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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 JUNE 30, 1998
COMMISSION FILE NUMBER 0-20270
THE NATIONAL REGISTRY INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 95-4346070
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization.) Identification No.)
2502 ROCKY POINT DRIVE, TAMPA, FLORIDA 33607
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(Address of principal executive offices and zip code)
(813) 636-0099
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]
There were 6,921,178 shares of outstanding Common Stock of the registrant
as of August 10, 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
(IN THOUSANDS)
JUNE 30, DECEMBER 31,
ASSETS 1998 1997
(UNAUDITED) (AUDITED)
--------- ---------
CURRENT ASSETS
Cash and cash equivalents $ 94 $ 298
Accounts receivable 1,549 472
Inventory 245 362
Prepaid expenses 274 272
Other 17 17
-------- --------
Total current assets 2,179 1,421
Furniture and equipment, net 764 1,052
Investment 306 105
-------- --------
$ 3,249 $ 2,578
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liablities
Accounts payable $ 497 $ 677
Accrued expenses 415 956
-------- --------
Total current liabilities 912 1,633
Deferred revenue 313 174
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 June 30, 1998 and December 31, 1997 1 1
Series C - Liquidation preference $20 per
share, 250,000 shares issued and outstanding
as of June 30, 1998 and 259,750 shares issued
and outstanding as of December 31, 1997,
respectively 3 3
Common stock, $.01 par value
Authorized - 25,000,000 shares as of June 30,
1998 and 75,000,000 as of December 31, 1997,
respectively
Issued and outstanding -
6,529,021 shares and 6,355,776 shares as of June 30,
1998 and December 31, 1997, respectively 65 64
Capital in excess of par value 45,021 44,378
Accumulated deficit (43,066) (43,675)
-------- --------
2,024 771
-------- --------
$ 3,249 $ 2,578
======== ========
SEE ACCOMPANYING NOTES.
2
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THE NATIONAL REGISTRY INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1998 1997 1998 1997
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Post contract services revenue $ 143 $ 127 $ 255 $ 254
Net product and service revenue 2,457 259 3,692 414
------- ------- ------- -------
Total revenue 2,600 386 3,947 668
Cost of products and services sold 240 100 544 181
------- ------- ------- -------
Gross profit 2,360 286 3,403 487
Operating expenses:
Sales and marketing 279 737 596 1,277
Royalties 125 143 250 268
Product development 363 732 682 1,458
General and administrative 827 847 1,369 1,379
------- ------- ------- -------
Total operating expenses 1,594 2,459 2,897 4,382
Other income (expense) 253 64 252 122
------- ------- ------- -------
Net income (loss) 1,019 (2,109) 758 (3,773)
Preferred stock dividend 75 596 149 657
------- ------- ------- -------
Net income (loss) attributable to
common stockholders $ 944 $(2,705) $ 609 $(4,430)
======= ======= ======= =======
Basic earnings (loss) per share $ 0.15 $ (0.47) $ 0.09 $ (0.77)
Diluted earnings (loss) per share $ 0.07 $ (0.47) $ 0.05 $ (0.77)
Weighted average number of
common shares outstanding 6,509 5,780 6,493 5,762
Diluted number of common
shares outstanding 12,934 8,852 12,918 8,834
</TABLE>
SEE ACCOMPANYING NOTES
3
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THE NATIONAL REGISTRY INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED JUNE 30,
1998 1997
-------- --------
Cash used in operating activities:
Net income (loss) $ 758 $(3,773)
Adjustments to reconcile net loss to net
cash used in operating activities:
Amortization of deferred compensation 14 31
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 305 270
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (1,077) (130)
Inventories 117 (89)
Prepaid expenses (2) (300)
Other assets (201) (3)
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities (721) (509)
Deferred revenue 139 --
------- -------
Net cash provided (used) by operating activities (186) (4,180)
Cash used in investing activities:
Purchase of equipment (18) (410)
Cash provided by financing activities:
Issuance of preferred stock -- 6,397
------- -------
Net (decrease) increase in cash and equivalents (204) 1,807
Cash and equivalents at beginning of period 298 914
------- -------
Cash and equivalents at end of period $ 94 $ 2,721
======= =======
SEE ACCOMPANYING NOTES
4
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THE NATIONAL REGISTRY INC.
