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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 MARCH 31, 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 (I.R.S. EMPLOYER
INCORPORATION 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 38,924,124 shares of outstanding common stock of the registrant
as of May 14, 1998.
Total number of pages: 19 Exhibit Index begins on page 19
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PART 1 - FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
THE NATIONAL REGISTRY INC.
CONDENSED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER
ASSETS 1998 31, 1997
(UNAUDITED) (AUDITED)
----------- ---------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 432 $ 298
Receivables 622 472
Inventory 314 362
Prepaid expenses 114 272
Other 17 17
-------- -------
Total current assets $ 1,499 $ 1,421
Equipment
Computer equipment 3,034 3,031
Office equipment and other 415 415
-------- -------
3,449 3,446
less accumulated depreciation (2,548) (2,394)
-------- -------
901 1,052
-------- -------
Investment 105 105
======== =======
TOTAL ASSETS $ 2,505 $ 2,578
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 385 $ 677
Accrued compensation 194 163
Other accrued expenses 99 127
Accrued settlement costs 450 450
Accrued legal and professional fees 229 216
Deferred revenue 632 174
-------- -------
Total current liabilities 1,989 1,807
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STOCKHOLDERS' EQUITY
Common stock, $.01 par value
Authorized - 75,000,000 shares
Issued and outstanding -
38,924,124 and 38,134,655 as of March 31,
1998 and December 31, 1997, respectively 389 381
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 March 1, 1998 and December 31, 1997 1 1
Series C - Liquidation preference $20 per
share, 250,000 shares issued and outstanding
as of March 31, 1998 and 259,750 shares issued
and outstanding as of December 31, 1997,
respectively 3 3
Capital in excess of par value 44,156 44,090
Accumulated deficit (44,010) (43,675)
Unamortized deferred compensation (23) (29)
-------- -------
516 771
======== =======
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,505 $ 2,578
======== =======
</TABLE>
SEE ACCOMPANYING NOTES.
2
<PAGE>
THE NATIONAL REGISTRY INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three months ended March 31,
1998 1997
------------ ---------------
<S> <C> <C>
Post Contract Services revenue $ 112 $ 127
Net product and service revenue 1,235 155
-------- --------
Total revenue 1,347 282
Cost of sales 304 81
-------- --------
Gross profit 1,043 201
-------- --------
Operating expenses:
Selling and marketing 317 540
Royalty fee 125 125
Product development 319 726
General and administrative 542 532
-------- --------
Total operating expenses 1,303 1,923
Other income (expense) (1) 58
-------- --------
Net loss (261) (1,664)
-------- --------
Preferred stock dividend 74 61
Net loss attributable to ======== ========
common stockholders $ (335) $ (1,725)
======== ========
Loss per common share $ (0.01) $ (0.05)
Weighted average number of
common shares 38,861 34,460
</TABLE>
SEE ACCOMPANYING NOTES
3
<PAGE>
THE NATIONAL REGISTRY INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
Cash used in operating activities: 1998 1997
------------ ---------------
<S> <C> <C>
Net loss $(261) $(1,664)
Adjustments to reconcile net loss to net
cash used in operating activities:
Compensation applicable to stock
option grants 6 17
Depreciation 153 133
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (150) (279)
Prepaid expenses 158 49
Inventory 48 (112)
Other assets -- 3
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities (276) (277)
Deferred revenue 458 (6)
----- -------
Net cash provided (used) by operating activities 136 (2,136)
----- -------
Cash used in investing activities:
Purchase of equipment (2) (225)
----- -------
Net cash used in investing activities (2) (225)
----- -------
Cash provided by financing activities:
Issuance of common stock -- 4
Issuance of preferred stock -- 6,440
----- -------
Net cash provided by financing activities -- 6,444
----- -------
Net increase in cash and cash equivalents 134 4,083
Cash and cash equivalents at beginning of period 298 914
===== =======
Cash and cash equivalents at end of period $ 432 $ 4,997
===== =======
</TABLE>
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 results are not necessarily
indicative of results to be expected for a full fiscal year and should be read
in conjunction with its financial statements and the notes thereto included in
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
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
conform with 1998 presentation.
