FORM 10 - KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from _____________ to __________________
Commission File No. 001-15465
Intelli-Check, Inc.
(Name of small business issuer as specified in its charter)
Delaware 11-3234779
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
775 Park Avenue, Suite 340, Huntington, New York 11743
(address of principal executive offices) (Zip Code)
Issuer's Telephone number, including area code: (516) 421-2011
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of Class)
Check whether Issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the Issuer was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes |X| No |_|
Check if disclosure of delinquent filers pursuant to item 405 of Regulation S-B
is not contained herein, and will not be contained, to the best of the
Registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this form 10-KSB or any amendment to
this Form 10-KSB. |_|
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State the aggregate market value of the voting stock held by non-affiliates of
the Issuer: $35,126,820 (based upon the closing price of Issuer's Common Stock,
$.001 par value, as of March 24, 2000.
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.
Common Stock, $.001 Par Value 6,515,152
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(Title of Class) (No. of Shares Outstanding
at March 24, 2000)
DOCUMENTS INCORPORATED BY REFERENCE: NONE
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PART I
Item 1. Business
(a) General Development of Business. We were originally incorporated in
the state of New York in 1994. In August 1999, we reincorporated in Delaware.
During the period from September 1996 until September 1999, we sold our
securities in private placements exempt from registration under the Securities
Act of 1933, as amended.
In November 1999, we sold, in an initial public offering, 1,000,000 shares
of common stock at an initial offering price of $7.50 per share. The net
proceeds that we received from the public offering amounted to approximately
$5,915,000.
In December 1999, the underwriter of the initial public offering exercised
its over- allotment option to purchase 150,000 common shares from us for $7.50
per share. The net proceeds received by us amounted to approximately $992,000.
(b) Business of Issuer
(1) Principal Products
Our company was formed to develop, manufacture and market an advanced
document verification system to enable a retailer to:
o determine the customer's age and validity of a driver license or
state issued identification card ("ID") to detect and prevent the
use of fraudulent identification for the purchase of alcohol,
tobacco and other age-restricted products;
o reduce the risk 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 which
principally utilize fake driver licenses as proof of identity.
In an effort to combat the problems of underage drinking and smoking, the
federal government and many states and Canadian provinces have enacted laws
requiring businesses that sell age-restricted products to verify the ID of
potential customers to determine if they are of legal age. These laws impose
stringent penalties for violations. In addition, many states and local
governments use undercover "sting" operations to detect violations.
The product we have designed and developed is based on our patented
ID-Check(TM) technology. ID-Check provides businesses with a reliable, simple
and cost-effective way to verify
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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 were convenience stores,
24 were bars and 12 were 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 that the driver license has become a de facto
identification card. In addition to its primary function, the driver license is
used to verify identity for social services, firearm sales, check cashing,
credit card use and other applications.
Non-driver identification card
Although many people do not have a driver license, jurisdictions that use
American Association of Motor Vehicle Administrators (AAMVA) and/or American
National Standards Institute (ANSI) compliant driver licenses offer
identification cards that contain encoded information. In addition, the ID-Check
terminal can also process the information encoded on U.S. military and uniformed
services identification cards. Because driver licenses are the most widely used
form of legally acceptable government documentation, we will refer to all of
these types of legally acceptable government identification documents as "driver
licenses". Our ID-Check software is capable of functioning with all of these
types of government identification.
The use of false identification
The high-tech revolution has created a major problem for merchants and
others who rely on identification documents. In an age where scanners, computers
and color printers are commonplace, fake ID's of the highest quality are readily
obtainable from a number of locations including college campuses and over the
Internet. These fakes can appear so real, even law enforcement agencies may
encounter difficulty distinguishing them from legally issued documents.
Additionally, some of these high-tech devices have the ability to easily alter
properly issued ID's. Therefore, anyone can create a false identity that gives
them the ability, in a commercial transaction, to present fake credit cards or
checks that are supported by false identification. 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;
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o unlawfully obtaining welfare or other government benefits;
o illegally purchasing firearms;
o theft of a rented motor vehicle;
o illegally entering gaming establishments; and
o purchasing movie tickets for certain rated movies while underage.
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 we believe is needed is
a system which can accurately read the electronically stored information. We
have developed a patented software technology that will provide an analysis of
all the data contained on these documents by reading and comparing all of the
required information encoded on the tracks of the magnetic stripe or barcode on
the driver license.
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.
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
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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 this problem, 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 trying to purchase tobacco products who appears
to be under the age of 27.
Regulation of retailers of alcoholic beverages
The retailer of alcoholic products who sells to an underage person could
face potential fines, suspension and/or potential outright revocation of its
license to sell alcoholic beverages.
As a result of law enforcement efforts and regulatory penalties, we
believe retailers that sell alcohol and tobacco, such as liquor stores, bars and
convenience stores, are facing increasing pressure to accurately verify the age
of their customers.
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 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 Canadian provinces and military authorities in the U.S. This
information, combined with our patented technology, will enable the ID-Check
software to read, decode and process all of the information legally permitted to
be processed which is 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, barcode scanners 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
(driver license) photograph to the person presenting the document for
identification, the clerk or employee simply swipes or scans the driver license
through the ID-Check terminal. The terminal quickly determines if the document:
o has been altered or tampered with;
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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 ID-Check terminal will automatically:
o respond to the user by displaying the results for both alcohol and
tobacco in words on the terminal's screen;
o save information to the terminal's own memory which can be
downloaded at a later time;
o print a record of the transaction including the results on a roll of
paper similar to that used in cash registers, if an optional printer
has been installed; and
o send the results to a personal computer which has Microsoft Windows
95/98/NT ("PC") for permanent storage when used in conjunction with
our Q-Link software, which simplifies record keeping by downloading
comprehensive ID-Check due diligence data to a PC. This provides a
merchant with secure back-up files that include individual and
cumulative transaction records.
(2) Marketing and Distribution
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 initially intend to generate revenues from the sale of ID-Check
terminals, PC software and jurisdictional upgrade cards.
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 at a base price of approximately $2,500
each. 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.
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We also may 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
develop and market related software applications.
Distribution strategy
In October 1999, we hired a vice president of sales. We intend to hire
additional sales and marketing support staff, to prepare additional marketing
materials and continue to develop our marketing strategy.
Our initial target markets
Our initial target markets for the ID-Check terminal will be financial
institutions, gaming and retail establishments. We intend to initially focus our
marketing efforts towards:
o banks;
o casinos;
o convenience stores;
o bars and night clubs; 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.
