FORM 10 - KSB/A
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from _____________ to __________________
Commission File No. 001-15465
Intelli-Check, Inc.
(Name of small business issuer as specified in its charter)
Delaware 11-3234779
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
246 Crossways Park West, Woodbury, New York 11797
(address of principal executive offices) (Zip Code)
Issuer's Telephone number, including area code: (516) 992-1900
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of Class)
Check whether Issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the Issuer was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
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Check if disclosure of delinquent filers pursuant to item 405 of Regulation S-B
is not contained herein, and will not be contained, to the best of the
Registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this form 10-KSB or any amendment to
this Form 10-KSB.
State the aggregate market value of the voting stock held by non-affiliates of
the Issuer: $33,393,614(based upon the closing price of Issuer's Common Stock,
$.001 par value, as of March 23, 2001).
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.
Common Stock, $.001 Par Value 7,827,923
(Title of Class) (No. of Shares Outstanding
at March 23, 2001)
DOCUMENTS INCORPORATED BY REFERENCE: NONE
PART I
Item (a) Business
(a) General Development of Business. We were originally incorporated in
the state of New York in 1994. In August 1999, we reincorporated in Delaware.
During the period from September 1996 until September 1999, we sold our
securities in private placements exempt from registration under the Securities
Act of 1933, as amended.
In November 1999, we sold, in an initial public offering, 1,000,000 shares
of common stock at an initial offering price of $7.50 per share. The net
proceeds that we received from the public offering amounted to approximately
$5,915,000.
In December 1999, the underwriter of the initial public offering exercised
its over-allotment option to purchase 150,000 common shares from us for $7.50
per share. The net proceeds received by us amounted to approximately $992,000.
In fiscal year 2000, options to acquire 66,000 shares of common stock and
warrants to acquire 1,115,084 shares were exercised. The net proceeds received
by us from these transactions was $3,426,374.
Recent Developments
In fiscal year 2001, we declared a dividend distribution of one
non-transferable right to purchase one share of our common stock for every 10
outstanding shares of common stock held of record on March 30, 2001, at an
exercise price of $8.50. The rights will expire one year after the date of an
effective registration statement relating to the shares of common stock
underlying the rights. If certain conditions occur, we have the right to redeem
the outstanding rights for $.01 per right.
(b) Business of Issuer
(1) Principal Products
Our company was formed to develop, manufacture and market an advanced
document verification system to enable a retailer to:
(i) reduce check cashing, credit card and other types of fraud which
principally utilize fake driver licenses as proof of identity;
(ii) determine the customer's age and validity of the ID to detect and
prevent the use of fraudulent identification for the purchase of
alcohol, tobacco and other age-restricted products; and
(iii) reduce the risk to the retailer of substantial monetary fines,
criminal penalties and license revocation for the sale of
age-restricted products to minors.
Our advanced document verification software that is contained in our
ID-check unit (terminal) reads in one swipe or scan the encoded data contained
on the driver licenses and state issued identification cards that comply with
the standards of the American Association of Motor Vehicle Administrators, the
American National Standards Institute and the International Standards
Organization.
Our terminal helps merchants deter the economic loss resulting from
"identity theft," which according to an article in the Dow Jones Newswire Column
dated September 7, 2000, is the fastest growing crime in America. The
availability of high-tech fake ID's exposes retailers to many forms of fraud
utilizing fake ID's, which our unit has the capability of detecting.
Additionally, in an effort to combat the problems of underage drinking and
smoking, the federal government and many states and Canadian provinces have
enacted laws requiring businesses that sell age-restricted products to verify
the ID of potential customers to determine if they are of legal age to buy these
products. These laws impose stringent
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penalties for violations. In addition, many states and local governments are
setting up undercover "sting" operations to detect violations.
The product we have designed and developed is based on our patented
ID-Check (TM) technology. ID-Check provides businesses with a reliable, simple
and cost-effective way to reduce economic loss supported by fake Driver licenses
and to verify age and reduce the risk of severe penalties for non-compliance
with laws pertaining to age restricted products.
Driver license
The driver license is the most widely used form of government issued photo
identification. We believe the driver license has become a de facto
identification card. In addition to its primary function, the driver license is
used to verify identity for social services, firearm sales, check cashing,
credit card use and other applications.
Non-driver identification card
Although many people do not have a driver license, many jurisdictions that
use American Association of Motor Vehicle Administrators (AAMVA) compliant
driver licenses offer other identification cards that may contain encoded
information. These identification cards, as well as military ID's, are
fundamentally identical to driver licenses. Because driver licenses are the most
widely used form of legally acceptable government documentation, we will refer
to all these types of legally acceptable governmental identification documents
as "driver licenses". Our ID-Check software is equally capable of performing its
function with all of these types of government identification.
The use of false identification
The high-tech revolution has created a major problem for merchants and
others who rely on identification documents. In an age where scanners, computers
and color printers are commonplace, fake ID's of the highest quality are easily
obtainable from a number of locations including college campuses and over the
Internet. These fakes appear so real, even law enforcement agencies have
encountered difficulty distinguishing them from legally issued documents.
Additionally, these high-tech devices have the ability to easily alter properly
issued ID's. Therefore, anyone can gain access to a false identity that gives
them the ability, in a commercial transaction, to present fake and stolen credit
cards or checks that are supported by false identification. Additionally,
starting with only a fraudulent driver license, an individual may be able to
create multiple identities, commit fraud, buy age restricted products such as
alcohol and tobacco while underage, evade law enforcement and engage in other
criminal activities, such as:
(i) unlawfully obtaining welfare or other government benefits;
(ii) illegally purchasing firearms;
(iii) theft of a rented motor vehicle;
(iv) illegally entering gaming establishments;
(v) purchasing movie tickets for certain rated movies while underage;
(vi) illegally purchasing narcotic prescriptions; and
(viii) refund fraud.
Given the ease with which identification can be falsified, simply looking
at a driver license may not be sufficient to verify age or identity and
determine whether or not it is fraudulent. Rather, what is needed is a system
which can accurately read the electronically stored information. We possess a
patented software application technology that provides an analysis of all the
data contained on these documents by reading and comparing the information
encoded on the tracks of the magnetic stripe or bar code on the driver license
against known standards.
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Exposure of Merchants to Fraud and the Need for Document Verification
Merchants are facing significant economic losses due to various types of
frauds, such as:
(i) check fraud supported by fake Ids;
(ii) credit and debit card fraud supported by fake Ids;
(iii) refund fraud;
(iv) pharmacy fraud, including false narcotic prescriptions, supported by
fake Ids; and
(v) employee fraud, including employee theft and payroll theft.
Underage Use of Alcohol and Tobacco Products and the Need for Age Verification
Overview
Underage access to age-restricted products, like alcohol and tobacco,
remains a major societal problem.
(i) according to Connecticut Clearinghouse, approximately 10.6 million
or 51.2% of high school students in the United States drink
alcoholic beverages at least once weekly, with 86% purchasing the
alcohol themselves;
(ii) the Office of Drug Control Policy reported that approximately 9.5
million drinkers of alcoholic beverages in 1996 were between the
ages of 12 and 20, according to the U.S. Department of Justice
Office of Juvenile Justice and Delinquency Prevention;
(iii) the Insurance Institute for Highway Safety has said that, in 1997,
26% of 16-20 year-olds fatally injured in motor vehicle crashes had
high blood alcohol concentrations;
(iv) according to the Journal of Adolescent Health, approximately 3,000
minors begin smoking regularly every day;
(v) Join Together Online's Fact Finder reports that underage youths can
purchase cigarettes successfully 70%-80% of the time over the
counter and 90%-100% of the time through vending machines; and
(vi) Join Together also reports that each year merchants illegally sell
minors 947 million packs of cigarettes and 26 million containers of
chewing tobacco worth $1.26 billion.
To combat this problem, most states have enacted laws which provide for
substantial penalties for businesses that sell tobacco and alcohol to minors.
Regulation of retailers of tobacco products
New federal regulations have been enacted that place a greater burden on
retailers to prevent the sale of tobacco products to minors. Clerks are required
to check the photo ID of anyone trying to purchase tobacco products who appears
to be under the age of 27.
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Regulation of retailers of alcoholic beverages
The retailer of alcoholic products who sells to an underage person could
face potential fines, suspension of its license and the potential outright
revocation of its license to sell alcoholic beverages.
As a result of law enforcement efforts and regulatory penalties, we
believe retailers that sell alcohol and tobacco, such as liquor stores, bars and
convenience stores, are facing increasing pressure to accurately verify the age
of their customers.
ID-Check Solution and Benefits
We believe the ID-Check solution is the most advanced, reliable and
effective technology, which provides retailers with an easy to use, reliable,
and cost-effective method of document and age verification. We have received
encoding formats from most jurisdictions that conform to AAMVA standards. This
information, combined with our patented technology, enables the ID-Check
software to read, decode and process the information electronically stored on
driver licenses. As jurisdictions and AAMVA change their documents and
guidelines, we believe our software, together with our programmable terminal,
can be adapted to these changes.
ID-Check terminals do not require a connection to a central data base to
operate. Our terminals have the ability to operate add-on peripherals such as
printers, bar code scanners and other devices. Additionally, our terminals can
communicate with personal computers, which could enhance the functionality of
the terminals and potentially create the opportunity for sales of other software
products by us.
The ID-Check process is quick, simple and easy to use. After matching the
(driver license) photograph to the person presenting the document for
identification, the clerk or employee simply swipes the driver license through
the ID-Check terminal if the card has a magnetic stripe or scans it if it has a
bar code. The terminal quickly determines if the document:
(i) is valid;
(ii) has been altered or tampered with;
(iii) has expired; and
(iv) has a date of birth equal to or greater than the legal age to
purchase age restricted products, such as alcohol and tobacco, in
the retailer's location.
Then, the terminal will automatically:
(i) respond to the user by displaying the results in words on the
terminal's screen;
(ii) save information that is permissible by law to the terminal's own
memory;
(iii) print a record of the transaction including the results on a roll of
paper similar to that used in cash registers, if an optional printer
has been installed; and
(iv) send the results to a personal computer which has Microsoft Windows
95/98/NT ("PC") for permanent storage when used in conjunction with
our Q-Link or C-Link software, which simplifies record keeping by
downloading comprehensive ID-Check due diligence data into a PC.
This provides a merchant with secure back-up files that include
individual and cumulative transaction records, where permitted by
law.
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(2) Marketing and Distribution
Our objective has been to become the leading developer and distributor of
document and age verification products. To date, we have begun our marketing
efforts through direct sales by our sales and marketing personnel, participation
in trade shows, through resellers and OEM agreements.
We generate revenues from the sale or lease of ID-Check terminals, the
sale of software upgrade cards and will, beginning in April 2001, generate
revenues from our C-Link software.
Our patented ID-Check software is installed in a self-contained terminal
similar to those commonly used as credit card terminals, which we intend to
market to mass merchandisers, grocery, convenience store and pharmacy chains,
casinos, banks and resellers of age restricted products. The ID-Check unit has a
suggested retail price of approximately $2,500, which includes our Q-Link
software, upgrade cards for the first year after purchase and our ID-Check
Guide. We have developed a comprehensive marketing plan to build customer
awareness and develop brand recognition in target markets. Initially, we intend
to promote the advantages and ease of use of the ID-Check terminal through:
(i) trade publications;
(ii) trade shows;
(iii) conventions and seminars;
(iv) direct mail;
(v) our website; and
(vi) national advertising.
We also intend to seek endorsements from public interest organizations and
trade associations, which we believe have an interest in discouraging illegal
purchases of age-restricted products.
As we gain market acceptance of the ID-Check terminal, we intend to
develop and market related software applications.
Distribution strategy
In October 1999, we hired a vice president of sales. In December 2000, we
hired a director of corporate sales. We intend to hire additional sales and
marketing support staff, to prepare additional marketing materials and continue
to develop our marketing strategy.
Our initial target markets
Our initial target markets for the ID-Check terminal are:
(i) mass merchandisers;
(ii) convenience stores;
(iii) grocery and pharmacy chains;
(iv) casinos;
(v) banks;
(vi) bars and night clubs; and
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(vi) resellers of age restricted products.
Distributors and independent sales organizations
Management estimates there are thousands of businesses referred to as
distributors or independent sales organizations (ISO's), which specialize in
marketing equipment to "mom and pop" establishments. We believe that this is the
most cost effective way of reaching the smaller retailers. As such, we have
actively begun to enter into sales agreements with distributors and ISO's to
distribute our product.
Upgrade cards
Our software requires periodic updates as states that did not previously
conform to AAMVA standards begin to store electronically readable information on
their driver licenses and as states adjust or modify the format of their
electronically stored information. The upgrade cards, which can be used to
instantly upgrade the terminal by simply swiping or scanning the upgrade card
through the ID-Check terminal are included in the purchase price of the ID-Check
unit for the first year after purchase. We have begun to sell upgrade card
packages for the period commencing after the first year of purchase. Because
each terminal has a unique serial number, the upgrade card will only work with
that terminal, making unauthorized copying of these cards valueless. We may also
develop a secure way of delivering upgrades through the Internet.
The ID-Check guide to US and Canadian ID's
The United States and Canada are moving toward uniformity in their driver
licenses and identification cards. However, some states and provinces have not
yet adopted AAMVA standards. Because of our familiarity with these government
documents, we offer a printed manual to provide financial institutions,
government agencies and retail stores with a method of verifying document
authenticity when driver licenses are presented which do not have information
electronically stored on either a magnetic stripe or bar code. This product is
bundled with the initial sale of the ID-Check terminal. Additionally, we intend
to independently market this product directly through our sales personnel.
C-Link Software
We have developed our C-Link software, which will be introduced to the
marketplace in April 2001. C-Link, when used in conjunction with our ID-check
terminal, has the ability to collect the information read and stored by the
ID-Check terminal and save it to a PC hard drive for permanent storage. Once
saved, the information can be utilized to prevent economic loss to the user and
can also be searched, analyzed and used to easily generate demographics,
statistics and mailing lists to existing customers where permitted by law.
Additional Target Customers
In addition to the target markets prior stated, others that could benefit
by using the ID-Check terminal to prevent fraudulent transactions supported by
the use of a fake driver license as proof of identity include:
(i) car rental agencies;
(ii) hotels and motels;
(iii) stadiums and arenas;
(iv) firearm merchants;
(v) movie theaters;
(vi) law enforcement agencies; and
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(vii) buildings with security concerns.
Products in Development
We have developed prototypes of the following products:
MAVE. In April 1998, we built two prototypes of a hand-held portable
version of our ID-Check terminal specifically designed for law enforcement. We
have trademarked this product as MAVE for Mobile Age Verification and
Enforcement.
P-Link. P-Link is a software application designed to replicate the
features of ID-Check using existing hardware (or with minimal additional
hardware components) included in Point-Of-Sale (POS) terminals for multi-lane
retailers such as grocery and mass-retail stores.
M-Link. M-Link expands C-Link's abilities to maintain memberships and
customer loyalty programs to encourage repeat customers. M-Link is intended to
be sold separately as a service pack, which extends the functionality of
C-Link's software.
Possible Future Uses for our Technology
We believe that our patented ID-Check technology may have applications in
a variety of other areas. Some examples of potential users for ID-Check
technology include:
(i) Airlines, since FAA regulations require passengers over 18 years old
to produce a valid driver license or other form of legally
acceptable picture identification in order to board any airliner
domestically; and
(ii) Credit card terminal manufacturers, which could use our technology
to verify that the credit card holder has presented a valid driver
license prior to processing the transaction.
(3) Competition
Unless a device can read, decode and analyze all of the information
legally permitted to be analyzed which is electronically stored on a driver
license, the user may not obtain accurate and reliable confirmation that a
driver license is valid and has not been altered or tampered with. We are aware
of several companies, including Legal Age and The IdentiScan Company, LLC, that
are currently offering products that electronically read and calculate age from
a driver license. We have tested and compared some of these products to ID-Check
and believe that our product is superior in quality and functionality. These
other products are based on types of equipment which have limited functionality.