2. NET LOSS PER COMMON SHARE
For the three month periods ended March 31, 1998 and 1997 the loss per
common share was computed by dividing the net loss attributable to the common
stockholders by the weighted average number of common shares outstanding during
the periods. Common stock equivalents, relating to convertible Series A
Preferred Stock, convertible Series C Preferred Stock (the "Series C Preferred
Stock"), and the exercise of stock options and warrants, were not included in
this calculation due to their anti-dilutive effect.
5
<PAGE>
THE NATIONAL REGISTRY INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS -- UNAUDITED
3. STOCKHOLDERS' EQUITY
On February 6, 1997, the Company completed an equity financing (the "Series
C Preferred Stock Private Placement") pursuant to which two accredited
investment funds purchased an aggregate of 350,000 shares of the Company's
Series C Preferred Stock for an aggregate purchase price of $7 million before
commissions and expenses which totaled approximately $613,000. The Series C
Preferred Stock carries a six percent per annum accretion which the Company
treated as a dividend resulting in a charge to accumulated deficit and a credit
to capital in excess of par value. The Company recorded accretion of
approximately $74,000 and $61,000 for the three months ended March 31, 1998 and
1997, respectively. All shares of the Series C Preferred Stock are convertible
at the option of the holder into shares of the Company's Common Stock, $0.01 par
value per share (the "Common Stock"), at the lesser of (i) $2.375 per share or
(ii) 82.5% of a floating price equal to the average closing bid price of the
Common Stock for the five trading days immediately preceding the date of
conversion. All shares of Series C Preferred Stock issued and outstanding as of
February 4, 2000 will be converted automatically into shares of Common Stock.
During the three months ended March 31, 1998 and 1997 9,750 and 0 shares of
Series C Preferred Stock were converted into 789,469 and 0 shares of Common
Stock, respectively, including 41,461 and 0 shares attributable to accrued
dividends, respectively. The Company may redeem the Series C Preferred Stock at
any time based upon a formula relating to the then applicable conversion price
or under certain other circumstances. 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 of $20 per share plus
accrued and unpaid dividends.
In connection with the Series C Preferred Stock Private Placement, the
Company issued to such accredited investment funds, warrants to purchase up to
400,000 shares of Common Stock at an exercise price of $2.6125 per share,
subject to certain adjustments from time to time. The warrants expire five years
after the date of closing.
In connection with the Series C Preferred Stock Private Placement, the
Company also issued warrants to purchase an aggregate of 140,000 shares of
Common Stock at an exercise price of $2.6125 per share to certain finders. Of
such warrants, warrants to purchase up to 70,000 shares are exercisable through
February 4, 2000, with the remaining warrants being exercisable through February
4, 2002. The Company has also agreed to certain registration rights with respect
to these warrants.
On March 17, 1997, the Company filed a registration statement with the SEC
to register certain shares of Common Stock issuable upon conversion of the
Series C Preferred Stock, shares of Common Stock held by certain selling
stockholders named in the registration statement and shares of Common Stock
issuable upon the exercise of certain options and warrants. On May 23, 1997 the
registration statement was declared effective by the SEC.
On March 11, 1998 the Board of Directors of the Company (the "Board")
repriced all stock options held by employees and directors of the Company to
$0.78, the closing bid price of the Common Stock on the Nasdaq SmallCap Market
(the "SmallCap Market") on March 11, 1998. The Board also granted 2,335,000
options to acquire Common Stock at $0.78 to employees and directors under the
Company's stock incentive plan.
6
<PAGE>
THE NATIONAL REGISTRY INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS -- UNAUDITED
4. IMPACT OF RECENTLY ISSUED PRONOUNCEMENT
As of January 1, 1998, the Company adopted Statement 130, Reporting
Comprehensive Income, issued by the Financial Accounting Standards Board.
Statement 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, the adoption of this Statement
has no 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.
