Item 1. BUSINESS.
(a) Technology of Registrant's Business and Products of Registrant.
See "Description of Technology Involved In Registrant's Business" and "Registrant's Products" in 1995 Form 10-K, Part I, Item 1.
(b) Developments in Registrant's Products since October 1, 1995.
1. Single Fingerprint Access System. The Registrant completed development of a ready-to-sell single fingerprint access system known as CHEK/ONE in July 1996. This system allows for the enrollment of the fingerprint(s) of individuals, assignment of a PIN or other identifying characteristic to these enrollees, and use of the combination of PIN and fingerprint to gain access to certain privileges. This system is intended for use in commercial, industrial, and government applications where secure control of access is required. The CHEK/ONE employs fingerprint scanners in a terminal, a multiplexer board and frame grabber board housed in an IBM compatible Personal Computer ("PC"), and computer programs to control the process and report on results. The scanner used in the CHEK/ONE was developed by the Registrant in 1995. The Registrant is marketing the CHEK/ONE to large manufacturers and distributors of access control systems such as manufacturers of Social Program Systems. Two of these manufacturers are testing the product for incorporation in their systems. The Registrant is also seeking orders from dealers in computer equipment and supplies who would re-sell the CHEK/ONE to their customers on a value added basis.
2. Forensic Quality Ten Print Scanner. The development of a ten fingerprint identification scanner, named "CHEK/TEN", (the successor to the LPS14 Scanner) which the Registrant believes meets the standards of the Federal Bureau of Investigation ("FBI") was completed in the last days of November 1996. FBI certification tests were conducted by Registrant in the first half of December 1996. This test data was then submitted to the FBI with a request that this scanner be granted certification for use as a "Live Scan" fingerprint scanner which generates electronic fingerprint records. Although Management believes that the FBI will grant certification based upon the test conducted, Registrant makes no representation to such effect.
3. Booking Station. Concurrent with the development and testing of the Forensic Quality Scanner, CHEK/TEN, the Registrant has been designing the CHEK/TEN Booking Station for use at police stations upon the arrest of a criminal suspect. A working prototype has been manufactured and is awaiting testing by police agencies. The booking station employs the CHEK/TEN in scanning of fingerprints under control of the computer programs in a PC. Other information describing the suspect or applicant is recorded at nearly the same time as the fingerprint scanning. This includes name, address, height, weight, hair and eye color, and optionally, a picture. Data collected in this manner is to be stored on the various magnetic and optical storage devices offered with the booking station. All of the necessary components that comprise a booking station are housed in a kiosk suitable for the police station environment. The booking station is expected to be marketed through dealers and other representatives of the Registrant. No orders for the booking station have been received thus far.
4. Availability of Parts and Supplies and Manner of Manufacture. The Registrant expects to subcontract out parts and some assembly for the CHEK/ONE, CHEK/TEN, and the Booking Station. Except for the optical prisms in the scanner, most of the parts are off the shelf items available from more than one manufacturer. Accordingly, Registrant does not anticipate problems in manufacturing or delivering these products.
5. Pricing. The prices of the Chek/One and Chek/Ten will vary with the number of units ordered and certain options which are selected by the buyer. No prices have been set for the Chek/Ten or the Booking Station.
(c) Competition.
In the development and marketing of fingerprint identification systems, the Registrant faces domestic and foreign competition from companies with far greater resources than it has. Based upon comparative testing of the Registrant's prototype scanner and those of other manufacturers, the Registrant believes that the CHEK/ONE is superior to those of competitors.
The CHEK/TEN forensic quality scanner utilizes a design proprietary to the Registrant. From reviews of the specifications and performance capabilities of forensic quality scanners manufactured by competitors, the management of Registrant believes that the CHEK/TEN exceeds the performance of forensic quality scanners of competitors. Accordingly, the Registrant should find a niche in supplying such scanners to original equipment manufacturers of and contractors for Automated Fingerprint Identifications Systems (AFIS) and Fingerprint Access
Control Systems (FACS). Thus far, however, the Registrant does not have any orders for either the CHEK/ONE and the CHEK/TEN.
(d) Dependence on Suppliers.
A number of different finished and raw material components are utilized by the Registrant during production. Among the finished components are integrated circuits, resistors, capacitors and other electronic devices, all of which are generally available from multiple sources. The Registrant also purchases metal and plastic casings, motors, and optical equipment which are also available from multiple sources. Based upon experience, the Registrant has not had any difficulty in purchasing any of the necessary components or materials for its products, because of the general availability of such components and materials from a number of sources. Consequently, a loss of one or more suppliers should not impair the Registrant's ability to fill orders.
(e) Dependence on Customers.
The Registrant has been in the development stage from its inception, and, since it has come out from under the protection of Chapter 11 of the Bankruptcy Laws, the Registrant thus far has no significant orders placed with it. By reason thereof, it can not now be determined if the Registrant shall in the future be dependent on any one or more customers.
(f) Employee Relationships.
The Registrant currently employs nineteen persons, of whom fifteen employees are technical staff having advanced degrees in physics, mathematics, engineering and computer sciences. None of its employees are unionized, and all employments are "at will", i.e., an employee can leave or be terminated at anytime. The Registrant has granted options to all of its employees. The Registrant does provide hospital and medical benefits. All employees are required to sign agreements assigning their rights in any patents or trade secrets to the Registrant arising out of the work they perform, and promising not to disclose or to use any confidential information pertinent to the Registrant and its products.
(g) Significant Contracts.
The Registrant has entered into one contract and is contemplating entry into similar contracts whereby the contractor agrees to act as a value added reseller ("VAR") for the products of the Registrant. Under these VAR contracts, the contractor
purchases at mutually agreed prices from Registrant and resells at such prices as the reselling contractor determines.
Apart from one VAR contract, the Registrant presently does not have any significant contracts with any suppliers, customers, employees, or agencies. It does have an employment agreement with its President, Thomas T. Harding. See "Executive Compensation" 1995 Form 10-K, Part III, Item 11.
(h) Patents and Other Intellectual Property Rights.
Patents and Know How
The Registrant holds United States patents on devices, some of which are incorporated in the Registrant's current products, but all of which pertain to the technology applicable to the Registrant's products. It has applied for a patent with the United States Patent and Trademark Office ("Patent Office") on one device. The Registrant has had patents issued by foreign countries, but some may have lapsed because of Registrant's failure to maintain same through the payment of requisite fees which failure occurred prior to the Registrant coming out the bankruptcy reorganization.
The competitive nature of the Registrant's industry makes the patents and patent applications important to the Registrant. However, there is no assurance that the issued patents, or the patents applied for, will prove enforceable, or that the Registrant will derive any competitive advantage therefrom. The Registrant also has other patents which, because of technological advancements, it no longer considers important and have allowed some to lapse.
The Registrant also relies on unpatented know-how and trade secrets and continuing research and development. As a result, the Registrant may not have any protection from other parties who independently develop the same know-how and trade secrets. While the Registrant's management is not aware that any of its products infringe on any outstanding patents of others, the manufacture and sale of the Registrant's proposed products may infringe on patents of third parties. If such be the case, failure to obtain needed licenses from such third parties could have a material adverse effect on the Company's ability either to complete the development of a certain product or to arrange for its manufacture and marketing.
Trademarks
In June 1996, the Registrant adopted the following trademarks in the marketing of its products and services:
(i) CHEK/ONE, which refers to the single fingerprint scanning system; (see: "Developments in Registrant's Products Since October 1, 1995", Part I, Item 1(b) above);
(ii) CHEK/TEN, which refers to the ten fingerprint scanning system; (see: "Developments in Registrant's Products Since October 1, 1995," Part I, Item 1(b) above).
On July 1, 1996, the Registrant applied for registration of CHEK/ONE and CHEK/TEN with the United States Patent and Trademark Office.
Apart from CHEK/ONE and CHEK/TEN trademarks, the Registrant currently uses trademarks and trade names which have not been registered with the United States Patent and Trademark Office or in any foreign government trademark offices. The Company does, however, believe that it has established common law rights to the use of all of its trademarks which, in combination with the Company's name, are used to indicate the origin of the products to which they are applied and to distinguish them from the products of competitors. The Company regards its trademarks important to its business. As to unregistered trademarks, the Company will not be able to avail itself of the protection granted to Federally registered marks under Federal law. Certain rights are, however, protected under the provisions of the Lanham Act and under state law in respect of unregistered or common law trademarks.
The Registrant also has registered trademarks with the United States Patent and Trademark Office for products it is not presently marketing,
(i) Other Factors Affecting Registrant's Business.
Compliance with Environmental and Occupational Safety and Health Laws
The Registrant believes that it is in compliance with all federal, state and local environmental laws and regulations applicable to it business and products. In view of the Registrant's policy not to manufacture components for its products such as electronic boards, but only to assemble and install such components into its products, it does not expect that it will have to incur any significant expense with respect to protecting the environment from pollution. Accordingly, such assembly and
installation shall not require the Registrant to be involved with "hazardous substances", and "pollutants and contaminants" as defined in 42 U.S. Code section section 9601, et. seq.
The Registrant believes that its office and other work places are in compliance with the occupational safety and health laws.
Item 2.
Item 2. PROPERTIES.
The Registrant currently operates out of a 5,600 square foot facility located on the first floor of a multi-story concrete and steel loft building at 145 Palisade Street, Dobbs Ferry, New York, which it leases from an independent third party, Commerce and Industry Associates under a written lease which commenced on November 15, 1993 and terminates November 14, 1998. The annual rent for the first floor facility increases at November 15 of each year with the annual rent for the period November 15, 1995 to November 14, 1996 being $49,414; for the twelve month period between November 15, 1996 and November 14, 1997, the annual rent will be $51,885; and from November 15, 1997 until November 14, 1998, the annual rent will be $54,479. All of these annual rents are payable in equal monthly installments. In the basement of the same building the Registrant also leases on a month-to-month basis from Commerce and Industry Associates about 800 square feet of storage space, which lease commenced on March 1, 1995. The rental for the basement is $750 per month plus electricity. The Registrant believes that the facilities are sufficient for its needs at least to the expiration of the lease for the first floor space. Registrant does not anticipate a problem with respect to continuing to renew the lease to the basement storage facilities for the next several months.
The Registrant has no other interest in real properties, whether by outright ownership, lease or mortgage.
Item 3.
Item 3. LEGAL PROCEEDINGS.
(a) Pending Litigation.
There is no pending litigation against the Registrant.
