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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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 September 30, 1995.
or
[_] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission file number 0-15235
Mitek Systems, Inc.
(Exact name of registrant as specified in its charter)
Delaware 87-0418827
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10070 Carroll Canyon Road, San Diego, California 92131
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code:
(619) 635-5900
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
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 voting stock held by non-affiliates of the
registrant was $6,192,000 as of November 30, 1995 (computed by reference to the
last sale price of a share of the registrant's Common Stock on that date as
reported by NASDAQ).
There were 7,727,959 shares outstanding of the registrant's Common Stock as
of November 30, 1995.
Documents incorporated by reference in this report:
Part II incorporates certain information by reference from the Annual
Report to Stockholders for the year ended September 30, 1995. Part III
incorporates certain information by reference from the Proxy Statement for the
1996 Annual Meeting of Stockholders.
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PART I
ITEM 1. BUSINESS
GENERAL
Mitek Systems, Inc. (the "Company") was incorporated under the laws of
the State of Delaware in 1986. The Company is primarily engaged in the
development, manufacture and sale of software products with particular focus on
functional business and office automation, and, until March, 1995, modified
computer systems for electronic security. The Company's intentions are global
in scope, and it aspires to be the preeminent supplier in its targeted markets.
In 1993, the Company began pursuing a strategy which focused on the
launch of a new product line with better commercial prospects, while maintaining
its relative position in the rapidly declining TEMPEST market. In March, 1995,
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the Company completed the transition out of the TEMPEST market by selling the
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assets of this business segment to Ravenn Data Systems, Inc.
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PRODUCTS AND RELATED MARKETS
AUTOMATED INTELLIGENT CHARACTER RECOGNITION
The Company's realigned business strategy began with the acquisition
of the Data Entry Products Division ("DEP") of HNC, Inc. ("HNC") in November
1992. DEP had developed and was selling hand printed character recognition and
page segmentation technologies used in remittance processing, business forms,
data entry processing and enhanced gray-scale optical character recognition.
This product line has been renamed as Mitek's Automated Document Recognition
(ADR) product line.
The ADR software products are based on advanced neural network
computing technology. Neural networks are powerful tools for pattern
recognition applications. They consist of sets of coupled mathematical
equations with adaptive parameters that are self-adjusting to "learn" patterns
of objects that are presented as images in repetitive "training" sessions.
Specially trained neural networks demonstrate superior recognition even in the
face of ambiguity. This technology has made automated recognition of human hand
printed documents a cost-saving alternative to data capture by key entry. The
ADR software, when presented electronic images, automatically converts machine
and hand printed letters and numbers into machine readable ASCII code or
Unicode. This eliminates or greatly reduces the need for manual data entry.
The Company's primary customers are OEMs and installers of processing systems
whose clients are businesses that repetitively process large quantities of
similar forms, such as checks or other financial documents.
The Company's software products are currently in use processing sales
orders, checks, tax forms, credit card drafts, ZIP codes, time sheets and
insurance applications. These installed products are offered for virtually all
major computer operating systems. The Company has expanded its targeted
customer base by developing networks to recognize European and other geographic
hand print.
The Company also competes in the fax server marketplace with its
proprietary software. In June, 1995 the Company completed the acquisition of
TRACS International, Inc., a Calgary, Canada based developer of network
facsimile server technology. The Company subsequently combined the Automated
Document Recognition capabilities with the facsimile server technology to gain
entry into this market.
During fiscal 1995, the Automated Document Recognition products and
contracts accounted for 76% of the Company's revenue. During fiscal 1994, the
Automated Document Recognition products and contracts accounted for 45% of the
Company's revenue.
TEMPEST
TEMPEST is an element of security relating to the unauthorized
disclosure of sensitive information through electromagnetic radiation from
electronic devices. TEMPEST protection is intended to suppress spurious
electronic signals emitted from information systems. It is a part of the overall
security related to electronic information systems that includes personnel,
encryption, communications, software and other hardware controls.
The Company's TEMPEST-modified products, which meet the government's
TEMPEST requirements, include desktop laser printers, facsimile machines,
Macintosh and DOS computers and monitors. In addition, the Company has modified
several related accessories which include disk drives, memory expansion boards,
special application cards, cables, fonts and other devices required for a full
product line.
During 1992, the U.S. government's policy with respect to the
deployment of TEMPEST counter measures changed. The result of this policy change
is a reduction in the amount of TEMPEST equipment that is
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expected to be purchased. The Company expected that future purchases of TEMPEST
equipment would be for more highly classified applications and programs in areas
where there would be less physical security. This change had caused a
substantial decrease in TEMPEST revenues. The Company anticipated a continued
decrease in the demand for TEMPEST products.
The Company's major customers included large Original Equipment
Manufacturers, major defense contractors and the United States government.
During fiscal 1995, TEMPEST-related products accounted for 24% of the
Company's revenues. During fiscal 1994, TEMPEST-related products accounted for
54% of the Company's revenues.
RESEARCH AND DEVELOPMENT
The Company's focus in research and development changed substantially
in fiscal 1993, and continued throughout fiscal 1994 and 1995. The Company
redirected its efforts toward software products and reduced its efforts in
TEMPEST systems. This was accomplished through reductions in staff, the DEP
acquisition and new hires. The Company also merged its personnel into a unified
management structure and 42%, or 14 employees, are now involved in research and
development. This compares to 35%, or 14 employees, in fiscal 1994.
The Company's expenses for research and development for the years
ending September 30, 1995, 1994 and 1993 were $1,004,000, $1,024,000 and
$1,192,000, respectively. The 1995, 1994 and 1993 figures do not include
$640,000, $722,000 and $613,000, respectively, that was spent in research and
development related to contracted development and charged to cost of sales.
PATENTS
The Company's value-added modifications are not patented, nor can
there be any assurance that if any such patents were issued significant
protection to the Company would result. While the Company believes that its
designs and technology are proprietary in nature, it is possible that
competitors may seek to copy various features of its products. The Company
believes that any patent or other protection is of less importance than such
factors as the quality and servicing of the Company's products, the Company's
relationship with its customers and the knowledge, skill and experience of the
Company's management.
The Company seeks registered trademark protection for its software-
related products; however it does not consider its business to be dependent upon
the protection or that its operations would be materially affected by the
expiration or loss of them. In the Company's opinion, its design, experience and
reputation are more responsible for its industry position than its trademarks.
The Company enforces the practice of maintaining trade secrets for
its key technologies. This practice affords the Company a significant advantage
in the marketplace.
