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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, 1999
COMMISSION FILE NUMBER 0-20270
THE NATIONAL REGISTRY INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4346070
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2502 ROCKY POINT DRIVE, TAMPA, FLORIDA 33607
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
(813) 636-0099
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
THERE WERE 16,791,481 SHARES OUTSTANDING OF THE NATIONAL REGISTRY
INC.'S COMMON STOCK AS OF MAY 7, 1999.
TOTAL NUMBER OF PAGES: 17 EXHIBIT INDEX BEGINS ON PAGE 17
<PAGE>
THE NATIONAL REGISTRY INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1999
INDEX
Part I. Financial Information
Item 1. Financial Statements
a. Balance Sheets
as of March 31, 1999 and December 31, 1998...................1
b. Statements of Operations
for the Three Months Ended March 31, 1999 and 1998...........2
c. Statements of Cash Flows
for the Three Months Ended March 31, 1999 and 1998...........3
d. Notes to Financial Statements................................4
Item 2. Management's Discussion and Analysis of Financial
Condition and Result of Operations..........................6
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K............................15
Signature.....................................................................16
<PAGE>
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PART 1 - FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
THE NATIONAL REGISTRY INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---------- ------------
(Unaudited)
(In thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 842 $ 1,736
Accounts receivable, net 34 149
Inventory 19 37
Prepaid expenses and other current assets 276 297
------- -------
Total current assets 1,171 2,219
Furniture and equipment, net 319 361
Investment 105 105
======= =======
$ 1,595 $ 2,685
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 310 $ 411
Deferred revenue 238 305
------- -------
Total current liabilities 548 716
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 March 31,
1999 and December 31, 1998 1 1
Common stock, $.01 par value
Authorized - 25,000,000 shares as of March 31, 1999 and
December 31, 1998
Issued and outstanding -
16,771,480 and 16,677,005 shares as of March 31,
1999 and December 31, 1998, respectively 168 167
Additional paid-in capital 47,268 47,138
Accumulated deficit (46,390) (45,337)
------- -------
1,047 1,969
======= =======
$ 1,595 $ 2,685
======= =======
</TABLE>
SEE ACCOMPANYING NOTES
1
<PAGE>
THE NATIONAL REGISTRY INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1999 1998
------------ ------------
<S> <C> <C>
Post contract services revenue $ 97 $ 133
Net product and service revenue 76 1,214
------------ ------------
Total revenue 173 1,347
Cost of products and services 95 303
------------ ------------
Gross profit 78 1,044
Operating expenses:
Product development 268 319
Sales and marketing 295 329
Minimum royalty payment 125 125
General and administrative 453 535
------------ ------------
Total operating expenses 1,141 1,308
------------ ------------
Operating loss (1,063) (264)
Interest and other income 10 3
------------ ------------
Net loss (1,053) (261)
Preferred stock dividend -- 74
------------ ------------
Net loss attributable to common stockholders $ (1,053) $ (335)
============ ============
Basic and diluted loss per common share $ (0.06) $ (0.05)
============ ============
Weighted average number of common shares outstanding 16,741,319 6,476,909
============ ============
</TABLE>
SEE ACCOMPANYING NOTES
2
<PAGE>
THE NATIONAL REGISTRY INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1999 1998
------------ ------------
(In thousands)
<S> <C> <C>
CASH USED IN OPERATING ACTIVITIES:
Net loss $(1,053) $ (261)
Adjustments to reconcile net loss to net cash used in operating activities
Compensation related to stock option grants -- 6
Depreciation 79 153
Changes in operating assets and liabilities:
Accounts receivable 115 (150)
Inventory 18 48
Prepaid expenses and other current assets 21 158
Accounts payable and accrued liabilities (101) (276)
Deferred revenue (67) 458
------- -------
Net cash (used in) provided by operating activities (988) 136
CASH USED IN INVESTING ACTIVITIES:
Purchases of equipment (37) (2)
------- -------
Net cash used in investing activities (37) (2)
CASH PROVIDED BY FINANCING ACTIVITIES:
Proceeds from issuance of common stock upon exercise of
employee stock options 131 --
------- -------
Net cash provided by financing activities 131 --
------- -------
Net (decrease) increase in cash and cash equivalents (894) 134
Cash and cash equivalents at beginning of period 1,736 298
------- -------
Cash and cash equivalents at end of period $ 842 $ 432
======= =======
</TABLE>
SEE ACCOMPANYING NOTES
3
<PAGE>
THE NATIONAL REGISTRY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements are unaudited and
condensed and, therefore, do not contain certain information included in the
annual consolidated financial statements of The National Registry Inc. and its
wholly-owned subsidiary, SAFLINK Corporation, (the "Company" or "NRI"). In the
opinion of management, all adjustments (consisting only of normally recurring
items) it considers necessary for a fair presentation have been included in the
accompanying consolidated financial statements.
