-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WIEvGFm6tasMipUFKvr9tEbdTCc0q/UoruJhLg09iunqLdwgRM8/AuSGk0ML7Kkn JVdI6F90JehUC9bUEuyRdQ== 0001047469-99-025778.txt : 19990630 0001047469-99-025778.hdr.sgml : 19990630 ACCESSION NUMBER: 0001047469-99-025778 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990629 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRINTRAK INTERNATIONAL INC CENTRAL INDEX KEY: 0001013050 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 330070547 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-20719 FILM NUMBER: 99655093 BUSINESS ADDRESS: STREET 1: 1250 N TUSTIN AVE CITY: ANAHEIM STATE: CA ZIP: 92807 BUSINESS PHONE: 7142382000 10-K405 1 10-K405 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 1999 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO ______________ COMMISSION FILE NUMBER: 000-20719 ------------------------ PRINTRAK INTERNATIONAL INC. (Exact name of registrant as specified in its charter) DELAWARE 33-0070547 (State or other jurisdiction (I.R.S. Employer Identification incorporation or organization) No.) 1250 NORTH TUSTIN AVENUE, ANAHEIM, 92807 CALIFORNIA (Zip Code) (Address of principal executive offices)
(714) 238-2000 (Registrant's telephone number, including area code) ------------------------ Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.0001 par value ------------------------ 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 the 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 the Registrant's Common Stock held by non-affiliates on May 28, 1999 (based upon the average of the high and low sales prices of such stock on such date) was $30,540,008. As of May 28, 1999, 11,441,552 shares of the Registrant's common stock, par value $0.0001 per share, were outstanding. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PRINTRAK INTERNATIONAL INC. FORM 10-K FOR THE FISCAL YEAR ENDED MARCH 31, 1999 INDEX
PART I Item 1. Business Item 2. Properties Item 3. Legal Proceedings Item 4. Submission of Matters to a Vote of Security Holders PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters Item 6. Selected Financial Data Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition Item 8. Financial Statements and Supplementary Data Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure PART III Item 10. Directors and Executive Officers of the Registrant Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management Item 13. Certain Relationships and Related Transactions PART IV Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K Signatures
2 PART I ITEM 1. BUSINESS GENERAL Printrak International Inc. (the "Company") is a worldwide supplier of integrated identification and information systems used in public safety applications and civil applications such as national ID programs. In the public safety market, Printrak's Digital Justice Solution-TM- provides networked fingerprint, photo imaging, computer-aided dispatch, automated records management and jail management systems. Printrak's civil systems prevent identity fraud and provide the identification infrastructure for emerging commercial fingerprint biometric applications. The Company's systems serve approximately 700 national, state, county and municipal agencies in 36 countries. The Company was originally formed in 1974 as a business unit of the Navigation Systems division of Rockwell International. The business and technology of the Company were acquired by Thomas De La Rue and Company Limited in 1981, and the Company was incorporated in California in December 1984 as "De La Rue Printrak, Inc." The Company was acquired by management in 1991 and was renamed "Printrak International Incorporated." The Company was reincorporated in Delaware in March 1996 under the name "Printrak International Inc." On May 7, 1997, the Company acquired all of the issued and outstanding capital stock of TFP Inc. ("TFP"), a South Carolina corporation. As a result of the transaction, TFP became a wholly-owned subsidiary of the Company. The business combination was accounted for by the pooling of interests method of accounting. Founded in 1988, TFP is considered a premier supplier of digital mugshot systems used by law enforcement, jail and correctional agencies. TFP's software applications also include jail management systems. On July 21, 1997, the Company acquired a business unit of SCC Communications Corp. ("SCC") located in Boulder, Colorado, in a transaction accounted for under the purchase method of accounting. The Boulder business unit provides computer-aided dispatch systems and records management systems for law enforcement and fire and emergency medical services agencies. As a result of the transaction, the business unit operates as a division of the Company (the "Boulder Division"). On September 9, 1997, the Company acquired SunRise Imaging ("SunRise"), a California corporation, in a transaction accounted for under the purchase method of accounting. As a result of the transaction, SunRise became a wholly-owned subsidiary of the Company. SunRise is a leading developer and manufacturer of high performance systems which digitize microfilm and microfiche records. The Company's fiscal year ends on March 31 and references to a fiscal year denote the calendar year in which the fiscal year ended; for example, "fiscal 1999" refers to the 12 months ended March 31, 1999. PRODUCTS The following hardware and software products represent the Company's current product offerings: AUTOMATED FINGERPRINT IDENTIFICATION SYSTEMS. The Company's automated fingerprint identification system ("AFIS") products represent a comprehensive, fully integrated architecture for the capture and input of fingerprint images, including image processing, search processing and overall database management. Each AFIS system is comprised of a number of components, including: 1) tenprint workstations which scan inked fingerprint cards and palmprints while performing quality control, data descriptor entry and fingerprint search initiation. The tenprint workstations also perform search verification and disposition; 2) livescan stations, typically installed in a booking environment, to electronically capture and transmit fingerprints, mugshots and arrest information; 3) latent workstations which are used by latent fingerprint examiners to capture, enhance, encode, search, verify and dispose latent prints from a crime scene; 4) Capture! stations that capture fingerprint images using a flatbed scanner, perform image quality 3 assessment, and transmit fingerprint data; 5) ID stations, equipped with single-finger live scanners, that electronically capture, process and transmit fingerprint image data; 6) image processing technology that extracts the searchable features from raw fingerprint image data; 7) scalable search processing technology that matches the extracted features of the search fingerprint against the agencies' fingerprint databases; 8) data storage and retrieval systems which contain large databases of compressed fingerprint and palmprint images as well as the searchable fingerprint feature data; 9) NIST archive/server systems that store electronic fingerprint and descriptor data, and which provide an open interface between the agency's Printrak AFIS system and the AFIS systems of other agencies; and 10) Software products which allow an agency to customize its workflow based on individual agency specifications. Utilizing an individual's fingerprints, the Company's fully integrated AFIS system gives agencies the ability to quickly and automatically associate the individual with their previous criminal history data and also allows the agency to check for outstanding warrants. This ability significantly increases the efficiency of the investigation, booking, suspect identification, incarceration and release functions. In the public safety market, the Company's AFIS system gives agencies the ability to quickly and automatically associate the individual with their previous criminal history data and also allows the agency to check for outstanding warrants. This ability significantly increases the efficiency of the investigation, booking, suspect identification, incarceration and release functions. In the civil market, the Company's AFIS systems allow agencies to detect attempts at duplicate enrollment under different names. This prevents individuals from obtaining duplicate benefits under different names, and allows agencies to give immigration, voting and other rights only to qualified individuals. The Company's sixth generation system, the AFIS 2000 series, uses a UNIX platform. The Series 7 AFIS is the Company's latest generation of products and runs on the Microsoft NT platform. DIGITAL PHOTO MUGSHOT. The Company's InstantImage mugshot product line consists of the Multicapture product and the Investigative Search product. Multicapture is typically used in the law enforcement booking environment to digitally capture and store photo-images of mugshots, tattoos, scars and other distinguishing marks. Investigative Search is the engine for searching criminal suspects based on demographic or physical attributes. After identifying potential suspects who match the criteria, the software electronically creates and reviews photo lineups. This mugshot system increases an agency's overall efficiency by automating photo taking, processing, storing, and viewing photo lineups. A typical mugshot system consists of various hardware and software components including booking stations, which utilize high resolution video or digital cameras for the capture of mugshots and viewing workstations for searching the mugshot database and creating photo lineups. Additionally, the systems are interfaced to data storage and retrieval systems that store the compressed photographic images and searchable data. The range of InstantImage mugshot installations encompasses stand-alone workstations to complex state-wide networks where multiple agencies share mugshot information. The digital photo mugshot system is fully integrated with the Company's Livescan station product. A typical installation would utilize the livescan unit to capture mugshot images, along with fingerprints and booking information. The mugshots are then stored in the InstantImage system for searching, viewing, and lineup creation at a viewing workstation. COMPUTER AIDED DISPATCH. The Company's computer aided dispatch ("CAD") application automates public safety agencies' call-taking and incident dispatching process by managing service calls and the patrol units that are assigned to each service incident. The Company's system provides public safety agencies with a fully integrated and configurable computer aided dispatch system allowing call-takers and dispatchers to quickly and effectively handle incident information, thus increasing officer safety and the overall potential for saving lives. The CAD application supports, not only law enforcement agencies, but also fire and emergency medical service agencies. 4 Because the CAD system provides mission critical information, the Company utilizes fault tolerant servers. These high availability hardware platforms enable the Company to provide continuous availability and performance to support critical applications such as communications center operations 24 hours per day, 365 days a year. Additionally, the Company provides configurable software which allows an agency to customize its workflow based on individual agency specifications. RECORDS MANAGEMENT. The Company's records management system ("RMS") manages the recording, indexing, tracking, viewing and analyzing of data for law enforcement, fire and emergency medical service agencies. The Law RMS provides complete records functionality for a law enforcement agency handling every phase of law enforcement activity from incident generation to assigning and tracking cases through arrest and booking. The Fire RMS provides a comprehensive suite of functionality for managing fire and emergency medical service activities. Both the RMS and Fire RMS provide extensive functionality for capturing the data required for local, state and national law and fire agency reporting. The Company's law and fire records systems are fully integrated with the Company's CAD product and operate on a Microsoft Windows NT platform. JAIL MANAGEMENT. The Company's jail management system assists jail administrators and staff in analyzing inmate populations and in developing the most effective jail policies. The system provides comprehensive inmate information including past incarcerations, current offense, court status, and prior institutional behavior. By providing jail administrators the tools to identify potential problem inmates, house similar inmates together, and target direct supervision toward those inmates who require it most, problems can be minimized. The Jail Manager software also includes statistical inmate reporting and calculates release dates. DIGITIZATION PRODUCTS. The Company's SunRise Imaging division produces microfilm scanners capable of scanning the three commonly used types of microforms: roll film, microfiche and aperture cards. Targeted to satisfy the conversion requirements of companies with large archival backfiles, the system provides high-speed throughput, image enhancement capabilities and quality control functionality which increases flexibility for microform scanning. The system is comprised of proprietary imaging hardware and software. The digitization software runs on a Microsoft Windows NT platform. Additionally, the Company provides the following services to complement its product offerings: FILE CONVERSION. The file conversion function converts agencies' tenprint cards into an electronic format. This process includes capture of images, entry or download of descriptive data, automatic encoding and classification of prints, quality review, identification of duplicates, database creation synchronization, as well as database loading. Other services include the conversion of palm print and mugshot records, and the conversion of data from existing databases on previous generation systems. MAPPING. Printrak's mapping product manages location, address and other relevant geofile data used by the CAD system to dispatch police, fire and emergency medical units. It is also used in conjunction with CAD to provide a graphical map display for dispatchers to use to keep track of their assigned incidents. This display provides both a spatially accurate map combined with user defined layers that allow for the designation of different jurisdictions, beats and zones. Additionally, the interface between the CAD system and the mapping product provides for the automatic placement of icons on the map that corresponds with incidents recorded and tracked in CAD. When used in conjunction with automated vehicle locator ("AVL"), the map also graphically displays the locations and status of units in service. SYSTEM MAINTENANCE. The Company typically warrants its systems for a period of up to 12 months, such warranty includes full support and maintenance. In addition, the Company sells annual maintenance contracts to most of its customers, which provide for system maintenance, ongoing technical support, system documentation materials and user training. 5 COMPETITION The market for law enforcement information systems is highly competitive and is characterized by rapidly changing technology. Historically, the principal competitors in the market for AFIS systems within the law enforcement information systems market have been Printrak, Nippon Electronics Corporation (NEC), and SAGEM Morpho, a large, privately held company based in France. NEC and SAGEM Morpho each has the technological and market expertise to provide large scale AFIS solutions. A company named Cogent, also located in Southern California, has also been a serious AFIS competitor. In the ten fingerprint live-scan market, the Company's principal competitors are Identix Inc. and Digital Biometrics Incorporated, although other competitors are also present within the marketplace. The nature of competition in this market is centered primarily on system functionality, image quality, price, service, and ease of integration into other systems within the customer's environment. In civil and commercial applications encompassing fingerprint identification technologies, there are many market competitors including Unisys, TRW and others. The Company competes in these markets on the basis of system functionality, price and customer service. In the digital photo mugshot market, the Company's principal competitors are EPIC Solutions, Imageware, DDSI and Dynamic Imaging. A large number of minor competitors are also present in the marketplace. The Company competes in the digital photo mugshot market on the basis of system functionality, image quality, ease of integration with other customer systems, price and customer service. The market for computer aided dispatch, records management and jail management systems like the AFIS market, is highly competitive and involves rapidly changing technology. The principal competitors in the CAD, RMS and jail management market have been and continue to be Intergraph and Tiburon. A significant number of secondary competitors are also present within the marketplace. Each of the principal competitors has the expertise to provide large scale, integrated CAD, RMS and jail management solutions. The nature of the competition is centered on functionality, reliability, ability to interface with the customer's mobile communication and in-vehicle systems, price and customer service. In the microfilm scanning market, the Company competes primarily with Mekel at the high end of the market segment. Competitors in the lower priced segment of the market, which SunRise does not generally compete against, consist primarily of Fuji and Wicks & Wilson. SunRise competes in this marketplace based upon throughput, image quality and flexibility to use multiple types of microfilm. Printrak has several competitors that offer some elements of enterprise-wide computing solutions for public safety agencies. However, Printrak's Digital Justice Solution-TM- currently offers the most comprehensive solution, which may include any or all of the following: AFIS, live scan, CAD, RMS, jail management, mugshot and microfilm scanners. Certain competitors such as Tiberon and Intergraph do provide solutions which include both CAD and RMS technologies. INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS The Company currently holds five patents and has two patent applications pending in the United States, holds three patents in Europe and five in Canada. Although the Company has implemented these protective measures, policing unauthorized use of the Company's technology or products is difficult and there can be no assurance that these measures will be successful. In addition, the laws of certain foreign countries may not protect the Company's proprietary rights to the same extent as do the laws of the United States. There can be no assurance that the Company's patents are or will be sufficiently broad to protect the Company's technology. There can be no assurance that additional U.S. or foreign patents will issue. In addition, there can be no assurance that any patents that may be issued to the Company, or which the Company may license from third parties, will not be challenged, invalidated or circumvented, or that any rights granted would ultimately provide protection to the Company. Further, there can be no assurance that others will not independently develop similar products or duplicate the Company's products. 