As filed with the Securities and Exchange Commission on November 1, 1999
Registration No. 333-87797
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
Amendment No. 1
to
FORM SB-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
----------
Intelli-Check, Inc.
(Name of small business issuer in its charter)
Delaware 11-3234779 7372
(State or other jurisdiction (I.R.S. Employer (Primary Standard
of incorporation or organization) Identification No.) Industrial Classification
Code No.)
775 Park Avenue
Huntington, NY 11743-3976
(516) 421 - 2011
(Address and telephone number of principal executive of offices and principal
place of business)
----------
Frank Mandelbaum
775 Park Avenue
Huntington, NY 11743-3976
(516) 421 - 2011
(Name, address and telephone number of agent for service process)
----------
Copies to:
Arnold N. Bressler, Esq James Martin Kaplan, Esq.
Milberg Weiss Bershad Hynes & Lerach LLP Tenzer Greenblatt LLP
One Pennsylvania Plaza 405 Lexington Avenue
New York, NY 10119-0165 New York, NY 10174
Tel: (212) 594-5300 Tel: (212) 885-5000
Fax: (212) 868-1229 Fax: (212) 885-5001
----------
Approximate date of proposed sale to the public:
As soon as practicable after the Registration Statement becomes effective.
----------
If any of these securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration number of the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
----------
The information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
The registrant by this prospectus amends this registration statement on
such date or dates as may be necessary to delay its effective date until the
registrant shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the registration statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
================================================================================
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION DATED November 1, 1999
INTELLI-CHECK, INC.
1,000,000 Shares of Common Stock
$7.00 per share
Intelli-Check, Inc. is offering 1,000,000 shares of our common stock. We
are also registering 25,000 shares of common stock for the benefit of existing
stockholders. Of these 25,000 shares, 15,000 will be issued upon the exercise of
warrants. The shares to be sold by existing stockholders are not being
underwritten and we will not receive any proceeds from the shares sold by the
selling stockholders.
This is our initial public offering and there currently is no public
market for our common stock. Application has been made for quotation of our
common stock on the American Stock Exchange under the symbol "IDN".
The net proceeds from this offering are estimated to be $5,723,500. We
plan to use the net proceeds to purchase terminals, to repay indebtedness, for
product development, sales and marketing and for working capital and general
corporate purposes.
At our request, the underwriters have reserved up to 100,000 shares of the
common stock being underwritten for sale at the initial public offering price to
some of our employees, business associates and other persons, who have expressed
an interest in purchasing shares in this offering. The number of shares
available for sale to the public will be reduced to the extent these individuals
purchase the reserved shares. Any reserved shares not purchased by these
individuals will be offered by the underwriters on the same basis as other
shares offered in this offering.
----------
Investing in our common stock involves risks.
See "Risk Factors" beginning on page 6.
----------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
----------
Offering Information
-----------------------------
Per Share Total
--------- ----------
Public offering price: $7.00 $7,000,000
Underwriting discounts
and commissions: $ .63 $ 630,000
Proceeds to Intelli-Check: $6.37 $6,370,000
----------
We have granted the underwriters a 30-day option to purchase up to an
additional 150,000 shares of common stock to cover over-allotments. The
underwriters are offering the shares on a firm commitment basis. The
underwriters expect to deliver the shares of common stock to purchasers on
______________, 1999.
GunnAllen Starr Securities, Inc.
Financial, Inc.
This prospectus is dated , 1999
<PAGE>
[PICTURES OF ID-CHECK PRODUCTS TO BE INCLUDED]
<PAGE>
================================================================================
PROSPECTUS SUMMARY
To fully understand our business and this offering, please read the rest
of this prospectus, as well as this summary.
Our Business
Intelli-Check was formed in 1994 to develop, manufacture and market an
advanced document verification system to enable a retailer to:
o determine the customer's age and the validity of the I.D. to detect and
prevent the use of fraudulent identification for the purchase of
alcohol, tobacco and other age-restricted products;
o reduce the risk to the retailer of substantial monetary fines, criminal
penalties and license revocation for the sale of age-restricted
products to minors; and
o reduce check cashing, credit card and other types of fraud.
With the cooperation of various governmental agencies, we developed our
initial software product called "ID-Check". The ID-Check terminal, which uses
our patented software:
o is easy to use, requiring just one quick swipe or scan of a driver
license or other ID card by the retailer;
o reads and analyzes encoded information and displays "yes", "no",
"expired" or "tampered" thereby reducing the guesswork of determining
age and the validity of the ID; and
o creates a record of transactions as proof that the retailer has used
proper due diligence.
Our Marketing Strategy
We intend to initially market our ID-Check terminal, subsequent upgrades
and related software applications to retailers of age-restricted products,
including:
o convenience stores;
o bars and night clubs;
o restaurants; and
o retail beer and liquor establishments.
In addition to using our sales personnel, we also intend to distribute
through other channels like independent sales organizations and wholesale
alcohol and tobacco distributors.
Our Location
Our principal executive offices are located at 775 Park Avenue,
Huntington, New York 11743. Our telephone number is (516) 421-2011. We were
originally incorporated in New York in October 1994. In September 1999, we
changed our state of incorporation to Delaware.
The names "ID-Check", "P-Link", "C-Link", "M-Link", "MAVE", "AIR-Check",
and "CREDIT-Check" are trademarks of Intelli-Check. Each trademark, trade name
or service mark of any other company appearing in this prospectus belongs to its
holder.
================================================================================
3
<PAGE>
================================================================================
<TABLE>
<CAPTION>
THE OFFERING
<S> <C>
Common stock offered by Intelli-Check ...................... 1,000,000 shares
Common stock to be outstanding after this offering ......... 6,271,152 shares. Our outstanding shares do not
include:
o 100,000 shares reserved for issuance upon
exercise of the underwriters' warrants;
o 760,000 shares reserved for issuance upon
exercise of options granted under our stock
option plans, of which 392,500 are currently
exercisable;
o 640,000 shares reserved for issuance upon
exercise of options available for future grants
under our stock option plans;
o 2,373,100 shares reserved for issuance upon
exercise of non-plan options and warrants, all
of which are currently exercisable; and
o 150,000 shares reserved for issuance in
this offering to cover over-allotments, if any, by
the underwriters.
Directed shares ............................................ Up to 100,000 shares reserved by the underwriters to be
offered at the initial public offering price to some of our
employees, business associates and other persons, who have
expressed an interest in purchasing shares in this offering.
Any reserved shares not purchased by these individuals will
be offered by the underwriters on the same basis as other
shares offered in this offering.
Use of proceeds ............................................ We intend to use the net proceeds of this offering for:
o purchase of hardware;
o repayment of indebtedness;
o product development;
o sales and marketing; and
o working capital and general corporate purposes.
Risk factors ............................................... Investing in our common stock involves a high
degree of risk and immediate and substantial
dilution.
Proposed AMEX symbol ....................................... IDN
</TABLE>
================================================================================
4
<PAGE>
================================================================================
SUMMARY FINANCIAL INFORMATION
The following summary financial information as of December 31, 1998 and
1997, and for the years ended December 31, 1998 and December 31, 1997 are
derived from our audited financial statements. The summary financial data as of
September 30, 1999 and for the nine months ended September 30, 1999 and 1998 are
derived from our unaudited financial statements.
Statement of Operations Information:
<TABLE>
<CAPTION>
Year Ended December 31 Nine Months Ended September 30
------------------------------ ------------------------------
1997 1998 1998 1999
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
Sales ........................................... $ 16,736 $ 86,354 $ 86,354 $ 327
Cost of goods sold .............................. 4,343 22,074 22,074 55
Gross profit .................................... 12,393 64,280 64,280 272
Operating expenses .............................. 1,579,632 1,506,615 826,799 1,214,146
Net loss ........................................$(1,604,296) $(1,503,814) $(785,767) $(1,249,458)
========== ========== ========= ==========
Net loss per common share basic and diluted ..... $ (0.46) $ (0.36) $ (0.19) $ (0.26)
========== ========== ========= ==========
Common shares used in computing per
share amounts:
Basic and diluted ............................... 3,505,638 4,208,003 4,162,553 4,841,483
========== ========== ========= ==========
</TABLE>
Balance Sheet Information:
<TABLE>
<CAPTION>
September 30, 1999
December 31, ----------------------------
1998 Actual As Adjusted
------------ -------- -----------
(unaudited)
<S> <C> <C> <C>
Cash ......................................... $159,600 $ 762,239 $5,285,739
Working capital (deficit) .................... (924,666) (325,885) 4,197,615
Total assets ................................. 451,303 1,667,356 6,190,856
Total long-term debt ......................... 6,993 10,299 10,299
Total debt ................................... 113,153 1,227,942 27,942
Stockholders' (deficit) equity ............... (657,570) 117,887 5,841,387
</TABLE>
The as adjusted information presented above gives effect to the sale of
1,000,000 shares offered by this prospectus and the repayment of $1,200,000 in
secured promissory notes.
================================================================================
5
<PAGE>
RISK FACTORS
The shares offered by this prospectus are speculative and involve a high
degree of risk. Each prospective investor should carefully consider the
following risk factors before making an investment decision.
Because of our lack of operating history, your basis for evaluating us is
limited.
We have a limited operating history by which you can evaluate our
prospects and future performance. Since we began business in 1994, we have been
engaged primarily in research and development and have had no significant
revenues from sales of our products. You should consider our prospects in light
of the risks, expenses and difficulties frequently encountered in the operation
of a new business that relies on developing technology. You should also consider
our prospects in light of the risks, expenses and difficulties encountered by
businesses in the move from development to commercialization of new products
based on innovative technology.
Because we have experienced losses and expect our expenses to increase, we
may not be able to achieve profitability.
We have incurred operating losses since our inception. We had an
accumulated deficit of approximately $2.75 million at September 30, 1999. We
cannot assure you that our revenues will become significant or that we will ever
achieve profitable operations.
We may not have sufficient capital for our business and we will be
required to seek additional financing to fund our operations.
Our capital requirements have been and will continue to be significant.
The net proceeds of the sale of the shares in this offering, together with our
available cash, are expected to continue to fund our projected operations at
least for the next twelve months. If we were to fail to attain positive cash
flow thereafter, we will be required to seek additional equity or debt financing
to fund the costs of our operations. We cannot assure you that additional
financing will be available to us when needed, on commercially reasonable terms,
or at all. If we are unable to obtain additional financing when needed, we will
be required to curtail our marketing and production plans and possibly cease
operations.
Because our business model is unproven, achieving market acceptance will
require significant efforts and expenditures to create awareness, demand and
interest by potential customers regarding perceived benefits.
We cannot assure you that any of our products will gain market acceptance
or that our product will function to the satisfaction of our customers. We also
do not know whether we will be able to produce our product at a cost that will
be acceptable to potential purchasers. As a result, we may be required to reduce
our prices, which would have an adverse effect on our profit margins.
We depend on our intellectual property, which may not be fully protected.
Our proprietary technology distinguishes our products from those of our
competitors. We rely on a combination of our patent and trademarks, trade secret
laws and nondisclosure and confidentiality agreements with our employees and
others with whom we do business, to protect our proprietary technology. We
cannot assure you that these measures will provide meaningful protection for our
trade secrets or proprietary technology in the event of any unauthorized use or
disclosure. In addition, others may obtain access to or independently develop
technologies or know-how similar to ours.
A third party is seeking to invalidate our patent.
The IdentiScan Company, LLC offers a product that electronically reads and
calculates age from a driver license. In August 1999, IdentiScan filed a
complaint against us which seeks to have the IdentiScan product declared
non-infringing on our patent and seeks to have our patent declared invalid. The
complaint does not seek monetary damages. We believe that our patent, to which
we hold clear title, is valid and fully enforceable. We intend to vigorously
defend it. We also believe IdentiScan's claim of non-infringement is without
merit. In October 1999, we made a motion to dismiss IdentiScan's claim. This
motion is currently pending. However, if our patent were to be declared invalid
or if our patent were to be otherwise limited, we believe it would have an
adverse effect on our business and future success because other companies,
including IdentiScan, might be able
6
<PAGE>
to use some or all of the technology covered by our patent to develop and market
products which will directly compete with our products. Furthermore, if we were
required to devote a significant portion of the proceeds of this offering to
defend our patent, we would have less money available for other purposes.
We currently rely on one hardware supplier to provide us with the
terminals to run our ID-Check software. Delays and inconsistencies in the
quality of the terminals could result in lost sales.
If the supplier of our hardware terminals does not meet our delivery
requirements, we may have to seek an alternate supplier. While we believe they
would be available, we have not yet identified any alternate suppliers. Because
of the technological nature of our product, we may not be able to quickly
replace our current hardware supplier if that were necessary. Any delay in
securing a new source on satisfactory terms or within the time frame to meet our
sales goals could have a material adverse effect on our business. Additionally,
delays in production or inconsistencies in quality could result in our failure
to fulfill sales orders and the cancellation of potential orders, which could
damage our reputation.
If governmental agencies were to stop sharing data with us, our business
would be adversely affected.
Currently, a number of states and Canadian provinces which conform to the
guidelines established by standardization bodies cooperate with us by providing
sample driver licenses and identification cards so that we may program the
ID-Check terminal to read and analyze the encoded information found on the
driver licenses and identification cards. We cannot assure you that these
jurisdictions will continue to cooperate with us. If they stop cooperating with
us, our ability to market our products may be severely limited.
Our success depends on our two most senior officers.
Our success will depend on our two most senior officers, Frank Mandelbaum,
our Chairman of the Board and Chief Executive Officer and Kevin Messina, our
President and Chief Technical Officer. The loss of the services of either of
them could materially and adversely affect us.
Future sales of our common stock by our existing stockholders could have
adverse effects.
Upon consummation of this offering we will have 6,271,152 shares of common
stock outstanding, of which the 1,000,000 shares offered hereby will be freely
tradeable without restriction or further registration under the Securities Act.
Of the remaining 5,271,152, 1,164,500 shares of our common stock have been held
for over two years and are currently eligible for sale under Rule 144 of the
Securities Act. Additionally, beginning 90 days after the date of this
prospectus, 394,605 shares of our common stock will be eligible for sale under
Rule 144. Also, upon the expiration of the one-year lock-up agreement with the
underwriters, 3,358,447 shares of our common stock will become eligible for
sale, in some cases subject to volume restrictions under Rule 144. In addition,
there are 3,873,100 shares subject to currently outstanding options or warrants
or reserved for future issuance. The market price of our common stock could
decline as a result of sales of a large number of shares of common stock in the
market after this offering, or the perception that these sales may occur. These
sales also might make it more difficult for us to sell equity securities in the
future at a time and at a price that we deem appropriate.
Our stock price could be extremely volatile.
The market price of our common stock may be highly volatile as a result of
factors specific to us or applicable to our market and industry in general.
These factors, include:
o variations in our annual or quarterly financial results or those of
our competitors;
o changes by financial research analysts in their recommendations or
estimates of our earnings;
o conditions in the economy in general or in the information
technology service sector in particular;
o announcements of technological innovations or new products or
services by us or our competitors;
o unfavorable publicity or changes in industry guidelines, applicable
laws and regulations, or their judicial or administrative
interpretations, affecting us or the information technology service
sectors;
o levels of customer satisfaction, including our ability to retain
existing customers and attract new customers; and
o price competition or the introduction of new competitors.
7
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements based on our current
expectations, assumptions, estimates and projections about Intelli-Check and our
industry. Our actual results could differ materially from those anticipated in
these forward-looking statements as a result of various factors, including all
the risks and uncertainties discussed in Risk Factors and elsewhere in this
prospectus. We do not undertake to update publicly any forward-looking
statements for any reason, even if new information becomes available or other
events occur in the future. The safe harbors for forward-looking statements
provided by the federal securities laws do not apply to initial public
offerings.
8
<PAGE>
USE OF PROCEEDS
The net proceeds to Intelli-Check from the sale of the 1,000,000 shares of
common stock offered by this prospectus are estimated to be $5,723,500, or
$6,647,500 if the underwriters' over-allotment option is exercised in full after
deducting the underwriting discount and estimated offering expenses. We will not
receive any portion of the proceeds from the sale of common stock by selling
stockholders.
We expect to use the net proceeds during the twelve months following the
consummation of this offering approximately as follows:
<TABLE>
<CAPTION>
Approximate Approximate
Dollar Percentage of
Application of Net Proceeds Amount Net Proceeds
- ------------------------ ----------- -------------
<S> <C> <C>
Purchase of terminals .............................................. $2,875,000 50.2%
Repayment of indebtedness .......................................... 1,225,000 21.4%
Product development ................................................ 400,000 7.0%
Sales and marketing ................................................ 300,000 5.2%
Working capital and general corporate purposes ..................... 923,500 16.2%
----------- -------
Total ............................................................ $5,723,500 100.0%
=========== =======
</TABLE>
Purchase of terminals. We intend to use a portion of the proceeds for the
purchase of ID-Check terminals, which we expect to be delivered by the end of
the second quarter of 2000.
Repayment of indebtedness. We intend to repay $1,200,000 principal amount
of 27 secured promissory notes bearing interest at the annual rate of 10%, plus
approximately $25,000 of accrued interest, which will be due on the promissory
notes. The promissory notes, the terms of which are identical except for the
principal amounts, mature on the earlier of July 31, 2000 or the closing of this
initial public offering. The proceeds from the sale of these promissory notes
were used for the purchase of ID-Check terminals and for working capital and
general corporate purposes.
Product development. We intend to continue to enhance the performance and
increase the capability of our ID-Check terminal. We also intend to develop
additional applications for our technology. Costs of product development include
the hiring of additional employees, construction of prototypes and testing.
Sales and marketing. We expect to hire sales and marketing personnel to
establish a marketing program. We also will be preparing additional marketing
materials and further developing our website.
Working capital and general corporate purposes. We may use a portion of
the proceeds allocated to working capital and general corporate purposes to pay
trade payables incurred from time to time and the salaries of our employees, if
cash flow from operations is insufficient for these purposes.
If the underwriters exercise their over-allotment option in full, we will
realize additional net proceeds of $924,000, all of which will be allocated to
working capital and general corporate purposes.
The foregoing represents our best estimate of the allocation of the net
proceeds of this offering based upon the current status of our business. This
estimate is based on certain assumptions, including the development of our
business in the way we anticipate. If any of our assumptions prove incorrect, we
may find it necessary to reallocate a portion of the proceeds within the
above-described categories or use portions of the proceeds for other purposes.
Our estimates may prove to be inaccurate, new programs or activities may be
undertaken which will require considerable additional expenditures or unforeseen
expenses may occur.
Based upon our current plans and assumptions relating to our business
plan, we believe the net proceeds of this offering, combined with other
anticipated available cash resources, will be sufficient to meet our cash
requirements for at least twelve months following the closing of this offering.
If our plans change or our assumptions prove to be inaccurate, we may need to
seek additional financing sooner than currently anticipated or curtail our
operations. We cannot assure you that the proceeds of this offering will be
sufficient to fund our proposed growth or that additional financing will be
available if needed.
Proceeds not immediately required for the purposes described above will be
invested principally in United States government securities, short-term
certificates of deposit, money market funds or other short-term interest bearing
investments.
9
<PAGE>
DILUTION
The difference between the initial public offering price per share and the
net tangible book value per share of common stock after this offering
constitutes the dilution to investors in this offering. Net tangible book value
is determined by dividing total tangible assets less total liabilities by the
number of outstanding shares of common stock.
At September 30, 1999, we had a net tangible book value of $42,699, or
$0.01 per share. After giving effect to the sale of 1,000,000 shares of common
stock offered by Intelli-Check by this prospectus, after deducting estimated
underwriting discounts and expenses of this offering, and the application of the
estimated net proceeds, our adjusted net tangible book value as of September 30,
1999 would have been $5,766,199, or $0.92 per share. This represents an
immediate increase in net tangible book value of $0.91 per share to existing
stockholders and an immediate dilution of $6.08 (86.9%) per share to new
investors.
The following table illustrates the dilution to new investors on a per
share basis:
<TABLE>
<S> <C> <C>
Initial public offering price per share .......................................... $7.00
Net tangible book value before offering .......................................... 0.01
Increase attributable to new investors and pro forma adjustments ................. 0.91
----
Adjusted net tangible book value after the offering .............................. 0.92
------
Dilution per share to new investors .............................................. $6.08
======
</TABLE>
The following table sets forth as of the date of this prospectus, with
respect to our existing stockholders and new investors, a comparison of the
number of shares of common stock we issued, the percentage ownership of those
shares, the total consideration paid, the percentage of total consideration paid
and the average price per share.
<TABLE>
<CAPTION>
Shares Acquired Total Consideration Average
----------------------------------------------- Price per
Number Percent Amount Percent Share
---------- -------- ----------- -------- --------
<S> <C> <C> <C> <C> <C>
Existing stockholders ............................ 5,271,152 84% $2,871,159 29% $ .54
New investors .................................... 1,000,000 16% $7,000,000 71% $7.00
---------- ------ ----------- ------ --------
Total ............................................ 6,271,152 100% $9,871,159 100%
========== ====== =========== ======
</TABLE>
The above table assumes no exercise of the underwriters' over-allotment option.
If the underwriters exercise the over-allotment option in full, we estimate that
the new investors will have paid $8,050,000 for the 1,150,000 shares of common
stock being offered, representing approximately 73.7% of the total consideration
for 17.9% of the total number of shares of common stock outstanding. In
addition, the above table does not give effect to the shares issuable upon
exercise of outstanding options and warrants.
DIVIDENDS
We have never declared or paid any dividends to the holders of our common
stock and we do not anticipate paying cash dividends in the foreseeable future.
We currently intend to retain all earnings for use in connection with the
expansion of our business and for general corporate purposes. The future
declaration and payment of dividends, if any, will be within the sole discretion
of our board of directors and will depend upon our profitability, financial
condition, cash requirements, future prospects and other factors deemed relevant
by our board of directors. In addition, the payment of cash dividends on our
common stock in the future could be limited by the terms of financing agreements
that we may enter into or by the terms of any preferred stock that may be
authorized and issued.
10
<PAGE>
CAPITALIZATION
The following table presents our capitalization as of September 30, 1999
on an actual basis, adjusted to give effect to pro forma information and
adjusted to give effect to our sale of 1,000,000 shares of common stock offered
by us under this prospectus and the anticipated application of the estimated net
proceeds. The share numbers presented in the following table do not include:
o 150,000 shares of common stock reserved for issuance in this
offering to cover the over-allotment option;
o 1,402,000 shares of common stock reserved for issuance upon exercise
of outstanding stock option plan and non-plan options;
o 1,681,100 shares of common stock reserved for issuance upon exercise
of outstanding warrants; and
o 690,000 shares of common stock reserved for issuance upon exercise
of options available for future grant under our stock option plans.
