<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 December 31, 1998 or
-----------------
Transition report pursuant to Section 13 or 15(d) of the Securities
- ---
Exchange Act of 1934
For the transition period from ______________________ to ______________________
Commission File Number: 1-9641
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IDENTIX INCORPORATED
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(Exact name of registrant as specified in its charter)
Delaware 94-2842496
------------------------- -------------------------
(State or other jurisdiction (IRS Employer
of incorporation of organization) Identification No.)
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:
25,439,511 shares of Common Stock
as of January 31, 1999
1
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IDENTIX INCORPORATED
INDEX
<TABLE>
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets December 31, 1998 and June 30, 1998............ 3
Consolidated Statements of Operations - three and six months ended
December 31, 1998 and 1997................................................. 4
Consolidated Statements of Cash Flows six months ended
December 31, 1998 and 1997................................................. 5
Notes to Consolidated Financial Statements.................................. 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................ 8
Item 3 Quantitative and Qualitative Disclosures about Market Risk.................. 21
PART II OTHER INFORMATION
Item 1 Legal Proceedings........................................................... 22
Item 4. Submission of Matters to a Vote of Security Holders......................... 22
Item 6 Exhibits.................................................................... 23
Signatures........................................................................... 24
</TABLE>
2
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IDENTIX INCORPORATED
CONSOLIDATED BALANCE SHEETS
Item 1. Financial Statements
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
------------ --------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,418,000 $ 753,000
Accounts receivable, less allowance for doubtful accounts
of $884,000 and $866,000 26,992,000 28,576,000
Inventories 6,857,000 7,163,000
Prepaid expenses and other assets 947,000 586,000
------------ ------------
Total current assets 37,214,000 37,078,000
Property and equipment, net 2,094,000 2,105,000
Intangibles and other assets 2,621,000 2,768,000
Interest in joint venture, net 3,000 61,000
------------ ------------
Total assets $ 41,932,000 $ 42,012,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to banks $ 4,093,000 $ 6,849,000
Accounts payable 9,038,000 8,428,000
Accrued compensation 1,937,000 1,837,000
Other accrued liabilities 520,000 574,000
Deferred revenue 1,910,000 1,237,000
------------ ------------
Total current liabilities 17,498,000 18,925,000
Deferred revenue - 88,000
Other liabilities 90,000 89,000
------------ ------------
Total liabilities 17,588,000 19,102,000
------------ ------------
Commitments and contingencies (Note 8)
Shareholders' equity:
Common stock, $0.01 par value; 50,000,000 shares authorized;
25,427,211 and 25,255,577 shares issued and outstanding 53,567,000 52,527,000
Accumulated deficit (29,042,000) (29,436,000)
Cumulative translation adjustment (181,000) (181,000)
------------ ------------
Total shareholders' equity 24,344,000 22,910,000
------------ ------------
Total liabilities and shareholders' equity $ 41,932,000 $ 42,012,000
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
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<TABLE>
<CAPTION>
IDENTIX INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended Six months ended
December 31, December 31,
------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Net product revenues $ 8,898,000 $ 8,089,000 $18,647,000 $16,996,000
Fingerprinting services revenues - 370,000 - 370,000
Services revenues 10,609,000 11,294,000 21,676,000 21,237,000
----------- ----------- ----------- -----------
Total revenues 19,507,000 19,753,000 40,323,000 38,603,000
----------- ----------- ----------- -----------
Costs and expenses:
Cost of product revenues 4,384,000 3,974,000 9,202,000 8,110,000
Cost of fingerprinting services revenues - 352,000 - 352,000
Cost of services revenues 9,294,000 9,489,000 18,887,000 18,053,000
Research, development and engineering 1,343,000 1,127,000 2,804,000 2,164,000
Marketing and selling 2,684,000 2,195,000 5,146,000 4,401,000
General and administrative 1,639,000 2,134,000 3,466,000 4,518,000
----------- ----------- ----------- -----------
Total costs and expenses 19,344,000 19,271,000 39,505,000 37,598,000
----------- ----------- ----------- -----------
Income from operations 163,000 482,000 818,000 1,005,000
Other income (expense), net 25,000 58,000 55,000 102,000
Interest income (expense), net (99,000) (61,000) (230,000) (82,000)
----------- ----------- ----------- -----------
Income before tax and
equity interest in joint venture 89,000 479,000 643,000 1,025,000
Provision for income taxes (60,000) (25,000) (90,000) (45,000)
Equity interest in joint venture, net of tax (85,000) (29,000) (159,000) (29,000)
----------- ----------- ----------- -----------
Net income (loss) $ (56,000) $ 425,000 $ 394,000 $ 951,000
=========== =========== =========== ===========
Basic net income (loss) per share $ (0.00) $ 0.02 $ 0.02 $ 0.04
=========== =========== =========== ===========
Diluted net income (loss) per share $ (0.00) $ 0.02 $ 0.02 $ 0.04
=========== =========== =========== ===========
Weighted average common shares used to
compute basic net income (loss) per share 25,354,000 25,060,000 25,319,000 25,011,000
=========== =========== =========== ===========
Weighted average common shares used to
compute diluted net income (loss) per share 25,354,000 25,756,000 25,646,000 25,690,000
=========== =========== =========== ===========
</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>
Six months ended
December 31,
------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 394,000 $ 951,000
Adjustments to reconcile net income to net
Cash provided by (used for) operating activities:
Depreciation 568,000 677,000
Amortization of intangibles 308,000 444,000
Amortization of deferred revenue (1,612,000) (860,000)
Interest in joint venture, net of tax 158,000 (214,000)
Changes in assets and liabilities:
Accounts receivable 1,584,000 (4,802,000)
Inventories 306,000 (1,521,000)
Prepaid expenses and other assets (361,000) (589,000)
Accounts payable 610,000 623,000
Accrued compensation 100,000 149,000
Other accrued liabilities (53,000) 302,000
Deferred revenue 2,197,000 1,267,000
----------- -----------
Net cash provided by (used for) operating activities 4,199,000 (3,573,000)
----------- -----------
Cash flows provided by (used in) investing activities:
Capital expenditures (557,000) (584,000)
Investment in joint venture (100,000) -
Deletions (Additions) to intangibles and other assets (161,000) (497,000)
------------ -----------
Net cash used in investing activities (818,000) (1,081,000)
------------ -----------
Cash flows provided by (used in) financing activities:
Borrowings under bank lines of credit 9,886,000 11,080,000
Payments under bank lines of credit (12,642,000) (8,341,000)
Proceeds from exercise of options and warrants, net 1,040,000 711,000
------------ -----------
Net cash provided by (used for) financing activities (1,716,000) 3,450,000
------------ -----------
Effect of exchange rate changes on cash
and cash equivalents - (70,000)
------------ -----------
Net increase (decrease) in cash and cash equivalents 1,665,000 (1,274,000)
Cash and cash equivalents at beginning of period 753,000 2,510,000
------------ -----------
Cash and cash equivalents at end of period $ 2,418,000 $ 1,236,000
============ ===========
</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. The results of
operations for the three and six months ended December 31, 1998 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 it's 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.
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 through Sylvan's testing systems nationwide. 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>
December 31, June 30,
1998 1998
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<S> <C> <C>
Purchased parts and materials $2,510,000 $3,518,000
Work-in-process 1,067,000 906,000
Finished goods, including spares 3,280,000 2,739,000
---------- ----------
$6,857,000 $7,163,000
========== ==========
</TABLE>
4. Bank Covenant Waiver
At December 31, 1998, the Company was in default on two of its bank line of
credit covenants. The Company has obtained waivers of default from the bank
for breaches of the covenants.
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 method.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
----------- -----------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income (loss) $ (56,000) $ 425,000 $ 394,000 $ 951,000
=========== =========== =========== ===========
Weighted average common shares outstanding 25,354,000 25,060,000 25,319,000 25,011,000
Dilutive effect of stock options and warrants - 696,000 327,000 679,000
----------- ----------- ----------- -----------
Weighted average common shares outstanding
assuming dilution
25,354,000 25,756,000 25,646,000 25,690,000
=========== =========== =========== ===========
Basic net income (loss) per share $ (0.00) $ 0.02 $ 0.02 $ 0.04
=========== =========== =========== ===========
Diluted net income (loss) per share $ (0.00) $ 0.02 $ 0.02 $ 0.04
=========== =========== =========== ===========
</TABLE>
6
<PAGE>
For the three month period ended December 31, 1998, the effect of options
and warrants was not included, as the effect was anti-dilutive.
