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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1995
(Also covers material applicable to Form 10-K for the fiscal years
ended May 31, 1993, September 30, 1993 and September 30, 1994)
Commission File Number 0-9940
FINGERMATRIX, INC.
(Exact name of registrant as specified in its charter)
NEW YORK 13-2854686
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
145 Palisade Street
Dobbs Ferry, New York 10522-1617
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (914) 693-1050
Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange
Title of each class on which registered
Common None
Securities registered pursuant to section 12(g) of the Act:
Common
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days.
Yes No X
Indicate by check mark if disclosure of delinquent filers pursuant to 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No X
The number of shares outstanding of registrant's one class of common stock, as
of September 30, 1995, was 3,945,404, and as of April 30, 1996 was 7,090,347.
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DOCUMENTS INCORPORATED BY REFERENCE
None
PART I
Item 1. BUSINESS.
(a) Summary of Registrant's Affairs During Bankruptcy Proceeding.
The Registrant filed for protection under Chapter 11 of the United States
Bankruptcy Laws (11 U.S. Code) on September 15, 1993 in the United States
Bankruptcy Court for the Southern District of New York. For about seventeen
years previous to the filing,1 Registrant was in the business of developing
fingerprint identification systems primarily for use by law enforcement
agencies. During this seventeen-year period the Registrant was, and to the
present time is, a "development stage" company. Prior to filing for bankruptcy
relief, the Registrant lost approximately $54,000,000 raised from equity
investors. During the seventeen year period, the Registrant was not able to
achieve annual sales in excess of $200,000, and over this period of time only
had revenues totaling $3,000,000.
Pursuant to a Second Amended Disclosure Statement dated as of March 10,
1995, prepared and filed in accordance with 11 U.S. Code Section 1125 and
Bankruptcy Court Rule 3017 ("Disclosure Statement"), and a Second Amended Plan
of Reorganization dated as of March 10, 1995 ("the Plan"), the Plan was voted
upon and approved by the creditors and shareholders of the Registrant and
confirmed by the Bankruptcy Court by an order dated March 31, 1995.2 In
accordance with the Plan, the Registrant exited from the protection of the
Bankruptcy Court3 and the Registrant's management was transferred from a
Trustee appointed by the Bankruptcy Court to a Board of Directors whose members
were representative of the creditors, shareholders and other persons having an
interest in Registrant. See Item 10: "DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT" and Item 13: "CERTAIN RELATIONSHIPS AND SPECIAL TRANSACTIONS - SIS
Capital Corp. and Shareholder Alliance".
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1 This period, or any portion thereof, shall sometimes be referred to herein as
"pre-petition".
2 The Plan was subsequently modified in minor aspects with respect to issuance
of new shares of common stock and warrants as will be described in Part II,
Item 5 "Recent Sales of Securities".
3 The period subsequent to the confirmation of the Plan shall sometimes be
referred to herein as "post confirmation", and the period subsequent to the
filing of the petition and before confirmation of the Plan shall sometimes be
referred to herein as "post petition".
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Under the Plan, after providing for administrative claims, expenses and
fees, the Registrant was authorized, among other things: (i) to settle and
repay loans made to the Registrant subsequent to the filing of its petition
under Chapter 11 of the Bankruptcy Law by a creditor, SIS Capital Corp.
("SIS") in the amount of $1,067,000, and to grant to SIS a lien on all of
Registrant's assets until said loans would be repaid4 and issuing securities
as hereinafter described; (ii) to settle the claims of its general unsecured
creditors by issuing securities as hereinafter described and paying them 25% of
their allowed claims which payments would be made in four installments of 5%,
10%, 5%, and 5%, with the first installment at Distribution Date of the Plan
(April 19, 1995) and each other installment at six month intervals thereafter;
(iii) to reorganize its capitalization by changing its authorized common shares
from 40,000,000 shares of common stock ($.02 par value) to 20,000,000 shares
($.01 par value), but maintaining authority to issue 1,000,000 Preferred Shares
($.01 par value); (iv) pursuant to the reorganized capitalization, to cancel
its former securities, issue new securities in replacement thereof to its
shareholders and to its creditors, including warrants that granted the holders
the option to purchase additional shares of the newly authorized shares; (v) to
issue new securities to a number of persons who loaned money to the Registrant
subsequent to the filing under Chapter 11 and who converted such loans to
equity; and (vi) to authorize financing up to $3,500,000 through the issuance
of new securities in accordance Section 1145 of the Bankruptcy Laws (11 U.S.
Code Section 1145) which permits such issuance without requiring registration
under the Securities Act of 1993, as amended ("Securities Act").
The Plan indicated that the Registrant had reported in its consolidated
federal income tax return for 1992 a net operating loss ("NOL") carry-forward.
The Plan opined that the Registrant can utilize NOL carry-forward to offset
income earned and to minimize its potential liability for alternative minimum
tax, if such were applicable. The Plan also set forth several warnings with
respect to the availability of the NOL carry-forward by the Registrant, among
them being that the tax law may change as to carry-forward of NOLs by doing
away with the NOL, and that the Plan's terms may preclude or disqualify the
carry-forward of NOL if the Plan resulted in a change of ownership greater than
that allowed under Section 382 of the Internal Revenue Code. Based upon the
Registrant's federal tax returns and upon the present status of the Internal
Revenue Code, it appears that the gross amount of the NOL available for the tax
year 1996 was $46,864,833 with varying amounts expiring between 1996 and the
year 2010. Accordingly, with the passing of each year the amount of the NOL is
reduced such that by the year 2011 there would be no NOL available. The
Registrant
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4 For details and risks attendant to the lien, see: Item 13: "CERTAIN
RELATIONSHIPS AND SPECIAL TRANSACTIONS-Risk of Foreclosure of SIS First Lien on
Assets of Registrant."
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makes no representation that all or any part of the NOL will be
applied to offset federal taxes on future income, although its management
believes that such offset shall be available to it.
The Bankruptcy court retained jurisdiction to supervise the carrying out of
the Plan and to adjudicate any disputed or disallowed claims against the
Registrant and any disputed claims of Registrant against third parties.
In soliciting acceptance of the Plan from the creditors and shareholders,
the Disclosure Statement contained an Interim Business Plan dated January 26,
1995 ("the Business Plan") drawn by Thomas T. Harding, the current President of
the Registrant. The premise of the Business Plan was that Registrant would
cease seeking contracts for large complex finger identification systems from
governmental agencies, and concentrate on being a supplier of certain
sub-systems and small systems which would be readily available as
"off-the-shelf products". Such a strategy would avoid the Registrant spending
enormous numbers of hours preparing bids and responses to requests for
proposals, as well as Registrant not having to design and develop the
particular kind of system which the Buyer wanted. While many of the estimates
and projections in the Business Plan have not come to pass, the basic strategy
of the Business Plan has been adhered to.
The above is only a summary of the Plan, and in order to obtain complete
details of: (i) the circumstances which gave rise to the filing under Chapter
11; (ii) all of the terms of the Plan, and (iii) all of the various events and
matters underlying the Plan, including the events which transpired during the
Chapter 11 Bankruptcy Proceeding, reference is made to the Disclosure Statement
and the Plan, which are exhibits annexed hereto and made part hereof. See also
Part II, Item 5 "MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS: Recent Sales of Securities"; and Part III, Item 13 "CERTAIN
RELATIONSHIPS AND SPECIAL TRANSACTIONS: SIS Capital Corp. and Shareholder
Alliance".
(b) Description of Technology Involved In Registrant's Business.
Arising out of need of the federal, state and local police authorities for
a highly accelerated automated means of fingerprint identification, Registrant
has been developing systems that address two general applications. These are:
(1) automating the process of entering fingerprint images into automated
systems (sometimes referred to as input), processing them, and performing the
task of matching them with other fingerprint images on file to determine the
identification of individuals; and (2) automating the process of acquiring and
processing of fingerprint images to perform the function of access control.
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For the first application, complete systems are referred to as Automated
Fingerprint Identification System, or AFIS. These systems have input devices,
computers, data storage equipment, data communication devices, and complex
computer programs. Input devices include: fingerprint scanners capable of
performing scanning of both individual fingers and thumbs, and "slaps" of the
four fingers of each hand; scanners capable of scanning FBI ten print cards
that contain fingerprint records; and various devices capable of reading
electronic, or machine readable, information.
For the second application, complete systems are hereinafter referred to as
Fingerprint Access Control Systems, or FACS. In these systems, fingerprint
images are used as the basis for making a decision to allow, limit, or prevent
access. These systems have input devices, computers, data storage equipment,
data communication devices, and complex computer programs. These systems,
however, have quite different requirements than those of AFIS. For example,
the fingerprint scanners required need only scan one finger at a time. No
fingerprint card readers are required. There is, however, a different suite of
complimentary input devices that is possible. This includes keypads for
entering a PIN, magnetic stripe card readers, and bar code card readers.
In a larger sense both types of system have many uses. The AFIS technology
can also be used to control large population enrollments for social benefit
programs. These can take the form of welfare benefits, voting rights,
immigration information, and so forth. The FACS technology can be used to
control access to doorways and computer networks, but also to act as "front
ends" to AFIS technology for social programs. The role for FACS in this case
is to provide a very fast response to requests for access to benefits that
cannot be provided in the much slower and larger AFIS technology. This is so
because the AFIS technology is used for identification, and the FACS is
typically used for verification of identity. Identification requires a
"one-to-many" search, while verification is a "one-to-one" search.
Both types of systems use very complex computer programs to control the
input process, process the fingerprint information acquired, and perform the
matching function. In large AFIS, there are many other types of programs.
These programs allow for both storage of large amounts of information and
querying this information for specific matches with characteristics entered
into the system. For example, crime scene evidence, criminal histories and
"rap sheets", and name files, including aliases, can be stored, and matched
with information entered into the systems by law enforcement officers. In FACS
there is much less information stored. These systems usually have an enrolled
population identified by limited demographic information. For example, an
enrollee might be characterized by a fingerprint file, name, department number,
shift worked, doors through which he enrollee may enter, and so forth.
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Both AFIS and FACS use the minutiae of a fingerprint, that is, the ridge
endings and bifurcations, to match stored fingerprint images to those that are
put into the systems via the input devices. In the case where a subject
presents his/her fingers for scanning, the process is as follows: first the
subject's finger(s) is/are scanned, then the images are processed, then the
minutiae are "extracted" and a fingerprint image file is built, and finally
this file is compared to a stored file. If a match is confirmed, the operator
of the system is informed. If a match cannot be confirmed, various
alternatives are available to try again.
(c) Products of the Company.
Prior to the filing for relief under Chapter 11 of the Bankruptcy Law in
September, 1993, the Registrant sought to develop and market by itself or as a
subcontractor to a larger computer systems integrator, automated fingerprint
identification systems, or AFIS, for use by law enforcement agencies; and
largely by itself, but on occasion with other concerns, the Registrant
attempted to develop and market fingerprint access control systems, of FACS,
for all other purposes. In addition the Registrant developed, manufactured and
marketed components for AFIS and FACS for other manufacturers thereof.
During the period that the Registrant was under the aegis of the Bankruptcy
Court pursuant to Chapter 11, the Registrant primarily devoted its energies to
unsuccessful attempts to obtain contracts from (i) the Government of Jamaica,
West Indies to supply a FACS for voter identification by fingerprint, and (ii)
the Departments of Social Welfare of the City and State of New York to supply
FACS for identification of welfare clients.
Since being discharged from the protection of the Bankruptcy Court in
April, 1995, the Registrant has concentrated on the development, manufacture
and marketing of the following small systems and sub-systems of AFIS and FACS
which the Registrant expects to market within the next six months:
(1) Single Print Scanner, Model LPS-12
This product scans a single finger placed on a glass platen. The platen is
flooded by liquid to optimize the interface between platen and finger. The
scanner produces fingerprint images which are believed to be far superior to
any produced by competing products. These images are sent out of the scanner
in video form at either 500 dots per inch (dpi) or 600 dpi resolution. These
scanners are designed to be an integral part of FACS. It is intended that
Registrant will use these scanners in FACS of its own design, and make them
available for sale to other companies that design FACS. Development of the
LPS-12 began in December, 1994, and was completed in the second quarter of
calendar year 1995.
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An earlier model of the LPS-12, with substantial differences technically,
was a component of a fingerprint identification system tested by the Department
of Social Welfare for the Counties of Rockland and Onondaga of the State of New
York in 1993 and 1994. Although this earlier model performed successfully for
about one year, the Registrant failed to win the contract for a FACS, for the
reason, among others, that the FACS developed by the Registrant, but not the
earlier model of the scanner incorporated into the FACS, had deficiencies in
communicating with other fingerprint identification stations over telephone
lines, and that the financial viability of the Registrant, while still under
the protection of the Bankruptcy Court, was questionable.
While the prices for the LPS-12 have not been established, the prices of
the LPS-12 will vary with the number of units ordered.
(2) Forensic Quality Scanner, Model LPS-14
This product scans a platen with an area large enough to include a "slap"
of all four fingers of one hand at the same time. Additionally, it is used for
scanning either "rolls" of fingers or "touches" of fingers. The platen is
flooded by liquid to optimize the interface between platen and finger. The
scanner produces fingerprint images far superior to any produced by competing
products. These images are sent out of the scanner in video form to be
processed by fingerprint image processing computer programs. Under control of
these programs a complete ten print card record can be generated in a form
approved by the Federal Bureau of Investigation ("FBI"). These scanners are
designed to be an integral part of booking stations (described below) as input
devices for AFIS. It is intended that Registrant will use these scanners in
booking stations of its own design, and make them available for sale to other
companies that design booking stations. Development of the LPS-14 began in the
second calendar quarter of 1995 and will be completed in the second quarter of
calendar year 1996.
Three prototype LPS-14 scanners are presently being assembled, and are
expected to be completed by the end of May, 1996. Thereafter there will be at
least one month of in-house testing followed by certification tests to be
conducted by representatives of the FBI. These tests will be conducted to
determine the suitability of the LPS-14 to be used in the booking of criminal
suspects and applicants for certain categories of jobs. These tests are
expected to be completed by the end of July, 1996. The Registrant makes no
representation that FBI approval will be obtained by that date. Until FBI
approval is obtained, the Registrant is not soliciting orders for the LPS-14.
Pricing for the LPS-14 has not yet been determined.
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(3) Fingerprint Access Control System (FACS)
Upon successful development and testing of the Single Finger Scanner, Model
LPS-12, work was begun to develop a complete FACS. This system allows for the
enrollment of the fingerprint(s) of individuals, assignment of a PIN or other
identifying characteristic to these enrollees, and use of the combination of
PIN and fingerprint to gain access to certain privileges. The system employs
LPS-12 scanners in a terminal, a multiplexer board and frame grabber board
housed in an IBM compatible Personal Computer (PC), and computer programs to
control the process and report on results.
These systems are intended for use in commercial, industrial, and
government applications where secure control of access is required. The design
of the Registrant's FACS will be completed in prototype form in May, 1996. At
that time a minimum one month in-house testing program will be conducted to
verify the performance of the system. Registrant expects to be able to make
deliveries of such a FACS commencing in the latter part of June, 1996. The
Registrant makes no representation that this schedule will be attained.
Pricing for the FACS has not been determined, and will be subject to
negotiation. While interest has been shown, no orders have thus far been
placed for the FACS.
(4) Booking Station.
Upon successful development and testing of the Forensic Quality Scanner,
Model LPS-14, the Registrant has scheduled the design, development and
manufacture of a booking station. The booking station will employ the LPS-14
in scanning of fingerprints under control of the computer programs in a PC.
Other information describing the suspect or applicant will be recorded at
nearly the same time as the fingerprint scanning. This may include name,
address, height, weight, hair and eye color, and optionally, a picture. Data
collected in this manner will be stored on the various magnetic and optical
storage devices offered with the booking station. All of the necessary
components that comprise a booking station will be housed in a kiosk suitable
for the police station environment where it will be installed. It is expected
that booking stations will be available for sale in the third quarter of 1996.
Prices for the booking station have not yet been determined.
(d) Competition.
In the development and marketing of fingerprint identification systems,
i.e., AFIS and FACS, the Registrant faces domestic and foreign competition from
companies with far greater resources than it has. With respect to the single
print scanner, based upon comparative testing of the Registrant's prototype
scanner and those of other manufacturers, the Registrant believes that
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this scanner is superior to those of competitors for the following reasons:
The forensic quality scanner utilizes the same technology as the single
print scanner, and therefore should excel those of the competitors.
Accordingly, the Registrant should find a niche in supplying such scanners to
original equipment manufacturers of and contractors for AFIS and FACS, Thus
far, however, the Registrant does not have any orders for either scanner.
(e) Dependence on Suppliers.
A number of different finished and raw material components is utilized by
the Registrant during production. Among the finished components are integrated
circuits, resistors, capacitors and other electronic devices, all of which are
generally available from multiple sources. The Registrant also purchases metal
and plastic casings, motors, and optical equipment which are also available
from multiple sources. Based upon the experience prior to the Bankruptcy
Proceeding, the Registrant has not had any difficulty in purchasing any of the
necessary components or materials for its product, because of the general
availability of most components used by the Registrant from a number of
sources. Consequently, a loss of one or more suppliers should not impair the
Registrant's ability to fill orders.
(f) Dependence on Customers.
The Registrant has been in the development stage from its inception, and,
since it has come out from under the protection of Chapter 11 of the Bankruptcy
Laws, the Registrant thus far has no orders placed with it. By reason thereof,
it can not now be determined if the Registrant shall in the future be dependent
on any one or more customers.
(g) Employee Relationships.
The Registrant currently employs sixteen persons, of whom thirteen
employees are technical staff having advanced degrees in physics, mathematics,
engineering and computer sciences. None of its employees are unionized, and
all employments are "at will", i.e., an employee can leave or be terminated at
anytime. The Registrant has granted options to all of its employees. The
Registrant does provide hospital and medical benefits. All employees are
required to sign agreements assigning their rights in any patents or trade
secrets to the Registrant arising out of the work they perform, and promising
not to disclose or to use any confidential information pertinent to the
Registrant and its products.
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(h) Significant Contracts.
Presently, the Registrant does not have any significant contracts with any
suppliers, customers, employees, or agencies. It does have an employment
agreement with its President, Thomas T. Harding. See Part III, Item 7, below.
