<PAGE>
As filed with the Securities and Exchange Commission on April 16, 1999
Registration No. 333-68805
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
--------------
AMENDMENT NO. 4
To
FORM S-4
REGISTRATION STATEMENT
Under
The Securities Act of 1933
--------------
IDENTIX INCORPORATED
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
Delaware 7373 94-2842496
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporate or organization) Classification Code Number) Identification No.)
</TABLE>
510 North Pastoria Avenue, Sunnyvale, California 94086, (408) 731-2000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Randall C. Fowler, President and Chief Executive Officer
510 North Pastoria Avenue, Sunnyvale, California 94086, (408) 731-2000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------
Copies to:
<TABLE>
<S> <C>
Richard A. Peers Thomas W. Kellerman
<CAPTION>
Christina L. Vail Jonathan P. Shanberge
Heller Ehrman White & McAuliffe Brobeck Phleger & Harrison LLP
525 University Avenue 2200 Geng Road
Palo Alto, California 94301 Palo Alto, CA 94303
Telephone: (650) 324-7000 Telephone: (650) 424-0160
Facsimile: (650) 324-0638 Facsimile: (650) 496-2885
</TABLE>
--------------
Commencement of proposed sale to the public: As soon as practicable after the
effective date of this Registration Statement.
If any of the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
--------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
IDT HOLDINGS, INC.
1150 Bayhill Drive, Suite 215,
San Bruno, California 94066
----------------
SOLICITATION OF WRITTEN CONSENTS
----------------
TO THE STOCKHOLDERS OF IDT HOLDINGS, INC.:
The Board of Directors of IDT Holdings, Inc. ("IDT") is soliciting your
written consent to approve and adopt the Agreement and Plan of Reorganization
and Merger, dated as of November 14, 1998, as amended on December 11, 1998,
February 3, 1999 and March 16, 1999, by and among Identix Incorporated
("Identix"), IDT, and ID Acquisition Corp., a wholly owned subsidiary of
Identix, and to approve the merger of the subsidiary with and into IDT.
As a result of the merger, IDT would be the surviving corporation and become
a wholly owned subsidiary of Identix. Each IDT stockholder will receive
approximately 1.067 shares of Identix common stock in the merger for each share
of IDT common stock the stockholder holds. The exact exchange ratio cannot be
determined until the closing of the merger, but will be equal to 5,050,000
divided by the number of shares of IDT capital stock outstanding at the
closing, assuming the exercise of all IDT stock options and warrants.
Only the holders of record of IDT common stock as of the close of business
on the record date, April 9, 1999, are entitled to approve the adoption of the
merger agreement and the proposed merger. The approval of the merger agreement
and the merger requires the affirmative consent of the holders of a majority of
the shares of IDT common stock outstanding on the record date.
IDT will be holding an informational meeting regarding the merger for the
IDT stockholders at its offices, located at 1150 Bayhill Drive, Suite 215, San
Bruno, California 94066, on April 23, 1999 at 10:00 a.m.
Your consent is very important. Please complete, sign and date your
written consent and return it promptly in the enclosed postage-prepaid
envelope. Failure to return a properly executed written consent will
generally have the same effect as a vote against the adoption of the merger
agreement.
By Order of the Board of Directors,
Oscar Pieper
President
San Bruno, California
April 17, 1999
<PAGE>
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- --------------------------------------------------------------------------------
IDT HOLDINGS, INC. IDENTIX INCORPORATED
INFORMATION STATEMENT PROSPECTUS
Common Stock
$.01 par value
The boards of directors of IDT Holdings, Inc. and Identix Incorporated have
approved the acquisition of IDT by Identix.
As a result of the merger, IDT security holders will be entitled to receive
a total of 5,050,000 shares of Identix common stock, either in the merger or
upon the exercise of IDT options and warrants assumed by Identix in the merger.
Immediately after the merger, IDT security holders will own approximately
16.56% of the outstanding Identix common stock, assuming the exercise of all
outstanding IDT options and warrants assumed by Identix in the merger.
Each IDT stockholder will receive approximately 1.067 shares of Identix
common stock in the merger for each share of IDT common stock the stockholder
holds. The IDT stockholders will not know, at the time of consent, the exact
number of shares to be received by them in the merger.
IDT stockholders will not immediately receive and be able to sell all of the
Identix shares issuable in the merger. Shortly after the closing, each IDT
stockholder will receive 90% of the shares issuable to the stockholder in the
merger. The remaining 10% of the shares will automatically be placed in escrow
for a one-year period. Those escrowed shares may be returned to Identix to the
extent that Identix successfully makes a claim after the closing for damages or
expenses as a result of breaches or misrepresentations by IDT relating to the
merger agreement or this prospectus. Holders of shares released from escrow
will be prohibited from selling those shares until fifteen months after
closing. In addition to the 10% placed in escrow, any IDT stockholder owning
more than 1,000 IDT shares immediately prior to the merger will be prohibited
from selling at least 40% of the Identix shares received by the stockholder in
the merger for a period of fifteen months from closing.
It is expected that IDT stockholders will not be taxed solely as a result of
the exchange of Identix common stock for IDT common stock in the merger, except
to the extent they receive cash for fractional shares. See "Material Federal
Income Tax Consequences" beginning on page 30 for a discussion of the
limitations on that conclusion and the assumptions on which it is based.
The merger cannot be completed unless IDT stockholders approve it. IDT is
hereby soliciting stockholder approval by written consent. Stockholder approval
of the merger is assured because Identix has received the agreement of persons
holding at least a majority of IDT common stock to vote their IDT shares in
favor of the merger. However, your consent is still very important. Please take
the time to vote by completing and mailing the enclosed written consent to us.
The IDT board of directors has scheduled the following informational meeting
for IDT stockholders regarding the merger:
April 23, 1999
10:00 a.m.
1150 Bayhill Drive, Suite 215, San Bruno, California 94066
The merger involves certain risks to IDT stockholders. See "Risk Factors,"
beginning on page 13.
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved these securities or determined if this prospectus
is truthful or complete. Any representation to the contrary is a criminal
offense.
Prospectus dated April 16, 1999, first mailed to IDT stockholders on April 17,
1999.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................................... 1
The companies............................................................ 1
IDT's reasons for the merger............................................. 1
The merger............................................................... 1
What IDT stockholders will receive in the merger......................... 1
What IDT option holders will receive in the merger....................... 2
Ownership of Identix following the merger................................ 2
Escrow of Identix shares in case Identix incurs damages or expenses...... 2
Fifteen-month resale restriction......................................... 2
Solicitation of written consent.......................................... 2
The informational meeting................................................ 2
IDT's recommendation to IDT stockholders................................. 3
Record date; voting power................................................ 3
Votes required........................................................... 3
Voting Agreement......................................................... 3
Appraisal rights......................................................... 3
Federal income tax consequences.......................................... 3
Listing of Identix common stock.......................................... 3
Interests of IDT officers and directors in the merger.................... 3
Conditions to the merger................................................. 4
Termination of the merger agreement...................................... 4
Accounting treatment..................................................... 4
Regulatory approvals..................................................... 5
Operations following the merger.......................................... 5
Identicator, Inc......................................................... 5
Recent Developments: Identix Preliminary Third Quarter Results............. 5
Selected Historical Financial Data and Comparative Per Share Data.......... 6
Market Price and Dividend Information...................................... 11
Special Note Regarding Forward-Looking Statements.......................... 12
Risk Factors............................................................... 13
Risks Relating to the Merger............................................. 13
Risks Relating to Business of Identix and Identicator Technology......... 14
IDT Stockholder Approval of the Merger..................................... 23
Informational Meeting.................................................... 23
Matter to be Acted Upon By Written Consent............................... 23
Record Date.............................................................. 23
Votes Required........................................................... 23
Revocation of Written Consent............................................ 24
Solicitation of Consents and Expenses.................................... 24
The Merger................................................................. 25
Background of the Merger................................................. 25
IDT's Reasons for the Merger; Recommendation of the IDT Board............ 26
Identix's Reasons for the Merger......................................... 28
Actions Preceding the Merger............................................. 29
Operations Following the Merger.......................................... 29
</TABLE>
i
<PAGE>
TABLE OF CONTENTS--(Continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
Interests of IDT Officers and Directors in the Merger.................. 30
Material Federal Income Tax Consequences............................... 30
Regulatory Approvals................................................... 33
Appraisal Rights....................................................... 33
The Merger Agreement..................................................... 38
Closing; Effect of Merger.............................................. 38
Conversion of Securities............................................... 38
Exchange Procedures.................................................... 40
Indemnification and Escrow............................................. 40
Fifteen-Month Resale Restriction....................................... 41
Representations and Warranties......................................... 42
Conduct of Business Pending the Merger................................. 43
Exclusivity............................................................ 44
Additional Covenants................................................... 44
Conditions............................................................. 44
Termination............................................................ 45
Expenses............................................................... 46
Amendment.............................................................. 46
Affiliate's Agreements................................................. 46
Voting Agreement....................................................... 46
Employment and Noncompetition Agreements............................... 47
Comparison of Capital Stock.............................................. 48
Description of Identix Capital Stock................................... 48
Description of IDT Capital Stock....................................... 48
Comparison of Stockholder Rights....................................... 50
Unaudited Pro Forma Condensed Combined Financial Information............. 53
Business of Identicator Technology....................................... 61
Overview............................................................... 61
Technology and Products................................................ 62
Marketing and Distribution Channels.................................... 64
Proprietary Technology................................................. 65
IDT'S Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 66
Security Ownership of Certain Beneficial Owners and Management of IDT.... 71
Business of Identix...................................................... 72
Overview............................................................... 72
Biometric Industry Overview............................................ 72
The Identix Solution................................................... 75
Strategy............................................................... 77
Biometric Security Products............................................ 78
Biometric Imaging Products............................................. 80
Fingerprint Services................................................... 82
ANADAC Services........................................................ 82
Product Development.................................................... 84
Sales, Marketing and Support........................................... 84
Backlog................................................................ 85
Patents and Trade Secrets.............................................. 85
</TABLE>
ii
<PAGE>
TABLE OF CONTENTS--(Continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
Competition............................................................ 87
Manufacturing.......................................................... 88
Employees.............................................................. 88
Properties............................................................. 89
Legal Proceedings...................................................... 89
Executive Officers and Directors....................................... 90
Executive Compensation................................................. 92
Agreements with Executive Officers..................................... 94
Director Compensation.................................................. 94
Compensation Committee Interlocks and Insider Participation............ 95
Certain Transactions................................................... 95
Identix's Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 96
Security Ownership of Certain Beneficial Owners and Management of
Identix................................................................. 108
Legal Matters............................................................ 109
Experts.................................................................. 109
Where You Can Find More Information...................................... 109
Index to Consolidated Financial Statements............................... F-1
Appendix A Agreement and Plan of Reorganization and Merger............... A-1
Appendix B Stockholder Voting and Proxy Agreement........................ B-1
Appendix C Escrow Agreement.............................................. C-1
Appendix D Delaware General Corporation Law Appraisal Rights............. D-1
Appendix E Chapter 13 General Corporation Law of California Dissenters'
Rights.................................................................. E-1
</TABLE>
iii
<PAGE>
SUMMARY
This summary highlights selected information from this document and does not
contain all of the information that is important to you. To understand the
merger fully and for a more complete description of the legal terms of the
merger, you should read carefully this entire document and the documents to
which we have referred you. We have included page references to direct you to
more complete descriptions of the topics presented in this summary.
The companies
Identix Incorporated (page 72)
510 North Pastoria Avenue
Sunnyvale, California 94086
(408) 731-2000
Identix is a leader in designing, developing, manufacturing and marketing
biometric products for the capture or comparison of fingerprints for security,
fraud prevention, law enforcement and other applications. "Biometrics" is the
analysis of unique biological characteristics of an individual, such as a
fingerprint, for identification or verification purposes.
Through its subsidiary ANADAC, Inc., Identix provides information technology,
engineering and management consulting services, including the installation and
integration of Identix products, to private and public sector clients.
IDT Holdings, Inc. and Identicator Technology, Inc. (page 61)
IDT Holdings, Inc. is a holding company. The business operations are conducted
through Identicator Technology, Inc., which is a wholly owned subsidiary of
IDT. Prior to completion of the merger, Identicator Technology, Inc. will be
merged with and into IDT. IDT and Identicator Technology are referred to
together in this document as "Identicator Technology."
IDT's reasons for the merger (page 26)
The IDT board of directors believes that the merger will enable IDT to benefit
from the sales and marketing, management and capital resources of Identix and
allow its stockholders to participate in a publicly traded company that is a
leader in biometric security and imaging products.
The merger (page 25)
The merger agreement is attached as Appendix A to this document. We encourage
you to read the merger agreement. It is the legal document governing the
merger.
What IDT stockholders will receive in the merger (page 38)
If you hold shares of IDT common stock, you will receive approximately 1.067
shares of Identix common stock in the merger for each share of IDT common stock
you hold. The exact exchange ratio cannot be determined until the closing of
the merger, but will be equal to 5,050,000 divided by the number of shares of
IDT capital stock outstanding at the closing, assuming the exercise of all IDT
stock options and warrants. As of the date of this prospectus, there were
4,732,096 shares of IDT capital stock outstanding, assuming exercise of all
stock options and warrants.
Identix will not issue fractional shares. Instead, you will receive cash for
any fractional share of Identix common stock owed to you based on the average
of the high and low prices of Identix common stock on the trading day before
the closing of the merger.
You should not send in your stock certificates until instructed to do so after
the merger is completed.
1
<PAGE>
What IDT option holders will receive in the merger (page 39)
If you hold options to purchase shares of IDT common stock, after the merger
your options will be assumed by Identix and you will have the right to purchase
Identix common stock. The number of shares issuable upon exercise of your IDT
options and the exercise price per share will be adjusted using the same
exchange ratio applied to determine the number of shares of Identix stock to be
issued per share of IDT common stock in the merger. See "What IDT stockholders
will receive in the merger" above.
Ownership of Identix following the merger
Immediately following the merger, existing IDT stockholders will own
approximately 16.56% of the outstanding Identix common stock, assuming the
exercise of all IDT stock options and warrants assumed by Identix in the
merger.
Escrow of Identix shares in case Identix incurs damages or expenses (page 40)
IDT stockholders will not immediately receive all of the Identix shares
issuable in the merger. 10% of the shares issuable to each IDT stockholder will
automatically be placed in escrow for a one-year period. Those escrowed shares
may be returned to Identix to the extent that Identix successfully makes a
claim for damages or expenses as a result of breaches or misrepresentations by
IDT relating to the merger agreement or this prospectus. Holders of shares
released from escrow will be prohibited from selling those shares until fifteen
months after closing.
A stockholder representative will be authorized to represent the IDT security
holders in all matters relating to the escrow. Harry F. Camp has been selected
by the IDT board to act as the stockholder representative. Approval by the IDT
stockholders of the merger will constitute approval of the escrow agreement and
the selection of the stockholder representative.
IDT will also ask its stock option and warrant holders to agree that 10% of
their IDT stock options and warrants, and the Identix common stock they receive
upon exercise of those options and warrants, will also be subject to the escrow
agreement and subject to cancellation if Identix successfully claims damages in
excess of the value of the shares issued into escrow at closing.
Fifteen-month resale restriction (page 41)
In addition to the shares subject to the escrow, at least 40% of the Identix
shares issued in the merger to any IDT stockholder who owns more than 1,000 IDT
shares immediately prior to the merger will automatically be subject to a
"lock-up" period for fifteen months. Shares subject to the lock-up period may
not be sold, pledged or otherwise transferred during the period, except upon
the death of a stockholder. The exact number of shares of each IDT stockholder
subject to the lock-up will be determined at closing. IDT will also ask each
holder of IDT stock options or warrants to agree that, in addition to the
portions of their options and warrants subject to the escrow, 40% of the
Identix shares issuable upon exercise of their options and warrants will be
subject to the lock-up period.
Solicitation of written consent (page 23)
IDT is soliciting approval of the merger by written consent of its
stockholders. The form of written consent is enclosed with this prospectus.
The informational meeting (page 23)
IDT will hold an informational meeting for the IDT stockholders at IDT's
principal office located at 1150 Bayhill Drive, Suite 215, San Bruno,
California 94066 on April 23, 1999 at 10:00 a.m. At the informational meeting,
you will be given an opportunity to ask questions about the merger.
2
<PAGE>
IDT's recommendation to IDT stockholders (page 26)
The IDT board of directors believes that the merger is fair to you and in your
best interests and unanimously recommends that you approve the adoption of the
merger agreement and approve the merger.
Record date; voting power (page 23)
You are entitled to take action by written consent if you owned shares of IDT
common stock as of the close of business on April 9, 1999, the record date.
On the record date, there were outstanding 2,727,762 shares of IDT common stock
and no shares of IDT Series A preferred stock. IDT stockholders will have one
vote for each share of IDT common stock they owned at the record date.
Votes required (page 23)
A majority of the shares of IDT common stock outstanding on the record date
must approve and adopt the merger agreement and approve the merger.
Voting agreement (page 46)
IDT stockholders who hold approximately 70% of the shares of IDT common stock
outstanding on the record date have agreed to vote their IDT shares in favor of
the adoption of the merger agreement and approval of the merger. The
stockholders who are parties to the voting agreement are International
Technology Concepts, Inc. and the directors of IDT.
Appraisal rights (page 33)
Under Delaware law, stockholders of IDT have rights to demand an appraisal of
the value of their shares of IDT common stock in lieu of participating in the
merger. In addition, because IDT is subject to certain California laws, IDT
stockholders are also entitled to exercise dissenters' rights under California
law.
Federal income tax consequences (page 30)
It is expected that IDT stockholders will not be taxed solely as a result of
the exchange of Identix common stock for IDT common stock in the merger, except
to the extent they receive cash for fractional shares. It is a condition to the
closing of the merger that each of IDT and Identix receive an opinion from its
outside counsel to that effect. However, tax counsel is not giving an opinion
as to any prior IDT transaction or as to the effect of the merger on prior IDT
transactions.
Tax matters are very complicated and the tax consequences of the merger to you
will depend in part on the facts of your own situation. You should consult your
tax advisors, as you deem appropriate, for a full understanding of the tax
consequences of the merger to you.
Listing of Identix common stock
As a condition of closing, the Identix common stock issued in connection with
the merger must be approved for quotation on the AMEX.
Interests of IDT officers and directors in the merger (page 30)
In considering the merger, you should be aware that the officers and directors
of IDT have interests in the merger that are in addition to the interests of
IDT's stockholders generally. Pursuant to their terms, some of the options held
by four IDT officers and directors will vest upon the consummation of the
merger. Furthermore, Identix will enter into employment agreements and issue
additional options after the merger to four officers of IDT, three of whom who
are also directors of IDT.
In connection with the merger, Identix will enter into an agreement with
International
3
<PAGE>
Technology Concepts, Inc. under which International Technology Concepts will
provide administrative, research, development, testing and production services
and access to facilities to Identix. Two of the officers and directors of IDT
are also officers, directors and principal stockholders of International
Technology Concepts.
In connection with the merger, Identix will enter into an agreement with
Identicator, Inc. under which Identicator, Inc. will provide administrative
services and a trademark license to Identix. Two of the officers and directors
of IDT are also officers, directors and principal stockholders of Identicator,
Inc.
Conditions to the merger (page 44)
Identix and IDT will complete the merger only if a number of conditions are
satisfied or waived, including the following:
. the holders of at least a majority of the IDT common stock approve the
merger agreement;
. the number of "dissenting shares" of IDT does not exceed 5% of the
aggregate number of shares of Identix common stock that would be
issuable in the merger at the effective time if there were no dissenting
shares;
. no material adverse change occurs in the businesses of either
Identicator Technology or Identix;
. four officers of Identicator Technology enter into employment and
noncompete agreements with Identix and receive option grants; and
. the escrow holder, Identix and the stockholder representative enter into
an escrow agreement and holders of IDT stock options have entered into
supplemental written agreements, so that the total number of shares of
Identix common stock available to satisfy escrow claims is at least
434,300.
Termination of the merger agreement (page 45)
Identix and IDT can jointly agree to terminate the merger agreement at any time
without completing the merger. Either company can terminate the merger
agreement under various circumstances, including if:
. the other company fails to perform any material covenant in the merger
agreement; or
. the other company has not met its closing conditions by May 11, 1999 and
the terminating party has not waived those conditions.
Accounting treatment
The merger will be accounted for by Identix as a purchase in accordance with
generally accepted accounting principles. Application of the purchase method of
accounting for the merger will reduce Identix's pre-tax earnings for at least 3
years, and as many as 12 years. The reported results of operations of Identix
will include the results of IDT from and after the closing date. The assets,
including intangible assets, and liabilities of IDT will be recorded at their
fair values as of the closing date. Any excess of the purchase consideration
over the fair values of the assets and liabilities of IDT will be recorded as
goodwill. Identix will write off at closing the value of certain acquired
intangible assets referred to as in-process research and development. In
addition, other acquired intangible assets and goodwill created as a result of
the merger will be amortized by Identix over a period from 3 to 12 years.
4
<PAGE>
Regulatory approvals (page 33)
The merger is not subject to the filing and waiting period requirements of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976.
Operations following the merger (page 29)
Following the merger, Identicator Technology will continue its operations as a
wholly-owned subsidiary of Identix. The board of directors of Identicator
Technology will consist of two continuing members, Oscar Pieper and Yuri
Khidekel, and two officers of Identix, Randall C. Fowler and James P. Scullion.
The following individuals will continue as officers of Identicator Technology
following the merger: Oscar Pieper, Yuri Khidekel, Yury Shapiro and Grant
Evans.
Identicator, Inc.
Until March 31, 1997, a predecessor of IDT was engaged in developing and
commercializing products for non-electronic, paper-based production,
development or capture of fingerprint images. On March 31, 1997, that
predecessor transferred that paper-based business to a company called
Identicator, Inc. and distributed shares in Identicator, Inc. to its
stockholders. IDT does not own any interest in Identicator, Inc., and Identix
is not acquiring Identicator, Inc. or any part of its business through the
merger.
Identicator, Inc. owns all rights to the Identicator trademark and logo, and
will grant to Identicator Technology a royalty-free, perpetual, irrevocable,
worldwide right and license to use the Identicator trademark and logo for its
business. The license will be exclusive in Identicator Technology's line of
business.
RECENT DEVELOPMENTS: IDENTIX'S PRELIMINARY THIRD QUARTER RESULTS
Identix announced on April 13, 1999, that it expects its total revenues for the
fiscal third quarter ended March 31, 1999 to be between $19 million and $19.5
million, which will be essentially flat with the third quarter of the previous
year and the December 31, 1998 quarter. Service revenues increased over both
last quarter and fiscal third quarter 1998 while product sales decreased
overall, due to seasonality, to fluctuations in large-scale live-scan
procurements by government agencies, and to lower biometric security product
sales related to Identix's preparation for introducing combined product
offerings following the closing of the merger. Identix expects a loss of
approximately $1 million for the third quarter compared to a loss of $56,000 in
the quarter ended December 31, 1998. The increase in loss is a result of a
decrease in sales of Identix's higher-margin products, partially offset by an
increase in lower-margin services revenues.
In the announcement, Identix Chairman, President & CEO Randall C. Fowler said,
"Live-scan revenues continue to fluctuate as a result of the lengthy sales
process and uncertainty surrounding large capital expenditures by government
agencies. We continue to innovate and aggressively market the live-scan product
line to remain a market leader. During this March 1999 quarter, Identix and
Identicator Technology were merging the best of technologies and redesigning
products to meet new price points with increased functionality. In anticipation
of closing the acquisition, we are preparing to meet the growing demands of the
market with a combined product line and marketing team. The merger of
Identicator Technology and Identix unifies two leaders in biometrics, and
enhances our growing role in identifying excellence."
5
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
AND COMPARATIVE PER SHARE DATA
Identix is providing the following information to aid you in your analysis
of the financial aspects of the merger. Identix derived this information from
its historical audited financial statements for the fiscal years ended June 30,
1994 through June 30, 1998, and its historical unaudited financial statements
for the six months ended December 31, 1997 and 1998 which have been prepared on
the same basis as the historical audited financial statements. In the opinion
of management, the unaudited financial statements of Identix, from which the
data have been derived, contain all adjustments, consisting only of normal
recurring accruals, necessary for the fair presentation of the results for, and
as of the end of, the periods. The operating results of Identix for the six
months ended December 31, 1998 are not necessarily indicative of the results
that may be expected for the year ending June 30, 1999. This information is
only a summary and you should read it in conjunction with Identix's
Consolidated Financial Statements (and related notes) beginning on page F-17
and "Identix's Management's Discussion and Analysis of Financial Condition and
Results of Operations" beginning on page 96. See also "Recent Developments:
Identix's Preliminary Third Quarter Results" on page 5.
Identix Selected Consolidated Financial Data
(in thousands, except per share data)
<TABLE>
<CAPTION>
Six Months
Ended
Fiscal Year Ended June 30, December 31,
------------------------------------------ ---------------
1994 1995 1996 1997 1998 1997 1998
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Historical Consolidated
Statement of Operations
Data:
Revenues................ $20,135 $27,014 $38,541 $52,543 $79,374 $38,603 $40,323
Net income (loss)....... (2,596) (715) (3,441) 518 768 951 394
Basic net income (loss)
per share.............. (0.14) (0.04) (0.15) 0.02 0.03 0.04 0.02
Diluted net income
(loss) per share....... (0.14) (0.04) (0.15) 0.02 0.03 0.04 0.02
Weighted average common
shares used in
computing basic net
income (loss) per
share.................. 18,304 19,371 23,485 24,817 25,104 25,011 25,319
Weighted average common
shares used in
computing diluted net
income (loss) per
share.................. 18,304 19,371 23,485 25,586 25,669 25,690 25,646
</TABLE>
<TABLE>
<CAPTION>
June 30,
--------------------------------------- December 31,
1994 1995 1996 1997 1998 1998
------- ------- ------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Historical Consolidated
Balance Sheet Data:
Cash and cash
equivalents............. $ 799 $ 3,842 $ 981 $ 2,510 $ 753 $ 2,418
Working capital.......... 3,588 9,571 14,914 15,477 18,153 19,716
Total assets............. 10,593 18,104 27,107 32,440 42,012 41,932
Long-term debt and
convertible debt........ 500 -- 127 -- -- --
Shareholders' equity..... 5,751 12,274 19,472 20,898 22,910 24,344
</TABLE>
6
<PAGE>
IDT is providing the following information to aid you in your analysis of
the financial aspects of the merger. IDT derived this information from its
historical unaudited financial statements for the fiscal years ended December
31, 1994 and 1995 and the audited financial statements for the fiscal years
ended December 31, 1996, 1997 and 1998.This information is only a summary and
you should read it in conjunction with IDT's Consolidated Financial Statements
(and related notes) beginning on page F-1 and "IDT's Management's Discussion
and Analysis of Financial Condition and Results of Operations" beginning on
page 66.
IDT Selected Historical Consolidated Financial Data
(in thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal Year Ended December 31,
-----------------------------------
1994 1995 1996 1997 1998
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Historical Consolidated Statement of
Operations Data:
Revenues.............................. $1,541 $2,088 $3,061 $3,194 $ 4,378
Net income (loss) from operations..... 424 703 453 143 (5,899)(1)
Net income (loss)..................... 81 709 459 146 (5,978)(1)
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------------------
1994 1995 1996 1997 1998
---- ---- ---- ------ ------
Historical Consolidated Balance Sheet Data:
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents........................ $135 $102 $474 $ 15 $ 76
Working capital (deficit)........................ 195 650 787 853 (55)
Total assets..................................... 214 893 847 1,991 1,990
Long-term debt, net of issuance costs............ -- -- -- -- 299
Total partners' capital.......................... 196 685 844 990 --
Shareholders' equity (deficit)................... -- -- -- -- (77)
</TABLE>
- --------
(1) The issuance of options to purchase IDT common stock at an exercise price
of $0.28 per share resulted in IDT recognizing stock compensation charges
of $4.6 million in the year ended December 31, 1998. See Note 9 of Notes to
IDT's Consolidated Financial Statements.
7
<PAGE>
The following table sets forth unaudited pro forma condensed combined
financial data for Identix and IDT which gives effect to the acquisition,
accounted for as a purchase, as if it had been consummated as of July 1, 1997
for the year ended June 30, 1998 statement of operations data and for the six
months ended December 31, 1998 statement of operations data. The net loss set
forth below does not include in-process research and development costs in the
amount of $10,044,000 which will be written off immediately after the
transaction is completed. The balance sheet data assumes the merger was
consummated on December 31, 1998. The pro forma data is not necessarily
indicative of the results that would have been achieved had the transaction
been consummated on those dates and should not be construed as representative
of future operations. This presentation is subject to the assumptions set forth
in the notes to the Unaudited Pro Forma Condensed Combined Financial
Information appearing elsewhere in this prospectus. The information presented
should be read in conjunction with the pro forma financial information and the
notes thereto and the historical consolidated financial statements including
the notes thereto of Identix and of IDT, appearing elsewhere in this
prospectus. See "Unaudited Pro Forma Condensed Combined Financial Information"
beginning on page 53, IDT's Consolidated Financial Statements beginning on page
F-1, and Identix's Consolidated Financial Statements beginning on page F-17.
Unaudited Selected Pro Forma Condensed Combined Financial Data
(in thousands, except per share data)
Pro Forma Combined Statement of Operations Data:
<TABLE>
<CAPTION>
Year Ended Six Months Ended
June 30, 1998 December 31, 1998
------------- -----------------
<S> <C> <C>
Revenues................................ $83,477 $42,597
Loss from operations.................... (1,960) (6,569)(1)
Loss before taxes....................... (2,129) (6,823)(1)
Net loss................................ (2,300) (7,072)(1)
Net loss per share--basic and diluted... (0.08) (0.25)
Shares used in computing net loss per
share--basic and diluted............... 28,013 28,228
</TABLE>
Pro Forma Combined Balance Sheet Data:
<TABLE>
<CAPTION>
December 31, 1998
-----------------
<S> <C>
Current assets.......................................... $38,887
Total assets............................................ 74,617
Working capital......................................... 18,961
Current liabilities..................................... 19,926
Long-term liabilities................................... 429
Stockholders' equity.................................... 54,262
</TABLE>
- --------
(1) The issuance of options to purchase IDT common stock at an exercise price
of $0.28 per share resulted in IDT recognizing stock compensation charges
of $4.6 million in the six months ended December 31, 1998. See Note 9 of
Notes to IDT's Consolidated Financial Statements.
8
<PAGE>
Comparative Per Share Information
The following table sets forth certain earnings, dividend and book value per
share data for IDT and Identix on a historical basis and pro forma combined
basis.
The information is only a summary and you should read it in conjunction with
the "Unaudited Pro Forma Condensed Combined Financial Information" on pages 53
through 61 and the respective audited and unaudited consolidated financial
statements of Identix and IDT, including the notes thereto, appearing elsewhere
in this prospectus. See IDT's Consolidated Financial Statements (and related
notes) beginning on page F-1, "IDT's Management's Discussion and Analysis of
Financial Condition and Results of Operations" beginning on page 66, Identix's
Consolidated Financial Statements (and related notes) beginning on page F-17
and "Identix's Management's Discussion and Analysis of Financial Condition and
Results of Operations" beginning on page 96.
The IDT pro forma equivalent per share amounts are calculated by multiplying
the Identix pro forma per share amounts by the assumed exchange ratio of
approximately 1.067. This ratio is calculated by dividing the total number of
shares of Identix common stock to be issued in the merger and upon the exercise
of options and warrants assumed in the merger (5,050,000) by the number of
shares of IDT common stock outstanding on a fully diluted basis (4,732,096).
Prior to September 30, 1998, Identicator Technology was a partnership and
had no common shares outstanding. On September 30, 1998, ownership of
substantially all of the assets and business of the partnership was transferred
to Identicator Technology, Inc., a wholly owned subsidiary of IDT Holdings,
Inc. Identicator Technology, Inc. will be merged with and into IDT prior to the
merger. The IDT historical book value is computed by dividing partners'
capital/shareholders' equity at the end of the period by the number of shares
of IDT common stock outstanding at December 31, 1998 (2,727,762). Partners'
capital was $905,000 at June 30, 1998 and shareholders' deficit was $77,000 at
December 31, 1998. The IDT historical net income (loss) per share is computed
by dividing net income (loss) by the number of shares of IDT common stock
outstanding at December 31, 1998 (2,727,762). Options and warrants outstanding
at December 31, 1998 to acquire shares of IDT common stock (2,004,334) are
included in the computation to the extent that they are dilutive. Net income
for the year ended June 30, 1998 was $85,000. The net loss for the six month
period ended December 31, 1998 was $5,890,000. This loss includes stock
compensation charges of $4,642,000 in connection with the issuance of options
to purchase IDT common stock at an exercise price of $0.28 per share during
that six month period.
9
<PAGE>
This information is not necessarily indicative of the results of future
operations of the combined company or the actual results that would have
occurred had the merger been consummated prior to the periods indicated.
<TABLE>
<CAPTION>
At or for the Year Ended At or for the Six Months Ended
June 30, 1998 December 31, 1998
------------------------ ------------------------------
<S> <C> <C>
Per Share of Identix
Common Stock:
Book Value:
Historical.......... $ 0.91 $ 0.96
Pro forma........... $ 1.94 $ 1.91
Net income (loss):
Historical.......... $ 0.03 $ 0.02
Pro forma........... $(0.08) $(0.25)
Per Share of IDT Common
Stock:
Book Value:
Historical.......... $ 0.33 $(0.03)
Pro forma
equivalent......... $ 2.06 $ 2.04
Net income (loss):
Historical.......... $ 0.02 $(2.16)
Pro forma
equivalent......... $(0.09) $(0.27)
</TABLE>
10
<PAGE>
MARKET PRICE AND DIVIDEND INFORMATION
The shares of Identix common stock are listed and principally traded on the
AMEX and quoted under the symbol "IDX." The following table sets forth, for the
quarters indicated, the high and low closing prices of Identix common stock as
reported on the AMEX. For current price information, IDT stockholders are urged
to consult publicly available sources.
Identix Common Stock
<TABLE>
<CAPTION>
Period High Low
------ ------ -----
<S> <C> <C>
Fiscal Year ended June 30, 1997:
First Quarter............................... $13.88 $8.19
Second Quarter.............................. 10.75 7.25
Third Quarter............................... 12.75 8.38
Fourth Quarter.............................. 11.25 7.44
Fiscal Year ended June 30, 1998:
First Quarter............................... $11.81 $8.75
Second Quarter.............................. 11.63 9.31
Third Quarter............................... 10.50 8.50
Fourth Quarter.............................. 8.56 5.63
Fiscal Year ending June 30, 1999:
First Quarter............................... $ 8.38 $4.56
Second Quarter ............................. 10.00 5.00
Third Quarter............................... 10.25 5.50
Fourth Quarter (through April 15, 1999)..... 8.00 6.31
</TABLE>
There is no public market for the IDT common stock.
Dividend Information
Identix has not paid any cash dividends on its common stock during the last
five fiscal years. Identix currently intends to retain any earnings for use in
its business and does not anticipate paying any cash dividends in the
foreseeable future. In addition, Identix's bank lines of credit restrict
Identix's ability to pay cash dividends.
IDT has never paid any cash dividends on the IDT common stock, and if the
merger is not consummated, it anticipates that it will continue to retain any
earnings for the foreseeable future for use in the operation of its business.
11
<PAGE>
Recent Closing Prices
The following table sets forth the closing prices per share of Identix
common stock on the AMEX on November 13, 1998, the last trading day before
announcement of the proposed merger, and on April 15, 1999, the latest
practicable trading day before the printing of this prospectus. The table also
includes an IDT equivalent value which is calculated by multiplying the closing
price per share of Identix common stock on the applicable date by an assumed
exchange ratio of 1.067 shares of Identix per share of IDT stock. The IDT
equivalent per share price can be used by the IDT stockholders to determine the
approximate value of one share of IDT capital stock based on the Identix common
stock trading price, without giving effect to the escrow and resale
restrictions.
<TABLE>
<CAPTION>
Identix Stock IDT Equivalent
------------- --------------
<S> <C> <C>
November 13, 1998............. $7.875 $8.403
April 15, 1999................ $ 8.00 $8.536
</TABLE>
Because the market price of Identix common stock is subject to fluctuation,
the market value of the shares of Identix common stock that holders of IDT
securities will receive in the merger may increase or decrease prior to and
following the merger.
Stockholders are urged to obtain current quotations for the market prices of
Identix common stock. No assurance can be given as to the market price of
Identix common stock at the effective time of the merger. The number of shares
to be issued by Identix in the merger is fixed. Accordingly, the market value
of the shares of Identix common stock that holders of IDT common stock will
receive in the merger may vary significantly from the prices shown above.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains statements that constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These forward-looking statements include all statements regarding the
intent, belief or current expectations regarding the matters discussed in this
prospectus, including statements as to "beliefs," "expectations,"
"anticipations," "intentions" or similar words, and all statements which are
not statements of historical fact. Actual results, performance or events may
differ materially for a variety of reasons, including the risks and
uncertainties described in "Risk Factors" or in the other SEC filings of
Identix. Identix and Identicator Technology undertake no obligation to publicly
update forward-looking statements made in this prospectus to reflect events or
circumstances after the date of this prospectus or to reflect the occurrence of
unanticipated events.
12
<PAGE>
RISK FACTORS
You should consider carefully the following risk factors in evaluating
whether to approve the merger agreement and the consummation of the merger. If
any of the following risks actually occur, they could have a severe negative
impact on Identix's or Identicator Technology's financial results and stock
price.
This prospectus contains forward-looking statements that involve risks and
uncertainties. Identix's and Identicator Technology's actual results could
differ materially from those anticipated in the forward-looking statements as a
result of certain factors, including the risks described below and elsewhere in
this prospectus.
Risks Relating to the Merger
The number of shares you will receive in the merger will be fixed even if the
Identix stock price changes. All outstanding IDT securities will be converted
into 5,050,000 shares of Identix common stock issuable in the merger or upon
exercise of options and warrants assumed by Identix in the merger. The ratio
will be fixed and will not be adjusted in the event of changes in the price of
Identix common stock. In addition, IDT may not terminate the merger agreement
solely because of a change in the stock price of Identix. Consequently, if the
market price of the Identix common stock decreases, the value of the
consideration to be received by IDT stockholders would also decrease.
Identix's results of operations will be adversely affected by write-offs and
amortization of intangible assets associated with the merger and expenses
incurred in connection with the merger. Identix expects to take a one-time
write-off related to acquired research and development of approximately
$10,044,000 in the quarter in which the merger closes. Identix will recognize
approximately $30,695,000 in core technology, assembled work force and goodwill
as a result of the merger, which Identix will be required to amortize over
periods of approximately 3-12 years. This goodwill amortization and the
amortization of core technology and assembled workforce will result in an
additional charge to pre-tax earnings of approximately $790,000 per quarter on
an ongoing basis.
In addition, Identix and IDT estimate that they will together incur direct
transaction costs, including legal, accounting, registration and printing fees,
of approximately $850,000 associated with the merger. There is a risk that
Identix may incur additional material charges in subsequent quarters to reflect
additional costs associated with the merger.
IDT stockholders risk forfeiture or a loss in value of a portion of the Identix
stock issued in the merger before those shares are received or can be sold by
the stockholders. 10% of the Identix shares issuable to IDT stockholders in the
merger will automatically be placed in escrow for one year and are subject to
the risk of forfeiture if Identix successfully makes a claim for damages or
expenses after the closing of the merger. Fifty percent of the shares issuable
in the merger, including the shares subject to the escrow, are subject to a
fifteen month lock-up period. There is a risk that the value of the Identix
shares issued in the merger subject to the fifteen month lock-up period will
decline before those shares are released from the lock-up.
The Internal Revenue Service could successfully contend that the merger is a
13
<PAGE>
taxable transaction to the IDT stockholders or that it affects transactions
previously engaged in by Identicator Technology or its predecessors. For
example, the IRS could successfully contend that the merger causes the 1998
restructuring in which Identicator Technology, the joint venture in which the
biometrics business was previously conducted, was transferred to Identicator
Technology, Inc., if the transaction was otherwise nontaxable, to be a taxable
transaction. Counsel for Identix and IDT have not rendered and are not
rendering an opinion as to the taxability of transactions previously engaged in
by Identicator Technology or its predecessors or the impact of the merger on
those previous transactions. The IDT stockholders are urged to consult their
own tax advisors regarding the tax consequences of those previous transactions
and the impact of the merger on the tax consequences of those previous
transactions.
The anticipated benefits of the merger may not be achieved unless certain
operations of Identix and Identicator Technology are successfully combined,
including aspects of the two companies, research and development and marketing
operations. The transition to a combined company will require substantial
management attention and the process of coordination of the operations,
especially research and development and marketing, may be complicated by the
necessity of combining personnel in different locations with disparate business
backgrounds and corporate cultures. In addition, combining the two
organizations could cause the interruption of, or a loss of momentum in, the
activities of either or both of the companies' businesses. Any difficulties
experienced in the transition process and any loss of or interruption in
business as a result of the diversion of resources to pursue the integration of
the organizations could have an adverse effect on the combined operations.
Risks Relating to Business of Identix and Identicator Technology
All of Identix's and Identicator Technology's product revenues are derived from
the sale of biometric products and their businesses will not grow unless the
market for biometric products expands both domestically and internationally.
Biometric products have not gained widespread commercial acceptance. Neither
company can accurately predict the future growth rate, if any, or the ultimate
size of the biometric technology market.
The expansion of the market for Identix's and Identicator Technology's products
depends on a number of factors including:
. the cost, performance and reliability of their products and products of
competitors
. customers' perception of the perceived benefits of these products
. public perceptions of the intrusiveness of these products and the manner
in which firms are using the fingerprint information collected
. public perceptions regarding the confidentiality of private information
. customers' satisfaction with Identix's and Identicator Technology's
products
. marketing efforts and publicity regarding these products.
Certain groups have publicly objected to the use of biometric products for some
applications on civil liberties grounds and legislation has been proposed to
regulate the use of biometric security products.
Even if biometric markets develop, Identix's and Identicator Technology's
products may not gain wide market acceptance.
14
<PAGE>
Identix and Identicator Technology 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 Identix's and
Identicator Technology's 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 Identix's and Identicator Technology's products.
Identix's and Identicator Technology's biometric security products also compete
with non-biometric technologies such as traditional key, card, surveillance
systems and passwords.
Identix's 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.
Identix and Identicator Technology 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 Identix or Identicator Technology.
Some present and potential competitors have financial, marketing and research
resources substantially greater than those of Identix and Identicator
Technology. In order to compete effectively in this environment, Identix and
Identicator Technology 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 its services business, Identix faces substantial competition from
professional services providers of all sizes in the government marketplace.
ANADAC is increasingly being required to bid on firm fixed price and similar
contracts that result in greater performance risk to ANADAC. If ANADAC is not
able to maintain a competitive cost structure, support specialized market
niches, retain its highly qualified personnel or align with technology leaders,
Identix may lose its ability to compete successfully in the services business.
The biometrics industry is characterized by rapid technological change and
evolving industry standards which could render existing products obsolete.
Identix's and Identicator Technology's future success will depend upon their
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 Identix's and Identicator Technology's products and purchase those
of their competitors.
Identix's and Identicator Technology's revenues and operating results often
vary significantly from quarter to quarter and may be negatively affected by a
number of factors, including the timing of large orders. Usually, most of each
company's revenues in a quarter come from a small number of large orders.
15
<PAGE>
Accordingly, revenues in a particular quarter depend on the timing and size of
major orders.
The following are some other reasons why Identix's or Identicator Technology's
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 Identix, Identicator
Technology, or their distributors sell
. cancellation, delays or amendments by government agencies relating to
contracts with Identix or Identicator Technology
. litigation costs
. expenses related to acquisitions, including the merger
. other one-time financial charges
. the lack of availability or increase in cost of key components
. economic downturns domestically or internationally.
Identix or Identicator Technology also may reduce prices or increase spending
in response to competition or to pursue new market opportunities.
Identix's products often have a lengthy sales cycle while the customer
evaluates and receives approvals for their purchase. If after expending
significant funds and effort Identix fails to receive an order, a severe
negative impact on its financial results and stock price could result. It is
difficult to predict accurately the sales cycle of any large order. If Identix
does not ship one or more large orders as forecasted for a fiscal quarter, its
total revenues and operating results for that quarter could be materially and
adversely affected.
Further, the lead time for ordering parts and materials and building Identix's
and Identicator Technology's products can be many months. As a result, Identix
and Identicator Technology must order parts and materials and build their
products based on forecasted demand. If demand for its products lags
significantly behind its forecasts, Identix or Identicator Technology may
produce more products than it can sell, which can result in cash flow problems
and write-offs or write-downs of obsolete inventory.
Identix derives a majority of its 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, Identix's prospective customers are
also subject to public agency contract requirements that vary from jurisdiction
to jurisdiction. Some of these requirements may be onerous or impossible to
satisfy.
In addition, public agency contracts are frequently awarded only after formal
competitive bidding processes, which have been and may continue to be
protracted, and typically impose provisions that permit cancellation in the
event that funds are unavailable to the public agency. There is a risk that
Identix 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. In addition, local
16
<PAGE>
government agency contracts may be contingent upon availability of matching
funds from state or federal entities.
During fiscal 1998, Identix derived approximately 89% of its 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 Identix's financial
results and stock price.
During fiscal 1998, Identix derived approximately 68% of its services revenue
from time and materials contracts and firm-fixed-price contracts. Identix
assumes certain performance risk on these contracts. If Identix fails to
estimate accurately ultimate costs or to control costs during performance of
the work, Identix's profit margins may be reduced and Identix may suffer
losses. In addition, revenues generated from government contracts are subject
to audit and subsequent adjustment by negotiation between Identix and
representatives of the government agencies. The Defense Contract Audit Agency
has completed an audit of ANADAC for the period from July 1, 1992 to June 30,
1995. Identix believes that the results of this audit will not result in a
material adjustment of revenues, but there is a risk that significant
adjustments could be required.
Identix and Identicator Technology rely on marketing partners to distribute
their products and may be adversely affected if those parties do not actively
promote their products or pursue installations which use their equipment. A
significant portion of Identix's and all of Identicator Technology's product
revenues come from sales to marketing partners including OEMs, systems
integrators, distributors and resellers. Some of these relationships are
formalized in agreements; however, the agreements are often terminable with
little or no notice and subject to periodic amendment. Identix and Identicator
Technology cannot control the amount and timing of resources that their
marketing partners devote to their activities on behalf of Identix or
Identicator Technology.
Identix and Identicator Technology intend to continue to seek strategic
relationships to distribute and sell certain of their products. Identix and
Identicator Technology, however, may not be able to negotiate acceptable
distribution relationships in the future and cannot predict whether current or
future distribution relationships will be successful.
Loss of sole or limited source suppliers may result in delays or additional
expenses. Identix and Identicator Technology obtain certain components for
their products from a single source or a limited group of suppliers. Neither
company has long term agreements with any of its suppliers. Identix and
Identicator Technology will experience delays in manufacturing and shipping of
products to customers if they lose these sources or if supplies from these
sources are delayed.
As a result, Identix or Identicator Technology 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 its products to accommodate components from different
suppliers. Neither Identix nor Identicator Technology can predict if it will
be able to obtain replacement components within the time frames it requires at
an affordable cost, or at all. Any delays resulting from suppliers failing to
deliver components on a timely basis in sufficient quantities and of
sufficient quality or any significant increase in the price of components from
existing or alternative suppliers could have a severe negative impact on
either company's financial results and stock price.
17
<PAGE>
The success of Identix's strategic plan to pursue sales in international
markets may be limited by risks related to international trade and marketing.
During fiscal 1998, Identix derived 18% of its net product revenues from
international sales. Identix currently has offices overseas in Australia,
Singapore, Brazil and Switzerland. There is a risk that Identix may not be able
to market, sell and deliver its products in foreign countries. Identix's net
product revenues attributable to international sales declined by 55% in the
three months ended December 31, 1998 from the three 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 Identix's ability to maintain and expand
its 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 Identix's
proprietary rights to the same extent as U.S. laws.
Identix may need to raise additional debt or equity financing in the next
twelve months. As of December 31, 1998, Identix had $19,716,000 in working
capital, which included $2,418,000 in cash and cash equivalents. In addition,
Identix had $5,029,000 available under its bank line of credit, which expires
in December 1999. The availability under this line of credit was reduced by
$1,500,000 in February 1999 when Identix provided a standby letter of credit to
Identicator Technology. ANADAC had $4,407,000 available under its bank line of
credit, which expires in March 2000. Identix may need to raise additional debt
or equity financing in the next 12 months if current sources of capital are not
sufficient to finance its operations or if the Identix or ANADAC lines of
credit are not renewed or if Identix or ANADAC fail to obtain a waiver of any
covenant breaches under their lines of credit. Identix 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.
Identicator Technology's business may be adversely affected if it can not raise
working capital to implement its business plan. If the merger is not completed,
IDT will likely be required to raise additional working capital through equity
or debt financing in order to meet its working capital needs beyond March 2000.
Identix provided Identicator Technology's bank with a standby letter of credit
in February 1999 to secure the repayment of Identicator Technology's $1,500,000
line of credit. Identicator Technology is required to reimburse Identix for any
amounts drawn under
18
<PAGE>
the letter of credit and is required to use its best efforts to obtain a
release of Identix from the letter of credit if the merger agreement is
terminated.
Although prior to entering into the merger agreement Identicator Technology was
discussing possible financings with several lenders and potential sources of
equity capital, Identicator Technology may not be able to obtain financing on
acceptable terms or in the amounts or at the time needed.
One stockholder owns a significant portion of Identix stock and may delay or
prevent a change in control or adversely affect the stock price through sales
in the open market. As of October 31, 1998, Ascom USA Inc. beneficially owned
approximately 20% of Identix's 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, Identix's common
stock price may be adversely affected. In addition, Identix may not be able to
obtain additional financing on favorable terms in the future because of Ascom's
preemptive rights and registration rights.
Identix may experience unanticipated expenses and other problems related to
Year 2000 issues. Year 2000 problems are caused by computer systems that only
use a two-digit year value and, accordingly, will be subject to error or
failure when the year 2000 arrives. Identix has a program for evaluating and
addressing risks related to the Year 2000 that is described under "Identix's
Management's Discussion and Analysis of Financial Condition and Results of
Operations" beginning on page 106. 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 or that its remedial efforts do not adequately
address identified 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, any failure in these or other cricial 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.
Identicator Technology may face unanticipated expenses and other problems
related to Year 2000 issues. Identicator Technology has evaluated the products
and services it offers in an effort to determine whether it or its customers
may have exposure to Year 2000 problems. Identicator Technology's products are
not date dependent. Nevertheless, Identicator Technology's software products
run on operating systems developed and sold by Microsoft Corporation.
Identicator Technology's products are dependent upon the error-free operation
of those systems. Identicator Technology has not conducted its own tests to
determine to what extent the operating systems fail to properly recognize Year
2000 dates.
Identicator Technology has conducted a preliminary review of its internal
information technology and non-information technology systems. Identicator
Technology has not
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conducted its own tests or surveyed vendors to determine whether off-the-shelf
software that is used in its computer systems is Year 2000 compliant.
Identicator Technology does not employ non-information technology systems which
are material to its operations.
Identicator Technology is in the very early stages of assessing the readiness
of its key suppliers and customers with respect to potential Year 2000
problems. To date, Identicator Technology has made inquiries regarding Year
2000 problems of only one of the four turnkey manufacturers which produce
Identicator Technology hardware and software products, International Technology
Concepts, Inc. Identicator Technology plans to survey the remainder of its key
suppliers, application vendors and other information technology suppliers to
determine their readiness with respect to Year 2000 problems. Identicator
Technology will be able to better determine what actions may be necessary to
address potential problems with key suppliers, application vendors and other
information technology suppliers after it receives responses back from these
suppliers, application vendors and other information technology suppliers.
To date, the costs for conducting Identicator Technology's Year 2000 assessment
have not been material. Identicator Technology is currently unable to predict
to what extent its business may be affected if any of its key suppliers or
customers or products operating in conjunction with third-party supplied
software or hardware experience a material Year 2000 problem. Any Year 2000
problem that affects the operation of Identicator Technology's software
applications or products could result in delay or loss of revenue, cancellation
of customer contracts, diversion of development resources, damage to
Identicator Technology's reputation, increased service and warranty costs, and
litigation costs, any of which could materially adversely affect Identicator
Technology's business, financial condition and results of operations.
The Year 2000 problem is pervasive and complex and there is a risk that
Identicator Technology 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 and Identicator Technology's products are complex and may contain
undetected or unresolved defects when sold or may not meet customer's
performance criteria. Performance failure may cause loss of market share, delay
in or loss of market acceptance, additional warranty expense or product recall.
The negative effects of any failure could be exacerbated if the failure
occurred in products that provide personal security, secure sensitive computer
data, authorize significant financial transactions or perform other functions
where a security breach could have significant consequences.
If a product fails to meet performance criteria, Identix and Identicator
Technology may delay recognizing revenue associated with a product and face
higher operating expenses during the period required to correct the defects.
There is a risk that for unforseen reasons Identix or Identicator Technology
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. Identix carries product liability insurance, but existing
coverage may not be adequate to cover potential claims.
Failure by either Identix or Identicator Technology to maintain the proprietary
nature of their technology, products and manufacturing processes would
negatively impact their ability to compete effectively. Identix principally
relies upon patent, copyright,
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trade secret and contract law to establish and protect its proprietary rights.
Identicator Technology principally relies upon a combination of copyright,
trade secret, contract, and to a limited extent, patent law.
There is a risk that claims allowed on any patents held by Identix or
Identicator Technology may not be broad enough to protect their technology. In
addition, their patents may be challenged, invalidated or circumvented and each
company cannot be certain that the rights granted thereunder will provide
competitive advantages to it. 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 those of Identix or Identicator
Technology.
There is a risk that Identix or Identicator Technology has infringed or in the
future will infringe patents owned by others, that Identix or Identicator
Technology will need to acquire licenses under patents belonging to others for
technology potentially useful or necessary to Identix or Identicator
Technology, and that licenses will not be available to Identix or Identicator
Technology on acceptable terms, if at all.
Identix or Identicator Technology may have to litigate to enforce its patents
or to determine the scope and validity of other parties' proprietary rights.
Litigation could be costly and divert management's attention. An adverse
outcome in any litigation may have a severe negative impact on such company's
financial results and stock price. To determine the priority of inventions,
Identix or Identicator Technology may have to participate in interference
proceedings declared by the United States Patent and Trademark Office or
oppositions in foreign patent offices, which could result in substantial cost
to the company and limitations on the scope or validity of its patents.
Identix and Identicator Technology also rely on trade secrets and proprietary
know-how which each of them seeks to protect by confidentiality agreements with
their employees, consultants, service providers and third parties. There is a
risk that these agreements may be breached, and that the remedies available to
Identix and Identicator Technology may not be adequate. In addition, Identix's
or Identicator Technology's trade secrets and proprietary know-how may
otherwise become known to or be independently discovered by others.
If either Identix or Identicator Technology fails to adequately manage growth
of its business, it could have a severe negative impact on that company's
financial results or stock price. Each has experienced substantial growth in
recent years and believes that in order to be successful it must continue to
grow rapidly. In order to do so, it must expand, train and manage its employee
base, particularly skilled technical, marketing and management personnel. Rapid
growth will also require an increase in the level of responsibility for both
existing and new management. In addition, Identix and Identicator Technology
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 either company may not be able to
manage any significant growth it experiences effectively.
Identix may encounter difficulties in acquiring and effectively integrating
complementary assets and businesses. As part of its business
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strategy, Identix intends to acquire assets and businesses principally relating
to or complementary to its current operations. In addition to the merger with
IDT, Identix acquired two companies in fiscal 1996 and one in fiscal 1998.
These and any other acquisitions by Identix will be accompanied by the risks
commonly encountered in acquisitions of companies. These risks include, among
other things:
. potential exposure to unknown liabilities of acquired companies
. higher than anticipated acquisition costs and expenses
. effects of costs and expenses of acquiring and integrating new
businesses on its operating results and financial condition
. the difficulty and expense of assimilating the operations and personnel
of the companies
. the potential disruption of its 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 its stockholders.
In addition, geographic distances may make integration of businesses more
difficult. Identix may not be successful in overcoming these risks or any other
problems encountered in connection with any acquisitions.
Loss of current senior executives and key technical, marketing and sales
personnel would adversely affect Identix's or Identicator Technology's
business. Identix's or Identicator Technology's personnel may voluntarily
terminate their relationship with Identix or Identicator Technology 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 either company's strategy could be
lengthy, costly and disruptive.
Identix is 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 by
Identix of its strategic plan. If Identix loses the services of key personnel,
it could have a severe negative impact on Identix's financial results and stock
price.
Identicator Technology receives important contributions from certain key
personnel. Specifically, Oscar Pieper, President, has approximately thirty
years of experience in the biometrics industry and is considered one of the
industry's pioneers. Grant Evans, Vice President--Sales and Marketing, has
established relationships with major companies and plays a central role in the
company's marketing strategy. In addition, both Yuri Khidekel, Vice President--
Software, and Yury Shapiro, Vice President--Hardware, serve as key researchers
and developers for Identicator Technology and are responsible for Identicator
Technology's research and development activities. If Identicator Technology
loses the services of its key personnel, it could have a severe negative impact
on Identicator Technology's financial results.
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IDT STOCKHOLDER APPROVAL OF THE MERGER
This prospectus is furnished in connection with the solicitation by IDT's
board of directors of the written consent of the holders of IDT common stock to
approve the merger.
Informational Meeting
An informational meeting will be held for all IDT stockholders at IDT's
principal office located at 1150 Bayhill Drive, Suite 215, San Bruno,
California 94066, on April 23, 1999, starting at 10:00 a.m., local time.
This prospectus and the accompanying form of written consent are first being
mailed to the IDT stockholders on or about April 17, 1999.
Matter to be Acted Upon By Written Consent
Stockholders of IDT are being asked to act by written consent to approve the
adoption of the merger agreement and to approve the merger. A copy of the
merger agreement and certain related agreements are included in this prospectus
as Appendices A to C.
Record Date
The IDT board has fixed the close of business on April 9, 1999 as the record
date. Only record holders of IDT common stock on the record date are entitled
to vote upon the merger agreement and the merger by written consent. On the
record date, there were 2,727,762 shares of IDT common stock outstanding and
entitled to vote held by approximately 129 stockholders of record. There were
no shares of IDT Series A preferred stock outstanding on the record date.
Each holder of record on the record date is entitled to one vote per share
of common stock. Affirmative votes must be submitted to IDT by written consent.
Votes Required
Under the IDT certificate of incorporation and the Delaware corporate law,
the approval of the holders of a majority of the shares of IDT common stock
outstanding on the record date is required to approve the adoption of the
merger agreement and approve the merger. Failure by an IDT stockholder to
submit a written consent to IDT will have the same legal effect as a vote
against approval of the adoption of the merger agreement and against approval
of the merger.
As of the record date, International Technology Concepts, Inc. and directors
of IDT together owned 1,922,181 shares of IDT common stock, or approximately
70% of the shares of IDT common stock outstanding. These stockholders of IDT
have entered into a voting agreement in which they have agreed, among other
things, to vote all of their shares of IDT common stock in favor of the merger.
See "The Merger--Voting Agreement."
As of the date of this prospectus, neither Identix nor any of its
subsidiaries owned any shares of IDT common stock.
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Revocation of Written Consent
A stockholder may revoke his, her or its written consent at any time prior
to the time when sufficient consents approving the adoption of the merger
agreement and approving the merger are delivered to IDT. Revocation may be made
by delivering to the Secretary of IDT a signed revocation notice. All written
revocation notices and other communications with respect to revocation of
written consents by IDT stockholders should be addressed as follows:
Identicator Technology, 1150 Bayhill Drive, Suite 215, San Bruno, California
94066, Attention: Marie Fernandez, or hand delivered to the Secretary or the
Secretary's designated agent.
Solicitation of Consents and Expenses
Identix will pay the cost of printing and mailing this prospectus. In
addition to solicitation by mail, consents may be solicited in person by
directors, officers and employees of IDT without additional compensation, and
by telephone, email, facsimile, or similar method. The extent to which this
will be necessary depends entirely upon how promptly written consents are
returned.
The matters set forth in this prospectus are of great importance to the
stockholders of IDT. Accordingly, IDT stockholders are urged to read and
carefully consider the information presented in this prospectus, and to
complete, date, sign and promptly return the enclosed written consent in the
enclosed postage-paid envelope.
IDT stockholders should not send any stock certificates
with their written consents.
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THE MERGER
Background of the Merger
Management of Identix and Identicator Technology (including its
predecessors) have known each other and have been familiar with the products of
each company for many years.
During the summer and fall of 1997, Oscar Pieper, the current President and
Chief Executive Officer of Identicator Technology, had approximately two or
three meetings with Randall C. Fowler, the Chief Executive Officer, President
and Chairman of Identix, and James P. Scullion, the Executive Vice President
and Chief Financial Officer of Identix. During these meetings, they discussed
potential strategic relationships between the two companies and the possibility
of Identix acquiring Identicator Technology. No agreements were reached and
Identicator Technology continued to plan for its independent existence,
including the restructuring of its business from a partnership to a corporation
to enhance its competitiveness and viability as a stand-alone company.
On November 3, 1997 and November 14, 1997, Mr. Pieper and Mr. Scullion had
telephone conversations in which they discussed the companies, a possible
acquisition and the valuations the two companies considered appropriate. Mr.
Pieper and Mr. Scullion concluded that no transaction could be consummated
between the two companies at that time.
On May 7, 1998, Mr. Scullion and Mr. Pieper met so that Mr. Scullion could
present a proposal for an acquisition of Identicator Technology. Again, Mr.
Pieper and Mr. Scullion concluded that no transaction could be consummated
between the two companies at that time.
On August 5, 1998, Mr. Scullion and Mr. Pieper met so that Mr. Scullion
could present a revised proposal for an acquisition of Identicator Technology
based on recent commercial announcements by Identicator Technology. Based on
the terms presented, they decided to continue negotiations relating to an
acquisition of Identicator Technology and entered into a confidentiality
agreement to permit limited due diligence to begin.
Over the period from August 7, 1998 through September 18, 1998, Mr. Scullion
and Mr. Pieper continued to discuss the potential terms of a transaction.
On September 18, 1998, the two parties reached a general understanding as to
the economic terms that would potentially be acceptable to both parties.
In October 1998, the parties commenced negotiating definitive documentation
for the transaction and commenced full due diligence.
Through November 14, 1998, the parties, as well as their legal and
accounting advisors, had numerous meetings to negotiate the terms of the
transaction and the definitive documentation and to perform due diligence.
During this process, the parties consulted with outside investment banks,
but neither party engaged the services of an investment bank. On November 14,
1998, the parties concluded negotiations and executed the merger agreement.
The number of Identix shares to be issued in connection with the merger was
determined through arms length negotiations based on the parties' judgments of
what constitutes a fair and
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appropriate value for IDT. In making these judgments, the parties considered
numerous factors, including those discussed in the following sections entitled
"IDT's Reasons for the Merger; Recommendation of the IDT Board" and "Identix's
Reasons for the Merger." No one specific formula was employed to arrive at the
number of Identix shares to be issued in connection with the merger.