RECENT DEVELOPMENTS
MASTER RESELLER - On May 12, 1998, the Company entered into an agreement
with XL Vision, Inc. ("XL Vision") a Safeguard Scientific, Inc. company,
pursuant to which XL Vision acquired seat licenses and various other NRI
products and services for an aggregate of approximately $2.9 million payable in
1998. XL Vision also acquired NRI's healthcare line of business and assumed
responsibility for servicing the healthcare market with NRI products, including
all agreements with resellers and contracts with end-users in the healthcare
line of business. Pursuant to such agreement XL Vision has become the first
master reseller for the entire NRI product line with non-exclusive worldwide
marketing rights for all of NRI's current and future products and direct access
to NRI's engineering and technical support.
7
<PAGE>
THE NATIONAL REGISTRY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - (CONTINUED)
STOCKHOLDERS ANNUAL MEETING - On May 12, 1998, the stockholders of the
Company approved a reverse stock split such that every six (6) shares of Common
Stock outstanding on the effective date of such reverse stock split would be
converted into one (1) share of Common Stock (the "Reverse Split"). It is
expected that the Reverse Split will be effective on or about May 27, 1998 to
stockholders of record at the close of business on May 26, 1998.
In addition, the stockholders also approved an amendment to the Company's
Certificate of Incorporation to reduce the number of authorized shares of Common
Stock from 75,000,000 shares to 25,000,000 shares, elected the eight directors
nominated by the Board, approved an increase in the number of shares of Common
Stock authorized for issuance under the Company's 1992 Stock Incentive Plan to
15,000,000 (2,500,000 on a post Reverse Split basis) and ratified the
appointment of Ernst & Young LLP as the Company's independent auditors for 1998.
SETTLEMENT OF LAWSUIT - On May 15, 1998, the Company reached a settlement
of a lawsuit filed by IIG on February 13, 1997. IIG asserted multiple claims
which include breach of contract, quantum meruit, unjust enrichment, breach of
the implied covenant of good faith and fair dealing and fraud and seeks an
accounting, specific performance, injunctive and declaratory relief and damages.
The settlement includes a $300,000 cash payment made by the Company on May 15,
1998, the issuance to IIG of 250,000 shares of Common Stock, and the granting to
IIG of an option to purchase 450,000 shares of Common Stock at an exercise price
of $0.5625, the closing bid price of the Common Stock on the SmallCap Market on
April 3, 1998 (the day the preliminary settlement was reached). Under the terms
of the settlement the lawsuit will be dismissed with prejudice.
NASDAQ - On February 27, 1998 the Company received notice from the Nasdaq
Stock Market, Inc. ("Nasdaq") that the Company's Common Stock was not in
compliance with the minimum bid price requirement as set forth in Marketplace
Rule 4310(c)(4) ("Rule (c)(4)"). As a result, the Company has been provided
ninety calendar days, which expires May 28, 1998, in order to regain compliance
with this standard. If the Common Stock does not regain compliance, by trading
at or above the minimum $1 requirement for at least 10 consecutive trade days,
the Common Stock could be delisted from the SmallCap Market and quotations would
no longer be available on Nasdaq. On May 12, 1998, the stockholders of the
Company approved a one-for-six reverse split. The Company expects to complete
the reverse split on or prior to May 27, 1998 which would place the Company in
compliance with Rule (c)(4). On April 20, 1998, the Company received
notification from Nasdaq that the Company is not in compliance with Marketplace
Rule 4310(c)(2) ("Rule (c)(2)") that requires the Company to maintain 1) net
tangible assets of $2 million; 2) market capitalization of $35 million; or 3)
net income of $500,000 in the most recently completed fiscal year or in two of
the most recently completed fiscal years. Nasdaq has requested that the Company
provide to Nasdaq a proposal for achieving compliance with Rule (c)(2) by May 4,
1998. On May 4, 1998, the Company delivered a proposal to Nasdaq outlining its
plan for achieving such compliance. The Company believes the $2.9 million
agreement with XL Vision, described above in RECENT DEVELOPMENTS - MASTER
RESELLER, will put the Company in compliance with Rule (c)(2). However, if
Nasdaq deems the submission to not warrant continued listing, Nasdaq will issue
a formal notice that specifies the delisting date for the Company's Common
Stock. If the Common Stock were excluded from the SmallCap Market, it would
adversely affect the prices of such securities and the ability of holders to
sell them.
