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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, 1998
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 INCORPORATION (I.R.S. EMPLOYER
OR ORGANIZATION.) IDENTIFICATION NO.)
2502 ROCKY POINT DRIVE, TAMPA, FLORIDA 33607
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
(813) 636-0099
(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 6,954,465 SHARES OF OUTSTANDING COMMON STOCK OF THE REGISTRANT
AS OF NOVEMBER 9, 1998.
TOTAL NUMBER OF PAGES: 19 EXHIBIT INDEX BEGINS ON PAGE 18
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PART 1 - FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
THE NATIONAL REGISTRY INC.
CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1998 1997
(UNAUDITED) (AUDITED)
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 88 $ 298
Accounts receivable - net 947 472
Inventory 116 362
Prepaid expenses 249 272
Other 17 17
----------- -----------
Total current assets 1,417 1,421
Furniture and equipment, net 634 1,052
Investments 306 105
----------- -----------
$ 2,357 $ 2,578
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 486 $ 677
Accrued expenses 301 956
Deferred revenue 478 174
----------- -----------
Total current liabilities 1,265 1,807
STOCKHOLDERS' EQUITY
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, 1998 and December 31, 1997 1 1
Series C - Liquidation preference $20 per
share, 230,000 shares issued and outstanding
as of September 30, 1998 and 259,750 shares
issued and outstanding as of December 31,
1997, respectively 2 3
Common stock, $.01 par value
Authorized - 25,000,000 and 75,000,000 shares
as of September 30, 1998 and December 31, 1997,
respectively
Issued and outstanding -
6,954,462 and 6,355,776 shares as of September
30, 1998 and December 31, 1997, respectively 69 64
Capital in excess of par value 45,107 44,378
Accumulated deficit (44,087) (43,675)
----------- -----------
1,092 771
----------- -----------
$ 2,357 $ 2,578
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</TABLE>
SEE ACCOMPANYING NOTES
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THE NATIONAL REGISTRY INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1998 1997 1998 1997
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Post contract services revenue $ 126 $ 127 $ 381 $ 381
Net product and service revenue 311 389 4,003 803
------------- ------------ ------------ -------------
Total revenue 437 516 4,384 1,184
Cost of products and services sold 248 234 792 415
------------- ------------ ------------ -------------
Gross profit 189 282 3,592 769
Operating expenses:
Sales and marketing 599 641 1,195 1,918
Royalties 125 127 375 395
Product development 291 483 973 1,941
General and administrative 130 831 1,499 2,210
------------- ------------ ------------ -------------
Total operating expenses 1,145 2,082 4,042 6,464
Other income 4 25 256 147
------------- ------------ ------------ -------------
Net income (loss) (952) (1,775) (194) (5,548)
Preferred stock dividend 69 980 218 1,470
------------- ------------ ------------ -------------
Net income (loss) attributable to
common stockholders $ (1,021) $ (2,755) $ (412) $ (7,018)
============= ============ ============ =============
Basic and diluted earnings (loss)
per share $ (0.15) $ (0.47) $ (0.06) $ (1.21)
Weighted average number of
common shares outstanding 6,902 5,859 6,736 5,794
Diluted number of common
shares outstanding 12,934 8,852 12,918 8,834
</TABLE>
SEE ACCOMPANYING NOTES
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THE NATIONAL REGISTRY INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
----------------- -----------------
<S> <C> <C>
Cash used in operating activities:
Net income (loss) $ (194) $ (5,548)
Adjustments to reconcile net loss to net
cash used in operating activities:
Amortization of deferred compensation 18 45
Compensation related to transfer of assets 6 -
Issuance of stock for legal settlement
and services 141 323
Issuance of warrants for legal settlement
and services 335 -
Depreciation 448 420
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (475) (198)
Inventories 246 (355)
Prepaid expenses 23 (57)
Other assets (201) (28)
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities (846) (243)
Deferred revenue 304 (3)
---------------- ----------------
Net cash provided (used) by operating activities (195) (5,644)
Cash used in investing activities:
Purchase of equipment (15) (462)
Cash provided by financing activities:
Issuance of preferred stock -- 6,397
---------------- ----------------
Net (decrease) increase in cash and equivalents (210) 291
Cash and equivalents at beginning of period 298 914
---------------- ----------------
Cash and equivalents at end of period $ 88 $ 1,205
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</TABLE>
SEE ACCOMPANYING NOTES
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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" or "NRI"). In the
opinion of management, all adjustments (consisting only of normally recurring
items) it considers necessary for a fair presentation have been included in the
accompanying financial statements.
The Company's condensed interim financial statements 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, 1997, as filed with the Securities and Exchange Commission
(the "SEC") on April 10, 1998.
All share and per share amounts in the 1997 financial statements, the
notes thereto, and Management's Discussion and Analysis have been reclassified
to reflect the one-for-six reverse stock split (the "Reverse Stock Split") of
the Company's common stock, $0.01 par value per share (the "Common Stock"), that
was effective on May 27, 1998. Certain other amounts in the 1997 financial
statements and the notes thereto have been reclassified to conform with the 1998
presentation of such items.
