UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D)
OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of Earliest Event Report): MARCH 17, 1997
THE NATIONAL REGISTRY INC.
-----------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
DELAWARE
----------------------------------------------
(State or Other Jurisdiction of Incorporation)
0-20270 95-4346070
------------------------ ---------------------
(Commission File Number) (I.R.S. Employer
Identification Number)
2502 ROCKY POINT DRIVE
TAMPA, FLORIDA 33607
-------------------------------------- ---------
(Address of Principal Executive Offices) (Zip Code)
(813) 636-0099
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
<PAGE>
ITEM 1. CHANGE IN CONTROL OF REGISTRANT
Not applicable
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
Not applicable.
ITEM 3. BANKRUPTCY OR RECEIVERSHIP
Not applicable.
ITEM 4. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT
Not applicable.
ITEM 5. OTHER EVENTS
The attached exhibits are incorporated by reference herein, and
the description set forth below is qualified in its entirety by
reference to such exhibits.
On March 17, 1997, The National Registry, Inc. issued a press
release announcing the results of its operations for the year
ended December 31, 1996.
ITEM 6. RESIGNATION OF REGISTRANT'S DIRECTORS
Not applicable.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Not applicable.
(b) Not applicable.
(c) Exhibits
The exhibits listed on the Exhibit Index on page 4 are filed as
part of this Report.
ITEM 8. CHANGE IN FISCAL YEAR
Not applicable.
2
<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 hereunto duly authorized.
THE NATIONAL REGISTRY INC.
By: /s/ JOHN L. GUSTAFSON
--------------------------
Name: John L. Gustafson
Title: President and Chief Executive
Officer
Date: March 17, 1997
3
<PAGE>
EXHIBIT INDEX
EXHIBIT PAGE NO.
- ------- -------
99.1 Press release dated March 17, 1997. 5
99.2 Financial Statements of The National Registry Inc. 6
for the years ended December 31, 1996, 1995 and 1994.
4
EXHIBIT 99.1
3/17/97 PRESS RELEASE - 1996 FINANCIALS
NRI ANNOUNCES 1996 RESULTS OF OPERATIONS
TAMPA, FL - MARCH 17, 1997 - The National Registry Inc. (NRI) reported
today that it had revenues of $2.31 million for the fiscal year ended December
31, 1996 and a net loss from operations of $7.34 million ($0.26 per share),
compared to revenues of $401,000 and a net loss of $5.07 million ($0.22 per
share) in 1995. The loss for 1996 primarily reflects costs associated with the
product development, launch and market development of the Company's line of new
NRIdentity /Registered Trademark/ Personal Authentication finger imaging
scanners and software products. At fiscal year end, on a pro forma basis after
giving effect to the Company's recently completed equity private placement, cash
and cash equivalents were $7.5 million.
"In 1996 NRI launched the industry's first affordable biometric personal
authentication scanners employing finger imaging technology for commercial use,"
said John L. Gustafson, President and Chief Executive Officer of NRI. "We are
now shipping NRIdentity Personal Authentication Scanners and Software to a
variety of customers for use in both commercial and government applications."
NRIdentity Scanners are manufactured by NRI's strategic partner, Key Tronic
Corporation, the U.S. leader in the design and manufacture of computer input
peripheral devices.
During 1996 NRI launched its NRIdentity Personal Authentication Scanners in
two configurations: NRIdentity Desktop Scanner and NRIdentity Keyboard Scanner.
Additionally, the Company announced its Secure Authentication Facility for
Microsoft Windows NT /Registered Trademark/, believed to be the industry's first
client server biometric authentication product for the Windows NT environment,
and introduced its Secure Screen Saver, a computer screen saver activated by
finger imaging.
The Company initiated pilot programs employing NRIdentity finger imaging
technologies for commercial customers including Sarasota Memorial Hospital and
Mayo Clinic Jacksonville. Through its relationships with Real Time Data
Management Services, Inc., NRI is providing finger imaging technology for Purdue
Employees Federal Credit Union's TERATouch unmanned kiosk program. The Company
initiated contracts for personal identification systems with the State of
Connecticut Department of Social Services, the Commonwealth of Massachusetts
Department of Transitional Assistance and provided ongoing systems services and
support to the State of New Jersey and to Suffolk and Nassau Counties in New
York.
The National Registry Inc., based in Tampa, Florida, brings The Power of
Positive Identification /Registered Trademark/ to business and government. The
Company provides cost-effective finger imaging technology to verify individual
identity, to protect business and personal information and to replace or enhance
passwords and PINs to safeguard and simplify access to electronic systems and
enable new on-line services for customers. NRI is a leading independent supplier
of finger image-based personal identification systems for use by state
governments. NRI stock is traded on Nasdaq (symbol NRID). Further information is
available through NRI's World Wide Web Site: HTTP://WWW.NRID.COM.
