FORM 10-K/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, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from to
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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 |_|
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: $ 85,946,332 (based upon the closing price of Issuer's Common Stock,
$.001 par value, as of March 25, 2002).
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 8,572,608
----------------------------- ---------
(Title of Class) (No. of Shares Outstanding
at March 25, 2002)
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.
In fiscal year 2001, options to acquire 166,500 shares of common stock,
warrants to acquire 388,975 shares of common stock and rights to acquire 180,198
shares of common stock were exercised. The net proceeds received by us from
these transactions was $3,231,174.
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 and
continuously held until exercise at an exercise price of $8.50. The rights will
expire on October 4, 2002, which is one year after the date the registration
statement relating to the shares of common stock underlying the rights was
declared effective. We currently have the right to redeem the outstanding rights
for $.01 per right upon 30 days notice to the holder. As of December 31, 2001,
180,198 rights have been exercised and the Company has received $1,531,683
before expenses of $133,834.
(b) Business of Issuer
(1) Principal Products
Our company was formed to develop, manufacture and market an advanced
document verification system to enable a user to detect altered, tampered or
fake IDs to:
(i) reduce check cashing, credit card and other types of fraud such as
identity theft, the fastest growing crime in America, which principally
utilizes fake driver licenses as proof of identity;
(ii) increase security and deter terrorism at airports, shipping
ports, rail and bus terminals, military installations, high profile
buildings and other sites where security is a concern;
(iii) 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 to 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 contained in our ID-Check unit
(terminal) reads in one swipe or scan the encoded data contained on U.S. and
Canadian driver licenses, state issued identification cards and military IDs
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that comply with the standards of the American Association of Motor Vehicle
Administrators (AAMVA), the American National Standards Institute (ANSI) and the
International Standards Organization (ISO).
Our terminal helps merchants deter the economic loss resulting from
identity theft, which 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 helping to detect.
The terminal is an effective tool to enhance security and deter terrorism
at airports and other sites where security is increasing. The terminals have
been installed in two major airports to verify the identity of those boarding an
aircraft and for employee screening. Since the tragic events of September 11,
2001, there has been increased interest in our technology to control access and
to help deter the threat of terrorism.
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 that they are of legal age to
purchase these products. These laws impose stringent penalties for violations.
In addition, many states and local governments have set 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 or altered
driver licenses and to verify age and reduce the risk of severe penalties for
non-compliance with laws pertaining to age restricted products.
On December 18, 2001, we acquired substantially all the assets of The
IDentiScan Company, LLC, a provider of age verification terminals, which has
broadened our product line to better penetrate the age-verification market.
IDentiScan has been selected to be the exclusive provider of age verification
terminals to Sunoco, Inc.
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. There are approximately 228,000,000
driver licenses in circulation in the U.S. and Canada. Our technology can read
the data encoded on all licenses that comply with the AAMVA/ANSI/ISO standards,
which is approximately 185,000,000 at the current time. Currently, forty States,
the District of Columbia, and seven Canadian Provinces encode their licenses.
The number of readable licenses will continue to grow as the remaining ten
States and five Canadian Provinces that have not yet encoded their license begin
to encode.
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 those 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 from over 5,000 sites on 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
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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) committing identity theft;
(ii) improperly boarding airplanes;
(iii) committing credit card, debit card and check cashing fraud;
(iv) unlawfully obtaining welfare or other government benefits;
(v) committing refund fraud,
(vi) committing pharmacy fraud, including false narcotic prescriptions,
(vii) gaining entrance to high profile buildings and sensitive
infrastructures, such as nuclear facilities;
(viii) illegally purchasing firearms;
(ix) purchasing age restricted products such as alcohol and tobacco
while under age.
(x) committing employee fraud, including employee theft and payroll
theft.
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. Since merchants are facing significant economic
losses due to these frauds, what is needed is a document verification 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.
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;
(vii) A recent study by the National Center on Addiction and Substance
Abuse at Columbia University (CASA) found that 5 million high
schoolers binge drink at least once a week. It was also stated in
the report that children under 21 drink 25% of the alcohol consumed
in the U.S.
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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.
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. Additionally, in states
where enacted, dram shop laws allow a person who is injured by any obviously
intoxicated person to file a claim for relief for fault against any person who
knowingly sells alcoholic beverages to a person under 21 years of age.
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 users with an easy, 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 database to
operate thus negating privacy concerns. 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 user 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
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(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.
(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 upgrades and 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 market to the
government, airlines, airports, high profile buildings and sensitive
infrastructure, 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 and upgrades for the first year after purchase. We have
developed a comprehensive marketing plan to build customer awareness and develop
brand recognition in target markets. We promote the advantages and ease of use
of the ID-Check terminal through:
(i) trade publications; (iv) direct mail;
(ii) trade shows; (v) our website; and
(iii) conventions and seminars; (vi) national advertising
We also 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 other 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. In January 2002, we hired a director of
sales for the Southern Region of the U.S. 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) airports, airlines, bus, port (vi) casinos;
and rail terminals
(vii) banks;
(ii) credit card issuers;
(viii) bars and night clubs;
(iii) mass merchandisers; and
(iv) convenience stores; (ix) resellers of age
restricted products.
(v) grocery and pharmacy chains;
Some of the reasons why we have targeted these markets are:
(a) The Airlines are required by FAA regulations to verify the identity
of passengers over 18 years of age. The form of identification is
usually a valid driver license or other form of legally acceptable
picture identification in order to board any airliner domestically;
and
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(b) Credit card issuers, who are facing huge economic losses through the
use of fraudulent credit cards, could use our technology to verify
that the credit card holder who presents a driver license as proof
of identity to support a transaction has presented a valid one prior
to processing the transaction.
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 will
continue to actively enter into sales agreements with distributors and ISO's to
distribute our product.
Upgrade Capability
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 technology, which can be used to
instantly upgrade the terminal by simply swiping or scanning an upgrade card
through the ID-Check terminal or downloading it from our website through a P.C.
are included in the purchase price of the ID-Check unit for the first year after
purchase. We have begun to sell upgrade packages for the period commencing after
the first year of purchase. Because each terminal has a unique serial number,
the upgrade will only work with that terminal, making unauthorized copying
valueless. We have also developed a secure way of delivering upgrades through
the Internet.
C-Link Software
We have developed our C-Link software, which was introduced to the
marketplace in 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 instantaneously view the transaction in real time for
enhanced security purposes 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 or for access control
include:
(i) car rental agencies;
(ii) hotels and motels;
(iii) stadiums and arenas;
(iv) check cashing services;
(v) oil refineries and nuclear facilities;
(vi) court houses; and
(vii) law enforcement agencies.
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.
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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.
(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, Card Com and ID Logix 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. Some of
these products are based on types of equipment which have limited functionality.
Those units that cannot read barcodes are at a significant disadvantage because
31 States and two Canadian Provinces currently utilize barcodes to encode their
driver licenses in addition to all U.S. military ID's and uniformed services
cards. This number 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.
(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. In 2001, we paid $200,000 as a deposit
to secure the purchase of the remaining units and will pay an additional
$400,000 on April 1, 2002.
(5) Intellectual Property
In January 1999, we were issued a patent on our ID-Check software
technology. In January 2002, we received notification from the U.S. Patent
Office on the issuance of our continuation patent. 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.
Upon the acquisition of the assets of IDentiScan, we received sole
ownership rights to intellectual property relating to age verification
technology. Specifically, Intelli-Check acquired ownership of U.S. Patent No.
6,148,091 and its Canadian counterpart, Canadian Patent. No. 2,242,205. These
patents are entitled "Apparatus for Controlling the Rental and Sale of
Age-Controlled Merchandise and for Controlling Access to Age-Controlled
Services." In addition, Intelli-Check also acquired all right, title and
interest to any and all patents resulting from pending U.S. and U.K. patent
applications relating to the foregoing patented technology as well as sole
rights to IDentiScan's trademarks, copyrights and trade secrets.
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 former 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.
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(6) Employees
As of March 25, 2002, we had twenty-eight full-time employees, including
four who are engaged in executive management, fourteen in information
technology, six in sales and marketing and four 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, $210,882 for 2001 and will be $2,305,731 for
the remaining years of the lease.
Item 3. Legal Proceedings
We are presently involved in three lawsuits.
