<PAGE>
Annual Report
to the Shareholders of
FINGERMATRIX
December 20, 1996
<PAGE>
FINGERMATRIX
145 PALISADE STREET
DOBBS FERRY, NEW YORK 10522-1617 USA
TEL: (914) 693-1050 FAX: (914) 693-1752
December 20, 1996
To: The Shareholders of Finger/Matrix, Inc.
From: Thomas T. Harding
President, CEO
Subject: Annual Report
Dear Shareholder,
On September 30, 1996 Finger/Matrix, Inc. completed its fiscal year. This is
the second fiscal year completed during my tenure as your president. We
completed our form 10-K and submitted it on time to the United States
Securities and Exchange Commission (SEC) in late December.
Since April, 1995 we have paid mandated debt and bankruptcy administration fees
aggregating approximately $2.1 million. As of this writing we have only
$217,000 of this debt remaining.
Fiscal year 1996 was a very important year in the re-engineering and
reconstruction of your company. As previously reported to you, the A-Warrant
exercise program was quite successful. Warrant exercises through mid-January of
1996 totaled some $2.9 million. Most of the funds were from the A-Warrant
program; some B-Warrant exercises were also recorded. Using those funds, plus
funds received from an off-shore investor during the fiscal year, we were able
to accomplish much. We built our very competent technical team and equipped
them with the type of superior technical infrastructure that is an absolute
necessity for the development of world-class products.
Our Chek/One access control product line was formally introduced, the Chek/Ten
live scan fingerprint booking station prototype was previewed, and marketing
activity began. Field tests of the Chek/One have been successful. We have
expanded the family of products under the Chek/One banner to include three
versions of the hardware and two versions of the software. This was all done to
meet known and identified requirements of potential customers.
<PAGE>
In December of 1996 we conducted tests for certification of our Chek/Ten live
scan fingerprint booking station. Our internal test results indicated that we
had complied with the specifications mandated by the United States Federal
Bureau of Investigation (FBI). We are now in the process of interaction with
the FBI to achieve certification.
We were fortunate to receive recognition in the industry trade press that
helped to spread the word that Finger/Matrix has made a comeback. We coupled
this with attendance at selected industry trade shows to reinforce that
message. As a result, inquiries have steadily increased each month, and we
expect this trend to continue.
Our international selling effort followed this marketing activity immediately.
Early results have been promising, but we have much more to do. However, we can
report that our proposal activity has produced some very positive results. We
are confident that the current fiscal year will see favorable order and
shipment profiles.
We continue to manage the company by watching our cash flow. Until product
revenues produce enough gross margin to provide for a self-sustaining
operation, we will remain at roughly the same staff level and expenditure rate.
Hopefully we will begin to approach break-even from a cash standpoint before
calendar year 1997 has ended.
We firmly believe that the "worst of the storm" has passed. Until the last debt
payment has been made, however, we must continue to work to overcome past
problems. We do this with continued resolve. Finger/Matrix is a company with a
solid set of patents, outstanding base science and technology, and innovative
new products. Without doubt, our people are our greatest asset.
You, our shareholders, have been patient and supportive. We who work for
Finger/Matrix are all committed to making your investment a worthy one. On its
merits, the company deserves to participate successfully in the huge markets
that we address, and as a result, provide proper returns to you. You can be
sure that we, the employees of Finger/Matrix, will continue to work with
diligence toward that end.
Best regards,
Thomas T. Harding
Thomas T. Harding
President
<PAGE>
FINGERMATRIX, INC.
(A Development Stage Company)
FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
<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 Stockholders' Equity (Deficiency) F-7 - F-19
Statements of Cash Flows F-20 - F-21
Consolidated Statement of Changes in Financial Position F-22 - F-23
Notes to Financial Statements F-24 - F-37
<PAGE>
FARBER, BLICHT & EYERMAN, LLP
- ------------------------------------------------------------------------------
Certified Public Accountants 255 Executive Drive, Suite 215
Plainview, NY 11803-1715
Telephone: (516) 576-7040
Facsimile: (516) 576-1232
To the Board of Directors
and Stockholders of
Fingermatrix, Inc.
