SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
|X| Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended September 30, 2003
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)
14145 Danielson St., Suite B, Poway, CA 92064
(Address of principal executive offices) (Zip Code)
(858) 513-4600 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.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) Yes |_| No |X|.
The aggregate market value of voting stock held by non-affiliates of the
registrant was $8,632,803 as of March 31, 2003 (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 11,308,537 shares outstanding of the registrant's Common Stock
as of December 3, 2003.
Documents incorporated by reference in this report: Part II incorporates
certain information by reference from the Annual Report to Stockholders for the
year ended September 30, 2003. Part III incorporates certain information by
reference from the Proxy Statement for the 2004 Annual Meeting of Stockholders.
MITEK SYSTEMS, INC.
FORM 10-K
For The Fiscal Year Ended September 30, 2003
Index
Part I
Item 1 Business............................................................ 3
Item 2 Properties.......................................................... 10
Item 3 Legal Proceedings................................................... 10
Item 4 Submission of Matters to a Vote of Security Holders................. 10
Item 4A Executive Officers of the Registrant ............................... 10
Part II
Item 5 Market for Registrant's Common Stock and Related Shareholder Matters 11
Item 6 Selected Financial Data............................................. 12
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations .............................................. 13
Item 7A Quantitative and Qualitative Disclosures about Market Risk.......... 27
Item 8 Financial Statements and Supplementary Data......................... 28
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures .............................................. 44
Item 9A Controls and Procedures ............................................ 44
Part III
Item 10 Directors and Executive Officers of the Registrant.................. 44
Item 11 Executive Compensation.............................................. 44
Item 12 Security Ownership of Certain Beneficial Owners and Management...... 45
Item 13 Certain Relationships and Related Transactions...................... 45
Item 14 Principal Accounting Fees and Services.............................. 45
Part IV
Item 15 Exhibits, Financial Statement Schedules and Reports on Form 8-K..... 45
Signatures.......................................................... 47
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PART I
ITEM 1. BUSINESS
GENERAL
This Form 10-K of Mitek Systems, Inc. (the "Company") contains
forward-looking statements concerning anticipated future revenues and earnings,
adequacy of future cash flow and related matters. These forward-looking
statements include, but are not limited to, statements containing the words
"expect," "believe," "will," "may," "should," "project," "estimate," "scheduled"
and like expressions, and the negative thereof. These statements address matters
including, but not limited to, statements relating to the development and pace
of sales of the Company's products, expected trends and growth in the Company's
results of operations, projections concerning the Company's available cash flow
and liquidity, anticipated penetration in new and existing markets for the
Company's products and the size of such markets, anticipated acceptance of the
Company's products by existing and new customers, and the ability of the Company
to achieve or sustain any growth in sales and revenue. The forward-looking
statements are subject to a variety of risks and uncertainties that could cause
actual results to differ materially from the statements, including those risks
described in the Company's Securities and Exchange Commission reports, and the
risk factors described in this Form 10-K Issues and Uncertainties."
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 hand printed and machine generated documents to do
so more quickly, with greater accuracy and at reduced costs.
PRODUCTS AND RELATED MARKETS
During fiscal 2003, the Company had one operating segment based on its
product and service offerings: Automated Document Processing.
AUTOMATED DOCUMENT PROCESSING
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
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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 and the automated
processing of documents. Mitek's family of ADR products is made up of the three
distinct product lines: Recognition Toolkits, Document and Image Processing
Solutions and Check Imaging Solutions.
Recognition Toolkits
The Company's ADR products incorporate the Company's proprietary
intelligent character recognition (ICR) software engine QuickStrokes(R) API
(Application Programmers Interface), and a licensed ICR software engine
CheckScript(TM) (a trademark of Parascript LLC). QuickStrokes(R) API and
CheckScript(TM) are sold to original equipment manufacturers (OEMs) such as
BancTec, Unisys, and J&B Software, and to systems integrators such as Computer
Sciences Corporation. Major end users include Chevron, GTE, CitiBank, NYNEX,
Fleet Bank, Chase Manhattan, Comerica Bank, HSBC, and British Telecom.
QuickStrokes(R) 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(R) API Courtesy
Amount Recognition (CAR) technology. This product provides a high level of
accuracy in remittance processing, proof of deposit, and lock box processing
applications.
Document and Image Processing Solutions
DynaFind(R) is a software toolkit that captures data from many types of
unstructured business documents. DynaFind is used in challenging data capture
applications where data must be found and extracted from documents that have no
pre-determined format or layout, but share common data elements. DynaFind
locates this data on documents using contextual, positional, format- and
keyword-specific information, even if it appears in a different location on each
document. The Company has supplied DynaFind(R)as a stand alone API to several
important OEMs in the document processing field. DynaFind(R) is also available
as an add-on feature that has been integrated into Doctus, Mitek's forms
processing solution.
Leveraging its core technical competency in ICR, the Company has addressed
the forms processing market with its Doctus(R) product. Doctus(R) incorporates
the Company's core ICR technology in an application designed for end users in a
broad variety of industries that require high volume automated data entry. The
Company believes its Doctus(R) software is a major innovation in forms
processing because it economically handles both structured and unstructured
forms. As a result, it significantly increases the number and types of forms
that can be automatically processed. Doctus(R) is able to process unstructured
forms because it incorporates Mitek's DynaFind(R) forms understanding
technology. With DynaFind(R), Doctus(R) automatically
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classifies unstructured forms and extracts relevant data from the form contents.
Major Doctus(R) customers include AIG and Sungard.
QuickFX(R) Pro is a software toolkit that provides automatic form ID, form
registration and form/template removal. The Company believes it will
significantly improve automatic data capture (ICR/OCR), forms processing,
document imaging and storage performance. QuickFX(R) Pro 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.
Check Imaging Solutions
CheckQuest(R) is Mitek's image-enabled check and item processing solution.
It is specifically designed for check image processing applications at community
and regional banks, such as Proof of Deposit, Retail/Wholesale Lock Box, and
Remittance Processing. CheckQuest is designed to expand and improve an
institution's operational efficiency and customer service without adding staff,
while reducing monthly expenses. CheckQuest utilizes Mitek's field-proven
CAR/LAR technology, currently in use worldwide for processing billions of checks
per year. With the passage of the Check Clearing for the 21st Century Act, or
Check 21, in October of 2003, banks can substitute electronic check images for
paper checks in the clearance and settlement process. This new electronic format
is expected to dramatically reduce bank operating costs and save millions of
dollars each year. With Check 21 calling for the use of electronic check images
within a year's time, The Company believes CheckQuest can play a strategic role
in preparing banks for check truncation and electronic check presentment.
RESEARCH AND DEVELOPMENT
During fiscal years 2003, 2002, and 2001 research and development expense
was approximately $2,242,000, $2,049,000, and $1,830,000, respectively. Those
amounts represented 19%, 16%, and 19%, respectively, of revenue in each of those
years. We plan to continue spending significant amounts for research and product
development.
Most of the Company's software products are developed internally. The
Company also purchases technology and licenses intellectual property rights. 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. We
do not believe we are materially dependent upon licenses and other agreements
with third parties, relating to the development of our products. Internal
development allows Mitek to maintain closer technical control over its products
and gives the Company the freedom to designate which modifications and
enhancements are most important and when they should be implemented. Mitek
devises innovative solutions to automated character processing problems, such as
the enhancement and improvement of degraded images, and the development of
user-manipulated tools to aid in automated document processing. The Company
intends to expand its existing product offerings and to introduce new document
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 strives to become informed at the earliest
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possible time about changing usage patterns and hardware advances that may
affect software design. The Company intends to continue to support industry
standard operating environments.
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 nineteen
software engineers at September 30, 2003, including seven with advanced degrees.
The Company balances its engineering resources between development of ICR
technology and applications development. Of the nineteen software engineers,
approximately ten are involved in ICR research and development of the
QuickStrokes(R) API recognition engine. The remaining software engineers are
involved in applications development, including the Doctus(R), QuickFX(R) Pro,
CheckQuest(R) and FraudProtect(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 holds a U.S. patent for its hierarchical character
recognition systems. The patent covers the Company's 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 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 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
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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.
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, in addition
to small and large financial institutions. The Company currently maintains sales
offices in California and Virginia and a services and support office in Alabama.
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
updates 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 Company licenses its software to organizations on a perpetual basis.
The Company also licenses software to organizations under Enterprise Agreements
that allow the end-user customer to acquire multiple licenses, without having to
acquire separate packaged products. These Enterprise Agreements are targeted at
large organizations that want to acquire perpetual licenses to software products
for their entire enterprise along with rights to unspecified future versions of
software products over the term of the agreement.
The ability to support international markets has assisted the Company in
its international sales effort. International sales accounted for approximately
3%, 4%,and 3%, of the Company's net sales for the fiscal years ended September
30, 2003, 2002, and 2001, 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 fiscal 2003 were made to customers in eighteen countries including Australia,
Brazil, Canada, Czech Republic, United Kingdom, France, Germany, Hong Kong,
Ireland, Israel, India, Italy, Jamaica, Japan, Netherlands, Portugal, Sweden,
and Uruguay. The Company sells its products in United States currency only. The
Company recorded a significant portion of its revenues from three customers in
fiscal 2003, three customers in fiscal 2002, and one customer in fiscal 2001,
respectively. Net sales from these customers aggregated 30%, 34%, and 11% for
the fiscal years 2003, 2002 and 2001, respectively.
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MAINTENANCE AND SUPPORT
Following the installation of our software at a customer site, we provide
ongoing software support services to assist our customers in operating the
systems. The Company has an internal customer service department that handles
installation and maintenance requirements. The majority of inquiries are handled
by telephone. For more complicated issues, our staff, with our customers'
permission, can log on to our customers' systems remotely. Occasionally, visits
to the customer's facilities are required to resolve support issues. We maintain
our customers' software largely through releases which contain improvements and
incremental additions. Nearly all of our in-house customers contract for annual
support services from us. These services are a significant source of recurring
revenue, and are contracted for on an annual basis and are typically priced at
approximately 15% to 18% of the particular software product's license fee. The
Company believes that as the installed base of its products grows and as
customers purchase additional complementary products, the software support
function will become a larger source of recurring revenues. Costs incurred by
the Company to supply maintenance and support services are charged to cost of
sales.
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 automated document processing
systems; (iii) companies offering competing technologies capable of recognizing
hand-printed and cursive characters; and (iv) direct competition from companies
offering check imaging systems to banks.
It is also possible that the Company will face competition from new
competitors. Moreover, as the market for automated document processing, ICR,
check imaging and fraud detection 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(R) API product and licensed CheckScript(TM)
product compete, to various degrees, with products produced by a number of
substantial competitors such as A2IA, Parascript, and Orbograph. Competition
among product providers in this market generally focuses on price, accuracy,
reliability and technical support. The Company believes its primary competitive
advantages are (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) an architectural software design, which
allows it to be more readily modified, improved with added functionality,
configured for new products, and ported to new operating systems and upgrades.
Despite these advantages, QuickStrokes(R) API and CheckScript(TM) competitors
have
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existed longer and have far greater financial resources and industry connections
than the Company.
