U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the fiscal year ended December 31, 1999
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from to
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Commission file number 000-28301
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ID TECHNOLOGIES CORPORATION
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(Name of Small Business Issuer in Its Charter)
North Carolina 56-1866233
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
920 Main Campus Drive / Suite 400
Raleigh, North Carolina 27606
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(Address of Principal Executive Offices) (Zip Code)
(919) 424-3722
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(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, no par value
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(Title of Class)
Check whether the 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 registrant 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 there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.
The issuer's revenues for its most recent fiscal year: $2,000.00
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As of March 15, 2000, 8,380,171 shares of common stock were outstanding.
As of March 15, 2000, the aggregate market value of shares of common stock
held by non-affiliates was approximately $ 2,891,576.
FORM 10-KSB INDEX
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
ITEM 2. DESCRIPTION OF PROPERTY.
ITEM 3. LEGAL PROCEEDINGS.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS.
ITEM 7. FINANCIAL STATEMENTS.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
ITEM 10. EXECUTIVE COMPENSATION.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K.
SIGNATURES
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
This Form 10-KSB contains forward-looking statements. Any statements
contained in this Form 10-KSB that are not statements of historical fact are
intended to be and are hereby identified as forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. ID
Technologies Corporation, a North Carolina corporation (the "Company" or
"IDTEK") cautions readers that forward looking statements involve known and
unknown risks and uncertainties which could cause actual results or outcomes to
differ materially from those expressed in the forward-looking statements.
Forward-looking statements include statements concerning plans, objectives,
goals, strategies, expectations, future events or performance and underlying
assumptions and other statements which are other than statements of historical
facts.
Without limiting the foregoing, words such as "may," "will," "expect,"
"believe," "anticipate," "estimate," "continue" or comparable terminology are
intended to identify forward-looking statements. These statements by their
nature involve substantial risks and uncertainties, and actual results may
differ materially depending on a variety of factors, many of which are not
within the Company's control. These factors include, but are not limited to,
economic conditions generally and in the industries in which the Company may
participate; competition within the Company's chosen industry, including
competition from much larger competitors; technological advances; and failure by
the Company to successfully develop business relationships and strategic
alliances. In addition to other factors and matters discussed elsewhere herein,
the following are important factors that, in the view of the Company, could
cause actual results to differ materially from those discussed in the
forward-looking statements: ability of the Company to obtain acceptable forms
and amounts of financing to fund current and future operations, research and
development and acquisitions; competition; the Company's operating losses; the
Company's ability to commercially develop its proposed products; the Company's
ability to attract, hire and retain employees and management personnel; and the
Company's ability to regain control over the development and exploitation of
its technology. The Company disclaims any intent or obligation to update these
forward-looking statements, whether as a result of new information, future
events or otherwise.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
The Company was incorporated on March 16, 1994, under the name CardGuard
International, Inc. On July 23, 1998, the Company changed its name from
CardGuard International, Inc. to ID Technologies Corporation. The Company's
corporate headquarters are located in Raleigh, North Carolina. Since inception,
the Company has had no significant revenues and is considered to be a
development stage company.
The Company is primarily a licensing company and is in the business of: (i)
developing and marketing its patented self-authenticating fingerprint technology
for applications where authentication of the identity of the owner of the card
is important (the "Technology") and (ii) selling exclusive and nonexclusive
licenses to use the Technology. The Company does not currently design,
manufacture, market or sell any finished goods or products which make use of
the Technology and has no current plans or ability to do so. Consequently, the
Company intends to continue development of the Technology and to promote its
Position as a licensor of the Technology to both sublicensors and manufacturers
of finished goods and products.
During the period from inception to December 1996, the Company focused on
obtaining a patent for the Technology. In December 1996, the Company received
the Notice of Allowance from the United States Patent Office for issuance of its
patent.
In July 1997, the Company entered into an exclusive licensing agreement
(the "IRE Agreement") with Information Resource Engineering, Inc. ("IRE"), a
leading provider of computer network security and encryption products and
services. Pursuant to the IRE Agreement, IRE provides research and development
assistance to the Company to develop the Technology. Currently, the success of
the Company is substantially dependent on the operations, research and
development of IRE. See section heading - "LICENSING AND LICENSE AGREEMENTS."
THE TECHNOLOGY
The Technology includes patented and trade secret technologies which are
designed to allow authentication and re-authentication of biometric skin
surfaces, including finger and thumbprints. The Technology is designed to
identify authorized card, document and other item users by means of
self-authenticating panels/substrates which register and re-authenticate
authorized users without the assistance of databases or external devices of any
sort. The biometric sensing panel component of the Technology will enable
instantaneous fingerprint identification. The sensing panel is designed to
utilize microchip-assisted and electrically-powered sensing, storing, computing
transmitting/signaling and associated technologies which are designed to be
housed in a credit card sized surface panel.
As a result of the Technology's design, it will not be dependent upon
Storing a user's fingerprint in a central database, but will store and
Confirm fingerprints in a self-contained unit. All present verification systems
known to the Company utilize databases to store user fingerprint information.
In such systems, valuable biometric signatures (fingerprint, eye scan, etc.)
Are kept with hundreds of thousands of other such signatures in databases. This
method of storing biometric information raises privacy concerns because such
databases become, in effect, national registries for fingerprints or other
biometric signatures. Moreover, database technology has long been
characterized by problems such as data mismatches, high costs, unauthorized
access to files and unauthorized access to the database itself. Although
the Technology is not dependent upon databases or external devices, it is
possible for the Technology to malfunction, leaving the user without a working
card or other identification system.
Certain methods, processes and technologies which comprise the Technology
Are generally patent protected by US Patent No. 5623552. The original US patent
has been augmented with other trade secret technologies acquired or developed by
IRE to cover many types of identification and security cards, as well as other
devices enabling applications which make use of the Technology.
The Technology has not yet been fully developed into a finished product.
However, there are three progressive prototype cards incorporating the
Technology now in development. The first prototype is the discrete components
card ("DCC"), which is a credit or debit card sized model that contains a memory
chip to store the fingerprint. A working prototype of this card was completed in
November 1999. The second prototype is the chip on board card ("COB"), which
will combine the components of the first prototype into two distinct on-board
microelectronic chips that will perform all necessary functions, lower expenses
of the system and allow initial mass production of the device. A fully working
COB card is scheduled to be completed in the fall of 2000. Finally, the third
prototype is the unified chip card ("UCC"), which the Company believes will
further lower the production cost and increase the strength and durability of
the product. A fully working UCC is scheduled to be completed by the end of the
last quarter of 2000.
THE MARKET
The market for cards employed for the storage of confidential information,
the maintenance of stored value, debit and credit cards, and security access and
control cards represents over one billion of the cards in use today worldwide.
This market includes the private credit, medical/insurance, airport and airline
security, hotel security, banking and telecommunications industries. The advent
and acceptance of a worldwide standard operating system to both read and write
on stored value and information cards has raised serious concerns about how to
protect unauthorized access to such information. To the knowledge of the
Company, there are currently only commercial biometric processors which rely on
special card readers, expensive specialized software and separate equipment in
order to capture biometric signatures (such as fingerprints) on a card. While
almost all of the applications mentioned above have the potential to support the
use of a self-authenticating fingerprint evaluator device, the Company will
focus on markets that have demonstrated early interest in the Technology.
MARKETING PLANS
The Company has commenced pre-marketing of the Technology to government and
industry. The Company's Technology system concept was demonstrated for the
public in May 1999 at Card Tech/Secure Tech 99, the world's leading card
technology and security tradeshow. Internet and conventional marketing have also
generated interest in the Technology both internationally and domestically,
which has resulted in several further demonstrations of the Company's Technology
system concept. Thirty-one demonstrations have been given to many potential
licensees, including IBM, VISA International, MasterCard, American Express,
Lockheed-Martin, General Electric, WhoVision, US Immigration and Naturalization
Services, Citibank, Bank of America, Cabletron, Bull and other companies and
governmental agencies. However, there can be no assurance that any such
companies or agencies will become licensees or users of the Technology.
Upon completion of a fully-working prototype of the COB card which is expected
to be in the fall of 2000, the Technology will be marketed to those industries
that demonstrate the potential for early exposure, publicity, profitability and
diversification into other licensing areas. To achieve this goal, the Company
intends to pursue licensing, partnerships and strategic alliances with
industry and government agencies through both direct contact and the use of
consulting services. However, there can be no assurance that the Company will
develop such relationships.
COMPETITION
At present, identification and security verification processes range from
simple devices used to store personal information such as names and addresses
(non-biometric) to highly secretive security systems which can verify complex
biometric data such as fingerprints, voice prints and eye characteristics
(biometric). The Company expects to compete with both non-biometric and
biometric technologies. With current non-biometric technologies, the user must
typically possess a key, card, or bit of information, such as a personal
identification number or password. These systems are easily defeated by
obtaining possession of the key, card, or password, or by counterfeiting the key
or the card. With respect to existing biometric technology, some of the
perceived disadvantages are as follows:
o Hand geometry devices are subject to physical changes in the user.
The devices are also typically large and, therefore, difficult to
Integrate into many applications.
o Facial recognition technology can be fooled by photographs and is
typically cost-prohibitive, thereby limiting its application in
mass-market uses.
o Iris scanning has remained costly, subject to user motion and
requires large databases.
o Retinal scanning has also remained expensive and is subject to user
health concerns regarding laser scanning of the retina.
o Signature verification is subject to user physical changes over time
and is susceptible to forgery.
o Voice analysis is subject to user physical changes and can be forged
through the use of devices capable of recording and altering
individual voices.
Furthermore, most currently available biometric identity verification
systems share a reliance upon database technology, which the Company believes is
problematic. Most valuable biometric signatures (fingerprints, voiceprints, eye
scans, etc.) commonly are stored with hundreds of thousands of other such
signatures in databases. This method of storing information often presents
multiple problems, including data mismatches, the high cost of storage and
retrieval and unauthorized access to both the files and the database itself.
The Company believes that the Technology system addresses more problems than
many competing products by providing a means of identifying users at the point
of authentication access without relying on information stored in a database.
The information stored on the card incorporating the Technology is intended not
to function in any reader or scanner without the authorized user's fingerprint
first being placed on and matched with the data stored in the card
itself. The user's fingerprint data never leaves the card. As a result, no
databases or special readers will be required. Moreover, it is anticipated that
all present readers such as ATMs and point of purchase terminals will be
compatible with the Technology system because the Company currently plans to
incorporate magnetic strip simulators into each card system that will activate
only for authorized users and allow these cards to operate with database, or
"legacy," systems worldwide.
The Company considers companies such as Identix, Identicator, NRI, Harris,
NEC, Motorola, Siemens, and other larger and smaller companies to be its
competition. Almost all present competitors use card systems that require
special readers and software applications to store digitized information and
depend on power sources independent of the card device. The Company
believes that it will offer a technological advantage over the current products
of its competitors because the Technology is expected to reduce costs and
eliminate the need for special equipment and software and will include a power
source within the card. However, there can be no assurance that competitors
will not introduce improved products or that the Company's product will
function as the Company anticipates. The Technology, however, will not
replace all competitive biometric systems since database systems will be of
continuing value in certain applications. Indeed, even as retailers and other
end-users of credit or identification cards accept cards utilizing alternative
authentication technology, they will continue to need specialized equipment
and software.
LICENSING AND LICENSE AGREEMENTS
The Company is primarily a licensing company. The Company's initial
licensing strategy consisted of granting exclusive licenses in broad fields of
use. More recently, however, the Company has proposed to restructure its
licensing strategy so that exclusive licenses would be granted in discrete
markets only and licenses would otherwise be limited to non-exclusive licenses.
Examples of discrete markets in which exclusive licenses may be granted include
residential home security in the United States, copying equipment use in the
United States, commercial building access and security in the Southeastern
United States and prison system access and security in a particular state. Such
licenses would have the following common components: a one-time standard license
fee payable to the Company; a right retained by the Company to select the
manufacturer of the product for the licensee; and either an ongoing royalty
payable by the licensee or a manufacturing surcharge paid by the card
manufacturers.
The Company currently has five main license holders: IRE, Protective
Technologies Inc. ("Protek"), Power^Up Marketing Corporation ("Power^Up"),
Revolution Labs, Inc. ("Revolution") and BrentScott Associates, LLC
("BrentScott").