A lawsuit was filed as a class action on October 18, 2001 on behalf of
short-sellers of the Company's stock, who suffered losses because of the rise in
the price of the Company's stock, in the United States District Court for New
Jersey. The class action suit was amended in November 2001 and is now an
individual action. The complaint alleges violations of the Securities and
Exchange Act of 1934. The Company believes the suit is without merit and will
defend itself vigorously.
Additionally, a lawsuit requesting a preliminary injunction was filed on
October 18, 2001 in the Supreme Court of the State of New York, Nassau County,
on behalf of Kevin Messina, the former Chief Technology Officer of the Company,
which sought to force the Company to permit Mr. Messina to sell his restricted
shares of the Company's common stock. The complaint also seeks damages of
$29,350 for unpaid salary, unused vacation, unreimbursed business expenditures
and unpaid director's fees and punitive damages in the amount of $3,000,000. Mr.
Messina's motion for a preliminary injunction was denied. The Company filed a
counterclaim seeking damages in the amount of $5,000,000 alleging breach of Mr.
Messina's obligations to the Company. Although settlement discussions have
recently begun, there can be no assurance that such discussions will result in a
settlement of the claims and counterclaims.
Additionally, a demand for arbitration was brought by Early Bird Capital
Inc. in January 2002, seeking issuance of warrants pursuant to the terms of a
Financial Advisory and Investment Banking Agreement dated as of August 20, 2002.
The Company believes that Early Bird Capital failed to perform under the
agreement and therefore, is not entitled to the warrants.
As a result of the acquisition of The IDentiScan Company, LLC, the patent
infringement suit against the Company was withdrawn with prejudice.
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.
Item 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of the Company's fiscal year ended December 31,
2001 there were no matters submitted to a vote of security holders.
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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.
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
----
First Quarter $3.70 $11.625
Second Quarter $4.50 $10.60
Third Quarter $7.40 $14.75
Fourth Quarter $10.20 $19.45
2002
----
January $12.12 $18.19
February $11.30 $15.08
March $13.25 $15.87
(b) Number of Holders of Common Stock. The number of holders of record of
our Common Stock on March 25, 2002 was 70, which does not include individual
participants in security position listings.
(c) Dividends. There were no cash dividends or other cash distributions
made by us during the fiscal year ended December 31, 2001. 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, 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
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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, employed
with the Company and is currently Vice President of our Product, Management and
Operations Department, 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, which became The Empire State
Development Corporation on February 1, 2000, 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
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 Empire State Development Corporation formerly known as 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 was
exercised in February 2001.
In connection with the issuance of securities to the New York State
Science and Technology Foundation now known as the Empire State Development
Corporation, (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
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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 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
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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.
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.
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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, which was exercised in October 2001 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, which expired in October 2001. 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. These warrants expired in
October 2001. 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.
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.
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. During 2001, 210
additional stock options vested
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for services performed which services were valued at $842. 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 for the underwriter warrants, all
of the warrant holders 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 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 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. 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.
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 continuously held from the record
date to the date of exercise, as well as common stock underlying vested stock
options and warrants, held of record on March 30, 2001, at an exercise price of
$8.50. The rights will expire on October 4, 2002, which is one year after the
effective date of the registration statement related to the shares of common
stock underlying the rights. As a result of certain conditions being met, the
Company has the right to redeem the outstanding rights for $.01 per right. The
Company reserved 970,076 shares of common stock for future issuance under this
rights offering. As of December 31, 2001, 180,198 of these rights were exercised
and the Company received $1,531,683 before expenses.
In March 2001, 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. In September 2001, the Company further extended the expiration of
these warrants until October 31, 2001. During 2001, the Company received
$1,058,175 from the exercise of 352,725 remaining warrants. Of these warrants,
75,000 were exercised by an Executive Officer of the Company. In addition,
36,250 warrants were converted into 25,329 shares of the Company's common stock
utilizing the cashless exercise provision. As of December 31, 2001, there
remained warrants outstanding to purchase 7,500 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.
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In March 2001, the Board of Directors authorized, subject to certain
business and market conditions, the purchase of up to $1,000,000 of our common
stock. As of December 31, 2001, we purchased 10,000 shares totaling
approximately $53,000 and subsequently retired these shares.
During 2001, the Company also received $785,150 from the exercise of
166,500 stock options.
Item 6. Selected Financial Data
The following selected financial data presented under the captions
"Statement of Earnings Data" and "Balance Sheet Data" as of the end of each of
the years in the five years ended December 31, 2001, are derived from the
financial statements of Intelli-Check, Inc. The financial statements of the
Company for all fiscal years presented have been audited by Arthur Andersen LLP,
independent public accountants. The selected financial data should be read in
conjunction with the financial statements as of December 31, 2001, the
accompanying notes and the report of independent public accountants thereon,
which are included elsewhere in this Form 10-K.
Years Ended December 31,
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
(In thousand's)
Statement of Earnings Data:
Revenue $ 17 $ 86 $ 29 $ 343 $ 886
Loss from operations (1,567) (1,442) (2,263) (3,379) (4,090)
Net Loss (1,604) (1,504) (2,299) (3,133) (3,963)
Net loss per common share - basic and diluted (0.46) (0.36) (0.45) (0.47) (0.52)
Common shares used in computing per
share amounts - basic and diluted 3,506 4,208 5,080 6,648 7,911
As of December 31
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
Balance sheet data:
Cash and cash equivalents 482 160 6,381 4,092 4,061
Working capital (deficit) (244) (925) 6,038 5,920 5,303
Total assets 925 451 7,208 7,940 8,423
Stockholders equity (deficit) (185) (658) 6,325 6,633 7,030
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(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 currently read the
encoding on over 50 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. During 2001, sales were limited due to
the refocus of our marketing efforts towards the larger customers in the retail
market, in which the sales cycle normally requires an extended time frame
involving multiple meetings, presentations and a test period, which has been
further extended by the rapid slowing of the economy, whereby decisions for
capital expenditures have been delayed. However, after the tragic events that
occurred on September 11, 2001, there has been a significant increase in
awareness and demand for our technology to help improve security across many
industries, including airlines, rail transportation and high profile buildings
and facilities. Since inception, we have incurred significant losses and
negative cash flow from operating activities, and as of December 31, 2001 we had
an accumulated deficit of approximately $12,065,942. 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 exercise of warrants, options
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and rights. 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 market being affected by the cost to industry of
"Identity Theft." 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 its ID-Check unit to some of the largest companies in the gaming
industry, a State Port Authority, military establishments, high profile
buildings and has placed test units in some of the largest military bases, two
commercial airports, State Motor Vehicle Bureaus, a major railroad, a major
grocery chain, and a large tobacco company. In addition, our ID-Check unit has
played a key role in a program organized by Mothers Against Drunk Driving (MADD)
to deter the use of fake ID's used for the purchase of alcoholic beverages.
(b) Results of Operations
Comparison of the year ended December 31, 2001 to the year ended December
31, 2000.
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 based on its fair value is deferred 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.
Revenues increased by $542,929 from $342,979 recorded for the year ended
December 31, 2000 to $885,908 recorded for the year ended December 31, 2001.
Revenues from distributors totaled $721,930 and revenues from direct customers
totaled $163,978. Revenues for the year ended December 31, 2000 included initial
sales of a limited number of ID-Check terminals prior to the 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 and
primarily consisted of the initial order under the marketing agreement with
Sensormatic Electronics Corporation. Sales of approximately $585,000 for the
year ended December 31, 2001 were limited by the recent refocus of our marketing
efforts towards the larger customers within the retail market, in which the
sales cycle normally requires an extended time frame involving multiple
meetings, presentations and a test period, which has been further extended by
the rapid slowing of the economy, resulting in decisions for capital
expenditures being delayed. In addition, the roll-out of Sensormatic's sales and
marketing initiatives, which were to begin in April 2001 never materialized.
Since Sensormatic has met all its obligations under the original agreement,
which was modified in January 2002, the agreement, which is scheduled to expire
on March 31, 2002, will, by mutual consent, not be renewed. We have also begun
to market to various government and state agencies, which have long sales cycles
including extended test periods.
Operating expenses, which consist of selling, general and administrative
and research and development expenses, increased 27.6% from $3,523,357 for the
year ended December 31, 2000 to $4,497,322 for the year ended December 31, 2001.
Selling expenses, which consist primarily of salaries and related costs for
marketing, increased 6.8% from $890,453 for the year ended December 31, 2000 to
$950,774 for the year ended December 31, 2001 primarily due to increases in
expenses attributable to the hiring of a Director of Corporate sales totaling
approximately $100,000, increased travel expenses of approximately $67,000 and
hiring professional consultants to promote our product totaling approximately
$229,000 offset by the reduction of advertising expenses totaling $293,000.
