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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
COMMISSION FILE NUMBER 0-20270
THE NATIONAL REGISTRY INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 95-4346070
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(State Or other jurisdiction of incorporation (I.R.S. Employer
or organization.) Identification no.)
2502 ROCKY POINT DRIVE, TAMPA, FLORIDA 33607
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(Address of principal executive offices and zip code)
(813) 636-0099
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]
There were 36,089,349 shares of outstanding Common Stock of the registrant
as of October 31, 1997.
Total number of pages: 19 Exhibit Index begins on Page 18
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PART 1 - FINANCIAL INFORMATION
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<TABLE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS
THE NATIONAL REGISTRY INC.
CONDENSED BALANCE SHEET
(In Thousands)
SEPTEMBER 30, DECEMBER 31,
ASSETS 1997 1996
(UNAUDITED) (AUDITED)
------------ -----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,205 $ 914
Receivables 658 460
Prepaid expenses 256 199
Deferred charges 9 6
Inventory 355 --
Other current assets 24 23
-------- --------
Total current assets $ 2,507 $ 1,602
Equipment
Computer equipment 2,983 2,568
Office equipment and other 428 381
-------- --------
3,411 2,949
less accumulated depreciation (2,244) (1,824)
-------- --------
1,167 1,125
-------- --------
Investment 105 105
Other assets 27 --
======== ========
TOTAL ASSETS $ 3,806 $ 2,832
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 668 $ 368
Accrued compensation 182 346
Other accrued expenses 255 634
-------- --------
Total current liabilities 1,105 1,348
-------- --------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value
Authorized - 75,000,000 shares
Issued and outstanding -
34,401,005 and 36,018,597 as of September 30,
1997 and December 31, 1996, respectively 360 344
Preferred stock, $.01 par value convertible
Authorized - 1,000,000 shares
Issued and outstanding
Series A - Liquidation preference $100 per
share, 100,000 shares issued and outstanding
as of September 30, 1997 and December 31, 1996 1 1
Series C - Liquidation preference $20 per
share, 296,250 shares issued and outstanding
as of September 30, 1997 and 0 shares issued
and outstanding as of December 31, 1996,
respectively 3 --
Capital in excess of par value 42,746 35,713
Accumulated deficit (40,310) (34,431)
Unamortized deferred compensation (99) (143)
-------- --------
2,701 1,484
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,806 $ 2,832
======== ========
</TABLE>
SEE ACCOMPANYING NOTES.
2
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<TABLE>
<CAPTION>
THE NATIONAL REGISTRY INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1997 1996 1997 1996
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net sales $ 516 $ 384 $ 1,184 $ 1,827
Cost of sales 234 270 415 1,100
-------- -------- -------- --------
Gross profit 282 114 769 727
-------- -------- -------- --------
Operating expenses:
Selling and marketing 650 636 1,938 1,908
Royalty fee 127 125 395 375
Product development 556 709 2,104 1,694
General and administrative 749 575 2,037 1,897
-------- -------- -------- --------
Total operating expenses 2,082 2,045 6,474 5,874
Other income 25 41 157 162
-------- -------- -------- --------
Net loss (1,775) (1,890) (5,548) (4,985)
-------- -------- -------- --------
Preferred stock dividend 980 -- 1,470 $ 1,412
Net loss attributable to ======== ======== ======== ========
common stockholders $ (2,755) $ (1,890) $ (7,018) $ (6,397)
======== ======== ======== ========
Loss per common share $ (0.08) $ (0.07) $ (0.20) $ (0.25)
Weighted average number of
common shares 35,152 28,436 34,767 26,014
</TABLE>
SEE ACCOMPANYING NOTES
3
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THE NATIONAL REGISTRY INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30,
1997 1996
------------ ------------
Cash used in operating activities:
Net loss $(5,548) $(4,985)
Adjustments to reconcile net loss to net
cash used in operating activities:
Compensation applicable to stock
option grants 45 119
Depreciation 420 359
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (198) (532)
Prepaid expenses (57) 79
Deferred charges (3) 125
Inventory (355) 143
Other assets (28) 12
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities (243) 283
------- -------
Net cash used in operating activities (5,967) (4,397)
------- -------
Cash used in investing activities:
Purchase of equipment (462) (727)
------- -------
Net cash used in investing activities (462) (727)
------- -------
Cash provided by financing activities:
Issuance of common stock for services 323 --
Issuance of common stock -- 244
Issuance of preferred stock 6,397 7,134
------- -------
Net cash provided by financing activities 6,720 7,378
------- -------
Net increase in cash and cash equivalents 291 2,254
Cash and cash equivalents at beginning of period 914 178
======= =======
Cash and cash equivalents at end of period $ 1,205 $ 2,432
======= =======
SEE ACCOMPANYING NOTES
4
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THE NATIONAL REGISTRY INC.