(i) Patents and Other Intellectual Property Rights.
Patents and Know How
The Registrant holds United States patents on devices, some of which are
incorporated in the Registrant's current products, but all of which pertain to
the technology applicable to the Registrant's products. It is also applying
for a patent with the United States Patent and Trademark Office ("Patent
Office") on one device. The Registrant has had patents issued by foreign
countries, but some, if not all, may have lapsed because of Registrant's
failure to maintain same through the payment of requisite fees.
The competitive nature of the Registrant's industry makes the patents and
patent applications important to the Registrant. However, there is no
assurance that the issued patents, or the patents applied for, will prove
enforceable, or that the Registrant will derive any competitive advantage
therefrom. The Registrant also has other patents which, because of
technological advancements, it no longer considers important.
The Registrant also relies on unpatented know-how and trade secrets and
continuing research and development. As a result, the Registrant may not have
any protection from other parties who independently develop the same know-how
and trade secrets. While the Registrant's management is not aware that any of
its products infringe on any outstanding patents of others, the manufacture and
sale of the Registrant's proposed products may infringe on patents of third
parties. If such be the case, failure to obtain needed licenses from such
third parties could have a material adverse effect on the Company's ability
either to complete the development of a certain product or to arrange for its
manufacture and marketing.
Trademarks
Although the Registrant has registered trademarks with the United States
Patent and Trademark office for products it is not presently marketing, the
Registrant currently uses trademarks and trade names which have not been
registered with the United States Patent and Trademark Office or in any foreign
government trademark offices. The Company does, however, believe that it has
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established common law rights to the use of all of its trademarks which, in
combination with the Company's name are used to indicate the origin of the
products to which they are applied and to distinguish them from the products of
competitors. The Company regards its trademarks important to its business. As
to unregistered trademarks, the Company will not be able to avail itself of the
protection granted to Federally registered marks under Federal law. Certain
rights are, however, protected under the provisions of the Lanham Act and under
state law in respect of unregistered or common law trademarks.
(j) Other Factors Affecting Registrant's Business.
Compliance with Environmental and Occupational
Safety and Health Laws
The Registrant believes that it is in compliance with all federal, state
and local environmental laws and regulations applicable to it business and
products. In view of the Registrant's policy not to manufacture for its
products such components as electronic boards, but only to assemble and install
such components into its products, it does not expect that it will have to
incur any significant expense with respect to protecting the environment from
pollution. Accordingly, such assembly and installation shall not require the
Registrant to be involved with "hazardous substances", and "pollutants and
contaminants" as defined in 42 U.S. Code Section Section 9601, et. seq..
The Registrant believes that its office and other work places are in
compliance with the occupational safety and health laws.
Item 2. PROPERTIES.
The Registrant currently operates out of a 5,600 square foot facility
located on the first floor of a multi-story concrete and steel loft building at
145 Palisade Street, Dobbs Ferry, New York, which it leases from an independent
third party, Commerce and Industry Associates under a written lease which
commenced on November 15, 1993 and terminates November 14, 1998. The annual
rent for the first floor facility increases at November 15 of each year with
the annual rent for the period November 15, 1995 to November 14, 1996 being
$49,414; for the twelve month period between November 15, 1996 and November 14,
1997, the annual rent will be $51,885; and from November 15, 1997 until
November 14, 1998, the annual rent will be $54,479. All of these annual rents
are payable in equal monthly installments. In the basement of the same
building the Registrant also leases on a month-to-month basis from Commerce and
Industry Associates about 2,000 square feet of storage space, which lease
commenced on March 1, 1995. The rental for the basement is
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$1,000 per month
plus $75 per month for electricity. The Registrant believes that the
facilities are sufficient for its needs at least to the expiration of the lease
for the first floor space. Registrant does not anticipate a problem with
respect to continuing to renew the lease to the basement storage facilities for
the next several months.
Prior to November 15, 1993, the Registrant occupied a 27,000 square foot
facility in North White Plains, New York, which it rented from the Registrant's
former President, Michael Schiller, and Mr. Schiller's sister and sister-in-law
at an annual rent of $200,000 per year. This lease was terminated by the
Registrant as part of its effort to economize. Claims were brought by the
former President and his relatives for unpaid rentals and other damages, which
were settled in the Bankruptcy Court.
The Registrant has no other interest in real properties, whether by
outright ownership, lease or mortgage.
Item 3. LEGAL PROCEEDINGS.
(a) Pending Litigation.
There is no pending litigation against the Registrant. All litigation,
threatened litigation, and claims pending at time of Registrant's filing for
relief under Chapter 11 of the Bankruptcy Law were settled and compromised in
the bankruptcy proceeding, albeit that two of the controversies were settled in
Bankruptcy Court proceedings subsequent to April 1995, when Registrant was
discharged from the protection of the Bankruptcy Law.
(b) Threatened Litigation.
The Registrant is not aware of any threatened litigation against it.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No meetings of security holders have been held since January of 1991.
Accordingly, no matters have been submitted to the security holders of
Registrant for a vote during the fourth quarter
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of the fiscal year ended September 30, 1995.5 However, the Second Amended
Plan of Reorganization dated March 10, 1995 ("the Plan") was submitted to a
vote of all of the security holders and to the various classes of creditors for
approval of the Plan. The vote for approval was based upon the Second Amended
Disclosure Statement dated March 10, 1995 ("Disclosure Statement") submitted by
the Trustee, Hal M. Hirsch. Shareholders and creditors were requested to
return ballots between March 10, 1995 and March 27, 1995 indicating their
approval or disapproval of the Plan. For details as to the matters which were
voted upon by the security holders and creditors and confirmed by order of the
Bankruptcy Court, see copies of the Plan and Disclosure Statement which are
annexed hereto as exhibits. See also: Part II, Item 5 (e) "Recent Sale of
Securities".
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5 Registrant was a Debtor under Chapter 11 of the United States Bankruptcy Code
(11 U.S.Code 101, et. seq.) from September 15, 1993 to April 17, 1995. A
Trustee, Hal M. Hirsch (the "Trustee"), was appointed by the Bankruptcy Court
on August 15, 1994 to oversee the assets and business of the Registrant. The
circumstances which led up to the appointment of the Trustee and the removal of
Michael Schiller, as president, are set forth in the Disclosure Statement.
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PART II
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS.
(a) Market Information.
Just prior to the date of filing of the petition for relief under the
Bankruptcy Law, September 15, 1993, the Old Common Stock was sold for $.25 per
share, and during the bankruptcy proceeding the Old Common Stock continued to
sell at that level, albeit that the trading was sporadic and light in volume.
After confirmation of the Plan and distribution of the New Common Stock on
April 19, 1995, Registrant's securities have been trading on the National
Association of Security Dealers Automatic Quotation System's Electronic
Bulletin Board. The following table shows the low and high bid prices for the
quarters ended June 30, 1995, September 30, 1995, December 31, 1995 and March
31, 1996:
New Common Stock
1995 1996
Low High Low High
3rd Quarter ended
June 30, $1.50 $2.375 --- ---
4th Quarter ended
Sept. 30, $1.75 $2.875 --- ---
1st Quarter ended
December 31, $1.375 $2.50 --- ---
2nd Quarter ended
March 31, --- --- $1.44 $1.69
Prior to January 16, 1996, each share of New Common Stock had one and
two-thirds (1-2/3) A-Warrants attached. The A-Warrants were not separately
tradeable, although the person who received same under the Plan could strip the
A-Warrants from his shares of New Common Stock and sell the shares of New
Common Stock and hold the A-Warrants for exercise or non-exercise as he or she
chose. The A-Warrants expired on January 16, 1996.
On April 30, 1996, the bid price per share for the Registrant's New Common
Stock was $2.00.
-14-
<PAGE>
A-Warrants
There was no separate market for the A-Warrants. Under the Plan, except for
A-Warrants issued to Gordon Molesworth, Daniel Storr and Orval Riessen
("Molesworth, Storr and Riessen"),6 the A-Warrants were intended for exercise
only by the persons to whom they were issued under the Plan. Upon exercise of
the A-Warrants, the exercising holder received one B-Warrant for every two
A-Warrants exercised. Except for A-Warrants issued to Molesworth, Storr and
Riessen, the A-Warrants expired on January 18, 1996. 2,773,800 A-Warrants were
exercised prior to expiration to purchase like number of shares of New Common
Stock at $1.00 per share, and 1,386,900 B-Warrants were issued. The expiration
date of the A-Warrants issued to Molesworth and Storr is at least five years
and ninety days from the Distribution Date, or July 17, 2000, which date may be
extended if certain circumstances occur.
B-Warrants
As of April 30, 1996, there has been no trading
in the B-Warrants, although the
B-Warrants are separately tradeable. B-Warrants and the underlying shares to
be issued on exercise are exempt from registration under the Securities Act
pursuant to Section 1145 of the U.S. Code. As of April 30, 1996, 103,039
B-Warrants were exercised at an exercise price of $2.00 per share. B-warrants
expire 635 days after the Distribution Date or by January 14, 1997.7
(b) Number of Security Holders.
Because a substantial proportion of Registrant's
securities are held in "street
name", the following table only represents the holders of record of
Registrant's securities, and not the beneficial owners thereof. The number of
holders of record were as follows:
As of September 30, 1995 As of April 30, 1996
New Common Stock 9,048 9,183
A-Warrants 3,104 3
B-Warrants 204 405
C-Warrants 3 3
- ---------------------------
6 Molesworth, Storr and Riessen were instrumental in the operation of the
Fingermatrix Shareholder Alliance and aided in finding financing for the
Registrant. In recognition of their services, A-Warrants and C-Warrants were
issued to them under the Plan, the numbers awarded being proportional to their
respective contributions. As of April 30, 1995, 500,000 A-Warrants and 300,000
C-Warrants were issued to Molesworth, Storr and Riessen. See: Item 13 "CERTAIN
RELATIONSHIPS AND SPECIAL TRANSACTIONS".
7 B-Warrant certificates mistakenly state that the B-Warrants expire September
28, 1996.
-15-
<PAGE>
(c) Description of Securities.
Although the Registrant's certificate of incorporation, as amended in the
Chapter 11 proceeding, provides for two classes of stock, namely, preferred
shares and common shares, only common shares ($.01 par value) ("New Common
Stock") are issued and outstanding.
Common Shares. Of the 20,000,000 shares of New Common Stock authorized, as
of September 30, 1995 and April 30, 1996, 3,945,404 shares and 7,090,547 shares
were issued and outstanding, respectively. Subject to dividend rights of
preferred shares, if ever issued, holders of the shares of New Common Stock are
entitled to dividends when, as and if declared by the Board of Directors out of
funds legally available for such purpose. Holders of the common shares are
entitled to cast one vote for each share held at all shareholder meeting for
all purposes, including the election of directors. No holder of New Common
Stock has a preemptive or preferential right to purchase or subscribe for any
part of any unissued or any additional authorized shares or any securities of
the Registrant convertible into shares. On liquidation or dissolution, the
holders of shares of New Common Stock are entitled to participate equally in
the assets of the Registrant, or the proceeds thereof, after payment of all
debts and liabilities of the Registrant and after making provision for any
preferences which may have been granted to holders of preferred shares, when,
as and if issued.
Of the 7,090,547 shares of New Common Stock, as of April 30, 1996, to the
knowledge of Registrant's management 1,673,712 shares are held by officers,
directors and persons owning more than 5% of the issued and outstanding common
stock. See Part III, Item 12 "SECURITY OWNERS".
Preferred Shares. 1,000,000 shares of preferred stock ($.01 par value) are
authorized and none are issued or outstanding. All prior classes of preferred
had been cancelled and exchanged for New Common Stock under the Plan. The
Preferred Stock may be issued in one or more series by the Board of Directors
without further shareholder action and shall contain such terms and
designations as the Board of Directors may fix.
A-Warrants, B-Warrants, C-Warrants, and Penny Warrants
For further details as to A-Warrants and B-Warrants, see Item 5(a) above,
"Market Information", and Item 5(e), "Recent Sale of Securities", immediately
below. Except for employee stock options granted to officers, employees and
directors, there are no other outstanding warrants, options or other rights to
purchase Registrant's New Common Stock or other securities. For details as to
director and employee stock options, see: Item 11 "EXECUTIVE COMPENSATION".
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<PAGE>
C-Warrants
C-Warrants were only issued to Molesworth, Storr and Riessen. Each C-Warrant
is entitled to purchase one share of New Common Stock at the exercise price of
$.01 per share. The C-Warrants are separately tradeable, and they and the
underlying shares to be issued on exercise are exempt from registration under
the Securities Act pursuant to Section 1145 of the U.S. Code. C-Warrants
expire five years from date of Distribution or by April 17, 2000.
Penny Warrants
In consideration of settling the claims for loans made to the Registrant and
for unpaid salary owed by Registrant, Michael Schiller, former president of
Registrant, received 200,000 warrants to purchase two hundred thousand shares
of New Common Stock at an exercise price of $.01 per share ("Penny Warrants").
Although the settlement with Mr. Schiller was approved by the Bankruptcy Court,
the 200,000 warrants were issued by the Registrant post confirmation.
Accordingly, the warrants and the underlying shares to be issued on exercise
can not be sold or transferred except in accordance with the Securities Act.
On January 16, 1996, Michael Schiller exercised his option and purchased
200,000 shares of New Common Stock for $2,000, and, therefore, there are no
outstanding Penny Warrants.
(d) Dividends.
The Registrant has not issued any dividends on any of its securities both
before and after becoming a Debtor under Chapter 11 of the federal Bankruptcy
Law. It does not contemplate issuing any dividends in the near future.
(e) Recent Sales of Securities.
A. Securities Intended To Be Issued Under The Plan.
Under the Plan which was confirmed on March 31, 1995, the authorized common
stock was reduced from 40,000,000 shares of $.02 par value common stock ("Old
Common Stock") to 20,000,000 shares of $.01 par value common stock ("New Common
Stock"). In addition to providing for issuance of New Common Stock, the Plan
provided for the issuance of A-Warrants, B-Warrants and C-Warrants.
Accompanying the issuance of each share of New Common Stock was an 1 and 2/3
A-Warrants to purchase 1 and 2/3 shares of New Common Stock at $1.00 per share.
Upon exercise of the A-Warrant, the holder thereof received 1/2 B-Warrant
exercisable at $2.00 per share. Except for A-Warrants issued to Molesworth,
Storr and Riessen, the A-Warrants had to be exercised within 270 days of the
"Distribution Date" of April 19, 1995, or by January 16, 1996, and the
B-Warrants have to be exercised within 635 days of the Distribution Date or by
-17-
<PAGE>
January 14, 1997, after which dates the warrants expire. Of the 20,000,000
shares of New Common Stock, 11,962,500 shares of New Common Stock were intended
to be issued or reserved for issuance under the Plan. See, "Securities Issued
Under the Plan", Par. B of this Item 5, for the amount of shares actually
issued and reserved for issuance.
Distribution of these securities,
as well as cash, under the Plan was dependent
upon the category or class of claims or interests that one was in, of which
there were seven. The seven classes followed the priority and classes
designated under the Bankruptcy Law which were:
1. Administrative Expense Claims. These claims relate to the cost and
expense of administering the Registrant while a Chapter 11 Debtor including the
fee of the Trustee, Hal M. Hirsch, and his law firm, which claims were paid in
cash out of financing arranged post-petition and post-confirmation amounting to
approximately $714,092 as of September 30, 1995 with an additional $43,457
being paid as of April 30, 1996.
2. Post-Petition Financing Claims. These claims were by persons who
advanced money to Registrant during the Chapter 11 Proceeding (post-petition)
consisting of two sub-classes:
First Class, being a company, SIS Capital Corp. ("SIS"), which was to receive
repayment of $1,067,000 that SIS had advanced to Registrant with repayment to
be made in five installments over a period of two and one-half years8 and
150,000 shares of New Common Stock and 250,000 A-Warrants and 125,000
B-Warrants (see: Item 13, "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS");and
Second Class, being several individual lenders (Equity Lenders) who were to be
issued up to 825,000 shares of New Common Stock for either money loaned to the
Registrant post-petition and who converted the loans at $1.00 per share into
shares of New Common Stock, or who would purchase shares from the Registrant up
to the sum of $3,500,000 authorized by the Bankruptcy Court at confirmation
date; in addition the Equity Lenders would receive up to 1,375,000 A-Warrants
to purchase like number of shares of New Common Stock at $1.00 per share and
687,500 B-Warrants to purchase like number of shares of New Common Stock at
$2.00 per share. Only 550,000 shares of New Common stock were issued to Equity
Lenders pursuant to the Plan at prices ranging from $1.00 to $1.60 per share.
Accordingly, the number of A-Warrants were reduced to 500,000 A-Warrants and
250,000 B-Warrants.
- ---------------------------
8 At April 30, 1996, the Registrant had paid SIS $650,000 in three installments
of $250,000 at Distribution Date and $200,000 each in November 1995 and April
1996, leaving a balance due of $417,000.
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<PAGE>
3. Secured Claims. This category of claims was intended for persons
holding valid liens on property of Registrant of which there were none.
4. Priority Claims. Claims by New York State for taxes in the sum of
$5,563 and four wage claims of $2,000 each by former employees of the
Registrant. All of the priority claims have been paid in full from the
proceeds of the sale of shares of the New Common Stock. No securities were
issued to this class.
5. Convenience Claims. This category of claims aggregating $5,485 was by
persons who held unsecured allowed claims of less than $500 who would be paid
and were paid in full upon the Plan's confirmation from the proceeds of the
sale of shares of the New Common Stock. No securities were issued to this
class.
6. General Unsecured Claims. Apart from those in the convenience claim
category, the Registrant owed to general unsecured creditors the sum of
$1,660,802.9 Twenty-five percent of this amount would be paid by the
Registrant out of the proceeds of the post petition and post confirmation
financings in four installments of 5%, 10%, 5% and 5% every six months
commencing on April 19, 1995, the Distribution Date. In addition, this class
was entitled to receive up to 300,000 shares of New Common Stock together with
500,000 A-Warrants which securities were to be issued in the same proportion as
the respective claims bore to the aggregate claims of this class.