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 46.6% from
$1,590,896 for the year ended December 31, 2000 to $2,332,150 for the year ended
December 31, 2001, primarily as a result of an increase in rent expense of
approximately $99,000 as we moved to a larger facility and increased
professional fees for accounting and investment relations counsel of
approximately $169,000, increased legal fees of approximately $244,000,
resulting from the defense of our patent and other law suits, increases in
depreciation expenses from additional purchases of equipment
-17-
of approximately $28,000, increases in insurance costs of $27,000 and
refurbishment costs on inventory of $100,000. Research and development expenses,
which consist primarily of salaries and related costs for the development of our
products, increased 16.5% from $1,042,008 for the year ended December 31, 2000
to $1,214,398 for the year ended December 31, 2001. This increase is primarily
attributable to net increases in salaries and related expenses and hiring
additional programmers totaling $188,000. We believe that we will require
additional investments in development and operating infrastructure. Therefore,
we expect that expenses will continue to increase for the foreseeable future as
we may 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 business. Research and
development expenses will also increase as we complete and introduce additional
products based upon our patented ID-Check technology. In addition, as a result
of the completion of the acquisition of the assets of IDentiScan, expenses will
increase as we expand this division.
Interest expense decreased from $14,863 for the year ended December 31,
2000 to $8,336 for the year ended December 31, 2001 as we have paid down certain
capital leases which had higher interest rates than those currently prevailing.
Interest income decreased from $261,181 for the year ended December 31,
2000 to $135,860 for the year ended December 31, 2001, which is a result of a
decrease in our cash and cash equivalents available for investment and lower
interest rates in effect during this period.
We have incurred net losses to date; therefore, we have paid nominal
taxes.
As a result of the factors noted above, our net loss increased from
$3,132,772 for the year ended December 31, 2000 to $3,962,931 for the year ended
December 31, 2001.
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.
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 year 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 end 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 expenses totaling approximately $227,000, as well
as increases in advertising and marketing expenses of $461,000
-18-
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
$100,000 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.
Critical Accounting Policies and the Use of Estimates
The preparation of our financial statements in conformity with accounting
principles generally accepted in the U.S. requires management to make estimates
and assumptions that affect the amounts reported in our financial statements and
accompanying notes. Actual results could differ materially from those estimates.
The items in our financial statements requiring significant estimates and
judgments are as follows:
We are currently involved in certain legal proceedings as discussed in the
"Commitments and Contingencies" note in the Notes to the Financial Statements.
We do not believe these legal proceedings will have a material adverse effect on
our financial position, results of operations or cash flows. However, were an
unfavorable ruling to occur in any quarterly period, there exists the
possibility of a material impact on the operating results of that period.
The above listing is not intended to be a comprehensive list of all of our
accounting policies. In many cases, the accounting treatment of a particular
transaction is specifically dictated by generally accepted accounting
principles, with no need for management's judgment in their application. There
are also areas in which management's judgment in selecting any available
alternative would not produce a materially different result. See our audited
financial statements and notes thereto which begin on page F-1 of this Annual
Report on Form 10-K which contain accounting policies and other disclosures
required by generally accepted accounting principles.
-19-
(c) Quarterly Results and Seasonality
The following table sets forth unaudited financial data for each of
Intelli-Check's last eight fiscal quarters.
Year Ended December 31, 2000 Year Ended December 31, 2001
------------------------------------- --------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
(Dollars in thousands)
Income Statement Data:
Revenues $ 30 $ 17 $ 110 $ 186 $ 205 $ 270 $ 280 $ 131
Gross profit 15 9 46 74 87 129 126 65
Loss from operations (743) (782) (769) (1,085) (930) (920) (937) (1,303)
Net loss (663) (709) (716) (1,045) (879) (883) (913) (1,288)
Net loss per share attributable to
common shareholders:
Basic (0.10) (0.11) (0.11) (0.15) (0.12) (0.11) (0.12) (0.16)(1)
Diluted (0.10) (0.11) (0.11) (0.15) (0.12) (0.11) (0.12) (0.16)(1)
(1) Basic earnings per share for fiscal 2001 in total exceeds by $0.01
the sum of the applicable amount for each of the quarters of fiscal
2001 due to the impact of stock issuances on the weighted average
number of shares outstanding.
The Company has not experienced seasonality in its sales volume or
operating expenses.
(d) 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. During 2001, we received $3,231,174 from the
issuance of common stock from the exercise of warrants, stock options and
rights. 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, 2001 of
$2,966,437 resulted primarily from the net loss of $3,962,931, a net decrease in
deferred revenues of $344,381 which was partially offset by an increase in
accounts payable and accrued expenses of $426,651, a decrease in inventory of
$367,650, and a net decrease in other current assets of $164,758 primarily
consisting of the related deferred costs of revenues and increased by deposits
of $200,000 for future purchases of inventory,. The increase in accounts payable
and accrued expenses for 2001 was attributable to certain large invoices
received toward the end of 2001. 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 investing activities was $193,824 for the year ended
December 31, 2001 and $223,511 for the year ended December 31, 2000. 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 $3,129,807 for the year ended December 31, 2001 and
$3,388,481 for the year ended December 31, 2000 and was primarily related to the
exercise of outstanding warrants and stock options, and rights in 2001.
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 continuously held from the record
date to the date of exercise, as well as common stock underlying vested stock
options and warrants, held of record
-20-
on March 30, 2001, at an exercise price of $8.50. The rights will expire on
October 4, 2002, which is one year after the effective date of the registration
statement related to the shares of common stock underlying the rights. As a
result of certain conditions being met, the Company has the right to redeem the
outstanding rights for $.01 per right. The Company reserved 970,076 shares of
common stock for future issuance under this rights offering. As of December 31,
2001, 180,198 of these rights were exercised and the Company received $1,531,683
before expenses. In addition, 92,746 rights were also exercised through March
25, 2002 and the Company received proceeds of $788,341.
During the year ended December 31, 2001, the Company received net proceeds
of $1,058,175 from the exercise of 352,725 warrants. As of December 31, 2001,
there remained warrants outstanding to purchase 7,500 shares of the Company's
common stock as an exercise price of $3.00 and 10,000 warrants that carry an
exercise price of $8.40. In addition, the Company received net proceeds of
$775,150 from the exercise of 166,500 stock options.
In March 2001, the Board of Directors authorized, subject to certain
business and market conditions, the purchase of up to $1,000,000 of our common
stock. As of December 31, 2001, we purchased 10,000 shares totaling
approximately $53,000 and subsequently retired these shares. We do not expect to
purchase additional shares unless certain conditions warrant it.
The Company's operating expenses for 2002 is expected to increase to
approximately $5,700,000 from $4,500,000 reported for 2001 including the
additional expenses resulting from the acquisition of IDentiScan totaling
$700,000 of which $250,000 is a non-cash amortization expense and other
additional non cash expenses of $200,000. We currently anticipate that our
available cash resources from expected revenues from the sale of the units in
inventory combined with either the exercise of the expiring rights by our share
holders before expiration or the exercise of the rights by our share holders
should we 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 from Welch Allyn
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.
Below is a table, which presents our contractual obligations and commitments at
December 31, 2001:
Payments Due by Period
-----------------------------------------------------------------------------------------------------------
Contractual Obligations Total Less than 1-3 years 4-5 years After 5 years
One Year
-----------------------------------------------------------------------------------------------------------
Capital Lease Obligations $ 48,080 $ 29,665 $ 18,425 -- --
-----------------------------------------------------------------------------------------------------------
Operating Leases 2,379,959 249,812 749,614 519,963 860,570
-----------------------------------------------------------------------------------------------------------
Purchase commitments (1) 400,000 400,000 -- -- --
-----------------------------------------------------------------------------------------------------------
Employment contracts 1,440,416 574,583 865,833 -- --
-----------------------------------------------------------------------------------------------------------
Total Contractual Cash Obligation $4,268,455 $1,254,050 $1,633,872 $519,963 $860,570
-----------------------------------------------------------------------------------------------------------
(1) The Company is required to pay the manufacturer $400,000 as an advance
deposit towards the open purchase order of approximately 2,850 ID-Check units.
(e) Net Operating Loss Carry Forwards
As of December 31, 2001, we had a net operating loss carry forward of
approximately $11,650,000, 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.
