SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20559
FORM 10-K
(Mark One)
(x) Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended September 30, 1998
or
( ) Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission file number 0-15235
MITEK SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 87-0418827
(State or other jurisdiction of I.R.S Employer Identification No.)
incorporation or organization)
10070 CARROLL CANYON ROAD, SAN DIEGO, CALIFORNIA 92131
(Address of principal executive offices) (Zip Code)
(619) 635-5900
Registrant's telephone number, including area code
NONE
Securities registered pursuant to Section 12(b) of the Act
COMMON STOCK, PAR VALUE $.001 PER SHARE
Securities registered pursuant to Section 12(g) of the Act
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /x/
The aggregate market value of voting stock held by non-affiliates of
the registrant was $5,499,170 as of December 1, 1998 (computed by reference to
the last sale price of a share of the registrant's Common Stock on that date as
reported by NASDAQ).
There were 11,573,152 shares outstanding of the registrant's Common
Stock as of December 1, 1998.
Documents incorporated by reference in this report: Part II
incorporates certain information by reference form the Annual Report to
Stockholders for the year ended September 30, 1998. Part III incorporates
certain information by reference from the Proxy Statement for the 1998 Annual
Meeting of Stockholders.
SEC FORM 10-K
FY 98 - PART I - GENERAL INFORMATION
ITEM 1. BUSINESS
GENERAL
Mitek Systems, Inc. (the "Company") was incorporated under the laws of
the State of Delaware in 1986. The Company is primarily engaged in the
development and sale of software products with particular focus on intelligent
character recognition and forms processing technology, products and services for
the document imaging markets.
The Company develops, markets and supports what it believes to be the
most accurate Automated Document Recognition ("ADR") products commercially
available for the recognition of hand printed characters. The Company's unique
proprietary technology recognizes hand printed and machine generated characters
with a level of accuracy that renders the Company's ADR products a viable
alternative to manual data entry in certain applications. The Mitek solution
allows customers that process large volumes of standardized hand printed
documents to do so more quickly, with greater accuracy and at reduced costs.
PRODUCTS AND RELATED MARKETS
AUTOMATED INTELLIGENT CHARACTER RECOGNITION
Since 1992 the Company has developed and marketed ADR products which
enable the automation of costly, labor intensive business functions such as
check and remittance processing, forms processing and order entry. The Company's
ADR products incorporate proprietary neural network software technology for the
recognition and conversion of hand printed and machine generated characters into
digital data. Neural networks are powerful tools for pattern recognition
applications and consist of sets of coupled mathematical equations with adaptive
parameters that self adjust to "learn" various forms and patterns. The Company's
ADR products combine the Company's neural network software technology with an
extensive database of character patterns, enabling them to make fine
distinctions across a wide variety of patterns with high speed, accuracy and
consistency. The Company leverages its core technology across a family of ADR
products that the Company believes offers the highest accuracy commercially
available for the recognition of hand printed characters.
The Company's ADR products incorporate the Company's proprietary
intelligent character recognition (ICR) software engine QuickStrokes-Registered
Trademark- API, and a licensed ICR software engine CheckScript-TM- (a trademark
of Parascript LLC). QuickStrokes-Registered Trademark- API and CheckScript-TM-
are sold to original equipment manufacturers (OEMs) such as BancTec, NCR, ABC
Bull, and Unisys, and to systems integrators such as Captiva. Major end users
include Chevron, GTE, European American Bank, NYNEX, Fleet Bank,
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National Westminster and British Telcom. QuickStrokes-Registered Tradmark- API
can process many foreign character sets.
The CheckScript-TM- product, used in financial document processing,
combines the Legal Amount Recognition (LAR) capabilities licensed from
Parascript, LLC with the Company's proprietary QuickStrokes-Registered Tradmark-
API Courtesy Amount Recognition (CAR) technology. This product provides
unprecedented accuracy in remittance processing, proof of deposit, and lock box
processing applications.
Leveraging its core technical competency in ICR, the Company has begun
to address certain vertical markets through the introduction of its Premier
Forms Processor Pro-TM- ("PFP Pro-TM-"). PFP Pro-TM- incorporates the Company's
core ICR technology in an application designed to be marketed directly to end
users in a broad variety of industries which require high volume automated data
entry. PFP Pro-TM- operates on the Windows operating platform on stand alone or
networked personal computers, features an intuitive graphical user interface
("GUI"), and is designed for easy installation and configuration by the end
user. The Company's end user customers include Los Angeles Unified School
District, Cognitronics UK, Woodgate, MSB International, Fluke, and Baltimore
Sun. The Company also sells its PFP Pro-TM- products to systems integrators and
Value Added Resellers.
The QuickFrame-TM- product is an advanced page segmentation system that
separates the scanned image of a document into isolated regions, each containing
a single information type. The system outputs the coordinates and type of each
region and can produce "cut-out" images of isolated regions for easier
processing. The QuickFrame- -TM- system is designed for document imaging and
forms processing applications across a wide variety of industries.
QuickFX-TM- is a software toolkit that provides automatic form ID, form
registration and form/template removal. It will significantly improve automatic
data capture (ICR/OCR), forms processing, document imaging and storage
performance. QuickFX-TM- reduces the image size by removing extraneous
information such as pre-printed text, lines, and boxes; leaving only the
filled-in data. It repairs the characters that are left, ensuring better
recognition, enhanced throughput, and higher accuracy rates.
RESEARCH AND DEVELOPMENT
The Company believes that its future success depends in part on its
ability to maintain and improve its core technologies, enhance its existing
products and develop new products that meet an expanding range of customer
requirements. The Company intends to expand its existing product offerings and
to introduce new forms processing software solutions. In the development of new
products and enhancements to existing products, the Company uses its own tools
extensively. The Company performs all quality assurance and develops
documentation internally. The Company intends to continue to support industry
standard operating environments.
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The Company's team of specialists in recognition algorithms, software
engineering, user interface design, product documentation and quality
improvement is responsible for maintaining and enhancing the performance,
quality and usability of all of the Company's products. In addition to research
and development, the engineering staff provides customer technical support on an
as needed basis, along with technical sales support.
In order to improve the accuracy of its ADR products, the Company
focuses research and development efforts on continued enhancement of its core
technology and on its database of millions of character images that is used to
"train" the neural network software that forms the core of the Company's ICR
engine. In addition, the Company has expanded its research and development tasks
to include pre- and post-processing of data subject to automated processing.
The Company's research and development organization included sixteen
software engineers at September 30, 1998, including six with advanced
degrees. In the fiscal year ended September 30, 1998, the Company spent
approximately $1,343,000 on research and development and spent approximately
$1,393,000 and $1,314,000 on research and development in each of the fiscal
years 1997 and 1996. The 1998, 1997, and 1996 figures do not include
$878,000, $458,000, and $411,000 respectively, that was spent in research and
development related to contract development and was charged to cost of sales.
The Company balances its engineering resources between development of
ICR technology and applications development. Of the sixteen software engineers,
approximately four are involved in ICR research and development of the
QuickStrokes-Registered Tradmark- API recognition engine. The remaining staff is
involved in applications development, including the PFP Pro-TM-, QuickFX-TM-,
and QuickFrame-TM- products, and customer services and support.
INTELLECTUAL PROPERTY
The Company's success and ability to compete is dependent in part upon
its proprietary technology. The Company relies on a combination of patent,
copyright and trade secret laws and non-disclosure agreements to protect its
proprietary technology. The Company was recently notified that the U.S. Patent
and Trademark Office has approved the issuance of a U.S. patent for its
hierarchical character recognition systems. The patent will cover the
multiple-pass, multiple-expert system that significantly increases the accuracy
of forms processing and item processing applications. The Company may seek to
file additional patents emanating from this patent to expand the scope of patent
coverage. The Company may also file future patents to cover technologies under
development. There can be no assurance that patents will be issued with respect
to future patent applications or that the Company's patents will be upheld as
valid or will prevent the development of competitive products.
The Company also seeks to protect its intellectual property rights by
limiting access to the distribution of its software, documentation and other
proprietary
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information. In addition, the Company enters into confidentiality agreements
with its employees and certain customers, vendors and strategic partners. There
can be no assurance that the steps taken by the Company in this regard will be
adequate to prevent misappropriation of its technology or that the Company's
competitors will not independently develop technologies that are substantially
equivalent or superior to the Company's technologies.
The Company is also subject to the risk of adverse claims and
litigation alleging infringement on the intellectual property rights of others.
In this regard, there can be no assurance that third parties will not assert
infringement claims in the future with respect to the Company's current or
future products or that any such claims will not require the Company to enter
into license arrangements or result in protracted and costly litigation,
regardless of the merits of such claims. No assurance can be given that any
necessary licenses will be available or that, if available, such licenses can be
obtained on commercially reasonable terms.
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SALES AND MARKETING
The Company markets its products and services primarily through its
internal, direct sales organization. The Company employs a technically-oriented
sales force with management assistance to identify the needs of existing and
prospective customers. The Company's sales strategy concentrates on those
companies that it believes are key users and designers of automated document
processing systems for high-performance, large volume applications. The Company
currently maintains sales offices in California, Virginia and Florida. In
addition, the Company sells and supports its products through foreign resellers
in Germany, France, Italy, the United Kingdom and Australia. The sales process
is supported with a broad range of marketing programs which include trade shows,
direct marketing, public relations and advertising.
The Company provides maintenance and support on a contractual basis
after the initial product warranty has expired. The Company provides telephone
support and on-site support. Customers with maintenance coverage receive
software releases from the Company. Foreign distributors generally provide
customer training, service and support for the products they sell. Additionally,
the Company's products are supported internationally by periodic distributor and
customer visits by Company management. These visits include attending imaging
shows, as well as sales and training efforts. Technical support is provided by
telephone as well as technical visits in addition to those previously mentioned.
The ability to support international markets has materially assisted
the Company in its international sales effort. The Company believes that the
competition has much less functionality in this regard. International sales
accounted for approximately 23%, 41%, and 31% of the Company's net sales for
the fiscal periods ended September 30, 1998, 1997, and 1996, respectively.
The Company believes that a significant percentage of the products in its
domestic sales are incorporated into systems that are delivered to end users
outside the United States. International sales in the past twelve months were
made in nineteen countries including Australia, Argentina, Brazil, Canada,
Czechoslovakia, Denmark, United Kingdom, France, Finland, Germany, Italy,
Japan, Mexico, Netherlands, Norway, Poland, Spain and Sweden. The Company
sells its products in United States currency only. The Company relied on a
significant portion of its revenues from one, three and two customers in
fiscal periods 1998, 1997, and 1996, respectively. Sales from these customers
aggregated 33%, 54%, and 33% of net sales for the fiscal periods 1998, 1997,
and 1996, respectively.
MAINTENANCE AND SUPPORT
The Company has an internal customer service department that handles
installation and maintenance requirements. The majority of inquiries are handled
by telephone, with occasional visits to the customer's facilities. The Company
believes that as the installed base of its products grows, the customer service
function will become a source of recurring revenues. Costs incurred by the
Company to supply maintenance and support services are charged to cost of sales.
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COMPETITION
The market for the Company's ADR products is intensely competitive,
subject to rapid change and significantly affected by new product
introductions and other market activities of industry participants. The
Company faces direct and indirect competition from a broad range of
competitors who offer a variety of products and solutions to the Company's
current and potential customers. The Company's principal competition comes
from (i) customer-developed solutions; (ii) direct competition from companies
offering ICR systems; and (iii) companies offering competing technologies
capable of recognizing hand-printed and cursive characters.
It is also possible that the Company will face competition from new
competitors. Moreover, as the market for automated data entry and ICR software
develops, a number of companies with significantly greater resources than the
Company could attempt to enter or increase their presence in the Company's
market either independently or by acquiring or forming strategic alliances with
competitors of the Company or to otherwise increase their focus on the industry.
In addition, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to increase the
ability of their products to address the needs of the Company's current and
prospective customers.
The Company's QuickStrokes-Registered Tradmark- API product and
licensed CheckScript-TM- product compete, to various degrees, with products
produced by a number of substantial competitors such as Computer Gesellschaft
Konstanz, a subsidiary of Siemens. Competition among product providers in this
market generally focuses on price, accuracy, reliability and technical support.
The Company believes its primary competitive advantages are its (i) recognition
accuracy with regard to hand printed characters, (ii) flexibility, since it may
operate on a broad range of computer operating platforms, (iii) scalability and
(iv) object-oriented software designs which can be more readily modified,
improved with added functionality, configured for new products, and ported to
new operating systems and upgrades. Despite these advantages,
QuickStrokes-Registered Tradmark- API and CheckScript-TM- competitors have
existed longer and have far greater financial resources and industry connections
than the Company.