In June, 1996, Michael Schiller, former Chief Executive Officer and Chairman of the Registrant, brought a proceeding in the United States Bankruptcy Court for the Southern District of New York to compel the removal of a legend from the certificate issued to him for 200,000 shares of the Registrant's Common stock. The legend restricted the sale or transfer of the shares except in
accordance with the Securities Act of 1933, as amended. These shares were issued to Mr. Schiller upon exercise of warrants to purchase the Registrant's common Stock at one penny per share. These penny warrants were granted to Mr. Schiller by the trustee of the Registrant in compromise and settlement of his claims against the Registrant's Chapter 11 bankruptcy estate for unpaid salary and other matters pursuant to an order of the Bankruptcy Court. It was Mr. Schiller's claim that the shares to be issued to him were free for him to sell in accordance with 1145 of the Bankruptcy Law (11 US Code section 1145). The Registrant, relying on the statement of the trustee that the warrants and the underlying shares were not intended to be exempt from the Securities Act of 1933, as amended, opposed the removal of the restrictive legend. The Bankruptcy Court, Judge Lifland, found that the shares were exempt under section 1145 and could be freely sold by Mr. Schiller, and ordered the Registrant to have the legend removed, which was done in August, 1996.
(b) Threatened Litigation.
The Registrant is not aware of any threatened litigation against it.
Item 4.
Item 4 above. However, on October 21, 1996, Lewis Schiller resigned as a director of Registrant because of the pressure of other corporate business than that of the Registrant. The vacancy created by Mr. Schiller's resignation has not thus far been filled.
For the present, the only executive officers of Registrant are Thomas T. Harding, President and Gordon R. Molesworth, Secretary, with Mr. Harding also performing the functions of Treasurer, as required. While Mr. Molesworth's company, Molesworth Associates, Inc., receives compensation as a consultant to the Registrant, only Mr. Harding is an employee of Registrant. At present the Directors receive no compensation for their duties as such, but upon the Registrant achieving sufficient income from operations, it is intended that the Directors shall receive a cash stipend for attending meetings and performing other acts. The non-employee Directors for their efforts however have each received options under Director Stock Option Plan to purchase 75,000 shares of Common Stock at an exercise price of $2.375 per share, the market price on July 21, 1995, the date of the grant of the option. While the options granted to each non-employee director is 75,000 shares, only 37,500 shares are exercisable during the first year following the grant and thereafter, on each of the anniversary date of the grant options to purchase 12,500 shares become exercisable, provided the non-employee director is still a director of Registrant.
Executive officers of the Registrant serve at the pleasure of the Registrant's Board of Directors, or until the next annual meeting of the Board of Directors and until their respective successors have been elected and qualify. Directors serve until the next annual meeting of shareholders and until their respective successors have been elected and qualify.
There are no arrangements or understandings between any Director and any other person regarding the nomination or election of Directors and, likewise, there are no arrangements or understandings between any officer and any other person regarding his election as an officer.
Set forth below are the names, ages and positions of the executive officers and all Directors of the Registrant.
Business Background of Directors and Officers
Set forth below is a brief description of the business backgrounds of the officers and directors of the Registrant.
Thomas T. Harding, President, Chief Executive Officer and Director. After a short period in November 1994 during which Mr. Harding was a marketing and management consultant to the Trustee, in December 1994 the Trustee with Bankruptcy Court approval appointed Mr. Harding as president of the Registrant. From 1979 to 1994, Mr. Harding was a marketing and management consultant to various corporate clients, among them the Registrant for the period from 1982 to 1990. Prior to 1979, Mr. Harding was a corporate vice-president and division manager with Perkin-Elmer (1976-1978), and division vice president of Litton Industries, Inc. (1972-1975). Mr. Harding holds a Bachelor of Science Degree in Electronics from the University of Scranton and he did graduate work at George Washington University in engineering administration.
Gordon R. Molesworth, Secretary and Director. Mr. Molesworth was one of the leaders of the Registrant's Pre-Petition shareholders group and he was instrumental in partially funding the financing of Registrant, both Post-Petition and Post-Confirmation. He was appointed to the Board of Directors as a representative for the shareholders Pre-Petition, as well as for
the new shareholders. Through his company, Molesworth Associates Inc., he also serves as communications consultant to the Company. He is the President of Molesworth Associates Inc., a communications and public relations consultancy located in Green Valley, Arizona, which has been in existence since 1959. Prior to 1990, Mr. Molesworth had been a consultant to the Registrant.
Seth M. Lukash, Director. He is Chairman and Chief Executive Officer of Tridex Corporation, an electronic equipment manufacturer listed on the NASDAQ stock market. Mr. Lukash also serves as a Director for the following organizations Tanaka Capital Management, Inc., an investment advisory firm located in New York, NY, and JobDirect Inc., an Internet-based recruitment organization located in Greenwich, CT. Mr. Lukash is also the Chairman of the Connecticut Chapter of the American Electronics Association (AEA). He also is a Board Member of the AEA. He has had no prior connection with Registrant and was chosen by reason of his success with his own company.
Fred I. Sonnenfeld, Director, is an attorney licensed to practice in the State of New York for over forty years. He is a partner in Sonnenfeld & Richman who are counsel to the Registrant. Between 1990 and January, 1993, Mr. Sonnenfeld's law firm was general counsel to the Registrant when his firm resigned such position. Mr. Sonnenfeld was one of three members of the committee for general unsecured creditors.
Item 11. EXECUTIVE COMPENSATION
The following table sets forth all compensation paid by the Company to each of its two executive officers fiscal year ended September 30, 1996:
The total cash compensation to all executive officers (one in number) for the fiscal year ended September 30, 1996 was $140,000.00. In addition, approximately $147,500 was paid to two technical managerial employees for said fiscal year. As of September 30, 1996, the total annual payroll for all full time technical and managerial staff, including the salary of the President (at $140,000 per year), was approximately $1,000,000. Because of the Registrant's inability to offer cash bonuses, five - ------------- 6 Mr. Harding's employment commenced in December, 1994. 7 Under the Plan, Mr. Harding received as a bonus for his work during the bankruptcy proceding 115,000 shares of Common Stock. 8 115,000 shares of Common Stock were issued to Mr. Harding in January, 1996. 9 Pursuant to a written agreement with the Registrant made in April 1995, Mr. Molesworth's company, Molesworth Associates, Inc. is paid $4,000 per month plus expenses for consulting and public relations services it renders to the Registrant. 10 Under the Plan, Mr. Molesworth received 250,000 A-Warrants and 150,000 C-Warrants for his services in reorganizing the Registrant and arranging for financing of Registrant. He exercised 50,000 A-Warrants and 50,000 C-Warrants to receive 100,000 shares of Common Stock, which Mr. Molesworth gave to his children.
technical employees received among them 19,500 shares of Common Stock in October 1995 having a market value of $2.375 per share. The share certificates for these bonus shares bear a legend restricting their sale, transfer, pledge or other disposition except in accord with the Securities Act.
Mr. Harding has an employment agreement with the Registrant which commenced on the confirmation of the Plan (April 17, 1995) and which continued for one year thereafter. The employment agreement was automatically renewed on April 17, 1996 for one year and will be renewable year after year unless Mr. Harding or Registrant gives notice to terminate the employment relationship at least thirty days prior to the annual date of renewal. His annual salary under the employment agreement is $140,000. As additional compensation to Mr. Harding, the employment agreement provides that he was to receive, and he did receive on January 5, 1996, without any payment on his part, 115,000 shares of the Common Stock, having a bid price of $1.875 per share. He also obtained an option to purchase 237,500 shares of the Common Stock at an exercise price which shall be equal to the "bid" price at the close of business on July 21, 1995 ($2 3/8 per share) in accordance with the Employee Stock Option Plan and which will expire July 21, 2005. The stock and the options were in discharge of options contemplated to be granted under the Plan to Mr. Harding. Mr. Harding is reimbursed for all reasonable and necessary expenses which he incurs in the performance of his duties. The Registrant paid him July 1995, the sum of $7,000 for relocating himself and his family to the New York City area. Apart from the right to participate as an employee in whatever employee benefit plans the Registrant shall afford to its employees, Mr. Harding receives no other benefits and compensation other than those set forth above.
During the fiscal year ended September 30, 1995, Mr. Sonnenfeld's law firm received no fees, and for the period between October 1, 1995 through September 30, 1996, his law firm received $91,125 in fees and was reimbursed $2,465.75 for disbursements.
Employee Stock Option Plan
The Plan provided for reservation of 225,000 shares of Common Stock to be issued under an Employee Stock Option Plan ("ESOP") to be adopted by the Board of Directors. Such an ESOP was adopted by the Board of Directors on July 21, 1995, except that the Directors increased the number of shares to 350,000. The ESOP was approved by the shareholders of the Registrant on August 6, 1996; the shareholders also ratified the options granted to employees prior to August 6, 1996.
The ESOP provides for the granting of incentive stock options ("ISO"), non-qualified stock options, or both, which shall be determined by a Compensation Committee made up of non-employee members of the Registrant's Board of Directors. The prices of the options are to be determined by the Compensation Committee within certain guidelines, namely, for non-qualified stock options, the price per share may not be less than 85% of the "fair market value" on the date of the grant of the option and for ISOs, the price per share may not be less than 100% of the fair market value of a share on date of grant (and not less than 110% of the fair market value of a share for an employee who owns more than ten percent of the outstanding securities of the Registrant. The ESOP determines the fair market value of a Registrant's share by anyone of the following which are applicable: (i) the closing price on date of the grant as reported on a national securities exchange; (ii) the closing price on the date of the grant as reported by the National Association of Securities Dealers Automatic Quotation System; (iii) the average of the closing bid and asked prices on the date of the grant as reported in the over-the-counter market; and (iv) and if none of the foregoing are extant, then by determination of the Compensation Committee.
As of September 30, 1996, the following ESOP options have been granted to officers and employees of the Registrant:
Options may be granted up to ten years from July 21, 1995, when the ESOP itself expires.
Non-Employee Directors' Stock Option Plan
The Plan provided for 125,000 A-Warrants to be issued to each of the non-employee directors. In July 1995, the directors of Registrant waived their rights to the A-Warrants and in lieu thereof adopted a Director Stock Option Plan ("DSOP"). At annual shareholders' meeting held on August 6, 1996, the shareholders approved the DSOP as well as the options that had been granted thereunder to non-employee directors. The maximum number of shares of the Common Stock which shall be reserved for the DSOP options is 500,000 shares. The options under DSOP are effective for ten years from DSOP's effective date, July 21, 1995. Accordingly all DSOP options expire on July 21, 2005.
