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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, 1999
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 18,476,154 SHARES OUTSTANDING OF THE NATIONAL REGISTRY
INC.'S COMMON STOCK AS OF AUGUST 10, 1999.
TOTAL NUMBER OF PAGES: 18 EXHIBIT INDEX BEGINS ON PAGE 18
<PAGE>
THE NATIONAL REGISTRY INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
INDEX
Part I. Financial Information
Item 1. Financial Statements
a. Condensed Consolidated Balance Sheets
as of June 30, 1999 and December 31, 1998....................1
b. Condensed Consolidated Statements of Operations
for the Three and Six Month Periods Ended
June 30, 1999 and 1998.......................................2
c. Condensed Consolidated Statements of Cash Flows
for the Six Month Periods Ended June 30, 1999 and 1998.......3
d. Notes to Condensed Consolidated Financial Statements.........4
Item 2. Management's Discussion and Analysis of Financial
Condition and Result of Operations..........................7
Item 3. Quantitive and Qualitative Disclosures About Market Risk....13
Part II. Other Information
Item 1. Legal Proceedings...........................................14
Item 4. Submission of Matters to a Vote of Security Holders.........15
Item 6. Exhibits and Reports on Form 8-K............................16
Signature.....................................................................17
<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>
JUNE 30,
1999 DECEMBER 31,
ASSETS (UNAUDITED) 1998
----------- ------------
(In thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,557 $ 1,736
Accounts receivable, net 234 149
Common stock subscriptions receivable 187 --
Inventory 90 37
Investment 105 105
Prepaid expenses and other current assets 260 297
-------- --------
Total current assets 2,433 2,324
Furniture and equipment, net 241 361
======== ========
$ 2,674 $ 2,685
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 624 $ 411
Deferred revenue 255 305
-------- --------
Total current liabilities 879 716
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 June 30, 1999 and
December 31, 1998 1 1
Common stock, $.01 par value
Authorized - 50,000,000 shares as of June 30, 1999 and
25,000,000 shares as of December 31, 1998, respectively
Issued and outstanding -
16,791,484 and 16,677,005 shares as of June 30, 1999
and December 31, 1998, respectively 168 167
Common stock subscribed 1,500 --
Additional paid-in capital 47,282 47,138
Accumulated deficit (47,156) (45,337)
-------- --------
1,795 1,969
======== ========
$ 2,674 $ 2,685
======== ========
</TABLE>
SEE ACCOMPANYING NOTES
1
<PAGE>
<TABLE>
<CAPTION>
THE NATIONAL REGISTRY INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------- ------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Post contract services revenue $ -- $ 143 $ 97 $ 255
Net product and service revenue 437 2,457 513 3,692
-------- -------- -------- --------
Total revenue 437 2,600 610 3,947
Cost of products and services 25 240 120 544
-------- -------- -------- --------
Gross profit 412 2,360 490 3,403
Operating expenses:
Product development 235 363 503 682
Sales and marketing 324 279 619 596
Minimum royalty payment 125 125 250 250
General and administrative 479 827 932 1,369
-------- -------- -------- --------
Total operating expenses 1,163 1,594 2,304 2,897
-------- -------- -------- --------
Operating income (loss) (751) 766 (1,814) 506
Interest and other income (expense) (15) 253 (5) 252
-------- -------- -------- --------
Net income (loss) (766) 1,019 (1,819) 758
Preferred stock dividend -- 75 -- 149
-------- -------- -------- --------
Net income (loss) attributable to common
stockholders $ (766) $ 944 $ (1,819) $ 609
======== ======== ======== ========
Basic earnings (loss) per common share $ (0.05) $ 0.15 $ (0.11) $ 0.09
Diluted earnings (loss) per common share $ (0.05) $ 0.07 $ (0.11) $ 0.05
Weighted number of common shares outstanding,
basic 16,785 6,509 16,764 6,493
Diluted number of common shares outstanding 16,785 12,934 16,764 12,918
</TABLE>
SEE ACCOMPANYING NOTES
