LETTER TO THE SHAREHOLDERS:
The Company's performance for the twelve months ended September 30, 1997
did not meet plan. The many positive developments were overshadowed by the
financial results, pointing to the need for change.
Financial Position - Although the financial results were below our
expectations, the overall financial position of the Company remains adequate.
The secondary offering completed late in 1996 has provided us with the capital
to fund the growth expected in the current fiscal year. Our anticipated cash
needs should be funded through operations.
Delays in OEM Business - The primary cause of the shortfall in fiscal 1997
revenue was due to delays in our OEM business, primarily the QuickStrokes API
for financial documents. Although the reasons varied from customer to customer,
we can confidently report that no business was lost to a competitor. We fully
expect this business will accelerate in the current fiscal year, however, there
is no guarantee that new delays will not materialize.
Acquisition - We completed the acquisition of Technology Solutions, Inc.
("TSI") late in the fiscal year. This strategic action, having long been a major
portion of our future growth strategies, gives us the ability to address the
large integrator market as well as certain end user applications. This
acquisition brings an added level of expertise in the forms processing market
along with application development expertise. Several new products, developed by
TSI, will allow us to address additional markets with proven technology as well
as increase our average sales price because of the large services content which
accompanies each sale.
New Products - The QuickModules product, a customizable, modular forms
processing product brought to us with the TSI acquisition is rapidly becoming
the product choice for integrators and end users. This product, in use in high
volume production environments, incorporates the finest features of both the
QuickStrokes recognition engine as well as technologies developed by TSI.
The CheckScript product, used in financial document processing, combines
the Legal Amount Recognition (LAR) capabilities of our strategic alliance with
Parascript LLC with our QuickStrokes Courtesy Amount Recognition (CAR)
technology. This product provides unprecedented accuracy in remittance
processing, proof of deposit and lock box processing applications.
The QuickRemit and QuickDeposit products, developed by TSI, are high speed
automated remittance processing and proof of deposit software packages which
feature both a recognition module (providing both CAR and LAR capabilities) as
well as a key from image module.
The Automated Fax Payroll product, a derivative of the Premier Forms
Processor (PFP), is targeted to fit the back office processing needs of third
party payroll processors.
1
Product Development - The efforts of the product development teams were
concentrated on the core technology as well as improved versions of application
software. Two major releases of the QuickStrokes character recognition engine
incorporated several major enhancements, while the PFP development team added
features required for a highly competitive product. Simultaneously, the PFP team
has been porting the software to a native 32 bit version, the platform of choice
in today's environment.
Competition - The company has maintained its competitive edge by investing
in research and entering into strategic alliances. We will continue this
investment in the future, as all of our products incorporate these core
technologies.
Management Change - The Board of Directors determined that the Company
needed to institute a change in senior management and we are proud to announce
that Elliot Wassarman has been appointed to the position of President and Chief
Executive Officer, as well as a Director, effective January 5, 1998. Mr.
Wassarman has held similar positions in private and public technology and
software industry related companies as well as various senior sales and
marketing roles during his career.
Goals for the Future - The goals for the fiscal year beginning October 1,
1997 and beyond are to resume the revenue growth, return the company to
profitability, and increase stockholder value. I believe that the markets which
we serve are experiencing good growth and that with excellent execution, these
goals are achievable.
We appreciate your continued support.
John M. Thornton
Chairman of the Board
2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NET SALES were $4,842,000, $8,154,000 and $6,633,000, for fiscal 1997,
1996, and 1995, respectively. The decrease in net sales in Fiscal 1997 compared
to Fiscal 1996 was the result of delayed business of certain OEMs and systems
integrators, combined with the increase in software only sales versus
hardware/software sales which carry a higher average selling price. The increase
in net sales in Fiscal 1996 compared to Fiscal 1995 was primarily due to an
increase in the number of systems integrators and OEMs selling the Company's ADR
products.
GROSS MARGIN was $2,665,000, $5,371,000, and $3,303,000, for the fiscal
years 1997, 1996, and 1995, respectively. Stated as a percentage of net sales,
gross margin for the corresponding periods was 55%, 66%, and 50%, respectively.
The fluctuations in gross margins are the result of the sales mix, combined with
amortization of prepaid licenses and goodwill.
