<PAGE>
Exhibit 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NET SALES
Net sales were $9,348,000, $9,741,000, and $6,501,000 for fiscal 2000,
1999, and 1998, respectively. Net sales decreased in fiscal 2000 compared to
fiscal 1999, while increasing from 1998. The increase from fiscal 1998 to fiscal
1999 was due to the introduction of Doctus, the Company's unstructured forms
processing solution, as well as increased sales of Quickstrokes and Checkquest.
The decrease from fiscal 1999 to fiscal 2000 was due to a decrease in sales of
Quickstrokes, offset by increases in sales of CheckScript and Doctus.
GROSS MARGIN
The Company has evolved to a primarily software products company from a
hardware/software products company.
Gross margins were $7,194,000, $8,254,000, and $4,503,000 for fiscal
2000, 1999, and 1998, respectively. Stated as a percentage of net sales, gross
margins for the corresponding periods were 77%, 85%, and 69%, respectively.
Goodwill and license amortization charged to cost of sales were $360,000 (4% of
net sales) for fiscal 2000 and $202,000 (2% of net sales) for fiscal 1999. The
decrease in gross margin from 1999, as well as the decrease in gross margin
stated as a percentage of sales, resulted from the mix of product sales shifting
to products on which the Company pays royalties, the aforementioned goodwill
amortization and decreased revenues.
OPERATIONS
Operations expenses were $1,241,000, $597,000 and $430,000 for fiscal
2000, 1999 and 1998, respectively. Stated as a percentage of net sales,
operations expenses were 13%, 6% and 7%, respectively. The increase in the
current year's expenses, and expenses as a percentage of net sales, as compared
with fiscal 1999 is primarily attributable to staff additions. The increase in
expenses from fiscal 1998 to fiscal 1999 was primarily attributable to staff
additions, while the corresponding decrease as a percentage of net sales is
primarily attributable to increased revenues.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $2.420,000, $1,711,000 and
$1,622,000 for fiscal 2000, 1999 and 1998, respectively. Stated as a percentage
of net sales, general and administrative expenses for the corresponding periods
were 26%, 18% and 25%, respectively. The increases in expenses, and expenses as
a percentage of net sales, in the current fiscal year were primarily
attributable to additional reserves for doubtful accounts and costs associated
with outside professional services. The increase in expenses from fiscal 1998 to
fiscal 1999 was primarily attributable to costs associated with outside
professional services, legal fees and staff additions, while the corresponding
decrease in the percentage of net sales was primarily attributable to increased
revenues.
Page 1
<PAGE>
RESEARCH AND DEVELOPMENT
Research and development expenses were $2,253,000, $1,409,000 and
$1,343,000 for fiscal 2000, 1999 and 1998, respectively. The 2000, 1999 and 1998
amounts do not include $110,000, $98,000 and $878,000, respectively, that was
spent in research and development related to contract development and charged to
cost of sales. Research and development expenses including charges to cost of
sales were $2,363,000, $1,507,000 and $2,221,000 for fiscal 2000, 1999 and 1998,
respectively. The increase in the absolute amount of expenses from 1999 to 2000
was the result of engineering staff additions and the undertaking of certain
engineering projects. Stated as a percentage of net sales, research and
development expenses including charges to cost of sales for the corresponding
periods were 25%, 15% and 34%, respectively. The increase as a percentage of net
sales for the fiscal year is primarily attributable to the increase in absolute
dollar expenditures. The decrease in the absolute amount of expenses from fiscal
1998 to 1999 is the result of engineering staff reductions and the elimination
of engineering projects, primarily the Technology Solutions Inc. engineering
staff, who were primarily engaged in contract development. The decrease as a
percentage of net sales from fiscal 1998 to fiscal 1999 is primarily
attributable to both the decrease in absolute dollar expenditures as well as the
increase in revenues.
SELLING AND MARKETING
Selling and marketing expenses were $2,739,000, $2,510,000, and
$1,671,000 for fiscal 2000, 1999 and 1998, respectively. Stated as a percentage
of net sales, selling and marketing expenses for the corresponding periods were
29%, 26% and 26%, respectively. The increase in expenses, and the increase in
expenses as a percentage of net sales, in the current fiscal year is primarily
attributable to the addition of personnel and increased marketing efforts for
the CheckQuest and Doctus product lines. The increase in expenses from fiscal
1998 to fiscal 1999 was primarily attributable to the addition of personnel and
increased marketing efforts for the Doctus product line.
OTHER CHARGES
For the fiscal year end 1998, other charges totaling $689,000 consist of several
non-recurring charges to operations. The charges consist of the following
components:
- GOODWILL IMPAIRMENT -In June 1997 the Company purchased substantially all
of the assets of Technology Solutions, Inc., a software developer and
solution provider of document image processing systems. In the first
quarter of 1998 one of the key employees of the Company, a former principal
of Technology Solutions, Inc., opted to resign his employment. The
unexpected departure, in the opinion of management, detrimentally impacted
the future cash flows of the Company. A $293,000 goodwill impairment was
recorded in the first quarter of fiscal 1998. See Note 2 of the
consolidated financial statements.