EXHIBIT 99.2
Financial Statements
The National Registry, Inc.
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
WITH REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
<PAGE>
The National Registry, Inc.
Financial Statements
Years ended December 31, 1996, 1995 and 1994
CONTENTS
Report of Independent Certified Public Accountants...........................1
Audited Financial Statements
Balance Sheets...............................................................2
Statements of Operations.....................................................4
Statements of Stockholders' Equity (Deficit).................................5
Statements of Cash Flows.....................................................8
Notes to Financial Statements................................................9
<PAGE>
Report of Independent Certified Public Accountants
Stockholders and Board of Directors
The National Registry, Inc.
We have audited the accompanying balance sheets of The National Registry, Inc.
as of December 31, 1996 and 1995, and the related statements of operations,
stockholders' equity (deficit), and cash flows for each of the three years in
the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The National Registry, Inc. at
December 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996 in conformity
with generally accepted accounting principles.
Ernst & Young LLP
Tampa, Florida
March 4, 1997
1
<PAGE>
THE NATIONAL REGISTRY, INC.
BALANCE SHEETS
DECEMBER 31
1996 1995
------ ------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents $ 914 $ 178
Receivables:
Trade 362 --
Other 98 22
Note--related party -- 60
------ ------
460 82
Inventory -- 143
Prepaid expenses 199 182
Deferred charges 6 159
Other 23 11
------ ------
Total current assets 1,602 755
Equipment:
Computer equipment 2,568 1,848
Office equipment and other 381 215
------ ------
2,949 2,063
Less accumulated depreciation (1,824) (1,323)
------ ------
1,125 740
Investment 105 105
------ ------
Total assets $2,832 $1,600
====== ======
2
<PAGE>
THE NATIONAL REGISTRY, INC.
BALANCE SHEETS (CONTINUED)
DECEMBER 31
1996 1995
-------- --------
(IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable $ 368 $ 220
Accrued compensation 346 13
Other accrued expenses 367 226
Accrued legal and professional fees 267 51
-------- --------
Total current liabilities 1,348 510
Commitments and contingencies
STOCKHOLDERS' EQUITY Common stock, $.01 par value:
Authorized--75,000,000 shares
Issued and outstanding--34,401,005 and 24,244,253
shares in 1996 and 1995 344 242
Preferred stock, $.01 par value convertible:
Authorized--1,000,000 shares
Issued and outstanding--100,000 shares in 1996
and 1995 (liquidation preference of $100 per share) 1 1
Capital in excess of par value 34,301 26,475
Accumulated deficit (33,019) (25,376)
Unamortized deferred compensation (143) (252)
-------- --------
Total stockholders' equity 1,484 1,090
-------- --------
Total liabilities and stockholders' equity $ 2,832 $ 1,600
======== ========
SEE ACCOMPANYING NOTES.
3
<PAGE>
THE NATIONAL REGISTRY, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31
1996 1995 1994
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
Revenue $ 2,305 $ 401 $ --
Cost of revenue 1,292 274 --
-------- -------- --------
Gross profit (loss) 1,013 (127) --
Operating expenses:
Selling and marketing 3,445 1,622 1,431
Product development 2,388 2,056 3,114
General and administrative 2,697 1,601 2,564
-------- -------- --------
Total operating expenses 8,530 5,279 7,109
Other income:
Interest income 177 82 103
-------- -------- --------
Net loss $ (7,340) $ (5,070) $ (7,006)
======== ======== ========
Net loss per common share $ (0.26) $ (0.22) $ (0.37)
======== ======== ========
Weighted average number of shares
outstanding 28,077 23,238 19,093
======== ======== ========
SEE ACCOMPANYING NOTES.