The Company's condensed consolidated 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 consolidated financial statements and the
notes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998, as filed with the Securities and Exchange
Commission (the "SEC") on March 31, 1999.
All share and per share amounts in the 1998 financial statements, the
notes thereto, and Management's Discussion and Analysis have been reclassified
to reflect the one-for-six reverse stock split (the "Reverse Stock Split") of
the Company's common stock, $0.01 par value per share (the "Common Stock"), that
was effective on May 27, 1998. Certain other amounts in the 1998 financial
statements and the notes thereto have been reclassified to conform with the 1999
presentation of such items.
2. NET LOSS PER COMMON SHARE
Net loss per common share was computed by dividing the net loss
attributable to common stockholders by the weighted average number of common
shares outstanding during the period. Common stock equivalents, relating to
convertible Series A Preferred Stock and exercise of certain stock options and
warrants, were not included in this calculation due to their anti-dilutive
effect. The following table sets forth the computation of basic and diluted loss
per common share:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
(In thousands except share and per share data) 1999 1998
------------ ------------
<S> <C> <C>
Weighted average number of shares of Common Stock
outstanding
16,741,319 6,476,909
Net loss $ (1,053) $ (261)
Preferred Stock dividend -- 74
------------ ------------
Net loss attributable to common stockholders $ (1,053) $ (335)
============ ============
Basic and diluted loss per common share $ (0.06) $ (0.05)
============ ============
</TABLE>
4
<PAGE>
THE NATIONAL REGISTRY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. STOCKHOLDERS' EQUITY
During the quarter ended March 31, 1999, the Company issued 94,475
shares of Common Stock upon exercise of stock options exercised by certain
employees pursuant to provisions of the Company's 1992 Stock Incentive Plan (the
"Plan"). All such options had an exercise price of $1.38 per share, the closing
price of the Common Stock on the Nasdaq SmallCap Market (the "SmallCap Market")
on the date of grant.
5
<PAGE>
THE NATIONAL REGISTRY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 and Exchange Act of 1934, as amended,
which involve certain risks and uncertainties which could cause actual results
to differ materially from those discussed herein. For a discussion of certain
risks associated with the Company and its operations see MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - FACTORS THAT MAY
AFFECT FUTURE RESULTS included in this quarterly report and in other reports,
proxy and informational statements and other information of the Company filed
with the SEC.
RECENT DEVELOPMENTS
NASDAQ - On April 20, 1999, the Company received a letter from the Nasdaq Stock
Market, Inc. ("Nasdaq") notifying the Company that the Common Stock was not in
compliance with the requirements set forth in Nasdaq Marketplace Rule 4310 (c)
(2) ("Rule 4310 (c) (2)"), which requires the Company to (i) maintain net
tangible assets of $2 million; (ii) maintain a market capitalization of $35
million; or (iii) have recorded net income of $500,000 in the most recently
completed fiscal year or in two of the three most recently completed fiscal
years. Pursuant to such letter, the Company submitted its proposal for achieving
compliance to Nasdaq on May 4, 1999.
The Company is evaluating strategies that would bring it back in
compliance with Rule 4310 (c) (2). These strategies include expanding strategic
alliances, creating additional strategic alliances, selling and issuing capital
stock of the Company and selling certain assets of the Company. There is no
assurance that the Company and the Common Stock will be in compliance with Rule
4310 (c) (2) at any time or that the Common Stock will not be delisted from the
SmallCap Market. If the Common Stock was delisted from the SmallCap Market, it
could adversely affect the prices of such securities and the ability of holders
to sell them. In addition, it could also adversely affect the Company's ability
to raise funds. See "Liquidity and Capital Resources - Subsequent to March 31,
1999."