- LICENSE FEE IMPAIRMENT - In April 1997 the Company entered into an
exclusive software licensing agreement with Parascript LLC. In December
1997 Parascript notified the Company of its dissatisfaction with the
Company's progress in marketing the software affected by the license
agreement, along with the assertion that the Company had committed material
breach of contract. The Company has strongly and vigorously denied the
claims. A proposed solution to the dispute by Parascript
Confidential Page 2
<PAGE>
included converting the Company's exclusive software license to a
non-exclusive software license. In addition, the Company over-estimated
the availability and the performance of the product and anticipated
prices for the software affected by the agreement. The adversarial
nature of the relationship, coupled with the decreased expectations, in
the opinion of management, would have detrimentally impacted the future
cash flows of the Company. As such, the Company recorded a license fee
impairment in the amount of $196,000. See Note 10 of the consolidated
financial statements.
- INVENTORY RESERVES - The Company has traditionally sold its QuickStrokes
Application Programmer Interface products with various acceleration
hardware boards. Decreasing prices, coupled with the higher speeds of
general hardware, have rapidly altered the market need for these
acceleration boards. The largest customer utilizing these acceleration
boards has informed the Company of its intent to discontinue the offering
of these products in the domestic market. As a result, the Company recorded
a reserve for inventory obsolescence in the amount of $200,000 during the
fiscal 1998.
INTEREST INCOME
Net interest income was $26,000, $28,000, and $73,000 for fiscal 2000,
1999 and 1998, respectively. Stated as a percentage of net sales, net interest
income for the corresponding periods was 0.3%, 0.3% and 1%, respectively. The
decrease in interest income in the current year and from fiscal 1998 to fiscal
1999 is primarily the result of lower invested funds during the year.
OTHER EXPENSES - NET
Other expenses for fiscal year 1998 resulted from reserves for the
recruitment and employment ($166,000) and resignation ($204,000) of Elliot
Wassarman as President and Chief Executive Officer of the Company during fiscal
1998, $35,000 to settle an employee related lawsuit, $53,000 to settle
Technology Solutions, Inc. acquisition legal matters, and $45,000 to settle a
customer dispute. These reserves were reduced by a reversal of $175,000 reserved
for TEMPEST in fiscal 1997, and a $34,000 gain from the sale of the Company's
fax business in January 1998 in a cash transaction. The gross proceeds of the
sale were $420,000 in cash, offset by the carrying value of the assets sold of
($308,000) and costs related to the transaction of ($78,000).
INCOME TAXES
For the current fiscal year, the Company did not record an income tax
provision or benefit for income taxes because the deferred tax assets generated
by the current year net loss was offset by a corresponding increase in the
valuation allowance. For the fiscal year 1999, the Company recorded an income
tax provision of $29,000. For fiscal 1998, the Company did not record an income
tax provision or benefit for income taxes.
NET INCOME (LOSS)
In the current fiscal year, the Company recorded a net loss of
($1,434,000). In fiscal 1999, the Company recorded net income of $2,026,000. In
fiscal 1998, the Company recorded a net loss of ($1,497,000).
LIQUIDITY AND CAPITAL RESOURCES
Confidential Page 3
<PAGE>
The Company has financed its cash needs primarily from profits in the
first two quarters of fiscal 2000, fiscal 1999, collection of accounts and notes
receivable, and borrowing from its line of credit.
Net cash used in operating activities during the year ended September
30, 2000 was $1,818,000. The primary use of cash from operating activities was
an increase in accounts receivable of $1,128,000 and an increase in inventories
of $68,000. The primary source of cash from operating activities was an increase
in accounts payable of $608,000. Higher receivables resulted primarily from the
Company's extending longer payment terms to certain key customers.
The Company's working capital and current ratio was $4,030,000 and
2.42, respectively, at September 30, 2000 and $4,816,000 and 3.81, respectively,
at September 30, 1999. At September 30, 2000, total liabilities to equity ratio
was .59 to 1 compared to .31 to 1 a year earlier. As of September 30, 2000,
total liabilities were greater by $1,118,000 than on September 30, 1999.
During fiscal 2000, the Company renegotiated its line of credit from
its bank, Rancho Santa Fe National Bank, in the amount of $2,500,000, which
now expires on June 8, 2001. Interest is payable at prime plus 1.5 percentage
points. In addition, the Company renewed its equipment credit line in the
amount of $250,000 under similar terms and conditions. The Company has
borrowed $510,000 under the working capital line of credit as of September
30, 2000. There were no borrowings under the working capital line of credit
as of September 30, 1999. There were no borrowings under the equipment line
of credit as of September 30, 2000 and September 30, 1999. The line of credit
has certain financial covenants which the Company was in compliance with at
September 30, 2000.
Confidential Page 4
<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, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended September 30, 2000. 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 auditing standards generally
accepted in the United States of America. These 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, 2000, and the results of its operations and its cash flows for
each of the three years in the period ended September 30, 2000, in conformity
with accounting principles generally accepted in the United States of America.
