<PAGE>
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 March 31, 1999 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
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IDENTIX INCORPORATED
--------------------
(Exact name of registrant as specified in its charter)
Delaware 94-2842496
-------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation of organization)
510 N. Pastoria Avenue, Sunnyvale, California 94086
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(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:
28,415,270 shares of Common Stock
as of April 30, 1999
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IDENTIX INCORPORATED
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION
<S> <C> <C>
Item 1 Financial Statements
Consolidated Balance Sheets - March 31, 1999 and June 30, 1998.................... 3
Consolidated Statements of Operations - three and nine months ended
March 31, 1999 and 1998........................................................... 4
Consolidated Statements of Cash Flows nine months ended
March 31, 1999 and 1998........................................................... 5
Notes to Consolidated Financial Statements....................................... 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................... 9
Item 3 Quantitative and Qualitative Disclosures about Market Risk........................ 23
PART II OTHER INFORMATION
Item 1 Legal Proceedings................................................................. 24
Item 6 Exhibits.......................................................................... 24
Signatures..................................................................................... 25
</TABLE>
2
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IDENTIX INCORPORATED
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Item 1. Financial Statements
March 31, June 30,
1999 1998
------------------ -----------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 829,000 $ 753,000
Accounts receivable, less allowance for doubtful accounts
of $727,000 and $866,000 29,316,000 28,576,000
Inventories 7,414,000 7,163,000
Prepaid expenses and other assets 1,117,000 586,000
-------------- --------------
Total current assets 38,676,000 37,078,000
Property and equipment, net 1,985,000 2,105,000
Intangibles and other assets 2,667,000 2,768,000
Interest in joint venture, net - 61,000
-------------- --------------
Total assets $ 43,328,000 $ 42,012,000
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to banks $ 6,424,000 $ 6,849,000
Accounts payable 9,141,000 8,428,000
Accrued compensation 1,847,000 1,837,000
Other accrued liabilities 680,000 574,000
Deferred revenue 1,354,000 1,237,000
-------------- --------------
Total current liabilities 19,446,000 18,925,000
Deferred revenue 197,000 88,000
Other liabilities 90,000 89,000
-------------- --------------
Total liabilities 19,733,000 19,102,000
-------------- --------------
Commitments and contingencies (Note 8)
Shareholders' equity:
Common stock, $0.01 par value; 50,000,000 shares authorized;
25,439,511 and 25,255,577 shares issued and outstanding 53,657,000 52,527,000
Accumulated deficit (29,881,000) (29,436,000)
Cumulative translation adjustment (181,000) (181,000)
-------------- --------------
Total shareholders' equity 23,595,000 22,910,000
-------------- --------------
Total liabilities and shareholders equity $ 43,328,000 $ 42,012,000
============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
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IDENTIX INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
--------------------------------- -----------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C>
Revenues:
Net product revenues $ 6,541,000 $ 7,695,000 $ 25,188,000 $ 24,691,000
Fingerprinting services revenues - 364,000 - 734,000
Services revenues 12,883,000 10,943,000 34,559,000 32,180,000
------------ ------------- ------------ -------------
Total revenues 19,424,000 19,002,000 59,747,000 57,605,000
------------ ------------- ------------ -------------
Cost and expenses:
Cost of product revenues 3,439,000 3,861,000 12,641,000 11,971,000
Cost of fingerprinting services revenues - 347,000 - 699,000
Cost of services revenues 11,037,000 9,305,000 29,924,000 27,358,000
Research, development and engineering 1,339,000 1,466,000 4,143,000 3,630,000
Marketing and selling 2,375,000 2,239,000 7,521,000 6,640,000
General and administrative 2,130,000 1,945,000 5,596,000 6,483,000
Reorganization and other non-recurring
costs - 717,000 - 717,000
------------ ------------- ------------ --------------
Total costs and expenses 20,320,000 19,880,000 59,825,000 57,498,000
------------ ------------- ------------ -------------
Income (loss) from operations (896,000) (878,000) (78,000) 107,000
Interest and other income (expense), net 169,000 9,000 229,000 111,000
Interest (expense) (97,000) (1,000) (332,000) (83,000)
------------ ------------- ------------ -------------
Income (loss) before tax and
equity interest in joint venture (824,000) (870,000) (181,000) 135,000
(Provision) benefit for incomes taxes 69,000 - (21,000) (25,000)
Equity interest in joint venture, net of tax (84,000) (4,000) (243,000) (33,000)
------------ ------------- ------------ -------------
Net income (loss) $ (839,000) $ (874,000) $ (445,000) $ 77,000
============ ============= ============ =============
Basic net income (loss) per share $ (0.03) $ (0.03) $ (0.02) $ 0.00
============ ============= ============ =============
Diluted net income (loss) per share $ (0.03) $ (0.03) $ (0.02) $ 0.00
============ ============= ============ =============
Weighted average common shares used to
compute basic net income (loss) per share 25,437,000 25,151,000 25,359,000 25,057,000
============ ============= ============ =============
Weighted average common shares used to
compute diluted net income (loss) per share 25,437,000 25,151,000 25,359,000 25,704,000
============ ============= ============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
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IDENTIX INCORPORATED
CONSOLIDATED STATEMENTS OF CASH
FLOWS (Unaudited)
<TABLE>
<CAPTION>
Nine months ended
March 31,
----------------------------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (445,000) $ 77,000
Adjustments to reconcile net income (loss) to net -------------- ---------------
cash provided by (used for) operating activities:
Depreciation 959,000 1,022,000
Amortization of intangibles 551,000 642,000
Amortization of deferred revenue (2,399,000) (1,391,000)
Interest in joint venture, net of tax 243,000 33,000
Increase in inventory reserve 78,000 213,000
Changes in assets and liabilities:
Accounts receivable (740,000) (1,660,000)
Inventories (329,000) (2,580,000)
Prepaid expenses and other assets (531,000) (525,000)
Accounts payable 713,000 983,000
Accrued compensation 10,000 191,000
Other accrued liabilities 107,000 (338,000)
Deferred revenue 2,625,000 1,977,000
-------------- ---------------
Net cash provided by (used for) operating activities 842,000 (1,356,000)
Cash flows used in investing activities:
Capital expenditures (839,000) (737,000)
Investment in joint venture (182,000) (232,000)
Additions to intangibles and other assets (450,000) (166,000)
-------------- ---------------
Net cash used in investing activities (1,471,000) (1,135,000)
-------------- ---------------
Cash flows provided by (used in) financing activities:
Borrowings under bank lines of credit 18,316,000 13,641,000
Payments under bank lines of credit (18,741,000) (12,790,000)
Proceeds from exercise of options and warrants, net 1,130,000 1,060,000
-------------- ---------------
Net cash provided by financing activities 705,000 1,911,000
-------------- ---------------
Net increase (decrease) in cash and cash equivalents 76,000 (580,000)
Cash and cash equivalents at beginning of period 753,000 2,510,000
-------------- ---------------
Cash and cash equivalents at end of period $ 829,000 $ 1,930,000
============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
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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 periods presented 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, 1998 included in the Company's Form 10-K/A. The results of
operations for the three and nine months ended March 31, 1999 are not
necessarily indicative of results to be expected for the entire fiscal
year, which ends on June 30, 1999.
The consolidated financial statements include the accounts of Identix
Incorporated ("Identix" or the "Company") and its wholly owned
subsidiaries: ANADAC, Inc. ("ANADAC"), Identix Australia Pty Limited
("Identix Australia"), and Biometric Applications and Technologies, Inc.
("BA&T"). The Company acquired BA&T on July 23, 1997 and accounted for the
acquisition of BA&T as a pooling of interests. The consolidated financial
statements do not include the results of operations of Identicator
Technology, Inc, acquired on April 26, 1999.
2. Joint Venture
On September 30, 1997, the Company entered into a joint venture agreement
with Sylvan Learning Centers, Inc. to form Sylvan/Identix Fingerprinting
Centers, L.L.C. ("SIFC") for the purpose of providing fingerprinting
services for a variety of civilian applications. The Company owns a 50%
interest in SIFC.
3. Inventories
Inventories are stated at the lower of cost (determined on the first-in,
first-out method) or market. Inventories consisted of the following:
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
--------------- ---------------
<S> <C> <C>
Purchased parts and materials $3,061,000 $3,518,000
Work-in-process 743,000 906,000
Finished goods, including spares 3,610,000 2,739,000
--------- ---------
$7,414,000 $7,163,000
========== ==========
</TABLE>
The Company provides for obsolete, slow moving or excess inventories in
the period when obsolescence or inventory in excess of expected demand is
first identified. During the nine months ended March 31, 1999, the Company
physically disposed of $621,000 of inventory as a result of the decision
to discontinue support for certain products and manufacturing space
utilization concerns. The inventory had been previously identified as
being potentially obsolete and had been reserved for in earlier periods.
