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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
COMMISSION FILE NUMBER 0-20270
SAFLINK CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4346070
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
18650 N.E. 67TH COURT, SUITE 210, REDMOND, WA 98052
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
(425) 881-6766
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
THERE WERE 19,510,141 SHARES OUTSTANDING OF SAFLINK CORPORATION'S
COMMON STOCK AS OF AUGUST 10, 2000.
TOTAL NUMBER OF PAGES: 15 EXHIBIT INDEX BEGINS ON PAGE 15
SAFLINK CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
INDEX
Part I. Financial Information
Item 1. Financial Statements
a. Condensed Consolidated Balance Sheets
as of June 30, 2000 and December 31, 1999..................................1
b. Condensed Consolidated Statements of Operations
for the Three and Six Month Periods Ended June 30, 2000 and 1999...........2
c. Condensed Consolidated Statements of Cash Flows
for the Six Month Periods Ended June 30, 2000 and 1999.....................3
d. Notes to Condensed Consolidated Financial Statements.......................4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................7
Item 3. Quantitative and Qualitative Disclosures About Market Risk................11
Part II. Other Information
Item 1. Legal Proceedings.........................................................12
Item 2. Changes in Securities.....................................................12
Item 3. Defaults Upon Senior Securities...........................................12
Item 4. Submission of Matters to a Vote of Security Holders.......................12
Item 5. Other Information.........................................................13
Item 6. Exhibits and Reports on Form 8-K..........................................13
Signature...................................................................................14
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PART 1 - FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
SAFLINK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
JUNE 30, DECEMBER 31,
ASSETS 2000 1999
-------- -----------
(In thousands)
Current assets:
Cash and cash equivalents $ 2,277 $ 5,335
Accounts receivable, net 350 180
Inventory 34 38
Investments 388 739
Prepaid expenses and other current assets 650 286
-------- --------
Total current assets 3,699 6,578
Furniture and equipment, net 361 204
Other assets 53 --
-------- --------
$ 4,113 $ 6,782
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 999 $ 602
Deferred revenue 602 582
-------- --------
Total current liabilities 1,601 1,184
Stockholders' equity:
Series A Preferred Stock - Liquidation preference of
$10,000,000 in aggregate as of June 30, 2000 and
December 31, 1999 1 1
Series D Preferred Stock - Liquidation preference of
$5,319,000 and $5,071,000 as of June 30, 2000 and
December 31, 1999, respectively 1 1
Common stock 195 186
Additional paid-in capital 55,985 54,577
Deferred stock-based compensation (64) --
Accumulated other comprehensive income (loss) (150) 201
Accumulated deficit (53,456) (49,368)
-------- --------
Total stockholders' equity 2,512 5,598
-------- --------
$ 4,113 $ 6,782
======== ========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
1
SAFLINK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
Revenue:
Products and services:
Software $ 329 $ 338 $ 469 $ 372
Hardware 31 6 247 21
Services and other 103 93 163 120
------------ ------------ ------------ ------------
463 437 879 513
Post contract services - government - - - 97
------------ ------------ ------------ ------------
Total revenue 463 437 879 610
Cost of revenue:
Software 8 7 12 8
Hardware 20 4 199 19
Services and other 62 14 81 27
Post contract services - government - - - 66
------------ ------------ ------------ ------------
90 25 292 120
------------ ------------ ------------ ------------
Gross profit 373 412 587 490
Operating expenses:
Product development 1,097 254 2,068 542
Sales and marketing 424 331 869 633
Minimum royalty payment - 125 - 250
Relocation 112 - 200 -
General and administrative 730 453 1,394 874
------------ ------------ ------------ ------------
Total operating expenses 2,363 1,163 4,531 2,299
------------ ------------ ------------ ------------
Loss from operations (1,990) (751) (3,944) (1,809)
Interest and other income (expense) 43 (15) 104 (10)
------------ ------------ ------------ ------------
Net loss (1,947) (766) (3,840) (1,819)
Preferred stock dividend 125 - 248 -
------------ ------------ ------------ ------------
Net loss attributable to common stockholders $ (2,072) $ (766) $ (4,088) $ (1,819)
============ ============ ============ ============
Basic and diluted loss per common share $ (0.11) $ (0.05) $ (0.21) $ (0.11)
Weighted average number of basic and diluted
common shares 19,487,141 16,785,547 19,290,800 16,763,555
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
2
SAFLINK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED JUNE 30,