6. Comprehensive Income
Effective July 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130").
Comprehensive income includes charges or credits to equity that are not the
result of transactions with owners. Items incurred in comprehensive income
consist primarily of residual foreign currency translation adjustments from
March 31, 1998. As the Company substantially liquidated its foreign
operation on that date, no changes in this balance have occurred in fiscal
1999.
7. Recent Accounting Pronouncements
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 "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. 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. The Company is reviewing the impact of SFAS 131
on its consolidated financial statements; however, such adoption is expected
to impact footnote disclosures only.
8. Contingent Liabilities
ANADAC is a named defendant in four 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 four
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. The aggregate amount of
damages sought in these suits is $7,700,000. Approximately 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 announced on November 16, 1998 the execution of a definitive
agreement to acquire privately held Identicator Technology, Inc.
("Identicator Technology"). The acquisition is scheduled to close by April
1999. Identicator Technology designs and manufactures fingerprint security
systems for information technology, banking and data/network security.
Identix will acquire all outstanding Identicator Technology shares in
exchange for 5,050,000 shares of Identix common stock. The Identix shares to
be issued in the transaction are subject to certain lock-up and escrow
provisions. The closing of the acquisition is conditioned upon effectiveness
of a registration statement with the SEC relating to the issuance of the
Identix stock and other customary closing conditions. The acquisition will
be accounted for under the purchase method of accounting.
7
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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
client operating environments.
Identix announced on November 16, 1998 the execution of a definitive agreement
to acquire privately held Identicator Technology. The acquisition is scheduled
to close by April 1999. Identicator Technology designs and manufactures
fingerprint security systems for information technology, banking and
data/network security. Identix will acquire all outstanding Identicator
Technology shares in exchange for 5,050,000 shares of Identix common stock. The
Identix shares to be issued in the transaction are subject to certain lock-up
and escrow provisions. The closing of the acquisition is conditioned upon the
effectiveness of a registration statement with the SEC relating to the issuance
of the Identix stock and other customary closing conditions. The acquisition
will be accounted for under the purchase method of accounting.
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 through
Sylvan's testing systems nationwide. The Company owns a 50% interest in SIFC.
Results of Operations
Revenues
- --------
Revenues for the three and six month periods ended December 31, 1998 were
$19,507,000 and $40,323,000, respectively, compared to $19,753,000 and
$38,603,000 for the same periods in the prior fiscal year. The decrease in
revenues of 1% for the three-month period was due to decreased services revenues
and the transfer of certain revenue producing contracts to SIFC. The increase
in revenues of 4% for the six month period was due to mainly to increased net
product revenues and to a lesser degree increased services revenues.
The Company's net product revenues were $8,898,000 and $18,647,000 for the three
and six month periods ended December 31, 1998, compared to $8,089,000 and
$16,996,000 for the same periods in the prior fiscal year. For the three and
six month periods ended December 31, 1998, the increase in net product revenues
of 10% 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 a decline in sales in Asia due to
the deteriorated economic condition in the region.
8
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IDENTIX INCORPORATED
Management's Discussion and Analysis - Continued . . .
International sales accounted for $911,000 or 10% and $1,969,000 or 11% of the
Company's net product revenues for the three and six month periods ended
December 31, 1998, respectively, compared to $1,860,000 or 23% and $4,397,000 or
26% for the same periods in the prior fiscal year. The decrease in
international sales for the three and six month periods was due to a decline in
sales in Asia. The Company expects international sales to continue to represent
a significant portion of total 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 had one product business customer that accounted for more than 10%
of total revenues for the three month period ended December 31, 1998, but did
not have any one customer account for more than 10% of total revenues for the
six month period. For the three and six month periods ended December 31, 1997,
the Company's product revenue included one customer which accounted for 14% and
13%, respectively, of total revenues.
The Company's services revenues were $10,609,000 and $21,676,000 for the three
and six month periods ended December 31, 1998, respectively, compared to
$11,294,000 and $21,237,000 for the same periods in the prior fiscal year. The
decrease in services revenues of 6% for the three month period ended December
31, 1998 was due primarily to a decrease in sales of third party products and
services to the U.S. government through the Company's General Services
Administration ("GSA") contract which is operated and maintained by ANADAC. 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 increase of 2% for the six month period
ending December 31, 1998 was due to an increase in sales to the U. S.
government. 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 six month periods ended December 31, 1998,
revenues directly from the DOD and from other U.S. government agencies accounted
for 91% of the Company's total services revenues compared to 87% for the same
periods in the prior fiscal year.
The Company's services business generates revenues from cost plus fixed fee
("CPFF") contracts, which accounted for approximately 19% and 18% of its
services revenues for the three and six month periods ended December 31, 1998,
compared to 19% 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.
The Company's services business also generates a significant amount of its
revenue from time-and-materials ("T&M") contracts and from firm fixed-price
("FFP") contracts. During the three and six month periods ended December 31,
1998, the Company derived 81% and 82% of its services revenues from T&M and FFP
contracts compared to 81% and 79% for the same periods in the prior fiscal year.
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 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
9
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IDENTIX INCORPORATED
Management's Discussion and Analysis - Continued . . .
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 has
completed an audit by the Defense Contract Audit Agency ("DCAA") for the period
from July 1, 1992 to June 30, 1995. The Company is awaiting the audit results
from the DCAA and believes there will be no material financial statement impact
as a result of the audit.
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 six month periods ended
December 31, 1998 as compared to the same periods in the prior fiscal year.
Gross Margin
- ------------
Gross margin on net product revenues was 51% for the three and six month periods
ended December 31, 1998, as compared to 51% and 52% for the same periods in the
prior fiscal year. The decrease in gross margin in for the six month period was
primarily due to one time sale at a high gross margin in fiscal 1998 and
unfavorable product mix of lower gross margin products 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.
Gross margin on services revenues was 12% and 13% for the three and six month
periods ended December 31, 1998 as compared to 16% and 15% for the same periods
in the prior fiscal year. The decreases in gross margin for the three and six
month periods was primarily due to increased revenues from certain contracts for
value added services provided by subcontractors which carry low gross margins.
Research, Development and Engineering
- -------------------------------------
Research, development and engineering expenses were $1,343,000 or 15% and
$2,804,000 or 15% of net product revenues for the three and six month periods
ended December 31, 1998, respectively, compared to $1,127,000 or 14% and
$2,164,000 or 13% of net product revenues for the same periods 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. 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.
Marketing and Selling
- ---------------------
Marketing and selling expenses were $2,684,000 or 14% and $5,146,000 or 13% of
total revenues for the three and six month periods ended December 31, 1998,
respectively, compared to $2,195,000 or 11% and $4,401,000 or 11% 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.
10
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IDENTIX INCORPORATED
Management's Discussion and Analysis - Continued . . .
General and Administrative
- --------------------------
General and administrative expenses were $1,639, 000 or 8% and $3,466,000 or 9%
of total revenues for the three and six month periods ended December 31, 1998,
respectively, compared to $2,134,000 or 11% and $4,518,000 or 12% of total
revenues for the same periods in the prior fiscal year. The decrease in general
and administrative expenses was primarily due to the decreased litigation costs
related to certain lawsuits which have been resolved, cost savings related to
the restructuring that occurred in the third quarter of fiscal 1998 and cost
savings at both ANADAC and the Company. Litigation charges were $48,000 and
$77,000 for the three and six month periods ended December 31, 1998 compared to
$37,000 and $460,000 for the same periods in the prior fiscal year.
Other Income and Expense, net
- -----------------------------
For the three and six month periods ended December 31, 1998, net other income
was $25,000 and $55,000, respectively, compared to net other income of $58,000
and $102,000 for the same periods in the prior fiscal year.