2. NET INCOME (LOSS) PER COMMON SHARE
For the three and nine month periods ended September 30, 1998 and 1997
basic and diluted loss per share was computed by dividing the net loss
attributable to common stockholders by the weighted average number of common
shares outstanding during these periods. Common stock equivalents were not
included in the calculation of diluted loss per share due to their anti-dilutive
effect.
3. STOCKHOLDERS' EQUITY
On July 1, 1998, the Board of Directors of the Company granted, under
the Company's 1992 Stock Incentive Plan (the "Plan"), options to acquire in the
aggregate up to 643,000 shares of Common Stock at $1.38 per share, the closing
price of the Common Stock on the Nasdaq SmallCap Market (the "SmallCap Market"),
to certain officers and employees of the Company. Such option grants shall vest
one third on each of the first three anniversaries of the grant date. The
Company hired an independent compensation consultant to advise the Board of
Directors in its consideration and determination of whether to grant options and
if so, how many, to each officer and employee of the Company. Such consultant
provided the Company with an analysis of option grant and compensation
information of other public companies so that the Company could determine
whether it would be appropriate to grant additional options to its officers and
employees in an attempt to provide competitive compensation packages.
On May 15, 1998, the Company issued 41,667 shares of Common Stock to
International Interest Group, Inc. ("IIG") as part of the settlement of a
lawsuit filed by IIG on February 13, 1997. Warrants to purchase an additional
75,000 shares of Common Stock at an exercise price of $3.38 per share, subject
to certain adjustments from time to time, were also issued in connection with
the settlement. These warrants are exercisable beginning on November 16, 1998 to
and including May 14, 2002.
On July 7, 1998, the Company filed a registration statement with the
SEC to register the shares of Common Stock issued to IIG and the shares of
Common Stock issuable upon the exercise of the warrants issued to IIG. This
registration statement was declared effective by the SEC on September 11, 1998.
-5-
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THE NATIONAL REGISTRY INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS--UNAUDITED
On February 6, 1997, the Company completed an equity financing (the
"Series C Preferred Stock Private Placement") pursuant to which the Company
issued 350,000 shares of the Company's Series C Preferred Stock for an aggregate
price of $7 million before approximately $613,000 of commissions and expenses.
In connection with the Series C Preferred Stock Private Placement, the Company
also issued warrants to purchase up to 66,667 shares of Common Stock to the
purchasers of the Series C Preferred Stock and warrants to purchase up to 23,333
shares of Common Stock to certain finders. The exercise price of such warrants
is $15.68 per share, subject to certain adjustments from time to time.
4. IMPACT OF RECENTLY ISSUED PRONOUNCEMENTS
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 ("SFAS 130"), REPORTING COMPREHENSIVE INCOME,
issued by the Financial Accounting Standards Board. SFAS 130 establishes new
rules for the reporting and display of comprehensive income and its components.
Adoption of this Statement has not had, and is not expected to have, a material
impact on the Company's net income or stockholders' equity.
As of January 1, 1998, the Company adopted Statement of Position 97-2
("SOP 97-2") SOFTWARE REVENUE RECOGNITION, issued by the American Institute of
Certified Public Accountants. SOP 97-2 changes the requirements for revenue
recognition relating to software sales. Adoption of this Statement has not had,
and is not expected to have, a material impact on the Company's net income or
stockholders' equity.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FACTORS THAT MAY AFFECT FUTURE RESULTS
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. For a discussion of certain risks
associated with the Company and its operations see MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - FACTORS THAT MAY
AFFECT FUTURE RESULTS included in this quarterly report and in other reports,
proxy and informational statements and other information of the Company filed
with the SEC.
RECENT DEVELOPMENTS
NASDAQ - On November 10, 1998, the Company received a letter from the Nasdaq
Stock Market, Inc. ("Nasdaq") notifying the Company that the Common Stock was
not in compliance with the $1.00 minimum bid price requirement set forth in
Nasdaq Marketplace Rule 4310(c)(4) ("Rule 4310(c)(4)"). Pursuant to such letter,
the Company has been provided with ninety calendar days, which expires on
February 10, 1999, to regain compliance with such standard. If the Common Stock
does not regain compliance by maintaining a closing bid price of $1.00 or
greater for at least 10 consecutive trading days, the Common Stock could be
delisted from the SmallCap Market effective with the close of business on
February 10, 1999. The Company estimates that, as of November 10, 1998, it is
not in compliance with Nasdaq Marketplace Rule 4310(c)(2) ("Rule 4310(c)(2)"),
which requires the Company to (i) maintain net tangible assets of $2 million;
(ii) maintain a market capitalization of $35 million; or (iii) have recorded net
income of $500,000 in the most recently completed fiscal year or in two of the
three most recently completed fiscal years.
The Company is evaluating strategies that would bring it back into
compliance with both rules. These strategies include expanding strategic
alliances, creating additional strategic alliances, selling and issuing capital
stock of the Company and selling certain assets of the Company. There is no
assurance that the Company and the Common Stock will be in compliance with Rule
4310(c)(2) or Rule 4310(c)(4) at any time or that the Common Stock will not be
delisted from the SmallCap Market. If the Common Stock was delisted and excluded
from trading on the SmallCap Market, it would adversely affect the prices of
such securities and the ability of holders to sell them. In addition, it could
also adversely affect the Company's ability to raise funds. See "--Liquidity and
Capital Resources--Subsequent to September 30, 1998."