COGENT SYSTEMS, INC. AGREEMENT - On May 13, 1998 the Company reached an
agreement with Cogent Systems, Inc. ("Cogent") that changed the payment schedule
associated with the minimum annual royalty of $500,000 from semi-annual payments
of $250,000 due on April 1 and October 1 of each year during the term of the
agreement to quarterly payments of $125,000 due on January 1, April 1, July 1
and October 1 of each year during the term of the agreement. The Company paid
$125,000 to Cogent on May 13, 1998. This payment was in satisfaction of the
April 1, 1998 payment.
8
<PAGE>
THE NATIONAL REGISTRY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - (CONTINUED)
A. RESULTS OF OPERATING ACTIVITIES
For the three months ended March 31, 1998, the Company incurred a net loss
of approximately $261,000. This compares to a net loss of approximately
$1,664,000 for the three months ended March 31, 1997. The decrease of
approximately $1,403,000 in net operating loss for the period ended March 31,
1998 was due primarily to an increase in gross profit of approximately $842,000
and a decrease in operating expenses of approximately $620,000. The increase in
gross profit for the period was primarily due to the increase in revenue and an
increase in the gross margin percentage compared to the same period in 1997.
Approximately $160,000 of the net loss in the period ended March 31, 1998, and
approximately $150,000 of the net loss in the period ended March 31, 1997, were
attributable to non-cash items, including depreciation and compensation related
to certain stock options.
REVENUE AND GROSS PROFIT
For the three months ended March 31, 1998 the Company reported operating
revenues of approximately $1,347,000. This compares to revenues of approximately
$282,000 for the three months ended March 31, 1997, or an increase of
approximately $1,065,000. The increase for the period was primarily due to the
sale of seat licenses to XL Vision. Revenues for the three months ended March
31, 1998 consisted of $1,000,000 related to the sale of seat licenses for
NRIdentity software products to XL Vision, approximately $112,000 from ongoing
maintenance revenue from the states of Connecticut and New Jersey, and
approximately $235,000 related to sales of NRIdentity software, hardware and
services to various commercial users. The Company's ongoing contracts with
Connecticut and New Jersey will expire in December 1998 and June 1998,
respectively, unless such contracts are renewed.
The Company's gross margin percentage for the three months ended March 31,
1998 was 77%, compared to 71% for the same period in 1997. The increase from
1997 to 1998 was primarily due to the change in product mix which included more
software sales during 1998.
OPERATING EXPENSES
Total operating expenses for the three months ended March 31, 1998 were
approximately $1,303,000 as compared to approximately $1,923,000 for same period
in 1997. This represents a decrease of approximately $620,000 or 32%. The
following table provides a breakdown of the changes in operating expenses for
the three months ended March 31, 1998 as compared to the same period in 1997:
THREE MONTHS ENDED
MARCH 31, 1998
(IN THOUSANDS, EXCEPT %)
$ CHANGE % CHANGE
--------- ---------
Selling and marketing $ (223) (41)%
Royalty fee - -
Product development (407) (56)
General and administrative 10 (2)
========= =========
$ (620) (32)%
========= =========
9
<PAGE>
THE NATIONAL REGISTRY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - (CONTINUED)
SELLING AND MARKETING
Selling and marketing expenses decreased approximately $223,000, or 41%,
for the three months ended March 31, 1998 compared to the same period in 1997.
The decrease was primarily due to decreases in employee expense, travel and
professional consulting services. These decreases are due primarily to the
Company's decision to eliminate expenditures in areas identified as being
outside strategic focus on indirect selling and marketing of commercial software
products. As part of such efforts, the Company eliminated a portion of its 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 technology
for a wide range of potential uses including computer network access security,
protection of medical and financial records, facilitation of electronic
commerce, enhancing customer service in banking, deterring on-line fraud,
enhancing security in the healthcare industries and deterring fraud in
government social services programs. While the Company has received favorable
responses from a limited number of commercial customers 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 of such contracts will prove to be profitable for the Company. The
sales cycle for the Company's products has taken longer to develop than
management anticipated due to the newness of the technology, 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 selling and marketing expenses will
increase if sales of the Company's products continue to increase.
