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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark one)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the fiscal year ended June 30, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from ___________________ to ______________________
Commission File Number: 1-9641
IDENTIX INCORPORATED
(Exact name of registrant as specified in its charter)
California 94-2842496
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
510 North Pastoria Avenue, Sunnyvale, California 94086
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 731-2000
Securities registered pursuant to Section 12(b) of the Act: Common Stock, no par value
Securities registered pursuant to Section 12(g) of the Act: None
Name of each exchange on which registered: American Stock Exchange
Pacific Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ____
The aggregate market value of the voting stock held by non-affiliates of the
registrant on July 31, 1996, based upon the closing price of the Common Stock on
the American Stock Exchange for such date, was approximately $186,942,000.
Shares of Common Stock held by each officer and director and by each person who
owns 10% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
The number of outstanding shares of the registrant's Common Stock on September
2, 1996 was 24,323,937.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement expected to be filed with the
Securities and Exchange Commission on or about October 1, 1996 and to be used in
connection with the Annual Meeting of Shareholders expected to be held October
30, 1996 are incorporated by reference in Part III of this Form 10-K.
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TABLE OF CONTENTS
PAGE
Item 1. BUSINESS...................................................................................................... 1
Item 2. PROPERTIES.................................................................................................... 18
Item 3. LEGAL PROCEEDINGS............................................................................................. 18
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS........................................................... 18
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS....................................................................................................... 20
Item 6. SELECTED FINANCIAL DATA....................................................................................... 21
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS................................................................................................. 22
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................................................... 28
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.......................................................................................... 46
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............................................................ 47
Item 11. EXECUTIVE COMPENSATION........................................................................................ 47
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................................................ 47
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................................................ 47
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.............................................. 48
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PART I
ITEM 1. BUSINESS
The statements in this Annual Report on Form 10-K that relate to future
plans, events or performance are forward-looking statements. Actual results
could differ materially due to a variety of factors, including the factors
described under "Risk Factors" and the other risks described in this Annual
Report on Form 10-K.
OVERVIEW
Identix Incorporated ("Identix" or the "Company") is a leader in
designing, developing, manufacturing and marketing products for the capture or
comparison of fingerprints for security, anti-fraud, law enforcement and other
applications. Identix's products are classified into two groups: (i) biometric
identity verification ("Bio-ID") products that identify an individual through
the unique biological characteristics of a fingerprint and (ii) biometric
imaging products that capture forensic quality fingerprint images directly from
an individual's fingers for law enforcement and other applications. At the core
of Identix's Bio-ID and biometric imaging products are proprietary fingerprint
capture technologies developed through the application of Identix's expertise in
optics and image processing. The Company's products also employ proprietary
algorithms, application software and high resolution printing technology.
Identix's technologies and know-how enable it to produce biometric solutions for
a broad range of commercial and governmental applications. The Company provides
information technology, engineering and management consulting services to
private and public sector clients through a wholly owned subsidiary, ANADAC,
Inc. ("ANADAC"). ANADAC's services support the development, installation,
integration and operation of hardware and software technology solutions,
including Identix products, for a variety of client operating environments. The
Company's other subsidiaries include: Fingerscan Pty Ltd. ("Fingerscan") a
manufacturer and integrator of Bio-ID products; and Innovative Archival
Solutions ("IAS"), a supplier of contract fingerprint services for employee and
applicant screening.
BIOMETRIC INDUSTRY OVERVIEW
Fingerprints have a long history of being used as a means of verifying
the identity of individuals. Fingerprint identification has its origins in law
enforcement. In the 1800s, law enforcement agencies began using fingerprints to
link suspects with crime scenes or objects associated with crimes. Today, the
use of fingerprints in law enforcement is standard practice. Fingerprints are
well suited for positive identification because it is believed that each
individual's fingerprints contain a unique pattern, distinguishable from the
fingerprint patterns of the rest of the population. The process of capturing,
storing, retrieving and comparing fingerprints has become increasingly automated
as a result of advances in optics, electronics and computing. These advances
have enabled fingerprint identification technology to be used to confirm an
individual's identity for a variety of commercial and governmental applications.
BIO-ID
The costs of fraud are estimated to be in the billions of dollars each
year in the United States alone. In addition, damages resulting from security
breaches, such as unauthorized persons gaining improper access to confidential
information, may not be quantifiable, but can be equally as serious.
Accordingly, the ability to verify the identity of a specific individual is of
critical importance for security and anti-fraud purposes. Numerous times each
day a person is required to identify himself with something the individual has
in his possession or with the knowledge of certain information, such as:
automated teller machine ("ATM") cards and personal identification numbers
("PINs") to transact business at an ATM; passwords to log-on to a computer
network; keys, cards or passwords to enter the workplace; PINs, passwords and
account numbers to make a commercial transaction online; credit cards to make a
credit purchase; time card to begin work; and a driver's license to write a
check or transact business at a bank.
- ------------------
The Company has adopted ONE DIGIT PIN(TM), TouchNet II(TM), TouchSafe II(TM),
TouchLock II(TM), TouchClock II(TM), TouchBlock(TM), TouchPrint(TM),
TouchView(TM), I3(TM), Docucolor(TM), Fingerscan(TM), Fingerlan I(TM), and
Fingerlan II(TM), as trademarks. The Fingerscan name and logo are registered in
Australia.
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Despite the importance of being able to verify the identity of an
individual, the most common verification methods used generally cannot provide
positive identification that a person is in fact the individual who that person
represents himself to be or is rightfully in possession of the physical object
or information that is being used to confirm identity. Keys, credit cards, ATM
cards and card keys can be lost or stolen. Passwords, account numbers or other
information used for identity verification can be divulged to or intercepted by
unauthorized users through electronic means and otherwise. In the workplace,
time-and-attendance information can be improperly altered by an employee
punching the time card for a tardy or absent co-worker.
A more accurate method of verifying identity is to analyze some unique
biological characteristic of an individual, known as "biometric" verification,
to verify that person's identity before allowing the requested access or
authorization. Examples of unique biological characteristics that can be used to
identify an individual include fingerprints, eye retina blood vessel patterns,
hand geometry, voice, signature and face structure. Although biometric systems
potentially provide a more accurate means of identification than traditional
non-biometric methods, until recently their use has been limited by the cost and
technological complexity of developing the equipment to read and record unique
biological data and to use that data to distinguish one individual from the next
and by the computer processing power and speed needed to perform those
functions. In order to compete with non-biometric systems, Bio-ID systems must
be fast, highly reliable and cost effective.
Bio-ID systems have the potential to be used in a broad range of
applications, including ATMs, computer database and network security,
point-of-sale terminals, electronic commerce and communications, and intranet
and Internet security.
BIOMETRIC IMAGING
Fingerprinting has gained widespread acceptance and has become
increasingly more useful for law enforcement purposes because of the advances
made in the process of capturing, storing, retrieving, and comparing fingerprint
data. The Henry System, developed approximately 100 years ago, made the process
of manually comparing fingerprints manageable by developing a system of
characterizing fingerprints by different ridge patterns. The ability to
characterize fingerprints by ridge patterns enabled the development of computer
systems capable of comparing fingerprints against large databases of
fingerprints. Developed in the 1970s, these systems, known as Automated
Fingerprint Identification Systems ("AFIS"), use pattern recognition algorithms
that detect fingerprint characteristics to accomplish fingerprint matching.
Until the late 1980s, fingerprint collection was done by the traditional
"ink-and-roll" process. This process starts at the local law enforcement agency
where usually three or more complete sets of ink-and-roll prints are taken, one
for the local agency, one to be mailed to the state and one to be mailed to the
FBI. When the FBI receives the card, the card is run through a scanner which
creates a digital image of the fingerprint. The AFIS then compares the digital
image with the existing database of fingerprints to check the identity of an
individual and also adds that fingerprint image into the database.
While the advent of AFIS systems significantly improved the ability to
compare fingerprints against large databases of fingerprints, the process of
collecting ink-and-roll cards, mailing those cards to the agency that maintains
the AFIS and scanning the fingerprint image into the AFIS often creates a
bottleneck in the system. The fingerprinting process can be complicated by a
lack of cooperation of the person being fingerprinted, the need to take multiple
sets of prints and operator error. In its 1995 fiscal year, the FBI received
approximately 40,000 fingerprint cards daily from local law enforcement and
other governmental agencies throughout the United States, which has led to
delays in scanning the cards into the FBI's AFIS. The FBI may reject the
ink-and-roll cards it receives if the prints are smudged or are entered in the
wrong area of the card. If the FBI rejects the card, the local agency is often
required to locate the individual and have a set of fingerprints taken again. As
a result of the foregoing factors, the time between taking a set of fingerprints
and receiving the results of the search may take several days or weeks, and the
suspect often must be released before the search results are obtained.
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In the late 1980s, live-scan technology, also known as biometric
imaging, was made commercially available to permit the inkless electronic
capture of fingerprint images. Identix was one of the first companies to develop
and commercialize live-scan systems. Live-scan systems electronically capture
and create a digitized image of the fingerprint directly from a person's finger.
The digitized fingerprint image captured by the live-scan unit can be compared
to a database of fingerprint images at the local agency if it has an AFIS and/or
the image can be electronically relayed to a state agency where it can be
compared against a larger database. In addition, because the fingerprint images
are captured electronically, any number of cards can be printed from one set,
eliminating the need to roll the image numerous times.
The United States and certain international law enforcement communities
are in the process of converting from manual ink-and-roll fingerprint capture to
live-scan fingerprint capture. In the United States, the FBI has undertaken a
major program to upgrade its Identification Division and has announced that its
goal is to bring its new identification facility on-line and to receive a
majority of fingerprint submissions electronically by the late 1990s. As a
result of increased automation at the federal and state levels, a number of law
enforcement agencies have procured live-scan fingerprint systems.
In addition to law enforcement applications, the ability to capture a
forensic quality fingerprint image electronically and compare that fingerprint
with a database of fingerprint images has other important applications, such as
screening potential foster parents, conducting employee background checks
(including jobs in federal or state government, child care, securities or
gaming), checking whether an applicant for a driver's license has received a
license under a different name in that state, or ensuring that welfare benefits
are paid to only qualified recipients.
IDENTIX TECHNOLOGY
The Company believes that the following core technological competencies
will enable it to address the opportunities presented in the developing
biometric product markets:
Optics and Image Processing Expertise. At the core of the Company's
Bio-ID and biometric imaging products are proprietary fingerprint capture
technologies developed through the application of the Company's optics and image
processing expertise. The fingerprint capture devices operate by passing a beam
of light through an inverted prism located directly under the acrylic surface
(the "platen") on which the finger is placed. A series of reflections is
experienced by the beam of light as it strikes the platen, forming an initial
image that accurately corresponds to the pattern of ridges and valleys of the
fingerprint. The reflected light passes through a series of lenses before
reaching a camera system that records the image information.
The design of the fingerprint capture device for the Company's Bio-ID
systems is different than that of the capture devices for the Company's
biometric imaging systems. Fingerprint capture devices for imaging systems must
meet forensic quality standards required for identifying individuals from within
large AFIS systems. To meet these stringent standards, the Company has applied
its optics and image processing expertise to develop a system that captures very
high resolution images. The result is a fingerprint capture unit that produces
rolled finger and "slap" (four fingers at once) images at 600 dots per inch and
500 dots per inch, respectively.
The requirements for Bio-ID units are very different. Bio-ID
applications demand low prices and small size, but do not require as high
resolution as biometric imaging products. To address this market, the Company
has applied its optics and image processing expertise to produce a fingerprint
capture device that is a fraction of the cost and size of a fingerprint capture
device for an imaging system, but with high enough resolution to provide
reliable identity verification.
Algorithms, Software and Printing Expertise. The Company's products also
employ proprietary algorithms, application software and high resolution printing
technology. The Company's Bio-ID products use the Company's patented fingerprint
analysis algorithms which permit the user considerable latitude in finger
placement during use, reducing the need to monitor finger location. The
algorithms, embedded in a proprietary application specific integrated circuit
("ASIC") are designed to accommodate considerable user error as well as
fingerprints which are
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difficult to read. Moreover, the Bio-ID system software, through the use of
menus and instructions, allows easy selection of customer options and provides
guidance in customizing system use. The Bio-ID systems also have self-diagnostic
features to check internally their own operation during start up, to monitor
continuously their status during operations and to provide an information file
on certain component failures or malfunctions.
The Company's live-scan products contain a number of proprietary
software features, including data management software and software for
digitizing and processing fingerprint data in accordance with stringent FBI
standards. The Company's expertise in networking and systems integration has
allowed it to implement large-scale systems in some of the largest law
enforcement agencies in the United States to automate and improve the efficiency
of the criminal identification process. In addition, the Company has developed
proprietary quality assurance software that can tell the operator if a smudged
or otherwise unreadable fingerprint image was captured, allowing the operator to
recapture the image.
BIO-ID PRODUCTS
The Company's Bio-ID products operate by comparing an individual's
finger with the mathematical characterization ("template") of the fingerprint
that the individual at the time of enrollment entered into the system's memory
or on a smart card (a card similar to a credit card with an embedded computer
chip and memory that stores a mathematical characterization of a fingerprint) or
magnetic strip card. The user enters a personal identification number and then
places his finger on the platen of the Bio-ID system. The system compares the
finger on the platen with the stored fingerprint data associated with the
identification number to confirm the user's identity. If the fingerprint and the
stored template match, the user is positively identified and access or
transaction processing is authorized. If the fingerprint and the stored template
do not match, access or transaction processing is denied. See "Identix
Technology."
TouchSafe II and TouchNet II. TouchSafe II is used for controlling
access to computer data, for authorizing business transactions such as
electronic funds transfers and for other applications. TouchSafe II is
configured to be connected to a personal computer to provide user
authentication. TouchSafe II provides the necessary electronics to interface
with personal computers in the form of a plug-in board. Pursuant to an agreement
with Oracle Corporation ("Oracle"), Identix is currently completing development
of TouchNet II, an enhanced version of TouchSafe II for securing access to
computers and networks, which can also be modified to provide identity
authentication on computer networks for electronic commerce. TouchNet II will be
a combination verification and encryption Bio-ID product to be used as a
peripheral with intranet computer appliances. TouchNet II is being designed to
interface with security software being developed by Oracle and other companies
for global customers' protection. TouchNet II will feature encryption coding
security which scrambles communications and fingerprint data.
TouchLock II. TouchLock II is an access control system which may be used
in many different applications, including securing access to physical space such
as ATMs and buildings, or authorizing financial transactions. TouchLock products
have been installed in the Pentagon and in banks and industrial plants around
the world. These products may be connected in a network configuration through a
personal computer and have the flexibility to permit access to designated entry
points, thereby allowing a customer to install different levels of security at
different locations within the same system. TouchLock II is also marketed under
the name Fingerscan internationally.
TouchClock II. TouchClock II is specifically designed for employee
time-and-attendance applications, to be used as an alternative to, or in
conjunction with, traditional punchcard time-and-attendance systems. The
TouchClock II can track an individual's time of arrival and departure as well as
breaks. TouchClock II is based on the same core proprietary technology as
TouchLock II.
TouchBlock. The Company sells a fingerprint identification kit to
original equipment manufacturers ("OEMs") consisting of a tooled optics
subsystem, custom integrated circuit, and supporting software modules which
allows biometric identification to be integrated into third party OEM systems
employing microprocessor
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based architectures. Most of the Company's TouchBlock sales to date have been
for time-and-attendance, ATM servicing and point-of-sale applications.
TouchLan II. TouchLan II is system management software designed to allow
the authorized system manager the ability to limit access of specific
individuals to certain times or to certain locations, as well as to create an
audit trail of all entries, alarms, enrollments, system changes and imposter
attempts. TouchLan II is compatible with Microsoft Windows. TouchLan II is also
marketed under the name Fingerlan II internationally.
BIOMETRIC IMAGING PRODUCTS
TouchPrint 600. The Company's TouchPrint products are computer-based,
inkless live-scan systems that electronically scan and capture forensic quality
fingerprint images directly from an individual's finger. The fingerprint images
then can be printed using a laser printer or transmitted over telephone lines to
AFIS systems for identification matching at local, state or federal agencies.
TouchPrint was designed for use by law enforcement agencies as a more accurate
and efficient method of recording fingerprint information than the conventional
"ink-and-roll" method. The TouchPrint 600 workstation and printer system was the
first system accredited under the FBI's new Image Quality Specifications ("IQS")
standard. Accreditation to this specification is required for direct electronic
submission of fingerprint images to the FBI's integrated AFIS currently under
development. In addition to law enforcement applications, there are other
applications for the TouchPrint systems, including background checks of
prospective employees by public and private sector employers. A standard
configuration of a TouchPrint 600 system consists of a high resolution scanner
with digital signal and video processing boards, multi processing application
software, a multi-tasking computer and monitors and a laser printer.
TouchView II. TouchView II is specifically designed to capture and
display a high resolution video fingerprint image on a customer-supplied
workstation. TouchView is used primarily by system integrators as an optical
live-scan fingerprint capture device which supplies fingerprint images to
computerized fingerprint database systems for identification matching. The
Company's TouchView single-finger imager is used for civilian applications in
welfare fraud prevention, immigration and border control, and motor vehicle
licensing. TouchView is incorporated into turnkey systems by several OEMs.