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NOTES TO CONDENSED FINANCIAL STATEMENTS -- UNAUDITED
1. BASIS OF PRESENTATION
The accompanying financial statements are unaudited and condensed and,
therefore, do not contain certain information included in the annual financial
statements of The National Registry Inc. (the "Company"). In the opinion of
management, all adjustments (consisting only of normally recurring accruals) it
considers necessary for a fair presentation have been included.
The Company's condensed interim financial results are not necessarily
indicative of results to be expected for a full fiscal year and should be read
in conjunction with its financial statements and the notes thereto included in
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1996, as filed with the Securities and Exchange Commission (the "SEC") on March
27, 1997, as amended in Amendment No. 1 to Form 10-K/A as filed with the SEC on
April 30, 1997.
Certain amounts in the 1996 financial statements have been reclassified to
conform with 1997 presentation.
2. NET LOSS PER COMMON SHARE
For the three and nine month periods ended September 30, 1997 and 1996 the
loss per common share was computed by dividing the net loss attributable to the
common shareholders by the weighted average number of shares outstanding during
the periods. Common stock equivalents, relating to convertible Series A
Preferred Stock, convertible Series C Preferred Stock and the exercise of stock
options and warrants were not included in this calculation due to their
anti-dilutive effect.
5
<PAGE>
THE NATIONAL REGISTRY INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS -- UNAUDITED
3. STOCKHOLDERS' EQUITY
On February 6, 1997, the Company completed an equity financing (the
"Series C Preferred Stock Private Placement") pursuant to which two accredited
investment funds purchased an aggregate of 350,000 shares of the Company's
Series C Preferred Stock, $.01 par value per share (the "Series C Preferred
Stock"), for an aggregate purchase price of $7 million before commissions and
expenses which totaled approximately $603,000. The Series C Preferred Stock
carries a six percent per annum accretion which the Company treated as a
dividend resulting in a charge to accumulated deficit and a credit to capital in
excess of par value. The Company recorded accretion of $106,000 and $273,000,
respectively, for the three and nine month periods ended September 30, 1997.
All shares of the Series C Preferred Stock are convertible at the option
of the holder into shares of Common Stock, at the lesser of (i) $2.375 per share
or (ii) 82.5% of a floating price equal to the average closing bid price of the
Common Stock for the five trading days immediately preceding the date of
conversion. All shares of Series C Preferred Stock issued and outstanding as of
February 4, 2000 will be converted automatically into shares of Common Stock.
During the three month and nine month periods ended September 30, 1997, 52,500
and 53,750 shares of Series C Preferred Stock were converted into 1,228,108 and
1,247,857 shares of Common Stock, respectively. The Company may redeem the
Series C Preferred Stock at any time based upon a formula relating to the then
applicable conversion price or under certain other circumstances. As part of the
Series C Preferred Stock Private Placement, the Company issued to such
accredited investment funds, warrants to purchase up to 400,000 shares of common
stock at an exercise price of $2.6125 per share, subject to certain adjustments
from time to time. The warrants expire five years after the date of closing.
In connection with the Series C Preferred Stock Private Placement, the
Company also issued warrants to purchase an aggregate of 140,000 shares of
Common Stock at an exercise price of $2.6125 per share to certain finders. Of
such warrants, warrants to purchase up to 70,000 shares are exerciseable through
February 4, 2000, with the remaining warrants being exercisable through February
4, 2002. The Company has also agreed to certain registration rights with respect
to these warrants.