Those units that cannot read barcodes are at a significant disadvantage because
nearly 31% of the currently issued driver licenses as well as all encoded U.S.
military ID's and uniformed services cards contain barcodes. This percentage is
expected to continue to increase within the next year based upon current
available information. In addition, some of these other products cannot connect
to a PC or use a printer. We also believe that some of these products may
infringe on our patent.
There are also products being marketed which are essentially electronic
calendars designed to assist the retailer in calculating the age of the person
presenting a driver license. These devices, however, cannot determine whether a
driver license is valid or has been altered.
A very small number of laminate verifiers are currently used to determine
the validity of the laminate on a driver license. However, laminate verifiers
are fragile, not reliable and we believe can only be used in New York State.
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(4) Supplier
We have engaged a subsidiary of Welch Allyn, Inc., a leading
privately-held manufacturer of medical equipment and barcode readers and
scanners, to provide a programmable terminal to operate our patented ID-Check
software. We have placed orders for 7,000 terminals of which we have received
4,000, which contain a three-track magnetic reader and a scanner/imager, which
is an advanced form of barcode scanner.
(5) Intellectual Property
In January 1999, we were issued a patent on our ID-Check software
technology. We have also been granted multiple copyrights in the United States,
which are effective in Canada and other major industrial countries. The patent
covers a specific process relating to ID-Check, including age verification from
a driver license. In addition, the copyright protection covers software source
codes and supporting graphics relating to the operation of ID-Check and other
software products. We have also received several trademarks relating to our
company, its product names, and logos.
We also rely on proprietary knowledge and employ various methods,
including confidentiality agreements, to protect our software codes, concepts,
ideas and documentation of our proprietary technology.
Under an agreement with Mr. Kevin Messina, our Senior Executive V.P. and
Chief Technology Officer, we will pay royalties equal to 0.005% of gross sales
from $2,000,000 to $52,000,000 and 0.0025% of gross sales in excess of
$52,000,000.
(6) Employees
As of March 23, 2001, we had twenty-three full-time employees, including
four who are engaged in executive management, thirteen in information
technology, four in sales and marketing and two administrative staff. We believe
our relations with our employees are generally good and we have no collective
bargaining agreements with any labor unions.
Item 2. Description of Property
Our executive offices are currently located in Woodbury, New York, where
we occupy approximately 9,700 square feet of leased space pursuant to a lease
expiring on December 31, 2010. Our offices were originally located in
Huntington, New York under a lease that expired October 31, 2000. Payments under
these leases were $80,538 for 2000 and will be $2,515,414 for the remaining
years of the lease.
Item 3. Legal Proceedings
The IdentiScan Company, LLC offers a product that electronically reads and
calculates age from a driver license. Representatives of IdentiScan had met with
us on several occasions in the past, at their suggestion, to discuss a merger
between the two companies. We declined to proceed with those discussions. We had
informed IdentiScan that we believe its product may infringe on our patent. In
response, in August 1999, IdentiScan filed a complaint against us which seeks to
have the IdentiScan product declared non-infringing on our patent and seeks to
have our patent declared invalid. The complaint does not seek monetary damages.
We believe that our patent, to which we hold clear title, is valid and fully
enforceable. We are vigorously defending it. We also believe IdentiScan's claim
of non-infringement is without merit. However, if our patent were to be declared
invalid or if our patent were to be otherwise limited, we believe it would have
an adverse effect on our business and future success because other companies,
including IdentiScan, might be able to use some or all of the technology covered
by our patent to develop and market products which will directly compete with
ID-Check. In October 1999, IdentiScan withdrew the original suit in Connecticut
and re-filed in Delaware, where the lawsuit is in its initial phase.
We are not aware of any infringement by our products or technology on the
proprietary rights of others.
Other than as set forth above, we are not currently involved in any legal
or regulatory proceeding, or arbitration, the outcome of which is expected to
have a material adverse effect on our business.
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Item 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of the Company's fiscal year ended December 31,
2000 there were no matters submitted to a vote of security holders.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
(a) The Company's Common Stock is traded on the American Stock Exchange
under the symbol "IDN." The following table indicates high and low sales
quotations for the periods indicated based upon information supplied by AMEX.
1999 Low High
---- --- ----
Fourth quarter $9.00 $13.50
(from 11/19/99-
12/31/99)
2000
----
First quarter $9.375 $13. 75
Second quarter $5.875 $11.875
Third quarter $6.625 $13.625
Fourth quarter $8.50 $15.125
2001 Low High
---- --- ----
January $8.25 $11.625
February $4.72 $10.26
(b) Number of Holders of Common Stock. The number of holders of record of
our Common Stock on March 23, 2001 was 75, which does not include individual
participants in security position listings.
(c) Dividends. There were no dividends or other distributions made by us
during the fiscal year ended December 31, 2000. Future dividend policy will be
determined by the Board of Directors based on our earnings, financial condition,
capital requirements and other then existing conditions. It is anticipated that
cash dividends will not be paid to the holders of our common stock in the
foreseeable future.
(d) Recent Sales of Unregistered Securities. In November 1999, we
completed our initial public offering from which we received net proceeds of
approximately $5,915,000. In December 1999 the underwriters of our initial
public offering exercised the over allotment option to purchase an additional
150,000 shares of our common stock from which we received net proceeds of
$992,000. After repayment of the Notes we issued in August and September we
invested approximately $5,000,000 in short term financial instruments and used
approximately $607,000 to make additional deposits on terminals and for general
capital purposes.
In addition, during 1999 and 2000 we sold the following unregistered
securities in reliance on the exemption provided by Section 4(2) and Regulation
506 of the Securities Act as transactions not involving a public offering:
In September 1996, we sold a total of 87,500 shares of our common stock
for $175,000. Paul Cohen and Eric Cohen, the father and uncle of our co-founder,
Todd Cohen, purchased 62,500 shares and 15,000 shares, respectively. Gregg
Messina, the brother of our co-founder, Kevin Messina, purchased 10,000 shares.
In connection with the issuance, (i) each shareholder represented to the Company
that, by virtue of his investment acumen, business experience or independent
financial and tax advice, he had the capability of evaluating the risks and
merits in investing in the shares, (ii) each shareholder represented that the
shares acquired cannot be sold without registration under the Securities Act,
except in reliance upon an exemption therefrom and (iii) the Company did not
engage in any general solicitation or advertisement for the issuance. The
shareholders further represented their intention to acquire the securities for
investment only and not with a view to the distribution thereof. Appropriate
legends were affixed to the stock certificates issued in such transactions. Each
shareholder had adequate access to sufficient information about the Company to
make an informed investment decision. The issuance and sale of these securities
were made in reliance on the exemption provided by Section 4(2) of the
Securities Act, as a transaction not involving any public offering.
In October 1996, we issued a total of 41,385 shares of our common stock to
satisfy loans in the aggregate amount of $82,770. Paul Cohen, the father of our
co-founder, Todd Cohen, accepted 28,885 shares in repayment of $57,770 of
indebtedness and William Glasgow, who has been, since September 1996, director
of corporate accounts of the Company, accepted 12,500 shares in repayment of
$25,000 of indebtedness. Also in October 1996, we issued a total of 22,500
shares of our common stock in repayment of $45,000 owed to our former attorneys,
Post & Heymann LLP. In connection with the issuance, (i) each shareholder
represented to the Company that, by virtue of his investment acumen, business
experience or independent financial and tax advice, he had the capability of
evaluating the risks and merits in investing in the shares, (ii) each
shareholder represented that the shares acquired cannot be sold without
registration under the Securities Act, except in reliance upon an exemption
therefrom and (iii) the registrant did not engage in any general solicitation or
advertisement for the issuance. The shareholders further represented their
intention to acquire the securities for investment only and not with a view to
the distribution thereof. Appropriate legends were affixed to the stock
certificates issued in such transactions. Each shareholder had adequate access
to sufficient information about the Company to make an informed investment
decision. The issuance and sale of these securities were made in reliance on the
exemption provided by Section 4(2) of the Securities Act, as a transaction not
involving any public offering. The issuance and sale of these securities were
made in reliance on the exemption provided by Section 4(2) of the Securities
Act, as a transaction not involving any public offering.
In December 1996 and January 1997, Frank Mandelbaum, our chief executive
officer, made loans totaling $142,000 with interest at 10% with maturity in 90
days. He subsequently extended the notes on several occasions. In November 1997,
as part of the private placement discussed below, we issued to Mr. Mandelbaum
71,000 shares of our common stock and warrants to purchase 71,000 shares of our
common stock at an exercise price of $3.00 per share in exchange for Mr.
Mandelbaum's forgiveness of his loan to us of $142,000. Mr. Mandelbaum is an
accredited investor, as that term is defined in Regulation D promulgated under
the Securities Act. The securities issued to Mr. Mandelbaum contain a legend
stating that the securities acquired cannot be sold without registration under
the Securities Act, except in reliance upon an exemption therefrom. As the chief
executive officer, Mr. Mandelbaum had adequate access to sufficient information
about the Company to make an informed investment decision. The Company did not
engage in any general solicitation or advertisement for the issuance. The
issuance and sale of these securities were made in reliance on the exemption
provided by Section 4(2) of the Securities Act, as a transaction not involving
any public offering.
In January 1997, we entered into a Note Purchase Agreement with the New
York State Science and Technology Foundation pursuant to which we issued a
Convertible Promissory Note in the amount of $250,000. The Foundation also
agreed to invest an additional $250,000 through the purchase of 125,000 shares
of Series A convertible preferred stock based upon our raising a certain amount
of additional capital. The note bore interest at 8% per annum. In January 1998,
we exercised our right to redeem the convertible promissory note held by the
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Foundation for 125,000 shares of Series A convertible preferred stock. In
addition, the Foundation purchased an additional 125,000 shares of Series A
convertible stock for $250,000. In July 1999, the Foundation exercised its
conversion rights and received 250,000 common stock in exchange for its
preferred stock.
The New York State Science and Technology Foundation subscribed to 100,000
units for $200,000 in the private placement of September 1998, discussed below,
which units consisted of one share of common stock and one warrant to acquire an
additional share at $3.00 per share. In April 1999, we adjusted the exercise
price of warrants issued to the Foundation from $3.00 to $2.00 if exercised
within 30 days of the adjustment. In May 1999, the Foundation exercised such
warrant and we issued 100,000 shares of our common stock and a new warrant to
purchase 100,000 shares of our common stock at an exercise price of $3.00, which
expires in May 2001.
In connection with the issuance of securities to the New York State
Science and Technology Foundation, (i) the Foundation represented to the Company
that it and/or its officers or employees were experienced in evaluating and
investing in newly-organized, high-technology companies such as the Company,
(ii) the Foundation represented that the shares acquired cannot be sold without
registration under the Securities Act, except in reliance upon an exemption
therefrom and (iii) the Company did not engage in any general solicitation or
advertisement for the issuance. Appropriate legends were affixed to the stock
certificates issued in such transactions. The Foundation had adequate access to
sufficient information about the Company to make an informed investment
decision. The issuance and sale of these securities were made in reliance on the
exemption provided by Section 4(2) of the Securities Act, as a transaction not
involving any public offering.
In February 1997, we issued 12,000 shares of our common stock to
Blanchfield King Kober, our former accountants, in payment of accounting fees
totaling $24,000. In June 1999, we issued an additional 9,000 shares of our
common stock to Blanchfield King Kober in payment of accounting fees totaling
$36,000. The Company believes that these accountants have such knowledge and
experience in financial and business matters that they were capable of
evaluating the merits and risks of the investment. The shares issued to the
shareholders contain a legend stating that the shares acquired cannot be sold
without registration under the Securities Act, except in reliance upon an
exemption therefrom. Because of their relationship with the Company, the
shareholders had adequate access to sufficient information about the Company to
make an informed investment decision. The Company did not engage in any general
solicitation or advertisement for the issuance. The issuance and sale of these
securities were made in reliance on the exemption provided by Section 4(2) of
the Securities Act, as a transaction not involving any public offering.
In May 1997 and June 1997, we sold 315,000 units to 8 purchasers, which
units consisted of one share of common stock and one warrant to acquire an
additional share at $3.00 per share originally set to expire in June 1999 in a
private placement with respect to which Jesup & Lamont Securities Corp. acted as
placement agent. The placement agent received a commission of $45,500 and a
non-accountable expense allowance of $20,000 in connection with the private
placement. Net proceeds to us were $550,849. Of the amount raised, $75,000
represented payment from one of our directors for 37,500 units. Our company also
issued to the placement agent non-redeemable warrants to purchase 7,500 units
for $2.25 per unit, which includes one share of common stock and an attached
warrant to purchase an additional share of common stock at $3.00 per share. In
connection with the issuance, (i) each shareholder represented to the Company
that he was either an accredited investor, as that term is defined in Regulation
D promulgated under the Securities Act, and/or that he and such other persons as
he found it necessary or advisable to consult, have sufficient knowledge and
experience in business and financial matters to evaluate the risks of the
investment and to make an informed investment decision with respect thereto,
(ii) each shareholder represented that the securities acquired cannot be sold
without registration under the Securities Act, except in reliance upon an
exemption therefrom and (iii) the Company did not engage in any general
solicitation or advertisement for the issuance. The shareholders further
represented their intention to acquire the securities for investment only and
not with a view to the distribution thereof. Appropriate legends were affixed to
the stock certificates and warrants issued in such transactions. Each
shareholder had adequate access to sufficient information about the Company to
make an informed investment decision. The issuance and sale of these securities
were made in reliance on the exemption provided by Section 4(2) of the
Securities Act, as a transaction not involving any public offering.
In November 1997, we sold in a private placement a total of 558,500 units
to 15 purchasers, which units consisted of one share of common stock and one
warrant to acquire an additional share at $3.00 per share originally
- 11 -
set to expire in November 1999. Our company received net proceeds of $1,117,000
from this offering. In connection with the issuance, (i) each shareholder
represented to the Company that he was either an accredited investor, as that
term is defined in Regulation D promulgated under the Securities Act, and/or
that he and such other persons as he found it necessary or advisable to consult,
have sufficient knowledge and experience in business and financial matters to
evaluate the risks of the investment and to make an informed investment decision
with respect thereto, (ii) each shareholder represented that the securities
acquired cannot be sold without registration under the Securities Act, except in
reliance upon an exemption therefrom and (iii) the Company did not engage in any
general solicitation or advertisement for the issuance. The shareholders further
represented their intention to acquire the securities for investment only and
not with a view to the distribution thereof. Appropriate legends were affixed to
the stock certificates and warrants issued in such transactions. Each
shareholder had adequate access to sufficient information about the Company to
make an informed investment decision. The issuance and sale of these securities
were made in reliance on the exemption provided by Section 4(2) of the
Securities Act, as a transaction not involving any public offering.
In July 1998, we commenced a private placement of 500,000 units at $6.00
per unit. These units consisted of two shares of common stock at $3.00 per share
and one warrant to acquire an additional share at $5.00 per share expiring two
years from the date of the closing. In connection with this offering, the
Company sold 31,000 units and received proceeds of $186,000. Due to market
conditions prevailing at that time for raising capital, we rescinded the
offering and all the subscribers agreed to re-subscribe under the terms of the
September 1998 offering.
In September 1998, we commenced a private placement of 1,000,000 units at
$2.00 per unit. These units consisted of one share of common stock and one
warrant to acquire an additional share at $3.00 per share. The offering was
extended to January 17, 1999. We sold 273,000 units to 4 purchasers and received
$546,000 as a result of the offering, of which $30,000 was received in January
1999. In connection with the issuance, (i) each shareholder represented to the
Company that he was either an accredited investor, as that term is defined in
Regulation D promulgated under the Securities Act, and/or that he and such other
persons as he found it necessary or advisable to consult, have sufficient
knowledge and experience in business and financial matters to evaluate the risks
of the investment and to make an informed investment decision with respect
thereto, (ii) each shareholder represented that the securities acquired cannot
be sold without registration under the Securities Act, except in reliance upon
an exemption therefrom and (iii) the Company did not engage in any general
solicitation or advertisement for the issuance. The shareholders further
represented their intention to acquire the securities for investment only and
not with a view to the distribution thereof. Appropriate legends were affixed to
the stock certificates and warrants issued in such transactions. Each
shareholder had adequate access to sufficient information about the Company to
make an informed investment decision. The issuance and sale of these securities
were made in reliance on the exemption provided by Section 4(2) of the
Securities Act, as a transaction not involving any public offering.