-21-
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 7a. Quantitative and Qualitative Disclosures About Market Risk
None
Item 8. Financial Statements
Financial Statements are attached hereto following page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
During fiscal year 2001 there were no changes in or disagreements with the
Company's principal independent accountant on accounting or financial
disclosure.
-22-
PART III
Item 10. Directors and Executive Officers of the Company
As of March 25, 2002, 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, 68 Chairman, Chief Executive Officer and Director 1996
Edwin Winiarz, 44 Senior Executive Vice President, Treasurer, Chief 1999
Financial Officer and Director
W. Robert Holloway, 62 Senior Executive Vice President, Sales 1999
Russell T. Embry, 38 Senior Vice President and Chief Technology Officer 2001
Paul Cohen, 61 Director 1996
Evelyn Berezin, 76 Director 1999
Charles McQuinn, 61 Director 1999
Jeffrey Levy, 60 Director 1999
Howard Davis, 46 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.
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
-23-
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.
Russell T. Embry was elected Senior Vice President and Chief Technology
Officer in July 2001 and was Vice President, Information Technology, since July
1999. From January 1998 to July 1999, Mr. Embry was Lead Software Engineer with
RTS Wireless. From April 1995 to January 1998, he served as Principal Engineer
at GEC-Marconi Hazeltine Corporation. From August 1994 through April 1995, he
was a staff software engineer at Periphonics Corporation. From September 1989 to
August 1994, Mr. Embry served as Senior Software Engineer at MESC/Nav-Com. From
July 1985 through September 1989, he was a software engineer at Grumman
Aerospace. Mr. Embry holds a B.S. in Computer Science from Stony Brook and an
M.S. in Computer Science from Polytechnic University, Farmingdale.
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 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.
-24-
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 11. 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, 2001. No other executive officers received total salary and
bonus compensation in excess of $100,000 during any of such fiscal years.
-25-
SUMMARY COMPENSATION TABLE
Annual Long-Term
Compensation Compensation
------------ ------------
Securities
Underlying
Name and Principal Position Year(s) *Salary ($) Options/SARS (#)
--------------------------- ------- ----------- ----------------
Frank Mandelbaum 2001 204,808
Chairman & CEO 2000 150,000 --
1999 150,000 75,000
1998 150,000 50,000
Edwin Winiarz 2001 322,971(a) 75,000
Senior Executive Vice President 2000 125,000 25,000
Chief Financial Officer 1999 37,981 50,000
W. Robert Holloway 2001 115,000
Senior Executive Vice President 2000 115,000 --
Sales 1999 19,904 20,000
Russell T. Embry 2001 133,750 --
Senior Vice President 2000 104,052 25,000
Chief Technology Officer 1999 44,231 30,000
Kevin Messina 2001 764,940(b)
Former Senior Executive Vice President 2000 150,000 --
Former Chief Technology Officer 1999 150,000 75,000
*Salaries include all deferred salaries paid and accrued.
(a) Includes $194,638 from the exercise of stock options
(b) Includes $712,440 from the exercise of stock options
The options shown above were granted under the 1998 and 1999 Stock Option
Plans, are exercisable as follows: (1) for Frank Mandelbaum at $3.00 per share,
(2) for Edwin Winiarz 25,000 options at an exercise price of $10.75, 50,000 at
an exercise price of $5.00 and 75,000 options at an exercise price of $8.04
exercisable on September 7, 2006 and (3) W. Robert Holloway at an exercise price
of $7.50. All options expire five years after the date of vesting.
Messrs. Mandelbaum and Messina had Employment Agreements expiring December
31, 2001, which provided for base annual salaries of $225,000, subject to
specified conditions. Because of our limited resources, Messrs. Mandelbaum and
Messina had 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 and Mr. Messina's deferred salary was approximately
$200,000. 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.
-26-
Mr. Kevin Messina resigned as Senior Executive Vice President and Chief
Technology Officer in May 2001.
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, 2001 to the named executive officers:
---------------------------------------------------------------------------------------------------------------------
Individual Grants Potential Realizable Value
---------------------------------------------------------------------------------------------------------------------
Number of % of Total Options
Securities Granted To Assumed Annual Rates of
Underlying Options Employees In Exercise Expiration Appreciation for Option
---------------------------------------------------------------------------------------------------------------------
2001
Name Granted Fiscal Year Price Date 5% 10%
---------------------------------------------------------------------------------------------------------------------
Edwin Winiarz 75,000 69.6% $8.04 9/7/2011 $166,598 $368,138
---------------------------------------------------------------------------------------------------------------------
The following table summarizes unexercised options granted through the
year-end December 31, 2001 to the named executive officers:
---------------------------------------------------------------------------------------------------------------------
Aggregate Value Of Unexercised
No. of Shares Dollar Value No. of Securities In-the-Money
Received Upon Received Upon Underlying Unexercised Options At Fiscal
Name Exercise Exercise Options / Warrants Year End 12/31/01
---------------------------------------------------------------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
Frank Mandelbaum
Chairman & CEO 475,000 25,000 $5,367,500 $282,500
---------------------------------------------------------------------------------------------------------------------
Ed Winiarz
Senior Executive VP
& CFO 60,000 75,000 414,250 469,500
---------------------------------------------------------------------------------------------------------------------
W. Robert Holloway
Senior Executive VP
Sales 20,000 30,000 136,000 204,000
---------------------------------------------------------------------------------------------------------------------
Russell T. Embry
Senior VP & CTO 55,000 149,250
---------------------------------------------------------------------------------------------------------------------
Kevin Messina
Former Senior Executive
VP & CTO 207,000 2,339,100
---------------------------------------------------------------------------------------------------------------------
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. Mr. Mandelbaum has options
to purchase 50,000 shares of common stock, which are currently exercisable.
Options to purchase 25,000 shares of our common stock became exercisable on
January 1, 2002. The options expire five years from the date of grant. Kevin
Messina exercised 50,000 options on October 5, 2001 and options to purchase
25,000 shares for Mr. Messina expired as a result of his resignation. During the
years ended December 31, 2000 and December 31, 2001, we granted employees other
than the executive officers named above options to purchase 215,000 shares and
32,750 shares respectively, of common stock under the 1998, 1999 and 2001 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.
-27-
Compensation of Non-Employee 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 became exercisable in July 2001. 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 were immediately exercisable
and 15,000 were exercisable in July 2001. In July 2001, Mr. Davis was granted
non-qualified options to purchase 15,000 shares of our common stock at an
exercise price of $10.15 exercisable on the date of our next annual meeting. In
addition, Mr. McQuinn was granted non-qualified options to purchase 30,000
shares of our common stock at an exercise price of $10.15. Of these options,
15,000 are exercisable in 2002 and the balance are exercisable in 2003 on the
date of our annual meeting during these years.
During 2001, Mr. Davis exercised 15,000 of his options and earned
compensation of $138,300, Mr. McQuinn exercised 1,000 of his options and earned
compensation of $6,800 and Ms. Berezin exercised 500 of her options and earned
compensation of $3,938. 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, July 2000 and July 2001 the following
non-qualified options were granted to committee chairpersons:
Name Committee Number of Options
---- --------- -----------------
March 2000 July 2000 July 2001
---------- --------- ---------
Ms. Berezin Audit 2,500 2,500 2,500
Mr. McQuinn Corporate Governance 2,500 2,500 2,500
Mr. Levy Technology Oversight 2,500 2,500 2,500
Mr. Davis Compensation 2,500 2,500
The following non-qualified options were granted to committee members:
Name Committee(s) Number of Options
---- ----------- -----------------
March 2000 July 2000 July 2001
---------- --------- ---------
Mr. Cohen Compensation, Audit 3,000 1,500 1,500
Ms. Berezin Corporate Governance,
Technology Oversight 3,000 3,000 3,000
Mr. McQuinn Audit, Technology Oversight 3,000 3,000 3,000
Mr. Levy Corporate Governance,
Compensation 3,000 3,000
Mr. Davis Audit 1,500 1,500 1,500
These options are exercisable at $12.125 for options granted in March
2000, $8.75 for options granted in July 2000 and $10.15 for options granted in
July 2001, 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.
-28-
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 received payment for gross sales of at least $1,000,000, which occurred in
April 2001, the salaries were 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 would have been 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 were obligated to 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 were not required to grant options to purchase
more than 150,000 shares of our common stock with respect to any one fiscal
year. During the terms of their agreements, no bonuses were earned.
On May 7, 2001, The Board of Directors accepted the resignation of Kevin
Messina. Accordingly, all of the obligations under the employment agreement,
including the payment of salary and incentives, ceased as of this date.
