<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark one)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
-----
Exchange Act of 1934.
For the quarterly period ended December 31, 1999 or
_______Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ______________________ to ______________________
Commission File Number: 1-9641
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IDENTIX INCORPORATED
--------------------
(Exact name of registrant as specified in its charter)
Delaware 94-2842496
--------------------------------- -----------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation of organization)
510 N. Pastoria Avenue, Sunnyvale, California 94086
- ---------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408) 731-2000
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days. YES X NO _____
-----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
31,073,204 shares of Common Stock
as of January 31, 2000
<PAGE>
IDENTIX INCORPORATED
INDEX
PART I FINANCIAL INFORMATION
Item 1 Unaudited Financial Statements
Consolidated Balance Sheets -
December 31, 1999 and June 30, 1999
Consolidated Statements of Operations -
Three and six months ended December 31, 1999 and 1998
Consolidated Statements of Cash Flows -
Six months ended December 31, 1999 and 1998
Notes to Consolidated Financial Statements
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3 Quantitative and Qualitative Disclosures about Market Risk
PART II OTHER INFORMATION
Item 1 Legal Proceedings
Item 4 Submission of Matters to a Vote of Security Holders
Item 6 Exhibits
Signature
<PAGE>
IDENTIX INCORPORATED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
Item 1. Financial Statements
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,653,000 $ 3,013,000
Accounts receivable, less allowance for doubtful accounts
of $985,000 and $809,000 25,212,000 25,993,000
Inventories 5,636,000 5,275,000
Prepaid expenses and other assets 1,082,000 1,043,000
------------ ------------
Total current assets 41,583,000 35,324,000
Property and equipment, net 2,402,000 2,141,000
Intangibles and other assets, net 32,028,000 33,981,000
------------ ------------
Total assets $ 76,013,000 $ 71,446,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 1,113,000 $ 4,796,000
Accounts payable 9,191,000 9,767,000
Accrued compensation 1,954,000 1,940,000
Other accrued liabilities 1,224,000 1,324,000
Deferred revenue 2,356,000 1,784,000
------------ ------------
Total current liabilities 15,838,000 19,611,000
Deferred revenue 40,000 156,000
Other liabilities 90,000 90,000
------------ ------------
Total liabilities 15,968,000 19,857,000
------------ ------------
Shareholders' equity:
Common stock, $0.01 par value; 50,000,000 shares authorized;
30,783,402 and 28,625,958 shares issued and outstanding 109,610,000 94,625,000
Accumulated deficit (49,384,000) (42,855,000)
Accumulated other comprehensive loss (181,000) (181,000)
------------ ------------
Total shareholders' equity 60,045,000 51,589,000
------------ ------------
Total liabilities and shareholders' equity $ 76,013,000 $ 71,446,000
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
IDENTIX INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
-----------------------------------------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Product revenues $ 7,459,000 $ 8,898,000 $14,497,000 $18,647,000
Services revenues 10,067,000 10,609,000 20,496,000 21,676,000
----------- ----------- ----------- -----------
Total revenues 17,526,000 19,507,000 34,993,000 40,323,000
----------- ----------- ----------- -----------
Cost and expenses:
Cost of product revenues 3,812,000 4,384,000 7,083,000 9,202,000
Cost of services revenues 8,725,000 9,294,000 17,735,000 18,887,000
Research, development and engineering 1,757,000 1,343,000 3,964,000 2,804,000
Marketing and selling 3,773,000 2,684,000 6,697,000 5,146,000
General and administrative 1,742,000 1,598,000 4,536,000 3,379,000
Amortization of acquired intangible assets 863,000 41,000 1,748,000 87,000
----------- ----------- ----------- -----------
Total costs and expenses 20,672,000 19,344,000 41,763,000 39,505,000
----------- ----------- ----------- -----------
Income (loss) from operations (3,146,000) 163,000 (6,770,000) 818,000
Interest and other income, net 192,000 25,000 373,000 55,000
Interest expense (30,000) (99,000) (77,000) (230,000)
----------- ----------- ----------- -----------
Income (loss) before taxes (2,984,000) 89,000 (6,474,000) 643,000
Provision for incomes taxes - (60,000) - (90,000)
Equity interest in joint venture (73,000) (85,000) (55,000) (159,000)
----------- ----------- ----------- -----------
Net income (loss) $(3,057,000) $ (56,000) $(6,529,000) $ 394,000
=========== =========== =========== ===========
Net income (loss) per share:
Basic $(0.10) $(0.00) $(0.21) $0.02
=========== =========== =========== ===========
Diluted $(0.10) $(0.00) $(0.21) $0.02
=========== =========== =========== ===========
Shares used in computing net income (loss)
per share:
Basic 30,915,000 25,354,000 30,780,000 25,319,000
Diluted 30,915,000 25,354,000 30,780,000 25,646,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
IDENTIX INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
December 31,
-------------------------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (6,529,000) $ 394,000
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activities:
Depreciation 793,000 568,000
Amortization of intangibles 2,088,000 308,000
Amortization of deferred revenue (1,996,000) (1,612,000)
Equity interest in joint venture 55,000 158,000
Increase in inventory reserve 506,000 55,000
Write-off of capitalized software 154,000 -
Changes in assets and liabilities:
Accounts receivable 591,000 1,584,000
Inventories (643,000) 251,000
Prepaid expenses and other assets (73,000) (361,000)
Accounts payable (576,000) 610,000
Accrued compensation 14,000 100,000
Other accrued liabilities (155,000) (53,000)
Deferred revenue 2,452,000 2,197,000
------------- --------------
Net cash provided by (used for) operating activities (3,319,000) 4,199,000
------------- --------------
Cash flows used for investing activities:
Capital expenditure (1,054,000) (557,000)
Investment in joint venture - (100,000)
Additions to intangibles and other assets (289,000) (161,000)
------------- --------------
Net cash used for investing activities (1,343,000) (818,000)
------------- --------------
Cash flows provided by (used for) financing activities:
Borrowings under bank lines of credit 1,818,000 9,886,000
Payments under bank lines of credit (5,301,000) (12,642,000)
Principal payments on short-term notes (200,000) -
Proceeds from sale of common stock and warrants 14,985,000 1,040,000
------------- --------------
Net cash provided by (used for) financing activities 11,302,000 (1,716,000)
------------- --------------
Net increase in cash and cash equivalents 6,640,000 1,655,000
Cash and cash equivalents at beginning of period 3,013,000 753,000
------------- --------------
Cash and cash equivalents at end of period $ 9,653,000 $ 2,418,000
============= ==============
Supplemental disclosures of cashflow information
Cash paid during the period for interest $ 75,000 $ 230,000
Cash paid during the period for income taxes - $ 90,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<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 a
fair presentation of the financial position and results of operations for
the interim periods presented have been included. These consolidated
financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto for the fiscal year
ended June 30, 1999 included in the Company's Form 10-K. The results of
operations for the three and six months ended December 31, 1999 are not
necessarily indicative of results to be expected for the entire fiscal
year, which ends on June 30, 2000.
The consolidated financial statements include the accounts of Identix
Incorporated ("Identix" or the "Company") and its wholly owned
subsidiaries: ANADAC, Inc. ("ANADAC"), Identix Australia Pty Limited
("Identix Australia"), Biometric Applications and Technologies, Inc.
("BA&T") and Identicator Technology, Inc., ("Identicator Technology"). The
Company also owns a 50% interest in Sylvan/Identix Fingerprinting Centers,
L.L.C. ("SIFC")
2. Inventories
Inventories are stated at the lower of cost (determined on the first-in,
first-out method) or market and consisted of the following:
December 31, June 30,
1999 1999
------------ ------------
Purchased parts and materials $ 2,200,000 $ 1,713,000
Work-in-process 947,000 706,000
Finished goods, including spares 2,489,000 2,856,000
------------ ------------
$ 5,636,000 $ 5,275,000
============ ============
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, 1999, the Company
physically disposed of $154,000 of inventory, which had been provided for
at June 30, 1999. During the six months ended December 31, 1999, the
Company provided $439,000 to write-down to market certain Biometric
Security products and $67,000 for certain other products.
3. Net Income (Loss) Per Share
Basic earnings (loss) per share is computed using the weighted average
number of common shares outstanding during the period. Diluted earnings
(loss) per share is computed using the weighted average number of common
shares outstanding during the period after considering the effect of
dilutive common stock options and warrants under the treasury stock method.