In February 1999, we extended the expiration date for the warrants issued
in May 1997, June 1997 and November 1997 until June 30, 2000.
In March 1999, we commenced a private placement and sold 259,600 units to
17 purchasers at $2.00 per unit. These units consisted of one share of common
stock and one warrant to acquire an additional share at $3.00 per share. We
received $489,200 as a result of the offering prior to June 30, 1999 and $30,000
in August, 1999. In connection with the issuance, (i) each shareholder
represented to the Company that he was either an accredited investor, as that
term is defined in Regulation D promulgated under the Securities Act, and/or
that he and such other persons as he found it necessary or advisable to consult,
have sufficient knowledge and experience in business and financial matters to
evaluate the risks of the investment and to make an informed investment decision
with respect thereto, (ii) each shareholder represented that the securities
acquired cannot be sold without registration under the Securities Act, except in
reliance upon an exemption therefrom and (iii) the Company did not engage in any
general solicitation or advertisement for the issuance. The shareholders further
represented their intention to acquire the securities for investment only and
not with a view to the distribution thereof. Appropriate legends were affixed to
the stock certificates and warrants issued in such transactions. Each
shareholder had adequate access to sufficient information about the Company to
make an informed investment decision. The issuance and sale of these securities
were made in reliance on the exemption provided by Section 4(2) of the
Securities Act, as a transaction not involving any public offering.
- 12 -
In March 1999, we issued warrants to GunnAllen Financial Inc. to purchase
50,000 shares of our common stock at an exercise price of $3.00 per share
expiring March 24, 2002. These warrants were issued in payment of the fee under
a consulting agreement. The Company believes that this broker dealer had such
knowledge and experience in financial and business matters that it was capable
of evaluating the merits and risks of the investment. The Company did not engage
in any general solicitation or advertisement for the issuance. GunnAllen had
adequate access to sufficient information about the Company to make an informed
investment decision. The issuance and sale of these securities were made in
reliance on the exemption provided by Section 4(2) of the Securities Act, as a
transaction not involving any public offering.
In May 1999, we issued 10,000 shares of our common stock to Allan Binder
in exchange for the termination of a royalty agreement. Mr. Binder is an
attorney and served as a consultant to the Company. Because of his relationship
with the Company, Mr. Binder had adequate access to sufficient information about
the Company to make an informed investment decision. The Company believes that
Mr. Binder had such knowledge and experience in financial and business matters
that he was capable of evaluating the merits and risks of the investment. The
shares issued to Mr. Binder contain a legend stating that the shares acquired
cannot be sold without registration under the Securities Act, except in reliance
upon an exemption therefrom. The Company did not engage in any general
solicitation or advertisement for the issuance. The issuance and sale of these
securities were made in reliance on the exemption provided by Section 4(2) of
the Securities Act, as a transaction not involving any public offering.
In May 1999, we issued to Frank Mandelbaum 75,000 shares of our common
stock and warrants to purchase 75,000 shares at an exercise price of $3.00 per
share and we issued to Kevin Messina 5,063 shares of our common stock and
warrants to purchase 5,063 shares at an exercise price of $3.00 per share. These
issuances reduced Mr. Mandelbaum's deferred compensation by $150,000 and Mr.
Messina's deferred compensation by $10,126. In addition, we issued to Mr.
Messina 69,937 shares of our common stock and warrants to purchase 69,937 shares
of our common stock at an exercise price of $3.00 per share in exchange for the
termination of Mr. Messina's reversion rights for certain software. In June
1999, all remaining deferred compensation and interest due to Mr. Mandelbaum,
Mr. Messina and Todd Cohen was eliminated by the issuance of options to purchase
375,000, 207,000 and 110,000 shares, respectively, of our common stock. Mr.
Mandelbaum's deferred compensation was reduced by approximately $380,000, Mr.
Messina's deferred compensation was reduced by approximately $210,000 and Mr.
Cohen's deferred compensation was reduced by approximately $110,000. Mr.
Mandelbaum is an accredited investor, as that term is defined in Regulation D
promulgated under the Securities Act. In addition, the Company believes that
each of these members of senior management had such knowledge and experience in
financial and business matters that they were capable of evaluating the merits
and risks of the investment. The securities issued to the shareholders contain a
legend stating that the warrants, options and underlying shares cannot be sold
without registration under the Securities Act, except in reliance upon an
exemption therefrom. As members of senior management, Messrs. Mandelbaum,
Messina and Cohen had adequate access to sufficient information about the
Company to make an informed investment decision. The Company did not engage in
any general solicitation or advertisement for the issuance. The issuance and
sale of these securities were made in reliance on the exemption provided by
Section 4(2) of the Securities Act, as a transaction not involving any public
offering.
In June 1999, we agreed to terminate the supplier agreement we had with
Hazeltine (formerly Marconi Aerospace Systems, Inc.), for which we issued 75,000
shares of our common stock to Hazeltine in payment of outstanding invoices
totaling $220,000, and we received all units of ID-Check which had been
manufactured, all samples, designs, drawings, software, molds and any other item
related to ID-Check. In connection with the issuance, (i) the shareholder
represented to the Company that it was an accredited investor, as that term is
defined in Regulation D promulgated under the Securities Act, and that it had
sufficient knowledge and experience in business and financial matters to
evaluate the risks of the investment and to make an informed investment decision
with respect thereto, (ii) the shareholder represented that the securities
acquired cannot be sold without registration under the Securities Act, except in
reliance upon an exemption therefrom and (iii) the Company did not engage in any
general solicitation or advertisement for the issuance. The shareholder further
represented its intention to acquire the securities for investment only and not
with a view to the distribution thereof. Appropriate legends were affixed to the
stock certificates issued in such transaction. The shareholder had adequate
access to sufficient information about the Company to make an informed
investment decision. The issuance and sale of these securities were made in
reliance on the exemption provided by Section 4(2) of the Securities Act, as a
transaction not involving any public offering.
- 13 -
In August and September 1999 we placed $1,200,000 of secured promissory
notes with interest at 10%. These notes have warrants attached to purchase 2,500
shares for each principal amount of $50,000 at $3.00 per share expiring in
August 2002 of securities by us and can be redeemed by us at $.01 per warrant at
any time that our stock has a public market price of $6.00 per share for 20
consecutive days. The notes mature on the sooner of July 31, 2000 or the date
that we receive gross proceeds from a public offering of our securities of
$6,000,000. In connection with the issuance, (i) each noteholder represented to
the Company that he was either an accredited investor, as that term is defined
in Regulation D promulgated under the Securities Act, and/or that he and such
other persons as he found it necessary or advisable to consult, have sufficient
knowledge and experience in business and financial matters to evaluate the risks
of the investment and to make an informed investment decision with respect
thereto, (ii) each noteholder represented that the notes, warrants and
underlying shares cannot be sold without registration under the Securities Act,
except in reliance upon an exemption therefrom and (iii) the Company did not
engage in any general solicitation or advertisement for the issuance. The
noteholders further represented their intention to acquire the securities for
investment only and not with a view to the distribution thereof. Appropriate
legends were affixed to the notes and warrants issued in such transactions. Each
noteholder had adequate access to sufficient information about the Company to
make an informed investment decision. The issuance and sale of these securities
were made in reliance on the exemption provided by Section 4(2) of the
Securities Act, as a transaction not involving any public offering.
- 14 -
In December 2000, the Company granted 25,000 stock options to Korey Kay &
Partners Inc., our advertising firm, for services to be performed, of which all
are exercisable at $10.00. In December 2000 3,599 of these stock options vested
for services performed which services were valued at $14,398. The stock options
were issued pursuant to the Company's 1998 stock option plan in reliance on the
exemption provided by Section 4(2) of the Securities Act, as a transaction not
involving any public offering. The agreement for the option grant contains
restrictions on transfer of the options by the optionee. The shares underlying
the options are registered pursuant to an effective Form S-8 registration
statement. The Company believes that Korey Kay, as the Company's advertising
firm, had such knowledge and experience in financial and business matters that
it was capable of evaluating the merits and risks of an investment and adequate
access to sufficient information about the Company to make an informed
investment decision.
During 2000, the Company received $3,223,874 from the exercise of
1,078,216 warrants previously issued. Except the underwriter warrants, all of
the warrantholders received these warrants from their participation in the
Company's private placement of stock and debt financing prior to its initial
public offering. In connection with the issuance, (i) each warrantholder
represented to the Company that, by virtue of his investment acumen, business
experience or independent financial and tax advice, he had the capability of
evaluating the risks and merits in investing in the shares, (ii) each
warrantholder represented that the shares acquired cannot be sold without
registration under the Securities Act, except in reliance upon an exemption
therefrom and (iii) the Company did not engage in any general solicitation or
advertisement for the issuance. The warrantholders further represented their
intention to acquire the securities for investment only and not with a view to
the distribution thereof. Appropriate legends were affixed to the stock
certificates issued in such transactions. Each warrantholder had adequate access
to sufficient information about the Company to make an informed investment
decision. The issuance and sale of these securities were made in reliance on the
exemption provided by Section 4(2) of the Securities Act, as a transaction not
involving any public offering. Of these warrants, 71,000 were exercised by an
Executive Officer of the Company and 37,500 warrants were exercised by a
Director of the Company. Each of the Executive Officer and Director who
exercised their warrants is an accredited investor as that term is defined in
Regulation D promulgated under the Securities Act. In addition, the Company
believes that each of these persons had such knowledge and experience in
financial and business matters that they were capable of evaluating the merits
and risks of the investment. The securities issued to the shareholders contain a
legend stating that the warrants and underlying shares cannot be sold without
registration under the Securities Act, except in reliance upon an exemption
therefrom. As a member of senior management and a director of the Company, such
persons had adequate access to the sufficient information about the Company to
make an informed investment decision. The Company did not engage in any general
solicitation or advertisement for the issuance. The issuance and sale of these
securities were made in reliance on the exemption provided by Section 4(2) of
the Securities Act, as a transaction not involving any public offering. In
addition, 90,000 warrants were exercised by the Company's underwriters. The
Company believes that the underwriter had such knowledge and experience in
financial and business matters that is was capable of evaluating the merits and
risks of the investment. The company did not engage in any general solicitation
or advertisement for the issuance. The underwriter had adequate access to
sufficient information about the Company to make an informed investment
decision. The issuance and sale of these securities were made in reliance on the
exemption provided by Section 4(2) of the Securities Act, as a transaction not
involving any public offer. As of December 31, 2000, there remained warrants
outstanding to purchase 496,475 shares of the Company's common stock at an
exercise price of $3.00 and 10,000 underwriter warrants that carry an exercise
price of $8.40.
During 2001, the Company received $369,375 from the exercise of 123,125 of
the remaining warrants outstanding through March 23, 2001. In addition, 10,000
warrants were converted into 7,062 shares of the Company's common stock
utilizing the cashless exercise provision. Also during this period, the Company
received $4,500 from the exercise of 1,500 stock options.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- 15 -
(a) Overview
Our company was formed in 1994 to address a growing need for a reliable
document and age verification system to detect fraudulent driver licenses and
other widely accepted forms of government-issued identification documents. Our
sales through September 30, 2000 had been minimal since through 1998 we had
previously produced only a limited pre-production run of our product for testing
and market acceptance. In late 1999, we received a limited number of ID-Check
terminals which were then available for sale. Shortly thereafter, these
terminals were returned to the manufacturer to be upgraded to contain an
advanced imager/scanner, which allows our software to read the encoding on 51
jurisdictions as opposed to 32 jurisdictions on the original scanner. During the
fourth quarter of 2000, we experienced a material increase in sales as a result
of product availability and establishing marketing and distributor agreements
with resellers. Since inception, we have incurred significant losses and
negative cash flow from operating activities, and as of December 31, 2000 we had
an accumulated deficit of approximately $6,900,000. We will continue to fund
operating and capital expenditures from proceeds that the company received from
its initial public offering ("IPO") as well as the exercising of warrants and
options. In view of the rapidly evolving nature of our business and our limited
operating history, we believe that period-to-period comparisons of revenues and
operating results are not necessarily meaningful and should not be relied upon
as indications of future performance.
The Company's initial marketing focus was targeted towards retailers of
age-restricted products such as alcohol and tobacco. Because of the Company's
enhanced ability to verify the validity of military ID's, driver licenses and
State issued ID cards, containing either magnetic stripes or bar codes that
conform to AAMVA/ANSI/ISO standards, the Company has refocused its marketing
efforts to address the larger market being affected by the well-publicized cost
to industry of "Identity Theft." Additionally, it has entered into a marketing
agreement with Sensormatic Electronics Corporation, the world's leading supplier
of electronic security systems. As a result of the Company's ID-Check product
having the ability to verify the encoded formats of the documents described
above, it has already sold to and received orders from some of the largest
companies in the gaming industry.
(b) Results of Operations
Comparison of the year ended December 31, 2000 to the year ended December
31, 1999.
The Company sells its product directly through its sales force and through
distributors. Revenue from direct sales of the Company's product is recognized
upon shipment to the customer. The Company's product requires continuing service
or post contract customer support and performance by the Company, and
accordingly a portion of the revenue is deferred based on its fair value and
recognized ratably over the period in which the future service, support and
performance are provided, which is generally one year. Currently, with respect
to sales to distributors, the Company does not have enough experience to
identify the fair value of each element and the full amount of the revenue and
related gross margin is deferred and recognized ratably over the one-year period
in which the future service, support and performance are provided.
Revenue on sales of our products is recognized upon shipment to the
customer. Certain sales require continuing service or post contract customer
support, and performance by us, accordingly, a portion of the revenue is
deferred and recognized ratably over the period in which the future service,
support and performance are provided, which is generally one year. Currently, if
we do not have enough experience to identify the fair value of each element, the
revenue and related gross margin is deferred and recognized ratably over the 1
year period in which the future service, support and performance are provided.
The Company's revenues increased from $29,407 for the year ended December
31, 1999 to $342,979 for the year ended December 31, 2000. Revenues from
distributors totaled $185,580 and revenues from direct customers totaled
$157,399. Revenues for the period ended December 31, 1999 consisted of sales of
a limited number of units from shipment of products received late in 1999 as we
did not have any product prior to this time available for sale since we had
prior withdrawn from the marketplace so that we could devote our resources to
expand the capability of our product by converting our software to operate on
programmable terminals. Revenues for the year ended December 31, 2000 included
initial sales of a limited number of ID-Check terminals that were available for
sale prior to the early return of our inventory of these terminals to the
manufacturer for upgrading. Sales of our enhanced product began in the later
part of the third quarter of 2000. Revenues of $517,950 from sales in the fourth
quarter of 2000, as well as cost of revenues of $299,040, were deferred in
accordance with the Securities and Exchange Commission's Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements". The deferred
revenue and the related cost of revenue will be recognized ratably over a 12
month period. Total revenues recognized and deferred from the sales of ID-Check
terminals for the year ended December 31, 2000 were $860,929.