Dobbs Ferry, NY
We have audited the accompanying balance sheets of Fingermatrix, Inc. (a
development stage company) as of September 30, 1996 and 1995, and the related
statements of operations, stockholders' equity (deficiency in assets), and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Fingermatrix, Inc. as of
September 30, 1996 and 1995, and the results of operations and its cash flows
for the years 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 emerged
from bankruptcy in April, 1995, generated no revenue in 1996 and 1995, and has
limited working capital at September 30, 1996. 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.
F-1
<PAGE>
To the Board of Directors
and Stockholders of
Fingermatrix, Inc.
Page 2
We were engaged to audit the statements of operations, stockholders'
deficiency in assets and cash flows for the year ended September 30, 1994. These
financial statements are the responsibility of the Company's management. Because
of the significance of the matters discussed in the immediately following
paragraph, the scope of our work was not sufficient to enable us to express, and
we do not express, an opinion on the 1994 financial statements referred to
above.
We were unable to locate missing accounting and bookkeeping records, which
included, among other things, contracts and invoices for the 1994 year, 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.
Farber, Blicht & Eyerman, LLP
Plainview, New York
November 18, 1996, except for
Note 10e, which is as of
December 2, 1996
F-2
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
SEPTEMBER 30, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
-------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $404,986 $1,067,577
Restricted cash (Note 1i) - 31,825
Inventories (Notes 1c and 3) 78,870 -
Prepaid expenses and
other current assets 156,842 20,855
-------- ----------
Total current assets 640,698 1,120,257
-------- ----------
Property, plant and
equipment - at cost
(Note 1d):
Equipment 206,281 44,964
Leasehold improvements 21,024 -
Furniture and fixtures 11,603 561
-------- ----------
238,908 45,525
Less allowance for
depreciation and
amortization 64,600 32,715
-------- ----------
174,308 12,810
-------- ----------
Other assets:
Patents (Note 1f) 241,533 224,385
Less accumulated
amortization 108,180 94,961
-------- ----------
133,353 129,424
Deposits 13,605 12,805
-------- ----------
146,958 142,229
-------- ----------
Total assets $961,964 $1,275,296
======== ==========
</TABLE>
See notes to financial statements.
F-3
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
SEPTEMBER 30, 1996 AND 1995
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS)
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Current liabilities:
Accounts payable - trade $ 1,291 $ 34,965
Accrued expenses (Note 4) 126,459 977,677
Note payable (Note 5) - 250,000
Current portion of long-term debt
(Note 6) 504,839 628,003
------------ ------------
Total current liabilities 632,589 1,890,645
Long term debt (Note 6) - 540,659
------------ ------------
Total liabilities 632,589 2,431,304
------------ ------------
Comments, commitments and
contingencies (Note 10)
Stockholders' equity (deficiency in assets) (Note 7):
Common stock - $.01 par value:
20,000,000 shares authorized;
8,206,250 and 3,945,404 shares
issued and outstanding 82,062 39,454
Additional paid in capital 60,452,875 56,412,163
Deficit accumulated during
the development stage (60,205,562) (57,607,625)
------------ ------------
Stockholders' equity (deficiency
in assets) 329,375 (1,156,008)
------------ ------------
Total liabilities and stockholders'
equity (deficiency in assets) $ 961,964 $ 1,275,296
============ ============
</TABLE>
See notes to financial statements.