The following is a reconciliation of the shares used in the calculation of
basic and diluted per share amounts for
<PAGE>
the periods presented:
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
------------ ------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income (loss) $(3,057,000) $ (56,000) $(6,529,000) $ 394,000
=========== =========== =========== ===========
Shares used in computing net income (loss) per share:
Basic 30,915,000 25,354,000 30,780,000 25,319,000
Dilutive effect of stock options and warrants - - - 327,000
----------- ----------- ----------- -----------
Diluted 30,915,000 25,354,000 30,780,000 25,646,000
=========== =========== =========== ===========
Net income (loss) per share:
Basic $ (0.10) $ (0.00) $ (0.21) $ 0.02
=========== =========== =========== ===========
Diluted $ (0.10) $ (0.00) $ (0.21) $ 0.02
=========== =========== =========== ===========
</TABLE>
Options and warrants outstanding during the three and six months ended
December 31, 1999 and the three months ended December 31, 1998 were not
included in the computation of diluted net loss per share as their effect
was anti-dilutive.
4. Comprehensive Income
Other comprehensive income (loss) includes charges or credits to equity
that are not the result of transactions with owners. Accumulated other
comprehensive income (loss) consisted of a foreign currency translation
adjustment. As the Company substantially liquidated its foreign operation
in February 1998, there has been no other comprehensive income (loss) from
that date.
5. Operating Segments Data
Revenues are attributed to the operating segment of the sales or service
organizations, and costs directly and indirectly incurred in generating
revenues are similarly assigned. The factors used to identify the operating
segments are: the nature of the product and service; the type of customer
for the product or service; the distribution method and the way in which
management has organized the Company for making operating decisions and
assessing performance. Management has organized the Company on product and
service lines rather than geographical or regulatory lines.
<TABLE>
<CAPTION>
For the three months ended For the six months ended
-------------------------- ------------------------
December 31, December 31,
----------- ------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Total revenues:
Biometric Imaging $ 5,124,000 $ 7,193,000 $10,608,000 $14,823,000
Biometric Security 2,335,000 1,705,000 3,889,000 3,824,000
Government Services 10,067,000 10,609,000 20,496,000 21,676,000
----------- ----------- ----------- -----------
$17,526,000 $19,507,000 $34,993,000 $40,323,000
=========== =========== =========== ===========
Net income (loss):
Biometric Imaging $ (455,000) $ 130,000 $ (996,000) $ 611,000
Biometric Security (2,920,000) (719,000) (6,171,000) (1,155,000)
Government Services 318 ,000 533,000 638,000 938,000
----------- ----------- ----------- -----------
$(3,057,000) $ (56,000) $(6,529,000) $ 394,000
=========== =========== =========== ===========
</TABLE>
<PAGE>
Identifiable assets: As of As of
December 31, 1999 June 30, 1999
----------------- ---------------
Biometric Imaging $ 16,740,000 $ 14,591,000
Biometric Security 40,476,000 37,556,000
Government Services 18,797,000 19,299,000
----------------- ---------------
$ 76,013,000 $ 71,446,000
================= ===============
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The statements in this report on Form 10-Q that relate to future plans,
events, or performance are forward-looking statements. Actual results, events
and performance may differ materially due to a variety of factors including the
factors described under "Risk Factors" below. The Company undertakes no
obligation to publicly update these forward-looking statements to reflect events
or circumstances that occur after the date hereof or to reflect the occurrence
of unanticipated events.
OVERVIEW
Identix designs, develops, manufactures and markets two categories of
products for security, anti-fraud, law enforcement and other applications: (i)
Biometric Security 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. The Company provides information technology, engineering and
management consulting services to private and public sector clients through its
wholly owned subsidiary ANADAC. ANADAC's services support the development,
installation, integration and operation of hardware and software technology
solutions, including Identix products, for a variety of client operating
environments.
On April 26, 1999, the Company acquired Identicator Technology, a privately
held developer of biometric fingerprint identification technology for
information technology applications. The acquisition was accounted for as a
purchase. Identicator Technology is now part of the Company's Biometric Security
Division and its operations have been relocated from San Bruno, California to
Sunnyvale, California.
On July 31, 1999, the Company closed the Kansas City office of BA&T and
terminated most of the staff.. Product development work in-process at BA&T was
transferred to other operations within the Company.
RESULTS OF OPERATIONS
Revenues
- --------
Revenues for the three and six month periods ended December 31, 1999 were
$17,526,000 and $34,993,000 compared to $19,507,000 and $40,323,000 for the same
periods in the prior fiscal year. The decrease in revenues of 10% and 13% for
the three and six month periods was due to decreases in both product and
services revenues.
Product revenues were $7,459,000 and $14,497,000 for the three and six
months ended December 31, 1999, compared to $8,898,000 and $18,647,000 for the
same periods in the prior fiscal year. For the three and six months ended
December 31, 1999, the decrease in product revenues of 16% and 22% respectively
was primarily due to a
<PAGE>
decrease in Biometric Imaging sales caused by certain governmental orders and
certain OEM orders for live-scan systems being delayed due to governmental
spending-approval authorization cycles. In addition, certain state and local
government agencies are delaying purchases of Biometric Imaging products while
such agencies are expanding or enhancing the capabilities of their communication
networks and, in some cases, their Automated Fingerprint Identification Systems
("AFIS"). This decrease was partially offset by revenues from the Company's
Information Technology products, which were $1,397,000 for the three months
ended December 31, 1999, a 77% increase over the previous quarter. The Company's
IT product revenues are derived through Identicator Technology, which was
acquired in April 1999, and therefore there were no revenues for these products
for the same periods in the prior fiscal year.
International sales accounted for $1,004,000 or 13% and $1,773,000 or 12%
of the Company's product revenues for the three and six months ended December
31, 1999, respectively, compared to $911,000 or 10% and $1,969,000 or 11% for
the same periods in the prior fiscal year. The increase in international sales
for the three months was primarily due to an increase in sales of Biometric
Security products to Latin America. The decrease in international sales for the
six months was due to new product transition issues during the first quarter
relating to Biometric Security-Physical Access products, which have
traditionally composed the majority of the Company's international revenue. The
Company expects international sales to continue to represent a significant
portion of product revenues, although the percentage may fluctuate from period
to period. Identix's international sales are predominately denominated in U.S.
dollars, and the Company actively monitors its foreign currency exchange
exposure and, if significant, will take action to reduce foreign exchange risk.
To date, the Company has not entered into any hedging transactions.
The Company did not have any product business customer that accounted for
more then 10% of total revenues for the three and six month periods ended
December 31, 1999 and six months ended December 31, 1998. During the three month
period ended December 31, 1998 the Company had one product business customer
that accounted for more than 10% of total revenues.
Services revenues were $10,067,000 and $20,496,000 for the three and six
month period ended December 31, 1999 compared to $10,609,000 and $21,676,000 for
the same periods in the prior fiscal year. The decrease in services revenues of
5% for the three and six months ended December 31, 1999 was primarily due to
decreased sales of third party products through the Company's General Services
Administration ("GSA") contract. The GSA contract allows U.S. Government
agencies to purchase the Company's products and services as well as third party
products and services at agreed upon prices and rates. The Company and the GSA
negotiate the prices and terms periodically or as new products or services are
added. The majority of the Company's services revenues are generated directly
from contracts with the U.S. government, principally the Department of Defense
("DOD"). For the three and six months ended December 31, 1999, revenues directly
from the DOD and from other U. S. government agencies accounted for 88% of the
Company's total services revenues compared to 91% for the same periods in the
prior fiscal year.
The Company's services business generates a significant amount of its
revenues from time-and-materials ("T&M") contracts and from firm fixed-price
("FFP") contracts. During the three and six months ended December 31, 1999, the
Company derived 81% of its services revenues from FFP and T&M contracts compared
to 81% and 82% for the same periods in the prior fiscal year. 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. T&M contracts
typically provide for payment of negotiated hourly rates for labor incurred plus
reimbursement of other allowable direct and indirect costs. The Company assumes
greater performance risk on FFP and T&M contracts and the failure to accurately
estimate ultimate costs or to control costs during performance of the work can
result in reduced profit margins or losses. There can be no assurance that the
Company's services business will not incur cost overruns for any FFP and T&M
contracts it is awarded.