The Company's PFP Pro-TM- products compete against complete
proprietary systems offered by software developers, such as GTESS
Corporation, RRI, and Cardiff Software, Inc. In addition, PFP Pro-TM- faces
competition from providers of recognition systems that incorporate ADR
technology such as Microsystems Technology, Inc., and Captiva. Because PFP
Pro-TM- is based on the Company's proprietary QuickStrokes-Registered
Tradmark- API engine, its competitive advantages reflect the advantages of
the QuickStrokes-Registered Tradmark- engine. Competitors in this market
offer both high and low cost systems. The Company's strategy is to position
PFP Pro-TM- to compete successfully in a scalable midrange price while
offering a higher degree of accuracy and greater flexibility than competing
systems currently on the market.
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Increased competition may result in price reductions, reduced gross
margins, and loss of market share, any of which could have a material adverse
effect on the Company's business, operating results and financial condition.
EMPLOYEES AND LABOR RELATIONS
As of September 30, 1998, the Company employed a total of 32 full-time
and two part-time persons plus six full-time temporary employees, consisting of
seven in marketing, sales and support, 16 in research and development, seven in
operations, and 10 in finance, administration and other capacities. The Company
has never had a work stoppage. None of its employees are represented by a labor
organization, and the Company considers its relations with its employees to be
good.
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ITEM 2. PROPERTIES
The Company's principal executive offices, as well as its principal
research and development facility, is located in approximately 21,000 square
feet of leased office building space in San Diego, California, of which the
Company subleases to a third party approximately 9,000 square feet. The lease
and sub lease on these facilities expires June 30, 2002. The Company also
leases a sales, customer services and support facility in Virginia. The
Company believes that its existing facilities are adequate for its current
needs.
ITEM 3. LEGAL PROCEEDINGS
In the general course of business, the Company, at various times, has
been named in lawsuits. During fiscal 1998, the Company was involved in a number
of legal proceedings. All of these proceedings were resolved (or in the process
of complete resolution) by the end of the fiscal year or shortly thereafter and
the costs of these settlements are included in the September 30, 1998
financials.
In October 1998 the Company settled a lawsuit with the two founders of
Technology Solutions, Inc.("TSI"). The Company had acquired substantially all of
the assets of TSI in June 1997 in exchange for 685,714 unregistered shares of
the Company's common stock and $240,000 cash. Disputes arose between the
Company, TSI, and the principals of TSI. Pursuant to the settlement agreement,
the Company reacquired 591,114 shares of its common stock and a non-exclusive,
non-transferable, perpetual, worldwide, royalty-free license to use key
components of the TSI document imaging systems software; TSI and its principals
reacquired ownership of their technology and software.
The Company agreed in October 1998 to settle a pending lawsuit with
Adaptive Solutions, a Beaverton, Oregon based computer assisted data entry
provider and also settled an employee related lawsuit.
In October 1998 the Company also revamped their agreement with
Parascript Limited Liability Corporation (LLC), under which the Company licenses
Parascript's Legal Amount Recognition (LAR) capabilities used in the
CheckScript-TM- product. The Company and Parascript LLC agreed to undo their
cross investment agreement and entered into a new licensing agreement. The new
licensing agreement is not exclusive except for six major customers, and
provides for a reduction in royalty percentages payable. The Company received
all 763,922 shares of unregistered common stock of the Company previously held
by Parascript LLC in exchange for returning its 10% interest in Parascript LLC,
exclusivity for six customers, and reduced royalties.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to security holders during the fourth
quarter ended September 30, 1998.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market for Registrant's common equity and related stockholder matters
is incorporated by reference from the Company's Annual Report to Stockholders
for the year ended September 30, 1998.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data for each of the years in the five-year period
ended September 30, 1998 is incorporated by reference from the Company's Annual
Report to Stockholders for the year ended September 30, 1998.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results
of operations is incorporated by reference from the Company's Annual Report to
Stockholders for the year ended September 30, 1998.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and supplementary data and the Independent
Auditor's Report is incorporated by reference from the Company's Annual Report
to Stockholders for the year ended September 30, 1998.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors and executive officers of the
Registrant and compliance with section 16(a) of the Securities Exchange Act is
incorporated by reference from information contained in the Proxy Statement for
the 1998 Annual Meeting of Stockholders under the heading "ELECTION OF
DIRECTORS".
ITEM 11. EXECUTIVE COMPENSATION
9
Incorporated by reference from the information contained in the Proxy
Statement for the 1998 Annual Meeting of Stockholders under the heading
"EXECUTIVE COMPENSATION".
10
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the information contained in the Proxy
Statement for the 1998 Annual Meeting of Stockholders under the heading
"SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACITONS.
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND
REPORTS ON FORM 8-K
(a) (1) The following documents are included in the Company's Annual
Report to Stockholders for the year ended September 30, 1998:
Independent Auditors' Report
Consolidated Balance Sheets -
For the Years Ended
September 30, 1998 and 1997
Consolidated Statements of Operations -
For the Years Ended
September 30, 1998, 1997, and 1996
Consolidated Statements of Changes in
Stockholders' Equity -
For the Years Ended
September 30, 1998, 1997, and 1996
Consolidated Statements of Cash Flows -
For the Years Ended
September 30, 1998, 1997, and 1996
Notes to Financial Statements For the
years Ended September 30, 1998,
1997, and 1996
With the exception of the financial statements listed above
and the information incorporated by reference herein, the
Annual Report to Stockholders for the fiscal year ended
September 30, 1998, is not to be deemed to be filed as part of
this report.
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(a)(2) Exhibits:
3.1 Certificate of Incorporation of Mitek Systems of Delaware Inc.
(now Mitek Systems, Inc.), a Delaware corporation, as amended.
(1)
3.2 Bylaws of Mitek Systems, Inc. as Amended and Restated. (1)
10.1 1986 Stock Option Plan (2)
10.2 1988 Non Qualified Stock Option Plan (2)
10.3 1996 Stock Option Plan
10.4 401(k) Plan (2)
10.5 $750,000 revolving line of credit Loan Agreement, Promissory
Note, and Commercial Security Agreement (3)
10.6 $250,000 equipment line of credit Promissory Note and
Commercial Security Agreement (3)
13. Annual Report to Stockholders for the year ended September 30,
1998.
21. Subsidiaries of the Registrant
23.1 Independent Auditors' Consent
27. Financial Data Schedule
(1) Incorporated by reference to the exhibits to the Company' Annual Report
on Form 10-K for the fiscal year ended September 30, 1997
(2) Incorporated by reference to the exhibits to the Company's Registration
Statement on Form SB-2 originally filed with the SEC on July 9, 1996
(3) Incorporated by reference to the exhibits to the Company's Quarterly
Report of Form 10-Q for the period ended June 30, 1998 filed on August
15, 1998
Upon request, the Registrant will furnish a copy of any of the
listed exhibits for $0.50 per page.
(b) The following is a list of Current Reports on Form 8-K filed
by the Company during or subsequent to the last quarter of the
fiscal year ended September 30, 1998:
Report on Form 8-K filed on October 9, 1998
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: December 28, 1998 MITEK SYSTEMS, INC.
By: /s/ John M. Thornton
---------------------
John M. Thornton,
Chairman of the Board,
President, Chief Executive Officer
and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
/s/ John M. Thornton December 28, 1998
John M. Thornton,
Chairman of the Board
President, Chief Executive Officer
and Chief Financial Officer
/s/ Gerald I. Farmer December 28, 1998
Gerald I. Farmer, Director
/s/ Daniel E. Steimle December 28, 1998
Daniel E. Steimle, Director
/s/ Sally B. Thornton December 28, 1998
Sally B. Thornton, Director
/s/ James B. DeBello December 28, 1998
James B. DeBello, Director
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MITEK SYSTEMS, INC.
INDEX TO EXHIBITS
EXHIBIT
NO. EXHIBIT
3.1 Certificate of Incorporation of Mitek Systems of Delaware,
Inc. (now Mitek Systems, Inc.) a Delaware corporation, as
amended. (1)
3.2 Bylaws of Mitek Systems, Inc. as Amended and
Restated. (1)
10.1 1986 Stock Option Plan (2)
10.2 1988 Non Qualified Stock Option Plan (2)
10.3 1996 Stock Option Plan
10.4 401(k) Plan (2)
10.5 $750,000 revolving line of credit Loan Agreement, Promissory
Note, and Commercial Security Agreement (3)
10.6 $250,000 equipment line of credit Promissory Note and
Commercial Security Agreement (3)
13. Annual Report to Stockholders for the year ended September 30,
1998.
21. Subsidiaries of the Registrant
23.1 Independent Auditors' Consent
27. Financial Data Schedule
(1) Incorporated by reference to the exhibits to the Company' Annual Report
on Form 10-K for the fiscal year ended September 30, 1997
(2) Incorporated by reference to the exhibits to the Company's Registration
Statement on Form SB-2 originally filed with the SEC on July 9, 1996
(3) Incorporated by reference to the exhibits to the Company's Quarterly
Report of Form 10-Q for the period ended June 30, 1998 filed on August
15, 1998
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EXHIBIT 10.3
MITEK SYSTEMS, INC.
AMENDED AND RESTATED 1996 STOCK OPTION PLAN
1. PURPOSE. This Stock Option Plan (the "Plan") is intended to serve
as an incentive to, and to encourage stock ownership by certain eligible
participants rendering services to Mitek Systems, Inc., a Delaware
corporation, and certain affiliates as set forth below (the "Corporation"),
so that they may acquire or increase their proprietary interest in the
Corporation and to encourage them to remain in the service of the Corporation.
2. ADMINISTRATION.
2.1 COMMITTEE. The Plan shall be administered by the Board of
Directors of the Corporation (the "Board of Directors"), or a committee of
two or more directors appointed by the Board of Directors (the "Committee")
who are Non-Employee Directors as defined in Rule 16b-3 promulgated under
Section 16 of the Securities Exchange Act of 1934 and an outside director as
defined in Treasury Regulation Section 1.162-27(e)(3). The Committee shall
select one of its members as Chairman and shall appoint a Secretary, who need
not be a member of the Committee. The Committee shall hold meetings at such
times and places as it may determine and minutes of such meetings shall be
recorded. Acts by a majority of the Committee in a meeting at which a quorum
is present and acts approved in writing by a majority of the members of the
Committee shall be valid acts of the Committee.
2.2 COMPLIANCE WITH RULE 16b-3. Each member of the Committee shall
be a "non employee director" as that term is defined in Rule 16b-3 ("Rule
16b-3") promulgated pursuant to Section 16(b) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act") meaning for purposes of this Plan,
that no director may be a member of the Committee if that director, during
the period of such director's service on the Committee (i) is an officer,
employee or consultant of the Corporation, or (ii) engages in any related
party transactions with the Corporation of a nature which would be required
to be disclosed to shareholders under the provisions of the Exchange Act.
The Board of Directors or the Committee may impose such conditions on the
exercise of any option as may be required to satisfy the requirements of Rule
16b-3 or any successor provision in effect at the time. All grants under the
Plan made to non employee directors shall be approved by the full Board of
Directors or ratified by the shareholders of the Corporation.
2.3 TERM. If the Board of Directors selects a Committee, the
members of the Committee shall serve on the Committee for the period of time
determined by the Board of Directors and shall be subject to removal by the
Board of Directors at any time. The Board of Directors may terminate the
function of the Committee at any time and resume all powers and authority
previously delegated to the Committee.
2.4 AUTHORITY. The Committee shall have sole discretion and
authority to grant options under the Plan to eligible participants rendering
services to the Corporation or any "parent" or "subsidiary" of the
Corporation, as defined in Section 424 of the Internal Revenue Code of 1986,
as amended (the "Code") ("Parent or Subsidiary"), at such times, under such
terms and in such amounts as it may decide. For purposes of this Plan and
any Stock Option Agreement (as defined below), the term "Corporation" shall
include any Parent or Subsidiary, if applicable. Subject to the express
provisions of the Plan, the Committee shall have complete authority to
interpret the Plan, to prescribe, amend and rescind the rules and regulations
relating to it, to determine the details and provisions of any Stock Option
Agreement, to accelerate any options and to make all other determinations
necessary and advisable for the administration of the Plan.
2.5 TYPE OF OPTION. The Committee shall have full authority and
discretion to determine, and shall specify, whether the eligible individual
will be granted options intended to qualify as incentive options under
Section 422 of the Code ("Incentive Options") or options which are not
intended to qualify under Section 422 of the Code ("Non-Qualified Options");
provided, however, that Incentive Options shall only be granted to employees
of the Corporation, or a Parent or Subsidiary thereof, and shall be subject
to the special limitations set forth herein attributable to Incentive Options.
2.6 INTERPRETATION. The interpretation and construction by the
Committee of any provisions of the Plan or of any option granted under the
Plan shall be final and binding on all parties having an interest in this
Plan or any option granted hereunder. No member of the Committee shall be
liable for any action or determination made in good faith with respect to the
Plan or any option granted under the Plan.