DSOP is not an incentive stock option plan. There are currently three non-employee directors, namely, Messrs. Molesworth, Lukash, and Sonnenfeld,11 who each shall have options to purchase 75,000 shares of Common Stock at the fair market value of the Common Stock as of July 21, 1995, which was $2.375 per share. Of the options to purchase 75,000 shares of Common Stock, only options to purchase 37,500 shares of Common Stock are exercisable during the first year of the grant. On each anniversary date after the grant, options to purchase 12,500 shares of Common Stock become exercisable, up to a total of 37,500 shares, provided the non- employee director is still a director on the Registrant's Board of Directors on each anniversary date. Accordingly, as of September 30, 1996, each of the non-employee directors have options to purchase 50,000 shares of Common Stock. Any new directors appointed or elected after the effective date are awarded option to purchase 25,000 shares of Common Stock at the fair market value of a share on the date of appointment or election. On each anniversary of the effective date the non-employee directors, if they are still in office shall be entitled to an option to purchase an additional 12,500 shares at the fair market value per share on such anniversary. Fair market value is determined in the same manner as the ESOP, except that if there is no market for the shares, then the Board of Directors in their discretion determine the price.
401-K Plan
Effective January 1, 1990, the Company established a 401(K) defined contribution and trust plan which covers substantially all officers and employees upon completion of six months employment. Officers and employees may contribute from 1% to 15% of their compensation. The Company may contribute to the fund at the discretion of management. During the forty months ended September 30, 1995, the Company did not make a contribution, nor has it done since. The Company has elected to pay the plan administrative expenses, which were nominal, for this period.
- -------- 11 The options (to purchase 50,000 shares) granted to Lewis Schiller were vitiated upon his resignation on October 21, 1996.
Item 12. SECURITY OWNERS.
Non-Management Persons Having More Than A 5% Interest In Registrant's Securities.
The following table sets forth information as of September 30, 1996 with respect to those persons who are not part of the Registrant's Management known to the Registrant to be the beneficial owner of more than five percent (5%) of Registrant's one class of voting securities, common stock ($.01 par value):
Management Security Ownership
The following table sets forth information as of September 30, 1996 with respect to the beneficial holdings of Management with respect to the Common Stock and the A-Warrants, B-Warrants and other options held:
Item 13. CERTAIN RELATIONSHIPS AND SPECIAL TRANSACTIONS.
SIS Capital Corp. and Shareholder Alliance
Reference is made to "SIS Capital Corp. and Shareholder Alliance", 1995 Form 10-K, Part III, Item 13 for full details as to these relationships and the transactions related thereto. Of the principal sum of $1,067,000 owed to SIS under the Plan, as of November 30, 1996, there is owed $217,000 plus interest currently at 8% per annum. One payment remains to be paid in April, 1997, in the said sum of $217,000.
Purchase of 2,000,000 Shares of Common Stock at $1.00 per Share.
For reasons set forth in "MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS-Recent Sale of Securities-Securities Issued Post-Confirmation" , Part II, Item 5
Item 8 of this report:
1. Report of Independent Auditors &
2. Balance Sheets as of September 30, 1996, 1995 &
3. Statements of Operations for the three years ended September 30, 1996, 1995 and 1994, from inception to September 30, 1996 &
4. Statements of Shareholders' Equity (Deficiency) from inception (May 1976) to September 30, 1996 to
5. Statements of Cash Flows for the three years ended September 30, 1996, 1995 and 1994 to
6. Statement of Changes of Financial Position &
7. Notes to Financial Statements to
(b) Report on Forms 8-K:
On July 10, 1996, the Registrant filed a Form 8-K with respect to litigation commenced by Michael Schiller. See "LEGAL PROCEEDINGS - Pending Litigation", Part I, Item 3(a) of this Form 10-K for result of this litigation.
Subsequent to September 30, 1996, Registrant filed the following Forms 8-K:
1. On November 5, 1996, pertaining to resignation of Lewis Schiller as a director.
2. On December 17, 1996, pertaining to sale of Common Stock to PT. Dolak. See "CERTAIN RELATIONSHIPS AND SPECIAL TRANSACTIONS - Purchase of 2,000,000 Shares of Common Stock at $1.00 Per Share", Part I, Item 13 of this Form 10-K.
(c) Exhibits:
Exhibit Description of Exhibits - ------- ----------------------- 22 Report of Results of Voting at the Annual Meeting of 8/6/96
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: December 19, 1996
FINGERMATRIX, INC.
By: S/ Thomas T. Harding Thomas T. Harding President
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.
Dated: December 19, 1996 S/ Thomas T. Harding Thomas T. Harding Chief Executive Officer and Director
Dated: December 20, 1996 S/ Gordon R. Molesworth Gordon R. Molesworth Secretary, Director
Dated: December , 1996 S/ Seth Lukash Seth Lukash, Director
Dated: December 20, 1996 S/ Fred I. Sonnenfeld Fred I. Sonnenfeld, Director
Supplemental Information to be Furnished With Reports Filed Pursuant to Section 15(d) of the Act.
The annual report for the year ended September 30, 1996 and proxy material for 1997 annual meeting shall be subsequently furnished to security holders of Registrant and copies thereof shall be furnished to the Commission upon transmittal to the security holders.
EXHIBIT 22(i)
REPORT OF RESULTS OF VOTE AT ANNUAL MEETING OF 8/6/96
TOTAL OUTSTANDING SHARES: 7,632,791.090 TOTAL SHARES VOTED : 4,444,646.000* TOTAL PERCENTAGE VOTED : 58.200
FINGERMATRIX, INC. (A Development Stage Company)
FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY)
Page Number
Auditor's Report -
Balance Sheets -
Statements of Operations -
Statements of Stockholders' Equity (Deficiency) -
Statements of Cash Flows -
Consolidated Statement of Changes in Financial Position -
Notes to Financial Statements -
FARBER, BLICHT & EYERMAN, LLP Certified Public Accountants 255 Executive Drive, Suite 215 Telephone: (516) 576-7040 Plainview, NY 11803-1715 Facsimile: (516) 576-1232
To the Board of Directors and Stockholders of Fingermatrix, Inc. Dobbs Ferry, NY
We have audited the accompanying balance sheets of Fingermatrix, Inc. (a development stage company) as of September 30, 1996 and 1995, and the related statements of operations, stockholders' equity (deficiency in assets), and cash flows for the years then ended. 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 generally accepted auditing standards. Those standards require that we plan and perform the audits 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 Fingermatrix, Inc. as of September 30, 1996 and 1995, and the results of operations and its cash flows for the years then ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Notes 1a and 2 to the financial statements, the Company is a development stage company that emerged from bankruptcy in April, 1995, generated no revenue in 1996 and 1995, and has limited working capital at September 30, 1996. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustment that might result from the outcome of these uncertainties.
To the Board of Directors and Stockholders of Fingermatrix, Inc. We were engaged to audit the statements of operations, stockholders' deficiency in assets and cash flows for the year ended September 30, 1994. These financial statements are the responsibility of the Company's management. Because of the significance of the matters discussed in the immediately following paragraph, the scope of our work was not sufficient to enable us to express, and we do not express, an opinion on the 1994 financial statements referred to above.
We were unable to locate missing accounting and bookkeeping records, which included, among other things, contracts and invoices for the 1994 year, which precluded us from verifying cash receipts, disbursements, purchases and revenues. Additionally, related accounting records of the Company's accounts receivable and payable were either missing or incomplete. Due to the loss of accounting records, there were unreconciled differences in common stock as recorded by the Company and the stock transfer agent. We were unable to satisfy ourselves about the above items by means of other auditing procedures.
FARBER, BLICHT & EYERMAN, LLP
Plainview, New York November 18, 1996, except for Note 10e, which is as of December 2, 1996
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
SEPTEMBER 30, 1996 AND 1995
ASSETS ------
1996 1995 Current assets: ---- ---- Cash and cash equivalents $404,986 $1,067,577 Restricted cash (Note 1i) -- 31,825 Inventories (Notes 1c and 3) 78,870 -- Prepaid expenses and other current assets 156,842 20,855 -------- ---------- Total current assets 640,698 1,120,257 -------- ---------- Property, plant and equipment--at cost (Note 1d): Equipment 206,281 44,964 Leasehold improvements 21,024 -- Furniture and fixtures 11,603 561 -------- ---------- 238,908 45,525 Less allowance for depreciation and amortization 64,600 32,715 -------- ---------- 174,308 12,810 -------- ---------- Other assets: Patents (Note 1f) 241,533 224,385 Less accumulated amortization 108,180 94,961 -------- ---------- 133,353 129,424 Deposits 13,605 12,805 -------- ---------- 146,958 142,229 -------- ---------- Total assets $961,964 $1,275,296 -------- ---------- -------- ----------
See notes to financial statements.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
SEPTEMBER 30, 1996 AND 1995
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS)
1996 1995 Current liabilities: ---- ---- Accounts payable--trade $ 1,291 $ 34,965 Accrued expenses (Note 4) 126,459 977,677 Note payable (Note 5) -- 250,000 Current portion of long-term debt (Note 6) 504,839 628,003 ------------ ------------ Total current liabilities 632,589 1,890,645
Long term debt (Note 6) -- 540,659 ------------ ------------ Total liabilities 632,589 2,431,304 ------------ ------------ Comments, commitments and contingencies (Note 10)
Stockholders' equity (deficiency in assets) (Note 7): Common stock--$.01 par value: 20,000,000 shares authorized; 8,206,250 and 3,945,404 shares issued and outstanding 82,062 39,454 Additional paid in capital 60,452,875 56,412,163 Deficit accumulated during the development stage (60,205,562) (57,607,625) ------------ ------------ Stockholders' equity (deficiency in assets) 329,375 (1,156,008) ------------ ------------ Total liabilities and stockholders' equity (deficiency in assets) $ 961,964 $ 1,275,296 ------------ ------------ ------------ ------------
See notes to financial statements.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF OPERATIONS
See notes to financial statements.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENT OF OPERATIONS
(Continued)
See notes to financial statements.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) FROM INCEPTION (MAY, 1976) TO SEPTEMBER 30, 1996
See notes to financial statements.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) FROM INCEPTION (MAY, 1976) TO SEPTEMBER 30, 1996
See notes to financial statements.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) FROM INCEPTION (MAY, 1976) TO SEPTEMBER 30, 1996
See notes to financial statements.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) FROM INCEPTION (MAY, 1976) TO SEPTEMBER 30, 1996
See notes to financial statements.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) FROM INCEPTION (MAY, 1976) TO SEPTEMBER 30, 1996
See notes to financial statements.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) FROM INCEPTION (MAY, 1976) TO SEPTEMBER 30, 1996
See notes to financial statements.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) FROM INCEPTION (MAY, 1976) TO SEPTEMBER 30, 1996
See notes to financial statements.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) FROM INCEPTION (MAY, 1976) TO SEPTEMBER 30, 1996
See notes to financial statements.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) FROM INCEPTION (MAY, 1976) TO SEPTEMBER 30, 1996
See notes to financial statements.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) FROM INCEPTION (MAY, 1976) TO SEPTEMBER 30, 1996
See notes to financial statements.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) FROM INCEPTION (MAY, 1976) TO SEPTEMBER 30, 1996
See notes to financial statements.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) FROM INCEPTION (MAY, 1976) TO SEPTEMBER 30, 1996
See notes to financial statements.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) FROM INCEPTION (MAY, 1976) TO SEPTEMBER 30, 1996
See notes to financial statements.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
See notes to financial statements.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
See notes to financial statements.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION
From inception (May 1976) to May 31, 1988 (*) Use of funds: Operations: Net loss $29,530,169 Items not consuming working capital: Depreciation and amortization (1,267,675) Amortization of deferred compensation-stock options (885,586) Common stock and warrants issued under settlement of law suit (425,000) Write-off of certain fixed assets (365,440) Write-off of certain patents (220,238) Stock appreciation rights (924,301) ----------- Working capital consumed by operations 25,441,929
Expenditures for patent applications 570,805 Acquisition of fixed assets 1,547,222 Deferred compensation - stock options 3,175,212 Reclassification of test equipment from inventory to fixed assets 633,319 Increase in deferred charges 209,187 Common stock issued in connection with acquisition of fixed assets 81,276 Common stock issued in connection with acquisition of patents 25,115 Long-term debt converted into common stock 444,500 Payments and current maturities of long-term debt 1,506,173 Preferred dividends paid 224,747 Loans receivable from employees 80,897 ----------- Total funds consumed 33,940,382 ----------- Sources of funds: Collections of loans receivable from employees 80,897 Decrease in deferred charges 100,418 Increase in long-term debt 1,950,672 Issuances of common stock 32,695,141 Issuances of preferred stock 5,976,001 Proceeds from sale of warrants 17,000 Issuance of stock options 3,636,562 ----------- Total funds provided 44,456,691 ----------- Net increase in working capital 10,516,309 Working capital--inception -- ----------- Working capital, May 31, 1988 $10,516,309 ----------- ----------- (*) Not covered by Auditors' Report.