GENERAL AND ADMINISTRATIVE expenses were $1,428,000, $1,186,000 and
$1,117,000 for fiscal years 1997, 1996, and 1995, respectively. Stated as a
percentage of net sales, general and administrative expenses for the
corresponding periods were 29%, 15%, and 17%, respectively. The increase in
fiscal 1997, in terms of percentage of net sales was attributable primarily to
the decrease in net sales, additional costs related to directors and officers
liability insurance, and bad debt increases. The decrease, as a percent of net
sales in fiscal 1996 compared to fiscal 1995 was the result of the increase in
net sales for the corresponding period.
RESEARCH AND DEVELOPMENT expenses were $1,393,000, $1,314,000 and
$1,004,000 for fiscal 1997, 1996, and 1995, respectively. Stated as a percentage
of net sales, research and development expenses for the corresponding periods
were 29%, 16%, and 15%, respectively. The increase in terms of absolute amounts
in fiscal 1997 versus fiscal 1996 reflects the costs associated with the
engineering staff increases as a result of the acquisition of Technology
Solutions, Inc. The increase in research and development expenses as a
percentage of net sales in fiscal 1997, 1996 and 1995, were primarily due to the
Company devoting an increasing portion of its resources to the development and
enhancement of its ADR technologies.
SELLING AND MARKETING expenses were $2,102,000, $1,414,000 and $1,388,000
for fiscal 1997, 1996 and 1995, respectively. Stated as a percentage of net
sales, selling and marketing expenses for the corresponding periods were 43%,
17% and 21%, respectively. The increase in selling and marketing expenses as a
percentage of net sales in the current year is attributable to the decrease in
net sales, increased marketing and promotional expenses, and staff additions. In
the prior periods, sales and marketing expense as a percentage of net sales were
lower than in the current year due to an increase in net sales in those periods.
NET INTEREST (INCOME) EXPENSE was $(94,000), $91,000 and $67,000 for fiscal
1997, 1996 and 1995, respectively. Stated as a percentage of net sales, net
interest expense for the corresponding periods was (2)%, 1% and 1%,
respectively. The net change in interest expense in
3
fiscal 1997 is primarily the result of invested funds received from the
secondary public offering, combined with no bank borrowings. The interest
expense in the prior years reflect borrowings from a factoring institution and
bank, respectively.
OTHER INCOME (EXPENSE) in fiscal 1997 consists of a reserve in the amount
of $175,000 for claims asserted against the company by the purchaser of the
TEMPEST business in March, 1995, as well as the write off of purchased research
and development costs in the amount of $229,000. Other income in fiscal 1995
consists of the gain on the sale of the TEMPEST business, made up of the
following components: sales price ($350,000) offset by the carrying cost of
inventory sold ($132,000) and costs related to the transaction ($13,000).
INCOME TAXES: For fiscal 1997, the Company did not record an income tax
provision or (benefit) for income taxes. For fiscal 1996, the Company recorded
an income tax provision of $137,000. For 1995, the Company recorded $800, which
represented the minimum state taxes payable.
NET INCOME (LOSS) In fiscal 1997, the Company recorded a net loss of
$2,566,000 versus net income of $1,229,000 in fiscal 1996. In fiscal 1995 the
Company incurred a net loss of $69,000.
LIQUIDITY AND CAPITAL RESOURCES: On September 30, 1997, stockholders'
equity was $5,751,000, an increase of $3,099,000 from $2,652,000 one year ago.
The Company's working capital and current ratio were $3,278,000 and 3.32,
respectively, on September 30, 1997 and $1,876,000 and 2.70, respectively, on
September 30, 1996. On September 30, 1997, total liabilities to equity ratio was
.25 to 1 compared to .42 to 1 a year earlier. On September 30, 1997, total
liabilities were $327,000 greater than on September 30, 1996.
In March, 1996, the Company established a $400,000 line of credit with
Rancho Santa Fe Bank ("Bank") for working capital purposes. Borrowings under
this line bear interest at the rate of 1 1/12% over the Bank's Prime Rate and
the line of credit currently expires on February 3, 1998. The line of credit is
secured by a lien on substantially all of the Company's assets. There were no
borrowings against the line of credit on September 30, 1997.
During fiscal years 1997 and 1996, the Company made payments against
outstanding indebtedness totaling $159,000 and $2,302,000, respectively. The
repayment of such indebtedness was funded by cash provided from financing and
operating activities.
The Company believes that together with existing cash, credit available
under the credit line, cash generated from operations, along with net proceeds
from its secondary offering in November, 1996, will be sufficient to finance its
operation for the next twelve months. All cash in excess of working capital
requirements will be kept in short term, investment grade securities.