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NOTES TO CONDENSED FINANCIAL STATEMENTS -- UNAUDITED
1. BASIS OF PRESENTATION
The accompanying financial statements are unaudited and condensed and,
therefore, do not contain certain information included in the annual financial
statements of The National Registry Inc. (the "Company" or "NRI"). In the
opinion of management, all adjustments (consisting only of normally recurring
accruals) it considers necessary for a fair presentation have been included.
The Company's condensed interim financial 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.
Certain amounts in the 1997 financial statements 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 have been reclassified to conform with the 1998 presentation.
2. NET INCOME (LOSS) PER COMMON SHARE
For the three and six month periods ended June 30, 1998 and 1997 basic
earnings (loss) per share was computed by dividing the net income (loss)
attributable to common stockholders by the weighted average number of common
shares outstanding during these periods. For the three and six month periods
ended June 30, 1998 diluted earnings per share was computed by dividing net
income attributable to common stockholders by the diluted number of common
shares outstanding which includes the weighted average number of common shares
outstanding and common stock equivalents relating to convertible Series A
Preferred Stock, $0.01 par value per share (the "Series A Preferred Stock"),
convertible Series C Preferred Stock, $0.01 par value per share (the "Series C
Preferred Stock"), and the exercise of stock options and warrants. Common stock
equivalents were not included in the calculation of diluted loss per share for
the three and six month period ended June 30, 1997 due to their anti-dilutive
effect.
3. STOCKHOLDERS' EQUITY
On May 15, 1998, the Company issued 41,667 shares of Common Stock
(adjusted to reflect the Reverse Stock Split) 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 (adjusted
to reflect the Reverse Stock Split) at an exercise price of $3.38 per share
(adjusted to reflect the Reverse Stock Split), 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 has not yet been declared effective by the SEC.
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 (adjusted
to reflect the Reverse Stock Split) to the purchasers of the Series C Preferred
Stock and warrants to purchase up to 23,333 shares of Common Stock (adjusted to
reflect the Reverse Stock Split) to certain finders. The exercise price of such
warrants is $15.68 per share (adjusted to reflect the Reverse Stock Split),
subject to certain adjustments from time to time.
5
<PAGE>
THE NATIONAL REGISTRY INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS--UNAUDITED
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.
5. YEAR 2000 EXPOSURE
The Company is currently working to resolve the potential impact of the
year 2000 on the processing of date-sensitive information by the Company's
computerized information systems. The year 2000 problem is the result of
computer programs being written using two digits (rather than four) to define
the applicable year. Any of the Company's 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. Based on preliminary
information, 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.
However, if the Company, its customers or vendors are unable to resolve such
processing issues in a timely manner, it could result in a material financial
risk. Accordingly, the Company plans to devote the necessary resources, if any,
to resolve all significant year 2000 issues in a timely manner.
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
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 recently 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. to form a strategic alliance to develop and market SAFsite(TM), a cost
effective new security solution for the Internet. SAFsite(TM) is based on the
Company's standards-based SAF(TM) architecture and is scheduled for release in
the third quarter of 1998.
REVERSE STOCK SPLIT - A one-for-six reverse stock split of the Common Stock
approved by the Company's stockholders on May 12, 1998 became effective on May
27, 1998 to stockholders of record at the close of business on May 26, 1998.
NASDAQ - The Company received notification from the Nasdaq Stock Market, Inc.
(the "Nasdaq") on June 18, 1998 that the Common Stock was in compliance with the
minimum bid price requirement as set forth in Marketplace Rule 4310 (c)(4)
("Rule (c)(4)"). The Company estimates that, as of July 31, 1998, it is not in
compliance with Marketplace Rule 4310 (c)(2) ("Rule (c)(2)"), which requires the
Company to maintain (i) net tangible assets of $2 million; (ii) a market
capitalization of $35 million; or (iii) 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 by the end of the third quarter. There is no assurance that the
Common Stock will be in compliance with Rules 4310(c)(4) or 4310 (c)(2) at any
time or that the Common Stock will not be delisted from the Nasdaq SmallCap
Market (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.
STOCK OPTION GRANT - 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 SmallCap Market on July 1,
1998, to 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 certain employees 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 provide its employees with competitive
compensation levels. As part of such grant, Jeffrey P. Anthony, Clinton C.
Fuller and James W. Shepperd each received a grant of options to acquire
150,000, 90,000 and 30,000 shares of Common Stock, respectively.