See notes to financial statements.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION
(Continued)
From inception (May 1976) to May 31, 1988 (*) ----------------- Changes in components of working capital: Increase in current assets: Cash $ 9,045,038 Accounts receivable 76,203 Interest receivable 364,055 Loans receivable from employees 37,264 Inventory 1,584,903 Prepaid expenses and other current assets 125,163 (Increase) in current liabilities: Accounts payable (456,779) Accrued expenses (259,538) ----------- Net increase in working capital $10,516,309 ----------- -----------
(*) Not covered by Auditors' Report.
See notes to financial statements.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
Note 1. Summary of Significant Accounting Policies
a. Organization, history and basis of presentation
The Company was incorporated in the State of New York in May, 1976. For the period from its inception through September 30, 1996, the Company has been in the development stage and, accordingly, has directed its efforts and resources to product and prototype development and production planning of its electronic fingerprint identification systems. The Company operated as a debtor in possession pursuant to Chapter 11 of the Federal Bankruptcy Code until September, 1994, at which date a Trustee was appointed. On March 31, 1995, a Plan of Reorganization was confirmed and, accordingly, the Company exited from protection of the Bankruptcy Court and the Company's Management was transferred to a Board of Directors.
The financial statements have been prepared assuming that the Company will continue as a going concern which is dependent upon the successful completion of the Company's development program, fulfilling of its obligations pursuant to the Plan of Reorganization, generating sufficient sales to obtain profitable operations and its ability to obtain additional working capital or financing, if necessary. During the three years ended September 30, 1996, the Company had aggregate operating revenues of $29,000 while incurring losses before extraordinary credits aggregating $6,850,900 during the same period. Additionally, the Company has an accumulated deficit of $60,205,562 as of September 30, 1996. The Company's recurring losses from operations and lack of sufficient working capital raise substantial doubt about the Company's ability to continue as a going concern (see Note 2).
The Company believes that its existing cash and the proceeds from future anticipated equity contributions from the exercise of warrants and additional equity commitments made from one investor (Note 10e) will generate sufficient cash to maintain its operations through January, 1997. In order to continue its operations and meet its reorganization plan obligations, management has taken steps to produce a prototype of its fingerprint identification systems equipment, which it intends to market to law enforcement agencies, commercial enterprises or other agencies and organizations that can utilize these type of products. Based upon the reactions received by the potential customers to date, the Company believes that its scanner and technology will be well received. Production commenced in the quarter ended December 31, 1996 on the Single Finger Access Control System.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
Note 1. Summary of Significant Accounting Policies (continued)
b. Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
c. Inventory valuation
Inventories are valued at the lower of cost (first-in, first-out) or market. See Note 3.
d. Property and equipment
Depreciation is computed on the straight-line method over the estimated useful lives of the assets, which is generally five years. Leasehold improvements are amortized on the straight-line basis over the shorter of their estimated useful lives or the remaining lease term. Any gain or loss realized on disposition is recorded in operations at the time of the disposal. Expenditures for maintenance, repairs, renewal and betterments are reviewed by management and only those expenditures representing improvements to property and equipment are capitalized (see Note 1f).
e. Research and development
The Company accounts for software development costs in accordance with Statement of Financial Accounting Standards No. 86 "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed". Accordingly, certain software development costs incurred will be capitalized after technological feasibility has been demonstrated. Technological feasibility is determined when planning, designing, coding and testing have been completed according to design specifications. Commencing with product introduction, such capitalized amounts will be amortized on a product-by-product basis at the greater of the amount computed using (a) the ratio of current revenues for a product to the total of current and anticipated future revenues or (b) the straight-line method over the remaining estimated economic life of the product. Amortization of capitalized software costs will be charged to cost of product revenues and cost of services revenues. As testing of the Company's products has not been completed, no software development costs have been capitalized from inception through September 30, 1996. Research and development expenditures are charged to research and development in the period incurred.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
Note 1. Summary of Significant Accounting Policies (continued)
f. Patents and intangible assets
The cost of obtaining patents is amortized on the straight-line method over 17 years. Patent application costs are deferred until a patent is received or the application is abandoned. During the year ended September 30, 1996, patent application costs aggregated $17,148. Costs incurred to maintain patents in good standing are expensed as incurred. Amortization of patent costs was $13,219, $15,815 and $15,815 for the years ended September 30, 1996, 1995 and 1994, respectively.
In fiscal 1996, the Company adopted Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". Accordingly, the Company evaluates asset recoverability at each balance sheet date or when an event occurs that may impair recoverability of the asset. The Company determines the recoverability of the carrying amount of each intangible asset by reviewing the following factors: the undiscounted value of expected operating cash flows in relation to its net capital investment, the estimated useful or contractual life of the intangible asset, the contract or product supporting the intangible asset, and in the case of purchased technology and capitalized software development costs, the Company will periodically review the recoverability of the assets value by evaluating its products with respect to technological advances, competitive products and the needs of its customers. During fiscal 1996, the Company did not incur any long- lived asset impairment losses.
g. Revenue recognition
The Company recognizes revenues from customers upon delivery and installation, subject to acceptance by the customer, of its systems. Service contract revenues are recognized as earned, pursuant to the terms of the contract.
h. Earnings (loss) per common share
Earnings (loss) per common share is computed using the income (loss) for the year adjusted for preferred dividends divided by the weighted average number of common shares outstanding during the respective periods. Retroactive effect has been given for all periods shown for the reverse .07 for 1 stock split effected April, 1995 concurrent with the bankruptcy plan confirmation. Common stock equivalents, convertible notes and convertible preferred stock outstanding, were not included in the computation, since the effect of their inclusion would be anti-dilutive or immaterial.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
Note 1. Summary of Significant Accounting Policies (continued)
i. Cash equivalents and restricted cash
Cash and cash equivalents generally consist of cash and money market instruments. These securities have original maturity dates not exceeding three months. Such investments are stated at cost which approximates fair value and are considered cash equivalents for purposes of reporting cash flows.
Cash that has been segregated for settlement of pending bankruptcy claims, which is under the control of a court-appointed trustee, is deemed restricted cash and is not included in cash equivalents.
j. Income taxes
Deferred income taxes are provided, if appropriate, to reflect the tax effect of differences between the financial statement and income tax basis of assets and liabilities. These differences result from the utilization of net operating losses. See Note 8.
k. Concentration of credit risk
Financial instruments which potentially subject the Company to concentrations of credit risk are cash and cash equivalents. The Company maintains its cash in highly rated financial institutions. As of September 30, 1996, the Company had bank deposits exceeding Federally insured limits by approximately $305,000.
l. Accounting for stock-based compensation
In October 1995, SFAS No. 123, "Accounting for Stock- Based Compensation", was issued. SFAS No. 123 establishes a fair value method of accounting for stock-based compensation plans either through recognition or disclosure. The Company intends to adopt the disclosure provisions of the Statement and, therefore, does not anticipate that SFAS No. 123 will have a material impact on its financial position, results of operations or cash flows.
m. Fair value of financial instruments
The carrying amounts of financial instruments, including cash and short-term debt, approximated fair value as of September 30, 1996 and 1995. The carrying value of long-term debt, including the current portion, approximated fair value as of September 30, 1996 and 1995, based upon the borrowing rates currently available to the Company for bank loans with similar terms and maturities.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
Note 2. Bankruptcy Reorganization
On September 15, 1993, the former Chief Executive Officer of the Company caused a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code to be filed on behalf of the Company in the Bankruptcy Court. As of that date, liabilities of the Company aggregated approximately $2,168,500, which exceeded the Company's assets of $252,000 by $1,916,500. The Company operated as a debtor under Chapter 11 of the United States Bankruptcy Code until September, 1994, at which date a Trustee was appointed. On March 31, 1995, a Plan of Reorganization ("the Plan") was confirmed. In the interim, the Chief Executive Officer was replaced and new management installed.
The Plan established different classes of creditors or equity interests and specified the property, if any, that was to be distributed to each class. As more fully detailed below, the Plan provides for distribution to the creditors of cash, Fingermatrix New Common Stock, A- Warrants, B-Warrants, and C-Warrants, and other consideration. See Notes 7 and 8 for further discussion of stock and warrant issuances.
The Company restructured $2,920,890 of liabilities by the payment of $447,150 on the distribution date (April 19, 1995), a commitment to pay $332,166 in the future, and the issuance of common stock and warrants valued at $360,448 in lieu of a cash payment (Note 10f), resulting in an extraordinary gain of $1,781,128 during the year ended September 30, 1995. This settlement represents a payment of approximately 27 cents for every dollar of pre-petition debt. During the term of the bankruptcy, the Company incurred $714,092 of bankruptcy administrative costs. These costs, primarily professional fees for attorneys and accountants, were expensed during the two years ended September 30, 1995. Through September 30, 1996, all Plan required payments had been made by the Company.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1996, 1995 AND 1994
Note 2. Bankruptcy Reorganization (continued)
The following is a summary of the cash, common stock and warrant distributions scheduled to be made under the Plan as modified by the Board of Directors and approved by the Shareholders:
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
Note 3. Inventories
As of September 30, 1996, inventories consisted of raw material components purchased in the 1996 fiscal year, to be utilized in the production of the Company's fingerprint identification systems.