The Company's services business also generates revenues from cost plus
fixed fee ("CPFF") contracts, which accounted for approximately 19% and 18% of
its services revenues for the three and six month periods ended
<PAGE>
December 31, 1999 compared to 19% and 18% for the same periods in the prior
fiscal year. CPFF contracts provide for the reimbursement of allowable costs,
including indirect costs plus a fee or profit. Revenues generated from contracts
with government agencies are subject to audit and subsequent adjustment by
negotiation between the Company and representatives of such government agencies.
ANADAC is currently undergoing such an audit by the Defense Contract Audit
Agency for the period from July 1, 1995 to June 30, 1997.
Gross Margin
- ------------
Gross margin on product revenues was 49% and 51 % for the three and six
month periods ended December 31, 1999, as compared to 51% for the same periods
in the prior fiscal year. The percentage decrease in gross margin for the three
months was primarily due to lower margins on sales of the Company's "end of
life" physical access control products as well as initial hardware only sales of
the Bio Security IT Division's fingerprint reader devices. During the six months
ended December 31, 1999, a charge was made against cost of product revenues of
$439,000 for a write down in inventory due to market price pressures. The
Company expects gross margins to fluctuate in future periods due to changes in
the product mix, the costs of components and the competition in the industry.
Gross margin on services revenues was 13% for the three and six months
ended December 31, 1999 as compared to 12% and 13%, respectively, for the same
periods in the prior fiscal year. The increase in gross margin for the three
months was primarily due to less revenues being generated from contracts that
include value added services from subcontractors which typically provide a lower
gross margin.
Research, Development and Engineering
- -------------------------------------
Research, development and engineering expenses were $1,757,000 or 24% and
$3,964,000 or 27% of product revenues for the three and six months ended
December 31, 1999 compared to $1,343,000 or 15% and $2,804,000 or 15% of product
revenues for the same periods in the prior fiscal year. The increase in
research, development and engineering expenses for the three and six month
periods was primarily due to increased costs associated with developing new IT
applicant solutions for the Bio Security Division. Management believes that
investment in research and development is critical to maintaining a strong
technological position in the industry and therefore expects research,
development and engineering expenses to continue to be a substantial expense in
future quarters.
Marketing and Selling
- ---------------------
Marketing and selling expenses were $3,773,000 or 22% and $6,697,000 or 19%
of total revenues for the three and six month periods ended December 31, 1999
compared to $2,684,000 or 14% and $5,146,000 or 13% of total revenues for the
same periods in the prior fiscal year. The increase in marketing and selling
expenses was primarily due to the inclusion of marketing and selling expenses of
Identicator Technology and the increased staffing and expenses to promote the
Company's new products, specifically, Biometric Security IT products such as the
DFR-300 and Bio-Logon software.
General and Administrative
- --------------------------
General and administrative expenses were $1,742,000 or 10% and $4,536,000
or 13% of total revenues for the three and six month periods ended December 31,
1999 compared to $1,598,000 or 8% and $3,379,000 or 8% of total revenues for the
same periods in the prior fiscal year. The increase for the three and six months
in general and administrative expenses was primarily due to the inclusion of
Identicator Technology's general and administrative costs and a write-off of
capitalized software of $154,000.
Amortization of Acquired Intangible Assets
- ------------------------------------------
Amortization of acquired intangible assets was $863,000 or 5% and $1,748,000 or
5% of total revenues for the three and six month periods ended December 31, 1999
compared to $41,000 or 0% and $87,000 or 0% of total
<PAGE>
revenues for the same periods in the prior fiscal year. The increase for the
three and six month periods was primarily due to the inclusion of amortization
of goodwill, core technology and assembled workforce recorded in connection with
the acquisition of Identicator Technology.
Interest and Other Income, net
- ------------------------------
For the three and six months ended December 31, 1999, interest and other
income was $192,000 and $373,000 compared to $25,000 and $55,000 for the same
periods in the prior fiscal year. The increase in interest and other income was
primarily due to an increase in interest income generated from investing the net
proceeds of $14,014,000 from the placement of common stock in July 1999 (see
Liquidity and Capital Resources).
Interest Expense
- ----------------
Interest expense was $30,000 and $77,000 for the three and six month
periods ended December 31, 1999 compared to $99,000 and $230,000 for the same
periods in the prior fiscal year. The decrease was due to lower borrowings under
the Company's lines of credit during both periods compared to the same periods
in the prior fiscal year.
The Identix Line of Credit was repaid in full on July 2, 1999. The weighted
average interest rate paid by ANADAC on borrowings under its line of credit (the
"ANADAC Line of Credit") during the three and six months ended December 31, 1999
was 8.4% and 8.2%, respectively.
Income Taxes
- ------------
The Company did not record any income tax provision for the three and six
month periods ended December 31, 1999 compared to a provision of $60,000 and
$90,000 for the same periods in the prior fiscal year which consisted of certain
State franchise taxes.
Equity Interest in Joint Venture
- --------------------------------
Equity interest in joint venture represents the Company's 50% share of the
results of SIFC. For the three and six months ended December 31, 1999, the
equity interest in the joint venture were losses of $73,000 and $55,000 compared
to losses of $85,000 and $159,000 for the same periods in the prior fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
In July 1999, the Company received net cash of $14,014,000 through a
private placement of its common stock. On July 2, 1999, the Identix Line of
Credit was repaid in full and certain other debts have been repaid since that
date.
The Company financed its operations during the six months ended December
31, 1999 primarily from the proceeds of the private placement and borrowings
under the ANADAC Line of Credit. As of December 31, 1999, the Company's
principal sources of liquidity consisted of $25,745,000 of working capital
including $9,653,000 in cash and cash equivalents, and amounts available for
future borrowings under the Identix Line of Credit and the ANADAC Line of
Credit.
The Identix Line of Credit is a $7,500,000 bank line of credit secured by
the personal property of Identix. Under the Identix Line of Credit, the Company
may borrow up to 80% of eligible accounts receivable. Amounts drawn bear
interest at the bank's prime rate of interest plus one half of one percent
(9.00% at December 31, 1999). The line of credit expires on February 23, 2000
and the Company expects to renew it prior to that date. There can be no
assurances that the Company will be able to renew such line of credit, or that
the terms of the new line of credit will be as favorable to the Company as those
currently in place. At December 31, 1999, there was no amount outstanding and
$4,986,000 was available under the Identix Line of Credit. The Identix Line of
Credit agreement
<PAGE>
contains financial and operating covenants, including restrictions on the
Company's ability to pay dividends on its common stock.
The ANADAC Line of Credit is a $6,000,000 bank line of credit secured by
ANADAC's accounts receivable and certain other assets. Amounts drawn bear
interest at the bank's prime rate of interest (8.50% at December 31, 1999). The
line of credit expires on March 31, 2000 and is subject to renewal. At December
31, 1999, $1,113,000 was outstanding and $4,736,000 was available under the
ANADAC Line of Credit. The ANADAC Line of Credit agreement contains certain
financial and operating covenants.
The Company used cash for operating activities of $3,319,000 during the six
months ended December 31, 1999. The primary use of cash was due to (i) the net
loss of $6,529,000 which includes amortization of intangibles of $2,088,000,
depreciation of $793,000 and an increase in the inventory reserve of $506,000,
(ii) a decrease in accounts payable of $576,000 and (iii) an increase in
inventory of $643,000, which was partially offset by a decrease in accounts
receivable of $591,000.
The Company used cash of $1,343,000 for investing activities during the six
months ended December 31, 1999 primarily for the purchase of property and
equipment of $1,054,000.
The Company generated cash of $11,302,000 from financing activities during
the six months ended December 31, 1999. Financing activities consisted of
proceeds from the sales of common stock and warrants of $14,985,000, net of
issuance costs, partially offset by net repayments of $3,483,000 against the
Company's lines of credit.
The Company did not have any material capital expenditure commitments as of
December 31, 1999.
The Company believes that the cash flow from operations, together with
existing working capital and the two bank lines of credit will be adequate to
fund the Company's cash requirements for at least the next twelve months.
However, the Company will need to renew the lines of credit and may require
additional equity or debt financing, to meet its working capital or capital
equipment needs. There can be no assurance that the Company will be able secure
extensions of the Identix or ANADAC Lines of Credit or that it will be able to
obtain such additional financing or that the terms of such financing will be
favorable to the Company.
IMPACT OF YEAR 2000
Identix has instituted a program to address 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's Year 2000 program consisted 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 all phases of the Year 2000 program. In phases 1, 2
and 4, Identix performed an evaluation of its products and information
technology infrastructure to determine their Year 2000 readiness. To the extent
that a Year 2000 issue was identified, Identix has solutions to remediate the
Year 2000 issues. Identix did not take remedial action for those products that
reached the end of their support life before the end of 1999. Phase 3 consisted
of notifying customers of Year 2000 issues with Identix products and providing
support to the customer's remediation efforts.