6
<PAGE>
THE NATIONAL REGISTRY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - (CONTINUED)
A. RESULTS OF OPERATING ACTIVITIES
For the three and six months ended June 30, 1998, the Company generated
net income of approximately $1,019,000 and $758,000, respectively. This compares
to net losses of approximately ($2,109,000) and ($3,773,000), respectively, for
the comparable periods in 1997. The increases of approximately $3,128,000 and
$4,531,000 in net income for the three and six months ended June 30, 1998 were
due primarily to increases in gross profit of approximately $2,074,000 and
$2,916,000, respectively, and decreases in operating expenses of approximately
$865,000 and $1,485,000, respectively. The increases in gross profit were
primarily attributable to increases in revenue and increases in the gross margin
percentages compared to the same periods in 1997. Approximately $501,000 and
$660,000 of operating expenses during the three and six months ended June 30,
1998, respectively, and approximately $149,000 and $301,000 of operating
expenses during the comparable periods in 1997, were from non-cash items,
including depreciation, compensation related to warrants that were issued as
part of the IIG settlement and finders fees related to the agreements with XL
Vision, Inc. ("XL Vision"), amortization of deferred compensation, and
compensation related to the transfer of assets.
REVENUE AND GROSS PROFIT
For the three and six months ended June 30, 1998, the Company reported
operating revenues of approximately $2,600,000 and $3,947,000, respectively,
compared to revenues of approximately $386,000 and $668,000 for the same periods
in 1997. The increases of approximately $2,214,000 and $3,279,000 for such three
and six month periods, respectively, were primarily due to the sale of prepaid
seat licenses to XL Vision. Revenues for the three months ended June 30, 1998
consisted of approximately $2,325,000 related to the sale of prepaid seat
licenses for software products and services to XL Vision, approximately $143,000
from ongoing maintenance revenue from the states of Connecticut and New Jersey,
and approximately $132,000 related to sales of software, hardware and services
to various other commercial users. Revenues for the six months ended June 30,
1998 consisted of approximately $3,325,000 related to the sale of seat licenses
for software products and services to XL Vision, approximately $255,000 from
ongoing maintenance revenue from the states of Connecticut and New Jersey, and
approximately $367,000 related to sales of software, hardware and services to
various other commercial users. The Company's contract with New Jersey expired
on June 30, 1998. The Company continues to provide services on a month-to-month
basis to New Jersey while the contract is being renegotiated. 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 six months ended
June 30, 1998 were 91% and 86%, compared to 74% and 73%, for the same periods in
1997. The increases from 1997 to 1998 were primarily due to the change in
product mix which included more software sales during 1998.
OPERATING EXPENSES
Total operating expenses for the three and six months ended June 30, 1998
decreased approximately $865,000 or 35% and $1,485,000 or 34% to approximately
$1,594,000 and $2,897,000, respectively, from approximately $2,459,000 and
$4,382,000, respectively, for the same periods in 1997. These decreases were
primarily due to the Company's continuation of its expense reduction plan, the
sale of its healthcare line of business, and its elimination of expenses outside
of its current strategic focus. The following table provides a breakdown of the
changes in operating expenses for the three and six months ended June 30, 1998
as compared to the same periods in 1997:
7
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THE NATIONAL REGISTRY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1998
(DOLLARS IN THOUSANDS)
INCREASE (DECREASE) INCREASE (DECREASE)
$ % $ %
------ -------- ------- ------
<S> <C> <C> <C> <C>
Sales and marketing $(458) (62)% $ (681) (53)%
Royalties (18) (13) (18) (7)
Product development (369) (50) (776) (53)
General and administrative (20) (2) (10) (1)
===== ======= ======= ===
$(865) (35)% $(1,485) (34)%
===== ======= ======= ===
</TABLE>
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 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 the Company'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 certain sales and marketing expenses will
increase if sales of the Company's products continue to 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.
8
<PAGE>
THE NATIONAL REGISTRY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - (CONTINUED)
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 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
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) and the Secure Authentication
Facility for Unicenter(R) 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 expects to introduce its
SAFsite(TM) product in the third quarter of 1998.
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, partially
offset by increases in rent, insurance, and outside services which included
approximately $168,000 in finder's fees associated with the XL Vision agreements
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 continue to increase.