2000 1999
------- --------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,840) $(1,819)
Adjustments to reconcile net loss to net cash used in operating
activities:
Stock compensation 109 -
Depreciation 87 150
Loss on disposal of furniture and equipment - 25
Changes in operating assets and liabilities:
Accounts receivable (170) (85)
Inventory 4 (53)
Prepaid expenses and other current assets (364) 37
Other assets (53) -
Accounts payable and accrued liabilities 397 213
Deferred revenue 20 (50)
------- -------
Net cash used in operating activities (3,810) (1,582)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (244) (54)
------- -------
Net cash used in investing activities (244) (54)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock upon exercise of employee
stock options and investor warrants 996 144
Proceeds from common stock subscriptions - 1,313
------- -------
Net cash provided by financing activities 996 1,457
------- -------
Net decrease in cash and cash equivalents (3,058) (179)
Cash and cash equivalents at beginning of period 5,335 1,736
------- -------
Cash and cash equivalents at end of period $ 2,277 $ 1,557
======= =======
NON CASH FINANCING AND INVESTING ACTIVITIES:
Preferred stock dividend $ 248 $ -
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
SAFLINK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements are unaudited and
condensed and, therefore, do not contain certain information included in the
annual consolidated financial statements of SAFLINK Corporation and its
wholly-owned subsidiary, SAFLINK International, Inc., (the "Company" or
"SAFLINK"). In the opinion of management, all adjustments (consisting only of
normally recurring items) it considers necessary for a fair presentation have
been included in the accompanying consolidated financial statements.
The Company's condensed consolidated interim financial statements are
not necessarily indicative of results to be expected for a full fiscal year and
should be read in conjunction with its consolidated financial statements and the
notes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999, as filed with the Securities and Exchange
Commission (the "SEC") on March 22, 2000.
Certain items in the 1999 financial statements and the notes thereto
have been reclassified to conform with the 2000 presentation of such items.
2. INVESTMENTS
At June 30, 2000, investments consist of a $100,000 bank time
certificate of deposit and an investment in publicly traded equity securities of
approximately $288,000. The time certificate of deposit, which is pledged to
secure a letter of credit issued in lieu of a security deposit related to the
lease of the Company's headquarters facility, is carried at cost and the equity
securities are classified as available-for-sale and are recorded at fair value.
Unrealized gains and losses on the available-for-sale equity securities are
reflected as a component of other comprehensive income until realized. Realized
gains and losses from the sale of available-for-sale equity securities are
determined on a specific identification method. There were no realized gains or
losses during the six months ended June 30, 2000.
A decline in market value of the available-for-sale equity securities
below cost that is deemed to be other than temporary results in the reduction in
the carrying amount to fair value. The impairment is charged to earnings and a
new cost basis for the security is established. Dividend income is recognized
when earned.
The Company has recorded deferred revenue of approximately $219,000 and
$329,000 as of June 30, 2000 and December 31, 1999, respectively, in connection
with the receipt of the equity securities as part of a strategic arrangement.
For the six months ended June 30, 2000, the Company has recorded non-cash
revenue related to this arrangement of $110,000. The Company did not record any
non-cash revenue for the comparable period in 1999.
3. STOCKHOLDERS' EQUITY
During the six months ended June 30, 2000, the Company issued 345,897
shares of Common Stock upon exercise of stock options exercised by certain
employees pursuant to provisions of the Company's 1992 Stock Incentive Plan (the
"Plan") and 520,585 shares of Common Stock upon
4
SAFLINK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
exercise of investor warrants. The options had exercise prices ranging from
$0.64 to $4.68 per share, which equaled fair values on the dates of grant. The
warrants had an exercise price of $1.00 per share.
4. SIGNIFICANT CUSTOMERS
Two customers accounted for approximately 35% and 23% of the Company's
revenues for the six months ended June 30, 2000. Two customers accounted for
approximately 52% and 13% of the Company's revenues for the six months ended
June 30, 1999. One customer accounted for approximately 65% of the Company's
revenues for the three months ended June 30, 2000. Two customers accounted for
approximately 72% and 18% of the Company's revenues for the three months ended
June 30, 1999.