I(3) Workstation. The Identix I3 workstation is a point-of-booking
system that integrates mugshot capture capability with Identix's TouchPrint
live-scan fingerprinting system. The I3 workstation is designed to be
integrated with the Company's DocuColor mugshot and image file management
system. The I3 workstation links the key elements of the criminal identification
process, including fingerprints, mugshots, biographical data, documents, arrest
data and criminal investigation files, to provide law enforcement agencies with
a system for consolidating criminal justice information. The I3 workstation is
a modular booking workstation equipped with a live-scan system and photo
capture camera, file server, investigative workstation, document scanner and
color printer.
DocuColor. The DocuColor mugshot and image file management system is an
image management system that provides the capability to create an "electronic
file folder" containing color video images, document images, fingerprints, forms
and digitized data. The system provides compact storage and easy retrieval of a
large volume of criminal justice information such that a user can, by querying
the system and utilizing certain physical characteristics of a suspect, produce
from a search of thousands of suspect records a photo line-up for comparison.
The DocuColor system operates on a personal computer workstation. A digital
video camera is used for capturing color photographs and a high resolution
scanner is used to digitize documents to store in an electronic file folder. A
high-capacity relational database is used to index and store information and
images. Images and data from the electronic file folders can be displayed on
high resolution monitors or printed on black and white or color printers. The
DocuColor system provides full networking capabilities to allow multiple users
access to a central database and image storage system.
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FINGERPRINT SERVICE BUSINESS
The Company believes that there is significant demand for fingerprinting
services and in June 1996 acquired IAS, which provides fingerprinting services
in two states using the Company's biometric imaging systems. Certain employers
require a background check, including a fingerprint check, as a condition of
employment. Persons who apply to be postal workers, stock brokers, bus drivers,
security guards, health care workers, foster parents, school teachers, daycare
providers and insurance brokers must be fingerprinted. Usually, an applicant is
required to go to a police station for ink fingerprinting and then submit the
fingerprint card to the employer for submission to the state authorities or the
FBI to perform a background investigation. This process usually takes several
weeks to complete and often the inked cards are rejected as unreadable. If the
fingerprint card is rejected, an applicant then must go through the process
again, which can delay an applicant's start date. In some cases, employers or
agencies find themselves with such a backlog of applicants awaiting
fingerprinting that they allow applicants to start the job without the
background check being complete, placing the employer at risk if an applicant
has a criminal record.
The fingerprint services business provides the applicant and employer
with the following advantages: fingerprinting takes place in a non-police
environment; background checks can be completed more quickly, allowing the
applicant to begin work sooner; re-submissions can be done automatically; the
rejection of cards because of poor print quality is virtually eliminated; and
employers may not be subject to the unnecessary risk of discovering that an
employee who has begun work may have a criminal record.
Fingerprint services are provided through mobile units which are
dispatched from a central location and make periodic visits to different
locales. The fingerprint services business maintains an "800" number which
people can call to find out the most convenient location for them to have
fingerprints taken and, if the location is serviced by a mobile unit, when the
mobile unit will be at that location. The applicant then makes an appointment
and provides all the necessary background information over the phone.
ANADAC SERVICES
The Company provides information technology, engineering and management
consulting services to private and public sector clients through ANADAC, which
is headquartered in Arlington, Virginia. ANADAC's services support the
development, installation, integration and operation of hardware and software
technology solutions, including Identix products, for a variety of client
operating environments. ANADAC provides such services through the following
groups and subsidiary:
Information Technology Group. ANADAC's Information Technology Group ("IT
Group") provides business process analysis and business process engineering as
well as system design, development, integration and implementation services to
automate a client's workflow thereby improving operational efficiency and
solving business problems. The IT Group's solutions incorporate a variety of
technologies such as digital imaging, biometric imaging, rastor to vector
conversion, networking, relational database development and management,
telecommunications and integration of nonhomogeneous software and hardware into
a single homogeneous environment.
The Company believes there is a significant opportunity to provide
businesses and government agencies imaging solutions to address work flow
inefficiencies. Since most business processes involve some sort of paper
documentation, imaging technologies play an important role in developing
business solutions that improve storage, distribution and access efficiency. The
IT Group focuses on providing acquisition, design, development and integration
support for imaging systems in a variety of different applications ranging from
law enforcement to office and business applications to automated storage and
retrieval. The IT Group utilizes the Company's DocuColor image file management
system to provide customers a file management system that allows users to
capture, catalog, index, store and retrieve data, digital video images and
document images using a file folder paradigm. The IT Group also develops and
implements biometric imaging solutions using the Company's products. For
example, the IT Group has been the system integrator for the Maryland Department
of Public Safety ("MDPS"), whereby the IT Group integrated the Company's
TouchPrint 600 live-scan fingerprinting system with
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the Company's DocuColor mugshot and file management system to provide MDPS a
statewide fingerprint and mug shot verification system designed to provide fast
and accurate suspect verification among Maryland's state law enforcement
entities. The IT Group also designs and implements other imaging systems using
"off-the-shelf" or commercially available products that satisfy its clients'
requirements.
Systems Engineering Group. ANADAC's System Engineering Group is a leader
in providing consulting, scheduling, project monitoring, financial and contract
management planning and implementing system acquisition programs in both the
public and private sectors. The Systems Engineering Group, with its extensive
expertise in planning and executing system procurements, also assists clients in
developing requests for proposals ("RFPs"), evaluating proposals and providing
the detailed analytical and comparative data required to make a selection. In
September 1995, ANADAC's System Engineering Group was awarded a contract for
program management engineering services by the Naval Sea Systems Command in
support of the AEGIS Combat Shipbuilding Program. The contract is valued at
approximately $7 million in the base year, with a total contract value of
approximately $38 million over a five-year period if all contract options are
exercised. There can be no assurance that any contract extensions will be
exercised or that funding will be provided beyond the base year.
Facilities Engineering Group. ANADAC's Facilities Engineering Group
provides strategic program management, including monitoring and cost control,
facility engineering audits, assessments, inspections and maintenance management
and construction management from design reviews to claims consulting.
System Dynamics, Inc. ANADAC's wholly owned subsidiary System Dynamics,
Inc. provides demographic data information and services principally to Fortune
500 companies for use in lobbying Federal and state legislatures.
A substantial portion of ANADAC's business comes from government
agencies, which subjects the business to certain additional risks. See "Risk
Factors--Fluctuations in Quarterly Results; History of Losses," "--Uncertainties
Related to Contracts for Services with Government Agencies," and "--Other Public
Agency Contract Considerations."
PRODUCT DEVELOPMENT
The Company considers research, development and engineering to be a
vital part of its operating discipline and continues to make substantial
investments in research, development and engineering to enhance the performance
and functionality, and in certain cases reduce the costs, of its existing
products and to increase its product offerings. The Company's expenditures for
research, development and engineering totaled $1,486,000, $1,582,000, and
$1,519,000 in the fiscal years ended June 30, 1996, 1995 and 1994, respectively.
In addition, research, development and engineering expenditures funded by
customers were $255,000, $381,000 and $596,000 in the fiscal years ended June
30, 1996, 1995 and 1994, respectively.
SALES, MARKETING AND SUPPORT
The Company markets its Bio-ID and biometric imaging product lines
directly to end users through its internal sales force, and indirectly through
authorized agents, distributors, value added resellers ("VARs"), system
integrators and OEMs. In fiscal 1996, North American MORPHO Systems, Inc.
("Morpho"), a system integrator, accounted for 14% of the Company's total
revenues.
Bio-ID Products. The Company's Bio-ID products are sold through a
worldwide network of direct sales personnel, dealers, system integrators, VARs
and OEMs. This sales organization is divided into four regions: Australia, Asia,
the Americas and Europe. Sales activity is concentrated in the markets of
database and network access security, banking (financial transactions)
time-and-attendance, access control and government (personal verification). The
Company has or plans to have sales, service, product marketing and application
engineering expertise in each regional sales office to provide the customers
with complete sales and maintenance support.
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In addition to marketing Bio-ID products directly through its own sales
force, the Company's strategy is to establish relationships with other companies
that are experts in specific market areas. The Company is working with strategic
collaborators to replace or supplement PINs and passwords with fingerprint
identity for a variety of applications. An extensive infrastructure already
exists for many of the markets in which the Company wishes to participate. In
such cases, the Company has and will pursue relationships with companies that
have strong positions in these markets. For example, the Company is developing a
biometric database access security product in cooperation with Oracle as part of
Oracle's strategy to enhance the security of its flagship database product. See
"Risk Factors--Dependence on Collaborative Partners for Product Distribution."
Sales activity varies widely from single access control devices sold by
a dealer or system integrator to complicated, networked solutions sold by
several companies working cooperatively, such as time-and-attendance, building
access and financial transaction authorization. The success of these sales
depends on the Company's ability to provide integrated solutions that are
usually software based. The majority of the service and support activities
relate to these software and integration issues.
Biometric Imaging Products. The Company's biometric imaging products are
marketed primarily through a direct sales force in North America located in five
regional offices. For international sales, the Company uses both a direct sales
force and international sales representatives. The Company currently has one
dedicated international sales representative and plans to employ additional
international sales representatives in this fiscal year. Identix also teams with
two major AFIS vendors, Morpho and NEC Technologies ("NEC"), to provide
TouchPrint 600 systems for law enforcement applications. In addition, the
Company works closely with skilled system integrators for civil and commercial
applications of its biometric imaging technology. The Company develops
proposals, either directly or in cooperation with its partners, and is often
directly involved in negotiating the contract terms.
The Company's TouchPrint 600 live-scan system is generally sold through
a competitive bid process based on a RFP. Funding for such projects often comes
from federal, state and local agencies. The funding, proposal, contract
negotiation and implementation process can extend over several months or years,
although for existing customers that are adding to or upgrading their systems,
the sales cycle is considerably shorter and these sales often are not required
to go through the bid process.
Product Support. Installation and maintenance support comes from the
Company's regional technical staffs as well as the Company's engineering staff.
This support generally includes travel to the customer site to explain the
technical operation of the system, clarify the configurations, detail any
necessary software customization and define the integration issues. The systems
are then installed and supported by the regional staffs or the Identix trained
system integrators, VARs or partners.
The Company's biometric imaging products carry a 90-day warranty and
extended service and warranty are offered through a choice of maintenance
contracts. Users are also supported through a 24 hour/7 days per week Help Desk
which is maintained and staffed by ANADAC's IT Group. The Company's Bio-ID
products carry a one year warranty and additional support is available for a fee
after the expiration of the warranty period. For equipment produced by other
companies, the Company passes on to its customers the standard warranties
provided by those manufacturers.
ANADAC Services. Historically, a significant portion of ANADAC's
revenues have been generated from contracts with the Department of Defense
("DOD"). Because of DOD budget cuts, ANADAC has increased its marketing efforts
to other government agencies and commercial entities. The marketing efforts for
each group within ANADAC are led by one business development person and the head
of the group.
PATENTS AND TRADE SECRETS
The Company's ability to compete effectively will depend in part on its
ability to maintain the proprietary nature of its technology, products and
manufacturing processes. The Company principally relies upon patent, copyright,
trade secret and contract law to establish and protect its proprietary rights.
The success of the Company's products business will depend in part on its
proprietary technology and the Company's protection of
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such technology. The Company holds the following patents: one United States
patent expiring in 2002 and ten foreign patents on one version of the Company's
optical fingerprint reading device; one United States patent expiring in 2008
and five foreign patents on a fingerprint analysis algorithm; one United States
patent expiring in 2012 covering an enhanced method of recording a fingerprint;
and one United States patent expiring in 2013 on the Company's curved platen
design palm scanner. Identix has an ongoing policy of filing patent applications
to seek protection for novel features of its products and currently has three
patent applications pending in the United States and one in a foreign country.
No assurance can be given that the claims allowed on any patents held by
the Company will be sufficiently broad to protect the Company's technology. In
addition, no assurance can be given that any patents issued to the Company will
not be challenged, invalidated or circumvented or that the rights granted
thereunder will provide competitive advantages to the Company. The loss of
patent protection on the Company's technology or the circumvention of its patent
protection by competitors could have a material adverse effect on the Company's
ability to compete successfully in its products business. There can be no
assurance that any existing or future patent applications by the Company will
result in issued patents with the scope of the claims sought by the Company, or
at all, that any current or future issued or licensed patents, trade secrets or
know-how will afford sufficient protection against competitors with similar
technologies or processes, or that any patents issued will not be infringed upon
or designed around by others. In addition, there can be no assurance that others
will not independently develop proprietary technologies and processes which are
the same as or substantially equivalent or superior to those of the Company.
Further, there can be no assurance that the Company has not or will not infringe
prior or future patents owned by others, that the Company will not need to
acquire licenses under patents belonging to others for technology potentially
useful or necessary to the Company, or that such licenses will be available to
the Company, if at all, on terms acceptable to the Company.
Litigation, which could result in substantial cost to the Company and
diversion of management attention, may also be necessary to enforce any patents
issued to the Company or to determine the scope and validity of other parties'
proprietary rights. For example, the Company is engaged in litigation with a
competitor regarding an alleged infringement by the Company of the competitor's
patent. If the outcome of any such litigation is adverse to the Company, its
business could be adversely affected. To determine the priority of inventions,
the Company may have to participate in interference proceedings declared by the
United States Patent and Trademark Office or oppositions in foreign patent
offices, which could result in substantial cost to the Company and limitations
on scope or validity of the Company's patents. See Item 3 "Legal Proceeding."
The Company also relies on trade secrets and proprietary know-how which
it seeks to protect by confidentiality agreements with its employees and
consultants and with third parties. There can be no assurance that these
agreements will not be breached, that the Company will have adequate remedies
for any breach, or that its trade secrets and proprietary know-how will not
otherwise become known or be independently discovered by others. See "Risk
Factors-- Protection of Proprietary Technology" and Item 3 "Legal Proceedings."
COMPETITION
The markets for Bio-ID products and biometric imaging systems are
extremely competitive and are characterized by rapid technological change, both
as a result of technical developments exploited by competitors, the changing
technical needs of the customers and frequent introductions of new features. In
addition, the Company is experiencing intense price competition in the law
enforcement market and, to a lesser extent, price competition in the markets
where the Company sells its Bio-ID products. The Company expects competition to
increase as other companies introduce additional and more competitive products.
In order to compete effectively in this environment, the Company must
continually be able to develop and market new and enhanced products and market
such products at competitive prices. There can be no assurance that the Company
will be able to make the technological advances necessary to compete
successfully in its products business. Some of the Company's present and
potential competitors have financial, marketing and research resources vastly
greater than those of the Company. Existing and new competitors may enter or
expand their efforts in the Company's product markets, or develop new products
to compete against the Company's products. No assurance can be given that the
Company's competitors will not develop new technologies or enhancements to
existing products or introduce new products that
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will offer superior price or performance features or that new products or
technologies will not render obsolete the products of the Company. For example,
other companies are currently developing other methods of biometric
identification such as hand geometry, voice recognition, signature recognition
or retina scanning, which could significantly reduce the potential market for
the Company's products if successfully developed and commercialized. The
Company's Bio-ID products also face competition from nonbiometric technologies
such as traditional key, card and surveillance systems, PIN numbers and similar
traditional verification methods.
The Company believes that the most important competitive factors for
Bio-ID products are the degree of security provided, ease of use, price and
reliability. In applications such as controlled access to computers, ATMs and
electronic funds transfer, the Company faces competition from technologies
relying on PIN numbers or passwords. In competing with these nonbiometric
products, the Company believes that the most important competitive issue is the
trade-off between the additional security provided by positive personal
identification and the higher price. In some instances, however, products using
nonbiometric technologies may be complementary to, rather than competitive with,
the Company's Bio-ID products. For example, card key systems can be integrated
with Bio-ID systems to supply different levels of security within a facility.
The Company believes that the most important competitive factors for the
biometric imaging products are the quality of fingerprint images, ease of use,
price and reliability. The Company is aware of two other companies that are
currently marketing live-scan products competing with Identix's TouchPrint
products, Digital Biometrics, Inc. ("DBI") and Printrak International Inc.
In its services business, the Company faces substantial competition from
professional services providers of all sizes in the government professional
services market. ANADAC is increasingly being required to bid on firm
fixed-price ("FFP") and similar contracts that result in greater performance
risk to ANADAC. If ANADAC is not able to maintain a competitive cost structure,
support specialized market niches, retain its highly qualified personnel or
align with technology leaders, its ability to compete successfully will be
materially and adversely affected.
MANUFACTURING
The Company limits its manufacturing activities to the assembly and
testing of proprietary subassemblies, final system assembly and functional
testing. Printed circuit board assemblies are fabricated by highly automated
outside suppliers for assembly and testing. This permits rapid expansion of
production capacity to meet increased product demand. The Company believes that
the cost of material and fabricated subassemblies will decline if manufacturing
volume increases. Quality control tests are performed at all stages of the
manufacturing process.