6 RESEARCH AND PRODUCT DEVELOPMENT The Company considers research, development and engineering to be a vital part of its operations and continues to make substantial investments in research, development and engineering to enhance the performance, functionality and reliability of its hardware and software products, as well as to develop new product offerings. During the fiscal years ended March 31, 1997, 1998 and 1999, the Company invested 16.6%, 15.3% and 8.0%, respectively, of its revenues in research, development and engineering. See "Certain Relationships and Related Transactions--Research, development and engineering." MANUFACTURING AND SOURCING PRODUCTS The Company's manufacturing operations consist primarily of the integration and testing of off the shelf components, such as computers and disks, and of subsystems and computer assemblies. Substantially all assemblies are manufactured by outside vendors based on specifications provided by the Company. The Company's subsidiaries, TFP and SunRise, manufactured mugshot and digital scanning systems through fiscal year 1998, however, with the integration of TFP and SunRise into the Company's operations in Anaheim, this manufacturing is being outsourced to the same vendor from which the Company procures its AFIS assemblies. The Company's CAD product is required to be fault tolerant and, as such, utilizes Tandem hardware which is purchased directly from the manufacturer. The Company generally purchases major assemblies from a single vendor as this promotes higher quality, prompt delivery and aids cost savings. The Company is dependent upon the ability of vendors to deliver these items in accordance with the Company's specifications and delivery schedules. The failure of these suppliers to deliver on schedule could delay or interrupt the Company's delivery of products and thereby adversely affect the Company's operating results. To date, the Company has not experienced any delays in deliveries from its suppliers that have had a major impact on its business. As a turnkey supplier of digital justice solutions, the Company also provides file conversion services for its AFIS product line which allows the customer's existing database of hardcopy records to be electronically encoded prior to delivery of a Printrak AFIS system. This file conversion service is performed at the Company's headquarters in Anaheim, California. The Company's computer aided dispatch application requires significant data mapping of the geographic points included within an agency's service jurisdiction. This data mapping is performed by a third party in Boulder, Colorado, and to date, the Company has not experienced any delays in the performance of service by this subcontractor. CUSTOMER SERVICE AND SUPPORT The Company believes that excellent customer service and support is essential to its success and has committed significant resources to these functions. As part of the Company's warranty and maintenance service agreements, on-site maintenance service is provided for the Company's AFIS systems five days per week, eight hours per day, during normal working hours. The Company's CAD/RMS and mugshot products are supported via on-site maintenance service or on-call phone service, depending on the requirements of the customer's maintenance agreement. Telephone support is provided for the Company's AFIS, mugshot, and CAD/RMS products twenty-four hours per day, seven days per week. The Company's customer support center is designed to provide focused hardware and software support to customer sites via a designated phone number. The Company's service organization includes customer service engineers, who provide on-site support and maintenance, and product support engineers, who are primarily located in the Company's headquarters facility, the Boulder, Colorado facility or in regional offices around the world. The Company sells annual maintenance service agreements to most of its customers, which provide for system maintenance, ongoing technical support, system documentation materials and user training. Typically, the price of AFIS, mugshot and CAD/RMS systems include a 12 month warranty which includes full support and maintenance. The Company provides a 90 day warranty with the sale of a SunRise 7 Imaging scanner. Individual components within any of the Company's product lines are typically warranted for 90 days. BACKLOG The Company measures its backlog of system revenues as orders for which contracts or purchase orders have been signed, but for which revenues have not been recognized. In those instances where revenue is recognized on a percentage of completion basis, the Company includes in backlog contract revenue not recognized at the period end. The Company typically delivers its products within six to nine months after receiving an order, however, in some instances, products are provided on a shorter delivery schedule, and occasionally, more time is required. As of March 31, 1999, the Company's system revenue backlog was approximately $105.3 million, compared to $29.7 million as of March 31, 1998. Orders comprising the Company's backlog may include requirements for custom software development or file conversion that may require extensive resources to be completed prior to shipment. Any failure of the Company to meet an agreed upon schedule could lead to the cancellation of the related order. The Company believes that it is important for competitive reasons and to better satisfy customer requirements to reduce order lead times. Additionally, variations in the size, complexity and delivery requirements of customer orders may result in substantial fluctuations in backlog on a regular basis. EMPLOYEES As of March 31, 1999, the Company employed 461 people on a full-time basis, 425 domestically and 36 internationally. Of this total, 99 were in research, development and engineering, 155 in customer support, 87 in assembly, materials and file conversion services, 65 in sales and marketing, and 55 in finance, information technology and administration. Printrak's success is highly dependent on its ability to attract and retain qualified employees. Competition for employees is increasingly intense in the software industry, and the Company believes this competition will continue. To date, the Company believes it has been successful in its efforts to recruit and retain qualified employees, but there is no assurance that it will continue to be as successful in the future. None of the Company's employees are subject to collective bargaining agreements. The Company believes that its relations with its employees are good. CERTAIN CONSIDERATIONS The Company's future operating results and stock price, may be affected by a number of factors that could cause actual results to differ from those stated herein. These factors include the following: LENGTHY SALES AND COLLECTION CYCLE The sale of our products is often subject to delays associated with the lengthy approval processes that typically accompany large capital expenditures. Our total revenues depend in significant part upon the decision of a government agency to upgrade and expand existing facilities, alter workflows, and hire additional technical expertise in addition to procuring our products, all of which involve a significant capital commitment as well as significant future support costs. Our systems therefore often have a lengthy sales cycle while the customer evaluates and receives approvals for the purchase of our products, while existing workflows are augmented so as to properly assimilate our system, and while the system is configured and shipped. Typically, the evaluation and execution of a customer contract may take a full year. Another six to nine months elapse while the system is configured, professional services are performed and the customer site is prepared. As such, it is not uncommon for the sales cycle to be two years. During this time, we expend substantial resources yet may receive no associated revenue. Any significant failure by us to execute a contract after expending such effort and funds could have a material adverse effect on our business, operating results and financial condition. 8 A customer contract typically provides payment terms associated with the achievement of certain contractual milestones. Often, the contract provides for a customer deposit at contract signature, however, portions of the customer's payment may ultimately be associated with the delivery and final acceptance of the complete system. Because the system configuration, file conversion and system acceptance testing consumes a six to nine month time period, our collection cycle is often quite lengthy. As such, we expend substantial resources but may not receive payment from the customer until the completion of a substantial portion of the contract. Any significant failure by us to perform to the requirements of a specific contract could have a material adverse effect on our business, operating results and financial condition. DEPENDENCE ON LARGE ORDERS; CUSTOMER CONCENTRATION In any given fiscal year, our revenues have principally consisted, and may continue to consist, of large orders from a limited number of customers. While the individual customer may vary from period to period, we are still dependent upon large orders for a significant portion of our total system revenues. During fiscal years 1999 and 1998, no sales exceeding 10% of total revenues existed. During the fiscal year ended March 31, 1997, revenues from the Royal Canadian Mounted Police and the Florida Department of Law Enforcement were $9.0 million, or 13.7%, and $6.9 million, or 10.5%, respectively, of our total revenues. There can be no assurance that we will continue to obtain such large orders on a consistent basis, and as such, our inability to obtain sufficient large orders could have a material adverse effect on our business, operating results and financial condition. Moreover, the timing and shipment of such orders may cause our operating results in any given quarter to differ from projections of securities analysts which could adversely affect the trading price of our Common Stock. DEPENDENCE ON CAPITAL SPENDING BY PUBLIC AGENCIES Substantially all of the our revenues are derived from the sale and maintenance of products delivered to domestic and foreign governmental agencies. The decision to purchase an AFIS, CAD, RMS, mugshot or jail management system generally involves a significant commitment of capital and frequent delays are often associated with significant capital expenditures. Our future performance is directly dependent upon the capital expenditure budgets of our customers and the continued demand by such customers for our products. Many domestic and foreign governmental agencies have experienced budget deficits that have also led to significant reductions in capital expenditures. Our operations in the future may be subject to period-to-period fluctuations as a consequence of such deficits or other negative factors affecting capital spending. There can be no assurance that such factors will not have a material adverse effect on our business, operating results and financial condition. RISKS ASSOCIATED WITH EXPANSION INTO ADDITIONAL MARKETS; RELIANCE ON TEAMING ARRANGEMENTS We believe that our future performance is, in part, dependent upon our ability to successfully market AFIS technology for use outside of the law enforcement market. These markets include the detection of welfare fraud, voter registration and identification, verification of immigration status, drivers' license identification and verification of eligibility of pension or medical benefits. Furthermore, the size of these contracts, when awarded, is significantly larger than contracts which we typically fulfill and often require multiple contractors. The requirements for a national ID system, for example, incorporate AFIS technology, but may also incorporate other technologies provided by other parties. In order to successfully pursue civil and commercial applications, we have entered into and will continue to enter into, where appropriate, teaming arrangements with third party system integrators. There can be no assurance regarding the performance of such third parties, or the overall success, if any, of such teaming arrangements. Additionally, there can be no assurance regarding the performance of other third parties associated with such large scale implementations, and we have no control over this aspect of any installation. Although we have successfully performed on some of the largest AFIS installations in the world, the applications associated with national ID programs or other civil and commercial applications, typically are 9 much larger. Although we are confident that we can successfully implement our technology in these markets, there can be no assurance that we will be successful. RISKS ASSOCIATED WITH ACQUISITIONS An important element of our strategy has been to expand our operations by acquiring companies with complementary product offerings in order to augment market coverage and strengthen technological capabilities. We have acquired companies in the past and we may make additional acquisitions of businesses, products or technologies in the future. These acquisitions have, and may continue to, result in dilutive issuance of securities, the incurrence of debt and amortization expense related to goodwill or other intangible assets. Any of these factors could adversely affect our business, operating results and financial condition. Acquisitions and their assimilation into our operations have presented and may continue to present us with numerous challenges. These challenges may include, but are not limited to, assimilating the technologies and products of acquired companies, locating qualified resources and incorporating separate geographic operations into the consolidated company. These challenges absorb and may continue to absorb significant management attention that would otherwise be available to the ongoing development of our core business. Moreover, there can be no assurance that the anticipated benefits of any acquisition, upon complete integration, will ultimately be realized. If our management does not effectively respond to these challenges, our business, operating results and financial condition could be adversely impacted. YEAR 2000 COMPLIANCE Many currently installed information technology systems or IT systems, such as computer systems and software products, as well as non-IT systems that are embedded, are coded to accept only two digit entries in the date code field. These date code fields were not designed to correctly process dates after December 31, 1999; therefore, these date code fields will need to accept four digit entries, or be modified in some fashion, to distinguish 21st century dates from 20th century dates. As a result, in less than seven months, computer systems and software used by many companies may need to be upgraded to comply with such "Year 2000" requirements. We believe that certain of our internal systems are not Year 2000 compliant and we are currently in the process of purchasing upgrades or transitioning to systems which our vendors have represented as being Year 2000 compliant. We have assessed the impact of such "Year 2000" issues on our products, our internal IT and non-IT systems, as well as on our customers, suppliers and service providers. We have determined that certain of our internal IT and non-IT systems are not Year 2000 compliant and we are currently in the process of purchasing upgrades or transitioning to systems which our vendors have represented as being Year 2000 compliant. We believe that with modifications and conversions, the Year 2000 issue can be managed and the associated risks mitigated. We believe that our internal critical systems are currently 2000 compliant with the remaining modifications and conversions to be completed by September 30, 1999. With regard to our products, we believe that the current versions of all products are Year 2000 compliant. However, certain older product versions are not Year 2000 compliant. We have notified our customers of potential Year 2000 compliance problems and have offered such customers the opportunity to purchase upgrades. For customers with current systems under maintenance agreements, we intend to offer Year 2000 upgrades as part of the maintenance process. Customers not under maintenance agreements or with older generation systems will be offered the opportunity to purchase upgrades. We do not anticipate a material cost to upgrading our products to be Year 2000 compliant. However, there can be no guarantee that Year 2000 issues will not have a material impact on our business, operating results and financial condition. We are unable to control whether our suppliers and service providers will be Year 2000 compliant. However, we have initiated communications with our significant vendors to determine the extent to which our operations may be vulnerable to such parties' failure to resolve their own Year 2000 issues. Our 10 operations may be affected to the extent that our vendors are unable to provide services or ship products. Where practicable, we will assess and attempt to mitigate our risks with respect to failure of those entities to be Year 2000 ready. We have not received responses from all of our significant vendors and thus the effect, if any, on our results of operations from the failure of such parties to be Year 2000 ready cannot be estimated. The inability of these third parties to remediate their Year 2000 problems could have a material adverse effect on our business, operating results and financial condition. Although we expect our internal systems to be Year 2000 compliant as described above, we have prepared a contingency plan that specifies what we plan to do if our significant vendors are not Year 2000 compliant in a timely manner. Even if these plans are put in place, there can be no assurance that such plans will be sufficient to address any third party failures or that unresolved or undetected internal and external Year 2000 issues will not have a material adverse effect on our business, operating results and financial condition. Should we not be completely successful in mitigating internal and external Year 2000 risks, the result could be a system failure or miscalculations causing disruptions of operations at our facilities or those of our vendors and suppliers, including among other things, a temporary inability to process transactions, manufacture products, send invoices or engage in similar normal business activities. We believe that under a worse case scenario, we could continue the majority of our normal business activities on a manual basis. While it is difficult to quantify the total cost to us of the Year 2000 compliance activities, our best estimate of expenditures to date is between $250,000-$350,000. The total remaining cost is estimated to be approximately $150,000. We are expensing as incurred all costs related to the assessment and remediation of the Year 2000 issue. These costs are being funded through operating cash flows. Notwithstanding the foregoing, there can be no assurances (a) that the representations provided by its third party vendors with respect to Year 2000 compliance will be accurate, or (b) that we will have any recourse against such vendors if the representations prove to be inaccurate. Furthermore, there can be no assurances that Year 2000-related failure caused by third parties, such as utility providers, transportation companies or others, will not have a material adverse effect on us. There can be no guarantee that Year 2000 issues will not have a material impact on our business, operating results and financial condition. We anticipate that our internal systems will be Year 2000 compliant by September 30, 1999. OTHER MATTERS In June 1998, the Financial Accounting Standards Board issued Statement No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (SFAS No. 133), which we are required to adopt effective in our fiscal year 2000. SFAS No. 133 will require us to record all derivatives on the balance sheet at fair value. We do not currently engage in hedging activities but will continue to evaluate the effect of adopting SFAS No. 133. We will adopt SFAS No. 133 in our fiscal year 2000. ITEM 2. PROPERTIES The Company leases an approximately 88,000 square foot facility in Anaheim, California from Kilroy Realty, L.P. This building is used as the Company's headquarters and includes administration, engineering and customer service and manufacturing facilities. The Company leases an approximately 6,700 square foot facility in Fremont, California from Aetna Life Insurance Company. Prior to the restructuring of the Company's subsidiaries and the relocation of SunRise's operations to Anaheim, California, the facility was used as SunRise's principal place of business. The Company is actively pursuing a subtenant to sublease the premises through the remaining term of the lease. Pursuant to the terms of the lease, the Company pays $12,605 per month, subject to periodic adjustments. The term of the lease expires April 2002. 11 The Company leases an approximately 21,800 square foot facility in Boulder, Colorado from Lookout, LLC for use by the Boulder Division. Pursuant to the terms of the lease, the Company pays $18,559 per month, subject to periodic adjustments. The term of the lease expires in November 2002. The Company leases an approximately 24,000 square foot facility in Irvine, California from The Irvine Company for use by sales, marketing and R&D. Pursuant to the terms of the lease, the Company pays $36,480 per month, subject to periodic adjustments. The term of the lease expires in April 2006. Additionally, the Company leases sales office space in Washington D.C., and Greenville, South Carolina along with offices in Staines, England and in Queensland, Australia which are used for international sales and customer support services. ITEM 3. LEGAL PROCEEDINGS From time to time, the Company may be involved in litigation relating to claims arising out of its operations in the normal course of business. As of the date of this report, the Company is not a party to any legal proceedings, the adverse outcome of which, in management's opinion, individually or in the aggregate, would have a material adverse effect on the Company's results of operations or financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's common stock, par value $.0001 per share (the "Common Stock"), is traded on the Nasdaq National Market under the symbol "AFIS". The table below establishes the high and low sale prices for the Common Stock for the period from March 31, 1997 through March 31, 1999 (as reported on the Nasdaq National Market). The last reported closing price of the Common Stock on the Nasdaq National Market on May 28, 1999 was $6.75. FISCAL QUARTER ENDED:
HIGH LOW --------- --------- March 31, 1997............................................................. $ 12.75 $ 8.00 June 30, 1997.............................................................. 9.63 8.63 September 30, 1997......................................................... 11.75 11.13 December 31, 1997.......................................................... 10.88 10.00 March 31, 1998............................................................. 10.50 8.00 June 30, 1998.............................................................. 8.25 5.13 September 30, 1998......................................................... 6.25 4.13 December 31, 1998.......................................................... 8.19 4.50 March 31, 1999............................................................. 8.75 6.25
As of May 28, 1999, there were 117 holders of record based on the records of the Company's transfer agent which does not include beneficial owners of Common Stock whose shares are held in the names of various securities brokers, dealers and registered clearing agencies. The terms of the Company's revolving credit agreement restrict the ability of the Company to pay dividends on the Common Stock. Any payment of future dividends will be at the discretion of the Company's Board of Directors and depend upon, among other things, the Company's earnings, financial 12 condition, capital requirements, extent of indebtedness, as well as any other contractual restrictions. The Company does not anticipate paying cash dividends on the Common Stock in the foreseeable future. ITEM 6. SELECTED FINANCIAL DATA The selected consolidated financial data set forth below for the periods and the dates indicated derived from the audited consolidated financial statements of the Company. The statement of operations data for each of the three fiscal years to the period ended March 31, 1999, and the balance sheet data at March 31, 1998 and 1999, are derived from the audited consolidated financial statements and notes thereto, which are included elsewhere in this report, and are qualified by reference to such financial statements and notes related thereto. The data set forth below should be read in conjunction with 13 "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes thereto included elsewhere in this report.