Net Interest Expense
- --------------------
Net interest expense was $99,000 and $230,000 for the three and six month
periods ended December 31, 1998, respectively, compared to $61,000 and $82,000
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 six month periods ended December 31, 1998
compared to the same periods in the prior fiscal year.
During the three and six month periods ended December 31, 1998, the weighted
average interest rate paid by Identix on borrowings under its line of credit
(the "Identix Line of Credit") was 8.0%. 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 six month periods ended December
31, 1998 was 7.9% and 8.2%.
Income Taxes
- ------------
The provision for income taxes was $60,000 and $90,000 for the three and six
months ended December 31, 1998, respectively, compared to $25,000 and $45,000
for the same periods in the prior fiscal year. The Company's 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.
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 six month periods ended December 31,
1998, equity interest in joint venture, net of tax, was a loss of $85,000 and
$159,000, respectively, compared to a loss of $29,000 for the three and six
month periods in the prior fiscal year. The joint venture's operations
commenced on October 1, 1997.
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IDENTIX INCORPORATED
Management's Discussion and Analysis - Continued . . .
Liquidity and Capital Resources
The Company financed its operations during the three and six months ended
December 31, 1998 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 December 31, 1998, the Company's principal sources of liquidity consisted
of $19,716,000 of working capital including $2,418,000 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
December 31, 1998). The line of credit expires on December 25, 1999. At December
31, 1998, $2,500,000 was outstanding and $5,029,000 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. At December 31, 1998, the Company was
in default on two of its bank line of credit covenants. The Company has obtained
waivers of default from the bank for breaches of the covenants.
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 Identix's 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 December 31, 1998).
The line of credit expires on March 31, 2000. At December 31, 1998, $1,593,000
was outstanding and $4,407,000 was available under the ANADAC Line of Credit.
The ANADAC Line of Credit agreement contains financial and operating covenants.
The Company generated cash of $4,199,000 from operating activities during the
six months ended December 31, 1998 primarily due to net income of $394,000,
decreases in accounts receivable of $1,584,000, increases in accounts payable of
$610,000 and increases in deferred revenue of $585,000. These sources of cash
were partially offset by increases in prepaid expenses and other assets of
$361,000. The decrease in accounts receivable was due primarily to a continued
focus by the Company on working capital management. The increase in deferred
revenue was due to the expanding installed base of TouchPrint 600 systems under
maintenance agreements.
The Company used cash of $818,000 in investing activities for the six months
ended December 31, 1998 for the purchase of plant and equipment of $557,000,
capitalized software development costs of $161,000 and a further investment of
$100,000 in SIFC.
Identix used cash of $1,716,000 for financing activities during the six months
ended December 31, 1998. Financing activities consisted of net repayments of
$2,756,000 against the Company's lines of credit, partially offset by the
proceeds from exercises of stock options of $1,040,000.
Identix did not have any material capital expenditure commitments as of December
31, 1998.
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IDENTIX INCORPORATED
Management's Discussion and Analysis - Continued . . .
The Company believes that cash flow from operations together with existing
working capital and the two bank lines of credit maintained by the Company, 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
are expected to 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 is expected to be completed in the quarter ended March 31, 1999.
Identix has identified certain internal software that requires 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.
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.
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IDENTIX INCORPORATED
Management's Discussion and Analysis - Continued . . .
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.
Our revenues and operating results often vary significantly from quarter to
quarter for a variety of reasons, including the timing of large orders, factors
affecting government procurements and market factors. 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.
Also, most of our revenues come from the sale of products and services to
government agencies. Government agencies are subject to political and budgetary
constraints that may cause them to cancel or substantially delay their orders.
Receipt of monies from government agencies may be substantially delayed due to
political and budgetary processes or other scheduling delays relating to the
contract or bidding process. In addition, our contracts with local government
agencies may be contingent upon availability of matching funds from state or
federal entities.
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
. litigation costs
. expenses related to acquisitions, including the acquisition of
Identicator Technology which is currently in process
. 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.
Further, the lead time for ordering parts and materials and 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.
Our success is dependent on significant growth occurring in the biometrics
market and acceptance of our products. All of our product revenues are derived
from the sale and service of biometric and biometric-related products. These
products represent a new approach to identity verification, which has only been
used in limited applications to date. Biometric security products in particular
have not gained widespread commercial acceptance and 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 benefits of these products
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. 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.
Our success depends on the development and expansion of markets for biometric
products both domestically and internationally. 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 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 we do. 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. Through our
ANADAC subsidiary we are increasingly being required to bid on firm fixed price
and similar contracts that result in greater performance risk to us. If we are
not able to maintain a competitive cost structure, support specialized market
niches, retain its highly qualified personnel or align with technology leaders,
we may lose our ability to compete successfully.
We rely on marketing partners to distribute our products. 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, such agreements are often terminable with
little or no notice and subject to periodic amendment. We cannot control the
amount and timing of resources that such marketing partners devote to their
activities on our behalf. There is a risk that such parties may not actively
promote our products or pursue installations which use our equipment.
We intend to continue to seek strategic relationships to distribute and sell our
products. However, we may not be able to negotiate acceptable distribution
relationships in the future and cannot predict whether current or future
distribution relationships will be successful.
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
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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 its products are bid or, if
awarded, that substantial delays or cancellations of purchases may follow as a
result of protests initiated by losing bidders.
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 between us and representatives of the government agencies. ANADAC
has completed such an audit by the Defense Contract Audit Agency for the period
from July 1, 1992 to June 30, 1995. We believe that the results of this audit
will not result in a material adjustment of our financial statements, but there
is a risk that significant adjustments could be required.
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 55% in the six months ended December 31, 1998 from the six
months ended December 31, 1997, 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.
Our financial results and stock price from quarter to quarter may be adversely
affected because we rely on large orders from a limited number of customers.
While individual customers may vary from period to period, we depend upon large
orders for a substantial portion of our total revenues. There is a risk that we
may not be able to obtain large orders on a consistent basis. If we are unable
to obtain sufficient large orders or are unable to collect receivables relating
to a large order, it could have a severe negative impact on our financial
results and stock price.
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Our products often have a lengthy sales cycle while the customer evaluates and
receives approvals for the purchase of our products or services. 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 such quarter could be materially and
adversely affected. In addition, even if we receive a large 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.
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. In addition to the acquisition of Identicator
Technology which is currently in process, we acquired two companies in fiscal
1996 and one in fiscal 1998. These and any other acquisitions 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
. 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
. failure to maximize its 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 such acquisitions.
We may need to raise additional debt or equity financing in the next twelve
months. As of December 31, 1998, we had $19,716,000 in working capital, which
included $2,418,000 in cash and cash equivalents. In addition, we had
$5,029,000 available under our bank line of credit, which expires in December
1999. ANADAC had $4,407,000 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 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 these lines of credit. 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.
Loss of sole or limited source suppliers may result in delays or additional
expenses. 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 may 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 such components within the time frames it requires at
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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.
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 December 31, 1998, Ascom USA Inc. beneficially owned
approximately 19% 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 of Identix common stock 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.
Ascom has requested registration of approximately 1,700,000 shares. If Ascom
sells a significant number of its shares in the open market, 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.
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 products are complex and may contain undetected or unresolved defects when
sold or may not meet customers' 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 such failure
could be exacerbated if such 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 such 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.
Our ability to compete effectively depends in part on our ability to maintain
the proprietary nature of our technology, products and manufacturing processes.
We principally rely upon patent, copyright, trade secret and contract law to
establish and protect our proprietary rights.
There is a risk that claims allowed on any patents held by us 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 us with competitive advantages. 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 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 such
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. Such litigation could be costly
and divert management's attention. An adverse outcome in any such 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.
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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
substantial growth in recent years and believe that in order to be successful we
must continue to 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
effectively any significant growth we experience.
Our success will depend upon our ability to retain our current senior management
teams and key technical, marketing and sales personnel. 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 Randall C. Fowler, President and CEO, James
P. Scullion, Executive Vice President and Chief Financial Officer, and Daniel F.
Maase, Vice President, Biometric Imaging Division. Mr. Fowler, the founder of
Identix, has approximately thirty years of experience in the biometrics industry
and is considered one of the industry's pioneers. Mr. Scullion and Mr. Maase
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 our strategic plan. If we
lose the services of key personnel, it could have a severe negative impact on
our financial results and stock price.