The Company currently uses certain components which are sole sourced,
the most important of which are the charge couple devices and ASICs for the
Bio-ID products and the charge couple devices for the biometric imaging
products. The partial or complete loss of supplies available from sole or
limited sources of supply or the delay in receiving supplies from these sources
could result in delays in manufacturing and shipping of products to customers
and require the incurrence of development and other costs to establish
alternative sources of supply. While the Company attempts to maintain a few
months worth of inventory on sole sourced components, it may take the Company
several months to locate alternative supplies if required, or redesign its
products to accommodate components from different suppliers. If the Company is
required to seek alternative suppliers, there can be no assurance that the
Company will be able to obtain such components within the time frames required
by the Company at an affordable cost, or at all. Any delays resulting from
suppliers failing to deliver components on a timely basis in sufficient
quantities or of sufficient quality or any significant increase in the price of
components from existing or alternative suppliers could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Risk Factors--Dependence on Sole and Limited Sources of Supply; Risks
Associated with Implementation of Larger Scale Manufacturing Capabilities."
EMPLOYEES
On June 30, 1996, Identix had 101 employees working in its products
business, of whom 17 were engaged in research, development and engineering, 29
in production, production support and fingerprint capture, 39 in
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sales, marketing and field service and 16 in general administration and finance.
On June 30, 1996, Identix had 189 employees working in its services business, of
whom 165 were service providers, 8 were engaged in sales and marketing and 16
were engaged in general administration and finance. None of Identix's employees
is represented by a union and Identix has never experienced a work stoppage.
Management considers its employee relations to be good.
RISK FACTORS
The Company's future operations, financial performance, business and
share price may be affected by a number of factors, including the following, any
of which could cause actual results to vary materially from anticipated results
or from those expressed in any forward-looking statements made by the Company in
this Annual Report on Form 10-K or in other reports, press releases or other
statements issued from time to time.
FLUCTUATIONS IN QUARTERLY RESULTS; HISTORY OF LOSSES
The Company's quarterly operating results have in the past been, and
will continue to be, subject to significant variations resulting from a number
of factors, many of which are outside of the Company's control and any one of
which could substantially affect the Company's results of operations for any
particular fiscal period. The Company's revenues in any period have been, and in
the near term are expected to be, derived from large orders from a limited
number of customers, which in most cases are government agencies or resellers
who sell the Company's products to government agencies. Accordingly, revenues in
a particular quarter will be dependent upon the timing and size of major orders
and the timing of recognition of revenues from those orders. Government agencies
are subject to political and budgetary constraints and orders from them may be
canceled or substantially delayed or the receipt of revenues or payments
substantially delayed due to political and budgetary processes or other
scheduling delays relating to the contract or bidding process. In addition, the
Company's contracts with local government agencies may be contingent upon
availability of matching funds from state or federal entities. Other factors
which can result in fluctuations in quarterly results of operations include
budgetary and purchasing cycles of government agencies; changes in the mix of
products and services sold; the pricing of existing and future products by the
Company's competitors; the introduction of new or enhanced products by the
Company or its competitors and the market acceptance thereof; expenses related
to, and results of, litigation; percentage of and costs associated with FFP
contracts and time-and-materials ("T&M") contracts; the availability and cost of
key components; and fluctuations in general economic conditions. The Company
also may choose to reduce prices or to increase spending in response to
competition or to pursue new market opportunities, all of which may adversely
affect the Company's business, financial condition and results of operations.
Further, the lead time for ordering parts and materials and building the
Company's products can be many months and the Company orders parts and materials
and builds products based on its forecasted demand for the products. If demand
for the Company's products lags significantly behind the Company's forecasts,
the Company runs the risk of building too large an inventory, which may
adversely affect cash flow and may result in writeoffs or writedowns of
inventory because of product obsolescence. Due to the foregoing factors, the
Company's operating results may be below the expectations of public market
analysts and investors in some future quarters, which would likely result in a
decline in the trading price of the Common Stock. The Company believes that
period-to-period comparisons of its results of operations should not be relied
upon as indications of future performance.
At June 30, 1996, the Company had an accumulated deficit of
approximately $30.1 million. The Company experienced net losses in each year
since inception, including a net loss of approximately $3.4 million for fiscal
1996 which included a $4.7 million write-off of in-process research and
development acquired when the Company purchased Fingerscan on March 26, 1996.
There can be no assurance that the Company will be able to achieve profitability
in any future periods. See Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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DEPENDENCE UPON NEW AND UNCERTAIN MARKETS; UNCERTAINTY OF MARKET ACCEPTANCE
Substantially all of the Company's product revenues to date have been,
and for the foreseeable future are anticipated to be, derived from Bio-ID
products and biometric imaging products. These products represent new
technologies which have not gained widespread commercial acceptance. In
particular, Bio-ID products represent a new approach to identity verification
which has only been used in very limited applications to date. The expansion of
the market for the Company's products depends on a number of factors, including
the cost and reliability of the Company's products and products of competitors,
customers' perception of the perceived benefits of these products, public
perceptions of the intrusiveness of these products and the manner in which
agencies are using the fingerprint information collected, public confidence as
to confidentiality of private information, customers' satisfaction with the
Company's products, and publicity regarding these products. Public objections
have been raised to the use of biometric imaging products for some applications
on civil liberties grounds. The Company's future success is dependent upon the
development and expansion of markets for Bio-ID products and biometric imaging
products both domestically and internationally. In addition, even if markets
develop for Bio-ID products and additional markets develop for biometric imaging
products, there can be no assurance that the Company's products will gain wide
market acceptance. A number of factors may limit the market acceptance of the
Company's products, including the performance and price of the Company's
products compared to competitive products or technologies, the practicalities of
developing the infrastructure necessary to support certain Bio-ID applications
such as ATMs and point-of-sale applications, the nature of technological
innovations and new product development activities by the Company and its
competitors, and the extent of marketing efforts by the Company's collaborators
or partners. If the markets for the Company's products fail to develop or
develop more slowly than anticipated or if the Company's products fail to gain
wide market acceptance, the Company's business, financial condition and results
of operations would be materially and adversely affected.
COMPETITION AND TECHNOLOGICAL CHANGE
The markets for Bio-ID products and biometric imaging systems are
extremely competitive and are characterized by rapid technological change, both
as a result of technical developments exploited by competitors, the changing
technical needs of the customers and frequent introductions of new features. In
addition, the Company is experiencing intense price competition in the law
enforcement market and, to a lesser extent, price competition in the markets
where the Company sells its Bio-ID products. The Company expects competition to
increase as other companies introduce additional and more competitive products.
In order to compete effectively in this environment, the Company must
continually be able to develop and market new and enhanced products and market
those products at competitive prices. There can be no assurance that the Company
will be able to make the technological advances necessary to compete
successfully in its products business. Some of the Company's present and
potential competitors have financial, marketing and research resources
substantially greater than those of the Company. Existing and new competitors
may enter or expand their efforts in the Company's product markets, or develop
new products to compete against the Company's products. No assurance can be
given that the Company's competitors will not develop new technologies or
enhancements to existing products or introduce new products that will offer
superior price or performance features or that new products or technologies will
not render obsolete the products of the Company. For example, other companies
are currently developing other methods of biometric identification such as hand
geometry, voice recognition, signature recognition or retina scanning, which
could significantly reduce the potential market for the Company's products if
successfully developed and commercialized. The Company believes that to remain
competitive in the future it will need to invest increasing financial resources
in research and development. The Company's Bio-ID products also face competition
from nonbiometric technologies such as traditional key, card and surveillance
systems, PINs and similar traditional verification methods.
In its services business, the Company faces substantial competition from
professional services providers of all sizes in the government professional
services market. ANADAC is increasingly being required to bid on FFP and similar
contracts that result in greater performance risk to ANADAC. If ANADAC is not
able to maintain a competitive cost structure, support specialized market
niches, retain its highly qualified personnel or align with technology leaders,
its ability to compete successfully will be materially and adversely affected.
See Item 1 "Business -- Competition."
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DEPENDENCE ON NEW PRODUCT INTRODUCTIONS
The Company's future success will depend upon its ability to address the
needs of the market by enhancing its current products and by developing and
introducing new products on a timely basis that keep pace with technological
developments and emerging industry standards (including FBI accreditation
standards), respond to evolving customer requirements and achieve market
acceptance. The development of new, technologically-advanced products and
product enhancements is a complex and uncertain process requiring high levels of
innovation, as well as the accurate anticipation of technological and market
trends. Any failure by the Company to anticipate or adequately respond to
technological developments or end user requirements, or any significant delays
in product development or introduction, could result in a loss of
competitiveness or total revenue. There can be no assurance that the Company
will be successful in developing and marketing product enhancements or new
products on a timely basis if at all, that the Company will not experience
difficulties that could delay or prevent the successful development,
introduction and sale of these products, or that any of its new products and
product enhancements will adequately meet the requirements of the marketplace
and achieve market acceptance. If the Company is unable, for technological or
any other reason, to develop, introduce and sell its products in a timely
manner, the Company's business, financial condition and results of operations
would be materially and adversely affected. In addition, because a number of the
Company's biometric imaging products and Bio-ID products are incorporated into
systems marketed by other companies, or are co-marketed together with other
products or services sold by other companies, the failure to introduce products
in a timely manner may cause such companies to seek alternative suppliers or
marketing partners. From time to time, the Company or its present or future
competitors may announce new products, capabilities or technologies that have
the potential to replace the Company's existing products. There can be no
assurance that announcements of currently planned or other new products will not
cause customers to delay or alter their purchasing decisions in anticipation of
such products, which could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, new
product introductions may contribute to fluctuations in quarterly operating
results or result in the early obsolescence of the Company's products, because
customers may forego ordering the Company's existing products. If the Company's
new products have reliability or quality problems, the Company may experience
reduced orders, higher manufacturing costs, delays in collecting accounts
receivable and additional service and warranty expense.
UNCERTAINTY RELATED TO CONTRACTS FOR SERVICES WITH GOVERNMENT AGENCIES
During fiscal 1996, the Company's services business derived
approximately 75% of its revenue from contracts relating to the DOD and other
U.S. Government agencies. Because of budget cuts affecting the DOD, services
revenues from the DOD have been declining. The Company has been expanding its
services business to other government agencies and commercial organizations, but
there can be no assurance that the results of these efforts will be substantial
enough to offset any further decline in revenue from the DOD. There can be no
assurance that the Company's services business will not be adversely affected by
further cuts in the DOD budget.
During fiscal 1996, the Company derived approximately 41% of services
revenues from T&M contracts and FFP contracts. T&M contracts typically provide
for payment of negotiated hourly rates for labor incurred plus reimbursement of
other allowable direct and indirect costs. FFP contracts provide for a fixed
price for stipulated services or products, regardless of the costs incurred,
which may result in losses from cost overruns. The Company anticipates that
revenues from FFP and T&M contracts will increase as a percentage of its total
services revenues. The Company assumes greater performance risk on FFP and T&M
contracts and the failure to estimate accurately ultimate costs or to control
costs during performance of the work can result in reduced profit margins or
losses. There can be no assurance that the Company's services business will not
incur such overruns for any FFP and T&M contracts it is awarded. In addition,
revenues generated from contracts with government agencies are subject to audit
and subsequent adjustment by negotiation between the Company and representatives
of such government agencies. If such revenues are audited, there can be no
assurance that no adjustments would be made and that such adjustments would not
have a material adverse effect on the Company's business, financial condition
and results of operations. See Item 1 "Business -- ANADAC Services," Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Item 8 Note 1 of Notes to Consolidated Financial Statements.
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OTHER PUBLIC AGENCY CONTRACT CONSIDERATIONS
A majority of the Company's revenues are derived from the sale of
products and services to governmental agencies or OEMs who sell products to
government agencies. Government agencies frequently require provisions in
contracts that are not standard in private commercial transactions, such as
bonding requirements and provisions permitting the purchasing agency to cancel
the contract without penalty if funding for the contract is no longer available
or is not obtained. As public agencies, the Company's prospective customers are
also subject to public agency contract requirements which vary from jurisdiction
to jurisdiction. Future sales to public agencies will depend on the Company's
ability to meet public agency contract requirements, certain of which may be
onerous or even impossible for the Company to satisfy. In addition, public
agency contracts are frequently awarded only after formal competitive bidding
processes, which have been and may continue to be protracted, and typically
contain provisions that permit cancellation in the event that funds are
unavailable to the public agency. There can be no assurance that the Company
will be awarded any of the contracts for which its products are bid or, if
awarded, that substantial delays or cancellations of purchases will not result
from protests initiated by losing bidders. See Item 1 "Business -- Sales and
Marketing."
DEPENDENCE ON COLLABORATIVE PARTNERS FOR PRODUCT DISTRIBUTION
The Company's strategy for the distribution of certain of its products
requires entering into various arrangements with corporate collaborators, such
as Oracle, Accu-Time Systems, Inc., Morpho and NEC. These agreements often are
of short duration, terminable with little or no notice, and subject to periodic
amendment. Although the Company believes that its collaborative partners and the
systems integrators with which it works have an economic motivation to promote
or use the Company's products, the amount and timing of resources to be devoted
to these activities are not within the control of the Company. There can be no
assurance that such parties will actively promote the Company's products or
pursue installations which use the Company's equipment, that any distribution or
other arrangements with the Company will not be terminated or renegotiated or
that the Company will derive any revenues from such arrangements. The Company
intends to continue to seek collaborative arrangements to commercialize certain
of its products. There can be no assurance that the Company will be able to
negotiate acceptable collaborative arrangements in the future or that current or
future collaborative arrangements will be successful.
RISKS ASSOCIATED WITH INTERNATIONAL EXPANSION
Approximately 13% and 32% of the Company's net product revenues were for
foreign installations in fiscal 1996 and 1995, respectively. A key component of
the Company's strategy is to continue expansion into international markets.
There can be no assurance that the Company will be able to market, sell and
deliver its products in these foreign countries. In addition to the uncertainty
as to the Company's ability to expand its international presence, there are
certain risks inherent in foreign operations, including longer accounts
receivable payment cycles in certain countries, general economic conditions in
each country, seasonal reductions in business activity during the summer months
in Europe and certain other parts of the world, delays in or prohibitions on
exporting products resulting from export restrictions for certain technologies
(such as encryption technology), fluctuations in foreign currencies,
fluctuations in the U.S. Dollar which can increase the sales price of the
Company's products in local currencies, loss of revenue, property and equipment
from expropriation, nationalization, war, insurrection, terrorism and other
political risks, the overlap of different tax structures, risks of increases in
taxes and other government fees and involuntary renegotiation of contracts with
foreign governments. The Company is also at risk from changes in foreign and
domestic laws, regulations and policies governing foreign operations. There can
be no assurance that laws or administrative practice relating to taxation,
foreign exchange or other matters of countries within which the Company operates
or will operate will not change. Any such change could have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, the laws of foreign countries treat the protection of proprietary
rights differently from, and may not protect the Company's proprietary rights to
the same extent as, laws in the United States.
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DEPENDENCE ON LARGE ORDERS BY CUSTOMERS
The Company's revenues have principally consisted, and will continue to
consist principally, of large orders from a limited number of customers. While
the individual customers may vary from period to period, the Company is
nevertheless dependent upon these large orders for a substantial portion of its
total revenues. There can be no assurance that the Company will be able to
obtain large orders on a consistent basis. The Company's inability to obtain
sufficient large orders would have a material adverse effect on the Company's
business, financial condition and results of operations. Moreover, the timing
and shipment of such orders may cause the operating results of the Company in
any given quarter to differ from projections of securities analysts, which could
adversely affect the trading price of the Company's Common Stock. Losses arising
from customer disputes regarding shipping schedules, product condition or
performance, or the Company's inability to collect accounts receivable from any
major customer could also have a material adverse effect on the Company's
business, financial condition and results of operations.
Orders for the Company's biometric imaging products are often subject to
delays associated with the lengthy approval processes that typically accompany
large capital expenditures by government agencies. The Company's total revenues
depend in significant part upon the decision of a government agency to adopt and
integrate the Company's systems, which often involves a significant capital
commitment as well as significant future support costs. Similar delays may also
be experienced from government agencies procuring the Company's services. The
Company often has a lengthy sales cycle while the customer evaluates and
receives approvals for the purchase of the Company's products or services. Any
significant failure by the Company to receive an order after expending
significant funds and effort could have a material adverse effect on its
business, financial condition and results of operations. It may be difficult to
accurately predict the sales cycle of any large order. In the event one or more
large orders fail to be shipped as forecasted for a fiscal quarter, the
Company's total revenues and operating results for such quarter could be
materially and adversely affected. In addition, even if the Company receives
such an order, the order may be contingent upon availability of matching funds
from state or federal entities or may be canceled or receipt of revenues may be
substantially delayed due to political and budgetary processes.
RISK OF PRODUCT DEFECTS AND FAILURE TO MEET PERFORMANCE CRITERIA
Complex products such as those offered by the Company may contain
undetected or unresolved defects or may fail initially to meet customers'
performance criteria when first introduced or as new versions are released.
There can be no assurance that, despite testing by the Company, defects or
performance flaws will not be found in new products or new versions of products
following commercial release or that performance failures will not result,
causing loss of market share, delay in or loss of market acceptance, additional
warranty expense or product recall. In addition, the failure of products to meet
performance criteria could result in delays in recognition of revenue and higher
operating expenses during the period required to correct and such defects. There
is a risk, that for unforeseen reasons, the Company may be required to repair or
replace a substantial number of products in use or to reimburse persons for
products that fail to work or meet strict performance criteria. Any such
occurrence could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company does carry product
liability insurance, but there can be no assurance that existing coverage is
adequate for current operations or will be adequate for future operations. The
Company's business could be adversely affected by the assertion of product
liability claims.