PRODUCTION
The Company, until March 1995, produced TEMPEST-qualified computer and
peripheral equipment by modifying standard production models. On receipt, the
equipment was subjected to incoming functional inspection. The equipment was
then disassembled, and certain parts of the equipment were modified by adding,
deleting or substituting various components and sheet metal parts. All
components and sheet metal parts added in the manufacturing process were subject
to incoming Quality Assurance ("QA") inspection criteria in addition to
manufacturing in-process inspection procedures. The equipment was then
reassembled and again subjected to functional testing. Following functional
testing, a certain number of randomly selected modified units were sent to the
Company's TEMPEST Engineering Department for TEMPEST quality control testing,
where procedures exceed the rigorous standards that the government requires. The
equipment was then subjected to final QA inspection prior to shipment to the
customer.
The software products (ADR and facsimile servers) require little
production effort.
MARKETING AND SALES
The Company markets its products primarily in the United States,
Australia, South America and Europe. The Sales and Marketing department consists
of 24% of the Company's personnel. In addition to this group, many of the
Company's technical and management personnel become involved in the sales
process.
The Company's direct sales are supplemented by the sales efforts of
original equipment manufacturers (OEMs). Under these OEM arrangements, the
manufacturer remains responsible for the ultimate sale of the modified, or
combined, product. As a result, the Company is able to increase its market
coverage through the manufacturer's selling efforts.
The Company's customers include government agencies, manufacturers,
systems integrators and contractors. They are generally large firms whose final
products incorporate the Company's products.
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Direct sales to the U.S. government accounted for 16%, 11% and 12% of
total sales in fiscal 1995, 1994 and 1993, respectively. There were two non-
government customers to which sales in excess of 10% for fiscal 1995. They were
BTI for 13% and Recognition International for 12%. The Company has enjoyed a
successful relationship with both firms since the DEP acquisition three years
ago. One non-government customer, Wang Laboratories, accounted for 21% of total
sales in fiscal 1994. There were two non-government customers to which sales
were in excess of 10% for fiscal 1993. Wang Laboratories accounted for 28% of
sales and Secure Computer Systems accounted for 17% of sales in fiscal 1993. The
Company has enjoyed a long relationship with both firms.
International sales are made through resellers and integrators in
selected countries. International sales for fiscal 1995, 1994 and 1993 accounted
for 21%, 13% and 23%, respectively, of total sales.
MAINTENANCE AND SUPPORT
The Company installs and maintains its products with its own personnel
and contract maintenance services. In addition to customer support at the
Company's San Diego, California and Calgary, Alberta, Canada offices, the
Company performs field maintenance support at its customers' locations
throughout the United States. Costs incurred by the Company to supply
maintenance and support services are charged to cost of sales.
SUPPLIERS
The Company, until March 1995, typically purchased readily available
standard production models of computer and peripheral equipment for its own
account and then modified the equipment to meet the TEMPEST specifications.
Because the TEMPEST design was typically unique to a particular product model,
the Company depended upon a single manufacturer for the supply of a product for
a particular model. In other cases, OEMs provided their equipment to the Company
on consignment and pay only for the value-added TEMPEST modification.
COMPETITION
The ADR software products compete primarily on performance. The
products are intended to replace data entry clerks. The company's customers
desire speed and accuracy and the number of checks processed per second or forms
processed per hour are important factors. The Company believes its product has
the highest accuracy available. The Company believes it has the plans and
resources to remain a leader in the automated intelligent character recognition
field. The current competitors include Nestor, AEG and CGK (German companies),
and GTESS.
The TEMPEST products competed primarily on price. Large competitors
had left the business and no longer competed. The current competitors tended to
be smaller companies, including HETRA and Secure Technology.
GOVERNMENT REGULATIONS
The Company, until March, 1995, operated under a number of Memoranda
of Understanding with the government's Industrial TEMPEST Program (the "ITP")
and adhered to that organization's procedures and regulations. TEMPEST products
were designed, tested and manufactured in accordance with a classified U.S.
government document designated NACSIM 5100A. To obtain or retain this classified
document, a Company must be a member in good standing of the ITP, have a minimum
of a "Secret" facility clearance, have the capability to safeguard classified
material and have certain of its officers, directors and employees obtain a
minimum of a "Secret" security clearance.
A substantial number of the TEMPEST products sold by the Company were
listed on the government's Endorsed Tempest Products List (ETPL), which is used
by government agencies and contractors as a guide for obtaining TEMPEST-
qualified equipment. To have its products continue to be listed on the ETPL, the
Company must produce and test its equipment in a manner which insures that it
meets the requirements of NACSIM 5100A. Failure to maintain certain of its
products on the ETPL would have had a material adverse effect on the Company's
business.
BACKLOG
The Company's order backlog includes only purchase orders for which
customer purchase order numbers have been issued and a definite delivery
schedule has been established, generally twelve months for the ADR software
products, and until March, 1995, within five months for TEMPEST products. The
backlog at September 30, 1995, includes only ADR software products.
The Company's backlog as of various dates is as follows:
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September 30, 1995 $1,218,193
September 30, 1994 $1,818,074
September 30, 1993 $5,275,000
The Company's backlog at any point in time is impacted by the timing
of orders and new product introductions.
Purchase orders and contracts received from customers by the Company
contain clauses that allow cancellation at the convenience of the customer. In
addition, purchase orders received from customers supplying product to the
government are subject to cancellation if the customer's contract is terminated
at the convenience of the government. Upon such cancellation, the Company is
generally entitled to reimbursement for allowable costs incurred and to a
proportionate share of profits or fees earned to the date of termination. To
date, the Company has not experienced any material purchase order or contract
termination's under these provisions. Since customers may cancel orders
included in backlog, the backlog totals as of any particular date may not be
indicative of the Company's actual revenues for any succeeding period.
EMPLOYEE AND LABOR RELATIONS
As of September 30, 1995, the Company had approximately 33 full-time
employees. The Company's employees are not subject to a collective bargaining
agreement. The Company believes that it has satisfactory working relationships
with its employees.
ITEM 2. PROPERTIES
The Company occupies approximately 12,600 square feet of leased space
at 10070 Carroll Canyon Road, San Diego, California. The current monthly rental
rate is $7,721 per month. These facilities are subject to a lease expiring on
April 30, 1998, with an option to extend the term for an additional 3 years.
During the quarter ended June 30, 1995, the Company vacated leased
facilities consisting of two buildings in San Diego. Pursuant to such event, the
Company recorded an expense of $80,000 related to the cost of vacating and the
subsequent move to the current facility.
The Company also leases approximately 2,000 square feet of space in
Sterling, Virginia, used as a sales and service office, at a monthly rental of
$1,970, pursuant to a lease expiring on October 31, 1998.