2
<PAGE>
<TABLE>
<CAPTION>
THE NATIONAL REGISTRY INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
1999 1998
---------- ----------
(in thousands)
<S> <C> <C>
CASH USED IN OPERATING ACTIVITIES:
Net income (loss) $(1,819) $ 758
Adjustments to reconcile net Income (loss) to net cash used in operating
activities:
Compensation related to stock option grants -- 14
Compensation related to transfer of assets -- 6
Issuance of stock and warrants for legal settlement and services -- 476
Depreciation 150 305
Loss on disposal of fixed assets 25 --
Changes in operating assets and liabilities:
Accounts receivable (85) (1,077)
Common stock subscriptions receivable (187) --
Inventory (53) 117
Prepaid expenses and other current assets 37 (203)
Accounts payable and accrued liabilities 213 (721)
Deferred revenue (50) 139
------- -------
Net cash used in operating activities (1,769) (186)
CASH USED IN INVESTING ACTIVITIES:
Purchases of equipment (54) (18)
------- -------
Net cash used in investing activities (54) (18)
CASH PROVIDED BY FINANCING ACTIVITIES:
Proceeds from issuance of common stock 144 --
Proceeds from private placement 1,500 --
------- -------
Net cash provided by financing activities 1,644 --
------- -------
Net decrease in cash and cash equivalents (179) (204)
Cash and cash equivalents at beginning of period 1,736 298
------- -------
Cash and cash equivalents at end of period $ 1,557 $ 94
======= =======
</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.
2. EARNINGS (LOSS) PER COMMON SHARE
For the three and six month periods ended June 30, 1999 and 1998, basic
earnings (loss) per common share was computed by dividing 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 common 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 periods ended June 30, 1999
due to their anti-dilutive effect.
4
<PAGE>
THE NATIONAL REGISTRY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table sets forth the computation of basic and diluted
earnings (loss) per common share:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
(In thousands except per share data) 1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Weighted average number of shares of
Common Stock outstanding 16,785 6,509 16,764 6,943
Diluted shares outstanding 16,785 12,934 16,764 12,918
Net income (loss) $ (766) $ 1,019 $ (1,819) $ 758
Preferred Stock dividend -- 75 -- 149
======== ======== ======== ========
Net income (loss) attributable to common
stockholders $ (766) $ 944 $ (1,819) $ 609
======== ======== ======== ========
Basic earnings (loss) per common share $ (0.05) $ 0.15 $ (0.11) $ 0.09
Diluted earnings (loss) per common share $ (0.05) $ 0.07 $ (0.11) $ 0.05
</TABLE>
3. STOCKHOLDERS' EQUITY
During the quarter ended June 30, 1999, the Company issued 20,000
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.
4. SUBSEQUENT EVENTS
The Company issued 1,681,670 shares of Common Stock, and warrants to
purchase an additional 840,835 shares of Common Stock at $1.00 per share, for
$2,102,000 on July 23, 1999. The warrants may be exercised by the holders at any
time until July 23, 2001. The June 30, 1999 balance sheet includes those
subscriptions received as of June 30, 1999.
5
<PAGE>
THE NATIONAL REGISTRY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following proforma condensed consolidated balance sheet presents
the Company's financial position as of June 30, 1999 as though the placement had
been completed as of June 30, 1999 (dollars in thousands):
ASSETS
Current assets:
Cash and cash equivalents $ 2,321
Accounts receivable - net 234
Inventory 90
Investment 105
Prepaid expenses and other current assets 260
--------
Total current assets 3,010
Furniture and equipment - net 241
--------
$ 3,251
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 624
Deferred revenue 255
--------
Total current liabilities 879
Stockholders' equity
Series A Preferred stock 1
Common stock 185
Additional paid-in capital 49,342
Accumulated deficit (47,156)
--------
Total stockholders' equity 2,372
--------
$ 3,251
========
6
<PAGE>
THE NATIONAL REGISTRY INC.