San Diego, California
December 8, 2000
1
<PAGE>
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
-----------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 537,113 $ 1,398,589
Accounts receivable - net 6,134,218 5,006,081
Inventories 125,614 58,082
Prepaid expenses and other assets 76,020 69,232
--------------------------------------
Total current assets 6,872,965 6,531,984
PROPERTY AND EQUIPMENT - net 346,087 281,571
OTHER ASSETS 554,906 575,298
--------------------------------------
TOTAL ASSETS $ 7,773,958 $ 7,388,853
======================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,272,449 $ 738,195
Accrued payroll and related taxes 483,063 720,300
Unearned maintenance income 368,640 203,408
Borrowings under line of credit 512,882 0
Other accrued liabilities 206,260 53,885
--------------------------------------
Total current liabilities 2,843,294 1,715,788
LONG-TERM LIABILITIES 41,103 51,040
--------------------------------------
Total liabilities 2,884,397 1,766,828
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY
Common stock - $.001 par value; 20,000,000
shares authorized, 11,119,843 and 10,438,854 issued
and outstanding in 2000 and 1999, respectively 11,120 10,439
Additional paid-in capital 9,208,083 8,507,613
Accumulated deficit (4,329,642) (2,896,027)
--------------------------------------
Total stockholders' equity 4,889,561 5,622,025
--------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,773,958 $ 7,388,853
======================================
</TABLE>
See notes to consolidated financial statements
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 2000, 1999, AND 1998
<TABLE>
<CAPTION>
2000 1999 1998
----------------------------------------------------------
<S> <C> <C> <C>
NET SALES $ 9,347,940 $ 9,741,297 $ 6,500,968
COST OF SALES 2,153,815 1,487,114 1,997,907
----------------------------------------------------------
GROSS MARGIN 7,194,125 8,254,183 4,503,061
COSTS AND EXPENSES:
Operations 1,240,924 597,031 430,123
General and administrative 2,420,105 1,710,964 1,621,940
Research and development 2,253,124 1,409,393 1,343,422
Selling and marketing 2,739,149 2,510,336 1,670,677
Other charges 0 0 689,000
Interest income - net (25,562) (28,426) (72,645)
--------------------------------------------------------
Total costs and expenses 8,627,740 6,199,298 5,682,517
----------------------------------------------------------
OPERATING INCOME(LOSS) (1,433,615) 2,054,885 (1,179,456)
OTHER EXPENSES - NET 0 0 (317,260)
----------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (1,433,615) 2,054,885 (1,496,716)
PROVISION FOR INCOME TAXES 0 29,000 0
----------------------------------------------------------
NET INCOME (LOSS) $(1,433,615) $ 2,025,885 $(1,496,716)
==========================================================
----------------------------------------------------------
NET INCOME (LOSS) PER SHARE - BASIC $ (0.13) $ 0.20 $ (0.13)
==========================================================
----------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC 10,856,762 10,359,458 11,564,239
==========================================================
----------------------------------------------------------
NET INCOME (LOSS) PER SHARE - DILUTED $ (0.13) $ 0.19 $ (0.13)
==========================================================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND
----------------------------------------------------------
COMMON SHARE EQUIVALENTS OUTSTANDING - DILUTED 10,856,762 10,755,277 11,564,239
==========================================================
</TABLE>
See notes to consolidated financial statements
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2000, 1999, AND 1998
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
-------------------------------------------------------------------
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, October 1, 1997 11,537 9,164,589 (3,425,196) 5,750,930
Exercise of stock options 36 27,298 0 27,334
Net loss 0 0 (1,496,716) (1,496,716)
------------------------------------------------------------------
Balance, September 30, 1998 11,573 9,191,887 (4,921,912) 4,281,548
Shares reacquired in connection with
settlement of TSI dispute (See Note 2) (591) (368,855) 0 (369,446)
Shares reacquired in connection with revised
Parascript agreement (See Note 10) (764) (476,687) 0 (477,451)
Repurchase of common stock (20) (14,130) 0 (14,150)
Fair value of stock options issued to non-employees 0 29,674 0 29,674
Exercise of stock options 241 145,724 0 145,965
Net Income 0 0 2,025,885 2,025,885
------------------------------------------------------------------
Balance, September 30, 1999 10,439 8,507,613 (2,896,027) 5,622,025
Exercise of stock options 681 662,294 0 662,975
Fair value of stock options issued to non-employees 0 38,176 0 38,176
Net loss 0 0 (1,433,615) (1,433,615)
------------------------------------------------------------------
Balance, September 30, 2000 $11,120 $9,208,083 $(4,329,642) $ 4,889,561
==================================================================
</TABLE>
See notes to consolidated financial statements
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 2000, 1999, AND 1998
<TABLE>
<CAPTION>
2000 1999 1998
-------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $(1,433,615) $ 2,025,885 $(1,496,716)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 431,192 325,325 488,518
Impairment of prepaid software rights - TSI 84,194
Provision for bad debts 731,871 273,529 92,877
Loss on disposal of property and equipment 1,010 3,907 1,847
Goodwill and license fee impairment 0 0 489,000
Gain on sale of FAX business 0 0 (34,256)
Fair value of stock options issued to non-employees 38,176 29,674 0
Changes in assets and liabilities:
Accounts receivable (1,860,008) (3,044,970) 35,510
Inventories, prepaid expenses, and other assets (418,077) 158,032 (203,841)
Accounts payable 537,136 87,989 164,351