PROTECTION OF PROPRIETARY TECHNOLOGY
The Company's ability to compete effectively will depend in part on its
ability to maintain the proprietary nature of its technology, products and
manufacturing processes. The Company principally relies upon patent, copyright,
trade secret and contract law to establish and protect its proprietary rights.
The success of the Company's products business will depend in part on its
proprietary technology and the Company's protection of such technology. The
Company holds United States and foreign patents covering certain of its products
and technologies and has other patent applications pending. No assurance can be
given that the claims allowed on any patents held by the Company will be
sufficiently broad to protect the Company's technology. In addition, no
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assurance can be given that any patents issued to the Company will not be
challenged, invalidated or circumvented or that the rights granted thereunder
will provide competitive advantages to the Company. The loss of patent
protection on the Company's technology or the circumvention of its patent
protection by competitors could have a material adverse effect on the Company's
ability to compete successfully in its products business. There can be no
assurance that any existing or future patent applications by the Company will
result in issued patents with the scope of the claims sought by the Company, or
at all, that any current or future issued or licensed patents, trade secrets or
know-how will afford sufficient protection against competitors with similar
technologies or processes, or that any patents issued will not be infringed upon
or designed around by others. In addition, there can be no assurance that others
will not independently develop proprietary technologies and processes which are
the same as or substantially equivalent or superior to those of the Company.
Further, there can be no assurance that the Company has not or will not infringe
prior or future patents owned by others, that the Company will not need to
acquire licenses under patents belonging to others for technology potentially
useful or necessary to the Company, or that such licenses will be available to
the Company, if at all, on terms acceptable to the Company. Litigation, which
could result in substantial cost to the Company and diversion of management
attention, may also be necessary to enforce any patents issued to the Company or
to determine the scope and validity of other parties' proprietary rights. For
example, the Company is engaged in litigation with DBI regarding an alleged
infringement by the Company of a DBI patent. See Item 3 "Legal Proceedings." If
the outcome of any such litigation is adverse to the Company, its business could
be adversely affected. To determine the priority of inventions, the Company may
have to participate in interference proceedings declared by the United States
Patent and Trademark Office or oppositions in foreign patent offices, which
could result in substantial cost to the Company and limitations on the scope or
validity of the Company's patents. The Company also relies on trade secrets and
proprietary know-how which it seeks to protect by confidentiality agreements
with its employees and consultants and with third parties. There can be no
assurance that these agreements will not be breached, that the Company will have
adequate remedies for any breach, or that its trade secrets and proprietary
know-how will not otherwise become known or be independently discovered by
others.
RISKS ASSOCIATED WITH MANAGING EXPANSION OF OPERATIONS
The Company has experienced significant growth in recent years and
believes that in order to be successful it must continue to grow rapidly. In
order to grow rapidly, the Company will be required to expand, train and manage
its employee base, particularly skilled technical, marketing and management
personnel. Rapid growth will also require an increase in the level of
responsibility for both existing and new management and will require the Company
to implement and improve operational, financial and management information
procedures and controls. The Company competes with some of the major technology,
consulting and software companies in seeking to attract qualified personnel.
There can be no assurance that the management skills and systems currently in
place will be adequate or that the Company will be able to manage any
significant growth it experiences effectively and to hire or assimilate new
personnel necessary to pursue its growth strategy. Any failure to adequately
manage growth could materially and adversely affect the Company's business,
financial condition and results of operations.
DEPENDENCE UPON SOLE AND LIMITED SOURCES OF SUPPLY; RISKS ASSOCIATED WITH
IMPLEMENTATION OF LARGER SCALE MANUFACTURING CAPABILITIES
Certain of the components included in the Company's products are
obtained from a single source or a limited group of suppliers, the most
important of which are the charge coupled devices and ASICs for the Bio-ID
products and the charge coupled devices for the biometric imaging products. The
Company has no long term agreements with any of its suppliers. Although the
Company seeks to reduce dependence on these sole and limited sources of
suppliers, the partial or complete loss of certain of these sources or the delay
in receiving supplies from these sources could result in delays in manufacturing
and shipping of products to customers and require the incurrence of development
and other costs to establish alternative sources of supply. While the Company
attempts to maintain a few months worth of inventory on sole sourced components,
it may take the Company several months to locate alternative suppliers if
required, and/or to re-tool its products to accommodate components from
different suppliers. If the Company is required to seek alternative suppliers,
there can be no assurance that the Company will be able to obtain such
components within the time frames required by the Company at an affordable cost,
or at all. Any delays resulting from suppliers failing to deliver components on
a timely basis in sufficient quantities and
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of sufficient quality or any significant increase in the price of components
from existing or alternative suppliers could have a material adverse effect on
the Company's business, financial condition and results of operations.
Historically, the volume of the Company's production requirements for
the law enforcement and public sectors has not placed significant capacity
constraints on the Company's manufacturing and assembling capabilities. However,
as the Company begins to market its products for potentially larger volume
commercial applications such as time-and-attendance and computer database
security, the Company may be required to fulfill larger orders in a short period
of time and to implement measures to decrease product costs. There can be no
assurance that the Company will be able to scale-up its manufacturing and
assembling capacities to fulfill such orders and to decrease manufacturing
costs. Any failure by the Company to implement higher volume manufacturing or
reduce product costs for commercial applications could have a material adverse
effect on the Company's business, financial condition and results of operations.
See Item 1 "Business -- Manufacturing."
RISKS ASSOCIATED WITH ACQUISITIONS
As part of its business strategy, the Company intends to acquire assets
and businesses principally relating to or complementary to its current
operations. The Company acquired Fingerscan in March 1996 and IAS in June 1996.
These and any other acquisitions by the Company will be accompanied by the risks
commonly encountered in acquisitions of companies. Such risks include, among
other things, potential exposure to unknown liabilities of acquired companies or
to acquisition costs and expenses exceeding amounts anticipated for such
purposes; fluctuations in the Company's quarterly and annual operating results
due to the costs and expenses of acquiring and integrating new businesses; the
difficulty and expense of assimilating the operations and personnel of the
companies; the potential disruption of the Company's ongoing business and
diversion of management time and attention; the inability of management to
maximize the Company's financial and strategic position by the successful
incorporation of acquired technology; the maintenance of uniform standards,
controls, procedures and policies; the impairment of relationships with and
possible loss of key employees and customers as a result of changes in
management; the incurrence of amortization expenses if an acquisition is
accounted for as a purchase; and dilution to the shareholders of the Company if
the consideration for the acquisition consists of stock. In addition, the
difficulty of integrating certain companies may be increased by geographic
distances. There can be no assurance that the Company will be successful in
overcoming these risks or any other problems encountered in connection with such
acquisitions.
DEPENDENCE UPON KEY PERSONNEL; NEED TO HIRE ADDITIONAL QUALIFIED PERSONNEL
The Company's success will depend upon its ability to retain its current
senior management team and key technical, marketing and sales personnel and its
ability to identify, attract and retain additional highly qualified personnel.
The Company's employees may voluntarily terminate their employment with the
Company at any time, and competition for qualified employees, especially
engineers, is intense. The process of locating additional personnel with the
combination of skills and attributes required to carry out the Company's
strategy is often lengthy. The loss of the services of key personnel, or the
inability to attract additional qualified personnel, could have a material
adverse effect on the Company's business, financial condition and results of
operations.
VOLATILITY OF STOCK PRICE
The stock market has from time to time experienced significant price and
volume fluctuations that may be unrelated to the operating performance of
particular companies. In addition, the market price of the Common Stock, like
the stock prices of many technology companies, has been, and may continue to be,
highly volatile. Variations in quarterly operating results, the timing and
volume of procurements for the Company's products and services, announcements of
technological innovations or new products or services by the Company or by the
Company's competitors, announcements regarding product pricing by the Company or
its competitors, failure of the Company to meet earnings or revenue projections
of market analysts, the commencement of litigation, the developments in or
outcome of any litigation, developments in patent or other proprietary rights,
and economic and other external factors, among other factors, may have a
material adverse effect on the market price of the Common Stock. See Item 5
"Market for Registrant's Common Equity and Related Stockholder Matters."
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SHARE HOLDINGS OF ASCOM HOLDING
As of June 30, 1996, Ascom Holding Inc. ("Ascom Holding"), a wholly
owned subsidiary of Ascom Holding AG, a Swiss Company ("Ascom"), beneficially
owned approximately 22% of the outstanding Common Stock. This concentration of
ownership may have the effect of delaying or preventing a change in control of
the Company. In 1994, the Company entered into a Voting Trust Agreement ("Voting
Trust Agreement") with Ascom whereby Ascom deposited all of its 5,418,224 shares
of the Company's Common Stock ("Voting Stock") into a voting trust ("Voting
Trust"). The Trustee has voting control of the Voting Stock. The term of the
Voting Trust Agreement is ten years. Ascom has preemptive rights with respect to
issuances of the Company's securities and registration rights with respect to
the securities it holds. The Company's ability to obtain additional financing on
favorable terms in the future may be adversely affected by the existence of
these preemptive rights and registration rights. In July 1996, Ascom Holding
transferred all of the Voting Stock to its subsidiary, Ascom USA Inc. See Item
12 "Security Ownership of Certain Beneficial Owners and Management."
ITEM 2. PROPERTIES
Identix leases approximately 40,000 square feet of space in Sunnyvale,
California for manufacturing, research and administration. The monthly lease
payments are $32,000 a month and the lease expires in 2001. Fingerscan leases
office space in Australia with an aggregate net monthly lease payment of $9,000.
Identix also services customers from sales offices in California, Washington,
New Jersey, Georgia, Virginia and Michigan. The Company operates its
fingerprinting services business from an office in Illinois. ANADAC leases
approximately 42,000 square feet in four locations in Virginia with aggregate
monthly lease payments of $83,000, which leases expire in 2000. ANADAC also
services customers from offices leased in Mississippi, Maryland, Louisiana and
Virginia. The Company believes that its facilities are adequate for its
operations for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
On May 31, 1995, DBI filed a lawsuit in the United States District Court
in the Northern District of California against the Company alleging that the
Company's TouchPrint 600 and 900 products violate a DBI patent and seeking
injunctive relief and unspecified damages. The lawsuit has no implication for
other Identix products. On August 22, 1996, the Court granted the Company's
motion that the TouchPrint 600 does not infringe the patent. The remaining issue
in the case is whether the Company's TouchPrint 900 product, which is the
predecessor of the TouchPrint 600 and is no longer in production, infringes the
patent. The Court has set November 1, 1996 as the date on which it will hear
motions relating to the TouchPrint 900 product. The Company and DBI have each
filed their respective motions relating to the TouchPoint 900 product with the
Court. The Company is defending this matter vigorously and believes that it is
unlikely that the outcome of this lawsuit will have a material adverse effect on
the Company's financial position and results of operations. However, there can
be no assurance that the Company will be successful in defending the action and,
even if the Company is successful in defending the action, the costs of such
defense have been, and may continue to be, substantial.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
No matters were submitted to a vote of security-holders during the
fourth quarter of the fiscal year ended June 30, 1996.
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SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of Identix, and their ages as of June 30, 1996,
are as follows:
NAME Age Position
- -------------------------- --- ----------------------------------------
Randall C. Fowler 56 President, Chief Executive Officer and Director
Harrison N. Walther 59 President and Chief Executive Officer of ANADAC and Director
James P. Scullion 40 Vice President, Finance, Chief Financial Officer and Secretary
Daniel F. Maase 52 Vice President, Engineering
Edward S. Murrer 47 Vice President, Marketing and Sales
Gary Cauble 45 Vice President, Manufacturing
Randall C. Fowler, Chairman of the Board of Directors, President and
Chief Executive Officer of the Company, positions he has held since 1982.
Harrison N. Walther has been a director of the Company since February
1995. Mr. Walther is the President and Chief Executive Officer of ANADAC. Mr.
Walther joined ANADAC in 1982. He served as Vice President of ANADAC from 1982
through 1984 and Executive Vice President from 1984 through 1985 before assuming
the duties of President in 1986.
James P. Scullion joined the Company as Vice President, Finance and
Chief Financial Officer in 1990. Prior to joining the Company, from 1986 to
1990, Mr. Scullion was Vice President, Finance and Chief Financial Officer at
DataTrak, Inc., a manufacturer of security access systems.
Daniel F. Maase, Vice President, Engineering, joined the Company in
November 1988 and was elected Vice President, Engineering in December 1988.
Prior to joining Identix he was an Operations Manager at Varian Associates, a
manufacturer of instruments and microwave power devices, medical equipment and
semiconductors, from 1987 to 1988.
Edward S. Murrer, Vice President Marketing and Sales, joined the Company
in January 1996. Prior to joining the Company, from 1994 to 1996, he was Vice
President of Marketing and Sales at MIPS Technologies, a subsidiary of Silicon
Graphics, Inc. ("MIPS"). Prior to joining MIPS, he was Executive Vice President
of Sales and Marketing of Capetronic USA HK, Inc., an OEM of high resolution
display monitors for the computer industry from 1990 to 1994.
Gary Cauble, Vice President, Manufacturing, joined the Company in August
1995. Prior to joining the Company, from 1990 to 1995, he was assistant Division
Manager/Operations Manager at Bell Industries.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is listed on the American Stock Exchange
("AMEX") and on the Pacific Stock Exchange ("PSE") under the symbol "IDX".
Volume of trading on the PSE is not significant compared to the volume of
trading on the AMEX.
The following table sets forth the range of high and low closing prices
of the Common Stock as reported on the AMEX for the fiscal periods indicated.
HIGH LOW
---- ---
YEAR ENDED JUNE 30, 1996
Fourth Quarter ........................................... 19 9 5/8
Third Quarter ............................................ 14 3/8 10 1/2
Second Quarter............................................ 14 3/4 9 13/16
First Quarter............................................. 16 3/8 6 7/16
YEAR ENDED JUNE 30, 1995
Fourth Quarter............................................ 6 15/16 3 5/16
Third Quarter............................................. 3 5/8 2 7/8
Second Quarter............................................ 3 1/4 2 7/16
First Quarter............................................. 3 9/16 2 15/16
The last reported sale price of the Common Stock on the AMEX on July 31,
1996 was $10.63. As of July 31, 1996, there were 1,206 holders of record of the
Common Stock.
The Company has not paid any cash dividends on its Common Stock during
the last five fiscal years. The Company currently intends to retain any earnings
for use in its business and does not anticipate paying any cash dividends in the
foreseeable future. In addition, the Company's bank lines of credit restrict the
Company's ability to pay dividends.
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ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below with respect to
the Company's statements of operations for each of the three fiscal years in the
period ended June 30, 1996 and with respect to the balance sheets at June 30,
1996 and 1995 are derived from the Company's consolidated financial statements
included elsewhere in this Annual Report on Form 10-K which have been audited by
Price Waterhouse LLP, independent accountants. Consolidated statement of
operations data for the year ended June 30, 1993 and 1992 and consolidated
balance sheet data at June 30, 1992, 1993, and 1994 have been derived from
audited financial statements of the Company not included in this Annual Report
on Form 10-K. The following selected consolidated financial data should be read
in conjunction with the consolidated financial statements for Identix and the
notes thereto appearing in Item 8 of this Annual Report on form 10-K and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing in Item 7 of this Annual Report on Form 10-K. Historical
operating results are not necessarily indicative of the results that may be
expected in any future period.
FISCAL YEAR ENDED JUNE 30,
--------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------- -------------- -------------- --------------- --------------
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues.................................. $ 38,541,000 $ 27,014,000 $ 20,135,000 $ 11,926,000 $ 3,713,000
Net loss.................................. (3,441,000)(1) (715,000) (2,596,000) (3,094,000) (3,025,000)
Net loss per share........................ (0.15) (0.04) (0.14) (0.20) (0.24)
Number of shares used in per share
calculation........................... 23,485,000 19,371,000 18,304,000 15,264,000 12,434,000
JUNE 30,
--------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------- -------------- -------------- --------------- --------------
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................. $ 981,000 $ 3,842,000 $ 799,000 $ 2,303,000 $ 31,000
Working capital........................... 14,914,000 9,571,000 3,588,000 4,011,000 1,404,000
Total assets.............................. 27,107,000 18,104,000 10,593,000 11,515,000 4,373,000
Long-term debt and convertible debt....... 127,000 -- 500,000 605,000 2,279,000
Shareholders' equity...................... 19,472,000 12,274,000 5,751,000 6,430,000 466,000
(1) Includes $4.7 million write-off of acquired-in-process research and
development related to the acquisition of Fingerscan Pty Ltd.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Identix designs, develops, manufactures and markets two categories of
products for security, anti-fraud, law enforcement and other applications: (i)
Bio-ID products that identify an individual through the unique biological
characteristics of a fingerprint and (ii) biometric imaging products that
capture forensic quality fingerprint images directly from an individual's
fingers for law enforcement and other applications. The Company's principal
Bio-ID products are TouchNet II, TouchSafe II, TouchLock II, TouchClock II and
TouchBlock, and the Company's principal biometric imaging products are
TouchPrint 600, TouchView II, I(3) Workstation and DocuColor. The Company
provides information technology, engineering and management consulting services
to private and public sector clients through its wholly owned subsidiary ANADAC.
ANADAC's services support the development, installation, integration and
operation of hardware and software technology solutions, including Identix
products, for a variety of client operating environments. The Company acquired
ANADAC in October 1992. The acquisition was accounted for as a purchase.