5. COMPREHENSIVE LOSS
For the six months ended June 30, 2000, total comprehensive loss was
$4,191,000, which consisted of a net loss of $3,840,000 and unrealized holding
losses on investments of $351,000. For the six months ended June 30, 1999, total
comprehensive loss was $1,819,000, which equaled the net loss for the six
months. For the three months ended June 30, 2000, total comprehensive loss was
$2,138,000, which consisted of a net loss of $1,947,000 and unrealized holding
losses on investments of $191,000. For the three months ended June 30, 1999,
total comprehensive loss was $766,000, which equaled the net loss for the three
months.
6. NET LOSS PER SHARE
In accordance with Statement of Financial Accounting Standard No. 128,
"Earnings Per Share", the Company has reported both basic and diluted net loss
per common share for each period presented. Basic net loss per common share is
computed on the basis of the weighted-average number of common shares
outstanding for the period. Diluted net loss per common share is computed on the
basis of the weighted-average number of common shares plus dilutive potential
common shares outstanding. Dilutive potential common shares are calculated under
the treasury stock method. Securities that could potentially dilute basic income
per share consist of outstanding stock options and warrants and convertible
preferred stock. Net loss available to common stockholders includes net loss and
preferred stock dividends. As the Company had a net loss available to common
stockholders in each of the periods presented, basic and diluted net loss per
common share are the same. All outstanding warrants and stock options to
purchase common shares were excluded because their effect was anti-dilutive.
Potential common shares consisted of options and warrants to purchase
approximately 3.7 million and 2.5 million common shares at June 30, 2000 and
1999, respectively, and preferred stock convertible into approximately 6.4
million and 2.6 million common shares at June 30, 2000 and 1999, respectively.
7. SEGMENT INFORMATION
Operating segments are revenue-producing components of the enterprise
for which separate financial information is produced internally for the
Company's management. Under this definition, the Company operated, for all
periods presented, as a single segment.
8. LEGAL PROCEEDINGS
On June 16, 1999, International Interest Group, Inc. ("IIG") filed suit
against the Company and Mr. J. Anthony Forstmann, a former director and chairman
of the Company, in the Superior Court of the State of California for the County
of Los Angeles (Civil Action No.: BC212033). This lawsuit relates to the alleged
failure of the Company to perform under the terms of a settlement agreement
relating to another lawsuit filed by IIG. The complaint alleges three causes of
action: (i) the Company's breach of contract with IIG causing IIG to sustain
damages in excess of $1.0 million; (ii) fraud; and
5
SAFLINK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(iii) rescission by IIG against the Company and Mr. Forstmann. On the first and
second causes of action, IIG has asked the court for actual contract damages,
consequential damages, and attorney fees and costs incurred in the prosecution
of these actions. On the second cause of action, IIG has also asked for punitive
damages. On the third cause of action, IIG has asked for a judicial order of
recission restoring to IIG all rights, causes, claims and remedies in the
lawsuit. On all causes of action, IIG seeks all recoverable costs of suit
incurred, prejudgment interest on all causes of action, and other relief the
court deems just and proper. The second and third causes of action were
dismissed with prejudice by the trial court during the first quarter of 2000 but
were reinstated by the appellate court in August 2000. The Company does not
believe the claims have any merit and it intends to vigorously defend itself in
this lawsuit.
9. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133)
in June 1998. This statement, as amended, establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It requires that
entities recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. If certain conditions
are met, a derivative may be specifically designated as a hedge. The accounting
for changes in the fair value of a derivative depends on the intended use of the
derivative and the resulting designation. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. The adoption of
SFAS No. 137 is not expected to have a material impact on the Company's
consolidated financial statements.
Statement of Position No. 98-9 amends certain paragraphs of SOP No.
97-2, Software Revenue, to require using the "residual method" of revenue
recognition for multiple-element arrangements involving software bundled with
one or more undelivered elements. This SOP is effective for the Company
beginning January 1, 2000. The adoption of this statement did not have a
material impact on the Company's consolidated financial statements.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101 ("SAB No. 101") "Revenue Recognition in Financial
Statements". SAB No. 101 provides guidance on revenue recognition issues. The
SAB as amended is effective no later than the fourth quarter of the 2000 fiscal
year. The Company has not yet determined the impact, if any, that SAB No. 101 is
expected to have on the Company's consolidated financial statements.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation: an interpretation of APB
Opinion No. 25," which is effective July 1, 2000. This interpretation provides
guidance for applying provisions of APB Opinion No. 25. The adoption of this
interpretation is not expected to have a material impact on the Company's
consolidated financial statements.