The other terms and conditions of the transaction, including the escrow and
the share lockup provisions, were also the subject of extensive arms length
negotiations. The purpose of the escrow was to provide a mechanism for Identix
to obtain redress for breaches or misrepresentations by IDT relating to the
merger agreement or this prospectus. The purpose of the share lockup was that,
given the large number of Identix shares to be issued in connection with the
merger, Identix wanted to stage the timing by which those shares could be sold
into the open market.
IDT's Reasons for the Merger; Recommendation of the IDT Board
On November 14, 1998, the board of directors of IDT unanimously determined
the merger to be fair to, and in the best interests of, IDT and its
stockholders. The IDT board unanimously approved the merger agreement and
unanimously decided to recommend that IDT stockholders approve and adopt the
merger agreement and approve the merger. In making this determination, the IDT
board considered the factors listed below:
1. Identix can provide Identicator Technology access to significantly
greater sales and marketing resources, management resources and capital
than Identicator Technology currently has available to it. These greater
resources will enhance the opportunity for increased sales and visibility
in the marketplace.
2. Identix's product offerings are complementary to Identicator
Technology's product offerings. The combination of the two companies brings
together a broad spectrum of biometric fingerprint product offerings and
technologies that will enable the combined company to provide biometric
fingerprint solutions for virtually any application in the information
technology, physical access control and law enforcement markets.
3. IDT stockholders will receive stock in a larger company that is
publicly traded, thereby allowing the IDT stockholders an opportunity to
participate in the potential growth of the combined company and also allow
them to get liquidity for their stock holdings in the public market if they
so desire.
4. Pursuant to the merger, Identicator Technology will initially operate
as a stand-alone entity and be able to continue on its current business
course.
The IDT board also considered a number of factors relating to the merger,
including, but not limited to:
. historical information concerning Identix's and Identicator Technology's
respective businesses, prospects, financial performance and condition,
operations, technology, management and competitive position, including
Identix's public reports filed with the SEC for the most recent fiscal
periods;
. Identicator Technology management's view of the financial condition,
results of operations and businesses of Identicator Technology and
Identix before and after giving effect to the merger;
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. current financial market conditions and historical market prices,
volatility and trading information with respect to Identix common stock;
. the consideration to be received by IDT stockholders in the merger;
. the belief that the terms of the merger agreement, including the
parties' representations, warranties and covenants, and the conditions
to their respective obligations, are reasonable;
. Identicator Technology management's view of the prospects of Identicator
Technology as an independent company;
. the potential for other third parties to enter into strategic
relationships with or acquire Identicator Technology;
. the potential for Identicator Technology to raise money in public or
private markets;
. the expected impact of the merger on Identicator Technology's customers
and employees; and
. reports from Identicator Technology management and legal advisors as to
the results of the due diligence investigation of Identix.
The IDT board also identified and considered a variety of potentially
negative factors in its deliberations concerning the merger, including, but not
limited to:
. the risk that the potential benefits sought in the merger might not be
fully realized;
. the possibility that the merger might not be consummated and the effect
of the public announcement of the merger on Identicator Technology's
business;
. the substantial charges to be incurred in connection with the merger,
including accounting charges and costs of integrating the businesses and
transaction expenses arising from the merger;
. the risk that despite the efforts of the combined company, key technical
and management personnel might not remain employed by the combined
company;
. foregoing the potential opportunities and benefits to Identicator
Technology from remaining independent; and
. various other risks.
The IDT board believed that the above risks were outweighed by the potential
benefits of the merger.
Prior to negotiations with Identix, IDT's focus had been on negotiating
private debt and equity financing and continuing the company as an independent
entity. Based on its review of the positive and negative factors described
above, IDT's management and board of directors concentrated on the following
considerations in choosing the merger over remaining independent or pursuing
alternative purchasers:
. a comparison of the valuation of IDT in Identix's offer to available
term sheets from private equity investors;
. the receipt of registered, publicly tradeable stock from Identix;
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. IDT's familiarity with and respect for the management of Identix;
. the synergies to be achieved in a merger with Identix;
. the capital resources available to a public company; and
. the possibility for the combined company to continue to implement, and
for the value of IDT's stockholders' investment to be influenced by,
IDT's strategic plan following the stock-for-stock merger.
While it may be possible for IDT to achieve several of these benefits by
remaining independent with private financing, IDT has no assurance that private
financing would be available on acceptable terms, in adequate amounts or at the
times needed by IDT to achieve comparable results.
As part of this analysis, IDT consulted with various advisors, including
individuals in the investment banking business, to assess their judgments of
Identix, the stock market's reaction to a combination between Identix and
Identicator Technology and the proposed valuation of the transaction. While IDT
did not retain an investment bank in connection with the transaction, IDT
determined that it had the necessary information and the appropriate internal
and external resources to evaluate the benefits, the risks and the fairness of
the transaction without retaining the services of an investment bank.
The IDT board unanimously recommends that the holders of IDT common stock
consent to the approval and adoption of the merger agreement and approval of
the merger.
Identix's Reasons for the Merger
On November 5, 1998, the board of directors of Identix unanimously
determined the merger to be fair to, and in the best interests of, Identix and
its stockholders. The Identix board unanimously approved the merger agreement.
In making this determination, the Identix board considered the factors listed
below:
1. The combination of the two companies brings together a broad spectrum
of biometric product offerings and technologies that will enable the
combined company to provide solutions for virtually any biometric
fingerprint application in the information technology, physical access
control and law enforcement markets.
2. Identicator Technology's management team has established a strong
reputation in the biometrics marketplace and brings valuable marketing and
engineering resources to Identix.
3. Identicator Technology has established key strategic relationships
with a number of large companies in the information technology and data
security marketplaces and has taken a leadership position for establishing
standards in the industry.
4. Identicator Technology has products and technologies that complement
Identix's products and technologies and that may be able to enhance
Identix's products.
The Identix board also considered a number of factors relating to the
merger, including, but not limited to:
. historical information concerning Identix's and Identicator Technology's
respective businesses, prospects, financial performance and condition,
operations, technology, management and competitive position;
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. Identix management's view of the financial condition, results of
operations and businesses of Identicator Technology and Identix before
and after giving effect to the merger;
. the consideration to be issued in the merger;
. the belief that the terms of the merger Agreement, including the
parties' representations, warranties and covenants, and the conditions
to their respective obligations, are reasonable;
. Identix management's view of the prospects of Identix as an independent
company;
. the expected impact of the merger on Identix's customers and employees;
and
. reports from Identix's management and legal and accounting advisors as
to the result of the due diligence investigation of Identicator
Technology.
The Identix board also identified and considered a variety of potentially
negative factors in its deliberations concerning the merger, including, but not
limited to:
. the risk that the potential benefits sought in the merger might not be
fully realized;
. the possibility that the merger might not be consummated and the effect
of the public announcement of the merger on Identix's business;
. the substantial charges to be incurred by Identix in connection with the
merger, including accounting charges and costs of integrating the
businesses and transaction expenses arising from the merger;
. the risk that despite the efforts of the combined company, key technical
and management personnel might not remain employed by the combined
company; and
. various other risks.
The Identix board believed that the above risks were outweighed by the
potential benefits of the merger.
In evaluating the transaction, Identix consulted with various investment
banks to assess their judgments of Identicator Technology, the stock market's
reaction to a combination between Identix and Identicator Technology and the
proposed valuation of the transaction. Identix, however, did not retain an
investment bank in connection with the transaction. Identix reached the
conclusion that it had the necessary information and the appropriate internal
and external resources to evaluate the benefits, the risks and the fairness of
the transaction without retaining the services of an investment bank.
Actions Preceding the Merger
Prior to the closing of the merger, Identicator Technology, Inc. will merge
with and into IDT.
Operations Following the Merger
Following the merger, Identicator Technology will continue its operations as
a wholly-owned subsidiary of Identix. The membership of the Identix board of
directors will remain unchanged as a result of the merger, and the members of
the IDT board of directors shall consist of two continuing
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members, Oscar Pieper and Yuri Khidekel, and two officers of Identix, Randall
C. Fowler, President and CEO of Identix, and James P. Scullion, Executive Vice
President and Chief Financial Officer of Identix. The following officers of IDT
shall continue as the officers of IDT after the merger: Oscar Pieper,
President; Yuri Khidekel, Vice President-Software; Yury Shapiro, Vice
President-Hardware; and Grant Evans, Vice President-Sales and Marketing. The
stockholders of IDT will become stockholders of Identix, and their rights as
stockholders will be governed by Identix's certificate of incorporation and
Identix's bylaws and the laws of the State of Delaware. See "Comparison of
Capital Stock."
Interests of IDT Officers and Directors in the Merger
Four members of IDT's management, three of whom also serve on IDT's board of
directors, have interests in the merger that are in addition to their interests
as stockholders of IDT generally. The IDT board of directors was aware of these
interests and considered them, among other matters, in approving the merger
agreement.
Pursuant to their terms, the vesting of approximately 868,488 shares
underlying options held by officers, directors and service providers will
accelerate upon the consummation of the merger, including approximately 330,014
shares underlying options held by four officers and directors of IDT.
Furthermore, Identix will enter into employment agreements and noncompetition
agreements with Mr. Pieper, Mr. Evans, Mr. Khidekel, and Mr. Shapiro. In
connection with the employment agreements, each of those officers will receive
an option to purchase 100,000 shares of Identix common stock at an exercise
price equal to the closing price of the Identix common stock on AMEX on the
closing date of the merger. The employment agreements provide that in the event
of any "termination other than for cause" by Identix or "resignation for good
reason" by the employee, the employee will receive severance pay of between 12
and 15 months of the employee's salary and the options will vest in full on the
date of termination. See "The Merger Agreement--Employment and Noncompetition
Agreements."
In connection with the merger, Identix will enter into an agreement with
International Technology Concepts, Inc. under which International Technology
Concepts will provide administrative, research, development, testing and
production services and access to facilities to Identix. In addition, Identix
will enter into an agreement with Identicator, Inc. under which Identicator,
Inc. will provide administrative services and a trademark license to Identix.
Identicator, Inc. will enter into an agreement with Identix under which Identix
will provide access to facilities to Identicator, Inc. Mr. Khidekel and Mr.
Shapiro are currently officers, directors and stockholders of International
Technology Concepts, Inc. Mr. Pieper and Harry F. Camp, the Chairman and a
director of IDT, are currently directors and stockholders of Identicator, Inc.
Material Federal Income Tax Consequences
The following discussion summarizes the material federal income tax
considerations of the merger generally applicable to IDT stockholders. It is a
condition to the obligation of Identix to consummate the merger that Identix
shall have received an opinion of Heller Ehrman White & McAuliffe ("HEWM"), and
it is a condition to the obligation of IDT to consummate the merger that IDT
shall have received an opinion of Brobeck, Phleger & Harrison LLP ("BPH"), in
each case
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dated as of the date upon which the merger is consummated and based on
representations made by Identix and IDT, to the effect that the merger will
constitute a "reorganization" within the meaning of Section 368(a) of the
Internal Revenue Code and that IDT, Identix and Identix's merger subsidiary
will each be a party to that reorganization within the meaning of Section
368(b) of the Code.
The discussion below under "--Exchange of IDT Stock for Identix Common
Stock," "--Cash Received in Lieu of Fractional Shares" and "--Reporting
Requirements" represents the opinions of HEWM and BPH as to the probable
treatment of the merger. It assumes that the merger will be treated in
accordance with the opinions of HEWM and BPH to be delivered at closing.
Opinions of counsel are not binding on the IRS or the courts. There can be no
assurance that the IRS will not successfully contend that the merger is a
taxable transaction. No advance ruling from the IRS has been or will be sought.
The discussion below is based upon the Internal Revenue Code, the applicable
Treasury Department regulations thereunder, judicial authority and current
administrative rulings and practice, all as in effect as of the date hereof.
Future legislative, judicial or administrative changes or interpretations could
alter or modify the statements and conclusions set forth herein. Any changes or
interpretations could have retroactive effect and could affect the federal
income tax consequences to IDT stockholders.
The following discussion does not address the consequences of the merger
under state, local or foreign law, nor does the discussion address all aspects
of federal income taxation that may be important to a IDT stockholder in light
of that stockholder's particular circumstances, including, without limitation,
issues concerning stockholders that are financial institutions, insurance
companies, foreign individuals and entities, tax-exempt entities, dealers in
securities, persons who acquired IDT common stock or IDT Series A preferred
stock pursuant to the exercise of an employee option (or otherwise as
compensation) or persons holding IDT stock as part of an integrated investment
(including a "straddle") composed of IDT stock and one or more other positions.
This discussion assumes that IDT stockholders hold their respective IDT stock
as capital assets within the meaning of Section 1221 of the Internal Revenue
Code.
The discussion below does not address the taxability of any transactions
other than the merger, nor does it address the effect of the merger on the
taxation of IDT stockholders who engaged in transactions other than the merger.
In particular, the discussion below does not, and the opinions of HEWM and BPH
will not, address the tax consequences of previous corporate transactions
involving IDT or Identicator Technology, or the effect of the merger on such
transactions, including (i) the spin-off of Identicator, Inc. by Identicator
Corporation in 1997 and (ii) the reorganization in which the joint venture in
which the biometrics business was previously conducted (known as Identicator
Technology, a California partnership) was restructured into Identicator
Technology, Inc., a Delaware corporation and wholly-owned subsidiary of IDT
(the "Restructuring"). As part of the Restructuring, Identicator Corporation
was also acquired by Identicator Technology.
Exchange of IDT Stock for Identix Common Stock. Except as discussed below
under "--Cash Received in Lieu of Fractional Shares," and "--Effect of
Merger on Previous Transactions," and assuming that the merger qualifies as
a "reorganization" within the meaning of Section
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368(a) of the Internal Revenue Code, no gain or loss will be recognized for
federal income tax purposes by IDT stockholders who exchange their IDT
stock for Identix common stock pursuant to the merger. The aggregate tax
basis of Identix common stock received as a result of the merger will be
the same as the stockholder's aggregate tax basis in the IDT stock
surrendered in the exchange, reduced by any tax basis allocable to
fractional shares exchanged for cash, and the holding period of the Identix
common stock will include the period for which the stockholder has held or
is deemed to have held the IDT stock surrendered therefor. If the IRS were
to successfully contend that the merger is a taxable transaction, each IDT
stockholder would be taxed based on the fair market value of the Identix
common stock received over his or her tax basis in the IDT stock
surrendered.
Cash Received in Lieu of Fractional Shares. The payment of cash to an IDT
stockholder in lieu of a fractional share interest in Identix common stock
will be treated as if the fractional share had been distributed as part of
the exchange and then redeemed by Identix. The cash payment will be treated
as having been received as a distribution in payment for the Identix common
stock hypothetically redeemed as provided in Section 302 of the Internal
Revenue Code. This generally should result in the recognition of capital
gain or loss measured by the difference between the amount of cash received
and the portion of the tax basis of the IDT stock allocable to such
fractional share interest. In the case of an individual, capital gain
recognized with respect to cash received in lieu of fractional share
interests in Identix common stock generally will be taxable at favorable
rates as long-term capital gain if the individual held his or her IDT stock
for more than one year at the effective time of the merger and at ordinary
income rates as a short-term capital gain if the individual held his or her
IDT stock for one year or less at the effective time of the merger. The
deductibility of capital losses is subject to limitation.
Dissenters. Any dissenters should seek their own tax advice as to the
treatment of any amounts received or expended by them.
Reporting Requirements. Each IDT stockholder that receives Identix common
stock in the merger will be required to file with the stockholder's federal
income tax return a statement setting forth the basis of the IDT stock
surrendered and the fair market value of the Identix common stock and any
other property received in the merger, and to retain permanent records of
these facts relating to the merger.
Effect of Merger on Previous Transactions. As noted above, this discussion
does not address, and neither HEWM nor BPH will render an opinion with
respect to, the tax consequences to IDT, or the IDT stockholders, of
transactions previously engaged in by IDT or Identicator Technology. There
is a risk that the IRS could successfully contend that the merger causes
the Restructuring, if it was otherwise a nontaxable transaction, to be a
taxable transaction.
Backup Withholding. Unless an exemption applies under applicable law and
regulations Identix is required to withhold, and will withhold, 31% of any
cash payments to an IDT stockholder in the merger unless the stockholder
provides the appropriate form as described below. Each IDT stockholder
should complete and sign the Substitute Form W-9 included as part of the
letter of transmittal so as to provide the information, including the
stockholder's taxpayer identification number, and certification necessary
to avoid backup withholding, unless an applicable exemption exists and is
proved in a manner satisfactory to Identix.
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The preceding discussion does not purport to be a complete analysis or
discussion of all potential tax effects relevant to the merger. Thus, IDT
stockholders are urged to consult their own tax advisors as to the specific tax
consequences to them of the merger, including tax return reporting
requirements, the applicability and effect of federal, state, local and other
applicable tax laws, the effect of any proposed changes in the tax laws and the
effect of the merger on the taxability of previous corporate transactions of
IDT or Identicator Technology.
Regulatory Approvals
Identix and IDT were not required to file notifications and furnish
information pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of
1976, to the Federal Trade Commission or to the federal Department of Justice.
At any time, before or after the consummation of the merger, the Department of
Justice, the Federal Trade Commission or any state or foreign governmental
authority, could take action under the antitrust laws as it deems necessary or
desirable in the public interest. Any action could include seeking to enjoin
the consummation of the merger or seeking divestiture of substantial assets of
Identix or IDT. Private parties may also seek to take legal action under the
antitrust laws under certain circumstances.
Appraisal Rights
IDT is organized under the Delaware General Corporation Law. IDT
stockholders who do not consent to the merger are entitled to exercise rights
of appraisal under Delaware corporate law. In addition, because IDT operates in
California and a majority of its capital stock is held by persons with
addresses in California, it is subject to certain California laws, including
dissenters' rights under the California General Corporation Law. An IDT
stockholder who does not vote in favor of the merger by returning a signed
written consent may exercise appraisal or dissenters' rights under either
Delaware corporate law or California corporate law, but may only receive an
award under one of the statutes. The shares of dissenting IDT stockholders who
have properly exercised their rights to an appraisal under Delaware corporate
law or dissenters' rights under California corporate law are referred to in
this document as "dissenting shares."
Delaware Law
Pursuant to Delaware corporate law, any IDT stockholder who (1) has not
consented to the merger and (2) has met the conditions and properly complied
with the requirements of Delaware corporate law will be entitled to appraisal
rights. Appraisal rights give stockholders the right to dissent from the merger
by demanding payment in cash for their shares equal to the fair value of their
shares, excluding any appreciation or depreciation resulting from the merger.
The fair value will be determined by agreement with the corporation or an
independent appraisal. The following summary of appraisal rights under Delaware
corporate law should be read in conjunction with, and is qualified in its
entirety by, the full text of Section 262 of the Delaware corporate law, which
is attached as Appendix D to this prospectus. By failing to follow the
statutory procedures set forth in Section 262, a stockholder may terminate or
waive its appraisal rights under Delaware corporate law.
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No later than ten days after the effective time of the merger, IDT will give
written notice of the approval of the merger to all IDT stockholders of record
who did not consent to the merger and are entitled to exercise appraisal
rights. The notice will state the effective time of the merger, or if it is not
known, IDT will send a later notice with that information. Any stockholder
wishing to exercise appraisal rights must submit a written demand for appraisal
to IDT within 20 days after the date IDT mails the notice of approval of the
merger to IDT stockholders.
Within 120 days after the effective time of the merger, upon written
request, IDT will send any stockholder who has submitted a demand for appraisal
a statement setting forth the aggregate number of shares not voted in favor of
the merger for which demands for appraisal have been received, and the
aggregate number of holders of dissenting shares.
If IDT and a dissenting stockholder do not agree upon the value of the
holder's shares of stock, either IDT or the holder may file within 120 days
after the effective time of the merger a petition in Delaware Court of Chancery
demanding a determination of the value of the stockholder's shares. In that
proceeding, the Court will determine the fair market value of the shares,
exclusive of any element of value arising from the accomplishment or
expectation of the merger, together with a fair rate of interest, if any, to be
paid upon the fair value of the shares. The costs of the proceeding may be
determined by the Court and assessed against the parties as the Court deems
equitable in the circumstances. In addition, the Court may, upon application of
a stockholder, order all or any part of the expenses incurred by the holder in
connection with the appraisal proceeding, including, without limitation,
reasonable attorneys' fees and expenses and the fees and expenses of experts,
to be charged pro rata against the value of all the shares entitled to an
appraisal. Notwithstanding the foregoing, at any time within 60 days after the
effective time of the merger, any stockholder that has demanded appraisal shall
have the right to withdraw the holder's demands for appraisal and to accept the
terms offered in the merger.
After the effective time of the merger, any stockholder who has demanded
appraisal rights will not be entitled to vote that holder's shares for any
purpose or be entitled to the payment of dividends or other distributions on
those shares that are declared with a record date on or after the effective
time of the merger, unless that holder's right to appraisal ceases. A
stockholder's appraisal right will terminate if (1) no petition for an
appraisal is filed within 120 days of the effective time of the merger with
Delaware Court of Chancery or (2) that holder delivers to IDT a written
withdrawal of the holder's demand for an appraisal and an acceptance of the
merger, either within 60 days after the effective time of the merger or
thereafter with the written approval of IDT.
Appraisal rights are exercisable only by the holder of record, not by a
beneficial owner who does not hold the shares of record.
California Law
In addition to IDT stockholders' appraisal rights under Delaware Corporate
Law, the IDT stockholders are also entitled to dissent from the merger under
Chapter 13 of California corporate law. The following summary of Chapter 13
should be read in conjunction with, and is qualified in its entirety by, the
full text of Chapter 13, which is attached as Appendix E to this prospectus. By
failing
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to follow the statutory procedures set forth in Chapter 13, a stockholder may
terminate or waive its dissenters' rights under California corporate law.
If the merger is approved by the affirmative consent of the holders of a
majority of the outstanding shares of IDT common stock, any stockholder who (1)
has not consented to the merger and (2) has fully complied with all applicable
provisions of Chapter 13 will hold dissenting shares. Dissenters rights give a
stockholder the right to require IDT to purchase the shares of IDT common stock
held by that stockholder for cash equal to the fair market value of the shares,
excluding any appreciation or depreciation resulting from the merger,
determined in accordance with Chapter 13. Under California corporate law, no
stockholder of IDT who is entitled to exercise dissenters' rights has any right
at law or in equity to contest the validity of the merger or to have the merger
set aside or rescinded, except in an action to test whether the number of
shares required to authorize or approve the merger had legally consented to the
merger.
Within 10 days after the approval of the merger by IDT stockholders, IDT
must notify all IDT stockholders who may exercise dissenters' rights of the
approval and must offer all of those stockholders a cash price for their shares
which IDT considers to be the fair market value of the shares. The notice must
also contain a brief description of the procedure to be followed under Chapter
13 to dispute the price offered and attach a copy of the relevant provisions of
California corporate law in order for a stockholder to exercise the right to
have IDT purchase his or her shares.
For a holder of IDT common stock to exercise dissenters' rights under
California corporate law, the procedures to be followed under Chapter 13
include the following requirements:
(1) The stockholder of record must not have submitted a written consent
approving the merger. It is sufficient to abstain from voting by not
returning the written consent. In addition, the stockholder may consent
with respect to part of his or her shares for the merger without losing the
right to exercise dissenters' rights as to other shares which were not
voted.
(2) Any stockholder who wishes to have its shares purchased must make a
written demand to have IDT purchase those shares for cash at their fair
market value. Merely withholding your consent does not constitute a demand
for purchase. A demand must:
(a) be made by the person who was the stockholder of record on the
record date, or the stockholder's duly authorized representative, and
not by someone who is merely a beneficial owner of the shares and not
by a stockholder who acquired the shares subsequent to the record date;
(b) state the number and class of dissenting shares held of record by
the dissenting stockholder;
(c) include a demand that IDT purchase the shares at the dollar
amount that the stockholder claims to be the fair market value of the
shares on the day before the terms of the merger were first announced,
excluding any appreciation or depreciation because of the proposed
merger, but adjusted for any stock split, reverse stock split or share
dividend which becomes effective thereafter. IDT believes that the date
for the calculation of fair
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market value is November 13, 1998. A stockholder may take the position
in the written demand that a different date is applicable. The
stockholder's statement of fair market value constitutes an offer by
such dissenting stockholder to sell the shares to IDT at that price.
The written demand must be received by IDT no later than 30 days from the
date IDT's notice respecting approval of the merger was mailed to the IDT
stockholders. A stockholder may not withdraw a demand for payment without the
consent of IDT. Under California corporate law, a demand by a stockholder is
not effective for any purpose unless it is received by IDT.
In addition, within 30 days after the date on which the notice of the
approval of the merger is mailed by IDT to its stockholders, the stockholder's
certificates representing any shares which the stockholder demands be
purchased, must be submitted to IDT, at its principal office, or at the office
of its transfer agent, to be stamped or endorsed with a statement that the
shares are dissenting shares or to be exchanged for certificates of appropriate
denomination so stamped or endorsed. Upon subsequent transfer of those shares,
the new certificates will be similarly stamped, together with the name of the
original dissenting stockholder.
If IDT and a holder of IDT dissenting shares agree that the shares held by
that stockholder are eligible for dissenters' rights and agree upon the price
of the shares, the holder of IDT dissenting shares is entitled to receive from
IDT the agreed price with interest thereon at the legal rate on judgments from
the date of such agreement. Any agreement fixing the fair market value of
dissenting shares as between IDT and the holders thereof must be filed with
Harry F. Camp of IDT at the address set forth below. Subject to certain
provisions of Section 1306 and Chapter 5 of California corporate law, payment
of the fair market value of IDT dissenting shares shall be made within 30 days
after the amount has been agreed upon or within 30 days after any statutory or
contractual conditions to the merger are satisfied, whichever is later, subject
to the surrender of the certificate therefor, unless provided otherwise by
agreement.
If IDT and a holder of IDT dissenting shares fail to agree on either the
fair market value of the shares or on the eligibility of the shares to be
purchased, then either the holder of IDT dissenting shares or IDT may file a
complaint for judicial resolution of the dispute in the superior court of the
proper county. The complaint must be filed within six months after the date on
which the respective notice of approval is mailed to the stockholders. If a
complaint is not filed within six months the shares will lose their status as
IDT dissenting shares. Two or more holders of IDT dissenting shares may join as
plaintiffs or be joined as defendants in such an action. If the eligibility of
the shares is at issue, the court must first decide that issue. If the fair
market value of the shares is in dispute, the court must determine, or shall
appoint one or more impartial appraisers to assist in its determination of, the
fair market value. The cost of the action will be assessed or apportioned as
the court considers equitable. If, however, the appraised value of the
dissenting shares exceeds the price offered by IDT, IDT must pay such costs.
Any demands, notices, certificates or other documents required to be
delivered to IDT may be sent to Identicator Technology, 1150 Bayhill Drive,
Suite 215, San Bruno, California 94066, Attention: Harry F. Camp.
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It is a condition of the merger agreement that the aggregate number of
dissenting shares not exceed five (5%) percent of the aggregate number of
shares of Identix common stock that would be issued in the merger at the
effective time of the merger if there were no dissenting shares. In the event
that the 5% threshold is exceeded, then notwithstanding the percentage of
approval for the merger proposal obtained by written consent, Identix will not
be obligated to close the merger.
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THE MERGER AGREEMENT
The following is a brief summary of certain provisions of the merger
agreement and the other agreements to be entered into in connection with the
merger agreement. This summary is qualified in its entirety by reference to the
full text of the merger agreement and the other agreements which are attached
as Appendices A through C of this prospectus.
Closing; Effect of Merger
The merger will close as soon as all the conditions to the merger have been
satisfied or waived. The merger will become effective when a certificate of
merger is filed with the Secretary of State of the State of Delaware. The
certificate of merger will be filed on the closing date. The closing and
effective time of the merger are anticipated to be on or about April 23, 1999.
At the effective time of the merger, (1) the Identix merger subsidiary will
be merged with and into IDT, (2) the separate corporate existence of that
subsidiary will cease, and (3) IDT will be the surviving corporation and will
be a wholly-owned subsidiary of Identix.
Conversion of Securities
Common Stock
At the effective time of the merger, each share of IDT common stock issued
and outstanding immediately prior to the effective time (other than any IDT
dissenting shares) will automatically be converted into the number of shares of
Identix common stock determined by dividing:
(1) 5,050,000, less the number of shares issuable upon conversion of
outstanding IDT Series A preferred stock, if any, and upon exercise of
the IDT warrants to purchase Series A preferred stock assumed by
Identix, by
(2) the sum of the number of shares of IDT common stock outstanding
immediately prior to the effective time plus the number of shares of
IDT common stock covered by all IDT stock options outstanding
immediately prior to the effective time, including vested and unvested
options.
The quotient determined by dividing (1) by (2) is referred to as the
"exchange ratio." Each share of common stock of the Identix merger subsidiary
outstanding immediately prior to the effective time of the merger will be
converted into one share of common stock of the surviving corporation.
No fractional shares will be issued in connection with the merger. In lieu
of a fraction of a share of Identix common stock, each IDT stockholder will
receive in cash the fair market value of its fractional share determined by
valuing the Identix common stock at the average of the high and low prices of
the Identix common stock on the AMEX on the trading day immediately before the
closing date as reported in the Wall Street Journal.
Preferred Stock
There are currently no shares of IDT Series A preferred stock issued and
outstanding, but there are outstanding IDT warrants to purchase 60,000 shares
of Series A preferred stock. If any of
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the IDT warrants are exercised prior to the merger and shares of IDT Series A
preferred stock are outstanding at the effective time of the merger, each
outstanding share of IDT Series A preferred stock, other than any dissenting
shares, will automatically be converted into the number of shares of Identix
common stock equal to dividing:
(1) $9.00, by
(2) the average of the closing prices of the Identix common stock on the
AMEX over a thirty-day period ending three days prior to the closing
date or any other exchange ratio as is mutually agreed by IDT, Identix
and holders of all outstanding IDT Series A preferred stock and IDT
warrants (the "preferred exchange ratio").
Any IDT warrants which are not exercised prior to the effective time will be
assumed by Identix. See "--IDT Warrants."
IDT Warrants
At the effective time of the merger, all outstanding IDT warrants will be
assumed by Identix and will represent the right to receive upon exercise, a
number of shares of Identix common stock equal to the number of shares of IDT
Series A preferred stock covered by the warrant multiplied by the preferred
exchange ratio at an exercise price equal to the quotient obtained by dividing:
(1) the exercise price per share of IDT Series A preferred stock, by
(2) the preferred exchange ratio.
The exercise price will be rounded to the nearest two-place decimal. Identix
will assume all IDT warrants in full.
IDT Options
At the effective time of the merger, each IDT option outstanding under IDT's
1998 Stock Option/Stock Issuance Plan or Identicator Corporation's 1995 Stock
Option Plan, will be assumed by Identix and will represent an option to
purchase that number of shares of Identix common stock equal to the product
determined by multiplying:
(1) the number of shares of IDT common stock issuable upon exercise of the
IDT option, by
(2) the exchange ratio.
Each assumed IDT option will be exercisable at an exercise price equal to
the quotient obtained by dividing:
(a) the exercise price per share of the IDT option, by
(b) the exchange ratio.
The exercise price will be rounded to the nearest two-place decimal. Any
fractional shares will be rounded to the nearest whole share of Identix common
stock. Identix will assume the IDT options in full and all of IDT's other
rights and obligations under the IDT stock option plans. The IDT options will
be exercisable after the effective time upon the same terms and conditions as
under the IDT stock option plans. Within 45 days following the effective time,
Identix will file a registration statement on Form S-8 under the Securities Act
of 1933 covering the shares of Identix common stock issuable upon exercise of
the assumed IDT options.
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Exchange Procedures
Promptly after the closing date, Identix, acting through ChaseMellon
Shareholder Services, LLC as exchange agent, will mail to each IDT stockholder
of record immediately prior to the closing date, a transmittal letter and
instructions for surrendering IDT stock certificates. Upon surrender to the
exchange agent of an IDT stock certificate and an executed copy of the
transmittal letter, the holder of the surrendered IDT stock certificate will be
entitled to receive:
. a certificate for Identix common stock, subject to the issuance of 10%
of the shares into escrow (see "--Indemnification and Escrow" below) and
the legending of a portion of the shares issued to certain holders as
described under "--Fifteen-Month Resale Restriction;"
. cash in lieu of any fractional shares; and
. unpaid dividends and distributions, if any, which the holder has the
right to receive in respect of the IDT stock surrendered.
IDT stockholders should not send in their stock certificates to the exchange
agent until they receive a letter of transmittal.
At the effective time of the merger, each outstanding IDT option and warrant
will be assumed by Identix without any action on the part of the holder
thereof. Option, warrant and stock purchase agreements should not be
surrendered.
Indemnification and Escrow
The merger agreement provides that IDT and its stockholders will indemnify
Identix for any damages incurred by Identix in connection with:
. IDT's breach of a representation or warranty under the merger agreement;
. IDT's failure to perform any agreement or covenant under the merger
agreement; or
. any untrue or alleged untrue statement or omission of material fact in
the registration statement or prospectus which relates to Identicator
Technology and is based on information furnished by Identicator
Technology.
At the effective time of the merger, one stock certificate representing, in
the aggregate, 10% of the shares of Identix common stock issuable to the IDT
stockholders in the merger will be delivered to U.S. Bank Trust National
Association, Global Escrow Depository Services, as escrow holder. The escrow
holder will hold and release the escrow shares in accordance with the escrow
agreement. A copy of the escrow agreement is attached to this prospectus as
Appendix C.
The IDT board of directors has selected Harry F. Camp to act as the
stockholder representative for the holders of the escrow shares with respect to
all matters under the merger agreement and escrow agreement. Your approval of
the merger agreement and the merger will constitute approval of the terms of
the escrow agreement and ratification of the selection of the stockholder
representative. The escrow agreement provides a procedure for Identix to make
claims for indemnification against the escrow shares and for the stockholder
representative to dispute any claims if appropriate. All escrow shares which
are not the subject of a claim by Identix or a dispute
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will be distributed to the IDT stockholders one year from the closing date.
Upon distribution from escrow, the escrow shares may not be sold, pledged or
otherwise transferred until fifteen months after closing, except upon the death
of a stockholder.
In addition, in order to provide Identix with at least 434,300 shares of
Identix common stock for indemnification under the merger agreement, IDT will
ask each holder of IDT options or warrants to agree in writing that 10% of
their IDT options and warrants, and the underlying Identix common stock, are
subject to the provisions of the escrow agreement. Any damages incurred by
Identix which exceed the value of the escrow shares will be satisfied by a pro
rata cancellation of the options and warrants, and the underlying Identix
common stock.
Any ordinary cash dividends paid with respect to the escrow shares while in
escrow will be paid to the IDT stockholders. Any other dividends or
distributions with respect to the escrow shares will be paid into escrow. The
certificate representing the escrow shares will be accompanied by a separate
stock power endorsed in blank by the stockholder representative. The holders of
the escrow shares will retain their voting rights with respect to the escrow
shares while in escrow.
The escrow shares and the IDT option and warrant shares discussed above
constitute the absolute limit on the obligations of IDT and the IDT
stockholders to indemnify Identix under the merger agreement. Identix may only
make claims against the escrow and IDT option and warrant shares if the amount
of damages sought by Identix exceeds $175,000 in the aggregate, in which case
Identix may make a claim for the full amount of damages including the first
$175,000.
Fifteen-Month Resale Restriction
The merger agreement provides that a total of 2,525,000 shares of Identix
common stock issuable in the merger or pursuant to the exercise of options and
warrants assumed in the merger will either be:
. subject to the escrow agreement (See "--Indemnification and Escrow") or
. subject to a "lock-up period" for fifteen months from the effective time
of the merger.
The shares subject to the lock-up period may not be sold, pledged or otherwise
transferred during the lock-up period, except upon the death of a stockholder.
IDT will ask each holder of IDT options or warrants assumed by Identix to agree
in writing to be bound by the lock-up period with respect to 40% of the
holder's shares issuable upon exercise of their IDT options and warrants. In
addition, a portion of the shares of Identix common stock issued in the merger
to each IDT stockholder who holds more than 1,000 shares of IDT common stock (a
"Principal Stockholder") will automatically be subject to the lock-up period.
In addition to the escrow shares, the aggregate number of shares held by the
Principal Stockholders automatically subject to the lock-up period will be
determined by subtracting from 2,525,000 the sum of:
(1) the number of Identix shares issued in the merger, or issuable upon
exercise of IDT options and warrants, subject to the escrow agreement
and
(2) the number of shares issuable by Identix upon exercise of assumed IDT
options and warrants subject to the lock-up period.
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The resulting number of shares will be automatically restricted and will be
allocated among the Principal Stockholders on a pro rata basis. The restricted
shares will bear a legend describing their restrictions. If you are a Principal
Stockholder, approval of the merger by the IDT stockholders will bind you to
the fifteen-month lock-up period for your pro rata portion of the restricted
shares. The exact portion of your shares that will be subject to the fifteen-
month lock-up period cannot be determined until the closing of the merger, but
will be at least 40% exclusive of the escrow shares.
Representations and Warranties
The merger agreement contains various representations and warranties of
Identix and IDT relating to, among other things:
. the corporate organization and power of Identix, its merger subsidiary
and IDT;
. the capital structure of Identix, its merger subsidiary and Identicator
Technology;
. the authorization and enforceability of the merger agreement and all
related agreements;
. the absence of conflicts under charter documents and any contracts, and
required consents or approvals;
. compliance with law;
. investigations and litigation;
. accuracy of financial statements and absence of undisclosed liabilities;
. absence of certain changes or events;
. absence of brokers and finders; and
. accuracy of documents and information.
IDT has made additional representations and warranties, relating to, among
other things:
. Identicator Technology's personal and real property, bank accounts,
inventories and accounts receivable;
. Identicator Technology's material contracts and insurance;
. Identicator Technology's legally enforceable rights to its intellectual
property;
. Identicator Technology's personnel, service providers, compensation and
benefits;
. taxes;
. certain payments to stockholders, directors, officers and employees of
Identicator Technology and related agreements;
. absence of environmental and tax liabilities;
. Identicator Technology's total assets and annual net sales for purposes
of the HSR Act;
. year 2000 compliance; and
. the restructuring of Identicator Technology and the spin-off of
Identicator, Inc.
In addition, Identix has made additional representations regarding the
authorization and validity of the shares of Identix common stock issued in the
merger and the timeliness and completeness of reports filed by it with the
Securities and Exchange Commission.
42
<PAGE>
Conduct of Business Pending the Merger
Prior to the closing of the merger, each of Identicator Technology and
Identix has agreed to advise the other of:
. any events which would make any representation or warranty materially
untrue or inaccurate;
. any material adverse change in condition, assets, liabilities, business
or results of operations taken as a whole; and
. any material litigation initiated by or against it.
Identicator Technology has agreed to carry on and preserve its business and
business relationships with customers, suppliers, employees consistent with its
past practice. In addition, Identicator Technology has agreed not to take
certain actions without the consent of Identix, which include, among other
things:
. borrow money outside of its existing line of credit or incur other
liabilities outside of the ordinary course of business, other than in
connection with the merger;
. encumber or dispose of assets, except inventory in the ordinary course of
business;
. enter into any material lease or contract for the purchase or sale of
real or personal property or amend or terminate any material contract,
agreement or license, except in the ordinary course of business;
. fail to maintain equipment and assets in good condition, except for
ordinary wear and tear;
. pay any bonus, increased salary or special remuneration to any officer,
employee or transferred employee (other than in accordance with past
practice), or consultant or enter into any new agreement with such
persons, except as contemplated in the merger agreement;
. change accounting methods, make tax elections or file amended returns;
. declare or pay any cash or stock dividend or distribution or redeem any
capital stock, except pursuant to stock repurchase agreements;
. split or combine its outstanding capital stock or enter into any
recapitalization affecting its capital stock;
. make loans, other than for expenses and travel, or guarantee any
obligation, except in the ordinary course of business;
. with specific exceptions, issue stock or rights to purchase securities of
IDT and Identicator Technology, and accelerate the vesting of any
outstanding option;
. amend its charter documents;
. merge, consolidate or reorganize with any other entity, except for the
merger;
. license any intellectual property, except under nonexclusive hardware or
software licenses granted to customers in the ordinary course of
business; or
. file any patent applications, except continuations in part or foreign
applications, without first consulting Identix.
43
<PAGE>
Exclusivity
During the period prior to closing, Identicator Technology has agreed not to
solicit, or support any offer from, furnish any information to, or participate
in any negotiations with, any third party regarding:
. a public offering of Identicator Technology;
. any acquisition or merger involving Identicator Technology; or
. any acquisition of any material part of the stock or assets of
Identicator Technology, including a license of Identicator Technology's
intellectual property outside of the ordinary course of business.
In addition, Identicator Technology is prohibited from entering into any
agreement or arrangement regarding a third party acquisition transaction prior
to closing.
The IDT board may consider an unsolicited proposal for an acquisition
transaction in accordance with its fiduciary duties under Delaware law.
Nevertheless, IDT will remain bound by its obligations under the merger
agreement, and the parties to the voting agreement will continue to be bound by
that agreement.
Additional Covenants
The merger agreement also contains certain other covenants including,
covenants relating to obtaining necessary consents for the merger, cooperation
of the parties with respect to any governmental filings or applications,
confidentiality of information, making public announcements and obtaining
affiliate agreements.
Conditions
The obligations of each of IDT and Identix to complete the merger are
subject to the satisfaction or waiver of the following conditions:
. the holders of at least a majority of the shares of IDT common stock
approve the merger;
. the certificate of merger is filed with the Secretary of State of
Delaware;
. each party's representations and warranties contained in the merger
agreement, as updated for the facts existing at the time of closing,
continue to be true in all material respects and each party performs
all of its obligations under the merger agreement;
. the shares of Identix common stock to be issued in the merger are
approved for quotation on the AMEX;
. counsel to IDT and Identix counsel deliver opinions regarding certain
aspects of the merger and certain federal income tax consequences of
the merger;
. the registration statement, of which this prospectus is a part, covering
the shares of Identix common stock issuable in the merger is effective
under the Securities Act of 1933;
. certain officers of Identicator Technology have entered into employment
agreements with Identix;
44
<PAGE>
. no material adverse change in the businesses of either Identicator
Technology or Identix occurs and each party does not determine in its
reasonable discretion that the transactions under the merger agreement
would cause a material adverse effect to it by reason of any instituted
or threatened litigation or proceedings; and
. each party takes all actions and delivers all documentation reasonably
requested by the other party in connection with the merger.
In addition, the obligations of Identix to complete the merger are subject
to the satisfaction or waiver of each of the following additional conditions:
. the number of dissenting shares of IDT does not exceed 5% of the
aggregate number of shares of Identix common stock that would be issued
in the merger at the effective time of the merger if there were no
dissenting shares.
. Identix receives all consents, approvals and waivers of third parties or
governmental authorities in connection with the merger;
. IDT delivers to Identix executed affiliate's agreements from each person
considered to be an affiliate of IDT and the voting agreement is in
effect as of the closing date;
. certain officers of IDT execute noncompetition agreements with Identix;
. the escrow holder, Identix, and the stockholder representative enter into
the escrow agreement and the holders of IDT options and warrants enter
into supplemental written agreements, so that the total number of
shares available to satisfy indemnification obligations is at least
434,300; and
. International Technology Concepts, Inc. and Identicator, Inc. enter into
support and indemnification agreements with Identix.
The obligations of IDT to complete the merger are subject to the
satisfaction or waiver of an additional condition that Identix shall have
granted stock options covering an aggregate of 400,000 shares of Identix common
stock to the persons entering into employment agreements with Identix.
Termination
The merger agreement may be terminated and the merger may be abandoned at
any time prior to the effective time of the merger, before or after the
approval of the merger agreement by the stockholders of IDT:
. by the mutual consent of IDT and Identix;
. by Identix if (1) the conditions to Identix's obligations to consummate
the merger have not been satisfied or waived by May 11, 1999 or (2) IDT
fails to perform any material covenant in the merger agreement; or
. by IDT, if (1) the conditions to IDT's obligations to consummate the
merger have not been satisfied or waived by May 11, 1999 or (2) Identix
fails to perform any material covenant in the merger agreement.
45
<PAGE>
Expenses
Whether or not the merger is consummated, all costs and expenses, including
legal, accounting and investment banking fees and expenses, incurred in
connection with the merger will be paid by the party incurring the expenses. If
the merger is consummated, IDT's expenses will be borne by IDT as a wholly-
owned subsidiary of Identix.
Amendment
The merger agreement may not be amended except by an instrument in writing
signed by each of the parties to the merger agreement.
Affiliate's Agreements
Subject to the escrow provisions described under "--Indemnification and
Escrow" and the legend and transfer restriction provisions described under "--
Fifteen-Month Resale Restriction," all shares of Identix common stock received
by IDT stockholders in the merger have been registered under the Securities Act
of 1933 and will be freely transferable, except that shares of Identix common
stock received by persons who are deemed to be "affiliates," as defined under
the Securities Act, of IDT prior to the merger or affiliates of Identix after
the merger may be resold by them only in transactions permitted by the resale
provisions of Rule 145 under the Securities Act or as otherwise permitted under
the Securities Act. Persons who may be deemed to be affiliates of IDT or
Identix generally include individuals or entities that control, are controlled
by, or are under common control with, such party and may include certain
officers and directors as well as principal stockholders of such party.
IDT must cause each of its affiliates to execute a written affiliate
agreement to the effect that it will not offer to sell, transfer, or otherwise
dispose of any of the shares of Identix common stock issued to it in or
pursuant to the merger unless that sale, transfer or other disposition is made
in conformity with Rule 145 under the Securities Act.
Voting Agreement
As of the record date, International Technology Concepts, Inc. and each IDT
director, who together own approximately 70% of the IDT common stock
outstanding as of the record date, have executed the voting agreement with
Identix. The voting agreement provides that each stockholder will vote all
shares owned or acquired by the stockholder:
(1) in favor of the merger, the merger agreement and the transactions
contemplated by the merger agreement and
(2) against any other proposal for merger, or sale of IDT or any other
action that would result in a breach of any provision in the merger
agreement or result in the conditions of the merger agreement not being
fulfilled.
In addition, each stockholder has granted Identix and its merger subsidiary
an irrevocable proxy to vote the stockholder's shares as specified in the
voting agreement. A copy of the voting agreement is attached to this prospectus
as Appendix B.
46
<PAGE>
Employment and Noncompetition Agreements
Prior to the closing date, each of Mr. Pieper, Mr. Evans, Mr. Khidekel, and
Mr. Shapiro will enter into an employment agreement and a noncompetition
agreement with Identix.
Each employment agreement provides that each individual will serve as a full
time employee of Identix for the term of the agreement. The employment
agreement also provides that in the event of any "termination other than for
cause" by Identix or " resignation for good reason" by the employee, the
employee will receive severance pay of between 12 and 15 months of the
employee's salary and the employee's options granted in connection with the
employment agreement will vest. The noncompetition agreements restrict Mr.
Pieper, Mr. Evans, Mr. Shapiro and Mr. Khidekel, from working for a competitive
business for a period of three years following the effective time of the
merger. The noncompetition agreements also provide that during this three-year
period, the individual will not solicit the services of or enter into any
agreement for employment or services with any person who is known or should be
known to be employed by or have been employed by Identix or an Identix
subsidiary in the preceding six months.
47
<PAGE>
COMPARISON OF CAPITAL STOCK
Description of Identix Capital Stock
The authorized capital stock of Identix consists of 50,000,000 shares of
common stock, $.01 par value per share, and 2,000,000 shares of preferred
stock, $.01 par value per share.
Identix Common Stock
As of January 31, 1999 there were approximately 25,439,111 shares of Identix
common stock outstanding held by approximately 1,182 stockholders of record.
Identix common stock is listed on the AMEX under the symbol IDX.
Holders of common stock are entitled to one vote per share on all matters to
be voted upon by the stockholders of Identix. Subject to any preferential
rights of the preferred stock, the holders of common stock are entitled to
receive dividends, when and if declared by the board of directors, out of
assets legally available for the payment of dividends. In the event of any
dissolution, liquidation of winding up of Identix, the holders of the common
stock are entitled to receive all remaining assets of the corporation after
payment of liabilities, subject to any preferential amounts distributed to the
preferred stock. The Identix common stock has no preemptive or conversion
rights or other subscription rights. There are no redemption or sinking fund
provisions applicable to the Identix common stock.
Identix Preferred Stock
Identix has 2,000,000 shares of preferred stock authorized, none of which
are outstanding. The Identix board has the authority to provide for the
issuance of the preferred stock in one or more series, and by filing a
certificate pursuant to Delaware corporate law, to establish from time to time
the number of shares to be included in each series, and to fix the designation,
powers, preferences and rights of the shares of each series and any
qualifications, limitations or restrictions thereof. The Identix board, without
stockholder approval, can issue preferred stock with voting and conversion
rights which could adversely affect the voting power or other rights of the
holders of Identix common stock and the issuance of preferred stock may have
the effect of delaying, deferring or preventing a change in control of Identix.
Transfer Agent and Registrar
The transfer agent and registrar of the Identix common stock is ChaseMellon
Shareholder Services, LLC and its telephone number is (415) 743-1444.
Description of IDT Capital Stock
The authorized capital stock of IDT consists of 12,000,000 shares of common
stock, $.001 par value per share, and 5,000,000 shares of preferred stock,
$.001 par value per share.
IDT Common Stock
As of the record date, there were approximately 2,727,762 shares of IDT
common stock outstanding held by 129 stockholders of record.
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<PAGE>
Holders of IDT common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders of IDT. Subject to any
preferential rights of the preferred stock, the holders of IDT common stock are
entitled to receive dividends, when and if declared by the board of directors,
out of assets legally available for the payment of dividends. In the event of
any dissolution, liquidation of winding up of IDT, the holders of the common
stock are entitled to receive all remaining assets of the corporation after
payment of liabilities, subject to any preferential amounts distributed to the
preferred stock. The IDT common stock has no redemption, preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the IDT common stock.
IDT Preferred Stock
Of the 5,000,000 shares of preferred stock authorized, 600,000 shares are
designated Series A preferred stock, none of which were outstanding as of the
record date. The preferred stock may be issued from time to time in one or more
series. The IDT board is authorized, within the limitations of IDT's
certificate of incorporation, to fix the dividend rights, dividend rates,
conversion rights, voting rights, terms of redemption, liquidation preferences
and any designation, preference and relative, participating, optional or other
special rights, qualifications, limitations or restrictions as may be desired
to the fullest extent permitted by Delaware law for any wholly unissued series
of preferred stock. The IDT board is also authorized to increase or decrease
the number of shares of any series subsequent to the issue of shares of that
series, but not below the number of shares of that series then outstanding. In
case the number of shares of any series shall be so decreased, the shares
constituting the decrease shall resume the status which they had prior to the
adoption of the resolution originally fixing the number of shares of the
series. Subject to any protective provisions of any series of preferred stock,
the rights of any additional series may be subordinate to, pari passu with, or
senior to the rights, privileges and preferences of any other series of
preferred stock or common stock.
IDT Series A Preferred Stock
No shares of Series A preferred stock have been issued. However IDT has
issued warrants to purchase 60,000 shares of Series A preferred stock, which
shares, if issued, would have terms as described in the following paragraphs.
Each holder of the Series A preferred stock is entitled to one vote for each
share of common stock into which the holder's shares can be converted on all
matters to be voted upon by the stockholders of IDT. In addition, the consent
of at least a majority of the then outstanding Series A preferred stock is
required before IDT may alter or change the rights, preferences or privileges
of the Series A preferred stock so as to affect differentially and adversely
those shares. Subject to any preferential rights of any other series of
preferred stock, the holders of the Series A preferred stock are entitled to
receive dividends in preference to the holders of the common stock, when and if
declared by the board of directors, out of assets legally available for the
payment of dividends. In the event of any dissolution, liquidation or winding-
up of IDT, the holders of the Series A preferred stock are entitled to receive
in preference to the holders of the common stock, after payment of liabilities
of the corporation, a per share amount equal to $9.00, plus all
49
<PAGE>
declared but unpaid dividends. The liquidation provision also applies to
consolidations, mergers or sales of all or substantially all of the assets of
IDT. If the assets of the corporation are insufficient to permit full payment
to each of the holders of Series A preferred stock, the entire assets available
for distribution shall be distributed ratably among the holders of the Series A
preferred stock in proportion to the amount of stock owned.
Each share of Series A preferred stock is convertible at the option of the
holder into a number of shares of IDT common stock determined by dividing $9.00
by the conversion price in effect for the Series A preferred stock The current
conversion price for the Series A preferred stock is $9.00. The Series A
preferred stock automatically converts into common stock upon the earlier of
(1) the date specified by the written consent or agreement of a majority of the
outstanding shares of Series A preferred stock, or (2) the consummation of
IDT's sale of its common stock in a firm commitment underwritten public
offering pursuant to a registration statement filed under the Securities Act.
The conversion ratio for the Series A preferred stock will be adjusted on a
broad based weighted average basis in the event of a dilutive issuance;
provided, however, that a dilutive issuance shall not include the sale of IDT
common stock reserved for employees, consultants and the like or shares issued
pursuant to partnering arrangements, leaselines or similar arrangements. The
Series A preferred stock is entitled to proportional antidilution protection
for stock splits, stock dividends and similar dilutive events.
In the event of (1) a merger or other transaction which would result in
IDT's stockholders immediately prior to the merger holding less than 50% of the
voting power of the surviving corporation or (2) a sale of all or substantially
all of the assets of the corporation, then the holders of the Series A
preferred stock shall be entitled to receive for each share of Series A
preferred stock, in cash or in securities received from the acquiring
corporation, an amount equal to $9.00, plus all declared but unpaid dividends,
and the remaining proceeds shall be distributed to the holders of the common
stock. IDT shall give each holder of record of Series A preferred stock written
notice of an impending transaction not later than the earlier of 20 days prior
to the stockholders' meeting to approve the transaction or 20 days prior to the
closing date of the transaction.
The Series A preferred stock is not redeemable.
Comparison of Stockholder Rights
Both IDT and Identix are incorporated under the laws of Delaware and are
subject to Delaware corporate law. Upon completion of the merger, the
stockholders of IDT will become holders of Identix common stock, and their
rights as Identix stockholders will be governed by the Identix certificate of
incorporation and Identix bylaws. Certain differences exist between the rights
of holders of Identix securities and IDT securities.
The following summary does not purport to be a complete statement of the
rights of IDT stockholders under the IDT certificate of incorporation and the
IDT bylaws as compared with the rights of Identix stockholders under the
Identix certificate of incorporation and Identix bylaws or a complete
description of the specific provisions referred to herein. The identification
of specific differences is not meant to indicate that other equally or more
significant differences do not exist. The summary is qualified in its entirety
by reference to the governing corporate instruments of Identix and IDT, to
which stockholders are referred.
50
<PAGE>
Percentage of Voting Stock; Influence Over Affairs
Upon completion of the merger, the percentage ownership of Identix by each
former IDT stockholder will be substantially less than the stockholder's
current percentage ownership of IDT. Accordingly, former IDT stockholders will
have significantly less voting influence over the affairs of Identix than they
currently enjoy over the affairs of IDT.
Voting Rights
Each holder of Identix common stock is entitled to one vote for each share
held of record and may not cumulate votes for the election of directors. Each
holder of IDT common stock is entitled to one vote for each share held of
record and may not cumulate votes for the election of directors. The holder of
outstanding shares of IDT Series A preferred stock, if any, is entitled to the
number of votes equal to the number of shares of IDT common stock into which
the shares of IDT Series A preferred stock could be converted on the record
date for the applicable vote or written consent of stockholders, and except as
otherwise required by law, shall have voting rights and powers equal to the
voting rights and powers of holders of IDT common stock.
Liquidation Preference
In the event of any dissolution, liquidation or winding-up of the
corporation, each holder of Identix common stock is entitled to receive its pro
rata portion of all remaining assets of the corporation after payment of
liabilities, subject to any preferential rights of preferred stock, if any.
Similarly, each holder of IDT common stock is entitled to receive its pro rata
portion of all remaining assets of the corporation after payment of
liabilities, subject to any preferential rights of preferred stock, if any. In
the event of any dissolution, liquidation or winding-up of the corporation,
each holder of IDT Series A preferred stock is entitled to receive, in
preference to the holders of IDT common stock, an amount per share equal to
$9.00, plus all declared but unpaid dividends, after payment of liabilities.
Neither Identix nor IDT has any shares of preferred stock outstanding as of the
record date, although IDT has issued warrants to acquire up to 60,000 shares of
Series A preferred stock.
Amendments to Certificates of Incorporation
Identix's certificate of incorporation may be amended in accordance with
Delaware corporate law. IDT's Certificate of Incorporation may also be amended
as provided under Delaware corporate law; however, so long as any shares of the
IDT Series A preferred stock are outstanding, IDT shall not, without obtaining
the approval of the holders of not less than a majority of the outstanding
shares of the IDT Series A preferred stock, alter or change the rights,
preferences or privileges of the Series A preferred stock so as to affect
differentially and adversely those shares.
Stockholder Action by Written Consent
The Identix certificate of incorporation provides that any action required
or permitted to be taken by the Identix stockholders must be effected at a duly
called annual or special meeting and may not be effected by written consent.
Because the IDT certificate of incorporation does not prohibit or limit
stockholder actions by written consent, IDT stockholders may act by written
consent without a meeting or by vote at a meeting.
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<PAGE>
Advance Notice of Certain Stockholder Actions
The Identix bylaws provide that a stockholder must give timely notice of
business it wishes to bring before a stockholders meeting. To be timely, a
stockholder's notice must be delivered to or mailed and received at the
principal officers of Identix no later than (1) in the case of an annual
meeting, 90 days before the anticipated date of the annual meeting, and (2) in
the case of a special meeting, 10 days prior to the meeting. The stockholder's
notice shall set forth:
. a description of the business;
. the name and address of the stockholder;
. the class and number of shares held; and
. any material interest of the stockholder in the business proposed.
The IDT certificate of incorporation and bylaws require at least 10 days
advance notice of stockholder business to be brought by stockholders before any
special meeting of stockholders, but no advance notice of the business to be
transacted is required for the annual meeting or for actions affected by
written consent.
Special Stockholder Meetings
The Identix certificate of incorporation provides that special meetings of
the stockholders of Identix may be called only by the Identix board of
directors, the chairman of the board or Identix's president. Stockholders do
not have the ability to call a special meeting. The IDT bylaws provide that
special meetings of stockholders may be called by IDT's president and shall be
called by the president or secretary at the written request of a majority of
the IDT board of directors, or at the written request of stockholders owning a
majority of the issued and outstanding capital stock of IDT entitled to vote.
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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial statements
give effect to the acquisition by Identix of IDT in a transaction accounted for
as a purchase. The unaudited pro forma condensed combined financial statements
are based on the individual historical financial statements of Identix and IDT
for the year ended June 30, 1998 and the six months ended December 31, 1998
included elsewhere in this prospectus.
The following unaudited pro forma condensed combined statements of
operations are not necessarily indicative of the results of operations of the
combined company or the results of operations which would have resulted had
Identix and IDT been combined during the periods presented. In addition, the
pro forma results are not intended to be a projection of future operating
results. The unaudited pro forma condensed combined financial statements should
be read in conjunction with the historical consolidated financial statements of
Identix and IDT, including the notes thereto, appearing elsewhere in this
prospectus.
The unaudited pro forma condensed combined balance sheet assumes that the
acquisition took place on December 31, 1998. The unaudited pro forma condensed
combined statements of operations assume that the acquisition took place as of
July 1, 1997. The unaudited pro forma condensed combined financial statements
are based on the estimates and assumptions set forth in the notes to such
statements. The pro forma adjustments are based on a preliminary valuation of
IDT made in connection with the development of the pro forma information for
illustrative purposes to comply with the disclosure requirements of the SEC.
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<PAGE>
Unaudited Pro Forma Condensed Combined Statement of Operations
Year Ended June 30, 1998
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Identix IDT Adjustments Combined
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues.................... $79,374,000 $4,103,000 $83,477,000
----------- ---------- -----------
Cost and expenses:
Cost of revenues........... 55,392,000 1,132,000 56,524,000
Research, development and
engineering............... 4,572,000 1,218,000 5,790,000
Marketing and selling...... 9,107,000 1,082,000 10,189,000
General and
administrative............ 8,474,000 590,000 $ 3,153,000 12,217,000
Reorganization costs....... 717,000 717,000
----------- ---------- ----------- -----------
Total costs and expenses.. 78,262,000 4,022,000 3,153,000 85,437,000
----------- ---------- ----------- -----------
Income (loss) from
operations.................. 1,112,000 81,000 (3,153,000) (1,960,000)
Interest and other income
(expense), net.............. 66,000 4,000 70,000
Interest expense............ (239,000) (239,000)
----------- ---------- ----------- -----------
Income (loss) before equity
interest in joint venture... 939,000 85,000 (3,153,000) (2,129,000)
Equity interest in joint
venture..................... (171,000) (171,000)
----------- ---------- ----------- -----------
Net income (loss)........... $ 768,000 $ 85,000 $(3,153,000) $(2,300,000)
=========== ========== =========== ===========
Net income (loss) per share:
Basic..................... $ 0.03 $ (0.08)
=========== ===========
Diluted................... $ 0.03 $ (0.08)
=========== ===========
Shares used in per share
calculation:
Basic..................... 25,104,000 28,013,000
=========== ===========
Diluted................... 25,669,000 28,013,000
=========== ===========
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
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<PAGE>
Unaudited Pro Forma Condensed Combined Statement of Operations
Six months ended December 31, 1998
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Identix IDT Adjustments Combined
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues.................. $40,323,000 $ 2,274,000 $42,597,000
----------- ----------- -----------
Cost and expenses:
Cost of revenues......... 28,089,000 1,365,000 29,454,000
Research, development and
engineering............. 2,804,000 796,000 3,600,000
Marketing and selling.... 5,146,000 708,000 5,854,000
General and
administrative.......... 3,466,000 574,000 $ 1,576,000 5,616,000
Stock compensation....... -- 4,642,000 -- 4,642,000
----------- ----------- ----------- -----------
Total costs and
expenses............. 39,505,000 8,085,000 1,576,000 49,166,000
----------- ----------- ----------- -----------
Income (loss) from
operations................ 818,000 (5,811,000) (1,576,000) (6,569,000)
Interest and other income
(expense), net............ 60,000 3,000 63,000
Interest expense.......... (235,000) (82,000) (317,000)
----------- ----------- ----------- -----------
Income (loss) before taxes
and equity interest in
joint venture............ 643,000 (5,890,000) (1,576,000) (6,823,000)
Provision for income
taxes..................... (90,000) (90,000)
Equity interest in joint
venture................... (159,000) (159,000)
----------- ----------- ----------- -----------
Net income (loss)......... $ 394,000 $(5,890,000) $(1,576,000) $(7,072,000)
=========== =========== =========== ===========
Net income (loss) per
share:
Basic................... $ 0.02 $ (0.25)
=========== ===========
Diluted................. $ 0.02 $ (0.25)
=========== ===========
Shares used in per share
calculation:
Basic................... 25,319,000 28,228,000
=========== ===========
Diluted................. 25,646,000 28,228,000
=========== ===========
</TABLE>
See accompanying notes to unaudited proforma condensed combined financial
statements.