7. Pre-Petition Security Holder Claims. In recognition of over
$54,000,000 invested by the holders of the Old Common Stock, the Series A and
Series B Preferred Stock, the Plan provided for the following securities to be
issued reserved for issuance under the Plan as follows:
(i) 1,500,000 shares
1,500,000 shares New Common Stock together with 2,500,000 A-Warrants to
purchase 2,500,000 shares of New Common Stock at $1.00 per share were issued in
cancellation and exchange of: (1) all issued and outstanding preferred Series
A consisting of 9,460 shares, (2) all issued and outstanding preferred Series B
shares consisting of 346,964, and (3) all issued and outstanding Old Common
Stock consisting of 16,811,267 shares. The exchange rate of the Old Common
Stock for the New Common Stock without including the warrants was approximately
11.2 shares of old for one share of new. The Plan gave no recognition to the
outstanding warrants and options to purchase the Old Common Stock. The Series
B preferred
- ----------------------------
9 In addition to the $1,660,802, there was a general unsecured claim of
$395,000, which claim was settled by the Registrant issuing shares of New
Common Stock and warrants in lieu of any cash payment.
-19-
<PAGE>
shares were erroneously treated as if they were Old Common Stock
for purpose of the exchange into New Common Stock one share of Series B
preferred shares for one share of Old Common stock, when as a matter of right
the Series B had the right to convert one share of Series B preferred for five
shares of Old Common Stock. This error in the Plan was corrected and the Board
of Directors of the Registrant in October, 1995, authorized issuance to the
Series B preferred holders additional shares of New Common Stock based upon the
Series B being converted into Old Common Stock at the rate of one share of
Series B for five shares of Old Common Stock. Accordingly, the holders of
Series B preferred received 151,600 (approx.) shares of New Common Stock,
together with 252,700 A-Warrants. Of the 1,500,000 shares of New Common Stock
reserved, 1,472,738 shares were originally issued to the holders of the Old
Common Stock and to the holders of the Series A and Series B Preferred, and the
balance of 27,262 shares of New Common Stock is being held for delivery to
persons whom the Disbursing Agent under the Plan has been unable to deliver the
certificates of New Common Stock.
All 1,500,000 shares of New Common Stock were issued or shall be issued by the
Registrant exempt from registration under the Securities Act of 1933, as
amended pursuant to 11 U.S. Code Section 1145.
(ii) 2,500,000 shares
2,500,000 shares of New Common Stock were reserved for issuance upon exercise
of like number of A-Warrants issued to the Class 7 Claimants (i.e., the holders
of the Old Common Stock and old preferred shares); by reason of the fact that
1,472,738 shares of New Common Stock were issued under the Plan rather than
1,500,000 shares, only 2,454,563 A-Warrants were issued to the Class 7
claimants. Management of the Registrant believes that only a small proportion
of these A-Warrants were exercised prior to the date of January 16, 1996, when
all of the A-Warrants issued to the Class 7 Claimants expired. Purchase of
these shares by exercise of the A-warrants was authorized under the Plan and
exempt from registration under the Securities Act of 1933, as amended, pursuant
to 11 U.S. Code Section 1145.
(iii) 1,250,000 shares
1,250,000 shares were reserved for Class 7
Claimants for issuance upon exercise
of like number of Class B Warrants upon their exercise of the A-Warrants. The
exercise price of the B-Warrants is $2.00 per share. Management believes that
only a small proportion of the B-Warrants now outstanding are held by members
of Class 7.
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<PAGE>
B. Securities Issued Under The Plan.
Under the Plan, at Distribution Date (April 19, 1995), 2,222,738 shares of the
New Common Stock were issued to: (i) the Class 7 Claimants (1,472,738 shares
along with 2,454,563 A-Warrants);10 (ii) the Equity Lenders (300,000 shares
along with 500,000 A-Warrants); (iii) 150,000 shares to SIS, and (iv) the
unsecured creditors (300,000 shares along with 500,000 A-Warrants).
Since the Distribution Date, 2,773,800 A-Warrants were exercised at $1.00 per
share to purchase like number of shares of New Common Stock from Registrant for
an aggregate price of $2,773,800. As of January 17, 1996, the balance of the
A-Warrants issued to the Class 7 Claimants expired. 500,000 A-Warrants issued
to Molesworth, Storr and Riessen are outstanding.
Since the Distribution Date, 103,039 B-Warrants were exercised at $2.00 per
share to purchase like number of shares of New Common stock from Registrant for
an aggregate price of $206,078. As of April 30, 1996, 1,358,103 B-Warrants are
outstanding.
Since the Distribution Date, 200,000 C-Warrants were exercised at a price of
$.01 per share to purchase like number of shares of New Common Stock. As of
April 30, 1996, 100,000 C-Warrants are outstanding.
Since the Distribution date, all 200,000 Penny Warrants were exercised at a
price of $.01 per share to purchase like number of shares of New Common Stock.
The certificates for the 200,000 shares of New Common Stock purchased upon
exercise of the Penny Warrants bear a legend restricting sale, transfer, pledge
or other disposition except in accordance with the Securities Act.
C. Securities Issued Post-Confirmation.
Unable to raise the capital financing contemplated under the Plan from the
Equity Lenders, the Registrant, on or about August 30, 1995, entered into a
private placement agreement with P.T. Dolak Permei ("Dolak"), an Indonesian
company, totally independent of the Registrant, whereby the Registrant would
sell 2,000,000 shares of New Common Stock at a price of $1.00 per share for an
aggregate price of $2,000,000. $1,000,000 of the $2,000,000 purchase price was
to be paid in September and October, 1995, and thereafter the balance was to be
paid in monthly installments of $100,000, commencing January 1, 1996. By
October 1995, Dolak had purchased 1,000,000 shares for $1,000,000, and in
March 1996, it
- -------------------------------
10 An additional 50,000 A-Warrants were issued to UNISYS in settlement of a
claim originally in the amount of $395,000 in August, 1995, approved by the
Bankruptcy Court, of which 25,000 A-Warrants could be exercised by applying a
credit of $25,000 which was recognized in the settlement as being owed by the
Registrant to UNISYS.
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<PAGE>
purchased 100,000 shares at $1.00 per share. At the time of the
last purchase, Dolak requested a deferral of the remaining purchases until June
1, 1996 when monthly purchases of 100,000 shares at $1 per share would resume.
An agreement with Dolak to such effect was entered into in May 1996.
Accordingly, as of April 30, 1996, Dolak has purchased 1,100,000 shares of New
Common Stock for an aggregate price of $1,100,000, and has signed a written
agreement to purchase 900,000 shares for $900,000. The Registrant makes no
representation that the obligation of Dolak to purchase the remaining shares is
enforceable or that Dolak shall honor the terms of the written agreement,
albeit that Registrant's management is of the belief that Dolak shall continue
to make the purchases contracted for. The shares issued to and to be issued to
Dolak were sold and to be sold in accordance with Regulation S promulgated
under the Securities Act with a restriction barring sale one year from issue of
each purchase.
In April, 1996, the Fireman's and Policeman's Pension Fund of Tampa Florida
("Tampa Fund") authorized the conversion of the Promissory Note in the sum of
$250,000 into 250,000 restricted shares of New Common Stock. The Promissory
Note was originally issued in November 1994 in exchange for a loan of $250,000
to the Registrant after approval by the United States Bankruptcy Court. Under
the original conversion terms, the loan was to be converted into two and
one-half(2 1/2%) percent of the equity at confirmation date which would have
entitled the Tampa Fund to 75,000 shares of the New Common Stock, or a price of
over $3.00 per share. In order to have the conversion price be closer to
market and to recognize the aid given by the Tampa Fund to the Registrant
during the bankruptcy proceeding, the Board of Trustees amended the conversion
right to $1.00 per share.
The Registrant may seek additional financing through private placements of its
securities. See: Item 7, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS".
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<PAGE>
Item 6. SELECTED FINANCIAL DATA.
Set forth below is certain selected financial data11 of the Registrant as of
and for the years ended September 30, 1995, 1994, 1993, and May 31, 1993, and
1992, and four-month period ended September 30, 1992.
<TABLE>
<CAPTION>
Four months
Years ended ended Years ended
September 30, September 30, May 31,
1995 1994 1993 1993 1992
<S> <C> <C> <C> <C> <C>
Net revenues $ 3,277 $ 29,764 $ 120,351 $ 44,655 $ 258,405
------------ ------------ ---------- -------- ------------
------------ ------------ ---------- -------- ------------
Loss before extra-
ordinary items ( 1,772,429) ( 2,604,658) ( 903,462) ( 3,671,988) ( 3,334,190)
------------ ------------ ---------- -------- ------------
------------ ------------ ---------- -------- ------------
Extraordinary credit 1,781,128 -- -- -- --
------------ ------------ ---------- -------- ------------
------------ ------------ ---------- -------- ------------
Earnings (loss) per
common share:(*)
Before extraordinary
credit (.93) (2.41) (.88) (3.32) (2.98)
Extraordinary credit .93 -- -- -- --
weighted average number
of common shares(*) 1,907,431 1,227,222 1,227,222 1,214,526 1,117,736
Balance Sheet Information
Working capital
(deficiency) ( 770,388) ( 4,128,894) (2,136,596) (1,619,180) 1,015,143
Total assets 1,275,296 199,751 211,072 442,151 2,315,743
Total liabilities 2,431,304 4,166,080 2,168,543 1,694,760 754,120
Shareholder's equity
(deficiency) (1,156,008) (3,966,329) (1,957,471) (1,252,609) 1,561,623
Shareholder's equity
(deficiency) per
common share)(*) (.07) (.24) (.12) (.32) 1.36
----- ----- ----- ----- -----
----- ----- ----- ----- -----
<FN>
(*) Retroactively adjusted to reflect 0.7 for 1 stock split effected on
April, 1995.
</TABLE>
- -----------------------
11 See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS" and "FINANCIAL
STATEMENTS" for further financial data.
-23-
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Financial Statements of the Company and notes thereto annexed hereto.
Liquidity and Capital Resources
After nearly twenty years of operation and a bankruptcy reorganization, the
Registrant is still a development stage company and it still has not yet
achieved a sufficient volume of sales to cover the large expenditures required
for product development, production engineering, tooling, equipment, and
promotion and sale of its products. As a consequence, the Registrant has
continuously operated at a loss from its inception to the present. It has been
and is currently dependent on the sale of its securities to fund its
operations.
By filing for relief under the Bankruptcy Law, the Registrant expected to shed
itself of a substantial portion of the burden of its prior capitalization and,
to a lesser extent, of its general unsecured debt, so as to be able to finance
further development and marketing of its fingerprint identification technology,
which appeared to be much more advanced in many areas than the technology being
used by others.
The Plan permitted the Registrant to compromise its pre-petition debt of
$2,168,500 and to greatly reduce the holdings of nearly 17,000,000 shares of
Old Common Stock and eliminating all of the old Series A and B Preferred
Shares. By reason thereof, the Registrant under the Plan contemplated raising
within two or three months of the Plan's confirmation up to $3,500,000, of
which at least $1,500,000 was expected to be received by the Registrant within
two or three weeks of the Plan's confirmation from persons who would receive
A-Warrants along with their shares of New Common Stock, and who indicated that
they would exercise the A-Warrants. The additional capital was needed to fund
not only the Registrant's future operations, but to pay: (i) the unpaid balance
of administrative expenses of the bankruptcy proceeding in the sum of
approximately $602,000, (ii) $1,067,000 to SIS Capital Corp., (iii)
approximately $25,000 of priority and convenience claims, and (iv)
approximately $470,000 to the general unsecured creditors (hereafter
collectively referred to as "Bankruptcy Obligations"). Only $480,463 of equity
financing was raised by April 19, 1995 (the "Distribution Date") by the sale of
shares of new Common Stock with A-Warrants. As a result, the Registrant had to
use such money to pay the Bankruptcy Obligations, and Registrant had little
money available to invest in the Registrant's business operations. The
estimates and projections set forth in the Interim Business Plan could not be
met.
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<PAGE>
In order to cope with this cash deficiency, the Registrant sought and obtained
financing outside the Plan through a private placement with an overseas company
on August 31, 1995. (See Part II, Item 5 "MARKET FOR REGISTRANT'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS: Recent Sales of Securities and Securities
Issued Post Confirmation"). By so doing, the Registrant obtained working
capital sufficient at least to embark on the first phases of its plan to
successfully market certain of its products and sub-systems, namely, to hire
necessary personnel, purchase needed equipment and to develop the first of its
products, that is the Single Print Scanner and the Forensic Quality Scanner.
Notwithstanding that the Registrant had as of September 30, 1995 cash in the
sum of $1,067,000, the Registrant had on that date a working capital deficiency
of $770,388, which deficiency was due to the portion of the Bankruptcy
Obligations payable within one year. Since September 30, 1995 to date hereof,
the Registrant has raised $3,679,210. The monthly operating costs of
Registrant for the year ended September 30, 1995 averaged $120,000. Since
September 30, 1995, the monthly operating varies between $150,000 and $230,000.
As of April 30, 1996, the Registrant had $804,000 in cash in banks or in cash
equivalents. Based upon continuation of such monthly operating costs, the
Registrant has sufficient capital to continue for at least seven months from
April 30, 1996 assuming that it has no revenues from sales of its products and
services and that it does not raise additional capital through the sale of its
securities. While the Registrant is expecting orders for its Single Print
Scanner, at this time, however, it does not have any orders, nor can it
represent that it will obtain orders.
The monthly operating costs do not take into account the remaining payments
which the Registrant has to make on the Bankruptcy Obligations. The remaining
payments owed on the Bankruptcy Obligation are the sum of $417,000 to SIS, with
$200,000 due October 19, 1996 and $217,000 due April 19, 1997; the sum of
$87,915 to the general unsecured creditors due October 19, 1996. The
Registrant has paid on the Bankruptcy Obligations through April 30, 1996 a
total of $1,766,694, all of it financed from funds raised from the Equity
Lenders and the Private Placement.12
In order to finance funding for operations of the Registrant as well as to pay
for the Bankruptcy Obligations, Registrant may seek such funding through sales
of its securities in private placements exempt from registration under the
Securities Act. In this regard, there are currently outstanding 1,358,000
B-Warrants, which if totally exercised would result in $2,716,000 of
- ----------------------
12 If the Fireman's and Policeman's Pension Fund had not elected to convert the
$250,000 Promissory Note, another $250,000 would have fallen due on May 31,
1996, eroding further the Registrant's working capital.
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<PAGE>
working capital. The Registrant makes no representation that any of said
B-Warrants will be exercised.
Results of Operations
During the forty-month period from May 31, 1992 to September 30, 1995, the
Registrant's revenues from sales aggregated to approximately $186,000 as
contrasted to the cost and expenses of operations during this forty-month
period aggregating approximately $9,150,500. Of these costs and expenses, cost
of sales were approximately $147,000, research and development during this
forty-month period aggregated approximately $2,935,000; selling, general and
administrative expenses totalled approximately $3,281,000, and interest on and
amortization of debt aggregated approximately $125,000, for a total of
$6,488,000. The remaining $2,662,500 of cost and expenses during this
forty-month period were attributable to: (i) the bankruptcy administration
costs of approximately $714,000; (ii) amortization of deferred compensation in
the total sum of approximately $1,443,500, and (iii) inventory write-down of
$505,000. This latter category of cost and expenses should be non-recurring.
The following is an analysis of the results of operations for the following
periods: (i) the year ended May 31, 1993 and the four-month period ended
September 30, 1993, (ii) the year ended September 30, 1994, and (iii) the year
ended September 30, 1995.
For the Y/E May 31, 1993 and
4-Month Period ended September 30, 1993:
During the annual period ended May 31, 1993, the Registrant had revenue
from sales of $37,119 and $7,536 of interest income. For the four-month period
ended September 30, 1993, it had revenue from sales of $120,020 and $331 of
interest income. The sales revenue was principally derived from rental of
systems to the State of New York. The cost of sales for the year ended May 31,
1993 was $116,442, and for the four month period ended September 30, 1993 the
cost of sales was $4,400.
The sum of $505,107 was written off against inventory for the year ended May
31, 1993, and in the four-month period ended September 30, 1993, Registrant
determined that costs assigned to certain patents in the amount of $145,888
were worthless and such costs were written off. Research and development
expenses for the annual period and the four month period were $906,436 and
$542,970, respectively.
As a result of operations in these two periods, the current assets as of May
31, 1993 and September 30,193 were $75,580 and $31,947, respectively, as
contrasted to current liabilities on
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<PAGE>
said dates in the sums of $1,694,760 and $2,168,543, respectively. Such a
disproportionate disparity between the assets and liabilities required the
Registrant to file for relief under Chapter 11 of the Bankruptcy Law.
For the Y/E September 30, 1994:
During this annual period, the Registrant had sales and service contract
revenue of $28,770 and $994 of interest income. The sales revenue was derived
from rental of systems to the State of New York. Cost of sales for this period
was $13,200 for amortization of patent costs. Research and development costs
were $747,349 as contrasted to $542,970 for the four month period ended
September 30, 1993 and $906,436 for the year ended May 31, 1993. The research
and development costs for the year ended September 30, 1994 were primarily
expended on developing a FACS for New York State and New York City Departments
of Welfare, and another FACS for the Jamaican government. The selling and
general administrative expenses were $788,329 as compared to $277,843 for the
four month period ended September 30, 1993 and $1,513,594 for the year ended
May 31, 1993. Such reduction was due to discharge of personnel occasioned by
the Chapter 11 Proceeding. Bankruptcy cost of administration was $454,054 for
this period. Amortization of deferred compensation and write off of stock
options granted to three employees at below market price in the sum of $595,800
was taken in this period. Such amortization had no effect on cash flow.
For the Y/E September 30, 1995:
During this period, the Registrant had only $268 in sales revenue.
Its cost of
sales was $13,200, the same amount as the prior fiscal year. Research and
development was $738,237 as compared to the prior fiscal period of $747,349.
The research and development costs were expended on development of the LPS-12,
the LPS-14, and the booking station. Selling and general administration costs
were $701,246 as compared to $788,329 for the year ended September 30, 1994.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by Part II, Item 8,
are included in Part IV, as indexed at Item 14(a)(1).
