<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO _________
Commission File Number: 000-20719
PRINTRAK INTERNATIONAL INC.
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(Exact name of registrant as specified in its charter)
Delaware 33-0070547
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) dentification No.)
1250 North Tustin Avenue Anaheim, California 92807
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(Address of principal executive offices) (Zip Code)
(714) 238-2000
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
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 and (2) has been subject to such filing
requirements for the past 90 days.
X Yes No
--- ---
11,356,042 shares of the issuer's common stock, par value $0.0001 per
share, were outstanding as of October 31, 1998.
<PAGE>
FORM 10-Q
CONTENTS
PAGE
NUMBER
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PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
Consolidated Balance Sheets at September 30, 1998 (unaudited)
and March 31, 1998..................................................... 1
Unaudited Consolidated Statements of Operations for the three month
periods ended September 30, 1998 and 1997.............................. 2
Unaudited Consolidated Statements of Operations for the six month
periods ended September 30, 1998 and 1997.............................. 3
Unaudited Consolidated Statements of Cash Flows for the six month
periods ended September 30, 1998 and 1997.............................. 4
Notes to the Unaudited Consolidated Financial Statements............... 6
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................. 10
PART II - OTHER INFORMATION
Item 1: Legal Proceedings.............................................. 18
Item 2: Changes in Securities and Use of Proceeds...................... 18
Item 3: Defaults upon Senior Securities................................ 18
Item 4: Submission of Matters to a Vote of Security Holders............ 18
Item 5: Other Information.............................................. 18
Item 6: Exhibits and Reports on Form 8-K............................... 19
Signature ............................................................ 20
<PAGE>
PRINTRAK INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1998 AND MARCH 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, March 31,
1998 1998
(unaudited)
----------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................................................... $453 $ 3,763
Short-term investments............................................................ -- 1,101
Accounts receivable, net (Note 2)................................................. 27,432 28,129
Inventories, net (Note 3)......................................................... 8,860 8,229
Prepaid expenses and other current assets......................................... 1,890 2,413
Deferred income taxes............................................................. 1,763 1,763
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Total current assets......................................................... 40,398 45,398
Notes receivable from related parties................................................. 66 558
Property, plant and equipment -- net ................................................. 4,039 5,086
Deferred income taxes................................................................. 2,244 2,243
Other long-term assets................................................................ 1,853 2,475
Goodwill and other intangible assets, net............................................. 2,616 2,835
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TOTAL ASSETS $51,216 $58,595
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-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................. $6,290 $ 6,538
Accrued wages and employee benefits.............................................. 1,991 3,178
Other accrued liabilities........................................................ 6,011 7,194
Current portion of long-term debt (Note 4)....................................... 809 1,056
Deferred revenue................................................................. 10,236 8,640
Income taxes payable............................................................. 1,580 477
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Total current liabilities................................................... 26,917 27,083
Long-term debt, less current portion (Note 4)........................................ 2,228 10,960
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Total liabilities........................................................... 29,145 38,043
STOCKHOLDERS' EQUITY:
Common stock ($.0001 par value; 20,000,000 shares authorized;
11,296,241 and 11,269,203 shares issued and outstanding) ....................... 1 1
Additional paid-in capital....................................................... 18,120 17,850
Retained earnings................................................................ 4,249 3,052
Unrealized gain on short-term investments........................................ 24 11
Note receivable from stockholder................................................. (300) (300)
Cumulative foreign exchange translation adjustment............................... (23) (62)
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Total stockholders' equity.................................................... 22,071 20,552
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TOTAL LIABILITIES & STOCKHOLDER'S EQUITY $ 51,216 $ 58,595
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</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1
<PAGE>
PRINTRAK INTERNATIONAL INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three months Three months
ended ended
September 30, September 30,
1998 1997
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<S> <C> <C>
REVENUES:
System........................................................................ $16,623 $15,905
Maintenance................................................................... 3,578 3,322
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Total revenues ........................................................... 20,201 19,227
COST OF REVENUES:
System........................................................................ 8,998 9,063
Maintenance................................................................... 2,708 2,178
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Total cost of revenues ................................................... 11,706 11,241
Gross profit.............................................................. 8,495 7,986
OPERATING EXPENSES:
Research, development and engineering......................................... 1,773 2,480
Selling, general and administrative .......................................... 5,300 5,462
In-process R & D expense...................................................... - 5,900
Total operating expenses.................................................. 7,073 13,842
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Operating income (loss).................................................. 1,422 (5,856)
Other income.................................................................. 54 177
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Income (loss) before provision for income taxes........................... 1,476 (5,679)
Provision for income taxes.................................................... 517 88
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Net income (loss)......................................................... $959 $(5,767)
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Net income (loss) per common share:
Basic.................................................................... $.08 $(.52)
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Diluted.................................................................. $.08 $(.52)
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</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
2
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PRINTRAK INTERNATIONAL INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Six months Six months
ended ended
September 30, September 30,
1998 1997
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<S> <C> <C>
REVENUES:
System........................................................................ $29,216 $28,297
Maintenance................................................................... 7,422 6,192
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Total revenues ........................................................... 36,638 34,489
COST OF REVENUES:
System........................................................................ 15,235 15,397
Maintenance................................................................... 5,610 3,820
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Total cost of revenues ................................................... 20,845 19,217
Gross profit.............................................................. 15,793 15,272
OPERATING EXPENSES:
Research, development and engineering......................................... 3,853 5,070
Selling, general and administrative .......................................... 9,938 9,271
Merger expenses............................................................... -- 874
In-process R & D expense....................................................... -- 5,900
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Total operating expenses.................................................. 13,791 21,115
Operating income (loss).................................................. 2,002 (5,843)
Other (expense) income........................................................ (161) 246
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Income (loss) before provision for income taxes........................... 1,841 (5,597)
Provision for income taxes.................................................... 644 117
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Net income (loss)......................................................... $1,197 $(5,714)
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Net income (loss) per common share:
Basic..................................................................... $.11 $(.51)
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Diluted................................................................... $.10 $(.51)
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</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
PRINTRAK INTERNATIONAL INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Six months Six months
ended ended
September 30, September 30,
1998 1997
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<S> <C> <C>
Cash flows from operating activities:
Net income (loss).................................................. ...... $1,197 $(5,714)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization............................................. 1,702 1,379
Write-off of In process R&D............................................... -- 5,900
Loss on sale of fixed assets.............................................. 179 14
Deferred tax provision.................................................... -- 103
Changes in operating assets and liabilities:
Accounts receivable, net............................................... 714 (6,418)
Inventories, net....................................................... (531) 237
Prepaid expenses and other current assets.............................. 524 (1,053)
Other assets........................................................... 622 946
Accounts payable and other current liabilities......................... 855 608
Accrued liabilities.................................................... (2,373) 1,508
Deferred revenue....................................................... 1,586 1,766
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Net cash provided by (used in) operating activities....................... 4,475 (724)
Cash flows from investing activities:
Capital expenditures...................................................... (719) (679)
Proceeds from the sale of PPE............................................. 5 --
Net proceeds from notes receivable........................................ 492 (8)
Business acquisitions..................................................... -- (9,606)
Proceeds from sale of short-term investments ............................. 1,114 2,469
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Net cash provided by (used in) investing activities....................... 892 (7,824)
Cash flows from financing activities:
Proceeds from long-term debt.............................................. -- 6,523
Principal repayments on long-term debt.................................... (8,979) --
Proceeds from exercise of stock options................................... 270 752
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Net cash (used in) provided by financing activities..................... (8,709) 7,275
Effect of exchange rate changes on cash balances............................ 32 (83)
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Net change in cash and cash equivalents.................................... (3,310) (1,356)
Cash and cash equivalents, beginning of year................................ 3,763 3,832
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</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
4
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<TABLE>
<S> <C> <C>
Cash and cash equivalents, end of period.................................... $ 453 $2,476
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Non-cash transaction-transfer of inventory to (from) fixed assets........... (100) 580
Supplemental disclosure of cash flow information:
Interest paid ......................................................... $ 408 $ 95
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Income taxes paid...................................................... $ 57 $ 431
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</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
PRINTRAK INTERNATIONAL INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
GENERAL BUSINESS
Printrak International Inc. ("the Company") is a worldwide supplier of
integrated identification and information systems used primarily in criminal
justice and public safety applications, as well as in emerging applications in
civil markets such as welfare and immigration control. The Company provides
networked fingerprint, photo imaging, computer-aided dispatch and automated
records management systems, as well as digital scanning devices. The Company's
integrated systems serve approximately 700 national, state, county and municipal
agencies in 36 countries.
