<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark one)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
- ---- Act of 1934.
For the quarterly period ended September 30, 1997 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: 1-9641
------
IDENTIX INCORPORATED
(Exact name of registrant as specified in its charter)
California 94-2842496
- ---------------------------------- -----------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation of organization)
510 N. Pastoria Avenue, Sunnyvale, California 94086
- ------------------------------------------------ --------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408) 731-2000
--------------
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 requirement for the past 90 days. YES X NO
---- ----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
25,010,111 shares of Common Stock
as of October 31, 1997
<PAGE> 2
IDENTIX INCORPORATED
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1997 1997
------------ ------------
<S> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 1,165,000 $ 2,510,000
Accounts receivable, less allowance for doubtful accounts
and sales returns of $671,000 and $625,000 21,886,000 18,737,000
Inventories 5,983,000 5,295,000
Prepaid expenses and other assets 738,000 323,000
------------ ------------
Total current assets 29,772,000 26,865,000
Property and equipment, net 2,457,000 2,567,000
Intangibles and other assets 3,057,000 3,008,000
------------ ------------
Total assets $ 35,286,000 $ 32,440,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to banks $ 2,692,000 $ 1,919,000
Accounts payable 6,818,000 6,314,000
Accrued compensation 1,760,000 1,515,000
Other accrued liabilities 1,436,000 1,079,000
Deferred revenue 1,007,000 561,000
------------ ------------
Total current liabilities 13,713,000 11,388,000
Deferred revenue 52,000 65,000
Other liabilities 89,000 89,000
------------ ------------
Total liabilities 13,854,000 11,542,000
------------ ------------
Commitments and contingencies (Note 5)
Shareholders' equity:
Common stock, no par; 50,000,000 shares authorized;
24,988,861 and 24,942,778 shares issued and outstanding 51,388,000 51,283,000
Accumulated deficit (29,678,000) (30,204,000)
Cumulative translation adjustment (278,000) (181,000)
------------ ------------
Total shareholders' equity 21,432,000 20,898,000
------------ ------------
Total liabilities and shareholders' equity $ 35,286,000 $ 32,440,000
============ ============
</TABLE>
See accompanying notes to these consolidated financial statements.
1
<PAGE> 3
IDENTIX INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
1997 1996
------------ ------------
<S> <C> <C>
Revenues:
Net product revenues $ 8,907,000 $ 6,379,000
Services revenues 9,943,000 5,700,000
------------ ------------
Total revenues 18,850,000 12,079,000
------------ ------------
Costs and expenses:
Cost of product revenues 4,136,000 3,372,000
Cost of services revenues 8,564,000 4,650,000
Research, development and engineering 1,037,000 537,000
Marketing and selling 2,206,000 1,666,000
General and administrative 2,404,000 1,768,000
------------ ------------
Total costs and expenses 18,347,000 11,993,000
------------ ------------
Income from operations 503,000 86,000
Other income (expense), net 44,000 (9,000)
Interest income (expense), net (21,000) (67,000)
------------ ------------
Net income $ 526,000 $ 10,000
============ ============
Net income per common and
common equivalent share $ 0.02 $ 0.00
============ ============
Weighted average common
and common equivalent shares 25,625,000 25,572,000
============ ============
</TABLE>
See accompanying notes to these consolidated financial statements.
2
<PAGE> 4
IDENTIX INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTH PERIOD
ENDED SEPTEMBER 30,
-----------------------------
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 526,000 $ 10,000
Adjustments to reconcile net income to net
cash used for operating activities:
Depreciation and amortization 557,000 461,000
Amortization of deferred revenue (332,000) (147,000)
Changes in assets and liabilities:
Accounts receivable (3,149,000) (3,058,000)
Inventories (688,000) 792,000
Prepaid expenses and other assets (415,000) (288,000)
Accounts payable 504,000 (569,000)
Accrued compensation 245,000 (73,000)
Other accrued liabilities 357,000 399,000
Deferred revenue 765,000 123,000
----------- -----------
Net cash used for operating activities (1,630,000) (2,350,000)
----------- -----------
Cash flows used for investing activities:
Capital expenditures (205,000) (639,000)
Additions to intangibles and other assets (291,000) (245,000)
Cash received in acquisitions -- 6,000
----------- -----------
Net cash used for investing activities (496,000) (878,000)
----------- -----------
Cash flows provided by financing activities:
Borrowings under bank lines of credit 3,688,000 6,178,000
Payments under bank lines of credit (2,915,000) (3,726,000)
Principal payments on long-term note -- (27,000)
Proceeds from sale of common stock and warrants, net 105,000 7,000
Other, net -- 2,000
----------- -----------
Net cash provided by financing activities 878,000 2,434,000
----------- -----------
Effects of exchange rate changes on cash
and cash equivalents (97,000) 24,000
----------- -----------
Net decrease in cash and cash equivalents (1,345,000) (770,000)
Cash and cash equivalents at beginning of period 2,510,000 981,000
----------- -----------
Cash and cash equivalents at end of period $ 1,165,000 $ 211,000
=========== ===========
</TABLE>
See accompanying notes to these consolidated financial statements.
3
<PAGE> 5
IDENTIX INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
These accompanying consolidated financial statements and related notes
are unaudited. However, in the opinion of management, all adjustments
(consisting only of normal recurring adjustments) which are necessary
for a fair presentation of the financial position and results of
operations for the interim period have been included. These consolidated
financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto for the fiscal year
ended June 30, 1997 included in the Company's Form 10-K. The results of
operations for the three months ended September 30, 1997 are not
necessarily indicative of results to be expected for the entire fiscal
year, which ends on June 30, 1998.
The consolidated financial statements include the accounts of Identix
Incorporated (the "Company") and its wholly owned subsidiaries: ANADAC,
Inc. ("ANADAC"), Fingerscan Pty Limited ("Fingerscan") and Biometric
Applications and Technologies, Inc. ("BA&T"). The Company acquired
Fingerscan on March 26, 1996. The Company accounted for the acquisition
of Fingerscan as a purchase. The Company acquired BA&T on July 23, 1997.
The Company accounted for the acquisition of BA&T as a pooling of
interests. Accordingly, the consolidated statement of operations and
consolidated statement of cash flows for the three month period ended
September 30, 1996 have been restated to include the accounts and
results of operations of BA&T and the consolidated balance sheet as of
June 30, 1997 has been restated to include the accounts and results of
operations of BA&T. In addition, the Company acquired Innovative
Archival Solutions, Inc. ("IAS") on June 30, 1996. The Company accounted
for the acquisition of IAS as a pooling of interests. On October 1,
1996, IAS was merged into Identix. All significant intercompany balances
and transactions have been eliminated in consolidation.
2. INVENTORIES
Inventories are stated at the lower of cost (determined on the first-in,
first-out cost method) or market. Inventories consisted of the
following:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1997 1997
----------- -----------
<S> <C> <C>
Purchased parts and materials $2,585,000 $3,027,000
Work-in-process 1,850,000 1,076,000
Finished goods, including spares 1,548,000 1,192,000
----------- -----------
$5,983,000 $5,295,000
</TABLE>
3. NET INCOME PER SHARE
Net income per common and common equivalent share is computed using the
weighted average number of common shares outstanding during the period
after considering the effect of common stock options and warrants under
the treasury method. Common stock options and warrants have been
excluded from the computation when their effect is anti-dilutive.
In February 1997, the Financial Accounting Standards Board ("FAS")
issued Statement of Financial Accounting Standards No. 128, "Earnings
per Share" ("SFAS 128"). This statement is effective for the Company's
interim period ended December 31, 1997. The statement redefines earnings
per share under Generally Accepted Accounting Principles. Under the new
standard, primary earnings per share is replaced by basic earnings per
share and fully diluted earnings per share is replaced by diluted
earnings per share. The adoption of SFAS 128 would not have a material
impact on the Company's earnings per share for the three month period
ended September 30, 1997.
4
<PAGE> 6
4. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, FAS issued Statement of Financial Accounting Standards No.
130 "Reporting Comprehensive Income" ("SFAS 130"). This statement is
effective for the Company's fiscal year ending June 30, 1999. The
statement establishes presentation and disclosure requirements for
reporting comprehensive income. Comprehensive income includes charges or
credits to equity that are not the result of transactions with owners.
The Company plans to adopt the disclosure requirements and report
comprehensive income as part of the Consolidated Statements of
Shareholders' Equity as required under SFAS 130, and expects there to be
no material impact on the Company's financial position and results of
operations as a result of the adoption of this new accounting standard.
In June 1997, FAS issued Statement of Financial Accounting Standards No.
131 "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). This statement is effective for the Company's
fiscal year ending June 30, 1999. The statement requires the Company to
report certain financial information about operating segments in
complete sets of financial statements of the Company and in condensed
financial statements of interim periods. It also requires that the
Company report certain information about its products and services, the
geographic areas in which it operates and its major customers. The
method FAS chose for determining what information to report is referred
to as the "management approach". The management approach is based on the
way that management organizes the segments within the enterprise for
making operating decisions and assessing performance. The Company's
management has not yet completed its assessment of how the "management
approach" will impact segment disclosures.
5. CONTINGENT LIABILITIES
The Company has been named as a defendant in a class action lawsuit,
which was filed in October 1996 in the United States District Court for
the Northern District of California. Certain executive officers of the
Company are also named as defendants. The plaintiff purports to
represent a class of all persons who purchased the Company's common
stock between January 31, 1996 and August 26, 1996 (the "Class Period").
The complaint alleges claims under the federal securities laws and
California laws. The plaintiff alleges that the Company and certain of
its executive officers made false and misleading statements regarding
the Company that caused the market price of its common stock to be
"artificially inflated" during the Class Period. The complaint does not
specify the amount of damages sought. The Company has established a
reserve for the Company's estimated expenses in connection with the
lawsuit. The Company and its officers deny the allegations and will
vigorously pursue resolution of the claims.
On May 31, 1995, Digital Biometrics, Inc. ("DBI"), a competitor, filed a
lawsuit in the United States District Court in the Northern District of
California against the Company alleging that certain of the Company's
TouchPrint products violate a DBI patent and seeking injunctive relief
and unspecified damages. The lawsuit has no implication for other
Identix products. On August 22, 1996, the Court granted the Company's
motion determining that the TouchPrint 600 does not infringe the patent.
On December 7, 1996, the Court issued another ruling determining that
the predecessor product of the TouchPrint 600, the TouchPrint 900
product, did not infringe the patent. As a result, the Court entered
judgment in favor of Identix and awarded Identix its costs of suit. On
January 7, 1997, DBI filed a Notice of Appeal. Oral argument on that
appeal was held before the Federal Circuit Court of Appeals on October
8, 1997 and the matter is under consideration by the Court.
5
<PAGE> 7
IDENTIX INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Identix Incorporated ("Identix" or "the Company") designs, develops,
manufactures and markets comprehensive solutions for the capture or comparison
of fingerprints for security, fraud prevention, law enforcement and other
applications. Identix's products are classified into two groups: (i) biometric
identity verification ("Bio-ID") products that verify the identify of an
individual through the unique biological characteristics of a fingerprint and
(ii) biometric imaging products that electronically capture forensic quality
fingerprint images directly from an individual's fingers for law enforcement and
other applications. The Company's principal Bio-ID products are TouchNet II*,
TouchSafe II*, TouchLock II*, TouchClock II*, TouchBlock II*. The Company's
principal biometric imaging products are TouchPrint 600*, TouchView II*, I(3)
Workstation* and DocuColor*. The Company provides information technology,
engineering and management consulting services to private and public sector
clients through a wholly owned subsidiary, ANADAC, Inc. ("ANADAC"). ANADAC's
services support the development, installation, integration, and operation of
hardware and software technology solutions, including Identix products, for a
variety of client operating environments.