YEAR ENDED MARCH 31, ------------------------------------------------------ 1995 1996 1997 1998 1999 --------- --------- --------- ---------- --------- (in thousands, except per share data) Statement of Operations Data: Revenues: System.................................................. $ 22,036 $ 41,400 $ 54,728 $ 58,742 $ 71,195 Maintenance............................................. 9,607 10,667 10,855 13,134 15,238 --------- --------- --------- ---------- --------- Total revenues.......................................... 31,643 52,067 65,583 71,876 86,433 Cost of revenues.......................................... 18,215 29,782 34,143 45,852 50,425 --------- --------- --------- ---------- --------- Gross profit.............................................. 13,428 22,285 31,440 26,024 36,008 Operating expenses: Research, development and engineering................... 4,867 9,274 10,859 11,002 6,936 Selling, general and administrative..................... 9,353 12,283 13,861 21,841 21,760 In process research and development..................... 5,900 Merger related expenses................................. 874 Restructuring costs..................................... 987 --------- --------- --------- ---------- --------- Total operating expenses................................ 14,220 21,557 24,720 40,604 28,696 Operating income (loss)................................... (792) 728 6,720 (14,580) 7,312 Other income (expense), net............................... 1,315 848 53 185 (156) --------- --------- --------- ---------- --------- Income (loss) before provision for income taxes........... 523 1,576 6,773 (14,395) 7,156 Provision (benefit) for income taxes...................... 221 386 2,141 95 (4,152) --------- --------- --------- ---------- --------- Net income (loss)......................................... $ 302 $ 1,190 $ 4,632 $ (14,490) $ 11,308 --------- --------- --------- ---------- --------- --------- --------- --------- ---------- --------- Net income (loss) per share: Basic................................................... $ 0.14 $ 0.44 $ (1.30) $ 1.00 Diluted................................................. $ 0.13 $ 0.42 $ (1.30) $ .96 Weighted average common and common equivalent shares outstanding: Basic................................................... 8,620 10,425 11,151 11,338 Diluted................................................. 9,085 10,963 11,151 11,781 BALANCE SHEET DATA: Cash, cash equivalents and short-term investments......... $ 1,272 $ 3,625 $ 8,431 $ 4,864 $ 8,557 Working capital........................................... 5,475 10,130 24,842 18,315 21,216 Total assets.............................................. 29,964 34,657 49,558 58,595 65,302 Long-term liabilities..................................... 7,834 5,742 1,683 10,960 180 Total stockholders' equity................................ 11,931 14,041 33,997 20,552 33,001
- ------------------------ ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and we intend that such forward-looking statements be subject to the safe harbors created thereby. Words such as "anticipates", "expects", "intends", "plans", "believes", "seeks", "estimates", variations of such words and similar expressions are intended to identify such forward-looking statements, which include (i) the existence and development of the our technical and manufacturing capabilities, (ii) anticipated competition, 14 (iii) potential future growth in revenues and income, (iv) potential future decreases in costs, and (v) the need for, and availability of, additional financing. The forward-looking statements included herein are based on current expectations that involve a number of risks and uncertainties. These forward-looking statements are based on assumptions that our markets will continue to grow, that our products will remain accepted within their respective markets and will not be replaced by new technology, that competitive conditions within our markets will not change materially or adversely, that we will retain key technical and management personnel, that our forecasts will accurately anticipate market demand, and that there will be no material adverse change in our operations or business. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions, and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. In addition, our business and operations are subject to substantial risks which increase the uncertainty inherent in such forward-looking statements, including those discussed in Item 1, "Business--Certain Considerations". In light of the significant uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by us or any other party that the objectives or plans will be achieved. The following is management's discussion and analysis of certain significant factors which have affected our earnings and financial position during the period included in the accompanying consolidated financial statements. This discussion compares the year ended March 31, 1999 with the year ended March 31, 1998 and the year ended March 31, 1998 is compared against the year ended March 31, 1997. This discussion should be read in conjunction with the consolidated financial statements and associated notes to the financial statements. FISCAL YEARS ENDED MARCH 31, 1999 AND 1998 TOTAL REVENUES. Our total revenues are comprised of system revenues, which include products, file conversion, data mapping, system installations and warranty/maintenance revenues related to hardware and software support. Total revenues increased 20.3% to $86.4 million for the year ended March 31, 1999, in comparison to revenues of $71.9 million for the year ended March 31, 1998. The overall increase in revenues is primarily attributable to a full year of revenue from the computer aided dispatch, photo imaging and digital scanning device product lines related to our fiscal 1998 acquisitions. In addition, the new Civil ID Argentina contract contributed $5.6 million in system revenue. These increases were partially offset by a reduction in revenues from the AFIS division during the current year. The reduction is primarily due to the timing of completion of contract elements which drive revenue recognition. In addition, the sale of mugshot systems declined from the prior year as we transitioned our sales efforts from smaller scale to larger scale contracts. Of our total current year revenues of $86.4 million, system revenues comprised $71.2 million with maintenance revenues contributing the remaining $15.2 million. For fiscal year 1998, system revenues equaled $58.8 million while maintenance revenues equaled $13.1 million. The increase in maintenance revenues of $2.1 million from the prior year is primarily due to the overall expansion of our customer base over the prior year. COST OF REVENUES. Cost of revenues primarily consists of purchased materials procured for use in the assembly of our products, manufacturing or assembly labor and overhead, software development costs specific to individual contracts, system integration costs, file conversion costs and data mapping costs, as well as maintenance expenses and estimated costs to complete systems installations. System margin for the last three years was 44.7%, 37.8% and 48.6%, respectively. Gross margin for the prior year of 37.8% was unfavorably impacted by the lower yields from the Boulder division, which 15 included numerous low margin contracts, acquired from SCC. Also included in the prior year cost of sales is approximately $882,000 of expenses associated with restructuring of TFP and SunRise into the Company's Anaheim operations. SunRise was consolidated into the Anaheim facility. RESEARCH, DEVELOPMENT AND ENGINEERING. Research, development and engineering expenses (RD&E) are comprised primarily of compensation paid to personnel engaged in research, development and engineering activities, amounts paid for outside services and consultants and the cost of materials used in the development of hardware and software products. RD&E expenses decreased 37.0% to $6.9 million for the year ended March 31, 1999, compared to $11.0 million for the same period of the previous year. RD&E expenses, as a percentage of revenue, decreased to 8.0% for the year ended March 31, 1999 from 15.3% for the year ended March 31, 1998. The $4.1 million decrease is primarily the result of an increased requirement of engineering resources for certain revenue-producing contracts on AFIS and the newly acquired product line. This was due to an increase in (i) the "customization" portion of the contracts and (ii) an increase in overall contract activity, in particular the $45 million Argentina contract, the Company's first significant contract in the AFIS civil market place. The costs are then classified as cost of revenues. We are actively recruiting to backfill the open RD&E positions. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative (SG&A) expense consists principally of compensation paid to sales, marketing and administrative personnel, commissions paid to sales personnel, professional service fees, travel and related expenses and other marketing expenses. For the fiscal year ended March 31, 1999, SG&A expenses remained consistent from fiscal year 1998 at $21.8 million. As a percentage of revenue, SG&A expenses were 25.2%, down from 30.4% in the prior year. Also included within SG&A for the prior year are $1.1 million of expenses associated with the restructuring of the operations of TFP and SunRise to reduce duplication of resources. These costs are primarily comprised of relocation and retention bonuses for certain employees, costs of relocating TFP and SunRise production facilities, and additional bad debt reserves due to employee transitions and changes in the customer base. IN PROCESS RESEARCH AND DEVELOPMENT EXPENSE. In the prior year, we incurred a $5.9 million charge related to in process research and development for the SunRise acquisition. We estimated that the cost to complete the technology projects would aggregate $1.1 million and would be incurred over a one year period. We incurred $1.0 million of research and development expenses related to these technology projects during the year ended March 31, 1999. We estimate that these projects are 100% complete at March 31, 1999. OTHER INCOME (EXPENSE), NET. Other expense equaled $156,000 in the current year and was primarily comprised of interest expense of $540,000, offset, in part, by interest income of approximately $347,000. In the previous year, other income totaled $185,000 and was primarily comprised of interest income of approximately $629,000, offset, in part, by interest expense of $467,000 and foreign currency losses of $136,000. PROVISION/BENEFIT FOR INCOME TAXES. Income tax benefit for the year ended March 31, 1999 equaled $4.2 million, versus an expense of $95,000 for the year ended March 31, 1998. Our current year tax benefit reflects the reversal of the valuation allowance of $6.2 million against our net deferred tax asset. Therefore, realization of the net deferred tax assets was determined by management to be more likely than not based on current and projected future taxable income. We evaluate a variety of factors in determining the amount of deferred income tax assets to be recognized pursuant to SFAS No. 109, "Accounting for Income Taxes". As a result of numerous factors, including, but not limited to our earnings history, existing contracts, sales backlog, the existence of taxable 16 temporary differences, and near-term earnings expectations, we believe that our net deferred tax asset is more likely than not to be realized, and in the third quarter of 1999, reduced or eliminated our deferred tax valuation allowance of $6.2 million. Although realization of the deferred tax assets is not assured, we believe that it is more likely than not that all of the deferred tax assets will be realized. FISCAL YEARS ENDED MARCH 31, 1998 AND 1997 TOTAL REVENUES. Total revenues increased 9.6% to $71.9 million for the year ended March 31, 1998, in comparison to revenues of $65.6 million for the year ended March 31, 1997. The overall increase in revenues is entirely attributable to our acquisitions during the fiscal year. Subsequent to completing the acquisition of the CAD/RMS division of SCC in July 1997, the Boulder Division contributed $8.2 million of total revenue while SunRise added $3.9 million in total revenues for the period of September 9, 1997 (date of acquisition) through March 31, 1998. In addition, TFP contributed $10.3 million in total revenues, a 52.6% increase over prior year revenues of $6.7 million. This increase is representative of a significant increase in mugshot installations to existing AFIS customers, as well as an expanding of TFP's overall customer base. These increases were partially offset by a reduction in revenues from the AFIS division during the current year. The reduction is primarily due to revenues in fiscal 1997 being impacted by the sale of a large document storage system for approximately $8.5 million while no similar systems were sold in fiscal 1998. Revenues from core AFIS systems remained consistent between fiscal 1997 and 1998. Of total current year revenues of $71.9 million, system revenues comprised $58.8 million with maintenance revenues contributing the remaining $13.1 million. For fiscal year 1997, system revenues equaled $54.7 million while maintenance revenues equaled $10.9 million. The increase in maintenance revenues of $2.2 million from the prior year is primarily due to our increased maintenance base due to acquisitions. The Boulder Division and TFP contributed incremental maintenance revenue of $1.3 million and $0.8 million, respectively. Anaheim's maintenance revenues of $9.5 million were generally consistent with previous year maintenance revenues of $9.7 million. COST OF REVENUES. Overall gross profit decreased to $26.0 million for the year ended March 31, 1998, down from $31.4 million for the year ended March 31, 1997. As a percentage of sales, gross margin for fiscal year 1998 declined to 36.2% from 47.9% for fiscal year 1997. The gross profit for system revenues decreased $4.4 million to $22.2 million for the current year while the prior year's system gross profit equaled $26.6 million. System margin as a percentage of sales declined as well, approximating 37.8% for the year ended March 31, 1998, down from 48.6% for the year ended March 31, 1997. Maintenance revenue gross profit equaled $3.8 million for the current year, versus a gross profit of $4.8 million for the previous fiscal year. As a percentage of sales, gross profit on maintenance revenue approximated 29.1% for the year ended March 31, 1998, as compared to 44.4% for the year ended March 31, 1997. The decline in overall system margins is partially attributable to the Boulder Division's contracts yielding lower margins than typical AFIS contracts. This was due to numerous low margin contracts acquired from SCC which we expended significant resources to complete. Additionally, margins in the Boulder Division are inherently lower than in the rest of the Company since a significant proportion of sales relate to the delivery of special fault tolerant equipment the gross margin on which is much less than that of hardware sold with AFIS systems and since the cost of engineering in the Boulder Division contracts is generally contract specific and therefore is charged to cost of revenues rather than research, development and engineering expenses. Also included within system cost of sales are approximately $882,000 of expenses associated with the restructuring of TFP and SunRise into the Company's Anaheim operations. Additionally, we incurred higher than estimated costs in completing system installations. The decline in maintenance gross margin is partially attributable to TFP and the Boulder Division's cost in maintaining certain systems for which we have not yet received a maintenance contract from the customer. This service was performed to encourage all customers to assign their contracts to us; however, 17 in some instances, costs were incurred without receiving a maintenance contract during this transition period. The decrease in margin for Anaheim is attributable to an increase in fixed maintenance support costs to support new contracts which were still under warranty in fiscal 1998 and without a corresponding increase in the price of existing maintenance contracts. RESEARCH, DEVELOPMENT AND ENGINEERING. RD&E expenses increased 1.3% to $11.0 for the year ended March 31, 1998, up from $10.9 million for the same period of the previous year. RD&E expenses, as a percentage of revenue, decreased to 15.3% for the year ended March 31, 1998 from 16.6% for the year ended March 31, 1997. One factor in the decline of RD&E expenses, as a percentage of revenue, is that the Boulder Division's investment in engineering expenses is more typically contract specific, and as such, is classified as cost of sales which lowers both the overall RD&E expenses, as a percentage of revenue, and lowers our overall gross margin. Included within current year RD&E expense are $249,000 of expenses associated with the restructuring of the engineering operations of SunRise and TFP into our corporate engineering organization. We experienced a decrease in contract labor expense in comparison to prior year as a reduced number of outside contractors were utilized. In the previous year, we had used significant contract labor to develop our document storage. This software application is now part of the AFIS family of products. SELLING, GENERAL AND ADMINISTRATIVE. For the year ended March 31, 1998, SG&A expenses increased to $21.8 million for fiscal year 1998, up from $13.9 million for fiscal year 1997. This represented an increase of $8.0 million or 57.6%. As a percentage of revenue, SG&A expenses approximated 30.4%, up from 21.1% in the prior year. Approximately $2.0 million of the increase was attributable to higher labor costs associated with additional personnel resulting primarily from our acquisitions, as well as the implementation of a sales commission plan that resulted in incremental expense of approximately $1.0 million. Travel and marketing expenses also increased approximately $0.8 million due to the acquisitions. Furthermore, during the year, approximately $0.5 million of international travel expense was incurred as we invested significant resources in marketing its civil applications for AFIS technology. Professional fees and insurance costs also incrementally increased due to our three acquisitions during fiscal year 1998. Also included within SG&A are $1.1 million of expenses associated with the restructuring of the operations of TFP and SunRise to reduce duplication of resources. These costs are primarily comprised of relocation and retention bonuses for certain employees, costs of relocating TFP and SunRise production facilities, and additional bad debt reserves due to employee transitions and changes in the customer base. IN-PROCESS RESEARCH & DEVELOPMENT EXPENSE. The in-process research and development expense of $5.9 million was due to the allocation of a portion of the purchase price to technology acquired related to the SunRise acquisition. The purchase price was allocated based on management's estimates and projections of future cash flows using the discounted cash flow valuation method. MERGER EXPENSE. Merger expenses of $0.9 million were associated with the TFP Inc. acquisition. The expenses primarily consisted of investment banking, legal and accounting fees associated with the pooling of interests transaction. RESTRUCTURING COSTS. The restructuring expense of $1.0 million consists of expenditures for the termination of SunRise and TFP personnel, losses on the disposal of fixed assets and the estimated loss associated with the lease termination of SunRise's Fremont facility and TFP's Greenville facility. The restructuring was completed during fiscal 1999. OTHER INCOME, NET. Other income equaled $185,000 in the current year and was primarily comprised of interest income of approximately $629,000, offset, in part, by interest expense of $467,000 and foreign currency losses of $136,000. In the previous year, other income totaled $53,000 and was principally associated with interest income of $364,000, interest expense of $450,000 and certain miscellaneous income items. 18 PROVISION FOR INCOME TAXES. Income tax expense for the year ended March 31, 1998 equaled $95,000, versus $2.1 million for the year ended March 31, 1997. The effective tax rate differs from the statutory rate principally due to the nondeductible in-process research and development expense and an increase in the valuation allowance on deferred tax assets. LIQUIDITY AND CAPITAL RESOURCES We finance our operations through the cash provided by our operations and the utilization of our revolving credit line. Our operating activities provided cash of approximately $15.9 million for the year ended March 31, 1999, primarily through net earnings before deferred tax adjustment and non cash depreciation and amortization that were offset by other changes in working capital. Our operating activities used net cash of approximately $3.6 million for the year ended March 31, 1998, primarily as a result of the cash portion of the net loss and increases in accounts receivable, inventories and prepaid expenses, offset by cash generated from increases in accrued liabilities and deferred revenues. Our investing activities used net cash of approximately $45,000 for fiscal year 1999, due primarily to capital expenditures of $1.7 million offset by the sale of short term investments for $1.1 million and the collection of a note receivable for $0.5 million. For fiscal year 1998, our investing activities used net cash of approximately $7.7 million for fiscal year 1998, due to capital expenditures of $1.5 million and business acquisitions of $9.6 million offset by the proceeds received from the sale of short term investments of $3.4 million. The $9.6 million cash used for business acquisitions is related to the acquisition of the CAD/ RMS division of SCC Communications and the acquisition of SunRise Imaging, net of cash received. Financing activities used net cash of approximately $11.1 million for the year ended March 31, 1999 mainly due to the paydown of our revolving credit line. We collected approximately $0.6 million from the exercise of stock options and employees' participation in the employee stock purchase plan. Net cash provided of approximately $11.2 million for the year ended March 31, 1998 was a result of our increased use of the revolving credit facility, and net borrowings exceeded repayments by $10.2 million. Furthermore, we collected approximately $1.0 million from the exercise of stock options and employees' participation in the employee stock purchase plan. On July 7, 1998, we received a written commitment letter from our bank to refinance our debt into a $15.0 million revolving credit facility, expiring in July 1999 and a $4.0 million term loan payable in quarterly installments beginning November 1, 1998 and maturing February 1, 2001. During fiscal 1999 we repaid the outstanding principal balance on our $4.0 million term loan and extended our $15.0 million revolving credit line facility to January 4, 2000. The revolving line of credit agreement contains certain restrictive covenants, which restrict our ability to pay dividends and requires us to maintain minimum tangible net worth and certain other financial ratios. As of March 31, 1999 we were in compliance with these covenants as amended. We believe that cash flow from operations and the revolving credit facility will be sufficient to meet cash needs for working capital and capital expenditures for at least the next 12 months. EUROPEAN MONETARY UNION Within Europe, the European Economic and Monetary Union (EMU) introduced a new currency, the euro, on January 1, 1999. The new currency is in response to the EMU's policy of economic convergence to harmonize trade policy, eliminate business costs associated with currency exchange and to promote the free flow of capital, goods and services. On January 1, 1999, the participating countries adopted the euro as their local currency, initially available for currency trading on currency exchanges and non-cash transactions such as banking. The existing local currencies, or legacy currencies, will remain legal tender through January 1, 2002. Beginning on January 1, 2002, euro-denominated bills and coins will be issued for cash transactions. For a period of 19 up to six months from this date, both legacy currencies and the euro will be legal tender. On or before July 1, 2002, the participating countries will withdraw all legacy currencies and exclusively use the euro. Our transactions are recorded in U.S. Dollars and we do not currently anticipate future transactions being recorded in the euro. Based on the lack of transactions recorded in the euro, we do not believe that the euro will have a material effect on our financial position, results of operations or cash flows. In addition, we have not incurred and do not expect to incur any significant costs from the continued implementation of the euro, including any currency risk, which could materially affect our business, financial condition or results of operations. The Company has not experienced any significant operational disruptions to date and does not currently expect the continued implementation of the euro to cause any significant operational disruptions. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to foreign currency exchange rate fluctuations in the normal course of business. Our main area of risk lies in contracts negotiated in foreign currencies other than US dollars. Depending on the payment terms of the contract we may be subject to currency rate fluctuations. We have had limited exposure in this area due to the small number of contracts negotiated in foreign currencies. However, there can be no assurance that this activity will not increase which in turn may affect results of operations and financial position. We have not been investing in marketable securities, but have been earning income on an interest bearing account through our bank. Changes in interest rates may affect the return on these investments in future periods. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data of the Registrant required by this Item 8 are set forth at the pages indicated at Item 14 (a)(1). ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 20 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required for Item 10 with respect to Directors and Executive Officers is incorporated by reference to the information contained in the sections captioned "Directors" and Other Executive Officers" in the Registrant's definitive Proxy Statement for its 1999 Annual Meeting of Stockholders to be held on August 25, 1999, to be filed with the Securities and Exchange Commission. ITEM 11. EXECUTIVE COMPENSATION. The information required by Item 11 is incorporated by reference to the information contained in the section entitled "Compensation of Executive Officers" in the Registrant's definitive Proxy Statement for its 1999 Annual Meeting of Stockholders to be held on August 25, 1999, to be filed with the Securities and Exchange Commission. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by Item 12 is incorporated by reference to the information contained in the section entitled "Security Ownership of Management and Directors" in the Registrant's definitive Proxy Statement for its 1999, Annual Meeting of Stockholders to be held on August 25, 1999, to be filed with the Securities and Exchange Commission. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by Item 13 is incorporated by reference to the information contained in the sections entitled "Compensation of Executive Officers" and Compensation Committee Interlocks and Insider Participation" in the Registrant's definitive Proxy Statement for its 1999 Annual Meeting of Stockholders to be held on August 25, 1999, to be filed with the Securities and Exchange Commission. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) 1. Financial Statements: See Index to Financial Statements and Schedule on page F-1 2. Financial Statement Schedule: See Index to Financial Statements and Schedule on page F-1 3. Exhibits. The following exhibits are filed (or incorporated by reference herein) as part of this Form 10K:
2.1 Agreement and Plan of Reorganization and Merger, dated as of April 7, 1997, between the Company, TFP Acquisition Corp., and TFP Inc. (Incorporated by reference to Exhibit 10.1 of the Company's Form 8-K as filed with the Securities and Exchange Commission on April 17, 1997, File No. 333-04610) 2.2 Agreement and Plan of Reorganization and Merger, dated as of August 29, 1997, between the Company, SunRise Acq. Corp., SunRise Imaging and the principal shareholders of SunRise Imaging (Incorporated by reference to Exhibit 2.1 of the Company's Form 8-K as filed with the Securities and Exchange Commission on September 24, 1997 File No. 000-20719) 3.1 Certificate of Incorporation of the Company (Incorporated by reference to Exhibit 3.1 of the Company's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission on May 3, 1996, File No. 333-4610)
21
3.2 Amended and Restated Certificate of Incorporation of the Company (Incorporated by reference to Exhibit 3.2 of Amendment No. 2 the Company's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission on June 28, 1996, File No. 333-4610) 3.3 Bylaws of the Company, as currently in effect (Incorporated by reference to Exhibit 3.3 of the Company's Annual Report on Form 10-K as filed with the Securities and Exchange Commission on June 30, 1997) 4.1 Form of Common Stock Certificate (Incorporated by reference to Exhibit 4.1 of Amendment No. 2 to the Company's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission on June 28, 1996, File No. 333-4610) 10.1* Printrak International Inc. Executive Stock Option Plan (the "Executive Plan"), as amended (Incorporated by reference to Exhibit 10.1 of the Company's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission on May 3, 1996, File No. 333-4610) 10.2* Form of Nonqualified Stock Option Agreement pertaining to the Executive Plan (Incorporated by reference to Exhibit 10.2 of the Company's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission on May 3, 1996, File No. 333-4610) 10.3* Printrak International Inc. 1994 Stock Option Plan (the "1994 Plan")(Incorporated by reference to Exhibit 10.3 of the Company's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission on May 3, 1996, File No. 333-4610) 10.4* Form of Nonqualified Stock Option Agreement pertaining to the 1994 Plan (Incorporated by reference to Exhibit 10.4 of the Company's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission on May 3, 1996, File No. 333-4610) 10.5* First Amended and Restated Printrak International Inc. 1996 Stock Incentive Plan (the "1996 Plan") (Incorporated by reference to Exhibit 4.1 of the Company's Registration Statement on Form S-8 as filed with the Securities and Exchange Commission on February 27, 1998, File No. 333-47009) 10.6* Form of Stock Option Agreement pertaining to the 1996 Plan (Incorporated by reference to Exhibit 10.6 of the Company's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission on May 3, 1996, File No. 333-4610) 10.7* Form of Restricted Stock Purchase Agreement pertaining to the 1996 Plan (Incorporated by reference to Exhibit 10.7 of the Company's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission on May 3, 1996, File No. 333-4610) 10.8* First Amended and Restated Printrak International Inc. Employee Stock Purchase Plan--1996 (Incorporated by reference to Exhibit 4.1 of the Company's Registration Statement on Form S-8 as filed with the Securities and Exchange Commission on October 10, 1997, File No. 333-38275) 10.9* Printrak International Inc. Voluntary Deferred Compensation Plan (Incorporated by reference to Exhibit 10.9 of the Company's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission on May 3, 1996, File No. 333-4610) 10.10* Employment Agreement dated May 1, 1996 between the Company and Richard M. Giles (Incorporated by reference to Exhibit 10.10 of the Company's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission on May 3, 1996, File No. 333-4610) 10.11 Promissory Note dated April 14, 1999 by Richard M. Giles, Trustee, in favor of the Company 10.12 Stock Pledge Agreement dated April 14, 1999 between the Company and Richard M. Giles, Trustee.