Operating expenses, which consist of selling, general and administrative
and research and development expenses, increased 55% from $2,278,109 for the
year ended December 31, 1999, to $3,523,357 for the year ended December 31,
2000. Selling expenses, which consist primarily of salaries and related costs
for marketing, increased substantially from $202,888 for the year ended December
31, 1999 to $890,453 for the year ended December 31, 2000 primarily due to the
hiring of both a senior executive vice president and a director of national
sales and their related travel
- 16 -
expenses totaling approximately $227,000, as well as increases in advertising
and marketing expenses of $461,000 resulting from the initiation of our
advertising campaign. General and administrative expenses, which consist
primarily of salaries and related costs for general corporate functions,
including executive, accounting, facilities and fees for legal and professional
services, increased 33% from $1,194,862 for the year ended December 31, 1999 to
$1,590,896 for the year ended December 31, 2000, primarily as a result of an
increase in salaries and related benefits because of additional hiring of
executive and administrative personnel of approximately $110,000 and increased
insurance costs of approximately $54,000 and professional and legal fees of
approximately $240,000, resulting from the defense of our patent lawsuit.
Research and development expenses, which consist primarily of salaries and
related costs for the development of our products, increased 18% from $880,359
for the year ended December 31, 1999 to $1,042,008 for the year ended December
31, 2000. This increase is primarily attributable to increases in salaries and
related expenses from hiring additional programmers of $97,000 and the increase
in fees paid to software consultants of approximately $47,000 as we accelerated
software development. We believe that we will require additional investments in
development and operating infrastructure, including the hiring of additional
programmers and systems personnel. Therefore, we expect that expenses will
increase in 2001 as we increase expenditures for attending additional
conventions, brand promotion, and other marketing activities. We also expect
that we will incur additional general and administrative expenses as we continue
to hire personnel and incur incremental costs related to the growth of the
business. Research and development expenses will also increase as we complete
and introduce additional products based upon our patented ID-Check technology.
Interest expense decreased from $55,472 for the year ended December 31,
1999 to $14,863 for the year ended December 31, 2000 as a result of lower
interest expense from the settlement of deferred compensation liability in 1999.
Interest income amounted to $261,181 for the year ended December 31, 2000
resulting from investing the proceeds received from our IPO, as well as from the
exercise of warrants and options, in short term investments.
We have incurred net losses to date; therefore, we have paid nominal
income taxes.
As a result of the factors noted above, our net loss increased from
$2,299,425 for the year ended December 31, 1999 to $3,132,772 for the year ended
December 31, 2000.
Comparison of the year ended December 31, 1999 to the year ended December
31, 1998.
Revenues decreased 66% from $86,354 for the year ended December 31, 1998
to $29,407 recorded for the year ended December 31, 1999. Revenues for the
period ended December 31, 1998 consisted of sales of our initial pre-production
run of ID-Check terminals while the December 31, 1999 period included sales of a
limited number of units from the shipment of products received late in 1999. In
the third quarter of 1998, we withdrew from the marketplace so that we could
devote our resources to expand the capability of our product by converting our
software to operate on programmable terminals.
Operating expenses, which consist of selling, general and administrative
and research and development expenses, increased 51% from $1,506,615 for the
year ended December 31, 1998 to $2,278,109 for the year ended December 31, 1999.
Selling expenses, which consist primarily of salaries and related costs for
marketing, increased 45.5% from $139,470 for the year ended December 31, 1998 to
$202,888 for the year ended December 31, 1999 primarily due to the hiring of a
director of national sales of approximately $88,000. General and administrative
expenses, which consist primarily of salaries and related costs for general
corporate functions, including executive, finance, accounting, facilities and
fees for professional services, increased 31.2% from $910,537 for the year
December 31, 1998 ended to $1,194,862 for the year ended December 31, 1999,
primarily as a result of an increase in salaries because of additional hiring
and the fact that our senior executives did not defer salary after June 1, 1999
of approximately $95,000, an increase in depreciation and increased professional
and legal fees of approximately $185,000. Research and development expenses,
which consist primarily of salaries and related costs for the development of our
products, increased 92.8% from $456,608 for the year ended December 31, 1998 to
$880,359 for the year ended December 31, 1999. This increase is primarily
attributable to increases in salaries in additional hiring and the fact that our
senior executive did not defer salary after June 1,1999 totaling approximately
$153,000, write off and replacement of pre-production units and testing of new
product design of approximately $290,000. We believe that we require additional
significant investments in development and operating infrastructure, including
the hiring of additional sales and marketing personnel. Therefore, we expect
that expenses will continue to increase for the foreseeable future as we
increase expenditures for advertising, brand promotion, public relations and
other marketing activities. We expect that we will incur additional general and
administrative expenses as we continue to hire personnel and incur incremental
costs related to the growth of the
- 17 -
business. Research and development expenses will also increase as we complete
and introduce additional products based upon our patented ID-Check technology.
Interest expense decreased from $61,479 for the year ended December 31,
1998 to $55,472 for the year ended December 31, 1999 as a result of lower
interest expense from the settlement of deferred compensation liability in 1999
partially offset from interest expense on our promissory notes issued in August
and September 1999.
Interest income amounted to $19,169 for the year ended December 31, 1999
resulting from investing the proceeds received from our IPO in short term
instruments.
We have incurred net losses to date, therefore we have paid nominal income
taxes.
As a result of the factors noted above, our net loss increased from
$1,503,814 for the year ended December 31, 1998 to $2,299,425 for the year ended
December 31, 1999.
(c) Liquidity and Capital Resources
Prior to our IPO, which became effective on November 18, 1999, we financed
our operations primarily through several private placements of stock and debt
financings. We used the net proceeds of these financings for the primary purpose
of funding working capital and general corporate purposes and for the purchase
of hardware terminals. As a result of our IPO and the underwriters exercise of
their over allotment option, we received approximately $6,907,000 in net
proceeds after deducting underwriters commissions and offering expenses. During
2000, we received $3,426,374 from the issuance of common stock from the exercise
of warrants and stock options. We funded the purchase of hardware terminals for
resale and working capital primarily from these proceeds. We will continue to
use these proceeds to fund working capital until we reach profitability.
Cash used in operating activities for the year ended December 31, 2000 of
$5,453,829 was primarily attributable to the net loss of $3,132,772, a decrease
in accounts payable and accrued expenses of $137,941, an increase in certificate
of deposit of $250,000, an increase in inventory of $2,349,729, and an increase
in other current assets of $457,325, which was partially offset by a decrease in
a deposit on hardware purchases of $245,800 and an increase of deferred revenue
of $545,334. This increase in inventory resulted primarily from the purchase of
inventory received at the end of the third quarter. Cash used in operating
activities for the year ended December 31, 1999 of $1,521,581 resulted primarily
from the net loss of $2,299,425, an increase in inventory of $169,916 and a
deposit on hardware purchases of $245,800 which was partially offset by an
increase in accounts payable and accrued expenses of $1,159,805. This increase
in accounts payable and accrued expenses for 1999 was attributable to our
diminished working capital. Cash used in investing activities was $223,511 for
the year ended December 31, 2000 and $93,797 for the year ended December 31,
1999. Net cash used in investing activities for both periods consisted primarily
of capital expenditures for computer equipment and furniture and fixtures. Cash
provided by financing activities was $3,388,481 for the year ended December 31,
2000 and was primarily related to the exercise of outstanding warrants and stock
options. Cash provided by financing activities of $7,836,326 for the year ended
December 31, 1999 was primarily related to proceeds received from the Company's
successful completion of its initial public offering as well as the proceeds
received from its private placement.
Because of our limited cash resources before our IPO, our senior officers
deferred the receipt of their compensation, in whole or in part, prior to June
1, 1999. This obligation was eliminated through the issuance of stock, warrants
and stock options in the second quarter of 1999. There is no deferred
compensation currently outstanding. As of December 31, 2000, warrant holders
exercised 986,500 warrants to purchase common stock, which were all outstanding
warrants that were due to expire on various dates through December 31, 2000 and
the Company received proceeds totaling $2,953,875. Most of these warrants were
originally due to expire on June 30, 2000, but the expiration date was extended
by the Company to December 31, 2000. Additionally, there were warrants
outstanding to purchase 584,600 shares of our common stock at an exercise price
of $3.00 and 100,000 of underwriter's warrants at an exercise price of $8.40
with an expiration date beyond December 31, 2000. Of these warrants, 98,125 were
converted by the cashless exercise provision into 38,584 shares of common stock.
An additional 90,000 warrants were also exercised and the company received
proceeds of $270,000 prior to December 31, 2000. In addition, 133,125 of these
warrants were exercised through March 23, 2001 and we received proceeds of
$369,375. The remaining warrants totaling 363,350
- 18 -
expire on various dates up to November 2004. If certain conditions occur, we
have the right to redeem the outstanding warrants on not less than 20 days
written notice for $0.01 per warrant, except for 10,000 of the underwriter's
warrants still outstanding. As of March 23, 2001, the conditions for redeeming
these warrants have not been met.
The Company's operating expenses for 2001 is expected to increase to
approximately $4,400,000 from $3,500,000 reported for 2000. We currently
anticipate that our available cash resources from the IPO and expected revenues
from the sale of the units in inventory combined with either the exercise of the
expiring warrants by our warrant holders before expiration or the exercise of
the warrants by our warrant holders should we be able to redeem them, will be
sufficient to meet our anticipated working capital and capital expenditure
requirements for at least the next twelve months. These requirements are
expected to include the purchase of the balance of the 7,000 terminals to run
our patented software, product development, sales and marketing, working capital
requirements and other general corporate purposes. We may need to raise
additional funds, however, to respond to business contingencies which may
include the need to fund more rapid expansion, fund additional marketing
expenditures, develop new markets for our ID-Check technology, enhance our
operating infrastructure, respond to competitive pressures, or acquire
complementary businesses or necessary technologies.
(d) Net Operating Loss Carry Forwards
As of December 31, 2000, we had a net operating loss carry forward of
approximately $6,521,000, which expires beginning in the year 2013. The issuance
of equity securities in the future, together with our earlier financings and our
IPO, could result in an ownership change and, thus could limit our use of our
prior net operating losses. If we achieve profitable operations, any significant
limitation on the utilization of our net operating losses would have the effect
of increasing our tax liability and reducing net income and available cash
reserves. We are unable to determine the availability of these net-operating
losses since this availability is dependent upon profitable operations, which we
have not achieved in prior periods, therefore we have recorded a full valuation
allowance for the benefit from the net-operating losses.
Forward Looking Statements
The foregoing contains certain forward-looking statements. Due to the fact
that the Company faces intense competition in a business characterized by
rapidly changing technology and high capital requirements, actual results and
outcomes may differ materially from any such forward looking statements and, in
general are difficult to forecast.
Item 7. Financial Statements
Financial Statements are attached hereto following page F-1.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
During fiscal year 2000 there were no changes in or disagreements with the
Company's principal independent accountant on accounting or financial
disclosure.
PART III
Item 9. Directors and Executive Officers of the Company
As of March 23, 2001, the Company's directors and executive officers were
as follows:
Position With the Company
Name and Age and Principal Occupation Held Office Since
------------ ------------------------ -----------------
Frank Mandelbaum, 67 Chairman, Chief Executive Officer 1996
and Director
- 19 -
Position With the Company
Name and Age and Principal Occupation Held Office Since
------------ ------------------------ -----------------
Kevin Messina, 35 Senior Executive Vice President, 1998
Chief Technology Officer and
Director
Edwin Winiarz, 43 Senior Executive Vice President, 1999
Treasurer and Chief Financial
Officer and Director
W. Robert Holloway, 61 Senior Executive Vice President, 1999
Sales
Paul Cohen, 60 Director 1996
Evelyn Berezin, 75 Director 1999
Charles McQuinn, 60 Director 1999
Jeffrey Levy, 59 Director 1999
Howard Davis, 45 Director 2000
Business Experience
Frank Mandelbaum has served as our Chairman of the Board and Chief
Executive Officer since July 1, 1996. He also served as Chief Financial Officer
until September 1999. From January 1995 through May 1997, Mr. Mandelbaum served
as a consultant providing strategic and financial advice to Pharmerica, Inc.
(formerly Capstone Pharmacy Services, Inc.), a publicly held company. Prior to
January 1995, Mr. Mandelbaum was Chairman of the Board, Chief Executive Officer
and Chief Financial Officer of Pharmerica, Inc. From July 1994 through December
1995, Mr. Mandelbaum served as Director and Chairman of the Audit and
Compensation Committees of Medical Technology Systems, Inc., also a publicly
held company. From November 1991 through January 1995, Mr. Mandelbaum served as
Director of the Council of Nursing Home Suppliers, a Washington, D.C. based
lobbying organization. From 1974 to date, Mr. Mandelbaum has been Chairman of
the Board and President of J.R.D. Sales, Inc., a privately held financial
consulting company. As required by his employment agreement, Mr. Mandelbaum
devotes substantially all his business time and attention to our business.
Kevin Messina, a co-founder of Intelli-Check, was elected Senior Executive
Vice President in July 2000 and appointed as Chief Technology Officer in June
1998. Between June 1998 and July 2000, Mr. Messina served as the Company's
President. From our company's inception in October 1994 to June 1998, Mr.
Messina served as our Executive Vice President, Chief Information Officer and
Secretary. Prior to October 1994, Mr. Messina was the founder and President of
K.M. Software, which served the banking and commodities industries. During 1998,
1999 and 2000, Mr. Messina was selected to serve on various industry councils
for AAMVA and various committees of ANSI and the International Standards
Organization (ISO). In August 1998, Mr. Messina was elected to the US delegation
representing ANSI, the National Committee for Information and Technical
Standards, the Information Technology Industry Council, the International
Electrotechnical Commission and various other national bodies that are members
of ISO. In November 1998, Mr. Messina was elected chairperson of the committee,
which was in charge of recommending encryption and bar code formats. Since then,
AAMVA has adopted the recommendation as the standard for U.S. and Canadian
driver licenses and ID cards for the five-year period ending in 2005.
- 20 -
Edwin Winiarz was elected Senior Executive Vice President in July 2000 and
a director in August 1999 and became Executive Vice President, Treasurer and
Chief Financial Officer on September 7, 1999. From July 1994 until August 1999,
Mr. Winiarz was Treasurer and Chief Financial Officer of Triangle Service Inc.,
a privately held national service company. From November 1990 through July 1994,
Mr. Winiarz served as Vice President Finance/Controller of Pharmerica, Inc.
(formerly Capstone Pharmacy Services, Inc.). From March 1986 until November
1990, Mr. Winiarz was a manager with the accounting firm of Laventhal & Horwath.
Mr. Winiarz is a certified public accountant and holds an MBA in management
information systems from Pace University.
W. Robert Holloway was elected Senior Executive Vice President in July
2000 and was Vice President, Sales from October 1999 to July 2000. From April
1999 to October 1999, Mr. Holloway was Director of Sales for The IdentiScan
Company LLC. In February and March 1999, Mr. Holloway worked as an independent
consultant. From August 1996 to January 1999, Mr. Holloway was Global Sales
Manager for Welch Allyn, Inc. From October 1994 to July 1996, Mr. Holloway was
Vice President and Sales Manager of Bowne & Company of New York. Mr. Holloway
holds an AB in economics from Columbia University and an MBA in finance from
Boston University.
Paul Cohen has served as a director of Intelli-Check since November 1996.
From December 1990 to present, Mr. Cohen has been the director of
pharmaceuticals for Allou Health and Beauty Care, Inc, a public company. Paul
Cohen is the father of Todd Cohen, our former President.
Evelyn Berezin was elected a director in August 1999. She has been, since
October 1987, an independent management consultant to technology based
companies. From July 1980 to September 1987, Ms. Berezin was President of
Greenhouse Management Company, a venture capital fund dedicated to investment in
early-phase high-technology companies. Ms. Berezin holds an AB in Physics from
New York University and has held an Atomic Energy Commission Fellowship. Ms.
Berezin is currently a member of the Board of Directors of Bionova Corp., a
publicly held biotechnology company. In addition, she has served on the boards
of a number of other public companies including Cigna Corp., Datapoint Corp.,
Koppers Company, Inc. and Genetic Systems Inc., as well as more than fourteen
private technology-based companies.