The inventory principally related to certain products that were either
non-Y2K compliant and therefore discontinued, such as the TouchLock I and
TouchPrint 900, or were parts made obsolete by design changes in the
TouchPrint 600 and other products.
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4. Bank Covenant Waiver
At March 31, 1999, the Company was in default on one of its bank line of
credit covenants. The Company has obtained a waiver of default from the
bank for the breach of the covenant.
5. Earnings (Loss) Per Share
Basic earnings (loss) per share is computed using the weighted average
number of common shares outstanding during the period. Diluted earnings
(loss) per share is computed using the weighted average number of common
shares outstanding during the period after considering the effect of
dilutive common stock options and warrants under the treasury stock
method.
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
--------- ---------
1999 1998 1999 1998
--------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net income (loss) $ (839,000) $ (874,000) $ (445,000) $ 77,000
=========== =========== =========== ===========
Weighted average common shares outstanding 25,437,000 25,151,000 25,359,000 25,057,000
Dilutive effect of stock options and warrants - - - 647,000
----------- ----------- ----------- -----------
Weighted average common shares outstanding
assuming dilution 25,437,000 25,151,000 25,359,000 25,704,000
=========== =========== =========== ===========
Basic net income (loss) per share $ (0.03) $ (0.03) $ (0.02) $ 0.00
=========== =========== =========== ===========
Diluted net income (loss) per share $ (0.03) $ (0.03) $ (0.02) $ 0.00
=========== =========== ============ ===========
</TABLE>
The effect of options and warrants were not included in the computation of
net loss per share, as their effect was anti-dilutive for the three and
nine month periods ending March 31, 1999 and the three month period ending
March 31, 1998.
6. Comprehensive Income
Effective July 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). Other comprehensive income includes charges or credits to equity
that are not the result of transactions with owners. Accumulated other
comprehensive income consisted of foreign currency translation adjustment.
As the Company substantially liquidated its foreign operation on March
31,1998, there have been no other comprehensive income from that date.
7. Recent Accounting Pronouncements
June 1997, the FASB issued Statement of Financial Accounting Standards No.
"Disclosures About Segments of an Enterprise and Related Information"
("SFAS 131"). This 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 commencing June 30, 1999. 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
the FASB 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
operation decisions and assessing performance.
8. Contingencies
ANADAC is a named defendant in five related personal injury lawsuits
pending in the Circuit Court of
7
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Virginia. All of these suits arise from the collapse of a balcony at the
University of Virginia during graduation ceremonies in May 1997 in which
one person was killed and approximately 23 others were injured. The
Commonwealth of Virginia and the Curator of the University's Academical
Village are also named defendants. It is alleged that the Commonwealth of
Virginia and the Curator were negligent in failing to maintain and ensure
the structural integrity of the historic structure which collapsed. It is
alleged that ANADAC is liable for failing to identify signs of structural
deterioration during a contracted 1994 inspection. ANADAC had been hired
by the University of Virginia to create a budget for maintaining ten
historic buildings based on a visual inspection and analysis of certain
statistical information. ANADAC's assignment did not include a structural
review of any nature and did not encompass the type of inspection that
would uncover a defect of the nature that caused the balcony collapse. Of
the five lawsuits, one was filed in the Circuit Court of Virginia in
Fairfax in March 1998, one was filed in that court in February 1999 and
the three others were filed in the Circuit Court of Virginia in
Charlottesville between July and September 1998. The aggregate amount of
damages sought in these suits is $9,050,000. Ten of the persons injured in
the accident have settled with the Commonwealth of Virginia, releasing all
potential claims with respect to the accident. Additional lawsuits may be
filed by other injured persons with respect to the accident. The Company
believes that the claims against ANADAC are without merit and will not
have a material adverse effect on the Company.
9. Acquisition
Identix completed the acquisition of Identicator Technology, Inc.
("Identicator Technology") on April 26, 1999. Identicator Technology
designs and manufactures fingerprint security systems for information
technology, banking and data/network security. Identix acquired all
outstanding Identicator Technology shares in a stock-for-stock
transaction. As a result of the transaction, Identicator Technology
securities holders are entitled to receive an aggregate of 5,050,000
shares of Identix common stock, either upon the acquisition or upon
exercise of options assured in the acquisition. The total value of the
acquisition, including transaction costs, was approximately $43 million.
The Identix shares to be issued in the transaction are subject to certain
lock-up and escrow provisions. The acquisition is being accounted for
under the purchase method.
8
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IDENTIX INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Item 2.
The forward-looking statements in this report on Form 10-Q 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. The Company
undertakes no obligation to publicly update these forward-looking statements to
reflect events or circumstances that occur after the date hereof or to reflect
the occurrence of unanticipated events.
Overview
Identix designs, develops, manufactures and markets two categories of products
for security, anti-fraud, law enforcement and other applications: (i)
Biometric Security ("Bio-Security") products that verify the identity of an
individual through the unique biological characteristics of a fingerprint and
(ii) Biometric Imaging ("Bio-Imaging") products that electronically capture
forensic quality fingerprint images directly from an individual's fingers for
law enforcement and other applications. The Company provides information
technology, engineering and management consulting services to private and public
sector clients through its wholly owned subsidiary ANADAC. ANADAC's services
support the development, installation, integration and operation of hardware and
software technology solutions, including Identix products, for a variety of
clients operating environments.
Identix completed the acquisition of Identicator Technology, Inc. ("Identicator
Technology") on April 26, 1999. Identicator Technology designs and manufactures
fingerprint security systems for information technology, banking and
data/network security. Identix acquired all outstanding Identicator Technology
shares in a stock-for-stock transaction. As a result of the transaction
Identicator Technology securities holders are entitled to receive an aggregate
of 5,050,000 shares of Identix common stock, either upon the acquisition or upon
exercise of options assured in the acquisition. The total value of the
acquisition, including transaction costs, was approximately $43 million. The
Identix shares to be issued in the transaction are subject to certain lock-up
and escrow provisions. The acquisition is being accounted for under the
purchase method.
On July 23, 1997, the Company acquired 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 into Identix's Biometric
Security products. The acquisition was accounted for as a pooling of interests.
On September 30, 1997, the Company entered into a joint venture agreement with
Sylvan Learning Centers, Inc. to form Sylvan/Identix Fingerprinting Centers,
L.L.C. ("SIFC") for the purpose of providing fingerprinting services for a
variety of civilian applications. The Company owns a 50% interest in SIFC. For
certain contracts held by Identix prior to the joint venture, Identix
subcontracts the fingerprinting services to the joint venture. Revenues
received by Identix under these contracts are presented separately as
fingerprinting services in consolidated statement of operations. As of July 1,
1998, the contracts have been assigned to SIFC.
Results of Operations
Revenues
- --------
Revenues for the three and nine month periods ended March 31, 1999 were
$19,424,000 and $59,747,000, respectively, compared to $19,002,000 and
$57,605,000 for the same periods in the prior fiscal year. The increase in
revenues of 2% for the three-month period was due to increased services revenues
which was partically offset by a decrease in net products revenues and the
transfer of certain revenue producing contracts to SIFC. The increase in
9
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IDENTIX INCORPORATED
Management's Discussion and Analysis Continued . . .
revenues of 4% for the nine-month period was due mainly to increased services
revenues and to a lesser degree increased net product revenues.
The Company's net product revenues were $6,541,000 and $25,188,000 for the three
and nine month periods ended March 31, 1999, compared to $7,695,000 and
$24,691,000 for the same periods in the prior fiscal year. For the three month
period ended March 31, 1999, the decrease in net product revenues of 15%, was
due to a decrease in Bio-Imaging sales caused by seasonality and fluctuations in
large-scale live-scan procurements by government agencies and a decrease in Bio-
Security sales relating to the consolidation of products with recently acquired
Identicator Technology. For the nine month period ended March 31, 1999, the
increase of 2% was due to increased sales of Bio-Imaging products, mainly the
TouchPrint 600 product line. In addition, increased sales of the TouchPrint 600-
product line have generated additional revenues from maintenance support
agreements. The increase in Bio-Imaging sales was partially offset by a decline
in Bio-Security product sales, which resulted primarily from Identix's
preparation for introducing combined product offerings following the closing of
the acquisition of Identicator Technology.