<TABLE>
<CAPTION>
September 30, 1999
----------------------------
Actual As Adjusted
---------- ------------
<S> <C> <C>
Short-term debt ................................................................ $1,200,000 $ --
========== ============
Current portion of long-term debt .............................................. $ 17,643 $ 17,463
========== ============
Long-term debt ................................................................. $ 10,299 $ 10,299
========== ============
Stockholders' Equity:
Preferred Stock Series A, par value $.01 per share, 1,000,000
authorized, no shares issued and outstanding pro forma or as adjusted ...... $ -- $ --
Common Stock, par value $.001 per share, 20,000,000 authorized;
5,271,152 shares issued and outstanding actual and 6,271,152 shares
issued and outstanding as adjusted ......................................... 5,271 6,271
Additional paid-in capital ..................................................... 2,865,888 8,588,388
Accumulated deficit ............................................................ (2,753,272) (2,753,272)
---------- ------------
Total Stockholders' Equity ..................................................... 117,887 5,841,387
---------- ------------
Total Capitalization ........................................................... $ 128,186 $ 5,851,686
========== ============
</TABLE>
The as adjusted short-term debt reflects the expected repayment of
$1,200,000 of secured promissory notes with the proceeds of this offering.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Intelli-Check was formed in 1994 to address a growing need for reliable
age and document verification systems to detect fraudulent driver licenses and
other widely accepted forms of government-issued identification documents. We
have emerged from a development stage company to an operating company and we
recently began commercial production of our product. Our sales to date have been
nominal since we have previously produced only a limited pre-production run of
our product for testing and market acceptance. Since inception, we have incurred
significant losses and negative cash flow, and as of September 30, 1999 we had
an accumulated deficit of approximately $2.75 million. We have not achieved
profitability and expect to continue to incur operating losses. We will continue
to fund operating and capital expenditures from available capital until such
time, if any, as we achieve profitability. 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.
Results of Operations
Comparison of the nine months ended September 30, 1999 to the nine months ended
September 30, 1998.
Sales decreased 99.6% from $86,354 for the nine months ended September 30,
1998 to $327 recorded for the nine months ended September 30, 1999. Sales for
the period ended September 30, 1998 consisted of sales of our initial
pre-production run of ID-Check terminals while the September 30, 1999 period
only included sales of supplies. In the third quarter of 1998, we withdrew from
the marketplace so that we could devote our resources to expand the capability
of our product by converting our software to operate on programmable terminals.
Operating expenses, which consist of selling, general and administrative
and research and development expenses, increased 46.8% from $826,799 in the
period ended September 30,1998 to $1,214,146 in the September 30, 1999 period.
Selling expenses, which consist primarily of salaries and related costs for
marketing, increased 45.3% from $118,315 in the period ended September 30, 1998
to $171,908 in the September 30, 1999 period primarily due to the hiring of a
director of national sales. General and administrative expenses, which consist
primarily of salaries and related costs for general corporate functions,
including executive, finance, accounting, facilities and fees for professional
services, increased 56% from $585,887 in the September 30, 1998 period to
$914,239 in the period ended September 30, 1999, primarily as a result of an
increase in salaries because of additional hiring and the fact that our senior
executives did not defer salary after June 1, 1999, an increase in depreciation
and increased professional fees. Research and development expenses, which
consist primarily of salaries and related costs for the development of our
products, remained relatively stable increasing 4.4% from $122,597 in the
September 30, 1998 period to $127,999 in the September 30, 1999 period. We
believe that we require additional significant investments in development and
operating infrastructure, including the hiring of additional sales and marketing
personnel. Therefore, we expect that expenses will continue to increase for the
foreseeable future as we increase expenditures for advertising, brand promotion,
public relations and other marketing activities. We expect that we will incur
additional general and administrative expenses as we continue to hire personnel
and incur incremental costs related to the growth of the business. Research and
development expenses will also increase as we complete and introduce additional
products based upon our patented ID-Check technology.
Interest expense increased from $23,248 in the period ended September 30,
1998 to $35,584 for the period ended September 30, 1999 as a result of interest
expense on increased deferred compensation and accrued interest on our
promissory notes issued in August and September 1999.
We have incurred net losses to date, therefore we have paid nominal income
taxes.
As a result of the factors noted above, our net loss increased from
$785,767 in the period ended September 30, 1998 to $1,249,458 in the September
30, 1999 period.
12
<PAGE>
Comparison of the year ended December 31, 1998 to the year ended December 31,
1997.
Sales increased 416% from $16,736 for the year ended December 31, 1997 to
$86,354 recorded for the year ended December 31, 1998. Revenues for the year
ended December 31, 1997 were lower because we did not receive the first
pre-production ID-Check terminals until October 1997. Thus, sales did not
commence until the last fiscal quarter for the reasons discussed above.
Operating expenses decreased 4.6% from $1,579,632 in the year ended
December 31, 1997 to $1,506,615 in the year ended December 31, 1998. This
decrease was attributable to a decline in research and development expenses
partially offset by higher general and administrative costs and selling
expenses. General and administrative expenses increased 6.9% from $992,375 in
the year ended December 31, 1997 to $1,060,537 in the year ended December
31,1998, primarily as a result of increased professional fees. Selling expenses
increased 12.1% from $124,453 in the year ended December 31, 1997 to $139,470 in
the year ended December 31, 1998 as a result of marketing expenses for the
introduction of ID-Check. Research and development expenses decreased 33.7% from
$462,804 in the year ended December 31, 1997 to $306,608 in the year ended
December 31, 1998 primarily due to the completion in 1997 of our software and
hardware development for the pre-production units.
Interest expense increased from $37,057 in the year ended December 31,
1997 to $61,479 for the year ended December 31, 1998 as a result of interest
expense on increased deferred compensation and borrowings during the year.
As of December 31, 1998, we had a net operating loss carryforward of
$950,568 for financial reporting purposes. At December 31, 1997, we had no
operating loss carry forward due to our status as a subchapter S corporation
under the Internal Revenue Code for the prior periods. Under subchapter S, all
losses were allocated to our stockholders. We have recorded a valuation reserve
equal to the amount of the carryforward due to the uncertain realization of
these tax benefits.
Our net loss decreased from a net loss of $1,604,296 in the year ended
December 31, 1997 to $1,503,814 in the year ended December 31, 1998, primarily
as a result of the increase in sales and the decrease in research and
development expenses.
Liquidity and Capital Resources
Our capital requirements have exceeded our cash flow from operations as we
have been developing our business. At December 31, 1998 we had a working capital
deficit of $924,666. Since inception, we have financed our operations primarily
through private equity and debt financing, issuance of stock for payables and
borrowings from officers. During the year ended December 31, 1997, we received
aggregate net proceeds of $1,917,849 from the private sales of stock and
warrants and issuance of a convertible note payable. During the year ended
December 31, 1998, we received aggregate net proceeds from the private sale of
stock and warrants of $766,000. During the nine months ended September 30, 1999,
we received aggregate net proceeds of $719,200 from the private sale of stock
and warrants. In addition, in August and September 1999, we received aggregate
net proceeds of $1,050,000 from the issuance of promissory notes and warrants.
We used the net proceeds primarily for the purchase of terminals, working
capital and general corporate purposes.
Cash used in operating activities for the nine months ended September 30,
1999 of $1,253,088 was primarily attributable to the net loss of $1,249,458,
deposits on hardware purchases of $423,905 and increase in other assets of
$148,320 offset by an increase in accounts payable and accrued expenses of
$503,370. Cash used in operating activities for the nine months ended September
30, 1998 of $791,538 was due primarily to net operating losses of $777,867. Cash
used in operating activities for the year ended December 31, 1998 of $1,048,025
resulted primarily from the net loss of $1,503,814 and the increase in inventory
of $122,292, offset by a loss on disposal of assets of $225,783 and increase in
accounts payable and accrued expenses of $262,172. Cash used in operating
activities for the year ended December 31, 1997 of $1,164,986 resulted primarily
from net losses of $1,604,296 offset by an increase in accounts payable and
accrued expenses of $423,651. The increase in accounts payable and accrued
expenses for both periods is attributable to our diminished working capital.
Cash used in investing activities was $85,409 for the nine months ended
September 30, 1999 and $26,006 for the nine months ended September 30, 1998.
Cash used in investing activities was $26,975 for the
13
<PAGE>
year ended December 31, 1998 and $246,264 for the year ended December 31, 1997.
Net cash used in investing activities for these periods consisted primarily of
capital expenditures for computer equipment and furniture and fixtures. Cash
provided by financing activities was $1,941,136 for the nine months ended
September 30, 1999 and $461,343 for the nine months ended September 30, 1998.
Cash provided by financing activities was $752,830 for the year ended December
31, 1998 and $1,866,540 for the year ended December 31, 1997. Cash provided by
financing activities primarily related to the private sales of promissory notes,
common stock, preferred stock and warrants discussed above.
Because of our limited cash resources, our senior officers deferred the
receipt of their compensation, in whole or in part, prior to June 1, 1999. This
obligation was eliminated through the issuance of stock, warrants and stock
options in the second quarter of 1999. No deferred compensation is currently
outstanding.
We currently anticipate that our available cash resources combined with
the net proceeds from this offering will be sufficient to meet our anticipated
working capital and capital expenditure requirements for at least twelve months
after the closing of this offering. These requirements are expected to include
the purchase of 5,000 terminals to run our patented software, product
development, sales and marketing, working capital requirements and other general
corporate purposes. We will also repay debt incurred in August and September
1999. 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.
Net Operating Loss Carryforwards
As of December 31, 1998, we had a net operating loss carryforward of
$950,568, which expires beginning in the year 2013. The issuance of equity
securities in the future, together with our recent financings and this offering,
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.
Recent Accounting Standards
In April 1998, the American Institute of Certified Public Accountants
issued 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
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. SOP 98-1 is effective for fiscal years
beginning after December 31, 1998. We do not expect the adoption of SOP 98-1 to
have a material effect on our financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards for derivative instruments,
including derivative instruments embedded in other contracts, and for hedging
activities. SFAS No. 133 was originally to be effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. In July 1999, however, the FASB
issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133," which
amends SFAS No. 133 to be effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. We currently do not engage or plan to engage in
derivative instruments or hedging activities.
Year 2000 Issues
Many currently installed computer systems and software products are coded
to accept or recognize only two digit entries in the date code field. These
systems and software products may recognize a date using "00" as the year 1900
rather than the year 2000. As a result, computer systems and/or software used by
many companies
14
<PAGE>
and governmental agencies may need to be upgraded to comply with such Year 2000
requirements or risk system failure or miscalculations causing disruptions of
normal business activities.
State of Readiness. We have made a preliminary assessment of the Year 2000
readiness of our information technology systems, including our ID-Check
software, and our non-information technology systems. Our plan consists of:
o quality assurance testing of our internally developed proprietary
software;
o contacting third-party vendors and licensors of material hardware,
software and services;
o contacting vendors of material non-information technology systems;
o assessment of repair or replacement requirements;
o repair or replacement; and
o implementation.
We have substantially completed a review and assessment of all proprietary
and third party hardware and software and believe that our hardware and software
are substantially Year 2000 compliant. We have made inquiries of a number of our
vendors requesting assurances of their compliance. These third parties,
including our supplier of terminals for the ID-Check software, have generally
advised us that their review of their operating systems indicate that their
operating systems are Year 2000 compliant or will be Year 2000 compliant in a
timely manner.
Costs. To date, we have not incurred any material costs in identifying or
evaluating Year 2000 compliance issues. Most of our expenses have been and will
continue to be related to the operating costs associated with evaluating Year
2000 compliance matters generally.
Risks. We are not currently aware of any Year 2000 compliance problems
that would have a material adverse effect on our business, results of operations
and financial condition. However, we may discover Year 2000 compliance problems
that will require substantial software revisions or replacement of hardware. Our
failure to fix or replace software or hardware on a timely basis could result in
lost revenues, increased operating costs and the loss of customers and other
business interruptions, any of which could have a material adverse effect on our
business, results of operations and financial condition. Moreover, the failure
to adequately address Year 2000 compliance issues could result in claims of
mismanagement, misrepresentation or breach of contract and related litigation,
which could be costly and time-consuming to defend.
In addition, we cannot assure you that third-party software or hardware
incorporated into our material systems or other systems upon which we rely will
not need to be revised or replaced, which could be time consuming and expensive.
In addition, we cannot assure you that governmental agencies, utility companies,
third-party service providers and others outside of our control will be Year
2000 compliant. The failure by such entities to be Year 2000 compliant could
result in a systemic failure beyond our control. Any of these occurrences could
have a material adverse effect on our business, financial condition and results
of operations. At this time, we do not possess the information necessary to
estimate the potential costs of revisions to or the replacement of software or
hardware that are determined not to be Year 2000 compliant. Although we do not
anticipate that such expenses will be material, such expenses, if higher than
anticipated, could have a material adverse effect on our business, financial
condition and results of operations.
Contingency Plan. As discussed above, we are engaged in an ongoing Year
2000 assessment and have not yet developed any contingency plans. The results of
our Year 2000 simulation testing and the responses received from third-party
vendors and service providers will be taken into account in determining the
nature and extent of any contingency plans.
15
<PAGE>
BUSINESS
Introduction
Intelli-Check was formed in 1994 to develop, manufacture and market an
advanced document verification system to enable a retailer to:
o determine the customer's age and the validity of the I.D. to detect
and prevent the use of fraudulent identification for the purchase of
alcohol, tobacco and other age-restricted products;
o reduce the risk to the retailer of substantial monetary fines,
criminal penalties and license revocation for the sale of
age-restricted products to minors; and
o reduce check cashing, credit card and other types of fraud.
In an effort to combat these problems, the federal government and many
states and Canadian provinces have enacted laws requiring businesses that sell
age-restricted products to verify the ID of potential customers to determine if
they are of legal age. These laws impose stringent penalties. In addition, many
states and local governments are setting up undercover "sting" operations to
detect violations.
The product we have designed and developed is based on our patented
ID-Check technology. ID-Check provides businesses with a reliable, simple and
cost-effective way to verify age and reduce the risk of severe penalties for
non-compliance with these laws. We have not manufactured or sold a substantial
number of ID-Check terminals to date. In 1998, we launched a limited
pre-production pilot program by installing an earlier version of our ID-Check
terminal in 68 locations throughout the United States and Canada. Of the 68
installations, 32 are convenience stores, 24 are bars and 12 are in a variety of
other retail establishments. Based on the positive reaction of our customers, we
have begun commercial production of an enhanced ID-Check terminal for more
widespread distribution.
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 in social services, gun control, check cashing and other applications.
Non-driver identification card
Although many people do not have a driver license, jurisdictions that use
AAMVA compliant driver licenses offer other identification cards that contain
encoded information. These identification cards, as well as military ID's and
immigration "Green" cards, are fundamentally identical to driver licenses.
Because driver licenses are the most widely used form of legally acceptable
governmental identification we refer to all of these types of documents as
"driver licenses" in this prospectus. Our ID-Check software is equally capable
of performing its function with all of these types of government identification.
AAMVA guidelines
In response to the ease with which driver licenses and non-driver
identification cards can be altered, tampered with or fraudulently obtained, an
increasing number of states and Canadian provinces have adopted the guidelines
established by the American Association of Motor Vehicle Administrators (AAMVA)
and the American National Standards Institute (ANSI). AAMVA is a U.S. based
international organization that establishes guidelines for motor vehicle
administrators in NAFTA countries. Currently, 32 states and 6 Canadian provinces
conform with AAMVA guidelines that suggest driver licenses and non-driver
identification cards contain "encoded" information on magnetic stripes or bar
codes, which cannot be accurately read without the necessary decoding equipment
and technology. Based on our discussions with government officials,
manufacturers of driver licenses and members of various other driver license
committees, we expect that additional U.S. states and Canadian provinces will
implement plans to issue driver licenses that contain information in
electronically readable format complying with AAMVA guidelines.
16
<PAGE>
Underage Use of Alcohol and Tobacco Products and the Need for Age Verification
Overview
Underage access to age-restricted products, like alcohol and tobacco,
remains a major societal problem, as the following statistics indicate:
o according to Connecticut Clearinghouse, approximately 10.6 million
or 51.2% of high school students in the United States drink
alcoholic beverages at least once weekly, with 86% purchasing the
alcohol themselves;
o the Office of Drug Control Policy reported that approximately 9.5
million drinkers of alcoholic beverages in 1996 were between the
ages of 12 and 20, according to the U.S. Department of Justice
Office of Juvenile Justice and Delinquency Prevention;
o The Insurance Institute for Highway Safety has said that, in 1997,
26% of 16-20 year olds fatally injured in motor vehicle crashes had
high blood alcohol concentrations;
o according to the Journal of Adolescent Health, approximately 3,000
minors begin smoking regularly every day;
o join together Online's Fact Finder reports that underage youths can
purchase cigarettes successfully 70%-80% of the time over the
counter and 90%-100% of the time through vending machines; and
o Join Together also reports that each year merchants illegally sell
minors 947 million packs of cigarettes and 26 million containers of
chewing tobacco worth $1.26 billion.
To combat these problems, most states have enacted laws which provide for
substantial penalties for businesses that sell tobacco and alcohol to minors.
Regulation of retailers of tobacco products
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 who is trying to purchase tobacco products and
appears to be under the age of 27.
According to the Coalition for Tobacco Retailing, penalties for the sale
of tobacco products to minors include:
o state fines of up to $6,000 per violation and/or 1 year in jail;
o federal fines of up to $10,000 for the fifth violation and
discretionary penalties for any subsequent violations;
o criminal charges against the selling establishment and/or its
employees; and
o revocation or suspension of the retailer's tobacco license.
Regulation of retailers of alcoholic beverages
The retailer of alcoholic products who sells to an underage person will
face fines, suspension of its license and the potential outright revocation of
its license to sell alcoholic beverages.
According to "Youth and Alcohol, Selected Reports to the Surgeon General,"
published by the U.S. Department of Education, state imposed penalties for the
sale of alcohol to minors include:
o fines of up to $10,000 and/or 5 years in jail;
o administrative penalties levied by alcoholic beverage control
agencies ranging from fines of up to $5,000 and a six-month license
suspension;
o criminal charges against owner and/or employees; and
o "dram shop" laws which permit civil lawsuits to be brought against
businesses.
17
<PAGE>
Some statistics concerning enforcement activity
o according to the Washington State Liquor Control Board, in June
1999, the State of Washington visited 273 locations to detect
tobacco sale violations. 15.38% of the businesses visited were found
to have sold tobacco products to underage persons
o during 1997 - 1998, the State of California Department of Alcohol
Beverage Control conducted 291 "Minor Decoy Operations", each
consisting of multiple on-site checks. Of the 6,568 visits to
Alcoholic Beverage Control licensed businesses, 20.63% or 1,355 were
found to have sold alcoholic beverages to the decoy
o the State of California Department of Alcohol Beverage Control has
said that most of the accusations filed for violations against
alcohol licensees in California are for sales of alcoholic beverages
to minors
o as reported in the Orlando Sentinel, in 1998, the Florida State
Department of Highway Safety reviewed 5,973 fraud cases in Florida
and invalidated 19% or 1,143 of the driver licenses inspected.
As a result of these and other 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.
The use of false identification
Fraudulent driver licenses can be easily produced using readily available,
advanced color copiers and other equipment. These false documents are easily
obtainable from a number of locations, such as college campuses, and over the
Internet. Starting with only a fraudulent driver license, an individual, in
addition to buying alcohol and tobacco products while underage, may be able to
create multiple identities, commit fraud, evade law enforcement and engage in
other criminal activities, such as:
o forging checks supported by false identification;
o providing additional identification for the use of stolen credit
cards;
o creating a false identity in order to evade law enforcement; and
o unlawfully obtaining welfare or other government benefits.
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. Rather, what is needed is a system
which can accurately read the electronically stored information. We are not
aware of any other patented software application technology that provides an
analysis of all the data contained on these documents for the purpose of age and
document verification by reading and comparing the information encoded in all of
the tracks of the magnetic stripe or bar code on the driver license.
ID-Check Solution and Benefits
We believe the ID-Check solution is the most advanced, reliable and
effective technology, providing retailers with an easy to use, reliable, and
cost-effective method of age and identity verification. We have received
encoding and encryption formats from each jurisdiction that conforms to AAMVA
guidelines, including military and immigration authorities in the U.S. and
Canada. This information, combined with our patented technology, enables the
ID-Check software to read, decode and process all of 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.
ID-Check terminals do not require a connection to a central data base to
operate. Our terminals have the ability to operate add-on peripherals such as
printers, bar code scanners, modems and other devices, which would enhance the
functionality of the terminals 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
photograph on the driver license to the person presenting the document for
identification, the clerk or employee simply swipes the driver
18
<PAGE>
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 has been altered;
o has expired; and
o has a date of birth equal to or greater than the legal age to
purchase either or both alcohol and tobacco products in the
retailer's location.
Then, the terminal will automatically:
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;
o save information to the terminal's own memory to be downloaded at a
later time;
o respond to the user by illuminating an appropriate, easily
recognizable symbol reflecting the results for both alcohol and
tobacco, or in words on the terminal's screen; and
o send the results to a PC for permanent storage and/or analysis in
conjunction with our related software products. Other currently
available age verification products
Unless a device can read, decode and analyze all of the information
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 Secure ID LLC and
The IdentiScan Company, LLC, 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. These other products are based on credit
card terminal equipment. Most cannot process bar codes. This is a significant
disadvantage because nearly 22% of the currently issued driver licenses contain
bar codes. In addition, most of these other products cannot connect to a PC or
use a printer. Furthermore, these products cannot distinguish between a credit
card and a driver license, thus limiting their effectiveness. We also believe
that some of these products may infringe on our patent. In determining whether
and when it is appropriate to commence litigation to protect our intellectual
property rights, we intend to carefully examine each instance of potential
infringement on a case-by-case basis and to weigh the potential damage caused by
any infringement against the demands a patent infringement litigation would
place on our financial and management resources.
There are also products being marketed which are essentially electronic
calendars designed to assist the retailer in calculating the age of the person
presenting a driver license. These devices, however, cannot determine whether a
driver license is valid or has been altered.
A small number of laminate verifiers are currently used to determine the
validity of the laminate on a driver license. However, laminate verifiers are
fragile, not reliable and can only be used in one state, New York, which is
currently considering replacing the laminate in its next generation of licenses.
Our Marketing and Distribution Strategy
Our objective is to become the leading developer and distributor of age
and document verification products. To date, we have engaged in limited
marketing efforts primarily through management's participation in trade shows.
We are developing a comprehensive marketing plan to build customer awareness and
develop brand recognition in target markets. Initially, we intend to promote the
advantages and ease of use of the ID-Check terminal through:
o trade publications;
o trade shows;
o conventions and seminars;
o direct mail; and
o our website.
19
<PAGE>
We also intend to seek endorsements from leading companies in the alcohol
and tobacco industries, public interest organizations and trade associations,
which we believe have an interest in discouraging illegal purchases of
age-restricted products.
As we gain market acceptance of the ID-Check terminal, we intend to
commence marketing efforts for subsequent upgrades and related software
applications.
Distribution strategy
In April 1999, we hired a director of national sales and in October 1999
we hired a vice president-sales. We intend to use a portion of the proceeds from
this offering to prepare additional marketing materials, hire additional sales
and marketing support staff and continue to develop our marketing strategy.
Our initial target markets
Our initial target markets for the ID-Check terminal will be retail
establishments. We intend to initially focus our marketing efforts towards:
o convenience stores;
o bars and night clubs;
o restaurants; and
o retail beer and liquor stores.
Independent sales organizations
Management estimates there are thousands of businesses referred to as
independent sales organizations (ISO's), which specialize in marketing equipment
having a purchase price of under $5,000. We have entered into an agreement with
Northern Leasing Systems, a leading privately-held equipment lease finance
company specializing in this type of equipment, to be our exclusive lease
finance company and the exclusive marketer of our ID-Check product to ISO's. The
agreement automatically renews annually, subject to Northern Leasing having
purchased, either directly or through ISO's, 2,500 terminals by the end of the
first year, 12,000 terminals by the end of the second year and 15,000 terminals
each year thereafter. We believe that the ID-Check terminal is a complementary
product that can be sold or leased to many of the ISO's existing customers.