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.
<PAGE>
Identix has sent inquiries to its suppliers to determine their readiness
with respect to Year 2000 problems. As of December 31, 1999, substantially all
of Identix's critical suppliers have made written assurances to Identix that
they will be able to continue to supply Identix into the year 2000. A failure of
a key supplier to provide Identix with necessary components or services could
result in a significant 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 continues to develop contingency plans to address Year 2000
concerns as part of its Year 2000 program. As of December 31, 1999, Identix was
in the process of formulating and planning for the event the Company may
experience unforeseen Year 2000 problems 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 $60,000.
Leading up to, and following the transition into calendar Year 2000, the
Company experienced no significant internal Year 2000 problems with its'
information technology systems. Externally, certain of the Company's Biometric
Imaging customers required temporary remediation to ensure proper function of
the Company's products. These temporary actions will require a permanent
solution which the Company is in the process of defining. The costs of both
short-term and long-term remediation efforts have been approximately $50,000 and
are not expected to exceed $100,000 excluding costs associated with existing
internal personnel. 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.
Not withstanding the foregoing, the Year 2000 problem is pervasive and
complex and there are risks 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. Though the Company has
experienced no significant Year 2000 problems to date, there can be no assurance
that significant Year 2000 problems will not develop going forward. Identix's
products are used in systems that perform a number of critical functions. For
example, the biometric security products are used to verify individual identity
in a number of high-risk situations such as prisons and airports. The biometric
security products are also used to protect computer data and to verify
commercial transactions, such as the authorization of money transfers by bank
personnel. Although Identix believes that it should not have liability for a
system failure relating to the Year 2000, such a failure in these or other
critical applications could potentially require Identix to expend substantial
resources to assist in remedying 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 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 of
Identix, its customers and suppliers to ascertain Year 2000 readiness and
compliance issues and to become year 2000 compliant, and the reaction of
customers to Year 2000 issues. All of these factors make it impossible for
Identix to ensure that it has identified all Year 2000 issues that may affect it
or all costs or liabilities that it may be exposed to as a result of Year 2000
issues.
The information contained in this Form 10-Q related to the Year 2000
constitutes Year 2000 Readiness Disclosure for purposes of the Year 2000
Information and Readiness Disclosure Act. That act does not limit liability
under the securities laws.
RISK FACTORS
The Company's operations, financial performance, business and share price
may be affected by a number of factors, including the following, any of which
could cause actual results to vary materially from anticipated results or from
those expressed in any forward-looking statements made by the Company in this
quarterly report Form 10-Q
<PAGE>
or in other reports, press releases or other statements issued from time to
time.
All of our product revenues are derived from the sale of biometric products
---------------------------------------------------------------------------
and our business will not grow unless the market for biometric products expands
- -------------------------------------------------------------------------------
both domestically and internationally.
- -------------------------------------
Biometric products have not gained widespread commercial acceptance. We cannot
accurately predict the future growth rate, if any, or the ultimate size of the
biometric technology market. The expansion of the market for our products
depends on a number of factors including:
. the cost, performance and reliability of our products and products of
competitors
. customers' perception of the perceived benefit of these products
. public perceptions of the intrusiveness of these products and the manner
in which firms are using the fingerprint information collected.
. public perceptions regarding the confidentiality of private information
. customers' satisfaction with our products
. marketing efforts and publicity regarding these products.
Certain groups have publicly objected to the use of biometric products for
some applications on civil liberties grounds and legislation has been proposed
to regulate the use of biometric security products. Even if biometric markets
develop, our products may not gain wide market acceptance.
We face intense competition from other biometric identification providers as
----------------------------------------------------------------------------
well as traditional identification and security systems providers.
- -----------------------------------------------------------------
A significant number of established and startup companies are developing and
marketing software and hardware for fingerprint biometric security applications
that do or will compete directly with our biometric security products. Some of
these companies are developing semiconductor or optically based direct contact
fingerprint image capture devices. Other companies are developing and marketing
other methods of biometric identification such as retinal blood vessel or iris
pattern, hand geometry, voice and facial structure. If one or more of these
approaches were widely adopted, it would significantly reduce the potential
market for our products.
Our biometric security products also compete with non-biometric technologies
such as traditional key, card, surveillance systems and passwords.
Our biometric imaging products face intense competition from a number of
competitors who are actively engaged in developing and marketing livescan
products, including Digital Biometrics, Inc., Heimann Biometric Systems GmbH and
Printrak International Inc.
We expect competition to increase further if and when biometric products gain
widespread commercial acceptance and as other companies introduce products that
are competitively priced, that may have increased performance or functionality
or that incorporate technological advances not yet developed or implemented by
us. Some present and potential competitors have financial, marketing, research
resources substantially greater than ours. In order to compete effectively in
this environment, we must continually develop and market new and enhanced
products at competitive prices and must have the resources available to invest
in significant research and development activities.
In our services business, we face substantial competition from professional
---------------------------------------------------------------------------
services providers of all sizes in the government marketplace.
- -------------------------------------------------------------
ANADAC is increasingly being required to bid on firm fixed price and similar
contracts that result in greater performance risk to ANADAC. If ANADAC is not
able to maintain a competitive cost structure, support
<PAGE>
specialized market niches, retain highly qualified personnel or align with
technology leaders, we may lose our ability to compete successfully in the
services business.
The biometrics industry is characterized by rapid technological change and
--------------------------------------------------------------------------
evolving industry standards, which could render existing products obsolete.
- --------------------------------------------------------------------------
Our future success will depend upon our ability to develop and introduce a
variety of new products and product enhancements to address the changing,
sophisticated needs of the marketplace. Material delays in introducing new
products and enhancements or the failure to offer innovative products at
competitive prices may cause customers to forego purchases of our products and
purchase those of our competitors.
Our revenues and operating results often vary significantly from quarter to
---------------------------------------------------------------------------
quarter and may be negatively affected by a number of factors, including the
- ----------------------------------------------------------------------------
timing of large orders.
- ----------------------
Usually, most of our revenues in a quarter come from a small number of large
orders. Accordingly, revenues in a particular quarter depend on the timing and
size of major orders. The following are some other reasons why our financial
results may fluctuate from quarter to quarter:
. reduced demand for products caused by a competitor's price reductions or
introduction of new competitors or new or enhanced products
. changes in the mix of products and services we or our distributors sell
. cancellation, delays or contract amendments by government agency customers
. the lack of availability of government funds
. litigation costs
. expenses related to acquisitions
. other one-time financial charges
. the lack of availability or increase in cost of key components
. economic downturns domestically or internationally.
We also may reduce prices or increase spending in response to competition or
----------------------------------------------------------------------------
to pursue new market opportunities.
- ----------------------------------
Our Biometric Imaging products often have a lengthy sales cycle while the
customer evaluates and receives approvals for purchase. If after expending
significant funds and effort we fail to receive an order, a severe negative
impact on our financial results and stock price could result.
It is difficult to predict accurately the sales cycle of any large order for
any of our products. If we do not ship one or more large orders as forecasted
for a fiscal quarter, our total revenues and operating results for that quarter
could be materially and adversely affected.
Further, the lead-time for ordering parts and materials and building our
products can be many months. As a result, we must order parts and materials and
build our products based on forecasted demand. If demand for our products lags
significantly behind our forecasts, we may produce more products than we can
sell, which can result in cash flow problems and write-offs or write-downs of
obsolete inventory.
We derive a majority of our services revenue from government contracts, which
-----------------------------------------------------------------------------
are often non-standard, involve competitive bidding and may be subject to
- -------------------------------------------------------------------------
cancellation without penalty.
- ----------------------------
Government contracts frequently include provisions that are not standard in
private commercial transactions. For example, government contracts may include
bonding requirements and provisions permitting the purchasing agency to cancel
the contract without penalty in certain circumstances. As public agencies, our
prospective
<PAGE>
customers are also subject to public agency contract requirements that vary from
jurisdiction to jurisdiction. Some of these requirements may be onerous or
impossible to satisfy.
In addition, public agency contracts are frequently awarded only after formal
competitive bidding processes, which have been and may continue to be
protracted, and typically impose provisions that permit cancellation in the
event that funds are unavailable to the public agency. There is a risk that we
may not be awarded any of the contracts for which our products are bid or, if
awarded, that substantial delays or cancellations of purchases may follow as a
result of protests initiated by losing bidders. In addition, local government
agency contracts may be contingent upon availability of matching funds from
state or federal entities.