22
10.13 Promissory Note dated March 1, 1996 by John G. Hardy in favor of the Company (Incorporated by reference to Exhibit 10.13 of the Company's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission on May 3, 1996, File No. 333-4610) 10.14 Stock Pledge Agreement dated March 1, 1996 between the Company and John G. Hardy (Incorporated by reference to Exhibit 10.14 of the Company's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission on May 3, 1996, File No. 333-4610) 10.15* Form of Severance Agreement between the Company and its executive officers (Incorporated by reference to Exhibit 10.15 of the Company's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission on May 3, 1996, File No. 333-4610) 10.16 Form of Indemnification Agreement for Officers and Directors of the Company (Incorporated by reference to Exhibit 10.16 of the Company's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission on May 3, 1996, File No. 333-4610) 10.17 Commercial Lease dated May 13, 1995 between the Company and RICOL, LLC (Incorporated by reference to Exhibit 10.20 of the Company's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission on May 3, 1996, File No. 333-4610) 10.18 First Amendment to Lease originally entered between the Company and RICOL, LLC, such Amendment being dated April 1, 1998 between the Company and Kilroy Realty, L.P. (Incorporated by reference to Exhibit 10.21 of the Company's Annual Report on Form 10-K for the year ended March 31, 1998, as filed with the Securities and Exchange Commission on July 14, 1998, File No. 000-20719) 10.19 Loan Agreement between the Company and Union Bank dated August 12, 1996 (Incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, as filed with the Securities and Exchange Commission on May 3, 1996, File No. 333-4610) 10.20 First Amendment to Loan Agreement between Company and Union Bank, dated July 31, 1998. 10.21 Promissory Note between the Company and Union Bank of California dated January 30, 1997 (Incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1996, as filed with the Securities Exchange Commission on February 13, 1997, File No. 333-04610) 10.22 Promissory Note between the Company and Union Bank of California dated November 2, 1998. 10.23* TFP Stock Option Plan (Incorporated by reference to Exhibit 4.1 of the Company's Registration Statement on Form S-8 as filed with the Securities and Exchange Commission on October 20, 1997, File No. 333-38277) 10.24 Commercial Lease between the Company and the Irvine Co., dated February 16, 1999 (Incorporated by reference to Exhibit 10.1 of the Company's Quarterly report on Form 10-Q for the quarter ended December 31, 1998, File No. 000-20719) 21 Significant Subsidiaries of the Company 23.1 Consent of Independent Auditors, Deloitte & Touche LLP, dated June 29, 1999 27 Financial Data Schedule
------------------------------- * These exhibits are identified as management contracts or compensatory plans or arrangements of the Registrant pursuant to Item 14(a) of Form 10-K (b) Reports on Form 8-K None. 23 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, in the City of Anaheim, State of California, on June 28, 1999. PRINTRAK INTERNATIONAL INC. /s/ RICHARD M. GILES ----------------------------------------- Richard M. Giles, CHAIRMAN OF THE BOARD, CHIEF EXECUTIVE OFFICER, ACTING CHIEF FINANCIAL OFFICER AND PRESIDENT
Pursuant to the requirements of the Securities Act of 1934 this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ------------------------------------------------------ ----------------------------------------- --------------- Chairman of the Board, Chief Executive /s/ RICHARD M. GILES Officer, acting Chief Financial Officer ------------------------------------------- and President (Principal Executive June 28, 1999 Richard M. Giles Officer and Principal Financial Officer) /s/ JOHN G. HARDY ------------------------------------------- President of Products Division and June 28, 1999 John G. Hardy Director /s/ DANIEL J. DRISCOLL ------------------------------------------- President of Digital Justice Division and June 28, 1999 Daniel J. Driscoll Director /s/ CHARLES L. SMITH ------------------------------------------- Director June 28, 1999 Charles L. Smith /s/ ALBERT WONG ------------------------------------------- Director June 28, 1999 Albert Wong /s/ PETER HIGGINS ------------------------------------------- Director June 28, 1999 Peter Higgins
24 PRINTRAK INTERNATIONAL INC. INDEX TO FINANCIAL STATEMENTS
PAGE --------- Independent Auditors' Report............................................................................... F-2 Consolidated Balance Sheets................................................................................ F-3 Consolidated Statements of Operations...................................................................... F-4 Consolidated Statements of Comprehensive Operations........................................................ F-5 Consolidated Statements of Stockholders' Equity............................................................ F-6 Consolidated Statements of Cash Flows...................................................................... F-7 Notes to Consolidated Financial Statements................................................................. F-9 Financial Statement Schedule--Valuation and Qualifying Accounts............................................ F-24
F-1 INDEPENDENT AUDITORS' REPORT The Stockholders and Board of Directors Printrak International Inc.: We have audited the accompanying consolidated balance sheets of Printrak International Inc. and subsidiaries (the Company) as of March 31, 1998 and 1999, and the related consolidated statements of operations, comprehensive operations, stockholders' equity and cash flows for each of the three years in the period ended March 31, 1999. Our audits also included the financial statement schedule listed in the index at 14(a)(2). These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits 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, such consolidated financial statements present fairly, in all material respects, the financial position of Printrak International Inc. and subsidiaries as of March 31, 1998 and 1999 and the results of their operations and their cash flows for each of the three years in the period ended March 31, 1999, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP June 9, 1999 Costa Mesa, California F-2 PRINTRAK INTERNATIONAL INC. CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 1998 AND 1999
1998 1999 ------------- ------------- ASSETS CURRENT ASSETS: Cash and cash equivalents.......................................................... $ 3,763,000 $ 8,557,000 Short-term investments............................................................. 1,101,000 Accounts receivable, net, (Notes 4 and 5).......................................... 28,129,000 29,995,000 Inventories, net (Note 6).......................................................... 8,229,000 8,245,000 Prepaid expenses and other current assets.......................................... 2,413,000 1,333,000 Deferred income taxes (Note 10).................................................... 1,763,000 5,207,000 ------------- ------------- Total current assets........................................................... 45,398,000 53,337,000 NOTES RECEIVABLE FROM RELATED PARTIES (Note 14).................................... 558,000 74,000 PROPERTY AND EQUIPMENT, net (Note 7)............................................... 5,086,000 4,103,000 DEFERRED INCOME TAXES (Note 10).................................................... 2,243,000 3,820,000 OTHER LONG-TERM ASSETS............................................................. 2,475,000 1,638,000 GOODWILL AND OTHER INTANGIBLE ASSETS, net (Note 2)................................. 2,835,000 2,330,000 ------------- ------------- TOTAL ASSETS....................................................................... $ 58,595,000 $ 65,302,000 ------------- ------------- ------------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable................................................................... $ 6,538,000 $ 8,879,000 Accrued wages and employee benefits................................................ 3,178,000 1,990,000 Other accrued liabilities (Notes 8 and 16)......................................... 7,194,000 7,508,000 Current portion of long-term debt (Notes 9 and 11)................................. 1,056,000 122,000 Deferred revenue................................................................... 8,640,000 12,704,000 Income taxes payable (Note 10)..................................................... 477,000 918,000 ------------- ------------- Total current liabilities...................................................... 27,083,000 32,121,000 LONG-TERM DEBT, less current portion (Notes 9 and 11).............................. 10,960,000 180,000 ------------- ------------- Total liabilities.............................................................. 38,043,000 32,301,000 COMMITMENTS AND CONTINGENCIES (Note 11) STOCKHOLDERS' EQUITY (Note 12): Preferred stock, $0.0001 par value; 5,000,000 shares authorized; no shares outstanding...................................................................... Common stock, $0.0001 par value; 20,000,000 shares authorized; 11,269,203 (1998) and 11,406,043 (1999) shares issued and outstanding.............................. 1,000 1,000 Additional paid-in capital......................................................... 17,850,000 18,886,000 Retained earnings.................................................................. 3,052,000 14,360,000 Note receivable from stockholder (Note 14)......................................... (300,000) (300,000) Accumulated other comprehensive income (loss)...................................... (51,000) 54,000 ------------- ------------- Total stockholders' equity..................................................... 20,552,000 33,001,000 ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......................................... $ 58,595,000 $ 65,302,000 ------------- ------------- ------------- -------------
See accompanying notes to consolidated financial statements. F-3 PRINTRAK INTERNATIONAL INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED MARCH 31, 1997, 1998 AND 1999
1997 1998 1999 ------------- -------------- ------------- REVENUES (Note 5): System............................................................. $ 54,728,000 $ 58,742,000 $ 71,195,000 Maintenance........................................................ 10,855,000 13,134,000 15,238,000 ------------- -------------- ------------- Total revenues................................................. 65,583,000 71,876,000 86,433,000 COST OF REVENUES: System............................................................. 28,111,000 36,535,000 39,774,000 Maintenance........................................................ 6,032,000 9,317,000 10,651,000 ------------- -------------- ------------- Total cost of revenues......................................... 34,143,000 45,852,000 50,425,000 GROSS PROFIT....................................................... 31,440,000 26,024,000 36,008,000 OPERATING EXPENSES: Research, development and engineering.............................. 10,859,000 11,002,000 6,936,000 Selling, general and administrative................................ 13,861,000 21,841,000 21,760,000 In-process research and development................................ 5,900,000 Merger expenses (Note 3)........................................... 874,000 Restructuring charges (Note 16).................................... 987,000 ------------- -------------- ------------- Total operating expenses....................................... 24,720,000 40,604,000 28,696,000 INCOME (LOSS) FROM OPERATIONS...................................... 6,720,000 (14,580,000) 7,312,000 OTHER INCOME (EXPENSE): Foreign currency gain (loss)....................................... (144,000) (136,000) (30,000) Interest expense................................................... (450,000) (467,000) (540,000) Interest income.................................................... 364,000 629,000 347,000 Other income....................................................... 283,000 159,000 67,000 ------------- -------------- ------------- Total other income(expense), net............................... 53,000 185,000 (156,000) ------------- -------------- ------------- INCOME (LOSS) BEFORE INCOME TAXES.................................. 6,773,000 (14,395,000) 7,156,000 PROVISION (BENEFIT) FOR INCOME TAXES (Note 10)..................... 2,141,000 95,000 (4,152,000) ------------- -------------- ------------- NET INCOME (LOSS).................................................. $ 4,632,000 $ (14,490,000) $ 11,308,000 ------------- -------------- ------------- ------------- -------------- ------------- NET INCOME (LOSS) PER COMMON SHARE: Basic.......................................................... $ 0.44 $ (1.30) $ 1.00 ------------- -------------- ------------- ------------- -------------- ------------- Diluted........................................................ $ 0.42 $ (1.30) $ .96 ------------- -------------- ------------- ------------- -------------- ------------- WEIGHTED AVERAGE SHARES OUTSTANDING: Basic.......................................................... 10,425,000 11,151,000 11,338,000 ------------- -------------- ------------- ------------- -------------- ------------- Diluted........................................................ 10,963,000 11,151,000 11,781,000 ------------- -------------- ------------- ------------- -------------- -------------
See accompanying notes to consolidated financial statements. F-4 PRINTRAK INTERNATIONAL INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS FOR THE YEARS ENDED MARCH 31, 1997, 1998 AND 1999
1997 1998 1999 ------------ -------------- ------------- NET INCOME (LOSS)................................................... $ 4,632,000 $ (14,490,000) $ 11,308,000 ------------ -------------- ------------- Other comprehensive income (loss), net of tax Foreign currency translation adjustments.......................... (85,000) (14,000) 116,000 Unrealized gain (loss) on securities: Unrealized holding gain (loss) arising during period............ 5,000 (35,000) (11,000) Less: Reclassification adjustment for losses included in net income........................................................ 11,000 ------------ -------------- ------------- OTHER COMPREHENSIVE NET INCOME (LOSS)............................... (80,000) (49,000) 116,000 ------------ -------------- ------------- COMPREHENSIVE NET INCOME (LOSS)..................................... $ 4,552,000 $ (14,539,000) $ 11,424,000 ------------ -------------- ------------- ------------ -------------- -------------
See accompanying notes to consolidated financial statements. F-5 PRINTRAK INTERNATIONAL INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED MARCH 31, 1997, 1998 AND 1999
COMMON STOCK NOTE ACCUMULATIVE -------------------- ADDITIONAL RECEIVABLE OTHER TOTAL NUMBER OF PAID-IN RETAINED FROM COMPREHENSIVE STOCKHOLDERS' SHARES PAR VALUE CAPITAL EARNINGS STOCKHOLDER INCOME(LOSS) EQUITY --------- --------- ---------- ---------- ----------- --------------- ------------ BALANCE, April 1, 1996.............. 8,722,694 $ 1,000 $1,301,000 $12,961,000 $(300,000) $ 78,000 $14,041,000 Exercise of common stock options.... 151,944 432,000 432,000 Issuance of common stock under employee stock purchase plan...... 79,564 541,000 541,000 Issuance of common stock in initial public offering................... 2,121,000 14,432,000 14,432,000 Unrealized gain on short term investments....................... 5,000 5,000 Foreign currency translation adjustment........................ (85,000) (85,000) Accretion of TFP Preferred Stock Prior to Merger................... 50,000 (50,000) Other............................... (1,000) (1,000) Net income.......................... 4,632,000 4,632,000 --------- --------- ---------- ---------- ----------- --------------- ------------ BALANCE, March 31, 1997............. 11,075,202 1,000 16,756,000 17,542,000 (300,000) (2,000) 33,997,000 Exercise of common stock options.... 110,704 385,000 385,000 Issuance of common stock under employee stock purchase plan...... 83,297 601,000 601,000 Issuance of warrants in exchange for services.......................... 108,000 108,000 Unrealized loss on short term investments....................... (35,000) (35,000) Foreign currency translation adjustment........................ (14,000) (14,000) Net loss............................ (14,490,000) (14,490,000) --------- --------- ---------- ---------- ----------- --------------- ------------ BALANCE, March 31, 1998............. 11,269,203 1,000 17,850,000 3,052,000 (300,000) (51,000) 20,552,000 Exercise of common stock options.... 62,914 190,000 190,000 Issuance of common stock under employee stock purchase plan...... 73,926 377,000 377,000 Tax benefit from stock option exercises......................... 469,000 469,000 Unrealized loss on short term investments....................... (11,000) (11,000) Foreign currency translation adjustment........................ 116,000 116,000 Net income.......................... 11,308,000 11,308,000 --------- --------- ---------- ---------- ----------- --------------- ------------ BALANCE, March 31, 1999............. 11,406,043 $ 1,000 $18,886,000 $14,360,000 $(300,000) $ 54,000 $33,001,000 --------- --------- ---------- ---------- ----------- --------------- ------------ --------- --------- ---------- ---------- ----------- --------------- ------------
See accompanying notes to consolidated financial statements. F-6 PRINTRAK INTERNATIONAL INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED MARCH 31, 1997, 1998 AND 1999
1997 1998 1999 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)........................................................ $ 4,632,000 $(14,490,000) $11,308,000 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization.......................................... 2,659,000 3,631,000 3,446,000 Loss on disposal of assets............................................. 845,000 59,000 In process research and development.................................... 5,900,000 Deferred taxes......................................................... 1,008,000 (5,142,000) Changes in operating assets and liabilities, net of the effect of acquisitions: Accounts receivable, net............................................. (11,824,000) (1,028,000) (1,908,000) Inventories, net..................................................... 601,000 (1,859,000) (383,000) Prepaid expenses and other assets.................................... (1,725,000) (1,942,000) 1,916,000 Accounts payable..................................................... (852,000) 440,000 2,342,000 Accrued liabilities.................................................. 1,061,000 5,071,000 (1,138,000) Deferred revenue..................................................... (899,000) 1,440,000 4,083,000 Income taxes payable................................................. 397,000 (253,000) 1,031,000 Other................................................................ (254,000) (1,309,000) 267,000 ----------- ----------- ----------- Net cash (used in) provided by operating activities................ (5,196,000) (3,554,000) 15,881,000 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures..................................................... (1,459,000) (1,517,000) (1,680,000) Cash paid for acquisitions, net of cash acquired......................... (9,609,000) Proceeds from sale of land and building, net............................. 31,000 Sale and maturities of short term investments............................ 3,463,000 1,120,000 Purchases of short-term investments...................................... (4,235,000) Notes receivable from related parties.................................... 888,000 (15,000) 484,000 ----------- ----------- ----------- Net cash (used in) investing activities............................ (4,806,000) (7,678,000) (45,000) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term debt............................................. 6,116,000 46,176,000 Principal payments on long-term debt..................................... (10,878,000) (35,979,000) (11,714,000) Proceeds from common stock issuances..................................... 15,405,000 986,000 567,000 ----------- ----------- ----------- Net cash (used in) provided by financing activities................ 10,643,000 11,183,000 (11,147,000) EFFECT OF EXCHANGE RATE CHANGES ON CASH BALANCES......................... (70,000) (20,000) 105,000 ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..................... 571,000 (69,000) 4,794,000 CASH AND CASH EQUIVALENTS, beginning of year............................. 3,261,000 3,832,000 3,763,000 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS, end of year................................... $ 3,832,000 $ 3,763,000 $ 8,557,000 ----------- ----------- ----------- ----------- ----------- ----------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION-- Cash paid during the year for: Interest............................................................... $ 450,000 $ 470,000 $ 540,000 ----------- ----------- ----------- ----------- ----------- ----------- Income taxes paid (received)........................................... $ 833,000 $ 828,000 $ (680,000) ----------- ----------- ----------- ----------- ----------- -----------
NONCASH TRANSACTIONS: For the year ended March 31, 1998, the Company entered into capital lease agreements for equipment amounting to $65,000. During the years ended March 31, 1998 and 1999, the Company capitalized $1,104,000 and $367,000, respectively, of equipment and materials, previously classified as inventory, into fixed assets. F-7 PRINTRAK INTERNATIONAL INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) FOR THE YEARS ENDED MARCH 31, 1997, 1998 AND 1999 During the year ended March 31, 1998, the Company issued warrants to purchase 20,000 shares of stock in exchange for services received from a vendor valued at $108,000. During the year ended March 31, 1999, the Company recorded a deferred tax benefit of $469,000, related to disqualifying dispositions of stock options exercised, as an increase to additional paid in capital. Detail of businesses acquired in purchase transactions during the year ended March 31, 1998: Purchased in-process research and development........................................ $5,900,000 Fair value of assets acquired........................................................ 10,645,000 Liabilities assumed.................................................................. (6,936,000) ---------- Cash paid for acquisitions, net of cash acquired..................................... $9,609,000 ---------- ----------