B. LIQUIDITY AND CAPITAL RESOURCES
Cash and working capital (deficit) as of June 30, 1998 were approximately
$94,000 and $1,267,000, respectively, compared to approximately $298,000 and
($212,000), respectively, as of December 31, 1997. The decrease in the Company's
cash as of June 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 Company's
agreements with XL Vision during the six months ended June 30, 1998. Cash and
working capital as of June 30, 1997 were approximately $2,771,000 and
$3,092,000, respectively.
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 treated 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 $75,000 and $149,000 for the three and six month periods ended
June 30, 1998, respectively, compared to $106,000 and $167,000 for the same
periods in 1997. The Company recorded no deemed dividends during the three and
six month periods ended June 30, 1998 and deemed dividends of approximately
$490,000 in the three and six month periods ended June 30, 1997.
9
<PAGE>
THE NATIONAL REGISTRY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - (CONTINUED)
All shares of the Series C Preferred Stock are convertible at the option
of the holder into shares of Common Stock, at the lesser of (i) $14.25 per share
(adjusted to reflect the Reverse Stock Split) 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 shares of the Series C
Preferred Stock were converted during the three months ended June 30, 1998.
During the six months ended June 30, 1998, 9,750 shares of Series C Preferred
Stock were converted into 131,578 shares of Common Stock (adjusted to reflect
the Reverse Stock Split) including 6,910 shares (adjusted to reflect the Reverse
Stock Split) attributable to accrued dividends on such shares of Series C
Preferred Stock. During the three and six months ended June 30, 1997, 1,250
shares of Series C Preferred Stock were converted into 3,292 shares of Common
Stock (adjusted to reflect the Reverse Stock Split), including 72 shares
(adjusted to reflect the Reverse Stock Split) attributable to accrued dividends
on such converted shares. On July 7, 1998, 20,000 shares of Series C Preferred
Stock were converted into 392,157 shares of Common Stock. An additional 33,263
shares of Common Stock attributable to accrued dividends will be issued in
August 1998 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 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 (adjusted to reflect the Reverse Stock Split) at an
exercise price of $15.68 per share (adjusted to reflect the Reverse Stock
Split), 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 (adjusted to reflect the Reverse Stock Split) at an
exercise price of $15.68 per share (adjusted to reflect the Reverse Stock
Split), 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
(adjusted to reflect the Reverse Stock Split) are exerciseable 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 requirements with respect to the
Series C Preferred Stock Private Placement.
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 management
has determined to dissolve the corporation. On May 27, 1998, the Company
received approximately $57,000 from BIOMETRX as partial repayment of the loan.
10
<PAGE>
THE NATIONAL REGISTRY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - (CONTINUED)
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. No shares of Common Stock were
issued as dividends during the three months ended June 30, 1998. During the six
months ended June 30, 1998, the Company issued 6,910 shares of Common Stock
(adjusted to reflect the Reverse Stock Split) as dividends related to the Series
C Preferred Stock.
The Company used net cash of approximately $186,000, excluding $18,000 in
capital expenditures, during the six months ended June 30, 1998. Cash as of
August 10, 1998 was approximately $140,000. On July 7, July 30, and August 3,
1998 the Company received $275,000, $100,000, and $175,000, respectively, from
XL Vision in connection with the agreement entered into on May 12, 1998. On July
7, 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 on
October 1, 1998. On August 5, 1998, the Company paid Veridicom, Inc.
("Veridicom") $50,000 in connection with the licensing agreement between
Veridicom and the Company. 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. While the Company is scheduled to receive $275,000 from XL Vision
during September 1998 and an additional $550,000 during the remainder of 1998,
the Company does not believe that the receipt of such payments will be adequate
to meet the Company's cash flow requirements. Accordingly, the Company is
reviewing the options available to it to obtain additional financing. These
options include, but are not limited to, the sale and issuance of stock, the
sale and issuance of debt, 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 diluted basis. There is a significant likelihood
that additional funding will not be available on terms acceptable to the
Company, if at all. The failure to obtain such additional funds would cause the
Company to cease or curtail operations. Even if such additional funding is
obtained, there 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.
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
limited operating history and substantial accumulated net losses, the Company's
need for additional funds, the SmallCap Market eligibility and maintenance
requirements, the possible delisting of the Company's Common Stock from the
SmallCap Market, technological and market uncertainty, competition, the
Company's dependence upon software licensors, and control of the Company.
11
<PAGE>
THE NATIONAL REGISTRY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - (CONTINUED)
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 $43,066,000
since inception through June 30, 1998. Although the Company generated
approximately $609,000 of net income attributable to common stockholders on
revenues of approximately $3,947,000 during the six months ended June 30, 1998,
there is no assurance that the Company will continue to generate significant
revenues or any net income in the future.
