SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1
TO
FORM 10-K/A
----------------
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-20270
THE NATIONAL REGISTRY INC.
(Exact name of registrant as specified in its charter)
Delaware 95-4346070
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2501 118th Avenue North, St. Petersburg, Florida 33716
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (813) 573-3353
--------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
par value $.01 per share
<PAGE>
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days. Yes X No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ].
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the average bid and asked prices of such stock on
April 25, 1996, was $36,543,000. There were 24,440,471 shares of Common Stock
outstanding as of April 25, 1996.
Total number of pages: 57 Exhibit Index begins on page 32
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PART I
Item 1. Business.
General
The National Registry Inc., a Delaware corporation (the "Company"), was
organized on October 23, 1991 and is a development stage company engaged in the
development and marketing of electronic identification systems and services
utilizing finger image identification technology. The Company is the licensee of
certain finger image identification software (the "Licensed Technology")
developed by Cogent Systems, Inc. (the "Software Licensor"), which, in addition
to performing certain other functions, compares a finger image (i.e., an
electronically stored fingerprint) derived from a "live" scan or an inked
fingerprint on paper to finger images stored in a database. See "-- The Software
Licensor and Technology." If two finger images match, the individual is
positively identified and access or transaction processing is authorized. The
Company believes that biometric (i.e. measurement of certain biological
characteristics of an individual such as finger print or voice print)
identification technology provides a more reliable means of identification and,
therefore, greater security than non-biometric methods of identification which
currently rely upon cards, keys, passwords, or personal information to identify
an individual. These non-biometric identifiers can be lost, stolen, duplicated,
transferred, or discovered by unauthorized persons.
The Company believes that the proprietary technology and systems licensed
to it and/or to be developed by it, if successfully exploited, may provide it
with certain advantages over certain other commercially available technologies.
See "-- The Software Licensor and Technology" and "-- Competition." In addition
to the finger image identification technology currently licensed to it, the
Company may from time to time seek to obtain the right to use other similar
technologies, although there is no assurance that such rights will be available
on satisfactory terms. Any such acquisition may be subject to the Company
obtaining additional financing, which may not be available to the Company on
satisfactory terms.
The Company is engaged in developing and marketing its finger image
identification technology for various potential applications, including health
insurance and medical record access, computer access security, international
border control, national identification cards for foreign countries and
identification services for the departments of motor vehicles of various states.
The Company is focusing its sales efforts on obtaining agreements from
government agencies to provide welfare fraud control systems and services, and
is currently involved in discussions with a number of governmental authorities
to seek their authorization to develop and install welfare fraud control systems
using finger image identification technology. See "--Recent Developments." In
addition, the Company is currently in discussions with a number of state and
local governmental authorities responsible for distributing welfare checks and
food stamps, Medicare/Medicaid and other benefits in connection with the
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potential sale and development of fraud control systems and services that can
positively identify qualified recipients of benefits and eliminate duplicate
payments. No assurance can be given that any discussions with prospective
purchasers of the Company's systems or services will result in the realization
of revenues by the Company.
As of December 31, 1995, the Company has reported $401,000 in operating
revenues and has an accumulated deficit in the development stage of $25,376,000.
The ability of the Company to become an operating enterprise depends largely on
the Company's ability to sell, design and install finger image identification
systems and services. Through March 26, 1996, there have been only limited sales
of the Company's welfare fraud control systems to local and state governments,
and no sales of any of the Company's commercial products. The Company's business
will be dependent, among other things, on obtaining sales and orders, retention
of key employees and consultants, and the Company's ability to finance future
development.
Recent Developments
On January 29, 1996, the Company completed an equity financing pursuant to
which certain investors purchased from the Company 800 shares of Series B
Preferred Stock, par value $.01 per share (the "Series B Preferred Stock"), for
an aggregate purchase price of $8.0 million before commissions and expenses
(estimated at approximately $770,000 in the aggregate). Shares of Series B
Preferred Stock are convertible at the option of the holder thereof into shares
of the Company's common stock, par value $.01 per share (the "Common Stock"),
based upon the result obtained by dividing the $10,000 per share purchase price
(increasing at the rate of eight percent (8%) per annum) (the "Stated Value") by
a conversion price equal to the lesser of (i) $2.53 per share or (ii) 85% of a
floating price equal to the average closing bid price of the Common Stock for
the five trading days immediately proceeding the date of conversion. All
outstanding shares of Series B Preferred Stock will automatically convert into
Common Stock on January 19, 1999. The Company may redeem the Series B Preferred
Stock, in cash, at a premium commencing on July 30, 1996, or, under certain
circumstances, at a price based on the Stated Value in the event of a notice of
conversion at less than $2.53 per share of Common Stock. The shares of Series B
Preferred Stock have no voting rights except as required by law and have a
liquidation preference equal to their Stated Value.
On February 20, 1996 the Company filed a registration statement to register
certain shares of Common Stock issuable upon conversion of certain shares of
Series B Preferred Stock, certain shares of Common Stock held by certain selling
stockholders named in such registration statement and certain shares of Common
Stock issuable upon the exercise of certain warrants. The Company has agreed
with the holders of the Series B Preferred Stock to use its reasonable best
efforts to cause such registration of Series B Preferred Stock to become
effective by April 28, 1996. The sale or perception of the availability for
public sale of such shares could have an adverse impact on the market for the
Company's Common Stock.
Through March 26, 1996, the Company has installed welfare fraud control
systems in 14 counties in the State of New Jersey, the County of Nassau, New
York and the County of Suffolk, New York. On March 11, 1996, the Company
announced that it had entered into a $75,000, six month contract with Lau
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Technologies to act as subcontractor to Lau Technologies in connection with the
installation of welfare fraud control systems incorporating the Company's finger
image identification technology at three sites in Massachusetts. The
installations comprise a pilot program which will be evaluated by the State of
Massachusetts for further implementation. On January 4, 1996, the Company
announced that it had entered into a $1.4 million, three year contract with NBS
Imaging Systems to act as a subcontractor to NBS Imaging Systems in connection
with the installation of a welfare fraud control system in the State of
Connecticut incorporating the Company's finger image identification technology.
Products
NRIdentity(TM) Software Solutions Sets
In August 1995, the Company began marketing NRIdentity(TM) Software
Solution Sets to the commercial market. These are integrated groupings of
standards-based software "building blocks" incorporating the Licensed Technology
that provide well-defined functionality and which facilitate the rapid
integration of real-time finger-image identification into new or existing
systems and applications. The Company believes that this building-block approach
to finger-image identification software offers a straightforward, cost effective
way to incorporate finger-image identification within systems and applications.
To date, no NRIdentity(TM) Software Solution Sets have been sold.
Scanning Devices
The Company is in the process of developing low cost optical scanning
computer peripheral products designed to, among other things, optically scan a
user's fingerprint (the "Microreader"). The resulting image can then be
converted into digital form and be transmitted to a computer for processing
using the NRIdentity(TM) Software Solution Sets to create an encoded pattern
description of the finger image. Such encoded pattern descriptions could then be
stored in a database and retrieved and matched against other encoded pattern
descriptions of finger images that are already on file in a database or which
may be created in a similar manner on site directly from an individual's finger.
See "--The Software Licensor and Technology."
The Company currently intends to develop both analog and digital
Microreaders for use in a wide range of potential applications that require
positive identification, including, possibly, welfare fraud control, medical
insurance fraud, medical record access security, voter registration and voting
fraud control, credit card fraud control and computer access control. Although
the Company's sales efforts are not entirely dependent upon the successful
development of the Microreader, the Company believes that the development of the
Microreader will give the Company a competitive advantage in selling and
implementing its finger image identification systems. While the Company expects
additional modifications, it is currently testing a possible prototype of the
Microreader. Completion of testing and development of such a prototype will
assist the Company's marketing efforts. The Company is also exploring
alternative systems which would utilize some components which are different than
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those used in the Microreader. The Company has established tentative
relationships with certain manufacturers who may both produce the Microreader,
once developed, and serve as original equipment manufacturers in an attempt to
create additional sales opportunities for the Company's products. There is no
assurance that the Company will develop or market the Microreader or any other
similar system.
On October 28, 1994, the Company filed two patent applications in
connection with the ergonomic design and optical system used in the Microreader,
both of which include allowed claims. On October 27, 1995, corresponding
international patent applications were filed for the October 1994 patent
applications. These patent applications are currently pending.
Marketing
The Company is focusing its sales efforts on obtaining agreements from
government agencies to, among other things, provide welfare fraud control
systems and services, and is currently involved in discussions with a number of
governmental authorities to seek their authorization to develop and install
welfare fraud control systems using the Licensed Technology. The Company is also
engaged in marketing its finger image identification technology to a wide range
of commercial markets including health care and health insurance industries,
computer access security, financial institutions, security systems for colleges
and universities and repositories of medical, financial and other confidential
data. The Company is evaluating creating relationships with certain value added
resellers who might utilize the Company's technologies or combine such
technologies with others to provide certain systems to third parties. There is
no assurance that the Company will successfully sell and market its products and
services or enter into any value added reseller relationships.
The Software Licensor and Technology
In April 1992, under the terms of a license agreement (the "License
Agreement"), the Software Licensor granted to the Company a seven and one-half
year exclusive license to all commercial applications of the Software Licensor's
finger image identification technology and non-exclusive rights to the Licensed
Technology for most governmental applications (including control of welfare
fraud), subject to certain limited rights of earlier termination. The Company
has no rights under the License Agreement to the law enforcement applications of
the Licensed Technology. Pursuant to the terms of the License Agreement, the
Software Licensor retained the right to also market and develop finger image
identification systems for all governmental applications, including, among
others, control of welfare fraud and law enforcement. In consideration of the
license, the Company has agreed to pay the Software Licensor royalties generally
based on the Company's revenues, subject to minimum semi-annual payments. In
addition, the Software Licensor also has agreed during the term of the License
Agreement to provide technical assistance to the Company in its utilization,
enhancement and development of the Software Licensor's finger image
identification technology.
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On March 10, 1994, the Company entered into a ten year extension,
continuing until October 1, 2009, of the term of the License Agreement, provided
that the Company makes a $10 million cash payment to the Software Licensor on or
prior to October 1, 1999 (the "Extension Payment"), in addition to ongoing
licensing fees. In the event the Company does not make the Extension Payment on
or prior to October 1, 1999, the license agreement will expire on October 1,
1999. There can be no assurance that the Company will be able to make the
Extension Payment. Regardless of whether the Extension Payment is made, certain
exclusive rights with respect to commercial markets which the Company fails to
enter as of April 1, 1997 may become non-exclusive at any time after April 1,
1997 upon five days written notice by the Software Licensor to the Company. As
of March 26, 1996, the Company has not entered into any commercial markets.
Upon the termination of the License Agreement (whether as a result of an
event of default or expiration of the license period on October 1, 1999 or
October 1, 2009, if the Company makes the Extension Payment prior to October 1,
1999), the Company would lose the right to use the Licensed Technology. Any such
loss of the Licensed Technology would substantially impair (if not entirely
preclude) the Company's ability to continue to conduct its business unless the
Company was able to make arrangements to obtain alternative technology from
another source, as to which there can be no assurance.
The Licensed Technology consists of certain rights to finger image
processing, pattern matching and search algorithms. These algorithms represent a
software solution that runs on generally available computer hardware. The
licensed finger image identification algorithms perform the following functions:
Image Pre-Processing. Enhances fingerprint images by clearly
differentiating ridges and valleys and locating and extracting ridge
endings and bifurcations (each such ridge ending and bifurcation is called
a "point of interest" or "minutia"). This process accepts gray scale image
inputs of finger images, either from live-scan cameras or flatbed scanners
which scan inked images on paper, and uses "fuzzy mathematics" to clearly
assign pixels to either ridge lines or valleys. The output of the process
results in an enhanced finger image, consisting of the ridge lines of the
finger that can be evaluated by the extraction and encoding process.
Extraction and Encoding. Locates and identifies the core of a finger
image and surrounding minutiae. The automated finger image identification
technology licensed by the Company evaluates the image and encodes a
pattern description of the core and relative positions of the surrounding
minutiae. This process evaluates the quality of the encoded finger image
and creates a standard finger image minutiae record ("Finger Image Minutiae
Record") output that can be stored in a database and compared by the
pattern matching process ("Pattern Matching Process") or searched by the
search process ("Search Process").
Pattern Matching. Provides a Pattern Matching Process which will score
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the similarity of the Finger Image Minutiae Records, providing highly
reliable finger image identification.