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<PAGE>
Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DATA CHANGES IN
REGISTRANT'S CERTIFYING ACCOUNTANT
The certifying accountants at September 15, 1993, when the Registrant filed its
Petition under Chapter 11, was Salibello & Broder. Upon appointment of the
Trustee in September, 1994, he obtained approval for the appointment of the
accounting firm of Bennett Kielson Storch & Company LLP, which continues to do
monthly unaudited financial statements. The Board of Directors of Registrant,
after interviewing accounting firms selected the accounting firm of Farber
Blicht & Eyerman LLP, as the Registrant's independent auditors. There are no
disagreements between the management of Registrant and the accounting firm of
Farber Blicht & Eyerman.
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<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
All of the five directors listed below were appointed pursuant to the Plan
at its effective date of April 17, 1995, and they were to continue to hold
office until the next annual meeting of the Registrant, at which time they each
would stand for re-election. Under the Restated Certificate of Incorporation
adopted by the Plan, there can be a minimum of five directors and a maximum of
fourteen directors. At effective date of the Plan, the Registrant had only one
officer, namely, Thomas T. Harding, who was President and Chief Executive
Officer. At the first meeting of the Board of Directors in April, 1995,
Thomas T. Harding's appointment as President and Chief Executive Officer of
Registrant was ratified, and Gordon R. Molesworth was appointed Secretary.
For the present, these are the only executive officers, with Mr. Harding also
performing the functions of Treasurer, as required. While Mr. Molesworth's
company, Molesworth Associates, Inc., receives compensation as a consultant to
the Registrant, only Mr. Harding is an employee of Registrant. At present the
Directors receive no compensation for their duties as such, but upon the
Registrant achieving sufficient income from operations, it is intended that
the Directors shall receive a cash stipend for attending meetings and
performing other acts. The non-employee Directors for their efforts however
have each received options under Director Stock Option Plan to purchase 75,000
shares of New Common Stock at an exercise price of $2.375 per share, the market
price on July 21, 1995, the date of the grant of the option. The non-employee
director stock options are subject to approval by the shareholders of
Registrant at Registrant's next annual meeting (tentatively scheduled for July
16, 1996). While the options granted to each non-employee director is 75,000
shares, only 37,500 shares are exercisable during the first year following the
grant and thereafter, on each of the anniversary date of the grant options to
purchase 12,500 shares become exercisable, provided the non-employee director
is still a director of Registrant.
Executive officers of the Registrant serve at the pleasure of the
Registrant's Board of Directors, or until the next annual meeting of the Board
of Directors and until their respective successors have been elected and
qualify. Directors serve until the next annual meeting of shareholders and
until their respective successors have been elected and qualify.
There are no arrangements or understandings between any Director and any
other person regarding the nomination or election of Directors and, likewise,
there are no arrangements or understandings between any officer and any other
person regarding his election as an officer.
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<PAGE>
Set forth below are the names, ages and positions of the executive officers
and all Directors of the Registrant.
Director Executive
Name Age Since Officer Since Position
---- --- -------- ------------- --------
Thomas T. Harding 57 Apr. 17, 1995 Dec. 1994 President, Chief
Executive Officer,
and Director
Gordon R. Molesworth 79 Apr. 17, 1995 Apr. 17, 1996 Secretary
Lewis N. Schiller 65 Apr. 17, 1995 N/A Director
Seth M. Lukash 50 Apr. 17, 1995 N/A Director
Fred I. Sonnenfeld 68 Apr. 17, 1995 N/A Director
Business Background of Directors and Officers
Set forth below is a brief description of the business backgrounds of
the officers and directors of the Registrant.
Thomas T. Harding, President, Chief Executive Officer and Director. After
a short period in November 1994 during which Mr. Harding was a marketing and
management consultant to the Trustee, in December 1994 the Trustee with
Bankruptcy Court approval appointed Mr. Harding as president of the Registrant.
From 1979 to 1994, Mr. Harding was a marketing and management consultant to
various corporate clients, among them the Registrant for the period from 1982
to 1990. Prior to 1979, Mr. Harding was a corporate vice-president and
division manager with Perkin-Elmer (1976-1978), and division vice president of
Litton Industries, Inc. (1972-1975). Mr. Harding holds a Bachelor of Science
Degree in Electronics from the University of Scranton and he did graduate work
at George Washington University in engineering administration.
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<PAGE>
Gordon R. Molesworth, Secretary and Director. Mr. Molesworth was one of
the leaders of the Registrant's Pre-Petition shareholders group and he was
instrumental in partially funding the financing of Registrant, both
Post-Petition and Post-Confirmation. He was appointed to the Board of
Directors as a representative for the shareholders Pre-Petition, as well as
for the new shareholders. Through his company, Molesworth Associates Inc., he
also serves as communications consultant to the Company. He is the President
of Molesworth Associates Inc., a communications and public relations
consultancy located in Green Valley, Arizona, which has been in existence since
1959. Prior to 1990, Mr. Molesworth had been a consultant to the Registrant.
Lewis S. Schiller, Director. He is the president and chief executive
officer of SIS Capital Corp. ("SIS"), the firm which loaned to Registrant
post-petition to its filing for relief under the Bankruptcy Law the sum of
$1,067,000. By reason of moneys owed to SIS, Mr. Schiller was designated to
the Board of Directors. SIS is an affiliate of Consolidated Technologies,
Inc., a publicly owned company of which Mr. Schiller is also the chairman and
chief executive officer, and he has held such positions since 1987. Mr.
Schiller is also Chairman and Chief Executive Officer of Trans Global, Inc., a
publicly-held corporation engaged in the business of contract engineering.
Trans Global is an affiliate of Consolidated Technologies, Inc. Mr. Schiller
is the brother of Michael Schiller, the former president and chief executive
officer of Registrant.
Seth M. Lukash, Director. He is Chairman and Chief Executive Officer of
Tridex Corporation, an electronic equipment manufacturer listed on the NASDAQ
stock market. Mr. Lukash also serves as a Director for the following
organizations - Tanaka Capital Management, Inc., an investment advisory firm
located in New York, NY, and JobDirect Inc., an Internet-based recruitment
organization located in Greenwich, CT. Mr. Lukash is also the Chairman of the
Connecticut Chapter of the American Electronics Association (AEA). He also is
a Board Member of the AEA. He has had no prior connection with Registrant and
was chosen by reason of his success with his own company.
Fred I. Sonnenfeld, Director, is an attorney licensed to practice in the
State of New York for over forty years. He is a partner in Sonnenfeld &
Richman who are counsel to the Registrant. Between 1990 and January, 1993,
Mr. Sonnenfeld's law firm was general counsel to the Registrant when his firm
resigned such position. Mr. Sonnenfeld was one of three members of the
committee for general unsecured creditors.
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<PAGE>
Item 11. EXECUTIVE COMPENSATION
The following table sets forth all compensation paid by the Company to
each of its two executive officers fiscal year ended September 30, 1995:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term Compensation
Annual Compensation Awards Payouts
--------------------------------- ------------------------------ --------------------------
===================================================================================================================
(a) (b) (c) (d) (e) (f) (g) (h)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Securities
Name and Other Annual Restricted Underlying All Other
Principal Salary Bonus Compensation Stock Award(s) Options/SARs LTIP Payouts Compensation
Position ($) ($) ($) ($) ($) ($) ($)
- -------------------------------------------------------------------------------------------------------------------
Thomas T. $115,377 0 14 0 0 15 0 0 0
Harding -
President,
Chief
Executive
Officer
- -------------------------------------------------------------------------------------------------------------------
Gordon R. $0 16 0 0 0 0 17 0 0
Molesworth -
Secretary
===================================================================================================================
</TABLE>
The total cash compensation to all executive officers (one in number) for the
fiscal year ended September 30, 1995 was $115,377.00. In addition,
approximately $147,500 was paid to two technical managerial employees for said
fiscal year. As of April 30, 1996, the total annual payroll for all full time
technical and managerial staff, including the salary of the President (at
$140,000 per year), was approximately $878,000. Because of the Registrant's
inability to offer cash bonuses, five technical
- ------------------
13 Mr. Harding's employment commenced in December, 1994.
14 Under the Plan, Mr. Harding received as a bonus for his work during the
bankruptcy proceeding 115,000 shares of New Common Stock.
15 115,000 shares of New Common stock was issued to Mr. Harding in January,
1996.
16 Pursuant to a written agreement with the Registrant made in April 1995, Mr.
Molesworth's company, Molesworth Associates, Inc. is paid $4,000 per month
plus expenses for consulting and public relations services it renders to the
Registrant.
17 Under the Plan, Mr. Molesworth received 250,000 A-Warrants and 150,000
C-Warrants for his services in reorganizing the Registrant and arranging for
financing of Registrant. He exercised 50,000 A-Warrants and 50,000 C-Warrants
to receive 100,000 shares of New Common Stock, which Mr. Molesworth gave to his
children.
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<PAGE>
employees received among them 19,500 shares of New Common Stock in October 1995
having a market value of $2.375 per share. The share certificates for these
bonus shares bear a legend restricting their sale, transfer, pledge or other
disposition except in accord with the Securities Act.
Mr. Harding has an employment agreement with the Registrant which commenced
on the confirmation dated (April 17, 1995) and which continued for one year
thereafter. The employment agreement was automatically renewed on April 17,
1996 for one year and will be renewable year after year unless Mr. Harding or
Registrant gives notice to terminate the employment relationship at least
thirty days prior to the annual date of renewal. His annual salary under the
employment agreement is $140,000. As additional compensation to Mr. Harding,
the employment agreement provides that he was to receive, and he did receive
on January 5, 1996, without any payment on his part, 115,000 shares of the New
Common Stock, having a bid price of $1.875 per share. He also obtained an
option to purchase 237,500 shares of the New Common Stock at an exercise price
which shall be equal to the "bid" price at the close of business on July 21,
1995 ($2 3/8 per share) in accordance with the Employee Stock Option Plan and
which will expire July 21, 2005. The stock and the options were in discharge
of options contemplated to be granted under the Plan to Mr. Harding. Mr.
Harding is reimbursed for all reasonable and necessary expenses which he
incurs in the performance of his duties. The Registrant paid him July 1995,
the sum of $7,000 for relocating himself and his family to the New York City
area. Apart from the right to participate as an employee in whatever employee
benefit plans the Registrant shall afford to its employees, Mr. Harding
receives no other benefits and compensation other than those set forth above.
During the fiscal year ended September 30, 1995, Mr. Sonnenfeld's law firm
received no fees and for the period between September 30, 1995 through April
30, 1996, his law firm received $14,297.90 in fees.
Employee Stock Option Plan
The Plan provided for reservation of 225,000 shares of New Common Stock to
be issued under an Employee Stock Option Plan ("ESOP") to be adopted by the
Board of Directors. Such an ESOP was adopted by the Board of Directors on
July 21, 1995, except that the Directors increased the number of shares to
350,000. The ESOP requires approval of the shareholders of the Registrant by
July 25, 1996 in order to validate the options granted to employees since July
25, 1995.
The ESOP provides for the granting of incentive stock options ("ISO"),
non-qualified stock options, or both, which shall be determined by a
Compensation Committee made up of non-employee members of the Registrant's
Board of Directors. The prices of the
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<PAGE>
options are to be determined by the Compensation Committee within
certain guidelines, namely, for non-qualified stock options,
the price per share may not be less than 85% of the "fair market
value" on the date of the grant of the option and for ISOs, the price per
share may not be less than 100% of the fair market value of a share on date
of grant (and not less than 110% of the fair market value of a share for an
employee who owns more than ten percent of the outstanding securities of the
Registrant. The ESOP determines the fair market value of a Registrant's share
by anyone of the following which are applicable: (i)the closing price on date
of the grant as reported on a national securities exchange; (ii)the closing
price on the date of the grant as reported by the National Association of
Securities Dealers Automatic Quotation System; (iii) the average of the
closing bid and asked prices on the date of the grant as reported in the
over-the-counter-market; and (iv) and if none of the foregoing are extant,
then by determination of the Compensation Committee.
As of April 30, 1996, the following ESOP options have been granted to
officers and employees of the Registrant:
Name or Number of Option Price Date Date
Group Shares Granted Granted Expire
- ------------------------------------------------------------------------------
Thomas T. Harding 237,500 $2.375 7/25/95 7/21/2005
All Employees At varying At varying 7/21/2005
(16 in number) 301,500 prices of dates between
$1.75 low to 7/25/95 and
$2.375 high 4/30/96
Options may be granted up to ten years from July 21, 1995, when the ESOP
itself expires.
Non-Employee Directors' Stock Option Plan
The Plan provided for 125,000 A-Warrants to be issued to each of the
non-employee directors. In July 1995, the directors of Registrant waived
their rights to the A-Warrants and in lieu thereof adopted a Director Stock
Option Plan ("DSOP") which is subject to shareholder approval at the next
annual shareholders' meeting tentatively scheduled for July 16, 1996. The
maximum number of shares of the New Common Stock which shall be reserved for
the DSOP options is 500,000 shares. The options under DSOP are effective for
ten years from DSOP's effective date, July 21, 1995. Accordingly all DSOP
options expire on July 21, 2005.
DSOP is not an incentive stock option plan. There are currently four
non-employee directors, namely, Messrs. Molesworth, Lukash, Schiller and
Sonnenfeld, who each shall have options to purchase 75,000 shares of New Common
Stock at the fair market value
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<PAGE>
of the New Common Stock as of July 21, 1995, which was $2.375 per share.
Of the options to purchase 75,000 shares of New Common Stock, only
options to purchase 37,500 shares of New Common Stock are exercisable
during the first year of the grant. On each anniversary date after
the grant, options to purchase 12,500 shares of New Common Stock become
exercisable, up to a total of 37,500 shares, provided the non-employee director
is still a director on the Registrant's Board of Directors on each anniversary
date. Any new directors appointed or elected after the effective date are
awarded option to purchase 25,000 shares of New Common Stock at the fair market
value of a share on the date of appointment or election. On each anniversary
of the effective date the non-employee directors, if they are still in office
shall be entitled to an option to purchase an additional 12,500 shares at the
fair market value per share on such anniversary. Fair market value is
determined in the same manner as the ESOP, except that if there is no market
for the shares, then the Board of Directors in their discretion determine the
price.
401-K Plan
Effective January 1, 1990, the Company established a 401(K) defined
contribution and trust plan which covers substantially all officers and
employees upon completion of six months employment. Officers and employees may
contribute from 1% to 15% of their compensation. The Company may contribute to
the fund at the discretion of management. During the forty months ended
September 30, 1995, the Company did not make a contribution, nor has it done
since. The Company has elected to pay the plan administrative expenses, which
were nominal, for this period.
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<PAGE>
Item 12. SECURITY OWNERS.
Non-Management Persons Having More Than
A 5% Interest In Registrant's Securities.
The following table sets forth information as of April 30, 1996 with respect
to those persons who are not part of the Registrant's Management known to the
Registrant to be the beneficial owner of more than five percent (5%) of
Registrant's one class of voting securities, common stock ($.01 par value)
referred to herein as "New Common Stock":
======================================================
Name and Number of Percent of
Address of shares class
Beneficial held
Owner
======================================================
P.T Dolak 1,100,000 15.5%
Permei shares
======================================================
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<PAGE>
Management Security Ownership
The following table sets forth information as of April 30, 1996 with
respect to the beneficial holdings of Management with respect to the New
Common Stock and the A-Warrants, B-Warrants and other options held:
Number of Shares Percent
Number of If All Options and of
Name Shares Warrants Exercised Class
- --------------------------------------------------------------------
Thomas T. Harding 116,237 353,737a 1.64
Gordon R. Molesworth 48,491 451,203b 0.68
Lewis S. Schiller 0 75,000c 0.00
Seth Lukash 0 75,000d 0.00
Fred I. Sonnenfeld 14,500 75,000e 0.02
- ------------------
a Mr. Harding received 237,500 options to purchase 237,500 shares of the
Registrants New Common stock pursuant to the employment agreement described in
Item 11, "EXECUTIVE COMPENSATION" and a stock option agreement. The option
expires on July 25, 2005.
b Mr. Molesworth received the following options and warrants:
250,000 A-Warrants issued pursuant to the Plan exercisable at
$1 per share expiring April 17, 2000 to purchase 250,000 shares;
27,712 B-Warrants issued pursuant to the Plan exercisable at
$2 per share expiring April 17, 2000 to purchase 27,712 shares;
150,000 C-Warrants issued pursuant to the Plan exercisable at
$.01 per share expiring April 17, 2000 to purchase 150,000 shares.
75,000 share option granted pursuant to Directors Stock Option Plan
("DSOP") at $2.375 per share; only 37,500 shares shall be exercisable
upon shareholder approval of DSOP.
c Mr. Schiller shall receive options to purchase 75,000 shares of New Common
stock pursuant to the Directors Stock Option Plan upon approval by thereof by
the shareholders at a price of $2.375 per share. Only options to purchase
37,500 shares shall be exercisable upon shareholder approval. SIS Capital
Corp., a company of which he is the Chairman and Chief Executive Officer,
received 155,103 shares of New Common Stock under the Plan, as well as 258,471
A- Warrants, which were exercised to purchase 258,471 shares of New Common
stock at $1.00 per share. SIS sold both the 150,000 shares and the 250,000
shares. In addition, Mr. Schiller's wife and sister each received 30,038
shares of New Common Stock as creditors under the Plan. Mr. Schiller's
brother, Michael Schiller, holds 306,647 shares of New Common Stock as of
April 30, 1996.
d Mr. Lukash shall receive an option to purchase 75,000 shares of New Common
Stock pursuant to the Directors Stock Option Plan upon approval thereof by
shareholders, of which only 37,500 shares are exercisable upon approval by
shareholders.
e Mr. Sonnenfeld acquired his shares of the New Common Stock as a general
unsecured creditor under the Plan. In addition, as a director he shall receive
an option to purchase 75,000 shares of New Common Stock in accordance with the
Directors Stock Option Plan upon approval by shareholders, of which only 37,500
shares shall be exercisable at time of shareholder approval.
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<PAGE>
Item 13. CERTAIN RELATIONSHIPS AND SPECIAL TRANSACTIONS.