Acrued payroll and related taxes (237,237) 477,873 (30,176)
Unearned maintenance income 165,232 1,840 (130,144)
Other accrued liabilities 142,438 (655,098) 420,477
-------------------------------------------------------
Net cash used in operating activities (1,817,688) (316,014) (202,553)
INVESTING ACTIVITIES
Purchases of property and equipment (216,763) (214,850) (109,285)
Proceeds from note receivable 0 56,478 348,753
Proceeds from sale of property and equipment 0 400 100
Proceeds from sale of Fax business 0 0 420,000
-------------------------------------------------------
Net cash provided by (used in) investing activities (216,763) (157,972) 659,568
FINANCING ACTIVITIES
Repurchase of common stock 0 (14,150) 0
Proceeds from borrowings 510,000 0 0
Repayment of notes payable and long-term liabilities 0 0 (4,706)
Proceeds from exercise of stock options and warrants 662,975 145,965 27,334
-------------------------------------------------------
Net cash provided by financing activities 1,172,975 131,815 22,628
-------------------------------------------------------
NET INCREASE (DECREASE) IN CASH (861,476) (342,171) 479,643
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,398,589 1,740,760 1,261,117
-------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 537,113 $ 1,398,589 $ 1,740,760
=======================================================
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW INFORMATION
Cash paid for interest $ 7,422 $ -
Cash paid for income taxes $ 70,800 $ 26,053 $ -
</TABLE>
See notes to consolidated financial statements
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
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") and, in
fiscal 1998, started emphasizing document imaging system products and solutions
systems integration services.
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 inter-company transactions and
balances are eliminated in consolidation. The business of the Canadian
corporation was sold in January 1998 - see Note 3.
Cash and Cash Equivalents - Cash equivalents are defined as highly
liquid financial instruments with original maturities of three months or less. A
substantial portion of the Company's cash and cash equivalents is deposited with
one financial institution. The Company monitors the financial condition of the
financial institution and does not believe that the deposit is subject to a
significant degree of risk.
Accounts Receivable - Accounts receivable are net of an allowance for
doubtful accounts of $763,912 and $326,886 on September 30, 2000 and 1999,
respectively. The provision for bad debts was $ 731,871, $ 273,529, and $ 92,877
for the years ended September 30, 2000, 1999 and 1998, respectively.
Inventories - Inventories are recorded at average cost. The Company
recorded a $200,000 reserve for inventory obsolescence during the first quarter
of fiscal 1998. At September 30, 2000 there were no inventory reserve balances
compared to an inventory reserve balance of $49,151 at September 30, 1999.
Property and Equipment - Following is a summary of property and
equipment as of September 30, 2000 and 1999.
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Property and equipment - at cost:
Equipment $1,266,246 $1,076,511
Furniture and fixtures 104,507 104,507
Leasehold improvements 52,984 52,984
---------- ----------
1,423,737 1,234,002
Less: accumulated depreciation and amortization 1,077,650 952,431
---------- ----------
Total $ 346,087 $ 281,571
========== ==========
</TABLE>
<PAGE>
Other Assets - Other assets consisted of the following at September 30,
2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Prepaid software rights - TSI - net $ 0 $126,290
Prepaid software rights - PFP Pro - net 99,992 149,996
Prepaid license/support fees - net 295,419 283,691
Investment in ITech 105,374 0
Other - net 54,121 15,321
-------- --------
$554,906 $575,298
======== ========
</TABLE>
The Company monitors events or changes in circumstances that may
indicate that the carrying amount of intangible assets may not be recoverable.
If these factors indicate that such asset is not recoverable, as determined
based upon undiscounted cash flows before interest charges of the asset over the
remaining amortization period, the carrying value of the asset will be reduced.
Investment in Itech Business Solutions Ltd. - On September 1, 2000 the
Company acquired a 15% investment in Itech Business Solutions Ltd. ("Itech"),
which is accounted for on the cost method at September 30, 2000. On October 3,
2000 the Company acquired an additional 15% interest in Itech for $80,506. After
this additional investment, the Company will account for its 30% interest in
Itech under the equity method. Subsequent to the additional investment on
October 3, 2000, Itech changed their name to Mitek Systems Ltd.
Goodwill impairment -In June, 1997 the Company purchased substantially
all of the assets of Technology Solutions, Inc. a software developer and
solution provider of document image processing systems. One of the key employees
of the Company, a former principal of Technology Solutions, Inc., resigned his
employment in December, 1997. The unexpected departure, in the opinion of
management, detrimentally impacted the future cash flows of the Company. The
Company determined the fair value of the goodwill by evaluating the expected
future net cash flows in accordance with SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of".
The evaluation indicated the carrying value of the goodwill exceeded the fair
value, resulting in an impairment loss of $293,000 in the first quarter of
fiscal 1998, included in Other Charges in the accompanying consolidated
statements of operations. On October 20,1998, the Company settled a pending
lawsuit with the two founders of Technology Solutions, Inc. - see Note 2. This
settlement did not result in an additional impairment of goodwill.