3. ELIGIBILITY.
3.1 GENERAL. All directors, officers, employees of and certain
persons rendering services to the Corporation relative to the Corporation's
management, operation or development shall be eligible to receive options
under the Plan. The selection of recipients of options shall be within the
sole and absolute discretion of the Committee. No person shall be granted an
Incentive Option under this Plan unless such person is an employee of the
Corporation on the date of grant. No person shall be granted an option under
this Plan unless such person has executed, if requested by the Committee, the
grant representation letter set forth on Exhibit "A," as such Exhibit may be
amended by the Committee from time to time. No person shall be granted more
than 500,000 options in any one year period.
3.2 TERMINATION OF ELIGIBILITY.
3.2.1 If an optionee ceases to be employed by the
Corporation, is no longer an officer or member of the Board of Directors of
the Corporation, or no longer performs services for the Corporation for any
reason (other than for "cause," as hereinafter defined, or such optionee's
death), any option granted hereunder to such optionee shall expire three
months after the occurrence giving rise to such termination of eligibility
(or 1 year in the event an optionee is "disabled," as defined in Section
22(e)(3) of the Code) or upon the date it expires by its terms, whichever is
earlier. Any option that has not vested in the optionee as of the date of
such termination
2
shall immediately expire and shall be null and void. The Committee shall, in
its sole and absolute discretion, decide, utilizing the provisions set forth
in Treasury Regulations Section 1.421-7(h), whether an authorized leave of
absence or absence for military or governmental service, or absence for any
other reason, shall constitute termination of eligibility for purposes of
this Section.
3.2.2 If an optionee ceases to be employed by the
Corporation, is no longer an officer or member of the Board of Directors of
the Corporation, or no longer performs services for the Corporation and such
termination is as a result of "cause," as hereinafter defined, then all
options granted hereunder to such optionee shall expire on the date of the
occurrence giving rise to such termination of eligibility or upon the date it
expires by its terms, whichever is earlier, and such optionee shall have no
rights with respect to any unexercised options. For purposes of this Plan,
"cause" shall mean an optionee's personal dishonesty, misconduct, breach of
fiduciary duty, incompetence, intentional failure to perform stated
obligations, willful violation of any law, rule, regulation or final cease
and desist order, or any material breach of any provision of this Plan, any
Stock Option Agreement or any employment agreement.
3.3 DEATH OF OPTIONEE AND TRANSFER OF OPTION. In the event an
optionee shall die, an option may be exercised (subject to the condition that
no option shall be exercisable after its expiration and only to the extent
that the optionee's right to exercise such option had accrued at the time of
the optionee's death) at any time within six months after the optionee's
death by the executors or administrators of the optionee or by any person or
persons who shall have acquired the option directly from the optionee by
bequest or inheritance. Any option that has not vested in the optionee as of
the date of death or termination of employment, whichever is earlier, shall
immediately expire and shall be null and void. No option shall be
transferable by the optionee other than by will or the laws of intestate
succession.
3.4 LIMITATION ON INCENTIVE OPTIONS. No person shall be granted
any Incentive Option to the extent that the aggregate fair market value of
the Stock (as defined below) to which such options are exercisable for the
first time by the optionee during any calendar year (under all plans of the
Corporation as determined under Section 422(d) of the Code) exceeds $100,000.
4. IDENTIFICATION OF STOCK. The Stock, as defined herein, subject to
the options shall be shares of the Corporation's authorized but unissued or
acquired or reacquired common stock (the "Stock"). The aggregate number of
shares subject to outstanding options shall not exceed 2,000,000 shares of
Stock (subject to adjustment as provided in Section 6). If any option
granted hereunder shall expire or terminate for any reason without having
been exercised in full, the unpurchased shares subject thereto shall again be
available for purposes of this Plan.
5. TERMS AND CONDITIONS OF OPTIONS. Any option granted pursuant to the
Plan shall be evidenced by a Stock Option Agreement in such form as the
Committee shall from time to time determine, which agreement shall comply
with and be subject to the following terms and conditions:
3
5.1 NUMBER OF SHARES. Each option shall state the number of shares
of Stock to which it pertains.
5.2 OPTION EXERCISE PRICE. Each option shall state the option
exercise price, which shall be determined by the Committee; provided,
however, that (i) the exercise price of any Incentive Option shall not be
less than the fair market value of the Stock, as determined by the Committee,
on the date of grant of such option, (ii) the exercise price of any Incentive
Option granted to an employee who owns more than 10% of the total combined
voting power of all classes of the Corporation's stock, as determined for
purposes of Section 422 of the Code, shall not be less than 110% of the fair
market value of the Stock, as determined by the Committee, on the date of
grant of such option, and (iii) the exercise price of any Non-Qualified
Option shall not be less than the fair market value of the Stock, as
determined by the Committee, on the date of grant of such option.
5.3 TERM OF OPTION. The term of an option granted hereunder shall
be determined by the Committee at the time of grant, but shall not exceed ten
years from the date of the grant. The term of any Incentive Option granted
to an employee who owns more than 10% of the total combined voting power of
all classes of the Corporation's stock, as determined for purposes of Section
422 of the Code, shall in no event exceed five years from the date of grant.
All options shall be subject to early termination as set forth in this Plan.
In no event shall any option be exercisable after the expiration of its term.
5.4 METHOD OF EXERCISE. An option shall be exercised by written
notice to the Corporation by the optionee (or successor in the event of
death) and execution by the optionee of an exercise representation letter in
the form set forth on Exhibit "B," as such Exhibit may be amended by the
Committee from time to time. Such written notice shall state the number of
shares with respect to which the option is being exercised and designate a
time, during normal business hours of the Corporation, for the delivery
thereof ("Exercise Date"), which time shall be at least 30 days after the
giving of such notice unless an earlier date shall have been mutually agreed
upon. At the time specified in the written notice, the Corporation shall
deliver to the optionee at the principal office of the Corporation, or such
other appropriate place as may be determined by the Committee, a certificate
or certificates for such shares. Notwithstanding the foregoing, the
Corporation may postpone delivery of any certificate or certificates after
notice of exercise for such reasonable period as may be required to comply
with any applicable listing requirements of any securities exchange. In the
event an option shall be exercisable by any person other than the optionee,
the required notice under this Section shall be accompanied by appropriate
proof of the right of such person to exercise the option.
5.5 MEDIUM AND TIME OF PAYMENT. The option exercise price shall be
payable in full on or before the option Exercise Date in any one of the
following alternative forms:
5.5.1 Full payment in cash or certified bank or cashier's
check;
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5.5.2 A Promissory Note (as defined below);
5.5.3 Full payment in shares of Stock of the Corporation
having a fair market value on the Exercise Date in the amount equal to the
option exercise price;
5.5.4 Through a special sale and remittance procedure
pursuant to which the optionee shall concurrently provide irrevocable written
instruction to (a) a Corporation-designated brokerage firm to effect the
immediate sale of the purchased shares and remit to the Corporation, out of the
sale proceeds available on the settlement date, sufficient funds to cover the
aggregate exercise price payable for the purchased shares plus all applicable
Federal, state and local income and employment taxes required to be withheld by
the Corporation by reason of such exercise and (b) the Corporation to deliver
the certificates for the purchased shares directly to such brokerage firm in
order to complete the sale.
5.5.5 A combination of the consideration set forth in
Sections 5.4.1, through 5.4.4 equal to the option exercise price; or
5.5.6 Any other method of payment complying with the
provisions of Section 422 of the Code with respect to Incentive Options,
provided the terms of payment are established by the Committee at the time of
grant and any other method of payment established by the Committee with respect
to Non-Qualified Options.
5.6 FAIR MARKET VALUE. The fair market value of a share of Stock on any
relevant date shall be determined in accordance with the following provisions:
5.6.1 If the Stock of the Corporation at the time is
neither listed nor admitted to trading on any stock exchange nor traded in
the over-the-counter market, then the fair market value shall be determined
by the Committee after taking into account such factors as the Committee
shall deem appropriate.
5.6.2 If the Stock of the Corporation is not at the time
listed or admitted to trading on any stock exchange but is traded in the
over-the-counter market, the fair market value shall be the mean between the
highest bid and lowest asked prices (or, if such information is available,
the closing selling price) of one share of Stock of the Corporation on the
date in question in the over-the-counter market, as such prices are reported
by the National Association of Securities Dealers through its NASDAQ system
or any successor system. If there are no reported bid and asked prices (or
closing selling price) for the Stock of the Corporation on the date in
question, then the mean between the highest bid price and lowest asked price
(or the closing selling price) on the last preceding date for which such
quotations exist shall be determinative of fair market value.
5.6.3 If the Stock of the Corporation is at the time listed
or admitted to trading on any stock exchange, then the fair market value
shall be the closing selling price of one
5
share of Stock of the Corporation on the date in question on the stock
exchange determined by the Committee to be the primary market for the Stock
of the Corporation, as such price is officially quoted in the composite tape
of transactions on such exchange. If there is no reported sale of Stock of
the Corporation on such exchange on the date in question, then the fair
market value shall be the closing selling price on the exchange on the last
preceding date for which such quotation exists.
5.7 PROMISSORY NOTE. Subject to the requirements of applicable
state or Federal law or margin requirements, and if provided in the Stock
Option Agreement, payment of all or part of the purchase price of the Stock
may be made by delivery of a full recourse promissory note ("Promissory
Note"). The Promissory Note shall be executed by the optionee, made payable
to the Corporation and bear interest at such rate as the Committee shall
determine, but in no case less than the minimum rate which will not cause
under the Code (i) interest to be imputed, (ii) original issue discount to
exist, or (iii) any other similar results to occur. Unless otherwise
determined by the Committee, interest on the Note shall be payable in
quarterly installments on March 31, June 30, September 30 and December 31 of
each year. A Promissory Note shall contain such other terms and conditions
as may be determined by the Committee; provided, however, that the full
principal amount of the Promissory Note and all unpaid interest accrued
thereon shall be due not later than five years from the date of exercise.
The Corporation may obtain from the optionee a security interest in all
shares of Stock issued to the optionee under the Plan for the purpose of
securing payment under the Promissory Note and may retain possession of the
stock certificates representing such shares in order to perfect its security
interest.
5.8 RIGHTS AS A SHAREHOLDER. An optionee or successor shall have
no rights as a shareholder with respect to any Stock underlying any option
until the date of the issuance to such optionee of a certificate for such
Stock. No adjustment shall be made for dividends (ordinary or extraordinary,
whether in cash, securities or other property) or distributions or other
rights for which the record date is prior to the date such Stock certificate
is issued, except as provided in Section 6.
5.9 MODIFICATION, EXTENSION AND RENEWAL OF OPTIONS. Subject to
the terms and conditions of the Plan, the Committee may modify, extend or
renew outstanding options granted under the Plan, or accept the surrender of
outstanding options (to the extent not exercised) and authorize the granting
of new options in substitution therefor.
5.10 VESTING AND RESTRICTIONS. The Committee shall have complete
authority and discretion to set the terms, conditions, restrictions, vesting
schedules and other provisions of any option in the applicable Stock Option
Agreement. In addition, the Committee shall have complete authority to
require conditions and restrictions on any Stock issued pursuant to this Plan.
5.11 OTHER PROVISIONS. The Stock Option Agreements shall contain
such other provisions as the Committee shall deem advisable.
6
6. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION.
6.1 SUBDIVISION OR CONSOLIDATION. Subject to any required action
by shareholders of the Corporation, the number of shares of Stock covered by
each outstanding option, and the exercise price thereof, shall be
proportionately adjusted for any increase or decrease in the number of issued
shares of Stock of the Corporation resulting from a subdivision or
consolidation of shares or the payment of a stock dividend (but only on the
Stock) or any other increase or decrease in the number of such shares
effected without receipt of consideration by the Corporation. Any fraction
of a share subject to option that would otherwise result from an adjustment
pursuant to this Section shall be rounded downward to the next full number of
shares without other compensation or consideration to the holder of such
option.
6.2 CAPITAL TRANSACTIONS. Upon a sale or exchange of all or
substantially all of the assets of the Corporation, a merger or consolidation
in which the Corporation is not the surviving corporation, a merger,
reorganization or consolidation in which the Corporation is the surviving
corporation and shareholders of the Corporation exchange their stock for
securities or property, a liquidation of the Corporation, or similar
transaction as determined by the Committee ("Capital Transaction"), this Plan
and each option issued under this Plan, whether vested or unvested, shall
terminate immediately prior to such Capital Transaction; provided, however,
that unless the outstanding options are assumed by a successor corporation in
a merger or consolidation, subject to terms approved by the Committee, all
optionees will have the right, during the 15 days prior to such Capital
Transaction, to exercise all vested options. The Committee may (but shall
not be obligated to) (i) accelerate the vesting of any option or (ii) apply
the foregoing provisions, including but not limited to termination of this
Plan and options granted pursuant to the Plan, in the event there is a sale
of 51% or more of the stock of the Corporation in any two year period or a
transaction similar to a Capital Transaction.
6.3 ADJUSTMENTS. To the extent that the foregoing adjustments
relate to stock or securities of the Corporation, such adjustments shall be
made by the Committee, whose determination in that respect shall be final,
binding and conclusive.