On March 26, 1996, the Company acquired Fingerscan Pty Limited ("Fingerscan"), a
privately held Australian-based company that designs and markets Bio-ID
products. Fingerscan had been a long-standing Identix OEM partner integrating
Identix fingerprint identification technology into Fingerscan's fingerprint
identity and verification products and systems. The acquisition was accounted
for as a purchase. Accordingly, the Company's financial statements include the
results of Fingerscan from the date of acquisition.
On June 30, 1996, the Company acquired Innovative Archival Solutions, Inc.
("IAS"), a privately held company which provides fingerprinting services using
the Company's biometric imaging products. The acquisition was accounted for as a
pooling of interests. Accordingly, the Company's fiscal 1996 consolidated
financial statements include the accounts and results of operations of IAS. For
the periods prior to fiscal 1996, the effects of the combination with IAS were
not significant, and the Company has not restated those years to include the
accounts and operations of IAS. On October 1, 1996, IAS was merged into Identix.
On July 23, 1997, the Company acquired Biometric Applications and Technology,
Inc. ("BA&T"), a privately held developer of biometric and "smart" card
applications and solutions. BA&T had been a software development partner that
integrated its software with Identix's Bio-ID products. The acquisition was
accounted for as a pooling of interests. Accordingly, the Company's fiscal 1997
consolidated financial statements include the accounts and results of operations
of BA&T. For the periods prior to fiscal 1997, the effects of the combination
with BA&T were not significant, and the Company has not restated those years to
include the accounts and results of operations of BA&T.
On September 30, 1997, the Company entered into a joint venture agreement with
Sylvan Learning Centers, Inc. for the purpose of providing fingerprinting
services through Sylvan's testing centers nationwide. As of October 1, 1997, the
business of IAS is being conducted through the joint venture.
The statements in this report that relate to future plans, events, or
performance are forward-looking statements. Actual results, events and
performance may differ materially due to a variety of factors including the
factors described under "Risk Factors" below. Readers are cautioned not to place
undo reliance on these forward-looking statements, which speak only as of the
date hereof. The Company undertakes no obligation to publicly release the result
of any revisions to these forward-looking statements that may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
- ---------- (*) The Company's has adopted TouchNet II(TM), TouchSafe II(TM),
TouchLock II(TM), TouchClock II(TM), TouchBlock II(TM), TouchPrint 600(TM),
TouchView II(TM), I(3) Workstation(TM) and DocuColor(R) as trademarks.
6
<PAGE> 8
IDENTIX INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED . . .
RESULTS OF OPERATIONS
Revenues
Revenues for the three month period ended September 30, 1997 were $18,850,000
compared to $12,079,000 for the same period in the prior fiscal year. For the
three month period ended September 30, 1997 the increase in revenues of 56% is
due to increases in the Company's net product revenues and services revenues.
The Company's net product revenues were $8,907,000 for the three month period
ended September 30, 1997 compared to $6,379,000 for the same period in the prior
fiscal year. For the three month period ended September 30, 1997, the increase
in net product revenues of 40% was due to increase shipments of both the
Company's biometric imaging and Bio-ID product lines. International sales
accounted for $2,537,000 or 28% of the Company's net product revenues for the
three month period compared to $1,265,000 or 20% for the same period in the
prior fiscal year. The increase is due to the increase of Bio-ID sales through
Fingerscan and increased international biometric imaging product sales. The
Company expects international sales to continue to represent a significant
portion of net product revenues although the percentage may fluctuate from
period to period. The Company's international sales are denominated in U.S.
dollars except for sales by Fingerscan which are denominated in Australian
dollars. The Company actively monitors its foreign currency exchange exposure
and, if significant, will take action to reduce foreign exchange risk. To date,
the Company has not entered into any hedging transactions. The overall impact of
currency fluctuations on operating results was not significant for the three
month period ended September 30, 1997. For the three month period ended
September 30, 1997, the Company's net products revenue included one customer
that accounted for 12% of total revenues. For the three month period ended
September 30, 1996, the Company's net products revenue included a different
customer that accounted for 15% of total revenues.
The Company's services revenues were $9,943,000 for the three month period ended
September 30, 1997 compared to $5,700,000 for the same period in the prior
fiscal year. The increase in services revenues of 74% for the three month period
ended September 30, 1997 was due primarily to increases in U.S. government
purchases through the Company's General Services Administration ("GSA") contract
which is operated and maintained by ANADAC. The GSA contract allows government
agencies to purchase, without a formal competitive bid process, the Company's
services and products as well as third party services and products at agreed
upon rates and prices, respectively. The Company and the General Services
Administration negotiate the rates and prices annually or as new services or
products are added. The majority of the Company's services revenues are
generated directly from contracts with the U.S. government, principally the
Department of Defense ("DOD"). For the three month period ended September 30,
1997, revenues directly from the DOD and from other U. S. government agencies
accounted for 87% of the Company's total services revenues compared to 76% for
the same period in the prior fiscal year. The increase is due to U.S. government
agency purchases through the GSA contract.
The Company's services business generates a significant amount of its revenues
from cost plus fixed fee ("CPFF") contracts, which accounted for approximately
22% of its services revenues for the three month period ended September 30,
1997, compared to 45% for the same period in the prior fiscal year. The decrease
in the percentage of services revenues generated by CPFF contracts is due to the
increase in third party services purchased through the GSA contract. CPFF
contracts provide for the reimbursement of allowable costs, including indirect
costs plus a fee or profit. The Company's services business also generates
revenue from time-and-materials ("T&M") contracts and from firm fixed-price
("FFP") contracts. During the three month period ended September 30, 1997, the
Company derived approximately 25% of its services revenues from T&M and FFP
contracts compared to 34% for the same period in the prior fiscal year. The
decrease in the percentage of services revenues generated by T&M and FFP
contracts is due to the increase in third party services purchased through the
GSA contract. T&M contracts typically provide for payment of negotiated hourly
rates for labor incurred plus reimbursement of other allowable direct and
indirect costs. FFP contracts provide for a fixed price for stipulated services
or products, regardless of the costs incurred, which may result in losses from
cost overruns. The Company has experienced a shift in its contract base from
CPFF to T&M and FFP type contracts. The Company assumes greater performance risk
on T&M and FFP contracts and the failure to accurately estimate ultimate costs
or to control costs during performance of the work can result in reduced profit
margins or losses. There can be no assurance that the Company's services
business will not incur cost overruns for any FFP and T&M contracts it is
awarded. In addition, revenues generated from contracts with government agencies
are subject to audit and subsequent adjustment by negotiation between the
Company and representatives of such government agencies. ANADAC is currently
undergoing an audit by the Defense Contract Audit Agency for the period from
January 1, 1993 to June 30, 1995.
7
<PAGE> 9
IDENTIX INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED . . .
Gross Margin
Gross margin on net product revenues was 54% for the three month period ended
September 30, 1997 as compared to 47% for the same period in the prior fiscal
year. The increase in gross margin was primarily due to (i) the favorable
product mix of higher gross margin products, (ii) cost reductions in certain
components of the biometric imaging and Bio-ID product lines and (iii)
increased manufacturing efficiencies resulting from the increase in unit volume.
The Company expects gross margins to fluctuate in future periods due to changes
in the product mix, the costs of components and competition in the industry.
Gross margin on services revenues was 14% for the three month period ended
September 30, 1997 as compared to 18% for the same period in the prior fiscal
year. The decrease in gross margin was primarily due to an increase in third
party services purchased through the GSA contract maintained by ANADAC. When the
Company sells third party services through the GSA contract, the Company earns a
fee based on a percentage of the third party services purchased. The fee earned
on third party services is typically less than the fee earned on services
directly provided by the Company.
Research, Development and Engineering
Research, development and engineering expenses were $1,037,000 or 12% of net
product revenues for the three month period ended September 30, 1997 compared to
$537,000 or 8% of net product revenues for the same period in the prior fiscal
year. For the three month period ended September 30, 1997, the Company had no
research, development and engineering expenditures funded by customers compared
to $125,000 for the same period in the prior fiscal year. The increase in
research, development and engineering expenses is primarily due to the addition
of engineering staff and related expenses to further develop and enhance the
Company's products including BA&T's Bio-ID software application suites. The
Company believes that investment in research and development is critical to
maintaining a strong technological position in the industry and therefore
expects research, development and engineering expenses to continue to increase
in absolute dollars in future fiscal 1998 quarters.
Marketing and Selling
Marketing and selling expenses were $2,206,000 or 12% of total revenues for the
three month period ended September 30, 1997 compared to $1,666,000 or 14% of
total revenues for the same period in the prior fiscal year. The increase in
marketing and selling expenses is due to the increased staffing and expenses to
(i) promote the Company's products and services, (ii) expand international sales
and distribution and (iii) expand its customer service organization.
General and Administrative
General and administrative expenses were $2,404,000 or 13% of total revenues for
the three month period ended September 30, 1997 compared to $1,768,000 or 15% of
total revenues for the same period in the prior fiscal year. The increase in
general and administrative expenses was primarily due to an increase in staffing
and other related administrative expenses to support the growth in operations
including BA&T's operations and to an increase in litigation reserves and
expenses to $423,000 for the three months ended September 30, 1997 compared to
$328,000 in the same period in the prior fiscal year.
8
<PAGE> 10
IDENTIX INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED . . .
Other Income and Expense
For the three month period ended September 30, 1997 other income was $44,000
compared to other expense of $9,000 for the same period in the prior fiscal
year.
Net Interest Expense
Net interest expense was $21,000 for the three month period ended September 30,
1997 compared to $67,000 for the same period in the prior fiscal year. The
difference was due to reduced borrowings under the Company's lines of credit
during the three month period ended September 30, 1997 compared to the same
period in the prior fiscal year.
During the three month period ended September 30, 1997, the weighted average
interest rate paid by the Company on its borrowings under line of credit (the
"Identix Line of Credit") was 8.5%. The weighted average interest rate paid by
ANADAC on borrowings under its bank line of credit (the "ANADAC Line of Credit")
during the three-month period ended September 30, 1997 was 8.5%.
LIQUIDITY AND CAPITAL RESOURCES
The Company financed its operations during the three months ended September 30,
1997 primarily from its existing working capital at June 30, 1997 and borrowings
under the Identix Line of Credit and the ANADAC Line of Credit. As of September
30, 1997, the Company's principal sources of liquidity consisted of $16.1
million of working capital including $1.2 million in cash and cash equivalents,
the Identix Line of Credit and the ANADAC Line of Credit.
The Identix Line of Credit is a $6,000,000 bank line of credit secured by the
personal property of Identix. Under the bank line of credit, the Company may
borrow up to 80% of eligible accounts receivable and may borrow up to 50% of
eligible inventory. Amounts drawn bear interest at the bank's prime rate of
interest (8.5% at September 30, 1997). The line of credit expires on August 28,
1998. At September 30, 1997, $1,600,000 was outstanding and $4,400,000 was
available under the Identix Line of Credit. The Identix Line of Credit agreement
contains financial and operating covenants, including restrictions on the
Company's ability to pay dividends on the Company's common stock.
The ANADAC Line of Credit is a $6,000,000 bank line of credit secured by
ANADAC's accounts receivable and certain other assets. Under the ANADAC Line of
Credit, ANADAC may borrow against qualified accounts receivable. Amounts drawn
bear interest at the bank's prime rate of interest (8.5% at September 30, 1997).
The line of credit expired on October 31, 1997. At September 30, 1997,
$1,092,000 was outstanding and $4,712,000 was available under the ANADAC Line of
Credit. The ANADAC Line of Credit agreement contains financial and operating
covenants. ANADAC has entered into a new bank line of credit with the same bank
to replace the ANADAC line of credit. The new line of credit is a $6,000,000
line of credit secured by ANADAC'S accounts receivable and certain other assets.
Under the new line of credit, ANADAC may borrow against qualified accounts
receivable. Amounts drawn bear interest at the bank's prime rate of interest.
The new line of credit expires on November 30, 1998.