The Company's Doctus(R) product competes against complete proprietary
systems offered by software developers, such as Microsystems Technology,
Readsoft, and Cardiff Software, Inc. In addition, Doctus(R) faces competition
from providers of recognition systems that incorporate ADR technology such as
Microsystems Technology, Inc., and Captiva. Because Doctus(R) is based on the
Company's proprietary QuickStrokes(R) API engine, its competitive advantages
reflect the advantages of the QuickStrokes(R) engine. The Company believes its
Doctus(R) and DynaFind(R) software provides the highest levels of automation in
the industry. DynaFind, the Company's document understanding software, does not
require extensive rules written by a programmer based on a large set of training
documents. The software automatically "learns" how to process unstructured forms
by reading only a few examples. Competitors in this market offer both high and
low cost systems. The Company's strategy is to position Doctus(R) 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.
The Company's CheckQuest(R) product competes against complete proprietary
systems offered by software developers such as Bankware, AFS, and BISYS/Document
Solutions. Because CheckQuest(R) is based on the Company's proprietary
QuickStrokes(R) engine, the Company believes its CheckQuest(R) software provides
superior workflow technology, combined with the labor-saving recognition
capabilities typically found in larger systems. By incorporating our superior
check reading technology, we are providing our banking customers a streamlined
check imaging process. The CheckQuest(R) system allows bank customers to
research checks via the Internet and receive check image statements via e-mail.
The Company's strategy is to position CheckQuest(R) to compete successfully in
the community and regional bank marketplace, while offering superior accuracy,
workflow and flexibility than competing systems currently on the market.
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, 2003, the Company employed a total of 57 full-time and
2 part-time persons, consisting of 14 in marketing, sales and support, 19 in
research and development, 19 in operations, and 7 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
AVAILABLE INFORMATION
Our internet address is www.miteksys.com. There we make available, free of
charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and any amendments to those reports, as soon as reasonably
practicable after we electronically file
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such material with, or furnish it to, the SEC. Our SEC reports can be accessed
through the investor relations section of our Web site. The information found on
our Web site is not part of this or any other report we file with or furnish to
the SEC.
ITEM 2. PROPERTIES
The Company's principal executive offices, as well as its principal
research and development facility, is located in approximately 26,455 square
feet of leased office building space in Poway, California. The lease on these
facilities expires September 30, 2005. During the year, the Company leased a
customer services and support facility in Alabama. 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
The Company currently is not aware of any such legal proceedings or claims
that it believes will have, individually or in the aggregate, a material adverse
effect on its business, financial condition, operating results, cash flow or
liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter ended September 30, 2003.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers as of December 29, 2003 were as follows:
Name Age Position with the Company
- --------------------------------------------------------------------------------
James B. DeBello 45 President, Chief Executive Officer
John M. Thornton 71 Chairman, Chief Financial Officer
Noel Flynn 43 Vice President - Operations
Murali Narayanan 51 Vice President - Marketing
James Graybeal 44 Vice President - Sales
Mr. DeBello was named President and Chief Executive Officer in May 2003. He has
served as a director of the company since 1994. Prior to being named Chief
Executive Officer, he served as Chief Executive Officer of Asia Corporation
Communications from 2001 to May 2003. Prior to that, he served as Chief
Executive Officer of IdeaEdge Ventures from 2000 to 2001. Prior to that, he
served as Chief Operating Officer of CollegeClub.com from 1999 to 2000.
Mr. Thornton served as Chairman, President, Chief Executive Officer and Chief
Financial Officer from August 1998 to May 2003, when he resigned as President
and Chief Executive Officer but remained as Chairman and Chief Financial
Officer. He has served as Chairman since 1987.
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Mr. Flynn joined the Company in 1989. He was named Vice President of Operations
in November 1999. Prior to that, he served as Director of Operations.
Mr. Narayanan joined the Company in July 2003 as Vice President of Marketing.
Prior to joining the Company, he served from May, 2000 as Vice President of
Business Development of Embrace Networks. Prior to that, he served from May 1999
to April 2000 as Director of Marketing, Internet and Connectivity Solutions for
Motorola, Inc.
Part II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the NASDAQ Stock Market under the symbol
MITK and the closing bid price on December 3, 2003 was $1.13. As of December 3,
2003, there were 511 holders of record of Mitek Systems, Inc. Common Stock. The
high and low common stock prices per share were as follows(1):
Quarter Ended Dec. 31 Mar. 31 Jun. 30 Sept. 30 Year
- --------------------------------------------------------------------------------------------
Fiscal 2002
Common stock price per share
High $2.25 $2.95 $2.71 $1.40 $2.95
Low 1.15 1.43 1.12 .80 .80
- --------------------------------------------------------------------------------------------
Fiscal 2003
Common stock price per share
High 1.44 1.49 1.64 1.49 1.64
Low .83 .85 1.00 .96 .83
- --------------------------------------------------------------------------------------------
(1) Bid quotations compiled by National Association of Securities Dealers,
Inc., represents inter-dealer quotations and not necessarily actual
transactions
We have not paid any dividends on our common stock. We currently intend to
retain earnings for use in our business and do not anticipate paying cash
dividends in the foreseeable future. We are prohibited from paying cash
dividends under the terms of our line of credit agreement.
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ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below with respect to our financial
statements has been derived from the audited financial statements. The data set
forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and related notes included elsewhere in this filing.
(DOLLARS IN THOUSANDS
EXCEPT PER SHARE DATA) 2003 2002 2001 2000 1999
- ---------------------- ---- ---- ---- ---- ----
Statement of Operations Data
Net Sales $ 11,594 $ 13,083 $ 9,387 $ 9,348 $ 9,741
Net income (loss) (2,492) 397 (341) (1,434) 2,026
Net income (loss) per share (0.22) 0.04 (0.03) (0.13) 0.19
Balance Sheet Data
- ------------------
Cash and short-term investments $ 1,819 $ 760 $ 865 $ 537 $ 1,399
Total assets 5,644 8,231 6,616 7,774 7,389
Long-term liabilities 369 466 175 41 51
Stockholders' equity 2,572 5,028 4,564 4,890 5,622
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
In addition to historical information, this Management's Discussion and
Analysis of Financial Condition and Results of Operations (the "MD&A") contains
certain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. As contained herein, the words "expects,"
"anticipates," "believes," "intends," "will," and similar types of expressions
identify forward-looking statements, which are based on information that is
currently available to the Company, speak only as of the date hereof, and are
subject to certain risks and uncertainties. To the extent that the MD&A contains
forward-looking statements regarding the financial condition, operating results,
business prospects or any other aspect of the Company, please be advised that
the Company's actual financial condition, operating results and business
performance may differ materially from that projected or estimated by the
Company in forward-looking statements. The Company has attempted to identify, in
context, certain of the factors that it currently believes may cause actual
future experiences and results to differ from the Company's current
expectations. The difference may be caused by a variety of factors, including,
but not limited to, adverse economic conditions, general decreases in demand for
Company products and services, intense competition, including entry of new
competitors, increased or adverse federal, state and local government
regulation, inadequate capital, unexpected costs, lower revenues and net income
than forecast, price increases for supplies, inability to raise prices, the risk
of litigation and administrative proceedings involving the Company and its
employees, higher than anticipated labor costs, the possible fluctuation and
volatility of the Company's operating results and financial condition, adverse
publicity and news coverage, inability to carry out marketing and sales plans,
loss of key executives, changes in interest rates, inflationary factors, and
other specific risks that may be alluded to in this MD&A.
RESULTS OF OPERATIONS
NET SALES
Net sales were $11,594,000, $13,083,000 and $9,387,000 for fiscal 2003,
2002 and 2001, respectively. Net sales decreased by $1,489,000 in fiscal 2003
compared to fiscal 2002. The decrease from fiscal 2002 to fiscal 2003 was
primarily due to reduced sales of Recognition Toolkits, which declined in
revenue by $1,498,000, or 25%, in fiscal 2003. The decrease reflects the
Company's efforts that were principally focused on Check Imaging Solutions.
Though the Company experienced a nominal increase in the installed customer base
for Recognition Toolkits, there were certain existing customers whose Fiscal
2002 enterprise licenses will not renew until fiscal 2004. Prospectively, the
Company expects this area to grow during fiscal 2004, given a renewed effort to
penetrate additional customer markets, along with renewal of enterprise
licenses, which should occur during fiscal 2004.
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Check Imaging Solutions revenue increased by $98,000, or 2%, during fiscal
2003. This increase reflects additional market penetration during the fiscal
year, but was substantially below the Company's expectation. The Company
believes there was considerable extension of the sales cycle during fiscal 2003,
due to legislation pending during the fiscal year. This legislation, eventually
signed into law in October of 2003, mandated changes in how banks process
checks, and will eventually eliminate the transportation of paper checks through
the Federal Reserve System. The Company believes uncertainty regarding the final
form caused many prospective customers to delay purchase of check imaging within
their operations. The Company believes the passage of this legislation will
encourage banks to reevaluate imaging solutions, and as the 2005 adoption
deadline approaches, will shorten the historical sales cycle.
Sales of the Company's Document and Image Processing Solutions decreased
by $270,000, or 26%, for fiscal 2003. This reflects the Company's efforts that
were principally focused on Check Imaging Solutions, not on Imaging Processing
Solutions. Prospectively, the Company expects this area to yield considerable
growth, with the addition of sales staff whose focus will be on this area.
The increase in revenue from fiscal 2001 to fiscal 2002 of $3,696,000 was
due to increased sales of Recognition Toolkits, which increased by $2,148,000,
or 55%. This increase reflected both additional market penetration and renewal
of existing enterprise licensing agreements. Check Imaging Solutions increased
sales by $1,082,000, or 26%, for fiscal 2002. This increase reflected additional
market penetration of the imaging solution. Sales of the Company's Document and
Imaging Processing Solutions increased by $267,000, or 36%, for fiscal 2002.
This increase reflects additional revenue due to the release of new image
processing tools, which were adopted by the existing customer base.
COST OF SALES
Cost of sales includes manufacturing and distribution costs for products
and programs sold, operation costs related to product support, and costs
associated with the delivery of consulting services. Cost of sales were
$4,541,000, $3,751,000,and $2,650,000, for fiscal 2003, 2002 and 2001,
respectively. The dollar increase in cost of sales in 2003 from 2002 resulted
primarily from margin erosion in the Company's Check Imaging Solutions. Due to
increased pricing pressures in the marketplace, the Company reduced prices. The
dollar increase in cost of sales in 2002 from 2001 resulted primarily from the
increased sales of the Company's Check Imaging Solutions and Recognition
Toolkits product lines.
Stated as a percentage of net sales, cost of sales for the corresponding
periods were 39%, 29% and 28%, respectively. The increase in cost of sales,
stated as a percentage of sales, resulted from the reduced gross margin as
discussed above. The increase in cost of sales, as a percentage of sales, in
fiscal 2002 from 2001 resulted from the mix of product sales shifting to
products which have both hardware and software included in the sale, which
typically carries lower gross margins, or to products on which the Company pays
royalties.
Page 14
OPERATIONS
Gross operations expense include payroll, employee benefits, and other
headcount-related costs associated with shipping and receiving, quality
assurance, customer support, installation and training. As installation,
training, maintenance and customer support revenues are recognized, the amounts
expensed are charged to cost of sales, with unabsorbed costs remaining in
operations expense.
