an open purchase order,
which we subsequently decided to cancel. We believe that we will require
additional investments in development and operating infrastructure as the
Company grows. Therefore, we expect that expenses will continue to incrementally
increase in line with increases in the growth of the business as we may increase
expenditures for advertising, brand promotion, public relations and other
marketing activities. Research and development expenses may also increase as we
complete and introduce additional products based upon our patented ID-Check
technology.
19
INTEREST EXPENSE. Interest expense increased from $4,878 for the year
ended December 31, 2002 to $43,487 for the year ended December 31, 2003
primarily as a result of interest incurred on the Early Bird award granted on
April 8, 2003.
INTEREST INCOME. Interest income decreased from $53,871 for the year ended
December 31, 2002 to $51,437 for the year ended December 31, 2003, which
primarily resulted from a decrease in our cash and cash equivalents available
for investment through the third quarter of 2003 and lower interest rates
available on our investments which was partially offset by the additional
interest income on the cash received from the successful completion of our
secondary offering in October 2003.
OTHER EXPENSES. Other expenses for the year ended December 31, 2003
totaling $921,730 is a result of a non- recurring charge from an arbitration
decision in favor of Early Bird Capital as a settlement on their demand.
INCOME TAXES. We have incurred net losses to date and, therefore, we have
paid nominal income taxes.
NET LOSS. As a result of the factors noted above, our net loss increased
from $5,550,234, which included $1,773,131 of non-cash expenses for the year
ended December 31, 2002 to $6,450,943 for the year ended December 31, 2003,
which included $2,314,627 of non-cash expenses, accounting for 60.1% of the
increase in our net loss.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 2002 TO THE YEAR ENDED DECEMBER 31,
2001.
REVENUE. Revenue increased $252,679 from $885,908 for the year ended
December 31, 2001 to $1,138,587 for the year ended December 31, 2002. Revenues
for the period ended December 31, 2002 consisted of revenue from distributors of
$464,463 and revenues from direct sales to customers of $674,124. Sales, which
represent shipments of products and contracted services, increased 34% from
$989,692 to $1,326,829 for the years ended December 31, 2001 and 2002,
respectively, primarily as a result of the inclusion of IDentiScan, which
continues to focus on the age verification market. The refocus of our marketing
efforts for Intelli-Check's patented technology to the document verification and
access control markets, which consists of the larger retailers and government
agencies, in which the sales cycle requires an extended time frame involving
multiple meetings, presentations and a test period, continues to impact our
sales. In addition, during 2001 and continuing in 2002, the sales cycle has been
further extended by the rapid slowing of the economy, resulting in decisions for
capital expenditures being delayed. Certain tests, recent marketing agreements
and legislative efforts from the government to enhance security are expected to
result in increased sales opportunities.
OPERATING EXPENSES. Operating expenses, which consist of selling, general
and administrative and research and development expenses, increased 46.2% from
$4,497,322 for the year ended December 31, 2001 to $6,573,129 for the year ended
December 31, 2002. Selling expenses, which consist primarily of salaries and
related costs for marketing, increased 51.2% from $950,774 for the year ended
December 31, 2001 to $1,437,509 for the year ended December 31, 2002 primarily
due to increased salary costs, commissions and related expenses from hiring
additional sales personnel totaling approximately $224,000, increased travel and
convention expenses of approximately $112,000, increased advertising and
marketing expenses of approximately $31,000 and hiring professional consultants
to promote our product totaling approximately $103,000. General and
administrative expenses, which consist primarily of salaries and related costs
for general corporate functions, including executive, accounting, facilities and
fees for legal and professional services, increased 43.9% from $2,332,150 for
the year ended December 31, 2001 to $3,355,549 for the year ended December 31,
2002, primarily as a result of increased salary costs and related expenses from
salary increases and the hiring of additional personnel relating to the
acquisition of the IDentiScan assets in December 2001 of approximately $131,000,
increased fees for investment relations consultants of approximately $705,000
primarily relating to the recognized non-cash expense of the granting of options
to this group, which was 78% of this increase, increases in depreciation and
amortization expenses of approximately $325,000 from additional purchases of
equipment and acquired intangible assets from the acquisition of IDentiScan,
increases in insurance costs of approximately $27,000 due to increases in
premiums and higher rent expense of approximately $34,000 due to rent
escalations and additional space from the acquisition of IDentiScan partially
offset by lower legal costs of approximately $131,000 due to the settling of
certain lawsuits. Research and development expenses, which consist primarily of
salaries and related costs for the development of our products, amounted to
$1,214,398 for the year ended December 31, 2001 compared to $1,180,071 for the
year ended December 31, 2002, has not materially changed. During the fourth
quarter of 2002, we recorded a reserve on inventory deposit of $600,000, which
represents the deposit we paid the manufacturer on an open purchase order due to
the uncertainty of whether or not we will complete the order to purchase
additional units from our manufacturer or to fulfill future orders from a new
platform once it is selected. As the Company experiences sales growth, we expect
that we will incur additional operating expenses to support this growth.
Research and development expenses may increase as we integrate additional
products and technologies with our patented ID-Check technology.
20
INTEREST EXPENSE. Interest expense decreased from $8,336 for the year
ended December 31, 2001 to $4,878 for the year ended December 31, 2002 as we
have paid down certain capital leases which had higher interest rates.
INTEREST INCOME. Interest income decreased from $135,860 for the year
ended December 31, 2001 to $53,871 for the year ended December 31, 2002, which
is a result of a decrease in our cash and cash equivalents available for
investment and lower interest rates in effect during this period.
OTHER INCOME. Other income for the year ended December 31, 2002 totaling
$336,344 resulted from a settlement of certain obligations under a Master
Licensing agreement between the Company and Sensormatic Electronics Corporation,
which was due to expire on March 31, 2002. We received $412,000 and incurred
$75,656 in refurbishment costs for previously customized terminals during the
quarter ended March 31, 2002.
INCOME TAXES. We have incurred net losses to date and, therefore, we have
paid nominal income taxes.
NET LOSS. As a result of the factors noted above, our net loss increased
from $3,962,931, which included $327,727 of non-cash expenses for the year ended
December 31, 2001, to $5,550,234 for the year ended December 31, 2002, which
included $1,773,131 of non-cash expenses, accounting for 91% of the increase in
our net loss.
LIQUIDITY AND CAPITAL RESOURCES
Prior to our initial public offering in November 1999, we financed our
operations primarily through several private placements of equity and debt
securities. We used the net proceeds of these financings for the primary purpose
of funding working capital and general corporate purposes and for the purchase
of hardware terminals. As a result of our IPO and the underwriters exercise of
their over allotment option, we received approximately $6,907,000 in net
proceeds after deducting underwriters commissions and offering expenses. During
2000, we received $3,426,374 from the issuance of common stock from the exercise
of warrants and stock options. During 2001 and 2002, we received $3,231,174 and
$1,742,466, respectively, from the issuance of common stock from the exercise of
warrants, stock options and rights. In March 2003, we received net proceeds
before legal expenses of $2,850,000, from the issuance of convertible preferred
stock. We funded the purchase of hardware terminals for resale and working
capital primarily from these proceeds.
In October 2003, we successfully completed our secondary public offering
of 1,100,000 shares of common stock at $8.00 per share and received proceeds net
of underwriting discounts and commissions and before other offering expenses of
approximately $7,906,000. Offering expenses totaled $324,574 and were fully paid
as of December 31, 2003. In connection with this offering, we granted to our
underwriter an option to purchase up to an additional 165,000 shares of its
common stock at $8.00 per share less underwriter discounts and commissions for
the purpose of covering over-allotments, which expired on November 16, 2003. In
addition, we sold to the underwriter 110,000 warrants for a price of $110 to
purchase 110,000 shares of our common stock at a price of $9.60 per share. The
warrants become exercisable on the first anniversary of the offering and expire
four years from such date. We will continue to use these proceeds to fund
working capital.
Cash used in operating activities for the year ended December 31, 2003 of
$4,612,915 was primarily attributable to the net loss of $6,450,943, an increase
in certificates of deposit, restricted of $1,009,801 resulting from the award in
the legal matter with Early Bird Capital, an increase in accounts receivable of
$155,636 resulting from credit sales made towards the end of the year, a
decrease in accounts payable and accrued expenses of $464,354 primarily from the
reversal of legal accruals resulting from the settlement of prior litigation
matters, which was offset primarily by a decrease of inventory of $259,130 and
an inventory reserve of $990,000, an increase in litigation settlement payable
of $921,700 resulting from the legal award recorded in the first quarter of
2003, depreciation and amortization of $436,778, write off of intangible assets
of $363,655 and amortization of deferred compensation of $357,194 from the
granting of stock options to consultants. Cash used in operating activities for
the year ended December 31, 2002 of $3,771,132 resulted primarily from the net
loss of $5,550,234 and an increase in other current assets of $502,890 primarily
resulting from a $400,000 deposit for future purchases of inventory, which was
partially offset by a decrease in inventory of $365,849, amortization of
deferred compensation of $713,051, depreciation and amortization of $451,580, a
reserve on inventory deposit of $600,000 and an increase of deferred revenue of
$197,347. Cash used in investing activities was $4,860,740 for the year ended
December 31, 2003 and $29,187 for the year ended December 31, 2002. Net cash
used in investing activities for both periods consisted of capital expenditures
for computer equipment and furniture and fixtures and for 2003 included purchase
of marketable securities and short term investments of $4,856,388 using cash
received from our secondary offering. Cash provided by financing activities was
$10,870,067 for the year ended December 31, 2003 and was primarily related to
the issuance of 1,100,000 shares of our common stock in connection with our
secondary public offering, the issuance of our Series A 8% Convertible
Redeemable Preferred Stock and the exercise of stock options. Cash provided by
financing activities was $1,649,663 for the year ended December 31, 2002 and was
primarily related to the exercise of outstanding warrants, stock options and
rights.
21
During 2003, we received net proceeds of $679,611 from the exercise of
175,209 options. During 2002, we received net proceeds of $829,600 from the
exercise of 1,250 warrants and 273,700 options. As of December 31, 2003, there
remained warrants outstanding to purchase 10,000 shares of the Company's common
stock at an exercise price of $8.40, which expire on November 18, 2004.
On March 27, 2003, pursuant to a Securities Purchase Agreement, we sold
30,000 shares of our Series A 8% Convertible Redeemable Preferred Stock, par
value $.01 per share, for $3,000,000 before expenses to Gryphon Master Fund,
L.P. Each share of Preferred Stock entitled the holder to receive dividends of
8% per annum and is currently convertible into 15.1515 shares of our common
stock for a total of 454,545 shares of common stock. Additionally, the investors
were issued five year warrants to purchase 113,636 shares of common stock at an
exercise price of $6.78. Dividend payments of $120,000 in cash are due
semi-annually beginning September 30, 2003 and, accordingly, we paid $122,958 on
September 30, 2003. In connection with this financing, we paid agent fees of
$150,000 and issued warrants and options to purchase 8,854 shares of common
stock at a price of $6.78. Shares of Preferred Stock are convertible at the
option of Gryphon Master Fund, L.P. at any time prior to redemption. We may
redeem any or all of the Preferred Stock at any time after one year from the
closing date at a cash redemption price of $100 per share, providing the volume
weighted average price of our Common Stock for 20 out of 30 consecutive trading
days exceeds $13.20 per share. We must redeem all of the Preferred Stock
outstanding on the fifth anniversary of the closing date at a redemption price,
in cash, equal to the purchase price of the Preferred Stock. A registration
statement covering the common stock issuable upon conversion of the preferred
stock and exercise of the warrants was declared effective in June 2003.
In March 2001, we declared a dividend distribution of one non-transferable
right to purchase one share of our common stock for every 10 outstanding shares
of common stock continuously held from the record date to the date of exercise,
as well as common stock underlying vested stock options and warrants, held of
record on March 30, 2001, at an exercise price of $8.50. The rights were due to
expire on October 4, 2002, which was one year after the effective date of the
registration statement related to the shares of common stock underlying the
rights. We extended the expiration date until April 4, 2003, further extended
the rights until December 31, 2003 and subsequently extended the date to June
30, 2004. We have the right to redeem the outstanding rights for $.01 per right
under certain conditions, which were not met as of March 25, 2004. We have
reserved 970,076 shares of common stock for future issuance under this rights
offering. As of December 31, 2003, we received $2,482,009 before expenses from
the exercise of 292,001 of these rights.
In March 2001, our Board of Directors authorized, subject to certain
business and market conditions, the purchase of up to $1,000,000 of our common
stock. As of December 31, 2002, we purchased 20,000 shares totaling
approximately $123,000 and subsequently retired these shares. We will purchase
additional shares when certain conditions warrant it.
For 2003, the Company's cash expense burn rate was approximately $400,000
per month and we expect that it will not materially change for 2004. We
currently anticipate that our available cash in hand and marketable securities
and cash resources from expected revenues from the sale of the units in
inventory and the licensing of our technology will be sufficient to meet our
anticipated working capital and capital expenditure requirements for at least
the next twelve months. These requirements are expected to include the purchase
of inventory, product development, sales and marketing, working capital
requirements and other general corporate purposes. We may need to raise
additional funds, however, to respond to business contingencies which may
include the need to fund more rapid expansion, fund additional marketing
expenditures, develop new markets for our ID-Check technology, enhance our
operating infrastructure, respond to competitive pressures, or acquire
complementary businesses or necessary technologies.
22
We are currently involved in certain legal proceedings as discussed in the
"Commitments and Contingencies" note in the Notes to the Financial Statements
filed in our form 10-K for the year ended December 31, 2003. We do not believe
these legal proceedings will have a material adverse effect on our financial
position, results of operations or cash flows.
As of December 31, 2003, we had a net operating loss carry forward of
approximately $22.3 million, which expires beginning in the year 2013. The
issuance of equity securities in the future, together with our earlier
financings and our IPO, could result in an ownership change and, thus could
limit our use of our prior net operating losses. If we achieve profitable
operations, any significant limitation on the utilization of our net operating
losses would have the effect of increasing our tax liability and reducing net
income and available cash reserves. We are unable to determine the availability
of these net-operating losses since this availability is dependent upon
profitable operations, which we have not achieved in prior periods; therefore we
have recorded a full valuation allowance for the benefit from the net-operating
losses.