We may experience unanticipated expenses and other problems related to Year 2000
issues. 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." 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. 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. The failure to identify
or remediate any Year 2000 problems could have a severe negative impact on our
financial results and stock price.
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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 sales, cost of
manufacturing and marketing 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.
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IDENTIX INCORPORATED
PART II OTHER INFORMATION
Item 1. Legal Proceedings
ANADAC, Inc. is a named defendant in four 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 four 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. The aggregate amount of damages sought in these
suits is $7,700,000. Approximately 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 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders was held on October 29,
1998.
(b) All Board of Directors nominees referenced in Item 2 (c)
below were elected at the Annual Meeting of Shareholders on
October 29, 1998.
(c) The matters voted upon and the results of the voting were as
follows:
(1) The following seven persons were elected to the Board of
Directors:
<TABLE>
<CAPTION>
Name Votes For Votes Withheld
---- --------- --------------
<S> <C> <C>
Randall C Fowler 23,317,290 940,344
Patrick M Morton 23,352,772 904,862
Randall Hawks, Jr. 23,341,622 916,012
Fred U Sutter 23,347,802 909,832
Larry J Wells 23,341,872 915,762
James P. Scullion 23,343,325 914,309
Charles W. Richion 23,327,805 929,829
</TABLE>
(2) Change in the Company's state of incorporation from
California to Delaware through the merger of the Company
into a newly formed Delaware corporation that is a
wholly owned subsidiary of the Company. The number of
shares voted in favor of the amendments was 14,308,162,
the number of shares voted against was 902,190, and the
number of shares that abstained was 154,409.
(3) Amendment to the Identix Incorporated Equity Incentive
Plan (the "Incentive Plan") was approved. The approved
amendment increased the number of shares available for
issuance under the Incentive Plan by 1,250,000 shares to
a total of 3,000,000. The number of shares voted in
favor of the amendment was 12,154,409, the number of
shares voted against was 2,643,823, and the number of
shares that abstained was 268,876.
(4) Adoption of the Identix Incorporated Employee Stock
Purchase Plan and the Identix Incorporated Foreign
Subsidiary Employee Stock Purchase Plan. The number of
shares voted
22
<PAGE>
in favor of adopting the plans was 13,383,031, the
number of shares voted against was 924,727, and the
number of shares that abstained was 215,278.
(5) Amendment to the Identix Incorporated Nonemployee
Directors Stock Option Plan to increase the number of
shares available for issuance under that plan from
250,000 to 410,000 shares and to approve the other
amendments to that plan described in the Proxy
Statement. The number of shares voted in favor of the
amendment was 12,501,598, the number of shares voted
against was 1,747,026, and the number of shares that
abstained was 274,413.
(6) The appointment of PricewaterhouseCoopers LLP as
independent accountants of the Company for the fiscal
year ending June 30, 1999 was ratified. The number of
shares voted in favor of the appointment was 23,979,119,
the number of shares voted against was 147,388, and the
number of shares that abstained was 131,127.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
Number Description
10.27 Amended and Restated Loan Agreement Between
Identix Incorporated and Imperial Bank,
dated December 25, 1998
10.28 February 1999 Amendment to Loan and Security
Agreement Between ANADAC Incorporated and
Crestar Bank, dated February 4, 1999
27.1 Financial Data Schedule
(b) During the three months ended December 31, 1998, the
Company filed one report on Form 8-K, dated December
16, 1998, to report the reincorporation of the Company
from California to Delaware.
23
<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
February 16, 1999 BY: /s/James P. Scullion
-------------------------------------
James P. Scullion
Executive Vice President,
Chief Financial Officer and Secretary
24
<PAGE>
EXHIBIT 10.27
AMENDED AND RESTATED LOAN AGREEMENT
THIS AMENDED AND RESTATED LOAN AGREEMENT is entered into as of December 25,
1998 (this "Loan Agreement") between IDENTIX INCORPORATED, a Delaware
corporation (herein called "Borrower"), and IMPERIAL BANK (herein called
"Bank"). This Loan Agreement amends, restates and supercedes in its entirety the
Prior Loan Agreement (as hereinafter defined).
RECITALS
A. Borrower and Bank entered into a certain Security and Loan Agreement
dated as of August 29, 1997, as the same was amended by that certain First
Amendment to the Security and Loan Agreement and Addendum Thereto dated as of
December 22, 1997, that certain Second Amendment to the Security and Loan
Agreement and Addendum Thereto and Waiver dated as of July 6, 1998, that certain
extension letter dated August 28, 1998 and that certain extension and
modification letter dated November 4, 1998 (collectively, the "Prior Loan
Agreement"), pursuant to which Bank agreed to extend and make loans available to
Borrower upon the terms and conditions contained therein.
B. Borrower and Bank desire to amend and restate the Prior Loan Agreement
in its entirety to, among other things, increase the amount of its commitment
thereunder, amend certain provisions relating to advances under said commitment
and modify certain covenants and reporting requirements of the Borrower, all as
more fully set forth herein.
C. Bank has agreed to continue to make and maintain the Revolving
Commitment as described in this Loan Agreement, but only upon the terms and
subject to the conditions hereinafter set forth and in reliance on the
representations and warranties set forth herein.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
covenants hereinafter set forth, and intending to be legally bound, the parties
hereby agree as follows:
1. Definitions. As used in this Loan Agreement and unless otherwise
defined herein, all initially capitalized terms shall have the meanings set
forth on Exhibit A attached hereto and incorporated herein by this reference.
2. Commitment.
A. Revolving Commitment. Subject to all the terms and conditions
of this Loan Agreement and prior to the termination of its commitment as
hereinafter provided, Bank hereby agrees to make loans (each a "Revolving Loan")
to Borrower, from time to time and in such amounts as Borrower shall request
pursuant to this Section 2.A., up to an aggregate principal amount outstanding
under the Revolving Loan Account not to exceed the lesser of: (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) the lesser of thirty-five percent (35.0%) of Eligible
Inventory or $1,000,000.00 (as the same may be adjusted from time to time as
provided for under Section 9.B. hereof, collectively, the "Borrowing Base") or
(2) $10,000,000.00 (the "Revolving Commitment"). If at any time or for any
reason, the outstanding principal amount of the Revolving Loan Account is
greater than the lesser of: (x) the Borrowing Base or (y) the Revolving
Commitment, Borrower shall immediately pay to Bank, in cash, the amount of such
excess. Any commitment of Bank, pursuant to the terms of this Loan Agreement, to
make Revolving Loans shall expire on the Revolving
1.
<PAGE>
Maturity Date, subject to Bank's right to renew said commitment in its sole and
absolute discretion at Borrower's request. Any such renewal of the Revolving
Commitment shall not be binding upon Bank unless it is in writing and signed by
an officer of Bank. The outstanding principal balance of the Revolving Loan
Account may be prepaid in whole or in part at any time without penalty. Provided
that no Event of Default has occurred and is continuing, all or any portion of
the Revolving Loans advanced by Bank which are repaid by Borrower shall be
available for reborrowing in accordance with the terms hereof. Borrower promises
to pay to Bank the entire outstanding unpaid principal balance (and all accrued
unpaid interest thereon) of the Revolving Loan Account on or before December 24,
1999 ("Revolving Maturity Date").
(1) Revolving Loans. The amount of each Revolving Loan made by Bank
to Borrower hereunder shall be debited to the loan ledger account of Borrower
maintained by Bank for the Revolving Commitment (herein called the "Revolving
Loan Account") and Bank shall credit the Revolving Loan Account with all loan
repayments in respect thereof made by Borrower. When Borrower desires to obtain
a Revolving Loan, Borrower shall notify Bank (which notice shall be signed by an
officer of Borrower and shall be irrevocable) in accordance with Section 3
hereof, to be received no later than 3:00 p.m. Pacific time one (1) Banking Day
before the day on which the Revolving Loan is to be made. Revolving Loans may
only be used for short-term working capital requirements, the issuance of
letters of credit and the purchase of foreign exchange futures contracts.