In July 1997, pursuant to the IRE Agreement, the Company granted IRE an
exclusive license to the Technology for use in IRE's primary business fields,
including dedicated computer networks, the Internet, and treasury and banking
areas. In consideration for this license (to which the Company ascribed a value
of over $500,000) and an initial 13.7% equity interest in the Company, IRE
agreed to provide (i) development of the Company's Technology and complimentary
technology, (ii) $300,000 in cash and (iii) additional engineering, design and
sales assistance. Also, IRE agreed to pay the Company a royalty equal to five
percent (5%) of IRE's future gross revenues (subject to certain discounts,
shipping, customs and insurance charges, taxes and allowances for returns)
related to the use of the Company's patent in IRE's fields of license during the
eighteen-year term of the IRE Agreement. This license was granted prior to
the Company's change to a non-exclusive licensing system. For more information
regarding the IRE Agreement, see Exhibit 6.02 attached hereto.
In April 1998, the Company granted three separate exclusive licenses to
three different licensees in the medical/pharmacy, telecommunications and
private card/credit markets. In March of 1999, as part of the Company's shift to
a non-exclusive licensing system, the Company entered into a new agreement (the
"Protek Agreement") whereby these three exclusive licenses were canceled and
Protek was granted the following:
(1) For a 20 year period, if the Company receives a manufacturing surcharge
payment under any license agreement in the areas of medical/pharmacy,
telecommunications and private card/credit, the Company will pay Protek
a portion of the license fees and/or the manufacturing surcharge and
any other revenue the Company actually receives from those licenses.
(2) For a period of seven years, Protek has the right to sell or use itself
(or with allied concerns) nonexclusive licenses from the Company for
the Technology in areas not subject to exclusive licenses granted by
the Company. Protek will receive a credit of up to $2,625,000 to be
applied to the initial license fees required to be paid in connection
with such agreements.
(3) For a period of 20 years, Protek has the nonexclusive right to sell
nonexclusive license agreements in fields not covered by an exclusive
license and shall receive a sales commission fee and manufacturing
surcharges.
(4) For the 20 year period, if the Company returns to the issuance of
exclusive licenses in any of the original areas of license covered by
the cancelled agreements, Protek will have the right to acquire an
exclusive license in such field of license, subject to non-exclusive
licenses previously granted.
For more information regarding the Protek Agreement, see Exhibit 6.04 attached
hereto.
In the last quarter of 1998, the Company entered into an exclusive
licensing agreement with Revolution with a term expiring in January 2014 (the
"Revolution Agreement"). Revolution and Protek have entered into an agreement
that provides that Protek may acquire Revolution's rights under this license,
subject to Protek's obtaining adequate financing for such purchase. Pertaining
to the field of FAA-controlled airport and airline employee security and
identification systems, the license was granted for a fee of $500,000, payment
of which is subject to delivery of a biometric fingerprint recognition card
incorporating the Technology at a cost of less than $20 per card. The license
also includes an agreement for on-going royalty payments to the Company of 6% of
Revolution's gross product sales. The Company considers this license to be
within a narrow and definable field so as to cause no material problems for the
Company's new, non-exclusive licensing system. The $500,000 license fee has not
Been paid to date. For more information regarding the Revolution Agreement, see
Exhibit 6.03 attached hereto.
In February 1999, the Company granted to Power^Up an exclusive license (the
"Power^Up Agreement") to use the Technology in connection with identification,
access and security cards, associated systems and equipment of whatever type
used in the hotel security industry, including hotel door locking devices,
in-room safes, mini bars and all associated security systems worldwide. The
initial term of the license is twenty (20) years. The license was granted for an
initial fee of $25,000, and an additional fee of $350,000 will be due upon
delivery and acceptance of a first working prototype. The license also includes
an agreement for on-going royalty payments to the Company of 6% of Power^Up's
gross product sales. The Company considers this license to be within a narrow
and definable field so as to cause no material problems for the Company's new,
non-exclusive licensing system. The $350,000 fee has not been paid to date. For
more information regarding the Power^Up Agreement, see Exhibit 6.05 attached
hereto.
In October 1999, the Company granted to BrentScott an exclusive license
(the "BrentScott Agreement") to use the Technology in connection with
identification, access and security cards, associated systems and equipment of
whatever type for all fields of use (except fields of use already subject to
license) within the member States of the Gulf Cooperation Counsel States
in the Middle East, consisting of the Kingdom of Saudi Arabia, Kuwait,
Bahrain, U.A.E., Oman and Qatar. The initial term of the license is three (3)
years and may be renewed for sequential one (1) year periods for a renewal
fee of $10,000 per year. The license was granted for an initial fee of $25,000,
paid and payable as follows: $2,000 upon execution of the agreement and $23,000
payable within ten (10) days after BrentScott's receipt of a functioning/
demonstrable and stand-alone operational product. Pursuant to the terms of
the license, the Company does not collect a royalty from BrentScott, but
instead collects a surcharge from authorized manufacturers from whom
BrentScott must purchase the finished products. For more information
regarding the BrentScott Agreement, see Exhibit 6.01 attached hereto.
RESEARCH AND DEVELOPMENT
The Company has spent considerable management time on the development of
the Technology over the last three years; however, pursuant to the IRE
Agreement, IRE is responsible for research and development with respect to the
Technology. IRE has expended over $500,000 in engineering development costs
from July 1997 to December 1999 on the development of the current DCC prototype.
Pursuant to the IRE Agreement, IRE is currently responsible for developing the
Technology for its intended uses. The Company has entered into negotiations with
IRE with respect to taking over and completing such development. Although the
IRE Agreement provides that IRE must proceed diligently to develop the
technology, the Company is not prohibited from engaging in its own research and
development. However, there can be no assurances that the Company will have the
financial resources or ability to conduct such research and development.
Furthermore, there can be no assurance that the Company will (or will have the
resources to) enforce IRE's contractual obligation if IRE ceases its research
and development activities. IRE has also taken the position in its negotiations
with the Company that the Company is not entitled to access, possession or
ownership of the development work-product to date unless the Company makes
additional financial concessions to IRE. If the negotiations with IRE are
successful, the Company would expect to take over such development by mid-2000,
and the Company expects that an additional $2,000,000 in capital will be
required and that two engineers would be engaged to implement the development.
EMPLOYEES
As of December 31, 1999, the Company engaged two full-time employees, four
part-time employees and twelve independent contractors. Both full-time employees
are involved in administrative and finance matters, and the four part-time
employees assist the full-time employees with administrative and finance
matters. The independent contractors are engaged primarily in marketing and
sales of licenses of the Technology.
REPORTS TO SECURITY HOLDERS
Prior to the filing of a Form 10-SB registration statement which became
effective December 13, 1999, the Company was not subject to the reporting
requirements of Section 13(a) or 15(d) of the Exchange Act. Upon effectiveness
of that registration statement, the Company now files annual and quarterly
reports with the Securities and Exchange Commission ("SEC"). The public may read
and copy any materials filed by the Company with the SEC at the SEC's Public
Reference Room at 150 Fifth Street, N.W., Washington, D.C. 20549. The public
may obtain information on the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330. The Company is an electronic filer and the SEC
maintains an Internet site that contains reports and other information regarding
the Company which may be viewed at http://www.sec.gov.
CERTAIN ADDITIONAL CONSIDERATIONS
In addition to the other information presented herein, the following
information should be considered carefully in evaluating the Company and its
business.
Lack of Profits and Going Concern. The Company has yet to generate any
significant revenues or profits and, for the years ended December 31, 1998 and
1999, the Company incurred net losses of $1,426,725 and $939,741 respectively.
The Company anticipates that net losses will continue for the foreseeable
future. There can be no assurance that the Company will be able to generate
significant revenues or operate successfully. The report of the Company's
independent certified public accountants on the Company's audited financial
statements includes an additional paragraph which refers to uncertainties as to
the Company's ability to continue to operate as a going concern.
Development Stage Company. The Company is in its development stage and has
no commercial products. Further, the Company will face the same challenges
experienced by other development stage companies, including, but not limited to,
developing market acceptance for its proposed products.
Technology. The Company owns the Technology, subject to the licenses which
The Company has already granted (see LICENSING AND LICENSE AGREEMENTS, above).
Accordingly, the Company does not have complete rights to exploit the Technology
in all markets. The success of the Company, therefore, will depend upon
collection of royalties, fees and manufacturing surcharges from its licensees
and manufacturers of products containing the Technology, and its ability to sell
licenses in other markets. Furthermore, to date, the Company has depended on IRE
for research and development of the Technology. The Company has initiated
discussions with IRE regarding taking over further development of the
Technology. If the Company is not successful in such negotiations, or cannot
reach mutually acceptable terms with IRE, the Company would have to engage in
research and development without the benefit of the materials and work performed
by IRE. If the Company is successful in such negotiations, there can be no
assurance that the Company will have the technical ability or financial
resources to successfully develop the Technology.
Limited Sales and Marketing; Market Acceptance. The Company has recently
begun developing its licensing, marketing and distribution system. However,
there can be no assurance that such efforts will be successful or that the
Company will be able to attract and retain qualified individuals with marketing
and sales expertise. The Company's future success will depend, among other
factors, upon the extent to which end users acquire, adopt and continue to use
the Company's products. There can be no assurance that the Company's products
will gain wide acceptance.
Changes in Technology. The Company's industry is subject to rapid
Technological change and intense competition and the Company's products could
become subject to technological obsolescence. There can be no assurance that the
Company will be able to keep pace with the changing technology. If the Company
is unable for technological or other reasons to develop products on a timely
basis in response to technological changes, or if the Company's products or
product enhancements do not achieve market acceptance, the Company's business
would be materially and adversely affected.
Need for Additional Funds. The Company expects that it will need to raise
substantial additional capital to fund the ongoing development and expansion of
its business, including its research, development, marketing and sales efforts,
and to attain profitability. There is no assurance that any additional funds
needed will be available to the Company on favorable terms, or at all. Although
based on assumptions that the Company considers reasonable, there is also no
assurance that the Company's estimate of its anticipated liquidity needs is
accurate or that new business developments or other unforeseen events will not
occur, resulting in the need to raise additional funds. In addition, it is
probable that raising additional funds will result in a substantial dilution to
the Company's existing investors.
Competition. The Company is engaged in a rapidly evolving field. Competition
from other companies is intense and expected to increase. Many of the Company's
competitors have substantially greater resources, research and development
staffs, sales and marketing staffs, and facilities than does the Company. In
addition, other recently developed technologies are, or may in the future be,
the basis of competitive products. There can be no assurance that the Company's
competitors will not develop technologies and products that are more effective
than those being developed by the Company or that would render the Company's
technology and products obsolete or noncompetitive.
Dependence on Key Personnel. The Company's operations are materially
Dependent upon the services of Mr. J. Phillips L. Johnston, the President and
CEO of the Company, and Mr. William F. Lane, the Chairman, Treasurer and
founder of the Company. The loss of the services of either of these individuals
could have a material adverse effect on the Company. There can be no
assurance that the Company will retain Mr. Johnston or Mr. Lane in its employ,
or that it will successfully attract and retain additional or replacement
personnel with the requisite experience and capabilities to enable the Company
to profitably and effectively evaluate, develop and market the Technology. The
Company expects to secure a term life insurance policy on the life of Mr.
Johnston in the amount of $500,000 (payable to the Company) when adequate
funding is completed in mid-2000.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's principal offices are located on North Carolina State
University's Centennial Campus at 920 Main Campus Drive, Suite 400, Raleigh,
North Carolina 27606. These offices contain approximately 500 square feet and
are leased on a month-to-month basis. The Company also maintains an office in
Wilson, North Carolina at 2506 West Nash Street, Suite C, Wilson, North Carolina
27896. This lease is for approximately 150 square feet and is also on a
month-to-month basis. The Company's aggregate monthly rent obligation is $700.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not involved in any material pending legal proceeding
adverse to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1999.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock is listed on the Over the Counter Bulletin Board
("OTCBB") under the symbol "IDTK." Although quotations for the Company's common
stock appear on the OTCBB, there is no established trading market for the
Company's common stock. For the past calendar year and from December 31, 1998
to the present, transactions in the common stock can only be described as
sporadic. Consequently, the Company believes that any published prices cannot
be attributed to a liquid and active trading market and, therefore, are not
indicative of any meaningful market value.