CONTRACTUAL OBLIGATIONS
The table below presents our contractual obligations and commitments at
December 31, 2003:
PAYMENTS DUE BY PERIOD
LESS THAN
CONTRACTUAL OBLIGATIONS TOTAL ONE YEAR 1-3 YEARS 4-5 YEARS AFTER 5 YEARS
- ----------------------- ----- -------- --------- --------- -------------
Capital Lease Obligations $ 427 $ 427 -- -- --
Operating Leases 1,884,640 250,602 $ 773,590 $ 562,308 $ 298,140
Purchase commitments (1) 0 -- -- -- --
Employment contracts 399,919 399,919 -- -- --
---------- ---------- ---------- ---------- ----------
Total Contractual Cash Obligation $2,284,986 $ 650,948 $ 773,590 $ 562,308 $ 298,140
(1) We paid a manufacturer approximately $120,000 in February 2004 under a
purchase commitment for certain products.
OFF-BALANCE SHEET ARRANGEMENTS
We have never entered into any off-balance sheet financing arrangements
and have never established any special purpose entities. We have not guaranteed
any debt or commitments of other entities or entered into any options on
non-financial assets.
FORWARD LOOKING STATEMENTS
The foregoing contains certain forward-looking statements. Due to the fact
that our business is characterized by rapidly changing technology, high capital
requirements and an influx of new companies trying to respond to enhanced
security needs as a result of current events, actual results and outcomes may
differ materially from any such forward looking statements and, in general are
difficult to forecast.
23
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements are attached hereto following beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On June 6, 2002, Arthur Andersen LLP was dismissed and Grant Thornton was
engaged as our principal independent public accountants. The decision to change
accountants was approved by the Board of Directors upon the recommendation of
the Audit Committee. The reports of Arthur Andersen LLP for the years ended
December 31, 2000 and 2001 did not contain any adverse opinion or disclaimer of
opinion, nor were they qualified as to uncertainty, audit scope or accounting
principles. During our fiscal years ended December 31, 2001 and the subsequent
interim period through June 6 2002, there were no disagreements with Arthur
Andersen LLP on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedures, which disagreements, if
not resolved to the satisfaction of Arthur Andersen LLP, would have caused them
to make reference thereto in their reports on the financial statements for those
years.
ITEM 9A CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) that are designed (i) to collect the information
we are required to disclose in the reports we file with the SEC, and (ii) to
process, summarize and disclose this information within the time periods
specified in the rules of the SEC. Under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, we have evaluated the effectiveness of the design and
operation of our disclosure controls and procedures. Such evaluation was
conducted as of the end of the period covered by this report. Based on such
evaluation, our Chief Executive and Chief Financial Officer have concluded that
these procedures are effective.
Additionally, there were no significant changes in our internal controls or in
other factors that could significantly affect these controls subsequent to the
end of the period covered by this report. We have not identified any significant
deficiencies or material weaknesses in our internal controls, and therefore
there were no corrective actions taken.
24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
As of March 24, 2004, the Company's directors and executive officers were
as follows:
POSITION WITH THE COMPANY
NAME AND PRINCIPAL OCCUPATION HELD OFFICE SINCE
- ----------------------------------------------------------------------------------------------------------------------------
Frank Mandelbaum Chairman, Chief Executive Officer and Director 1996
Edwin Winiarz Senior Executive Vice President, Treasurer, Chief 1999
Financial Officer and Director
Russell T. Embry Senior Vice President and Chief Technology Officer 2001
Ralph H. Thomas Senior Vice President, Sales and Marketing 2003
Evelyn Berezin Director 1999
Charles McQuinn Director 1999
Jeffrey Levy Director 1999
Jim Moody Director 2003
Arthur L. Money Director 2003
John N. Hatsopoulos Director 2003
FRANK MANDELBAUM, age 70, has served as our Chairman of the Board and
Chief Executive Officer since July 1, 1996. He also served as Chief Financial
Officer until September 1999. From January 1995 through May 1997, Mr. Mandelbaum
served as a consultant providing strategic and financial advice to Pharmerica,
Inc. (formerly Capstone Pharmacy Services, Inc.), a publicly held company. Prior
to January 1995, Mr. Mandelbaum was Chairman of the Board, Chief Executive
Officer and Chief Financial Officer of Pharmerica, Inc. From July 1994 through
December 1995, Mr. Mandelbaum served as Director and Chairman of the Audit and
Compensation Committees of Medical Technology Systems, Inc., also a publicly
held company. From November 1991 through January 1995, Mr. Mandelbaum served as
Director of the Council of Nursing Home Suppliers, a Washington, D.C. based
lobbying organization. From 1974 to date, Mr. Mandelbaum has been Chairman of
the Board and President of J.R.D. Sales, Inc., a privately held financial
consulting company. As required by his employment agreement, Mr. Mandelbaum
devotes substantially all his business time and attention to our business.
EDWIN WINIARZ, age 46, was elected Senior Executive Vice President in July
2000 and a director in August 1999 and became Executive Vice President,
Treasurer and Chief Financial Officer on September 7, 1999. From July 1994 until
August 1999, Mr. Winiarz was Treasurer and Chief Financial Officer of Triangle
Service Inc., a privately held national service company. From November 1990
through July 1994, Mr. Winiarz served as Vice President Finance/Controller of
Pharmerica, Inc. (formerly Capstone Pharmacy Services, Inc.). From March 1986
until November 1990, Mr. Winiarz was a manager with the accounting firm of
Laventhal & Horwath. Mr. Winiarz is a certified public accountant and holds an
MBA in management information systems from Pace University.
RUSSELL T. EMBRY, age 40, was elected Senior Vice President and Chief
Technology Officer in July 2001 and was Vice President, Information Technology,
since July 1999. From January 1998 to July 1999, Mr. Embry was Lead Software
Engineer with RTS Wireless. From April 1995 to January 1998, he served as
Principal Engineer at GEC-Marconi Hazeltine Corporation. From August 1994
through April 1995, he was a staff software engineer at Periphonics Corporation.
From September 1989 to August 1994, Mr. Embry served as Senior Software Engineer
at MESC/Nav-Com. From July 1985 through September 1989, he was a software
engineer at Grumman Aerospace. Mr. Embry holds a B.S. in Computer Science from
Stony Brook and an M.S. in Computer Science from Polytechnic University,
Farmingdale.
25
RALPH H. THOMAS, age 56, was elected Senior Vice President, Sales and
Marketing in November 2003. Prior to joining Intelli-Check, Mr. Thomas served as
Director of Business Development with DAP Technologies from January 2001 to
November 2003, a manufacturer of wireless and "ruggedized" mobile computers. He
served as Vice President of Sales for Walkabout Computers from December 1999 to
January 2001, a leading designer and manufacturer of rugged pen tablets; Vice
President, Sales, Marketing and Customer Service for Halm Industries from 1992
to December 1999, a specialty manufacturer of imaging and printing equipment;
and Vice President, Industry Marketing for Symbol Technologies from 1986 to
1992, where he helped dramatically increase company revenues through focused
marketing, orchestrated selling efforts and field support programs. Earlier in
his career, Mr. Thomas held various sales and marketing positions at
Perkin-Elmer Corporation, AT&T, General Electric and Litton Industries. Mr.
Thomas is also a member of the Board of Directors of Rugged Outdoor Computing,
Inc., a venture-backed start-up company based in Memphis, Tennessee. He holds an
MBA in Marketing from Fairleigh Dickinson University and a BS in Marketing from
St. Peter's College in New Jersey.
EVELYN BEREZIN, age 78, was elected a director in August 1999. She has
been, since October 1987, an independent management consultant to technology
based companies. From July 1980 to September 1987, Ms. Berezin was President of
Greenhouse Management Company, a venture capital fund dedicated to investment in
early-phase high-technology companies. Ms. Berezin holds an AB in Physics from
New York University and has held an Atomic Energy Commission Fellowship. Ms.
Berezin has served on the boards of a number of public companies including
Bionova Corp., Cigna Corp., Datapoint Corp., Koppers Company, Inc. and Genetic
Systems Inc., as well as more than fourteen private technology-based companies.
She also serves on the boards of Sion Energy Inc. and BioPhotonics Corp. Ms.
Berezin holds honorary doctorates from Adelphi University and Eastern Michigan
University and is on the Board of the Stony Brook Foundation of Stony Brook
University and Brookhaven Science Associates, the manager of Brookhaven
Laboratories.
CHARLES MCQUINN, age 63, was elected a director in August 1999. He has
been, since 1997, an independent product development/marketing consultant to
Internet based companies. Mr. McQuinn has also served as CEO of The McQuinn
Group, Inc., a system integration and institutional marketing company, from
November 1998 to the present. From 1995 to 1997, Mr. McQuinn was President of
DTN West, a fixed income price quote company with products for banks and
governments. From 1990 to 1995, Mr. McQuinn was President of Bonneville Market
Information, an equities price quote company with products for traders and
brokers. From 1985 to 1990, Mr. McQuinn was President of Bonneville
Telecommunications Company, a satellite video and data company. Prior to 1985,
he held various product development/marketing/management positions with
Burroughs Corporation. Mr. McQuinn holds a BS in marketing from Ball State
University and an MBA in management from Central Michigan University.
JEFFREY LEVY, age 61, was elected a director in December 1999. He has
been, since February 1977, President and Chief Executive Officer of LeaseLinc,
Inc., a third-party equipment leasing company and lease brokerage company. Prior
to 1977, Mr. Levy served as President and Chief Executive Officer of American
Land Cycle, Inc. and Goose Creek Land Cycle, LLC, arboreal waste recycling
companies. During that time he also served as Chief Operating Officer of ICC
Technologies, Inc. and AWK Consulting Engineers, Inc. Mr. Levy has had a
distinguished career as a member of the United States Air Force from which he
retired as a colonel in 1988. He serves as a board member of the Northern
Virginia Chapter of Mothers Against Drunk Driving, the Washington Regional
Alcohol Program, the Zero Tolerance Coalition and the National Drunk and Drugged
Driving Prevention Month Coalition and is a member of the Virginia Attorney
General's Task Force on Drinking by College Students and MADD's National
Commission on Underage Drinking. Mr. Levy holds a BS in International Relations
from the United States Air Force Academy, a graduate degree in Economics from
the University of Stockholm and an MBA from Marymount University.
JIM MOODY, age 68, was elected a director in August 2003. Mr. Moody is
currently with Morgan Stanley in Washington, DC. Mr. Moody is the former
Wisconsin Representative to the United States Congress. During his five terms in
Congress (1983-93), he served on the powerful Ways & Means Committee which
oversees the entire federal tax system, nearly two thirds of federal spending,
including Social Security and Medicare, as well U.S. trade laws and federal debt
management. Previously, Mr. Moody served as president and CEO of InterAction, an
association of U.S. organizations working overseas in economic development and
humanitarian relief. He was also vice president and CFO for the International
Fund for Agricultural Development (IFAD), a specialized agency of the United
Nations headquartered in Rome, Italy, where he managed a $2.2 billion investment
fund and represented the agency to other UN bodies and various U.S. government
agencies including the Treasury, the State Department and Congress. Prior to
Congressional service, Mr. Moody was an Assistant Professor of Economics at the
University of Wisconsin-Milwaukee, where he taught Public Finance and Taxation,
and opened up the first U.S. Peace Corps program in Bangladesh and Pakistan. He
has been a fellow and a visiting instructor at the Institute of Politics at the
JFK School of Government at Harvard University, and is currently a member of the
Council on Foreign Relations. Mr. Moody received his B.A. from Haverford
College, his MPA from Harvard University, and earned a Ph.D. in Economics from
the University of California, Berkeley.
26
ARTHUR L. MONEY, age 63, was elected a director in February 2003. Mr.
Money was confirmed by the Senate and served as the Assistant Secretary of
Defense for Command, Control, Communications and Intelligence from 1999 to 2001
and was also the Chief Information Officer for the Department of Defense from
1998 until 2001. Prior to that he served as the Senior Civilian Official, Office
of the Assistant Secretary of Defense, from 1998 to 1999 and was earlier
confirmed by the Senate as Assistant Secretary of the Air Force for Research,
Development and Acquisition and served as Chief Information Officer, from 1996
to 1998. Mr. Money currently serves as a member of the advisory board of several
corporations including the Boeing Company (NYSE: BA). He also serves on the
Board of Directors of numerous companies including Silicon Graphics, Inc. (NYSE:
SGI) and CACI International (NYSE: CAI) and has been recognized for his vision,
leadership and commitment to excellence in systems and process re-engineering.
Mr. Money, who holds a Master of Science Degree in Mechanical Engineering from
the University of Santa Clara (Calif.) and a Bachelor of Science Degree in
Mechanical Engineering from San Jose (Calif.) State University also currently
serves on several U.S. Government Boards and Panels such as NIMA Advisory Board,
Defense Science Board, US Air Force AC2ISR Center Advisory Board and the US Navy
"DSAP" Special Advisory Panel. Prior to his government service, he had a
distinguished business career having served as President of ESL Inc., a
subsidiary of TRW, Inc., from 1990 to 1994 prior to its consolidation with its
Avionics and Surveillance Group when he became Vice President and Deputy General
Manager of the Group.
JOHN N. HATSOPOULOS, age 70, was elected a director in December 2003. Mr.
Hatsopoulos is currently the chief executive officer of American Distributed
Generation Inc. He is the co-founder of Thermo Electron Corporation (NYSE:TMO)
and the retired president and vice chairman of its Board of Directors. Mr.