On February 1, 2002, the Company entered into a new three-year employment
contract with its Chairman and Chief Executive Officer, effective January 1,
2002. The agreement provides for an annual base salary of $250,000. In addition,
the Company granted to the Chairman and Chief Executive Officer an option to
purchase 350,000 shares of common stock, of which 125,000 options are
immediately exercisable at $12.10 per share and 225,000 options become
exercisable at a rate of 75,000 per year on December 31, 2002, 2003 and 2004.
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 Mr.
Mandelbaum and one outside director.
We had 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.
On September 7, 2001, the Company renewed the employment agreement with
Mr. Winiarz. The agreement, which expires December 31, 2004, provides for a base
salary of $135,000 with annual increases of 5% per annum. In addition, the
Company granted 75,000 stock options at an exercise price of $8.04 vesting on
September 7, 2006 with earlier vesting incentives.
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.
Upon the expiration of this agreement, we renewed the agreement for an
additional two years under the same terms and conditions.
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.
-29-
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of December 31, 2001 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 8,470,762 shares
outstanding as of December 31, 2001.
--------------------------------------------------------------------------------------------------------------------
Name Shares Beneficially Owned Percent
--------------------------------------------------------------------------------------------------------------------
Frank Mandelbaum 1,382,560 15.21
--------------------------------------------------------------------------------------------------------------------
Edwin Winiarz 63,500 *
--------------------------------------------------------------------------------------------------------------------
W. Robert Holloway 24,200 *
--------------------------------------------------------------------------------------------------------------------
Paul Cohen 331,823 3.84
--------------------------------------------------------------------------------------------------------------------
Evelyn Berezin 65,600 *
--------------------------------------------------------------------------------------------------------------------
Charles McQuinn 65,600 *
--------------------------------------------------------------------------------------------------------------------
Jeffrey Levy 63,780 *
--------------------------------------------------------------------------------------------------------------------
Howard Davis** 60,800 *
--------------------------------------------------------------------------------------------------------------------
Kevin Messina 1,224,390 14.11
--------------------------------------------------------------------------------------------------------------------
Todd Cohen 1,095,930 12.63
--------------------------------------------------------------------------------------------------------------------
Empire State Development***, formerly New York State Science and 605,000 7.10
Technology Foundation
--------------------------------------------------------------------------------------------------------------------
All Executive Officers & Directors as a group (10 persons) 3,282,253 33.49
--------------------------------------------------------------------------------------------------------------------
* Indicates beneficial ownership of less than one percent of the total
outstanding common stock.
** In March 2002, Mr. Davis exercised 200 of the options beneficially owned by
him and now holds 200 shares of common stock.
*** The person who exercises the voting power is the CFO who, at the present
time, is Frances A. Walton.
The amounts shown for Mr. Mandelbaum do not include 31,400 shares and
3,140 rights held by Mr. Mandelbaum's wife, for which Mr. Mandelbaum disclaims
beneficial ownership.
The amounts shown for Mr. Paul Cohen do not include 52,500 shares and
5,000 rights held by Mr. Cohen's wife and daughter, for which Mr. Cohen
disclaims beneficial ownership.
Mr. Todd Cohen's address is P.O. Box 20054, 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
-30-
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 and/or rights at the exercise price shown:
-----------------------------------------------------------------------------
Name Number of Shares Exercise Price
-----------------------------------------------------------------------------
Frank Mandelbaum 475,000 $3.00
121,500 $8.50
-----------------------------------------------------------------------------
Edwin Winiarz 50,000 $5.00
35,000 $8.50
-----------------------------------------------------------------------------
W. Robert Holloway 20,000 $7.50
2,200 $8.50
-----------------------------------------------------------------------------
Paul Cohen 127,500 $3.00
3,000 $12.125
1,500 $8.75
1,500 $10.15
28,438 $8.50
-----------------------------------------------------------------------------
Evelyn Berezin 44,500 $3.00
5,500 $12.125
5,500 $8.75
5,500 $10.15
4,100 $8.50
-----------------------------------------------------------------------------
Charles McQuinn 44,000 $3.00
5,500 $12.125
5,500 $8.75
5,500 $10.15
4,100 $8.50
-----------------------------------------------------------------------------
Jeffrey Levy 15,000 $11.625
2,500 $12.125
1,500 $8.00
35,500 $8.75
5,500 $10.15
3,950 $8.50
-----------------------------------------------------------------------------
Howard Davis 15,000 $11.625
2,500 $8.000
1,500 $12.125
19,000 $8.75
4,000 $10.15
3,800 $8.50
-----------------------------------------------------------------------------
Kevin Messina 207,000 $3.00
92,490 $8.50
-----------------------------------------------------------------------------
Todd Cohen 110,000 $3.00
99,630 $8.50
-----------------------------------------------------------------------------
Item 13. 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 May 2001,
Mr. Messina resigned as an officer of our Company to pursue other opportunities
and in July 2001, he completed his term as a director.
-31-
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, which were exercised in October 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.
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 14. Exhibits and Reports on Form 8-K
(a) Exhibits. See index of exhibits annexed hereto.
(b) Reports on Form 8-K. None.
-32-
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
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 AAMVAnet, Inc. and
Intelli-Check, Inc. effective November 15, 2000
10.12 2001 Stock Option Plan (4)
10.13 Employment Agreement between Edwin Winiarz and the
Company, dated as of September 7, 2001*
10.14 Employment Agreement between Frank Mandelbaum and the
Company, dated as of February 1, 2002*
10.15 Memorandum of Understanding between AAMVAnet, Inc. and
Intelli-Check, Inc. effective January 29, 2002
21 List of Subsidiaries (1)
23 Consent of Arthur Andersen LLP
99 Letter to Commission Pursuant to Temporary Note 3T
----------
* 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 Registrant's Proxy Statement on Schedule 14A
filed May 31, 2001.
-33-
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 28, 2002 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 28, 2002 /s/ Frank Mandelbaum
------------------------------
Frank Mandelbaum
and Director Chairman, Chief Executive
Officer
Date: March 28, 2002 /s/ Edwin Winiarz
------------------------------
Edwin Winiarz
Senior Executive Vice President,
Treasurer and Chief Financial Officer
Date: March 28, 2002 /s/ Paul Cohen
------------------------------
Paul Cohen, Director
Date: March 28, 2002 /s/ Evelyn Berezin
------------------------------
Evelyn Berezin, Director
Date: March 28, 2002 /s/ Charles McQuinn
------------------------------
Charles McQuinn, Director
Date: March 28, 2002 /s/ Jeffrey Levy
------------------------------
Jeffrey Levy, Director
Date: March 28, 2002 /s/ Howard Davis
------------------------------
Howard Davis, Director
INDEX
Page
----
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-1
FINANCIAL STATEMENTS:
Balance Sheet as of December 31, 2000 and 2001 F-2
Statements of Operations for the Years Ended
December 31, 1999, 2000 and 2001 F-3
Statements of Stockholders' Equity for the Years Ended
December 31, 1999, 2000 and 2001 F-4
Statements of Cash Flows for the Years Ended
December 31, 1999, 2000 and 2001 F-5
NOTES TO FINANCIAL STATEMENTS F-6 - F-16
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Intelli-Check, Inc.:
We have audited the accompanying balance sheets of Intelli-Check, Inc. (a
Delaware corporation) as of December 31, 2001 and 2000, and the related
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 2001. 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, 2001 and 2000, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2001 in conformity
with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
New York, New York
March 6, 2002
INTELLI-CHECK, INC.