The Company also leases approximately 1,545 square feet of space in
Calgary, Alberta, Canada used as a sales, service, and development office at a
monthly rental of $1,592 pursuant to a lease expiring on July 31, 1997, with an
option to extend the term for an additional 3 years.
The Company believes its facilities are adequate for planned
operations.
All of the Company's property and equipment is pledged as collateral
under various loan arrangements.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to security holders during the fourth
quarter ending September 30, 1995.
EXECUTIVE OFFICERS OF THE REGISTRANT
JOHN M. THORNTON, 62, is the Chairman of the Board of Directors. His
background information is included in the Company's Proxy Statement and
incorporated herein by reference.
JOHN F. KESSLER, 46, is President and Chief Executive Officer of the
Company and a Director. His background information is included in the Company's
Proxy Statement and incorporated herein by reference.
GERALD FARMER, Ph.D, 61, is Executive Vice President. His background
information is included in the Company's Proxy Statement and incorporated herein
by reference.
PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Market for Registrant's common equity and related stockholder matters
is incorporated by reference on Page 12 from the Company's Annual Report to
Stockholders for the year ended September 30, 1995.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data for each of the years in the five-year period
ended September 30, 1995 is incorporated by reference from Page 12 of the
Company's Annual Report to Stockholders for the year ended September 30, 1995.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and
results of operations is incorporated by reference on pages 3 and 4 of the
Company's Annual Report to Stockholders for the year ended September 30, 1995.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Financial statements and supplementary data and the Independent
Auditors' Report is incorporated by reference from pages 5 through 11 of the
Company's Annual Report to Stockholders for the year ended September 30, 1995.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors of the Registrant is incorporated by
reference from information contained in the Proxy Statement for the 1996 Annual
Meeting of Stockholders under the heading "ELECTION OF DIRECTORS" and additional
information is incorporated by reference under the heading "Security Ownership
of Certain Beneficial Owners and Management." Information concerning officers of
the Registrant is included in Part I hereof under the caption "EXECUTIVE
OFFICERS OF THE REGISTRANT."
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the information contained in the Proxy
Statement for the 1996 Annual Meeting of Stockholders under the heading
"EXECUTIVE COMPENSATION."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the information contained in the Proxy
Statement for the 1996 Annual Meeting of Stockholders under the heading
"SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
NONE
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (1) The following documents are included in the Company's Annual
Report to Stockholders for the year ended September 30, 1995:
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Independent Auditors' Report
Balance Sheets - September 30, 1995 and 1994
Statements of Operations - For the Years Ended
September 30, 1995, 1994 and 1993
Statements of Changes in Stockholders' Equity - For the
Years Ended September 30, 1995, 1994 and 1993
Statements of Cash Flows - For the Years Ended
September 30, 1995, 1994 and 1993
Notes to Financial Statements - For the Years Ended
September 30, 1995, 1994 and 1993
With the exception of the financial statements listed above
and the information incorporated by reference herein, the
Annual Report to Stockholders for the fiscal year ended
September 30, 1995, is not to be deemed to be filed as part
of this report.
(a) (2) Exhibits (All items marked with an asterisk are incorporated
by reference from the exhibits to the Registrant's Annual
Report on Form 10-K for the fiscal year ended September 30,
1987; if marked by two asterisks, items are incorporated by
reference from the Registrant's report on Form 8-K, filed
December 7, 1992.)
3.1 Certificate of Incorporation of Mitek Systems of Delaware
Inc. (now Mitek Systems, Inc.), a Delaware corporation, as
amended.*
3.2 Bylaws of Mitek Systems, Inc. as Amended and Restated.*
10.1 License Agreement as of November 25, 1992 by and between HNC,
Inc. and Mitek Systems, Inc.**
13. Annual Report to Stockholders for the year ended September
30, 1995.
23. Independent Auditors' Consent
Upon request, the Registrant will furnish a copy of any of the listed
exhibits for $0.50 per page.
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(b) The following is a list of Current Reports on Form 8-K filed
by the Company during or subsequent to the last quarter of
the fiscal year ended September 30, 1995:
NONE
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: December 15, 1995 MITEK SYSTEMS, INC.
By: /s/
_____________________________
Barbara Hurlstone
Acting Secretary
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Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
/s/ JOHN M. THORNTON December 15, 1995
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John M. Thornton,
Chairman of the Board
/s/ JOHN F. KESSLER December 15, 1995
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John F. Kessler, Director and
President and Chief Executive Officer
(Principal Executive Officer)
/s/ DANIEL E. STEIMLE December 15, 1995
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Daniel E. Steimle, Director
/s/ GERALD FARMER December 15, 1995
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Gerald Farmer, Director
/s/ SALLY B. THORNTON December 15, 1995
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Sally B. Thornton, Director
/s/ JAMES B. DeBELLO December 15, 1995
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James B. DeBello, Director
/s/ JOHN F. KESSLER December 15, 1995
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John F. Kessler
Secretary & Treasurer
(Principal Financial Officer)
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LETTER TO THE SHAREHOLDERS:
At the beginning of the fiscal year, we set the following objectives for
the enrichment of your Company.
. Transform the Company into an imaging software company.
. Aggressively pursue new market opportunities for our products.
. Enhance shareholder value.
My report to you encompasses our progress toward achievement of these
objectives, along with a brief look into the future.
TRANSFORM THE COMPANY INTO AN IMAGING SOFTWARE COMPANY.
In March, 1995, the Company sold the assets of the TEMPEST business segment
to a company which could and would take advantage of the remaining market
demand, while supporting our former TEMPEST customers. The energy and focus of
the Company shifted entirely to imaging products, markets and technology.
The transformation of the Company has been a long process, beginning in
1992 with the acquisition of the core software and technology. This past year,
we have concentrated our efforts on moving the Company to become a provider of
business solutions. Our vision and mission for the ensuing years is simply
stated as "We provide the best in document imaging processing solutions, built
upon our core competency of intelligent recognition technologies, for vertically
and horizontally integrated markets."
We continued to improve the core technology through Company sponsored
research and development contracts that add to our basic understanding of
document imaging. During the year, the Company invested approximately six
engineering man years in these activities, and remains at the forefront of hand
print recognition accuracy.
As a provider of business solutions, the Company must supply more than
recognition technology. Regardless of the product, we satisfy our customers with
enhanced feature sets, easy to use interfaces, and superior support. These
requirements have necessitated a shift in our development activities toward
applications development, all centered around our core imaging software.
AGGRESSIVELY PURSUE NEW MARKET OPPORTUNITIES FOR OUR PRODUCTS.