PRODUCT DEVELOPMENT
Product development expenses for the three months ended March 31, 1998,
decreased approximately $407,000, or 56%, compared to the same period in 1997.
The decrease was primarily due to reductions in employee expenses, travel and
professional consulting services.
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 begun transitioning out of hardware development in order to focus
its resources on software and market development. The Company believes it will
be able to successfully transition out of hardware development due to the fact
that the Company's NRIdentity software products support new low-cost technology
that is currently emerging.
The Company's software product strategy has been to develop and market a
series of software developers' kits that operate on a variety of client/server
platforms and to then use those same kits to develop and market a series of
packaged applications that provide biometric authentication for a range of
client/server systems. Software developers' kits have been developed for both
workstations and servers and include biometric processing on a workstation,
one-to-one match or verification on the workstation, one-to-one match on a
server, and one-to-many search on a server. The kits operate on Windows 95(TM)
and Windows NT(TM) personal computers and on Windows NT(TM), Sun Solaris(TM),
DEC Alpha(TM), IBM AIX(TM) and HP Unix(TM) servers. Client/server packaged
applications developed to date and currently being marketed are the NRIdentity
Screen Saver for Windows 95(TM), the Secure Authentication Facility for Windows
NT(TM) and the Secure Authentication Facility for Unicenter(R) TNG(TM) single
sign-on module for Windows NT(TM). The Company has also developed additional
products within the Secure Authentication Facility product line for internet
applications including Secure Authentication Facility for Internet Information
Server(TM).
10
<PAGE>
THE NATIONAL REGISTRY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS -(CONTINUED)
There is no assurance that the Company will successfully transition out of
hardware development, that new 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 transitions 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 any such sales would
be profitable.
The Company expects to continue to incur product development costs as it
continues to develop additional products and enhance existing products.
GENERAL AND ADMINISTRATIVE
For the three months ended March 31, 1998, general and administrative
expenses increased approximately $10,000, or 2%, compared to the same period in
1997. Increases in rent and insurance were partially offset by decreases in
employee and telephone expenses. The Company expects certain general
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 March 31, 1998 were approximately
$432,000 and $(490,000), respectively, compared to $298,000 and $(386,000),
respectively, as of December 31, 1997. The increase in the Company's cash as of
March 31, 1998 compared to December 31, 1997 relates primarily to the receipt of
$1.25 million from XL Vision for the purchase of seat licenses for NRI software
products offset by the net cash utilized in operating activities. The increase
in working capital deficit relates primarily to the net loss incurred during the
first quarter of 1998. Cash and working capital as of March 31, 1997 was
approximately $4,997,000 and $4,959,000, respectively. The decrease in cash and
working capital as of March 31, 1998 compared to March 31, 1997 was due
primarily to approximately $6.4 million that the Company received from an equity
financing completed on February 6, 1997. Cash as of May 13, 1998 was
approximately $322,000. This includes $250,000 received from XL Vision on April
20, 1998 for the purchase of seat licenses for NRI software products.
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 commissions and expenses which totaled
approximately $613,000. The Series C Preferred Stock carries a six percent per
annum accretion which the Company treated as a dividend resulting in a charge to
accumulated deficit and a credit to capital in excess of par value. The Company
recorded accretion of approximately $74,000 during the first quarter of 1998.
All shares of the Series C Preferred Stock are convertible at the option of
the holder into shares of Common Stock, at the lesser of (i) $2.375 per share or
(ii) 82.5% of a floating price equal to the average closing bid price of the
Common Stock for the five trading days immediately preceding the date of
conversion. All shares of Series C Preferred Stock issued and outstanding as of
February 4, 2000 will be converted automatically into shares of Common Stock.
During the first quarter of 1998 9,750 shares of Series C Preferred Stock were
converted into 789,469 shares of Common Stock, including 41,461 attributable to
accrued dividends. 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 400,000 shares of Common Stock at an exercise price of $2.6125
per share, subject to certain adjustments from time to time. The warrants expire
five years after the date of closing.