International sales accounted for $802,000 or 12% and $2,771,000 or 12% of the
Company's net product revenues for the three and nine month periods ended March
31, 1999, respectively, compared to $1,062,000 or 14% and $5,519,000 or 22% for
the same periods in the prior fiscal year. The decrease in international sales
for the three and nine month periods was due to a decline in sales in Asia and
the decline in Bio-Security sales which compose the majority of international
revenues. 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. Identix's international sales are
predominately denominated in U.S. dollars, and 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 Company did not have any one product business customer that accounted for
more then 10% of total revenues for the three and nine month periods ended March
31, 1999 and the nine month period ending March 31, 1998. For the three month
period ended March 31, 1998, the Company's product business included one
customer which accounted for 11% of total revenues.
The Company's services revenues were $12,883,000 and $34,559,000 for the three
and nine month periods ended March 31, 1999, respectively, compared to
$10,943,000 and $32,180,000 for the same periods in the prior fiscal year. The
increase in services revenues of 18% and 7% for the three and nine month periods
ended March 31, 1999 was due primarily to an increase in U.S. government
purchases through the Company's General Services Administration ("GSA") contract
and increased purchases through the NAVSEA contract from the US Naval Sea
Systems Command. The GSA contract allows Government agencies to purchase the
Company's products and services as well as third party products and services at
agreed upon prices and rates. The Company and the GSA negotiate the prices and
terms periodically or as new products or services 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
and nine month periods ended March 31, 1999, revenues directly from the DOD and
from other U. S. government agencies accounted for 87% and 90%, respectively, of
the Company's total services revenues compared to 88% and 90%, respectively, for
the same periods in the prior fiscal year.
The Company's services business generates a significant amount of its revenues
from time-and-materials ("T&M") contracts and from firm fixed-price ("FFP")
contracts. During the three and nine month periods ended March 31, 1999, the
Company derived 85% and 83% of its services revenues from FFP and T&M contracts
compared to 80% and 79% for the same periods in the prior fiscal year. FFP
contracts provide for a fixed price for stipulated services
10
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IDENTIX INCORPORATED
Management's Discussion and Analysis Continued . . .
or products, regardless of the costs incurred, which may result in losses from
cost overruns. T&M contracts typically provide for payment of negotiated hourly
rates for labor incurred plus reimbursement of other allowable direct and
indirect costs. 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. The Company's
services business also generates revenues from cost plus fixed fee ("CPFF")
contracts, which accounted for approximately 15% and 17% of its services
revenues for the three and nine month periods ended March 31, 1999, compared to
20% and 21% for the same periods in the prior fiscal year. The decrease in the
percentage of services revenues generated by CPFF contracts is due to the
increase in other forms of contract revenue. CPFF contracts provide for the
reimbursement of allowable costs, including indirect costs plus a fee or profit.
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 has completed an audit by the Defense
Contract Audit Agency ("DCAA") for the period from July 1, 1992 to June 30,
1995. The results of this audit found no material disallowed costs.
On July 1, 1998, the Company transferred certain revenue producing contracts to
SIFC that had been previously sub-contracted to SIFC, resulting in the decrease
in fingerprinting services revenues in the three and nine month periods ended
March 31, 1999 as compared to the same periods in the prior fiscal year.
Gross Margin
- ------------
Gross margin on net product revenues was 47% and 50% for the three and nine
month periods ended March 31, 1999, as compared to 50% and 52% for the same
periods in the prior fiscal year. The decrease in gross margin for the nine
month period was primarily due to a one time sale with a high gross margin in
fiscal 1998 and product mix of lower gross margin products sold in fiscal 1999.
The Company expects gross margins to fluctuate in future periods due to changes
in the product mix, the costs of components and the competition in the industry.
The increase in inventory reserve was $78,000 for the nine month period ended
March 31, 1999 as compared to $213,000 for the same period in the prior fiscal
year. The reduced amount was based upon management's ongoing assessment of
potentially obsolete and excess inventory, the large components of which had
been adequately provided for in earlier periods because they were known to be
non-Y2K compliant.
Gross margin on services revenues was 14% and 13% for the three and nine month
periods ended March 31, 1999 as compared to 15% for the same periods in the
prior fiscal year. The decrease in gross margin for the three and nine month
periods was primarily due to increased revenues from certain contracts which
provide value added services provided by subcontractors which carry lower gross
margins.
Research, Development and Engineering
- -------------------------------------
Research, development and engineering expenses were $1,339,000 or 20% and
$4,143,000 or 16% of net product revenues for the three and nine month periods
ended March 31, 1999, respectively, compared to $1,466,000 or 19% and $3,630,000
or 15% of net product revenues for the same periods in the prior fiscal year.
The decrease in research, development and engineering expenses for the three
month period is primarily due to cost control measures implemented relating to
the decreased products revenues. The increase in research, development and
engineering expenses for the nine month period is primarily due to the addition
of engineering staff and related expenses to further develop and enhance the
Company's products. Management 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 be a substantial expense in future quarters.
11
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IDENTIX INCORPORATED
Management's Discussion and Analysis Continued . . .
Marketing and Selling
- ---------------------
Marketing and selling expenses were $2,375,000 or 12% and $7,521,000 or 13% of
total revenues for the three and nine month periods ended March 31, 1999,
respectively, compared to $2,239,000 or 12% and $6,640,000 or 12% of total
revenues for the same periods in the prior fiscal year. The increase in
marketing and selling expenses is due to the increased staffing and expenses to
promote the Company's products and services and to expand its sales
organization.
General and Administrative
- --------------------------
General and administrative expenses were $2,130,000 or 11% and $5,596,000 or 9%
of total revenues for the three and nine month periods ended March 31, 1999,
respectively, compared to $1,945,000 or 10% and $6,483,000 or 11% of total
revenues for the same periods in the prior fiscal year. The increase in the
three month period in general and administrative expenses was due to increases
in staff to support increased services revenues relating to ANADAC. The
decrease in the nine month period in general and administrative expenses was
primarily due to the decreased litigation costs related to certain lawsuits
which have been resolved and cost savings related to the restructuring that
occurred in the third quarter of fiscal 1998. Litigation charges were $41,000
and $143,000 for the three and nine month periods ended March 31, 1999 compared
to $71,000 and $707,000 for the same periods in the prior fiscal year.
Interest and Other Income Expense, net
- ---------------------------------------
For the three and nine month periods ended March 31, 1999, net other income was
$169,000 and $229,000, respectively, compared to net other income of $9,000 and
$111,000 for the same periods in the prior fiscal year. The increase in interest
and other income expense, net was primarily due to an increase in license fee
income and a recovery of indirect taxes.
Interest Expense
- ----------------
Net interest expense was $97,000 and $332,000 for the three and nine-month
periods ended March 31, 1999, respectively, compared to $1,000 and $83,000 for
the same periods in the prior fiscal year. The difference was due to increased
borrowings for working capital requirements under the Company's lines of credit
during the three and nine-month periods ended March 31, 1999 compared to the
same periods in the prior fiscal year.
During the three and nine month periods ended March 31, 1999, the weighted
average interest rate paid by Identix on borrowings under its line of credit
(the "Identix Line of Credit") was 8.3% and 8.3%, respectively. The weighted
average interest rate paid by ANADAC on borrowings under its line of credit (the
"ANADAC Line of Credit") during the three and nine-month periods ended March 31,
1999 were 7.8% and 8.0%, respectively.
Income Taxes
- ------------
The income tax benefit was $69,000 and provision was $21,000 for the three and
nine month periods ended March 31, 1999, respectively, compared to nil and
provision of $25,000 for the same periods in the prior fiscal year. The tax
benefit relates to a previous tax year. The Company's effective tax rate is
below the statutory rate due to the utilization of net operating loss
carryforwards incurred in prior years. The Company is subject to certain
alternative minimum tax requirements for which an estimate is made based on the
Company's anticipated effective tax rate at the end of the fiscal year.
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IDENTIX INCORPORATED
Management's Discussion and Analysis Continued . . .
Equity Interest in Joint Venture, Net of Tax
- --------------------------------------------
The equity interest in joint venture, net of tax, represents the Company's share
of the results of SIFC. For the three and nine month periods ended March 31,
1999, equity interest in joint venture, net of tax, was a loss of $84,000 and
$243,000, respectively, compared to a loss of $4,000 and $33,000 for the three
and nine month periods in the prior fiscal year. The joint venture's operations
commenced on October 1, 1997.
Liquidity and Capital Resources
The Company financed its operations during the three and nine months ended March
31, 1999 primarily from its existing working capital at June 30, 1998 and
borrowings under the Identix Line of Credit and the ANADAC Line of Credit. As
of March 31, 1999, the Company's principal sources of liquidity consisted of
$19,230,000 of working capital including $829,000 in cash and cash equivalents
and available borrowings under the Identix Line of Credit and the ANADAC Line of
Credit.