4
<PAGE>
<TABLE>
<CAPTION>
THE NATIONAL REGISTRY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
CAPITAL UNAMORTIZED
COMMON STOCK PREFERRED STOCK IN EXCESS ACCUMULATED DEFERRED
SHARES AMOUNT SHARES DEFICIT OF PAR DEFICIT COMPENSATION TOTAL
------- ------ ------ ------- --------- ----------- ------------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 18,624 $186 100 $1 $20,729 $(13,300) $(1,170) $6,446
Issuance of common
stock, net of offering
costs, on August 5, 377 4 -- -- 747 -- -- 751
1994 at $2.00/share
Cancellation of
compensatory stock -- -- -- -- (784) -- 370 (414)
options
Stock gifted by -- -- -- -- 195 -- -- 195
principal stockholder
Expense related to stock
option plans -- -- -- -- -- -- 563 563
Issuance of common stock
upon exercise of stock
options at $2.25/share 8 -- -- -- 16 -- -- 16
Issuance of common stock
upon exercise of stock
options at $.01/share 450 4 -- -- -- -- -- 4
Issuance of common stock
upon exercise of 150 2 -- -- 73 -- -- 75
warrants at $.50/share
Issuance of common stock
as compensation -- -- -- -- 183 -- -- 183
Issuance of common stock
upon exercise of stock
options at $.00/share 155 2 -- -- 613 -- -- 615
Net loss -- -- -- -- -- (7,006) -- (7006)
------ ---- --- -- ------- -------- ------- ------
Balance at December 31, 1994 19,763 $198 100 $1 $21,772 (20,306) (237) 1,428
====== ==== === == ======= ======== ======= ======
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
THE NATIONAL REGISTRY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
CAPITAL UNAMORTIZED
COMMON STOCK PREFERRED STOCK IN EXCESS ACCUMULATED DEFERRED
SHARES AMOUNT SHARES AMOUNT OF PAR DEFICIT 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 150 1 -- 1 (1) -- -- --
at no cost
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) --
Repricing of compensatory
stock options -- -- -- -- 74 -- (74) --
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>
6
<PAGE>
<TABLE>
<CAPTION>
THE NATIONAL REGISTRY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
CAPITAL UNAMORTIZED
COMMON STOCK PREFERRED STOCK IN EXCESS ACCUMULATED DEFERRED
SHARES AMOUNT SHARES AMOUNT OF PAR DEFICIT COMPENSATION TOTAL
------- ------ ------- ------ --------- ----------- ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 24,244 $242 100 $1 $26,475 $(25,376) $(252) $ 1,090
Issuance of Series B
preferred stock, net of
offering costs, at -- -- 1 -- 7,280 -- -- 7,280
$10,000 per share
Dividend on Series B
preferred stock at 8% -- -- -- -- 303 (303) -- --
Conversion of Series B
preferred stock to
common stock at various 9,927 100 (1) -- (100) -- -- --
exchange rates
Expense related to stock
option plans -- -- -- -- -- -- 109 109
Issuance of common stock
upon exercise of stock
options at $1.50 per 230 2 -- -- 343 -- -- 345
share
Net loss -- -- -- -- -- (7,340) -- (7,340)
------- ---- --- -- ------- -------- ----- --------
Balance at December 31, 1996 34,401 $344 100 $1 $34,301 $(33,019) $(143) $ 1,484
======= ==== === == ======= ======== ===== ========
</TABLE>
SEE ACCOMPANYING NOTES.
7
<PAGE>
THE NATIONAL REGISTRY, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
1996 1995 1994
---------------------------------
(IN THOUSANDS)
CASH USED IN OPERATING ACTIVITIES
Net loss $(7,340) $(5,070) $(7,006)
Adjustments to reconcile net loss to net
cash used in operating activities:
Compensation applicable to stock option 109 306 764
grants
Compensation applicable to stock gift
by principal stockholder -- -- 195
Compensation applicable to Phoenix -- -- 183
stock grant
Depreciation 536 525 647
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Receivables (378) (22) (60)
Inventory 143 (143) 32
Prepaid expense (17) (29) 22
Deferred charges 153 (159) --
Other assets (12) 20 18
Increase (decrease) in liabilities:
Accounts payable 148 151 87
Accrued expenses 690 86 --
------- ------- -------
Net cash used in operating activities (5,968) (4,335) (5,118)
CASH USED IN INVESTING ACTIVITIES
Purchase of equipment (921) (453) (475)
Increase in investments -- (105) --
------- ------- -------
Net cash used in investing activities (921) (558) (475)
CASH PROVIDED BY FINANCING ACTIVITIES
Proceeds from issuance of preferred stock 7,280 -- --
Proceeds from issuance of common stock 345 4,426 846
------- ------- -------
Net cash provided by financing activities 7,625 4,426 846
------- ------- -------
Net increase (decrease) in cash 736 (467) (4,747)
Cash and cash equivalents at beginning of 178 645 5,392
period
------- ------- -------
Cash and cash equivalents at end of period $ 914 $ 178 $ 645
======= ======= =======
8
<PAGE>
SEE ACCOMPANYING NOTES.