Charles McQuinn was elected a director in August 1999. He has been, since
1997, an independent product development/marketing consultant to Internet based
companies. Mr. McQuinn has also served as CEO of The McQuinn Group, Inc., a
system integration and institutional marketing company, from November 1998 to
the present. From 1995 to 1997, Mr. McQuinn was President of DTN West, a fixed
income price quote company with products for banks and governments. From 1990 to
1995, Mr. McQuinn was President of Bonneville Market Information, an equities
price quote company with products for traders and brokers. From 1985 to 1990,
Mr. McQuinn was President of Bonneville Telecommunications Company, a satellite
video and data company. Prior to 1985, he was with Burroughs Corporation in
various product development/marketing/management positions. Mr. McQuinn holds a
BS in marketing from Ball State University and an MBA in management from Central
Michigan University.
Jeffrey Levy was elected a director in December 1999. He has been, since
February 1977 President and Chief Executive Officer of LeaseLinc, Inc., a
third-party equipment leasing company and lease brokerage. Prior to 1977 Mr.
Levy served as President and Chief Executive Officer of American Land Cycle,
Inc. and Goose Creek Land Cycle, LLC, arboreal waste recycling companies. During
that time he also served as Chief Operating Officer of ICC Technologies, Inc.
and AWK Consulting Engineers, Inc. Mr. Levy has had a distinguished career as a
member of the United States Air Force from which he retired as a colonel in
1988. He serves as a board member of the Northern Virginia Chapter of Mothers
Against Drunk Driving, the Washington Regional Alcohol Program, the Zero
Tolerance Coalition and the National Drunk and Drugged Driving Prevention Month
Coalition and is a member of the Virginia Attorney General's Task Force on
Drinking by College Students and MADD's National Commission on Underage
Drinking. Mr. Levy holds a BS in International Relations from the United States
Air Force Academy, a graduate degree in Economics from the University of
Stockholm and an MBA from Marymount University.
Howard Davis was appointed a non-voting advisor to the Board in December
1999 and elected a director in March 2000. He has been, since 1997, Executive
Vice President of GunnAllen Financial Inc., where he is the executive
responsible for the investment banking and finance division. From 1990 to 1997
Mr. Davis was President and Chief Executive Officer of Kensington Securities,
Inc. In 1997, Kensington and GunnAllen joined together. Mr. Davis has also
served as President of Wentworth Securities, Inc. from 1988 to 1990 and prior to
that as President of Numero Uno
- 21 -
Franchise Corporation. He has attended the University of Southern California,
California State University, Northridge and Kent State University where he
majored in Finance and Accounting.
Directors serve for staggered terms of either 3 years, 2 years or 1 year
and hold office until the next annual meeting, following the conclusion of their
term, of stockholders and the election and qualification of their successors.
Executive officers are elected by and serve at the discretion of the board of
directors.
Board Committees
The board of directors has established a compensation committee which is
comprised of Mr. Davis, chairman, Mr. Levy and Mr. Cohen. The compensation
committee reviews and determines the compensation for all officers and directors
of our company and reviews general policy matters relating to the compensation
and benefits of all employees. The compensation committee also administers the
stock option plans.
The board of directors has established an audit committee which is
comprised of Ms. Berezin, chairman, Mr. McQuinn and Mr. Davis. The audit
committee recommends to the board of directors the annual engagement of a firm
of independent accountants and reviews with the independent accountants the
scope and results of audits, our internal accounting controls and audit
practices and professional services rendered to us by our independent
accountants.
The board of directors has established a corporate governance committee,
which is comprised of Mr. McQuinn, chairman, Ms. Berezin and Mr. Levy. The
corporate governance committee reviews our internal policies and procedures and
by-laws and acts as our nominating committee for the Board of Directors.
The board of directors has also established a technology oversight
committee comprised of Mr. Levy, chairman, Ms. Berezin and Mr. McQuinn. The
technology oversight committee will monitor the development of products and
services offered by our company and assist management in planning future
development of products and services within the framework of consumer,
regulatory and competitive environments. This committee will also monitor
actions taken to protect our intellectual property and will recommend
appropriate actions in furtherance of that protection.
Compliance with Section 16(a) of the Exchange Act
The Securities and Exchange Commission has adopted rules relating to the
filing of ownership reports under Section 16 (a) of the Securities Exchange Act
of 1934. One such rule requires disclosure of filings, which under the
Commission's rules, are not deemed to be timely. During its review, the Company
discovered that Mr. Mandelbaum failed to file a timely report regarding the sale
and gift of 18,600 shares of common stock by his spouse for which he disclaims
beneficial ownership. Such report was subsequently filed.
Item 10. Executive Compensation
The following table sets forth compensation paid to executive officers
whose compensation was in excess of $100,000 for any of the three fiscal years
ended December 31, 2000. No other executive officers received total salary and
bonus compensation in excess of $100,000 during any of such fiscal years.
- 22 -
SUMMARY COMPENSATION TABLE
Annual Long-Term
Compensation Compensation
------------ ------------
Securities
Underlying
Name and Principal Position Year(s) Salary ($) Options/SARS (#)
--------------------------- ------- ---------- ----------------
Frank Mandelbaum 2000 *150,000 --
Chairman & CEO 1999 150,000 75,000
1998 150,000 50,000
Kevin Messina 2000 150,000 --
Senior Executive Vice President, 1999 150,000 75,000
Chief Technology Officer 1998 150,000 --
Edwin Winiarz 2000 125,000 25,000
Senior Executive Vice President, Chief Financial Officer 1999 37,981 50,000
W. Robert Holloway 2000 115,000 --
Senior Executive Vice President- 1999 19,904 20,000
Sales
* Salaries include all deferred salaries paid and accrued.
The options shown above were granted under the 1998 and 1999 Stock Option
Plans, are exercisable at $3.00 per share, except for (1) Ed Winiarz having
25,000 options, at an exercise price of $10.75 exercisable on September 1, 2001
and 50,000 at an exercise price of $5.00 and (2) W. Robert Holloway at an
exercise price of $7.50. All options expire five years after the date of grant.
Messrs. Mandelbaum and Messina have Employment Agreements expiring
December 31, 2001, which provide for base annual salaries of $225,000, subject
to specified conditions. Because of our limited resources, Messrs. Mandelbaum
and Messina have from time to time agreed to defer the receipt of substantial
portions of their salaries. In May 1999, Mr. Mandelbaum's deferred salary was
reduced by $150,000 by the issuance to him of 75,000 shares of our common stock
and warrants entitling him to purchase an additional 75,000 shares of our common
stock at a price of $3.00 per share at any time prior to May 3, 2001. In May
1999, Mr. Messina's deferred salary was reduced by $10,126 through the issuance
to him of 5,063 shares of our common stock and warrants to purchase 5,063 shares
of our common stock at a purchase price of $3.00 per share at any time prior to
May 3, 2001. As of June 30, 1999, Mr. Mandelbaum's deferred salary was
approximately $375,000, Mr. Messina's deferred salary was approximately $200,000
and Mr. Todd Cohen's deferred salary was approximately $110,000. In June 1999,
Mr. Messina received, in lieu of all deferred salary, options to purchase
207,000 shares of common stock at an exercise price of $3.00 per share. Also in
June 1999, Mr. Mandelbaum received, in lieu of all deferred salary, options to
purchase 375,000 shares of common stock at an exercise price of $3.00 per share.
Mr. Todd Cohen resigned as President in April 1998. In June 1999, Mr.
Cohen received, in lieu of all deferred salary, options to purchase 110,000
shares of common stock at an exercise price of $3.00 expiring July 15, 2004.
All the options granted in exchange for deferred salary expire five years
after the date of grant.
The following table summarizes options granted during the year ended
December 31, 2000 to the named executive officers:
- 23 -
------------------------------------------------------------------------------------------------------------------
Individual Grants
---------------------------------------------------------------
% of Total Options Potential Realizable Value At
Number of Granted To Assumed Annual Rates of Stock Price
Securities Employees In Appreciation for Option Term
Underlying Options 2000 Exercise Expiration -----------------------------------
Name Granted Fiscal Year Price Date 5% 10%
------------------------------------------------------------------------------------------------------------------
Ed Winiarz 25,000 10.40% $ 10.75 9/1/05 $74,250 $164,075
------------------------------------------------------------------------------------------------------------------
The following table summarizes unexercised options granted through the
year-end December 31, 2000 to the named executive officers:
No. of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
No. of Aggregate Options/Warrants At Fiscal year End 12/31/00
Shares Recieved Dollar Value --------------------------- ----------------------------
Name Upon Exercise Received Upon Exercise Exercisable Unexercisable Exercisable Unexercisable
---- --------------- ---------------------- ----------- ------------- ----------- -------------
Frank Mandelbaum 71,000 $559,125 525,000 50,000 $4,134,375 $393,750
Chairman & CEO
Kevin Messina 357,000 50,000 $2,811,375 $393,750
Senior Executive VP & CTO
Ed Winiarz 50,000 25,000 $ 293,750 $ 3,125
Senior Executive VP & CFO
W. Robert Holloway 20,000 30,000 $ 67,500 $101,250
Senior Executive VP Sales
Pursuant to their employment agreements, Messrs. Mandelbaum and Messina
each received a grant in August 1999 of options to purchase 75,000 shares of our
common stock at a purchase price of $3.00 per share. Options to purchase 50,000
shares of common stock are currently exercisable. Options to purchase 25,000
shares of our common stock become exercisable on January 1, 2002. The options
expire five years from the date of grant. During the years ended December 31,
1999 and December 31, 2000, we granted employees other than the executive
officers named above options to purchase 156,000 shares and 215,000 shares
respectively, of common stock under the 1998 and 1999 Stock Option Plans.
The amounts shown as potential realizable value represent hypothetical
gains that could be achieved for the respective options if exercised at the end
of the option term. The 5% and 10% assumed annual rates of compounded stock
price appreciation are mandated by rules of the Securities and Exchange
Commission and do not represent our estimate or projection of our future common
stock prices. These amounts represent certain assumed rates of appreciation in
the value of our common stock from the fair market value on the date of grant.
Actual gains, if any, on stock option exercises are dependent on the future
performance of the common stock and overall stock market conditions. The amounts
reflected in the table may not necessarily be achieved.
Compensation of Directors
Non-employee directors receive a fee of $500 for attending board meetings
and $250 for attendance at such meetings telephonically. They also receive a fee
of $300 for each committee meeting held on a date other than that of a board
meeting and are reimbursed for expenses incurred in connection with the
performance of their respective duties as directors. In August 1999,
non-employee directors, Messrs. Paul Cohen and McQuinn and Ms. Berezin, each
received a grant of a non-qualified stock option to purchase an aggregate of
45,000 shares of our common stock upon their election as a director at an
exercise price of $3.00 per share. Of these options, 15,000 were immediately
exercisable and an additional 15,000 became exercisable in July 2000 and the
remaining 15,000 will become exercisable on the date of our next annual meeting.
On December 13, 1999, Mr. Levy and Mr. Davis were each granted non-qualified
options to purchase 15,000 shares of our common stock at an exercise price of
$11.625, the fair market value on the date of grant. These options were
immediately exercisable. In addition, in July 2000 they were each granted
non-qualified options to purchase an aggregate of 30,000 shares of our common
stock for serving as a director at an exercise price of $8.25 per share. Of
these options, 15,000 are immediately exercisable and 15,000 will be exercisable
at the time of the next annual meeting for Mr. Levy and 15,000 for Mr. Davis
provided that he is re-elected. Options granted to non-employee directors are
exercisable only during the non-employee director's term and automatically
expire on the date his or her service terminates. Mr. Paul Cohen had previously
been granted options to purchase 30,000 shares of common stock exercisable at
$3.00 per share. Mr. Cohen also received an option to purchase 50,000 shares of
common stock exercisable at $3.00 per share in connection with a one-year
consulting agreement dated November 1, 1997.
In addition, non-employee directors who are members of a committee are
entitled to receive grants of stock options for each year served. Each
chairperson of a committee receives options to purchase 2,500 shares of our
common stock, while a committee member receives options to purchase 1,500 shares
of our common stock. In March 2000 and July 2000 the following non-qualified
options were granted to committee chairpersons:
- 24 -
Name Committee Number of Options
---- ------------ -----------------
March 2000 July 2000
---------- ---------
Ms. Berezin Audit 2,500 2,500
Mr. McQuinn Corporate Governance 2,500 2,500
Mr. Levy Technology Oversight 2,500 2,500
Mr. Davis Compensation 2,500
The following non-qualified options were granted to committee members:
Name Committee(s) Number of Options
---- ------------ -----------------
March 2000 July 2000
---------- ---------
Mr. Cohen Compensation, Audit 3,000 1,500
Ms. Berezin Corporate Governance,
Technology Oversight 3,000 3,000
Mr. McQuinn Audit, Technology Oversight 3,000 3,000
Mr. Levy Corporate Governance, Compensation 3,000
Mr. Davis Audit 1,500 1,500
These options are exercisable at $12.125 for options granted in March 2000
and $8.75 for options granted in July 2000, the fair market value on the date of
grant, are immediately exercisable during the committee members term and expire
five years from date of grant.
Employment Contracts, Termination of Employment and Change-in-Control
Arrangements
Effective January 1, 1999, Mr. Mandelbaum and Mr. Messina each entered
into a three-year employment agreement with Intelli-Check. Each of the
agreements provides for a base salary of $225,000. However, until such time as
we receive payment for gross sales of at least $1,000,000, the salaries are
capped at $150,000. The agreements also provide for the payment of a bonus if
our sales exceed $2,000,000 in the previous year. The bonus will be in the
amount of $50,000 plus 1% of the amount of sales in excess of $2,000,000 in each
year. In addition, for each fiscal year ending during the term of the employment
agreements, we will grant to each of the executives an option to purchase the
greater of 25,000 shares of our common stock at fair market value on the date of
grant or 10,000 shares of our common stock at fair market value on the date of
grant for each full $250,000 by which pre-tax profits for each year exceeds
pre-tax profits for the prior fiscal year. However, we are not required to grant
options to purchase more than 150,000 shares of our common stock with respect to
any one fiscal year.
If there shall occur a change of control, as defined in the employment
agreement, the employee may terminate his employment at any time and be entitled
to receive a payment equal to 2.99 times his average annual compensation,
including bonuses, during the three years preceding the date of termination,
payable in cash to the extent of three months salary and the balance in shares
of our common stock based on a valuation of $2.00 per share. Included within the
definition of change of control is the first day on which a majority of the
directors of the company do not consist of individuals recommended by Messrs.
Mandelbaum, Messina and one outside director.
We have entered into a two-year employment agreement with Mr. Winiarz,
which became effective on September 7, 1999. The agreement provides for a base
salary of $125,000. In addition, we granted Mr. Winiarz an option to purchase
50,000 shares of common stock, of which 30,000 options were immediately
exercisable at $5.00 per share and 20,000 options became exercisable on
September 7, 2000 at $5.00 per share.
We entered into a two-year employment agreement with Mr. Holloway, which
became effective on October 25, 1999. The agreement provides for a base salary
of $115,000. In addition, we granted Mr. Holloway an option to purchase 50,000
shares of common stock at $7.50 per share, of which 20,000 shares are
immediately exercisable and 5,000 shares become exercisable for each 10,000
sales of ID-Check products sold that exceed 10,000. The maximum options that can
be earned in any calendar year may not exceed 100,000. Any options earned above
the initial 50,000 options will be at fair market value on the date of grant.
- 25 -
Under the terms of the agreements, each of the executives has the right
to receive his compensation in the form of shares of common stock valued at 50%
of the closing bid price of our shares of common stock as of the date of the
employee's election, which is to be made at the beginning of each quarter. In
addition, each of the employment agreements requires the executive to devote
substantially all his time and efforts to our business and contains
non-competition and nondisclosure covenants of the officer for the term of his
employment and for a period of two years thereafter. Each employment agreement
provides that we may terminate the agreement for cause.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of December 31, 2000 certain
information regarding beneficial ownership of Intelli-Check's common stock by
each person who is known by us to beneficially own more than 5% of our common
stock. The table also identifies the stock ownership of each of our directors,
each of our officers, and all directors and officers as a group. Except as
otherwise indicated, the stockholders listed in the table have sole voting and
investment powers with respect to the shares indicated.
