SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20559
FORM 10-K
(Mark One)
(x) Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended September 30, 1996
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. Employee Identification No.)
incorporation or organization)
10070 Carroll Canyon Road, San Diego, California 92131
(Address of principal executive offices) (Zip Code)
(619) 635-5900
Registrant's telephone number, including area code
None
Securities registered pursuant to Section 12(b) of the Act
Common Stock, par value $.001 per share
Securities registered pursuant to Section 12(g) of the Act
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
The aggregate market value of voting stock held by non-affiliates of the
registrant was $12,942,484 as of November 8, 1996 (computed by reference to the
last sale price of a share of the registrant's Common Stock on that date as
reported by NASDAQ).
There were 7,822,971 shares outstanding of the registrant's Common Stock as of
November 8, 1996.
Documents incorporated by reference in this report
Part II incorporates certain information by reference form the Annual Report to
Stockholders for the year ended September 30, 1996. Part III incorporates
certain information by reference from the Proxy Statement for the 1996 Annual
Meeting of Stockholders.
PART I
ITEM 1. BUSINESS
General
The Company develops and markets automatic data recognition ("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 technology for the
recognition of hand printed and machine generated characters into digital data.
Neural networks are powerful tools for pattern recognition applications and
consist of sets of coupled mathematical equations with adaptive parameters that
are self adjusting to "learn" various forms and patterns. The Company's ADR
products combine the Company's neural network software technology with an
extensive database of character patterns, enabling them to make fine
distinctions across a wide variety of patterns with high speed, accuracy and
consistency. The Company leverages its core technology across a family of ADR
products that the Company believes offers the highest accuracy commercially
available for the recognition of hand printed characters.
The Company's ADR products incorporate the Company's intelligent character
recognition ("ICR") software engine, QuickStrokes API, with high speed
coprocessor boards which are configurable to meet customer requirements.
QuickStrokes API is sold to original equipment manufacturers ("OEMs"), systems
integrators and value-added resellers ("VARs") such as BancTec Technologies,
Inc. ("BancTec"), NCR, Bull Corporation of North America,, SHL Systemshouse,
Inc., a subsidiary of MCI, TRW Financial Solutions, One Button Operating
Systems, Inc., Consolidated Business Solutions, Inc., Moon Sung Systems, and
Kliendeinst. Major end users include AVON Products Company, certain of the
Federal Reserve Banks, SCS Communications, the Australian Tax Office, the
Mexican Tax Authority and American Express. QuickStrokes API can process
documents in several languages.
Leveraging its core technical competing in ICR, The Company has begun to address
certain vertical end-user markets through the introduction of Premier Forms
Processor ("PFP"). PFP incorporates the Company's core ICR technology in an
application design to be marketed directly to end users in a broad variety of
industries with requirements for high volume automated data entry. PFP operates
on the Windows operating platform on stand alone or networked personal
computers, features an intuitive graphical user interface ("GUI"), and is
designed for easy installation and configuration by the end user. The Company
also sells the PFP to system integrators and VARs.
Products
The Company incorporates its advanced ICR software technology into a family of
document imaging products addressing requirements for accurate, high volume,
automated data entry residing on hand printed or machine generated forms. The
Company's ICR software is incorporated into end user systems sold by its OEM,
system integrator and VAR customers, as well as the Company's own end user
application, the PFP. The Company's Products include the QuickStrokes API
recognition engine, the PFP application and other products leveraging the
Company's expertise in ICR.
QuickStrokes API. QuickStrokes API (Application Programmers Interface) is a
"recognition engine" which is incorporated into end-user systems to provide
recognition capability. QuickStrokes API CAR performs Courtesy Amount
Recognition, a process wherein the numeric portion of personal and commercial
checks is recognized and translated into digital data. QuickStrokes API Forms is
a recognition engine for forms that is licensed to large integrators of forms
processing systems and to OEMs for use in remittance processing systems. The
QuickStrokes API has been developed with a flexible underlying architecture to
accommodate additional features and functionality as dictated by market demands.
QuickStrokes API products are currently in use processing sales orders, checks
and financial documents, tax forms, credit card drafts, time sheets, and
insurance applications. The QuickStrokes API engine processes documents in nine
languages by recognizing machine or hand printed characters written in Dutch,
English, French, German, Italian, Portuguese, Russian, Spanish and Swedish.
Premier Forms Processor. The Company has developed a proprietary forms
processing application, the Premier Forms Processor ("PFP"), which incorporates
the Company's core ICR technology in an application designed for and users in a
broad variety of industries with requirements for high volume automated data
entry. The Company's PFP product consists of several modules required to
implement a forms processing application, which can recognize hand printed and
machine generated characters. The PFP runs on windows operating platform on
stand alone or networked personal computers, features a GUI, and is designed for
easy installation and configuration by the end user.
Other Products. The Company markets the NiFaxshare product line, which combines
its ADR technologies with conventional incoming facsimile routing technologies
to provide economical and practical "faxmail" solutions. The Company markets its
Nifaxshare products to large end users, such as the Bank of Montreal, Capital
Cities-ABC, and J. P. Morgan Private Banking, as well as a network of VARs.
QuickFrame is an advanced page segmentation system that separates the scanned
image of a document into isolated regions, and classifies the kind of
information contained in the region. The system outputs the coordinates and type
of each region and can produce "cut-out" images of isolated regions for easier
processing. The QuickFrame system is ideal for document image segmentation.
The Company has an internal customer service department that handles
installation and maintenance requirements. The majority of inquiries are handled
by telephone, with occasional visits to the customer's facilities. The Company
believes that as the installed base of its products grows, the customer service
function will become a source of recurring revenues. Costs incurred by the
Company to supply maintenance and support services are charged to cost of sales.
Customers and End Users
The Company licenses and sells its ADR products to a broad range of companies
seeking high volume, high reliability document processing systems. End users of
the Company's products generally seek to automate manual data entry processing
in order to increase processing speed and reduce data entry costs.
Traditionally, the Company has derived its revenues from the sale of
QuickStrokes API as an ICR engine to various OEMs, VARs and systems integrators.
With the introduction of the PFP, the Company now offers a scalable turnkey
system which is marketed to VARs, systems integrators and end users. The
Company's products are used in a variety of applications on a worldwide basis.
For example, systems using the Company's technology are in use at Avon Products
Company's United States forms processing centers, handling approximately 2
million sales order forms daily, which are hand printed by different sales
agents from around the country. The Company's products are also used by
financial institutions such as Mellon Bank, National Westminster Bank and
Unibanco for check processing. Systems using the Company's technology are
currently being used by tax authorities in Australia and Mexico to process tax
returns. In addition, utilities companies such as Southwestern Bell and NYNEX
use the Company's technologies for invoice processing and payment
reconciliation.