On March 17, 1997, the Company filed a registration statement with the SEC
to register certain shares of Common Stock issuable upon conversion of the
Series C Preferred Stock, shares of Common Stock held by certain selling
stockholders named in the registration statement and shares of Common Stock
issuable upon the exercise of certain options and warrants. On May 23, 1997 the
registration statement was declared effective by the SEC.
6
<PAGE>
THE NATIONAL REGISTRY INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALSYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
Except for the historical information contained herein, certain of the
matters discussed in this quarterly report are "forward-looking statements" as
defined in Section 21E of the Securities Exchange Act of 1934, as amended, which
involve certain risks and uncertainties which could cause actual results to
differ materially from those discussed herein. Such risks and uncertainties
include, but are not limited to, the Company's limited operating history and
substantial accumulated net loss, the Company's need for additional funds,
technological and market uncertainty, competition, the Company's dependence upon
a software licensor, the Company's dependence on patents and other proprietary
rights, control of the Company, the possibility of liquidation or bankruptcy of
the Company, the NASDAQ SmallCap Market eligibility and maintenance
requirements, the possible delisting of the Company's Common Stock from the
NASDAQ SmallCap Markets, shares of the Company's capital stock eligible for
future public sale, the limited liquidity of the Common Stock and the market
price volatility of the Common Stock. See the relevant discussions elsewhere
herein, and in the Company's registration statement on Form S-3 (Registration
No.333-23467) declared effective on May 23, 1997 by the SEC, and the Company's
periodic reports and other documents filed with the SEC for further discussions
of these and other risks and uncertainties applicable to the Company and its
business.
RECENT DEVELOPMENTS
In September of 1997, the Company began the implementation of a cost
reduction program designed to reduce operating expenses of the Company. As part
of such program, the Company consolidated certain salaried positions and is in
the process of terminating leases of certain corporate facilities. Additionally,
the Company has determined to make no substantial capital expenditures during
the remainder of 1997. The Company believes that implementation of these changes
should enable it to materially reduce its operating costs. While the Company
does not believe it to be the case, it is possible that the implementation of
the cost reduction program may have a negative impact on sales. The Company
plans to continually review its operations in an attempt to locate additional
ways to further reduce costs as necessary.
On September 8, 1997 W. Lee Shevel resigned from the Board of Directors of
the Company. On September 8, 1997, the Board of Directors of the Company elected
Francis R. Santangelo as a director of the Company to fill such vacancy.
7
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THE NATIONAL REGISTRY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - (CONTINUED)
During the three month period ended September 30, 1997, the Company
entered into the contracts and agreements discussed below. There can be no
assurance that any of the programs or contracts discussed below will be
commercially successful, if successful that sales will result from such programs
or contracts, or that any future sales will be commercially profitable for the
Company.
The Health Information Network Connection (THINC) entered
into an agreement with the Company to provide finger imaging technology
for the NYU Medical Center and three of its affiliates. Initial deliveries
are expected to occur in the fourth quarter.
Scott & White Hospital, Clinic and Health Plan in Temple, Texas has
entered into an agreement with the Company to provide finger imaging
technology for securing patient records. This agreement includes the
Company's recently announced product, Secure Authentication Facility for
Unicenter(R) TNG(TM). Initial shipments were made in September and
additional shipments are expected in the fourth quarter.
Unisys Federal Systems Division entered into an agreement with the Company
to provide finger imaging technology as part of the NASA Scientific and
Engineering Workstation Procurement contract (the "SEWP II contract").
Since the Company is now an approved vendor on the SEWP II contract, its
products can be purchased by federal agencies using a toll free phone
number or over the World Wide Web.
IMNET entered into an agreement with the Company that will enable IMNET to
integrate the Company's technology into IMNET's Electronic Patient Record
System (EPRS), making IMNET a value-added reseller of the Company's
products.