Search. Provides a fast database pattern matching process that
compares the Finger Image Minutiae Record of a specific person against the
database containing the stored Finger Image Minutiae Records of all
enrollees. The Search Process determines whether there exists any similar
Finger Image Minutiae Record in the database and if so, uses the Pattern
Matching algorithm on each to determine the best identity of the specific
person. As discussed earlier, this search is referred to as an "open
search".
The Licensed Technology consists essentially of stand-alone processes that
can be integrated with a wide variety of computer hardware environments and
re-deployed in many different ways to satisfy the finger image identification
requirements of a wide range of potential products and services. The Licensed
Technology can be operated on mainframe computers, computer workstations and on
cost-effective personal computer platforms.
The Company's finger image identification access control systems and
services currently being marketed and developed would require persons to enroll
in the system through a "live" scan of their fingers or the off-site scanning of
an inked fingerprint on paper, after which they may be assigned identification
("ID") numbers which will be stored together with the individual's unique finger
image. The Licensed Technology may operate in either of two modes: (i)
"confirmation", whereby an individual enters his name, an ID number or similar
identification on a numerical keypad and presents his finger for scanning and
the scanned finger image is matched against the stored finger image
corresponding to that name, ID number or other identification to verify
identification of such individual, and access then is either granted or denied;
or (ii) "identification" or "open search", in which an individual's finger image
is compared against the entire database of finger images to determine if the
individual is an enrolled user, and if so, the identity of such individual. This
"open search" capability eliminates the need for a user to remember an ID number
or similar means of identification, as access is determined by finger scan alone
and also prevents the creation of duplicate files for an individual. The term
"identification" as used herein generally includes both the confirmation and
open search capabilities described above.
To support its efforts in the marketing of finger image identification
systems and services, the Company has developed and continues to refine and
adapt electronic identification systems and services using finger image
identification technology. The Company anticipates that such systems and
services will be able to (i) "purge" a database to prevent individuals from
being registered in the database more than once thereby eliminating multiple
files for the same individual and (ii) verify the identity of persons for the
purpose of granting or denying access to confidential information, restricted
facilities or valuable property, including cash payments. There is no assurance
the Company will be able to develop systems or services which will be able to
perform either of these functions or, if so developed, will be able to
successfully manufacture or market such systems or services.
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The Company refines the Licensed Technology on a continuing basis. The
Company also explores and evaluates on a continuing basis other biometric
technologies, including other finger image identification technologies, with a
view towards licensing any such other advanced biometric technologies.
The Company has integrated its finger image identification technology with,
and is capable of storing, retrieving and matching finger image codes in, from
and against, as the case may be, most existing forms of personal identification
cards, including smart cards, optical cards and bar coded cards.
Other Strategic Relationships
Blue Cross and Blue Shield
On May 24, 1994, the Company, Blue Cross and Blue Shield of New Jersey,
Inc. ("BCBSNJ"), and a wholly owned subsidiary of BCBSNJ entered into a
Stockholders Agreement (the "Stockholders Agreement") pursuant to which the
parties agreed to form a corporation jointly-owned by the Company and such
BCBSNJ subsidiary, BIOMETRx Inc. ("BIOMETRx"), for the purpose of marketing the
Licensed Technology to certain markets, including the healthcare industry
nationwide and to certain government agencies in New Jersey. Pursuant to the
terms of the Stockholders Agreement, the Company entered into a Sublicense
Agreement (the "Sublicense Agreement") with BIOMETRx pursuant to which the
Company shall sublicense to BIOMETRx the rights to market products and services
incorporating the Licensed Technology to certain markets and that it will not
compete against BIOMETRx in connection with the marketing of certain products
and services. The Company has agreed that it will either extend the term of the
License Agreement (as described above) through April 1, 2009 by making the
Extension Payment (as defined herein) in accordance with the terms of the
License Agreement, as amended, or supply BIOMETRx with a suitable alternative
technology. The Company and BCBSNJ each agreed to loan up to $300,000 to
BIOMETRx for working capital purposes. Through March 26, 1996, the Company and
BCBSNJ have each loaned $60,000 to BIOMETRx to fund preliminary organizational
and development activities. As of March 26, 1996, BIOMETRx has not commenced
operations.
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Unisys Marketing Agreement
On January 31, 1996, the Company announced that it had entered a joint
marketing agreement with Unisys Corporation ("Unisys") to offer integrated
information solutions that incorporate NRI finger-imaging technology to
financial markets. Under the terms of the agreement, Unisys will offer
NRIdentity(TM) Software Solution Sets as part of its family of software
applications for financial institutions. Unisys supplies computers, software,
and other information technology to banks, credit unions and financial
institutions in the United States and internationally.
Key Tronic Corporation
On December 14, 1995, the Company announced that it had entered into a
developmental joint venture agreement with Key Tronic Corporation, a
manufacturer of computer keyboards, pursuant to which the Company licensed
certain technology relating to the Microreader to Key Tronic for the
development, manufacture and marketing of computer keyboards and other computer
attached desktop peripheral devices incorporating such technology. There is no
assurance that the Company or Key Tronic will be able to develop, manufacture or
market any keyboards or peripheral devices incorporating the Company's finger
image technology.
Competition
Although the Company believes that the finger image identification software
licensed to the Company is among the most advanced available, to the best of the
Company's knowledge, the following companies also have automated finger image
identification technology and are active in the United States: Digital
Biometrics Inc., Fingermatrix Inc., Identix Inc., NEC Technologies, Inc., North
American Morpho Systems, Inc. and Printrak International Inc. Other biometric
technologies which may compete with the Licensed Technology include
identification by eye retina blood vessel patterns, hand geometry and signature
analysis. The Company believes finger image identification technology has the
advantage of being reliable, relatively high accuracy levels, easy to use,
relatively inexpensive and may have the highest degree of social acceptance. The
Company is aware of several other companies which produce or are developing
other biometric identification products. The Company's products and services
compete with those of companies which may have substantially greater resources
than the Company.
In addition, the Company will face competition from non-biometric
technologies such as traditional key, card and surveillance systems in the
facilities access control market. In applications such as controlled access to
computers, automated teller machines and electronic funds transfers, the Company
will face competition from technologies relying on personal identification
numbers. In competing with these non-biometric products, the Company believes
that the most important competitive issue will be the trade-off between the
additional security and fraud prevention capabilities provided by positive
personal identification versus the higher initial cost of biometric recognition
technology. The Company expects that the development of the Microreader will
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lower this cost and may allow the Company access to new markets. However, many
of the Company's present and potential competitors have financial, marketing and
research resources vastly greater than those of the Company. There is no
assurance that the Company will be able to compete successfully against other
parties or other technologies.
Patents and Trademarks
Pursuant to the License Agreement, the Company has licensed from the
Software Licensor, on a world-wide exclusive basis, all commercial applications
of the Licensed Technology and, on a world-wide non-exclusive basis,
governmental applications of the Licensed Technology other than those relating
to law enforcement. The Company has no rights, other than pursuant to its
license of rights, to any patents or other intellectual property of the Software
Licensor. The competitive nature of the Company's industry makes any patents and
patent applications to which the Software Licensor has rights important to the
Company. However, there is no assurance that any patents will be issued to the
Software Licensor, or that any issued patents, or any patents applied for, will
prove enforceable, or that the Company will derive any competitive advantage
therefrom.
On October 28, 1994, the Company filed two patent applications in
connection with the ergonomic design and optical system used in the Microreader,
both of which include allowed claims. On October 27, 1995, corresponding
international patent applications were filed for the October 1994 patent
applications. These patent applications are currently pending. In the event the
Company is unable to obtain such patents, as to which there can be no assurance,
it could lose certain competitive advantages, if any, it may have in connection
with the Microreader.
The Company also relies on unpatented know-how, trade secrets and
continuing research and development. As a result, the Company may not have any
protection from other parties who independently develop the same know-how and
trade secrets. Proprietary protection of the Company's products and services may
be important to its business, and the Company's failure or inability to maintain
such protection could have a material adverse affect on the Company's business,
financial condition, results of operations and prospects. Moreover, while the
Company does not believe that the production and sale of the Company's proposed
products or services infringe on rights of third parties, if such is not the
case, failure to obtain needed licenses from such third parties could have a
material adverse effect on the Company's ability either to complete the
development of a certain product or to arrange for its production and marketing.
The Company has registered certain service marks and trademarks with the
United States Patent and Trademark office. However, the Company has not
registered certain of the various trademarks and trade names which it uses with
the United States Patent and Trademark Office nor in any foreign government
trademark offices. With respect to unregistered trademarks, the Company intends
to accompany the use of such trademarks with the Company's name to indicate the
origin of the products to which they are applied, to distinguish them from the
products of competitors and to build goodwill in such trademarks. Certain rights
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are, however, protected under the provisions of the Lanham Act and under state
law in respect of unregistered or common law trademarks.
Employees
As of March 26, 1996, the Company has 42 full-time employees and
consultants. From time to time the Company has also hired additional consultants
for specific assignments, and intends to continue this practice in the future.
None of its employees are represented by a labor union. Management believes that
the future success of the Company will depend in part on its ability to retain
its existing technical and other personnel and to attract and retain other
qualified employees. The Company believes that its relationship with its
employees is good.
Item 2. Properties.
The Company's current principal executive offices and research and
development facilities consist of approximately 4,600 square feet located at
2501 118th Avenue North, St. Petersburg, Florida 33716. The Company leases such
office space from the Home Shopping Network.
The Company also leases office space for its sales and marketing and
technical personnel in Seattle, Washington; Bowie, Maryland; and Trenton, New
Jersey.
Item 3. Legal Proceedings.
None.
Item 4. Submission of Matters to a Vote of Security-Holders.
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
There is presently a limited public trading market for the Common Stock.
The Common Stock has been listed on the NASDAQ SmallCap Market since April 27,
1993 (NASDAQ: NRID). The following table sets forth the range of high and low
closing bid quotations for the Common Stock as reported on the NASDAQ SmallCap
Market for each full quarterly period from January 1, 1994 through December 31,
1995 and for the period January 1, 1996 through March 26, 1996. Such quotations
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represent prices between dealers without adjustment for retail markups,
markdowns or commissions, and may not necessarily represent actual transactions.
Common Stock
Bid Price
-----------------------------
High Low
---- ---
1994
First Quarter 5-5/8 2-3/4
Second Quarter 5 2-3/4
Third Quarter 3-3/4 1-5/16
Fourth Quarter 2-9/16 1-1/8
1995
First Quarter 3 15/16
Second Quarter 3 1-11/16
Third Quarter 2-31/32 1-3/8
Fourth Quarter 2-15/16 2
1996
First Quarter
(through March 26, 1996) 2-27/32 1-27/32
As indicated in the preceding paragraph, there has been only a limited
public market for the outstanding Common Stock and the market price for the
Common Stock does not necessarily reflect the value of the Company. There is no
assurance that a viable public market for such shares will develop in the future
or, if one develops, such a public market will continue to exist.
On March 26, 1996, the closing bid price of the Common Stock as reported on
the NASDAQ SmallCap Market was $1-27/32. As of March 26, 1996 there were
approximately 2,500 record holders of Common Stock.
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Since its incorporation, the Company has not paid or declared dividends on
the Common Stock, nor does it intend to pay or declare cash dividends on its
Common Stock in the foreseeable future.
Item 6. Selected Financial Data (in thousands except per share data).
<TABLE>
<CAPTION>
For the Period
October 31, 1991
(inception)
to
Year Ended Year Ended Year Ended Year Ended December 31,
Summary Statement December 31, December 31, December 31, December 31, 1995
of Operations Data 1992 1993 1994 1995
- ---------------------------------- ----------------- ----------------- ----------------- ---------------- -------------------
<S> <C> <C> <C> <C> <C>
Revenues 0 0 0 $401,000 $401,000
Net loss (6,728) (6,050) (7,006) (5,070) (25,376)
Net loss per common share ($.45) ($0.33) ($0.37) ($0.22) ($1.35)
Weighted average number of
common shares 15,021 18,489 19,093 23,238 18,779
<CAPTION>
- ---------------------------------- ----------------- -------- ---------------------------------- ----------------------------
Summary Balance At December 31,
----------------------------------
Sheet Data 1991 1992 1993 1994 1995 (1)
- ---------------------------------- ----------------- ----------------- ----------------- ---------------- -------------------
<S> <C> <C> <C> <C> <C>
Total assets $16 $6,738 $6,632 $1,701 $1,600
Total liabilities 74 397 186 273 510
Stockholders' equity (deficit) (58) 6,341 6,446 1,428 1,090
</TABLE>
(1) On January 29, 1996, the Company completed an equity financing of
Series B Preferred Stock which raised $8.0 million before commissions and
expenses (estimated at approximately $770,000 in the aggregate). See "Item 1.
