<PAGE>
PROSPECTUS
3,550,000 SHARES
[LOGO]
COMMON STOCK
----------------
Of the 3,550,000 shares of Common Stock offered hereby, 2,250,000 shares are
being sold by Mitek Systems, Inc. (the "Company") and 1,300,000 shares are being
sold by the Selling Stockholders. See "Principal and Selling Stockholders." The
Company will not receive any of the proceeds from the sale of shares by the
Selling Stockholders.
The Common Stock is quoted on the Nasdaq SmallCap Market under the symbol
"MITK." On November 20, 1996, the last sale price for the Common Stock, as
reported on the Nasdaq SmallCap Market was $2.625 per share.
------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" AT PAGE 5.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<S> <C> <C> <C> <C>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS (1) COMPANY (2) STOCKHOLDERS (3)
Per Share........... $2.25 $0.17 $2.08 $2.08
Total (4)........... $7,987,500 $603,500 $4,680,000 $2,704,000
</TABLE>
(1) Excludes the value of warrants to purchase an aggregate of 146,250 shares of
Common Stock to be issued to the Underwriters. The Company and the Selling
Stockholders have agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933. See
"Underwriting."
(2) Before deducting offering expenses estimated at $540,000, including a 1%
non-accountable expense allowance payable to Cruttenden Roth Incorporated,
which are payable by the Company.
(3) A Selling Stockholder has agreed to pay $25,000 towards offering expenses
incurred in connetion with the sale of its shares of Common Stock.
(4) A Selling Stockholder has granted the Underwriters an option, exercisable
within 45 days of the date hereof, to purchase up to an additional 532,500
shares of Common Stock solely to cover overallotments, if any. If such
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions, Proceeds to Company and Proceeds to Selling
Stockholders will be $9,185,625, $694,025, $4,680,000, and $3,811,600,
respectively. See "Underwriting."
The shares of Common Stock are offered by the Underwriters subject to
receipt and acceptance of such shares by them. The Underwriters reserve the
right to reject any order in whole or in part. It is expected that certificates
for such shares will be ready for delivery on or about November 26, 1996.
------------------------
UNTERBERG HARRIS CRUTTENDEN ROTH
INCORPORATED
November 21, 1996
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ SMALLCAP MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING
TRANSACTIONS IN THE COMPANY'S COMMON STOCK ON THE NASDAQ SMALL CAP AND IN THE
OVER-THE-COUNTER MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES
EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING "RISK FACTORS" AND THE CONSOLIDATED FINANCIAL STATEMENTS
AND NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. THIS PROSPECTUS
CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934.
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN SUCH
FORWARD-LOOKING STATEMENTS AS A RESULT OF THE RISKS DESCRIBED IN THIS
PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION CONTAINED IN THIS
PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVERALLOTMENT OPTION. SEE
"UNDERWRITING."
THE COMPANY
The Company develops and markets automatic data recognition ("ADR") products
which enable the automation of costly, labor intensive business functions such
as check and remittance processing, forms processing and order entry. The
Company's products incorporate proprietary neural network software technology
for the recognition and conversion of hand printed or machine generated
characters into digital data. Neural networks are powerful tools for pattern
recognition applications consisting of sets of mathematical equations with
parameters that self-adjust to "learn" various forms and patterns. The Company's
software products are currently used to process sales orders, checks and other
financial documents, tax forms, credit card drafts, time sheets, and insurance
applications.
Despite significant advances in information technology, vast amounts of data
continue to be created on paper through hand or machine printing. In 1995,
according to industry reports, over 60 billion checks were written in the United
States alone and the volume of checks processed is expected to grow between 4%
and 5% for 1996. In the United States, approximately 600,000 people are engaged
in data entry of information contained in hand printed and machine generated
documents such as processing of checks, medical forms, remittances, and payroll
documents. Moreover, manual data entry functions are generally highly repetitive
and labor intensive tasks. As a result, enterprises with large data entry
requirements have long sought to automate portions of the data entry process
with the emphasis placed on accuracy and consistency.
Leveraging its core intelligent character recognition ("ICR") technology,
the Company offers a family of software products that it believes offers the
highest accuracy commercially available for the recognition of hand printed
characters. The Company's ADR products incorporate the Company's ICR software
engine, QuickStrokes API, which has been developed with a flexible underlying
architecture to respond to customer demands for additional features and
functionality. The Company markets its products and services primarily through
its direct sales organization, primarily to key systems integrators and
designers of large high performance document processing systems. The Company
sells to original equipment manufacturers ("OEMs"), such as BancTec
Technologies, Inc. ("BancTec"), NCR Corporation ("NCR"), Bull Corporation of
North America ("ABC Bull"), Unisys and IA Corporation of America ("IA
Corporation"), system integrators such as SHL Systemhouse, Inc. (a subsidiary of
MCI Communications Corporation) and Wheb Systems, Inc. ("Wheb"), and value-added
resellers ("VARs") such as One Button Operating System, Inc., Comprehensive
Business Solutions, Inc. and Moon Sung Systems.
Elements of the Company's business strategy include: strengthening its
technological leadership in ICR technology, expansion of OEM channels of
distribution, penetration of vertical markets, building a recurring revenue base
through maintenance contracts and expansion of the Company's sales and marketing
capability. The Company has begun to address vertical end-user markets through
the introduction of the Premier Forms Processor product ("PFP"). The PFP
incorporates the Company's core ICR technology in an application designed to be
marketed directly to end users in a broad variety of industries which require
high volume automated data entry.
Prior to March 1995, the Company was engaged in the business of modifying
computer systems for electronic security under the TEMPEST name, principally for
the defense industry. In March 1995, the Company sold the assets of its TEMPEST
business and discontinued TEMPEST operations.
3
<PAGE>
The Company was incorporated in Delaware in 1986, its principal executive
offices are located at 10070 Carroll Canyon Road, San Diego, California 92131,
and its telephone number is (619) 635-5900. The Company's Internet address is
http:\\www.miteksys.com.
THE OFFERING
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<S> <C>
Common Stock offered hereby:
By the Company................................... 2,250,000 Shares
By the Selling Stockholders...................... 1,300,000 Shares
Common Stock to be outstanding after the
offering.......................................... 10,032,971 Shares (1)
Use of proceeds.................................... General corporate purposes, including
working capital, capital expenditures
related to research and development,
and expansion of sales and marketing
capabilities. See "Use of Proceeds."
Nasdaq SmallCap Market symbol...................... MITK
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
------------------------------------------
1993 1994 1995 1996
--------- --------- --------- ---------
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
<S> <C> <C> <C> <C>
Net sales:
ADR................................................ $ 2,894 $ 4,674 $ 5,079 $ 8,154
TEMPEST (2)........................................ 10,171 5,489 1,554 --
--------- --------- --------- ---------
Total net sales.................................. 13,065 10,163 6,633 8,154
Gross margin......................................... 3,494 3,506 3,303 5,371
Operating income (loss).............................. (908) (1,280) (273) 1,366
Net income (loss).................................... $ (902) $ (1,058) $ (69) $ 1,229
Net income (loss) per share.......................... $ (.13) $ (.15) $ (.01) $ .15
Weighted average shares outstanding (3).............. 6,866 6,877 7,286 8,203
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
-------------------------
ACTUAL AS ADJUSTED(4)
--------- --------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash................................................................................ $ 210 $ 4,350
Working capital..................................................................... 1,884 6,024
Total assets........................................................................ 3,762 7,902
Long-term liabilities............................................................... 6 6
Total stockholders' equity.......................................................... $ 2,652 $ 6,792
</TABLE>
- ------------------------------
(1) As of September 30, 1996, does not include (i) up to 146,250 shares
issuable upon exercise of warrants to be granted to the Underwriters upon
completion of this offering (the "Underwriters' Warrant"), (ii) up to
215,000 shares issuable upon the exercise of additional outstanding
warrants and (iii) 463,041 shares issuable upon the exercise of options
granted under the Company's 1986 Stock Option Plan, 1988 Nonqualified Stock
Option Plan and 1996 Stock Option Plan (the "Option Plans") at a weighted
average per share exercise price of $1.21.
(2) In March 1995, the Company sold the assets of its TEMPEST business and
discontinued TEMPEST operations.
(3) For an explanation of the number of shares used to compute net income per
share, see Note 1 of the Notes to the Consolidated Financial Statements.
(4) As adjusted to reflect the sale of 2,250,000 shares of Common Stock offered
by the Company hereby at a public offering price of $2.25 per share and the
application of the estimated net proceeds therefrom. See "Use of Proceeds."
4
<PAGE>
RISK FACTORS
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. IN ADDITION
TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING FACTORS SHOULD BE
CONSIDERED CAREFULLY BEFORE PURCHASING ANY OF THE COMMON STOCK OFFERED HEREBY.
PRODUCT CONCENTRATION
The Company currently derives substantially all of its product revenues from
licenses and sales of products incorporating its ADR technology. As a result,
factors adversely affecting the pricing of or demand for the Company's ADR
products and services, such as competition from other products or technologies,
any decline in the demand for automated entry of hand printed characters,
negative publicity or obsolescence of the hardware or software environments in
which the Company's products operate could have a material adverse effect on the
Company's business, operating results and financial condition. The Company's
financial performance will continue to depend, in significant part, on the
successful development, introduction and customer acceptance of new and enhanced
versions of the Company's ADR products and services. There can be no assurance
that the Company will continue to be successful in developing and marketing its
ADR products and related services. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business -- Products."
DEPENDENCE ON EMERGING MARKETS FOR ADR PRODUCTS
The market for ADR products is relatively new, intensely competitive, highly
fragmented, underdeveloped, and rapidly evolving. Marketing and sales techniques
in the ADR marketplace, as well as the bases for effective competition, are not
well established. There can be no assurance that the market for ADR products
will develop or that, if it does develop, organizations will adopt the Company's
products or services. The Company has spent, and intends to continue to spend,
significant resources educating potential customers about the benefits of its
products. However, there can be no assurance that such expenditures will enable
the Company's products to achieve further market acceptance, and if the ADR
market fails to develop or develops more slowly than the Company anticipates,
the Company's business, operating results and financial condition would be
materially adversely affected. See "Business -- Industry Background" and "--
Competition."
NEW PRODUCTS AND CHANGING TECHNOLOGIES
The markets for products incorporating ADR technology are characterized by
rapidly advancing technology and rapidly changing user preferences. The
Company's ability to compete effectively with its ADR product line will depend
upon its ability to meet changing market conditions and develop enhancements to
its products on a timely basis in order to maintain its competitive advantage.
In addition, continued growth will ultimately depend upon the Company's ability
to develop additional technologies and attract strategic alliances for related
or separate product lines. There can be no assurance that the Company will be
successful in developing and marketing product enhancements and additional
technologies, that the Company will not experience difficulties that could delay
or prevent the successful development, introduction and marketing of these
products, or that its new products and product enhancements will adequately meet
the requirements of the marketplace, will be of acceptable quality, or will
achieve market acceptance. For example, the Company's recently-introduced PFP
product is designed to address certain vertical markets, many of which have not
in the past made extensive use of ADR technologies. The Company intends to make
significant investments in further development and marketing relating to its PFP
product. Should the markets fail to develop, or should the Company's new
products, including its PFP product, fail to gain market acceptance, the
Company's business, operating results and financial condition would be
materially adversely affected. If the Company is unable, for technological or
other reasons, to develop and introduce products in a timely manner in response
to changing market conditions or customer requirements, the Company's business,
operating results and financial condition will be materially and adversely
affected. Moreover, from time to time, the Company or its competitors may
announce new products or technologies
5
<PAGE>
that have the potential to replace the Company's existing product offerings.
There can be no assurance that the announcement of new product offerings will
not cause customers to defer purchases of existing Company products, which could
adversely affect the Company's results of operations. See "Business -- Products"
and "-- Technology."
RECENT LOSSES
The Company incurred losses of $902,000, $1,058,000 and $69,000 in fiscal
1993, 1994 and 1995, respectively. It has only recently begun to operate
profitably. There can be no assurance that this trend in increasing
profitability will continue or that the Company will not incur substantial
losses in the future. See "Selected Consolidated Financial Data."
EXPANSION OF SALES AND DISTRIBUTION CHANNELS
The Company has historically sold its ADR products to OEMs in the form of
recognition engines to be incorporated into such OEMs' products. The OEM has
then traditionally performed much of the marketing and distribution of the
Company's products. With the introduction of the Company's PFP product line,
which is intended to be sold principally to end users, the Company has
substantially increased and plans substantial future increases in expenditures
to build and maintain a global marketing, sales and customer support
infrastructure. Additionally, the Company intends to increase both its product
offerings and target markets through marketing, sales and distribution and
development of relationships with other companies. The Company intends to
increase the number of these strategic relationships as well as form alliances
with systems integrators, VARs and consultants. Whether the Company can
successfully generate its own sales leads, introduce new products and enter new
markets will depend on its ability to expand its direct sales and support
services, expand its indirect distribution channel, and increase its
relationships and alliances with other companies. As a result of its planned
expansion, the Company expects to incur significant costs to build such
corporate infrastructure, and any failure to achieve growth in revenues in
excess of increased expenses would have a material adverse effect on the
Company's business, operating results and financial condition. There can be no
assurance that the Company will be able to successfully expand its direct sales
and support services force, expand its indirect distribution channel, or
establish or maintain successful third party relationships. Any failure to do so
could have a material adverse effect on the Company's business, operating
results and financial condition. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business -- Sales and
Marketing."
CUSTOMER CONCENTRATION; DEPENDENCE ON KEY CUSTOMERS
Because the Company currently markets its products principally to OEMs and
systems integrators, the Company is dependent upon a few significant customers
for the majority of its sales. In the fiscal year ended September 30, 1996,
three customers, BancTec, TCSI Corporation ("TCSI") and Wheb, accounted for an
aggregate of 42% of the Company's total sales. The Company currently has no long
term contracts with these or other significant customers. Thus, there can be no
assurance that the Company's significant customers will continue to purchase
products from the Company and any reductions in orders from any of the Company's
significant customers could have a material adverse effect upon the Company's
business, operating results and financial condition. The Company recently
received notice from TCSI that TCSI will not be placing any additional orders
for the Company's products in the forseeable future due to a change in the
direction of TCSI's business, and no assurance can be given that the Company
will be able to replace the revenues it might have received from such orders.
While the Company intends to expand the direct marketing of its products, no
assurances can be given with respect to the speed or success of such efforts.
Consequently, the Company anticipates that it may continue to be dependent upon
a select number of significant customers for a substantial portion of its
revenues in the near future. As a result, any cancellation, delay or reduction
in orders from any of these customers could have a material adverse effect on
the Company's business, operating results and financial condition. See "Business
- -- Customers and End Users."
6
<PAGE>
DEPENDENCE ON THIRD PARTY LICENSORS
The Company licenses certain critical software from third parties. The core
ICR software for the Company's Quickstrokes API engine is licensed from HNC
Software, Inc. ("HNC") pursuant to a License Agreement dated November 23, 1992,
between the Company and HNC. In addition, the Company licenses certain software
incorporated in its PFP product line from VALIdata Sistemas de Captura, S.A. de
C.V. ("VALIdata") pursuant to a Marketing License Agreement dated as of March
26, 1996 between the Company and VALIdata. The Company also licenses certain
software relating to the presentation of characters for inspection from
Cognitronics Imaging Systems, Inc. All of these licenses are "fully paid."
However, the VALIdata license agreement requires the Company to undertake
certain obligations, and the failure of the Company to meet such obligations, or
the violation of the terms of any of the other licenses, could result in a
termination of one or more these licenses. Furthermore, the Company's license
agreement with VALIdata will expire in March 1997 and, upon expiration, the
Company's license to PFP application software will terminate unless the parties
mutually agree to renew the license agreement. In the event that any of the
foregoing license agreements terminates, the Company may be required to develop
or obtain licenses for replacement software. Development or procurement of
replacement software would be costly and require a substantial expenditure of
time and effort by the Company. Furthermore, no assurance can be given that the
Company would be able to develop or license replacement software on a timely or
cost-effective basis. Accordingly, the loss of any license could have a material
adverse impact upon the Company's business, financial condition and results of
operations. See "Business -- Technology."
MANAGEMENT OF CHANGING BUSINESS; ABILITY TO MANAGE GROWTH
Prior to November 1992, the Company's business focused on the development
and sales of its TEMPEST products to government and defense industry customers.
In November 1992, the Company obtained a license to certain ADR technologies and
began a period of significant transition in its business focus. The transition
of business focus and the growth of the ADR business has placed, and will
continue to place, a strain on the Company's management, operational, financial
and accounting resources. To continue the ongoing development of its
technologies, while at the same time managing the products it is already
shipping, the Company must, among other things, respond to competitive
developments, continue to attract, retain and motivate qualified personnel, use
a portion of available capital to support the expense of enhancing and marketing
its technologies, and manage its growth in the face of a rapidly changing
business environment. Moreover, in order to support additional commercial
applications of its current products while continuing to enhance its ADR
technologies, the Company may need to expand its customer engineering
capabilities and develop tools and documentation which will enable customers and
OEMs to develop, integrate and test their products without requiring direct
support from the Company's product development groups. There can be no assurance
that these processes can be successfully managed given the Company's limited
resources. See "Business -- Overview."
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS
The Company's quarterly operating results have in the past and may in the
future vary significantly depending on factors including the timing of customer
projects and purchase orders, new product announcements and releases by the
Company and other companies, gain or loss of significant customers, price
discounting of the Company's products, the timing of expenditures, customer
product delivery requirements, availability and cost of components or labor and
economic conditions generally and in the information technology market
specifically. Any unfavorable change in these or other factors could have a
material adverse effect on the Company's operating results for a particular
quarter. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Quarterly Results of Operations."
Many of the Company's customers order on an as-needed basis and often delay
issuance of firm purchase orders until their project commencement dates are
determined. Quarterly revenue and operating results will therefore depend on the
volume and timing of orders received during the quarter, which are difficult to
forecast accurately. Moreover, a significant portion of the Company's sales have
historically resulted from shipments during the last few weeks of the quarter
from orders
7
<PAGE>
generally received in the last month of the quarter. Any concentration of sales
at the end of the quarter may limit the Company's ability to plan or adjust
operating expenses. Therefore, if anticipated shipments in any quarter do not
occur or are delayed, expenditure levels could be disproportionately high as a
percentage of sales, and the Company's operating results for that quarter would
be adversely affected.
The Company expects quarterly fluctuations to continue for the foreseeable
future. Accordingly, the Company believes that period-to-period comparisons of
its financial results should not be relied upon as an indication of future
performance. No assurance can be given that the Company will be able to achieve
or maintain profitability on a quarterly or annual basis in the future. Due to
all of the foregoing factors, it is possible that in some future quarter the
Company's operating results will be below the expectations of public market
analysts and investors. In such event, the price of the Company's Common Stock
would likely be materially adversely affected.
BROAD DISCRETION AND POSSIBLE CHANGES IN APPLICATION OF NET PROCEEDS
No specific purpose has been identified for the use of the net proceeds of
this offering, and a significant portion of the estimated net proceeds has been
allocated for working capital. Consequently, the Company will have broad
discretion as to the specific application of these proceeds. See "Use of
Proceeds."
LENGTHY SALES CYCLE
Due in part to the mission-critical nature of certain of the Company's
applications, potential customers perceive high risk in connection with adoption
of the Company's neural network technology. As a result, customers have been
cautious in making product acquisition decisions. In addition, the purchase of
the Company's products involves a significant commitment to the Company's
technologies, with the attendant delays frequently associated with customers'
internal procedures to approve large capital expenditures and test and accept
new technologies that affect key operations. For these and other reasons, the
sales cycle associated with the purchase of the Company's products is typically
lengthy and subject to a number of significant risks, including customers'
budgetary constraints and internal acceptance reviews, over which the Company
has little or no control. Because of the lengthy sales cycle, if revenues
forecasted from a specific customer for a particular quarter are not realized in
that quarter, the Company likely would not be able to generate revenues from
alternate sources in time to compensate for the shortfall. As a result, and due
to the typical size of customers' orders, a lost or delayed sale could have a
material adverse effect on the Company's quarterly operating results.