8
<PAGE>
THE NATIONAL REGISTRY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - (CONTINUED)
A. RESULTS OF OPERATING ACTIVITIES
For the three and nine month periods ended September 30, 1997, the Company
incurred net losses of $1,775,000 and $5,548,000, respectively, resulting in
losses per common share of $(0.08) and $(0.20), respectively after preferred
stock dividends. This compares to net losses of $1,890,000 and $6,397,000 for
the three and nine month periods ended September 30, 1996, respectively, or
$(0.07) and $(0.25) per common share, respectively after preferred stock
dividends. The decrease of $115,000 in net loss for the three month period ended
September 30, 1997 was due primarily to an increase in gross profit of $168,000
that was partially offset by an increase in operating expenses of $37,000 and a
decrease in other income of $16,000. The increase in gross profit for the three
month period was primarily due to the increase in revenue and an increase in the
gross margin percentage compared to the same period in 1996. Approximately
$164,000 and $465,000, respectively, of the net losses in the three and nine
month periods ended September 30, 1997, and $174,000 and $478,000, respectively,
of the net losses in the three and nine month periods ended September 30, 1996,
were attributable to non-cash items, including depreciation and compensation
related to certain stock options.
REVENUE AND GROSS PROFIT
For the three and nine month periods ended September 30, 1997, the Company
reported operating revenues of $516,000 and $1,184,000, respectively. This
compares to operating revenues of $384,000 and $1,827,000, respectively, for the
three and nine month periods ended September 30, 1996, or an increase of
$132,000 and a decrease of $643,000 for such periods, respectively. The increase
for the three month period was primarily due to increased sales of
NRIdentity(TM) software and hardware products, while the decrease for the nine
month period was primarily due to start-up revenue of $860,000 related to the
Connecticut State project that was recognized in the first quarter of 1996.
Revenues for the three month period ended September 30, 1997 reflect increases
of approximately $234,000 and $130,000 compared to the first and second quarters
of 1997, respectively. Revenues for the three month period ended September 30,
1997 consisted primarily of sales of NRIdentity(TM) software and scanners to
various commercial users (approximately $390,000) and ongoing revenues from
contracts with the States of New Jersey and Connecticut (approximately
$126,000). The Company's ongoing contracts with these agencies are expected to
generate approximately $114,000 in revenue in the fourth quarter of 1997 and the
first and second quarters of 1998, respectively. The New Jersey contract will
expire in June 1998 and the Connecticut contract will expire in December 1998
unless such contracts are renewed.
The Company's gross margin percentages before operating expenses for the
three and nine month periods ended September 30, 1997 were 55% and 65%,
respectively, compared to 30% and 40%, respectively, for the same periods in
1996. The increases from 1996 to 1997 were primarily due to a shift from the
sale of services during 1996 to the sale of software and hardware during 1997.
9
<PAGE>
THE NATIONAL REGISTRY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - (CONTINUED)
OPERATING EXPENSES
Total operating expenses for the three and nine month periods ended
September 30, 1997 increased over the same periods in 1996 by $37,000 and
$600,000, respectively. This represents changes of 2% and 10%, respectively. The
following table provides a breakdown of the changes in operating expenses for
the three month and nine month periods ended September 30, 1997 as compared to
the same periods in 1996:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT %) (IN THOUSANDS, EXCEPT %)
$ Change % Change $ Change % Change
--------- --------- --------- ---------
Selling and marketing $ 14 2% $ 30 2%
Royalty fee 2 2 20 5
Product development (153) (22) 410 24
General and administrative 174 30 140 7
===== ===== ===== =====
$ 37 2% $ 600 10%
===== ===== ===== =====
SELLING AND MARKETING
Selling and marketing expenses increased $14,000 and $30,000, or 2% and
2%, for the three and nine month periods ended September 30, 1997, respectively,
compared to the same periods in 1996. The increases were primarily due to
increases in advertising, public relations, employee expense and travel. These
increases were substantially offset by a reduction in professional fees. The
Company believes that certain aspects of its cost reduction plan began in
September 1997 should result in lower selling and marketing expenses during the
near future.