(a) Letter of Credit Usage and Sublimit. Subject to the
availability of the Revolving Commitment and in reliance on the representations
and warranties of Borrower set forth herein, at any time and from time to time
from the date hereof through the Banking Day immediately prior to the Revolving
Maturity Date, Bank shall issue for the account of Borrower such standby and
commercial letters of credit ("Letters of Credit") as Borrower may request,
which request 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 constitute
Revolving Loans for the purpose of calculating availability under the Revolving
Commitment. 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 Revolving Maturity Date, subject to
Bank's right to extend the expiration date of each such Letter of Credit beyond
the Revolving Maturity Date in its sole and absolute discretion. All Letters 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.
(b) Foreign Exchange Usage and Sublimit. Subject to the
availability of the Revolving Commitment and in reliance on the representations
and warranties of Borrower set forth herein, at any time and from time to time
from the date hereof through the Banking Day immediately prior to the Revolving
Maturity Date, 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 up to $150,000.00,
representing ten percent (10%) of the maximum aggregate notional contract amount
under all such Exchange Contracts, shall be deemed to constitute outstanding
Revolving Loans for the purpose of calculating availability under the Revolving
Commitment. 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 in writing, no Exchange Contract shall have a due
date that is later than the Revolving Maturity Date subject to Bank's right to
extend the due date of each such Exchange Contract beyond the Revolving Maturity
Date in its sole and absolute discretion. All Exchange Contracts 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
2.
<PAGE>
contract application. Borrower will pay any standard issuance and other fees
that Bank notifies Borrower will be charged for issuing and processing Exchange
Contracts for Borrower. After and during the continuance of an Event of 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.
(2) Interest Payments on Revolving Loans. Borrower further promises to
pay to Bank from the date of the advance of the initial Revolving Loan through
the Revolving Maturity Date, on or before the tenth (10th) day of each month,
interest on the average daily unpaid balance of the Revolving Loan Account
during the immediately preceding month at a rate of interest equal to one-half
of one percent (0.50%) per annum in excess of the rate of interest which Bank
has announced as its prime lending rate (the "Prime Rate"), which shall vary
concurrently with any change in the 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 Revolving Loan Account is outstanding divided by 360,
which shall for interest computation purposes be considered one (1) year.
(a) Reduction in Interest Rate. Notwithstanding any of the
provisions contained in Section 2.A.(2) above, provided that no Event of Default
has occurred and is continuing, if on March 31, 1999 Borrower is in compliance
with all of the financial covenants set forth in Section 10 hereof, then
beginning on April 1, 1999, Bank agrees to reduce the rate of interest accruing
on the unpaid balance of the Revolving Loan Account to a rate of interest per
annum equal to the Prime Rate.
3. Loan Requests. Requests for Revolving 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 2,
which shall disclose that Borrower is entitled to the amount and type of Loan
being requested. Bank is hereby authorized to charge Borrower's deposit account
with Bank for all sums due Bank under this Loan Agreement.
4. Delivery of Payments. Payment to Bank of all amounts due hereunder
shall be made at its Santa Clara Valley Regional office, or at such other place
as may be designated in writing by Bank from time to time. If any payment date
fall on a day that is not a day that Bank is open for the transaction of
business ("Banking Day"), the payment due date shall be extended to the next
Banking Day.
5. Late Charge. If any interest payment, principal payment or principal
balance payment required hereunder is not received by Bank on or before ten (10)
days from the date in which such payment becomes due, Borrower shall pay to
Bank, a late charge equal to the lesser of (a) five percent (5.0%) of the amount
of such unpaid payment, in addition to said unpaid payment or (b)the maximum
amount permitted to be charged by applicable law, until remitted to Bank;
provided; however, nothing contained in this Section 5, shall be construed as
any obligation on the part of Bank to accept payment of any past due payment or
less than the total unpaid principal balance of the Revolving Loan Account
following the Revolving Maturity Date. All payments shall be applied first to
any late charges due hereunder, next to accrued interest then payable and the
remainder, if any, to reduce any unpaid principal due under the Revolving Loan
Account.
6. Default Interest. From and after the Revolving Maturity Date or such
earlier date as all sums owing under the Revolving Loan Account becomes due and
payable by acceleration or otherwise, or upon the occurrence of an Event of
Default, at the option of Bank all sums owing under the Revolving Loan Account
shall bear interest until paid in full at a rate equal to the lesser of (a) five
percent (5.0%) per annum in excess of the then applicable interest rate provided
for in Section 2.A.(2) hereof or (b) the maximum amount permitted to be charged
by applicable law, until all obligations hereunder are repaid in full or the
Event of Default is waived or cured to the satisfaction of Bank, as applicable.
3.
<PAGE>
7. Representations and Warranties. Borrower represents and warrants to
Bank: (a) That Borrower is a corporation, duly organized and existing in the
State of its incorporation and the execution, delivery and performance of each
of the Loan Documents 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 bound or affected: (b)
Borrower is, and at the time the Collateral becomes subject to Bank's security
interest will be, the true and lawful owner of and has, and 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 and to Permitted
Liens; (c) Each Account is, and 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 delivery instructions)
to, or services rendered, performed and accepted by, the account debtor; (d)
That there are and will be no defenses, counterclaims, or setoffs which may be
asserted against the Accounts from time to time represented by Borrower to be
Eligible Accounts, except as permitted in the definition thereof; (e) Any and
all financial information, including information relating to the Collateral,
submitted by Borrower to Bank, whether previously or in the future, is and will
be true and correct; (f) There is no litigation or other proceeding pending or
threatened against or affecting Borrower, 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; (g) (i) The consolidated and consolidating
balance sheets of Borrower dated as of September 30, 1998, and the related
consolidated and consolidating profit and loss statements for Borrower's fiscal
year then ended, copies of which have heretofore been delivered to Bank by
Borrower, and all other statements and data submitted in writing by Borrower to
Bank in connection with Borrower's request for credit are true and correct, and
said balance sheet and profit and loss statement accurately 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 GAAP, (ii) since such date, there have been no material adverse
changes in the financial condition of Borrower, and (iii) Borrower has no
knowledge of any liabilities, contingent or otherwise, which are 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
Material Adverse Effect upon its financial condition, operations or business as
now conducted; (h) Borrower has no liability for any delinquent local, state or
federal taxes, and, if Borrower has contracted with any government agency, it
has no liability for renegotiation of profits; and (i) 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, patent
rights and license rights of others; and (j) Borrower and its Subsidiaries have
reviewed the areas within their operations and business which could be adversely
affected by, and have developed or are developing a program to address on a
timely basis, the Year 2000 Problem and have made related appropriate inquiry of
material suppliers and vendors, and based on such review and program, the Year
2000 Problem will not have a Material Adverse Effect upon its financial
condition, operations or business as now conducted.
8. Negative Covenants. Borrower agrees that so long as any loans,
obligations or liabilities remain outstanding or unpaid to Bank or the
commitment of Bank hereunder is in effect, neither Borrower, nor any of its
subsidiaries ("Subsidiaries") will, without the prior written consent of Bank:
A. Make any substantial change in the character of its business as now
conducted;
B. Create, incur, assume or permit to exist any Indebtedness other
than loans from Bank except obligations now existing as shown in the financial
statements referenced in Section 7.(g)(i), excluding those being refinanced by
Bank, Subordinated Debt, Permitted Indebtedness, and previously disclosed and
Bank approved indebtedness to Crestar Bank not to exceed $10,000,000.00 entered
into by Borrower's wholly owned subsidiary, ANADAC; or sell or transfer, either
with or without recourse, any accounts or notes receivable or any monies due or
to become due;
4.
<PAGE>
C. Create, incur, assume or permit to exist 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
Permitted Liens and liens in favor of Bank, excluding any mortgage, pledge,
encumbrance, lien entered into by Borrower's wholly owned subsidiary, ANADAC;
D. Sell, lease, dispose of or grant a security interest in any of
the Collateral other than to Bank (other than the disposing of such Collateral
in the ordinary and normal course of its business as now conducted or other
assets which are obsolete or otherwise considered surplus), or execute any
financing statements covering the Collateral in favor of any secured party or
Person other than Bank. Notwithstanding the foregoing, upon delivery of prior
notice to Bank and the subsequent receipt of Bank's approval, Borrower may lease
certain Collateral, as approved by Bank, to its vendors and Bank agrees to
execute a financing statement evidencing the release of its security interest in
such leased Collateral.