Distributors of alcohol and tobacco products
Many distributors of alcohol and tobacco products sell related products
and supplies to retail merchants. We believe the ID-Check terminal is a
complementary product and offers a marketing opportunity to these distributors.
We are currently in discussions with a distributor of alcohol and tobacco
products, with a view to entering into a distribution agreement under which the
distributor would receive the exclusive right to distribute the ID-Check
terminal within a specified territory to retail merchants of alcohol products.
This right would expire if the distributor fails to meet specified sales goals.
We do not know if we will be successful in entering into this agreement.
Furthermore, we cannot assure you that any such arrangement would be profitable.
Revenue Sources
We initially intend to generate revenues from the sale or lease of
ID-Check terminals and sale of software upgrade cards.
ID-Check terminals
Our patented ID-Check software will initially be installed in a
self-contained terminal similar to those commonly used as credit card terminals,
which we intend to market to retailers for approximately $2,000 each.
Upgrade cards
Our software will require periodic updates as states that did not
previously conform to AAMVA guidelines begin to store electronically readable
information on their driver licenses and as states adjust or modify the
20
<PAGE>
format of their electronically stored information. We intend to sell upgrade
cards which can be used to instantly upgrade the terminal by simply swiping the
upgrade card through the ID-Check terminal. Because each terminal has a unique
serial number, the upgrade card will only work with that terminal, making
unauthorized copying of these cards valueless. We also intend to develop a
secure way of delivering upgrades through the Internet.
The ID-Check guide to US and Canadian ID's
The United States and Canada are moving toward uniformity in their driver
licenses and identification cards. However, some states and provinces have not
yet adopted AAMVA and/or ANSI guidelines. Because of our familiarity with these
government documents, we intend to offer a printed manual to provide financial
institutions, government agencies and retail stores with a method of verifying
document authenticity when documents are presented which do not have information
electronically stored on either a magnetic stripe or bar code. We intend to
market this product directly through our sales personnel.
Additional Target Customers
In addition to retailers of alcohol and tobacco products, others that
could benefit by using the ID-Check terminal include:
o car rental agencies;
o hotels and motels;
o stadiums and arenas;
o firearm merchants;
o gaming establishments;
o movie theaters;
o law enforcement agencies; and
o vending machine manufacturers.
Products in Development
We have begun developing the following products:
MAVE. In April 1998, we built two prototypes of a hand-held portable
version of our ID-Check terminal specifically designed for law enforcement. We
have trademarked this product as MAVE for Mobile Age Verification and
Enforcement. One prototype was loaned to the State of Florida's Division of
Alcoholic Beverage & Tobacco Control's Tobacco Pilot Program for Enforcement. In
March 1999, we shipped three units to enable the Division to begin a pilot
program to fully evaluate MAVE. After the completion of this offering, we intend
to begin limited commercial production of MAVE.
P-Link. P-Link is a software application designed to replicate the
features of ID-Check using existing hardware (or with minimal additional
hardware components) included in Point-Of-Sale (POS) terminals for multi-lane
retailers such as grocery and mass-retail stores. The POS terminal would halt
the purchase of age-restricted products until a driver license is verified by
the P-Link software application. Once the age-verification process has been
completed, the terminal would block age-restricted products from being totaled
into the sale if the unit shows that the customer is underage. This product is
intended to be marketed directly to manufacturers and integrators of POS
terminals to expand their product capabilities.
C-Link and M-Link. We have developed and distributed two pre-production
Microsoft Windows 95/98/NT compatible software products that work in conjunction
with our ID-Check terminal. These products are called C-Link and M-Link. C-Link
collects the information read by the ID-Check terminal and saves it to a PC hard
drive for permanent storage. Once saved, the information can be searched,
analyzed and used to easily generate demographics, statistics and mailing lists
to existing customers. M-Link expands C-Link's abilities to maintain memberships
and customer loyalty programs to encourage repeat customers. M-Link is intended
to be sold separately as a service pack, which extends the functionality of
C-Link's software.
21
<PAGE>
Possible Future Uses for our Technology
We believe that our patented ID-Check technology has applications in a
variety of other areas. Some examples of potential users for ID-Check technology
include:
o airlines, since FAA regulations require passengers over 18 years old
to produce a valid driver license or other form of legally
acceptable picture identification in order to board any airliner
domestically;
o credit card terminal manufacturers, which could use our technology
to verify that the credit card holder has presented a valid driver
license prior to processing the purchase; and
o financial services companies, which could use our technology to
verify the validity of a driver license presented in connection with
check cashing, opening a new account or a mortgage application.
Although we anticipate that this effort will require an indeterminate
amount of time and resources, we intend to use a portion of the $400,000 of the
proceeds of this offering allocated for product development to begin developing
these possible future uses for our technology. We do not currently have more
specific plans to develop any of them.
In addition, we may in the future seek to license our technology to
manufacturers of scanning devices or others to enhance the functionality of
their products. We do not currently have any specific plans to enter into these
types of licenses.
Manufacturing
We have engaged a subsidiary of Welch Allyn, Inc., a leading
privately-held manufacturer of medical equipment and bar code readers and
scanners, to provide a programmable terminal to operate our patented ID-Check
software. We have placed an order for 525 ID-Check terminals, which are expected
to be delivered during November 1999. These terminals will have most, but not
all, of the features of an upgraded version of our initial product. Most of the
net proceeds of the private placement in August and September 1999 were used to
purchase approximately 1,000 units of an upgraded version of our ID-Check
terminal. We expect delivery of these terminals to begin in the first quarter of
2000, which will enable us to commence more widespread marketing.
Technical Support and Maintenance
The ID-Check hardware terminals are certified by Underwriters Laboratory
(UL) and its European equivalent (CE) for retail use and are virtually
maintenance-free other than occasional surface cleaning.
Technical support will be provided by us to our customers through:
o our website (E-mail) on the Internet;
o tips and hints on our website; and
o a toll-free number.
Technical support will be provided during normal business hours and a
voice mailbox will be capable of taking messages during non-business hours.
Competition
We expect that competition may become intense in the markets addressed by
us. We may compete with a large number of companies, many of which may be
substantially larger and have significantly greater capital and management
resources than we do. We believe that we may have some advantage over potential
competitors because we have been issued one patent and five copyrights on our
software and because of the substantial time that we have spent in developing
our software and hardware and in developing a substantial database of
information relating to the encoded information of each jurisdiction. However,
we cannot assure you that we will be able to compete successfully.
22
<PAGE>
Intellectual Property
In January 1999, we were issued a patent on our ID-Check software
technology. We have also been granted five copyrights in the United States,
which are effective in Canada and 17 other major industrial countries. The
patent covers a specific process relating to ID-Check, including age
verification from a driver license. In addition, the copyright protection covers
software source codes and supporting graphics relating to the operation of
ID-Check and other software products. We have also received several trademarks
relating to our company, its product names, and logos. We cannot assure you as
to the degree of protection which the patent may afford, or that our patent
would be upheld if challenged or that other companies will not develop similar
or superior methods or products outside the protection of the patent issued to
us.
We also rely on proprietary knowledge and employ various methods,
including confidentiality agreements, to protect our software codes, concepts,
ideas and documentation of our proprietary technology. However, these methods
may not afford complete protection and we cannot assure you that others will not
independently develop similar knowledge.
Under an agreement with Mr. Messina, 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.
The IdentiScan Company, LLC offers a product that electronically reads and
calculates age from a driver license. Representatives of IdentiScan had met with
us on several occasions in the past, at their suggestion, to discuss a merger
between the two companies. We declined to proceed with those discussions. We
have informed IdentiScan that we believe its product may infringe on our patent.
In response, in August 1999, IdentiScan filed a complaint against us which seeks
to have the IdentiScan product declared non-infringing on our patent and seeks
to have our patent declared invalid. The complaint does not seek monetary
damages. We believe that our patent, to which we hold clear title, is valid and
fully enforceable. We intend to vigorously defend it. We also believe
IdentiScan's claim of non-infringement is without merit. In October 1999, we
made a motion to dismiss IdentiScan's claim. This motion is currently pending.
However, if our patent were to be declared invalid or if our patent were to be
otherwise limited, we believe it would have an adverse effect on our business
and future success because other companies, including IdentiScan, might be able
to use some or all of the technology covered by our patent to develop and market
products which will directly compete with ID-Check.
We are not aware of any infringement by our products or technology on the
proprietary rights of others. Nevertheless, infringement or invalidity claims
may be asserted against us and we could incur significant expense in defending
them. If any claims or actions are asserted against us, we may be required to
modify our products or seek licenses for these intellectual property rights. We
may not be able to modify our products or obtain licenses on commercially
reasonable terms, in a timely manner or at all. Our failure to do so could
adversely affect our business.
Employees
As of October 27, 1999, we had fourteen full-time employees, including
three who are engaged in executive management, four programmers, four in sales
and marketing and three administrative staff. We believe our relations with our
employees are generally good and we have no collective bargaining agreements
with any labor unions.
Facilities
Our executive offices are located in Huntington, New York, where we occupy
approximately 4,200 square feet of leased space pursuant to a lease expiring on
October 31, 2000. Minimum payments under the lease are $78,420 per year for 1999
and with a maximum increase of no greater than 4% for each remaining year of the
lease.
Legal Proceedings
We are in dispute with our landlord, Huntington Atrium, which brought a
lawsuit against us in 1998 in the District Court, County of Suffolk, State of
New York, relating to our original occupancy date and to determine the party
responsible for improvements to the space. The landlord's claim is for
approximately $177,000 and
23
<PAGE>
our counterclaim is for approximately $50,000. While we believe that we have
meritorious defenses to the landlord's claim, an adverse decision would not have
a material adverse effect on our company.
As discussed above, in August 1999, IdentiScan filed a complaint against
us in the United States District Court for the District of Connecticut which
seeks to have the IdentiScan product declared non-infringing on our patent and
seeks to have our patent declared invalid. The complaint does not seek monetary
damages. We believe that our patent, to which we hold clear title, is valid and
fully enforceable. We intend to vigorously defend it. We also believe
IdentiScan's claim of non-infringement is without merit. In October 1999, we
made a motion to dismiss IdentiScan's claim. This motion is currently pending.
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.
24
<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table sets forth the ages of and positions and offices
presently held by each director and executive officer of Intelli-Check:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Frank Mandelbaum ........................... 65 Chairman, Chief Executive Officer and Director
Kevin Messina .............................. 33 President, Chief Technology Officer and Director
Edwin Winiarz .............................. 41 Executive Vice President, Treasurer and Chief Financial
Officer and Director
W. Robert Holloway ......................... 59 Vice President-Sales
Paul Cohen ................................. 59 Director
Anthony Broderick .......................... 56 Director
Evelyn Berezin ............................. 74 Director
Charles McQuinn ............................ 59 Director
</TABLE>
Frank Mandelbaum has served as our Chairman of the Board, 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.
Kevin Messina, a co-founder of Intelli-Check, was elected President and
appointed as Chief Technology Officer in June 1998. From our company's inception
in October 1994 to June 1998, Mr. Messina served as our Executive Vice
President, Chief Information Officer and Secretary. Prior to October 1994, Mr.
Messina was the founder and President of K.M. Software, which served the banking
and commodities industries. During 1998 and 1999, Mr. Messina was selected to
serve on various industry councils for AAMVA and various committees of ANSI and
the International Standards Organization (ISO). In August 1998, Mr. Messina was
elected to the US delegation representing ANSI, the National Committee for
Information and Technical Standards, the Information Technology Industry
Council, the International Electrotechnical Commission and various other
national bodies that are members of ISO. In November 1998, Mr. Messina was
elected chairperson of the committee which was in charge of recommending
encryption and bar code formats. Since then, ANSI has adopted the recommendation
as the standard for U.S. and Canadian driver licenses and ID cards for the
five-year period ending in 2005.
Edwin Winiarz was elected 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.
W. Robert Holloway became Vice President-Sales in October 1999. From April
1999 to October 1999, Mr. Holloway was Director of Sales for The IdentiScan
Company LLC. In February and March 1999, Mr. Holloway worked as an independent
consultant. From August 1996 to January 1999, Mr. Holloway was Global Sales
Manager for Welch Allyn, Inc. From October 1994 to July 1996, Mr. Holloway was
Vice President and Sales Manager of Bowne & Company of New York. Mr. Holloway
holds an AB in economics from Columbia University and an MBA in finance from
Boston University.
25
<PAGE>
Paul Cohen has served as a director of Intelli-Check since November 1996.
From December 1990 to present, Mr. Cohen has been the director of
pharmaceuticals for Allou Health and Beauty Care, Inc, a public company. Paul
Cohen is the father of Todd Cohen, our former President.
Anthony Broderick has served as a director of Intelli-Check since November
1996. Mr. Broderick is an independent aviation safety consultant whose clients
include international airlines, aerospace firms, a major aircraft manufacturer,
and governments. From June 1976 to June 1996, when he retired, Mr. Broderick was
Associate Administrator for Regulation and Certification in the Federal Aviation
Administration. Prior to June 1976, Mr. Broderick was employed with the U.S.
Department of Transportation from February 1971. Mr. Broderick has been the
recipient of numerous awards recognizing his distinguished service and
leadership in the field of airline safety.
Evelyn Berezin 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 is currently a member of the Board of Directors of Bionova Corp., a
publicly held biotechnology company. In addition, she has served on the boards
of a number of other public companies including Cigna Corp., Datapoint Corp.,
Koppers Company, Inc. and Genetic Systems Inc., as well as more than fourteen
private technology-based companies.
Charles McQuinn was elected a director in August 1999. He has been, since
1997, an independent product development marketing consultant to Internet based
companies. In this position, he has been responsible for the development of four
fixed income electronic trading systems for Zions Bank, which target the markets
of dealers, institutions, retail and Bloomberg News Service. Mr. McQuinn has
also served as President 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 was with Burroughs Corporation in various product
development/marketing/management positions. Mr. McQuinn holds a BS in marketing
from Ball State University and an MBA in management from Central Michigan
University.
Directors are elected at each annual meeting of stockholders and hold
office until the next annual meeting of stockholders and the election and
qualification of their successors. Executive officers are elected by and serve
at the discretion of the board of directors.
We have agreed, for a period of 36 months from the date of this
prospectus, if so requested by the underwriters, to select a designee of the
underwriters as a non-voting adviser to our board of directors. The underwriters
have not yet exercised their right to designate such a person.
Board Committees
The board of directors has established a compensation committee which is
comprised of Mr. Broderick, chairman, Mr. Mandelbaum and Mr. Cohen. The
compensation committee reviews and determines the compensation for all officers
and directors of our company and reviews general policy matters relating to the
compensation and benefits of all employees. The compensation committee also
administers the stock option plans.
The board of directors has established an audit committee which is
comprised of Ms. Berezin, chairman, Mr. McQuinn and Mr. Cohen. 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.
26
<PAGE>
The board of directors has established a corporate governance committee,
which is comprised of Mr. McQuinn, chairman, Ms. Berezin and Mr. Broderick. The
corporate governance committee reviews our internal policies and procedures.
Director Compensation
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. In August 1999, each
non-employee director, Messrs. Paul Cohen, Broderick and McQuinn and Ms.
Berezin, received a grant of a non-qualified stock option to purchase an
aggregate of 45,000 shares of our common stock upon their election as a director
at an exercise price of $3.00 per share. Of these options, 15,000 are
immediately exercisable and an additional 15,000 will be exercisable on the
succeeding two anniversaries of the date of grant, provided the director is
re-elected. Options granted to non-employee directors are exercisable only
during the non-employee director's term and automatically expire on the date his
or her service terminates. Messrs. Broderick and Paul Cohen have previously been
granted options to purchase 30,000 shares of common stock exercisable at $3.00
per share. Mr. Cohen also received an option to purchase 50,000 shares of common
stock exercisable at $3.00 per share in connection with a one-year consulting
agreement dated November 1, 1997.
Executive Compensation
The following table sets forth the compensation earned for the three
fiscal years ended December 31, 1998 to Mr. Mandelbaum, our Chairman and Chief
Executive Officer, to Mr. Messina, our President, and to Todd Cohen, our former
President. No other officer of Intelli-Check received compensation during any of
those fiscal years in excess of $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
------------------------ -----------------
Securities
Underlying
Name And Principal Position Year(s) Salary ($) Options/SARS (#)
- ------------------------- ------ -------- ---------------
<S> <C> <C> <C>
Frank Mandelbaum ................................. 1998 150,000 50,000
Chairman & CEO 1997 150,000 --
1996 75,000 --
Kevin Messina .................................... 1998 150,000 --
President 1997 150,000 50,000
1996 37,500 --
Todd Cohen ....................................... 1998 50,000 15,000
Former President 1997 150,000 50,000
1996 37,500 --
</TABLE>
The options shown above were granted under the 1998 Stock Option Plan, are
exercisable at $3.00 per share, and generally expire five years after the date
of grant. Mr. Cohen's options expire on August 15, 2000.
Messrs. Mandelbaum and Messina have Employment Agreements expiring
December 31, 2001, which provide for base annual salaries of $225,000, subject
to specified conditions. Because of our limited resources, Messrs. Mandelbaum
and Messina have from time to time agreed to defer the receipt of substantial
portions of their salaries. In May 1999, Mr. Mandelbaum's deferred salary was
reduced by $150,000 by the issuance to him of 75,000 shares of our common stock
and warrants entitling him to purchase an additional 75,000 shares of our common
stock at a price of $3.00 per share at any time prior to May 3, 2001. In May
1999, Mr. Messina's deferred salary was reduced by $10,126 through the issuance
to him of 5,063 shares of our common stock and warrants to purchase 5,063 shares
of our common stock at a purchase price of $3.00 per share at any time prior to
May 3, 2001. As of June 30, 1999, Mr. Mandelbaum's deferred salary was
approximately $375,000, Mr. Messina's deferred salary was approximately $200,000
and Mr. Todd Cohen's deferred salary was approximately $110,000. In June 1999,
Mr. Messina received, in lieu of all deferred salary, options to purchase
27
<PAGE>
207,000 shares of common stock at an exercise price of $3.00 per share. Also in
June 1999, Mr. Mandelbaum received, in lieu of all deferred salary, options to
purchase 375,000 shares of common stock at an exercise price of $3.00 per share.
Mr. Cohen resigned as President in April 1998. In June 1999, Mr. Cohen
received, in lieu of all deferred salary, options to purchase 110,000 shares of
common stock at an exercise price of $3.00.
All the options granted in exchange for deferred salary expire five years
after the date of grant.
The following table summarizes options granted during the year ended
December 31, 1998 to the named executive officers:
<TABLE>
<CAPTION>
Potential
Realizable
Value at
Individual Grants Assumed Annual
------------------------------------------------- Rates of
Number of % of Total Stock Price
Securities Options Appreciation for
Underlying Granted to Option Term
Options Employees in Exercise Expiration -----------------------
Name Granted Fiscal Year Price Date 5% 10%
- ----- ---------- ------------ -------- ---------- --- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Frank Mandelbaum ......... 50,000 91% $3.00 9/04/03 $41,442 $91,577
</TABLE>
These options were granted pursuant to our 1998 Stock Option Plan. The
options granted to Mr. Mandelbaum are fully vested. During the year ended
December 31, 1998, we granted employees other than Mr. Mandelbaum options to
purchase 5,000 shares of common stock under the 1998 Stock Option Plan.
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.
Pursuant to their employment agreements, Messrs. Mandelbaum and Messina
each received a grant in August 1999 of options to purchase 75,000 shares of our
common stock at a purchase price of $3.00 per share. Each of the options become
exercisable with respect to 25,000 shares of our common stock on January 1,
2000, an additional 25,000 shares of our common stock on January 1, 2001, and
the final 25,000 shares of our common stock on January 1, 2002. The options
expire five years from the date of grant.
Employment Agreements
Effective January 1, 1999, Mr. Mandelbaum and Mr. Messina each entered
into a three-year employment agreement with Intelli-Check. Each of the
agreements provides for a base salary of $225,000. However, until such time as
we receive payment for gross sales of at least $1,000,000, the salaries are
capped at $150,000. The agreements also provide for the payment of a bonus if
our sales exceed $2,000,000 in the previous year. The bonus will be 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, we will grant to each of the executives an option to purchase the
greater of 25,000 shares of our common stock at fair market value on the date of
grant or 10,000 shares of our 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, we are not required to grant
options to purchase more than 150,000 shares of our common stock with respect to
any one fiscal year.
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. Included within the
definition of change of control is the first day on which a majority of the
directors of the company do not consist of individuals recommended by Messrs.
Mandelbaum, Messina and one outside director.
28
<PAGE>
We have entered into a two-year employment agreement with Mr. Winiarz,
which became effective on September 7, 1999. The agreement provides for a base
salary of $125,000. In addition, we granted Mr. Winiarz an option to purchase
50,000 shares of common stock, of which 10,000 options are immediately
exercisable at $5.00 per share, 20,000 options are immediately exercisable at
$7.00 per share and 20,000 options will become exercisable on September 7, 2000
at $7.00 per share.
We entered into a two-year employment agreement with Mr. Holloway, which
became effective on October 25, 1999. The agreement provides for a base salary
of $115,000. In addition, we granted Mr. Holloway an option to purchase 50,000
shares of common stock at $7.00 per share, of which 20,000 shares are
immediately exercisable and 5,000 shares become exercisable for each 10,000
sales of ID-Check products sold that exceed 10,000. The maximum options that can
be earned in any calendar year may not exceed 100,000. Any options earned above
the initial 50,000 options will be at fair market value on the date of grant.
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.
Stock Option Plans
1998 Stock Option Plan. Our 1998 Stock Option Plan was adopted by the
Board of Directors and stockholders in June 1998. Up to 400,000 shares of our
common stock have been authorized and reserved for issuance under the plan.
Under the plan, options may be granted in the form of incentive stock options or
non-qualified stock options from time to time to employees, officers, directors
and consultants of Intelli-Check, as determined by the compensation committee of
the board of directors. The compensation committee determines the terms and
conditions of options granted under the plan, including the exercise price. The
plan provides that the committee must establish an exercise price for incentive
stock options that is not less than the fair market value per share at the date
of the grant. However, if incentive stock options are granted to persons owning
more than 10% of the voting stock of Intelli-Check, the plan provides that the
exercise price must not be less than 110% of the fair market value per share at
the date of the grant. Each option must expire within five years of the date of
the grant. There are currently 340,000 immediately exercisable options
outstanding which have been granted under the plan, all of which are exercisable
at $3.00 per share.
1999 Stock Option Plan. Our 1999 Stock Option Plan was adopted by the
Board of Directors and stockholders in August 1999. Up to 1,000,000 shares of
our common stock have been authorized and reserved for issuance under the plan.
