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SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549
 FORM 10-Q
 (Mark one) þ
    
    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
 For the quarterly period ended March 31, 2005 or o
    
    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: 1-9641 IDENTIX
INCORPORATED   Delaware
    
    94-2842496(State or other jurisdiction of
    
    (IRS Employer Identification No.)incorporation of organization)5600 Rowland Road, Minnetonka, Minnesota
    
    55343(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (952) 932-0888 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 requirement for the past 90 days. YES þ NO o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). YES þ NO o APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date: 88,923,358 shares of Common Stock
as of April 30, 2005   1




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IDENTIX INCORPORATED INDEX PART I
    
    FINANCIAL INFORMATIONItem 1
    
    Unaudited Financial StatementsCondensed Consolidated Balance Sheets  March 31, 2005 and June 30, 2004
    
    
    3Condensed
Consolidated Statements of Operations  Three and Nine months ended March 31, 2005 and 2004
    
    
    4Condensed Consolidated Statements of Cash Flows  Nine months ended March 31, 2005 and 2004
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    26Item 4
    
    Controls and Procedures
    
    
    26PART II
    
    OTHER INFORMATIONItem 1
    
    Legal Proceedings
    
    
    27Item 6
    
    Exhibits
    
    
    27Signature
    
    
    28CEO CertificationCFO Certification906 Certifications
  2




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IDENTIX INCORPORATED 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (in thousands, except share amounts)
 (Unaudited)
 March 31,
    
    
    June 30,2005
    
    
    2004ASSETSCurrent assets:Cash and cash equivalents
    
    $
    27,450
    
    
    $
    35,944Marketable securities
    
    
    9,690
    
    
    
    9,472Accounts receivable, net
    
    
    16,009
    
    
    
    11,412Inventories
    
    
    6,275
    
    
    
    7,171Prepaid expenses and other assets
    
    
    973
    
    
    
    1,052Total current assets
    
    
    60,397
    
    
    
    65,051Property and equipment, net
    
    
    1,683
    
    
    
    2,153Goodwill
    
    
    141,213
    
    
    
    141,213Acquired intangible assets, net
    
    
    14,646
    
    
    
    18,497Other assets
    
    
    744
    
    
    
    1,913Total assets
    
    $
    218,683
    
    
    $
    228,827LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    5,137
    
    
    $
    4,881Accrued compensation
    
    
    4,160
    
    
    
    2,948Other accrued liabilities
    
    
    3,791
    
    
    
    4,992Deferred revenue
    
    
    7,539
    
    
    
    6,408Total current liabilities
    
    
    20,627
    
    
    
    19,229Deferred revenue
    
    
    1,596
    
    
    
    462Other liabilities
    
    
    181
    
    
    
    5,647Total liabilities
    
    
    22,404
    
    
    
    25,338Stockholders equity:Common stock, $0.01 par value; 200,000,000 shares authorized
88,921,193 and 88,429,821 shares issued and outstanding,
respectively
    
    
    889
    
    
    
    884Additional paid-in capital
    
    
    552,256
    
    
    
    549,956Accumulated deficit
    
    
    (356,716
    )
    
    
    (347,193
    )Deferred stock-based compensation
    
    
    
    
    
    
    (14
    )Accumulated other comprehensive loss
    
    
    (150
    )
    
    
    (144
    )Total stockholders equity
    
    
    196,279
    
    
    
    203,489Total liabilities and stockholders equity
    
    $
    218,683
    
    
    $
    228,827
 The accompanying notes are an integral part of these condensed consolidated financial statements. 3




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IDENTIX INCORPORATED 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (in thousands, except per share amounts)
  Three Months Ended March 31,
    
    
    Nine Months Ended March 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenues:Product revenues
    
    $
    12,119
    
    
    $
    6,674
    
    
    $
    30,683
    
    
    $
    17,821Service revenues
    
    
    8,133
    
    
    
    7,817
    
    
    
    24,750
    
    
    $
    21,193Total Revenues
    
    $
    20,252
    
    
    $
    14,491
    
    
    $
    55,433
    
    
    $
    39,014Cost and expenses:Cost of product revenues (excluding amortization of intangible assets)
    
    
    6,285
    
    
    
    3,929
    
    
    
    18,563
    
    
    
    10,256Cost of service revenues
    
    
    6,140
    
    
    
    7,585
    
    
    
    18,249
    
    
    
    16,656Research and development
    
    
    3,029
    
    
    
    2,184
    
    
    
    8,345
    
    
    
    7,207Marketing and selling
    
    
    3,179
    
    
    
    2,746
    
    
    
    8,744
    
    
    
    8,238General and administrative
    
    
    3,013
    
    
    
    3,166
    
    
    
    9,215
    
    
    
    9,880Amortization of acquired intangible assets
    
    
    1,283
    
    
    
    1,419
    
    
    
    3,852
    
    
    
    4,176Restructuring and other, net
    
    
    
    
    
    
    2,115
    
    
    
    (620
    )
    
    
    2,115Total costs and expenses
    
    
    22,929
    
    
    
    23,144
    
    
    
    66,348
    
    
    
    58,528Loss from operations
    
    
    (2,677
    )
    
    
    (8,653
    )
    
    
    (10,915
    )
    
    
    (19,514
    )Interest and other income, net
    
    
    763
    
    
    
    300
    
    
    