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<PAGE>
Unaudited Pro Forma Condensed Combined Balance Sheet
December 31, 1998
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Identix IDT Adjustments Combined
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents........... $ 2,418,000 $ 76,000 $ 2,494,000
Accounts receivable,
net................... 26,992,000 1,407,000 28,399,000
Inventories............ 6,857,000 102,000 6,959,000
Prepaid expenses and
other assets.......... 947,000 88,000 1,035,000
------------ ----------- ----------- ------------
Total current
assets.............. 37,214,000 1,673,000 38,887,000
Property and equipment,
net...................... 2,094,000 312,000 2,406,000
Intangibles and other
assets................... 2,624,000 5,000 $30,695,000 33,324,000
------------ ----------- ----------- ------------
Total assets......... $ 41,932,000 $ 1,990,000 $30,695,000 $ 74,617,000
============ =========== =========== ============
Current liabilities:
Notes payable to
banks................. $ 4,093,000 $ 304,000 $ 4,397,000
Accounts payable....... 9,038,000 400,000 9,438,000
Accrued liabilities.... 2,457,000 702,000 $ 700,000 3,859,000
Deferred revenue,
current portion....... 1,910,000 322,000 2,232,000
------------ ----------- ----------- ------------
Total current
liabilities......... 17,498,000 1,728,000 700,000 19,926,000
Other long-term
liabilities.............. 90,000 -- 90,000
Notes payable, net of
issuance costs........... -- 299,000 299,000
Deferred revenue, less
current portion.......... -- 40,000 -- 40,000
------------ ----------- ----------- ------------
Total liabilities.... 17,588,000 2,067,000 700,000 20,355,000
------------ ----------- ----------- ------------
Shareholders' equity
(deficit):
Common stock........... 53,567,000 11,290,000 28,672,000 93,529,000
Accumulated deficit.... (29,042,000) (1,119,000) (8,925,000) (39,086,000)
Deferred stock
compensation.......... -- (10,248,000) 10,248,000 --
Cumulative translation
adjustment............ (181,000) -- (181,000)
------------ ----------- ----------- ------------
Total shareholders'
equity (deficit).... 24,344,000 (77,000) 29,995,000 54,262,000
------------ ----------- ----------- ------------
Total liabilities and
shareholders' equity
(deficit)........... $ 41,932,000 $ 1,990,000 $30,695,000 $ 74,617,000
============ =========== =========== ============
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
56
<PAGE>
Notes to Unaudited Pro Forma Condensed Combined Financial Statements
Note 1--Basis of Presentation:
The unaudited pro forma condensed combined balance sheet has been prepared
to reflect the acquisition of IDT by Identix as if the acquisition had occurred
on December 31, 1998.
The unaudited pro forma condensed combined statement of operations for the
year ended June 30, 1998 and the six months ended December 31, 1998 have been
prepared to reflect the acquisition of IDT by Identix as if the acquisition had
occurred on July 1, 1997.
There were no material differences in the accounting policies of Identix and
IDT for the periods presented.
Note 2--Purchase Accounting and Pro Forma Adjustments:
Purchase Price
In connection with the merger, Identix issued or will be obligated to issue
a total of 5,050,000 shares of Identix common stock. This amount is comprised
of 2,909,370 shares of common stock and options and warrants to purchase
2,140,630 shares of common stock with exercise prices of $0.26 and $8.07,
respectively. The market value of a share of common stock of $8.08 was
determined using the average quoted market price of the Identix common stock
for the two days preceding and following the announcement of the merger. All
options and warrants previously issued by IDT will be assumed by Identix and
represent options and warrants to purchase 2,073,783 and 66,847 shares of
Identix common stock, respectively, upon consummation of the merger. 10% of the
IDT options and warrants assumed in the merger, and the Identix common stock
issuable upon exercise thereof, will be subject to the escrow agreement to the
extent agreed by the holders of such IDT options and warrants. The IDT option
grants contained provisions for accelerated vesting of all or a portion of the
options in the event of a transaction resulting in a change in control of IDT.
Options vested before the merger, vesting on the merger and unvested after the
merger for directors and officers and other individuals are as follows:
<TABLE>
<CAPTION>
Identix equivalent shares at December 31, 1998
------------------------------------------------------------
Vested before Merger Vesting on Merger Unvested after Merger
-------------------- ----------------- ---------------------
<S> <C> <C> <C>
Directors and officers.. 631,464 389,861 48,128
Other................... 223,043 619,674 161,793
------- --------- -------
Total................ 854,507 1,009,535 209,921
======= ========= =======
</TABLE>
On the closing of the merger, stock compensation expense of $8,783,000 will
be recorded in IDT's financial statements as a result of the acceleration of
vesting on these options. Because the merger is being accounted for as a
purchase, this expense will not affect Identix's financial statements.
The value of the Identix options and warrants to be exchanged for vested and
unvested IDT options and warrants has been included in the determination of the
purchase price. The fair value of the options and warrants was determined using
a Black/Scholes option pricing model with the following assumptions:
<TABLE>
<S> <C>
Expected life...................................................... 2-5 years
Volatility......................................................... 52%
Risk free interest rate............................................ 5.8-6.2%
Dividend yield..................................................... 0%
</TABLE>
57
<PAGE>
The weighted average fair value of the Identix options and warrants
exchanged was $7.69.
<TABLE>
<CAPTION>
Fair Total Fair
Shares Value Value
--------- ----- -----------
<S> <C> <C> <C>
Common shares outstanding...................... 2,909,370 $8.08 $23,502,000
Common shares issuable on exercise of options.. 2,073,783 $7.80 16,176,000
Common shares issuable on exercise of
warrants...................................... 66,847 $4.25 284,000
--------- -----------
5,050,000 $39,962,000
========= ===========
</TABLE>
In addition, Identix assumed liabilities of IDT totaling $2,067,000 and
incurred acquisition costs of $700,000, resulting in a total purchase price of
$42,729,000.
Identix will issue options to purchase 400,000 shares of common stock to
certain individuals upon the closing of the merger. These options will be
issued in connection with employment agreements and will be subject to vesting
requirements. These options have not been included in the determination of the
purchase price and will be accounted for in accordance with APB 25.
Allocation of Purchase Price.
The total purchase price of $42,729,000 was allocated to the fair value of
the assets acquired as follows:
<TABLE>
<CAPTION>
Amortization
Life
------------
<S> <C> <C>
Tangible assets.................................... $ 1,990,000 --
In-process research and development................ 10,044,000 --
Core technology.................................... 4,663,000 5
Assembled workforce................................ 202,000 3
Goodwill........................................... 25,830,000 12
-----------
Total............................................ $42,729,000
===========
</TABLE>
In-Process Research and Development.
The fair value of the purchased in-process research and development was
determined using the stage of completion method based on the future cash flows
that are projected to be generated by the products under development over a 5-
year period.
In-process research and development activities consist of hardware and
software product concept formulation, mechanical and optical design,
engineering prototyping, software code programming and testing procedure design
and development. The important elements of the in-process projects at the time
of acquisition include product concepts and designs, software code, test
specifications and processes and pre-prototype models. The fair value of the
in-process products was determined as a whole but IDT management estimates
approximately 80% of the value is attributable to the software related products
and 20% to hardware related products. Material cash inflows from significant
projects are projected to commence in 2000.
IDT has several hardware projects in process. The primary focus of the in-
process hardware products involves the development of next generation
fingerprint readers which are expected to be of
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<PAGE>
significantly reduced cost and size. Fingerprint readers are under development
which are self contained and small enough to fit into portable devices. As of
the date the merger agreement was signed, the individual hardware projects were
between 8% and 69% complete. These products are projected to be introduced in
the years 1999 through 2001. The projected cost to complete the in-process
hardware projects is approximately $3.2 million.
IDT has several software projects in process. The primary focus of the in-
process software products is to integrate and support the next generation
readers, to enhance the ease of use and existing functionality of current
products and to add additional capabilities. The addition of audit trails,
advanced encryption/decryption capabilities and other advanced features capable
of operating on a variety of environments including Internet, intranet and
stand alone applications are among the elements under development. As of the
date the merger agreement was signed, the individual software projects were
between 4% and 73% complete. These products are projected to be introduced in
the years 1999 through 2000. The projected cost to complete the in-process
software projects is approximately $1.7 million.
To determine the overall percentage of completion of the in-process
projects:
. Historical costs were analyzed and assigned to each project. Estimates
of the cost to complete each project were developed as well as the
time frame for completion. A percentage completion factor was then
calculated for the various projects.
. To properly weigh the projects relative to the future cash flows used
in determining the value of the in-process research and development,
the percentage completion for each project was then applied to the
projected cash flows, based on gross profits, for each project to
arrive at the weighted average cash flows. These cash flows were then
reduced by a discount factor of 30%. The discount factor of 30%
represents a premium to IDT's weighted average cost of capital to
reflect the higher risk of the under development technology and the
relatively high projected financial results compared to historical
results. The discounted cash flows weighted for the percentage
completion represented 50% of the overall discounted cash flows, based
on gross profits.
Significant assumptions utilized in determining the estimated cash flows
from in-process research and development projects are as follows:
Revenue is assumed to grow from $12.2 million in Year 1 to $75.6 million
before declining to $37.8 million in Year 5. This increase in revenue
reflects the early stage of the market and the projected acceptance and
adoption of the technology over the next few years.
Gross margin is assumed to decrease from 77% to 45% over the same five
year period. Gross margin is higher reflecting projected increased levels
of high margin software sales in the near term. The gross margin decreases
over the projection period as the in-process product mix shifts toward
lower margin hardware products which are in earlier stages of completion
compared with higher margin software products which are in more advanced
stages of completion.
Selling and marketing costs for the in-process products are assumed to
decrease from 23% to 17% over the five year period reflecting revenue
leverage from sales through IDT's distribution channel.
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<PAGE>
General and administrative costs for the in-process products are assumed
to decrease from 9% to 6% over the five year period as expenses are not
projected to increase in line with sales.
Research and development costs related to in-process products are
expected to decrease from 14% to 3% over the projection period while
sustaining engineering costs are projected to increase from $0.2 million in
Year 1 to $2.5 million in Year 5.
In estimating the future cash flows, management of IDT used historical
information with regard to margins and expenses, and performed an assessment of
the products' acceptance in the emerging market for biometric security. The
most significant and uncertain assumption used in the valuation was the
projected revenue stream from the products under development.
The new generation of products under development are projected to sell
through sales channels and to customers which are substantially different from
its historical channels and customers. Therefore, pricing and margins will
differ from historical levels and are projected to be lower overall on
significantly higher unit volume.
Total expense levels are projected to increase with the growth of business
activity but will represent a smaller percentage of revenues due to the higher
volume of sales and the fact that the new sales channels require substantially
less support infrastructure than the channels historically used.
The projected or assumed completion dates, revenues, expenses, cash flows
and other financial information described above are forward-looking statements
that involve substantial risks and uncertainties. Actual results or performance
may differ materially for a variety of reasons. The major risks with respect to
the timely completion and commercialization of the in-process projects are that
technological feasibility may not be achieved for some or all of the in-process
projects, IDT may lose key technical personnel or a competitor may develop
technology or products which compete with or replace the in-process projects.
Other risks that may affect future results or performance are described under
"Risk Factors" beginning on page 13.
Pro Forma Adjustments
The following adjustments were applied to the historical statements of
operations to arrive at the pro forma condensed combined statement of
operations:
(a) Reflects the additional amortization expense of intangible assets of
$3,153,000 and $1,576,000 for the year ended June 30, 1998 and six
months ended December 31, 1998, respectively, over their estimated
useful lives of 3-12 years.
(b) Shares used in the per share calculations reflect the 2,909,370
Identix common shares issued to IDT shareholders as if they were
outstanding from the beginning of each period presented. Identix
shares totaling 2,140,630 which would be issuable on the exercise of
outstanding IDT options and warrants have not been included in the
computation of the diluted per share calculation as their effect would
have been anti-dilutive.
(c) Prior to September 30, 1998, the current business of IDT was operated
as a joint venture and was not subject to income tax. Each venture
partner was individually liable for tax on its share of the joint
venture profits. For purposes of the pro forma statements of
operations
60
<PAGE>
for the year ended June 30, 1998 and six months ended December 31, 1998
no amounts have been recorded for income taxes related to IDT as the
combined entity had a loss before income taxes.
Note: In-process research and development costs in the amount of $10,044,000,
which will be written off immediately after the transaction is complete, have
been excluded from the unaudited pro forma condensed combined statements of
operations.
BUSINESS OF IDENTICATOR TECHNOLOGY
Overview
In 1991, the founders of Identicator Technology commenced development of
electronic identification systems with particular emphasis on finger imaging
for use in a broad range of applications such as data security, electronic
commerce, and physical access control, as well as in the civil and criminal
justice systems. In 1993, these efforts resulted in the formation of
Identicator Technology as a joint venture, California partnership,
headquartered in San Bruno, California and maintaining a software and hardware
development facility in Dublin, California and a sales office in Washington,
D.C. In 1998, Identicator Technology restructured the joint venture into a
Delaware corporation as the wholly owned subsidiary of the newly-formed IDT.
Identicator Technology's systems use proprietary software and hardware
technologies for positive personal identification. Identicator Technology's
systems provide a higher level of security and ease of use compared to
passwords and personal identification numbers, which will ultimately result in
lower systems administration costs as the need to continually change an
individual's password is eliminated. Identicator Technology's electronic
fingerprint based identification system is compact, fast, reliable, low-cost,
accurate, and user friendly, which Identicator Technology believes
differentiates it from its competition. These cost-effective systems allow
integration into a broad range of existing applications that require user
authentication such as access to personal computers, networks, automatic
teller machines, credit card readers, and physical access control systems.
Identicator Technology believes that it has the largest PC installed base of
cold search (minutiae based) biometric systems worldwide.
Biometric Technologies
The biometrics industry is based upon the premise that a basic need exists
in commercial markets for positive personal identification. The existence of
passwords for data access, PINs for ATM and account access, identification
cards, photos and signatures on credit cards provides evidence of this need.
In the search for a solution to the authentication problem, biometrics,
which is is the measurement of unique physical characteristics, emerged as a
promising solution. There are six primary forms of biometric technology:
finger imaging, voice, eye, signature, face, and hand. Identicator Technology
believes that minutiae based finger imaging systems are the most accepted form
of biometric technology. Facial identification, however, has merit in certain
applications, and Identicator Technology is developing a facial identification
system.
61
<PAGE>
Technology and Products
Identicator Technology's hardware and software products represent a complete
electronic finger imaging identification solution that can accomplish both
match (one-to-one) and search (one-to-many) of images in a database.
Identicator Technology's equipment optically scans a fingerprint, digitizes and
processes the image, and analyzes and extracts its unique characteristics
(minutiae) ultimately reducing the fingerprint to a small piece of digital
information as small as 60 bytes. This digital information can be stored on the
magnetic stripe of a credit, debit or ATM card or driver's license or in the
memory of a smart card, which is used for positive user authentication
purposes.
Although Identicator Technology has both proprietary hardware and software,
Identicator Technology anticipates that hardware (scanners) may ultimately
become a commodity. It is Identicator Technology's strategy to continue to sell
its hardware through a contract manufacturing relationship, controlling the
intellectual property associated with the hardware and increasing revenue
growth and market share position. As the hardware becomes more of a commodity
technology product, it is Identicator Technology's intention to license its
technology to select peripheral component suppliers and to convert this revenue
stream to a royalty based model. Additionally, as this occurs, Identicator
Technology's focus will primarily be on the software development of
applications and continuous improvement of the algorithm for the core operating
system for finger imaging.
Identicator Technology's existing product line is summarized below:
Hardware--Direct Fingerprint Readers (DFR)
. DFR-200--The DFR-200 OEM fingerprint sensor is the newest product in the
DFR line and is presently in commercial use. The DFR-200 is very small
in size and is designed as an original equipment manufacturer ("OEM")
product, specifically for incorporation into mice, keyboards, monitors,
and similar products. It contains Identicator Technology's proprietary
MicroPrism, a replaceable platen. Compaq is currently selling the DFR-
200, which includes logon software, as a stand-alone peripheral for
computer security for $99.
. DFR-90--The DFR-90 is a reliable fingerprint scanning device that
electronically captures high resolution fingerprint images and passes
them via a standard RS-170 video signal to a PC. The DFR-90 meets the
American National Standards Institute/National Institute of Science and
Technology, FBI and Automated Fingerprint Identification System
requirements and is designed primarily for the enrollment of individuals
into a database. The DFR-90 is installed in many locations within the
United States, including the Georgia Department of Motor Vehicles, the
FBI and the National Security Agency, and internationally in countries
such as Spain, Argentina, and Australia.
. DFR-98--The DFR-98 is similar to the DFR-90, except that it features the
replaceable MicroPrism and it has a smaller footprint than the DFR-90.
. DFR-100--The DFR-100 has a smaller footprint, powered directly from the
PC and produces digital output. The DFR-100 is designed to perform
identification functions for day-to-day use at the point of transaction.
The DFR-100 is being phased out in favor of the DFR-200.
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<PAGE>
Software
Identicator Technology has developed a series of software technologies and
applications targeted to industry channels of distribution. All software
solutions are based on a common software architecture and components that
facilitate ease of development and maintenance. Identicator Technology's
existing software includes:
. Software Development Toolkit--Identicator Technology's proprietary
software tools, in the form of System Developer Kits ("SDKs")
encapsulate all the logic necessary for capturing, processing, reducing,
matching, and searching finger images. Identicator Technology's SDK
products run on DOS, Windows, Windows 95, and Windows NT.
. Application Software--Identicator Technology has and continues to
develop software applications based on industry standards and protocols
targeted at the information technology industry. These applications are
designed to replace passwords, authentication systems, and PINs by
providing security identification as stand-alone solutions, as well as
in combination with existing token-based systems such as smart cards for
Windows, NT, Java, and Unix based operating systems. Currently the
product family includes:
-NT Logon.
-Windows 95 Logon.
-Screen Saver Logon.
-Fingerprint Distributed System.
. Advanced Market Applications--Identicator Technology is developing a
series of vertical applications targeted to enterprise-wide solutions
developed on the Identicator Technology proprietary algorithms. Finger
imaging is utilized as the link to solutions for markets such as
enterprise intranets, extranets, and the financial and medical
communities.
Under Development
. Application Program Interface--Identicator Technology currently has
under development a set of Application Programming Interfaces ("APIs")
that utilize a common architecture set at the user interface, resource
manager, and database management levels. The API development is focused
on utilizing common industry protocols and standards to position the
technology for the broadest industry acceptance.
. Embedded Solutions--In the future, Application Specific Integrated
Circuit ("ASIC") chips will house a significant portion of the software
required for the system operation, performing functions including image
processing, feature extraction, single print match, and multiple print
search. Software drivers will be available for use with all Identicator
Technology ASICs in a variety of cross platforms, cross operating
systems, and localized versions. These drivers will have published APIs
so that licensees can develop their own code.
. Facial System--Identicator Technology is developing an identification
system based on facial features. Identicator Technology's initial facial
system products will be delivered in the form of a software developer's
toolkit and used for dual biometrics in civil market applications.
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<PAGE>
Marketing and Distribution Channels
Market Overview
The biometric markets can be divided into three major segments:
. Criminal Justice Market--The criminal justice segment is the traditional
domain for fingerprint identification applications and includes
automated booking systems, probation and parole systems, prison inmate
and visitor control and release applications, and field deployable
identification systems.
. Civil Market--Identicator Technology's finger imaging systems are in use
in State Drivers License Bureaus in the U.S., in systems implemented by
major systems integrators. In addition, Identicator Technology's
products can also be used in National Identification, Voter Registration
and National Welfare programs.
. Commercial Market--The commercial market can be divided into three
categories:
- Data Security: Computer security includes all forms of information
security requiring positive user authentication and identification,
including access to internal and external computer networks and
communication links. Today, a password is the most commonly employed
method by which access to confidential data is controlled. However,
passwords have proven to be inadequate protection against a
motivated hacker, are often forgotten, are not user friendly, and
require a significant amount of administrative overhead. Unlike
passwords or tokens (smart cards), every finger image is unique and
cannot be forgotten or stolen. IT administrators want a secure, more
user-friendly system. Particularly important in data security is the
migration toward "single sign-on" systems that are made possible
through Identicator Technology's technology.
- Financial Security: This category includes all types of consumer and
commercial electronic funds transfer such as ATM and credit card
transactions, electronic commerce, and interactive and home banking.
To date, efforts to secure these transactions have been focused on
protecting the card from fraudulent use by means of PINs, passwords
and signature comparison. A much higher level of security can be
obtained by positively linking the card to the cardholder and the
account to the accountholder through finger imaging. This category
also includes government based electronic benefits transfer
applications.
- Physical Access Control: Physical access control includes access to
all types of facilities, as well as applications in time and
attendance, immigration, border control, building security, and
airport security. Also included in this category are home, hotel,
and vehicle security.
Market Focus
Identicator Technology sells its products and solutions primarily through
large systems integrators such as Unisys Corporation, Lockheed Martin
Corporation, and Polaroid Corporation, PC OEMs, such as Compaq Corporation, and
peripheral manufacturers, such as KeyTronic Corporation, together with many
smaller systems integrators and value added resellers that access intermediate
markets. Historically, sales have been primarily driven through the criminal
justice and civil markets.
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<PAGE>
For example, Unisys has integrated the Company's hardware and software into 700
ATMs in Spain with over 1 million smart cards produced using Identicator
Technology's finger template stored in the cards specifically designed for
disbursement of government benefits. Polaroid has integrated Identicator
Technology's products in various Drivers License Bureaus, including West
Virginia and Georgia.
While the criminal justice and civil market applications have established
the capture, storage, analysis, and transmission of finger imaging as a
solution for personal identification and user authentication, Identicator
Technology believes that the commercial market potentially may become the
largest market for finger identity security due to the need for identity
security and the proliferation of technology, information, and data exchange.
Identicator Technology believes that it is well positioned to take advantage of
the commercial markets with its leading edge technology, products, and
significant installed base.
Strategy
Identicator Technology's overall strategy is to be the industry leader by
establishing strategic relationships with, and licensing and selling its
products to, established industry distribution partners and channels for
incorporation into their existing PC device product lines. Key relationships
with major PC OEMs, peripheral manufacturers, software publishers, and systems
integrators have already been established.
Proprietary Technology
Identicator Technology principally relies upon a combination of copyright,
trade secret, contract and, to a limited extent, patent law to establish and
protect its proprietary rights. In order to protect its trade secrets and
proprietary know-how, Identicator Technology enters into confidentiality
agreements with its employees, consultants, service providers, and third
parties. There is a risk that these agreements may be breached, and the
remedies available to Identicator Technology may not be adequate. In addition,
Identicator Technology's trade secrets and proprietary know-how may otherwise
become known or be independently discovered by others.
65
<PAGE>
IDT'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with IDT's
Consolidated Financial Statements and related notes included elsewhere in this
prospectus. The following discussion may contain predictions, estimates, and
other forward-looking statements that involve a number of risks and
uncertainties. See "Risk Factors" beginning on page 13 for a discussion of
certain factors that could cause actual results to differ from those described
in the following discussion and "Special Note Regarding Forward-Looking
Statements" on page 12.
Overview
IDT designs, develops, markets and, through subcontractors, manufactures
electronic identification systems with particular emphasis on finger imaging
for use in the civil and criminal justice systems as well as in a broad range
of commercial applications, including information technology, Internet,
physical access control, banking, data/network security, and electronic
commerce.
IDT generates revenues from sales of hardware and software products. In
addition, during a five year period which ended June 30, 1998, IDT received
significant royalty payments from one customer, Unisys. IDT expects future
revenues to include hardware and software license fees in addition to sales
from hardware and software product shipments.
Identicator Technology, a California general partnership (the
"partnership"), was a joint venture between Identicator Corporation and
International Technology Concepts, Inc. (the "partners"). On September 30,
1998, ownership of substantially all of the assets and business of the
partnership was transferred to Identicator Technology, Inc., a wholly owned
subsidiary of IDT.
IDT purchases certain inventory from International Technology Concepts, Inc.
In addition, the partnership paid commissions and fees for administrative
support to both International Technology Concepts, Inc. and Identicator, Inc.
Management of Identicator, Inc. is involved in the day to day management of
IDT.
Results of Operations
Years Ended December 31, 1998 and 1997
Revenues. Total revenues for 1998 were $4,378,000, up 37% from the revenues
of $3,194,000 for 1997.
Product sales increased 75% to $3,769,000 in 1998 versus $2,158,000 during
1997. Of the increase in revenues, $1,388,000 resulted from sales to one
customer, Key Tronic Corporation. Key Tronic purchases IDT's newest product,
the DFR-200, for integration into keyboards produced for Compaq Corporation as
well as for integration into its own products.
The increase in product sales was partially offset by a decrease in royalty
revenues, primarily from Unisys, which were $609,000 in 1998, down 41% from
$1,036,000 in 1997. Unisys has a license from Identicator Technology for the
use of its technology. The customer's initial contractual
66
<PAGE>
obligation to pay fixed quarterly royalties to IDT expired in March 1998,
accounting for the decrease. The current license provides for royalty payments
based on purchases.
Gross Margin. Total gross margins in 1998 were 54% of total revenues
compared to 79% for 1997. Gross margins for product sales declined to 46% in
1998 compared to 69% for 1997 as a result of start-up costs associated with the
launch of the DFR-200 as well as from sales of the DFR-200 which is a higher
volume, lower margin hardware product compared to IDT's other hardware
products. Sales from the DFR-200 are expected to become a larger proportion of
overall revenues, which should have the effect of lowering overall margins in
the future. The lower Unisys royalty revenue in 1998 also contributed to the
overall gross margin decline.
Research and Development. Research and development expenses consist
primarily of payments to International Technology Concepts, Inc. for salaries
and benefits of hardware and software engineers and related supporting
infrastructure. Research and development expenses increased to $1,440,000
during 1998, or 33% of total revenues, compared to $1,019,000, or 32% of total
revenues, in 1997. IDT continued to fund increasing amounts of research and
development for future hardware and software products and enhancements. In the
future, IDT expects to continue to increase its absolute dollar spending on
research and development, although not necessarily as a percentage of total
revenues.
Sales and Marketing. Sales and marketing expenses consist primarily of
payments to Identicator, Inc. for salaries and benefits of sales and marketing
personnel and related supporting infrastructure, marketing consulting services,
advertising and promotion costs. Sales and marketing expenses increased to
$1,289,000 during 1998, representing 29% of total revenues, compared to
$854,000, or 27% of total revenues, for 1997. Investments in sales and
marketing personnel to expand the customer base and open additional sales
channels primarily accounted for the higher spending level.
General and Administrative. General and administrative costs consist
primarily of payments to Identicator, Inc. for executive management salaries
and benefits and accounting and administrative services, legal services,
provisions for uncollectible accounts receivable and miscellaneous overhead
expenses. General and administrative expenditures were $889,000 in 1998, or 20%
of total revenues, up from $510,000, or 16% of total revenues, for 1997. The
increase in general and administrative expenses was primarily attributable to
additional executive management level consulting costs and to a lesser degree
payment of certain legal and other expenses associated with the reorganization
in which the partnership was restructured into Identicator Technology, Inc., a
Delaware corporation. Legal and accounting fees incurred in connection with the
proposed merger totaling $121,000 also contributed to the increase in expenses.
These increased expenses were partially offset by lower provisions for doubtful
accounts compared to 1997.
Stock Compensation. In September 1998, IDT issued options to purchase
1,944,334 shares of its common stock to current and former employees,
shareholders and consultants of Identicator Corporation and International
Technology Concepts, Inc. All options were issued to non-employee service
providers of IDT and were therefore recorded at fair value. Of the total,
options for 1,247,167 shares vest over time; therefore, IDT recorded deferred
stock compensation on the grant
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date of $7,227,000 and related amortization expense at December 31, 1998 of
$602,000. Options subject to future vesting are accounted for as variable
options and are subject to remeasurement at each balance sheet date. At
December 31, 1998 the fair value of the options subject to vesting was
remeasured at $10,850,000. The remaining 697,167 options related to options
issued in exchange for options of Identicator Corporation in connection with
the recapitalization and reorganization. Substantially all of these options
were fully vested and, accordingly, $4,040,000 was recorded as stock
compensation expense on the date of grant. There was no stock compensation
expense for the comparable period of 1997. See Note 8 to IDT's Consolidated
Financial Statements.
Years ended December 31, 1997 and 1996
Revenues. Total revenues for 1997 were $3,194,000, up 4% from the revenues
of $3,061,000 for 1996.
Product sales increased 12% to $2,158,000 in 1997 compared to $1,929,000 in
1996. The increased sales primarily resulted from higher hardware and software
product shipments. The introduction of IDT's DFR-100 product also contributed
to the sales increase.
The increase in revenues were partially offset by a decrease in royalty
revenues from Unisys which fell to $1,036,000 in 1997 from $1,132,000 in 1996,
a decline of 8%.
Gross Margin. Total gross margins increased to 79% of total revenues in 1997
from 75% of total revenues in 1996. The increase primarily resulted from an
improved product mix and higher margins from the DFR-100, which was launched
late in 1996.
Research and Development. Research and development expenses increased to
$1,019,000 in 1997, representing 32% of total revenues, compared to $792,000,
or 26% of total revenues, in 1996. The growth in expenses consisted of
additional salaries and benefits of $144,000 and facilities charges of $47,000
to further develop IDT's products, particularly the DFR-200 and related
software enhancements.
Sales and Marketing. Sales and marketing expenses increased to $854,000 in
1997, or 27% of total revenues, from $628,000, or 21% of total revenues, in
1996. Added sales and marketing resources accounted for most of the increased
spending while expanded promotional activity also contributed to the increase.
General and Administrative. General and administrative expenditures were
$510,000 in 1997, or 16% of total revenues, compared to $430,000, or 14% of
total revenues, in 1996. This increase was due to the establishment of higher
reserves for potentially doubtful accounts receivable as a result of a
comprehensive analysis of unpaid accounts and consistent with significantly
higher levels of accounts receivable in 1997 versus 1996 based on higher sales
activity. IDT continues to pursue collection of a large portion of the doubtful
accounts and accordingly has not written off these accounts to the reserves.
Taxation
No provision for income taxes has been recorded. Prior to September 30,
1998, the partnership was not a taxpaying entity as each partner was
individually liable for its own tax payments. IDT incurred a loss in the period
from October 1, 1998 to December 31, 1998.
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Liquidity and Capital Resources
As of December 31, 1998, IDT's principal sources of liquidity consisted of
$76,000 in cash and a bank line of credit.
Cash used in operating activities during the year ended December 31, 1998
was $435,000, compared to cash used in operating activities of $358,000 during
the year ended December 31, 1997. During 1998, cash used in operating
activities consisted of the net loss of $5,978,000 (including $4,642,000 in
non-cash charges primarily related to stock compensation expense) and increases
in accounts receivable, partially offset by increases in deferred revenue,
accrued liabilities and accounts payable. In 1997, cash used in operating
activities consisted of net income of $146,000, offset by greater increases in
accounts receivable and inventory.
IDT used cash of $308,000 and $101,000 in investing activities for the year
ended December 31, 1998 and 1997 , respectively, consisting of purchases of
property and equipment.
IDT's financing activities during the year ended December 31, 1998 provided
cash of $500,000 from the proceeds of a Note and Warrant Purchase Agreement.
The principal on the note issued pursuant to this agreement is due June 5, 2000
and interest of 5.5% on the principal outstanding is due semi-annually.
Warrants to acquire up to 60,000 shares of IDT's Series A preferred stock at an
exercise price of $9.00 per share were issued in conjunction with the issuance
of this Note. The exercise price of the warrant was subsequently amended to be
$5.00 per share of Series A preferred stock.
At December 31, 1998 the Company had approximately $1 million in
noncancelable purchase commitments with suppliers. The Company expects to sell
all product which it has committed to purchase from suppliers.
On December 31, 1998, IDT had a $1,000,000 bank line of credit secured by
all of its assets. Under the line of credit, amounts borrowed are limited to
80% of qualifying accounts receivable. Amounts drawn under the line of credit
bear interest at the bank's prime rate of interest plus 1%. The bank's prime
rate was 7.7% at December 31, 1998. The line of credit expires in July 1999. At
December 31, 1998, the Company was not in compliance with the covenants under
the line of credit; however, the bank granted a waiver as of that date.
In February 1999, the bank line of credit was amended to increase the amount
available under the line to $1,500,000 and to remove the financial covenants.
At the same time as the amendment, Identix issued a standby letter of credit to
the bank to secure repayment of amounts drawn by IDT under the line of credit.
IDT is required to reimburse Identix for all draws on the letter of credit,
interest on any draws, and fees and expenses associated with the letter of
credit. If the merger agreement is terminated, IDT is required to use its best
efforts to obtain a release of Identix from the letter of credit.
Management of IDT believes that amounts available under the amended line of
credit will be sufficient to fund IDT's operations through March 2000. In the
event the merger is not completed as currently contemplated, IDT will likely be
required to raise additional equity or debt financing in order to meet its
working capital needs beyond March 2000 and in order to release Identix under
the standby letter of credit. IDT management has had discussions with several
lenders and believes that it will be
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able to obtain sufficient amounts of debt financing. There can be no assurance,
however, that IDT would be able to obtain any financing or that the terms of
any financing would be favorable to IDT.
Year 2000 Compliance
IDT has evaluated the products and services it offers, and has begun an
assessment of its internal information technology infrastructure, in an effort
to determine whether it or its customers may have exposure to Year 2000
problems 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 Company has also begun to make inquiries of its key suppliers to determine
their readiness with respect to Year 2000 problems.
IDT's products are not date dependent. Nevertheless, IDT's software products
run on operating systems developed and sold by Microsoft Corporation. IDT's
products are dependent upon the error-free operation of such systems. IDT has
not conducted its own tests to determine to what extent the operating systems
fail to properly recognize Year 2000 dates.
IDT has conducted a preliminary review of its internal information
technology and non-information technology systems. IDT has not conducted its
own tests or surveyed vendors to determine whether off-the-shelf software that
is used in its computer systems is Year 2000 compliant. IDT does not employ
non-information technology systems which are material to its operations.
IDT is at risk of disruption to its business, cost structure and revenues if
Year 2000 problems are experienced by its key suppliers or customers. IDT is in
the very early stages of assessing the readiness of its key suppliers and
customers with respect to potential Year 2000 problems. To date, IDT has made
inquiries regarding Year 2000 problems of only one of the four turnkey
manufacturers which produce IDT hardware and software products, International
Technology Concepts, Inc. IDT plans to survey the remainder of its key
suppliers, application vendors and other information technology suppliers to
determine their readiness with respect to Year 2000 problems. IDT will be able
to better determine what actions may be necessary to address potential problems
with key suppliers, application vendors and other information technology
suppliers after it receives responses back from these suppliers, application
vendors and other information technology suppliers.
To date, the costs for conducting IDT's Year 2000 assessment have not been
material. IDT is currently unable to predict to what extent its business may be
affected if any of its key suppliers or customers or products operating in
conjunction with third-party supplied software or hardware experience a
material Year 2000 problem. Any Year 2000 problem that affects the operation of
IDT's software applications or products could result in delay or loss of
revenue, cancellation of customer contracts, diversion of development
resources, damage to IDT's reputation, increased service and warranty costs,
and litigation costs, any of which could materially adversely affect IDT's
business, financial condition and results of operations.
The Year 2000 problem is pervasive and complex and there can be no assurance
that IDT has been or will be able identify all of the Year 2000 issues that may
affect IDT or that any remedial efforts it takes will adequately address any
potential Year 2000 problems.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF IDT
The following table sets forth information regarding IDT's outstanding
shares of common stock beneficially owned as of December 31, 1998 by: (1) each
person who beneficially owns more than five percent of the outstanding common
stock; (2) all directors; (3) all named executive officers, and (4) all
directors and executive officers as a group.
<TABLE>
<CAPTION>
Number of Percent of
Name and Address Shares Class
---------------- --------- ----------
<S> <C> <C>
International Technology Concepts, Inc.(1)........... 1,358,881 49.8%
11501 Dublin Boulevard #101
Dublin, CA 94568
Oscar Pieper(2)...................................... 562,100 18.6%
1150 Bayhill Drive, Suite 215
San Bruno, CA 94066
Grant Evans.......................................... 74,000 2.6%
Harry F. Camp........................................ 555,867 18.6%
1150 Bayhill Drive, Suite 215
San Bruno, CA 94066
Yuri Khidekel(1)..................................... 1,553,531 53.2%
11501 Dublin Boulevard #101
Dublin, CA 94568
Yury Shapiro(1)...................................... 1,518,173 52.6%
11501 Dublin Boulevard #101
Dublin, CA 94568
All directors and executive officers as a group(1)
(6 persons)......................................... 2,924,790 78.4%
</TABLE>
- --------
(1) Includes 1,358,881 shares held by International Technology Concepts, Inc.
Mr. Khidekel and Mr. Shapiro as well as Naum Pinkhasik and Michael Pruss,
are each an officer, director and principal shareholder of International
Technology Concepts, Inc., and as such have the ability to influence the
voting and disposition of the listed shares. Mr. Khidekel, Mr. Shapiro, Mr.
Pinkhasik and Mr. Pruss each disclaim beneficial ownership of shares held
by International Technology Concepts, Inc.
(2) Includes 263,100 shares held by the Pieper Family Trust dated 3/29/95.
The above table includes, for each of the persons and the group listed
below, shares subject to stock options and assumes that no other person has
exercised any outstanding warrants or options since December 31, 1998. All such
options are fully exercisable, but are subject to a right of repurchase at cost
by IDT which lapses ("vests") over 48 months from grant. In addition, options
will vest upon the closing of the merger to the extent shown below. For
purposes of the table below, the number of options that are vested within 60
days of December 31, 1998 is used as the number of options vested before the
merger.
<TABLE>
<CAPTION>
Total
Number of Portion of
Shares Options
Subject Vesting
to Upon
Options Merger
--------- ----------
<S> <C> <C>
Oscar Pieper........................................ 299,000 0
Grant Evans......................................... 74,000 27,689
Harry F. Camp....................................... 255,667 0
Yuri Khidekel....................................... 194,650 166,264
Yury Shapiro........................................ 159,292 136,062
All directors and executive officers as a group..... 1,002,609 337,499
</TABLE>
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BUSINESS OF IDENTIX
Overview
Identix is a leader in designing, developing, manufacturing and marketing
comprehensive solutions for the capture or comparison of fingerprints for
security, fraud prevention, law enforcement and other applications. Identix's
products are classified into two groups: (i) biometric security products that
verify the identity of an individual through the unique biological
characteristics of a fingerprint and (ii) biometric imaging products that
electronically capture forensic quality fingerprint images directly from an
individual's fingers for law enforcement and other applications.
At the core of Identix's biometric security and biometric imaging products
are its proprietary fingerprint capture technologies. Identix's products employ
patented algorithms and proprietary customizable application software suites,
as well as industry leading expertise in optics and high resolution printing
technology. Identix's technologies and know-how enable it to produce biometric
solutions for federal, state and local governmental entities and commercial
customers worldwide. As of June 30, 1998, Identix had shipped over 15,000
biometric security products to customers in over 40 countries through its
worldwide network of sales offices and distributorships. In addition, law
enforcement and other government agencies in 38 states and four foreign
countries have installed Identix biometric imaging products.
Through ANADAC, Identix provides information technology, engineering and
management consulting services, including the installation and integration of
Identix products, to private and public sector clients. Identix also formed a
joint venture in September 1997 with Sylvan Learning Systems, Inc. for the
purpose of providing fingerprinting services through Sylvan's testing centers
nationwide.
Biometric Industry Overview
The analysis of unique biological characteristics of an individual, also
known as biometrics, is being used increasingly for identification and
verification purposes. Examples of unique biological characteristics that can
be used to identify an individual include fingerprints, retinal blood vessel or
iris patterns of the eye, hand geometry, voice and facial structure. Among
these, fingerprint analysis has gained the most widespread use for biometric
identification and verification purposes. Fingerprint analysis is an accurate
and reliable method to distinguish one individual from another, employs well-
developed and proven technology and processes and is viewed as less intrusive
relative to certain other biometric identification methods. The process of
capturing, storing, retrieving and comparing fingerprints has become
increasingly automated as a result of advances in optics, electronics and
computing. These advances have enabled fingerprint identification technology to
be used to confirm an individual's identity for a variety of commercial and
governmental applications.
Biometric Security
The costs of fraud are estimated to be in the billions of dollars each year
in the United States alone. In addition, damages resulting from security
breaches, such as unauthorized persons gaining improper access to confidential
information, may not be quantifiable, but can be equally as
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problematic. Accordingly, the ability to verify the identity of a specific
individual is of critical importance in reducing acts of fraud and increasing
security. Each day an individual is required to identify himself numerous times
with something the individual has in his possession or with the knowledge of
certain information, such as:
. magnetic stripe cards and PINs to transact business at ATMs or point-
of-sale terminals; passwords to log-on to a computer or a computer
network;
. keys, cards or passwords to enter the workplace;
. PINs, passwords and account numbers to complete a commercial
transaction on-line; credit cards to make a credit purchase;
. time cards to begin work; and
. a driver's license to write a check or transact business at a bank.
However, these common verification methods generally cannot provide positive
identification. Keys, credit cards, ATM cards and card keys can be lost or
stolen. Passwords, account numbers or other information used for identity
verification can be divulged to or intercepted by unauthorized users through
electronic means and otherwise. In the workplace, time-and-attendance
information can be improperly altered by an employee punching a time card for a
tardy or absent co-worker.
The analysis of unique biological characteristics offers a more accurate
method of verifying an individual's identity. Over the last decade,
technological advances, including significant advances in two-dimensional
imagers, high performance microprocessors and computer memory, have enabled the
commercial development of equipment to read, record and analyze unique
biological data. Potential applications of biometric identification systems
span a broad range and include computer database and network access and
security, computer software, intranet and Internet security, electronic
commerce, communications devices, point-of-sale terminals, bank transaction
authorization, facility access and security, ATMs, time-and-attendance, home
security and automobiles. However, implementation of biometric equipment for
these diverse applications may require network management software, customer-
specific applications software and interfaces that allow integration with the
customer's existing computer systems to provide complete biometric solutions.
Biometric Imaging
Fingerprint images have emerged as an important means of identification and
verification in both government and civilian markets. In law enforcement in
particular, fingerprint identification is widely utilized and has been accepted
by courts around the world. Historically, fingerprints have been collected
using the traditional "ink-and-roll" process. Typically, this process starts at
the local law enforcement agency where usually three or more complete sets of
ink-and-roll prints are taken, one for the local agency, one for the state and
one for the Federal Bureau of Investigation. The FBI reports that it currently
receives over 34,000 fingerprint cards each work day. The fingerprint is then
compared at the local agency, state and/or FBI with a database of fingerprints
by means of an Automated Fingerprint Identification Systems ("AFIS"), a
computer system developed in the 1970s which uses minutiae-based recognition
algorithms which detect fingerprint characteristics to
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accomplish fingerprint matching. Before the AFIS can make the comparison, an
ink-and-roll card is run through a scanner which creates a digital image of the
fingerprint. The AFIS then compares the digital image with an existing database
of fingerprints to identify an individual if that individual's fingerprint is
in the database and, at the same time, updates the database with that
fingerprint image.
While the advent of computerized AFIS systems significantly improved the
ability to compare fingerprints against large databases of fingerprints, the
manual process of collecting and mailing ink-and-roll cards to the agency that
maintains the AFIS and scanning the fingerprint image into the AFIS has led to
significant bottlenecks. In addition, the fingerprinting process can be
complicated by a lack of cooperation of the person being fingerprinted, the
need to take multiple sets of prints and operator error. Various agencies have
reported that in excess of 30% of the cards are rejected because prints are
smudged or applied incorrectly. If the FBI or state agency rejects the card,
the local agency is often required to locate the individual, if possible, and
have another set of fingerprints taken. As a result, the time between taking a
set of fingerprints and receiving the results of the search may take several
days, several weeks or longer.
Live-scan biometric imaging systems, which electronically capture and
digitize an image of the fingerprint directly from a person's finger, were
developed to replace the manual ink-and-roll process. The digitized fingerprint
image captured by the live-scan system can then be compared with a database of
stored fingerprint images by an AFIS. If a state or federal agency can receive
electronic fingerprint cards, then the image can be electronically relayed to
that agency for comparison and the results can be returned to the local agency
within minutes or hours. In addition, because the fingerprint images are
captured electronically, multiple cards can be printed from one set of images,
eliminating the need to roll the fingerprint numerous times. Live-scan systems
also generally have quality assurance features that help reduce the chance of
operator error during the fingerprinting process.
A number of domestic and certain international law enforcement communities
are in the process of converting from manual ink-and-roll fingerprint capture
to live-scan fingerprint capture. In the United States, the FBI has undertaken
a major program to upgrade its Identification Division and has announced that
its goal is to bring its new identification facility on-line and to receive a
majority of fingerprint submissions electronically. This announcement by the
FBI, coupled with increased automation at the federal and state levels, has
prompted other federal, state and local agencies to adopt live-scan systems as
their primary method for conducting background and identification checks. Other
federal agencies, including Immigration and Naturalization Service, Internal
Revenue Service, U.S. Drug Enforcement Agency, U.S. Marshals Service and the
U.S. Secret Service use live-scan systems to perform identification and
background checks.
The ability to capture a forensic quality fingerprint image electronically
and compare that fingerprint with a database of fingerprint images also has
important non-law enforcement applications, such as conducting employee
background checks, including jobs in federal or state government, banking,
airport, child care, stock brokers and other securities professionals or
gaming, or screening potential foster parents. Millions of fingerprint cards
are taken each year in the United States for civilian purposes. Traditionally,
local police stations have performed this service, with completed fingerprint
cards submitted to state authorities or the FBI to perform a background
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investigation. This process usually takes several weeks to complete. In
addition, if an ink-and-roll fingerprint card is rejected, an applicant must go
through the process again, which can delay further an applicant's start date.
In some cases, employers or agencies find themselves with such a backlog of
applicants awaiting fingerprinting or results of the background check that they
allow applicants to start the job without the background check being complete,
placing the employer at risk if an applicant has a criminal record. The need
for reliable and convenient fingerprint capture in a non-law enforcement
environment and the need to streamline the background checking process have
created a demand for live-scan products and fingerprinting services.
The Identix Solution
Identix has developed an industry-leading set of biometric security and
imaging solutions for security, fraud prevention, law enforcement and other
applications. The core of Identix's products are proprietary fingerprint
capture technologies developed through the application of Identix's
understanding of the science of fingerprint biometrics, optics, algorithms,
computing and networking.
Biometric Security Solutions. In the biometric security market, Identix
provides a comprehensive line of integrated biometric hardware and software
solutions for a variety of applications, providing Identix's customers with
significant improvements over traditional security and identification measures.
Identix believes its biometric security technology is the most widely used in
the world. Identix has sold over 15,000 biometric security products to
customers in over 40 countries through its worldwide network of sales offices
and distributorships to provide complete biometric solutions for a wide variety
of applications, including the following:
Building access: Numerous organizations have installed Identix's
biometric security products to secure building access, including the
Pentagon and various other United States government agencies, banks and
industrial plants.
Bank transaction authorization: Three large international banks use
Identix's biometric security products for transaction authorization.
Network and computer database security: Identix has and continues to
develop a wide range of enterprise level security solutions for
databases, network security, e-commerce and other emerging computer user
needs. For example, Identix through a joint development and marketing
agreement with Oracle Corporation, provides a biometric security solution
for use in authorizing access to Oracle's database software. In addition,
Identix has developed a biometric security solution for advanced user
biometric authentication for Computer Associate's Unicenter TNG system
management software.
Airport security: Identix's biometric security products have been chosen
for use in pilot programs at Chicago International O'Hare Airport to
develop a universal air cargo security access system and general door
access throughout the airport that is based on a combination of biometric
identification and smart cards.
Time-and-attendance: Woolworth's Limited, a major Australian supermarket
chain, uses Identix's biometric security products to maintain accurate
time-and-attendance records for in excess of 80,000 employees in over 500
stores.
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ATM service: Armaguard, an Australian armored car and cash carrying
company, uses Identix's biometric security products to secure access for
service personnel to approximately 1,200 ATMs across Australia.
Corrections: The California Department of Corrections and the California
Youth Authority are installing Identix's biometric security fingerprint
readers and networking software for physical access control in prisons
and CYA facilities statewide. The systems enable authorized staff members
to enter and exit secure areas, provide an exact record of each entry and
exit and alert security staff if authorized persons do not biometrically
check out of the secured areas when expected.
Identix believes that success in the biometric security industry requires
addressing the customer's needs by providing the necessary software
applications and necessary interfaces with the customer's legacy computer
systems. Identix has developed system management software to facilitate the
deployment of biometric security devices and to control and manage a
distributed network of biometric security devices. This management software
enables an authorized system manager to limit the scope of access of
individuals and can create an audit trail of entries, alarms, enrollments,
system changes and impostor attempts. Identix has also developed a number of
customizable software applications to address specific customer's
identification and verification requirements. These applications include:
. a secure sign-on for Windows NT,
. a specialized tracking system for correctional institution operations
(Bio-Sentinel), and
. identity verification for digital certificate authorization in
electronic commerce.
Identix has developed solutions to interface Identix's biometric security
products with customer legacy computer systems, including Oracle databases,
Computer Associates Unicenter TNG system management software, smart card
readers and legacy systems. In addition, Identix has also developed the
necessary software that encodes a smart card with fingerprint information used
to verify an individual's identity before authorizing a transaction.
Biometric Imaging Solutions. In the biometric imaging market, Identix has
established a leadership position by providing systems for the efficient
capture and management of digital fingerprint images and demographic data for
various law enforcement, immigration and civilian employment, screening and
background checks. Law enforcement and other government agencies in 38 states
and four foreign counties have installed Identix's biometric imaging products
for the following applications:
Law Enforcement: Identix provides live-scan systems for state-wide law
enforcement networks in California, Arizona, Texas, Illinois, Ohio, New
Jersey, Maryland and Georgia. Many large cities and counties also use a
network of Identix TouchPrint 600 live-scan systems for law enforcement,
including New York City Police Department, Cook County (Chicago)
Sheriff's Department, Boston Police Department and Detroit Police
Department.
Fingerprinting Services for Civilian Application: Identix recently
entered into a joint venture with Sylvan for the purpose of providing
fingerprinting services for a variety of
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civilian applications. The joint venture has statewide contracts with the
State of Illinois and the California Department of Social Services to
provide fingerprint services to screen applicants for licensing programs,
such as day care workers or foster parents. In addition, the joint
venture has programs with the American Banking Association and the
National Association of Securities Dealers for performing background
checks on banking and securities personnel.
Immigration: The INS uses Identix's biometric imaging products to perform
background checks on persons who enter the United States and persons
seeking naturalization.
Social services: Social service agencies in five states use Identix's
biometric imaging products to provide forensic quality images to identify
welfare recipients and prevent collection of benefits by the same person
under different names.
Motor vehicle licensing: Two states use Identix's biometric imaging
products to check whether driver's license applicants have received
and/or had revoked a license under different names in that state.
In order to meet the forensic quality standards required for identifying
individuals from within large AFIS systems, Identix has applied its optics and
image processing expertise to develop a system that it believes captures higher
resolution and more accurate images than other available systems. The Identix
fingerprint capture unit produces rolled finger and "slap" (four fingers at
once) images at 600 dots per inch and 500 dots per inch, respectively.
Identix's live-scan products contain proprietary high-resolution printing
technology and a number of proprietary software features, including data
management software and software for digitizing and processing fingerprint data
in accordance with FBI standards. Identix's expertise in networking and systems
integration has allowed it to implement large scale systems in some of the
largest law enforcement agencies in the United States to automate and improve
the efficiency of the identification process. In addition, Identix has
developed proprietary quality assurance software that can tell the operator if
a smudged or otherwise unreadable fingerprint image was captured, allowing the
operator to recapture the image and has developed capture sequence control
software that detects sequence errors resulting from the accidental rolling of
the wrong finger for placement on the fingerprint card.
Strategy
Identix's goal is to continue to develop and expand high level security
applications for information technology, banking, government and other
biometric security applications worldwide, to augment its presence in the
domestic biometric imaging markets and penetrate international biometric
imaging markets. The key elements of Identix's strategy include:
Deliver Comprehensive Biometric Solutions. In both the biometric imaging and
biometric security fields, Identix strives to provide comprehensive solutions
for its customers. Identix is able to deliver complete biometric security
systems for a range of different uses by integrating fingerprint image capture
devices, fingerprint analysis algorithms, operating systems to manage networks
of biometric devices and end-user software solutions that Identix believes best
meet the end-user's needs. Identix considers biometric security software and
algorithms to be critical in providing comprehensive customer solutions and
strives to maintain its leading edge in these areas, unlike
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certain other companies which are focusing solely on the development of image
capture devices. In the biometric imaging industry, Identix intends to offer
expanded capabilities to encompass all phases of the booking operation in a
single, integrated system, through modular expansion. In addition, Identix's
field service organization continues to expand the scope of its services to law
enforcement agencies, assisting in systems analysis and providing interfaces
between Identix and existing computer systems to improve the quality and
efficiency of records collection. In both biometric security and biometric
imaging, Identix seeks to continue to provide superior technical services and
responsiveness and complete customer solutions that meet or exceed
specifications.
Penetrate New Markets Through Strategic Relationships. Identix is
establishing strategic relationships with a select group of market leaders to
provide biometric security solutions for a variety of applications. An
extensive infrastructure already exists for many of the markets in which
Identix wishes to participate. In these cases, Identix has and will pursue
relationships with companies with strong positions in these markets. For
example, Identix has developed biometric security products in cooperation with
both Oracle and Computer Associates to enhance the security of their software.
In addition, Identix has developed relationships with two of the leading AFIS
suppliers in the world, Sagem Morpho, Inc. and NEC Technologies, Inc., to
provide forensic quality biomteric imaging to government agencies. In September
1997, Identix entered into a joint venture with Sylvan to provide
fingerprinting services. Identix intends to continue to focus on developing
strategic relationships with OEMs, system integrators and resellers who serve
as prime contractors for large, integrated systems in the domestic and
international markets.
Maintain and Enhance Leadership in Biometric Technology. Identix's success
depends on providing technologically advanced, cost-effective solutions.
Accordingly, Identix intends to continue to invest in research and development
and, where necessary, acquire companies or technologies that are complementary
to its business in order to maintain and enhance its leadership position in
biometric technology. These efforts include development of low cost fingerprint
capture devices, enhanced algorithms, applications software, integration tools
and software, highly integrated hardware designs, and mechanical and electronic
components designed for high volume production.
Maintain a Global Presence and Perspective. Identix believes that there are
many opportunities to apply biometric technologies throughout the world and
that solutions provided in one area of the world can be used in other regions
for customers with similar requirements. Where fraud is prevalent, biometric
solutions have the potential of providing immediate substantial savings.
Identix has established a regional sales and support presence in North and
South America, Australia, Europe and Asia to address opportunities throughout
the world.
Biometric Security Products
Identix's biometric security products operate by comparing an individual's
fingerprint with a previously recorded mathematical characterization, or
template, of that fingerprint. The template can be stored in a computer's
memory, in a stand-alone biometric security product or a smart card. When
requesting access or authorization the user identifies himself with a PIN or
coded identification card and then places his finger on the platen of the
biometric security system. The system compares the finger placed on the platen
with the stored template to confirm the user's identity. If the fingerprint and
the stored template match, the user is positively identified and access or
transaction processing is
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authorized. If the fingerprint and the stored template do not match, access or
transaction processing is denied.
TouchSafe II and TouchNet II. TouchSafe II and TouchNet II for Oracle are
used for controlling access to computers, computer databases and networks in a
wide range of solutions including government, airports, banking and healthcare.
TouchSafe II and TouchNet II are designed to be connected to both personal
computers and sophisticated client/server networks to provide advanced user
authentication through Identix developed solutions, such as the Oracle and
Computer Associates specific solutions, or third party custom developed
solutions. TouchNet II features data hashing security which encodes and decodes
network-based communications and fingerprint data for heightened security.
TouchSAFE Personal and TouchNet III. TouchSAFE Personal and TouchNet III
serve the same market applications as TouchSafe II and TouchNet II. Both
products connect to the host computer via a serial interface and perform
enrollment and verification functions within the device using Identix
proprietary pattern-matching algorithms and either a custom ASIC microprocessor
or an off-the-shelf microcontroller. Both products will operate with all
Identix biometric security systems and application software. TouchSAFE Personal
also incorporates an optional internal smart card read/write device, all within
its streamlined desktop configuration. Identix believes that these products can
provide identity authentication on computer networks for electronic commerce,
database access and other computer-related information and data security
applications.
TouchLock II. TouchLock II is an access control system which may be used in
many different applications, including securing access to physical space such
as buildings, vaults and ATMs or authorizing financial transactions. TouchLock
products, which are very rugged and recognized for their mission-critical
reliability, have been installed in the Pentagon and various other United
States government agencies and in banks and industrial plants around the world.
These products may be connected in a network configuration through a personal
computer and have the flexibility to permit access to designated entry points,
thereby allowing a customer to install different levels of security at
different locations within the same system. In addition, TouchLock II can be
used as a stand-alone system eliminating the need for a personal computer or
network connection. TouchLock II is also marketed under the name Fingerscan
internationally.
TouchClock II. TouchClock II is specifically designed for employee time-and-
attendance applications, to be used as an alternative to, or in conjunction
with, traditional punchcard time-and-attendance systems. TouchClock II can
track an individual's time of arrival and departure as well as breaks.
TouchClock II is based on the same core proprietary technology as TouchLock II.
TouchBlock II, TouchBlock 2.5 and F3. Identix sells fingerprint
identification kits to OEMs consisting of a tooled optics subsystem, custom
integrated circuit or off-the-shelf microcontrollers, and supporting software
modules which allows biometric identification to be integrated into third party
OEM systems.
Fingerlan III. Fingerlan III is system management software for use with
TouchLock designed to allow the authorized system manager the ability to limit
access of specific individuals to
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certain times or to certain locations, as well as to create an audit trail of
all entries, alarms, enrollments, system changes and impostor attempts.
Fingerlan III is compatible with Microsoft Windows.
Application Software. Identix's biometric security software products
comprise two major categories: applications developed internally and software
interfaces to third party products. Applications developed internally include a
secure sign-on for Windows NT, a specialized tracking system for correctional
institution operations (Bio-Sentinel), and identity verification for digital
certificate authorization in electronic commerce. Identix has developed
solutions to interface Identix's biometric security products with customer
legacy computer systems, including Oracle databases, Computer Associates
Unicenter TNG system management software, smart card readers and legacy
applications. In addition, Identix has also developed the necessary software
that encodes a smart card with fingerprint information used to verify an
individual's identity before authorizing a transaction. Identix works with its
customers to develop software applications and provides software developer kits
for customized applications.
Algorithms. Identix has developed patented pattern recognition algorithms
that operate on an entirely different basis than the minutiae-based algorithm
used in law enforcement and in other commercially available biometric security
products.
Biometric Imaging Products
Identix's biometric imaging products are used for the capture, storage and
management of high resolution forensic quality fingerprint images and other
identifying information.
TouchPrint 600 Live-Scan System. Identix's TouchPrint products are computer-
based, inkless live-scan systems that electronically scan and capture forensic
quality fingerprint images directly from an individual's finger. The
fingerprint images then can be printed using a laser printer or transmitted
over telephone lines or a wide area network to AFIS systems for identification
matching at local, state or federal agencies. TouchPrint was designed for use
by law enforcement agencies as a more accurate and efficient method of
recording fingerprint and demographic information than the conventional "ink-
and-roll" method. The TouchPrint 600 workstation and printer system was the
first system accredited under the FBI's Image Quality Specifications standard.
Accreditation to this specification is required for direct electronic
submission of fingerprint images to the FBI's integrated AFIS. In addition to
law enforcement applications, other applications for the TouchPrint systems
include background checks of prospective employees by public and private sector
employers. TouchPrint 600 systems typically integrate a high resolution scanner
with digital signal and video processing boards, multi-processing application
software, a multi-tasking computer, monitors as well as a laser printer
enclosed in a cabinet.
TouchPrint 600 Card Scan System. The TouchPrint 600 Card Scan System
provides digitization of inked fingerprint images that were originally recorded
on 10-print card stock. The TouchPrint 600 Card Scan System is designed to be
used primarily by lower volume booking sites that want to participate in an
electronic fingerprint identification network. The TouchPrint Card Scan System
has a flat-bed scanner on which the user places the inked fingerprint card. The
system checks for lateral and angular misalignment of the card, digitizes the
complete card, applies automatic
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contrast equalization and extracts the digital image of each individual
fingerprint on the card. The digitized fingerprint record can be forwarded by
mail or electronically for identification processing by the FBI, or a local or
state AFIS or for archive at a central records repository.
TouchPrint 600 Palm Scanner. The TouchPrint 600 Palm Scanner is an inkless
live-scan system that electronically captures high quality palm images for
forensic matching. The TouchPrint 600 Palm Scanner can be integrated with
existing TouchPrint 600 live-scan networks. The palm images can be transmitted
to identification bureaus for examination using existing TouchPrint 600
communication software and printed using existing TouchPrint 600 printing
systems with upgrade.
TouchView II. TouchView II is specifically designed to capture and display a
high resolution video fingerprint image on a customer-supplied workstation.
TouchView is designed to be used primarily by system integrators as an optical
fingerprint capture device which supplies fingerprint images to a frame grabber
which digitizes the image for computerized fingerprint database systems for
identification matching. Identix's TouchView single-finger imagers are
incorporated by OEMs into turnkey systems and are used for civilian
applications in welfare fraud prevention, immigration and border control, and
motor vehicle licensing.
DocuColor. The DocuColor mugshot and image file management system is an
image management system that provides the capability to create an "electronic
file folder" containing color video images, document images, fingerprints,
forms and digitized data. The system provides compact storage and easy
retrieval of a large volume of criminal justice information so that a user can,
by querying the system and utilizing certain physical characteristics of a
suspect, produce from a search of thousands of suspect records a photo line-up
for comparison. The system operates on a personal computer workstation. A
digital video camera is used for capturing color photographs and a high
resolution scanner is used to digitize documents to store in an electronic file
folder. A high-capacity relational database is used to index and store
information and images. Images and data from the electronic file folders can be
displayed on high resolution monitors or printed on black and white or color
printers. The DocuColor system provides networking capabilities to allow
multiple users access to a central database and image storage system.
TouchPrint 600 Store & Forward System. The TouchPrint 600 Store & Forward
System located at central processing sites manage the flow of electronic
fingerprint records from a network of TouchPrint live-scan systems. The high-
performance, multi-function Store & Forward platform simultaneously supports
record receiving, interactive record editing, selective record transmitting and
record printing on locally attached printers.
TouchPrint 600 Print Server. TouchPrint 600 Print Servers provide automated
receipt and printing of live-scan fingerprint records at remote or central
facilities. High-capacity record storage options ensure uninterrupted record
flow during peak load periods.