YEAR 2000 EXPOSURE
The Company recognizes the need to ensure that its operations will not
be adversely impacted by Year 2000 ("Y2K") software failures. The Y2K problem is
the result of computer programs being written using two digits (rather than
four) to define the applicable year. Computer programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than 2000,
which could result in miscalculations or system failures. The Company is
currently working to address the potential impact of the Y2K problem. Its
processes for evaluating and managing the risks and costs associated with this
potential problem are being managed by internal staff members.
The Company has, to date, determined that (i) all of the software that
it has developed for sale to others is Y2K compliant and (ii) all of the
developers of other software that it has acquired for use in
6
<PAGE>
THE NATIONAL REGISTRY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
its business have publicly stated that their products are also Y2K compliant.
The Company is still evaluating the possible effects of its Y2K exposure
relative to certain equipment utilized by it. The Company has not yet determined
the impact that a Y2K failure suffered by vendors, customers, suppliers or other
third party providers would have on the Company, but believes such a failure
could have a material adverse impact on the Company's business, condition
(financial or otherwise), results of operations, prospects and cash flows.
The Company will continue to evaluate the status of its Y2K compliance
to determine whether a contingency plan for dealing with any such failures is
necessary, but no such plan has yet been adopted by the Company. The Company has
not yet determined what the nature and timing of any such contingency plan would
be. Based on the information the Company has developed to date, the Company
estimates that costs of addressing potential problems will not have a material
adverse impact on the Company's business, condition (financial or otherwise),
results of operations, prospects and cash flows. However, there can be no
assurance that these estimates will be achieved and actual results could differ
materially from those anticipated. Specific factors that might cause such
material differences include, but are not limited to, the extent to which the
Company might be adversely impacted by vendors, customers, suppliers and other
third party service providers' failure to remediate their own Y2K issues.
A. RESULTS OF OPERATING ACTIVITIES
For the three month periods ended March 31, 1999 and 1998, the Company
incurred net losses of approximately $1.1 million and $335,000, respectively.
The increase in net loss of approximately $718,000 was primarily due to a
reduction in revenue of approximately $1.2 million, partially offset by a
reduction in cost of products and services provided of approximately $208,000
and a reduction in operating expenses of approximately $167,000.
REVENUE AND GROSS PROFIT
For the three month periods ended March 31, 1999 and 1998, the Company
reported total revenues of $173,000 and $1.3 million, respectively. The $1.1
million decrease in revenue was primarily due to receipt of approximately $1.0
million of revenue from the sale of prepaid licenses to XL Vision, Inc. during
the first quarter of 1998 with no comparable transaction during the first
quarter of 1999. Revenue was also reduced by the transfer of management
responsibility for the identification and authentication aspects of the State of
Connecticut welfare system to the prime contractor, Polaroid Corporation,
effective March 1, 1999. The Company further transferred responsibility for the
identification and authentication aspects of the State of New Jersey welfare
system to Image Computing, Inc. effective April 1, 1999.
Revenues for the three months ended March 31, 1999, consisted of
approximately $97,000 of maintenance revenue from the States of Connecticut and
New Jersey and $76,000 from sales of software, hardware and services to various
commercial users.
Revenues for the three months ended March 31, 1998, consisted of
approximately $1.0 million related to the sale of prepaid licenses for software
products and services to XL Vision, approximately
7
<PAGE>
THE NATIONAL REGISTRY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
$133,000 from maintenance revenue from the States of Connecticut and New Jersey,
and approximately $214,000 related to sales of software, hardware and services
to various other commercial users.
The Company's gross margin percentages for the three month periods
ended March 31, 1999 and 1998 were 45% and 78%, respectively. The changes from
1998 to 1999 were primarily due to a change in product mix which included a
lower level of software sales in 1999.
