EXHIBIT 99.1
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IDENTIX INCORPORATED
Consolidated Financial Statements
June 30, 2006, 2005 and 2004
IDENTIX INCORPORATED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Financial Statements:
Report of Independent Registered Public Accounting Firm ..................2
Consolidated Balance Sheets as of June 30, 2006 and 2005 .................3
Consolidated Statements of Operations for the years ended June 30, 2006,
2005 and 2004 .........................................................4
Consolidated Statements of Stockholders' Equity and Comprehensive Loss
for the years ended June 30, 2006, 2005 and 2004 ......................5
Consolidated Statements of Cash Flows for the years ended June 30, 2006,
2005 and 2004 .........................................................6
Notes to Consolidated Financial Statements ...............................7
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PRICEWATERHOUSECOOPERS LLP
Suite 1400
225 South Sixth Street
Minneapolis MN 55402
Telephone (612) 596 6000
Facsimile (612) 373 7160
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Identix Incorporated:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and comprehensive
loss and of cash flows present fairly, in all material respects, the financial
position of Identix Incorporated and its subsidiaries at June 30, 2006 and 2005,
and the results of their operations and their cash flows for each of the three
years in the period ended June 30, 2006 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 123R, "Share-Based
Payment," on July 1, 2005.
As discussed in Note 2 to the consolidated financial statements, the Company is
in the process of being acquired by Viisage Technology, Inc.
/s/ PricewaterhouseCoopers LLP
Minneapolis, Minnesota
August 4, 2006
IDENTIX INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
JUNE 30, JUNE 30,
2006 2005
-------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 22,267 $ 22,445
Marketable securities 9,879 9,753
Restricted cash 404 2,649
Accounts receivable, net 17,818 15,376
Inventories 4,952 6,340
Prepaid expenses and other assets 961 928
--------- ---------
Total current assets 56,281 57,491
Restricted cash 633 933
Property and equipment, net 3,887 1,738
Goodwill 141,213 141,213
Acquired intangible assets, net 9,565 13,363
Other assets 301 317
--------- ---------
Total assets $ 211,880 $ 215,055
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,272 $ 6,597
Accrued compensation 4,113 3,894
Other accrued liabilities 3,738 3,634
Deferred revenue 5,704 6,738
--------- ---------
Total current liabilities 20,827 20,863
Deferred revenue 3,089 1,947
Other liabilities 492 159
--------- ---------
Total liabilities 24,408 22,969
--------- ---------
Commitments and contingencies (Notes 2, 3, 14 and 15)
Stockholders' equity:
Common stock, $0.01 par value,
200,000,000 shares authorized
89,941,035 and 88,976,326 shares
issued and outstanding,
respectively 899 889
Additional paid-in capital 557,995 552,507
Accumulated deficit (371,272) (361,159)
Accumulated other comprehensive loss (150) (151)
--------- ---------
Total stockholders' equity 187,472 192,086
--------- ---------
Total liabilities and stockholders'
equity $ 211,880 $ 215,055
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
3
IDENTIX INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FISCAL YEAR ENDED JUNE 30,
--------------------------------
2006 2005 2004
-------- -------- --------
REVENUES:
Product revenues $ 53,177 $ 40,149 $ 24,506
Service revenues 28,545 31,813 29,555
-------- -------- --------
Total revenues 81,722 71,962 54,061
COST AND EXPENSES:
Cost of product revenues 28,276 27,180 18,942
Cost of service revenues 23,192 24,561 22,529
Research and development 13,858 11,215 9,675
Marketing and selling 12,916 11,390 10,680
General and administrative 12,743 12,126 13,618
Amortization of acquired intangible
assets 811 1,005 871
Restructuring and other, net 1,741 (507) 2,115
-------- -------- --------
Total costs and expenses 93,537 86,970 78,430
-------- -------- --------
Loss from operations (11,815) (15,008) (24,369)
Interest and other income, net 1,178 1,625 1,153
Equity interest in loss of joint
venture -- -- (302)
-------- -------- --------
Loss from continuing operations
before income taxes (10,637) (13,383) (23,518)
(Provision) benefit for income taxes 144 (42) 1,957
-------- -------- --------
Loss from continuing operations (10,493) (13,425) (21,561)
DISCONTINUED OPERATIONS:
Loss from discontinued LDS and IPS
operations (296) (541) (915)
Gain on sale of LDS and IPS, net of
provision for income taxes 676 -- 3,934
-------- -------- --------
Income (loss) from discontinued
operations 380 (541) 3,019
NET LOSS $(10,113) $(13,966) $(18,542)
======== ======== ========
Basic and diluted loss per share from
continuing operations $ (0.12) $ (0.15) $ (0.25)
Basic and diluted income (loss) per
share from discontinued operations $ 0.00 $ (0.01) $ 0.03
-------- -------- --------
Basic and diluted net loss per share $ (0.11) $ (0.16) $ (0.21)
======== ======== ========
WEIGHTED AVERAGE COMMON SHARES USED
IN BASIC AND DILUTED LOSS PER SHARE
COMPUTATION 89,318 88,696 86,758
The accompanying notes are an integral part of these consolidated financial
statements.
4
IDENTIX INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
PART 1 OF 2 OF TABLE
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
------------------------ -----------------------
SHARES AMOUNT SHARES AMOUNT
---------- ---------- ---------- ----------
BALANCE JUNE 30, 2003 234,558 $ 3,702 85,944,951 $ 859
Components of comprehensive loss:
Net loss -- -- -- --
Cumulative Translation Adjustment -- -- -- --
Change in Unrealized gain on available
for-sale marketable securities -- -- -- --
Total comprehensive loss
Sale of common stock under stock option plans -- -- 1,192,729 12
Sale of common stock under employee
retirement plan -- -- 117,620 1
Issuance of common stock to IIS employees -- -- 143,402 2
Stock issued for acquisition of technology -- -- 675,000 7
Convertible preferred stock converted into
common stock (234,558) (3,702) 234,558 2
Exercise of stock warrants -- -- 121,561 1
Issuance of stock options to consultants -- -- -- --
Amortization of deferred stock-based
compensation -- -- -- --
---------- ---------- ---------- ----------
BALANCE JUNE 30, 2004 -- -- 88,429,821 884
Components of comprehensive loss:
Net loss -- -- -- --
Cumulative translation adjustment -- -- -- --
Change in unrealized gain on available
for-sale marketable securities -- -- -- --
Total comprehensive loss
Sale of common stock under stock option plans -- -- 441,673 4
Sale of common stock under employee
retirement plan -- -- 104,832 1
Issuance of stock options to consultants -- -- -- --
Amortization of deferred stock-based
compensation -- -- -- --
---------- ---------- ---------- ----------
BALANCE JUNE 30, 2005 -- -- 88,976,326 889
Components of comprehensive loss:
Net loss -- -- -- --
Cumulative translation adjustment -- -- -- --
Total comprehensive loss
Sale of common stock under stock option plans -- -- 684,497 7
Common stock issued under employee
retirement plan -- -- 112,868 1
Exercise of stock warrants -- -- 142,344 2
Stock-based compensation expense related to
stock plans -- -- 25,000 --
---------- ---------- ---------- ----------
BALANCE JUNE 30, 2006 -- $ -- 89,941,035 $ 899
========== ========== ========== ==========
PART 2 OF 2 OF TABLE
ACCUMULATED
ADDITIONAL DEFERRED OTHER
PAID IN ACCUMULATED STOCK-BASED COMPREHENSIVE
CAPITAL DEFICIT COMPENSATION LOSS TOTAL
---------- ----------- ------------ ---------- ----------
BALANCE JUNE 30, 2003 $ 536,173 $ (328,651) $ (663) $ (156) $ 211,264
Components of comprehensive loss:
Net loss -- (18,542) -- -- (18,542)
Cumulative Translation Adjustment -- -- -- 11 11
Change in Unrealized gain on available
for-sale marketable securities -- -- -- 1 1
----------
Total comprehensive loss (18,530)
Sale of common stock under stock option plans 5,085 -- -- -- 5,097
Sale of common stock under employee
retirement plan 646 -- -- -- 647
Issuance of common stock to IIS employees 747 -- -- -- 749
Stock issued for acquisition of technology 3,416 -- -- -- 3,423
Convertible preferred stock converted into
common stock 3,700 -- -- -- --
Exercise of stock warrants 150 -- -- -- 151
Issuance of stock options to consultants 39 -- -- -- 39
Amortization of deferred stock-based
compensation -- -- 649 -- 649
---------- ---------- ---------- ---------- ----------
BALANCE JUNE 30, 2004 549,956 (347,193) (14) (144) 203,489
Components of comprehensive loss:
Net loss -- (13,966) -- -- (13,966)
Cumulative translation adjustment -- -- -- (1) (1)
Change in unrealized gain on available
for-sale marketable securities -- -- -- (6) (6)
----------
Total comprehensive loss (13,973)
Sale of common stock under stock option plans 1,919 -- -- -- 1,923
Sale of common stock under employee
retirement plan 614 -- -- -- 615
Issuance of stock options to consultants 18 -- -- -- 18
Amortization of deferred stock-based
compensation -- -- 14 -- 14
---------- ---------- ---------- ---------- ----------
BALANCE JUNE 30, 2005 552,507 (361,159) -- (151) 192,086
Components of comprehensive loss:
Net loss -- (10,113) -- -- (10,113)
Cumulative translation adjustment -- -- -- 1 1
----------
Total comprehensive loss (10,112)
Sale of common stock under stock option plans 3,213 -- -- -- 3,220
Common stock issued under employee
retirement plan 663 -- -- -- 664
Exercise of stock warrants 687 -- -- -- 689
Stock-based compensation expense related to
stock plans 925 -- -- 925
---------- ---------- ---------- ---------- ----------
BALANCE JUNE 30, 2006 $ 557,995 $ (371,272) $ -- $ (150) $ 187,472
========== ========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
5
IDENTIX INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FISCAL YEAR ENDED JUNE 30,
--------------------------------
2006 2005 2004
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(10,113) $(13,966) $(18,542)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 6,028 6,378 7,822
Realized gain on sales of marketable
securities (314) (143) (46)
Gain on sale of discontinued LDS and
IPS operations, pre-tax (919) -- (5,934)
Stock-based compensation expense 925 32 688
Common stock issued under employee
retirement plan 664 -- --
Equity interest in loss of joint venture -- -- 302
Bad debt expense (recoveries), net 86 23 (539)
Loss on disposal of equipment 35 18 188
Inventory obsolescence provision 1,246 1,561 3,563
Restructuring and other, net 352 (507) 1,609
Changes in assets and liabilities, excluding
sales of LDS and IPS, and acquisitions:
Restricted cash 2,649 (1,821) 431
Accounts receivable (2,527) (3,994) 4,745
Inventories 142 (730) (1,366)
Prepaid expenses and other assets (19) (41) 480
Accounts payable 410 1,716 (2,674)
Accrued compensation 198 946 (378)
Other accrued liabilities (348) (6,339) (3,172)
Deferred revenue 395 1,815 (119)
-------- -------- --------
Net cash used in operating activities (1,110) (15,052) (12,942)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of LDS and IPS,
net of transaction costs 584 -- 7,808
Cash paid in acquisition, net of cash
acquired -- -- 1,307
Net proceeds from the sales of
marketable securities 18,900 25,100 21,000
Purchases of marketable securities (18,712) (25,238) (20,929)
Additions of intangible assets (600) -- --
Intangible asset refund -- -- 102
Restricted cash (104)
Capital expenditures (2,987) (847) (1,009)
-------- -------- --------
Net cash (used in) provided by
investing activities (2,919) (985) 8,279
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the exercise of stock
options and warrants and issuance
of common stock 3,909 2,538 5,895
Payment under capital lease
obligations (58) -- --
-------- -------- --------
Net cash provided by financing
activities 3,851 2,538 5,895
-------- -------- --------
Net increase (decrease) in cash and
cash equivalents (178) (13,499) 1,232
Cash and cash equivalents at period
beginning 22,445 35,944 34,712
-------- -------- --------
Cash and cash equivalents at period end $ 22,267 $ 22,445 $ 35,944
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest $ 17 $ 11 $ 2
Taxes $ 67 $ 12 $ 94
SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Property and equipment acquired under
capital lease $ 193 $ -- $ --
Accrued obligation for acquisition of
intangible assets $ 650 $ -- $ --
Stock issued for acquisition of
technology $ -- $ -- $ 3,423
Conversion of preferred stock to
common stock $ -- $ -- $ 3,702
Issuance of common stock to IIS
employees $ -- $ -- $ 749
The accompanying notes are an integral part of these consolidated financial
statements.