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission ("SEC").
The unaudited consolidated financial statements reflect all adjustments, which
are normal and recurring in nature, and which in the opinion of management are
necessary to a fair statement of the financial position and results of
operations as of September 30, 1998 and for the three month and six month
periods ended September 30, 1998 and 1997. The results of operations for the
three month and six month periods ended September 30, 1998 are not necessarily
indicative of the results of operations for the entire fiscal year ending March
31, 1999. These consolidated financial statements and related footnotes should
be read in conjunction with the consolidated financial statements and related
footnotes presented in the Company's 10-K.
NEW ACCOUNTING PRONOUNCEMENTS
REVENUE RECOGNITION - In October 1997, the AICPA issued SOP 97-2, "Software
Revenue Recognition" which later in part was amended by SOP 98-4, "Deferral of
the Effective Date of a Provision of SOP 97-2". These statements supersede SOP
91-1 under which the Company has previously been recognizing revenue. The
Company adopted SOP 97-2 for transactions entered into beginning April 1, 1998.
Pursuant to SOP 97-2, the Company recognizes revenue on contracts which do not
require significant modification or customization of software when all of the
following conditions are met: a signed contract is obtained, delivery has
occurred, the fee is fixed and determinable, collectibility is probable, and any
uncertainties with regard to customer acceptance are insignificant. A majority
of the Company's contracts include a combination of the following elements:
hardware, software, license fees, installation, program modifications, file
conversion, training, and customer support. For such contracts, revenue must be
allocated to each component based on vendor specific objective evidence of the
components fair value. Revenue allocated to undelivered products is recognized
as the above criteria are met; revenue for services is recognized as services
are performed or, for maintenance agreements, ratably over the life of the
related contract. Cash payments for systems sales or maintenance received in
advance of revenue recognition are accounted for as deferred revenue. For those
contracts which have been considered long-term contracts due to a significant
amount of customization, the Company recognizes revenue on a percentage of
completion basis.
6
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COMPREHENSIVE INCOME - Effective April 1, 1998, the Company has adopted SFAS No.
130, REPORTING COMPREHENSIVE INCOME. This statement establishes standards for
the reporting of comprehensive income and its components. Comprehensive income,
as defined, includes all changes in equity (net assets) during a period from
nonowner sources. For the three month and six month periods ending September 30,
1998, the difference between net income, as reported, and comprehensive income
was not significant.
2. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
September 30, March 31,
1998 1998
(unaudited)
------------- -------------
<S> <C> <C>
Billed receivables.................................................. $ 18,842 $ 18,641
Unbilled receivables................................................ 10,016 10,840
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28,858 29,481
Less allowance for doubtful accounts................................ (1,426) (1,352)
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$ 27,432 $ 28,129
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</TABLE>
Unbilled receivables consist of system and maintenance revenues which have been
earned but not invoiced because of contractual terms of the underlying
agreements.
3. INVENTORIES
Inventories consist of the following :
<TABLE>
<CAPTION>
September 30, March 31,
1998 1998
(unaudited)
------------- -------------
<S> <C> <C>
Raw materials ...................................................... $ 4,265 $ 4,979
Work in process..................................................... 6,293 4,657
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10,558 9,636
Less allowance for inventory obsolescence and revaluation........... (1,698) (1,407)
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$ 8,860 $ 8,229
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</TABLE>
4. DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
September 30, March 31,
1998 1998
(unaudited)
------------- -------------
<S> <C> <C>
Revolving line of credits with bank:
Working capital line ............................................ $ 617 $ 7,488
Acquisition line................................................. 2,000 4,000
</TABLE>
7
<PAGE>
<TABLE>
<S> <C> <C>
Obligations under capital leases................................. 420 528
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Total debt................................................... 3,037 12,016
Less current portion of Long-term debt........................... (809) (1,056)
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$ 2,228 $ 10,960
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</TABLE>
In July 1998, the Company negotiated an arrangement with its bank to refinance
its debt into a $15.0 million revolving credit facility to be used principally
for working capital and a $4.0 million term loan which has been utilized in the
past for acquisitions. During the third quarter of fiscal 1999 the Company
repaid the outstanding principal balance on the term loan and extended the
revolving credit facility to January 4, 2000. The revolving line of credit
agreement contains certain restrictive covenants, which restrict the Company's
ability to pay dividends and requires the Company to maintain minimum tangible
net worth and certain other financial ratios. The Company was in compliance with
these covenants as amended.
5. NET INCOME AND NET INCOME PER SHARE
SFAS No. 128 requires dual presentation of "basic" and "diluted" earnings per
share, thus replacing "primary" and "fully diluted" earnings per share required
under APB No. 15. Basic EPS excludes common stock equivalents and is computed by
dividing net income by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the inclusion of common stock equivalents
and their potential dilution. Diluted EPS is similar to fully diluted EPS;
however, it uses the average stock price during the period as part of the
computation. Common stock equivalents are excluded from the prior year EPS
calculations because their effect would be anti-dilutive.