Software. The TouchPrint 600 live-scan comes with Identix's proprietary user
interface software, which can be custom configured to meet the demanding
demographic data entry and specialized workflow requirements of law enforcement
agencies. TouchPrint's Image Quality Assurance software automatically checks
each fingerprint image and alerts the operator if the fingerprint should be re-
scanned. In addition, Identix offers software options such as AccuCapture
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Sequence Control that provides true "slap-to-roll" comparison eliminating
fingerprint sequence errors by the live-scan operators. The TouchPrint 600 also
supports selective management reporting functions to evaluate system and
operator performance.
Fingerprint Services
Certain employers, including federal or state government agencies, child
care, securities and gaming licensing agencies, require a background check,
including a fingerprint check, as a condition of employment. Usually, an
applicant is required to go to a police station for ink fingerprinting and then
submit the fingerprint card to the employer for submission to the state
authorities or the FBI to perform a background investigation. If the
fingerprint card is rejected, an applicant then must go through the process
again.
The need for reliable and convenient fingerprint capture for diverse
applications has given rise to the fingerprinting business. In September 1997,
Identix and Sylvan entered into a joint venture to pursue opportunities created
by this demand for fingerprint services. The joint venture provides
fingerprinting services on a contract basis using Identix live-scan systems at
locations provided by government agencies or Sylvan and through mobile units
which are dispatched from a central location and make periodic visits to
different locales. The business maintains an "800" number which people can call
to find out the most convenient location for them to have fingerprints taken,
including the times at which mobile units are servicing various locations, and
to schedule an appointment. The joint venture earns a fee for each user of the
services. The joint venture has statewide contracts with the State of Illinois
and the California Department of Social Services to provide fingerprint
services to screen applicants for licensing programs, such as day care workers
or foster parents. In addition, the joint venture has established programs with
the American Banking Association and the National Association of Securities
Dealers for performing background checks on banking and securities personnel.
The fingerprint services business provides the applicant and employer with
the following advantages: fingerprinting takes place in a non-police
environment; background checks can be completed more quickly allowing the
applicant to begin work sooner; re-submissions can be done automatically; the
rejection of cards because of poor print quality is virtually eliminated; and
employers may not be subject to the unnecessary risk of discovering that an
employee who has begun work may have a criminal record.
ANADAC Services
Identix provides information technology, engineering and management
consulting services to private and public sector clients through ANADAC, which
is headquartered in Arlington, Virginia. 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. ANADAC provides these services through the following
groups and subsidiary:
Information Technology Group. ANADAC's Information Technology Group provides
business process analysis and business process engineering as well as system
design, development,
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integration and implementation services to automate a client's workflow thereby
improving operational efficiency and solving business problems. The IT Group's
solutions incorporate a variety of technologies such as digital imaging,
biometric imaging, networking, relational database development and management,
telecommunications and integration of nonhomogeneous software and hardware into
a single homogeneous environment.
The IT Group focuses on providing acquisition, design, development and
integration support for imaging systems in a variety of different applications
ranging from law enforcement to office and business applications to automated
storage and retrieval. The IT Group utilizes Identix's DocuColor image file
management system to provide customers a file management system that allows
users to capture, catalog, index, store and retrieve data, digital video images
and document images using a file folder paradigm. The IT Group also develops
and implements biometric solutions using Identix's products. For example, the
IT Group has been a systems integrator for the Maryland Department of Public
Safety and Cook County Sheriff's Department whereby they integrated Identix's
TouchPrint 600 live-scan system, Identix's DocuColor mugshot and file
management system and the customers' criminal justice information systems. The
IT Group also functioned as the software development facility to integrate
Identix's TouchLock and TouchSafe product lines into Computer Associates
Unicenter TNG system management software and Identix's Bio-Sentinel software.
The IT Group also designs and implements other imaging systems using "off- the-
shelf" or commercially available products that satisfy its clients'
requirements.
The IT Group has used internally developed technology to develop the Identix
General Services Administration ("GSA") computerized catalog that enables
federal and state agencies to call up specifications and pricing, then order
equipment and services from its GSA Federal Supply Schedule Contract ("FSS").
Through the GSA FSS program, Identix streamlines the acquisition process and
allows federal and state agencies to procure Identix equipment in an expedient
matter. Originally the IT Group implemented the GSA FSS program for internal
use; now however, the IT Group allows third parties for a fee to sell through
Identix's GSA computerized catalog.
Systems Engineering Group. ANADAC's System Engineering Group is a leader in
providing consulting, scheduling, project monitoring, financial and contract
management planning and implementing system acquisition programs in both the
public and private sectors. The Systems Engineering Group has extensive
expertise in planning and executing weapon system acquisitions. In September
1995, ANADAC's System Engineering Group was awarded a contract for program
management engineering services by the Naval Sea Systems Command in support of
the AEGIS Combat Shipbuilding Program. The contract generated approximately $7
million per year in revenue in the past three years, and is estimated to have a
total contract value of approximately $38 million over a five-year period if
all contract options are exercised. There can be no assurance that any contract
extensions will be exercised or that funding will be provided beyond the base
year.
Facilities Group. ANADAC's Facilities Group provides strategic program
management, including monitoring and cost control, facility engineering audits,
assessments, inspections and maintenance management and construction management
programs. An example contract includes functioning as the construction manager
for GSA's 10-year renovation of the White House and Executive Office buildings.
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Legislative Demographic Services, Inc. ANADAC's wholly owned subsidiary
Legislative Demographic Services, Inc. provides demographic data information
and services principally to Fortune 500 companies for use in lobbying Federal
and state legislatures.
A substantial portion of ANADAC's business comes from government agencies,
which subjects the business to certain additional risks.
Product Development
Identix continues to invest in research, development and engineering to
enhance the performance and functionality, and in certain cases reduce the
costs, of its existing products as well as to increase the breadth of Identix's
product offerings. Identix's expenditures for research, development and
engineering totaled $4,572,000, $2,754,000, and $1,486,000, in the fiscal years
ended June 30, 1998, 1997 and 1996, respectively. In addition, research,
development and engineering expenditures funded by customers were $16,000,
$269,000, and $255,000 in the fiscal years ended June 30, 1998, 1997 and 1996,
respectively.
Identix's development programs have recently focused on: the next generation
biometric security devices which are being developed to be faster, more
reliable and cost effective than currently available devices; biometric
security end user software applications; development of the recently introduced
palm scanner; and enhancement of Identix's other live-scan products.
Sales, Marketing and Support
Identix markets its biometric security and biometric imaging product lines
directly to end users through its internal sales force, and indirectly through
authorized agents, distributors, VARs, system integrators and OEMs. Identix's
sales organization is divided into four regions: North America; Asia/ Pacific;
Latin America; Europe, Middle East and Africa.
Biometric Security Products. Identix's biometric security products are sold
through a worldwide network of direct sales personnel, distributors, systems
integrators, VARs and OEMs. Sales activity is concentrated in the markets of
database and network access security, banking (financial transactions), time-
and-attendance, access control and government (personal verification). Identix
has sales, service, product marketing and application engineering expertise in
each regional sales offices to provide the customers with complete sales and
maintenance support.
Sales activity varies widely from single access control devices sold by a
dealer or system integrator to complicated, networked solutions sold by several
companies working cooperatively, such as financial transaction authorization,
time-and-attendance and building access. The success of these sales depends on
Identix's ability to provide integrated solutions that are usually software
based. The majority of the service and support activities relate to these
software and integration issues.
Biometric Imaging Products. Identix's biometric imaging products are
marketed domestically primarily through a direct sales force and
internationally through sales representatives. Identix also teams with two
major AFIS vendors, NEC and Sagem Morpho, to provide TouchPrint 600 systems or
OEM versions thereof for law enforcement applications. In addition, Identix
works
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closely with skilled system integrators for civil and commercial applications
of its biometric imaging technology. Identix develops proposals, either
directly or in cooperation with its partners, and is often directly involved in
negotiating the contract terms.
Identix's TouchPrint 600 live-scan system is generally sold through a
competitive bid process based on a RFP. Funding for these projects often comes
from federal, state and local agencies. The funding, proposal, contract
negotiation and implementation process can extend over several months or years,
although for existing customers that are adding to or upgrading their systems,
the sales cycle is considerably shorter and these sales often are not required
to go through the bid process.
Product Support. Installation and maintenance support comes from Identix's
24 hour/7 days per week TouchCare support center, regional technical staffs as
well as Identix's engineering staff. This support generally includes travel to
the customer site to explain the technical operation of the system, clarify the
configurations, detail any necessary software customization and define the
integration issues. The systems are then installed and supported by the
TouchCare support center, regional staffs and the Identix trained system
integrators, VARs or partners. Identix provides ongoing training at its
Sunnyvale, California facility for customers and distributors, as well as
providing on-site training for customers.
Identix's biometric imaging products carry a 90-day warranty and extended
service and warranty are offered through a choice of maintenance contracts.
Identix's biometric security products carry a one year warranty and additional
support is available for a fee after the expiration of the warranty period. For
equipment produced by other companies, Identix passes on to its customers the
standard warranties provided by those manufacturers. Service centers are
located in California, Australia, Indonesia and Switzerland.
ANADAC Services. ANADAC markets its services directly to United States
government agencies, including the DOD, and to commercial entities.
Backlog
Product sales are generally made pursuant to purchase orders, which are
subject to cancellation. Identix typically ships its products within sixty days
of receipt of an order. For its ANADAC services business, amounts in backlog
are often not funded and, even if they are funded, are subject to cancellation
by the contracting agency. Accordingly, Identix believes that backlog at any
given time cannot be considered a meaningful indicator of future financial
performance.
Identix had product backlog of $4,865,000 on June 30, 1998, all of which is
scheduled to be shipped and recognized as revenue in the current fiscal year.
Identix had product backlog of $2,558,000 on June 30, 1997 and $1,677,000 on
June 30, 1996.
ANADAC had services backlog of $139,316,000 on June 30, 1998, of which
$19,280,00 is scheduled to be provided and recognized as revenue in the current
fiscal year. ANADAC had services backlog of $44,450,000 on June 30, 1997 and
$54,372,000 on June 30, 1996.
Patents and Trade Secrets
Identix's ability to compete effectively will depend in part on its ability
to maintain the proprietary nature of its technology, products and
manufacturing processes. Identix principally relies
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upon patent, copyright, trade secret and contract law to establish and protect
its proprietary rights. The success of Identix's products business will depend
in part on its proprietary technology and Identix's protection of the
technology. Identix holds the following patents:
. one U.S. patent expiring in 2004 and ten foreign patents on one version
of Identix's optical fingerprint reading device;
. one U.S. patent expiring in 2008 and six foreign patents on a
fingerprint analysis algorithm;
. one U.S. patent expiring in 2013 covering an enhanced method of
recording a fingerprint;
. one U.S. patent expiring in 2014 and two foreign patents on Identix's
curved platen design palm scanner;
. one U.S. patent expiring in 2015 covering a different version of
Identix's optical fingerprint reading device;
. one U.S. patent expiring in 2015 covering a fingerprint reading device
with a heated optical platen; and
. one U.S. patent expiring in 2016 covering a system for reducing smear in
rolled fingerprint capture.
Identix has an ongoing policy of filing patent applications to seek
protection for novel features of its products and currently has four patent
applications pending in the United States and six in foreign countries. No
assurance can be given that the claims allowed on any patents held by Identix
will be sufficiently broad to protect Identix's technology. In addition, no
assurance can be given that any patents issued to Identix will not be
challenged, invalidated or circumvented or that the rights granted thereunder
will provide competitive advantages to Identix. The loss of patent protection
on Identix's technology or the circumvention of its patent protection by
competitors could have a material adverse effect on Identix's ability to
compete successfully in its products business. There can be no assurance that
any existing or future patent applications by Identix will result in issued
patents with the scope of the claims sought by Identix, or at all, that any
current or future issued or licensed patents, trade secrets or know-how will
afford sufficient protection against competitors with similar technologies or
processes, or that any patents issued will not be infringed upon or designed
around by others. In addition, there can be no assurance that others will not
independently develop proprietary technologies and processes which are the same
as or substantially equivalent or superior to those of Identix. Further, there
can be no assurance that Identix has not or will not infringe prior or future
patents owned by others, that Identix will not need to acquire licenses under
patents belonging to others for technology potentially useful or necessary to
Identix, or that any licenses will be available to Identix, if at all, on terms
acceptable to Identix.
Litigation, which could result in substantial cost to Identix and diversion
of management attention, may also be necessary to enforce any patents issued to
Identix or to determine the scope and validity of other parties' proprietary
rights. If the outcome of any litigation is adverse to Identix, its business
could be adversely affected. To determine the priority of inventions, Identix
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 Identix and limitations on scope or
validity of Identix's patents.
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Identix also relies on trade secrets and proprietary know-how which it seeks
to protect by confidentiality agreements with its employees and consultants and
with third parties. There can be no assurance that these agreements will not be
breached, that Identix will have adequate remedies for any breach, or that its
trade secrets and proprietary know-how will not otherwise become known or be
independently discovered by others.
Competition
The markets for biometric security and biometric imaging products are
extremely competitive and are characterized by rapid technological change, both
as a result of technical developments exploited by competitors, the changing
technical needs of the customers and frequent introductions of new features.
Identix expects competition to increase as other companies introduce additional
and more competitive products. In order to compete effectively in this
environment, Identix must continually be able to develop and market new and
enhanced products and market those products at competitive prices. There can be
no assurance that Identix will be able to make the technological advances
necessary to compete successfully in its products business. Some of Identix's
present and potential competitors have financial, marketing and research
resources substantially greater than those of Identix. Existing and new
competitors may enter or expand their efforts in Identix's product markets, or
develop new products to compete against Identix's products. No assurance can be
given that Identix's competitors will not develop new technologies or
enhancements to existing products or introduce new products that will offer
superior price or performance features or that new products or technologies
will not render obsolete the products of Identix.
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 Identix's biometric security products,
including a number of companies that are developing semiconductor or optically-
based direct contact fingerprint image capture devices. In addition, 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, which could significantly reduce the potential
market for Identix's products if widely adopted. Identix's biometric security
products also face competition from non-biometric technologies such as
traditional key, card and surveillance systems, PINs and similar traditional
verification methods. Identix believes that in an effort to remain competitive
in the future it will need to invest increasing financial resources in research
and development.
Identix believes that the most important competitive factors for biometric
security products are the degree of security provided, ease of use,
functionality, price and reliability. In applications such as controlled access
to computers, ATMs and electronic funds transfer, Identix faces competition
from technologies relying on PIN numbers or passwords. In competing with these
non-biometric products, Identix believes that the most important competitive
issue is the trade-off between the additional security provided by positive
personal identification and the higher price. In some instances, however,
products using non-biometric technologies may be complementary to, rather than
competitive with, Identix's biometric security products. For example, card key
systems can be integrated with biometric security systems to supply different
levels of security within a facility.
Identix believes that the most important competitive factors for the
biometric imaging products are the quality of fingerprint images, the
capability to work within large criminal history
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networks, ease of use, price and reliability. Identix's biometrics imaging
products face intense competition from a limited number of competitors who are
actively engaged in developing and marketing live scan products, including
Digital Biometrics Inc., Heimann Biometric Systems GmbH and Printrak
International, Inc.
In its services business, Identix faces substantial competition from
professional services providers and systems integrators of all sizes in the
government marketplace. ANADAC is increasingly being required to bid on firm
fixed price and similar contracts that result in greater performance risk to
ANADAC. If ANADAC is not able to maintain a competitive cost structure, support
specialized market niches, retain its highly qualified personnel or align with
technology leaders, it may lose its ability to compete successfully in the
services business.
Manufacturing
Identix limits its manufacturing activities to the assembly and testing of
proprietary subassemblies, final system assembly and functional testing.
Printed circuit board assemblies are fabricated by highly automated outside
suppliers. Identix believes this would permit rapid expansion of production
capacity to meet any significant increase in product demand. Identix believes
that the cost of material and fabricated subassemblies will decline if
manufacturing volume increases. Quality control tests are performed at all
stages of the manufacturing process.
Identix currently uses certain components which are sole sourced, the most
important of which are the charge coupled and CMOS imaging devices and ASICs
for the biometric security products and the charge coupled devices for the
biometric imaging products. The partial or complete loss of supplies available
from sole or limited sources of supply or the delay in receiving supplies from
these sources could result in delays in manufacturing and shipping of products
to customers and require the incurrence of development and other costs to
establish alternative sources of supply. While Identix attempts to maintain a
few months worth of inventory on sole sourced components, it may take Identix
several months to locate alternative supplies if required, or redesign its
products to accommodate components from different suppliers. If Identix is
required to seek alternative suppliers, there can be no assurance that Identix
will be able to obtain components within the time frames required by Identix at
an affordable cost, or at all. Any delays resulting from suppliers failing to
deliver components on a timely basis in sufficient quantities or of sufficient
quality or any significant increase in the price of components from existing or
alternative suppliers could have a material adverse effect on Identix's
business, financial condition and results of operations.
Employees
As of December 31, 1998, Identix had 175 employees working in its products
business, of whom 47 were engaged in research, development and engineering, 29
in production and production support, 79 in sales, marketing and field service
and 20 in general administration and finance. As of December 31, 1998, Identix
had 242 employees working in its services business, of whom 199 were service
providers, 19 were engaged in sales and marketing and 24 were engaged in
general administration and finance. None of Identix's employees is represented
by a union and Identix has never experienced a work stoppage. Management
considers its employee relations to be good.
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Properties
Identix leases approximately 40,000 square feet of space in Sunnyvale,
California for manufacturing, research and administration. The monthly lease
payments are $35,000 a month plus taxes, insurance and maintenance costs and
the lease expires in 2001. Sales and service offices are leased in Australia,
Zurich, Rio de Janiero and Singapore with an aggregate net monthly lease
payment of approximately $13,000. Identix also services customers from sales
offices in California , Virginia and Michigan. Identix also has small offices
in Illinois and Missouri primarily providing engineering services. ANADAC
leases approximately 42,000 square feet in four locations in Virginia with
aggregate monthly lease payments of $83,000, which leases expire in 2000 and
2001. ANADAC also services customers from offices leased in Mississippi,
Maryland, Massachusetts and Virginia. Identix believes that its facilities are
adequate for its operations for the foreseeable future.
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.
Identix believes that the claims against ANADAC are without merit and will not
have a material adverse effect on Identix.
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Executive Officers and Directors
The executive officers and directors of Identix, and their ages, as of
December 31, 1998, are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Randall C. Fowler............ 59 President, Chief Executive Officer and
Director
Harrison N. Walther.......... 61 President and Chief Executive Officer of
ANADAC
James P. Scullion............ 42 Executive Vice President, Chief Financial
Officer, Secretary and Director
Daniel F. Maase.............. 55 Vice President, Biometric Imaging Division
John Kirsten................. 54 Vice President, Biometric Security Division
Alan Schallop................ 58 Vice President, Worldwide Sales, Marketing
and Customer Support
Gary L. Cauble............... 47 Vice President, Manufacturing
John Bruce-Smith............. 41 Vice President, Finance
Patrick H. Morton............ 58 Director
Randall Hawks, Jr............ 48 Director
Fred U. Sutter............... 70 Director
Larry J. Wells............... 55 Director
Charles W. Richion........... 62 Director
</TABLE>
Randall C. Fowler is Chairman of the Board of Directors, President and Chief
Executive Officer of Identix, positions he has held since founding Identix in
1982.
Harrison N. Walther was the President and Chief Executive Officer of ANADAC
until he retired on December 31, 1998. Mr. Walther joined ANADAC in 1982. He
served as Vice President of ANADAC from 1982 through 1984 and Executive Vice
President from 1984 through 1985 before assuming the duties of President in
1986. Mr. Walther was a director of Identix from February 1995 through October
1998.
James P. Scullion has been a director of Identix since 1998, the Executive
Vice President and Chief Financial Officer of Identix since July 1996 and, from
1990 to 1996, he was Vice President, Finance and Chief Financial Officer of
Identix. From 1986 to 1990, he was Vice President, Finance and Chief Financial
Officer at DataTrak, Inc., a manufacturer of security access systems.
Daniel F. Maase, Vice President, biometric imaging Division, joined Identix
in November 1988 and served as Vice President, Engineering from December 1988
until he was appointed to his present position in February 1998. Prior to
joining Identix he was an Operations Manager at Varian Associates, a
manufacturer of instruments and microwave power devices, medical equipment and
semiconductors, from 1987 to 1988.
John Kirsten, Vice President, biometric security Division, joined Identix in
May 1998. Prior to joining Identix, he spent several years in the software
industry, serving as Vice President of International Operations for
Objectivity, Inc. from 1997 to 1998, Vice President of International Operations
for IDE/Aonix from 1995 to 1997, and Vice President of European Operations for
IMSL/Visual Numerics, Inc. from 1992 to 1995.
Alan Schallop, Vice President, Worldwide Sales, Marketing & Customer
Support, joined Identix in October 1997 as the Vice President, North American
Sales, Marketing & Customer
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Support. He was appointed to his present position in February 1998. Prior to
joining Identix, Mr. Schallop was the Vice President of Worldwide Sales and
Customer Support of Zapex Technologies from December 1996 to October 1997, the
Chief Operating Officer of Pharm/Net from June 1996 to December 1996, the Vice
President of Worldwide Customer Support of Wyse Technology from May 1995 to May
1996, the Vice President of North American Sales and Channels of OpenVision
Technologies Inc. from March 1994 to February 1995 and served in various
positions with Sequent Computer Systems, Inc. from December 1990 to February
1994, including Vice President and General Manager of North American Sales. Mr.
Schallop worked at Hewlett-Packard Co. from 1969 to 1990 in various positions,
including U.S. Sales Manager for Networked Systems and OEM products.
Gary L. Cauble, Vice President, Manufacturing, joined Identix in August
1995. Prior to joining Identix, from 1990 to 1995, he was assistant Division
Manager/Operations Manager at Bell Industries.
John Bruce-Smith, Vice President, Finance, joined Identix Australia Pty
Limited as Controller in November 1997 and served as Controller of Identix from
April 1998 through August 1998, before being appointed to his present position
in September 1998. Prior to joining Identix, he worked as a financial project
manager at Racal Telecommunications Ltd in England from February 1997 through
September 1997. Prior to that, Mr. Bruce-Smith served in various financial
capacities with AWA Limited in Sydney from 1990 through 1996, most recently
serving as Assistant Chief Financial Officer.
Patrick H. Morton has been a director of Identix since 1985. Mr. Morton is
president of Kokusai Semiconductor Equipment Corporation. In addition, Mr.
Morton is Chairman of the Board of Directors and co-founder of QuadRep, Inc.,
manufacturers' representative company. He held the position of President of
QuadRep, Inc. from 1981 through 1990 and has been Chairman since 1991.
Randall Hawks, Jr.. has been a director of Identix since 1988. Mr. Hawks is
currently President and Chief Executive Officer at WHEB Systems, Inc. From 1994
to 1995, Mr. Hawks was Executive Vice President of AT&T Paradyne, a
communications equipment subsidiary of AT&T. Prior to joining AT&T Paradyne,
Mr. Hawks was Executive Vice President of Identix from 1989 to November 1993
and was Vice President of Marketing from 1985 to 1989.
Fred U. Sutter has been a director of Identix since 1988. Until January
1996, Mr. Sutter was Chairman, Chief Executive Officer and President of Ascom
Holding Ltd., a United States subsidiary of Ascom Holding AG, the parent
company of a group of telecommunication companies and service automation
providers. From December 1993 to July 1995, Mr. Sutter was the Chief Executive
Officer and President of Ascom Holding AG. From January 1991 to August 1993, he
was the Deputy President of Ascom Holding AG. From January 1987 to December
1990, he was President of Ascom Hasler AG. Ascom Hasler AG is a Swiss
telecommunications company and is a part of Ascom Holding AG.
Larry J. Wells has been a director of Identix since 1992. Since 1989, Mr.
Wells has been a general partner of Anderson and Wells Company, the management
company for Sundance Venture Partners, L.P. Prior to his affiliation with
Anderson and Wells Company, Mr. Wells held similar
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<PAGE>
positions with Inco Venture Capital from 1988 to 1989 and Citicorp Venture
Capital from 1983 to 1987. Mr. Wells currently serves on the Board of Directors
of Cellegy Pharmaceuticals, Inc., a drug development company, Isonics
Corporation, an advanced materials and technology company, and Legacy Brands,
Inc., a premium food producer and distributor.
Charles W. Richion has been a director of Identix since 1998. Mr. Richion
served as Vice President, Corporate Development, of Identix from June 1997 to
June 30, 1998. Since July 1, 1998 he has been engaged as a consultant to
Identix. Prior to joining Identix, Mr. Richion worked at Hewlett-Packard
Company from 1965 through 1996 serving in a variety of functions. His most
recent positions included Vice President and Director of U.S. Sales operations
and building the Global Partners program.
Executive Compensation
The table set forth below provides certain summary information concerning
compensation paid to or accrued for Identix's Chief Executive Officer and each
of the four other most highly compensated executive officers of Identix who
served as executive officers at June 30, 1998 for fiscal years ended June 30,
1998, 1997 and 1996. Included in the table are two individuals who no longer
serve as executive officers of Identix: Harrison N. Walther and Charles W.
Richion. Mr. Walther retired on December 31, 1998. On June 30, 1998, Mr.
Richion's employment with Identix terminated and Mr. Richion became a
consultant to Identix. Mr. Richion was elected to the Identix Board of
Directors on October 29, 1998. Identix repriced underwater stock options on
April 28, 1998, which constituted a cancellation of the underwater option and
the grant of a new option. If a stock option was granted earlier in fiscal year
1998 and then canceled and reissued in connection with the repricing on April
28, 1998, the stock option is only counted once in the table under 1998.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual
Compensation Other Long Term
------------------ Compensation Compensation
Name and Principal Position Year Salary($) Bonus($) ($) Options(#)(1)
--------------------------- ---- --------- -------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Randall C. Fowler........... 1998 225,000 16,700 -- 95,000
Chairman, President and 1997 200,000 2,933 9,600 50,000(2)
Chief Executive Officer 1996 168,000 -- -- 45,000
Harrison N. Walther......... 1998 187,681 173,432 26,551 85,000
President and Chief
Executive 1997 171,167 120,049 -- 45,000(2)
Officer of ANADAC, Inc. 1996 146,910 110,448 -- 20,000
James P. Scullion........... 1998 190,000 11,400 8,000 95,000
Executive Vice President 1997 165,000 1,600 6,000 50,000(2)
and Chief Financial Officer 1996 126,000 -- -- 45,000
Daniel F. Maase............. 1998 130,000 35,050 -- 50,000
Vice President of Bio-
Imaging 1997 126,000 15,000 -- 25,000(2)
Division 1996 126,000 5,000 -- 25,000
Charles W. Richion.......... 1998 245,192 -- -- 75,000
Vice President,
Corporate Development
</TABLE>
- --------
(1) All figures in this column reflect options to purchase Identix's common
stock.
(2) These stock options were canceled in connection with the April 28, 1998
repricing and the reissued options are also included in the table under
1998.
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<PAGE>
The following table sets forth stock options granted to the executive
officers identified in the Summary Compensation Table during the fiscal year
1998 under Identix's Equity Incentive Plan. Since inception, Identix has not
granted any stock appreciation rights. Potential realizable value is based on
an assumption that the market price of the stock appreciates at the stated
rate, compounded annually, from the date of grant until the end of the option
term. These values are calculated based on the requirements promulgated by the
Securities and Exchange Commission and do not reflect Identix's estimated
future stock price appreciation. Except for the options granted to Mr. Richion
which vest over a period of less than 12 months, options vest ratably over
twenty-four months from the date of grant with acceleration of vesting of
options if Identix achieves certain financial goals set by the Compensation
Committee. Options that were repriced on April 28, 1998 continued with the same
vesting schedule as the original options. The percentage in the second column
is based on the total number of options granted to employees in fiscal year
1998. If a stock option was granted earlier in fiscal year 1998 and then
canceled and reissued in connection with the repricing on April 28, 1998, the
stock option is only counted once in determining the number of options granted
to employees in fiscal year 1998. The exercise price for each option is the
fair market value on the date of grant.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential
Realizable
Value at
Individual Assumed Annual
Grants % of Rates of Stock
Total Options Price
Granted to Appreciation
Employees in for Options
Options Fiscal Year Exercise Price Expiration ---------------
Name Granted 1998 Per Share Date 5% 10%
---- ------- ------------- -------------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Randall C. Fowler....... 20,000(1) 1% $ 9.8750 10/30/07 124,207 314,764
20,000(2) 1% $ 7.6250 10/30/07 90,066 225,081
50,000(2) 4% $ 7.6250 7/26/06 188,924 455,645
25,000 2% $ 7.6250 4/28/08 119,883 303,807
Harrison N. Walther..... 15,000(1) 1% $ 9.8750 10/30/07 93,155 236,073
20,000(2) 1% $ 7.6250 10/30/06 78,515 190,756
25,000(2) 2% $ 7.6250 7/26/06 94,462 227,823
15,000(2) 1% $ 7.6250 10/30/07 67,549 168,811
25,000 2% $ 7.6250 4/28/08 119,883 303,807
James P. Scullion....... 20,000(1) 1% $ 9.8750 10/30/07 124,207 314,764
20,000(2) 1% $ 7.6250 10/30/07 90,066 225,081
50,000(2) 4% $ 7.6250 7/26/06 188,924 455,645
25,000 2% $ 7.6250 4/28/08 119,883 303,807
Daniel F. Maase......... 10,000(1) 1% $ 9.8750 10/30/07 62,103 157,382
10,000(2) 1% $ 7.6250 10/30/07 45,033 112,541
25,000(2) 2% $ 7.6250 7/26/06 94,462 227,823
15,000 1% $ 7.6250 4/28/08 71,930 182,284
Charles W. Richion...... 15,000(1) 1% $10.1250 7/24/07 95,513 242,050
10,000(1) 1% $10.3750 9/23/07 65,248 165,351
25,000(1) 2% $ 9.6875 1/29/08 152,310 385,985
25,000(2) 2% $ 7.6250 1/29/08 116,293 292,701
10,000(2) 1% $ 7.6250 9/23/07 44,434 110,726
25,000(2) 2% $ 7.6250 2/6/07 101,991 249,681
15,000(2) 1% $ 7.6250 7/24/07 65,182 161,656
</TABLE>
- --------
(1) This option was canceled as part of the repricing on April 28, 1998.
(2) This option was issued as part of the repricing on April 28, 1998.
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<PAGE>
The following table sets forth stock options exercised by the executive
officers identified in the Summary Compensation Table during fiscal year 1998,
and the number and value of all unexercised options at fiscal year end. The
value of "in-the-money" options refers to options having an exercise price,
which is less than the market price of Identix's common stock on June 30, 1998.
Value realized is determined by multiplying the exercised shares by the
difference between the market close price on the date of exercise and the
stated exercise price.
Aggregated Option Exercises in Last Fiscal Year
And Fiscal Year End Values
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Unexercised In-the-Money
Options at Options at
Fiscal Year Fiscal Year
End End
Shares -------------- -------------
Acquired on Value Exercisable/ Exercisable/
Name Exercise(#) Realized($) Unexercisable Unexercisable
---- ----------- ----------- -------------- -------------
<S> <C> <C> <C> <C>
Randall C. Fowler.......... -- -- 301,667/38,333 756,150/0
Harrison N. Walther........ 40,000 272,500 72,083/32,917 0/0
James P. Scullion.......... 12,966 81,369 174,851/38,333 269,872/0
Daniel F. Maase............ 43,366 311,510 76,076/32,292 154,676/0
Charles W. Richion......... -- -- 75,000/0 0/0
</TABLE>
- --------
Identix did not make any awards during the fiscal year ended June 30, 1998
to any of the executive officers named in the Summary Compensation Table under
any long-term incentive plan providing compensation intended for performance to
occur over a period longer than one fiscal year.
Agreements with Executive Officers
As of June 30, 1998, Mr. Walther, then a director of Identix and President
and Chief Executive Officer of ANADAC, was indebted to ANADAC in the amount of
$134,232 for premium payments made on his behalf for a split dollar life
insurance policy. Mr. Walther retired on December 31, 1998. In connection with
his retirement, the policy was cancelled and the indebtedness was repaid with
the proceeds from the policy. Mr. Walther was also indebted to ANADAC on
June 30, 1998 in the principal amount of $16,854 for a loan made to Mr. Walther
in July 1989. This loan was repaid upon Mr. Walther's retirement.
Director Compensation
Each nonemployee director receives $1,000 for each board meeting attended up
to $4,000 annually. Identix also reimburses non-employee directors for certain
expenses incurred by them in connection with attendance of board meetings.
Directors who are employees of Identix receive no additional or special
remuneration for serving as directors.
Under Identix's Nonemployee Directors Stock Option Plan as currently in
effect, each nonemployee director of Identix, upon the director's first
election to the Board, is entitled to receive
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<PAGE>
an automatic nondiscretionary initial grant of (i) a nonqualified stock option
to purchase 20,000 shares of common stock if less than six months have elapsed
since the last annual meeting of shareholders or (ii) a nonqualified stock
option to purchase 10,000 shares of common stock if more than six months have
elapsed since the last annual meeting of shareholders. In addition, on the date
of the first meeting of the Board following the annual meeting of the
shareholders of Identix, each eligible director is entitled to receive a
nonqualified stock option purchase 20,000 shares of common stock.
The exercise price of the nonqualified stock options granted under the
Nonemployee Directors Stock Option Plan is equal to the fair market value of
the shares on the date of grant. The nonqualified stock options become
exercisable with respect to one fourth of the number of shares covered by the
option for each three-month period which elapses after the date of grant, so
that the option will be fully exercisable on the first anniversary of the date
the option was granted.
Compensation Committee Interlocks and Insider Participation
Randall Hawks Jr., a member of the Compensation Committee of Identix's Board
of Directors during fiscal year 1998, formerly was Executive Vice President of
Identix from 1989 to November 1993 and was Vice President of Marketing from
1985 to 1989.
Certain Transactions
At July 31, 1998, Ascom owned approximately 20% of the outstanding common
stock of Identix. Identix granted Ascom registration rights with respect to the
common stock acquired from Identix and preemptive rights to participate in any
offering of certain securities of Identix. Ascom's preemptive rights allow it
to purchase a sufficient number of shares of common stock to preserve its
ownership interest in Identix at a purchase price per share equal to the lower
of (1) the weighted average price of the shares sold in the dilutive event or
(2) the average closing price of the common stock for the 20 trading days
immediately preceding the dilutive event. The presence of Ascom's registration
and preemptive rights may adversely affect the terms on which Identix could
obtain additional financing. On September 2, 1994, Identix entered into a
voting trust agreement with Ascom whereby Ascom deposited all of its shares of
Identix's common stock held by Ascom (at July 31, 1998, 5,048,924) into a
voting trust. The trustee of the voting trust is on Identix's Board of
Directors and has voting control of the Ascom stock subject to the voting
trust. The voting trust agreement expires in 2004. In consideration for Ascom
entering into the voting trust, Identix granted Ascom certain additional
registration rights with respect to the Ascom stock subject to the voting
trust, modified certain contractual transfer restrictions with respect to the
Ascom's stock, and granted Ascom price protections regarding certain sales of
Ascom's stock.
Patrick H. Morton is a member of Identix's Board of Directors and presently
owns 38% of Integrated Manufacturing Solutions, Inc. ("IMS"), a manufacturer of
integrated circuit boards, that provides manufacturing services to Identix. IMS
billed Identix approximately $2,437,000 and $427,000 in fiscal 1998 and 1997,
respectively. Amounts outstanding to IMS at June 30, 1998 were approximately
$311,000. Identix did not do business with IMS prior to fiscal 1997.
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<PAGE>
IDENTIX'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with Identix's
Consolidated Financial Statements and related notes included elsewhere in this
prospectus. The following discussion may contain predictions, estimates, and
other forward-looking statements that involve a number of risks and
uncertainties. See "Risk Factors" beginning on page 13 for a discussion of
certain factors that could cause actual results to differ from those described
in the following discussion and "Special Note Regarding Forward-Looking
Statements" on page 12. See also "Recent Developments: Identix's Preliminary
Third Quarter Results" on page 5.
Overview
Identix designs, develops, manufactures and markets two categories of
products for security, anti-fraud, law enforcement and other applications: (i)
biometric security products that verify the identity of an individual through
the unique biological characteristics of a fingerprint and (ii) biometric
imaging products that electronically capture forensic quality fingerprint
images directly from an individual's fingers for law enforcement and other
applications. Identix 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.
On March 26, 1996, Identix acquired Fingerscan Pty Limited, a privately-held
Australian-based company that designs and markets biometric security products.
Fingerscan had been a long standing Identix OEM partner integrating Identix
fingerprint identification technology into Fingerscan's fingerprint identity
and verification products and systems. The acquisition was accounted for as a
purchase. Accordingly, Identix's fiscal 1996 consolidated financial statements
include the results of Fingerscan from the date of acquisition. Fingerscan's
name was changed to Identix Australia Pty Limited during fiscal 1998.
On June 30, 1996, Identix acquired Innovative Archival Solutions, Inc.
("IAS"), a privately-held company which provides fingerprinting services using
Identix's biometrix imaging systems. The acquisition was accounted for as a
pooling of interests. Identix's fiscal 1996 consolidated financial statements
include the accounts and operations of IAS. For fiscal 1995, the effects of the
combination with IAS were not significant and Identix has not restated fiscal
year 1995 to include the accounts and operations of IAS.
On July 23, 1997, Identix acquired Biometric Applications & Technology, Inc.
("BA&T"), a privately held developer of biometric and "smart" card applications
and solutions. BA&T had been a software development partner that integrated its
software into Identix's biometric security products. The acquisition was
accounted for as a pooling of interests.
On September 30, 1997, Identix entered into a joint venture agreement with
Sylvan Learning Centers, Inc. to form Sylvan/Identix Fingerprinting Centers,
L.L.C. ("SIFC") for the purpose of providing fingerprinting services for a
variety of civilian applications. Identix owns a 50% interest in SIFC.
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<PAGE>
Identix implemented a restructuring of the Biometric Security Division in
February 1998. Management of the Biometric Security Division was transferred
from Fingerscan in Australia to Identix. The following functions were
transferred to personnel employed in the U.S. by the parent company: management
control and responsibility for profitability; global sales and service;
engineering; product development and manufacturing. The remaining operations of
Fingerscan consist of a sales and service office for the Australian market.
Management determined that the functional currency of Fingerscan had changed
from the Australian to U.S. dollar and that the above actions constituted a
substantial liquidation of Fingerscan.
Results of Operations
Six Months ended December 31, 1998 and 1997
Revenues. Revenues for the six month period ended December 31, 1998 were
$40,323,000, compared to $38,603,000 for the same period in the prior fiscal
year. The increase in revenues of 4% was due to increased net product revenues
and to a lesser degree increased services revenues.
Identix's net product revenues were $18,647,000 for the six month period
ended December 31, 1998, compared to $16,996,000 for the same period in the
prior fiscal year. 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.
International sales accounted for $1,969,000 or 11% of Identix's net product
revenues for the six month period ended December 31, 1998, compared to
$4,397,000 or 26% for the same period in the prior fiscal year. The decrease in
international sales was due to a decline in sales in Asia. Identix 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 Identix actively monitors its foreign currency exchange exposure and, if
significant, will take action to reduce foreign exchange risk. To date, Identix
has not entered into any hedging transactions.
No one product business customer accounted for more than 10% of total
revenues for the six month period ended December 31, 1998. For the six month
period ended December 31, 1997, Identix's product revenue included one customer
which accounted for 13% of total revenues.
Identix's services revenues were $21,676,000 for the six month period ended
December 31, 1998, compared to $21,237,000 for the same period in the prior
fiscal year. 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
Identix's services revenues are generated directly from contracts with the U.S.
government, principally the Department of Defense. For the six month period
ended December 31, 1998, revenues directly from the DOD and from other U.S.
government agencies accounted for 91% of Identix's total services revenues
compared to 87% for the same period in the prior fiscal year.
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Identix's services business generates revenues from cost plus fixed fee
("CPFF") contracts, which accounted for approximately 18% of its services
revenues for the six month period ended December 31, 1998, compared to 21% for
the same period in the prior fiscal year. The decrease in the percentage of
services revenues generated by CPFF contracts is due to the increase in other
forms of contract revenue. CPFF contracts provide for the reimbursement of
allowable costs, including indirect costs plus a fee or profit.
Identix'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 six month period ended December 31, 1998, Identix
derived 82% of its services revenues from T&M and FFP contracts compared to 79%
for the same period 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. Identix assumes greater
performance risk on T&M and FFP contracts and the failure to accurately
estimate ultimate costs or to control costs during performance of the work can
result in reduced profit margins or losses. There can be no assurance that
Identix'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 Identix and representatives of the 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. Identix 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, Identix 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 six month period ended December 31,
1998 as compared to the same period in the prior fiscal year.
Gross Margin. Gross margin on net product revenues was 51% for the six month
period ended December 31, 1998, as compared to 52% for the same period in the
prior fiscal year. The decrease in gross margin was primarily due to a one time
sale at a high gross margin in fiscal 1998 and unfavorable product mix of lower
gross margin products in fiscal 1999. Identix 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 13% for the six month period ended
December 31, 1998 as compared to 15% for the same period in the prior fiscal
year. The decrease in gross margin 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 $2,804,000 or 15% of net product revenues for the six month
period ended December 31, 1998, compared to $2,164,000 or 13% of net product
revenues for the same period in the prior fiscal year. The increase in
research, development and engineering expenses is primarily due to the addition
of engineering staff and related expenses to further develop and enhance
Identix's products.
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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.
The actual revenue from products acquired from Fingerscan based on the F3
and F4 technologies have been significantly less than the revenues estimated in
determining the fair value of the in-process research and development acquired.
In valuing the acquired in-process research and development, management of
Fingerscan in 1996 estimated that F3 revenue for fiscal years 1997 through 2001
would be $160,000,000 and that F4 revenue for fiscal years 1998 through 2003
would be $45,000,000. The F3 technology was completed and incorporated into two
products which were introduced toward the end of fiscal 1998. Currently
forecasted revenue from F3 products is approximately $5,000,000. The F4
research and development project did not result in any discrete, identifiable
product from which revenues are expected to be derived.
In both projects, there were significant technical problems that took longer
to overcome than originally expected. Further, the market demand for biometric
security products based on these technologies has been smaller than originally
expected due to the price of these products and a lack of market awareness.
Marketing and Selling. Marketing and selling expenses were $5,146,000 or 13%
of total revenues for the six month period ended December 31, 1998, compared to
$4,401,000 or 11% of total revenues for the same period in the prior fiscal
year. The increase in marketing and selling expenses is due to the increased
staffing and expenses to promote Identix's products and services.
General and Administrative. General and administrative expenses were
$3,466,000 or 9% of total revenues for the six month period ended December 31,
1998, compared to $4,518,000 or 12% of total revenues for the same period 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 Identix. Litigation charges were $77,000 for the six month period ended
December 31, 1998 compared to $460,000 for the same period in the prior fiscal
year.
Other Income and Expense, net. For the six month period ended December 31,
1998, net other income was $55,000, compared to net other income of $102,000
for the same period in the prior fiscal year.
Net Interest Expense. Net interest expense was $230,000 for the six month
period ended December 31, 1998, compared to $82,000 for the same period in the
prior fiscal year. The difference was due to increased borrowings for working
capital requirements under Identix's lines of credit during the six month
period ended December 31, 1998 compared to the same period in the prior fiscal
year.
During the six month period ended December 31, 1998, the weighted average
interest rate paid by Identix on borrowings under its line of credit was 8.3%.
The weighted average interest rate paid by ANADAC on borrowings under its line
of credit during the six month period ended December 31, 1998 was 8.2%.
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Income Taxes. The provision for income taxes was $90,000 for the six months
ended December 31, 1998, compared to $45,000 for the same period in the prior
fiscal year. Identix's tax rate is below the statutory rate due to the
utilization of net operating loss carryforwards incurred in prior years.
Identix is subject to certain alternative minimum tax requirements for which an
estimate is made based on Identix'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 Identix's share of the results of SIFC. For the
six month period ended December 31, 1998, equity interest in joint venture, net
of tax, was a loss of $159,000, compared to a loss of $29,000 for the six month
period in the prior fiscal year. The joint venture's operations commenced on
October 1, 1997.
Years Ended June 30, 1998 and 1997
Revenues. Revenues for fiscal 1998 were $79,374,000, compared to $52,543,000
for fiscal 1997. For fiscal 1998 the increase in revenues of 51% is due to
increases in both Identix's net product revenues and services revenues.
Identix's net product revenues were $34,720,000 for fiscal 1998, compared to
$26,652,000 in fiscal 1997. For fiscal 1998, the increases in net product
revenues of 30% were due to increased shipments of Identix's biometric imaging
product group, mainly the TouchPrint 600 product line. In addition, increased
sales of the TouchPrint 600 product line have generated additional revenues
from maintenance support agreements and related customer support. The increase
in biometric imaging sales was partially offset by a decline in Identix's
biometric security product group sales, which resulted primarily from a decline
in sales in Asia related to the adverse economic events in the region.
International sales accounted for $6,350,000 or 18% of Identix's net product
revenues for fiscal 1998, compared to $8,178,000 or 31% for fiscal 1997. The
decrease in international sales for the year was primarily due to a decline in
sales in Asia. Identix did not have any customer account for 10% or more of
total product revenues in either fiscal 1998 or fiscal 1997.
Identix's fingerprinting services revenues were $1,078,000 for fiscal 1998.
For certain contracts that Identix held prior to the commencement of SIFC,
Identix subcontracted the fingerprinting services to the joint venture at
amounts equal to the amounts billed to the customers; therefore, no gross
margin was recognized by Identix except for a 5% license fee charged to SIFC
for use of certain of Identix's trademarks. As of July 1, 1998, all contracts
for fingerprinting services held by Identix have been assigned to SIFC and
Identix does not expect to report revenues for fingerprinting services in the
future.
Identix's services revenues were $43,576,000 for fiscal 1998 compared to
$25,891,000 for fiscal 1997. The increases in services revenues of 68% for
fiscal 1998 was due primarily to increases in U.S. government purchases through
Identix's GSA contract which is operated and maintained by ANADAC. The GSA
contract allows government agencies to purchase Identix's products and services
as well as third party products and services at agreed upon prices and rates.
Identix and the General Services Administration negotiate the prices and rates
periodically or as new products or services are added. The majority of
Identix's services revenues are generated directly from contracts
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with the U.S. government, principally the DOD. For fiscal 1998, revenues
directly from the DOD and from other U.S. government agencies accounted for 89%
of Identix's total services revenues compared to 77% in fiscal 1997.
Identix's services business generates a significant amount of its revenues
from CPFF contracts, which accounted for approximately 21% of its services
revenues for fiscal 1998, compared to 39% for fiscal 1997. The decrease in the
percentage of services revenues generated by CPFF contracts is primarily due to
the increase in third party services purchased through Identix's GSA contract.
Identix's services business also generates revenue from T&M contracts and FFP
contracts. During fiscal 1998, Identix derived approximately 68% of its
services revenues from T&M and FFP contracts compared to 46% in fiscal 1997.
The increase in the percentage of services revenues generated by T&M and FFP
contracts is primarily due to the increase in third party services purchased
through Identix's GSA contract.
Gross Margin. Gross margin on net product revenues was 51% for fiscal 1998,
as compared to 50% in fiscal 1997. Identix 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 14% for fiscal 1998 as compared to 20%
for fiscal 1997. The decrease in gross margin for the year was primarily due to
an increase in third party services purchased through the GSA contact
maintained by ANADAC. When Identix sells third party services through the GSA
contract, Identix earns a fee based on a percentage of the third party
purchased services. The fee earned on third party services is typically less
than the fee earned on services directly provided by Identix.
Research, Development and Engineering. Research, development and engineering
expenses were $4,572,000 or 13% of net product revenues for fiscal 1998,
compared to $2,754,000 or 10% for fiscal 1997. 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 Identix's
products.
Marketing and Selling. Marketing and selling expenses were $9,107,000 or 11%
of total revenues for fiscal 1998 compared to $8,076,000 or 15% of total
revenues for fiscal 1997. The increase in marketing and selling expenses in
absolute dollars is due to the increased staffing and expenses to promote
Identix's products and services and to expand its customer support
organization.
General and Administrative. General and administrative expenses were
$8,474,000 or 11% of total revenues for fiscal 1998, compared to $7,171,000 or
14% of total revenues for fiscal 1997. The increase in general and
administrative expenses was primarily due to an increase in staffing and other
related administrative expenses to support the growth in operations and the
development of supporting infrastructure. The increase was partially offset by
a decrease in litigation charges which were $491,000 for fiscal 1998 compared
to $736,000 for fiscal 1997. See Note 10 of Notes to Consolidated Financial
Statements on page F-38.
Reorganization and Other Non-Recurring Costs. Reorganization and other non-
recurring costs were $717,000 for fiscal 1998. These costs consisted primarily
of a $460,000 write-off of cumulative translation adjustment and, to a lesser
extent, the write-off of deferred offering costs and severance costs relating
to the streamlining of Identix's international operations.
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Interest and Other Income. For fiscal 1998, interest and other income was
$66,000 compared to interest and other income of $232,000 for fiscal 1997. The
decrease in interest and other income is primarily due to a foreign currency
transaction loss of $202,000.
Interest Expense. Interest expense was $239,000 for fiscal 1998, compared to
$264,000 for fiscal 1997. The difference was due to lower levels of borrowing
under the lines of credit.
The weighted average interest rate paid by Identix on borrowings under its
line of credit for fiscal 1998 and 1997 was approximately 8.5% each year. The
weighted average interest rate paid by ANADAC on borrowings under its bank line
of credit during fiscal 1998 and 1997 was 8.5% and 8.3%, respectively.
Income Taxes. No federal income taxes were paid or accrued in fiscal 1998
and 1997 due to the use of net operating loss carryforwards. Identix had
federal and state NOL carryforwards of approximately $19.6 million and $3.6
million, respectively, as of June 30, 1998 that may be applied to reduce future
taxable income. However, under the Tax Reform Act of 1986, a corporation's
ability to use its NOLs may be impaired or limited in certain circumstances,
including a cumulative stock ownership change of more than 50% over a three
year period (an "ownership change"). Management believes that Identix's public
offering of units in January 1993 caused Identix to experience an ownership
change under these provisions. As a result, there is an annual limitation on
the utilization of Identix's NOL carryforwards incurred prior to the ownership
change of approximately $2.5 million. The NOL carryforwards expire on various
dates through fiscal 2011.
Equity Interest in Joint Venture. The equity interest in joint venture loss
of $171,000 for fiscal 1998 represents Identix's share of the results of SIFC.
Years Ended June 30, 1997 and 1996
Revenues. Revenues for fiscal 1997 were $52,543,000 compared to $38,541,000
for fiscal 1996. The increase in revenues of 36% for fiscal 1997 was due to
increases in both net product revenues and services revenues.
Identix's net product revenues were $26,652,000 for fiscal 1997 compared to
$16,565,000 for fiscal 1996. The increase of 61% in net product revenues for
fiscal 1997 was due primarily to increased shipments of Identix's biometric
security products, primarily in international markets, and TouchPrint 600
product line and increased fingerprint services. International sales
represented $8,178,000 or 31% of Identix's net product revenues for fiscal 1997
compared to $2,198,000 or 13% for fiscal 1996. The overall impact of currency
fluctuations on operating results was not significant in fiscal 1997 or fiscal
1996. In fiscal 1997, Identix did not have any customer account for 10% or more
of total product revenues. In fiscal 1996, Identix's products business had one
customer which represented 14% of total revenues.
Identix's services revenues were $25,891,000 for fiscal 1997 compared to
$21,976,000 for fiscal 1996. The increase of 18% in services revenues for
fiscal 1997 was due to increased contract revenues from both U.S. Government
and commercial clients. The majority of Identix's services revenues are
generated from contracts with the U.S. Government, principally the DOD. For
fiscal
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1997, revenues directly from the DOD and from other U.S. Government agencies
accounted for 77% of Identix's total services revenues compared to 78% for
fiscal 1996.
CPFF contracts accounted for 39% of Identix's services revenues for fiscal
1997 compared to 43% for fiscal 1996. During fiscal 1997, Identix derived
approximately 46% of services revenues from T&M contracts and FFP contracts
compared to 41% for fiscal 1996.
Gross Margin. Gross margin on net product revenues was 50% for fiscal 1997
compared to 47% for fiscal 1996. The increase in gross margin for fiscal 1997
compared to fiscal 1996 was primarily due to (i) the favorable mix of biometric
security and biometric imaging product sales, (ii) cost reductions in certain
components and (iii) increased manufacturing efficiencies because of the
increase in unit volume and the absorption of manufacturing overhead resulting
from higher production levels.
Gross margin on services revenues was 20% for fiscal 1997 compared to 18%
for fiscal 1996. The increase in the gross margin on services revenues was
primarily due to increased gross margins on revenues generated by ANADAC's
information technology group.
Research, Development and Engineering. Research, development and engineering
expenses were $2,754,000 or 10% of net product revenues for fiscal 1997
compared to $1,486,000 or 9% of net product revenues for fiscal 1996. In
addition, for fiscal 1997 and 1996, research, development and engineering
expenditures funded by customers were $269,000 and $255,000, respectively. The
increase in research, development and engineering expenses, in absolute
dollars, is primarily due to the inclusion of research, development and
engineering expenses incurred by Fingerscan to develop and maintain certain
biometric security products, and in general, the addition of engineering staff
and related expenses to further develop and enhance Identix's products,
including Identix's introduction of the TouchPrint 600 Card Scan System and new
TouchPrint printer line.
Marketing and Selling. Marketing and selling expenses were $8,076,000 or 15%
of total revenues for fiscal 1997 compared to $4,958,000 or 13% of total
revenues for fiscal 1996. The increase in marketing and selling expenses was
due to the inclusion of Fingerscan's marketing and selling expenses for the
entire year in fiscal 1997 and increased staffing and expenses to (i) promote
Identix's products and services, (ii) expand international sales and
distribution and (iii) expand its customer service organization.
General and Administrative. General and administrative expenses were
$7,171,000 or 14% of total revenues for fiscal 1997 compared to $4,431,000 or
11% of total revenues for fiscal 1996. The increase in general and
administrative expenses was primarily due to (i) the additional administrative
expenses related to the operations of Fingerscan, (ii) litigation charges of
$736,000 related to a patent infringement lawsuit filed by a competitor and a
class action suit filed against Identix compared to litigation reserves and
expenses of $390,000 for fiscal 1996 and (iii) an increase in staffing and
related administrative expenses.
Write-off of Acquired In-Process Research and Development. On March 26,
1996, Identix acquired Fingerscan. The excess of the purchase price over the
fair market value of the assets purchased and liabilities assumed was
$5,280,000, of which $4,723,000 was allocated to in-process
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research and development, based on an independent appraisal, and was written-
off in the quarter ended March 31, 1996. See Note 2 of Notes to Consolidated
Financial Statements on page F-28.
At the time of the acquisition, the remaining research and development
efforts required to complete the in-process research and development and to
introduce products based upon resulting technologies included additional
development of hardware and software by Fingerscan and outside contractors,
predominantly integrated circuit manufacturers. The future research and
development expense associated with the in-process products was estimated to be
approximately $4,550,000 between 1996 and 2003.
There were two significant technologies in-process at the time of
acquisition. "F3" was expected to result in new products that were 1/20th the
size and 1/10th the price of existing products. The second in-process
technology, "F4", was expected to greatly enhance user access by eliminating
the need for a smart card or access code and have far greater database scanning
capabilities.
Each project had a different likelihood of success. Identified risks for the
F3 were significant remaining development issues, lack of working model or
prototype and the high risk nature of the technology. Risks for the F4 included
those for the F3 plus the risk that competitors would drive prices down quicker
than anticipated, gaining market share before the F4 technology was viable in
its targeted market. The discount factor applied to the future cash flows for
these in-process technologies was 45% based on the independent assessment of
the calculated weighted cost of capital and the risks associated with the in-
process products.
The valuation methodology used included an analysis and estimation of the
fair market value and remaining economic life of both the core and in-process
technologies on a going concern basis. The valuation of the business enterprise
and the acquired in-process research and development were developed by
discounting future net cash flows at a rate that reflected both the return
requirements of the market and risks inherent in the investment.
Interest and Other Income. Net interest and other income was $232,000 during
fiscal 1997 compared to $460,000 during fiscal 1996. In fiscal 1997, interest
and other income was primarily related to an export market development grant
related to a subsidiary's export sales of $123,000 as compared to $27,000 in
fiscal 1996. In fiscal 1996, interest and other income also included the
proceeds from a licensing agreement related to one of Identix's trademarks of
$249,000.
Interest Expense. Interest expense of $264,000 was incurred by Identix
during fiscal 1997 compared to interest expense of $164,000 for fiscal 1996.
The difference was due to increased borrowings against the Identix line of
credit.
The weighted average interest rate paid by Identix on the Identix line of
credit for fiscal 1997 was approximately 8.5%. During fiscal 1996, Identix did
not borrow against the Identix line of credit. The weighted average interest
rate paid on the ANADAC line of credit for fiscal 1997 and fiscal 1996 was
approximately 8.3% and 8.5%, respectively.
Income Taxes. No federal income taxes were paid or accrued in fiscal 1997
and fiscal 1996 due to the use of NOL carryforwards in fiscal 1997 and
operating losses incurred in fiscal 1996.
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Liquidity and Capital Resources
Identix financed its operations during the 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, Identix'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, Identix 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 Identix's ability
to pay dividends on Identix's common stock. At December 31, 1998, Identix was
in default on two of its bank line of credit covenants. Identix has obtained
waivers of default from the bank for breaches of the covenants. Further,
Identix expects to be in default of one of the covenants at March 31, 1999, but
has obtained a waiver of default from the bank.
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.
Identix 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 Identix on working capital management. The increase in deferred
revenue was due to the expanding installed base of TouchPrint 600 systems under
maintenance agreements.
Identix used cash of $6,356,000 in its operating activities during the year
ended June 30, 1998 primarily due to increases in accounts receivable of
$9,839,000 and inventories of $1,868,000. These uses of cash were partially
offset by increases in deferred revenue, net of amortization, of $699,000 and
accounts payable of $2,114,000. The increase in accounts receivable was due
primarily to an increase in total revenues, and the increase in inventories was
due primarily to the stocking of inventory for Identix's biometric security and
biometric imaging product groups. The increase in deferred revenue was
primarily due to an increase in the number of TouchPrint 600 systems under
maintenance contracts. The increase in accounts payable was due to financing
the increase in inventories and timing of vendor payments.
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Identix 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 $1,575,000 in investing activities
during the year ended June 30, 1998 consisting of purchases of property and
equipment of $883,000 and additions to intangibles and other assets of
$631,000.
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 Identix's lines of credit, partially offset by
the proceeds from exercises of stock options of $1,040,000. Identix's financing
activities provided cash of $6,174,000 during the year ended June 30, 1998.
Financing activities consisted of increased net borrowings of $4,930,000
against Identix's lines of credit and proceeds from exercises of stock options
and warrants to purchase common stock of $1,244,000.
Identix did not have any material capital expenditure commitments as of
December 31, 1998.
Identix believes that cash flow from operations together with existing
working capital and the two bank lines of credit maintained by Identix, will be
adequate to fund Identix's cash requirements for at least the remainder of
fiscal 1999. However, Identix may require additional equity or debt financing
beyond the amounts currently forecasted by Identix to meet its working capital
or capital equipment needs. There can be no assurance that Identix would be
able to obtain financing or that the terms of any financing would be favorable
to Identix.
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
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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.
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, any 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,
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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.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF IDENTIX
The following table sets forth certain information regarding Identix's
outstanding shares of common stock beneficially owned as of December 31, 1998
by (1) each person who is known by Identix beneficially own more than 5% of the
outstanding common stock; (2) all directors; (3) all executive officers named
in the Summary Compensation Table; and (4) by all directors and officers as a
group. Percentage ownership is based on an aggregate of 25,427,211 shares
outstanding as of December 31, 1998. Shares of common stock subject to options
that are currently exercisable or exercisable within 60 days of December 31,
1998 are deemed to be outstanding and to be beneficially owned by the person
holding such options for the purpose of computing the percentage ownership of
such person, but are not deemed outstanding for computing the percentage of any
other person. Except as otherwise indicated, Identix believes that the
beneficial owners of the securities listed below, based on information
furnished by such owners, have sole investment and voting power with respect to
the common stock shown as being beneficially owned by them.
<TABLE>
<CAPTION>
Number Subject to
Total Options and Percentage
Directors, Officers and Number of Shares Warrants Exercisable Beneficially
5% Shareholders Beneficially Owned Within 60 Days Owned
----------------------- ------------------ -------------------- ------------
<S> <C> <C> <C>
Ascom USA Inc............ 4,858,924(1) -- 19.11%
9 East Ninth Street, #1
New York, NY 10003
Randall C. Fowler........ 1,337,165 327,083 5.19%
510 N. Pastoria Avenue
Sunnyvale, CA 94086
Larry J. Wells........... 4,903,924(2) 45,000 19.25%
Randall Hawks, Jr........ 110,000 105,000 *
Fred U. Sutter........... 55,000 45,000 *
Patrick H. Morton........ 93,320 45,000 *
Harrison N. Walther...... 304,770 65,417 1.20%
James P. Scullion........ 211,223 200,267 *
Daniel F. Maase.......... 92,952 92,952 *
Charles W. Richion....... 80,000 80,000 *
All directors and
officers as a group (15
persons)................ 7,327,249(2) 1,135,347 27.58%
</TABLE>
- --------
* Less than one percent.
(1) All of the Ascom USA Inc. beneficially owned shares are held in a voting
trust for which Mr. Larry Wells, a member of the Board of Directors of
Identix, is serving as the trustee. The trustee of the voting trust votes
all the shares held in the voting trust.
(2) Includes 4,858,924 shares held by Ascom USA Inc. in a voting trust for
which Mr. Wells is currently serving as voting trustee.
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LEGAL MATTERS
The validity of the Identix common stock to be issued to IDT stockholders
pursuant to the merger will be passed upon by Heller Ehrman White & McAuliffe,
Palo Alto, California, counsel to Identix.
Heller Ehrman White & McAuliffe will provide an opinion to Identix and
Brobeck Phleger & Harrison LLP will provide an opinion to Identicator
Technology as to the qualification of the merger as a reorganization under the
Internal Revenue Code.
EXPERTS
The consolidated financial statements of Identix as of June 30, 1998 and
1997, and for each of the three years in the period ended June 30, 1998
included in this prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given upon the authority
of said firm as experts in accounting and auditing.
The consolidated financial statements of IDT Holdings, Inc. (formerly
Identicator Technology, a California general partnership) as of December 31,
1998 and 1997 and for each of the three years in the period ended December 31,
1998 included in this prospectus have been so included in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
Identix has filed with the SEC a Registration Statement under the Securities
Act of 1933 on Form S-4, which covers the Identix common stock offered hereby.