6
NOTE 1--THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
Identix Incorporated ("we", "us", "our" the "Company") designs,
manufactures, develops and markets solutions for security, anti-fraud, law
enforcement and other applications. The principal markets for our products are
the Americas, Asia, Australia, Europe, and the Middle East.
BASIS OF CONSOLIDATION
The consolidated financial statements include our accounts and the
accounts of our wholly owned subsidiaries. All inter-company balances and
transactions have been eliminated in consolidation.
MANAGEMENT ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could materially differ from those
estimates.
LIQUIDITY
While we believe that existing working capital will be adequate to fund
our current cash requirements through at least the next twelve months, we may
need to raise additional debt or equity financing in the future. We may not be
able to obtain additional debt or equity financing. If successful in raising
additional financing, we may not be able to do so on terms that are not
excessively dilutive to existing stockholders or less costly than existing
sources of financing. Failure to secure additional financing in a timely manner
and on favorable terms in the future could have a material adverse impact on our
financial performance and stock price and require us to implement certain cost
reduction initiatives and curtail certain of our operations. See Note 2.
JOINT VENTURE
In September 1997, we entered into a joint venture agreement with Sylvan
Learning Centers, Inc. ("Sylvan") to form Sylvan/Identix Fingerprinting Centers,
LLC ("SIFC") for the purpose of providing fingerprinting services. On February
23, 2004, we acquired the remaining 50% ownership of SIFC now known as Identix
Identification services (HS) (see Note 3). Prior to the acquisition of IIS, we
derived license fees from SIFC, which were included within the interest and
other (expense), net, line item of the consolidated statement of operations in
addition to our equity interest in the income (loss) from the joint venture.
License fees recognized from SFIC were $207,000 for the year ended June 30,
2004.
REVENUE RECOGNITION
Significant management judgments and estimates are made in connection with
the revenues recognized in any accounting period. For example, we must assess
whether the fee associated with a revenue transaction is fixed or determinable
and the likelihood of collection from our customers. Material differences could
result in the amount and timing of revenues for any period if management were to
make different judgments or utilize different estimates.
We derive our revenue from sales of products and services. With respect to
product revenues, we sell hardware, software or a combination of hardware and
software products. Our service revenue is derived from maintenance contracts
related to product sales, consulting, installation and training services. A
customer, depending on their needs, may order a single hardware or software
product or service or combine hardware products, software products and services
to create a multiple element arrangement. Our policies with respect to the
recognition of revenue related to the various combinations of our products and
services are described in the following paragraphs.
7
Product Revenues
In the case of hardware only sales, we recognize revenue in accordance
with Securities and Exchange Commission Staff Accounting Bulletin ("SAB") 104,
"Revenue Recognition." Revenue related to product sales that require no
installation as well as printers and other peripheral devices, is recognized in
accordance with the terms of the sale, generally when we ship the product,
provided no significant obligations remain and collection of the receivable is
deemed reasonably assured. Certain of our hardware sales to end users require
installation subsequent to shipment and transfer of title. Revenue related to
hardware sales that are contingent on installation is deferred until
installation is complete, title has transferred and customer acceptance has been
obtained. Due to our current policy and practices, we consider acceptance of
these products to be contingent upon successful installation of the product.
When hardware products are sold via authorized representatives, dealers,
distributors or other third party sales channels, the obligation to install the
machines generally does not remain our responsibility but is rather an
obligation between the authorized representative, dealer, distributor or other
third party and their ultimate customer. As a result, for sales to third party
distributors, revenue is recognized at the time title is transferred which is
generally upon shipment. On rare occasions, we will be required to install our
products on the behalf of our third party distributors. In these cases, revenue
is recorded in the same manner as products sold to end users where acceptance of
the product by the third party distributor is contingent upon successful
installation of the product.
For hardware arrangements (where software products, if any, are incidental
to the arrangement) with multiple elements we apply the guidance in SAB 104 and
Emerging Issues Task Force Issue ("EITF") 00-21, "Accounting for Revenue
Arrangements with Multiple Deliverables." For each multiple element arrangement,
we determine if each element is a separate unit of accounting pursuant to EITF
00-21 by ensuring (1) that the delivered element has stand alone value to the
customer, (2) that there is objective evidence of the fair value for the
undelivered element and (3) that if the arrangement includes a general right of
return relative to the delivered item, that delivery of the undelivered items is
considered probable and in our control. The elements in a multiple element
arrangement typically consist of hardware products, installation, training and
maintenance services. To determine the fair value for each hardware element in
an arrangement, we rely upon vendor specific objective evidence ("VSOE") of fair
value using the price charged when that element is sold separately. If VSOE of
fair value is not available for hardware elements, we rely upon vendor objective
evidence of fair value in the form of competitor pricing of the same or
interchangeable products. To determine the fair value for training and
installation services, we rely upon VSOE of fair value using the price charged
when that element is sold separately. To-date we have not entered into a
multiple element arrangement where separation of the various elements was not
possible. However, in the case where separation is not possible for an element,
the element may be combined with other elements and the combined elements would
be treated as a single unit of accounting and the appropriate revenue
recognition methodology will be applied.
With respect to software product sales, including ABIS systems, BioLogon
and software developer kits, revenue is recognized on software products in
accordance with American Institute of Certified Public Accountants ("AICPA")
Statement of Position ("SOP") 97-2, "Software Revenue Recognition" as amended,
and SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With
Respect to Certain Transactions," as well as Technical Practice Aids issued from
time to time by the AICPA. We recognize revenue on software products when
persuasive evidence of an arrangement exists, delivery has occurred, the
vendor's fee is fixed or determinable, VSOE of fair value exists to allocate the
total fee to all undelivered elements of the arrangement and collection is
deemed probable. VSOE of fair value is determined for undelivered elements
(e.g., maintenance, training or consulting) using the price charged when that
element is sold separately. In cases where we do not have VSOE of fair value for
all delivered elements in the transaction (e.g., for licenses), the residual
method is used such that the fair value of the undelivered elements is deferred
and the remaining portion of the arrangement fee is allocated to the delivered
element(s) and is recognized as revenue. In circumstances when the software and
services being sold include services to provide significant production,
modification or customization of the software and the services cannot be
segregated into separate units of accounting, we account for the software sales
under SOP 97-2 and SOP 81-1, "Accounting for Performance of Construction-Type
and Certain Production-Type Contracts." In the cases where SOP 81-1 is applied,
we use either the cost-to-cost method or the efforts-expended method of
percentage of completion. Under the cost-to-cost method, sales, including
estimated earned fees or profits, are recorded based on the percentage that
total costs incurred bear to total estimated costs. Under the efforts-expended
method, sales are recorded based on the extent of progress measured by the ratio
of hours performed to date to estimated total hours at completion.
8
In the event that a multiple element arrangement includes both hardware,
software and services and the software is more-than-incidental to the
arrangement, but not essential to the functionality of the hardware, we apply
the guidance of EITF 03-05, "Applicability of AICPA Statement of Position 97-2
to Non-Software Deliverables in an Arrangement Containing More-Than-Incidental
Software," which allows the non-software elements and related services to be
accounted for under SAB 104 and EITF 00-21 and the software elements and related
services to be accounted for under SOP 97-2.
Our sales arrangements do not provide a contractual right of return.
Service Revenues
Revenue from maintenance arrangements such as those typically sold with
our live scan systems are recognized ratably over the term of the arrangements.
Maintenance revenue that is bundled with other elements of an arrangement is
deferred based upon fair value of the maintenance services. Fair value is based
on the renewal rate for continued maintenance arrangements.