The number of shares used in computing EPS is as follows for the six months
ended September 30:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Weighted average shares outstanding-basic........................... 11,311,000 11,141,000
Common Stock equivalents............................................ 319,000 --
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Weighted average shares outstanding - diluted....................... 11,630,000 11,141,000
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</TABLE>
The number of shares used in computing EPS is as follows for the three months
ended September 30:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Weighted average shares outstanding-basic........................... 11,325,000 11,139,000
Common Stock equivalents............................................ 251,000 --
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Weighted average shares outstanding - diluted....................... 11,576,000 11,139,000
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</TABLE>
6. RESTRUCTURING CHARGES
In fiscal 1998, the Company announced a formal plan for restructuring both its
SunRise and TFP subsidiaries to realize cost savings and capitalize on synergies
by consolidating the subsidiaries into the Company's Anaheim operations. The
restructuring charges include lease termination and facility closure costs,
losses on the disposition of fixed assets and severance costs for terminated
employees. As of September 30, 1998, the Company has principally completed the
restructuring activities, with the
8
<PAGE>
exception of subleasing its Fremont, CA facility, and actual costs have not
differed significantly from amounts previously accrued. Approximately $220,000
of accrued restructuring costs, accrued for in fiscal 1998, are included in
accrued liabilities as of September 30, 1998, which principally relate to
future lease commitments and unpaid severance.
9
<PAGE>
PRINTRAK INTERNATIONAL INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTORY NOTE
This Quarterly Report on Form 10-Q contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934 and the Company intends that such
forward-looking statements be subject to the safe harbors created thereby. Words
such as "anticipates", "expects", "intends", "plans", "believes", "seeks",
"estimates", variations of such words and similar expressions are intended to
identify such forward-looking statements, which include (i) the existence and
development of the Company's technical and manufacturing capabilities, (ii)
anticipated competition, (iii) potential future growth in revenues and income,
(iv) potential future decreases in costs, and (v) the need for, and availability
of, additional financing.
The forward-looking statements included herein are based on current expectations
that involve a number of risks and uncertainties. These forward-looking
statements are based on assumptions that the Company's markets will continue to
grow, that the Company's products will remain accepted within their respective
markets and will not be replaced by new technology, that competitive conditions
within the Company's markets will not change materially or adversely, that the
Company will retain key technical and management personnel, that the Company's
forecasts will accurately anticipate market demand, and that there will be no
material adverse change in the Company's operations or business. Assumptions
relating to the foregoing involve judgments with respect to, among other things,
future economic, competitive and market conditions, and future business
decisions, all of which are difficult or impossible to predict accurately and
many of which are beyond the control of the Company. In light of the significant
uncertainties inherent in the forward-looking information included herein, the
inclusion of such information should not be regarded as a representation by the
Company or any other person that the objectives or plans of the Company will be
achieved.
The following is management's discussion and analysis of certain significant
factors which have affected the earnings and financial position of the Company
during the period included in the accompanying financial statements. This
discussion compares the three month period ended September 30, 1998 with the
three month period ended September 30, 1997, as well as the six month period
ended September 30, 1998 with the six month period ended September 30, 1997.
This discussion should be read in conjunction with the financial statements and
associated notes.
10
<PAGE>
RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED SEPTEMBER 30, 1998 COMPARED TO THE THREE MONTH PERIOD
ENDED SEPTEMBER 30, 1997
TOTAL REVENUES
The Company's total revenues are comprised of system revenues, which include
products, file conversion, data mapping services and system installations, and
maintenance revenues related to hardware and software support.
Total revenues increased 4.8% to $20.2 million for the quarter ended September
30, 1998, up from $19.2 million for the quarter ended September 30, 1997. This
$1.0 million revenue increase reflects a full quarter of operations in the
current year for the Company's Boulder and SunRise divisions. For the second
quarter of fiscal year 1999, the Company's Boulder division contributed $4.1
million in total revenues versus $2.0 million during the second quarter of
fiscal year 1998. SunRise Imaging added $1.9 million during the current fiscal
period versus $.7 million during the same quarter of fiscal 1998. TFP's revenues
of $1.8 million were down 46.5% from $3.4 million during the same quarter of
fiscal 1998. Management believes this reduction is principally related to sales
force and product delivery integration into the Company's Anaheim operations
which was substantially complete during the first quarter of fiscal 1999. The
Company's AFIS product line contributed $12.0 million in total quarterly
revenues, versus $13.2 million for the same period of the previous year. This
revenue decline is primarily attributable to the implementation of Statement of
Position No. 97-2, Software Revenue Recognition. The implementation of this
accounting pronouncement resulted in the delay of revenue recognition on certain
contracts. This revenue is expected to be recognized in subsequent quarters.
System revenues increased $.7 million or 4.5% to $16.6 million for the second
quarter from $15.9 million for the first quarter of the previous year as a
result of the Boulder and SunRise Imaging acquisitions. Maintenance revenues
equaled $3.6 million for the quarter ended September 30, 1998, increasing 7.7%
from revenues of $3.3 million for the quarter ended September 30, 1997. The
increase in maintenance revenues is reflective of an overall expansion of the
customer base over the prior year.
The Company's quarterly revenues have in the past, and in the future, may be
expected to fluctuate significantly. These fluctuations are the result of a
variety of factors, including: the Company's delivery cycle, variations in order
size, variations in product mix, and the timing of orders.
GROSS PROFIT
Cost of revenues primarily consist of purchased materials procured for use in
the assembly of the Company's products, manufacturing or assembly labor and
overhead, file conversion costs and data mapping costs, as well as maintenance
expenses and estimated costs to complete system installations.
11
<PAGE>
Overall gross profit increased 6.4% to $8.5 million for the quarterly period
ended September 30, 1998, versus $8.0 million for the same period of the
previous fiscal year. Gross margin was 42.0% for the three months ended
September 30, 1998, up slightly from 41.5% for the three months ended September
30, 1997. The gross profit for system revenues increased to $7.6 million for the
quarter ended September 30, 1998 from $6.8 million for the same quarter from the
previous fiscal year. The system gross margin also increased to 45.9% for the
current quarter from 43.0% for the second quarter of the previous fiscal year.
Maintenance gross profit decreased to $.9 million for the quarter ended
September 30, 1998 from $1.1 million during the same prior year fiscal period.
Gross margin related to maintenance revenue decreased to 24.3% for the three
months ended September 30, 1998 in comparison to 34.3% for the second quarter of
the previous year.
The increase in system gross margin primarily reflects higher margins
realized on certain contracts in the Company's AFIS product line, a full
quarter of activity for the SunRise division with margins of approximately
60% and also higher margins realized on the Company's file conversion
process. The reduction in the Company's maintenance gross margin is due in
part to the duplicative resource costs incurred between AFIS and TFP during
the transition of TFP into Anaheim's operations. The decrease in maintenance
gross margin is also a result of several low margin maintenance contracts the
Company's Boulder division inherited through acquisition.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative (SG&A) expenses consist principally of
compensation paid to sales, marketing, and administrative personnel, payments to
consultants, professional service fees, travel and related expenses, and other
marketing expenses.
For the three month period ended September 30, 1998, SG&A expenses decreased to
$5.3 million from $5.5 million for the period ended September 30, 1997. This
$.2 million decrease primarily reflects cost savings resulting from cost
synergies associated with the TFP integration into Anaheim. SG&A expenses,
as a percentage of revenues, decreased to 26.2% for the three months ended
September 30, 1998 from 28.4% for the three months ended September 30, 1997.