BALANCE SHEET
DECEMBER 31, 2000 and 2001
ASSETS
2001 2000
---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 4,061,235 $ 4,091,689
Accounts receivable 25,536 44,795
Inventory 2,168,688 2,536,338
Other current assets 370,880 511,638
------------ -----------
Total current assets 6,626,339 7,184,460
CERTIFICATE OF DEPOSIT, restricted (Note 9) 268,494 250,000
PROPERTY AND EQUIPMENT, net (Note 3) 466,576 438,021
ACQUIRED SOFTWARE, net (Note 8) 426,806 --
GOODWILL (Note 8) 181,447 --
PATENT COSTS, net of accumulated
amortization of $46,236 and
$38,235 for 2001 and
2000, respectively (Note 8) 289,425 67,426
OTHER INTANGIBLES, net (Notes 4 and 8) 164,132 --
------------ -----------
Total assets $ 8,423,219 $ 7,939,907
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 254,171 $ 180,792
Accrued expenses (Note 5) 842,501 489,229
Deferred revenue 200,953 545,334
Current portion of capital lease
obligations (Note 9) 25,421 48,767
------------ -----------
Total current liabilities 1,323,046 1,264,122
------------ -----------
CAPITAL LEASE OBLIGATIONS (Note 9) 17,317 42,738
------------ -----------
OTHER LIABILITIES 53,324 --
------------ -----------
COMMITMENTS AND CONTINGENCIES (Note 9)
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;
8,470,762 and 7,696,236 shares issued
and outstanding
as of 2001 and 2000, respectively 8,470 7,696
Deferred compensation (189,000) --
Additional paid-in capital 19,331,004 13,561,362
Accumulated deficit (12,120,942) (6,936,011)
------------ -----------
Total stockholders' equity 7,029,532 6,633,047
------------ -----------
Total liabilities and
stockholders' equity $ 8,423,219 $ 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, 2000 AND 2001
1999 2000 2001
---- ---- ----
REVENUE $ 29,407 $ 342,979 $ 885,908
COST OF REVENUE 14,420 198,712 479,041
----------- ----------- -----------
Gross profit 14,987 144,267 406,867
----------- ----------- -----------
OPERATING EXPENSES:
Selling 202,888 890,453 950,774
General and administrative 1,194,862 1,590,896 2,332,150
Research and development 880,359 1,042,008 1,214,398
----------- ----------- -----------
Total operating expenses 2,278,109 3,523,357 4,497,322
----------- ----------- -----------
Loss from operations (2,263,122) (3,379,090) (4,090,455)
OTHER INCOME (EXPENSE):
Interest income 19,169 261,181 135,860
Interest expense (55,472) (14,863) (8,336)
----------- ----------- -----------
(36,303) 246,318 127,524
----------- ----------- -----------
Net loss $(2,299,425) $(3,132,772) $(3,962,931)
=========== =========== ===========
PER SHARE INFORMATION:
Net loss per common share-
Net loss $(2,299,425) $(3,132,772) $(3,962,931)
Dividend on warrant modification -- -- (140,000)
----------- ----------- -----------
Net loss attributable to common shareholders $(2,299,425) $(3,132,772) $(4,102,931)
=========== =========== ===========
Basic and diluted $ (0.45) $ (0.47) $ (0.52)
=========== =========== ===========
Common shares used in computing per share amounts-
Basic and diluted 5,079,807 6,648,191 7,910,913
=========== =========== ===========
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, 2000 AND 2001
Series A
Common Stock Preferred Stock
------------ ---------------
Shares Amount Shares Amount
------ ------ ------ ------
BALANCE, December 31, 1998 4,402,552 $4,402 250,000 $ 2,500
Issuance of common stock in private placements 274,600 275 -- --
Exercise of warrant 160,000 160 -- --
Issuance of common stock for note payable and interest 69,937 70 -- --
Issuance of common stock for deferred salary 80,063 80 -- --
Issuance of common stock for settlements and accounts 128,000 128 -- --
payable
Issuance of stock options for deferred salary -- -- -- --
Conversion of preferred stock 250,000 250 250,000) (2,500)
Issuance of common stock in IPO, net of expenses 1,150,000 1,150 -- --
Net loss -- -- -- --
--------- ------ ------- -------
BALANCE, December 31, 1999 6,515,152 $6,515 -- $ --
Exercise of warrants 1,115,084 1,115 -- --
Exercise of stock options 66,000 66 -- --
Issuance of stock options in settlement of accounts payable -- -- -- --
Net loss -- -- -- --
--------- ------ ------- -------
BALANCE, December 31, 2000 7,696,236 $7,696 -- $ --
Exercise of warrants 378,084 379 -- --
Exercise of options 166,500 165 -- --
Distributions of Rights Dividends -- -- -- --
Effect on extension of expiration of warrants -- -- -- --
Issuance of common stock for exercise of rights 180,198 180 -- --
Purchase and retirement of common stock (10,000) (10) -- --
Issuance of stock options in settlement of accounts payable -- -- -- --
Issuance of common stock for the acquisition of certain 59,744 60 -- --
assets
Recognition of Deferred Compensation -- -- -- --
Amortization of Deferred Compensation -- -- -- --
Net loss -- -- -- --
--------- ------ ------- -------
BALANCE, December 31, 2001 8,470,762 $8,470 -- $ --
========= ====== ======= =======
Additional
Paid-in Deferred Accumulated
Capital Compensation Deficit Total
-------------- ------------ ------- -----
BALANCE, December 31, 1998 $ 839,342 $ -- $ (1,503,814) $ (657,570)
Issuance of common stock in private placements 548,925 -- -- 549,200
Exercise of warrant 379,840 -- -- 380,000
Issuance of common stock for note payable and interest 139,804 -- -- 139,874
Issuance of common stock for deferred salary 160,046 -- -- 160,126
Issuance of common stock for settlements and accounts 445,588 -- -- 445,716
payable
Issuance of stock options for deferred salary 700,000 -- -- 700,000
Conversion of preferred stock 2,250 -- -- --
Issuance of common stock in IPO, net of expenses 6,905,976 -- -- 6,907,126
Net loss -- -- (2,299,425) (2,299,425)
------------ --------- ------------ -----------
BALANCE, December 31, 1999 $ 10,121,771 $ -- $ (3,803,239) $ 6,325,047
Exercise of warrants 3,222,759 -- -- 3,223,874
Exercise of stock options 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 $ 13,561,362 $ -- $ (6,936,011) $ 6,633,047
Exercise of warrants 1,057,796 -- -- 1,058,175
Exercise of options 774,985 -- -- 775,150
Distributions of Rights Dividends 1,082,000 -- (1,082,000) --
Effect on extension of expiration of warrants 140,000 -- (140,000) --
Issuance of common stock for exercise of rights 1,397,669 -- -- 1,397,849
Purchase and retirement of common stock (52,590) -- -- (52,600)
Issuance of stock options in settlement of accounts payable 842 -- -- 842
Issuance of common stock for the acquisition of certain
assets 979,940 -- -- 980,000
Recognition of Deferred Compensation 389,000 (389,000) -- --
Amortization of Deferred Compensation -- 200,000 -- 200,000
Net loss -- -- (3,962,931) (3,962,931)
------------ --------- ------------ -----------
BALANCE, December 31, 2001 $ 19,331,004 $(189,000) $(12,120,942) $ 7,029,532
============ ========= ============ ===========
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, 2000 AND 2001
1999 2000 2001
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,299,425) $(3,132,772) $(3,962,931)
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation and amortization 104,053 90,115 126,885
Noncash expenditure -- 14,398 842
Amortization of deferred compensation -- -- 200,000
Changes in assets and liabilities-
(Increase) in certificate of deposit, restricted -- (250,000) (18,494)
(Increase) decrease in accounts receivable (14,320) (30,475) 19,259
(Increase) decrease in inventory (169,916) (2,349,729) 367,650
(Increase) decrease in other current assets (299,192) (211,525) 164,758
(Increase) Decrease in other assets (2,586) 8,766 --
Increase (Decrease) increase in accounts
payable & accrued expenses 1,159,805 (137,941) 426,651
Increase (decrease) in deferred revenue -- 545,334 (344,381)
Increase in other liabilities -- -- 53,324
----------- ----------- -----------
Net cash used in operating activities (1,521,581) (5,453,829) (2,966,437)
----------- ----------- -----------
CASH FLOWS FROM INVESTING activities:
Purchases of property and equipment (93,797) (223,511) (140,877)
Cash paid for acquisition expenses -- -- (52,947)
----------- ----------- -----------
Net cash used in investing activities (93,797) (223,511) (193,824)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 7,836,326 3,426,374 3,231,174
Repayment of capital lease obligations -- (37,893) (48,767)
Treasury stock purchased -- -- (52,600)
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 3,129,807
----------- ----------- -----------
Net decrease in cash and
cash equivalents 6,220,948 (2,288,859) (30,454)
CASH AND CASH EQUIVALENTS, beginning of year 159,600 6,380,548 4,091,689
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 6,380,548 $ 4,091,689 $ 4,061,235
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 37,458 $ 14,863 $ 8,336
=========== =========== ===========
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 -- --
Common stock issued to purchase certain assets in acquisition -- -- 980,000
Capital lease obligations incurred 71,519 54,125 --
Stock options issued in settlement of account payable -- 14,398 842
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, such as Identity
theft, which utilize fake ID's as support for these transactions, to increase
security and deter terrorism at airports, military installations and other sites
where security is a concern 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 user; displays a "valid",
"expired", "tampered" or other customized display; and creates a record where
permitted by law of transactions to protect the merchant against fraudulent
transactions, unauthorized access and as proof that the retailer has used proper
due diligence in the sale of age restricted products.