License Fee impairment - In April 1997 the Company entered into an
exclusive software licensing agreement with Parascript Limited Liability Company
(Parascript). In December 1997, Parascript notified the Company of its
dissatisfaction with the Company's progress in marketing the software affected
by the license agreement, along with the assertion that the Company had
committed material breach of contract. The Company strongly and vigorously
denied the claims. In addition, the Company over-estimated the availability and
the performance of the product and anticipated prices for the software affected
by the agreement. The adversarial nature of the relationship coupled with the
decreased expectations, in the opinion of management, would have detrimentally
impacted the future cash flows of the Company. The Company determined the fair
value
Page 2
<PAGE>
of the license fee, paid for the exclusive license, by evaluating the
expected future net cash flows in accordance with SFAS 121. The evaluation
resulted in an impairment loss of $196,000 in the first quarter of fiscal 1998,
included in Other Charges in the accompanying consolidated statements of
operations. On October 16, 1998, the Company entered into a new agreement with
Parascript - see Note 10.
Inventory Reserves - The Company traditionally sold its QuickStrokes(R)
Application Programmer Interface products with various acceleration hardware
boards. Decreasing prices coupled with the higher speeds of general hardware
rapidly altered the market need for these acceleration boards. The largest
customer utilizing these acceleration boards informed the Company of its intent
to discontinue the offering of these products in the domestic market. As a
result, the Company recorded a reserve for inventory obsolescence in the amount
of $200,000 in the first quarter of fiscal 1998, included in Other Charges in
the accompanying consolidated statements of operations. At September 30, 2000
there were no inventory reserve balances compared to an inventory obsolescence
reserve balance of $49,151 at September 30, 1999.
Depreciation and Amortization - Depreciation and amortization of
property and equipment, prepaid license/support fees and prepaid software rights
are provided using the straight-line method over estimated useful lives ranging
from three to five years. Depreciation and amortization of property and
equipment totaled $151,238, $121,322, and $114,502 for the years ended September
30, 2000, 1999 and 1998, respectively. Amortization of prepaid license/support
fees and prepaid software rights totaled $233,277, $202,248, and $374,016 for
the years ended September 30, 2000, 1999 and 1998, respectively.
Revenue Recognition - The Company recognizes revenues in accordance
with the American Institute of Certified Public Accountants Statement of
Position No. 97-2, "Software Revenue Recognition". Accordingly, software product
revenues are recognized when persuasive evidence of an arrangement exists,
delivery has occurred, the Company's fees are fixed and determinable, and
collectibility is probable. Product maintenance revenues are amortized over the
length of the maintenance contract, which is usually twelve months. Unearned
contract maintenance revenue is included in current liabilities as unearned
income in the accompanying balance sheet at September 30, 2000.
Research and Development - Research and development costs are expensed
in the period incurred.
Income Taxes - The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes", which requires the use of the liability method for deferred income taxes
- see Note 6.
Net Income (Loss) Per Share - The Company calculates net income (loss)
per share in accordance with Statement of Financial Accounting Standards
No. 128, "Earnings per Share". Basic net income (loss) per share is based on the
weighted average number of common shares outstanding during the period. Diluted
net income (loss) per share also gives effect to all potential dilutive common
shares outstanding during the period, such as options and warrants.
Page 3
<PAGE>
Consolidated Statements of Cash Flows - Significant non-cash investing
and financing activities were comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
2000 1999 1998
<S> <C> <C> <C>
Shares of unregistered common stock reacquired
pursuant to settlement agreement (Note 2)
0 $369,446 0
Shares of unregistered common stock reacquired
pursuant to revised cross
investment and licensing agreements
(Note 10)
0 $477,451 0
</TABLE>
Accounting Estimates - The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America 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.
Stock Based Compensation - As permitted by Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation", the Company accounts for costs of stock-based compensation in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees", and accordingly, discloses the pro forma effect on
net income (loss) and related per-share amounts using the fair value based
method to account for stock-based compensation (Note 4)
Comprehensive Income - There are no material current differences
between net income and comprehensive income and, accordingly, no amounts have
been reflected in the accompanying consolidated financial statements.
Segment Reporting - SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information", results in the use of a management approach
in identifying segments of an enterprise. Management has determined that segment
disclosures are not appropriate because the Company operates in only one
segment.
Derivative Instruments - During 1998, SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", was issued effective for all
fiscal quarters for fiscal years beginning after June 15, 2000. This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. The Company does not expect the adoption of this statement
to materially effect the consolidated financial statements.
In December 1999, the SEC issued Staff Accounting Bulletin (SAB)
No. 101, Revenue Recognition in Financial Statements. SAB 101 provides the SEC
staff's views in applying generally accepted accounting principles to selected
revenue recognition issues including software revenue recognition. The Company
is required to adopt SAB 101 in the fourth quarter of the 2001 fiscal year. We
have not completed the process of evaluating the impact that the adoption of
SAB 101 will have on the Company's financial position or results of operations.
Page 4
<PAGE>
Reclassifications - Certain prior years' balances have been
reclassified to conform to the 2000 presentation.