Unless otherwise indicated, the address for each of the named individuals
is c/o Intelli-Check, Inc., 246 Crossways Park West, Woodbury, NY 11797-2015.
Shares of common stock which an individual or group has a right to acquire
within 60 days pursuant to the exercise or conversion of options, warrants or
other similar convertible or derivative securities are deemed to be outstanding
for the purpose of computing the percentage ownership of such individual or
group, but are not deemed to be outstanding for the purpose of computing the
percentage ownership of any other person shown in the table.
The applicable percentage of ownership is based on 7,696,236 shares
outstanding as of December 31, 2000.
-----------------------------------------------------------------------------------------
Name Shares Beneficially Owned Percent
-----------------------------------------------------------------------------------------
Frank Mandelbaum 1,327,000 16.09
-----------------------------------------------------------------------------------------
Kevin Messina 1,401,736 17.35
-----------------------------------------------------------------------------------------
Edwin Winiarz 50,000 *
-----------------------------------------------------------------------------------------
W. Robert Holloway 22,000 *
-----------------------------------------------------------------------------------------
Paul Cohen 296,385 3.79
-----------------------------------------------------------------------------------------
Evelyn Berezin** 41,000 *
-----------------------------------------------------------------------------------------
Charles McQuinn*** 41,000 *
-----------------------------------------------------------------------------------------
Jeffrey Levy 38,300 *
-----------------------------------------------------------------------------------------
Howard Davis 35,500 *
-----------------------------------------------------------------------------------------
Todd Cohen 1,077,900 13.81
-----------------------------------------------------------------------------------------
Empire State Development,**** formerly 550,000 6.67
New York State Science and Technology Foundation
-----------------------------------------------------------------------------------------
All Executive Officers and Directors as a group (10 3,252,921 36.27
persons)
-----------------------------------------------------------------------------------------
* Indicates beneficial ownership of less than one percent of the total
outstanding common stock.
- 26 -
** In February 2001, Ms. Berezin exercised 500 of the options beneficially
owned by her and now holds 500 shares of common stock.
*** In February 2001, Mr. McQuinn exercised 1000 of the options beneficially
owned by him and now holds 1000 shares of common stock.
**** The person who exercises the voting power is the CFO who, at the present
time, is Francis Walton.
The amounts shown for Mr. Mandelbaum do not include 31,400 shares held by
Mr. Mandelbaum's wife, for which Mr. Mandelbaum disclaims beneficial ownership.
The amounts shown for Mr. Paul Cohen do not include 50,000 shares held by
Mr. Cohen's wife, for which Mr. Cohen disclaims beneficial ownership.
Mr. Todd Cohen's address is 5 Violet Drive, Huntington Station, New York
11746.
Due to recent legislation, all assets of the New York State Small Business
Technology Investment Fund, which were located in the New York State Science and
Technology Foundation, were transferred to The Urban Development Corporation
d/b/a Empire State Development. The Commissioner of Empire State Development is
Charles A. Gargano. The members of the Board of Directors are Charles A.
Gargano, J. Patrick Barrett, Charles E. Dorkey, III, David Feinberg, Anthony
Gioia, Deborah Weight and Elizabeth McCaul. The address for that fund is 633
Third Avenue, New York, NY 10017.
The amounts shown in the table above for the following persons include the
right to acquire the number of shares shown pursuant to currently exercisable
stock options and/or warrants at the exercise price shown:
--------------------------------------------------------------------------------
NAME NUMBER OF SHARES EXERCISE PRICE
--------------------------------------------------------------------------------
Frank Mandelbaum 550,000 $3.00
--------------------------------------------------------------------------------
Kevin Messina 382,000 $3.00
--------------------------------------------------------------------------------
Edwin Winiarz 50,000 $5.00
--------------------------------------------------------------------------------
W. Robert Holloway 20,000 $7.50
--------------------------------------------------------------------------------
Paul Cohen 110,000 $3.00
3,000 $12.125
1,500 $8.75
--------------------------------------------------------------------------------
Evelyn Berezin 30,000 $3.00
5,500 $12.125
5,500 $8.75
--------------------------------------------------------------------------------
Charles McQuinn 30,000 $3.00
5,500 $12.125
5,500 $8.75
--------------------------------------------------------------------------------
Jeffrey Levy 15,000 $11.625
2,500 $12.125
20,500 $8.75
--------------------------------------------------------------------------------
Howard Davis 15,000 $11.625
1,500 $12.125
19,000 $8.75
--------------------------------------------------------------------------------
- 27 -
--------------------------------------------------------------------------------
Todd Cohen 110,000 $3.00
--------------------------------------------------------------------------------
*Empire State Development, formally New 100,000* $3.00
York State Science and Technology
Foundation
--------------------------------------------------------------------------------
* Exercised on February 22, 2001.
Item 12. Certain Relationships and Related Transactions
In October 1994, Messrs. Todd Cohen and Kevin Messina co-founded
Intelli-Check and each purchased 975,000 shares of common stock for $975. In
April 1998, Mr. Todd Cohen resigned as an officer of our company for personal
reasons and in August 1999, he completed his term as a director.
In June 1996, Mr. Messina's company, K.M. Software, assigned two
copyrights covering certain software employed by ID-Check and a patent
application covering the ID-Check technology to Intelli-Check for an agreement
to pay $98,151 plus interest. The agreement also gave K.M. Software, or its
successor, the right to reclaim the rights to the copyrights and the patent
under certain specified conditions. In May 1999, the prior agreement was
superseded and in exchange Mr. Messina received 69,937 shares of our common
stock and warrants to purchase 69,937 shares of our common stock, at $3.00 per
share, exercisable at any time prior to May 3, 2001. The May 1999 agreement
provides for the payment by Intelli-Check of royalties equal to 0.005% of gross
sales from $2,000,000 to $52,000,000 and 0.0025% of gross sales in excess of
$52,000,000. Also, in May 1999, Mr. Messina's deferred salary was reduced by
$10,126 through the issuance to him of 5,063 shares of our common stock and
warrants to purchase 5,063 shares of our common stock at a purchase price of
$3.00 per share at any time prior to May 3, 2001. In June 1999, the balance of
Mr. Messina's deferred salary was reduced to zero by the issuance of options to
purchase 207,000 shares of our common stock at a purchase price of $3.00 per
share at any time prior to June 30, 2004.
In June 1996, Frank Mandelbaum, Intelli-Check's Chief Executive Officer
and Chairman of the Board of Directors, purchased 950,000 shares of common stock
for $50,000. From time to time since then, Mr. Mandelbaum loaned money to
Intelli-Check totaling $142,000. In November 1997, Mr. Mandelbaum converted his
outstanding loans into 71,000 shares of our common stock and warrants to
purchase 71,000 shares of our common stock at $3.00 per share, which he
exercised on December 31, 2000. In May 1999, Mr. Mandelbaum's deferred salary
was reduced by $150,000 through the issuance to him of 75,000 shares of our
common stock and warrants to purchase 75,000 shares of our common stock at a
purchase price of $3.00 per share at any time prior to May 3, 2001. In June
1999, Mr. Mandelbaum's deferred salary was reduced to zero by the issuance of
options to purchase 375,000 shares of our common stock at an exercise price of
$3.00 per share at any time prior to June 30, 2004.
In March 1997, one of our directors, Paul Cohen purchased 37,500 units
consisting of one share of common stock and one warrant to purchase an
additional share at $3.00 per share in connection with one of our private
placements, for $75,000. He exercised the warrants in December 2000 and the
Company received net proceeds of $112,500. In November 1997, Mr. Cohen received
an option to purchase 50,000 shares of common stock exercisable at $3.00 per
share in connection with a one-year consulting agreement. Also in November 1997,
Mr. Cohen's wife purchased 25,000 units consisting of one share of common stock
and one warrant to purchase an additional share of common stock for $3.00 in
connection with one of our private placements for $50,000. Mrs. Cohen exercised
the warrant in December 2000 and the Company received net proceeds of $75,000.
In August 1999, Mr. Cohen purchased one unit in connection with our last private
placement. The unit consisted of a promissory note having a principal amount of
$50,000, which bore interest at the annual rate of 10% and a warrant to purchase
2,500 shares of our common stock for $3.00 per share. The principal was repaid
by the Company to Mr. Cohen in November 1999.
- 28 -
In June 1999, all deferred compensation due to Todd Cohen, our former
President and director, was eliminated by the issuance of options to purchase
110,000 shares of common stock at an exercise price of $3.00 per share at any
time prior to June 30, 2004.
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits. See index of exhibits annexed hereto.
(b) Reports on Form 8-K. None.
- 29 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant had duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 23, 2001 INTELLI-CHECK, INC.
By: /s/ Frank Mandelbaum
--------------------
Frank Mandelbaum
Chairman, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Date: March 23, 2001 /s/ Frank Mandelbaum
------------------------
Frank Mandelbaum
Chairman, Chief Executive Officer and Director
Date: March 23, 2001
------------------------
Kevin Messina
Senior Executive Vice President, Chief Technology
Officer and Director
Date: March 23, 2001 /s/ Edwin Winiarz
------------------------
Edwin Winiarz
Senior Executive Vice President, Treasurer and Chief
Financial Officer
Date: March 23, 2001 /s/ Paul Cohen
------------------------
Paul Cohen, Director
Date: March 23, 2001 /s/ Evelyn Berezin
------------------------
Evelyn Berezin, Director
Date: March 23, 2001 /s/ Charles McQuinn
------------------------
Charles McQuinn, Director
Date: March 23, 2001 /s/ Jeffrey Levy
------------------------
Jeffrey Levy, Director
Date: March 23, 2001 /s/ Howard Davis
------------------------
Howard Davis, Director
INDEX TO FINANCIAL STATEMENTS
Page
----
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-1
FINANCIAL STATEMENTS:
Balance Sheet as of December 31, 2000 F-2
Statements of Operations for the Years Ended December 31, 1999 and 2000 F-3
Statements of Stockholders' Equity for the Years Ended December 31, 1999 and 2000 F-4
Statements of Cash Flows for the Years Ended December 31, 1999 and 2000 F-5
NOTES TO FINANCIAL STATEMENTS F-6 - F-15
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Intelli-Check, Inc.:
We have audited the accompanying balance sheet of Intelli-Check, Inc. (a
Delaware corporation) as of December 31, 2000, and the related statements of
operations, stockholders' equity and cash flows for the years ended December 31,
1999 and 2000. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Intelli-Check, Inc. as of
December 31, 2000, and the results of its operations and its cash flows for the
years ended December 31, 1999 and 2000 in conformity with accounting principles
generally accepted in the United States.
ARTHUR ANDERSEN LLP
New York, New York
March 19, 2001
F-1
INTELLI-CHECK, INC.
BALANCE SHEET
DECEMBER 31, 2000
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 4,091,689
Accounts receivable 44,795
Inventory 2,536,338
Other current assets 511,638
Total current assets 7,184,460
CERTIFICATE OF DEPOSIT (Note 8) 250,000
PROPERTY AND EQUIPMENT, net (Note 3) 438,021
PATENT COSTS, net of accumulated amortization of $38,235 67,426
-----------
Total assets $ 7,939,907
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 180,792
Accrued expenses (Note 4) 489,229
Deferred revenue 545,334
Current portion of capital lease obligations (Note 8) 48,767
-----------
Total current liabilities 1,264,122
-----------
CAPITAL LEASE OBLIGATIONS (Note 8) 42,738
-----------
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY:
Series A Convertible Preferred Stock - $.01 par value;
250,000 shares authorized; 0 shares issued and outstanding --
Common stock - $.001 par value; 20,000,000 shares authorized;
7,696,236 shares issued and outstanding 7,696
Additional paid-in capital 13,561,362
Accumulated deficit (6,936,011)
-----------
Total stockholders' equity 6,633,047
-----------
Total liabilities and stockholders' equity $ 7,939,907
===========
The accompanying notes are an integral part of this balance sheet.
F-2
INTELLI-CHECK, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 2000
1999 2000
----------- -----------
REVENUE $ 29,407 $ 342,979
COST OF REVENUE 14,420 198,712
----------- -----------
Gross profit 14,987 144,267
----------- -----------
OPERATING EXPENSES:
Selling 202,888 890,453
General and administrative 1,194,862 1,590,896
Research and development 880,359 1,042,008
----------- -----------
Total operating expenses 2,278,109 3,523,357
----------- -----------
Loss from operations (2,263,122) (3,379,090)
OTHER INCOME (EXPENSE):
Interest income 19,169 261,181
Interest expense (55,472) (14,863)
----------- -----------
(2,299,425) (3,132,772)
INCOME TAX BENEFIT -- --
----------- -----------
Net loss $(2,299,425) $(3,132,772)
=========== ===========
PER SHARE INFORMATION:
Net loss per common share-
Basic and diluted $ (0.45) $ (0.47)
=========== ===========
Common shares used in computing per share amounts-
Basic and diluted 5,079,807 6,648,191
=========== ===========
The accompanying notes are an integral part of these statements.
F-3
INTELLI-CHECK, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 2000
Series A
Common Stock Preferred Stock Additional
------------------ ------------------- Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit Total
--------- ------ -------- ------- ----------- ----------- -----------
BALANCE, December 31, 1998 4,402,552 $4,402 250,000 $ 2,500 $ 839,342 $(1,503,814) $ (657,570)
Issuance of common stock in
private placements 274,600 275 -- -- 548,925 -- 549,200
Exercise of warrant 160,000 160 -- -- 379,840 -- 380,000
Issuance of common stock for note
payable and interest 69,937 70 -- -- 139,804 -- 139,874
Issuance of common stock for
deferred salary 80,063 80 -- -- 160,046 -- 160,126
Issuance of common stock for
settlements and accounts payable 128,000 128 -- -- 445,588 -- 445,716
Issuance of stock options for
deferred salary -- -- -- -- 700,000 -- 700,000
Conversion of preferred stock 250,000 250 (250,000) (2,500) 2,250 -- --
Issuance of common stock in IPO,
net of expenses 1,150,000 1,150 -- -- 6,905,976 -- 6,907,126
Net loss -- -- -- -- -- (2,299,425) (2,299,425)
--------- ------ -------- ------- ----------- ----------- -----------
BALANCE, December 31, 1999 6,515,152 6,515 -- -- 10,121,771 (3,803,239) 6,325,047
Exercise of warrants 1,115,084 1,115 -- -- 3,222,759 -- 3,223,874
Exercise of stock options 66,000 66 -- -- 202,434 -- 202,500
Issuance of stock options in
settlement of accounts payable -- -- -- -- 14,398 -- 14,398
Net loss -- -- -- -- -- (3,132,772) (3,132,772)
--------- ------ -------- ------- ----------- ----------- -----------
BALANCE, December 31, 2000 7,696,236 $7,696 -- $ -- $13,561,362 $(6,936,011) $ 6,633,047
========= ====== ======== ======= =========== =========== ===========
The accompanying notes are an integral part of these statements.