RISK OF PRODUCT DEFECTS
Products as complex as those offered by the Company, particularly the
Company's QuickStrokes and PFP products, may contain undetected defects or
errors when first introduced or as new versions are released. As a result, the
Company has in the past and could in the future face loss or delay in
recognition of revenues as a result of software errors or defects. In addition,
the Company's products are typically intended for use in applications that may
be critical to a customer's business. As a result, the Company expects that its
customers and potential customers have a greater sensitivity to product defects
than the market for software products generally. Furthermore, in connection with
the sale of its TEMPEST business, the Company agreed to indemnify the purchaser
for all product defect claims (other than product errors claims) arising out of
products which were sold, or services which were rendered, prior to the sale of
the TEMPEST business. Consequently, the Company still faces potential product
defect claims from the TEMPEST business. There can be no assurance that, despite
testing by the Company and by current and potential customers, errors will not
be found in new products or releases after commencement of commercial shipments,
resulting in loss of revenues or delay in market acceptance, diversion of
development resources, damage to the Company's reputation, or increased service
and warranty costs, any of which would have a material adverse effect upon the
Company's business, operating results and financial condition. See "Business --
Research and Development."
8
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COMPETITION
The market for the Company's ADR products is intensely competitive, subject
to rapid change and significantly affected by new product introductions and
other market activities of industry participants. The Company faces direct and
indirect competition from a broad range of competitors who offer a variety of
products and solutions to the Company's current and potential customers. The
Company's principal competition comes from (i) customer-developed solutions;
(ii) direct competition from companies offering ICR systems; and (iii) companies
offering competing technologies capable of recognizing hand printed characters.
Many of the Company's competitors have longer operating histories, including
greater experience in the data entry and character recognition markets,
significantly greater financial, technical, marketing and other resources than
the Company, greater name recognition and a larger installed base of customers.
It is also possible that the Company will face competition from new
competitors. These include companies that are existing licensors, such as HNC,
existing OEM, systems integrator and VAR customers such as BancTec, or dominant
software companies with a presence in publishing or office automation such as
Microsoft Corporation and Adobe Systems Incorporated. In addition, the Company's
license agreement with HNC provides that, upon expiration of certain exclusivity
periods beginning in November 1997, HNC will have the right to use certain of
the core technologies used in the Company's ADR products, originally developed
by HNC and licensed to the Company in 1992, to compete directly with the
Company. Moreover, as the market for automated data entry and ICR software
develops, a number of these or other companies with significantly greater
resources than the Company could attempt to enter or increase their presence in
the Company's market either independently or by acquiring or forming strategic
alliances with competitors of the Company. In addition, current and potential
competitors have established or may establish cooperative relationships among
themselves or with third parties to increase the ability of their products to
address the needs of the Company's current and prospective customers and it is
possible that new competitors or alliances among competitors may emerge and
rapidly acquire significant market share. Increased competition may result in
price reductions, reduced gross margins and loss of market share, any of which
could have a material adverse effect on the Company's business, operating
results and financial condition. Furthermore, a significant percentage of the
Company's revenues are attributable to the sale of co-processor boards sold
together with the Company's software. Anticipated increases in the speed and
power of the next generation of microprocessors, such as the Pentium P-6, could
have the effect of reducing the demand for the Company's co-processor boards. It
is also possible that the Company's co-processor boards will face competition
from semiconductor manufacturers embedding the technology on their chips. There
can be no assurance that the Company will be able to compete successfully
against current or future competitors or that competitive pressures faced by the
Company will not materially adversely affect its business, operating results and
financial condition. See "Business -- Competition."
SUPPLIER AND COMPONENT DEPENDENCE
The Company depends heavily on subcontracted manufacturers to provide the
co-processor boards sold with its QuickStrokes API products to provide
components on a timely basis at reasonable prices. Although the Company believes
such board products could be obtained from a variety of third party
manufacturers, the Company is currently receiving such products from only two
suppliers, HNC and Electronic Surface Mounted Industries. There can be no
assurance that the Company will be able to obtain, on a timely basis, all the
components it requires. The Company has no long term contracts with either of
the co-processor board suppliers. If the Company cannot obtain essential
components as required, the Company could be unable to meet demand for its
products, thereby adversely affecting its operating results and allowing
competitors to gain market share. Additionally, scarcity of such components
could result in cost increases and adversely affect the Company's gross margin
for its ADR products. See "Business -- Products."
9
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PATENTS AND PROPRIETARY RIGHTS
The Company's success and its ability to compete is dependent in part upon
its proprietary technology. To license its products, the Company relies
primarily on "shrink wrap" licenses that are not signed by the end user and,
therefore, may be unenforceable under the laws of certain jurisdictions. In
addition, a substantial portion of the Company's sales are to OEMs and systems
integrators pursuant to purchase orders and invoices that are not subject to any
overriding purchase agreement or contract. As a result, the Company may have
relatively limited visibility as to these customers' future requirements, and
the scope and terms of the parties' agreements with respect to matters typically
covered in such purchase agreements, such as intellectual property rights and
indemnification, may not be clearly defined. Additionally, the Company generally
relies on trademark, trade secret, copyright and patent law to protect its
intellectual property. The Company may also rely on the creative skills of its
personnel, new product developments, frequent product enhancements and reliable
product maintenance as means of protecting its proprietary technologies. There
can be no assurance, however, that such means will be successful in protecting
the Company's intellectual property. The Company presently has no patents or
patent applications pending relating to the Quickstrokes API products. There can
be no assurance that others will not develop technologies that are similar or
superior to the Company's technology. The source code for the Company's
proprietary software is protected both as a trade secret and as a copyrighted
work. Despite these precautions, it may be possible for a third party to copy or
otherwise obtain and use the Company's products or technology without
authorization, or to develop similar technology independently. In addition,
effective copyright and trade secret protection may be unavailable or limited in
certain foreign countries. Moreover, there can be no assurance that the
protection provided to the Company's proprietary technology by the laws and
courts of foreign nations against piracy and infringement will be substantially
similar to the remedies available under United States law. Any of the foregoing
considerations could result in a loss or diminution in value of the Company's
intellectual property, which could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company could be liable for contributory infringement claims with
respect to its OEM customers. There can be no assurances that any such
infringement claims or claims by such OEMs for indemnification will not occur in
the future. The Company could incur substantial costs in defending itself or its
customers in litigation brought by third parties alleging infringement or in
prosecuting infringement claims against third parties, or in seeking a
determination of the scope and validity of the proprietary rights of others. Any
such litigation could be costly and a diversion of management's attention, which
by themselves could have material adverse effects on the Company's business,
financial condition and results of operations. Adverse determinations in such
litigation could result in the loss of the Company's proprietary rights, subject
the Company to significant liabilities, require the Company to seek licenses
from third parties or prevent the Company from using its technologies, any of
which could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Technology."
INFRINGEMENT OF PROPRIETARY RIGHTS
The Company has in the past received correspondence that certain
technologies incorporated in the Company's products infringe the patent rights
of a third party. Although the Company has resolved the past claim and there are
currently no claims of infringement pending against the Company, there can be no
assurance that the Company will not receive notices in the future from third
parties asserting that the Company's products infringe, or may infringe, third
parties' intellectual property rights. There can be no assurance that licenses
to disputed third-party technology or intellectual property rights would be
available on reasonable commercial terms, if at all. Furthermore, the Company
may initiate claims or litigation against third parties for infringement of the
Company's proprietary rights or to establish the validity of the Company's
proprietary rights. Litigation, either as plaintiff or defendant, could result
in significant expense to the Company and divert the efforts of the Company's
technical and management personnel from productive tasks, whether or not such
litigation is resolved in favor of the Company. In the event of an adverse
ruling in any such litigation, the Company might be required to pay substantial
damages, discontinue the use and sale of infringing
10
<PAGE>
products, expend significant resources to develop non-infringing technology or
obtain licenses to infringing technology, and the court might invalidate the
Company's patents, trademarks or other proprietary rights. In the event of a
successful claim against the Company and the failure of the Company to develop
or license a substitute technology, the Company's business, financial condition
and results of operations would be materially and adversely affected.
RISKS ASSOCIATED WITH INTERNATIONAL SALES
In fiscal 1995 and 1996, international sales represented approximately 21%
and 31% of the Company's total revenues, respectively. The Company intends to
continue to expand its operations outside the United States and to enter
additional international markets, which will require significant management
attention and financial resources. The Company has committed and continues to
commit significant time and development resources to customizing its products
for selected international markets and to developing international sales and
support channels. There can be no assurance that the Company's efforts to
develop products for international markets or to develop international sales and
support channels will be successful. The failure of such efforts could have a
material adverse effect on the Company's business, financial condition and
results of operations. International sales are subject to inherent risks,
including longer sales cycles, unexpected changes in regulatory requirements,
uncertainties with regard to laws protecting proprietary technology, import and
export restrictions and tariffs, difficulties in staffing and managing foreign
operations, the burdens of complying with a variety of foreign laws, greater
difficulty or delay in accounts receivable collection, potentially adverse tax
consequences and political and economic instability. The Company's export sales
are currently denominated exclusively in United States dollars. An increase in
the value of the United States dollar relative to foreign currencies could make
the Company's products more expensive and, therefore, potentially less
competitive in foreign markets. If for any reason exchange or price controls or
other restrictions on foreign currencies are imposed, the Company's business,
financial condition and results of operations could be materially adversely
affected. As the Company increases its international sales, its total revenues
may also be affected to a greater extent by seasonal fluctuations resulting from
lower sales that typically occur during the summer months in certain parts of
the world. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business -- Sales and Marketing."
RECENT DELISTING
In connection with restructuring its business from dependence upon TEMPEST
products to its ADR technologies, the Company incurred significant write-downs
and accruals with the termination of its TEMPEST business. These write-downs and
accruals, which exceeded $1 million, caused the Company's net capital to fall
below the minimum threshold for listing on the Nasdaq SmallCap Market. As a
result, the Company's Common Stock was temporarily delisted from the Nasdaq
SmallCap Market from March 1995 through May 1995. The Company immediately
commenced a private placement of the Common Stock which successfully raised
additional capital and the Company's Common Stock subsequently was relisted on
the Nasdaq SmallCap Market. See "Certain Transactions."
CONTROL BY PRINCIPAL STOCKHOLDERS, OFFICERS AND DIRECTORS
Following this offering, the Company's 5% stockholders, officers and
directors will beneficially own approximately 31.34%, and John M. Thornton,
Chairman of the Board, will beneficially own 27.4%, of the Company's outstanding
Common Stock (26.0% and 22.10%, respectively, if the Underwriters' overallotment
option is exercised in full). As a result, such persons will have significant
ability to control the vote on matters submitted to stockholders for approval
(including the election of all directors, and any merger, consolidation or sale
of all or substantially all of the Company's assets) and to control the
management and affairs of the Company. Accordingly, such concentration of
ownership may have the effect of delaying, deferring or preventing a change in
control of the Company. See "Management" and "Principal and Selling
Stockholders."
11
<PAGE>
DEPENDENCE ON KEY PERSONNEL
The Company's future success depends in large part on the continued service
of its key technical and management personnel. The Company does not have
employment contracts with, or "key person" life insurance policies on, any of
its employees. Loss of services of key employees could have a material adverse
effect on the Company's operations and financial condition. Given the Company's
state of development, the Company is also dependent on its ability to identify,
hire, train, retain and motivate high quality personnel, especially highly
skilled engineers involved in the ongoing developments required to refine the
Company's technologies and to introduce future applications. The high technology
industry is characterized by a high level of employee mobility and aggressive
recruiting of skilled personnel. There can be no assurance that the Company will
be able to attract qualified personnel or that the Company's current employees
will continue to work for the Company. The failure to attract, assimilate and
train key personnel could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Management."
FACTORS INHIBITING TAKEOVER
The Board of Directors is authorized to issue up to 1,000,000 shares of
Preferred Stock and to determine the price, rights, preferences, privileges and
restrictions, including voting rights, of those shares without any further vote
or action by the stockholders. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The issuance of Preferred
Stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire a majority of the outstanding voting
stock of the Company. The Company has no current plans to issue shares of
Preferred Stock. In addition, Section 203 of the Delaware General Corporation
Law restricts certain business combinations with any "interested stockholder" as
defined by such statute. The statute may have the effect of delaying, deferring
or preventing a change in control of the Company. See "Description of Capital
Stock."
VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock has been, and is likely to
continue to be, highly volatile. Future announcements concerning the Company or
its competitors, quarterly variations in operating results, announcements of
technological innovations, the introduction of new products or changes in
product pricing policies by the Company or its competitors, claims of
infringement of proprietary rights or other litigation, changes in earnings
estimates by analysts or other factors could cause the market price of the
Common Stock to fluctuate substantially. In addition, the stock market has from
time-to-time experienced significant price and volume fluctuations that have
particularly affected the market prices for the common stocks of technology
companies and that have often been unrelated to the operating performance of
particular companies. These broad market fluctuations may also adversely affect
the market price of the Company's Common Stock. In the past, following periods
of volatility in the market price of a company's securities, securities class
action litigation has occurred against the issuing company. There can be no
assurance that such litigation will not occur in the future with respect to the
Company. Such litigation could result in substantial costs and a diversion of
management's attention and resources, which could have a material adverse effect
on the Company's business, financial condition and results of operations. Any
adverse determination in such litigation could also subject the Company to
significant liabilities. See "Price Range of Common Stock."
Additionally, the Company offers software products in a range of prices.
Sales of products with high average sales prices can constitute a significant
percentage of the Company's quarterly revenue. Operating results in any period
should not be considered indicative of the results to be expected for any future
period, and there can be no assurance that the Company's net sales will continue
to increase, or that its recent rate of quarterly sales and earnings growth will
be sustained.
12
<PAGE>
NO DIVIDENDS
The Company has not paid any dividends on its Common Stock and does not
intend to pay dividends for the foreseeable future. See "Dividend Policy."
IMMEDIATE AND SUBSTANTIAL DILUTION
The offering involves an immediate and substantial dilution to new investors
of $1.58 per share of Common Stock, or 70% of their investment between the
public offering price of $2.25 per share of Common Stock and the pro forma net
tangible book value of $0.67 per share of Common Stock upon the completion of
the offering, at a public offering price of $2.25 per share and assuming no
exercise of the overallotment option or the Underwriters' Warrant. See
"Dilution."
FUTURE CAPITAL NEEDS
The Company may need to raise additional funds through public or private
financing. No assurance can be given that additional financing will be available
or that, if available, it will be available on terms favorable to the Company or
its stockholders. If additional funds are raised through the issuance of equity
securities, the percentage ownership of then current stockholders of the Company
will be reduced and such equity securities may have rights, preferences or
privileges senior to those of the holders of the Company's Common Stock. The
Company's capital requirements will depend on many factors, including, but not
limited to, the rate of market acceptance and competitive position of the
products incorporating the Company's technologies, the levels of promotion and
advertising required to launch and market such products and attain a competitive
position in the marketplace, the extent to which the Company invests in new
technology to support its product development efforts, and the response of
competitors to the products offered by the Company.
LIMITATION ON OFFICERS' AND DIRECTORS' LIABILITIES UNDER DELAWARE LAW
Pursuant to the Company's Certificate of Incorporation, and as authorized
under applicable Delaware Law, directors and officers of the Company are not
liable for monetary damages for breach of fiduciary duty, except for liability
(i) for any breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the Delaware General Corporation Law or (iv) for any transaction from which the
director derived an improper personal benefit. See "Management --
Indemnification of Directors and Executive Officers and Limitation of
Liability."
13
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,250,000 shares of
Common Stock offered by the Company hereby are estimated to be $4,140,000 at the
public offering price of $2.25 per share and after deducting estimated
underwriting discounts and commissions and estimated offering expenses. The
Company will not receive any proceeds from the sale of Common Stock by the
Selling Stockholders, or from the exercise of the Underwriters' overallotment
option.
The Company expects to use the net proceeds of this offering for general
corporate purposes, including research and development, expansion of the
Company's sales and marketing capabilities, and related capital expenditures and
working capital. A portion of the proceeds may also be used to acquire or invest
in complementary businesses or products or to obtain the right to use
complementary technologies. However, the Company has no present understandings,
commitments, agreements or intentions with respect to any material acquisitions
of other businesses, products or technologies. Pending use of the net proceeds
for the above purposes, the Company intends to invest such funds in short-term,
interest-bearing, investment grade obligations.
14
<PAGE>
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on the Nasdaq SmallCap Market under the
symbol "MITK." The following table sets forth, for the fiscal periods indicated,
the high and low closing prices for the Common Stock as reported by the Nasdaq
SmallCap Market (or the OTC Bulletin Board for the period beginning March 1995
and ending May 1995). The quotations for the Common Stock traded on the Nasdaq
SmallCap Market may reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
FISCAL 1994
First Quarter....................................................................... $ 1 10/32 $ 1 1/16
Second Quarter...................................................................... 1 5/8 1 1/16
Third Quarter....................................................................... 1 7/16 15/16
Fourth Quarter...................................................................... 1 3/16 15/16
FISCAL 1995
First Quarter....................................................................... 1 1/4 13/16
Second Quarter...................................................................... 1 3/8 7/8
Third Quarter....................................................................... 1 3/16 15/16
Fourth Quarter...................................................................... 1 7/16 1 1/16
FISCAL 1996
First Quarter....................................................................... 1 15/32 1 7/32
Second Quarter...................................................................... 1 9/32 1 7/8
Third Quarter....................................................................... 6 1/8 2
Fourth Quarter...................................................................... 5 7/8 3 1/2
FISCAL 1997
First Quarter (through November 20, 1996)........................................... 4 7/32 2 5/8
</TABLE>
On November 20, 1996, the last reported sale price for the Common Stock, as
reported on the Nasdaq SmallCap Market, was $2.625 per share. The number of
record holders of Common Stock as of September 30, 1996 was 607 and the
approximate number of beneficial holders is estimated to be over 1,000 as of
that same date.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Stock.
The Company currently anticipates that it will retain all future earnings for
use in the operation and expansion of its business and does not anticipate
paying any cash dividends in the foreseeable future.
15
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of September 30, 1996 and on an as adjusted basis to give effect to
the sale of the 2,250,000 shares of Common Stock offered by the Company hereby
at the public offering price of $2.25 per share and the application of the
estimated net proceeds therefrom. The financial data in the following table
should be read in conjunction with the Company's Consolidated Financial
Statements and the Notes thereto contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
----------------------------
ACTUAL AS ADJUSTED
------------- -------------
<S> <C> <C>
Long-term liabilities (1)........................................................... $ 6,147 $ 6,147
------------- -------------
Stockholders' equity:
Preferred stock, $0.001 par value; 1,000,000 shares authorized: no shares issued
and outstanding.................................................................. -- --
Common stock, $0.001 par value; 20,000,000 shares authorized: 7,782,971 shares
issued and outstanding actual; 10,032,971 shares issued and outstanding pro forma
(2).............................................................................. 7,783 10,033
Additional paid-in capital........................................................ 3,503,635 7,641,385
Accumulated deficit............................................................... (859,078) (859,078)
------------- -------------
Total stockholders' equity...................................................... 2,652,340 6,792,340
------------- -------------
Total capitalization................................................................ $ 2,658,487 $ 6,798,487
------------- -------------
------------- -------------
</TABLE>
- ------------------------
(1) See Note 8 of Notes to Consolidated Financial Statements.