Under the plan, options may be granted in the form of incentive stock options or
non-qualified stock options from time to time to employees, officers, directors
and consultants of Intelli-Check, as determined by the compensation committee of
the board of directors. The compensation committee determines the terms and
conditions of options granted under the plan, including the exercise price. The
plan provides that the committee must establish an exercise price for incentive
stock options that is not less than the fair market value per share at the date
of the grant. However, if incentive stock options are granted to persons owning
more than 10% of the voting stock of Intelli-Check, the plan provides that the
exercise price must not be less than 110% of the fair market value per share at
the date of the grant. Each option must expire within five years of the date of
the grant. There are currently 360,000 options outstanding which have been
granted under the plan, 10,000 are immediately exercisable at $5.00 per share
and 42,500 are immediately exercisable at $7.00 per share. The other 307,500,
upon vesting over a period of years, will be exercisable at prices ranging from
$3.00 - $7.00 per share.
Limitation on Liability and Indemnification Matters
As authorized by the Delaware General Corporation Law, our certificate of
incorporation provides that none of our directors shall be personally liable to
us or our stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability for:
29
<PAGE>
o any breach of the director's duty of loyalty to our company or its
stockholders
o acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law
o unlawful payments of dividends or unlawful stock redemptions or
repurchases
o any transaction from which the director derived an improper personal
benefit
This provision limits our rights and the rights of our stockholders to
recover monetary damages against a director for breach of the fiduciary duty of
care except in the situations described above. This provision does not limit our
rights or the rights of any stockholder to seek injunctive relief or rescission
if a director breaches his duty of care. In addition, our certificate of
incorporation provides that if the Delaware General Corporation Law is amended
to further limit the liability of a director, then the liability of the
directors shall be eliminated or limited to the fullest extent permitted by such
amendment. These provisions will not alter the liability of directors under
federal securities laws.
Our certificate of incorporation further provides for the indemnification
of any and all persons who serve as our director, officer, employee or agent to
the fullest extent permitted under the Delaware General Corporation Law.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers and controlling persons pursuant
to the foregoing provisions, or otherwise, we have been advised that in the
opinion of the SEC such indemnification is against public policy as expressed in
the Securities Act, and is, therefore, unenforceable.
30
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth, as of the date of this prospectus and as
adjusted to reflect the sale by us of the 1,000,000 shares of common stock
offered under this prospectus, 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 and each other person for
whose benefit we are registering shares of 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., 775 Park Avenue, Huntington, New York 11743.
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.
The applicable percentage of ownership is based on 5,271,152 shares
outstanding as of the date of this prospectus and 6,271,152 shares to be
outstanding upon consummation of this offering, but does not include shares to
be issued if the over-allotment option is exercised.
<TABLE>
<CAPTION>
Shares Beneficially Owned Shares Owned
Prior to Offering After Offering
------------------------- ---------------------
Number Percent Shares Offered Number Percent
-------- ----- --- -------------- -------- --------
Selling Stockholders:
<S> <C> <C> <C> <C> <C>
Jesup & Lamont Securities Corp. ... 15,000 * 15,000 -- --
Allan Binder ...................... 10,000 * 10,000 -- --
Executive Officers, Directors &
5% Stockholders:
Frank Mandelbaum .................. 1,297,000 22.2 -- 1,297,000 19.0
Kevin Messina ..................... 1,392,000 24.8 -- 1,392,000 21.1
Edwin Winiarz ..................... 30,000 * -- 30,000 *
W. Robert Holloway ................ 20,000 * -- 20,000 *
Paul Cohen ........................ 281,385 5.2 -- 281,385 4.4
Anthony Broderick ................. 45,000 * -- 45,000 *
Evelyn Berezin .................... 15,000 * -- 15,000 *
Charles McQuinn ................... 15,000 * -- 15,000 *
Todd Cohen ........................ 1,150,000 21.1 -- 1,150,000 17.8
New York State Science and
Technology Foundation ........... 550,000 10.2 -- 550,000 8.6
All executive officers
and directors
as a group (8 persons) .......... 3,095,385 48.1 -- 3,095,385 41.6
</TABLE>
- ----------
*Indicates beneficial ownership of less than one percent of the total
outstanding common stock.
The amounts shown for Jesup & Lamont Securities Corp. include the
currently exercisable right to acquire 7,500 units at $2.25 per unit. Each unit
consists of one share and a warrant to acquire an additional share at $3.00 per
share. Jesup & Lamont Securities Corp.'s address is 650 Fifth Avenue, New York,
NY 10019.
Mr. Binder's address is 577 Old Country Road, Dix Hills, NY 11746.
The amounts shown for Mr. Mandelbaum do not include 50,000 shares held by
Mr. Mandelbaum's wife, for which Mr. Mandelbaum disclaims beneficial ownership.
The amounts shown for Mr. Paul Cohen do not include 25,000 shares held by
Mr. Cohen's wife and 2,500 shares held by Mr. Cohen's daughter, for which Mr.
Cohen disclaims beneficial ownership.
Mr. Todd Cohen's address is 5 Violet Drive, Huntington Station, New York
11746.
31
<PAGE>
The Executive Director of the New York State Science and Technology
Foundation is David Catalfano. The members of the Foundation's board of
directors are Charles A. Gargano, Charles E. Dorkey, III, Antonia Novello, David
H. Feinberg, Richard P. Mills, Anthony H.Gioia, Evelyn Berezin, George McNamee,
Calvin O. Butts, Walter L. Robb, Van C. Campbell and Morris Stoler. Each of
these individuals may be considered a controlling person of the Foundation. The
address for the Foundation and each of these individuals is 99 Washington
Avenue, Albany, NY 12210, except for Ms. Berezin, who is also a director of
Intelli-Check. Her address is Intelli-Check's address shown above.
The amounts shown in the table above for the following persons include the
right to acquire the number of shares shown pursuant to currently exercisable
stock options and/or warrants at the exercise price shown:
<TABLE>
<CAPTION>
Name No. of Shares Exercise Price
- ---- ------------- --------------
<S> <C> <C>
Frank Mandelbaum ....................................... 571,000 $3.00
Kevin Messina .......................................... 332,000 $3.00
Edwin Winiarz .......................................... 10,000 $5.00
Edwin Winiarz .......................................... 20,000 $7.00
W. Robert Holloway ..................................... 20,000 $7.00
Paul Cohen ............................................. 135,000 $3.00
Anthony Broderick ...................................... 45,000 $3.00
Evelyn Berezin ......................................... 15,000 $3.00
Charles McQuinn ........................................ 15,000 $3.00
Todd Cohen ............................................. 175,000 $3.00
New York State Science and Technology Foundation ....... 100,000 $3.00
</TABLE>
CERTAIN TRANSACTIONS
In October 1994, Messrs. Todd Cohen and Kevin Messina co-founded
Intelli-Check and each purchased 975,000 shares of common stock for $975. In
April 1998, Mr. Todd Cohen resigned as an officer of our company for personal
reasons and in August 1999, he completed his term as a director.
In June 1996, Mr. Messina's company, K.M. Software, assigned two
copyrights covering certain software employed by ID-Check and a patent
application covering the ID-Check technology to Intelli-Check for an agreement
to pay $98,151 plus interest. The agreement also gave K.M. Software, or its
successor, the right to reclaim the rights to the copyrights and the patent
under certain specified conditions. In May 1999, the prior agreement was
superseded and in exchange Mr. Messina received 69,937 shares of our common
stock and warrants to purchase 69,937 shares of our common stock, at $3.00 per
share, exercisable at any time prior to May 3, 2001. The May 1999 agreement
provides for the payment by Intelli-Check of 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. Also, in May 1999, Mr. Messina's deferred salary was reduced by
$10,126 through the issuance to him of 5,063 shares of our common stock and
warrants to purchase 5,063 shares of our common stock at a purchase price of
$3.00 per share at any time prior to May 3, 2001. In June 1999, the balance of
Mr. Messina's deferred salary was reduced to zero by the issuance of options to
purchase 207,000 shares of our common stock at a purchase price of $3.00 per
share at any time prior to June 30, 2004.
In June 1996, Frank Mandelbaum, Intelli-Check's Chief Executive Officer
and Chairman of the Board of Directors, purchased 950,000 shares of common stock
for $50,000. From time to time since then, Mr. Mandelbaum loaned money to
Intelli-Check totaling $142,000. In November 1997, Mr. Mandelbaum converted his
outstanding loans into 71,000 shares of our common stock and warrants to
purchase 71,000 shares of our common stock at $3.00 per share expiring on June
30, 2000. In May 1999, Mr. Mandelbaum's deferred salary was reduced by $150,000
through the issuance to him of 75,000 shares of our common stock and warrants to
purchase 75,000 shares of our common stock at a purchase price of $3.00 per
share at any time prior to May 3, 2001. In June 1999, Mr. Mandelbaum's deferred
salary was reduced to zero by the issuance of options to purchase 375,000 shares
of our common stock at an exercise price of $3.00 per share at any time prior to
June 30, 2004.
32
<PAGE>
In November 1997, one of our directors, Paul Cohen, received an option to
purchase 50,000 shares of common stock exercisable at $3.00 per share in
connection with a one-year consulting agreement. Also in November 1997, Mr.
Cohen's wife purchased 25,000 units consisting of one share of common stock and
one warrant to purchase an additional share of common stock for $3.00 in
connection with one of our private placements. The purchase price was $50,000.
In August 1999, Mr. Cohen purchased one unit in connection with our most recent
private placement. The unit consists of a promissory note having a principal
amount of $50,000, bearing interest at the annual rate of 10% and a warrant to
purchase 2,500 shares of our common stock for $3.00 per share.
In June 1999, all deferred compensation due to Todd Cohen, our former
President and director, was eliminated by the issuance of options to purchase
110,000 shares of our common stock at an exercise price of $3.00 per share at
any time prior to June 30, 2004.
DESCRIPTION OF SECURITIES
Common Stock
Our company is authorized to issue up to 20,000,000 shares of common
stock, $.001 par value. Common stockholders are entitled to one vote for each
share held of record on each matter submitted to a vote of stockholders. Common
stockholders are entitled to receive proportionately any dividends which may be
declared on the common stock by the board of directors. Upon the liquidation of
Intelli-Check, common stockholders are entitled to share proportionately in all
assets remaining after payment of liabilities and after providing for each class
of stock, if any, having preference over common stock. Common stockholders do
not have any priority right over others to purchase securities we may issue in
the future. They also do not have any right to convert their common stock into
any other securities.
Preferred Stock
Intelli-Check is authorized to issue up to 1,000,000 shares of preferred
stock, $.01 par value per share. In January 1998, the New York State Science and
Technology Foundation converted our promissory note in the amount of $250,000
into 125,000 shares of series A convertible preferred stock. Also in January, we
sold 125,000 shares of preferred stock to the Foundation for $250,000. The
preferred stock was convertible into common stock at any time at the initial
conversion rate of one for one. In July 1999, the Foundation exercised its
conversion rights and received 250,000 shares of common stock in exchange for
its preferred stock.
The Board of Directors may issue additional shares of preferred stock in
the future. The preferred stock may be issued in one or more series, the terms
of which may be determined at the time of issuance by the Board of Directors,
without further action by stockholders. These rights may include special voting
rights, preferences as to dividends and liquidation, conversion and redemption
rights and sinking fund provisions. Additional rights granted to future holders
of preferred stock could be used to restrict our company's ability to merge with
or sell its assets to a third party, thereby preserving control by present
owners.
Warrants
From time to time in connection with financings used to fund our
development, we have issued warrants to purchase our common stock. As of October
27, 1999, there were warrants outstanding to purchase 888,500 shares of our
common stock expiring on June 30, 2000 and warrants outstanding to purchase
892,600 shares of our common stock expiring on various dates up to August 2002.
Each warrant entitles the holder to purchase one share of common stock for
$3.00. If certain circumstances occur, we have the right to redeem the
outstanding warrants at a price of $.01 per warrant on not less than 20 days
written notice if the last sale price of the common stock has averaged at least
$4.50 per share for the 20 consecutive trading days ending at least five days
prior to the date on which notice is given for some of the warrants and $6.00
per share for certain other warrants.
Registration Rights
Allan Binder, who holds 10,000 shares of common stock, is entitled to
piggyback registration rights, under the Securities Act, with respect to those
shares. Jesup & Lamont Securities Corp., which holds a warrant to
33
<PAGE>
purchase 7,500 units, each of which consists of one share of common stock and an
additional warrant to purchase one share of common stock, is entitled to
piggyback registration rights with respect to those 15,000 shares. These 25,000
shares are being registered under this prospectus. In connection with this
offering, we have agreed to grant to the underwriters certain demand and
piggyback registration rights in connection with the 100,000 shares of common
stock issuable upon exercise of the underwriters' warrants.
In addition, the holders of warrants to purchase 60,000 shares of our
common stock are entitled to piggyback registration rights and one demand
registration right under specified conditions. The demand registration right is
exercisable at any time from one year to five years after the effective date of
this prospectus by the holders of warrants exercisable into a majority of the
shares. The piggyback registration rights become effective after this offering.
Delaware Anti-Takeover Law
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. That section requires the vote of at least two-thirds of the
outstanding voting stock of a company not owned by an interested stockholder to
approve certain business combinations. Section 203 defines interested
stockholder as any entity or person owning 15% or more of the outstanding voting
stock of the company and any entity or person affiliated with, controlling on
controlled by such entity or person. As a result, this statute may discourage
attempts to acquire Intelli-Check, including attempts that might result in a
premium over the market price for the shares of common stock held by
stockholders.
Our by-laws provide that stockholders must comply with an advance notice
procedure for the nomination of candidates for election as directors as well as
for other stockholder proposals to be considered at annual meetings of
stockholders. In general, notice of intent to nominate a director or raise
matters at annual meetings will have to be received by us. These provisions may
preclude stockholders from bringing matters before an annual meeting of
stockholders or from making nominations for directors.
The authorized but unissued shares of common stock and preferred stock are
available for future issuance without stockholder approval. These additional
shares may be utilized for a variety of corporate purposes, including future
public offerings to raise additional capital, corporate acquisitions and
employee benefit plans. The existence of authorized but unissued shares of
common stock and preferred stock could render more difficult or discourage an
attempt to obtain control of Intelli-Check by means of a proxy contest, tender
offer, merger or otherwise.
Transfer Agent and Warrant Agent
The transfer agent for the common stock and the warrant agent for the
underwriters' warrants is Continental Stock Transfer & Trust Company.
SHARES ELIGIBLE FOR FUTURE SALE
Immediately after the closing of this offering, we will have 6,271,152
shares of common stock issued and outstanding. Of this total, 1,010,000 shares
registered hereby together with 1,164,500 shares previously issued and held for
more than two years will be freely tradeable without restriction or further
registration under the Securities Act of 1933, as amended, except for any shares
purchased by an "affiliate" of our company (in general, a person who has a
controlling position with regard to the company). Shares held by an affiliate
will be subject to the resale limitations of Rule 144 under the Securities Act.
All of the remaining 4,096,652 shares of common stock currently
outstanding are "restricted securities". These shares will become eligible for
sale at various times beginning 90 days following the date of this prospectus
when 394,605 shares will be eligible to be sold, and the balance of the
restricted shares will become eligible for sale at various times beginning April
2, 2000, subject to the contractual provisions described below.
In addition, there are 3,873,100 shares subject to currently outstanding
options or warrants, or reserved for future issuance.
In addition, we have granted certain demand and piggyback registration
rights to the underwriters with respect to the shares of common stock issuable
upon exercise of the underwriters' warrants.
34
<PAGE>
Our officers, directors and 5% shareholders have agreed not to sell or
otherwise dispose of any shares of common stock or exercise any registration
rights for a period not to exceed twelve months following the date of this
prospectus without the underwriters' prior written consent. Upon the expiration
of the twelve-month period, 3,358,447 shares of our common stock will become
eligible for sale, in some cases subject to volume restrictions under Rule 144.
We cannot predict the effect, if any, that market sales of common stock or
the availability of such shares for sale will have on the market price
prevailing from time to time. Nevertheless, the possibility that substantial
amounts of common stock may be sold in the public market may adversely affect
prevailing market prices for the common stock and could impair our company's
ability to raise capital through the sale of its equity securities.
UNDERWRITING
The underwriters named below have severally agreed, subject to the terms
and conditions contained in the underwriting agreement relating to this
offering, to purchase from our company the number of shares set forth opposite
their names below:
Name Number of Shares
----- ----------------
GunnAllen Financial, Inc. ..................................
Starr Securities, Inc. ..................................... ---------
Total .................................................... 1,000,000
=========
The underwriting agreement provides that the obligations of the
underwriters are subject to approval of certain legal matters by counsel and to
various other conditions. The nature of the underwriters' obligations is such
that they are committed to purchase and pay for all of the shares of common
stock if any are purchased.
The underwriters have advised us that they propose to offer the shares of
common stock to the public at the public offering price set forth on the cover
page of this prospectus. The underwriters may allow certain dealers who are
members of the NASD concessions, not in excess of $_____ per share, of which not
in excess of $______ per share may be reallowed to other dealers who are members
of the NASD.
Up to 100,000 shares are being reserved by the underwriters to be offered
at the initial public offering price to some of our employees, business
associates and other persons, who have expressed an interest in purchasing
shares in this offering. The number of shares available for sale to the public
will be reduced to the extent these individuals purchase the reserved shares.
Any reserved shares not purchased by these individuals will be offered by the
underwriters on the same basis as other shares offered in this offering.
We have granted to the underwriters an option, exercisable not later than
30 days after the date of this prospectus, to purchase up to 150,000 shares at
the public offering price set forth on the cover page of this prospectus, less
underwriting discounts and commissions. The underwriters may exercise this
option only to cover over-allotments, if any, made in connection with the sale
of the shares of common stock offered by this prospectus. If the underwriters
exercise their over-allotment in full, the total price to the public would be
$8,050,000, the total underwriting discounts and commissions would be $724,500
and the total proceeds (before payment of the expenses of this offering) to our
company would be $7,325,500.
We have agreed to pay to the underwriters a non-accountable expense
allowance equal to 3% of the gross proceeds derived from the sale of the shares
offered by this prospectus, including any securities sold prior to the
underwriters' over-allotment option, $30,000 of which has been paid as of the
date of this prospectus. We have also agreed to pay all expenses in connection
with qualifying the shares offered under the laws of such states as the
underwriters may designate, including expenses of counsel retained for such
purpose by the underwriters. We estimate the expenses of this offering to be
$375,000, or $469,500 if the underwriters' over-allotment option is completely
exercised.
We retained GunnAllen Financial as a consultant for the period March 1999
through June 1999. GunnAllen Financial received a fee consisting of a warrant to
purchase 50,000 shares of our common stock at an exercise price of $3.00 per
share, expiring March 24, 2002. Under this agreement, GunnAllen Financial
provided us general financial advisory services.
35
<PAGE>
GunnAllen Financial acted as placement agent for the $1,200,000 private
placement made by us in August and September, 1999 and received a commission of
$120,000 for its services. GunnAllen Financial has been appointed as our agent
for the exercise of our outstanding warrants and will receive a fee of 5% of the
exercise price if we redeem the warrants within twelve months of the date of
this prospectus.
At the closing of this offering, we will sell to the underwriters and
their designees, for an aggregate of $100, underwriters' warrants to purchase up
to 100,000 shares of common stock. The underwriters' warrants are exercisable at
any time, in whole or in part, during the four-year period commencing one year
from the date of this prospectus, at an exercise price of $7.70 per share (110%
of the public offering price per share). The underwriters' warrants are only
assignable or transferable to the officers and partners of the underwriters and
members of the selling group for one year following the date of this prospectus.
During the exercise period, the holders of the underwriters' warrants will have
the opportunity to profit from a rise in the market price of the common stock,
which will dilute the interests of our stockholders. We expect that the
underwriters' warrants will be exercised when we would, in all likelihood, be
able to obtain any capital needed on terms more favorable than those provided by
the underwriters' warrant. Any profit realized by the underwriters on the sale
of the underwriters' warrants, the underlying shares of common stock may be
deemed additional underwriting compensation. The underwriters' warrants contain
a cashless exercise provision.
For a period of three years from the date of this prospectus, the
underwriters will have a right of first refusal with respect to any private
placements or underwriting of any future public offerings of our securities.
We have agreed that, upon the request of the holders of the majority of
the underwriters' warrants, we will (at our own expense), on one occasion during
the exercise period, register the underwriters' warrants and the shares of
common stock underlying the underwriters' warrants under the Securities Act. We
have also agreed to include the underwriters' warrants and all such underlying
shares of common stock in any appropriate registration statement which is filed
by us under the Securities Act during the five years following the date of this
prospectus.
We have agreed, for a period of three years from the date of this
prospectus, that the underwriters shall have the option to designate one
individual as a non-voting adviser to our board of directors to attend any and
all board and board committee meetings. The underwriters have not yet exercised
and currently do not intend to exercise their right to designate such a person
in the near future.
All of our officers, directors and our 5% stockholders have agreed not to
sell or otherwise dispose any of their shares in the public markets for a period
of twelve months from the date of this prospectus without the underwriters'
prior written consent.
The underwriters have informed us that they do not expect sales of the
securities offered to discretionary accounts to exceed 1% of the shares offered
by this prospectus.
We have agreed to indemnify the underwriters against certain civil
liabilities, including liabilities under the Securities Act. We have been
advised that, in the opinion of the SEC, indemnification for liabilities arising
under the Securities Act is against public policy as expressed in the Securities
Act and is, therefore, unenforceable.
Before this offering there has been no public market for the common stock.
Accordingly, the initial public offering price of the common stock has been
determined by negotiation between us and the underwriters and may not
necessarily be related to our asset value, net worth or other established
criteria of value. Factors to be considered in determining such price include
our financial condition and prospects, an assessment of our management, market
prices of similar securities of comparable publicly-traded companies, certain
financial and operating information of companies engaged in activities similar
to our business and the general condition of the securities market.
In connection with this offering, the underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of our common stock.
Such transactions may include stabilization transactions effected in accordance
with Regulation M of the Securities Exchange Act of 1934, pursuant to which such
persons may bid for or purchase common stock for the purpose of pegging, fixing
or maintaining the price of our common stock at a level that is higher than the
market would dictate in the absence of such transactions.
36
<PAGE>
The underwriters may also create a short position for the account of the
underwriters by selling more shares in connection with the offering than they
are committed to purchase from us, and in such case may purchase common stock in
the open market following the completion of the offering to cover all or a
portion of their short position. The underwriters may also cover all or a
portion of their short position, up to 150,000 shares, by exercising the
over-allotment option described above.
In addition, the underwriters may also impose a "penalty bid" under
contractual arrangements whereby the underwriters may reclaim from a dealer
participating in the offering the selling concession with respect to shares
that are distributed in the offering but subsequently purchased for the account
of the underwriters in the open market.
In general, any of the transactions described above may result in the
maintenance of the price of our common stock at a level above that which might
otherwise prevail in the absence of such transactions. We and the underwriters
make no representation or prediction as to the direction or magnitude of any
effect that such transactions may have on the price of our common stock. In
addition, we and the underwriters make no representation that the underwriters
will engage in such transactions or that such transactions, once commenced, will
not be discontinued without notice.
LEGAL MATTERS
The validity of the securities offered by this prospectus will be passed
upon for our company by Milberg Weiss Bershad Hynes & Lerach LLP, New York, New
York. Tenzer Greenblatt LLP has served as counsel to the underwriters in
connection with this offering.
EXPERTS
The financial statements of our company as of December 31, 1998, and for
the years ended December 31, 1997 and 1998, included in this prospectus and
registration statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said report.
ADDITIONAL INFORMATION
We have filed with the SEC the registration statement on form SB-2 under
the Securities Act with respect to the common stock offered by this prospectus.