SIS Capital Corp. and Shareholder Alliance
Commencing two or three months before the Registrant filed its petition for
relief under Chapter 11 of the Bankruptcy Law and continuing after the filing
of the petition, moneys were loaned at various times to the Registrant by SIS
Capital Corp. ("SIS") so that Registrant could continue to function. Shortly
after the filing of its petition in September 1993, a court order was entered
to permit such funding of Registrant by SIS up to a designated sum. In
November 1994, another application was made authorizing the Registrant to
receive borrowed funds from SIS. From the filing date until November 1994,
the Registrant's day to day operation was conducted by the founder, president
and chief executive officer of Registrant, Michael Schiller ("M. Schiller").
SIS was and is a wholly owned subsidiary of Consolidated Technologies Group,
Ltd., a public company whose chairman and chief executive officer was and is
Lewis S. Schiller ("L.S. Schiller"), the brother of M. Schiller.
In the Spring of 1993, a group of shareholders of Registrant ("Shareholders
Alliance") united to seek the ouster of M. Schiller from his positions of
Chairman, President and Chief Executive Officer of Registrant on the ground
that he caused the Registrant to consume over fifty million dollars in capital
over a period of seventeen years without having developed a single system or
product capable of generating regular and sustained income. At that time, M.
Schiller, whether because he wanted to protect himself from being ousted (as
claimed by the Shareholder Alliance) or to raise money for the Registrant (as
contended by M. Schiller), caused the Registrant in the Summer of 1993 to issue
to himself 12,250,000 shares for a consideration considerably below the market
price. As a result, the Shareholder Alliance brought a lawsuit against
Michael Schiller in the United States District Court for the Southern District
of New York requiring him to restore the shares to the Registrant, which
M. Schiller did do in January 1994.
Notwithstanding that the Registrant had filed for protection under Chapter
11 of the Bankruptcy Law, the Shareholder Alliance continued its efforts to
seek the removal of M. Schiller, on the alleged grounds, among others, that M.
Schiller had diverted funds of the Registrant, that he was not capable of
successfully reorganizing the Registrant, and that they, the Shareholder
Alliance, could raise additional capital for the Registrant from the
- ------------------
18 Among the persons instrumental in forming the Shareholder Alliance were
Messrs. Molesworth, Storr, and Riessen.
-38-
<PAGE>
Pre-Petition investors only if M. Schiller was not in charge of management.
Their efforts succeeded and a Trustee, Hal M. Hirsch, was appointed to oversee
M. Schiller's management on August 15, 1994 and in November, 1994, the Trustee
removed M. Schiller as President and Chief Executive Officer.
The contest between M. Schiller and SIS on one side, and the Shareholder
Alliance on the other side created difficulties in securing financing for the
Registrant. This was due to the positions taken by the contesting parties.
The Shareholder Alliance would not have its investors contribute capital to the
Registrant until M. Schiller was removed from Registrant's management, and, if
M. Schiller were removed, SIS would cease its funding of the day to day
operation of the Registrant, which could cause the Registrant's Chapter 11
proceeding to be converted to a Chapter 7 proceeding requiring the Registrant
to be liquidated and dissolved.
The Plan resolved this problem by the Shareholder Alliance and its three
representatives, Messrs. Molesworth, Storr, and Riessen, being given the first
opportunity to raise the necessary funding to reorganize the Registrant and
enable it develop and market viable products under management acceptable to the
Shareholder Alliance. This was done by having the members of the initial
Board of Directors who were acceptable to the Shareholders Alliance specified
in the Plan. In order to secure the acquiescence of SIS to the initial Board
of Directors one of the persons designated as a director was one who would
represent the interest of SIS. The general unsecured creditors were also given
one representative. Pending the efforts of the initial Board of Directors to
successfully develop and market viable products, SIS' contributions to
Registrant of $1,067,000 post-petition would be repaid from such financing as
the Shareholder Alliance was able to raise and from the Registrant's revenues.
To secure SIS' repayment of its contribution, a first lien on all of the
Registrant's assets was granted to SIS under the Plan. If, however, the
management designated in the Plan was not able to repay in full SIS's
contributions with interest, SIS had the right to either take over control of
management of Registrant or foreclose upon the assets of the Registrant.
Thus, if SIS replaced the management with its own designees, it would be given
the second opportunity to develop and market the Registrant's products.
Discharge of SIS First Lien on Assets of Registrant.
Pursuant to the Plan, SIS received a first lien on all of Registrant's
assets in April 1995. Although legally not obliged to do so, on June 7, 1996,
SIS Capital Corp. waived and discharged its lien on the assets of Registrant,
and SIS is now only a general creditor of the Registrant to the extent of the
moneys owed to it under the Plan. According to SIS's Chairman and CEO, L.S.
Schiller, SIS did so waive and discharge its lien in order to demonstrate its
confidence in the Registrant and in deference to the
-39-
<PAGE>
moneys which have been invested in Registrant since the confirmation of the
Plan in April 1995. As a result of this discharge of SIS's lien, all of the
assets of the Registrant are held by Registrant free and clear of any liens,
mortgages or other secured interests of third parties.
Of the principal sum of $1,067,000 owed to SIS under the Plan, as of April
30, 1996, there is owed $417,000 plus interest currently at 8% per annum.
Two payments remain to be paid in October, 1996, and April, 1997, in the sums
of $200,000 and $217,000, respectively.
Issuance of Shares to Preferred Shareholders.
The holders of the Series B Preferred Shares under the Plan, were
erroneously treated as if these were holders of Old Common Stock, and
therefore entitled to the same number of shares as the holders of Old Common
Stock would receive. Actually, the Series B shareholders had a right to
convert one share of Series B to five shares of Old Common Stock. When this
error was discovered, proceedings were brought before the Bankruptcy Court to
correct the Plan, but the Bankruptcy Court refused to do so. Once the Plan
was confirmed, it was a problem to be handled by the Board of Directors of the
Registrant. As a result of threatened lawsuits by the holders of the Series B
preferred and in consideration of settlement of the claims of the Series B
Preferred, in October of 1995, the Board of Directors authorized the issuance
of additional shares of New Common Stock based upon the Series B Preferred
being converted into Old Common Stock at the rate of one share of Series B for
five shares of Old Common Stock. The shares of New Common Stock were to be
obtained from the shares authorized under the Plan for issuance, but which were
never issued. As a result, the Series B Preferred holders received
approximately an additional 151,600 shares of New Common Stock for an
aggregate par value of $1,516. See, Part II, Item 5 (e) "MARKET FOR
REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS-Distribution of
Securities - 1,500,000 shares".
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<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS.
(a) The following documents are included in Part II, Item 8 of this
report:
1. Report of Independent Auditors F-1 & F-2
2. Balance Sheets as of September
30, 1995,1994, 1993, & May 30, 1993 F-3 & F-4
3. Statements of Operations for the
two years ended September 30, 1995
and 1994, the four months ended
September 30, 1993, the one year
ended May 31, 1993 and from inception
to September 30, 1995 F-5 & F-6
4. Statements of Shareholders' Equity
(Deficiency) from inception (May 1976)
to September 30, 1995 F-7 to F-18
5. Statements of Cash Flows for the
two years ended September 30, 1995
and 1994, the four months ended
September 30, 1993, the one year
ended May 31, 1993, and from
June 1, 1988 to September 30, 1995 F-19 to F-21
6. Statement of Changes of Financial
Position F-22 & F-23
-41-
<PAGE>
7. Notes to Financial Statements F-24 to F-35
(b) Report from 8-K N/A
(c) Exhibits:
Exhibit Description of Exhibits
- ------- -----------------------
2 (i) Second Amended Plan of Reorganization with Exhibits
(ii) Second Amended Disclosure Statement with Order Approving
Second Amended Disclosure Statement
(iii) Order Confirming Second Amended Plan of Reorganization
3 (i) Restated Certificate of Incorporation
(ii) By-laws
10 Material Contracts:
(i) Employment Agreement with Thomas T. Harding
(ii) Employee Stock Option Plan
(iii) Directors Stock Option Plan
(iv) Stock Purchase Agreement with P.T. Dolak Permei
(v) Amendment to Stock Purchase Agreement with P.T.
Dolak Permei
(vi) Stock Purchase Agreement with City of Tampa Fire-
workers and Police Officers Pension Fund
(vii) Lease to 145 Palisade Street Dobbs Ferry
(viii) Waiver and Discharge of SIS Capital Corp. Lien
13 Annual Report to Shareholders for year ended September 30, 1995
99 List of Patents
-42-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Dated: June 10, 1996
FINGERMATRIX, INC.
By: S/ Thomas T. Harding
Thomas T. Harding
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Dated: June 10, 1996
S/ Thomas T. Harding
Thomas T. Harding
Chief Executive Officer
and Director
Dated: June 10, 1996
S/ Gordon R. Molesworth
Gordon R. Molesworth
Secretary, Director
Dated: June 10, 1996
S/ Lewis Schiller
Lewis Schiller, Director
Dated: June 10, 1996
S/ Seth Lukash
Seth Lukash, Director
Dated: June 10, 1996
S/ Fred I. Sonnenfeld
Fred I. Sonnenfeld, Director
-43-
<PAGE>
Supplemental Information to be Furnished With Reports
Filed Pursuant to Section 15(d) of the Act.
The annual report for the year ended September 30, 1995 and proxy material
for 1996 annual meeting shall be subsequently furnished to security holders of
Registrant and copies thereof shall be furnished to the Commission upon
transmittal to the security holders.
-44-
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
TABLE OF CONTENTS
Page Number
-----------
Auditor's Report F-1 - F-2
Balance Sheets F-3 - F-4
Statements of Operations F-5 - F-6
Statements of Shareholders' Equity (Deficiency) F-7 - F-18
Statements of Cash Flows F-19 - F-20
Consolidated Statement of Changes in Financial Position F-21 - F-22
Notes to Financial Statements F-23 - F-39
<PAGE>
FARBER, BLICHT & EYERMAN, LLP
- -------------------------------------------------------------------------------
Certified Public Accountants
255 Executive Drive, Suite 215 Telephone: (516) 576-7040
Plainview, NY 11803-1715 Facsimile: (516) 576-1232
To the Board of Directors
and Stockholders of
Fingermatrix, Inc.
Dobbs Ferry, NY
We have audited the accompanying balance sheet of Fingermatrix, Inc.
(a development stage company) as of September 30, 1995, and the related
statements of operations, stockholders' deficiency in assets, and cash
flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of
Fingermatrix, Inc. as of September 30, 1995, and the results of
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in
Notes 1a and 2 to the financial statements, the Company is a development
stage company that recently emerged from bankruptcy and has a working
capital deficiency and a deficiency in assets of $770,388 and
$1,156,008, respectively. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. The
financial statements do not include any adjustment that might result
from the outcome of these uncertainties.
We were engaged to audit the accompanying balance sheets of the
Company as of September 30, 1994, 1993 and May 31, 1993, and the related
statements of operations, stockholders deficiency in assets and cash
flows for the years ended September 30, 1994 and May 31, 1993 and the
four months ended September 30, 1993. These financial statements are
the responsibility of the Company's management.
F-1
<PAGE>
To the Board of Directors
and Stockholders of
Fingermatrix, Inc.
Page 2
We were unable, however, to locate missing accounting and
bookkeeping records, which included, among other things, contracts and
invoices for the periods stated in the immediately preceding paragraph,
which precluded us from verifying cash receipts, disbursements,
purchases and revenues. Additionally, related accounting records of the
Company's accounts receivable and payable were either missing or
incomplete. Due to the loss of accounting records, there were
unreconciled differences in common stock as recorded by the Company and
the stock transfer agent. We were unable to satisfy ourselves about the
above items by means of other auditing procedures.
Because of the significance of the matters discussed in the
immediately preceding paragraph, the scope of our work was not
sufficient to enable us to express, and we do not express, an opinion on
the financial statements referred to in the second preceding paragraph.
/s/ FARBER, BLICHT & EYERMAN, LLP
Plainview, New York
January 10, 1996, except for Notes 5(a),
6(a) and 10(f), the latest of which
is dated June 7, 1996
F-2
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30,
--------------------------------- May 31,
1995 1994 1993 1993
---- ---- ---- ------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $1,067,577 $ 13,567 $ 3,292 $ 3,635
Restricted cash (Note 1i) 31,825 - - -
Loans receivable from
employees, net of
allowance for doubtful
accounts of $44,462
for all years - 17,225 16,231 15,900
Prepaid expenses and
other current assets 20,855 6,394 12,424 56,045
---------- -------- -------- --------
Total current assets 1,120,257 37,186 31,947 75,580
---------- -------- -------- --------
Property, plant and
equipment - at cost
(Note 1d):
Equipment 44,964 98,975 641,073 641,073
Leasehold improvements - - 84,702 84,702
Furniture and fixtures 561 5,196 45,927 45,927
---------- -------- -------- --------
45,525 104,171 771,702 771,702
Less allowance for
depreciation and
amortization 32,715 98,934 748,400 711,242
---------- -------- -------- --------
12,810 5,237 23,302 60,460
---------- -------- -------- --------
Other assets:
Patents (Note 1f) 224,385 224,385 224,385 462,542
Less accumulated
amortization 94,961 81,762 68,562 156,431
---------- -------- -------- --------
129,424 142,623 155,823 306,111
Deposits 12,805 14,705 - -
---------- -------- -------- --------
142,229 157,328 155,823 306,111
---------- -------- -------- --------
Total assets $1,275,296 $199,751 $211,072 $442,151
---------- -------- -------- --------
---------- -------- -------- --------
</TABLE>
See notes to financial statements.
F-3
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' DEFICIENCY IN ASSETS
<TABLE>
<CAPTION>
September 30,
------------------------------------ May 31,
1995 1994 1993 1993
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Current liabilities:
Accounts payable -
trade (Note 4a) $ 34,965 $ 49,112 $ - $ 776,936
Accrued expenses
(Note 4a) 977,677 436,560 - 722,964
Accounts payable
(Note 4b):
Pre-petition
creditors - 2,130,543 2,130,543 156,860
Post-petition
creditors - 520,819 - -
Notes payable
(Note 5) 250,000 1,029,046 38,000 38,000
Current portion of
long-term debt
(Note 6) 628,003 - - -
---------- ---------- ---------- ----------
Total current
liabilities 1,890,645 4,166,080 2,168,543 1,694,760
Long term debt
(Note 6) 540,659 - - -
---------- ---------- ---------- ----------
Total liabilities 2,431,304 4,166,080 2,168,543 1,694,760
Comments, commitments
and contingencies
(Note 10)
Stockholders'
deficiency in
assets - Note 7 (1,156,008) (3,966,329) (1,957,471) (1,252,609)
---------- ---------- ---------- ----------
Total liabilities and
stockholders'
deficiency in assets $1,275,296 $ 199,751 $ 211,072 $ 442,151
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See notes to financial statements.
F-4
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
From
Four months Year Inception
Years ended ended ended (May 1976) to
September 30 , September 30, May 31, September 30,
1995 1994 1993 1993 1995 (*)
---- ---- ---- ---- --------
<S> <C> <C> <C> <C> <C>
Revenues:
Sales and service contracts $ 268 $ 28,770 $ 120,020 $ 37,119 $ 3,432,750
Interest income 3,009 994 331 7,536 2,792,615
------------- ----------- ---------- ----------- ------------
Total 3,277 29,764 120,351 44,655 6,225,365
------------- ----------- ---------- ----------- ------------
Costs and Expenses:
Cost of sales 13,200 13,200 4,400 116,442 2,021,390
Write down of inventory (Note 3) - - - 505,107 2,314,813
Research and development (Note 1e) 738,237 747,349 542,970 906,436 20,181,542
Selling, general and
administrative 701,246 788,329 277,843 1,513,594 32,596,090
Bankruptcy administration
costs (Notes 2 and 4) 260,038 454,054 - - 714,092
Interest and amortization
of debt expense 62,985 35,690 - 25,888 607,765
Amortization of deferred
compensation - stock
options (Note 10d) - 595,800 198,600 649,176 4,808,788
Loss from investment in
Unimark Credit Systems,
Inc. (Note 1b) - - - - 1,145,768
Liquidation damages - - - - 702,118
------------- ----------- ---------- ----------- ------------
Total 1,775,706 2,634,422 1,023,813 3,716,643 65,092,366
------------- ----------- ---------- ----------- ------------
Loss before extraordinary items (1,772,429) (2,604,658) (903,462) (3,671,988) (58,867,001)
Extraordinary credit - gain on
debt restructuring (Notes 1a,2) 1,781,128 - - - 1,781,128
------------- ----------- ---------- ----------- ------------
Net income (loss) $ 8,699 $(2,604,658) $ (903,462) $(3,671,988) $(57,085,873)
------------- ----------- ---------- ----------- ------------
<FN>
(*) Not covered by Auditors' Report.
</TABLE>
See notes to financial statements.
F-5
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
(Continued)
<TABLE>
<CAPTION>
Four months Year
Years ended ended ended
September 30, September 30, May 31,
1995 1994 1993 1993
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Earnings (loss) per common
share (*):
Before extraordinary credit $ (.93) $ (2.41) $ (.88) $ (3.32)
Extraordinary credit .93 - - -
---------- ---------- ---------- ----------
Net earnings (loss)
per common share $ - $ (2.41) $ (.88) $ (3.32)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average number
of shares outstanding (*) 1,907,431 1,227,222 1,227,222 1,214,526
---------- ---------- ---------- ----------
<FN>
(*) Retroactively adjusted to reflect reverse .07 for 1 stock split effected in April, 1995,
concurrent with bankruptcy plan confirmation.
</TABLE>
See notes to financial statements.