2. ACQUISITIONS
On September 30, 1998, the Company purchased the software rights
(source code) to its PFP Pro Product, previously licensed from VALIData Sistemas
de Captura, S.A. de C.V., for $200,000 in cash paid in October, 1998. This
$200,000 was capitalized as prepaid software rights and included in other assets
in the balance sheet at September 30, 1998 and is being amortized on a straight
line basis over 48 months as a component of cost of sales.
On June 3, 1997, the Company purchased substantially all of the
assets of Technology Solutions, Inc., a Chantilly, Virginia based software
developer and solution provider of document image processing systems. The
purchase price consisted of issuing 685,714 unregistered shares of the Company's
common stock and $240,000 cash payment. The purchase resulted in $1,065,107 of
goodwill, to be amortized on a straight-line basis over 60 months as a component
of cost of sales. A $293,000 goodwill impairment was recorded in the first
quarter of fiscal 1998. Disputes arose between the Company, TSI, and the
principals of TSI. On October 20,1998, the Company entered into an agreement
with TSI and its principals in settlement of all claims and cross-claims.
Pursuant to this agreement, the Company reacquired 591,114 shares of its
unregistered common stock and a non-exclusive, non-transferable, perpetual,
worldwide, royalty-free license to use key components of the TSI document
imaging systems software. TSI and its principals reacquired ownership of their
technology and software. This settlement did not result in an impairment of
goodwill. The remaining unamortized goodwill balance after this transaction of
$168,366 was allocated to the software rights retained and was being amortized
on a straight line basis over 48 months, as a component of cost of sales;
however, after evaluating the remaining goodwill balance at September 30, 2000,
the Company made the determination to expense the balance of this goodwill which
totaled $84,194, to cost of sales.
3. SALE OF FAX BUSINESS
On January 30, 1998, the Company sold its Fax Products assets in a cash
transaction, resulting in a gain of $34,000 included in Other Expenses - Net on
the Consolidated Statement of Operations. The gross proceeds of the sale were
$420,000 in cash, offset by the net carrying value of the assets sold of
($308,000) and costs related to the transaction of ($78,000).
4. STOCKHOLDERS' EQUITY
OPTIONS - The Company has 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 1986 plan expired on September 30, 1996
and no additional options may be granted under this plan. The 1988 plan provides
for the purchase of up to 650,000 shares of common stock through non-qualified
options. The 1988 plan expired on September 13, 1998. 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 are excluded from the
plans.
The 1996 plan provides for the purchase of up to 1,000,000 shares of
common stock through incentive and non-qualified options. Options must be
granted at fair
Page 5
<PAGE>
market value and for a term of not more than ten years. Employees owning in
excess of 10% of the outstanding stock are included in the plan on the same
terms except that the options must be granted for a term of not more than
five years. The 1996 plan maximized in February 1999 and no additional
options may be granted under this plan.
The 1999 plan provides for the purchase of up to 1,000,000 shares of
common stock through incentive and non-qualified options. Incentive options must
be granted at fair market value while non-qualified options may be granted at no
less than 85% of fair market value, and for a term of not more than ten years.
Employees owning in excess of 10% of the outstanding stock are included in the
plan on the same terms except that the options must be granted for a term of not
more than five years.
Information concerning stock options granted by the Company under all
plans for the years ended September 30, 2000, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
SHARES PRICE RANGE
<S> <C> <C>
Balance, October 1, 1997 977,666 $ .656 - 3.750
Granted 1,798,802 .89 - 1.250
Exercised (35,693) .656 - 1.38
Cancelled (1,187,359) .656 - 3.75
---------- ----------------
Balance, September 30, 1998 1,553,416 .67 - 2.125
Granted 1,162,953 .4375 - 3.50
Exercised (240,738) .4375 - 1.38
Cancelled (1,140,533) .4375 - 1.25
---------- ----------------
Balance, September 30, 1999 1,335,098 .4375 - 3.50
Granted 465,000 3.43 - 12.37
Exercised (599,598) .4375 - 3.50
Cancelled (84,658) .719 - 7.25
---------- ----------------
Balance, September 30, 2000 1,115,842 $ .4375 - 12.37
========== ================
</TABLE>
The weighted average remaining contractual life was 8.01 years for the
outstanding stock options at September 30, 2000, with a weighted average
exercise price of $3.96. At September 30, 2000, options for 178,916 shares
remained available for granting under the 1999 option plan. At September 30,
2000, options for 378,441 shares were exercisable with a weighted average
exercise price for these options of $2.96.
All stock options are granted at fair market value of the Company's
common stock at the grant date. The weighted average fair value of the stock
options granted during fiscal 2000 was $4.50. The fair value of each stock
option grant is estimated on the date of the grant using the Black-Scholes
option pricing model with the following weighted average assumptions used for
grants in 2000: risk-free interest rate of 6%; expected dividend yield of 0%;
expected life of 3 years; and expected volatility of 103%. Stock options
generally expire between six to ten years from the grant date. Stock options
generally vest over a three-year period, with one thirty sixth becoming
exercisable on each of the monthly anniversaries of the grant date.