The following table sets forth for the respective periods indicated, the
prices of the Company's common stock in the over-the-counter market, as reported
and summarized by the OTCBB. Such prices are based on inter-dealer bid and asked
prices, without markup, markdown, commissions or adjustments and may not
represent actual transactions.
<TABLE>
<CAPTION>
Calendar Quarter Ended High Bid ($) Low Bid ($)
- ---------------------- ----------- -----------
<S> <C> <C>
June 30, 1998. . . . . 5.500 1.500
September 30, 1998 . . 4.000 1.938
December 31, 1998. . . 3.250 1.125
March 31, 1999 . . . . 2.750 1.063
June 30, 1999. . . . . 3.500 1.188
September 30, 1999 . . 2.000 0.875
December 31, 1999. . . 0.750 0.531
</TABLE>
The Company's common stock is subject to the provisions of Section 15(g)
and Rule 15g-9 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), commonly referred to as the "penny stock" rule. Section 15(g) sets forth
certain requirements for transactions in penny stocks and Rule 15g-9(d)(1)
incorporates the definition of penny stock as that used in Rule 3a51-1 of the
Exchange Act.
The Commission generally defines a penny stock to be any equity security
That has a market price less than $5.00 per share, subject to certain
exceptions. Rule 3a51-1 provides that any equity security is considered to be a
penny stock unless that security is: registered and traded on a national
securities exchange meeting specified criteria set by the Commission;
authorized for quotation on The NASDAQ Stock Market; issued by a registered
investment company; excluded from the definition on the basis of price (at least
$5.00 per share) or the issuer's net tangible assets; or exempted from
the definition by the Commission. If the Company's shares are deemed to be
a penny stock, which at this time they are, trading in the shares will be
subject to additional sales practice requirements on broker-dealers who sell
penny stocks to persons other than established customers and accredited
investors, generally persons with assets in excess of $1,000,000 or annual
income exceeding $200,000, or $300,000 together with their spouse.
For transactions covered by these rules, broker-dealers must make a special
suitability determination for the purchase of such securities and must have
received the purchaser's written consent to the transaction prior to the
purchase. Additionally, for any transaction involving a penny stock, unless
exempt, the rules require the delivery, prior to the first transaction, of a
risk disclosure document relating to the penny stock market. A broker-dealer
also must disclose the commissions payable to both the broker-dealer and the
registered representative, and current quotations for the securities. Finally,
the monthly statements must be sent disclosing recent price information for the
penny stocks held in the account and information on the limited market in penny
stocks. Consequently, these rules may restrict the ability of broker dealers to
trade and/or maintain a market in the Company's common stock and may affect the
ability of shareholders to sell their shares.
As of December 31, 1999, there were 213 holders of record of the Company's
common stock.
The Company has not declared or paid cash dividends or made distributions
in the past, and the Company does not anticipate that it will pay cash dividends
or make distributions in the foreseeable future. The Company currently intends
to retain and reinvest future earnings, if any, to finance its operations.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS.
The Company is engaged in the development of biometric technologies,
know-how, and products for licensing worldwide. The Company holds the patent
for a card, panel, or substrate allowing "on-board" storage and authentication
(identification) of fingerprints with a frontier biometric market size estimated
to be 1/10 trillion dollars. The applications of this technology are many and
varied: from welfare cards to loyalty/medical records/personal information
cards to controlling firearms by one user.
The development and production of this biometric breakthrough is managed by
the Company's scientific partner IRE of Baltimore, Maryland. IRE is a leading
provider of network and internet security systems and technologies. IRE is a
13.7% Company shareholder and holds a Company license with rights to the
internet, computer network, banking and treasury fields worldwide.
A prototype card has just been completed, as well as a comprehensive
manufacturing plan to build a single-chip production card at a cost below $20.
The non-recurring engineering cost (NRE) will be paid by IRE to the production
card maker for a single-chip card at a cost of approximately $1,700,000.
Presently, the Company has initial licenses in place with IRE, Protek,
Power^Up, BrentScott and Revolution, which are expected to yield $1.46 million
in initial license fees when card production begins. Production is expected to
begin in 2000 or 2001.
The Company believes it has to be the first-to-market leader with the
following competitive advantages:
- - A biometric fingerprint card with storage and a power source (lithium
battery) on board.
- - A biometric fingerprint card not requiring an independent power source.
- - A biometric fingerprint card safe-guarding personal privacy (a government
or corporate-based database system is unnecessary).
- - A biometric fingerprint card with 160 m.p.s of computing power (the power
of a Newton computer).
The biometric fingerprint card is essentially a standalone computer on a card
protected by the Lane foundation patent: United States Patent Number 5,623,552
issued on April 22, 1997.
The Company has been a developmental-stage company with nominal revenues
since its inception. Losses were $1,684,313 in 1997, $1,426,725 in 1998, and
$939,741 in 1999.
As of March 2000, the Company has depleted its cash. In fact, the CEO has
lent the company $15,000 in March 2000 and intends to lend $20,000 in April
2000. The Company believes it needs to raise $1,500,000 and is considering
several options for obtaining this additional capital.
Currently, the Company has an operating cost burn rate of $400,000 per
year. However, the Company plans to engage an identified quality, engineering
firm to develop different form, factors, and applications with software, such as
passports, time and attendance, and proximity cards. Management believes this
can be accomplished in one year at a cost of less than $600,000. However, there
is no assurance that $1,500,000 can be raised or that this amount of capital is
sufficient to operate the Company until it obtains sufficient revenues to
sustain operations. Furthermore, there is no assurance that a new engineering
firm can meet the time or cost budget, either on new hardware or software.
With our policy of contracting out development and concentrating on
licensing of our intellectual property, the Company does not plan to purchase
any equipment or buy or rent plant(s) in the next year. Nonetheless, when and
if the $1,500,000 is raised, the Company intends to hire a high-level engineer
to oversee our multi-development card projects and assist our licensees with
their particular biometric applications.
RESULTS OF OPERATIONS
The following discussion provides an analysis of the Company's results of
operations and liquidity and capital resources. This should be read in
conjunction with the financial statements of the Company and notes thereto. The
operating results of the years presented were not significantly affected by
inflation.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31: 1999 1998
---------- ------------
<S> <C> <C>
Revenue. . . . . . . . . . . . . . . $ 2,000 $ 50,000
Operating Expenses:
Research and development. . . . . . 269,441 192,319
Selling, general and administrative 580,588 1,284,904
---------- ------------
Operating Losses . . . . . . . . . . (848,029) (1,427,223)
Other income (expense) net:. . . . . (91,712) 498
---------- ------------
Net Loss . . . . . . . . . . . . . . $(939,741) $(1,426,725)
========== ============
</TABLE>
COMPARISON OF YEARS ENDED DECEMBER 31, 1999 AND 1998:
License revenue for both 1999 and 1998 were nominal and not significant.
License fee payments were predicated primarily on a $20 cost biometric
fingerprint production card. Royalty payments are predicated on the sale
of the cards to end users by licensees. There have been no royalty payments.
The research and development expenses are a non-cash entry in both years
which mirrors exactly IRE's research and development cash expenses for the
development of the biometric fingerprint card. IRE's research and development
cost for the card was $269,441 for 1999 and $192,319 for 1998.
Selling, general, and administrative expenses during 1999 were $580,588,
down 54.8% from the 1998 expense of $1,284,904 due to the Company's efforts to
reduce these costs.
Net interest expense was $91,712 in 2000 versus $498 in 1999 as a result of
interest of 12% on $185,000 convertible debentures issued in mid-1999 and 8%
interest on $300,000 convertible debentures issued in September 1999.
Additional interest expense in 1999 related to the discount amortization on
stock options and warrants associated with the aforementioned debt issuances.
The Company's loss for 1999 was $939,741, down 34.1% from the Company's
1998 loss of $1,426,725, due primarily to the Company's significant reduction in
selling, general and administrative expenses.
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997:
License revenue for both 1998 and 1997 were nominal and not significant.
License fee payments were predicated primarily on a $20 cost biometric
fingerprint production card. Royalty payments are predicated on the sale of the
cards to end users by licensees. There have been no royalty payments.
The research and development expenses are a non-cash entry in both years
which exactly mirrors IRE's research and development cash expenses for the
development of the biometric fingerprint card. IRE's research and development
cost for the card was $192,319 for 1998 and $201,405 for 1997.
Selling, general and administrative expenses during 1998 were $1,284,904,
down 15.6% from the 1997 expense of $1,522,405 due to the Company's efforts to
reduce these costs.
The Company's loss for 1998 was $1,426,725, down 15.3% from the Company's
1997 loss of $1,684,313, due primarily to the Company's efforts to reduce
selling, general and administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company raised $485,000 in 1999. A majority of the money raised was
paid to bring payables current. The Company's current cash requirements are
$35,000 per month excluding the approximately $100,000 in payables outstanding
as of March 15, 2000. As indicated above, the Company will need to raise
capital of $500,000 to allow the Company to operate for the calendar year 2000.
There is no assurance that any capital can be raised. CEO Phil Johnston lent
The Company $15,000 in March 2000 and plans to lend the Company $25,000
in April 2000.
The Company has no bank credit lines or any likelihood of servicing any
bank credit until profitable.
ITEM 7. FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
Page No.
--------
<S> <C>
Report of Independent Auditors. . . . . . . . . . F-1
Balance Sheets as of December 31, 1999 and 1998. . F-2
Statements of Operations for the period from
March 16, 1994 (date of inception) through
December 31, 1999 . . . . . . . . . . . . . . . F-3
Statements of Shareholder's Equity for the period
(Deficit) from March 16, 1994 (date of inception)
through December 31, 1999 . . . . . . . . . . . F-4
Statements of Cash Flows for the period from
March 16, 1994 (date of inception) through
December 31, 1999 . . . . . . . . . . . . . . . F-5
Notes to Financial Statements . . . . . . . . . . F-6
</TABLE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
ID Technologies Corporation
We have audited the accompanying balance sheet of ID Technologies Corporation (a
development stage company) as of December 31, 1999, and the related statements
of operations, shareholders' deficit and cash flows for the year ended December
31, 1999. These financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The financial statements of ID
Technologies for the year ended December 31, 1998 and the period from inception
(March 16, 1994) through December 31, 1998 were audited by other auditors whose
report, dated August 26, 1999, included an explanatory paragraph regarding the
Corporation's ability to continue as a going concern.
We conducted our audit 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 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
audit provides a reasonable basis for our opinion.
In our opinion, the 1999 financial statements referred to above present fairly,
in all material respects, the financial position of ID Technologies Corporation
(a development stage company) at December 31, 1999 and in results of its
operations and its cash flows for the year ended December 31, 1999 in conformity
with accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Corporation will continue as a going concern. As more fully described in Note
1, the Corporation is a development stage company, has not yet generated
sustainable revenues, has suffered recurring losses from operations, has a
working capital deficit, and has a net capital deficiency that raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 1. The financial statements
do not include any adjustments that may result from the outcome of this
uncertainty.
ERNST & YOUNG LLP
Raleigh, North Carolina
March 13, 2000
F-1
ID Technologies Corporation
(A Development Stage Company)
<TABLE>
<CAPTION>
Balance Sheets
December 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . $ 62,986 $ 8,254
Notes receivable. . . . . . . . . . . . . . . . . . . . . . . 3,270 13,270
Prepaid expenses. . . . . . . . . . . . . . . . . . . . . . . 150 150
------------ ------------
Total current assets. . . . . . . . . . . . . . . . . . . . . 66,406 21,674
Equipment, net. . . . . . . . . . . . . . . . . . . . . . . . 1,884 1,174
Intangible assets, net. . . . . . . . . . . . . . . . . . . . 17,562 21,537
------------ ------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . $ 85,852 $ 44,385
=========== ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities. . . . . . . . . . . $ 122,260 $ 61,612
Note payable to shareholder . . . . . . . . . . . . . . . . . - 42,750
Convertible debt, net of discount of $171,000 . . . . . . . . 129,000 -
------------ ------------
Total current liabilities . . . . . . . . . . . . . . . . . . 251,260 104,362
Long-term convertible debt, net of discount of $34,166. . . . 150,834 -
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . 93,000 93,000
Commitments and contingencies (Note 13)
Shareholders' deficit:
Series A preferred stock, $.001 par value; 300,000 shares
authorized; no shares issued and outstanding at December 31,
1999 and 1998 . . . . . . . . . . . . . . . . . . . . . . . . - -
Common stock, no par value, 50,000,000 shares authorized,
8,277,583 and 8,175,833 shares issued and outstanding at
December 31, 1999 and 1998, respectively. . . . . . . . . . . 282,953 282,953
Additional paid-in-capital. . . . . . . . . . . . . . . . . . 3,390,859 2,707,383
Deficit accumulated during the development stage. . . . . . . (4,083,054) (3,143,313)
------------ ------------
Total shareholders' deficit . . . . . . . . . . . . . . . . . (409,242) (152,977)
------------ ------------
Total liabilities and shareholders' deficit . . . . . . . . . $ 85,852 $ 44,385
=========== ============
</TABLE>
See accompanying notes.
