<PAGE>
Annual Report
to the Shareholders of
FingerMatrix, Inc.
June 19. 1996
<PAGE>
FingerMatrix INC.
- ------------------------------------------------------------------------------
145 Palisade Street, Dobbs Ferry, NY 10522-1617 914/693-1050 FAX: 914/693-1752
June 19, 1996
Dear Shareholder,
It is my privilege to submit to you this Annual Report for Fingermatrix, Inc.
Your company has undergone a complete transformation in its recent past, and we
would like to provide you with a short progress report.
Since embarking on our mission to turn Fingermatrix into a growing and
profitable company eighteen months ago, our new board of directors, our
employees and I have labored with intensity to make it happen. In the first
four months of our tenure we endured the constraints of Chapter 11 existence,
and the survival budget that came with it. For the first five months after
exiting from Chapter 11 we were still forced to work without sufficient funding
for making dramatic progress. Then, in September of 1995, we received a major
influx of capital from an off-shore investor. This allowed us to embark on a
reinvigorated journey to transform Fingermatrix into "the New
Fingermatrix".
From that point until the present we have been able to establish a new
infrastructure in the company, from adding the latest PC technology to
acquiring optimum software tools to adding key personnel. Our work environment
has been improved so that visitors to our facility are welcomed into a
professional setting. Our relationships with vendors has been strengthened. Our
employees have exhibited pride in their work and in their company. The result
is most visible in product development and in the reception that we have
received from potential customers.
The A-Warrant exercise program that ended in January, 1996 provided a second
major source of funding for your company. A total of some $2.9 million was
received through mid-January for both A and B-Warrants. To date we have paid
approximately 78% of the cash debt of the company since emerging from Chapter
11. The remaining 22% is scheduled for payment in October, 1996 and April,
1997. We foresee no difficulty in meeting the obligations of this schedule.
Obviously, we set goals for ourselves in running the company when arriving in
December, 1994. We have accomplished two of our initial goals, and have one
more goal very much in the final stages of completion.
<PAGE>
The first goal, now accomplished, was to file our annual audited statement
(1O-K) with the Securities and Exchange Commission. This effort required more
than eight months of work by a team of auditors and accountants, followed by
extensive legal documentation to present the status of the company in a
professional and complete way. This Annual Report reflects the company's
activity from May of 1992, when the previous management filed its last report,
through the completion of Fiscal Year 1995 last September 30.
The attached financial summary reflects the activity of a company that
encountered severe difficulty, went through a reorganization, has come out of
it, and is making considerable progress. In short order you will receive the
10Q reports for our first two fiscal quarters of fiscal year 1996. Thereafter,
our performance will be reflected in 1 0Q and 1 OK reports which we fully
intend to file in a timely manner.
The second goal just reached is the complete re-engineering of our access
control product set. Named Chek/One, this product set has been previewed to a
select group of systems integration firms. We are now about to launch a major
marketing thrust to introduce the Chek/One in the many applications areas for
which it is suited.
Our live scan booking station, the Chek/Ten, is in the final stages of
re-engineering. We expect that our first prototype will be available for
internal testing very shortly. After a period of verification that the system is
ready, we will request testing by the FBI for certification.
Both the Chek/One and Chek/Ten product sets are built around our patented
Clean/Match liquid platen scanner technology. This technology provides forensic
quality images for both the single finger touch needed in the Chek/One and the
multiple finger touches, rolls, and slaps needed in the Chek/Ten. We are
confident that we stand above the competition in our approach to obtaining the
finest fingerprint images possible.
The coming six months will yield further progress toward completion of our
product line and the establishment of the marketing and sales momentum we will
need. Much remains to be done in the building of a strong Fingermatrix, but we
have taken the first solid steps toward successful reentry into our markets. We
are confident that we have embarked on a journey toward growth and
profitability. As we take each step of the way we will keep you informed.
Best regards,
Thomas T. Harding
President
<PAGE>
FINGERMATRIX, INC.
(A Development Stage Company)
FINANCIAL STATEMENTS
SEPTEMBER 30, 1995, 1994, 1993
AND
MAY 31, 1993
<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 la 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.
FARBER, BLICHT & EYERMAN, LLP
Plainview, New York
January 10, 1996, except for Notes 5(a),
6(a) and lO(f), the latest of which
is dated June 7, 1996
F-2
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
ASSETS
September 30, May 31,
------------------------------------ ------
1995 1994 1993 1993
---- ---- ---- ----
Current assets:
Cash and cash equivalents $1,067,577 $ 13,567 $ 3,292 $ 3,635
Restricted cash (Note li) 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 $l99,751 $211,072 $442,151
---------- -------- -------- --------
---------- -------- -------- --------
See notes to financial statements.
F-3
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' DEFICIENCY IN ASSETS
September 30, May 31,
---------------------------------- ------
1995 1994 1993 1993
---- ---- ---- ----
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
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
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 1,513,59 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 la,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 CASH FLOWS
<TABLE>
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>
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) - - (l,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 $l,067,577
---------- --------- -------- ----------- ----------
---------- --------- -------- ----------- ----------
Supplemental disclosures of cash
flow information:
Cash paid during the period for:
Interest $ 35,691 $ 204 $ - $ 13,964 $ 43,709
Reference is made to Notes 2,7,8 and 10g relating to non-monetary issuances of common stock.
<FN>
(*) Not covered by Auditors' Report.
</TABLE>
See notes to financial statements.
F-2O
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION
<TABLE>
From inception
(May 1976) to
May 31, 1988 (*)
----------------
<S> <C>
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
-----------
-----------
<FN>
(*) Not covered by Auditors' Report.
</TABLE>
See notes to financial statements.
F-21
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION
(Continued)
<TABLE>
From inception
(May 1976) to
May 31, 1988 (*)
---------------
<S> <C>
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
-----------
-----------
<FN>
(*) Not covered by Auditors' Report.
</TABLE>
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
S57,607,625 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 Sl45,888 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- $250,000 $817,000
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 2,862,500 300,000
<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, l995, 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:
September 30, May 31,
---------------------------- -------
1995 1994 1993 1993
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
-------- -------- ------- --------
-------- -------- ------- --------
(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.
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:
September 30, May 31,
---------------------------- -------
1995 1994 1993 1993
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
------- ---------- ---------- --------
------- ---------- ---------- --------
September 30, May 31,
---------------------------- -------
1995 1994 1993 1993
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 $ - $ -
------- -------- ------- -------
------- -------- ------- -------
(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).
F-29
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:
September 30, May 31,
---------------------------- -------
1995 1994 1993 1993
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
-------- ---------- ------- -------
-------- ---------- ------- -------
(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.
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:
September 30, May 31,
---------------------------- -------
1995 1994 1993 1993
---- ---- ---- ----
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 - l995;
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)
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% 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 l,000,000 authorized shares of the Company's serial
preferred stock, a second series of preferred stock, having a par value of $.O1
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 2,996,6625 $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 or 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, l995 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 S47,061 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 S907,000, 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 3anuary 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 S2,000,000 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 $3951000 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