Business--Recent Developments."
The Company was the surviving corporation following the completion of a
merger with Topsearch, Inc., a publicly traded company, on February 20, 1992.
Topsearch had no operations and immaterial losses and, therefore, results prior
to October 23, 1991 have been excluded.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Results of Development Activities
The Company incurred net losses for the fiscal years ended December 31,
1995, 1994, 1993 and since inception of $5,070,000, $7,006,000, $6,050,000 and
$25,376,000, respectively, due to its startup efforts in developing and
marketing its finger image identification software and processing capability.
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The Company believes that revenues from sales of its product has been
limited in the governmental area because such market has been slow to develop
and because of the time lag between the time a governmental agency or authority
seeks bids on a proposed system and the time a contract is entered into with
such governmental agency or authority. The Company believes that it has had no
revenue from sales of its commercial product because the Company is still
developing its commercial products and because the commercial market for finger
image identification technology has to date been limited. The Company hopes to
achieve significant commercial sales of its products through continued marketing
efforts and the completion of the development of its products for developing
commercial markets.
The following discussion presents certain changes in revenue and operating
expenses of the Company which have occurred between the years ended December 31,
1995 and 1994, along with certain changes in operating expenses between the
years ended December 31, 1994 and 1993. Reference should also be made to the
Consolidated Financial Statements and Summary Financial Data included herein.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Revenues and Cost of Revenues
Revenues for the fiscal year ended December 31, 1995 were $401,000. There
were no revenues in 1994. Revenues increased due to the installation of welfare
fraud control systems in Suffolk and Nassau counties, New York in the first
quarter of 1995 and another welfare fraud control system in the State of New
Jersey in August 1995. The New Jersey contract will, by its terms, expire, if
not renewed, in January 1997; the Suffolk and Nassau contracts will, by their
terms, expire, if not renewed, in January 1998. While the Company has recently
announced certain new contracts (see "Item 1. Business--Recent Developments"),
the anticipated net revenues thereunder are still substantially below the level
necessary to cover the Company's ongoing operating expenses.
Cost of revenues for the fiscal year ended December 31, 1995 was $274,000.
There was no cost of revenues in 1994 due to lack of sales. Cost of revenues
consists of amortization of the following: hardware acquired by the Company on
behalf of customers, software, installation costs, including software
development costs over the term of the contracts and ongoing technical support.
Operating Expenses
Operating expenses for the year ended December 31, 1995 decreased over the
same period in 1994 by $1,830,000, or 35%. The decrease from 1995 to 1994 was
primarily due to corporate-wide reductions in employee and consulting-related
expenses and related overhead and reductions in depreciation expense.
15
<PAGE>
The Company expects operating expenses to increase during fiscal year 1996
by at least 20% (and potentially at a significantly greater level) over fiscal
year 1995, primarily due to increased employee and consulting expenses as it
hires the personnel required to solicit and implement systems sales as well as
develop its products and applications.
The following table sets forth certain changes in operating expenses,
including the absolute dollar and percentage changes for the year ended December
31, 1995, compared to the year ended December 31, 1994:
Changes in Operating Expenses
(in thousands, except %)
$ %
Change Change
------ ------
Selling and marketing $ 191 13%
Product development (1,058) (34)
General and administrative (963) (38)
------- ---
($1,830) (35)%
======= ===
Selling and Marketing
Selling and marketing expenses for the year ended December 31, 1995
increased $191,000, or 13% over the same period in 1994 due primarily to a
$219,000 increase in employee and consulting expenses, and a $28,000 increase in
related travel, due to the Company's increased selling and marketing efforts in
an attempt to establish and develop commercial relationships through which it
desires to distribute its products. These increases were partially offset by a
decrease in rent due to the closing of the New York office in June 1994.
Product Development
Product development expenses for the year ended December 31, 1995 decreased
$1,058,000, or 34% over the same period in 1994 due primarily to a decrease in
consulting fees and personnel expense ($784,000), supplies expense ($49,000) and
miscellaneous expense ($37,000) related to the development of the Company's
Microreader, and a decrease in depreciation expense of $185,000 due to disposals
and equipment and software purchased in 1992 becoming fully depreciated.
General and Administrative
For the year ended December 31, 1995, general and administrative expenses
decreased $963,000, or 38% over the same period in 1994 due primarily to
decreases in employee and consulting expense of $890,000 (of which $827,000
relates to non-cash reduction in option and stock gift/issuance expense) and
reductions in travel expense of $52,000.
16
<PAGE>
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Operating Expenses
The operating expenses for the year ended December 31, 1994 increased over
the same period in 1993 by $913,000, or 15%. The increase from 1993 to 1994 was
primarily due to consulting-related expense ($1,873,000) and depreciation
expense ($45,000) associated with development of the Microreader and non-cash
expenses associated with stock option amortization and stock issued to certain
consultants in lieu of cash compensation, offset by reductions in personnel,
royalties, rent, travel and advertising.
The following table sets forth certain changes in operating expenses,
including the absolute dollar and percentage changes for the year ended December
31, 1994, compared to the year ended December 31, 1993:
Changes in Operating Expenses
(in thousands, except %)
-----------------------
$ %
Change Change
------- -------
Selling and marketing $ (960) (40)%
Product development 2,006 181
General and administrative (133) (5)
------- -------
$ 913 15%
======= =======
Selling and Marketing
The significant components of the changes in selling and marketing expenses
are detailed below in absolute dollars and percentages for the year ended
December 31, 1994, compared to the year ended December 31, 1993:
Changes in Certain Selling
and Marketing Expenses
(in thousands, except %)
-----------------------
$ %
Change Change
------- -------
Employee and consulting $(375) (41)%
Royalties (425) (46)
Rent (62) (53)
Travel (42) (18)
Advertising and promotions (49) (67)
-----
$(953)
=====
17
<PAGE>
Employee and consulting expenses decreased for the year ended December 31,
1994 due to a reduction in personnel as the Company focused more of its efforts
on government markets, such as welfare fraud control systems, and less on
consumer markets.
Royalty expense decreased due to a one-time non-cash charge of $425,000 in
the first quarter of 1993 due to the issuance of stock and warrants to the
Software Licensor at below market prices.
Rent expense decreased for the year ended December 31, 1994 due to the
closing of the New York office in June 1994.
Travel expense decreased for the year ended December 31, 1994 due to the
reduction in personnel in 1994.
Advertising expense decreased as the Company shifted its primary marketing
focus away from consumer products which would be targeted to a mass market, to
welfare fraud control systems and driver's license systems incorporating finger
image identification technology, products which are targeted to governmental
agencies and consequently require significantly less direct advertising. The
Company shifted its primary marketing focus to governmental agencies, where its
license of the Licensed Technology is non-exclusive, because it believes that
such a marketing strategy would maximize the use of the Company's limited
financial resources and personnel. The Company believes that its shift in
marketing focus will not significantly change its expected development
expenditures relating to the development of its systems and services.
Product Development
Product development expenses for the year ended December 31, 1994 increased
$2,006,000, or 181%, over the same period in 1993 due primarily to a $1,873,000
increase in consulting fees and personnel expense related to the development of
the Microreader, an increase in depreciation expense ($145,000) due to equipment
purchased to support the Microreader development, equipment purchased for
installation in welfare sites and write-off of certain equipment and software.
General and Administrative
For the year ended December 31, 1994, general and administrative expense
decreased $133,000, or 5%, over the same period in 1993 due primarily to
decreases in rent ($167,000), due to the downsizing of the St. Petersburg,
Florida headquarters in December 1993, and decreases in travel ($73,000) offset
by an increase in employee and consulting expense ($145,000), due primarily to
non-cash stock option amortization charges and charges for stock issued to
certain consultants in lieu of cash compensation.
18
<PAGE>
Liquidity and Capital Resources
Cash and working capital as of March 26, 1996 were approximately $5,957,000
and $6,400,000, respectively. The increase from December 31, 1995 was due
primarily to the receipt in January 1996 of $8.0 million in equity financing,
before commissions and expenses, offset by ongoing net operating expenses.
Cash and working capital as of December 31, 1995 was $178,000 and $245,000,
respectively, as compared to $645,000 and $616,000, respectively, as of December
31, 1994. This represented a decrease from the Company's cash and working
capital position as of December 31, 1994 of $467,000 and $638,000, respectively.
The decrease in cash and working capital position from that as of December 31,
1994 primarily related to net cash used in operating activities of $4,335,000
and $453,000 in capital additions offset by $4,426,000 in proceeds from sale, in
March 1995, of Common Stock. The Company estimates its cash burn rate for 1996,
before capital expenditures, to be approximately, $290,000 per month.
Capital expenditures for the year ended December 31, 1995 were $453,000.
These expenditures were primarily for computer hardware and software used in
development of the Microreader and computer equipment to support welfare fraud
control system sales. The Company currently anticipates spending approximately
$1,300,000 in 1996, primarily on equipment to support development of the
Microreader, equipment to perform benchmark testing of the Company's systems and
hardware and furniture to support hiring of additional systems integration,
product development and sales and marketing staff.
On January 29, 1996, the Company completed an equity financing pursuant to
which certain investors purchased from the Company 800 shares of Series B
Preferred for an aggregate purchase price of $8.0 million before commissions and
expenses (estimated at approximately $770,000 in the aggregate). Shares of
Series B Preferred Stock are convertible at the option of the holder thereof
into shares of Common Stock, based upon the result obtained by dividing the
$10,000 per share purchase price (increasing at the rate of eight per cent per
annum) (the "Stated Value") by a conversion price equal to the lesser of (i)
$2.53 per share or (ii) 85% of a floating price equal to the average closing bid
price of the Common Stock for the five trading days immediately proceeding the
date of conversion. All outstanding shares of Series B Preferred Stock will
automatically convert into Common Stock on January 19, 1999. The Company may
redeem the Series B Preferred Stock, in cash, at a premium commencing on July
30, 1996, or, under certain circumstances, at a price based on the Stated Value
in the event of a notice of conversion at less than $2.53 per share of Common
Stock. Any exercise by the Company of its redemption rights, absent new
financing, would adversely impact the Company's liquidity. The shares of Series
B Preferred Stock have no voting rights except as required by law and have a
liquidation preference equal to their Stated Value.
On February 20, 1996 the Company filed a registration statement to register
certain shares of Common Stock issuable upon conversion of certain shares of
Series B Preferred Stock, certain shares of Common Stock held by certain selling
19
<PAGE>
stockholders named in such registration statement and certain shares of Common
Stock issuable upon the exercise of certain warrants. The Company has agreed
with the holders of the Series B Preferred Stock to use its reasonable best
efforts to cause such registration of Series B Preferred Stock to become
effective by April 28, 1996.
On May 24, 1994, the Company, BCBSNJ and a wholly owned subsidiary of
BCBSNJ entered into the Stockholders Agreement pursuant to which the parties
agreed to form BIOMETRx for the purpose of marketing the Company's finger image
identification technology to, among other markets, the healthcare industry
nationwide and to certain governmental agencies in New Jersey. The Company and
BCBSNJ have each agreed to loan up to $300,000 to BIOMETRx for working capital
purposes. Through March 26, 1996, the Company and BCBSNJ have each loaned
$60,000 to BIOMETRx to fund preliminary organizational and development
activities. As of March 26, 1996, BIOMETRx has not commenced operations.
BIOMETRx intends, upon commencement of the operations thereof, to seek capital
from third party investors. There is no assurance that BIOMETRx will commence
operations or, if it commences operations, when such operations will commence
and whether such operations will be successful in the marketing of any systems,
services or products.
Since its incorporation, the Company has not paid or declared dividends on
the Common Stock, nor does it intend to pay or declare cash dividends on its
Common Stock in the foreseeable future. While the Series B Preferred Stock does
not carry any dividend preference, the Stated Value of such shares increases at
the rate of eight percent (8%) per annum.