F-2
ID Technologies Corporation
(A Development Stage Company)
<TABLE>
<CAPTION>
Statements of Operations
PERIOD FROM
INCEPTION
(MARCH 16,
1994) THROUGH
DECEMBER 31,
1999 1998 1999
----------- ------------ ---------------
<S> <C> <C> <C>
License revenue. . . . . . . . . . . . . $ 2,000 $ 50,000 $ 92,000
Operating expenses:
Research and development . . . . . . . . 269,441 192,319 663,668
Selling, general and administrative. . . 580,588 1,284,904 3,420,122
Loss from operations . . . . . . . . . . (848,029) (1,427,223) 3,991,840
----------- ------------ ---------------
Other income (expense):
Interest income - contractual. . . . . . 1,000 1,157 2,157
Amortization of debt discount on
convertible debentures . . . . . . . . . (66,704) - (66,704)
Interest expense . . . . . . . . . . . . (26,008) (659) (26,667)
(91,712) 498 (91,214)
----------- ------------ ---------------
Net loss . . . . . . . . . . . . . . . . $ (939,741) $(1,426,725) $ (4,083,054)
----------- ------------ ---------------
Basic and diluted per common stock . . . $ (.11) $ (.17)
Weighted average number of common shares
outstanding . . . . . . . . . . . . . . 8,226,854 8,164,583
========== ==========
</TABLE>
See accompanying notes.
F-3
ID Technologies Corporation
(A Development Stage Company)
<TABLE>
<CAPTION>
Statements of Shareholders' Equity (Deficit)
Period from inception (March 16, 1994) through December 31, 1999
DEFICIT
ADDITIONAL ACCUMULATED
PAID-IN DURING
SHARES AMOUNT CAPITAL DEVELOPMENT TOTAL
--------- -------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Balance at March 16, 1994. . . . . . . . . . . . - - - - -
Issuance of common shares for cash and noncash
consideration. . . . . . . . . . . . . . . . . 1,595,200 366 33 - 399
Net loss . . . . . . . . . . . . . . . . . . . . - - - (123) (123)
--------- -------- ----------- ------------- ------------
Balance at December 31, 1994 . . . . . . . . . . 1,595,200 366 33 (123) 276
Issuance of common shares for noncash
consideration. . . . . . . . . . . . . . . . . 404,800 - 101 - 101
Net loss . . . . . . . . . . . . . . . . . . . . - - - (2,263) (2,263)
--------- -------- ----------- ------------- ------------
Balance at December 31, 1995 . . . . . . . . . . 2,000,000 366 134 (2,386) (1,886)
Issuance of common shares for cash and noncash
consideration. . . . . . . . . . . . . . . . . 6,000,000 - 1,500 - 1,500
Net loss . . . . . . . . . . . . . . . . . . . . - - - (29,889) (29,889)
--------- -------- ----------- ------------- ------------
Balance at December 31, 1996 . . . . . . . . . . 8,000,000 366 1,634 (32,275) (30,275)
Issuance of common shares for cash, net of
issuance costs . . . . . . . . . . . . . . . . 153,333 282,587 - - 282,587
Capital contribution in form of research and
development services . . . . . . . . . . . . . . - - 201,405 - 201,405
Stock-based compensation . . . . . . . . . . . . - - 1,333,600 - 1,333,600
Net loss . . . . . . . . . . . . . . . . . . . . - - - (1,684,313) (1,684,313)
--------- -------- ----------- ------------- ------------
Balance at December 31, 1997 . . . . . . . . . . 8,153,333 282,953 1,536,639 (1,716,588) 103,004
Issuance of common shares for noncash
consideration. . . . . . . . . . . . . . . . . . 22,500 - 45,000 - 45,000
Capital contribution in form of research and
development services . . . . . . . . . . . . . . - - 192,319 - 192,319
Stock-based compensation . . . . . . . . . . . . - - 933,425 - 933,425
Net loss . . . . . . . . . . . . . . . . . . . . - - - (1,426,725) (1,426,725)
--------- -------- ----------- ------------- ------------
Balance at December 31, 1998 . . . . . . . . . . 8,175,833 282,953 2,707,383 (3,143,313) (152,977)
Issuance of warrants in connection with issuance
of convertible debt. . . . . . . . . . . . . . - - 271,870 - 271,870
Capital contribution in form of research and
development services . . . . . . . . . . . . . - - 269,441 - 269,441
Issuance of common shares for noncash
consideration. . . . . . . . . . . . . . . . . 101,750 - 142,165 - 142,165
Net loss . . . . . . . . . . . . . . . . . . . . - - - (939,741) (939,741)
--------- -------- ----------- ------------- ------------
Balance at December 31, 1999 . . . . . . . . . . 8,277,583 $282,953 $ 3,390,859 $ (4,083,054) $ (409,242)
========= ======== =========== ============= ============
</TABLE>
See accompanying notes.
F-4
ID Technologies Corporation
(A Development Stage Company)
<TABLE>
<CAPTION>
Statements of Cash Flows
PERIOD FROM
INCEPTION
(MARCH 16,
1994) THROUGH
DECEMBER 31,
1999 1998 1999
---------- ------------ ---------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss. . . . . . . . . . . . . . . . . . . . . . . $(939,741) $(1,426,725) $ (4,083,054)
Adjustments to reconcile net loss to net cash used in
operation activities:
Depreciation. . . . . . . . . . . . . . . . . . . . 930 377 1,391
Amortization. . . . . . . . . . . . . . . . . . . . 3,975 4,085 10,341
Deferred revenue. . . . . . . . . . . . . . . . . . - 75,000 93,000
Stock-based compensation. . . . . . . . . . . . . . - 933,425 2,267,025
Noncash marketing expenses. . . . . . . . . . . . . 4,165 45,000 49,165
Noncash research and development expenses . . . . . 269,441 192,319 664,794
Noncash professional fees . . . . . . . . . . . . . 138,000 - 138,000
Discount on convertible debenture . . . . . . . . . 66,704 - 66,704
Change in operating assets and liabilities:
Notes receivable. . . . . . . . . . . . . . . . . 10,000 (10,270) (3,270)
Prepaid expenses. . . . . . . . . . . . . . . . . - 1,500 (150)
Accounts payable and accrued liabilities. . . . . 60,648 10,597 122,260
---------- ------------ ---------------
Net cash used in operating activities . . . . . . . . (385,878) (174,692) (673,794)
INVESTING ACTIVITIES
Patent costs. . . . . . . . . . . . . . . . . . . . . - - (27,903)
Purchase of equipment . . . . . . . . . . . . . . . . (1,640) (1,216) (3,275)
---------- ------------ ---------------
Net cash used in investing activities . . . . . . . . (1,640) (1,126) (31,178)
FINANCING ACTIVITIES
Proceeds from issuance of note payable to shareholder 45,000 42,750 102,750
Payment of note payable to shareholder. . . . . . . . (87,750) - (102,750)
Proceeds from issuance of convertible debt. . . . . . 565,000 - 565,000
Payment on convertible debt . . . . . . . . . . . . . (80,000) - (80,000)
Proceeds from issuance of common shares, net. . . . . - - 282,958
Net cash provided by financing activities . . . . . . 442,250 42,750 767,958
---------- ------------ ---------------
Increase (decrease) in cash and cash equivalents. . . 54,732 (133,158) 62,986
Cash and cash equivalents, beginning of period. . . . 8,254 141,412 -
---------- ------------ ---------------
Cash and cash equivalents, end of period. . . . . . . $ 62,986 $ 8,254 $ 62,986
---------- ------------ ---------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest. . . . . . . $ 4,808 $ 659 $ 5,467
========== =========== ==============
</TABLE>
See accompanying notes.
F-5
1. NATURE OF BUSINESS
BACKGROUND
ID Technologies Corporation (the "Company") is a development stage company
incorporated in North Carolina on March 16, 1994. The Company was formed to
develop and commercialize certain technologies allowing for self-authenticating
fingerprint identification and transmission and signaling devices housed
together in a microelectronic panel suitable for, but not limited to, the
confines of a credit card.
STATUS OF DEVELOPMENT
During the period from inception to December 1996, the Company focused on
obtaining a patent for its proposed technology. In December 1996, the Company
received the Notice of Allowance from the United States Patent Office for
issuance of its patent. Since December 1996, the Company has outsourced its
research and development efforts to Information Resource Engineering, Inc.
("IRE"). The Company, in conjunction with IRE, a significant shareholder of the
Company, has developed a computer assisted version of a prototype card.
The Company incurred a net loss of $939,741 for the year ended December 31, 1999
and had an accumulated deficit of $4,083,054 at December 31, 1999. The Company
has yet to generate any significant revenues and has no assurance of future
revenues. Even if successful, substantial time may pass before significant
revenues might be realized. As a development stage enterprise, the Company is
also subject to a number of risks including obtaining adequate financing,
successfully developing and marketing its technologies, successfully defending
its rights under the patent, and attracting and retaining key personnel. These
factors among others raise substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments relating to the recoverability and classification of assets or
liabilities that might be necessary should the Company be unable to continue as
a going concern.
Management plans to obtain the capital necessary to execute its business plan
through several sources, which include (1) the sale of additional licenses of
the Company's fingerprint identification technology, (2) obtaining venture
capital financing and (3) obtaining debt financing. Management expects that
these efforts will result in the introduction of additional capital to the
Company. There is no assurance that the Company will be able to raise
sufficient capital or find a sufficient number of purchasers of its licenses to
fund the future operating expenses of the Company and the inability to obtain
such financing would have a material adverse effect on the Company.
F-6
2. SUMMARY OF 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 amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers highly liquid, short-term investments with a maturity of
three months or less when purchased to be cash equivalents.
EQUIPMENT
Equipment is recorded at cost and is being depreciated on a straight-line basis
over its estimated useful life of three years. Accumulated depreciation totaled
$1,392 and $461 at December 31, 1999 and 1998, respectively.
INTANGIBLE ASSETS
In filing its patent, the Company incurred direct legal costs in the amount of
$27,903 which it capitalized. The patent costs are being amortized on a
straight-line basis over seven years, the estimated economic life of the patent.
Accumulated amortization at December 31, 1999 and 1998 was $10,341 and $6,366,
respectively.
INCOME TAXES
The Company accounts for income taxes using the liability method which requires
the recognition of deferred tax assets or liabilities for the temporary
differences between financial reporting and tax basis of the Company's assets
and liabilities and tax carryforwards. A valuation allowance is recorded to
reduce net deferred tax assets to an amount which management believes is more
likely than not to be realized.
F-7
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOSS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earning per Share, ("FAS 128"). FAS 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously expected fully dilutive
earnings per share. All loss per share amounts for all periods have been
presented to conform to FAS 128. Due to the net losses for each of the two
years presented, stock options, warrants and convertible debentures are
considered antidilutive and therefore have not been included in the computation.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB
25"). No compensation is recorded for stock options or other stock-based awards
to employees that are granted with an exercise price equal to or above the
estimated fair value per share of the Company's common stock on the grant date.
The pro forma affect of recording stock-based compensation at the estimated fair
value of awards on the grant date, as prescribed by Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation ("FAS
123"), is disclosed in Note 8.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. The Company incurred
advertising expense of $102,400 and $118,323 for the years ended December 31,
1999 and 1998, respectively.