RESEARCH, DEVELOPMENT AND ENGINEERING
Research, development and engineering expenses (RD&E) are comprised primarily of
compensation paid to personnel engaged in research, development and engineering
activities, amounts paid for outside services and the cost of materials used in
the development of hardware and software products.
RD&E expenses decreased 28.5% to $1.8 million for the quarter ended September
30, 1998, down from $2.5 million for the quarter ended September 30, 1997. The
decrease in RD&E expense is primarily the result of increased allocation of
resources to contract specific tasks, which are classified as cost of sales as
well as a reduction in contract labor. RD&E expenses, as a percentage of
revenues, decreased to 8.8% for the three months ended September 30, 1998, down
from 12.9% for the same period of the previous year.
12
<PAGE>
IN-PROCESS R&D EXPENSE
The in-process R & D expense of $5.9 million in the prior fiscal period is the
value assigned to SunRise Imaging's developmental products. Goodwill was reduced
by a corresponding amount and the remaining goodwill value will be amortized
over varying periods, ranging from three to ten years.
PROVISION FOR INCOME TAXES
Income tax expense for the quarter ended September 30, 1998 equaled $.5 million
in comparison to $.1 million for the quarter ended September 30, 1997. The
Company's tax provision is based on the federal statutory rate of 35% and
reflects the impact of state and foreign taxes.
SIX MONTH PERIOD ENDED SEPTEMBER 30, 1998 COMPARED TO THE SIX MONTH PERIOD
ENDED SEPTEMBER 30, 1997
TOTAL REVENUES
Total revenues increased 6% to $36.6 million for the six months ended September
30, 1998, up from $34.5 million for the prior year. This $2.1 million revenue
increase is primarily attributable to the Company's acquisitions during fiscal
year 1998. For the first six months of fiscal year 1999, the Company's Boulder
and SunRise divisions together contributed $7.9 million to the increase in total
revenues. Offsetting this increase in revenue is a decline in the Company's AFIS
product line system revenue of $3.9 million due mainly to the implementation of
Statement of Position No. 97-2, Software Revenue Recognition. Resulting in the
delay of revenue recognition on certain contracts expected to be recognized in
the third and fourth quarters of fiscal year 1999. System revenues for TFP
decreased $2.8 million reflecting sales force and product delivery integration
into the Company's Anaheim operations.
Maintenance revenue contributed $1.2 million to the increase in total revenue
for the six months ended September 30, 1998, increasing 19.9% to $7.4 million.
The increase is reflective of an overall expansion of the customer base over
the prior year.
GROSS PROFIT
Overall gross profit increased 3.4% to $15.8 million for the six months ended
September 30, 1998 in comparison to $15.3 million for the prior year. Gross
margin was 43.1% for the six months ended September 30, 1998, down from 44.3%
for the same prior year period. Gross profit for system revenues increased to
$14.0 million for the six month period ended September 30, 1998 from $12.9
million for the same period of the previous fiscal year. System gross margin
increased to 47.9% for the current period from 45.6% from the same prior year
period. Overall maintenance gross profit decreased $.6 million for the six month
period ended September 30, 1998 from $2.4 million in the prior year to $1.8
million for the current fiscal period. Gross margin related to maintenance
revenues decreased to 24.4% for the first six months of the current year in
comparison to 38.3% for the same previous year period.
The increase in system margin is due mainly to the inclusion of six months of
activity for the Company's SunRise division in the current fiscal year versus
one month of activity in the prior fiscal year, subsequent to acquisition.
SunRise is realizing margins of approximately 60%. Higher margins are also being
realized on the Company's file conversion process. The decrease in the Company's
maintenance margin is due in part to the duplicative resource costs incurred
between AFIS and TFP during the transition of TFP into
13
<PAGE>
Anaheim operations. The decrease in maintenance gross margin is also a result
of several low margin maintenance contracts the Company's Boulder division
inherited through acquisition.
RESEARCH, DEVELOPMENT AND ENGINEERING
RD&E decreased 24.0% to $3.9 million for the six month period ended September
30, 1998 compared with $5.1 million for the same prior year period. This $1.2
million decrease is primarily the result of an increased allocation of resources
to contract specific tasks, which are classified as cost of revenues, as well as
a reduction in contract labor. RD&E expenses, as a percentage of revenues,
decreased to 10.5% for the six months ended September 30, 1998, down from 14.7%
for the same period of the previous year.
SELLING, GENERAL AND ADMINISTRATIVE
SG&A expenses increased 7.2% to $9.9 million for the six month period ended
September 30, 1998, compared with $9.3 million for the same period in fiscal
1998. The increase reflects additional current period costs related to the
Company's Boulder and SunRise divisions acquired in fiscal 1998. SG&A expenses,
as a percentage of revenues, increased slightly to 27.1% for the six months
ended September 30, 1998 from 26.9% for the six months ended September 30,
1997.
OTHER (EXPENSE) INCOME
Other expense for the six month period ended September 30, 1998 equaled $161,000
in comparison to other income of $246,000 for the six month period ended
September 30, 1997. Other expense for the six month period ended September 30,
1998 reflects an additional $300,000 of interest expense associated with
additional borrowings under the Company's revolving line of credit, as well as a
decrease of approximately $100,000 in interest income on liquidation of certain
Company investments.
PROVISION FOR INCOME TAXES
Income tax expense for the six month period ended September 30, 1998 equaled $.6
million in comparison to expense of $.1 million for the six month period ended
September 30, 1997. The Company's current year tax provision is based on a
statutory rate of 35% and reflects the impact of state and foreign taxes.
BACKLOG
The Company measures its backlog of system revenues as orders for which
contracts or purchase orders have been signed, but for which revenues have not
been recognized. In those instances where revenue is recognized on a percentage
of completion basis, the Company includes in backlog contract revenue not
recognized at the period end. As of September 30, 1998, the Company's system
revenue backlog approximated $35.7 million, compared to $35.6 million as of June
30, 1998 and $36.3 million on September 30, 1997. In addition, the Company's
maintenance revenue backlog approximated $15 million as of September 30, 1998.
In October 1998 the Company entered into the largest contract in its history
with Siemens Argentina, a $45 million contract to provide automated
fingerprint technology to the Argentina government as part of their national
ID program. The production cycle of the six year contract includes delivery
of the substantial majority of hardware and software during the first two
years with maintenance commencing during years two through six. Including the
Argentina order and several other significant orders received in October
1998, the Company's backlog is currently in excess of $100 million.
14
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Orders comprising the Company's system backlog may include requirements for
custom software development or file conversion that may require extensive
resources to be completed prior to shipment. Any failure of the Company to meet
an agreed upon schedule could lead to the cancellation of the related order. The
Company believes that it is important for competitive reasons and to better
satisfy customer requirements to reduce order lead times. Additionally,
variations in the size, complexity and delivery requirements of customer orders
may result in substantial fluctuations in backlog on a regular basis.
Accordingly, the Company believes that backlog may not be a meaningful indicator
of future financial performance.