During 2001, the Company developed additional software products that utilize its
patented software technology. C-Link(R) runs on a personal computer and was
created to work in conjunction with the ID-Check unit that allows the retailer
to instantly view the data for further verification, analyze data and generate
various reports where permitted by law. The Company also has developed software
that can be integrated onto a Windows platform that will enable a user of the
software to perform all the functions of the ID-Check terminal.
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
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. Therefore, 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.
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, 2001.
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 and leasehold improvements are
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 and allocated costs as a
result of certain assets acquired (see note 8), are amortized over a period
between 10 and 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, 2000 and 2001.
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, 2001, 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,
2001, 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 the downturn of the
economy and the refocus of its marketing efforts 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.
The Company currently has one supplier for the production of its ID-check
products (Note 9). 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 Loss Attributable to Common Shareholders
The Company computes net (loss) per common share in accordance with SFAS No.
128, "Earnings Per Share". Under the provisions of SFAS No. 128, basic net loss
per common share ("Basic EPS") is computed by dividing
F-7
INTELLI-CHECK, INC.
NOTES TO FINANCIAL STATEMENTS
net loss by the weighted average number of common shares outstanding. Diluted
net loss per common share ("Diluted EPS") is computed by dividing net 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, 2000 and 2001, does not include the impact
of stock options and warrants then outstanding, as the effect of their inclusion
would be antidilutive.
The following table summarizes the equivalent number of common shares assuming
the related securities that were outstanding as of December 31, 1999, 2000 and
2001 had been converted:
1999 2000 2001
---- ---- ----
Stock options 1,182,500 1,312,349 1,467,578
Warrants 1,605,475 489,725 17,500
--------- --------- ---------
Total dilutive securities
assuming the Company was in
an income position 2,787,975 1,802,074 1,485,078
========= ========= =========
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, 2000 and 2001.
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.
Critical Accounting Policies and the Use of Estimates
The preparation of our financial statements in conformity with accounting
principles generally accepted in the U.S. requires management to make estimates
and assumptions that affect the amounts reported in our financial statements and
accompanying notes. Actual results could differ materially from those estimates.
The items in our financial statements requiring significant estimates and
judgments are as follows:
We are currently involved in certain legal proceedings as discussed in the
"Commitments and Contingencies" note. We do not believe these legal proceedings
will have a material adverse effect on our financial position, results of
operations or cash flows. However, were an unfavorable ruling to occur in any
quarterly period, there exists the possibility of a material impact on the
operating results of that period.
F-8
INTELLI-CHECK, INC.
NOTES TO FINANCIAL STATEMENTS
The above listing is not intended to be a comprehensive list of all of our
accounting policies. In many cases, the accounting treatment of a particular
transaction is specifically dictated by generally accepted accounting
principles, with no need for management's judgment in their application. There
are also areas in which management's judgment in selecting any available
alternative would not produce a materially different result.
Recently Issued Accounting Standards
In July 2001, the Financial Accounting Standard Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations ("SFAS 141") and
No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). SFAS 141 requires
all business combinations initiated after June 30, 2001 to be accounted for
using the purchase method. Under FAS 142, goodwill and intangible assets with
indefinite lives are no longer amortized but are reviewed annually (or more
frequently if impairment indicators arise) for impairment. Separable intangible
assets that are not deemed to have indefinite lives will continue to be
amortized over their useful lives (but with no maximum life). The amortization
provisions of SFAS 142 apply to goodwill and intangible assets acquired after
June 30, 2001. With respect to goodwill and intangible assets acquired prior to
July 1, 2001, the Company is required to adopt SFAS 142 effective January 1,
2002. The Company is currently evaluating the effect that adoption of the
provisions of SFAS 142 that are effective January 1, 2002 will have on its
results of operations and financial position.
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets ("SFAS 144"). This statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS 144 will be effective for financial statements of fiscal years beginning
after December 15, 2001. We do not anticipate that it will have a material
impact on the Company's financial results.
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, 2001
and 2000:
2001 2000
---- ----
Computer equipment $ 508,044 $ 368,207
Furniture and fixtures 152,251 151,210
Leasehold improvements 143,253 143,253
Office equipment 40,412 40,412
--------- ---------
843,960 703,082
Less- Accumulated amortization (377,384) (265,061)
--------- ---------
$ 466,576 $ 438,021
========= =========
Depreciation expense for the years ended December 31, 1999, 2000 and 2001
amounted to $97,843, $83,908 and $112,044, respectively.
4. OTHER INTANGIBLES
Other intangibles are comprised of the following as of December 31, 2001:
Covenant not to compete $150,000
Copy Rights 17,500
--------
167,500
Less- Accumulated depreciation (3,368)
--------
$164,132
========
F-9
INTELLI-CHECK, INC.
NOTES TO FINANCIAL STATEMENTS
5. ACCRUED EXPENSES
Accrued expenses are comprised of the following as of December 31, 2001 and
2000:
2001 2000
---- ----
Professional fees $474,245 $251,501
Payroll 97,500 71,824
Rent 30,784 34,346
Other 239,972 131,558
-------- --------
$842,501 $489,229
======== ========
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, 2001 and 200 are as follows:
2001 2000
---- ----
Deferred tax assets, net:
Net operating loss carryforwards $ 4,662,652 $ 2,608,000
Depreciation (20,000) (20,000)
Accruals -- (64,000)
Reserves 5,000 --
Other -- (5,700)
Less- Valuation allowance (4,647,652) (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, 2001 and 2000, the Company had net operating loss
carryforwards (NOL's) for federal income tax purposes of approximately
$11,656,000 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 2021 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.
As of December 31, 2001, there were no outstanding shares of Series A
Convertible Preferred Stock.
Common Stock, Warrants and Rights
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.
F-10
INTELLI-CHECK, INC.
NOTES TO FINANCIAL STATEMENTS
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. 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 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 continuous held from the record date
to the date of exercise, as well as common stock underlying vested stock options
and warrants, held of record on March 30, 2001, at an exercise price of $8.50.
The rights will expire on October 4, 2002, which is one year after the effective
date of the registration statement related to the shares of common stock
underlying the rights. As a result of certain conditions being met, the Company
has the right to redeem the outstanding rights for $.01 per right. The Company
reserved 970,076 shares of common stock for future issuance under this rights
offering. The Company has recorded the fair value of the rights of $1,082,000 as
a dividend during the quarter ended March 31, 2001, which was calculated using
the Black-Scholes valuation method and recorded as an increase in additional
paid-in capital and a reduction in accumulated deficit. As of December 31, 2001,
180,198 of these rights were exercised and the Company received $1,531,683
before expenses of $133,834.
In March 2001, 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. During the three months ended March 31, 2001, the Company recorded the
$85,000 difference between the fair value of the warrants prior and subsequent
to this extension as a dividend. In September 2001, the Company further extended
the expiration of these warrants until October 31, 2001 and recorded the $55,000
difference between the fair value of the warrants prior and subsequent to this
extension as a dividend during the three months ended September 30, 2001. These
dividends were calculated using the Black-Scholes valuation method and are
included in net loss attributable to common shareholders.
During the year ended December 31, 2001, the Company received proceeds of
$1,058,175 from the exercise of 352,725 warrants. In addition, 36,250 warrants
were converted into 24,329 shares of the Company's common stock utilizing the
cashless exercise provision. As of December 31, 2001, there remained warrants
outstanding to purchase 7,500 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 March 2001, the Board of Directors authorized, subject to certain business
and market conditions, the purchase of up to $1,000,000 of our common stock. As
of December 31, 2001, the Company purchased 10,000 shares of the Company's
common stock for approximately $53,000 and subsequently retired those shares.
All warrants have been issued with an exercise price that is equal to or above
the fair market value of the Company's common stock on the date of grant.
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
F-11
INTELLI-CHECK, INC.
NOTES TO FINANCIAL STATEMENTS
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 to purchase
25,000 shares of common stock at $10.00 per share in lieu of cash payments for
advertising services rendered. Options on 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 and $842 in the accompanying statement of operations as of December 31,
2000 and 2001, respectively, and will amortize the remaining expense as services
are performed.