REVENUE RECOGNITION
The Company recognizes revenue from the licensing of its technology as well as
from the associated royalties. Licensing revenue is recognized based on the
specific terms of each agreement. Royalty revenue is recognized as earned
pursuant to the applicable royalty agreement.
F-8
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income ("FAS
130"). FAS 130 requires that total comprehensive income and comprehensive
income per share be disclosed with equal prominence as net income and earnings
per share. Comprehensive income is defined as stockholders' equity exclusive of
transactions with owners such as capital contributions and dividends. The
Company adopted this Standard in 1998. The Company did not report any items of
other comprehensive income in any of the years presented.
SEGMENT REPORTING
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, Disclosure about Segments of an Enterprise and Related
Information ("FAS 131"), which superceded Statement of Financial Accounting
Standards No. 14, Financial Reporting for Segments of Business Enterprise. FAS
131 establishes standards for the public reporting of information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports. Since the Company only operates in one segment, the adoption
of FAS 131 did not affect the Company's net loss or financial position.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("FAS 133"). FAS 133 establishes a new model for
accounting for derivatives and hedging activities and supercedes several
existing standards. FAS 133, as amended by FAS 137, is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. The Company does not
expect that the adoption of FAS 133 will have a material impact on the financial
statements.
F-9
3. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK
In 1999 and 1998, two customers accounted for all of the Company's license
revenue. The Company had no outstanding accounts receivable from either
customer at December 31, 1999 and 1998.
4. DEFERRED REVENUE
In 1998, the Company entered into three exclusive license agreements and
received an aggregate of $75,000 in license fees upon the execution of these
agreements. In accordance with the terms of the three exclusive license
agreements, which include additional obligations on the part of the Company, the
$75,000 was recorded as deferred revenue at December 31, 1998. On March 30,
1999, the Company entered into a nonexclusive license agreement with Protective
Technologies, Inc. ("Protek") (see Notes 12 and 15). In conjunction with this
new agreement, the three exclusive license agreements were terminated, and
Protek assumed the $75,000 license fee deposit.
In 1998, the Company received $18,000 from potential licensees as deposits on
options to acquire certain license rights. These amounts are reflected as
deferred revenue in the accompanying balance sheets until such time as the
Company enters into binding agreements with the potential licensees, and
completes development of the licensed technology and delivers such to the
licensees.
F-10
5. CONVERTIBLE DEBENTURES AND WARRANTS
In April 1999, the Company issued $185,000 of unsecured, subordinated
debentures that mature April 2002 at 12% annual interest. The Company may
redeem the debentures at any time, provided that it gives at least thirty days
prior written notice to the debenture holders, during which period the debenture
holders may elect instead to convert the outstanding principal amount and
accrued and unpaid interest into the Company's common stock at $2.00 per share,
including accrued interest, which is subject to adjustments for changes in
capital stock, including dividends. In the event of an acquisition, merger or
new public offering, the debentures will be converted at the option of the
Company at $2.50 per share or greater. If notice of redemption has not occurred
by the maturity date, the debentures may be converted at any time between the
Company's notice of maturity (which will occur at least 30 days but not more
than 60 days before the maturity date) and the business day immediately
proceeding the maturity date. The debentures carry a three year option,
exercisable immediately, to buy 37,000 shares of the Company's common stock, or
one option for every $5.00 of principal held, at an exercise price of $2.75 per
share. The estimated value of these options, $43,870, has been recorded as a
debt discount and additional paid-in capital.
In September 1999, the Company issued $300,000 of unsecured debentures that
mature September 2000 at 8% annual interest. The debenture holder may convert
the debenture into shares of the Company's Series A Preferred Stock at $2.00 per
share, which is subject to adjustments for changes in capital stock, including
dividends, at any time upon receipt of notice from the Company of its intent to
prepay the debenture or upon a merger, change of ownership of greater than 50%,
sale of assets, or an initial public offering.
F-11
5. CONVERTIBLE DEBENTURES AND WARRANTS (CONTINUED)
In connection with the issuance of the $300,000 debentures, the Company issued
various detachable warrants to purchase shares of the Company's common stock, as
follows:
<TABLE>
<CAPTION>
TITLE OF NUMBER PURCHASE PRICE VESTING
WARRANT OF SHARES PER WARRANT SHARE PERIOD
- -------- ----------------- -------------------------------- ----------------------------
<S> <C> <C> <C>
WC-1 450,000 0.30 to $5.00 (increasing 1-10 years
. . sliding scale over 10 years)
WC-2 . . 150,000 $ 0.01 Immediately
WC-3 . . 200,000 $ 0.50 Immediately
WC-4 Fair market value (based on Exercisable only if certain
Variable, up to most recent financing by events occur, including a
$500,000 worth of institutional investors or, if merger, sale of assets,
common stock none within prior 12 months, change of ownership, or
as determined by third-party qualified public offering of
valuation expert) the Company
</TABLE>
The warrants expire September 24, 2009. Each warrant is subject to full-ratchet
anti-dilution protection. Furthermore, the holder may exercise each warrant and
receive shares of common stock without the payment of any additional
consideration to the Company based on the value of the warrant as determined in
accordance with the formula set forth in each warrant. The Company has granted
the holder certain demand and piggy-back registration rights to register shares
of the Company's common stock received upon conversion of the debentures or upon
exercise of the warrants. The estimated value of these warrants, $228,000, has
been recorded as a debt discount and additional paid-in capital.
In 1996, the Company issued warrants to a law firm, in exchange for legal
services, which entitled the holders to acquire 80,000 shares of common stock at
a price of $5 per share. The warrants immediately vested and expire in 2001.
Management believed the fair value of these warrants on the date of the grant
was nominal, and as such, no legal expense was recognized. In 1997, an
amendment lowered the exercise price of these warrants to $3.33 per share of
common stock. Legal expense of $133,600 was recognized due to the repricing of
these warrants. Subsequent to the amendment, the warrants were canceled and new
warrants were issued which entitled the holders to acquire 20,000 shares of
common stock at $3.33 per share. No warrants were issued to the law firm in
1998 and 1999.
F-12
6. RELATED PARTY TRANSACTIONS
In September 1999, the Company contracted a board member to conduct a marketing
study for compensation of $5,000. A payable of $2,500 is outstanding at
December 31, 1999 and is included in the accounts payable and accrued
liabilities in the 1999 financial statements.
At December 31, 1998, the Company had a loan outstanding in the amount of
$42,750 to a shareholder, that accrued interest at 12% per annum. This amount,
together with accrued interest, was repaid in April 1999. The Company borrowed
an additional $45,000 from the shareholder at various times during 1999, and
repaid the entire amount, including interest which accrued between 7.5% and 12%,
during 1999.
The Company received management assistance services during 1999 and 1998 in the
amount of $17,450 and $68,500, respectively, from an entity owned by certain of
the Company's significant shareholders.
7. SHAREHOLDERS' EQUITY (DEFICIT)
On September 24, 1999, the Company entered into a Shareholders Agreement with
certain officers and shareholders ("investors") of the Company whereby the
Company has rights of first refusal to purchase shares offered for sale by the
investors at a price specified by the investor. If the Company does not
purchase the offered shares within five days of receipt of written notice from
the investor, the remaining investors have rights of first refusal to purchase
the offered shares, on a pro rata basis determined by such party's proportional
interest of all outstanding shares of the Company's common and Series A
Preferred Stock, at the specified price for an additional seven days.
F-13
7. SHAREHOLDERS' EQUITY (DEFICIT) (CONTINUED)
COMMON STOCK
Holders of the Company's common stock are entitled to one vote per share on each
matter submitted to a vote at any meeting of shareholders. Shares of common
stock do not carry cumulative voting rights and, therefore, holders of a
majority of the outstanding shares of common stock will be able to elect the
entire board of directors and, if they do so, minority shareholders would not be
able to elect any members of the board of directors. However, holders of a
majority of the Company's common stock have executed an Investor Rights
Agreement together with the holder of the Company's $300,000 debentures ("the
debenture holder") that provides that such shareholders shall vote their shares
in such a manner so that the Company's board of directors will be comprised of
five (5) directors and that a designee of the debenture holder shall be elected
as a director so long as the debenture holder owns 50,000 shares of common stock
or the Company's Series A Preferred Stock. All of the shares of common stock
currently issued and outstanding are fully paid and non-assessable. The holders
of common stock are entitled to such dividends as may be declared from time to
time by the board of directors from funds available therefor (provided, however,
that no dividends may be paid on the common stock unless equivalent dividends
are then declared and paid on the Series A Preferred Stock), and upon
liquidation they are entitled to receive pro rata all assets of the Company
available for distribution to such holders (subject to the rights of the holders
of the Series A Preferred Stock).
F-14
7. SHAREHOLDERS' EQUITY (DEFICIT) (CONTINUED)
PREFERRED STOCK
The Company's Articles of Incorporation, as amended, provide for the issuance of
Series A Preferred Stock; however, no shares of such stock are currently issued
and outstanding. Shares of the Series A Preferred Stock are convertible into
shares of common stock by the holders thereof at any time. Such shares are also
automatically convertible upon the Company's initial public offering of its
common stock. The conversion rate is set forth in the Company's Articles of
Incorporation, as amended, and provides for full-ratchet anti-dilution
protection. The holders of Series A Preferred Stock are entitled to receive
dividends out of the assets of the Company legally available therefor as
declared from time to time by the board of directors. Holders of the Series A
Preferred Stock are entitled to receive, prior and in preference to any
distribution to holders of common stock, an amount equal to $2.00 per share in
the event of any liquidation, dissolution or winding up of the Company. Holders
of shares of Series A Preferred Stock are entitled to the number of votes equal
to the number of shares of common stock into which such share of Series A
Preferred Stock could be converted and shall have the same voting rights and
powers as the common stock. The Series A Preferred Stock also enjoys the
benefits of redemption rights and preemptive (or first participation) rights, as
more fully described in the Company's Articles of Incorporation, as amended.
The Investors Rights Agreement restricts the ability of the Company to merge,
sell all or substantially all of the assets or the Company or take certain other
actions unless holders of fifty percent (50%) or more of the Series A Preferred
Stock consent to the taking of such actions.
During the period from inception to December 31, 1996, the Company issued
6,537,800 shares of common stock for noncash consideration, primarily comprised
of services, to certain of its shareholders. Management has estimated the fair
value of these shares based on the initial per share cash contribution to form
the Company, as there were no events which would indicate a change in this value
prior to the Company receiving a Notice of Allowance for the patent on its
identification technology in December 1996. Compensation expense recognized
related to these stock issuances totaled $1,634.
In conjunction with the Information Resources Engineering ("IRE") license
agreement, in 1997, the Company issued 121,000 shares of common stock for cash
consideration of $140,000, or approximately $1.16 per share. As additional
non-monetary consideration for these shares, IRE will perform certain research
and development expenses on behalf of the Company for which the Company will not
be billed (see Note 9).
7. SHAREHOLDERS' EQUITY (DEFICIT) (CONTINUED)
During the period from September 15, 1997 to December 31, 1997, the Company
issued 32,333 shares of common stock at an average price of approximately $5.00
per share prior to recognition
of $19,078 in stock issuance costs. The net cash consideration received by the
Company was $142,587.
F-15
In 1998, the Company issued 22,500 shares of common stock in exchange for
marketing services. Advertising expense related to this issuance totaled
$45,000.
In 1999, the Company issued 101,750 shares of common stock in exchange for
professional fees and marketing services. Professional fees and advertising
expense related to these issuances totaled $138,000 and $4,165, respectively.
The following number of potentially convertible shares of common stock related
to convertible debentures, warrants, and stock options are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
-------- -------
<S> <C> <C>
For conversion of convertible debentures . . . . 92,500 -
Outstanding warrants . . . . . . . . . . . . . . 917,000 80,000
Outstanding stock options. . . . . . . . . . . . 766,000 516,000
Possible future issuance under stock option plan 617,148 -
-------- -------
Total shares potentially convertible . . . . . . 2,392,648 596,000
========= =======
</TABLE>
F-16
8. STOCK OPTION PLAN
During 1997, the Company's Board of Directors approved the granting of stock
options to certain employees and non-employee members of the Board of Directors
as compensation for their services as members of the Company's Board of
Directors. Prior to 1997, the Company had not previously issued stock options
to its employees or its directors.