Hatsopoulos is also managing partner of Glen Rose Capital LLC, a leverage buyout
investment fund, and managing partner of Alexandros Partners LLC, a financial
advisory firm. Prior to his role at American Distributed Generation, which
provides a range of products and services in support of the emerging market for
on-site generation of electricity, heating and cooling at commercial,
institutional and light industrial facilities, Mr. Hatsopoulos held a wide
variety of positions at Thermo Electron Corporation. Over more than four
decades, Mr. Hatsopoulos served, among other positions, as vice president of
corporate strategy, handling acquisitions, financial and investor relations and
corporate investments, chief financial officer and, at retirement, president and
vice chairman of the Board of Directors. Mr. Hatsopoulos graduated from Athens
College in Athens, Greece in 1953. He holds a B.S. in history and mathematics
from Northeastern University, together with Honorary Doctorates in Business
Administration from Boston College and Northeastern University. He served on the
Board of Directors of the American Stock Exchange from 1994 through 2000. He is
currently a member of the Board of Directors of TEI BioSciences Inc. and a
"Member of the Corporation" for Northeastern University.
AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
The board of directors has established a separately designated stand alone
Audit Committee established in accordance with Section 3(a)(58(A) of the
Exchange Act, which is currently comprised of Mr. Moody, chairman, Mr. McQuinn
and Ms. Berezin. They are all considered "independent" under Section 121(A) of
the listing standards of the American Stock Exchange. The audit committee
recommends to the board of directors the annual engagement of a firm of
independent accountants and reviews with the independent accountants the scope
and results of audits, our internal accounting controls and audit practices and
professional services rendered to us by our independent accountants.
The Board of Directors has determined that we have at least one audit
committee financial expert serving on our audit committee. Mr. Moody served as
the CFO for the International Fund for Agricultural Development and was an
Assistant Professor of Economics at the University of Wisconsin-Milwaukee where
he taught Public Finance and Taxation, is an "audit committee financial expert",
and is an independent member of the board of directors.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Securities and Exchange Commission has adopted rules relating to the
filing of ownership reports under Section 16 (a) of the Securities Exchange Act
of 1934. One such rule requires disclosure of filings, which under the
Commission's rules, are not deemed to be timely. During the review, it was
determined that each of Messrs. Money, McQuinn and Levy failed to file a timely
report concerning the grant of stock options on July 10, 2003, however, such
failure was remedied by the reporting of these grants later in July 2003. It was
also determined that Mr. Mandelbaum failed to file a timely report regarding the
exercise of 50,000 in-the-money stock options on September 4, 2003; however,
such failure was remedied by the reporting of this exercise in November 2003.
All other transactions were timely filed.
CODE OF ETHICS
On March 22, 2004, we adopted a code of ethics that applies to our Chief
Executive Officer and Chief Financial Officer, and other persons who perform
similar functions. A copy of our Code of Ethics is filed as an exhibit to this
Annual Report on Form 10-K. Our Code of Ethics is intended to be a codification
of the business and ethical principles which guide us, and to deter wrongdoing,
to promote honest and ethical conduct, to avoid conflicts of interest, and to
foster full, fair, accurate, timely and understandable disclosures, compliance
with applicable governmental laws, rules and regulations, the prompt internal
reporting of violations and accountability for adherence to this Code.
27
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth compensation paid to executive officers
whose compensation was in excess of $100,000 for any of the three fiscal years
ended December 31, 2003. No other executive officers received total salary and
bonus compensation in excess of $100,000 during any of such fiscal years.
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
------------------- ----------------------
Securities Underlying
Name and Principal Position Year Salary($) Options/SARS (#)
--------------------------- ---- --------- ----------------
Frank Mandelbaum 2003 250,000 100,000
Chairman & CEO 2002 250,000 350,000
2001 204,808 --
Edwin Winiarz 2003 141,750 30,000
Senior Executive Vice President 2002 135,000
Chief Financial Officer 2001 128,333 75,000
Russell T. Embry 2003 150,000 12,500
Senior Vice President 2002 150,000 12,500
Chief Technology Officer 2001 133,750 --
W. Robert Holloway 2003 108,728 --
Former Senior Vice President 2002 115,000 --
Sales 2001 115,000 --
EQUITY COMPENSATION PLAN INFORMATION
NUMBER OF SECURITIES WEIGHTED AVERAGE
TO BE ISSUED UPON EXERCISE PRICE OF NUMBER OF SECURITIES REMAINING AVAILABLE
EXERCISE OF OUTSTANDING FOR FUTURE ISSUANCE UNDER EQUITY
OUTSTANDING OPTIONS, OPTIONS, WARRANTS COMPENSATION PLANS (EXCLUDING SECURITIES
PLAN CATEGORY WARRANTS AND RIGHTS AND RIGHTS REFLECTED IN COLUMN A)
(a) (b) (c)
- ------------------------------------ ------------------------ ----------------------- --------------------------------------------
Equity compensation plans approved 1,666,699 $8.38 251,676
by security holders
- ------------------------------------ ------------------------ ----------------------- --------------------------------------------
Equity compensation plans not 1,034,425 $7.32 none
approved by security holders
- ------------------------------------ ------------------------ ----------------------- --------------------------------------------
Total 2,701,124 $7.97 25,676
- ------------------------------------ ------------------------ ----------------------- --------------------------------------------
28
OPTION GRANTS
The following table summarizes options granted during the year ended
December 31, 2003 to the named executive officers:
- ------------------------- ------------------------------------------------------------------------ ----------------------------
Individual Grants Potential Realizable Value
- ------------------------- ---------------------- --------------------- -------------- ------------ ----------------------------
% of Total Options
Number of Securities Granted to Assumed Annual Rates of
Underlying Options Employees In Exercise Expiration Appreciation for Option (1)
- ------------------------- ---------------------- --------------------- -------------- ------------ ---------------- -----------
2003
Name Granted Fiscal Year Price Date 5% 10%
- ------------------------- ---------------------- --------------------- -------------- ------------ ---------------- -----------
Russell T. Embry 12,500 4.8% $ 7.44 05/05/09 $25,694 $56,777
- ------------------------- ---------------------- --------------------- -------------- ------------ ---------------- -----------
Frank Mandelbaum 100,000 38.6% $ 8.22 07/10/08 $227,103 $501,839
- ------------------------- ---------------------- --------------------- -------------- ------------ ---------------- -----------
Ralph H. Thomas 10,000 3.9% $ 7.35 11/10/08 $20,307 $44,872
- ------------------------- ---------------------- --------------------- -------------- ------------ ---------------- -----------
Ralph H. Thomas 40,000 15.5% $ 7.35 11/10/13 $81,227 $179,490
- ------------------------- ---------------------- --------------------- -------------- ------------ ---------------- -----------
Edwin Winiarz 30,000 11.6% $ 8.22 07/10/08 $68,131 $150,552
- ------------------------- ---------------------- --------------------- -------------- ------------ ---------------- -----------
(1) The amounts shown as potential realizable value represent hypothetical
gains that could be achieved for the respective options if exercised at the end
of the option term. The 5% and 10% assumed annual rates of compounded stock
price appreciation are mandated by rules of the Securities and Exchange
Commission and do not represent our estimate or projection of our future common
stock prices. These amounts represent certain assumed rates of appreciation in
the value of our common stock from the fair market value on the date of grant.
Actual gains, if any, on stock option exercises are dependent on the future
performance of the common stock and overall stock market conditions. The amounts
reflected in the table may not necessarily be achieved
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE TABLE
The following table summarizes unexercised options granted through the
year-end December 31, 2003 to the named executive officers:
- ------------------------------ ---------------- ---------------- --------------------------------- -------------------------------
Aggregate Value of Unexercised
No. of Shares Dollar Value No. of Securities In-the-Money
Received Upon Received Upon Underlying Unexercised Options At Fiscal
Name Exercise Exercise Options / Warrants Year End 12/31/03
- ------------------------------ ---------------- ---------------- --------------- ----------------- -------------- ----------------
Exercisable Unexercisable Exercisable Unexercisable
- ------------------------------ ---------------- ---------------- --------------- ----------------- -------------- ----------------
Frank Mandelbaum
Chairman & CEO 825,000 75,000 $2,209,500
- ------------------------------ ---------------- ---------------- --------------- ----------------- -------------- ----------------
Edwin Winiarz
Senior Executive VP & CFO 165,000 $ 101,850
- ------------------------------ ---------------- ---------------- --------------- ----------------- -------------- ----------------
Russell T. Embry
Senior VP & CTO 83,750 6,250 $ 62,263 $ 2,938
- ------------------------------ ---------------- ---------------- --------------- ----------------- -------------- ----------------
Ralph H. Thomas Senior VP,
Sales and Marketing 10,000 40,000 $5,600 $22,400
- ------------------------------ ---------------- ---------------- --------------- ----------------- -------------- ----------------
COMPENSATION OF DIRECTORS
Non-employee directors receive a fee of $500 for attending board meetings
and $250 for attendance at such meetings telephonically. They also receive a fee
of $300 for each committee meeting held on a date other than that of a board
meeting and are reimbursed for expenses incurred in connection with the
performance of their respective duties as directors. Through December 2002,
non-employee directors received 15,000 options for each full year of service on
the Company's board of directors. In July 2003, the board increased the amount
of options granted to non-employee directors for each full year of service to
25,000 options. In addition, non-employee directors who are members of a
committee are entitled to receive grants of stock options for each year served.
The chairperson of the audit committee receives options to purchase 7,500 shares
of our common stock and audit committee members receive options to purchase
3,000 shares of our common stock. Of the remaining committees, each chairperson
receives options to purchase 2,500 shares of our common stock, while a committee
member receives options to purchase 1,500 shares of our common stock. These
options are immediately exercisable during the committee members' term and
expire five years from date of grant.
29
In November 2003, the Company accepted the resignation of Mr. Davis from
its Board of Directors and agreed to extend the expiration date of his vested
options until November 11, 2004. All unvested options subsequently expired.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
On February 1, 2002, we entered into a new three-year employment contract
with our Chairman and Chief Executive Officer, Frank Mandelbaum, effective
January 1, 2002. The agreement provides for an annual base salary of $250,000.
In addition, we granted to Mr. Mandelbaum an option to purchase 350,000 shares
of common stock, of which 275,000 options are immediately exercisable at $12.10
per share and 75,000 options become exercisable on December 31, 2004.
If there shall occur a change of control, as defined in the employment
agreement, the employee may terminate his employment at any time and be entitled
to receive a payment equal to 2.99 times his average annual compensation,
including bonuses, during the three years preceding the date of termination,
payable in cash to the extent of three months salary and the balance in shares
of our common stock based on a valuation of $2.00 per share.
On September 7, 2001, we renewed our employment agreement with Mr.
Winiarz. The agreement, which expires December 31, 2004, provides for a base
salary of $135,000 with annual increases of 5% per annum. In addition, we
granted 75,000 stock options at an exercise price of $8.04 vesting on September
7, 2006 with earlier vesting incentives.
Under the terms of the agreements, each of the executives has the right to
receive his compensation in the form of shares of common stock valued at 50% of
the closing bid price of our shares of common stock as of the date of the
employee's election, which is to be made at the beginning of each quarter. In
addition, each of the employment agreements requires the executive to devote
substantially all his time and efforts to our business and contains
non-competition and nondisclosure covenants of the officer for the term of his
employment and for a period of two years thereafter. Each employment agreement
provides that we may terminate the agreement for cause.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The board of directors has established a compensation committee which is
currently comprised of Mr. Levy, chairman, Mr. Moody and Mr. Money. No member of
the Compensation Committee has a relationship that would constitute an
interlocking relationship with Executive Officers or Directors of the Company or
another entity.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth, as of December 31, 2003 certain
information regarding beneficial ownership of Intelli-Check's common stock by
each person who is known by us to beneficially own more than 5% of our common
stock. The table also identifies the stock ownership of each of our directors,
each of our officers, and all directors and officers as a group. Except as
otherwise indicated, the stockholders listed in the table have sole voting and
investment powers with respect to the shares indicated.
Unless otherwise indicated, the address for each of the named individuals
is c/o Intelli-Check, Inc., 246 Crossways Park West, Woodbury, NY 11797-2015.
Shares of common stock which an individual or group has a right to acquire
within 60 days pursuant to the exercise or conversion of options, warrants or
other similar convertible or derivative securities are deemed to be outstanding
for the purpose of computing the percentage ownership of such individual or
group, but are not deemed to be outstanding for the purpose of computing the
percentage ownership of any other person shown in the table.
30
The applicable percentage of ownership is based on 10,154,880 shares
outstanding as of December 31, 2003.
- ----------------------------------------------------------------------- ---------------------------------- --------------------
NAME SHARES BENEFICIALLY OWNED PERCENT
- ----------------------------------------------------------------------- ---------------------------------- --------------------
Frank Mandelbaum (1) 1,495,800 13.50
- ----------------------------------------------------------------------- ---------------------------------- --------------------
Edwin Winiarz (2) 168,500 1.63
- ----------------------------------------------------------------------- ---------------------------------- --------------------
Ralph Thomas (3) 10,000 *
- ----------------------------------------------------------------------- ---------------------------------- --------------------
Russell T. Embry (4) 95,250 *
- ----------------------------------------------------------------------- ---------------------------------- --------------------
Evelyn Berezin (5) 114,050 1.11
- ----------------------------------------------------------------------- ---------------------------------- --------------------
Charles McQuinn (6) 115,100 1.12
- ----------------------------------------------------------------------- ---------------------------------- --------------------
Jeffrey Levy (7) 96,980 *
- ----------------------------------------------------------------------- ---------------------------------- --------------------
Arthur L. Money (8) 36,500 *
- ----------------------------------------------------------------------- ---------------------------------- --------------------
Jim Moody (9) 34,000 *
- ----------------------------------------------------------------------- ---------------------------------- --------------------
John Hatsopoulos (10) 25,000 *
- ----------------------------------------------------------------------- ---------------------------------- --------------------
Empire State Development formerly New York State Science and
Technology Foundation (11) 605,000 5.93
- ----------------------------------------------------------------------- ---------------------------------- --------------------
All Executive Officers & Directors as a group (10 persons) 2,192,480 20.44
- ----------------------------------------------------------------------- ---------------------------------- --------------------
* Indicates beneficial ownership of less than one percent of the total
outstanding common stock.