F-6
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FROM INCEPTION (MAY, 1976) TO SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Deficit
Common Stock Accumulated
----------------------------------- Additional During the
Price Par Value Paid in Development
Shares Per Share Total Capital Stage Total
--------- --------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance (at inception)
Common stock issued for cash 564,45 8 $.20 to $ 11,289 $ 190,998 $ - $ 202,287
2.00
Common stock issued for assets 691,500 .17 13,830 103,206 - 117,036
Net loss for the year - - - - (274,349) (274,349)
--------- ----- -------- ---------- ----------- -----------
Balance at May 31, 1977(*) 1,255,958 - 25,119 294,204 (274,349) 44,974
Common stock issued upon
conversation of debt 222,250 2.00 4,445 440,055 - 444,500
Net loss for the year - - - - (230,254) (230,254)
--------- ----- -------- ---------- ----------- -----------
Balance at May 31, 1978(*) 1,478,208 - 29,564 734,259 (504,603) 259,220
Common stock issued for cash 170,000 2.00 3,400 336,600 - 340,000
Common stock issued for services 31,250 2.00 625 61,875 - 62,500
Net loss for the year - - - - (967,640) (967,640)
--------- ----- -------- ---------- ----------- -----------
Balance at May 31, 1979(*) 1,679,458 2.00 33,589 1,132,734 (1,472,243) (305,920)
Common stock issued for
liquidation damages 32,964 2.00 659 65,269 - 65,928
Common stock issued for services 51,250 2.00 1,025 101,475 - 102,500
Common stock issued to
noteholder for waiving
default on note 2,825 2.00 57 5,593 - 5,650
Common stock issued in payment
of old debt 1,000 2.00 20 1,980 - 2,000
Common stock issued upon
conversion of debt 88,393 2.83 1,769 248,231 - 250,000
Net loss for the year - - - - (1,221,278) (1,221,278)
--------- ----- -------- ---------- ----------- -----------
Balance at May 31, 1980(*) 1,855,890 - $ 37,119 $1,555,282 $(2,693,521) $(1,101,120)
--------- ----- -------- ---------- ----------- -----------
<FN>
(*) Not covered by Auditors' Report.
</TABLE>
See notes to financial statements.
F-7
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FROM INCEPTION (MAY, 1976) TO SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Deficit
Common Stock Accumulated
----------------------------------- Additional During the
Price Par Value Paid in Development
Shares Per Share Total Capital Stage Total
--------- ----- -------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at May 31, 1980(*) 1,855,890 - $ 37,119 $1,555,282 $(2,693,521) $(1,101,120)
Common stock issued in public
offering 500,000 $4.00 10,000 1,990,000 - 2,000,000
Common stock issued upon exercise
of warrants 339,353 3.00 6,787 1,011,272 - 1,018,059
Common stock issued upon
recapitalization of debt 594,275 2.21 to 11,885 613,683 - 625,568
3.00
Common stock issued for services 18,000 2.00 360 35,640 - 36,000
Common stock and warrants issued
under settlement of lawsuit 26,875 8.00 538 424,462 - 425,000
Net loss for the year - - - - (1,614,141) (1,614,141)
--------- ----- -------- ---------- ----------- -----------
Balance at May 31, 1981(*) 3,334,393 - 66,689 5,630,3 39 (4,307,662) 1,389,366
Common stock issued upon
exercise of warrants 430,201 2.00 to 8,605 1,231,394 - 1,239,999
4.00
Warrants issued for services at
an exercise price less than
market value - - - 50,000 - 50,000
Common stock issued for services 14,500 3.05 to 288 55,339 - 55,627
4.42
Common stock issued under
settlement of lawsuit 16,241 - 325 (325) - -
Net loss for the year - - - - (1,588,610) (1,588,610)
--------- ----- -------- ---------- ----------- -----------
Balance at May 31, 1982(*) 3,795,335 - $75,907 $6,966,747 $(5,896,272) $ 1,146,382
--------- ----- -------- ---------- ----------- -----------
<FN>
(*) Not covered by Auditors' Report.
</TABLE>
See notes to financial statements.
F-8
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FROM INCEPTION (MAY, 1976) TO SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Deficit
Common Stock Accumulated
Convertible ------------------------------ Additional During the
Preferred Price Par Value Paid in Development
Stock Shares Per Share Total Capital Stage Total
------- --------- ----- --------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at May 31,
1982(*) - 3,795,335 - $ 75,907 $ 6,966,747 $(5,896,272) $1,146,382
Preferred stock and
warrants issued in
a public offering 6,600 - - - 5,464,995 - 5,471,595
Common stock issued
upon exercise of
stock appreciation
rights - 28,974 - 579 337,547 - 338,126
Common stock issued
upon exercise of
warrants - 549,126 $2.00 to 10,982 1,705,279 - 1,716,261
4.80
Common stock issued
upon conversion of
preferred stock (4,171) 834,100 - 16,682 (12,511) - -
Warrants issued to an
employee at an
exercise price less
than market value - - - - 5,000 - 5,000
Common stock issued in
payment of debt - 74,837 3.87 1,497 289,647 - 291,144
Warrants issued in
payment of debt - - - - 121,184 - 121,184
Net loss for the year - - - - (2,899,728) (2,899,728)
------- --------- ----- --------- ----------- ------------ -----------
Balance at May 31,
1983(*) $ 2,429 5,282,372 $ 105,647 $14,877,888 $(8,796,000) $6,189,964
------- --------- ----- --------- ----------- ------------ -----------
<FN>
(*) Not covered by Auditors' Report.
</TABLE>
See notes to financial statements.
F-9
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FROM INCEPTION (MAY, 1976) TO SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Deficit
Common Stock Accumulated
Convertible ------------------------------ Additional During the
Preferred Price Par Value Paid in Development
Stock Shares Per Share Total Capital Stage Total
------- --------- ----- --------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at May 31, 1983(*) $ 2,429 5,282,372 $ 105,647 $14,877,888 $(8,796,000) $6,189,964
Convertible preferred stock
issued upon exercise of
warrants 233 - - - 278,768 - 279,001
Common stock issued upon
exercise of warrants - 154,531 $2.00 to 3,091 516,899 - 519,990
5.00
Common stock issued upon
conversion of preferred
stock (627) 125,394 - 2,508 (1,881) - -
Warrants issued for cash - - - - 5,000 - 5,000
Compensation expense
relating to stock
appreciation rights - - - - 355,500 - 355,500
Preferred cash dividends
paid $1.00 per share - - - - (224,747) - (224,747)
Net loss for the year - - - - (4,002,829) (4,002,829)
------- --------- ----- --------- ----------- ------------ -----------
Balance at May 31, 1984(*) 2,035 5,562,297 111,246 15,807,427 (12,798,829) 3,121,879
Convertible preferred stock
issued upon exercise of
warrants 193 - - - 229,307 - 229,500
Common stock issued upon
exercise of warrants - 44,437 2.75 to 889 244,238 - 245,127
5.00
Common stock issued upon con-
version of preferred stock (758) 151,546 - 3,031 (2,273) - -
Warrants issued for cash - - - - 12,000 - 12,000
Compensation expense
relating to waiver of
stock appreciation rights - - - - 230,675 - 230,675
Common stock issued in
private offering - 383,164 - 7,663 1,727,709 - 1,735,372
Net loss for the year - - - - - (3,380,834) (3,380,834)
------- --------- ----- --------- ----------- ------------ -----------
Balance at May 31, 1985(*) $ 1,470 6,141,444 $ 122,829 $18,249,083 $(16,179,663) $ 2,193,719
------- --------- ----- --------- ----------- ------------ -----------
<FN>
(*) Not covered by Auditors' Report.
</TABLE>
See notes to financial statements.
F-10
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FROM INCEPTION (MAY, 1976) TO SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Deficit
Common Stock Accumulated
Convertible ----------------------------- Additional During the Compensation
Preferred Price Par Value Paid-In Development Stock
Stock Shares Per Share Total Capital Stage Options Total
------- ------ --------- ------- --------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at May 31, 1985(*) $ 1,470 6,141,444 $122,829 $18,249,083 $(16,179,663) $ - $ 2,193,719
Common stock issued upon
conversion of preferred
stock (97) 19,308 - 386 (289) - - -
Common stock issued upon
exercise of warrants - 473,541 $2.75 9,471 1,789,543 - - 1,799,014
to
7.00
Common stock issued in
private offering - 855,600 5.00 17,112 3,974,553 - - 3,991,665
to
6.00
Common stock issued in
payment of debt - 43,228 6.76 865 290,923 - - 291,788
Issuance of stock options for
300,000 shares - - - - 1,912,500 - (1,912,500) -
Amortization of deferred
compensation stock options - - - - - - 63,750 63,750
Net loss for the year - - - - (3,223,374) - (3,223,374)
------- --------- ----- -------- ----------- ------------ ----------- ----------
Balance at May 31, 1986 (*) 1,373 7,533,121 - 150,663 26,216,313 (19,403,037) (1,848,750) 5,116,562
Common stock issued upon
conversion of preferred stock (250) 50,128 - 1,002 (752) - - -
Common stock issued upon
exercise of warrants - 283,097 4.25 5,662 1,197,060 - - 1,202,722
to
6.75
Common stock issued upon
exercise of stock options - 3,000 6.00 60 17,940 - - 18,000
Common stock issued in payment
of debt - 86,116 3.00 1,722 181,505 - - 183,227
to
5.25
Amortization of deferred
compensation - stock options - - - - - - 382,500 382,500
Net loss for the year - - - - (4,340,962) - (4,340,962)
------- --------- ----- -------- ----------- ------------ ----------- ----------
Balance at May 31, 1987 (*) $ 1,123 7,955,462 $159,109 $27,612,066 $(23,743,999) $(1,466,250) $2,562,049
------- --------- ----- -------- ----------- ------------ ----------- ----------
<FN>
(*) Not covered by Auditors' Report.
</TABLE>
See notes to financial statements.
F-11
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FROM INCEPTION (MAY, 1976) TO SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Deficit
Common Stock Accumulated
Convertible ----------------------------- Additional During the Compensation
Preferred Price Par Value Paid-In Development Stock
Stock Shares Per Share Total Capital Stage Options Total
------- ------ --------- ------- --------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at May 31, 1987(*) $ 1,123 7,955,462 $ - $159,109 $27,612,066 $(23,743,999) $(1,466,250) $ 2,562,049
Common stock issued upon
conversation of rights - 2,649,681 $5.00 52,994 11,876,291 - - 11,929,285
Common stock issued upon
exercise of warrants - 450,164 4.64 9,003 2,014,610 - - 2,023,613
Common stock issued upon
conversation
of preferred stock (64) 12,776 - 256 (192) - - -
Issuance of warrants for 893,000
shares (net of retirement of
warrants and options for
446,500 shares) - - - - 1,724,062 - (1,262,712) 461,350
Amortization of deferred
compensation - stock options - - - - - - 439,336 439,336
Net loss for the year - - - - (5,786,170) - (5,786,170)
------- ---------- -------- ----------- ------------ ----------- -----------
Balance at May 31, 1988 (*) 1,059 11,068,083 221,362 43,226,837 (29,530,169) (2,289,626) 11,629,463
Amortization of deferred
compensation - stock options - - - - - - 801,997 801,997
Net loss for the year - - - - (6,004,883) - (6,004,883)
------- ---------- -------- ----------- ------------ ----------- -----------
Balance at May 31, 1989 (*) $ 1,059 11,068,083 $221,362 $43,226,837 $(35,535,052) $(1,487,629) $ 6,426,577
------- ---------- -------- ----------- ------------ ----------- -----------
<FN>
(*) Not covered by Auditors' Report.
</TABLE>
See notes to financial statements.
F-12
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FROM INCEPTION (MAY, 1976) TO SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Deficit
Common Stock Accumulated
Convertible ----------------------------- Additional During the Compensation
Preferred Price Par Value Paid-In Development Stock
Stock Shares Per Share Total Capital Stage Options Total
------- ------ --------- ------- --------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at May 31, 1989(*) $ 1,059 11,068,083 $ - $221,362 $43,226,837 $(35,535,052) $(1,487,629) $ 6,426,577
Common stock issued upon
exercise of employee
incentive stock options - 8,300 $1.25 166 10,209 - - 10,375
Common stock issued upon
exercise of warrants - 200,000 .50 4,000 96,000 - - 100,000
Common stock issued upon
conversion
of preferred stock (962) 192,328 - 3,847 (2,885) - - -
Common stock issued in
lieu of accumulated
dividends on preferred
stock - 257,100 2.03 5,142 516,610 (521,752) - -
Common stock issued for
the purchase of Unimark - 280,000 1.33 5,600 365,400 - - 371,000
Common stock returned
from escrow - (1,884) - (38) 38 - - -
Common stock issued in
private offering - 1,150,000 1.00 23,000 1,127,000 - - 1,150,000
Common stock issued in
payment of debt - 189,874 2.36 3,797 444,287 - - 448,084
Common stock issued in
connection with
a loan to the Company - 10,000 1.00 200 9,800 - - 10,000
Amortization of deferred
compensation -
stock options - - - - - - 801,995 801,995
Net loss for the year - - - - (7,581,322) - (7,581,322)
------- ---------- -------- ----------- ------------ ----------- -----------
Balance at May 31, 1990 (*) $ 97 13,353,801 $267,076 $45,793,296 $(43,638,126) $ (685,634) $ 1,736,709
------- ---------- -------- ----------- ------------ ----------- -----------
<FN>
(*) Not covered by Auditors' Report.
</TABLE>
See notes to financial statements.
F-13
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FROM INCEPTION (MAY, 1976) TO SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Deficit
Common Stock Accumulated
Convertible ----------------------------- Additional During the Compensation
Preferred Price Par Value Paid-In Development Stock
Stock Shares Per Share Total Capital Stage Options Total
------- ------ --------- ------- --------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at May 31, 1990 (*) $ 97 13,353,801 $ - $267,076 $45,793,296 $(43,638,126) $(685,634) $ 1,736,709
Common stock issued upon
exercise of employee
incentive stock options - 6,816 $1.25 136 8,384 - - 8,520
Common stock issued upon
conversion of preferred stock (1) 300 - 6 (5) - - -
Common stock issued upon
conversion of preferred stock - 1,000,000 1.00 20,000 980,000 - - 1,000,000
Common stock issued in
private offering - 700,000 .50 14,000 386,000 - - 400,000
to
1.00
Common stock issued in
payment of debt - 100,525 1.22 2,010 120,307 - - 122,317
Amortization of deferred
compensation - stock options - - - - - - 685,634 685,634
Net loss for the year - - - - (3,463,900) - (3,463,900)
------- ---------- -------- ----------- ------------ ----------- -----------
Balance at May 31, 1991 (*) $ 96 15,161,442 $303,228 $47,287,982 $(47,102,026) $ - $ 489,280
------- ---------- -------- ----------- ------------ ----------- -----------
<FN>
(*) Not covered by Auditors' Report.
</TABLE>
See notes to financial statements.
F-14
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FROM INCEPTION (MAY, 1976) TO SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Deficit
Common Stock Accumulated
Convertible ----------------------------- Additional During the Compensation
Preferred Price Par Value Paid-In Development Stock
Stock Shares Per Share Total Capital Stage Options Total
------- ------ --------- ------- --------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at May 31, 1991 (*) $ 96 15,161,442 $ - $303,228 $47,287,982 $(47,102,026) $ - $ 489,280
Common stock issued upon
exercise of employee
incentive stock options - 5,000 1.25 100 6,150 - - 6,250
Common stock issued upon
conversion of preferred stock (299) 149,450 - 2,989 (2,690) - - -
Preferred stock issued in
public offering (net of
registration costs) 3,165 - - - 2,683,356 - - 2,686,521
Preferred stock issued in
private offering 794 - - - 793,206 - - 794,000
Common stock issued in
private offering - 1,022,870 50 to 20,459 900,412 - - 920,871
1.25
Common stock issued in
payment of debt - 24,475 1.75 489 42,342 - - 42,831
Preferred cash dividends paid - - - - (233,940) - - (233,940)
Issuance of stock options for
2,344,000 shares - - - - 3,513,000 - (3,513,000) -
Amortization of deferred
compensation - stock options - - - - - - 190,000 190,000
Net loss for the year - - - - (3,334,190) - (3,334,190)
------ ---------- -------- ----------- ------------ ----------- -----------
Balance at May 31, 1992 (*) $3,756 16,363,237 $327,265 $54,989,818 $(50,436,216) $(3,323,000) $ 1,561,623
------ ---------- -------- ----------- ------------ ----------- -----------
<FN>
(*) Not covered by Auditors' Report.
</TABLE>
See notes to financial statements.
F-15
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FROM INCEPTION (MAY, 1976) TO SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Deficit
Common Stock Accumulated
Convertible ----------------------------- Additional During the Compensation
Preferred Price Par Value Paid-In Development Stock
Stock Shares Per Share Total Capital Stage Options Total
------- ------ --------- ------- --------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at May 31, 1992 (*) $ 3,756 16,363,237 $ - $327,265 $54,989,818 $(50,436,216) $(3,323,000) $ 1,561,623
Common stock issued
upon conversion of
preferred stock (191) 95,530 - 1,910 (1,719) - - -
Common stock issued
in private offering - 95,500 1.00 1,910 93,590 - - 95,500
Common stock issued
to employees in lieu
of bonuses - 257,000 .44 5,140 107,940 - - 113,080
Amortization of deferred
compensation - stock
options - - - - - - 649,176 649,176
Deferred compensation
stock options voided
(Note 8d) - - - - (455,842) - 455,842 -
Net loss for the year - - - (3,671,988) - (3,671,988)
------- ---------- -------- ----------- ------------ ----------- -----------
Balance at May 31, 1993 $ 3,565 16,811,267 $336,225 $54,733,787 $(54,108,204) $(2,217,982) $(1,252,609)
------- ---------- -------- ----------- ------------ ----------- -----------
<FN>
(*) Not covered by Auditors' Report.
</TABLE>
See notes to financial statements.
F-16
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FROM INCEPTION (MAY, 1976) TO SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Deficit
Common Stock Accumulated
Convertible ----------------------------- Additional During the Compensation
Preferred Price Par Value Paid-In Development Stock
Stock Shares Per Share Total Capital Stage Options Total
------- ------ --------- ------- --------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at May 31, 1993 $3,565 16,811,267 $ $336,225 $54,733,787 $(54,108,204) $(2,217,982) $(1,252,609)
Amortization of deferred
compensation stock
options - - - - - 198,600 198,600
Net loss for the four
months ended September 30,
1993 - - - - (903,462) - (903,462)
------- ---------- ----- -------- ----------- ------------ ----------- -----------
Balance, September 30, 1993 3,565 16,811,267 336,225 54,733,787 (55,011,666) (2,019,382) (1,957,471)
Amortization of deferred
compensation stock options - - - - - 595,800 595,800
Net loss for the year - - - - (2,604,658) - (2,604,658)
------ ---------- -------- ----------- ------------ ----------- -----------
Balance at September 30, 1994 $3,565 16,811,267 $336,225 $54,733,787 $(57,616,324) $(1,423,582) $(3,966,329)
------ ---------- -------- ----------- ------------ ----------- -----------
</TABLE>
See notes to financial statements.