The change in development activity resulted in the introduction of new
products. Our product plans included enhanced versions of the QuickStrokes API
(Application Programmers Interface), the Premier Forms Processor (PFP), and the
NiF Fax Mail Solution. While we would have preferred earlier introduction dates,
we believe the window of opportunity remains open.
All of our product offerings revolve around the QuickStrokes API, our
character recognition engine. During the fiscal year, we identified key new
accounts for our specialized capability for Courtesy Amount Recognition for
business and personal checks. As a result of a focused program, we were able to
reach agreement with three new accounts, which contributed approximately
$800,000 in new revenue.
During the year, we introduced a software-only version of the API for
Forms, which led to forty-one new integrators purchasing our product for
development of customized applications.
The Premier Forms Processor began shipping in late fiscal 1995. While the
revenue from this product was of small consequence, we anticipate that we will
show substantial revenue growth in fiscal 1996. The need for this product is
evident in many market segments and applications. Our design allows for a
modular, or scalable, product family to fit a wide variety of applications.
The NIF product, as originally envisioned, did not represent a solution
that would capture a large share of the dynamic fax server market. As a "receive
and route" product, it lacked the characteristics of a "fax server", which adds
the "send and direct" capabilities. This would have put the Company at a
competitive disadvantage, as our product would be compared to true fax servers.
As a result, we searched and selected TRACS International as our fax server
partner, and in June completed the acquisition of the Company. This now
positions us to participate in a market that is expected to grow to $1.6 billion
over the next three years.
In summary, the first half of the fiscal year revenue for ADR products was
disappointing, totaling only $1,813,000. The results of our focused efforts
began paying off in the second half of the year, as revenue reached $3,302,000,
an 82% increase, for these products.
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ENHANCE SHAREHOLDER VALUE.
The Company's financial condition improved during the fiscal year,
primarily by reducing the losses and debt, and improving financial ratios. As we
progressed through the year, it was evident that, although we were making
progress in our operating results, the stock market was not aware of, or at a
minimum, not reacting to this progress. The Company began an active investor
relations program to generate awareness of the Company in the financial and
investor communities. Although we are not in a position to predict market
performance, we believe that improved financial conditions, coupled with greater
awareness of the Company, will be reflected in the price of the Company's
securities, the ultimate measurement of shareholder value.
LOOKING FORWARD.
I believe that we have built the foundation of products, marketing, and
sales to achieve the ensuing years objectives of revenue growth, profitability,
and shareholder value. While the Company does not provide forward looking
projections, it is not unreasonable to expect that the growth rate which we
experienced in the last half of 1995 is achievable in 1996. With this growth, we
have positioned the Company's cost structure to achieve profitability levels
appropriate to an imaging software Company. Our challenge is to execute, to
achieve our vision, and implement the strategic direction of the Company.
We appreciate your support.
/s/ John F. Kessler
-------------------------------------
John F. Kessler
President and CEO
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NET SALES in fiscal 1995 decreased 35% to $6,633,000 from fiscal 1994 sales
of $10,163,000. This decrease was attributable to the $3,953,000 decline in the
sales of TEMPEST products, the result of the decline in demand and the sale of
the TEMPEST business segment in March, 1995. This decrease was offset by the
$423,000, or 9%, increase in sales of ADR products.
For fiscal 1994, net sales decreased 22% to $10,163,000 from fiscal 1993
sales of $13,065,000. This decrease was attributable to a decline of $4,681,929
in TEMPEST product sales, offset by an increase of $1,779,409 in ADR sales. The
decrease in TEMPEST sales was the result of the change in the U.S. governments'
policy with respect to the deployment of TEMPEST countermeasures.
COST OF GOODS SOLD, as a percent of sales was 50.2% in fiscal 1995 compared
to 65.5% in fiscal 1994. Cost of goods sold for fiscal 1993 was 73.2%. The
decrease in cost of goods sold, as a percent of sales, in fiscal years 1995 and
1994 was primarily the result of the increase in the mix of ADR software
products sold versus sales of lower margin TEMPEST products. Royalties and
amortization charges resulting from the Data Entry Products (DEP) acquisition in
fiscal years 1995, 1994, and 1993 were $655,000, $753,000, and $693,000,
respectively.
GENERAL AND ADMINISTRATIVE expenses increased to 16.8% of sales in fiscal
1995, and in absolute dollar amounts by $12,000. The increase, when stated as a
percent of sales, was the result of the decrease in revenues. The absolute
spending increase was due to overall spending reductions of approximately
$70,000 offset by approximately $80,000 of expenses incurred in conjunction with
the Company's move to smaller facilities following the sale of the TEMPEST
business segment.
Fiscal 1994 general and administrative costs were 10.9% of sales compared
to 10.6% of sales in fiscal 1993, however decreased in absolute dollar amounts
by $278,000. This decrease was primarily attributable to a $126,000 bad debt
recovery, as well as reduced personnel.
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RESEARCH AND DEVELOPMENT expenses as a percentage of sales were 15.1% in
fiscal 1995 compared 10.1% and 9.1% in fiscal 1994 and 1993, respectively. The
increase, when stated as a percentage of sales, was the result of the decrease
in revenues. In absolute dollar amounts, these expenses decreased $20,000 in
fiscal 1995 and $168,000 in fiscal 1994, the result of an increase in the
amounts charged to cost of goods sold for the sale of contract research
services.
SELLING AND MARKETING in fiscal 1995 were 20.9% of sales compared to 14.9%
and 12.5% of sales in fiscal 1994 and 1993, respectively. The increase, when
stated as a percentage of sales, was the result of the decrease in revenues. In
absolute amounts, selling and marketing expenses decreased $125,000 in fiscal
1995 compared to fiscal 1994 after decreasing $119,000 in fiscal 1994 compared
to 1993. The decrease in fiscal 1995 and 1994 was the result of reduced
personnel costs offset by costs incurred related to the introduction of new ADR
products.
TEMPEST WRITE DOWNS AND ACCRUALS: During September 1994, the Company
determined that the value of certain assets and the benefit of certain
commitments related to the TEMPEST product line had been significantly impaired
due to the continued decline in sales of these products. Accordingly, the
Company recorded a charge of $1,046,000 during the quarter ended September 30,
1994, related to the write down of certain assets to net realizable value and
the accrual of certain obligations for which no future benefit is expected. The
charge was comprised of inventory obsolescence ($816,000), accrual of lease
obligations on a closed facility ($124,000), and other related charges
($106,000).
INTEREST EXPENSE in fiscal 1995 was $67,000 compared with $98,000 in fiscal
1994 and $196,000 in fiscal 1993. The decreases in interest resulted from a
substantial decrease in average interest bearing debt, and to a lesser extent,
from lower interest rates.