(2) Does not include (i) up to 146,250 shares issuable upon exercise of the
Underwriters' Warrant, (ii) up to 215,000 shares issuable upon the exercise
of additional outstanding warrants and (iii) 463,041 shares issuable upon
the exercise of outstanding options granted under the Option Plans at a
weighted average per share exercise price of $1.21.
16
<PAGE>
DILUTION
The net tangible book value of the Company as of September 30, 1996 was
$2,545,377 or $0.33 per share of Common Stock. Net tangible book value per
common share represents the amount of total tangible assets of the Company less
the amount of total liabilities divided by the number of shares of Common Stock
outstanding. After giving effect to the sale by the Company of 2,250,000 shares
of Common Stock at the public offering price of $2.25 per share and receipt of
the estimated net proceeds therefrom, and recognizing that the Company will not
receive any proceeds from the sale of Common Stock by the Selling Stockholders
or the exercise of the Underwriters' overallotment option, the pro forma net
tangible book value of the Company at September 30, 1996 would have been
approximately $0.67 per share. This represents an immediate increase in net
tangible book value of $0.34 per share of Common Stock held by the existing
stockholders of the Company or a 103% increase, and an immediate dilution of
$1.58 per share to new investors purchasing shares at the public offering price,
or a 70% decrease from the amount of their investment. "Dilution" per share is
determined by subtracting pro forma net tangible book value per share after the
offering from the amount paid for a share in the offering.
The following table illustrates the dilution in net tangible book value per
share to new investors as of September 30, 1996.
<TABLE>
<S> <C> <C>
Assumed public offering price per share.............................. $ 2.25
Net tangible book value per common share as of September 30,
1996.............................................................. $ 0.33
Increase in net tangible book value per share attributable to new
investors......................................................... 0.34
---------
Pro forma net tangible book value per common share after the
offering............................................................ 0.67
---------
Dilution per share to new investors.................................. $ 1.58
---------
---------
</TABLE>
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following Consolidated Statement of Operations Data and Balance Sheet
Data have been derived from the Financial Statements of the Company. The
Consolidated Balance Sheets of the Company as of September 30, 1995 and 1996 and
the related Consolidated Statements of Operations for each of the three years in
the period ended September 30, 1996 have been audited by Deloitte & Touche LLP,
Independent Auditors, whose report is included elsewhere in this Prospectus. The
Consolidated Balance Sheets as of September 30, 1993 and 1994 and the related
Consolidated Statements of Operations for year ended September 30, 1993 have
also been audited. The data presented should be read in conjunction with the
Company's Consolidated Financial Statements and the Notes thereto included
herein.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
------------------------------------------
1993 1994 1995 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales:
ADR.............................................................. $ 2,894 $ 4,674 $ 5,079 $ 8,154
TEMPEST (1)...................................................... 10,171 5,489 1,554 --
--------- --------- --------- ---------
Total net sales................................................ 13,065 10,163 6,633 8,154
Cost of goods sold................................................. 9,570 6,657 3,330 2,783
--------- --------- --------- ---------
Gross margin..................................................... 3,495 3,506 3,303 5,371
Operating expenses:
Research and development......................................... 1,192 1,024 1,004 1,314
Selling and marketing............................................ 1,632 1,513 1,388 1,414
General and administrative....................................... 1,383 1,105 1,117 1,186
--------- --------- --------- ---------
Total operating expenses....................................... 4,207 3,642 3,509 3,914
Income (loss) from operations...................................... (712) (136) (206) 1,457
Other income (expense):
Interest expense (net)........................................... (196) (98) (67) (91)
TEMPEST write downs and accruals................................. -- (1,046) -- --
Gain on sale of TEMPEST.......................................... -- -- 205 --
--------- --------- --------- ---------
Total other income (expense)................................... (196) (1,144) 138 (91)
Income (loss) before income taxes.................................. (908) (1,280) (68) 1,366
Provision (benefit) for income taxes............................... (6) (222) 1 137
--------- --------- --------- ---------
Net income (loss).................................................. $ (902) $ (1,058) $ (69) $ 1,229
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income (loss) per common share................................. $ (.13) $ (.15) $ (.01) $ .15
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average shares outstanding................................ 6,866 6,877 7,286 8,203
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
------------------------------------------
1993 1994 1995 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.......................................... $ 236 $ 100 $ 104 $ 210
Working capital.................................................... 577 153 602 1,884
Total assets....................................................... 5,081 3,074 2,864 3,762
Long-term liabilities.............................................. 526 367 57 6
Total stockholders' equity......................................... $ 1,818 $ 809 $ 1,343 $ 2,652
</TABLE>
- ------------------------------
(1) In March 1995, the Company sold the assets of its TEMPEST business and
discontinued TEMPEST operations.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
WITH THE EXCEPTION OF HISTORICAL MATTERS, THE MATTERS DISCUSSED IN THIS
SECTION ARE FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES.
FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO, STATEMENTS RELATING
TO THE DEVELOPMENT AND PACE OF INTERNATIONAL SALES OF THE COMPANY'S PRODUCTS,
EXPECTED TRENDS IN THE COMPANY'S RESULTS OF OPERATIONS, AND PROJECTIONS
CONCERNING THE COMPANY'S AVAILABLE CASH FLOW AND LIQUIDITY FOLLOWING THE
COMPLETION OF THIS OFFERING. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THE RESULTS DISCUSSED IN SUCH FORWARD-LOOKING STATEMENTS.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE
DISCUSSED BELOW, AS WELL AS THOSE DISCUSSED UNDER THE CAPTION "RISK FACTORS" AND
ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
The Company develops and markets ADR products for character recognition
applications within the document image processing market. The Company's current
products and services enable businesses and government agencies to automate
labor intensive, high volume data entry tasks. The Company was originally
founded in 1982 to focus on a defense area known as TEMPEST, a government
program aimed at national security with respect to electronic transmissions.
Revenues from TEMPEST-related operations equaled $10.1 million in the fiscal
year ended September 30, 1993, but declined to $1.6 million in fiscal 1995 as a
result of a decline in demand for TEMPEST products leading to the sale of the
TEMPEST product line in March 1995. In response to declining TEMPEST revenue
beginning in 1992, the Company changed its focus to certain imaging products
which the Company believed would have greater market potential. Between 1992 and
1995, the Company significantly restructured its operations, reducing personnel
from approximately 157 to 30 and relocating to smaller facilities. During that
period, the Company incurred approximately $2 million of losses, $1.8 million of
which were write-offs associated with the TEMPEST business. In March 1995, the
Company sold all of the assets related to its TEMPEST business for $350,000,
marking the final step in shifting its business focus entirely to imaging
products.
In November 1992, the Company entered a license agreement with HNC pursuant
to which the Company obtained a perpetual license (exclusive in the initial five
years) to HNC's ADR technology, including rights to neural network software
programs that had been under development since 1987. In connection with this
transaction, the Company hired twelve former HNC personnel who had been the
principal developers of the acquired technology. Revenues from the sale of ADR
products grew from $2.9 million in fiscal 1993 to $4.7 million in fiscal 1994
and $5.1 million in fiscal 1995, though the Company was unprofitable in each of
those years. For the fiscal year ended September 30, 1996, ADR revenues,
principally attributable to the sale of the Company's QuickStrokes API products,
were $8.2 million and net income equaled $1.2 million.
Since fiscal 1992, the Company has developed new and enhanced ADR products
including the QuickStrokes API and Premier Forms Processor products. Revenues
from ADR products have increased steadily from 1992, and the Company intends to
focus primarily on this market for the forseeable future. The Company
anticipates that research and development and sales and marketing expenditures
for fiscal year 1997 will increase significantly. Three customers, BancTec, TCSI
and Wheb accounted for 42% of the Company's net revenues for fiscal 1996. The
Company recently received notice from TCSI that TCSI will not be placing any
additional orders for the Company's products in the foreseable future due to a
change in the direction of TCSI's business and no assurance can be given that
the Company will be able to replace the revenues it might have received from
such orders. See "Business -- Customers and End Users" and "Risk Factors --
Customer Concentration; Dependence on Key Customers."
Currently, the Company derives its revenues principally from sales of its
ADR products and, to a lesser extent, from sales of software maintenance
contracts relating to its products. The Company recognizes revenues in
accordance with the American Institute of Certified Public Accountants
19
<PAGE>
Statement of Position No. 91-1, Software Revenue Recognition. Accordingly,
software product revenues are recognized upon shipment if collection is probable
and the Company's remaining obligations are insignificant. Product maintenance
revenues are amortized over the length of the maintenance contract, which is
usually twelve months. Inflation has not had a significant impact on the
Company's operating results to date, nor does the Company expect it to have a
significant impact through fiscal 1997.
Historically, approximately 70% of the Company's revenue has been
attributable to sales of its software in combination with a co-processor board
as a "bundled" package. The Company anticipates that in the future the speed and
processing power of the next generation of microprocessors, such as the Pentium
P-6, will increase, thus potentially reducing the need for co-processor boards
as part of the Company's solution. Although this evolution in hardware
technology could initially cause a reduction in the Company's total net sales,
the Company believes this change could allow it to provide more cost-effective
solutions, which in turn could increase the rate of market acceptance for the
Company's products. Additionally, the Company has historically received greater
gross margins on the software component of its products, and therefore
anticipates that any shift in its revenue mix toward a larger percentage of
software-only sales could favorably impact gross margins. However, no assurance
can be given that the foregoing market changes will favorably impact market
acceptance for the Company's products and gross margins, and if such changes do
not favorably impact market acceptance for the Company's products and gross
margins, the Company's business, operating results and financial condition could
be materially adversely affected.
The Company is pursuing a strategy of developing products capable of
addressing document image processing requirements in selected international
markets by developing localized versions of its products and establishing
overseas distribution channels. International sales accounted for approximately
31% of the Company's net sales for the fiscal year ended September 30, 1996.
International sales in the past twelve months were made in 15 countries. See
"Business -- Products." There can be no assurance that the Company's efforts to
develop products, international markets or to develop international sales and
support channels will be successful. The failure of such efforts could have a
material adverse effect on the Company's business, financial condition and
results of operations. International sales are subject to inherent risks,
including longer sales cycles, unexpected changes in regulatory requirements,
import and export restrictions and tariffs, difficulties in staffing and
managing foreign operations, the burdens of complying with a variety of foreign
laws, greater difficulty or delay in accounts receivable collection, potentially
adverse tax consequences and political and economic instability.
20
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected items of
the Company's consolidated statements of operations as a percentage of its net
sales:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED SEPTEMBER 30,
---------------------------------
1993 1994 1995 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales:
ADR................................................................. 22.0% 46.0% 77.0% 100.0%
TEMPEST............................................................. 78.0 54.0 23.0 --
------ ------ ------ ------
Total net sales................................................. 100.0 100.0 100.0 100.0
Gross margin.......................................................... 26.8 34.5 49.8 66.0
Operating expenses:
Research and development............................................ 9.1 10.1 15.1 16.1
Selling and marketing............................................... 12.5 14.9 20.9 17.3
General and administrative.......................................... 10.6 10.9 16.8 14.7
------ ------ ------ ------
Total operating expenses........................................ 32.2 35.9 52.8 48.1
Interest expense (net)................................................ 1.5 1.0 1.0 1.1
TEMPEST write downs and accruals...................................... -- 10.3 -- --
Gain on sale of TEMPEST............................................... -- -- 3.1 --
Income (loss) before income taxes..................................... (6.9) (12.6) (1.0) 16.8
Provision (benefit) for income taxes.................................. -- 2.2 -- 1.7
------ ------ ------ ------
Net income (loss)..................................................... (6.9)% (10.4)% (1.0)% 15.1%
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
FISCAL YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
NET SALES
Net sales were $8,154,000, $6,633,000 and $10,163,000, for fiscal 1996,
1995, and 1994, respectively. The decrease in net sales in prior periods was
primarily due to the decline in demand for TEMPEST products and the sale of the
TEMPEST business in March 1995. TEMPEST sales for the corresponding periods were
$0, $1,554,000 and $5,489,000, respectively. ADR sales for the corresponding
periods were $8,154,000, $5,079,000, and $4,674,000, respectively. The increase
in ADR revenue during these respective periods were primarily due to an increase
in the number of systems integrators and OEMs selling the Company's ADR
products.
GROSS MARGIN
Gross margin for the fiscal years ended September 30, 1996, 1995, and 1994,
were $5,371,000, $3,303,000, and $3,506,000, respectively. Stated as a
percentage of net sales, gross margin for the corresponding periods were 66%,
50%, and 35%, respectively. The increase in gross margin as a percentage of net
sales in each period was primarily due to the shift in product mix away from
TEMPEST products, which carried a relatively low gross margin, toward relatively
higher gross margin ADR products. Royalties and amortization charges resulting
from the HNC acquisition are a component of gross margin and in fiscal 1996,
1995, and 1994 were $297,000, $655,000, and $753,000, respectively. All
royalties payable to HNC in connection with the acquisition have been paid in
full. Monthly amortization expenses related to the HNC acquisition of $22,500
will continue until September, 1997.
RESEARCH AND DEVELOPMENT
Research and development expenses were $1,314,000, $1,004,000 and $1,024,000
for fiscal 1996, 1995, and 1994, respectively. Stated as a percentage of net
sales, research and development expenses for the corresponding periods were 16%,
15%, and 10%, respectively. The increase in research and development expenses as
a percentage of net sales in fiscal 1996, 1995 and 1994, were primarily due to
the Company devoting an increasing percentage of its research and development
expenditures to the
21
<PAGE>
development and enhancement of its ADR technologies. The Company anticipates a
significant increase in absolute dollars spent on research and development
expenses over the next fiscal year due to increased staffing levels and payments
to third parties associated with new product development and enhancement of
existing products.
SELLING AND MARKETING
Selling and marketing expenses were $1,414,000, $1,388,000 and $1,513,000
for fiscal 1996, 1995 and 1994, respectively. Stated as a percentage of net
sales, selling and marketing expenses for the corresponding periods were 17%,
21% and 15%, respectively. The decrease in selling and marketing expenses as a
percentage of sales in current year were attributed to the increase in net
sales, while the increase in selling and marketing expenses as a percentage of
net sales in prior periods were due to decline in net sales and increased costs
incurred in connection with the introduction of new ADR products. The Company
anticipates selling and marketing expenses will increase in absolute dollars in
the future due to efforts to increase sales by hiring industry specialists and
additional sales and marketing staff.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $1,186,000, $1,117,000 and
$1,105,000 for fiscal 1996, 1995 and 1994. Stated as a percentage of net sales,
general and administrative expenses for the corresponding periods were 15%, 17%
and 11%, respectively. The decrease in expense in the current year as a
percentage of net sales were attributed to the increase in net sales, while the
increase in expense as a percentage of net sales in the prior periods were
primarily due to a decline in net sales. The Company expects moderate increases
in general and administrative expenses commesurate with the growth of the
Company's business and that general and administrative expenses will remain
stable or decrease as a percentage of net sales.
INTEREST EXPENSE
Net interest expense was $91,000, $67,000 and $98,000 for fiscal 1996, 1995
and 1994, respectively. Stated as a percentage of net sales, net interest
expense for the corresponding periods was 1%, 1% and 1%, respectively. The
increase in interest expense in the current year reflects borrowings from a
factoring institution which bears higher interest costs. Interest in fiscal 1995
and 1994 decreased primarily due to substantial decreases in average outstanding
interest bearing debt.
GAIN ON SALE OF TEMPEST
Other income consists of the gain on the sale of the TEMPEST business, made
up of the following components: sale price ($350,000) offset by the carrying
cost of inventory sold ($132,000) and costs related to the transaction
($13,000).
INCOME TAXES
For the fiscal year ended September 30, 1996, the Company recorded an income
tax provision of $137,000. For the fiscal year ended September 30, 1995, the
Company recorded $800 which represented the minimum state taxes payable. For
fiscal year ended September 30, 1994, the Company recorded an income tax benefit
of $223,000. Such benefits represent the carryback of net operating losses to
recover taxes paid in fiscal years 1991 and 1990. The Company anticipates
utilizing the balance of the two benefits in the fourth quarter of fiscal 1996
and the first quarter of fiscal 1997 and anticipates realizing the benefits of
research and development credit carry forwards beginning in fiscal 1997.
22
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain quarterly financial information for
fiscal 1995 and 1996. This information is derived from unaudited financial
statements that include, in the opinion of management, all normal recurring
accruals necessary for a fair presentation of the information set forth therein.
The operating results for any quarter are not necessarily indicative of results
to be expected for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------
DEC. MAR. JUNE DEC. MAR.
31, 31, 30, SEPT. 31, 31,
1994 1995 1995 30, 1995 1995 1996
------- ------- ------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net sales:
ADR................................................................. $1,071 $ 703 $1,563 $1,742 $1,825 $1,924
TEMPEST (1)......................................................... 821 733 -- -- -- --
------- ------- ------- -------- ------- -------
Total net sales................................................... 1,892 1,436 1,563 1,742 1,825 1,924
------- ------- ------- -------- ------- -------
Gross margin.......................................................... 861 746 863 833 1,085 1,187
------- ------- ------- -------- ------- -------
Operating expenses:
Research and development............................................ 289 287 230 198 268 320
Selling and marketing............................................... 306 398 347 337 303 283
General and administrative.......................................... 230 238 373 276 355 258
------- ------- ------- -------- ------- -------
Total operating expenses.......................................... 825 923 950 811 926 861
------- ------- ------- -------- ------- -------
Income (loss) from operations......................................... 36 (177) (87) 22 159 326
Other income (expense):
Interest expense (net).............................................. (19) (21) (10) (17) (48) (33)
Other income........................................................ -- 205 -- -- -- --
------- ------- ------- -------- ------- -------
Total other income (expense)...................................... (19) 184 (10) (17) (48) (33)
------- ------- ------- -------- ------- -------
Income (loss) before income taxes..................................... 17 7 (97) 5 111 293
Provision (benefit) for income taxes.................................. 3 1 -- (3) 22 38
------- ------- ------- -------- ------- -------
Net income (loss)..................................................... 14 6 (97) 8 89 255
------- ------- ------- -------- ------- -------
------- ------- ------- -------- ------- -------
Net increase (loss) per common share.................................. $ -- $ -- $ (.01) $ -- $ .01 $ .03
------- ------- ------- -------- ------- -------
------- ------- ------- -------- ------- -------
Weighted average shares outstanding................................... 7,010 7,029 7,562 7,728 7,835 7,952
------- ------- ------- -------- ------- -------
------- ------- ------- -------- ------- -------
<CAPTION>
JUNE SEPT.
30, 30,
1996 1996
------- -------
<S> <C> <C>
Net sales:
ADR................................................................. $2,117 $2,288
TEMPEST (1)......................................................... -- --
------- -------
Total net sales................................................... 2,117 2,288
------- -------
Gross margin.......................................................... 1,386 1,713
------- -------
Operating expenses:
Research and development............................................ 335 391
Selling and marketing............................................... 347 481
General and administrative.......................................... 273 300
------- -------
Total operating expenses.......................................... 955 1,172
------- -------
Income (loss) from operations......................................... 431 541
Other income (expense):
Interest expense (net).............................................. (7) (3)
Other income........................................................ -- --
------- -------
Total other income (expense)...................................... (7) (3)
------- -------
Income (loss) before income taxes..................................... 424 538
Provision (benefit) for income taxes.................................. 22 55
------- -------
Net income (loss)..................................................... 402 483
------- -------
------- -------
Net increase (loss) per common share.................................. $ .05 $ .06
------- -------
------- -------
Weighted average shares outstanding................................... 8,210 8,405
------- -------
------- -------
</TABLE>
The following table sets forth certain unaudited consolidated statement of
income data as a percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------
DEC. MAR. JUNE DEC. MAR.