-6-
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THE NATIONAL REGISTRY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - (CONTINUED)
PLAN TO CHANGE COMPANY NAME - On July 7, 1998, the Company announced its
intention to solicit stockholder approval for a formal name change to
SAFLINK(TM) Corporation at a yet to be scheduled stockholders' meeting. The
Company organized a wholly owned subsidiary named SAFLINK(TM) Corporation that
is conducting all of the Company's business activities until the Company submits
the proposed name change to its stockholders.
STRATEGIC ALLIANCE WITH WEBLINK COMMUNICATIONS - On July 7, 1998, the Company
announced that it had signed a letter of intent with WebLink Communications,
Inc. ("Weblink") to form a strategic alliance to develop and market SAFsite(TM),
a cost effective new security solution for the Internet. The Company released
SAFsite(TM) in early October 1998, but has been unable to reach a definitive
agreement with Weblink concerning a strategic alliance and is currently pursuing
other strategies for marketing and distribution of its Internet products.
YEAR 2000 EXPOSURE
The Company is currently working to resolve the potential impact of the
year 2000 ("Y2K") problem on the processing of date-sensitive information by
computerized information systems. The Y2K problem is the result of computer
programs being written using two digits (rather than four) to define the
applicable year. Computer programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than 2000, which could
result in miscalculations or system failures. The Company has not fully
completed its efforts to insure that the Y2K problem will not have a material
adverse impact on the Company's business, condition (financial or otherwise),
results of operations, prospects and cash flows in future periods.
The Company has, to date, determined that (i) all of the software that
it has developed for sale to others is Y2K compliant and (ii) all of the
developers of other software that it has acquired for use in its business have
publicly stated that their products are also Y2K compliant. However, the Company
has not yet determined the impact that a Y2K failure suffered by customers or
other suppliers would have on the Company, but believes such a failure could
have a material adverse impact on the Company's business, condition (financial
or otherwise), results of operations, prospects and cash flows. The Company has
not developed a contingency plan for dealing with any such failures, and is
currently evaluating the necessity of developing such a plan. Based on the
information the Company has developed to date, costs of addressing potential
problems are not currently expected to have a material adverse impact on the
Company's business, condition (financial or otherwise), results of operations,
prospects and cash flows in future periods. The Company plans to devote the
necessary resources to resolve remaining significant Y2K issues in a timely
manner.
A. RESULTS OF OPERATING ACTIVITIES
For the three and nine month periods ended September 30, 1998, the
Company incurred net losses of approximately $952,000 and $194,000,
respectively. This compares to net losses of approximately $1,775,000 and
$5,548,000, respectively, for the comparable periods in 1997. The third quarter
decrease in net loss of approximately $823,000 was primarily due to a reduction
in operating expenses of approximately $937,000, partially offset by a reduction
in gross profit of approximately $93,000. The $5,354,000 decrease in net loss
for the nine months ended September 30, 1998 was primarily due to a gross profit
increase of approximately $2,823,000 coupled with a decrease in operating
expenses of approximately $2,422,000. The decrease in third quarter gross profit
was due to a decrease in revenue of approximately $79,000 coupled with lower
profit margins, while the increase in year-to-date gross profit was primarily
attributable to an increase in revenue from software sales of approximately
$3,200,000. Approximately $147,000 and $807,000 of operating expenses during the
three and nine month periods ended September 30, 1998, respectively, and
approximately $164,000 and $465,000 of operating expenses during the comparable
periods in 1997, were from non-cash items. Such non-cash items included
depreciation, compensation related to
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THE NATIONAL REGISTRY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - (CONTINUED)
warrants that were issued as part of a legal settlement with IIG and finders
fees related to the reseller and prepaid license agreements with XL Vision, Inc.
("XL Vision"), amortization of deferred compensation, and compensation related
to the transfer of certain assets.
REVENUE AND GROSS PROFIT
For the three and nine month periods ended September 30, 1998, the
Company reported total revenues of $437,000 and $4,384,000, respectively,
compared to total revenues of $516,000 and $1,184,000 for the same periods in
1997. The $79,000 decrease in third quarter revenues was primarily due to a
$78,000 reduction in product and service revenue while the $3,200,000 increase
for the nine-month period was primarily due to the sale of prepaid licenses to
XL Vision.
Revenues for the three months ended September 30, 1998 consisted of
approximately $122,000 related to the sale of prepaid licenses for software
products and services to XL Vision, $126,000 of ongoing maintenance revenue from
the states of Connecticut and New Jersey and $189,000 from sales of software,
hardware and services to various other commercial users.
Revenues for the nine months ended September 30, 1998 consisted of
approximately $3,472,000 related to the sale of prepaid licenses for software
products and services to XL Vision, approximately $378,000 from ongoing
maintenance revenue from the states of Connecticut and New Jersey, approximately
$73,000 of one-time revenue from the state of Connecticut, and approximately
$461,000 related to sales of software, hardware and services to various other
commercial users. The Company's contract with New Jersey expired on September
30, 1998, but has been verbally extended through February 28, 1999. The
Company's contract with Connecticut will expire in December 1998 unless the
contract is renewed.