4
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND 1996
ASSETS 1997 1996
CURRENT ASSETS
Cash and cash equivalents $1,261,117 $ 210,413
Accounts receivable - net 2,363,028 2,158,541
Note receivable 502,031 100,000
Inventories 415,973 278,206
Prepaid expenses and other assets 151,705 232,643
-------------------------------
Total current assets 4,693,854 2,979,803
PROPERTY AND EQUIPMENT - net 205,013 146,888
OTHER ASSETS 2,289,428 635,751
-------------------------------
TOTAL $7,188,295 $3,762,442
-------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $485,855 $472,755
Accrued payroll and related taxes 272,603 302,037
Other accrued liabilities 652,440 319,973
Current portion of long-term liabilities 4,706 9,190
--------------------------------
Total current liabilities 1,415,604 1,103,955
--------------------------------
LONG-TERM LIABILITIES 21,761 6,147
--------------------------------
Total liabilities 1,437,365 1,110,102
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY
Common stock - $001 par value; 20,000,000
shares authorized, 11,537,009 and
7,782,971 issued and outstanding in 1997
and 1996, respectively 11,537 7,783
Additional paid-in capital 9,164,589 3,503,634
Accumulated deficit (3,425,196) (859,077)
---------------------------------
Total stockholders' equity 5,750,930 2,652,340
---------------------------------
TOTAL $ 7,188,295 $3,762,442
---------------------------------
See notes to consolidated financial statements.
5
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
1997 1996 1995
NET SALES $4,841,555 $8,153,628 $6,633,176
COST OF SALES 2,176,115 2,782,204 3,330,109
-------------------------------------------
GROSS MARGIN 2,665,440 5,371,424 3,303,067
-------------------------------------------
COSTS AND EXPENSES:
General and administrative 1,427,525 1,186,170 1,117,014
Research and development 1,392,817 1,313,951 1,004,131
Selling and marketing 2,101,615 1,414,125 1,388,422
Interest (income) expense - net (93,910) 91,344 66,941
-------------------------------------------
Total costs and expenses 4,828,047 4,005,590 3,576,508
-------------------------------------------
OPERATING INCOME (LOSS) (2,162,607) 1,365,834 (273,441)
OTHER INCOME (EXPENSE) (403,512) 204,853
-------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (2,566,119) 1,365,834 (68,588)
PROVISION FOR INCOME TAXES 136,825 800
--------------------------------------------
NET INCOME (LOSS) $(2,566,119) $1,229,009 $ (69,388)
--------------------------------------------
NET INCOME (LOSS) PER SHARE $(0.25) $0.15 ($0.01)
--------------------------------------------
See notes to consolidated financial statements.
6
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
Common Additional Accumulated
Stock Paid-In Capital Deficit Total
Balance, September 30, 1994 $6,913 $2,820,619 $(2,018,698) $ 808,834
Issuance of common stock for cash, net of costs 667 475,037 475,704
Issuance of common stock in connection
with Tracs International, Inc., acquisition
(Note 2) 75 78,563 78,638
Exercise of stock options 73 48,853 48,926
Net loss (69,388) (69,388)
--------------------------------------------------------------------
Balance, September 30, 1995 7,728 3,423,072 (2,088,086) 1,342,714
Stock warrants issued for services rendered 17,131 17,131
Exercise of stock options 45 48,441 48,486
Exercise of warrants 10 14,990 15,000
Net income 1,229,009 1,229,009
--------------------------------------------------------------------
Balance, September 30, 1996 7,783 3,503,634 (859,077) 2,652,340
Issuance of common stock for cash, net of costs 2,250 4,087,066 4,089,316
Exercise of stock options 34 38,688 38,722
Exercise of warrants 20 29,980 30,000
Issuance of common stock in connection with
acquisition and investment (Notes 2 and 10) 1,450 1,505,221 1,506,671
Net loss (2,566,119) (2,566,119)
--------------------------------------------------------------------
Balance, September 30, 1997 $11,537 $9,164,589 $(3,425,196) $ 5,750,930
--------------------------------------------------------------------
See notes to consolidated financial statements.