As of May 31, 1992, the Company's financial statements reflected inventory aggregating $502,582. However, the Company's limited sales led management to re-evaluate its inventory and a determination was made that new prototypes were required and the Company's existing inventory had no market value. Accordingly, all inventory was written off and no inventory was reflected in the accompanying financial statements for 1995 and 1994.
Note 4. Accrued Expenses
Details of accrued expenses as of September 30, 1996 and 1995 are as follows: 1996 1995 ---- ---- Accrued salaries $ 22,968 $302,625 Bankruptcy administration costs -- 595,794 Patent professional fees and costs 32,689 -- Other 70,802 79,258 -------- -------- $126,459 $977,677 -------- -------- -------- --------
Note 5. Note Payable
As of the balance sheet dates, note payable is comprised of the following:
September 30, ------------- 1996 1995 ---- ---- Convertible note payable--Tampa Firefighters' and Police Officers' Pension Fund; post-petition financing; note bears interest at prime, plus 4% per annum (12.75% at September 30, 1995), convertible into 250,000 shares of common stock; maturity May 30, 1996 (a) $ -- $250,000 -------- -------- -------- --------
(a) On May 23, 1996, the note was converted by the note holder into 250,000 shares of common stock.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
Note 6. Long-term Debt
As of September 30, 1996 and 1995, long-term debt is comprised of the following:
Note payable--SIS Capital Corp. ("SIS) post- petition financing; note in the original amount of $1,067,000 was collateralized by a first lien upon all Company assets and bears interest at prime, plus 2% (10.25% and 10.75% at September 30, 1996 and 1995, respectively); note is payable in three $200,000 semi-annual installments, commencing October 19, 1995; the principal balance and all accrued interest is payable April 19, 1997 (as of September 30, 1996 and 1995, related accrued interest aggregated $15,552 and $35,744, respectively)(a) $417,000 $ 817,000
Pre-petition payables due in three semi-annual payments, commencing October 19, 1995, without interest (final payment made October 19, 1996): Unrelated creditors 41,990 176,006 Related parties (see Note 10a) 45,849 175,656 -------- ---------- 504,839 1,168,662 Less current portion 504,839 628,003 -------- ----------
$ - $ 540,659 -------- ---------- -------- ----------
(a) On June 1, 1996, SIS agreed to waive and discharge its first priority security interest and lien on the Company's assets.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
Note 7. Preferred and Common Stock
Effective with the bankruptcy reorganization consummated on March 31, 1995, the Company's entire preferred and common stock structure was changed. As of that date, all issued and outstanding convertible preferred $.01 par value shares and common $.02 par value shares were canceled and new common stock with $.01 par value was issued.
In conjunction with the reorganization, the Company arranged for new stockholders to invest $480,463 in exchange for 300,000 new common shares. Said proceeds were received in April, 1995. The Plan of Reorganization had allotted, 825,000 shares for issuance to said new stockholders, which would have represented an ownership of 271/2% in the Company. See chart in Note 2. These shareholders were also issued 500,000 A-Warrants and 250,000 B-Warrants.
In October, 1994, $250,000 was received from another investor. The proceeds represented a convertible note payable with interest at prime, plus 4% (11.75%). In April, 1995, the note was converted into 250,000 shares of common stock. Accrued interest was forgiven upon conversion and was included in the gain on debt restructuring.
The Company has 1,000,000 shares of preferred stock ($.01 par value) authorized, however, none are issued or outstanding. All prior classes of preferred had been canceled and exchanged for New Common Stock under the Plan. The Preferred Stock may be issued in one or more series by the Board of Directors without further shareholder action and shall contain such terms and designations as the Board of Directors may fix.
Note 8. Stock Warrants and Options
a. In addition to the common shares issued as part of the revision of the capital structure of the Company discussed in Note 7 above, the Company issued three classes of common stock warrants, Series A, B and C. The number of warrants expected to be issued is detailed in the chart in Note 2. Pursuant to the terms of the reorganization plan, all previously issued warrants that were not fully exercised, exchanged and evidenced by stock certificates were canceled. Class A warrants expired January 16, 1996, except for 500,000 warrants issued to three individuals who were instrumental in securing financing for the Company.
In conjunction with the overall settlement of claims between the Company and the former Chief Executive Officer, the Company issued an additional 200,000 common stock warrants ("additional warrants") that were exercisable at $.01 per share and which were exercised in September, 1996.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
Note 8. Stock Warrants and Options (continued)
As of September 30, 1996, the number of warrants exercisable is detailed in the chart below:
Exercise Number of price per Expiration Total Class warrants share date Amount ----- --------- --------- ---------- ------ B Warrants 1,245,681 $2.00 January 14, 1997 2,491,362 C Warrants 100,000 $ .01 April 17, 2000 1,000
Class B warrants entitle the holder thereof to purchase for $2.00 one share of common stock in exchange for one warrant.
Class C and additional Warrants entitle the holder thereof to purchase for $.01 one share of common stock in exchange for one warrant.
Class A warrants entitled the holder thereof to purchase for $1.00 one share of common stock in exchange for one warrant. Exercising party also received one-half of one B Warrant.
b. On July 21, 1995, the Company adopted and the Stockholders subsequently approved, an Employee Stock Option Plan ("ESOP") that covers employees of the Company and an Outside Directors Stock Option Plan ("DSOP"). The Company has reserved 850,000 shares of common stock for issuance to key employees and/or directors under these plans. Changes in the shares authorized, granted and available under the Plans are as follows: Number of Shares ------ Authorized July 21, 1995 (1) 850,000 Granted (578,500) Exercised -- ------- Available, September 30, 1995 271,500
Granted (34,000) Terminated 42,500 Exercised -- ------- Available, September 30, 1996 280,000 ------- ------- (1) Date of adoption of Plan.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
Note 8. Stock Warrants and Options (continued)
Option exercise prices pursuant to the ESOP and DSOP shall not be less than 85% and 100%, respectively, of the fair market value of the common stock at the time of the Grant. During the years ended September 30, 1996 and 1995, options were granted at prices ranging from $1.75 to $2.375 per share. Exercise periods are for ten years (5 years for certain incentive stock options), but terminate at a stipulated period of time after an employees' death or termination of employment for causes other than disability or retirement. No options have been exercised since inception of the plans. The options become exercisable in such installments, which need not be equal, and at such times as designated by the Compensation Committee.
Note 9. Income Taxes
The Company, as of September 30, 1996, has available approximately $47,762,000 of net operating loss carryforwards to reduce future Federal and state income taxes. In addition, the Company had available investment tax credits of approximately $15,100, expiring 1996 through 2001, and research tax credits of approximately $585,000 which began to expire in the fiscal year ended May 31, 1993. Since there is no guarantee that the related deferred tax asset will be realized by reduction of taxes payable on taxable income during the carryforward period, a valuation allowance in the amounts of $19,012,000 and $18,667,000, respectively, has been computed to offset in its entirety the deferred tax asset attributable to the net operating loss and tax credits.
The net operating loss carryforwards expire as follows:
Year NOL Amount ---- ------------- 1997 $ 2,549,215 1998 3,878,063 1999 3,181,148 2000 3,290,778 2001 4,047,945 2002 5,383,607 2003 5,162,539 2004 5,615,608 2005 2,207,073 2006 2,792,000 2007 3,671,988 2008 903,462 2009 2,604,658 2010 2,473,840 ----------- $47,761,924 ----------- -----------
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
Note 9. Income Taxes (continued)
Under Section 382 of the Internal Revenue Code of 1986, the use of the Company's net operating loss carryforwards and various business tax credits may be limited after the occurrence of an ownership change, as defined. An ownership change is a series of transactions resulting in an increase of more than 50 percentage points in the percentage of ownership interest in stockholders who, before or after such ownership change, own, directly, or indirectly, 5% or more of the stock of such corporation.
Note 10. Commitments and Contingencies
a. The Company leases its office and factory space pursuant to a non-cancelable operating lease which expires in November, 1998. The terms of the lease require the Company to pay for its own electricity, in addition to the basic annual rental which increases from $47,061 to $54,479 over the term of the lease.
The future minimum annual rental commitments at September 30, 1996 on long-term leases is as follows:
1997 $51,885 1998 54,479 1999 6,810
Rental expense for each of the periods was as follows:
Year ended September 30, 1994 $471,280 Year ended September 30, 1995 64,751 Year ended September 30, 1996 73,019
During the pendency of the bankruptcy reorganization, the former President and his family made claims for, among other things, back rent, diminution of value of their building and unpaid real estate taxes. The Trustee reached an accord with said individuals that aggregated $907,000, which was included in the class of general unsecured creditors. A substantial portion of this amount was classified as rent expense in the 1994 financial statements.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
Note 10. Commitments and Contingencies (continued)
b. The Company has an employment agreement Thomas T. Harding, who is serving as President, providing for an annual salary of $140,000, which agreement expires in April, 1997. The agreement is automatically renewed unless either the Company or the employee gives 30 days written notice terminating the contract.
c. Effective January 1, 1990, the Company established a 401(K) defined contribution and trust plan which covers substantially all officers and employees upon completion of six months employment. Officers and employees may contribute from 1% to 15% of their compensation. The Company may contribute to the fund at the discretion of management. During the three years ended September 30, 1996, the Company did not make a contribution. The Company has elected to pay the plan administrative expenses, which were nominal, for this period.
d. At September 30, 1996, 2,195,681 shares of the Company's common stock were reserved for issuance in connection with the exercise of warrants, grants to employees, and the employee and director stock option plan (see Note 2 and Note 7).
e. On August 30, 1995, the Company executed a stock purchase agreement with an offshore corporation that provided for said investor to purchase 2,000,000 shares of common stock at $1.00 per share for an aggregate $2,000,000 cash investment. Through September 30, 1995 and 1996, the Company had received $1,000,000 and $1,500,000, respectively, towards this purchase. By December 2, 1996, the unpaid balance of $500,000 was received in full.
f. On October 5, 1995, the Company settled a disputed $395,000 claim, with a former customer by issuing securities as discussed below with an estimated value of $360,448. The customer had been seeking a refund of monies previously paid to the Company for sales. However, in lieu of cash, the settlement required the Company to issue 53,098 shares of common stock, 88,143 Class A warrants, and related 44,072 Class B warrants. Additionally, the customer received 50,000 additional Class A warrants and the Company gave a $25,000 credit towards the exercise of these additional Class A warrants. The gain on debt restructuring in the accompanying statement of operations for the year ended September 30, 1995 has been charged $360,448 to reflect the cost to the Company of this settlement.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
Note 10. Commitments and Contingencies (continued)
g. To correct an error in the Plan, on October 24, 1995, the Company approved the distribution of new common stock and warrants to holders of the Series B convertible preferred stock and certain present and former employees who were not fully covered by the original distribution made on April 19, 1995. The series B preferred shares were erroneously treated as if they were old common stock for purposes of the exchange into new common stock, when as a matter of right, each said share was convertible into five shares of new common. The additional shares and warrants aggregated 180,826 and 301,256, respectively.
h. During the pendency of the bankruptcy reorganization, a Stockholders' Alliance was formed by a group of common stock owners. Said Alliance incurred certain legal and professional fees in connection with financing and other company related matters. To reimburse the Alliance for said expenses, the Board of Directors approved the issuance of 62,032 shares to the individuals who comprised the Alliance.
i. In 1992, the Company issued 2,344,000 stock options to three key employees at below market price. The difference between the market price and the exercise price of the options granted aggregated $3,513,000 and was charged to deferred compensation - stock options and additional paid-in-capital was credited. In subsequent periods, the options were terminated due to the departure of the employees. At that time, the unamortized portion was written off and additional paid in capital was charged. For the year ended September 30, 1995, said charge amounted to $1,423,582.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS.