6.4 ABILITY TO ADJUST. The grant of an option pursuant to the
Plan shall not affect in any way the right or power of the Corporation to
make adjustments, reclassifications, reorganizations or changes of its
capital or business structure or to merge, consolidate, dissolve, liquidate,
sell or transfer all or any part of its business or assets.
6.5 NOTICE OF ADJUSTMENT. Whenever the Corporation shall take any
action resulting in any adjustment provided for in this Section, the
Corporation shall forthwith deliver notice of such action to each optionee,
which notice shall set forth the number of shares subject to the option and
the exercise price thereof resulting from such adjustment.
6.6 LIMITATION ON ADJUSTMENTS. Any adjustment, assumption or
substitution of an Incentive Option shall comply with Section 425 of the
Code, if applicable.
7
7. NONASSIGNABILITY. Options granted under this Plan may not be sold,
pledged, assigned or transferred in any manner other than by will or by the
laws of intestate succession, and may be exercised during the lifetime of the
optionee only by such optionee. Any transfer in violation of this provision
shall void such option, and any Stock Option Agreement entered into by the
optionee and the Corporation regarding such option shall be void and have no
further force or effect. No option shall be pledged or hypothecated in any
way, nor shall any option be subject to execution, attachment or similar
process.
8. NO RIGHT OF EMPLOYMENT. Neither the grant nor exercise of any
option nor anything in this Plan shall impose upon the Corporation or any
other corporation any obligation to employ or continue to employ any
optionee. The right of the Corporation and any other corporation to
terminate any employee shall not be diminished or affected because an option
has been granted to such employee.
9. TERM OF PLAN. This Plan is effective on the date the Plan is
adopted by the Board of Directors and options may be granted pursuant to the
Plan from time to time within a period of ten (10) years from such date, or
the date of any required shareholder approval required under the Plan, if
earlier. Termination of the Plan shall not affect any option theretofore
granted.
10. AMENDMENT OF THE PLAN. The Board of Directors of the Corporation may,
subject to any required shareholder approval, suspend, discontinue or terminate
the Plan, or revise or amend it in any respect whatsoever with respect to any
shares of Stock at that time not subject to options.
11. APPLICATION OF FUNDS. The proceeds received by the Corporation from
the sale of Stock pursuant to options may be used for general corporate
purposes.
12. RESERVATION OF SHARES. The Corporation, during the term of this Plan,
shall at all times reserve and keep available such number of shares of Stock as
shall be sufficient to satisfy the requirements of the Plan.
13. NO OBLIGATION TO EXERCISE OPTION. The granting of an option shall not
impose any obligation upon the optionee to exercise such option.
14. APPROVAL OF BOARD OF DIRECTORS AND SHAREHOLDERS. The Plan shall not
take effect until approved by the Board of Directors of the Corporation. This
Plan shall be approved by a vote of the Shareholders within 12 months from the
date of approval by the Board of Directors. In the event such shareholder vote
is not obtained, all Incentive Options granted hereunder, whether vested or
unvested, shall become Non-Qualified Options.
15. WITHHOLDING TAXES. Notwithstanding anything else to the contrary in
this Plan or any Stock Option Agreement, the exercise of any option shall be
conditioned upon payment by such optionee in cash, or other provisions
satisfactory to the Committee, of all local, state, federal
8
or other withholding taxes applicable, in the Committee's judgment, to the
exercise or to later disposition of shares acquired upon exercise of an
option.
16. PARACHUTE PAYMENTS. Any outstanding option under the Plan may not
be accelerated to the extent any such acceleration of such option would, when
added to the present value of other payments in the nature of compensation
which becomes due and payable to the optionee would result in the payment to
such optionee of an excess parachute payment under Section 280G of the Code.
The existence of any such excess parachute payment shall be determined in the
sole and absolute discretion of the Committee.
17. SECURITIES LAWS COMPLIANCE. Notwithstanding anything contained
herein, the Corporation shall not be obligated to grant any option under this
Plan or to sell, issue or effect any transfer of any Stock unless such grant,
sale, issuance or transfer is at such time effectively (i) registered or
exempt from registration under the Securities Act of 1933, as amended (the
"Act"), and (ii) qualified or exempt from qualification under the California
Corporate Securities Law of 1968 and any other applicable state securities
laws. As a condition to exercise of any option, each optionee shall make
such representations as may be deemed appropriate by counsel to the
Corporation for the Corporation to use any available exemption from
registration under the Act or qualification under any applicable state
securities law.
18. RESTRICTIVE LEGENDS. The certificates representing the Stock
issued upon exercise of options granted pursuant to this Plan will bear the
following legends giving notice of restrictions on transfer under the Act and
this Plan, as follows:
(a) THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ISSUED
OR TRANSFERRED IN A TRANSACTION WHICH WAS NOT REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, IN RELIANCE
UPON AN EXEMPTION AFFORDED BY SUCH ACT. NO SALE OR TRANSFER
OF THESE SHARES SHALL BE MADE, NO ATTEMPTED SALE OR TRANSFER
SHALL BE VALID, AND THE ISSUER SHALL NOT BE REQUIRED TO GIVE
ANY EFFECT TO ANY SUCH TRANSACTION UNLESS (A) SUCH
TRANSACTION SHALL HAVE BEEN DULY REGISTERED UNDER THE ACT OR
(B) THE ISSUER SHALL HAVE FIRST RECEIVED AN OPINION OF
COUNSEL SATISFACTORY TO IT THAT SUCH REGISTRATION IS NOT
REQUIRED.
(b) Any other legends required by applicable state securities laws as
determined by the Committee.
19. NOTICES. Any notice to be given under the terms of the Plan shall be
addressed to the Corporation in care of its Secretary at its principal office,
and any notice to be given to an
9
optionee shall be addressed to such optionee at the address maintained by the
Corporation for such person or at such other address as the optionee may
specify in writing to the Corporation.
As adopted by the Board of Directors on _____________, 1998.
MITEK SYSTEMS, INC., a Delaware corporation
By:
---------------------------------------
, President
--------------------
10
EXHIBIT A
____________, 1998
Mitek Systems, Inc.
10070 Carroll Canyon Road
San Diego, California 92131
Re: AMENDED AND RESTATED 1996 STOCK OPTION PLAN
To Whom It May Concern:
This letter is delivered to Mitek Systems, Inc., a Delaware corporation (the
"Corporation"), in connection with the grant to _________________________
(the "Optionee") of an option (the "Option") to purchase _____ shares of
common stock of the Corporation (the "Stock") pursuant to the Mitek Systems,
Inc. Amended and Restated 1996 Stock Option Plan dated October __, 1996 (the
"Plan"). The Optionee understands that the Corporation's receipt of this
letter executed by the Optionee is a condition to the Corporation's
willingness to grant the Option to the Optionee.
In addition, the Optionee makes the following representations and
warranties with the understanding that the Corporation will rely upon them in
the Corporation's determination of whether the grant of the Option meets the
requirements of the "private offering" exemption provided in Section 25102(f)
of the California Corporations Code and certain exemptions provided under the
Securities Act of 1933, as amended.
1. The Optionee acknowledges receipt of a copy of the Plan and
Agreement. The Optionee has carefully reviewed the Plan and Agreement.
2. The Option and the Stock will be acquired by the Optionee for
investment only, for the Optionee's own account, and not with a view to or
for sale in connection with any distribution of the Option or the Stock. The
Optionee will not take, or cause to be taken, any action which would cause
the Optionee, or any entity or person affiliated with the Optionee, to be
deemed an underwriter with respect to the Option or the Stock.
3. The Optionee either:
EXHIBIT A - PAGE 1
a. has a preexisting personal or business relationship with the
Corporation or any of its officers, directors or controlling persons of a
nature and duration as would allow the Optionee to be aware of the character,
business acumen, general business and financial circumstances of the
Corporation or of the person with whom such relationship exists; or
b. by reason of the Optionee's business or financial experience,
or the business or financial experience of the Optionee's professional
advisor who is unaffiliated with and is not compensated by the Corporation or
any affiliate or selling agent of the Corporation, directly or indirectly,
the Optionee has the capacity to protect the Optionee's interests in
connection with the grant of the Option and the purchase of the Stock.
4. The Optionee acknowledges that an investment in the Corporation
represents a speculative investment and a high degree of risk. The Optionee
acknowledges that the Optionee has had the opportunity to obtain and review
all information from the Corporation necessary to make a reasonably informed
investment decision and that the Optionee has had all questions asked of the
Corporation answered to the reasonable satisfaction of the Optionee. The
Optionee is able to bear the economic risk of an investment in the Option and
the Stock.
5. The grant of the Option has not been accompanied by the publication
of any advertisement.
6. The Optionee understands and acknowledges that the Stock has not
been, and will not be, registered under the Securities Act of 1933, as
amended, or qualified under the California Corporate Securities Law of 1968.
The Optionee understands and acknowledges that the Stock may not be sold
without compliance with the registration requirements of federal and
applicable state securities laws unless an exemption from such laws is
available. The Optionee understands that the Certificate representing the
Stock shall bear the legends set forth in the Plan.
7. The Optionee understands and acknowledges that the Option and the
Stock are subject to the terms and conditions of the Plan.
8. The Optionee understands and agrees that, at the time of exercise
of any part of the Option for Stock, the Optionee may be required to provide
the Corporation with additional representations, warranties and/or covenants
similar to those contained in this letter.
9. The Optionee is a resident of the State of __________.
10. The Optionee will notify the Corporation immediately of any change in
the above information which occurs before the Option is exercised in full by the
Optionee.
EXHIBIT A - PAGE 2
The foregoing representations and warranties are given on ______________,
1998 at ____________________.
OPTIONEE:
---------------------------------------
EXHIBIT A - PAGE 3
EXHIBIT B
____________, 1998
Mitek Systems, Inc.
10070 Carroll Canyon Road
San Diego, California 92131
Re: AMENDED AND RESTATED 1996 STOCK OPTION PLAN
To Whom It May Concern:
I (the "Optionee") hereby exercise my right to purchase _____ shares of
common stock (the "Stock") of Mitek Systems, Inc., a Delaware corporation
(the "Corporation"), pursuant to, and in accordance with, the Mitek Systems,
Inc. Amended and Restated 1996 Stock Option Plan dated ____________, 1998
(the "Plan") and Stock Option Agreement (the "Agreement") dated
_______________, 1998. As provided in such Plan, I deliver herewith payment
as set forth in the Plan in the amount of the aggregate option exercise
price. Please deliver to me at my address as set forth above stock
certificates representing the subject shares registered in my name (and
(SPOUSE) , as (STYLE OF VESTING)).
The Optionee hereby represents as follows:
1. The Optionee acknowledges receipt of a copy of the Plan and
Agreement. The Optionee has carefully reviewed the Plan and Agreement.
2. The Optionee either:
(a) has a preexisting personal or business relationship with the
Corporation or any of its officers, directors or controlling persons of a
nature and duration as would allow the undersigned to be aware of the
character, business acumen, general business and financial circumstances of
the Corporation or of the person with whom such relationship exists; or
(b) by reason of the Optionee's business or financial experience
or the business or financial experience of the Optionee's professional
advisor(s) who is (are) unaffiliated with and is (are) not compensated by the
Corporation or any affiliate or selling agent of the Corporation, directly or
indirectly, has the capacity to protect the Optionee's interests in
connection with the purchase of nonqualified stock options of the Corporation
and Stock issuable upon the exercise thereof.
EXHIBIT B - PAGE 1
3. The Optionee is able to bear the economic risk of his investment in
the stock options of the Corporation and an investment in the Stock issuable
upon exercise thereof.
4. The Optionee acknowledges that an investment in the Corporation
represents a speculative investment and a high degree of risk. The Optionee
acknowledges that the Optionee has had the opportunity to obtain and review
all information from the Corporation necessary to make a reasonably informed
investment decision and that the Optionee has had all questions asked of the
Corporation answered to the reasonable satisfaction of the Optionee.
5. The grant of Options for Stock and the exercise of the Options has
not been accompanied by the publication of any advertisement.
6. The Optionee understands and acknowledges that the Stock has not,
and will not, be registered under the Securities Act of 1933, as amended, or
qualified under the California Securities Law of 1968. The Optionee
understands and acknowledges that the Stock may not be sold without
compliance with the registration and qualification requirements of federal
and applicable state securities laws unless exemptions from such laws are
available. The Optionee understands that the certificates representing the
Stock shall bear the legends set forth in the Plan.
7. The Optionee is a resident of the State of __________.
8. The Optionee hereby is purchasing for the Optionee's own account and
not with a view to or for sale in connection with any distribution of the stock
options of the Corporation or any Stock issuable upon exercise thereof.
The foregoing representations and warranties are given on
___________________________ at ______________________.
OPTIONEE:
---------------------------------------
Elliott Wasserman, President
EXHIBIT B - PAGE 2
LETTER TO SHAREHOLDERS
The Company's performance in the fiscal year ending September 30, 1998 improved
materially in the second half of the year. Significant write-offs and internal
reorganization occurred in the first half of the fiscal year. Sales and profits
expanded in the last two quarters. Mitek's operations have been streamlined by
cost reductions and greater focus, which we believe will allow the Company to
bring more value to our customers with more competitive, feature-rich products
and solutions.