The Company has attempted to market its biometric finger image
identification technology for a wide range of potential uses including computer
network access security, protection of medical and financial records,
facilitation of electronic commerce, enhancing customer service in banking,
deterring on-line fraud, enhancing security in the healthcare industries and
deterring fraud in government social services programs. The Company currently
has value-added reseller agreements in place with 20 companies. Approximately
120 organizations have purchased personal authentication scanners and NRIdentity
software products. While the Company has received favorable responses from a
limited number of commercial customers there can be no assurance that the
Company will be able to secure additional contracts for its products and
services in commercial markets or, if it is able to secure such contracts, that
any of such contracts will prove to be profitable for the Company. The sales
cycle for the Company's products has taken longer to develop than management
anticipated due to the newness of the technology and the extended period of time
potential customers require for the testing, evaluating and piloting of
applications.
10
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THE NATIONAL REGISTRY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - (CONTINUED)
PRODUCT DEVELOPMENT
Product development expenses for the three and nine month periods ended
September 30, 1997, decreased $153,000 and increased $410,000 or (22%) and 24%,
respectively, compared to the same periods in 1996. The decrease during the
third quarter of 1997 was primarily due to reductions in employee expenses,
travel and professional consulting services as compared to the same period in
1996. Increases for the nine month period were primarily due to increases in
employee expenses, travel, rent and depreciation during the first two quarters
of 1997 as compared to those same periods during 1996. These increases were
partially offset by a decrease in professional consulting services.
The Company's hardware product strategy has been to develop low-cost
fingerprint scanners that capture an image of an individual's fingerprint and
convert the resulting image into digital form. NRIdentity(TM) scanners are
manufactured by Key Tronic Corporation ("Key Tronic") under a developmental
joint venture agreement dated December 14, 1995. Under this agreement, the
Company licensed certain optical and electronic technology to Key Tronic for the
development, manufacture and marketing of computer keyboards and other computer
attached desktop peripheral devices incorporating such technology. Though there
is no assurance, the Company believes that the continued development and
marketing of NRIdentity(TM) Personal Authentication Scanner devices will give
the Company a competitive advantage in selling its finger-imaging identification
software and systems.
The Company's software product strategy has been to develop and market a
series of software developers' kits that operate on a variety of client/server
platforms and to then use those same kits to develop and market a series of
packaged applications that provide finger image authentication for a range of
client/server systems. Software developers' kits have been developed for both
workstations and servers and include finger image processing on a workstation,
one-to-one match or verification on the workstation, one-to-one match on a
server, and one-to-many search on a server. The kits operate on Windows 95(TM)
and Windows NT(TM) personal computers and on Windows NT(TM), Sun Solaris(TM),
DEC Alpha(TM), IBM AIX(TM) and HP Unix(TM) servers. Client/server packaged
applications developed to date and currently being marketed are the NRIdentity
Screen Saver for Windows 95(TM), the Secure Authentication Facility for Windows
NT(TM) and the Secure Authentication Facility for Unicenter(R) TNG(TM) single
sign-on module for Windows NT(TM). The Company is in the process of developing
additional products within the Secure Authentication Facility product line for
internet applications.
There is no assurance that the Company will successfully develop
additional scanner technology or software products, or that the Company, its
licensee, Key Tronic, or any other person or entity will successfully market
keyboards or other peripheral devices incorporating the Company's technology.
Even if the Company develops additional scanner technology or software products,
there can be no assurance that the Company will be able to generate significant
sales of its products or services, or, if the Company is able to consummate
significant sales, that any such sales would be profitable.
GENERAL AND ADMINISTRATIVE
For the three and nine month periods ended September 30, 1997, general and
administrative expenses increased $174,000 and $140,000, or 30% and 7%,
respectively, compared to the same periods in 1996. The increase for the three
month period was primarily due to an increase of approximately $130,000 in legal
fees and increases in insurance, rent, depreciation and expenses related to the
shareholders' meeting. These increases were partially offset by decreases in
employee and travel expenses during the nine month period. The Company believes
that certain aspects of the cost reduction plan began in September 1997 should
result in lower general and administrative expenses during the near future.