(a) The following documents are included in Part II, Item 8 of this report:
1. Report of Independent Auditors &
2. Balance Sheets as of September 30, 1996, 1995 &
3. Statements of Operations for the three years ended September 30, 1996, 1995 and 1994, from inception to September 30, 1996 &
4. Statements of Shareholders' Equity (Deficiency) from inception (May 1976) to September 30, 1996 to
5. Statements of Cash Flows for the three years ended September 30, 1996, 1995 and 1994 to
6. Statement of Changes of Financial Position &
7. Notes to Financial Statements to
(b) Report on Forms 8-K:
On July 10, 1996, the Registrant filed a Form 8-K with respect to litigation commenced by Michael Schiller. See "LEGAL PROCEEDINGS - Pending Litigation", Part I, Item 3(a) of this Form 10-K for result of this litigation.
Subsequent to September 30, 1996, Registrant filed the following Forms 8-K:
1. On November 5, 1996, pertaining to resignation of Lewis Schiller as a director.
2. On December 17, 1996, pertaining to sale of Common Stock to PT. Dolak. See "CERTAIN RELATIONSHIPS AND SPECIAL TRANSACTIONS - Purchase of 2,000,000 Shares of Common Stock at $1.00 Per Share", Part I, Item 13 of this Form 10-K.
(c) Exhibits:
Exhibit Description of Exhibits - ------- ----------------------- 22 Report of Results of Voting at the Annual Meeting of 8/6/96
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: December 19, 1996
FINGERMATRIX, INC.
By: S/ Thomas T. Harding Thomas T. Harding President
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.
Dated: December 19, 1996 S/ Thomas T. Harding Thomas T. Harding Chief Executive Officer and Director
Dated: December 20, 1996 S/ Gordon R. Molesworth Gordon R. Molesworth Secretary, Director
Dated: December , 1996 S/ Seth Lukash Seth Lukash, Director
Dated: December 20, 1996 S/ Fred I. Sonnenfeld Fred I. Sonnenfeld, Director
Supplemental Information to be Furnished With Reports Filed Pursuant to Section 15(d) of the Act.
The annual report for the year ended September 30, 1996 and proxy material for 1997 annual meeting shall be subsequently furnished to security holders of Registrant and copies thereof shall be furnished to the Commission upon transmittal to the security holders.
EXHIBIT 22(i)
REPORT OF RESULTS OF VOTE AT ANNUAL MEETING OF 8/6/96
TOTAL OUTSTANDING SHARES: 7,632,791.090 TOTAL SHARES VOTED : 4,444,646.000* TOTAL PERCENTAGE VOTED : 58.200
FINGERMATRIX, INC. (A Development Stage Company)
FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY)
Page Number
Auditor's Report -
Balance Sheets -
Statements of Operations -
Statements of Stockholders' Equity (Deficiency) -
Statements of Cash Flows -
Consolidated Statement of Changes in Financial Position -
Notes to Financial Statements -
FARBER, BLICHT & EYERMAN, LLP Certified Public Accountants 255 Executive Drive, Suite 215 Telephone: (516) 576-7040 Plainview, NY 11803-1715 Facsimile: (516) 576-1232
To the Board of Directors and Stockholders of Fingermatrix, Inc. Dobbs Ferry, NY
We have audited the accompanying balance sheets of Fingermatrix, Inc. (a development stage company) as of September 30, 1996 and 1995, and the related statements of operations, stockholders' equity (deficiency in assets), and cash flows for the years then ended. 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 generally accepted auditing standards. Those standards require that we plan and perform the audits 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 Fingermatrix, Inc. as of September 30, 1996 and 1995, and the results of operations and its cash flows for the years then ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Notes 1a and 2 to the financial statements, the Company is a development stage company that emerged from bankruptcy in April, 1995, generated no revenue in 1996 and 1995, and has limited working capital at September 30, 1996. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustment that might result from the outcome of these uncertainties.
To the Board of Directors and Stockholders of Fingermatrix, Inc. We were engaged to audit the statements of operations, stockholders' deficiency in assets and cash flows for the year ended September 30, 1994. These financial statements are the responsibility of the Company's management. Because of the significance of the matters discussed in the immediately following paragraph, the scope of our work was not sufficient to enable us to express, and we do not express, an opinion on the 1994 financial statements referred to above.
We were unable to locate missing accounting and bookkeeping records, which included, among other things, contracts and invoices for the 1994 year, which precluded us from verifying cash receipts, disbursements, purchases and revenues. Additionally, related accounting records of the Company's accounts receivable and payable were either missing or incomplete. Due to the loss of accounting records, there were unreconciled differences in common stock as recorded by the Company and the stock transfer agent. We were unable to satisfy ourselves about the above items by means of other auditing procedures.
FARBER, BLICHT & EYERMAN, LLP
Plainview, New York November 18, 1996, except for Note 10e, which is as of December 2, 1996
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
SEPTEMBER 30, 1996 AND 1995
ASSETS ------
1996 1995 Current assets: ---- ---- Cash and cash equivalents $404,986 $1,067,577 Restricted cash (Note 1i) -- 31,825 Inventories (Notes 1c and 3) 78,870 -- Prepaid expenses and other current assets 156,842 20,855 -------- ---------- Total current assets 640,698 1,120,257 -------- ---------- Property, plant and equipment--at cost (Note 1d): Equipment 206,281 44,964 Leasehold improvements 21,024 -- Furniture and fixtures 11,603 561 -------- ---------- 238,908 45,525 Less allowance for depreciation and amortization 64,600 32,715 -------- ---------- 174,308 12,810 -------- ---------- Other assets: Patents (Note 1f) 241,533 224,385 Less accumulated amortization 108,180 94,961 -------- ---------- 133,353 129,424 Deposits 13,605 12,805 -------- ---------- 146,958 142,229 -------- ---------- Total assets $961,964 $1,275,296 -------- ---------- -------- ----------
See notes to financial statements.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
SEPTEMBER 30, 1996 AND 1995
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS)
1996 1995 Current liabilities: ---- ---- Accounts payable--trade $ 1,291 $ 34,965 Accrued expenses (Note 4) 126,459 977,677 Note payable (Note 5) -- 250,000 Current portion of long-term debt (Note 6) 504,839 628,003 ------------ ------------ Total current liabilities 632,589 1,890,645
Long term debt (Note 6) -- 540,659 ------------ ------------ Total liabilities 632,589 2,431,304 ------------ ------------ Comments, commitments and contingencies (Note 10)
Stockholders' equity (deficiency in assets) (Note 7): Common stock--$.01 par value: 20,000,000 shares authorized; 8,206,250 and 3,945,404 shares issued and outstanding 82,062 39,454 Additional paid in capital 60,452,875 56,412,163 Deficit accumulated during the development stage (60,205,562) (57,607,625) ------------ ------------ Stockholders' equity (deficiency in assets) 329,375 (1,156,008) ------------ ------------ Total liabilities and stockholders' equity (deficiency in assets) $ 961,964 $ 1,275,296 ------------ ------------ ------------ ------------
See notes to financial statements.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF OPERATIONS
See notes to financial statements.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENT OF OPERATIONS
(Continued)
See notes to financial statements.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) FROM INCEPTION (MAY, 1976) TO SEPTEMBER 30, 1996
See notes to financial statements.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) FROM INCEPTION (MAY, 1976) TO SEPTEMBER 30, 1996
See notes to financial statements.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) FROM INCEPTION (MAY, 1976) TO SEPTEMBER 30, 1996
See notes to financial statements.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) FROM INCEPTION (MAY, 1976) TO SEPTEMBER 30, 1996
See notes to financial statements.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) FROM INCEPTION (MAY, 1976) TO SEPTEMBER 30, 1996
See notes to financial statements.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) FROM INCEPTION (MAY, 1976) TO SEPTEMBER 30, 1996
See notes to financial statements.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) FROM INCEPTION (MAY, 1976) TO SEPTEMBER 30, 1996
See notes to financial statements.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) FROM INCEPTION (MAY, 1976) TO SEPTEMBER 30, 1996
See notes to financial statements.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) FROM INCEPTION (MAY, 1976) TO SEPTEMBER 30, 1996
See notes to financial statements.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) FROM INCEPTION (MAY, 1976) TO SEPTEMBER 30, 1996
See notes to financial statements.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) FROM INCEPTION (MAY, 1976) TO SEPTEMBER 30, 1996
See notes to financial statements.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) FROM INCEPTION (MAY, 1976) TO SEPTEMBER 30, 1996
See notes to financial statements.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) FROM INCEPTION (MAY, 1976) TO SEPTEMBER 30, 1996
See notes to financial statements.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
See notes to financial statements.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
See notes to financial statements.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION
From inception (May 1976) to May 31, 1988 (*) Use of funds: Operations: Net loss $29,530,169 Items not consuming working capital: Depreciation and amortization (1,267,675) Amortization of deferred compensation-stock options (885,586) Common stock and warrants issued under settlement of law suit (425,000) Write-off of certain fixed assets (365,440) Write-off of certain patents (220,238) Stock appreciation rights (924,301) ----------- Working capital consumed by operations 25,441,929
Expenditures for patent applications 570,805 Acquisition of fixed assets 1,547,222 Deferred compensation - stock options 3,175,212 Reclassification of test equipment from inventory to fixed assets 633,319 Increase in deferred charges 209,187 Common stock issued in connection with acquisition of fixed assets 81,276 Common stock issued in connection with acquisition of patents 25,115 Long-term debt converted into common stock 444,500 Payments and current maturities of long-term debt 1,506,173 Preferred dividends paid 224,747 Loans receivable from employees 80,897 ----------- Total funds consumed 33,940,382 ----------- Sources of funds: Collections of loans receivable from employees 80,897 Decrease in deferred charges 100,418 Increase in long-term debt 1,950,672 Issuances of common stock 32,695,141 Issuances of preferred stock 5,976,001 Proceeds from sale of warrants 17,000 Issuance of stock options 3,636,562 ----------- Total funds provided 44,456,691 ----------- Net increase in working capital 10,516,309 Working capital--inception -- ----------- Working capital, May 31, 1988 $10,516,309 ----------- ----------- (*) Not covered by Auditors' Report.