Revenue from installation services is recognized as the services are
performed. Installation services revenue that is bundled with other elements of
an arrangement is deferred based upon fair value of the installation services.
Revenue for our professional services offerings, including training and
consulting services, and revenue for IIS which performs a service by capturing
fingerprints for certain individuals where a background check is required as a
condition of employment, is recognized as the services are delivered or
performed.
MAJOR CUSTOMERS
In fiscal years 2006, 2005 and 2004, we had one customer, the United
States government, which accounted for 20%, 23% and 14% respectively, of total
revenue. In fiscal years 2006 and 2004, no single agency of the U.S. government
accounted for more than 10% of our total revenues for the year. In fiscal year
2005, one federal government agency accounted for 13% of our total revenues for
the year. No other customer accounted for more than 10% of total revenue.
CASH EQUIVALENTS AND MARKETABLE SECURITIES
Cash equivalents consist of highly liquid investments with remaining
maturities of three months or less when purchased by the Company. Marketable
securities are held as securities available for sale and are carried at their
market value based on quoted market prices as of the balance sheet date. The
amortized cost of securities is adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization is included in interest
income. Realized gains or losses are determined based on the specific
identification method and are reflected in income. Net unrealized gains or
losses are recorded directly in stockholders' equity except those unrealized
losses that are deemed to be other than temporary are reflected in income. We
determine the appropriate classification of marketable securities at the time of
purchase and revaluate such designation as of each balance sheet date.
RESTRICTED CASH
Short term and long term restricted cash consists of cash balances held by
a bank primarily in the form of deposits in a money market account for use as a
guarantee for performance bonds and to secure letters of credit.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject us to concentrations of
credit risk consist principally of cash, cash equivalents, marketable
securities, and accounts receivable. We place cash, cash equivalents, and
marketable securities in a variety of financial instruments and, by policy,
limit the amount of credit exposure by investing our excess cash and cash
9
equivalents with major banks in money market accounts and by restricting
investments in marketable securities to highly rated securities.
We perform ongoing credit evaluations of our customers and provide for
expected losses. We believe that any risk of material loss is reduced due to our
substantial number of federal and state and local government customers.
TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable are initially recorded at fair value upon the
sale of goods or services to customers. They are stated net of allowances for
doubtful accounts which represent estimated losses resulting from the inability
of customers to make the required payments. When determining the allowances for
doubtful accounts, we take several factors into consideration including the
overall composition of accounts receivable aging, our prior history of accounts
receivable write-offs, the type of customer and our day-to-day knowledge of
specific customers. Changes in the allowances for doubtful accounts are recorded
as bad debt expense and are included in marketing and selling expense in our
consolidated statements of operations.
SUPPLIERS
Certain components and parts used in our products are procured from a
single source or limited group of suppliers. We do not have long-term agreements
with any of our suppliers. The failure of a supplier, including a
sub-contractor, to deliver on schedule could delay or interrupt our delivery of
products and thereby adversely affect our revenues and results of operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of our financial instruments, including cash and cash
equivalents, marketable securities, accounts receivable, accounts payable and
accrued liabilities approximate their fair values due to their relatively short
maturities. We do not hold or issue financial instruments for trading purposes.
INVENTORIES
Inventories are stated at the lower of standard cost (which approximates
actual cost on a first-in, first-out cost method) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation is computed using the straight-line method with
the estimated useful lives of the assets ranging from two to ten years. The
major asset classes and associated lives are as follows:
Class Life
-------------------- --------------------------------
Tools and Dies 2 Years
Software 2 Years
Machinery and 3 Years
Equipment
Furniture and 10 Years
Fixtures
Capital Lease Over the shorter of the term
Equipment or useful life
Leasehold Over the shorter of the term
Improvements or useful life
Depreciation of equipment held under capital leases and leasehold
improvements are computed using the straight-line method over the shorter of the
remaining lease term or the estimated useful life of the related equipment or
improvements. Repair and maintenance costs are expensed as incurred.
Depreciation expense from continuing operations was $959,000, $1,206,000 and
$1,961,000 for the years ended June 30, 2006, 2005 and 2004, respectively.
10
We evaluate the recoverability of property and equipment and other
long-lived assets, excluding goodwill if changes in circumstances or the
occurrence of events suggest the remaining value is not recoverable. An
impairment of long-lived assets is recognized in the event the carrying value of
such assets exceeds the future undiscounted cash flows attributable to such
assets. Such impairment would be measured as the excess of the carrying value of
the asset(s) over their fair values.
INTANGIBLE ASSETS
Acquired intangible assets include developed technology, service and
maintenance agreements, patents and core technology, trade names and trademarks,
order backlog and employee contracts . The acquired intangible assets are
amortized over their estimated useful lives generally ranging from five to ten
years (see Note 8). The amortization expense related to core technology, and
developed technology is presented as a component of the cost of product revenues
on our consolidated statement of operations. Amortization related to other
intangible assets is presented as amortization expense of acquired intangible
assets. We review intangible assets for impairment if changes in circumstances
or the occurrence of events suggest the remaining value is not recoverable. The
assessment for impairment of intangible assets requires us to make several
estimates about fair value, many of which are based upon projected future cash
flows.
GOODWILL
Goodwill represents the excess of the aggregate purchase price over the
fair value of the net assets of an acquired business. We perform a goodwill
impairment assessment on an annual basis during the fourth quarter or more
frequently if changes in circumstances or the occurrence of events suggest an
impairment exists. The impairment test entails comparing the carrying value of
goodwill to the estimated fair value of the reporting unit to which the goodwill
is assigned. There are a number of significant management assumptions and
estimates inherent in estimating the fair value of the reporting unit including
those used to estimate future cash flows and the appropriate discount rate that
incorporates our cost of capital and the risk profile of the cash flows. Actual
cash flows may be less than those we have estimated. A change in industry or
market conditions or a downturn in our operations could result in a further
impairment of goodwill. There were no goodwill impairments during the years
ended June 30, 2006, 2005 or 2004.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed when incurred.
SOFTWARE DEVELOPMENT COSTS
Certain software development costs incurred are capitalized after
technological feasibility has been demonstrated. Technological feasibility is
determined when planning, designing, coding and testing have been completed
according to design specifications. The period of time between technological
feasibility and general release of products to customers is generally extremely
short. Commencing with product introduction, such capitalized amounts are
amortized on a product-by-product basis at the greater of the amount computed
using (a) the ratio of current revenues for a product to the total of current
and anticipated future revenues or (b) the straight-line method over the
remaining estimated economic life of the product. Generally, we assign an
estimated economic life of one to five years to capitalized software costs.
Research and development expenditures are charged to research and development in
the period incurred. At June 30, 2006 and 2005, the net book value of
capitalized software costs was zero.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of foreign subsidiaries are translated into U.S.
Dollars at the exchange rate in effect at the balance sheet date. Revenues,
costs and expenses are translated using the average exchange rate for the year.
Gains and losses resulting from translation are accumulated as a separate
component of accumulated other comprehensive income (loss) in stockholders'
equity. Gains and losses resulting from foreign currency transactions are
11
included in the consolidated statement of operations, as incurred, and have not
been significant for the periods presented.
PRODUCT WARRANTY
We provide a warranty for manufacturing and material defects on all units
sold. A reserve for warranty costs, based on our estimates utilizing projected
costs to repair units, is recorded and periodically adjusted to reflect actual
experience (see Note 15).
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between financial statement carrying
amounts of existing assets and liabilities and their respective tax bases and
operating loss and tax credit carry forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. Valuation allowances are established when necessary to reduce
tax assets to the amounts reasonably expected to be realized.
STOCK-BASED COMPENSATION
Effective July 1, 2005, we began accounting for our employee and director
stock option plans and employee stock purchase plans in accordance with
provisions of Statement of Financial Accounting Standards ("SFAS") No. 123
(revised 2004), "Share-Based Payment" ("123W"). SFAS No. 123R revised SFAS No.
123, "Accounting for Stock-Based Compensation," and supersedes APB Opinion No.
25, "Accounting for Stock Issued to Employees." The revised statement addresses
the accounting for share-based payment transactions with employees and other
third parties, eliminates the ability to account for share-based payments using
APB Opinion No. 25 and requires that the compensation costs relating to such
transactions be recognized in the consolidated statement of operations based
upon the grant-date fair value of those instruments. We used the modified
prospective method of transition as provided by SFAS No. 123R, and as a result,
compensation expense related to share based payments is recorded only for
periods beginning July 1, 2005. Under the modified prospective method, stock
based compensation expense is generally recognized over the vesting period for
new awards granted after July 1, 2005 and for unvested awards outstanding at
July 1, 2005. For the year ended June 30, 2006 our loss from continuing
operations and net loss was increased by approximately $925,000, or $0.01 per
share, for share-based compensation expense under SFAS No. 123R. No tax benefit
was recognized in the statement of operations for share based compensation
arrangements since we have not recorded taxable income in preceding years. In
addition, no amount of share-based compensation cost was capitalized as part of
property and equipment or inventory for the periods presented. See Note 10.
COMPREHENSIVE LOSS AND ACCUMULATED OTHER COMPREHENSIVE LOSS
Comprehensive loss includes net loss and other comprehensive loss. Other
comprehensive loss includes cumulative translation adjustments and unrealized
gains and losses on available-for-sale securities. Our comprehensive loss has
been presented in the Consolidated Statement of Stockholders' Equity and
Comprehensive Loss. The accumulated other comprehensive loss as of June 30, 2006
and 2005 consists of cumulative translation adjustments of $150,000 and
$151,000, respectively.
EARNINGS PER SHARE
Basic earnings per share are computed by dividing the net loss available
to common shareholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share gives effect to all
dilutive potential common shares outstanding during the period, including
convertible preferred stock as well as stock options and warrants, using the
treasury stock method.
12
Options and warrants to purchase 7,360,000, 8,328,000, and 7,213,910
shares of common stock were outstanding at June 30, 2006, 2005 and 2004,
respectively, but were not included in the computation of diluted net loss per
share as their effect was anti-dilutive.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 151, "Inventory Costs--an Amendment of ARB No. 43, Chapter 4." SFAS No.