Certain of the Company's largest current customers based on payments received in
the fiscal years 1995 and 1996, are listed below under the major application
category for which the Company believes the customer is using the Company
products:
Financial Document Processing
BancTec Technologies, Inc. (including
Recognition International
Bull Corporation of North America
IA Corporation
Infoscore, Inc.
Kleindienst Datenteknik GmbH
NCR Corporation
TRW Financial Solutions
Unisys
Forms Processing
IT Corporation of America
National Computer Systems
SHL Systemhouse, Inc.
VALIdata Sistemas de Captura, S.A. de C.V
Wheb Systems, Inc.
Three customers, BancTec, TCSI Corporation ("TCSI") and Wheb Systems, Inc.
("Wheb"), accounted for 42% of the Company's net sales for the first nine months
of fiscal 1996. BancTec is a leading provider of electronic and document-based
financial transaction processing systems, work flow and imaging products,
application software and professional services. BancTec develops solutions for
the banking, financial services, insurance, health care, government, utility,
telecommunications, grocery and retail industries. TCSI is a manufacturer of
financial processing systems. Wheb is a systems integrator providing forms
processing systems and solutions to a variety of private companies and
government agencies.
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 direct sales strategy concentrates on those
companies that it believes are key users and designers of automated document
processing systems for high-performance applications. The Company currently
maintains direct sales offices in Virginia, Illinois, New Jersey, California and
Calgary, Canada. In addition, the Company sells and supports its products
through representatives and distributors in Illinois 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 an as needed basis, on-site support. Customers with maintenance coverage
receive regular software releases from the Company. Foreign distributors
generally provide customer training, service and support for the products they
sell. Additionally, the product is supported internationally by periodic
distributor and customer visits by the Vice President, Executive Vice President
and President. These visits include attending imaging shows, as well as sales
and training efforts. Technical support is provided by telephone as well as
technical visits in addition to those previously mentioned.
The ability to read handprint characters in many different nations has
materially assisted the Company in its international sales effort. The Company
believes that the competition has much less functionality in this regard.
International sales accounted for approximately 31% of the Company's net sales
for the fiscal year ended September 30, 1996. 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 such that
the total percentage of its products which are ultimately utilized by foreign
end users is between 40% and 50%. International sales in the past twelve months
were made in fifteen countries including Australia, Argentina, Belgium, Brazil,
England, France, Finland, Germany, Italy, Malaysia, Mexico, Portugal, Poland,
Spain and Sweden. The Company sells its products in United States currency only.
Technology
The Company utilizes a wide range of technologies in its proprietary products.
These include segmentation techniques, grayscale processing techniques, noise
and line removal techniques, object oriented programming, GUIs and extensive
proprietary databases. The use of artificial neural networks for recognition
distinguishes the Company's products from most of its competitors.
The Company provides a hand printed and machine generated character recognition
engine in several configurations. This engine performs all the processing
required to take the image of a section of a document, find the characters
within that area, remove noise or lines that might interfere with the correct
identification of the characters, separate the characters from each other, and
then recognize the characters. The results are then placed in a defined data
format structure and returned to a host computer. The results are the identity
of the characters found, their locations and size, the confidence level of
correct recognition, and a second choice and the confidence level that is
associated with that second choice. This confidence factor, related to the
probability of recognition correctness, allows the system to be "tuned" for the
complexity or criticality of the specific application.
The enabling technology for the Company is artificial neural network
computation. The strength of neural networks is that they have the ability to be
"trained" to recognize various kinds of patterns. Neural networks are
mathematical equations with adaptive coefficients. Examples of data are
presented to the networks in a way that allows the adaptive coefficients to be
adjusted to fit. This adjustment is called "training" because it mimics the
manner in which human intelligence is trained to read and interpret information.
Once the network is trained, it will recognize the patterns in which it was
trained at high speeds. Once the training process is complete, the network will
have developed the capability to recognize digits in a wide degree of variation,
with very high speed and accuracy approaching, or in certain applications,
exceeding average human capacity.
The Company's technology includes a comprehensive set of tools for extracting
data from many types of different forms including forms that are crooked,
enlarged or reduced and eliminates lines, boxes, or combs processing only the
data of interest, as defined by the user, such as numeric, alpha, or
alpha-numeric data. Once digitized, the forms may emanate from a scanner or from
digital archives. The quality of these images may vary significantly. The
Company's software can enhance these images using proprietary noise filtering
algorithms which eliminate smudges and stains, enhance gray scale images, and
repair broken and degraded characters. The Company's software has the ability to
recognize the vagaries of characters, whether hand printed or machine generated,
separating characters that are touching or overlapping, eliminating ambiguities,
finding data that has been written out of its assigned area, and recognizing a
vast array of characters, compensating for personal, regional and national
differences in character style.
The Company acquired a license (exclusive for the initial five years) to the
core ICR technology underlying its ADR products from HNC Software, Inc. ("HNC")
in November 1992. At the time of acquisition of the license, thirteen of the
personnel responsible for developing the core software for HNC moved to Mitek in
connection with the transaction. The HNC license provided for a grant of rights
against payments of royalties amounting up to $2.6 million over three years. All
royalties and amounts due under the license have now been paid in full. On
November 23, 1997, certain exclusivity rights of the original licensed
technology shall expire and HNC will be able to use or license others to use
certain of the core technologies used in the Company's ADR products to compete
directly with the Company.
The Company's PFP software product incorporates the Company's QuickStrokes API
engine, certain software modules developed by the Company and certain software
and technology licensed on a nonexclusive basis from VALIdata Sistemas de
Captura, S.A. de C.V. ("VALIdata"). Pursuant to a Marketing License Agreement
dated as of March 26, 1996 (the "VALIdata License Agreement"), between the
Company and VALIdata, the Company was granted a nonexclusive, worldwide right to
use, reproduce and distribute copies of PFP software owned or controlled by
VALIdata to customers of the Company, in exchange for payment of certain
royalties to VALIdata. The VALIdata License Agreement provides for a one year
term, with provisions for annual renewal upon the written consent of both
parties. There can be no assurance, however, that the VALIdata License Agreement
will be renewed by VALIdata, and if renewed, on terms acceptable to the Company.
The PFP software covered by the VALIdata License Agreement is designed for the
Windows-3.1 operating system. However, the Company believes that the Windows NT
operating system will become the industry standard for this type of application
over the near term. Accordingly, the Company is currently developing PFP
application software for the Windows NT operating platform.