OTHER INCOME consists of the gain on the sale of the TEMPEST business, made
up of the following components: Sale price ($350,000) offset by the carrying
cost of inventory sold ($132,000) and costs related to the transaction
($13,000).
INCOME TAXES: In fiscal 1995, the Company recorded an income tax provision
of $800, which represents the minimum state taxes payable. In fiscal 1994 and
1993 the Company recorded an income tax benefit of $223,000 and $6,000,
respectively. Such benefits represent the carryback of net operating losses to
recover taxes paid in fiscal years 1991 and 1990.
NET LOSS: In fiscal 1995, 1994, and 1993 the Company incurred net losses of
$69,000, $1,058,000 and $902,000, respectively.
LIQUIDITY AND CAPITAL RESOURCES: At September 30, 1995, stockholders'
equity was $1,343,000, an increase of $534,000 from $809,000 one year ago. Of
this increase, $481,000 was the result of the Company's undertaking of a private
stock offering in the quarters ending March 31, 1995 and June 30, 1995. The
Company's working capital and current ratio was $602,000 and 1.41, at September
30, 1995, and $153,000 and 1.08, at September 30, 1994. At September 30, 1995,
total liabilities to equity ratio was 1.13 to 1 compared to 2.8 to 1 a year
earlier. As of September 30, 1995, total liabilities were $743,000 less than on
September 30, 1994.
In October 1992, our bank agreed to advance an additional $1,000,000 to be
used to pay for prepaid royalties and support costs in connection with the DEP
acquisition. The $1,000,000 advance was payable in monthly installments of
$20,833 plus interest at prime plus 2% through November 1, 1993, at which time
all unpaid principal and interest were due. On November 19, 1993, the Company
refinanced the then remaining balance of $750,000. Under the refinancing, the
term of the advance was extended to November 1, 1996. The outstanding balance of
the advance was $292,000 as of September 30, 1995.
During fiscal years 1995 and 1994, the Company made payments against
outstanding indebtedness totaling $1,023,000 and $1,254,000, respectively. The
repayment of such indebtedness was funded by cash provided from operating
activities.
In August, 1995, the Company, while seeking conventional credit facilities,
obtained a six month interim credit facility of $650,000 with a financial
institution. Borrowings under the agreement accrue interest at a rate of 3% per
month for amounts advanced against trade accounts receivable, with a minimum
monthly interest charge of $6,500. The borrowings outstanding under this
agreement totaled $195,000 at September 30, 1995.
The Company believes it will have sufficient cash flow from operations and
existing credit facilities to meets its operational needs in the coming year.
-12-
BALANCE SHEETS
YEARS ENDED SEPTEMBER 30, 1995 AND 1994
ASSETS 1995 1994
CURRENT ASSETS:
Cash $ 103,895 $ 99,976
Accounts receivable - net 1,619,886 1,512,373
Note receivable 158,335
Income taxes receivable 238,950
Inventories 131,929 127,117
Prepaid expenses 52,777 72,534
---------- ----------
Total current assets 2,066,822 2,050,950
PROPERTY AND EQUIPMENT - net 131,085 208,683
OTHER ASSETS - Principally prepaid
license/support fees 666,393 813,982
---------- ----------
TOTAL $2,864,300 $3,073,615
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term liabilities $ 267,927 $ 335,662
Note payable - bank 226,875
Amount payable under factoring agreement 195,545
Accounts payable 722,955 570,407
Accrued payroll and related taxes 163,789 202,914
Other accrued liabilities 114,803 562,092
---------- ----------
Total current liabilities 1,465,019 1,897,950
---------- ----------
LONG-TERM LIABILITIES 56,567 366,831
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY:
Common stock - $.001 par value;
20,000,000 shares authorized, 6,913,013
and 6,865,644 issued and outstanding in
1994 and 1993, respectively 7,728 6,913
Additional paid-in capital 3,423,072 2,820,619
Accumulated deficit (2,088,086) (2,018,698)
---------- ----------
Total stockholders' equity 1,342,714 808,834
---------- ----------
TOTAL $2,864,300 $3,073,615
========== ==========
See notes to financial statements.
-13-
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
1995 1994 1993
NET SALES $6,633,176 $10,162,511 $13,065,030
COST OF GOODS SOLD 3,330,109 6,656,394 9,570,523
---------- ----------- -----------
GROSS MARGIN 3,303,067 3,506,117 3,494,507
---------- ----------- -----------
COSTS AND EXPENSES:
General and administrative 1,117,014 1,104,972 1,382,640
Research and development 1,004,131 1,024,321 1,192,069
Selling and marketing 1,388,422 1,513,309 1,632,094
Tempest writedowns and accruals 1,046,394
Interest - net 66,941 97,538 195,823
---------- ----------- -----------
Total costs and expenses 3,576,508 4,786,534 4,402,626
---------- ----------- -----------
OPERATING LOSS (273,441) (1,280,417) (908,119)
OTHER INCOME 204,853
---------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (68,588) (1,280,417) (908,119)
PROVISION (BENEFIT) FOR INCOME TAXES 800 (222,766) (6,265)
---------- ----------- -----------
NET INCOME (LOSS) $ (69,388) $(1,057,651) $ (901,854)
========== =========== ===========
EARNINGS (LOSS) PER SHARE $(0.01) $(0.15) $(0.13)
========== =========== ===========
See notes to financial statements.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
Additional
Common Paid-In Accumulated
Stock Capital Deficit Total
Balance, October 1, 1992 $6,865 $2,772,240 $ (59,193) $ 2,719,912
Net loss (901,854) (901,854)
------ ---------- ----------- -----------
Balance, September 30, 1993 6,865 2,772,240 (961,047) 1,818,058
Issuance of common stock 15 18,735 18,750
Exercise of stock options 33 29,644 29,677
Net loss (1,057,651) (1,057,651)
------ ---------- ----------- -----------
Balance, September 30, 1994 6,913 2,820,619 (2,018,698) 808,834
Issuance of common stock through
private placement for cash 667 475,037 475,704
Issuance of common stock in
connection with Tracs International,
Inc. acquisition (Note 2) 75 78,563 78,638
Exercise of stock options 73 48,853 48,926
Net loss (69,388) (69,388)
------ ---------- ----------- -----------
Balance, September 30, 1995 $7,728 $3,423,072 $(2,088,086) $ 1,342,714
====== ========== =========== ===========
See notes to financial statements.