OPERATING EXPENSES
Total operating expenses for the three month period ended March 31,
1999 decreased approximately $167,000 (13%) to approximately $1.1 million from
approximately $1.3 million for the same period in 1998. This decrease was
primarily due to the expense reduction plan implemented by the Company in late
1997, the sale of the Company's healthcare line of business, and its elimination
of expenses outside of its current strategic focus on indirect sales and
marketing of software products. The following table provides a breakdown of the
dollar and percentage changes in operating expenses for the three month period
ended March 31, 1999, as compared to the same period in 1998:
(In thousands) INCREASE INCREASE
(DECREASE) (DECREASE)
--------- ----------
Product development $ (51) (16)%
Sales and marketing (34) (10)
Minimum royalty payments -- --
General and administrative (82) (15)
----- -----
$(167) (13)%
===== =====
PRODUCT DEVELOPMENT - The decrease in product development expenses was 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
completed its transition out of hardware development through its focus on sales
of software products that support alternative lower cost hardware technology
currently emerging from other suppliers.
The Company's software product strategy has been to develop and market
a series of software developers' kits that operate on a variety of client/server
platforms and to then use those kits to develop and market a series of packaged
applications that provide biometric authentication for a range of client/server
systems. Software developers' kits have been developed for both workstations and
servers and include biometric processing of face, voice, and finger biometric
identifiers on a workstation, one-to-one match or verification on the
workstation, one-to-one match on a server, and one-to-many search on a server
using finger imaging. The software developers' kits operate on Windows 95 and
Windows
8
<PAGE>
THE NATIONAL REGISTRY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
NT(R) personal computers and on Windows NT, SUN Solaris(TM), DEC(R) Alpha,
IBM(R) AIX, and HP UNIX servers.
To date, the Company has developed and is currently marketing the
following Client/Server packaged applications: the Screen Saver for Windows 95,
the Secure Authentication Facility for Windows(TM), Secure Authentication
Facility for Novell NetWare(R)(TM); and Secure Authentication Facility for
Unicenter(TM) single sign-on module for Windows NT. The Company has also
developed additional products within the Secure Authentication Facility product
line for Internet applications including Secure Authentication Facility for
Internet Information Server(TM) and its SAFSsite(TM) product, as well as its
SAFtyLatch(TM) product, a file encryption application for stand alone and
networked computers.
There is no assurance that the Company`s transition out of hardware
development and into software development will be successful, 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. There can be 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.
SALES AND MARKETING - The decrease in sales and marketing expenses was primarily
due to decreases in employee expenses, travel, professional consulting services,
and advertising expenses. These decreases were 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 in May 1998, eliminated a portion of its other sales and marketing
staff, closed certain offices and shifted certain sales and marketing efforts to
some 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 its new SAFsite(TM) and SAFtyLatch products will meet a
demonstrated market need, there can be no assurance that the Company will be
able to secure additional contracts for its products and services in commercial
markets or, if it is able to secure such contracts, that any 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 to test, evaluate and pilot
applications.
The Company expects that sales and marketing expenses will increase if
sales of the Company's products increase.
9
<PAGE>
THE NATIONAL REGISTRY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL AND ADMINISTRATIVE - The decrease in general and administrative expenses
was primarily due to a decrease in legal expenses of approximately $66,000 as
well as decreases in employee expense, travel, telephone, and other expenses
resulting from the expense reduction plan implemented by the Company in late
1997. The Company expects certain general and administrative costs to increase
if sales of the Company's products increase.
B. LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL
Cash and working capital as of March 31, 1999 were approximately
$842,000 and $623,000, respectively, compared to approximately $1.7 million and
$1.5 million, respectively, as of December 31, 1998. The decrease in the
Company's cash and working capital as of March 31, 1999 compared to December 31,
1998 is primarily due to the net operating expenses.
DIVIDENDS
Since its incorporation, the Company has not paid or declared dividends
on the Common Stock, nor does it intend to pay or declare cash dividends on its
Common Stock in the forseeable future.
SUBSEQUENT TO MARCH 31, 1999
The Company used net cash of approximately $857,000, excluding $37,000
in capital expenditures, during the three months ended March 31, 1999, and
generated net cash of approximately $136,000, excluding $2,000 in capital
expenditures, during the three months ended March 31, 1998. Cash as of May 7,
1999 was approximately $442,000.