The Company accounts for its options in accordance with Accounting
Principles Board Opinion No. 25, under which no compensation cost has been
recognized for
Page 6
<PAGE>
employee stock option awards. Had compensation cost been determined
consistent with SFAS No. 123, the Company's pro forma net loss and loss per
share for fiscal 1998 would have been ($2,005,401) and ($.17), respectively,
the Company's pro forma net income and net income per share for fiscal 1999
would have been $1,440,842 and $.13, respectively, and the Company's pro
forma net loss and net loss per share for fiscal 2000 would have been
($2,418,779) and ($.22), respectively. Because the SFAS No. 123 method of
accounting has not been applied to options granted prior to October 1, 1995,
the resulting pro forma compensation cost may not be representative of that
to be expected in future years.
5. LINE OF CREDIT - BANK
In August 2000, the Company renegotiated its working capital line of
credit from its bank, Rancho Santa Fe National Bank for $2,500,000. The line of
credit expires on June 8, 2001 and interest is payable at prime plus 1.5
percentage points. In addition, the Company renewed its equipment credit line in
the amount of $250,000 under similar terms and conditions. There were borrowings
in the amount of $510,000 under the working capital line of credit and no
borrowings under the equipment line of credit at September 30, 2000. The line of
credit has certain financial covenants which the Company was in compliance with
at September 30, 2000. The Company had total interest expense of $7,422, $0, and
$301 for the fiscal years ended September 30, 2000, 1999 and 1998,
respectiveley.
6. INCOME TAXES
For the years ended September 30, 2000, 1999 and 1998, the Company's
provision for income taxes was as follows:
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Federal - current $0 $29,000 $0
State - current 0 0 0
-- ------- --
Total $0 $29,000 $0
== ======= ==
</TABLE>
There was no provision for deferred income taxes in 2000, 1999 or 1998.
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, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Deferred tax assets:
Reserves not currently deductible $ 327,000 $ 161,000
Book depreciation and amortization in excess of tax 374,000 438,000
Research credit carryforwards 529,000 529,000
AMT credit carryforward 39,000 49,000
Net operating loss carryforwards 706,000 247,000
Capitalized research and development costs 306,000 347,000
Uniform capitalization (21,000) (20,000)
Other 153,000 133,000
------------ ------------
Total deferred tax assets 2,413,000 1,884,000
Valuation allowance for net deferred tax assets (2,413,000) (1,884,000)
------------ ------------
Total $ 0 $ 0
============ ============
</TABLE>
Page 7
<PAGE>
The Company has provided a valuation allowance against deferred tax
assets recorded as of September 30, 2000 and 1999 due to uncertainties regarding
the realization of such assets.
The research credit and net operating loss carryforwards expire during
the years 2005 to 2020. The federal and California net operating loss
carryforwards at September 30, 2000 are approximately $3,800,000 and $1,900,000,
respectively.
The differences between the provision 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>
2000 1999 1998
<S> <C> <C> <C>
Amount computed using statutory rate (34%) $(487,000) $ 698,000 $(508,900)
Net change in valuation reserve for deferred tax 529,000 (671,000) 503,000
assets
Non-deductible items 12,000 7,000 8,757
State income taxes (54,000) 0 0
Other 0 (5,000) (2,857)
--------- ---------- ----------
Provision for income taxes $ 0 $ 29,000 $ 0
========= ========== ==========
</TABLE>
7. LONG-TERM LIABILITIES
As of September 30, 2000 and 1999, long-term liabilities were as
follows:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Deferred rent payable - see Note 8 $32,036 $41,973
Non current deposits 9,067 9,067
------- -------
Total $41,103 $51,040
======= =======
</TABLE>
8. COMMITMENTS AND CONTINGENCIES
LEASES - The Company's offices and manufacturing facilities are leased
under non-cancelable operating leases. The primary facilities lease expires on
June 30, 2002. In addition, the Company leases office space in Sterling, VA
which expires December 31, 2003. The lease payments are expensed on a
straight-line basis over the lease term.
The Company signed an agreement to sub-lease office space adjacent to
its primary offices, effective May 1, 1998 through June 30, 2002. In addition
the Company signed an agreement to sub-lease office space it previously occupied
in Chantilly, VA, effective January 1, 1999 through July 31, 2002.
Future annual minimum rental payments payable by the Company and annual
minimum sub-lease amounts under non-cancelable leases are as follows:
<TABLE>
<CAPTION>
OPERATING SUB-LEASE
LEASES (INCOME)
<S> <C> <C>
YEAR ENDING SEPTEMBER 30:
2001 294,128 (175,782)
2002 241,939 (147,449)
2003 32,579 0
-------- ----------
Total $568,646 $(323,231)
======== ==========
</TABLE>
Page 8
<PAGE>
Rent expense for operating leases, net of sub-lease income, for the
years ended September 30, 2000, 1999 and 1998 totaled $168,173, $167,141, and
$271,502, respectively.