Operations expenses were $1,694,000, $1,872,000, and $1,279,000 for fiscal
2003, 2002, and 2001, respectively. The dollar decrease in the 2003 expense is
primarily attributable to additional amounts charged to cost of sales,
reflecting increased activity in installation and training. The dollar increase
in the 2001 fiscal year was primarily attributable to staff additions. These
increased costs are a result of the growth in the installed base of Checkquest
customers, as well as the demand for additional installation and training
personnel which the Company deemed necessary to meet the installation and
training needs for new customers.
Stated as a percentage of net sales, operations expenses for fiscal 2003,
2002, and 2001 were 15%, 14%, and 14%, respectively. The increase in the 2003
expense, as a percentage of net sales, was primarily attributable to the reduced
amount of sales. The fixed amount in the 2002 expense, as a percentage of net
sales, is primarily attributable to additions to the Company's staff of
CheckQuest support, installation and training specialists, combined with an
increase in travel costs.
SELLING AND MARKETING
Selling and marketing expenses include payroll, employee benefits, and
other headcount-related costs associated with sales and marketing personnel and
advertising, promotions, trade shows, seminars, and other programs. Selling and
marketing expenses were $3,768,000, $3,014,000, and $2,292,000, for fiscal 2003,
2002, and 2001, respectively. The dollar increase in 2003 expense is primarily
attributable to increased salaries and commission expense, which resulted from
the addition of three salespersons primarily focused on the community bank
market. The dollar increase in 2002 expense is primarily attributable to
increased sales and the use of sales representatives compensated on a
commission-only basis
Stated as a percentage of net sales, selling and marketing expenses for
fiscal 2003, 2002, and 2001 were 32%, 23%, and 24%, respectively. The increase
in 2003 expense, as a percentage of net sales, was primarily attributable to the
increased expense, combined with the decreased sales. The decrease in 2002
expense, as a percentage of net sales, was primarily attributable to the effect
of the increased Checkquest salespersons, which occurred in fiscal 2002, who
accounted for the increased sales. This increase in sales was only partially
offset by an increase in dollar expense, primarily commissions.
We expect that we will decrease overall spending on Checkquest sales
force, having already eliminated three positions during fiscal 2003, while
anticipating adding one position to the Solutions sales force during fiscal
2004.
Page 15
RESEARCH AND DEVELOPMENT
Research and development expenses include payroll, employee benefit, and
other headcount-related costs associated with product development. These costs
are incurred to maintain and enhance existing products. The Company maintains
sufficient staff to maintain the existing product lines, including development
of newer, more feature-rich versions of its existing product lines, as the
Company determines is demanded by the marketplace. The Company also maintains
research personnel, whose efforts are designed to ensure product paths from
current technologies to anticipated future generations of products within the
Company's area of business.
Research and development expenses were $2,242,000, $2,049,000, and
$1,830,000 for fiscal 2003, 2002, and 2001, respectively. The dollar increase in
the 2003 expense is primarily due to annual salary adjustments given to
engineering personnel. The dollar increase in the 2002 expense is due to
additional personnel added to support and enhance the Checkquest product line.
Stated as a percentage of net sales, research and development expense for
fiscal 2003, 2002, and 2001, including charges to cost of sales, were 19%, 16%,
and 19%, respectively. The increase in 2003 expense, as a percentage of net
sales, is primarily attributable to the decrease in sales. The decrease in 2002
expense, as a percentage of net sales, is primarily attributable to the increase
in sales.
During fiscal 2004, we expect our research and development expenses to
continue to increase due to annual salary adjustments, however we do not expect
to increase the number of research and development personnel.
GENERAL AND ADMINISTRATIVE
General and administrative expenses include payroll, employee benefit, and
other headcount-related costs associated with the finance, facilities, and legal
and other administrative fees. General and administrative costs were $1,848,000,
$2,010,000, and $1,634,000, for fiscal 2003, 2002, and 2001, respectively. The
dollar decrease in the 2003 expense is primarily attributable to reduced bad
debt expense, resulting from more stringent order acceptance criteria. The
dollar increase in the 2002 expense is primarily attributable to costs
associated with outside professional services, primarily strategic planning
services incurred to better focus and direct the Company's efforts, as well as
increased bad debt expense.
Stated as a percentage of net sales, general and administrative expense
for fiscal 2003, 2002, and 2001 were 16%, 15%, and 17%, respectively. The
increase in 2003 expense, as a percentage of net sales, was primarily due to
decreased sales. The decrease in 2002 expense, as a percentage of net sales, was
primarily attributable to increased sales.
Prospectively, we do not expect any material change in our general and
administrative expense growth, based upon our current operating plan for fiscal
2004.
Page 16
OTHER INCOME (EXPENSE)
Net interest income (expense) was $18,000, $9,000, and ($43,000), for
fiscal 2003, 2002, and 2001, respectively. Stated as a percentage of net sales,
net interest income (expense) for the corresponding periods was 0.2%, 0.1%, and
(0.5%), respectively. The increase in interest income in the current year is
attributable to interest earned on cash invested during the year. The Company
moved from interest expense in 2001 to income in 2002 due to reduced borrowings
under the Company's line of credit.
INCOME TAXES
For the fiscal years 2003, the Company recorded income tax expense, which
was primarily franchise taxes paid to states in which the Company operated. In
fiscal 2002, and 2001 the Company did not record an income tax provision or
benefit for income taxes because the deferred tax assets generated by the
current year net benefit was offset by a corresponding decrease in the valuation
allowance.
FINANCIAL CONDITION
At September 30, 2003 the Company had $1,819,000 in cash as compared to
$760,000 at September 30, 2002. Accounts receivable totaled $2,901,000, a
decrease of $3,373,000 over the September 30, 2002, balance of $6,274,000. This
decrease was primarily a result of collection of existing receivables.
Unearned revenue as of September 30, 2003 was $1,204,000, increasing
$335,000 from September 30, 2002, reflecting the addition of new and anniversary
multi-year product support agreements, partially offset by continued recognition
of unearned revenue from product support agreements licensed in prior periods.
During fiscal 2003, the Company financed its cash needs primarily from
operating activities.
Net cash generated from operating activities during the year ended
September 30, 2003 was $1,223,000. The primary use of cash from operating
activities was the net loss of $2,492,000 and a decrease in accounts payable of
$686,000. The primary sources of cash from operating activities was a decrease
in accounts receivable of $3,270,000 and depreciation and amortization expense,
which does not require cash, of $442,000.
Net cash used from investing activities was primarily from the acquisition
of fixed assets, primarily a high-speed sorter used for development work, as
well as additional computer equipment used in development.
Net cash from financing activities was primarily the borrowing and
repayment on the Company's line of credit.
Page 17
The Company's working capital and current ratio was $2,341,000 and 1.87,
respectively, at September 30, 2003, $4,643,000 and 2.70, respectively, at
September 30, 2002. At September 30, 2003, total liabilities to equity ratio was
1.19 to 1 compared to .64 to 1 a year earlier. As of September 30, 2003, total
liabilities were reduced by $132,000 than on September 30, 2002.
On February 19, 2003 the Company revised its working capital revolving
line of credit. This line requires interest to be paid at prime plus 1
percentage point, and is subject to a limit on maximum available borrowings of
$1,200,000. The Company had no borrowings under the working capital line of
credit on September 30, 2003 or on September 30, 2002. This credit line is
subject to a net worth covenant whereby the Company must maintain a tangible net
worth of $3,750,000 in order to use the credit line. The loss sustained during
the year ended September 30, 2003 caused the Company's net worth to fall to
$2,680,000. Though the Company had no borrowings under the credit line as of
September 30, 2003, the Company is no longer in compliance with the
aforementioned net worth covenant. The Company requested, and the lender agreed
to, a modification of the net worth covenant, which reduced the maximum
available borrowings to $500,000 subject to a required minimum tangible net
worth of $2,000,000. All other covenants and conditions remained the same.
The existing credit line expires on February 28, 2004. The Company
believes that it will be able to renew the current credit line with its current
lender. If such renewal cannot be obtained, the Company believes that
alternative financing, under terms satisfactory to the Company will be
available. However no assurance can be made that the Company will be able to
renew its current credit line or that alternative financing can be secured under
terms satisfactory to the Company.
There are no significant capital expenditures planned for the foreseeable
future.
The Company signed an agreement to lease office space at 14145 Danielson
Street, Suite B, Poway, California effective July 1, 2002 through September
30,2005. The future annual minimum rents have been disclosed in the footnotes to
the Financial Statements.
The Company evaluates its cash requirements on a quarterly basis.
Historically, the Company has managed its cash requirements principally from
cash generated from operations. Although the Company's strategy for fiscal 2004
is to grow the identified markets for its new products and enhance the
functionality and marketability of the Company's character recognition
technology, it has not yet observed a significant change in liquidity or future
cash requirements as a result of this strategy. Cash requirements over the next
twelve months are principally to fund operations, including spending on research
and development. The Company believes that it will have sufficient liquidity to
finance its operations for the next twelve months using existing cash, cash
generated from operations, and borrowings under the Company's line of credit as
available, as discussed above.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In November 2002, the FASB issued FASB Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees. This
Page 18
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under certain
guarantees that it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. This Interpretation does not
prescribe a specific approach for subsequently measuring the guarantor's
recognized liability over the term of the related guarantee. This Interpretation
also incorporates, without change, the guidance in FASB Interpretation No. 34,
Disclosure of Indirect Guarantees of Indebtedness of Others, which is being
superseded. The initial recognition and measurement provisions of this
Interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002, irrespective of the guarantor's fiscal
year-end. The disclosure requirements in this Interpretation are effective for
financial statements of interim or annual periods ending after December 15,
2002. The Company has issued no guarantees that qualify for disclosure in this
interim financial statement.
In December 2002, the FASB issued SFAS No. 148 Accounting for Stock-Based
Compensation - Transition and Disclosure. SFAS No. 148 amends SFAS No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The amendments to SFAS No. 123 provided for under SFAS No. 148 are
effective for financial statements for fiscal years ending after December 15,
2002. However, certain provisions of SFAS No. 148 relating to interim financial
statements are effective for the Company's second quarter beginning January 1,
2003. The Company has not elected to adopt the fair value accounting provisions
of SFAS No. 123 and therefore the adoption of SFAS No. 148 did not have a
material effect on our results of operations or financial position.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities. In general, a variable interest
entity is a corporation, partnership, trust, or any other legal structure used
for business purposes that either (a) does not have equity investors with voting
rights or (b) has equity investors that do not provide sufficient financial
resources for the entity to support its activities. FIN 46 requires a variable
interest entity to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual returns or both. The
consolidation requirements of FIN 46 were initially to apply to variable
interest entities created after January 31, 2003. The consolidation requirements
were initially to apply to transactions entered into prior to February 1, 2003
in the first fiscal year or interim period beginning after June 15, 2003. The
FASB postponed implementation of FIN 46 in October 2003. Currently the
provisions of FIN 46 must be applied in the first interim or annual period
ending after December 15, 2003. The Company has not completed the process of
evaluating the impact that the adoption of FIN 46 will have on its financial
position or operating results.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Mitek's financial statements and accompanying notes are prepared in
accordance with generally accepted accounting principles in the United States of
America. Preparing financial
Page 19
statements requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenue, and expenses. These estimates
and assumptions are affected by management's application of accounting policies.