On March 26, 1996, the Company acquired Fingerscan, a privately-held
Australian-based company that designs and markets Bio-ID products. Fingerscan
had been a long-standing Identix OEM partner integrating Identix fingerprint
identification technology into Fingerscan's fingerprint identity and
verification products and systems. The acquisition was accounted for as a
purchase. Accordingly, the Company's fiscal 1996 consolidated financial
statements include the results of Fingerscan from the date of acquisition. See
Item 8 Note 2 of Notes to Consolidated Financial Statements.
On June 30, 1996, the Company acquired IAS, a privately-held company
which provides fingerprinting services using the Company's biometric imaging
systems. The acquisition was accounted for as a pooling of interests. The
Company's fiscal 1996 consolidated financial statements include the accounts and
operations of IAS. For fiscal 1995 and 1994, the effects of the combination with
IAS were not significant and the Company has not restated those years to include
the accounts and operations of IAS. See Item 8 Note 2 of Notes to Consolidated
Financial Statements.
YEARS ENDED JUNE 30, 1996 AND 1995
Revenues. Revenues for fiscal 1996 were $38,541,000 compared to
$27,014,000 for fiscal 1995. The increase in revenues of 43% for fiscal 1996 was
due to increases in both net product revenues and services revenues.
The Company's net product revenues were $16,565,000 for fiscal 1996
compared to $9,025,000 for fiscal 1995. The increase of 84% in net product
revenues for fiscal 1996 was primarily due to increased shipments of the
Company's TouchPrint products and the inclusion of IAS revenues. Revenues from
the sale of Bio-ID products were relatively unchanged as a result of the
increase from the inclusion of Fingerscan revenues being offset by a decrease in
revenues from TouchBlock sales to OEMs. International sales represented
$2,198,000 or 13% of the Company's net product revenues for fiscal 1996 compared
to $2,904,000 or 32% for fiscal 1995. The Company expects international sales to
continue to represent a significant portion of net product revenues, although
the percentage may fluctuate from period to period. The Company's international
sales are denominated in U.S. dollars, except sales by Fingerscan which are
denominated in Australian dollars. To date, transactions conducted in currencies
other than U.S. dollars have not presented significant currency exchange
exposure. Accordingly, the Company has not entered into hedging transactions.
The Company plans to actively monitor its foreign currency exchange exposure and
to take appropriate action to reduce foreign exchange risk, if significant. In
fiscal 1996, the Company's products business had one customer which represented
14% of total revenues. This customer is a prime contractor on certain contracts
for which the Company supplied product as a subcontractor. For fiscal 1997, the
Company expects revenues from this customer will be significantly less than in
fiscal 1996 as a percentage of total revenues because the supply of product on
the fiscal 1996 contracts has
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been substantially fulfilled by the Company. In fiscal 1995, there were no
non-U.S. Government customers that accounted for more than 10% of the total
revenues.
The Company's services revenues were $21,976,000 for fiscal 1996
compared to $17,989,000 for fiscal 1995. The increase of 22% in services
revenues for fiscal 1996 was due to increased contract revenues from both U.S.
Government and commercial clients. The majority of the Company's services
revenues are generated from contracts with the U.S. Government, principally the
DOD. Revenues from the DOD and from other U.S. Government agencies for fiscal
1996 accounted for 75% of the Company's total services revenues compared to 79%
for fiscal 1995.
The Company's services business generates a significant amount of its
revenues from cost plus fixed fee ("CPFF") contracts, which accounted for 43% of
its services revenues for fiscal 1996 compared to 47% for fiscal 1995. CPFF
contracts provide for the reimbursement of allowable costs, including indirect
costs plus a fee or profit. The Company's services business also generates
revenue from T&M and from FFP contracts. During fiscal 1996 and fiscal 1995, the
Company derived approximately 41% of services revenues from T&M contracts and
FFP contracts. T&M contracts typically provide for payment of negotiated hourly
rates for labor incurred plus reimbursement of other allowable direct and
indirect costs. FFP contracts provide for a fixed price for stipulated services
or products, regardless of the costs incurred, which may result in losses from
cost overruns. The Company anticipates that revenues from FFP and T&M contracts
will increase as a percentage of its total services revenues. The Company
assumes greater performance risk on FFP and T&M contracts and the failure to
estimate accurately ultimate costs or to control costs during performance of the
work can result in reduced profit margins or losses. There can be no assurance
that the Company's services business will not incur such cost overruns for any
FFP and T&M contracts it is awarded. In addition, revenues generated from
contracts with government agencies are subject to audit and subsequent
adjustment by negotiation between the Company and representatives of such
government agencies.
Gross Margin. Gross margin on net product revenues was 47% for fiscal
1996 compared to 40% for fiscal 1995. The increase in gross margin for fiscal
1996 compared to fiscal 1995 was primarily due to (i) increased manufacturing
efficiencies because of the increase in unit volume and the absorption of
manufacturing overhead resulting from higher production levels, (ii) sales of
new higher gross margin products introduced in mid and late fiscal 1995, (iii)
higher gross margin on net product revenues generated by Fingerscan and IAS, and
(iv) inclusion in cost of product revenues for fiscal 1995 of a write down of
inventories related to certain mature products.
Gross margin on services revenues was 18% for fiscal 1996 compared to
14% for fiscal 1995. The increase in the gross margin on services revenues was
mainly due to applying semi-fixed overhead costs across a larger labor base.
Gross margin on total revenues was 31% for fiscal 1996 compared to 22%
for fiscal 1995. In the future, the Company expects its gross margins to be
affected by several factors, including the mix of products sold and services
provided, competition (especially in the live-scan market where average selling
prices may decrease because of competition), introduction of new products,
access to distribution channels, and fluctuations in labor and material costs.
Research, Development and Engineering. Research, development and
engineering expenses were $1,486,000 or 9% of net product revenues for fiscal
1996 compared to $1,582,000 or 18% of net product revenues for fiscal 1995. In
addition, for fiscal 1996 and 1995, research, development and engineering
expenditures funded by customers were $255,000 and $381,000, respectively. The
Company expects research, development and engineering expenses to increase in
absolute dollars in fiscal 1997.
Marketing and Selling. Marketing and selling expenses were $4,958,000 or
13% of total revenues for fiscal 1996 compared to $2,465,000 or 9% of total
revenues for fiscal 1995. The increase in marketing and selling expenses was due
to increased staffing and expenses to promote the Company's products and
services and to expand its customer service organization. In addition, marketing
and selling expenses for fiscal 1996 reflected
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inclusion of the marketing and selling activity related to the operations of
Fingerscan since March 26, 1996 and IAS for all of fiscal 1996. The Company
expects marketing and selling expenses to increase in absolute dollars in fiscal
1997 as the Company expands international sales, marketing and customer service
activities.
General and Administrative. General and administrative expenses were
$4,220,000 or 11% of total revenues for fiscal 1996 compared to $2,677,000 or
10% of total revenues for fiscal 1995. The increase in general and
administrative expenses was primarily due to the additional administrative
expenses related to the operations of Fingerscan and IAS, expenses of $390,000
related to a lawsuit filed by a competitor (See Item 8 Note 9 of Notes to
Consolidated Financial Statements), the increase in lease expense as the
Company's services business moved into larger facilities in August 1995 and the
Company's products business leased additional space for its manufacturing
operations in April 1996, and an increase in staffing. The Company expects
spending for general and administrative expenses to increase in absolute dollars
in fiscal 1997.
Write-off of Acquired In-Process Research and Development. In connection
with the acquisition of Fingerscan, the excess of the purchase price for the
Fingerscan shares over the fair market value of the net tangible assets acquired
aggregated approximately $5,280,000, of which $4,723,000 was allocated to
in-process research and development based on an independent appraisal and
written off in the quarter ended March 31, 1996. Fiscal 1996 income from
operations before the write-off for acquired in process research and development
was $1,197,000. The Company believes there are significant developmental issues
remaining to develop the acquired in-process research and development into
commercially viable products. See Item 8 Note 2 of Notes to Consolidated
Financial Statements.
Interest Income and Expense. Interest income of $245,000 and $30,000 was
generated during fiscal 1996 and 1995, respectively. The increase in interest
income during fiscal 1996 was due primarily to the investment of proceeds
received from the exercise of outstanding warrants in June and July 1995.
Interest expense was $160,000 in fiscal 1996 compared to $233,000 in
fiscal 1995. The decrease in interest expense in fiscal 1996 was due to reduced
borrowings under the Company's line of credit (the "Identix Line of Credit").
During fiscal 1996, Identix did not borrow against the Identix Line of
Credit. The weighted average interest rate paid on the Identix Line of Credit
for fiscal 1995 was approximately 9.9%. The weighted average interest rate paid
on ANADAC's line of credit (the "ANADAC Line of Credit") for fiscal 1996 and
1995 was approximately 8.5% and 8.4%, respectively.
Income Taxes. No federal income taxes were paid or accrued in fiscal
1996 and 1995 due to operating losses. The Company realized an income tax
benefit of $136,000 during fiscal 1995 related to the application of a loss
carryback to taxes paid in prior years by ANADAC. The Company had a federal net
operating loss ("NOL") carryforward of approximately $26.0 million as of June
30, 1996 that may be applied to reduce future taxable income. However, under the
Tax Reform Act of 1986, a corporation's ability to use its NOLs may be impaired
or limited in certain circumstances, including a cumulative stock ownership
change of more than 50% over a three year period (an "ownership change").
Management believes that the Company's public offering of units in January 1993
caused the Company to experience an ownership change under these provisions. As
a result, there is an annual limitation on the utilization of the Company's NOL
carryforwards incurred prior to the ownership change of $2.5 million. The NOL
carryforwards expire on various dates through fiscal 2010.
YEARS ENDED JUNE 30, 1995 AND 1994
Revenues. Revenues for fiscal 1995 were $27,014,000 compared to
$20,135,000 for fiscal 1994. The increase in revenues of 34% for fiscal 1995 was
due to increases in both product and services revenues.
The Company's net product revenues were $9,025,000 for fiscal 1995
compared to $6,023,000 for fiscal 1994. The increase of 50% in net product
revenues for fiscal 1995 was primarily due to increased shipments of TouchPrint
products, TouchBlock for incorporation into time-and-attendance systems and ATM
security products,
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and TouchView. International sales represented $2,904,000 or 32% of the
Company's net product revenues for fiscal 1995 compared to $2,197,000 or 36% for
fiscal 1994.
The Company's services revenues were $17,989,000 for fiscal 1995
compared to $14,112,000 for fiscal 1994. The increase of 27% in services
revenues for fiscal 1995 was due to increased contract revenues from both U.S.
Government and commercial clients. Revenues from the DOD and from other U.S.
Government agencies for fiscal 1995 accounted for 79% of the Company's total
services revenues compared to 81% for fiscal 1994. Revenues from CPFF contracts
accounted for 47% of its services revenues for fiscal 1995 compared to 51% for
fiscal 1994. Revenue from FFP and T&M contracts accounted for 41% of service
revenues for fiscal 1995 compared to 39% for fiscal 1994.
Gross Margin. Gross margin on net product revenues was 40% for fiscal
1995 compared to 30% for fiscal 1994. The increase in gross margin for fiscal
1995 was primarily due to (i) higher gross margin on certain new products
introduced in fiscal 1995, and (ii) increased manufacturing efficiencies because
of the increase in unit volume and the absorption of manufacturing overhead
resulting from higher production levels, offset in part by a writedown of
inventories in fiscal 1995 related to certain mature products. Gross margin on
services revenues was 14% for both fiscal 1995 and 1994. Gross margin on total
revenues was 22% for fiscal 1995 compared to 18% for fiscal 1994.
Research, Development and Engineering. Research, development and
engineering expenses were $1,582,000 or 18% of net product revenues for fiscal
1995 compared to $1,519,000 or 25% of net product revenues for fiscal 1994. In
addition, for fiscal 1995 and 1994, research, development and engineering
expenditures funded by customers were $381,000 and $596,000.
Marketing and Selling. Marketing and selling expenses were $2,465,000 or
9% of total revenues for fiscal 1995 compared to $2,029,000 or 10% of total
revenues for fiscal 1994. The increase in marketing and selling expenses was due
to increased staffing and expenses to promote the Company's products and
services.
General and Administrative. General and administrative expenses were
$2,677,000 or 10% of total revenues for fiscal 1995 compared to $2,641,000 or
13% of total revenues for fiscal 1994.
Interest Income and Expense. Interest income of $30,000 and $39,000 was
generated during fiscal 1995 and 1994, respectively, as a result of temporary
investments of available cash balances.
Interest expense was $233,000 in fiscal 1995 compared to $140,000 in
fiscal 1994. The increase in interest expense was due to increased borrowings
under the Company's lines of credit to finance the Company's revenue growth.
The weighted average interest rate paid by Identix on the Identix Line
of Credit for fiscal 1995 and 1994 was approximately 9.9% and 8.4%,
respectively. The weighted average interest rate paid by ANADAC on the ANADAC
Line of Credit for fiscal 1995 and 1994 was approximately 8.4% and 6.1%,
respectively.
Income Taxes. No federal income taxes were paid or accrued in fiscal
1995 and 1994 due to operating losses. The Company realized an income tax
benefit of $136,000 during fiscal 1995 related to the application of a loss
carryback to taxes paid in prior years by ANADAC.
LIQUIDITY AND CAPITAL RESOURCES.
The Company financed its operations during fiscal 1996 primarily from
its existing working capital at June 30, 1995, the net proceeds of $5.1 million
from financing activities and borrowings under the ANADAC Line of Credit. As of
June 30, 1996, the Company's principal sources of liquidity consisted of $14.9
million in working capital including $981,000 of cash and cash equivalents, the
Identix Line of Credit and the ANADAC Line of Credit.
25
28
The Identix Line of Credit, which expires on October 4, 1996, allows for
borrowing up to $3.0 million and bears interest at the bank's prime rate of
interest (8.25% at June 30, 1996) plus 0.5% per annum. Under this line of
credit, the Company may borrow up to 80% of eligible accounts receivable. There
were no borrowings under the Identix Line of Credit during fiscal 1996. At June
30, 1996, $3,000,000 was available under this line of credit. The Identix Line
of Credit agreement contains financial and operating covenants, including
restrictions on the Company's ability to pay dividends on the Company's Common
Stock. If the Company does not meet the covenants it needs to obtain waivers of
default. During fiscal 1996, the Company was in default on one of its bank line
of credit covenants. The Company has obtained a waiver of default from the bank
for breaches of the covenant.
The ANADAC Line of Credit is a $4.0 million bank line of credit which
expires on October 31, 1996. Amounts drawn bear interest at the bank's prime
rate of interest (8.25% at June 30, 1996). Available borrowings on the ANADAC
Line of Credit are based upon qualifying accounts receivable. The ANADAC Line of
Credit agreement includes, among other things, certain financial covenants and
maintenance of certain financial ratios. At June 30, 1996, $1.7 million was
outstanding and $1.8 million was available under the ANADAC Line of Credit.
The Company is currently negotiating new lines of credit with the same
banks.
The Company's operating activities used net cash of $5.2 million,
primarily to finance increases in accounts receivable and inventory, which were
in part offset by an increase in accounts payable. Accounts receivable at June
30, 1996 increased to $16.3 million from $8.2 million at June 30, 1995. This
increase was due primarily to the growth in overall revenues and a significant
percent of fiscal year 1996 revenues having been realized in the fourth quarter.
Inventories at June 30, 1996 increased to $4.5 million, compared to $2.5 million
at June 30, 1995. This increase was due primarily to (i) the growth in product
revenues requiring higher stocking levels, (ii) inventory purchases for sales
that were not realized when anticipated, and (iii) an increase in the stocking
level of a key component discontinued by a manufacturer. The Company has located
a replacement for the component and is designing the replacement component into
the Company's product. Accounts payable at June 30, 1996, increased to $3.3
million from $1.6 million at June 30, 1995. This increase was mainly due to the
increase in inventories and the growth of operations.
The Company's investing activities used net cash of $2.7 million,
primarily for additions to property and equipment and capitalized software
development costs.
The Company's financing activities provided net cash of $5.1 million,
primarily due to the net proceeds from warrant exercises, including warrants
exercised in the warrant redemption program, and the proceeds from the exercise
of stock options.
The Company believes that cash flow from operations, together with
existing working capital and the two bank lines of credit maintained by the
Company, will be adequate for the Company's cash requirements for fiscal 1997.
However, the Company may need to obtain additional financing prior to June 30,
1997. There can be no assurance that the Company would be able to obtain such
financing or that the terms of financing would be favorable to the Company.
Identix did not have any material capital expenditure commitments as of
June 30, 1996.