(1) Includes 927,100 shares issuable upon exercise of stock options
exercisable within 60 days. Does not include 22,640 shares and 2,040
rights held by Mr. Mandelbaum's wife, for which Mr. Mandelbaum disclaims
beneficial ownership
(2) Includes 168,500 shares issuable upon exercise of stock options
exercisable within 60 days.
(3) Includes 10,000 shares issuable upon exercise of stock options exercisable
within 60 days.
(4) Includes 89,000 shares issuable upon exercise of stock options exercisable
within 60 days.
(5) Includes 113,550 shares issuable upon exercise of stock options
exercisable within 60 days.
(6) Includes 114,100 shares issuable upon exercise of stock options
exercisable within 60 days.
(7) Includes 96,950 shares issuable upon exercise of stock options exercisable
within 60 days.
(8) Includes 52,800 shares issuable upon exercise of stock options exercisable
within 60 days.
(9) Includes 25,000 shares issuable upon exercise of stock options exercisable
within 60 days.
(10) Includes 25,000 shares issuable upon exercise of stock options exercisable
within 60 days.
(11) Frances A. Walton, the Chief Financial Officer exercises voting and
dispositive power over the shares. The address is 633 Third Avenue, New
York, NY 10017
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On January 21, 2004, we entered into an agreement with Alexandros Partners
LLC to act as consultants in advising us in financial and investor relation
matters. We agreed to pay a consulting fee of $50,000 payable in 12 equal
monthly installments. In addition, we issued a warrant granting the right to
purchase 100,000 shares of our common stock at a purchase price of $7.54 per
share vesting ratably over the 12 month period. The agreement terminates on
December 31, 2004. A principal of Alexandros Partners LLC is currently a member
of our Board of Directors. This transaction was approved by all of the
independent directors of our Board of Directors.
31
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
During fiscal year ended December 31, 2001 until June 6, 2002, our
principal independent auditor was Arthur Andersen LLP. Thereafter, our principal
independent auditor was Grant Thornton LLP. The services of each were provided
in the following categories and amount:
AUDIT FEES
The aggregate fees billed by Arthur Anderson LLP for the review of the
financial statements in our Quarterly Reports on Form 10-Q during the fiscal
year ended December 2002 were $4,500.
The aggregate fees billed by Grant Thornton LLP for professional services
rendered for the audit of the Company's annual financial statements for the
fiscal years ended December 31, 2003 and 2002, for the reviews of the financial
statements included in the Company's Quarterly Reports on Form 10-Q for fiscal
years 2003 and 2002 and for services performed in connection with the Company's
Forms S-2 and S-3 registration statements filed in 2003, were $252,660 in 2003
and $74,400 in 2002.
AUDIT RELATED FEES
Other than the fees described under the caption "Audit Fees" above, Grant
Thornton LLP did not bill any fees for services rendered to us during fiscal
years 2003 and 2002 for assurance and related services in connection with the
audit or review of our consolidated financial statements.
TAX FEES
There were no tax fees billed by Grant Thornton LLP during 2003 and 2002.
ALL OTHER FEES
There were no fees billed by Arthur Anderson LLP for other professional
services rendered during the fiscal year ended December 31, 2002.
There were no fees billed by Grant Thornton LLP for other professional
services rendered during the fiscal year ended December 31, 2003 and 2002.
PRE-APPROVAL OF SERVICES
The Audit Committee pre-approves all services, including both audit and
non-audit services, provided by our independent accountants. For audit services,
each year the independent auditor provides the Audit Committee with an
engagement letter outlining the scope of the audit services proposed to be
performed during the year, which must be formally accepted by the Committee
before the audit commences. The independent auditor also submits an audit
services fee proposal, which also must be approved by the Committee before the
audit commences.
ITEM 15. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. See index of exhibits annexed hereto.
(b) Reports on Form 8-K.
On November 17, 2003, we filed a report on Form 8-K, under Items 7 and 12
to disclose that we issued a press release announcing our results of operations
and financial condition for the three and nine months ended September 30, 2003,
and attaching the press release as an exhibit.
32
EXHIBIT INDEX
Exhibit No. Description
1 Form of Underwriting Agreement (1)
3.1 Certificate of Incorporation of the Company (1)
3.2 By-laws of the Company (1)
3.3 Certificate of Designation of Preferred Stock of
Intelli-Check, Inc. (7)
4.1 Specimen Stock Certificate (2)
4.2 Form of Underwriters' Warrant Agreement (1)
4.3 Warrant to Gryphon Master Fund LLP (7)
4.4 Form of Underwriters Warrant Agreement including form of
Warrant Certificate(8)
10.1 1998 Stock Option Plan (1) *
10.5 Agreement of Lease between the Company and Industrial and
Research Associates, dated as of October 15, 2000 (5)
10.6 1999 Stock Option Plan (1) *
10.7 Development and Supply Agreement between the Company and
Welch Allyn Data Collection Inc. dated July 9, 1999 (1)
10.9 Employment Agreement between the Company and W. Robert
Holloway, dated October 25, 1999 (1) *
10.10 Agreement between the Company and Kevin Messina,
individually and d/b/a K.M. Software Development, dated as
of May 3, 1999 (1) *
10.11 Memorandum of Understanding between AAMVAnet, Inc. and
Intelli Check, Inc. effective November 15, 2000 (5)
10.12 2001 Stock Option Plan (4)
10.13 Employment Agreement between Edwin Winiarz and the
Company, dated as of September 7, 2001*
10.14 Employment Agreement between Frank Mandelbaum and the
Company, dated as of February 1, 2002* (6)
10.15 Memorandum of Understanding between AAMVAnet, Inc. and
Intelli-Check, Inc. effective January 29, 2002 (5)
10.16 Securities Purchase Agreement between Intelli-Check, Inc.
and Gryphon Master Fund dated March 27, 2003. (7)
10.17 Registration Rights Agreement between Intelli-Check, Inc.
and Gryphon Master Fund dated March 27, 2003. (7)
14.1 Code of Business Conduct and Ethics
21 List of Subsidiaries (1)
31.1 Certification of Chief Executive Officer pursuant to
Section 302 of The Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to
Section 302 of The Sarbanes-Oxley Act of 2002
32 Certification of Chief Executive Officer and Chief
Financial pursuant to Section 906 of The Sarbanes-Oxley
Act of 2002
- -------------
* Denotes a management contract or compensatory plan, contract or
arrangement.
(1) Incorporated by reference to Registration Statement on Form SB-2
(File No. 333-87797) filed September 24, 1999.
(2) Incorporated by reference to Amendment No. 1 to the Registration
Statement filed November 1, 1999.
(3) Incorporated by reference to Amendment No. 2 to the Registration
Statement filed November 15, 1999.
(4) Incorporated by reference to Registrant's Proxy Statement on
Schedule 14A filed May 31, 2001.
(5) Incorporated by reference to Registrant's Annual Report on Form 10-K
filed March 29, 2001.
(6) Incorporated by reference to Registrant's Annual Report on Form 10-K
filed March 29, 2002.
(7) Incorporated by reference to Registrant's Annual Report of Form 10-K
filed March 31, 2003.
(8) Incorporated by reference to Registration Statement on Form S-2
(File No. 333-108043) filed September 30, 2003.
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant had duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date March 25, 2004 INTELLI-CHECK, INC.
By: /s/ Frank Mandelbaum
---------------------------------
Frank Mandelbaum
Chairman, 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 the
Registrant and in the capacities and on the dates indicated.
Date March 25, 2004 INTELLI-CHECK, INC.
By: /s/ Frank Mandelbaum
--------------------------------
Frank Mandelbaum
Chairman, Chief Executive Officer
and Director
Date: March 25, 2004 /s/ Edwin Winiarz
-------------------------------------
Edwin Winiarz
Senior Executive Vice President,
Treasurer and Chief Financial Officer
Date: March 25, 2004 /s/ Evelyn Berezin
-------------------------------------
Evelyn Berezin, Director
Date: March 25, 2004 /s/ Jeffrey Levy
-------------------------------------
Jeffrey Levy, Director
Date: March 25, 2004 /s/ Charles McQuinn
-------------------------------------
Charles McQuinn, Director
Date: March 25, 2004 /s/ Arthur L. Money
-------------------------------------
Arthur L. Money, Director
Date: March 25, 2004 /s/ Jim Moody
-------------------------------------
Jim Moody, Director
Date: March 25, 2004 /s/ John Hatsopoulos
-------------------------------------
John Hatsopoulos, Director
INDEX
Page
----
REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-1 - F-2
FINANCIAL STATEMENTS:
Balance Sheets as of December 31, 2002 and 2003 F-3
Statements of Operations for the Years Ended December 31, 2001, 2002 and 2003 F-4
Statements of Stockholders' Equity for the Years Ended December 31, 2001, 2002 and 2003 F-5
Statements of Cash Flows for the Years Ended December 31, 2001, 2002 and 2003 F-6
NOTES TO FINANCIAL STATEMENTS F-7 - F-20
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of INTELLI-CHECK, INC.
We have audited the accompanying balance sheets of Intelli-Check, Inc. as of
December 31, 2003 and 2002, and the related statements of operations,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The financial statements of Intelli-Check, Inc. for the year ended
December 31, 2001 were audited by other auditors who have ceased operations and
whose report dated March 6, 2002, expressed an unqualified opinion on those
statements.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Intelli-Check, Inc. as of
December 31, 2003 and 2002, and the results of its operations and its cash flows
for the years then ended in conformity with accounting principles generally
accepted in the United States of America.
/s/ Grant Thornton LLP
New York, New York
March 5, 2004
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Intelli-Check, Inc.:
We have audited the accompanying balance sheets of Intelli-Check, Inc. (a
Delaware corporation) as of December 31, 2001 and 2000, and the related
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 2001. 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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to the above present fairly,
in all material respects, the financial position of Intelli-Check, Inc. as of
December 31, 2001 and 2000, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2001 in conformity
with accounting principles generally accepted in the United States.
/s/Arthur Andersen LLP
New York, New York
March 6, 2002
This Report of Independent Certified Public Accountants is a copy of a
previously issued Arthur Andersen LLP ("Andersen") report and has not been
reissued by Andersen. The inclusion of this previously issued Andersen report is
pursuant to the "Temporary Final Rule and Final Rule; Requirements for Arthur
Andersen LLP Auditing Clients," issued by the U.S. Securities and Exchange
Commission in March 2002. Note that this previously issued Andersen report
includes references to certain fiscal years, which are not required to be
presented in the accompanying financial statements as of and for the fiscal year
ended December 31, 2003.
F-2
INTELLI-CHECK, INC.
BALANCE SHEETS
DECEMBER 31, 2002 and 2003
ASSETS
2002 2003
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 1,910,579 $ 3,306,991
Certificate of deposit, restricted (Note 10) -- 1,007,310
Marketable securities and short-term investments -- 4,856,388
Accounts receivable 93,530 249,166
Inventory 1,802,839 553,709
Other current assets 273,770 217,387
------------ ------------
Total current assets 4,080,718 10,190,951
CERTIFICATE OF DEPOSIT (Note 10) 273,317 275,808
PROPERTY AND EQUIPMENT, net (Note 3) 324,112 210,407
ACQUIRED SOFTWARE, net (Notes 4 and 9) 211,806 --
GOODWILL (Notes 4 and 9) 181,447 --
PATENT COSTS, net (Notes 4 and 9) 260,215 48,798
OTHER INTANGIBLES, net (Notes 4 and 9) 83,299 5,590
------------ ------------
Total assets $ 5,414,914 $ 10,731,554
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 298,635 $ 183,712
Accrued expenses (Note 5) 771,405 482,464
Litigation settlement payable (Note 10) -- 921,700
Deferred revenue 357,059 252,705
Current portion of capital lease obligations (Note 10) 19,572 427
------------ ------------
Total current liabilities 1,446,671 1,841,008
------------ ------------
CAPITAL LEASE OBLIGATIONS (Note 10) 427 --
------------ ------------
OTHER LIABILITIES 94,565 114,898
------------ ------------
Total liabilities 1,541,663 1,955,906
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 10)
SERIES A 8% CONVERTIBLE REDEEMABLE PREFERRED STOCK,
net of beneficial conversion feature, warrants issued and issuance costs - $.01
par value; 1,000,000 shares authorized; 30,000 shares issued and
outstanding- liquidation preference of $3,000,000 -- 1,874,940
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock - $.001 par value; 20,000,000 shares authorized; 8,875,302 and
10,154,918 shares issued and outstanding as of 2002 and 2003, respectively 8,874 10,154
Deferred compensation (348,476) (377,967)
Additional paid-in capital 22,399,029 34,287,631
Accumulated deficit (18,186,176) (27,019,110)
------------ ------------
Total stockholders' equity 3,873,251 6,900,708
------------ ------------
Total liabilities and stockholders' equity $ 5,414,914 $ 10,731,554
============ ============
The accompanying notes are an integral part of these statements.