Critical accounting policies for Mitek include revenue recognition, impairment
of accounts and notes receivable, and accounting for income taxes.
Revenue Recognition
The Company enters into contractual arrangements with end users that may
include licensing of the Company's software products, product support and
maintenance services, consulting services, resale of third-party hardware, or
various combinations thereof, including the sale of such products or services
separately. The Company's accounting policies regarding the recognition of
revenue for these contractual arrangements is fully described in Notes to
Unaudited Condensed Consolidated Financial Statements.
The Company considers many factors when applying accounting principles
generally accepted in the United States of America related to revenue
recognition. These factors include, but are not limited to:
o The actual contractual terms, such as payment terms, delivery dates,
and pricing of the various product and service elements of a
contract
o Availability of products to be delivered
o Time period over which services are to be performed
o Creditworthiness of the customer
o The complexity of customizations to the Company's software required
by service contracts
o The sales channel through which the sale is made (direct, VAR,
distributor, etc.)
o Discounts given for each element of a contract
o Any commitments made as to installation or implementation "go live"
dates
Each of the relevant factors is analyzed to determine its impact,
individually and collectively with other factors, on the revenue to be
recognized for any particular contract with a customer. Management is required
to make judgments regarding the significance of each factor in applying the
revenue recognition standards, as well as whether or not each factor complies
with such standards. Any misjudgment or error by management in its evaluation of
the factors and the application of the standards, especially with respect to
complex or new types of transactions, could have a material adverse affect on
the Company's future revenues and operating results.
Accounts Receivable.
We evaluate the creditworthiness of our customers prior to order
fulfillment and we perform ongoing credit evaluations of our customers to adjust
credit limits based on payment history and our assessment of the customer's
current creditworthiness. We constantly monitor collections from our customers
and maintain a provision for estimated credit losses that is based on historical
experience and on specific customer collection issues. While such credit losses
have historically been within our expectations and the provisions established,
we cannot guarantee that
Page 20
we will continue to experience the same credit loss rates that we have in the
past. Since our revenue recognition policy requires customers to be deemed
creditworthy, our accounts receivable are based on customers whose payment is
reasonably assured. Our accounts receivable are derived from sales to a wide
variety of customers. We do not believe a change in liquidity of any one
customer or our inability to collect from any one customer would have a material
adverse impact on our financial position.
Deferred Income Taxes.
Deferred income taxes 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. We maintain a valuation
allowance against the deferred tax asset due to uncertainty regarding the future
realization based on historical taxable income, projected future taxable income,
and the expected timing of the reversals of existing temporary differences.
Until such time as the Company can demonstrate that it will no longer incur
losses or if the Company is unable to generate sufficient future taxable income
we could be required to maintain the valuation allowance against our deferred
tax assets.
ISSUES AND UNCERTAINTIES
This Annual Report on Form 10-K contains statements that are
forward-looking. These statements are based on current expectations and
assumptions that are subject to risks and uncertainties. Actual results could
differ materially because of issues and uncertainties such as those listed below
and elsewhere in this report, which, among others, should be considered in
evaluating our financial outlook.
Because most of our revenues are from a single type of technology, our product
concentration may make us especially vulnerable to market demand and competition
from other technologies.
We currently derive substantially all of our product revenues from
licenses and sales of hardware and software products incorporating its character
recognition technology. As a result, factors adversely affecting the pricing of
or demand for our products and services, such as competition from other products
or technologies, any decline in the demand for automated entry of hand printed
characters, negative publicity or obsolescence of the hardware or software
environments in which our products operate could result in lower sales or gross
margins and would have a material adverse effect on our business, operating
results and financial condition.
Competition in our market may result in pricing pressures, reduced margins or
the inability of our products and services to achieve market acceptance.
We compete against numerous other companies which address the character
recognition market, some of whom have greater financial, technical, marketing
and other resources. Other companies could choose to enter our marketplace. We
may be unable to compete successfully against our current and potential
competitors, which may result in price reductions, reduced margins and the
inability to achieve market acceptance for our products. Moreover, from time to
time, our competitors or we may announce new products or technologies that have
the potential to replace our existing product offerings. There can be no
assurance that the announcement of
Page 21
new product offerings will not cause potential customers to defer purchases of
our existing products, which could adversely affect our business, operating
results and financial condition.
We must continue extensive research and development in order to remain
competitive.
Our ability to compete effectively with our character recognition product
line will depend upon our ability to meet changing market conditions and develop
enhancements to our products on a timely basis in order to maintain our
competitive advantage. Rapidly advancing technology and rapidly changing user
preferences characterize the markets for products incorporating character
recognition technology. Our continued growth will ultimately depend upon our
ability to develop additional technologies and attract strategic alliances for
related or separate product lines. There can be no assurance that we will be
successful in developing and marketing product enhancements and additional
technologies, that we will not experience difficulties that could delay or
prevent the successful development, introduction and marketing of these
products, or that our new products and product enhancements will adequately meet
the requirements of the marketplace, will be of acceptable quality, or will
achieve market acceptance.
If our new products fail to gain market acceptance, our business,
operating results and financial condition would be materially adversely affected
by the lower sales. If we are unable, for technological or other reasons, to
develop and introduce products in a timely manner in response to changing market
conditions or customer requirements, our business, operating results and
financial condition may be materially and adversely affected by lower sales.
Delisting from the Nasdaq SmallCap Market
Our common stock is listed on the Nasdaq SmallCap Market. No assurance can
be made that our common stock will continue to be listed on the Nasdaq SmallCap
Market. If our common stock were not able to be traded on the Nasdaq SmallCap
Market, it would likely be traded on the OTC market or the "pink sheets."
Securities traded on the Nasdaq SmallCap Market, the OTC market or the "pink
sheets" are subject to certain securities regulations. These regulations may
limit, in certain circumstances, certain trading activities in our common stock,
which could reduce the volume of trading in our common stock or the market price
of our common stock.
Additionally, the Nasdaq SmallCap Market has recently experienced extreme
price and volume fluctuations. The OTC market and the "pink sheets" also
typically exhibit extreme price and volume fluctuations. These broad market
factors may materially adversely affect the market price of our common stock,
regardless of our actual operating performance. In the past, individual
companies whose securities have exhibited periods of volatility in their market
price have had securities class action litigation instituted against that
company. This type of litigation, if instituted, could result in substantial
costs and a diversion of management's attention and resources.
Our quarterly results have fluctuated greatly in the past and will likely
continue to do so, which may cause substantial fluctuations in our common stock
price.
Page 22
Our quarterly operating results have in the past and may in the future
vary significantly depending on factors including the timing of customer
projects and purchase orders, new product announcements and releases by us and
other companies, gain or loss of significant customers, price discounting of our
products, the timing of expenditures, customer product delivery requirements,
availability and cost of components or labor and economic conditions generally
and in the information technology market specifically. Any unfavorable change in
these or other factors could have a material adverse effect on our operating
results for a particular quarter, which may cause downward pressure on our
common stock price. We expect quarterly fluctuations to continue for the
foreseeable future.
Our historical order flow patterns, which we expect to continue, have caused
forecasting difficulties for us.
Historically, a significant portion of our sales have resulted from
shipments during the last few weeks of the quarter from orders received in the
last month of the applicable quarter. . The Company, however, will base its
expense levels, in significant part, on its expectations of future revenue. . As
a result, the Company expects its expense levels to be relatively fixed in the
short term. Any concentration of sales at the end of the quarter may limit our
ability to plan or adjust operating expenses. Therefore, if anticipated
shipments in any quarter do not occur or are delayed, expenditure levels could
be disproportionately high as a percentage of sales, and our operating results
for that quarter would be adversely affected. As a result, the Company believes
that period-to-period comparisons of the Company's results of operations are not
and will not necessarily be meaningful, and you should not rely upon them as an
indication of future performance. If our operating results for a quarter are
below the expectations of public market analysts and investors, the price of our
common stock may be materially adversely affected.
Revenue recognition accounting standards and interpretations may change, causing
the Company to recognize lower revenues.
In October 1997, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) No. 97-2, Software Revenue
Recognition. The Company adopted SOP 97-2, as amended by SOP 98-4 Deferral of
the Effective Date of a Provision of SOP 97-2 as of July 1, 1998. In December
1998, the AICPA issued SOP 98-9, Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions. The Company adopted SOP 98-9
on January 1, 2000. These standards address software revenue recognition matters
primarily from a conceptual level and do not include specific implementation
guidance. The Company believes that it is currently in compliance with SOP 97-2
and SOP 98-9. In addition, in December 1999, the Securities and Exchange
Commission (SEC) staff issued Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements (SAB 101), which provides further guidance
with regard to revenue recognition, presentation and disclosure. The Company
adopted SAB 101 during the fourth quarter of fiscal 2000.
The accounting profession and the SEC continue to discuss certain
provisions of SOP 97-2, SAB 101 and other revenue recognition standards and
related interpretations with the objective of providing additional guidance on
potential application of the standards and interpretations. These discussions
could lead to unanticipated changes in revenue recognition standards and, as a
Page 23
result, in the Company's current revenue accounting practices, which could cause
the Company to recognize lower revenues. As a result, the Company may need to
change its business practices.
If our products have product defects, it could damage our reputation, sales,
profitability and result in other costs.
Our products are extremely complex and are constantly being modified and
improved, and as such they may contain undetected defects or errors when first
introduced or as new versions are released. As a result, we have in the past and
could in the future face loss or delay in recognition of revenues as a result of
software errors or defects. In addition, our products are typically intended for
use in applications that are critical to a customer's business. As a result, we
believe that our customers and potential customers have a greater sensitivity to
product defects than the market for software products generally.
There can be no assurance that, despite our testing, errors will not be
found in new products or releases after commencement of commercial shipments,
resulting in loss of revenues or delay in market acceptance, diversion of
development resources, damage to our reputation, adverse litigation, or
increased service and warranty costs, any of which would have a material adverse
effect upon our business, operating results and financial condition.
Our success and our ability to compete are dependent, in part, upon protection
of our proprietary technology.
We generally rely on trademark, trade secret, copyright and patent law to
protect our intellectual property. We may also rely on creative skills of our
personnel, new product developments, frequent product enhancements and reliable
product maintenance as means of protecting our proprietary technologies. There
can be no assurance, however, that such means will be successful in protecting
our intellectual property. There can be no assurance that others will not
develop technologies that are similar or superior to our technology.
The source code for our proprietary software is protected both as a trade
secret and as a copyrighted work. Despite these precautions, it may be possible
for a third party to copy or otherwise obtain and use our products or technology
without authorization, or to develop similar technology independently.
We may have difficulty protecting our proprietary technology in countries other
than the United States.
We operate in a number of countries other than the United States.
Effective copyright and trade secret protection may be unavailable or limited in
certain countries. Moreover, there can be no assurance that the protection
provided to our proprietary technology by the laws and courts of foreign nations
against piracy and infringement will be substantially similar to the remedies
available under United States law. Any of the foregoing considerations could
result in a loss or diminution in value of our intellectual property, which
could have a material adverse effect on our business, financial condition, and
results of operations.