The Company's gross margin percentages for the three and nine month
periods ended September 30, 1998 were 43% and 82%, respectively, compared to 55%
and 65%, for the same periods in 1997. The changes from 1997 to 1998 were
primarily due to a change in product mix which, for the three and nine month
periods ended September 30, 1998, included a lower level and higher level of
software sales, respectively.
OPERATING EXPENSES
Total operating expenses for the three and nine month periods ended
September 30, 1998 decreased approximately $937,000 (45%) and $2,422,000 (37%)
to approximately $1,145,000 and $4,042,000, respectively, from approximately
$2,082,000 and $6,464,000, respectively, for the same periods in 1997. These
decreases were primarily due to the expense reduction plan implemented by the
Company in late 1997, the sale of the Company's healthcare line of business, and
its elimination of expenses outside of its current strategic focus on indirect
sales and marketing of software products. The following table provides a
breakdown of the dollar and percentage changes in operating expenses for the
three and nine month periods ended September 30, 1998 as compared to the same
periods in 1997:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS)
INCREASE (DECREASE) INCREASE (DECREASE)
$ % $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Sales and marketing $ ( 42) ( 7)% $ (723) (38)%
Royalties ( 2) ( 2) ( 20) ( 5)
Product development (192) (40) (968) (50)
General and administrative (701) (84) (711) (32)
========= ========= ========= =========
$ (937) (45)% $ (2,422) (37)%
========= ========= ========= =========
</TABLE>
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THE NATIONAL REGISTRY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - (CONTINUED)
SALES AND MARKETING - The decreases in sales and marketing expenses were
primarily due to decreases in employee expense, travel, professional consulting
services, and advertising expenses. These decreases are due primarily to the
Company's decision to eliminate expenditures in areas identified as being
outside of the Company's current strategic focus on indirect sales and marketing
of commercial software products. As part of such efforts, the Company sold its
healthcare line of business, eliminated a portion of its other sales and
marketing staff and closed certain offices shifting such sales and marketing
efforts to certain of the Company's strategic partners.
The Company has attempted to market its biometric identification and
authentication technology ("I&A") 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 industry and
deterring fraud in government social services programs. While the Company has
received favorable responses from a limited number of commercial customers and
believes that it's new SAFsite(TM) product will meet a demonstrated market need,
there is 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 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, among other things, the lack of
industry standards and acceptance by the commercial market, the cost of hardware
associated with the technology, and the extended period of time potential
customers require for the testing, evaluating and piloting of applications.
The Company expects that sales and marketing expenses will increase if
sales of the Company's products increase.
PRODUCT DEVELOPMENT - The decreases in product development expenses were
primarily due to reductions in employee expense, travel and professional
consulting services related to the elimination of expenditures outside of the
Company's current strategic focus.
The Company's hardware product strategy has historically been to
develop low-cost fingerprint scanners that capture an image of an individual's
fingerprint and convert the resulting image into digital form. However, the
Company has transitioned out of hardware development in order to focus its
resources on software and market development. The Company believes it has
successfully transitioned out of hardware development through its focus on sales
of software products that support alternative lower-cost hardware technology
currently emerging from other suppliers.
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 kits to develop and market a series of packaged
applications that provide biometric authentication for a range of client/server
systems. Software developers' kits have been developed for both workstations and
servers and include biometric processing of face, voice, and finger biometric
identifiers 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
using finger imaging. The software developers' 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 Screen Saver
for Windows 95(TM), the Secure Authentication Facility for Windows NT(TM),
Secure Authentication Facility for Novell NetWare(TM) and the Secure
Authentication Facility for Unicenter(RM) TNG(TM) single sign-on module for
Windows NT(TM). The Company has also developed additional products within the
Secure Authentication Facility product line for Internet applications including
Secure Authentication Facility for Internet Information Server(TM) and its
SAFsite(TM) product, which was introduced in early October 1998.
-9-
<PAGE>
THE NATIONAL REGISTRY INC.
MANAGEMENT'S DISCUSSION AND ANYALYSIS - (CONTINUED)
There is no assurance that the Company has successfully transitioned
out of hardware development and into software development, that alternative
lower-cost hardware technology will be commercially available, that the Company
will be able to develop additional software products, or that the Company will
successfully market its technology. Even if the Company has transitioned out of
hardware development, new hardware technology is available, and the Company
develops additional software products, there is no assurance that the Company
will be able to generate significant sales, or, if the Company is able to
consummate significant sales, that such sales will be profitable.
The Company expects to continue to incur product development costs as
it develops additional products and enhances existing products.
GENERAL AND ADMINISTRATIVE - The decreases in general and administrative
expenses were primarily due to decreases in employee expense, travel, telephone,
and other expenses resulting from the expense reduction plan implemented by the
Company in late 1997, as well as decreases in legal fees of approximately
$143,000 and $224,000 for the three and nine month periods, respectively. Such
decreases were partially offset by increases in insurance and one-time payments
of approximately $168,000 for finder's fees associated with the sale of prepaid
licenses to XL Vision and $167,000 associated with the settlement of the IIG
lawsuit. The Company expects certain general and administrative costs to
increase if sales of the Company's products increase.
B. LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL
Cash and working capital (deficit) as of September 30, 1998
were approximately $88,000 and $152,000, respectively, compared to approximately
$298,000 and ($386,000), respectively, as of December 31, 1997. The decrease in
the Company's cash as of September 30, 1998 compared to December 31, 1997 is
primarily due to the payment of $300,000 to IIG in settlement of a lawsuit and
the reduction of accounts payable and other accrued expenses. The increase in
working capital is primarily due to the increase in accounts receivable
generated by the sale of prepaid licenses to XL Vision during the nine months
ended September 30, 1998. Cash and working capital as of September 30, 1997 were
approximately $1,205,000 and $1,402,000, respectively.
SERIES C PREFERRED STOCK
On February 6, 1997, the Company completed the Series C Preferred Stock
Private Placement pursuant to which two accredited investment funds purchased an
aggregate of 350,000 shares of the Series C Preferred Stock for an aggregate
purchase price of $7 million before approximately $613,000 of commissions and
expenses. The Series C Preferred Stock carries a six percent per annum accretion
which the Company treats as a dividend resulting in a charge to net income and a
credit to capital in excess of par value. The Company recorded accretion of
approximately $69,000 and $218,000 for the three and nine month periods ended
September 30, 1998. The Company did not record any accretion during the three
and nine month periods ended September 30, 1997, but rather recorded $350,000 of
accretion for the period of February 6, 1997 through December 31, 1997 during
the fourth quarter of 1997. The Company also recorded one-time charges of
approximately $980,000 and $1,470,000 during the three and nine month periods
ended September 30, 1997 for the deemed dividend attributable to the recognition
of the market discount that the holders of the Series C Preferred Stock will
receive upon conversion of such securities to Common Stock.
All shares of the Series C Preferred Stock are convertible at the
option of the holder into shares of Common Stock, at a conversion rate equal to
the lesser of (i) $14.25 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 automatically
converted into shares of Common Stock. No
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<PAGE>
THE NATIONAL REGISTRY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - (CONTINUED)
Series C Preferred Stock was converted into Common Stock during the three months
ended September 30, 1998. During the nine months ended September 30, 1998,
29,750 shares of Series C Preferred stock were converted into 556,998 shares of
Common Stock, including 40,173 shares attributable to accrued dividends on such
shares of Series C Preferred Stock. During the three and nine month periods
ended September 30, 1997, 52,500 and 53,750 shares of Series C Preferred Stock
were converted into 204,685 and 207,976 shares of Common Stock, respectively,
including 6,828 and 6,900 shares attributable to accrued dividends on such
converted shares.
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. Any exercise by the Company of its redemption rights,
absent new financing, would adversely impact the Company's liquidity. The shares
of Series C Preferred Stock have no voting rights except as required by law and
have a liquidation preference equal to their stated value of $20 per share plus
accrued and unpaid dividends.
As part of the Series C Preferred Stock Private Placement, the Company
issued to such accredited investment funds, warrants to purchase up to 66,667
shares of Common Stock at an exercise price of $15.68 per share, subject to
certain adjustments from time to time. The warrants expire on February 4, 2002.
In connection with the Series C Preferred Stock Private Placement, the Company
also issued warrants to purchase an aggregate of 23,334 shares of Common Stock
at an exercise price of $15.68 per share, subject to certain adjustments from
time to time, to certain finders. Of such warrants, warrants to purchase up to
11,667 shares of Common Stock are exercisable through February 4, 2000, with the
remaining warrants being exercisable through February 4, 2002.
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. The registration
statement was declared effective by the SEC on May 23, 1997 and the Company
believes that this satisfies its registration requirement with respect to the
Series C Preferred Stock Private Placement.
BLUE CROSS BLUE SHIELD
On May 24, 1994, the Company, Blue Cross Blue Shield of New Jersey,
Inc. ("BCBSNJ") and a wholly owned subsidiary of BCBSNJ entered into a
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 each agreed to loan up to $300,000 to BIOMETRX for working capital
purposes. The Company and BCBSNJ each loaned $60,000 to BIOMETRX to fund
preliminary organizational and development activities. BIOMETRX has not
commenced operations and the Company and BCBSNJ have agreed to dissolve the
corporation. On May 27, 1998, the Company received approximately $57,000 from
BIOMETRX as partial repayment of the loan.
DIVIDENDS
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. The Series C Preferred Stock carries a
dividend of 6% per annum, which is cumulative and is payable, at the option of
the Company (subject to certain conditions) in cash or shares of Common Stock,
quarterly in arrears, but in no event later than the conversion date applicable
to such shares of Series C Preferred Stock. During the three and nine month
periods ended September 30, 1998, the Company issued 33,263 and 40,173 shares of
Common Stock, respectively, as dividends related to the Series C Preferred
Stock.