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. 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:
o control of the Company;
o the Company's need for additional funds;
o the Company's limited operating history and substantial
accumulated net losses;
o the SmallCap Market eligibility and maintenance requirements;
o the possible delisting of the Company's Common Stock from the
SmallCap Market;
o technological and market uncertainty;
o competition; and
o the Company's dependence upon software licensors.
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.
As discussed in Note 4 to the financial statements, the Company raised
$2.1 million in capital through the placement of its Common Stock and warrants
to purchase Common Stock. This transaction was completed on July 23, 1999. While
the Company believes that this transaction will bring it back in compliance with
Rule 4310 (c) (2), 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 June 30, 1999."
7
<PAGE>
THE NATIONAL REGISTRY INC.
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 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 and six month periods ended June 30, 1999, the Company
incurred net losses of approximately $766,000 and $1.8 million, respectively,
compared to net income attributable to common stockholders of $944,000 and
$609,000, respectively, for the comparable periods in 1998. These unfavorable
variances of approximately $1.7 million and $2.4 million, respectively, were
primarily due to reductions in gross profit of approximately $1.9 million and
$2.9 million, respectively, partially offset by (i) reductions in cost of
products and services provided of approximately $215,000 and $424,000,
respectively, and (ii) reductions in operating expenses of approximately
$431,000 and $593,000, respectively.
8
<PAGE>
THE NATIONAL REGISTRY INC.
REVENUE AND GROSS PROFIT
For the three and six month periods ended June 30, 1999, the Company
reported total revenue of $437,000 and $610,000, respectively, compared to $2.6
million and $3.9 million for the comparable periods in 1998. The revenue
decreases were primarily due to receipt of approximately $1.4 million and $3.5
million of revenue from the sale of prepaid licenses to XL Vision, Inc. during
the respective three and six month periods in 1998 with no comparable
transactions during 1999. Revenue for the six months ended June 30, 1999 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 and the transfer
of responsibility for the identification and authentication aspects of the State
of New Jersey welfare system to Image Computing, Inc. effective April 1, 1999.
Revenue of $437,000 for the three months ended June 30, 1999 was
primarily from the sale of the Company's SAFtyLatch software to consumers
through various resellers. Revenue of $610,000 for the six months ended June 30,
1999 consisted of approximately $97,000 of maintenance revenue from the States
of Connecticut and New Jersey and $513,000 from sales of software, hardware and
services to consumers and various commercial users.
The Company's gross margin percentages for the three and six month
periods ended June 30, 1999 were approximately 94% and 80%, respectively
compared to approximately 91% and 86% for the comparable periods in 1998. The
changes from 1998 to 1999 were primarily due to a change in product mix.
OPERATING EXPENSES
Total operating expenses for the three months ended June 30, 1999
decreased approximately $431,000 (27%) to approximately $1.2 million from
approximately $1.6 million for the same period in 1998. Total operating expenses
for the six months ended June 30, 1999 decreased approximately $593,000 (20%) to
approximately $2.3 million from approximately $2.9 million for the same period
in 1998. These decreases were primarily due to the Company's ongoing expense
reduction plan, the sale of the Company's healthcare line of business, and its
elimination of expenses outside of its current strategic focus on indirect sales
and marketing of software products. The following table provides a breakdown of
the dollar and percentage changes in operating expenses for the three and six
month periods ended June 30, 1999, as compared to the same periods in 1998:
THREE MONTHS SIX MONTHS
(In thousands) INCREASE INCREASE INCREASE INCREASE
(DECREASE) (DECREASE) (DECREASE) (DECREASE)
---------- ---------- ---------- ----------
Product development $(128) (35)% $(179) (26)%
Sales and marketing 45 16 23 4
Minimum royalty payments -- -- -- --
General and administrative (348) (42) (437) (32)
----- ----- ----- -----
$(431) (27)% $(593) (20)%
===== ===== ===== =====
9
<PAGE>
THE NATIONAL REGISTRY INC.