31, 31, 30, SEPT. 31, 31,
1994 1995 1995 30, 1995 1995 1996
------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net sales:
ADR................................................................. 56.6% 49.0% 100.0% 100.0% 100.0% 100.0%
TEMPEST (1)......................................................... 43.4 51.0 -- -- -- --
------- ------- ------- -------- ------- -------
Total net sales................................................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross margin.......................................................... 45.5 51.9 55.2 47.8 59.5 61.7
Operating expenses:
Research and development............................................ 15.2 20.0 14.7 11.4 14.7 16.6
Selling and marketing............................................... 16.2 27.7 22.2 19.3 16.6 14.7
General and administrative.......................................... 12.2 16.6 23.9 15.8 19.5 13.4
------- ------- ------- -------- ------- -------
Total operating expenses.......................................... 43.6 64.3 60.8 46.5 50.8 44.7
Interest expense (net)................................................ 1.0 1.5 .6 1.0 2.6 1.7
Other income.......................................................... -- 14.3 -- -- -- --
------- ------- ------- -------- ------- -------
Income (loss) before income taxes..................................... .9 .5 (6.2) .3 6.1 15.2
Provision (benefit) for income taxes.................................. .2 .1 -- (.2) 1.2 2.0
------- ------- ------- -------- ------- -------
Net income (loss)..................................................... .7% .4% (6.2)% .5% 4.9% 13.2%
------- ------- ------- -------- ------- -------
------- ------- ------- -------- ------- -------
<CAPTION>
JUNE SEPT.
30, 30,
1996 1996
------- -------
<S> <C> <C>
Net sales:
ADR................................................................. 100.0% 100.0%
TEMPEST (1)......................................................... -- --
------- -------
Total net sales................................................... 100.0% 100.0%
Gross margin.......................................................... 65.5 74.9
Operating expenses:
Research and development............................................ 15.8 17.1
Selling and marketing............................................... 16.4 21.0
General and administrative.......................................... 12.9 13.1
------- -------
Total operating expenses.......................................... 45.1 51.2
Interest expense (net)................................................ .3 .1
Other income.......................................................... -- --
------- -------
Income (loss) before income taxes..................................... 20.0 23.5
Provision (benefit) for income taxes.................................. 1.0 2.4
------- -------
Net income (loss)..................................................... 19.0% 21.1%
------- -------
------- -------
</TABLE>
- ------------------------------
(1) In March 1995, the Company sold the assets of its TEMPEST business and
discontinued TEMPEST operations.
23
<PAGE>
The Company's quarterly revenues and operating results have varied
significantly in the past and may do so in the future. General and
administrative expenses for the quarter ended June 30, 1995 included a one-time
charge of $80,000 in connection with the relocation of the Company's facilities.
General and administrative expenses for the quarter ended December 31, 1995
reflected an increase in the reserves for a questionable account. In June 1995,
the Company entered into a one-time arrangement with one of its significant
customers, BancTec, pursuant to which BancTec acquired certain software licenses
and co-processor boards at a reduced price, and agreed to pay the associated
license fees in advance of delivery of the co-processor boards. The result of
this transaction was to increase gross margin in the quarter ended June 30, 1995
as the Company recognized revenues from the sale of the software licenses
without any associated costs, and to decrease gross margins for the quarter
ended September 30, 1995 as the Company recognized revenues from the sale of
co-processor boards at less than the usual market price, together with
associated costs. A significant portion of the Company's business has been
derived from substantial orders placed by large organizations, and the timing of
such orders has caused material fluctuations in the Company's operating results.
Although the Company hopes to derive a greater percentage of its revenues from
monthly usage fees and maintenance fees under long-term contracts, there can be
no assurance that the Company will realize such recurring revenues. The
Company's expense levels are based in part on its expectations regarding future
revenues and in the short term are fixed to a large extent. Therefore, the
Company may be unable to adjust spending in a timely manner to compensate for
any unexpected revenue shortfall. As a result, if anticipated revenues in any
quarter do not occur or are delayed, the Company's operating results for that
quarter would be disproportionately affected. Operating results may also
fluctuate due to factors such as the demand for the Company's products, product
life cycles, the introduction and acceptance of new products and product
enhancements by the Company or its competitors, changes in the mix of
distribution channels through which the Company's products are offered, changes
in the level of operating expenses, customer order deferrals in anticipation of
new products, competitive conditions in the industry and economic conditions
generally or in various industry segments.
In addition, due in part to the mission-critical nature of certain of the
Company's applications, potential customers perceive a significant degree of
risk in connection with adoption of the Company's neural network technology. As
a result, customers have been cautious in making product acquisition decisions.
In addition, the purchase of the Company's products involves a significant
operational commitment on the part of end users, with the attendant delays
frequently associated with customers' internal procedures to approve large
capital expenditures and test and accept new technologies that affect key
operations. For these and other reasons, the sales cycle associated with the
purchase of the Company's products is typically lengthy and subject to a number
of significant risks, including customers' budgetary constraints and internal
acceptance reviews, over which the Company has little or no control. Because of
the lengthy sales cycle, if revenues forecasted from a specific customer for a
particular quarter are not realized in that quarter, the Company likely would
not be able to generate revenues from alternate sources in time to compensate
for the shortfall. As a result, and due to the typical size of customers'
orders, a lost or delayed sale could have a material adverse effect on the
Company's quarterly operating results.
The Company expects quarterly fluctuations to continue for the foreseeable
future. Accordingly, the Company believes that period-to-period comparisons of
its financial results should not be relied upon as an indication of future
performance. No assurance can be given that the Company will be able to achieve
or maintain profitability on a quarterly or annual basis in the future. Due to
all of the foregoing factors, it is possible that in some future quarter the
Company's operating results will be below the expectations of public market
analysts and investors. In such event, the price of the Company's Common Stock
could be materially adversely affected. See "Risk Factors -- Potential
Fluctuations in Quarterly Results."
24
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1996, the Company's working capital had increased to
$1,884,000 from $602,000 at September 30, 1995. This increase was primarily
attributable to earnings applied to reduce factoring and bank debt and to
decreases in accounts payable. The Company's operating activities provided cash
of $533,000 in the fiscal year ended September 30, 1996 and used cash of
$327,000 in 1995. For the fiscal year ended September 30, 1996, net cash
provided by operating activities was primarily due to net income plus
depreciation and amortization, and an increase in accounts payable and accrued
expenses, offset by increases in inventories, prepaid expenses and other assets,
and accounts receivable. For the fiscal year ended September 30, 1996, net cash
used in investing activities was $143,000 for purchases of property and
equipment. Net cash used in financing activities for the fiscal year ended
September 30, 1996 was $283,000 which was a result of the repayment of existing
debt offset by the collection of notes receivable and proceeds from borrowings
and the exercise of stock options and warrants.
The Company paid off its factoring line of credit in March 1996 and
concurrently established a $400,000 line of credit with Rancho Santa Fe Bank
("Bank") for working capital purposes. Borrowings under this line of credit bear
interest at the rate of 2 1/2% over the Bank's Prime Rate and are secured by
substantially all of the Company's assets. At November 20, 1996, outstanding
borrowings against this line of credit totalled $150,000 and the line currently
expires on February 1, 1997.
The Company expects to make capital expenditures for equipment throughout
the remainder of fiscal 1996, and expected personnel additions will require
additional capital expenditures. The Company believes that the net proceeds from
this offering, together with existing cash, credit available under the line of
credit and cash generated from operations, will be sufficient to finance its
operations for the next twelve months. All cash in excess of working capital
requirements will be kept in short term, investment grade securities.
The Company was delisted from the Nasdaq SmallCap Market in March 1995 for
falling below the minimum net capital requirement. The decline in the Company's
net capital was the result of a write down of assets and obligations related to
the Company's TEMPEST business. In March 1995, the Company conducted a private
placement of its Common Stock, raising net proceeds of $476,000 and successfully
reapplied for listing on the Nasdaq SmallCap Market in May 1995. See "Risk
Factors -- Recent Delisting" and "Certain Transactions."
25
<PAGE>
BUSINESS
WITH THE EXCEPTION OF HISTORICAL MATTERS, THE MATTERS DISCUSSED IN THIS
SECTION ARE FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES.
FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO, STATEMENTS RELATING
TO THE COMPANY'S STRATEGIES, THE DEVELOPMENT AND PACE OF INTERNATIONAL SALES FOR
THE COMPANY'S PRODUCTS, AND EXPECTED TRENDS IN THE RESULTS OF THE COMPANY'S
OPERATIONS. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE
RESULTS DISCUSSED IN SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE
OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED BELOW, AS WELL AS
THOSE DISCUSSED UNDER THE CAPTION "RISK FACTORS" AND ELSEWHERE IN THIS
PROSPECTUS.
OVERVIEW
The Company develops and markets ADR products which enable the automation of
costly, labor intensive business functions such as check and remittance
processing, forms processing and order entry. The Company's ADR products
incorporate proprietary neural network software technology for the recognition
and conversion of hand printed and machine generated characters into digital
data. Neural networks are powerful tools for pattern recognition applications
and consist of sets of coupled mathematical equations with adaptive parameters
that self adjust to "learn" various forms and patterns. The Company's ADR
products combine the Company's neural network software technology with an
extensive database of character patterns, enabling them to make fine
distinctions across a wide variety of patterns with high speed, accuracy and
consistency. The Company leverages its core technology across a family of ADR
products that the Company believes offers the highest accuracy commercially
available for the recognition of hand printed characters.
The Company's ADR products incorporate the Company's ICR software engine,
QuickStrokes API, with high speed co-processor boards which are configurable to
meet customer requirements. QuickStrokes API is sold to OEMs, such as BancTec,
NCR, ABC Bull, Unisys and IA Corporation, systems integrators such as SHL
Systemhouse, Inc and Wheb, and VARs such as One Button Operating Systems, Inc.,
Comprehensive Business Solutions, Inc. and Moon Sung Systems. Major end users
include Avon Products Company, certain of the Federal Reserve Banks, SCS
Communications, the Australian Tax Office, the Mexican Tax Authority and
American Express. QuickStrokes API can process documents in several languages.
Leveraging its core technical competency in ICR, the Company has begun to
address certain vertical markets through the introduction of the PFP. The PFP
incorporates the Company's core ICR technology in an application designed to be
marketed directly to end users in a broad variety of industries which require
high volume automated data entry. PFP operates on the Windows operating platform
on stand alone or networked personal computers, features an intuitive graphical
user interface ("GUI"), and is designed for easy installation and configuration
by the end user. The Company also sells its PFP products to systems integrators
and VARs.
INDUSTRY BACKGROUND
Despite significant advances in information technology, vast amounts of data
continue to be created on paper through hand or machine printing. In 1995,
according to industry reports, over 60 billion checks were written in the United
States alone and the volume of checks processed is expected to grow between 4%
and 5% for 1996. In the United States, approximately 600,000 people are engaged
in manual data entry of information contained in hand printed and machine
generated documents such as check processing, medical forms, remittances, and
payroll. Moreover, manual data entry functions are generally highly repetitive
and labor intensive tasks. Individuals engaged in manual data entry functions
may develop debilitating long term health problems such as repetitive stress
syndrome thereby increasing company health care costs and decreasing
productivity.
As a result, enterprises with large volumes of data entry requirements have
long sought to automate portions of the data entry task, including the use of
document image processing ("DIP") technology to capture and manipulate paper
images digitally. In its rudimentary form, DIP has existed in the form of
optical character recognition ("OCR") technology for nearly 30 years. Despite
this
26
<PAGE>
longevity, OCR technologies remain unsuitable for certain DIP applications, in
part because OCR technologies do not generally achieve sufficient levels of
accuracy in recognizing hand printed or hand and machine generated characters.
Beginning in the late 1980's, the inherent limitations of OCR technologies
led to the development of ICR, an advanced technology capable of recognizing
hand-printed characters. Originally, ICR technologies were deployed primarily in
check processing applications, which had not been successfully addressed by OCR
products. ICR has continued to gain limited acceptance in the production imaging
segment of the DIP market, which is comprised of hand printed and mixed hand
printed and machine generated forms processing. However, despite their early
success in certain applications, the usefulness of many ICR products remains
limited due to their reliance upon limited databases resulting in the products'
inability to adequately "learn" to recognize characters and patterns that
include inconsistencies and ambiguities. In addition, most ICR products
commercially available to date have been relatively expensive, custom
applications tailored to specific niche uses, and have not historically
incorporated the flexibility to enable their deployment across a broad range of
vertical applications.
THE MITEK SOLUTION
The Company develops, markets and supports what it believes to be the most
accurate ADR products commercially available for the recognition of hand printed
characters. The Company's unique proprietary technology recognizes hand printed
and machine generated characters with a level of accuracy that renders the
Company's ADR products a viable alternative to manual data entry in certain
applications. The Mitek solution allows customers that process large volumes of
standardized hand printed documents to do so more quickly, with greater accuracy
and at reduced costs.
The following are the key attributes of the Mitek solution:
HIGH LEVEL OF ACCURACY IN MISSION CRITICAL APPLICATIONS. The market for ICR
technologies is characterized by applications with critical dependence on
accuracy -- the historic impediment to automated data image processing of hand
printed documents -- such as processing checks, bank drafts, payments letters,
and credit card payment forms. The Company's QuickStrokes API engine, based upon
proprietary neural network software, provides a high level of accuracy in high
volume hand printed and machine generated character recognition applications. A
system utilizing the Company's ADR products has been installed at the Avon
Products Company's order processing plant, which processes approximately 2
million order forms per day. The system, which incorporates the Company's ICR
engine, has been able to achieve and maintain a character accuracy rate of 99.4%
on forms read by such system. The Company believes, based on market testing and
acceptance by major OEMs and end users, and based upon recognition data
submitted to the National Institute of Standards and Technology by the Company
and certain of its competitors, that its products offer increased accuracy and
superior price/performance relative to its competitors.
RAPID DEPLOYMENT AND DEMONSTRATED RETURN ON INVESTMENT FOR CUSTOMERS. The
Company's software solutions are designed to be rapidly deployed and to quickly
demonstrate cost-benefit advantages to the customer. The Company usually
delivers its products over a period of days, and customer return on investment
periods are often less than one year. Return on investment is generally rapid
because the Company's ADR products address applications that have a significant
profit impact. The Company's products are often installed at customer sites that
process large numbers of similar forms on a daily basis. The Company's ADR
software products are capable of processing hand printed forms at significantly
faster rates than manual data entry methods, resulting in significant cost
reductions in certain applications.
FLEXIBLE DESIGN OPERATING ON INDUSTRY STANDARD PLATFORMS. The Company's
solutions are designed to be easily integrated into a customer's existing
environment or architecture. The Company supplies products for the most popular
operating systems such as MS-DOS, Windows 3.1, Windows NT, Windows 95, OS/2,
OS/F, Solaris and HP UNIX. The Company's application products represent a
complete software solution, including software, communications interfaces and
GUIs. The Company
27
<PAGE>
also supplies system integration, ongoing performance analysis and application
consulting services to help ensure ongoing success. The Company believes that
this flexible combination of product, service and platforms represents an
advancement that enables successful intelligent system development in many
mission-critical data entry applications.
SCALABLE DESIGN TO MEET A VARIETY OF NEEDS AND BUDGETS. The Company's ADR
software includes a proprietary flexible, neural network ICR engine. The
flexibility of this engine allows the Company to customize products or create
product enhancements that may be customized to a client's needs on a cost
efficient basis in a relatively rapid time frame. The Company has traditionally
licensed its QuickStrokes API recognition engine to OEMs, VARs and systems
integrators who have incorporated the engine into a variety of specific customer
applications. With the introduction of its PFP, the Company has entered the end
user market with a scalable turnkey product that can be tailored by the Company,
VARs or the end user to meet a variety of application requirements. The
scalability of the design also permits the Company to bring the high accuracy of
its QuickStrokes API engine to lower volume applications on a cost effective
basis. Moreover, the PFP is designed to be scalable to provide additional
processing speed and capacity with enhancements to the end users' hardware and
software. The Company prices its products to deliver what the Company believes
to be the best functionality to price available in the marketplace.
MITEK STRATEGY
The Company's objective is to become the leading provider of technologically
advanced ADR products in the production imaging segment of the DIP market.
Elements of the Company's business strategy include:
STRENGTHEN TECHNOLOGICAL LEADERSHIP. The Company believes that its ICR
technology based upon neural networks enables it to provide the most
technologically advanced recognition engines available in the marketplace for
the recognition of hand printed characters. Since 1992, the Company has
significantly enhanced its technology and plans to strengthen its leadership
position in this area by improving the recognition capability, functionality and
scalability of its products through ongoing investment in research and
development and the introduction of enhanced products to the marketplace.
EXPAND SYSTEMS INTEGRATORS AND OEM CHANNELS. The Company believes that
systems integrators and OEMs of document imaging production equipment represent
the most effective route to the end user and, therefore the Company's most
significant revenue opportunity. The Company plans to establish new
relationships with systems integrators and OEMs, and further develop existing
relationships with leading providers of electronic and document-based financial
transaction processing systems, such as BancTec and Kleindienst Datentecnik
GmbH. The Company strives to deliver superior service to these customers by
developing frequent product enhancements and working closely with its customers
to ensure that the customers' needs are met by the Company's product offerings.
PENETRATE VERTICAL MARKETS THROUGH THE DEVELOPMENT OF END USER
APPLICATIONS. The Company intends to deploy its advanced ICR technology in a
series of ADR products addressing the requirements of strategic vertical markets
such as insurance, payroll processing and home healthcare. The Company believes
these markets represent a substantial opportunity due to the high level of data
entry/forms processing associated with these industries. The first such end user
application is the PFP. The Company intends to develop a variety of specialized
user interfaces to address a number of vertical markets.
EXPAND SALES AND MARKETING CAPABILITY. The Company plans to significantly
expand its sales and marketing staff (both domestically and internationally) in
order to improve its sales to OEMs, systems integrators, VARs and end users. The
Company plans to add sales and marketing personnel with industry and channel
experience, pursue direct sales in several strategic markets and eventually open
sales, marketing and support offices in areas of the United States where large
OEMs and significant end users or large potential end users of its products are
located.
28
<PAGE>
BUILD RECURRING REVENUE BASE BY EMPHASIZING MAINTENANCE OPPORTUNITIES. The
Company continues to market its ADR products as an ongoing service that includes
product updates, application consulting, and on-line or on-site support and
maintenance. The Company considers this to be an opportunity to increase revenue
through improved marketing of its maintenance services.
PRODUCTS
The Company incorporates its advanced ICR software technology into a family
of document imaging products addressing requirements for accurate, high volume,
automated entry of data residing on hand printed or machine generated forms. The
Company's ICR software is incorporated into end user systems sold by its OEM,
systems integrator and VAR customers, as well as the Company's own end user
application, the PFP. The following chart depicts a typical document image
processing system incorporating the Company's ICR software:
[CHART]
Graph depicts various work stations and document and information flow for a
typical Mitek Systems, Inc. document image process system.
The Company's products include the QuickStrokes API recognition engine, the
Premier Forms Processor application and other products leveraging the Company's
expertise in ICR.
QUICKSTROKES API
QuickStrokes API is a "recognition engine" which is incorporated into
end-user systems to provide recognition capability. QuickStrokes API CAR
performs Courtesy Amount Recognition ("CAR"), a process wherein the numeric
portion of personal and commercial checks is recognized and translated into
digital data. QuickStrokes API Forms is a recognition engine for forms that is
licensed to large integrators and to OEMs of forms processing systems. The
QuickStrokes API products have been developed with a flexible underlying
architecture to accommodate additional features and
29
<PAGE>
functionality as dictated by market demands. The Company's QuickStrokes API
products are currently in use processing sales orders, checks and financial
documents, tax forms, credit card drafts, time sheets, and insurance
applications. The QuickStrokes API engine currently processes documents in nine
languages by recognizing machine or hand printed characters written in Dutch,
English, French, German, Italian, Portuguese, Russian, Spanish and Swedish.