FINANCIAL CONDITION
Cash, cash equivalents and short-term investments declined from $4.9 million at
March 31, 1998 to $.5 million at September 30, 1998 as a result of a paydown on
the Company's line of credit of $9.0 million. Total inventory levels increased
slightly from $8.2 million at March 31, 1998 to $8.9 million at September 30,
1998 primarily due to the Company's increased backlog of system orders. Prepaid
expenses and other current assets declined $.5 million during the period as a
result of the reduction of a current non-trade receivable.
During the first quarter, the Company's Chief Executive Officer and President,
Richard M. Giles, repaid a $500,000 note associated with the sale of the
building from the Company to a limited liability partnership controlled by Mr.
Giles. As a result, the note receivable from related parties declined from
$558,000 to $66,000.
The decrease in the net balance of property, plant and equipment of $1.1 million
from $5.1 million at March 31, 1998 to $4.0 million at September 30, 1998
reflects capital expenditures of approximately $.7 million, capital deletions of
approximately $.4 million and depreciation expense of $1.4 million.
The decrease in accrued wages and employee benefits is primarily the result of
the number of days of accrued payroll at March 31, 1998 versus September 30,
1998. The reduction in other accrued liabilities is primarily the result of
decreases in warranty and estimated costs to complete reserves due to completion
of vendor obligations on certain contracts as well as the adoption of SOP 97-2.
Additionally, accrued liabilities declined due to the usage of the restructuring
accruals recorded for the integration of TFP and SunRise operations in the
Company's headquarter's in Anaheim, CA. The Company's integration of TFP and
SunRise was substantially completed as of the first quarter of fiscal 1999.
The decline in long-term debt is a result of reduced borrowing levels on the
Company's revolving line of credit as the Company is better able to meet
liquidity needs through funds generated by operations, and also due to the
absence of acquisitions in the current fiscal year.
The $1.6 million increase in deferred revenue is due mainly to payment terms in
advance of revenue recognition on certain new contract signings. This reflects
the Company's strategy of structuring new contracts with more favorable payment
terms.
The increase in income taxes payable from $.5 million at March 31, 1998, to $1.6
million at September 30, 1998, reflects additional provision for income taxes on
net earnings during the current fiscal period.
LIQUIDITY AND CAPITAL RESOURCES
15
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The Company finances its operations through the cash provided by its operations
and the utilization of its revolving credit line. The Company's operating
activities provided cash of approximately $4.5 million for the six months ended
September 30, 1998 primarily through net earnings before non-cash depreciation
and amortization, as well as through increases in deferred revenue. The
Company's operating activities used cash of $.7 million for the six months ended
September 30, 1997.
The Company's investing activities provided net cash of $.9 million for the
period ended September 30, 1998 due primarily to the repayment of the $.5
million note receivable from RICOL, LLC, the liquidation of the Company's
short-term investments and offset by capital expenditures. For the period ended
September 30, 1997, the Company's investing activities used cash of
approximately $7.8 million due primarily to cash used to acquire the Boulder
division and SunRise Imaging for $9.6 million and capital expenditures of $.7
million, offset, in part, by the sale of short-term investments which yielded
approximately $2.5 million.
Financing activities used cash of $8.7 million during the six month period ended
September 30, 1998 as a result of the paydown on the Company's revolving credit
line. During the six month period ended September 30, 1997, financing activities
provided approximately $7.3 million, $6.5 million of which reflects proceeds
from long-term debt.
In July 1998, the Company negotiated an arrangement with its bank to refinance
its debt into a $15.0 million revolving credit facility to be used principally
for working capital and a $4.0 million term loan which has been utilized in the
past for acquisitions. During the third quarter of fiscal 1999 the Company
repaid the outstanding principal balance on the term loan and extended the
revolving credit facility to January 4, 2000. The revolving line of credit
agreement contains certain restrictive covenants, which restrict the Company's
ability to pay dividends and requires the Company to maintain minimum tangible
net worth and certain other financial ratios. The Company was in compliance with
these covenants as amended.
The Company believes that the cash generated from operations, as well as the use
of the revolving credit line will provide sufficient resources to fund the
Company through at least the end of fiscal year 1999.
YEAR 2000 COMPLIANCE
Many currently installed information technology ("IT") systems, such as
computer systems and software products, as well as non-IT systems that include
embedded technology, are coded to accept only two digit entries in the date code
field, and thus, were not designed to correctly process dates after December 31,
1999. These date code fields will need to accept four digit entries, or be
modified in some fashion, to distinguish 21st century dates from 20th century
dates. As a result, in less than two years, computer systems and software used
by many companies may need to be upgraded or are being upgraded to comply with
such "Year 2000" requirements.
The Company has assessed the impact of such "Year 2000" issues on its
products, its internal IT and non-IT systems, as well as on its customers,
suppliers and service providers. The Company has determined that certain of its
internal IT and non-IT systems are not Year 2000 compliant and is currently in
the process of purchasing upgrades or transitioning to systems which the
Company's vendors have represented as being Year 2000 compliant. The Company
believes that with modifications and conversions, the Year 2000 issue can be
managed and the associated risks mitigated. The Company anticipates that its
internal systems will be Year 2000 compliant by June 30, 1999.
16
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With regard to the Company's products, the Company believes that the current
versions of all products are Year 2000 compliant. However, certain older
product versions are not Year 2000 compliant. The Company is in the process
of notifying its customers of potential Year 2000 compliance problems and
offering customers the opportunity to purchase upgrades.
The Company is unable to control whether its suppliers and service
providers will be Year 2000 compliant. However, the Company has initiated
communications with its significant vendors to determine the extent to which the
Company's operations may be vulnerable to such parties failure to resolve their
own Year 2000 issues. The Company's operations may be affected to the extent
that its vendors are unable to provide services or ship products. Where
practicable, the Company will assess and attempt to mitigate its risks with
respect to failure of those entities to be Year 2000 ready. The Company has not
received responses from all of its significant vendors, and thus, the effect, if
any, on the Company's results of operations from the failure of such parties to
be Year 2000 ready cannot be estimated.
Although the Company expects its internal systems to be Year 2000
compliant as described above, the Company intends to prepare a contingency plan
that will specify what it plans to do if it or its significant vendors are not
Year 2000 compliant in a timely manner. The Company expects to prepare its
contingency plan in calendar year 1999 following the anticipated completion of
its internal remediation and the assessment of the compliance of the Company's
significant vendors. Even if these plans are completed on time and put in place,
there can be no assurance that such plans will be sufficient to address any
third party failures or that unresolved or undetected internal and external Year
2000 issues will not have a material adverse effect on the Company's business,
financial condition and results of operations.
While it is difficult to quantify the total cost to the Company of
the Year 2000 compliance activities, the Company's best estimate of
expenditures is between $200,000 - $300,000 of which, $100,000 has been spent
to date. Notwithstanding the foregoing, there can be no assurances (a) that
the representations provided by its third party vendors with respect to Year
2000 compliance will be accurate, or (b) that the Company will have any
recourse against such vendors if the representations prove to be inaccurate.