On April 6, 1999 the Company paid Cogent Systems, Inc. ("Cogent")
$125,000 pursuant to the licensing agreement between Cogent and the Company.
Under such agreement, NRI is obligated to pay Cogent an additional $125,000 as a
minimum quarterly royalty payment on July 1, 1999.
The Company believes that its existing working capital, together with
anticipated cash flows from sales under 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
beyond June 30, 1999. Absent a significant increase in sales, which itself may
require a significant increase in working capital, the Company will require
significant additional funds during 1999 to continue its operations.
Accordingly, the Company is reviewing the options available to it to obtain
additional financing.
The options the Company is reviewing include, but are not limited to,
the sale and issuance of stock, the sale and issuance of debt 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
10
<PAGE>
THE NATIONAL REGISTRY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
transaction would be in the form of the sale and issuance of additional shares
of Common Stock or securities that are convertible into Common Stock, which
would substantially increase the number of shares of Common Stock outstanding on
a fully-diluted basis.
There is a significant likelihood that additional funding 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
curtail or cease operations. Even if such additional funding is obtained, there
is no assurance that the Company will be able to generate significant sales of
its products or services, or, if the Company is able to consummate significant
sales, that any such sales would be profitable.
C. FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to other information contained in this quarterly report,
the following factors, among others, may have affected, and in the future could
affect the Company's actual results and could cause future results to differ
materially from those in any forward looking statements made by or on behalf of
the Company. Factors that could cause future results to differ from expectations
include, but are not limited to the following: the Company's need for additional
funds, the Company's limited operating history and substantial accumulated net
losses, the SmallCap Market eligibility and maintenance requirements, the
possible delisting of the Company's Common Stock from the SmallCap Market,
control of the Company, technological and market uncertainty, competition, and
the Company's dependence upon software licensors.
NEED FOR ADDITIONAL FUNDS
The Company believes that its existing working capital, together with
anticipated cash flows from sales under current contracts, continuation of it's
operating expense reduction plan and the reduction of capital expenditures will
be insufficient to meet its expected working capital needs beyond June 30, 1999.
Accordingly, the Company is reviewing the options available to it to obtain
additional funding. 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 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. The failure to obtain, or
delay in obtaining, such additional funding would cause the Company to curtail
or cease operations. Even if such additional funding is obtained, there is no
assurance that the Company will be able to generate significant sales of its
products or services, or, if the Company is able to consummate significant
sales, that any such sales would be profitable.
LIMITED OPERATING HISTORY, SUBSTANTIAL ACCUMULATED NET LOSSES
From its commencement of business in October 1991 through the end of
1997, the Company was principally engaged in organizational, development and
marketing activities. The Company has an accumulated net loss of approximately
$46.4 million since inception through March 31, 1999, including a net loss of
approximately $1.1 million for the three months ended March 31, 1999. There is
no assurance that the Company will be able to generate significant revenues or
any net income in the future.
11
<PAGE>
THE NATIONAL REGISTRY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
NASDAQ SMALLCAP MARKET ELIGIBILITY AND MAINTENANCE REQUIREMENTS; POSSIBLE
DELISTING OF SECURITIES FROM THE NASDAQ SMALLCAP MARKET
On April 20, 1999, the Company received a letter from the Nasdaq Stock
Market, Inc. ("Nasdaq") notifying the Company that the Common stock was not in
compliance with the requirements set forth in Nasdaq Marketplace Rule 4310 (c)
(2) ("Rule 4310 (c) (2)"), which requires the Company to (i) maintain net
tangible assets of $2 million; (ii) maintain a market capitalization of $35
million; or (iii) have recorded net income of $500,000 in the most recently
completed fiscal year or in two of the three most recently completed fiscal
years. Pursuant to such letter, the Company submitted its proposal for achieving
compliance to Nasdaq on May 4, 1999.
The Company is evaluating strategies that would bring it back in
compliance with Rule 4310 (c) (2). These strategies include expanding strategic
alliances, creating additional strategic alliances, selling and issuing capital
stock of the Company and selling certain assets of the Company. There is no
assurance that such funding will be available on terms acceptable to the
Company, if at all. Additionally there is no assurance that the Company will be
able to make itself compliant with Rule 4310 (c) (2), that the Company will be
in compliance with Rule 4310 (c) (2) in the future or that the Common Stock will
not be delisted from the SmallCap Market. If the Common Stock was delisted and
excluded from trading on the SmallCap market, it could adversely affect the
prices of such securities and the ability of holders thereof to sell them. See
"Liquidity and Capital Resources - Subsequent to March 31, 1999."