F-17
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FROM INCEPTION (MAY, 1976) TO SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Deficit
Common Stock Accumulated
Convertible ----------------------------- Additional During the Compensation
Preferred Price Par Value Paid-In Development Stock
Stock Shares Per Share Total Capital Stage Options Total
------- ------ --------- ------- --------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1994 $3,565 16,811,267 $ - $336,225 $54,733,787 $(57,616,324) $(1,423,582) $(3,966,329)
Bankruptcy reorganization
transactions:
Cancellation of old shares (3,565) (16,811,267) - (336,225) 339,790 - - -
Issuance of new shares to
holders of old shares and
unsecured pre-petition
creditors - 1,472,738 - 14,727 (14,727) - - -
Shares issued as additional
consideration for settle-
ment of post-petition
financing (Note 2) - 150,000 - 1,500 (1,500) - - -
Shares issued in exchange for
convertible note (Note 7) - 250,000 1.00 2,500 247,500 - - 250,000
Cancellation of deferred
compensation stock options
(Note 10d) - - - - (1,423,582) - 1,423,582 -
Shares issued in connection
with settlement of litigation
(Note 10g) - 78,098 4.62 781 359,667 - - 360,448
Shares issued to new share-
holders in exchange for cash
investment (Note 5) - 300,000 1.60 3,000 477,463 - - 480,463
Other transactions:
Stock warrants exercised
(Note 6) - 694,56 various 6,946 703,765 - - 710,711
Shares issued pursuant to
a private placement
(Note 10f) - 1,000,000 1.00 10,000 990,000 - - 1,000,000
Net income for the year - - - 8,699 - 8,699
------ ---------- -------- ----------- ------------ ----------- -----------
Balance at September 30, 1995 $ - 3,945,404 $ 39,454 $56,412,163 $(57,607,625) $ - $(1,156,008)
------ ---------- -------- ----------- ------------ ----------- -----------
</TABLE>
See notes to financial statements.
F-18
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
From June 1,
Years ended Four months Year ended 1988 to
September 30, September 30, May 31, September 30,
---------------------------- ------------ ----------- ------------
1995 1994 1993 1993 1995 (*)
----------- ----------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Loss before extraordinary credits $(1,772,429) $(2,604,658) $(903,462) $(3,671,988) $(29,336,832)
Extraordinary credit 1,781,128 - - - 1,781,128
----------- ----------- --------- ----------- ------------
Net income (loss) 8,699 (2,604,658) (903,462) (3,671,988) (27,555,704)
----------- ----------- --------- ----------- ------------
Adjustments to reconcile net income
(loss) to net cash used in
operating activities:
Extraordinary credit - gain on
debt restructuring (1,781,128) - - - (1,781,128)
Depreciation and amortization 20,811 31,265 41,558 137,347 1,156,082
Amortization of deferred compensation
stock options - 595,800 198,600 649,176 3,923,202
Write-off of certain patents - - 145,888 44,462 235,570
Allowance for doubtful accounts - - - - 70,354
Write-off of property and equipment - - - - 21,991
Gain on sale of property and equipment - - - - (500)
Loss from Unimark Credit System, Inc. - - - - 470,374
Settlement of litigation in exchange
for common stock - - - - 165,148
Changes in assets and liabilities:
Decrease in accounts receivable - - - 8,120 17,429
Decrease in interest receivable - - - - 364,055
(Increase) decrease in loans receivable
from employees - (994) (331) (955) 8,459
Decrease in inventory - - - 502,582 1,584,903
(Increase) decrease in prepaid expenses
and other current assets (14,461) 6,030 43,621 15,598 104,308
(Increase) decrease in deposits 1,900 (14,705) - - (12,805)
(Decrease) increase in accounts payable (14,147) 569,931 473,783 425,087 1,842,573
Increase in accrued expenses 541,117 436,560 - 500,506 1,441,103
----------- ----------- --------- ----------- ------------
Total adjustments (1,245,908) 1,623,887 903,119 2,281,923 9,611,118
----------- ----------- --------- ----------- ------------
Net cash used in operating activities (1,237,209) (980,771) (343) (1,390,065) (17,944,586)
----------- ----------- --------- ----------- ------------
<FN>
(*) Not covered by Auditors' Report.
</TABLE>
See notes to financial statements.
F-19
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
From June 1,
Years ended Four months Year ended 1988 to
September 30, September 30, May 31, September 30,
---------------------------- ------------ ----------- ------------
1995 1994 1993 1993 1995 (*)
----------- ----------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Cash flows from investing activities:
Expenditures for property and
equipment $(15,185) - - - (140,858)
Expenditures for patents - - - (1,900) (186,513)
Proceeds from sale of property and
equipment - - - - 3,500
Payment for covenant not to compete - - - - (100,000)
Investment in Unimark Credit System,Inc. - - - - (111,333)
----------- ----------- --------- ----------- ------------
Net cash used in investing activities (15,185) - - (1,900) (535,204)
----------- ----------- --------- ----------- ------------
Cash flows from financing activities:
Payment to restricted cash account (31,825) - - - (31,825)
Payments to creditors as part of
debt restructuring (446,124) - - - (446,124)
Proceeds from notes payable 575,954 991,046 - 38,000 2,760,811
Proceeds from shares issued, pursuant
to private placements 1,480,463 - - 208,580 4,953,914
Proceeds from exercise of stock
warrants and options 710,711 - - - 835,856
Payments under capitalized leases - - - (4,273) (50,109)
Payment of dividends - - - - (233,940)
Proceeds from public offering - - - - 2,686,521
Payments from (to) employee 17,225 - - (18,680) 27,225
----------- ----------- --------- ----------- ------------
Net cash flows provided by financing
activities 2,306,404 991,046 - 223,627 10,502,329
----------- ----------- --------- ----------- ------------
Net increase (decrease) in cash and
cash equivalents 1,054,010 10,275 (343) (1,168,338) (7,977,461)
Cash and cash equivalents at beginning
of period 13,567 3,292 3,635 1,171,973 9,045,038
----------- ----------- --------- ----------- ------------
Cash and cash equivalents at
end of period $ 1,067,577 $ 13,567 $ 3,292 $ 3,635 $ 1,067,577
----------- ----------- --------- ----------- ------------
----------- ----------- --------- ----------- ------------
Supplemental disclosures of cash
flow information:
Cash paid during the period for:
Interest $ 35,691 $ 204 $ - $ 13,964 $ 43,709
<FN>
Reference is made to Notes 2,7,8 and 10g relating to non-monetary issuances of common stock.
(*) Not covered by Auditors' Report.
</TABLE>
See notes to financial statements.
F-20
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION
From inception
(May 1976) to
May 31, 1988 (*)
----------------
Use of funds:
Operations $29,530,169
-----------
Net loss:
Items not consuming working capital:
Depreciation and amortization (1,267,675)
Amortization of deferred compensation-stock options (885,586)
Common stock and warrants issued under settlement of law suit (425,000)
Write-off of certain fixed assets (365,440)
Write-off of certain patents (220,238)
Stock appreciation rights (924,301)
-----------
Working capital consumed by operations 25,441,929
Expenditures for patent applications 570,805
Acquisition of fixed assets 1,547,222
Deferred compensation - stock options 3,175,212
Reclassification of test equipment from inventory to fixed assets 633,319
Increase in deferred charges 209,187
Common stock issued in connection with acquisition of fixed assets 81,276
Common stock issued in connection with acquisition of patents 25,115
Long-term debt converted into common stock 444,500
Payments and current maturities of long-term debt 1,506,173
Preferred dividends paid 224,747
Loans receivable from employees 80,897
-----------
Total funds consumed 33,940,382
-----------
Sources of funds:
Collections of loans receivable from employees 80,897
Decrease in deferred charges 100,418
Increase in long-term debt 1,950,672
Issuances of common stock 32,695,141
Issuances of preferred stock 5,976,001
Proceeds from sale of warrants 17,000
Issuance of stock options 3,636,562
-----------
Total funds provided 44,456,691
-----------
Net increase in working capital 10,516,309
Working capital - inception -
-----------
Working capital, May 31, 1988 $10,516,309
-----------
-----------
(*) Not covered by Auditors' Report.
See notes to financial statements.
F-21
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION
(Continued)
From inception
(May 1976) to
May 31, 1988 (*)
----------------
Changes in components of working capital:
Increase in current assets:
Cash $ 9,045,038
Accounts receivable 76,203
Interest receivable 364,055
Loans receivable from employees 37,264
Inventory 1,584,903
Prepaid expenses and other current assets 125,163
(Increase) in current liabilities:
Accounts payable (456,779)
Accrued expenses (259,538)
-----------
Net increase in working capital $10,516,309
-----------
-----------
(*) Not covered by Auditors' Report.
See notes to financial statements.
F-22
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1995, 1994, 1993 AND MAY 31, 1993
Note 1. Summary of Significant Accounting Policies
a. Organization, history and basis of presentation
The Company was incorporated in the State of New York
in May, 1976. For the period from its inception through September 30,
1995, the Company has been in the development stage and, accordingly,
has directed its efforts and resources to product and prototype
development and production planning of its electronic fingerprint
identification systems. The Company operated as a debtor in possession
pursuant to Chapter 11 of the Federal Bankruptcy Code until September,
1994, at which date a Trustee was appointed. On March 31, 1995, a Plan
of Reorganization was confirmed and, accordingly, the Company exited
from protection of the Bankruptcy Court and the Company's Management was
transferred to a Board of Directors.
The financial statements have been prepared assuming
that the Company will continue as a going concern which is dependent
upon the successful completion of the Company's development program,
fulfilling of its obligations, pursuant to the Plan of Reorganization,
generating sufficient sales to obtain profitable operations and its
ability to obtain additional financing, if necessary. During the forty
month period from June 1, 1993 through September 30, 1995, the Company
had aggregate operating revenues of $186,177 while incurring losses
before extraordinary credits in the sum of $8,952,537, during the same
period. Additionally, the Company has an accumulated deficit of
$57,607,625 as of September 30, 1995. The Company's recurring losses
from operations and lack of sufficient working capital raise substantial
doubt about the Company's ability to continue as a going concern (see
Note 2).
The Company believes that its existing cash and the
proceeds from future anticipated equity contributions from the exercise
of warrants and additional equity commitments made from one investor
(Note 10f) will generate sufficient cash to maintain its operations
through calendar year 1996. In order to continue its operations and
meet its reorganization plan obligations, management has taken steps to
produce a prototype of its fingerprint identification systems equipment,
which it intends to market to law enforcement agencies, commercial
enterprises or other agencies and organizations that can utilize these
type of products. Based upon the reactions received by the potential
customers to date, the Company believes that its scanner and technology
will be well received. Plans have been made to commence production in
mid 1996.
F-23
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1995, 1994, 1993 AND MAY 31, 1993
Note 1. Summary of Significant Accounting Policies (continued)
b. Consolidation and dissolution of subsidiary
The accompanying financial statements for the May,
1993 through September, 1995 period include the accounts of the Company.
The financial statements prior to May, 1993 included Unimark Credit
Systems, Inc. "Unimark", the Company's sole subsidiary, whose operations
were discontinued in February 1990. Unimark was inactive after that
date and has now been dissolved.
c. Inventory valuation
Inventories were valued at the lower of cost (first-
in, first-out) or market. See Note 3.
d. Property and equipment
Depreciation is computed on the straight-line method
over the estimated useful lives of the assets, which is generally five
years. Leasehold improvements are amortized on the straight-line basis
over the shorter of their estimated useful lives or the remaining lease
term. Any gain or loss realized on disposition is recorded in
operations at the time of the disposal. Expenditures for maintenance,
repairs, renewal and betterments are reviewed by management and only
those expenditures representing improvements to property and equipment
are capitalized.
e. Research and development
Research and development expenses are charged to
expense in the year incurred.
f. Patents
The cost of obtaining patents is amortized on the
straight-line method over 17 years. Patent application costs are
deferred until a patent is received or the application is abandoned.
Amortization of patent costs was $15,815, $15,815, $5,272 and $29,824
for the periods ended September 30, 1995, 1994, 1993 and May 31, 1993,
respectively. During the four months ended September 30, 1993, the
Company determined that costs assigned to certain patents and patent
applications having a book value of $145,888 were worthless and were
written off.
F-24
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1995, 1994, 1993 AND MAY 31, 1993
Note 1. Summary of Significant Accounting Policies (continued)
g. Revenue recognition
The Company recognizes revenues from customers upon
delivery (and installation, if necessary) subject to acceptance by the
customer, of its systems. Service contract revenues are recognized as
billed, which is usually monthly.
h. Earnings (loss) per common share
Earnings (loss) per common share is computed using the
income (loss) for the year adjusted for preferred dividends divided by
the weighted average number of common shares outstanding during the
respective periods. Retroactive effect has been given for all periods
shown for the reverse .07 for 1 stock split effected April, 1995
concurrent with the bankruptcy plan confirmation. Common stock
equivalents, convertible notes and convertible preferred stock
outstanding, were not included in the computation, since the effect of
their inclusion would be anti-dilutive or immaterial.
i. Cash equivalents and restricted cash
Cash and cash equivalents generally consist of cash
and money market instruments. These securities have original maturity
dates not exceeding three months. Such investments are stated at cost
which approximates fair value and are considered cash equivalents for
purposes of reporting cash flows.
Cash that has been segregated for settlement of
pending bankruptcy claims, which is under the control of a court-
appointed trustee, is deemed restricted cash and is not included in cash
equivalents.
j. Income taxes
Effective June 1, 1993, the Company adopted Statement
of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income
Taxes". The adaption of SFAS 109 had no significant effect on the
Company's financial position and results of operations.
Deferred income taxes are provided, if appropriate, to
reflect the tax effect of differences between the financial statement
and income tax basis of assets and liabilities. These differences
result from the utilization of net operating losses. See Note 9.
F-25
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1995, 1994, 1993 AND MAY 31, 1993
Note 2. Bankruptcy Reorganization
On September 15, 1993, the former Chief Executive Officer of
the Company caused a voluntary petition for reorganization under Chapter
11 of the U.S. Bankruptcy Code to be filed on behalf of the Company in
the Bankruptcy Court. As of that date, liabilities of the Company
aggregated approximately $2,168,500, which exceeded the Company's assets
of $252,000 by $1,916,500. The Company operated as a debtor under
Chapter XI of the United States Bankruptcy Code until September, 1994,
at which date a Trustee was appointed. On March 31, 1995, a Plan of
Reorganization ("the Plan") was confirmed. In the interim, the Chief
Executive Officer was replaced and new management installed.
The Plan established different classes of creditors or equity
interests and specified the property, if any, that was to be distributed
to each class. As more fully detailed below, the Plan provides for
distribution to the creditors of cash, Fingermatrix New Common Stock,
A-Warrants, B-Warrants, and C-Warrants, and other consideration. See
Notes 7 and 8 for further discussion of stock and warrant issuances.
The Company restructured $2,920,890 of liabilities by the
payment of $447,150 on the distribution date (April 19, 1995), a
commitment to pay $332,166 in the future, and the issuance of common
stock and warrants valued at $360,448 in lieu of a cash payment (Note
10g), resulting in an extraordinary gain of $1,781,128 during the year
ended September 30, 1995. This settlement represents a payment of
approximately 27 cents for every dollar of pre-petition debt. During
the term of the bankruptcy, the Company incurred $714,092 of bankruptcy
administrative costs. These costs, primarily professional fees for
attorneys and accountants, were expensed during the two years ended
September 30, 1995.
F-26
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1995, 1994, 1993 AND MAY 31, 1993
Note 2. Bankruptcy Reorganization (continued)
The following is a summary of the cash, common stock and warrant
distributions scheduled to be made under the Plan as modified:
<TABLE>
<CAPTION>
Cash on Deferred
New Common Shares A-Warrants B-Warrants C-Warrants Other Warrants Distribution Cash
Recipient Number (A) % Number Number Number (Note 8a) Date Payments
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Old Shareholders 1,500,000 50% 2,500,000 1,250,000 -0- -0- -0- -0-
- -------------------------------------------------------------------------------------------------------------------------------
New Shareholders 825,000 27.5 1,375,000 687,500 -0- -0- -0- -0-
- -------------------------------------------------------------------------------------------------------------------------------
SIS Capital Corp. 150,000 5 250,000 125,000 -0- -0- -0- -0-
- -------------------------------------------------------------------------------------------------------------------------------
Unsecured Creditors 300,000 10 500,000 250,000 -0- -0- $96,520/$.05 $351,662/$.20
per $1.00 of per $1.00 of
allowed claim allowed claim
- -------------------------------------------------------------------------------------------------------------------------------
ESOP (B) 225,000 7.5 375,000 187,000 -0- -0- -0- -0-
- -------------------------------------------------------------------------------------------------------------------------------
Board of Directors -0- -0- 125,000 62,500 -0- -0- -0- -0-
- -------------------------------------------------------------------------------------------------------------------------------
Gordon Molesworth,
Daniel Storr and
Orvall Riessen -0- -0- 500,000 250,000 300,000 -0- -0- -0-
- -------------------------------------------------------------------------------------------------------------------------------
Michael Schiller -0- -0- 100,000 50,000 -0- 200,000 -0- -0-
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL: 3,000,000 100% 5,725,000 2,862,000 300,000
- -------------------------------------------------------------------------------------------------------------------------------
<FN>
(A) Actual number of shares distributed varies from the above chart;
see Statement of Shareholders' Equity (Deficit).
(B) Modified so that stock warrants were issued in lieu of shares.
</TABLE>
F-27
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1995, 1994, 1993 AND MAY 31, 1993
Note 3. Inventory
As of May 31, 1992, the Company's financial statements
reflected inventory aggregating $502,582. However, the Company's
limited sales led management to re-evaluate its inventory and a
determination was made that new prototypes were required and the
Company's existing inventory had no market value. Accordingly, all
inventory was written off and no inventory is being reflected in the
accompanying financial statements.