The markets for products incorporating ADR technology are characterized by
rapidly advancing technology and rapidly changing user preferences. The
Company's ability to compete effectively with its ADR product line will depend
upon its ability to meet changing market conditions and develop enhancements to
its products on a timely basis in order to maintain its competitive advantage.
In addition, continued growth will ultimately depend upon the Company's ability
to develop additional technologies and attract strategic alliances for related
or separate product lines. There can be no assurance that the Company will be
successful in developing and marketing product enhancement and additional
technologies, that the Company will not experience difficulties that could delay
or prevent the successful development, introduction and marketing of these
products, or that its new products and product enhancement will adequately meet
the requirements of the marketplace, will be of acceptable quality, or will
achieve market acceptance.
Research and Development
The Company believes that its future success depends in part on its ability to
maintain and improve its core technologies, enhance its existing products and
develop new products that meet an expanding range of customer requirements. The
Company intends to expand its existing product offerings and to introduce new
forms processing software solutions. In the development of new products and
enhancements to existing products, the Company uses its own tools extensively.
To date, the Company has relied primarily on ICR technology acquired from HNC as
well as internal development, although it may, based on timing and cost
considerations, acquire technology or products from third parties or
consultants. The Company performs all quality assurance and develops
documentation internally. 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 data base of
hundreds of thousands of images that is used to "train" the neural network
software that forms the core of the Company's ICR engine. Additionally, the
Company continues to enhance its specialized software which focuses on
eliminating the confusion of matrices that may otherwise mislead the software.
The confusing items are separated one by one until the ambiguities that cause
software algorithms errors are removed.
The Company's research and development organization included 14 software
engineers at September 30,1996, including seven with advanced degrees. During
fiscal 1996, the Company spent approximately $1.3 million on research and
development and spent approximately $1.0 million on research and development in
each of fiscal years 1995 and 1994 and $1.2 million in fiscal 1993. The Company
balances its engineering resources between development of ICR and applications
development. Of the 14 software engineers, approximately 6 are involved in ICR
research and development of the QuickStrokes API recognition engine. The
remaining staff are involved in applications development, including the PFP and
NiFaxshare products.
Products as complex as those offered by the Company, particularly the Company's
QuickStrokes and PFP products, may contain undetected defects or errors when
first introduced or as new versions are released. As a result, the Company has
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, the Company's
products are typically intended for use in applications that may be critical to
a customer's business. As a result, the Company expects that its 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
testing by the Company and by current and potential customers, 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 the Company's reputation, or increased service
and warranty costs, any of which would have a material adverse effect upon the
Company's business, operating results and financial condition.
Competition
The market for the Company's ADR products is intensely competitive, subject to
rapid change and significantly affected by new product introductions and other
market activities of industry participants. The Company faces direct and
indirect competition from a broad range of competitors who offer a variety of
products and solutions to the Company's current and potential customers. The
Company's principal competition comes from (i) customer-developed solutions;
(ii) direct competition from companies offering ICR systems; and (iii) companies
offering competing technologies capable of recognizing hand-printed characters.
It is also possible that the Company will face competition from new competitors.
These include companies that are existing licensors such as HNC and OEM, systems
integrators and VAR customers, such as BancTec, or dominant software companies
with a presence in publishing or office automation such as Microsoft Corporation
and Adobe Systems Incorporated. In addition, the Company's license agreement
with HNC provides that, upon expiration of certain exclusivity periods beginning
in November 1997, HNC will have the right to use certain of the core
technologies used in the Company's ADR products, originally developed by HNC and
acquired by the Company in 1992, to compete directly with the Company. Moreover,
as the market for automated data entry and ICR software develops, a number of
these or other companies with significantly greater resources that 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 API products compete, to various degrees, with
products produced by a number of substantial competitors including AEG, a
subsidiary of Daimler Benz, Computer Gesellschaft Konstanz, a subsidiary of
Siemens, and Nestor, Inc. The Company believes its primary competitive
advantages are its (i) recognition accuracy with regard to hand printed
characters, (ii) flexibility, since it may operate on a broad range of computer
operating platforms, (iii) scalability and (iv) object-oriented software designs
which can be more readily modified, improved with added functionality,
configured for new products, and ported to new operating systems and upgrades.
Despite these advantages, QuickStrokes API's competitors have existed longer and
have far greater financial resources and industry connections than the Company.
The Company's PFP products compete against complete proprietary systems offered
by software developers, such as GTESS Corporation, Symbus Technology, Inc. and
Cardiff Software, Inc. In addition, PFP faces competition from providers of
recognition systems that incorporate ADR technology, including in some
instances, the Company's QuickStrokes API product, such as Microsystems
Technology, Inc., and National Computer Systems. Because PFP is based on the
Company's proprietary QuickStrokes API engine, its competitive advantages
reflect the advantages of the QuickStrokes engine. Competitors in this market
offer both high and low cost systems. The Company's strategy is to position PFP
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. Increased competition may result in price reductions, reduce 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.
Furthermore, a significant percentage of the Company's revenues are attributable
to sale of co-processor boards sold together with the Company's software.
Anticipated increases in the microprocessor speed and power available, such as
the Pentium P-6, could have the effect of reducing the demand for such
co-processor boards. It is also possible that the Company's co-processor boards
will have competition from semiconductor manufacturers embedding the technology
on their chips. There can be no assurance that the Company will be able to
compete successfully against current or future competitors or that competitive
pressures faced by the Company will not materially adversely affect its
business, operating results and financial condition.
Employees and Labor Relations
As of September 30, 1996, the Company employed a total of 43 persons, consisting
of thirteen in marketing, sales and support, 16 in research and development,
eight in operations and six in finance, administration and other capacities. All
employees work on a full time basis. 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.
ITEM 2. PROPERTIES
The Company's principal executive offices, as well as its principal research and
development facility, is located in approximately 12,000 square feet of leased
office building space in San Diego, California. The lease on this facility
expires April 30, 1998, with an option to extend the lease for an additional
three years. The Company also leases a sales office facility in Sterling,
Virginia. In addition, the Company leases office space used as a sales, service,
and development facility in Calgary, Alberta, Canada. The Company believes that
its existing facilities are adequate for its current needs and that additional
space will be available as needed.