Page 24
Companies may claim that we infringe their intellectual property or proprietary
rights, which could cause us to incur significant expenses or prevent us from
selling our products.
We have in the past had companies claim that certain technologies
incorporated in our products infringe their patent rights. Although we have
resolved the past claims and there are currently no claims of infringement
pending against us, there can be no assurance that we will not receive notices
in the future from parties asserting that our products infringe, or may
infringe, those parties' intellectual property rights. There can be no assurance
that licenses to disputed technology or intellectual property rights would be
available on reasonable commercial terms, if at all.
Furthermore, we may initiate claims or litigation against parties for
infringement of our proprietary rights or to establish the validity of our
proprietary rights. Litigation, either as plaintiff or defendant, could result
in significant expense to us and divert the efforts of our technical and
management personnel from operations, whether or not such litigation is resolved
in our favor. In the event of an adverse ruling in any such litigation, we might
be required to pay substantial damages, discontinue the use and sale of
infringing products, expend significant resources to develop non-infringing
technology or obtain licenses to infringing technology. In the event of a
successful claim against us and our failure to develop or license a substitute
technology, our business, financial condition and results of operations would be
materially and adversely affected.
We depend upon our key personnel.
Our future success depends in large part on the continued service of our
key technical and management personnel. We do not have employment contracts
with, or "key person" life insurance policies on, any of our employees,
including James B. DeBello, our President and Chief Executive Officer, or John
M. Thornton, our Chairman of the Board and Chief Financial Officer. Loss of
services of key employees could have a material adverse effect on our operations
and financial condition. We are also dependent on our ability to identify, hire,
train, retain and motivate high quality personnel, especially highly skilled
engineers involved in the ongoing developments required to refine our
technologies and to introduce future applications. The high technology industry
is characterized by a high level of employee mobility and aggressive recruiting
of skilled personnel.
Additionally, there are several proposals in the United States Congress
and in the accounting industry to require corporations to include a compensation
expense in their statement of operations relating to the issuance of employee
stock options. If such a measure is approved, we may decide to issue fewer stock
options. As a result, we may be impaired in our efforts to attract and retain
necessary personnel. We cannot assure you that we will be successful in
attracting, assimilating and retaining additional qualified personnel in the
future. If we were to lose the services of one or more of our key personnel, or
if we failed to attract and retain additional qualified personnel, it could
materially and adversely affect our customer relationships, competitive position
and revenues.
Page 25
A few of our stockholders have significant control over our voting stock which
may make it difficult to complete some corporate transactions without their
support and may prevent a change in control.
As of September 30, 2003, John M. Thornton, who is our Chairman of the
Board and Chief Financial Officer and his spouse, Director Sally B. Thornton,
beneficially owned approximately 24% of our outstanding common stock. Our
directors and executive officers as a whole, own approximately 30% of our
outstanding common stock. As a result, these stockholders may effectively
control the outcome of all matters submitted to our stockholders for approval,
including the election of directors. In addition, this ownership could
discourage the acquisition of our common stock by potential investors and could
have an anti-takeover effect, possibly depressing the trading price of our
common stock.
We may issue preferred stock, which could adversely affect the rights of common
stock holders
The Board of Directors is authorized to issue up to 1,000,000 shares of
preferred stock and to determine the price, rights, preferences, privileges and
restrictions, including voting rights, of those shares without any further vote
or action by the stockholders. The rights of the holders of common stock will be
subject to, and may be adversely affected by, the rights of the holders of any
preferred stock that may be issued in the future. The issuance of preferred
stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire a majority of our outstanding voting
stock. We have no current plans to issue shares of preferred stock. In addition,
Section 203 of the Delaware General Corporation Law restricts certain business
combinations with any "interested stockholder" as defined by such statute. The
statute may have the effect of delaying, deferring or preventing a change in our
control.
Our common stock price has been volatile.
The market price of our common stock has been, and is likely to continue
to be, highly volatile. Future announcements concerning us or our competitors,
quarterly variations in operating results, announcements of technological
innovations, the introduction of new products or changes in product pricing
policies by the Company or its competitors, claims of infringement of
proprietary rights or other litigation, changes in earnings estimates by
analysts or other factors could cause the market price of our common stock to
fluctuate substantially. In addition, the stock market has from time-to-time
experienced significant price and volume fluctuations that have particularly
affected the market prices for the common stocks of technology companies and
that have often been unrelated to the operating performance of particular
companies. These broad market fluctuations may adversely affect the market price
of our common stock. During the fiscal year ended September 30, 2003, our common
stock price ranged from $.83 to $1.64.
We do not intend to pay dividends on the common stock.
We have not paid any dividends on our common stock and do not intend to
pay dividends for the foreseeable future.
We may need additional capital in the future.
Page 26
We may need to raise additional funds in the future through public or
private financing. No assurance can be given that additional financing will be
available or that, if available, it will be available on terms favorable to us.
If additional funds are raised through the issuance of equity securities, the
percentage ownership of our then current stockholders will be reduced and such
equity securities may have rights, preferences or privileges senior to those of
the holders of our common stock. If we are unable to obtain needed financing on
terms favorable to us, such could have an adverse effect upon our financial
condition, results of operations and ability to maintain operations as planned.
Our capital requirements will depend on many factors, including, but not limited
to, the rate of market acceptance and competitive position of the products
incorporating our technologies, the levels of promotion and advertising required
to launch and market such products and attain a competitive position in the
marketplace, the extent to which we invest in new technology to support our
product development efforts, and the response of competitors to the products we
offer.
Our current credit facility may not be sufficient for our capital requirements.
While we believe that our current credit line is sufficient, together with
cash on hand and cash generated from operations, to finance our operations for
the next twelve months, we can make no assurance that we will not need
additional financing during the next twelve months or beyond. Actual sales,
expenses, market conditions or other factors which could have a material affect
upon us could require us to obtain additional financing. If such financing is
not available, or if available, is not available on reasonable terms, it could
have a material adverse effect upon our results of operations and financial
condition. We had a working capital line of credit with a maximum available
credit line of $1,200,000. As of September 30, 2003, we had no borrowings under
this credit line. This credit line was subject to a net worth covenant whereby
the Company was required to maintain a tangible net worth of $3,750,000 in order
to use the credit line. The loss sustained during the year ended September 30,
2003 caused the Company's net worth to fall to $2,680,000. Though the Company
had no borrowings under the credit line as of September 30, 2003, the Company is
no longer in compliance with the aforementioned net worth covenant. The Company
requested, and the lender agreed to, a modification of the net worth covenant,
which reduced the maximum available borrowings to $500,000 subject to a required
minimum tangible net worth of $2,000,000. All other covenants and conditions
remained the same. The existing credit line expires on February 28, 2004.
The liability of our officers and directors is limited pursuant to Delaware law.
Pursuant to our Certificate of Incorporation, and as authorized under
applicable Delaware Law, our directors and officers are not liable for monetary
damages for breach of fiduciary duty, except for liability (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or that involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the Delaware General
Corporation Law or (iv) for any transaction from which the director derived an
improper personal benefit.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Page 27
The Company is exposed to certain market risks arising from adverse
changes in interest rates, primarily due to the potential effect of such changes
on the Company's variable rate working capital line of credit, as described
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital." As of September 30, 2003, the Company had
no outstanding balance under its line of credit. The Company does not use
interest rate derivative instruments to manage exposure to interest rate
changes.
Page 28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 2003, 2002, AND 2001
2003 2002 2001
-------------------------------------------------
SALES
Software $ 7,227,063 $ 9,688,481 $ 7,106,250
Hardware 2,447,252 2,146,717 1,463,611
Professional Services, education and other 1,919,748 1,247,985 817,279
-------------------------------------------------
NET SALES 11,594,063 13,083,183 9,387,140
COSTS AND EXPENSES:
Cost of Sales-Software 864,714 1,150,253 745,999
Cost of Sales-Hardware 2,605,552 2,022,788 1,540,040
Cost of Sales-Professional Services, education and other 1,070,939 578,246 363,598
Operations 1,694,489 1,872,152 1,279,334
Selling and marketing 3,767,966 3,013,782 2,292,305
Research and development 2,241,804 2,048,676 1,829,749
General and administrative 1,848,469 2,009,821 1,634,247
-------------------------------------------------
Total costs and expenses 14,093,933 12,695,718 9,685,272
-------------------------------------------------
OPERATING (LOSS) INCOME (2,499,870) 387,465 (298,132)
OTHER INCOME (EXPENSE) - NET 18,334 9,341 (43,292)
-------------------------------------------------
(LOSS) INCOME BEFORE INCOME TAXES (2,481,536) 396,806 (341,424)
PROVISION FOR INCOME TAXES 10,654 0 0
-------------------------------------------------
NET (LOSS) INCOME $ (2,492,190) $ 396,806 $ (341,424)
=================================================
-------------------------------------------------
NET (LOSS) INCOME PER SHARE - BASIC $ (0.22) $ 0.04 $ (0.03)
=================================================
WEIGHTED AVERAGE NUMBER OF -------------------------------------------------
COMMON SHARES OUTSTANDING - BASIC 11,154,489 11,132,867 11,120,120
=================================================
-------------------------------------------------
NET (LOSS) INCOME PER SHARE - DILUTED $ (0.22) $ 0.04 $ (0.03)
=================================================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND
COMMON SHARE EQUIVALENTS OUTSTANDING - DILUTED 11,154,489 11,327,163 11,120,120
=================================================
See notes to financial statements
Page 29
BALANCE SHEETS
SEPTEMBER 30, 2003 AND 2002
2003 2002
-----------------------------
ASSETS
CURRENT ASSETS
Cash $ 1,819,102 $ 760,416
Accounts receivable-net of allowances of 2,900,693 6,273,987
$253,697 and $150,208, respectively
Note receivable - related party 195,623 199,227
Inventories - net 43,182 18,443
Prepaid expenses and other assets 84,167 129,097
-----------------------------
Total current assets 5,042,767 7,381,170
PROPERTY AND EQUIPMENT - net 321,029 379,533
OTHER ASSETS 279,985 470,496
-----------------------------
TOTAL ASSETS $ 5,643,781 $ 8,231,199
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 881,032 $ 1,567,121
Accrued payroll and related taxes 690,388 648,410
Deferred revenue 884,917 479,570
Other accrued liabilities 245,818 42,805
-----------------------------
Total current liabilities 2,702,155 2,737,906
LONG-TERM LIABILITIES:
Deferred rent 16,135 8,419
Deferred revenue 318,826 388,923
Long-term payable 34,194 68,400
-----------------------------
Total long-term liabilities 369,155 465,742
TOTAL LIABILITIES 3,071,310 3,203,648
-----------------------------
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY:
Common stock - $.001 par value; 20,000,000
shares authorized, 11,185,282 and 11,138,772 issued
and outstanding at September 30, 2003 and 2002, respectively 11,185 11,139
Additional paid-in capital 9,327,736 9,290,672