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
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 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 SAFsite(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 increases in sales and marketing expenses were
centered in employee expenses, travel and advertising expenses. These increases
were primarily due to costs associated with
10
<PAGE>
THE NATIONAL REGISTRY INC.
introduction of the Company's SAFtyLatch product to original equipment
manufacturers ("OEM's") as well as to consumers through the retail distribution
channel.
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.
GENERAL AND ADMINISTRATIVE - The decreases in general and administrative
expenses were primarily due to decreases in depreciation, legal expenses,
employee expense, travel, telephone, and other expenses resulting from the
Company's ongoing expense reduction plan. 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 June 30, 1999 were approximately $1.6
million and $1.4 million, respectively, compared to $842,000 and $623,000,
respectively, as of March 31, 1999 and approximately $1.7 million and $1.5
million, respectively, as of December 31, 1998. The increase in the Company's
cash and working capital as of June 30, 1999 compared to March 31, 1999 was
primarily due to the receipt of approximately $1.3 million of cash and $187,000
of common stock subscriptions receivable for Common Stock and Warrants issued on
July 23, 1999 under a private placement finalized on that date, partially offset
by net operating expenses for the period. The decrease as of March 31, 1999 when
compared to December 31, 1998 was primarily due to net operating expenses for
the period.
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.
11
<PAGE>
THE NATIONAL REGISTRY INC.
SUBSEQUENT TO JUNE 30, 1999
The Company used net cash of approximately $1.8 million (excluding $1.6
million generated from the sale of Common Stock and Common Stock purchase
warrants and $54,000 used for capital expenditures) during the six months ended
June 30, 1999, and 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 2, 1999 was approximately $1.7 million.
On July 6, 1999, the Company paid Cogent Systems, Inc. ("Cogent") the
final $125,000 minimum royalty payment required by the licensing agreement
between Cogent and the Company. The Company is currently negotiating a
modification to the license to eliminate a $10 million extension payment due on
or before October 1, 1999. If an acceptable modification is not achieved, the
Company will most likely elect not to make the extension payment and will allow
the license to terminate. If the license terminates on October 1, 1999, the
Company anticipates that it will use alternate suppliers for its products that
use finger imaging technology.
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 December 31, 1999. Absent a significant increase in sales, which itself
may require a significant increase in working capital, the Company will require
significant additional funds to continue its operations beyond December 31,
1999. 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 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.
12
<PAGE>
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.
13
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 13, 1999, Anthony Calandra (the "Plaintiff") filed suit
against the Company and J. Anthony Forstmann, a director and former chairman of
the Company, (collectively, the "Defendants") in the United States District
Court Middle District of Florida Tampa Division (Civil Action No.
99-1135-CIV-T-25E). The amended complaint claims, among other things, that (i)
the Company allegedly granted to the Plaintiff a right to purchase 150,000
shares of common stock of the Company at $.20 per share, (ii) the Company
allegedly refused to honor the option in response, (iii) the Company erroneously
took the position that the option was to be adjusted for a one for six reverse
split of the stock, and (iv) the Plaintiff is entitled to specific performance
or damages due to the diminished value of the stock since his attempts to
exercise his option, and/or the Defendants are estopped to claim that the one
for six reverse split is effective as to the Plaintiff's option since the option
did not allegedly provide for a reverse split and because the Plaintiff
attempted to exercise his option before the reverse split and therefore it would
allegedly be unjust and inequitable to dilute Plaintiff's rights. The Plaintiff
demands specific performance and/or damages from the Defendants consisting of
the difference between the exercise price of the option and the highest price of
the stock on the date(s) when the Plaintiff sought to exercise the option or
equitable relief to issue a mandatory decree directing the Defendants to honor
the option pursuant to its terms, plus damages in an amount sufficient to
reimburse Plaintiff for losses he sustained due to Defendants' alleged failure
to honor the option in a timely and appropriate manner, plus pre-judgment
interest, plus costs of action, and trial by jury of all issues. The Company
does not believe the lawsuit has merit and intends to vigorously defend the
claims asserted against it.