7
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
1997 1996 1995
OPERATING ACTIVITIES
Net income (loss) $(2,566,119) $ 1,229,009 $ (69,388)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 680,370 420,194 430,598
Gain on sale of TEMPEST (204,853)
Write-off of IID investment 228,512
(Gain) loss on sale of property and equipment (140) 2,822 (6,045)
Changes in assets and liabilities:
Accounts and notes receivable (606,518) (638,655) (96,813)
Income taxes receivable 238,950
Inventories, prepaid expenses, and other assets (757,846) (590,959) (133,670)
Accounts payable and accrued expenses 313,535 110,786 (486,175)
-------------------------------------------------
Net cash provided by (used in) operating activities (2,708,206) 533,197 (327,396)
-------------------------------------------------
INVESTING ACTIVITIES
Purchases of property and equipment (150,079) (143,361) (49,311)
Proceeds from sale of TEMPEST 206,665
Acquisition of Technology Solutions, Inc. - net (240,000)
Proceeds from note receivable 158,335
Proceeds from sale of property and equipment 140 6,045
-------------------------------------------------
Net cash provided by (used in) investing activities (389,939) 14,974 163,399
-------------------------------------------------
FINANCING ACTIVITIES
Proceeds from borrowings 150,000 1,796,816 710,339
Repayment of notes payable and long-term liabilities (159,189) (2,301,955) (1,067,053)
Proceeds from exercise of stock options and warrants 68,722 63,486 48,926
Net proceeds from sales of stock 4,089,316 475,704
-------------------------------------------------
Net cash provided by (used in) financing activities 4,148,849 (441,653) 167,916
-------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,050,704 106,518 3,919
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 210,413 103,895 99,976
-------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $1,261,117 $ 210,413 $ 103,895
-------------------------------------------------
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW INFORMATION
Cash paid for interest $ 3,165 $101,377 $ 85,662
-------------------------------------------------
Income tax refund received $30,185 $ 2,712 $279,903
-------------------------------------------------
Cash paid for income taxes $13,500 $ 21,263 $ 2,737
-------------------------------------------------
Effects of acquisition:
Fair value of assets acquired $1,077,857
Value of stock issued (837,857)
-------------------------------------------------
Net cash paid for acquisition $ 240,000
-------------------------------------------------
See notes to consolidated financial statement
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
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, Inc., incorporated on June 21, 1995. All intercompany transactions and
balances are eliminated in consolidation.
Cash and Cash Equivalents - Cash equivalents are defined as highly liquid
financial instruments with original maturities of three months or less. A
substantial portion of the Company's cash and cash equivalents is deposited with
one financial institution. The Company monitors the financial condition of the
financial institution and does not believe that the deposit is subject to a
significant degree of risk.
Accounts and Notes Receivable - Accounts receivable are net of an allowance
for doubtful accounts of $181,000 and $91,146 on September 30, 1997 and 1996,
respectively. The provision for bad debts was $210,556, $99,500 and $60,000 for
the years ended September 30, 1997, 1996 and 1995, respectively.
Inventories - Inventories are recorded at the lower of cost (on a first-in,
first-out basis) or market. Major classes of inventories on September 30, 1997
and 1996 were as follows:
1997 1996
Raw materials $ 75,082 $ 55,366
Finished goods 340,891 222,840
---------------------------------------------
Total $415,973 $278,206
---------------------------------------------
9
Property and Equipment - Following is a summary of property and equipment
as of September 30, 1997 and 1996.
1997 1996
Property and equipment - at cost
Equipment $1,034,707 $ 937,560
Furniture and fixtures 62,430 59,136
Leasehold improvements 52,985 52,985
------------------------------------------
1,150,122 1,049,681
Less: accumulated depreciation and
amortization 945,109 902,793
------------------------------------------
Total $ 205,013 $ 146,888
------------------------------------------
Other Assets - Other assets consisted of the following at September 30,
1997 and 1996:
1997 1996
Goodwill - net $1,071,790 $106,963
Prepaid license/support fees - net 531,534 519,097
Investment in Parascript 668,814
Other - net 17,290 9,691
------------------------------------------
Total $2,289,428 $635,751
------------------------------------------
The Company monitors events or changes in circumstances that may indicate
that the carrying amount of goodwill and intangible assets may not be
recoverable. If these factors indicate that such asset is not recoverable, as
determined based upon undiscounted cash flows before interest charges of the
asset over the remaining amortization period, the carry value of the asset will
be reduced.
Depreciation and Amortization - Depreciation and amortization of property
and equipment and prepaid license/support fees and goodwill are provided using
the straight-line method over estimated useful lives ranging from two to five
years. Depreciation and amortization of property and equipment totaled $127,622,
$124,736 and $153,691 for the years ended September 30, 1997, 1996, and 1995,
respectively. Amortization of other assets, primarily goodwill and prepaid
license/support fees, totaled $781,260, $295,458 and $276,908 for the years
ended September 30, 1997, 1996 and 1995, respectively.