F-4
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
From
Inception
(May 1976) to
Years ended September 30, September 30,
--------------------------------------------------------
1996 1995 1994 1996 (*)
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues:
Sales and service contracts $ - $ 268 $ 28,770 $ 3,432,750
Interest income 24,538 3,009 994 2,817,153
----------- ----------- ----------- ------------
24,538 3,277 29,764 6,249,903
----------- ----------- ----------- ------------
Costs and Expenses:
Cost of sales - - - 2,008,190
Write down of inventory (Note 3) - - - 2,314,813
Research and development (Note 1e) 1,358,059 751,437 760,549 21,552,801
Selling, general and
administrative 1,203,020 701,246 788,329 33,675,013
Bankruptcy administration
costs (Note 2) - 260,038 454,054 714,092
Interest and amortization
of debt expense 61,396 62,985 35,690 669,161
Amortization of deferred
compensation - stock
options (Note 10i) - - 595,800 4,808,788
Loss from investment in
Unimark Credit Systems,
Inc. - - - 1,145,768
Liquidation damages - - - 702,118
----------- ----------- ----------- ------------
Total costs and expenses 2,622,475 1,775,706 2,634,422 67,590,744
----------- ----------- ----------- ------------
Loss before extraordinary item (2,597,937) (1,772,429) (2,604,658) (61,340,841)
Extraordinary credit - gain on
debt restructuring (Notes 1a,2) - 1,781,128 - 1,781,128
----------- ----------- ----------- ------------
Net income (loss) $(2,473,840) $ 8,699 $(2,604,658) $(59,559,713)
=========== =========== =========== ============
<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>
Years ended September 30,
---------------------------------------------------------
1996 1995 1994
--------- ---------- ----------
<S> <C> <C> <C>
Earnings (loss) per common
share (*):
Before extraordinary credit $ (.42) $ (.93) $ (2.41)
Extraordinary credit - .93 -
--------- ---------- ----------
Net earnings (loss)
per common share $ (.42) $ - $ (2.41)
========= ========== ==========
Weighted average number
of shares outstanding (*) 5,843,633 1,907,431 1,227,222
========= ========== ==========
<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, 1996
<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 564,458 $.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, 1996
<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 5,630,339 (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, 1996
<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> <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, 1996
<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> <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, 1996
<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 .75 to 9,471 1,789,543 - - 1,799,014
7.00
Common stock issued in
private offering - 855,600 5.00 to 17,112 3,974,553 - - 3,991,665
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 to 5,662 1,197,060 - - 1,202,722
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 to 1,722 181,505 - - 183,227
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 0.00 to $ 159,109 $27,612,066 $(23,743,999) $(1,466,250) $2,562,049
------ --------- ------- --------- ----------- ------------ ----------- ----------
<FN>
(*) Not covered by Auditor's 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, 1996
<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 Auditor's 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, 1996
<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 Auditor's 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, 1996
<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 to 14,000 386,000 - - 400,000
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 Auditor's 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, 1996
<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, 1996
<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 - - - - (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, 1996
<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, 1996
<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 5) - 250,000 1.00 2,500 247,500 - - 250,000
Cancellation of deferred
compensation stock options
(Note 10i) - - - - (1,423,582) - 1,423,582 -
Shares issued in connection
with settlement of litigation
(Note 10f) - 78,098 4.62 781 359,667 - - 360,448
Shares issued to new share-
holders in exchange for cash
investment (Note 7) - 300,000 1.60 3,000 477,463 - - 480,463
Other transactions:
Stock warrants exercised
(Note 8) - 694,568 various 6,946 703,765 - - 710,711
Shares issued pursuant to
a private placement
(Note 10e) - 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 STOCKHOLDERS' EQUITY (DEFICIENCY)
FROM INCEPTION (MAY, 1976) TO SEPTEMBER 30, 1996
<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 September 30, 1995 3,945,404 - $ 39,454 $56,412,163 $(57,607,625) $(1,156,008)
Issuance of shares to holders
of old preferred shares 142,856 - 1,429 (1,429) - -
Shares issued as reimbursement
for professional fees incurred
by Stockholders' Alliance
(Note 10h) 62,032 1.75 620 107,936 - 108,556
Shares issued in exchange for
convertible note (Notes 5 and 7) 250,000 1.00 2,500 247,500 - 250,000
Shares issued in lieu of
employee bonuses 143,787 $2.25 to 1,438 324,404 - 325,842
$2.00
Stock warrants exercised (Note 8) 3,162,071 $.01 to 31,621 2,867,301 - 2,898,922
$2.00
Shares issued pursuant to a
private placement (Note 10e) 500,000 $1.00 5,000 495,000 - 500,000
Net loss for the year - - - - (2,597,937) (2,597,937)
---------- -------- ----------- ----------- ------------ -----------
Balance at September 30, 1996 8,206,150 - $ 82,062 $60,452,875 $(60,205,562) $ 329,375
---------- -------- ----------- ----------- ------------ -----------
</TABLE>
See notes to financial statements.