ITEM 3. LEGAL PROCEEDINGS
There are no legal claims currently pending against the Company. The Company
has, however, received a notice of a possible claim arising in connection with
this offering. In January 1995, the Company entered into a contract with
Heartland Financial Corp ("Heartland") for the provision of certain financial
consulting services, including assisting the Company in establishing
relationships with investment bankers and improving the liquidity of the
Company's Common Stock. Heartland has indicated to the Company in conversations
that it believes that it is entitled to a $375,000 fee in connection with a
secondary public offering of the Company's Common Stock under the terms of its
contract. The Company disputes this claim. The contract between Heartland and
the Company requires that all disputes be arbitrated. While there can be no
assurance that Heartland will not seek to arbitrate its claim against the
Company or would be unsuccessful in prosecuting such a claim if it were
arbitrated, the Company believes that any potential liability arising out of
such a claim would be immaterial.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to security holders during the fourth quarter
ended September 30, 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq SmallCap Market under the
symbol "MITK." The following table sets forth, for the fiscal periods indicated,
the high and low closing prices for the Common Stock as reported by the Nasdaq
SmallCap Market. The quotations for the Common Stock traded on the Nasdaq
SmallCap Market may reflect inter-dealer prices, without retail mark-up,
mark-downs or commission and may not necessarily represent actual transactions.
FISCAL QUARTER 1996 1997
------------------------------------------------------------
LOW HIGH LOW HIGH
------------------------------------------------------------
1st 1.250 1.6875 .813 1.25
2nd 1.375 2.6875 .875 1.375
3rd 2.00 6.125 .938 1.188
4th 3.50 5.875 1.063 1.688
ITEM 6. SELECTED FINANCIAL DATA
The table below sets forth selected financial data for each of the years in the
five-year period ended September 30, 1996.
($000 EXCEPT PER SHARE DATA) 1996 1995 1994 1993 1992
---------------------------------------------------
Sales $ 8,154 $ 6,633 $10,163 $13,065 $18,464
Net income (loss) 1,229 (69) (1,058) (902) 41
Earning (loss) per share 0.15 (0.01) (0.15) (0.13) 0.01
Total assets 3,762 2,864 3,074 5,081 6,257
Long-term debt 6 57 367 526 1,284
Stockholders' equity 2,652 1,343 809 1,818 2,720
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Net Sales
Net sales were $8,154,000, $6,633,000 and $10,163,000 , for fiscal 1996, 1995,
and 1994, respectively. The decrease in net sales in prior periods was primarily
due to the decline in demand for TEMPEST products and the sale of the TEMPEST
business in March 1995. TEMPEST sales for the corresponding periods were $0,
$1,554,000 and $5,489,000, respectively. ADR sales for the corresponding periods
were $8,154,000, $5,079,000, and $4,647,000, respectively. The increase in ADR
revenue during these respective periods were primarily due to an increase in the
number of systems integrators and OEMs selling the Company's ADR products.
Gross Margin
Gross margin for the fiscal years ended September 30, 1996, 1995, and 1994, were
$5,371,000, $3,303,000, and $3,506,000, respectively. Stated as a percentage of
net sales, gross margin for the corresponding periods were 66%, 50%, and 35%,
respectively. The increase in gross margin as a percentage of net sales in each
period was primarily due to the shift in product mix away from TEMPEST products,
which carried a relatively low gross margin, toward relatively higher gross
margin ADR products. Royalties and amortization charges resulting from the HNC
acquisition are a component of gross margin and in fiscal 1996, 1995, and 1994
were $297,000, $655,000, and $753,000, respectively. All royalties payable to
HNC in connection with the acquisition have been paid in full. Monthly
amortization expenses related to the HNC acquisition, of $22,500, will continue
until September, 1997.
Research and Development
Research and development expenses were $1,314,000, $1,004,000 and $1,024,000 for
fiscal 1996, 1995, and 1994, respectively. Stated as a percentage of net sales,
research and development expenses for the corresponding periods were 16%, 15%,
and 10%, respectively. The increase in research and development expenses as a
percentage of net sales in fiscal 1996, 1995 and 1994, were primarily due to the
Company devoting an increasing percentage of its research and development
expenditures to the development and enhancement of its ADR technologies.
Selling and Marketing
Selling and marketing expenses were $1,414,000, $1,388,000 and $1,513,000 for
fiscal 1996, 1995 and 1994, respectively. Stated as a percentage of net sales,
selling and marketing expenses for the corresponding periods were 17%, 21% and
15%, respectively. The decrease in selling and marketing expenses as a
percentage of sales in the current year were attributed to the increase in net
sales, while the increase in selling and marketing expenses as a percentage of
net sales in prior periods were due to decline in net sales and increased costs
incurred in connection with the introduction of new ADR products.
General and Administrative
General and administrative expenses were $1,186,000, $1,117,000 and $1,105,000
for fiscal 1996, 1995 and 1994. Stated as a percentage of net sales, general and
administrative expenses for the corresponding periods were 15%, 17% and 11%,
respectively. The decrease in expense in the current year as a percentage of net
sales were attributed to the increase in net sales, while the increase in
expense as a percentage of net sales in the prior periods were primarily due to
a decline in net sales.
Interest Expense
Net interest expense was $91,000, $67,000 and $98,000 for fiscal 1996, 1995 and
1994, respectively. Stated as a percentage of net sales, net interest expense
for the corresponding periods was 1%, 1% and 1%, respectively. The increase in
interest expense in the current year reflects borrowings from a factoring
institution which bears higher interest costs. Interest in fiscal 1995 and 1994
decreased primarily due to substantial decreases in average outstanding interest
bearing debt.
Gain on Sale of TEMPEST
Other income consists of the gain on the sale of the TEMPEST business in March,
1995, made up of the following components: sale price ($350,000) offset by the
carrying cost of inventory sold ($132,000) and costs related to the transaction
($13,000).
Income Taxes
For the fiscal year ended September 30, 1996, the Company recorded an income tax
provision of $137,000. For the fiscal year ended September 30, 1995, the Company
recorded $800 which represented the minimum state taxes payable. For fiscal year
ended September 30, 1994, the Company recorded an income tax benefit of
$223,000. Such benefits represent the carryback of net operating losses to
recover taxes paid in fiscal years 1991 and 1990. The Company anticipates
utilizing the balance of the two benefits in the fourth quarter of fiscal 1996
and the first quarter of fiscal 1997 and anticipates realizing the benefits of
research and development credit carry forwards beginning in fiscal 1997.
Net Income (Loss)
In fiscal 1996, the Company recorded net income of $1,229,000. In fiscal 1995
and 1994, the Company incurred net losses of $69,000 and $1,058,000,
respectively.
Liquidity and Capital Resources
At September 30, 1996, stockholders' equity was $2,652,000, an increase of
$1,309,000 from $1,343,000 one year ago. The Company's working capital and
current ratio was $1,884,000 and 2.71 at September 30, 1996, and $602,000 and
1.41 at September 30, 1995. At September 30, 1996, total liabilities to equity
ratio was .419 to 1 compared to 1.13 to 1 a year earlier. As of September 30,
1996, total liabilities were $411,000 less than on September 30, 1995.