Warranty - The Company accrues a warranty cost for all products sold. On
September 30, 1997 and 1996, other accrued liabilities included an accrued
warranty liability of $10,000 and
10
$55,000, respectively. Warranty expense was $18,814, $2,642 and $-0- for the
years ended September 30, 1997, 1996 and 1995, respectively.
Revenue Recognition - The Company recognizes revenues in accordance with
the American Institute of Certified Public Accountants Statement of Position No.
91-1, Software Revenue Recognition. Accordingly, software product revenues are
recognized upon shipment if collection is probable and the Company's remaining
obligations are insignificant. Product maintenance revenues are amortized over
the length of the maintenance contract which is usually twelve months.
Research and Development - Research and development costs are expensed in
the period incurred.
Income Taxes - The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes", which requires the use of the liability method for deferred income taxes
(see Note 6). There was no material cumulative effect of adopting FAS No. 109.
Income (Loss) Per Share - Income (loss) per share is based on the weighted
average number of common and common equivalent shares outstanding during the
year. Outstanding stock options are included as common equivalents using the
treasury stock method when the effect is dilutive. The weighted average number
of common shares and common stock equivalents used in determining income (loss)
per share was 10,356,318 in 1997; 8,202,753 in 1996; and 7,285,788 in 1995.
Statements of Cash Flows - Significant non-cash investing and financing
activities were comprised of the following:
Year ended September 30
1997 1996 1995
Shares exchanged for the assets of
Technology Solutions, Inc. (Note 2) $837,857
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 for TRACS
International, Inc. (Note 2) (76,638)
Shares exchanged for investment in
Parascript LLC (Note 10) $668,814
11
Accounting Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and contingencies at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results may differ from those estimates.
New Accounting Standards - In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation", which was effective for the
Company beginning October 1, 1996 (Note 4). SFAS No. 123 requires expanded
disclosures of stock-based compensation arrangements with employees and
encourages (but does not require) compensation cost to be measured based on the
fair value of the equity instrument awarded. Corporations are permitted,
however, to continue to apply Accounting Principles Board ("APB) Opinion No. 25,
which recognizes compensation cost based on the intrinsic value of the equity
instrument awarded. The Company has continued to apply APB Opinion No. 25 to its
stock-based compensation awards to employees and has disclosed the required pro
forma effect on net income (loss) and income (loss) per share.
The FASB issued SFAS No. 128, "Earnings per Share" ("SFAS 128") (Note 4) in
March 1997, effective for financial statements issued for periods ending after
December 15, 1997. The statement provides simplified standards for the
computation and presentation of earnings per share ("EPS"), making EPS
comparable to international standards, SFAS 128 requires dual presentation of
"Basic" and "Diluted" EPS, by entities with complex capital structures,
replacing "Primary" and "Fully Diluted" EPS under APB Opinion No. 15. The
Company does not expect the adoption of SFAS No. 128 to have a material effect
on its net income (loss) per share.
Reclassifications - Certain prior years' balances have been reclassified to
conform to the 1997 presentation.
2. ACQUISITIONS
On June 21, 1995, the Company purchased substantially all of the assets and
assumed the liabilities of Tracs International, Inc., a Calgary, Canada based
developer of local area network facsimile servers. The purchase price included
75,000 unregistered shares of the Company's common stock and a 5% royalty on
facsimile related sales for a maximum period of three years or a maximum amount
of $300,000. Additional issuances of the Company's common shares may occur,
contingent 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.
On October 11, 1996, the Company purchased certain technologies from
Instant Information Deutschland (IID), a Munich, Germany based value-added
distributor of Mitek Networks. The purchase price was $257,000; $87,000 payable
in cash and the relief of all debt owed to Mitek by IID in the amount of
$170,000. As part of the purchase, the Company has exclusive licensing rights to
12
use copyrights associated with the purchased technology. The licensing rights
are freely transferable, worldwide and royalty-free. The licensing rights'
carrying value of $228,512 was written-off in fiscal 1997.
On June 3, 1997, the Company purchased substantially all of the assets of
Technology Solutions, Inc., a Chantilly, Virginia based software developer and
solution provider of document image processing systems. The purchase price
consisted of 685,714 unregistered shares of the Company's common stock valued at
$837,857 and a $240,000 cash payment. The purchase resulted in $1,065,107 of
goodwill, to be amortized over 60 months.
3. SALE OF TEMPEST BUSINESS
On March 17, 1995, the Company sold its Tempest business for $350,000. The
Company recognized a gain on this sale of $204,853 which is recorded as other
income in the consolidated statement of operations.