-14-
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
1995 1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 6,530,318 $10,196,004 $ 13,846,571
Cash paid to suppliers and employees (7,009,961) (8,949,360) (11,492,487)
Interest paid (85,903) (136,120) (183,469)
Income tax refund received 238,150 58,852 185,134
----------- ----------- ------------
Net cash provided by (used in) operating activities (327,396) 1,169,376 2,355,749
----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchases of property and equipment (49,311) (94,434) (237,962)
Acquisition of business (1,800,000)
Proceeds from sale of Tempest 206,665
Proceeds from sale of property 6,045 36,923
----------- ----------- ------------
Net cash used in investing activities 163,399 (57,511) (2,037,962)
----------- ----------- ------------
FINANCING ACTIVITIES:
Proceeds from borrowings 710,339 1,000,000
Repayment of notes payable and long-term liabilities (1,067,053) (1,254,437) (1,168,622)
Proceeds from exercise of stock options 48,926 6,195
Net proceeds from sales of stock 475,704
----------- ----------- ------------
Net cash provided by (used in) financing activities 167,916 (1,248,242) (168,622)
----------- ----------- ------------
NET INCREASE (DECREASE) IN CASH 3,919 (136,377) 149,165
CASH AT BEGINNING OF YEAR 99,976 236,353 87,188
----------- ----------- ------------
CASH AT END OF YEAR $ 103,895 $ 99,976 $ 236,353
----------- ----------- ------------
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net loss $ (69,388) $(1,057,651) $ (901,854)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 423,690 807,912 1,102,980
Gain on sale of Tempest (204,853)
Gain on sale of property and equipment (6,045) (33,409)
Common stock issued as compensation 42,232
Changes in assets and liabilities
Deferred rent (76,064) 38,737 102,255
Accounts receivable 107,513 117,045 960,410
Income taxes receivable 238,950 (238,950)
Inventory, prepaid expenses and other assets (162,534) 1,275,875 1,507,291
Increase (decrease) in accounts payable and
Accounts payable and accrued expenses (410,111) 217,585 (415,333)
----------- ----------- ------------
Net cash provided by (used in) operating activities $ (327,396) $ 1,169,376 $ 2,355,749
=========== =========== ============
See notes to financial statements.
-15-
NOTES TO FINANCIAL STATEMENTS
FOR YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business - Mitek Systems, Inc. (the "Company") is a designer, manufacturer
and marketer of advanced character recognition products for intelligent forms
processing applications ("Character Recognition"). Through March 1995, the
Company was also a systems integrator and value-added reseller of computer
equipment systems to businesses and high-security governmental agencies
("Tempest")(see Note 3).
Basis of Consolidation - The consolidated financial statements include
accounts of Mitek Systems, Inc. and its wholly-owned subsidiary, Mitek Systems
Canada, Incorporated on June 21, 1995. All inter company transactions and
balances are eliminated in consolidation.
Accounts Receivable - Accounts receivable are net of an allowance for
doubtful accounts of $32,953 in 1995 and $19,841 in 1994. The provision for bad
debts was $60,000, $115,895 and $0 for the years ended September 30, 1995, 1994
and 1993, respectively.
Inventories - Inventories are recorded at the lower of cost (on a first-in,
first-out basis) or market. Major classes of inventories at September 30, 1995
and 1994 were as follows:
1995 1994
Raw materials 36,929 $ 69,567
Work-in-process 42,970
Finished goods 52,030 57,550
-------- --------
Total $131,929 $127,117
======== ========
Property and Equipment - Following is a summary of property and equipment
as of September 30, 1995 and 1994:
1995 1994
Property and equipment at cost
Equipment 1,055,877 $2,460,016
Furniture and fixtures 61,772 96,169
Leasehold improvements 52,985 78,094
---------- ----------
1,170,634 2,634,279
Less: accumulated depreciation
and amortization 1,039,549 2,425,596
---------- ----------
Total $ 131,085 $ 208,683
========== ==========
Depreciation and Amortization - Depreciation and amortization of property
and equipment are provided using the straight-line method over estimated useful
lives ranging from three to five years. Depreciation and amortization of
property and equipment totalled $153,691, $352,543, and $410,349 for the years
ended September 30, 1995, 1994, and 1993, respectively. Amortization of prepaid
license/support fees (see Note 2) totaled $270,000, $455,369 and $692,629 for
the years ended September 30, 1995, 1994, and 1993, respectively.
Warranty - The Company accrues a warranty cost for all products sold. At
September 30, 1995 and 1994, other accrued liabilities included an accrued
warranty liability of $19,176 and $44,098, respectively. Warranty expense was
$-0-, $44,429, and $61,000 for the years ended September 30, 1995, 1994, and
1993, respectively.
Revenue Recognition - Revenue from product sales is generally recognized
upon shipment.
Research and Development - Research and development costs are expensed in
the period incurred.
Income Taxes - The provision (benefit) for income taxes for the year ended
September 30, 1993 was computed pursuant to Statement of Financial Accounting
Standards No. 96 (FAS 96) "Accounting for Income Taxes". Effective October 1,
1993, the Company adopted Statement of Financial Accounting Standards No. 109
(FAS 109) "Accounting for Income Taxes," which was used in computing the
provision for income taxes for the years ended September 30, 1994 and 1995 (see
Note 7).
Loss Per Share - Loss per share is based on the weighted average number of
common and common equivalent shares outstanding during the year. Outstanding
stock options are included as common equivalents using the treasury stock method
when the effect is dilutive. The weighted average number of shares used in
determining loss per share was 7,285,788 in 1995; 6,877,425 in 1994; and
6,865,644 in 1993.
Statements of Cash Flows - Significant non-cash investing and financing
activities were comprised of the following:
YEAR ENDED SEPTEMBER 30,
1995 1994 1993
Capital lease obligations
and installment debt
incurred to acquire
property and equipment $107,427
Conversion of deferred
rent to short-term
obligation due to lease
termination (Note 8) $198,762
Note receivable for the sale
of the Tempest product
line and related assets
(Note 3) $350,000
Shares exchanged for the
assets and assumed liabilities
of Tracs International, Inc.
(Note 2) 78,638
2. ACQUISITION
On June 21, 1995, the Company purchased substantially all of the assets and
assumed the liabilities of Tracs International, Inc., a Calgary, Canada based
developer of local area network facsimile servers. The purchase price included
75,000
-16-
unregistered shares of the Company's common stock and a 5% royalty on facsimile
related sales for a maximum period of three years or a maximum amount of
$300,000. Additional issuances of the Company's common shares may occur,
contingent upon the exceeding of certain revenue targeted during a six month
period following release from beta testing of a new product. The purchase
resulted in $136,250 of goodwill, to be amortized over 60 months.