In October 1992, our bank agreed to advance an additional $1,000,000 to be used
to pay for prepaid royalties and support costs in connection with the DEP (ADR)
acquisition. The $1,000,000 advance was payable in monthly installments of
$20,833 plus interest at prime plus 2% through November 1, 1993, at which time
all unpaid principal and interest were due. On November 19, 1993, the Company
refinanced the then remaining balance of $750,000. Under the refinancing, the
term of the advance was extended to November 1, 1996. The outstanding balance of
the advance was $-0- and $292,000 as of September 30, 1996 and 1995,
respectively.
In August, 1995, the Company, while seeking conventional credit facilities,
obtained a six month interim credit facility of $650,000 with a financial
institution. Borrowings under the agreement accrued interest at a rate of 3% per
month for amounts advanced against trade accounts receivable, with a minimum
monthly interest charge of $6,500. The borrowings outstanding under this
agreement totaled $-0- and $195,000 at September 30, 1996 and 1995,
respectively.
Simultaneously with the pay off of the factoring line of credit in March, 1996,
the Company established a $400,000 line of credit with Rancho Santa Fe Bank
("Bank") for working capital purposes. Borrowings under this line bears interest
at the rate of 2 1/12% over the Bank's Prime Rate and the line of credit
currently expires on February 1, 1997. The line of credit is secured by a lien
on substantially all of the Company's assets. The outstanding balance was $-0-
at September 30, 1996.
During fiscal years 1996 and 1995, the Company made payments against outstanding
indebtedness totaling $2,302,00 and $1,067,000, respectively. The repayment of
such indebtedness was funded by cash provided from operating activities.
The Company believes that together with existing cash, credit available under
the credit line, cash generated from operations, along with net proceeds from
its secondary offering in November, 1996, will be sufficient to finance its
operation for the next twelve months. All cash in excess of working capital
requirements will be kept in short term, investment grade securities.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
YEARS ENDED SEPTEMBER 30, 1996 and 1995
1996 1995
------------------------------------
ASSETS
CURRENT ASSETS:
Cash $ 210,413 $ 103,895
Accounts receivable - net 2,258,541 1,619,886
Note receivable 158,335
Inventories 278,206 131,929
Prepaid expenses and other assets 240,364 52,777
-------------------------------------
Total current assets 2,987,524 2,066,822
PROPERTY AND EQUIPMENT - net 146,888 131,085
OTHER ASSETS - Principally prepaid
license/support fees 628,030 666,393
-------------------------------------
TOTAL $3,762,442 $2,864,300
-------------------------------------
LIABILITIES AND STOCKHOLDERS EQUITY
CURRENT LIABILITIES:
Current portion of long-term liabilities $ 9,190 $ 267,927
Amount payable under factoring agreement 195,545
Accounts payable 472,775 722,955
Accrued payroll and related taxes 302,037 163,789
Other accrued liabilities 319,973 114,803
-------------------------------------
Total current liabilities 1,103,955 1,465,019
-------------------------------------
LONG-TERM LIABILITIES 6,147 56,567
-------------------------------------
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY:
Preferred stock - $0.001 par value; 1,000,000
shares authorized, no charges issued and
outstanding -- --
Common stock - $.001 par value; 20,000,000
shares authorized, 7,782,971 and 7,727,959
issued and outstanding in 1996 and 1995,
respectively 7,783 7,728
Additional paid-in capital 3,503,634 3,423,072
Accumulated deficit (859,077) (2,088,086)
------------------------------------
Total stockholders' equity 2,652,340 1,342,714
------------------------------------
TOTAL $3,762,442 $2,864,300
------------------------------------
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended September 30,
-------------------------------------------
1996 1995 1994
-------------------------------------------
NET SALES $8,153,628 $ 6,633,176 $10,162,511
COST OF GOODS SOLD 2,782,204 3,330,109 6,656,394
-------------------------------------------
GROSS MARGIN 5,371,424 3,303,067 3,506,117
-------------------------------------------
COST AND EXPENSES:
Research and development 1,313,951 1,004,131 1,024,321
Selling and marketing 1,414,125 1,388,422 1,513,309
General and administrative 1,186,170 1,117,014 1,104,972
Tempest writedowns and accruals 1,046,394
Interest - net 91,344 66,941 97,538
-------------------------------------------
Total costs and expenses 4,005,590 3,576,508 4,786,534
-------------------------------------------
OPERATING INCOME (LOSS) 1,365,834 (273,441) (1,280,417)
-------------------------------------------
OTHER INCOME 204,853
-------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES 1,365,834 (68,588) (1,280,417)
PROVISION (BENEFIT) FOR INCOME TAXES 136,825 800 (222,766)
-------------------------------------------
NET INCOME (LOSS) $ 1,229,009 $ (69,388) $ 1,057,651)
-------------------------------------------
INCOME (LOSS) PER SHARE $ 0.15 $ (0.01) $ (0.15)
-------------------------------------------
See notes to consolidated financial statement
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
Additional
Common Paid-In Accumulated
Stock Capital Deficit Total
----------------------------------------------------------
Balance, September 30, 1993 $ 6,865 $ 2,772,240 $ (961,047) $ 1,818,058
Issuance of common stock 15 18,735 18,750
Exercise of stock options 33 29,644 29,677
Net loss (1,057,651) (1,057,651)
-----------------------------------------------------------
Balance, September 30, 1994 6,913 2,820,619 2,018,698) 808,834
Issuance of common stock through
private placement for cash 667 475,037 475,704
Issuance of common stock in connection
with Tracs International, Inc.,
acquisition (Note 2) 75 78,563 78,638
Exercise of stock options 73 48,853 48,926
Net loss (69,388) (69,388)
----------------------------------------------------------
Balance, September 30, 1995 7,728 3,423,072 (2,088,086) 1,342,714
Stock warrants issued for services
rendered 17,131 17,131
Exercise of stock options 45 48,441 48,486
Exercise of warrants 10 14,990 15,000
Net Income 1,229,009 1,229,009
-----------------------------------------------------------
Balance, September 30, 1996 $ 7,783 $ 3,503,634 $ (859,077) $ 2,652,340
-----------------------------------------------------------
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
Twelve Months Ended September 30,
-------------------------------------------
1996 1995 1994
-------------------------------------------
OPERATING ACTIVITIES:
Net income (loss) $1,229,009 $ (69,388) $ (1,057,651)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 420,194 430,598 807,912
Gain on sale of TEMPEST (204,853)
(Gain) loss on sale of property
and equipment 2,822 (6,045) (33,409)
Common stock issued as compensation 42,232
Changes in assets and liabilities:
Accounts receivable (638,655) (96,813) 117,045