FINANCIAL POSITION - At fiscal year end, the Company had cash reserves, no
debt other than normal trade payables and leases, and unused $750,000 working
capital and $250,000 equipment lines of credit. This strong position is a result
of increased profits in the second half of 1998, collection of accounts and
notes receivable, and execution of operations within budget.
MAJOR EVENTS - The Company faced a number of management and operational
challenges at the beginning of the year, which burdened the Company in terms of
time and expense. The Company also reexamined and restructured several of its
strategic relationships during the year. Management believes that each
challenge was resolved on favorable terms.
In the general course of business, the Company, at various times, has been
named in lawsuits. During fiscal 1998, the Company was involved in a number of
legal proceedings. All of these proceedings were resolved (or in the process of
complete resolution) by the end of the fiscal year or shortly thereafter and the
costs of these settlements are included in the September 30, 1998 financials.
In October 1998 the Company settled a lawsuit with the two founders of
Technology Solutions, Inc. ("TSI"). The Company had acquired substantially all
of the assets of TSI in June 1997 in exchange for 685,714 unregistered shares of
the Company's common stock and $240,000 cash. Disputes arose between the
Company, TSI, and the principals of TSI. Pursuant to the settlement agreement,
the Company reacquired 591,114 shares of its common stock and a non-exclusive,
non-transferable, perpetual, worldwide, royalty-free license to use key
components of the TSI document imaging systems software. TSI and its principals
reacquired ownership of their technology and software.
The Company agreed in October 1998 to settle a pending lawsuit with
Adaptive Solutions, a Beaverton, Oregon based computer assisted data entry
provider, and also settled an employee related law suit.
In October 1998 the Company revamped their agreement with Parascript
Limited Liability Corporation (LLC), under which the Company licenses
Parascript's Legal Amount Recognition (LAR) capabilities used in the
CheckScript-TM- product. The Company and Parascript LLC agreed to undo their
cross investment agreement and entered into a new licensing agreement. The new
licensing agreement is not exclusive except for six major customers, and reduces
the royalty percentages payable by the Company. The Company reacquired 763,922
shares of its common stock previously held by Parascript LLC in exchange for
returning its 10% interest in Parascript LLC, exclusivity for six customers, and
reduced royalties.
The Company sold the assets of its Fax Products Division in cash
transaction in January 1998.
At year-end, Mitek was also able to secure complete ownership of the
Premier Forms Processor Pro-TM- (PFP Pro-TM-) source code, key to one of our
core products.
These events have enabled the Company to concentrate on its core business,
which seeks to capitalize on its QuickStrokes-Registered Trademark-,
CheckScript-TM- and PFP Pro-TM- product lines.
PRODUCT DEVELOPMENT - The Company plans to continue to advance its core
technologies and add new features to its products, which should enable greater
sales through additional markets and improved product performance. The Company
released new and improved products during the year including PFP Pro-TM-,
QuickFX-TM- v1.0, and FaxShare-TM- v3.1.
STRATEGIC GROWTH PLAN - Management believes the Company is positioned to
meet the challenges of the coming year and beyond as a direct result of the
Company's innovative product capabilities being introduced to forms processing
markets and Mitek's increased penetration of its proprietary technology in the
item processing marketplace. Management has a detailed a growth plan for fiscal
1999 that includes penetrating three target markets due to our strong
proprietary position and numerous competitive advantages, including proven
product performance, superior results, recognition technology ownership, custom
recognition capabilities and unsurpassed value. Armed with our technological
advantages, we expect to be able to break new ground and open new markets which
will position Mitek as a market leader and drive our financial performance for
the current fiscal year
The first market includes the $250 million software and services segment of
the forms processing market growing annually at 20% for structured documents and
80% for unstructured documents. To address this market, the Company's PFP
Pro-TM- product offers a proven automated forms processing solution through
Mitek's leading edge, high-speed character recognition engine. PFP Pro-TM-,
backed by Mitek's comprehensive systems integration, training and maintenance
programs, is expected to significantly penetrate the forms processing (for both
structured and unstructured documents) market.
Mitek's second target is the $60 million core check recognition engine
segment of the item processing market with an expected annual growth rate of
10%. The Company's CheckScript-TM- product provides superior results for the
item processing market and offers advanced Courtesy Amount/Legal Amount
Recognition (CAR/LAR) technology. CheckScript-TM- delivers recognition
accuracy in excess of 80% within a variety of formats and a combination of
cursive and printed script for remittance processing.
The third target is the emerging lower tier of the $100 million Proof of
Deposit (POD) segment of the item processing market. Mitek is pursuing the
development of a POD product for the low to middle tier financial institutions
such as community banks and credit unions. The Company's development activity
will be minimal because this product is based on Mitek's existing form
processing platform and leverages the competitive advantages of its
CheckScript-TM- product. The combined Proof of Deposit and forms processing
platform product offering captures check and deposit-slip images at the branch
and assures that the amounts on these documents balance and that data will then
be available for upload to either corporate headquarters or a service bureau to
complete the processing.
As a complement to the Company's proprietary product base, Mitek has formed
a professional services organization charged with the responsibility of insuring
successful product installation and promoting a satisfied customer experience.
In addition, Mitek is planning a 100%
increase in the number of sales representatives in the coming year. The
Company is targeting experienced, senior level personnel with direct knowledge
and established contacts in the image document processing marketplace who will
complement its existing sales base and provide additional leverage in its
target markets.
Our goals for 1999 are to continue the growth in revenue and profits we
have experienced in recent quarters and build shareholder value by achieving
milestones throughout the current fiscal year, including additional product
launches, growing our sales force, increasing market penetration, rapid top-line
growth, bottom-line improvements, and continued technological innovation. The
prospects of achieving these goals are both challenging and inviting.
We appreciate your continued support.
John M. Thornton
President and Chief Executive Officer
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NET SALES
Net sales were $6,501,000, $4,842,000, and $8,154,000 for fiscal 1998,
1997, and 1996, respectively. The increase in net sales in fiscal 1998 compared
to fiscal 1997 is the result of increases in new and existing products,
services, and customers. The decrease in net sales in fiscal 1997 as compared
to fiscal 1996 resulted from the loss of certain Original Equipment
Manufacturer (OEM) business, combined with the transition of the product line
from hardware-based products with a higher retail cost but lower gross margins,
to software-based products with lower retail costs and higher gross margins.
GROSS MARGIN AND OPERATIONS RECLASSIFICATION
The Company has evolved to a primarily software products company from a
hardware/software products company. Therefore, cost of operations has been
reclassified from cost of goods sold to costs and expenses for fiscal 1998,
1997, and 1996.
GROSS MARGIN
Gross margins were $4,503,000, $3,084,000, and $5,673,000, for fiscal 1998,
1997, and 1996, respectively. Stated as a percentage of net sales, gross margin
for the corresponding periods were 69%, 64%, and 70%, respectively. The
fluctuations in gross margins are the result of sales mix, proprietary versus
royalty products sold, and amortization of prepaid licenses and goodwill.
OPERATIONS
Operations expenses were $430,000, $418,000 and $301,000 for fiscal 1998,
1997 and 1996, respectively. Stated as a percentage of sales, operations
expenses were 7%, 9% and 4%, respectively. For fiscal 1998 and 1997, the
absolute amounts are relatively constant and changes in operating expenses as a
percentage of net sales corresponds to changes in net sales in those periods.
The increase in absolute amounts in fiscal 1997 from fiscal 1996 results
primarily from additional operations staff.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $1,622,000, $1,428,000, and
$1,186,000 for fiscal 1998, 1997 and 1996, respectively. Stated as a percentage
of net sales, general and administrative expenses for the corresponding periods
were 25%, 29%, and 15%, respectively. The increase in absolute amounts in the
current year resulted primarily from additional costs for legal fees related to
settlements (primarily Technology Solutions, Inc. acquisition matter, an
employee related lawsuit, and a customer dispute), and outside services.
Subsequent to the end of fiscal 1998, the Company completed settlement
agreements in connection with each dispute. The increase in absolute amounts
Page 1
for fiscal 1997 over fiscal 1996 was attributed to costs associated with the
addition of directors and officers liability insurance and an increase in bad
debts. The decrease in general and administrative expenses as a percentage of
sales in fiscal 1998 from fiscal 1997 and as an increase as a percentage of
sales in fiscal 1997 from fiscal 1996 results from increased sales in fiscal
1998 from fiscal 1997, and decreased sales in fiscal 1997 from fiscal 1996.
Page 2
RESEARCH AND DEVELOPMENT
Research and development expenses were $1,343,000, $1,393,000, and
$1,314,000 for fiscal 1998, 1997, and 1996, respectively. The 1998, 1997, and
1996 amounts do not include $878,000, $458,000, and $411,000, respectively,
that was spent in research and development related to contract development
and charged to cost of sales. Research and development expenses before
charges to cost of sales were $2,221,0000, $1,851,000, and $1,725,000 for
fiscal 1998, 1997, and 1996, respectively. Stated as a percentage of net
sales, research and development expenses before charges to cost of sales for
the corresponding periods were 34%, 38%, and 21%, respectively. The increase
in the in the absolute amount of expenses and the increase in amounts charged
to cost of sales in fiscal 1998 versus fiscal 1997 is primarily a result of
the Technology Solutions, Inc. (TSI) acquisition; TSI engineering staff were
primarily engaged in contract development, which expenses are charged to cost
of sales.
SELLING AND MARKETING
Selling and marketing expenses were $1,671,000, $2,102,000, and
$1,414,000, for fiscal 1998, 1997 and 1996, respectively. Stated as a
percentage of net sales, selling and marketing expenses for the corresponding
periods were 26%, 43%, and 17%, respectively. The decrease in selling and
marketing expenses as an absolute amount and as a percentage of sales in the
current year is primarily attributed to a reduction of the sales force due to
the reorganization of the Company in the first half of fiscal 1998. The
increase in selling and marketing expenses as a percentage of sales in fiscal
1997 versus fiscal 1996 was primarily attributed to marketing and promotion
efforts, staff additions and reclassification of key employee.
OTHER CHARGES
Other charges in fiscal 1998 resulted from a $293,000 goodwill impairment,
$196,000 prepaid license/support fee impairment, and a $200,000 inventory
obsolescence reserve.
INTEREST (INCOME) EXPENSE
Net interest (income) expense was ($73,000), ($94,000), and $91,000 for
fiscal 1998, 1997 and 1996, respectively. Stated as a percentage of net
sales, net interest (income) expense for the corresponding periods was (1%),
(2%), and 1%, respectively. The decrease in interest (income) in the
current year is primarily the result of lower invested funds during the first
half of the year. The decrease in interest expense and increase in interest
(income) for fiscal 1997 versus fiscal 1996 is primarily the result of funds
received from the secondary public offering, which generated interest income,
combined with no bank borrowings. The interest expense in fiscal 1996
reflects borrowings from a factoring institution and a bank.
Page 3
OTHER EXPENSES - NET
Other expenses in the current year results from reserves for the
recruitment and employment ($166,000) and resignation ($204,000) of Elliot
Wassarman as President and Chief Executive Officer of the company during fiscal
1998, $35,000 to settle an employee related law suit, $53,000 to settle
Technology Solutions, Inc. acquisition legal matters, and $45,000 to settle a
customer dispute. These reserves were reduced by a reversal of $175,000
reserved for TEMPEST in fiscal 1997, and a $34,000 gain from the sale of the
Company's fax business in January 1998 in a cash transaction. The gross
proceeds of the sale were $420,000 in cash, offset by the carrying value of the
assets sold of ($308,000) and costs related to the transaction of ($78,000).
Other expenses in fiscal 1997 is the result of a $175,000 reserve for
claims asserted against the company by the purchaser of the Company's
TEMPEST business in March 1995 and the write off of purchased research
and development costs in the amount of $228,000.
INCOME TAXES
For fiscal 1998 and 1997, the Company did not record an income tax
provision or benefit for income taxes. For fiscal 1996, the Company recorded
an income tax provision of $137,000.
NET INCOME (LOSS)
In fiscal 1998 and fiscal 1997, the Company recorded a net loss of
($1,497,000) and ($2,566,000), respectively. In fiscal 1996, the Company
recorded net income of $1,229,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its cash needs primarily from increased profits in
the second half of 1998, collection of accounts and notes receivable, and
execution of operations within budget.
Net cash used by operating activities during the year ended September 30,
1998 was $203,000. The primary use of cash from operating activities was a
decrease in inventory, prepaid expenses and other assets of $204,000. The
primary source of cash from operating activities was a decrease in accounts
receivable of $128,000 and an increase in accounts payable and accrued expenses
of $425,000. Lower inventory resulted primarily from a $200,000 reserve taken
principally on acceleration hardware board components as decreasing prices
coupled with the higher speeds of general hardware rapidly altered the need for
these acceleration boards. The decrease in accounts receivable resulted from
improved management of receivables. Accounts receivable decreased even though
sales increased by approximately 34% over the prior fiscal year. The increase
in accounts payable and accrued expenses resulted primarily from the increase in
reserves for litigation and dispute settlements of $391,000.