The Identix Line of Credit is a $10,000,000 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. Amounts drawn bear interest
at the bank's prime rate of interest plus one half of one percent (8.25% at
March 31, 1999). The line of credit expires on December 25, 1999. At March 31,
1999, $3,900,000 was outstanding and $1,353,000 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 its common stock. At March 31, 1999, the Company was in default on
this bank line of credit. The Company has obtained a waiver from the bank for
the breach of the covenant.
In February 1999, Identix provided Identicator Technology, Inc., with a standby
letter of credit to secure a $1,500,000 bank line of credit. The letter of
credit reduced the availability under the Identixs Line of Credit by
$1,500,000.
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 (7.75% at March 31, 1999).
The line of credit expires on March 31, 2000. At March 31, 1999, $2,524,000 was
outstanding and $3,203,000 was available under the ANADAC Line of Credit. The
ANADAC Line of Credit agreement contains financial and operating covenants.
The Company generated cash of $842,000 from operating activities during the nine
months ended March 31, 1999. The net loss of $445,000 was more than offset by
increases in accounts payable of $713,000 and increases in deferred revenue of
$226,000, net of amortization of deferred revenue. These sources of cash were
partially offset by increases in accounts receivable of $740,000 and increases
in prepaid expenses and other assets of $531,000. The increase in deferred
revenue was caused by the expanding installed base of TouchPrint 600 systems
under maintenance agreements.
The Company used cash of $1,471,000 in investing activities for the nine months
ended March 31, 1999 for the purchase of plant and equipment of $839,000,
additions to intangibles and other assets of $450,000 and a further investment
of $182,000 in SIFC.
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IDENTIX INCORPORATED
Management's Discussion and Analysis Continued . . .
Identix generated cash of $705,000 for financing activities during the nine
months ended March 31, 1999. Financing activities consisted of proceeds from
exercises of stock options of $1,130,000, partially offset by net repayments of
$425,000 against the Company's lines of credit.
Identix did not have any material capital expenditure commitments as of March
31, 1999.
The Company believes that cash flow from operations, together with existing
working capital and the two bank lines of credit will be adequate to fund the
Company's cash requirements for at least the remainder of fiscal 1999. 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 such financing would be favorable to
the Company.
Year 2000
Identix has instituted a program to determine whether Identix has exposure to
Year 2000 problems. Year 2000 problems are caused by computer systems that only
use a two-digit year value and, accordingly, will be subject to error or failure
when the year 2000 arrives.
Identix's Year 2000 program consists of the following: (1) evaluation of
Identix products; (2) development of solutions to Year 2000 issues for Identix
products; (3) customer notification and support regarding Identix products; (4)
evaluation and remediation of Identix's information technology infrastructure;
(5) assessment of Year 2000 compliance of third party providers of critical
components and services; and (6) development of contingency plans to address
Year 2000 issues. Identix's Year 2000 program is overseen by its Year 2000
Committee.
Identix has completed phases 1 and 2 of the Year 2000 program. In these phases,
Identix performed an evaluation of its products to determine their Year 2000
readiness. To the extent that a Year 2000 issue was identified, Identix has
developed solutions to remediate the Year 2000 issues. Identix is not taking
remedial action for those products that will reach the end of their support life
before the end of 1999.
Phase 3 consists of notifying customers of Year 2000 issues with Identix
products and providing support to the customer's remediation efforts. Identix
expects to have the notification process substantially completed by the quarter
ended June 30, 1999. Identix's remediation support activities have commenced
and will continue at least through the quarter ended December 31, 1999.
Identix's products are included in complex systems and the process undertaken by
its customers to assess and remediate Year 2000 issues may be lengthy. For
example, Identix has sold TouchPrint products that, at the request of the
customers, use a two-digit value for the year. In this case, customer
remediation is likely to require a change in the customer's workflow.
Phase 4 was completed in the quarter ended March 31, 1999. Identix has
identified certain internal software that requireed updating in order to be Year
2000 complaint. As part of Identix's maintenance contract for that software,
the vendor of that software has provided Identix with an upgrade that addresses
the year 2000 problem.
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IDENTIX INCORPORATED
Management's Discussion and Analysis Continued . . .
Identix is at risk of disruption to its business if Year 2000 problems are
experienced by its key suppliers. The purpose of phase 5 is to determine the
Year 2000 readiness of suppliers of critical components and services. Identix
has sent inquiries to its suppliers to determine their readiness with respect to
Year 2000 problems. Identix is still in the process of collecting and
evaluating responses. Identix will be able to better determine what actions may
be necessary to address potential problems with key suppliers after it receives
responses back from these suppliers. A failure of a key supplier to provide
Identix with necessary components or services could result in a delay by Identix
in providing products or services to its customers and have a severe negative
impact on Identix's stock price or financial performance.
Identix has not yet undertaken phase 6, the development of contingency plans to
address Year 2000 concerns. Identix plans to complete this in the second half
of calendar 1999 to the extent that it identifies areas where there is a
significant possibility that Year 2000 compliance will not be achieved.
Identix believes that its costs not borne by customers for its Year 2000 program
will be less than $250,000, excluding costs associated with existing internal
personnel. The costs of the program to date have been less than $25,000.
Identix has used existing personnel for the Year 2000 program and has no current
plans to add staff specifically for this purpose. Identix has not separately
tracked the internal costs associated with the Year 2000 program.
The Year 2000 problem is pervasive and complex and there is a risk that Identix
has not identified all of the Year 2000 issues that may affect it and that any
remedial efforts it takes will not adequately address any potential Year 2000
problems. Identix's products are used in systems that perform a number of
critical functions. For example, the biometric security products are used to
verify individual identity in a number of high risk situations such as prisons
and airports. The biometric security products are also used to protect computer
data and to verify commercial transactions, such as the authorization of money
transfers by bank personnel. Although Identix believes that it should not have
liability for a system failure relating to the Year 2000, such a failure in
these or other critical applications could potentially require Identix to expend
substantial resources to assist in remediating the failure or result in
litigation to ascertain liability or recover costs. Identix believes that this
represents the most reasonably likely worst case scenario with respect to the
Year 2000.
Identix has made forward-looking statements regarding its Year 2000 program.
These statements include the expected completion schedule for various phases of
the Year 2000 program, the costs to and liabilities of Identix associated with
the Year 2000 and Identix's Year 2000 readiness. There are many factors that
could cause actual events or results to differ materially from those stated in
the forward-looking statements. These factors include the complexity associated
with identifying Year 2000 problems, the inability to ascertain Year 2000
readiness and compliance of component and service suppliers, and the reaction of
customers to Year 2000 issues. All of these factors make it impossible for
Identix to ensure that it has identified all Year 2000 issues that may affect it
or all costs or liabilities that it may be exposed to as a result of Year 2000
issues.
The information contained in this Form 10-Q related to the Year 2000 constitutes
Year 2000 Readiness Disclosure for purposes of the Year 2000 Information and
Readiness Disclosure Act. That act does not limit liability under the
securities laws.
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RISK FACTORS
Our future operations, 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 any forward-looking statements we
make in this Report on Form 10-Q or in other reports, press releases or other
statements issued from time to time.
ALL OF OUR PRODUCT REVENUES ARE DERIVED FROM THE SALE OF BIOMETRIC PRODUCTS AND
OUR BUSINESS WILL NOT GROW UNLESS THE MARKET FOR BIOMETRIC PRODUCTS EXPANDS BOTH
DOMESTICALLY AND INTERNATIONALLY.
Biometric products have not gained widespread commercial acceptance. We cannot
accurately predict the future growth rate, if any, or the ultimate size of the
biometric technology market. The expansion of the market for our products
depends on a number of factors including:
. the cost, performance and reliability of our products and products of
competitors
. customers' perception of the perceived benefit of these products
. public perceptions of the intrusiveness of these products and the manner in
which firms are using the fingerprint information collected
. public perceptions regarding the confidentiality of private information
. customers' satisfaction with our products
. marketing efforts and publicity regarding these products.
Certain groups have publicly objected to the use of biometric products for some
applications on civil liberties grounds and legislation has been proposed to
regulate the use of biometric security products.
Even if biometric markets develop, our products may not gain wide market
acceptance.
WE FACE INTENSE COMPETITION FROM OTHER BIOMETRIC IDENTIFICATION PROVIDERS AS
WELL AS TRADITIONAL IDENTIFICATION AND SECURITY SYSTEMS PROVIDERS.