9
<PAGE> 11
IDENTIX INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED . . .
The Company's operating activities used cash of $1,630,000 during the three
months ended September 30, 1997. Net income of $526,000 and increases in
deferred revenue of $765,000 and accounts payable of $504,000 were offset by
increases in accounts receivable of $3,149,000 and inventory of $688,000. The
increase in deferred revenue was primarily due to an increase in the number of
live-scan systems under maintenance contracts. The increase in accounts payable
was due to financing the increase in inventories and timing of vendor payments.
The increase in accounts receivable was due primarily to an increase in total
revenues and the increase in inventories was due primarily to the stocking of
certain inventory for the Company's Bio-ID and biometric imaging product lines.
Net cash used in investing activities during the three months ended September
30, 1997 was $496,000 due primarily to purchases of property and equipment of
$205,000 and additions to intangibles and other assets of $291,000.
Net cash provided by financing activities during the three months ended
September 30, 1997 was $878,000 due primarily to increased net borrowings
against the Company's lines of credit.
Identix did not have any material capital expenditure commitments as of
September 30, 1997.
The Company believes that cash flow from operations together with existing
working capital and two bank lines of credit maintained by the Company will be
adequate for the Company's cash requirements for fiscal 1998. However, the
Company may require additional equity or debt financing beyond the amounts
currently forecasted by the Company to meet its working capital or capital
equipment needs. There can be no assurance that the Company would be able to
obtain such financing or that the terms of financing would be favorable to the
Company.
10
<PAGE> 12
IDENTIX INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS - CONTINUED . . .
RISK FACTORS
The Company's future operation, financial performance, business and
share price may be affected by a number of factors, including the following, any
of which could cause actual results to vary materially from anticipated results
or from those expressed in any forward-looking statements made by the Company in
this Report on Form 10-Q for the three month period ended September 30, 1997, or
in other reports, press releases or other statements issued from time to time.
FLUCTUATIONS IN QUARTERLY RESULTS
The Company's quarterly operating results have in the past been, and will
continue to be, subject to significant variations resulting from a number of
factors, many of which are outside of the Company's control and any one of which
could substantially affect the Company's results of operations for any
particular fiscal period. The Company's revenues in any period have been, and in
the near term are expected to be, derived from large orders from a limited
number of customers. Accordingly, revenues in a particular quarter will be
dependent upon the timing and size of major orders and the timing of recognition
of revenues from those orders. A majority of the Company's revenues are derived
from the sale of products and services either directly to governmental agencies
or original equipment manufacturers ("OEMs"), systems integrators or resellers
who sell products and services to government agencies. Government agencies are
subject to political and budgetary constraints and orders from them may be
canceled or substantially delayed or the receipt of revenues or payments
substantially delayed due to political and budgetary processes or other
scheduling delays relating to the contract or bidding process. In addition, the
Company's contracts with local government agencies may be contingent upon
availability of matching funds from state or federal entities. Other factors
which can result in fluctuations in quarterly results of operations include
budgetary and purchasing cycles of government agencies; changes in the mix of
products and services sold and the mix of product sales by distribution
channels; the pricing of existing and future products by the Company's
competitors; the introduction of new or enhanced products by the Company or its
competitors and the market acceptance thereof; expenses related to, and results
of, litigation; percentage of and costs associated with FFP contracts and T&M
contracts; the availability and cost of key components; and fluctuations in
general economic conditions. The Company also may choose to reduce prices or to
increase spending in response to competition or to pursue new market
opportunities, all of which may adversely affect the Company's business,
financial condition and results of operations. Further, the lead time for
ordering parts and materials and building the Company's products can be many
months and the Company orders parts and materials and builds products based on
its forecasted demand for the products. If demand for the Company's products
lags significantly behind the Company's forecasts, the Company runs the risk of
building too large an inventory, which may adversely affect cash flow and may
result in write-offs or writedowns of inventory because of product obsolescence.
Due to the foregoing factors, the Company's operating results may differ from
the expectations of securities analysts and investors, which could adversely
affect the trading price of the Company's common stock. The Company believes
that period-to-period comparisons of its results of operations should not be
relied upon as indications of future performance.
DEPENDENCE UPON NEW AND UNCERTAIN MARKETS; UNCERTAINTY OF MARKET ACCEPTANCE
Substantially all of the Company's product revenues to date have been,
and for the foreseeable future are anticipated to be, derived from Bio-ID
products and biometric imaging products. These products represent new
technologies, which have not gained widespread commercial acceptance. In
particular, Bio-ID products represent a new approach to identity verification,
which has only been used in limited applications to date. The expansion of the
market for the Company's products depends on a number of factors, including the
cost and reliability of the Company's products and products of competitors,
customers' perception of the perceived benefits of these products, public
perceptions of the intrusiveness of these products and the manner in which
agencies are using the fingerprint information collected, public confidence as
to confidentiality of private information, customers' satisfaction with the
Company's products and publicity regarding these products. Public objections
have been raised as to the use of biometric products for some applications on
civil liberties grounds. The Company's future success is dependent upon the
development and expansion of markets for Bio-ID products and biometric imaging
products both domestically and internationally. In addition, even if markets
develop for Bio-ID products and additional markets develop for biometric imaging
products, there can be no assurance that the Company's products will gain wide
market acceptance in these markets. A number of factors may limit the market
acceptance of the Company's products, including the performance and price of the
Company's products compared to competitive products or
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technologies, the practicalities of developing the infrastructure necessary to
support certain Bio-ID applications such as ATMs and point-of-sale applications,
the nature of technological innovations and new product development activities
by the Company and its competitors, and the extent of marketing efforts by the
Company's collaborators or partners. If the markets for the Company's products
fail to develop or develop more slowly than anticipated or if the Company's
Bio-ID products fail to gain wide market acceptance, or biometric imaging
products lose market share, the Company's business, financial condition and
results of operations would be materially and adversely affected.
COMPETITION AND TECHNOLOGICAL CHANGE
The markets for Bio-ID products and biometric imaging systems are extremely
competitive and are characterized by rapid technological change, both as a
result of technical developments exploited by competitors, the changing
technical needs of customers and frequent introductions of new features. The
Company expects competition to increase as other companies introduce additional
and more competitive products. In order to compete effectively in this
environment, the Company must continually be able to develop and market new and
enhanced products and market those products at competitive prices. There can be
no assurance that the Company will be able to make the technological advances
necessary to compete successfully in its products business. Some of the
Company's present and potential competitors have financial, marketing and
research resources substantially greater than those of the Company. Existing and
new competitors may enter or expand their efforts in the Company's product
markets, or develop new products to compete against the Company's products. No
assurance can be given that the Company's competitors will not develop new
technologies or enhancements to existing products or introduce new products that
will offer superior price or performance features or that new products or
technologies will not render obsolete the products of the Company. For example,
other companies are developing currently or have developed other methods of
biometric identification such as retinal blood vessel or iris pattern, hand
geometry, voice and facial structure, which could significantly reduce the
potential market for the Company's products if widely adopted. In addition,
several companies, including Philips Electronics N.V., Harris Corporation, Sony
Corporation, SGS-Thomson Microelectronics, Inc. and Veridicom, Inc., are
developing semiconductor or optically-based direct contact fingerprint image
capture devices that could compete directly with the Company's Bio-ID image
capture devices. The Company's Bio-ID products also face competition from
non-biometric technologies such as traditional key, card and surveillance
systems, PINs and similar traditional verification methods. The Company believes
that in an effort to remain competitive in the future it will need to invest
increasing financial resources in research and development.
In its services business, the Company faces substantial competition from
professional services providers of all sizes in the government professional
services market. ANADAC is increasingly being required to bid on FFP and similar
contracts that result in greater performance risk to ANADAC. If ANADAC is not
able to maintain a competitive cost structure, support specialized market
niches, retain its highly qualified personnel or align with technology leaders,
its ability to compete successfully will be materially and adversely affected.
DEPENDENCE ON NEW PRODUCT INTRODUCTIONS
The Company's future success will depend upon its ability to address the
needs of the market by enhancing its current products and by developing and
introducing new products on a timely basis that keep pace with technological
developments and emerging industry standards (including FBI accreditation
standards), respond to evolving customer requirements and achieve market
acceptance. The development of new, technologically-advanced products and
product enhancements is a complex and uncertain process requiring high levels of
innovation, as well as the accurate anticipation of technological and market
trends. Any failure by the Company to anticipate or adequately respond to
technological developments or end user requirements, or any significant delays
in product development or introduction, could result in a loss of
competitiveness or revenue. There can be no assurance that the Company will be
successful in developing and marketing product enhancements or new products on a
timely basis if at all, that the Company will not experience difficulties that
could delay or prevent the successful development, introduction and sale of
these products, or that any of its new products and product enhancements will
adequately meet the requirements of the marketplace and achieve market
acceptance. If the Company is unable, for technological or any other reason, to
develop, introduce and sell its products in a timely manner, the Company's
business, financial condition and results of operations would be materially and
adversely affected. In addition, because a number of the Company's biometric
imaging products and Bio-ID products are incorporated into systems marketed by
other companies, or are co-marketed together with other products or services
sold by other companies, the failure to introduce products in a timely manner
may cause such companies to seek alternative suppliers or
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marketing partners. From time to time, the Company or its present or future
competitors may announce new products, capabilities or technologies that have
the potential to replace the Company's existing products. There can be no
assurance that announcements of currently planned or other new products will not
cause customers to delay or alter their purchasing decisions in anticipation of
such products, which could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, new
product introductions may contribute to fluctuations in quarterly operating
results or result in the early obsolescence of the Company's products, because
customers may forego ordering the Company's existing products. If the Company's
new products have reliability or quality problems, the Company may experience
reduced orders, higher manufacturing costs, delays in collecting accounts
receivable and additional service and warranty expense.
DEPENDENCE ON STRATEGIC RELATIONSHIPS FOR PRODUCT DISTRIBUTION
The Company's strategy for the distribution of certain of its products
requires entering into various strategic relationships with OEMs, systems
integrators and resellers. Some of these relationships are formalized in
agreements; however, such agreements are often terminable with little or no
notice, and subject to periodic amendment. Although the Company believes that
the OEMs, systems integrators and resellers with which it works have an economic
motivation to promote or use the Company's products, the amount and timing of
resources to be devoted to these activities are not within the control of the
Company. There can be no assurance that such parties will actively promote the
Company's products or pursue installations which use the Company's equipment,
that any distribution or other arrangements with the Company will not be
terminated or renegotiated or that the Company will derive any revenues from
such arrangements. The Company intends to continue to seek strategic
relationships to distribute and sell certain of its products. There can be no
assurance that the Company will be able to negotiate acceptable strategic
relationships in the future or that current or future strategic relationships
will be successful.
PUBLIC AGENCY CONTRACT CONSIDERATIONS
A majority of the Company's revenues are derived from the sale of
products and services either directly to governmental agencies or to OEMs,
systems integrators or resellers who sell products to government agencies.
Government agencies frequently require provisions in contracts that are not
standard in private commercial transactions, such as bonding requirements and
provisions permitting the purchasing agency to cancel the contract without
penalty if funding for the contract is no longer available or is not obtained.
As public agencies, the Company's prospective customers are also subject to
public agency contract requirements, which vary from jurisdiction to
jurisdiction. Future sales to public agencies will depend on the Company's
ability to meet public agency contract requirements, certain of which may be
onerous or even impossible for the Company to satisfy. In addition, public
agency contracts are frequently awarded only after formal competitive bidding
processes, which have been and may continue to be protracted, and typically
contain provisions that permit cancellation in the event that funds are
unavailable to the public agency. There can be no assurance that the Company
will be awarded any of the contracts for which its products are bid or, if
awarded, that substantial delays or cancellations of purchases will not result
from protests initiated by losing bidders.