Page 4
The Company's working capital and current ratio was $2,517,000 and 2.40 at
September 30, 1998, and $3,278,000 and 3.32 at September 30, 1997. At
September 30, 1998, total liabilities to equity ratio was .43 to 1 compared to
.25 to 1 a year earlier. As of September 30, 1998, total liabilities were
greater by $417,000 than on September 30, 1997.
In June 1998, the Company obtained an increase in its working capital
line of credit from its Bank, Rancho Santa Fe Bank ("Bank") from $400,000 to
$750,000. The line of credit expires on June 8, 1999 and interest is payable
at prime plus 1.5 percentage points. In addition, the Company obtained an
equipment credit line in the amount of $250,000 under similar terms and
conditions. There were no borrowings under the working capital or equipment
lines of credit as of September 30, 1998. The Company believes that together
with existing cash, credit available under the extended credit line, and cash
generated from operations, funds will be sufficient to finance its operations
for the next twelve months. All cash in excess of working capital
requirements will be kept in short term, investment grade securities.
YEAR 2000
Historically, most computer databases, as well as embedded microprocessors
in computer systems and industrial equipment, were designed with date data
fields which used only two digits of the year. Most computer programs,
computers, and embedded microprocessors controlling equipment were programmed to
assume that all two digit dates were preceded by "19", causing "00" to be
interpreted as the year 1900. This formerly common practice now could result in
a computer system or embedded microprocessor which fails to recognize properly a
year that begins with "20", rather than "19". This in turn could result in
computer system miscalculations or failures, as well as failures of equipment
controlled by date-sensitive microprocessors, and is generally referred to as
the "Year 2000 problem."
1. THE COMPANY'S STATE OF YEAR 2000 READINESS. In 1997 the Company began to
formulate a plan to address its year 2000 issues. The Company's Year 2000 plan
now contemplates five phases: Awareness, Assessment, Remediation, Testing, and
Implementation.
AWARENESS INVOLVES ensuring that employees who deal with the Company's
computer assets, and all managers, executives and directors, understand the
nature of the Year 2000 problem and the adverse effects on the business
operations of the Company that would result from the failure to become and
remain Year 2000 ready. ASSESSMENT INVOLVES the identification and inventorying
of all computer assets of the Company (both information technology systems and
embedded microprocessors) and the determination as to whether such assets will
properly recognize a year that begins with "20", rather than "19". Computer
hardware, software and firmware, and embedded microprocessors, that, among other
things, properly recognize a year beginning with "20" are said to be "Year 2000
ready". REMEDIATION INVOLVES the repair or replacement of computer assets that
are not Year 2000 ready. TESTING INVOLVES the validation of the actions taken
in the
Page 5
remediation phase. IMPLEMENTATION is the installation and integration of
remediated and tested computer assets into an overall information technology and
embedded microprocessor system that is Year 2000 ready.
These phases have substantial overlap. The Company has completed the
Awareness and Assessment phases (4th Quarter 1998) and has commenced the
Remediation (4th Quarter 1998) and Testing (4th Quarter 1998) phases. The
Company has assigned Noel Flynn, Vice President of Operations/Customer Support,
the responsibility for overseeing the timely completion of each phase of the
Company's Year 2000 plan.
The Company believes that all employees who deal with the Company's
computer assets, and all levels of the Company's management, appreciate the
importance of Year 2000 readiness and understand that achieving such readiness
is primarily a business problem, not merely a technology problem. The Company
has also communicated directly with its vendors of goods and services in an
attempt to assure that its key vendors are aware of the importance the Company
places on Year 2000 readiness.
The Company began its assessment of its internal computer systems in 1997.
Computers and applications were identified, assessed and ranked for critical
importance to the operations of the Company. Since then, the Company has
modified and tested such applications and replaced the one system that was not
Year 2000 compliant. The Company currently plans to have addressed all computer
systems that are critical to its operations by March 1999.
The Company is in the process of completing its assessment of the potential
for Year 2000 problems with embedded microprocessors in its equipment, and will
have remedied all non-compliant equipment by February 1999.
The Company has mailed information concerning Year 2000 readiness to
vendors of goods and services. The Company is not presently dependent upon any
single source and supply for critical components or services for its products,
and believes it can acquire such products from a number of suppliers. The
Company expects to continue discussions with all of its vendors of goods and
services during 1998 and 1999 to attempt to ensure the uninterrupted supply of
such goods and services and to develop contingency plans in the event of the
failure of any vendors to become and remain Year 2000 ready.
The Company currently estimates the total cost of completing all five
phases of its Year 2000 plan, will not exceed $85,000. This estimate is based
on currently available information and will be updated as the Company completes
its assessment.
2. THE RISKS OF THE COMPANY'S YEAR 2000 ISSUES. If any computer hardware,
software applications, or embedded microprocessors critical to the Company's
operations have been overlooked in the assessment or remediation phases, if any
of the Company's remediated or replaced internal computer systems fail the
testing phase, there could be a material adverse effect on the Company's results
of operations, liquidity and financial condition of a magnitude which the
Company has not yet fully analyzed.
Page 6
In addition, the Company has not yet been assured that (1) the computer
systems of all of its "key" or "mission critical" vendors of goods and services
will be Year 2000 ready in a timely manner or that (2) the computer systems of
third parties with which the Company's computer systems exchange data will be
Year 2000 ready both in a timely manner and in a manner compatible with
continued data exchange with the Company's computer systems.
If the vendors of the Company's most important goods and services, or the
suppliers of the Company's necessary energy, telecommunications and
transportation needs, fail to provide the Company with (1) the materials and
services which are necessary to produce, distribute and sell its product, (2)
the electrical power and other utilities necessary to sustain its operations, or
(3) reliable means of transporting supplies to its customers, such failure could
have a material adverse effect on the results of operations, liquidity and
financial condition of the Company.
The Company's customers are primarily banks and financial institutions or
entities that provide financial services to those industries. The banking
industry has indicated it may experience severe problems associated with the
Year 2000 problem. Banks and other financial institutions are spending
significant capital resources to remedy their own Year 2000 issues. These
expenditures may reduce budgeted funds that would otherwise be available to
acquire new technologies and systems from the Company and other suppliers. To
the extent that those customers experience or continue to experience significant
capital costs for Year 2000 compliance, the demand for the Company's products
may be reduced because of budgetary constraints.
3. THE COMPANY'S CONTINGENCY PLAN. The Company is collecting the information
necessary to develop a business contingency plan to address both unavoided and
unavoidable Year 2000 risks and expects to have it completed by July 1999.
Page 7
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND 1997
1998 1997
---------------------------
ASSETS
CURRENT ASSETS
Cash $ 1,740,760 $ 1,261,117
Accounts receivable - net 2,234,640 2,363,028
Note receivable 56,478 502,031
Inventories 123,909 415,973
Prepaid expenses and other assets 161,437 151,705
--------------------------
Total current assets 4,317,224 4,693,854
PROPERTY AND EQUIPMENT - net 192,135 205,013
OTHER ASSETS 1,626,413 2,289,428
--------------------------
TOTAL ASSETS $ 6,135,772 $ 7,188,295
==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term liabilities $ - $ 4,706
Accounts payable 650,206 485,855
Accrued payroll and related taxes 242,427 272,603
Unearned maintenance income 201,568 336,712
Other accrued liabilities 705,836 315,728
--------------------------
Total current liabilities 1,800,037 1,415,604
LONG-TERM LIABILITIES 54,187 21,761
--------------------------
Total liabilities 1,854,224 1,437,365
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY
Common stock - $.001 par value; 20,000,000
shares authorized, 11,573,152 and
11,537,009 issued and outstanding in 1998
and 1997, respectively 11,573 11,537
Additional paid-in capital 9,191,887 9,164,589
Accumulated deficit (4,921,912) (3,425,196)
--------------------------
Total stockholders' equity 4,281,548 5,750,930
--------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,135,772 $ 7,188,295
==========================
See notes to consolidated financial statements
8
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997, AND 1996
1998 1997 1996
------------------------------------------
NET SALES $ 6,500,968 $ 4,841,555 $ 8,153,628
COST OF SALES 1,997,907 1,757,820 2,480,831
------------------------------------------
GROSS MARGIN 4,503,061 3,083,735 5,672,797
COSTS AND EXPENSES:
Operations 430,123 418,295 301,373
General and administrative 1,621,940 1,427,525 1,186,170
Research and development 1,343,422 1,392,817 1,313,951
Selling and marketing 1,670,677 2,101,615 1,414,125
Other charges 689,000 0 0
Interest (income) expense - net (72,645) (93,910) 91,344
------------------------------------------
Total costs and expenses 5,682,517 5,246,342 4,306,963
------------------------------------------
OPERATING INCOME(LOSS) (1,179,456) (2,162,607) 1,365,834
OTHER EXPENSES - NET (317,260) (403,512) 0
------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (1,496,716) (2,566,119) 1,365,834
PROVISION FOR INCOME TAXES 0 0 136,825
------------------------------------------
NET INCOME (LOSS) $(1,496,716) $(2,566,119) $ 1,229,009
==========================================
------------------------------------------
EARNINGS (LOSS) PER SHARE - BASIC $ (0.13) $ (0.25) $ 0.16
==========================================
------------------------------------------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC 11,564,239 10,093,007 7,747,915
==========================================
------------------------------------------
EARNINGS (LOSS) PER SHARE - DILUTED $ (0.13) $ (0.25) $ 0.15
==========================================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND ------------------------------------------
COMMON SHARE EQUIVALENTS OUTSTANDING - DILUTED 11,564,239 10,093,007 8,202,753
==========================================
See notes to consolidated financial statements
9
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997, AND 1996
ADDITIONAL
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
-------------------------------------------------------
Balance, September 30, 1995 $ 7,728 $ 3,423,072 $ (2,088,086) $ 1,342,714
Stock warrants issued for services rendered 0 17,131 0 17,131
Exercise of stock options 45 48,441 0 48,486
Exercise of warrants 10 14,990 0 15,000
Net income 0 0 1,229,009 1,229,009
-------------------------------------------------------
Balance, September 30, 1996 7,783 3,503,634 (859,077) 2,652,340
Issuance of common stock for cash, net of costs 2,250 4,087,066 0 4,089,316
Exercise of stock options 34 38,688 0 38,722
Exercise of warrants 20 29,980 0 30,000
Issuance of common stock in connection with
acquisition and investment 1,450 1,505,221 0 1,506,671
Net loss 0 0 (2,566,119) (2,566,119)
-------------------------------------------------------
Balance, September 30, 1997 11,537 9,164,589 (3,425,196) 5,750,930
Exercise of stock options 36 27,298 0 27,334
Net loss 0 0 (1,496,716) (1,496,716)
-------------------------------------------------------
Balance, September 30, 1998 $ 11,573 $ 9,191,887 $ (4,921,912) $ 4,281,548
=======================================================
See notes to consolidated financial statements
10
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997, AND 1996
OPERATING ACTIVITIES
1998 1997 1996
--------------------------------------------
Net income (loss) $ (1,496,716) $ (2,566,119) $ 1,229,009
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 488,518 680,370 420,194
(Gain) loss on sale of property and equipment 1,847 (140) 2,822
Goodwill and license fee impairment 489,000 0 0
Gain on sale of FAX business (34,256) 0 0
Write off of IID investment 0 228,512 0
Changes in assets and liabilities:
Accounts receivable 128,387 (606,518) (638,655)
Inventories, prepaid expenses, and other assets (203,841) (757,846) (590,959)
Accounts payable, accrued payroll and related taxes,
unearned maintenance income, and other accrued liabilities 424,508 313,535 110,786
--------------------------------------------
Net cash provided by (used in) operating activities (202,553) (2,708,206) 533,197
INVESTING ACTIVITIES
Purchases of property and equipment (109,285) (150,079) (143,361)
Acquisition of Technology Solutions, Inc. - net 0 (240,000) 0
Proceeds from note receivable 348,753 0 158,335
Proceeds from sale of property and equipment 100 140 0
Proceeds from sale of Fax business 420,000 0 0
--------------------------------------------
Net cash provided by (used in) investing activities 659,568 (389,939) 14,974
FINANCING ACTIVITIES
Proceeds from borrowings 0 150,000 1,796,816
Repayment of notes payable and long-term liabilities (4,706) (159,189) (2,301,955)
Proceeds from exercise of stock options and warrants 27,334 68,722 63,486
Net proceeds from sales of stock 0 4,089,316 0
--------------------------------------------
Net cash provided by (used in) financing activities 22,628 4,148,849 (441,653)
--------------------------------------------
NET INCREASE IN CASH 479,643 1,050,704 106,518
CASH AT BEGINNING OF YEAR 1,261,117 210,413 103,895
--------------------------------------------
CASH AT END OF YEAR $ 1,740,760 $ 1,261,117 $ 210,413
============================================
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW INFORMATION
Cash paid for interest $ - $ 3,165 $ 101,377
Income tax refund received $ - $ 30,185 $ 2,712
Cash paid for income taxes $ - $ 13,500 $ 21,263
See notes to consolidated financial statements
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business - Mitek Systems, Inc. (the "Company") is a designer,
manufacturer and marketer of advanced character recognition products for
intelligent forms processing applications ("Character Recognition") and, in
fiscal 1998, started emphasizing document imaging system products and solutions
systems integration services.
