<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q/A
AMENDMENT NO. 1
(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
--------------------
(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)
Increase in inventory reserve 55,000 124,000
Changes in assets and liabilities:
Accounts receivable 1,584,000 (4,802,000)
Inventories 251,000 (1,645,000)
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
---------- ----------
<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>
The Company provides for obsolete, slow moving or excess inventories in the
period when obsolescence or inventory in excess of expected demand is first
identified. During the six months ended December 31, 1998, the Company
physically disposed of $621,000 of inventory as a result of the decision to
discontinue support for certain products and manufacturing space utilization
concerns. The inventory had been previously identified as being potentially
obsolete and had been reserved for in earlier periods. The inventory
principally related to certain products that were either non-Y2K compliant
and therefore discontinued, such as the TouchLock I and TouchPrint 900, or
were parts made obsolete by design changes in the TouchPrint 600 and other
products.
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.
The increase of inventory reserve was $55,000 for the six month period ended
December 31, 1998 as compared to $124,000 for the same period in the prior
fiscal year. The reduced amount was based upon management's ongoing assessment
of potentially obsolete and excess inventory, the larger components of which had
been adequately provided for in earlier periods because they were known to be
non-Y2K compliant.
Gross margin on services revenues was 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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<PAGE>
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
----------
* Previously filed as an Exhibit to the Quarterly Report
on Form 10-Q filed on February 16, 1999.
(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
April 16, 1999 BY: /s/ Randall C. Fowler
-------------------------------------
Randall C. Fowler
Chairman, President, and
Chief Executive Officer
24