6
SAFLINK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FACTORS THAT MAY AFFECT FUTURE RESULTS
Except for the historical information contained herein, certain of the
matters discussed in this quarterly report are "forward-looking statements" as
defined in Section 21E of the Securities Exchange Act of 1934, as amended, which
involve certain risks and uncertainties which could cause actual results to
differ materially from those discussed herein. In addition to other information
contained in this quarterly report, the following factors, among others, may
have affected, and in the future could affect our actual results and could cause
future results to differ materially from those in any forward looking statements
made by or on behalf of the Company. Factors that could cause future results to
differ from expectations include, but are not limited to, the following:
o our need for additional funds;
o control of the Company;
o our limited operating history and substantial accumulated net
losses;
o the SmallCap Market eligibility and maintenance requirements;
o the possible delisting of our Common Stock from the SmallCap
Market;
o technological and market uncertainty;
o rapid changes in technology;
o competition;
o our dependence upon software licensors;
o our ability to retain key employees and to attract high quality new
employees;
o shares eligible for future sale could adversely affect our ability
to raise capital and the market price for our stock;
o there is a limited public market for our common stock;
o the market price for our stock has been and may continue to be
volatile;
o we are exploring an acquisition strategy with which we have no
experience;
o our dependence on significant growth in the biometrics market;
o our marketing partners' ability to promote our products; and
o our failure to pay dividends.
These factors are discussed in greater detail in our Annual Report on Form 10-K
filed with the SEC on March 22, 2000.
A. RECENT EVENTS
On August 2, 2000, we sent a notice of default to our Australian
distributor, Triton Secure, Ltd. as a result of their failure to
satisfy the payment terms of the Master Distributor Agreement between
them and us. The provisions of the Master Distributor Agreement give
Triton 30 days from August 2, 2000 to cure the breach. The Master
Distribution Agreement currently obligates Triton to pay SAFLINK
US $200,000 annually in non-refundable prepaid license fees.
7
SAFLINK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
B. RESULTS OF OPERATING ACTIVITIES
We incurred net losses attributable to common stockholders of
approximately $2.1 million and $4.1 million for the three and six month periods
ended June 30, 2000 compared to net losses attributable to common stockholders
of approximately $766,000 and $1.8 million for the comparable periods in 1999.
These increases in net loss of approximately $1.3 million and $2.3 million,
respectively, were primarily due to increases in operating expenses of
approximately $1.2 million and $2.2 million, for the three and six month
periods, respectively, coupled with increased preferred stock dividends of
approximately $125,000 and $248,000, respectively.
REVENUE AND COST OF REVENUE
Revenue of $463,000 for the three months ended June 30, 2000 increased
approximately $26,000 (6%) from revenue of approximately $437,000 for the three
months ended June 30, 1999 while revenue of $879,000 for the six months ended
June 30, 2000 increased approximately $269,000 (44%) from revenue of $610,000
for the six months ended June 30, 1999.
Revenue from sales of commercial products and services increased
approximately $366,000 (71%) to approximately $879,000 for the six months ended
June 30, 2000 from approximately $513,000 for the six months ended June 30,
1999. Post contract services revenue decreased by approximately $97,000 (100%)
due to our decision to divest our contracts to manage the identification and
authentication aspects of the Connecticut and New Jersey welfare systems in
early 1999.
The approximately $65,000 and $172,000 increases in cost of revenue for
the three and six month periods ended June 30, 2000, respectively, when compared
to the same periods in 1999 were primarily attributable to the increase in
revenue.
The Company's gross margin percentages for the three and six month
periods ended June 30, 2000 were approximately 81% and 67%, respectively,
compared to approximately 94% and 80% for the three and six month periods ended
June 30, 1999, respectively. The changes from 1999 to 2000 were primarily due to
a change in product mix which included the elimination of post contract services
revenue and a higher level of hardware and software sales in 2000.
OPERATING EXPENSES
Total operating expenses for the three months ended June 30, 2000
increased approximately $1.2 million (103%) to approximately $2.4 million from
approximately $1.2 million for the same period in 1999. Total operating expenses
for the six months ended June 30, 2000 increased approximately $2.2 million
(97%) to approximately $4.5 million from approximately $2.3 million for the same
period in 1999.
These increases were primarily due to the expansion of product
development, sales and marketing activities in preparation for releases of our
new Internet products planned for the third quarter of this year and, to a
lesser degree, the relocation of our headquarters to Redmond, Washington
8
SAFLINK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
during the first half of this year, partially offset by the expiration of our
obligation to make minimum royalty payments of $125,000 per quarter to Cogent
Systems, Inc.