Management believes that the adequacy of its cash resources will be
dependent on its ability to achieve sales and, to the extent necessary, obtain
additional capital to complete the development and marketing of its finger image
identification systems and services. There can be no assurance that the Company
will be able to complete significant sales of its systems or services during
1996. The Company continues to spend net cash at a rate of approximately
$400,000 per month (including capital expenditures). The Company believes that
its existing working capital, together with anticipated cash flows from
operations and other funding sources will be sufficient to meet its expected
working capital needs through mid-1997. However, absent a significant increase
in sales, the Company will require additional funds thereafter to continue,
among other things, development, testing and marketing of its finger image
identification systems and services and to maintain its operations. There is a
significant likelihood that such additional funds will not be available on terms
acceptable to the Company, if at all. It is likely that any such additional
infusion of capital would be in the form of the sale and issuance of additional
shares of Common Stock, which may substantially increase the number of shares of
Common Stock outstanding on a fully-diluted basis. The failure to obtain such
additional funds may cause the Company to cease or curtail operations. Even if
such additional funding is obtained, there can be no assurance that the Company
will be able to complete developing and testing of its systems and services or,
if completed, that it will be able to consummate significant sales of its
systems or services.
20
<PAGE>
Item 8. Financial Statements and Supplementary Data.
Index to Financial Statements and Financial Schedules
Page
No.
----
Report of Independent Certified
Public Accountants.................................................. F-1
Consolidated Balance Sheets as of
December 31, 1995 and December 31, 1994............................. F-2
Consolidated Statements of Operations
For each of the three years in the
period ended December 31, 1995
and for the period from October 23, 1991
(inception) to December 31, 1995.................................... F-3
Consolidated Statements of Stockholders' Equity (Deficit)
for the period from October 23, 1991
(inception) to December 31, 1995.................................... F-4
Consolidated Statements of Cash Flows
For each of the three years in the
period ended December 31, 1995
and for the period from October 23, 1991
(inception) to December 31, 1995.................................... F-8
Notes to Consolidated Financial Statements............................ F-9
Financial Statement Schedules -- The Financial
Statement Schedules filed as part of this
report are listed in "Index to Financial
Statement Schedules" at Item 14..................................... 32
21
<PAGE>
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Comprising Item 8 of the Annual Report
on Form 10-K to the
SECURITIES AND EXCHANGE COMMISSION
THE NATIONAL REGISTRY INC.
Year Ended December 31, 1993,
Year Ended December 31, 1994,
Year Ended December 31, 1995 and
the period from October 23, 1991 (inception)
to December 31, 1995
22
<PAGE>
THE NATIONAL REGISTRY INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31,
1994 1995
-------- --------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 645 $ 178
Prepaid expense 153 182
Deferred Charges -- 159
Inventory -- 143
Note receivable-related party 60 60
Other 31 33
-------- --------
Total current assets 889 755
-------- --------
EQUIPMENT
Computer equipment 1,681 1,848
Office equipment and other 218 215
-------- --------
1,899 2,063
Less accumulated depreciation (1,087) (1,323)
-------- --------
812 740
-------- --------
Investment -- 105
-------- --------
TOTAL ASSETS $ 1,701 $ 1,600
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 273 $ 510
-------- --------
Total current liabilities 273 510
-------- --------
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY
Common stock, $.01 par value
Authorized - 50,000,000 shares
Issued and outstanding - 24,244,253 and 19,763,753
shares in 1995 and 1994 198 242
Preferred stock, $.01 par value convertible
Authorized - 1,000,000 shares
Issued and outstanding - 100,000 shares in 1995 and 1994
(liquidation preference of $100 per share) 1 1
Capital in excess of par value 21,772 26,475
Deficit accumulated in the development stage (20,306) (25,376)
Unamortized deferred compensation (237) (252)
-------- --------
1,428 1,090
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,701 $ 1,600
======== ========
See accompanying notes.
F-2
<PAGE>
THE NATIONAL REGISTRY INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
From October 23,
1991 (Inception)
December 31, December 31, December 31, to December 31,
1993 1994 1995 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue $ -- $ -- $ 401 $ 401
Cost of Revenue -- -- 274 274
-------- -------- -------- --------
Gross Profit -- -- 127 127
-------- -------- -------- --------
Operating Expenses:
Selling and marketing 2,391 1,431 1,622 7,905
Product development 1,108 3,114 2,056 7,874
General and administrative 2,697 2,564 1,601 10,332
-------- -------- -------- --------
Total Operating Expenses 6,196 7,109 5,279 26,111
Other Income:
Interest income 146 103 82 608
-------- -------- -------- --------
Net Loss ($ 6,050) ($ 7,006) ($ 5,070) ($25,376)
======== ======== ======== ========
Loss per common share ($ 0.33) ($ 0.37) ($ 0.22) ($ 1.35)
Weighted average number of common shares 18,489 19,093 23,238 18,779
</TABLE>
See accompanying notes.
F-3
<PAGE>
THE NATIONAL REGISTRY INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
( in thousands)
From October 23, 1991 (inception) to December 31, 1995
<TABLE>
<CAPTION>
Deficit
Accumulated
Capital in in the
Common Stock Preferred Stock excess of Development
Shares Amount Shares Amount par Stage
-------- ------- ---------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Capital contributions by majority
stockholder of NRI
October 23, 1991 @ $305.00/share 1 $ -- --- $ -- $305 $ --
November 1, 1991 --- --- --- --- 25 ---
November 9, 1991 --- --- --- --- 6 ---
November 19, 1991 --- --- --- --- 70 ---
November 22, 1991 --- --- --- --- 39 ---
Retirement of stock through reverse purchase (1) --- --- --- --- ---
Issuance of common stock on December 24,
1991 in connection with reverse purchase
(@ zero cost) 14,625 146 --- --- (146) ---
Outstanding common stock of Topsearch,
Inc. in connection with reverse purchase
@ $.03/share 300 3 --- --- 7 ---
Issuance of common stock (@ zero cost) 75 1 --- --- (1) ---
Compensation applicable to transfer of
common stock to consultants by --- --- --- --- 9 ---
majority stockholder
Capital contributions receivable --- --- --- --- 4,000 ---
Net loss for the period from October 23, 1991
(inception) to December 31, 1991 --- --- --- --- --- (522)
-------- ------- ---------- -------- ----------- -------------
Balance at December 31, 1991 15,000 $150 0 $0 $4,314 ($522)
======== ======= ========== ======== =========== =============
<CAPTION>
Unamortized Capital
Deferred Contribution
Compensation Receivable Total
------------- ---------- ----------
<S> <C> <C> <C>
Capital contributions by majority
stockholder of NRI
October 23, 1991 @ $305.00/share $ -- $ -- $305
November 1, 1991 --- --- 25
November 9, 1991 --- --- 6
November 19, 1991 --- --- 70
November 22, 1991 --- --- 39
Retirement of stock through reverse purchase --- --- ---
Issuance of common stock on December 24,
1991 in connection with reverse purchase
(@ zero cost) --- --- ---
Outstanding common stock of Topsearch,
Inc. in connection with reverse purchase
@ $.03/share --- --- 10
Issuance of common stock (@ zero cost) --- --- ---
Compensation applicable to transfer of
common stock to consultants by --- --- 9
majority stockholder
Capital contributions receivable --- (4,000) ---
Net loss for the period from October 23, 1991
(inception) to December 31, 1991 --- --- (522)
------------- ---------- ----------
Balance at December 31, 1991 $0 ($4,000) ($58)
============= ========== ==========
</TABLE>
See accompanying notes.
F-4
<PAGE>
THE NATIONAL REGISTRY INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
( in thousands)
From October 23, 1991 (inception) to December 31, 1995 (Continued)
<TABLE>
<CAPTION>
Deficit
Accumulated
Capital in in the
Common Stock Preferred Stock excess of Development
Shares Amount Shares Amount par Stage
-------- ------- ---------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1991 15,000 $150 0 $0 $4,314 ($522)
Capital contributions from related parties --- --- --- --- 2,164 ---
Issuance of preferred stock on April 28, 1992
@ $50.00/share --- --- 100 1 4,999 ---
Issuance of common stock, net of offering
costs, on December 28, 1992 @ $1.98/share 2,530 25 --- --- 4,982 ---
Granting of compensatory stock options --- --- --- --- 2,075 ---
Expense related to stock option plans --- --- --- --- --- ---
Net loss --- --- --- --- --- (6,728)
-------- ------- ---------- -------- ----------- -------------
Balance at December 31, 1992 17,530 175 100 1 18,534 (7,250)
Issuance of common stock, net of offering
costs, on January 15, 1993 @ $2.00/share 555 6 --- --- 1,102 ---
Issuance of common stock, net of offering
costs, on January 29, 1993 @ $2.00/share 339 3 --- --- 678 ---
Granting of compensatory stock options --- --- --- --- 924 ---
Stock options granted by principal stockholder --- --- --- --- 190 ---
Expense related to stock option plans --- --- --- --- --- ---
Issuance of common stock upon exercise of
stock options @ $.01/share 50 1 --- --- --- ---
Capital contributions from related parties --- --- --- --- 2,837 ---
Writeoff of capital contribution receivable
from a related party --- --- --- --- (3,961) ---
Issuance of common stock to a related party
@ $.01/share 150 1 --- --- 249 ---
Issuance of warrants to purchase 150,000
shares of common stock to a related party --- --- --- --- 176 ---
Net loss --- --- --- --- --- (6,050)
-------- ------- ---------- -------- ----------- -------------
Balance at December 31, 1993 18,624 $186 100 $1 $20,729 ($13,300)
======== ======= ========== ======== =========== =============
<CAPTION>
Unamortized Capital
Deferred Contribution
Compensation Receivable Total
------------- ---------- ----------
<S> <C> <C> <C>
Balance at December 31, 1991 $0 ($4,000) ($58)
Capital contributions from related parties --- 39 2,203
Issuance of preferred stock on April 28, 1992
@ $50.00/share --- --- 5,000
Issuance of common stock, net of offering
costs, on December 28, 1992 @ $1.98/share --- --- 5,007
Granting of compensatory stock options (2,075) --- 0
Expense related to stock option plans 917 --- 917
Net loss --- --- (6,728)
------------- ---------- ----------
Balance at December 31, 1992 (1,158) (3,961) 6,341
Issuance of common stock, net of offering
costs, on January 15, 1993 @ $2.00/share --- --- 1,108
Issuance of common stock, net of offering
costs, on January 29, 1993 @ $2.00/share --- --- 681
Granting of compensatory stock options (924) --- 0
Stock options granted by principal stockholder (190) --- 0
Expense related to stock option plans 1,102 --- 1,102
Issuance of common stock upon exercise of
stock options @ $.01/share --- --- 1
Capital contributions from related parties --- --- 2,837
Writeoff of capital contribution receivable
from a related party --- 3,961 0
Issuance of common stock to a related party
@ $.01/share --- --- 250
Issuance of warrants to purchase 150,000
shares of common stock to a related party --- --- 176
Net loss --- --- (6,050)
------------- ---------- ----------
Balance at December 31, 1993 ($1,170) $0 $6,446
============= ========== ==========
</TABLE>
See accompanying notes.
F-5
<PAGE>
THE NATIONAL REGISTRY INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
From October 23, 1991 (inception) to December 31, 1995 (Continued)
<TABLE>
<CAPTION>
Deficit
Accumulated
Capital in in the
Common Stock Preferred Stock excess of Development
Shares Amount Shares Amount par Stage
-------- ------- ---------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 18,624 $186 100 $1 $20,729 ($13,300)
Issuance of common stock, net of offering
costs, on August 5, 1994 @ $2.00/share 377 4 --- --- 747 ---
Cancellation of compensatory stock options --- --- --- --- (784) ---
Stock gifted by principal stockholder --- --- --- --- 195 ---
Expense related to stock option plans --- --- --- --- --- ---
Issuance of common stock upon exercise of
stock options @ $2.25/share 8 0 --- --- 16 ---
Issuance of common stock upon exercise of
stock options @ $.01/share 450 4 --- --- --- ---
Issuance of common stock upon exercise of
warrants @ $.50/share 150 2 --- --- 73 ---
Issuance of common stock as compensation --- --- --- --- 183 ---
Issuance of common stock upon exercise of
stock options @ $.00/share 155 2 --- --- 613 ---
Net loss --- --- --- --- --- (7,006)
-------- ------- ---------- -------- ----------- -------------
Balance at December 31, 1994 19,763 $198 100 $1 $21,772 ($20,306)
======== ======= ========== ======== =========== =============
<CAPTION>
Unamortized
Deferred
Compensation Total
------------- ----------
<S> <C> <C>
Balance at December 31, 1993 ($1,170) $6,446
Issuance of common stock, net of offering
costs, on August 5, 1994 @ $2.00/share --- 751
Cancellation of compensatory stock options 370 (414)
Stock gifted by principal stockholder 195
Expense related to stock option plans 563 563
Issuance of common stock upon exercise of
stock options @ $2.25/share --- 16
Issuance of common stock upon exercise of
stock options @ $.01/share --- 4
Issuance of common stock upon exercise of
warrants @ $.50/share --- 75
Issuance of common stock as compensation --- 183
Issuance of common stock upon exercise of
stock options @ $.00/share --- 615
Net loss --- (7,006)
------------- ----------
Balance at December 31, 1994 ($237) $1,428
============= ==========
</TABLE>
See accompanying notes.