A significant number of established and startup companies are developing and
marketing software and hardware for fingerprint biometric security applications
that could compete directly with our biometric security products. Some of these
companies are developing semiconductor or optically-based direct contact
fingerprint image capture devices. Other companies are developing and marketing
other methods of biometric identification such as retinal blood vessel or iris
pattern, hand geometry, voice and facial structure. If one or more of these
approaches were widely adopted, it would significantly reduce the potential
market for our products.
Our biometric security products also compete with non-biometric technologies
such as traditional key, card, surveillance systems and passwords.
Our biometric imaging products face intense competition from a limited number of
competitors who are actively engaged in developing and marketing livescan
products, including Digital Biometrics, Inc., Heimann Biometric Systems GmbH and
Printrak International Inc.
We expect competition to increase as other companies introduce products that are
competitively priced, that may
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have increased performance or functionality or that incorporate technological
advances not yet developed or implemented by us. Some present and potential
competitors have financial, marketing and research resources substantially
greater than ours. In order to compete effectively in this environment, we must
continually develop and market new and enhanced products at competitive prices
and must have the resources available to invest in significant research and
development activities.
IN OUR SERVICES BUSINESS, WE FACE SUBSTANTIAL COMPETITION FROM PROFESSIONAL
SERVICES PROVIDERS OF ALL SIZES IN THE GOVERNMENT MARKETPLACE.
ANADAC is increasingly being required to bid on firm fixed price 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 highly qualified personnel or align with technology leaders, we
may lose our ability to compete successfully in the services business.
THE BIOMETRICS INDUSTRY IS CHARACTERIZED BY RAPID TECHNOLOGICAL CHANGE AND
EVOLVING INDUSTRY STANDARDS WHICH COULD RENDER EXISTING PRODUCTS OBSOLETE.
Our future success will depend upon our ability to develop and introduce a
variety of new products and product enhancements to address the changing,
sophisticated needs of the marketplace. Material delays in introducing new
products and enhancements or the failure to offer innovative products at
competitive prices may cause customers to forego purchases of our products and
purchase those of our competitors.
OUR REVENUES AND OPERATING RESULTS OFTEN VARY SIGNIFICANTLY FROM QUARTER TO
QUARTER AND MAY BE NEGATIVELY AFFECTED BY A NUMBER OF FACTORS, INCLUDING THE
TIMING OF LARGE ORDERS.
Usually, most of our revenues in a quarter come from a small number of large
orders. Accordingly, revenues in a particular quarter depend on the timing and
size of major orders.
The following are some other reasons why our financial results may fluctuate
from quarter to quarter:
. reduced demand for products caused by a competitor's price reductions or
introduction of new or enhanced products
. changes in the mix of products and services we or our distributors sell
. cancellation, delays or contract amendments by government agency customers
. litigation costs
. expenses related to acquisitions
. other one-time financial charges
. the lack of availability or increase in cost of key components
. economic downturns domestically or internationally.
We also may reduce prices or increase spending in response to competition or to
pursue new market opportunities.
Our products often have a lengthy sales cycle while the customer evaluates and
receives approvals for purchase. If after expending significant funds and effort
we fail to receive an order, a severe negative impact on our financial results
and stock price could result. It is difficult to predict accurately the sales
cycle of any large order. If we do not ship one or more large orders as
forecasted for a fiscal quarter, our total revenues and operating results for
that quarter could be materially and adversely affected.
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<PAGE>
Further, the lead time for ordering parts and materials and building our
products can be many months. As a result, we must order parts and materials and
build our products based on forecasted demand. If demand for our products lags
significantly behind our forecasts, we may produce more products than we can
sell, which can result in cash flow problems and write-offs or write-downs of
obsolete inventory.
WE DERIVE A MAJORITY OF OUR REVENUE FROM GOVERNMENT CONTRACTS WHICH ARE OFTEN
NON-STANDARD, INVOLVE COMPETITIVE BIDDING AND MAY BE SUBJECT TO CANCELLATION
WITHOUT PENALTY.
Government contracts frequently include provisions that are not standard in
private commercial transactions. For example, government contracts may include
bonding requirements and provisions permitting the purchasing agency to cancel
the contract without penalty in certain circumstances. As public agencies, our
prospective customers are also subject to public agency contract requirements
that vary from jurisdiction to jurisdiction. Some of these requirements may be
onerous or impossible 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 impose provisions that permit cancellation in the
event that funds are unavailable to the public agency. There is a risk that we
may not be awarded any of the contracts for which our products are bid or, if
awarded, that substantial delays or cancellations of purchases may follow as a
result of protests initiated by losing bidders. In addition, local government
agency contracts may be contingent upon availability of matching funds from
state or federal entities.
During fiscal 1998, we derived approximately 89% of our services revenue
directly from contracts relating to the Department of Defense and other U.S.
Government agencies. The loss of a material government contract due to budget
cuts or otherwise could have a severe negative impact on our financial results
and stock price.
During fiscal 1998, we derived approximately 68% of our services revenue from
time and materials contracts and firm-fixed-price contracts. We assume certain
performance risk on these contracts. If we fail to estimate accurately ultimate
costs or to control costs during performance of the work, our profit margins may
be reduced and we may suffer losses. In addition, revenues generated from
government contracts are subject to audit and subsequent adjustment by
negotiation with representatives of the government agencies. The Defense
Contract Audit Agency has completed an audit of ANADAC for the period from July
1, 1992 to June 30, 1995. The results of this audit found no disallowed costs.
WE RELY ON MARKETING PARTNERS TO DISTRIBUTE OUR PRODUCTS AND MAY BE ADVERSELY
AFFECTED IF THOSE PARTIES DO NOT ACTIVELY PROMOTE OUR PRODUCTS OR PURSUE
INSTALLATIONS WHICH USE OUR EQUIPMENT.
A significant portion of our product revenues come from sales to marketing
partners including OEMs, systems integrators, distributors and resellers. Some
of these relationships are formalized in agreements; however, the agreements are
often terminable with little or no notice and subject to periodic amendment. We
cannot control the amount and timing of resources that our marketing partners
devote to activities on our behalf.
We intend to continue to seek strategic relationships to distribute and sell
certain of our products. We, however, may not be able to negotiate acceptable
distribution relationships in the future and cannot predict whether current or
future distribution relationships will be successful.
LOSS OF SOLE OR LIMITED SOURCE SUPPLIERS MAY RESULT IN DELAYS OR ADDITIONAL
EXPENSES.
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We obtain certain components for our products from a single source or a limited
group of suppliers. We do not have long term agreements with any of our
suppliers. We will experience delays in manufacturing and shipping of products
to customers if we lose these sources or if supplies from these sources are
delayed.
As a result, we may be required to incur additional development and other costs
to establish alternative sources of supply. It may take several months to locate
alternative suppliers, if required, or to re-tool our products to accommodate
components from different suppliers. We cannot predict if we will be able to
obtain replacement components within the time frames we require 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 severe negative impact on our financial
results and stock price.
THE SUCCESS OF OUR STRATEGIC PLAN TO PURSUE SALES IN INTERNATIONAL MARKETS MAY
BE LIMITED BY RISKS RELATED TO INTERNATIONAL TRADE AND MARKETING.
During fiscal 1998, we derived 18% of our net product revenues from
international sales. We currently have offices overseas in Australia, Singapore,
Brazil and Switzerland. There is a risk that we may not be able to market, sell
and deliver our products in foreign countries. Our net product revenues
attributable to international sales declined by 24% in the nine months ended
March 31, 1999 from the nine months ended March 31, 1998, mainly due to a
decline in sales resulting from economic instability in Asia.
In addition to the uncertainty as to our ability to maintain and expand our
international presence, there are certain risks inherent in foreign operations,
including:
. regional economic conditions
. delays in or prohibitions on exporting products resulting from export
restrictions for certain products and technologies, including "crime
control" products and encryption technology
. fluctuations in foreign currencies and the U.S. dollar
. loss of revenue, property and equipment from expropriation, nationalization,
war, insurrection, terrorism and other political risks
. the overlap of different tax structures
. seasonal reductions in business activity
. risks of increases in taxes and other government fees
. involuntary renegotiation of contracts with foreign governments.
In addition, foreign laws treat the protection of proprietary rights differently
from laws in the United States and may not protect our proprietary rights to the
same extent as U.S. laws.
WE MAY NEED TO RAISE ADDITIONAL DEBT OR EQUITY FINANCING IN THE NEXT TWELVE
MONTHS.