11
<PAGE>
THE NATIONAL REGISTRY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - (CONTINUED)
In connection with the Series C Preferred Stock Private Placement, the
Company also issued warrants to purchase an aggregate of 140,000 shares of
Common Stock at an exercise price of $2.6125 per share to certain finders. Of
such warrants, warrants to purchase up to 70,000 shares are exercisable through
February 4, 2000, with the remaining warrants being exercisable through February
4, 2002. The Company has also agreed to certain registration rights with respect
to these warrants.
On March 17, 1997, the Company filed a registration statement with the SEC
to register certain shares of Common Stock issuable upon conversion of the
Series C Preferred Stock, shares of Common Stock held by certain selling
stockholders named in the registration statement and shares of Common Stock
issuable upon the exercise of certain options and warrants. On May 23, 1997 the
registration statement was declared effective by the SEC.
On May 24, 1994, the Company, Blue Cross Blue Shield of New Jersey, Inc.
("BCBSNJ") and a wholly owned subsidiary of BCBSNJ entered into that certain
Stockholders Agreement pursuant to which the parties agreed to form a
corporation jointly owned by the Company and such BCBSNJ subsidiary, BIOMETRX,
Inc. ("BIOMETRX"), for the purpose of marketing the Company's finger image
identification technology to, among other markets, the healthcare industry
nationwide and to certain governmental agencies in New Jersey. The Company and
BCBSNJ have each agreed to loan up to $300,000 to BIOMETRX for working capital
purposes. Through May 14, 1998, the Company and BCBSNJ have each loaned $60,000
to BIOMETRX to fund preliminary organizational and development activities. As of
May 14, 1998, BIOMETRX has not commenced operations, and management has
determined to delay commencement of activities pending further review of the
applicable market requirements and demands. There is no assurance that BIOMETRX
will commence operations or, if it commences operations, when such operations
will commence and whether such operations will be successful in the marketing of
any systems, services, or products.
Since its incorporation, the Company has not paid or declared dividends on
the Common Stock, nor does it intend to pay or declare cash dividends on its
Common Stock in the foreseeable future. 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 first quarter of 1998,
the Company issued 41,461 shares of Common Stock as dividends related to the
Series C Preferred Stock.
The Company generated net cash of approximately $136,000, net of $2,000 in
capital expenditures, during the first quarter of 1998. Cash as of May 13, 1998
was approximately $322,000. On May 13, 1998 the Company received $600,000 from
XL Vision in connection with the agreement entered into on May 12, 1998. On May
13, 1998 the Company paid Cogent $125,000 in connection with its licensing
agreement (as discussed earlier under RECENT DEVELOPMENTS - COGENT SYSTEMS, INC.
AGREEMENT). On May 15, 1998, the Company paid IIG $300,000 in settlement of its
lawsuit as described previously in RECENT DEVELOPMENTS - SETTLEMENT OF LAWSUIT.
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.
12
<PAGE>
THE NATIONAL REGISTRY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS - (CONTINUED)
While the Company has sold certain software licenses and various other products
for approximately $2.9 million to XL Vision (as discussed earlier under RECENT
DEVELOPMENTS - MASTER RESELLER) approximately $875,000 of the payments under
that agreement are scheduled to be received during the second quarter of 1998
with the remainder scheduled to be received during the rest of 1998. The Company
does not believe that the receipt of such payments will address 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 very 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. However, there is a significant likelihood that additional funding or
strategic relationships will not be available on terms acceptable to the
Company, if at all. The failure to obtain such additional funds would cause the
Company to cease or curtail operations. Even if such additional funding is
obtained, there 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 expressed 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, control of the Company, shares of
the Company's capital stock eligible for public sale, the limited liquidity of
the Common Stock, the market price volatility of the Common Stock, and the
possibility of liquidation or bankruptcy of the Company.
13
<PAGE>
LIMITED OPERATING HISTORY, SUBSTANTIAL ACCUMULATED NET LOSSES
From its commencement of business in October 1991, the Company has been
principally engaged in organizational, development and marketing activities.