E. Make (1) any loans or advances to any Person or other entity
other than in the ordinary and normal course of its business as now conducted
(provided that such loans or advances are not made to any Person or entity which
is controlled by or under common control with Borrower) or (2) any investment in
the securities of any Person or other entity other than the United States
Government. Notwithstanding the foregoing, Borrower may make (a) loans or
advances (with normal trade terms) in the form of any product of Borrower sold
to its Subsidiaries in the ordinary and normal course of its business as now
conducted, (b) loans or advances to its wholly-owned Subsidiaries up to the
aggregate amount of $1,500,000.00 at any one time outstanding; provided,
however, if any loans or advances are made in excess of $500,000.00 to any one
Subsidiary, said Subsidiary shall execute and deliver to Bank a guaranty of the
Revolving Commitment, in form and substance satisfactory to Bank and (c)
investments of up to $500,000.00 in a joint venture between Borrower and Sylvan
Learning Systems, Inc.
F. (1) Purchase or otherwise acquire all or substantially all of the
assets or business of any Person or other entity; or (2) liquidate, dissolve,
merge or consolidate, or commence any proceedings therefore; or (3) except in
the ordinary and normal course of its business as now conducted, 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 proceed
with any acquisition (as described above) (a) so long as no Event of Default has
occurred and is continuing or would exist after giving effect to such
transaction and (b) upon consummating such transaction, Borrower remains in
compliance with all of the financial covenants set forth in Section 10 hereof;
G. (1) Declare or pay any dividend or make any other distribution on
any of its capital stock now outstanding or hereafter issued; or (2) purchase,
redeem or retire any of such stock other than in dividends or distributions
payable in Borrower's or any such Subsidiary's capital stock, except for the
repurchase of Borrower's capital stock from officers, directors, employees or
consultants of Borrower upon termination of their employment with or rendering
of service to Borrower; and
H. Sell, transfer, assign, mortgage, pledge, license, lease, grant a
security interest in, or otherwise encumber any of its Intellectual Property,
other than licenses or leases of its intellectually property granted in the
ordinary and normal course of its business as now conducted.
9. Affirmative Covenants. Borrower affirmatively covenants that so long
as any loans, obligations or liabilities remain outstanding or unpaid to Bank or
the commitment of Bank hereunder is in effect, it will:
A. 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;
5.
<PAGE>
B. 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 the Accounts directly with the account
debtors obligated thereon or otherwise, all under reasonable procedures
acceptable to Bank and at Borrower's sole expense; provided further that, prior
to an Event of Default, Borrower shall not be responsible for the expense of
more than two (2) such audits in any fiscal year. Borrower hereby acknowledges
and agrees that upon completion of any such audit. Bank shall have the right to
adjust the Borrowing Base percentages, in its sole and reasonable discretion,
based on its review of the results of such Collateral audit;
C. 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;
D. Reimburse Bank upon demand for any and all legal costs, including
reasonable attorneys' fees, and other expenses incurred in collecting any sums
payable by Borrower under the Revolving Loan Account or any other obligation
secured hereby, enforcing any term or provision of this Loan Agreement or
otherwise or in the checking, handling and collection of the Collateral and the
preparation and enforcement of any agreement relating thereto;
E. Notify Bank of each location and of each office of Borrower at
which records of Borrower relating to the Accounts are kept;
F. 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 (to the extent customarily maintained by
businesses similar to Borrower) and with loss payable 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;
G. In the event the unpaid balance of the Revolving Loan Account
shall exceed the maximum amount of outstanding loans to which Borrower is
entitled under Section 2 hereof, as applicable, Borrower shall immediately pay
to Bank for credit to such Loan Account the amount of such excess;
H. Maintain and preserve all rights, franchises and other authority
adequate and necessary for the conduct of its business and maintain and preserve
its existence in the state of its incorporation and any other state(s) in which
Borrower conducts its business, except with respect to such other state(s),
where the failure to do so would not have a Material Adverse Effect;
I. 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 businesses. Borrower shall provide evidence of property
insurance in amounts and types acceptable to Bank, and certificates naming Bank
as a loss payee;
J. Pay and discharge, before the same becomes delinquent and
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: (1) the same are being
contested in good faith and by appropriate proceedings in such manner as not to
cause any Material Adverse Effect or the loss of any
6.
<PAGE>
right of redemption from any sale thereunder; and (2) it shall have set aside on
its books reserves (segregated to the extent required by GAAP);
K. Maintain a standard and modern system of accounting in accordance
with GAAP 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; provided that Bank shall use its best efforts to not interfere
with the conduct of Borrower's business;
L. Maintain its properties, equipment and facilities in good order
and repair;
M. Maintain its primary banking and operating and depository accounts
with Bank;
N. Prior to allowing any of Borrower's raw materials, work in
process, finished goods inventory and property, plant and equipment to be
transported to or be held at any contract manufacturer, warehouse or other
location (other than with bona fide distributors and retail accounts), Borrower
shall provide notice to Bank and Borrower shall have complied with such filing
and notice requirements as shall, in Bank's opinion, assure Borrower's and
Bank's priority in such property over creditors of such contract manufacturer,
warehouseman or operator of such other location, including, without limitation,
making filings under California Commercial Code (S)2326, providing notice under
California Commercial Code (S)9114 and making filings and publications as
required under California Civil Code (S)3440.1 and (S)3440.5 All such filings,
notices and publications shall be in form and substance satisfactory to Bank;
and
O. Borrower shall perform all acts reasonably necessary to ensure
that (1) Borrower, its Subsidiaries and any business in which Borrower holds a
substantial interest and (2) all customers, suppliers and vendors that are
material to Borrower's business, become Year 2000 Compliant in a timely manner.
Such acts shall include, without limitation, performing a comprehensive review
and assessment of all of Borrower's systems and adopting a detailed plan, with
an itemized budget, for the remediation, monitoring and testing of such systems.
If requested by Bank, Borrower shall within ten (10) business days deliver a
statement to Bank summarizing the Year 2000 exposure, program or progress of
Borrower and its Subsidiaries or other evidence of Borrower's compliance with
the terms of this Section 9.0. certified by an officer of Borrower.
10. Financial Covenants and Information. All financial covenants and
financial information referenced herein shall be interpreted and prepared in
accordance with GAAP as used in the United States of America applied on a basis
consistent with previous years for the operations of Borrower, excluding its
Subsidiaries. Compliance with the financial covenants shall be calculated and
monitored on a monthly basis, except as shall be expressly stated to the
contrary. Borrower affirmatively covenants that so long as any loans,
obligations or liabilities remain outstanding or unpaid to Bank or any
commitment is outstanding hereunder, it will, 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:
A. At all times, maintain a Minimum Tangible Net Worth of not less
than (1) $11,000,000.00 through the month ending May 31, 1999 and
(2)$12,000,000.00 beginning with the month ending June 30, 1999. 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;
7.
<PAGE>
B. At all times maintain a Maximum Ratio of Total Liabilities to
Tangible Net Worth not to exceed 1.25 to 1.00. As used herein "Total
Liabilities" means all liabilities, excluding Subordinated Debt and deferred
revenues;
C. At all times maintain a Minimum Quick Ratio of not less than 1.00
to 1.00. As used herein "Quick Ratio" means the sum of all cash plus Accounts
(excluding Accounts due from its Subsidiaries, but including 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) divided by current liabilities less deferred revenue;
D. Measured on a quarterly basis on the last day of each fiscal
quarter, have an operating after-tax profitability of at least $1.00;
E. As soon as it is available, but not later than twenty-five (25)
days after and as of the end of each month, deliver to Bank an internally-
prepared consolidated and consolidating financial statement consisting of a
balance sheet and profit and loss statement, in form satisfactory to Bank, and a
Compliance Certificate in the form of Exhibit B attached hereto and incorporated
herein by this reference, certified by an officer of Borrower;
F. As soon as it is available, but not later than forty-five (45)
days after and as of the end of each of the first three fiscal quarters of each
fiscal year of Borrower, a copy of its quarterly 10-Q report for each such
quarter, as filed with the Securities Exchange Commission.