F-3
INTELLI-CHECK, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2001 2002 AND 2003
2001 2002 2003
----------- ----------- -----------
REVENUE $ 885,908 $ 1,138,587 $ 1,235,611
COST OF REVENUE (479,041) (501,429) (454,032)
INVENTORY WRITEDOWN (Note 2) -- -- (990,000)
----------- ----------- -----------
Gross profit (loss) 406,867 637,158 (208,421)
----------- ----------- -----------
OPERATING EXPENSES:
Selling 950,774 1,437,509 1,352,274
General and administrative 2,332,150 3,355,549 2,386,088
Research and development 1,214,398 1,180,071 1,226,725
Write off of intangible assets (Notes 2 and 9) -- -- 363,655
Reserve on inventory deposit (Notes 2 and 10) -- 600,000 --
----------- ----------- -----------
Total operating expenses 4,497,322 6,573,129 5,328,742
----------- ----------- -----------
Loss from operations (4,090,455) (5,935,971) (5,537,163)
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest income 135,860 53,871 51,437
Interest expense (8,336) (4,878) (43,487)
Other income(expense) (Note 10) -- 336,744 (921,730)
----------- ----------- -----------
127,524 385,737 (913,780)
----------- ----------- -----------
Net loss (3,962,931) (5,550,234) (6,450,943)
Accretion of convertible redeemable preferred stock costs -- -- (198,540)
Dividend on convertible redeemable preferred stock -- -- (183,451)
Dividend on warrant modification (140,000) -- --
----------- ----------- -----------
Net loss attributable to common stockholders $(4,102,931) $(5,550,234) $(6,832,934)
=========== =========== ===========
PER SHARE INFORMATION:
Net loss per common share -
Basic and diluted $ (0.52) $ (0.64) $ (0.74)
=========== =========== ===========
Weighted average common shares used in computing
per share amounts -
Basic and diluted 7,910,913 8,685,656 9,217,856
=========== =========== ===========
The accompanying notes are an integral part of these statements.
F-4
INTELLI-CHECK, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
Additional
Common Stock Paid-in
Shares Amount Capital
---------- ------------ ------------
BALANCE, December 31, 2000 7,696,236 $ 7,696 $ 13,561,362
Exercise of warrants 378,084 379 1,057,796
Exercise of options 166,500 165 774,985
Distributions of rights dividends -- -- 1,082,000
Effect on extension of expiration of warrants -- -- 140,000
Issuance of common stock for exercise of rights 180,198 180 1,397,669
Purchase and retirement of common stock (10,000) (10) (52,590)
Issuance of stock options in settlement of accounts payable -- -- 842
Issuance of common stock for the acquisition of certain 59,744 60 979,940
assets
Recognition of deferred compensation -- -- 389,000
Amortization of deferred compensation -- -- --
Net loss -- -- --
---------- ------------ ------------
BALANCE, December 31, 2001 8,470,762 8,470 19,331,004
Exercise of warrants 1,250 1 3,749
Exercise of options 273,700 274 825,576
Effect on extension of expiration of options -- -- 8,500
Effect on extension of expiration of rights dividend -- -- 515,000
Issuance of common stock for exercise of rights 107,396 107 912,759
Purchase and retirement of common stock (10,000) (10) (70,054)
Issuance of additional common stock for prior year's
acquisition of certain assets 32,194 32 (32)
Recognition of deferred compensation -- -- 1,469,327
Amortization of deferred compensation -- -- --
Valuation adjustment of deferred compensation -- -- (596,800)
Net loss -- -- --
---------- ------------ ------------
BALANCE, December 31, 2002 8,875,302 8,874 22,399,029
Effect on extension of expiring options -- -- 167,000
Exercise of stock options 175,209 175 679,436
Exercise of rights 4,407 5 37,455
Issuance of common stock in connection with secondary
offering 1,100,000 1,100 7,580,326
Effect on extension of expiring rights dividend -- -- 2,000,000
Warrants issued in connection with the issuance of
convertible redeemable preferred stock -- -- 497,700
Beneficial conversion feature embedded in
convertible redeemable preferred stock issued 540,000
Amortization of deferred compensation -- -- --
Dividend on convertible redeemable preferred stock -- -- --
Recognition of deferred compensation 319,904
Accretion of convertible redeemable preferred stock
Valuation adjustment of deferred compensation -- -- 66,781
Net loss -- -- --
---------- ------------ ------------
BALANCE, December 31, 2003 10,154,918 $ 10,154 $ 34,287,631
========== ============ ============
Deferred Accumulated
Compensation Deficit Total
------------ ------------ ------------
BALANCE, December 31, 2000 $ -- $ (6,936,011) $ 6,633,047
Exercise of warrants -- -- 1,058,175
Exercise of options -- -- 775,150
Distributions of rights dividends -- (1,082,000) --
Effect on extension of expiration of warrants -- (140,000) --
Issuance of common stock for exercise of rights -- -- 1,397,849
Purchase and retirement of common stock -- -- (52,600)
Issuance of stock options in settlement of accounts payable -- -- 842
Issuance of common stock for the acquisition of certain -- -- 980,000
assets
Recognition of deferred compensation (389,000) -- --
Amortization of deferred compensation 200,000 -- 200,000
Net loss -- (3,962,931) (3,962,931)
------------ ------------ ------------
BALANCE, December 31, 2001 (189,000) (12,120,942) 7,029,532
Exercise of warrants -- -- 3,750
Exercise of options -- -- 825,850
Effect on extension of expiration of options -- -- 8,500
Effect on extension of expiration of rights dividend -- (515,000) --
Issuance of common stock for exercise of rights -- -- 912,866
Purchase and retirement of common stock -- -- (70,064)
Issuance of additional common stock for prior year's
acquisition of certain assets -- -- --
Recognition of deferred compensation (1,469,327) -- --
Amortization of deferred compensation 713,051 -- 713,051
Valuation adjustment of deferred compensation 596,800 -- --
Net loss -- (5,550,234) (5,550,234)
------------ ------------ ------------
BALANCE, December 31, 2002 (348,476) (18,186,176) 3,873,251
Effect on extension of expiring options -- -- 167,000
Exercise of stock options -- -- 679,611
Exercise of rights -- -- 37,460
Issuance of common stock in connection with secondary
offering 7,581,426
Effect on extension of expiring rights dividend -- (2,000,000) --
Warrants issued in connection with the issuance of
convertible redeemable preferred stock -- -- 497,700
Beneficial conversion feature embedded in
convertible redeemable preferred stock issued -- -- 540,000
Amortization of deferred compensation 357,194 -- 357,194
Dividend on convertible redeemable preferred stock -- (183,451) (183,451)
Recognition of deferred compensation (319,904)
Accretion of convertible redeemable preferred stock -- (198,540) (198,540)
Valuation adjustment of deferred compensation (66,781) -- --
Net loss -- (6,450,943) (6,450,943)
------------ ------------ ------------
BALANCE, December 31, 2003 $ (377,967) $(27,019,110) $ 6,900,708
============= ============ ============
The accompanying notes are an integral part of these statements.
F-5
INTELLI-CHECK, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
2001 2002 2003
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,962,931) $ (5,550,234) $ (6,450,943)
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation and amortization 126,885 451,580 436,778
Write off of intangible assets -- -- 363,655
Non cash stock based compensation expense 842 8,500 167,000
Amortization of deferred compensation 200,000 713,051 357,194
Writedown of inventory -- -- 990,000
Reserve on inventory deposit -- 600,000 --
Changes in assets and liabilities-
(Increase) in certificates of deposit, restricted (18,494) (4,823) (1,009,801)
Decrease (increase) in accounts receivable 19,259 (67,994) (155,636)
Decrease in inventory 367,650 365,849 259,130
Decrease (increase) decrease in other current assets 164,758 (502,890) 56,383
Increase (decrease) in accounts payable and accrued expenses 426,651 18,482 (464,354)
Increase in litigation settlement payable -- -- 921,700
Increase (decrease) in deferred revenue (344,381) 197,347 (84,021)
Increase in other liabilities 53,324 -- --
------------ ------------ ------------
Net cash used in operating activities (2,966,437) (3,771,132) (4,612,915)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (140,877) (29,187) (4,352)
Investment in marketable securities and short-term investments -- -- (4,856,388)
Cash paid for acquisition expenses (52,947) -- --
------------ ------------ ------------
Net cash used in investing activities (193,824) (29,187) (4,860,740)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 3,231,174 1,742,466 717,071
Net proceeds from issuance of common stock from secondary offering -- -- 7,581,426
Net proceeds from issuance of convertible redeemable preferred stock -- -- 2,714,100
Payment of dividend to preferred stockholders -- -- (122,958)
Repayment of capital lease obligations (48,767) (22,739) (19,572)
Treasury stock purchased (52,600) (70,064) --
------------ ------------ ------------
Net cash provided by financing activities 3,129,807 1,649,663 10,870,067
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (30,454) (2,150,656) 1,396,412
CASH AND CASH EQUIVALENTS, beginning of year 4,091,689 4,061,235 1,910,579
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 4,061,235 $ 1,910,579 $ 3,306,991
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 8,336 $ 4,878 $ 1,487
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Stock options issued for services rendered $ 389,000 $ 1,469,327 $ 319,904
Beneficial conversion feature and warrants issued in connection
with issuance of convertible redeemable preferred stock -- -- 1,037,700
Accretion of convertible redeemable preferred stock cost -- -- 198,540
Common stock issued to purchase certain assets in acquisition 980,000 -- --
The accompanying notes are an integral part of these statements.
F-6
INTELLI-CHECK, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND OPERATIONS
Intelli-Check, Inc. (the "Company" or "we") was originally incorporated in New
York in October 1994 and later reincorporated in Delaware in December 1999 to
develop, manufacture and market an advanced document verification system to
enable a retailer to help prevent economic loss through various frauds, such as
Identity theft, which utilizes fake ID's as support for these transactions, to
increase security and deter terrorism at airports, military installations and
other sites where security is a concern and to determine whether purchasers of
age restricted products meet the minimum age requirements for the sale. This
helps reduce the risk to the retailer of substantial monetary fines, criminal
penalties and license revocation for the sale of age-restricted products to
minors.
The Company has developed and patented the innovative software technology that
is included in the advanced document verification system terminal called
"ID-Check." The ID-Check terminal, in which the Company's patented software is
loaded, was designed to offer convenient and reliable document and age
verification. ID-Check reads, analyzes and displays the encoded information
contained on driver licenses and other forms of accepted government issued
identification where permitted by law. In addition, the ID-Check terminal is
capable of being upgraded to accommodate changes made by the governmental
issuers of driver licenses and ID cards. The ID-Check terminal requires a quick
swipe or scan of the driver license or ID card by the user; displays a "valid",
"expired", "tampered" or other customized display; and creates a record where
permitted by law of transactions to protect the merchant against fraudulent
transactions, unauthorized access and as proof that the retailer has used proper
due diligence in the sale of age restricted products.
During 2001 and 2002, the Company developed additional software products that
utilize its patented software technology. C-Link(R) runs on a personal computer
and was created to work in conjunction with the ID-Check unit that allows the
retailer to instantly view the data for further verification, analyze data and
generate various reports where permitted by law. The Company also has developed
software that can be integrated onto a Windows platform that will enable a user
of the software to perform all the functions of the ID-Check terminal.
Additionally, in December 2001, the Company acquired the assets of the
IDentiScan Company, LLC ("IDentiScan"), which had developed a product that helps
determine whether a purchaser of age restricted products meets the minimum age
requirements for sale in a less sophisticated method than the Company's ID-Check
terminal. However, as of December 31, 2003, the Company has made a decision to
discontinue the selling of its IDentiScan products.
Since inception, the Company has incurred significant losses and negative cash
flow from operating activities, and as of December 31, 2003 we had an
accumulated deficit of $27,019,110. However, during 2003, the Company received
financing totaling $3 million (see Note 7) and also successfully completed a
secondary offering of 1,100,000 share of its common stock and received
$7,906,000 (see Note 8). We currently anticipate that our available cash in hand
and marketable securities, cash resources from expected revenues from the sale
of the units in inventory and the licensing of our technology will be sufficient
to meet our anticipated working capital and capital expenditure requirements for
at least the next twelve months.
2. SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments with
original maturities of three months or less when purchased. As of December 31,
2003 and 2002, cash equivalents included money market funds, commercial paper
and other liquid short-term debt instruments (with maturities at date of
purchase of three months or less) of $3,280,691 and $1,787,024, respectively.
Marketable Securities
The Company has classified its marketable securities as held-to-maturity as the
Company has the intent and ability to hold these securities to maturity. The
securities are carried at amortized cost using the specific identification
method. Interest income is recorded using an effective interest rate, with the
associated premium or discount amortized to interest income. All of the
Company's marketable securities have maturities of less than 1 year with a
weighted average interest rate of 1.55%. The carrying value of the marketable
securities as of December 31, 2003, of $4,056,388 approximated the fair market
value.
F-7
INTELLI-CHECK, INC.
NOTES TO FINANCIAL STATEMENTS
Inventory
Inventory is stated at the lower of cost or market and cost is determined using
the first-in, first-out method. Inventory is primarily comprised of finished
goods.
Inventory Valuation
The Company's inventory consists primarily of its ID-Check terminals that run
our patented software. The Company acquired such inventory in December 1999 and,
shortly thereafter; it was returned to the manufacturer for upgrade and became
available for sale in the fourth quarter of 2000. The Company periodically
evaluates the current market value of its inventory, taking into account any
technological obsolescence that may occur due to changes in hardware technology
and the acceptance of the product in the marketplace. Even though the Company
has had limited sales to date, it believes that a sufficient market exists to
sell its current inventory, with margin, over a period of time. The Company had
reserved during the fourth quarter of 2002 its previously paid deposit of
$600,000 towards the purchase of units that would have been available to be
purchased had the outstanding purchase order not terminated with our
manufacturer. Based on ongoing evaluation of the Company's inventory, the
Company has recorded an inventory write down of $990,000 during 2003. Should we
determine in a future period that an adjustment to market value of the inventory
is necessary, we would record such adjustment at that time, which could have a
material adverse effect of our results of operations. The current terminal is
fully capable of running the Company's patented software as it utilizes a
state-of-the-art imager/scanner and magnetic stripe reader.
Long-Lived Assets and Impairment of Long-Lived Assets
The Company's long-lived assets include property and equipment, acquired
software, patents, goodwill and other intangibles.