Accumulated deficit (6,766,450) (4,274,260)
-----------------------------
Total stockholders' equity 2,572,471 5,027,551
-----------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,643,781 $ 8,231,199
=============================
See notes to financial statements
Page 30
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 2003, 2002, AND 2001
2003 2002 2001
-----------------------------------------------
OPERATING ACTIVITIES
Net (loss) income $(2,492,190) $ 396,806 $ (341,424)
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Depreciation and amortization 441,931 634,352 570,167
Provision for bad debts 103,489 285,000 155,000
Loss on disposal of property and equipment 986 36 2,129
Fair value of stock options issued to non-employees 15,576 54,613 15,082
Changes in assets and liabilities:
Accounts receivable 3,269,805 (1,922,436) 1,511,519
Inventory, prepaid expenses, and other assets 15,702 (209,233) (620,419)
Other long term assets 0 (16,425) 0
Accounts payable (686,089) 437,547 (145,757)
Accrued payroll and related taxes 41,978 208,404 (43,057)
Long-term payable (34,206) 68,400 0
Deferred revenue 335,250 419,724 80,130
Other accrued liabilities 210,729 17,930 (214,070)
-----------------------------------------------
Net cash provided by operating activities 1,222,961 374,718 969,300
INVESTING ACTIVITIES
Purchases of property and equipment (190,616) (308,659) (131,710)
Proceeds from sale of property and equipment 1,203 780 0
Payment received on (Investment in) note receivable-net 3,604 (184,039) 0
-----------------------------------------------
Net cash used in investing activities (185,809) (491,918) (131,710)
FINANCING ACTIVITIES
Proceeds from borrowings under line of credit 360,000 300,000 1,196,000
Repayment of borrowings under line of credit (360,000) (300,000) (1,706,000)
Proceeds from exercise of stock options and warrants 21,534 12,269 644
-----------------------------------------------
Net cash provided by (used in) financing activities 21,534 12,269 (509,356)
-----------------------------------------------
NET INCREASE (DECREASE) IN CASH 1,058,686 (104,931) 328,234
CASH AT BEGINNING OF YEAR 760,416 865,347 537,113
-----------------------------------------------
CASH AT END OF YEAR $ 1,819,102 $ 760,416 $ 865,347
===============================================
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW INFORMATION
Cash paid for interest $ 6,736 $ 1,693 $ 48,110
===============================================
Cash paid for income taxes $ 10,654 $ -- $ --
===============================================
See notes to financial statements
Page 31
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2003, 2002, AND 2001
Additional
Common Paid-In Accumulated
Stock Capital Deficit Net
----------------------------------------------------------
Balance, October 1, 2000 $11,120 $9,208,083 $(4,329,642) $ 4,889,561
Exercise of stock options 1 643 644
Fair value of stock options issued to non-employees 15,082 15,082
Net loss (341,424) (341,424)
----------------------------------------------------------
Balance, September 30, 2001 11,121 9,223,808 (4,671,066) 4,563,863
Exercise of stock options 18 12,251 12,269
Fair value of stock options issued to non-employees 54,613 54,613
Net income 396,806 396,806
----------------------------------------------------------
Balance, September 30, 2002 11,139 9,290,672 (4,274,260) 5,027,551
Exercise of stock options 46 21,488 21,534
Fair value of stock options issued to non-employees 15,576 15,576
Net loss (2,492,190) (2,492,190)
----------------------------------------------------------
Balance, September 30, 2003 $11,185 $9,327,736 $(6,766,450) $ 2,572,471
==========================================================
See notes to financial statements
Page 32
MITEK SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2003, 2002 AND 2001
NOTE 1 - NATURE OF OPERATIONS AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - Mitek Systems, Inc. (the "Company") is a designer,
manufacturer and marketer of advanced character recognition products for
intelligent forms processing applications ("Character Recognition") with an
emphasis in document imaging system products and solutions systems integration
services.
Fiscal 2003 operations resulted in a significant operating loss. Should
additional losses occur, the Company may need to raise significant additional
funds to continue its activities. In the absence of positive cash flows from
operations, the Company may be dependent on its ability to secure additional
funding through the issuance of debt or equity instruments. If adequate funds
are not available, the Company may be forced to significantly curtail its
operations or to obtain funds through entering into collaborative agreements or
other arrangements that may be on unfavorable terms. The Company's failure to
raise sufficient additional funds on favorable terms, or at all, would have a
material adverse effect on its business, results of operations and financial
position.
Basis of Accounting - The financial statements are prepared in accordance
with accounting principles generally accepted in the United States of America.
Accounting Estimates - The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenue, and expenses. Examples include
estimates of loss contingencies and product life cycles, and assumptions such as
the elements comprising a software arrangement, including the distinction
between upgrades/enhancements and new products; and when technological
feasibility is achieved for our products. Actual results may differ from
management's estimates and assumptions.
Fair Value of Financial Instruments - The carrying amount of cash, cash
equivalents, accounts receivable, notes receivable, accounts payable, and
accrued liabilities are considered representative of their respective fair
values because of the short-term nature of those instruments.
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 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.
Allowance for Doubtful Accounts - The allowance for doubtful accounts
reflects the Company's best estimate for probable losses inherent in the
accounts receivable balance. The Company determine the allowance based on known
troubled accounts, historical experience, and other currently available
evidence. Activity in the allowance for doubtful accounts is as follows:
Page 33
Balance at Charged to costs Write-offs and Balance at end of
beginning of period and expenses other period
------------------- ---------------- -------------- -----------------
Year Ended September 30
2001 763,912 155,000 579,887 339,025
2002 339,025 285,000 473,817 150,208
2003 150,208 103,489 0 253,697
Inventories - Inventories are recorded at the lower of average cost or
market.
Property and Equipment - Property and Equipment are carried at cost.
Following is a summary of property and equipment as of September 30, 2003 and
2002.
2003 2002
----------- -----------
Property and equipment - at cost:
Equipment $ 1,367,459 $ 1,545,795
Furniture and fixtures 159,672 159,672
----------- -----------
Leasehold improvements 6,700 6,611
1,533,831 1,712,078
Less: accumulated depreciation and amortization (1,212,802) (1,332,545)
----------- -----------
Total $ 321,029 $ 379,533
=========== ===========
Property and Equipment are carried at cost. Depreciation and amortization
of property and equipment are provided using the straight-line method over
estimated useful lives ranging from three to five years. Depreciation and
amortization of property and equipment totaled $246,931, $222,468, and $181,511
for the years ended September 30, 2003, 2002 and 2001, respectively.
Other Assets - The costs of acquiring the Company's software product
rights were capitalized and are being amortized over the estimated periods to be
benefited, typically 2 to 3 years. Other assets consisted of the following at
September 30, 2003 and 2002:
2003 2002
-------- --------
Prepaid software rights - Docubase- net $243,750 $438,750
Investment in Mitek Systems Ltd. 4,489 0
Other - net 31,746 31,746
-------- --------
Total $279,985 $470,496
======== ========
Amortization of prepaid software rights, which is charged to cost of
sales, for fiscal 2003, 2002 and 2001 was $195,000, $332,758, and $273,902,
respectively.
Long-Lived Assets - The Company periodically evaluates the carrying value
of license agreements and other intangible assets to determine whether any
impairment of these assets has occurred or whether any revision to the related
amortization periods should be made. This evaluation is based on management's
projections of the undiscounted future cash flows associated with each product
or asset. If management's evaluation were to indicate that the
Page 34
carrying values of these intangible assets were impaired, the impairment to be
recognized is measured by the amount the carrying amount of the assets exceeds
the fair value of the assets. The Company did not record any impairment for the
years ended September 30, 2003, 2002, or 2001.
Investment in Mitek Systems Ltd. - On September 1, 2000 the Company
acquired a 15% investment in Itech Business Solutions Ltd. ("Itech"), which was
accounted for under the cost method at September 30, 2000. On October 3, 2000
the Company acquired an additional 15% interest in Itech for $88,506. After this
additional investment, the Company accounted for its 30% interest in Itech under
the equity method. Subsequent to the additional investment on October 3, 2000,
Itech changed their name to Mitek Systems Ltd. During fiscal 2002, the Company
acquired an additional 18% interest in consideration for a loan to Mitek Systems
Ltd. This loan carries monthly payment terms and a 10% rate of interest. Amounts
due from Mitek Systems Ltd at September 30, 2003 and 2002 were $195,623 and
$199,227, respectively. The additional interest in Mitek Systems Ltd required no
additional investment. Included in fiscal 2003, 2002 and 2001 Other Income
(Expenses) is $4,489, ($11,636), and ($13,604), respectively, related to the
Company's equity in the income (loss) of Mitek Systems, Ltd.
Deferred Revenue - Deferred revenue represents customer billings, paid
either upfront or annually at the beginning of each billing period, which are
accounted for as subscriptions with revenue recognized ratably over the billing
coverage period. For certain other licensing arrangements revenue attributable
to undelivered elements, including free post-delivery telephone support and the
right to receive unspecified upgrades/enhancements on the Company's software on
a when-and-if-available basis, is based upon the sales price of those elements
when sold separately and is recognized ratably on a straight-line basis over the
term of the agreement. Historically, the percentage of revenue recorded as
unearned due to undelivered elements generally ranged from approximately 8% to
15% of the sales price of the software.
Revenue Recognition - Revenues from sales of software licenses sold
through direct and indirect channels, which do not contain multiple elements,
are recognized upon shipment of the related product, if the requirements of
Statement of Position ("SOP") 97-2, as amended, are met. If the requirements of
SOP 97-2, including evidence of an arrangement, delivery, fixed or determinable
fee, collectibility or vendor specific evidence about the value of an element
are not met at the date of shipment, revenue is not recognized until such
elements are known or resolved. Software license revenue for arrangements to
deliver unspecified additional software products in the future is recognized
ratably over the term of the arrangement, beginning with the initial shipment.
Revenue from post-contract customer support is recognized ratably over the term
of the contract. Revenue from professional services is recognized when such
services are delivered and accepted by the customer
In December 1999, SEC Staff Accounting Bulletin ("SAB") No. 101, Revenue
Recognition in Financial Statements was issued. SAB 101 provides the SEC staff's
view in applying generally accepted accounting principles to selected revenue
recognition issues, including software revenue recognition. There was no impact
on the financial statements as a result of the adoption of SAB 101. Therefore,
no adjustment was recorded.
Research and Development - Research and development costs are expensed in
the period incurred.
Page 35
Income Taxes - The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes. Deferred tax assets and liabilities arise from temporary differences
between the tax bases of assets and liabilities and their reported amounts in
the financial statements that will result in taxable or deductible amounts in
future years.
Management evaluates the available evidence about future taxable income
and other possible sources of realization of deferred tax assets. The valuation
allowance reduces deferred tax assets to an amount that represents management's
best estimate of the amount of such deferred tax assets that more likely than
not will be realized. - see Note 4.
Net Income (Loss) Per Share - The Company calculates net income (loss) per
share in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 128, Earnings per Share. Basic net income (loss) per share is based on the
weighted average number of common shares outstanding during the period. Diluted
net income (loss) per share also gives effect to all potential dilutive common
shares outstanding during the period, such as options and warrants, if dilutive.
The weighted average number of common shares and common share equivalents
outstanding for the year ended September 30, 2002 included 194,296 common share
equivalents related to stock options and warrants. Outstanding stock options for
fiscal 2003 and 2001 were excluded from this calculation, as they would have
been antidilutive.