During the fourth quarter of 2001, the Company granted options to purchase
41,231 shares of common stock at prices ranging from $9.22 to $16.05 per share
to consultants under various agreements. The fair market value of each option
was estimated on the date of grant using the Black-Scholes option pricing model.
Accordingly, we have recorded $389,000 as deferred compensation for these
services as of December 31, 2001 of which $200,000 was recognized during 2001.
At the Company's Annual Meeting held on July 11, 2001, the stockholders approved
the 2001 Stock Option Plan covering up to 500,000 of the Company's common
shares, pursuant to which the 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 2001 Stock Option Plan and determines the terms and conditions of options
granted, including the exercise price. The 2001 Stock Option Plan provides that
all stock options will expire within ten years of the date of grant. Incentive
stock options granted under the 2001 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 the grant and the exercise price must not be less than 110% of the fair
market value per share at the date of the grant for grants to persons owning
more than 15% of the voting stock of the Company. The 2001 Stock Option Plan
also entitles non-employee directors to receive grants on non-qualified stock
options as approved by the Board of Directors.
During the year ended December 31, 2001, the Company received net proceeds of
$775,150 from the exercise of 166,500 stock options.
Had compensation for the 1998, 1999 and 2001 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 changed to the following
pro forma amounts:
Year Ended Year Ended Year Ended
December 31, 1999 December 31, 2000 December 31, 2001
----------------- ----------------- -----------------
Net loss, as reported $(2,299,425) $(3,132,772) $(4,102,931)
Net loss, pro forma (2,582,153) (4,077,551) (5,505,085)
Basic and diluted loss per share, as
reported (0.45) (0.47) (0.52)
Basic and diluted loss per share, pro forma (0.51) (0.61) (0.70)
F-12
INTELLI-CHECK, INC.
NOTES TO FINANCIAL STATEMENTS
Stock option activity under the 1999 and 2001 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 376,560 $9.80
Canceled (80,000) 3.00
Exercised (66,000) 3.07
---------- -----
Outstanding at December 31, 2000 1,778,560 4.89
Granted 330,481 0.86
Canceled (37,500) 5.17
Exercised (166,500) 4.72
---------- -----
Outstanding at December 31, 2001 1,905,041 $6.11
========== =====
Included in the option schedule are 792,000 non-plan options.
As of December 31, 1999, 2000 and 2001, 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 2 years; risk free interest
rates of 5.00%, 6.00% and 3.34%; expected volatility of 68.11%, 91% and 90% and
a dividend yield of 0%, 0% and 0%, respectively.
The weighted-average remaining life of the options outstanding at December 31,
1999, 2000 and 2001 is 4.66 years, 3.87 years and 2 years, respectively, and the
weighted-average fair value of the options outstanding at December 31, 1999,
2000 and 2001 is $2.07, $5.14 and $5.14, respectively.
As of December 31, 2001, the Company has 744,828 options exercisable and 554,459
options available for future grant under the 1998, 1999 and 2001 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. ACQUISITION
On December 18, 2001,the Company acquired substantially all of the assets of the
IDentiScan Company, LLC, which was accounted for under the purchase method. The
aggregate purchase price totaled $1,032,947 which consisted of 59,774 of the
Company's restricted common stock valued at $980,000 and transaction costs of
$52,947, plus additional incentives upon meeting specific objectives over the
next three years. If after one year from closing, the aggregate current market
price of the shares issued at closing is less than $750,000, the Company will
pay additional cash or additional common stock for the short fall, if any. The
allocation of the purchase price was as follows: $430,000 acquired technology,
$181,447 to goodwill, $397,500 in other intangible assets, and $24,000 to
tangible assets. All Intangible assets are being amortized on a straight-line
basis of between 2-10 years, which represents the estimated future period to be
benefited.
9. 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,
F-13
INTELLI-CHECK, INC.
NOTES TO FINANCIAL STATEMENTS
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
interest bearing certificate of deposit collateralizing the letter of credit. As
of December 31, 2001 the total amount in this account is $268,494.
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:
2002 $ 249,812
2003 259,103
2004 244,539
2005 245,972
2006 254,884
Thereafter 1,125,649
----------
$2,379,959
==========
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:
2002 $29,655
2003 18,425
-------
Total minimum lease payments 48,080
Less- Amount representing interest (5,342)
-------
Present value of net minimum lease payments $42,738
=======
Royalty and License Agreements
The Company entered into an agreement with a former 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 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 provided 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 would
have been 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 was obligated to 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 was not required to grant options to purchase more than
150,000 shares of common stock with respect to any one fiscal year. During the
terms of their agreements, no bonuses were earned.
On May 7, 2001, the Board of Directors accepted the resignation of its Senior
Vice President and Chief Technical Officer. Accordingly, all of the obligations
under the employment agreement, including the payment of salaries and
incentives, ceased as of this date.
On February 1, 2002 the Company entered into a new three-year employment
contract with its chairman and Chief Executive Officer, the agreement provides
for an annual base salary of $250,000. In addition, the Company granted the
Chairman and
F-14
INTELLI-CHECK
NOTES TO FINANCIAL STATEMENTS
Chief Executive Officer an option to purchase 350,000 shares of common stock
exercisable at $12.10 per share of which 125,000 options are immediately
exercisable and 225,000 options become exercisable at a rate of 75,000 per year
at December 31, 2002, 2003 and 2004.
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 an exercise price of $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 provided 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 were
immediately exercisable at $5.00 per share and 20,000 options became exercisable
on September 7, 2000 at $5.00 per share.
On September 7, 2001, the Company renewed the employment agreement of its Senior
Executive Vice President and Chief Financial Officer. The agreement, which
expires December 31, 2004, provides for a base salary of $135,000 with annual
increases of 5%. In addition, the Company granted 75,000 stock options at an
exercise price of $8.04 vesting on September 7, 2006 with earlier vesting
incentives.
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. This agreement was renewed for an
additional 2 years expiring October 2003 under the same terms and conditions.
Supplier Agreements
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 and provides for automatic renewal periods of one
year. 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.
During 2001, the Company agreed to provide the manufacturer with advance
deposits totaling $600,000 towards the fulfillment of its obligation on its
purchase order. The Company paid $200,000 during September 2001 and expects to
pay the remaining $400,000 in April 2002.
Legal Proceedings
A lawsuit was filed as a class action on October 18, 2001 on behalf of
short-sellers of the Company's stock, who suffered losses because of the rise in
the price of the Company's stock, in the United States District Court for New
Jersey. The class action suit was amended in November 2001 and is now an
individual action. The complaint alleges violations of the Securities and
Exchange Act of 1934. The Company believes the suit is without merit and will
defend itself vigorously.
A lawsuit requesting a preliminary injunction was filed on October 18, 2001 in
the Supreme Court of the State of New York, Nassau County, on behalf of Kevin
Messina, the former Chief Technology Officer of the Company, which sought to
force the Company to permit Mr. Messina to sell his restricted shares of the
Company's common stock. The complaint also seeks damages of $29,350 for unpaid
salary, unused vacation, unreimbursed business expenditures, unpaid director's
fees and punitive damages in the amount of $3,000,000. Mr. Messina's motion for
a preliminary injunction was denied. The Company
F-15
INTELLI-CHECK, INC.
NOTES TO FINANCIAL STATEMENTS
has acted properly and will defend itself vigorously. The Company filed a
counterclaim seeking damages in the amount of $5,000,000 alleging breach of Mr.
Messina's obligations to the Company.
A demand for arbitration was brought by Early Bird Capital Inc. in January 2002,
seeking issuance of warrants pursuant to the terms of a Financial Advisory and
Investment Banking Agreement dated as of August 20, 2002. The Company believes
that Early Bird Capital failed to perform under the agreement and therefore, is
not entitled to the warrants. The Company has acted properly and will defend
itself vigorously.
As a result of the acquisition of The IDentiScan Company, LLC, the patent
infringement suit against the Company was withdrawn with prejudice.
10. SUBSEQUENT EVENTS
Effective January 30, 2002, the Company mutually agreed with Sensormatic
Electronics Corporation not to renew its non-exclusive Master Distributor
agreement which was due to expire on March 31, 2002. The Company received
$412,000 and additionally Sensormatic agreed to return to the Company all units
previously purchased and unsold in their inventory as settlement of its
obligations under the agreement. The Company will recognize the income, net of
refurbishment costs of approximately $75,000, in the first quarter of 2002.
F-16