As of January 1, 2002, the Company has adopted SFAS No. 142 "Goodwill and Other
Intangible Assets". Under SFAS No. 142, goodwill and intangible assets with
indefinite lives are no longer amortized but are reviewed annually (or more
frequently if impairment indicators arise) for impairment. Separable intangible
assets that are not deemed to have indefinite lives will continue to be
amortized over their useful lives (but with no maximum life). Pursuant to the
adoption of SFAS No. 142, the Company has evaluated its goodwill and other
intangibles to identify additional separately identifiable intangibles; no
adjustment was warranted. Intangible assets that will continue to be classified
as goodwill will no longer be amortized. This provision had no material impact
on the Company's financial position and results of operations. At December 31,
2003, the Company performed an impairment test of its goodwill and determined
that there was an impairment of the recorded goodwill, which resulted from the
Company's decision to discontinue the selling of its IDentiScan products. As a
result, the Company wrote off the original recorded value of goodwill totaling
$181,447 as of December 31, 2003, which affected the results of operations for
the period then ended.
As of January 1, 2002, the Company adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-lived Assets" which supersedes SFAS No. 121,
"Accounting for the Impairment or Disposal of Long-lived Assets to be Disposed
Of". SFAS No. 144 requires that identifiable intangible assets that are not
deemed to have indefinite lives will be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amounts of the assets may
be impaired. Furthermore, these assets are evaluated for continuing value and
proper useful lives by comparison to undiscounted expected future cash flow
projections. The Company has determined that as a result of discontinuing the
selling of its IDentiScan products, certain of its intangible assets, including
patent costs, with a remaining book value of $182,208 have been impaired and
should be written off as of December 31, 2003, which affected the results of
operations for the period then ended.
Property and Equipment
Property and equipment are recorded at cost and are depreciated over their
estimated useful lives ranging from two to ten-years using the straight-line
basis. Equipment held under capital leases and leasehold improvements are
amortized utilizing the straight-line method over the lesser of the term of the
lease or estimated useful life of the asset.
Intangible Assets
Patent costs, primarily consisting of legal costs and allocated costs as a
result of certain assets acquired from IDentiScan (see Note 9), are being
amortized over a period between 10 and 17 years using the straight-line method.
Acquired Software was amortized over a period of 2 years using the straight-line
method. Other intangibles, consisting of a covenant not to compete and
copyrights are amortized over a period of 2 and 3 years, respectively using the
straight-line method. As discussed above and in Note 9, certain of these
intangible assets were written off as of December 31, 2003.
F-8
INTELLI-CHECK, INC.
NOTES TO FINANCIAL STATEMENTS
Costs of Computer Software Developed or Obtained for Internal Use
The Company accounts for certain software costs under Statement of Position
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1"), which provides guidance for determining whether
computer software is internal-use software and guidance on accounting for the
proceeds of computer software originally developed or obtained for internal use
and then subsequently sold to the public. It also provides guidance on
capitalization of the costs incurred for computer software developed or obtained
for internal use.
Capitalized Software Development Costs
SFAS No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased
or Otherwise Marketed," specifies that costs incurred internally in creating a
computer software product shall be charged to expense when incurred as research
and development until technological feasibility has been established for the
product. Software production costs for computer software that is to be used as
an integral part of a product or process shall not be capitalized until both (a)
technological feasibility has been established for the software and (b) all
research and development activities for the other components of the product or
process have been completed. The Company has not capitalized any software costs
for the years ended December 31, 2001, 2002 and 2003.
Revenue Recognition
The Company sells its products directly through its sales force and through
distributors. Revenue from direct sales of the Company's product is recognized
upon shipment to the customer and title has passed. The Company's products
require continuing service or post contract customer support and performance by
the Company; accordingly, a portion of the revenue pertaining to the service and
support is deferred based on its fair value and recognized ratably over the
period in which the future service, support and performance are provided, which
is generally one year. Currently, with respect to sales to distributors and
sales of the Company's IDentiScan products, the Company does not have enough
experience to identify the fair value of each element and the full amount of the
revenue and related gross margin is deferred and recognized ratably over the
one-year period in which the future service, support and performance are
provided.
In addition, the Company recognizes sales from licensing of its patented
software to customers. The Company's licensed software requires continuing
service or post contract customer support and performance by the Company;
accordingly, a portion of the revenue is deferred based on its fair value and
recognized ratably over the period in which the future service, support and
performance are provided, which is generally one year.
During the second quarter of fiscal 2003, the Company began receiving royalties
from licensing its technology, which are recognized as revenues in the period
they are earned.
The Company has adopted EITF 00-21, "Revenue Arrangements with Multiple
Deliverables" for fiscal year ended December 31, 2003. Revenue arrangements were
allocated to the separate units of accounting based on their relative fair
values and revenue is recognized in accordance with its policy as stated above.
The impact of adopting EITF 00-21 on the financial statements was immaterial.
Research and Development Costs
Research and development costs are charged to expense as incurred.
Income Taxes
The Company accounts for income taxes under SFAS No. 109, "Accounting for Income
Taxes." Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and net operating loss carryforwards. Deferred tax assets
and liabilities are measured using expected tax rates in effect for the year in
which those temporary differences are expected to be recovered or settled. The
Company has recorded a full valuation allowance for its net deferred tax assets
as of December 31, 2003, due to the uncertainty of the realizability of those
assets.
F-9
INTELLI-CHECK, INC.
NOTES TO FINANCIAL STATEMENTS
Fair Value of Financial Instruments
The Company adheres to the provisions of SFAS No. 107, "Disclosures about Fair
Value of Financial Instruments." This pronouncement requires that the Company
calculate the fair value of financial instruments and include this additional
information in the notes to financial statements when the fair value is
different than the book value of those financial instruments. The Company's
financial instruments include cash and cash equivalents, certificate of
deposits, marketable securities, accounts receivable and accounts payable. At
December 31, 2002 and 2003, the carrying value of the Company's financial
instruments approximated fair value, due to their short-term nature.
Business Concentrations and Credit Risk
Financial instruments, which subject the Company to concentrations of credit
risk, consist primarily of cash, cash equivalents and marketable securities. The
Company maintains cash between two financial institutions. The marketable
securities consist of short term investment grade corporate bonds. The Company
performs periodic evaluations of the relative credit standing of these
institutions.
The Company's sales to date have been limited due to the refocus of its
marketing efforts to a number of clients which are concentrated in the United
States of America and the long sales cycle to government entities. The Company
performs ongoing credit evaluations, generally does not require collateral, and
establishes an allowance for doubtful accounts based upon factors surrounding
the credit risk of customers, historical trends and other information.
The Company had one supplier for the production of its ID-check products, which
terminated July 2003 and one supplier for the production of its IDentiScan
products (Note 9). The Company has modified its software to operate in windows
based systems and can integrate with different hardware platforms that are
readily available in the marketplace. The Company does not maintain a
manufacturing facility of its own and is not dependent on maintaining its
production relationships due to the flexibility of its software to run on
multiple existing platforms.
Net Loss Attributable to Common Shareholders
The Company computes net loss per common share in accordance with SFAS No. 128,
"Earnings Per Share". Under the provisions of SFAS No. 128, basic net loss per
common share ("Basic EPS") is computed by dividing net loss by the weighted
average number of common shares outstanding. Diluted net loss per common share
("Diluted EPS") is computed by dividing net loss by the weighted average number
of common shares and dilutive common share equivalents then outstanding. SFAS
No. 128 requires the presentation of both Basic EPS and Diluted EPS on the face
of the statements of operations.
Diluted EPS for the years ended December 31, 2001, 2002 and 2003, does not
include the impact of stock options and warrants then outstanding, as the effect
of their inclusion would be antidilutive.
The following table summarizes the equivalent number of common shares assuming
the related securities that were outstanding as of December 31, 2001, 2002 and
2003 had been converted:
2001 2002 2003
--------- --------- ---------
Stock options 1,946,041 2,333,866 2,701,124
Convertible redeemable preferred stock 454,545
Warrants 17,500 10,000 233,636
--------- --------- ---------
Total 1,963,541 2,343,866 3,389,305
========= ========= =========
Stock-Based Compensation
At December 31, 2003, the Company has stock based compensation plans, which are
described more fully in Note 8. As permitted by the SFAS No. 123, "Accounting
for Stock Based Compensation", the Company accounts for stock-based compensation
arrangements with employees in accordance with provisions of Accounting
Principles Board ("APB") Opinion No. 25 "Accounting for Stock Issued to
Employees". Compensation expense for stock options issued to employees is based
on the difference on the date of grant, between the fair value of the Company's
stock and the exercise price of the option. No stock based employee compensation
cost is reflected in net loss, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock at the
date of grant. The Company accounts for equity instruments issued to
non-employees in accordance with the provisions of SFAS No. 123 and Emerging
Issues Task Force ("EITF") Issue No. 96-18, "Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction With
Selling Goods or Services". All transactions in which goods or services are the
consideration received for the issuance of equity instruments are accounted for
based on the fair value of the consideration received or the fair value of the
equity instrument issued, whichever is more reliably measurable.
F-10
INTELLI-CHECK, INC.
NOTES TO FINANCIAL STATEMENTS
The following table illustrates the effect on net loss and loss per share if the
Company had applied the fair value recognition provisions of SFAS No. 123 to
employees stock based compensation:
Year Ended
----------
December 31, 2001 December 31, 2002 December 31, 2003
----------------- ----------------- -----------------
Net loss attributable to common stockholders,
as reported $ (4,102,931) $ (5,550,234) $ (6,832,934)
Add:
Total stock based employee compensation
expense determined under fair value based
method for all awards
(1,402,154) (2,196,369) (2,970,686)
-------------- -------------- --------------
Net loss, pro forma $ (5,505,085) $ (7,746,603) $ (9,803,620)
Basic and diluted loss per share, as reported $ (0.52) $ (0.64) $ (0.74)
Basic and diluted loss per share, pro forma $ (0.70) $ (0.89) $ (1.06)
Comprehensive Loss
The Company's comprehensive net loss is equal to its net loss for the years
ended December 31, 2001, 2002 and 2003.
Segment Information
The Company adheres to the provisions of SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." This statement establishes
standards for the way public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in financial
statements issued to shareholders. Management has determined that it does not
have any separately reportable business segments.
Use of Estimates
The preparation of the Company's financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts
reported in the Company's financial statements and accompanying notes. Actual
results could differ materially from those estimates.
Recently Issued Accounting Pronouncements
In April 2003, the FASB issued Statement of Financial Accounting Standards No.
149 ("SFAS No. 149"), "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities," which amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities under SFAS No. 133. SFAS
No. 149 is effective for contracts entered into or modified after September 30,
2003 except for the provisions that were cleared by the FASB in prior
pronouncements. The Company believes that the adoption of SFAS No. 149 had no
material effect on its financial position and results of operations.
In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150
("SFAS No. 150"), "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity." This statement establishes
standards for how an issuer classifies and measures in its statement of
financial position certain financial instruments with characteristics of both
liabilities and equity. In accordance with the standard financial instruments
that embody obligations for the issuer are required to be classified as
liabilities. This Statement is effective for financial instruments entered into
on or before May 31, 2003 and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. The Company adopted SFAS No.
150 on July 1, 2003, and upon further consideration of all relevant factors it
has concluded that the adoption has no material effect on its financial position
and results of operations.
F-11
INTELLI-CHECK, INC.
NOTES TO FINANCIAL STATEMENTS
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
3. PROPERTY AND EQUIPMENT
Property and equipment are comprised of the following as of December 31, 2002
and 2003:
2002 2003
Computer equipment $ 481,640 $ 485,989
Furniture and fixtures 155,589 155,589
Leasehold improvements 143,253 143,253
Office equipment 47,552 47,552
--------- ---------
828,034 832,383
Less- Accumulated depreciation and amortization (503,922) (621,976)
--------- ---------
$ 324,112 $ 210,407
========= =========
Depreciation expense for the years ended December 31, 2001, 2002 and 2003
amounted to $112,044, $126,537 and $118,057, respectively.
4. INTANGIBLE ASSETS
The following summarize the carrying amounts of intangible assets and related
amortization:
As of December 31, 2002 As of December 31, 2003
----------------------- -----------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
Amortized intangible assets
Software 430,000 218,194 -- --
Patents 335,611 75,446 105,661 56,863
Other
Covenants not to compete 150,000 78,125 -- --
Copy rights 17,500 6,076 17,500 11,910
-------- -------- -------- --------
Total $933,161 $377,841 $123,161 $ 68,773
======== ======== ======== ========
Amortization expense for years ended December 31, 2001, 2002, and 2003 were
$14,841, $325,043 and $318,724, respectively.
As of December 31, 2003, estimated amortization expense for each of the
succeeding five years is $6,209.
5. ACCRUED EXPENSES
Accrued expenses are comprised of the following as of December 31, 2002 and
2003:
2002 2003
-------- --------
Professional fees $563,294 $184,876
Payroll 120,536 128,783
Rent 27,363 23,943
Other 60,212 144,862
-------- --------
$771,405 $482,464
======== ========
F-12
INTELLI-CHECK, INC.
NOTES TO FINANCIAL STATEMENTS
6. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets for federal and state income taxes as of
December 31, 2002 and 2003 are as follows:
2002 2003
----------- -----------
Deferred tax assets, net:
Net operating loss carryforwards $ 6,502,540 $ 8,904,550
Depreciation (20,000) (20,000)
Reserves 240,000 636,000
Less- Valuation allowance (6,722,540) (9,520,550)
----------- -----------
Deferred tax assets, net $ -- $ --
=========== ===========
Realization of deferred tax assets is dependent upon future earnings, if any.
The Company has recorded a full valuation allowance against its deferred tax
assets since management believes that it is more likely than not that these
assets will not be realized in the near future.
As of December 31, 2003 the Company had net operating loss carryforwards (NOL's)
for federal income tax purposes of approximately $22.3 million. There can be no
assurance that the Company will realize the benefit of the NOL's. The federal
NOL's are available to offset future taxable income and expire from 2018 through
2023 if not utilized. Under Section 382 of the Internal Revenue Code, these
NOL's may be limited due to ownership changes.
The effective tax rate for the years ended December 31, 2001, 2002 and 2003 is
different from the tax benefit that would result from applying the statutory tax
rates mainly due to the additional valuation allowance that has been recognized.