F-6
<PAGE>
THE NATIONAL REGISTRY INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
( in thousands)
From October 23, 1991 (inception) to December 31, 1995 (Continued)
<TABLE>
<CAPTION>
Deficit
Accumulated
Capital in in the Unamortized
Common Stock Preferred Stock excess of Development Deferred
Shares Amount Shares Amount par Stage Compensation Total
-------- ------- ---------- ------- ---------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 19,763 $198 100 $1 $21,772 ($20,306) ($237) $1,428
Issuance of common stock at no cost 150 1 --- --- (1) --- --- 0
Issuance of common stock, net of offering
costs, at $1.00 per share 4,000 40 --- --- 3,928 --- --- 3,968
Cancellation of compensatory stock options --- --- --- --- (125) --- 106 (19)
Granting of compensatory stock options --- --- --- --- 372 --- (372) 0
Repricing of compensatory stock options --- --- --- --- 74 --- (74) 0
Expense related to stock option plans --- --- --- --- --- --- 325 325
Issuance of common stock upon exercise of
stock options at $1.50 per share 306 3 --- --- 455 --- --- 458
Issuance of common stock upon exercise of
stock options at $.01 per share 25 --- --- --- --- --- --- ---
Net loss --- --- --- --- --- (5,070) --- (5,070)
-------- ------ --------- ------- --------- ------------- ------------ --------
Balance at December 31, 1995 24,244 $242 100 $1 $26,475 ($25,376) ($252) $1,090
======== ====== ========= ======= ========= ============= ============ ========
</TABLE>
See accompanying notes.
F-7
<PAGE>
THE NATIONAL REGISTRY INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
From October 23,
Year Ended Year Ended Year Ended 1991 (inception)
December 31, December 31, December 31, to December 31,
1993 1994 1995 1995
---------- ---------- ---------- -------------
Cash used in operating activities:
<S> <C> <C> <C> <C>
Net Loss ($6,050) ($7,006) ($5,070) ($25,376)
Adjustments to reconcile net loss to net cash
used in operating activities:
Compensation applicable to stock option grants 1,102 764 306 3,089
Compensation applicable to stock gifts by
principal stockholder --- 195 --- 195
Compensation applicable to Phoenix stock grant --- 183 --- 183
Compensation applicable to Cogent warrants 176 --- --- 176
Compensation applicable to Cogent stock 250 --- --- 250
Depreciation 489 647 525 1,812
Compensation applicable to transfer of stock --- --- --- 9
Expenses paid by Home Shopping Network 359 --- --- 647
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Prepaid expense 48 22 (29) (182)
Deferred charges --- --- (159) (159)
Inventory (1) 32 (143) (143)
Note from related party --- (60) --- (60)
Other assets (28) 18 (2) (27)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (211) 87 237 511
---------- ---------- ---------- -------------
Total adjustments 2,184 1,888 735 6,301
---------- ---------- ---------- -------------
Net cash used in operating activities (3,866) (5,118) (4,335) (19,075)
---------- ---------- ---------- -------------
Cash used in investing activities:
Additions to organizational costs --- --- --- (6)
Purchase of equipment (194) (475) (453) (2,373)
Increase in investments --- --- (105) (105)
---------- ---------- ---------- -------------
Net cash used in investing activities (194) (475) (558) (2,484)
---------- ---------- ---------- -------------
Cash provided by financing activities:
Proceeds from issuance of common stock 1,789 846 4,426 12,067
Proceeds from issuance of preferred stock --- --- --- 5,000
Capital contributions from related parties 2,448 --- --- 4,660
---------- ---------- ---------- -------------
Net cash provided by financing activities 4,237 846 4,426 21,727
---------- ---------- ---------- -------------
---------- ---------- ---------- -------------
Net increase in cash and cash equivalents 177 (4,747) (467) 168
Cash and cash equivalents at beginning of period 5,215 5,392 645 ---
Cash received from merger --- --- --- 10
---------- ---------- ---------- -------------
Cash and cash equivalents at end of period $5,392 $645 $178 $178
========== ========== ========== =============
</TABLE>
See accompanying notes.
F-8
<PAGE>
THE NATIONAL REGISTRY INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
1. The Company
The Company is a development stage company whose objective is to be a
leading provider of electronic identification systems and services utilizing
biometric identification technology. The Company is in the process of developing
and marketing various identification systems using finger image identification
technology. Biometric identification technology analyzes and measures certain
biological characteristics of an individual, such as a fingerprint or
voiceprint, to create a unique identifier which can be electronically stored and
retrieved to positively identify that individual. The Company believes that
biometric identification technology provides a more reliable means of
identification and, therefore, greater security than non-biometric methods which
currently rely upon cards, keys, passwords, or personal information to identify
an individual. These non-biometric identifiers can be lost, stolen, duplicated,
transferred or discovered by unauthorized persons.
To date, the Company has not reported significant operating revenues. The
ability of the Company to become an operating enterprise depends largely on the
commercial success of the finger image identification systems being marketed and
developed by the Company.
With the proceeds from the sale of common stock on January 29, 1996 (see
Note 11) the Company believes it has sufficient cash to continue its development
stage activities through mid-1997. The Company has prepared an analysis of its
anticipated cash flows for 1996 and has controls in place, including a periodic
review by its Executive Committee of actual vs. budgeted operations, in order to
assure that its resources are used in accordance with the guidelines set forth
in the Company's analysis.
Completion of negotiations of contracts, retention of key employees and
consultants, and the Company's ability to finance future development by raising
additional capital are other factors that may impact the Company's operations
beyond 1995.
F-9
<PAGE>
THE NATIONAL REGISTRY INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of The National
Registry Inc. and its wholly owned subsidiaries Biometric Sensing Corp. and NRI
Canada. All intercompany accounts and transactions have been eliminated.
Revenue Recognition and Deferred Charges
Fiscal 1995 operating revenue is derived from the lease of company
installed equipment and software as well as ongoing maintenance of the equipment
and software. As of December 31, 1995 future lease revenue due the Company over
the term of the leases amounted to approximately $920,000. The Company
recognizes revenue ratably over the term of the leases which generally are one
to three years. The Company capitalizes the costs associated with installation
of the equipment and software as deferred charges. These costs are amortized
ratably over the life of the related lease. There were no deferred charges
recorded in 1994 or 1993. The cost of the equipment is amortized to cost of
sales over the term of the lease which is generally its estimated useful life.
Royalty fees are charged to cost of revenues as incurred.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Prepaid Expense
Prepaid expense consists primarily of royalty fees paid to Cogent Systems,
Inc. (see Note 5).
Use of Estimates
The preparation of financial statements in conformity with Generally
Accepted Accounting Principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
F-10
<PAGE>
THE NATIONAL REGISTRY INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Inventories
The Company purchases computer hardware and software in connection with the
installation of its finger image systems. Inventories are stated at cost not in
excess of realizable values.
Equipment
Equipment is recorded at cost. Depreciation is provided on the
straight-line basis over the following estimated service lives:
Years
-----
Computer equipment 3
Office equipment and other 3 to 10
Depreciation expense was $525,000 in 1995, $647,000 in 1994 and $489,000 in
1993.
Income Taxes
The Company has adopted the provisions of "Statement of Financial
Accounting Standards No. 109 Accounting for Income Taxes" and has applied this
method of accounting for income taxes for all periods presented.
Net Loss per Common Share
Net loss per common share was computed by dividing net loss by the weighted
average number of common shares outstanding during the period. Common stock
equivalents, relating to convertible Series A Preferred Stock and exercise of
certain stock options were not included in this calculation due to their
antidilutive effect.
F-11
<PAGE>
THE NATIONAL REGISTRY INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Stock Option Accounting
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123") effective for accounting years beginning after
December 15, 1995. FAS 123 provides alternatives for the methods used by
entities to record compensation expense associated with its stock-based
compensation plans. Additionally, FAS 123 provides further guidance on the
disclosure requirements relating to stock-based compensation plans. The Company
has elected to follow Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB 25) and related interpretations in
accounting for its stock option grants. The Company will include the required
proforma footnote disclosure in its fiscal 1996 financial statements.
3. Stock Options and Warrants
The Company has an employee stock incentive plan (the "SIP") for officers,
directors and key employees under which 2,700,000 shares were reserved for
issuance as of December 31, 1995, 1994 and 1993. In addition, the Company has
granted, outside of the SIP, options to purchase an aggregate of 308,500 shares
to certain employees. Options currently granted by the Company generally vest
over a three to five year period. Options issued to RMS Limited Partnership
("RMS") and Francis R. Santangelo ("Santangelo")(See Note 7) vested upon
issuance.
On May 25, 1994 the Company amended the option agreements for two employees
to allow for a cashless conversion of their 290,000 vested options. The effect
of this transaction was to allow the employees to surrender their vested options
and receive 155,000 shares of common stock for no cost to the employees. For
accounting purposes the Company treated the transaction as a stock appreciation
right payable in shares which resulted in a noncash charge to expense of
$615,000 with an offsetting increase to capital in excess of par value and
common stock.
F-12
<PAGE>
THE NATIONAL REGISTRY INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
As a result of a stock offering in 1994 (see Note 7) the following
currently exerciseable warrants to purchase shares of the Company's common stock
were outstanding as of December 31, 1995:
Exercise Expiration
Number of Shares Price Date
---------------- -------- ---------
75,200 $ 3.60 August 5, 1997
During the years ended December 31, 1995 and 1994, 600,000 and 1,297,000
stock options were canceled and 1,110,500 and 0 options expired unexercised,
respectively. The Company accounts for stock option cancellations by reversing,
in the year canceled, amounts recognized as expense in previous years and
reducing capital in excess of par value. The Company also reduces deferred
compensation expense and capital in excess of par value by the amount of the
remaining unamortized deferred compensation expense which relate to the canceled
stock options. As a result of the cancellations in 1995 and 1994, the Company
recorded a reduction in previously expensed compensation of $19,000 and
$414,000, respectively, and reduced unamortized deferred compensation by
$106,000 and $370,000, respectively.
As of December 31, 1995, total outstanding stock options were as follows:
Shares
---------------------------
Exercise Under Outside
Price SIP of SIP
-------- --------- ---------
$ .01 75,000 --
1.00 -- 1,000,000
1.50 1,290,500 500,000
1.78 60,000 --
2.00 -- 500,000
2.25 45,000 308,500
2.50 -- 500,000
3.75 45,000 --
--------- ---------
1,515,500 2,808,500
========= =========
F-13
<PAGE>
THE NATIONAL REGISTRY INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Activity in these stock option plans for the years ended December 31, 1993,
1994 and 1995 were as follows:
1993 1994 1995
- -------------------------------------------------------------------------------
Outstanding - Beginning of year 1,490,000 4,406,000 2,646,500
Granted 3,457,000 150,000 3,718,500
Exercised (50,000) (612,500) (330,500)
Canceled/Expired (491,000) (1,297,000) (1,710,500)
- -------------------------------------------------------------------------------
Outstanding - End of year 4,406,000 2,646,500 4,324,000
===============================================================================
Weighted Average price of options exercised $ .01 $ .93 $ 1.39
===============================================================================
Compensation related to stock options is measured at the grant date. The
difference between market value of the options, at time of issuance, and their
exercise price is charged to stockholders' equity, as unamortized deferred
compensation, and amortized to expense over the options' vesting periods. The
Company has recognized $325,000, $764,000 and $1,102,000 as compensation expense
in 1995, 1994 and 1993, respectively, relating to compensatory options ($917,000
in 1992 and none in 1991). Of the 4,324,000 options outstanding, 2,940,800
options are exerciseable as of December 31, 1995.
On March 9, 1995, in consideration for services rendered on behalf of the
Company, the Company agreed to lower the exercise price on unexercised stock
options to purchase up to 791,000 shares of Common Stock issued to employees of
the Company under the Company's Employee Stock Option Plan. As a result of this
action the Company recorded an additional $74,000 of unamortized deferred
compensation. The vesting schedules of such stock options remained unchanged.