See notes to financial statements.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION
(Continued)
From inception (May 1976) to May 31, 1988 (*) ----------------- Changes in components of working capital: Increase in current assets: Cash $ 9,045,038 Accounts receivable 76,203 Interest receivable 364,055 Loans receivable from employees 37,264 Inventory 1,584,903 Prepaid expenses and other current assets 125,163 (Increase) in current liabilities: Accounts payable (456,779) Accrued expenses (259,538) ----------- Net increase in working capital $10,516,309 ----------- -----------
(*) Not covered by Auditors' Report.
See notes to financial statements.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
Note 1. Summary of Significant Accounting Policies
a. Organization, history and basis of presentation
The Company was incorporated in the State of New York in May, 1976. For the period from its inception through September 30, 1996, the Company has been in the development stage and, accordingly, has directed its efforts and resources to product and prototype development and production planning of its electronic fingerprint identification systems. The Company operated as a debtor in possession pursuant to Chapter 11 of the Federal Bankruptcy Code until September, 1994, at which date a Trustee was appointed. On March 31, 1995, a Plan of Reorganization was confirmed and, accordingly, the Company exited from protection of the Bankruptcy Court and the Company's Management was transferred to a Board of Directors.
The financial statements have been prepared assuming that the Company will continue as a going concern which is dependent upon the successful completion of the Company's development program, fulfilling of its obligations pursuant to the Plan of Reorganization, generating sufficient sales to obtain profitable operations and its ability to obtain additional working capital or financing, if necessary. During the three years ended September 30, 1996, the Company had aggregate operating revenues of $29,000 while incurring losses before extraordinary credits aggregating $6,850,900 during the same period. Additionally, the Company has an accumulated deficit of $60,205,562 as of September 30, 1996. The Company's recurring losses from operations and lack of sufficient working capital raise substantial doubt about the Company's ability to continue as a going concern (see Note 2).
The Company believes that its existing cash and the proceeds from future anticipated equity contributions from the exercise of warrants and additional equity commitments made from one investor (Note 10e) will generate sufficient cash to maintain its operations through January, 1997. In order to continue its operations and meet its reorganization plan obligations, management has taken steps to produce a prototype of its fingerprint identification systems equipment, which it intends to market to law enforcement agencies, commercial enterprises or other agencies and organizations that can utilize these type of products. Based upon the reactions received by the potential customers to date, the Company believes that its scanner and technology will be well received. Production commenced in the quarter ended December 31, 1996 on the Single Finger Access Control System.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
Note 1. Summary of Significant Accounting Policies (continued)
b. Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
c. Inventory valuation
Inventories are valued at the lower of cost (first-in, first-out) or market. See Note 3.
d. Property and equipment
Depreciation is computed on the straight-line method over the estimated useful lives of the assets, which is generally five years. Leasehold improvements are amortized on the straight-line basis over the shorter of their estimated useful lives or the remaining lease term. Any gain or loss realized on disposition is recorded in operations at the time of the disposal. Expenditures for maintenance, repairs, renewal and betterments are reviewed by management and only those expenditures representing improvements to property and equipment are capitalized (see Note 1f).
e. Research and development
The Company accounts for software development costs in accordance with Statement of Financial Accounting Standards No. 86 "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed". Accordingly, certain software development costs incurred will be capitalized after technological feasibility has been demonstrated. Technological feasibility is determined when planning, designing, coding and testing have been completed according to design specifications. Commencing with product introduction, such capitalized amounts will be amortized on a product-by-product basis at the greater of the amount computed using (a) the ratio of current revenues for a product to the total of current and anticipated future revenues or (b) the straight-line method over the remaining estimated economic life of the product. Amortization of capitalized software costs will be charged to cost of product revenues and cost of services revenues. As testing of the Company's products has not been completed, no software development costs have been capitalized from inception through September 30, 1996. Research and development expenditures are charged to research and development in the period incurred.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
Note 1. Summary of Significant Accounting Policies (continued)
f. Patents and intangible assets
The cost of obtaining patents is amortized on the straight-line method over 17 years. Patent application costs are deferred until a patent is received or the application is abandoned. During the year ended September 30, 1996, patent application costs aggregated $17,148. Costs incurred to maintain patents in good standing are expensed as incurred. Amortization of patent costs was $13,219, $15,815 and $15,815 for the years ended September 30, 1996, 1995 and 1994, respectively.
In fiscal 1996, the Company adopted Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". Accordingly, the Company evaluates asset recoverability at each balance sheet date or when an event occurs that may impair recoverability of the asset. The Company determines the recoverability of the carrying amount of each intangible asset by reviewing the following factors: the undiscounted value of expected operating cash flows in relation to its net capital investment, the estimated useful or contractual life of the intangible asset, the contract or product supporting the intangible asset, and in the case of purchased technology and capitalized software development costs, the Company will periodically review the recoverability of the assets value by evaluating its products with respect to technological advances, competitive products and the needs of its customers. During fiscal 1996, the Company did not incur any long- lived asset impairment losses.
g. Revenue recognition
The Company recognizes revenues from customers upon delivery and installation, subject to acceptance by the customer, of its systems. Service contract revenues are recognized as earned, pursuant to the terms of the contract.
h. Earnings (loss) per common share
Earnings (loss) per common share is computed using the income (loss) for the year adjusted for preferred dividends divided by the weighted average number of common shares outstanding during the respective periods. Retroactive effect has been given for all periods shown for the reverse .07 for 1 stock split effected April, 1995 concurrent with the bankruptcy plan confirmation. Common stock equivalents, convertible notes and convertible preferred stock outstanding, were not included in the computation, since the effect of their inclusion would be anti-dilutive or immaterial.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
Note 1. Summary of Significant Accounting Policies (continued)
i. Cash equivalents and restricted cash
Cash and cash equivalents generally consist of cash and money market instruments. These securities have original maturity dates not exceeding three months. Such investments are stated at cost which approximates fair value and are considered cash equivalents for purposes of reporting cash flows.
Cash that has been segregated for settlement of pending bankruptcy claims, which is under the control of a court-appointed trustee, is deemed restricted cash and is not included in cash equivalents.
j. Income taxes
Deferred income taxes are provided, if appropriate, to reflect the tax effect of differences between the financial statement and income tax basis of assets and liabilities. These differences result from the utilization of net operating losses. See Note 8.
k. Concentration of credit risk
Financial instruments which potentially subject the Company to concentrations of credit risk are cash and cash equivalents. The Company maintains its cash in highly rated financial institutions. As of September 30, 1996, the Company had bank deposits exceeding Federally insured limits by approximately $305,000.
l. Accounting for stock-based compensation
In October 1995, SFAS No. 123, "Accounting for Stock- Based Compensation", was issued. SFAS No. 123 establishes a fair value method of accounting for stock-based compensation plans either through recognition or disclosure. The Company intends to adopt the disclosure provisions of the Statement and, therefore, does not anticipate that SFAS No. 123 will have a material impact on its financial position, results of operations or cash flows.
m. Fair value of financial instruments
The carrying amounts of financial instruments, including cash and short-term debt, approximated fair value as of September 30, 1996 and 1995. The carrying value of long-term debt, including the current portion, approximated fair value as of September 30, 1996 and 1995, based upon the borrowing rates currently available to the Company for bank loans with similar terms and maturities.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
Note 2. Bankruptcy Reorganization
On September 15, 1993, the former Chief Executive Officer of the Company caused a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code to be filed on behalf of the Company in the Bankruptcy Court. As of that date, liabilities of the Company aggregated approximately $2,168,500, which exceeded the Company's assets of $252,000 by $1,916,500. The Company operated as a debtor under Chapter 11 of the United States Bankruptcy Code until September, 1994, at which date a Trustee was appointed. On March 31, 1995, a Plan of Reorganization ("the Plan") was confirmed. In the interim, the Chief Executive Officer was replaced and new management installed.
The Plan established different classes of creditors or equity interests and specified the property, if any, that was to be distributed to each class. As more fully detailed below, the Plan provides for distribution to the creditors of cash, Fingermatrix New Common Stock, A- Warrants, B-Warrants, and C-Warrants, and other consideration. See Notes 7 and 8 for further discussion of stock and warrant issuances.
The Company restructured $2,920,890 of liabilities by the payment of $447,150 on the distribution date (April 19, 1995), a commitment to pay $332,166 in the future, and the issuance of common stock and warrants valued at $360,448 in lieu of a cash payment (Note 10f), resulting in an extraordinary gain of $1,781,128 during the year ended September 30, 1995. This settlement represents a payment of approximately 27 cents for every dollar of pre-petition debt. During the term of the bankruptcy, the Company incurred $714,092 of bankruptcy administrative costs. These costs, primarily professional fees for attorneys and accountants, were expensed during the two years ended September 30, 1995. Through September 30, 1996, all Plan required payments had been made by the Company.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1996, 1995 AND 1994
Note 2. Bankruptcy Reorganization (continued)
The following is a summary of the cash, common stock and warrant distributions scheduled to be made under the Plan as modified by the Board of Directors and approved by the Shareholders:
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
Note 3. Inventories
As of September 30, 1996, inventories consisted of raw material components purchased in the 1996 fiscal year, to be utilized in the production of the Company's fingerprint identification systems.
As of May 31, 1992, the Company's financial statements reflected inventory aggregating $502,582. However, the Company's limited sales led management to re-evaluate its inventory and a determination was made that new prototypes were required and the Company's existing inventory had no market value. Accordingly, all inventory was written off and no inventory was reflected in the accompanying financial statements for 1995 and 1994.