F-19
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
From June 1,
1988 to
Years ended September 30, September 30,
------------------------------------------- -------------
1996 1995 1994 1996 (*)
---- ---- ----- ---------
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Loss before extraordinary credit $(2,597,937) $(1,772,429) $(2,604,658) $(31,934,769)
Extraordinary credit - 1,781,128 - 1,781,128
----------- ----------- ----------- ------------
Net income (loss) (2,597,937) 8,699 (2,604,658) (30,153,641)
----------- ----------- ----------- ------------
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 45,104 20,811 31,265 1,201,186
Amortization of deferred compensation
stock options - - 595,800 3,923,202
Write-off of certain patents - - - 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 liabilities in
exchange for common stock 131,773 - - 296,921
Changes in assets and liabilities:
Decrease in accounts receivable - - - 17,429
Decrease in interest receivable - - - 364,055
(Increase) decrease in loans receivable
from employees - - (994) 8,459
(Increase) decrease in inventory (78,870) - - 1,506,033
(Increase) decrease in prepaid expenses
and other current assets (27,362) (14,461) 6,030 76,946
(Increase) decrease in deposits (800) 1,900 (14,705) (13,605)
(Decrease) increase in accounts
payable (33,674) (14,147) 569,931 1,808,899
(Decrease) increase in accrued
expenses (548,593) 541,117 436,560 892,510
----------- ----------- ----------- ------------
Total adjustments (512,422) (1,245,908) 1,623,887 9,098,696
----------- ----------- ----------- ------------
Net cash used in operating activities (3,110,359) (1,237,209) (980,771) (21,054,945)
----------- ----------- ----------- ------------
<FN>
(*) Not covered by Auditors' Report.
</TABLE>
See notes to financial statements.
F-20
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
From June 1,
1988 to
Years ended September 30, September 30,
------------------------------------------- -------------
1996 1995 1994 1996 (*)
---- ---- ---- --------
<S> <C> <C> <C> <C>
Cash flows from investing activities:
Expenditures for property and equipment $ (193,383) $ (15,185) $ - $ (334,241)
Expenditures for patents (17,148) - - (203,661)
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 (210,531) (15,185) - (745,735)
---------- ----------- --------- ------------
Cash flows from financing activities:
Payment from (to) restricted cash account 31,825 (31,825) - -
Payments to creditors as part of
debt restructuring (663,823) (446,124) - (1,109,947)
Proceeds from notes payable - 575,954 991,046 2,760,811
Proceeds from shares issued, pursuant
to private placements 500,000 1,480,463 - 5,453,914
Proceeds from exercise of stock
warrants and options 2,790,297 710,711 - 3,626,154
Payments under capitalized leases - - - (50,109)
Payment of dividends - - - (233,940)
Proceeds from public offering - - - 2,686,521
Payments from employee - 17,225 - 27,225
---------- ----------- --------- ------------
Net cash flows provided by financing
activities 2,658,299 2,306,404 991,046 13,160,629
---------- ----------- --------- ------------
Net increase (decrease) in cash and
cash equivalents (662,591) 1,054,010 10,275 (8,640,052)
Cash and cash equivalents at beginning
of period 1,067,577 13,567 3,292 9,045,038
---------- ----------- --------- ------------
Cash and cash equivalents at end of period $ 404,986 $ 1,067,577 $ 13,567 $ 404,986
---------- ----------- --------- ------------
---------- ----------- --------- ------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 73,071 $ 35,691 $ 204 $ 116,780
---------- ----------- --------- ------------
---------- ----------- --------- ------------
<FN>
Reference is made to Notes 2, 5, 7, 8, 10e and 10f relating to non-monetary
issuances of common stock.
(*) 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
<TABLE>
<CAPTION>
From inception
(May 1976) to
May 31, 1988 (*)
----------------
<S> <C>
Use of funds:
Operations:
Net loss $29,530,169
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-22
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION
<TABLE>
<CAPTION>
(Continued)
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-23
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
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,
1996, 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 working capital or financing, if necessary. During the three years
ended September 30, 1996, the Company had aggregate operating revenues of
$29,000 while incurring losses before extraordinary credits aggregating
$6,850,900 during the same period. Additionally, the Company has an accumulated
deficit of $60,205,562 as of September 30, 1996. 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 10e)
will generate sufficient cash to maintain its operations through January, 1997.