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
diluted basis. The failure to obtain such additional funds would cause the
Company to cease or curtail 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.
NASDAQ SMALLCAP MARKET ELIGIBILITY AND MAINTENANCE REQUIREMENTS; POSSIBLE
DELISTING OF SECURITIES FROM THE NASDAQ SMALLCAP MARKET
On May 29, 1998, the Company received notice from Nasdaq that the Common
Stock would be delisted from the SmallCap Market for non-compliance with the
minimum bid price requirement as set forth in Marketplace Rule 4310(c)(4)
effective the close of business on June 8, 1998, unless the Company requested a
temporary exception to the new requirements by sending a hearing request to
Nasdaq prior to the close of business on June 5, 1998. On June 2, 1998, the
Company sent a letter to Nasdaq requesting a hearing which, pursuant to the
above-referenced May 29, 1998 Nasdaq letter, stayed the delisting of the Common
Stock. By letter dated June 17, 1998 Nasdaq notified the Company of the
procedure required to be filed to proceed with such a hearing. On June 18, 1998,
a letter was sent to Nasdaq on behalf of the Company confirming that the Company
was in compliance with Rule 4310(c)(4) as of such date. By letter dated June 22,
1998, Nasdaq confirmed that the Company was in compliance with Rule 4310(c)(4).
There is no assurance that the Common Stock will continue to 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.
On May 29, 1998 the Company received notification from Nasdaq that the
Company was not in compliance with Rule 4310(c)(2) that requires the Company to
maintain (i) net tangible assets of $2 million; (ii) market capitalization of
$35 million; or (iii) net income of $500,000 in the most recently completed
fiscal year or in two of the three most recently completed fiscal years. Nasdaq
requested that the Company demonstrate compliance with Rule 4310(c)(2) by June
22, 1998 in a publicly filed document with the SEC. Pursuant to such letter, on
June 12, 1998 the Company filed a Form 8-K attaching its balance sheet as of May
31, 1998 and its statement of operations for the five months ended May 31, 1998.
The Company estimates that it is not in compliance with Rule 4310(c)(2) as of
July 31, 1998. Although the Company is reviewing the options available to it to
obtain additional equity to put it into compliance with Rule 4310(c)(2), there
is no assurance that such equity will be available. Additionally, there is no
assurance
12
<PAGE>
THE NATIONAL REGISTRY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - (CONTINUED)
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.
TECHNOLOGICAL AND MARKET UNCERTAINTY
The development and marketing of the Company's products and services may
be impeded by problems relating to the development, production, distribution or
marketing of its 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.
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 which 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 identification by eye
retina blood vessel patterns, hand geometry and signature analysis. The
Company's products and services compete with companies which 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 and Veridicom 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.
13
<PAGE>
THE NATIONAL REGISTRY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - (CONTINUED)
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 which 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.
CONTROL OF THE COMPANY
As of June 30, 1998, J. Anthony Forstmann and RMS Limited Partnership, a
Nevada limited partnership controlled by Roy M. Speer ("RMS"), beneficially
owned approximately 13.9% and 9.3% 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 June 30,
1998, Home Shopping Network, Inc. owned 100,000 shares of the Series A Preferred
Stock convertible into approximately 1,056,026 shares or 13.9% of the Common
Stock and Clearwater Fund IV, L.L.C. owned 250,000 shares of Series C
convertible into approximately 4,144,000 shares or 38.8% of the Common 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 direct the business and
policies of the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
A one-for-six reverse stock split of the Common Stock became effective on
May 27, 1998 to stockholders of record at the close of business on May 26, 1998.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of its Stockholders held on May 12, 1998
(the "Annual Meeting") the stockholders of the Company approved the following
proposals:
PROPOSAL 1. ELECTION OF DIRECTORS
The following persons were elected as directors of the Company at the
Annual Meeting to hold office for a term of one year or until their successors
have been duly elected and qualified:
<TABLE>
<CAPTION>
NAME VOTES FOR VOTES AGAINST VOTES WITHHELD BROKER NON-VOTES
- ---- --------- ------------- -------------- ----------------
<S> <C> <C> <C> <C>
Jeffrey P. Anthony 32,821,795 0 408,611 0
Frank M. Devine 32,826,795 0 403,611 0
J. Anthony Forstmann 32,825,795 0 404,611 0
Donald C. Klosterman 32,825,795 0 404,611 0
John L. Gustafson 32,826,195 0 404,211 0
Don M. Lyle 32,826,195 0 404,211 0
Francis R. Santangelo 32,827,195 0 403,211 0
Robert J. Rosenblatt 32,825,195 0 405,211 0
</TABLE>
PROPOSAL 2. AMENDMENT TO EFFECT A REVERSE STOCK SPLIT
The proposed amendment to the Certificate of Incorporation (the
"Certificate") to effect a one-for-six reverse stock split of the Common Stock
was approved with 31,025,517 votes for the proposal, 2,123,735 votes against the
proposal, 81,154 votes abstaining and 0 broker non-votes.