9
<PAGE>
THE NATIONAL REGISTRY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. THE COMPANY
Prior to 1996, the Company was a development stage company. As a result of the
operating revenues generated in 1996, management no longer considers the Company
to be a development stage company. The Company's 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 nonbiometric methods which
currently rely upon cards, keys, passwords, or personal information to identify
an individual. These nonbiometric identifiers can be lost, stolen, duplicated,
transferred or discovered by unauthorized persons.
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 factors that may impact the Company's operations beyond
1996.
With the proceeds from the sale of preferred stock on February 6, 1997 (see Note
9) the Company believes it has sufficient cash to continue its operations
through early to mid 1998. The Company has prepared an analysis of its
anticipated cash flows for 1997 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION AND DEFERRED CHARGES
Operating revenue is derived from the lease of company installed equipment and
software as well as ongoing maintenance of the equipment and software. 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. The cost of the
10
<PAGE>
THE NATIONAL REGISTRY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 4).
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.
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 $536,000 in 1996, $525,000 in 1995 and $647,000 in
1994.
11
<PAGE>
THE NATIONAL REGISTRY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
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.
FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash equivalents, accounts
receivable, notes receivable, investment and accounts payable. The fair value of
these instruments approximates their carrying value.
RECLASSIFICATIONS
Certain amounts in the prior year financial statements have been reclassified to
conform to the 1996 presentation.
12
<PAGE>
THE NATIONAL REGISTRY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. STOCK OPTIONS
The Company has an employee stock incentive plan (the SIP) for officers,
directors and key employees under which 3,700,000 shares were reserved for
issuance as of December 31, 1996. In addition, the Company has granted, outside
of the SIP, options to purchase an aggregate of 301,000 shares to certain
employees. Options currently granted by the Company generally vest over a three
to five-year period.
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 employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION, requires use of option valuation models
that were not developed for use in valuing employee stock options. Under APB 25,
if the exercise price of the Company's employee stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized.
Certain previously granted options had exercise prices that were less than the
market price of the underlying stock and the Company has recorded compensation
expense for these options. 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 $109,000, $325,000 and $764,000 as
compensation expense in 1996, 1995 and 1994, respectively, relating to
compensatory options.
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, the Company recorded a reduction in
previously expensed compensation of $19,000 and reduced unamortized deferred
compensation by $106,000. There was no impact in 1996 or 1994.
Pro forma information regarding net income and earnings per share as required by
Statement 123 has been determined as if the Company has accounted for its
employee stock options granted subsequent to December 31, 1994 under the fair
value method of that Statement. The fair value for these options was estimated
at the date of grant using a Black-Scholes option pricing model
13
<PAGE>
THE NATIONAL REGISTRY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. STOCK OPTIONS (CONTINUED)
with the following weighted-average assumptions for 1995 and 1996, respectively:
risk-free interest rates of 6% and 6.5%; no dividends; volatility factors of the
expected market price of the Company's common stock of 1.036 and 1.098 and a
weighted-average expected life of the option of 4.5 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
In connection with various successful efforts to raise capital, the Company
granted 300,000 and 2,500,000 options to various investment bankers in 1996 and
1995, respectively. As these options were granted to non-employees and are
considered an additional offering cost, they have been excluded from the pro
forma net loss and weighted average fair value calculations below.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows
1995 1996
-------- --------
(IN THOUSANDS)
Pro forma net loss $(5,769) $(7,879)
Pro forma loss per share $(.25) $(.28)
14
<PAGE>
<TABLE>
<CAPTION>
THE NATIONAL REGISTRY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. STOCK OPTIONS (CONTINUED)
A summary of the Company's stock option activity, and related information for
the years ended December 31 follows:
1994 1995 1996
--------------------------------------------------------------------------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
OPTIONS AVERAGE OPTIONS AVERAGE OPTIONS AVERAGE
(000) EXERCISE PRICE (000) EXERCISE PRICE (000) EXERCISE PRICE
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding--beginning of 4,406 $2.04 2,646 $2.44 4,324 $1.48
year
Granted 150 1.50 3,719 1.66 791 1.11
Exercised (613) 1.04 (330) 1.39 (230) 1.50
Canceled/expired (1,297) 2.46 (1,711) 2.40 (7) 2.25
------ ------ -----
Outstanding-end of year 2,646 $2.44 4,324 $1.48 4,876 $1.42
====== ====== =====
Exercisable at end of year 1,497 $2.40 2,941 $1.49 3,274 $2.14
====== ====== =====
Weighted-average fair
value of options N/A $1.59 $.87
granted during the
year
</TABLE>
Exercise prices for options outstanding as of December 31, 1996 ranged from $.01
to $3.75. The weighted-average remaining contractual life of those options is
eight years.
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 during 1995. The vesting schedules of such stock options remained
unchanged.