See accompanying notes to consolidated financial statements. F-8 PRINTRAK INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MARCH 31, 1997, 1998 AND 1999 1. DESCRIPTION OF THE BUSINESS Printrak International Inc. ("the Company") is a worldwide supplier of integrated identification and information systems used primarily in criminal justice and public safety applications, as well as in emerging applications in civil markets such as welfare and immigration control. The Company provides networked fingerprint, photo imaging, computer-aided dispatch and automated records management systems, as well as digital scanning devices. The Company's integrated systems serve approximately 700 national, state, county and municipal agencies in 36 countries. The Company primarily markets its products to national, regional and local law enforcement agencies around the world. The Company's prospective customers are subject to public agency contract requirements which vary from jurisdiction to jurisdiction. Public agency contracts typically contain provisions that permit cancellation in the event that funds are unavailable to the public agency. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include the accounts of Printrak International Inc. and its wholly-owned subsidiaries, Printrak Australia Pty., Printrak Limited and Printrak Argentina. All significant intercompany balances and transactions have been eliminated. REVENUE RECOGNITION--The Company accounts for system revenue pursuant to SOP 97-2, SOFTWARE REVENUE RECOGNITION or SOP 81-1, LONG TERM CONSTRUCTION CONTRACTS, as applicable. Pursuant to SOP 97-2, the Company recognizes revenue on contracts which do not require significant modification or customization of software when all of the following conditions are met: a signed contract is obtained, delivery has occurred, the fee is fixed and determinable, collectibility is probable, and any uncertainties with regard to customer acceptance are insignificant. Most contracts include a combination of the following elements: hardware, software, license fees, installation, program modifications, file conversion, training and customer support. For such contracts, SOP 97-2 requires that revenue be allocated to each element based on vendor specific objective evidence of the elements fair value. Revenue allocated to undelivered elements is recognized as the above criteria are met. For contracts which require significant customization to the basic system, revenue recognition is based on SOP 81-1. Under these types of contracts, the Company recognizes revenue under the percentage of completion method, principally based on output measures such as contract milestones or units shipped. Revenue from maintenance service agreements is recognized ratably over the period of the contract. Cash payments for system sales or maintenance received in advance of revenue recognition are classified as deferred revenue. SOP 97-2 was issued in October 1997 and adopted by the Company for fiscal 1999. Prior to the effective date of SOP 97-2, the Company recognized revenue pursuant to SOP 91-1, SOFTWARE REVENUE RECOGNITION, which was superseded by SOP 97-2 for all transactions entered into in fiscal years beginning after December 15, 1997. FOREIGN CURRENCY--The financial position and results of operations of the Company's foreign subsidiaries are measured using the local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the exchange rate in effect at each year-end. Income statement accounts are translated at the average rate of exchange prevailing during the year. Translation adjustments arising from differences in exchange rates from period to period are included in the foreign currency translation F-9 PRINTRAK INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED MARCH 31, 1997, 1998 AND 1999 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) adjustments account in stockholders' equity. Realized gains or losses from foreign currency transactions are included in operations as incurred. CASH EQUIVALENTS--Cash equivalents are deemed to be highly-liquid investments with an original maturity of three months or less. SHORT-TERM INVESTMENTS--The Company accounts for its investments in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. Marketable equity and debt securities available for current operations are classified in the balance sheet as current assets. Unrealized holding gains and losses, if any, are included as a component of stockholders' equity until realized. At March 31, 1998, short-term investments consist of common stock based mutual funds which have been categorized as available for sale and, as a result, are stated at fair value. INVENTORIES--Inventories are stated at the lower of cost or market, with cost being determined on a first-in, first-out (FIFO) basis. PROPERTY AND EQUIPMENT--Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which range from three to five years. Leasehold improvements are amortized over the shorter of the lease term or the useful lives of the related assets. Maintenance, repairs and minor renewals are charged to expense, as incurred. Additions and improvements are capitalized. LONG LIVED ASSETS--The Company accounts for the impairment and disposition of long-lived assets in accordance with Statement of Financial Accounting Standards No. 121 (SFAS No. 121), ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. In accordance with SFAS No. 121, long-lived assets to be held are reviewed for events or changes in circumstances which indicate that their carrying value may not be recoverable. The Company periodically reviews the carrying value of long-lived assets to determine whether or not an impairment to such value has occurred and has determined that there was no impairment at March 31, 1999. GOODWILL AND OTHER INTANGIBLES--Goodwill represents the excess purchase cost over the net assets acquired and is amortized over lives ranging from 3 to 10 years using the straight-line method. Other intangible assets include acquired workforce value and acquired technology which are being amortized using the straight-line method over 36 and 42 months, respectively. Accumulated amortization on goodwill and other intangible assets amounted to $542,000 and $622,000 as of March 31, 1998 and 1999, respectively. The Company periodically evaluates the recoverability of goodwill based on a profitability analysis related to its product sales and evaluates the recoverability of other intangible assets based on the requirements of SFAS No. 121. The Company has determined that there was no impairment as of March 31, 1999. INCOME TAXES--The Company accounts for income taxes under SFAS No. 109, ACCOUNTING FOR INCOME TAXES which provides that deferred income taxes are recognized for the tax consequences in future years for differences between the tax bases of assets and liabilities (temporary differences) and their financial reporting amounts at each year-end based on enacted tax laws and statutory rates applicable to the periods in which the temporary differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. F-10 PRINTRAK INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED MARCH 31, 1997, 1998 AND 1999 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) SOFTWARE DEVELOPMENT COSTS--Development costs incurred in the research, development and engineering of new software products and enhancements to existing software products are expensed as incurred until technological feasibility has been established. For the years ended March 31, 1997, 1998 and 1999 software development was substantially completed concurrent with the establishment of technological feasibility due to the nature of the development effort and, accordingly, no costs were capitalized. The Company considers technological feasibility to be established when all planning, designing, coding and testing has been completed according to design specifications. After technological feasibility is established, any additional costs are capitalized in accordance with SFAS No. 86, ACCOUNTING FOR COSTS OF COMPUTER SOFTWARE TO BE SOLD, LEASED OR OTHERWISE MARKETED. RESEARCH, DEVELOPMENT AND ENGINEERING--Research, development and engineering costs are expensed as incurred. Research, development and engineering includes costs for the development of new products and prototype units. The Company also incurs engineering costs associated with modifications to its system, testing of such systems and the integration of equipment to comply with customer requirements. Management believes that system modifications can generally be utilized by other customers and accordingly, has combined such costs with research, development and engineering. Any customized modification for a customer contract is charged to cost of sales as management believes these costs are specific to a customer's workflow requirements. ACCOUNTING FOR STOCK-BASED COMPENSATION--The Company accounts for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board (APB) Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (Note 12). USE OF 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 disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NET INCOME (LOSS) PER SHARE--Pursuant to SFAS No. 128, EARNINGS PER SHARE, (SFAS No. 128), the Company provides dual presentation of "Basic" and "Diluted" earnings per share (EPS). SFAS No. 128 replaced "Primary" and "Fully diluted" EPS under Accounting Principles Board ("APB") Opinion No. 15. Basic EPS excludes dilution from common stock equivalents and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution from common stock equivalents, similar to fully diluted EPS, but uses only the average stock price during the period as part of the computation. Common stock equivalents are excluded from the calculation of diluted EPS in loss years, as the impact is antidilutive. The number of shares used in computing EPS is as follows for the year ended March 31:
1997 1998 1999 ------------ ------------ ------------ Weighted average shares outstanding--basic.......... 10,425,000 11,151,000 11,338,000 Common stock equivalents............................ 538,000 443,000 ------------ ------------ ------------ Weighted average shares outstanding--diluted........ 10,963,000 11,151,000 11,781,000 ------------ ------------ ------------ ------------ ------------ ------------
F-11 PRINTRAK INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED MARCH 31, 1997, 1998 AND 1999 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) COMPREHENSIVE INCOME--Pursuant to SFAS No. 130, REPORTING COMPREHENSIVE INCOME, the Company has included Consolidated Statements of Comprehensive Operations for the years ended March 31, 1997, 1998 and 1999. SEGMENT REPORTING--In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, (SFAS No. 131). This statement establishes standards for the way companies report information about operating segments in annual financial statements. It also establishes standards for related disclosure about products and services, geographic areas and major customers. POSTRETIREMENT BENEFITS--In February 1998, the FASB issued SFAS No. 132, EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS, (SFAS No. 132). This statement revises and standardizes employers' disclosure requirements about pension and other postretirement benefit plans, requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis and eliminates certain disclosures that are not longer useful. The Company does not maintain an employee pension plan or any other postretirement benefit plans. RECENT ACCOUNTING PRONOUNCEMENTS--In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES which the Company is required to adopt effective in its fiscal year 2000. SFAS No. 133 will require the Company to record all derivatives on the balance sheet at fair value. The Company does not currently engage in hedging activities and will continue to evaluate the effect of adopting SFAS No. 133. The Company will adopt SFAS No. 133 in its fiscal year 2000. RECLASSIFICATION--Certain amounts in the accompanying consolidated financial statements have been reclassified to conform with the March 31, 1999 presentation. 3. ACQUISITIONS On May 7, 1997, the Company acquired all of the issued and outstanding capital stock of TFP, Inc. (TFP), a South Carolina corporation, in accordance with the terms and conditions of the Agreement and Plan of Reorganization and Merger dated as of April 7, 1997, by and among Printrak, TFP Acquisition Corp., a South Carolina corporation and wholly-owned subsidiary of Printrak, and TFP. Pursuant to the Merger Agreement, TFP became a wholly-owned subsidiary of Printrak and the outstanding shares and outstanding warrants to purchase shares of TFP common stock and Series A preferred stock were converted into an aggregate of 1,399,494 shares of Printrak common stock. Additionally, all the outstanding options to purchase shares of TFP common stock were converted into options to purchase 116,496 shares of Printrak common stock. The terms of the Merger Agreement were the result of arm's length negotiations among the parties. The transaction was accounted for under the pooling of interests method of accounting. F-12 PRINTRAK INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED MARCH 31, 1997, 1998 AND 1999 3. ACQUISITIONS (CONTINUED) The following table shows the separate historical results of the Company and TFP for the year ended March 31, 1997.
MARCH 31, 1997 -------------- Revenues Printrak.................................................................... $ 58,865,000 TFP......................................................................... 6,718,000 -------------- Total..................................................................... $ 65,583,000 -------------- -------------- Net income Printrak.................................................................... $ 4,428,000 TFP......................................................................... 204,000 -------------- Total..................................................................... $ 4,632,000 -------------- --------------
Merger expenses incurred to consummate the TFP transaction totaled $874,000, consisting of investment banking fees, accounting fees, legal fees, financial printing fees, stock transfer fees and certain other transaction costs, all of which are included in the accompanying consolidated statement of operations for the year ended March 31, 1998. On July 21, 1997, the Company acquired a business unit of SCC Communications Corp. (SCC) located in Boulder, Colorado, in a transaction accounted for under the purchase method of accounting. As a result of the acquisition, the business unit operates as a division of the Company (the Boulder Division) and its operating results have been included in the Company's consolidated statement of operations from the date of acquisition. The Boulder Division provides computer-aided dispatch systems and records management systems for law enforcement, fire and emergency medical services agencies. The total purchase price for the transaction was $697,000, which was allocated to $4,253,000 of acquired identified assets, $1,966,000 of goodwill, and ($5,522,000) of assumed liabilities. The pro forma impact of the SCC acquisition in fiscal 1997 and 1998 was not significant. On September 9, 1997, the Company acquired the outstanding shares of SunRise Imaging (SunRise), a California corporation, in a transaction accounted for under the purchase method of accounting. As a result of the acquisition, SunRise became a wholly owned subsidiary of the Company and its operating results have been included in the Company's consolidated statement of operations from the date of acquisition. SunRise develops and manufactures automated systems which digitize microfilm and microfiche records. The total purchase price for the transaction was $10,175,000, which was allocated to $5,002,000 of acquired identified assets, $5,900,000 of acquired in-process research and development, $687,000 of goodwill, and ($1,414,000) of assumed liabilities. As of the acquisition date, the technological feasibility of the acquired in-process research and development had not been established and, accordingly, the allocated value was charged to operations during the year ended March 31, 1998. The consolidated F-13 PRINTRAK INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED MARCH 31, 1997, 1998 AND 1999 3. ACQUISITIONS (CONTINUED) results of operations on a pro forma basis as though the SunRise acquisition had been consummated on April 1, 1996 and 1997 are as follows:
YEAR ENDED MARCH 31, ---------------------------- 1997 1998 ------------- ------------- Total revenues................................................. $ 63,123,000 $ 77,871,000 Net income (loss).............................................. $ 5,530,000 $ (3,755,000) Net income (loss) per common share Basic........................................................ $ .53 $ (.34) Diluted...................................................... $ .50 $ (.34)
The pro forma information is not necessarily indicative of the results of operations that would have occurred nor of future results of the combined enterprise. 4. ACCOUNTS RECEIVABLE Accounts receivable consist of the following at March 31:
1998 1999 ------------- ------------- Billed receivables............................................. $ 18,641,000 $ 22,626,000 Unbilled receivables........................................... 10,840,000 7,996,000 ------------- ------------- 29,481,000 30,622,000 Less allowance for doubtful accounts........................... (1,352,000) (627,000) ------------- ------------- $ 28,129,000 $ 29,995,000 ------------- ------------- ------------- -------------
Unbilled receivables consist of system and maintenance revenues which have been earned but not invoiced because of contractual terms of the underlying agreements. 5. CONCENTRATIONS OF REVENUE, CREDIT RISK AND OPERATING SEGMENT MAJOR CUSTOMERS--The Company's revenues are generated from credit sales to customers primarily in the public safety market. The Company performs credit evaluations of its commercial customers and maintains reserves for potential credit losses and generally does not require collateral. However, the majority of the customers are government agencies which do not require credit evaluations. Major customers have varied from year to year but a significant portion of the Company's revenue has historically consisted of large orders from a limited number of customers. Sales to individual customers amounting to more than 10% of total revenues were $9,040,000 and $6,863,000 in fiscal 1997. No individual customer exceeded 10% of total revenues in fiscal years 1998 and 1999. Given the significant amount of revenues derived from such customers in any given year, the uncollectibility of related receivables or a decrease in the number of large orders received could have a material adverse effect on the Company's financial condition and results of operations. International sales are subject to inherent risks, including unexpected changes in regulatory requirements, tariffs and other barriers, fluctuating exchange rates, difficulties in staffing and managing foreign F-14 PRINTRAK INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED MARCH 31, 1997, 1998 AND 1999 5. CONCENTRATIONS OF REVENUE, CREDIT RISK AND OPERATING SEGMENT (CONTINUED) sales and support operations, greater working capital requirements, political and economic instability, and potentially limited intellectual property protection. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the Company's chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company operates in only one segment, which entails the design, manufacture and sale of integrated identification and information systems for public safety and civil applications. The Company's products include Automated Fingerprint Identification Systems (AFIS), Computer Aided Dispatch Systems/Record Management Systems (CAD/RMS), Digitalization Systems and Digital Photo Mugshot Systems. The Company does not allocate operating expenses to these segments, nor does it allocate specific assets to these segments. Therefore, segment information reported includes only revenues. Operating segment data for the years ended March 31, 1997, 1998 and 1999 was as follows:
1997 1998 1999 ------------- ------------- ------------- AFIS............................................ $ 58,865,000 $ 49,559,000 $ 58,456,000 CAD/RMS......................................... 8,186,000 14,410,000 Digitalization.................................. 3,878,000 7,445,000 Mugshot......................................... 6,718,000 10,253,000 6,122,000 ------------- ------------- ------------- Total Revenues................................ $ 65,583,000 $ 71,876,000 $ 86,433,000 ------------- ------------- ------------- ------------- ------------- -------------
INTERNATIONAL SALES--A substantial portion of the Company's total revenues are derived from international sales. International sales as a percent of the Company's total revenues are summarized as follows for the year ending March 31:
GEOGRAPHIC AREA 1997 1998 1999 - --------------------------------------------------------------------- --------- --------- --------- Domestic............................................................. 69.1% 75.6% 66.0% Europe............................................................... 10.8% 11.9% 13.0% Canada............................................................... 18.8% 1.5% 10.5% Latin America........................................................ -- 5.2% 9.3% Other International.................................................. 1.3% 5.8% 1.2% --------- --------- --------- 100.0% 100.0% 100.0% --------- --------- --------- --------- --------- ---------
F-15 PRINTRAK INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED MARCH 31, 1997, 1998 AND 1999 6. INVENTORIES Inventories consist of the following at March 31:
1998 1999 ------------- ------------ Raw materials.................................................... $ 4,979,000 $ 4,678,000 Work in process.................................................. 4,657,000 4,114,000 ------------- ------------ 9,636,000 8,792,000 Less allowance for excess and obsolete inventories............... (1,407,000) (547,000) ------------- ------------ $ 8,229,000 $ 8,245,000 ------------- ------------ ------------- ------------
7. PROPERTY AND EQUIPMENT Property and equipment consist of the following at March 31:
1998 1999 ------------- ------------- Building and improvements...................................... $ 365,000 $ 642,000 Computer equipment............................................. 8,616,000 8,643,000 Purchased software............................................. 697,000 1,130,000 Other equipment and furniture.................................. 1,436,000 2,155,000 ------------- ------------- 11,114,000 12,570,000 Less accumulated depreciation and amortization................. (6,028,000) (8,467,000) ------------- ------------- $ 5,086,000 $ 4,103,000 ------------- ------------- ------------- -------------
Assets under capital lease were $968,000 and $858,000 as of March 31, 1998 and 1999, respectively. Accumulated amortization on such leased equipment amounted to $466,000 and $563,000, respectively (Note 11). 8. OTHER ACCRUED LIABILITIES Other accrued liabilities consist of the following at March 31:
1998 1999 ------------ ------------ Warranty and estimated costs to complete system installations..... $ 4,776,000 $ 3,578,000 Sales commissions................................................. 1,128,000 Sales and foreign taxes........................................... 804,000 713,000 Professional fees................................................. 145,000 275,000 Insurance......................................................... 38,000 94,000 Restructuring..................................................... 618,000 452,000 Other............................................................. 813,000 1,268,000 ------------ ------------ $ 7,194,000 $ 7,508,000 ------------ ------------ ------------ ------------
F-16 PRINTRAK INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED MARCH 31, 1997, 1998 AND 1999 9. LONG-TERM DEBT Long-term debt consists of the following at March 31:
1998 1999 ------------- ----------- Credit facility with bank, collateralized by substantially all assets of the Company, interest payable monthly at the bank's reference rate or the bank's LIBOR rate, plus 1.75%: $15 million Revolving Credit Line.......................................... $ 7,488,000 $ -- Term Loan.................................................................. 4,000,000 -- Obligations under capital leases (Note 11)................................... 528,000 302,000 ------------- ----------- 12,016,000 302,000 Less current portion of long-term debt....................................... (1,056,000) (122,000) ------------- ----------- $ 10,960,000 $ 180,000 ------------- ----------- ------------- -----------
During fiscal 1999, the Company repaid the outstanding principal balance on its credit facility and extended its $15.0 million revolving credit line facility to January 4, 2000. The revolving line of credit agreement contains certain restrictive covenants, which restrict the Company's ability to pay dividends and requires the Company to maintain minimum tangible net worth and certain other financial ratios. The Company was in compliance with these covenants as of March 31, 1999. The bank's reference rate and LIBOR rate at March 31, 1999 were 7.75% and 4.9%, respectively. Annual debt principal repayments are as follows: Year ending March 31: 2000............................................................ $ 122,000 2001............................................................ 97,000 2002............................................................ 80,000 2003............................................................ 3,000 --------- $ 302,000 --------- ---------
F-17 PRINTRAK INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED MARCH 31, 1997, 1998 AND 1999 10. INCOME TAXES The Company's provision for income taxes consists of the following for the year ended March 31:
1997 1998 1999 ------------ ----------- ------------- Current: Federal........................................... $ 499,000 $ (236,000) $ 414,000 State............................................. 551,000 51,000 193,000 Foreign........................................... 280,000 280,000 (86,000) ------------ ----------- ------------- Total current................................... 1,330,000 95,000 521,000 ------------ ----------- ------------- Deferred: Federal........................................... 528,000 2,050,000 State............................................. 283,000 (465,000) Foreign........................................... (103,000) Change in valuation allowance..................... (6,155,000) ------------ ----------- ------------- Total deferred.................................. 811,000 -0- (4,673,000) ------------ ----------- ------------- Total provision (benefit)........................... $ 2,141,000 $ 95,000 $ (4,152,000) ------------ ----------- ------------- ------------ ----------- -------------
The net deferred tax assets at March 31, 1998 were offset by a valuation allowance of $6,155,000. During the year ended March 31, 1999, the future realization of the net deferred tax assets was determined by management to be more likely than not based on current and projected future taxable income and accordingly, the valuation allowance of $6,155,000 was reversed. The reconciliation between the Company's effective tax rate and the statutory federal income tax rate follows:
1997 1998 1999 --------- --------- --------- Statutory federal income tax rate..................................... 35.0% (35.0)% 35.0% State taxes net of federal benefit.................................... 8.1 (1.7) 4.2 Previously unbenefitted state NOLs and R&D credits.................... (10.1) Foreign operations.................................................... 1.2 (0.1) (2.2) Increase (decrease) in valuation allowance............................ (15.8) 22.2 (86.0) In Process research and development................................... 14.3 Goodwill and other intangibles........................................ 1.3 1.4 Other................................................................. 3.1 (0.3) (0.3) --------- --------- --------- 31.6% 0.7% (58.0)% --------- --------- --------- --------- --------- ---------
The Company has not provided for U.S. federal income and foreign withholding taxes on the earnings of its foreign subsidiary because it is currently anticipated that these earnings will be permanently reinvested. If these earnings are distributed, foreign tax credits will become available under U.S. law to reduce the effect on the Company's overall tax liability. F-18 PRINTRAK INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED MARCH 31, 1997, 1998 AND 1999 10. INCOME TAXES (CONTINUED) Income (loss) before provision for income taxes was comprised of the following for the year ended March 31:
1997 1998 1999 ------------ -------------- ------------ Income (loss) before provision for income taxes: Domestic........................................ $ 5,968,000 $ (15,041,000) $ 7,360,000 Foreign......................................... 805,000 646,000 (204,000) ------------ -------------- ------------ $ 6,773,000 $ (14,395,000) $ 7,156,000 ------------ -------------- ------------ ------------ -------------- ------------
Deferred tax assets consist primarily of the following temporary differences at March 31:
1998 1999 ------------- ------------ Net operating loss carryforwards................................. $ 3,901,000 $ 2,260,000 Intangible asset basis........................................... 1,252,000 824,000 Deferred revenue................................................. 876,000 1,534,000 Reserves......................................................... 3,613,000 2,702,000 Employee benefits................................................ 245,000 426,000 Depreciation..................................................... 537,000 800,000 Other............................................................ (263,000) 481,000 ------------- ------------ Gross deferred assets............................................ 10,161,000 9,027,000 Valuation allowance.............................................. (6,155,000) -0- ------------- ------------ Net deferred tax assets.......................................... $ 4,006,000 $ 9,027,000 ------------- ------------ ------------- ------------
At March 31, 1999, the Company has net operating loss carryforwards of approximately $4,237,000 and $13,653,700, respectively, for federal and California income tax purposes, which begin to expire in 2003. As a result of an equity ownership change in a prior year, the use of certain of the federal and California net operating loss carryforwards is subject to limitations. 11. COMMITMENTS AND CONTINGENCIES COMMITMENTS--The Company is obligated under noncancelable capital and operating leases for its principal operating facility and certain furniture and office equipment. The Company incurred $849,000, $958,000 and $1,118,000 in rent expense during the years ended March 31, 1997, 1998 and 1999, respectively. During each of the years ended March 31, 1997 and 1998, $773,000 of rent expense was to a related party (Note 14). F-19 PRINTRAK INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED MARCH 31, 1997, 1998 AND 1999 11. COMMITMENTS AND CONTINGENCIES (CONTINUED) Future minimum lease commitments at March 31, 1999 under noncancelable leases that have initial or remaining terms in excess of one year are as follows:
CAPITAL OPERATING LEASES LEASES ----------- ------------ Year ending March 31: 2000............................................................. $ 146,000 $ 1,777,000 2001............................................................. 111,000 1,747,000 2002............................................................. 86,000 1,739,000 2003............................................................. 4,000 1,480,000 2004............................................................. 1,290,000 Thereafter....................................................... 1,058,000 ----------- ------------ Total minimum payments required.................................... 347,000 $ 9,091,000 ------------ ------------ Less amount representing interest.................................. (45,000) ----------- Capital lease obligations.......................................... 302,000 Less current portion of capital lease obligations.................. (122,000) ----------- $ 180,000 ----------- -----------
Certain of the Company's customers require the Company to be bonded to ensure performance under certain contracts or to guarantee outstanding bids. At March 31, 1999, the Company had outstanding performance bonds ensuring performance under various contracts which totaled $26,598,193. LITIGATION--From time to time, the Company may be involved in litigation relating to claims arising out of its operations in the normal course of business. As of March 31, 1999, the Company is not a party to any legal proceedings, the adverse outcome of which, in management's opinion, individually or in aggregate, would have a material adverse effect on the Company's results of operations or financial position. 12. COMMON STOCK BENEFIT PLANS EXECUTIVE STOCK OPTION PLAN--The Company adopted the Executive Stock Option Plan (the Executive Plan) in May 1992 which provides for the granting of incentive stock options and nonstatutory options to purchase shares of the Company's common stock and restricted stock grants covering an aggregate of 800,000 shares of the Company's common stock. As of March 31, 1999, there were options outstanding to purchase 646,194 shares under the Executive Plan at a weighted average exercise price of $4.78 per share. 1994 STOCK OPTION PLAN--The Company adopted the 1994 Stock Option Plan (the 1994 Plan) in December 1993. The 1994 Plan provides for the granting of incentive stock options and nonstatutory options to purchase shares of the Company's common stock and restricted stock grants covering an aggregate of 744,000 shares of the Company's common stock. As of March 31, 1999, there were options outstanding to purchase 463,289 shares under the 1994 Plan at a weighted average exercise price of $4.31 per share. F-20 PRINTRAK INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED MARCH 31, 1997, 1998 AND 1999 12. COMMON STOCK BENEFIT PLANS (CONTINUED) 1996 STOCK INCENTIVE PLAN--The Company adopted the 1996 Stock Incentive Plan (the 1996 Plan) in April 1996. The 1996 Plan provides for the granting of incentive stock options and nonstatutory options. The 1996 Plan provides for options to purchase shares of the Company's common stock and restricted stock grants covering an aggregate of 1,500,000 shares of the Company's common stock. As of March 31, 1999, there were options outstanding to purchase 1,007,684 shares under the 1996 Plan at a weighted average exercise price of $5.45 per share. TFP STOCK INCENTIVE PLAN--TFP adopted a stock option plan in August 1994. In conjunction with the acquisition of TFP, the outstanding options were converted into the right to acquire 116,496 shares of common stock of Printrak. As of March 31, 1999, there were options outstanding to purchase 41,552 shares under the Plan at a weighted average exercise price of $2.77 per share. The exercise price of incentive stock options under the above Plans must at least be equal to the fair market value of a share of common stock on the date the option is granted (110% with respect to optionees who own at least 10% of the outstanding common stock). Nonstatutory options shall have an exercise price of not less than 85% of the fair market value of a share of common stock on the date such option is granted (110% with respect to optionees who own at least 10% of the outstanding common stock). The options must expire no later than ten years from the date of grant (five years with respect to optionees who own at least 10% of the outstanding common stock). Vesting is generally 20% at the end of the first year with the remaining vesting over four years on a pro rata basis. As of March 31, 1999, options to purchase 629,000 shares were available for future grant under these Plans. The following is a summary of stock option activity:
NUMBER OF OPTIONS WEIGHTED EXERCISABLE AS NUMBER OF AVERAGE OF FISCAL YEAR SHARES EXERCISE PRICE END ----------- --------------- --------------- BALANCE, March 31, 1996............................................. 1,349,300 5.74 Granted (weighted average fair value of $5.62).................... 260,600 8.45 Exercised......................................................... (151,944) 2.84 Canceled.......................................................... (166,456) 10.21 ----------- BALANCE, March 31, 1997............................................. 1,291,500 6.06 525,000 Granted (weighted average fair value of $9.57).................... 874,800 10.52 Exercised......................................................... (110,704) 3.47 Canceled.......................................................... (189,824) 11.35 ----------- BALANCE, March 31, 1998............................................. 1,865,772 7.72 828,250 Granted (weighted average fair value of $4.95).................... 1,801,800 5.76 Exercised......................................................... (62,914) 3.03 Canceled.......................................................... (1,445,939) 9.68 ----------- BALANCE, March 31, 1999............................................. 2,158,719 5.01 1,003,822 ----------- -----------
F-21 PRINTRAK INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED MARCH 31, 1997, 1998 AND 1999 12. COMMON STOCK BENEFIT PLANS (CONTINUED) Stock options outstanding at March 31, 1999 are summarized as follows:
OPTIONS OUTSTANDING ------------------------------------------------ OPTIONS EXERCISABLE WEIGHTED ------------------------------- NUMBER WEIGHTED AVERAGE AVERAGE NUMBER WEIGHTED RANGE OF OUTSTANDING AT REMAINING EXERCISE EXERCISABLE AT AVERAGE EXERCISE PRICES MARCH 31, 1999 CONTRACTUAL LIFE PRICE MARCH 31, 1999 EXERCISE PRICE - ---------------- -------------- ------------------- ----------- -------------- --------------- $2.46 16,051 8.10 $ 2.46 16,051 $ 2.46 $2.50 447,008 4.00 2.50 436,928 2.50 $2.96-$4.94 174,744 8.15 4.06 84,406 3.55 $5.25 1,046,016 8.43 5.25 288,682 5.25 $5.38-$11.75 474,900 7.85 6.98 177,755 7.07 -------------- -------------- $2.46-$11.75 2,158,719 7.35 $ 4.95 1,003,822 $ 4.19 -------------- -------------- -------------- --------------
On May 26, 1998, the Board of Directors approved a program for the cancellation and regrant of 452,000 options whereby the existing options of six executives ranging from $9.88 to $18.75 would be canceled and regranted at the fair market value of $6.94 per share. On July 13, 1998, the Board of Directors approved a program for the Cancellation and regrant of 654,047 options whereby all other options, held by remaining employees ranging from $6.25 to $12.50 would be canceled and regranted for options priced at the fair market value of $5.25 per share. The vesting period for the repriced shares remained unchanged in both cases. EMPLOYEE STOCK PURCHASE PLAN--The Company adopted the Employee Stock Purchase Plan (the Purchase Plan) in April 1996, covering an aggregate of 100,000 shares of common stock. The number of shares available for purchase was increased to 350,000 during fiscal 1998. Employees are eligible to participate if they are employed by the Company for at least 30 hours per week and if they have been employed by the Company for at least one year. The Purchase Plan permits eligible employees to purchase common stock through payroll deductions, which may not exceed 15% of an employee's compensation or a specified number of shares. The price of stock purchased under the Purchase Plan is equal to 85% of the lower of the fair market value of the common stock at the beginning or end of each six month offer period. The Purchase Plan will terminate on December 31, 2006. Activity under the Purchase Plan is summarized as follows:
WEIGHTED AVERAGE SHARES WEIGHTED AVERAGE FAIR VALUE PER FISCAL YEAR ISSUED PRICE PER SHARE SHARE - ----------- ----------- ----------------- ------------------- 1997 79,564 $ 6.80 $ 8.50 1998 83,297 $ 7.21 $ 11.62 1999 73,926 $ 5.10 $ 6.41
At March 31, 1999, 113,213 shares were reserved for future issuances under the Purchase Plan. ADDITIONAL INFORMATION (SFAS NO. 123) As discussed in Note 1, the Company continues to account for its stock-based awards using the intrinsic value method in accordance with APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, F-22 PRINTRAK INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED MARCH 31, 1997, 1998 AND 1999 12. COMMON STOCK BENEFIT PLANS (CONTINUED) and its related interpretations. No compensation expense has been recognized in the financial statements for employee stock arrangements, as all grants have been at exercise prices equal to or greater than the market value of the underlying shares at the date of grant. SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, requires the disclosure of pro forma net income and earnings per share had the Company adopted the fair value method as of the beginning of fiscal 1996. Under SFAS No. 123, the fair value of stock-based awards to employees is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The Company's calculations were made using the Black-Scholes option pricing model with the following weighted average assumptions: expected life, approximately two years following vesting; stock volatility, 78% in 1997, 63% in 1998 and 80% in 1999; risk free interest rates, 6.0% in 1997, 6.0% in 1998 and 5.4% in 1999 and no dividends during the expected term. The Company's calculations are based on a single option approach and forfeitures are recognized as they occur. Had compensation cost been determined under all of the Company's plans using the provisions of SFAS No. 123, the Company's net income (loss) and income (loss) per share would have been reduced to the pro forma amounts indicated below:
1997 1998 1999 ------------ -------------- ------------- Net income (loss): As reported $ 4,632,000 $ (14,490,000) $ 11,308,000 Pro forma $ 3,922,000 $ (16,541,000) $ 7,938,000 Income (loss) per share: Basic: As reported $ 0.44 $ (1.30) $ 1.00 Pro forma $ 0.38 $ (1.48) $ .70 Diluted: As reported $ 0.42 $ (1.30) $ .96 Pro forma $ 0.36 $ (1.48) $ .67