PREMIER FORMS PROCESSOR
The Company has co-developed and licensed a proprietary forms processing
application, the PFP, which incorporates the Company's core ICR technology in an
application designed for end users in a broad variety of industries with
requirements for high volume automated data entry. The Company's PFP product
consists of the modules required to implement a forms processing application and
can recognize hand printed and machine generated characters. The PFP runs on the
Windows operating platform on stand alone or networked personal computers,
features a GUI, and is designed for ease of installation and configuration by
the end user.
OTHER PRODUCTS: NIFAXSHARE AND QUICKFRAME
The Company's NiFaxshare product line combines the Company's ADR
technologies with conventional incoming facsimile routing technologies to
provide economical and practical "faxmail" solutions. The Company markets its
NiFaxshare products to large end users, such as the Bank of Montreal, Capital
Cities-ABC, and J. P. Morgan Private Banking, as well as a network of VARs.
QuickFrame is an advanced page segmentation system that separates the scanned
image of a document into isolated regions and classifies the kinds of
information contained in the region. The system outputs the coordinates and type
of each region and can produce "cut-out" images of isolated regions to
facilitate processing.
The following table lists the Company's current products accounting for
substantially all of the Company's product sales:
<TABLE>
<CAPTION>
PLATFORMS
PRODUCT NAME APPLICATION SUPPORTED TARGET CUSTOMER LIST PRICE
<S> <C> <C> <C> <C>
QuickStrokes Remittance Processing and DOS OEMs, VARs, $9,000
API CAR Check Clearing Windows: 3.x, 95, Systems
NT Integrators
OS/2
QuickStrokes OS/F $20,000 -
API CAR with HP-UNIX $30,000
Co-processor Solaris
Boards
QuickStrokes General Forms Processing DOS OEMs, VARs, $4,000
API Forms Windows: 3.x, 95, Systems
NT Integrators
OS/2
OS/F
HP-UNIX
QuickStrokes Solaris $15,000 -
API Forms with $22,000
Co-processor
Boards
PFP General Forms Processing Windows: 3.x VARs, Systems $14,000
Integrators, End
Users
PFP with $25,000
Co-processor
Boards
</TABLE>
30
<PAGE>
The Company has an internal customer service department that handles
installation and maintenance requirements. The majority of inquiries are handled
by telephone, with occasional visits to the customer's facilities. The Company
believes that as the installed base of its products grows, the customer service
function will become a source of recurring revenues.
CUSTOMERS AND END USERS
The Company licenses and sells its ADR products to a broad range of
companies seeking high volume, high reliability document processing systems. End
users of the Company's products generally seek to automate manual data entry
processing in order to increase processing speed and reduce data entry costs.
Traditionally, the Company has derived its revenues from the sale of
QuickStrokes API as an ICR engine to various OEMs, VARs and systems integrators.
With the introduction of the PFP, the Company now offers a scalable turnkey
system which is marketed to VARs, systems integrators and end users. The
Company's products are used in a variety of applications on a worldwide basis.
For example, systems using the Company's technology are in use at Avon Products
Company's United States forms processing centers, handling approximately 2
million sales order forms daily, which are hand printed by different sales
agents from around the country. The Company's products are also used by
financial institutions such as Mellon Bank, National Westminster Bank and
Unibanco for check processing. Systems using the Company's technology are
currently being used by tax authorities in Australia and Mexico to process tax
returns. In addition, utilities companies such as Southwestern Bell and New York
Telephone use the Company's technologies for invoice processing and payment
reconciliation.
Certain of the Company's largest current customers based on payments
received in the fiscal years 1995 and 1996, are listed below under the major
application category for which the Company believes the customer is using the
Company products:
<TABLE>
<CAPTION>
FINANCIAL DOCUMENT PROCESSING FORMS PROCESSING
- ------------------------------------------------------------- ---------------------------------------------------
<S> <C>
BancTec Technologies, Inc. CentroMatic Systemi, SPA
(including Recognition International) Headway Computer Products
Bull Corporation of North America IT Corporation of America
IA Corporation National Computer Systems
Infoscore, Inc. SHL Systemhouse, Inc.
Kleindienst Datentecnik GmbH VALIdata Sistemas de Captura, S.A. de C.V.
NCR Corporation Wheb Systems, Inc.
TRW Financial Solutions
Unisys
</TABLE>
Three customers, BancTec, TCSI and Wheb, accounted for 42% of the Company's
net sales for fiscal 1996. BancTec is a leading provider of electronic and
document-based financial transaction processing systems, work flow and imaging
products, application software and professional services. BancTec develops
solutions for the banking, financial services, insurance, health care,
government, utility, telecommunications, grocery and retail industries. TCSI is
a manufacturer of financial processing systems, primarily for the transportation
industry. Wheb is a systems integrator providing forms processing systems and
solutions to a variety of commercial companies and government agencies.
The Company does not have long-term contracts with these or other
significant customers. Thus, there can be no assurance that the Company's
significant customers will continue to purchase products from the Company and
any reductions in orders from any of the Company's significant customers could
have a material adverse effect upon the Company's business, operating results
and financial condition. The Company recently received notice from TCSI that
TCSI will not be placing any additional orders for the Company's products in the
forseeable future due to a change in the
31
<PAGE>
direction of TCSI's business, and no assurance can be given that the Company
will be able to replace the revenues it might have received from such orders.
See "Risk Factors--Customer Concentration; Dependence on Key Customers."
SALES AND MARKETING
The Company markets its products and services primarily through its
internal, direct sales organization. The Company employs a technically-oriented
sales force with management assistance to identify the needs of existing and
prospective customers. The Company's sales strategy concentrates on those
companies that it believes are key users and designers of automated document
processing systems for high-performance applications. The Company currently
maintains sales offices in Virginia, New Jersey, California and Calgary, Canada.
In addition, the Company sells and supports its products through representatives
and distributors in Illinois and Australia. The sales process is supported with
a broad range of marketing programs which include trade shows, direct marketing,
public relations and advertising.
The Company provides maintenance and support on a contractual basis after
the initial product warranty has expired. The Company provides telephone support
and on-site support. Customers with maintenance coverage receive regular
software releases from the Company. Foreign distributors generally provide
customer training, service and support for the products they sell. Additionally,
the Company's products are supported internationally by periodic distributor and
customer visits by Company management. These visits include attending imaging
shows, as well as sales and training efforts. Technical support is provided by
telephone as well as technical visits in addition to those previously mentioned.
The ability to read hand printed or machine generated characters in various
languages has materially assisted the Company in its international sales effort.
The Company believes that the competition has much less functionality in this
regard. International sales accounted for approximately 31% of the Company's net
sales for the period ended September 30, 1996. The Company believes that a
significant percentage of the products in its domestic sales are incorporated
into systems that are delivered to end users outside the United States such that
the total percentage of its products which are ultimately utilized by foreign
end users is between 40% and 50%. International sales in the past twelve months
were made in 15 countries including Australia, Argentina, Belgium, Brazil,
England, France, Finland, Germany, Italy, Malaysia, Mexico, Portugal, Poland,
Spain and Sweden. The Company sells its products in United States currency only.
See "Risk Factors -- Risks Associated with International Sales."
TECHNOLOGY
The Company utilizes a wide range of technologies in its proprietary
products. These include segmentation techniques, gray-scale processing
techniques, noise and line removal techniques, object-oriented programming,
GUIs, and extensive proprietary databases. The Company believes that the use of
artificial neural networks for recognition distinguishes its products from those
of most of its competitors.
The Company provides a hand printed and machine generated character
recognition engine in several configurations. This engine performs all the
processing required to take the image of a section of a document, find the
characters within that area, remove noise or lines that might interfere with the
correct identification of the characters, separate the characters from each
other, and then recognize the characters. The results are then placed in a
defined data structure format and returned to a host computer. The results are
the identity of the characters found, their locations and size, the confidence
level of correct recognition, and a second choice and the confidence level that
is associated with that second choice. This confidence factor, related to the
probability of recognition correctness, allows the system to be "tuned" for the
complexity or criticality of the specific application.
The enabling technology for the Company's products is artificial neural
network computation. The strength of neural networks is that they have the
ability to be "trained" to recognize various
32
<PAGE>
kinds of patterns. Neural networks are mathematical equations with adaptive
coefficients. Examples of data are presented to the networks in a way that
allows the adaptive coefficients to be adjusted to fit. This adjustment is
called "training" because it mimics the manner in which human intelligence is
trained to read and interpret information. Once the network is trained, it will
recognize at high speeds the patterns in which it was trained. Once the training
process is complete, the network will have developed the capability to recognize
digits in a wide degree of variation, with very high speed and accuracy,
approaching, or in certain applications, exceeding average human accuracy.
The Company's technology includes a comprehensive set of tools for
extracting data from many types of different forms including forms that are
crooked, enlarged or reduced and eliminates lines, boxes or combs, processing
only the data of interest, as defined by the user, such as numeric, alpha, or
alpha-numeric data. Once digitized, the forms may emanate from a scanner or from
digital archives. The quality of these images may vary significantly. The
Company's software can enhance these images using proprietary noise filtering
algorithms which eliminate smudges and stains, enhance gray scale images, and
repair broken and degraded characters. The Company's software has the ability to
recognize the vagaries of characters, whether hand printed or machine generated,
separating characters that are touching or overlapping, eliminating ambiguities,
finding data that has been written out of its assigned area, and recognizing a
vast array of characters, compensating for personal, regional and national
differences in character style.
The Company acquired a license (exclusive for the initial five years) to
core ICR technology and software underlying its ADR products from HNC in
November 1992. Since that time the Company has devoted significant time and
resources to substantially enhancing the functionality of the core ICR
technology. At the time of acquisition of the license, twelve of the personnel
responsible for developing HNC's core ICR software moved to the Company in
connection with the transaction. The HNC license provided for a grant of rights
against payment of royalties amounting up to $2.6 million over three years. All
royalties and amounts due under the license have now been paid in full. On
November 23, 1997, certain of the Company's exclusive license rights from HNC
shall become nonexclusive and HNC will be able to use or license the rights to
others to use certain of the core technologies used in the Company's ADR
products to compete directly with the Company.
The Company's PFP software product incorporates the Company's Quickstrokes
API engine, certain software modules developed by the Company and certain
software and technology licensed on a nonexclusive basis from VALIdata. Pursuant
to a Marketing License Agreement dated as of March 26, 1996 (the "VALIdata
License Agreement"), between the Company and VALIdata, the Company was granted a
nonexclusive, worldwide right to use, reproduce and distribute copies of PFP
software owned or controlled by VALIdata to customers of the Company, in
exchange for payment of certain royalties to VALIdata. The VALIdata License
Agreement provides for a one year term, with provisions for annual renewal upon
the written consent of both parties. There can be no assurance, however, that
the VALIdata License Agreement will be renewed by VALIdata, and if renewed, on
terms acceptable to the Company.
The PFP software covered by the VALIdata License Agreement is designed for
the Windows 3.1 operating system. However, the Company believes that the Windows
NT operating system will become the industry standard for this type of
application over the near term. Accordingly, the Company is currently developing
PFP application software for the Windows NT operating platform.
The markets for products incorporating ADR technology are characterized by
rapidly advancing technology and rapidly changing user preferences. The
Company's ability to compete effectively with its ADR product line will depend
upon its ability to meet changing market conditions and develop enhancements to
its products on a timely basis in order to maintain its competitive advantage.
In addition, continued growth will ultimately depend upon the Company's ability
to develop additional technologies and attract strategic alliances for related
or separate product lines. There can be no assurance that the Company will be
successful in developing and marketing product enhancements and additional
technologies, that the Company will not experience difficulties that could delay
or
33
<PAGE>
prevent the successful development, introduction and marketing of these
products, or that its new products and product enhancements will adequately meet
the requirements of the marketplace, will be of acceptable quality, or will
achieve market acceptance.
RESEARCH AND DEVELOPMENT
The Company believes that its future success depends in part on its ability
to maintain and improve its core technologies, enhance its existing products and
develop new products that meet an expanding range of customer requirements. The
Company intends to expand its existing product offerings and to introduce new
forms processing software solutions. To date, the Company has relied primarily
on ICR technology acquired from HNC as well as internal development, although it
may, based on timing and cost considerations, acquire technology or products
from third parties or consultants. The Company performs all quality assurance
and develops documentation internally. The Company intends to continue to
support industry standard operating systems.
The Company's team of specialists in recognition algorithms, software
engineering, user interface design, product documentation and quality
improvement is responsible for maintaining and enhancing the performance,
quality and usability of all of the Company's products. In addition to research
and development, the engineering staff provide customer technical support on an
as needed basis, along with technical sales support.
In order to improve the accuracy of its ADR products, the Company focuses
research and development efforts on continued enhancement of its database of
hundreds of thousands of images that is used to "train" the neural network
software that forms the core of the Company's ICR engine. Additionally, the
Company continues to enhance its recognition software through use of such tools
as confusion matrices, which can be used to avoid substitution errors in
recognition.
The Company's research and development organization included 14 software
engineers at September 30, 1996, including seven with advanced degrees. During
fiscal 1996, the Company spent approximately $1.3 million on research and
development and spent approximately $1.0 million on research and development in
each of fiscal years 1995 and 1994. The Company balances its engineering
resources between development of ICR and applications development. Of the 14
software engineers, approximately six are involved in ICR research and
development of the QuickStrokes API recognition engine. The remaining staff are
involved in applications development, including the PFP and NiFaxshare products.
Products as complex as those offered by the Company, particularly the
Company's QuickStrokes and PFP products, may contain undetected defects or
errors when first introduced or as new versions are released. As a result, the
Company has in the past and could in the future face loss or delay in
recognition of revenues as a result of software errors or defects. In addition,
the Company's products are typically intended for use in applications that may
be critical to a customer's business. As a result, the Company expects that its
customers and potential customers have a greater sensitivity to product defects
than the market for software products generally. There can be no assurance that,
despite testing by the Company and by current and potential customers, errors
will not be found in new products or releases after commencement of commercial
shipments, resulting in loss of revenues or delay in market acceptance,
diversion of development resources, damage to the Company's reputation, or
increased service and warranty costs, any of which would have a material adverse
effect upon the Company's business, operating results and financial condition.
COMPETITION
The market for the Company's ADR products is intensely competitive, subject
to rapid change and significantly affected by new product introductions and
other market activities of industry participants. The Company faces direct and
indirect competition from a broad range of competitors who offer a variety of
products and solutions to the Company's current and potential customers. The
Company's principal competition comes from (i) customer-developed solutions;
(ii) direct competition from companies offering ICR systems; and (iii) companies
offering competing technologies capable of recognizing hand printed characters.
34
<PAGE>
It is also possible that the Company will face competition from new
competitors. These include companies that are existing licensors such as HNC and
OEM, systems integrators and VAR customers, such as BancTec, or dominant
software companies with a presence in publishing or office automation such as
Microsoft Corporation and Adobe Systems Incorporated. In addition, the Company's
license agreement with HNC provides that, upon expiration of certain exclusivity
periods beginning in November 1997, HNC will have the right to use certain of
the core technologies used in the Company's ADR products, originally developed
by HNC and acquired by the Company in 1992, to compete directly with the
Company. Moreover, as the market for automated data entry and ICR software
develops, a number of these or other companies with significantly greater
resources than the Company could attempt to enter or increase their presence in
the Company's market either independently or by acquiring or forming strategic
alliances with competitors of the Company or to otherwise increase their focus
on the industry. In addition, current and potential competitors have established
or may establish cooperative relationships among themselves or with third
parties to increase the ability of their products to address the needs of the
Company's current and prospective customers.
The Company's Quickstrokes API products compete, to various degrees, with
products produced by a number of substantial competitors including AEG, a
subsidiary of Daimler Benz, Computer Gesellschaft Konstanz, a subsidiary of
Siemens, and Nestor, Inc. The Company believes its primary competitive
advantages are its (i) recognition accuracy with regard to hand printed
characters, (ii) flexibility, since it may operate on a broad range of computer
operating platforms, (iii) scalability and (iv) flexible software architecture
of Quickstrokes API which can be more readily modified, improved with added
functionality, configured for new products, and ported to new operating systems
and upgrades. Despite these advantages, QuickStrokes API's competitors have
existed longer and have far greater financial resources and industry connections
than the Company.
The Company's PFP products compete against complete proprietary systems
offered by software developers, such as GTESS Corporation, Symbus Technology,
Inc. and Cardiff Software, Inc. In addition, PFP faces competition from
providers of recognition systems that incorporate ADR technology, including in
some instances, the Company's Quickstrokes API product, such as Microsystems
Technology, Inc., and National Computer Systems. Because PFP is based on the
Company's proprietary QuickStrokes API engine, its competitive advantages
reflect the advantages of the QuickStrokes engine. Competitors in this market
offer both high and low cost systems. The Company's strategy is to position PFP
to compete successfully in a scalable midrange price while offering a higher
degree of accuracy and greater flexibility than competing systems currently on
the market. Increased competition may result in price reductions, reduce gross
margins and loss of market share, any of which could have a material adverse
effect on the Company's business, operating results and financial condition.
Furthermore, a significant percentage of the Company's revenues are attributable
to sale of co-processor boards sold together with the Company's software.
Anticipated increases in the microprocessor speed and power available, such as
the Pentium P-6, could have the effect of reducing the demand for such
co-processor boards. It is also possible that the Company's co-processor boards
will have competition from semiconductor manufacturers embedding the technology
on their chips. There can be no assurance that the Company will be able to
compete successfully against current or future competitors or that competitive
pressures faced by the Company will not materially adversely affect its
business, operating results and financial condition. See "Risk Factors --
Competition."
EMPLOYEES
As of September 30, 1996, the Company employed a total of 40 persons,
consisting of 13 in marketing, sales and support, 14 in research and
development, seven in operations and six in finance, administration and other
capacities. All employees work on a full time basis. The Company has never had a
work stoppage. None of its employees is represented by a labor organization, and
the Company/ employer considers its relations with its employees to be good.
The Company's future performance depends in significant part upon attracting
and retaining key technical, sales, senior management and financial personnel.
Competition for such personnel is
35
<PAGE>
intense, and the inability to retain its key personnel or to attract, assimilate
or retain other highly qualified personnel in the future on a timely basis could
have a material adverse effect on the Company's results of operations. See "Risk
Factors -- Dependence on Key Personnel."
PROPERTIES
The Company's principal executive offices, as well as its principal research
and development facility, is located in approximately 12,000 square feet of
leased office building space in San Diego, California. The lease on this
facility expires April 30, 1998, with an option to extend the lease for an
additional three years. The Company also leases a sales office facility in
Sterling, Virginia. In addition, the Company leases office space used as a
sales, service, and development facility in Calgary, Alberta, Canada. The
Company believes that its existing facilities are adequate for its current needs
and that additional space will be available as needed.
LEGAL PROCEEDINGS
There are no legal claims currently pending against the Company. The Company
has, however, received a notice of a possible claim arising in connection with
this offering. In January 1995, the Company entered into a contract with
Heartland Financial Corp ("Heartland") for the provision of certain financial
consulting services, including assisting the Company in establishing
relationships with investment bankers and improving the liquidity of the
Company's Common Stock. Heartland has indicated to the Company in conversations
that it believes that it is entitled to a $375,000 fee in connection with this
offering under the terms of its contract. The Company disputes this claim. The
contract between Heartland and the Company requires that all disputes be
arbitrated. While there can be no assurance that Heartland will not seek to
arbitrate its claim against the Company or would be unsuccessful in prosecuting
such a claim if it were arbitrated, the Company believes that any potential
liability arising out of such a claim would be immaterial.