-11-
<PAGE>
THE NATIONAL REGISTRY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - (CONTINUED)
SUBSEQUENT TO SEPTEMBER 30, 1998
The Company used net cash of approximately $195,000, excluding $15,000
in capital expenditures, during the nine months ended September 30, 1998, and
generated net cash of approximately $9,000, excluding $15,000 in capital
expenditures, during the three months ended September 30, 1998. Cash as of
November 9, 1998 was approximately $115,000. The Company has collected the
remaining $550,000 due from XL Vision pursuant to the May 12, 1998 agreements.
On October 13, 1998 the Company paid Cogent Systems, Inc. ("Cogent")
$125,000 in connection with the licensing agreement between Cogent and the
Company. Under such agreement, the Company is obligated to pay Cogent an
additional $125,000 as a minimum quarterly royalty payment on each of January 1,
April 1, July 1, and October 1, 1999. The Company entered into an agreement to
license speech recognition and speaker verification technologies from Lernout &
Hauspie Speech Products N.V. ("L&H") effective September 30, 1998. The Company
intends to integrate L&H Voice Print speaker verification software into its
entire suite of biometric security software products and developer's tool kits,
and is committed to pay L&H $125,000 as a prepaid licensing fee on December 20,
1998.
The Company believes that its existing working capital, together with
anticipated cash flows from sales from current contracts, continuation of the
Company's operating expense reduction plan and the reduction of capital
expenditures will be insufficient to meet its expected working capital needs
through the remainder of 1998. Absent a significant increase in sales, which
itself may require a significant increase in working capital, the Company will
require significant additional funds during 1998 to continue its operations.
Accordingly, the Company is reviewing the options available to it to obtain
additional financing.
The options the Company is reviewing include, but are not limited to,
the sale and issuance of stock, the sale and issuance of debt, the sale of
certain assets of the Company 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 possible that any such additional infusion of capital or other transaction
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.
There is a significant likelihood that additional funding will not be
available on terms acceptable to the Company, if at all. The Company has had
numerous conversations with potential equity investors. Such potential investors
have expressed concern about the possible number of shares of Common Stock
issuable to the holders of the Series C Preferred Stock. As of November 9, 1998,
such shares of Series C Preferred Stock were convertible into approximately
13,119,400 shares of Common Stock, which would constitute approximately 65.4% of
the shares of Common Stock issued and outstanding assuming the conversion of all
shares of Series C Preferred Stock. The number of shares of Common Stock
issuable upon conversion of the Series C Preferred Stock, however, is subject to
a floating conversion rate. See "--Series C Preferred Stock." Accordingly, the
number of shares of Common Stock issuable upon such conversion may increase, as
well as decrease, depending upon the change in the bid price of the Common Stock
on the SmallCap Market. The Company has had conversations with the holder of the
Series C Preferred Stock about, among other things, limiting the ability to
convert such shares, converting such shares today or other acts which would
possibly facilitate the Company completing such financing. If the Company is
unable to reach an agreement with the holder of the Series C Preferred Stock, as
to which the Company's efforts to date have been unsuccessful, it likely would,
absent material sales agreements, be unable to consummate a necessary financing
transaction. The failure to obtain such additional funds would cause the Company
to curtail or cease operations. Even if such additional funding is obtained,
there is no assurance that the Company will be able to generate significant
sales of its products or services, or,
-12-
<PAGE>
THE NATIONAL REGISTRY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - (CONTINUED)
if the Company is able to consummate significant sales, that any such sales
would be profitable.
C. FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to other information contained in this quarterly report,
the following factors, among others, sometimes have affected, and in the future
could affect the Company's actual results and could cause future results to
differ materially from those in any forward looking statements made by or on
behalf of the Company. Factors that could cause future results to differ from
expectations include, but are not limited to the following: the Company's need
for additional funds, the Company's limited operating history and substantial
accumulated net losses, the SmallCap Market eligibility and maintenance
requirements, the possible delisting of the Company's Common Stock from the
SmallCap Market, control of the Company, technological and market uncertainty,
competition, and the Company's dependence upon software licensors.
NEED FOR ADDITIONAL FUNDS
The Company believes that its existing working capital, together with
anticipated cash flows from sales from current contracts, continuation of the
Company's operating expense reduction plan and the reduction of capital
expenditures will be insufficient to meet its expected working capital needs
through the remainder of 1998. Accordingly, the Company is reviewing the options
available to it to obtain additional financing. There is a significant
likelihood that such additional financing will not be available on terms
acceptable to the Company. It is possible 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. In addition, the potential issuance of a large number of
shares of Common Stock upon conversion of the Series C Preferred Stock
(constituting currently approximately 65.4 percent of the shares of Common Stock
outstanding after such conversion) has lead to difficulties in raising
additional equity.
The Company has been unable to reach an agreement with the holder of
the shares of Series C Preferred Stock that could facilitate obtaining such
needed financing. In addition, if the conversion rate of the Series C Preferred
Stock continues to decline, the Company will require additional authorized
shares of Common Stock in order to meet its conversion obligations and/or to
have shares of Common Stock available to sell for equity investments. In either
case, approval by the stockholders of the Company would be required to increase
the authorized capital of the Company, which approval would be subject to the
proxy rules and procedures, including notice and other time consuming
procedures. The failure to obtain, or delay in obtaining, such additional funds
would cause the Company to curtail or cease operations. Even if such additional
funding is obtained, there is 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.