4. STOCKHOLDERS' EQUITY
Options - The Company has two stock option plans for executives and key
individuals who make significant contributions to the Company. The 1986 plan
provides for the purchase of up to 630,000 shares of common stock through
incentive and non-qualified options. The 1988 plan provides for the purchase of
up to 650,000 shares of common stock through non-qualified options. For both
plans, options must be granted at fair market value and for a term of not more
than six years. Employees owning in excess of 10% of the outstanding stock of
the Company are excluded from the plans. The 1986 plan expired on September 8,
1996. A 1996 Stock Option Plan replaced the expired plan. The 1996 plan provides
for the purchase of up to 1,000,000 shares of common stock through incentive and
non-qualified options. Remaining terms are the same as the expired plan.
13
Information concerning all stock options granted by the Company for the
years ended September 30, 1997, 1996 and 1995 is as follows:
Shares Price Range
Balance, September 30, 1994 793,000 .656 - 2.250
Granted 81,000 1.090 - 1.250
Exercised (72,947) .656 - 1.159
Canceled (245,553) .656 - 2.250
--------------------------------------
Balance, September 30, 1995 555,500 .656 - 2.250
Granted 292,250 1.375 - 3.680
Exercised (45,012) .670 - 1.380
Canceled (61,154) 1.219 - 2.750
--------------------------------------
Balance, September 30, 1996 741,584 .656 - 2.250
Granted 630,250 1.030 - 3.375
Exercised (34,402) .656 - 1.438
Canceled (359,766) 1.219 - 3.750
--------------------------------------
Balance, September 30, 1997 977,666 $ .656 - 3.750
--------------------------------------
The weighted average remaining contractual life was 3.77 years for the
outstanding stock options at September 30, 1997, with a weighted average
exercise price of $1.52. At September 30, 1997, options for 686,083 and 64,609
shares remained available for granting under the 1996 and 1988 stock option
plans, respectively. At September 30, 1997, options for 621,068 shares were
exercisable with a weighted average exercise price for these options of $1.32.
All stock options are granted at fair market value of the Company's common
stock at the grant date. The weighted average fair value of the stock options
granted during fiscal 1997 was $1.06. The fair value of each stock option grant
is estimated on the date of the grant using the BlackScholes option pricing
model with the following weighted average assumptions used for grants in 1997:
risk-free interest rate of 6%; expected dividend yield of 0%; expected life of 3
years; and expected volatility of 76%. Stock options generally expire six years
from the grant date. Stock options generally vest over a three year period, with
one thirty sixth becoming exercisable on each of the monthly anniversaries of
the grant date.
The Company accounts for its options in accordance with Accounting
Principles Board Opinion No. 25, under which no compensation cost has been
recognized for stock option awards. Had compensation cost been determined
consistent with SFAS No. 123, the Company's pro forma net income and earnings
per share for fiscal 1996 would have been $1,168,987 and $.14, respectively, and
the Company's pro forma net loss and net loss per share for fiscal 1997 would
have been $2,715,014 and $.26, respectively. Because the SFAS No. 123 method of
accounting has not been applied to options granted prior to October 1, 1995, the
resulting pro forma compensation cost may not be representative of that to be
expected in future years.
14
Sale of Common stock - In the first quarter of fiscal 1997, the Company
undertook a secondary public offering in which a total of 2,250,000 shares of
common stock were sold at $2.25 per share, providing the Company with net
proceeds of $4,089,316.
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.
Dividends - Payment of dividends is restricted by the terms of outstanding
debt obligations.
5. NOTES PAYABLE - BANK
The Company has a $400,000 line of credit agreement with a bank which bears
an interest rate of prime plus 1-1/2% and expires on February 3, 1998. At
September 30, 1997, the Company had no outstanding borrowings on the line.
6. INCOME TAXES
For the years ended September 30, 1997, 1996 and 1995, the Company's
provision for income taxes was as follows:
1997 1996 1995
Federal - current $0 $ 98,588 $ 0
State - current 0 38,237 800
------------------------------------------
Total $0 $136,825 $800
------------------------------------------
15
There was no provision for deferred income taxes in 1997, 1996 or 1995.
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, 1997 and 1996 are as follows:
1997 1996
Deferred tax assets:
Reserves not currently deductible $ 83,000 $ 63,000
Book depreciation and amortization
in excess of tax 32,000 85,000
Research credit carryforwards 529,000 529,000
AMT credit carryforwards 29,000 29,000
Net operating loss carryforwards 949,000 60,000
Capitalized research and development
costs 85,000 85,000
Uniform capitalization 15,000 266,000
Other 330,000 176,000
---------------------------------
Total deferred tax assets 2,052,000 1,293,000
Valuation allowance for net deferred tax
assets (2,052,000) (1,293,000)
---------------------------------
Total $ 0 $ 0
---------------------------------
The Company has provided a valuation allowance against deferred tax assets
recorded as of September 30, 1997 and 1996 due to uncertainties regarding the
realization of such assets.