Upgrade cards
Our software will require periodic updates as states and Canadian
provinces that did not previously conform to AAMVA/ANSI guidelines begin to
store electronically readable information on their driver licenses and as states
adjust or modify the format of their electronically
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stored information. We intend to sell jurisdictional upgrade cards which can be
used to instantly upgrade the terminal by simply swiping and/or scanning 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 may also 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/ANSI guidelines. Because of our familiarity with these
government documents, we intend to offer a printed manual to provide financial
institutions, government and law enforcement agencies and retail stores with a
method of verifying document authenticity when driver licenses are presented
which do not have information electronically stored on either a magnetic stripe
or barcode. This product will be bundled with the initial sale of the ID-Check
terminal. Additionally, we intend to independently market this product directly
through our sales personnel.
Additional Target Customers
In addition to financial institutions, gaming establishments and retailers
of alcohol and tobacco products, others that could benefit by using the ID-Check
terminal to prevent fraudulent transactions supported by the use of a fake
driver license as proof of identity include:
o car rental agencies;
o hotels and motels;
o stadiums and arenas;
o firearm merchants;
o movie theaters;
o law enforcement agencies; and
o vending machine manufacturers.
Products in Development
We have developed prototypes of 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.
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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.
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.
Possible Future Uses for our Technology
We believe that our patented ID-Check technology may have 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; and
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.
(3) Competition
Unless a device can read, decode and analyze all of the information
legally permitted to be analyzed which is electronically stored on a driver
license, the user may not obtain accurate and reliable confirmation that a
driver license is valid and has not been altered or tampered with. We are aware
of several companies, including 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 types of equipment which
have limited functionality. Those units that cannot read barcodes are at a
significant disadvantage because nearly 31% of the currently issued driver
licenses contain barcodes as well as all encoded U.S. military ID's and
uniformed services cards. This percentage is expected to increase within the
next year. In addition, some of these other products cannot connect to a PC or
use a printer. Furthermore, some of 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.
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.
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A very 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 we believe can only be used in New York State.
(4) Supplier
We have engaged a subsidiary of Welch Allyn, Inc., a leading
privately-held manufacturer of medical equipment and barcode readers and
scanners, to provide a programmable terminal to operate our patented ID-Check
software. We have placed orders for 7,000 terminals subject to certain
conditions which will contain an imager which is an advanced form of barcode
scanner. These terminals will have most, but not all, of the features of a final
version of our initial product. We have begun beta testing this version of
ID-Check.
(5) Intellectual Property
In January 1999, we were issued a patent on our ID-Check software
technology. We have also been granted multiple copyrights in the United States,
which are effective in Canada and 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 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.
Under an agreement with Mr. Messina, our President, 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.
(6) Employees
As of March 24, 2000, we had seventeen full-time employees, including four
who are engaged in executive management, six in information technology, two in
sales and marketing and five administrative staff. We believe our relations with
our employees are generally good and we have no collective bargaining agreements
with any labor unions.
Item 2. Description of Property
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 were $78,420 per year for
1999 and $73,399 for the remaining year of the lease.
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Item 3. Legal Proceedings
We are in dispute with our landlord, 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 our counterclaim is for approximately $50,000. This matter is pending.
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 had
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. 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. In October 1999 we made a motion to dismiss the
complaint on the grounds that the Connecticut courts lack jurisdiction. That
motion has not yet been decided.
We are not aware of any infringement by our products or technology on the
proprietary rights of others.
Other than as set forth above, we are not currently involved in any legal
or regulatory proceeding, or arbitration, the outcome of which is expected to
have a material adverse effect on our business.
Item 4. Submission of Matters to a Vote of Security Holders
During the Company's fiscal year ended December 31, 1999 there were no
matters submitted to a vote of security holders.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
(a) The Company's Common Stock is traded on the American Stock Exchange.
The following table indicates high and low sales quotations for the periods
indicated based upon information supplied by AMEX since the Company's initial
public offering in November 1999.
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1999 Low High
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Fourth quarter
(from November 19, 1999
through December 31, 1999)... $ 9.00 $ 13.50
2000 Low High
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January ...................... $ 9.75 $ 13.75
February ..................... $10.125 $ 13.00
(b) Number of Holders of Common Stock. The number of holders of record of
our Common Stock on March 24, 2000 was 60, which does not include individual
participants in security position listings.
(c) Dividends. There were no dividends or other distributions made by us
during the fiscal year ended December 31, 1999. Future dividend policy will be
determined by the Board of Directors based on our earnings, financial condition,
capital requirements and other then existing conditions. It is anticipated that
cash dividends will not be paid to the holders of our common stock in the
foreseeable future.
In November 1999, we completed our initial public offering from which we
received net proceeds of approximately $5,915,000. In December 1999 the
underwriters of our intial public offering excercised the over-allotment option
to purchase an additional 150,000 shares of our common stock from which we
received net proceeds of $992,000. After repayment of the Notes we issued in
August and September we invested approximately $5,000,000 in short term
financial instruments and used approximately $607,000 to make additional
deposits on terminals and for general working capital purposes.
In addition, during 1999 we sold the following unregistered securities in
reliance on the exemption provided by Section 4(2) and Regulation 506 of the
Securities Act as transactions not involving a public offering:
In March 1999, we commenced a private placement and sold 259,600 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. We received $489,200
as a result of the offering prior to June 30, 1999 and $30,000 in August, 1999.
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.
In April 1999, we adjusted the exercise price of warrants issued to Empire
State Development, formerly New York Science and Technology Foundation to
purchase 100,000 shares of our common stock 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 May 1999, we issued 10,000 shares of our common stock to a third party
in exchange for the termination of a royalty agreement as part of the settlement
of a lawsuit.
In May 1999, we issued to Mr. Mandelbaum 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 Mr. Messina 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
were due to reductions in deferred compensation. 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, we agreed to terminate the supplier agreement we had with
Hazeltine (formerly Marconi Aerospace Systems, Inc.), for which we issued 75,000
shares of our common stock to Hazeltine 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 June 1999, all remaining deferred compensation and interest due to
Frank Mandelbaum, Kevin Messina and Todd Cohen was eliminated by the issuance of
options to purchase 375,000, 207,000 and 110,000 shares, respectively, of our
common stock.
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In June 1999, we issued 9,000 shares of our common stock to Blanchfield
King Kober, our former accountants in payment of accounting fees totalling
$36,000.
In August and September 1999 we placed $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 expiring in
August 2002 of securities by us 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.