On June 16, 1999, International Interest Group, Inc. ("IIG") filed suit
against the Company and Mr. Forstmann in the Superior Court of the State of
California for the County of Los Angeles (Civil Action No.: BC212033). This
lawsuit relates to the alleged failure of the Company to perform under the terms
of a settlement agreement relating to another lawsuit filed by IIG. The
complaint alleges three causes of action: (i) the Company's breach of contract
with IIG causing IIG to sustain damages in excess of $1.0 million; (ii) fraud;
(iii) recission by IIG against the Company and Mr. Forstmann. On the first and
second causes of action, IIG has asked the court for actual contract damages,
consequential damages, and attorney fees and costs incurred in the prosecution
of these actions. On the second cause of action, IIG has also asked for punitive
damages. On the third cause of action, IIG has asked for a judicial order of
recission restoring to IIG all rights, causes, claims and remedies in the
lawsuit. On all causes of action, IIG seeks all recoverable costs of suit
incurred, prejudgment interest on all causes of action, and other relief the
court deems just and proper. The Company does not believe the lawsuit has merit
and intends to vigorously defend the claims asserted against it.
ITEM 2. CHANGES IN SECURITIES
None
14
<PAGE>
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 11,
1999 (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>
Hector J. Alcalde 15,311,969 0 98,825 0
Jeffrey P. Anthony 15,282,206 0 128,588 0
Frank M. Devine 15,310,679 0 100,115 0
J. Anthony Forstmann 15,312,013 0 98,781 0
O. G. Greene 15,310,846 0 99,948 0
Donald C. Klosterman 15,311,514 0 99,280 0
Robert J. Rosenblatt 15,310,113 0 100,681 0
Francis R. Santangelo 15,311,263 0 99,531 0
</TABLE>
PROPOSAL 2. AMENDMENT TO INCREASE AUTHORIZED COMMON STOCK
The proposal to increase the authorized Common Stock from 25,000,000
shares to 50,000,000 shares was approved with 15,028,202 votes for the proposal,
361,664 votes against the proposal, 20,928 votes abstaining and 0 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, 1999 was ratified with 15,365,081 votes for the proposal, 20,804
votes against the proposal, 24,909 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
------
4.1 First Amended and Restated Stockholders' Voting Agreement
dated as of June 25, 1999 by and Among RMS Limited
Partnership, Francis R. Santangelo and J. Anthony
Forstmann
27 Financial Data Schedule (Electronic filing only)
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on July 23, 1999
announcing the placement of 1,681,670 shares of its Common
Stock and warrants to purchase 840,835 shares of its Common
Stock for $2.1 million.
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 13, 1999 BY: /s/ JAMES W. SHEPPERD
----------------------------
James W. Shepperd
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
17
<PAGE>
THE NATIONAL REGISTRY INC.
EXHIBIT INDEX
EXHIBIT 4.1 - First Amended and Restated Stockholders' Voting Agreement dated
as of June 25, 1999 by and Among RMS Limited Partnership, Francis
R. Santangelo and J. Anthony Forstmann
EXHIBIT 27 - Financial Data Schedule (Electronic Filing Only)
18
EXHIBIT 4.1
THE NATIONAL REGISTRY INC.
FIRST AMENDED AND RESTATED STOCKHOLDERS' VOTING AGREEMENT
THIS FIRST AMENDED AND RESTATED STOCKHOLDERS' VOTING AGREEMENT (the
"Agreement") dated as of June 25, 1999 ("Effective Date"), is being entered into
by and among RMS Limited Partnership ("RMS"), a Nevada limited partnership,
Francis R. Santangelo ("Santangelo") and J. Anthony Forstmann ("Forstmann" and
together with RMS and Santangelo are the "Shareholders" and individually a
"Shareholder").