F-4
INTELLI-CHECK, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 2000
1999 2000
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,299,425) $(3,132,772)
Adjustments to reconcile net loss to net cash used in operating activities-
Depreciation and amortization 104,053 90,115
Noncash expenditure -- 14,398
Changes in assets and liabilities-
(Increase) in certificate of deposit -- (250,000)
(Increase) in accounts receivable (14,320) (30,475)
(Increase) in inventory (169,916) (2,349,729)
(Increase) in other current assets (53,392) (457,325)
(Increase) decrease in deposit (245,800) 245,800
(Increase) decrease in other assets (2,586) 8,766
Increase (decrease) in accounts payable and accrued expenses 1,159,805 (137,941)
Increase in deferred revenue -- 545,334
----------- -----------
Net cash used in operating activities (1,521,581) (5,453,829)
----------- -----------
CASH FLOWS FROM INVESTING activities:
Purchases of property and equipment (93,797) (223,511)
----------- -----------
Net cash used in investing activities (93,797) (223,511)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 7,836,326 3,426,374
(Repayment of) capital lease obligations -- (37,893)
Proceeds from promissory notes 1,200,000 --
Repayment of promissory notes (1,200,000) --
----------- -----------
Net cash provided by financing activities 7,836,326 3,388,481
----------- -----------
Net increase (decrease) in cash and cash equivalents 6,220,948 (2,288,859)
CASH AND CASH EQUIVALENTS, beginning of year 159,600 6,380,548
----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 6,380,548 $ 4,091,689
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 37,458 $ 14,863
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Conversion of preferred stock to common stock $ 250,000 $ --
Common stock issued to satisfy debt and notes payable 139,874 --
Common stock issued to satisfy deferred salary 160,126 --
Common stock issued for settlements and accounts payable 445,715 --
Stock options issued to satisfy deferred salary 700,000 --
Capital lease obligations incurred 71,519 54,125
Stock options issued in settlement of account payable -- 14,398
The accompanying notes are an integral part of these statements.
F-5
INTELLI-CHECK, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
Intelli-Check, Inc. (the "Company") was originally incorporated in New York in
October 1994 and reincorporated in Delaware in December 1999 to develop,
manufacture and market an advanced document verification system to enable a
retailer to help prevent economic loss through various frauds utilizing fake
ID's as support for these transactions and to determine whether purchasers of
age restricted products meet the minimum age requirements for the sale. This
helps reduce the risk to the retailer of substantial monetary fines, criminal
penalties and license revocation for the sale of age-restricted products to
minors.
The Company has developed and patented the innovative software technology that
is included in the advanced document verification system terminal called
"ID-Check." The ID-Check terminal, in which the Company's patented software is
loaded, was designed to offer convenient and reliable document and age
verification. ID-Check reads, analyzes and displays the encoded information
contained on driver licenses and other forms of accepted government issued
identification where permitted by law. In addition, the ID-Check terminal is
capable of being upgraded to accommodate changes made by the governmental
issuers of driver licenses and ID cards. The ID-Check terminal requires a quick
swipe or scan of the driver license or ID card by the retailer; displays a
"valid", "invalid", "yes", "no", "expired", "tampered" or other customized
displays; and creates a record of transactions to protect the merchant against
fraudulent transactions and as proof that the retailer has used proper due
diligence in the sale of age restricted products.
2. SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments with
original maturities of three months or less when purchased.
Revenue Recognition
Revenue on sales of the Company's product is recognized upon shipment to the
customer. Certain sales require continuing service or post contract customer
support and performance by the Company, and accordingly a portion of the revenue
is deferred and recognized ratably over the period in which the future service,
support and performance are provided, which is generally one year. Currently, if
the Company does not have enough experience to identify the fair value of each
element, the full amount of the revenue and related gross margin is deferred and
recognized ratably over the one-year period in which the future service, support
and performance are provided.
During the year ended December 31, 2000, the Company contracted sales of
$860,929, of which $517,950 have been deferred and are included in deferred
revenue in the accompanying balance sheet. In addition, the Company has deferred
the related cost of revenues from the above transactions amounting to $299,040,
which are included in other current assets in the accompanying balance sheet.
Inventory
Inventory is stated at the lower of cost or market and cost is determined using
the first-in, first-out method. Inventory is primarily comprised of finished
goods.
Long-Lived Assets
The Company's policy is to record long-lived assets at cost and amortize these
costs over the expected useful life of the related assets, in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." These assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amounts of the assets may not be
reasonable. Furthermore, these assets are evaluated for continuing value and
proper useful lives by comparison to undiscounted expected future cash flow
projections. The Company has determined that no impairment exists as of December
31, 2000.
F-6
INTELLI-CHECK, INC.
NOTES TO FINANCIAL STATEMENTS
Property and Equipment
Property and equipment are recorded at cost and are depreciated over their
estimated useful lives ranging from three to ten-years using the straight-line
basis. Equipment held under capital leases is amortized utilizing the
straight-line method over the lesser of the term of the lease or estimated
useful life of the asset.
Patent Costs
Patent costs, primarily consisting of legal costs, are amortized over a period
of 17 years.
Capitalized Software Development Costs
SFAS No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased
or Otherwise Marketed," specifies that costs incurred internally in creating a
computer software product shall be charged to expense when incurred as research
and development until technological feasibility has been established for the
product. Software production costs for computer software that is to be used as
an integral part of a product or process shall not be capitalized until both (a)
technological feasibility has been established for the software and (b) all
research and development activities for the other components of the product or
process have been completed. The Company has not capitalized any software costs
for the years ended December 31, 1999 and 2000.
Income Taxes
The Company accounts for income taxes under SFAS No. 109, "Accounting for Income
Taxes." Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and net operating loss carryforwards. Deferred tax assets
and liabilities are measured using expected tax rates in effect for the year in
which those temporary differences are expected to be recovered or settled. The
Company has recorded a full valuation allowance for its deferred tax assets as
of December 31, 2000, due to the uncertainty of the realizability of those
assets.
Fair Value of Financial Instruments
The Company adheres to the provisions of SFAS No. 107, "Disclosures about Fair
Value of Financial Instruments." This pronouncement requires that the Company
calculate the fair value of financial instruments and include this additional
information in the notes to financial statements when the fair value is
different than the book value of those financial instruments. At December 31,
2000 the carrying value of all financial instruments approximated fair value.
Business Concentrations and Credit Risk
Financial instruments, which subject the Company to concentrations of credit
risk, consist primarily of cash, cash equivalents and short-term commercial
paper. The Company maintains cash between two financial institutions. The
Company performs periodic evaluations of the relative credit standing of these
institutions. The Company has had limited sales due to initial release of the
enhanced product in late September 2000 to a number of clients which are
concentrated in the United States. The Company performs ongoing credit
evaluations, generally does not require collateral, and establishes an allowance
for doubtful accounts based upon factors surrounding the credit risk of
customers, historical trends and other information.
There were no customers that accounted for greater than 10% of sales or accounts
receivable for the year ended December 31, 1999. However, approximately 80% of
the Company's sales during the year ended December 31, 2000 were made to one
customer under a master manufacturing order agreement. In addition, the same
customer accounted for approximately 27% of accounts receivable as of December
31, 2000.
F-7
INTELLI-CHECK, INC.
NOTES TO FINANCIAL STATEMENTS
The Company currently has one supplier for the production of its ID-check
products (Note 8). The Company does not maintain a manufacturing facility of its
own and, accordingly, is dependent on maintaining its existing production
relationships. Further, should the Company's relationship with its supplier
terminate unexpectedly, it may not be able to find an alternative, comparable
supplier on satisfactory terms to the Company, and therefore, there may be an
adverse effect on the Company's results of operations.
Net Income (Loss) Per Common Share
The Company computes net income (loss) per common share in accordance with SFAS
No. 128, "Earnings Per Share". Under the provisions of SFAS No. 128, basic net
income (loss) per common share ("Basic EPS") is computed by dividing net income
(loss) by the weighted average number of common shares outstanding. Diluted net
income (loss) per common share ("Diluted EPS") is computed by dividing net
income (loss) by the weighted average number of common shares and dilutive
common share equivalents then outstanding. SFAS No. 128 requires the
presentation of both Basic EPS and Diluted EPS on the face of the statements of
operations.
Diluted EPS for the years ended December 31, 1999 and 2000, does not include the
impact of stock options and warrants then outstanding, as the effect of their
inclusion would be antidilutive.
Stock-Based Compensation
The Company accounts for stock compensation under the provisions of SFAS No.
123, "Accounting for Stock-Based Compensation," by continuing to apply the
provisions of Accounting Principles Board No. 25, "Accounting for Stock Issued
to Employees," ("APB No. 25") while providing the necessary pro forma
disclosures as if the fair value method had been applied.
Research and Development Costs
Research and development costs are charged to expense as incurred.
Comprehensive Loss
The Company's comprehensive net loss is equal to its net loss for the years
ended December 31, 1999 and 2000.
Segment Information
The Company adheres to the provisions of SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." This statement establishes
standards for the way public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in financial
statements issued to shareholders. Management has determined that it does not
have any separately reportable business segments.
Costs of Computer Software Developed or Obtained for Internal Use
The Company accounts for certain software costs under Statement of Position
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1"), which provides guidance for determining whether
computer software is internal-use software and guidance on accounting for the
proceeds of computer software originally developed or obtained for internal use
and then subsequently sold to the public. It also provides guidance on
capitalization of the costs incurred for computer software developed or obtained
for internal use. The adoption of SOP 98-1 in 1999 did not have a material
effect on the Company's financial statements.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-8
INTELLI-CHECK, INC.
NOTES TO FINANCIAL STATEMENTS
Recently Issued Accounting Standards
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities," which establishes accounting and reporting standards of
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities.
In July 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities Deferral of the Effective Date of FASB
Statement No. 133," which amends SFAS No. 133 to be effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. The Company does not
currently engage in derivative activity and does not expect the adoption of this
standard to have a material effect on the Company's results of operations,
financial position or cash flows.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 101, which provides guidance on the recognition,
presentation and disclosure of revenue in financial statements filed with the
SEC. The Company adopted SAB 101 in the fourth quarter of 2000, which did not
have a material impact on the Company's previously reported financial position,
results of operations, or cash flows.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation, and Interpretation of APB Opinion No.
25" ("FIN 44"). The Interpretation is intended to clarify certain problems that
have arisen in practice since the issuance of APB No. 25 "Accounting for Stock
Issued to Employees." The effective date of the interpretation was July 1, 2000.
The provisions of the interpretation will apply prospectively, but it will also
cover certain events occurring after December 15, 1998 and after January 12,
2000. The adoption of FIN 44 did not have a material impact on the Company's
current or historical financial statements.
In September 2000, the Emerging Issue Task Force ("EITF") reached a consensus
with respect to EITF Issue No. 00-10 "Accounting for Shipping and Handling
Revenues and Costs." The purpose of this issue discussion was to clarify the
classification of shipping and handling revenues and costs. The consensus
reached was that all shipping and handling billed to customers is revenue.
Further, a consensus was reached that classification of shipping and handling
costs is an accounting policy decision that should be disclosed pursuant to APB
No. 22, "Disclosures of Accounting Policies".
The Company currently records amounts billed for shipping and handling
appropriately as revenue and the related costs are recorded as cost of revenue.
The Company adopted this consensus in the fourth quarter of 2000, which did not
have a material impact on the Company's historical or current financial
statements.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
3. PROPERTY AND EQUIPMENT
Property and equipment are comprised of the following as of December 31, 2000:
Computer equipment $ 368,207
Furniture and fixtures 151,210
Leasehold improvements 143,253
Office equipment 40,412
----------
703,082
Less- Accumulated depreciation (265,061)
----------
$ 438,021
==========
Depreciation expense for the years ended December 31, 1999 and 2000 amounted to
$97,843 and $83,908, respectively.
F-9
INTELLI-CHECK, INC.
NOTES TO FINANCIAL STATEMENTS
4. ACCRUED EXPENSES
Accrued expenses are comprised of the following as of December 31, 2000:
Professional fees $ 251,501
Payroll 71,824
Rent 34,346
Other 131,558
----------
$ 489,229
==========
5. SHORT-TERM DEBT
In August and September 1999, the Company placed $1,200,000 of secured
promissory notes with interest at 10% for net proceeds of $1,050,00. The notes
had warrants attached to purchase 2,500 shares of common stock for each
principal amount of $50,000, at $3.00 per share. The warrants expire in August
2002 and can be redeemed by the Company at $0.01 per warrant at any time the
Company's common stock has an average market price of $6.00 per share for a
period of twenty consecutive trading days. The fair value of the warrants was
deemed to be immaterial. The notes were to mature at the earlier of July 31,
2000 or the date at which the Company received gross proceeds from an initial
public offering ("IPO") of its securities of at least $6,000,000. In connection
with the closing of the Company's IPO in November 1999, these notes along with
all accrued interest, were repaid prior to December 31, 1999.
6. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets for federal and state income taxes as of
December 31, 2000 are as follows:
Deferred tax assets, net:
Net operating loss carryforwards $ 2,608,000
Depreciation (20,000)
Accruals (64,000)
Other (5,700)
Less- Valuation allowance (2,518,300)
------------
Deferred tax assets, net $ --
============
Realization of deferred tax assets is dependent upon future earnings, if any.
The Company has recorded a full valuation allowance against its deferred tax
assets since management believes that it is more likely than not that these
assets will not be realized in the near future.
As of December 31, 1999 and 2000, the Company had net operating loss
carryforwards (NOL's) for federal income tax purposes of approximately
$3,250,000 and $6,521,000, respectively. There can be no assurance that the
Company will realize the benefit of the NOL's. The federal NOL's are available
to offset future taxable income and expire from 2018 through 2020 if not
utilized. Under Section 382 of the Internal Revenue Code, these NOL's may be
limited due to ownership changes.
7. STOCKHOLDERS' EQUITY
Series A Convertible Preferred Stock
In January 1997, the Board of Directors authorized the creation of a class of
Series A Convertible Preferred Stock with a par value of $.01. The Series A
Convertible Preferred Stock is convertible into an equal number of common shares
at the holder's option, subject to adjustment for anti-dilution. The holders of
Series A Convertible Preferred Stock are entitled to receive dividends as and if
declared by the Board of Directors. In the event of liquidation or dissolution
of the Company, the holders of Series A Convertible Preferred Stock are entitled
to receive all accrued dividends, if applicable, plus the liquidation price of
$1.00 per share.
F-10
INTELLI-CHECK, INC.
NOTES TO FINANCIAL STATEMENTS
As of December 31, 2000, there were no outstanding shares of Series A
Convertible Preferred Stock.
Common Stock and Warrants
In January 1999, the Company completed a private placement of stock, which
originally commenced in 1998. During January 1999, the Company sold 15,000
units, consisting of one share of the Company's common stock and one warrant to
purchase an additional share of common stock at $3.00, expiring two years from
the date of closing. The Company received total proceeds of $30,000 in January
1999. The Company allocated the net proceeds from the sale of the common stock
to the common stock and to the warrant.
In February 1999, the Company extended the expiration dates for the warrants
issued on May 26, 1997 and November 30, 1997 until June 30, 2000 and further
extended the warrants to December 31, 2000. The Company did not record a charge
for the adjustment to the terms of the warrants, as the amount was immaterial.
All of the warrants were exercised prior to their expiration.
In March 1999, the Company commenced an additional private placement and sold
259,600 units, consisting of one share of common stock and one warrant to
purchase an additional share of common stock at $3.00, expiring two years from
the date of closing. The Company received total proceeds of $489,200 prior to
June 30, 1999 and the remaining balance of $30,000 in August 1999. The Company
allocated the net proceeds from the sale of the common stock to the common stock
and to the warrant.
In April 1999, the Company adjusted the exercise price of a warrant to purchase
common stock of the Company issued to an investor, in a previous common stock
private placement, from $3.00 to $2.00. The adjustment was contingent upon the
investor exercising the warrants within thirty days of the adjustment. The
Company did not record a charge for the adjustment to the terms of the warrants,
as the amount was immaterial as the exercise price of the warrant was equal or
above the fair market value of the Company's common stock on the date of the
adjustment. The investor exercised this warrant in May 1999 at the adjusted
exercise price and the Company received total proceeds of $200,000. In addition,
the investor received a new warrant to purchase 100,000 shares of the Company's
common stock at an exercise price of $3.00 per share, which was exercised in
February 2001. In the opinion of management, the new warrant was been issued
with an exercise price that was equal or above the fair market value of the
Company's common stock on the date of grant.
In connection with an agreement executed in May 1999, which superceded a prior
license agreement (Note 8), the Company repaid a loan of $98,151 and accrued
interest of $41,724 to the then President of the Company. The Company paid $1.00
in cash and issued 69,937 units, consisting of one share of the Company's common
stock and one warrant to purchase an additional share of common stock at $3.00,
expiring in May 2001.