For the three and six months ended December 31, 1999, we derived approximately
88% of our services revenue directly from contracts relating to the Department
of Defense and other U.S. Government agencies. The loss of a material government
contract due to budget cuts or otherwise could have a severe negative impact on
our financial results and stock price.
For the three and six months ended December 31, 1999, we derived approximately
81% of our services revenue from time and materials contracts and firm-fixed-
price contracts. We assume certain performance risk on these contracts. If we
fail to estimate accurately ultimate costs or to control costs during
performance of the work, our profit margins may be reduced and we may suffer
losses. In addition, revenues generated from government contracts are subject to
audit and subsequent adjustment by negotiation with representatives of the
government agencies. ANADAC is currently undergoing such an audit by the Defense
Contract Audit Agency for the period from July 1, 1995 to June 30, 1997. While
the Company believes that the results of such audit will have no material effect
on the Company's profits, there can be no assurance that no adjustments will be
made and that, if made, such adjustments will not have a material effect on the
Company's business, financial condition and results of operation.
We rely on marketing and distribution partners to distribute our products and
-----------------------------------------------------------------------------
may be adversely affected if those parties do not actively promote our products
- -------------------------------------------------------------------------------
or pursue installations that use our equipment.
- ----------------------------------------------
A significant portion of our product revenues comes from sales to marketing
partners including OEMs, systems integrators, distributors and resellers. Some
of these relationships are formalized in agreements; however, the agreements are
often terminable with little or no notice and subject to periodic amendment. We
cannot control the amount and timing of resources that our marketing partners
devote to activities on our behalf.
We intend to continue to seek strategic relationships to distribute and sell
certain of our products. We, however, may not be able to negotiate acceptable
distribution relationships in the future and cannot predict whether current or
future distribution relationships will be successful.
We depend on products and services provided by International Technology
- -----------------------------------------------------------------------
Concepts, Inc. ("IT Concepts")
- ------------------------------
Our Biometric Security Division purchases certain complete biometric security
I.T. products, components of I.T. products and engineering services related to
the development of products from IT Concepts. If we were to lose IT Concepts as
a supplier of these products and engineering services, we would be required to
find alternative suppliers for the products and services or hire additional
engineering personnel to provide the services, which could delay shipment of
products to customers and the development of new technology and products. There
is a risk that we would not be able to find such personnel or suppliers at a
reasonable cost, or at all. Any delay in product development or shipment may
have a material adverse effect on our financial results and stock price.
Loss of sole or limited source suppliers may result in delays or additional
- ---------------------------------------------------------------------------
expenses.
- --------
We obtain certain components and complete products from a single source or a
limited group of suppliers. We do not have long-term agreements with any of our
suppliers. We will experience significant delays in manufacturing and shipping
of products to customers if we lose these sources or if supplies from these
sources are delayed.
<PAGE>
As a result, we may be required to incur additional development manufacturing
and other costs to establish alternative sources of supply. It may take several
months to locate alternative suppliers, if required, or to re-tool our products
to accommodate components from different suppliers. We cannot predict if we will
be able to obtain replacement components within the time frames we require at an
affordable cost, or at all. Any delays resulting from suppliers failing to
deliver components or products on a timely basis in sufficient quantities and of
sufficient quality or any significant increase in the price of components from
existing or alternative suppliers could have a severe negative impact on our
financial results and stock price.
The success of our strategic plan to pursue sales in international markets may
- ------------------------------------------------------------------------------
be limited by risks related to international trade and marketing.
- ----------------------------------------------------------------
For the three and six months ended December 31, 1999, we derived 13% and 12%,
respectively, of our product revenues from international sales. We currently
have offices in Australia, Singapore, Brazil, Britain and Switzerland. There is
a risk that we may not be able to market, sell and deliver our products in
foreign countries. Our product revenues attributable to international sales
declined by 36% in fiscal 1999 from fiscal 1998, mainly due to a decline in
sales resulting from economic instability in Asia.
In addition to the uncertainty as to our ability to maintain and expand our
international presence, there are certain risks inherent in foreign operations
and international markets, including:
. regional economic conditions
. delays in or prohibitions on exporting products resulting from export
restrictions for certain products and technologies, including "crime control"
products and encryption technology
. fluctuations in foreign currencies and the U.S. dollar
. loss of revenue, property and equipment from expropriation, nationalization,
war, insurrection, terrorism and other political risks
. the overlap of different tax structures
. seasonal reductions in business activity
. risks of increases in taxes and other government fees
. involuntary renegotiation of contracts with foreign governments.
In addition, foreign laws treat the protection of proprietary rights
differently from laws in the United States and may not protect our proprietary
rights to the same extent as U.S. laws.
We may need to raise additional debt or equity financing in the next twelve
- ---------------------------------------------------------------------------
months.
- ------
As of December 31, 1999, we had $25,745,000 in working capital, which included
$9,653,000 in cash and cash equivalents. In addition, we had $4,986,000
available under the Identix bank line of credit, which expires in February 23,
2000, and ANADAC had $4,736,000 available under the ANADAC Bank Line of Credit,
which expires on March31, 2000. In July 1999, the Company received net cash
proceeds of $14,014,000 through a private placement of its common stock.
However, we may need to raise additional debt or equity financing in the next 12
months. We may not be able to obtain additional equity or debt financing and if
successful in securing additional financing, we may not be able to do so on
terms that are not excessively dilutive to existing stockholders or less costly
than existing sources of debt financing. Failure to secure additional financing
on favorable terms could have a severe negative impact on our financial
performance and stock price.
One stockholder owns a significant portion of our stock and may delay or prevent
- --------------------------------------------------------------------------------
a change in control or adversely affect the stock price through sales in the
- ----------------------------------------------------------------------------
open market.
- -----------
In January 2000, the State of Wisconsin Investment Board acquired
approximately 12% of the Company's outstanding common stock. The concentration
of large percentages of ownership in any single shareholder may
<PAGE>
delay or prevent change in control of the Company. Additionally, the sale of a
significant number of our shares in the open market could adversely affect our
stock price.
We may experience unanticipated expenses and other problems related to Year 2000
- --------------------------------------------------------------------------------
issues.
- ------
Year 2000 problems are caused by computer systems that only use a two-digit
year value and, accordingly, will be subject to error or failure when the year
2000 arrives. We have a program for evaluating and addressing risks related to
the Year 2000 that is described under "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The Year 2000 problem is
pervasive and complex and there is a risk that we have not identified all of the
Year 2000 issues that may affect us or that our remedial efforts do not
adequately address identified Year 2000 problems. Our products are used in
systems that perform a number of critical functions. For example, the biometric
security products are used to verify individual identity in a number of high-
risk situations such as prisons and airports. The biometric security products
are also used to protect computer data and to verify commercial transactions,
such as the authorization of money transfers by bank personnel. Further,
biometric imaging products are used in law enforcement to automate the booking
process and used to screen applicants for various public programs. Although we
believe that we should not have liability for a system failure relating to the
Year 2000, any failure in these or other critical applications could potentially
require us to expend substantial resources to assist in remediating the failure
or result in litigation to ascertain liability or recover costs.
Our products are complex and may contain undetected or unresolved defects when
- ------------------------------------------------------------------------------
sold or may not meet customer's performance criteria.
- ----------------------------------------------------
Performance failure in our products may cause loss of market share, delay in
or loss of market acceptance, additional warranty expense or product recall, or
other contractual liabilities. The negative effects of any failure could be
exacerbated if the failure occurred in products that provide personal security,
secure sensitive computer data, authorize significant financial transactions or
perform other functions where a security breach could have significant
consequences.
If a product fails to meet performance criteria, we may delay recognizing
revenue associated with a product and face higher operating expenses during the
period required to correct the defects. There is a risk that for unforeseen
reasons we may be required to repair or replace a substantial number of products
in use or to reimburse customers for products that fail to work or meet strict
performance criteria. We carry product liability insurance, but existing
coverage may not be adequate to cover potential claims.
Failure by us to maintain the proprietary nature of our technology, products and
- --------------------------------------------------------------------------------
manufacturing processes would negatively impact our ability to compete
- ----------------------------------------------------------------------
effectively.