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
(a) Overview
Our company 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 minimal
since through 1998 we had previously produced only a limited pre-production run
of our product for testing and market acceptance and, in late 1999, we received
a limited number of ID-Check terminals which were available for sale. These
terminals were subsequently returned to the manufacturer to be upgraded to
contain an advanced barcode imager/scanner which allows our software to read the
encoding on 48 jurisdictions as opposed to 32 jurisdictions on the original
scanner. Since inception, we have incurred significant losses and negative cash
flow, and as of December 31, 1999 we had an accumulated deficit of approximately
$3,800,000. We will continue to fund operating and capital expenditures from
proceeds that the company received from its initial public offering ("IPO"). 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.
(b) Results of Operations
Comparison of the year ended December 31, 1999 to the year ended December
31, 1998.
Sales decreased 66% from $86,354 for the year ended December 31, 1998 to
$29,407 recorded for the year ended December 31, 1999. Sales for the period
ended December 31, 1998 consisted of sales of our initial pre-production run of
ID-Check terminals while the December 31, 1999 period included sales of a
limited number of units from the shipment of products received late in 1999. 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 51% from $1,506,615 for the
year ended December 31,1998 to $2,278,109 for the year ended December 31, 1999.
Selling expenses, which consist primarily of salaries and related costs for
marketing, increased 27% from $139,470 for the year ended December 31, 1998 to
$176,481 for the year ended December 31, 1999 primarily due to the hiring of
both a vice president and 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 52% from $1,060,537 for
the year December 31, 1998 ended to $1,613,893 for the year ended December 31,
1999, primarily as a result of an increase in salaries because of additional
hiring, an increase in depreciation and increased professional and legal fees.
Research and development expenses, which consist primarily of salaries and
related costs for the development of our products, increased 59% from $306,608
for the year ended December 31, 1998 to $487,735 for the year ended December 31,
1999. This increase is primarily attributable to increases in salaries in hiring
programmers, write off and replacement of pre-production units and testing of
new product design. 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 decreased from $61,479 for the year ended December 31,
1998 to $55,472 for the year ended December 31, 1999 as a result of lower
interest expense from the settlement of deferred compensation liability in 1999
partially offset from interest expense on our promissory notes issued in August
and September 1999.
Interest income amounted to $19,169 for the year ended December 31, 1999
resulting from investing the proceeds received from our IPO in short term
investments.
We have incurred net losses to date, therefore we have paid nominal income
taxes.
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As a result of the factors noted above, our net loss increased from
$1,503,814 for the year ended December 31, 1998 to $2,299,425 for the year ended
December 31, 1999.
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.
(c) Liquidity and Capital Resources
Prior to our IPO, we financed our operations primarily through several
private placements of stock and debt financings. We used the net proceeds for
the primary purpose of funding working capital and general corporate purposes
and for the purchase of hardware terminals. As a result of our IPO, we received
approximately $5,915,000 in net proceeds after deducting underwriters
commissions and offering expenses. In addition, the underwriters also exercised
their over allotment option and purchased 150,000 shares of common stock
resulting in additional
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<PAGE>
proceeds to us of $992,000 net of underwriting commissions. We will use these
proceeds to purchase hardware terminals for resale and working capital.
Cash used in operating activities for the year ended December 31, 1999 of
$1,521,581 was primarily attributable to the net loss of $2,299,425, deposits on
hardware purchases of $245,800 and an increase in inventory of $169,916, which
was primarily offset by an increase in accounts payable and accrued expenses of
$1,159,805. The increase in accounts payable and accrued expenses was
attributable to lack of available funds for payment of deferred salary and
vendor payables, which were satisfied by the issuance of common stock and stock
options. 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. The
increase in accounts payable and accrued expenses was attributable to our
diminished working capital. Cash used in investing activities was $93,797 for
the year ended December 31, 1999 and $26,975 for the year ended December 31,
1998. Net cash used in investing activities for both periods consisted primarily
of capital expenditures for computer equipment and furniture and fixtures. Cash
provided by financing activities was $7,836,326 for the year ended December 31,
1999 and was primarily related to proceeds received from the Company's
successful completion of its initial public offering as well as proceeds
received from private placements. Cash provided by financing activities was
$752,830 for the year ended December 31, 1998 and was primarily related to the
private sales of promissory notes, common stock, preferred stock and warrants.
Because of our limited cash resources before our IPO, 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. There is no deferred
compensation currently outstanding. Currently, there are warrants outstanding to
purchase 1,671,000 shares of our common stock at an exercise price of $3.00,
except for the underwriter's warrants that carry an exercise price of $8.40. If
certain conditions occur, we have the right to redeem the outstanding warrants
on not less than 20 days written notice for $0.01 per warrant. In addition,
828,500 of these warrants expire on June 30, 2000. The balance of the warrants
expire on various dates up to November 2004. As of March 24, 2000, except for
the Underwriter's warrants, the conditions for redeeming the warrants have been
met and we may elect to redeem the warrants before their expiration. However,
there is no guarantee that the conditions for redemption will be satisfied in
the future.
We currently anticipate that our available cash resources from the IPO
combined with either the exercise of the expiring warrants by our warrantholders
before expiration or the exercise of the warrants by our warrantholders should
we elect to redeem them, will be sufficient to meet our anticipated working
capital and capital expenditure requirements for at least the next twelve
months. These requirements are expected to include the purchase of 7,000
terminals to run our patented software, product development, sales and
marketing, working capital requirements and other general corporate purposes. We
may need to raise additional funds, however, to respond to business
contingencies which may include the need to fund more rapid expansion, fund
additional marketing expenditures, develop new markets for our ID-Check
technology, enhance our operating infrastructure, respond to competitive
pressures, or acquire complementary businesses or necessary technologies.
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<PAGE>
(d) Net Operating Loss Carryforwards
As of December 31, 1999, we had a net operating loss carryforward of
approximately $3,250,000, 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.
(e) Year 2000 Issues
Our comprehensive program to address Year 2000 issues was successful in
that our business activities continued without disruption through the days
before and after January 1, 2000. In terms of supply chain readiness, on the
basis of the information available to us, we do not expect disruptions caused by
the failures of third parties to remediate their Year 2000 issues.
Forward Looking Statements
The foregoing contains certain forward-looking statements. Due to the fact
that the Company faces intense competition in a business characterized by
rapidly changing technology and high capital requirements, actual results and
outcomes may differ materially from any such forward looking statements and, in
general are difficult to forecast.
Item 7. Financial Statements
Financial Statements Data are attached hereto following page F-1.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
During fiscal year 1999 there were no changes in or disagreements with the
Company's principal independent accountant on accounting or financial
disclosure.