This prospectus does not contain all the information set forth in the
registration statement and the exhibits and schedules thereto, because certain
parts have been omitted pursuant to the SEC rules and regulations. For such
information, reference is made to the registration statement, exhibits and
schedules filed with the SEC. In addition, Identix files annual, quarterly and
special reports, proxy statements and other information with the SEC. You may
read and copy any document filed by Identix at the SEC's public reference
facilities. Please call the SEC at 1-800-SEC-0330 for further information about
its public reference facilities. These SEC filings are also available to the
public at the SEC's web site at "www.sec.gov." Reports, proxy statements and
other information concerning Identix can also be inspected at the offices of
the American Stock Exchange, Inc., 86 Trinity Plaza, New York, New York 10006.
109
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
IDT HOLDINGS, INC.
(formerly Identicator Technology, a California general partnership)
Report of Independent Accountants........................................ F-2
Consolidated Balance Sheets.............................................. F-3
Consolidated Statements of Operations.................................... F-4
Consolidated Statement of Changes in Partners' Capital................... F-5
Consolidated Statements of Cash Flows.................................... F-6
Notes to Consolidated Financial Statements............................... F-7
IDENTIX INCORPORATED
Years ended June 30, 1998, 1997 and 1996
Report of Independent Accountants........................................ F-17
Consolidated Balance Sheets as of June 30, 1998 and 1997................. F-18
Consolidated Statements of Operations for the years ended June 30, 1998,
1997 and 1996........................................................... F-19
Consolidated Statements of Shareholders' Equity for the years ended June
30, 1998, 1997 and 1996................................................. F-20
Consolidated Statements of Cash Flows for the years ended June 30, 1998,
1997 and 1996........................................................... F-21
Notes to Consolidated Financial Statements............................... F-22
Schedule II Valuation and Qualifying Accounts and Reserves for the years
ended June 30, 1998, 1997 and 1996...................................... F-39
Six months ended December 31, 1998 and 1997
Consolidated Balance Sheets as of December 31, 1998 (unaudited).......... F-40
Consolidated Statements of Operations for the six months ended December
31, 1998 and 1997 (unaudited)........................................... F-41
Consolidated Statements of Cash Flows for the six months ended December
31, 1998 and 1997 (unaudited)........................................... F-42
Notes to Consolidated Financial Statements (unaudited)................... F-43
</TABLE>
F-1
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholders
IDT Holdings, Inc. and subsidiaries
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, changes in partners' capital and
shareholders deficit and cash flows present fairly, in all material respects,
the financial position of IDT Holdings Inc. and its subsidiaries at December
31, 1997 and 1998, and the results of their operations and their cash flows for
the years ended December 31, 1996, 1997 and 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
February 26, 1999
F-2
<PAGE>
IDT HOLDINGS, INC.
(formerly Identicator Technology, a California general partnership)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1998
---------- ------------
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents........................... $ 15,000 $ 76,000
Receivables, net of allowance for doubtful accounts
of $205,000 and $214,000 at December 31, 1997 and
1998, respectively................................. 827,000 1,407,000
Prepaid inventory from related parties.............. 211,000 87,000
Inventory........................................... -- 102,000
Prepaid expenses and other current assets........... 1,000 1,000
---------- ------------
Total current assets.............................. 1,054,000 1,673,000
Property and equipment, net........................... 132,000 312,000
Other assets.......................................... 5,000 5,000
---------- ------------
Total assets...................................... $1,191,000 $ 1,990,000
========== ============
Liabilities, Partners' Capital and Shareholders'
Deficit
Current liabilities:
Bank borrowings..................................... -- $ 304,000
Accounts payable.................................... -- 400,000
Accrued expenses and other current liabilities...... $3,000 142,000
Payable to related parties.......................... 139,000 560,000
Deferred revenue, current portion................... 59,000 322,000
---------- ------------
Total current liabilities......................... 201,000 1,728,000
Notes payable, net of issuance costs.................. -- 299,000
Deferred revenue, less current portion................ -- 40,000
---------- ------------
Total liabilities................................. 201,000 2,067,000
---------- ------------
Commitments (Note 5)
Partners' capital:
Identicator Corporation............................. 495,000 --
International Technology Concepts, Inc.............. 495,000 --
---------- ------------
Total partners' capital........................... 990,000 --
---------- ------------
Shareholders' deficit:
Preferred stock, $0.001 par value; 5,000,000 shares
authorized;
0 shares issued and outstanding.................... -- --
Common stock, $0.001 par value; 12,000,000 shares
authorized: 2,727,762 shares issued and outstand-
ing................................................ -- 3,000
Additional paid in capital.......................... -- 11,287,000
Deferred stock compensation......................... -- (10,248,000)
Accumulated deficit................................. -- (1,119,000)
---------- ------------
Total shareholders' deficit....................... -- (77,000)
---------- ------------
Total liabilities, partners' capital and
shareholders'deficit ............................ $1,191,000 $ 1,990,000
========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
IDT HOLDINGS, INC.
(formerly Identicator Technology, a California general partnership)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
Revenues:
Product sales............................. $1,929,000 $2,158,000 $ 3,769,000
Royalties................................. 1,132,000 1,036,000 609,000
---------- ---------- -----------
Total revenues.......................... 3,061,000 3,194,000 4,378,000
Cost of product sales....................... 758,000 668,000 2,017,000
---------- ---------- -----------
Gross profit................................ 2,303,000 2,526,000 2,361,000
Operating expenses:
Research and development.................. 792,000 1,019,000 1,440,000
Sales and marketing....................... 628,000 854,000 1,289,000
General and administrative................ 430,000 510,000 889,000
Stock compensation........................ -- -- 4,642,000
---------- ---------- -----------
Total operating expenses................ 1,850,000 2,383,000 8,260,000
---------- ---------- -----------
Operating income (loss)..................... 453,000 143,000 (5,899,000)
Interest income............................. 6,000 3,000 7,000
Interest expense............................ -- -- (86,000)
---------- ---------- -----------
Net income (loss)........................... $ 459,000 $ 146,000 $(5,978,000)
========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
IDT HOLDINGS, INC.
(formerly Identicator Technology, a California general partnership)
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' CAPITAL AND
SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
International Common Stock Additional Deferred Accumu-
Identicator Technology --------------- Paid in Stock lated
Corporation Concepts, Inc. Shares $ Capital Compensation Deficit Total
----------- -------------- --------- ----- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Partners' capital accounts,
January 1, 1996........ 343,000 342,000 -- -- -- -- -- 685,000
Net income for the year
ended December 31,
1996................... 229,000 230,000 -- -- -- -- -- 459,000
Distribution to
partners............... (150,000) (150,000) -- -- -- -- -- (300,000)
----------- ----------- --------- ----- ----------- ------------ ----------- -----------
Partners' capital
accounts, December 31,
1996................... 422,000 422,000 -- -- -- -- -- 844,000
Net income for the year
ended December
31, 1997............... 73,000 73,000 -- -- -- -- -- 146,000
----------- ----------- --------- ----- ----------- ------------ ----------- -----------
Partners' capital
accounts, December 31,
1997................... 495,000 495,000 -- -- -- -- -- 990,000
Net loss for the nine
months ended
September 30, 1998..... (2,429,000) (2,430,000) -- -- -- -- -- (4,859,000)
Deferred stock
compensation........... -- -- -- -- 11,267,000 (11,267,000) -- --
Stock compensation
expense and
amortization of
deferred stock
compensation........... -- -- -- -- -- 4,191,000 -- 4,191,000
Stock issuance in lieu
of partners' capital
accounts............... 1,934,000 1,935,000 2,727,762 3,000 (3,872,000) -- -- --
Amortization of deferred
stock compensation..... -- -- -- -- -- 451,000 -- 451,000
Issuance of warrant to
purchase common stock.. -- -- -- -- 269,000 -- -- 269,000
Remeasurement of
deferred stock
compensation........... -- -- -- -- 3,623,000 (3,623,000) -- --
Net loss for the three
months ended
December 31, 1998...... -- -- -- -- -- -- (1,119,000) (1,119,000)
----------- ----------- --------- ----- ----------- ------------ ----------- -----------
Shareholders' equity,
December 31, 1998...... $ -- $ -- 2,727,762 3,000 $11,287,000 $(10,248,000) $(1,119,000) $ (77,000)
=========== =========== ========= ===== =========== ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
IDT HOLDINGS, INC.
(formerly Identicator Technology, a California general partnership)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1996 1997 1998
--------- --------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).......................... $ 459,000 $ 146,000 $(5,978,000)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation............................. 11,000 20,000 128,000
Provisions for doubtful accounts......... 71,000 134,000 9,000
Amortization of warrants and deferred
stock compensation...................... -- -- 4,710,000
Changes in operating assets and
liabilities:
Accounts receivable.................... 340,000 (748,000) (589,000)
Prepaid inventory from related
parties............................... (103,000) (108,000) 124,000
Inventory.............................. -- -- (102,000)
Accounts payable....................... -- -- 400,000
Accrued liabilities.................... (71,000) -- 139,000
Payable to related parties............. -- 139,000 421,000
Deferred revenue....................... -- 59,000 303,000
--------- --------- -----------
Net cash provided by (used in)
operating activities................ 707,000 (358,000) (435,000)
--------- --------- -----------
Cash flows used in investing activities:
Acquisition of property and equipment...... (35,000) (96,000) (308,000)
Other assets............................... -- (5,000) --
--------- --------- -----------
Net cash used in investing activities.... (35,000) (101,000) (308,000)
--------- --------- -----------
Cash flows provided by (used in) financing
activities:
Bank borrowings............................ -- -- 304,000
Notes payable.............................. -- -- 500,000
Distributions to partners.................. (300,000) -- --
--------- --------- -----------
Net cash (used in) provided by financing
activities.............................. (300,000) -- 804,000
Net increase (decrease) in cash and cash
equivalents................................. 372,000 (459,000) 61,000
Cash and cash equivalents at beginning of
period...................................... 102,000 474,000 15,000
--------- --------- -----------
Cash and cash equivalents at end of period... $ 474,000 $ 15,000 $ 76,000
========= ========= ===========
Disclosure of non-cash items:
Issuance of warrants in connection with
borrowings................................ $ 269,000
===========
Deferred compensation related to stock
options................................... $14,890,000
===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
IDT HOLDINGS, INC.
(formerly Identicator Technology, a California general partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1--Formation and Business:
Identicator Technology, a California general partnership (the "Venture"),
was a joint venture between Identicator Corporation and International
Technology Concepts, Inc. (the "partners"). The joint venture agreement was
entered into on May 31, 1993 and amended on December 3, 1993 and was the
culmination of design and development activities started in 1991. The Venture
operated and managed its business and entered into contracts as a general
partnership. On September 30, 1998, ownership of the assets and business of the
Venture was transferred to Identicator Technology, Inc., a wholly owned
subsidiary of IDT Holdings, Inc. ("IDT" or the "Company"). See Note 9 to the
consolidated financial statements. The Company designs, develops, manufactures,
markets, sells and licenses biometric identification products and systems.
Management of the former Venture partners are involved in the day to day
management of the Company.
Management of IDT believes that sufficient working capital will be available
after the proposed merger with Identix to implement its business plan. In the
event the merger is not completed as currently contemplated, IDT will likely be
required to raise additional equity or debt financing to meet its working
capital needs beyond March 2000. IDT management has had discussions with
several lenders and believes that it will be able to obtain sufficient amounts
of debt financing. There can be no assurance, however, that IDT would be able
to obtain such financing or that the terms of such financing would be favorable
to IDT.
Note 2--Summary of Significant Accounting Policies:
Principles of consolidation
For the period from September 30, 1998 to December 31, 1998, the
consolidated financial statements include the accounts of IDT Holdings, Inc.
and its wholly-owned subsidiary. All significant intercompany accounts and
transactions have been eliminated.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and cash equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. At December
31, 1997 and 1998, cash equivalents include $4,000 and $26,000, respectively,
of money market funds, the fair value of which approximates cost.
F-7
<PAGE>
IDT HOLDINGS, INC.
(formerly Identicator Technology, a California general partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Concentration of credit risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash, cash equivalents and accounts
receivable. Substantially all of the Company's cash and cash equivalents are
invested in high quality financial institutions.
To date, accounts receivable have been derived from revenues from customers
located primarily in the United States. The Company performs ongoing credit
evaluations of its customers' financial conditions and, generally, requires no
collateral from its customers. The Company maintains an allowance for doubtful
accounts receivable based upon the expected collectibility of accounts
receivable.
For the year ended December 31, 1997 and 1998, three customers accounted for
70% and three customers accounted for 79% of the total revenues, respectively.
At December 31, 1997 and 1998, one customer accounted for 67% and one customer
accounted for 54% of the total accounts receivable, respectively.
Prepaid inventory from related parties and inventory
At December 31, 1997, inventory consisted primarily of prepaid inventories,
for which payments had been made but no goods received, purchased from
International Technology Concepts, Inc. At December 31, 1998, inventories
consisted of prepaid inventory of $87,000 and work in progress of $102,000.
Inventories are stated at the lower of cost (determined on a first-in first-out
basis) or market.
Property and equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets, generally three to five years.
Long-lived assets
The Company evaluates the recoverability of its long-lived assets in
accordance with Statements of Financial Accounting Standards No. 121,
"Accounting for Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed of" ("SFAS 121"). SFAS 121 requires recognition of impairment of long-
lived assets in the event the net book value of such assets exceeds the future
undiscounted cash flows attributable to such assets.
Revenue recognition
The Company generates revenues from the sales of products and from product
license agreements. Product sales are recognized upon shipment. Product license
revenues are recognized on
F-8
<PAGE>
IDT HOLDINGS, INC.
(formerly Identicator Technology, a California general partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
delivery, provided other remaining obligations of the Company are not
significant and collection is probable. Royalty revenues are recognized as
earned in accordance with the terms of the license agreements.
For 1996, 1997 and 1998 royalty revenues were recognized pursuant to an
agreement under which the Company provided the licensee with technical support.
The agreement was cancelable by the licensee, subject to certain termination
penalties. Royalty revenues under this agreement have been recognized ratably
over the license term. The agreement expired in March 1998.
Deferred revenue
Deferred revenue consist primarily of advance payments related to license
contracts, evaluation units shipped to customers and revenue from product sales
which Company's obligations have not been entirely completed.
Research and development
Research and development expenditures are charged to operations as incurred.
Advertising
The Company charges advertising costs to expenses as they are incurred.
Advertising expense for 1996, 1997 and 1998 was $15,000, $33,000 and $48,000
respectively.
Accounting for stock-based compensation
The Company accounts for stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock
Issued to Employees," and complies with the disclosure provisions of Statement
of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-
Based Compensation."
Taxation
Prior to the transfer of the assets and business to IDT, the Venture was not
a taxpaying entity as each partner was individually liable for its own tax
payments.
IDT's income taxes are computed using the asset and liability method,
deferred income tax assets and liabilities are determined based on the
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the currently enacted tax rates and laws.
F-9
<PAGE>
IDT HOLDINGS, INC.
(formerly Identicator Technology, a California general partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 3--Property and Equipment:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------
1997 1998
-------- --------
<S> <C> <C>
Development equipment.............................. $146,000 $433,000
Furniture and fixtures............................. 27,000 48,000
-------- --------
173,000 481,000
Less: Accumulated depreciation and amortization.... (41,000) (169,000)
-------- --------
$132,000 $312,000
======== ========
</TABLE>
Depreciation expense was $11,000, $20,000 and $128,000 for 1996, 1997 and
1998, respectively.
Note 4--Borrowings:
Notes Payable
On June 5, 1998, the Venture entered into a Note and Warrant Purchase
Agreement which required a reorganization of the Venture into a corporation.
The Venture issued subordinated promissory notes to an independent third party
in the principal amount of $500,000 having a maturity date of June 5, 2000 and
bearing interest at 5.5%. The proceeds of the Note were used for general
working capital purposes. In connection with the subordinated promissory note,
the Venture issued warrants to acquire 60,000 shares of Series A preferred
stock exercisable for a period of five years at an exercise price of $9.00 per
share. The warrants were valued using the Black/Scholes option pricing model.
The estimated fair value of the Company's common stock was subsequently deemed
to be $4.00 per share at the date of grant of the warrants. The following
assumptions were used in determining the estimated fair value of the warrants
granted:
<TABLE>
<S> <C>
Expected life........................................................ 5 years
Volatility........................................................... 50%
Risk free interest rate.............................................. 6.2%
Dividend rate........................................................ 0%
</TABLE>
The estimated fair value of $68,000 was recorded as a debt issuance cost and
will be amortized over the term of the debt. In November 1998, the exercise
price of the warrants were reduced to $5.00 per share, increasing the estimated
fair value of the warrants to approximately $268,000. Amortization of $68,000
related to these warrants has been recorded as interest expense in the year
ended December 31, 1998. None of the warrants have been exercised as of
December 31, 1998.
Bank borrowings
In June 1998, the Company entered into a Loan and Security Agreement with a
bank, which provided for borrowings of up to $1,000,000 but limited to 80% of
the eligible accounts receivable as
F-10
<PAGE>
IDT HOLDINGS, INC.
(formerly Identicator Technology, a California general partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
determined by the bank. Borrowings bear interest at a rate of prime (7.7% at
December 31, 1998) plus 1.0% per annum and are collateralized by the assets of
the Company. The Loan and Security Agreement expires in July 1999. At December
31, 1998 the Company had $304,000 outstanding under the agreement. Under this
agreement, the Company was required to maintain certain financial covenants. At
December 31, 1998, the Company was not in compliance with certain financial
covenants; however, the bank granted a waiver as of such date. Subsequently, in
February 1999 the Loan and Security agreement was amended to increase the
amount available for borrowings up to $1,500,000, to remove the financial
covenants and to change the interest rate to prime plus 0.5% per annum. In
consideration for the amendment, Identix agreed to deliver to the bank a
standby letter of credit in the sum of $1,500,000, which is unconditional,
irrevocable, payable to the bank and expires on March 31, 2000. The Company has
agreed to reimburse Identix in full for all amounts drawn on the letter of
credit.
Note 5--Commitments:
Purchase commitments
At December 31, 1998 the Company had approximately $1.1 million in
noncancelable purchase commitments with suppliers. The Company expects to sell
all product which it has committed to purchase from suppliers.
Leases
The Company leases its premises in Maryland, under an operating lease
agreement which expires in October 2002. Future minimum lease payments required
under the operating lease as of December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999................................ 65,000
2000................................ 67,000
2001................................ 69,000
2002................................ 59,000
</TABLE>
Rent expense for the years ended December 31, 1996, 1997 and 1998 was
$25,000, $34,000 and $101,000, respectively.
Note 6--Recapitalization and Reorganization:
On September 30, 1998, the Venture entered into a recapitalization and
reorganization. The recapitalization and reorganization resulted in the
transfer of the assets and business of the partnership to Identicator
Technology, Inc., a wholly owned subsidiary of IDT. The recapitalization and
reorganization resulted in the issuance of a total of 2,727,762 shares to the
former Venture partners or the shareholders of the former partners.
F-11
<PAGE>
IDT HOLDINGS, INC.
(formerly Identicator Technology, a California general partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 7--Partners' Capital:
Prior to the recapitalization and reorganization described in Note 6, the
partners shared equally in the profits and losses of the Venture. The partners
were each required to contribute operating capital as required and agreed. No
voluntary contributions were permitted and no withdrawals of capital were
permitted without the consent of the members.
Note 8--Shareholders' Equity
Preferred Stock
The Board of Directors is authorized to issue an aggregate of 5,000,000
shares of $0.001 par value Preferred Stock, which may be issued from time to
time in one or more series. To date, 600,000 shares have been designated Series
A Preferred Stock. No shares of Series A Preferred Stock have been issued.
The rights, preferences, privileges and restrictions of holders of Series A
Preferred Stock are set forth in the Company's Certificate of Incorporation,
and are summarized as follows:
Voting
The holders of Series A Preferred Stock have the right to one vote for each
share of common stock into which such Series A Preferred Stock could be
converted.
Dividends
Holders of Series A Preferred Stock are entitled to receive dividends prior
and in preference to any declaration or payment of any dividend on common
stock. Such dividends are not cumulative.
Conversion
Each share of Series A Preferred Stock is convertible at the option of the
holder at any time into shares of Common Stock based on a conversion formula.
The initial conversion rate is one share of Common Stock for each share of
Series A Preferred Stock. The initial conversion rate of Series A Preferred
Stock is subject to adjustments as provided in the Certificate of
Incorporation. Each share of Series A Preferred Stock shall automatically be
converted into shares of Common Stock upon the earlier of (i) the date
specified by agreement of the holders of a majority of the outstanding shares
of Series A Preferred Stock, voting as a separate class, or (ii) upon closing
of a firm commitment underwritten initial public offering of the Company's
Common Stock.
Liquidation, Dissolution or Winding Up
In the event of liquidation, dissolution or winding up of the Company,
holders of Series A Preferred Stock are entitled to receive, prior and in
preference to any distribution of the assets of the
F-12
<PAGE>
IDT HOLDINGS, INC.
(formerly Identicator Technology, a California general partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Company to the holders of Common Stock, an amount equal to $9.00 per share plus
any declared but unpaid dividends. In the event that funds are insufficient to
make a complete distribution to the holders of Series A Preferred Stock as
described above, the distribution shall be distributed ratably among the
holders of Series A Preferred Stock. In the event funds are sufficient to make
a complete distribution to the holders of Series A Preferred Stock as described
above, the remaining assets will be distributed ratably among the holders of
Common Stock.
A merger of the Company with or into another corporation will result in the
holders of the Series A Preferred Stock receiving stock or cash received from
the acquiring corporation, or in combination thereof, an amount equal to the
original Series A Preferred Stock issue price plus an amount equal to the
applicable premium. In the event that proceeds of the transaction are not
sufficient to make full payment of the preferential amounts then the entire
amount shall be distributed to the holders of the Series A Preferred Stock in
proportion to the amount of such stock owned.
Common Stock
The Company's Certificate of Incorporation authorizes the Company to issue
12,000,000 shares of $0.001 par value Common Stock.
Note 9--Stock Option/Stock Issuance Plan
In September 1998, the Company adopted the 1998 Stock Option/Stock Issuance
Plan (the "Plan"). The Plan provides for the granting of stock options to
employees, non-employee Board members and consultants. The 1998 Plan is divided
in two separate equity programs: (i) the Stock Issuance Program, and (ii) an
Option Grant Program. The Company has reserved 1,500,000 shares of Common Stock
for issuance under the Plan.
Under the Stock Issuance Program eligible persons may be issued shares of
Common Stock directly, either through the purchase of those shares at fair
value or as a bonus for services rendered to the Company. The purchase price
per share shall not be less than 85% of the estimated fair value of the shares
on the date of the grant as determined by the Board of Directors, provided,
however, that the purchase price of shares of Common Stock issued to a 10%
shareholder shall not be less than 110% of the estimated fair value of the
shares on the date of the grant. Shares issued under the Plan may be fully and
immediately vested upon issuance or may vest in one or more installments over
the person's period of service or upon attainment of specified performance
objectives. To date, no shares of Common Stock have been issued under the Plan.
Options granted under the Option Grant Program may be either incentive stock
options or nonqualified stock options. Incentive stock options ("ISO") may be
granted only to Company employees. Nonqualified stock options ("NSO") may be
granted to Company employees and consultants. Options under the Plan may be
granted for periods of up to ten years and at prices no less than 85% of the
estimated fair value of the shares on the date of the grant as determined by
the Board of Directors, provided, however, that (i) the exercise price of an
ISO and NSO shall not be
F-13
<PAGE>
IDT HOLDINGS, INC.
(formerly Identicator Technology, a California general partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
less than 100% and 85% of the estimated fair value of the shares on the date of
grant, respectively, and (ii) the exercise price of an ISO and NSO granted to a
10% shareholder shall not be less than 110% of the estimated fair value of the
shares on the date of the grant. The maximum term of each option is 10 years.
IDT had no employees in any of the years ended December 31, 1998, 1997 and
1996. IDT contracted for substantially all of its services from two affiliated
companies, Identicator Corporation (and subsequent to its spin-off,
Identicator, Inc.) and International Technology Concepts, Inc. The following
table summarizes cumulative IDT option activity through December 31, 1998.
<TABLE>
<CAPTION>
Number Value at Value at
of Date of December 31,
Option Recipients Options Grant 1998
----------------- --------- ----------- ------------
<S> <C> <C> <C>
Employees of IDT (excluding officers and
directors)................................. -- -- --
IDT officers and directors.................. 1,002,609 $ 5,810,000 $ 6,697,000
Employees and consultants of International
Technology Concepts (excluding IDT officers
and directors)............................. 779,225 4,515,000 6,779,000
Employees of Identicator, Inc.
(excluding IDT officers and directors)..... 162,500 942,000 1,414,000
Other non-employees of IDT ................. -- -- --
--------- ----------- -----------
TOTAL 1,944,334 $11,267,000 $14,890,000
========= =========== ===========
</TABLE>
As these options were granted to non-employees, these options are subject to
the accounting prescribed by SFAS 123. In addition, 1,247,167 options subject
to future vesting requirements are accounted for as variable options in
accordance with EITF 96-18. Deferred compensation expense related to unvested
options will be recognized over the four year vesting term of the options.
Options subject to future vesting were issued in 1998 in consideration for
future research and development, selling, general and administrative services.
As part of the recapitalization and reorganization described in Note 6, the
Company assumed the obligations of Identicator Corporation under its 1995 Non-
Qualified Stock Option Plan. Each outstanding and unexercised option to
purchase Identicator Corporation common stock became an option to purchase
common stock of the Company on a one for one basis. A total of 697,167 options
were assumed.
The following summarizes stock activity under the Plan.
<TABLE>
<CAPTION>
Stocks Weighted Average
Available for Options Exercise/Issuance
Grant/Issuance Outstanding Price Per Share
-------------- ----------- -----------------
<S> <C> <C> <C>
Stocks authorized.............. 1,500,000 -- --
Options granted................ (1,247,167) 1,247,167 $0.28
Options exercised.............. -- -- --
Options canceled............... -- -- --
---------- ---------
Balance at December 31, 1998... 252,833 1,247,167 $0.28
========== =========
</TABLE>
F-14
<PAGE>
IDT HOLDINGS, INC.
(formerly Identicator Technology, a California general partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 1998, 801,098 options were vested with a weighted average
exercise price of $0.28. The weighted average of the remaining contractual life
was 9.67 years.
The fair value of each option grant is estimated on the date of the grant
using the Black Scholes method with the following assumptions used for grants
during the year ended December 31, 1998: dividend of yield of 0%; risk-free
interest rates of 5.2%; volatility of 50% and a weighted average expected
option term ranging from two to five years. The fair value of the options
granted during 1998 was subsequently determined to be approximately $5.79. The
fair value of these options recognized as deferred compensation will be subject
to revaluation at each balance sheet date based on the fair value of the
Company's common stock at each balance sheet date. The fair value of options
recognized as deferred compensation was $8.70 at December 31, 1998.
Compensation expense of $4,040,000 was recorded in 1998 related to the fully
vested options assumed from Identicator Corporation.
Amortization of deferred compensation of $602,000 was recorded in 1998,
based on the fair value of the options as determined at date of grant. At
December 31, 1998 the Company remeasured the fair value of the options recorded
as deferred compensation to $10,850,000. The balance of deferred compensation
at December 31, 1998 was $10,248,000.
Note 10--Income taxes
No provision for income taxes has been recorded. Prior to September 30,
1998, the Venture was not a tax paying entity as each partner was individually
liable for its own tax payments. The Company incurred a loss in the period from
October 1, 1998 to December 31, 1998:
The components of the deferred tax assets are as follows:
<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
Net operating loss carryforwards............................. $ 71,000
Reserves..................................................... 93,000
Stock compensation........................................... 1,849,000
Deferred revenue............................................. 144,00
-----------
2,157,000
Valuation allowance.......................................... (2,157,000)
-----------
$ 0
===========
</TABLE>
In accordance with generally accepted accounting principles, a valuation
allowance must be established for a deferred tax asset if it is uncertain that
a tax benefit may be realized from the asset in the future. A tax benefit will
only be realized for a significant portion of the deferred tax assets if the
stock options for which stock compensation has been recorded are exercised. If
these options are not exercised, or if the fair market value is less than that
used in determining the stock compensation, then this tax benefit may be
reduced or eliminated. The Company has established a valuation
F-15
<PAGE>
IDT HOLDINGS, INC.
(formerly Identicator Technology, a California general partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
allowance to the extent of its deferred tax assets, since it is more likely
than not that a benefit may not be realized in the future.
The Company had federal and state net operating loss carryforwards of
approximately $192,000 and $96,000, respectively, at December 31, 1998,
available to offset future taxable income. The Company's federal and state net
operating loss carryforwards will expire by the year 2018 and 2003,
respectively, if not utilized.
Note 11--Related Party Transactions:
The Company paid fees for administrative support to International Technology
Concepts, Inc. in the amount of $106,000, $91,000, and $91,000 in 1996, 1997
and 1998, respectively and $91,000 in each year to Identicator, Inc. Management
of Identicator Inc. (a company with common ownership to Identicator
Corporation) was involved in the day to day management of the Company.
The Company recorded amounts of $115,000, $214,000 and $833,000 in 1996,
1997 and 1998, respectively, in respect of salaries and benefits for employees
of Identicator, Inc. and its predecessor Identicator Corporation who were
providing sales and marketing services to the Company. In addition, the Company
recorded $388,000, $540,000 and $748,000 in 1996, 1997 and 1998 representing
payments to International Technology Concepts, Inc. for salaries and benefits
of employees providing research and development services to the Company.
International Technology Concepts, Inc. also undertook research and
development projects on behalf of the Company. In 1996, 1997 and 1998, the
Company recorded research and development expense in the amounts of $273,000,
$291,000 and $518,000 for projects conducted by International Technology
Concepts, Inc.
Prior to 1998, payments by the Company to Identicator Inc., Identicator
Corporation and International Technology Concepts, Inc. for support services
were based on a percentage of gross profits generated by the Venture.
Thereafter, payments by the Company to Identicator, Inc., Identicator
Corporation and International Technology Concepts, Inc. for employee and
research and development services are based on actual costs incurred by these
entities. Management believes that the payments made represented reasonable
compensation for the type and level of support services, employee services and
research and development expenses provided, and approximate the costs that
would have been incurred by the Venture on a stand-alone basis.
The Company paid commissions of $97,000 and $52,000 in 1996 and 1997,
respectively, to International Technology Concepts, Inc. and $267,000 and
$261,000 in 1996 and 1997, respectively, to Identicator Corporation. No
commissions were paid in 1998.
The Company made purchases of inventory from International Technology
Concepts, Inc. in the amount of $719,000, $707,000 and $650,000 in 1996, 1997
and 1998, respectively.
F-16
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Identix Incorporated
In our opinion, the consolidated financial statements listed in the
accompanying index on Page F-1 present fairly, in all material respects, the
financial position of Identix Incorporated and its subsidiaries at June 30,
1998 and 1997, and the results of their operations and their cash flows for
each of the three years in the period ended June 30, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
July 28, 1998
F-17
<PAGE>
IDENTIX INCORPORATED
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents........................ $ 753,000 $ 2,510,000
Accounts receivable, less allowance for doubtful
accounts of $866,000 and $625,000............... 28,576,000 18,737,000
Inventories...................................... 7,163,000 5,295,000
Prepaid expenses and other assets................ 586,000 323,000
------------ ------------
Total current assets........................... 37,078,000 26,865,000
Property and equipment, net........................ 2,105,000 2,567,000
Intangibles and other assets....................... 2,768,000 3,008,000
Investment in joint venture........................ 61,000 --
------------ ------------
Total assets................................... $ 42,012,000 $ 32,440,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to banks........................... $ 6,849,000 $ 1,919,000
Accounts payable................................. 8,428,000 6,314,000
Accrued compensation............................. 1,837,000 1,515,000
Other accrued liabilities........................ 574,000 1,079,000
Deferred revenue................................. 1,237,000 561,000
------------ ------------
Total current liabilities...................... 18,925,000 11,388,000
Deferred revenue................................... 88,000 65,000
Other liabilities.................................. 89,000 89,000
------------ ------------
Total liabilities.............................. 19,102,000 11,542,000
------------ ------------
Commitments and contingencies (Notes 9 and 10)
Shareholders' equity:
Common stock, no par value; 50,000,000 shares
authorized; 25,255,577 and 24,942,778 shares
issued and outstanding.......................... 52,527,000 51,283,000
Accumulated deficit.............................. (29,436,000) (30,204,000)
Cumulative translation adjustment................ (181,000) (181,000)
------------ ------------
Total shareholders' equity..................... 22,910,000 20,898,000
------------ ------------
Total liabilities and shareholders' equity..... $ 42,012,000 $ 32,440,000
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-18
<PAGE>
IDENTIX INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Fiscal year ended June 30,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Net product revenues..................... $34,720,000 $26,652,000 $16,565,000
Fingerprinting services revenues......... 1,078,000 -- --
Services revenues........................ 43,576,000 25,891,000 21,976,000
----------- ----------- -----------
Total revenues........................ 79,374,000 52,543,000 38,541,000
----------- ----------- -----------
Costs and expenses:
Cost of product revenues................. 16,887,000 13,359,000 8,722,000
Cost of fingerprinting services
revenues................................ 1,028,000 -- --
Cost of services revenues................ 37,477,000 20,633,000 17,958,000
Research, development and engineering.... 4,572,000 2,754,000 1,486,000
Marketing and selling.................... 9,107,000 8,076,000 4,958,000
General and administrative............... 8,474,000 7,171,000 4,431,000
Reorganization and other non-recurring
costs................................... 717,000 -- --
Write-off of acquired in-process
research and development................ -- -- 4,723,000
----------- ----------- -----------
Total costs and expenses.............. 78,262,000 51,993,000 42,278,000
----------- ----------- -----------
Income (loss) from operations............. 1,112,000 550,000 (3,737,000)
Interest and other income (expense), net.. 66,000 232,000 460,000
Interest expense.......................... (239,000) (264,000) (164,000)
----------- ----------- -----------
Income (loss) before equity interest in
joint venture............................ 939,000 518,000 (3,441,000)
Equity interest in joint venture.......... (171,000) -- --
----------- ----------- -----------
Net income (loss)......................... $ 768,000 $ 518,000 $(3,441,000)
=========== =========== ===========
Basic net income (loss) per share......... $ 0.03 $ 0.02 $ (0.15)
=========== =========== ===========
Diluted net income (loss) per share....... $ 0.03 $ 0.02 $ (0.15)
=========== =========== ===========
Weighted average common shares............ 25,104,000 24,817,000 23,485,000
Weighted average common shares assuming
dilution................................. 25,669,000 25,586,000 23,485,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-19
<PAGE>
IDENTIX INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
---------------------- Accumulated Cumulative
Shares Amount Deficit Translation Adj. Total
---------- ----------- ------------ ---------------- -----------
<S> <C> <C> <C> <C> <C>
Balance June 30, 1995... 21,520,879 $39,437,000 $(27,163,000) $ -- $12,274,000
Sale of common stock
under stock option
plans.................. 679,724 1,569,000 1,569,000
Sale of common stock
under warrant
exercise............... 1,295,885 3,559,000 3,559,000
Issuance of common stock
related to acquisition
of Fingerscan Pty
Limited................ 668,976 5,459,000 5,459,000
Issuance of common stock
related to acquisition
of Innovative Archival
Solutions, Inc. ....... 155,000 70,000 70,000
Cumulative translation
adjustment............. (18,000) (18,000)
Net loss................ (3,441,000) (3,441,000)
---------- ----------- ------------ --------- -----------
Balance June 30, 1996... 24,320,464 50,024,000 (30,534,000) (18,000) 19,472,000
Sale of common stock
under stock option
plans.................. 66,739 190,000 190,000
Sale of common stock
under warrant
exercise............... 105,575 332,000 332,000
Cumulative translation
adjustment............. (163,000) (163,000)
Issuance of common stock
related to acquisition
of
Biometric Applications
and Technology, Inc. .. 450,000 737,000 (188,000) 549,000
Net income.............. 518,000 518,000
---------- ----------- ------------ --------- -----------
Balance June 30, 1997... 24,942,778 51,283,000 (30,204,000) (181,000) 20,898,000
Sale of common stock
under stock option
plans.................. 287,799 1,191,000 1,191,000
Sale of common stock
under warrant
exercise............... 25,000 53,000 53,000
Net income.............. 768,000 768,000
---------- ----------- ------------ --------- -----------
Balance June 30, 1998... 25,255,577 $52,527,000 $(29,436,000) $(181,000) $22,910,000
========== =========== ============ ========= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-20
<PAGE>
IDENTIX INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Fiscal year ended June 30,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Increase (decrease) in cash and cash
equivalents:
Net income (loss)................... $ 768,000 $ 518,000 $ (3,441,000)
Adjustments to reconcile net income
(loss) to net cash provided by or
used for operating activities:
Depreciation....................... 1,345,000 1,116,000 1,045,000
Amortization of intangibles........ 871,000 814,000 492,000
Amortization of deferred revenue... (2,127,000) (937,000) (408,000)
Write-off of acquired in-process
research
and development................... -- -- 4,723,000
Increase in inventory reserve...... 338,000 284,000 177,000
Changes in assets and liabilities,
net of effects of acquisitions:
Accounts receivable................ (9,839,000) (2,406,000) (7,966,000)
Inventories........................ (2,206,000) (1,115,000) (1,896,000)
Prepaid expenses and other assets.. (263,000) (57,000) 253,000
Accounts payable................... 2,114,000 3,005,000 1,484,000
Accrued compensation............... 322,000 279,000 169,000
Other accrued liabilities.......... (505,000) 424,000 (299,000)
Deferred revenue................... 2,826,000 1,014,000 437,000
------------ ------------ ------------
Net cash provided by (used for)
operating activities............... (6,356,000) 2,939,000 (5,230,000)
------------ ------------ ------------
Cash flows used in investing
activities:
Capital expenditures................ (883,000) (1,379,000) (1,951,000)
Investment in joint venture......... (61,000) -- --
Additions to intangibles and other
assets............................. (631,000) (975,000) (898,000)
Cash received in acquisitions....... -- 6,000 180,000
------------ ------------ ------------
Net cash used in investing
activities......................... (1,575,000) (2,348,000) (2,669,000)
------------ ------------ ------------
Cash flows provided by financing
activities:
Borrowings under bank lines of
credit............................. 20,150,000 16,530,000 14,361,000
Payments under bank lines of
credit............................. (15,220,000) (16,457,000) (14,666,000)
Borrowings under long-term note..... -- -- 318,000
Principal payments on long-term
note............................... -- (233,000) (85,000)
Proceeds from sale of common stock
and warrants, net.................. 1,244,000 522,000 5,128,000
Capital contribution................ -- 737,000 --
Other, net.......................... -- 2,000 --
------------ ------------ ------------
Net cash provided by financing
activities......................... 6,174,000 1,101,000 5,056,000
------------ ------------ ------------
Effect of exchange rate changes on
cash and cash equivalents........... -- (163,000) (18,000)
------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents.................... (1,757,000) 1,529,000 (2,861,000)
Cash and cash equivalents at
beginning of year................... 2,510,000 981,000 3,842,000
------------ ------------ ------------
Cash and cash equivalents at end of
year................................ $ 753,000 $ 2,510,000 $ 981,000
============ ============ ============
Supplemental disclosures of cash flow
information:
Cash paid during the year for
interest............................ $ 291,000 $ 206,000 $ 172,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-21
<PAGE>
IDENTIX INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
Identix Incorporated (the "Company") designs, manufactures, develops and
markets two categories of products for security, anti-fraud, law enforcement
and other applications: (i) Biometric Security products that verify the
identity of an individual through the unique biological characteristics of a
fingerprint and (ii) Biometric Imaging products that electronically capture
forensic quality fingerprint images 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, Inc.
("ANADAC"). The principal markets for the Company's products are the Americas,
Asia, Australia, Europe and the Middle East.
On March 26, 1996, the Company acquired Fingerscan Pty Limited
("Fingerscan") pursuant to a share purchase agreement whereby Fingerscan became
a wholly owned subsidiary of the Company. The acquisition was accounted for as
a purchase (Note 2). In fiscal 1998, Fingerscan changed its name to Identix
Australia Pty Limited ("Identix Australia").
On June 30, 1996, the Company acquired Innovative Archival Solutions, Inc.
("IAS") pursuant to a share purchase agreement. The acquisition was accounted
for as a pooling of interests (Note 2). Since September 30, 1997, the business
of IAS has been conducted through Sylvan/Identix Fingerprinting Center, L.L.C.
("SIFC").
On July 23, 1997, the Company acquired Biometric Applications and
Technology, Inc. ("BA&T") pursuant to a share purchase agreement. The
acquisition was accounted for as a pooling of interests (Note 2).
Ascom USA Inc., a subsidiary of Ascom Hasler AG, a Swiss Company, owned
approximately 20% of the Company's common stock at June 30, 1998 (Note 6).
Basis of Consolidation
The consolidated financial statements include the accounts of Identix
Incorporated and its wholly owned subsidiaries: ANADAC, Identix Australia and
BA&T; all significant intercompany balances and transactions have been
eliminated in consolidation.
Management Estimates and Assumptions
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
F-22
<PAGE>
IDENTIX INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Joint Venture
On September 30, 1997, the Company entered into a joint venture agreement
with Sylvan Learning Centers, Inc. to form SIFC for the purpose of providing
fingerprinting services through Sylvan's testing systems nationwide. The
Company owns a 50% interest in the joint venture. For certain contracts held by
Identix prior to the joint venture, Identix subcontracts the fingerprinting
services to the joint venture. Revenues received by Identix under these
contracts are presented separately as fingerprinting services revenue in the
consolidated statement of operations. As of July 1, 1998, the contracts have
been assigned to SIFC.
Revenue Recognition
Revenue from product sales is recognized in accordance with the terms of
sale, generally upon shipment by the Company, provided no significant vendor
obligations remain and collection of the receivable is deemed probable.
Extended service and maintenance contract revenue is deferred and recognized
ratably over the life of the service period of the related agreement.
The majority of the Company's services are performed for the U.S. Government
under various cost-reimbursable, time and material and fixed-price contracts.
Revenues for cost-plus fixed fee contracts are recognized as costs are
incurred, including a proportionate amount of the fee earned. Revenues on time-
and-materials contracts are recognized to the extent of billable rates times
hours worked plus materials expense incurred. Revenues on fixed-price contracts
are generally recognized on the percentage-of-completion method based on costs
incurred in relation to total estimated costs. Unbilled accounts receivable at
June 30, 1998 represent revenue accrued which becomes billable upon attainment
of contract milestones. Provisions for estimated contract losses are recorded
in the period such losses are determined.
Services revenues directly from contracts with the U.S. Government,
principally with the Department of Defense, and from subcontracts with other
U.S. Government contractors were approximately 89% of total services revenues
for fiscal 1998, 77% for fiscal 1997 and 78% for fiscal 1996. Contract costs
for services revenues to the U.S. Government, including indirect expenses, are
subject to audit and subsequent adjustment by negotiation between the Company
and U.S. Government representatives. Revenues are recorded in amounts expected
to be realized upon final settlement. Audits of ANADAC's costs have been
completed by the Defense Contract Audit Agency through June 30, 1992. ANADAC is
currently undergoing an audit by the Defense Contract Audit Agency for the
period from July 1, 1992 to June 30, 1995. No material adjustments have been
made, and ANADAC does not anticipate adjustments for any open years that would
have a material effect on the consolidated financial statements.
Major Customer and International Revenues
In fiscal 1998 and 1997, the Company had no non-U.S. Government customers
that accounted for 10% or more of total revenues. In fiscal 1996 one non-U.S.
Government customer in the Company's products business accounted for 14% of
total revenues.
F-23
<PAGE>
IDENTIX INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Net product revenues included international revenues of $6,350,000 in fiscal
1998, $8,178,000 in fiscal 1997, and $2,198,000 in fiscal 1996.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments with a maturity of
three months or less when purchased. These investments consist of income
producing securities, which are readily convertible to cash and are stated at
cost, which approximates market.
Concentration of Credit Risk
The Company performs on-going credit evaluations of its customers' financial
conditions and limits the amount of credit extended when deemed necessary. The
Company maintains an allowance for potential credit losses which are based upon
the expected collectibility of all accounts receivable. Management believes
that any risk of loss is significantly reduced due to the Company's substantial
number of government customers. The write-off of uncollectible amounts in
current and prior years has not been significant.
Currently, the Company's policy is to limit its exposure in financial
instruments by investing its excess cash with major banks in money market
securities. The Company, by policy, limits the amount of exposure to any one
financial institution.
Inventories
Inventories are stated at the lower of cost (determined on the first-in,
first-out cost method) or market. 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.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method with the estimated useful lives of the assets ranging
from two to five years. Amortization of equipment held under capital leases and
leasehold improvements is computed using the straight-line method and the
shorter of the remaining lease term or the estimated useful life of the related
equipment or improvements. Repair and maintenance costs are expensed as
incurred.
Intangibles and Other Assets
Intangible assets include goodwill, purchased technology, capitalized
contract rights and capitalized software developments costs. Goodwill and
purchased technology are amortized over five to seven years. Capitalized
contract rights are amortized over the terms of the related contracts, usually
one to five years.
F-24
<PAGE>
IDENTIX INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company accounts for software development costs in accordance with
Statement of Financial Accounting Standards No. 86 "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed." Accordingly,
certain software development costs incurred are capitalized after technological
feasibility has been demonstrated. Technological feasibility is determined when
planning, designing, coding and testing have been completed according to design
specifications. Commencing with product introduction, such capitalized amounts
are amortized on a product-by-product basis at the greater of the amount
computed using (a) the ratio of current revenues for a product to the total of
current and anticipated future revenues or (b) the straight-line method over
the remaining estimated economic life of the product. Generally, the Company
assigns an estimated economic life of one to five years to capitalized software
costs. Amortization of capitalized software costs is charged to cost of product
revenues. Research and development expenditures are charged to research and
development in the period incurred.
In fiscal 1996, the Company adopted Statement of Financial Accounting
Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." Accordingly, the Company evaluates asset
recoverability at each balance sheet date or when an event occurs that may
impair recoverability of the asset. The Company determines the recoverability
of the carrying amount of each intangible asset by reviewing the following
factors: the undiscounted value of expected operating cash flows in relation to
its net capital investments, the estimated useful or contractual life of the
intangible asset, the contract or product supporting the intangible asset, and
in the case of purchased technology and capitalized software development costs,
the Company periodically reviews the recoverability of the asset value by
evaluating its products with respect to technological advances, competitive
products and the needs of its customers.
Product Warranty
The Company provides a warranty for manufacturing and material defects on
all units sold. A reserve for warranty costs, based on estimates made by
management utilizing projected costs to repair units, is recorded at the time
of sale and periodically adjusted to reflect actual experience.
Income Taxes
Deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the income tax bases of assets
and liabilities and the amounts reported for financial reporting purposes for
all periods presented (Note 7).
Stock-Based Compensation
The Company accounts for its employee and director stock option plans and
employee stock purchase plans in accordance with provisions of the Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"). Additional pro forma disclosures as required under Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123") are presented in Note 5.
F-25
<PAGE>
IDENTIX INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS
130"). This statement is effective for the Company's fiscal year ending June
30, 1999. The statement establishes presentation and disclosure requirements
for reporting comprehensive income. Comprehensive income includes charges or
credits to equity that are not the result of transactions with owners. The
Company plans to report comprehensive income as part of the Consolidated
Statements of Shareholders' Equity as required under SFAS 130 and expects there
to be no material impact on its financial position and results of operations as
a result of the adoption of this new accounting standard.
Segments of an Enterprise and Related Information
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 131 "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS 131"). This statement is
effective for the Company's fiscal year ending June 30, 1999. The statement
requires the Company to report certain financial information about operating
segments in a complete set of financial statements as well as 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 operating decisions and
assessing performance. Company management has not yet completed its assessment
of how the "management approach" will impact existing segment disclosures, but
does not expect that this new standard will have a material adverse effect on
the consolidated financial statement disclosures.
Foreign Currency Translation
The Company's foreign subsidiary used the local currency as the functional
currency until March 31, 1998. Since then, the functional currency has been the
US dollar. Accordingly, assets and liabilities were translated at the exchange
rate in effect at that date and revenue and expenses since then are recorded in
US dollars at current exchange rates. Foreign currency transaction losses
included in interest and other income were $202,000 in fiscal 1998. Such
amounts were not material in fiscal 1997 and fiscal 1996.
Earnings Per Share
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS 128") during the second quarter of fiscal 1998.
This statement simplifies the standards for computing earnings per share (EPS)
previously defined in Accounting Principles Board Opinion No. 15 "Earnings Per
Share." All prior-period earnings per share data has been restated in
F-26
<PAGE>
IDENTIX INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
accordance with SFAS 128. SFAS 128 requires presentation of both Basic EPS and
Diluted EPS on the face of the income statement. Basic EPS is computed by
dividing net income available to common stockholders (numerator) by the
weighted average number of common shares outstanding (denominator) during the
period. Diluted EPS gives effect to all dilutive potential common shares
outstanding during the period including stock options and warrants, using the
treasury stock method, and convertible preferred stock, using the if-converted
method. In computing Diluted EPS, the average stock price for the period is
used in determining the number of shares assumed to be purchased from the
exercise of stock options.
Following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share for the periods presented below:
<TABLE>
<CAPTION>
Years Ended June 30,
-----------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net income (loss) (Numerator)......... $ 768,000 $ 518,000 $(3,441,000)
=========== =========== ===========
Weighted average common stock
outstanding (Denominator)............ 25,104,000 24,817,000 23,485,000
Dilutive effect of stock options and
warrants............................. 565,000 769,000 --
----------- ----------- -----------
Weighted average common stock
outstanding assuming dilution
(Denominator)........................ 25,669,000 25,586,000 23,485,000
=========== =========== ===========
Basic net income (loss) per share..... $ 0.03 $ 0.02 $ (0.15)
=========== =========== ===========
Diluted net income (loss) per share... $ 0.03 $ 0.02 $ (0.15)
=========== =========== ===========
</TABLE>
Options to purchase 934,287 and 560,322 shares of common stock at weighted
average exercise prices of $10.21 and $11.09 per share were outstanding at June
30, 1998 and June 30, 1997, respectively, but were not included in the
computation of diluted EPS because they were anti-dilutive.
Shares held by the Company's employee stock ownership plan are treated as
outstanding for purposes of computing earnings per share.
NOTE 2 -- ACQUISITIONS
Biometric Applications and Technology, Inc
On July 23, 1997, pursuant to a share purchase agreement, the Company issued
450,000 shares of the Company's common stock to acquire BA&T, a privately held
company located in Kansas City, Missouri. In connection with the acquisition of
BA&T, the Company incurred costs of approximately $45,000, primarily for
transaction and professional fees. BA&T develops and markets biometric and
"smart" card software applications and solutions and has been an Identix
software development partner. The acquisition has been accounted for as a
pooling of interests.
F-27
<PAGE>
IDENTIX INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's fiscal 1998 consolidated financial statements include the
accounts and operations of BA&T. The Company has restated the consolidated
financial statements for fiscal 1997 to include the results and operations of
BA&T. For fiscal 1996, the effects of the combination with BA&T were not
significant and the Company has not restated the fiscal 1996 consolidated
financial statements to include the accounts and operations of BA&T.
Separate net revenues, net income (loss) and related per share amounts of
the combined entities for the year ended June 30, 1997 are presented in the
following table:
<TABLE>
<CAPTION>
Identix BA&T Combined
----------- --------- -----------
<S> <C> <C> <C>
Net revenues............................ $52,390,000 $ 153,000 $52,543,000
Net income (loss)....................... $ 1,250,000 $(732,000) $ 518,000
Net income per share
Basic.................................. $ 0.02
Diluted................................ $ 0.02
</TABLE>
Fingerscan
On March 26, 1996, the Company acquired Fingerscan, a privately-held
Australian-based company that designs and markets Biometric Security products,
pursuant to a Share Purchase Agreement whereby Fingerscan became a wholly owned
subsidiary of the Company. In accordance with the Share Purchase Agreement, the
shareholders of Fingerscan were issued 668,976 shares of the Company's no par
value common stock.
The acquisition was accounted for using the purchase method of accounting.
Accordingly, the Company's results for fiscal 1996 include the operations of
Fingerscan from the date of acquisition and the purchase price has been
allocated to the assets purchased and the liabilities assumed based upon the
fair values at the date of acquisition. Based upon an appraisal by an
investment banking firm, the value of the 668,976 shares of the Company's
common stock issued in the acquisition was determined to be $5,459,000
reflecting a 32% discount for certain restrictions related to the resale of the
common stock issued to purchase Fingerscan. The excess of the purchase price
over the fair market value of the net tangible assets acquired aggregated
approximately $5,280,000, of which $4,723,000 was allocated to in-process
research and development and $557,000 was allocated to other intangibles
including acquired technology. An independent appraisal was performed which
used the income approach to determine the fair value of Fingerscan and its
identifiable assets, including the portion of the purchase price attributed to
the in-process research and development. The income approach includes an
analysis of the markets, completion costs, cash flows, other required assets,
contributions made by core technology and risks associated with achieving such
cash flows. The developmental products acquired were evaluated in context of
Interpretation 4 of SFAS No. 2 and SFAS No. 86 and the identified in-process
research and development was expensed in accordance with these provisions as
technological feasibility had not yet been reached. At the time of acquisition,
the in-process research and development charge represented a multiple of
approximately 19 times Fingerscan's trailing twelve month research and
development expenditures. The Company amortizes the amount allocated to other
intangibles including acquired technology over a five-year period.
F-28
<PAGE>
IDENTIX INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company and Fingerscan as if the
acquisition had occurred at the beginning of the respective periods. The pro
forma combined statements of operations do not include the adjustment for the
non-recurring write-off of acquired in-process research and development. The
net income per share is based on the average number of shares of common stock
of Identix outstanding during the period plus the common shares issued by
Identix to acquire Fingerscan. These pro forma results have been prepared for
comparative purposes only and do not purport to be indicative of what operating
results would have been had the acquisition actually taken place on the assumed
dates or of operating results which may occur in the future.
<TABLE>
<CAPTION>
Fiscal year ended
June 30, 1996
-----------------
<S> <C>
Net revenues............................................. $39,883,000
Net income............................................... $ 966,000
Net income per share
Basic................................................... $ 0.04
Diluted................................................. $ 0.04
</TABLE>
The Company implemented a restructuring of the Biometric Security Division
in February 1998. Management of the Biometric Security Division was transferred
from Fingerscan in Australia to Identix. The following functions were
transferred from Fingerscan in Australia to personnel employed in the U.S. by
the parent company:
. Management control and responsibility for profitability
. Global sales and service
. Engineering and product development
. Manufacturing
The remaining operations of Fingerscan consist of a sales and service office
for the Australian Biometric Security market. Management determined that the
functional currency of Fingerscan had changed from the Australian to the
U.S. dollar and that the above actions constituted a substantial liquidation of
Fingerscan. Accordingly, $460,000 of cumulative translation adjustment was
charged to income during fiscal 1998.
IAS
On June 30, 1996, pursuant to a share purchase agreement, the Company issued
155,000 shares of the Company's common stock to acquire IAS, a privately held
company. In connection with the acquisition of IAS, the Company incurred costs
of approximately $40,000 primarily for transaction and professional fees,
before tax. The acquisition has been accounted for as a pooling of interests.
The Company's fiscal 1996 consolidated financial statements include the
accounts and operations of IAS. For fiscal 1995, the effects of the combination
with IAS were not significant and the Company has not restated the fiscal 1995
consolidated financial statements to include the accounts and operations of
IAS.
F-29
<PAGE>
IDENTIX INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Separate net revenues, net income (loss) and related per share amounts of
the combined entities, after adjustments for transactions between the two
entities, for the year ended June 30, 1996 are presented in the following
table:
<TABLE>
<CAPTION>
Identix IAS Adjustments Combined
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenues................... $37,208,000 $2,194,000 $(861,000) $38,541,000
Net income (loss).............. $(3,557,000) $ 256,000 $(140,000) $(3,441,000)
Net loss per share
Basic......................... $ (0.15)
Diluted....................... $ (0.15)
</TABLE>
NOTE 3 -- BALANCE SHEET DETAIL
<TABLE>
<CAPTION>
June 30,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Accounts receivable:
Commercial and other.................................. $16,655,000 $11,914,000
United States Government:
Billed................................................ 10,350,000 5,277,000
Unbilled.............................................. 2,062,000 1,730,000
Employee receivables.................................. 375,000 441,000
Less: allowance for doubtful accounts................. (866,000) (625,000)
----------- -----------
$28,576,000 $18,737,000
=========== ===========
Inventories:
Purchased parts and materials......................... $ 3,518,000 $ 3,027,000
Work-in-process....................................... 906,000 1,076,000
Finished goods, including spares...................... 2,739,000 1,192,000
----------- -----------
$ 7,163,000 $ 5,295,000
=========== ===========
Property and equipment:
Manufacturing, test and office equipment.............. $ 5,356,000 $ 5,326,000
Furniture and fixtures................................ 1,205,000 1,194,000
Leasehold improvements................................ 149,000 127,000
----------- -----------
6,710,000 6,647,000
Less: accumulated depreciation and amortization....... (4,605,000) (4,080,000)
----------- -----------
$ 2,105,000 $ 2,567,000
=========== ===========
Intangibles and other assets:
Goodwill and deferred acquisition costs............... $ 1,298,000 $ 1,370,000
Purchased technology.................................. 1,334,000 1,334,000
Capitalized software costs............................ 3,099,000 2,367,000
Less: accumulated amortization........................ (3,302,000) (2,516,000)
----------- -----------
2,429,000 2,555,000
Other assets.......................................... 339,000 453,000
----------- -----------
$ 2,768,000 $ 3,008,000
=========== ===========
</TABLE>
F-30
<PAGE>
IDENTIX INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 4 -- LINES OF CREDIT
The Company has a $6,000,000 bank line of credit (the "Identix Line of
Credit") secured by substantially all of the personal property of the Company.
Under the Identix Line of Credit, the Company may borrow up to 80% of eligible
accounts receivable and up to 50% of eligible inventory. Amounts drawn bear
interest at the bank's prime rate of interest (8.50% at June 30, 1998). The
line of credit expires on October 27, 1998. At June 30, 1998, $4,925,000 was
outstanding and $1,075,000 was available under this bank line of credit. The
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. During fiscal 1998, the Company was in default on one of its bank line
of credit covenants. The Company has obtained a waiver of default from the bank
for breaches of the covenant. At June 30, 1998, the Company was in compliance
with such bank covenants.
On July 6, 1998, the Identix Line of Credit was amended to increase the
maximum amount available to $7,000,000. The Company may now borrow up to 80% of
eligible accounts receivable and may borrow up to 35% of eligible inventory.
ANADAC has a $6,000,000 bank line of credit and outstanding balances bear
interest at the bank's prime lending rate (8.50% at June 30, 1998) and are
payable upon demand. Available borrowings under the line are based upon
qualifying accounts receivable balances. The line of credit expires November
30, 1998. At June 30, 1998, $1,924,000 was outstanding and $4,076,000 was
available under the ANADAC Line of Credit. The line of credit agreement
includes, among other things, certain financial covenants and maintenance of
certain financial ratios. At June 30, 1998, ANADAC was in compliance with such
bank covenants.
NOTE 5 -- CAPITAL STOCK
Employee Stock Options
In May 1983, the Company adopted an incentive stock option plan which
expired in 1993 ("1983 Plan"). Under the 1983 Plan, the Company reserved a
total of 2,000,000 shares of the Company's common stock. In October 1992, the
Company adopted the 1992 Incentive Stock Option Plan ("1992 Plan"). The 1992
Plan will expire in 2002. A total of 1,000,000 shares of the Company's common
stock has been reserved for issuance under the 1992 Plan. In July 1995, the
Company adopted the Identix Incorporated Equity Incentive Plan ("1995 Plan").
The 1995 Plan will expire in 2005. In October 1997, the Company amended the
1995 Plan so that a total of 1,750,000 shares of the Company's common stock are
reserved for issuance under the 1995 Plan. The 1995 Plan provides for the
discretionary award of options, restricted stock, stock purchase rights,
performance shares or any combination of these awards to eligible employees,
including executive officers and consultants. In August 1995, the Company
adopted the Non-employee Directors Stock Option Plan ("Directors Plan"), under
which nonqualified stock options are granted to non-employee directors on a
formula basis. A total of 250,000 shares of the Company's common stock is
reserved for issuance under the Directors Plan.
F-31
<PAGE>
IDENTIX INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Under the 1983, 1992, and 1995 Plans, options are granted for a period of 10
years. All grants of incentive stock options must be made at a price at least
equal to the then fair market value of the Company's common stock at the date
of grant. All grants of nonqualified stock options must be made at a price of
at least 85% of the then fair market value of the Company's common stock at the
date of grant. Options generally vest on a monthly basis over a period of two
to five years.
Under the Directors Plan, options are granted for a period of 10 years at an
exercise price equal to the fair market value of the Company's common stock on
the date of the grant. Upon election or appointment, each director of the
Company who is not, and has not been an officer or employee of the Company,
receives an option to purchase 10,000 shares of the Company's common stock;
provided, however, that if a director was appointed to the Board of Directors
after six months of the date of the annual meeting of shareholders at which
directors are elected, that director receives an option to purchase 5,000
shares of the Company's common stock. Thereafter, each director receives an
option to purchase 10,000 shares of the Company's common stock on the date of
the first meeting of the Board of Directors of the Company following the annual
meeting of the shareholders at which directors are elected. Options vest
quarterly over a one year period from the date of grant.
The following table summarizes the Company's stock option activity and
related information for the past three years:
<TABLE>
<CAPTION>
Shares Available Optioned Shares Weighted
for Grant Outstanding Average Price
---------------- --------------- -------------
<S> <C> <C> <C>
Balance June 30, 1995.......... 47,006 1,454,904 $ 2.48
Shares reserved upon adoption
of the 1995 Plan.............. 1,000,000 --
Shares reserved upon adoption
of the Directors Plan......... 250,000 --
Options Granted................ (730,000) 730,000 $ 9.28
Options Exercised.............. -- (679,724) $ 2.28
Options Canceled............... 29,291 (29,291) $ 5.93
Options Canceled and Expired... (8,000) $ 2.75
---------- ----------
Balance June 30, 1996.......... 596,297 1,467,889 $ 5.85
Shares reserved upon adoption
of amendment to 1995 Plan..... 250,000 --
Options Granted................ (933,350) 933,350 $ 9.31
Options Exercised.............. -- (66,739) $ 2.73
Options Canceled............... 260,534 (260,534) $10.55
Options Canceled and Expired... (150) $ 4.00
---------- ----------
Balance as of June 30, 1997.... 173,481 2,073,816 $ 6.90
Shares reserved upon adoption
of amendment to 1995 Plan..... 500,000 --
Options Granted................ (1,672,633) 1,672,633 $ 8.26
Options Exercised.............. -- (287,799) $ 4.14
Options Canceled............... 1,167,256 (1,167,256) $ 9.74
Options Canceled and Expired... (133) $ 2.50
---------- ----------
Balance as of June 30, 1998.... 168,104 2,291,261 $ 6.59
---------- ----------
</TABLE>
F-32
<PAGE>
IDENTIX INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of June 30, 1998 options for approximately 1,440,410 common shares were
exercisable under the 1983, 1992, 1995 and Directors Plans.