- -----------
We principally rely upon patent, copyright, trade secret and contract law to
establish and protect our proprietary rights. There is a risk that claims
allowed on any patents or trademarks we hold may not be broad enough to protect
our technology. In addition, our patents or trademarks may be challenged,
invalidated or circumvented and we cannot be certain that the rights granted
thereunder will provide competitive advantages to us. Moreover, any current or
future issued or licensed patents, trade secrets or know-how may not afford
sufficient protection against competitors with similar technologies or
processes, and the possibility exists that already issued patents or trademarks
may infringe upon or be designed around by others. In addition, there is a risk
that others may independently develop proprietary technologies and processes,
which are the same as, substantially equivalent or superior to ours, or become
available in the market at a lower price.
There is a risk that we have infringed or in the future will infringe patents
or trademarks owned by others, that we will need to acquire licenses under
patents or trademarks belonging to others for technology potentially useful or
necessary to us, and that licenses will not be available to us on acceptable
terms, if at all.
<PAGE>
We may have to litigate to enforce our patents or trademarks or to determine
the scope and validity of other parties' proprietary rights. Litigation could be
costly and divert management's attention. An adverse outcome in any litigation
may have a severe negative impact on our financial results and stock price. To
determine the priority of inventions, we may have to participate in interference
proceedings declared by the United States Patent and Trademark Office or
oppositions in foreign patent and trademark offices, which could result in
substantial cost to us and limitations on the scope or validity of our patents
or trademarks.
We also rely on trade secrets and proprietary know-how, which we seek to
protect by confidentiality agreements with our employees, consultants, service
providers and third parties. There is a risk that these agreements may be
breached, and that the remedies available to us may not be adequate. In
addition, our trade secrets and proprietary know-how may otherwise become known
to or be independently discovered by others.
If we fail to adequately manage growth of our business, it could have a severe
- ------------------------------------------------------------------------------
negative impact on our financial results or stock price.
- -------------------------------------------------------
We believe that in order to be successful we must grow rapidly. In order to do
so, we must expand, train and manage our employee base, particularly skilled
technical, marketing and management personnel. Rapid growth will also require an
increase in the level of responsibility for both existing and new management. In
addition, we will be required to implement and improve operational, financial
and management information procedures and controls. The management skills and
systems currently in place may not be adequate and we may not be able to manage
any significant growth we experience effectively.
We may encounter difficulties in acquiring and effectively integrating
- ----------------------------------------------------------------------
complementary assets and businesses.
- -----------------------------------
As part of our business strategy, we may acquire assets and businesses
principally relating to or complementary to our current operations. We acquired
Identicator Technology in fiscal 1999, one company in fiscal 1998 and two
companies in fiscal 1996. These and any other acquisitions by Identix are and
will be accompanied by the risks commonly encountered in acquisitions of
companies. These risks include, among other things:
. potential exposure to unknown liabilities of acquired companies
. higher than anticipated acquisition costs and expenses
. effects of costs and expenses of acquiring and integrating new businesses on
our operating results and financial condition
. the difficulty and expense of assimilating the operations and personnel of the
companies
. the potential disruption of our ongoing business
. diversion of management time and attention
. failure to maximize our financial and strategic position by the successful
incorporation of acquired technology
. the maintenance of uniform standards, controls, procedures and policies
. loss of key employees and customers as a result of changes in management
. the incurrence of amortization expenses
. possible dilution to our stockholders.
In addition, geographic distances may make integration of businesses more
difficult. We may not be successful in overcoming these risks or any other
problems encountered in connection with any acquisitions.
Loss of current senior executives and key technical, marketing and sales
- ------------------------------------------------------------------------
personnel would adversely affect our business.
- ---------------------------------------------
Our personnel may voluntarily terminate their relationship with us at any
time, and competition for qualified personnel, especially engineers, is intense.
The process of locating additional personnel with the combination of
<PAGE>
skills and attributes required to carry out our strategy could be lengthy,
costly and disruptive. We are dependent on the services of certain key
personnel, including the following:
. Randall C. Fowler, Chairman, CEO and founder of Identix, has approximately
thirty years of experience in the biometrics industry and is considered one of
the industry's pioneers. On December 21, 1999, Mr. Fowler announced his
intention to retire on March 31, 2000. The Company is actively searching for
Mr. Fowler's replacement. There can be no assurance that the Company will be
able to attract a highly skilled and motivated individual to succeed Mr.
Fowler as Chairman and CEO.
. James P. Scullion, President and Chief Financial Officer, and Daniel F. Maase,
Vice President, Biometric Imaging Division, have a combined total of 20 years
experience with Identix and have a substantial amount of acquired knowledge
regarding Identix and the biometrics industry generally and play a major role
in the execution of Identix's strategic plan.
. Oscar Pieper, Vice President, Business Development, has approximately thirty
years of experience in the biometrics industry and is considered one of the
industry's pioneers.
. Grant Evans, Vice President, Biometric Security Division, Information
Technology, has established relationships with major companies and plays a
central role in the company's marketing strategy.
. Yuri Khidekel, Vice President, Software, Biometric Security Division,
Information Technology, and Yury Shapiro, Vice President, Hardware, Biometric
Security Division, Information Technology, serve as key researchers and
developers and are responsible for Identicator Technology's research and
development activities.
. William Spence, Vice President, Biometric Security Division, Physical Access,
plays a major role in the execution of the strategic plan of this division.
If we lose the services of key personnel, or fail to replace the services of
key personnel who depart from the Company, we could experience a severe negative
impact on our financial results and stock price. In addition, there is intense
competition for highly qualified engineering and marketing personnel in the
Silicon Valley where the Company principally operates. The loss of the services
of any key engineering, marketing or other personnel or the failure of the
Company to attract, integrate, motivate and retain additional key employees
could have a material adverse effect on the Company's business, operating and
financial results and stock price.
Our business operations may be adversely affected in the event of an earthquake.
- -------------------------------------------------------------------------------
Our corporate headquarters and most of our research and development operations
are located in Silicon Valley in Northern California, a region known for seismic
activity. An earthquake or other significant natural disaster could have a
material adverse impact on our business, financial condition and operating
results.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk - The Company does not use derivative financial instruments
in its investment portfolio. The Company's investment portfolio is primarily
comprised of money market funds that mature within ninety days. The Company
places investments in instruments that meet high credit quality standards.
These securities are subject to interest rate risk, and could decline in value
if interest rates fluctuate. Due to the short duration and conservative nature
of the Company's investment portfolio, the Company does not expect any material
loss with respect to its investment portfolio.
<PAGE>
Foreign Currency Exchange Rate Risk - Certain of the Company's revenues, cost
of revenues and operating expenses are transacted in local currencies. As a
result, the Company's international results of operations are subject to foreign
exchange rate fluctuations. The Company does not currently hedge against foreign
currency rate fluctuations. Gains and losses from such fluctuations are not
material to the Company's consolidated results of operations.
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not party to any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders ("the Meeting") was held
at the Wyndham Garden Hotel, located at 1300 Chesapeake
Terrace, Sunnyvale, California 94089, at 2:00 PM, on
Thursday, October 28, 1999, pursuant to due notice.
(b) According to the certified list of stockholders which was
presented at the Meeting, there were 30,765,786 shares of
Stock of the Company outstanding and entitled to vote.
(c) There were present at the Meeting, in person or by proxy,
the holders of 24,942,178 shares of Stock of the Company,
representing 81% of the total votes eligible to be cast,
constituting a majority and more than a quorum of the
outstanding shares entitled to vote.
(d) All Board of Directors nominees referenced in Item 1 below
were elected at the Annual Meeting of Shareholders on
October 28, 1999.
(e) The matters were voted upon and the results of the voting
were as follows:
(1) The following seven persons were elected to the Board
of Directors:
Name Votes For Votes Withheld
---- --------- --------------
Randall C. Fowler 24,771,858 170,320
Randall Hawks, Jr. 24,834,533 107,645
Patrick H. Morton 24,842,008 100,170
Charles W. Richion 24,831,387 100,791
James P. Scullion 24,835,893 106,285
Fred U. Sutter 24,836,888 105,290
Larry J. Wells 24,840,658 101,520
(2) Ratification of Auditors:
FOR 24,781,564
AGAINST 50,720
ABSTAIN 109,894
BROKER NON-VOTE -
Item 6. Exhibits and Reports on Form 8-K.
22
<PAGE>
(a) Exhibits
10.30 Separation Agreement between Identix Incorporated and
Randall C. Fowler
27.1 Financial Data Schedule
During the three months ended December 31, 1999, no reports were filed on Form
8-K.