151 amends ARB 43, Chapter 4, to clarify that abnormal amounts of idle facility
expense, freight, handling costs, and wasted materials (spoilage) should be
recognized as current-period charges. In addition, this Statement requires that
allocation of fixed production overheads to the costs of conversion be based on
the normal capacity of the production facilities. The provisions of this
Statement are effective for inventory costs incurred beginning July 1, 2005. The
adoption of the provisions of SFAS No. 151 did not have a material impact on the
Company's financial position or results of operations.
In June 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections", a replacement of APB Opinion No. 20, "Accounting Changes," and
SFAS No. 3, "Reporting Accounting Changes." SFAS No. 154 changes the
requirements related to accounting for and reporting of a change in accounting
principle. This Statement applies to all voluntary changes in accounting
principle and changes required by a new accounting pronouncement, in the unusual
instance that the pronouncement does not include specific transition provisions.
SFAS No. 154 requires retrospective application to prior periods' financial
statements of changes in accounting principle versus the previous guidance which
allowed the recording of the impact of an accounting change in the current
period's net income as a cumulative effect adjustment. The Statement is
effective for us beginning in fiscal year 2007. Adoption is not expected to have
a material impact on our consolidated earnings, financial position or cash
flows.
In June 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"),
"Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement
No. 109." FIN 48 prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return. The enterprise is first required to
determine whether it is more likely than not that a tax position will be
sustained upon examination, including resolution of any related appeals or
litigation processes, based on the technical merits of the position. A tax
position that meets the more-likely-than-not recognition threshold is then
measured to determine the amount of benefit to recognize in the financial
statements. The provisions of FIN 48 are effective for us beginning in fiscal
year 2008. Adoption is not expected to have a material impact on our financial
position, results of operations or cash flows.
NOTE 2--PROPOSED MERGER WITH VIISAGE TECHNOLOGY, INC.
On January 12, 2006, we entered into a definitive agreement with Viisage
Technology, Inc. ("Viisage") to merge in an all stock transaction. The combined
company will blend two approaches to solving the challenge of protecting and
securing personal identities by establishing a comprehensive single platform for
multi-modal finger, face, skin and imaging identify solutions.
Under the terms of the transaction, our shareholders will receive a fixed
exchange ratio of 0.473 newly issued shares of Viisage common stock for each
share of our common stock. Based on Viisage's closing stock price of $17.69 on
January 11, 2006, the transaction was valued at approximately $770 million on a
fully diluted basis. The merger is subject to certain closing conditions,
including, among other things, the approval of Identix stockholders of the
merger, the approval of Viisage stockholders of the issuance of Viisage common
stock in connection with the merger, and other customary closing conditions. The
meetings of the shareholders to approve the merger are scheduled for August 29,
2006.
A termination fee of $20 million may be payable by either Viisage or
Identix to the other party in the event the termination of the merger agreement
under several circumstances. As of June 30, 2006, we had $33,183,000 of cash,
restricted cash and marketable securities. While we believe we have sufficient
cash on hand available to pay such fee, our growth strategy and financing
strategy does not assume the payment of such fee and, as a result, we could be
materially adversely affected if we were required to pay the termination fee.
13
We have incurred merger-related expenses associated with the pending
merger with Viisage totaling $1,576,000 in fiscal year 2006, which were
principally comprised of legal and investment banking fees. See Note 5.
During fiscal year 2006, we recorded revenue of $1,000 and costs and
expenses of $27,000 for demonstration products that we provided to Viisage. We
also recorded costs and expenses of $41,000 for demonstration equipment that we
purchased from Viisage. In addition, we recorded $32,000 of merger related
expenses for reimbursement of time and expenses of Viisage employees. As of June
30, 2006, a liability of $26,000 included in accounts payable remains in
connection with these expenses.
NOTE 3--ACQUISITIONS
On September 9, 2005, we entered into an agreement to purchase certain
technology with an estimated life of 5 years and made an initial payment of
$300,000. During the third quarter of fiscal year 2006, certain milestones were
successfully completed, triggering additional consideration due totaling
$950,000 over two years. This additional consideration was recorded as an
intangible asset for $950,000 during fiscal year 2006. Identix has paid $300,000
of this additional consideration as of June 30, 2006 with a remaining liability
of $650,000.
On February 23, 2004, we acquired the remaining 50% ownership of SIFC from
Sylvan. SIFC is now known as IIS. We had previously held a 50% interest in the
SIFC joint venture and accounted for its investment under the equity method of
accounting. The complete results of operations of US have been included in our
consolidated statement of operations since February 23, 2004. IIS provides
services to corporations and government agencies whereby HS captures
fingerprints and transmits the data for applicant background checks. HS
maintains a network of Identix Live Scan systems at processing centers across
the country where certified technicians process applicants. In consideration for
Sylvan's 50% interest in the joint venture, Identix paid Sylvan $875,000 in cash
and paid acquisition costs of $50,000. At the date of acquisition, Identix had a
negative investment in the joint venture of $235,000. The purchase price was
allocated to other intangible assets of $840,000, goodwill of $268,000 and net
liabilities of $418,000. The other intangible assets are being amortized over a
weighted-average amortization period of approximately 4.4 years. The proforma
impact of the RS acquisition was not significant to our results of operations
for the twelve months ended June 30, 2004.
On March 10, 2004, we acquired certain technology from Delean Vision
Worldwide Inc. (Delean). This transaction was accounted for as a purchase of
assets The technology acquired was biometric recognition algorithms known as
skin texture analysis (STA) that allows a unique characteristic of the skin
structure known as a "skinprint" to be used to identify individuals. In exchange
for the technology and intellectual property rights, we issued to Delean 675,000
shares of our common stock with a value of $3,423,000. The purchase price was
allocated to intangible assets. We also issued Delean a warrant with contingent
future vesting rights to purchase up to 800,000 shares of our common stock at
$4.70 per share. The warrant expires in March 2014 and vests based upon the
successful issuance of certain patents with the U.S. government related to the
technology acquired from Delean. The fair value of any warrants which vest will
be recorded as additional cost of the intangible assets at the time of vesting.
As of June 30, 2006, none of the warrants issued to Delean had vested and no
related expense had been recognized.
NOTE 4--DISCONTINUED OPERATIONS
On April 28, 2006, we closed the sale of our wholly-owned subsidiary,
Legislative Demographic Services, Inc. ("LDS"), for cash consideration of
$234,000. Under the terms of the transaction, we retained LDS' existing cash and
accounts receivable of $647,000 and $251,000, respectively, and net
inter-company balances, and the purchaser assumed all remaining liabilities of
LDS. The terms of the sale include an obligation on our part to indemnify the
buyer against certain potential liabilities, including for breaches of
representations and warranties we made in the sales agreement, for an amount not
to exceed $300,000. This indemnification expires in January 2007. The
transaction resulted in income from discontinued operations, net, of $167,000 of
which $463,000 is attributable to the gain on the sale of LDS, net of a $106,000
provision for income taxes, and $296,000 is attributable to the loss of the LDS
discontinued operations from July 1, 2005 to the date of the sale. The LDS
operations are presented in our Consolidated Statements of Operations as
discontinued operations for all periods presented. The cash proceeds of $234,000
are shown in the line entitled Proceeds from the Sale of LDS and IPS, net of
transaction costs in the Consolidated Statement of Cash Flows for the year ended
June 30, 2006.
14
On February 13, 2004, we consummated the sale of Identix Public Sector
(IPS) to Alion Science and Technology Corporation (Alion). In fiscal year 2004,
we recognized income from discontinued operations of $3,125,000 of which
$3,934,000 is attributable to the gain on the sale of IPS and $809,000 is
attributable to the loss on the IPS discontinued operations from July 1, 2003 to
the date of the sale. The IPS operations are presented in our Consolidated
Statements of Operations as discontinued operations for all periods presented.
Under the terms of the agreement, upon closing Alion paid the Company $8,850,000
million in cash. This amount is shown as proceeds from sale of IPS, net of
transaction costs of $1,042,000, in the Consolidated Statement of Cash Flows for
the year ended June 30, 2004. The terms of the sale included the potential for
additional future payments to us of up to $500,000 pending satisfaction of
certain conditions. During the year ended June 30, 2006, we and Alion agreed
that certain conditions were met that warranted Alion paying us $350,000 to
settle the contingent payment portion of the sales agreement. As a result, when
the $350,000 payment is netted with the associated tax expense of $137,000 we
recorded a net gain of $213,000 from the disposal of discontinued operations on
our Consolidated Statement of Operations for the year ended June 30, 2006. The
terms of the sale also included an obligation on our part to indemnify Alion
against certain potential liabilities, including breaches of representations and
warranties we made in the sales agreement, for an amount not to exceed
$2,125,000. This obligation expired in February 2006.
The following table represents the summarized results for the discontinued
operations for fiscal years 2006, 2005 and 2004:
FISCAL YEAR ENDED JUNE 30,
2006 2005 2004*
-------- -------- --------
(IN THOUSANDS)
IPS
- ---
Revenue $ -- $ -- $ 20,078
Cost of revenues -- -- 17,550
Operating Expenses -- -- 3,337
-------- -------- --------
Loss from discontinued IPS operations $ -- $ -- $ (809)
======== ======== ========
* This period reflects activity only through February 13, 2004, the date of
disposition of IPS.
FISCAL YEAR ENDED JUNE 30,
2006** 2005 2004
-------- -------- --------
(IN THOUSANDS)
LDS
- ---
Revenue $ 1,281 $ 1,877 $ 1,137
Cost of revenues 1,120 1,786 861
Operating Expenses 457 632 382
-------- -------- --------
Loss from discontinued LDS operations $ (296) $ (541) $ (106)
======== ======== ========
** This period reflects activity only through April 28, 2006, the date of
disposition of LDS.