In April 1998, 903,833 outstanding options with exercise prices in excess of
the then fair market value of the common stock, $7.625, were repriced to $7.625
per share. Such options have been included in the above table as both canceled
and granted in fiscal 1998. No other terms of the options were amended.
The following table summarizes significant option groups outstanding at June
30, 1998 and related weighted average prices and lives as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------- ------------------------
Number
Range of Number Weighted Average Weighted Average of Weighted Average
Exercise Price Outstanding Remaining Life Exercise Price Shares Exercise Price
- -------------- ----------- ---------------- ---------------- ------- ----------------
<S> <C> <C> <C> <C> <C>
$1.33 - $ 3.00 305,138 4.66 $2.42 287,570 $2.40
$3.19 - $ 5.31 171,958 5.61 3.26 167,026 3.24
$6.00 - $ 7.81 1,732,449 8.61 7.48 929,098 7.44
$9.88 - $12.25 81,716 8.81 10.46 56,716 10.72
</TABLE>
Pro Forma Disclosures
All options were granted at an exercise price equal to the fair market value
of the Company's common stock at the date of grant. The weighted average fair
value at date of grant for options granted during fiscal 1998, 1997 and 1996
were $3.67, $4.85 and $4.83 per option, respectively. The fair value of options
at date of grant was estimated using the Black-Scholes model with the following
assumptions:
<TABLE>
<CAPTION>
Fiscal Year
Ended June 30,
----------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Stock Options:
Expected life (years)................................... 4 4 4
Risk free interest rate................................. 5.53% 6.32% 5.85%
Volatility.............................................. 53% 60% 60%
Dividend yield.......................................... -- -- --
</TABLE>
F-33
<PAGE>
IDENTIX INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Had compensation expense for the Company's stock-based compensation plans
been determined based on the methods prescribed by SFAS No. 123, the Company's
net income (loss) and net income (loss) per share for the years ended June 30,
1998, 1997 and 1996 would have been as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
-----------------------------------
1998 1997 1996
----------- --------- -----------
<S> <C> <C> <C>
Net income (loss):
As reported......................... $ 768,000 $ 518,000 $(3,441,000)
Pro forma........................... $(1,701,000) $(893,000) $(3,813,000)
Net income (loss) per share:
As reported
Basic.............................. $ 0.03 $ 0.02 $ (0.15)
Diluted............................ $ 0.03 $ 0.02 $ (0.15)
Pro forma
Basic.............................. $ (0.07) $ (0.04) $ (0.16)
Diluted............................ $ (0.07) $ (0.04) $ (0.16)
</TABLE>
Employee Stock Ownership Plan
The ANADAC, Inc. Employee Stock Ownership Plan ("ESOP") enables eligible
employees of ANADAC to share in the growth of the Company through the
acquisition of common stock. The ESOP provides for the Company, at its
discretion, to make contributions of up to 10% of each participant's base
salary. The amount of compensation expense related to the ESOP is based upon
the cash contributions to the ESOP made by the Company. The Company's expense
for ESOP was $188,000 in fiscal 1998, $158,000 in fiscal 1997 and $183,000 in
fiscal 1996. A total of 303,909 and 360,427 allocated shares of common stock
were held by the ESOP at June 30, 1998 and 1997, respectively.
Warrants
Under certain private transactions authorized by the Board of Directors of
the Company from 1992 through 1994, warrants to purchase 395,160 shares of the
Company's common stock were issued at exercise prices ranging from $2.125 to
$3.75 per share. At June 30, 1998, warrants from these transactions to purchase
40,000 shares of the Company's common stock were outstanding, which expire in
January 1999.
Warrants to purchase 2,250,000 shares of the Company's common stock at $3.00
per share were issued as part of a public offering in 1993. Also, as part of
the public offering, the Company issued the underwriter a warrant to purchase
45,000 units at an exercise price of $12.00 per unit, each unit consisting of
five warrants to purchase common stock and one share of series A Preferred
Stock convertible into five shares of common stock. On June 6, 1995, the
Company announced that on July 6, 1995 it would redeem, for $0.05 per warrant,
all warrants issued in the public offering not exercised by July 5, 1995. At
June 30, 1996, all warrants were exercised or redeemed. As part of the warrant
redemption, the Company entered into a standby underwriting agreement whereby
the underwriter would purchase for $3.00 per share all unexercised warrants
related to the warrant redemption. Pursuant to the agreement, the underwriter
purchased 3,210 of the unexercised warrants.
F-34
<PAGE>
IDENTIX INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On December 15, 1994, the Company issued warrants to purchase 250,000 shares
of its common stock for $3.00 per share to an investment banking firm and
certain of its officers and employees for providing services to the Company.
The warrant holders exercised the warrants in August 1995.
NOTE 6 -- RELATED PARTY TRANSACTIONS
As of June 30, 1998, Ascom USA Inc. ("Ascom") beneficially owned 5,075,924
or approximately 20% of the Company's outstanding common stock ("the Voting
Stock"). The Company is a party to a Voting Trust Agreement with Ascom (the
"Agreement") whereby Ascom deposited all of its shares of the Company's common
stock held by Ascom, into a voting trust. The trustee of the voting trust is on
the Company's Board of Directors and has voting control of the Voting Stock.
The term of the Voting Trust Agreement expires in 2004. In consideration for
Ascom entering into the Agreement, the Company granted Ascom certain additional
registration rights with respect to the Voting Stock, modified certain
contractual transfer restrictions with respect to the Voting Stock, and granted
Ascom price protections regarding certain sales of Voting Stock.
Patrick H. Morton is a member of the Company's Board of Directors and
presently owns 38% of Integrated Manufacturing Solutions, Inc, ("IMS") a
manufacturer of integrated circuit boards, that provides manufacturer services
to the Company. IMS billed the Company approximately $2,437,000 and $427,000 in
fiscal 1998 and 1997, respectively. Amounts outstanding to IMS at June 30, 1998
were approximately $311,000. The Company did not do business with IMS prior to
fiscal 1997.
NOTE 7 -- INCOME TAXES
The following is a reconciliation between statutory federal income taxes and
the provision for income taxes:
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
---------------------------------
1998 1997 1996
--------- --------- -----------
<S> <C> <C> <C>
Tax expense (benefit) at statutory
rate................................. $ 261,000 $ 438,000 $(1,204,000)
State taxes net of federal benefit.... 33,000 80,000 --
Release of valuation allowance........ (360,000) (578,000) --
Benefit of operating losses not
recognized........................... -- -- 1,174,000
Other................................. 66,000 60,000 30,000
--------- --------- -----------
$ -- $ -- $ --
========= ========= ===========
</TABLE>
F-35
<PAGE>
IDENTIX INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred tax assets (liabilities) comprise the following:
<TABLE>
<CAPTION>
June 30,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Loss and credit carryforwards.................... $ 8,440,000 $ 9,200,000
Depreciation and amortization.................... 80,000 80,000
Inventory reserves and basis differences......... 360,000 222,000
Compensation accruals............................ 340,000 244,000
Accounts receivable and sales reserves........... 336,000 237,000
Other............................................ 384,000 280,000
----------- -----------
Gross deferred tax assets........................ 9,940,000 10,263,000
----------- -----------
Unbilled accounts receivable..................... (908,000) (1,014,000)
Capitalized software............................. (492,000) (535,000)
Other............................................ (284,000) (283,000)
----------- -----------
Gross deferred tax liabilities................... (1,684,000) (1,832,000)
----------- -----------
Net deferred tax asset before valuation
allowance....................................... 8,256,000 8,431,000
Deferred tax asset valuation allowance........... (8,256,000) (8,431,000)
----------- -----------
Total net deferred tax asset................. $ -- $ --
=========== ===========
</TABLE>
The deferred tax asset valuation allowance is attributed to U.S. Federal,
State and foreign deferred tax assets. Management believes sufficient
uncertainty exists regarding the realizability of these assets, such that a
full valuation allowance is required.
As of June 30, 1998, the Company has federal and state net operating loss
carryforwards of approximately $19.6 million and $3.6 million, respectively,
for financial reporting and income tax purposes, which are available to offset
future taxable income. The carryforwards expire on various dates through fiscal
2011. Under the Tax Reform Act of 1986, the amounts of and the benefit from net
operating losses that can be carried forward may be impaired or limited in
certain circumstances, including a cumulative stock ownership change of more
than 50% over a three-year period. As a result of the public offering in
January 1993, a change of ownership occurred, causing an annual limitation on
the utilization of the net operating loss carryforwards, incurred prior to the
ownership change, of approximately $2.5 million.
F-36
<PAGE>
IDENTIX INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 8 -- FOREIGN OPERATIONS DATA
In geographical reporting, revenues are attributed to the geographical
location of the sales and service organizations, and costs directly and
indirectly incurred in generating revenues are similarly assigned. For fiscal
1996, the Company's revenues from unaffiliated customers and identifiable
assets were less than 10% of consolidated total revenues and total assets,
respectively.
<TABLE>
<CAPTION>
Fiscal year ended June
30,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Net revenues from unaffiliated customers:
North America........................................ $73,024,000 $43,305,000
Asia-Pacific......................................... 3,344,000 9,238,000
Europe, Middle East, Africa.......................... 3,006,000 --
----------- -----------
$79,374,000 $52,543,000
----------- -----------
Operating results:
North America........................................ $ 4,482,000 $ 2,262,000
Asia-Pacific......................................... (1,763,000) 30,000
Europe, Middle East, Africa.......................... 229,000 --
General Corporate Expenses........................... (2,180,000) (1,774,000)
----------- -----------
$ 768,000 $ 518,000
----------- -----------
Identifiable assets:
North America........................................ $40,025,000 $27,079,000
Asia-Pacific......................................... 1,312,000 5,361,000
Europe, Middle East, Africa.......................... 675,000 --
----------- -----------
$42,012,000 $32,440,000
----------- -----------
</TABLE>
Intercompany transfers are at prices sufficient to recover a reasonable
profit. These transfers are eliminated in the consolidated financial
statements. Intercompany transfers of products from North America to other
regions were $1,991,000 and $3,814,000 for fiscal 1998 and 1997, respectively.
As a result of the substantial liquidation of the Company's Australian
subsidiary in the quarter ended March 31, 1998, assets of the foreign
operations were transferred to the United States in satisfaction of a portion
of intercompany borrowings.
NOTE 9 -- COMMITMENTS
Leases
The Company currently occupies its headquarters and products business
facility under a lease, which expires in April 2001 and is required to pay
taxes, insurance, and maintenance as well as monthly rental payments. Further,
the Company leases office space for its products sales force under operating
leases which expire at various dates through 2003. The Company leases office
space for its services business under operating leases expiring at various
dates through 2001. The leases contain escalation provisions requiring rental
increases for increases in operating expense and real estate taxes.
F-37
<PAGE>
IDENTIX INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Future minimum lease payments for operating leases are as follows:
<TABLE>
<S> <C>
Year ending June 30,
1999.......................................................... $1,669,000
2000.......................................................... 1,508,000
2001.......................................................... 1,034,000
2002.......................................................... 32,000
Thereafter.................................................... 25,000
----------
Total..................................................... $4,268,000
==========
</TABLE>
Total rental expense under operating leases was $1,882,000, $1,788,000 and
$1,308,000 for the years ended June 30, 1998, 1997 and 1996, respectively.
NOTE 10 -- CONTINGENT LIABILITIES
The Company was named as a defendant in a class action lawsuit, which was
filed in October 1996 in the United States District Court for the Northern
District of California. Certain executive officers of the Company were also
named as defendants. Plaintiffs sought to represent a class of all persons who
purchased the Company's common stock between January 31, 1996 and August 26,
1996 (the "Class Period"). The complaint alleged claims under the federal
securities laws and California law. Plaintiffs alleged that the Company and
certain of its executive officers made false and misleading statements
regarding the Company that caused the market price of its common stock to be
"artificially inflated" during the Class Period. The Company and its officers
denied plaintiffs' allegations. In December 1997, the Company and its officers
reached an agreement with plaintiffs and their counsel to settle the lawsuit.
The settlement was funded largely with directors and officers liability
insurance proceeds. The settlement was approved by the Court, following notice
to the class members, and the lawsuit was dismissed with prejudice on March 6,
1998.
On May 31, 1995, Digital Biometrics, Inc. ("DBI"), a competitor, filed a
lawsuit in the United States District Court for the Northern District of
California against the Company alleging that certain of the Company's
TouchPrint products violate a DBI patent and seeking injunctive relief and
unspecified damages. The lawsuit has no implication for other Identix products.
On August 22, 1996, the District Court granted the Company's motion determining
that the TouchPrint 600 does not infringe the patent. On December 7, 1996, the
District Court issued another ruling determining that the predecessor product
of the TouchPrint 600, the TouchPrint 900 product, did not infringe the patent.
As a result, the District Court entered judgment in favor of Identix and
awarded Identix its costs of suit. On January 7, 1997, DBI filed a Notice of
Appeal. On July 2, 1998, the United States Court of Appeals for the Federal
Circuit affirmed the District Court's judgment. DBI has publicly announced that
it has no plans to appeal the ruling and, accordingly, the Company believes
that the judgment in favor of the Company will be the final disposition of the
case.
F-38
<PAGE>
IDENTIX INCORPORATED
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
Balance
at Additions
Beginning Charged to Balance at
Description of Period Expense Deductions End of Period
- ----------- --------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Inventory Reserve:
Year ended June 30, 1996......... $242,000 $177,000 $ 75,000 $344,000
Year ended June 30, 1997......... $344,000 $284,000 $ 65,000 $563,000
Year ended June 30, 1998......... $563,000 $338,000 $ 35,000 $866,000
Allowance for Doubtful Accounts:
Year ended June 30, 1996......... $347,000 $238,000 $ 97,000 $488,000
Year ended June 30, 1997......... $488,000 $500,000 $363,000 $625,000
Year ended June 30, 1998......... $625,000 $862,000 $621,000 $866,000
</TABLE>
F-39
<PAGE>
IDENTIX INCORPORATED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
December 31
1998
------------
<S> <C>
Current assets:
Cash and cash equivalents...................................... $ 2,418,000
Accounts receivable, less allowance for doubtful accounts of
$884,000...................................................... 26,992,000
Inventories.................................................... 6,857,000
Prepaid expenses and other assets.............................. 947,000
------------
Total current assets......................................... 37,214,000
Property and equipment, net...................................... 2,094,000
Intangibles and other assets..................................... 2,621,000
Investment in joint venture, net................................. 3,000
------------
Total assets................................................. $ 41,932,000
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to banks......................................... $ 4,093,000
Accounts payable............................................... 9,038,000
Accrued compensation........................................... 1,937,000
Other accrued liabilities...................................... 520,000
Deferred revenue............................................... 1,910,000
------------
Total current liabilities.................................... 17,498,000
Deferred revenue................................................. --
Other liabilities................................................ 90,000
------------
Total liabilities............................................ 17,588,000
------------
Commitments and contingencies (Note 8)
Shareholders' equity:
Common stock, $.01 par value; 50,000,000 shares authorized;
25,427,211 shares issued and outstanding...................... 53,567,000
Accumulated deficit............................................ (29,042,000)
Cumulative translation adjustment.............................. (181,000)
------------
Total shareholders' equity................................... 24,344,000
------------
Total liabilities and shareholders' equity................... $ 41,932,000
============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-40
<PAGE>
IDENTIX INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
December 31,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Revenues:
Net product revenues............................... $18,647,000 $16,996,000
Fingerprinting services revenues................... -- 370,000
Services revenues.................................. 21,676,000 21,237,000
----------- -----------
Total revenues.................................. 40,323,000 38,603,000
----------- -----------
Costs and expenses:
Cost of product revenues........................... 9,202,000 8,110,000
Cost of fingerprinting services revenues........... -- 352,000
Cost of services revenues.......................... 18,887,000 18,053,000
Research, development and engineering.............. 2,804,000 2,164,000
Marketing and selling.............................. 5,146,000 4,401,000
General and administrative......................... 3,466,000 4,518,000
----------- -----------
Total costs and expenses........................ 39,505,000 37,598,000
----------- -----------
Income from operations.............................. 818,000 1,005,000
Other income, net................................... 55,000 102,000
Interest income (expense), net...................... (230,000) (82,000)
----------- -----------
Income (loss) before tax and equity interest in
joint venture...................................... 643,000 1,025,000
Provision for income taxes.......................... (90,000) (45,000)
Equity interest in joint venture, net of tax........ (159,000) (29,000)
----------- -----------
Net income.......................................... $ 394,000 $ 951,000
=========== ===========
Basic net income per share.......................... $ 0.02 $ 0.04
=========== ===========
Diluted net income per share........................ $ 0.02 $ 0.04
=========== ===========
Weighted average common shares used to compute basic
net income per share............................... 25,319,000 25,011,000
Weighted average common shares used to compute
diluted net income per share....................... 25,646,000 25,690,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-41
<PAGE>
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 or 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.
F-42
<PAGE>
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 the 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 Annual Report on Form 10-K. The results of operations
for the 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. This 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.
F-43
<PAGE>
IDENTIX INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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>
Six Months Ended
December 31,
---------------------
1998 1997
---------- ----------
<S> <C> <C>
Net income (loss).................................... $ 394,000 $ 951,000
========== ==========
Weighted average common shares outstanding........... 25,319,000 25,011,000
Dilutive effect of stock options and warrants........ 327,000 679,000
---------- ----------
Weighted average common shares outstanding assuming
dilution............................................ 25,646,000 25,690,000
========== ==========
Basic net income (loss) per share.................... $ 0.02 $ 0.04
========== ==========
Diluted net income (loss) per share.................. $ 0.02 $ 0.04
========== ==========
</TABLE>
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.
F-44
<PAGE>
IDENTIX INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
F-45
<PAGE>
APPENDIX A
AGREEMENT AND PLAN
OF REORGANIZATION AND MERGER
AMONG IDENTIX INCORPORATED, IDT HOLDINGS, INC.
AND ID ACQUISITION CORP.
This Agreement and Plan of Reorganization and Merger ("Agreement") is made
as of November 14, 1998 by and among Identix Incorporated, a California
corporation , IDT Holdings, Inc., a Delaware corporation (the "Company"), and
ID Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of
Identix ("Acquisition Sub").
BACKGROUND
A. Identix and the Company desire that the Acquisition Sub shall be merged
with and into the Company; that the Company shall be the surviving corporation
and shall become a wholly-owned subsidiary of Identix; and that each share of
the Common Stock, $.001 par value, of the Company and of the Series A Preferred
Stock, $.001 par value, of the Company which is outstanding immediately prior
to the effective time of the merger, other than those shares which become
"dissenting shares" within the meaning of Section 1300(b) of the California
Corporations Code or for which appraisal rights have been perfected under
Section 262 of the Delaware General Corporation Law, be converted as set forth
in this Agreement into the number of shares of the Common Stock of Identix, as
is determined under Section 2.3 of this Agreement.
B. Identix and the Company intend that the merger constitute a
"reorganization" under Section 368(a) of the Internal Revenue Code of 1986, as
amended.
In consideration of the mutual premises and agreements set forth herein, THE
PARTIES AGREE AS FOLLOWS:
ARTICLE I
DEFINITIONS
The terms defined in this Article I shall, for purposes of this Agreement,
have the meanings specified in this Article I unless the context expressly or
by necessary implication otherwise requires:
1.1 Affiliates Agreement. "Affiliates Agreement" shall have the meaning set
forth in Section 8.11 of this Agreement.
1.2 Balance Sheet. "Balance Sheet" shall have the meaning set forth in
Section 3.6 of this Agreement.
1.3 Balance Sheet Date. "Balance Sheet Date" shall have the meaning set
forth in Section 3.6 of this Agreement.
A-1
<PAGE>
1.4 Biometric Business. "Biometric Business" means the development, design,
manufacturing or marketing of products or services that capture or compare (on
a one-to-one or one-to-many basis) fingerprint, facial or other biometric
characteristics or are used for identification, verification or security based
on fingerprint, facial or other biometric characteristics, including, but not
limited to, biometric hardware or software products that are used for computer,
database, network or Internet security, access control or time-and-attendance
or that interface to smart cards, debit cards, credit cards and the like.
Excluded from the definition of "Biometric Business" is the business conducted
by Identicator, Inc. related to the non-electronic, paper-based production,
development or capture of fingerprint images.
1.5 Certificate of Merger. "Certificate of Merger" shall mean a certificate
of merger to be filed with the Delaware Secretary of State to effect the Merger
pursuant to Sections 103 and 251 of the DGCL.
1.6 Certificate. "Certificate" shall have the meaning set forth in Section
2.6.3 of this Agreement.
1.7 CERCLA. "CERCLA" means the Comprehensive Environmental Response
Compensation and Liability Act, 42 U.S.C., Section 9601 et. seq.
1.8 Closing. "Closing" shall mean the delivery by Identix and the Company of
the various documents contemplated by this Agreement or otherwise required in
order to consummate the Merger.
1.9 Closing Date. "Closing Date" shall have the meaning set forth in Section
2.2 of this Agreement.
1.10 Code. "Code" shall mean the Internal Revenue Code of 1986, as amended.
1.11 Company. "Company" or "IDT Holdings" shall mean IDT Holdings, Inc., a
Delaware corporation. For the purposes of Articles III and VIII, references to
the "Company" shall include both IDT Holdings and Identicator Technology.
1.12 Company Common. "Company Common" shall mean the Common Stock, $.001 par
value, of the Company.
1.13 Company Officer-Certified Disclosure Statement. "Company Officer-
Certified Disclosure Statement" shall have the meaning set forth in the first
paragraph of Article III of this Agreement.
1.14 Company Option. "Company Option" shall have the meaning set forth in
Section 2.4 of this Agreement.
1.15 Company Plans. "Company Plans" shall have the meaning set forth in
Section 2.4 of this Agreement.
1.16 Company Series A Preferred. "Company Series A Preferred" shall mean the
Series A Preferred Stock, $.001 par value, of the Company.
A-2
<PAGE>
1.17 Contract. "Contract" shall have the meaning set forth in Section 3.22.
1.18 Corporations Code. "Corporations Code" shall mean the California
Corporations Code.
1.19 DGCL. "DGCL" shall mean the Delaware General Corporation Law.
1.20 Dissenting Shares. "Dissenting Shares" shall mean all shares, if any,
of the outstanding capital stock of the Company for which dissenter's rights
shall be perfected under Section 1300 et seq. of the Corporations Code or
appraisal rights shall be perfected under Section 262 of the DGCL.
1.21. Company Warrants. "Company Warrants" shall mean the warrants to
purchase 60,000 shares of Company Series A Preferred outstanding on the date of
this Agreement.
1.22 Effective Time. "Effective Time" shall mean the time when the
Certificate of Merger is filed with the Secretary of State of the State of
Delaware and the Merger becomes effective.
1.23 Environmental Laws. "Environmental Laws" means any statutes relating to
protection of the environment, or health or safety, including without
limitation the following: (a) CERCLA; (b) the Resource Conservation and
Recovery Act, 42 U.S.C., Section 6901, et. Seq.; (c) the Clean Water Act, 33
U.S.C., Section 1251, et. seq.; (d) the Toxic Substances Control Act, 15
U.S.C., Section 2601, et. seq.; (e) the Federal Insecticide, Fungicide, and
Rodenticide Act, 7 U.S.C., Section 136, et. seq.; (f) the Clean Air Act, 42
U.S.C., Section 7401, et. seq.; (g) the Safe Drinking Water Act, 42 U.S.C.,
Section 300f, et. seq.; (h) the California Hazardous Waste Control Law, Health
& Safety Code, Section 25100, et. seq.; (i) the California Medical Waste
Management Act, Health & Safety Code, Section 117600, et. seq.; or (j) listed
as a chemical known to the State of California to cause cancer or reproductive
toxicity pursuant to Section 25249.8 of the California Health and Safety Code,
Division 20, Chapter 6.6 (Safe Drinking Water and Toxic Enforcement Act of
1986).
1.24 Escrow Agreement. "Escrow Agreement" shall mean the Agreement relating
to an escrow of certain shares of Company Common pursuant to Section 2.5 of
this Agreement, in the form attached to this Agreement as Exhibit A.
1.25 Escrow Holder. "Escrow Holder" shall mean U.S. Bank Trust National
Association, Global Escrow Depository Services.
1.26 Exchange Act. "Exchange Act" shall mean the Securities and Exchange Act
of 1934, as amended.
1.27 Exchange Agent. "Exchange Agent" shall have the meaning set forth in
Section 2.6.1 of this Agreement.
1.28 Exchange Ratio. "Exchange Ratio" shall have the meaning set forth in
Section 2.3.
A-3
<PAGE>
1.29 Hazardous Material. "Hazardous Material" means any substance, material,
contaminant, pollutant, infectious agent, or hazardous, biohazardous, or
medical waste which is defined or becomes regulated by any local government
authority, the State of California, any other state or the United States
Government, pursuant to any Environmental Laws, including any petroleum
products or asbestos.
1.30 Holders. "Holders" shall mean holders of Company Common and Company
Series A Preferred outstanding immediately prior to the Effective Time.
1.31 Identicator Corp. "Identicator Corp." shall mean Identicator
Corporation, a Nevada corporation, that was merged into Identicator Technology
on September 30, 1998 pursuant to the Restructuring.
1.32 Identicator, Inc. "Identicator, Inc." shall mean Identicator, Inc., a
Nevada corporation.
1.33 Identicator Technology. "Identicator Technology" shall mean Identicator
Technology, Inc., a Delaware corporation that is a wholly-owned subsidiary of
IDT Holdings.
1.34 Identix. "Identix" shall mean Identix Incorporated, a California
corporation ("Identix California"); provided, however that if Identix
California reincorporates in Delaware through a merger of Identix California
into Identix Incorporated, a Delaware corporation and a wholly-owned subsidiary
of Identix California ("Identix Delaware"), then "Identix" shall mean Identix
Delaware from and after the date of such merger.
1.35 Identix Common. "Identix Common" shall mean the Common Stock of
Identix.
1.36 Identix Officer-Certified Disclosure Statement. "Identix Officer-
Certified Disclosure Statement" shall have the meaning set forth in the first
paragraph of Article IV of this Agreement.
1.37 IDT Holdings. "IDT Holdings" or the "Company" shall mean IDT Holdings,
Inc., a Delaware corporation.
1.38 IT Concepts. "IT Concepts" shall mean International Technology
Concepts, Inc., a California corporation.
1.39 Joint Venture. "Joint Venture" shall mean the general partnership named
"Identicator Technology" between Identicator Corp. and IT Concepts that was
formed on May 31, 1993 and was dissolved on September 30, 1998 pursuant to the
Restructuring.
1.40 Merger. "Merger" shall mean the merger of the Acquisition Sub with and
into the Company in accordance with this Agreement, the Certificate of Merger
and applicable law.
1.41 1933 Act. "1933 Act" shall mean the Securities Act of 1933, as amended,
and the rules, regulations and forms thereunder.
1.42 Preferred Exchange Ratio. "Preferred Exchange Ratio" shall have the
meaning set forth in Section 2.3 of this Agreement.
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1.43 Principal Holders. "Principal Holders" shall mean holders of Company
Common who immediately prior to the Effective Time own more than 1,000 shares
of the outstanding Company Common.
1.44 Proxy Statement/Prospectus. "Proxy Statement/Prospectus" shall mean the
Proxy Statement/Prospectus to be mailed to the stockholders of the Company in
connection with the Merger.
1.45 Restructuring. "Restructuring" shall mean the series of restructuring
transactions relating to Identicator Corp. and the Joint Venture that closed on
September 30, 1998 and resulted in the transfer of the Joint Venture business
to Identicator Technology.
1.46 S-4. "S-4" shall mean the Registration Statement on Form S-4 to be
filed by Identix with the SEC in connection with the issuance of Identix Common
Stock pursuant to the Merger.
1.47 SEC. "SEC" shall mean the Securities and Exchange Commission.
1.48 Stockholder Representative. "Stockholder Representative" shall mean the
person selected by the Board of Directors of the Company and authorized by this
Agreement to act as representative of the stockholders of the Company under the
Escrow Agreement, and any substitute representative(s) selected in accordance
with the Escrow Agreement.
1.49 Spinoff. "Spinoff" shall mean the transaction that closed on March 31,
1997 pursuant to which Identicator Corp. transferred certain assets and
liabilities relating to its paper-based fingerprint business to Identicator,
Inc., then a wholly-owned subsidiary, and distributed the outstanding shares of
Identicator, Inc. to the stockholders of Identicator Corp.
1.50 Subsidiary. "Subsidiary" shall mean, with respect to a particular party
hereto, any corporation or other organization, whether incorporated or
unincorporated, of which at least a majority of the securities or interests
having by the terms thereof ordinary voting power to elect a majority of the
board of directors or others performing similar functions with respect to such
corporation or other organization is directly or indirectly owned by such party
or by one or more Subsidiaries, or by such party and one or more Subsidiaries.
1.51 Transferred Employees. "Transferred Employees" shall have the meaning
set forth in Section 8.14.
1.52 Voting Agreement. "Voting Agreement" shall have the meaning set forth
in Section 12.13 of this Agreement.
ARTICLE II
MERGER, CLOSING AND CONVERSION OF SHARES
2.1 Merger. Subject to and in accordance with the terms and conditions of
the Agreement and the Certificate of Merger, Identix, the Company and
Acquisition Sub shall execute and file the Certificate of Merger with the
Secretary of State of the State of Delaware, whereupon Acquisition Sub shall be
merged with and into the Company, the separate corporate existence of
Acquisition Sub
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shall cease and the Company shall continue as the surviving corporation and
shall become a wholly-owned subsidiary of Identix pursuant to Sections 251 and
259 of the DGCL. The Company as the surviving corporation after the Merger is
hereinafter sometimes referred to as the "Surviving Corporation."
2.2 Closing. The Closing shall take place at the offices of Heller Ehrman
White & McAuliffe, 525 University Avenue, Palo Alto, California 94301, as soon
as practicable after all of the conditions to the parties' obligations to
consummate the Merger set forth in Articles VI and VII of this Agreement have
been satisfied or waived (the "Closing Date").
2.3 Conversion of Shares. Each share of Company Series A Preferred
outstanding immediately prior to the Effective Time (except those shares of
Company Series A Preferred which become Dissenting Shares and whose holder and
the Company do not thereafter agree in writing should be treated as Dissenting
Shares) shall, by virtue of the Merger and without any action on the part of
the holder thereof be converted, at and as of the Effective Time into a number
of shares of Identix Common that the Holder thereof is entitled to receive
pursuant to Article IV, Section D(6) of the IDT Holdings' Certificate of
Incorporation as in effect on the date hereof, or such other ratio as is
mutually agreed by IDT Holdings, Identix and the holders of all outstanding
Company Series A Preferred and Company Warrants (the "Preferred Exchange
Ratio"). Each share of Company Common outstanding immediately prior to the
Effective Time (except those shares of Company Common which become Dissenting
Shares and whose holder and the Company do not thereafter agree in writing
should not be treated as Dissenting Shares) shall, by virtue of the Merger and
without any action on the part of the holder thereof be converted, at and as of
the Effective Time into a number of shares of Identix Common determined by
dividing (a) 5,050,000 (less the number of shares of Identix Common issued or
issuable on account of the Company Series A Preferred and the Company Warrants
in accordance with the preceding sentence and Section 2.13), by (b) the sum of
the number of shares of Company Common outstanding immediately prior to the
Effective Time plus the number of shares covered by Company Options outstanding
immediately prior to the Effective Time (including both vested and unvested
options). The quotient determined by dividing (a) by (b) described in the
preceding sentence shall be referred to as the "Exchange Ratio." Holders of
Company Common and Company Series A Preferred shall receive only whole shares
of Identix Common; in lieu of any fractional share of Identix Common, Holders
shall receive in cash the fair market value of such fractional share valuing
Identix Common at the average of the high and low prices of the Identix Common
on the American Stock Exchange on the trading day immediately preceding the
Closing Date as listed in The Wall Street Journal. Each share of Acquisition
Sub outstanding prior to the Effective Time shall, by virtue of the Merger and
without any action on the part of the holder thereof be converted, at and as of
the Effective Time into one share of Company Common.
2.4 Company Options. At the Effective Time, each of the outstanding options
to purchase Company Common ("Company Option") issued under the Company's 1998
Stock Option/Stock Issuance Plan or under the Identicator Corporation 1995
Stock Option Plan (collectively, the "Company Plans") shall thereafter entitle
the holder thereof to receive, upon exercise thereof, for each one share of
Company Common subject to such Company Option, a number of shares of Identix
Common equal to the Exchange Ratio at an exercise price for each full share of
Identix
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Common equal to the quotient obtained by dividing (a) the exercise price per
share of Company Common with respect to such Company Option, by (b) the
Exchange Ratio, which exercise price per share shall be rounded to the nearest
two-place decimal. The number of shares of Identix Common that may be purchased
by a holder on the exercise of any Company Option shall not include any
fractional share of Identix Common but shall be rounded to the nearest whole
share of Identix Common. Identix shall assume in full such Company Options and
all of the Company's other rights and obligations under the Company Plans as
provided herein. The assumption of a Company Option by Identix shall not
terminate or modify (except as required hereunder) any right of first refusal,
right of repurchase, vesting schedule, or other restriction on transferability
relating to the Company Option, except for the acceleration of vesting that
will occur as a result of the Merger under existing contractual arrangements.
Continuous employment or consulting services with the Company shall be credited
to an optionee for purposes of determining the number of shares subject to
exercise, vesting or repurchase after the Effective Time. After such
assumption, Identix shall issue, upon any partial or total exercise of any
Company Option, in lieu of shares of Company Common, the number of shares of
Identix Common to which the holder of the Company Option is entitled pursuant
to this Agreement. The assumption by Identix of Company Options shall not give
the holders of such Company Options any additional benefits which they did not
have immediately prior to the Effective Time. Identix shall file with the SEC
within 45 days following the Effective Time a registration statement on Form S-
8 under the 1933 Act covering the shares of Identix Common to be issued upon
exercise of Company Options assumed by Identix.
2.5 Escrow.
2.5.1 In order to provide indemnification in accordance with Article X of
this Agreement and with the Escrow Agreement, at the Effective Time or as soon
thereafter as possible, one stock certificate representing, in aggregate, 10%
of the whole shares of Identix Common (rounded down to the nearest whole share)
into which each Holder's shares of Company Common were converted pursuant to
Section 2.3 of this Agreement shall be delivered to the Escrow Holder. The
Stockholder Representative has been selected by the Board of Directors of the
Company and, in the event of inability or unwillingness prior to the execution
of the Escrow Agreement of such person to act as a Stockholder Representative,
a substitute Stockholder Representative shall be similarly selected. The
Stockholder Representative is authorized by this Agreement, as a specific term
and condition of the Merger, to act hereunder and under the Escrow Agreement
with the powers and authority provided for herein and therein, as
representative of the Holders and their successors. Approval of this Agreement
and the Merger at the special stockholders meeting of the Company relating to
this Agreement and the Merger shall constitute approval of the terms and
conditions of the Escrow Agreement and ratification of the selection of the
Stockholder Representative and of his authority to act hereunder and under the
Escrow Agreement on behalf of the Holders and their successors. Any rights of
the Holders to receive any shares placed in such escrow shall in no
circumstances be sold, assigned or otherwise transferred by them other than by
will or pursuant to the laws of descent and distribution. Any dividends or
other distributions paid in respect of the shares of Identix Common deposited
with the Escrow Holder in accordance with this Section 2.5 shall be paid to the
Escrow Holder in accordance with the terms of the Escrow Agreement, other than
ordinary cash dividends, if any, which shall be distributed currently to the
persons whose shares of Identix Common are being held in the Escrow. The
certificate representing securities delivered to the Escrow
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Holder shall be accompanied by a separate stock power endorsed in blank by the
Stockholder Representative on behalf of the Holders. Subject to the Escrow
Agreement, holders of Identix Common shall retain their voting rights with
respect to securities deposited with the Escrow Holder in accordance with this
Section 2.5.
2.5.2 In order that the total number of shares of Identix Common that
will be available to satisfy the indemnification provisions of Article X shall
be at least 434,300, some or all of the holders of Company Options, including
those identified in Section 2.5.2 of the Company Officer-Certified Disclosure
Statement, shall agree in writing that 10% of their Company Options and shares
of Identix Common issuable thereunder are subject to the provisions of the
Escrow Agreement and that the incurrence of Damages by Identix that exceed the
value of the Identix Common held under the Escrow Agreement shall be satisfied
by a pro rata cancellation of such Company Options. The Company will use its
best efforts to enter into agreements, in a form reasonably acceptable to
Identix, with the holders of Company Options identified in Section 2.5.2 of the
Company Officer-Certified Disclosure Statement to carry out the provisions of
this paragraph promptly after the execution of this Agreement. In addition, the
Company will solicit the approval of the other holders of Company Options to be
assumed by Identix to subject 10% of such Company Options and the shares
issuable thereunder to the same indemnification provisions.
2.6 Exchange of Certificates.
2.6.1 Prior to the Closing Date, Identix shall appoint ChaseMellon
Shareholder Services, or such other bank or trust company selected by Identix
as the Company may approve, to act as exchange agent (the "Exchange Agent") in
the Merger.
2.6.2 Promptly after the Closing Date, the Exchange Agent shall make
available for exchange in accordance with this Section 2.6, the shares of
Identix Common issuable pursuant to Section 2.3 in exchange for outstanding
shares of Company Common and Company Series A Preferred, subject to the
issuance of 10% of the shares issuable to each Holder into escrow pursuant to
Section 2.5 and subject to the legending requirement set forth in Section 2.10.
2.6.3 As soon as practicable after the Closing Date, the Exchange Agent
shall mail to each holder of record of a stock certificate that, immediately
prior to the Closing Date, represented outstanding shares of Company Common (a
"Certificate") whose shares are being converted into Identix Common pursuant to
Section 2.3, (i) a letter of transmittal (which shall specify that delivery
shall be effected, and risk of loss and title to the Certificates shall pass,
only upon delivery of the Certificates to the Exchange Agent and shall be in
such form and have such other provisions as Identix may reasonably specify) and
(ii) instructions for use in effecting the surrender of the Certificates in
exchange for certificates evidencing Identix Common. Upon surrender of a
Certificate for cancellation to the Exchange Agent or to such other agent or
agents as may be appointed by Identix, together with such letter of
transmittal, duly executed, the Holder of such Certificate shall be entitled to
receive in exchange therefor (subject to the escrow provisions of Section 2.5
and the legending provisions of Section 2.10) the number of shares of Identix
Common to which the Holder is entitled pursuant to Section 2.3 hereof and is
represented by the Certificate so surrendered. The Certificate so surrendered
shall forthwith be canceled. In the event of a transfer of ownership of Company
Common that is not registered in the transfer records of the Company, or its
transfer agent,
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Identix Common may be delivered to a transferee if the Certificate representing
such Company Common is presented to the Exchange Agent and accompanied by all
documents required to evidence and effect such transfer and to evidence that
any applicable stock transfer taxes have been paid. Until surrendered as
contemplated by this Section 2.6.3, each Certificate shall be deemed at any
time after the Closing Date to represent the right to receive upon such
surrender such whole number of shares of Identix Common as provided by Section
2.3 and the provisions of the DGCL, subject to the escrow provisions of
Sections 2.5 and the legending provisions of Section 2.10.
2.6.4 No dividends or distributions payable to holders of record of
Identix Common after the Effective Time, or cash payable in lieu of fractional
shares, shall be paid to the holder of any unsurrendered Certificate until the
holder of the Certificate shall surrender such Certificate.
2.6.5 All Identix Common delivered upon the surrender for exchange of
shares of Company Common in accordance with the terms hereof shall be deemed to
have been delivered in full satisfaction of all rights pertaining to such
shares of Company Common. There shall be no further registration of transfers
on the stock transfer books of the Company or its transfer agent of the shares
of Company Common that were outstanding immediately prior to the Effective
Time. If, after the Closing Date, Certificates are presented for any reason,
they shall be canceled and exchanged as provided in this Section 2.6.
2.7 Dissenting Shares. Holders of Dissenting Shares shall have those rights,
but only those rights, of appraisal under Section 262 of the DGCL or of holders
of "dissenting shares" under Section 1300 et seq. of the Corporations Code. The
Company shall give Identix prompt notice of any demand, purported demand or
other communication received by the Company with respect to any Dissenting
Shares or shares claimed to be Dissenting Shares, and Identix shall have the
right to participate in all negotiations and proceedings with respect to such
shares. The Company agrees that, without the prior written consent of Identix,
it shall not voluntarily make any payment with respect to, or settle or offer
to settle, any demand or purported demand respecting such shares.
2.8 Registration on Form S-4. The Identix Common to be issued in the Merger
shall be registered under the 1933 Act on Form S-4. As promptly as practicable
after the date hereof, Identix shall prepare and file with the SEC the Form S-4
and any other documents required by the 1933 Act or Exchange Act in connection
with the Merger (including, without limitation the filing of Form 8-K by
Identix when appropriate). Each of Identix and the Company shall use its best
efforts to have the Form S-4 declared effective under the 1933 Act as promptly
as practicable after such filing. Identix shall also take any action required
to be taken under any applicable state securities or "blue sky" laws in
connection with the issuance of the Identix Common in the Merger. The Company
shall furnish to Identix all information concerning the Company and the holders
of Company Stock as may be reasonably requested in connection with any action
contemplated by this Section 2.8.
2.9 Tax Treatment. The parties intend to adopt this Agreement as a plan or
reorganization under, and intend to consummate the Merger in accordance with,
the provisions of Section 368(a) of the Code.
2.10 Restrictions on Identix Common. A total of 2,525,000 shares of Identix
Common issuable in the Merger or issuable upon exercise of Company Options or
Company Warrants assumed
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by Identix hereunder shall either be subject to the escrow provisions of
Section 2.5.1 or 2.5.2 or shall be subject to the transfer restrictions set
forth in this Section 2.10. The shares of Identix Common that are subject to
this Section 2.10 may not be sold, transferred, pledged or otherwise assigned
by the holders thereof prior to the first anniversary of the Effective Time,
other than by will or pursuant to the laws of descent and distribution.
Promptly after execution of this Agreement, the Company shall use its best
efforts to obtain the written agreement, in form reasonably satisfactory to
Identix, of the holders of Company Options identified in Section 2.5.2 of the
Company Officer-Certified Disclosure Statement to be bound by the transfer
restrictions of this Section 2.10 with respect to 40% of the shares issuable
pursuant to their Company Options. In addition, the Company will solicit the
approval of the other holders of Company Options to subject 40% of the shares
issuable thereunder to the same transfer restrictions. In order to carry out
the restriction set forth in this Section, certificates representing the shares
of Identix Common restricted by this Section 2.10 that are issued to each
Principal Holder pursuant to the Merger (excluding the shares placed in escrow)
or issued to holders of Company Options who have agreed to the provisions
hereof shall bear the following legend:
"The shares represented by this certificate may not be sold, transferred,
pledged or otherwise assigned prior to [insert date of first anniversary of
the Effective Time], other than by will or pursuant to the laws of descent
and distribution."
The aggregate number of the Principal Holders' shares of Identix Common issued
pursuant to the Merger (excluding the shares placed in escrow) that will be
subject to the foregoing restrictions shall be determined by the following
formula: 2,525,000 minus the number of shares of Identix Common subject to the
escrow provisions of Sections 2.5.1 and 2.5.2 minus the number of shares
Identix Common issuable upon exercise of assumed Company Options and Company
Warrants that are contractually bound by the restrictions of this Section 2.10.
The shares so restricted shall be apportioned ratably among the Principal
Holders. The purpose of the foregoing calculation is to ensure that 2,525,000
shares of Identix Common issuable pursuant to the Merger or issuable upon
exercise of assumed Company Options or Company Warrants are either bound by
Section 2.5.1, 2.5.2 or 2.10 and that any shortfall therefrom shall come from
the shares issued to the Principal Holders pursuant to the Merger.
2.11 Certificate of Incorporation; Bylaws. The Certificate of Incorporation
of the Company as in effect on the date hereof shall from and after the
Effective Time be and continue to be the Certificate of Incorporation of the
Surviving Corporation until changed or amended as provided by law, except that
at the Effective Time and upon filing of the Certificate of Merger, the
Certificate of Incorporation of the Company shall be amended and restated in
its entirety to read identically with the Certificate of Incorporation of
Acquisition Sub except that the name of the Surviving Corporation shall be "IDT
Holdings, Inc." From and after the Effective Time, the bylaws of Acquisition
Sub, as in effect immediately prior to the Effective Time, shall be the bylaws
of the Surviving Corporation.
2.12 Board of Directors; Officers. Oscar Pieper, Yuri Khidekel, Randall C.
Fowler and James P. Scullion shall be the directors of the Surviving
Corporation and the officers of the Company immediately prior to the Effective
Time shall be the officers of the Surviving Corporation, in each case until
their respective successors are duly appointed or elected and qualified.
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2.13 Company Warrants. At the Effective Time each of the outstanding Company
Warrants shall thereafter entitle the holder thereof to receive, upon exercise
thereof, for each one share of Company Series A Preferred subject to such
Company Warrant, a number of shares of Identix Common equal to the Preferred
Exchange Ratio at an exercise price for each full share of Identix Common equal
to the quotient obtained by dividing (a) the exercise price per share of
Company Series A Preferred with respect to such Company Warrant, by (b) the
Preferred Exchange Ratio, which exercise price shall be rounded to the nearest
two-place decimal. The number of shares of Identix Common issuable on the
exercise of any Company Warrant shall not include any fractional share of
Identix Common but Identix shall pay cash in lieu of any fractional share in
accordance with the terms of the Company Warrants. Identix shall assume in full
the Company Warrants. After such assumption, Identix shall issue, upon any
partial or total exercise of any Company Warrant, in lieu of shares of Company
Series A Preferred, the number of shares of Identix Common to which the holder
of the Company Warrant is entitled pursuant to this Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Any disclosure delivered by the Company to Identix pursuant to this Article
shall have been delivered on or prior to the date hereof and certified by an
officer of the Company as true, accurate and complete, shall specifically refer
to this Agreement and shall identify the Section of this Agreement requiring
the delivery of such disclosure (such disclosure being referred to herein as an
"Company Officer-Certified Disclosure Statement"). For the purposes of this
Article III, references to the "Company" shall include IDT Holdings, as well as
Identicator Technology. For purposes of this Article III, any references to the
Company's "knowledge" means actual knowledge of the persons identified in
Section 3.0 of the Company Officer-Certified Disclosure Statement as well as
information contained in the files or records of IDT Holdings, Identicator
Technology, Identicator, Inc. or IT Concepts. Except as set forth in the
Company Officer-Certified Disclosure Statement, the Company represents and
warrants to Identix that:
3.1 Organization and Authority. The Company and each of its Subsidiaries:
(i) is a corporation duly organized, validly existing and in good standing
under the laws of the jurisdiction of its incorporation; (ii) has all necessary
corporate power to own and lease its properties, to carry on its business as
now being conducted and to enter into and perform this Agreement and all
agreements to which the Company is or will be a party that are exhibits to this
Agreement; and (iii) is qualified to do business in all jurisdictions in which
the failure to so qualify would have a material adverse effect on the
condition, financial or otherwise, assets, liabilities, business or results of
operations of the Company. The Company has made available to Identix for
inspection complete and correct copies of the following with respect to the
Company and each of its Subsidiaries: Certificate of Incorporation, as amended,
and Bylaws as in effect on the date hereof and a record of any and all
proceedings and actions at all meetings of, or taken by written consent by, the
Board of Directors and stockholders, from the date of inception of such
corporation.
3.2 Authority Relating to this Agreement; No Violation of Other Instruments.
3.2.1 The execution and delivery of this Agreement and all agreements to
which the Company is or will be a party that are exhibits to this Agreement and
the performance hereunder and
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thereunder by the Company have been duly authorized by all necessary corporate
action on the part of the Company, subject to stockholder approval, and,
assuming execution of this Agreement and such other agreements by each of the
other parties thereto, this Agreement and such other agreements will constitute
legal, valid and binding obligations of the Company, enforceable against the
Company in accordance with their terms, subject as to enforcement: (i) to
bankruptcy, insolvency, reorganization, arrangement, moratorium and other laws
of general applicability relating to or affecting creditors' rights; and (ii)
to general principles of equity, whether such enforcement is considered in a
proceeding in equity or at law.
3.2.2 Neither the execution of this Agreement or any other agreement to
which the Company is or will be a party that is an exhibit to this Agreement
nor the performance of any of them by the Company will: (i) conflict with or
result in any breach or violation of the terms of any decree, judgment, order,
law or regulation of any court or other governmental body now in effect
applicable to the Company; (ii) conflict with, or result in, with or without
the passage of time or the giving of notice, any breach of any of the terms,
conditions and provisions of, or constitute a default under or otherwise give
another party the right to terminate, or result in the creation of any lien,
charge, or encumbrance upon any of the assets or properties of the Company
pursuant to, any material indenture, mortgage, lease, agreement or other
instrument to which the Company is a party or by which it or any of its assets
or properties are bound, including all Contracts (as defined in Section 3.22);
(iii) permit the acceleration of the maturity of any material indebtedness of
the Company or of any other person secured by the assets or properties of the
Company; or (iv) violate or conflict with any provision of the Company's
Articles of Incorporation, Bylaws, or similar organizational instruments.
3.2.3 No consent from any third party and no consent, approval or
authorization of, or declaration, filing or registration with, any government
or regulatory authority is required to be made or obtained by the Company in
order to permit the execution, delivery or performance of this Agreement or any
other agreement to which the Company is or will be a party that is an exhibit
to this Agreement by the Company, or the consummation of the transactions
contemplated by this Agreement and such other agreements, except as
contemplated in Sections 6.14 or 6.17 of this Agreement and except for such
consents, approvals, authorizations, declarations, filings or registrations the
failure to make or obtain would not have a material adverse effect on the
Company.
3.2.4 The board of directors of IDT Holdings has, at a meeting of such
board duly held on November 14, 1998, (i) approved this Agreement, (ii)
determined that this Agreement is fair to and in the best interests of the
stockholders of the Company, and (iii) resolved to recommend approval of this
Agreement to the stockholders of the Company.
3.3 Compliance with Law. The Company holds all licenses, permits and
authorizations necessary for the lawful conduct of the Company's business
wherever conducted pursuant to all applicable statutes, laws, ordinances, rules
and regulations of all governmental bodies, agencies and subdivisions having,
asserting or claiming jurisdiction over the Company or over any part of the
Company's operations, and the Company knows of no violation thereof. The
Company is not in violation of any decree, judgment, order, law or regulation
of any court or other governmental body (including, without limitation,
applicable environmental protection legislation and regulations, equal
employment and civil rights regulations, wages, hours and the payment of social
security taxes and
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occupational health and safety legislation), which violation could reasonably
be expected to have a material adverse effect on the condition, financial or
otherwise, assets, liabilities, business or results of operations of the
Company.
3.4 Capitalization of IDT Holdings. The authorized capital stock of IDT
Holdings is Twelve Million (12,000,000) shares of Company Common, of which Two
Million Seven Hundred Twenty Seven Thousand Seven Hundred Sixty Two (2,727,762)
shares are issued and outstanding as of the date hereof, and Five Million
(5,000,000) shares of Preferred Stock, of which Six Hundred Thousand (600,000)
are designated Company Series A Preferred, none of which are outstanding as of
the date hereof. Each share of Company Series A Preferred is convertible into
one share of Company Common. A list of all of the stockholders of IDT Holdings,
with the number of shares owned by each as of the date hereof, is contained in
Section 3.4 of the Company Officer-Certified Disclosure Statement. All such
issued and outstanding shares have been duly authorized and validly issued, and
are fully paid and non-assessable. As of the date hereof, IDT Holdings has
outstanding options to purchase 1,994,334 shares of Company Common pursuant to
the Company Plans. Section 3.4 of the Company Officer-Certified Disclosure
Statement contains a list of all outstanding Company Options, including with
respect to each outstanding Company Option, the name of the optionee, the
number of shares covered thereby, the exercise price thereof, the expiration
date, and, to the extent unvested, the vesting schedule and the vesting base
date. The Company has outstanding Company Warrants to purchase 60,000 shares of
Company Series A Preferred, which warrants have an exercise price and are held
by the persons indicated in Section 3.4 of the Company Officer-Certificate
Disclosure Statement. The Company Plans and the Company Warrants permit
assumption by Identix in accordance with the terms set forth in this Agreement
and IDT Holdings has taken all actions necessary for Identix to assume the
Company Plans and the Company Warrants upon the Effective Time. Except as set
forth in this Section, there are no outstanding warrants, options, agreements,
convertible or exchangeable securities or other commitments, obligations or
legal requirements pursuant to which IDT Holdings is or may become obligated to
issue, sell, purchase, retire or redeem any shares of capital stock or other
securities. There are no registration rights with respect to IDT Holdings'
capital stock which will survive the Closing.
3.5 Investments in Others. Section 3.5 of the Company Officer-Certified
Disclosure Statement contains a list of each corporation, association,
partnership, joint venture or other entity in which the Company, directly or
indirectly, owns an equity interest and sets forth the Company's percentage
interest by voting rights and by profits, in each such entity. Except for the
entities identified in such list, the Company does not conduct any part of its
business operations through any subsidiaries or through any other entity in
which the Company has an equity investment.
3.6 Financial Statements. The Company has delivered the following
consolidated financial statements of the Company (the "Company Financial
Statements") to Identix: (a) Audited Balance Sheets of the Company dated as of
December 31, 1996 and 1997, together with audited Statements of Operations,
Shareholders' Equity and Changes in Cash Flows for the two years ended December
31, 1996 and 1997; and (b) unaudited balance sheet of the Company (the "Balance
Sheet") dated as of September 30, 1998 (the "Balance Sheet Date"), together
with unaudited Statements of Operations, Shareholders' Equity and Changes in
Cash Flows for the nine months ended September 30, 1998. Each Company Financial
Statement together with the notes thereto is in
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accordance with the books and records of the Company, fairly presents the
financial position of the Company and the results of operations of the Company
for the period indicated, and has been prepared in accordance with generally
accepted accounting principles consistently applied, except that the unaudited
financial statements omit footnotes.
3.7 Absence of Undisclosed Liabilities. As of the Balance Sheet Date, the
Company had no indebtedness or liability (absolute or contingent) which is not
shown or provided for in full on the Balance Sheet. Except as set forth in the
Balance Sheet, the Company does not have outstanding any indebtedness or
liability (absolute or contingent) other than those incurred since the Balance
Sheet Date in the ordinary course of business.
3.8 Absence of Certain Changes or Events. Since the Balance Sheet Date,
except as contemplated by this Agreement, there have been no material changes
in the condition, financial or otherwise, assets, liabilities, business or the
results of operations of the Company, other than changes in the ordinary course
of business which in the aggregate have not been materially adverse. For the
purposes of this Section 3.8, all references to employees include Transferred
Employees. Without limiting the foregoing, since the Balance Sheet Date, except
as contemplated by this Agreement:
(i) the Company has not entered into any material transaction other than
in the ordinary course of business;
(ii) there have been no losses or damage to any of the assets or
properties of the Company due to fire or other casualty, whether or not
insured, amounting to more than Ten Thousand Dollars ($10,000) in the
aggregate;
(iii) there has been no increase or decrease in the rates of direct
compensation payable or to become payable by the Company to any employee, agent
or consultant (other than routine increases made in the ordinary course of
business or pursuant to a collective bargaining agreement), or any bonus,
percentage compensation, service award or other like benefit, granted, made or
accrued to or to the credit of any such employee, agent or consultant, or any
material welfare, pension, retirement or similar payment or arrangement made or
agreed to be made by the Company (other than such events occurring pursuant to
any previously existing benefit plan or collective bargaining agreement);
(iv) the Company has not executed, created, amended or terminated any
material contract except in the ordinary course of business;
(v) the Company has not declared or paid any dividend or made any
distribution on its capital stock, nor redeemed, purchased or otherwise
acquired any of its capital stock;
(vi) the Company has not received notice that there has been a
cancellation of an order for its products or a loss of a customer of the
Company, the cancellation or loss of which would materially adversely affect
the condition, financial or otherwise, assets, liabilities, business or results
of operations of the Company;
(vii) there has been no resignation or termination of employment of any
officer or key employee of the Company and the Company does not know of the
impending resignation or
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termination of employment of any officer or key employee of the Company, other
than the corporate secretary and assistant secretary of the Company;
(viii) there has been no material change in the contingent obligations of
the Company by way of guaranty, endorsement, indemnity, warranty or otherwise;
(ix) there have been no loans made by the Company to its employees,
officers or directors, other than travel advances and other advances made in
the ordinary course of business;
(x) there has been no waiver or compromise by the Company of a material
right or of a material debt owed to it;
(xi) the Company has not made or agreed to make any disbursements or
payments of any kind to any member or members of its Board of Directors;
(xii) there have been no capital expenditures by the Company exceeding
Twenty Five Thousand Dollars ($25,000) in any individual instance or exceeding
One Hundred Thousand Dollars ($100,000) in the aggregate;
(xiii) there has been no change in accounting methods or practices
(including without limitation, any change in depreciation or amortization
policies or rates) by the Company;
(xiv) there has been no revaluation by the Company of any of the assets
or properties of the Company;
(xv) there has been no sale or transfer of any of the assets or
properties of the Company, except in the ordinary course of business;
(xvi) there has been no loan by the Company to any person or entity other
than as permitted by (ix) or in the ordinary course of business;
(xvii) to the Company's knowledge, there has been no commencement or
notice of threat of commencement of any governmental proceeding against or
investigation of the Company or its affairs;
(xviii) to the Company's knowledge, there has been no revocation of
license or right to do business granted to the Company;
(xix) the Company has not paid any obligation or liability (fixed,
contingent or otherwise) or discharged or satisfied any lien, or settled any
liability, claim, dispute, proceeding, suit or appeal pending or threatened
against it, except for current liabilities incurred in the ordinary course of
business; and
(xx) there has been no agreement or commitment by the Company to do or
perform any of the acts described in this Section 3.8.
3.9 Inventories. The inventories shown on the Balance Sheet are of a
quantity and quality useable or saleable in the ordinary course of business,
subject to any applicable reserves. Additions and deletions from the
inventories since the Balance Sheet Date have been in the ordinary course of
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business. The amounts shown for inventories on the Balance Sheet have been
determined in accordance with generally accepted accounting principles on a
first-in, first-out basis and are stated at lower of cost or market.
3.10 Accounts Receivable. Subject to any reserves set forth on the Balance
Sheet, the accounts receivable shown on the Balance Sheet as of the Balance
Sheet Date, or thereafter acquired by the Company prior to the date hereof,
represent and will represent bona fide claims against debtors for sales and
other charges and are not subject to discount except for normal cash and
immaterial trade discounts. The amount carried for doubtful accounts and
allowances disclosed on the Balance Sheet as of the Balance Sheet Date is
sufficient to provide for any losses which may be sustained on realization of
the receivables shown on the Balance Sheet as of the Balance Sheet Date, or
thereafter acquired by the Company prior to the date hereof.
3.11 Taxes. Section 3.11 of the Company Officer-Certified Disclosure
Statement contains a true and complete list of all types of taxes paid by the
Company. All tax returns and reports with respect to the Company required by
law to be filed under the laws of any jurisdiction, domestic or foreign, have
been duly and timely filed and are correct in all material respects and all
taxes, fees or other governmental charges of any nature which were required to
have been paid have been paid. The Company has no knowledge of any unpaid taxes
or any actual or threatened assessment of deficiency or additional tax or other
governmental charge or a basis for such a claim against the Company. The
Company has no knowledge of any tax audit of the Company by any taxing or other
authority in connection with any of its fiscal years; the Company has no
knowledge of any such audit currently pending or threatened, and there are no
tax liens on any of the properties of the Company other than liens for taxes
not yet due and payable.
3.12 Personal Property. The Company has good title, free and clear of all
title defects, objections and liens, including without limitation, leases,
chattel mortgages, conditional sales contracts, collateral security
arrangements and other title or interest-retaining arrangements, to or with
respect to leased properties and assets valid leasehold interests in all of its
machinery, equipment, furniture, inventory and other personal property except
(i) the lien of current taxes not yet due and payable, (ii) such imperfections
of title, liens and easements as do not and will not materially detract from or
interfere with the use of the properties subject thereto or affected thereby,
or otherwise materially impair business operations involving such properties
and (iii) liens securing debt which is reflected on the Balance Sheet. All such
personal property is in good operating condition, subject to normal wear and
tear. All of the leases to personal property utilized in the business of the
Company are valid and enforceable and are not in default.
3.13 Real Property. The Company does not own any real property. Section 3.13
of the Company Officer-Certified Disclosure Statement contains a list of all
leases for real property to which the Company is a party, the square footage
leased with respect to each lease and the expiration date of each lease. All
such leases are valid and enforceable subject as to enforcement: (i) to
bankruptcy, insolvency, reorganization, arrangement, moratorium and other laws
of general applicability relating to or affecting creditors' rights; and (ii)
to general principles of equity, whether such enforcement is considered in a
proceeding in equity or at law. The Company is not in default under any such
lease. To the Company's knowledge, the real property leased or occupied by the
Company, the improvements located thereon, and the furniture, fixtures and
equipment relating
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thereto (including plumbing, heating, air conditioning and electrical systems),
conform to any and all applicable health, fire, safety, zoning, land use and
building laws, ordinances and regulations. There are no outstanding contracts
made by the Company for any improvements made to the real property owned,
leased or occupied by the Company that have not been paid for or accounted for
on the Balance Sheet.
3.14 Patents, Trademarks, Trade Names and Copyrights. Section 3.14 of the
Company Officer-Certified Disclosure Statement sets forth a list of all
patents, patent applications, trademarks, registered and unregistered, and
trade names, registered and unregistered, of the Company. All patents,
trademarks, trade names, copyrights, processes, designs, formulas, inventions,
trade secrets, know-how, technology or other proprietary rights which are
necessary to the conduct of the Company's business are owned or are useable by
the Company. The conduct of any business conducted by the Company does not
infringe or constitute a misappropriation of any copyright or trade secret of
any other person or, to the Company's knowledge, any patent, trademark, trade
name or other proprietary right of any other person. No litigation is pending
or, to the knowledge of the Company, has been threatened against the Company
or, in connection with the Company, any officer, director, stockholder,
employee or agent of the Company or Transferred Employees, for the infringement
of any patents, trademarks or trade names of any other party or for the misuse
or misappropriation of any trade secret, know-how or other proprietary right
owned by any other party nor, to the knowledge of the Company, does any basis
exist for such litigation. To the Company's knowledge, there has been no
infringement or unauthorized use by any other party of any patent, trademark,
trade name, copyright, process, design, formula, invention, trade secret, know-
how, technology or other proprietary right belonging to the Company.
3.15 Warranties. The Company has made no warranties or guarantees relating
to its products other than as implied or required by law or contained in the
agreements listed in Section 3.22 of the Company Officer-Certified Disclosure
Statement. Section 3.15 of the Company Officer-Certified Disclosure Statement
contains a list of all warranty and indemnification obligations of the Company
relating to patents and other proprietary rights, other than those contained in
the agreements listed in Section 3.22 of the Company Officer-Certified
Disclosure Statement.