The following table provides a breakdown of the dollar and percentage
changes in operating expenses for the three and six month periods ended June 30,
2000, as compared to the same periods in 1999:
THREE MONTHS SIX MONTHS
(Dollars in thousands) INCREASE INCREASE INCREASE INCREASE
(DECREASE) (DECREASE) (DECREASE) (DECREASE)
-------- --------- --------- --------
Product development $ 843 332% $ 1,526 282%
Sales and marketing 93 28 236 37
Minimum royalty payments (125) (100) (250) (100)
Relocation 112 N.M.* 200 N.M.*
General and administrative 277 61 520 59
------- ------- ------- -------
$ 1,200 103% $ 2,232 97%
======= ======= ======= =======
* Not meaningful
PRODUCT DEVELOPMENT - The increase in product development expenses was primarily
due to the addition of new staff to enhance current products as well as to
develop new Internet products we plan to introduce during the third quarter of
this year. We expect our product development expenses to continue to increase as
we prepare for the expected release of our new Internet products during the
third and fourth quarters of this year and as we develop other additional
products and enhance existing products.
SALES AND MARKETING - The increase in sales and marketing expenses was primarily
due to increases in employee expenses, travel, and advertising expenses as we
added new staff to market our products to both commercial and governmental
organizations as they begin to redirect their information technology
expenditures to enhanced Internet and network security solutions. The sales
cycle for our products has taken longer to develop than management anticipated
due to, among other things, the lack of industry standards and acceptance by the
commercial market, the cost of hardware associated with the technology, and the
extended period of time potential customers require to test, evaluate and pilot
applications. However, we believe that a convergence of factors, including
recent decreases in hardware costs as well as the development of industry
standards, will lead to greater market acceptance of biometric security
solutions and we expect our sales and marketing expenses to continue to increase
as we continue to expand our sales and marketing activities.
GENERAL AND ADMINISTRATIVE - The increase in general and administrative expenses
was primarily due to additions to infrastructure to support our increased
product development and sales and marketing activities and we expect general and
administrative costs to continue to increase if sales of our products increase.
9
SAFLINK CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
C. LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL
Cash and working capital as of June 30, 2000 were approximately $2.3
million and $2.1 million, respectively, compared to approximately $4.2 million
and $4.3 million, respectively, as of March 31, 2000 and $5.3 million and $5.4
million, respectively, as of December 31, 1999. The decrease in the Company's
cash and working capital as of June 30, 2000 compared to March 31, 2000 and
December 31, 1999 was primarily due to net operating losses, partially offset by
proceeds of approximately $1.0 million upon the exercise of employee stock
options and investor warrants during the quarter ended March 31, 2000.
Cash as of August 10, 2000 was approximately $1.5 million. The decrease
from June 30, 2000 was primarily due to net operating losses. Absent a
significant increase in sales, which itself may require a significant increase
in working capital, we will require significant additional funds to continue our
operations beyond September 30, 2000. The options we are reviewing to obtain
additional financing include, but are not limited to, the sale and issuance of
stock, the issuance of debt, the sale of certain of our assets and
entering into a strategic transaction or business combination to either obtain
the needed funding or to create what we believe would be a better opportunity to
obtain such funds. In addition, we are seeking to raise additional capital to
accelerate our product development and sales and marketing and we have retained
the investment banking firm of H.C. Wainwright & Co., Inc. to assist us in
attempting to raise such additional capital. We have had discussions with a
variety of potential strategic partners and sources of capital and will continue
to explore and pursue opportunities with such entities, but there can be no
assurance that we will be able to obtain additional financing or enter into a
strategic transaction or business combination.
It is possible that any such infusion of capital would be in the form
of the sale and issuance of additional shares of our common stock or securities
that are convertible into our common stock, which could substantially increase
the number of shares of common stock outstanding on a fully-diluted basis. The
failure to obtain such additional funds could cause us to cease or curtail
operations. Even if such additional funding is obtained, there is no assurance
that we will be able to generate significant sales of our products or services,
or, if we are able to consummate significant sales, that any such sales would be
profitable.
DIVIDENDS
Since our incorporation, we have not paid or declared dividends on our
Common Stock, nor do we intend to pay or declare cash dividends on our Common
Stock in the forseeable future.