Stock Based Compensation - As permitted by SFAS No. 123, Accounting for
Stock-Based Compensation, the Company accounts for costs of stock-based
compensation to employees in accordance with Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees and related
interpretations, and accordingly, discloses the pro forma effect on net income
(loss) and related per-share amounts using the fair value based method to
account for stock-based compensation (Note 2). The fair value of stock
compensation issued to non-employees is determined using the Black-Scholes
option pricing model and compensation expense is recorded pursuant to the
provisions of EITF 96-18.
The Company accounts for stock options granted to its employees and
members of its board of directors under the intrinsic value method in accordance
with Accounting Principles Board Opinion No. 25 (APB No. 25) Accounting for
Stock Issued to Employees, and related interpretations, and with the disclosure
requirements of SFAS No. 123, Accounting for Stock-Based Compensation, as
amended by SFAS No. 148, Accounting for Stock-Based Compensation - Transition
and Disclosure. The following table illustrates the effect on net (loss) income
and net (loss) income per share if the Company had applied the fair value
recognition provisions of SFAS No. 123 to stock-based compensation (in
thousands, except per share amounts).
Year Ended Year Ended Year Ended
September 30 September 30 September 30
2003 2002 2001
------------ ------------ ------------
Net (loss) income, as reported $ 2,492 $ 397 $ (341)
Add: Stock-based employee compensation expense 0 0 0
included in reported net (loss) income, net of related
tax effects
Deduct; Total stock-based employee compensation
expense determined under the fair value method, net of
related tax effects (5,631) (962) (1,074)
------- ----- -------
Pro Forma net (loss) income ($3,139) ($565) ($1,415)
======= ===== =======
Net (loss) income per share (.28) (.05) (.13)
Page 36
Segment Reporting - SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, results in the use of a management approach
in identifying segments of an enterprise. Management has determined that the
Company operates in only one segment.
Comprehensive Income (Loss) - There are no differences between net income
and comprehensive income and, accordingly, no amounts have been reflected in the
accompanying financial statements.
In November 2002, the FASB issued FASB Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees. This Interpretation elaborates on the disclosures to be made by a
guarantor in its interim and annual financial statements about its obligations
under certain guarantees that it has issued. It also clarifies that a guarantor
is required to recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee. This
Interpretation does not prescribe a specific approach for subsequently measuring
the guarantor's recognized liability over the term of the related guarantee.
This Interpretation also incorporates, without change, the guidance in FASB
Interpretation No. 34, Disclosure of Indirect Guarantees of Indebtedness of
Others, which is being superseded. The initial recognition and measurement
provisions of this Interpretation are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002, irrespective of the
guarantor's fiscal year-end. The disclosure requirements in this Interpretation
are effective for financial statements of interim or annual periods ending after
December 15, 2002. The Company has issued no guarantees that qualify for
disclosure in this interim financial statement.
In December 2002, the FASB issued SFAS No. 148 Accounting for Stock-Based
Compensation - Transition and Disclosure. SFAS No. 148 amends SFAS No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The amendments to SFAS 123 provided for under SFAS No. 148 are
effective for financial statements for fiscal years ending after December 15,
2002. The Company has not elected to adopt the fair value accounting provisions
of SFAS No. 123 and therefore the adoption of SFAS No. 148 did not have a
material effect on our results of operations or financial position.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities. In general, a variable interest
entity is a corporation, partnership, trust, or any other legal structure used
for business purposes that either (a) does not have equity investors with voting
rights or (b) has equity investors that do not provide sufficient financial
resources for the entity to support its activities. FIN 46 requires a variable
interest entity to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual returns or both. The
consolidation requirements of FIN 46 were initially to apply to variable
interest entities created after January 31, 2003. The consolidation requirements
were initially to apply to
Page 37
transactions entered into prior to February 1, 2003 in the first fiscal year or
interim period beginning after June 15, 2003. The FASB postponed implementation
of FIN 46 in December 2003. The Company has not completed the process of
evaluating the impact that the adoption of FIN 46 will have on its financial
position or operating results.
NOTE 2 - STOCKHOLDERS' EQUITY
Stock 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 1986 plan expired on September 30, 1996
and no additional options may be granted under this plan. The 1988 plan provides
for the purchase of up to 650,000 shares of common stock through non-qualified
options. The 1988 plan expired on September 13, 1998. For both plans, options
were granted at fair market value of the Company's stock at the grant date 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 1996 plan provides for the purchase of up to 1,000,000 shares of
common stock through incentive and non-qualified options. Options must be
granted at fair market value of the Company's stock at the grant date and for a
term of not more than 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. The 1996 plan
maximized in February 1999 and no additional options may be granted under this
plan.
The 1999 plan provides for the purchase of up to 1,000,000 shares of
common stock through incentive and non-qualified options. Incentive options must
be granted at fair market value of the Company's stock at the grant date while
non-qualified options may be granted at no less than 85% of fair market value of
the Company's stock at the grant date, and for a term of not more than 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.
The 2000 plan provides for the purchase of up to 1,000,000 shares of
common stock through incentive and non-qualified options. Incentive options must
be granted at fair market value while non-qualified options may be granted at no
less than 85% of fair market value, and for a term of not more than 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, 2003, 2002 and 2001 is as follows:
Weighted Average
Exercise Price Per
Shares Share
--------- ------------------
Balance, October 1, 2000 1,115,842 $3.96
Granted 486,500 $0.98
Exercised (1,111) $0.70
Cancelled (128,788) $5.98
--------- -----
Balance, September 30, 2001 1,472,443 $2.84
Granted 510,500 $1.65
Exercised (17,818) $0.69
Cancelled (96,528) $1.41
--------- -----
Balance, September 30, 2002 1,868,597 $2.56
Granted 856,000 $1.17
Exercised (46,510) $0.46
Cancelled (327,124) $3.20
--------- -----
Balance, September 30, 2003 2,350,963 $2.03
========= =====
Page 38
The following table summarizes information about stock options outstanding
at September 30, 2003:
Weighted Weighted Average
Average Weighted Exercise Price
Range of Number Remaining Average Exercise Number of Exercisable
Exercise Price Outstanding Contractual Life Price Exercisable Options
- ------------------------------------------------------------------------------------------------------------------
$ 0.43- - $ 0.80 2,000 5.08 $ 0.44 2,000 $ 0.44
$ 0.81- - $ 0.99 468,497 5.99 $ 0.91 381,936 $ 0.90
$ 1.00- - $ 2.32 1,372,140 5.60 $ 1.50 436,529 $ 1.56
$ 2.33- - $ 3.68 254,903 5.86 $ 2.85 254,611 $ 2.84
$ 3.69- - $ 5.09 1,723 6.33 $ 5.09 1,723 $ 5.09
$ 5.10- - $ 7.68 245,700 6.70 $ 6.81 245,639 $ 6.81
$ 7.69- - $12.37 6,000 6.43 $ 9.30 6,000 $ 9.30
---------------------------------------------------------------------------------
2,350,963 6.39 $ 2.03 1,328,438 $ 2.62
=================================================================================
All stock options are granted with an exercise price equal to the fair
market value of the Company's common stock at the grant date. The weighted
average fair value of the stock options granted was $.59, $.93, and $.88 for
fiscal 2003, 2002 and 2001, respectively. 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
2003: risk-free interest rate of 2%; expected dividend yield of 0%; expected
life of 3 years; and expected volatility of 78%. In 2002, the assumptions were:
risk-free interest rate of 5.5%; expected dividend yield of 0%; expected life of
3 years; and expected volatility of 82%. In 2001, the assumptions were:
risk-free interest rate of 4.5%; expected dividend yield of 0%; expected life of
3 years; and expected volatility of 192%. Stock options generally expire between
six to ten 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.
Page 39
The Company has also issued 18,000 stock options to non-employees which
are accounted for as variable arrangements under the provisions of EITF 96-18.
Compensation expense related to such awards were $15,576, $54,612, and $15,082
for the years ended September 30, 2003, 2002 and 2001, respectively, and are
included in general and administrative expense. Future increases in the fair
value of the Company's common stock could result in additional compensation
expense.
NOTE 3 - LINE OF CREDIT - BANK
On February 19, 2003 the Company revised its working capital revolving
line of credit. This line requires interest to be paid at prime plus 1
percentage point, and is subject to a limit on maximum available borrowings of
$1,200,000. The Company had no borrowings under the working capital line of
credit on September 30, 2003 or on September 30, 2002. This credit line was
subject to a net worth covenant whereby the Company was required to maintain a
tangible net worth of $3,750,000 in order to use the credit line. The loss
sustained during the year ended September 30, 2003 caused the Company's net
worth to fall to $2,680,000. Though the Company had no borrowings under the
credit line as of September 30, 2003, the Company is no longer in compliance
with the aforementioned net worth covenant. The Company requested, and the
lender agreed to, a modification of the net worth covenant, which reduced the
maximum available borrowings to $500,000 subject to a required minimum tangible
net worth of $2,000,000. All other covenants and conditions remained the same.
The existing credit line expires on February 28, 2004.
NOTE 4 - INCOME TAXES
For the years ended September 30, 2003 and 2002, the provision for income
taxes were as follows:
2003 2002 2001
---- ---- ----
Federal - Current 0 0 0
State - Current 11,000 0 0
-------------------------------
Total 11,000 0 0
===============================
Under SFAS 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, 2003 and 2002 are as follows:
Page 40
2003 2002
----------- -----------
Deferred tax liabilities:
Reserves not currently deductible $ 159,000 $ 64,000
Book depreciation and amortization in excess of tax 333,000 330,000
Research credit carryforwards 529,000 529,000
AMT credit carryforward 69,000 69,000
Net operating loss carryforwards 3,088,000 2,235,000
Capitalized research and development costs 104,000 182,000
Uniform capitalization (19,000) (13,000)
Other 132,000 124,000
----------- -----------
Total deferred tax assets 4,395,000 3,520,000
Valuation allowance for net deferred tax assets (4,395,000) (3,520,000)
----------- -----------
Total $ 0 $ 0
=========== ===========
The Company has provided a valuation allowance against deferred tax assets
recorded as of September 30, 2003 and 2002 due to uncertainties regarding the
realization of such assets.
The research credit and net operating loss carryforwards expire during the
years 2005 to 2020. The federal and California net operating loss carryforwards
at September 30, 2003 are approximately $8,143,000 and $4,232,000, respectively.
The differences between the provision for income taxes and income taxes
computed using the U.S. federal income tax rate were as follows for the years
ended September 30:
2003 2002 2001
--------- --------- ---------
Amount computed using statutory rate (34%) $(844,000) $ 135,000 $(116,000)
Net change in valuation allowance
for net deferred tax assets 919,000 (157,000) 178,000
Non-deductible items 26,000 22,000 13,000
State income taxes (90,000) 0 (75,000)
--------- --------- ---------
Provision for income taxes $ 11,000 $ 0 $ 0
========= ========= =========
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Legal Matters - In the normal course of business, the Company, at various
times, has been named in lawsuits. As previously disclosed, the Company, and
officers of the Company, William Boersing, John M. Thornton, Dennis A. Brittain,
Noel Flynn, and Board of Directors member, James De Bello, were sued in five
lawsuits filed in October and November 2000. The same or similar allegations are
made in all five lawsuits. These lawsuits were settled during the third quarter
of fiscal 2001. The settlement did not have a material adverse effect on the
Company's financial condition or results of operations. As previously disclosed,
the Company was also a defendant in a case filed by DMS, Inc., d/b/a Document
Management & Support. The plaintiff sought damages against the Company on a
number of theories. This lawsuit was dismissed during the third quarter of
fiscal 2001.