Basis of Consolidation - The consolidated financial statements include
accounts of Mitek Systems, Inc. and its wholly-owned subsidiary, Mitek Systems
Canada, Incorporated on June 21, 1995. All intercompany transactions and
balances are eliminated in consolidation. The business of the Canadian
corporation was sold in January, 1998 - see note 3.
Cash and Cash Equivalents - Cash equivalents are defined as highly
liquid financial instruments with original maturities of three months or less.
A substantial portion of the Company's cash and cash equivalents is deposited
with one financial institution. The Company monitors the financial condition of
the financial institution and does not believe that the deposit is subject to a
significant degree of risk.
Accounts Receivable - Accounts receivable are net of an allowance for
doubtful accounts of $125,000 and $181,000 on September 30, 1998 and 1997,
respectively. The provision for bad debts was $ 92,877, $ 210,566, and $99,500
for the years ended September 30, 1998, 1997 and 1996, respectively.
Inventories - Inventories are recorded at the lower of cost (on a
first-in, first-out basis) or market. The Company recorded a $200,000 reserve
for inventory obsolescence during the first quarter of fiscal 1998. Major
classes of inventories on September 30, 1998 and 1997 were as follows:
1998 1997
Raw materials $ 14,177 $ 75,082
Finished Goods 109,732 340,891
--------- --------
Total $ 123,909 $415,973
========= ========
12
Property and Equipment - Following is a summary of property and
equipment as of September 30, 1998 and 1997.
1998 1997
Property and equipment - at cost:
Equipment $1,038,974 $1,034,707
Furniture and fixtures 92,118 62,430
Leasehold improvements 52,984 52,985
---------- ----------
1,184,076 1,150,122
Less: accumulated depreciation and amortization 991,941 945,109
---------- ----------
Total $ 192,135 $ 205,013
========== ==========
Other Assets - Other assets consisted of the following at September
30, 1998 and 1997:
1998 1997
Goodwill - net $ 537,832 $1,071,790
Prepaid software rights - PFP Pro - net 200,000 0
Prepaid license/support fees - net 202,476 531,534
Investment in Parascript 668,814 668,814
Other - net 17,291 17,290
---------- ----------
Total - net $1,626,413 $2,289,428
========== ==========
The Company monitors events or changes in circumstances that may
indicate that the carrying amount of goodwill and intangible assets may not be
recoverable. If these factors indicate that such asset is not recoverable, as
determined based upon undiscounted cash flows before interest charges of the
asset over the remaining amortization period, the carrying value of the asset
will be reduced.
Goodwill impairment -In June, 1997 the Company purchased substantially
all of the assets of Technology Solutions, Inc. a software developer and
solution provider of document image processing systems. One of the key employees
of the Company, a former principal of Technology Solutions, Inc., resigned his
employment in December, 1997. The unexpected departure, in the opinion of
management, could detrimentally impact the future cash flows of the Company. The
Company determined the fair value of the goodwill by evaluating the expected
future net cash flows (undiscounted and without interest charges), in
accordance with SFAS 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of. The evaluation indicated the carrying
value of the goodwill exceeded the fair value, resulting in an impairment loss
of $293,000 in the first quarter of fiscal 1998, included in Other Charges in
the accompanying consolidated statements of operations. Subsequent to September
30, 1998,
13
the Company settled a pending lawsuit with the two founders of Technology
Solutions, Inc. -- see Note 2. This settlement did not result in an additional
impairment of goodwill.
License Fee impairment - In April 1997 the Company entered into an
exclusive software licensing agreement with Parascript Limited Liability
Company (Parascript). In December 1997, Parascript notified the Company of
its dissatisfaction with the Company's progress in marketing the software
affected by the license agreement, along with an assertion that the Company
had committed material breach of contract. The Company strongly and
vigorously denied the claims. In addition, the Company over-estimated the
availability and the performance of the product and anticipated prices for
the software affected by the agreement. The adversarial condition of the
relationship coupled with the decreased expectations, in the opinion of
management, will detrimentally impact the future cash flows of the Company.
The Company determined the fair value of the goodwill represented by the
license fee paid for the exclusive license by evaluating the expected future
net cash flows (undiscounted and without interest charges), in accordance
with SFAS 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of. The evaluation indicates the carrying
value of the goodwill exceeded the fair value, resulting in an impairment
loss of $196,000 in the first quarter of fiscal 1998, included in Other
Charges in the accompanying consolidated statements of operations.
Subsequent to September 30, 1998 the Company entered into a new agreement
with Parascript - see Note 10.
The Company traditionally sold its QuickStrokes-Registered Trademark-
Application Programmer Interface products with various acceleration hardware
boards. Decreasing prices coupled with the higher speeds of general hardware
rapidly altered the market need for these acceleration boards. The largest
customer utilizing these acceleration boards informed the Company of its
intent to discontinue the offering of these products in the domestic market.
As a result, the Company recorded a reserve for inventory obsolescence in the
amount of $200,000 in the first quarter of fiscal 1998, included in Other
Charges in the accompanying consolidated statements of operations. At
September 30, 1998 the reserve remains at $200,000 and the Company is
attempting to sell its remaining acceleration hardware boards.
Depreciation and Amortization - Depreciation and amortization of
property and equipment, goodwill, prepaid license/support fees and prepaid
software rights are provided using the straight-line method over estimated
useful lives ranging from three to five years. Depreciation and amortization
of property and equipment totaled $114,502, $127,622, and $124,736 for the years
ended September 30, 1998, 1997 and 1996, respectively. Amortization of prepaid
license/support fees and prepaid software rights totaled $374,016, $552,748, and
$295,458 for the years ended September 30, 1998, 1997 and 1996, respectively.
Warranty - The Company previously accrued a warranty cost for
acceleration hardware boards sold. During early fiscal 1998 the decreasing
prices and increasing performance of general computing hardware rapidly altered
the market need for these acceleration boards. The Company currently sells
primarily software only and discontinued accruing warranty cost. On September
30, 1998 and 1997, other accrued
14
liabilities included an accrued warranty liability of $10,000 and $10,000,
respectively. Warranty expenses were $-0-, $18,814, and $2,642 the years ended
September 30, 1998, 1997 and 1996, respectively.
Revenue Recognition - The Company recognizes revenues in accordance with
the American Institute of Certified Public Accountants Statement of Position No.
97-2, Software Revenue Recognition. Accordingly, software product revenues are
recognized when persuasive evidence of an arrangement exists, delivery has
occurred, the Company's fees are fixed and determinable, and collectibility is
probable. Product maintenance revenues are amortized over the length of the
maintenance contract, which is usually twelve months. Unearned contract
maintenance revenue is included in Current Liabilities as unearned income in the
accompanying balance sheet at September 30, 1998.
Research and Development - Research and development costs are expensed
in the period incurred.
Income Taxes - The Company accounts for income taxes in accordance
with Statement of Financial Accounting Standards No. 109 Accounting for
Income Taxes, which requires the use of the liability method for deferred
income taxes - see Note 6.
Earnings (Loss) Per Share - The Company calculates earnings (loss) per
share in accordance with Statement of Financial Accounting Standards No. 128,
Earnings per Share. Basic earnings per share is based on the weighted average
number of common shares outstanding during the period. Diluted earnings per
share also gives effect to all potential dilutive common shares outstanding
during the period, such as options and warrants.
Consolidated Statements of Cash Flows - Significant non-cash investing
and financing activities were comprised of the following:
YEAR ENDED SEPTEMBER 30,
1998 1997 1996
Shares exchanged for the assets of
Technology Solutions, Inc. (Note 2) 0 837,857 0
Shares exchanged for investment
in Parascript LLC 0 668,814 0
Accounting Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and contingencies at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results may differ from those estimates.
Stock Based Compensation - Statement of Financial Accounting
Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation, was
effective for the
15
Company beginning October 1, 1996. SFAS No. 123 requires expanded disclosures
of stock-based compensation arrangements with employees and encourages (but
does not require) compensation cost to be measured based on the fair value of
the equity instrument awarded. Corporations are permitted, however, to
continue to apply Accounting Principles Board ("APB") Opinion No. 25, which
recognizes compensation cost based on the intrinsic value of the equity
instrument awarded. The Company will continue to apply APB Opinion No. 25 to
its stock-based compensation awards to employees and disclose the required pro
forma effect on net income and earnings per share.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" ("SFAS 130"), and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", ("SFAS 131"). SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. SFAS No. 131 establishes
standards of reporting by publicly-held business enterprises and disclosure of
information about operating segments in annual financial statements and, to a
lesser extent, in interim financial reports issued to shareholders. SFAS Nos.
130 and 131 are effective for fiscal years beginning after December 15, 1997.
As both SFAS Nos. 130 and 131 deal with financial statement disclosure, the
Company does not anticipate the adoption of these new standards will have a
material impact on its financial position, results of operations or cash flows.
The Company has not yet determined what its reporting segments will be, if any,
under SFAS 131.
Reclassifications - Certain prior years balances have been reclassified
to conform to the 1998 presentation.
2. ACQUISITIONS
On October 11, 1996, the Company purchased certain technologies from Instant
Information Deutschland (IID), a Munich, Germany based value-added distributor
of Mitek Networks. The purchase price was $257,000; $87,000 payable in cash and
the relief of all debt owed to Mitek by IID in the amount of $170,000. As part
of the purchase, the Company has exclusive licensing rights to use copyrights
associated with the purchased technology. The licensing rights are freely
transferable, worldwide and royalty-free. The purchase will enable the Company
to sell certain technologies directly into the German marketplace which were
previously distributed by IID. The carrying value was written off in fiscal
1997.
On September 30, 1998, the Company purchased the software rights (source
code) to its PFP Pro Product, previously licensed from VALIData Sistemas de
Captura, S.A. de C.V., for $200,000 in cash paid in October, 1998. This
$200,000 is included as prepaid software rights - PFP Pro in other assets at
September 30, 1998 and will be amortized over 48 months as a component of
cost of sales.
On June 3, 1997, the Company purchased substantially all of the assets of
Technology Solutions, Inc., a Chantilly, Virginia based software developer and
solution provider of document image processing systems. The purchase price
consisted of issuing 685,714 unregistered shares of the Company's common stock
and $240,000 cash
16
payment. The purchase resulted in $1,065,107 of goodwill, to be amortized over
60 months as a component of cost of sales. A $293,000 goodwill impairment was
recorded in the first quarter of fiscal 1998. Disputes arose between the
Company, TSI, and the principals of TSI. On October 20,1998, the Company
entered into an agreement with TSI and its principals in settlement of all
claims and cross-claims. Pursuant to this agreement, the Company reacquired
591,114 shares of its unregistered common stock and a non-exclusive,
non-transferable, perpetual, worldwide, royalty-free license to use key
components of the TSI document imaging systems software. TSI and its
principals reacquired ownership of their technology and software. This
settlement will not result in an impairment of goodwill, and the reacquired
common stock will be recorded as treasury stock in the amount of $369,466. The
goodwill balance after this transaction of $168,366 is applicable to the
software rights retained and will be amortized over 48 months, as a component
of cost of sales.
3. SALE OF FAX BUSINESS
On January 30, 1998, the Company sold its Fax Products assets in a
cash transaction, resulting in a gain of $34,000 included in Other
Expenses - net on the Consolidated Statements of Operations. The gross
proceeds of the sale were $420,000 in cash, offset by the net carrying value
of the assets sold of ($308,000) and costs related to the transaction of
($78,000).
4. STOCKHOLDERS' EQUITY
OPTIONS - The Company has stock option plans for executives and key
individuals who make significant contributions to the Company. The 1986 plan
provides for the purchase of up to 630,000 shares of common stock through
incentive and non-qualified options. The 1988 plan provides for the purchase of
up to 650,000 shares of common stock through non-qualified options For both
plans, options must be granted at fair market value and for a term of not more
than six years. Employees owning in excess of 10% of the outstanding stock are
excluded from the plans. The 1986 plan expired on September 30, 1996 and the
1998 plan expired on September 13, 1998; no additional options may be granted
under these plans.
The 1996 plan provides for the purchase of up to 2,372,547 shares of
common stock through incentive and non-qualified options. Options must be
granted at fair market value and for a term of not more that ten years.
Employees owning in excess of 10% of the outstanding stock are included in the
plan on the same terms except that the options must be granted for a term of not
more than five years.