LIMITED OPERATING HISTORY, SUBSTANTIAL ACCUMULATED NET LOSSES
From its commencement of business in October 1991 through the end of
1997, the Company was principally engaged in organizational, development and
marketing activities. The Company has an accumulated net loss of approximately
$44,087,000 since inception through September 30, 1998, including a net loss of
approximately $194,000 for the nine months ended September 30, 1998. There is no
assurance that the Company will be able to generate significant revenues or any
net income in the future.
NASDAQ SMALLCAP MARKET ELIGIBILITY AND MAINTENANCE REQUIREMENTS; POSSIBLE
DELISTING OF SECURITIES FROM THE NASDAQ SMALLCAP MARKET
On November 10, 1998, the Company received a letter from Nasdaq
notifying the Company that the Common Stock was not in compliance with the $1.00
minimum bid price requirement set forth in Rule 4310(c)(4). Pursuant to such
letter, the Company has been provided with ninety calendar days, which expires
on February 10, 1999, to regain compliance with such standard. If the Common
Stock does not regain compliance by maintaining a closing bid price of $1.00 or
greater for at least 10 consecutive trading days, the Common Stock could be
delisted from the SmallCap Market effective with the close of business on
February 10, 1999. The Company estimates that, as of November 10, 1998, it is
not in compliance with Rule 4310(c)(2), which requires the Company to (i)
maintain net tangible assets of $2
-13-
<PAGE>
THE NATIONAL REGISTRY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - (CONTINUED)
million; (ii) maintain a market capitalization of $35 million; or (iii) have
recorded net income of $500,000 in the most recently completed fiscal year or in
two of the three most recently completed fiscal years. There is no assurance
that the Common Stock will be in compliance with Rule 4310(c)(4) at any time or
that the Common Stock will not be delisted from the SmallCap Market. If the
Common Stock was delisted and excluded from trading on the SmallCap Market, it
would adversely affect the prices of such securities and the ability of holders
to sell them.
Although the Company is reviewing the options available to it to obtain
additional equity or other means to put it into compliance with Rule 4310(c)(2),
there is no assurance that such equity will be available on terms acceptable to
the Company, if at all. Additionally there is no assurance that the Company will
be able to make itself compliant with Rule 4310(c)(2), that the Company will be
in compliance with Rule 4310(c)(2) in the future or that the Common Stock will
not be delisted from the SmallCap Market. If the Common Stock was delisted and
excluded from trading on the SmallCap Market, it would adversely affect the
prices of such securities and the ability of holders thereof to sell them.
CONTROL OF THE COMPANY
As of September 30, 1998, J. Anthony Forstmann and RMS Limited
Partnership, a Nevada limited partnership controlled by Roy M. Speer ("RMS"),
beneficially owned approximately 13.8% and 9.6% of the Common Stock,
respectively. Mr. Forstmann and RMS are parties to a certain stockholders'
voting agreement pursuant to which they agreed to vote certain shares for
directors nominated by the other, and not to vote in favor of certain specified
actions unless mutually agreed to by Mr. Forstmann and RMS. Accordingly, such
persons, acting together, are in a position immediately to exercise significant
control over the general affairs of the Company, to control the vote on any
matters presented to stockholders and direct the business and policies of the
Company.
As of September 30, 1998, Home Shopping Network, Inc. owned 100,000
shares of the Series A Preferred Stock convertible into 1,056,026 shares or
13.2% of the assumed after conversion outstanding shares of Common Stock and
Clearwater Fund IV, L.L.C. owned 230,000 shares of Series C Preferred Stock
convertible into approximately 5,610,800 shares or 44.7% of the assumed after
conversion outstanding shares of Common Stock (which amount is subject to change
based upon the closing bid price of the Common Stock, and had increased to
approximately 13,119,400 or 65.4% of the assumed after conversion outstanding
shares of Common Stock as of November 9, 1998 - see "--Series C Preferred
Stock"). Accordingly, such entities, independently or with one or more of the
other persons or entities set forth above, are in a position upon conversion to
exercise significant control over the general affairs of the Company, to control
the vote on any matters presented to stockholders and to direct the business and
policies of the Company.
TECHNOLOGICAL AND MARKET UNCERTAINTY
The development and marketing of the Company's products and services
may be impeded by various possible problems relating to the development,
production, distribution or marketing of such products and services, which
problems may be beyond the financial and technical abilities of the Company to
solve. Technology employed in I&A is subject to rapid change, and more advanced
or alternate technology employed by competitors, currently or in the future, and
not available to the Company could give such competitors a significant advantage
over the Company. In addition, concerns about unauthorized (including
government) access to private information may impede market acceptance of I&A
systems. Further, there is no assurance that products and services developed by
competitors of the Company will not significantly limit the potential market for
the Company's products and services or render the Company's products and
services obsolete. Finally, there is no assurance that laws, rules or
regulations will not be adopted in such a manner as will materially adversely
affect the Company.