In October 1999, the Company's Board of Directors approved the 1999 Stock Option
Plan (the "Plan"). Under the Plan, options to purchase 1,383,148 shares of
common stock may be granted to employees, directors, and eligible individuals,
as determined by the Compensation Committee. The Plan is intended to create
additional performance incentives for directors, officers, employees,
consultants and advisors of the Company. The incentive stock options may be
granted at an exercise price not less than the fair market value on the date of
grant and shall vest over a period of two years.
The following table summarizes stock option activity for the years ended
December 31, 1997 and 1998 and 1999:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED
NUMBER OF EXERCISE AVERAGE EXERCISE PRICE
OPTIONS PRICE FAIR VALUE RANGE
--------- --------- ----------- ---------------
<S> <C> <C> <C> <C>
Outstanding as of December 31, 1996 - - - -
Granted . . . . . . . . . . . . . . 300,000 $ 1.00 $ 5.00 $ 1.00
Forfeited . . . . . . . . . . . . . - - - -
Expired . . . . . . . . . . . . . . - - - -
Outstanding as of December 31, 1997 300,000 $ 1.00 $ 5.00 $ 1.00
--------- --------- ----------- ---------------
Granted . . . . . . . . . . . . . . 216,000 $ 1.00 $ 5.00 $ 1.00
Forfeited . . . . . . . . . . . . . - - - -
Expired . . . . . . . . . . . . . . - - - -
Outstanding as of December 31, 1998 516,000 $ 1.00 $ 5.00 $ 1.00
--------- --------- ----------- ---------------
Granted . . . . . . . . . . . . . . 300,000 $ .50 $ .37 $ .32 - $1.38
Forfeited . . . . . . . . . . . . . - - - -
Expired . . . . . . . . . . . . . . 50,000 $ 1.00 $ 5.00 $ 1.00
Outstanding as of December 31, 1999 766,000 $ .80 $ 3.19 $ .32 - $1.38
========= ========= =========== ===============
Exercisable as of December 31, 1999 565,000
=========
</TABLE>
The weighted-average remaining contractual life of options outstanding as of
December 31, 1999 is 5.8 years.
F-17
8. STOCK OPTION PLAN (CONTINUED)
All of the stock options granted during 1998 were immediately vested at the date
of grant. Total expense recognized in 1998 for option grants totaled $933,425.
Stock options granted in 1999 vest over a two year period. No expense has been
recognized during 1999, as all stock options granted in 1999 are exercisable at
the fair market value on the date of grant. In accordance with the provisions
of APB 25 and FAS 123, the Company chose to account for stock-based compensation
through the Black-Scholes option pricing model. If the Company had elected to
recognize compensation cost based on the fair value of options at grant date as
prescribed by FAS 123, the Company's net loss would be as follows:
<TABLE>
<CAPTION>
1999 1998
--------- -----------
<S> <C> <C>
Net loss reported. . . . . . $939,741 $1,426,725
Net loss pro forma . . . . . 950,230 1,486,573
Net loss per share reported. $ (.11) $ (.17)
Net loss per share pro forma (.12) (.18)
</TABLE>
To determine the impact of FAS 123, the fair value of these option grants were
estimated on the date of grant using the Black-Scholes method based upon the
following assumptions:
<TABLE>
<CAPTION>
1999 1998
----- -----
<S> <C> <C>
Risk-free interest rate . . . 5.8% 5.5%
Expected years until exercise 2 4
Expected stock volatility . . 157% 118%
Dividend yield. . . . . . . . 0% 0%
</TABLE>
F-18
9. INFORMATION RESOURCES ENGINEERING AGREEMENT
On July 30, 1997, the Company and IRE entered into a patent license agreement
(the "Patent License Agreement"), whereby, in exchange for consideration of
$10,000 in cash and IRE's commitment to conduct research and development
programs to develop prototypes of products utilizing the Company's fingerprint
identification technology, IRE was granted an exclusive worldwide license to the
use of the Company's patented technology in the markets defined in the Patent
License Agreement. In addition, the Company is entitled to receive royalties of
5% of the net selling price, as defined in the Patent License Agreement, of all
products sold by IRE which use the Company's fingerprint identification
technology.
IRE has agreed to consider proposals of sublicenses from any of the Company's
prospective licensees for the use of the Company's fingerprint identification
technology in the markets in which IRE was granted an exclusive license. In the
event that the Company, with IRE's consent, sells licenses to other parties in
IRE's exclusive markets, the Company will be required to pay IRE 50% of the
gross royalty income it receives from these licenses.
Under the Patent License Agreement, the Company was granted the rights to
license the technology developed by IRE in markets in which IRE was granted an
exclusive license. The Company is not required to pay IRE any royalty from such
licenses.
As part of the Patent License Agreement, the Company agreed to sell or cause its
existing shareholders to sell to IRE 1,120,660 shares of the Company's common
stock, which represented 13.7% of the outstanding common stock of the Company on
a fully diluted basis on the effective date of the Patent License Agreement, for
total consideration of $290,000 or $.26 per share. The Company issued 121,000
shares of common stock to IRE for cash consideration of $1.16 per share or
$140,000 (see Note 7) and the Company's existing shareholders sold to IRE
999,660 shares for total consideration of $150,000.
If IRE has not commercially developed the licensed technology to a reasonable
level by July 30, 2001, the Company shall have the right to terminate the Patent
License Agreement for a payment of $10,000. If the Company elects to terminate
the Patent License Agreement, IRE can require the Company to repurchase all or
part of the 1,120,660 shares of the Company's common stock purchased by IRE
pursuant to the Patent License Agreement at a price of $.26 per share.
F-19
9. INFORMATION RESOURCES ENGINEERING AGREEMENT (CONTINUED)
As discussed above, IRE is performing research and development services on
behalf of the Company for which the Company is not required to reimburse IRE for
the costs incurred in such research and development effort. The costs incurred
by IRE on the Company's behalf are recorded by the Company as research and
development expenses and as a capital contribution which is reflected as an
increase in additional paid-in capital because the performance of these services
represents a part of the purchase price of the shares of common stock sold to
IRE by the Company (see Note 7). IRE has incurred $663,165 in costs in
developing the licensed technology through December 31, 1999, which is reflected
in the accompanying financial statements.
10. INCOME TAXES
Under Statement of Financial Accounting Standards No. 109 Accounting for Income
Taxes, a deferred tax asset is established for the complete amount of tax
benefits available in future periods from the assumed realization of tax net
operating loss carryforwards (NOL) and tax credits. In addition, a deferred tax
asset or liability is established for the complete amount of tax benefits or
liabilities from the assumed effect of temporary differences. A valuation
allowance is established to adjust the deferred assets to their estimated net
realizable value.
F-20
10. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities at
December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
NOL carryforwards . . . . . . . . . . . . . . $ 595,695 $ 237,564
Deferred tax assets related to temporary
differences as follows
Deferred revenue . . . . . . . . . . . . . 30,070 36,244
Stock-based compensation . . . . . . . . . 821,720 883,006
Amortization . . . . . . . . . . . . . . . 1,820
Tax credits. . . . . . . . . . . . . . . . 11,385 1,322
Total deferred tax assets . . . . . . . . . . 1,460,695 1,158,136
------------ ------------
Valuation allowance . . . . . . . . . . . . . (1,460,695) (1,158,136)
Net deferred tax assets . . . . . . . . . . . - -
------------ ------------
Deferred tax liabilities related to temporary
differences: . . . . . . . . . . . . . . . - -
Net deferred taxes. . . . . . . . . . . . . . $ - $ -
============ ============
</TABLE>
As of December 31, 1999 and 1998, the Company had net operating loss
carryforwards for tax purposes of approximately $1,545,000 and $610,000,
respectively. Such carryforwards will begin to expire in 2011. The utilization
of the federal net operating loss carryforwards may be subject to limitation
under the rules regarding a change in stock ownership as determined by the
Internal Revenue Code. No benefit for the losses has been recognized in the
accompanying financial statements, due to uncertainty of the Company's ability
to generate taxable income in the future.
F-21
11. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Following is an analysis of selling, general and administrative expenses
incurred by the Company for the years ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
-------- ----------
<S> <C> <C>
Commission expense . . . . . . . $ 7,375 $ 2,750
Marketing expense. . . . . . . . 102,400 118,323
Salaries . . . . . . . . . . . . 69,953 43,625
Professional fees. . . . . . . . 316,505 129,435
Noncash stock-based compensation - 933,425
Other. . . . . . . . . . . . . . 84,355 57,346
-------- ----------
$580,588 $1,284,904
========== ==========
</TABLE>
12. NONEXCLUSIVE LICENSING AGREEMENT
On March 30, 1999, the Company entered into a nonexclusive licensing agreement
with Protek, in which Protek will act as a marketing agent and will sell the
Company's licenses to third parties. Upon the execution of the agreement,
Protek received a credit totaling $2,625,000 for future purchases of the
Company's licenses. The unused portion, if any, of this credit will expire
seven years after the execution of the license agreement. In addition, for a 20
year period beginning on the date of the execution of the agreement, Protek is
entitled to (1) a sales commission fee ranging between five and ten percent of
the initial license fees and manufacturing surcharges and (2) a license fee
percentage ranging between fifteen and fifty percent of all license fees,
manufacturing surcharges and other revenues the Company receives through
Protek's licensing agreement, less all sales commissions paid to Protek and to
unaffiliated third parties, during the entire 20-year period.
F-22
13. COMMITMENTS AND CONTINGENCIES
The Company leases its office facility under an operating lease which is
renewable on an annual basis. Rental expense for this lease in 1999 and 1998
was approximately $7,146 and $1,800, respectively.
The Company is subject to various legal matters in the ordinary course of
business. In the opinion of management, the ultimate outcome of any such
matters will not have a material adverse effect on the financial condition,
results of operations or cash flows of the Company.
14. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures of estimated fair values were determined by management
using available market information and appropriate valuation methodologies.
Considerable judgment is necessary to interpret market data and develop
estimated fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts that the Company should realize upon
disposition of the financial instruments. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value. The carrying amounts and estimated fair value of the
Company's financial instruments at December 31, 1999, were as follows:
<TABLE>
<CAPTION>
FAIR
CARRYING AMOUNT VALUE
---------------- --------
<S> <C> <C>
Cash and cash equivalents . $ 62,986 $ 62,986
Notes receivable. . . . . . 3,270 3,270
Short-term convertible debt 129,000 223,067
Long-term convertible debt. 150,834 76,052
</TABLE>
The fair values for the Company's short and long-term convertible debt were
estimated using discounted cash flow analysis, based on the Company's estimated
incremental borrowing rate the Company would have likely incurred in the event
of securing the debt without warrants.
15. SUBSEQUENT EVENTS
On February 22, 2000, the Company executed a non-binding letter of intent to
purchase all of the outstanding stock of Protek, subject to a $5 million
commitment expected from an investor during 2000.
END OF FINANCIAL STATEMENTS
F-23
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company reported on a Form 8-K filed February 11, 2000, that it changed
independent public accounting firms for the fiscal year ended December 31, 1999.
No disagreements existed or now exist between the former accountant and the
Company.
PART III
- ---------
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The following is a list of the names and ages of all directors and
executive officers of the Company:
<TABLE>
<CAPTION>
DIRECTOR OR
NAME AGE POSITION OFFICER SINCE
- ------------------------ --- ---------------------- --------------
<S> <C> <C> <C>
William F. Lane 67 Chairman and Treasurer March 1994
J. Phillips L. Johnston 60 CEO, President June 1997
and Director
Peter L. Coker 57 Director February 2000
Ira A. Hunt, Jr. (*) 76 Director July 1997
Joe S. Wakil, MD 37 Director July 1999
Glenn J. Kline 37 Director September 1999
Harold H. Reddick, Jr. 44 Secretary December 1997
<FN>
(*) Mr. Hunt resigned his seat on the Board of Directors in February
2000.