Information concerning stock options granted by the Company under all
plans for the years ended September 30, 1998, 1997 and 1996 are as follows:
SHARES PRICE RANGE
Balance, September 30, 1995 555,500 .656 - 2.250
Granted 292,250 1.375 - 3.680
17
Exercised (45,012) .670 - 1.380
Cancelled (61,154) 1.219 - 2.750
---------- -------------
Balance, September 30, 1996 741,584 .656 - 2.250
Granted 630,250 1.030 - 3.375
Exercised (34,402) .656 - 1.438
Cancelled (359,766) 1.219 - 3.750
---------- -------------
Balance, September 30, 1997 977,666 .656 - 3.750
Granted 1,798,802 .89 - 1.250
Exercised (35,693) .656 - 1.38
Cancelled (1,187,359) .656 - 3.68
---------- -------------
Balance, September 30, 1998 1,553,416 .67 - 2.125
========== =============
The weighted average remaining contractual life was 1.5 years for the
outstanding stock options at September 30, 1998, with a weighted average
exercise price of $1.04. At September 30, 1998, options for 1,136,828 shares
remained available for granting under the 1996 option plan. At September 30,
1998, options for 473,687 shares were exercisable with a weighted average
exercise price for these options of $1.05.
All stock options are granted at fair market value of the Company's
common stock at the grant date. The weighted average fair value of the stock
options granted during fiscal 1998 was $0.59. The fair value of each stock
option grant is estimated on the date of the grant using the Black-Scholes
option pricing model with the following weighted average assumptions used for
grants in 1998: risk-free interest rate of 5.5%; expected dividend yield of 0%;
expected life of 3 years; and expected volatility of 82%. Stock options
generally expire six years from the grant date. Stock options generally vest
over a three year period, with one thirty sixth becoming exercisable on each of
the monthly anniversaries of the grant date.
The Company accounts for its options in accordance with Accounting
Principles Board Opinion No. 25, under which no compensation cost has been
recognized for stock option awards. Had compensation cost been determined
consistent with SFAS No. 123, the Company's pro forma net income and earnings
per share for fiscal 1996 would have been $1,168,987 and $.14, respectively, the
Company's pro forma net loss and net loss per share for fiscal 1997 would have
been ($2,715,014) and ($.26), respectively, and the Company's pro forma net loss
and net loss per share for fiscal 1998 would have been ($2,005,401) and ($.17),
respectively. Because the SFAS No. 123 method of accounting has not been applied
to options granted prior to October 1, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in future
years.
Sale of Common stock - In the first quarter of fiscal 1997, the Company
undertook a secondary public offering in which a total of 2,250,000 shares of
common stock were sold at $2.25 per share, providing the Company with net
proceeds of $4,089,316.
5. NOTES PAYABLE - BANK
18
In June 1998, the Company obtained an increase in its working capital
line of credit from its Bank, Rancho Santa Fe Bank ("Bank") from $400,000 to
$750,000. The line of credit expires on June 8, 1999 and interest is payable
at prime plus 1.5 percentage points. In addition, the Company obtained an
equipment credit line in the amount of $250,000 under similar terms and
conditions. There were no borrowings under the working capital or equipment
lines of credit as of September 30, 1998. The Company believes that together
with existing cash, credit available under the extended credit line, and cash
generated from operations, funds will be sufficient to finance its operations
for the next twelve months. All cash in excess of working capital
requirements will be kept in short term, investment grade securities.
6. INCOME TAXES
For the years ended September 30, 1998, 1997 and 1996, the Company's
provision for income taxes were as follows:
1998 1997 1996
Federal - current $-0- $-0- $98,588
State - current $-0- $-0- 38,237
---- ---- --------
Total $-0- $-0- $136,825
==== ==== ========
19
There was no provision for deferred income taxes in 1998, 1997, or 1996. Under
FAS No. 109, deferred income tax liabilities and assets reflect the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's net deferred tax liabilities
and assets as of September 30, 1998 and 1997 are as follows:
1998 1997
Deferred tax assets:
Reserves not currently deductible $ 58,000 $ 83,000
Book depreciation and amortization in excess of tax 119,000 32,000
Research credit carryforwards 529,000 529,000
AMT credit carryforward 19,000 29,000
Net operating loss carryforwards 1,280,000 949,000
Capitalized research and development costs 230,000 85,000
Uniform capitalization 9,000 15,000
Other 311,000 330,000
------------ ------------
Total deferred tax assets 2,555,000 2,052,000
Valuation allowance for net deferred tax assets (2,555,000) (2,052,000)
------------ ------------
Total $ 0 $ 0
============ ============
The Company has provided a valuation allowance against deferred tax
assets recorded as of September 30, 1998 and 1997 due to uncertainties regarding
the realization of such assets.
The research credit and net operating loss carryforwards expire during
the years 2005 to 2011. The federal net operating loss carryforward at
September 30, 1998 totaled $3,245,249.
The differences between the provision (benefit) for income taxes and income
taxes computed using the U.S. federal income tax rate were as follows for the
year ended September 30:
1998
Amount computed using statutory rate (34%) $(508,900)
Net change in valuation reserve for deferred
tax assets 503,000
Non-deductible items 8,757
State income taxes 0
Other (2,857)
-------
Provision (benefit) for income taxes $ 0
=========
20
7. LONG-TERM LIABILITIES
As of September 30, 1998 and 1997, long term liabilities were as
follows:
1998 1997
Capital lease obligations $ 0 $ 4,715
Deferred rent payable - see Note 8 50,187 21,752
Non current deposit 4,000 0
--------- --------
54,187 26,467
--------- --------
Less current portion 0 (4,706)
Total $54,187 $21,761
========= ========
The following property and equipment is leased under non-cancelable
capital leases as of September 30, 1997:
1997
Equipment $ 26,254
Less accumulated depreciation (25,208)
--------
Total $ 1,046
========
8. COMMITMENTS AND CONTINGENCIES
LEASES - The Company's offices and manufacturing facilities are leased
under non-cancelable operating leases. The primary facilities lease expires on
June 30, 2002. In addition, the Company leases office space in Chantilly, VA
which expires July 31, 2002. The lease payments are expensed on a straight-line
basis over the lease term.
The Company signed an agreement to sub-lease office space adjacent to its
primary offices, effective May 1, 1998 through June 30, 2002.
Future annual minimum rental payments payable by the Company and annual
minimum sub-lease amounts payable to the Company under non-cancelable leases
are as follows:
OPERATING SUB-LEASE
LEASES (INCOME)
YEAR ENDING SEPTEMBER 30:
1999 $252,311 $(105,526)
2000 259,694 (109,410)
2001 269,596 (112,062)
2002 216,672 (87,354)
-------- ---------
Total $998,273 $(414,352)
======== =========
21
Rent expense for operating leases for the years ended September 30,
1998, 1997 and 1996 totaled $271,502, $196,323, and $159,249, respectively.
22
9. PRODUCT REVENUES AND SALES CONCENTRATIONS
Product Revenues - During fiscal years 1998 , 1997 and 1996, the
Company's revenues were derived primarily from the Character Recognition Product
line. Revenues by product line as a percentage of net sales are summarized as
follows:
YEAR ENDED SEPTEMBER 30,
------------------------
1998 1997 1996
Character recognition 85% 87% 94%
Other 15% 13% 6%
Sales Concentrations - For the years ended September 30, 1998, 1997 and
1996, the Company had the following sales concentrations:
YEAR ENDED SEPTEMBER 30,
------------------------
1998 1997 1996
Customers to which sales were
in excess of 10% of total sales
* Number of customers 1 3 2
* Aggregate percentage of sales 33% 54% 33%
Foreign Sales - primarily Europe 23% 41% 31%
10. LICENSING AGREEMENT
In April 1997 the Company entered into an exclusive software licensing
agreement with Parascript Limited Liability Company (Parascript). The terms
of the agreement required the Company to pay Parascript $650,000 cash, and
lend Parascript $250,000 cash to be repaid in part from the royalties due
Parascript (the $250,000 loan was repaid during the year ended September 30,
1998). In addition, the entities entered into a cross investment agreement
providing Parascript with 763,922 shares of unregistered common stock of the
Company valued at $668,814 in exchange for a 10% interest in Parascript. The
investment in Parascript is accounted for on the cost method and is included
in Other Assets in the accompanying Balance Sheet at September 30, 1998.
On October 16, 1998 the Company and Parascript agreed to undo their
cross investment agreement and entered into a new licensing agreement. The new
licensing agreement is not exclusive except for six major customers, and
provides for a reduction in royalty percentages payable. The Company received
763,922 shares of unregistered common stock of the Company previously held by
Parascript valued at $477,451 in exchange for returning its 10% interest in
Parascript, exclusivity for six customers, and reduced royalties. The
difference between the carrying value of the investment in Parascript of
$668,814 at September 30, 1998 and the $477,451 value on October 16,
23
1998 of $191,363 will be recorded as prepaid license rights and amortized over
48 months as a component of cost of sales.
* * * * * *
24
INDEPENDENT AUDITORS' REPORT
Mitek Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Mitek Systems,
Inc. (the "Company") as of September 30, 1998 and 1997, and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for each of the three years in the period ended September 30, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company at
September 30, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 1998, in
conformity with generally accepted accounting principles.
San Diego, California
November 6, 1998
SUPPLEMENTAL INFORMATION
CORPORATE OFFICE
Mitek Systems, Inc.
10070 Carroll Canyon Road
San Diego, California 92131
(619)635-5900
REGIONAL OFFICE
4506 Daly Drive, Suite 500
Chantilly, Virginia 20151
CORPORATE OFFICERS
John M. Thornton, Chairman, President, Chief Executive Officer and Chief
Financial Officer
TRANSFER AGENT
Chase Mellon Shareholder Services
400 S. Hope Street, Fourth Floor, Los Angeles, California 90071
AUDITORS
Deloitte & Touche, LLP
701 B Street, Suite 1900, San Diego, California 92101
DIRECTORS
John M. Thornton (1), (2), Chairman, President, Chief Executive Officer and
Chief Financial Officer
Sally B. Thornton (1), Investor
Daniel E. Steimle (1), (2), Chief Financial Officer, Transmeta Corporation
James B. DeBello (2), Vice President, Assistant General Manager, Qualcomm Eudora
Internet E-Mail Software Division
Gerald I. Farmer, Ph.D.
NOTES
(1) Compensation Committee
(2) Audit Committee
FORM 10-K REPORT
Copies of the Company's Form 10-K report to the Securities and Exchange
Commission, are available free to stockholders and may be obtained by writing or
calling Secretary, Mitek Systems, Inc., 10070 Carroll Canyon Road, San Diego,
California 92131, phone (619) 635-5900.
26
STOCKHOLDERS:
As of December 1, 1998, there were 576 holders of record of Mitek Systems, Inc.
Common Stock.
DIVIDENDS
Mitek Systems, Inc. has paid no dividends on its common stock since its
incorporation and currently intends to retain all earnings for use in its
business. Payment of dividends is restricted by the terms of outstanding debt
obligations.
COMMON STOCK MARKET (1)
PRICE RANGE (2)
FISCAL QUARTER 1998 1997
LOW HIGH LOW HIGH
1ST .875 1.75 1.50 4.2187
2ND .53125 1.40625 1.4687 2.6875
3RD .84375 1.25 1.125 2.0937
4TH .4375 1.125 .844 1.5625
(1) The Company's common stock is traded on NASDAQ Small Cap Market under the
symbol "MITK" and the closing bid price on December 1, 1998 was $0.625.
(2) Bid quotations compiled by National Association of Securities Dealers, Inc.,
represents inter-dealer quotations and not necessarily actual transactions.
SELECTED FINANCIAL DATA
The table below sets forth selected financial data for each of the years in
the five-year period ended September 30, 1998.
($000 EXCEPT PER SHARE DATA) 1998 1997 1996 1995 1994
Sales $6,501 $4,842 $8,154 $6,633 $10,163
Net income (loss) (1,497) (2,566) 1,229 (69) (1,058)
Net income (loss) per share (0.13) (0.25) 0.16 (0.01) (0.15)
Total assets 6,136 7,188 3,762 2,864 3,074
Long-term liabilities 55 22 6 57 367
Stockholders' equity 4,282 5,751 2,652 1,343 809
27
Exhibit 21.
MITEK SYSTEMS CANADA INC.
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-3888 of Mitek Systems, Inc. on Form S-8 of our report dated November 6,
1998, appearing in the Annual Report on Form 10-K of Mitek Systems, Inc. for
the year ended September 30, 1998.
Deloitte & Touche LLP
San Diego, California
December 28, 1998
5
YEAR
SEP-30-1998
OCT-01-1997
SEP-30-1998
1,740,760
0
2,416,118
125,000
123,909
4,317,224
1,184,076
991,941
6,135,772
1,800,037
54,187
0
0
11,573
4,269,975
4,281,548
6,500,968
6,500,968
1,997,907
5,755,162
317,260
92,877
(72,645)
(1,496,716)
0
(1,496,716)
0
0
0
(1,496,716)
(0.13)
(0.13)