PART III
Item 9. Directors and Executive Officers of the Company
As of March 24, 2000, the Company's directors and executive officers were
as follows:
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Position With the Company
Name and Age and Principal Occupation Held Office Since
- ------------ ------------------------ -----------------
Frank Mandelbaum, 66 Chairman, Chief Executive 1996
Officer and Director
Kevin Messina, 33 President, Chief Technology 1998
Officer and Director
Edwin Winiarz, 42 Executive Vice President, 1999
Treasurer and Chief Financial
Officer and Director
W. Robert Holloway, 60 Vice President-Sales 1999
Paul Cohen, 59 Director 1996
Anthony Broderick, 56 Director 1996
Evelyn Berezin, 74 Director 1999
Charles McQuinn, 59 Director 1999
Jeffrey Levy, 58 Director 1999
Howard Davis, 44 Director 2000
Business Experience
Frank Mandelbaum has served as our Chairman of the Board and Chief
Executive Officer since July 1, 1996. He also served as Chief Financial Officer
until September 1999. From January 1995 through May 1997, Mr. Mandelbaum served
as a consultant providing strategic and financial advice to Pharmerica, Inc.
(formerly Capstone Pharmacy Services, Inc.), a publicly held company. Prior to
January 1995, Mr. Mandelbaum was Chairman of the Board, Chief Executive Officer
and Chief Financial Officer of Pharmerica, Inc. From July 1994 through December
1995, Mr. Mandelbaum served as Director and Chairman of the Audit and
Compensation Committees of Medical Technology Systems, Inc., also a publicly
held company. From November 1991 through January 1995, Mr. Mandelbaum served as
Director of the Council of Nursing Home Suppliers, a Washington, D.C. based
lobbying organization. From 1974 to date, Mr. Mandelbaum has been Chairman of
the Board and President of J.R.D. Sales, Inc., a privately held financial
consulting company. As required by his employment agreement, Mr. Mandelbaum
devotes substantially all his business time and attention to our business.
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
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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.
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
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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 for Internet based
products. Mr. McQuinn has also served as CEO of The McQuinn Group, Inc., a
system integration and institutional marketing company, from November 1998 to
the present. From 1995 to 1997, Mr. McQuinn was President of DTN West, a fixed
income price quote company with products for banks and governments. From 1990 to
1995, Mr. McQuinn was President of Bonneville Market Information, an equities
price quote company with products for traders and brokers. From 1985 to 1990,
Mr. McQuinn was President of Bonneville Telecommunications Company, a satellite
video and data company. Prior to 1985, he 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.
Jeffrey Levy was elected a director in December 1999. He has been, since
February 1977 President and Chief Executive Officer of LeaseLinc, Inc., a
third-party equipment leasing company and lease brokerage. Prior to 1977 Mr.
Levy served as President and Chief Executive Officer of American Land Cycle,
Inc. and Goose Creek Land Cycle, LLC, arboreal waste recycling companies. During
that time he also served as Chief Operating Officer of ICC Technologies, Inc.
and AWK Consulting Engineers, Inc. Mr. Levy has had a distinguished career as a
member of the United States Air Force from which he retired as a colonel in
1988. He serves as a board member of the Northern Virginia Chapter of Mothers
Against Drunk Driving, the Washington Regional Alcohol Program, the Zero
Tolerance Coalition and the National Drunk and Drugged Driving Prevention Month
Coalition and is a member of the Virginia Attorney General's Task Force on
Drinking by College Students and MADD's National Commission on Underage
Drinking. Mr. Levy holds a BS in International Relations from the United States
Air Force Academy, a graduate degree in Economics from the University of
Stockholm and an MBA from Marymount University.
Howard Davis was appointed a non-voting advisor to the Board in December
1999 and elected a director in March 2000. He has been, since 1997, Executive
Vice President of GunnAllen Financial Inc., where he is the executive
responsible for the investment banking and finance division. From 1990 to 1997
Mr. Davis was President and Chief Executive Officer of Kensington Securities,
Inc. In 1997, Kensington and GunnAllen joined together. Mr. Davis has also
served as President of Wentworth Securities, Inc. from 1988 to 1990 and prior to
that as President of Numero Uno Franchise Corporation. He has attended the
University of Southern California, California State University, Northridge and
Kent State University where he majored in Finance and Accounting.
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.
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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. Davis. The audit
committee recommends to the board of directors the annual engagement of a firm
of independent accountants and reviews with the independent accountants the
scope and results of audits, our internal accounting controls and audit
practices and professional services rendered to us by our independent
accountants.
The board of directors has 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 and
by-laws and acts as our nominating committee for the Board of Directors.
The board of directors has also established a technology oversight
committee comprised of Mr. Levy, Chairman, Ms. Berezin and Mr. McQuinn. The
technology oversight committee will monitor the development of products and
services offered by our company and assist management in planning future
development of products and services within the framework of consumer,
regulatory and competitive environments. This committee will also monitor
actions taken to protect our intellectual property and will recommend
appropriate actions in furtherance of that protection.
Compliance with Section 16(a) of the Exchange Act
The Securities and Exchange Commission has adopted rules relating to the
filing of ownership reports under Section 16 (a) of the Securities Exchange Act
of 1934. One such rule requires disclosure of filings which under the
Commission's rules, are not deemed to be timely. During its review, the Company
discovered that Mr. Levy failed to file a timely report regarding the purchase
of 300 shares of common stock. Such report was subsequently filed.
Item 10. Executive Compensation
The following table sets forth compensation paid to executive officers
whose compensation was in excess of $100,000 for any of the three fiscal years
ended December 31, 1999. No other executive officers received total salary and
bonus compensation in excess of $100,000 during any of such fiscal years.
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SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation
--------------------- ----------------
Securities
Underlying
Name And Principal Position Year(s) Salary ($) Options/SARS (#)
- --------------------------- ------ ---------- ----------------
Frank Mandelbaum ..................... 1999 150,000 75,000
Chairman & CEO ....................... 1998 150,000 50,000
1997 150,000 --
Kevin Messina ........................ 1999 150,000 75,000
President ............................ 1998 150,000 --
1997 150,000 50,000
Todd Cohen ........................... 1999 -0- --
Former President ..................... 1998 50,000 15,000
1997 150,000 50,000
The options shown above were granted under the 1998 and 1999 Stock Option
Plans, 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 in the past, 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 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.
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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, 1999 to the named executive officers:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Potential Realizable
Individual Grants Value at
- --------------------------------------------------------------------- -----------------------
Number of % of Total Assumed Annual Rates
Securities Options of Stock Price
Underlying Granted To Exercise Expiration Appreciation for Option
Options Employees Term
in
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1999
Name Granted Fiscal Year Price Date 5% 10%
- ------------------------------------------------------------------------------------------------
Frank Mandelbaum 75,000 24.5% $3.00 9/04/04 $777,734 $981,405
Kevin Messina 75,000 24.5% $3.00 9/04/04 $777,734 $981,405
- ------------------------------------------------------------------------------------------------
</TABLE>
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. During the year ended December 31,
1999, we granted employees other than the executive officers named above options
to purchase 156,000 shares of common stock under the 1998 and 1999 Stock Option
Plans.