As of March 31, 1999, we had $19,230,000 in working capital, which included
$829,000 in cash and cash equivalents. In addition, we had $1,353,000 available
under our bank line of credit, which expires in December 1999. The availability
under this line of credit was reduced by $1,500,000 in February 1999 when we
provided a standby letter of credit to Identicator Technology. ANADAC had
$3,203,000 available under its bank line of credit, which expires in March 2000.
We may need to raise additional debt or equity financing in the next 12 months
if
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current sources of capital are not sufficient to finance our operations or if
our lines of credit are not renewed or if we fail to obtain a waiver of any
covenant breaches under our lines of credit. We were in default of certain
covenants at December 31, 1998 and March 31, 1999 for which waivers were
obtained. We may not be able to obtain additional equity or debt financing on
terms that are not excessively dilutive to existing stockholders or more costly
than existing sources of debt financing.
ONE STOCKHOLDER OWNS A SIGNIFICANT PORTION OF OUR STOCK AND MAY DELAY OR PREVENT
A CHANGE IN CONTROL OR ADVERSELY AFFECT THE STOCK PRICE THROUGH SALES IN THE
OPEN MARKET.
As of April 30, 1999, Ascom USA, Inc. beneficially owned approximately 17.5% of
our outstanding common stock. This concentration of ownership may delay or
prevent a change in control of Identix. Ascom deposited all of its shares into a
voting trust which expires in 2004. Ascom has preemptive rights with respect to
issuances of Identix securities and registration rights with respect to the
securities it holds. If Ascom sells a significant number of our shares in the
open market pursuant to this prospectus or otherwise, our common stock price may
be adversely affected. In addition, we may not be able to obtain additional
financing on favorable terms in the future because of Ascom's preemptive rights
and registration rights.
WE MAY EXPERIENCE UNANTICIPATED EXPENSES AND OTHER PROBLEMS RELATED TO YEAR 2000
ISSUES.
Year 2000 problems are caused by computer systems that only use a two-digit year
value and, accordingly, will be subject to error or failure when the year 2000
arrives. We have a program for evaluating and addressing risks related to the
Year 2000 that is described under "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The Year 2000 problem is
pervasive and complex and there is a risk that we have not identified all of the
Year 2000 issues that may affect us or that our remedial efforts do not
adequately address identified Year 2000 problems. Our products are used in
systems that perform a number of critical functions. For example, the biometric
security products are used to verify individual identity in a number of high
risk situations such as prisons and airports. The biometric security products
are also used to protect computer data and to verify commercial transactions,
such as the authorization of money transfers by bank personnel. Although we
believe that we should not have liability for a system failure relating to the
Year 2000, any failure in these or other critical applications could potentially
require us to expend substantial resources to assist in remediating the failure
or result in litigation to ascertain liability or recover costs.
OUR PRODUCTS ARE COMPLEX AND MAY CONTAIN UNDETECTED OR UNRESOLVED DEFECTS WHEN
SOLD OR MAY NOT MEET CUSTOMER'S PERFORMANCE CRITERIA.
Performance failure may cause loss of market share, delay in or loss of market
acceptance, additional warranty expense or product recall. The negative effects
of any failure could be exacerbated if the failure occurred in products that
provide personal security, secure sensitive computer data, authorize significant
financial transactions or perform other functions where a security breach could
have significant consequences.
If a product fails to meet performance criteria, we may delay recognizing
revenue associated with a product and face higher operating expenses during the
period required to correct the defects. There is a risk that for unforeseen
reasons we may be required to repair or replace a substantial number of products
in use or to reimburse customers for products that fail to work or meet strict
performance criteria. We carry product liability insurance, but existing
coverage may not be adequate to cover potential claims.
FAILURE BY US TO MAINTAIN THE PROPRIETARY NATURE OF OUR TECHNOLOGY, PRODUCTS AND
MANUFACTURING PROCESSES WOULD NEGATIVELY IMPACT OUR ABILITY TO COMPETE
EFFECTIVELY.
We principally rely upon patent, copyright, trade secret and contract law to
establish and protect our proprietary
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rights. There is a risk that claims allowed on any patents we hold may not be
broad enough to protect our technology. In addition, our patents may be
challenged, invalidated or circumvented and we cannot be certain that the rights
granted thereunder will provide competitive advantages to us. Moreover, any
current or future issued or licensed patents, trade secrets or know-how may not
afford sufficient protection against competitors with similar technologies or
processes, and the possibility exists that already issued patents may infringe
upon or be designed around by others. In addition, there is a risk that others
may independently develop proprietary technologies and processes, which are the
same as, substantially equivalent or superior to ours.
There is a risk that we have infringed or in the future will infringe patents
owned by others, that we will need to acquire licenses under patents belonging
to others for technology potentially useful or necessary to us, and that
licenses will not be available to us on acceptable terms, if at all.
We may have to litigate to enforce our patents or to determine the scope and
validity of other parties' proprietary rights. Litigation could be costly and
divert management's attention. An adverse outcome in any litigation may have a
severe negative impact on our financial results and stock price. To determine
the priority of inventions, we 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
us and limitations on the scope or validity of our patents.
We also rely on trade secrets and proprietary know-how which we seek to protect
by confidentiality agreements with our employees, consultants, service providers
and third parties. There is a risk that these agreements may be breached, and
that the remedies available to us may not be adequate. In addition, our trade
secrets and proprietary know-how may otherwise become known to or be
independently discovered by others.
IF WE FAIL TO ADEQUATELY MANAGE GROWTH OF OUR BUSINESS, IT COULD HAVE A SEVERE
NEGATIVE IMPACT ON OUR FINANCIAL RESULTS OR STOCK PRICE.
We have experienced significant growth recently and believe that in order to be
successful we must grow rapidly. In order to do so, we must expand, train and
manage our 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. In addition, we will be
required to implement and improve operational, financial and management
information procedures and controls. The management skills and systems currently
in place may not be adequate and we may not be able to manage any significant
growth we experience effectively.
WE MAY ENCOUNTER DIFFICULTIES IN ACQUIRING AND EFFECTIVELY INTEGRATING
COMPLEMENTARY ASSETS AND BUSINESSES.
As part of our business strategy, we intend to acquire assets and businesses
principally relating to or complementary to our current operations. We acquired
Identicator Technology in fiscal 1999, one company in fiscal 1998 and two
companies in fiscal 1996. These and any other acquisitions by Identix will be
accompanied by the risks commonly encountered in acquisitions of companies.
These risks include, among other things:
. potential exposure to unknown liabilities of acquired companies
. higher than anticipated acquisition costs and expenses
. effects of costs and expenses of acquiring and integrating new businesses on
our operating results and financial condition
. the difficulty and expense of assimilating the operations and personnel of
the companies
. the potential disruption of our ongoing business
. diversion of management time and attention
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. failure to maximize our financial and strategic position by the successful
incorporation of acquired technology
. the maintenance of uniform standards, controls, procedures and policies
. loss of key employees and customers as a result of changes in management
. the incurrence of amortization expenses
. possible dilution to our stockholders.
In addition, geographic distances may make integration of businesses more
difficult. We may not be successful in overcoming these risks or any other
problems encountered in connection with any acquisitions.
LOSS OF CURRENT SENIOR EXECUTIVES AND KEY TECHNICAL, MARKETING AND SALES
PERSONNEL WOULD ADVERSELY AFFECT OUR BUSINESS.
Our personnel may voluntarily terminate their relationship with us at any time,
and competition for qualified personnel, especially engineers, is intense. The
process of locating additional personnel with the combination of skills and
attributes required to carry out our strategy could be lengthy, costly and
disruptive.
We are dependent on the services of certain key personnel, including the
following:
. Randall C. Fowler, Chairman, CEO and founder of Identix, has approximately
thirty years of experience in the biometrics industry and is considered one
of the industry's pioneers.
. James P. Scullion, President and Chief Financial Officer, and Daniel F.
Maase, Vice President, Biometric Imaging Division, have a combined total of
20 years experience with Identix and have a substantial amount of acquired
knowledge regarding Identix and the biometrics industry generally and play a
major role in the execution of Identix's strategic plan.
. Oscar Pieper, President of Identicator Technology, has approximately thirty
years of experience in the biometrics industry and is considered one of the
industry's pioneers.
. Grant Evans, Vice President--Sales and Marketing of Identicator Technology,
has established relationships with major companies and plays a central role
in the company's marketing strategy.
. Yuri Khidekel, Vice President--Software of Identicator Technology, and Yury
Shapiro, Vice President--Hardware of Identicator Technology, serve as key
researchers and developers and are responsible for Identicator Technology's
research and development activities.