10
ITEM 3. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE, INVESTMENT and FOREIGN CURRENCY RISK Our exposure to
market rate risk for changes in interest rates relates primarily to the time
certificate of deposit included in our investment portfolio. Investments in
fixed rate earning instruments carry a degree of interest rate risk as their
fair market value may be adversely impacted due to a rise in interest rates. We
also currently hold equity securities of a publicly traded foreign company. This
investment is included in short-term investments and is accounted for in
accordance with the provisions of SFAS No. 115. Such an investment is subject to
significant fluctuations in fair market value due to the general volatility of
the foreign market. As a result, our financial results could be adversely
affected by factors such as changes in foreign currency exchange rates or weak
economic conditions in foreign markets.
Due in part to these factors, our future investment income may fall
short of expectations due to changes in interest rates, foreign currency
exchange rates and foreign economies or we may suffer losses if we are forced to
sell securities which have declined in market value due to changes in interest
rates, foreign currency exchange rates and foreign economies. At June 30, 2000,
we owned a time certificate of deposit in the amount of $100,000 and equity
securities with a fair market value of $288,000.
11
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 16, 1999, International Interest Group, Inc. ("IIG") filed suit
against the Company and Mr. J. Anthony Forstmann, a former director and chairman
of the Company, in the Superior Court of the State of California for the County
of Los Angeles (Civil Action No.: BC212033). This lawsuit relates to the alleged
failure of the Company to perform under the terms of a settlement agreement
relating to another lawsuit filed by IIG. The complaint alleges three causes of
action: (i) the Company's breach of contract with IIG causing IIG to sustain
damages in excess of $1.0 million; (ii) fraud; and (iii) rescission by IIG
against the Company and Mr. Forstmann. On the first and second causes of action,
IIG has asked the court for actual contract damages, consequential damages, and
attorney fees and costs incurred in the prosecution of these actions. On the
second cause of action, IIG has also asked for punitive damages. On the third
cause of action, IIG has asked for a judicial order of recission restoring to
IIG all rights, causes, claims and remedies in the lawsuit. On all causes of
action, IIG seeks all recoverable costs of suit incurred, prejudgment interest
on all causes of action, and other relief the court deems just and proper. The
second and third causes of action were dismissed with prejudice by the trial
court during the first quarter of 2000 but were reinstated by the appellate
court in August 2000. The Company does not believe the claims have any merit and
it intends to vigorously defend itself in this lawsuit.
ITEM 2. CHANGES IN SECURITIES
On May 18, 2000, the Company issued a warrant to purchase up to 25,000
shares of its Common Stock, $.01 par value, to CarrAmerica Realty Corporation
("CarrAmerica") as partial consideration for CarrAmerica to enter into a lease
agreement for the Company's new principal offices located at 18650 N.E. 67th
Court, Redmond, WA 98052. The warrant was fully vested upon grant and is
exercisable until May 31, 2005. The exercise price of $3.00 per share equals the
closing price of the Common Stock on May 18, 2000. The warrant was issued
pursuant to an exemption by reason of Section 4(2) of the Securities Act of
1933, as amended. The issuance was made without general solicitation or
advertising. CarrAmerica was an accredited investor and sophisticated investor
with access to all relevant information.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of its Stockholders held on
May 12, 2000 (the "Annual Meeting") the stockholders of the Company approved the
following proposals:
12
PROPOSAL 1. ELECTION OF DIRECTORS
The following persons were elected as directors of the Company at the
Annual Meeting to hold office for a term of one year or until their successors
have been duly elected and qualified:
VOTES VOTES BROKER
NAME VOTES FOR AGAINST WITHHELD NON-VOTES
---- --------- ------- -------- ---------
Hector J. Alcalde 17,624,784 0 38,789 0
Jeffrey P. Anthony 17,623,943 0 39,630 0
Frank M. Devine 17,628,076 0 35,497 0
Donald C. Klosterman 17,624,709 0 38,864 0
Robert J. Rosenblatt 17,626,197 0 37,376 0
Francis R. Santangelo 17,623,548 0 40,025 0
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER
--------
27 Financial Data Schedule (Electronic filing only)
(b) None
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SAFLINK CORPORATION
DATE: August 14, 2000 BY: /s/ JAMES W. SHEPPERD
----------------------------
James W. Shepperd
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
14
EXHIBIT INDEX
EXHIBIT 27 - Financial Data Schedule (Electronic Filing Only)
15