This prospectus, which constitutes a part of the registration statement, does
not contain all of the information set forth in the registration statement and
the exhibits filed with it, portions of which have been omitted as permitted by
the rules and regulations of the SEC. For further information with respect to
our company and the securities offered by this prospectus, reference is made to
the registration statement and to the exhibits filed. Statements contained in
this prospectus regarding the content of any contract or other document referred
to are not necessarily complete. In each instance, we refer you to the copy of
such contract or other document filed as an exhibit to the registration
statement, and these statements are qualified in their entirety by such
reference to the contract or document.
The registration statement, including all exhibits, may be inspected
without charge at the principal office of the SEC at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the SEC's regional offices located
at Seven World Trade Center, Suite 1300, New York, New York 10048 and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
these materials may also be obtained from the Public Reference Section of the
SEC at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, upon the
payment of prescribed fees. You may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition,
registration statements and certain other filings made with the SEC through its
Electronic Data Gathering, Analysis and Retrieval systems are publicly available
through the commission's site on the World Wide Web located at
http://www.sec.gov. The registration statement, including all exhibits and
schedules thereto and amendments thereof, has been filed with the SEC through
the Electronic Data Gathering, Analysis and Retrieval system.
Upon the closing of this offering, we will become subject to the reporting
requirements of the Securities Exchange Act and in accordance with these
requirements, will file reports, proxy statements and other information with the
SEC. We intend to furnish our stockholders with annual reports containing
audited financial statements and such other periodic reports as we deem
appropriate or as may be required by law.
37
<PAGE>
INTELLI-CHECK, INC.
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Public Accountants .............................. F-2
Financial Statements:
Balance Sheets as of December 31, 1998 and
September 30, 1999 (Unaudited) ........................................ F-3
Statements of Operations for the Years Ended December 31,
1997 and 1998 and the Nine Months Ended September 30, 1998
and 1999 (Unaudited) ............................................ F-4
Statements of Stockholders' (Deficit) Equity for the Years Ended
December 31, 1997 and 1998 and the Nine Months Ended
September 30, 1999 (Unaudited) .................................. F-5
Statements of Cash Flows for the Years Ended December 31, 1997 and
1998 and the Nine Months Ended September 30, 1998 and
1999 (Unaudited) ................................................ F-6
Notes To Financial Statements ....................................... F-7 - F-17
F-1
<PAGE>
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, 1998, and the related statements of
operations, stockholders' (deficit) equity and cash flows for the two 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.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Intelli-Check, Inc. as of
December 31, 1998, and the results of its operations and its cash flows for the
two years then ended in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
New York, New York
September 24, 1999
F-2
<PAGE>
Intelli-Check, Inc.
<TABLE>
<CAPTION>
Balance Sheets
December 31, September 30,
Assets 1998 1999
------------- -------------
(Unaudited)
Current Assets:
<S> <C> <C>
Cash $ 159,600 $ 762,239
Inventory 16,693 15,894
Deposit -- 423,905
Other current assets 921 11,247
---------- ----------
Total current assets 177,214 1,213,285
Property and Equipment, net (Note 3) 188,064 224,383
Patent Costs, net of accumulated amortization of $25,816 as of
December 31, 1998 and $30,473 as of September 30, 1999
(unaudited) 79,845 75,188
Other Assets 6,180 154,500
---------- ----------
Total assets $ 451,303 $1,667,356
========== ==========
Liabilities and Stockholders' (Deficit) Equity
Current Liabilities:
Accounts payable $ 243,351 $ 59,902
Accrued expenses 752,370 261,625
Promissory notes (Note 10) -- 1,200,000
Note payable to related party (Note 5) 98,151 --
Current portion of capital lease obligations 8,008 17,643
---------- ----------
Total current liabilities 1,101,880 1,539,170
---------- ----------
Capital Lease Obligations (Note 9) 6,993 10,299
---------- ----------
Commitments and Contingencies (Note 9)
Stockholders' Equity (Deficit):
Series A Convertible Preferred Stock -- $.01 par value; 1,000,000 shares
authorized; no shares issued and outstanding as of December 31,
1998 and September 30, 1999 (unaudited), respectively 2,500 --
Common stock-- $.001 par value; 20,000,000 shares authorized;
4,402,552 and 5,271,152 shares issued and outstanding as of
December 31, 1998 and September 30, 1999 (unaudited), respectively 4,402 5,271
Additional paid-in capital 839,342 2,865,888
Accumulated deficit (1,503,814) (2,753,272)
---------- ----------
Total stockholders' (deficit) equity (657,570) 117,887
---------- ----------
Total liabilities and stockholders' (deficit) equity $ 451,303 $1,667,356
========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE>
<TABLE>
<CAPTION>
Intelli-Check, Inc.
Statements of Operations
For the Years Ended For the Nine Months Ended
December 31 September 30
---------------------------------------------------------------
1997 1998 1998 1999
----------- -------------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C>
Sales $ 16,736 $ 86,354 $ 86,354 $ 327
Cost of Goods Sold 4,343 22,074 22,074 55
----------- ----------- ---------- ----------
Gross Profit 12,393 64,280 64,280 272
Operating Expenses:
Selling 124,453 139,470 118,315 171,908
General and administrative 992,375 1,060,537 585,887 914,239
Research and development 462,804 306,608 122,597 127,999
----------- ----------- ---------- ----------
Loss from operations (1,567,239) (1,442,335) (762,519) (1,213,874)
Other Income (Expenses):
Interest Expense (37,057) (61,479) (23,248) (35,584)
----------- ----------- ---------- ----------
(1,604,296) (1,503,814) (785,767) (1,249,458)
Income Tax Benefit (Note 2) -- -- -- --
Net Loss $(1,604,296) $(1,503,814) $ (785,767) $(1,249,458)
=========== =========== ========== ===========
Per Share Information:
Net loss per common share--
Basic and diluted $(0.46) $(0.36) $ (0.19) $ (0.26)
=========== =========== ========== ===========
Common shares used in computing
per share amounts--
Basic and diluted 3,505,638 4,208,003 4,162,553 4,841,483
=========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
Intelli-Check, Inc.
<TABLE>
<CAPTION>
Statements of Stockholders' Equity (Deficit)
For the Years Ended December 31, 1997 and 1998
and the Nine Months Ended September 30, 1999 (Unaudited)
Series A
Common Stock Preferred Stock Additional
----------------- ----------------- Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit Total
------ -------- ------ ------ -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 ............ 3,251,385 $ 3,251 -- $ -- $ 374,226 $ (626,119) $ (248,642)
Issuance of common stock .......... 885,500 886 -- -- 1,666,963 -- 1,667,849
Net loss .......................... -- -- -- -- -- (1,604,296) (1,604,296)
--------- ------- ------- ------- ---------- ---------- -----------
Balance, December 31, 1997 .......... 4,136,885 4,137 -- -- 2,041,189 (2,230,415) (185,089)
Conversion from S Corporation to
C Corporation .................... -- -- -- -- (2,230,415) 2,230,415 --
Conversion of debt into Series A
Preferred Stock .................. -- -- 125,000 1,250 248,750 -- 250,000
Issuance of Series A Preferred Stock -- -- 125,000 1,250 248,750 -- 250,000
Common stock issued for employee
compensation ..................... 7,667 7 -- -- 15,326 -- 15,333
Issuance of common stock in private
placement ........................ 258,000 258 -- -- 515,742 -- 516,000
Net loss .......................... -- -- -- -- -- (1,503,814) (1,503,814)
--------- ------- ------- ------- ---------- ---------- -----------
Balance, December 31, 1998 .......... 4,402,552 4,402 250,000 2,500 839,342 (1,503,814) (657,570)
Issuance of common stock in private
placements ....................... 274,600 275 -- -- 548,925 -- 549,200
Exercise of warrant ............... 100,000 100 -- -- 199,900 -- 200,000
Issuance of common stock for note
payable and interest ............. 69,937 70 -- -- 139,804 -- 139,874
Issuance of common stock for
deferred salary .................. 80,063 80 -- -- 160,046 -- 160,126
Issuance of common stock for
settlements and accounts payable . 94,000 94 -- -- 275,621 -- 275,715
Issuance of stock options for
deferred salary .................. -- -- -- -- 700,000 -- 700,000
Conversion of preferred stock ..... 250,000 250 (250,000) (2,500) 2,250 -- --
Net loss (unaudited) .............. -- -- -- -- -- (1,249,458) (1,249,458)
--------- ------- ------- ------- ---------- ----------- -----------
Balance, September 30, 1999
(unaudited) ...................... 5,271,152 $ 5,271 -- $ -- $2,865,888 $(2,753,272) $ 117,887
========= ======= ======== ======= ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
Intelli-Check, Inc.
<TABLE>
<CAPTION>
Statements of Cash Flows
For the Years Ended For the Nine Months
December 31 Ended September 30
---------------- -----------------
1997 1998 1998 1999
----- ----- ----- -----
(Unaudited)
<S> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss ............................................... $(1,604,296) $(1,503,814) $ (777,867) $(1,249,458)
Adjustments to reconcile net loss to net cash used in
operating activities--
Depreciation and amortization ............................ 38,096 70,183 48,573 74,752
Loss on disposal of assets .......................... -- 225,783 -- --
Noncash compensation ................................ -- 15,333 -- --
Changes in assets and liabilities-
(Increase) decrease in inventory ................... (24,116) (122,292) 5,036 799
(Increase) in other current assets ................. -- (921) (2,773) (10,326)
(Increase) in deposit .............................. -- -- -- (423,905)
Decrease (increase) in other assets ................ 1,679 5,531 4,733 (148,320)
Increase (decrease) in accounts payable and
accrued expenses .................................. 423,651 262,172 (69,240) 503,370
Net cash used in operating activities ........... (1,164,986) (1,048,025) (791,538) (1,253,088)
Cash Flows From Investing Activities:
Purchases of property and equipment .................... (246,264) (26,975) (26,006) (85,409)
Net cash (used in) investing activities ......... (246,264) (26,975) (26,006) (85,409)
Cash Flows From Financing Activities:
Net proceeds from issuance of common stock ............. 1,667,849 516,000 226,000 749,200
Proceeds from issuance of preferred stock .............. -- 250,000 250,000 --
Repayment of capital lease obligations ................. -- (13,170) (14,657) (8,063)
(Repayments of) proceeds from notes payable ............ 250,000 -- -- (1)
(Repayments of) stockholder loans ...................... (88,809) -- -- --
Decrease in deferred financing costs ................... 37,500 -- -- --
Proceeds from promissory notes ......................... -- -- -- 1,200,000
Net cash provided by financing activities ....... 1,866,540 752,830 461,343 1,941,136
Net increase (decrease) in cash ................. 455,290 (322,170) (356,201) 602,639
Cash, beginning of period ................................ 26,480 481,770 481,770 159,600
Cash, end of period ...................................... $ 481,770 $ 159,600 $ 125,569 $ 762,239
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest ............... $ 30,800 $ 14,603 $ 9,000 $ 1,660
Supplemental Disclosure of Noncash Financing Activities:
Conversion of preferred stock to common stock .......... -- -- -- 250,000
Conversion of debt to preferred stock .................. -- 250,000 250,000 --
Common stock issued to satisfy debt and notes payable .. 142,000 -- -- 139,874
Common stock issued to satisfy deferred salary ......... -- -- -- 160,126
Common stock issued for settlements and accounts payable -- -- -- 275,715
Stock options issued to satisfy deferred salary ........ -- -- -- 700,000
Capital lease obligations incurred ..................... 28,171 -- -- 20,505
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
Intelli-Check, Inc.
Notes To Financial Statements
1. Nature of Business
Intelli-Check, Inc. (the "Company") was incorporated in New York in
October 1994 to develop, manufacture and market an advanced document
verification system to enable a retailer to determine their customer's age and
identity. The system may be used to detect and prevent the use of fraudulent
identification for the purchase of alcohol, tobacco and other age-restricted
products; to reduce the risk to the retailer of substantial monetary fines,
criminal penalties and license revocation for the sale of age-restricted
products to minors; and to reduce check cashing, credit card and other types of
fraud.
The Company has developed and patented the innovative software technology
that is included in the advanced document verification system terminal called
the "ID-Check." The ID-Check terminal, in which the Company's patented software
is loaded, was designed to offer convenient and reliable age and document
verification. The ID-Check reads, analyzes and displays the encoded information
contained on driver licenses and most other forms of accepted government issued
identification. In addition, the ID-Check product 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 of the driver license or
ID card by the retailer; displays a "yes", "no", "expired" or "tampered"; and
creates a record of transactions as proof that the retailer has used proper due
diligence.
During the fourth quarter of 1997, the Company commenced its principal
operations by realizing sales of pre-production prototypes of ID-Check. The
Company has completed its refinement of its software and has placed its initial
order for 525 units of its ID-Check terminal under a supplier agreement with a
third party (Note 10).
Through December 31, 1998, the Company has incurred significant cumulative
losses and has a net capital deficiency as of December 31, 1998. In addition,
the Company's liquidity requirements have been and will continue to be
significant. Management has developed a detailed plan and has taken certain
actions in order to generate the funding necessary for the Company's operations,
including: (1) a plan for marketing and sales of the Company's product, ID-Check
(see above); (2) issuance of additional capital and debt (Note 10); (3) hiring
and retaining key employees (Notes 9 and 10); and (4) effective cost control.
2. Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
Revenue on sales of the Company's product is recognized upon shipment to
the customer.
Inventory
Inventory is stated at the lower of cost or market and cost is determined
using the first-in, first-out method. Inventory is comprised of finished goods.
Long-Lived Assets
The Company's policy is to record long-lived assets at cost, amortizing
these costs over the expected useful life of the related assets, in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
of." These
F-7
<PAGE>
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amounts of the assets may not be reasonable.
Furthermore, these assets are evaluated for continuing value and proper useful
lives by comparison to undiscounted expected future cash flow projections.
Property and Equipment
Property and equipment are recorded at cost. All fixed assets are
depreciated over their estimated useful lives ranging from three to seven years
using the straight-line basis. Equipment held under capital leases is amortized
utilizing the straight-line method over the lesser of the term of the lease or
estimated useful life of the asset in accordance with SFAS No. 13, "Accounting
for Leases."
Patent Costs
Patent costs, primarily consisting of legal costs, are amortized over a
period of 17 years.
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. During the fourth quarter of 1997, the Company
completed both (a) and (b), as described above; however, no capitalized costs
were incurred or recorded during the remainder of 1997 or 1998.
Income Taxes
Prior to 1998, the Company had elected to be treated as a Subchapter S
Corporation for federal and state income tax purposes and, as a result, the
losses of the Company were passed through directly to the shareholders. The
Company did, however, remain liable for New York State Subchapter S income
taxes. During 1998, the Company's tax status changed from an S Corporation to a
C Corporation as a result of the issuance of the Series A Convertible Preferred
Stock on January 8, 1998 (Note 6).
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 deferred
tax assets as of December 31, 1998, due to the uncertainty of the realizability
of those assets.
Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable and accounts payable
approximate fair value due to the short-term maturity of these instruments. The
carrying amounts of capital lease obligations, including current portions,
approximate fair value.
Business Concentrations and Credit Risk
Financial instruments, which subject the Company to concentrations of
credit risk, consist primarily of cash. The Company maintains cash with only one
financial institution. The Company performs periodic evaluations of the relative
credit standing of this institution. The Company has had limited sales of
prototypes to a number of clients which are concentrated in the United States.
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. There were no customers that accounted for greater than 10% of
sales for the years ended December 31, 1997 and 1998, and in addition, no
customer accounted for greater than 10% of accounts receivable as of December
31, 1998.
F-8
<PAGE>
Net Income (Loss) Per Common Share
The Company computes net income (loss) per common share in accordance with
SFAS No. 128, "Earnings Per Share". Under the provisions of SFAS No. 128, basic
net income (loss) per common share ("Basic EPS") is computed by dividing net
income (loss) by the weighted average number of common shares outstanding.
Diluted net income (loss) per common share ("Diluted EPS") is computed by
dividing net income (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, 1997 and 1998 and for the
nine months ended September 30, 1998 and 1999, does not include the impact of
stock options then outstanding, as the effect of their inclusion would be
antidilutive.
Stock-Based Compensation
In 1998, the Company adopted the provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation," by continuing to apply the provisions of
Accounting Principles Board No. 25, "Accounting for Stock Issued to Employees,"
("APB No. 25") while providing the necessary pro forma disclosures as if the
fair value method had been applied.
Research and Development Costs
Research and development costs are charged to expense as incurred.
Unaudited Interim Consolidated Financial Statements
The unaudited consolidated financial information included herein for the
nine months ended September 30, 1998 and 1999, have been prepared in accordance
with generally accepted accounting principles for interim financial statements.
In the opinion of the Company, these unaudited financial statements, reflect all
adjustments necessary, consisting of normal recurring adjustments, for a fair
presentation of such data on a basis consistent with that of the audited data
presented herein. The results of operations for interim periods are not
necessarily indicative of the results expected for a full year.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income." This statement establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general-purpose
financial statements. The Company adopted this statement in 1998. The adoption
of this statement did not have an impact on the Company's financial condition or
results of operations. Accordingly, the Company's comprehensive net loss is
equal to its net loss for the years ended December 31, 1997 and 1998 and for the
nine months ended September 30, 1998 and 1999.
Segment Information
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." This statement establishes standards for
the way the public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. The Company adopted this statement in 1998. In
the initial year of application, comparative information for earlier years must
be restated. Management has determined that it does not have any separately
reportable business segments.
Costs of Computer Software Developed or Obtained for Internal Use
In April 1998, the American Institute of Certified Public Accountants
issued 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
F-9
<PAGE>
software developed or obtained for internal use. SOP 98-1 is effective for
fiscal years beginning after December 31, 1998. The adoption of SOP 98-1 did not
have a material effect on the Company's financial statements.
Recently Issued Accounting Standards
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives
and Hedging Activities," which establishes accounting and reporting standards of
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities.
In July 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133," which amends SFAS No. 133 to be effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. The Company does not
currently engage in derivative activity and does not expect the adoption of this
standard to have a material effect on the Company's results of operations,
financial position or cash flows.
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:
December 31, September 30,
1998 1999
------------ ------------
(Unaudited)
Computer equipment ........................... $103,676 $206,431
Furniture and fixtures ....................... 95,443 97,778
Leasehold improvements ....................... 63,820 64,452
Office equipment ............................. 8,440 9,132
-------- --------
271,379 377,793
Less-- Accumulated depreciation .............. 83,315 153,410
-------- --------
$188,064 $224,383
======== ========
Depreciation expense for the years ended December 31, 1997 and 1998
amounted to $20,066 and $36,982, respectively, and for the nine months ended
September 30, 1998 and 1999 amounted to $16,331 and $70,095, respectively,
(unaudited).
4. Accrued Expenses
Accrued expenses are comprised of the following:
December 31, September 30,
1998 1999
------------ --------------
(Unaudited)
Payroll .................................. $629,272 $ 16,656
Professional fees ........................ -- 122,500
Interest ................................. 82,738 3,000
Other .................................... 40,360 119,469
-------- --------
$752,370 $261,625
======== ========
5. Note Payable To Related Party
As of December 31, 1998, the Company was indebted to the President of the
Company under a note payable agreement in the amount of $98,151, which
represented the principal of the note. The note bore interest at 8% and during
1998, the due date was extended to the sooner of June 1999 or the receipt of the
proceeds
F-10
<PAGE>
from a stock offering through either a Private Placement or an Initial
Public Offering ("IPO") that exceeds $3,000,000. Accrued interest on the note
was included in accrued expenses in the accompanying balance sheets. The note
payable and all accrued interest were repaid subsequent to December 31, 1998
(Note 10).
6. Convertible Secured Demand Note
In January 1997, the Company entered into a Note Purchase Agreement with
the New York State Science and Technology Foundation (the "Foundation") pursuant
to which the Company issued a Convertible Promissory Note in the amount of
$250,000 and the Foundation agreed to invest an additional $250,000 through the
purchase of 125,000 shares of Series A Convertible Preferred Stock based upon
the Company raising a certain amount of additional capital. The Note bore
interest at 8% per annum and was converted into 125,000 shares of Series A
Convertible Preferred Stock in January 1998. In addition, the Foundation
purchased an additional 125,000 shares of Series A Convertible Preferred Stock
for $250,000 in cash, upon the closing of a private placement of the Company's
common stock in January 1998. The Series A Convertible Preferred Stock is
convertible into the Company's common shares on a one-for-one basis (Note 8).
7. Income Taxes
No provision for U.S. federal or state income taxes has been recorded for
the years ended December 31, 1997 and 1998 and for the nine months ended
September 30, 1998 and 1999 (unaudited) as the Company has incurred an operating
loss.
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 are as
follows:
December 31, September 30,
1998 1999
------------- -------------
(unaudited)
Deferred tax assets, net:
Net operating loss carryforwards ........... $ 380,000 $ 880,000
Depreciation ............................... (12,000) (20,000)
Other ...................................... (10,000) (16,000)
Less-- Valuation allowance ................. 358,000 844,000
--------- ---------
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 be realized. No income tax benefit has been recorded for all periods
presented because of the valuation allowance.
As of December 31, 1998 and September 30, 1999 (unaudited), the Company
had net operating loss carryforwards (NOL's) for federal income tax purposes of
approximately $950,000 and $2,200,000 (unaudited), respectively. 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 2009 through
2019 if not utilized. Under Section 382 of the Internal Revenue Code, these
NOL's may be limited due to ownership changes.
In January 1998, as a result of the issuance of Series A Convertible
Preferred Stock, the Company's S Corporation status was terminated and the
Company began operations as a C Corporation. Accordingly, the Company became
subject to federal and state income taxes and the retained deficit of the
Company was transferred to additional paid-in capital.
If the Company operated as a C corporation since January 1997, the pro
forma income tax benefit would have been approximately $642,000 (unaudited),
offset by a full valuation allowance. No pro forma adjustments are required for
the year ended December 31, 1998 and the nine months ended September 30, 1998
(unaudited) as the Company was operating as a C Corporation for the majority of
each period and the adjustment would be immaterial.
F-11
<PAGE>
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 (See Note 10).
Common Stock and Warrants
In May 1997, the Company completed a private placement of stock and
received proceeds of $630,000 for 315,000 units, which consist of one share of
common stock and one warrant to purchase an additional share of common stock for
$3.00, expiring two years from the date of the closing. At any time following
the completion of an IPO of its securities, the Company may, under certain
circumstances, including, but not limited to, having an effective registration
statement covering the resale of the common stock underlying the warrants,
redeem the warrants at a price of $.01 per warrant on not less than 20 days
written notice if the last sale price of the common stock has averaged at least
$4.50 per share for the 20 consecutive trading days ending at least five days
prior to the date on which notice is given. of the amount raised, $75,000
represented payments from a Director of the Company for 37,500 units of the
Company's private placement.
In May 1997, in connection with the private placement discussed above, the
Company issued warrants to the placement agent to purchase 7,500 units
consisting of one share of common stock for $2.25 per share, with an attached
warrant to purchase an additional share of common stock at $3.00 per share
expiring in June 2000. The placement agent is entitled to piggyback registration
rights with regards to the underlying common shares under the warrant agreement.
The Company allocated the net proceeds from the sale of the units to the common
stock and to the warrants issued.