If we lose the services of key personnel, it could have a severe negative impact
on our financial results and stock price.
22
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk - The Company does not use derivative financial instruments
in its investment portfolio. The Company's investment portfolio is generally
comprised of municipal government securities that mature within one year. The
Company places investments in instruments that meet high credit quality
standards. These securities are subject to interest rate risk, and could
decline in value if interest rates fluctuate. Due to the short duration and
conservative nature of the Company's investment portfolio, the Company does not
expect any material loss with respect to its investment portfolio.
Foreign Currency Exchange Rate Risk - Certain of the Company's revenues, cost of
revenues and marketing expenses are transacted in local currencies. As a
result, the Company's international results of operations are subject to foreign
exchange rate fluctuations. The Company does not currently hedge against
foreign currency rate fluctuations. Gains and losses from such fluctuations are
not material to the Company's consolidated results of operations.
23
<PAGE>
IDENTIX INCORPORATED
PART II OTHER INFORMATION
Item 1. Legal Proceedings
ANADAC, Inc. is a named defendant in five related personal injury
lawsuits pending in the Circuit Court of Virginia. All of these suits
arise from the collapse of a balcony at the University of Virginia
during graduation ceremonies in May 1997 in which one person was
killed and approximately 23 others were injured. The Commonwealth of
Virginia and the Curator of the University's Academical Village are
also named defendants. It is alleged that the Commonwealth of
Virginia and the Curator were negligent in failing to maintain and
ensure the structural integrity of the historic structure which
collapsed. It is alleged that ANADAC is liable for failing to
identify signs of structural deterioration during a contracted 1994
inspection. ANADAC had been hired by the University of Virginia to
create a budget for maintaining ten historic buildings based on a
visual inspection and analysis of certain statistical information.
ANADAC's assignment did not include a structural review of any nature
and did not encompass the type of inspection that would uncover a
defect of the nature that caused the balcony collapse. Of the five
lawsuits, one was filed in the Circuit Court of Virginia in Fairfax in
March 1998 and the three others were filed in the Circuit Court of
Virginia in Charlottesville between July and September 1998, one was
filed in that court in February 1999. The aggregate amount of damages
sought in these suits is $9,050,000. Ten of the persons injured in the
accident have settled with the Commonwealth of Virginia, releasing all
potential claims with respect to the accident. Additional lawsuits may
be filed by other injured persons with respect to the accident. The
Company believes that the claims against ANADAC are without merit and
will not have a material adverse effect on the Company.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
Number Description
10.29 First Amendment to Amended and Restated Loan Agreement
Between Identix Incorporated and Imperial Bank, dated
February 12, 1999
27.1 Financial Data Schedule
(b) During the three months ended March 31, 1999, no reports were
filed on Form 8-K.
24
<PAGE>
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
May 14, 1999 BY: /s/James P. Scullion
-------------------------------
James P. Scullion
President, Chief Financial Officer
and Secretary
25
<PAGE>
Exhibit 10.29
FIRST AMENDMENT TO
AMENDED AND RESTATED LOAN AGREEMENT
This First Amendment To Amended and Restated Loan Agreement ("First
Amendment") is made and entered into as of February 12, 1999, by and among
Identix Incorporated, a Delaware corporation ("Borrower"), and Imperial Bank
("Bank").
Recitals
A. Borrower and Bank entered into a certain Amended and Restated
Loan Agreement dated as of December 25, 1998 (as the same may from time to time
be modified, amended, supplemented, restated or superseded, the "Loan
Agreement"), pursuant to which Bank agreed to extend and make loans available to
Borrower upon the terms and conditions contained therein.
B. Borrower has not complied with the "Minimum Tangible Net Worth"
and "operating profitability" financial covenants set forth in Sections 10.A and
10.D., respectively, of the Loan Agreement for the fiscal quarter ending
December 31, 1998. Consequently, Borrower has requested and Bank has agreed to
(1) waive said financial covenant violations, (2) permit the acquisition by
Borrower of IDT Holdings, Inc. and Identicator Technology and (3) amend the
Minimum Tangible Net Worth covenant under the Loan Agreement, subject to all of
the terms and conditions set forth in this First Amendment.
C. The Loan Agreement, this First Amendment and the other Loan
Documents (as defined in the Loan Agreement), together with all other documents
entered into or delivered pursuant to any of the foregoing, in each case as
originally executed or as the same may from time to time be modified, amended,
supplemented, restated or superseded are hereinafter collectively referred to as
the "Loan Documents."
Agreement
Now, Therefore, in consideration of the foregoing recitals and the
mutual covenants herein set forth and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, and intending to
be legally bound, and to induce Bank to enter into this First Amendment,
Borrower and Bank hereby agree to amend the Loan Agreement as follows:
1. Definitions. Unless otherwise defined herein, all terms defined
in the Loan Agreement have the same meaning when used herein.
2. Limited Waiver. Bank hereby waives the Event of Default which
has occurred under Sections 10.A and 10.D of the Loan Agreement as a result of
the failure of Borrower to comply with the "Minimum Tangible Net Worth" and
"operating profitability" financial covenants for the fiscal quarter ending
December 31, 1998.
3. Consent. Notwithstanding the occurrence of an Event of Default
as more fully described in Section 2 hereof, Bank hereby consents to and
Borrower may proceed with the acquisition of IDT Holdings, Inc. and Identicator
Technology.
4. Amendments to Loan Agreement. The Loan Agreement is hereby
amended as follows:
4.1 The definition of the Borrowing Base set forth under
Section 2.A of the Loan Agreement is hereby amended in its entirety and the
following definition substituted therefor:
"...(1) the sum of (a) eighty percent (80.0%) of Eligible
Accounts due from Domestic Account Debtors and Foreign Account Debtors plus
(b) eighty percent (80.0%) of Eligible Accounts due from ANADAC plus (c)
from the date of the First Amendment through April 18, 1999, the lesser of
thrity-five percent (35.0%) of Eligible Inventory or $500,000.00 (as the
same
<PAGE>
may be adjusted from time to time as provided for under Section 9.B,
hereof, collectively, the "Borrowing Base") or..."
4.2 Section 10.A. of the Loan Agreement is hereby deleted in
its entirety and the following section substituted therefor:
"A. At all times, maintain a Minimum Tangible Net Worth in an
amount which is greater than the then outstanding principal amount of the
Revolving Loan Account multiplied by 1.25. As used herein, "Tangible Net
Worth" shall mean the sum of all assets, excluding any value for goodwill,
Trademarks, Patents, Copyrights, organization expense, investments in its
Subsidiaries, in-process technology, Accounts due from its Subsidiaries
(excluding Accounts due from sale of any product of Borrower to ANADAC in
the ordinary and normal course of its business as now conducted which are
less than 90 days from the applicable invoice date) and other similar
intangible items, less all liabilities, plus Subordinated Debt;"
5. Limited Amendment and Waivers. Each of the amendments and
waivers set forth in this First Amendment shall be limited precisely as written
and shall not be deemed (a) to be an amendment or waiver of any other term or
condition of the Loan Agreement or the other Loan Documents, to prejudice any
right or remedy which Bank may now have or may have in the future under or in
connection with the Loan Agreement or the other loan Documents or (b) to be a
consent to any future amendment or waiver.
6. Delivery of Cash Flow Projections. Borrower agrees to deliver
to Bank a Statement of Cash Flows on or before March 15, 1999. The Statement of
Cash Flows will be prepared on a consolidating basis using Identix, Identix
Australia Pty Limited (Fingerscan), and Biometric Applications and Technology,
Inc. (BA&T) operations only, excluding all other Subsidiaries, and will detail
Borrower's best forecast of its sources and uses of cash from operations
(including but not limited to a schedule of collection of trade accounts
receivable), investing, and financing activities for the term of the Loan
Agreement, and shall be in form and substance satisfactory to Bank. Borrower's
failure to deliver said Statement of Cash Flows shall constitute an Event of
Default as defined in the Loan Agreement.
7. Representations And Warranties. Borrower represents and
warrants that the representations and warranties respectively made in the Loan
Documents continue to be true and complete in all material respects as of the
date hereof after giving effect to this First Amendment (except to the extent
such specifically relate to another date or as specifically described on
Schedule 1attached hereto and incorporated herein by this reference) and that
the execution, delivery and performance of this First Amendment are duly
authorized, do not require the consent or approval of any governmental body or
regulatory authority and are not in contravention of or in conflict with any
material law or regulation or any term or provision of any other material
agreement entered into by Borrower.
8. Conditions Precedent. The legal effectiveness of this First
Amendment is subject to the satisfaction of all of the following conditions
precedent:
(a) Executed Amendment. Bank shall have received this First
Amendment duly executed and delivered by Borrower and the same shall have become
effective.