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<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the executive officers and directors of the
Company and their ages as of October 1, 1996:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------- --------- -------------------------------------------------------
<S> <C> <C>
John M. Thornton (1)(2)................ 64 Chairman of the Board
John F. Kessler........................ 47 President, Chief Executive Officer and Director
Gerald I. Farmer, Ph.D................. 62 Executive Vice President and Director
James B. DeBello (2)................... 37 Director
Daniel E. Steimle (1)(2)............... 48 Director
Sally B. Thornton (1).................. 62 Director
</TABLE>
- ------------------------------
(1) Compensation Committee
(2) Audit Committee
MR. THORNTON, a director of the Company since March 1986, was appointed
Chairman of the Board as of October 1, 1987. Additionally, he served as
President of the Company from May 1991 through July 1991 and Chief Executive
Officer from May 1991 through February 1992. From 1976 through 1986, Mr.
Thornton was the principal shareholder and served as Chairman of the Board at
Micom, Inc. Mr. Thornton was a President of Wavetek Corporation for 18 years.
Mr. Thornton is also a director of Dynamic Instruments, Inc. and Chairman of the
Board of Thornton Winery Corporation. Mr. Thornton is the spouse of Sally B.
Thornton, a director.
MR. KESSLER, a director of the Company since August 1993, was appointed
President and Chief Executive Officer of the Company in April 1994. Prior to
joining the Company, he was Vice President -- Finance/Administration and Chief
Financial Officer of Bird Medical Technologies, Inc., a manufacturer of medical
equipment from November 1992 and also served as Secretary from January 1993 to
April 1994. Prior to joining Bird Medical, Mr. Kessler was Vice President,
Finance/ Administration and Chief Financial Officer of Emerald Systems
Corporation, a computer systems company from January 1992 to November 1992. From
July 1980 to July 1991, Mr. Kessler was with Wavetek Corporation serving in
various positions, including Chief Financial Officer during the period of 1987
to 1991.
DR. FARMER, a director of the Company since May 1994, has been Executive
Vice President of the Company since November 1992. Prior to joining the Company,
Dr. Farmer worked as Executive Vice President of HNC Software, Inc. from January
1987 to November 1992. He has held senior management positions with IBM
Corporation, Xerox, SAIC and Gould Imaging and Graphics.
MR. DEBELLO, a director of the Company since November 1994, has been Vice
President and Assistant General Manager of Qualcomm Eudora Internet E-Mail
Software Division of Qualcomm, Inc. since November, 1996. From 1990 to 1996, he
was President of Solectek Corporation in San Diego, California. He held various
positions in the John M. Thornton & Associates group of companies from July 1986
to April 1990. Prior to that, he was employed by the Los Angeles Olympic
Organizing Committee coordinating the marketing efforts to support ticket sales,
traffic management and community relations.
MR. STEIMLE, a director of the Company since February 1987, has been Vice
President and Chief Financial Officer of Advanced Fibre Communications, a
telecommunications equipment company, since December 1993. Prior to that time,
Mr. Steimle was Senior Vice President, Operations and Chief Financial Officer of
The Santa Cruz Operation from September 1991 to December 1993. Mr. Steimle
served as Director of Business Development for Mentor Graphics, a software
development company,
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<PAGE>
from August 1989 to September 1991. Prior to that time, Mr. Steimle was the
Corporate Vice President, Chief Financial Officer and Treasurer of Cipher Data
Products, Inc., a manufacturer of data storage equipment.
MS. THORNTON, a director of the Company since April 1988, has been a private
investor for more than six years. She served as Chairman of Medical Materials,
Inc. in Camarillo until February 1996, is on the Board of Directors of Thornton
Winery Corporation in Temecula, Sjogren's Syndrome Foundation in Port
Washington, New York, and is a Life Trustee of the San Diego Museum of Art. Ms.
Thornton is the spouse of John M. Thornton, Chairman of the Board.
Directors are elected by the stockholders at each annual meeting of
stockholders to serve until the next annual meeting of stockholders or until
their successors are duly elected and qualified. Officers are chosen by, and
serve at the discretion of, the Board of Directors.
EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by, or
paid for services rendered to the Company in all capacities during the last
three completed fiscal years by (i) the Company's chief executive officer and
(ii) the Company's two other most highly compensated executive officers who were
serving as executive officers at the end of that year (together, the "Named
Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION -------------
--------------------------------- AWARDS
OTHER SECURITIES
ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS
- ---------------------------------------- ---- -------- ------- ---------- -------------
<S> <C> <C> <C> <C> <C>
John M. Thornton 1996 $150,000 $ -- $ -- $ --
Chairman of the Board 1995 150,000 -- -- --
1994 150,000 -- -- --
John F. Kessler 1996 140,000 42,375(2) 1,095(3) 100,000
President and Chief Executive Officer 1995 140,000 -- -- --
1994 59,231(1) -- -- 200,000
Gerald I. Farmer, Ph.D 1996 137,100 41,497(2) 1,091(3) 20,000
Executive Vice President 1995 137,100 -- -- --
1994 137,100 3,428 -- 50,000
</TABLE>
The following table sets forth the number of shares covered by both
exercisable and unexercisable stock options as of September 30, 1996. Also
reported are values of "in-the-money" options that represent the positive spread
between the respective exercise prices of outstanding stock options and the fair
market value of the Company's Common Stock as of September 30, 1996.
OPTION VALUES AT SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS
YEAR-END AT FISCAL YEAR END (4)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
John M. Thornton -- -- $ -- $ --
John F. Kessler 188,334 116,666 522,219 313,898
Gerald Farmer, Ph.D. 87,222 27,778 256,484 75,019
</TABLE>
- ------------------------------
(1) Mr. Kessler was elected President and Chief Executive Officer of the Company
in April 1994.
(2) Subject to board approval.
(3) Consists solely of matching contributions to the Company's 401(k) plan.
(4) Based on closing bid price of $4.00 as of September 30, 1996 as reported on
the Nasdaq SmallCap Market.
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<PAGE>
The Company maintains an Executive Severance Policy which provides for
severance pay in the event of involuntary termination in an amount equal to 13
weeks of the participant's base compensation, plus two additional weeks of base
compensation for each year of service up to a maximum of 26 weeks. By special
arrangement, the Company has agreed to pay Mr. Kessler severance pay equal to 26
weeks compensation in the event of involuntary termination.
The Company also maintains an Executive Incentive Plan in which Messrs.
Kessler and Farmer participate. The plan provides for cash bonuses, expressed as
a percentage of the participant's base compensation, in the event that the
Company meets certain net sales and pre-tax, pre-bonus income goals. The precise
goals and the amount of the potential bonus are established by the Compensation
Committee each year. In fiscal 1996, Mr. Kessler and Dr. Farmer each received
bonuses under this plan in the amount of $42,375 and $41,497 respectively.
DIRECTOR COMPENSATION
The Company does not pay compensation for service as a director to persons
employed by the Company. Outside directors are paid $1,000 for each meeting they
attend.
EMPLOYEE BENEFIT PLANS
1986 AND 1988 STOCK OPTION PLANS. The Company's 1986 Stock Option Plan (the
"1986 Plan") authorized the issuance of an aggregate of 630,000 shares of the
Company's Common Stock. At September 30, 1996, 331,584 shares of Common Stock
were subject to outstanding options issued pursuant to the 1986 Plan. The 1986
Plan terminated on September 30, 1996 and no additional options may be granted
under that plan. The Company's 1988 Stock Option Plan (the "1988 Plan")
authorizes the Company to grant to its directors, officers and key employees
non-qualified stock options to purchase up to 650,000 shares of the Company's
Common Stock. At September 30, 1996, 472,973 shares were reserved for issuance
under the 1988 Plan of which 410,000 were subject to outstanding options and
62,973 remained available for future grants. The Compensation Committee of the
Board of Directors (the "Committee") administers the 1986 Plan and the 1988
Plan. The Committee selects the recipients to whom options are granted and
determines the number of shares to be awarded. Options granted pursuant to the
1986 Plan and the 1988 Plan are exercisable at a price determined by the
Committee at the time of the grant, but in no event will the option price be
lower than the fair market value of the Common Stock on the date of the grant.
However, discounted options to directors under the 1988 Plan may be exercisable
at $1.00 per share. Options become exercisable at such times and in such
installments (which may be cumulative) as the Committee provides in the terms of
each individual option agreement. In general, the Committee is given broad
discretion to issue options in exchange and to accept a wide variety of
consideration (including shares of Common Stock of the Company, promissory
notes, or unexercised options) in payment for the exercise price of stock
options.
1996 STOCK OPTION PLAN. The Board of Directors has approved the adoption of
a 1996 Stock Option Plan (the "1996 Plan"). The 1996 Plan authorizes the
issuance of an additional 1,000,000 shares of the Company's Common Stock
pursuant to the exercise of options granted thereunder. Options granted under
the 1996 Plan are exercisable at a price determined by the Committee at the time
of grant, but in no event will the option price be lower than the fair market
value of the Common Stock on the date of grant. Subsequent to September 30,
1996, options for 283,250 shares were granted under the 1996 Plan and 716,750
were available for future grants. The options granted vest on a monthly basis
over a three year vesting period and certain of the options are subject to an
accelerated vesting schedule in the event of a change in control of the Company.
EMPLOYEE SAVINGS PLAN. Effective January 1, 1991, the Company established
an Employee Savings Plan (the "Savings Plan") intended to qualify under Section
401(k) of the Internal Revenue Code (the "Code"), which is available to all
employees who satisfy the age and service requirements under the Savings Plan.
The Savings Plan allows an employee to defer up to 15% of the employee's
compensation for the pay period as elected in his or her salary deferral
agreement on a pre-tax basis pursuant to a cash or deferred arrangement under
Section 401(k) of the Code (subject to maximums permitted under federal law).
This contribution generally will not be subject to federal tax until it is
distributed from the
39
<PAGE>
Savings Plan. In addition, these contributions are fully vested and
non-forfeitable. Contributions to the Savings Plan are deposited in a trust fund
established in connection with the Savings Plan. The Company may make
discretionary contributions to the Savings Plan at the end of each fiscal year
as deemed appropriate by the Board of Directors. Vested amounts allocated to
each participating employee are distributed in the event of retirement, death,
disability or other termination of employment.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY
As permitted by Section 145 of the Delaware General Corporation Law, the
Amended and Restated Bylaws (the "Bylaws") of the Company provide that the
Company shall indemnify its directors and officers to the fullest extent
permitted by Delaware law, including circumstances in which indemnification is
otherwise discretionary under Delaware law, and further requires the Company to
indemnify such persons against expenses, judgments, fines, settlements and other
amounts reasonably incurred in connection with any proceeding to which any such
person may be made a party by reason of the fact that such person was an agent
of the Company (including expenses, judgments, fines and settlements of
derivative actions, unless indemnification is otherwise prohibited by law),
provided such person acted in good faith and in a manner he reasonably believed
to be in the best interests of the Company, and, in the case of a criminal
proceeding, had no reason to believe his conduct was unlawful.
As permitted by the Delaware General Corporation Law, the Company's
Certification of Incorporation includes a provision that eliminates the personal
liability of its directors to the fullest extent permitted by the Delaware
General Corporation Law, which eliminates personal liability for monetary
damages for breach of fiduciary duty as director except for liability (i) for
any breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the Delaware General Corporation Law or (iv) for any transaction from which the
director derived an improper personal benefit.
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<PAGE>
CERTAIN TRANSACTIONS
At the close of its fiscal year ending September 30, 1994, the Company wrote
down $1,046,000 of assets related to its TEMPEST business, attributable to the
decline in the TEMPEST market. That write-down caused the Company's net capital
to fall below the minimum listing requirements for the Nasdaq SmallCap Market,
and the Company was delisted on March 9, 1995. In March, 1995, the Company
issued an aggregate of 666,999 shares of its Common Stock to 15 individuals, in
a private placement for an aggregate of $475,704, net of costs, or $0.71 per
share. Mr. Thornton, Chairman of the Board, acquired 26,000 shares of Common
Stock at a gross price of $.94 per share, and Mr. Kessler, President and Chief
Executive Officer, acquired 35,000 shares, in that offering at a gross price of
$.75 per share, on the same terms and conditions offered to other investors. The
proceeds from this offering were used to increase the Company's net capital and
in May 1995, the Company successfully reapplied for listing on the Nasdaq
SmallCap Market. See "Risk Factors -- Recent Delisting" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
Effective October 20, 1995, the Company entered into investment banking
agreements with several NASD-registered broker dealers, including Cruttenden
Roth Incorporated. Pursuant to those agreements, the Company issued warrants to
purchase an aggregate of 210,000 shares of its Common Stock at a price of $1.50
per share exercisable for a period of two years. The warrants were granted in
exchange for the provision of various investment banking services, and contained
piggyback registration rights which permit the holders to include their shares
in any future registration statement filed by the Company until March 31, 1998,
subject to certain limitations. See "Description of Capital Stock --
Registration Rights."
Any future transactions between the Company and its officers, directors,
principal shareholders or other affiliates will be on terms no less favorable to
the Company than can be obtained from unaffiliated third parties on an
arms-length basis and will be approved by a majority of the Company's
independent and disinterested directors.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information known to the Company with
respect to the beneficial ownership of the Company's outstanding Common Stock as
of September 30, 1996, and as adjusted to reflect the sale of the Common Stock
being offered hereby by (i) each person (or group of affiliated persons) who is
known by the Company to own beneficially more than 5% of the Company's Common
Stock, (ii) each of the Company's directors, (iii) each of the Named Officers,
(iv) all executive officers and directors of the Company as a group, and (v)
each of the Selling Stockholders. Unless otherwise specified, the address of the
stockholder is the address of the Company as set forth herein.
<TABLE>
<CAPTION>
SHARES NUMBER OF SHARES
BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO BEING AFTER
OFFERING (1) OFFERED OFFERING (1)(2)
------------------ --------- ------------------
DIRECTORS, NAMED OFFICERS AND 5% STOCKHOLDERS NUMBER PERCENT NUMBER NUMBER PERCENT
- ---------------------------------------------------- --------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
John M. and Sally B. Thornton Trust (3)............. 3,702,584 47.6% 952,625 2,749,959 27.4%
John B. DeBello (4)................................. 7,500 * 0 7,500 *
John F. Kessler (5)................................. 252,222 3.2 0 252,222 2.5
Gerald I. Farmer (6)................................ 101,111 1.3 0 101,111 1.0
Daniel F. Steimle (7)............................... 33,688 * 0 33,688 *
Directors and Executive Officers as a Group (6
persons)........................................... 4,097,105 52.6% 952,625 3,144,480 31.34%
<CAPTION>
OTHER SELLING STOCKHOLDERS
- ----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Richard S. Dawson (8)............................... 18,808 * 17,724 1,084 *
Glenn Hamilton (9).................................. 7,200 * 7,200 0 *
Ken Davis (9)....................................... 8,700 * 8,700 0 *
ETL Holdings Canada Inc. (9)........................ 9,576 * 9,576 0 *
Solion Corporation of Alberta Ltd. (9).............. 9,576 * 9,576 0 *
Merritt Widen (10).................................. 193,364 2.5 193,364 0 *
Nathan A. Low (11).................................. 25,000 * 25,000 0 *
Douglas A. Backus (12).............................. 20,000 * 20,000 0 *
J.P. III, Inc. Pension Plan (13).................... 20,000 * 20,000 0 *
David Rochat (14)................................... 15,151 * 15,151 0 *
Mary E.C. Benek (15)................................ 15,151 * 15,151 0 *
Wayne Johnson (16).................................. 5,933 * 5,933 0 *
</TABLE>
- ------------------------------
* Less than 1%
(1) Does not include (i) up to 146,250 shares issuable upon exercise of the
Underwriters' Warrant, (ii) up to 215,000 shares issuable upon exercise of
outstanding warrants and (iii) 463,041 issuable upon the exercise of
options granted under the Option Plans at a weighted average per share
exercise price of $1.21.
(2) Assumes the Underwriters' overallotment option is not exercised. The
Underwriters' overallotment option has been granted by the John M. and
Sally B. Thornton Trust (the "Thornton Trust") in an amount up to 532,500
shares. If the Underwriters' overallotment option is exercised in full, the
Thornton Trust will own 2,217,459 shares, or 22.10% of the outstanding
shares.
(3) John M. Thornton and Sally B. Thornton, husband and wife, are trustees of a
family trust, and are each directors of the Company. Mr. Thornton has
served as its Chairman of the Board for the past nine years and was
President and CEO from 1991-92.
(4) Represents 7,500 shares of Common Stock subject to options exercisable
within 60 days of September 30, 1996. Mr. DeBello is a director of the
Company.
(5) Represents 16,100 shares of Common Stock held by John F. Kessler IRA and
33,900 shares of Common Stock held by John F. and Kerry J. Kessler, tenants
in common, and includes 202,222 shares of Common Stock subject to options
exercisable within 60 days of September 30, 1996. Mr. Kessler is the
President, CEO and a director of the Company.
(6) Represents 10,000 shares of Common Stock held by Dr. Farmer and includes
91,111 shares of Common Stock subject to options exercisable within 60 days
of September 30, 1996. Dr. Farmer is a director and Executive Vice
President of the Company.
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<PAGE>
(7) Represents 14,521 shares of Common Stock held by Mr. Steimle and includes
19,167 shares of Common Stock subject to options exercisable within 60 days
of September 30, 1996. Mr. Steimle is a director of the Company.
(8) Includes 1,084 shares of Common Stock subject to options exercisable within
60 days of September 30, 1996. Mr. Dawson is an employee at the Company's
subsidiary Mitek Systems Canada, Inc. and was a founder of TRACS
International, Inc. Address: c/o TRACS International, Inc., 10655 Southport
Road, S.W., Suite 560, Calgary, Alberta, Canada T2W 4Y1.
(9) Address: c/o TRACS International, Inc., 10655 Southport Road, SW, Suite
560, Calgary, Alberta, Canada T2W 4Y1.
(10) Mr. Widen is an affiliate of Heartland. Heartland has provided financial
services to the Company over the prior two years. Address: 1 Hallidie
Plaza, #701, San Francisco, California 94102.
(11) Address: 515 West End Avenue, #33D, New York, New York, 10024.
(12) Address: 37 Kessel Court, #211, Madison, Wisconsin 53703.
(13) Address: 2 E. Mifflin Street, Suite 901, Madison, Wisconsin 53703.
(14) Address: RFD #1, Chelsea, Vermont 05038.
(15) Address: 2619 Prindle Road, Belmont, California 92002.
(16) Address: 22 Wakeman Place, Westport, Connecticut 06880.
43
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of (i) 20,000,000 shares of
Common Stock, $.001 par value, and (ii) 1,000,000 shares of Preferred Stock,
$.001 par value. All outstanding shares of Common Stock are fully paid and
nonassessable.
COMMON STOCK
As of September 30, 1996, there were 7,782,971 outstanding shares of Common
Stock held by 607 holders of record. Each share of Common Stock has an equal and
ratable right to receive dividends when, as and if declared by the Board of
Directors out of assets legally available therefor and subject to the dividend
obligations of the Company to the holders of any Preferred Stock then
outstanding. In the event of a liquidation, dissolution or winding up of the
Company, the holders of Common Stock are entitled to share equally and ratably
in the assets available for distribution after the payment of all liabilities,
and subject to any prior rights of any holders of Preferred Stock that at the
time may be outstanding.
The holders of Common Stock have no preemptive rights or other rights to
subscribe for securities of the Company. Each share of Common Stock is entitled
to one vote in the election of directors and on all matters submitted to a vote
of stockholders. Holders of Common Stock currently have the right to cumulate
their votes in the election of directors under a provision of the California
General Corporate Law which applies to the Company by virtue of the nature of
its operations in California. Under the California General Corporation Law, the
Company may amend its Bylaws to provide for the elimination of a stockholder's
right to cumulate votes in the election of directors. Such a provision would
become effective if the shares of the Company were to be listed on the New York
Stock Exchange or American Stock Exchange, or if the Company's shares were to be
listed on the Nasdaq National Market and the Company had at least 800 holders of
its equity securities (measured as of the record date for its most recent annual
meeting of stockholders).