FISCAL YEAR ENDED JUNE 30,
2006 2005 2004
-------- -------- --------
(IN THOUSANDS)
TOTAL DISCONTINUED OPERATIONS
- -----------------------------
Revenue $ 1,281 $ 1,877 $ 21,215
Cost of revenues 1,120 1,786 18,411
Operating Expenses 457 632 3,719
-------- -------- --------
Loss from discontinued operations $ (296) $ (541) $ (915)
======== ======== ========
The following table represents the components of the gain on sale of the
discontinued operations net of provision for income taxes:
15
FISCAL YEAR ENDED JUNE 30,
2006 2005 2004
-------- -------- --------
(IN THOUSANDS)
IPS
- ---
Gain on sale of IPS $ 350 $ -- $ 5,934
Provision for income taxes (137) -- (2,000)
-------- -------- -------
Gain on sale of IPS net of provision $ 213 $ -- $ 3,934
for income taxes ======== ======== ========
FISCAL YEAR ENDED JUNE 30,
2006 2005 2004
-------- -------- --------
(IN THOUSANDS)
LDS
- ---
Gain on sale of LDS $ 569 $ -- $ --
Provision for income taxes (106) -- --
-------- -------- -------
Gain on sale of LDS net of provision
for income taxes $ 463 $ -- $ --
======== ======== =======
FISCAL YEAR ENDED JUNE 30,
2006 2005 2004
-------- -------- --------
(IN THOUSANDS)
TOTAL DISCONTINUED OPERATIONS
- -----------------------------
Gain on sale of discontinued
operations $ 919 $ -- $ 5,934
Provision for income taxes (243) -- (2,000)
-------- -------- -------
Gain on sale of discontinued
operations net of provision for
income taxes $ 676 $ -- $ 3,934
======== ======== =======
NOTE 5--RESTRUCTURING AND OTHER
Restructuring and other, net includes charges that result from unique
facts and circumstances. Restructuring and other, net consisted of the following
for the periods presented:
FISCAL YEAR ENDED
2006 2005 2004
-------- -------- --------
(IN THOUSANDS)
Charges and adjustments to lease exit $ (67) $ (620) $ 610
costs related to the 2002
Restructuring Programs
Severance and benefits costs 232 113 250
Employee agreement obligation -- -- 506
SIFC acquisition related -- -- 749
Viisage merger related costs 1,576 -- --
-------- -------- --------
Total $ 1,741 $ (507) $ 2,115
======== ======== ========
2006 RESTRUCTURING ACTIONS
During the third quarter of fiscal year 2006, we recorded a charge of
$232,000 in severance costs related to a reduction in our field service staff by
approximately 19 employees. At June 30, 2006, all of the 19 employees had been
terminated and no liability remained.
During the third and fourth quarters of fiscal year 2006, we incurred
merger related costs of $1,576,000 related to the anticipated merger with
Viisage (see Note 2), which were principally comprised of legal and investment
banking fees. As of June 30, 2006, aggregate liabilities of $352,000 included in
accounts payable and accrued compensation remains in connection with the Viisage
merger related costs.
16
2005 RESTRUCTURING ACTIONS
During the fourth quarter of fiscal year 2005, we recorded a charge of
$113,000 in severance costs related to a reduction in our field service staff by
approximately 10 employees. As of June 30, 2005, all 10 of the employees had
been terminated and a severence related liability of $96,000 remained. The
$96,000 liability was paid during the fist quarter of fiscal year 2006.
2004 RESTRUCTURING AND OTHER ACTIONS
Restructuring and other charges recorded during the twelve months ended
June 30, 2004 consisted of $506,000 related to payments made under the former
Chairman of the Board's employment agreement associated with his retirement in
February 2004 and $749,000 for the value of shares of our common stock issued to
certain former SIFC employees in connection with the acquisition of 100% of SIFC
(See Note 3). In addition, we recorded a charge of $250,000 related to a
reduction in force of 6% of our workforce or approximately 30 employees in
February 2004. As of June 30, 2004, all 30 of the employees had been terminated
and all severance amounts had been paid.
2002 RESTUCTURING PROGRAM - VISIONICS
SEVERENCE AND BENEFITS
In June 2002, in connection with our merger with Visionics Corporation
("Visionics"), approximately 110 employees were terminated from the Company's
Los Gatos, California, Dublin, California and IPS locations. The terminated
employees were from all functional areas of the Company. The workforce reduction
resulted in an initial charge of $3,481,000 relating primarily to severence and
fringe benefits. During the year ended June 30, 2003, we recorded an additional
$2,283,000 in severance charges related to employees with extended terminations
to assist in the integration. As of June 30, 2005, all of the employees severed
in connection with the merger were terminated. In connection with the June 2002
terminations, certain stock options were subject to remeasurement and
acceleration resulting in a non-cash charge of $900,000. `Be remaining liability
as of June 30, 2006 of $74,000 represents the anticipated premiums on a life
insurance policy for a former key employee and the payments for this policy will
continue until fiscal year 2012.
LEASE EXIT COSTS
In June 2002, we recorded a charge of $10,340,000 for the estimated cost
to terminate or sublease two excess leased facilities in Northern California.
The estimate was based on current comparable rates for leases in respective
markets. During the twelve months ended June 30, 2003, an additional charge of
$1,061,000 was made as an adjustment to the estimated sublease income related to
our Northern California facilities. During the twelve months ended June 30,
2004, an additional charge of $610,000 was recorded related to lease exit costs
associated with our Northern California facilities. The charges recorded in
fiscal year 2003 and 2004 related to our Northern California facilities
reflected updated assessments of what we would have recovered under the then
current conditions of the Northern California real estate market.
During the first quarter of fiscal year 2005 we recorded a charge of
$451,000 related to a reduction in the estimated lease recoveries associated
with the Los Gatos facilities lease and a gain of $1,071,000 was recorded in the
second quarter of fiscal year 2005 when we negotiated the release from our Los
Gatos facilities lease. In the first quarter, we believed the charge of $451,000
was necessary because at that time the real estate markets in Northern
California had continued to decline and it was not anticipated that we would be
able to negotiate an exit to the lease and no such discussions between the
ourselves and the lessor had commenced. The gain recorded in the second quarter
represented the difference between our accrued lease exit costs of $6,363,000,
on the date of the release reduced by the negotiated payoff amount and
associated transactions costs of $5,292,000. The lease settlement amount of
$5,292,000 was paid in January 2005, and is included in cash payments made from
inception of the restructuring program to June 30, 2006 of $10,134,000. In the
fourth quarter of 2006, we recorded a gain of $67,000 related to the final
settlement of operating expenses, taxes, insurance, and other charges permitted
under the lease.
17
The following table represents the activity associated with continuing
operations related to the 2002 restructuring program in connection with our
merger with Visionics:
TOTAL
CHARGES RESTRUCTURING
FROM LIABILITY
CONTINUING NON-CASH CASH REFUND AS OF JUNE
OPERATIONS CHARGES PAYMENTS RECEIVABLE 30, 2006
---------- ------- -------- ---------- --------
(in thousands)
Severance and $ 6,664 $ 900 $ 5,690 $ -- $ 74
benefits
Lease exit costs* 10,491 388 10,134 (31) --
------- ------- ------- ------- -------
Total $17,155 $ 1,288 $15,824 $ (31) $ 74
======= ======= ======= ======= =======
* Amounts in the table exclude $833,000 of charges that related to
discontinued operations.
The following table represents a summary of activity related to the 2002
restructuring program that occurred between June 30, 2005 and June 30, 2006:
RESTRUCTURING TOTAL RESTRUCTURING
LIABILITY LIABILITY
AS OF JUNE CHARGES CASH REFUND AS OF JUNE
30, 2005 (ADJUSTMENTS) PAYMENTS RECEIVABLE 30, 2006
-------- ------------- -------- ---------- --------
(in thousands)
Severance and $108 $-- $ 34 $-- $ 74
benefits
Lease exit costs 361 (67) 325 (31) --
---- ---- ---- ---- ----
Total $469 $(67) $359 $(31) $ 74
==== ==== ==== ==== ====
The restructuring liability is classified in the consolidated balance
sheet based on the anticipated timing of the respective payments. There is no
remaining lease obligation at June 30, 2006 for the Dublin, California facility.
The final lease payment was made in March 2006. During the fourth quarter of
fiscal year 2006, we recorded a refund receivable of $31,000 as a result of
final settlement of operating expenses, taxes, insurance and other charges
permitted under the lease. The remaining severance and benefits liability
represents the anticipated premiums on a life insurance policy for a former key
employee and the payments for this policy will continue until fiscal year 2012.
18
NOTE 6--BALANCE SHEET DETAIL
JUNE 30,
2006 2005
-------------- --------------
(IN THOUSANDS)
Accounts receivable:
Commercial and other $ 15,507 $ 14,607
United States Government 2,614 1,286
Other receivables 106 34
Less: allowance for doubtful accounts (409) (551)
-------------- --------------
$ 17,818 $ 15,376
============== ==============
Inventories:
Purchased parts and materials $ 4,188 $ 3,403
Work-in-process 379 2,008
Finished goods, including spares 385 929
-------------- --------------
$ 4,952 $ 6,340
============== ==============
Property and equipment:
Manufacturing, test and office equipment$ 9,272 $ 6,919
Furniture and fixtures 787 795
Leasehold improvements 632 543
-------------- --------------
10,691 8,257
Less: accumulated depreciation and (6,804) (6,519)
amortization -------------- --------------
$ 3,887 $ 1,738
============== ==============
Other assets:
Deposits $ 301 $ 317
-------------- --------------
$ 301 $ 317
============== ==============
Accrued compensation:
Salary and wages $ 1,807 $ 1,525
Severance - 41
Benefits 2,246 2,116
Payroll taxes 60 212
-------------- --------------
$ 4,113 $ 3,894
============== ==============
Other accrued liabilities
Lease exit costs $ - $ 361
Warranty reserve 1,554 1,416
Customer deposits 1,117 798
Other accrued liabilities 1,067 1,059
-------------- --------------
$ 3,738 $ 3,634
============== ==============
Other accrued liabilities-noncurrent
Payable for acquisition of intangible $ 350 $ -
assets
Other accrued liabilities 142 159
-------------- --------------
$ 492 $ 159
============== ==============
19
NOTE 7--LINE OF CREDIT
Our line of credit which expired October 1, 2005, provided for borrowings
of up to the lesser of $15,000,000 or the cash collateral base or the borrowing
base. Borrowings under the line of credit were collateralized by substantially
all of our assets and we would have been charged interest at the bank's prime
rate of interest, which was 6.50% at September 30, 2005. There were no amounts
outstanding under this line of credit during fiscal year 2004 or fiscal year
2005, or during the time period which this credit facility was open in fiscal
year 2006. Due to the cost associated with renewing the line of credit and our
current cash balance we decided to allow the credit facility to expire effective
October 1, 2005.