Through March 31, 1998, the Company has reported an accumulated net loss of
approximately $44,010,000 and has had only limited revenues. There is no
assurance that the Company will be able to achieve significant revenues or any
net income in the future.
NEED FOR ADDITIONAL FUNDS
As of March 31, 1998, the Company's cash balance and working capital
deficit were approximately $432,000 and $(490,000) and its cash balance as of
May 13, 1998 was approximately $322,000, respectively. Management believes that
the adequacy of its cash resources will be dependent on its ability to achieve
additional sales and, to the extent necessary, obtain additional capital to
complete the development and marketing of its biometric identification products
and services. There is no assurance that the Company will be able to complete
significant sales of its products or services or obtain such additional capital
during 1998. The Company generated cash from operations of approximately
$136,000 (before capital expenditures) during the first quarter of 1998. The net
cash expenditure rate will increase depending upon operational decisions made by
management in its sole discretion. Absent a significant increase in sales, the
Company will require additional funds to maintain operations and continue, among
other things, development, testing and marketing of its biometric identification
products and services. On May 13, 1998 the Company received $600,000 from XL
Vision in connection with the agreement entered into on May 12, 1998. On May 13,
1998 the Company paid Cogent $125,000 in connection with its licensing agreement
(as discussed earlier under RECENT DEVELOPMENTS - COGENT SYSTEMS, INC.
AGREEMENT). On May 15, 1998, the Company paid IIG $300,000 in settlement of its
lawsuit. 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. While the Company has sold certain software
licenses and various other products for approximately $2.9 million to XL Vision
(as discussed earlier under RECENT DEVELOPMENTS - MASTER RESELLER) approximately
$875,000 of the payments under that agreement are scheduled to be received
during the second quarter of 1998 with the remainder scheduled to be received
during the rest of 1998. The Company does not believe that the receipt of such
payments will satisfy the Company's cash flow requirements for the next twelve
months. 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,
if at all. It is very 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 convertible into Common Stock, which may substantially
increase the number of shares of Common Stock outstanding on a fully-diluted
basis. The failure to obtain such additional funds may cause the Company to
cease or curtail operations. Even if such additional funding is obtained, there
is no assurance that the Company will be able to complete the developing and
testing of its products and services or, if completed, that it will be able to
consummate significant sales of its products or services or, if the Company is
able to consummate significant sales, that any such sales would be profitable.
14
<PAGE>
NASDAQ SMALLCAP MARKET ELIGIBILITY AND MAINTENANCE REQUIREMENTS; POSSIBLE
DELISTING OF SECURITIES FROM THE NASDAQ SMALLCAP MARKET
On February 27, 1998 the Company received notice from Nasdaq that the
Company's Common Stock was not in compliance with the minimum bid price
requirement as set forth in Rule 4310(c)(4). As a result, the Company has been
provided ninety calendar days, which expires May 28, 1998, in order to regain
compliance with this standard. If the Common Stock does not regain compliance,
by trading at or above the minimum $1 requirement for at least 10 consecutive
trade days, the Common Stock could be delisted from the SmallCap Market and
quotations would no longer be available on Nasdaq. On May 12, 1998, the
stockholders of the Company approved a one-for-six reverse split. The Company
expects to complete the reverse split on or prior to May 27, 1998 which would
place the Company in compliance with Rule (c)(4). On April 20, 1998, the Company
received notification from Nasdaq that the Company is not in compliance with
Rule 4310(c)(2) that requires the Company to maintain 1) net tangible assets of
$2 million; 2) market capitalization of $35 million; or 3) net income of
$500,000 in the most recently completed fiscal year or in two of the most
recently completed fiscal years. Nasdaq has requested that the Company provide
to Nasdaq a proposal for achieving compliance with Rule (c)(2) by May 4, 1998.