Note 4. Accrued Expenses
Details of accrued expenses as of September 30, 1996 and 1995 are as follows: 1996 1995 ---- ---- Accrued salaries $ 22,968 $302,625 Bankruptcy administration costs -- 595,794 Patent professional fees and costs 32,689 -- Other 70,802 79,258 -------- -------- $126,459 $977,677 -------- -------- -------- --------
Note 5. Note Payable
As of the balance sheet dates, note payable is comprised of the following:
September 30, ------------- 1996 1995 ---- ---- Convertible note payable--Tampa Firefighters' and Police Officers' Pension Fund; post-petition financing; note bears interest at prime, plus 4% per annum (12.75% at September 30, 1995), convertible into 250,000 shares of common stock; maturity May 30, 1996 (a) $ -- $250,000 -------- -------- -------- --------
(a) On May 23, 1996, the note was converted by the note holder into 250,000 shares of common stock.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
Note 6. Long-term Debt
As of September 30, 1996 and 1995, long-term debt is comprised of the following:
Note payable--SIS Capital Corp. ("SIS) post- petition financing; note in the original amount of $1,067,000 was collateralized by a first lien upon all Company assets and bears interest at prime, plus 2% (10.25% and 10.75% at September 30, 1996 and 1995, respectively); note is payable in three $200,000 semi-annual installments, commencing October 19, 1995; the principal balance and all accrued interest is payable April 19, 1997 (as of September 30, 1996 and 1995, related accrued interest aggregated $15,552 and $35,744, respectively)(a) $417,000 $ 817,000
Pre-petition payables due in three semi-annual payments, commencing October 19, 1995, without interest (final payment made October 19, 1996): Unrelated creditors 41,990 176,006 Related parties (see Note 10a) 45,849 175,656 -------- ---------- 504,839 1,168,662 Less current portion 504,839 628,003 -------- ----------
$ - $ 540,659 -------- ---------- -------- ----------
(a) On June 1, 1996, SIS agreed to waive and discharge its first priority security interest and lien on the Company's assets.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
Note 7. Preferred and Common Stock
Effective with the bankruptcy reorganization consummated on March 31, 1995, the Company's entire preferred and common stock structure was changed. As of that date, all issued and outstanding convertible preferred $.01 par value shares and common $.02 par value shares were canceled and new common stock with $.01 par value was issued.
In conjunction with the reorganization, the Company arranged for new stockholders to invest $480,463 in exchange for 300,000 new common shares. Said proceeds were received in April, 1995. The Plan of Reorganization had allotted, 825,000 shares for issuance to said new stockholders, which would have represented an ownership of 271/2% in the Company. See chart in Note 2. These shareholders were also issued 500,000 A-Warrants and 250,000 B-Warrants.
In October, 1994, $250,000 was received from another investor. The proceeds represented a convertible note payable with interest at prime, plus 4% (11.75%). In April, 1995, the note was converted into 250,000 shares of common stock. Accrued interest was forgiven upon conversion and was included in the gain on debt restructuring.
The Company has 1,000,000 shares of preferred stock ($.01 par value) authorized, however, none are issued or outstanding. All prior classes of preferred had been canceled and exchanged for New Common Stock under the Plan. The Preferred Stock may be issued in one or more series by the Board of Directors without further shareholder action and shall contain such terms and designations as the Board of Directors may fix.
Note 8. Stock Warrants and Options
a. In addition to the common shares issued as part of the revision of the capital structure of the Company discussed in Note 7 above, the Company issued three classes of common stock warrants, Series A, B and C. The number of warrants expected to be issued is detailed in the chart in Note 2. Pursuant to the terms of the reorganization plan, all previously issued warrants that were not fully exercised, exchanged and evidenced by stock certificates were canceled. Class A warrants expired January 16, 1996, except for 500,000 warrants issued to three individuals who were instrumental in securing financing for the Company.
In conjunction with the overall settlement of claims between the Company and the former Chief Executive Officer, the Company issued an additional 200,000 common stock warrants ("additional warrants") that were exercisable at $.01 per share and which were exercised in September, 1996.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
Note 8. Stock Warrants and Options (continued)
As of September 30, 1996, the number of warrants exercisable is detailed in the chart below:
Exercise Number of price per Expiration Total Class warrants share date Amount ----- --------- --------- ---------- ------ B Warrants 1,245,681 $2.00 January 14, 1997 2,491,362 C Warrants 100,000 $ .01 April 17, 2000 1,000
Class B warrants entitle the holder thereof to purchase for $2.00 one share of common stock in exchange for one warrant.
Class C and additional Warrants entitle the holder thereof to purchase for $.01 one share of common stock in exchange for one warrant.
Class A warrants entitled the holder thereof to purchase for $1.00 one share of common stock in exchange for one warrant. Exercising party also received one-half of one B Warrant.
b. On July 21, 1995, the Company adopted and the Stockholders subsequently approved, an Employee Stock Option Plan ("ESOP") that covers employees of the Company and an Outside Directors Stock Option Plan ("DSOP"). The Company has reserved 850,000 shares of common stock for issuance to key employees and/or directors under these plans. Changes in the shares authorized, granted and available under the Plans are as follows: Number of Shares ------ Authorized July 21, 1995 (1) 850,000 Granted (578,500) Exercised -- ------- Available, September 30, 1995 271,500
Granted (34,000) Terminated 42,500 Exercised -- ------- Available, September 30, 1996 280,000 ------- ------- (1) Date of adoption of Plan.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
Note 8. Stock Warrants and Options (continued)
Option exercise prices pursuant to the ESOP and DSOP shall not be less than 85% and 100%, respectively, of the fair market value of the common stock at the time of the Grant. During the years ended September 30, 1996 and 1995, options were granted at prices ranging from $1.75 to $2.375 per share. Exercise periods are for ten years (5 years for certain incentive stock options), but terminate at a stipulated period of time after an employees' death or termination of employment for causes other than disability or retirement. No options have been exercised since inception of the plans. The options become exercisable in such installments, which need not be equal, and at such times as designated by the Compensation Committee.
Note 9. Income Taxes
The Company, as of September 30, 1996, has available approximately $47,762,000 of net operating loss carryforwards to reduce future Federal and state income taxes. In addition, the Company had available investment tax credits of approximately $15,100, expiring 1996 through 2001, and research tax credits of approximately $585,000 which began to expire in the fiscal year ended May 31, 1993. Since there is no guarantee that the related deferred tax asset will be realized by reduction of taxes payable on taxable income during the carryforward period, a valuation allowance in the amounts of $19,012,000 and $18,667,000, respectively, has been computed to offset in its entirety the deferred tax asset attributable to the net operating loss and tax credits.
The net operating loss carryforwards expire as follows:
Year NOL Amount ---- ------------- 1997 $ 2,549,215 1998 3,878,063 1999 3,181,148 2000 3,290,778 2001 4,047,945 2002 5,383,607 2003 5,162,539 2004 5,615,608 2005 2,207,073 2006 2,792,000 2007 3,671,988 2008 903,462 2009 2,604,658 2010 2,473,840 ----------- $47,761,924 ----------- -----------
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
Note 9. Income Taxes (continued)
Under Section 382 of the Internal Revenue Code of 1986, the use of the Company's net operating loss carryforwards and various business tax credits may be limited after the occurrence of an ownership change, as defined. An ownership change is a series of transactions resulting in an increase of more than 50 percentage points in the percentage of ownership interest in stockholders who, before or after such ownership change, own, directly, or indirectly, 5% or more of the stock of such corporation.
Note 10. Commitments and Contingencies
a. The Company leases its office and factory space pursuant to a non-cancelable operating lease which expires in November, 1998. The terms of the lease require the Company to pay for its own electricity, in addition to the basic annual rental which increases from $47,061 to $54,479 over the term of the lease.
The future minimum annual rental commitments at September 30, 1996 on long-term leases is as follows:
1997 $51,885 1998 54,479 1999 6,810
Rental expense for each of the periods was as follows:
Year ended September 30, 1994 $471,280 Year ended September 30, 1995 64,751 Year ended September 30, 1996 73,019
During the pendency of the bankruptcy reorganization, the former President and his family made claims for, among other things, back rent, diminution of value of their building and unpaid real estate taxes. The Trustee reached an accord with said individuals that aggregated $907,000, which was included in the class of general unsecured creditors. A substantial portion of this amount was classified as rent expense in the 1994 financial statements.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
Note 10. Commitments and Contingencies (continued)
b. The Company has an employment agreement Thomas T. Harding, who is serving as President, providing for an annual salary of $140,000, which agreement expires in April, 1997. The agreement is automatically renewed unless either the Company or the employee gives 30 days written notice terminating the contract.
c. Effective January 1, 1990, the Company established a 401(K) defined contribution and trust plan which covers substantially all officers and employees upon completion of six months employment. Officers and employees may contribute from 1% to 15% of their compensation. The Company may contribute to the fund at the discretion of management. During the three years ended September 30, 1996, the Company did not make a contribution. The Company has elected to pay the plan administrative expenses, which were nominal, for this period.
d. At September 30, 1996, 2,195,681 shares of the Company's common stock were reserved for issuance in connection with the exercise of warrants, grants to employees, and the employee and director stock option plan (see Note 2 and Note 7).
e. On August 30, 1995, the Company executed a stock purchase agreement with an offshore corporation that provided for said investor to purchase 2,000,000 shares of common stock at $1.00 per share for an aggregate $2,000,000 cash investment. Through September 30, 1995 and 1996, the Company had received $1,000,000 and $1,500,000, respectively, towards this purchase. By December 2, 1996, the unpaid balance of $500,000 was received in full.
f. On October 5, 1995, the Company settled a disputed $395,000 claim, with a former customer by issuing securities as discussed below with an estimated value of $360,448. The customer had been seeking a refund of monies previously paid to the Company for sales. However, in lieu of cash, the settlement required the Company to issue 53,098 shares of common stock, 88,143 Class A warrants, and related 44,072 Class B warrants. Additionally, the customer received 50,000 additional Class A warrants and the Company gave a $25,000 credit towards the exercise of these additional Class A warrants. The gain on debt restructuring in the accompanying statement of operations for the year ended September 30, 1995 has been charged $360,448 to reflect the cost to the Company of this settlement.
FINGERMATRIX, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
Note 10. Commitments and Contingencies (continued)
g. To correct an error in the Plan, on October 24, 1995, the Company approved the distribution of new common stock and warrants to holders of the Series B convertible preferred stock and certain present and former employees who were not fully covered by the original distribution made on April 19, 1995. The series B preferred shares were erroneously treated as if they were old common stock for purposes of the exchange into new common stock, when as a matter of right, each said share was convertible into five shares of new common. The additional shares and warrants aggregated 180,826 and 301,256, respectively.
h. During the pendency of the bankruptcy reorganization, a Stockholders' Alliance was formed by a group of common stock owners. Said Alliance incurred certain legal and professional fees in connection with financing and other company related matters. To reimburse the Alliance for said expenses, the Board of Directors approved the issuance of 62,032 shares to the individuals who comprised the Alliance.
i. In 1992, the Company issued 2,344,000 stock options to three key employees at below market price. The difference between the market price and the exercise price of the options granted aggregated $3,513,000 and was charged to deferred compensation - stock options and additional paid-in-capital was credited. In subsequent periods, the options were terminated due to the departure of the employees. At that time, the unamortized portion was written off and additional paid in capital was charged. For the year ended September 30, 1995, said charge amounted to $1,423,582.