13. EMPLOYEE BENEFIT PLANS The Company's 401(k) Savings Plan (the Savings Plan) covers domestic full-time employees with 90 days of consecutive service. In May 1997, the Board approved a resolution to match employee contributions. Employee deferrals during fiscal year 1998 were eligible for a matching contribution equal to fifty percent (50%) of the employee's salary deferral, not to exceed 4% of the employee's annual salary. Matching contributions vest over a period of four years of service. The aggregate expense related to the contributions was $270,000 and $329,000 in 1998 and 1999, respectively. Effective April 1, 1993, the Company adopted a Profit Sharing Plan (the Plan) that covered all domestic full-time employees with 90 days of consecutive service. Under the Plan, each eligible employee received a bonus, determined under a formula set forth in the Plan, based on the Company's earnings. Bonuses incurred under the Plan totaled approximately $747,000 for the year ended March 31, 1997. The Plan was terminated as of December 31, 1996. F-23 PRINTRAK INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED MARCH 31, 1997, 1998 AND 1999 14. RELATED-PARTY TRANSACTIONS On May 14, 1998, RICOL, LLC, a California limited liability company (RICOL), which is controlled by Richard M. Giles, the Company's Chairman, President, Chief Executive Officer and Acting Chief Financial Officer, sold the principal operating facility (the Property) utilized by the Company. Upon the sale of the building, RICOL repaid a note plus interest in the aggregate amount of $558,000 to the Company associated with the original sale of the building from the Company to RICOL on May 13, 1995. During fiscal year 1997, the Company received $730,000 of principal payments on the note receivable from RICOL. In connection with the sale of the property, the Company entered into a lease for the Property with the unrelated third party for a term of six years, expiring April 30, 2004 with rent of $58,087 per month, subject to adjustments. From time to time, the Company has made loans to Mr. Giles, which have been evidenced by promissory notes. On April 14, 1999 the Company extended a loan for $600,000 to Mr. Giles which is collateralized by 200,000 shares of the Company's common stock owned by the Giles Trust, bears interest at 5.5% per annum, and matures April 14, 2001. In February 1996, the Company loaned an executive of the Company the sum of $300,000 to enable him to exercise 120,000 vested options to purchase shares of the Company's common stock and $10,000 to pay certain tax obligations. The loan was collateralized by the related shares, bears interest at 5.5% per annum, and principal and interest was due as of March 1, 1998. The loan was extended during the current year and is now due on March 1, 2000. Due to its nature, the loan has been classified as a reduction of stockholders' equity in the accompanying consolidated financial statements. 15. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's balance sheets include the following financial instruments: cash and cash equivalents, trade accounts receivable, notes receivable from related parties, accounts payable, accrued liabilities and debt. The Company considers the carrying amounts in the financial statements of all financial instruments to approximate their fair value because of the relatively short period of time between origination of the instruments and their expected realization or the fact that such instruments have interest rates which approximate current market rates. 16. RESTRUCTURING CHARGES In fiscal 1998, the Company announced a formal plan for restructuring both its SunRise and TFP subsidiaries to realize cost savings and capitalize on synergies by consolidating the subsidiaries into the Company's Anaheim operations. The restructuring charges of $987,000 include lease termination and facility closure costs, losses on the disposition of fixed assets and severance costs for terminated employees. As a result of the restructuring, the Company also incurred inventory write-offs, the value of which was impacted by the Company's decision to relocate and outsource manufacturing operations, personnel relocation costs, and other integration costs. These additional costs amounted to approximately $2,191,000 and are included in cost of sales ($882,000), research, development and engineering ($249,000), and selling general and administrative expenses ($1,060,000) in the accompanying consolidated statements of operations. The restructuring was completed during fiscal 1999, and the remaining accrual relates to future minimum lease obligations, which run through 2002. F-24 PRINTRAK INTERNATIONAL INC. SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS BALANCE AT -------------------------- BEGINNING OF CHARGED TO FROM BALANCE AT DESCRIPTION PERIOD EXPENSES ACQUISITIONS DEDUCTIONS END OF PERIOD - ----------------------------------------- ------------ ------------ ------------ ------------- ------------- Year ended March 31, 1997: Allowance for doubtful accounts receivable............................. $ 327,000 $ 47,000 $ (81,000) $ 293,000 Allowance for excess and obsolete inventories............................ 584,000 603,000 (740,000) 447,000 ------------ ------------ ------------- ------------- Total.................................... $ 911,000 $ 650,000 $ (821,000) $ 740,000 ------------ ------------ ------------- ------------- ------------ ------------ ------------- ------------- Year ended March 31, 1998: Allowance for doubtful accounts receivable............................. $ 93,000 $ 1,051,000 $ 420,000 $ (412,000) $ 1,352,000 Allowance for excess and obsolete inventories............................ 447,000 995,000 743,000 (778,000) 1,407,000 ------------ ------------ ------------ ------------- ------------- Total.................................... $ 740,000 $ 2,046,000 $ 1,163,000 $ (1,190,000) $ 2,759,000 ------------ ------------ ------------ ------------- ------------- ------------ ------------ ------------ ------------- ------------- Year ended March 31, 1999: Allowance for doubtful accounts receivable............................. $ 1,352,000 $ 1,020,000 $ $ (1,745,000) $ 627,000 Allowance for excess and obsolete inventories............................ 1,407,000 (860,000) 547,000 ------------ ------------ ------------ ------------- ------------- Total.................................... $ 2,759,000 $ 1,020,000 $ $ 2,605,000 $ 1,174,000 ------------ ------------ ------------ ------------- ------------- ------------ ------------ ------------ ------------- -------------
F-25 EX-10.11 2 EXHIBIT 10.11 EXHIBIT 10.11 SECURED PROMISSORY NOTE $600,000 APRIL 14, 1999 ANAHEIM, CALIFORNIA FOR VALUE RECEIVED, receipt of which is hereby acknowledged, the undersigned Richard M. Giles, Trustee of the Giles Living Trust UDT dated December 17, 1993 (the "Borrower") promises to pay to the order of Printrak International Inc., a Delaware corporation (the "Company"), in lawful money of the United States of America, the principal sum of Six Hundred Thousand Dollars ($600,000). 1. PRINCIPAL AND INTEREST. The principal balance of the Note together with interest accrued and unpaid to date shall be due and payable on or before April 14, 2001. 2. RATE OF INTEREST. Interest shall accrue under the Note on any unpaid principal balance at a rate per annum equal to the lesser of 5.5% or the maximum rate permitted by law, and shall be paid on or before the maturity of this Note. 3. APPLICATION PAYMENTS. Each payment shall be credited first to accrued but unpaid interest and the balance to principal. Prepayment of principal and interest may be made at any time without penalty. 4. EVENTS OF ACCELERATION. The entire unpaid principal and unpaid interest of the Note shall become immediately due and payable upon one or more of the following events: (a) the default in any payment due under this Note, and the failure to cure such default within ten days of written notice of such default; (b) the insolvency of Richard M. Giles or the Borrower, the execution by Richard M. Giles or the Borrower of a general assignment for the benefit of creditors, the filing by or against Richard M. Giles or the Borrower of a petition in bankruptcy or a petition for relief under the provisions of the federal bankruptcy act of another state or federal law for the relief of debtors and the continuation of such petition without dismissal for a period of ninety (90) days or more; (c) the occurrence of a material event of default under the Stock Pledge Agreement securing this Note; (d) the termination of Richard M. Giles' employment with the Company; or (e) the liquidation of the Borrower; or (f) the sale of any shares of Common Stock of the Company which are pledged as security pursuant to the Stock Pledge Agreement dated concurrently herewith. 5. SECURITY. Payment of this Note shall be secured by 200,000 shares of the Company's Common Stock pursuant to a Stock Pledge Agreement dated concurrently herewith. In addition, Richard M. Giles agrees to unconditionally and personally guarantee the obligations of the Borrower under this Note. Anything herein to the contrary notwithstanding, in the event of any default in payment or principal or interest under this Note, the Company agrees to pursue to the fullest extent possible its rights and remedies to foreclose upon and dispose of the shares of Common Stock pledged as collateral under the Stock Pledge Agreement prior to pursuing any right or remedy as to the personal liability or other assets of the Borrower and Richard M. Giles. 6. COLLECTION. If action is instituted to collect this Note, the Borrower and Richard M. Giles promises to pay all reasonable costs and expenses (including reasonable attorneys fees) incurred in connection with such action. 7. WAIVER. No previous waiver and no failure or delay by the Company or in acting with respect to the terms of this Note or the Stock Pledge Agreement shall constitute a waiver of any breach, default, or failure or condition under this Note, the Stock Pledge Agreement, or any of the obligations secured thereby must be made in writing and shall be limited to the express terms of such waiver. The Borrower and Richard M. Giles hereby expressly waives presentment and demand for payment at such time as any payments are due under this Note. 8. CONFLICTING AGREEMENTS. In the event of any inconsistencies between the terms of this Note and the terms of any other document related to the loan evidenced by the Note, the terms of this Note shall prevail. 9. GOVERNING LAW. This Note shall be construed in accordance with the law of the State of California. /s/ Richard M. Giles -------------------------------------------------- Richard M. Giles, Trustee of the Giles Living Trust UDT dated December 17, 1993 /s/ Richard M. Giles --------------------------------------------------- Richard M. Giles, Guarantor EX-10.12 3 EXHIBIT 10.12 EXHIBIT 10.12 STOCK PLEDGE AGREEMENT THIS STOCK PLEDGE AGREEMENT (the "Agreement") is entered into this 14th of April 1999 by and between Printrak International Inc., a Delaware corporation (the "Company") and Richard M. Giles, Trustee of the Giles Living Trust UDT dated December 17, 1993 (the "Stockholder"). RECITALS A. Concurrently with the execution and delivery of this Agreement, the Stockholder has executed and delivered a Secured Promissory Note in the original principal amount of Six Hundred Thousand Dollars ($600,000.00) (the "Note"). B. The Company and the Stockholder desire to secure performance of Stockholder's obligations and indebtedness under the Note. AGREEMENT NOW THEREFORE, in consideration of the premises and the mutual agreements, covenants and conditions and releases contained herein, the Company and the Stockholder hereby agree as follows: 1. COLLATERAL. The Stockholder hereby grants the Company a security interest in, and assigns, transfers to and pledges the Company the following securities and other property: (i) the 200,000 shares of Company's common stock ("Common Stock") deposited with the Company as collateral for the Note; (ii) any and all new, additional or different securities or other property subsequently distributed with respect to the shares identified in Subsection (i) that are to be deposited with the Company pursuant to the requirements of Section 4 of this Agreement; and (iii) any and all other property and money that is delivered to or comes into the possession of the Company pursuant to the terms and provisions of this Agreement. All securities, property and money so assigned, transferred to and pledged with the Company shall be herein referred to as the "Collateral" and shall be accompanied by one or more stock power assignments properly endorsed by the Stockholder. The Company shall hold the Collateral in accordance with the following terms and provision contained herein. 2. WARRANTIES. The Stockholder hereby warrants that the Stockholder is the owner of the Collateral and has the right to pledge the Collateral and that the Collateral is free from all liens, adverse claims and other security interests (other than those created hereby). 3. RIGHTS AND POWERS. The Company may without obligation to do so, exercise one or more of the following rights and powers with respect to the Collateral: (a) accept in its discretion, but subject to the applicable limitations of Sections 7(c) and 7(e), other property of the Stockholder in exchange for all or part of the Collateral and release Collateral to the Stockholder to the extent necessary to effect such exchange, and in such event the money, property or securities received in the exchanges shall be held by the Company as substitute security for the Note and all other indebtedness secured hereunder, and (b) transfer record ownership of the Collateral to the Company or its nominee and receive, endorse and give receipt for, or collect by legal proceedings or otherwise, dividends or other distributions made or paid with respect to the Collateral, provided and only if there exists at the time an outstanding event of default under Section 8 of this Agreement. The Company will notify the Stockholder of any action taken by the Company pursuant to the provisions of this Section 3. Expenses reasonably incurred in connection with such action shall by payable by the Stockholder and form part of the indebtedness secured hereunder as provided in Section 10. So long as there exists no event of default under Section 8 of this Agreement, the Stockholder may exercise all voting rights and be entitled to receive any and all regular cash dividends paid on the Collateral. Accordingly, until such time as an event of default occults under this Agreement, all proxy statements and other Stockholder materials pertaining to the Collateral shall be delivered to the Stockholder. Any cash sums that the Company may receive in the exercise of its rights and powers under Section 3(b) above shall be applied to the payment of the Note and other indebtedness secured hereunder, in such order of application as the Company deems appropriate. Any remaining cash shall be paid over to the Stockholder. 4. DUTY TO DELIVER. Any new, additional or different securities that may now or hereafter become distributable with respect to the Collateral by reason of (i) any stock divided, stock split or reclassification of the Common Stock of the Company, or (ii) any merger, consolidation or other reorganization affecting the capital structure of the Company, shall, upon receipt by the Stockholder, be promptly delivered to and deposited with the Company as part of the Collateral hereunder. Such securities shall be accompanied by one or more properly endorsed stock power assignments. 5. CARE OF COLLATERAL. The Company shall exercise reasonable care in the custody and preservation of the Collateral, but shall have no obligation to initiate any action with respect to any conversion, call, exchange right, preemptive, subscription right, purchase offer or other right or privilege relating to or affecting the Collateral. The Company shall have no duty to reserve the rights of the Stockholder against adverse claims or to protect the Collateral against the possibility of a decline in market value. The Company shall not be obligated to take any action with respects to the Collateral requested by the Stockholder unless the request is made in writing and the Company determines that there requested action will not unreasonably jeopardize the value of the Collateral as security for the Note and other indebtedness secured hereunder. The Company may at any time release and deliver all or part of the Collateral to the Stockholder, and the receipt thereof by the Stockholder shall constitute a complete and full -2- acquittance for the Collateral so released and delivered. The Company shall accordingly be discharged from any further liability or responsibility for the Collateral, and the released Collateral shall no longer be subject to the provisions of this Agreement. However, any and all release of the Collateral shall be effected in compliance with the applicable limitations of Sections 7(c) and 7(e). 6. PAYMENT OF TAXES AND OTHER CHANGES. The Stockholder shall pay, prior to the delinquency date, all taxes, liens, assessments and other charges against the Collateral, and in the event of the Stockholder's failure to do so, the Company may at is election pay any or all of such taxes and charges without contesting the validity or legality thereof. The payment so made shall become a part of the indebtedness secured hereunder and until paid shall bear interest at the Company's interest rate then being earned by the Company on its deposits. 7. RELEASE OF COLLATERAL. Provided (i) all indebtedness secured hereunder (other than payments not yet due and payable under the Note) shall at the time have been paid in full or cancelled, (ii) there does not otherwise exist any event of default under Section 8, the pledge shares of Common Stock together with any additional Collateral that may hereafter be pledged and deposited hereunder, shall be released from pledge and returned to the Stockholder in accordance with the following provisions: (a) Upon payment or prepayment of principal under the Note, together with payment of all accrued interest to date, one or more shares of the Common Stock held as Collateral hereunder shall (subject to the applicable limitations of Sections 7(c) and 7(e) below) be released to the Stockholder within three days after such payment or prepayment. The number of the shares to be released shall be equal to the number obtained by multiplying (i) the total number of shares of Common Stock held under this Agreement at the time of the payment or prepayment, by (ii) a fraction the numerator of which shall be the amount of the principal paid or prepaid and the denominator of which shall be the unpaid principal balance of the Note immediately prior to such payment or prepayment. In no event, however, shall any fractional shares be released. (b) Any additional Collateral that may hereafter be pledged and deposited with the Company (pursuant to the requirements of Section 4) with respect to the shares of Common Stock pledged hereunder shall be released at the same time the particular shares of Common Stock to which the additional Collateral relates are to be released in accordance with the applicable provisions of Section 7(a). Under no circumstances, however, shall any shares of Common Stock or any other Collateral be released if previously applied to the payment of any indebtedness secured hereunder. (c) In no event, however, shall any shares of Common Stock be released pursuant to the provisions of Section 7(a) or 7(b) if, and to the extent, the fair market value of the Common Stock and all other Collateral that would otherwise remain in pledge hereunder after such release were effected would be less than one hundred fifty percent (150%) of the unpaid balance of the Note (principal and accrued interest). (d) For all valuation purposes under this Agreement, the fair market value per share of Common Stock on any relevant date shall be determined in accordance with the following provisions: -3- (i) If the Common Stock is not at the time listed or admitted to trading on any stock exchange but is traded in the over-the-counter market, the fair market value shall be the average of the highest bid and lowest asked prices (or, if such information is available, the closing selling price) per share of Common Stock on the date in question in the over-the-counter market, as such prices are reported by the National Association of Securities Dealers on the NASDAQ National Market or any successor system. If there are no reported bid and asked prices (or closing selling price) for the Common Stock on the date in question, then the average of the highest bid price and lowest asked price (or the closing selling price) on the last preceding date for which such quotations exist shall be determinative of fair market value. (ii) If the Common Stock at the time listed or admitted to trading on any stock exchange, than the fair market value shall be the closing selling price per share of Common Stock on the date in question on the stock exchange serving as the primary market for the Common Stock, as such price is officially quoted on the composite tape of transactions on such exchange. If there is no reported sale of Common Stock on such exchange on the date in question, then the fair market value shall be the closing selling price on the exchange on the last preceding date for which such quotation exists. (iii) If the Common Stock at the time is neither listed nor admitted to trading on any stock exchange nor traded in the over-the-counter market, then the fair market value shall be the most current value per share determined in good faith by the Company's Board of Directors. (e) In the event the securities constituting the Collateral are "margin securities" (within the meaning of Section 207.0(i) of Regulation G of the Federal Reserve Board), then, to the extent applicable, the number of shares to be released pursuant to Section 7(a) or 7(b) shall be reduced to the extent necessary to comply with Regulation G. 8. EVENTS OF DEFAULT. The occurrence of one or more of the following events shall constitute an event of default under this Agreement: (a) the failure of the Stockholder to pay the principal and accrued interest when due under the Note; or (b) the failure of the Stockholder to perform a material obligation imposed upon the Stockholder by reason of this Agreement and the failure to cure such default within fifteen days or written notice of the Company to the Stockholder. Upon the occurrence of any event of default, the Company may, at its election, declare the Note and all other indebtedness secured hereunder to become immediately due and payable and may exercise any or all of the rights and remedies granted to a secured party under the provisions of the California Uniform Commercial Code (as on or hereafter in effect), including (without limitation) the power to dispose of the Collateral by public or private sale or to accept the Collateral in full payment of the Note and all other indebtedness secured hereunder. Anything herein to the contrary notwithstanding, the Company agrees to pursue its rights to foreclose and dispose of the Collateral pursuant to the applicable provisions of the California Uniform Commercial Code prior to seeking recourse against the Stockholder, or any other assets of the Stockholder -4- Any proceeds realized from the disposition of the Collateral pursuant to the foregoing power of sale shall be applied first to the payment of reasonable expenses incurred by the Company in connection with the disposition, then to the payment of the Note and finally to any other indebtedness secured hereunder. Any surplus proceeds shall be paid over to the Stockholder. However, in the event such proceeds prove insufficient to satisfy all obligations of the Stockholder under the Note, then the Stockholder shall remain personally liable for the resulting deficiency. 9. OTHER REMEDIES. The rights, powers and remedies granted to the Company and the Stockholder pursuant to the provisions of this Agreement shall be in addition to all rights, powers and remedies granted to the Company and the Stockholder under any statute or rule of law. Any forbearance, failure or delay by the Company or the Stockholder in exercise any right, power or remedy under this Agreement shall not be deemed to be a waiver of such right, power or remedy. Any single or partial exercise of any right, power or remedy under this Agreement shall not preclude the further exercise thereof, and every right, power and remedy of the Company and the Stockholder under this Agreement shall continue in full force and effect unless such right power or remedy is specifically waived by an instrument executed by the Company or the Stockholder, as the case may be. 10. COSTS AND EXPENSES. All reasonable costs and expenses (including reasonable attorneys' fees) incurred by the Company in the exercise or enforcement of any right, power or remedy granted it under this Agreement shall become part of the indebtedness secured hereunder and shall constitute an personal liability of the Stockholder payable immediately upon demand. 11. APPLICABLE LAW. This Agreement shall be governed by and construed in accordance with the laws of the state of California and shall be binding upon the executors, administrators, heirs and assigns of the Stockholder. 