Income taxes receivable 238,950 (238,950)
Inventories, prepaid expenses and
other assets (590,959) (133,670) 1,275,875
Accounts payable and accrued
expenses 110,786 (486,175) 256,322
------------------------------------------
Net cash provided by (used in)
operating activities 533,197 (327,396) 1,169,376
------------------------------------------
INVESTING ACTIVITIES:
Purchases of property and equipment (143,361) (49,311) (94,434)
Proceeds from sale of TEMPEST 206,665
Proceeds from note receivable 158,335
Proceeds from sale of property &
equipment 6,045 36,923
------------------------------------------
Net cash provided by (used in)
investing activities 14,974 163,399 (57,511)
------------------------------------------
FINANCING ACTIVITIES:
Proceeds from bank borrowings 1,796,816 710,339
Repayment of debt (2,301,955) (1,067,053) (1,254,437)
Proceeds from exercise of stock
options and warrants 63,486 48,926 6,195
Net proceeds from sales of stock 475,704
------------------------------------------
Net cash provided by (used in)
financing activities (441,653) 167,916 (1,248,242)
------------------------------------------
NET INCREASE (DECREASE IN CASH 106,518 3,919 (136,377)
CASH AT BEGINNING OF YEAR 103,895 99,976 236,353
------------------------------------------
CASH AT END OF YEAR $ 210,413 $ 103,895 $ 99,976
------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 101,377 $ 85,662 $ 131,013
------------------------------------------
Income tax refund received $ 2,712 $ 279,903 $ 71,602
------------------------------------------
Cash paid for income taxes $ 21,263 $ 2,737 $ 16,184
------------------------------------------
See notes to consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business - Mitek Systems, Inc. (the "Company") is a designer, manufacturer and
marketer of advanced character recognition products for intelligent forms
processing applications ("Character Recognition"). Through March 1995, the
Company was also a systems integrator and value-added reseller of computer
equipment systems to businesses and high-security governmental agencies
("Tempest") (see Note 3).
Basis of Consolidation - The consolidated financial statements include accounts
of Mitek Systems, Inc. and its wholly-owned subsidiary, Mitek Systems Canada,
Inc., incorporated on June 21, 1995. All intercompany transactions and balances
are eliminated in consolidation.
Accounts Receivable - Accounts receivable are net of an allowance for doubtful
accounts of $91,146 and $32,953 at September 30, 1996 and 1995, respectively.
The provision for bad debts were $99,500, $60,000 and $115,895 for the years
ended September 30, 1996, 1995 and 1994, respectively.
Inventories - Inventories are recorded at the lower of cost (on a first-in,
first-out basis) or market. Major classes of inventories at September 30, 1996
and 1995 were as follows:
1996 1995
-------------------------------------------
Raw materials $ 55,366 $ 36,929
Work-in-process 42,970
Finished Goods 222,840 52,030
-------------------------------------------
Total $278,206 $131,929
-------------------------------------------
Property and Equipment - Following is a summary of property and equipment as of
September 30, 1996 and 1995.
1996 1995
--------------------------------------------
Property and equipment - at cost
Equipment $ 937,560 $1,055,877
Furniture and fixtures 59,136 61,772
Leasehold improvements 52,985 52,985
--------------------------------------------
1,049,681 1,170,634
Less: accumulated depreciation and
amortization 902,793 1,039,549
--------------------------------------------
Total $ 146,888 $ 131,085
--------------------------------------------
Depreciation and Amortization - Depreciation and amortization of property and
equipment and prepaid license/support fees are provided using the straight-line
method over estimated useful lives ranging from two to five years. Depreciation
and amortization of property and equipment totaled $124,736, $153,691 and
$352,543 for the years ended September 30, 1996, 1995 and 1994, respectively.
Amortization of prepaid license/support fees totaled $295,458, $276,908 and
$455,369 for the years ended September 30, 1996, 1995 and 1994, respectively.
Warranty - The Company accrues a warranty cost for all products sold. At
September 30, 1996 and 1995, other accrued liabilities included an accrued
warranty liability of $55,000 and $19,176, respectively. Warranty expense was
$2,642, $-0- and $44,429 for the years ended September 30, 1996, 1995 and 1994,
respectively.
Revenue Recognition - Revenue from product sales is generally recognized upon
shipment.
Research and Development - Research and development costs are expensed in the
period incurred.
Income Taxes - Effective October 1, 1993, the Company adopted Statement of
Financial Accounting Standards No. 109 (FAS 109) "Accounting for Income Taxes".
There was no material cumulative effect of adopting FAS No. 109 and no material
effect on the effective tax rate for fiscal 1994.
Income (Loss) Per Share - Income (loss) per share is based on the weighted
average number of common and common equivalent shares outstanding during the
year. Outstanding stock options are included as common equivalents using the
treasury stock method when the effect is dilutive. The weighted average number
of shares used in determining income (loss) per share was 8,202,753 in 1996;
7,285,788 in 1995; and 6,877,425 in 1994.
Statements of Cash Flows - Significant non-cash investing and financing
activities were comprised of the following:
Year Ended September 30,
-----------------------------------
1996 1995 1994
-----------------------------------
Conversion of deferred rent to short-term
obligation due to lease termination $198,762
Note receivable for the sale of the Tempest
product line and related assets $350,000
(Note 3)
Shares exchanged for the assets and assumed
liabilities for TRACS International,
Inc. (Note 2) 78,638
Accounting Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and contingencies at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results may differ from those estimates.
New Accounting Standards - In October 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards ("SFAS") No. 123,
Accounting for Stock-Based Compensation", which will be effective for the
Company beginning October 1, 1996. SFAS No. 123 requires expanded disclosures of
stock-based compensation arrangements with employees and encourages (but does
not require) compensation cost to be measured based on the fair value of the
equity instrument awarded. Corporations are permitted, however, to continue to
apply Accounting Principles Board ("APB) Opinion No. 25, which recognizes
compensation cost based on the intrinsic value of the equity instrument awarded.
The Company will continue to apply APB Opinion No. 25 to its stock-based
compensation awards to employees and will disclosed the required pro forma
effect on net income and earnings per share.
Reclassifications - Certain prior years balances have been reclassified to
conform to the 1996 presentation.