Employee 401(k) Plan - The Company has a 401(k) plan that allows
participating employees to contribute up to 15% of their salary, subject to
annual limits. The Board may, at its sole discretion, approve Company
contributions. During fiscal 2003, 2002 and 2001, the Company elected not to
make any contributions to the plan.
Leases - The Company's offices and manufacturing facilities are leased
under non-cancelable operating leases. The primary facilities lease expires on
September 30, 2005. In addition, the Company leases office space in Sterling,
Virginia which expires December 31, 2003, and in Pelham, Alabama which expires
July 31, 2004. The lease costs are expensed on a straight-line basis over the
lease term.
Page 41
Future annual minimum rental payments payable by the Company under
non-cancelable leases are as follows:
Operating
Leases
-----------
Year Ending September 30:
2004 502,789
2005 463,408
2006 56,725
Thereafter 49,354
----------
Total $1,072,276
==========
Rent expense for operating leases, net of sub-lease income, for the years
ended September 30, 2003, 2002 and 2001 totaled $505,711, $314,872, and
$184,445, respectively.
The Company, as part of the lease on its headquarters in June 2002, agreed
to purchase the furniture located on the premises. This lease agreement requires
a portion of the rent payments be applied to the purchase of this furniture. The
long-term payable of $34,194 at September 30. 2003 is the portion of the lease
attributable to the purchase of the furniture, which is to be paid beyond one
year, concurrent with the term of the lease.
NOTE 6 - Related Party Transactions
During the second and third quarter of 2002, the Company engaged the
services of a director of the Company, to provide financial consulting services
unrelated to service as a board member. The total amount paid for these services
was $105,875.
NOTE 7 - PRODUCT REVENUES AND SALES CONCENTRATIONS
Product Revenues - During fiscal years 2003, 2002 and 2001, 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,
--------------------------------
2003 2002 2001
---- ---- ----
Character recognition 90% 95% 95%
Maintenance & Other 10% 5% 5%
Sales Concentrations - The Company sells its products primarily to
community depository institutions. For the years ended September 30, 2003, 2002
and 2001, the Company had the following sales concentrations:
Year Ended September 30,
--------------------------
2003 2002 2001
---- ---- ----
Customers to which sales were
in excess of 10% of total sales
Number of customers 3 3 1
Aggregate percentage of sales 30% 34% 11%
Foreign Sales - primarily Europe 3% 4% 3%
Page 42
Below is a summary of the revenues by product lines.
2003 2002 2001
------- ------- ------
Revenue (000's)
Recognition Toolkits $ 4,465 $ 5,963 $3,815
Check Image Solutions 5,391 5,293 4,211
Document and Image Processing
Solutions 740 1,010 743
Maintenance and other 998 817 618
------- ------- ------
Total Revenue $11,594 $13,083 $9,387
======= ======= ======
NOTE 8 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial information for the years ended September
30, 2003 and 2002 is as follows (In thousands, except per share data):
First Second Third Fourth
Quarter Quarter Quarter Quarter
=======================================================================================================
Year Ended September 30, 2003
Net Sales $ 2,971 $ 3,858 $ 3,042 $ 1,723
Income (Loss) from Operations 63 29 (957) (1,636)
Net Income (Loss) 61 26 (953) (1,625)
Net Income (Loss) per share-Basic .03 .01 (.09) (.15)
Net Income (Loss) per share-Diluted .03 .01 (.09) (.15)
Year Ended September 30, 2002
Net Sales $ 3,388 $ 3,080 $ 2,763 $ 3,852
Income (Loss) from Operations 377 (131) 162 (20)
Net Income (Loss) 380 (141) 173 (15)
Net Income (Loss) per share-Basic .03 (.01) .02 (.00)
Net Income (Loss) per share-Diluted .03 (.01) .02 (.00)
Page 43
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Mitek Systems, Inc.:
We have audited the accompanying balance sheets of Mitek Systems, Inc. (the
"Company") as of September 30, 2003 and 2002, and the related statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended September 30, 2003. 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 auditing standards generally accepted
in the United States of America. 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 overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company at September 30,
2003 and 2002, and the results of its operations and its cash flows for each of
the three years in the period ended September 30, 2003, in conformity with
accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
San Diego, California
December 29, 2003
Page 44
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
ITEM 9A. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management,
including the Chief Executive Officer and Chief Financial Officer, we have
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Exchange Act Rule 13a-14(c) as of the end of
the period covered by this report. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer have concluded that these disclosure
controls and procedures are effective. There were no changes in our internal
control over financial reporting during the quarter ended September 30, 2003
that have materially affected, or are reasonably likely to materially affect,
our internal controls over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to Directors may be found under the caption
"Election of Directors and Management Information" of our Proxy Statement for
the Annual Meeting of Shareholders to be held February 4, 2004 (the "Proxy
Statement"). Such information is incorporated herein by reference.
The information in the Proxy Statement set forth under the caption
"Section 16(a) Beneficial Ownership Reporting Compliance" is incorporated herein
by reference.
We have adopted the Mitek Systems, Inc. financial Code of Professional
Conduct (the "finance code of ethics"), a code of ethics that applies to our
Chief Executive Officer, Chief Financial Officer, Corporate Controller and other
finance organization employees. The finance code of ethics is publicly available
on our website at www.miteksys.com. If we make any substantive amendments to the
finance code of ethics or grant any waiver, including any implicit waiver, from
a provision of the code to our Chief Executive Officer, Chief Financial Officer
or Corporate Controller, we will disclose the nature of such amendment or waiver
on that website or in a report on Form 8-K.
ITEM 11. EXECUTIVE COMPENSATION
The information in the Proxy Statement set forth under the captions
"Information Regarding Executive Officer Compensation" and "Information
Regarding the Board and its Committees - Director Compensation" is incorporated
herein by reference.
Page 45
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information in the Proxy Statement set forth under the captions
"Equity Compensation Plan Information" and "Information Regarding Beneficial
Ownership of Principal Shareholders, Directors, and Management" is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the captions "Certain Relationships and
Related Transactions" of the Proxy Statement is incorporated herein by
reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information concerning principal accountant fees and services appears in
the proxy statement under the heading "Fees Paid to Deloitte & Touche LLP" and
is incorporated herein by reference.
PART IV
ITEM 15. 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, 2003:
Independent Auditors' Report
Balance Sheets -
As of
September 30, 2003 and 2002
Statements of Operations -
For the Years Ended
September 30, 2003, 2002, and 2001
Statements of Stockholders' Equity -
For the Years Ended
September 30, 2003, 2002, and 2001
Statements of Cash Flows -
For the Years Ended
September 30, 2003, 2002, and 2001
Page 46
Notes to Financial Statements -
For the years Ended
September 30, 2003, 2002, and 2001
With the exception of the financial statements listed above and the
other information incorporated by reference herein, the Annual
Report to Stockholders for the fiscal year ended September 30, 2003,
is not to be deemed to be filed as part of this report.
(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(3)
10.4 1999 Stock Option Plan (4)
10.5 401(k) Plan (2)
13. Annual Report to Stockholders for the year ended September 30, 2003.
23. Independent Auditors' Consent
31.1 Certification by Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification by Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1 Certification by Chief Executive Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
32.2 Certification by Chief Financial Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
Page 47
99.1 Certification by Chief Executive Officer
99.2 Certification by Chief Financial Officer
- ----------
(1) Incorporated by reference to the exhibits to the Company' Annual Report on
Form 10-K for the fiscal year ended September 30, 1987
(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
Upon request, the Registrant will furnish a copy of any of the listed
exhibits for $0.50 per page.
(3) Incorporated by reference to the exhibits to the Company's Registration
Statement on Form 10-K for the fiscal year ended September 30, 2001
(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, 2003:
None
(4) Incorporated by reference to the exhibits to the Company's Registration
Statement on Form S-8 originally filed with the SEC on June 10, 1999.
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 29, 2003 MITEK SYSTEMS, INC.
By: /s/ James B. DeBello
-------------------------------------
James B. DeBello,
President, Chief Executive Officer
Page 48
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 29, 2003
- -----------------------------------
John M. Thornton,
Chairman of the Board
and Chief Financial Officer
/s/ James B. DeBello December 29, 2003
- -----------------------------------
James B. DeBello,
President
and Chief Executive Officer
/s/ Gerald I. Farmer December 29, 2003
- -----------------------------------
Gerald I. Farmer, Director
/s/ Daniel E. Steimle December 29, 2003
- -----------------------------------
Daniel E. Steimle, Director
/s/ Sally B. Thornton December 29, 2003
- -----------------------------------
Sally B. Thornton, Director
/s/ John G. Rebelo, Jr December 29, 2003
- -----------------------------------
John G. Rebelo, Jr., Director
/s/ David Holvey December 29, 2003
- -----------------------------------
David Holvey, Director
Page 49
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-3888, 333-23707, 333-80567, 333-58032 and 333-106843 of Mitek Systems, Inc.
on Form S-8 of our report dated December 29, 2003, appearing in this Annual
Report on Form 10-K of Mitek Systems, Inc. for the year ended September 30,
2003.
San Diego, California
December 29, 2003
Page 49
Exhibit 31.1
CERTIFICATION OF
CHIEF EXECUTIVE OFFICER
I, James B. DeBello, certify that:
1. I have reviewed this annual report on Form 10-K of Mitek Systems, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report.
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared; and
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal control
over financial reporting.
Dated: December 29, 2003 By: /s/ James B. DeBello
-------------------------------------
James B. DeBello
Chief Executive Officer
Page 50
Exhibit 31.2
CERTIFICATION OF
CHIEF FINANCIAL OFFICER
I, John M. Thornton, certify that:
1. I have reviewed this annual report on Form 10-K of Mitek Systems, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report.
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared; and
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal control
over financial reporting.
Dated: December 29, 2003 By: /s/ John M. Thornton
-------------------------------------
John M. Thornton
Chief Financial Officer
Page 51
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, James B. DeBello, Chief Executive Officer of Mitek Systems, Inc. (the
"Registrant"), do hereby certify pursuant to Rule 15d-14(b) of the Securities
and Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18
of the United States Code that:
(1) the Registrant's Annual Report on Form 10-K of the Registrant
for the year ended September 30, 2003 (the "Report"), to which this statement is
filed as an exhibit, fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Registrant.
Dated: December 29, 2003 By: /s/ James B. DeBello
-------------------------------------
James B. DeBello
Chief Executive Officer
Page 52
Exhibit 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, John M. Thornton, Chief Financial Officer of Mitek Systems, Inc. (the
"Registrant"), do hereby certify pursuant to Rule 15d-14(b) of the Securities
and Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18
of the United States Code that:
(1) the Registrant's Annual Report on Form 10-K of the Registrant
for the year ended September 30, 2003 (the "Report"), to which this statement is
filed as an exhibit, fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Registrant.
Dated: December 29, 2003 By: /s/ John M. Thornton
-------------------------------------
John M. Thornton
Chief Financial Officer
Page 53