In November 1997, the Company completed an additional private placement of
stock and received proceeds of $1,117,000 for 558,500 units, consisting of one
share of the Company's common stock and one warrant to purchase an additional
share of common stock for $3.00, under the same terms as the warrants issued in
the May 1997 private placement. of this amount, $85,000 was received from
certain family members of existing shareholders of the Company for 42,500 units.
In connection with the second private placement, the Company's Chief
Executive Officer converted indebtedness of $142,000 from the Company into a
subscription of 71,000 units.
The Company recorded the proceeds from both private placements that
occurred during 1997, net of approximately $79,000 in issuance expenses.
In 1998, the Company sold 258,000 shares of common stock at $2.00 per
share for total proceeds of $516,000. The Company completed two additional
private placements of common stock subsequent to December 31, 1998 (Note 9).
In the opinion of management, all warrants 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.
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
F-12
<PAGE>
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.
Pursuant to the 1998 Stock Option Plan, the Company had granted in 1997,
50,000 stock options to each of three members of the Board of Directors, of
which all are exercisable at $3.00 per share and all expire within 5 years from
the date of grant. One of the directors had declined to stand for re-election to
the Board. In connection with this decision in 1999, the Company extended the
date of expiration of the former director's stock options until August 15, 2000.
The Company did not record a charge for the adjustment to the terms of the stock
options, as the amount was immaterial.
In August 1999, the Company adopted the 1999 Stock Option Plan (Note 10).
Had compensation for the 1998 and 1999 Stock Option Plans been determined
consistent with the provisions of SFAS No.123, the effect on the Company's net
loss and basic and diluted loss per share would have been changed to the
following pro forma amounts:
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
Year Ended Year Ended September 30, September 30,
December 31, December 31, 1998 1999
1997 1998 (unaudited) (unaudited)
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Net loss, as reported $(1,604,296) $(1,503,814) $(785,767) $(1,249,458)
Net loss, pro forma (1,665,496) (1,537,814) (786,767) (1,345,658)
Basic and diluted loss per share, as reported (0.46) (0.36) (0.19) (0.26)
Basic and diluted loss per share, pro forma (0.48) (0.37) (0.19) (0.29)
</TABLE>
Stock option activity under the 1998 and 1999 Stock Option Plans during
the periods indicated is as follows:
<TABLE>
<CAPTION>
Weighted
Options Average
Granted Exercise Price
-------- -------------
<S> <C> <C>
Options outstanding at January 1, 1997 ................. -- $ --
Granted .............................................. 180,000 3.00
Canceled ............................................. -- --
------- -----
Outstanding at December 31, 1997 ....................... 180,000 3.00
Granted .............................................. 100,000 3.00
Canceled ............................................. -- --
------- -----
Outstanding at December 31, 1998 ....................... 280,000 3.00
Granted .............................................. 430,000 3.23
Canceled ............................................. -- --
------- -----
Outstanding at September 30, 1999 (unaudited) .......... 710,000 $ 3.10
======= =====
</TABLE>
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 5 years; risk free interest rate of 5.00%; expected volatility of 0%
and a dividend yield of 0%.
The weighted-average remaining life of the options outstanding at December
31, 1998 and September 30, 1999 is 3.82 years and 4.66 years (unaudited),
respectively, and the weighted-average fair value of the options outstanding at
December 31, 1998 and September 30, 1999 is $0.34 and $0.34 (unaudited),
respectively.
On November 1, 1997, the Company entered into a one-year consulting
agreement with a member of the Board of Directors, who is not an employee, the
compensation for which was the issuance of options to
F-13
<PAGE>
purchase 50,000 shares of Common Stock at $3.00 per share. The Company
determined the value of the options to be immaterial under the Black-Scholes
Option Pricing Model.
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. Commitments and Contingencies
Operating Leases
The Company has entered into various leases for office equipment and
office space expiring through October 2000. Future minimum lease payments under
these lease agreements are as follows:
Year ending December 31:
1999 .............................................. $ 74,280
2000 .............................................. 77,251
--------
$151,531
========
Capital Lease Obligations
The Company leases computer equipment under several capital leases
expiring in 2000. 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:
1999 ............................................. $ 8,941
2000 ............................................. 7,620
-------
Total minimum lease payments .................. 16,561
Less -- Amount representing interest ............. 1,560
-------
Present value of net minimum lease payments ... $15,001
=======
Royalty Agreements
In January 1996, the Company entered into an agreement with a third party.
The agreement states that if the Company has sales exceeding $500,000 to certain
customers as specified within the agreement, the Company must pay between 2 to
4% of gross revenues as a royalty to the third party. In addition, if the
Company is sold to a prospective purchaser, as defined, the third party will
receive a fee ranging from 4 to 5% of the purchase price. The fee will be
determined based upon such purchase price. As each of the aforementioned events
had not occurred, no royalties were due as of December 31, 1998. The Company
settled this agreement subsequent to December 31, 1998 (Note 10).
During 1997, the third party filed a lawsuit against the Company in the
New York State Supreme Court in Suffolk County, claiming that the Company had
breached the agreement entered into in January 1996 by failing to pay the third
party certain fees and/or royalties to which the third party believes he was
entitled in connection with sales of products of the Company to certain
designated parties.
The Company stipulated with the third party the dismissal of the action
subsequent to December 31, 1998 (Note 10).
The Company previously entered into an royalty agreement with the
President of the Company during 1996 to license certain software. The agreement
stipulated, among other provisions, that the President would receive royalties
equal to a percentage of the Company's gross sales. As of December 31, 1998, no
amounts have been earned under this agreement. This agreement was terminated in
May 1999 and superceded by a new agreement. (Note 10).
Employment Agreement
On July 1, 1996, the Company entered into a one-year employment contract
with its Chairman and Chief Executive Officer. Each party has agreed to defer
the payment until such time as the Company has significant
F-14
<PAGE>
sales of its product. Under the terms of the agreement, the Company had extended
the employment agreement one-month for each month of salary not paid. As of
December 31, 1998, no amounts had been paid to the Chairman and Chief Executive
Officer. The agreement was replaced with a new employment agreement in January
1999 (Note 10).
Supplier Agreement
In December 1996, the Company signed an exclusive supplier agreement with
Hazeltine Corporation ("Hazeltine"). The agreement specifies that the Company
would make total payments of $499,563 for the design and production of one
hundred pre-production prototypes. In addition, Hazeltine agreed to manufacture
ID-Check products, for a price determined by the terms of the agreement, for an
initial term of five years from the end of the calendar year in which
Hazeltine's sales of ID-Check products to the Company first achieve a rate of
not less than 100,000 units per year. The Company terminated said agreement
subsequent to December 31, 1998 (Note 10).
10. Subsequent Events
Employment Agreements
On January 1, 1999, the Company entered into three-year employment
contracts with both its Chairman and Chief Executive Officer and its President.
Each of the agreements provides for a base salary of $225,000 and the payment of
a bonus if the Company's sales exceed $2,000,000 in the previous year. The bonus
will be 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 will grant to each of the
executives an option to purchase the greater of 25,000 shares of our common
stock at fair market value on the date of grant or 10,000 shares of our 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 is not required to grant options to purchase more than
150,000 shares of our common stock with respect to any one fiscal year.
In July 1999, the Company entered into a two-year employment agreement
with its new Chief Financial Officer, which became effective on September 7,
1999. The agreement provides 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 10,000 options are immediately exercisable at $5.00
per share, 20,000 options are exercisable on September 7, 2000 at the initial
public offering price and 20,000 options become exercisable at the initial
public offering price when all external accounting functions, except for
year-end audit, are being performed internally.
Private Placements of Common Stock
In January 1999, the Company completed a private placement of stock, which
originally commenced in 1998. During January 1999, the Company sold 15,000
units, consisting of one share of the Company's common stock and one warrant to
purchase an additional share of common stock at $3.00, expiring two years from
the date of closing. The Company received total proceeds of $30,000 in January
1999. The Company allocated the net proceeds from the sale of the units to the
common stock and to the warrant.
In March 1999, the Company commenced an additional private placement and
sold 259,600 units, consisting of one share of common stock and one warrant to
purchase an additional share of common stock at $3.00, expiring two years from
the date of closing. The Company received total proceeds of $489,200 prior to
June 30, 1999 and the remaining balance of $30,000 in August 1999. The Company
allocated the net proceeds from the sale of the units to the common stock and to
the warrant.
In the opinion of management, all of the above warrants 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.
Warrants
In February 1999, the Company extended the expiration dates for the
warrants issued on May 26, 1997 and November 30, 1997 until June 30, 2000. The
Company did not record a charge for the adjustment to the terms of the warrants,
as the amount was immaterial.
F-15
<PAGE>
In March 1999, the Company issued warrants to GunnAllen Financial, Inc. to
purchase 50,000 shares of common stock at an exercise price of $3.00 per share
expiring March 24, 2002. The warrants were issued in connection with a
consulting service agreement and in the opinion of management 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. The Company did not record a charge
for the issuance to the terms of the warrants, as the amount was immaterial. In
the opinion of management, the exercise price of the warrant was equal or above
the fair market value of the Company's Common Stock on the date of the grant.
In April 1999, the Company adjusted the exercise price of a warrant to
purchase common stock of the Company issued to the Foundation, in a previous
common stock private placement, from $3.00 to $2.00. The adjustment was
contingent upon the Foundation exercising the warrants within thirty days of the
adjustment. The Company did not record a charge for the adjustment to the terms
of the warrants, as the amount was immaterial as the exercise price of the
warrant was equal or above the fair market value of the Company's Common Stock
on the date of the adjustment. The Foundation exercised this warrant in May 1999
at the adjusted exercise price and the Company received total proceeds of
$200,000. In addition, the Foundation received a new warrant to purchase 100,000
shares of the Company's common stock at an exercise price of $3.00 per share
expiring in May 2001. In the opinion of management, the new warrant has 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.
Repayment of Note Payable
In connection with an agreement executed in May 1999, which superceded a
prior license agreement, the Company repaid an outstanding loan of $98,151 and
accrued interest of $41,724 to the President of the Company. The Company paid
$1.00 in cash and issued 69,937 units, consisting of one share of the Company's
common stock and one warrant to purchase an additional share of common stock at
$3.00, expiring in May 2001. The units were valued at $2.00 per unit, with the
value primarily allocated to the share of common stock. In addition, under the
agreement, the Company is licensing certain software from the President and has
agreed to pay the executive royalties equal to .005% on gross sales from
$2,000,000 to $52,000,000 and .0025% on gross sales in excess of $52,000,000.
Conversion of Deferred Salary
In May 1999, the Chairman and Chief Executive Officer converted $150,000
in deferred salary into 75,000 units, consisting of one share of the Company's
common stock and one warrant to purchase an additional share of common stock at
$3.00, expiring in May 2001. In addition, the Company's President converted
$10,126 in deferred salary into 5,063 units, consisting of one share of the
Company's common stock and one warrant to purchase an additional share of common
stock at $3.00, expiring in May 2001.
In June 1999, the Chairman and Chief Executive officer converted
approximately $380,000 in deferred salary and interest into 375,000 options to
purchase a share of common stock at $3.00, expiring in June 2004. In addition,
the Company's President converted approximately $210,000 in deferred salary and
interest into 207,000 options to purchase a share of common stock at $3.00,
expiring in June 2004. Furthermore, the Company's former President converted
approximately $110,000 in deferred salary and interest into 110,000 options to
purchase a share of common stock at $3.00, expiring in June 2004.
Settlement Agreements
In connection with an outstanding lawsuit, the Company stipulated with the
plaintiff to the dismissal of the action, which had been pending since January
1997 in the New York State Supreme Court, Suffolk County, on February 22, 1999.
In exchange for the plaintiff's dismissal of his claims against the Company and
execution of a release of all claims against the Company, the Company has agreed
to dismiss its counterclaim against the plaintiff and execute a reciprocal
release for him. The settlement does not provide for any repayment from the
Company to the plaintiff or from the plaintiff to the Company.
In May 1999, the Company and the third party agreed to terminate the
royalty agreement pursuant to a Settlement Agreement. Under the Settlement
Agreement, the Company issued 10,000 shares of common stock, valued at $2.00 per
share with piggyback registration rights, to the third party in exchange for the
termination of
F-16
<PAGE>
the royalty agreement. The Company recorded a charge of $20,000 in the
accompanying statement of operations for the six months ended June 30, 1999
(unaudited). The Company has no further liability to the third party.
In June 1999, the Company and Hazeltine (succeeded by Marconi Aerospace
Systems, Inc.) entered into an agreement to terminate the Exclusive Supplier
Agreement. Under the terms of the termination agreement, Hazeltine will return
all units of the Company's ID-Check in its possession as well as all samples,
designs, drawings, software, molds and any other item related to the ID-Check.
The Company issued 75,000 shares of common stock to Hazeltine in order to
satisfy outstanding payables of approximately $220,000 due Hazeltine, which was
included in accounts payable in the accompanying December 31, 1998 balance
sheet.
Common Stock Issued for Services
In June 1999, the Company issued 9,000 shares of common stock to a third
party for professional services rendered on behalf of the Company. The shares
were valued at $4.00 per share, and accordingly, the Company recorded a charge
of $36,000 in the accompanying statement of operations for the nine months ended
September 30, 1999 (unaudited).
Supplier Agreement
In June 1999, the Company entered into a new supplier agreement with Welch
Allyn, Inc., and the Company immediately executed its first order with Welch
Allyn, Inc., for the purchase of 525 units of its newly designed product.
Conversion of Preferred Stock
In July 1999, the Foundation converted 250,000 shares of Series A
Convertible Preferred Stock into 250,000 shares of common stock.
Secured Promissory Notes
In August and September 1999, the Company placed $1,200,000 of secured
promissory notes with interest at 10% for net proceeds of $1,050,000. The notes
have warrants attached to purchase 2,500 shares of common stock for each
principal amount of $50,000, at $3.00 per share. The warrants expire in August
2002 and can be redeemed by the Company at $.01 per warrant at any time the
Company's common stock has an average market price of $6.00 per share for a
period of twenty consecutive trading days. The fair value of the warrants was
deemed to be immaterial. The notes mature at the earlier of July 31, 2000 or the
date at which the Company receives gross proceeds from a public offering of its
securities of at least $6,000,000.
1999 Stock Option Plan
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.
Initial Public Offering
The Company has entered into a letter of intent for an initial public
offering of its common stock. The offering contemplates the sale of 1,000,000
shares of common stock at an offering price of $7.00 per share before
underwriting commissions and offering expenses.
F-17
<PAGE>
We have not authorized any dealer, salesperson or any other person to give
any information or to represent anything not contained in this prospectus. You
must not rely on any unauthorized information. This prospectus does not offer to
sell or buy any shares in any jurisdiction where it is unlawful.
================================================================================
TABLE OF CONTENTS
Page
----
Prospectus Summary ....................................................... 3
Risk Factors ............................................................. 6
Forward-Looking Statements ............................................... 8
Use of Proceeds .......................................................... 9
Dilution ................................................................. 10
Dividends ................................................................ 10
Capitalization ........................................................... 11
Management's Discussion and Analysis
of Financial Condition and
Results of Operations .................................................. 12
Business ................................................................. 16
Management ............................................................... 25
Principal and Selling Stockholders ....................................... 31
Certain Transactions ..................................................... 32
Description of Securities ................................................ 33
Shares Eligible for Future Sale .......................................... 34
Underwriting ............................................................. 35
Legal Matters ............................................................ 37
Experts .................................................................. 37
Additional Information ................................................... 37
Index to the Company's
Financial Statements ................................................... F-1
Until , 1999, all dealers effecting transactions in the registered
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
<PAGE>
1,000,000 SHARES
INTELLI-CHECK. INC.
Common Stock
----------
Prospectus
----------
GunnAllen
Financial, Inc.
Starr Securities,Inc.
================================================================================
, 1999
<PAGE>
Part II
Information Not Required In Prospectus
Item 24. Indemnification of Directors and Officers
Intelli-Check's Certificate of Incorporation limits the liability of
directors to the maximum extent permitted by Delaware General Corporation Law.
Delaware law provides that the directors of a corporation will not be personally
liable to such corporation or its stockholders for monetary damages for breach
of their fiduciary duties as directors, except for liability (i) for any breach
of their duty of loyalty to the corporation or its stockholders; (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law; (iii) for unlawful payments of dividends or unlawful
stock repurchases or redemptions as provided in Section 174 of the Delaware
General Corporation Law; or (iv) for any transaction from which the director
derives an improper personal benefit. Intelli-Check's By-laws provide that the
Company shall indemnify its directors and officers under certain circumstances,
including those circumstances in which indemnification would otherwise be
discretionary, and the Company is required to advance expenses to its officers
and directors as incurred in connection with proceedings against them for which
they may be indemnified.
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than the
underwriting discount and the underwriters' non-accountable expense allowance,
payable by the Registrant in connection with the sale of common stock being
registered. All amounts are estimates except the SEC registration fee and the
American Stock Exchange filing fees.
Amount
--------
SEC registration fee ........................................... $ 2,500
NASD filing fee ................................................ 1,500
American Stock Exchange listing fee ............................ 42,500
Blue sky fees and expenses (including legal fees) .............. 10,000
Transfer agent fees ............................................ 5,000
Printing ....................................................... 75,000
Legal fees and expenses ........................................ 150,000
Accounting fees and expenses ................................... 100,000
Miscellaneous .................................................. 50,000
--------
Total .................................................... $436,500
========
Item 26. Recent Sales of Unregistered Securities
In the past three years, the Company made the following sales of
unregistered securities pursuant to exemptions from the registration
requirements of the Securities Act of 1933, as amended (the Securities Act).
In September 1996, we sold a total of 87,500 shares of our common stock
for $175,000. Paul Cohen and Eric Cohen, the father and brother of our
co-founder, Todd Cohen, purchased 62,500 shares and 15,000 shares, respectively.
Gregg Messina, the brother of our co-founder, Kevin Messina, purchased 10,000
shares. In connection with the issuance, (i) each shareholder represented to the
Company that, by virtue of his investment acumen, business experience or
independent financial and tax advice, he had the capability of evaluating the
risks and merits in investing in the shares, (ii) each shareholder represented
that the shares acquired cannot be sold without registration under the
Securities Act, except in reliance upon an exemption therefrom and (iii) the
Company did not engage in any general solicitation or advertisement for the
issuance. The shareholders further represented their intention to acquire the
securities for investment only and not with a view to the distribution thereof.
Appropriate legends were affixed to the stock certificates issued in such
transactions. Each shareholder had adequate access to sufficient information
about the Company to make an informed investment decision.
II-1
<PAGE>
The issuance and sale of these securities were made in reliance on the exemption
provided by Section 4(2) of the Securities Act, as a transaction not involving
any public offering.
In October 1996, we issued a total of 41,385 shares of our common stock to
satisfy loans in the aggregate amount of $82,770. Paul Cohen, the father of our
co-founder, Todd Cohen, accepted 28,885 shares in repayment of $57,770 of
indebtedness and William Glasgow, who has been, since September 1996, director
of corporate accounts of the Company, accepted 12,500 shares in repayment of
$25,000 of indebtedness. Also in October 1996, we issued a total of 22,500
shares of our common stock in repayment of $45,000 owed to our former attorneys,
Post & Heymann LLP. In connection with the issuance, (i) each shareholder
represented to the Company that, by virtue of his investment acumen, business
experience or independent financial and tax advice, he had the capability of
evaluating the risks and merits in investing in the shares, (ii) each
shareholder represented that the shares acquired cannot be sold without
registration under the Securities Act, except in reliance upon an exemption
therefrom and (iii) the registrant did not engage in any general solicitation or
advertisement for the issuance. The shareholders further represented their
intention to acquire the securities for investment only and not with a view to
the distribution thereof. Appropriate legends were affixed to the stock
certificates issued in such transactions. Each shareholder had adequate access
to sufficient information about the Company to make an informed investment
decision. The issuance and sale of these securities were made in reliance on the
exemption provided by Section 4(2) of the Securities Act, as a transaction not
involving any public offering.
In December 1996 and January 1997, Frank Mandelbaum, our chief executive
officer, made loans totalling $142,000 with interest at 10% with maturity in 90
days. He subsequently extended the notes on several occasions. In November 1997,
as part of the private placement discussed below, we issued to Mr. Mandelbaum
71,000 shares of our common stock and warrants to purchase 71,000 shares of our
common stock at an exercise price of $3.00 per share in exchange for Mr.
Mandelbaum's forgiveness of his loan to us of $142,000. Mr. Mandelbaum is an
accredited investor, as that term is defined in Regulation D promulgated under
the Securities Act. The securities issued to Mr. Mandelbaum contain a legend
stating that the securities acquired cannot be sold without registration under
the Securities Act, except in reliance upon an exemption therefrom. As the chief
executive officer, Mr. Mandelbaum had adequate access to sufficient information
about the Company to make an informed investment decision. The Company did not
engage in any general solicitation or advertisement for the issuance. The
issuance and sale of these securities were made in reliance on the exemption
provided by Section 4(2) of the Securities Act, as a transaction not involving
any public offering.
In January 1997, we entered into a Note Purchase Agreement with the New
York State Science and Technology Foundation pursuant to which we issued a
Convertible Promissory Note in the amount of $250,000. The Foundation also
agreed to invest an additional $250,000 through the purchase of 125,000 shares
of Series A convertible preferred stock based upon our raising a certain amount
of additional capital. The note bore interest at 8% per annum. In January 1998,
we exercised our right to redeem the convertible promissory note held by the
Foundation for 125,000 shares of Series A convertible preferred stock. In
addition, the Foundation purchased an additional 125,000 shares of Series A
convertible preferred stock for $250,000. In July 1999, the Foundation exercised
its conversion rights and received 250,000 shares of common stock in exchange
for its preferred stock. The New York State Science and Technology Foundation
subscribed to 100,000 units for $200,000 in the private placement of September
1998, discussed below, which units consisted of one share of common stock and
one warrant to acquire an additional share at $3.00 per share. In April 1999, we
adjusted the exercise price of warrants issued to the Foundation from $3.00 to
$2.00 if exercised within 30 days of the adjustment. In May 1999, the Foundation
exercised such warrant and we issued 100,000 shares of our common stock and a
new warrant to purchase 100,000 shares of our common stock at an exercise price
of $3.00, which expires in May 2001. In connection with the issuance of
securities to the New York State Science and Technology Foundation, (i) the
Foundation represented to the Company that it and/or its officers or employees
were experienced in evaluating and investing in newly-organized, high-technology
companies such as the Company, (ii) the Foundation represented that the shares
acquired cannot be sold without registration under the Securities Act, except in
reliance upon an exemption therefrom and (iii) the Company did not engage in any
general solicitation or advertisement for the issuance. Appropriate legends were
affixed to the stock certificates issued in such transactions. The Foundation
had adequate access to sufficient information about the Company to make an
informed investment decision. The issuance and sale of these securities were
made in reliance on the exemption provided by Section 4(2) of the Securities
Act, as a transaction not involving any public offering.
II-2
<PAGE>
In February 1997, we issued 12,000 shares of our common stock to
Blanchfield King Kober, our former accountants, in payment of accounting fees
totaling $24,000. In June 1999, we issued an additional 9,000 shares of our
common stock to Blanchfield King Kober in payment of accounting fees totalling
$36,000. The Company believes that these accountants have such knowledge and
experience in financial and business matters that they were capable of
evaluating the merits and risks of the investment. The shares issued to the
shareholders contain a legend stating that the shares acquired cannot be sold
without registration under the Securities Act, except in reliance upon an
exemption therefrom. Because of their relationship with the Company, the
shareholders had adequate access to sufficient information about the Company to
make an informed investment decision. The Company did not engage in any general
solicitation or advertisement for the issuance. The issuance and sale of these
securities were made in reliance on the exemption provided by Section 4(2) of
the Securities Act, as a transaction not involving any public offering.