3. SALE OF TEMPEST BUSINESS
On March 17, 1995, the Company sold its Tempest business for $350,000. The
Company recognized a gain on this sale of $204,853 which is recorded as other
income in the consolidated statement of operations.
4. STOCKHOLDERS' EQUITY
Options - The Company has two stock option plans for executives and key
individuals who make significant contributions to the Company. The 1986 plan
provides for the purchase of up to 630,000 shares of common stock through
incentive and non-qualified options. The 1988 plan provides for the purchase of
up to 650,000 shares of common stock through non-qualfied options. For both
plans, options must be granted at fair market value and for a term of not more
than six years. Employees owning in excess of 10% of the outstanding stock are
excluded from the plans.
Information concerning all stock options granted by the Company for the
years ended September 30, 1995, 1994 and 1993 is as follows:
Shares Price Range
Balance, September 30, 1992 755,834 .656 - 2.250
Granted 121,000 .670 - 1.063
Cancelled (4,500) .670 - 1.560
--------
Balance, September 30, 1993 872,334 .656 - 2.250
Granted 357,500 1.160 - 1.340
Exercised (32,369) .656 - 1.810
Cancelled (404,465) .656 - 2.250
--------
Balance, September 30, 1994 793,000 .656 - 2.250
Granted 81,000 1.09 - 1.250
Exercised (72,947) .656 - 1.158
Cancelled (245,553) .656 - 2.250
--------
Balance, September 30, 1995 555,500 $.656 - $2.250
========
At September 30, 1995, options for 281,991 and 172,973 shares remained
available for granting under the 1986 and 1988 stock option plans, respectively.
At September 30, 1995, options for 291,597 shares were exercisable.
Sale of Common Stock - The Company undertook a private placement stock
offering during the second and third quarters of 1995 in which 666,999 shares of
common stock were issued, with net proceeds of $475,704.
5. NOTES PAYABLE - BANK
At September 30, 1994, the Company had $226,875 outstanding on a note
payable to a bank at an interest rate of 8.75%. The original note payable was
paid-off in full during 1995.
In October 1992, the bank agreed to advance an additional $1,000,000. The
$1,000,000 advance was payable in monthly installments of $20,833 plus interest
at prime plus 2% through November 1, 1993, at which time all unpaid principal
and interest were due. On November 19, 1993, the Company refinanced the then
remaining balance of $750,000. Under the refinancing, the term of the advance
was extended to November 1, 1996. The outstanding balance of the advance was
$291,667 and $541,667 as of September 30, 1995 and 1994, respectively.
Under the above term loan, the Company was required to maintain a minimum
net worth of $500,000 in addition to certain other financial ratios, and all of
the Company's existing or hereafter acquired assets are pledged to collateralize
these notes. The Company's principal investor may be required to advance funds
to the Company to maintain the net worth and other financial ratios stipulated
under the agreements. As of September 30, 1995, the Company was in compliance
with all the financial ratio requirements.
6. FACTORING AGREEMENT
In September 1995, the Company entered into a receivable factoring
agreement with a finance company. Under the agreement, the finance company
agreed to purchase receivables from the Company up to a maximum of $650,000. The
finance fee is calculated by taking 10% of the gross face value of the purchased
receivables for every 10 day period from the date the receivables are
transferred until such receivables are collected, subject to a minimum finance
fee of $6,500 per month. Such agreement expires in March 1996 and is renewable
at the option of the Company for six-month terms. At September 30, 1995 the
Company factored receivable balance was approximately $196,000.
7. INCOME TAXES
For the years ended September 30, 1995, 1994 and 1993, the Company's
provision (benefit) for income taxes was as follows:
1995 1994 1993
Federal - current $(227,000) $(7,065)
State - current $800 4,234 800
---- --------- -------
Total $800 $(222,766) $(6,265)
==== ========= =======
The federal benefit for fiscal years 1994 and 1993 represents the carryback
of net operating losses to recover taxes paid in prior periods.
Effective October 1, 1993, the Company adopted Statement of Financial
Accounting Standards (FAS) No. 109, "Accounting for Income Taxes". This
Statement supersedes FAS No. 96, which had been in use by the Company. There was
no material cumulative effect of adopting FAS No. 109 and no material effect on
the effective tax rate for fiscal 1994.
There was no provision for deferred income taxes in 1995, 1994 or 1993.
Under FAS No. 109, deferred income tax liabilities and assets reflect the net
tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's net deferred tax liabilities
and assets as of September 30, 1995 and 1994 are as follows:
-17-
1995 1994
Deferred tax assets:
Reserves not currently deductible $ 21,000 $ 610,000
Book depreciation and amortization
in excess of tax 108,000 161,000
Research credit carryforwards 529,000 360,000
Net operating loss carryforwards 838,000 46,000
Capitalized research and development costs 24,000 27,000
Other 148,000 86,000
----------- -----------
Total deferred tax assets 1,668,000 1,290,000
Valuation allowance for net deferred
tax assets (1,668,000) (1,290,000)
----------- -----------
Total $ 0 $ 0
=========== ===========
The Company has provided a valuation allowance against deferred tax assets
recorded as of September 30, 1995 and 1994 due to uncertainties regarding the
realization of such assets.
The research credit and net operating carryforwards expire during the years
2004 and 2010.
The differences between the provision (benefit) for income taxes and income
taxes computed using the U.S. federal income tax rate were as follows for the
years ended September 30:
1995 1994 1993
Amount computed using statutory
rate (34%) $ (23,320) $(435,342) $(308,760)
Increase in valuation reserve for
deferred tax assets 192,320 203,829
Temporary differences:
Accrued expenses not deductible
until paid (169,000) - 285,970
Deductible expenses accrued in
financial statements of prior
years - (24,893)
Depreciation - 41,383
Non deductible items 4,513 3,539
Other - (4,304)
State income taxes 800 4,234 800
--------- --------- ---------
Provision (benefit) for
income taxes $ 800 $(222,766) $ (6,265)
========= ========= =========
8. LONG-TERM LIABILITIES
As of September 30, 1995 and 1994, long-term liabilities were as follows:
1995 1994
Capital lease obligations (see Note 9) $ 31,831 $ 83,766
Deferred rent payable (see Note 9) 996 77,060
Notes payable - bank (see Note 5) 291,667 768,542
--------- ---------
324,494 929,368
Less current portion (267,927) (562,537)
--------- ---------
Total $ 56,567 $ 366,831
========= =========
9. COMMITMENTS AND CONTINGENCIES
Leases - The Company's offices and manufacturing facilities are leases
under non-cancellable operating leases. The primary facilities lease expires
April 30, 1998, at which time the lease is renewable at current market rates.