WITNESSETH
WHEREAS, the Shareholders are parties to that certain Stockholders'
Voting Agreement ("Voting Agreement") dated March 14, 1995 concerning certain
voting arrangements with respect to shares of common stock ("Common Stock"), par
value $0.01 per share, of The National Registry Inc. ("NRI"), a Delaware
corporation, and certain options ("Options") to acquire such Common Stock;
WHEREAS, RMS and Santangelo acquired certain shares of Series "C"
Convertible Preferred Stock ("Preferred Stock") of NRI pursuant to a Stock
Purchase Agreement dated as of December 17, 1998 and converted such shares into
shares of Common Stock;
WHEREAS, as of the date hereof, Santangelo owns of record 1,308,377
shares of Common Stock and Options to acquire 249,999 additional shares of
Common Stock, Forstmann owns of record 583,333 shares of Common Stock and
Options to acquire 117,917 additional shares of Common Stock and RMS owns of
record 8,080,805 shares of Common Stock; and
WHEREAS, the Shareholders desire to enter into this Agreement, which
amends and restates the Voting Agreement in its entirety;
NOW, THEREFORE, in consideration of the mutual covenants and
obligations set forth in this agreement, the parties hereto hereby agree as
follows:
1. Tandem Voting. Subject to Section 2 below, each of Santangelo and
Forstmann (on behalf of itself and each Affiliate of such Shareholder that may
acquire such Voting Shares on or after the date hereof) agrees to vote in tandem
with and in like manner as and as directed by RMS (or its designee) for the
election of directors of NRI and on all other matters which may be presented at
any meeting of the shareholders of NRI or with respect to which the consent of
the shareholders of NRI is sought. RMS shall provide written notice to each
Santangelo and Forstmann on or prior to the time of a vote for the election of
directors of NRI or on any other matters which may be presented at any meeting
of the shareholders of NRI or as to which the consent of the shareholders of NRI
is sought. Such notice shall state how such Shareholder shall vote on such
matter or the consent required of such Shareholder.
<PAGE>
THE NATIONAL REGISTRY INC.
2. Director Designee.
(a) RMS hereby agrees to vote the Voting Shares (as hereinafter
defined) in favor of one nominee selected by Forstmann ("Director Designee"),
and reasonably acceptable to RMS, for election to the board of directors of NRI.
(b) If at any time Forstmann shall notify RMS of his desire to
have his Director Designee removed, RMS shall vote all of the Voting Shares for
the removal of such Director Designee and shall undertake all other reasonable
actions, at Forstmann's expense, permitted under applicable law for the removal
of such Director Designee.
(c) In the event that the Director Designee ceases to serve for
any reason whatsoever, RMS shall vote all of the Voting Shares for the election
of a new Director Designee and shall undertake all other reasonable actions, at
Forstmann's expense, permitted under applicable law for the election of such
Director Designee.
3. Termination.
(a) In the event that Forstmann or his Affiliates cease to
hold, in aggregate, at least 2% (two percent) of the issued and outstanding
Common Stock, then Section 2 herein shall cease to apply and the Shareholders
and their respective Affiliates shall be released from any obligations
thereunder.
(b) In the event that (i) more than 50% (fifty percent) of the
issued and outstanding Common Stock is sold to any Person or "group", as such
term is defined under the Securities Exchange Act of 1934, as amended, other
than any of the Shareholders, (ii) NRI sells substantially all of its assets to
any Person, other than to an Affiliate, and RMS and its Affiliates hold less
than 50% (fifty percent) of the voting interest of such Person or (iii) NRI
merges with any Person, other than with an Affiliate, and RMS and its Affiliates
hold in the aggregate less than 25% (twenty five percent) of the voting interest
of such Person, then in each case this Agreement shall terminate as of the date
of consummation of any such transaction.