PREFERRED STOCK
The Company has no outstanding shares of Preferred Stock. Preferred Stock
may, however, be issued from time to time in one or more series, and the Board
of Directors, without further approval of the stockholders, is authorized to fix
the dividend rates and terms, conversion preferences, privileges and restriction
rights and terms, liquidation preferences, sinking fund and any other rights,
preferences, privileges and restrictions applicable to each series of Preferred
Stock. The purpose of authorizing the Board of Directors to determine such
rights and preferences is to eliminate delays associated with a stockholder vote
on specific issuances. The issuance of Preferred Stock, while providing
flexibility in connection with possible acquisitions and other corporate
purposes, could, among other things, adversely affect the voting power of the
holders of Common Stock and, under certain circumstances, make it more difficult
for a third party to gain control of the Company.
DELAWARE ANTI-TAKEOVER LAW
The Company may become subject to the provisions of Section 203 of the
Delaware General Corporation Law (the "Anti-Takeover Law") regulating corporate
takeovers. The Anti-Takeover Law prevents certain Delaware corporations,
including those whose securities are listed on the Nasdaq SmallCap Market, from
engaging, under certain circumstances, in a "business combination" (which
includes a merger or sale of more than 10% of the corporation's assets), with
any "interested stockholder" (a stockholder who owns 15% or more of the
corporation's outstanding voting stock) for three years following the date that
such stockholder became an "interested stockholder." A Delaware corporation may
"opt out" of the Anti-Takeover Law with an express provision in its original
certificate of incorporation or an express provision in its certificate of
incorporation or bylaws resulting from a stockholders' amendment approved by at
least a majority of the outstanding voting shares. The Company has not "opted
out" of the provisions of the Anti-Takeover Law.
CERTAIN CHARTER PROVISIONS
Section 102 of the Delaware General Corporation Law provides that Delaware
corporations may include provisions in their certificate of incorporation
relieving directors of monetary liability for breach of their fiduciary duty as
directors, except for liability (i) for any breach of the director's duty of
44
<PAGE>
loyalty to the corporation or its stockholders, (ii) for acts or omissions not
in good faith or that involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the Delaware General Corporation Law or (iv) for
any transaction from which the director derived an improper personal benefit.
The Company's Certificate of Incorporation provides that the personal
liability of the directors of the Company is eliminated to the fullest extent
permitted under Delaware law. The Company's Bylaws provide that the Company
shall indemnify its directors and officers to the fullest extent permitted by
Delaware law, including circumstances in which indemnification is otherwise
discretionary under Delaware law, and further requires the Company to indemnify
such persons against expenses, judgments, fines, settlements and other amounts
reasonably incurred in connection with any proceeding to which any such person
may be made a party by reason of the fact that such person was an agent of the
Company (including expenses, judgments, fines and settlements of derivative
actions, unless indemnification is otherwise prohibited by law), provided such
person acted in good faith and in a manner he reasonably believed to be in the
best interests of the Company, and, in the case of a criminal proceeding, had no
reason to believe his conduct was unlawful. The Company believes that the
foregoing provisions are necessary to attract and retain qualified persons as
directors and officers.
REGISTRATION RIGHTS
The Company has granted registration rights under agreements with three
principal groups of security holders. In March 1995, the Company sold shares of
its Common Stock to 15 individuals in a private placement in reliance on Section
4(2) of the Securities Act. See "Certain Transactions." The Company also entered
into registration rights agreements with each of the individuals in that
offering. Pursuant to the terms of the registration rights agreement, investors
holding a majority of the shares acquired in the private placement have the
right to demand that the Company effect one registration statement covering
their shares. They are also granted "piggyback" registration rights on any other
registration statement filed by the Company prior to March 1, 1998; provided,
however, that the Company is only required to effect one registration, whether
demand or piggyback, for the shares covered by such registration rights. This
Prospectus is part of a registration statement that includes certain of the
shares issued in connection with that offering, and no investors from the
private placement will have registration rights after the effectiveness of this
offering.
In June 1995, the Company purchased substantially all of the assets of TRACS
International, Inc. ("TRACS"), a Calgary Canada corporation, in exchange for
75,000 shares of its Common Stock and royalties on certain product sales. In
connection with that transaction, the Company entered into a registration rights
agreement with TRACS pursuant to which the Company covenanted to use its best
efforts to effect a registration covering such shares on or before June 30,
1996. All of the shares originally issued to TRACS are presently included in
this offering, and upon its completion the Company's obligations to TRACS under
the registration rights agreement will be fulfilled.
In October 1995, the Company entered into investment banking agreements with
several NASD registered broker-dealers. Pursuant to the investment banking
agreements, the Company issued warrants to purchase Common Stock to the
broker-dealers which vested upon the performance of certain specified investment
banking services. The warrants also provided for "piggy-back" registration
rights which permit the holders to include the Common Stock underlying their
warrants in any future registration statement filed by the Company at any time
prior to March 31, 1998, subject to certain limitations such as underwriters
cutbacks. None of the shares issuable upon exercise of those warrants are
included in the present offering. As of the date of this Prospectus, warrants to
purchase 210,000 shares of Common Stock had been issued to broker-dealers, of
which warrants to purchase 200,000 shares of Common Stock had vested and 10,000
had expired pursuant to their terms. See "Certain Transactions."
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is Chase Mellon
Shareholder Services Incorporated, LPC.
45
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
(the "Underwriting Agreement"), the Company and the Selling Stockholders have
agreed to sell to each of the Underwriters named below, and each of the
Underwriters have severally agreed to purchase, the respective number of shares
of Common Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ------------------------------------------------------------------------------------------- -----------
<S> <C>
Unterberg Harris........................................................................... 1,775,000
Cruttenden Roth Incorporated............................................................... 1,775,000
-----------
Total.................................................................................. 3,550,000
-----------
-----------
</TABLE>
In the Underwriting Agreement, the several Underwriters have agreed, subject
to the terms and conditions set forth therein, to purchase all of the Common
Stock offered hereby if any such shares are purchased. In the event of a default
by an Underwriter, the Underwriting Agreement provides that, in certain
circumstances, such commitments of the non-defaulting Underwriter may be
increased or the Underwriting Agreement may be terminated.
The Underwriters have advised the Company that they propose initially to
offer the Common Stock offered hereby to the public at the public offering price
per share set forth on the cover page of this Prospectus and to certain dealers
at such price less a concession not in excess of $0.10 per share. The
Underwriters may allow, and such dealers may re-allow, a discount not in excess
of $0.10 per share on sales to certain other dealers. After the public offering
of the Common Stock, the offering price, discount and re-allowance may be
changed.
John M. Thornton has granted the Underwriters an option, which may be
exercised within 45 days after the date of this Prospectus, to purchase up to an
additional 532,500 shares of Common Stock to cover over-allotments, if any, at
the initial public offering price, less the underwriting discount. To the extent
that the Underwriters exercise the option, each of the Underwriters will have a
firm commitment, subject to certain conditions, to purchase approximately the
same percentage of shares that the number of shares of Common Stock to be
purchased by it shown on the foregoing table bears to the total number of shares
initially offered hereby.
The Company and, to the extent of any proceeds received by them, the Selling
Stockholders, have agreed to indemnify the Underwriters against certain civil
liabilities, including liabilities under the Securities Act, and to contribute
to payments the Underwriters may be required to make in respect thereof.
The Company and the Company's directors and officers have agreed to a
"lock-up" arrangement under which they will not publicly sell or dispose of any
shares of Common Stock, except for the shares offered hereby, without the prior
written consent of Unterberg Harris for a period of 180 days after the effective
date of this Registration Statement. In addition, during the period between 180
days and 270 days after the effective date of the Registration Statement, the
Company and its directors and officers will not sell more than the number of
shares of Common Stock such person or entity may sell pursuant to Rule 144 of
the Securities Act.
Upon completion of this offering, the Company will issue to the Underwriters
warrants to purchase an aggregate of up to 146,250 shares of Common Stock. The
warrants will be exercisable at a per share exercise price equal to 120% of the
public offering price, subject to adjustment in certain events, and are
exercisable at any time during the four-year period commencing one year
following the date of this Prospectus. The warrants are not transferable for one
year from the date of this Prospectus except (i) to an Underwriter or a partner
or officer of an Underwriter or (ii) by will or operation of law. Following such
one-year period, the warrants will be freely transferable. The holders of shares
Common Stock acquired upon exercise of the warrants have the right to include
such shares in any future registration statements filed by the Company and to
demand one registration for the shares.
46
<PAGE>
For the term of the warrants, the holders of the warrants are given the
opportunity to profit from a rise in the market price of the Common Stock with a
resulting reduction in the interest of the Company's stockholders upon exercise
of the warrants.
The Company has agreed to pay Cruttenden Roth Incorporated a non-accountable
expense allowance of one percent of the total proceeds of the offering. The
Company has also agreed that, for a period of one year after the effective date
of the registration statement of which this Prospectus is a part, if the Company
conducts an offering of any debt or equity securities for the purpose of raising
capital for the Company, then Unterberg Harris and Cruttenden Roth Incorporated
will have a right of first refusal to manage such offering.
In connection with this offering, the Underwriters and selling group members
(if any) or their respective affiliates may engage in passive market making
transactions in the Common Stock on the Nasdaq SmallCap Market or
over-the-counter market, immediately prior to the commencement of sales in this
offering, in accordance with Rule 10b-6A under the Exchange Act. Passive market
making consists of displaying bids in the Nasdaq SmallCap Market or
over-the-counter market limited by the bid prices of independent market makers
on each day. Such bids are generally limited to a specified percentage of the
passive market maker's average daily trading volume in the Common Stock during a
specified prior period and must be discontinued when such limit is reached.
Passive market making may stabilize the market price of the Common Stock at a
level above that which might otherwise prevail and, if commenced, may be
discontinued at any time.
The Underwriters have informed the Company and the Selling Stockholders that
the Underwriter will not confirm sales to discretionary accounts.
In January 1995, the Company entered into a contract with Heartland
Financial Corp ("Heartland") for the provision of certain financial consulting
services, including assisting the Company in establishing relationships with
investment bankers and improving the liquidity of the Company's Common Stock.
Heartland has indicated to the Company in conversations that it believes that it
is entitled to a $375,000 fee in connection with this offering under the terms
of its contract. The Company disputes this claim. The contract between Heartland
and the Company requires that all disputes be arbitrated. While there can be no
assurance that Heartland will not seek to arbitrate its claim against the
Company or would be unsuccessful in prosecuting such a claim if it were
arbitrated, the Company believes that any potential liability arising out of
such a claim would be immaterial.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company and the Selling Stockholders by Luce, Forward, Hamilton &
Scripps LLP, 600 W. Broadway, Suite 2600 San Diego, California, 92101. Gray Cary
Ware & Freidenrich, A Professional Corporation, 4365 Executive Drive, Suite 1600
San Diego, California, 92121, is acting as counsel for the Underwriters in
connection with certain legal matters, relating to the Common Stock offered
hereby. Luce, Forward, Hamilton & Scripps LLP has warrants to purchase 15,000
shares of the Company's Common Stock at an exercise price of $1.50 per share.
47
<PAGE>
EXPERTS
The consolidated financial statements as of September 30, 1995 and 1996 for
each of the three years in the period ended September 30, 1996 included in this
Prospectus and Registration Statement have been audited by Deloitte & Touche
LLP, Independent Auditors, as stated in their report appearing herein, and have
been so included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed a Registration Statement with respect to the Shares
offered by this Prospectus on Form SB-2 (together with all amendments and
exhibits thereto, the "Registration Statement") under the Securities Act with
the Securities and Exchange Commission (the "Commission"). This Prospectus does
not contain all of the information set forth in the Registration Statement,
certain parts of which are omitted in accordance with the rules and regulations
of the Commission. For further information, reference is hereby made to the
Registration Statement, which may be inspected without charge at the Public
Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 at the regional offices of the Commission
located at 7 World Trade Center, New York, New York 10048, and at Northwest
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661,
copies of all or any portion of the Registration Statement may be obtained from
the Public Reference Section of the Commission upon payment of the prescribed
fees.
The Company is also subject to the informational reporting requirements of
the Securities Exchange Act of 1934, as amended, and in accordance therewith
files reports, proxy statements and other information with the Commission. Such
reports, proxy statements and other information can be inspected and copied
without charge at the Public Reference Section of the Commission, and at the
Commission's regional offices; and copies of such material can be obtained from
the Public Reference Section of the Commission upon payment of prescribed fees.
ADDITIONAL INFORMATION
The Company will provide without charge to each person to whom a copy of
this Prospectus has been delivered, upon the written or oral request of such
person, a copy of any and all of the documents referred to above which have been
or may be incorporated in this Prospectus by reference (other than exhibits to
such documents, unless such exhibits are specifically incorporated by reference
therein). Requests for such copies should be directed to the Company's principal
executive offices located at 10070 Carroll Canyon Road, San Diego, California
92131, Attention: President, telephone number (619) 635-5900.
48
<PAGE>
MITEK SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------------------
<S> <C>
Independent Auditors' Report................................................................ F-2
Consolidated Balance Sheets................................................................. F-3
Consolidated Statements of Operations....................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity.................................. F-5
Consolidated Statements of Cash Flows....................................................... F-6
Notes to Consolidated Financial Statements.................................................. F-7 through F-13
Unaudited Pro Forma Consolidated Statement of Operations.................................... F-14
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Mitek Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Mitek
Systems, Inc. (the "Company") as of September 30, 1996 and 1995, and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for each of the three years in the period ended September 30, 1996. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
at September 30, 1996 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 1996, in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
San Diego, California
November 1, 1996
F-2
<PAGE>
MITEK SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------------
1995 1996
-------------- -------------
<S> <C> <C>
Current Assets:
Cash............................................................................. $ 103,895 $ 210,413
Accounts receivable -- net....................................................... 1,619,886 2,258,541
Note receivable.................................................................. 158,335 --
Inventories...................................................................... 131,929 278,206
Prepaid expenses and other assets................................................ 52,777 240,364
-------------- -------------
Total current assets........................................................... 2,066,822 2,987,524
-------------- -------------
Property and Equipment -- net...................................................... 131,085 146,888
Other Assets -- net................................................................ 666,393 628,030
-------------- -------------
Total.......................................................................... $ 2,864,300 $ 3,762,442
-------------- -------------
-------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term liabilities......................................... $ 267,927 $ 9,190
Amount payable under factoring agreement......................................... 195,545 --
Accounts payable................................................................. 722,955 472,775
Accrued payroll and related taxes................................................ 163,789 302,037
Other accrued liabilities........................................................ 114,803 319,973
-------------- -------------
Total current liabilities...................................................... 1,465,019 1,103,955
-------------- -------------
Long-term Liabilities.............................................................. 56,567 6,147
-------------- -------------
Commitments and Contingencies (Note 9).............................................
Stockholders' Equity:
Common stock -- $.001 par value; 20,000,000 shares authorized, 7,782,971 and
7,727,958 issued and outstanding in 1996 and 1995, respectively................. 7,728 7,783
Additional paid-in capital....................................................... 3,423,072 3,503,634
Accumulated deficit.............................................................. (2,088,086) (859,077)
-------------- -------------
Total stockholders' equity..................................................... 1,342,714 2,652,340
-------------- -------------
Total........................................................................ $ 2,864,300 $ 3,762,442
-------------- -------------
-------------- -------------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
MITEK SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------------
1994 1995 1996
------------- ------------ ------------
<S> <C> <C> <C>
Net sales.............................................................. $ 10,162,511 $ 6,633,176 $ 8,153,628
Cost of goods sold..................................................... 6,656,394 3,330,109 2,782,204
------------- ------------ ------------
Gross margin........................................................... 3,506,117 3,303,067 5,371,424
------------- ------------ ------------
Costs and expenses:
General and administrative........................................... 1,104,972 1,117,014 1,186,170
Research and development............................................. 1,024,321 1,004,131 1,313,951
Selling and marketing................................................ 1,513,309 1,388,422 1,414,125
Tempest writedowns and accruals...................................... 1,046,394 -- --
Interest -- net...................................................... 97,538 66,941 91,344
------------- ------------ ------------
Total costs and expenses........................................... 4,786,534 3,576,508 4,005,590
------------- ------------ ------------
Operating income (loss)............................................ (1,280,417) (273,441) 1,365,834
Other income........................................................... -- 204,853 --
------------- ------------ ------------
Income (loss) before income taxes...................................... (1,280,417) (68,588) 1,365,834
Provision (benefit) for income taxes................................... (222,766) 800 136,825
------------- ------------ ------------
Net income (loss).................................................. $ (1,057,651) $ (69,388) $ 1,229,009
------------- ------------ ------------
------------- ------------ ------------
Income (loss) per share................................................ $ (0.15) $ (0.01) $ 0.15
------------- ------------ ------------
------------- ------------ ------------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
MITEK SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
----------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Balance, September 30, 1993............................. $ 6,865 $ 2,772,240 $ (961,047) $ 1,818,058
Issuance of common stock.............................. 15 18,735 -- 18,750
Exercise of stock options............................. 33 29,644 -- 29,677
Net loss.............................................. -- -- (1,057,651) (1,057,651)
----------- ------------- -------------- --------------
Balance, September 30, 1994............................. 6,913 2,820,619 (2,018,698) 808,834
Issuance of common stock through private placement for
cash................................................. 667 475,037 -- 475,704
Issuance of common stock in connection with Tracs
International, Inc. acquisition (Note 2)............. 75 78,563 -- 78,638
Exercise of stock options............................. 73 48,853 -- 48,926
Net loss.............................................. -- -- (69,388) (69,388)
----------- ------------- -------------- --------------
Balance, September 30, 1995............................. 7,728 3,423,072 (2,088,086) 1,342,714
Stock warrants issued for services rendered........... -- 17,131 -- 17,131
Exercise of stock options............................. 45 48,441 -- 48,486
Exercise of warrants.................................. 10 14,990 -- 15,000
Net income............................................ -- -- 1,229,009 1,229,009
----------- ------------- -------------- --------------
Balance, September 30, 1996............................. $ 7,783 $ 3,503,634 $ (859,077) $ 2,652,340
----------- ------------- -------------- --------------
----------- ------------- -------------- --------------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
MITEK SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Operating Activities:
Net income (loss)...................................................... $(1,057,651) $ (69,388) $ 1,229,009
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization........................................ 807,912 430,598 420,194
Gain on sale of Tempest.............................................. -- (204,853) --
(Gain) loss on sale of property and equipment........................ (33,409) (6,045) 2,822
Common stock issued as compensation.................................. 42,232 -- --
Changes in assets and liabilities:
--
Accounts receivable................................................ 117,045 (96,813) (638,655)
Income taxes receivable............................................ (238,950) 238,950 --
Inventories, prepaid expenses and other assets..................... 1,275,875 (133,670) (590,959)
Accounts payable and accrued expenses.............................. 256,322 (486,175) 110,786
----------- ----------- -----------
Net cash provided by (used in) operating activities.............. 1,169,376 (327,396) 533,197
----------- ----------- -----------
Investing Activities:
Purchases of property and equipment.................................... (94,434) (49,311) (143,361)
Proceeds from sale of Tempest.......................................... -- 206,665 --
Proceeds from note receivable.......................................... -- -- 158,335
Proceeds from sale of property and equipment........................... 36,923 6,045 --
----------- ----------- -----------
Net cash provided by (used in) investing activities.............. (57,511) 163,399 14,974
----------- ----------- -----------
Financing Activities:
Proceeds from borrowings............................................... -- 710,339 1,796,816
Repayment of debt...................................................... (1,254,437) (1,067,053) (2,301,955)
Proceeds from exercise of stock options and warrants................... 6,195 48,926 63,486
Net proceeds from sales of stock....................................... -- 475,704 --
----------- ----------- -----------
Net cash provided by (used in) financing activities.............. (1,248,242) 167,916 (441,653)
----------- ----------- -----------
Net Increase (decrease) in Cash.......................................... (136,377) 3,919 106,518
Cash at Beginning of Year................................................ 236,353 99,976 103,895
----------- ----------- -----------
Cash at End of Year...................................................... $ 99,976 $ 103,895 $ 210,413
----------- ----------- -----------
----------- ----------- -----------
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest................................................. $ 131,013 $ 85,662 $ 101,377
----------- ----------- -----------
----------- ----------- -----------
Income tax refund received............................................. $ 71,602 $ 279,903 $ 2,712
----------- ----------- -----------
----------- ----------- -----------
Cash paid for income taxes............................................. $ 16,184 $ 2,737 $ 21,263
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
MITEK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS -- Mitek Systems, Inc. (the "Company") is a designer, manufacturer
and marketer of advanced character recognition products for intelligent forms
processing applications ("Character Recognition"). Through March 1995, the
Company was also a systems integrator and value-added reseller of computer
equipment systems to businesses and high-security governmental agencies
("Tempest") (see Note 3).