On March 14, 1995, in connection with RMS Limited Partnership's (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.
15
<PAGE>
THE NATIONAL REGISTRY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. TECHNOLOGY LICENSE
The Company maintains 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 grants the
Company exclusive license to all commercial applications of the Software
Licensor's finger image identification technology and nonexclusive rights for
most governmental applications, subject to certain rights of early termination
until October 2009. Pursuant to the License Agreement royalties are generally
based on revenues of the Company, subject to a minimum annual royalty payment of
$500,000 per year, through October 1, 2009. In order for the Company to maintain
the License Agreement beyond October 1, 1999, the Company will also be obligated
to pay the Software Licensor a fee of $10 million on or before October 1, 1999.
Royalties under this agreement are charged to Selling and Marketing expense and
were $623,000 and $500,000 for 1996 and 1995, respectively.
5. INCOME TAXES
As of December 31, 1996, the Company had net operating loss carryforwards of
approximately $14,483,000 for federal income tax purposes which expire at
various dates through 2011. The difference between the net operating loss
carryforward for federal income tax purposes and the deficit accumulated for
financial reporting 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
60-month period.
These temporary differences and net operating loss carryforwards give rise to a
deferred tax asset of $9,104,000 and $9,411,000 as of December 31, 1996 and
1995, respectively, based on a combined federal and state statutory rate of
37.7%. Due to the uncertainty of achieving taxable income sufficient to realize
the deferred tax asset, a valuation allowance of $9,104,000 and $9,411,000 was
recorded as of December 31, 1996 and 1995, respectively, which fully offset the
deferred tax asset.
If all options currently outstanding were to be exercised, a changed in
ownership would occur which could limit the future deductibility of the net
operating loss carryforwards.
16
<PAGE>
THE NATIONAL REGISTRY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. 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.
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 15.5% 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.
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, 1996, no dividends have been declared for this
preferred stock. Under the preferred stock purchase agreement, the shareholder
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 exercisable 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.
17
<PAGE>
THE NATIONAL REGISTRY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
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.
In connection with various efforts to raise capital, none of which were
consummated, 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.
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 exercisable, 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 exercisable, 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.
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 were convertible at the option of the holder into shares of
common stock, based upon a defined conversion formula. Until conversion, the
Series B preferred stock accreted dividends at a rate of 8% per year. Prior to
conversion, the Company accreted dividends of $303,000. As of December 31, 1996,
all holders of Series B preferred stock had converted their shares into an
aggregate of 9,927,000 shares of the Company's common stock.
18
<PAGE>
THE NATIONAL REGISTRY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
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 exercisable at
any time and expire on January 29, 2001. The Company has also agreed to certain
registration rights with respect to such warrants.
7. COMMITMENTS AND CONTINGENCIES
The Company leases office space under various non cancelable operating leases
and is committed under a technology license agreement for certain royalty
payments (see Note 4). Future minimum payments under these commitments are as
follows:
YEARS ENDING DECEMBER 31
------------ -----------
1997 $ 641,000
1998 629,000
1999 10,629,000
2000 532,000
2001 500,000
-----------
$12,931,000
===========
Rent and lease expense was $222,000, $85,000 and $120,000 for 1996, 1995 and
1994, respectively.
8. 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 1996, 1995 or 1994.
19
<PAGE>
THE NATIONAL REGISTRY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. SUBSEQUENT EVENTS
On February 6, 1997, The National Registry, Inc. (the "Company") completed a new
financing pursuant to which two accredited investment funds purchased from the
Company an aggregate of 350,000 shares of Series C Preferred Stock, $.01 par
value per share (the "Series C Preferred Stock"), for a gross cash purchase
price of $7 million before commissions and expenses. Shares of the Series C
Preferred Stock are convertible at the option of the holder into shares of the
Company's common stock, $.01 par value per share (the "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. The Series C Preferred Stock is
convertible, as to one-third of such shares, beginning 121 days after the
closing date, as to an additional one-third of such shares, beginning 151 days
after the closing date and, as to the remaining shares, beginning 181 days after
the closing date. All shares of Series C Preferred Stock issued and outstanding
as of February 4, 2000 will automatically convert into shares of Common Stock.
The Company may redeem the Series C Preferred Stock at any time based on a
formula relating to the then applicable conversion price or under certain other
circumstances. In addition, as part of such transaction, the Company issued to
such accredited investment funds warrants to purchase, within five years of the
date of closing, 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 Company
has agreed to file a registration statement for the underlying Common Stock on
or prior to March 17, 1997 and to use its reasonable best efforts to cause such
registration statement to become effective by June 5, 1997.
20