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. Production commenced in the
quarter ended December 31, 1996 on the Single Finger Access Control System.
F-24
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
Note 1. Summary of Significant Accounting Policies (continued)
b. Use of Estimates
The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
c. Inventory valuation
Inventories are 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 (see Note 1f).
e. Research and development
The Company accounts for software development
costs in accordance with Statement of Financial Accounting Standards No. 86
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed". Accordingly, certain software development costs incurred will be
capitalized after technological feasibility has been demonstrated.
Technological feasibility is determined when planning, designing, coding and
testing have been completed according to design specifications. Commencing with
product introduction, such capitalized amounts will be amortized on a
product-by-product basis at the greater of the amount computed using (a) the
ratio of current revenues for a product to the total of current and anticipated
future revenues or (b) the straight-line method over the remaining estimated
economic life of the product. Amortization of capitalized software costs will
be charged to cost of product revenues and cost of services revenues. As
testing of the Company's products has not been completed, no software
development costs have been capitalized from inception through September 30,
1996. Research and development expenditures are charged to research and
development in the period incurred.
F-25
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
Note 1. Summary of Significant Accounting Policies (continued)
f. Patents and intangible assets
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. During the
year ended September 30, 1996, patent application costs aggregated $17,148.
Costs incurred to maintain patents in good standing are expensed as incurred.
Amortization of patent costs was $13,219, $15,815 and $15,815 for the years
ended September 30, 1996, 1995 and 1994, respectively.
In fiscal 1996, the Company adopted Statement of
Financial Accounting Standards No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of". Accordingly,
the Company evaluates asset recoverability at each balance sheet date or when
an event occurs that may impair recoverability of the asset. The Company
determines the recoverability of the carrying amount of each intangible asset
by reviewing the following factors: the undiscounted value of expected
operating cash flows in relation to its net capital investment, the estimated
useful or contractual life of the intangible asset, the contract or product
supporting the intangible asset, and in the case of purchased technology and
capitalized software development costs, the Company will periodically review
the recoverability of the assets value by evaluating its products with respect
to technological advances, competitive products and the needs of its customers.
During fiscal 1996, the Company did not incur any long-lived asset impairment
losses.
g. Revenue recognition
The Company recognizes revenues from customers
upon delivery and installation, subject to acceptance by the customer, of its
systems. Service contract revenues are recognized as earned, pursuant to the
terms of the contract.
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.
F-26
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
Note 1. Summary of Significant Accounting Policies (continued)
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
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 8.
k. Concentration of credit risk
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, 1996, the Company had bank deposits exceeding
Federally insured limits by approximately $305,000.
l. Accounting for stock-based compensation
In October 1995, SFAS No. 123, "Accounting
for Stock-Based Compensation", was issued. SFAS No. 123 establishes a
fair value method of accounting for stock-based compensation plans either
through recognition or disclosure. The Company intends to adopt the disclosure
provisions of the Statement and, therefore, does not anticipate that SFAS No.
123 will have a material impact on its financial position, results of
operations or cash flows.
m. Fair value of financial instruments
The carrying amounts of financial instruments,
including cash and short-term debt, approximated fair value as of September
30, 1996 and 1995. The carrying value of long-term debt, including the
current portion, approximated fair value as of September 30, 1996 and 1995,
based upon the borrowing rates currently available to the Company for bank
loans with similar terms and maturities.
F-27
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
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 11 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 10f), 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. Through September 30, 1996, all Plan required payments had been made
by the Company.
F-28
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
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 by the
Board of Directors and approved by the Shareholders:
<TABLE>
<CAPTION>
Cash on Deferred
New Common Shares A-Warrants B-Warrants C-Warrants Other Warrants Distribution Cash
Recipient Number (A) % Number Number Number and Options 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- 350,000 -0- -0-
(C)
- ------------------------------------------------------------------------------------------------------------------------------------
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-
(Note 8)
- ------------------------------------------------------------------------------------------------------------------------------------
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.
(C) Deleted. See Note 8(b) for modifications.
</TABLE>
F-29
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
Note 3. Inventories
As of September 30, 1996, inventories consisted of raw
material components purchased in the 1996 fiscal year, to be utilized in the
production of the Company's fingerprint identification systems.
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 was reflected
in the accompanying financial statements for 1995 and 1994.