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.
Compensation of Directors
Non-employee directors receive a fee of $500 for attending board meetings
and $250 for attendance at such meetings telephonically. They also receive a fee
of $300 for each committee
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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. On December 13, 1999, Mr. Levy and Mr. Davis were
each granted non-qualified options to purchase 15,000 shares of our common stock
at an exercise price of $11.625, the fair market value on the date of grant.
These options are immediately exercisable. 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.
In addition, non-employee directors who are members of a committee are
entitled to receive grants of stock options for each year served. Each
chairperson of a committee receives options to purchase 2,500 shares of our
common stock, while a committee member receives options to purchase 1,500 shares
of our common stock. In March 2000 the following non-qualified options were
granted to committee chairpersons:
Name Committee Number of Options
---- --------- -----------------
Mr. Broderick Compensation 2,500
Ms. Berezin Audit 2,500
Mr. McQuinn Corporate Governance 2,500
Mr. Levy Technology Oversight 2,500
The following non-qualified options were granted to committee members:
Name Committee(s) Number of Options
---- ----------- -----------------
Mr. Cohen Compensation, Audit 3,000
Mr. Broderick Audit 1,500
Ms. Berezin Corporate Governance,
Technology Oversight 3,000
Mr. McQuinn Audit, Technology Oversight 3,000
Mr. Davis Audit 1,500
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These options, which are exercisable at $12.125, the fair market value on
the date of grant, are immediately exercisable during the committee members term
and expire five years from date of grant.
Employment Contracts, Termination of Employment and Change-in-Control
Arrangements
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.
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 30,000 options are immediately
exercisable at $5.00 per share and 20,000 options will become exercisable on
September 7, 2000 at $5.00 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 $7.50 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
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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.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of December 31, 1999 certain
information regarding beneficial ownership of Intelli-Check's common stock by
each person who is known by us to beneficially own more than 5% of our common
stock. The table also identifies the stock ownership of each of our directors,
each of our officers, and all directors and officers as a group. Except as
otherwise indicated, the stockholders listed in the table have sole voting and
investment powers with respect to the shares indicated.
Unless otherwise indicated, the address for each of the named individuals
is c/o Intelli-Check, Inc., 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 6,515,152 shares
outstanding as of December 31, 1999.
- --------------------------------------------------------------------------------
Name Shares Beneficially Owned
- --------------------------------------------------------------------------------
Percent
Frank Mandelbaum .................................. 1,322,000 18.6
- --------------------------------------------------------------------------------
Kevin Messina ..................................... 1,417,000 20.6
- --------------------------------------------------------------------------------
Edwin Winiarz ..................................... 30,000 *
- --------------------------------------------------------------------------------
W. Robert Holloway ................................ 20,000 *
- --------------------------------------------------------------------------------
Paul Cohen ........................................ 281,385 4.2
- --------------------------------------------------------------------------------
Anthony Broderick ................................. 45,000 *
- --------------------------------------------------------------------------------
Evelyn Berezin .................................... 15,000 *
- --------------------------------------------------------------------------------
Charles McQuinn ................................... 15,000 *
- --------------------------------------------------------------------------------
Jeffrey Levy ...................................... 15,300 *
- --------------------------------------------------------------------------------
Howard Davis ...................................... 15,000 *
- --------------------------------------------------------------------------------
Todd Cohen ........................................ 1,150,000 17.2
- --------------------------------------------------------------------------------
-26-
<PAGE>
- --------------------------------------------------------------------------------
Name Shares Beneficially Owned
- --------------------------------------------------------------------------------
Percent
Empire State Development, formerly ................ 550,000 8.3
New York State Science and Technology
Foundation
- --------------------------------------------------------------------------------
All Executive Officers and Directors as a ......... 3,175,685 40.9
group (10 persons)
- --------------------------------------------------------------------------------
* Indicates beneficial ownership of less than one percent of the total
outstanding common stock.
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. Cohe"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.
Due to recent legislation, all assets of the New York State Small Business
Technology Investment Fund which were located in the New York State Science and
Technology Foundation were transferred to The Urban Development Corporation
d/b/a Empire State Development. The Commissioner of Empire State Development is
Charles A. Gargano. The members of the Board of Directors are Charles A.
Gargano, J. Patrick Barrett, Charles E. Dorkey, III, David Feinberg, Anthony
Gioia, Deborah Weight and Elizabeth McCaul. The address for that fund is 30
South Pearl St., Albany, NY 12245.
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:
- --------------------------------------------------------------------------------
NAME NUMBER OF SHARES EXERCISE PRICE
- --------------------------------------------------------------------------------
Frank Mandelbaum ........................... 596,000 $ 3.00
- --------------------------------------------------------------------------------
Kevin Messina .............................. 357,000 $ 3.00
- --------------------------------------------------------------------------------
Edwin Winiarz .............................. 30,000 $ 5.00
- --------------------------------------------------------------------------------
W. Robert Holloway ......................... 20,000 $ 7.50
- --------------------------------------------------------------------------------
Paul Cohen ................................. 135,000 $ 3.00
- --------------------------------------------------------------------------------
Anthony Broderick .......................... 45,000 $ 3.00
- --------------------------------------------------------------------------------
Evelyn Berezin ............................. 15,000 $ 3.00
- --------------------------------------------------------------------------------
-27-
<PAGE>
- --------------------------------------------------------------------------------
NAME NUMBER OF SHARES EXERCISE PRICE
- --------------------------------------------------------------------------------
Charles McQuinn ............................ 15,000 $ 3.00
- --------------------------------------------------------------------------------
Jeffrey Levy ............................... 15,000 $ 11.625
- --------------------------------------------------------------------------------
Howard Davis ............................... 15,000 $ 11.625
- --------------------------------------------------------------------------------
Todd Cohen ................................. 175,000 $ 3.00
- --------------------------------------------------------------------------------
Empire State Development, .................. 100,000 $ 3.00
formally New York State Science
and Technology Foundation
- --------------------------------------------------------------------------------
Item 12. Certain Relationships and Related 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.
-28-
<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 common stock at an exercise price of $3.00 per share at any
time prior to June 30, 2004.
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits. See index of exhibits annexed hereto.
(b) Reports on Form 8-K. None.