F-14
<PAGE>
THE NATIONAL REGISTRY INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
On March 14, 1995, in connection with RMS' purchase of 4,000,000 shares of
Common Stock from the Company (See Note 7), (i) Messrs. Forstmann and Abu-Zayyad
agreed to cancel the 500,000 vested stock options previously granted by Mr.
Forstmann to Mr. Abu-Zayyad, (ii) the Company and Mr. Forstmann agreed to cancel
the 500,000 stock options previously granted by the Company to Mr. Forstmann and
(iii) the Company and Mr. Abu-Zayyad amended the agreement relating to the
options previously granted by the Company to Mr. Abu-Zayyad, increasing the
number of vested options from 500,000 to 1,000,000. These options expired
unexercised in September 1995.
4. Capital Contributions
On April 28, 1992 the Company sold 100,000 shares of its Series A Preferred
Stock (the "Preferred Stock") to Home Shopping Network, Inc. ("HSN") pursuant to
a stock purchase agreement (the "Stock Purchase Agreement"). Under the terms of
the Stock Purchase Agreement, $5 million was paid in cash and HSN agreed to fund
up to an additional $5 million by either paying for certain capital purchases
and operational expenditures or providing other agreed upon services which may
be requested by the Company. HSN required that as a condition to its purchase of
Preferred Stock, the Company agree that $5 million of the purchase price for the
Preferred Stock be in the form of future capital purchases and operational
expenditures or services. As of December 31, 1993, HSN had funded the entire
$5,000,000, ($2,174,000 in expenses, $1,251,000 in capital expenditures and
$1,575,000 in cash) which the Company charged to expense, equipment or cash and
credited to capital in excess of par value, and has entirely met its obligations
under the Stock Purchase Agreement. As of December 31, 1992, the first year of
the Stock Purchase Agreement, HSN had funded $2,163,000 ($952,000 in expenses
and $1,211,000 in capital expenditures). The capital expenditures and expenses
were funded either by the Company paying third parties for the items ($874,000
in 1993 and $1,727,000 in 1992) and then subsequently being reimbursed in cash
by HSN or by HSN either paying a third party (principally $34,000 for capital
purchases in 1993, $148,000 in 1992) or performing a service and passing an
accounting entry to the Company ($354,000 reflected as operating expenses in
1993, $288,000 in 1992). There is no assurance that the capital expenditures and
expenses paid by HSN on behalf of the Company or allocated by HSN to the Company
have been effected at amounts which would have resulted from transactions with
unrelated parties.
F-15
<PAGE>
THE NATIONAL REGISTRY INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Preferred Stock is convertible at the option of the holder and will
automatically be converted into 6,336,154 shares of Common Stock, or
approximately 20% of the Common Stock of the Company (after giving effect to
such conversion), upon the satisfaction of certain conditions. The Preferred
Stock and, when issued, the Common Stock, is subject to an irrevocable proxy in
favor of J. Anthony Forstmann, which shall terminate, for among other reasons,
on the date Mr. Forstmann and the members of his family in the aggregate cease
to control greater than 20% of the voting power of the capital stock entitled to
vote in the election of directors of the Company.
5. Technology License
On April 1, 1992, the Company signed a license agreement (the "License
Agreement") with Cogent Systems, Inc., the Licensor of certain finger image
identification technology (the "Software Licensor"), pursuant to which the
Software Licensor granted the Company a seven and one-half year exclusive
license to all commercial applications of the Software Licensor's finger image
identification technology and non-exclusive rights for most governmental
applications, subject to certain rights of early termination. Pursuant to the
License Agreement, the Company is obligated to pay the Software Licensor
royalties generally based on revenues of the Company, subject to a minimum
annual royalty payment of $500,000 per year, through October 1, 1999. Payments
under this agreement are charged to Selling and Marketing expense. In connection
with the execution of the License Agreement, on April 1, 1993, the Company
issued warrants, expiring October 1, 1999, to purchase up to 150,000 shares of
Common Stock to the Software Licensor at an exercise price of $.50 per share.
These warrants were exercised in 1994. In addition, on April 29, 1993 the
Company sold 150,000 shares of Common stock to the Software Licensor at a sales
price of $.01 per share. The Company has recorded the excess of market value as
of the date the license was signed over the exercise price, in the case of the
warrants, or the sale price, in the case of the Common Stock sale, as additional
Selling and Marketing expense and as "Capital in excess of par value". The
Company estimated the market value of these warrants and shares at $1.67 per
share which equals the price paid, on an if converted basis, by Home Shopping
Network for the Series A Preferred Stock purchased in connection with the Stock
Purchase Agreement which was consummated on April 28, 1992.
F-16
<PAGE>
THE NATIONAL REGISTRY INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
On March 10, 1994 the Company entered into a ten year extension, continuing
until October 1, 2009, of the term of its license agreement with the Software
Licensor of its core finger image identification technology, provided that the
Company makes a $10 million payment to the Software Licensor prior to October 1,
1999, in addition to ongoing licensing fees.
6. Income Taxes
As of December 31, 1995, the Company had net operating loss carryforwards
of approximately $12,133,000 for federal income tax purposes which expire at
various dates through 2010. The difference between the net operating loss
carryforward for federal income tax purposes and the deficit accumulated in the
development stage arises primarily from temporary differences associated with
the Company's start-up expenses which were capitalized for income tax purposes
and, beginning January 1995, are being ratably amortized to expense over a sixty
month period.
These temporary differences and net operating loss carryforwards give rise
to a deferred tax asset of $9,411,000 and $7,629,000 as of December 31, 1995 and
1994, respectively, based on a combined federal and state statutory rate of
37.7%. Due to the Company being in the development stage, and recurring
operating losses, management could not currently conclude that it was more
likely than not that the benefit of net operating losses would be realized in
the future. Therefore, a valuation allowance of $9,411,000 and $7,629,000 was
recorded as of December 31, 1995 and 1994, respectively, which fully offset the
deferred tax asset.
7. Stockholders' Equity
The holders of Common Stock are entitled to receive ratably such dividends,
if any, as may be declared by the Board of Directors out of funds legally
available for the payment of dividends. In the event of liquidation, dissolution
or winding up of the Company, the holders of Common Stock are entitled to share
ratably in all assets of the Company remaining after provision for payment of
liabilities and after holders of the Preferred Stock receive a liquidation
preference of $100 per share.
F-17
<PAGE>
THE NATIONAL REGISTRY INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The holders of Preferred Stock shall not be entitled to vote on any matters
submitted to the stockholders of the Company, except as required by applicable
law. Through December 31, 1995 no dividends have been declared. Under the
Preferred Stock purchase agreement, HSN has the right of first refusal to
purchase a pro rata share of any new stock issuances for a period of five years.
On August 5, 1994, the Company issued 376,700 shares of Common Stock to
three foreign investors pursuant to an offering under Regulation S promulgated
under the Securities Act of 1933, as amended, at a purchase price of $2.00 per
share net of all expenses of the offering resulting in net proceeds of $751,000
(the "Financing"). In connection with the Financing, the Company issued to Sands
Brothers & Co., Inc., the placement agent involved in the Financing (the
"Placement Agreement"), warrants to purchase 37,600 shares of Common Stock at an
exercise price of $3.60 per share. Such warrants are exerciseable at any time
and expire on August 5, 1997. The Company has also agreed to certain
registration rights with respect to the warrants issued in connection with the
Financing. Because the Company failed to file a registration statement with
respect to the shares underlying such warrants, as required under the agreement
governing the registration rights, the Placement Agent was issued an additional
37,600 warrants having the same terms as described above.
On October 5, 1994 J. Anthony Forstmann, majority stockholder, gifted
165,000 shares of his stock to a consultant of the Company in lieu of cash
compensation. The Company recorded $195,000, the market value on the date of
gift, as noncash compensation expense with a corresponding increase to capital
in excess of par value.
On October 11, 1994 the Company granted 150,000 shares of the Company's
Common Stock to Phoenix Partners, an investment banking firm, at no cost, in
lieu of cash compensation. In 1994, the Company recorded $183,000, the market
value on that date, as noncash compensation expense with a corresponding
increase to capital in excess of par value and common stock. These shares were
issued on February 13, 1995.
F-18
<PAGE>
THE NATIONAL REGISTRY INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
On March 14, 1995, RMS acquired, for a cash purchase price of $4.0 million,
4,000,000 shares of Common Stock and an option to acquire up to 1,500,000 shares
of Common Stock, which option is currently exerciseable, at the following
exercise prices: 600,000 shares at $1.00 per share, 300,000 shares at $1.50 per
share, 300,000 shares at $2.00 per share and 300,000 shares at $2.50 per share.
In addition, an option to purchase up to 1,000,000 shares of Common Stock was
granted by the Company to Santangelo, which option is currently exerciseable, at
the following exercise prices: 400,000 shares at $1.00 per share, 200,000 shares
at $1.50 per share, 200,000 shares at $2.00 per share and 200,000 shares at
$2.50 per share. As part of such transaction, J. Anthony Forstmann, RMS and
Santangelo entered into a stockholders' voting agreement, dated as of March 14,
1995, pursuant to which Mr. Forstmann and RMS agreed to vote for a director
nominated by the other and not to vote certain shares of Common Stock
beneficially owned in favor of certain specified stockholder actions unless
mutually agreed upon.
8. Commitments and Contingencies
The Company leases office space under various operating leases and is
committed under a technology license agreement for certain royalty payments (see
Note 5). Future minimum payments under these commitments are as follows:
Years Ending December 31,
------------ ------------
1996 $ 505,000
1997 500,000
1998 500,000
1999 500,000
2000 --
----------
$2,005,000
==========
Rent and lease expense was $85,000, $120,000, and $329,000 ($205,000 of
which was funded by HSN (see Note 4), under the terms of the Stock Purchase
Agreement) for 1995, 1994 and 1993, respectively.
F-19
<PAGE>
THE NATIONAL REGISTRY INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
On May 24, 1994, the Company, Blue Cross Blue Shield of New Jersey
("BCBSNJ") and Enterprise Holding Co., Inc.("Enterprise"), a wholly owned
subsidiary of BCBSNJ, entered into a Stockholders Agreement pursuant to which
the parties agreed to form BIOMETRx Inc. ("BIOMETRx"), a corporation to be
jointly-owned by the Company and Enterprise, for the purpose of marketing the
Company's finger image identification technology to the healthcare industry
nationwide and to certain governmental agencies in New Jersey. The Company and
BCBSNJ have each agreed to loan up to $300,000 to BIOMETRx for working capital
purposes. BIOMETRx may seek capital from third party investors in the future. As
of December 31, 1995 the Company and Enterprise had each loaned $60,000 to
BIOMETRx but operations had not yet commenced. The Company uses the equity
method of accounting for this investment.
9. Defined Contribution Retirement Plan
The Company offers an employee benefit plan pursuant to Section 401(k) of
the Internal Revenue Code (the "Plan") covering substantially all employees.
Matching employer contributions are set at the discretion of the Board of
Directors. There were no contributions made for 1995, 1994 or 1993.
10. Business Combination Involving Topsearch, Inc.
On December 24, 1991, Topsearch, Inc. ("TOP") acquired all of the issued
and outstanding capital stock of the Company. Effective February 20, 1992, TOP
was merged with and into the Company (the "Merger"). In connection with the
Merger, on February 20, 1992, the Company effected a 4.8 for 1 exchange of its
Common Stock for TOP common stock. All shares and per share amounts for periods
prior to the merger have been restated to reflect the 4.8 for 1 stock exchange.
The accompanying financial statements reflect the Merger with the Company
considered the acquiring company for accounting purposes (although TOP was the
surviving company pursuant to the terms of the Merger).
F-20
<PAGE>
THE NATIONAL REGISTRY INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
11. Subsequent Events
On January 29, 1996, the Company completed an equity financing pursuant to
which certain investors purchased from the Company 800 shares of Series B
Preferred Stock for an aggregate purchase price of $8.0 million before
commissions and expenses (the "Series B Preferred Stock Private Placement").