BASIS OF CONSOLIDATION -- The consolidated financial statements include
accounts of Mitek Systems, Inc. and its wholly-owned subsidiary, Mitek Systems
Canada, Incorporated on June 21, 1995. All intercompany transactions and
balances are eliminated in consolidation.
ACCOUNTS RECEIVABLE -- Accounts receivable are net of an allowance for
doubtful accounts of $91,146 and $32,953 at September 30, 1996 and 1995,
respectively. The provision for bad debts was $99,500, $60,000 and $115,895 for
the years ended September 30, 1996, 1995 and 1994, respectively.
INVENTORIES -- Inventories are recorded at the lower of cost (on a first-in,
first-out basis) or market. Major classes of inventories at September 30, 1996
and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Raw materials....................................................... $ 55,366 $ 36,929
Work-in-process..................................................... 42,970
Finished Goods...................................................... 222,840 52,030
----------- -----------
Total............................................................. $ 278,206 $ 131,929
----------- -----------
----------- -----------
</TABLE>
PROPERTY AND EQUIPMENT -- Following is a summary of property and equipment
as of September 30, 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Property and equipment -- at cost:
Equipment..................................................... $ 937,560 $ 1,055,877
Furniture and fixtures........................................ 59,136 61,772
Leasehold improvements........................................ 52,985 52,985
------------- -------------
1,049,681 1,170,634
Less: accumulated depreciation and amortization................. 902,793 1,039,549
------------- -------------
Total......................................................... $ 146,888 $ 131,085
------------- -------------
------------- -------------
</TABLE>
DEPRECIATION AND AMORTIZATION -- Depreciation and amortization of property
and equipment and prepaid license/support fees are provided using the
straight-line method over estimated useful lives ranging from two to five years.
Depreciation and amortization of property and equipment totalled $124,736,
$153,691 and $352,543 for the years ended September 30, 1996, 1995 and 1994,
respectively. Amortization of prepaid license/support fees totalled $295,458,
$276,908 and $455,369 for the years ended September 30, 1996, 1995 and 1994,
respectively.
WARRANTY -- The Company accrues a warranty cost for all products sold. At
September 30, 1996 and 1995, other accrued liabilities included an accrued
warranty liability of $55,000 and $19,176, respectively. Warranty expense was
$2,642, $-0- and $44,429 for the years ended September 30, 1996, 1995 and 1994,
respectively.
REVENUE RECOGNITION -- Revenue from product sales is generally recognized
upon shipment.
F-7
<PAGE>
MITEK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT -- Research and development costs are expensed in
the period incurred.
INCOME TAXES -- Effective October 1, 1993, the Company adopted Statement of
Financial Accounting Standards No. 109 (FAS 109) "Accounting for Income Taxes".
There was no material cumulative effect of adopting FAS No. 109 and no material
effect on the effective tax rate for fiscal 1994.
INCOME (LOSS) PER SHARE -- Income (Loss) per share is based on the weighted
average number of common and common equivalent shares outstanding during the
year. Outstanding stock options are included as common equivalents using the
treasury stock method when the effect is dilutive. The weighted average number
of shares used in determining income (loss) per share was 8,202,753 in 1996;
7,285,788 in 1995; and 6,877,425 in 1994.
STATEMENTS OF CASH FLOWS -- Significant non-cash investing and financing
activities were comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Conversion of deferred rent to short-term obligation due to lease
termination..................................................... $ 198,762
Note receivable for the sale of the Tempest product line and
related assets (Note 3)......................................... $ 350,000
Shares exchanged for the assets and assumed liabilities of Tracs
International, Inc. (Note 2).................................... 78,638
</TABLE>
ACCOUNTING 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 contingencies at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results may differ from those estimates.
NEW ACCOUNTING STANDARDS -- In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation", which will be effective for the
Company beginning October 1, 1996. SFAS No. 123 requires expanded disclosures of
stock-based compensation arrangements with employees and encourages (but does
not require) compensation cost to be measured based on the fair value of the
equity instrument awarded. Corporations are permitted, however, to continue to
apply Accounting Principles Board ("APB") Opinion No. 25, which recognizes
compensation cost based on the intrinsic value of the equity instrument awarded.
The Company will continue to apply APB Opinion No. 25 to its stock-based
compensation awards to employees and will disclosed the required pro forma
effect on net income and earnings per share.
RECLASSIFICATIONS -- Certain prior years balances have been reclassified to
conform to the 1996 presentation.
2. ACQUISITION
On June 21, 1995, the Company purchased substantially all of the assets and
assumed the liabilities of Tracs International, Inc., a Calgary, Canada based
developer of local area network facsimile servers. The purchase price included
75,000 unregistered shares of the Company's common stock and a 5% royalty on
facsimile related sales for a maximum period of three years or a maximum amount
of $300,000. Additional issuances of the Company's common shares may occur,
contingent
F-8
<PAGE>
MITEK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITION (CONTINUED)
upon the exceeding of certain revenue targeted during a six month period
following release from beta testing of a new product. The purchase resulted in
$136,250 of goodwill, to be amortized over 60 months.
3. SALE OF TEMPEST BUSINESS
On March 17, 1995, the Company sold its Tempest business for $350,000. The
Company recognized a gain on this sale of $204,853 which is recorded as other
income in the consolidated statement of operations.
4. STOCKHOLDERS' EQUITY
OPTIONS -- The Company has two stock option plans for executives and key
individuals who make significant contributions to the Company. The 1986 plan
provides for the purchase of up to 630,000 shares of common stock through
incentive and non-qualified options. The 1988 plan provides for the purchase of
up to 650,000 shares of common stock through non-qualified options. For both
plans, options must be granted at fair market value and for a term of not more
than six years. Employees owning in excess of 10% of the outstanding stock of
the Company are excluded from the plans. The 1986 plan expired on September 8,
1996. A 1996 Option Plan replaced the expired plan. The 1996 plan provides for
the purchase of up to 1,000,000 shares of common stock through incentive and
non-qualified options. Remaining terms are the same as the expired plan.
Information concerning all stock options granted by the Company for the
years ended September 30, 1996, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
SHARES PRICE RANGE
---------- ---------------
<S> <C> <C>
Balance, September 30, 1993..................................... 872,334 $ .656-2.250
Granted......................................................... 357,500 1.160-1.340
Exercised....................................................... (32,369) .656-1.810
Cancelled....................................................... (404,465) .656-2.250
----------
Balance, September 30, 1994..................................... 793,000 .656-2.250
Granted......................................................... 81,000 1.090-1.250
Exercised....................................................... (72,947) .656-1.159
Cancelled....................................................... (245,553) .656-2.250
----------
Balance, September 30, 1995..................................... 555,500 .656-2.250
Granted......................................................... 292,250 1.375-3.680
Exercised....................................................... (45,012) .670-1.380
Cancelled....................................................... (61,154) 1.219-2.750
----------
Balance, September 30, 1996..................................... 741,584 $ .656-$3.680
----------
----------
</TABLE>
At September 30, 1996, options for 1,000,000 and 62,973 shares remained
available for granting under the 1996 and 1988 stock option plans, respectively.
At September 30, 1996, options for 463,041 shares were exercisable.
SALE OF COMMON STOCK -- The Company undertook a private placement stock
offering during the second and third quarters of 1995 in which 666,999 shares of
common stock were issued, with net proceeds of $475,704.
5. NOTES PAYABLE -- BANK
At September 30, 1995, the Company had $291,667 outstanding on an advance
made by a bank under a refinancing agreement at an interest rate of prime plus
2%. The advance was paid-off in full during the year ended September 30, 1996.
F-9
<PAGE>
MITEK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. NOTES PAYABLE -- BANK (CONTINUED)
The Company has a $400,000 line of credit agreement with a bank which bears
an interest rate of prime plus 2 1/2% and expires on February 1, 1997. At
September 30, 1996, the Company had no outstanding borrowings on the line.
6. FACTORING AGREEMENT
In September 1995, the Company entered into a receivable factoring agreement
with a finance company. Under the agreement, the finance company agreed to
finance receivables from the Company up to a maximum of $650,000. The finance
fee is calculated by taking 10% of the gross face value of the transferred
receivables for every 10 day period from the date the receivables are
transferred until such receivables are collected, subject to a minimum finance
fee of $6,500 per month. Such agreement expires in March 1996 and was not
renewed.
7. INCOME TAXES
For the years ended September 30, 1996, 1995 and 1994, the Company's
provision (benefit) for income taxes was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- --------- ------------
<S> <C> <C> <C>
Federal -- current......................................... $ 98,588 $ (227,000)
State -- current........................................... 38,237 $ 800 4,234
----------- --------- ------------
Total.................................................... $ 136,825 $ 800 $ (222,766)
----------- --------- ------------
----------- --------- ------------
</TABLE>
The federal benefit for fiscal year 1994 represents the carryback of net
operating losses to recover taxes paid in prior periods.
There was no provision for deferred income taxes in 1996, 1995 or 1994.
Under FAS No. 109, deferred income tax liabilities and assets reflect the net
tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's net deferred tax liabilities
and assets as of September 30, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Deferred tax assets:
Reserves not currently deductible..................................... $ 63,000 $ 21,000
Book depreciation and amortization in excess of tax................... 85,000 108,000
Research credit carryforwards......................................... 529,000 529,000
AMT credit carryforward............................................... 29,000
Net operating loss carryforwards...................................... 60,000 838,000
Capitalized research and development costs............................ 85,000 24,000
Uniform capitalization................................................ 266,000
Other................................................................. 176,000 148,000
-------------- --------------
Total deferred tax assets........................................... 1,293,000 1,668,000
Valuation allowance for net deferred tax assets..................... (1,293,000) (1,668,000)
-------------- --------------
Total................................................................... $ 0 $ 0
-------------- --------------
-------------- --------------
</TABLE>
The Company has provided a valuation allowance against deferred tax assets
recorded as of September 30, 1996 and 1995 due to uncertainties regarding the
realization of such assets.
The research credit and net operating loss carryforwards expire during the
years 2004 to 2010. The Federal net operating loss carryforward at September 30,
1996 totaled $176,000.
F-10
<PAGE>
MITEK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
The differences between the provision (benefit) for income taxes and income
taxes computed using the U.S. federal income tax rate were as follows for the
years ended September 30:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ---------- ------------
<S> <C> <C> <C>
Amount computed using statutory rate (34%)..................... $ 464,384 $ (23,320) $ (435,342)
Net change in valuation reserve for deferred tax assets........ (375,292) 23,320 203,829
Non deductible items........................................... 9,496 4,513
State income taxes............................................. 38,237 800 4,234
------------ ---------- ------------
Provision (benefit) for income taxes........................... $ 136,825 $ 800 $ (222,766)
------------ ---------- ------------
------------ ---------- ------------
</TABLE>
8. LONG-TERM LIABILITIES
As of September 30, 1996 and 1995, long-term liabilities were as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ------------
<S> <C> <C>
Capital lease obligations (see Note 10).............................. $ 13,904 $ 31,831
Deferred rent payable (see Note 10).................................. 1,433 996
Notes payable -- bank (see Note 6)................................... 291,667
--------- ------------
15,337 324,494
Less current portions................................................ (9,190) (267,927)
--------- ------------
Total.............................................................. $ 6,147 $ 56,567
--------- ------------
--------- ------------
</TABLE>
The following property and equipment is leased under non-cancellable capital
leases as of September 30, 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
--------- ------------
<S> <C> <C>
Equipment............................................................ $ 26,254 $ 133,751
Less accumulated depreciation........................................ (9,284) (100,274)
--------- ------------
Total................................................................ $ 16,970 $ 33,477
--------- ------------
--------- ------------
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
LEASES -- The Company's offices and manufacturing facilities are leased
under non-cancellable operating leases. The primary facilities lease expires on
April 30, 1998, at which time the lease is renewable at current market rates.
Future annual minimum rental payments under non-cancellable leases are as
follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
----------- ---------
<S> <C> <C>
YEAR ENDING SEPTEMBER 30:
1997............................................................... $ 134,938 $ 11,220
1998............................................................... 84,228 4,993
1999............................................................... 2,153
2000...............................................................
2001...............................................................
----------- ---------
Total............................................................ 221,319 16,213
Less amount representing interest.................................. 2,309
----------- ---------
Present value of minimum lease payments............................ $ 221,319 $ 13,904
----------- ---------
----------- ---------
</TABLE>
F-11
<PAGE>
MITEK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Rent expense for operating leases for the years ended September 30, 1996,
1995 and 1994 totalled $159,249, $62,509 and $480,996, respectively.
10. PRODUCT REVENUES AND SALES CONCENTRATIONS
PRODUCT REVENUES -- During fiscal years 1996 and 1995 the Company's revenues
were derived primarily from the Character Recognition Product line. Revenues by
product line as a percentage of net sales, are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Tempest............................................................. 22% 54%
Character recognition............................................... 94% 74% 45%
Other............................................................... 6% 4% 1%
</TABLE>
SALES CONCENTRATIONS -- For the years ended September 30, 1996, 1995 and
1994, the Company had the following sales concentrations:
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
U.S. government and its agencies
* Percent of total sales.................................................... 7% 16% 11%
Non-governmental customers to which sales were in excess of 10% of total sales
* Number of customers....................................................... 2 2 1
* Aggregate percentage of sales............................................. 33% 25% 21%
Foreign Sales -- primarily Europe............................................. 31% 21% 13%
</TABLE>
11. OFFERING COSTS
Through September 30, 1996, the Company incurred $185,000 of direct
incremental costs, consisting primarily of legal and accounting services, in
connection with a proposed public offering of its common stock which is expected
to be completed in the first quarter of fiscal 1997. Such costs have been
capitalized at September 30, 1996 and will be netted against the proceeds
received from the offering.
12. SUBSEQUENT EVENT
Effective October 11, 1996, the Company purchased certain technologies from
Instant Information Deutschland (IID), a Munich, Germany based value-added
distributor of Mitek products. The purchase price was $257,000; $87,000 payable
in cash and the relief of all debt owed to the Company by IID in the amount of
$170,000. As part of the purchase, the Company has exclusive licensing rights to
use copyrights associated with the purchased technology. The licensing rights
are freely transferrable, worldwide and royalty-free. The purchase will enable
the Company to sell certain technologies directly into the German marketplace
which were previously distributed by IID. The carrying value will be amortized
over the estimated life of the purchased technology.
* * * * * *
F-12
<PAGE>
MITEK SYSTEMS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
The following unaudited pro forma consolidated statement of operations for
the year ended September 30, 1995 gives effect to the sale of the TEMPEST line
of business which occurred on March 17, 1995. This transaction is reflected as
of October 1, 1994. The pro forma information is based on the September 30, 1995
statement of operations of Mitek Systems, Inc. (the "Company"), giving effect to
the completed sale of the Company's TEMPEST line of business and the accounting
assumptions and adjustments described in the accompanying notes to the pro forma
consolidated statement of operations.
The unaudited pro forma consolidated statement of operations has been
prepared by the management of the Company based upon the unaudited statement of
operations of the TEMPEST line of business for the period from October 1, 1994
to March 17, 1995 (the date of sale) and the statement of operations of the
Company for the year ended September 30, 1995.
Management of the Company does not believe that the unaudited pro forma
consolidated statement of operations is indicative of the results that actually
would have occurred if the sale had taken effect on the date indicated or which
may be obtained in the future. The unaudited pro forma consolidated statement of
operations should be read in conjunction with the financial statements and notes
of Mitek Systems, Inc.
F-13
<PAGE>
MITEK SYSTEMS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
MITEK PRO FORMA PRO FORMA
SYSTEMS, INC. ADJUSTMENTS CONSOLIDATED
------------------- ----------- ------------
<S> <C> <C> <C>
Net sales............................................................. $ 6,633,176 $(1,498,000)(A) $ 5,135,176
Cost of goods sold.................................................... 3,330,109 (1,142,432)(A) 2,187,677
------------------- ----------- ------------
Gross margin.......................................................... 3,303,067 (355,568) 2,947,499
------------------- ----------- ------------
Costs and expenses:
General and administrative.......................................... 1,117,014 -- 1,117,014
Research and development............................................ 1,004,131 (58,329)(A) 945,802
Selling and marketing............................................... 1,388,422 -- 1,388,422
Interest -- net..................................................... 66,941 -- 66,941
------------------- ----------- ------------
Total costs and expenses............................................ 3,576,508 (58,329) 3,518,179
------------------- ----------- ------------
Operating loss........................................................ (273,441) (297,239) (570,680)
Other income.......................................................... 204,853 (204,853)(B) 0
------------------- ----------- ------------
Loss before income taxes.............................................. (68,588) (502,092) (570,680)
Provision for income taxes............................................ 800 -- 800
------------------- ----------- ------------
Net loss.............................................................. $ (69,388) $ (502,092) $ (571,480)
------------------- ----------- ------------
------------------- ----------- ------------
Loss per share........................................................ $ (0.01) -- $ (0.08)
Weighted average common shares outstanding............................ 7,285,788 -- 7,285,788
</TABLE>
F-14
<PAGE>
MITEK SYSTEMS, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
Mitek Systems, Inc. (the "Company") sold the TEMPEST line of business on
March 17, 1995 for $350,000, recognizing a gain of $204,853. The following
adjustments are necessary to reflect the pro forma effects of the executed
transaction.
(A) Reflects the revenue and related cost of sales recognized and the
research and development costs incurred from the TEMPEST line of business during
the period October 1, 1994 through March 17, 1995.
(B) Reflects the gain recognized on the sale of the TEMPEST line of business
in the year ended September 30, 1995.
F-15
<PAGE>
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NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED BY THE COMPANY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY, AND IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MAY NOT BE RELIED UPON. THE PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OTHER THAN THOSE SPECIFICALLY OFFERED HEREBY OR AN OFFER TO SELL, OR
A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SALE WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE ANY OF THE
DATE AS OF WHICH INFORMATION IS FURNISHED OR SINCE THE DATE OF THIS PROSPECTUS.
--------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Prospectus Summary.................................. 3
Risk Factors........................................ 5
Use of Proceeds..................................... 14
Price Range of Common Stock......................... 15
Dividend Policy..................................... 15
Capitalization...................................... 16
Dilution............................................ 17
Selected Consolidated Financial Data................ 18
Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 19
Business............................................ 26
Management.......................................... 37
Certain Transactions................................ 41
Principal and Selling Stockholders.................. 42
Description of Capital Stock........................ 44
Underwriting........................................ 46
Legal Matters....................................... 47
Experts............................................. 48
Available Information............................... 48
Additional Information.............................. 48
Index to Financial Statements....................... F-1
</TABLE>
------------------------
UNTIL DECEMBER 16, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THE DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS
IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITER AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
3,550,000 SHARES
[LOGO]
COMMON STOCK
----------------------
PROSPECTUS
----------------------
UNTERBERG HARRIS
CRUTTENDEN ROTH
INCORPORATED
NOVEMBER 21, 1996
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