7. SERIES A 8% CONVERTIBLE REDEEMABLE PREFERRED STOCK
On March 27, 2003, pursuant to a Securities Purchase Agreement, we sold 30,000
shares of our Series A 8% Convertible Redeemable Preferred Stock, par value $.01
per share, for $3,000,000 before expenses to Gryphon Master Fund, L.P. Each
share of Preferred Stock entitles the holder to receive dividends of 8% per
annum and is currently convertible into 15.1515 shares of our common stock.
Additionally, each investor received one (1) five year warrant to purchase
3.787875 shares of common stock at an exercise price of $6.78 with each share of
Preferred Stock purchased. The total amount of shares that may be issued upon
conversion of the Preferred Stock and exercise of the warrants are 454,545 and
113,636, respectively. Dividend payments of $120,000 in cash are due
semi-annually beginning September 30, 2003 and, accordingly, the Company paid
$122,958 on September 30, 2003. In connection with this financing, we paid agent
fees of $150,000 and issued warrants and options to purchase 8,854 shares of our
common stock at a price of $6.78. We also paid professional fees of
approximately $136,000. We recorded the relative fair value of all the warrants
issued in connection with this transaction of $497,700 against the amount of the
Convertible Redeemable Preferred Stock as of March 27, 2003, which was
calculated using the Black-Scholes valuation method, as well as $540,000 of
beneficial conversion feature in accordance with EITF 00-27 and such amounts are
being accreted along with issuance cost of $285,900 over the five year period
until the mandatory redemption date of the Preferred Stock, the fifth
anniversary of closing. We recorded dividend and accretion of $381,991 in 2003.
Shares of Preferred Stock are convertible at the option of Gryphon Master Fund,
L.P at any time prior to redemption. We may redeem any or all of the Preferred
Shares at any time after one year from the closing date at a cash redemption
price of $100 per share, providing the volume weighted average price of our
Common Stock for any 20 out of 30 consecutive trading days exceeds $13.20 per
share. We must redeem all of the Preferred Stock outstanding on the fifth
anniversary of the closing date at a redemption price, in cash, equal to the
purchase price of the Preferred Stock. A registration statement covering the
common stock issuable upon conversion of the preferred stock and exercise of the
warrants was declared effective on June 24, 2003.
8. STOCKHOLDERS' EQUITY
Series A Convertible Preferred Stock
In January 1997, the Board of Directors authorized the creation of a class of
Series A Convertible Preferred Stock with a par value of $.01. The Series A
Convertible Preferred Stock is convertible into an equal number of common shares
at the holder's option, subject to adjustment for anti-dilution. The holders of
Series A Convertible Preferred Stock are entitled to receive dividends as and if
declared by the Board of Directors. In the event of liquidation or dissolution
of the Company, the holders of Series A Convertible Preferred Stock are entitled
to receive all accrued dividends, if applicable, plus the liquidation price of
$1.00 per share. As of December 31, 2002 and 2003, there were no outstanding
shares of Series A Convertible Preferred Stock.
F-13
INTELLI-CHECK, INC.
NOTES TO FINANCIAL STATEMENTS
Secondary Offering
On October 8, 2003, the Company successfully consummated its secondary offering
of 1,100,000 shares of common stock at $8.00 per share and received proceeds net
of underwriting discounts and commissions and before other offering expenses of
approximately $7,906,000. Offering expenses totaled $324,574 and were fully paid
as of December 31, 2003. In connection with this offering, the Company granted
to its underwriter an option to purchase up to an additional 165,000 shares of
its common stock at $8.00 per share less underwriter discounts and commissions
for the purpose of covering over-allotments, which expired on November 16, 2003.
In addition, the Company sold to the underwriter 110,000 warrants for a price of
$110 to purchase 110,000 shares of its common stock at a price of $9.60 per
share. The warrants become exercisable on the first anniversary of the offering
and expire four years from such date.
Common Stock, Warrants and Rights
In March 2001, the Company declared a dividend distribution of one
non-transferable right to purchase one share of the Company's common stock for
every 10 outstanding shares of common stock continuous held from the record date
to the date of exercise, as well as common stock underlying vested stock options
and warrants, held of record on March 30, 2001, at an exercise price of $8.50.
The rights, which were due to expire on October 4, 2002, were extended by the
Company on October 1, 2002 until April 4, 2003, further extended to December 31,
2003 and subsequently extended until June 30, 2004. Under certain conditions,
the Company has the right to redeem the outstanding rights for $.01 per right.
Such conditions were not met as of February 27, 2004. The Company reserved
970,076 shares of common stock for future issuance under this rights offering.
The Company has recorded the fair value of the rights of $1,082,000 as a
dividend during the quarter ended March 31, 2001, which was calculated using the
Black-Scholes valuation method and recorded as an increase in additional paid-in
capital and a reduction in accumulated deficit. The Company also recorded the
fair value of the additional rights extensions of $515,000 and $2,000,000 during
the years ended December 31, 2002 and 2003, respectively, using the
Black-Scholes valuation method and recorded an increase in additional
paid-in-capital and a reduction in accumulated deficit. As of December 31, 2003,
292,001 of these rights were exercised and the Company received $2,482,009
before expenses of $133,834.
In March 2001, the Company extended the expiration date of its warrants that
were due to expire on various dates through June 30, 2001, until September 30,
2001. During the three months ended March 31, 2001, the Company recorded the
$85,000 difference between the fair value of the warrants prior and subsequent
to this extension as a dividend. In September 2001, the Company further extended
the expiration of these warrants until October 31, 2001 and recorded the $55,000
difference between the fair value of the warrants prior and subsequent to this
extension as a dividend during the three months ended September 30, 2001. These
dividends were calculated using the Black-Scholes valuation method and are
included in net loss attributable to common shareholders.
In March 2001, the Board of Directors authorized, subject to certain business
and market conditions, the purchase of up to $1,000,000 of our common stock. As
of December 31, 2001, the Company purchased 10,000 shares of the Company's
common stock for approximately $53,000 and subsequently retired those shares.
During June 2002, the Company purchased 10,000 shares totaling approximately
$70,000 and subsequently retired those shares.
As of December 31, 2003, there remained warrants outstanding to purchase 10,000
shares of the Company's common stock at an exercise price of $8.40 per share,
which are due to expire on November 18, 2004.
All warrants have been issued with an exercise price that is equal to or above
the fair market value of the Company's common stock on the date of grant.
Stock Options
In order to retain and attract qualified personnel necessary for the success of
the Company, the Company adopted a Stock Option Plan (the "1998 Stock Option
Plan") covering up to 400,000 of the Company's common shares, pursuant to which
officers, directors, key employees and consultants to the Company are eligible
to receive incentive stock options and nonqualified stock options. The
Compensation Committee of the Board of Directors administers the 1998 Stock
Option Plan and determines the terms and conditions of options granted,
including the exercise price. The 1998 Stock Option Plan provides that all stock
options will expire within ten years of the date of grant. Incentive stock
options granted under the 1998 Stock Option Plan must be granted at an exercise
price that is not less than the fair market value per share at the date of grant
and the exercise price must not be less than 110% of the fair market value per
share at the date of grant for grants to persons owning more than 10% of the
voting stock of the Company. The 1998 Stock Option Plan also entitles
nonemployee directors to receive grants of non-qualified stock options as
approved by the Board of Directors.
F-14
INTELLI-CHECK, INC.
NOTES TO FINANCIAL STATEMENTS
In August 1999, the Company adopted the 1999 Stock Option Plan (the "1999 Stock
Option Plan") covering up to 1,000,000 of the Company's common shares, pursuant
to which officers, directors, key employees and consultants to the Company are
eligible to receive incentive stock options and nonqualified stock options. The
Compensation Committee of the Board of Directors administers the 1999 Stock
Option Plan and determines the terms and conditions of options granted,
including the exercise price. The 1999 Stock Option Plan provides that all stock
options will expire within ten years of the date of grant. Incentive stock
options granted under the 1999 Stock Option Plan must be granted at an exercise
price that is not less than the fair market value per share at the date of grant
and the exercise price must not be less than 110% of the fair market value per
share at the date of grant for grants to persons owning more than 10% of the
voting stock of the Company. The 1999 Stock Option Plan also entitles
nonemployee directors to receive grants of non-qualified stock options as
approved by the Board of Directors.
At the Company's Annual Meeting held on July 11, 2001, the stockholders approved
the 2001 Stock Option Plan covering up to 500,000 of the Company's common
shares, pursuant to which the officers, directors, key employees and consultants
to the Company are eligible to receive incentive stock options and nonqualified
stock options. The Compensation Committee of the Board of Directors administers
the 2001 Stock Option Plan and determines the terms and conditions of options
granted, including the exercise price. The 2001 Stock Option Plan provides that
all stock options will expire within ten years of the date of grant. Incentive
stock options granted under the 2001 Stock Option Plan must be granted at an
exercise price that is not less than the fair market value per share at the date
of the grant and the exercise price must not be less than 110% of the fair
market value per share at the date of the grant for grants to persons owning
more than 15% of the voting stock of the Company. The 2001 Stock Option Plan
also entitles non-employee directors to receive grants on non-qualified stock
options as approved by the Board of Directors.
At the Company's Annual Meeting held on July 10, 2003, the stockholders approved
the 2003 Stock Option Plan covering up to 500,000 of the Company's common
shares, pursuant to which the officers, directors, key employees and consultants
to the Company are eligible to receive incentive stock options and nonqualified
stock options. The Compensation Committee of the Board of Directors administers
the 2003 Stock Option Plan and determines the terms and conditions of options
granted, including the exercise price. The 2003 Stock Option Plan provides that
all stock options will expire within ten years of the date of grant. Incentive
stock options granted under the 2003 Stock Option Plan must be granted at an
exercise price that is not less than the fair market value per share at the date
of the grant and the exercise price must not be less than 110% of the fair
market value per share at the date of the grant for grants to persons owning
more than 15% of the voting stock of the Company. The 2003 Stock Option Plan
also entitles non-employee directors to receive grants on non-qualified stock
options as approved by the Board of Directors.
During the fourth quarter of 2001, the Company granted options to purchase
41,231 shares of common stock at prices ranging from $9.22 to $16.05 per share
to consultants under various agreements. During 2002, the Company granted stock
options to purchase 180,176 shares of common stock at exercise prices ranging
from $3.97 to $12.10 per share to consultants under various agreements. During
2003, the Company granted additional stock options to purchase 69,425 shares of
common stock at exercise prices ranging from $6.78 to $6.97 per share to
consultants under various agreements. The fair market value of each option was
estimated on the date of grant using the Black-Scholes option pricing model.
Accordingly, we have recorded $389,000, $1,469,327 and $319,904 as deferred
compensation for these services as of December 31, 2001, 2002 and 2003,
respectively. As a result of some of the granted options having varying vesting
periods, the Company revalued certain options either as of the vesting date or
as of the balance sheet date for those options unvested using the Black Scholes
option pricing model. Accordingly, the Company recorded a reduction of the fair
value of these options totaling $596,800 for the year ended December 31, 2002
and an increase in the fair value of $66,781 for the year ended December 31,
2003. During December 31, 2001, 2002 and 2003, the Company recognized
amortization of deferred compensation of $200,000, $713,051 and $357,194,
respectively.
F-15
INTELLI-CHECK, INC.
NOTES TO FINANCIAL STATEMENTS
Stock option activity under the 1998, 1999 and 2001 Stock Option Plans during
the periods indicated below is as follows:
Number Weighted
Of Average
Options Exercise Price
------- --------------
Outstanding at January 1, 2001 1,768,560 4.89
Granted 381,481 11.88
Canceled (37,500) 5.17
Exercised (166,500) 4.72
--------- -----
Outstanding at December 31, 2001 1,946,041 $6.26
Granted 693,176 $9.86
Canceled (31,651) $9.27
Exercised (273,700) $3.02
--------- -----
Outstanding at December 31, 2002 2,333,866 $7.72
Granted 713,650 $7.73
Canceled (171,183) $8.86
Exercised (175,209) $3.88
--------- -----
Outstanding at December 31, 2003 2,701,124 $7.97
========= =====
Included in the option schedule are 1,034,425 non-plan options, of which 701,925
are fully vested.
The weighted-average remaining life of the options outstanding at December 31,
2001, 2002 and 2003 is 2 years, 3.54 years and 2.89 years respectively, and the
weighted-average fair value of the options granted during the year ended
December 31, 2001, 2002 and 2003 is $5.14, $6.62 and $5.58 respectively.
As of December 31, 2001, 2002 and 2003, the fair market value of each option
grant has been estimated on the date of grant using the Black-Scholes option
pricing model based upon expected option lives of 2, 5 and 5 years; risk free
interest rates of 4.50%, 4.50% and 4.50%; expected volatility of 90%, 90% and
90% and a dividend yield of 0%, 0% and 0%, respectively.
As of December 31, 2003, the Company has 1,966,124 options exercisable with a
weighted average exercise price of $7.28. As of December 31, 2003, the Company
has 251,676 options available for future grant under the 1998, 1999, 2001 and
2003 Stock Option Plans.
On November 12, 2003, a member of the Company's Board of Directors resigned. The
Company agreed to extend the expiration date of his options to November 11,
2004, which originally were due to expire on February 10, 2004. As a result, the
Company recorded the fair value of the extension of $138,000 as a non cash
expense during the fourth quarter ended December 31, 2003, which was calculated
using the Black-Scholes valuation method.
In the opinion of management, all stock options have been issued with an
exercise price that is equal or above the fair market value of the Company's
Common Stock on the date of grant.
9. ACQUISITION
On December 18, 2001, the Company acquired substantially all of the assets of
the IDentiScan Company, LLC, which was accounted for under the purchase method.