In June 1999, the Company issued 9,000 shares of common stock to a third party
for professional services rendered on behalf of the Company. The shares were
valued at $4.00 per share, and accordingly, the Company recorded a charge of
$36,000 in the accompanying statement of operations for the year ended December
31, 1999. In addition, the Company issued 34,000 shares of common stock to a
third party in connection with fees incurred in connection with its IPO. The
shares were valued at $5.00 per share, and accordingly, the Company recorded
this transaction as an offset to additional paid in capital as of December 31,
1999.
On November 18, 1999, the Company successfully completed its IPO of 1,150,000
shares of common stock at $7.50 per share, including the underwriters'
overallotment option, for net proceeds of approximately $6,907,000 after
underwriting commissions and offering expenses.
During the year ended December 31, 2000, the Company received net proceeds of
$3,223,874 from the exercise of 1,115,084 warrants. As of December 31, 2000,
there remained warrants outstanding to purchase 596,475 shares of the Company's
common stock at an exercise price of $3.00, except for 10,000 warrants that
carry an exercise price of $8.40.
In the opinion of management, all warrants have been issued with an exercise
price that is equal or above the fair market value of the Company's common stock
on the date of grant.
F-11
INTELLI-CHECK, INC.
NOTES TO FINANCIAL STATEMENTS
Stock Options
In order to retain and attract qualified personnel necessary for the success of
the Company, the Company adopted a Stock Option Plan (the "1998 Stock Option
Plan") covering up to 400,000 of the Company's common shares, pursuant to which
officers, directors, key employees and consultants to the Company are eligible
to receive incentive stock options and nonqualified stock options. The
Compensation Committee of the Board of Directors administers the 1998 Stock
Option Plan and determines the terms and conditions of options granted,
including the exercise price. The 1998 Stock Option Plan provides that all stock
options will expire within ten years of the date of grant. Incentive stock
options granted under the 1998 Stock Option Plan must be granted at an exercise
price that is not less than the fair market value per share at the date of grant
and the exercise price must not be less than 110% of the fair market value per
share at the date of grant for grants to persons owning more than 10% of the
voting stock of the Company. The 1998 Stock Option Plan also entitles
nonemployee directors to receive grants of non-qualified stock options as
approved by the Board of Directors.
Pursuant to the 1998 Stock Option Plan, the Company had granted in 1997, 50,000
stock options to each of three members of the Board of Directors, of which all
are exercisable at $3.00 per share and all expire within 5 years from the date
of grant. One of the directors had declined to stand for re-election to the
Board. In connection with this decision in 1999, the Company extended the date
of expiration of the former director's stock options until August 15, 2000. The
Company did not record a charge for the adjustment to the terms of the stock
options, as the amount was immaterial.
In August 1999, the Company adopted the 1999 Stock Option Plan (the "1999 Stock
Option Plan") covering up to 1,000,000 of the Company's common shares, pursuant
to which officers, directors, key employees and consultants to the Company are
eligible to receive incentive stock options and nonqualified stock options. The
Compensation Committee of the Board of Directors administers the 1999 Stock
Option Plan and determines the terms and conditions of options granted,
including the exercise price. The 1999 Stock Option Plan provides that all stock
options will expire within ten years of the date of grant. Incentive stock
options granted under the 1999 Stock Option Plan must be granted at an exercise
price that is not less than the fair market value per share at the date of grant
and the exercise price must not be less than 110% of the fair market value per
share at the date of grant for grants to persons owning more than 10% of the
voting stock of the Company. The 1999 Stock Option Plan also entitles
nonemployee directors to receive grants of non-qualified stock options as
approved by the Board of Directors.
In December 2000, the Company granted an option to a third-party purchase 25,000
shares of common stock at $10.00 per share of which 3,599 shares are immediately
exercisable and 21,401 vest as advertising services are performed. The fair
market value of each option has been estimated at $4.00 on the date of grant
using the Black-Scholes option pricing model and will be revalued at each
measurement date when services are performed. The Company recorded a charge of
$14,398 in the accompanying statement of operations as of December 31, 2000 and
will amortize the remaining expense as services are performed.
Had compensation for the 1998 and 1999 Stock Option Plans been determined
consistent with the provisions of SFAS No.123, the effect on the Company's net
loss and basic and diluted loss per share would have been changed to the
following pro forma amounts:
Year Ended Year Ended
December 31, 1999 December 31, 2000
----------------- -----------------
Net loss, as reported $(2,299,425) $(3,132,772)
Net loss, pro forma (2,582,153) (4,077,551)
Basic and diluted loss per
share, as reported (0.45) (0.47)
Basic and diluted loss per
share, pro forma (0.51) (0.61)
F-12
INTELLI-CHECK, INC.
NOTES TO FINANCIAL STATEMENTS
Stock option activity under the 1998 and 1999 Stock Option Plans during the
periods indicated is as follows:
Weighted
Average
Options Granted Exercise Price
--------------- --------------
Outstanding at January 1, 1999 280,000 $ 3.00
Granted 1,278,000 3.88
Canceled (10,000) 3.00
--------- --------
Outstanding at December 31, 1999 1,548,000 $ 3.72
--------- --------
Granted 476,560 $ 9.48
Canceled (80,000) 3.00
Exercised (66,000) 3.07
--------- --------
Outstanding at December 31, 2000 1,878,560 $ 5.04
========= ========
Included in the option schedule are 692,000 non-plan options.
As of December 31, 1999 and 2000, the fair market value of each option grant has
been estimated on the date of grant using the Black-Scholes option pricing model
based upon expected option lives of 5 years and 2 years; risk free interest
rates of 5.00% and 6.00%; expected volatility of 68.11% and 91.0% and a dividend
yield of 0% and 0%, respectively.
The weighted-average remaining life of the options outstanding at December 31,
1999 and 2000 is 4.66 years and 3.87 years, respectively, and the
weighted-average fair value of the options outstanding at December 31, 1999 and
2000 is $2.07 and $5.14, respectively.
As of December 31, 2000, the Company has 799,979 options exercisable and 147,440
options available for future grant under the 1998 and 1999 Stock Option Plans.
In the opinion of management, all stock options have been issued with an
exercise price that is equal or above the fair market value of the Company's
Common Stock on the date of grant.
8. COMMITMENTS AND CONTINGENCIES
Operating Leases
During July 2000, the Company entered into a 10-year lease agreement for its new
office. The lease provides for monthly rental payments of $17,458 beginning
December 15, 2000 and for immaterial annual increases. In connection with this
lease, the Company provided an irrevocable unconditional letter of credit in the
amount of $250,000 as security, which will be reduced after 45 months to $34,916
for the balance of the lease. The Company has invested $250,000 in a restricted
certificate of deposit collateralizing the letter of credit.
In addition, the Company has entered into various leases for office equipment
and office space expiring through December 2010. Future minimum lease payments
under these lease agreements are as follows:
Year Ending December 31:
2001 $ 215,376
2002 223,756
2003 230,036
2004 235,801
2005 245,062
Thereafter 1,380,822
F-13
INTELLI-CHECK, INC.
NOTES TO FINANCIAL STATEMENTS
Capital Lease Obligations
The Company leases computer equipment and office equipment under several capital
leases expiring in 2003. The asset and liability are recorded at the lower of
the present value of minimum lease payments or the fair market value of the
assets.
Future minimum payments under the lease agreements are as follows:
Year Ending December 31:
2001 $ 59,546
2002 29,655
2003 18,425
---------
Total minimum lease payments 107,626
Less- Amount representing interest 16,121
---------
Present value of net minimum lease payments $ 91,505
---------
Royalty and License Agreements
In January 1996, the Company entered into an agreement with a third party. The
agreement stated that if the Company has sales exceeding $500,000 to certain
customers as specified within the agreement, the Company must pay between 2 to
4% of gross revenues as a royalty to the third party. In May 1999, the Company
and the third party agreed to terminate the royalty agreement pursuant to a
Settlement Agreement. Under the Settlement Agreement, the Company issued 10,000
shares of common stock, valued at $2.00 per share with piggyback registration
rights, to the third party in exchange for the termination of the royalty
agreement. The Company recorded a charge of $20,000 in the accompanying
statement of operations for the year ended December 31, 1999.
The Company entered into an agreement with an officer of the Company during 1996
to license certain software. The agreement stipulated, among other provisions,
that the officer would receive royalties equal to a percentage of the Company's
gross sales. This agreement was terminated in May 1999 and superceded by a new
agreement which calls for payment of the executive royalties of .005% on gross
sales from $2,000,000 to $52,000,000 and .0025% on gross sales in excess of
$52,000,000
Employment Agreements
On January 1, 1999, the Company entered into three-year employment contracts
with both its Chairman and Chief Executive Officer and its Senior Executive Vice
President and Chief Technology Officer. Each of the agreements provides for a
base salary of $225,000 subject to certain conditions and the payment of a bonus
if the Company's sales exceed $2,000,000 in the previous year. The bonus will be
in the amount of $50,000 plus 1% of the amount of sales in excess of $2,000,000
in each year. In addition, for each fiscal year ending during the term of the
employment agreements, the Company will grant to each of the executives an
option to purchase the greater of 25,000 shares of common stock at fair market
value on the date of grant or 10,000 shares of common stock at fair market value
on the date of grant for each full $250,000 by which pre-tax profits for each
year exceeds pre-tax profits for the prior fiscal year. However, the Company is
not required to grant options to purchase more than 150,000 shares of common
stock with respect to any one fiscal year.
In May 1999, the Chairman and Chief Executive Officer converted $150,000 in
deferred salary into 75,000 units, consisting of one share of the Company's
common stock and one warrant to purchase an additional share of common stock at
$3.00, expiring in May 2001. In addition, the Company's Senior Executive Vice
President and Chief Technology Officer converted $10,126 in deferred salary into
5,063 units, consisting of one share of the Company's common stock and one
warrant to purchase an additional share of common stock at $3.00, expiring in
May 2001.
F-14
INTELLI-CHECK, INC.
NOTES TO FINANCIAL STATEMENTS
In June 1999, the Chairman and Chief Executive Officer converted approximately
$380,000 in deferred salary and interest into 375,000 options to purchase a
share of common stock at $3.00, expiring in June 2004. In addition, the
Company's Senior Executive Vice President and Chief Technology Officer converted
approximately $210,000 in deferred salary and interest into 207,000 options to
purchase a share of common stock at $3.00, expiring in June 2004. Furthermore,
the Company's former President converted approximately $110,000 in deferred
salary and interest into 110,000 options to purchase a share of common stock at
$3.00, expiring in June 2004.
In July 1999, the Company entered into a two-year employment agreement with its
Senior Executive Vice President and Chief Financial Officer, which became
effective on September 7, 1999. The agreement provides for a base salary of
$125,000. In addition, the Company granted the Chief Financial Officer an option
to purchase 50,000 shares of common stock, of which 30,000 options are
immediately exercisable at $5.00 per share and 20,000 options became exercisable
on September 7, 2000 at $5.00 per share.
Effective October 1999, the Company entered into a two-year employment agreement
with its Senior Executive Vice President of Sales. The agreement provides for a
base salary of $115,000. In addition, the Company granted the Senior Executive
Vice President of Sales an option to purchase 50,000 shares of common stock at
$7.50 per share, of which 20,000 shares are immediately exercisable and 5,000
shares become exercisable for each 10,000 sales of ID-Check products sold that
exceed 10,000. The maximum options that can be earned in any calendar year may
not exceed 100,000. Any options earned above the initial 50,000 options will be
at fair market value on the date of grant.
Supplier Agreements
In June 1999, the Company and Hazeltine (succeeded by Marconi Aerospace Systems,
Inc.) entered into an agreement to terminate the Exclusive Supplier and Royalty
Agreements originally entered into in December 1996. Under the terms of the
termination agreement, Hazeltine returned all units of the Company's ID-Check in
its possession as well as all samples, designs, drawings, software, molds and
any other item related to the ID-Check. The Company issued 75,000 shares of
common stock to Hazeltine in 1999, in order to satisfy outstanding payables of
approximately $220,000 due Hazeltine.
In July 1999, and amended November 1999 and July 2000, the Company entered into
a supplier agreement with Welch Allyn, Inc. The agreement specified that the
Company pay approximately $188,000 for the development of the Company's ID-check
products. In addition, Welch Allyn Inc. agreed to manufacture these products for
an initial period of two years. The Company placed an initial order for a total
of 2,000 units of which they had received 500 units as of December 31, 1999.
These units were subsequently returned to the manufacturer to exchange the
original scanner for a high-tech scanner, which allows the software to read the
encoding on 51 jurisdictions as opposed to 32 jurisdictions that could be read
on the original scanner. The Company received all of its product on these
orders. During July 2000, the Company placed an additional order to purchase
5,000 units and has received a portion of the units prior to December 31, 2000.
9. SUBSEQUENT EVENTS
In February 2001, the Company signed a letter of intent to acquire certain
assets of Neotilt Corp., a Canadian developer of software for hand held age and
document verification units for approximately $500,000 of the Company's common
stock. Neotilt Corp. may earn additional performance incentives in cash of up to
$125,000 and additional stock options based upon the achievement of certain
milestones. The letter of intent expires on March 31, 2001. The Company will
account for this acquisition under the purchase method of accounting.
In February 2001, an existing investor exercised 100,000 warrants at an exercise
price of $3.00 per share of common stock.
In March 2001, the Company declared a dividend distribution of one
non-transferable right to purchase one share of the Company's common stock for
every 10 outstanding shares of common stock held of record on March 30, 2001, at
an exercise price of $8.50. The rights will expire one year after the date of an
effective registration statement relating to the shares of common stock
underlying the rights. If certain conditions occur, the Company has the right to
redeem the outstanding rights for $.01 per right. In addition, the Company
extended the expiration date of its warrants that were due to expire on various
dates through June 30, 2001, until September 30, 2001.
F-15
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
1 Form of Underwriting Agreement (1)
3.1 Certificate of Incorporation of the Company (1)
3.2 By-laws of the Company (1)
4.1 Specimen Stock Certificate (2)
4.2 Form of Underwriters' Warrant Agreement (1)
10.1 1998 Stock Option Plan (1) *
10.2 Employment Agreement between Frank Mandelbaum and the Company,
dated as of January 1, 1999 (1) *
10.3 Employment Agreement between Kevin Messina and the Company, dated
as of January 1, 1999 (1) *
10.4 Employment Agreement between Edwin Winiarz and the Company, dated
as of July 21, 1999 (1) *
10.5 Agreement of Lease between the Company and Industrial and Research
Associates, dated as of October 15, 2000(4)
10.6 1999 Stock Option Plan (1) *
10.7 Development and Supply Agreement between the Company and Welch
Allyn Data Collection Inc., dated July 9, 1999 (1)
10.8 Agreement between the Company and Northern Leasing Systems Inc.,
dated as of August 13, 1999 (1)
10.9 Employment Agreement between the Company and W. Robert Holloway,
dated October 25, 1999 (1) *
10.10 Agreement between the Company and Kevin Messina, individually and
d/b/a K.M. Software Development, dated as of May 3, 1999 (1) *
10.11 Memorandum of Understanding between AAMVA net, Inc. and
Intelli-Check, Inc. effective November 15, 2000(4)
21 List of Subsidiaries (1)
23 Consent of Arthur Andersen LLP
-----------------------
* Denotes a management contract or compensatory plan, contract or
arrangement.
(1) Incorporated by reference to Registration Statement on Form Sb-2
(File No. 333-87797) filed September 24, 1999.
(2) Incorporated by reference to Amendment No. 1 to the Registration
Statement filed November 1, 1999.
(3) Incorporated by reference to Amendment No. 2 to the Registration
Statement filed November 15, 1999.
(4) Incorporated by reference to the Annual Report on Form 10-KSB filed
March 23, 2001.