Note 4. Accrued Expenses
Details of accrued expenses as of September 30, 1996 and
1995 are as follows:
1996 1995
---- ----
Accrued salaries $ 22,968 $302,625
Bankruptcy administration costs - 595,794
Patent professional fees and costs 32,689 -
Other 70,802 79,258
-------- --------
$126,459 $977,677
-------- --------
-------- --------
Note 5. Note Payable
As of the balance sheet dates, note payable is
comprised of the following:
September 30,
------------------
1996 1995
---- ----
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), convertible into 250,000 shares
of common stock; maturity May 30, 1996 (a) $ - $250,000
-------- --------
(a) On May 23, 1996, the note was
converted by the note holder into
250,000 shares of common stock.
F-30
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
Note 6. Long-term Debt
As of September 30, 1996 and 1995, long-term debt is
comprised of the following:
<TABLE>
<S> <C> <C>
Note payable - SIS Capital Corp. ("SIS) post- petition financing; note in the
original amount of $1,067,000 was collateralized by a first lien upon all
Company assets and bears interest at prime, plus 2% (10.25% and 10.75% at
September 30, 1996 and 1995, respectively); 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, 1996
and 1995, related accrued interest aggregated $15,552 and
$35,744, respectively)(a) $417,000 $ 817,000
Pre-petition payables due in three semi-annual payments, commencing October 19,
1995, without interest (final payment made October 19, 1996):
Unrelated creditors 41,990 176,006
Related parties (see Note 10a) 45,849 175,656
-------- ----------
504,839 1,168,662
Less current portion 504,839 628,003
-------- ----------
$ - $ 540,659
-------- ----------
-------- ----------
<FN>
(a) On June 1, 1996, SIS agreed to waive and discharge its first
priority security interest and lien on the Company's assets.
</TABLE>
F-31
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
Note 7. Preferred and Common Stock
Effective with the bankruptcy reorganization consummated on
March 31, 1995, the Company's entire 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, $250,000 was received from another
investor. The proceeds represented a convertible note payable with interest at
prime, plus 4% (11.75%). In April, 1995, the note was converted into 250,000
shares of common stock. Accrued interest was forgiven upon conversion and was
included in the gain on debt restructuring.
The Company has 1,000,000 shares of preferred stock ($.01
par value) authorized, however, none are issued or outstanding. All prior
classes of preferred had been canceled 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.
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. Class A warrants expired January 16, 1996, except for 500,000
warrants issued to three individuals who were instrumental in securing financing
for the Company.
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 were
exercisable at $.01 per share and which were exercised in September, 1996.
F-32
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
Note 8. Stock Warrants and Options (continued)
As of September 30, 1996, the number of warrants
exercisable is detailed in the chart below:
Exercise
Number of price per Expiration Total
Class warrants share date Amount
----- --------- --------- ---------- ------
B Warrants 1,245,681 $2.00 January 14, 1997 2,491,362
C Warrants 100,000 $ .01 April 17, 2000 1,000
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.
Class A warrants entitled the holder thereof to
purchase for $1.00 one share of common stock in exchange for one warrant.
Exercising party also received one-half of one B Warrant.
b. On July 21, 1995, the Company adopted and the
Stockholders subsequently approved, an Employee Stock Option Plan ("ESOP") that
covers employees of the Company and an Outside Directors Stock Option Plan
("DSOP"). 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
Granted (34,000)
Terminated 42,500
Exercised -
---------
Available, September 30, 1996 280,000
---------
---------
(1) Date of adoption of Plan.
F-33
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
Note 8. Stock Warrants and Options (continued)
Option exercise prices pursuant to the ESOP and DSOP shall not be
less than 85% and 100%, respectively, of the fair market value of the common
stock at the time of the Grant. During the years ended September 30, 1996 and
1995, options were granted at prices ranging from $1.75 to $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 plans. 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, 1996, has available
approximately $47,762,000 of net operating loss carryforwards to reduce future
Federal and state income taxes. In addition, the Company had available
investment tax credits of approximately $15,100, 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 amounts of
$19,012,000 and $18,667,000, respectively, 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:
<TABLE>
<CAPTION>
Year NOL Amount
---- -----------
<S> <C>
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
2010 2,473,840
-----------
$47,761,924
-----------
-----------
</TABLE>
F-34
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
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.