11
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THE NATIONAL REGISTRY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - (CONTINUED)
B. LIQUIDITY AND CAPITAL RESOURCES
Cash and working capital as of September 30, 1997 was $1,205,000 and
$1,402,000, respectively, compared to $914,000 and $254,000, respectively, as of
December 31, 1996. Cash and working capital as of September 30, 1996 was
$2,432,000 and $2,389,000, respectively. Cash as of October 31, 1997 was
approximately $1,150,000.
The increase in the Company's cash and working capital as of September 30,
1997 compared to December 31, 1996, relates primarily to the Series C Preferred
Stock Private Placement, which generated net proceeds of approximately
$6,397,000. This was offset, in part, by net losses and certain capital
expenditures made during the nine month period ended September 30, 1997.
In an effort to reduce the monthly net cash expenditure rate, the Company
began implementing a plan to reduce operating expenses in September of 1997.
This plan includes closing certain corporate facilities outside its Tampa
headquarters and reducing the number of employees. Additionally, the Company has
determined to make no substantial capital expenditures during the remainder of
1997.
On February 6, 1997, the Company completed an equity financing pursuant to
which two accredited investment funds purchased an aggregate of 350,000 shares
of the Company's Series C Preferred Stock, $.01 par value per share (the "Series
C Preferred Stock"), for an aggregate purchase price of $7 million before
commissions and expenses which totaled approximately $603,000. The Series C
Preferred Stock carries a six percent per annum accretion which the Company
treated as a dividend resulting in a charge to accumulated deficit and a credit
to capital in excess of par value. The Company recorded accretion of $106,000
and $273,000, respectively, for the three and nine month periods ended September
30, 1997.
All shares of the Series C Preferred Stock are convertible at the option
of the holder into shares of Common Stock, at the lesser of (i) $2.375 per share
or (ii) 82.5% of a floating price equal to the average closing bid price of the
Common Stock for the five trading days immediately preceding the date of
conversion. All shares of Series C Preferred Stock issued and outstanding as of
February 4, 2000 will be converted automatically into shares of Common Stock.
During the three month and nine month periods ended September 30, 1997, 52,500
and 53,750 shares of Series C Preferred Stock were converted into 1,228,108 and
1,247,857 shares of Common Stock, respectively. The Company may redeem the
Series C Preferred Stock at any time based upon a formula relating to the then
applicable conversion price at the time of the redemption or under certain other
circumstances. As part of the Series C Preferred Stock Private Placement, the
Company also issued, to such accredited investment funds, warrants to purchase
up to 400,000 shares of common stock at an exercise price of $2.6125 per share,
subject to certain adjustments from time to time. The warrants expire five years
after the date of closing.
In connection with the Series C Preferred Stock Private Placement, the
Company also issued warrants to purchase an aggregate of 140,000 shares of
Common Stock at an exercise price of $2.6125 per share to certain finders. Of
such warrants, warrants to purchase up to 70,000 shares are exerciseable through
February 4, 2000 with the remaining warrants being exercisable through February
4, 2002. The Company has also agreed to certain registration rights with respect
to these warrants.
On March 17, 1997, the Company filed a registration statement with the SEC
to register certain shares of Common Stock issuable upon conversion of the
Series C Preferred Stock, shares of Common Stock held by certain selling
stockholders named in the registration statement and shares of Common Stock
issuable upon the exercise of certain options and warrants. On May 23, 1997 the
registration statement was declared effective by the SEC.
12
<PAGE>
THE NATIONAL REGISTRY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - (CONTINUED)
On May 24, 1994, the Company, Blue Cross Blue Shield of New Jersey, Inc.
("BCBSNJ") and a wholly owned subsidiary of BCBSNJ entered into that certain
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 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 October 31, 1997, the Company and BCBSNJ have each loaned
$60,000 to BIOMETRX to fund preliminary organizational and development
activities. As of October 31, 1997, BIOMETRX has not commenced operations. 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.