CONTROL OF THE COMPANY
As of March 31, 1999, RMS Limited Partnership, a Nevada limited
partnership controlled by Roy M. Speer ("RMS"), Francis R. Santangelo and J.
Anthony Forstmann beneficially owned approximately 47.8%, 7.8% and 4.1% of the
Common Stock, respectively. Mr. Forstmann, Mr. Santangelo and RMS are parties to
a certain stockholders' voting agreement pursuant to which they agreed to vote
certain shares for directors nominated by Mr. Forstmann or RMS, 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 March 31, 1999, Clearwater Fund
III, LP ("Clearwater") owned 1,000,000 shares or approximately 6.5% of the
Common Stock and Home Shopping Network, Inc. ("HSN") owned 100,000 shares of the
Series A Preferred Stock convertible into 1,056,026 shares or approximately 5.9%
of the after conversion outstanding shares of Common Stock. Accordingly,
Clearwater or HSN with one or more of the other persons or entities set forth
above, is in position upon conversion to exercise significant control over the
general affairs of the Company, to control the vote on any matters presented to
stockholders and to direct the business and policies of the Company.
TECHNOLOGICAL AND MARKET UNCERTAINTY
The development and marketing of the Company's products and services
may be impeded by various possible problems relating to the development,
production, distribution or marketing of such products and services, which
problems may be beyond the financial and technical abilities of the
12
<PAGE>
THE NATIONAL REGISTRY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 a manner that 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 that produce or are developing other biometric I&A
technologies which may compete with the Licensed Technology (as defined below)
or may be integrated into I&A products and services that are competitive with
those offered by the Company. Such technologies include, among others,
identification by eye retina blood vessel patterns, hand geometry and signature
analysis. The Company's products and services compete with products of companies
that have substantially greater resources than the Company and are better
equipped than the Company. There is no assurance that the Company will be able
to compete successfully against these companies or technologies. Announcements
and advances by the Company's competitors concerning new products or features,
governmental or other contracts and developments or disputes relative to
proprietary rights may have a material adverse impact on the Company's business,
condition (financial or otherwise), results of operations and prospects.
DEPENDENCE UPON SOFTWARE LICENSORS
The Company has acquired certain rights to biometric I&A software (the
"Licensed Technology") under agreements with software algorithm suppliers
including Cogent Systems, Inc., ITT Industries, Inc., Lernout & Hauspie Speech
Products NV, Veridicom, Inc., Visionics Corporation and Who? Vision Systems 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. Although the Company is not in default of any such
agreements 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. 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 producers of such technology.
13
<PAGE>
THE NATIONAL REGISTRY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 3. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates.
The Company does not use any hedging transactions or any financial instruments
for trading purposes and is not a party to any leveraged derivatives.
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER
------
27 Financial Data Schedule (Electronic filing only)
(b) Reports on Form 8-K
None
15
<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 __, 1999 BY: /s/ JAMES W. SHEPPERD
----------------------------
James W. Shepperd
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
16
<PAGE>
EXHIBIT INDEX
-------------
EXHIBIT DESCRIPTION
- ------- -----------
27 Financial Data Schedule (Electronic Filing Only)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 842
<SECURITIES> 0
<RECEIVABLES> 34
<ALLOWANCES> 20
<INVENTORY> 19
<CURRENT-ASSETS> 1,171
<PP&E> 319
<DEPRECIATION> 1,191
<TOTAL-ASSETS> 1,595
<CURRENT-LIABILITIES> 548
<BONDS> 0
1
0
<COMMON> 168
<OTHER-SE> 878
<TOTAL-LIABILITY-AND-EQUITY> 1,595
<SALES> 173
<TOTAL-REVENUES> 173
<CGS> 95
<TOTAL-COSTS> 95
<OTHER-EXPENSES> 1,141
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,053)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,053)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,384)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