-14-
<PAGE>
THE NATIONAL REGISTRY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - (CONTINUED)
COMPETITION
The Company is attempting to compete in the highly competitive market
for network and Internet security which is dominated by more traditional I&A
techniques (such as cards, keys, passwords and personal information). A number
of other companies also have biometric I&A technology and have sold systems
incorporating such technology in the United States. The Company is aware of
several other companies that produce or are developing other biometric I&A
technologies which may compete with the Licensed Technology (as defined below)
or may be integrated into I&A products and services that are competitive with
those offered by the Company. Such technologies include, among others,
identification by eye retina blood vessel patterns, hand geometry and signature
analysis. The Company's products and services compete with companies that have
substantially greater resources than the Company and are better equipped than
the Company. There is no assurance that the Company will be able to compete
successfully against these companies or technologies.
DEPENDENCE UPON SOFTWARE LICENSORS
The Company has acquired certain rights to biometric I&A software (the
"Licensed Technology") under agreements with software algorithm suppliers
including Cogent Systems, Inc., ITT Industries, Inc., L&H, Veridicom, Inc. and
Visionics Corporation that may be terminated in the event the Company fails to
pay license fees (including minimum specified payments) or commits any other
material breach of any covenant of such agreements.
Under the terms of the license agreement with Cogent (the "Cogent
Agreement"), the Company was granted a worldwide exclusive license, commencing
April 1, 1992 and expiring October 1, 1999, to all commercial applications of
Cogent's finger image identification technology and worldwide non-exclusive
rights to Cogent's finger image identification technology for governmental
applications, other than those relating to law enforcement, with respect to
which no rights were granted to the Company. The expiration of such license
agreement will be extended until October 1, 2009, provided that the Company
makes a $10 million cash payment to Cogent on or prior to October 1, 1999 (the
"Extension Payment"). In addition, the Company is required to make minimum
quarterly royalty payments of $125,000 due January 1, April 1, July 1, and
October 1 of each year during the term of the Cogent Agreement. Although the
Company is not in default of such agreement as of the date hereof, there is no
assurance that such defaults will not occur in the future or that the Company
will make the minimum royalty payments or the Extension Payment.
Regardless of whether the Extension Payment is made, pursuant to the
Cogent Agreement, certain exclusive rights with respect to commercial markets
the Company had not entered as of April 1, 1997, became nonexclusive as of such
date. For commercial markets the Company had not entered as of April 1, 1997,
including any segment thereof, as required under the terms of the Cogent
Agreement, the Company stands to lose its exclusivity in those markets and upon
expiration of the Cogent Agreement (whether as a result of an event of default
or expiration of the license period, if the Company does not make the Extension
Payment on or prior to October 1, 1999 or minimum royalty payments as required),
the Company would lose all of its rights to use Cogent's technology. The loss of
such rights could substantially impair the Company's ability to offer finger
imaging based on one to many matching on unlimited population sizes unless the
Company was able to make arrangements to obtain alternative technology from
another source, as to which there is no assurance.
Although the Company's products can be sold without biometric I&A
technology to which it has licenses, any loss of the Licensed Technology would
substantially impair (if not entirely preclude) the Company's ability to compete
with products including such technology.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
-15-
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
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 10, 1998 BY: /S/ JAMES W. SHEPPERD
-----------------------------
JAMES W. SHEPPERD
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)
-17-
<PAGE>
EXHIBIT INDEX
EXHIBIT 11 - Computation of Earnings per Share
EXHIBIT 27 - Financial Data Schedule (Electronic Filing Only)
EXHIBIT 11
THE NATIONAL REGISTRY INC.
CALCULATION OF BASIC AND DILUTED EARNINGS (LOSS) PER SHARE
(In thousands except per share amounts)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Weighted average shares of
common stock outstanding 6,902 5,859 6,736 5,794
Diluted shares outstanding 12,934 8,852 12,918 8,834
Net income(loss) $ (952) $ (1,775) $ (194) $ (5,548)
Preferred Stock dividend 69 980 218 1,470
---------- ---------- ---------- ----------
Net income(loss) attributable
to common stockholders $ (1,021) $ (2,755) $ (412) $ (7,018)
========== ========== ========== ==========
Basic and diluted
earnings(loss) per share(1) $ (0.15) $ (0.47) $ (0.06) $ (1.21)
========== ========== ========== ==========
</TABLE>
(1) Common stock equivalents, relating to convertible Series A Preferred Stock,
convertible Series C Preferred Stock, stock options and warrants are not
included in the calculation of diluted loss per share for the three and nine
month periods ended September 30, 1998 and 1997 due to their anti-dilutive
effect.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 88
<SECURITIES> 0
<RECEIVABLES> 947
<ALLOWANCES> 29
<INVENTORY> 116
<CURRENT-ASSETS> 1,417
<PP&E> 634
<DEPRECIATION> 2,827
<TOTAL-ASSETS> 2,357
<CURRENT-LIABILITIES> 1,265
<BONDS> 0
3
0
<COMMON> 69
<OTHER-SE> 1,020
<TOTAL-LIABILITY-AND-EQUITY> 2,357
<SALES> 4,384
<TOTAL-REVENUES> 4,384
<CGS> 792
<TOTAL-COSTS> 792
<OTHER-EXPENSES> 4,042
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (194)
<INCOME-TAX> 0
<INCOME-CONTINUING> (194)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (194)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