12. ARBITRATION. Any controversy between the parties hereto involving the construction or application of any terms, covenants or conditions of this Agreement or the Note, of any claims arising out of or relating to this Agreement or the Note, or the breach hereof or thereof, will be submitted to and settled by final and binding arbitration in Orange County, California, in accordance with the rules of the American Arbitration Association then in effect, and judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. In the event of arbitration under this Agreement or the Note, the prevailing party shall be entitled to recover from the losing party reasonable expenses, attorneys' fees, and costs incurred therein or in the enforcement or collection of any judgment or award rendered therein. The "prevailing party" means the party determined by the arbitrator to have most nearly prevailed, even if such party did not prevail in all matters, necessarily the one in whose favor a judgment is rendered. 13. SEVERABILITY. If any provision of this Agreement is held to be invalid under applicable law, then such provision shall be ineffective only to the extent of such invalidity, and neither the remainder of such provision or this Agreement shall be affected thereby. -5- IN WITNESS WHEREOF, the undersigned have duly executed this Stock Pledge Agreement as of the date first written above. PRINTRAK INTERNATIONAL INC. By: /s/ David L. McNeff --------------------------------------------- Its: /s/ John Hardy -------------------------------------------- /s/ Richard M. Giles ------------------------------------------------- Richard Giles, Trustee of the Giles Living Trust UDT dated December 17, 1993 -6- EX-10.20 4 EXHIBIT 10.20 EXHIBIT 10.20 [UNION BANK OF CALIFORNIA LETTERHEAD] November 5, 1998 Ms. Susanna Bennett Vice President Finance and Corporate Secretary Printrak International, Inc. 1250 North Tustin Avenue Anaheim, CA 92807 Re: First Amendment ("Amendment") to the Amended and Restated Agreement dated July 31, 1998 (this Amendment, and the Amended and Restated Loan Agreement together called the "Agreement") Dear Susanna: In reference to the Agreement between Union Bank of California, N.A. ("Bank") and Printrak International Inc. ("Borrower"), the Bank and Borrower desire to amend the Agreement. Capitalized terms used herein which are not otherwise defined shall have the meaning given them in the Agreement. AMENDMENTS TO THE AGREEMENT: (a) Section 1.1.1, line 5 of the Agreement is hereby amended by substituting the date "January 4, 2000" for the date "August 2, 1999." (b) Section 1.1.1.1, line 10 of the Agreement is hereby amended by substitution the date "January 4, 2000" for the date "August 2, 1999." Except as specifically amended hereby, the Agreement shall remain in full force and effect and is hereby ratified and confirmed. This Amendment shall not be a waiver of any existing or future default or breach of a condition or covenant unless specified herein. This Amendment shall become effective when the Bank shall have received the acknowledgment copy of this Amendment executed by the Borrower and the following executed documents plus an amendment fee of Seven Thousand Five Hundred Dollars ($7,500.00), all of which must be received before November 6, 1998. Very truly yours, UNION BANK OF CALIFORNIA, N.A. By: /s/ Stephen Dunne --------------------------- Title: Vice President/SCE --------------------------- By: /s/ Burt Yano --------------------------- Title: Senior Vice President --------------------------- Agreed and Accepted to this 5th day of November, 1998. PRINTRAK INTERNATIONAL, INC. By: /s/ Susanna Bennett --------------------------- Title: Vice President Finance and Corporate Secretary --------------------------- EX-10.22 5 EXHIBIT 10.22 EXHIBIT 10.22 UNION BANK OF CALIFORNIA PROMISSORY NOTE (BASE RATE) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Borrower Name PRINTRAK INTERNATIONAL INC. - ------------------------------------------------------------------------------- Borrower Address Office 45061 Loan Number 7144705187 0081-00-0-000 1250 NORTH TUSTIN AVE. --------------------------------------------------- ANAHEIM, CA 92807 Maturity Date January 4, 2000 Amount $15,000,000.00 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- $15,000,000.00 Date NOVEMBER 2, 1998 - -------------- ----------------------- FOR VALUE RECEIVED, on JANUARY 4, 2000, the undersigned ("Debtor") promises to pay to the order of UNION BANK OF CALIFORNIA, N.A. ("Bank"), as indicated below, the principal sum of FIFTEEN MILLION AND NO/100 Dollars ($15,000,000.00), or so much thereof as is disbursed, together with interest on the balance of such principal from time to time outstanding, at the per annum rate or rates at the times set forth below. 1. INTEREST PAYMENTS. Debtors shall pay interest on the 2ND day of each MONTH (commencing DECEMBER 2, 1998). Should interest not be paid when due, it shall become part of the principal and bear interest as herein provided. All computations of interest under this note shall be made on the basis of a year of 360 days, for actual days elapsed. a. BASE INTEREST RATE. At Debtor's option, amounts outstanding hereunder in minimum amounts of at least $500,000.00 shall bear interest at a rate which is equal to Bank's LIBOR Rate for the Interest Period selected by Debtor, plus the Applicable Margin. No Base Interest Rate may be changed, altered or otherwise modified until the expiration of the Interest Period selected by Debtor. The exercise of interest rate options by Debtor shall be as recorded in Bank's records, which records shall be prima facie evidence of the amount borrowed under either interest option and the interest rate; provided, however, that failure of Bank to make any such notation in its records shall not discharge Debtor from its obligations to repay in full with interest all amounts borrowed. In no event shall any Interest Period extend beyond the maturity date of this note. To exercise this option, Debtor may, from time to time with respect to principal outstanding on which a Base Interest Rate is not accruing, and on the expiration of any Interest Period with respect to principal outstanding on which a Base Interest Rate has been accruing, select an index offered by Bank for a Base Interest Rate Loan and an Interest Period by telephoning an authorized lending officer of Bank located at the banking office identified below prior to 10:00 a.m., Pacific time, on any Business Day and advising that officer of the selected index, the Interest Period and the Origination Date selected (which Origination Date, for a Base Interest Rate Loan based on the LIBOR-Rate, shall follow the date of such selection by no more than two (2) Business Days). Bank will mail a written confirmation of the terms of the selection to Debtor promptly after the selection is made. Failure to send such confirmation shall not effect Bank's rights to collect interest at the rate selected. If, on the date of the selection, the index selected is unavailable for any reason, the selection shall be void. Bank reserves the right to fund the principal from any source of funds notwithstanding any Base Interest Rate selected by Debtor. b. VARIABLE INTEREST RATE. All principal outstanding hereunder which is not bearing interest at a Base Interest Rate shall bear interest at a rate per annum equal to the Reference Rate plus the Applicable Margin, which rate shall vary as and when the Reference Rate or the Applicable Margin, as the case may be, changes. At any time prior to the maturity of this note, subject to the provisions of paragraph 4, below, of this note, Debtor may borrow, repay and reborrow hereon so long as the total outstanding at any one time does not exceed the principal amount of this note. Debtor shall pay all amounts due under this note in lawful money of the United States at Bank's ORANGE COUNTY COMMERCIAL BANKING Office, or such other office as may be designated by Bank, from time to time. PN-REV(LIBOR-RR) -1- 1/30/98 2. LATE PAYMENTS. If any payments required by the terms of this note shall remain unpaid ten days after same is due, at the option of Bank, Debtor shall pay a fee of $100 to Bank. 3. INTEREST RATE FOLLOWING DEFAULT. In the event of default, at the option of Bank, and, to the extent permitted by law, interest shall be payable on the outstanding principal under this note at a per annum rate equal to five percent (5%) in excess of the interest rate specified in paragraph 1.b, above, calculated from the date of default until all amounts payable under this note are paid in full. 4. PREPAYMENT. a. Amounts outstanding under this note bearing interest at a rate based on the Reference Rate may be prepaid in whole or in part at any time, without penalty or premium. Debtor may prepay amounts outstanding under this note bearing interest at a Base Interest Rate in whole or in part provided Debtor has given Bank not less than five (5) Business Days prior written notice of Debtor's intention to make such prepayment and pays to Bank the liquidated damages due as a result. Liquidated Damages shall also be paid, if Bank, for any other reason, including acceleration or foreclosure, receives all or any portion of principal bearing interest at a Base Interest Rate prior to its scheduled payment date. Liquidated Damages shall be an amount equal to the present value of the product of: (i) the difference (but not less than zero) between (a) the Base Interest Rate applicable to the principal amount which is being prepaid, and (b) the return which Bank could obtain if it used the amount of such prepayment of principal to purchase at bid price regularly quoted securities issued by the United States having a maturity date most closely coinciding with the relevant Base Rate Maturity Date and such securities were held by Bank until the relevant Base Rate Maturity Date ("Yield Rate"); (ii) a fraction, the numerator of which is the number of days in the period between the date of prepayment and the relevant Base Rate Maturity Date and the denominator of which is 360; and (iii) the amount of the principal so prepaid (except in the event that principal payments are required and have been made as scheduled under the terms of the Base Interest Rate Loan being prepaid, then an amount equal to the lesser of (A) the amount prepaid or (B) 50% of the sum of (1) the amount prepaid and (2) the amount of principal scheduled under the terms of the Base Interest Rate Loan being prepaid to be outstanding at the relevant Base Rate Maturity Date). Present value under this note is determined by discounting the above product to present value using the Yield Rate as the annual discount factor. b. In no event shall Bank be obligated to make any payment or refund to Debtor, nor shall Debtor be entitled to any setoff or other claim against Bank, should the return which Bank could obtain under this prepayment formula exceed the interest that Bank would have received if no prepayment had occurred. All prepayments shall include payment of accrued interest on the principal amount so prepaid and shall be applied to payment of interest before application to principal. A determination by Bank as to the prepayment fee amount, if any, shall be conclusive. c. Bank shall provide Debtor a statement of the amount payable on account of prepayment. Debtor acknowledges that (i) Bank establishes a Base Interest Rate upon the understanding that it apply to the Base Interest Loan for the entire Interest Period, and (ii) any prepayment may result in Bank incurring additional costs, expenses or liabilities; and Debtor agrees to pay these liquidated damages as a reasonable estimate of the costs, expenses and liabilities of Bank associated with such prepayment. 5. DEFAULT AND ACCELERATION OF TIME FOR PAYMENT. Default shall include, but not be limited to, any of the following: (a) the failure of Debtor to make any payment required under this note when due; (b) any breach, misrepresentation or other default by Debtor, any guarantor, co-maker, endorser, or any person or entity other than Debtor providing security for this note (hereinafter individually and collectively referred to as the "Obligor") under any security agreement, guaranty or other agreement between Bank and any Obligor; (c) the insolvency of any Obligor or the failure of any Obligor generally to pay such Obligor's debts as such debts become due; (d) the commencement as to any Obligor of any voluntary or involuntary proceeding under any laws relating to bankruptcy, insolvency, reorganization, arrangement, debt adjustment or debtor relief; (e) the assignment by any Obligor for the benefit of such Obligor's creditors; (f) the appointment, or commencement of any proceeding for the appointment of a receiver, trustee, custodian or similar official for all or substantially all of any Obligor's property; (g) the commencement of any proceeding for the dissolution or liquidation of any Obligor; (h) the termination of existence or death of any Obligor; (i) the revocation of any guaranty or subordination agreement given in connection with this note; (j) the failure of any Obligor to comply with any order, judgement, injunction, decree, writ or demand of any court or other public authority; (k) the filing or recording against any Obligor, or the property of any Obligor, of any notice of levy, notice to withhold, or other legal process for taxes other than property taxes; (l) the default by any Obligor personally liable for amounts owed hereunder on any obligation concerning the borrowing of money; (m) the issuance against any Obligor, or the property of any Obligor, of any writ of attachment, execution, or other judicial lien; or (n) the deterioration of the financial condition of any Obligor which results in Bank deeming itself, in good faith, insecure. Upon the occurrence of any such default, Bank, in its discretion, may cease to advance funds hereunder and may declare all obligations under this note immediately due and payable; however, upon the occurrence of an event of default under d, e, f, or g, all principal and interest shall automatically become immediately due and payable. 6. ADDITIONAL AGREEMENTS OF DEBTOR. If any amounts owing under this note are not paid when due, Debtor promises to pay all costs and expenses, including reasonable attorneys' fees, incurred by Bank in the collection or enforcement of this note. Debtor and any endorsers of this note, for the maximum period of time and the full extent permitted by law, (a) waive diligence, presentment, demand, notice of nonpayment, protest, notice of protest, and notice of every kind; (b) waive the right to assert the defense of any statute of limitations to any debt or obligation hereunder; and (c) consent to renewals and extensions of time for the payment of any amounts due under this note. If this note is signed by more than one party, the term "Debtor" includes each of the undersigned and any successors in interest thereof; all of whose liability shall be joint and several. Any married persons who signs this note agrees that recourse may be had against the separate property of that person for any obligations hereunder. The receipt of any check or other item of payment by Bank, at its option, shall not be considered a payment on account until such check or other item of payment is honored when presented for payment at the drawee bank. Bank may delay the credit of such payment based upon Bank's schedule of funds availability, and interest under this note shall accrue until the funds are deemed collected. In any action brought under or arising out of this note, Debtor and any Obligor, including their successors and assigns, hereby consent to the jurisdiction of any competent court within the State of PN-REV(LIBOR-RR) -2- 1/30/98 California, as provided in any alternative dispute resolution agreement executed between Debtor and Bank, and consent to service of process by any means authorized by said state's law. The term "Bank" includes, without limitation, any holder of this note. This note shall be construed in accordance with and governed by the laws of the State of California. This note hereby incorporates any alternative dispute resolution agreement previously, concurrently or hereafter executed between Debtor and Bank. 7. DEFINITIONS. As used herein, the following terms shall have the meanings respectively set forth below: "Agreement" means that certain Amended and Restated Loan Agreement, of even date herewith, by and between Debtor and Bank, as at any time amended, supplanted or otherwise modified or restated. "Applicable Margin" means (1) in the case of a Base Interest Rate Loan, a per annum rate equal to (a) 2.75%, if the ratio of Debtor's total liabilities to Tangible Net Worth (as such term is defined in the Agreement) (the "Leverage Ratio") as at the end of the most recent calendar month in respect of which Debtor has furnished a financial statement to Bank as required by the Agreement (the "Reported Period") is equal to or greater than 2.25:1.00, (b) 2.50%, if the Leverage Ratio as at the end of the most recent Reported Period is less than 2.25:1.00 but equal to or greater than 2.00:1.00, (c) 2.25%, if the Leverage Ratio as at the end of the most recent Reported Period is less than 2.00:1.00 but equal to or greater than 1.75:1.00; (d) 2.00% if the Leverage Ratio as at the end of the most recent Reported Period is less than 1.75:1.00 but equal to or greater than 1.50:1.00, and (e) 1.75%, if the Leverage Ratio as at the end of the most recent Reported Period is less than 1.50:1.00; and (2) in the case of principal amounts outstanding hereunder that are bearing interest at a rate based upon the Reference Rate, a per annum rate equal to (a) 0.25%, if the Leverage Ratio as at the end of of the most recent Reported Period is less than 2.25:1.00, and (b) 0.00%, if the Leverage Ratio as at the end of the most recent Reported Period is less than 2.25:1.00. A change in the Applicable Margin resulting from a change in the Leverage Ratio shall become effective on the first day of the calendar month following the Reported Period in respect of which a financial statement furnished by Debtor to Bank pursuant to the Agreement reflects a change in the Leverage Ratio which requires a change in the Applicable Margin as provided for herein. For the purpose of determining the Applicable Margin, if a default under this note or an Event of Default (as such term is defined in the Agreement) has occurred and is continuing (including without limitation a default or an Event of Default resulting from the failure of Debtor to furnish any financial statement to Bank as required by the Agreement), then without waiving any right or remedy that Bank may have under the Agreement as a result of such default or Event of Default (including without limitation the rights to accelerate Debtor's obligations and invoke the default interest rate), the Leverage Ratio shall be conclusively presumed to be equal to or greater than 2.25:1.00 from the date of the occurrence of such default or Event of Default until such default or Event of Default is cured or otherwise waived by Bank. "Base Interest Rate" means a rate of interest based on the LIBOR-Rate. "Base Interest Rate Loan" means amounts outstanding under this note that bear interest at a Base Interest Rate. "Base Rate Maturity Date" means the last day of the Interest Period with respect to principal outstanding under a Base Interest Rate Loan. "Business Day" means a day on which Bank is open for business for the funding of corporate loans, and, with respect to the rate of interest based on the LIBOR Rate, on which dealings in U.S. dollar deposits outside of the United States may be carried on by Bank. "Interest Period" means with respect to funds bearing interest at a rate based on the LIBOR Rate, any calendar period of one, three, six, nine or twelve months. In determining an Interest Period, a month means a period that starts on one Business Day in a month and ends on and includes the day preceding the numerically corresponding day in the next month. For any month in which there is no such numerically corresponding day, then as to that month, such day shall be deemed to be the last calendar of such month. Any Interest Period which would otherwise end on a non-Business Day shall end on the next succeeding Business Day unless that is the first day of a month, in which event such Interest Period shall end on the next preceding Business Day. "LIBOR Rate" means a per annum rate of interest (rounded upward, if necessary, to the nearest 1/100 of 1%) at which dollar deposits, in immediately available funds and in lawful money of the United States would be offered to Bank, outside of the United States, for a term coinciding with the Interest Period selected by Debtor and for an amount equal to the amount of principal covered by Debtor's interest rate selection, plus Bank's costs, including the costs, if any, of reserve requirements. "Origination Date" means the first day of Interest Period. "Reference Rate" means the rate announced by Bank from time to time at its corporate headquarters as its Reference Rate. The Reference Rate is an index rate determined by Bank from time to time as a means of pricing certain extensions of credit and is neither directly tied to any external rate of interest or index nor necessarily the lowest rate of interest charged by Bank at any given time. PRINTRAK INTERNATIONAL INC. - ----------------------------------- By /s/ Susanna Bennett Vice President Finance and Corporate Secretary -------------------------------- TITLE PN-REV(LIBOR-RR) -3- 1/30/98 EX-21 6 EXHIBIT 21 EXHIBIT 21 SIGNIFICANT SUBSIDIARIES OF PRINTRAK INTERNATIONAL INC. As of March 31, 1997, Printrak International Inc. (the "Company") had one subsidiary, Printrak Limited. On May 7, 1997, the Company acquired TFP, Inc. a South Carolina corporation, which became a wholly-owned subsidiary of the Company. On September 9, 1997, SunRise Imaging, a California corporation, was acquired and became a wholly owned subsidiary of the Company. On December 1, 1997, the Company established Printrak International PTYLTD, in Australia, as a wholly-owned subsidiary of the Company. On December 11, 1998, the Company established Printrak de Argentina S.R.L, in Argentina, as a wholly-owned subsidiary of the Company. EX-23.1 7 EXHIBIT 23.1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 333-47009, 333-38277 and 333-38275 on Form S-8 of our report dated June 9, 1999 appearing in this Annual Report on Form 10-K of Printrak International, Inc. for the year ended March 31, 1999. DELOITTE & TOUCHE LLP Costa Mesa, California June 29, 1999 EX-27 8 EXHIBIT 27
5 YEAR MAR-31-1999 APR-01-1998 MAR-31-1999 8,557,000 0 30,622,000 (627,000) 8,245,000 53,337,000 12,570,000 (8,467,000) 65,302,000 32,121,000 180,000 0 0 1,000 33,000,000 65,302,000 71,195,000 86,433,000 39,774,000 79,597,000 (384,000) (476,000) 540,000 7,156,000 (4,152,000) 11,308,000 0 0 0 11,308,000 1.00 .96
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