-29-
<PAGE>
INDEX
Page
----
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-1
FINANCIAL STATEMENTS:
Balance Sheet as of December 31, 1999 F-2
Statements of Operations for the Years Ended
December 31, 1998 and 1999 F-3
Statements of Stockholders' (Deficit) Equity for
the Years Ended December 31, 1998 and 1999 F-4
Statements of Cash Flows for the Years Ended
December 31, 1998 and 1999 F-5
NOTES TO FINANCIAL STATEMENTS F-6 - F-15
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Intelli-Check, Inc.:
We have audited the accompanying balance sheet of Intelli-Check, Inc. (a
Delaware corporation) as of December 31, 1999, and the related statements of
operations, stockholders' equity and cash flows for the years ended December 31,
1998 and 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Intelli-Check, Inc. as of
December 31, 1999, and the results of its operations and its cash flows for the
years ended December 31, 1998 and 1999 in conformity with accounting principles
generally accepted in the United States.
New York, New York
March 7, 2000
F-1
<PAGE>
INTELLI-CHECK, INC.
BALANCE SHEET
DECEMBER 31, 1999
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,380,548
Accounts receivable 14,320
Inventory 186,609
Deposit 245,800
Other current assets 54,313
------------
Total current assets 6,881,590
PROPERTY AND EQUIPMENT, net (Note 3) 244,289
PATENT COSTS, net of accumulated amortization of $32,025 73,636
OTHER ASSETS 8,766
------------
Total assets $ 7,208,281
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 430,982
Accrued expenses 376,979
Current portion of capital lease obligations 35,430
------------
Total current liabilities 843,391
------------
CAPITAL LEASE OBLIGATIONS (Note 9) 39,843
------------
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY:
Series A Convertible Preferred Stock - $.01
par value; 250,000 shares authorized;
0 shares issued and outstanding --
Common stock - $.001 par value; 20,000,000
shares authorized; 6,515,152 shares
issued and outstanding 6,515
Additional paid-in capital 10,121,771
Accumulated deficit (3,803,239)
------------
Total stockholders' equity 6,325,047
------------
Total liabilities and stockholders' equity $ 7,208,281
============
The accompanying notes are an integral part of this balance sheet.
F-2
<PAGE>
INTELLI-CHECK, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999
1998 1999
----------- -----------
SALES $ 86,354 $ 29,407
COST OF GOODS SOLD 22,074 14,420
----------- -----------
Gross profit 64,280 14,987
OPERATING EXPENSES:
Selling 139,470 176,481
General and administrative 1,060,537 1,613,893
Research and development 306,608 487,735
----------- -----------
Loss from operations (1,442,335) (2,263,122)
OTHER INCOME (EXPENSES):
Interest income -- 19,169
Interest expense (61,479) (55,472)
----------- -----------
(1,503,814) (2,299,425)
INCOME TAX BENEFIT (Note 2) -- --
----------- -----------
Net loss $(1,503,814) $(2,299,425)
=========== ===========
PER SHARE INFORMATION:
Net loss per common share-
Basic and diluted $ (0.35) $ (0.45)
=========== ===========
Common shares used in computing per
share amounts-
Basic and diluted 4,402,552 5,079,807
=========== ===========
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
INTELLI-CHECK, INC.
STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
Series A
Common Stock Preferred Stock Additional
------------------- -------------------- Paid-in Accumululated
Shares Amount Shares Amount Amount Deficit Total
--------- ------- -------- -------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1998 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 160,000 160 -- -- 379,840 -- 380,000
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 128,000 128 -- -- 445,588 -- 445,716
Issuance of stock options
for deferred salary -- -- -- -- 700,000 -- 700,000
Conversion of preferred
stock 250,000 250 (250,000) (2,500) 2,250 -- --
Issuance of common stock
in IPO, net of expenses 1,150,000 1,150 -- -- 6,905,976 -- 6,907,126
Net loss -- -- -- -- -- (2,299,425) (2,299,425)
--------- ------- -------- -------- ------------ ------------ ------------
BALANCE, December 31, 1999 6,515,152 $ 6,515 -- $ -- $ 10,121,771 $ (3,803,239) $ 6,325,047
========= ======= ======== ======== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
INTELLI-CHECK, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999
1998 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,503,814) $(2,299,425)
Adjustments to reconcile net loss to net
cash used in operating activities-
Depreciation and amortization 70,183 104,053
Loss on disposal of assets 225,783 --
Noncash compensation 15,333 --
Changes in assets and liabilities-
(Increase) in accounts receivable -- (14,320)
(Increase) in inventory (122,292) (169,916)
(Increase) in other current assets (921) (53,392)
(Increase) in deposit -- (245,800)
Decrease (increase) in other assets 5,531 (2,586)
Increase in accounts payable and
accrued expenses 262,172 1,159,805
----------- -----------
Net cash used in operating
activities (1,048,025) (1,521,581)
----------- -----------
CASH FLOWS FROM INVESTING activities:
Purchases of property and equipment (26,975) (93,797)
----------- -----------
Net cash used in investing
activities (26,975) (93,797)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 516,000 7,836,326
Proceeds from issuance of preferred stock 250,000 --
(Repayment of) capital lease obligations (13,170) --
Proceeds from promissory notes -- 1,200,000
Repayment of promissory notes -- (1,200,000)
----------- -----------
Net cash provided by financing
activities 752,830 7,836,326
----------- -----------
Net (decrease) increase in cash (322,170) 6,220,948
CASH AND CASH EQUIVALENTS, beginning of period 481,770 159,600
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 159,600 $ 6,380,548
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for
interest $ 14,603 $ 37,458
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH
FINANCING ACTIVITIES:
Conversion of preferred stock to
common stock $ -- $ 250,000
Conversion of debt to preferred stock 250,000 --
Common stock issued to satisfy debt
and notes payable -- 139,874
Common stock issued to satisfy
deferred salary -- 160,126
Common stock issued for settlements
and accounts payable -- 445,715
Stock options issued to satisfy
deferred salary -- 700,000
Capital lease obligations incurred -- 71,519
The accompanying notes are an integral part of these statements.
F-5
<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
"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. ID-Check reads, analyzes and displays the encoded information
contained on driver licenses and other forms of accepted government issued
identification. In addition, the ID-Check terminal is capable of being upgraded
to accommodate changes made by the governmental issuers of driver licenses and
ID cards. The ID-Check terminal requires a quick swipe or scan of the driver
license or ID card by the retailer; displays a "yes", "no", "expired" or
"tampered"; and creates a record of transactions as proof that the retailer has
used proper due diligence.