2. ACQUISITION
On June 21, 1995, the Company purchased substantially all of the assets and
assumed the liabilities of Tracs International, Inc., a Calgary, Canada based
developer of local area network facsimile servers. The purchase price included
75,000 unregistered shares of the Company's common stock and a 5% royalty on
facsimile related sales for a maximum period of three years or a maximum amount
of $300,000. Additional issuances of the Company's common shares may occur,
contingent upon the exceeding of certain revenue targeted during a six month
period following release from beta testing of a new product. The purchase
resulted in $136,250 of goodwill, to be amortized over 60 months
3. SALE OF TEMPEST BUSINESS
On March 17, 1995, the Company sold its Tempest business for $350,000. The
Company recognized a gain on this sale of $204,853 which is recorded as other
income in the consolidated statement of operations.
4. STOCKHOLDERS' EQUITY
Options - The Company has two stock option plans for executives and key
individuals who make significant contributions to the Company. The 1986 plan
provides for the purchase of up to 630,000 shares of common stock through
incentive and non-qualified options. The 1988 plan provides for the purchase of
up to 650,000 shares of common stock through non-qualified options. For both
plans, options must be granted at fair market value and for a term of not more
than six years. Employees owning in excess of 10% of the outstanding stock of
the Company are excluded from the plans. The 1986 plan expired on September 8,
1996. A 1996 Stock Option Plan replaced the expired plan. The 1996 plan provides
for the purchase of up to 1,000,000 shares of common stock through incentive and
non-qualified options. Remaining terms are the same as the expired plan.
Information concerning all stock options granted by the Company for the years
ended September 30, 1996, 1995 and 1994 is as follows:
Shares Price Range
------------------------------------------
Balance, September 30, 1993 872,334 $ .656 - 2.250
Granted 357,500 1.160 - 1.340
Exercised (32,369) .656 - 1,810
Cancelled (404,465) .656 - 2.250
------------------------------------------
Balance, September 30, 1994 793,000 .656 - 2.250
Granted 81,000 1.090 - 1.250
Exercised (72,947) .656 - 1.159
Cancelled (245,553) .656 - 2.250
------------------------------------------
Balance, September 30, 1995 555,500 .656 - 2.250
Granted 292,250 1.375 - 3.680
Exercised (45,012) .670 - 1.380
Cancelled (61,154) 1.219 - 2.750
------------------------------------------
Balance, September 30, 1996 741,584 $ .656 - 3.680
------------------------------------------
At September 30, 1996, options for 1,000,000 and 62,973 shares remained
available for granting under the 1996 and 1988 stock option plans, respectively.
At September 30, 1996, options for 463,041 shares were exercisable.
Sale of Common stock - The Company undertook a private placement stock offering
during the second and third quarters of 1995 in which 666,999 shares of common
stock were issued, with net proceeds of $475,704.
5. NOTES PAYABLE - BANK
At September 30, 1995, the Company had $291,667 outstanding on an advance made
by a bank under a refinancing agreement at an interest rate of prime plus 2%.
The advance was paid-off in full during the year ended September 30, 1996.
The Company has a $400,000 line of credit agreement with a bank which bears an
interest rate of prime plus 2-1/2% and expires on February 1, 1997. At September
30, 1996, the Company had no outstanding borrowings on the line.
6. FACTORING AGREEMENT
In September 1995, the Company entered into a receivable factoring agreement
with a finance company. Under the agreement, the finance company agreed to
finance receivables from the Company up to a maximum of $650,000. The finance
fee is calculated by taking 10% of the gross face value of the transferred
receivables for every 10 day period from the date the receivables are
transferred until such receivables are collected, subject to a minimum finance
fee of $6,500 per month. Such agreement expired in March 1996 and was not
renewed.
7. INCOME TAXES
For the years ended September 30, 1996, 1995 and 1994, the Company's provision
(benefit) for income taxes were as follows:
1996 1995 1994
---------------------------------------------------
Federal - current $ 98,588 $(227,000)
State - current 38,237 $ 800 4,234
---------------------------------------------------
Total $136,825 $ 800 $(222,766)
---------------------------------------------------
The federal benefit for fiscal year 1994 represents the carryback of net
operating losses to recover taxes paid in prior periods.
There was no provision for deferred income taxes in 1996, 1995 or 1994. Under
FAS No. 109, deferred income tax liabilities and assets reflect the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's net deferred tax liabilities
and assets as of September 30, 1996 and 1995 are as follows:
1996 1995
-------------------------------------
Deferred tax assets:
Reserves not currently deductible $ 63,000 $ 21,000
Book depreciation and amortization in
excess of tax 85,000 108,000
Research credit carryforwards 529,000 529,000
AMT credit carryforwards 29,000
Net operating loss carryforwards 60,000 838,000
Capitalized research and development costs 85,000 24,000
Uniform capitalization 266,000
Other 176,000 148,000
------------------------------------
Total deferred tax assets 1,293,000 1,668,000
Valuation allowance for net deferred
tax assets (1,293,000) (1,668,000)
------------------------------------
Total $ 0 $ 0
------------------------------------
The Company has provided a valuation allowance against deferred tax assets
recorded as of September 30, 1996 and 1995 due to uncertainties regarding the
realization of such assets.
The research credit and net operating loss carryforwards expire during the years
2004 to 2010. The Federal net operating loss carryforward at September 30, 1996
totaled $176,000.
The differences between the provision (benefit) for income taxes and income
taxes computed using the U.S. federal income tax rate were as follows for the
years ended September 30:
1996 1995 1994
----------------------------------
Amount computed using statutory rate (34%) $464,384 $(23,320) $(435,342)
Net change in valuation reserve for deferred
tax assets (375,292) 23,320 203,829
Nondeductible items 9,496 4,513
State income taxes 38,237 800 4,234
----------------------------------
Provision (benefit) for income taxes $138,825 $ 800 $(222,766)
----------------------------------
8. LONG-TERM LIABILITIES
As of September 30, 1996 and 1995, long-term liabilities were as follows:
1996 1995
------------------------------------
Capital lease obligations (see Note 10) $ 13,904 $ 31,831
Deferred rent payable (see Note 10) 1,433 996
Notes payable - bank (see Note 6) 291,667
------------------------------------
15,337 324,494
Less current portions (9,190) (267,927)
------------------------------------
Total $ 6,147 $ 56,567
------------------------------------
The following property and equipment is leased under non-cancellable capital
leases as of September 30, 1996 and 1995.
1996 1995
------------------------------------
Equipment $ 26,254 $ 133,751
Less accumulated depreciation (9,284) (100,274)
------------------------------------
Total $ 16,970 $ 33,477
------------------------------------
9. COMMITMENTS AND CONTINGENCIES
Leases - The Company's offices and manufacturing facilities are leased under
non-cancellable operating leases. The primary facilities lease expires on April
30, 1998, at which time the lease is renewable at current market rates.