</TABLE>
Mr. Lane served as Chairman, President, Treasurer and Chief Executive
Officer of the Company from March 1994 to September 1999. He currently serves
as Chairman of the Board and Treasurer and his term of office as a Director is
set to expire in May 2000. He is the Company's founder and has been active in
various industries for over thirty-five years. Mr. Lane has been president of
three different trade associations and served the State of North Carolina as
Assistant Secretary of Commerce for three years and as a Deputy Commissioner of
Motor Vehicles for two years. Mr. Lane was the founder of four companies which
he later sold to public companies. Mr. Lane is a graduate of North Carolina
State University. He is also a graduate of The National Association
Of Small Business Investment Companies Management School and the Governor's
Executive Management Program.
Mr. Johnston has served the Company as a Director since June 1997. His
term of office as a Director is set to expire in May 2000. Mr. Johnston was
formerly the Chairman, President and CEO of Pilot Therapeutics, Inc. from
October 1998 to September 1999, Digital Recorders, Inc. (NASDAQ-TBWS) for nine
years until April 30, 1998, DataPix, Inc. and Currier Piano Company. He was the
CEO and Chairman of Norman Perry and Chantry Lamp Company and the Erwin-Lambeth
Company. He is the former administrator of North Carolina Credit Unions. Mr.
Johnston is a co-founder and founding Chairman of the Board of the North
Carolina Electronics and Information Technology Association. In 1997, Mr.
Johnston was named the Emerging Entrepreneur of the Year by the Council for
Entrepreneurial Development. Mr. Johnston has a Bachelor degree in Economics
from Duke University and a Doctor of Jurisprudence degree from the University of
North Carolina Chapel Hill Law School. Additionally, he attended New York
University Business School and the John F. Kennedy School of Government at
Harvard University.
Mr. Coker has served the Company as a Director since February 28, 2000.
His term of office as a Director is set to expire in May 2000. Mr. Coker is the
Senior Managing Director of Capital Investment Partners, LLC, the Company's
investment banker since 1994. Mr. Coker is a graduate of North Carolina State
University.
Mr. Hunt has served the Company as a Director since July 1997. His term of
office as a Director is set to expire in March 2000. Mr. Hunt is a graduate of
the United States Military Academy in West Point, New York. He served
thirty-three years in various command and staff positions in the United States
Army before retiring from active service as a Major General in 1976.
Subsequently, Mr. Hunt was President of Pacific Architects and Engineers in Los
Angeles, California, and as a Vice President of Frank E. Basil, Inc. in
Washington, DC; both organizations maintain worldwide operations focusing upon
security matters. Currently, Mr. Hunt serves as a Director of IRE. Mr. Hunt
has a Masters of Science degree in civil engineering from the Massachusetts
Institute of Technology, an MBA from the University of Detroit, a Doctor of the
University degree from the University of Grenoble, France, and a Doctor of
Business Administration degree from George Washington University.
Dr. Wakil has served the Company as a Director since July 1999. His term
of office as a Director is set to expire in May 2000. Dr. Wakil has over
fifteen years of experience in the medical products industry. In 1983, he
co-founded Corazonix Corporation, a cardiovascular instrument manufacturer
concentrating in the ultrasound and electrophysiology products areas. Corazonix
eventually licensed technologies to A.H. Robins, Hewlett Packard and Arrhythmia
Research Technologies. In 1986, Dr. Wakil founded Eyesys Technologies, Inc.
("Eyesys"), a technology development company focusing on the eye-care field.
Eyesys has grown to become a $10 million operation and is largely credited with
establishing the field of corneal topography. Eyesys markets and sells its
products worldwide to over 30,000 ophthalmologists and optometrists in more than
80 countries. Dr. Wakil has held various positions with Eyesys, including
President, CEO and Chairman of the Board. In 1997, Eyesys was sold to Premier
Laser Systems, Inc. Dr. Wakil has served on the boards of several wellness and
prevention companies, including Science Based Health, Inc., an international
laser refractive surgery center operator with over $24 million in annual
revenues. His formal education includes a Bachelor of Science degree in
Biomedical Engineering from Duke University, a Master's in Electrical
Engineering from Rice University, and a medical degree from Baylor College of
Medicine in Houston, Texas. Dr. Wakil is also on the boards of Tray
Technologies, LLC and Aris Vision Institute.
Mr. Kline has served the Company as a Director since September 1999. His
term of office as a Director is set to expire in May 2000. Mr. Kline is
currently the managing director of Centennial Venture Partners, LLC, a venture
capital investment firm, and he has served in such capacity since February of
1998. During the period from September 1994 to January 1998, Mr. Kline was a
senior director of Del Monte Foods Co. and served as head of the Strategic
Planning and Business Development Group. Mr. Kline received his Bachelor of
Arts degree from Pomona College and his Master's of Business Administration from
UCLA.
Mr. Reddick has served the Company as its Secretary since December 1997.
His term of office as the Company's Secretary expires in March 2000. Since
1992, Mr. Reddick has served as an independent financial advisor, marketing
consultant and management advisor to early-stage companies. Mr. Reddick
attended Wake Forest University and graduated from North Carolina State
University.
SIGNIFICANT EMPLOYEES OR CONTRACTORS
Katherine A. Chandler is an independent contractor and has been engaged to
provide controller services to the Company. Ms. Chandler formed Chandler
Consulting, Inc. ("CCI") in 1997. CCI provides temporary controller services
and performs all types of finance related projects for small businesses. During
the period from 1992 to 1997, Ms. Chandler served as Finance Director for
Qualex, Inc., a photofinishing company with $1 billion in revenues and 12,000
employees. Prior to Qualex, Ms. Chandler was a senior accountant at Ernst &
Young, LLP. Ms. Chandler received her Bachelor of Science degree in accounting
from the University of North Carolina at Chapel Hill.
Edward M. Collins is engaged as the assistant to the President. Mr.
Collins received his Bachelor of Arts degree from the University of North
Carolina at Charlotte in 1992 and expects to receive his Master of Business
Administration from Wake Forest University in May 2000. Mr. Collins served as
an intern in the Information Technology Special Projects Unit at Carolina Power
& Light during the Summer of 1999 and was a Senior Application Consultant at
Marsh Software Systems from 1995 to 1998 and an Application Consultant for Marsh
from 1992 to 1995.
Mr. Bill Daubenmier is the Chief Information Officer of the Company and is
responsible for both the Internet and Intranet.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Each of the following individuals and entities failed to timely file with
the SEC his or her Form 3, initial report of beneficial ownership of the
Company's securities: J. Phillips L. Johnston, William F. Lane, Harold H.
Reddick, Jr., Kaye B. Amick, Ira Hunt, Glen J. Kline, and Information Resource
Engineering, Inc. To the Company's knowledge, Joe S. Wakil, one of the Company's
directors, has not yet filed his required Form 3. In addition, J. Phillips L.
Johnston and William F. Lane each failed to timely file one Form 4 report
reflecting, for each individual, one open market purchase of the Company's
securities.
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth certain information regarding the annual
compensation for each of the last three years for each of the two individuals
who served as the Company's Chief Executive Officer during 1999. No other
executive officer of the Company earned more than $100,000 in salary and bonus
during the fiscal year ended December 31, 1999:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
-------------------
Name and Year Salary
Principal Position ($)
------- --------
<S> <C> <C>
1999 $ 37,500
J. Phillips L. Johnston,. . 1998 $ 0
President and CEO (1) . . . 1997 $ 0
1999 $ 30,000
William F. Lane . . . . . . 1998 $ 26,125
Chairman and Treasurer (2) 1997 $ 4,320
__________________
<FN>
(1) Mr. Johnston is the current President and CEO of the Company.
The effective date of his appointment to such positions was September 1, 1999.
Mr. Johnston is currently serving as an officer of the Company pursuant to a
written employment agreement. Under this employment agreement, Mr. Johnston
receives the following compensation: (a) annual salary of $150,000, subject to
possible increases once the Company has raised additional capital; (b) incentive
stock options to purchase 250,000 shares of the Company's common stock at a
strike price of $.312 per share, to vest annually - over three years, subject to
the terms and conditions of the Company's 1999 Incentive Stock Option Plan (as
described below); (c) eligibility for additional stock options, salary increases
and bonuses based on the attainment of mutually agreed upon annual
milestones; (d) participation in employee benefit plans made available from
time to time to the Company's executive officers; and (e) the arrangement is
deemed to be at will so that either party may terminate the arrangement at any
time for any reason.
(2) Mr. Lane served as the Company's CEO and President from March
1994 to September 1999. He currently serves as the Company's Chairman and
Treasurer.
</TABLE>
STOCK OPTION PLAN
The Company's Board of Directors approved the Company's 1999 Stock Option
Plan (the "Plan") in October 1999. The Plan will be presented to the
shareholders at the next annual meeting. Prior to adoption of the Plan, the
Company issued options (non-qualified) to purchase 516,000 shares of the
Company's common stock to officers, directors and consultants of the Company.
The purchase price for shares pursuant to such non-qualified options is $1.00
per share.
The purpose of the Plan is to enable the Company to offer to its key
employees, officers, directors, consultants and sales representatives whose
past, present and/or potential contributions to the Company have been, are or
will be important to the success of the Company, an opportunity to acquire a
proprietary interest in the Company. The total number of shares of the
Company's common stock reserved and available for distribution under the Plan is
1,383,148 shares. These shares will underlie the options issued by the Company
pursuant to the Plan. The option holders will not be protected against dilution
if the Company should issue additional shares in the future. Neither the
options nor the shares underlying the options have preemptive rights. For more
information regarding the Plan, see Exhibits 6.07 and 6.08 attached hereto.
The Company has granted Directors of the Company non-qualified options to
purchase Company common stock during the last fiscal year as follows:
<TABLE>
<CAPTION>
OPTIONS GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
Number of Percent Of Total
Securities Options Granted
Underlying to Employees In Exercise Or
Options Fiscal Base Price
Name Granted (#) Year ($/Sh) Expiration Date
- ----------------------- ----------- ----------------- ------------- ---------------
<S> <C> <C> <C> <C>
J. Phillips L.. . . . . 250,000(*) 83% $ .32 September 2009
Johnston - CEO
William F. Lane . . . . 0 -- -- --
Joe S. Wakil, M.D.. . . 50,000 17% $ 1.38 August 2009
_______________________
<FN>
(*) These options were granted to Mr. Johnston pursuant to an employment
agreement dated November 9, 1999.
</TABLE>
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FY-END OPTION VALUES
Number of
Securities Value Of
Underlying Unexercised
Unexercised In-The-Money
Options At FY- Options At FY-
End (#) End ($)
Exercisable/ Exercisable/
Name Unexercisable Unexercisable
- ------------------ --------------- ----------------
<S> <C> <C>
J. Phillips L. . . 133,000/ $ 25,979/
Johnston - CEO . . 167,000 $ 52,271
William F. Lane. . 100,000 --
Joe S. Wakil, M.D. 50,000 --
</TABLE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the beneficial
ownership of the shares of the Company's common stock as of March 15, 2000, by
(i) each person who is known to the Company to be the beneficial owner of more
than five percent (5%) of the issued and outstanding shares of the Company's
common stock, (ii) each director of the Company individually, (iii) the Named
Executive, and (iv) all directors and executive officers as a group:
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE OF SHARES PERCENT OF CLASS
OF BENEFICIAL OWNER BENEFICIALLY OWNED (1) OUTSTANDING
- ---------------------------------- ------------------------- -----------------
<S> <C> <C>
William F. Lane (2)(3)(4) 2,513,704 30.82%
2506 W. Nash Street
Suite C
Wilson, NC 27896
J. Phillips L. Johnston (3)(4) 301,000 5.10%
Venture Bldg. II
NCSU Centennial Campus
920 Main Campus Drive
Suite 400
Raleigh, NC 27606
Ira A. Hunt, Jr. 490,000 8.57%
7102 Capitol View Drive
McLean, VA 22101
Peter L. Coker (3) 420,000 5.01%
Capital Investment Partners, LLC
17 Glenwoon Ave.
Raleigh, NC 27603
Joe S. Wakil, M.D. (3) 97,006 2.21%
2928 Carnagie Street
Houston, TX 77005
Glenn J. Kline (3) 0 0.00%
Venture Bldg. II
NCSU Centennial Campus
920 Main Campus Drive
Raleigh, NC 27606
Kaye B. Amick 858,939 10.25%
1809 Faison Road
Durham, NC 27896
Information Resource Engineering, Inc. 1,120,660 13.37%
8029 Corporate Drive
Baltimore, MD 21236
All Directors and Executive
Officers as a Group (6 persons) 3,331,710 41.99%
<FN>
(1) Includes shares as to which such persons have the right to
acquire beneficial ownership upon exercise of options which are
exercisable within sixty (60) days hereof, as follows: Mr. Lane -
100,000; Mr. Hunt - 250,000; Mr. Johnston - 133,000; and Mr. Wakil
- 90,000.