The Company has completed its refinement of its software and has placed orders
for units of its ID-Check terminal under a supplier agreement with a third party
(Note 9), partially received at December 31, 1999.
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.
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments with
original maturities of three months or less when purchased.
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 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.
F-6
<PAGE>
INTELLI-CHECK, INC.
NOTES TO FINANCIAL STATEMENTS
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 1998 or 1999.
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, 1999, 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 and short term commercial paper. The Company
maintains cash between two financial institutions. The Company performs periodic
evaluations of the relative credit standing of these institutions. The Company
has had limited sales due to delivery of product in late December 1999 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, 1998 and 1999, and in addition, no customer accounted for
greater than 10% of accounts receivable as of December 31, 1999.
F-7
<PAGE>
INTELLI-CHECK, INC.
NOTES TO FINANCIAL STATEMENTS
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, 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.
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, 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 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 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.
F-8
<PAGE>
INTELLI-CHECK, INC.
NOTES TO FINANCIAL STATEMENTS
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 as of December 31, 1999:
Computer equipment $ 253,445
Furniture and fixtures 99,111
Leasehold improvements 64,452
Office equipment 8,440
---------
425,448
Less- Accumulated depreciation 181,159
---------
$ 244,289
=========
Depreciation expense for the years ended December 31, 1998 and 1999 amounted to
$36,982 and $97,843, respectively.
4. ACCRUED EXPENSES
Accrued expenses are comprised of the following as of December 31, 1999:
Payroll $ 47,181
Professional fees 150,000
Other 179,798
---------
$ 376,979
=========
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 from a stock offering through either a Private Placement or an Initial
Public Offering ("IPO") that exceeds $3,000,000.
In connection with an agreement executed in May 1999, which superceded a prior
license agreement (Note 9), the Company repaid the 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 shares of common stock.
F-9
<PAGE>
INTELLI-CHECK, INC.
NOTES TO FINANCIAL STATEMENTS
6. SHORT-TERM DEBT
Convertible Secured Demand Note
In January 1997, the Company entered into a Note Purchase Agreement with Empire
State Development formally, 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.
In July 1999, the Foundation converted 250,000 shares of Series A Convertible
Preferred Stock into 250,000 shares of common stock.
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 were to mature at the earlier of July 31,
2000 or the date at which the Company receives gross proceeds from an IPO of its
securities of at least $6,000,000. In connection with the closing of the IPO,
these notes along with all accrued interest, were repaid prior to December 31,
1999.
7. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets for federal and state income taxes are as
follows:
1999
-----------
Deferred tax assets, net:
Net operating loss carryforwards $ 1,300,000
Depreciation (25,000)
Other (20,000)
Less- Valuation allowance (1,255,000)
-----------
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 not be realized. No income tax benefit has been recorded for all
periods presented because of the valuation allowance.
As of December 31, 1998 and 1999, the Company had net operating loss
carryforwards (NOL's) for federal income tax purposes of approximately $950,000
and $3,250,000, 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.
F-10
<PAGE>
INTELLI-CHECK, INC.
NOTES TO FINANCIAL STATEMENTS
8. STOCKHOLDERS' EQUITY
Series A Convertible Preferred Stock
In January 1997, the Board of Directors authorized the creation of a class of
Series A Convertible Preferred Stock with a par value of $.01. The Series A
Convertible Preferred Stock is convertible into an equal number of common shares
at the holder's option, subject to adjustment for anti-dilution. The holders of
Series A Convertible Preferred Stock are entitled to receive dividends as and if
declared by the Board of Directors. In the event of liquidation or dissolution
of the Company, the holders of Series A Convertible Preferred Stock are entitled
to receive all accrued dividends, if applicable, plus the liquidation price of
$1.00 per share.
As of December 31, 1999, there were no outstanding shares of Series A
Convertible Preferred Stock (See Note 6).
Common Stock and Warrants
In 1998, the Company sold 258,000 shares of common stock at $2.00 per share for
total proceeds of $516,000.
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 common stock
to the common stock and to the warrant.
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.
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 common stock to the common stock
and to the warrant.
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.
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 year ended December
31, 1999. In addition, the Company issued 34,000 shares of common stock to a
third party in connection with fees incurred in connection with its IPO. The
shares were valued at $5.00 per share, and accordingly, the Company recorded
this transaction as an offset to additional paid in capital as of December 31,
1999.
F-11
<PAGE>
INTELLI-CHECK, INC.
NOTES TO FINANCIAL STATEMENTS
On November 18, 1999, the Company successfully completed its IPO of 1,150,000
shares of common stock at $7.50 per share, including the underwriters'
overallotment option, for net proceeds of approximately $6,907,000 after
underwriting commissions and offering expenses.
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 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 (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.
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:
Year Ended Year Ended
December 31, 1998 December 31, 1999
----------------- -----------------
Net loss, as reported $(1,503,814) $(2,299,425)
Net loss, pro forma (1,537,814) (2,582,153)
Basic and diluted loss per share,
as reported (0.35) (0.45)
Basic and diluted loss per share,
pro forma (0.35) (0.51)
F-12
<PAGE>
INTELLI-CHECK, INC.
NOTES TO FINANCIAL STATEMENTS
Stock option activity under the 1998 and 1999 Stock Option Plans during the
periods indicated is as follows:
Weighted
Average
Options Granted Exercise Price
--------------- --------------
Outstanding at January 1, 1998 180,000 $ 3.00
Granted 100,000 3.00
Canceled -- --
--------- --------
Outstanding at December 31, 1998 280,000 3.00
Granted 1,278,000 3.88
Canceled 10,000 --
--------- --------
Outstanding at December 31, 1999 1,548,000 $ 3.72
========= ========
Included in the option schedule are 692,000 non plan options.
As of December 31, 1998 and 1999, 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 rates of 5.00%;
expected volatility of 0% and 68.11% and a dividend yield of 0%.
The weighted-average remaining life of the options outstanding at December 31,
1998 and 1999 is 3.82 years and 4.66 years, respectively, and the
weighted-average fair value of the options outstanding at December 31, 1998 and
1999 is $0.34 and $2.07, respectively.
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:
2000 $ 73,399
=========
Capital Lease Obligations
The Company leases computer equipment under several capital leases expiring in
2002. 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:
2000 $ 47,038
2001 37,436
2002 7,546
---------
Total minimum lease payments 92,020
Less- Amount representing interest 16,747
---------
Present value of net minimum lease payments $ 75,273
=========
F-13
<PAGE>
INTELLI-CHECK, INC.