The research credit and net operating loss carryforwards expire during the
years 2005 to 2011. The Federal net operating loss carryforward at September 30,
1997 totaled $2,791,000.
16
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:
1997 1996 1995
Amount computed using
statutory rate (34%) $(779,425) $ 464,384 $(23,320)
Net change in valuation reserve
for deferred tax assets 759,544 (375,292) 23,320
Nondeductible items 10,537 9,496
State taxes 38,237 800
Other 9,344
------------------------------------------------------
Total $ 0 $136,825 $ 800
------------------------------------------------------
7. LONG-TERM LIABILITIES
As of September 30, 1997 and 1997, long-term liabilities were as follows:
1997 1996
Capital lease obligations (Note 9) $ 4,715 $13,904
Deferred rent payable (Note 8) 21,752 1,433
------------------------------------------
26,467 15,337
Less current portions (4,706) (9,190)
------------------------------------------
Total $21,761 $ 6,147
------------------------------------------
The following property and equipment is leased under non-cancelable capital
leases as of September 30, 1997 and 1996.
1997 1996
Equipment $ 26,254 $ 26,254
Less accumulated depreciation (25,208) (17,376)
--------------------------------------------
Total $ 1,046 $ 8,878
--------------------------------------------
8. COMMITMENTS AND CONTINGENCIES
Leases - The Company's San Diego, California office facilities are leased
under non-cancelable operating leases. The facilities lease expires on June 30,
2002. The lease obligation totals $1,016,871 over the term of the agreement.
17
The Company's Chantilly, Virginia office facilities are leased under
non-cancelable operating leases. The facilities lease expires on August 31,
2002. The lease obligation totals $234,496 over the term of the agreement.
Future annual minimum rental payments under non-cancelable leases are as
follows:
Operating Capital
Year ending September 30: Leases Leases
1998 $ 237,070 $4,993
1999 258,849
2000 259,694
2001 269,596
2002 216,672
---------------------------------
Total 1,241,881 4,993
Less amount representing interest - 278
---------------------------------
Present value of minimum lease payments $1,241,881 $4,715
--------------------------------
Rent expense for operating leases for the years ended September 30, 1997,
1996 and 1995 totaled $196,323, $159,249 and $62,509, respectively.
In the general course of business, the Company, at various times, has been
named in lawsuits. The Company believes that it has meritorious defenses to
these lawsuits and that resolution of these matters will not have a material
adverse affect on the business or financial condition of the Company.
9. PRODUCT REVENUES AND SALES CONCENTRATIONS
Product Revenues - During fiscal years 1997 and 1996 the Company's revenues
were derived primarily from the Character Recognition Product line. Revenues by
product line as a percentage of net sales, are summarized as follows:
1997 1996 1995
Tempest 22%
Character recognition 94% 94% 74%
Other 6% 6% 4%
18
Sales Concentrations - For the years ended September 30, 1997, 1996 and
1995, the Company had the following sales concentrations:
1997 1996 1995
U.S. government and its agencies
o Percent of total sales 8% 7% 16%
Non-government customers to which
sales were in excess of 10% of total
sales
o Number of customers 3 2 2
o Aggregate percentage of sales 54% 33% 25%
Foreign sales - primarily Europe 41% 31% 21%
10. LICENSING AGREEMENT
In April, 1997 the Company entered into an exclusive software licensing
agreement with Parascript LLC. The terms of the agreement required the Company
to pay Parascript $650,000 cash, and lend Parascript $250,000 cash to be repaid
in part from the royalties due Parascript. In addition, the entities entered
into a cross investment agreement providing Parascript with 763,922 shares of
unregistered common stock of the Company valued at $668,814 in exchange for a
10% interest in the Parascript Limited Liability Corporation (LLC). The
investment in the LLC is accounted for on the cost method and is included in
Other Assets in the accompanying Balance Sheet at September 30, 1997.
11. SUBSEQUENT EVENT
The Company has entered into an Employment Agreement with Mr. Elliot
Wassarman, effective as of January 5, 1998. Pursuant to the Agreement, Mr.