(c) In the event that any Shareholder ceases to hold at least
50% (fifty percent) of the Common Stock (including any Common Stock which may be
received upon conversion or exchange of any other security of NRI) that such
Shareholder holds on the date hereof, then this Agreement shall terminate with
respect to such Shareholder and such Shareholder shall be released from all
obligations hereunder. If, by the operation of the this Section 3(c), only one
Shareholder shall be bound by the terms and conditions of this Agreement, then
this Agreement shall terminate as of such date.
2
<PAGE>
THE NATIONAL REGISTRY INC.
4. Notice Provisions. All notices or communications required to be given
by any Person pursuant to this Agreement shall be effected in writing either by
personal delivery or by registered or certified mail, postage prepaid with
return receipt requested to the addresses indicated below:
If to Forstmann:
J. Anthony Forstmann
7 Beverly Park
Beverly Hills, CA 90210
With a copy to:
Kaye, Scholer, Fierman, Hays & Handler
1999 Avenue of the Stars
Suite 1600
Los Angeles, California 90067
Attention: Barry L. Dastin, Esq.
If to RMS:
RMS Limited Partnership
201 West Liberty Street
PO Box 281
Reno, NV 89504
Attn: C. Thomas Burton
With a copy to:
Thomas J. Egan, Jr., Esq.
Baker & McKenzie, Suite 900
815 Connecticut Avenue, NW
Washington, DC 20006
If to Santangelo:
Francis R. Santangelo
10926 Tamarisk Trail
Boyton Beach, FL 33436
5. Owner of Shares. Each party to this Agreement may deem and treat the
person in whose name shares of securities are registered in the stock books of
NRI as the owner thereof for all purposes, including without limitation, for
giving of notices under this Agreement.
3
<PAGE>
THE NATIONAL REGISTRY INC.
6. Legend. A copy of this Agreement shall be filed with the Secretary of
NRI and shall be kept at its principal executive office. Upon the execution of
this Agreement, each of the parties thereto shall cause each certificate
representing shares of voting securities now or hereafter owned by it to carry a
legend as follows:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE PROVISIONS OF
THE FIRST AMENDED AND RESTATED STOCKHOLDERS' VOTING AGREEMENT, DATED AS OF JUNE
25, 1999. A COPY OF SUCH AGREEMENT IS ON FILE AT THE OFFICES OF THE COMPANY.
7. Complete Agreement. This is the complete agreement between the parties
with respect to the subject matter hereof and supersedes all prior negotiations
and agreements with respect thereto. There are no representations, warranties,
covenants, conditions, terms, agreements, promises, understandings, commitments
or other arrangements with respect to the subject matter hereof other than those
expressly set forth herein.
8. Governing Law. This agreement shall be governed by, construed under and
enforced in accordance with the laws of the State of Delaware without regard to
any conflict of law principles thereof.
9. Binding Agreement; Successors. This agreement shall be binding upon,
inure to the benefit of and be enforceable by the parties hereto and each of
their respective successors, assigns, heirs and other representatives.
10. Headings. The section headings herein are for reference purposes only
and shall not affect in any way, the meaning or interpretation of this
agreement, nor are they deemed to constitute a part of this Agreement.
11. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
12. Attorneys' Fees. In any action or proceeding brought to enforce any
provision of this Agreement, or where any provision hereof is validly asserted
as a defense, the successful party shall be entitled to recover reasonable and
actual attorneys' fees (including any such fees incurred in connection with
enforcement of any judgments) in addition to its or his costs and expenses and
other available remedies.
13. Waiver; Amendment. Any waiver of an provision or breach of this
Agreement must be in writing, executed by the waving party. No waiver of any
provision or breach of this Agreement shall be a waiver of any other provision
or breach of this Agreement or any subsequent breach. Any amendment or
modification of this Agreement must be in writing and executed by all of the
parties hereto.