NOTES TO FINANCIAL STATEMENTS
Royalty and License Agreements
In January 1996, the Company entered into an agreement with a third party. The
agreement stated 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 May 1999, the Company
and the third party agreed to terminate the royalty agreement (this agreement
was terminated) 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 the royalty agreement. The Company recorded a charge of $20,000
in the accompanying statement of operations as of December 31, 1999.
The Company entered into an 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. This agreement was terminated in May 1999 and
superceded by a new agreement which calls for payment of the executive royalties
of .005% on gross sales from $2,000,000 to $52,000,000 and .0025% on gross sales
in excess of $52,000,000
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 common stock at fair market
value on the date of grant or 10,000 shares of common stock at fair market value
on the date of grant for each full $250,000 by which pre-tax profits for each
year exceeds pre-tax profits for the prior fiscal year. However, the Company is
not required to grant options to purchase more than 150,000 shares of common
stock with respect to any one fiscal year.
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.
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 30,000 options are immediately exercisable at $5.00 per
share and 20,000 options will become exercisable on September 7, 2000 at $5.00
per share.
Effective October 1999, the Company entered into a two-year employment agreement
with its Vice President of Sales. The agreement provides for a base salary of
$115,000. In addition, the Company granted the Vice President of Sales an option
to purchase 50,000 shares of common stock at $7.50 per share, of which 20,000
shares are immediately exercisable and 5,000 shares 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.
F-14
<PAGE>
INTELLI-CHECK, INC.
NOTES TO FINANCIAL STATEMENTS
Supplier Agreements
In June 1999, the Company and Hazeltine (succeeded by Marconi Aerospace Systems,
Inc.) entered into an agreement to terminate the Exclusive Supplier and Royalty
Agreements originally entered into in December 1996. Under the terms of the
termination agreement, Hazeltine returned 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 December 31, 1998 balance sheet.
In July 1999, and amended November 1999, the Company entered into a new supplier
agreement with Welch Allyn, Inc. The agreement specified that the Company pay
approximately $188,000 for the development of the Company's ID-check products.
In addition, Welch Allyn Inc. agreed to manufacture these products for a price
determined by the terms of the agreement for an initial period of two years. The
Company placed orders for a total of 2,000 units of which they had received 500
units as of December 31, 1999. These units were subsequently returned to the
manufacturer to exchange the original scanner for a high-tech scanner, which
allows the software to read the encoding on 48 jurisdictions as opposed to 32
jurisdictions that could be read on the original scanner. During March 2000, the
Company placed an additional order to purchase 5,000 units subject to certain
conditions. The Company expects these conditions to be met.
F-15
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant had duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 30, 2000 INTELLI-CHECK, INC.
By: /s/ Frank Mandelbaum
-----------------------------
Frank Mandelbaum
Chairman, Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Date: March 30, 2000 /s/ Frank Mandelbaum
------------------------
Frank Mandelbaum
Chairman, Chief Executive Officer and Director
Date: March 30, 2000
-------------
Kevin Messina
President, Chief Technology Officer and Director
Date: March 30, 2000 /s/ Edwin Winiarz
---------------------
Edwin Winiarz
Executive Vice President, Treasurer
and Chief Financial Officer and Director
Date: March 30, 2000 /s/ Paul Cohen
------------------
Paul Cohen, Director
Date: March 30, 2000
---------------------
Anthony Broderick, Director
Date: March 30, 2000
------------------------
Evelyn Berezin, Director
Date: March 30, 2000 /s/ Charles McQuinn
-----------------------
Charles McQuinn, Director
Date: March 30, 2000 /s/ Jeffrey Levy
--------------------
Jeffrey Levy, Director
Date: March 30, 2000 /s/ Howard Davis
--------------------
Howard Davis, Director
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
1 Form of Underwriting Agreement (1)
3.1 Certificate of Incorporation of the Company (1)
3.2 By-laws of the Company (1)
4.1 Specimen Stock Certificate (2)
4.2 Form of Underwriters' Warrant Agreement (1)
10.1 1998 Stock Option Plan (1) *
10.2 Employment Agreement between Frank Mandelbaum and the
Company, dated as of January 1, 1999 (1) *
10.3 Employment Agreement between Kevin Messina and the Company,
dated as of January 1, 1999 (1) *
10.4 Employment Agreement between Edwin Winiarz and the Company,
dated as of July 21, 1999 (1) *
10.5 Agreement of Lease between the Company and The Huntington
Atrium, dated as of October 25, 1996 (1)
10.6 1999 Stock Option Plan (1) *
10.7 Development and Supply Agreement between the Company and
Welch Allyn Data Collection Inc., dated July 9, 1999 (1)
10.8 Agreement between the Company and Northern Leasing Systems Inc.,
dated as of August 13, 1999 (1)
10.9 Employment Agreement between the Company and W. Robert
Holloway, dated October 25, 1999 (1) *
10.10 Agreement between the Company and Kevin Messina, individually and
d/b/a K.M. Software Development, dated as of May 3, 1999 (1) *
10.11 Memorandum of Understanding between AAMVAnet, Inc. and
Intelli-Check, Inc. effective November 15, 1999 (3)
21 List of Subsidiaries (1)
27 Financial Data Schedule
- -----------------
* Denotes a management contract or compensatory plan, contract or
arrangement.
<PAGE>
(1) Incorporated by reference to Registration Statement on Form Sb-2 (File
No. 333- 87797) filed September 24, 1999.
(2) Incorporated by reference to Amendment No. 1 to the Registration
Statement filed November 1, 1999.
(3) Incorporated by reference to Amendment No. 2 to the Registration
Statement filed November 15, 1999.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The accompanying financial information should be read in conjunction with the
audited financial statements of Itelli-Check, Inc. as of and for the year ended
December 31, 1999
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 6,380,548
<SECURITIES> 0
<RECEIVABLES> 14,320
<ALLOWANCES> 0
<INVENTORY> 186,609
<CURRENT-ASSETS> 6,881,590
<PP&E> 425,448
<DEPRECIATION> 181,159
<TOTAL-ASSETS> 7,208,281
<CURRENT-LIABILITIES> 843,391
<BONDS> 0
0
0
<COMMON> 6,515
<OTHER-SE> 8,318,532
<TOTAL-LIABILITY-AND-EQUITY> 7,208,281
<SALES> 29,407
<TOTAL-REVENUES> 29,407
<CGS> 14,420
<TOTAL-COSTS> 14,420
<OTHER-EXPENSES> 2,278,109
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36,303
<INCOME-PRETAX> (2,229,425)
<INCOME-TAX> (2,229,425)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,229,425)
<EPS-BASIC> (0.45)
<EPS-DILUTED> (0.45)
</TABLE>