Shares of Series B Preferred Stock are convertible at the option of the holder
thereof into shares of Common Stock, based upon the result obtained by dividing
the $10,000 per share purchase price (increasing at the rate of eight per cent
per annum) (the "Stated Value") by a conversion price equal to the lesser of (i)
$2.53 per share or (ii) 85% of a floating price equal to the average closing bid
price of the Common Stock for the five trading days immediately proceeding the
date of conversion. The Company treats the eight percent per annum accretion as
a dividend resulting in a charge to accumulated deficit and a credit to capital
in excess of par value. All outstanding shares of Series B Preferred Stock will
automatically convert into Common Stock on January 19, 1999. The Company may
redeem the Series B Preferred Stock, in cash, at a premium of up to 125% of the
Stated Value commencing on July 30, 1996, or, under certain other circumstances,
at a price based on the Stated Value in the event of a notice of conversion at
less than $2.53 per share of Common Stock. The shares of Series B Preferred
Stock have no voting rights except as required by law and have a liquidation
preference equal to their Stated Value.
In connection with the Series B Preferred Stock Private Placement, the
Company issued to Swartz Investments, LLC, the placement agent involved in the
Series B Preferred Stock Private Placement, warrants to purchase 284,585 shares
of Common Stock at an exercise price of $2.53 per share. Such warrants are
exerciseable at any time and expire on January 29, 2001. The Company has also
agreed to certain registration rights with respect to such warrants.
On February 20, 1996 the Company filed a registration statement to register
certain shares of Common Stock issuable upon conversion of certain shares of
Series B Preferred Stock, certain shares of Common Stock held by certain selling
stockholders named in such registration statement and certain shares of Common
Stock issuable upon the exercise of certain warrants.
F-21
<PAGE>
Item 9. Changes In and Disagreements With Accountants On Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The names and ages of all current directors and executive officers of the
Company are set forth below. As of April 26, 1996, the Board of Directors
consists of three persons.
Directors
Term Director
Name Age Position Expires Since
- ---- --- -------- ------- -----
J. Anthony Forstmann(1) 58 Chairman 1997 1991
and Director
John L. Gustafson(1) 52 President, 1997 1995
Chief Executive
Officer and Director
W. Lee Shevel(1) 63 Vice-Chairman 1997 1995
and Director
- ---------------
1 Compensation Committee and Audit Committee member.
Pursuant to a Stock Purchase Agreement, dated as of April 28, 1992, by and
between the Company and Home Shopping Network, Inc. ("Home Shopping Network"),
Home Shopping Network has the right to nominate up to three directors for the
Company's Board of Directors. Home Shopping Network had nominated as directors
of the Company Gerald F. Hogan and Peter M. Kern, who each resigned from the
Board of Directors effective September 28, 1995 and March 29, 1996,
respectively. Home Shopping Network has notified the Company that it plans to
nominate Kevin J. McKeon to serve as a member of the Company's Board of
Directors.
Pursuant to a stockholders' voting agreement, dated as of March 14, 1995
(the "Stockholders' Voting Agreement"), J. Anthony Forstmann, RMS Limited
Partnership, a Nevada limited partnership ("RMS"), and Francis R. Santangelo
each agreed to vote certain shares of Common Stock beneficially owned by such
party, and each of their respective affiliates, for a director nominated by Mr.
23
<PAGE>
Forstmann and a director nominated by RMS and not to vote certain shares of
Common Stock beneficially owned by such party, and each of their respective
affiliates, in favor of certain specified stockholder actions unless such
actions are agreed upon by Mr. Forstmann and RMS. To date, RMS has not exercised
its right to nominate a director pursuant to the Stockholders' Voting Agreement.
Executive Officers as of April 25, 1996
Term Officer
Name Age Position Expires Since
- ---- --- -------- ------- -----
Clinton C. Fuller 51 Vice President-- 1997 1995
Product Marketing
and Financial
Services
John L. Gustafson 52 President and 1997 1995
Chief Executive
Officer
Robert C. Leamy 47 Vice President-- 1997 1995
Product Operations
Todd D. Lowe 43 Vice President-- 1997 1995
Identification Systems
and Services
Steven T. Price 45 Treasurer, 1997 1992
Controller and
Assistant Secretary
The business experience during the past five years of each director and
executive officer is summarized below.
J. Anthony Forstmann has been the Chairman of the Board of the Company from
June 1995, Co-Chairman from August 1993 to June 1995, Chairman from the
Company's inception in October 1991 to August 1993, a member of the Board's
Compensation Committee since February 1993 and a member of the Board's Audit
Committee since December 1995. Mr. Forstmann was President of the Company from
October 1991 to August 1993 and from September 1994 to March 1995 and Chief
Executive Officer of the Company from October 1991 to August 1993 and from
September 1994 to December 1995. Mr. Forstmann has been a Managing Director of
J.A. Forstmann & Co., a merchant banking firm, since October 1987. He co-founded
Forstmann-Leff Associates, an institutional money management firm, in 1968 and
was a Managing Director thereof from its inception until October 1987. Mr.
Forstmann has been a Limited Partner of Forstmann Little & Co. since its
inception in 1978. Mr. Forstmann has been a director of Home Shopping Network,
24
<PAGE>
Inc., since 1992, as well as of Cities in Schools, a non-profit corporation. Mr.
Forstmann received a BA in Economics from Yale University and an MBA from the
Graduate School of Business Administration, Columbia University.
John L. Gustafson has served as President, Chief Operating Officer and a
Director of the Company since March 1995, Chief Executive Officer since December
1995 and a member of each of the Board's Audit and Compensation Committees since
December 1995. From November 1993 to March 1995, Mr. Gustafson served as Vice
President for Business Development of Allied Technical Services, a wholly-owned
subsidiary of Allied Signal Inc. From 1968 to November 1993, Mr. Gustafson held
a variety of senior executive positions at Unisys Corp. and at Burroughs
Corporation, its predecessor company. Mr. Gustafson received his BS in Math from
St. Louis University and his MS in Computer Science from the University of
Missouri-Rolla.
W. Lee Shevel has served as Vice Chairman of the Board and a Director of
the Company since March 1995, a member of each of the Board's Audit and
Compensation Committees since December 1995 and as a consultant to the Company
since January 1995. Mr. Shevel also serves as a director of Insync Systems,
Inc., a privately held company in the business of providing gas distribution
apparatus for semiconductor processes. Since June 1994, Mr. Shevel has been
Managing Director of EIM, a consulting firm which he founded. From 1982 to June
1994, Mr. Shevel held a variety of senior executive positions at Unisys Corp.
and at Burroughs Corporation, its predecessor company, including Vice President
of Enterprise Integration, President of Unisys' Shipboard and Ground Systems
Group and of Paramax Electronics, Unisys' Canadian subsidiary. Mr. Shevel
received BS, MS and Ph.D. degrees in Engineering from Carnegie Mellon
University.
Clinton C. Fuller has been Vice President--Product Marketing and Financial
Services of the Company since July 1995, overseeing the development and
marketing of the Company's products and services, including developing products
for the financial services industry. From September 1967 to June 1995, Mr.
Fuller held a variety of managerial positions at Unisys Corp., including
worldwide general manager of Unisys' financial retail delivery systems division.
Mr. Fuller received a BS in Computer Science from Lackawanna College.
Robert C. Leamy has been Vice President--Product Operations of the Company
since October 1995, managing the Company's product development. From August 1975
to October 1995, Mr. Leamy served as Engineering Director at Unisys Corp. where,
among other things, he helped develop computer products and systems used in law
enforcement. Mr. Leamy received his BS in Engineering from the University of
California, Los Angeles, a MS in Electrical Engineering and Computer Sciences
from the University of California, Berkeley and a MS in Administration from the
University of California, Irvine.
Todd D. Lowe has been Vice President--Identification Systems and Services
of the Company since September 1995, managing the implementation of the
Company's systems. From January 1982 to August 1995, Mr. Lowe was an employee of
Unisys Corp. where he was the business manager for its automated finger imaging
systems division (which was subsequently acquired by Loral Corporation),
25
<PAGE>
managing the development of personal identification systems for government
social services agencies. Mr. Lowe received a BS in Chemistry from the United
States Naval Academy.
Steven T. Price has been Treasurer of the Company since September 1992 and
Controller since April 1992. From April 1991 to April 1992, Mr. Price was the
Vice President of Finance and Administration for Medic Alert Foundation
International. From September 1990 to April 1992, Mr. Price was Chief Financial
Officer for GOALS Athletic Wear, Inc. From May 1986 to September 1990, Mr. Price
held a variety of positions in various entities owned by Citicorp, N.A.,
including Corporate Controller for Quotron Systems, Inc. Prior to working for
Citicorp., Mr. Price spent an aggregate of four years working as an auditor for
Coopers & Lybrand. Mr. Price holds an MS Accounting degree from California State
University-Sacramento, an MBA degree from Southern Illinois
University-Edwardsville and a BS in Psychology from Swarthmore College. Mr.
Price is a certified public accountant.
Compliance With Section 16(a) of The Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
(the "SEC") and the Nasdaq Stock Market. Officers, directors and greater than
ten-percent shareholders are required by SEC regulations to furnish the Company
with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Forms 5 were
required for those persons, the Company believes that, during fiscal 1995, J.
Anthony Forstmann, the Chairman of the Company, failed to file on a timely basis
five reports, covering 62 transactions in the aggregate, and William A. Wilson,
a director of the Company during 1995 who did not stand for re-election at the
Company's 1995 Annual Meeting of Stockholders, failed to file on a timely basis
one report, covering eight transactions. As of December 15, 1995, Mr. Forstmann
had filed all of his late reports, and as of February 28, 1995 Mr. Wilson had
filed his late report.
Item 11. Executive Compensation.
The following table sets forth all compensation with respect to J. Anthony
Forstmann, Chairman of the Company and President and Chief Executive Officer of
the Company from September 6, 1994 to December 4, 1995, and John L. Gustafson,
President and Chief Operating Officer of the Company since March 14, 1995 and
Chief Executive Officer since December 4, 1995 (the "Named Executive Officers").
The table omits other executive officers employed by the Company on December 31,
1995, because none of such officers' total annual salary and bonus for 1995
exceeded $100,000:
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<PAGE>
SUMMARY COMPENSATION TABLE
- --------------------------------------------------------------------------------
Annual Long-Term
Compensation Compensation
- --------------------------------------------------------------------------------
Awards
--------------
Securities
Name and Principal Salary Underlying
Position(1) Year ($) Options
(#)
- --------------------------------------------------------------------------------
J. Anthony Forstmann - Co-Chairman 1993 -0- 500,000(2)
of the Board, President and Chief 1994 -0- -0-
Executive Officer 1995 -0- -0-
- --------------------------------------------------------------------------------
John L. Gustafson - President and Chief 1993 NA NA
Executive Officer 1994 NA NA
1995 $136,133 400,000
- --------------------------------------------------------------------------------
(1) Mr. Forstmann does not receive cash compensation from the Company either as
an officer or a director of the Company.
(2) Options to purchase 500,000 shares of Common Stock were canceled on March
14, 1995.
The Company offers a plan pursuant to Section 401(k) of the Internal
Revenue Code (the "401(k) Plan") covering substantially all employees, including
the Named Executive Officers. Matching employer contributions are set at the
discretion of the Board of Directors. There were no employer contributions made
for either 1995, 1994 or 1993, the first year the 401(k) Plan was in effect.
Stock Incentive Plan
The 1992 Stock Incentive Plan, adopted by the Board of Directors and
approved by the stockholders of the Company in January 1992 (the "Plan"),
authorizes the granting of stock incentive awards ("Awards") to qualified
officers, employees, directors and third parties providing valuable services to
the Company (e.g., independent contractors, consultants and advisors to the
Company). At the Company's Annual Meeting of Stockholders held on August 12,
1993, the stockholders of the Company approved a proposal amending the Plan to
increase from 1,500,000 to 2,700,000 the number of shares of Common Stock
reserved for issuance upon exercise of options granted pursuant to the Plan. The
following table sets forth individual grants of stock options made during fiscal
year 1992 to each of the Named Executive Officers (during fiscal year 1995 no
stock appreciation rights ("SARs") were awarded):
27
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Individual Grants
- ------------------------------------------------------------------------------------------------------------------------------------
Potential Realizable Value at
Percent of Assumed Annual Rates of Stock Price
Total Market Appreciation For Option
Options Price of Term
Granted to Common
Employees Exercise Stock on
Options in Fiscal Price Date of Expiration
Name (#) Year ($/Sh) Grant Date 0%($) 5% ($) 10%($)
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
J. Anthony
Forstmann -0- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
John L. Gustafson 400,000(1) 32.8% $1.50 $1.91(2) 3/14/2005 $164,000 $644,475 $1,381,619
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Stock Options were granted on March 14, 1995, of which options to purchase
80,000 shares of Common Stock vested on March 14, 1996 and options to
purchase 80,000 shares of Common Stock will vest on each of the next four
anniversaries of the grant date.