G. As soon as it is available, but not later than ninety (90) days
after the end of Borrower's fiscal year, deliver to Bank (1) unqualified copies
of Borrower's consolidated financial statements together with changes in
financial position audited by an independent certified public accountant
selected by Borrower but acceptable to Bank and (2) a copy of its annual 10-K
report, as filed with the Securities Exchange Commission;
H. So long as any amounts remain outstanding and unpaid under the
Revolving Loan Account, on a 1) monthly basis as of the month end and as soon as
it is available, but not later than ten (10) days after the end of each month,
deliver to Bank, in such form and detail as Bank may require, statements showing
aging of the Accounts, Borrower's accounts payable, and inventory report
together with a Borrowing Base Certificate in the form of Exhibit C attached
hereto and incorporated herein by this reference (the "Borrowing Base
Certificate"), certified by an officer of Borrower; provided, however, if the
amounts outstanding and unpaid under the Revolving Loan Account exceed
$5,000,000.00, Borrower shall be required to provide the aging of the Accounts
and Borrower's accounts payable on a semi-monthly (twice monthly) basis per 1)
above and in addition 2) as of the end of each mid-month (15th) and as soon as
it is available, but not later than the 25th of each month. In addition, if the
amounts that have been advanced under the Borrowing Base for Eligible Inventory
exceed $500,000.00, Borrower shall be required to provide the inventory report
on a semi-monthly basis per 1) and 2) above. Notwithstanding the foregoing, if
Borrower has not provided to Bank statements showing aging of the Accounts,
Borrower's accounts payable, and inventory report for the most recent month then
ended, then as a condition to any request for a Revolving Loan, Borrower shall
have delivered to Bank said aging statements as well as a Borrowing Base
Certificate covering the most recent month then ended at least twenty (20) days
prior to the date of Borrower's request for an advance for said Revolving Loan;
I. As soon as it is available, but not later than twenty-five (25)
days following the close of Borrower's acquisition of IDT Holdings, Inc. and
Identicator, deliver to Bank revised consolidating and consolidated financial
projections;
8.
<PAGE>
J. Upon the reasonable request of Bank, deliver to Bank current
budgets, sales projections, operating plans and other financial exhibits and
information in form and substance satisfactory to Bank; and
K. Upon any officer becoming aware, deliver immediately to Bank
written notice of any pending or threatened litigation claiming, or reasonably
likely to result in, damages against Borrower in an amount in excess of
$50,000.00.
11. Loan Fee. In addition to any other amounts due or to become due,
concurrent with the execution hereof, Borrower shall deliver to Bank a loan
renewal fee in the amount of Fifty Thousand Dollars ($50,000.00).
12. Default and Remedies. The occurrence of any one or more of the
following shall constitute an "Event of Default": (a) Default be made in the
payment of any obligation by Borrower under any Loan Document; (b) Except for
any failure to pay as described in clause (a) above, breach be made in any
warranty, statement, promise, term or condition, contained herein or in any
other Loan Document and the same shall not have been cured to the satisfaction
of Bank within fifteen (15) days after Borrower shall have become aware thereof,
whether by written notice from Bank, or otherwise, (except that no cure period
shall exist for breaches in respect of Borrower's obligations under Subsections
8.E., 8.F., 8.G., 8.H., Subsections 10.A., 10.B., 10.C., 10.D., 10.E., 10.F.,
10.G., 10.H., and 10.I. of this Loan Agreement, and Sections 1 and 2 of the
General Security Agreement; and except for a five (5) day cure period shall
exist for breaches in respect of Borrower's obligations under Subsections 9.A.,
9.B., 9.C., 9.F., 9.G., 9.H., 9.I. and 9.O., and Subsections 10.J. and 10.K.);
(c) Any statement, warranty or representation made by Borrower at any time
proves false; (d) Borrower defaults in the repayment of any principal of or the
payment of any interest on any indebtedness exceeding in the aggregate principal
amount $50,000.00 or breaches or violates any term or provision of any
promissory note, loan agreement, mortgage, indenture or other evidence of such
indebtedness pursuant to which amounts outstanding in the aggregate exceed
$50,000.00 if the effect of such breach is to permit the acceleration of such
indebtedness, whether or not waived by the note holder or obligee, and such
failure shall not have been cured to Bank's satisfaction within fifteen (15)
calendar days after Borrower shall become aware thereof, whether by written
notice from Bank or otherwise, or there has in fact been an acceleration of such
indebtedness; (e) Borrower becomes insolvent or makes an assignment for the
benefit of creditors; (f) Any proceeding be commenced by Borrower under any
bankruptcy, reorganization, arrangement, readjustment of debt or moratorium law
or statute or, any such a proceeding is commenced against Borrower and is not
dismissed or stayed within thirty (30) days (provided that no Revolving Loans
will be made prior to the dismissal of such proceeding); (g) Any money judgment,
writ of attachment, garnishment, execution or other legal process be entered
against Borrower or issued against any material property of Borrower which is
not fully covered by insurance (subject to reasonable deductibles) and remains
unvacated, unbonded, unstayed or unpaid or undischarged for more than fifteen
(15) days (whether or not consecutive) or in any event later than five (5) days
prior to the date of any proposed sale thereunder, or if any assessment for
taxes against Borrower other than against any of its real property, is made by
the Federal or State government or any department thereof; or (h) Any change in
Borrower's financial condition, prospects or operations which has a Material
Adverse Effect. Upon the occurrence and during the continuance of an Event of
Default, Bank may, at its option and without demand first made and without
notice to Borrower, do any one or more of the following: (i) Terminate its
obligation to make loans to Borrower as provided in Section 2 hereof; (ii)
Declare all sums secured hereby immediately due and payable; (iii) Immediately
take possession of the Collateral wherever it may be found, using all legally
permissible means to do so, 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; (iv) Proceed in the
foreclosure of Bank's security interest and sale of the Collateral in any manner
permitted by law, or provided for herein; (v) 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; (vi) Retain the
Collateral in full satisfaction of the obligations secured thereby to the extent
permitted under the Uniform Commercial Code; or (vii) Exercise any remedies of a
secured party under the Uniform Commercial Code. Prior to any such
9.
<PAGE>
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 that it may have hereunder or by law. If a
sufficient sum is not realized from any such disposition of the Collateral to
pay all obligations secured by this Loan Agreement, Borrower hereby promises and
agrees to pay Bank any deficiency.
13. Records Retention. 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 (4) months from the time such items are delivered to Bank.
14. Attorneys' Fees. Borrower agrees to reimburse Bank for its reasonable
attorneys' fees and expenses incurred in connection with the negotiation,
preparation, execution and delivery of the Loan Documents.
15. Governing Law; Judicial Reference.
A. Governing Law. This Agreement shall be deemed to have been made
in the State of California and the validity, construction, interpretation, and
enforcement hereof, and the rights of the parties hereto, shall be determined
under, governed by, and construed in accordance with the internal laws of the
State of California, without regard to principles of conflicts of law.
B. Judicial Reference.
(1) Other than (a)nonjudicial foreclosure and all matters in
connection therewith regarding security interests in real or personal property;
or (b) 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 Loan Agreement or the other Loan Documents, which controversy,
dispute or claim is not settled in writing within thirty (30) days after the
"Claim Date" (defined as the date on which a party subject to this Loan
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 Loan 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 where
the real property, if any, is located or Santa Clara 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/her representative). The referee shall be
appointed to sit as a temporary judge, with all of the powers for 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 (S) 170.6. The referee shall (x) be requested to set the matter
for hearing within sixty (60) days after the date of selection of the referee
and (y) 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 judgement
shall be entered pursuant to CCP (S) 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 heating and/or trial.
All discovery permitted by this Loan 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
10.
<PAGE>
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.
(2) Except as expressly set forth in this Loan 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.
(3) 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 that 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 laws, 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.
(4) 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, (S) 1280 through (S) 1294.2 of the CCP as
amended from time to time. The limitations with respect to discovery as set
forth hereinabove shall apply to any such arbitration proceeding.