FORWARD-LOOKING STATEMENTS
The statements in this Annual Report on Form 10-K that relate to future
plans, events or performance are forward-looking statements that involve risks
and uncertainties, including risks that the markets for Bio-ID and biometric
imaging products fail to develop or develop more slowly than anticipated, that
competitors develop products with superior price or performance features, that
the Company is unable to develop and market new or enhanced products in response
to technological developments or end user requirements on a timely basis or at
all, that the Company's collaborative partners do not actively promote the
Company's products or pursue installations
26
29
which use the Company's equipment, that the Company incurs cost overruns for
fixed price contracts, that the Company experiences declining demand for its
products or services, that the Company becomes subject to additional litigation,
that the Company is unable to protect its intellectual property rights, that
orders from government agencies are canceled or substantially delayed or the
receipt of revenues substantially delayed, that the Company fails to hire or
retain key personnel, that the Company experiences disruptions of supplies from
sole or limited source suppliers, that the Company is not profitable in future
periods, that the Company requires additional capital to fund its operations or
other risks described under "Risk Factors" in Item 1. Actual results, events and
performance may differ materially. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof. The Company undertakes no obligation to publicly release the result of
any revisions to these forward-looking statements that may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
27
30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF IDENTIX INCORPORATED
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and (2) on page 48 present fairly, in all material
respects, the financial position of Identix Incorporated and its subsidiaries at
June 30, 1996, and 1995, and the results of their operations and their cash
flows for each of the three years in the period ended June 30, 1996, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
San Jose, California
August 26, 1996
28
31
IDENTIX INCORPORATED
CONSOLIDATED BALANCE SHEETS
June 30,
-----------------------------------
1996 1995
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 981,000 $ 3,842,000
Accounts receivable, less allowance for doubtful accounts and
sales returns of $488,000 and $347,000............................ 16,331,000 8,158,000
Inventories.......................................................... 4,464,000 2,511,000
Prepaid expenses and other assets.................................... 266,000 511,000
------------ ------------
Total current assets............................................ 22,042,000 15,022,000
Property and equipment, net.......................................... 2,218,000 1,249,000
Intangibles and other assets......................................... 2,847,000 1,833,000
------------ ------------
Total assets................................................. $27,107,000 $ 18,104,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to banks............................................... $ 1,846,000 $ 2,101,000
Accounts payable..................................................... 3,309,000 1,635,000
Accrued compensation................................................. 1,185,000 999,000
Other accrued liabilities............................................ 426,000 483,000
Current portion of long-term debt.................................... 106,000 --
Deferred maintenance revenue......................................... 256,000 233,000
------------ ------------
Total current liabilities....................................... 7,128,000 5,451,000
Deferred maintenance revenue......................................... 293,000 287,000
Long-term debt....................................................... 127,000 --
Other liabilities.................................................... 87,000 92,000
------------ ------------
Total liabilities......................................... 7,635,000 5,830,000
------------ ------------
Commitments and contingencies (Notes 8 and 9)
Shareholders' equity:
Common stock, no par; 30,000,000 shares authorized;
24,320,464 and 21,520,879 shares issued and
outstanding..................................................... 50,024,000 39,437,000
Accumulated deficit............................................... (30,534,000) (27,163,000)
Cumulative translation adjustment................................. (18,000) --
------------ ------------
Total shareholders' equity...................................... 19,472,000 12,274,000
------------ ------------
Total liabilities and shareholders' equity................... $27,107,000 $ 18,104,000
============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
29
32
IDENTIX INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEAR ENDED JUNE 30,
--------------------------------------------------------
1996 1995 1994
---------- ---------- ----------
Revenues:
Net product revenues......................... $16,565,000 $ 9,025,000 $ 6,023,000
Services revenues............................ 21,976,000 17,989,000 14,112,000
---------- ---------- ----------
Total revenues............................. 38,541,000 27,014,000 20,135,000
---------- ---------- ----------
Costs and expenses:
Cost of product revenues..................... 8,722,000 5,445,000 4,245,000
Cost of services revenues.................... 17,958,000 15,493,000 12,196,000
Research, development and
engineering................................ 1,486,000 1,582,000 1,519,000
Marketing and selling........................ 4,958,000 2,465,000 2,029,000
General and administrative................... 4,220,000 2,677,000 2,641,000
Write-off of acquired in-process
research and development................... 4,723,000 -- --
---------- ---------- ----------
Total costs and expenses................... 42,067,000 27,662,000 22,630,000
---------- ---------- ----------
Loss from operations........................... (3,526,000) (648,000) (2,495,000)
Interest income................................ 245,000 30,000 39,000
Interest expense............................... (160,000) (233,000) (140,000)
---------- ---------- ----------
Loss before income tax benefit................. (3,441,000) (851,000) (2,596,000)
Income tax benefit............................. -- 136,000 --
---------- ---------- ---------
Net loss....................................... $(3,441,000) $ (715,000) $(2,596,000)
=========== =========== ===========
Net loss per common share...................... $ (0.15) $ (0.04) $ (0.14)
=========== ============ ============
Weighted average common shares
outstanding.................................. 23,485,000 19,371,000 18,304,000
The accompanying notes are an integral part of these consolidated
financial statements.
30
33
IDENTIX INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
Amount
Preferred Stock Common Stock Equivalent to Cumulative
Number of Number of Accumulated Guaranteed Translation
Shares Amount Shares Amount Deficit ESOP Debt Adjustment Total
---------- ------ ---------- ------ ----------- ------------- ----------- -----
BALANCE JUNE 30, 1993...... 357,910 $3,579 16,139,203 $26,914 $(23,852) $(211) $ -- $6,430
Sale of common stock
under stock option
plans ............... 497,199 1,060 1,060
Sale of common stock
related to warrant
exercise............. 359,160 804 804
Conversion of preferred
stock to common
stock................ (357,910) (3,579) 1,789,550 3,579 --
Dividends paid on
preferred stock...... (53) (53)
Amount equivalent to
guaranteed ESOP
debt................... 106 106
Net loss for the year.... (2,596) (2,596)
----------- ------- ---------- ------- --------- ------- ----------- ------
BALANCE JUNE 30, 1994...... -- -- 18,785,112 32,304 (26,448) (105) -- 5,751
Sale of common stock
under stock option
plans ................. 367,703 579 579
Sale of common stock in
private placement...... 500,000 1,351 1,351
Sale of common stock
related to warrant
exercise............. 1,701,398 4,703 4,703
Conversion of Sundance
note to common
stock.................. 166,666 500 500
Amount equivalent to
guaranteed ESOP
debt................... 105 105
Net loss for the year.... (715) (715)
----------- -------- ---------- ------- --------- ------ ---------- -------
BALANCE JUNE 30, 1995...... -- -- 21,520,879 39,437 (27,163) -- -- 12,274
Sale of common stock
under stock option
plans ................. 679,724 1,569 1,569
Sale of common stock
related to warrant
exercise............... 1,295,885 3,559 3,559
Issuance of common stock
related to acquisition of
Fingerscan Pty Ltd. ..... 668,976 5,459 5,459
Issuance of common stock
related to the acquisition
of Innovative Archival
Solutions ............. 155,000 70 70
Cumulative translation
adjustment............... (18) (18)
Net loss for the year.... (3,441) (3,441)
----------- -------- ---------- ------- --------- ------ ---------- -------
BALANCE JUNE 30, 1996...... -- $ -- 24,320,464 $50,024 $ (30,534) $ $ (18) $19,472
=========== ======== ========== ======= ========= ====== ========== =======
The accompanying notes are an integral part of these consolidated
financial statements.
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34
IDENTIX INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEAR ENDED JUNE 30,
------------------------------------------------
1996 1995 1994
------------- -------------- -------------
Increase (decrease) in cash and cash equivalents:
Net loss...................................................... $(3,441,000) $(715,000) $(2,596,000)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation.............................................. 1,045,000 707,000 623,000
Amortization of intangibles............................... 492,000 523,000 522,000
Amortization of deferred maintenance revenue.............. (408,000) (204,000) (135,000)
Write-off of acquired in-process research
and development......................................... 4,723,000 -- --
Changes in assets and liabilities, net of effects of
acquisitions:
Accounts receivable....................................... (7,966,000) (4,089,000) (289,000)
Accounts receivable from Ascom Hasler..................... -- 177,000 15,000
Inventories............................................... (1,719,000) (283,000) (1,040,000)
Prepaid expenses and other assets......................... 253,000 (318,000) 359,000
Accounts payable.......................................... 1,484,000 58,000 336,000
Accrued compensation...................................... 169,000 98,000 209,000
Other accrued liabilities................................. (299,000) 15,000 (83,000)
Deferred maintenance revenue.............................. 437,000 172,000 347,000
Advances under contract with Ascom Hasler................. -- -- (216,000)
----------- ------------- -------------
Net cash used for operating activities........................ (5,230,000) (3,859,000) (1,948,000)
----------- ------------- -------------
Cash flows used in investing activities:
Capital expenditures.......................................... (1,951,000) (989,000) (496,000)
Additions to intangibles and other assets..................... (898,000) (210,000) (283,000)
Cash received in acquisitions................................. 180,000 -- --
Proceeds from sale of property and equipment.................. -- 14,000 7,000
----------- ------------- -------------
Net cash used in investing activities......................... (2,669,000) (1,185,000) (772,000)
----------- ------------- -------------
Cash flow from financing activities:
Borrowings under bank lines of credit......................... 14,361,000 14,708,000 9,270,000
Payments under bank lines of credit........................... (14,666,000) (13,254,000) (9,865,000)
Borrowings under long-term note............................... 318,000 -- --
Principal payments on long-term note.......................... (85,000) -- --
Dividends on preferred stock.................................. -- -- (53,000)
Proceeds from sale of common stock and warrants, net.......... 5,128,000 6,633,000 1,864,000
----------- ------------- ------------
Net cash provided by financing activities..................... 5,056,000 8,087,000 1,216,000
----------- ------------- ------------
Effect of exchange rate changes on cash
and cash equivalents.......................................... (18,000) -- --
----------- ------------- ------------
Net increase (decrease) in cash and cash equivalents............ (2,861,000) 3,043,000 (1,504,000)
Cash and cash equivalents at beginning of year.................. 3,842,000 799,000 2,303,000
----------- ------------- ------------
Cash and cash equivalents at end of year........................ $ 981,000 $ 3,842,000 $ 799,000
=========== ============= ============
The accompanying notes are an integral part of these consolidated
financial statements.
32
35
IDENTIX INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
Supplemental disclosures of cash flow information:
Fiscal year ended June 30,
-------------------------------------------------
1996 1995 1994
-------- -------- --------
Cash paid during the year for interest $172,000 $233,000 $141,000
Non-cash investing and financing activities:
On June 30, 1995, the Company, at its option, converted a $500,000 note
to Sundance Venture Partners, L.P. ("Sundance") into 166,666 shares of the
Company's common stock (Note 6).
On March 26, 1996, the Company acquired Fingerscan Pty Ltd
("Fingerscan") pursuant to a share purchase agreement whereby Fingerscan became
a wholly owned subsidiary of the Company (Note 2). The acquisition was accounted
for as a purchase as follows:
Cash $ 156,000
Accounts receivable 152,000
Inventory 234,000
Property and equipment, net 23,000
Intangibles and other assets 581,000
In-process research and development 4,723,000
----------
$5,869,000
==========
Accounts payable and other accruals $ 393,000
Accrued compensation 17,000
Common stock 5,459,000
----------
$5,869,000
==========
The accompanying notes are an integral part of these consolidated
financial statements.
33
36
IDENTIX INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
Identix Incorporated (the "Company") designs, manufactures, develops and
markets two categories of products for security, anti-fraud, law enforcement and
other applications: (i) biometric identity verification ("Bio-ID") products that
identify an individual through the unique biological characteristics of a
fingerprint and (ii) biometric imaging products that capture forensic quality
fingerprint images from an individual's fingers for law enforcement and other
applications. The Company provides information technology, engineering and
management consulting services to private and public sector clients through its
wholly owned subsidiary ANADAC, Inc. ("ANADAC"). The principal markets for the
Company's products are the Americas, Asia, Europe and Australia. Ascom Holding,
Inc., a sister subsidiary of Ascom Hasler AG ("Ascom Hasler"), a Swiss Company,
owned approximately 22% of the Company's common stock at June 30, 1996 (Note 6).
On March 26, 1996, the Company acquired Fingerscan pursuant to a share
purchase agreement whereby Fingerscan became a wholly owned subsidiary of the
Company. The acquisition was accounted for as a purchase (Note 2).
On June 30, 1996, the Company acquired Innovative Archival Solutions
("IAS") pursuant to a share purchase agreement. The acquisition was accounted
for as a pooling of interests (Note 2).
Basis of Consolidation
The consolidated financial statements include the accounts of Identix
Incorporated and its wholly owned subsidiaries, ANADAC, Fingerscan and IAS; all
significant intercompany balances and transactions have been eliminated in
consolidation.
Revenue Recognition
Revenue from product sales is recognized in accordance with the terms of
sale, generally upon shipment by the Company, provided no significant vendor
obligations remain and collection of the receivable is deemed probable. Extended
service and maintenance contract revenue is deferred and recognized on a
straight-line basis over the life of the service period of the related
agreement.
The majority of the Company's services are performed for the U.S.
Government under various cost-reimbursable, time-and-material and fixed-price
contracts. Revenues for cost-plus fixed fee contracts are recognized as costs
are incurred, including a proportionate amount of the fee earned. Revenues on
time-and-materials contracts are recognized to the extent of billable rates
times hours worked plus materials expense incurred. Revenues on fixed-price
contracts are generally recognized on the percentage-of-completion method based
on costs incurred in relation to total estimated costs. Unbilled accounts
receivable at June 30, 1996 represent revenue accrued which becomes billable
upon attainment of contract milestones. Provisions for estimated contract
losses are recorded in the period such losses are determined.
Services revenues from contracts with the U.S. Government, principally
with the Department of Defense, and from subcontracts with other U.S. Government
contractors were approximately 75% of total services revenues for fiscal 1996,
79% for fiscal 1995 and 81% for fiscal 1994. Contract costs for services
revenues to the U.S. Government, including indirect expenses, are subject to
audit and subsequent adjustment by negotiation between the Company and U.S.
Government representatives. Revenues are recorded in amounts expected to be
realized upon final settlement. Audits of ANADAC's costs have been completed by
the Defense Contract Audit Agency ("DCAA") through December 31, 1992. No
material adjustments have been made, and ANADAC does not anticipate adjustments
for any open years that would have a material effect on the consolidated
financial statements.
34
37
IDENTIX INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Major Customer and International Revenues
In fiscal 1996, one non-U.S. Government customer in the Company's
products business accounted for 14% of total revenues. In fiscal 1995 and 1994,
there were no non-U.S. Government customers that accounted for more than 10% of
total revenues.
Net product revenues included international revenues of $2,198,000 in
fiscal 1996, $2,904,000 in fiscal 1995, and $2,197,000 in fiscal 1994.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments with a maturity of
three months or less when purchased. These investments consist of income
producing securities which are readily convertible to cash and are stated at
cost which approximates market.
Concentration of Credit Risk
The Company performs on-going credit evaluations of its customers'
financial conditions and limits the amount of credit extended when deemed
necessary. The Company maintains reserves for potential credit losses which are
based upon the expected collectibility of all accounts receivable. Management
believes that any risk of loss is significantly reduced due to the Company's
credit evaluation process and because of the Company's substantial number of
government customers.
Currently, the Company's policy is to limit its exposure in financial
instruments by investing its excess cash in deposits with major banks in money
market securities. The Company limits the amount of exposure to any one
financial institution.
Inventories
Inventories are stated at the lower of cost (determined on the first-in,
first-out cost method) or market. The Company provides for obsolete, slow moving
or excess inventories in the period when obsolescence or inventory in excess of
annual demand is first identified.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed
using the straight-line method with the estimated useful lives of the assets
ranging from two to five years. Amortization of equipment held under capital
leases and leasehold improvements is computed using the straight-line method and
the shorter of the remaining lease term or the estimated useful life of the
related equipment or improvement. Repair and maintenance costs are expensed as
incurred.
Intangibles and Other Assets
Intangible assets include goodwill, purchased technology, capitalized
contract rights and capitalized software development costs. Goodwill and
purchased technology are amortized over five to seven years. Capitalized
contract rights are amortized over the terms of the related contracts, usually
one to five years.
The Company accounts for software development costs in accordance with
Statement of Financial Accounting Standards No. 86 "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed." Accordingly,
certain software development costs incurred are capitalized after technological
feasibility has been demonstrated. Technological feasibility is determined when
planning, designing, coding and testing have been completed according to design
specifications. Commencing with product introduction, such
35
38
IDENTIX INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
capitalized amounts are amortized on a product-by-product basis at the greater
of the amount computed using (a) the ratio of current revenues for a product to
the total of current and anticipated future revenues or (b) the straight-line
method over the remaining estimated economic life of the product. Generally, the
Company assigns an estimated economic life of one to five years to capitalized
software costs. Amortization of capitalized software costs is charged to cost of
product revenues and cost of services revenues. Research and development
expenditures are charged to research and development in the period incurred.
In fiscal 1996, the Company adopted Statement of Financial Accounting
Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." Accordingly, the Company evaluates asset
recoverability at each balance sheet date or when an event occurs that may
impair recoverability of the asset. The Company determines the recoverability of
the carrying amount of each intangible asset by reviewing the following factors:
the undiscounted value of expected operating cash flows in relation to its net
capital investment, the estimated useful or contractual life of the intangible
asset, the contract or product supporting the intangible asset, and in the case
of purchased technology and capitalized software development costs, the Company
periodically reviews the recoverability of the asset value by evaluating its
products with respect to technological advances, competitive products and the
needs of its customers. During fiscal 1996, the Company did not incur any
long-lived asset impairment losses.
Product Warranty
The Company provides a warranty for manufacturing and material defects
on all units sold. A reserve for warranty costs, based on estimates made by
management utilizing projected costs to repair units, is recorded at the time of
sale and periodically adjusted to reflect actual experience.