The future minimum annual rental commitments at
September 30, 1996 on long-term leases is as follows:
1997 $51,885
1998 54,479
1999 6,810
Rental expense for each of the periods was as
follows:
Year ended September 30, 1994 $471,280
Year ended September 30, 1995 64,751
Year ended September 30, 1996 73,019
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. A substantial portion of
this amount was classified as rent expense in the 1994 financial statements.
F-35
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
Note 10. Commitments and Contingencies (continued)
b. The Company has an employment agreement Thomas T.
Harding, who is serving as President, providing for an annual salary of
$140,000, which agreement expires in April, 1997. 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 three years
ended September 30, 1996, the Company did not make a contribution. The Company
has elected to pay the plan administrative expenses, which were nominal, for
this period.
d. At September 30, 1996, 2,195,681 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
(see Note 2 and Note 7).
e. 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 at $1.00 per share for an aggregate
$2,000,000 cash investment. Through September 30, 1995 and 1996, the Company had
received $1,000,000 and $1,500,000, respectively, towards this purchase. By
December 2, 1996, the unpaid balance of $500,000 was received in full.
f. 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.
F-36
<PAGE>
FINGERMATRIX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
Note 10. Commitments and Contingencies (continued)
g. 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.
h. During the pendency of the bankruptcy reorganization, a
Stockholders' Alliance was formed by a group of common stock owners. Said
Alliance incurred certain legal and professional fees in connection with
financing and other company related matters. To reimburse the Alliance for said
expenses, the Board of Directors approved the issuance of 62,032 shares to the
individuals who comprised the Alliance.
i. 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. For the year ended
September 30, 1995, said charge amounted to $1,423,582.
F-37
<PAGE>
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 for the year ended September 30,
1996. This discussion and analysis does not reflect events
subsequent to September 30, 1996. Such subsequent events,
however, do not materially change the conclusions one would draw
from the following discussion and analysis.
Liquidity and Capital Resources
Reference is made to "Management's Discussion and Analysis
of Financial Condition and Results of Operation-Liquidity and
Capital Resources" of the 1995 Form 10-K, Part II, Item 7, as to
Registrant's lack of revenues and dependence upon the sale of
its securities to fund the operations of the Registrant. Such
dependence continued throughout the fiscal year ended September
30, 1996 as the Registrant had no sales revenues. Based upon
present lack of substantial firm sales orders, it is likely that
the Registrant will be dependent upon financing through sale of
its securities to maintain its operation for a substantial
portion of the year ending September 30, 1997, if not for the
entire fiscal year.
In the fiscal year ended September 30, 1996, the Registrant
secured s3,398,922 in equity financing through the private sales
of its common stock and the exercise of A-Warrants and B-
Warrants. A substantial proportion of the capital raised by the
Registrant since its exit from reorganization in April 1995,
namely, $1,109,947, was paid to creditors and secured creditors
under the Plan, of which $663,823 was paid in the fiscal year
ended September 30, 1996, leaving a balance of $504,839 plus
interest at approximately 10.5% per annum. As of November 30,
1996, the Registrant paid an additional $287,839, leaving a
balance of $217,000 plus interest which is to be paid in April,
1997, to one remaining creditor, SIS Capital Corp. Such payments
to creditors drained away much needed capital for the development
of the Registrant's products, and contributed to the delay in
being able to market the products. Upon the final payment to SIS
Capital Corp. scheduled for April 1997, the Registrant shall be
debt free, assuming the Registrant does not raise additional
capital through bank or other debt financing, and Registrant
shall able to apply capital raised through sale of its securities
exclusively to the development and marketing of its products.
As of September 30, 1996, Registrant had cash or cash
equivalents in the sum of $404,986. The Registrant had on that
date working capital of only $8,109. This working capital was
reduced by the portion of the Bankruptcy Obligations payable
within one year. As stated above, the Registrant raised
$3,290,298 in equity financing for the year ended September 30,
1996. The monthly operating costs of Registrant for such fiscal
<PAGE>
year averaged $208,000. Based upon recent monthly operating
costs of $180,000, and based upon an additional $500,000
investment by P.T. Dolak and exercise of B-Warrants of
approximately $45,000, the Registrant has sufficient capital to
continue for at least two months from November 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 securities1.