16. Miscellaneous Provisions.
A. 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.
B. No failure or delay on the part of Bank, in the exercise of any
power, right or privilege hereunder shall operate as a waiver thereof, nor shall
any single or partial exercise thereof.
C. All rights and remedies existing under this Loan Agreement or any
other Loan Document are cumulative to, and not exclusive of, any rights or
remedies otherwise available.
D. All headings and captions in this Loan Agreement and any related
documents are for convenience only and shall not have any substantive effect.
E. This Loan Agreement may be executed in any number of
counterparts, each of which when so delivered shall be deemed an original, but
all such counterparts shall constitute but one and the same instrument. Each
such agreement shall become effective upon the execution of a counterpart hereof
or thereof by
11.
<PAGE>
each of the parties hereto and telephonic notification that such executed
counterparts has been received by Borrower and Bank.
F. This Loan Agreement is not intended to be, and shall not be
construed to create, a novation or accord and satisfaction, and, except as
otherwise provided herein, the Prior Loan Agreement is amended and restated in
full by the terms of this Loan Agreement and all obligations outstanding under
the Prior Loan Agreement are governed by the terms of this Loan Agreement.
BANK: BORROWER:
IMPERIAL BANK IDENTIX INCORPORATED,
A Delaware corporation
By: /s/ J. Michael di Vittorio By: /s/ James P. Scullion
----------------------------- --------------------------------
J. Michael diVittorio James P. Scullion
Assistant Vice President Executive Vice President and
Chief Financial Officer
LIST OF EXHIBITS AND SCHEDULES
- ------------------------------
EXHIBIT A: Definitions
SCHEDULE 1 TO EXHIBIT A: List of Specific Permitted Indebtedness
SCHEDULE 2 TO EXHIBIT A: List of Specific Permitted Liens
EXHIBIT B: Compliance Certificate
EXHIBIT C: Borrowing Base Certificate
12.
<PAGE>
EXHIBIT 10.28
FEBRUARY 1999 AMENDMENT TO
LOAN AND SECURITY AGREEMENT
---------------------------
THIS FEBRUARY 1999 AMENDMENT TO LOAN AND SECURITY AGREEMENT (the
"Amendment"), dated as of February 4, 1999 and effective as of November 30,
1998, made by and between CRESTAR BANK, a Virginia banking corporation (the
"Lender"), ANADAC, INC., a Virginia corporation (the "Parent"), and LEGISLATIVE
DEMOGRAPHIC SERVICES, INC., a Delaware corporation, formerly known as System
Dynamics, Inc., a Delaware corporation ("LDS," and together with the Parent, the
"Borrowers"), recites and provides:
RECITALS
--------
The Parent, Defense Systems Concepts, Inc., a Maryland corporation ("DSC"),
and the Lender are parties to a Loan and Security Agreement, dated as of January
9, 1991 (the "Original Loan Agreement"). LDS subsequently became a party to the
Original Loan Agreement in accordance with the terms thereof, and DSC
subsequently was released as a party to the Original Loan Agreement. The
Original Loan Agreement has been amended by amendments dated August 5, 1992,
October 23, 1992, July 26, 1993, January 31, 1995, May 26, I995, June 21, 1995,
May 24, 1996, December 31, 1996, October 31, 1997, and November 10, 1998 (the
"Substantive Amendments"). In addition, the Termination Date, as defined in the
Original Loan Agreement, has been extended from time to time pursuant to various
letter agreements (the "Extension Letters"). The Original Loan Agreement, as
amended to the date hereof by the Substantive Amendments and the Extension
Letters, and as further amended, modified or supplemented from time to time,
shall be referred to as the "Loan Agreement." Terms defined in the Loan
Agreement shall have the same defined meanings when such terms are used in this
Amendment.
The Borrowers and the Lender have agreed to amend the terms of the Loan
Agreement. Accordingly, for valuable consideration, the receipt and sufficiency
of which are acknowledged, the Borrowers and the Lender agree as follows:
AGREEMENT
---------
1. The following definition in Section 1 of the Loan Agreement is amended
to read in its entirety as follows:
"Termination Date means March 31, 2000, and any extension or
extensions thereof granted by the Lender in accordance with the provisions
of Section 2.1 (h)."
2. Section 7.1 of the Loan Agreement is deleted in its entirety and is
replaced with the following provisions:
<PAGE>
"(S)7.1 Minimum Tangible Net Worth. The Parent will maintain at all
---------------------------------
times a Tangible Net Worth of not less than $5,500,000."
3. Section 7.3 Current Ratio of the Loan Agreement is deleted in its
-------------
entirety.
4. Section 7.4 Cash Flow Coverage of the Loan Agreement is deleted in its
------------------
entirety.
5. Except for the amendments to the Loan Agreement set forth above, the
Loan Documents shall remain in full force and effect. The Borrowers acknowledge
and agree that this Amendment effects an extension of the Termination Date,
among other amendments, and is not a novation, and the Borrowers ratify and
confirm the remaining terms and provisions of the Loan Documents in all
respects.
6. The Borrowers represent and warrant that this Amendment has been duly
authorized, executed and delivered by each of them in accordance with
resolutions adopted by their respective boards of directors. All other
representations and warranties made by the Borrowers in the Loan Documents are
incorporated by reference in this Amendment and are deemed to have been repeated
as of the date of this Amendment, with the same force and effect as if set forth
in this Amendment, except that any representation or warranty relating to any
financial statements shall be deemed to be applicable to the financial
statements most recently delivered to the Lender in accordance with the
provisions of the Loan Documents.
7. The Borrowers jointly and severally agree to pay all costs and expenses
incurred by the Lender in connection with this Amendment, including, but not
limited to, reasonable attorneys' fees.
8. This Amendment shall be governed by the laws of the Commonwealth of
Virginia, without reference to conflict of laws principles.
9. This Amendment may be executed by the parties individually or in any
combination, in one or more counterparts, each of which shall be an original and
all of which together constitute one and the same instrument.
10. The Borrowers acknowledge and agree that there are no defenses,
counterclaims or setoffs against any of their respective obligations under the
Loan Documents.
[SIGNATURES ON FOLLOWING PAGE]
2
<PAGE>
WITNESS the following signatures.
ANADAC, INC.,
a Virginia corporation
By: /s/Melinda K. Jensen
---------------------------------------
Melinda K. Jensen
Chief Financial Officer
LEGISLATIVE DEMOGRAPHIC
SERVICES, INC., a Delaware corporation,
formerly known as System Dynamics, Inc., a
Delaware corporation
By: /s/ Paul J. Bulger
--------------------------------------
Name: Paul J. Bulger
-----------------------------------
Title: President
-----------------------------------
CRESTAR BANK,
a Virginia banking corporation
By: /s/ Peter J. Mandanis
--------------------------------------
Peter J. Mandanis
Vice President
3
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE IS INCLUDED IN THIS FORM 10-Q IN COMPLIANCE WITH
THE COMMISSION'S RULES RELATING TO THE EDGAR FILING PROCESS. THIS SCHEDULE
CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE
SHEET AS OF DECEMBER 31, 1998 AND THE CONSOLIDATED STATEMENT OF OPERATIONS DATED
AS OF THE SIX MONTH PERIOD ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND ACCOMPANYING NOTES.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,418,000
<SECURITIES> 0
<RECEIVABLES> 27,876,000
<ALLOWANCES> 884,000
<INVENTORY> 6,857,000
<CURRENT-ASSETS> 37,214,000
<PP&E> 2,094,000<F1>
<DEPRECIATION> 0<F2>
<TOTAL-ASSETS> 41,932,000
<CURRENT-LIABILITIES> 17,498,000
<BONDS> 0
0
0
<COMMON> 53,567,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 41,932,000
<SALES> 18,647,000
<TOTAL-REVENUES> 40,323,000
<CGS> 9,202,000
<TOTAL-COSTS> 39,505,000
<OTHER-EXPENSES> 0<F2>
<LOSS-PROVISION> 0<F2>
<INTEREST-EXPENSE> 0<F2>
<INCOME-PRETAX> 484,000<F3>
<INCOME-TAX> 90,000
<INCOME-CONTINUING> 394,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 394,000
<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>