Future annual minimum rental payments under non-cancellable leases are as
follows:
Operating Capital
Leases Leases
----------------------------------------
Year Ending September 30:
1997 $134,938 $ 11,220
1998 84,228 4,993
1999 2,153
2000
2001
---------------------------------------
Total 221,319 16,213
Less amount representing interest 2,309
---------------------------------------
Present value of minimum lease payments $221,319 $ 13,904
---------------------------------------
Rent expense for operating leases for the years ended September 30, 1996, 1995
and 1994 totalled $159,249, $62,509 and $480,996, respectively.
10. PRODUCT REVENUES AND SALES CONCENTRATIONS
Product Revenues - During fiscal years 1996 and 1995 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,
----------------------------------------------
1996 1995 1994
----------------------------------------------
Tempest 22% 54%
Character recognition 94% 74% 45%
Other 6% 4% 1%
Sales Concentrations - For the years ended September 30, 1996, 1995 and 1994,
the Company had the following sales concentrations:
1996 1995 1994
------------------------------------------
U.S. government and its agencies
* Percent of total sales 7% 16% 11%
Non-governmental customers to
which sales were in excess of 10%
of total sales
* Number of customers 2% 2% 1%
* Aggregate percentage of sales 33% 25% 21%
Foreign Sales - primarily Europe 31% 21% 13%
11. OFFERING COSTS
Through September 30, 1996, the Company incurred $185,000 of direct incremental
costs, consisting primarily of legal and accounting services, in connection with
a proposed public offering of its common stock which is expected to be completed
in the first quarter of fiscal 1997. Such costs have been capitalized at
September 30, 1996 and will be netted against the proceeds received from the
offering.
12. SUBSEQUENT EVENT
Effective October 11, 1996, the Company purchased certain technologies from
Instant Information Deutschland (IID), a Munich, Germany based value-added
distributor of Mitek Networks. The purchase price was $257,000; $87,000 payable
in cash and the relief of all debt owed to Mitek by IID in the amount of
$170,000. As part of the purchase, the Company has exclusive licensing rights to
use copyrights associated with the purchased technology. The licensing rights
are freely transferable, worldwide and royalty-free. The purchase will enable
the Company to sell certain technologies directly into the German marketplace
which were previously distributed by IID. The carrying value will be amortized
over the estimated life of the purchased technology.
INDEPENDENT AUDITORS' REPORT
Mitek Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Mitek Systems,
Inc. (the "Company") as of September 30, 1996 and 1995, and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for each of the three years in the period ended September 30, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company at
September 30, 1996 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 1996, in
conformity with generally accepted accounting principles.
San Diego, California
November 1, 1996
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors and executive officers of the Registrant is
incorporated by reference from the Proxy Statement for the 1996 Annual Meeting
of Stockholders (the "1996 Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the information contained in the 1996 Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Incorporated by reference from the information contained in the 1996 Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND
REPORTS ON FORM 8-K
(a) (1) The following documents are included in the Company's Annual Report to
Stockholders for the year ended September 30, 1996:
Independent Auditors' Report
Balance Sheets - September 30, 1996 and 1995
Statements of Operations - For the Years Ended September 30, 1996, 1995 and
1994
Statements of Changes in Stockholders' Equity - For the Years Ended
September 30, 1996, 1995 and 1994.
Statements of Cash Flows - For the Years Ended September 30, 1996, 1995 and
1994.
Notes to Financial Statements - For the years Ended September 30, 1996,
1995 and 1994
With the exception of the financial statements listed above and the information
incorporated by reference herein, the Annual Report to Stockholders for the
fiscal year ended September 30, 1996, is not to be deemed to be filed as part of
this report.
(2) Financial Statement Schedules:
None
(3) Exhibits (All items marked with an asterisk are incorporated by reference
from the exhibits to the Registrant's Annual Report on Form 10-K for the fiscal
year ended September 30, 1987; if marked by two asterisks, items are
incorporated by reference from the Registrant's report on Form 8-K, filed
December 7, 1992):
3.1 Certificate of Incorporation of Mitek Systems of Delaware Inc. (now
Mitek Systems, Inc.), a Delaware corporation, as amended.*
3.2 Bylaws of Mitek Systems, Inc. as Amended and Restated.*
10.1 License Agreement as of November 25, 1992 by and between HNC, Inc. and
Mitek Systems, Inc.**
23 Independent Auditors' Consent
Upon request, the Registrant will furnish a copy of any of the listed exhibits
for $0.50 per page.
(b) The following is a list of Current Reports on Form 8-K filed by the Company
during or subsequent to the last quarter of the fiscal year ended September 30,
1996.
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Dated: November 19, 1996 MITEK SYSTEMS, INC.
By: /s/ Barbara Hurlstone
Barbara Hurlstone, Secretary
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 Chairman of the Board November 19, 1996
John M. Thornton
/s/ John F. Kessler Director and President and Chief November 19, 1996
John F. Kessler Executive Officer (Principal
Executive Officer)
/s/ Gerald I. Farmer Executive Vice President, November 19, 1996
Gerald I. Farmer Director
/s/ Daniel E. Steimle Director November 19, 1996
Daniel E. Steimle
/s/ Sally B. Thornton Director November 19, 1996
Sally B. Thornton
/s/ James B. DeBello Director November 19, 1996
James B. DeBello
/s/ Barbara Hurlstone Secretary and Treasurer November 19, 1996
Barbara Hurlstone (Principal Financial Officer)
MITEK SYSTEMS, INC.
INDEX TO EXHIBITS
EXHIBIT EXHIBIT SEQUENTIALLY
NO. NUMBERED PAGE
3.1 Certificate of Incorporation of Mitek Systems of *
Delaware, Inc. (now Mitek Systems, Inc.), a
Delaware corporation, as amended
3.2 Bylaws of Mitek Systems, Inc. as Amended and *
Restated
10.1 License Agreement as of November 25, 1992 by **
and between HNC, Inc. and Mitek Systems, Inc.
23 Independent Auditors' Consent ---
____________________
* Incorporated by reference from the exhibits to Registrant's Annual Report on
Form 10-K for the fiscal year ended September 30, 1987.
** Incorporated by reference from the exhibits to Registrant's Report on Form
8-K, filed December 7, 1992.
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-3888 of Mitek Systems, Inc. on Form S-8 of our reports dated November 1,
1996, appearing in this Annual Report on Form 10-K of Mitek Systems, Inc. for
the year ended September 30, 1996.
Deloitte & Touche LLP
San Diego, California
November 19, 1996