The aggregate purchase price totaled $1,032,947 which consisted of 59,774 of the
Company's restricted common stock valued at $980,000 based on the fair market
value at the date of acquisition and transaction costs of $52,947, plus
additional incentives upon meeting specific objectives over the next three
years. The purchase agreement provided that if after one year from closing, the
aggregate current market price of the shares issued at closing is less than
$750,000, the Company would pay additional cash or additional common stock for
the short fall. The Company computed the market value of the original 59,774
shares issued as of December 18, 2002 and it was valued at $487,457. As a
result, the Company issued an additional 32,194 shares to the owners of
IDentiScan in accordance with the Asset Purchase Agreement. The allocation of
the purchase price was $430,000 to acquired technology, $230,000 to
patents/trademarks, $181,447 to goodwill, $167,500 for other intangible assets,
and $24,000 to tangible assets. All Intangible assets except goodwill were being
amortized on a straight-line basis of between 2-10 years, which represents the
estimated future period to be benefited.
F-16
INTELLI-CHECK, INC.
NOTES TO FINANCIAL STATEMENTS
As of December 31, 2003, the Company decided to discontinue the selling of its
IDentiScan products. The Company has determined that there is no future benefit
from these intangibles related to the IDentiScan acquisition and, accordingly,
all of its intangible assets, except for $5,590 of copyrights, with a remaining
book value of $363,655, were written off as of December 31, 2003, which affected
the results of operations for the period then ended.
10. COMMITMENTS AND CONTINGENCIES
Operating Leases
During July 2000, the Company entered into a 10-year lease agreement for its new
office. The lease provides for monthly rental payments of $17,458 beginning
December 15, 2000 with immaterial annual increases. In connection with this
lease, the Company provided an irrevocable unconditional letter of credit in the
amount of $250,000 as security, which will be reduced after 45 months to $34,916
for the remaining lease term. The Company has invested $250,000 in a restricted
interest bearing certificate of deposit collateralizing the letter of credit. As
of December 31, 2003 the total amount in this account is $275,808.
In addition, the Company has entered into various leases for office equipment
and office space expiring through December 2010. Future minimum lease payments
under these lease agreements are as follows:
Year Ending December 31:
2004 $ 250,602
2005 252,171
2006 256,387
2007 265,032
2008 275,640
Thereafter 584,808
--------------
$ 1,884,640
==============
Rent expense for the years ended December 31, 2001, 2002 and 2003 amounted to
$208,100, $242,083 and $252,386, respectively.
Capital Lease Obligations
The Company leases computer equipment and office equipment under several capital
leases expiring in 2004. The asset and liability are recorded at the lower of
the present value of minimum lease payments or the fair market value of the
assets.
Future minimum payments under the lease agreements are as follows:
Year Ending December 31, 2004 $ 427
----------
Total minimum lease payments $ 427
==========
Royalty and License Agreements
The Company entered into an agreement with a former officer of the Company
during 1996 to license certain software. The agreement stipulated, among other
provisions, that the officer would receive royalties equal to a percentage of
the Company's gross sales. This agreement was terminated in May 1999 and was
superceded by a new agreement which calls for payment of royalties of .005% on
gross sales from $2,000,000 to $52,000,000 and .0025% on gross sales in excess
of $52,000,000. As of December 31, 2003, total fees payable under this agreement
amounted to $94.
F-17
INTELLI-CHECK, INC.
NOTES TO FINANCIAL STATEMENTS
Employment Agreements
On January 1, 1999, the Company entered into three-year employment contracts
with both its Chairman and Chief Executive Officer and its Senior Executive Vice
President and Chief Technology Officer. Each of the agreements provided for a
base salary of $225,000 subject to certain conditions and the payment of a bonus
if the Company's sales exceed $2,000,000 in the previous year. The bonus would
have been in the amount of $50,000 plus 1% of the amount of sales in excess of
$2,000,000 in each year. In addition, for each fiscal year ending during the
term of the employment agreements, the Company was obligated to grant to each of
the executives an option to purchase the greater of 25,000 shares of common
stock at fair market value on the date of grant or 10,000 shares of common stock
at fair market value on the date of grant for each full $250,000 by which
pre-tax profits for each year exceeds pre-tax profits for the prior fiscal year.
However, the Company was not required to grant options to purchase more than
150,000 shares of common stock with respect to any one fiscal year. During the
terms of their agreements, no bonuses were earned.
On May 7, 2001, the Board of Directors accepted the resignation of its Senior
Vice President and Chief Technical Officer. Accordingly, all of the obligations
under the employment agreement, including the payment of salaries and
incentives, ceased as of this date.
On February 1, 2002 the Company entered into a new three-year employment
contract with its Chairman and Chief Executive Officer, the agreement provides
for an annual base salary of $250,000. In addition, the Company granted the
Chairman and Chief Executive Officer an option to purchase 350,000 shares of
common stock exercisable at $12.10 per share of which 275,000 options are
currently exercisable and 75,000 options become exercisable at December 31,
2004.
In July 1999, the Company entered into a two-year employment agreement with its
Senior Executive Vice President and Chief Financial Officer, which became
effective on September 7, 1999. The agreement provided for a base salary of
$125,000. In addition, the Company granted the Chief Financial Officer an option
to purchase 50,000 shares of common stock, of which 30,000 options were
immediately exercisable at $5.00 per share and 20,000 options became exercisable
on September 7, 2000 at $5.00 per share.
On September 7, 2001, the Company renewed the employment agreement of its Senior
Executive Vice President and Chief Financial Officer. The agreement, which
expires December 31, 2004, provides for a base salary of $135,000 with annual
increases of 5%. In addition, the Company granted 75,000 stock options at an
exercise price of $8.04.
Effective October 1999, the Company entered into a two-year employment agreement
with its Senior Executive Vice President of Sales. The agreement provides for a
base salary of $115,000. In addition, the Company granted the Senior Executive
Vice President of Sales an option to purchase 50,000 shares of common stock at
$7.50 per share, of which 20,000 shares are immediately exercisable and 5,000
shares would have become exercisable for each 10,000 sales of ID-Check products
sold that exceed 10,000. The maximum options that could have been earned in any
calendar year were not to exceed 100,000. This agreement was renewed for an
additional 2 years under the same terms and conditions. The contract expired in
October 2003 and the unvested options expired.
Supplier Agreements
In July 1999, and amended November 1999 and July 2000, the Company entered into
a supplier agreement with Hand Held Products (HHP), formerly Welch Allyn, Inc.
The agreement specified that the Company pay approximately $188,000 for the
development of the Company's ID-check products. In addition, HHP agreed to
manufacture these products for an initial period of two years and provides for
automatic renewal periods of one year. The Company placed an initial order for a
total of 2,000 units of which 500 units were received as of December 31, 1999.
These units were subsequently returned to the manufacturer to exchange the
original scanner for a high-tech scanner, which allows the software to read the
encoding on 51 jurisdictions as opposed to 32 jurisdictions that could be read
on the original scanner. The Company received all of its product on these
orders. During July 2000, the Company placed an additional order to purchase
5,000 units and had received a portion of the units prior to December 31, 2000.
During 2001, the Company agreed to provide HHP with advance deposits totaling
$600,000 towards the fulfillment of its obligation on its purchase order. The
Company satisfied its obligation and paid $200,000 in 2001 and the remaining
$400,000 in 2002. It was further agreed that should the Company decide not to
purchase the required units under the purchase order, all of the materials
purchased by the manufacturer to secure the production of units would be shipped
to the Company and the balance of the obligation would cease. As of December 31,
2002, the Company reserved the deposit of $600,000 due to the uncertainty of
whether or not the Company will complete this purchase order and use the
materials.
Effective July 9, 2003, HHP terminated the Development and Supply agreement
dated July 9, 1999 due to the discontinuation of manufacturing the IDC-1400
model. In addition, the Company decided not to purchase the remaining units
under the outstanding purchase order. The materials that were held by HHP for
the production of additional units will be disposed of during 2004. The
introduction of the Company's new software solutions, capable of operating on
multiple platforms, negates the need to replace the IDC-1400 model.
F-18
INTELLI-CHECK, INC.
NOTES TO FINANCIAL STATEMENTS
In connection with the acquisition of certain assets of the IDentiScan Company,
LLC, on December 17, 2001, the Company entered into a product supply agreement
with Accu-Time Systems, Inc. ("ATS"). ATS agreed to manufacture the IDentiScan
line of products for an initial period of three (3) years and provides for
automatic renewal periods of one year. As a result of the Company discontinuing
the sale of these products, the product supply agreement will not be renewed.
On January 2, 2004, the Company entered into a 2 year product supply agreement
with a manufacturer of input devices and has agreed to a minimum purchase of
units totaling approximately $120,000. These devices, which were private
labeled, are programmed to work in conjunction with the ID-Check technology.
Customer Agreement
Effective January 30, 2002, the Company mutually agreed with Sensormatic
Electronics Corporation not to renew its non-exclusive Master Distributor
agreement which was due to expire on March 31, 2002. The Company received
$412,000 from Sensormatic Electronics Corporation and additionally Sensormatic
agreed to return to the Company all units previously purchased and unsold in
their inventory as settlement of its obligations under the agreement. The
Company did not assign any value to these units. The Company recognized the
income, net of refurbishment costs, totaling $336,744 and it was recorded as
other income on the Company's Statements of Operations for the year ended
December 31, 2002.
Investment Firm Relationships
Effective March 28, 2002, the Company entered into an agreement with KPMG
Corporate Finance LLC to act as an exclusive financial advisor to the Company.
The fee for such services was $100,000 of which $50,000 was paid as of March 31,
2002 and the balance paid by June 30, 2002. This amount was expensed in the
second quarter of 2002 as services were rendered. In connection with financing
described in Note 7, KPMG agreed to receive 2.0% in cash and 1% of funds drawn
in warrants. Effective January 5, 2004, the Company terminated this agreement.
On January 21, 2004, the Company entered into an agreement with Alexandros
Partners LLC to act as consultants in advising the Company in financial and
investor relation matters. The Company agreed to pay a consulting fee of $50,000
payable in 12 equal monthly installments. In addition, the Company issued a
warrant granting the right to purchase 100,000 shares of the Company's common
stock at a purchase price of $7.54 per share vesting ratably over the 12 month
period. The agreement terminates on December 31, 2004. A principal of Alexandros
Partners LLC is currently a member of the Company's Board of Directors.
Legal Proceedings
A class action lawsuit was filed on October 18, 2001 on behalf of short-sellers
of the Company's stock, who allegedly suffered losses because of the rise in the
price of the Company's stock, in the United States District Court for New
Jersey. The class action suit was amended in November 2001 and became an
individual action. On July 26, 2002, the Company filed a motion to dismiss the
lawsuit. On July 30, 2003, the court granted the Company's motion to dismiss the
lawsuit. However, it did allow the Plaintiff to replead some of the claims. The
Plaintiff filed an amended complaint pertaining to certain of the pleadings. On
December 15, 2003, the Company agreed to a settlement with the Plaintiff and the
Plaintiff withdrew their amended lawsuit with prejudice. The settlement, which
was covered by insurance, did not affect the Company's financial position or
results of operations.
On February 19, 2003, the Company filed a summons and complaint upon CardCom
Technology, Inc. alleging infringement on its patent. During September 2003, the
Company settled this case with CardCom Technology, Inc. The Company granted
CardCom a three year royalty license to use certain of the Company's patents in
connection with the manufacture, use and sale of CardCom's age verification
products in the United States and Canada. It also provides that CardCom will pay
royalties of approximately 10% on its net sales. For the year ended December 31,
2003, the Company received $65,165 in royalty fees pursuant to this agreement.
On April 9, 2003, the Company received notification from the American
Arbitration Association that it had awarded Early Bird Capital $921,730 on the
settlement of their demand. The Company had filed with the New York State
Supreme Court an application for setting aside the confirmation of the award. On
October 14, 2003, the court confirmed the award with interest at a rate of 9%
per annum beginning April 9, 2003. The Company recorded a charge of $921,730 in
its Statements of Operations for the three month period ending March 31, 2003.
The Company secured a one year letter of credit for the full amount of the
charge along with interest totaling $1,004,686 until April 9, 2004 in the form
of a certificate of deposit. On March 5, 2004, the parties agreed that the
Company will pay $950,000 to Early Bird Capital by March 8, 2004 as full
settlement in this matter. In connection with this matter, the Company reversed
approximately $513,000 of legal accruals in the fourth quarter of 2003.
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INTELLI-CHECK, INC.
NOTES TO FINANCIAL STATEMENTS
On August 1, 2003, the Company filed a summons and complaint against Tricom Card
Technologies, Inc. alleging infringement on its patent seeking injunctive and
monetary relief. On October 23, 2003, the Company amended its complaint to
include infringement on an additional patent.
We are not aware of any infringement by our products or technology on the
proprietary rights of others.
Other than as set forth above, we are not currently involved in any legal or
regulatory proceeding, or arbitration, the outcome of which is expected to have
a material adverse effect on our business.
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth unaudited financial data for each of
Intelli-Check's last eight fiscal quarters.
Year Ended December 31, 2002 Year Ended December 31, 2003
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter(1) Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
(Dollars in thousands)
Income Statement Data:
Revenues $ 254 $ 287 $ 232 $ 366 $ 264 $ 342 $ 345 $ 285
Gross profit 124 171 126 216 160 (596)(3) 243 (15)(4)
Loss from operations (1,772) (1,346) (1,234) (1,584) (1,101) (2,061) (1,042) (1,333)
Net loss (1,424) (1,332) (1,224) (1,570) (2,019)(2) (2,050) (1,078)(5) (1,304)
Net loss per share attributable
to Common stockholders:
Basic and diluted (0.17) (0.15) (0.14) (0.18) (0.23) (0.24) (0.13) (0.15)
(1) During the fourth quarter, a reserve on inventory deposit of $600,000 was
recorded.
(2) During the first quarter, a litigation reserve of $921,730 was recorded.
(3) During the second quarter, an inventory reserve of $800,000 was recorded.
(4) During the fourth quarter, an additional inventory reserve of $190,000 was
recorded.
(5) Third quarter net loss was reduced by $126,000 to reflect additional
considerations which resulted in determining that adopting FASB No.150 had
no effect on our financial position and results of operations. This
adjustment had no effect on net loss attributable to common stockholders.
We have not experienced seasonality in our sales volume or operating
expenses.
F-20