9. PRODUCT REVENUES AND SALES CONCENTRATIONS
Product Revenues - During fiscal years 2000, 1999 and 1998, 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,
2000 1999 1998
<S> <C> <C> <C>
Character recognition 97% 94% 85%
Other 3% 6% 15%
</TABLE>
Sales Concentrations - For the years ended September 30, 2000, 1999 and
1998, the Company had the following sales concentrations:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
2000 1999 1998
<S> <C> <C> <C>
Customers to which sales were
in excess of 10% of total sales
* Number of customers 3 1 1
* Aggregate percentage of sales 52% 10% 33%
Foreign Sales - primarily Europe 15% 22% 23%
</TABLE>
10. LICENSING AGREEMENT
In April 1997 the Company entered into an exclusive software licensing
agreement with Parascript Limited Liability Company (Parascript). The terms of
the agreement required the Company to pay Parascript $650,000 cash, and lend
Parascript $250,000 cash to be repaid in part from the royalties due Parascript
(the $250,000 loan was repaid during the year ended September 30, 1998). In
addition, the entities entered into a cross investment agreement providing
Parascript with 763,922 shares of unregistered common stock of the Company
valued at $668,814 in exchange for a 10% interest in Parascript. The investment
in Parascript was accounted for on the cost method and is included in Other
Assets in the accompanying Balance Sheet at September 30, 1998.
On October 16, 1998 the Company and Parascript agreed to undo their
cross investment agreement and entered into a new licensing agreement. The new
licensing agreement is not exclusive except for six major customers, and
provides for a reduction in royalty percentages payable. The Company received
763,922 shares of unregistered common stock of the Company previously held by
Parascript valued at $477,451 in exchange for returning its 10% interest in
Parascript, exclusivity for six customers, and reduced royalties. The difference
between the carrying value of the investment in Parascript of $668,814 at
September 30, 1998 and the $477,451 value on October 16, 1998 of $191,363 was
recorded as prepaid license rights and is being amortized over 48 months as a
component of cost of sales.
Page 9
<PAGE>
********
Page 10
<PAGE>
SUPPLEMENTAL INFORMATION
CORPORATE OFFICE
Mitek Systems, Inc.
10070 Carroll Canyon Road
San Diego, California 92131
(858) 635-5900
REGIONAL OFFICE
107 Carpenter Drive, Suite 120
Sterling, Virginia 20164
(703) 318-7030
CORPORATE OFFICERS
John M. Thornton, Chairman of the Board, President, Chief Executive Officer and
Chief Financial Officer
David Pintsov, Ph.D., Senior Vice President
Dennis Brittain, Ph.D., Chief Technical Officer
William Boersing, Vice President North American Sales
Noel Flynn, Vice President Operations / Customer Support
TRANSFER AGENT
Chase Mellon Shareholder Services
400 S. Hope Street, Fourth Floor, Los Angeles, California 90071
AUDITORS
Deloitte & Touche, LLP
701 B Street, Suite 1900, San Diego, California 92101
DIRECTORS
John M. Thornton, Chairman of the Board, President, Chief Executive Officer and
Chief Financial Officer
Sally B. Thornton (1), Investor
Daniel E. Steimle (1), (2), Vice President, Chief Financial Officer,
LGC Wireless
James B. DeBello (1), (2), Venture Chief Executive Officer, Idea Edge Ventures
Gerald I. Farmer, Ph.D. (2)
NOTES
(1) Compensation Committee
(2) Audit Committee
FORM 10-K REPORT
Copies of the Company's Form 10-K report to the Securities and Exchange
Commission, are available free to stockholders and may be obtained by writing or
calling Secretary, Mitek Systems, Inc., 10070 Carroll Canyon Road, San Diego,
California 92131, phone (858) 635-5900.
1
<PAGE>
STOCKHOLDERS:
As of December 1, 2000, there were 525 holders of record of Mitek Systems, Inc.
Common Stock.
DIVIDENDS
Mitek Systems, Inc. has paid no dividends on its common stock since its
incorporation and currently intends to retain all earnings for use in its
business. Payment of dividends is restricted by the terms of outstanding debt
obligations.
COMMON STOCK MARKET (1)
PRICE RANGE (2)
<TABLE>
<CAPTION>
FISCAL QUARTER 2000 1999
LOW HIGH LOW HIGH
<S> <C> <C> <C> <C>
1ST 3.37 5.31 0.40 1.37
2ND 3.93 16.68 1.06 2.06
3RD 4.09 11.12 1.31 2.93
4TH 4.12 6.50 2.50 4.37
</TABLE>
(1) The Company's common stock is traded on the NASDAQ National Market under the
symbol "MITK" and the closing bid price on December 1, 2000 was $.525.
(2) Bid quotations compiled by National Association of Securities Dealers, Inc.,
represents inter-dealer quotations and not necessarily actual transactions.
SELECTED FINANCIAL DATA
The table below sets forth selected financial data for each of the
years in the five-year period ended September 30, 2000.
<TABLE>
<CAPTION>
($000 EXCEPT PER SHARE DATA) 2000 1999 1998 1997 1996
<S> <C> <C> <C> <C> <C>
Sales $ 9,348 $9,741 $ 6,501 $ 4,842 $8,154
Net income (loss) (1,434) 2,026 (1,497) (2,566) 1,229
Net income (loss) per share (0.13) .19 (0.13) (0.25) 0.16
Total assets 7,774 7,389 6,136 7.188 3,762
Long-term liabilities 41 51 55 22 6
Stockholders' equity 4,890 5,622 4,282 5,751 2,652
</TABLE>
2