3.16 Litigation. Neither the Company nor, to the Company's knowledge, any
officer, director, stockholder, employee or agent of the Company or any
Transferred Employee is a party to any pending or, to the Company's knowledge,
threatened action, suit, proceeding or, to the Company's knowledge,
investigation, at law or in equity or otherwise in, for or by any court or
other governmental body which could have a material adverse effect on: (i) the
condition, financial or otherwise, assets or properties of the Company,
liabilities, business or results of operations of the Company; or (ii) the
transactions contemplated by this Agreement. The Company is not and has not
been subject to any pending or, to the Company's knowledge, threatened product
liability claim. The Company is not subject to any decree, judgment or order of
any court or other governmental body which could have a material adverse effect
on the condition, financial or otherwise, assets, liabilities, business or
results of operations of the Company or which could prevent the transactions
contemplated by this Agreement.
3.17 Protection of Intangible Property. Each employee and consultant
(including employees and consultants of Identicator, Inc. and IT Concepts) who
has worked on or contributed to
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the development of the Company's technology, trade secrets and other
proprietary rights, including without limitation, the Company's software,
firmware or hardware, has executed a proprietary rights and information
agreement substantially in the form attached as Exhibit 3.17 to the Company
Officer-Certified Disclosure Statement. The Company's source codes and trade
secrets have not been used, distributed or otherwise commercially exploited
under circumstances which have caused, or with the passage of time could cause,
the loss of copyright or trade secret status. The Company has set forth in
Section 3.17 of the Company Officer-Certified Disclosure Statement a list of
all persons or entities to whom the Company has disclosed its source codes.
3.18 Personnel.
(a) Section 3.18 of the Company Officer-Certified Disclosure Statement
contains a list of the names, current salary rates, bonuses paid during the
last fiscal year, and accrued vacation and sick leave for all the employees of
the Company and all of the Transferred Employees. Section 3.18 of the Company
Officer-Certified Disclosure Statement contains a list of: (i) all employment,
bonus, profit sharing, percentage compensation, commission, employee benefit
plans, incentive plans, pension or retirement plans, stock purchase and stock
option plans, oral or written contracts or agreements with directors, officers,
employees or unions, or consulting agreements, to which the Company is a party
or is subject as of the date of this Agreement or to which Identicator, Inc. or
IT Concepts is a party or is subject as of the date of this Agreement and that
relates to the Transferred Employees; and (ii) all group insurance programs in
effect for employees of the Company or the Transferred Employees. Neither the
Company, Identicator, Inc. nor IT Concepts is in default with respect to any of
the obligations so listed. The Company has delivered complete and correct
copies of all such obligations (to the extent they are in writing or written
descriptions to the extent they are oral) to Identix. The employment of each
employee of the Company and each Transferred Employees is "at will" and may be
terminated without liability. Neither the Company, Identicator, Inc. nor IT
Concepts has any union contracts or collective bargaining agreements with, or
any other obligations to, employee organizations or groups relating to the
Company's business or the Transferred Employees, nor is the Company,
Identicator, Inc. or IT Concepts currently engaged in any labor negotiations
except in minor grievances not involving any employee organization or group,
nor, to the knowledge of the Company, is the Company, Identicator, Inc. or IT
Concepts the subject of any union organization affecting the Company's
business. There is no pending or, to the Company's knowledge, threatened labor
dispute, strike or work stoppage affecting the Company's business.
(b) All plans described in Section 3.18 of the Officer-Certified Disclosure
Statement or in Section 3.18(a) above (collectively, "Employee Plans") are in
material compliance with applicable provisions of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), and regulations issued under
ERISA in any respect relevant to the Company's business or the Transferred
Employees, and there is no unfunded liability with respect to such plans.
Section 3.18 of the Company Officer-Certified Disclosure Statement also lists
the amount payable to employees of the Company and the Transferred Employee
under other fringe benefit plans. None of the benefit plans of the Company or,
to the extent they apply to the Transferred Employees or the Company's
business, Identicator, Inc. or IT Concepts are subject to Title IV of ERISA,
and neither the Company, Identicator, Inc., IT Concepts nor any entity treated
as a single employer with the Company under Section 414(b) or (c) of the Code
(a "Company ERISA Affiliate") has maintained a plan subject to
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such title during the six-year period ended on the date hereof. Neither the
Company, Identicator, Inc., IT Concepts nor any Company ERISA Affiliate has any
obligation to contribute to, or has had within the six-year period ending on
the date hereof, any obligation to or has actually contributed to, any
multiemployer plan.
(c) The Company and, with respect to the Transferred Employees and the
Company's Business, Identicator, Inc. and IT Concepts are in compliance with
all federal and state wage, tax and withholding obligations for all current and
former employees, whether or not correctly characterized as employees by the
Company, Identicator, Inc. or IT Concepts, including but not limited to
personnel classified as freelancers, consultants, independent contractors, or
temporary, casual or contract employees. The Company, Identicator, Inc. and IT
Concepts are in compliance with all Employee Plans for all such personnel,
whether or not such personnel have been correctly characterized by the Company,
Identicator, Inc. or IT Concepts.
3.19 Insurance. The Company has policies of insurance of the type and in
amounts customarily carried by persons conducting business or owning assets
similar to those of the Company. Section 3.19 of the Company Officer-Certified
Disclosure Statement contains a list of all insurance policies and bonds in
force with respect to the Company showing for each such policy or bond: (i) the
owner; (ii) the coverage of such policy or bond; (iii) the amount of premium
properly allocable to such policy or bond; (iv) the name of the insurer; and
(v) the termination date of the policy or bond. Copies of all such insurance
policies and bonds have been furnished to Identix. All such insurance policies
and bonds are in full force and effect.
3.20 Certain Payments. To the knowledge of the Company, neither the Company,
nor any stockholder, director, officer, employee or agent of the Company or
Transferred Employee, has made or caused to be made, directly or indirectly,
the payment of any consideration whatsoever to any public official, candidate
for public office, political party, or other third person in connection with
the business or operations of the Company, or pertaining to the Company's
relations with any customer, supplier, or creditor, in contravention of the law
of any applicable jurisdiction.
3.21 Brokers and Finders. Neither the Company nor, to the Company's
knowledge, any stockholder, director, officer, employee or agent of the Company
or any Transferred Employee has retained any broker, finder or investment
banker in connection with the transactions contemplated by this Agreement.
3.22 Contracts. Section 3.22 of the Company Officer-Certified Disclosure
Statement lists all oral or written agreements, notes, instruments, or
contracts to which the Company is a party or by which its assets or properties
may be bound which involve the payment or receipt of more than $25,000 (on an
annual basis), or which have a term of more than one year, or which involve
intellectual property, or which are employment or consulting agreements (the
"Contracts"). The Company is not in default in performance of its obligations
under any material provisions of such Contracts. The Company has no knowledge
of any violation of any Contract by any other party thereto and has no
knowledge of any intent by any other party to a Contract not to perform its
obligations under such Contract.
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3.23 Stockholders and Employees. None of the stockholders, directors or
management personnel of the Company is presently a party to any transaction
with the Company, including without limitation, any contract, agreement or
other arrangement: (i) providing for the furnishing of services to or by; (ii)
providing for rental of real or personal property to or from; or (iii)
otherwise requiring payments to or from any stockholder, director or management
personnel, or any member of the family of any stockholder, director or
management personnel or any corporation, trust or other entity in which any
stockholder, director or management personnel has a substantial interest or is
an officer, director, investor or partner.
3.24 Absence of Environmental Liabilities. Excluding environmental
liabilities that, individually or in the aggregate, have not or would not
reasonably be expected to have a material adverse effect on the condition,
financial or otherwise, assets, liabilities, business or results of operations
of the Company: (a) Neither the Company nor the real property owned, leased,
operated, or occupied by the Company is in violation of any applicable federal,
state or local law, ordinance, regulation or order or any Environmental Laws or
any of its applicable permits or authorizations relating to industrial hygiene,
worker safety, public health and safety, environmental protection, or Hazardous
Materials on, under or about such real property, including, without limitation,
the soil and groundwater underlying such real property; (b) Any handling,
transportation, storage, treatment or use of Hazardous Material that has
occurred on or about or from the real property owned, leased, operated, or
occupied by the Company during the Company's ownership, tenancy, or occupancy
and prior to the Closing Date has been and will be as of the Closing Date in
compliance with all applicable laws, ordinances, regulations, orders, and all
Environmental Laws relating to Hazardous Material; (c) To the Company's
knowledge, the real property leased, operated, or occupied by the Company,
including without limitation, the soil and groundwater on or under such real
property, is free of any release, spill, disposal, or discharge (as those terms
are defined in Environmental Laws) of any Hazardous Material; (d) No
notification of release of Hazardous Material pursuant to CERCLA or the federal
Clean Water Act, or any state or local environmental law or regulatory
requirement has been received by the Company as to any of such real property;
(e) No Hazardous Materials generated by the Company or any of its affiliates in
operating the Company's business have ever been sent as wastes, directly or
indirectly, to any site listed or formally proposed for listing on the national
Priority List or Comprehensive Environmental Response, Compensation and
Liability Information System, promulgated pursuant to CERCLA or to any site
listed on any Federal or state list of hazardous substances sites requiring
investigation, remediation, or clean-up; (f) The Company has not received from
any governmental authority or third party any notice of any suit, demand,
claim, violation, citation, criminal, civil or administrative action, request
for information, demand letter, or other notification that, in connection with
the conduct of its business, it (or any of its officers, directors, or
employees) is or may be potentially responsible with respect to any
investigation or clean-up of Hazardous Material at any site; (g) To the
Company's knowledge, there currently are not and have never been any
underground storage tanks or vaults on the real property; and (h) There is no
asbestos (whether friable or not) located on or in the real property.
3.25 Power of Attorney; Suretyships. The Company has no power of attorney
outstanding, nor has any obligation or liability, either actual, accrued,
accruing or contingent, as guarantor, surety, cosigner, endorser, co-maker,
indemnitor or otherwise in respect of the obligation of any other person,
corporation, partnership, joint venture, association, organization or other
entity.
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3.26 Business Practices. To the Company's knowledge, the Company has not
made, offered or agreed to offer anything of value to any government official,
political party or candidate for government office nor has it taken any action
which would cause it to be in violation of the Foreign Corrupt Practices Act of
1977.
3.27 Bank Accounts. Section 3.27 of the Company Officer-Certified Disclosure
Statement contains a list of all bank accounts of the Company, identifying the
name of the bank, the account number, and the authorized signatories to the
account.
3.28 Order Backlog. Section 3.28 of the Company Officer-Certified Disclosure
Statement of the Company contains a list of the aggregate backlog of orders for
the Company's products as of September 30, 1998. All such orders have been or
will be filled by the Company in the ordinary course of business, and the
Company knows of no reason why any customer placing any such order may refuse
delivery of the ordered products or fail timely to pay for such products in
accordance with the terms of such orders.
3.29 Hart-Scott-Rodino. The "ultimate parent entity" of the Company does not
(and will not prior to the Closing) have "total assets" or "annual net sales"
in excess of $100,000,000, as those terms are defined in the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, and the regulations thereunder.
3.30 Officer's Certificate as to Tax Matters. The Company knows of no reason
why it will be unable to deliver to Heller Ehrman White & McAuliffe and
Brobeck, Phleger & Harrison LLP at the closing an Officer's Certificate in form
sufficient to enable each such counsel to render the opinions described in
Sections 6.6 and 7.4.
3.31 Year 2000 Compliance. All of the Company's products (including products
sold to date, products currently being sold or future products), both
individually and when operating in conjunction with all other systems or
products with which they are designed to interface, and all computer software
and hardware (including microcode, firmware, system and application programs,
files, databases, computer services, and microcontrollers, including those
embedded in computer and noncomputer equipment) contained in the Company's
products (including products sold to date, products currently being sold or
future products) are Year 2000 Compliant. "Year 2000 Compliant" means that such
hardware or software will: (a) process date data from at least the years 1900
through 2101 without error or interruption; and (b) maintain functionality with
respect to the introduction, processing, or output of records containing dates
falling on or after January 1, 2000. All of the Company's internal computer
systems are, both individually and in conjunction with all other systems with
which they interface, Year 2000 Compliant, except that the Company makes no
such representation with respect to off-the-shelf software that is used in the
Company's internal computer systems the failure or malfunctioning of which
would not have a material adverse effect on the Company. The Company has made
inquiries of its key suppliers of services and products and, to its knowledge,
the Company is not relying on the products or services of any third party whose
systems are not Year 2000 Compliant. To the Company's knowledge, the Company
does not have any material expenses or other material liabilities associated
with securing Year 2000 Compliance (as described above), or making contingency
arrangements to address Year 2000 Compliance issues, with respect to the
Company's products (including products sold to date, products currently being
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sold or future products), internal computer systems or the computer systems of
the Company's critical suppliers or customers.
3.32 Accuracy of Documents and Information. The copies of all instruments,
agreements, other documents and written information set forth as, or referenced
in, Schedules or Exhibits to this Agreement or specifically required to be
furnished pursuant to this Agreement by the Company to Identix, including,
without limitation, the Company Officer-Certified Disclosure Statement, are and
will be complete and correct in all material respects. All information in the
Company Officer-Certified Disclosure Statement is as of the date hereof. No
representations or warranties made by the Company in this Agreement, nor any
document, written information, statement, financial statement, certificate,
Schedule or Exhibit furnished directly to Identix pursuant to this Agreement or
in the Company Officer-Certified Disclosure Statement contains any untrue
statement of a material fact, or omits to state a material fact necessary to
make the statements or facts contained herein not misleading. The disclosure
contained in this Agreement, the Exhibits and Schedules hereto and the Company
Officer-Certified Disclosure Statement, taken as a whole, does not omit to
state any material information regarding the Company, its financial position,
assets, liabilities, business and results of operations.
3.33 Identicator Technology Capitalization. IDT Holdings owns all
outstanding capital stock of Identicator Technology free and clear of any
pledges, liens or encumbrances. There do not exist any warrants, obligations,
subscriptions, options, securities convertible into capital stock or other
commitments to issue capital stock of Identicator Technology.
3.34 Restructuring. The Restructuring was accomplished in compliance with
all Federal, California, Nevada, Delaware and other applicable laws. The
Restructuring resulted in the transfer in full to Identicator Technology of the
Biometric Business that had previously been conducted by the Joint Venture,
Identicator Corp. and IT Concepts and of all other assets of the Joint Venture
and Identicator Corp. The disclosures made to the stockholders of Identicator
Corp. and to IT Concepts in connection with the Restructuring were accurate and
complete in all material respects. No stockholder of Identicator Corp.
exercised dissenter or appraisal rights in connection with the Restructuring
and the deadline for exercising such rights has expired. IDT Holdings and
Identicator Technology (excluding the operations of Corp. and the Joint Venture
to which Identicator Technology succeeded by operation of the Restructuring)
did not engage in any business activities or enter into any agreements prior to
the Restructuring, other than agreements with employees and consultants
relating to the Company Options and capital stock and agreements related to
effecting the Restructuring.
3.35 Spinoff. The Spinoff was completed on March 31, 1997. Identicator
Technology, as successor-in-interest to Identicator Corp., has no liability
with respect to any failure to comply with any Federal, California, Nevada or
other applicable laws with respect to the Spinoff. Identicator Technology, as
successor-in-interest to Identicator Corp., is not currently subject to any
contractual commitments or other liabilities relating to the conduct of the
business that was spun off to Identicator, Inc. The Spinoff was not taxable
either to Identicator Corp. or its stockholders pursuant to Section 355 of the
Code.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF IDENTIX
Any disclosure delivered by Identix to the Company pursuant to this Article
shall have been delivered on or prior to the date hereof and certified by an
officer of Identix as true, accurate and complete, shall specifically refer to
this Agreement and shall identify the Section of this Agreement requiring the
delivery of such disclosure (each such disclosure being referred to herein as
the "Identix Officer-Certified Disclosure Statement"). For purposes of this
Article IV (other than Sections 4.1 and 4.3), any references to "Identix" shall
include references to Identix's Subsidiaries. Except as set forth in the
Identix Officer-Certified Disclosure Statement, Identix represents and warrants
to the Company that:
4.1 Organization and Authority. Identix and each of its Subsidiaries: (i) is
a corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation; (ii) has all necessary corporate
power to own and lease its properties, to carry on its business as now being
conducted and to enter into and perform this Agreement and all agreements to
which Identix is or will be a party that are exhibits to this Agreement; and
(iii) is qualified to do business in all jurisdictions in which the failure to
so qualify would have a material adverse effect on the condition, financial or
otherwise, assets, liabilities, business or results of operations of Identix.
Identix has made available to the Company for inspection complete and correct
copies of its Articles of Incorporation, as amended, and Bylaws as in effect on
the date hereof and a record of any and all proceedings and actions at all
meetings of, or taken by written consent by, its Board of Directors and
shareholders, from and after July 1, 1996.
4.2 Authority Relating to this Agreement; No Violation of Other Instruments.
4.2.1 The execution and delivery of this Agreement and all agreements to
which Identix is or will be a party that are exhibits to this Agreement and the
performance hereunder and thereunder by the Company have been duly authorized
by all necessary corporate action on the part of Identix and, assuming
execution of this Agreement and such other agreements by each of the other
parties thereto, this Agreement and such other agreements will constitute
legal, valid and binding obligations of Identix, enforceable against Identix in
accordance with their terms, subject as to enforcement: (i) to bankruptcy,
insolvency, reorganization, arrangement, moratorium and other laws of general
applicability relating to or affecting creditors' rights; and (ii) to general
principles of equity, whether such enforcement is considered in a proceeding in
equity or at law.
4.2.2 Neither the execution of this Agreement or any other agreement to
which Identix is or will be a party that is an exhibit to this Agreement nor
the performance of any of them by Identix will: (i) conflict with or result in
any breach or violation of the terms of any decree, judgment, order, law or
regulation of any court or other governmental body now in effect applicable to
Identix; (ii) conflict with, or result in, with or without the passage of time
or the giving of notice, any breach of any of the terms, conditions and
provisions of, or constitute a default under or otherwise give another party
the right to terminate, or result in the creation of any lien, charge, or
encumbrance upon any of the assets or properties of Identix pursuant to, any
material indenture, mortgage, lease, agreement or other instrument to which
Identix is a party or by which it or any of its assets or properties are bound,
including all Contracts (as defined in Section 3.22) of Identix; (iii)
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permit the acceleration of the maturity of any material indebtedness of Identix
or of any other person secured by the assets or properties of Identix; or (iv)
violate or conflict with any provision of Identix's Articles of Incorporation,
Bylaws, or similar organizational instruments.
4.2.3 No consent from any third party and no consent, approval or
authorization of, or declaration, filing or registration with, any government
or regulatory authority is required to be made or obtained by Identix in order
to permit the execution, delivery or performance of this Agreement or any other
agreement to which Identix is or will be a party that is an exhibit to this
Agreement by Identix, or the consummation of the transactions contemplated by
this Agreement and such other agreements, except as contemplated in Sections
2.4, 2.8, 7.6, 7.7 and 7.8 of this Agreement and except for such consents,
approvals, authorizations, declarations, filings or registrations the failure
to make or obtain would not have a material adverse effect on Identix.
4.3 Capitalization. The authorized capital stock of Identix is Two Million
(2,000,000) shares of Preferred Stock, none of which are issued and
outstanding, and Fifty Million (50,000,000) shares of Identix Common, of which
Twenty Five Million Two Hundred Ninety Eight Thousand Four Hundred Forty Four
(25,298,444) shares are issued and outstanding on the date hereof. All such
issued and outstanding shares have been duly authorized and validly issued, and
are fully paid and non-assessable. On the date hereof, Identix has reserved a
total of 4,366,146 shares of Identix Common for issuance under its 1983
Incentive Stock Option Plan, 1992 Employee Stock Option Plan, Equity Incentive
Plan, Nonemployee Directors Stock Option Plan, Employee Stock Purchase Plan,
Foreign Subsidiary Employee Stock Purchase Plan, ANADAC, Inc. 1984 Incentive
Stock Option Plan and outstanding warrants. Of the shares reserved for issuance
as described in the preceding sentence, as of the date hereof, there are
outstanding options, warrants or other rights to acquire 2,709,018 shares of
Identix Common. Except as set forth in the preceding sentence, there are no
outstanding warrants, options, agreements, convertible or exchangeable
securities or other commitments pursuant to which Identix is or may become
obligated to issue, sell, purchase, retire or redeem any shares of capital
stock or other securities. Identix on the date hereof does not have any plan or
present intention to issue securities, except for the securities reserved for
issuance under the plans and warrants described in this Section 4.3 and for the
securities issuances specifically contemplated by this Agreement.
4.4 Financial Statements. Identix has made available to the Company its
Annual Report on Form 10-K for the fiscal year ended June 30, 1998 (the "1998
Form 10-K"), which includes the following consolidated financial statements of
Identix (the "Identix Financial Statements"): Audited Balance Sheets of Identix
dated as of June 30, 1997 and 1998, together with audited Statements of
Operations, Shareholders' Equity and Changes in Cash Flows for the three years
ended June 30, 1996, 1997 and 1998. Each Identix Financial Statement together
with the notes thereto is in accordance with the books and records of Identix,
fairly presents the financial position of Identix and the results of operations
of Identix for the period indicated, and has been prepared in accordance with
generally accepted accounting principles consistently applied.
4.5 Absence of Undisclosed Liabilities. As of June 30, 1998, Identix had no
indebtedness or liability (absolute or contingent) which is not shown or
provided for in full in the Identix Financial Statements. Except as set forth
in the Identix Financial Statements, Identix does not have outstanding
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any indebtedness or liability (absolute or contingent) other than those
incurred since June 30, 1998 in the ordinary course of business.
4.6 Brokers and Finders. Neither Identix nor, to Identix's knowledge, any
shareholder, director, officer, employee or agent of Identix has retained any
broker, finder or investment banker in connection with the transactions
contemplated by this Agreement.
4.7 SEC Documents. Identix has filed with the SEC all required forms,
reports, registration statements and documents required to be filed by it with
the SEC on or after January 1, 1998 (collectively, all such forms, reports,
registration statements and documents filed on or after January 1, 1998 are
referred to herein as the "Identix SEC Reports"), all of which complied as to
form when filed in all material respects with the applicable provisions of the
1933 Act and the Exchange Act, as the case may be. As of their respective dates
the Identix SEC Reports (including all exhibits and schedules thereto and
documents incorporated by reference therein) did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
4.8 Absence of Certain Changes or Events. Since June 30, 1998, except as
contemplated by this Agreement, there have been no material changes in the
condition, financial or otherwise, assets, liabilities, business or the results
of operations of Identix, other than changes in the ordinary course of business
which in the aggregate have not been materially adverse.
4.9 Officer's Certificate as to Tax Matters. Identix knows of no reason why
it will be unable to deliver to Heller Ehrman White & McAuliffe and Brobeck,
Phleger & Harrison LLP at the closing an Officer's Certificate in form
sufficient to enable each such counsel to render the opinions described in
Sections 6.6 and 7.4.
4.10 Shares Issued in Connection with the Merger. The shares of Identix
Common to be issued to the Holders pursuant to the Merger, when issued in
accordance with this Agreement and the Certificate of Merger, will be duly
authorized, validly issued, fully paid and non-assessable. The shares of
Identix Common to be issued to the holders of the Company Options or Company
Warrants upon exercise of the Company Options or Company Warrants after the
Merger, when issued upon exercise of the Company Options or Company Warrants in
accordance with this Agreement, the Certificate of Merger, and either the
Company Plans or the Company Warrants, will be duly authorized, validly issued,
fully paid and non-assessable.
4.11 Litigation. Neither Identix nor any officer, director, shareholder,
employee or agent of Identix is a party to any pending or, to Identix's
knowledge, threatened action, suit, proceeding or, to Identix's knowledge,
investigation, at law or in equity or otherwise in, for or by any court or
other governmental body which could have a material adverse effect on: (i) the
condition, financial or otherwise, assets or properties of the Identix,
liabilities, business or results of operations of Identix; or (ii) the
transactions contemplated by this Agreement. Identix is not and has not been
subject to any pending or, to Identix's knowledge, threatened product liability
claim. Identix is not subject to any decree, judgment or order of any court or
other governmental body which could have a material
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adverse effect on the condition, financial or otherwise, assets, liabilities,
business or results of operations of Identix or which could prevent the
transactions contemplated by this Agreement.
4.12 Compliance with Law. Identix holds all licenses, permits and
authorizations necessary for the lawful conduct of Identix's business wherever
conducted pursuant to all applicable statutes, laws, ordinances, rules and
regulations of all governmental bodies, agencies and subdivisions having,
asserting or claiming jurisdiction over Identix or over any part of Identix's
operations, and Identix knows of no violation thereof. Identix is not in
violation of any decree, judgment, order, law or regulation of any court or
other governmental body (including, without limitation, applicable
environmental protection legislation and regulations, equal employment and
civil rights regulations, wages, hours and the payment of social security taxes
and occupational health and safety legislation), which violation could
reasonably be expected to have a material adverse effect on the condition,
financial or otherwise, assets, liabilities, business or results of operations
of Identix.
4.13 Accuracy of Documents and Information. The copies of all instruments,
agreements, other documents and written information set forth as, or referenced
in, Schedules or Exhibits to this Agreement or specifically required to be
furnished pursuant to this Agreement by Identix to the Company, including,
without limitation, the Identix Officer-Certified Disclosure Statement, are and
will be complete and correct in all material respects. All information in the
Identix Officer-Certified Disclosure Statement is as of the date hereof. No
representations or warranties made by Identix in this Agreement, nor any
document, written information, statement, financial statement, certificate,
Schedule or Exhibit furnished directly to the Company pursuant to this
Agreement or in the Identix Officer-Certified Disclosure Statement contains any
untrue statement of a material fact, or omits to state a material fact
necessary to make the statements or facts contained herein not misleading. The
disclosure contained in this Agreement, the Exhibits and Schedules hereto, and
Identix's Officer-Certified Disclosure Statement, taken as a whole, does not
omit to state any material information regarding Identix, its financial
position, assets, liabilities, business and results of operations.
4.14 Identicator, Inc. and IT Concepts. Identix acknowledges and understands
that Identicator, Inc. and IT Concepts are entities separate from the Company
and its subsidiaries, are not parties to the Merger and will continue to
operate as entities separate from the Company and its subsidiaries and Identix
and its subsidiaries after consummation of the Merger.
ARTICLE V
REPRESENTATIONS AND WARRANTIES RELATING TO ACQUISITION SUB
Identix and Acquisition Sub hereby represent and warrant to the Company
that:
5.1 No Business Activities. Acquisition Sub was formed in November 1998 for
the purposes of carrying out the Merger and has not engaged in any business
activities or entered into any agreements other than as contemplated by this
Agreement.
5.2 Organization and Authority. Acquisition Sub: (i) is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation; (ii) has all necessary corporate power to
own and lease its properties, to carry on its business as now being
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conducted and to enter into and perform this Agreement and all agreements to
which Acquisition Sub is or will be a party that are exhibits to this
Agreement; and (iii) is qualified to do business in all jurisdictions in which
the failure to so qualify would have a material adverse effect on the
condition, financial or otherwise, assets, liabilities, business or results of
operations of Acquisition Sub. Acquisition Sub has made available to the
Company for inspection complete and correct copies of its Certificate of
Incorporation, as amended, and Bylaws as in effect on the date hereof and a
record of any and all proceedings and actions at all meetings of, or taken by
written consent by, its Board of Directors and stockholders, from the date of
inception.
5.3 Authority Relating to this Agreement; No Violation of Other Instruments.
5.3.1 The execution and delivery of this Agreement and all agreements to
which Acquisition Sub is or will be a party that are exhibits to this Agreement
and the performance hereunder and thereunder by the Company have been duly
authorized by all necessary corporate action on the part of Acquisition Sub
and, assuming execution of this Agreement and such other agreements by each of
the other parties thereto, this Agreement and such other agreements will
constitute legal, valid and binding obligations of Acquisition Sub, enforceable
against Acquisition Sub in accordance with their terms, subject as to
enforcement: (i) to bankruptcy, insolvency, reorganization, arrangement,
moratorium and other laws of general applicability relating to or affecting
creditors' rights; and (ii) to general principles of equity, whether such
enforcement is considered in a proceeding in equity or at law.
5.3.2 Neither the execution of this Agreement or any other agreement to
which Acquisition Sub is or will be a party that is an exhibit to this
Agreement nor the performance of any of them by Acquisition Sub will: (i)
conflict with or result in any breach or violation of the terms of any decree,
judgment, order, law or regulation of any court or other governmental body now
in effect applicable to Acquisition Sub; or (ii) violate or conflict with any
provision of Acquisition Sub's Certificate of Incorporation, Bylaws, or similar
organizational instruments.
5.3.3 Except as contemplated in Section 7.8 of this Agreement, no consent
from any third party and no consent, approval or authorization of, or
declaration, filing or registration with, any government or regulatory
authority is required to be made or obtained by Acquisition Sub in order to
permit the execution, delivery or performance of this Agreement or any other
agreement to which Acquisition Sub is or will be a party that is an exhibit to
this Agreement by Acquisition Sub, or the consummation of the transactions
contemplated by this Agreement and such other agreements.
5.4 Capitalization. The authorized capital stock of Acquisition Sub is One
Thousand (1,000) shares of Common Stock, of which one hundred (100) shares are
issued and outstanding and held by Identix. All such issued and outstanding
shares have been duly authorized and validly issued, and are fully paid and
non-assessable. There are no outstanding warrants, options, agreements,
convertible or exchangeable securities or other commitments pursuant to which
Acquisition Sub is or may become obligated to issue, sell, purchase, retire or
redeem any shares of capital stock or other securities.
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ARTICLE VI
CONDITIONS TO THE OBLIGATIONS OF IDENTIX AND ACQUISITION SUB
The obligations of Identix and Acquisition Sub to consummate the Merger are
subject to the fulfillment, at or before the Closing of all the following
conditions, any one or more of which may be waived by Identix.
6.1 Representations and Warranties True at Closing. The representations and
warranties of the Company contained in this Agreement shall be deemed to have
been made again at and as of the Closing with respect to the stated facts
(including the update of the Company Officer-Certified Disclosure Statement
referred to in Section 8.1 of this Agreement) then existing and shall be true
in all material respects.
6.2 Covenants Performed. All of the obligations of the Company to be
performed at or before the Closing pursuant to the terms of this Agreement
shall have been duly performed.
6.3 Certificate. At the Closing, Identix shall have received a certificate
signed by the President of the Company to the effect that the conditions set
forth in Sections 6.1 and 6.2 have been satisfied.
6.4 Stockholder Approval. This Agreement and the Certificate of Merger shall
have been duly approved by the stockholders of the Company.
6.5 Dissenting Shares. The aggregate number of Dissenting Shares shall not
exceed two percent of the aggregate of the outstanding shares of Identix Common
that would be outstanding immediately following the Merger if there were no
Dissenting Shares.
6.6 Tax Opinion. Identix shall have received the opinion of its counsel to
the effect that the Merger will constitute a reorganization within the meaning
of Section 368(a) of the Code, which opinion shall be substantially similar to
the opinion delivered to the Company pursuant to Section 7.4. In preparing the
tax opinion, counsel may rely upon (and to the extent reasonably required, the
parties shall make) reasonable representations relating thereto.
6.7 Opinion of Counsel to the Company. Brobeck, Phleger & Harrison LLP,
counsel to the Company, shall have issued an opinion in favor of Identix in the
form of Exhibit B.
6.8 AMEX Approval. The shares of Identix Common to be issued in the Merger
and upon exercise of the Company Options and the Company Warrants shall have
been approved for quotation on the American Stock Exchange.
6.9 Affiliates Agreements. The Company shall have delivered to Identix the
letter required by Section 8.11 naming all persons who are considered to be
"affiliates" of the Company, and each such affiliate shall have executed and
delivered an Affiliates Agreement to Identix.
6.10 S-4. The S-4 shall have become effective under the 1933 Act and shall
not be the subject of any stop order or proceedings seeking a stop order and
the Proxy Statement/Prospectus shall on the Closing Date not be subject to any
proceeding commenced or threatened by the SEC.
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6.11 Voting Agreement. The Voting Agreement shall remain in full force as of
the Closing Date and there shall be no amendment or other modification to such
agreements to which Identix, Acquisition Sub and all parties thereto shall not
have consented in writing.
6.12 Noncompetition Agreements. Oscar Pieper, Grant Evans, Yuri Khidekel and
Yury Shapiro shall have entered into noncompetition agreements with the Company
in the form attached hereto as Exhibit C.
6.13 Employment Agreements. Oscar Pieper, Grant Evans, Yuri Khidekel and
Yury Shapiro shall have entered into employment agreements with Identix or the
Surviving Corporation substantially in the form attached hereto as Exhibit D
and on the terms described in Section 7.9 of the Identix Officer-Certified
Disclosure Statement.
6.14 Certificate of Merger. The Certificate of Merger shall have been filed
with the Secretary of State of the State of Delaware.
6.15 Material Changes in the Business of the Company Between the Date of
this Agreement and the Closing. There shall have been no material adverse
change in the financial position, results of operations, assets, liabilities or
business of the Company and Identicator Technology, taken as a whole, since the
date of this Agreement.
6.16 No Action to Prevent Completion. Identix shall not have determined, in
the reasonable exercise of its discretion, that the transactions contemplated
by this Agreement would cause a material adverse effect to Identix by reason of
the institution or threat of institution of litigation or other proceedings
with respect to or affecting the transactions contemplated by this Agreement.
6.17 Consents. Identix shall have received in writing all consents,
approvals, and waivers required in connection with the Merger (a) from parties
to the Company's agreements, indentures, mortgages, franchises, licenses,
permits, leases, and other instruments set forth in Section 6.17 of the Company
Officer-Certified Disclosure Statement, and (b) from all necessary or required
governmental authorities.
6.18 Documentation. All actions, proceedings, instruments, resolutions,
certificates, and documents reasonably requested by Identix to be executed and
delivered to Identix in order to carry out this Agreement and to consummate the
Merger, and all of the relevant legal matters, shall be reasonably satisfactory
to Identix and its counsel.
6.19 Support and Indemnification Agreements. IT Concepts and Identicator,
Inc. shall have each entered into a Support and Indemnification Agreement with
Identix in the forms attached to the Identix Officer-Certified Disclosure
Agreement.
6.20 Escrow. The Stockholder Representative, Identix and the Company shall
have entered into the Escrow Agreement and holders of Company Options described
in Section 2.5.2 shall have entered into the agreements referred to in Section
2.5.2 so that the total number of shares of Identix Common issued at the
Effective Time and issuable upon exercise of assumed Company
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Options that are available to satisfy the indemnification obligations under
Article X shall be not less than 434,300.
ARTICLE VII
CONDITIONS TO THE OBLIGATIONS OF THE COMPANY
The obligations of the Company to consummate the Merger are subject to the
fulfillment, at or before the Closing, of all of the following conditions, any
one or more of which may be waived by the Company:
7.1 Representations and Warranties True at Closing. The representations and
warranties of Identix and Acquisition Sub contained in this Agreement shall be
deemed to have been made again at and as of the Closing with respect to the
stated facts (including the update of the Identix Officer-Certified Disclosure
Statement referred to in Section 8.1 of this Agreement) then existing and shall
be true in all material respects.
7.2 Covenants Performed. All of the obligations of Identix to be performed
at or before the Closing pursuant to the terms of this Agreement shall have
been duly performed.
7.3 Certificate. At the Closing, the Company shall have received a
certificate signed by the President of Identix to the effect that the
conditions set forth in Sections 7.1 and 7.2 have been satisfied.
7.4 Tax Opinion. The Company shall have received the opinion of its counsel
to the effect that the Merger will constitute a reorganization within the
meaning of Section 368(a) of the Code, which opinion shall be substantially
similar to the opinion delivered to Identix pursuant to Section 6.6. In
preparing the tax opinion, counsel may rely upon (and to the extent reasonably
required, the parties shall make) reasonable representations relating thereto.
7.5 Opinion of Counsel to Identix. Heller Ehrman White & McAuliffe, counsel
to Identix, shall have issued an opinion in favor of the Company in the form of
Exhibit E.
7.6 AMEX Approval. The shares of Identix Common to be issued in the Merger
and upon exercise of the Company Options and the Company Warrants shall have
been approved for quotation on the American Stock Exchange.
7.7 S-4. The S-4 shall have become effective under the 1933 Act and shall
not be the subject of any stop order or proceedings seeking a stop order and
the Proxy Statement/Prospectus shall on the Closing not be subject to any
proceeding commenced or threatened by the SEC.
7.8 Certificate of Merger. The Certificate of Merger shall have been filed
with the Secretary of State of the State of Delaware.
7.9 Employment Agreements. Identix or the Surviving Corporation shall have
entered into employment agreements with Oscar Pieper, Grant Evans, Yuri
Khidekel and Yury Shapiro substantially in the form attached hereto as Exhibit
D and on the terms described in Section 7.9 of the Identix Officer-Certified
Disclosure Statement.
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7.10 Option Grants. Identix shall have taken the necessary actions to grant
stock options to purchase an aggregate of 400,000 shares of Identix Common to
the employees of the Company or the Transferred Employees designated in Section
7.10 of the Identix Officer-Certified Disclosure Statement. The exercise price
of such options shall be equal to the closing price of the Identix Common on
the Closing Date and shall vest in accordance with the terms set forth in
Section 7.10 of the Identix Officer-Certified Disclosure Statement.
7.11 Material Changes in the Business of Identix Between the Date of this
Agreement and the Closing. There shall have been no material adverse change in
the financial position, results of operations, assets, liabilities or business
of Identix and its Subsidiaries, taken as a whole, since the date of this
Agreement.
7.12 No Action to Prevent Completion. The Company shall not have determined,
in the reasonable exercise of its discretion, that the transactions
contemplated by this Agreement would cause a material adverse effect to the
Company by reason of the institution or threat of institution of litigation or
other proceedings with respect to or affecting the transactions contemplated by
this Agreement.
7.13 Documentation. All actions, proceedings, instruments, resolutions,
certificates, and documents reasonably requested by the Company to be executed
and delivered to the Company in order to carry out this Agreement and to
consummate the Merger, and all of the relevant legal matters, shall be
reasonably satisfactory to the Company and its counsel.
7.14 Stockholder Approval. This Agreement and the Certificate of Merger
shall have been duly approved by the stockholders of the Company.
ARTICLE VIII
PRE-CLOSING COVENANTS
For the purposes of this Article VIII, references to the "Company" shall
include IDT Holdings, Inc., as well as Identicator Technology. During the
period from the date of this Agreement until the Effective Time, Identix and
the Company covenant and agree as follows:
8.1 Advice of Changes. Each party will promptly advise the other in writing
(i) of any event occurring subsequent to the date of this Agreement that would
render any representation or warranty of such party contained in this
Agreement, if made on or as of the date of such event or the Closing Date,
untrue or inaccurate in any material respect and (ii) of any material adverse
change in such party's condition, financial or otherwise, assets, liabilities,
business or results of operations, taken as a whole. Not less than four days
before the Closing, each party shall deliver to the other party hereto an
update of the Officer-Certified Disclosure Statement previously delivered by
such party, showing any changes which have occurred with respect to the
information contained therein since it was originally issued and containing a
description of any representation or warranty in this Agreement which is no
longer true as of such date. Such update shall also include an update to the
representations contained in Sections 3.4 and 4.3. Such update shall be
certified by an officer of such party.
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8.2 Maintenance of Business. The Company will use its best efforts to carry
on and preserve its business and its relationships with customers, suppliers,
employees, Transferred Employees and others in substantially the same manner as
it has prior to the date hereof. If the Company becomes aware of a
deterioration in the relationship with any customer, supplier, key employee or
Transferred Employee, it will promptly bring such information to the attention
of Identix in writing and, if requested by Identix, will exert its best efforts
to restore the relationship.
8.3 Conduct of Business. The Company will continue to conduct its business
and maintain its business relationships in the ordinary and usual course and
will not, without the prior written consent of Identix (which consent shall not
be unreasonably withheld or delayed):
8.3.1 borrow any money, other than pursuant to the Company's line of
credit as in existence on the date hereof;
8.3.2 incur any liability except for those that may be incurred (i) in
the ordinary course of business, consistent with past practice, and are not
material in amount or (ii) in connection with the performance or consummation
of this Agreement;
8.3.3 encumber or permit to be encumbered any of its assets except in the
ordinary course of its business consistent with past practice;
8.3.4 dispose of any of its assets, except inventory in the ordinary
course of business, consistent with past practice;
8.3.5 enter into any material lease or contract for the purchase or sale
of any property, real or personal, except in the ordinary course of business,
consistent with past practice;
8.3.6 fail to maintain its equipment and other assets in good working
condition and repair according to the standards it has maintained to the date
of this Agreement, subject only to ordinary wear and tear;
8.3.7 pay any bonus, increased salary, or special remuneration to any
officer, employee (other than those paid in the ordinary course of business),
Transferred Employee or consultant or enter into any new employment or
consulting agreement with any such person, except as expressly contemplated by
this Agreement or as set forth in the Company Officer-Certified Disclosure
Statement;
8.3.8 change accounting methods, make any tax elections or file any
amended tax returns;
8.3.9 declare, set aside or pay any cash or stock dividend or other
distribution in respect of capital stock, or redeem or otherwise acquire any of
its capital stock (except pursuant to employee stock repurchase agreements upon
termination of an employee consistent with its past practice);
8.3.10 amend or terminate any material contract, agreement or license to
which it is a party except those amended or terminated in the ordinary course
of business consistent with past practice, and which are not material in
amount;
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8.3.11 loan any amount to any person or entity, other than advances for
travel and expenses which are incurred in the ordinary course of business
consistent with past practice, not material in amount and documented by
receipts for the claimed amounts;
8.3.12 guarantee or act as a surety for any obligation except for the
endorsement of checks and other negotiable instruments in the ordinary course
of business, consistent with past practice, which are not material in amount;
8.3.13 waive or release any material right or claim except in the
ordinary course of business, consistent with past practice;
8.3.14 with respect to IDT Holdings, issue or sell any shares of its
capital stock of any class or any other of its securities, or issue or create
any warrants, obligations, subscriptions, options, convertible securities, or
other commitments to issue shares of capital stock except (a) upon exercise of
an option or warrant currently outstanding as disclosed in Section 3.4, or (b)
for a total of 300,000 shares of Company Common that are either (i) sold to
purchasers who are not granted any contractual rights that survive the Closing,
or (ii) issued or issuable under options granted after the date hereof for the
purpose of recruiting new personnel in accordance with the past practices
regarding the total number of options granted and the options awarded in
relation to the job title of the recipient;
8.3.15 accelerate the vesting of any outstanding options, other than such
acceleration that will occur as a result of the Merger under existing
contractual arrangements;
8.3.16 split or combine the outstanding shares of its capital stock of
any class or enter into any recapitalization affecting the number of
outstanding shares of its capital stock of any class or affecting any other of
its securities;
8.3.17 merge, consolidate or reorganize with, or acquire any entity,
except for the Merger;
8.3.18 amend its Certificate of Incorporation or Bylaws, except as
expressly contemplated by this Agreement;
8.3.19 license any of its technology or intellectual property, except
under non exclusive hardware or software licenses granted to consumers or end
users in the ordinary course of business;
8.3.20 with respect to Identicator Technology, issue any shares of
capital stock or issue or create any warrants, obligations, subscriptions,
options, securities convertible into capital stock or other commitments to
issue capital stock;
8.3.21 file any patent applications, except for continuations in part or
foreign applications with respect to existing patents held by the Company,
without first consulting with Identix; or
8.3.22 agree to do any of the things described in the preceding clauses
8.3.1 through 8.3.21.
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8.4 Stockholder Meeting. The Company will use its best efforts to hold a
special meeting of its stockholders at the earliest practicable date to submit
this Agreement and related matters for their consideration and approval.
8.5 Proxy Statement/Prospectus. The Company will send to its stockholders,
for the purpose of considering and voting upon the Merger, the Proxy
Statement/Prospectus satisfying all requirements of applicable state and
federal laws. The Proxy Statement/Prospectus shall contain the unanimous
recommendation of the board of directors of the Company in favor of the
approval and adoption of the Agreement. In addition, each party shall promptly
provide to the other party all information relating to its respective business
or operations necessary for inclusion in the Proxy Statement/Prospectus to
satisfy all requirements of applicable state and federal securities laws. The
Company shall not provide to its stockholders or publish any material that
violates the 1933 Act or Exchange Act with respect to the transactions
contemplated hereby.
8.6 Regulatory Approvals. Prior to the Closing, each party hereto shall
execute and file, or join in the execution and filing, of any application or
other document that may be necessary in order to obtain the authorization,
approval or consent of any governmental body, federal, state, local or foreign
which may be reasonably required, or which the other party hereto may
reasonably request, in connection with the consummation of the transactions
contemplated by this Agreement. Each party shall use its best efforts to obtain
all such authorizations, approvals and consents.
8.7 Necessary Consents. Prior to the Closing, each party hereto will use its
best efforts to obtain such written consents and take such other actions as may
be necessary or appropriate in addition to those set forth in Section 8.6 to
allow the consummation of the transactions contemplated hereby and to allow
such party to carry on its business after the Closing.
8.8 Litigation. Prior to the Closing, each party will notify the other party
in writing promptly after learning of any material actions, suits, proceedings
or investigations by or before any court, board or governmental agency,
initiated by or against it, or known by it to be threatened against it.
8.9 Exclusivity. From the date hereof until the earlier of termination of
this Agreement or consummation of the Merger, the Company will not, directly or
indirectly, through any officer, director, employee, affiliate or agent or
otherwise, take any action to solicit, initiate, seek, entertain, encourage or
support any inquiry, proposal or offer from, furnish any information to, or
participate in any negotiations with, any third party regarding a public
offering of the Company, any acquisition of the Company, any merger or
consolidation with or involving the Company, or any acquisition of any material
portion of the stock or assets of the Company, including the grant of any
license to any intellectual property of the Company other than licenses in the
ordinary course of business related to the sale of the Company's products. The
Company will not accept or enter into any agreement, arrangement or
understanding regarding any such third party acquisition transaction during
such period. In the event the Company receives an unsolicited proposal for any
acquisition transaction, the Board of Directors shall be able to consider such
proposal in accordance with their fiduciary obligations under Delaware law;
provided however, that the Company shall remain fully obligated to carry out
its covenants and agreements under this Agreement, including those set forth in
Sections 8.4 and 8.5, and the parties to the Voting Agreement shall remain
fully bound thereunder.
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<PAGE>
8.10 Satisfaction of Conditions Precedent. Each party will use its best
efforts to satisfy or cause to be satisfied all the conditions precedent which
are set forth in Articles VI and VII, and each party will use its best efforts
to cause the transactions contemplated by this Agreement to be consummated,
and, without limiting the generality of the foregoing, to obtain all consents
and authorizations of third parties and to make all filings with, and give all
notices to, third parties that may be necessary or reasonably required on its
part in order to effect the transactions contemplated hereby.
8.11 Affiliates. To ensure compliance with Rule 145 of the 1933 Act, the
Company will, prior to the mailing of the Proxy Statement/Prospectus, deliver
to Identix a letter identifying all persons who are "affiliates" of the Company
at the time this Agreement is submitted for approval to the Company's
stockholders. The Company shall use its best efforts to cause each of its
affiliates to deliver to Identix, on or prior to the mailing of the Proxy
Statement/Prospectus, a written agreement (the "Affiliates Agreement"), in form
provided by counsel to Identix, providing that such person will make no
disposition of Identix Common in violation of Rule 145 of the 1933 Act.
8.12 Representations Regarding Tax Matters. Each party will make such
representations as are reasonably requested by counsel to both parties in order
that such counsel may render the tax opinions required by Sections 6.6 and 7.4
hereof.
8.13 Customers and Suppliers. The Company will use its best efforts to keep
and maintain the existing favorable business relationship with its key
customers and suppliers.
8.14 Transferred Employees. The persons identified in Section 3.18 of the
Company Officer-Certified Disclosure Statement are employees or consultants of
Identicator, Inc. and IT Concepts who perform services for Identicator
Technology. To the extent indicated in Section 3.18 of the Company Officer-
Certified Disclosure Statement, the parties intend that such personnel (the
"Transferred Employees") shall become employees of Identicator Technology or
Identix as of the Effective Time. The relationship of the Transferred Employees
with Identicator, Inc. and IT Concepts shall terminate as of the Effective
Time, subject to their becoming employees of Identix or Identicator Technology.
Identicator, Inc. and IT Concepts shall pay such personnel all obligations
accrued to them for their prior service and as a result of such termination
other than accrued personal time disclosed in Section 3.18 of the Company
Officer-Certified Disclosure Statement, which accrued personal time shall
become the responsibility of Identix. Such persons shall become employees of
Identicator Technology or Identix, subject to their signing Identix's standard
employee proprietary rights agreements and offer letters. The Company shall use
its best efforts to promote and effect the transfer of the Transferred
Employees from Identicator, Inc. and IT Concepts to Identicator Technology or
Identix. Identix agrees to provide the Transferred Employees with credit for
all service with the Company, IT Concepts and Identicator, Inc. for purposes of
vesting and eligibility under Identix's employee benefit plans to the extent
permitted by such plans. To the extent that such plans do not permit credit for
service, Identix shall use its best efforts to provide comparable value to such
Transferred Employees.
8.15 Proxy Statement/Prospectus and S-4. None of the information relating to
the Company and its Subsidiaries or their respective officers and directors
that has been or will be supplied by the Company for inclusion or incorporation
by reference in the Proxy
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<PAGE>
Statement/Prospectus or the S-4 will, in the case of the Proxy
Statement/Prospectus or any amendments or supplements thereto, at the time of
the mailing of the Proxy Statement/Prospectus and any amendments or supplements
thereto, and at the time of the meeting of stockholders of the Company to vote
upon this Agreement, the Merger and related transactions, or, in the case of
the S-4, at the time it becomes effective under the 1933 Act and at the
Effective Time, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they are
made, not misleading. If at any time prior to the Effective Time any event with
respect to the Company, its officers or directors should occur which is or is
required to be described in an amendment or a supplement to the Proxy
Statement/Prospectus or the S-4, such event shall be so described and such
description in such amendment or supplement of such information will not
contain any statement which, at the time and in light of the circumstances
under which it is made, is false or misleading with respect to any material
fact or omit to state any material fact required to be stated therein or in the
Proxy Statement/Prospectus or the S-4 or necessary to make the statements
therein or in the S-4 or Proxy Statement/Prospectus not false or misleading.
8.16 Proxy Statement/Prospectus and S-4. None of the information relating to
Identix and its Subsidiaries or their respective officers and directors that
has been or will be supplied by Identix for inclusion or incorporation by
reference in the Proxy Statement/Prospectus or the S-4 will, in the case of the
Proxy Statement/Prospectus or any amendments or supplements thereto, at the
time of the mailing of the Proxy Statement/Prospectus and any amendments or
supplements thereto, and at the time of the meeting of stockholders of the
Company to vote upon this Agreement, the Merger and related transactions, or,
in the case of the S-4, at the time it becomes effective under the 1933 Act and
at the Effective Time, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which they
are made, not misleading. If at any time prior to the Effective Time any event
with respect to Identix, its officers or directors should occur which is or is
required to be described in an amendment or a supplement to the Proxy
Statement/Prospectus or the S-4, such event shall be so described and such
description in such amendment or supplement of such information will not
contain any statement which, at the time and in light of the circumstances
under which it is made, is false or misleading with respect to any material
fact or omit to state any material fact required to be stated therein or in the
Proxy Statement/Prospectus or the S-4 or necessary to make the statements
therein or in the S-4 or Proxy Statement/Prospectus not false or misleading.
ARTICLE IX
CONFIDENTIALITY COVENANT AND ANNOUNCEMENTS
9.1 Confidentiality. The provisions of the Confidentiality Agreement dated
August 7, 1998 between Identix and the Company shall continue to govern the use
and confidential treatment of information exchanged between the Company and
Identix. If this Agreement is terminated for any reason whatsoever, the terms
of that Confidentiality Agreement shall govern the return or destruction of all
confidential information.
9.2 Announcements. No party to this Agreement shall issue a press release or
other public communication relating to this Agreement, the Certificate of
Merger or the Merger without the
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<PAGE>
prior approval of the other party. Notwithstanding the foregoing, Identix may
make such announcements regarding the Merger as, in the judgment of its
management after consultation with legal counsel, are necessary to comply with
securities laws or American Stock Exchange regulations.
ARTICLE X
INDEMNIFICATION
10.1 Indemnification Relating to Agreement. To the extent and in the manner
set forth in the Escrow Agreement, the Company agrees, and by approval of this
Agreement and the Merger at the special stockholders' meeting of the Company,
the stockholders of the Company agree, that the amounts deposited in escrow
pursuant to Section 2.5 of this Agreement shall be used to defend, indemnify
and hold Identix harmless from and against, and to reimburse Identix with
respect to, any and all losses, damages, liabilities, claims, judgments,
settlements, costs and expenses (including reasonable attorneys' fees) of every
nature (collectively, "Damages") incurred by Identix by reason of or arising
out of or in connection with (i) any breach by the Company of any
representation or warranty of the Company contained in this Agreement or in any
certificate or other document delivered to Identix pursuant to the provisions
of this Agreement, including, without limitation, the Company Officer-Certified
Disclosure Statement, or (ii) the failure, partial or total, of the Company to
perform any agreement or covenant required by this Agreement to be performed by
it. It is expressly agreed that a diminution in the value of the business of
the Company by reason of any of the foregoing shall be deemed a "loss" for
purposes of this Article X.
10.2 Indemnification Relating to S-4. To the extent and in the manner set
forth in the Escrow Agreement, the Company agrees, and by approval of this
Agreement and the Merger at the special stockholders' meeting of the Company,
the stockholders of the Company agree, that the amounts deposited in escrow
pursuant to Section 2.5 of this Agreement shall be used to defend, indemnify
and hold harmless Identix, its officers, directors and agents, its attorneys
and accountants, and each person who controls Identix within the meaning of the
1933 Act, from and against any Damages, insofar as such Damages are incurred by
reason of or arise out of or in connection with any untrue statement or alleged
untrue statement of any material fact contained in the S-4 or in the Proxy
Statement/Prospectus or in any amendment or supplement to any of them, or are
incurred by reason of or arise out of or in connection with the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances in
which they were made, not misleading, insofar as such statement or omission
relates to the Company and is based on information furnished by the Company.
10.3 Escrow. The shares of Identix Common to be deposited in escrow in
accordance with Section 2.5.1 of this Agreement and to be subject to the
provisions of Section 2.5.2 shall constitute an absolute limit on the
obligation of the Company or its stockholders to indemnify and hold Identix
harmless under this Agreement. From and after the Effective Time, the
indemnification remedies and the related escrow contained in this Agreement,
the Escrow Agreement and the agreements referenced in Section 2.5.2, and any
statutory, common law or equitable remedies available to Identix and
Acquisition Sub for fraud, intentional misrepresentation or active concealment
shall be the sole remedies, exclusive of all other statutory or common law
remedies, Identix and Acquisition Sub may have for a breach of a
representation, warranty or covenant under this Agreement (but does not
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<PAGE>
preclude Identix and Acquisition Sub from pursuing any remedies available under
other agreements attached as exhibits hereto or referred to in Section 6.19).
10.4 Limitation. Identix may only make claims under this Article X and the
Escrow Agreement and the agreements referenced in Section 2.5.2 if the amount
of Damages exceed $175,000 in the aggregate, in which case Identix may make a
claim for the full amount of such Damages, including the first $175,000.
ARTICLE XI
TERMINATION
11.1 Mutual Agreement. This Agreement may be terminated at any time prior to
the Effective Time by the unanimous consent of Identix and the Company, even if
and after the stockholders of the Company have approved this Agreement and the
Certificate of Merger.
11.2 Termination by Identix. This Agreement may be terminated by Identix
alone, by means of written notice to the Company if (a) the Company fails to
perform any material covenant of the Company contained in this Agreement, or
(b) on or before February 28, 1999, any of the conditions set forth in Article
VI of this Agreement shall not have been satisfied by the Company or waived by
Identix.
11.3 Termination by the Company. This Agreement may be terminated by the
Company alone, by means of written notice to Identix if (a) Identix fails to
perform any material covenant of Identix contained in this Agreement or (b) on
or before February 28, 1999, any of the conditions set forth in Article VII of
this Agreement shall not have been satisfied by Identix or waived by the
Company.
ARTICLE XII
MISCELLANEOUS
12.1 Expenses. Each of Identix and the Company shall pay its own costs and
expenses, including legal, accounting and investment banking fees and expenses,
relating to this Agreement, the negotiations leading up to this Agreement and
the transactions contemplated by this Agreement.
12.2 Amendment. This Agreement shall not be amended except by a writing duly
executed by both parties.
12.3 Entire Agreement. This Agreement, including the Exhibit, Schedules, and
other documents delivered pursuant to this Agreement, contains all the terms
and conditions agreed upon by the parties relating to the subject matter of
this Agreement and supersedes all prior agreements, negotiations,
correspondence, undertakings, and communications of the parties, whether oral
or written, respecting that subject matter, except the Confidentiality
Agreement between the Company and Identix dated August 7, 1998.
12.4 Governing Law. Except to the extent that the DGCL shall be applicable
to the Merger, the approval of the Merger and the other internal corporate
affairs of the parties, this Agreement shall be governed by and construed in
accordance with the laws of the State of California as applied to agreements
entered into by California residents and entirely to be performed within
California.
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<PAGE>
12.5 Headings. The headings contained in this Agreement are intended for
convenience and shall not be used to determine the rights of the parties.
12.6 Mutual Contribution. The parties to this Agreement and their counsel
have mutually contributed to its drafting.
12.7 Notices. All notices, requests, demands, and other communications made
in connection with this Agreement shall be in writing and shall be deemed to
have been duly given on the date of delivery if delivered by hand delivery or
by facsimile to the persons identified below, one business day after depositing
with an overnight courier, or five days after mailing if mailed by certified or
registered mail postage prepaid return receipt requested addressed as follows:
If to Identix:
Identix Incorporated
510 N. Pastoria Ave.
Sunnyvale, CA 94086
Attn: James P. Scullion and Richard Friedman
Facsimile: (408) 739-0178
Confirmation Number: (408) 731-2000
With a copy to:
Heller, Ehrman, White & McAuliffe
525 University Avenue
Palo Alto, California 94301
Attention: SAO File: 17506-0001
Facsimile: (650) 324-0638
Confirmation Number: (650) 324-7000
If to the Company:
IDT Holdings, Inc.
1150 Bayhill Road
San Bruno, CA 94066
Attention: President
Facsimile: (650) 873-8653
Confirmation Number: (650) 873-8650
With a copy to:
Brobeck, Phleger & Harrison LLP
Two Embarcadero Place, 2200 Geng Road
Palo Alto, CA 94303
Attention: Thomas W. Kellerman
Facsimile: (650) 496-2885
Confirmation Number: (650) 424-0160
Such addresses may be changed, from time to time by means of a notice given in
the matter provided in this section.
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<PAGE>
12.8 Severability. If any provision of this Agreement is held to be
unenforceable for any reason, it shall be adjusted rather than voided, if
possible, in order to achieve the intent of the parties to the extent possible.
In any event, all other provisions of this Agreement shall be deemed valid and
enforceable to the full extent.
12.9 Survival of Representation and Warranties. All representations and
warranties contained in this Agreement, including the Exhibits, Schedules and
other documents delivered pursuant to this Agreement shall survive the
Effective Time for a period of one year.
12.10 Waiver. Waiver of any term or condition of this Agreement by any party
shall not be construed as a waiver of a subsequent breach or failure of the
same term or condition, or a waiver of any other term or condition in this
Agreement.
12.11 Assignment. Except for the contemplated reincorporation of Identix as
described under the definition of "Identix" in Article I, neither party may
assign, by operation of law or otherwise, all or any portion of its rights or
duties under this Agreement without the prior written consent of the other
party, which consent may be withheld in the absolute discretion of the party
asked to give consent.
12.12 Counterparts. This Agreement may be signed in counterparts with the
same effect as if the signatures to each party were upon a single instrument.
All counterparts shall be deemed an original of this Agreement.
12.13 Voting Agreement. Concurrently with the execution of this Agreement,
IT Concepts and each director of the Company, which stockholders collectively
own approximately 70% of the shares of outstanding Company Common, shall enter
into the Stockholder Voting and Proxy Agreement in the form attached hereto as
Exhibit F, pursuant to which, among other things, they shall agree to vote all
the shares of Company capital stock held by them in favor of the Merger (the
"Voting Agreement").
12.14 Other Remedies. Except as specifically noted above, no remedies
contained in this Agreement or in any of the Exhibits or Schedules hereto shall
be in lieu of, or constitute a waiver of, any remedies at law or in equity (not
based upon negligent misrepresentation) that one party may otherwise have
against the other party hereto or against any present or former officer,
director or controlling stockholder of such party.
12.15 Continuation of Business of the Company. Identix hereby covenants and
agrees that it shall continue to operate the business of the Company as a
separate division or subsidiary for a period of at least nine months from the
Effective Time.
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<PAGE>
IN WITNESS WHEREOF, Identix, Acquisition Sub and the Company have executed
this Agreement as of the date first above written.
IDENTIX INCORPORATED
By: /s/ Randall C. Fowler
----------------------------------
Title: Chairman, President and CEO
--------------------------------
ID ACQUISITION CORP.
By: /s/ Randall C. Fowler
----------------------------------
Title: President
--------------------------------
IDT HOLDINGS, INC.
By: /s/ Oscar R. Pieper
----------------------------------
Title: President
---------------------------------
List of Exhibits
<TABLE>
<C> <S>
Exhibit A Escrow Agreement
Exhibit B Opinion of Brobeck, Phleger & Harrison LLP
Exhibit C Noncompetition Agreement
Exhibit D Employment Agreement
Exhibit E Opinion of Heller Ehrman White & McAuliffe
Exhibit F Stockholder Voting and Proxy Agreement
</TABLE>
[Signature Page to the Agreement and Plan of Reorganization and Merger]
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<PAGE>
AMENDMENT NO. 1 TO
AGREEMENT AND PLAN OF REORGANIZATION AND MERGER
This Amendment No. 1 ("Amendment") is entered into as of December 11, 1998
by and among Identix Incorporated, a California corporation, IDT Holdings, Inc,
a Delaware corporation, and ID Acquisition Corp., a Delaware corporation, and
amends the Agreement and Plan of Reorganization and Merger, dated November 14,
1998, by and among the parties hereto (the "Agreement"). Capitalized terms used
herein without definition shall have the meanings given to them in the
Agreement.
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Article III. The first paragraph of Article III of the Agreement is
hereby amended and restated in its entirety effective as of the execution of
the Agreement to provide as follows:
"Any disclosure delivered by the Company to Identix pursuant to this
Article shall have been delivered on or prior to the date hereof and
certified by an officer of the Company as true, accurate and complete,
shall specifically refer to this Agreement and shall identify the Section
of this Agreement requiring the delivery of such disclosure (such
disclosure being referred to herein as an "Company Officer-Certified
Disclosure Statement"). For the purposes of this Article III, references
to the "Company" shall include IDT Holdings, as well as Identicator
Technology and Identicator Corp. For purposes of this Article III, any
references to the Company's "knowledge" means actual knowledge of the
persons identified in Section 3.0 of the Company Officer-Certified
Disclosure Statement as well as information contained in the files or
records of IDT Holdings, Identicator Technology, Identicator Corp.,
Identicator, Inc. or IT Concepts. Except as set forth in the Company
Officer-Certified Disclosure Statement, the Company represents and
warrants to Identix that:"
2. Section 3.4. The reference to "1,994,334" in the fifth sentence of
Section 3.4 of the Agreement is hereby corrected to read "1,944,334."