In May 1997 and June 1997, we sold 315,000 units to 8 purchasers, which
units consisted of one share of common stock and one warrant to acquire an
additional share at $3.00 per share originally set to expire in June 1999 in a
private placement with respect to which Jesup & Lamont Securities Corp. acted as
placement agent. The placement agent received a commission of $45,500 and a
non-accountable expense allowance of $20,000 in connection with the private
placement. Net proceeds to us were $550,849. Of the amount raised, $75,000
represented payment from one of our directors for 37,500 units. Our company also
issued to the placement agent non-redeemable warrants to purchase 7,500 units
for $2.25 per unit, which includes one share of common stock and an attached
warrant to purchase an additional share of common stock at $3.00 per share. In
connection with the issuance, (i) each shareholder represented to the Company
that he was either an accredited investor, as that term is defined in Regulation
D promulgated under the Securities Act, and/or that he and such other persons as
he found it necessary or advisable to consult, have sufficient knowledge and
experience in business and financial matters to evaluate the risks of the
investment and to make an informed investment decision with respect thereto,
(ii) each shareholder represented that the securities acquired cannot be sold
without registration under the Securities Act, except in reliance upon an
exemption therefrom and (iii) the Company did not engage in any general
solicitation or advertisement for the issuance. The shareholders further
represented their intention to acquire the securities for investment only and
not with a view to the distribution thereof. Appropriate legends were affixed to
the stock certificates and warrants issued in such transactions. Each
shareholder had adequate access to sufficient information about the Company to
make an informed investment decision. The issuance and sale of these securities
were made in reliance on the exemption provided by Section 4(2) of the
Securities Act, as a transaction not involving any public offering.
In November 1997, we sold in a private placement a total of 558,500 units
to 15 purchasers, which units consisted of one share of common stock and one
warrant to acquire an additional share at $3.00 per share originally set to
expire in November 1999. Our company received net proceeds of $1,117,000 from
this offering. In connection with the issuance, (i) each shareholder represented
to the Company that he was either an accredited investor, as that term is
defined in Regulation D promulgated under the Securities Act, and/or that he and
such other persons as he found it necessary or advisable to consult, have
sufficient knowledge and experience in business and financial matters to
evaluate the risks of the investment and to make an informed investment decision
with respect thereto, (ii) each shareholder represented that the securities
acquired cannot be sold without registration under the Securities Act, except in
reliance upon an exemption therefrom and (iii) the Company did not engage in any
general solicitation or advertisement for the issuance. The shareholders further
represented their intention to acquire the securities for investment only and
not with a view to the distribution thereof. Appropriate legends were affixed to
the stock certificates and warrants issued in such transactions. Each
shareholder had adequate access to sufficient information about the Company to
make an informed investment decision. The issuance and sale of these securities
were made in reliance on the exemption provided by Section 4(2) of the
Securities Act, as a transaction not involving any public offering.
In July 1998, we commenced a private placement of 500,000 units at $6.00
per unit. These units consisted of two shares of common stock at $3.00 per share
and one warrant to acquire an additional share at $5.00 per share expiring two
years from the date of the closing. In connection with this offering, the
Company sold 31,000 units and received proceeds of $186,000. Due to market
conditions prevailing at that time for raising capital, we rescinded the
offering and all the subscribers agreed to re-subscribe under the terms of the
September 1998 offering.
II-3
<PAGE>
In September 1998, we commenced a private placement of 1,000,000 units at
$2.00 per unit. These units consisted of one share of common stock and one
warrant to acquire an additional share at $3.00 per share. The offering was
extended to January 17, 1999. We sold 273,000 units to 4 purchasers and received
$546,000 as a result of the offering, of which $30,000 was received in January
1999. In connection with the issuance, (i) each shareholder represented to the
Company that he was either an accredited investor, as that term is defined in
Regulation D promulgated under the Securities Act, and/or that he and such other
persons as he found it necessary or advisable to consult, have sufficient
knowledge and experience in business and financial matters to evaluate the risks
of the investment and to make an informed investment decision with respect
thereto, (ii) each shareholder represented that the securities acquired cannot
be sold without registration under the Securities Act, except in reliance upon
an exemption therefrom and (iii) the Company did not engage in any general
solicitation or advertisement for the issuance. The shareholders further
represented their intention to acquire the securities for investment only and
not with a view to the distribution thereof. Appropriate legends were affixed to
the stock certificates and warrants issued in such transactions. Each
shareholder had adequate access to sufficient information about the Company to
make an informed investment decision. The issuance and sale of these securities
were made in reliance on the exemption provided by Section 4(2) of the
Securities Act, as a transaction not involving any public offering.
In February 1999, we extended the expiration date for the warrants issued
in May 1997, June 1997 and November 1997 until June 30, 2000.
In March 1999, we commenced a private placement and sold 259,600 units to
17 purchasers at $2.00 per unit. These units consisted of one share of common
stock and one warrant to acquire an additional share at $3.00 per share. We
received $489,200 as a result of the offering prior to June 30, 1999 and $30,000
in August, 1999. In connection with the issuance, (i) each shareholder
represented to the Company that he was either an accredited investor, as that
term is defined in Regulation D promulgated under the Securities Act, and/or
that he and such other persons as he found it necessary or advisable to consult,
have sufficient knowledge and experience in business and financial matters to
evaluate the risks of the investment and to make an informed investment decision
with respect thereto, (ii) each shareholder represented that the securities
acquired cannot be sold without registration under the Securities Act, except in
reliance upon an exemption therefrom and (iii) the Company did not engage in any
general solicitation or advertisement for the issuance. The shareholders further
represented their intention to acquire the securities for investment only and
not with a view to the distribution thereof. Appropriate legends were affixed to
the stock certificates and warrants issued in such transactions. Each
shareholder had adequate access to sufficient information about the Company to
make an informed investment decision. The issuance and sale of these securities
were made in reliance on the exemption provided by Section 4(2) of the
Securities Act, as a transaction not involving any public offering.
In March 1999, we issued warrants to GunnAllen Financial, Inc. to purchase
50,000 shares of our common stock at an exercise price of $3.00 per share
expiring March 24, 2002. These warrants were issued in payment of the fee under
a consulting agreement. The Company believes that this broker dealer had such
knowledge and experience in financial and business matters that it was capable
of evaluating the merits and risks of the investment. The Company did not engage
in any general solicitation or advertisement for the issuance. GunnAllen had
adequate access to sufficient information about the Company to make an informed
investment decision. The issuance and sale of these securities were made in
reliance on the exemption provided by Section 4(2) of the Securities Act, as a
transaction not involving any public offering.
In May 1999, we issued 10,000 shares of our common stock to Allan Binder
in exchange for the termination of a royalty agreement. Mr. Binder is an
attorney and served as a consultant to the Company. Because of his relationship
with the Company, Mr. Binder had adequate access to sufficient information about
the Company to make an informed investment decision. The Company believes that
Mr. Binder had such knowledge and experience in financial and business matters
that he was capable of evaluating the merits and risks of the investment. The
shares issued to Mr. Binder contain a legend stating that the shares acquired
cannot be sold without registration under the Securities Act, except in reliance
upon an exemption therefrom. The Company did not engage in any general
solicitation or advertisement for the issuance. The issuance and sale of these
securities were made in reliance on the exemption provided by Section 4(2) of
the Securities Act, as a transaction not involving any public offering.
II-4
<PAGE>
In May 1999, we issued to Frank Mandelbaum, our chief executive officer,
75,000 shares of our common stock and warrants to purchase 75,000 shares at an
exercise price of $3.00 per share and we issued to Kevin Messina, our president,
5,063 shares of our common stock and warrants to purchase 5,063 shares at an
exercise price of $3.00 per share. These issuances reduced Mr. Mandelbaum's
deferred compensation by $150,000 and Mr. Messina's deferred compensation by
$10,126. In addition, we issued to Mr. Messina 69,937 shares of our common stock
and warrants to purchase 69,937 shares of our common stock at an exercise price
of $3.00 per share in exchange for the termination of Mr. Messina's reversion
rights for certain software. In June 1999, all remaining deferred compensation
and interest due to Mr. Mandelbaum, Mr. Messina and Todd Cohen, our co-founder,
was eliminated by the issuance of options to purchase 375,000, 207,000 and
110,000 shares of our common stock. Mr. Mandelbaum's deferred compensation was
reduced by approximately $380,000, Mr. Messina's deferred compensation was
reduced by approximately $210,000 and Mr. Cohen's deferred compensation was
reduced by approximately $110,000. Mr. Mandelbaum is an accredited investor, as
that term is defined in Regulation D promulgated under the Securities Act. In
addition, the Company believes that each of these members of senior management
had such knowledge and experience in financial and business matters that they
were capable of evaluating the merits and risks of the investment. The
securities issued to the shareholders contain a legend stating that the
warrants, options and underlying shares cannot be sold without registration
under the Securities Act, except in reliance upon an exemption therefrom. As
members of senior management, Messrs. Mandelbaum, Messina and Cohen had adequate
access to sufficient information about the Company to make an informed
investment decision. The Company did not engage in any general solicitation or
advertisement for the issuance. The issuance and sale of these securities were
made in reliance on the exemption provided by Section 4(2) of the Securities
Act, as a transaction not involving any public offering.
In June 1999, we agreed to terminate the supplier agreement we had with
Marconi Aerospace Systems, Inc., formerly Hazeltine, for which we issued 75,000
shares of our common stock to Marconi in payment of outstanding invoices
totalling $220,000, and we received all units of ID-Check which had been
manufactured, all samples, designs, drawings, software, molds and any other item
related to ID-Check. In connection with the issuance, (i) the shareholder
represented to the Company that it was an accredited investor, as that term is
defined in Regulation D promulgated under the Securities Act, and that it had
sufficient knowledge and experience in business and financial matters to
evaluate the risks of the investment and to make an informed investment decision
with respect thereto, (ii) the shareholder represented that the securities
acquired cannot be sold without registration under the Securities Act, except in
reliance upon an exemption therefrom and (iii) the Company did not engage in any
general solicitation or advertisement for the issuance. The shareholder further
represented its intention to acquire the securities for investment only and not
with a view to the distribution thereof. Appropriate legends were affixed to the
stock certificates issued in such transaction. The shareholder had adequate
access to sufficient information about the Company to make an informed
investment decision. The issuance and sale of these securities were made in
reliance on the exemption provided by Section 4(2) of the Securities Act, as a
transaction not involving any public offering.
In August and September 1999 we sold to 27 investors $1,200,000 of secured
promissory notes with interest at 10%. These notes have warrants attached to
purchase 2,500 shares for each principal amount of $50,000 at $3.00 per share,
which expire in August 2002 and can be redeemed by us at $.01 per warrant at any
time that our stock has a public market price of $6.00 per share for 20
consecutive days. The notes mature on the sooner of July 31, 2000 or the date
that we receive gross proceeds from a public offering of our securities of
$6,000,000. In connection with the issuance, (i) each noteholder represented to
the Company that he was either an accredited investor, as that term is defined
in Regulation D promulgated under the Securities Act, and/or that he and such
other persons as he found it necessary or advisable to consult, have sufficient
knowledge and experience in business and financial matters to evaluate the risks
of the investment and to make an informed investment decision with respect
thereto, (ii) each noteholder represented that the notes, warrants and
underlying shares cannot be sold without registration under the Securities Act,
except in reliance upon an exemption therefrom and (iii) the Company did not
engage in any general solicitation or advertisement for the issuance. The
noteholders further represented their intention to acquire the securities for
investment only and not with a view to the distribution thereof. Appropriate
legends were affixed to the notes and warrants issued in such transactions. Each
noteholder had adequate access to sufficient information about the Company to
make an informed investment decision. The issuance and sale of these securities
were made in reliance on the exemption provided by Section 4(2) of the
Securities Act, as a transaction not involving any public offering.
II-5
<PAGE>
Item 27. Exhibits
Number Description
- ------- ----------
1 Form of Underwriting Agreement*
3.1 Certificate of Incorporation of the Company*
3.2 By-laws of the Company*
4.1 Specimen Stock Certificate***
4.2 Form of Underwriters' Warrant Agreement*
5 Opinion of Milberg Weiss Bershad Hynes & Lerach LLP***
10.1 1998 Stock Option Plan*
10.2 Employment Agreement between Frank Mandelbaum and the Company, dated
as of January 1, 1999*
10.3 Employment Agreement between Kevin Messina and the Company, dated as
of January 1, 1999*
10.4 Employment Agreement between Edwin Winiarz and the Company, dated as
of July 21, 1999*
10.5 Agreement of Lease between the Company and The Huntington Atrium,
dated as of October 25, 1996*
10.6 1999 Stock Option Plan*
10.7 Development and Supply Agreement between the Company and Welch Allyn
Data Collection Inc., dated July 9, 1999**
10.8 Agreement between the Company and Northern Leasing Systems Inc.,
dated as of August 13, 1999*
10.9 Employment Agreement between the Company and W. Robert Holloway,
dated October 25, 1999***
10.10 Agreement between the Company and Kevin Messina, individually and
d/b/a K.M. Software Development, dated as of May 3, 1999***
21 List of Subsidiaries*
23(1) Consent of Milberg Weiss Bershad Hynes & Lerach LLP (included in
Exhibit 5)
23(2) Consent of Arthur Andersen LLP***
24 Power of Attorney*
27 Financial Data Schedule***
- ----------
* Previously filed.
** Previously filed in redacted form pursuant to Rule 406 under the Securities
Act. Previously filed separately in unredacted form subject to a request for
confidential treatment under Rule 406.
*** Filed herewith.
Item 28. Undertakings
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned Registrant hereby undertakes:
(1) That it will file, during any period in which in offers or sells
securities, a post-effective amendment to this registration statement
to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
II-6
<PAGE>
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in
the registration statement; and
(iii) Include any additional or changed material information on the
plan of distribution.
(2) That for determining liability under the Securities Act, it will treat
each post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to
be the initial bona fide offer.
(3) To file a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the Offering.
(4) To provide to the underwriters at the closing specified in the
Underwriting Agreement certificates in such denomination and
registered in such names as required by the underwriters to permit
prompt delivery to each purchaser.
(5) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this registration statement as of the time it was
declared effective.
(6) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
II-7
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant has duly caused this Amendment No. 1 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, State of New York, on November 1, 1999.
INTELLI-CHECK, INC.
By /S/ FRANK MANDELBAUM
---------------------------
Frank Mandelbaum, Chairman
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 1 to the Registration Statement has been signed by the
following persons in the capacities indicated below:
INTELLI-CHECK, INC.
Dated: November 1, 1999 /S/ FRANK MANDELBAUM
---------------------------------
Frank Mandelbaum, Chairman, Chief
Executive Officer and Director
Dated: November 1, 1999 /S/ *
------------------------------------------
Kevin Messina, President, Chief Technology
Officer and Director
Dated: November 1, 1999 /S/ *
-----------------------------------------------
Edwin Winiarz, Executive Vice President,
Treasurer, Chief Financial Officer and Director
Dated: November 1, 1999 *
---------------------------------------
Paul Cohen, Director
Dated: November 1, 1999
---------------------------------------
Anthony Broderick, Director
Dated: November 1, 1999 _______________________________________
Evelyn Berezin, Director
Dated: November 1, 1999 *
---------------------------------------
Charles McQuinn, Director
*By: /s/ Frank Mandelbaum
--------------------
Frank Mandelbaum
Attorney-in-fact
II-8
INT
COMMON STOCK
COMMON STOCK
INCORPORATED UNDER THE LAWS
OF THE STATE OF DELAWARE
SEE REVERSE FOR
CERTAIN DEFINITIONS
CUSIP 45817G 10 2
THIS CERTIFIES that
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, PAR VALUE $.001 PER SHARE,
OF
INTELLI-CHECK, INC.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed.
This certificate is not valid unless countersigned and registered by the
Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
SECRETARY
CHAIRMAN & CEO
COUNTERSIGNED AND REGISTERED:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
(Jersey City, N.J.) TRANSFER AGENT
AND REGISTRAR
BY:
AUTHORIZED OFFICER
<PAGE>
The Corporation will furnish without charge to each stockholder who so
requests a statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM
TEN ENT
JT TEN
-
-
-
as tenants in common
as tenants by the entireties
as joint tenants with right of
survivorship and not as tenants
in common
UNIF GIFT MIN ACT-.........................Custodian........................
(Cust) (Minor)
under Uniform Gifts to Minors
Act..........................
(State)
Additional abbreviations may also be used though not in the above list.
For value received, hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the
premises.
Dated
NOTICE:
THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON
THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed:
- --------------------------------------------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15.
EXHIBIT 5
[LETTERHEAD MILBERG WEISS BERSHAD HYNES & LERACH LLP]
November 1, 1999
Intelli-Check, Inc.
775 Park Avenue, Suite 340
Huntington, New York 11743
Re: Intelli-Check, Inc.
Registration Statement on Form SB-2
Ladies and Gentlemen:
We have acted as counsel to Intelli-Check, Inc., a Delaware corporation
(the "Company"), in connection with the preparation and filing by the Company of
a registration statement (the "Registration Statement") on Form SB-2, File No.
333-87797, under the Securities Act of 1933, and the prospectus (the
"Prospectus") included therein, relating to the public offering by the Company
of 1,000,000 shares (the "Firm Shares") of the Company's common stock, par value
$.001 per share (the "Common Stock"). The offering also involves the grant to
GunnAllen Financial, Inc. (the "Underwriter") of an option to purchase up to an
additional 150,000 shares of Common Stock (the "Additional Shares") to cover
over-allotments in connection with the offering, the sale to the Underwriter of
warrants (the "Underwriter's Warrants") to purchase up to 100,000 shares of
Common Stock and the registration for the benefit of certain existing
securityholders of an aggregate of 25,000 shares of Common Stock, 15,000 of
which are issuable upon the exercise of warrants.
In rendering the opinions set forth below, we have examined original
copies or certified, conformed or photostatic copies of the corporate records of
the Company and such certificates of public officials, drafts of the
Underwriting Agreement relating to the offering, certificates of the officers of
the Company and copies identified to our satisfaction of such other documents as
we deemed relevant and necessary as a basis for the opinion hereinafter set
forth. In all such examinations, we have assumed the genuineness of all
signatures, the authenticity of documents submitted to us as originals and the
conformity to the originals of all documents submitted to us as certified,
conformed or photostatic copies.
As to various questions of material fact to this opinion, we have relied
upon statements and certificates of officers and representatives of the Company.
On the basis of the foregoing and our examination of such questions of law
as we deemed relevant, we are of the opinion that:
<PAGE>
1. All the outstanding shares of capital stock of the Company (including
the Firm Shares, the Additional Shares and shares of Common Stock registered for
the benefit of certain existing securityholders) have been duly authorized, and
except for the 15,000 shares issuable upon exercise of warrants, validly issued
and are fully paid, non-assessable and not subject to any preemptive or similar
rights;
2. The 15,000 shares of Common Stock issuable to the holder of warrants,
when issued, paid for and delivered in accordance with the terms of such
warrants will be duly authorized and validly issued, nonassessable and not
subject to any preemptive or similar rights.
3. Each of the Underwriter's Warrants and the Common Stock issuable upon
the exercise of such warrants, when issued, paid for and delivered in accordance
with the terms of such warrants, will be duly authorized, validly issued and
fully paid, non-assessable and not subject to any preemptive or similar rights;
We note that we are members of the bar of the State of New York and our
opinion is limited to matters governed by the federal laws of the United States,
the laws of the State of New York and the general corporation laws of the State
of Delaware.
We hereby consent to be named in the Registration Statement and the
Prospectus as attorneys who have passed upon legal matters in connection with
the offering of the securities offered thereby under "Legal Matters."
We further consent to your filing a copy of this opinion as an Exhibit to
the Registration Statement.
Very truly yours,
MILBERG WEISS BERSHAD
HYNES & LERACH LLP
EMPLOYMENT
AGREEMENT
AGREEMENT made as of the 25th day of October, 1999 between
INTELLI-CHECK, INC. ("Company"), a New York Corporation having an office at 775
Park Avenue, Suite 340, Huntington, NY 11743 and Robert Holloway ("Employee"),
residing at 2142 Singing Woods Drive, Skaneateles, N.Y. 13152
WHEREAS, Company and Employee wish to enter into an Employment
Agreement pursuant to which Employee will serve as Vice President, Sales of the
Company.
NOW, THEREFORE, in consideration of the respective agreements
hereinafter set forth, the parties agree as follows:
Article I
Employment
1.01 Term. Company hereby employs Employee, and Employee hereby accepts
employment with Company (including also employment by, and in
connection with the business activities of any of Company's affiliates,
subsidiaries and related corporations), in the position and with the
duties hereinafter set forth, for a period (the "term") commencing on
October 25, 1999 and ending October 24, 2001 subject, however, to
earlier termination in accordance with the provisions of this
Agreement. This Agreement shall automatically renew except if the
Employer gives Employee 90 days written notice before the completion of
the initial term of this Agreement.
Article II
Duties
2.01 General. Employee shall be the Vice President, Sales of the Company and
shall perform such executive duties as may from time to time be
assigned to him by Company's Board of Directors. If so elected or
appointed, Employee shall also serve without additional compensation as
a director and/or officer of the Company or any of its subsidiaries.
However, the Employee recognizes and agrees that the Board may elect to
amend the position and/or duties assigned to Employee. Such amendment
of position and/or duties shall be commensurate with that of a Vice
President with no reduction in Fixed Salary, benefits or incentives.
2.02 Performance. During the term of his employment, Employee shall devote
substantially all his business time, best efforts and attention to the
business, operations and affairs of Company and the performance of his
duties hereunder provided, however, that during the term of his
employment, Employee may work for a non-competing Company so long as he
devotes substantially all of his business time, best efforts and
attention to the business operations and affairs of the Company and the
performance of his duties hereunder.
2.03 Employee's Representations. Employee represents and warrants to and
agrees with Company that:
Page 1 of 9
<PAGE>
Neither the execution nor performance by Employee of this Agreement is
prohibited by or constitutes or will constitute, directly or
indirectly, a breach or violation of, or will be adversely affected by,
any written or other agreement to which Employee is or has been a party
or by which he is bound.
Neither Employee nor any business or entity in which he has any
interest or from which he receives any payments has, directly or
indirectly, any interest of any kind in or is entitled to receive, and
neither Employee nor any such business or entity shall accept, from any
person, firm, corporation or other entity doing business with Company
any payments of any kind on account of any services performed by
Employee during the term of his employment.
Article III
Compensation and Related Matters
3.01(a) Fixed Salary. As compensation for Employee's services Company shall pay
Employee a salary of $115,000 per annum (the "Fixed Salary").
3.01(b) The Employee shall have the right at his election, to receive
compensation in the form of the Company's restricted Common Stock. Such
Stock shall be valued at fifty percent (50%) of the closing bid price
of the Company's Common Stock as quoted on NASDAQ/NMS (or other
established exchange) as of the date of the Employee's election. Such
election may be for all or part of the Employee's Compensation. At the
beginning of each quarter, Employee shall give the Company notice of
his election to exercise his option to receive restricted Common Stock
in lieu of cash compensation.