Note 4. Accounts Payable and Accrued Expenses
a. As of September 30, 1995, 1994 and 1993 and May 31,
1993, the Company was obligated to its suppliers, professionals,
employees and related party creditors for services and supplies. Trade
accounts payable at May 31, 1993 in the amount of $776,936 were
recharacterized as pre-petition debts on September 30, 1993. See Note
4b.
Details of accrued expenses at the balance sheet dates
are as follows:
<TABLE>
<CAPTION>
September 30, May 31,
-------------------------------- --------
1995 1994 1993 1993
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Accrued salaries payable
to employees and officers,
including $167,788 to
stockholders at May 31,
1993 (1) $302,625 $ - $ - $479,098
Accrued rent payable to
related parties - - - 89,287
-------- -------- ------- --------
302,625 - - 568,385
Various accrued expenses,
including bankruptcy
administration costs of
$595,794 and $413,800, at
September 30, 1995 and
1994, respectively 675,052 436,560 - 154,579
-------- -------- ------- --------
Total $977,677 $436,560 $ - $722,964
<FN>
(1) 1995 amount represents stock grants to employees and officers made
on July 25, 1995, paid via the issuance of common stock in
October, 1995. See Note 8b.
</TABLE>
F-28
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1995, 1994, 1993 AND MAY 31, 1993
Note 4. Accounts Payable and Accrued Expenses (continued)
b. Accounts payable for pre-petition and post-petition
creditors as of the balance sheet dates are as follows:
<TABLE>
<CAPTION>
September 30, May 31,
-------------------------------- --------
1995 1994 1993 1993
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Pre-petition payables
Payables to unrelated
creditors (Note 2) $ - $1,738,707 $1,738,707 $ -
Payables to related
parties (2) (3) - 391,836 391,836 156,860
-------- ---------- ---------- ---------
Total pre-petition
payables $ - $2,130,543 $2,130,543 $156,860
-------- ---------- ---------- ---------
-------- ---------- ---------- ---------
</TABLE>
<TABLE>
<CAPTION>
September 30, May 31,
-------------------------------- --------
1995 1994 1993 1993
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Post-petition payables
Due to related parties (3):
Accrued rent $ - $ 398,557 $ - $ -
Accrued interest - 35,691 - -
Various cash expenses
and advances - 86,571 - -
-------- ---------- ---------- ---------
Total post-petition
payables $ - $520,819 $ - $ -
-------- ---------- ---------- ---------
-------- ---------- ---------- ---------
<FN>
(2) Liability to related parties represents a combination of accrued
rent, payable to the former President of the Company and his
family, cash advances to the Company and expenses paid for by the
former President of the Company, net of repayments and off-
setting advances made to a Company owned by said officer,
aggregating $38,439 at May 31, 1993.
(3) These liabilities were incorporated into an overall settlement
reached by the Company during its bankruptcy reorganization with
said individuals aggregating $907,000, payable at $.25 per $1.00
of the aggregate amount (Note 2)
</TABLE>
F-29
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1995, 1994, 1993 AND MAY 31, 1993
Note 5. Notes Payable
As of the balance sheet dates, notes payable are comprised of
the following:
<TABLE>
<CAPTION>
September 30, May 31,
-------------------------------- --------
1995 1994 1993 1993
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Convertible note payable -
Tampa Firefighters' and
Police Officers' Pension
Fund; post-petition
financing; note bears
interest at prime,
plus 4% per annum
(12.75% at September 30,
1995), is convertible
into 75,000 shares of
common stock; maturity
is May 30, 1996 (a) $250,000 $ - $ - $ -
Note payable - SIS Capital,
Corp. ("SIS") - pre-
petition, unsecured,
non-interest bearing,
payable on demand;
restructured and
transferred to unsecured
claims as of March 31,
1995 - 38,000 38,000 38,000
Note payable - SIS, post-
petition, collateralized
by first lien on all
assets, bearing interest
at 8% per annum,
restructured and
incorporated into
$1,067,000 note payable;
See Notes 2 and 6 - 991,046 - -
-------- ---------- ------- -------
$250,000 $1,029,046 $38,000 $38,000
-------- ---------- ------- -------
-------- ---------- ------- -------
<FN>
(a) On May 23, 1996, the note was converted by the note holder into
250,000 shares of common stock. The Board of Directors had
previously modified the conversion terms so that the conversion
price was $1.00 instead of $3.33 per share.
</TABLE>
F-30
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1995, 1994, 1993 AND MAY 31, 1993
Note 6. Long-term Debt
As of September 30, 1995, long-term debt is comprised
of the following:
Note payable - SIS post- petition financing; note
in the original amount of $1,067,000 is
collateralized by a first lien upon all Company
assets and bears interest at prime, plus 2%
(10.75% at September 30, 1995); note is payable
in three $200,000 semi-annual installments,
commencing October 19, 1995; the principal
balance and all accrued interest is payable
April 19, 1997 (as of September 30, 1995,
related accrued interest aggregated $35,744)(a) $ 817,000
Pre-petition payables due in four
equal semi-annual payments, commencing
October 19, 1995, without interest:
Unrelated creditors 176,006
Related parties 175,656
----------
1,168,662
Less current portion 628,003
----------
$ 540,659
----------
----------
Scheduled maturities of long-term liabilities as of September
30, 1995 is as follows:
1996 $ 628,003
1997 540,659
----------
$1,168,662
----------
----------
(a) On June 1, 1996, SIS agreed to waive and discharge its first
priority security interest and lien on the Company's assets.
F-31
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1995, 1994, 1993 AND MAY 31, 1993
Note 7. Stockholders' Deficiency in Assets
Stockholders' deficiency in assets as of the balance sheet
dates is as follows:
<TABLE>
<CAPTION>
September 30, May 31,
-------------------------------- --------
1995 1994 1993 1993
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Convertible preferred
stock - $.01, par
value; $10 per share
liquidation
preference
Authorized 1,000,000
shares
Series A: issued and
outstanding - 9,460
shares - 1994 and
1993 $ - $ 95 $ 95 $ 95
Series B: issued and
outstanding - 346,964
shares - 1994 and
1993 - 3,470 3,470 3,470
Common stock - $.01 par
value - 1995; $.02
par value, 1993 and
1994:
Authorized - 20,000,000
shares - 1995;
40,000,000 shares -
1994 and 1993; issued
and outstanding -
3,945,404 shares - 1995;
16,811,267 shares -
1994 and 1993 39,454 336,225 336,225 336,225
Additional paid in
capital 56,412,163 54,733,787 54,733,787 54,733,787
Deficit accumulated
during the
development stage (57,607,625) (57,616,324) (55,011,666) (54,108,204)
Deferred compensa-
tion stock options - (1,423,582) (2,019,382) (2,217,982)
----------- ----------- ----------- -----------
$(1,156,008) $(3,966,329) $(1,957,471) $(1,252,609)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
F-32
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1995, 1994, 1993 AND MAY 31, 1993
Note 7. Stockholders' Deficiency in Assets (continued)
Effective with the bankruptcy reorganization consummated on
March 31, 1995, all of the Company's preferred and common stock
structure was changed. As of that date, all issued and outstanding
convertible preferred $.01 par value shares and common $.02 par value
shares were canceled and new common stock with $.01 par value was
issued.
In conjunction with the reorganization, the Company arranged
for new stockholders to invest $480,463 in exchange for 300,000 new
common shares. Said proceeds were received in April, 1995. The Plan of
Reorganization had allotted, 825,000 shares for issuance to said new
stockholders, which would have represented an ownership of 27-1/2% in the
Company. See chart in Note 2. These shareholders were also issued
500,000 A-Warrants and 250,000 B-Warrants.
In October, 1994, $250,000 was received from another
investor. The proceeds represented a convertible note payable with
interest at prime, plus 4% (11.75%). In April, 1995, the note was
converted into 250,000 shares of common stock. Accrued interest was
forgiven upon conversion and was included in the gain on debt
restructuring.
Convertible preferred stock and its related rights and
privileges prior to the above-mentioned reorganization are detailed
below.
In 1982, the Board of Directors of the Company approved a
resolution creating a series of preferred stock (denominated "Series A")
consisting of 720,000 shares. Each share of Series A preferred stock
was convertible into two shares of common stock, was entitled to two
votes per share, had a liquidation preference of $10 per share and was
redeemable by the Company at $12.50 per share. The Series A shares were
entitled to cumulative preferred dividends at the rate of $1.00 per
annum, on June 30 and December 31. In April, 1992, the Company paid all
dividends through December 31, 1991 on the Series A shares totaling
$75,680. No dividends were paid subsequent to that date. Cumulative
unpaid dividends of $28,380 through March 31, 1995 were canceled upon
the cancellation of the shares.
F-33
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1995, 1994, 1993 AND MAY 31, 1993
Note 7. Stockholders' Deficiency in Assets (continued)
In March, 1991, the Board of Directors of the Company
authorized an amendment of the Certificate of Incorporation to decrease
the aggregate number of authorized shares of Series A preferred stock
from 720,000 shares to 9,560 shares and to create from 1,000,000
authorized shares of the Company's serial preferred stock, a second
series of preferred stock, having a par value of $.01 per share
(denominated "Series B") which consisted of 950,000 authorized shares.
Each share of Series B preferred stock was convertible into five shares
of common stock, was entitled to one vote per share as a separate class,
had a liquidation preference of $10 per share and was redeemable by the
Company at $10 per share. The Series B shares were entitled to
cumulative preferred dividends payable at a rate of $1.00 per annum on
March 1 and September 1. The Company paid the March 1, 1992 dividend on
the Series B preferred stock totaling $158,260. No dividends were paid
subsequent to that date. Cumulative unpaid dividends of $1,046,495
through March 31, 1995 were canceled upon the cancellation of the
shares.
Note 8. Stock Warrants and Options
a. In addition to the common shares issued as part of the
revision of the capital structure of the Company discussed in Note 7
above, the Company issued three classes of common stock warrants, Series
A, B and C. The number of warrants expected to be issued is detailed in
the chart in Note 2. Pursuant to the terms of the reorganization plan,
all previously issued warrants that were not fully exercised, exchanged
and evidenced by stock certificates were canceled.
In conjunction with the overall settlement of claims
between the Company and the former Chief Executive Officer, the Company
issued an additional 200,000 common stock warrants ("additional
warrants") that are exercisable at $.01 per share and which expire
September 28, 1996.
F-34
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1995, 1994, 1993 AND MAY 31, 1993
Note 8. Stock Warrants and Options (continued)
As of September 30, 1995, the Company has outstanding
common stock warrants as follows:
Exercise
Number of price per Expiration Total
Class warrants share date Amount
----- --------- --------- ---------- ------
A Warrants 2,996,625 $1.00 January 16, 1996 $2,996,625
B Warrants 222,041 $2.00 January 14, 1997 444,082
C Warrants 300,000 $ .01 April 14, 2000 3,000
Additional
Warrants 200,000 $ .01 September 28, 1996 2,000
Class A warrants entitle the holder thereof to purchase
for $1.00 one share of common stock in exchange for one warrant.
Exercising party shall also receive one-half of one B Warrant.
Class B warrants entitle the holder thereof to purchase
for $2.00 one share of common stock in exchange for one warrant.
Class C and additional Warrants entitle the holder
thereof to purchase for $.01 one share of common stock in exchange for
one warrant.
Between October 1, 1995 and January 16, 1996 (expiration
date of A Warrants), warrants were exercised generating $2,194,800 and
resulting in the issuance of 2,303,250 common shares.
b. On July 21, 1995, the Company adopted, subject to
shareholder approval, two stock option plans, an Employee Stock Option
Plan that covers employees of the Company and an Outside Directors Plan.
The Company has reserved 850,000 shares of common stock for issuance to
key employees and/or directors under these plans. Changes in the shares
authorized, granted and available under the Plans are as follows:
Number
of
Shares
------
Authorized July 21, 1995 (1) 850,000
Granted (578,500)
Exercised -
--------
Available , September 30, 1995 271,500
--------
--------
(1) Date of adoption of Plan.
F-35
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1995, 1994, 1993 AND MAY 31, 1993
Note 8. Stock Warrants and Options (continued)
Under the Plan, option exercise prices shall not be less
than 85% (100% in the case of incentive stock options) of the fair
market value of the common stock at the time of the Grant. During the
year ended September 30, 1995, options were granted, at approximately
$2.375 per share. Exercise periods are for ten years (5 years for
certain incentive stock options), but terminate at a stipulated period
of time after an employees' death or termination of employment for
causes other than disability or retirement. No options have been
exercised since inception of the Plan. The options become exercisable
in such installments, which need not be equal, and at such times as
designated by the Compensation Committee.
Note 9. Income Taxes
The Company, as of September 30, 1995, has available
approximately $46,865,000 of net operating loss carryforwards to reduce
future Federal and state income taxes. In addition, the Company had
available investment tax credits of approximately $16,500, expiring 1996
through 2001, and research tax credits of approximately $585,000 which
began to expire in the fiscal year ended May 31, 1993. Since there is
no guarantee that the related deferred tax asset will be realized by
reduction of taxes payable on taxable income during the carryforward
period, a valuation allowance in the amount of $18,667,000 has been
computed to offset in its entirety the deferred tax asset attributable
to the net operating loss and tax credits.
The net operating loss carryforwards expire as follows:
Year NOL Amount
---- ----------
1996 $ 1,576,749
1997 2,549,215
1998 3,878,063
1999 3,181,148
2000 3,290,778
2001 4,047,945
2002 5,383,607
2003 5,162,539
2004 5,615,608
2005 2,207,073
2006 2,792,000
2007 3,671,988
2008 903,462
2009 2,604,658
-----------
$46,864,833
-----------
-----------
F-36
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1995, 1994, 1993 AND MAY 31, 1993
Note 9. Income Taxes (continued)
Under Section 382 of the Internal Revenue Code of 1986, the
use of the Company's net operating loss carryforwards and various
business tax credits may be limited after the occurrence of an ownership
change, as defined. An ownership change is a series of transactions
resulting in an increase of more than 50 percentage points in the
percentage of ownership interest in stockholders who, before or after
such ownership change, own, directly, or indirectly, 5% or more of the
stock of such corporation.
Note 10. Commitments and Contingencies
a. The Company leases its office and factory space
pursuant to a non-cancelable operating lease which expires in November,
1998. The terms of the lease require the Company to pay for its own
electricity, in addition to the basic annual rental which increases from
$47,061 to $54,479 over the term of the lease. During the period up to
November 15, 1993, the Company was leasing its space from the former
President and his family.
The future minimum annual rental commitments at
September 30, 1995 on long-term leases is as follows:
September 30, 1996 $ 49,414
1997 51,885
1998 54,479
1999 6,810
Rental expense for each of the periods was as follows:
Year ended May 31, 1993 $212,081
Four months ended September 30, 1993 66,667
Year ended September 30, 1994 471,280
Year ended September 30, 1995 64,751
During the pendency of the bankruptcy reorganization,
the former President and his family made claims for, among other things,
back rent, diminution of value of their building and unpaid real estate
taxes. The Trustee reached an accord with said individuals that
aggregated $907,000, which was included in the class of general
unsecured creditors. Substantially all of this amount was classified as
rent expense in the accompanying financial statements.
F-37
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1995, 1994, 1993 AND MAY 31, 1993
Note 10. Commitments and Contingencies (continued)
b. In conjunction with restructuring of the Company's
affairs, the Company entered into a one year employment agreement with a
former consultant to the Company, who is serving as President, providing
for an annual salary of $140,000. The agreement is automatically
renewed unless either the Company or the employee gives 30 days written
notice terminating the contract.
c. Effective January 1, 1990, the Company established a
401(K) defined contribution and trust plan which covers substantially
all officers and employees upon completion of six months employment.
Officers and employees may contribute from 1% to 15% of their
compensation. The Company may contribute to the fund at the discretion
of management. During the forty months ended September 30, 1995, the
Company did not make a contribution. The Company has elected to pay the
plan administrative expenses, which were nominal, for this period.
d. In 1992, the Company issued 2,344,000 stock options to
three key employees at below market price. The difference between the
market price and the exercise price of the options granted aggregated
$3,513,000 and was charged to deferred compensation - stock options and
additional paid-in-capital was credited. In subsequent periods, the
options were terminated due to the departure of the employees. At that
time, the unamortized portion was written off and additional paid in
capital was charged.
e. At September 30, 1995, 4,282,000 shares of the
Company's common stock were reserved for issuance in connection with the
exercise of warrants, grants to employees, and the employee and director
stock option plan.
f. On August 30, 1995, the Company executed a stock
purchase agreement with an offshore corporation that provided for said
investor to purchase 2,000,000 shares of common stock for an aggregate
$2,000,000 cash investment. Through September 30, 1995, the Company had
received $1,000,000 towards this purchase. In March, 1996, an
additional $100,000 was received and the residual amount is due, and the
stock is issuable, in nine $100,000 monthly installments, commencing
June 1, 1996.
F-38
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1995, 1994, 1993 AND MAY 31, 1993
Note 10. Commitments and Contingencies (continued)
g. On October 5, 1995, the Company settled a disputed
$395,000 claim, with a former customer by issuing securities as
discussed below with an estimated value of $360,448. The customer had
been seeking a refund of monies previously paid to the Company for
sales. However, in lieu of cash, the settlement required the Company
to issue 53,098 shares of common stock, 88,143 Class A warrants, and
related 44,072 Class B warrants. Additionally, the customer received
50,000 additional Class A warrants and the Company gave a $25,000 credit
towards the exercise of these additional Class A warrants. The gain on
debt restructuring in the accompanying statement of operations for the
year ended September 30, 1995 has been charged $360,448 to reflect the
cost to the Company of this settlement.
h. To correct an error in the Plan, on October 24, 1995,
the Company approved the distribution of new common stock and warrants
to holders of the Series B convertible preferred stock and certain
present and former employees who were not fully covered by the original
distribution made on April 19, 1995. The series B preferred shares were
erroneously treated as if they were old common stock for purposes of the
exchange into new common stock, when as a matter of right, each said
share was convertible into five shares of new common. The additional
shares and warrants aggregated 180,826 and 301,256, respectively.
i. Financial instruments which potentially subject the
Company to concentrations of credit risk are cash and cash equivalents.
The Company maintains its cash in highly rated financial institutions.
As of September 30, 1995, the Company had bank deposits exceeding
Federally insured limits by approximately $755,000.
F-39