3. Section 6.5. Section 6.5 of the Agreement is hereby amended in its
entirety to provide as follows: "The aggregate number of Dissenting Shares
shall not exceed five percent of the aggregate number of shares of Identix
Common that would be issued pursuant to the Merger at the Effective Time if
there were no Dissenting Shares."
4. Sections 11.2 and 11.3. The references to "February 28, 1999" in Sections
11.2 and 11.3 of the Agreement are hereby amended to read "March 31, 1999."
5. Continuing Effect. The parties hereby acknowledge and agree that the
Agreement, as amended by this Amendment, continues in full force and effect.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first above written.
IDENTIX INCORPORATED
By: /s/ James P. Scullion
----------------------------------
Title: Executive Vice President
--------------------------------
ID ACQUISITION CORP.
By: /s/ James P. Scullion
----------------------------------
Title: Vice President
--------------------------------
IDT HOLDINGS, INC.
By: /s/ Oscar Pieper
----------------------------------
Title: President
--------------------------------
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<PAGE>
AMENDMENT NO. 2 TO
AGREEMENT AND PLAN OF REORGANIZATION AND MERGER
This Amendment No. 2 ("Amendment") is entered into as of February 3, 1999 by
and among Identix Incorporated, a Delaware corporation, IDT Holdings, Inc., a
Delaware corporation, and ID Acquisition Corp., a Delaware corporation, and
amends the Agreement and Plan of Reorganization and Merger, dated November 14,
1998 and amended on December 11, 1998, by and among the parties hereto (the
"Agreement"). Capitalized terms used herein without definition shall have the
meanings given to them in the Agreement.
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Sections 11.2 and 11.3. The references to "March 31, 1999" in Sections
11.2 and 11.3 of the Agreement are hereby amended to read "April 30, 1999."
2. Continuing Effect. The parties hereby acknowledge and agree that the
Agreement, as amended by this Amendment, continues in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first above written.
IDENTIX INCORPORATED
/s/ Randall C. Fowler
By: _________________________________
Title: Chairman, President CEO
ID ACQUISITION CORP.
/s/ Randall C. Fowler
By: _________________________________
Title: President
IDT HOLDINGS, INC.
/s/ Oscar R. Pieper
By: _________________________________
Title: President
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<PAGE>
AMENDMENT NO. 3 TO
AGREEMENT AND PLAN OF REORGANIZATION AND MERGER
This Amendment No. 3 ("Amendment") is entered into as of March 16, 1999 by
and among Identix Incorporated, a Delaware corporation, IDT Holdings, Inc, a
Delaware corporation, and ID Acquisition Corp., a Delaware corporation, and
amends the Agreement and Plan of Reorganization and Merger, dated November 14,
1998 and amended on December 11, 1998 and February 3, 1999, by and among the
parties hereto (the "Agreement"). Capitalized terms used herein without
definition shall have the meanings given to them in the Agreement.
BACKGROUND
On March 16, 1999, Identix agreed to extend the expiration date of a standby
letter of credit facility previously issued by Identix to Identicator
Technology, Inc., a wholly-owned subsidiary of IDT. The standby letter of
credit was issued to enable Identicator Technology, Inc. to obtain additional
financing to continue to fund its operations pending the consummation of the
Merger. In consideration for the extension of the standby letter of credit, IDT
is now willing to extend the duration of resale restrictions applicable to
certain Identix Shares issuable in the Merger.
AGREEMENT
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Section 2.5.2. A new sentence is added to the end of Section 2.5.2 which
provides as follows: "The agreements referenced in this Section 2.5.2 shall
provide that upon the expiration of the Escrow Agreement, the shares underlying
the portion of Company Options released from escrow may not be sold,
transferred, pledged or otherwise assigned by the holders thereof until 15
months have elapsed from the Effective Time, other than by will or pursuant to
the laws of descent and distribution."
2. Section 2.5.3. A new Section 2.5.3 is added after Section 2.5.2 which
provides as follows:
"2.5.3 The shares of Identix Common released to the Holders upon the
termination of the Escrow Agreement may not be sold, transferred, pledged or
otherwise assigned by the holders thereof until 15 months have elapsed from the
Effective Time, other than by will or pursuant to the laws of descent and
distribution. Certificates representing such shares shall bear the legend set
forth in Section 2.10."
3. Section 2.10. Section 2.10 is amended by deleting "prior to the first
anniversary of" in the second sentence thereof and inserting in its place
"until fifteen months have expired from." Section 2.10 is further amended by
deleting "[insert date of first anniversary of the Effective Time]" in the
fifth sentence thereof and inserting in its place "[insert date fifteen months
from the Effective Time]".
4. Exhibit C. Section 4.1 of the form of Escrow Agreement attached as Exhibit
C to the Agreement is hereby amended by adding a sentence at the end thereof
that provides: "The
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<PAGE>
certificates representing the distributed Escrow Fund shall be legended in
accordance with the terms of Sections 2.5.3 and 2.10 of the Agreement."
5. Sections 11.2 and 11.3. The references to "April 30, 1999" in Sections
11.2 and 11.3 of the Agreement are hereby amended to read "May 11, 1999."
6. Continuing Effect. The parties hereby acknowledge and agree that the
Agreement, as amended by this Amendment, continues in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first above written.
IDENTIX INCORPORATED
<TABLE>
<S> <C>
By: /s/ James P. Scullion
-----------------------------------
Title: Executive Vice President
---------------------------------
ID ACQUISITION CORP.
By: /s/ James P. Scullion
-----------------------------------
Title: Vice President
---------------------------------
IDT HOLDINGS, INC.
By: /s/ Oscar R. Pieper
-----------------------------------
Title: President
---------------------------------
ACKNOWLEDGEMENT
The Stockholders party to the Stockholder Voting and Proxy Agreement (the
"Voting Agreement"), dated November 14, 1998, by and among Identix, ID
Acquisition Corp. and such Stockholders, hereby acknowledge and confirm that
the covenants and proxies made by them in the Voting Agreement remain in full
force and effect after giving affect to the amendments in the Agreement made by
the foregoing Amendment.
/s/ Harry F. Camp /s/ Oscar Pieper
- ------------------------------------- -------------------------------------
Harry F. Camp Oscar Pieper
/s/ Yuri Khidekel /s/ Yury Shapiro
- ------------------------------------- -------------------------------------
Yuri Khidekel Yury Shapiro
International Technology Concepts, Inc.
By: /s/ Yuri Khidekel
- -------------------------------------
Title: Vice President of R & D
- -------------------------------------
</TABLE>
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<PAGE>
APPENDIX B
STOCKHOLDER VOTING AND PROXY AGREEMENT
STOCKHOLDER VOTING AND PROXY AGREEMENT, dated as of November 14, 1998, (this
"Agreement") among Identix Incorporated, a California corporation ("Parent"),
ID Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of
Parent ("Sub"), and each other person and entity listed on the signature pages
hereof (each, a "Stockholder").
BACKGROUND
A. As of the date hereof, each Stockholder owns of record the number of
shares of common stock (the "Common Stock"), of IDT Holdings, Inc., a Delaware
corporation (the "Company"), set forth opposite such Stockholder's name on
Exhibit A hereto (all such shares, together with all shares of Common Stock of
the Company which are hereafter acquired by the Stockholders, being referred to
herein as the "Shares").
B. Parent, Sub and the Company have entered into an Agreement and Plan of
Reorganization and Merger dated as of the date hereof (the "Merger Agreement"),
which provides, upon the terms and subject to the conditions set forth therein,
for the merger of Sub with and into the Company (the "Merger"); and
C. As a condition to the willingness of Parent and Sub to enter into the
Merger Agreement and in furtherance of the acquisition of the Company by
Parent, Parent and Sub have required that the Stockholders agree, and in order
to induce Parent and Sub to enter into the Merger Agreement, each Stockholder
has agreed, severally and not jointly, to enter into this Agreement.
NOW, THEREFORE, in consideration of the foregoing premises and agreements
contained herein, the parties hereto agree as follows:
ARTICLE I
TRANSFER AND VOTING OF SHARES
Section 1.1. Voting Agreement. Each Stockholder hereby agrees that from the
date hereof to the earlier to occur of the termination of the Merger Agreement
or the effective date of the Merger (in either case, the "Termination Date"),
at any meeting of the Stockholders of the Company, however called, and in any
action by consent of the Stockholders of the Company, such Stockholder shall
vote the Shares; (A) in favor of the Merger, the Merger Agreement (as amended
from time to time, provided that any amendment that could have a material
adverse effect on a Stockholder must be approved by the Stockholder in order
for this Agreement to continue to bind the Stockholder) and the transactions
contemplated by the Merger Agreement and (B) against any proposal for any
recapitalization, merger (other than the Merger), sale of assets or other
business combination between the Company and any person or entity (other than
Parent or Sub) or any other action or agreement that would result in a breach
of any covenant, representation or warranty or any other obligation or
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<PAGE>
agreement of the Company under the Merger Agreement or which would result in
any of the conditions to the Merger Agreement not being fulfilled.
Section 1.2. No Disposition or Encumbrance of Shares and Options. Each
Stockholder hereby covenants and agrees that, from the date hereof to the
Termination Date, it shall not, and shall not offer or agree to, sell,
transfer, tender, assign, hypothecate or otherwise dispose of, or create or
permit to exist any pledge, lien, security interest, mortgage, charge, claim,
option, proxy, voting restriction, limitation on disposition, adverse claim of
ownership or use or encumbrance of any kind on the Shares or options to acquire
Company Common Stock owned by such Stockholder, unless such disposition or
encumbrance (a) is either (i) made subject to the written assumption of
Stockholder's obligations hereunder, or (ii) specifically required by court
order or by operation of law, and (b) does not detrimentally effect the ability
of Identix to carry out the purpose of this Agreement.
Section 1.3. Voting of Shares; Further Assurances.
(a) Each Stockholder, by this Agreement, with respect to its Shares, does
hereby constitute and appoint Sub and Parent, or any nominee of Sub and Parent,
with full power of substitution, from the date hereof to the Termination Date,
as its true and lawful attorney and proxy (its "Proxy"), for and in its name,
place and stead, to vote each of such Shares as its Proxy, at every annual,
special or adjourned meeting of the Stockholders of the Company, including the
right to sign its name (as stockholder) to any consent, certificate or other
document relating to the Company that the law of the State of Delaware may
permit or require: (i) in favor of the Merger, the Merger Agreement (as amended
from time to time, provided that any amendment that could have a material
adverse effect on a Stockholder must be approved by the Stockholder in order
for this Agreement to continue to bind the Stockholder) and the transactions
contemplated by the Merger Agreement; and (ii) against any proposal for any
recapitalization, merger (other than the Merger), sale of assets or other
business combination between the Company and any person or entity (other than
Parent or Sub) or any other action or agreement that would result in a breach
of any covenant, representation or warranty or any other obligation or
agreement of the Company under the Merger Agreement or which could result in
any of the conditions to the Merger Agreement not being fulfilled.
(b) THIS POWER OF ATTORNEY IS IRREVOCABLE, IS GRANTED IN CONSIDERATION OF
PARENT AND SUB ENTERING INTO THE MERGER AGREEMENT AND IS COUPLED WITH AN
INTEREST SUFFICIENT IN LAW TO SUPPORT AN IRREVOCABLE POWER.
(c) This appointment shall revoke all prior attorneys and proxies appointed
by any Stockholder at any time with respect to the Shares and no subsequent
attorneys or proxies will be appointed by such Stockholder, or be effective,
with respect thereto during the term of the Proxy granted pursuant to this
Section 1.3.
(d) Each Stockholder shall perform such further acts and execute such
further documents and instruments as may reasonably be required to vest in Sub
and Parent the power to carry out and give effect to the provisions of this
Agreement.
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<PAGE>
Section 1.4. Legends.
(a) Each Stockholder shall instruct the Company to cause each certificate of
any Stockholder evidencing the Shares to bear a legend in the following form:
THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, EXCHANGED OR
OTHERWISE TRANSFERRED OR DISPOSED OF EXCEPT IN COMPLIANCE WITH THE TERMS
AND CONDITIONS OF THE STOCKHOLDER VOTING AND PROXY AGREEMENT DATED AS OF
NOVEMBER 6, 1998, AS IT MAY BE AMENDED, AMONG IDENTIX INCORPORATED, ID
ACQUISITION CORP. AND THE REGISTERED HOLDER OF THIS CERTIFICATE, A COPY OF
WHICH IS ON FILE AT THE PRINCIPAL EXECUTIVE OFFICES OF THE ISSUER.
(b) In the event that the Shares shall cease to be subject to the
restrictions on transfer set forth in this Agreement, the Company shall, upon
the written request of the holder thereof, issue to such holder a new
certificate evidencing such Shares without the legend required by Section
1.4(a).
ARTICLE II
COVENANTS OF STOCKHOLDERS
Section 2.1 No Solicitation Of Transactions. Each Stockholder covenants and
agrees that in its capacity as a Stockholder of the Company it shall not during
the term of this Agreement, directly or indirectly, take any action to solicit,
initiate, seek, entertain, encourage or support any inquiry, proposal or offer
from, furnish any information to, or participate in any negotiations with, any
third party regarding a public offering of the Company, any acquisition of the
Company, any merger or consolidation with or involving the Company, or any
acquisition of any material portion of the stock or assets of the Company,
including the grant of any license to any intellectual property of the Company
other than licenses in the ordinary course of business related to the sale of
the Company's products. The Stockholder will promptly communicate to Parent any
solicitation received by it in its capacity as a Stockholder of the Company
with respect to any of the foregoing and the terms of such proposal or inquiry,
including the identity of the person and its affiliates making the same, that
it may receive in respect of any such transaction, or of any such information
requested from it or of any such negotiations or discussions being sought to be
initiated with it.
Section 2.2. Negative Covenants. Each Stockholder agrees not to prior to the
Termination Date:
(a) sell, transfer, pledge, assign or otherwise dispose of, or enter into
any contract, option or other arrangement with respect to the sale, transfer,
pledge, assignment or other disposition of, the Shares or options to acquire
Company Common Stock owned by such Stockholder to any person other than Parent
or Parent's designee; or
(b) deposit any Shares into a voting trust or grant a proxy or enter into a
voting agreement with respect to any Shares, except for this Agreement.
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ARTICLE III
MISCELLANEOUS
Section 3.1. Notices. All notices or other communications under this
Agreement shall be in writing and shall be given by delivery in person, by
facsimile, cable, telegram, telex or other standard form of telecommunications,
or by registered or certified mail, postage prepaid, return receipt requested,
addressed as follows:
If to Parent: Identix Incorporated
510 N. Pastoria Ave.
Sunnyvale, CA 94086
Attn: James P. Scullion and
Richard Friedman
Facsimile: (408) 739-0178
with a copy to: Heller Ehrman White & McAuliffe
525 University Avenue
Palo Alto, California 94301
Attn: SAO File 17506-0001
Facsimile: (650) 324-0638
If to a Stockholder:at the address or facsimile number of such
Stockholder set forth on Exhibit A
with a copy to: Brobeck, Phleger & Harrison LLP
Two Embarcadero Place, 2200 Geng Road
Palo Alto, CA 94303
Attn: Thomas W. Kellerman
Facsimile: (650) 496-2885
(or such other address for a party as shall be specified in a notice given in
accordance with this Section 3.1) and shall be deemed to have been given one
business day after transmission by facsimile, cable, telegram, telex of other
standard form of telecommunications, one business day after deposit with a
nationally recognized overnight courier or four days after deposit in the U.S.
mail.
Section 3.2. Severability. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of
this Agreement is so broad as to be unenforceable, the provision shall be
interpreted to be only so broad as is enforceable.
Section 3.3. Entire Agreement. This Agreement and any documents delivered by
the parties in connection herewith constitute the entire agreement among the
parties with respect to the subject matter hereof and supersede all prior
agreements and understandings among the parties with respect thereto. No
addition to or modification of any provision of this Agreement shall be binding
upon any party hereto unless made in writing and signed by all parties hereto.
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Section 3.4. Assignment, Binding Effect. Except as specifically permitted
herein, neither this Agreement nor any of the rights, interests or obligations
hereunder shall be assigned by any of the parties hereto (whether by operation
of law or otherwise) without the prior written consent of the other parties,
except that Parent or Sub may assign all or any of their rights and obligations
hereunder to any affiliate of Parent (including by operation of law in
connection with the reincorporation of Parent in Delaware). Subject to the
preceding sentence, this Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and assigns.
Section 3.5. Specific Performance. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
was not performed in accordance with its specific terms or was otherwise
breached. It is accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions hereof in any Delaware court (without the
necessity of posting a bond), this being in addition to any other remedy to
which they are entitled at law or in equity.
Section 3.6. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware, without regard
to its rules of conflict of laws.
Section 3.7. Headings. Headings of the Articles and Sections of this
Agreement are for the convenience of the parties only, and shall be given no
substantive or interpretive effect whatsoever.
Section 3.8. Counterparts. This Agreement may be executed by the parties
hereto in separate counterparts, each of which when so executed and delivered
shall be an original, but all such counterparts shall together constitute one
and the same instrument. Each counterpart may consist of a number of copies
hereof each signed by less than all, but together signed by all of the parties
hereto.
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<PAGE>
IN WITNESS WHEREOF, Parent and Sub have caused this Agreement to be executed
by its officers thereunto duly authorized and each Stockholder has caused this
Agreement to be executed, or duly executed by an authorized signatory, all as
of the date first written above.
IDENTIX INCORPORATED
By: /s/ James P. Scullion
----------------------------------
Title: Executive Vice President
--------------------------------
ID ACQUISITION CORP
By: /s/ James P. Scullion
----------------------------------
Title: Executive Vice President
---------------------------------
/s/ Yuri Khidekel
---------------------------------------
By: Yuri Khidekel
/s/ Yury Shapiro
--------------------------------------
By: Yuri Shapiro
INTERNATIONAL TECHNOLOGY CONCEPTS, INC.
/s/ Yuri Khidekel
---------------------------------------
By: Yuri Khidekel
Title: Vice President
[Entity Stockholder]
By:
------------------------------------
Title:
----------------------------------
/s/ Harry F. Camp
--------------------------------------
[Individual Stockholder]
[Entity Stockholder]
By:
------------------------------------
Title:
----------------------------------
/s/ Oscar Pieper
--------------------------------------
[Individual Stockholder]
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<PAGE>
Exhibit A
List of Stockholders
<TABLE>
<CAPTION>
Name and address Shares of Common Options to Purchase
of Stockholder Stock Held Common Stock Held
-------------------------------------- ---------------- -------------------
<S> <C> <C>
Harry F. Camp
1100 Sacramento St. #302
San Francisco, CA 94108 300,200 255,667
Oscar Pieper
1150 Bayhill Dr. #215
San Bruno, CA 94066 263,100 299,000
International Technology Concepts, Inc.
11501 Dublin Blvd.
Suite 101
Dublin, CA 94568 1,358,881
Yuri Khidekel
11501 Dublin Blvd.
Suite 101
Dublin, CA 94568 194,650
Yury Shapiro
11501 Dublin Blvd.
Suite 101
Dublin, CA 94568 159,292
</TABLE>
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<PAGE>
APPENDIX C
ESCROW AGREEMENT
THIS ESCROW AGREEMENT ("Escrow Agreement") is made as of , 1999
among Identix Incorporated, a Delaware corporation ("Identix"); Harry F. Camp
(the "Representative"); and U.S. Bank Trust National Association, Global Escrow
Depository Services ("Escrow Holder").
BACKGROUND
A. Pursuant to an Agreement and Plan of Reorganization and Merger (the
"Agreement") dated as of November , 1998, among Identix, ID Acquisition Corp,
a Delaware corporation and a wholly-owned subsidiary of Identix ("Acquisition
Corp"), and IDT Holding, Inc., a Delaware corporation (the "Company"),
Acquisition Corp will be merged with and into the Company and the Company will
be the surviving corporation and become a wholly-owned subsidiary of Identix
(the "Merger").
B. This Escrow Agreement is being entered into pursuant to Section 2.5 and
Article X of the Agreement. Execution and delivery of this Escrow Agreement is
a condition to the obligations of the parties to the Agreement to consummate
the Merger.
C. As set forth in Section 2.5.1 of the Agreement, by their approval of the
Agreement and the Merger, the holders of shares of the common stock of the
Company have authorized the Representative to act as the representative of
those persons who, immediately prior to the effective time of the Merger, are
holders (the "Former Stockholders") of shares of the common stock of the
Company (other than holders of "dissenting shares" within the meaning of
Section 1300(b) of the California Corporations Code or shares for which
appraisal rights have been perfected in accordance with Section 262 of the
Delaware General Corporation Law) under this Escrow Agreement with the powers
and authority provided herein.
D. Pursuant to the Agreement, the shares of the common stock of the Company
that are outstanding immediately prior to the effective time of the Merger,
other than dissenting shares, will be converted into shares of the common stock
of Identix.
E. Section 2.5.1 of the Agreement provides that at the effective time of the
Merger, certain of the shares of the common stock of Identix issued in the
Merger shall be delivered on behalf of the Former Stockholders to the Escrow
Holder in order to secure the indemnification obligations of the Company set
forth in Article X of the Agreement.
THE PARTIES AGREE AS FOLLOWS:
ARTICLE I DEFINITIONS
Unless otherwise defined herein, capitalized terms used herein shall have
the meanings set forth in the Agreement. In addition, for the purposes of this
Escrow Agreement, the following terms shall have the following meanings:
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1.1 Claim Certificate. "Claim Certificate" shall mean a certificate signed
by an officer of Identix stating (i) that an Indemnified Person has incurred or
reasonably believes it may in the future incur the amount of Damages specified
in such Claim Certificate, (ii) in reasonable detail, the facts alleged as the
basis for such claim and the section or sections of the Agreement alleged to
have been violated, and (iii) the number of Escrowed Shares to which Identix
believes the Indemnified Person is entitled with respect to such Damages.
1.2 Damages. "Damages" shall mean any and all losses, damages, liabilities,
claims, judgments, settlements, costs and expenses (including reasonable
attorneys' fees) of the type referred to in Article X of the Agreement.
1.3 Escrow Fund. "Escrow Fund" shall mean the Escrowed Shares then held by
the Escrow Holder.
1.4 Escrowed Share. An "Escrowed Share" shall mean a share of Identix Common
delivered to the Escrow Holder by the Exchange Agent on behalf of the Former
Stockholders in accordance with Section 2.5 of the Agreement, together with any
and all other shares of Identix Common, other securities of Identix or any
other issuer, other property or cash received or receivable in respect of such
share of Identix Common (other than ordinary cash dividends), including,
without limitation, any and all securities, property or cash (other than
ordinary cash dividends) to be issued or distributed in connection with any
recapitalization, reclassification, split-up, merger, consolidation, exchange,
stock dividend, stock split or similar event declared or effected with respect
to such share of Identix Common.
1.5 Indemnified Person. "Indemnified Person" shall mean Identix and any
other entity or person who is a beneficiary of the indemnification obligations
of the Company contained in Article X of the Agreement.
1.6 Value. "Value," when used with respect to an Escrowed Share, shall mean
the average closing price of the Identix common stock on the American Stock
Exchange for a period of 21 trading days commencing on the 10th trading day
before the date of this Escrow Agreement and ending on the 10th trading day
after the date of this Agreement, as adjusted for stock splits, stock
dividends, recapitalizations and the like.
ARTICLE II
CREATION OF ESCROW
2.1 Purpose. This Escrow Agreement is being executed and delivered, and the
deposit of the Escrow Fund hereunder is being made, for the purpose of securing
the indemnification obligations of the Company and the Former Stockholders set
forth in Article X of the Agreement.
2.2 Creation of Escrow Fund. At or promptly after the Effective Time, the
Representative shall instruct the Exchange Agent to deposit with the Escrow
Holder certificates representing those shares of Identix Common required to be
so deposited under Section 2.5 of the Agreement. Identix and the Former
Stockholders agree that any other securities, property or cash which thereafter
are to become part of the Escrow Fund as provided in Section 1.4 of this Escrow
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<PAGE>
Agreement, shall be promptly deposited with the Escrow Holder upon receipt by
or on behalf of the Former Stockholders, and receipt by the Escrow Holder on
behalf of the Former Stockholders shall be deemed receipt by the Former
Stockholders. Certificates representing securities deposited in the Escrow Fund
shall be accompanied by separate stock powers endorsed in blank by the
Representative on behalf of the Former Stockholders.
2.3 Voting Rights. The Former Stockholders shall retain their voting rights
with respect to securities held by the Escrow Holder unless and until such
securities are delivered by the Escrow Holder to Identix in accordance with
this Agreement.
2.4 Ordinary Cash Dividends. If Identix pays an ordinary cash dividend on
the Identix Common during the term hereof, such dividends payable shall be paid
by Identix directly to the Former Stockholders and not included in the Escrow
Fund.
2.5 Income Tax Treatment. For income tax purposes, Identix and the Former
Stockholders shall treat the Escrowed Shares as if they had been constructively
received by the Former Stockholders and then placed into the Escrow Fund by the
Former Stockholders.
ARTICLE III
CLAIMS
3.1 Payment After Delivery of Claim Certificate. If Identix gives the Escrow
Holder and the Representative a Claim Certificate, then, as soon as practicable
but not earlier than 45 days after the giving of such Claim Certificate, the
Escrow Holder, subject to the requirements of Section 3.2 hereof, shall deliver
to Identix, from the Escrow Fund, on behalf of the Indemnified Person that
number of Escrowed Shares having a Value (to the extent the Escrow Fund is
sufficient for such purpose) equal to the Damages specified in such Claim
Certificate.
3.2 Disputes Respecting Claims. Unless, within 45 days after the giving of
any Claim Certificate by Identix, Identix and the Escrow Holder receive a
written notice from the Representative stating that the Representative
questions the accuracy of a matter asserted in such Claim Certificate, such
Claim Certificate shall constitute full authority to the Escrow Holder to take
the action provided for in Section 3.1 and shall be conclusive and binding on
all parties hereto and on the Former Stockholders. If, however, the
Representative timely gives such a notice, the Escrow Holder shall not make any
distribution to Identix of that portion of the Escrow Fund which the
Representative asserts in his notice should not be so distributed until (i) the
Escrow Holder receives the written consent of the Representative and Identix to
such distribution or (ii) there is a final decision of a court of competent
jurisdiction in an action between Identix and the Representative with respect
to the disputed amount. For this purpose, a final decision shall mean the final
judgment of any court of competent jurisdiction from which no appeal is then
allowed or a final decision of an arbitrator under an arrangement providing for
no appeal of such decision. The reasonable expenses, including attorneys' fees,
of all of the parties to any such lawsuit or proceeding shall be reasonably
apportioned among them, taking into consideration the outcome of the lawsuit or
proceeding and the reasonableness of the conduct of each such party in
connection with the dispute over the disposition of that portion of the Escrow
Fund which was in controversy, in light of the facts known to such party at the
time such party engaged in such conduct. Any and all amounts payable to Identix
or any
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<PAGE>
other Indemnified Person pursuant to the preceding sentence shall be paid out
of the Escrow Fund as though it were an item of Damages.
3.3 Notice and Defense of Third Party Claims. No later than 15 days after
receipt by Identix of a written notice of any action, suit, audit or proceeding
commenced against Identix or the Company which might be a basis for
indemnification under Article X of the Agreement, Identix will give the
Representative written notice thereof and will afford them an opportunity to
defend such action, suit, audit or proceeding on behalf of the Former
Stockholders, at the expense of the Representative or the Former Stockholders,
provided that Identix may participate in the control of such defense. No
Indemnified Person shall settle claims subject to this Escrow Agreement without
the prior written consent of the Representative, which consent will not be
unreasonably withheld.
ARTICLE IV
DISTRIBUTION OF ESCROW FUND
4.1 Distribution of Undisputed Amounts. Subject to Section 4.2 hereof, on
the date one year after the date of this Escrow Agreement (the "Escrow
Termination Date") the Escrow Holder shall promptly distribute the entire
remaining Escrow Fund to the Representative for the benefit of the Former
Stockholders, or to the Former Stockholders if and as the Representative shall
direct, pro rata according to the number of shares of Company Common held by
the Former Stockholders at the Effective Time.
4.2 Distribution of Disputed Amounts. Notwithstanding the provisions of
Section 4.1 hereof, if, prior to the Escrow Termination Date, Identix shall
have given a Claim Certificate to the Representative and the Escrow Holder and
a dispute, in accordance with Section 3.2 hereof, respecting that Claim
Certificate or the subject matter of such Claim Certificate has not yet been
resolved in accordance with Section 3.2, then the Escrow Holder shall continue
to hold that portion of the Escrow Fund which is the subject of such dispute.
Any portion of the Escrow Fund so withheld shall continue to be held by the
Escrow Holder until it receives authorization to distribute the portion of the
Escrow Fund so withheld in accordance with the second sentence of Section 3.2.
4.3 Dispute Resolution. It is the intention of the parties that if a dispute
arises with respect to a Claim Certificate issued by Identix, that such dispute
be resolved in an expeditious manner. Accordingly, within 10 days of the
issuance by the Representative of a notice disputing a Claim Certificate, the
Representative and an executive officer of Identix shall meet to resolve the
dispute and shall use their good faith efforts to resolve the dispute over the
next 20 days. If no resolution is reached after such 20-day period, either
party may immediately request arbitration of such dispute. The parties shall
negotiate in good faith to agree on an expedited binding arbitration procedure
to resolve such dispute. If the parties in 15 days cannot agree in writing to
such a procedure, either party may cause the dispute to immediately go into
binding arbitration before one arbitrator who is a lawyer knowledgeable and
experienced with respect to the issues being arbitrated in accordance with the
commercial arbitration rules of the American Arbitration Association in San
Francisco County, San Mateo County or Santa Clara County, California. The costs
of the arbitrator and the arbitration proceeding (other than attorney's fees)
shall be apportioned among the parties inversely in accordance with the
percentage of the amount claimed in the Claim Certificate that is
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<PAGE>
actually awarded to Identix by the arbitrator. Notwithstanding the foregoing
provisions, if a Claim Certificate is issued by Identix with respect to an
ongoing action, suit, audit or proceeding commenced against Identix or the
Company, then the dispute resolution mechanism set forth in this Section 4.3
shall not commence until the final adjudication or settlement of such action,
suit, audit or proceeding.
ARTICLE V
ESCROW HOLDER
The "General Provisions Regarding Corporate Escrow Agreements" attached
hereto as Exhibit A are incorporated herein by reference.
ARTICLE VI
REPRESENTATIVE
6.1 Action by Representative. The Representative shall have full power and
authority to represent all Former Stockholders with respect to all matters
arising under this Escrow Agreement and with respect to the obligations set
forth in Article X of the Agreement. All action taken by the Representative
hereunder shall be binding upon the Former Stockholders as if expressly
confirmed and ratified in writing by each of them. Without limiting the
generality of the foregoing, the Representative shall have full power and
authority on behalf of all of the Former Stockholders to interpret all the
terms and provisions of this Escrow Agreement, to give all approvals and take
any other actions with respect to the Former Stockholders in connection with
the subject matter of this Agreement and to consent to any amendment hereof.
All action to be taken by the Representative shall be conclusive and binding
upon all of the Former Stockholders. Identix may deal solely with and rely
solely upon the Representative as the representative of all the Former
Stockholders.
6.2 Successor Representative. In case of the resignation, death or inability
to act of the Representative, a successor or successors shall be named by a
majority in interest of the Former Stockholders or if any such vacancy shall
not be filled within 25 business days, by the Escrow Holder. Each such
successor Representative shall have all of the power, authority, rights and
privileges hereby conferred upon an original Representative, and the term
"Representative" as used herein shall be deemed to include each such successor
Representative.
6.3 Limitation of Liability. The Representative shall incur no liability to
the Former Stockholders except by reason of his willful misconduct or gross
negligence.
6.4 Posting Bond; Compensation. The Representative shall not be required to
post a bond for the performance of services hereunder and shall receive no
compensation for the performance of services, other than the reimbursement for
out-of-pocket expenses, attorneys fees and any costs of arbitration borne by
the Company hereunder which it may recover from the Escrow Fund (i) in an
amount up to $100,000 at any time prior to the satisfaction of any claims made
by Identix hereunder, and (ii) in any remaining amount upon the termination of
this Escrow Agreement after satisfaction of any claims made by Identix
hereunder.
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ARTICLE VII
MISCELLANEOUS
7.1 Notices. Except as expressly provided in this Escrow Agreement, all
notices (including any Claim Certificate) given in connection with this Escrow
Agreement shall be deemed to have been duly given on the date of delivery if
personally delivered, one business day after deposit with a nationally
recognized overnight courier or three days after mailing if mailed by certified
or registered mail, return receipt requested, addressed as follows:
If to Identix:
Identix Incorporated
510 N. Pastoria Ave.
Sunnyvale, California 94086
Attention: President and General Counsel
With a copy to:
Heller Ehrman White & McAuliffe
525 University Avenue
Palo Alto, California 94301
Attention: SAO File 17506-0001
If to the Representative:
Harry F. Camp
1100 Sacramento Street, #302
San Francisco, CA 94108
With a copy to:
Brobeck, Phleger & Harrison LLP
Two Embarcadero Place, 2200 Geng Road
Palo Alto, CA 94303
Attention: Thomas W. Kellerman
If to the Escrow Holder:
U.S. Bank Trust National Association
Global Escrow Depository Services #SANF0527
One California Street, 4th Floor
San Francisco, CA 94111
Attn: Cora Murphy
Such addresses may be changed from time to time by means of a notice given in
the manner provided in this Section 7.1.
7.2 Successors and Assigns. Neither the Escrow Holder nor the Representative
may assign, by operation of law or otherwise, all or any portion of its or
their rights, obligations or
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<PAGE>
liabilities under this Escrow Agreement without the prior written consent of
Identix, which consent may be withheld in the absolute discretion of Identix.
The foregoing sentence is not intended to limit the right of the Former
Stockholders to appoint a successor Representative pursuant to Section 6.2. Any
attempted assignment in violation of this Section 7.2 shall be voidable. This
Escrow Agreement and all action taken hereunder in accordance with its terms
shall be binding upon and inure to the benefit of Identix and the other
Indemnified Persons and their respective successors, assigns, heirs, executors,
administrators and legal representatives, the Former Stockholders and their
respective successors, assigns, heirs, executors, administrators and legal
representatives, the Escrow Holder and its successors and the Representative
and their successors, assigns, heirs, executors, administrators and legal
representatives.
7.3 Headings. The headings contained in this Escrow Agreement are intended
principally for convenience and shall not, by themselves, determine the rights
of the parties to this Escrow Agreement.
7.4 Waiver. Waiver of any term or condition of this Escrow Agreement by any
party shall not be construed as a waiver of a subsequent breach or failure of
the same term or condition, or a waiver of any other term or condition of this
Escrow Agreement.
7.5 Governing Law. This Escrow Agreement shall be governed by, and construed
in accordance with, the laws of the State of California as applied to
agreements entered into and entirely to be performed within the state.
IN WITNESS WHEREOF, the parties hereto have caused this Escrow Agreement to
be signed the day and year first above written.
IDENTIX: Identix Incorporated
By:
-----------------------------------
Title:
----------------------------------
REPRESENTATIVE:
---------------------------------------
Harry F. Camp
ESCROW HOLDER:
U.S. Bank Trust National Association
Global Escrow Depository Services
By:
-----------------------------------
Title:
----------------------------------
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<PAGE>
APPENDIX D
DELAWARE GENERAL CORPORATION CODE APPRAISAL RIGHTS
SECTION 262 APPRAISAL RIGHTS
(a) Any stockholder of a corporation of this State who holds shares of stock
on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to (S)228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and
the words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions
thereof, solely of stock of a corporation, which stock is deposited with the
depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to (S)251 (other than a merger effected pursuant to (S)251(g)
of this title), (S)252, (S)254, (S)257, (S)258, (S)263 or (S)264 of this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders;
and further provided that no appraisal rights shall be available for any shares
of stock of the constituent corporation surviving a merger if the merger did
not require for its approval the vote of the stockholders of the surviving
corporation as provided in subsection (f) of (S)251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series of
stock of a constituent corporation if the holders thereof are required by the
terms of an agreement of merger or consolidation pursuant to (S)(S)251, 252,
254, 257, 258, 263 and 264 of this title to accept for such stock anything
except:
a. Shares of stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts in
respect thereof, which shares of stock or depository receipts at the effective
date of the merger or consolidation will be either listed on a national
securities exchange or designated as a national
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market system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc. or held of record by more than 2,000
holders;
c. Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts described
in the foregoing subparagraphs a. b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under (S)253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall be
available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets
of the corporation. If the certificate of incorporation contains such a
provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for such
meeting with respect to shares for which appraisal rights are available
pursuant to subsections (b) or (c) hereof that appraisal rights are available
for any or all of the shares of the constituent corporations, and shall include
in such notice a copy of this section. Each stockholder electing to demand the
appraisal of such stockholder's shares shall deliver to the corporation, before
the taking of the vote on the merger or consolidation, a written demand for
appraisal of such stockholder's shares. Such demand will be sufficient if it
reasonably informs the corporation of the identity of the stockholder and that
the stockholder intends thereby to demand the appraisal of such stockholder's
shares. A proxy or vote against the merger or consolidation shall not
constitute such a demand. A stockholder electing to take such action must do so
by a separate written demand as herein provided. Within 10 days after the
effective date of such merger or consolidation, the surviving or resulting
corporation shall notify each stockholder of each constituent corporation who
has complied with this subsection and has not voted in favor of or consented to
the merger or consolidation of the date that the merger or consolidation has
become effective; or
(2) If the merger or consolidation was approved pursuant to (S)228 or
(S)253 of this title, each constituent corporation, either before the effective
date of the merger or consolidation or within ten days thereafter, shall notify
each of the holders of any class or series of stock of such constituent
corporation who are entitled to appraisal rights of the approval of the merger
or consolidation and that appraisal rights are available for any or all shares
of such class or series of stock of such constituent corporation, and shall
include in such notice a copy of this section; provided that, if the notice is
given on or after the effective date of the merger or consolidation, such
notice shall be
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given by the surviving or resulting corporation to all such holders of any
class or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective date
of the merger or consolidation, shall, also notify such stockholder's of the
effective date of the merger or consolidation. Any stockholder entitled to
appraisal rights may, within 20 days after the date of mailing of such notice,
demand in writing from the surviving or resulting corporation the appraisal of
such holder's shares. Such demand will be sufficient if it reasonably informs
the corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of such holder's shares. If such notice
did not notify stockholders of the effective date of the merger or
consolidation, either (i) each such constituent corporation shall send a second
notice before the effective date of the merger or consolidation notifying each
of the holders of any class or series of stock of such constituent corporation
that are entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send such a
second notice to all such holders on or within 10 days after such effective
date; provided, however, that if such second notice is sent more than 20 days
following the sending of the first notice, such second notice need only be sent
to each stockholder who is entitled to appraisal rights and who has demanded
appraisal of such holder's shares in accordance with this subsection. An
affidavit of the secretary or assistant secretary or of the transfer agent of
the corporation that is required to give either notice that such notice has
been given shall, in the absence of fraud, be prima facie evidence of the facts
stated therein. For purposes of determining the stockholders entitled to
receive either notice, each constituent corporation may fix, in advance, a
record date that shall be not more than 10 days prior to the date the notice is
given, provided, that if the notice is given on or after the effective date of
the merger or consolidation, the record date shall be such effective date. If
no record date is fixed and the notice is given prior to the effective date,
the record date shall be the close of business on the day next preceding the
day on which the notice is given.
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholder's. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw such
stockholder's demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10
days after such stockholder's written request for such a statement is received
by the surviving or resulting corporation or within 10 days after expiration of
the period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 120 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with
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whom agreements as to the value of their shares have not been reached by the
surviving or resulting corporation. If the petition shall be filed by the
surviving or resulting corporation, the petition shall be accompanied by such a
duly verified list. The Register in Chancery, if so ordered by the Court, shall
give notice of the time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting corporation and to
the stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week before the day of
the hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The
forms of the notices by mail and by publication shall be approved by the Court,
and the costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled
to appraisal rights. The Court may require the stockholders who have demanded
an appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as
to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger
or consolidation, together with a fair rate of interest, if any, to be paid
upon the amount determined to be the fair value. In determining such fair
value, the Court shall take into account all relevant factors. In determining
the fair rate of interest, the Court may consider all relevant factors,
including the rate of interest which the surviving or resulting corporation
would have had to pay to borrow money during the pendency of the proceeding.
Upon application by the surviving or resulting corporation or by any
stockholder entitled to participate in the appraisal proceeding, the Court may,
in its discretion, permit discovery or other pretrial proceedings and may
proceed to trial upon the appraisal prior to the final determination of the
stockholder entitled to an appraisal. Any stockholder whose name appears on the
list filed by the surviving or resulting corporation pursuant to subsection (f)
of this section and who has submitted such stockholder's certificates of stock
to the Register in Chancery, if such is required, may participate fully in all
proceedings until it is finally determined that such stockholder is not
entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to
the stockholders entitled thereto. Interest may be simple or compound, as the
Court may direct. Payment shall be so made to each such stockholder, in the
case of holders of uncertificated stock forthwith, and the case of holders of
shares represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
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proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation,
either within 60 days after the effective date of the merger or consolidation
as provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the
Court of Chancery shall be dismissed as to any stockholder without the approval
of the Court, and such approval may be conditioned upon such terms as the Court
deems just.
(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation.
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APPENDIX E
CHAPTER 13
GENERAL CORPORATION LAW OF CALIFORNIA
DISSENTERS' RIGHTS
SECTION 1300. RIGHT TO REQUIRE PURCHASE; "DISSENTING SHARES" AND
"DISSENTING SHAREHOLDER" DEFINED.
(a) If the approval of the outstanding shares (Section 152) of a corporation
is required for a reorganization under subdivisions (a) and (b) or subdivision
(e) or (f) of Section 1201, each shareholder of such corporation entitled to
vote on the transaction, and each shareholder of a subsidiary corporation in a
short-form merger may, by complying with this chapter, require the corporation
in which the shareholder holds shares to purchase for cash at their fair market
value the shares owned by the shareholder which are dissenting shares as
defined in subdivision (b). The fair market value shall be determined as of the
day before the first announcement of the terms of the proposed reorganization
or short-form merger, excluding any appreciation or depreciation in consequence
of the proposed action, but adjusted for any stock split, reverse stock split
or share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or short-form
merger either (A) listed on any national securities exchange certified by
the Commissioner of Corporations under subdivision (o) of Section 25100 or
(B) listed on the list of OTC margin stocks issued by the Board of
Governors of the Federal Reserve System, and the notice of meeting of
shareholders to act upon the reorganization summarizes this section and
Sections 1301, 1302, 1303 and 1304; provided, however, that this provision
does not apply to any shares with respect to which there exists any
restriction on transfer imposed by the corporation or by any law or
regulation; and provided, further, that this provision does not apply to
any class of shares described in subparagraph (A) or (B) if demands for
payment are filed with respect to 5 percent or more of the outstanding
shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted
in favor of the reorganization or, (B) if described in subparagraph (A) or
(B) of paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or which were held of record on the
effective date of a short-form merger; provided, however, that subparagraph
(A) rather than subparagraph (B) of this paragraph applies in any case
where the approval required by Section 1201 is sought by written consent
rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
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(c) As used in this chapter, "dissenting shareholder" means the record
holder of dissenting shares and includes a transferee of record.
SECTION 1301. DEMAND FOR PURCHASE.
(a) If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such shareholder a notice
of the approval of the reorganization by its outstanding shares (Section 152)
within 10 days after the date of such approval, accompanied by a copy of
Sections 1300, 1302, 1303, 1304 and this section, a statement of the price
determined by the corporation to represent the fair market value of the
dissenting shares, and a brief description of the procedure to be followed if
the shareholder desires to exercise the shareholder's right under such
sections. The statement of price constitutes an offer by the corporation to
purchase at the price stated any dissenting shares as defined in subdivision
(b) of Section 1300, unless they lose their status as dissenting shares under
Section 1309.
(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance
with paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of record
by the shareholder which the shareholder demands that the corporation purchase
and shall contain a statement of what such shareholder claims to be the fair
market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market
value constitutes an offer by the shareholder to sell the shares at such price.
SECTION 1302. ENDORSEMENT OF SHARES.
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110
was mailed to the shareholder, the shareholder shall submit to the corporation
at its principal office or at the office of any transfer agent thereof, (a) if
the shares are certificated securities, the shareholder's certificates
representing any shares which the shareholder demands that the corporation
purchase, to be stamped or endorsed with a statement that the shares are
dissenting shares or to be exchanged for certificates of appropriate
denomination so stamped or endorsed or (b) if the shares are uncertificated
securities, written notice of the number of shares which the shareholder
demands that the corporation purchase. Upon subsequent transfers of the
dissenting shares on the books of the corporation, the new certificates,
initial transaction
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statement, and other written statements issued therefor shall bear a like
statement, together with the name of the original dissenting holder of the
shares.
SECTION 1303. AGREED PRICE; TIME FOR PAYMENT.
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the
fair market value of any dissenting shares as between the corporation and the
holders thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount
thereof has been agreed or within 30 days after any statutory or contractual
conditions to the reorganization are satisfied, whichever is later, and in the
case of certificated securities, subject to surrender of the certificates
therefor, unless provided otherwise by agreement.
SECTION 1304. DISSENTER'S ACTION TO ENFORCE PAYMENT.
(a) If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market value of the
shares, then the shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within 6 months after the date on which
notice of the approval by the outstanding shares (Section 152) or notice
pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, but
not thereafter, may file a complaint in the superior court of the proper county
praying the court to determine whether the shares are dissenting shares or the
fair market value of the dissenting shares or both or may intervene in any
action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If the
status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
SECTION 1305. APPRAISER'S REPORT--PAYMENT--COSTS.
(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time fixed
by the court, the appraisers, or a majority of them, shall make and file a
report in the office of the clerk of the court. Thereupon, on the motion of any
party, the report shall be submitted to the court and considered on such
evidence as the court considers relevant. If the court finds the report
reasonable, the court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a report
within 10 days from the date of their appointment or within such further time
as may be allowed by the court or the report is not confirmed by the court, the
court shall determine the fair market value of the dissenting shares.
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(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market value
of each dissenting share multiplied by the number of dissenting shares which
any dissenting shareholder who is a party, or who has intervened, is entitled
to require the corporation to purchase, with interest thereon at the legal rate
from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for
the shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections
1300,1301 and 1302 if the value awarded by the court for the shares is more
than 125 percent of the price offered by the corporation under subdivision (a)
of Section 1301).
SECTION 1306. DISSENTING SHAREHOLDER'S STATUS AS CREDITOR.
To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
SECTION 1307. DIVIDENDS PAID AS CREDIT AGAINST PAYMENT.
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor.
SECTION 1308. CONTINUING RIGHTS AND PRIVILEGES OF DISSENTING SHAREHOLDERS.
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A
dissenting shareholder may not withdraw a demand for payment unless the
corporation consents thereto.
SECTION 1309. TERMINATION OF DISSENTING SHAREHOLDER STATUS.
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to require
the corporation to purchase their shares upon the happening of any of the
following:
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(a) The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter all
necessary expenses incurred in such proceedings and reasonable attorneys' fees.
(b) The shares are transferred prior to their submission for endorsement in
accordance with Section 1302 or are surrendered for conversion into shares of
another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six months after the date on which notice of
the approval by the outstanding shares or notice pursuant to subdivision (i) of
Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
SECTION 1310. SUSPENSION OF PROCEEDINGS FOR PAYMENT PENDING LITIGATION.
If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceedings
under Sections 1304 and 1305 shall be suspended until final determination of
such litigation.
SECTION 1311. EXEMPT SHARES.
This chapter, except Section 1312, does not apply to classes of shares whose
terms and provisions specifically set forth the amount to be paid in respect to
such shares in the event of a reorganization or merger.
SECTION 1312. ATTACKING VALIDITY OF REORGANIZATION OR MERGER.
(a) No shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attack the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set aside
or rescinded, except in an action to test whether the number of shares required
to authorize or approve the reorganization have been legally voted in favor
thereof, but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event of
a reorganization or short-form merger is entitled to payment in accordance with
those terms and provisions or, if the principal terms of the reorganization are
approved pursuant to subdivision (b) of Section 1202, is entitled to payment in
accordance with the terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded
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payment of cash for such shareholder's shares pursuant to this chapter; but if
the shareholder institutes any action to attack the validity of the
reorganization or short-for merger or to have the reorganization or short-form
merger set aside or rescinded, the shareholder shall not thereafter have any
right to demand payment of cash for the shareholder's shares pursuant to this
chapter. The court in any action attacking the validity of the reorganization
or short-form merger or to have the reorganization or short-form merger set
aside or rescinded shall not restrain or enjoin the consummation of the
transaction except upon 10 days' prior notice to the corporation and upon a
determination by the court that clearly no other remedy will adequately protect
the complaining shareholder or the class of shareholders of which such
shareholder is a member.
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled.
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SUPPLEMENTAL NOTICE TO INTERNATIONAL TECHNOLOGY CONCEPTS, INC.:
As noted in the prospectus of which this Supplement is a part, neither
Heller Ehrman White & McAuliffe (Identix's tax counsel) nor Brobeck, Phleger &
Harrison LLP (Identicator Technology's tax counsel) has rendered or will render
an opinion with respect to the tax consequences to IDT or the IDT stockholders
of transactions previously engaged in by IDT or Identicator Technology. The
effect of transactions previously engaged in by IDT or Identicator Technology
is of special importance to International Technology Concepts, Inc. ("IT
Concepts") and its stockholders. Because IT Concepts transferred assets to IDT,
the tax treatment of IT Concepts could be different from the treatment of the
other IDT stockholders. IT Concepts should therefore seek its own tax counsel
as to this separate issue.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 15. Indemnification of Directors and Officers
In accordance with the Delaware General Corporation Law, the Registrant's
Certificate of Incorporation includes provisions regarding the limitation of
liability and indemnification of officers and directors of the Registrant.
Articles NINTH and TENTH of the Registrant's Certificate of Incorporation
provide as follows:
NINTH. No director of the corporation shall be personally liable to the
corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability: (a) for any breach of
the director's duty of loyalty to the corporation or its stockholders; (b)
for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law; (c) under Section 174 of the
Delaware General Corporation Law; or (d) for any transaction from which the
director derived any improper personal benefit. If the Delaware General
Corporation Law is amended to authorize corporate action further
eliminating or limiting the personal liability of directors, then the
liability of a director of the corporation shall be eliminated or limited
to the fullest extent permitted by the Delaware General Corporation Law, as
so amended. Any repeal or modification of this paragraph shall not
adversely affect any right or protection of a director of the corporation
existing at the time of the repeal or modification.
TENTH.
A. Right to Indemnification
Each person who was or is made a party or is threatened to be made a
party to or is involved in any action, suit or proceeding, whether civil,
criminal, administrative or investigative (a "proceeding"), by reason of
the fact that he or she or a person of whom he or she is the legal
representative, is or was a director or officer of the corporation or is or
was serving at the request of the corporation as a director or officer,
employee or agent of another corporation, or of a partnership, joint
venture, trust or other enterprise, including service with respect to
employee benefit plans, whether the basis of such proceeding is alleged
action in an official capacity as a director, officer, employee or agent or
in any other capacity while serving as a director, officer, employee or
agent, shall be indemnified and held harmless by the corporation to the
fullest extent authorized by the Delaware General Corporation Law, as the
same exists or may hereafter be amended (but, in the case of any such
amendment, only to the extent that such amendment permits the corporation
to provide broader indemnification rights than that law permitted the
corporation to provide before the amendment) against all expenses,
liabilities and losses including, without limitation, attorneys' fees,
judgments, fines, ERISA excise taxes and penalties and amounts paid or to
be paid in settlement) reasonably incurred or suffered by such person in
connection therewith. Such indemnification shall continue as to a person
who has ceased to be a director, officer, employee or agent and shall inure
to the benefit of his or her heirs, executors and administrators. However,
the corporation shall indemnify any such person seeking indemnity in
connection with an action, suit or proceeding (or part thereof)
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initiated by that person only if that action, suit or proceeding (or part
thereof) was authorized by the board of directors of the corporation. The
rights set forth in this Article TENTH shall be contract rights and shall
include the right to be paid expenses incurred in defending any such
proceeding in advance of its final disposition. However, the payment of
such expenses incurred by a director or officer of the corporation in his
or her capacity as a director or officer (and not in any other capacity in
which service was or is rendered by such person while a director or
officer, including, without limitation, service to an employee benefit
plan) in advance of the final disposition of such proceeding shall be made
only upon delivery to the corporation of an undertaking, by or on behalf of
such director or officer, to repay all amounts so advanced if it should be
determined ultimately that such director or officer is not entitled to be
so indemnified.
B. Right of Claimant to bring Suit
If a claim under Paragraph A of this Article TENTH is not paid in full
by the corporation within 90 days after a written claim has been received
by the corporation, the claimant may at any time thereafter bring suit
against the corporation to recover the unpaid amount of the claim. If
successful in whole or in part, the claimant shall be entitled to be paid
the expense of prosecuting that claim. It shall be a defense to any such
action (other than an action an action brought to enforce a claim for
expenses incurred in defending any proceeding in advance of its final
disposition where the required undertaking, if any, has been tendered to
this corporation) that the claimant has not met the standards of conduct
which make it permissible under the Delaware General Corporation Law for
the corporation to indemnify the claimant for the amount claimed. However,
the burden of proving such defense shall be on the corporation. Neither the
failure of the corporation (including its board of directors, independent
legal counsel or its stockholders) to have made a determination before the
commencement of such action that indemnification of the claimant is proper
in the circumstances because he or she has met the applicable standard of
conduct set forth in the Delaware General Corporation Law, nor an actual
determination by the corporation (including its board of directors,
independent legal counsel or its stockholders) that the claimant has not
met such applicable standard of conduct, shall be a defense to the action
or create a presumption that the claimant has not met the applicable
standard of conduct.
C. Non Exclusivity of Rights
The rights conferred on any person by Paragraphs A and B of this Article
TENTH shall not be exclusive of any other rights which such person may have
or hereafter may acquire under any statute, provision of the Certificate of
Incorporation, by law, agreement, vote of stockholders or of disinterested
directors, or otherwise.
D. Expenses as a Witness
To the extent that any director, officer, employee, or agent of the
corporation is by reason of such position, or a position with another
entity at the request of the corporation, a witness in any action, suit or
proceeding, he or she shall be indemnified and held harmless against all
costs and expenses actually and reasonably incurred by him or her on his or
her behalf in connection therewith.
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E. Indemnity Agreements
The corporation may enter into agreements with any director, officer,
employee or agent of the corporation or any person who serves at the
request of the corporation as a director, officer, employee, or agent of
another corporation or other enterprise, providing for indemnification to
the fullest extent permissible under the Delaware General Corporation Law
and the corporation's Certificate of Incorporation.
F. Effect of Repeal or Modification
Any repeal or modification of this Article TENTH shall not adversely
affect any right of indemnification or advancement of expenses of a
director or officer, employee or agent of the corporation existing at the
time of such repeal or modification with respect to any action or omission
occurring before the repeal or modification.
G. Separability
Each and every paragraph, sentence, term and provision of this Article
TENTH is separate and distinct. If any paragraph, sentence, term or
provision is held to be invalid or unenforceable for any reason, such
invalidity or unenforceability shall not affect the validity or
enforceability of any other such paragraph, sentence, term or provision. To
the extent required in order to make any such paragraph, sentence, term or
provision of this Article TENTH valid or enforceable, the corporation
shall, and the indemnitee or potential indemnitee may, request a court of
competent jurisdiction to modify the paragraph, sentence, term or provision
in order to preserve its validity and provide the broadest possible
indemnification permitted by applicable law.
H. Insurance
The corporation may maintain insurance, at its expense, to protect
itself and any director, officer, employee or agent of the corporation or
another corporation, partnership, joint venture, trust or other enterprise
against any expense, liability or loss of the type referred to in this
Article TENTH, whether or not the corporation would have the power to
indemnify such person against such expense, liability or loss under
applicable law.
I. Indemnification of Employees and Agents of the Corporation
The corporation may, to the extent authorized from time to time by the
board of directors, grant rights to indemnification, and to the advancement
of expenses to any employee or agent of the corporation to the fullest
extent of the provisions of this Article with respect to the
indemnification and advancement of expenses of directors and officers of
the corporation.
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Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibits
No. Description
-------- -----------
<C> <S>
2.1 Agreement and Plan of Reorganization and Merger, dated November 14,
1998 and amended as of December 11, 1998, February 3, 1999 and March
16, 1999, among Identix Incorporated, IDT Holdings, Inc. and ID
Acquisition Corp. (included as Appendix A in the Information
Statement/Prospectus)
2.2 Stockholder Voting and Proxy Agreement, dated as of November 14,
1998, among Identix Incorporated and certain stockholders of IDT
Holdings, Inc. (included as Appendix B in the Information
Statement/Prospectus)
2.3 Form of Escrow Agreement among Identix Incorporated, Harry F. Camp
and U.S. Bank Trust Association, Global Escrow Depository Services
(included as Appendix C in the Information Statement/Prospectus)
5.1* Opinion of Heller Ehrman White & McAuliffe
8.1* Tax Opinion of Heller Ehrman White & McAuliffe
8.2* Tax Opinion of Brobeck, Phleger & Harrison LLP
23.1* Consent of Heller Ehrman White & McAuliffe (contained in opinions
filed as Exhibits 5.1 and 8.1)
23.2* Consent of Brobeck, Phleger & Harrison LLP (contained in opinion
filed as Exhibit 8.2)
23.3 Consent of PricewaterhouseCoopers LLP, Independent Accountants for
Identix
23.4 Consent of PricewaterhouseCoopers LLP, Independent Accountants for
IDT
24.1* Power of Attorney
99.1* Form of IDT Written Consent
</TABLE>
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* Previously filed.
Item 22. Undertakings
A. The undersigned registrant hereby undertakes:
(1)To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(a) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(b) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
(c) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
Provided, however, that paragraphs (1)(a) and (1)(b) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the registrant pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration statement.
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(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of the offering.
B. (1) That, prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is part of this registration
statement, by any person or party who is deemed to be an underwriter within the
meaning of 145(c), the issuer undertakes that such reoffering prospectus will
contain the information called for by the applicable registration form with
respect to reofferings by person who may be deemed underwriters, in addition to
the information called for by other items of the applicable form.
(2) That every prospectus: (i) that is filed pursuant to paragraph (1)
immediately preceding, or (ii) purports to meet the requirements of Section
10(a)(3) of the Act and is used in connection with an offering of securities
subject to Rule 415 will be filed as part of an amendment to the registration
statement and will not be used until such amendment is effective, and that, for
purposes of determining any liability under the Securities Act of 1933, each
such post-effective amendment shall be deemed a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed a bona fide offering thereof.
C. To respond to requests for information that is incorporated by reference
into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this Form, within
one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of
the registration statement through the date of responding to the request.
D. To supply by means of a post-effective amendment all required information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in the registration statement when it
became effective.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the Registrant's Restated Articles of Incorporation and
Bylaws, and the California Corporations Code, the Registrant has been informed
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in a
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person for liabilities arising under the Act
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against policy as expressed in the Act
and will be governed by the final adjudication of such issue.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-4 and has duly caused this Amendment No. 4 to
Registration Statement on Form S-4 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Sunnyvale, California on
April 16, 1999.
IDENTIX INCORPORATED
/s/ Randall C. Fowler
By: _________________________________
Randall C. Fowler, Chairman,
President
and Chief Executive Officer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 4 to Registration Statement on Form S-4 has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<C> <S> <C>
/s/ Randall C. Fowler Chairman, President and April 16, 1999
__________________________________ Chief Executive Officer
Randall C. Fowler (Principal Executive
Officer)
* Executive Vice April 16, 1999
____________________________________ President, Chief
James P. Scullion Financial Officer,
Secretary and Director
(Principal Financial
and Accounting Officer)
* Director April 16, 1999
____________________________________
Randall Hawks Jr.
* Director April 16, 1999
____________________________________
Patrick H. Morton
* Director April 16, 1999
____________________________________
Fred U. Sutter
* Director April 16, 1999
____________________________________
Charles W. Richion
* Director April 16, 1999
____________________________________
Larry J. Wells
/s/ Randall C. Fowler
*By: __________________________
Randall C. Fowler
Attorney-in-fact
</TABLE>
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
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<C> <S> <C>
2.1 Agreement and Plan of Reorganization and Merger, dated November
14, 1998 and amended as of December 11, 1998, February 3, 1999
and March 16, 1999, among Identix Incorporated, IDT Holdings,
Inc. and ID Acquisition Corp. (included as Appendix A in the
Information Statement/Prospectus)
2.2 Stockholder Voting and Proxy Agreement, dated as of November 14,
1998, among Identix Incorporated and certain stockholders of IDT
Holdings, Inc. (included as Appendix B in the Information
Statement/Prospectus)
2.3 Form of Escrow Agreement among Identix Incorporated, Harry F.
Camp and U.S. Bank Trust Association, Global Escrow Services
(included as Appendix C in the Information Statement/Prospectus)
5.1* Opinion of Heller Ehrman White & McAuliffe
8.1* Tax Opinion of Heller Ehrman White & McAuliffe
8.2* Tax Opinion of Brobeck, Phleger & Harrison LLP
23.1* Consent of Heller Ehrman White & McAuliffe (contained in
opinions filed as Exhibits 5.1 and 8.1)
23.2* Consent of Brobeck, Phleger & Harrison LLP (contained in opinion
filed as Exhibit 8.2)
23.3 Consent of PricewaterhouseCoopers LLP, Independent Accountants
for Identix
23.4 Consent of PricewaterhouseCoopers LLP, Independent Accountants
for IDT
24.1* Power of Attorney
99.1* Form of IDT Written Consent
</TABLE>
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* Previously filed.
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the prospectus constituting part of this
Registration Statement on Form S-4 of Identix Incorporated of our report dated
July 28, 1998 relating to the financial statements of Identix Incorporated as
of June 30, 1998 and 1997 and for each of the three years in the period ended
June 30, 1998 which appear in such prospectus.We also consent to the reference
to us under the heading "Experts" in such prospectus.
/s/ PricewaterhouseCoopers LLP
San Jose, California
April 15, 1999
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the prospectus constituting part of this
Registration Statement on Form S-4 of Identix Incorporated of our report dated
February 26, 1999 relating to the financial statements of IDT Holdings, Inc.
(formerly Identicator Technology, a California general partnership) which
appears in such prospectus. We also consent to the reference to us under the
heading "Experts" in such prospectus.
/s/ PricewaterhouseCoopers LLP
San Jose, California
April 15, 1999