The monthly operating costs do not take into account
the remaining payment of $217,000 which the Registrant has to
make on the Bankruptcy Obligations2 to SIS Capital Corp. on
April 19, 1997. The Registrant has paid on the Bankruptcy
Obligations through November 30, 1996 a total of $2,111,878, all
of it financed from funds raised from the Equity Lenders and the
Private Placement.
In order to finance funding for operations of the Registrant
as well as to pay for the Bankruptcy Obligations, Registrant
shall seek such funding through sales of its securities in
private placements exempt from registration under the Securities
Act.
Results of Operations
During the thirty-six month period from October 1, 1993
to September 30, 1996, the Registrant's revenues from sales
aggregated to approximately $57,500 (inclusive of interest
revenues) as contrasted to the cost and expenses of operations
during this thirty-six month period aggregating approximately
$6,908,500. Of these costs and expenses, research and
development during this thirty-six month period aggregated
approximately $2,870,000; selling, general and administrative
expenses totalled approximately $3,406,700, and interest and
- ------------------------------
1 Additional capital was received by the Company through the sale of its common
stock in the months of December 1996, January and February 1997 aggregating
approximately $700,000 which are not reflected in the in this discussion and
analysis. Of the sum of $700,000, the sum of approximately $270,000 was
received by the Company through exercise of approximately B-Warrants at a price
of $2 per share for 125,000 shares, $450,000 was received in a sale to eleven
non-U.S. persons at a price of $1.4344 per share for 313,720 shares. These
sales are in addition to the sale of securities to P.T. Dolak referred to
immediately above contemplating an investment of $500,000, but (does include
the $45,000 contemplate from the exercise of the B-Warrants.
2 Bankruptcy Obligations are (i) debts to unsecured creditors of approximately
$540,000, (ii) debts to SIS Capital Corp. of approximately $1,067,000, and
(iii) administrative costs and professional fees aggregating approximately
$728,600, inclusive of approximately $14,600 ordered by the Bankruptcy Court to
be paid to Gordon Molesworth in reimbursement of services rendered and expenses
incurred in the Company's Chapter 11 Bankruptcy Proceeding
2
<PAGE>
amortization of debt cost aggregated approximately $160,000, for
a total of $6,436,700. Included in the $3,406,700 were the
bankruptcy administration costs of approximately $714,000, which
cost should be non-recurring.
The following is an analysis of the results of operations
for the last three fiscal years ended September 30, 1996, 1995
and 1994.
For the Y/E September 30, 1996:
During this annual period, the Registrant had no sales
revenue. The prior fiscal year, as noted below, had $268.
Research and development costs were $1,358,059 as compared to the
prior fiscal year of $751,437. These increased research and
development costs were attributable to refining the operation of
the Chek/One, attempting to achieve F.B.I. standards for the
Chek/Ten, and manufacturing prototypes for the Chek/One, Chek/Ten
and the Booking Station for "beta testing" by prospective
customers. Selling, general and administrative costs for this
fiscal year were $1,203,020 as contrasted to $701,246 in the
prior fiscal year. The approximate $502,000 increase in these
costs were in part attributable to having five additional full
time employees plus five other employees who had worked for only
part of the prior fiscal year. In addition, approximately
$120,000 was paid in accounting and legal fees to enable the
Registrant to update the disclosure and financial statements
required under the S12 of the Securities Exchange Act for the
three prior fiscal years and a four month stub period. The debt
expense on the moneys owed to SIS Capital Corp. pursuant to the
Second Amended Plan of Reorganization $61,396 as compared to
$62,985 in the prior year.
For the Y/E September 30, 1995:
During this period, the Registrant had only $268 in sales
revenue. Research and development was $751,437 as compared to
the prior fiscal period of $760,549. The research and
development costs were expended on development of the LPS-12 (now
the CHEK/ONE), the LPS-14 (now the CHEK/TWO), and the booking
station. Selling and general administration costs were $701,246
as compared to $788,329 for the year ended September 30, 1994.
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. Research and development costs were $760,549
3
<PAGE>
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, which research and development
costs were not recouped. 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.
4