Management believes that the adequacy of its cash resources will be
dependent on its ability to generate additional revenue and to obtain additional
working capital prior to the end of 1997. There can be no assurance that the
Company will achieve significant sales of its products or services during the
remainder of 1997 or obtain additional working capital. The Company expended net
cash at a rate of approximately $6.1 million during the nine months ended
September 30, 1997. The quarterly net cash expenditure rates were $2.3 million,
$2.3 million and $1.5 million for the first, second and third quarters of 1997
respectively. During October 1997, the Company expended net cash at a rate of
approximately $475,000 including capital expenditures. This amount was offset by
a prepayment of approximately $200,000 received from the State of New Jersey for
services the Company is scheduled to provide through June 1998 under an
existing contract and collection of two large accounts receivable balances
(approximately $220,000). While the Company does not believe it to be the case,
it is possible that the implementation of the cost reduction program may have a
negative impact on sales. During the fourth quarter of 1997, the Company is
committed to a $250,000 payment related to its licensing agreement with Cogent.
The Company believes that its existing working capital, together with
anticipated cash flows from sales, the implementation of the Company's operating
expense reduction plan and the reduction of capital expenditures will be
sufficient to meet its expected working capital needs through the remainder of
1997. However, absent a significant increase in sales, which itself would likely
require a significant increase in working capital, the Company will require
significant additional funds by the early part of 1998 to continue its
operations. The Company is reviewing the options available to it to obtain
additional financing. These options include, but are not limited to, the sale
and issuance of stock, the sale and issuance of debt, and entering into an
additional strategic relationship or relationships to either obtain the needed
funding or to create what the Company believes would be a better opportunity to
obtain such funds. 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 or securities that are convertible into Common Stock, which would
substantially increase the number of shares of Common Stock outstanding on a
fully-diluted basis. However, there is a significant likelihood that additional
funding or strategic relationships will not be available on terms acceptable to
the Company, if at all. The failure to obtain such additional funds would 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 generate
significant sales of its products or services, or, if the Company is able to
consummate significant sales, that any such sales would be profitable.
13
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On February 13, 1997, International Interest Group ("IIG") filed a
complaint against the Company in Los Angeles Superior Court. The complaint
asserts claims for breach of contract, quantum meruit, unjust enrichment, breach
of the implied covenant of good faith and fair dealing and fraud and seeks an
accounting, specific performance, injunctive and declaratory relief and damages
of an unspecified amount. The damages are alleged to be in excess of $1,000,000.
IIG asserts the claims in connection with a letter agreement pursuant to which
it allegedly agreed to assist the Company in locating candidates which would
participate with the Company in developing commercial applications for the
Company's technology and/or provide assistance to develop such technology or to
provide financing. IIG asserts, among other things, that it located such a
candidate and that it is due certain compensation in accordance with the letter
agreement. On March 17, 1997, the Company filed a Motion for Stay or Dismissal
of the Suit and a Motion to Compel Arbitration. These Motions were denied by the
Los Angeles Superior Court. Trial has been set for January 14, 1998.
On May 12, 1997, IIG filed a First Amended Complaint that added Key Tronic
Corporation as a defendant. Key Tronic has notified the Company that it has not
yet been served with the Suit. On September 24, 1997, the Company filed a First
Amended Cross-Complaint against IIG. The causes of action alleged in the First
Amended Cross-Complaint include fraud, negligent misrepresentation, interference
with business interests, libel and breach of the implied covenant of good faith
and fair dealing. The First Amended Cross-Complaint seeks declaratory relief and
demands damages in an amount to be proved at trial. The Company believes it has
meritorious defenses to the asserted claims and intends to vigorously defend
itself.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
14
<PAGE>
THE NATIONAL REGISTRY INC.