UNCERTAINTY RELATED TO CONTRACTS FOR SERVICES WITH GOVERNMENT AGENCIES
During the three months ended September 30, 1997 and fiscal 1997, the
Company derived approximately 87% and 77%, respectively, of its services revenue
directly from contracts relating to the DOD and other U.S. Government agencies.
Loss of any material government contract due to budget cuts or otherwise could
have a material adverse effect on the Company's business, financial condition
and results of operations.
During the three months ended September 30, 1997 and fiscal 1997, the
Company derived approximately 25% and 46%, respectively, of services revenues
from T&M contracts and FFP contracts. T&M contracts typically provide for
payment of negotiated hourly rates for labor incurred plus reimbursement of
other allowable direct and indirect costs. FFP contracts provide for a fixed
price for stipulated services or products, regardless of the costs incurred,
which may result in losses from cost overruns.
The Company anticipates that revenues from FFP and T&M contracts will
continue to represent a significant percentage of its total services revenues.
The Company assumes greater performance risk on FFP and T&M contracts and the
failure to estimate accurately ultimate costs or to control costs during
performance of the work can result in reduced profit
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margins or losses. There can be no assurance that the Company's services
business will not incur such overruns for any FFP and T&M contracts it is
awarded. In addition, revenues generated from contracts with government agencies
are subject to audit and subsequent adjustment by negotiation between the
Company and representatives of such government agencies. ANADAC is currently
undergoing an audit for the period from July 1, 1992 to June 30, 1995. While the
Company believes that the results of the ANADAC audit will have no material
effect on the Company's revenues, there can be no assurance that no adjustments
will be made and that, if made, such adjustments will not have a material
adverse effect on the Company's business, financial condition and results of
operations.
RISKS ASSOCIATED WITH INTERNATIONAL EXPANSION
During the three months ended September 30, 1997 and fiscal 1997, the
Company's net product revenues from international sales were 28% and 31%,
respectively. A key component of the Company's strategy is to continue expansion
into international markets. There can be no assurance that the Company will be
able to market, sell and deliver its products in these foreign countries. In
addition to the uncertainty as to the Company's ability to expand its
international presence, there are certain risks inherent in foreign operations,
including longer accounts receivable payment cycles in certain countries,
general economic conditions in each country, seasonal reductions in business
activity during the summer months in Europe and certain other parts of the
world, delays in or prohibitions on exporting products resulting from export
restrictions for certain technologies (such as encryption technology),
fluctuations in foreign currencies, fluctuations in the U.S. dollar which can
increase the sales price of the Company's products in local currencies, loss of
revenue, property and equipment from expropriation, nationalization, war,
insurrection, terrorism and other political risks, the overlap of different tax
structures, risks of increases in taxes and other government fees and
involuntary renegotiation of contracts with foreign governments. The Company is
also at risk from changes in foreign and domestic laws, regulations and policies
governing foreign operations. There can be no assurance that laws or
administrative practices relating to taxation, foreign exchange or other matters
of countries within which the Company operates or will operate will not change.
Any such change could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, the laws of foreign
countries treat the protection of proprietary rights differently from, and may
not protect the Company's proprietary rights to the same extent as, laws in the
United States.
The Company's international sales are denominated in U.S. dollars,
except sales by Fingerscan which are denominated in Australian dollars. The
Company actively monitors its foreign currency exchange exposure and, if
significant, will take action to reduce foreign exchange risk. To date, the
Company has not entered into any hedging transactions.
DEPENDENCE ON LARGE ORDERS BY CUSTOMERS
The Company's revenues have principally consisted, and will continue to
consist principally, of large orders from a limited number of customers. While
the individual customers may vary from period to period, the Company is
nevertheless dependent upon these large orders for a substantial portion of its
total revenues. There can be no assurance that the Company will be able to
obtain large orders on a consistent basis. The Company's inability to obtain
sufficient large orders would have a material adverse effect on the Company's
business, financial condition and results of operations. Moreover, the timing
and shipment of such orders may cause the operating results of the Company in
any given quarter to differ from the expectations of securities analysts, which
could adversely affect the trading price of the Company's common stock. Losses
arising from customer disputes regarding shipping schedules, product condition
or performance, or the Company's inability to collect accounts receivable from
any major customer could also have a material adverse effect on the Company's
business, financial condition and results of operations.
Orders for the Company's biometric imaging products are often subject to
delays associated with the lengthy approval processes that typically accompany
large capital expenditures by government agencies. The Company's total revenues
depend in significant part upon the decision of a government agency to adopt and
integrate the Company's systems, which often involves a significant capital
commitment as well as significant future support costs. Similar delays may also
be experienced from government agencies procuring the Company's services. The
Company often has a lengthy sales cycle while the customer evaluates and
receives approvals for the purchase of the Company's products or services. Any
significant failure by the Company to receive an order after expending
significant funds and effort could have a material adverse effect on its
business, financial condition and results of operations. It may be difficult to
predict accurately the sales cycle of any
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large order. In the event one or more large orders fail to be shipped as
forecasted for a fiscal quarter, the Company's total revenues and operating
results for such quarter could be materially and adversely affected. In
addition, even if the Company receives such an order, the order may be
contingent upon availability of matching funds from state or federal entities or
may be canceled or receipt of revenues may be substantially delayed due to
political and budgetary processes.
RISKS ASSOCIATED WITH ACQUISITIONS
As part of its business strategy, the Company intends to acquire assets
and businesses principally relating to or complementary to its current
operations. The Company acquired Fingerscan in March 1996, IAS in June 1996 and
BA&T in July 1997. These and any other acquisitions by the Company will be
accompanied by the risks commonly encountered in acquisitions of companies. Such
risks include, among other things, potential exposure to unknown liabilities of
acquired companies or to acquisition costs and expenses exceeding amounts
anticipated for such purposes; fluctuations in the Company's quarterly and
annual operating results due to the costs and expenses of acquiring and
integrating new businesses; the difficulty and expense of assimilating the
operations and personnel of the companies; the potential disruption of the
Company's ongoing business and diversion of management time and attention; the
inability of management to maximize the Company's financial and strategic
position by the successful incorporation of acquired technology; the maintenance
of uniform standards, controls, procedures and policies; the impairment of
relationships with and possible loss of key employees and customers as a result
of changes in management; the incurrence of amortization expenses if an
acquisition is accounted for as a purchase; and dilution to the shareholders of
the Company if the consideration for the acquisition consists of the Company's
equity. In addition, the difficulty of integrating certain companies may be
increased by geographic distances. There can be no assurance that the Company
will be successful in overcoming these risks or any other problems encountered
in connection with such acquisitions.
RISK OF PRODUCT DEFECTS AND FAILURE TO MEET PERFORMANCE CRITERIA
Complex products such as those offered by the Company may contain
undetected or unresolved defects or may fail initially to meet customers'
performance criteria when first introduced or as new versions are released.
There can be no assurance that, despite testing by the Company, defects or
performance flaws will not be found in new products or new versions of products
following commercial release or that performance failures will not result,
causing loss of market share, delay in or loss of market acceptance, additional
warranty expense or product recall. In addition, the failure of products to meet
performance criteria could result in delays in recognition of revenue and higher
operating expenses during the period required to correct such defects. There is
a risk, that for unforeseen reasons, the Company may be required to repair or
replace a substantial number of products in use or to reimburse persons for
products that fail to work or meet strict performance criteria. Any such
occurrence could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company does carry product
liability insurance, but there can be no assurance that existing coverage is
adequate for current operations or will be adequate for future operations. The
Company's business could be materially and adversely affected by the assertion
of product liability claims.
PROTECTION OF PROPRIETARY TECHNOLOGY
The Company's ability to compete effectively will depend in part on its
ability to maintain the proprietary nature of its technology, products and
manufacturing processes. The Company principally relies upon patent, copyright,
trade secret and contract law to establish and protect its proprietary rights.
The success of the Company's products business will depend in part on its
proprietary technology and the Company's protection of such technology. The
Company holds United States and foreign patents covering certain of its products
and technologies and has other patent applications pending. Identix has an
ongoing policy of filing patent applications to seek protection for novel
features of its products.
No assurance can be given that the claims allowed on any patents held by
the Company will be sufficiently broad to protect the Company's technology. In
addition, no assurance can be given that any patents issued to the Company will
not be challenged, invalidated or circumvented or that the rights granted
thereunder will provide competitive advantages to the Company. The loss of
patent protection on the Company's technology or the circumvention of its patent
protection by competitors could have a material adverse effect on the Company's
ability to compete successfully in its products business.
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There can be no assurance that any existing or future patent applications by the
Company will result in issued patents with the scope of the claims sought by the
Company, or at all, that any current or future issued or licensed patents, trade
secrets or know-how will afford sufficient protection against competitors with
similar technologies or processes, or that any patents issued will not be
infringed upon or designed around by others. In addition, there can be no
assurance that others will not independently develop proprietary technologies
and processes, which are the same as, substantially equivalent or superior to
those of the Company. Further, there can be no assurance that the Company has
not or will not infringe prior or future patents owned by others, that the
Company will not need to acquire licenses under patents belonging to others for
technology potentially useful or necessary to the Company, or that such licenses
will be available to the Company, if at all, on terms acceptable to the Company.
Litigation, which could result in substantial cost to the Company and
diversion of management attention, may also be necessary to enforce any patents
issued to the Company or to determine the scope and validity, of other parties'
proprietary rights. For example, the Company is engaged in litigation with a
competitor regarding the scope of a competitor's patent. If the outcome of any
such litigation is adverse to the Company, its business, financial condition and
results of operations could be materially and adversely affected. To determine
the priority of inventions, the Company may have to participate in interference
proceedings declared by the United States Patent and Trademark Office or
oppositions in foreign patent offices, which could result in substantial cost to
the Company and limitations on the scope or validity of the Company's patents.
The Company also relies on trade secrets and proprietary know-how which
it seeks to protect by confidentiality agreements with its employees and
consultants and with third parties. There can be no assurance that these
agreements will not be breached, that the Company will have adequate remedies
for any breach, or that its trade secrets and proprietary know-how will not
otherwise become known or be independently discovered by others.
RISKS ASSOCIATED WITH MANAGING EXPANSION OF OPERATIONS
The Company has experienced substantial growth in recent years and
believes that in order to be successful it must continue to grow rapidly. In
order to grow rapidly, the Company will be required to expand, train and manage
its employee base, particularly skilled technical, marketing and management
personnel. Rapid growth will also require an increase in the level of
responsibility for both existing and new management and will require the Company
to implement and improve operational, financial and management information
procedures and controls. The Company competes with some of the major technology,
consulting and software companies in seeking to attract qualified personnel.
There can be no assurance that the management skills and systems currently in
place will be adequate or that the Company will be able to manage effectively
any significant growth it experiences and to hire or assimilate new personnel
necessary to pursue its growth strategy. Any failure to adequately manage growth
could materially and adversely affect the Company's business, financial
condition and results of operations.
DEPENDENCE UPON SOLE AND LIMITED SOURCES OF SUPPLY; RISKS ASSOCIATED WITH
IMPLEMENTATION OF LARGER SCALE MANUFACTURING CAPABILITIES
Certain of the components included in the Company's products are
obtained from a single source or a limited group of suppliers, the most
important of which are the charge coupled devices and application specific
integrated circuits ("ASICs") for the Bio-ID products and the charge coupled
devices for the biometric imaging products. The Company has no long term
agreements with any of its suppliers. Although the Company seeks to reduce
dependence on these sole and limited sources of suppliers, the partial or
complete loss of certain of these sources or the delay in receiving supplies
from these sources could result in delays in manufacturing and shipping of
products to customers. This may require the incurrence of development and other
costs to establish alternative sources of supply. While the Company attempts to
maintain a few months of inventory on sole source components, it may take the
Company several months to locate alternative suppliers if required, and/or to
re-tool its products to accommodate components from different suppliers. If the
Company is required to seek alternative suppliers, there can be no assurance
that the Company will be able to obtain such components within the time frames
required by the Company at an affordable cost, or at all. Any delays resulting
from suppliers failing to deliver components on a timely basis in sufficient
quantities and of sufficient quality or any significant increase in the price of
components from existing or alternative suppliers could have a material adverse
effect on the Company's business, financial condition and results of operations.