23
<PAGE>
IDENTIX INCORPORATED
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant, Identix Incorporated, a corporation
organized and existing under the laws of the State of Delaware, has duly caused
this report to be signed on its behalf by the undersigned thereunto duly
authorized, in the City of Sunnyvale, State of California, on February 11, 2000.
IDENTIX INCORPORATED
BY: /s/ James P. Scullion
--------------------------------------
James P. Scullion
President, Chief Operating Officer and Chief Financial
Officer
24
<PAGE>
EXHIBIT 10.30
SEPARATION AGREEMENT
This Separation Agreement (the "Agreement") is between Identix Incorporated
(the "Company"), and Randall C. Fowler ("Employee").
WHEREAS, Employee was employed by the Company;
WHEREAS, the Company and Employee have agreed that (i) Employee shall
retire and Employee's full-time employment relationship with the Company shall
terminate as of the date set forth herein, (ii) Employee and the Company shall
release each other from any claims arising from or related to the employment
relationship, and (iii) Employee shall continue to be involved with the Company
consistent with the terms herein.
NOW THEREFORE, in consideration of the mutual promises made herein and the
benefits provided pursuant to such promises, the Company and Employee (the
"Parties") hereby agree as follows:
1. Resignation. Employee hereby resigns and shall retire from his
-----------
full-time employment with the Company as of March 31, 2000 (the "Employment
Termination Date").
2. Consideration. As consideration for Employee entering into this
-------------
Agreement and agreeing to provide such ongoing services to the Company as the
Board of Directors may reasonably request through the Employment Termination
Date, the Company shall provide the following to Employee:
(a) Payment of Salary. The Company shall continue to pay Employee
-----------------
all base salary, accrued vacation and any and all other benefits due to
Employee through the Employment Termination Date.
(b) Salary Continuation and Other Benefits. From April 1, 2000
--------------------------------------
through March 31, 2001, Employee shall receive, as salary continuation pay,
his full base salary, less customary withholdings, payable on the Company's
typical payroll dates. Employee agrees that he will be available to act as a
consultant to the Company during the period of salary continuation payments.
The Company also agrees to pay the Employee's COBRA premium for Employee
and/or his dependant(s) medical insurance through the later of when Employee
reaches age 65 or, in the event of Employee's death, when Employee's spouse
reaches age 65 (the "Benefit Termination Date"); provided, however, that in
the event the Company's insurer will no longer accept COBRA premiums covering
Employee and/or his dependent(s), the Company then will pay an amount equal to
the last COBRA premium, on a monthly basis, directly to Employee through the
later of such dates, and the Company agrees to treat such premium payments as
a Company-provided benefit policy. The Company further agrees to pay through
the
<PAGE>
Benefit Termination Date the existing, ongoing insurance premium on the term
life insurance policy on Employee's life with a face value of $1,000,000, and
to follow Employee's instructions regarding designating who will be the
beneficiary under said policy. The Company shall provide to Employee a copy of
such policy. The Company shall provide to Employee annually on the renewal
date of such policy evidence of payment of the premium for and continued
effectiveness of such policy. Employee shall also be entitled to retain the
computer and facsimile machine previously provided by the Company for
Employee's home office. It is agreed that the salary and benefits payments
provided herein by the Company are conditioned upon Employee's compliance with
all provisions of this Agreement.
(c) Board of Directors. Employee hereby resigns as Chairman of the
------------------
Company's Board of Directors as of March 31, 2000; provided, however, that it
will be the prerogative of a majority of the Board of Directors to request
that Employee continue temporarily as Board Chairman beyond said date.
Employee agrees not to seek renomination as a Director beyond the end of
Employee's current term, unless renominated by a majority of the Company's
Board of Directors.
(d) Stock Option Vesting. The stock options previously granted to
--------------------
Employee shall continue to vest through the period salary continuation
payments are paid pursuant to Section 2(b), at which time Employee shall be
entitled to exercise those vested options pursuant to the terms of the
applicable stock option agreements.
(e) No Other Benefits. Except as other specifically provided
-----------------
herein, Employee agrees that all employee benefits shall cease as of the
Employment Termination Date.
(f) Non-Solicitation. Payment of all benefits hereunder shall be
----------------
contingent on Employee not soliciting for hire any employees of the Company
through March 31, 2001.
3. Employee Release of Claims. Employee agrees that the foregoing
--------------------------
consideration represents settlement in full of all outstanding obligations owed
to Employee by the Company. Employee, on behalf of Employee and his heirs,
executors and assigns, hereby fully and forever releases the Company and its
officers, directors, employees, investors, stockholders, administrators,
predecessor, subsidiary and successor corporations, and assigns, of and from any
claim, duty, obligation or cause of action relating to any matters of any kind,
whether presently known or unknown, suspected or unsuspected, that any of them
may possess arising from any omissions, acts or facts that have occurred up
until and including the effective date of this Agreement including, without
limitation,
(a) any and all claims relating to or arising from Employee's
employment relationship with the Company and the termination of that
relationship;
2
<PAGE>
(b) any and all claims relating to, or arising from, Employee's
right to purchase, or actual purchase of shares of stock of the Company;
(c) any and all claims for wrongful discharge of employment; breach
of contract, both express and implied; breach of a covenant of good faith and
fair dealing, both express and implied; negligent or intentional infliction of
emotional distress; negligent or intentional misrepresentation; negligent or
intentional interference with contract or prospective economic advantage; and
defamation;
(d) any and all claims for violation of any federal, state or
municipal statute, including, but not limited to, Title VII of the Civil
Rights Act of 1964, the Civil Rights Act of 1991, the Age Discrimination in
Employment Act of 1967, the Americans with Disabilities Act of 1990, and the
California Fair Employment and Housing Act;
(e) any and all claims arising out of any other laws and
regulations relating to employment or employment discrimination;
(f) any rights he may have under the Age Discrimination in
Employment Act of 1967 ("ADEA"). Employee further acknowledges that he has
been advised by this writing that (i) he should consult with an attorney prior
-----
to executing this Agreement; (ii) he has at least twenty-one (21) days within
which to consider this Agreement; (iii) he has at least seven (7) days
following the execution of this Agreement by the parties to revoke the
Agreement; and (iv) this Agreement shall not be effective until the revocation
period has expired; and
(g) any and all claims for attorneys' fees and costs.
The Company and Employee agree that the release set forth in this section shall
be and remain in effect in all respects as a complete general release as to the
matters released. This release does not extend to any obligations incurred
under this Agreement.
4. Company Release of Claims. The Company, on behalf of itself and its
-------------------------
successors and assigns, hereby fully and forever releases Employee and his
heirs, executors and assigns, of and from any claim, duty, obligation or cause
of action relating to any matters of any kind, whether presently known or
unknown, suspected or unsuspected, that any of them may possess arising from any
omissions, acts or facts that have occurred up until and including the effective
date of this Agreement including, without limitation,
(a) any and all claims relating to or arising from Employee's
employment relationship with the Company and the termination of that
relationship;
(b) any and all claims relating to, or arising from, Employee's
right to purchase, or actual purchase of shares of stock of the Company;
3
<PAGE>
(c) breach of contract, both expressed and implied; breach of
covenant of good faith and fair dealing, both expressed and implied; negligent
or intentional infliction of emotional distress; negligent or intentional
misrepresentation; negligent or intentional interference with contract or
prospective business advantage; and defamation;
(d) any and all claims for attorneys' fees and costs.
The Company and Employee agree that the release set forth in this section shall
be and remain in effect in all respects as a complete general release as to the
matters released. This release does not extend to any obligations incurred
under this Agreement.
5. Section 1542. As to those matters released in Sections 3 and 4 above,
------------
Employee and the Company each hereby expressly waive and relinquish any and all
rights or benefits that he or it may now have, or in the future may have, under
the terms of Section 1542 of the California Civil Code and any similar law of
any state or territory of the United States. Such section provides as follows:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES
NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
RELEASE WHICH, IF KNOWN BY HIM, MUST HAVE MATERIALLY AFFECTED HIS
SETTLEMENT WITH THE DEBTOR."
6. Tax Consequences. The Company makes no representations or
----------------
warranties with respect to the tax consequences of the payment of any sums to
Employee under the terms of this Agreement. Employee agrees and understands
that he is responsible for payment, if any, of local, state and/or federal
taxes on the sums paid hereunder by the Company and any penalties or
assessments thereon.