(2) The average of the bid and asked price on the Nasdaq SmallCap Market on
March 14, 1996.
28
<PAGE>
During fiscal year 1995, no stock options were exercised by any Director or
Named Executive Officer of the Company. The following table sets forth the
number and value of stock options outstanding s of December 31, 1995 for the
Named Executive Officers:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
- --------------------------------------------------------------------------------
Number of Unexercised Value of Unexercised in-
Options at the-Money Options
Fiscal Year End (#) at Fiscal Year End ($)(1)
----------------------------------------------------------
Name Exercisable/Unexercisable Exercisable/Unexercisable
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
J. Anthony Forstmann -0-/-0- -0-/-0-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
John L. Gustafson -0-/400,000 -0-/$512,500
- --------------------------------------------------------------------------------
(1) Assumes a market price equal to the $2.78125 per share, the average of the
closing bid and asked price on the NASDAQ Small-Cap Market on December 29,
1995.
Compensation of Directors
No cash compensation has been paid to any of the directors of the Company
for being a director of the Company, except that such persons are reimbursed for
out-of-pocket expenses incurred in attending meetings of the Board of Directors
or committees of the Board of Directors of the Company.
On November 8, 1993, the Board of Directors granted options to purchase
45,000 shares of Common Stock, at an exercise price of $3.75 per share, to
Gerald F. Hogan, a director of the Company who resigned from the Board of
Directors effective September 28, 1995, and Peter M. Kern, a director of the
Company who resigned from the Board of Directors effective March 29, 1996, such
options vesting pro rata on each of the first three anniversaries of August 12,
1993, the date each of the foregoing individuals became directors of the
Company. Mr. Hogan's options expired unexercised on December 28, 1995.
Compensation Committee Interlocks and Insider Participation
On January 4, 1995, Gerald R. Johnson and William A. Wilson resigned as
members of the Compensation Committee of the Board of Directors. The
Compensation Committee presently consists of Messrs. Forstmann, Gustafson and
Shevel. Mr. Forstmann was President of the Company until March 1995 and Chief
Executive Officer of the Company until December 1995 and Mr. Gustafson has been
President of the Company since March 1995 and Chief Executive Officer of the
Company since December 1995.
29
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of April 25, 1996 by (i) each person
who is known by the Company to own beneficially more than 5% of the Company's
outstanding Common Stock; (ii) each of the Company's directors; (iii) each
person nominated to serve as a director of the Company; (iv) each of the Named
Executive Officers (as hereinafter defined); and (v) all executive officers and
directors of the Company as a group:
Amounts and
Nature of
Name and Address Beneficial Percent of
of Beneficial Owner Ownership Class
J. Anthony Forstmann 12,786,154(1)(2) 41.5%(2)
7 Beverly Park
Beverly Hills, CA 90210
Home Shopping Network, Inc. 6,336,154(2) 20.6%(2)
P.O. Box 9090
Clearwater, FL 34618
RMS Limited Partnership 5,500,000(3) 21.2%(3)
201 West Liberty Street
P.O. Box 281
Reno, NV 89504
John L. Gustafson 80,000(4) (5)
W. Lee Shevel 60,000(4) (5)
Executive officers and directors
as a group (7 people) 12,926,154(1)(2)(4) 41.8%(1)(2)(4)
(1) Of such amount, 3,500,000 shares of Common Stock are pledged in favor of
Theodore J. Forstmann, Mr. Forstmann's brother, to secure a demand note,
and 1,500,000 shares of Common Stock are pledged in favor of a financial
institution to secure a non-recourse credit facility. Includes 1,000,000
shares of Common Stock directly held by Mr. Forstmann's spouse, Catherine
S. Forstmann.
(2) Includes 6,336,154 shares of Common Stock issuable upon conversion of
100,000 currently convertible shares of Series A Preferred Stock held by
Home Shopping Network, for which Mr. Forstmann holds an irrevocable proxy.
Such irrevocable proxy shall terminate on the first to occur of the
following: (a) April 21, 2002, (b) the bankruptcy, insolvency or
30
<PAGE>
dissolution of the Company or (c) the date that Mr. Forstmann and members
of his family in the aggregate cease to control, directly or indirectly,
more than 20% of the total voting power in an election of directors of the
Company.
(3) Includes 1,500,000 shares of Common Stock subject to outstanding options
which are vested and excercisable.
(4) Includes shares of Common Stock that can be acquired by exercise of vested
and exercisable stock options within 60 days of April 25, 1996 as follows:
Mr. Gustafson--80,000 shares; Mr. Shevel--60,000 shares; and all directors
and officers as a group--140,000 shares.
(5) Less than 1%.
Item 13. Certain Relationships and Related Transactions.
During fiscal 1995, the Company retained as a consultant W. Lee Shevel, a
director of the Company, and paid him an aggregate of $96,800 (including $34,800
in travel and other expenses). On March 14, 1995, the Company granted Mr. Shevel
options to purchase 300,000 shares of Common Stock at an exercise price of $1.50
per share, of which options to purchase 60,000 shares of Common Stock have
vested and options to purchase 60,000 shares of Common Stock will vest on each
of the next four anniversaries of the date of the grant. In addition, during
fiscal 1995, the Company retained DMG & Associates ("DMG"), a healthcare
marketing consulting firm founded by Donna M. Gustafson, the wife of John L.
Gustafson, the Chief Executive Officer and President of the Company, and paid
DMG an aggregate of $82,500 (including $14,300 in travel and other expenses). On
October 13, 1995, the Company granted Ms. Gustafson options to purchase 25,000
shares of Common Stock at an exercise price of $2.25 per share, vesting pro rata
on each of the next three anniversaries of the date of grant. The Company is
currently utilizing the services of Mr. Shevel and DMG and may continue to
utilize their services from time to time in the future.
Gerald F. Hogan, a director of the Company who resigned from the Board of
Directors effective September 28, 1995, and Peter M. Kern, a director of the
Company who resigned from the Board of Directors effective March 29, 1996, were
nominated by and served as representatives of Home Shopping Network, Inc. in
accordance with Home Shopping Network's right to nominate up to three directors
pursuant to the Stock Purchase Agreement, dated as of April 28, 1992 (the "Stock
Purchase Agreement"), by and between the Company and Home Shopping Network,
pursuant to which Home Shopping Network purchased 100,000 shares of the Series A
Preferred Stock of the Company. Following Mr. Kern's resignation from the Board
of Directors, Home Shopping Network has notified the Company that it plans to
nominate Kevin J. McKeon to serve as a member of the Board of Directors pursuant
to its rights under the Stock Purchase Agreement.
The Company engages in a variety of transactions with Home Shopping
Network, including the rental by the Company of office space from Home Shopping
Network for an annual rental of approximately $60,000.
31
<PAGE>
The Company believes that each of the related party transactions described
herein were on terms as fair to the Company as could have been obtained from
unaffiliated third parties.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following documents are filed as a part of
this Annual Report on Form 10-K:
(1) Financial Statements
The financial statements filed as a part of this report are
listed in the "Index to Consolidated Financial Statements" at
Item 8.
(2) Financial Statement Schedules
All schedules have been omitted because they are either not applicable, not
material or the required information has been given in the financial statements
or in notes to the financial statements.
(b) Reports on Form 8-K
During the fourth quarter of 1995, the Company filed no reports on Form
8-K.
(c) Exhibits
32
<PAGE>
Exhibit
No. Description
- ------ -----------
3.1 Articles of Incorporation, as amended to date, of the
Company (incorporated by reference to Exhibit 3.1 of the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1992).
3.2 By-Laws of the Company (incorporated by reference to Exhibit
3.3 of the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1991).
4.1 Certificate of the Voting Powers, Designations, Preferences,
Rights, Qualifications, Limitations and Restrictions of the
Series A Preferred Stock of the Company (incorporated by
reference to Exhibit 4.1 of the Company's Quarterly Report
on Form 10-Q for the period ended March 31, 1992).
4.2 Certificate of Designation, Number, Powers, Preferences and
Relative, Participating, Optional, and Other Special Rights
and the Qualifications, Limitations, Restrictions, and Other
Distinguishing Characteristics of Series B Preferred Stock
of the Company (incorporated by reference to Exhibit 3 of
the Company's Report on Form 8-K, dated January 25, 1996).
10.1 Agreement and Plan of Merger dated as of December 24, 1991
between the Company, Topsearch and Top Search Merging Corp.
(incorporated by reference to the Company's Report on Form
8-K, dated December 24, 1991).
10.2 Escrow Agreement dated as of December 24, 1991 between
Topsearch, Lawrence K. Fleischman, Lawrence E. Kaplan,
Stanley A. Kaplan, Edward W. O'Donnell, Jay M. Haft, Esq.,
and Nettie Becker Escrow, Inc. (incorporated by reference
from the Exhibits to the Company's Report on Form 8-K, dated
December 24, 1991).
10.3 Replacement Note (incorporated by reference to Exhibit 10.3
of the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1992).
10.4 License Agreement, dated as of April 1, 1992, by and between
Cogent Systems, Inc. and the Company (confidential treatment
requested) (incorporated by reference to Exhibit 10.1 of the
Company's Quarterly Report on Form 10-Q for the period ended
March 31, 1992).
33
<PAGE>
10.5 Stock Purchase Agreement, dated as of April 28, 1992, by and
between Home Shopping Network and the Company (incorporated
by reference to Exhibit 10.2 of the Company's Quarterly
Report on Form 10-Q for the period ended March 31, 1992).
10.6 Stock Incentive Plan (incorporated by reference to Exhibit
10.6 of the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1992).
10.7 Management Agreement, dated as of August 17, 1993, by and
between the Company and Fuad Abu-Zayyad (incorporated by
reference to Exhibit 10.7 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1993).
10.8 Option Agreement, dated as of August 17, 1993, by and
between the Company and Fuad Abu-Zayyad (incorporated by
reference to Exhibit 10.8 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1993).
10.9 Option Agreement, dated as of August 17, 1993, by and
between the Company and J. Anthony Forstmann (incorporated
by reference to Exhibit 10.9 of the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1993).
10.10 Letter of Intent, dated as of March 9, 1995 (incorporated by
reference from the Exhibits to the Company's Report on Form
8-K, dated March 14, 1995).
10.11 Stock Purchase Agreement, dated as of March 14, 1995, by and
among the Company, RMS Limited Partnership ("RMS") and
Francis R. Santangelo (incorporated by reference from the
Exhibits to the Company's Report on Form 8-K, dated March
14, 1995).
10.12 Stock Option Agreement, dated as of March 14, 1995, by and
between the Company and RMS (incorporated by reference from
the Exhibits to the Company's Report on Form 8-K, dated
March 14, 1995).
10.13 Stock Option Agreement, dated as of March 14, 1995, by and
between the Company and Francis R. Santangelo (incorporated
by reference from the Exhibits to the Company's Report on
Form 8-K, dated March 14, 1995).
10.14 Stockholders' Voting Agreement, dated as of March 14, 1995,
by and between J. Anthony Forstmann and RMS (incorporated by
reference from the Exhibits to the Company's Report on Form
8-K, dated March 14, 1995).
34
<PAGE>
10.15 Amendment No. 1 to Stock Option Agreement, dated as of March
14, 1995, by and between the Company and Fuad Abu-Zayyad.
10.16 Agreement to Terminate Stock Option Agreement, dated as of
March 14, 1995, by and between J. Anthony Forstmann and the
Company,
11 Computation of Earnings Per Share.
23.1 Consent of Ernst & Young LLP
35
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE NATIONAL REGISTRY INC.
--------------------------
(Registrant)
Date: June 30, 1996 By: /s/ John Gustafson
------------------------
John L. Gustafson
President, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of registrant
and on the dates indicated.
Date: June 30, 1996 By: /s/ John Gustafson
------------------------
John L. Gustafson
President, Chief Executive
Officer and Director
Date: June 30, 1996 By: /s/ Steven T. Price
------------------------
Steven T. Price
Treasurer and Controller
Date: June 30, 1996 By: /s/ J. Anthony Forstmann
------------------------
J. Anthony Forstmann
Chairman of the Board
By:
------------------------
Kevin J. McKeon
Director
Date: June 30, 1996 By: /s/ W. Lee Shevel
------------------------
W. Lee Shevel
Director
36