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Historically, the volume of the Company's production requirements for
the law enforcement and public sectors has not placed significant capacity
constraints on the Company's manufacturing and assembling capabilities. However,
as the Company begins to market its products for potentially larger volume
commercial applications, the Company may be required to fulfill larger orders in
a short period of time and to implement measures to decrease product costs.
There can be no assurance that the Company will be able to scale-up its
manufacturing and assembling capacities to fulfill such orders and to decrease
manufacturing costs. Any failure by the Company to implement higher volume
manufacturing or reduce product costs for commercial applications could have a
material adverse effect on the Company's business, financial condition and
results of operations.
DEPENDENCE UPON KEY PERSONNEL; NEED TO HIRE ADDITIONAL QUALIFIED PERSONNEL
The Company's success will depend upon its ability to retain its current
senior management team and key technical, marketing and sales personnel and its
ability to identify, attract and retain additional highly qualified personnel.
The Company's employees may voluntarily terminate their employment with the
Company at any time, and competition for qualified employees, especially
engineers, is intense. The process of locating additional personnel with the
combination of skills and attributes required to carry out the Company's
strategy is often lengthy. The loss of the services of key personnel, or the
inability to attract additional qualified personnel, could have a material
adverse effect on the Company's business, financial condition and results of
operations.
ONGOING LITIGATION
The Company has been named as a defendant in a class action lawsuit,
which was filed in October 1996 in the United States District Court for the
Northern District of California. Certain executive officers of the Company are
also named as defendants. The plaintiff purports to represent a class of all
persons who purchased the Company's common stock between January 31, 1996 and
August 26, 1996 (the "Class Period"). The complaint alleges claims under the
federal securities laws and California law. The plaintiff alleges that the
Company and certain of its executive officers made false and misleading
statements regarding the Company that caused the market price of its common
stock to be "artificially inflated" during the Class Period. The complaint does
not specify the amount of damages sought. The Company has established a reserve
for the Company's estimated expenses in connection with the lawsuit. The Company
and its officers deny the allegations and will vigorously pursue resolution of
the claims. There can be no assurance that the Company will prevail in its
defense of the lawsuit and that judgments against the Company will not be
material.
On May 31, 1995, Digital Biometric, Inc. ("DBI"), a competitor, filed a
lawsuit in the United States District Court in Northern District of California
against the Company alleging that certain of the Company's TouchPrint products
violate a DBI patent and seeking injunctive relief and unspecified damages. The
lawsuit has no implication for other Identix products. On August 22, 1996, the
Court granted the Company's motion determining that TouchPrint 600 does not
infringe the patent. On December 7, 1996, the Court issued another ruling
determining that the predecessor product of the TouchPrint 600, the TouchPrint
900 product, did not infringe the patent. As a result, the Court entered
judgment in favor of Identix and awarded Identix its cost of suit. On January 7,
1997, DBI filed a Notice of Appeal. Oral argument on that appeal was held before
the Federal Circuit Court of Appeals on October 8, 1997 and the matter is under
consideration by the Court.
VOLATILITY OF STOCK PRICE
The stock market has from time to time experienced significant price and
volume fluctuations that may be unrelated to the operating performance of
particular companies. In addition, the market price of the common stock, like
the stock prices of many technology companies, has been, and may continue to be,
highly volatile. Variations in quarterly operating results, the timing and
volume of procurements for the Company's products and services, announcements of
technological innovations or new products or services by the Company or by the
Company's competitors, announcements regarding product pricing by the Company or
its competitors, failure of the Company to meet earnings or revenue expectations
of securities analysts, the commencement of litigation, the developments in or
outcome of any litigation, developments in patent or other proprietary rights,
and economic and other external factors, among other factors, may have a
material adverse effect on the market price of the common stock.
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SHARE HOLDINGS OF ASCOM HOLDING
As of September 30, 1997, Ascom USA Inc. ("Ascom"), beneficially owned
approximately 21% of the outstanding common stock. This concentration of
ownership may have the effect of delaying or preventing a change in control of
the Company. The Company is a party to a Voting Trust Agreement ("Voting Trust
Agreement") with Ascom whereby Ascom deposited all of its 5,177,824 shares of
the Company's Common Stock ("Voting Stock") into a voting trust ("Voting
Trust"). The Trustee has voting control of the Voting Stock. The Voting Trust
Agreement expires in 2004. Ascom has preemptive rights with respect to issuances
of the Company's securities and registration rights with respect to the
securities it holds. The Company's ability to obtain additional financing on
favorable terms in the future may be adversely affected by the existence of
these preemptive rights and registration rights.
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IDENTIX INCORPORATED
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The Company has been named as a defendant in a class action
lawsuit, which was filed in October 1996 in the United States
District Court for the Northern District of California. Certain
executive officers of the Company are also named as defendants.
The plaintiff purports to represent a class of all persons who
purchased the Company's common stock between January 31, 1996
and August 26, 1996 (the "Class Period"). The complaint alleges
claims under the federal securities laws and California law. The
plaintiff alleges that the Company and certain of its executive
officers make false and misleading statements regarding the
Company that caused the market price of its common stock to be
"artificially inflated" during the Class Period. The complaint
does not specify the amount of damages sought. The Company has
established a reserve for the Company's estimated expenses in
connection with the lawsuit. The Company and its officers deny
the allegations and will vigorously pursue resolution of the
claims.
On May 31, 1995, Digital Biometrics, Inc. ("DBI"), a competitor,
filed a lawsuit in the United States District Court in the
Northern District of California against the Company alleging
that certain of the Company's TouchPrint products violate a DBI
patent and seeking injunctive relief and unspecified damages.
The lawsuit has no implication for other Identix products. On
August 22, 1996, the Court granted the Company's motion
determining that the TouchPrint 600 does not infringe the
patent. On December 7, 1996, the Court issued another ruling
determining that the predecessor product of the TouchPrint 600,
the TouchPrint 900 product, did not infringe the patent. As a
result, the Court entered judgment in favor of Identix and
awarded Identix its costs of suit. On January 7, 1997, DBI filed
a Notice of Appeal. Oral argument on that appeal was held before
the Federal Circuit Court of Appeals on October 8, 1997 and the
matter is under consideration by the Court.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
Number Description
------ -----------
10.26 Security and Loan Agreement Between Identix
Incorporated and Imperial Bank
11.1 Statement of Computation of Earnings Per Share
27.1 Financial Data Schedule
(b) No reports on Form 8-K were filed by the Company during
the three month period ended September 30, 1997.
19
<PAGE> 21
IDENTIX INCORPORATED
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
IDENTIX INCORPORATED
November 14, 1997
BY: /s/James P. Scullion
-------------------------------------
James P. Scullion
Executive Vice President,
Chief Financial Officer and Secretary
20
<PAGE> 22
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
10.26 Security and Loan Agreement Between Identix Incorporated and
Imperial Bank
11.1 Statement of Computation of Earnings Per Share
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.26
[IMPERIAL BANK LOGO]
SECURITY AND LOAN AGREEMENT
(ACCOUNTS RECEIVABLE AND/OR INVENTORY)
This Agreement is entered into between Identix Incorporated, a Corporation
(herein called "Borrower") and IMPERIAL BANK (herein called "Bank").
1. Bank hereby commits, subject to all the terms and conditions of this
Agreement and prior to the termination of its commitment as hereinafter
provided, to make loans to Borrower from time to time in such amounts as may
be determined by Bank up to, but not exceeding in the aggregate unpaid
principal balance, the following Borrowing Bank:
80.000 % of Eligible Accounts
50.000 % of the Value of Inventory, until December 31, 1997,
not to exceed $2,000,000.00.
and in no event more than $6,000,000.00
2. The amount of each loan made by Bank to Borrower hereunder shall be debited
to the loan ledger account of Borrower maintained by bank (herein called
"Loan Account") and Bank shall credit the Loan Account with all loan
repayments made by Borrower. Borrower promises to pay Bank (a) the unpaid
balance of borrower's Loan Account on demand and (b) on or before the tenth
day of each month, interest on the average daily unpaid balance of the Loan
Account during the immediately preceding month at the rate of No percent
(0.000%) per annum in excess of the rate of Interest which Bank has
announced as its prime lending rate ("Prime Rate") which shall vary
concurrently with any change in such Prime Rate. Interest shall be computed
at the above rate on the basis of the actual number of days during which the
principal balance of the loan account is outstanding divided by 360, which
shall for interest computation purposes be considered one year. Bank at its
option may demand payment of any or all of the amount due under the Loan
Account including accrued but unpaid interest at any time. Such notice may
be given verbally or in writing and should be effective upon receipt by
Borrower. The amount of Interest payable each month by Borrower shall not be
less than a minimum monthly charge of $250.00. Bank is hereby authorized to
charge Borrower's deposit account(s) with Bank for all sums due Bank under
this Agreement.
3. Requests for loans hereunder shall be in writing duly executed by Borrower
in a form satisfactory to Bank and shall contain a certification setting
forth the matters referred to in Section 1, which shall disclose that
Borrower is entitled to the amount of loan being requested.
4. As used in this Agreement, the following terms shall have the following
meanings:
A. "Accounts" means any right to payment for goods sold or leased, or to
be sold or to be leased, or for services rendered or to be rendered no
matter how evidenced, including accounts receivable, contract rights,
chattel paper, instruments, purchase orders, notes, drafts, acceptances,
general intangibles and other forms of obligations and receivables.
B. "Inventory" means all of the Borrower's goods, merchandise and other
personal property which are held for sale or lease, including those held
for display or demonstration or out on lease or consignment or to be
furnished under a contract of service or are raw materials, work in
process or materials used or consumed, or to be used or consumed in
Borrower's business, and shall include all property rights, patents,
plans, drawings, diagrams, schematics, assembly and display materials
relating thereto.
C. "Collateral" means any and all personal property of Borrower which is
assigned or hereafter is assigned to Bank as security or in which Bank
now has or hereafter acquires a security interest.
D. "Eligible Accounts" means all of Borrower's Accounts excluding,
however, (1) all Accounts under which payment is not received within
90/120* days from any invoice date, (2) all Accounts against which the
account debtor or any other person obligated to make payment thereon
asserts any defense, offset, counterclaim or other right to avoid or
reduce the liability represented by the Account and (3) any Accounts
if the account debtor or any other person liable in connection
therewith is insolvent, subject to bankruptcy or receivership
proceedings or has made an assignment for the benefit of creditors or
whose credit standing is unacceptable to Bank and Bank has so notified
Borrower. Eligible Accounts shall only include such accounts as Bank in
its sole discretion shall determine are eligible from time to time.
E. "Value of Inventory" means the value of Borrower's Inventory determined
in accordance with generally accepted accounting principles
consistently applied excluding, however, the amount of progress
payments, pre-delivery payments, deposits and any other sums received
by Borrower in anticipation of the sale and delivery of inventory, all
inventory on consignment or lease to others, and all property on
consignment or lease from others to Borrower.
5. Borrower hereby assigns to Bank all Borrower's present and future Accounts,
including all proceeds due thereunder, all guaranties and security therefor
and all merchandise giving rise thereto, and hereby grants to Bank a
continuing security interest in all Borrower's inventory and in all proceeds
and products thereof, whether now owned or hereafter existing or acquired,
including all moneys in the Collateral Account referred to in Section 6
hereof, as security for any and all obligations of Borrower to Bank, whether
now owing or hereafter incurred and whether direct, indirect, absolute or
contingent. So long as Borrower is indebted to Bank or Bank is committed to
extend credit to Borrower, Borrower will execute and deliver to Bank such
assignments, including Bank's standard forms of Specific or General
Assignment covering Individual Accounts, notices, financing statements, and
other documents and papers as Bank may require in order to affirm,
effectuate or further assure the assignment to Bank of the Collateral or to
give any third party, including the account debtors obligated on the
Accounts, notice of Bank's Interest in the Collateral.