The line of credit agreement contained financial, operating and reporting
covenants that were not binding until we drew on the line of credit.
NOTE 8--INTANGIBLE ASSETS
The Company's intangible assets at June 30, 2006 and 2005 were comprised
of the following:
JUNE 30, 2006 JUNE 30, 2005
(IN (IN
THOUSANDS) THOUSANDS)
-------- -------- -------- -------- -------- --------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION NET AMOUNT AMORTIZATION NET
-------- ------------ -------- -------- ----------- --------
ACQUIRED INTANGIBLE
ASSETS:
Developed technology $ 16,100 $(12,924) $ 3,176 $ 16,100 $ (9,706) $ 6,394
Service/maintenance
agreements 4,440 (2,894) 1,546 4,440 (2,103) 2,337
Patents/core technology 12,659 (7,816) 4,843 11,410 (6,803) 4,607
Tradename/Trademark 500 (500) -- 500 (500) --
Order backlog and
employee contracts 300 (300) -- 300 (275) 25
Patents and licenses 204 (204) -- 204 (204) --
Internal Capitalized
software development
costs 179 (179) -- 179 (179) --
-------- -------- -------- -------- -------- --------
$ 34,382 $(24,817) $ 9,565 $ 33,133 $(19,770) $ 13,363
-------- -------- -------- -------- -------- --------
During the first quarter of fiscal year 2006, we entered into an agreement
to purchase certain core technology with an estimated life of 5 years and made
an initial payment of $300,000. During the third quarter of fiscal year 2006,
certain milestones were successfully completed, triggering additional
consideration due totaling $950,000 over two years. The total consideration of
$1,250,000 was recorded as an intangible asset during fiscal year 2006. As of
June 30, 2006, Identix has a remaining liability of $650,000 related to this
acquisition of core technology.
Amortization expense related to developed technology and patents/core
technology are classified as cost of products revenue and was $4,237,000,
$4,130,000 and $4,672,000 for fiscal year 2006, 2005 and 2004 respectively.
Amortization expense related to all other categories of acquired intangible
assets are classified as amortization expense on the statements of operations
and was $811,000, $1,005,000 and $871,000 for fiscal years 2006, 2005 and 2004,
respectively.
Estimated amortization expense of intangible assets for each of next five
fiscal years is as follows (in thousands):
For year ended June 30, 2007 $ 5,081
For year ended June 30, 2008 1,840
For year ended June 30, 2009 698
For year ended June 30, 2010 612
For year ended June 30, 2011 412
Thereafter 922
---------
Total $ 9,565
---------
20
NOTE 9--MARKETABLE SECURITIES
Our portfolio of marketable securities at June 30, 2006 and 2005 consists
of the following:
JUNE 30, 2006
(IN THOUSANDS)
-------------------------------------------
GROSS
UNREALIZED
COST GAINS FAIR VALUE
------------ ------------ ------------
U.S. government and agency $ 8,901 $ - $ 8,901
obligations
Commercial Paper 978 - 978
------------ ------------ ------------
$ 9,879 $ - $ 9,879
------------ ------------ ------------
JUNE 30, 2005
(IN THOUSANDS)
-------------------------------------------
GROSS
UNREALIZED
COST GAINS FAIR VALUE
------------ ------------ ------------
U.S. government and agency $ 8,765 $ - $ 8,765
obligations
Commercial Paper 988 - 988
------------ ------------ ------------
$ 9,753 $ - $ 9,753
============ ============ ============
At June 30, 2006 and 2005, our marketable securities were all classified
as short term and had maturities within one year from the balance sheet date.
NOTE 10--CAPITAL STOCK
CONVERTIBLE PREFERRED STOCK
In July 2000, we entered into a Securities Purchase Agreement with
Motorola, Inc. ("Motorola"), whereby we sold 234,558 shares of Series A
Convertible Preferred Stock (the "Series A Preferred Stock") at $15.99 per
share, resulting in cash proceeds of $3,702,000, net of issuance costs. The sale
of the Series A Preferred Stock was exempt from registration under applicable
securities laws. However, Motorola demanded registration rights, which were
effective beginning on January 7, 2001. In the third quarter of fiscal year
2004, Motorola converted the 234,558 shares of Series A Convertible Preferred
Stock into 234,558 shares of common stock.
In connection with the issuance of the Series A Preferred Stock, we also
issued Motorola a warrant to purchase 187,647 shares of our common stock at
$17.11 per share. The warrant was immediately exercisable and expired
unexercised on July 7, 2005.
EMPLOYEE STOCK OPTIONS
In February 2002, we adopted the Identix Incorporated 2002 Equity
Incentive Plan ("2002 Plan"). Stockholders approved the 2002 Plan in June 2002.
The 2002 Plan will expire in 2012. A total of 5,800,000 shares of the Company's
common stock were initially reserved for the issuance under the 2002 Plan. The
2002 Plan provides for the discretionary award of options, restricted stock,
stock purchase rights, performance shares or any combination of these awards to
our eligible employees and Non-employee directors and consultants. Options
generally vest on an annual basis over a period of four years.
In April 2000, we adopted the Identix Incorporated New Employee Stock
Incentive Plan ("New Employee Plan"). The New Employee Plan will expire in 2010.
In February 2001, we amended the New Employee Plan so that a total of 2,500,000
shares of our common stock were reserved for issuance under the New Employee
Plan. Under the New Employee Plan, awards may be granted as a material
inducement to any person accepting employment or consultancy with us, provided
such person is not employed by us at the time of the award. The New Employee
Plan provides for the discretionary award of options, restricted stock, stock
purchase rights, performance shares or any combination of these awards to
eligible persons; provided, however, that only nonqualified stock options may be
21
granted under the plan. Under the New Employee Plan, the term of any
nonqualified stock option granted may not exceed 15 years. Options generally
vest on an annual basis over a period of four years.
In August 1995, our shareholders approved the Non-Employee Directors Stock
Option Plan ("Directors Plan"), under which nonqualified stock options are
granted to non-employee directors on a formula basis. In October 1998, 2000 and
2002, the stockholders amended the Directors Plan so that a total of 1,310,000
shares of our common stock were reserved for issuance under the Directors Plan.
The Directors Stock Option Plan provides that when a person who is not,
and has not been in the preceding twelve months, an officer or an employee of
Identix is elected or appointed a member of the Board, we will grant that person
on the effective date of such election or appointment (i) a nonqualified stock
option to purchase 30,000 shares of our common stock if less than six months
have elapsed since the last annual meeting of stockholders or (ii) a
nonqualified stock option to purchase 15,000 shares of common stock if at least
six months have elapsed since the last annual meeting of stockholders. The
Directors Plan, as currently in effect, further provides that on the first
meeting of the Board immediately following the annual meeting of stockholders
(even if held on the same day as the meeting of stockholders), we will grant to
each non-employee director then in office a nonqualified stock option to
purchase an additional 30,000 shares of our common stock.
Under the Directors Plan, options are granted for a period of 10 years at
an exercise price equal to the fair market value of our common stock on the date
of the grant. Options vest quarterly over a one-year period from the date of
grant. This plan was terminated in the second quarter of fiscal year 2006.
On November 15, 2005, our shareholders approved the Non-Employee Directors
Stock Award Plan ("Directors Stock Plan"), under which restricted shares of
stock are granted to non-employee directors on a formula basis. As of June 30,
2006, 280,000 shares of our common stock were reserved for issuance under the
Directors Stock Plan.
Under the Directors Stock Plan, each person who becomes a non-employee
Director of the Company after approval of the plan is automatically granted (i)
10,000 shares of Restricted Stock (as adjusted for stock splits, stock
dividends, reclassifications and like transactions) on the effective date of
such person's appointment or election as a non-employee Director if less than
six months have elapsed since the Company's last annual meeting of stockholders
or (ii) 5,000 shares of Restricted Stock (as adjusted for stock splits, stock
dividends, reclassifications and like transactions) on the effective date of
such person's appointment or election as a non-employee Director if at least six
months have elapsed since the Company's last annual meeting of stockholders,
provided that the person is not, and has not been in the preceding 12 months, an
officer or employee of the Company (an "Initial Award"). Outstanding awards
under this plan vest over one year.
In July 1995, the stockholders approved the Identix Incorporated Equity
Incentive Plan ("1995 Plan"). The 1995 Plan expired on July 5, 2005. In October
1997, 1998 and 2000, the stockholders amended the 1995 Plan so that a total of
4,700,000 shares of our common stock were reserved for issuance under the 1995
Plan. The 1995 Plan provides for the discretionary award of options, restricted
stock, stock purchase rights, performance shares or any combination of these
awards to eligible employees and non-employee directors and consultants. Under
the 1995 Plan, the term of any incentive stock option granted may not exceed 10
years and the term of any nonqualified stock option may not exceed 15 years. The
exercise price of incentive stock options must not be less than the fair market
value of our common stock at the date of grant. The exercise price of
nonqualified stock options must be at least 85% of the fair market value of the
Company's common stock at the date of grant.
In connection with the acquisition of Visionics in June 2002, we assumed
Visionics' stock option plans. At June 25, 2002, approximately 3,225,128 shares
of the Company's common stock were reserved for issuance under the assumed plans
and the related options.
SHARE BASED COMPENSATION EXPENSE
The fair value of each option award granted during the periods presented
was estimated on the date of grant using the Black-Scholes option valuation
model that uses the assumptions noted in the following table. Expected
22
volatilities are based on the historical volatility of our stock. We use
historical data to estimate option exercise and employee termination information
within the valuation model; separate groups of grantees that have similar
historical exercise behaviors are considered separately for valuation purposes.