Income Taxes
Deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the income tax bases of assets and
liabilities and the amounts reported for financial reporting purposes for all
periods presented (Note 7).
Stock-Based Compensation
In October 1995 the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 123 "Accounting for Stock-Based
Compensation" (FAS 123). FAS 123 requires that the Company determine the fair
value for all stock-based compensation and either deduct the fair value of
stock-based compensation from the results of operations or disclose pro forma
results of operations as if they had. The Company will adopt the pro forma
disclosure requirements of FAS 123 in fiscal 1997 and, accordingly, expects
there will be no material impact on the Company's financial position and results
of operations as a result of the adoption of this new accounting standard.
Foreign Currency Translation
The local currency is the functional currency for the Company's foreign
subsidiary. Assets and liabilities are translated at year-end exchange rates for
the operation in the local currency environment. Income and expense items are
translated at average rates of exchange prevailing during the year. Gains or
losses from translation of foreign operations where the local currency is the
functional currency are included as a component of shareholders' equity.
36
39
IDENTIX INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loss Per Share
Loss per share is based on the weighted average number of shares
outstanding during each year. As a result of the losses reported in the periods
presented, common stock equivalents are anti-dilutive and therefore excluded.
Management Estimates and Assumptions
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
NOTE 2 -- ACQUISITIONS
Fingerscan:
On March 26, 1996, the Company acquired Fingerscan, a privately-held
Australian-based company that designs and markets biometric identity and
verification products, pursuant to a Share Purchase Agreement whereby Fingerscan
became a wholly owned subsidiary of the Company. In accordance with the Share
Purchase Agreement, the shareholders of Fingerscan were issued 668,976 shares of
the Company's no par value common stock. The Company's results for fiscal 1996
include the operations of Fingerscan from the date of acquisition.
The acquisition was accounted for using the purchase method of
accounting. Accordingly, the purchase price has been allocated to the assets
purchased and the liabilities assumed based upon the fair values at the date of
acquisition. Based upon an appraisal by an investment banking firm, the value of
the 668,976 shares of the Company's common stock issued in the acquisition was
determined to be $5,459,000 reflecting a 32% discount for certain restrictions
related to the resale of the common stock issued to purchase Fingerscan. The
excess of the purchase price over the fair market value of the net tangible
assets acquired aggregated approximately $5,280,000, of which $4,723,000 was
allocated to in-process research and development and $557,000 was allocated to
other intangibles including acquired technology. An independent appraisal was
performed which used the income approach to determine the fair value of
Fingerscan and its identifiable assets, including the portion of the purchase
price attributed to the in-process research and development. The income approach
includes an analysis of the markets, completion costs, cash flows, other
required assets, contributions made by core technology, and risks associated
with achieving such cash flows. The developmental products acquired were
evaluated in context of Interpretation 4 of SFAS No. 2 and SFAS No. 86 and the
identified in-process research and development was expensed in accordance with
these provisions as technological feasibility had not yet been reached. The
in-process research and development charge represents a multiple of
approximately 19 times Fingerscan's trailing twelve month's research and
development expenditures. The Company amortizes the amount allocated to other
intangibles including acquired technology over a five year period.
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company and Fingerscan as if the
acquisition had occurred at the beginning of the respective periods. The pro
forma combined statements of operations do not include the adjustment for the
non-recurring write-off of acquired in-process research and development. The net
income per share is based on the average number of shares of common stock of
Identix outstanding during the period plus the common shares issued by Identix
to acquire Fingerscan. These pro forma results have been prepared for
comparative purposes only and do not purport to be indicative of what operating
results would have been had the acquisition actually taken place on the assumed
dates or of operating results which may occur in the future.
37
40
IDENTIX INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEAR ENDED JUNE 30,
1996 1995
----- ----
(UNAUDITED)
Net revenues $39,883,000 $29,703,000
Net income $ 966,000 $ 278,000
Net income per share $ .04 $ .01
IAS:
On June 30, 1996, pursuant to a share purchase agreement, the Company
issued 155,000 shares of the Company's common stock to acquire IAS, a privately
held company. The acquisition has been accounted for as a pooling of interests.
The Company's fiscal 1996 consolidated financial statements include the accounts
and operations of IAS. For fiscal 1995 and 1994, the effects to the combination
with IAS were not significant and the Company has not restated those years to
include the accounts and operations of IAS.
In connection with the acquisition of IAS, the Company incurred costs of
approximately $40,000 primarily for transaction and professional fees, before
tax. Adjustments have been made to eliminate significant intercompany
transactions.
Separate net revenues, net income and related per share data amounts of
the combined entities for the year ended June 30, 1996 are presented in the
following table:
Identix IAS Adjustments Combined
------------ ----------- ----------- -----------
Net revenues $ 37,208,000 $ 2,194,000 $ (861,000) $38,541,000
Net income (loss) $ (3,557,000) $ 256,000 $ (140,000) $(3,441,000)
Net loss per share $ (0.15)
38
41
IDENTIX INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 -- BALANCE SHEET DETAIL
JUNE 30,
----------------------------------
1996 1995
------------ ----------------
Accounts receivable:
Commercial and other $ 12,677,000 $ 5,719,000
United States Government:
Billed 2,573,000 2,095,000
Unbilled 1,094,000 213,000
Employee receivables 475,000 478,000
Less: allowance for doubtful accounts and sales returns (488,000) (347,000)
------------ ------------
$ 16,331,000 $ 8,158,000
============ ============
Inventories:
Purchased parts and materials $ 2,869,000 $ 1,193,000
Work-in-process 429,000 643,000
Finished goods, including spares 1,166,000 675,000
------------ ------------
$ 4,464,000 $ 2,511,000
============ ============
Property and equipment:
Manufacturing, test and office equipment $ 4,167,000 $ 2,930,000
Furniture and fixtures 1,118,000 632,000
Leasehold improvements 244,000 53,000
------------ ------------
5,529,000 3,615,000
Less: accumulated depreciation and amortization (3,311,000) (2,366,000)
------------ ------------
$ 2,218,000 $ 1,249,000
============ ============
Intangibles and other assets:
Goodwill $ 1,271,000 $ 1,014,000
Purchased technology 1,334,000 778,000
Capitalized software costs 1,652,000 1,269,000
Less: accumulated amortization (1,703,000) (1,276,000)
------------ ------------
2,554,000 1,785,000
Other assets 293,000 48,000
------------ ------------
$ 2,847,000 $ 1,833,000
============ ============
NOTE 4 -- LINES OF CREDIT
The Company has a $3,000,000 bank line of credit secured by
substantially all of the personal property of the Company. Under the line of
credit the Company may borrow up to 80% of eligible accounts receivable. Amounts
drawn bear interest at the bank's prime rate plus 0.5%. The line of credit
expires on October 4, 1996. The line of credit requires bank approval for
payment of dividends on the Company's common stock. At June 30, 1996, there were
no borrowings under the bank line of credit. During fiscal 1996, the Company was
in default on one of its bank line of credit covenants. The Company has obtained
a waiver of default from the bank for breaches of the covenant.
ANADAC has a $4,000,000 bank line of credit and any outstanding balances
bear interest at the bank's prime lending rate and are payable upon demand.
Available borrowings under the line are based upon qualifying accounts
receivable balances. The line of credit agreement includes, among other things,
certain financial covenants and maintenance of certain financial ratios. The
line of credit expires October 31, 1996. At June 30, 1996, $1,671,000 was
outstanding bearing interest at 8.25%.
ANADAC has a $400,000 equipment financing line of credit secured by the
equipment purchased under the line of credit. Amounts bear interest at the
bank's prime rate plus 0.75% per annum. The
39
42
IDENTIX INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
repayment period is not to exceed thirty-six months. As of June 30, 1996, ANADAC
has $233,000 borrowed under this line of credit bearing interest at 9.00%.
IAS has a $200,000 bank line of credit secured by accounts receivable
and equipment. Amounts drawn bear interest at the bank's index base rate plus
0.75% per annum. The line of credit expires on December 26, 1996. At June 30,
1996, $175,000 was outstanding bearing interest at 10.25%.
NOTE 5 -- CAPITAL STOCK
Common Stock
On October 19, 1994, the Company sold in a private placement 500,000
shares of common stock at $2.75 per share to two institutional investors. The
Company received net proceeds of $1,351,000.
On March 26, 1996, the Company issued 668,976 shares to acquire
Fingerscan (Note 2).
On June 30, 1996, the Company issued 155,000 shares to acquire IAS (Note
2).
Employee Stock Options
In May 1983, the Company adopted an incentive stock option plan which
expired in 1993 ("1983 Plan"). Under the 1983 Plan, the Company reserved a total
of 2,000,000 shares of common stock. In October 1992, the Company adopted the
1992 Incentive Stock Option Plan ("1992 Plan"). The 1992 Plan will expire in
2002. A total of 1,000,000 shares of common stock has been reserved for issuance
under the 1992 Plan. In July 1995, the Company adopted the Identix Incorporated
Equity Incentive Plan ("1995 Plan"). The 1995 Plan will expire in 2005. A total
of 1,000,000 shares of the Company's common stock is reserved for issuance under
the 1995 Plan. The 1995 Plan provides for the discretionary award of options,
restricted stock, stock purchase rights, performance shares or any combination
of these awards to eligible employees, including executive officers and
consultants. In August 1995, the Company adopted the Non-Employee Directors
Stock Option Plan ("Directors Plan"), under which nonqualified stock options are
granted to non-employee directors on a formula basis. A total of 250,000 shares
of the Company's common stock is reserved for issuance under the Directors Plan.
Under the 1983, 1992, and 1995 Plans, options are granted for a period
of ten years, and all grants of incentive stock options must be made at a price
at least equal to the then fair market value of the common stock at the date of
grant. All grants of nonstatutory stock options must be made at a price of at
least 85% of the then fair market value of the common stock at the date of
grant. Options generally vest on a monthly basis over a period of two to five
years.
Under the Directors Plan, options are granted for a period of 10 years
at an exercise price equal to the fair market value of common stock on the date
of the grant. Upon election or appointment, each director of the Company who is
not, and has not been an officer or employee of the Company, receives an option
to purchase 10,000 shares of common stock; provided, however, that if a director
was appointed to the Board of Directors after six months of the date of the
annual meeting of shareholders at which directors are elected, that director
receives an option to purchase 5,000 shares of common stock. Thereafter, each
director receives an option to purchase 10,000 shares of common stock on the
date of the first meeting of the Board of Directors of the Company following the
annual meeting of the shareholders at which directors are elected. Options vest
quarterly over a one year period from the date of grant.
40
43
IDENTIX INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of activity under the plans follows:
Shares Optioned
Available Shares
For Grant Outstanding Exercise Price
---------- ---------- --------------
BALANCE JUNE 30, 1993...................................... 547,500 1,479,718
Options granted............................................ (374,000) 374,000 $2.31-$3.81
Options exercised.......................................... -- (382,641) $1.50-$2.63
Options canceled........................................... 40,833 (40,833) $2.31-$3.19
Options canceled and expired............................... -- (70,394) $1.75-$3.81
---------- ----------
BALANCE JUNE 30, 1994...................................... 214,333 1,359,850
Options granted............................................ (241,500) 241,500 $2.50-$5.31
Options exercised.......................................... -- (196,277) $1.10-$3.81
Options canceled........................................... 74,173 (74,173) $2.06-$5.31
Options canceled and expired............................... -- (24,000) $2.00-$2.63
---------- ----------
BALANCE JUNE 30, 1995...................................... 47,006 1,306,900
Shares reserved upon adoption of the 1995 Plan............. 1,000,000 -- --
Shares reserved upon adoption of the Directors Plan........ 250,000 -- --
Options granted............................................ (730,000) 730,000 $7.06-$12.25
Options exercised.......................................... -- (533,695) $1.56-$12.25
Options canceled........................................... 29,291 (29,291) $2.31-$ 7.06
Options canceled and expired............................... -- (8,000) $2.75-$ 2.75
---------- ----------
BALANCE JUNE 30, 1996...................................... 596,297 1,465,914
========== =========
As of June 30, 1996, options for approximately 838,000 common shares
were exercisable under the 1983, 1992, 1995 and Directors Plans.
Upon the acquisition of ANADAC, the Company assumed the options
outstanding under ANADAC's Incentive Stock Option Plan ("ANADAC Plan"),
obligating the Company to issue up to 544,613 shares of the Company's common
stock. The options assumed under the ANADAC Plan are incentive stock options
with expiration dates through 2001. All outstanding options were fully vested as
of October 23, 1992, the acquisition date, and are subject to antidilution
adjustments for stock splits or stock dividends.
A summary of activity under the ANADAC Plan follows:
Shares Optioned
Available Shares Exercise
For Grant Outstanding Price
--------- ----------- --------
Shares reserved upon
adoption of ANADAC Plan................. 544,613 $1.27-$2.16
Options exercised......................... -- (83,000) $1.64-$1.97
--------- ----------
Balance at June 30, 1993.................. -- 461,613
Options exercised......................... -- (114,558) $1.27-$1.97
Options canceled.......................... 27,625 (27,625) $1.33-$1.65
--------- ----------
Balance at June 30, 1994.................. 27,625 319,430
Options exercised......................... -- (171,426) $1.27-$1.97
Options expired........................... (27,625) -- $1.33-$1.65
--------- ----------
Balance at June 30, 1995.................. -- 148,004
Options exercised......................... -- (146,029) $1.27-$2.16
--------- ----------
Balance at June 30, 1996.................. -- 1,975
========= ==========
41
44
IDENTIX INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Employee Stock Ownership Plan
The ANADAC, Inc. Employee Stock Ownership Plan ("ESOP") enables eligible
employees of ANADAC to share in the growth of the Company through the
acquisition of common stock. The ESOP provides for the Company, at its
discretion, to make contributions of up to 10% of each participant's base
salary. The amount of compensation expense related to the ESOP is based upon the
common stock allocated to participants. The Company's expense for the ESOP was
$183,000 in fiscal 1996, $148,000 in fiscal 1995 and $116,000 in fiscal 1994.
Warrants
Under certain private transactions authorized by the Board of Directors
of the Company from 1992 through 1994, warrants to purchase 395,160 shares of
the Company's common stock were issued at exercise prices ranging from $2.125 to
$3.75 per share. At June 30, 1996, warrants from these transactions to purchase
145,000 shares of the Company's common stock were outstanding, of which 25,000
expire in September 1997 and 120,000 expire in January 1999.
On March 18, 1992, the Company issued Sundance a warrant to purchase
25,575 shares of common stock at $3.00 per share. The warrant expires in March
1997 (Note 6).
In connection with the closing of a bank line of credit in December
1992, the Company issued to the bank a warrant to purchase 30,000 shares of
common stock at $2.69 per share. The bank exercised the warrant in May 1996.
Warrants to purchase 2,250,000 shares of the Company's common stock at
$3.00 per share were issued as part of a public offering in 1993. Also, as part
of the public offering, the Company issued the underwriter a warrant to purchase
45,000 units at an exercise price of $12.00 per unit, each unit consisting of
five warrants to purchase common stock and one share of Series A Preferred Stock
convertible into five shares of common stock. On June 6, 1995, the Company
announced that on July 6, 1995 it would redeem, for $0.05 per warrant, all
warrants issued in the public offering not exercised by July 5, 1995. At June
30, 1996, all warrants were exercised or redeemed. As part of the warrant
redemption, the Company entered into a standby underwriting agreement whereby
the underwriter would purchase for $3.00 per share all unexercised warrants
related to the warrant redemption. Pursuant to the agreement, the underwriter
purchased 3,210 of unexercised warrants.
On December 15, 1994, the Company issued warrants to purchase 250,000
shares of its common stock for $3.00 per share, expiring January 27, 1998 to an
investment banking firm and certain of its officers and employees for providing
services to the Company. The warrant holders exercised the warrants in August
1995.
At June 30, 1996, warrants to purchase 170,575 shares of common stock
were outstanding.
NOTE 6 -- RELATED PARTY TRANSACTIONS AND CONVERTIBLE DEBT
On March 18, 1992, the Company entered into a convertible promissory
note and warrant purchase agreement with Sundance. Larry J. Wells is a general
partner of Anderson and Wells Company, the general partner of Sundance. Mr.
Wells became a member of the Company's Board of Directors in May 1992. Under the
agreement, the Company received $500,000 from Sundance in exchange for a
promissory note. Interest on the note accrues at 10% and is payable quarterly.
On June 30, 1995, the Company, at its option, converted the note into 166,666
shares of the Company's common stock. As additional consideration for the note,
the Company issued Sundance a warrant to purchase 25,575 shares
42
45
IDENTIX INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of the Company's common stock at $3.00 per share (Note 5). The closing price of
the Company's common stock on March 18, 1992 was $3.50.
On September 2, 1994, the Company entered into a Voting Trust Agreement
with Ascom Holding, Inc. ("Ascom") (the "Agreement") whereby Ascom deposited all
of its shares of the Company's common stock held by Ascom totaling 5,418,224
(the "Voting Stock") into a voting trust. The trustee of the voting trust is on
the Company's Board of Directors and has voting control of the Voting Stock. The
term of the Agreement is 10 years. In consideration for Ascom entering into the
Agreement, the Company granted Ascom certain additional registration rights with
respect to the Voting Stock, modified certain contractual transfer restrictions
with respect to the Voting Stock, and granted Ascom price protections regarding
certain sales of Voting Stock. In July 1996, Ascom Holding, Inc. transferred the
5,418,224 shares of Voting Stock to its subsidiary, Ascom USA Inc.