Wassarman will serve as President and Chief Executive Officer of the Company for
a base annual salary of $220,000. In addition to base salary, Mr. Wassarman is
entitled to participate in the Executive and Key Employee Bonus Plan. Mr.
Wassarman's employment is an "at will" contract and may be terminated by either
the Company or Mr. Wassarman at any time. In the event that the Company
terminates Mr. Wassarman's employment under certain circumstances, Mr. Wassarman
will receive a severance payment equal to six month's salary, payable over a six
month period of time, and continuation of certain employee benefits.
In addition, the Company has entered into a Nonqualified Stock Option
Agreement with Mr. Wassarman, effective January 5, 1998, providing him options
to acquire up to 800,000 shares of the Company's common stock at $1.125 per
share, subject to certain vesting requirements. Of such options, 550,000 vest on
a monthly basis at the rate of 15,278 per month for each month Mr. Wassarman
remains in the employ of the Company. Upon a change in control of the Company
the unvested portion of the 550,000 options will vest immediately, and Mr.
Wassarman will be eligible to receive up to an additional 250,000 vested
options.
19
INDEPENDENT AUDITORS' REPORT
Mitek Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Mitek Systems,
Inc. (the "Company") as of September 30, 1997 and 1996, 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, 1997. 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. These standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company at
September 30, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 1997, in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
San Diego, California
November 18, 1997
20
CORPORATE OFFICE
Mitek Systems, Inc.
10070 Carroll Canyon Road
San Diego, California 92131
(619) 635-5900
REGIONAL OFFICES:
10655 Southport Road S.W., Ste. 560
Calgary, Alberta, Canada T2W 4Y1
4506 Daly Drive, Suite 500
Chantilly, Virginia 20151
632 Pompton Ave. Cedar Grove, NJ 07009
CORPORATE OFFICERS
John M. Thornton, Chairman
Elliot Wassarman, President and CEO
John F. Kessler, Chief Financial Officer
David A. Pintsov, Senior Vice President
Curtis D. Abel, Vice President - Sales and Marketing
TRANSFER AGENT
Chase Mellon Shareholder Services
15821 Ventura Blvd., Suite 670, Encino, California 91436
AUDITORS
Deloitte & Touche, LLP
701 B Street, Suite 1900, San Diego, California 92101
DIRECTORS
John M. Thornton (1), (2), Chairman
Sally B. Thornton (1), Investor
Elliot Wassarman, President and CEO, Mitek Systems, Inc.
Daniel E. Steimle (1), (2),Vice President, Finance and Administration and Chief
Financial Officer, Hybrid Networks, Inc.
James B. DeBello (2), Vice President, Assistant General Manager, Qualcomm Eudora
Internet E-Mail
Software
Division
Gerald I. Farmer, Ph.D
21
NOTES
(1) Compensation Committee
(2) Audit Committee
FORM 10-K REPORT
Copies of the Company's Form 10-K report to the Securities and Exchange
Commission, are available free to stockholders and may be obtained by writing or
calling Secretary, Mitek Systems, Inc., 10070 Carroll Canyon Road, San Diego,
California 92131, phone (619) 635-5900.
STOCKHOLDERS: As of December 1, 1997, there were 590 holders of record of Mitek
Systems, Inc. Common Stock.
DIVIDENDS Mitek Systems, Inc. has paid no dividends on its common stock since
its incorporation and currently intends to retain all earnings for use in its
business. Payment of dividends is restricted by the terms of outstanding debt
obligations.
COMMON STOCK MARKET
PRICE RANGE (1)
Fiscal Quarter 1997 1996
Low High Low High
1st 1.50 4.2187 1.25 1.6875
2nd 1.4687 2.6875 1.375 2.6875
3rd 1.125 2.0937 2.00 6.125
4th .844 1.5625 3.50 5.875
(1) Bid quotations compiled by National Association of Securities Dealers,
Inc., represents inter-dealer quotations and not necessarily actual
transaction.
22
SELECTED FINANCIAL DATA
The table below sets forth selected financial data for each of the
years in the five-year period ended September 30, 1997.
($000 EXCEPT PER SHARE DATA) 1997 1996 1995 1994 1993
Sales $4,842 $8,154 $6,633 $10,163 $13,065
Net income (loss) (2,566) 1,229 (69) (1,058) (902)
Net Income (loss) per share (0.25) 0.15 (0.01) (0.15) (.013)
Total assets 7,188 3,762 2,864 3,074 5,081
Long-term debt 22 6 57 367 526
Stockholders' equity 5,751 2,652 1,343 809 1,818
23