PROPOSAL 3. AMENDMENT TO DECREASE AUTHORIZED COMMON STOCK
The proposed amendment to the Certificate to decrease the authorized
Common Stock from 75,000,000 shares to 25,000,000 shares was approved with
31,220,942 votes for the proposal, 1,768,030 votes against the proposal, 241,434
votes abstaining and 0 broker non-votes.
PROPOSAL 4. AMENDMENT TO 1992 STOCK INCENTIVE PLAN
The proposed amendment to the Company's 1992 Stock Incentive Plan to
increase from 4,700,000 (783,334 on a post-split basis) to 15,000,000 (2,500,000
on a post-split basis), the number of shares of Common Stock authorized for
issuance thereunder was approved with 11,674,489 votes for the proposal,
2,875,205 votes against the proposal, 171,879 votes abstaining and 18,508,833
broker non-votes.
15
<PAGE>
PROPOSAL 3. APPOINTMENT OF INDEPENDENT AUDITORS
The appointment by the Board of Directors of the Company of Ernst & Young,
LLP as the Company's independent auditors for the fiscal year ending December
31, 1998 was ratified with 32,914,720 votes for the proposal, 158,672 votes
against the proposal, 157,014 votes abstaining and 0 broker non-votes.
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
The Company filed a Form 8-K on May 29, 1998 announcing
certain management changes and the effectiveness of the
Reverse Stock Split.
The Company filed a Form 8-K on June 12, 1998 which included a
balance sheet as of May 31, 1998 and a statement of operations
for the five months ended May 31, 1998.
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: AUGUST 14, 1998 BY: /s/ JAMES W. SHEPPERD
--------------------------
JAMES W. SHEPPERD
CHIEF FINANCIAL OFFICER
AND PRINCIPAL FINANCIAL OFFICER
17
<PAGE>
EXHIBIT INDEX
EXHIBIT 11 - Computation of Earnings per Share
EXHIBIT 27 - Financial Data Schedule (Electronic Filing Only)
18
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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Weighted average shares of
common stock outstanding 6,509 5,780 6,493 5,762
Diluted shares outstanding 12,934 8,852 12,918 8,834
Net income(loss) $ 1,019 $ (2,109) $ 758 $ (3,773)
Preferred Stock dividend 75 596 149 657
--------- --------- --------- ---------
Net income(loss) attributable
to common stockholders $ 944 $ (2,705) $ 609 $ (4,430)
========= ========= ========= =========
Basic earnings(loss) per share
$ 0.15 $ (0.47) $ 0.09 $ (0.77)
========= ========= ========= =========
Diluted earnings(loss) per
share (1) $ 0.07 $ (0.47) $ 0.05 $ (0.77)
========= ========= ========= =========
<FN>
(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 six
months ended June 30, 1997 due to their anti-dilutive effect.
</FN>
</TABLE>
19
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 94
<SECURITIES> 0
<RECEIVABLES> 1,549
<ALLOWANCES> 19
<INVENTORY> 245
<CURRENT-ASSETS> 2,179
<PP&E> 764
<DEPRECIATION> 2,682
<TOTAL-ASSETS> 3,249
<CURRENT-LIABILITIES> 912
<BONDS> 0
4
0
<COMMON> 65
<OTHER-SE> 1,955
<TOTAL-LIABILITY-AND-EQUITY> 3,249
<SALES> 3,947
<TOTAL-REVENUES> 3,947
<CGS> 544
<TOTAL-COSTS> 544
<OTHER-EXPENSES> 2,897
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 758
<INCOME-TAX> 0
<INCOME-CONTINUING> 758
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 758
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.05
</TABLE>