4
<PAGE>
THE NATIONAL REGISTRY INC.
14. Specific Performance. Each of the parties hereto acknowledges that
money damages would be both incalculable and an insufficient remedy for any
breach of this Agreement by a party hereto and that any such breach would cause
the other party hereto irreparable harm. Accordingly, each party hereto agrees
that in the event of any actual or threatened beach of this Agreement by any
party hereto, the other parties hereto shall be entitled to specific
performance. Such remedy shall not be the exclusive remedy for any breach of
this Agreement, but shall be in addition to all other remedies available at law
or equity to such party.
15. Interpretation of Agreement. This Agreement shall be construed in its
entirety, with no emphasis or meaning being given to the headings or captions
utilized in this Agreement or the placement of the various provisions.
16. Definitions. The following capitalized terms shall have the meanings
set forth below:
(a) "Affiliate" means, with respect to any specified Person,
(i) any other Person directly or indirectly controlling or controlled by or
under direct or indirect common control with such specified Person or (ii) any
other Person that owns, directly or indirectly, 5% or more of such specified
Person's voting stock or any executive officer or director of any such specified
Person or other Person or, with respect to any natural Person, any Person having
a relationship with such Person by blood, marriage or adoption not more remote
than first cousin. For the purposes of this definition, "control," when used
with respect to any specified Person, means the power to direct the management
and policies of such Person, directly or indirectly, whether through the
ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing. For
purposes of this Agreement, no Shareholder shall be deemed to be an Affiliate of
any other Shareholder.
(b) "Person" means any individual, corporation, limited
liability company, partnership, joint venture, association, trust, or
unincorporated organization.
(c) "Voting Shares" shall mean shares of NRI's Common Stock,
Options, Preferred Stock or any other voting securities of NRI held on or after
the Effective Date by any Shareholder or its Affiliate, plus all voting
securities hereinafter attributable to such shares or received or receivable in
respect thereof by way of stock splits or stock dividends, recapitalization or
liquidation of the NRI or merger or consolidation of the NRI with any other
corporation or organization.
17. Assignment. RMS may assign the terms and conditions of this Agreement
to any Affiliate that holds Voting Shares.
[Remainder of Page Intentionally Left Blank]
5
<PAGE>
THE NATIONAL REGISTRY INC.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first above written.
/s/ J. ANTHONY FORSTMANN
---------------------------
J. Anthony Forstmann
/s/ FRANCIS R. SANTANGELO
----------------------------
Francis R. Santangelo
RMS: Limited Partnership
By: Crystal Diamond, Inc.
Its: Managing General Partner
By:/s/ RICHARD W. BAKER
-------------------------
Name: Richard W. Baker
Title: Secretary/Treasurer of
Crystal Diamond, Inc.
ACKNOWLEDGMENT OF FIRST AMENDED AND RESTATED STOCKHOLDERS' VOTING AGREEMENT
The National Registry Inc. hereby acknowledges the existence of the
foregoing First Amended and Restated Stockholders' Voting Agreement.
THE NATIONAL REGISTRY INC.
By: /s/ JEFFREY P. ANTHONY
------------------------
Name: Jeffrey P. Anthony
Title: President
6
<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> JUN-30-1999
<CASH> 1,557
<SECURITIES> 0
<RECEIVABLES> 421
<ALLOWANCES> 18
<INVENTORY> 90
<CURRENT-ASSETS> 2,433
<PP&E> 241
<DEPRECIATION> 1,038
<TOTAL-ASSETS> 2,674
<CURRENT-LIABILITIES> 879
<BONDS> 0
1
0
<COMMON> 168
<OTHER-SE> 1,626
<TOTAL-LIABILITY-AND-EQUITY> 2,674
<SALES> 610
<TOTAL-REVENUES> 610
<CGS> 120
<TOTAL-COSTS> 120
<OTHER-EXPENSES> 2,304
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,819)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,819)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,819)
<EPS-BASIC> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