Furthermore, there can be no assurances that Year 2000-related failure caused
by third parties, such as utility providers, transportation companies or
others, will not have a material adverse effect on the Company. There can be
no guarantee that Year 2000 issues will not have a material impact on the
Company's business, operating results and financial condition.
17
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PRINTRAK INTERNATIONAL INC.
PART II-OTHER INFORMATION
Item 1 - LEGAL PROCEEDINGS
From time to time, the Company may be involved in litigation relating to claims
arising out of its operations in the normal course of business. As of the date
of this report, the Company is not a party to any legal proceedings, the adverse
outcome of which, in management's opinion, individually or in the aggregate,
would have a material adverse effect on the Company's results of operations or
financial position.
Item 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
Item 3 - DEFAULTS UPON SENIOR SECURITIES
None.
Item 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders was held on September 16, 1998. Of the
11,334,642 shares of the Company's common stock issued and outstanding and
entitled to vote at the meeting, there were present at the meeting, in person or
by proxy, the holders of 9,910,238 common shares, representing 87.4% of the
total number of shares entitled to vote at the meeting. This percentage
represents a quorum. The following two proposals were presented and voted on at
the stockholders' meeting:
Proposal One: Each of the six nominees to the Board of Directors was elected
for a one-year term by the stockholders. The following directors were elected:
R. Giles, J. Hardy, D. Driscoll, C. Smith, A. Wong and P. Higgins.
Proposal Two: To ratify the appointment of Deloitte & Touche LLP as independent
auditors. The voting results were: For 9,892,025; Against 8,400; Abstain
9,813; Broker Non-Vote 0.
Item 5 - OTHER INFORMATION
Any stockholder desiring to submit a proposal for action at the 1999
Annual Meeting of Stockholders and presentation in the Company's proxy statement
with respect to such meeting should arrange for such proposal to be delivered to
the Company's offices, Attn: Secretary, Printrak International Inc., 1250 N.
Tustin Avenue, Anaheim, California 92807, no later than April 15, 1999 in order
to be considered for inclusion in the Company's proxy statement relating to the
meeting. Matters pertaining to such proposals, including the number and length
thereof, eligibility of persons entitled to have such proposals included and
other aspects are regulated by the Securities Exchange Act of 1934, Rules and
Regulations of the Securities and Exchange Commission and other laws and
regulations to which interested persons should refer.
On May 21, 1998 the Securities and Exchange Commission adopted an
amendment to Rule 14a-4, as promulgated under the Securities and Exchange Act of
1934, as amended. The amendment to Rule 14a-
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4(c)(1) governs the Company's use of its discretionary proxy voting authority
with respect to a stockholder proposal which is not addressed in the Company's
proxy statement. The new amendment provides that if a proponent of a proposal
fails to notify the Company at least 45 days prior to the month and day of
mailing of the prior year's proxy statement, then the Company will be allowed
to use its discretionary voting authority when the proposal is raised at the
meeting, without any discussion of the matter in the proxy statement.
With respect to the Company's 1999 Annual Meeting of Stockholders, if
the Company is not provided notice of a stockholder proposal, which the
stockholder has not previously sought to include in the Company's proxy
statement, by June 30, 1999, the Company will be allowed to use its voting
authority as outlined.
Item 6 - EXHIBITS AND REPORTS ON FORM 8-K
Exhibit Index:
10.1 First Amendment to the Amended and Restated Loan Agreement with Union Bank
dated November 5, 1998.
10.2 Promissory Note with Union Bank in the amount of $15,000,000 dated
November 2, 1998
27 Financial Data Schedule
The Company did not file any current reports on Form 8-K during the quarter
ended September 30, 1998.
19
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SIGNATURE
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.
PRINTRAK INTERNATIONAL INC.
(REGISTRANT)
BY /s/ RICHARD M. GILES
-------------------------------------------
Name: Richard M. Giles
Title: Chief Executive Officer, President
and acting Chief Financial Officer
November 16, 1998
20
<PAGE>
November 5, 1998
Ms. Susanna Bennett
Vice President Finance and Corporate Secretary
Printrak International Inc.
1250 North Tustin Avenue
Anaheim, CA 92807
Re: First Amendment ("Amendment") to the Amended and Restated Agreement dated
July 31, 1998(this Amendment, and the Amended and Restated Loan Agreement
together called the "Agreement")
Dear Susanna:
In reference to the Agreement between Union Bank of California, N.A.
("Bank") and Printrak International Inc. ("Borrower"), the Bank and Borrower
desire to amend the Agreement. Capitalized terms used herein which are not
otherwise defined shall have the meaning given them in the Agreement.
AMENDMENTS TO THE AGREEMENT:
(a) Section 1.1.1, line 5 of the Agreement is hereby amended by
substituting the date "January 4, 2000" for the date "August 2, 1999."
(b) Section 1.1.1.1, line 10 of the Agreement is hereby amended by
substitution the date "January 4, 2000" for the date "August 2, 1999."
Except as specifically amended hereby, the Agreement shall remain in full
force and effect and is hereby ratified and confirmed. This Amendment shall
not be a waiver of any existing or future default or breach of a condition or
covenant unless specified herein.
This Amendment shall become effective when the Bank shall have received the
acknowledgment copy of this Amendment executed by the Borrower and the
following executed documents plus an amendment fee of Seven Thousand Five
Hundred Dollars ($7,500.00), all of which must be received before November 6,
1998.
Very truly yours,
UNION BANK OF CALIFORNIA, N.A.
By:
---------------------------
Title:
------------------------
By:
---------------------------
Title:
------------------------
Agreed and Accepted to this __________________ day of
November, 1998.
PRINTRAK INTERNATIONAL, INC.
By:
---------------------------
Title:
------------------------
<PAGE>
UNION
BANK OF
CALIFORNIA
PROMISSORY NOTE
(BASE RATE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Borrower Name PRINTRAK INTERNATIONAL INC.
- --------------------------------------------------------------------------------
Borrower Address Office 45061 Loan Number 7144705187 0081-00-0-000
1250 NORTH TUSTIN AVE. -------------------------------------------------------
ANAHEIM, CA 92807 Maturity Date JANUARY 4, 2000 Amount $15,000,000.00
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$15,000,000.00 Date NOVEMBER 2, 1998
- -------------- -----------------
FOR VALUE RECEIVED, on JANUARY 4, 2000, the undersigned ("Debtor") promises
to pay to the order of UNION BANK OF CALIFORNIA, N.A. ("Bank"), as indicated
below, the principal sum of FIFTEEN MILLION AND NO/100 Dollars ($15,000,000.00),
or so much thereof as is disbursed, together with interest on the balance of
such principal from time to time outstanding, at the per annum rate or rates
and at the times set forth below.
1. INTEREST PAYMENTS. Debtor shall pay interest on the 2ND day of each MONTH
(commencing DECEMBER 2, 1998). Should interest not be paid when due, it shall
become part of the principal and bear interest as herein provided. All
computations of interest under this note shall be made on the basis of a year
of 360 days, for actual days elapsed.
a. BASE INTEREST RATE. At Debtor's option, amounts outstanding
hereunder in minimum amounts of at least $500,000.00 shall bear interest
at a rate which is equal to Bank's LIBOR Rate for the Interest Period
selected by Debtor, plus the Applicable Margin.