PART II - OTHER INFORMATION (CONTINUED)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on July 25, 1997 (the
"Annual Meeting") the stockholders of the Company approved the following
proposals:
PROPOSAL 1. ELECTION OF DIRECTORS
The following persons were elected as directors of the Company at the
Annual Meeting to hold office for a term of one year or until their successors
have been duly elected and qualified:
<TABLE>
<CAPTION>
NAME VOTES FOR VOTES AGAINST VOTES WITHHELD BROKER NON-VOTES
- ---- --------- ------------- -------------- ----------------
<S> <C> <C> <C> <C>
J. Anthony Forstmann 24,468,504 0 4,107,632 0
John L. Gustafson 24,468,504 0 4,107,632 0
W. Lee Shevel 24,468,004 0 4,108,132 0
Frank M. Devine 24,468,404 0 4,107,732 0
Donald C. Klosterman 24,468,404 0 4,107,732 0
Don M. Lyle 24,467,904 0 4,108,232 0
Jed B. Trosper 24,468,404 0 4,107,732 0
</TABLE>
PROPOSAL 2. AMENDMENT TO 1992 STOCK INCENTIVE PLAN
The proposed amendment to the Company's 1992 Stock Incentive Plan to
increase from 3,700,000 to 4,700,000 the number of shares of Common Stock
authorized for issuance thereunder was approved with 23,238,558 for the
proposal, 5,111,855 against the proposal, 225,723 votes abstaining and 0 broker
non-votes.
PROPOSAL 3. APPOINTMENT OF INDEPENDENT AUDITORS
The appointment by the Board of Directors of the Company of Ernst & Young,
LLP as the Company's independent auditors for the fiscal year ending December
31, 1997 was ratified with 28,497,950 for the proposal, 53,300 against the
proposal, 74,886 votes abstaining and 0 broker non-votes.
15
<PAGE>
THE NATIONAL REGISTRY INC.
PART II - OTHER INFORMATION (CONTINUED)
ITEM 5. OTHER INFORMATION
On September 8, 1997 W. Lee Shevel resigned from the Board of Directors of
the Company. On September 8, 1997, the Board of Directors of the Company elected
Francis R. Santangelo as a director of the Company to fill such vacancy.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
EXHIBIT
NUMBER
------
11 Computation of Earnings Per Share
27 Financial Data Schedule (Electronic filing only)
(B) REPORTS ON FORM 8-K
None
16
<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.
DATE: NOVEMBER 7, 1997 BY: /s/ DAVID E. BROGAN
--------------------------
David E. Brogan
Treasurer and Controller
(duly authorized Officer and
principal financial officer)
17
<PAGE>
EXHIBIT INDEX
EXHIBIT 11 - Computation of Earnings per Share
EXHIBIT 27 - Financial Data Schedule (Electronic Filing Only)
<TABLE>
<CAPTION>
EXHIBIT 11
THE NATIONAL REGISTRY INC.
CALCULATION OF LOSS PER SHARE
(In thousands except per share amounts)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
PRIMARY AND FULLY DILUTED 1997 1996 1997 1996
LOSS PER SHARE: (1) -------- -------- -------- --------
<S> <C> <C> <C> <C>
Weighted average shares
outstanding of Common Stock 35,152 28,436 34,767 26,014
Net loss $ (1,775) $ (1,890) $ (5,548) $ (4,985)
-------- -------- -------- --------
Preferred Stock dividend 980 -- 1,470 1,412
Net loss attributable to
Common Shareholders (2,775) (1,890) (7,108) (6,397)
Net loss per share $ (0.08) $ (0.07) $ (0.20) $ (0.25)
======== ======== ======== ========
<FN>
- ----------
(1) Net loss per common share was compiled 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, convertible
Series C Preferred stock, stock options and warrants are not included in this
calculation due to their anti-dilutive effect.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1205
<SECURITIES> 0
<RECEIVABLES> 755
<ALLOWANCES> 97
<INVENTORY> 355
<CURRENT-ASSETS> 2507
<PP&E> 3411
<DEPRECIATION> 2244
<TOTAL-ASSETS> 3806
<CURRENT-LIABILITIES> 1105
<BONDS> 0
4
0
<COMMON> 360
<OTHER-SE> 2337
<TOTAL-LIABILITY-AND-EQUITY> 3806
<SALES> 1184
<TOTAL-REVENUES> 1184
<CGS> 415
<TOTAL-COSTS> 415
<OTHER-EXPENSES> 6474
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (157)
<INCOME-PRETAX> (5548)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5548)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5548)
<EPS-PRIMARY> (0.20)
<EPS-DILUTED> (0.20)
</TABLE>