On May 4, 1998, the Company delivered a proposal to Nasdaq outlining its plan
for achieving such compliance. The Company believes the $2.9 million agreement
with XL Vision, described above in RECENT DEVELOPMENTS - MASTER RESELLER, will
put the Company in compliance with Rule (c)(2). However, if Nasdaq deems the
submission to not warrant continued listing, Nasdaq will issue a formal notice
that specifies the delisting date for the Company's Common Stock. If the Common
Stock were excluded from the SmallCap Market, it would adversely affect the
prices of such securities and the ability of holders 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 biometric identification 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
biometric identification 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 enter a highly competitive business which is
dominated by more traditional identification techniques (such as cards, keys,
passwords and personal information). A number of companies also have automated
biometric identification technology and have sold systems incorporating such
technology in the United States. In addition, the Company is aware of several
other companies which produce or are developing other biometric technologies
which may compete with the Cogent technology or other technologies utilized 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 may 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 other parties or
technologies.
15
<PAGE>
DEPENDENCE UPON SOFTWARE LICENSORS
The Company has acquired certain rights to certain biometric identification
software (the "Licensed Technology") under agreements with software algorithm
suppliers 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 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 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 on January 1, April 1, July 1, and October 1 of
each year during the term of the agreement (as discussed under RECENT
DEVELOPMENTS - COGENT SYSTEMS, INC. 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 into as of April 1, 1997 became nonexclusive as of such
date. For commercial markets the Company had not entered into as of April 1,
1997, including any segment thereof, as required under the terms of the
agreement, the Company stands to lose its exclusivity in those markets and upon
the termination of the 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), the Company would lose all of its
rights to use Cogent's technology which could substantially impair the Company's
ability to continue to offer finger imaging based 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.
Any loss of the Licensed Technology would substantially impair (if not
entirely preclude) the Company's ability to continue to conduct its business
unless the Company was able to make arrangements to obtain alternative
technology from another source, as to which there can be no assurance.
CONTROL OF THE COMPANY
As of March 31, 1998, J. Anthony Forstmann and RMS Limited Partnership, a
Nevada limited partnership controlled by Roy M. Speer ("RMS"), beneficially own
approximately 13.1% and 8.3% 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. In addition, Clearwater Fund
IV, L.L.C. owned 250,000 shares of Series C Preferred Stock that was convertible
into approximately 9,894,867 or approximately 20.3% of the Common Stock on March
31, 1997. Accordingly, such entity is in a position upon conversion of the
Series C Preferred Stock 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.
16
<PAGE>
THE NATIONAL REGISTRY INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 15, 1998 the Company reached a settlement of a lawsuit filed by IIG
on February 13, 1997. IIG asserted multiple claims which include breach of
contract, quantum meruit, unjust enrichment, breach of the implied covenant of
good faith and fair dealing and fraud and seeks an accounting, specific
performance, injunctive and declaratory relief and damages. The settlement
included a $300,000 cash payment made by the Company on May 15, 1998, the
issuance to IIG of 250,000 shares of Common Stock, and the granting to IIG of an
option to purchase 450,000 shares of Common Stock at an exercise price of
$0.5625, the closing bid price of the Common Stock on the SmallCap Market on
April 3, 1998. Under the terms of the settlement the lawsuit will be dismissed
with prejudice.
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
17
<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: May 15, 1998 BY: /s/
--------------------------
DAVID E. BROGAN
CHIEF FINANCIAL OFFICER AND
SECRETARY AND PRICIPAL
FINANCIAL OFFICER
18
<PAGE>
EXHIBIT INDEX
EXHIBIT 11 - Computation of Earnings per Share
EXHIBIT 27 - Financial Data Schedule (Electronic Filing Only)
19
EXHIBIT 11
THE NATIONAL REGISTRY INC.
CALCULATION OF LOSS PER SHARE
(In thousands except per share amounts)
FOR THE THREE MONTHS
ENDED MARCH 31,
1998 1997
--------- ---------
Weighted average shares
outstanding of Common Stock 38,861 34,460
Net loss $ (261) $ (1,664)
--------- ---------
Preferred Stock dividend 74 61
Net loss attributable to
Common Shareholders (335) (1,725)
Net loss per share (1) $ (0.01) $ (0.05)
========= =========
(1) Net loss per common share was compiled by dividing net loss by the weighted
average number of common shares outstanding during the period. Common stock
equivalents, relating to convertible Series A Preferred Stock, convertible
Series C Preferred stock, stock options and warrants are not included in this
calculation due to their anti-dilutive effect.
20
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