6. Until Bank exercises its rights to collect the Accounts and Inventory
proceeds pursuant to paragraph 10, Borrower will collect with diligence all
Borrower's Accounts and inventory proceeds, provided that no legal action
shall be maintained thereon or in connection therewith without Bank's prior
written consent. Any collection of Accounts or Inventory proceeds by
Borrower, whether in the form of cash, checks, notes, or other instruments
for the payment of money (property endorsed or assigned where required to
enable Bank to collect same), shall be in trust for Bank, and Borrower
shall keep all such collections separate and apart from all other funds and
property so as to be capable of identification as the property of Bank and
deliver said collections, together with the proceeds of all cash sales,
daily to Bank in the identical form received. The proceeds of such
collections when received by Bank may be applied by Bank directly to the
payment of Borrower's Loan Account or any other obligation secured hereby.
Any credit given by Bank upon receipt of said proceeds shall be conditional
credit subject to collection. Returned items at Bank's option may be
charged to Borrower's general account. All collections of the Accounts and
inventory proceeds shall be set forth on an itemized schedule, showing the
name of the account debtor, the amount of each payment and such other
information as Bank may request.
7. Until Bank exercises its rights to collect the Accounts or inventory
proceeds pursuant to paragraph 10, Borrower may continue its present
policies with respect to returned merchandise and adjustments. However,
Borrower shall immediately notify Bank of all cases involving returns,
repossessions, and loss or damage of or to merchandise represented by the
Accounts or constituting inventory and of any credits, adjustments or
disputes arising in connection with the goods or services represented by
the Accounts or constituting inventory and, in any of such events, Borrower
will immediately pay to Bank from its own funds (and not from the proceeds
of Accounts or Inventory) for application to Borrower's Loan Account or any
other obligation secured hereby the amount of any credit for such returned
or repossessed merchandise and adjustments made to any of the Accounts.
Until payment is made as provided herein or until release by Bank from its
security interest, all merchandise returned to or
Page 1 of 2
<PAGE> 2
repossessed by Borrower shall be set aside and identified as the property
of Bank and Bank shall be entitled to enter upon any premises where such
merchandise is located and take immediate possession thereof and remove
same.
8. Borrower represents and warrants to Bank: (i) If Borrower is a corporation,
that Borrower is duly organized and existing in the State of its
incorporation and the execution, delivery and performance hereof are within
Borrower's corporate powers, have been duly authorized and are not in
conflict with law or the terms of any charter, by-law or other
incorporation papers, or of any indenture, agreement or undertaking to
which Borrower is a party or by which Borrower is found or affected; (ii)
Borrower is, or at the time the collateral becomes subject to Bank's
security interest will be, the true and lawful owner of and has, or at the
time the Collateral becomes subject to Bank's security interest will have,
good and clear title to the Collateral, subject only to Bank's rights
therein; (iii) Each Account is, or at the time the Account comes into
existence will be, a true and correct statement of a bona fide indebtedness
incurred by the debtor named therein in the amount of the Account for
either merchandise sold or delivered (or being held subject to Borrower's
deliver instructions) to, or services rendered, performed and accepted by,
the account debtor; (iv) That there are or will be no defenses,
counterclaims, or setoffs which may be asserted against the Accounts; and
(v) any and all financial information, including information relating to
the Collateral, submitted by Borrower to Bank, whether previously or in the
future, is or will be true and correct.
9. Borrower will: (i) Furnish Bank from time to time such financial statements
and information as Bank may reasonably request and inform Bank immediately
upon the occurrence of a material adverse change therein; (ii) Furnish Bank
periodically, in such form and detail and at such times as Bank may
require, statements showing aging and reconciliation of the Accounts and
collections thereon, and reports as to the inventory and sales thereof;
(iii) Permit representatives of Bank to inspect the inventory and
Borrower's books and records relating to the Collateral and make extracts
therefrom at any reasonable time and to arrange for verification of the
Accounts, under reasonable procedures, acceptable to Bank, directly with
the account debtors or otherwise at Borrower's expense; (iv) Promptly
notify Bank of any attachment or other legal process levied against any of
the Collateral and any information received by Borrower relative to the
Collateral, including the Accounts, the account debtors or other persons
obligated in connection therewith, which may in any way affect the value of
the Collateral or the rights and remedies of Bank in respect thereto; (v)
Reimburse Bank upon demand for any and all legal costs, including
reasonable attorneys' fees, and other expense incurred in collecting any
sums payable by Borrower under Borrower's Loan Account of any other
obligation secured hereby, enforcing any form or provision of this
Security Agreement or otherwise in the checking, handling and collection of
the Collateral and the preparation and enforcement of any agreement
relating thereto; (vi) Notify Bank of each location at which the inventory
is or will be kept, other than for temporary processing, storage or similar
purposes, and of any removal thereof to a new location and of each office
of Borrower at which records of Borrower relating to the Accounts are kept;
(vii) Provide, maintain and deliver to Bank policies insuring the
Collateral against loss or damage by such risks and in such amounts, forms
and companies as Bank may require and with loss payable solely to Bank, and,
in the event Bank takes possession of the Collateral, the insurance policy
or policies and any unearned or returned premium thereon shall at the
option of Bank become the sole property of Bank, such policies and the
proceeds of any other insurance covering or in any way relating to the
Collateral, whether now in existence or hereafter obtained, being hereby
assigned to Bank; (viii) Do all acts necessary to maintain, preserve and
protect all inventory, keep all inventory in good condition and repair and
not to cause any waste or unusual or unreasonable depreciation thereof,
and (ix) In the event the unpaid balance of Borrower's Loan Account shall
exceed the maximum amount of outstanding loans to which Borrower is
entitled under Section 1 hereof, Borrower shall immediately pay to Bank,
from its own funds and not from the proceeds of Collateral, for credit to
Borrowers' Loan Account the amount of such excess.
10. Bank may at any time, without prior notice to Borrower, collect the
Accounts and Inventory proceeds and may give notice of assignment to any
and all account debtors, and Borrower does hereby make, constitute and
appoint Bank its irrevocable, true and lawful attorney with power to
receive, open and dispose of all mail addressed to Borrower, to endorse the
name of Borrower upon any checks or other evidences of payment that may
come into the possession of Bank upon the Accounts or as proceeds of
Inventory; to endorse the name of the undersigned upon any document or
instrument relating to the Collateral; in its name or otherwise, to demand,
sue for, collect and give acquittances for any and all moneys due or to
become due upon the Accounts; to compromise, prosecute or defend any
action, claim or proceeding with respect thereto; and to do any and all
things necessary and proper to carry out the purpose herein contemplated.
11. Until Borrower's Loan Account and all other obligations secured hereby
shall have been repaid in full, Borrower shall not sell, dispose of or
grant a security interest in any of the Collateral other than to Bank, or
execute any financing statements covering the Collateral in favor of any
secured party or person other than Bank.
12. Should: (i) Default be made in the payment of any obligation, or breach be
made in any warranty, statement, promise, term or condition, contained
herein or hereby secured; (ii) Any statement or representation made for the
purpose of obtaining credit hereunder prove false; (iii) Bank deem the
Collateral inadequate or unsafe or in danger of misuse; (iv) Borrower become
insolvent or make assignment for the benefit of creditors; or (v) Any
proceeding be commenced by or against Borrower under any bankruptcy,
reorganization, arrangement, readjustment of debt or moratorium law or
statute; then in any such event, Bank may, at its option and without demand
first made and without notice to Borrower, do any one or more of the
following: (a) Terminate its obligation to make loans to Borrower as
provided in Section 1 hereof; (b) Declare all sums secured hereby
immediately due and payable; (c) Immediately take possession of the
Collateral wherever it may be found, using all necessary force so to do, or
require Borrower to assemble the Collateral and make it available to Bank at
a place designated by Bank which is reasonably convenient to Borrower and
Bank, and Borrower waives all claims for damages due to or arising from or
connected with any such taking; (d) Proceed in the foreclosure of Bank's
security interest and sale of the Collateral in any manner permitted by law,
or provided for herein; (e) Sell, lease or otherwise dispose of the
Collateral at public or private sale, with or without having the Collateral
at the place of sale, and upon terms and in such manner as Bank may
determine, and Bank may purchase same at any such sale; (f) Retain the
Collateral in full satisfaction of the obligations secured thereby; (g)
Exercise any remedies of a secured party under the Uniform Commercial Code.
Prior to any such disposition, Bank may, at its option, cause any of the
Collateral to be repaired or reconditioned in such manner and to such extent
as Bank may deem advisable, and any sums expended therefor by Bank shall be
repaid by Borrower and secured hereby. Bank shall have the right to enforce
one or more remedies hereunder successively or concurrently, and any such
action shall not estop or prevent Bank from pursuing any further remedy
which it may have hereunder or by law. If a sufficient sum is not realized
from any such disposition of Collateral to pay all obligations secured by
this Security Agreement, Borrower hereby promises and agrees to pay Bank any
deficiency.
13. If any writ of attachment, garnishment, execution or other legal process be
issued against any property of Borrower, or if any assessment for taxes
against Borrower, other than real property, is made by the Federal or State
government or any department thereof, the obligation of Bank to make loans
to Borrower as provided in Section 1 hereof shall immediately terminate and
the unpaid balance of the Loan Account, all other obligations secured
hereby and all other sums due hereunder shall immediately become due and
payable without demand, presentment or notice.
14. Borrower authorizes Bank to destroy all invoices, delivery receipts,
reports and other types of documents and records submitted to Bank in
connection with the transactions contemplated herein at any time subsequent
to four months from the time such items are delivered to Bank.
15. Nothing herein shall in any way limit the effect of the conditions set
forth in any other security or other agreement executed by Borrower, but
each and every condition hereof shall be in addition thereto.
16. Additional Provisions: See attached Addendum
Executed this 29th day of August, 1997
Identix Incorporated
------------------------------------
(Name of Borrower)
IMPERIAL BANK
By: /s/ James P. Scullion
-------------------------------
By: /s/ Ken LeDeit Executive Vice President,
-------------------------- Chief Financial Officer and
Assistant Vice President Secretary
By: /s/ Gregory M. Capitolo
-------------------------------
Vice President Finance
*If none, Insert "None"
<PAGE> 3
ADDENDUM TO SECURITY AND LOAN AGREEMENT
("SECURITY AND LOAN AGREEMENT") BETWEEN
IDENTIX INCORPORATED AND IMPERIAL BANK
DATED AUGUST 29, 1997
This Addendum, is made and entered into August 29, 1997, between Identix
Incorporated ("Borrower") and Imperial Bank ("Bank"). This Addendum amends and
supplements the Security and Loan Agreement. In the event of any inconsistency
between the terms herein and the terms of the Security and Loan Agreement, the
terms herein shall in all cases govern and control. All capitalized terms
herein, unless otherwise defined herein, shall have the meaning set froth in
the Security and Loan Agreement.
1. Any commitment of Bank, pursuant to the terms of the Security and Loan
Agreement, to make advances against Eligible Accounts and Inventory shall
expire on August 28, 1998, subject to Bank's right to renew said commitment in
its sole discretion. Any such renewal of the commitment shall not be binding
upon Bank unless it is in writing and signed by an officer of the Bank. All
amounts outstanding under the Security and Loan Agreement shall be due and
payable in full on the earlier of (i) the occurrence of a default under the
Security and Loan Agreement of this Addendum, or (ii) August 28, 1998.
2. As a condition precedent to Bank's obligation to make and advances to
Borrower, Borrower shall, among other things, cause Continuing Guarantees to be
executed and delivered to Bank by Fingerscan Pty Ltd. in the amount of
$6,000,000.00 in form and substance satisfactory to Bank.