No Base Interest Rate may be changed, altered or otherwise modified
until the expiration of the Interest Period selected by Debtor. The
exercise of interest rate options by Debtor shall be as recorded in
Bank's records, which records shall be prima facie evidence of the
amount borrowed under either interest option and the interest rate;
provided, however, that failure of Bank to make any such notation in its
records shall not discharge Debtor from its obligations to repay in full
with interest all amounts borrowed. In no event shall any Interest
Period extend beyond the maturity date of this note.
To exercise this option, Debtor may, from time to time with respect to
principal outstanding on which a Base Interest Rate is not accruing, and
on the expiration of any Interest Period with respect to principal
outstanding on which a Base Interest Rate has been accruing, select an
index offered by Bank for a Base Interest Rate Loan and an Interest
Period by telephoning an authorized lending officer of Bank located at
the banking office identified below prior to 10:00 a.m., Pacific time,
on any Business Day and advising that officer of the selected index, the
Interest Period and the Origination Date selected (which Origination
Date, for a Base Interest Rate Loan based on the LIBOR-Rate, shall
follow the date of such selection by no more than two (2) Business Days).
Bank will mail a written confirmation of the terms of the selection to
Debtor promptly after the selection is made. Failure to send such
confirmation shall not affect Bank's rights to collect interest at the
rate selected. If, on the date of the selection, the index selected is
unavailable for any reason, the selection shall be void. Bank reserves
the right to fund the principal from any source of funds notwithstanding
any Base Interest Rate selected by Debtor.
b. VARIABLE INTEREST RATE. All principal outstanding hereunder which is
not bearing interest at a Base Interest Rate shall bear interest at a
rate per annum equal to the Reference Rate plus the Applicable Margin,
which rate shall vary as and when the Reference Rate or the Applicable
Margin, as the case may be, changes.
At any time prior to the maturity of this note, subject to the
provisions of paragraph 4, below, of this note, Debtor may borrow, repay
and reborrow hereon so long as the total outstanding at any one time
does not exceed the principal amount of this note. Debtor shall pay all
amounts due under this note in lawful money of the United States at
Bank's ORANGE COUNTY COMMERCIAL BANKING Office, or such other office as
may be designated by Bank, from time to time.
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<PAGE>
2. LATE PAYMENTS. If any payment required by the terms of this note shall
remain unpaid ten days after same is due, at the option of Bank, Debtor shall
pay a fee of $100 to Bank.
3. INTEREST RATE FOLLOWING DEFAULT. In the event of default, at the option
of Bank, and, to the extent permitted by law, interest shall be payable on
the outstanding principal under this note at a per annum rate equal to five
percent (5%) in excess of the interest rate specified in paragraph 1.b.
above, calculated from the date of default until all amounts payable under
this note are paid in full.
4. PREPAYMENT.
a. Amounts outstanding under this note bearing interest at a rate based
on the Reference Rate may be prepaid in whole or in part at any time,
without penalty or premium. Debtor may prepay amounts outstanding under
this note bearing interest at a Base Interest Rate in whole or in part
provided Debtor has given Bank not less than five (5) Business Days
prior written notice of Debtor's intention to make such prepayment and
pays to Bank the liquidated damages due as a result. Liquidated Damages
shall also be paid, if Bank, for any other reason, including
acceleration or foreclosure, receives all or any portion of principal
bearing interest at a Base Interest Rate prior to its scheduled payment
date. Liquidated Damages shall be an amount equal to the present value
of the product of: (i) the difference (but not less than zero) between
(a) the Base Interest Rate applicable to the principal amount which is
being prepaid, and (b) the return which Bank could obtain if it used the
amount of such prepayment of principal to purchase at bid price
regularly quoted securities issued by the United States having a
maturity date most closely coinciding with the relevant Base Rate
Maturity Date and such securities were held by Bank until the relevant
Base Rate Maturity Date ("Yield Rate"); (ii) a fraction, the numerator
of which is the number of days in the period between the date of
prepayment and the relevant Base Rate Maturity Date and the denominator
of which is 360; and (iii) the amount of the principal so prepaid
(except in the event that principal payments are required and have been
made as scheduled under the terms of the Base Interest Rate Loan being
prepaid, then an amount equal to the lesser of (A) the amount prepaid
or (B) 50% of the sum of (1) the amount prepaid and (2) the amount of
principal scheduled under the terms of the Base Interest Rate Loan being
prepaid to be outstanding at the relevant Base Rate Maturity Date).
Present value under this note is determined by discounting the above
product to present value using the Yield Rate as the annual discount
factor.
b. In no event shall Bank be obligated to make any payment or refund to
Debtor, nor shall Debtor be entitled to any setoff or other claim
against Bank, should the return which Bank could obtain under this
prepayment formula exceed the interest that Bank would have received if no
prepayment had occurred. All prepayments shall include payment of
accrued interest on the principal amount so prepaid and shall be applied
to payment of interest before application to principal. A determination
by Bank as to the prepayment fee amount, if any, shall be conclusive.
c. Bank shall provide Debtor a statement of the amount payable on
account or repayment. Debtor acknowledges that (i) Bank establishes a
Base Interest Rate upon the understanding that it apply to the Base
Interest Rate Loan for the entire Interest Period, and (ii) any
prepayment may result in Bank incurring additional costs, expenses or
liabilities; and Debtor agrees to pay these liquidated damages as a
reasonable estimate of the costs, expenses and liabilities of Bank
associated with such prepayment.
5. DEFAULT AND ACCELERATION OF TIME FOR PAYMENT. Default shall include, but
not be limited to, any of the following: (a) the failure of Debtor to make
any payment required under this note when due; (b) any breach,
misrepresentation or other default by Debtor, any guarantor, co-maker,
endorser, or any person or entity other than Debtor providing security for
this note (hereinafter individually and collectively referred to as the
"Obligor") under any security agreement, guaranty or other agreement between
Bank and any Obligor; (c) the insolvency of any Obligor or the failure of any
Obligor generally to pay such Obligor's debts as such debts become due;
(d) the commencement as to any Obligor of any voluntary or involuntary
proceeding under any laws relating to bankruptcy, insolvency, reorganization,
arrangement, debt adjustment or debtor relief; (e) the assignment by any
Obligor for the benefit of such Obligor's creditors; (f) the appointment, or
commencement of any proceeding for the appointment of a receiver, trustee,
custodian or similar official for all or substantially all of any Obligor's
property; (g) the commencement of any proceeding for the dissolution or
liquidation of any Obligor; (h) the termination of existence or death of any
Obligor; (i) the revocation of any guaranty or subordination agreement given
in connection with this note; (j) the failure of any Obligor to comply with
any order, judgement, injunction, decree, writ or demand of any court or
other public authority; (k) the filing or recording against any Obligor, or
the property of any Obligor, of any notice of levy, notice to withhold, or
other legal process for taxes other than property taxes; (l) the default by
any Obligor personally liable for amounts owed hereunder on any obligation
concerning the borrowing of money; (m) the issuance against any Obligor, or
the property of any Obligor, of any writ of attachment, execution, or other
judicial lien; or (n) the deterioration of the financial condition of any
Obligor which results in Bank deeming itself, in good faith, insecure. Upon
the occurrence of any such default, Bank, in its discretion, may cease to
advance funds hereunder and may declare all obligations under this note
immediately due and payable; however, upon the occurrence of an event of
default under d, e, f, or g, all principal and interest shall automatically
become immediately due and payable.