The expected term of options granted is derived from historical information and
represents the period of time that options granted are expected to be
outstanding. The risk free rate for periods within the expected term of the
option is generally based on the 3 and 5 year U.S. Treasury bond rate in effect
at the time of the grant.
FISCAL YEAR ENDED JUNE 30, 2006
----------------------------------
DIRECTORS AND
EMPLOYEES OFFICERS
----------------------------------
Expected volatility 65.73% 77.91%
Expected dividends - -
Expected term (in years) 4.00 5.46
Risk-free interest rate 4.62% 4.44%
A summary of option activity under our plans and changes during the year ended
June 30, 2006, are presented below:
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE REMAINING AGGREGATE
PRICE CONTRACTUAL INTRINSIC
OPTIONS SHARES TERM(YEARS) VALUE
- --------------------------------------------------------------------------------
Outstanding at July 1, 7,058,681 $ 6.09 6.87
2005
Granted 331,535 $ 6.80 9.57
Exercised (684,497) $ 4.70 -
Forfeited or expired (227,763) $ 6.91 -
---------
Outstanding at June 30, 2006 6,477,956 $ 6.25 6.12 $9,409,000
---------
Excercisable at June 30 2006 5,887,432 $ 6.29 5.89 $8,575,000
=========
The weighted average fair value at date of grant for options granted
during fiscal years 2006, 2005 and 2004 was $3.66, $4.10 and $4.64 per option,
respectively.
The total intrinsic value of options exercised during the years ended June
30, 2006, 2005 and 2004 was $1,686,000, $1,170,000, and $2,965,000 respectively.
As of June 30, 2006 there was $1,368,000 of total unrecognized compensation cost
related to nonvested share-based compensation arrangements granted under our
stock option plans. That cost is expected to be recognized over a
weighted-average period of 1.44 years.
A summary of the status of our non-vested shares of restricted stock as of
June 30, 2006 is presented below:
WEIGHTED AVERAGE
GRANT DATE FAIR
NONVESTED RESTRICTED STOCK SHARES VALUE
--------------------------------------------------------------------------
Nonvested at July 1, 2005 - $ -
Granted 50,000 $ 4.56
Vested (25,000) $ 4.56
Forfeited - $ -
------------
Nonvested at June 30, 2006 25,000 $ 4.56
------------
The total fair value of restricted stock vested during the year ended June
30, 2006 was $177,000.
For periods prior to July 1, 2005, we accounted for our employee and
director stock option plans and employee stock purchase plans in accordance with
provisions of the Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees." As permitted by SFAS No. 123, we
measured employee compensation cost for our stock option plans using the
intrinsic value method of accounting.
23
Had compensation cost for our employee stock plans been recognized based
upon the estimated fair value on the grant date under the fair value methodology
prescribed by SFAS No. 123, as amended by SFAS No. 148, our net loss and net
loss per share would have been as follows (in thousands except per share data):
FISCAL YEARS ENDED JUNE 30,
----------------------------------
2005 2004
-------------- --------------
Net Loss as reported $(13,966) $(18,542)
Add: Employee stock-based compensation
expense included in reported net loss 14 649
Deduct: Total employee stock-based
compensation expense determined under
fair value based method for all awards (11,370) (3,836)
-------------- --------------
Pro forma net loss $ (25,322) $ (21,729)
============== ==============
Basic and diluted net loss per share:
As Reported $ (0.16) $ (0.21)
Pro forma $ (0.29) $ (0.25)
Shares 88,696 86,758
On June 30, 2005, we accelerated the vesting on 2,299,956 stock options
where the strike price of the stock options was above the market price of $5.03
per share at June 30, 2005. This action resulted in approximately $6,200,000 of
additional stock-based compensation expense in the pro forma disclosure for the
twelve months ended June 30, 2005. This was done for the purposes of eliminating
future compensation expense associated with the accelerated options upon our
adoption of SFAS No. 123R.
The employee stock-based compensation expense determined under the fair
value based method for the years ended June 30, 2005 and 2004 was estimated
using the Black-Scholes option valuation model with the assumptions noted in the
following table.
FISCAL YEAR ENDED FISCAL YEAR ENDED
JUNE 30, 2005 JUNE 30, 2004
----------------- -----------------
DIRECTORS DIRECTORS
AND AND
EMPLOYEES OFFICERS EMPLOYEES OFFICERS
--------- -------- --------- --------
Expected volatility 84.20% 85.05% 89.43% 89.04%
Expected dividends - - - -
Expected term (in 4.96 4.46 4.96 4.48
years)
Risk-free interest rate 3.86% 3.78% 2.70% 3.48%
A summary of option activity under our stock option plans and changes
during the years ended June 30, 2005 and 2004 is presented in the table below:
SHARES AVAILABLE OPTIONS WEIGHTED
FOR GRANT OUTSTANDING AVERAGE PRICE
BALANCE AS OF JUNE 30, 2003 7,168,794 8,259,664 $ 6.62
Options granted (1,450,023) 1,450,023 $ 5.69
Options exercised - (1,192,729) $ 4.29
Options canceled 2,162,648 (2,162,648) $ 8.55
------------- -------------
BALANCE AS OF JUNE 30, 2004 7,881,419 6,354,310 $ 6.21
Options granted (1,668,870) 1,668,870 $ 6.14
Options exercised - (441,673) $ 4.35
Options canceled 491,403 (522,826) $ 9.14
------------- ------------- ------------
BALANCE AS OF JUNE 30, 2005 6,703,952 7,058,681 $ 6.09
============= ============= ============
During fiscal year 2005 and 2004, we recognized $18,000 and $39,000 of
stock option expense related to 7,000 options that were granted consultants
during each year. During fiscal year 2005 and 2004, we recognized expense of
$14,000 and $649,000 primarily as a result of amortization of the intrinsic
value of the employee stock options assumed in the Visionics merger from fiscal
year 2002.
24
DEFINED CONTRIBUTION PLAN
We have a retirement savings plan pursuant to Section 401(k) of the
Internal Revenue Code (the Code), whereby an eligible employee may contribute a
portion of their earnings, not to exceed annual amounts allowable under the
Code. In addition, we may also make contributions at the discretion of the Board
of Directors. For the years ended June 30, 2006, 2005 and 2004, we provided for
matching contributions in our common stock totaling $664,000, $615,000 and
$605,000, respectively.
WARRANTS
We acquired certain technology from Delean on March 10, 2004 (see Note 3).
In exchange for the technology and intellectual property rights of Delean, we
issued 675,000 shares of Identix common stock and a warrant with contingent
future vesting rights in favor of Delean to purchase up to 800,000 shares of
Identix common stock at $4.70 per share. The warrant vests upon the successful
issuance of certain patents with the US government related to the technology
acquired from Delean. The fair value of any warrants which vest will be recorded
as additional cost of the intangible assets at the time of vesting. As of June
30, 2006, these warrants had not vested nor had any expense related to these
warrants been recorded. The Delean warrants expire in 2014.
In connection with our merger with Visionics in fiscal year 2002, all
warrants to purchase shares of Visionics common stock outstanding immediately
prior to the consummation of the merger were converted into warrants to purchase
635,211 shares of our common stock. The warrants to purchase 410,860, 142,344
and 82,007 shares of common stock had per share exercise prices ranging from
$1.24 to $1.40, from $4.22 to $5.82 and from $9.83 to $12.55, respectively. All
the warrants issued were immediately exercisable. During fiscal years 2003, 2004
and 2005, warrants to purchase a total of 410,860 shares were either exercised
or expired unexercised. During the fiscal year ended June 30, 2006, warrants to
purchase 142,344 shares were exercised for total proceeds of $689,000. The total
intrinsic value of warrants exercised during this period was $427,000. The
remaining warrants to purchase 82,007 shares of our common stock at June 30,
2006 expire in October 2006 and have exercise prices between $9.83 and $12.55.
In connection with the private placement of our common stock in July 1999,
we issued to the investors warrants to purchase 905,798 shares of common stock
for $11.33 per share until January 1, 2001 and an additional 362,319 shares at
$11.18 per share until July 1, 2004. The Company also issued a fully exercisable
warrant on July 1, 1999 to purchase 33,186 shares of common stock for $10.85 per
share to the broker who arranged the private placement. In April 2000, warrants
to purchase 905,798 of the Company's common shares at $11.33 per share were
exercised. The Company received net cash proceeds of $10,263,000. The warrant to
purchase 362,319 shares expired on July 1, 2004 such that no warrants remained
outstanding as of June 30, 2006 or 2005.
25
NOTE 11--INCOME TAXES
The following is a reconciliation between the statutory federal income tax rate
and the provision for income taxes related to continuing operations:
FISCAL YEAR ENDED JUNE 30,
-----------------------------
2006 2005 2004
------- ------- -------
(IN THOUSANDS)
Federal tax at statutory rate $(3,723) $(4,873) $(6,489)
State tax, net of federal benefit (255) (301) (1,119)
Tax benefit from discontinued operations -- -- (2,000)
(see note below)
Stock-based compensation 10 5 239
Gain on sale of subsidiary -- -- 667
Change in valuation allowance 3,870 5,152 6,544
Other (46) 59 201
------- ------- -------
$ (144) $ 42 $(1,957)
======= ======= =======
We recorded a deferred income tax benefit of $2,000,000 in fiscal year
2004 in our continuing operations which was created by the use of our net
operating losses to offset the income from the sale of the discontinued IPS
operations in fiscal year 2004 (see Note 4).
Deferred tax assets (liabilities) comprise the following:
----------------------------
2006 2005
----------- -----------
(IN THOUSANDS)
----------------------------
Net operating loss carryforwards $ 76,967 $ 78,837
Restructuring reserves and basis 2,286 2,302
differences
Accounts receivable and related allowances 160 215
Deferred revenue 1,205 551
Tax credit carryforward 2,666 2,786
Other 587 77
----------- -----------
Gross deferred tax assets 83,871 84,768
Valuation allowance (81,912) (81,077)
----------- -----------
Net deferred assets 1,959 3,691
----------- -----------
Unbilled accounts receivable - -
Acquired intangibles (1,959) (3,691)
----------- -----------
Gross deferred tax liabilities (1,959) (3,691)
----------- -----------
Total net deferred tax asset $ - $ -
=========== ===========
We have a valuation allowance of $81,912,000 as of June 30, 2006. Based
upon the results of the current and other recent year operations, we projected
operating results, and all other available objective information, we do not
believe it is more likely than not that sufficient future taxable income will be
generated to realize all of the net deferred tax assets. Included in the
valuation allowance as of June 30, 2006 and 2005 are tax benefits attributable
to non-compensatory stock options of $5,922,000 and $5,338,000, respectively,
which may be, if realized, credited to additional paid-in-capital.