3. Subject to the availability of the Borrowing Base and in reliance of
the representations and warranties of Borrower set froth herein, at any time
and from time to time from the date hereof through the business day immediately
prior to the expiration date in Section 1 above, Bank shall issue for the
account of Borrower such standby and commercial letters of credit ("Letters of
Credit") as Borrower may request, which shall be made by delivering to Bank a
duly executed letter of credit application on Bank's standard form; provided,
however, that the outstanding and undrawn amounts under all such Letters of
Credit (i) shall not at any time exceed $3,000,000.00 and (ii) shall be deemed
to be outstanding for the purpose of calculating availability under the Borrower
Base. Unless Borrower shall have deposited with Bank cash collateral in an
amount sufficient to cover all undrawn amounts under each such Letter of Credit
and Bank shall have agreed in writing, no Letter of Credit shall have an
expiration date that is later than the expiration date in Section 1 above. All
Letter of Credit shall be in form and substance acceptable to Bank in its sole
discretion and shall be subject to the terms and conditions of Bank's form
application and letter of credit agreement. Borrower will pay any standard
issuance and other fees that Bank notifies Borrower will be charged for issuing
and processing Letters of Credit for Borrower.
4. Subject to the availability of the Borrowing Base and in reliance on
the representations and warranties of Borrower set froth herein, at any time
and from time to time from the date hereof through the business day immediately
prior to the expiration date in Section 1 above, Bank shall arrange the
purchase by Borrower of foreign exchange futures contracts ("Exchange
Contracts") as Borrower may request, which request shall be made by delivering
to Bank a duly executed exchange contract application on Bank's standard form;
provided, however, that the maximum aggregate notional contract amount under
all such Exchange Contracts shall not at any time exceed $1,500,000.00
provided, further, that 10% of the maximum aggregate notional contract amount
under all such Exchange Contracts shall be deemed to be outstanding for the
purpose of calculating availability under the Borrowing base. Unless Borrower
shall have deposited with Bank cash collateral in an amount sufficient to cover
all undrawn amounts under each such Exchange Contract and Bank shall have agreed
<PAGE> 4
Addendum to Security and Loan Agreement
Dated August 29, 1997
in writing, no Exchange Contract shall have a due date that is later than the
expiration date in Section 1 above. All Exchange contacts shall be in form and
substance acceptable to Bank in its sole discretion and shall be subject to the
terms and conditions of Bank's form exchange contract application. Borrower
will pay any standard issuance and other fees that Bank notifies Borrower will
be charges for issuing and processing Exchange Contract for Borrower. After and
during the continuance of a default, Bank may, in its sole and absolute
discretion, terminate any or all of the Exchange Contracts. Borrower agrees to
indemnify and hold harmless Bank from and against all loss, costs and expense
associated with any such termination of any Exchange Contract.
5. At no time will the sum of (i) all Letter of Credit outstanding, plus (ii)
10% of the maximum aggregate notional contract amount under all such Exchange
Contracts, and plus (iii) direct borrowings, exceed in the aggregate the lessor
of the borrowing base or the sum of $6,000,000.00.
6. In addition to the provisions in the Security and Loan Agreement, Eligible
Accounts shall only include such accounts as Bank in its sole discretion shall
from time to time determine are eligible. Eligible Accounts shall also not
include any of the following:
a. Accounts under which payment is not received within ninety (90) days
from invoice day, except for accounts due from (i) governmental entity, agency
or instrumentality thereof, (ii) N. A. Morpho Systems, and (iii) NEC Technology;
b. Accounts due from the following customers: (i) governmental entity,
agency or instrumentality thereof, (ii) N. A. Morpho Systems, and (iii) NEC
Technology under which payment is not received within one hundred twenty (120)
days from invoice day;
c. Accounts with respect to which the account debtor is an officer,
director, shareholder, employee, subsidiary or affiliate of Borrower, except
for accounts due from ANADAC until December 31, 1997;
d. Accounts due from a customer if more than twenty-five percent (25%)
or more of the aggregate amount of accounts of such customer have at that time
remained unpaid for more than ninety (90) days from the invoice date (CROSS
AGE), except for accounts due from (i) governmental entity, agency or
instrumentality thereof, (ii) N. A. Morpho Systems, and (iii) NEC Technology;
e. Accounts due from the following customers: (i) governmental entity,
agency or instrumentality thereof, (ii) N. A. Morpho Systems, and (iii) NEC
Technology if more than twenty-five percent (25%) or more of the aggregate
amount of accounts of such customers named above have at that time remained
unpaid for more than one hundred twenty (120) days from the invoice date (CROSS
AGE);
f. Accounts representing billings for inventory or equipment on rent to
the account debtor;
g. Accounts with respect to intentional transactions unless insured or
covered by a letter of credit in a manner and form acceptable to the Bank,
except for the accounts of Protocol Solutions Limited and NIASCO;
h. Salesman's accounts for promotional purposes;
<PAGE> 5
Addendum to Security and Loan Agreement
Dated August 29, 1997
i. The amount by which any one account exceeds twenty-five percent (25%)
of the total accounts receivable balance (CONCENTRATION), except for accounts
due from N. A. Morpho Systems and NEC Technology;
j. The amount by which any one of the following accounts N. A. Morpho
Systems and NEC Technology exceeds thirty-five percent (35%) of the total
accounts receivable balance (CONCENTRATION);
k. Accounts where the account debtor is a seller to borrower, to the
extent that a potential offset exists (CONTRA);
l. Credit balances greater than 90 days from invoice date.
7. Pursuant to the provisions in the Security and Loan Agreement and this
Addendum, Bank will advance until December 31, 1997 up to fifty percent (50%)
of Eligible Inventory at the request of Borrower made from time to time, up to
a maximum amount outstanding not to exceed $2,000,000 (Inventory Sublimit).
Eligible Inventory is defined as gross inventory located at Borrower's chief
executive office, less reserves.
8. Borrower represents and warrants that:
a. There is no litigation or other proceeding pending or threatened
against or affecting Borrower, except as previously disclosed to Bank as of the
date hereof, and Borrower is not in default with respect to any order, writ,
injunction, decree or demand of any court or other governmental or regulatory
authority;
b. The balance sheet of Borrower dated as of July 31, 1997, and the
related profit and loss statement for the month then ended, a copy of which has
heretofore been delivered to Bank by Borrower, and all other statements and
data submitted in writing by Borrower to Bank in connection with its request
for credit are true and correct, and said balance sheet and profit and loss
statement truly present the financial condition of Borrower as of the date
thereof and the results of the operations of Borrower for the period covered
thereby, and have been prepared in accordance with generally accepted
accounting principles on a basis consistently maintained. Since such date,
there have been no material adverse changes. Borrower has no knowledge of any
liabilities, contingent or otherwise, at such date not reflected in said
balance sheet, and Borrower has not entered into any special commitments or
substantial contracts which are not reflected in said balance sheet, other than
in the ordinary and normal course of its business, which may have a materially
adverse effect upon its financial condition, operations or business as now
conducted;
c. Borrower has no liability for any delinquent state, local or federal
taxes, and, if Borrower has contracted with any government agency, Borrower has
no liability for renegotiation of profits;
d. Borrower, as of the date hereof, possesses all necessary trademarks,
trade names, copyrights, patents, patent rights, and licenses to conduct its
business as now operated, without any known conflict with valid trademarks,
trade names, copyrights, patents and license rights of others.
9. Borrower agrees that so long as it is indebted to Bank, it will not,
without prior written consent of Bank;
a. Make any substantial change in the character of its business;
<PAGE> 6
Addendum to Security and Loan Agreement
Dated August 29, 1997
b. Create, incur, assume or permit to exist any indebtedness for borrowed
monies other than loans from Bank except for indebtedness (i) fully subordinated
in form and substance satisfactory to Bank to debt due bank, (ii) equipment
leases, and (iii) obligations now existing as shown in financial statement dated
July 31, 1997, excluding those being refinanced by Bank; or sell or transfer,
either with or without recourse, any accounts or notes receivable or any monies
due or to become due;
c. Create, incur or assume any mortgage, pledge, encumbrance, lien or
charge of any kind (including the charge upon property at any time purchased or
acquired under conditional sale or other title retention agreement) upon any
asset now owned or hereafter acquired by it, other than liens (i) for taxes not
delinquent, (ii) in Bank's favor, and (iii) for equipment leased from parties
other than Bank;
d. Make any loans or advances, except Borrower may make loans or advances
to its 100% owned subsidiaries not exceeding $2,250,000 in the aggregate
outstanding at any one time, decreasing to $1,500,000 in the aggregate
outstanding at any one time at December 31, 1997 provided that said subsidiary
or subsidiaries execute and deliver to Bank a guaranty of the Bank loan, in form
and content acceptable to Bank when loans or advances exceed $500,000 to said
subsidiary (Loans and/or advances in the form of product of Borrower sold to its
subsidiaries in the ordinary course of business with normal trade terms will be
excluded from this covenant.), to any person or other entity other than in the
ordinary and normal course of its business as now conducted or make any
investment in the securities of any person or other entity other than (i) up to
$500,000 in a joint venture between Identix Incorporated and Sylvan Learning
Systems, Inc. and (ii) the United States Government; or guarantee or otherwise
become liable upon the obligation of any person or other entity, except by
endorsement of negotiable instruments for deposit or collection in the ordinary
and normal course of its business;
e. Purchase or otherwise acquire the assets or business of any person or
other entity; or liquidate, dissolve, merge or consolidate, or commence any
proceedings therefore; or except in the ordinary and normal course of its
business, sell (including without limitation the selling of any property or
other asset accompanied by the leasing back of the same) any assets including
any fixed assets, any property, or other assets necessary for the continuance of
its business as now conducted. Notwithstanding the foregoing, Borrower may make
acquisitions as long as such events do not cause the Borrower to violate any of
the financial convents contained herein;
f. Declare or pay any dividend or make any other distribution on any of
its capital stock now outstanding or hereafter issued or purchase, redeem or
retire any of such stock.
10. All financial covenants and financial information referenced herein shall
be interpreted and prepared in accordance with generally accepted accounting
principles applied on a basis consistent with previous years. Compliance with
financial covenants shall be calculated and monitored on a monthly basis except
where noted otherwise and will be calculated using the financial statements for
Identix operations only, excluding subsidiaries.