(2) Mr. Lane owns his shares as a joint tenant with his wife,
Barbara D. Lane.
(3) Director of the Company
(4) Named Executive Officer of the Company.
</TABLE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Director Hunt loaned the Company $5,460 in the Summer of 1999 and was
repaid in full in July 1999.
In September 1999, Director Joe S. Wakil received $5,000 from the Company
to conduct a marketing study for the Company. A payable of $2,500 is
outstanding at December 31, 1999 and is included in the accounts payable and
accrued liabilities in the 1999 financial statements.
At December 31, 1998, the Company had a loan outstanding in the amount of
$42,750 to Director William F. Lane, that accrued interest at 12% per annum.
This amount, together with accrued interest, was repaid in April 1999. The
Company borrowed an additional $45,000 from Mr. Lane at various times during
1999, and repaid the entire amount, including interest which accrued between
7.5% and 12%, during 1999.
The Company received management assistance services during 1999 and 1998 in
the amount of $17,450 and $68,500, respectively, from TelAmeriCard Corporation,
an entity owned by certain of the Company's significant shareholders.
Chief Executive Officer J. Phillips L. Johnston loaned the Company $15,000
in March 2000 which remains outstanding and intends to lend the Company $20,000
in April 2000.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.
(A) EXHIBITS.
--------
<TABLE>
<CAPTION>
Exhibit Sequential
No. Description Page No.
- ------- ---------------------------------------------------------------- ----------
<S> <C> <C>
3 Articles of Incorporation, together with all
amendments thereto, filed as Exhibit 2.01 to
the Registrant's Form 10-SB filed as of
November 30, 1999, filed with the SEC,
which is incorporated herein by reference to
such Form 10-SB.
3.1 Bylaws, filed as Exhibit 2.02 to the
Registrant's Form 10-SB filed as of
November 30, 1999, filed with the SEC,
which is incorporated herein by reference to
such Form 10-SB.
4 Form of Debenture Purchase Agreement by
and among the Company and purchasers of
the Company's 12% Convertible
Subordinated Debentures due 2002, filed as
Exhibit 3.01 to the Registrant's Form 10-SB
filed as of November 30, 1999, filed with
the SEC, which is incorporated herein by
reference to such Form 10-SB.
4.1 Form of 12% Convertible Subordinated
Debenture Due 2002, filed as Exhibit 3.02
to the Registrant's Form 10-SB filed as of
November 30, 1999, filed with the SEC,
which is incorporated herein by reference to
such Form 10-SB.
4.2 Registration Rights Agreement, dated as of
December 31, 1997, between the Company
and Hutchison & Mason PLLC, filed as
Exhibit 3.04 to the Registrant's Form 10-SB
filed as of November 30, 1999, filed with
the SEC, which is incorporated herein by
reference to such Form 10-SB.
4.3 Stock Purchase Agreement, dated as of
August 1, 1997, by and among the
Company, Li-Pei Wu and William F. Lane
(as agent for certain sellers), together with
Addendum to Stock Purchase Agreement of
even date therewith, filed as Exhibit 3.04 to
the Registrant's Form 10-SB filed as of
November 30, 1999, filed with the SEC,
which is incorporated herein by reference to
such Form 10-SB.
4.4 Convertible Debenture, dated September 24,
1999, made by the Company in favor of
Centennial Venture Partners, LLC, filed as
Exhibit 3.05 to the Registrant's Form 10-SB
filed as of November 30, 1999, filed with
the SEC, which is incorporated herein by
reference to such Form 10-SB ("CVP").
4.5 Common Stock Purchase Warrant, dated,
September 24, 1999, made by the Company in
favor of CVP (450,000 shares), filed as
Exhibit 3.06 to the Registrant's Form 10-SB
filed as of November 30, 1999, filed with
the SEC, which is incorporated herein by
reference to such Form 10-SB.
4.6 Common Stock Purchase Warrant, dated
September 24, 1999, made by the Company
in favor of CVP (150,000 shares), filed as
Exhibit 3.07 to the Registrant's Form 10-SB
filed as of November 30, 1999, filed with
the SEC, which is incorporated herein by
reference to such Form 10-SB.
4.7 Common Stock Purchase Warrant, dated
September 24, 1999, made by the Company
in favor of CVP (200,000 shares), filed as
Exhibit 3.08 to the Registrant's Form 10-SB
filed as of November 30, 1999, filed with
the SEC, which is incorporated herein by
reference to such Form 10-SB.
4.8 Common Stock Purchase Warrant, dated
September 24, 1999, made by the Company
in favor of CVP (up to $500,000), filed as
Exhibit 3.09 to the Registrant's Form 10-SB
filed as of November 30, 1999, filed with
the SEC, which is incorporated herein by
reference to such Form 10-SB.
4.9 Investor Rights Agreement, dated as of
September 24, 1999, by and among the
Company and certain holders of its capital
stock, filed as Exhibit 3. 10 to the
Registrant's Form 10-SB filed as of
November 30, 1999, filed with the SEC,
which is incorporated herein by reference to
such Form 10-SB.
4.10 Shareholders Agreement, dated September
24, 1999, by and among the Company and
certain shareholders and investors, filed as
Exhibit 3.11 to the Registrant's Form 10-SB
filed as of November 30, 1999, filed with
the SEC, which is incorporated herein by
reference to such Form 10-SB.
10 License Agreement, dated October 1, 1999,
between the Company and BrentScott
Associates, LLC, filed as Exhibit 6.01 to the
Registrant's Form 10-SB filed as of
November 30, 1999, filed with the SEC,
which is incorporated herein by reference to
such Form 10-SB.
10.1 Patent License Agreement, dated July 30,
1997, between the Company and
Information Resource Engineering, Inc.,
filed as Exhibit 6.02 to the Registrant's
Form 10-SB filed as of November 30, 1999,
filed with the SEC, which is incorporated
herein by reference to such Form 10-SB.
10.2 License Agreement, dated October 31,
1999, between the Company and Revolution
Labs, Inc. ("Revolution"), together with the
agreement among the Company, Revolution
and Protective Technologies, Inc. ("Protek")
regarding the potential purchase by Protek
of Revolution's fields of license, filed as
Exhibit 6.03 to the Registrant's Form 10-SB
filed as of November 30, 1999, filed with
the SEC, which is incorporated herein by
reference to such Form 10-SB.
10.3 Agreement, dated March 30, 1999, among
Safe Guard Corporation, Protek, Secure
Card International, Inc., International
Biometrics Incorporated, Tele-Guard, Inc.
and the Company, filed as Exhibit 6.04 to
the Registrant's Form 10-SB filed as of
November 30, 1999, filed with the SEC,
which is incorporated herein by reference to
such Form 10-SB.
10.4 License Agreement dated February 2, 1999
between the Company and Power^Up
Marketing Corporation, filed as Exhibit 6.05
to the Registrant's Form 10-SB filed as of
November 30, 1999, filed with the SEC,
which is incorporated herein by reference to
such Form 10-SB.
10.5 Debenture Purchase Agreement, dated
September 24, 1999, between the Company
and certain purchasers, filed as Exhibit 6.06
to the Registrant's Form 10-SB filed as of
November 30, 1999, filed with the SEC,
which is incorporated herein by reference to
such Form 10-SB.
10.6 1999 Stock Option Plan, filed as Exhibit
6.07 to the Registrant's Form 10-SB filed as
of November 30, 1999, filed with the SEC,
which is incorporated herein by reference to
such Form 10-SB.
10.7 Form of Incentive Stock Option Agreement,
filed as Exhibit 6.08 to the Registrant's
Form 10-SB filed as of November 30, 1999,
filed with the SEC, which is incorporated
herein by reference to such Form 10-SB.
10.8 Employment Agreement between the
Company and CEO/President Mr. J. Phillips
L. Johnston, dated November 9, 1999.
27 Financial Data Schedule.
</TABLE>
(B) REPORTS ON FORM 8-K.
On February 11, 2000, the Company filed a report on Form 8-K reporting
under Item 4 that the Company changed independent public accountants for the
year ended December 31, 1999 from PriceWaterhouseCoopers, LLP to Ernst & Young,
LLP.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
ID TECHNOLOGIES, INC.
BY /S/ J. Phillips L. Johnston
---------------------------------
DATE: March 30, 2000 J. Phillips L. Johnston, President and CEO
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- ---------------------------- ---------------------------------------- ---------------
<S> <C> <C>
/S/ J. Phillips L. Johnston
- ----------------------------
J. Phillips L. Johnston. . President and Director
(Principal Executive Officer) March 30, 2000
/S/ William F. Lane
- ----------------------------
William F. Lane. . . . . . . Chairman, Director, and Treasurer
(Principal Financial and Accounting Officer) March 30, 2000
/S/ Peter L. Coker
- ---------------------------- March 30, 2000
Peter L. Coker. . . . . Director
Glen J. Kline . . . . . Director March 30, 2000
Joe S. Wakil, M.D.. . . Director March 30, 2000
</TABLE>
EXHIBIT 10.8
ID TECHNOLOGIES CORPORATION
ADMINISTRATIVE OFFICES
2506 WEST NASH ST. SUITE C
WILSON, NC 27896
TEL: 252-206-1089 FAX: 252-206-4990
November 9, 1999
Mr. J. Phillips L. Johnston, Sr.
ID Technologies Corporation
NCSU Centennial Campus
920 Main Campus Drive
Suite 400
Raleigh, NC 27606
Dear Mr. Johnston,
This letter will serve to confirm your agreement to join ID Technologies
Corporation ("IDTEK") as its CEO/President reporting to the Board of Directors.
Our agreement is as follows:
1. Your Start Date is deemed to be July 26, 1999 when the Board of Directors
elected you CEO. You agreed to work without compensation until October 1, 1999;
2. You will be granted incentive stock options to purchase 250,000 shares of
common stock to vest equally over three (3) years, with 83,000 vesting on Start
Date, options to be governed by IDTEK's 1999 Stock Option Plan (the "SOP");
3. You will be eligible to receive additional options and earn both salary
increases and cash bonuses pursuant to the attainment of mutually agreeable,
annual milestones set by you and the Compensation Committee of IDTEK's Board of
Directors;
4. Your employment relationship at IDTEK is at will and it may be ended by
you or by IDTEK at any time and for any reason;
5. You will receive two (2) weeks of paid vacation annually, but you will be
expected to coordinate your vacation in advance with the Chairman. You may not
carry unused vacation forward, and IDTEK will not pay you for any unused
vacation on termination for cause;
6. Your annual salary will be $150,000 effective October 1, 1999, you and
will be eligible for increases once IDTEK has closed its next round of external
financing; and
7. You will be entitled to participate in all disability, health, dental,
and life insurance plans and other welfare benefit programs, plans, and
practices made available from time to time by IDTEK to its senior executives.
If you are in agreement with the aforementioned arrangement, please sign below
and return one fully executed copy to me.
On behalf of the Board of Directors, I appreciate your interest in becoming
involved with ID Technologies, and I look forward to working closely with you to
support the long-term success of this exciting company.
Sincerely,
/s/ William F. Lane
William F. Lane
Chairman
AGREED TO AND ACCEPTED:
By: /s/ William F. Lane
----------------------
J. Phillips L. Johnston, Sr.
cc: Jim Hunt
Glenn Kline
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 1999
ANNUAL REPORT, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CAPTION>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 62986
<SECURITIES> 0
<RECEIVABLES> 3270
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 66406
<PP&E> 3276
<DEPRECIATION> 1392
<TOTAL-ASSETS> 85852
<CURRENT-LIABILITIES> 251260
<BONDS> 0
0
0
<COMMON> 282953
<OTHER-SE> 3390859
<TOTAL-LIABILITY-AND-EQUITY> 85852
<SALES> 2000
<TOTAL-REVENUES> 3000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 848029
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 92712
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (848029)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (939741)
<EPS-BASIC> (.11)
<EPS-DILUTED> (.11)
</TABLE>