6. ADDITIONAL AGREEMENTS OF DEBTOR. If any amounts owing under this note are
not paid when due, Debtor promises to pay all costs and expenses, including
reasonable attorneys' fees, incurred by Bank in the collection or enforcement
of this note. Debtor and any endorsers of this note, for the maximum period
of time and the full extent permitted by law, (a) waive diligence,
presentment, demand, notice of nonpayment, protest, notice of protest, and
notice of every kind; (b) waive the right to assert the defense of any
statute of limitations to any debt or obligation hereunder; and (c) consent
to renewals and extensions of time for the payment of any amounts due under
this note. If this note is signed by more than one party, the term "Debtor"
includes each of the undersigned and any successors in interest thereof; all
of whose liability shall be joint and several. Any married person who signs
this note agrees that recourse may be had against the separate property of
that person for any obligations hereunder. The receipt of any check or other
item of payment by Bank, at its option, shall not be considered a payment on
account until such check or other item of payment is honored when presented
for payment at the drawee bank. Bank may delay the credit of such payment
based upon Bank's schedule of funds availability, and interest under this
note shall accrue until the funds are deemed collected. In any action brought
under or arising out of this note, Debtor and any Obligor, including their
successors and assigns, hereby consent to the jurisdiction of any competent
court within the State of
-2-
<PAGE>
California, as provided in any alternative dispute resolution agreement
executed between Debtor and Bank, and consent to service of process by any
means authorized by said state's law. The term "Bank" includes, without
limitation, any holder of this note. This note shall be construed in
accordance with and governed by the laws of the State of California. This
note hereby incorporates any alternative dispute resolution agreement
previously, concurrently or hereafter executed between Debtor and Bank.
7. DEFINITIONS. As used herein, the following terms shall have the meanings
respectively set forth below: "Agreement" means that certain Amended and
Restated Loan Agreement, of even date herewith, by and between Debtor and
Bank, as at any time amended, supplemented or otherwise modified or restated.
"Applicable Margin" means (1) in the case of a Base Interest Rate Loan, a per
annum rate equal to (a) 2.75%, if the ratio of Debtor's total liabilities to
Tangible Net Worth (as such term is defined in the Agreement) (the "Leverage
Ratio") as at the end of the most recent calendar month in respect of which
Debtor has furnished a financial statement to Bank as required by the
Agreement (the "Reported Period") is equal to or greater than 2.25:1.00, (b)
2.50%, if the Leverage Ratio as at the end of the most recent Reported Period
is less than 2.25:1.00 but equal to or greater than 2.00:1.00, (c) 2.25%, if
the Leverage Ratio as at the end of the most recent Reported Period is less
than 2.00:1.00 but equal to or greater than 1.75:1.00, (d) 2.00%, if the
Leverage Ratio as at the end of the most recent Reported Period is less than
1.75:1.00 but equal to or greater than 1.50:1.00, and (e) 1.75%, if the
Leverage Ratio as at the end of the most recent Reported Period is less than
1.50:1.00; and (2) in the case of principal amounts outstanding hereunder that
are bearing interest at a rate based upon the Reference Rate, a per annum
rate equal to (a) 0.25%, if the Leverage Ratio as at the end of the most
recent Reported Period is equal to or greater than 2.25:1.00, and (b) 0.00%,
if the Leverage Ratio as at the end of the most recent Reported Period is
less than 2.25:1.00. A change in the Applicable Margin resulting from a
change in the Leverage Ratio shall become effective on the first day of the
calendar month following the Reported Period in respect of which a financial
statement furnished by Debtor to Bank pursuant to the Agreement reflects a
change in the Leverage Ratio which requires a change in the Applicable Margin
as provided for herein. For the purpose of determining the Applicable Margin,
if a default under this note or an Event of Default (as such term is defined
in the Agreement) has occurred and is continuing (including without
limitation a default or an Event of Default resulting from the failure of
Debtor to furnish any financial statement to Bank as required by the
Agreement), then, without waiving any right or remedy that Bank may have
under the Agreement as a result of such default or Event of Default
(including without limitation the rights to accelerate Debtor's obligations
and invoke the default interest rate), the Leverage Ratio shall be
conclusively presumed to be equal to or greater than 2.25:100 from the date
of the occurrence of such default or Event of Default until such default or
Event of Default is cured or otherwise waived by Bank. "Base Interest Rate"
means a rate of interest based on the LIBOR-Rate. "Base Interest Rate Loan"
means amounts outstanding under this note that bear interest at a Base
Interest Rate. "Base Rate Maturity Date" means the last day of the Interest
Period with respect to principal outstanding under a Base Interest Rate Loan.
"Business Day" means a day on which Bank is open for business for the funding
of corporate loans, and, with respect to the rate of interest based on the
LIBOR Rate, on which dealings in U.S. dollar deposits outside of the United
States may be carried on by Bank. "Interest Period" means with respect to
funds bearing interest at a rate based on the LIBOR Rate, any calendar period
of one, three, six, nine or twelve months. In determining an Interest Period,
a month means a period that starts on one Business Day in a month and ends on
and includes the day preceding the numerically corresponding day in the next
month. For any month in which there is no such numerically corresponding day,
then as to that month, such day shall be deemed to be the last calendar day
of such month. Any Interest Period which would otherwise end on a
non-Business Day shall end on the next succeeding Business Day unless that is
the first day of a month, in which event such Interest Period shall end on
the next preceding Business Day. "LIBOR Rate" means a per annum rate of
interest (rounded upward, if necessary, to the nearest 1/100 of 1%) at which
dollar deposits, in immediately available funds and in lawful money of the
United States would be offered to Bank, outside of the United States, for a
term coinciding with the Interest Period selected by Debtor and for an amount
equal to the amount of principal covered by Debtor's interest rate selection,
plus Bank's costs, including the costs, if any, of reserve requirements.
"Origination Date" means the first day of the Interest Period. "Reference
Rate" means the rate announced by Bank from time to time at its corporate
headquarters as its Reference Rate. The Reference Rate is an index rate
determined by Bank from time to time as a means of pricing certain extensions
of credit and is neither directly tied to any external rate of interest or
index nor necessarily the lowest rate of interest charged by Bank at any
given time.
PRINTRAK INTERNATIONAL INC.
- --------------------------------------
By /s/ Susanna Bennett VP OF FINANCE
-----------------------------------
TITLE
-3-
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