For financial statement purposes, the lease payments are expensed over the lease
term.
In addition, the following property and equipment is leased under
non-cancellable capital leases as of September 30, 1995 and 1994:
1995 1994
Equipment $ 131,751 $ 464,589
Furniture and fixtures 30,738
Leasehold improvements 5,928
--------- ---------
133,751 501,255
Less accumulated amortization (100,274) (444,631)
--------- ---------
Total $ 33,477 $ 56,624
========= =========
Future annual minimum rental payments under non-cancellable leases are as
follows:
OPERATING CAPITAL
LEASES LEASES
Year Ending September 30:
1996 119,135 21,865
1997 130,213 11,220
1998 84,228 4,993
1999 2,153
======== =======
Total $335,729 $38,078
Less amount representing interest 6,247
-------- -------
Present value of minimum lease payments $335,729 $31,831
======== =======
Rent expense for operating leases for the years ended September 30, 1995,
1994 and 1993 totalled $62,509, $480,996 and $466,287, respectively.
10. PRODUCT REVENUES AND SALES CONCENTRATIONS
Product Revenues - During fiscal years 1995 and 1994 the Company's revenues
were derived primarily from two product lines: Character Recognition and
Tempest. Prior to fiscal 1993, the Company's revenues were generated solely from
Tempest products. Revenues by product line, as a percentage of net sales, are
summarized as follows:
YEAR ENDED SEPTEMBER 30,
1995 1994
Tempest 22% 54%
Character recognition 74% 45%
Other 4% 1%
Sales Concentrations - For the years ended September 30, 1995, 1994 and
1993, the Company had the following sales concentrations:
1995 1994 1993
U.S. government and its agencies
o Percent of total sales 16% 11% 12%
Non-governmental customers to which
sales were in excess of 10% of total sales
o Number of customers 2 1 2
o Aggregate percentage of sales 25% 21% 45%
Foreign Sales - primarily Europe 21% 13% 23%
-18-
INDEPENDENT AUDITORS' REPORT
Mitek Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Mitek
Systems, Inc. (the "Company") as of September 30, 1995 and 1994, and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for each of the three years in the period ended September 30, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
at September 30, 1995 and 1994, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 1995, in
conformity with generally accepted accounting principles.
San Diego, California
November 10, 1995
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-33888 of Mitek Systems, Inc. on Form S-8 of our report dated November 10,
1995 appearing in the Annual Report on Form 10-K of Mitek Systems, Inc. for the
year ended September 30, 1995.
San Diego, California
-19-
OFFICERS AND DIRECTORS
CORPORATE OFFICE
Mitek Systems, Inc.
10070 Carroll Canyon Rd.
San Diego, California 92131
(619) 635-5900
REGIONAL OFFICES
109 Carpenter Dr., Ste 120
Sterling, Virginia 20164
10655 Southport Rd S.W., Ste 560
Calgary, Alberta T2W 4Y
CORPORATE OFFICERS
John M. Thornton, Chairman
John F. Kessler, President and Chief Financial Officer
Gerald I. Farmer, Ph.D., Executive Vice President and
General Manager - ADR Group
TRANSFER AGENT
Chemical Mellon Shareholder Service
300 South Grand Avenue, Los Angeles, California 90071
AUDITORS
Deloitte & Touche
701 B Street, Suite 1900, San Diego, California 92101
DIRECTORS
John M. Thornton (1), (2), Chairman
Sally B. Thornton (1), (2), Investor
John F. Kessler, President and Chief Executive Officer, Mitek Systems, Inc.
Daniel E. Steimle (1), Vice President and Chief Financial Officer,
Advanced Fibre Communications
James B. DeBello (2), President, Solectek Corporation
Gerald I. Farmer, Ph.D., Executive Vice President and General Manager -
ADR Group, Mitek Systems, Inc.
NOTES
(1) Audit Committee
(2) Compensation Committee
COMMON STOCK MARKET
PRICE RANGE (1)
FISCAL QUARTER 1995 1994
LOW HIGH LOW HIGH
1st .813 1.25 1.063 1.313
2nd .875 1.375 1.063 1.625
3rd .938 1.188 .938 1.688
4th 1.063 1.688 .938 1.188
(1) Bid quotations compiled by National Association of Securities Dealers, Inc.,
represents inter-dealer quotations and not necessarily actual transaction.
STOCKHOLDERS
As of 11-30-95, there were 1439 holders of record of Mitek Systems, Inc. Common
Stock.
DIVIDENDS
Mitek Systems, Inc. has paid no cash dividends on its common stock since its
incorporation and currently intends to retain all earnings for use in its
business. Payment of dividends is restricted by the terms of outstanding debt
obligations.
FORM 10-K REPORT
Copies of the Company's Form 10-K report to the Securities and Exchange
Commission, are available free to stockholders and may be obtained by writing or
calling Secretary, Mitek Systems, Inc., 10070 Carroll Canyon Road, San Diego,
CA 92131, phone (619) 635-5900.
[LOGO OF MITEK SYSTEMS, INC.]
10070 Carroll Canyon Road
San Diego, CA 92131
(800) 350-0661
Fax: (619) 635-5908
http://www.miteksys.com
FINANCIAL HIGHLIGHTS
($000 except per share data)
1995 1994 1993 1992 1991
Sales $6,633 $10,163 $13,065 $18,464 $26,988
Net income (loss) (69) (1,058) (902) 41 869
Earnings (loss) per share (.01) (.15) (.13) .01 .13
Total assets 2,864 3,074 5,081 6,257 12,155
Long-term debt 57 367 526 1,284 2,284
Stockholders' equity 1,343 809 1,818 2,720 2,678
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MITEK SYSTEMS, INC.
INDEX TO EXHIBITS
EXHIBIT SEQUENTIALLY
NO. EXHIBIT NUMBERED PAGE
3.1 Certificate of Incorporation of Mitek Systems *
of Delaware, Inc. (now Mitek Systems, Inc.),
a Delaware corporation, as amended.
3.2 Bylaws of Mitek Systems, Inc. as Amended and *
Restated.
10.1 License Agreement as of November 25, 1992 **
by and between HNC, Inc. and Mitek Systems, Inc.
13. Annual Report to Stockholders for the year 11
ended September 30, 1995.
23 Independent Auditors' Consent 19
* Incorporated by reference from the exhibits to Registrant's Annual Report
on Form 10-K for the fiscal year ended September 30, 1987.
** Incorporated by reference from the exhibits to Registrant's Report on
Form 8-K, filed December 7, 1992.
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