We have federal net operating loss carry forwards of approximately
$211,000,000 as of June 30, 2006 available to reduce future taxable income. As
of June 30, 2006 we have state net operating loss carry forwards of
approximately $51,000,000. These carry forwards began to expire in 2007 and will
continue to expire through 2027. For federal and state tax purposes, our net
operating loss carry forwards may be subject to certain limitations on annual
utilization in the event of changes in ownership, as defined by federal and
state law.
As of June 30, 2006 and 2005, we have federal research and experimentation
credit carry forwards of approximately $2,425,000 for both periods which begin
to expire in 2007 and will continue to expire through 2027. We also have state
26
research and experimentation tax credit carry forwards of approximately $240,000
as of June 30, 2006, which will be carried forward indefinitely.
NOTE 12--REPORTABLE SEGMENT DATA
Our reportable segments are strategic business groups that offer different
products and services and include inter-segment revenues, corporate allocations
and administrative expenses. Revenues are attributed to the reportable segment
that is responsible for generating the revenue and the direct and indirect costs
incurred are similarly assigned. During the fiscal year ended June 30, 2006, the
reportable segments were changed to identify Finger Printing Services as a
reportable segment. The change was made to comply with the requirements of
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about
Segments of an Enterprise and Related Information" which requires disclosure of
reportable segment data when certain tests are met. In our case beginning with
fiscal year 2006, the revenue associated with the Finger Printing Services
segment was now 10% or more of total revenue and as a result, information
related to this segment is required to be disclosed. The information for fiscal
years 2005 and 2004 below has been reclassified to conform to the current
presentation. The Biometric Systems segment consists primarily of activities
related to the sale, services and integration of Biometric hardware and
software. The Finger Printing Services segment consists primarily of activities
related to servicing contracts with state agencies and private sector entities
where background checks and/or applicant screening are required. The Finger
Printing Services segment is comprised of the US operations. The Other segment,
where specified, relates to discontinued operations.
FISCAL YEAR ENDED JUNE 30,
2006 2005 2004
------------- ------------- -------------
Total revenues (In Thousands)
Biometric systems $ 73,133 $ 65,055 $ 51,640
Finger Printing
Services 8,589 6,907 2,421
------------- ------------- -------------
$ 81,722 $ 71,962 $ 54,601
============= ============= =============
Depreciation and
amortization:
Biometric systems $ 5,572 $ 5,887 $ 7,240
Finger Printing
Services 435 454 264
Other(1) 21 37 318
------------- ------------- -------------
$6,028 $6,378 $7,822
============= ============= =============
Interest and other income (expense),
net:
Biometric systems $ 1,002 $ 1,041 $ 1,155
Finger Printing
Services 176 584 (2)
------------- ------------- -------------
$ 1,178 $ 1,625 $ 1,153
============= ============= =============
Capital expenditures:
Biometric systems $ 2,158 $ 573 $ 930
Finger Printing
Services 819 272 32
Other(2) 10 2 47
------------- ------------- -------------
$ 2,987 $ 847 $ 1,009
============= ============= =============
Loss from operations:
Biometric systems $ (11,831) $ (15,473) $ (24,369)
Finger Printing
Services 16 465 130
------------- ------------- -------------
$ (11,815) $ (15,008) $ (24,369)
============= ============= =============
JUNE 30, JUNE 30,
------------- -------------
2006 2005
------------- -------------
Goodwill (IN THOUSANDS)
Biometric systems $ 140,945 $ 140,945
Finger Printing
Services 268 268
------------- -------------
$ 141,213 $ 141,213
============= =============
27
JUNE 30, JUNE 30,
------------- -------------
2006 2005
------------- -------------
Assets: (IN THOUSANDS)
Biometric systems $ 204,446 $ 208,442
Finger Printing
Services 7,434 5,755
Other(3) - 858
------------- -------------
$ 211,880 $ 215,055
============= =============
(1) Includes identifiable expense classified as discontinued operations of
$21,000, $37,000 and $318,000 for the years ended June 30, 2006, 2005 and 2004
respectively,
(2) Includes identifiable expenditures from discontinued operations of $10,000,
$2,000 and $47,000 for the years ended June 30, 2006, 2005 and 2004
respectively,
(3) Includes identifiable assets from discontinued operations of $858,000 for
the year ended June 30, 2005,
NOTE 13--FOREIGN OPERATIONS DATA
In geographical reporting, revenues and identifiable assets are attributed to
the geographical location of the sales and service organizations:
FISCAL YEAR ENDED JUNE 30,
2006 2005 2004
-------------- -------------- --------------
Total revenues: (IN THOUSANDS)
United States $ 70,822 $ 63,270 $ 47,196
International 10,900 8,692 6,865
-------------- -------------- --------------
$ 81,722 $ 71,962 $ 54,061
============== ============== ==============
JUNE 30, JUNE 30,
------------- -------------
2006 2005
------------- -------------
*Identifiable long lived (IN THOUSANDS)
assets:
United States $ 3,874 $ 1,712
International 13 26
------------- -------------
$ 3,887 $ 1,738
============= =============
*Long lived assets consist of property and equipment.
NOTE 14--COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
We currently occupy our Minnesota headquarters under a lease that expires
in March 2008, and are required to pay taxes, insurance, and maintenance as well
as monthly rental payments. We also lease space for our corporate research and
development lab in New Jersey under a lease that has been extended until April
2007, and we are required to pay taxes, insurance, and maintenance as well as
monthly rental payments. We also lease space in Fairfax, Virginia for a sales
office under a lease that expires in 2009. Further, we lease office space for
our sales force and customer support activities under operating leases, which
expire at various dates through 2008. The leases contain escalation provisions
requiring rental increases for increases in operating expense and real estate
taxes.
28
Future net minimum lease payments for operating leases are as follows (in
thousands):
Periods or fiscal years ending June 30:
2007 $ 1,804,000
2008 1,309,000
2009 358,000
Thereafter -
------------
Total $ 3,471,000
============
Total rental expense from continuing operations under operating leases,
net of sublease income, was $1,833,000, $1,813,000, and $1,767,000 for the years
ended June 30, 2006, 2005 and 2004, respectively.
LEGAL MATTERS
From time to time in the ordinary course of business we are involved in
disputes with third parties, including former employees of the Company.
Currently we are a defendant in one lawsuit filed by a former employee in the
Fresno County Superior Court of California alleging among other things wrongful
discharge. We believe the claims are completely without merit and are vigorously
defending the lawsuit. In a separate dispute, in June 2006 another former
employee filed a lawsuit in U.S. District Court for the Central District of
California alleging, among other things, unlawful wage rate discrimination based
on gender. The employee had previously initiated an arbitration proceeding in
California containing the same allegations. The former employee filed the
lawsuit after the Company prevailed in its declaratory judgment action in
federal court in Minnesota in April 2006 when the court enjoined the plaintiff
from further prosecuting plaintiff's arbitration proceeding in California and
further ordered plaintiff to arbitrate her dispute in Minnesota in accordance
with the terms of plaintiff s sales commission agreement with Company. We
believe that the plaintiff s claims are completely without merit and are
vigorously defending the lawsuit and the pending arbitration proceeding. While
it is not possible at this early stage to predict with certainty the outcome of
these disputes, based on the facts and information currently available to us, we
believe that liabilities and costs arising out of these actions will not have a
material adverse impact on the Company's consolidated financial position,
results of operations or cash flows.
OTHER
We are subject to the possibility of various loss contingencies arising in
the ordinary course of business. We consider the likelihood of the loss or
impairment of an asset or the incurrence of a liability as well as our ability
to reasonably estimate the amount of loss in determining loss contingencies. An
estimated loss contingency is accrued when it is probable that a liability has
been incurred or an asset has been impaired and the amount of loss can be
reasonably estimated. We regularly evaluate available current information to
determine whether such reserves should be adjusted.
NOTE 15--INDEMNIFICATION ARRANGEMENTS AND PRODUCT WARRANTIES
The terms of the sale of IPS (see Note 4) included an obligation on our
part to indemnify Alion against certain potential liabilities, including for
breaches of representations and warranties we made in the sales agreement, for
an amount not to exceed $2,125,000. This indemnification expired in February
2006.
The terms of the sale of LDS (see Note 4) included an obligation on our
part to indemnify the buyer against certain potential liabilities, including for
breaches of representations and warranties we made in the sales agreement, for
an amount not to exceed $300,000. This indemnification expires in January 2007.
From time to time, we agree to indemnify our customers against liability
if our products infringe a third party's intellectual property rights. As of
June 30, 2006 and 2005, we were not subject to any pending litigation alleging
that our products infringe the intellectual property rights of any third
parties.
We offer a warranty on various products and services. We estimate the
costs that may be incurred under our warranties and record a liability in the
amount of such costs at the time the product is sold. Factors that affect our
29
warranty liability include the number of units sold, historical and anticipated
rates of warranty claims and cost per claim. We periodically assess the adequacy
of our recorded warranty liabilities and adjust the amounts as necessary. The
amount of the reserve recorded is equal to the estimated costs to repair or
otherwise satisfy the claim.
The following table presents changes in our warranty liability for fiscal
years 2006 and 2005 respectively:
JUNE 30, JUNE 30,
------- -------
2006 2005
------- -------
(IN THOUSANDS)
Balance at beginning of $ 1,416 $ 921
period
Warranty Expense 292 1,768
Closed Warranty Claims (154) (1,273)
------- -------
Balance at end of period $ 1,554 $ 1,416
======= =======
30