3.01(c) Fixed Salary Adjustment. The Fixed Salary may not be decreased
hereunder during the term of this Agreement, but may be increased upon
review by and within the sole discretion of the Company's Board of
Directors.
3.02 Expenses. Company shall pay or reimburse Employee for all reasonable
travel, hotel, entertainment and other business expenses incurred in
the performance of Employee's duties upon submission of appropriate
vouchers and other supporting data therefore.
3.03 Stock Options. The Company will grant to the Employee, pursuant to a
Stock Option Agreement substantially in the form of Exhibit A attached
hereto, an option to purchase 50,000 shares of the Company's Common
Stock at the price of the proposed initial public offering price
("IPO") to be vested as follows: 20,000 upon signing of Employment
Agreement, 5,000 for each 10,000 sales of ID-Check Products sold that
exceed 10,000. The maximum options that can be earned in any calendar
year may not exceed 100,000. Any options earned above the 50,000
granted herein shall be at fair market value on date of such grant.
3.04 Benefits. Employee shall be entitled to (i) participate in all general
pension, profit-sharing, life, medical, disability and other insurance
and employee benefit plans and programs at any time in effect for
executive employees of Company, provided, however, that nothing herein
shall obligate Company to establish or maintain any employee benefit
plan or program, whether of the type referred to in this clause (i) or
otherwise, and (ii) three (3) weeks vacation during each twelve month
period of employment at mutually agreeable times. Employee shall be
entitled to the use of a Company vehicle, however, Employee may elect
to provide his own vehicle and if such election is made, Company agrees
to pay Employee One Thousand Dollars ($1,000) per
Page 2 of 9
<PAGE>
month to cover cost of the vehicle, insurance, repairs and other
expenses, pertaining thereto.
Article IV
Termination for Cause; Disability; Death
4.01 For Cause. Company shall have the right to terminate the employment of
Employee hereunder at any time for Cause (as hereinafter defined)
without prior notice (except as otherwise hereinafter provided). For
purposes of this Agreement "Cause" shall mean and include the
occurrence of any of the following acts or events by or relating to the
Employee: (i) any material misrepresentation by Employee in this
Agreement; (ii) any material breach of any obligations of Employee
under this Agreement which remains uncured for more than twenty (20)
days after written notice thereof by Company to Employee or if the
default is such that it cannot be cured within such 20-day period, upon
said breach; (iii) habitual insobriety or substance abuse of Employee
while performing his duties hereunder; (iv) theft or embezzlement from
Company or any other material acts of dishonesty; (v) repeated
insubordination respecting reasonable orders or directions of Company's
Board of Directors; (vi) conviction of a crime (other than traffic
violations and minor misdemeanors) or (vii) if Employee becomes the
subject of any order, judgment, or decree, not subsequently reversed,
suspended or vacated, of any court of competent jurisdiction,
permanently or temporarily enjoining him from, or otherwise limiting,
engaging in any activity in connection with the purchase or sale of any
security or commodity or in connection with any violation of Federal or
state securities laws or Federal commodities. In the event of
termination for Cause, Employee's Fixed Salary shall terminate as of
the effective date of termination of employment.
4.02 Without Cause. Company may not terminate the employment of Employee,
except for Cause notwithstanding Article IV; Section 4.01 of Company's
by-laws.
4.03 Disability. If Employee, by reason of illness, mental or physical
incapacity or other disability, is unable to perform his regular duties
hereunder (as may be determined by the Board of Directors), Company
shall continue to pay half of Employee's salary for the balance of the
term of this Agreement, provided, however, in the event Employee
recovers from any such illness, mental or physical incapacity or other
disability (as may be determined by an independent physician to which
Employee shall make himself available for examination at the reasonable
request of the Board of Directors), Employee shall immediately resume
his regular duties hereunder. Any payments to Employee under any
disability insurance or plan maintained by Company shall be applied
against and shall reduce the amount of the salary payable by Company
under this Agreement. If at any time during the year the Employee has
suffered a complete and total disability, defined as the inability to
perform his/her duties from any location, then the provisions of
paragraph 3.03 shall be pro-rated so as not to provide for incentive
compensation for the period of complete and total disability.
4.04 Death. In the event of Employee's death, Company shall continue to pay
half of the Employee's Fixed Salary for the balance of the term of this
Agreement to Employee's surviving spouse, provided, however, that, if
Company is the beneficiary of life insurance on Employee's life, it
shall use the proceeds of such insurance promptly upon the receipt
thereof to prepay (in inverse order to maturity), half of the Fixed
Salary remaining to be paid discounted to present value using an
assumed interest rate of 8% per annum. Company shall have the right
(but not the obligation) to obtain a life insurance policy on
Employee's life. The proceeds of any such life insurance policy shall
be payable to Company. Employee shall cooperate with Company and
Page 3 of 9
<PAGE>
use his best efforts in all respects and regard to obtaining a life
insurance policy, including, without limitation, undergoing a physical
examination upon reasonable request.
Article V
Confidential Information; Non-Competition
5.01 Confidential Information. Employee shall not, at any time during or
following termination or expiration of the term of this Agreement,
directly or indirectly, disclose, publish or divulge to any person
(except in the regular course of Company's business), or appropriate,
use or cause, permit or induce any person to appropriate or use, any
proprietary, secret or confidential information of Company including,
without limitation, knowledge or information relating to its trade
secrets, business methods, the names or requirements of customers or
the prices, credit or other terms extended to its customers, all of
which Employee agrees are and will be of great value to Company and
shall at all times be kept confidential. Upon termination or expiration
of this Agreement, Employee shall promptly deliver or return to Company
all materials of a proprietary, secret or confidential nature relating
to Company together with any other property of Company which may have
theretofore been delivered to or may be in possession of Employee.
5.02 Non-Competition. During the term of this Agreement and for a period of
two years after the sooner of the expiration date of this Agreement or
the date when Employee ceases to be employed by Company as a result of
either a voluntary termination of his employment or a termination for
cause, Employee shall not, within the United States, its territories
and/or, possessions and countries in which the Company does business,
without the prior written consent of Company in each instance, directly
or indirectly, in any manner or capacity, whether for himself or any
other person and whether as proprietor, principal, owner, shareholder,
partner, investor, director, officer, employee, representative,
distributor consultant, independent contractor or otherwise engage or
have any interest in any entity which is engaged in any business or
activity then conducted or engaged in by Company. The two-year period
referred to in the preceding sentence shall be reduced by two months
for each full year that elapses after the commencement date of this
Agreement. Notwithstanding the foregoing, however, Employee may at any
time own in the aggregate as a passive (but not active) investment not
more than 5% of the stock or other equity interest of any
publicly-traded entity which engages in a business competitive with
Company.
5.03 Reasonableness. Employee agrees that each of the provisions of this
Section 5 is reasonable and necessary for the protection of Company;
that each such provision is and is intended to be divisible; that if
any such provision (including any sentence, clause or part) shall be
held contrary to law or invalid or unenforceable in any respect in any
jurisdiction, or as to any one or more periods of time, areas of
business activities, or any part thereof, the remaining provisions
shall not be affected but shall remain in full force and effect as to
the other and remaining parts; and that any invalid or unenforceable
provision shall be deemed, without further action on the part of the
parties hereto, modified, amended and limited to the extent necessary
to render the same valid and enforceable in such jurisdiction. Employee
further recognizes and agrees that any violation of any of his
agreements in this Section 5 would cause such damage or injury to
Company as would be irreparable and the exact amount of which would be
impossible to ascertain and that, for such reason, among others,
Company shall be entitled, as a matter of course, to injunctive relief
from any court of competent jurisdiction restraining any further
violation. Such right to injunctive relief shall be cumulative and in
addition to, and not in limitation of, all other rights and remedies
which Company may possess.
Page 4 of 9
<PAGE>
5.04 Survival. The provisions of this Section 5 shall survive the expiration
or termination of this Agreement for any reason.
Article VI
Miscellaneous
6.01 Notices. All notices under this Agreement shall be in writing and shall
be deemed to have been duly given if personally delivered against
receipt or if mailed by first class registered or certified mail,
return receipt requested, addressed to Company and to Employee at their
respective addresses set forth on the first page of this Agreement, or
to such other person or address as may be designated by like notice
hereunder. Any such notice shall be deemed to have been given on the
day delivered, if personally delivered, or on the third day after the
date of mailing if mailed.
6.02 Parties in Interest. This Agreement shall be binding upon and inure to
the benefit of and be enforceable by the parties hereto and their
respective heirs, legal representatives, successors and, in the case of
the Company, assigns, but no other person shall acquire or have any
rights under or by virtue of this Agreement, and the obligations of
Employee under this Agreement may not be assigned or delegated.
6.03 Governing Law; Severability. This Agreement shall be governed by and
construed and enforced in accordance with the laws and decisions of the
State of New York applicable to contracts made and to be performed
therein without giving effect to the principles of conflict of laws. In
addition to the provisions of 5.03 above, the invalidity or
unenforceability of any other provision of this Agreement, or the
application thereof to any person or circumstance, in any jurisdiction
shall in no way impair, affect or prejudice the balance of this
Agreement, which shall remain in full force and effect, or the
application thereof to other persons and circumstances.
6.04 Entire Agreement; Modification; Waiver; Interpretation. This Agreement
contains the entire agreement and understanding between the parties
with respect to the subject matter hereof and supersedes all prior
negotiations and oral understandings, if any. Neither this Agreement
nor any of its provisions may be modified, amended, waived, discharged
or terminated, in whole or in part, except in writing signed by the
party to be charged. No waiver of any such provision or any breach of
or default under this Agreement shall be deemed or shall constitute a
waiver of any other provision, breach or default. All pronouns and
words used in this Agreement shall be read in the appropriate number
and gender, the masculine, feminine and neuter shall be interpreted
interchangeably and the singular shall include the plural and vice
versa, as the circumstances may require.
6.05 Indemnification. Employee shall indemnify and hold Company free and
harmless from and against and shall reimburse it for any and all
claims, liabilities, damages, losses, judgments, costs and expenses
(including reasonable counsel fees and other reasonable out-of-pocket
expenses) arising out of or resulting from any breach or default of any
of his representations, warranties and agreements in this Agreement.
Company shall indemnify and hold Employee free and harmless from and
against and shall reimburse him for any and all claims, liabilities,
damages, losses, judgments, costs and expenses (including reasonable
counsel fees and other reasonable out-of-pocket expenses) arising out
of or resulting from any breach or default of any of its
representations, warranties and agreements in this Agreement.
Page 5 of 9
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date
first above written.
INTELLI-CHECK, INC.
By/s/ Frank Mandelbaum
-------------------------------
Frank Mandelbaum, Chairman
/s/ Robert Holloway
-------------------------------
Robert Holloway
Page 6 of 9
<PAGE>
EXHIBIT A
STOCK OPTION AGREEMEMT
Intelli-Check, Inc., a New York corporation (the "Company"), as of the
25th day of October, 1999 hereby grants to Robert Holloway ("Optionee"),
residing at 2142 Singing Woods Drive, Skaneateles, N.Y. 13152 in consideration
of services and advice rendered by Optionee to the Company, the irrevocable
right and option ("Option") to purchase all or part of an aggregate of 50,000
shares ("Shares") of the Company's common stock, par value $.001 per share
("Common Stock"), on the terms and conditions hereinafter set forth:
1. Purchase Price. The purchase price for the Shares shall be at the proposed
initial public offering price ("IPO") per share subject to adjustment as
provided in Paragraph 5 below.
2. Term of Option: Exercise.
(a) Subject to earlier termination pursuant hereto, the Option
shall terminate five (5) years from the date hereof. The
Option shall be exercisable as follows: 20,000 upon signing of
Employment Agreement, and 5,000 for each 10,000 sales of
ID-Check Products sold that exceed 10,000.
(b) The Option shall be exercised by fifteen (15) days written
notice to the Secretary or Treasurer of the Company at its
then principal office. The notice shall specify the number of
Shares as to which the Option is being exercised and shall be
accompanied by payment in full of the purchase price for such
Shares. The option price shall be payable in United States
dollars, and may be paid in cash or by certified check on a
United States bank or by other means acceptable to the
Company. In no event shall the Company be required to issue
any Shares (i) until counsel for the Company determines that
the Company has complied with all applicable securities
exchange or the National Association of Security Dealers
Automated Quotation System on which the Common Stock may then
be listed, and (ii) unless Optionee reimburses the Company for
any tax withholding required and supplies the Company with
such information and data as the Company may deem necessary.
(c) Optionee shall not, by virtue of the granting of the Option,
be entitled to any rights of a shareholder in the Company and
shall not be considered a record holder of any Shares
purchased by Optionee until the date on which Optionee shall
actually be recorded as the holder of such Shares upon the
stock records of the Company. The Company shall not be
required to issue any fractional Share upon exercise of the
Option and shall not be required to pay to Optionee the cash
equivalent of any fractional Share interest.
3. Restrictions on Transfer and Termination.
(a) No option shall be transferred by Optionee otherwise than by
will or by the laws of descent and distribution. During the
lifetime of Optionee the Option shall be exercisable only by
Optionee or by Optionee's legal representative.
(b) In the event of the termination of Optionee's employment by
the Company at any time for any reason (excluding termination
for cause, disability or death), the Option and all rights
thereunder shall be exercisable by Optionee at any time within
three (3) months thereafter, but not later than the
termination date of the Option. Notwithstanding the foregoing,
in the event Optionee is permanently and totally disabled
(within the meaning of Section 105(d) (4), or any successor
section, of the Internal Revenue Code), Optionee's Option and
all rights thereunder shall be exercisable by Optionee (or
Optionee's legal representative) at any time within six (6)
months of Optionee's termination of employment, but not later
than the termination date of the Option. The right of the
Optionee (or Optionee's legal representative) to exercise the
Option or any portion of the Option, shall apply only to that
portion of the Option which has accrued in accordance with
Section 2(a) of this Agreement and which the Optionee is
entitled to exercise as of the date of termination.
(c) If Optionee shall die while in the employ of the Company, the
Option may be exercised by
Page 7 of 9
<PAGE>
Optionee's designated beneficiary or beneficiaries (or if none
have been effectively designated, by Optionee's executor,
administrator or the person to whom Optionee's rights under
the Option shall pass by Optionee's will or by the laws of
descent and distribution) at any time within six (6) months
after the date of Optionee's death, but not later than the
termination date of the Option. The right of the Optionee's
beneficiary or legal representative to exercise the Option or
any portion of the Option, shall apply only to that portion of
the Option which has accrued in accordance with Section 2(a)
of this Agreement and which Optionee was entitled to exercise
as of the date of death.
(d) In the event Optionee's employment is terminated for Cause,
the Option and all rights thereunder shall terminate at 5:00
p.m. on the date of termination of employment.
(e) This Option is granted pursuant to an Employment Agreement
between Company and Optionee dated October 25, 1999, which
Employment Agreement governs Optionee's rights and obligations
as an employee including, without limitation, Company's right
to terminate Optionee's employment under certain
circumstances, and nothing in this Agreement shall confer upon
Optionee any additional rights with respect to the terms and
conditions of Optionee's employment.
4. Securities Act Matters.
(a) Optionee represents that Shares issued upon any exercise of
the Option will be acquired for Optionee's own account for
investment only and not with a view to the distribution
thereof within the meaning of the Federal Securities Act of
1933, as amended (hereinafter, together with the rules and
regulations thereunder, collectively referred to as the
"Act"), and that Optionee does not intend to divide Optionee's
participation with others or transfer or otherwise dispose of
all or any Shares except as below set forth. As herein used
the terms "transfer" and "dispose" mean and include, without
limitation, any sale, offer for sale, assignment, gift, pledge
or other disposition or attempted disposition.
(b) Optionee understands that in the opinion of the Securities and
Exchange Commission ("SEC") Shares must be held by Optionee
for an indefinite period unless subsequently registered under
the Act or unless an exemption from registration thereunder is
available; that, under Rule 144 of the Act, after one or more
years from the date of payment for and issuance of the shares,
certain public sales thereof (which may be limited as to the
number of Shares) may be made in accordance with the subject
to the terms, conditions and restrictions of Rule 144, but
only if certain reporting and other requirements thereunder
have been complied with; and that should Rule 144 be
inapplicable, registration or the availability of an exemption
under the Act will be necessary in order to permit public
distribution of any Shares. Optionee also understands that the
Company is and will be under no obligation to register the
Shares or to comply with any exemption under the Act.
(c) Optionee shall not at any time transfer or dispose of any
Shares except pursuant to either (i) a registration statement
under the Act which registration statement has become
effective as to the Shares being sold or (ii) a specific
exemption from registration under the Act, but only after
Optionee has first obtained either a "no-action" letter from
the SEC, following full and adequate disclosure of all facts
relating to such proposed transfer, or a favorable opinion
from or acceptable to counsel to the Company that the proposed
transfer or other disposition complies with and is not in
violation of the Act or any applicable state "blue sky" or
securities laws.
5. Anti-Dilution Provisions.
(a) Subject to the provisions of Paragraph 5(b) below, if at any
time or from time to time prior to expiration of the Option
there shall occur any change in the outstanding Common Stock
of the Company by reason of any stock dividend, stock split,
combination or exchange of shares, merger, consolidation,
recapitalization, reorganization, liquidation or the like,
then and as often as the same shall occur, the kind and number
of Shares subject to the Option,
Page 8 of 9
<PAGE>
or the purchase price per share, or both, shall be adjusted by
the Board of Directors of the Company ("Board") in such manner
as it may deem appropriate and equitable, the determination of
which Board shall be binding and conclusive. Failure of the
Board to provide for any such adjustment shall be conclusive
evidence that no adjustment is required.
(b) The Board shall have the right to engage a firm of independent
certified public accountants, which may be the Company's
regular auditors, to make any computation provided for in this
Section, and a certificate of that firm showing the required
adjustment shall be conclusive and binding.
6. Notices. All notices and other communications required or permitted under
this Agreement shall be in writing and shall be given either by (i) personal
delivery or regular mail, in each case against receipt, or (ii) first class
registered or certified mail, return receipt requested. Any such
communication shall be deemed to have been given (i) on the date of receipt
in the cases referred to in clause (i) of the preceding sentence and (ii) on
the second day after the date of mailing in the cases referred to in clause
(ii) of the preceding sentence. All such communications to the Company shall
be addressed to it, to the attention of its Secretary or Treasurer, at its
then principal office and to Optionee at the address set forth above or such
other address as may be designated by like notice hereunder.
7. Miscellaneous. This Agreement cannot be changed except in writing signed by
the party to be charged. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York applicable to
agreements made and to be performed exclusively in New York. The Option has
been granted pursuant to the Company's 1999 Stock Option Plan. This
Agreement is in all respects subject to the terms and conditions of said
Plan. The Option granted hereunder is intended to be a Non-Qualified Stock
Option. Optionee acknowledges that Optionee is not holding any other stock
options granted by the Company. Optionee shall execute this Agreement and
return it to the Company within thirty (30) days after the mailing or
delivery by the Company of this Agreement. If Optionee shall fail to execute
and return this Agreement to the Company within said thirty (30) day period,
the Option shall automatically terminate. The section headings in this
Agreement are solely for convenience of reference and shall not affect its
meaning or interpretation.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date first above written.
INTELLI-CHECK, INC.
By:________________________________
Optionee:
_____________________________________
Name
Page 9 of 9
Exhibit 10.10
AGREEMENT
This Agreement is made as of this 3rd day of May, 1999 by and between
Intelli-Check, Inc. ("ICI", formerly referred to as "ICC"), a New York
Corporation, having offices at 775 Park Avenue, Suite 340, Huntington, New York
11743 and Kevin M. Messina, individually, and d/b/a/ K.M. Software Development
("Messina") and supersedes all prior agreements between the parties,
specifically including the License Agreement Amendment as of June 17, 1996 (the
"Amendment") by and between Intelli-Check, Inc., Todd J. Cohen, individually and
Kevin M. Messina individually d/b/a/ K.M. Software Development.
RECITALS
Whereas Messina has licensed certain intellectual property ("Property") to
ICI as a result of the Amendment dated June 17, 1996 between ICI and Messina
(Attached hereto as Exhibit "A").
Whereas ICI has paid Messina the "Expense Amount" referenced in the
Amendment for documented out-of-pocket expenses as well as accrued interest
relating thereto in order to secure ICI's rights in and to the Property.
Whereas the parties wish to formally acknowledge satisfaction of all debts
owned to Messina in relation to the Amendment.
NOW THEREFORE, in consideration of the foregoing and the mutual covenants
hereinafter set forth, ICI and Messina, intending to be legally bound, hereby
covenant and agree as follows:
1. In satisfaction of all debts owed to Messina, ICI issued payment of
$139,875.93 on May 3, 1999. This payment consisted of $98,151.00 for repayment
of the principal of a loan made by Mr. Messina to ICI (the Expense Amount). The
remaining $41,724.93 represents interest accrued on the principal. Payment was
issued in the form of 69,937
1
<PAGE>
units valued at $2.00 consisting of one-share of common stock and one-warrant to
purchase an additional one-share of common stock at $3.00 expiring on May 3,
2001. Mr. Messina acknowledges receipt of the 69,937 units and a check in the
amount of $1.93 representing the difference between the unit value and amount
owed, therefore satisfying all debt to Mr. Messina relating to License Agreement
Amendment dated June 17, 1996.
2. In continuation of the terms of the License Agreement dated June 17, 1996
(the Amendment), the company will pay to Mr. Messina a royalty payment of .005%
on gross sales from $2,000,000 to $52,000,000 and royalty payment of .0025% on
gross sales over $52,000,000 excluding supply items (the "Royalty Amount").
3. This Agreement shall be binding upon the parties hereto, and their respective
successors and assigns.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
written above, to be effective as of that date.
Intelli-Check, Inc. Kevin Messina individually and
d/b/a/ K.M. Software Development
/s/ Frank Mandelbaum /s/ Kevin Messina
- ----------------------------- -------------------------------------
By: Frank Mandelbaum By: Kevin Messina
Title: CEO individually and Former President
K.M. Software Development
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated September 24, 1999 for Intelli-Check, Inc. included in or made a
part of this registration statement.
ARTHUR ANDERSEN LLP
New York, New York
November 1, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> Year 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 SEP-30-1999
<CASH> 159,600 762,239
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 16,693 15,894
<CURRENT-ASSETS> 177,214 1,213,285
<PP&E> 271,379 377,793
<DEPRECIATION> 83,315 153,410
<TOTAL-ASSETS> 451,303 1,667,356
<CURRENT-LIABILITIES> 1,101,880 1,539,170
<BONDS> 0 0
0 0
2,500 0
<COMMON> 4,402 5,271
<OTHER-SE> (6,644,472) 112,616
<TOTAL-LIABILITY-AND-EQUITY> 451,303 1,667,356
<SALES> 86,354 327
<TOTAL-REVENUES> 86,354 327
<CGS> 22,074 55
<TOTAL-COSTS> 22,074 55
<OTHER-EXPENSES> 1,506,615 1,214,146
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 61,479 35,584
<INCOME-PRETAX> (1,503,814) (1,249,458)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,503,814) (1,249,458)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,503,814) (1,249,458)
<EPS-BASIC> (0.36) (0.26)
<EPS-DILUTED> (0.36) (0.26)
</TABLE>