(b) Resolutions and Other Corporate Documents. If requested
by Bank, Bank shall have received resolutions of the Board of Directors of
Borrower authorizing Borrower to enter into this First Amendment and to deliver
such other corporate documents as Bank shall reasonably request.
(c) Financial Condition. There shall have occurred no
material adverse change in the financial condition or prospects of Borrower as
shown on the most recent financial statements submitted to Bank or disclosed to
Bank, respectively, and relied upon by Bank in entering into this First
Amendment.
(d) No Default. After giving effect to the waiver contained
in this First Amendment, no Event of Default has occurred that remains uncured
and is continuing or will result from
<PAGE>
the consummation of the transactions contemplated by this First Amendment that
would constitute an Event of Default as defined in the Loan Agreement.
(e) Payment of Fees. Bank shall have received (i) a
modification fee of $2,000.00 in connection with Bank's agreement to enter into
this First Amendment and (ii) reimbursement from Borrower of its costs and
expenses incurred (including, without limitation, its attorneys' fees and
expenses) in connection with this First Amendment and the transactions
contemplated hereby.
(f) Other Documents. Bank shall have received such other
documents, information and items from Borrower as it shall reasonably request to
effectuate the transactions contemplated hereby.
9. Release And Waiver.
(a) Borrower hereby acknowledges and agrees that: (1) it has
no claim or cause of action against Bank or any parent, subsidiary or affiliate
of Bank, or any of Bank's officers, directors, employees, attorneys or other
representatives or agents (all of which parties other than Bank being,
collectively, "Bank's Agents") in connection with the Loan Documents, the loans
thereunder or the transactions contemplated therein and herein; (2) it has no
offset or defense against any of its respective obligations, indebtedness or
contracts in favor of Bank; and (3) it recognizes that Bank has heretofore
properly performed and satisfied in a timely manner all of its obligations to
and contracts with Borrower.
(b) Although Bank regards its conduct as proper and does not
believe Borrower to have any claim, cause of action, offset or defense against
Bank or any of Bank's Agents in connection with the Loan Documents, the loans
thereunder or the transactions contemplated therein, Bank wishes and Borrower
agrees to eliminate any possibility that any past conditions, acts, omissions,
events, circumstances or matters could impair or otherwise affect any rights,
interests, contracts or remedies of Bank. Therefore, Borrower unconditionally
releases and waives (1) any and all liabilities, indebtedness and obligations,
whether known or unknown, of any kind of Bank or of any of Bank's Agents to
Borrower, except the obligations remaining to be performed by Bank as expressly
stated in the Loan Agreement, this First Amendment and the other Loan Documents
executed by Bank; (2) any legal, equitable or other obligations or duties,
whether known or unknown, of Bank or of any of Bank's Agents to Borrower (and
any rights of Borrower against Bank) besides those expressly stated in the Loan
Agreement, this First Amendment and the other Loan Documents; (3) any and all
claims under any oral or implied agreement, obligation or understanding with
Bank or any of Bank's Agents, whether known or unknown, which is different from
or in addition to the express terms of the Loan Agreement, this First Amendment
or any of the other Loan Documents; and (4) all other claims, causes of action
or defenses of any kind whatsoever (if any), whether known or unknown, which
Borrower might otherwise have against Bank or any of Bank's Agents, on account
of any condition, act, omission, event, contract, liability, obligation,
indebtedness, claim, cause of action, defense, circumstance or matter of any
kind whatsoever which existed, arose or occurred at any time prior to the
execution and delivery of this First Amendment or which could arise concurrently
with the effectiveness of this First Amendment.
(c) Borrower agrees that it understands the meaning and
effect of Section 1542 of the California Civil Code, which provides:
Section 1542. Certain Claims Not Affected by General
Release. A general release does not extend to claims
that the creditor does not know or suspect to exist in
his favor at the time of executing the release, which if
known by him must have materially affected his
settlement with the debtor.
BORROWER AGREES TO ASSUME THE RISK OF ANY AND ALL UNKNOWN, UNANTICIPATED OR
MISUNDERSTOOD DEFENSES, CLAIMS, CAUSES OF ACTION, CONTRACTS, LIABILITIES,
INDEBTEDNESS AND OBLICATIONS WHICH ARE RELEASED BY THIS FIRST AMENDMENT IN FAVOR
OF BANK AND BANK'S AGENTS, AND BORROWER HEREBY WAIVES AND RELEASES
<PAGE>
ALL RIGHTS AND BENEFITS WHICH IT MIGHT OTHERWISE HAVE UNDER THE AFORMEMENTIONED
SECTION 1542 OF THE CALIFORNIA CIVIL CODE WITH REGARD TO THE RELEASE OF SUCH
UNKNOWN, UNANTICIPATED OR MISUNDERSTOOD DEFENSES, CLAIMS, CAUSES OF ACTION,
CONTRACT, LIABILTITES, INDEBTEDNESS AND OBLIGATIONS. TO THE EXTENT (IF ANY)
WHICH ANY SUCH LAWS MAY BE APPLICABLE, BORROWER WAIVES AND RELEASES (TO THE
MAXIMUM EXTENT PERMITTED BY LAW) ANY RIGHT OR DEFENSE WHICH IT MIGHT OTHERWISE
HAVE UNDER ANY OTHER LAW OF ANY APPLICABLE JURISDICTION WHICH MIGHT LIMIT OR
RESTRICT THE EFFECTIVENESS OR SCOPE OF ANY OF ITS WAIVERS OR RELEASES UNDER THIS
FIRST AMENDMENT.
10. Full Force And Effect; Entire Agreement. Except to the extent
expressly provided in this First Amendment, the terms and conditions of the Loan
Agreement and the other Loan Documents shall remain in full force and effect.
This First Amendment and the other Loan Documents constitute and contain the
entire agreement of the parties hereto and supersede any and all prior
agreements, negotiations, correspondence, understandings and communications
between the parties, whether written or oral, respecting the subject matter
hereof. The parties hereto further agree that the Loan Documents comprise the
entire agreement of the parties thereto and supersede any an all prior
agreements, negotiations, correspondence, understandings and other
communications between he parties thereto, whether written or oral respecting
the extension of credit by Bank to Borrower and/or its affiliates.
11. Counterparts; Effectiveness. This First Amendment may be
executed in any number of counterparts, each of which when so delivered shall be
deemed an original, but all such counterparts taken together shall constitute
but one and the same instrument. Each such agreement shall become effective upon
the execution of a counterpart hereof of thereof by each of the parties hereto
and telephonic notification that such executed counterparts has been received by
Borrower and Bank.
<PAGE>
In Witness Whereof, each of the parties hereto has caused this First
Amendment to be executed and delivered by its duly authorized officer as of the
date first written above.
Borrower
Identix Incorporated
a Delaware corporation
By: /s/ James P. Scullion
---------------------
James P. Scullion
Executive Vice President and
Chief Financial Officer
BANK
IMPERIAL BANK
By: /s/ J. Michael diVittorio
-------------------------
J. Michael diVittorio
Assistant Vice President
<PAGE>
SCHEDULE 1
SCHEDULE OF EXCEPTIONS
TO REPRESENTATIONS AND WARRANTIES
(List or indicate "None")
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 829,000
<SECURITIES> 0
<RECEIVABLES> 30,043,000
<ALLOWANCES> 727,000
<INVENTORY> 7,414,000
<CURRENT-ASSETS> 38,676,000
<PP&E> 1,985,000<F1>
<DEPRECIATION> 0<F1>
<TOTAL-ASSETS> 43,328,000
<CURRENT-LIABILITIES> 19,446,000
<BONDS> 0
0
0
<COMMON> 53,657,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 43,328,000
<SALES> 25,188,000
<TOTAL-REVENUES> 59,747,000
<CGS> 12,641,000
<TOTAL-COSTS> 59,825,000
<OTHER-EXPENSES> 0<F2>
<LOSS-PROVISION> 0<F2>
<INTEREST-EXPENSE> 332,000
<INCOME-PRETAX> (424,000)<F3>
<INCOME-TAX> 21,000
<INCOME-CONTINUING> (445,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (445,000)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
<FN>
<F1>PROPERTY, PLANT AND EQUIPMENT IS SHOWN NET OF ACCUMULATED DEPRECIATION.
<F2>NOT SHOWN SEPARATELY WHEN REPORTING FORM 10-Q
<F3>INCLUDES EQUITY INTEREST IN JOINT VENTURE NET OF TAX
</FN>
</TABLE>