11. Borrower affirmatively covenants that so long as any loans, obligations or
liabilities remain outstanding or unpaid to Bank, it will:
a. At all times maintain a quick ratio [meaning all cash plus accounts
receivable (excluding accounts receivable due from subsidiaries) divided by
current liabilities less deferred revenue and accounts payable due from
subsidiaries] of at least one to one (1.00:1.00);
<PAGE> 7
Addendum to Security and Loan Agreement
Dated August 29, 1997
b. At all times maintain a maximum ratio of total liabilities (meaning
all liabilities, excluding deferred revenue and long term indebtedness fully
subordinated to debt due Bank) to tangible net worth (meaning all assets
excluding any value for goodwill, trademarks, patents, copyrights, organization
expenses, investment in subsidiaries, non-trade accounts receivable due from
subsidiaries, in-process technology, and other similar intangible items, less
total liabilities, plus long term indebtedness fully subordinated to debt due
Bank) not to exceed one to one (1.00:1:00);
c. At all times maintain a minimum tangible net worth (as defined in
Section 10.b hereof) of not less than $10,000,000.00;
d. Measured on a quarterly basis on the last day of each fiscal quarter
maintain after tax profitability;
e. As soon as it is available, but not later than 15 days after and as
of the end of each month, deliver to Bank: (i) a listing of aged accounts
receivable and accounts payable from invoice date; (ii) inventory report; and
(iii) Borrowing Base Certificate certified by an officer of Borrower; in form
satisfactory to Bank;
f. As soon as it is available, but not later than 25 days after and as
of the end of each month, deliver to Bank: (i) monthly financial statements of
Identix operations only, excluding subsidiaries consisting of a balance sheet,
profit and loss statement, and inter-company transaction report, and (ii)
Compliance Certificate certified by an officer of Borrower; in form
satisfactory to Bank;
g. As soon as it is available, but not later than 45 days after and as
of the end of each quarter, deliver to Bank quarterly consolidating financial
statements consisting of a balance sheet, and profit and loss statement.
h. As soon as it is available, but not later than 45 days of the end of
each of the first three fiscal quarters, deliver to Bank Borrower's 10-Q report
containing consolidated financial statements consisting of a balance sheet, and
profit and loss statement;
i. As soon as it is available, but not later than 90 days after the end
of Borrower's fiscal year, deliver to Bank annual consolidating financial
statements consisting of a balance sheet, and profit and loss statement;
j. As soon as it is available, but not later than 90 days after the end
of Borrower's fiscal year, deliver to Bank Borrower's 10K report containing a
report of audit of Borrower's consolidated financial statements together with
changes in financial position certified without negative qualification by an
independent certified public accountant selected by Borrower but acceptable to
Bank;
k. Upon Bank's reasonable Borrower shall deliver to Bank, budgets, sales
projections, operating plans, or other financial exhibits;
l. Permit representatives of Bank to conduct an audit of Borrower's
books and records relating to the Collateral and make extracts therefrom with
results satisfactory to Bank, provided that Bank shall use its best efforts to
not interfere with the conduct of Borrower's business, and to the extent
possible, to arrange for verification of all Accounts directly with the persons
obligated thereon or otherwise, all under reasonable procedures acceptable to
Bank and at Borrower's sole expense; provided further that, prior to the
occurrence of a default under the Security and Loan Agreement or this Addendum,
Borrower shall not be responsible for the expense of more than one audit in any
fiscal year;
<PAGE> 8
Addendum to Security and Loan Agreement
Dated August 29, 1997
m. Maintain and preserve all rights, franchises and other authority
adequate for the conduct of its business; maintain its properties, equipment
and facilities in good order and repair; conduct its business or partnership,
maintain and preserve its existence;
n. Maintain public liability, property damage and workers compensation
insurance and insurance on all its insurable property against fire and other
hazards with responsible insurance carriers to the extent usually maintained by
similar business. Borrower shall provide evidence of property insurance in
amounts and types acceptable to Bank, and certificates naming Bank Loss Payee;
o. Pay and discharge, before the same become delinquent and before
penalties accrue thereon, all taxes, assessments and governmental charges upon
or against it or any of its properties, and any of its other liabilities at any
time existing, except to the extent and so long as:
(i) The same are being contested in good faith and by appropriate
proceedings in such manner as not to cause any materially adverse
affect upon its financial condition or the loss of any right of
redemption from any sale thereunder; and
(ii) It shall have set aside on its books reserves (segregated to the
extent required by generally accepted accounting practice) deemed by
its adequate with respect thereto.
p. Maintain a standard and modern system of accounting in accordance
with generally accepted accounting principles on a basis consistently
maintained; permit Bank's representatives to have access to, and to examine its
properties, books and records at all reasonable times.
12. In addition to any other amounts due, or to become due, Borrower agrees to
pay a loan fee in the amount of thirty thousand dollars ($30,000.00) to Bank
upon signing of this Agreement.
13. Borrower will maintain substantially all its banking relationship with Bank.
14. All obligations of Borrower shall be Secured by a perfected first priority
security interest in all corporate assets, excluding leased equipment. Borrower
agrees to execute amendments appropriate and acceptable to Bank to perfect and
maintain Bank's security interest.
15. If any interest payment, principal payment or principal balance payment due
from Borrower is delinquent ten (10) or more days, Borrower agrees to pay Bank
a late charge in the amount of 5% of the payment so due and unpaid, in addition
to the payment; but nothing in this provision is to be construed as any
obligation on the part of Bank to accept payment of any payment past due or
less than the total unpaid principal balance after maturity. All payments shall
be applied first to any late charges owing, then to interest and the remainder,
if any, to principal.
16. Should there be a default under the Security and Loan Agreement, the
General Security Agreement, or under any note executed by Borrower, all
obligations, loans and liabilities of Borrower to Bank, due or to become due,
whether now existing or hereafter arising, shall, at the option of Bank, become
immediately due and payable without notice or demand, and Bank shall thereupon
have the right to exercise all of its default rights and remedies. The default
rate of interest shall be five percent per year in excess of the rate otherwise
charged.
<PAGE> 9
Addendum to Security and Loan Agreement
Dated August 29, 1997
17. Notice of Default. Borrower shall promptly notify Bank in writing of
the occurrence of any event of default hereunder or any event which upon notice
and lapse of time would be an event of default.
18. Miscellaneous Provisions. Failure or Indulgence Not Waiver. No
failure or delay on the part of Bank or any holder of Notes issued hereunder,
in the exercise of any power, right or privilege hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise thereof. All rights
and remedies existing under this agreement or any not issued in connection with
a loan that Bank may make hereunder, are cumulative to, and not exclusive of,
any rights or remedies otherwise available.
19. Reference Provision.
a. Other than (i) non-judicial foreclosure and all matters in
connection therewith regarding security interests in real or personal property;
or (ii) the appointment of a receiver, or the exercise of other provisional
remedies (any and all of which may be initiated pursuant to applicable law),
each controversy, dispute or claim between the parties arising out of or
relating to this Note ("Agreement"), which controversy, dispute of claim is not
settled in writing within thirty (30) days after the "Claim Date" (defined as
the date on which a party subject to the Agreement gives written notice to all
other parties that a controversy, dispute or claim exists), will be settled by a
reference proceeding in California in accordance with the provisions of Section
638 et seq. of the California Code of Civil Procedure, or their successor
section ("CCP"), which shall constitute the exclusive remedy for the settlement
of any controversy, dispute or claim concerning this Agreement, including
whether such controversy, dispute or claim is subject to the reference
proceeding and except as set forth above, the parties waive their rights to
initiate any legal proceedings against each other in any court or jurisdiction
other than the Superior Court in the County of where the real property securing
this Agreement, if any, is located or Los Angeles County if none (the "Court").
The referee shall be a retired Judge of the Court selected by mutual agreement
of the parties, and if they cannot so agree within forty-five (45) days after
the Claim Date, the referee shall be promptly selected by the Presiding Judge of
the Court (or his representative). The referee shall be appointed to sit as a
contemporary judge, with all of the powers of a temporary judge, as authorized
by law, and upon selection should take and subscribe to the oath of office as
provided for in Rule 244 of the California Rules of Court (or any subsequently
enacted Rule). Each party shall have one peremptory challenge pursuant to CCP
Section 170.6. The referee shall (a) be requested to set the matter for hearing
within sixty (60) days after the Claim Date and (b) try any and all issues of
law or fact and report a statement of decision upon them, if possible, within
ninety (90) days of the Claim Date. Any decision rendered by the referee will be
final, binding and conclusive and judgment shall be entered pursuant to CCP
Section 644 in any court in the State of California having jurisdiction. Any
party may apply for a reference proceeding at any time after thirty (30) days
following notice to any other party of the nature of the controversy, dispute or
claim, by filing a petition for a hearing and/or trial. All discovery permitted
by this Agreement shall be completed no later than fifteen (15) days before the
first hearing date established by the referee. The referee may extend such
period in the event of a party's refusal to provide requested discovery for any
reason whatsoever, including, without limitation, legal objections raised to
such discovery or unavailability of a witness due to absence or illness. No
party shall be entitled to "priority" in conducting discovery. Depositions may
be taken by either party upon seven (7) days written notice, and request for
production or inspection of documents shall be responded to within ten (10) days
after service. All disputes relating to discovery which cannot be resolved by
the parties shall be submitted to the referee whose decision shall be final and
binding upon the parties. Pending appointment of the referee as provided herein,
the Superior Court is empowered to issue temporary and/or provisional remedies,
as appropriate.
<PAGE> 10
Addendum to Security and Loan Agreement
Dated August 29, 1997
b. Except as expressly set forth in this Agreement, the referee shall
determine the manner in which the reference proceeding is conducted including
the time and place of all hearings, the order of presentation of evidence, and
all other questions that arise with respect to the course of the reference
proceeding. All proceedings and hearings conducted before the referee, except
for trial, shall be conducted without a court reporter, except that when any
party so requests, a court reporter will be used at any hearing conducted
before the referee. The party making such a request shall have the obligation
to arrange for and pay for the court reporter. The costs of the court reporter
at the trial shall be borne equally by the parties.
c. The referee shall be required to determine all issues in accordance
with existing case law and the statutory laws of the State of California. The
rules of evidence applicable to proceedings at law in the State of California
will be applicable to the reference proceeding. The referee shall be empowered
to enter equitable as well as legal relief, to provide all temporary and/or
provisional remedies and to enter equitable orders that will be binding upon
the parties. The referee shall issue a single judgment at the close of the
reference proceeding which shall dispose of all of the claims of the parties
that are the subject of the reference. The parties hereto - expressly reserve
the right to contest or appeal from the final judgment or any appealable order
or appealable judgment entered by the referee. The parties hereto expressly
reserve the right to findings of fact, conclusions of law, a written statement
of decision, and the right to move for a new trial or a different judgment,
which new trial, if granted, is also to be a reference proceeding under this
provision.
d. In the event that the enabling legislation which provides for
appointment of a referee is repealed (and no successor statute is enacted), any
dispute between the parties that would otherwise be determined by the reference
procedure herein described will be resolved and determined by arbitration. The
arbitration will be conducted by a retired judge of the Court, in accordance
with the California Arbitration Act, section 1280 through section 1294.2 of the
CCP as amended from time to time. The limitations with respect to discovery as
set forth herein above shall apply to any such arbitration proceeding.
This Addendum is executed by and on behalf of the parties as of the date first
above written.
Identix Incorporated Imperial Bank
By: /s/ James P. Scullion By: /s/ Ken LeDeit
-------------------------- --------------------------
Its: Exec. V.P., CFO Its: AVP
------------------------- -------------------------
<PAGE> 1
EXHIBIT 11.1
IDENTIX INCORPORATED
STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
Net income (loss) $ 526,000 $ 10,000
=========== ===========
Number of shares used in computing
per share amounts:
Weighted average common outstanding 24,961,000 24,772,000
Common equivalent shares attributable
to stock options and warrants 664,000 800,000
----------- -----------
Total weighted average common and
common equivalent shares outstanding 25,625,000 25,572,000
=========== ===========
Net income (loss) per share $ 0.02 $ 0.00
=========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1997 AND THE CONSOLIDATED
STATEMENT OF OPERATIONS DATED AS OF THE THREE MONTH PERIOD ENDED SEPTEMBER 30,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
AND ACCOMPANYING NOTES.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,165,000
<SECURITIES> 0
<RECEIVABLES> 22,557,000
<ALLOWANCES> 671,000
<INVENTORY> 5,983,000
<CURRENT-ASSETS> 29,772,000
<PP&E> 2,457,000<F1>
<DEPRECIATION> 0<F1>
<TOTAL-ASSETS> 35,286,000
<CURRENT-LIABILITIES> 13,713,000
<BONDS> 0
0
0
<COMMON> 51,388,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 35,286,000
<SALES> 8,907,000
<TOTAL-REVENUES> 18,850,000
<CGS> 4,136,000
<TOTAL-COSTS> 18,347,000
<OTHER-EXPENSES> 0<F2>
<LOSS-PROVISION> 0<F2>
<INTEREST-EXPENSE> 0<F2>
<INCOME-PRETAX> 526,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 526,000
<EPS-PRIMARY> .02
<EPS-DILUTED> 0<F2>
<FN>
<F1>Property, plant and equipment is shown net of accumulated depreciation.
<F2>Not shown separately when reporting Form 10-Q.
</FN>
</TABLE>