7. No Admission of Liability. No action taken by the Parties hereto,
-------------------------
or either of them, either previously or in connection with this Agreement
shall be deemed or construed to be (a) an admission of the truth or falsity of
any claims heretofore made or (b) an acknowledgment or admission by either
party of any fault or liability whatsoever to the other party or to any third
party.
8. Costs. The Parties shall each bear their own costs, attorneys' fees
-----
and other fees incurred in connection with this Agreement.
9. Publicity. The Parties each agree not to disparage the other. They
---------
further agree that the Company may issue the press release attached hereto as
Exhibit A immediately upon the signing of this Agreement.
4
<PAGE>
10. Arbitration and Equitable Relief.
--------------------------------
(a) The parties hereto agree that any dispute or controversy
arising out of, relating to, or in connection with this Agreement, or the
interpretation, validity, construction, performance, breach, or termination
thereof shall be settled by arbitration to be held in Santa Clara County,
California, in accordance with the National Rules for the Resolution of
Employment Disputes then in effect of the American Arbitration Association
(the "Rules"). The arbitrator may grant injunctions or other relief in such
dispute or controversy. The decision of the arbitrator shall be final,
conclusive and binding on the parties to the arbitration. Judgment may be
entered on the arbitrator's decision in any court having jurisdiction.
(b) The arbitrator shall apply California law to the merits of any
dispute or claim, without reference to rules of conflict of law. The
arbitration proceedings shall be governed by federal arbitration law and by
the Rules, without reference to state arbitration law. The parties hereto
hereby expressly consent to the personal jurisdiction of the state and federal
courts located in California for any action or proceeding arising from or
relating to this Agreement and/or relating to any arbitration in which the
parties are participants.
(c) The Company and Employee shall each pay one-half of the costs
and expenses of such arbitration, and shall separately pay its counsel fees
and expenses.
(d) THE PARTIES HERETO HAVE READ AND UNDERSTAND SECTION 10, WHICH
DISCUSSES ARBITRATION. THE PARTIES HERETO UNDERSTAND THAT BY SIGNING THIS
AGREEMENT, THEY AGREE TO SUBMIT ANY FUTURE CLAIMS ARISING OUT OF, RELATING TO,
OR IN CONNECTION WITH THIS AGREEMENT, OR THE INTERPRETATION, VALIDITY,
CONSTRUCTION, PERFORMANCE, BREACH, OR TERMINATION THEREOF TO BINDING
ARBITRATION, AND THAT THIS ARBITRATION CLAUSE CONSTITUTES A WAIVER OF THEIR
RIGHT TO A JURY TRIAL AND RELATES TO THE RESOLUTION OF ALL DISPUTES RELATING
TO ALL ASPECTS OF THE EMPLOYER/EMPLOYEE RELATIONSHIP, INCLUDING BUT NOT
LIMITED TO, THE FOLLOWING CLAIMS:
(i) ANY AND ALL CLAIMS FOR WRONGFUL DISCHARGE OF EMPLOYMENT;
BREACH OF CONTRACT, BOTH EXPRESS AND IMPLIED; BREACH OF THE COVENANT OF GOOD
FAITH AND FAIR DEALING, BOTH EXPRESS AND IMPLIED; NEGLIGENT OR INTENTIONAL
INFLICTION OF EMOTIONAL DISTRESS; NEGLIGENT OR INTENTIONAL MISREPRESENTATION;
NEGLIGENT OR INTENTIONAL INTERFERENCE WITH CONTRACT OR PROSPECTIVE ECONOMIC
ADVANTAGE; AND DEFAMATION;
5
<PAGE>
(ii) ANY AND ALL CLAIMS FOR VIOLATION OF ANY FEDERAL STATE OR
MUNICIPAL STATUTE, INCLUDING, BUT NOT LIMITED TO, TITLE VII OF THE CIVIL
RIGHTS ACT OF 1964, THE CIVIL RIGHTS ACT OF 1991, THE AGE DISCRIMINATION IN
EMPLOYMENT ACT OF 1967, THE AMERICANS WITH DISABILITIES ACT OF 1990, THE FAIR
LABOR STANDARDS ACT, THE CALIFORNIA FAIR EMPLOYMENT AND HOUSING ACT, AND LABOR
CODE SECTION 201, et seq.; AND
(iii) ANY AND ALL CLAIMS ARISING OUT OF ANY OTHER LAWS AND
REGULATIONS RELATING TO EMPLOYMENT OR EMPLOYMENT DISCRIMINATION.
11. Authority. The Company represents and warrants that the
---------
undersigned has the authority to act on behalf of the Company and to bind the
Company and all who may claim through it to the terms and conditions of this
Agreement. Employee represents and warrants that he has the capacity to act on
his own behalf and on behalf of all who might claim through Employee to bind
them to the terms and conditions of this Agreement.
12. No Representations. Each party represents that it has had the
------------------
opportunity to consult with an attorney, and has carefully read and
understands the scope and effect of the provisions of this Agreement. Neither
party has relied upon any representations or statements made by the other
party hereto which are not specifically set forth in this Agreement.
13. Severability. In the event that any provision hereof becomes or is
------------
declared by a court of competent jurisdiction to be illegal, unenforceable or
void, this Agreement shall continue in full force and effect without said
provision.
14. Entire Agreement: Binding on Successors. This Agreement represents
---------------------------------------
the entire agreement and understanding between the Company and Employee
concerning Employee's separation from the Company, and supersedes and replaces
any and all prior agreements and understandings concerning Employee's
relationship with the Company and compensation from the Company. The terms of
this Agreement shall inure to the benefit of and be binding on the respective
executors, administrators, heirs, successors and assigns of the parties.
15. No Oral Modification. This Agreement may only be amended in writing
--------------------
signed by Employee and the Chairman of the Compensation Committee of the Board
of the Company.
16. Effective Date. This Agreement is effective seven days after it has
--------------
been signed by both parties, except that the Company is authorized to issue
the press release attached as Exhibit A immediately upon signing.
6
<PAGE>
17. Counterparts. This Agreement may be executed in counterparts, and
------------
each counterpart shall have the same force and effect as an original and shall
constitute an effective, binding agreement on the part of each of the
undersigned.
18. Voluntarily Execution of Agreement. This Agreement is executed
----------------------------------
voluntarily and without any duress or undue influence on the part or behalf of
the Parties hereto, with the full intent of releasing all claims. The Parties
acknowledge that:
(a) They have read this Agreement;
(b) They have been represented in the preparation, negotiation,
and execution of this Agreement by legal counsel of their own choice or that
they have voluntarily declined to seek such counsel;
(c) They understand the terms and consequences of this Agreement
and of the releases it contains;
(d) They are fully aware of the legal and binding effect of this
Agreement.
Identix Incorporated Employee
By: /s/ Larry J. Wells By: /s/ Randall C. Fowler
--------------------------- --------------------------
Name: Larry J. Wells Name: Randall C. Fowler
------------------------- ------------------------
Title: Director Date: December 20,1999
------------------------ ------------------------
Date: December 20, 1999
--------------------------
7
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE IS INCLUDED IN THIS FORM 10-Q IN COMPLIANCE WITH
THE COMMISSIONS RULES RELATING TO THE EDGAR FILING PROCESS. THIS SCHEDULE
CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE
SHEET AS OF DECEMBER 31, 1999 AND THE CONSOLIDATED STATEMENT OF OPERATIONS
DATED AS OF THE SIX MONTH PERIOD ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND ACCOMPANYING NOTES.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 9,653,000
<SECURITIES> 0
<RECEIVABLES> 26,197,000
<ALLOWANCES> 985,000
<INVENTORY> 5,636,000
<CURRENT-ASSETS> 41,583,000
<PP&E> 2,402,000<F1>
<DEPRECIATION> 0<F2>
<TOTAL-ASSETS> 76,013,000
<CURRENT-LIABILITIES> 15,838,000
<BONDS> 0
0
0
<COMMON> 109,610,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 76,013,000
<SALES> 34,993,000
<TOTAL-REVENUES> 14,497,000
<CGS> 7,083,000
<TOTAL-COSTS> 41,763,000
<OTHER-EXPENSES> 0<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 77,000
<INCOME-PRETAX> (6,529,000)<F3>
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,529,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,529,000)
<EPS-BASIC> (0.21)
<EPS-DILUTED> (0.21)
<FN>
<F1>Property, plant and equipment is shown net of accumulated depreciation.
<F2>Not shown separately when reporting form 10-Q.
<F3>Includes equity interest in joint venture net of tax.
</FN>
</TABLE>