NOTE 7 -- INCOME TAXES
Deferred tax assets (liabilities) comprise the following:
JUNE 30,
-------------------------------------
1996 1995
------------ -------------
Federal and state loss and credit carryforwards............... $ 9,600,000 $10,533,000
Depreciation and amortization................................. 93,000 439,000
Inventory reserves and basis differences...................... 324,000 242,000
Compensation accruals......................................... 150,000 118,000
Accounts receivable and sales reserves........................ 47,000 (26,000)
Other......................................................... 281,000 42,000
------------ -------------
Gross deferred tax assets..................................... 10,495,000 11,348,000
------------ -------------
Unbilled accounts receivable.................................. (520,000) (144,000)
Capitalized software.......................................... (165,000) (164,000)
Other......................................................... (187,000) (92,000)
------------ -------------
Gross deferred tax liabilities................................ (872,000) (400,000)
------------ -------------
Net deferred tax asset before valuation allowance............. 9,623,000 10,948,000
Deferred tax assets valuation allowance....................... (9,623,000) (10,948,000)
------------ -------------
Total net deferred tax asset.................................. $ -- $ --
============= ==============
The deferred tax asset valuation allowance is attributed to U.S. Federal
and State deferred tax assets. Management believes sufficient uncertainty exists
regarding the realizability of these assets, such that a full valuation
allowance is required.
As of June 30, 1996, the Company has a federal net operating loss
carryforward of approximately $26.0 million for financial reporting and income
tax purposes, which is available to offset future taxable income. The
carryforward expires on various dates through the fiscal year 2010. Under the
Tax Reform Act of 1986, the amounts of and the benefit from net operating losses
that can be carried forward may be impaired or limited in certain circumstances,
including a cumulative stock ownership change of more than 50% over a three-year
period. As a result of the public offering in January 1993, a change of
ownership occurred, causing an annual limitation on the utilization of the net
operating loss carryforward, incurred prior to the ownership change, of
approximately $2.5 million.
During fiscal 1995, the Company realized an income tax benefit of
$136,000 related to the application of a loss carryback to recover taxes paid in
prior years by ANADAC.
43
46
IDENTIX INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 -- COMMITMENTS
LEASES
The Company currently occupies its headquarters and products business
facility under a lease, which expires in April 2001 and is required to pay
taxes, insurance, and maintenance as well as monthly rental payments. The
Company leases office space for its services business under operating leases
expiring at various dates through 2001. The leases contain escalation provisions
requiring rental increases for increases in operating expense and real estate
taxes.
Future minimum lease payments for operating leases are as follows:
Year ending June 30,
1997..................... $1,612,000
1998..................... 1,578,000
1999..................... 1,432,000
2000..................... 1,326,000
2001..................... 897,000
Thereafter............... --
----------
Total $6,845,000
==========
Total rental expense under operating leases was $1,308,000, $1,135,000
and $1,046,000 for the years ended June 30, 1996, 1995, and 1994, respectively.
NOTE 9 -- CONTINGENT LIABILITIES
The Company is a defendant in a patent infringement lawsuit related to
the Company's TouchPrint 600 and 900 products filed against the Company by a
competitor. TouchPrint is a "live-scan" system used by law enforcement agencies
to scan and capture high quality fingerprint images. The lawsuit has no
implication for other Identix products. The Court has granted the Company's
motion that the TouchPrint 600 does not infringe the patent. The remaining issue
in the case is whether the Company's TouchPrint 900 product, which is the
predecessor of the TouchPrint 600 and is no longer in production, infringes the
patent. The Company is defending this matter vigorously and believes that it is
unlikely that the outcome of this lawsuit will have a material adverse effect on
the Company's financial position and results of operations.
NOTE 10 -- INTERIM PERIOD RESTATEMENT (UNAUDITED)
The Company has made changes in the application of its revenue
recognition policy for certain Law Enforcement contracts and has amended its
Forms 10-Q to restate revenues and earnings for its fiscal 1996 second and third
quarters ended December 31, 1995 and March 31, 1996, respectively. While there
was no impact on the results for the year ended June 30, 1996, there was a
positive effect on fiscal 1996 fourth quarter results with offsetting reductions
in fiscal 1996 second and third quarter results.
44
47
IDENTIX INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the effects of the restatement on quarterly amounts
previously reported for fiscal 1996 is as follows:
Fourth Third Second First
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Total revenues
As reported $ 11,665,000 $ 9,447,000 $ 8,840,000 $ 7,513,000
As restated $ 14,807,000 $ 8,402,000 $ 6,743,000 $ 7,513,000
Net income (loss)
As reported $ 158,000 $ (4,346,000) $ 389,000 $ 124,000
As restated $ 1,710,000 $ (4,867,000) $ (642,000) $ 124,000
Net income (loss)
per share
As reported $ 0.01 $ (0.19) $ 0.02 $ 0.01
As restated $ 0.07 $ (0.21) $ (0.03) $ 0.01
The quarterly data for the three months ended September 30, 1995,
December 31, 1995 and March 31, 1996 exclude the results of operations of IAS
which was acquired in a transaction accounted for as a pooling of interests in
June 1996. The quarterly data for the three months ended June 30, 1996 includes
the results of operations of IAS.
45
48
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
46
49
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item with respect to executive officers
is set forth in Part I of this Annual Report on Form 10-K and the information
with respect to the directors is incorporated by reference to the information
set forth under the caption "Election of Directors" in the proxy statement to be
used in connection with the 1996 Annual Meeting of the Shareholders (the "Proxy
Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to
the information set forth under the caption "Executive Compensation" in the
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to
the information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to
the information set forth under the caption "Certain Transactions" in the Proxy
Statement.
47
50
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)1. FINANCIAL STATEMENTS.
The information required by this Item appears in Item
8 of this Annual Report on Form 10-K.
Report of Independent Accountants ........................28
Consolidated Balance Sheets ..............................29
Consolidated Statements of Operations ....................30
Consolidated Statements of Shareholders' Equity ..........31
Consolidated Statements of Cash Flows ....................32
Notes to Consolidated Financial Statements ...............34
(a)2. FINANCIAL STATEMENTS SCHEDULES.
Schedule II Valuation and Qualifying Accounts and Reserves
(a)3. EXHIBITS.
3.1(2) Registrant's Amended and Restated Articles of
Incorporation, as amended
3.2(2) Registrant's Bylaws, as amended
10.1(1) Identix's 1983 Incentive Stock Option Plan and
forms of Incentive Stock Option Agreement and
Non-Statutory Stock Option Agreement
10.2(2) Stock Option Agreement dated March 13, 1989
between Identix and Ascom Hasler AG, as amended by
Amendment Number 1 thereto dated April 20, 1989
and Amendment Number 2 thereto dated August 8,
1989
10.3(3) Stock Purchase Agreement dated July 24, 1990
between Identix and Ascom Hasler AG
10.4(4) Stock Purchase Agreement and Amendment Number 3 to
Stock Option Agreement dated December 14, 1990
between Identix and Ascom Hasler AG
10.5(5) Loan Agreement and Amendment Number 4 to
Stock Option Agreement dated December 12,
1991 between Identix and Ascom Hasler AG
10.6(5) Convertible Promissory Note and Warrant
Purchase Agreement dated March 18, 1992,
and amended July 29, 1992 between Identix
and Sundance Venture Partners, L.P.
10.7(5) Amended and Restated Agreement and Plan of
Reorganization and Merger Among Identix
Incorporated, ANADAC, Inc. and Identix Acquisition
Corporation, dated August 27, 1992
10.8(2) Registrant's 1992 Employee Stock Option Plan and
forms of Incentive Stock Option Agreement and
Nonqualified Stock Option Agreement
10.9(2) Loan Agreement dated October 30, 1992 between
Identix and Ascom Hasler AG
10.10(2) Loan and Security Agreement dated January 9, 1991
among Crestar Bank, Defense Systems Concepts, Inc.
and ANADAC, as amended August 5, 1992 and October
23, 1992
10.11(2) ANADAC 1984 Incentive Stock Option Plan and forms
of Incentive Stock Option Agreement and
Nonstatutory Stock Option Agreement
10.12(6) Voting Trust Agreement with Respect to Capital
Stock of Identix Incorporated among Identix
Incorporated, William E. Colby, and Ascom Holding
Inc. dated as of September 2, 1994
48
51
10.13(6) Amendment No. 5 to Stock Option Agreement among
Identix Incorporated, Ascom Hasler, Ltd., and
Ascom Holding Inc. dated as of September 2, 1994
10.14(6) Amendment to Registration Rights Agreement among
Identix Incorporated, Ascom Hasler, Ltd., and
Ascom Holding Inc. dated as of September 2, 1994
10.15(7) Office Building Lease dated May 18, 1995, between
ANADAC, Inc. and Charles Smith Management, Inc.
10.16(8) Office Building Lease dated April 1, 1995 between
ANADAC, Inc., and U.S. AIR, Inc.
10.17(8) Office Building Lease dated July 27, 1995 between
ANADAC, Inc., and Third Gould Limited Liability
Company
10.18(8) Registrant's 1995 Equity Incentive Plan
10.19(8) Registrant's 1995 Nonemployee Directors Stock
Option Plan
10.20(8) Letter Agreement dated July 28, 1995 between
Identix and Ascom Holding Inc.
10.21(9) AEGIS Combat Ship Building Contract Program
23.1 Consent of Price Waterhouse LLP, Independent
Accountants
24.1 Power of Attorney
27.1 Financial Data Schedule
----------
(1) Incorporated by reference to registrant's
registration statement no. 29-95551.
(2) Incorporated by reference to registrant's
registration statement no. 33-55074.
(3) Incorporated by reference to the July 24, 1990
Form 8-K.
(4) Incorporated by reference to the December 14, 1990
Form 8-K.
(5) Incorporated by reference to the June 30, 1992
Form 10-K.
(6) Incorporated by reference to the September 30,
1994 Form 10-Q.
(7) Incorporated by reference to the March 31, 1995
Form 10-Q.
(8) Incorporated by reference to the June 30, 1995
Form 10-K.
(9) Incorporated by reference to the September 30,
1995 Form 10-Q.
49
52
(b) REPORTS ON FORM 8-K:
On April 10, 1996, the Registrant filed a Current Report on Form 8-K
with the Securities and Exchange Commission in connection with acquisition of
Fingerscan Pty Ltd. and amended such filing with Amendment No. 1, Amendment No.
2 and Amendment No. 3 on Form 8-K/A on June 10, 1996, July 12, 1996 and August
2, 1996, respectively.
50
53
IDENTIX INCORPORATED
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Balance at Additions
Beginning Charged to Balance at
Description of Period Expense Deductions End of Period
----------- ---------- ---------- ---------- -------------
Inventory Reserve:
Year ended June 30, 1994 $ 122,000 $ 25,000 $ - $ 147,000
==================== ===================== ===================== ====================
Year ended June 30, 1995 $ 147,000 $ 95,000 $ - $ 242,000
==================== ===================== ===================== ====================
Year ended June 30, 1996 $ 242,000 $ 177,000 $ 75,000 $ 344,000
==================== ===================== ===================== ====================
Allowance for Doubtful Accounts:
Year ended June 30, 1994 $ 692,000 $ 93,000 $ 266,000 $ 519,000
==================== ===================== ===================== ====================
Year ended June 30, 1995 $ 519,000 $ 5,000 $ 177,000 $ 347,000
==================== ===================== ===================== ====================
Year ended June 30, 1996 $ 347,000 $ 238,000 $ 97,000 $ 488,000
==================== ===================== ===================== ====================
51
54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant, Identix Incorporated, a corporation
organized and existing under the laws of the State of California, has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized, in the City of Sunnyvale, State of California, on the 27th day of
September 1996.
IDENTIX INCORPORATED
By: /s/ RANDALL C. FOWLER
------------------------------------
Randall C. Fowler, President,
Chief Executive Officer and Director
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Randall C. Fowler and James P. Scullion,
jointly and severally, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any amendments to this
Annual Report on Form 10-K and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
/s/ RANDALL C. FOWLER President, Chief Executive Officer September 27, 1996
- -------------------------------------------- and Director (Principal Execuitve
Randall C. Fowler Officer)
/s/ JAMES P. SCULLION Vice President, Finance, Chief September 27, 1996
- -------------------------------------------- Financial Officer and Secretary
James P. Scullion (Principal Financial and Accounting
Officer)
/s/ RANDALL HAWKS, JR. Director September 27, 1996
- --------------------------------------------
Randall Hawks, Jr.
/s/ PATRICK H. MORTON
- -------------------------------------------- Director September 27, 1996
Patrick H. Morton
/s/ FRED U. SUTTER Director September 27, 1996
- --------------------------------------------
Fred U. Sutter
52
55
/s/ HARRISON N. WALTHER Director September 27, 1996
- --------------------------------------------
Harrison N. Walther
/s/ LARRY J. WELLS Director September 27, 1996
- --------------------------------------------
Larry J. Wells
/s/ ED ZSCHAU Director September 27, 1996
- --------------------------------------------
Ed Zschau
53
56
IDENTIX INCORPORATED
1996 FORM 10-K REPORT
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGES
------- ----------- ------------
3.1(2) Registrant's Amended and Restated Articles of Incorporation, as amended --
3.2(2) Registrant's Bylaws, as amended --
10.1(1) Identix's 1983 Incentive Stock Option Plan and forms of Incentive Stock Option --
Agreement and Non-Statutory Stock Option Agreement
10.2(2) Stock Option Agreement dated March 13, 1989 between Identix and Ascom --
Hasler AG, as amended by Amendment Number 1 thereto dated April 20, 1989
and Amendment Number 2 thereto dated August 8, 1989
10.3(3) Stock Purchase Agreement dated July 24, 1990 between Identix and Ascom --
Hasler AG
10.4(4) Stock Purchase Agreement and Amendment Number 3 to Stock Option --
Agreement dated December 14, 1990 between Identix and Ascom Hasler AG
10.5(5) Loan Agreement and Amendment Number 4 to Stock Option Agreement dated --
December 12, 1991 between Identix and Ascom Hasler AG
10.6(5) Convertible Promissory Note and Warrant Purchase Agreement dated --
March 18, 1992, and amended July 29, 1992 between Identix and Sundance
Venture Partners, L.P.
10.7(5) Amended and Restated Agreement and Plan of Reorganization and Merger --
Among Identix Incorporated, ANADAC, Inc. and Identix Acquisition
Corporation, dated August 27, 1992
10.8(2) Registrant's 1992 Employee Stock Option Plan and forms of Incentive Stock --
Option Agreement and Nonqualified Stock Option Agreement
10.9(2) Loan Agreement dated October 30, 1992 between Identix and Ascom Hasler --
AG
10.10(2) Loan and Security Agreement dated January 9, 1991 among Crestar Bank, --
Defense Systems Concepts, Inc. and ANADAC, as amended August 5, 1992
and October 23, 1992
10.11(2) ANADAC 1984 Incentive Stock Option Plan and forms of Incentive Stock --
Option Agreement and Nonstatutory Stock Option Agreement
10.12(6) Voting Trust Agreement with Respect to Capital Stock of Identix Incorporated --
among Identix Incorporated, William E. Colby, and Ascom Holding Inc. dated
as of September 2, 1994
10.13(6) Amendment No. 5 to Stock Option Agreement among Identix Incorporated, --
Ascom Hasler, Ltd., and Ascom Holding Inc. dated as of September 2, 1994
10.14(6) Amendment to Registration Rights Agreement among Identix Incorporated, --
Ascom Hasler, Ltd., and Ascom Holding Inc. dated as of September 2, 1994
10.15(7) Office Building Lease dated May 18, 1995, between ANADAC, Inc. and --
Charles Smith Management, Inc.
10.16(8) Office Building Lease dated April 1, 1995 between ANADAC, Inc., and U.S. --
AIR, Inc.
10.17(8) Office Building Lease dated July 27, 1995 between ANADAC, Inc., and Third --
Gould Limited Liability Company
10.18(8) Registrant's 1995 Equity Incentive Plan --
10.19(8) Registrant's 1995 Nonemployee Directors Stock Option Plan --
57
10.20(8) Letter Agreement dated July 28, 1995 between Identix and Ascom Holding Inc. --
10.21(9) AEGIS Combat Ship Building Contract Program
23.1 Consent of Price Waterhouse LLP, Independent Accountants
24.1 Power of Attorney
27.1 Financial Data Schedule
- ----------
(1) Incorporated by reference to registrant's registration statement no.
29-95551.
(2) Incorporated by reference to registrant's registration statement no.
33-55074.
(3) Incorporated by reference to the July 24, 1990 Form 8-K.
(4) Incorporated by reference to the December 14, 1990 Form 8-K.
(5) Incorporated by reference to the June 30, 1992 Form 10-K.
(6) Incorporated by reference to the September 30, 1994 Form 10-Q.
(7) Incorporated by reference to the March 31, 1995 Form 10-Q.
(8) Incorporated by reference to the June 30, 1995 Form 10-K.
(9) Incorporated by reference to the September 30, 1995 Form 10-Q.