    1,425
    
    
    
    971Equity interest in loss of joint venture
    
    
    
    
    
    
    (55
    )
    
    
    
    
    
    
    (302
    )Loss from continuing operations before income taxes
    
    
    (1,914
    )
    
    
    (8,408
    )
    
    
    (9,490
    )
    
    
    (18,845
    )Provision for income taxes
    
    
    (11
    )
    
    
    (9
    )
    
    
    (33
    )
    
    
    (28
    )Loss from continuing operations
    
    
    (1,925
    )
    
    
    (8,417
    )
    
    
    (9,523
    )
    
    
    (18,873
    )Discontinued operations:Loss from discontinued operations
    
    
    
    
    
    
    (1,050
    )
    
    
    
    
    
    
    (809
    )Gain on sale of IPS
    
    
    
    
    
    
    5,934
    
    
    
    
    
    
    
    5,934Income from discontinued operations
    
    
    
    
    
    
    4,884
    
    
    
    
    
    
    
    5,125Net loss
    
    $
    (1,925
    )
    
    $
    (3,533
    )
    
    $
    (9,523
    )
    
    $
    (13,748
    )Basic and diluted loss per share from continuing
operations
    
    $
    (0.02
    )
    
    $
    (0.10
    )
    
    $
    (0.11
    )
    
    $
    (0.22
    )Basic and diluted income per share from discontinued
operations
    
    $
    
    
    
    $
    0.06
    
    
    $
    
    
    
    $
    0.06Basic and diluted net loss per share
    
    $
    (0.02
    )
    
    $
    (0.04
    )
    
    $
    (0.11
    )
    
    $
    (0.16
    )Weighted average common shares used in basic
and diluted loss per share computation
    
    
    88,834
    
    
    
    86,645
    
    
    
    88,620
    
    
    
    86,267
 The accompanying notes are an integral part of these condensed consolidated financial statements. 4




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IDENTIX INCORPORATED 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)
 (Unaudited)
 Nine Months Ended March,2005
    
    
    2004Cash flows from operating activities:Net loss
    
    $
    (9,523
    )
    
    $
    (13,748
    )Adjustments to reconcile net loss to net cash used in operating
activities:Depreciation and amortization
    
    
    4,836
    
    
    
    6,065Inventory obsolescence provision
    
    
    1,086
    
    
    
    3,315Stock-based compensation expense
    
    
    14
    
    
    
    558Loss on property and equipment
    
    
    11
    
    
    
    Gain on sale of discontinued operations
    
    
    
    
    
    
    (5,934
    )Equity interest in loss of joint venture
    
    
    
    
    
    
    302Bad debt
recoveries - net
    
    
    (32
    )
    
    
    (625
    )Realized gain on sales of marketable securities
    
    
    (90
    )
    
    
    (24
    )Restructuring and other, net
    
    
    (620
    )
    
    
    1,610Changes in assets and liabilities:Accounts receivable
    
    
    (4,566
    )
    
    
    4,754Inventories
    
    
    (190
    )
    
    
    (2,155
    )Prepaid expenses and other assets
    
    
    1,248
    
    
    
    1,038Accounts payable
    
    
    256
    
    
    
    (2,834
    )Accrued compensation
    
    
    1,212
    
    
    
    669Other accrued liabilities
    
    
    (6,047
    )
    
    
    (2,854
    )Deferred revenue
    
    
    2,265
    
    
    
    1,394Net cash used in operating activities
    
    
    (10,140
    )
    
    
    (8,469
    )Cash flows from investing activities:Proceeds from sale of IPS, net of transaction costs
    
    
    
    
    
    
    7,808Cash acquired in acquisition, net of cash paid
    
    
    
    
    
    
    1,264Net proceeds from the sales of marketable securities
    
    
    19,300
    
    
    
    15,007Purchases of marketable securities
    
    
    (19,433
    )
    
    
    (14,943
    )Capital expenditures
    
    
    (526
    )
    
    
    (863
    )Net cash (used in) provided by investing activities
    
    
    (659
    )
    
    
    8,273Cash flows from financing activities:Proceeds from exercise of stock options and the issuance of stock
under employee benefit plans
    
    
    2,305
    
    
    
    1,410Net cash provided by financing activities
    
    
    2,305
    
    
    
    1,410Net decrease in cash and cash equivalents
    
    
    (8,494
    )
    
    
    1,214Cash and cash equivalents at period beginning
    
    
    35,944
    
    
    
    34,712Cash and cash equivalents at period end
    
    $
    27,450
    
    
    $
    35,926Non Cash Activities:Stock issued for acquisition of technology
    
    $
    
    
    
    $
    3,423Conversion of preferred stock to common stock
    
    $
    
    
    
    $
    3,702
 The accompanying notes are an integral part of these condensed consolidated financial statements. 5




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IDENTIX INCORPORATED 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
  1.
    Basis of Presentation The accompanying condensed consolidated financial statements and related notes are unaudited.
However, in the opinion of management, all adjustments (consisting only of normal recurring
adjustments, unless otherwise noted), which are necessary for a fair statement of the financial
position and results of operations for the interim periods presented, have been included. These
condensed consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto for the fiscal year ended June 30, 2004
included in the Identix Incorporated Form 10-K. Identix Incorporated is hereinafter referred to
as Identix or the Company. The results of operations for the three and nine months ended
March 31, 2005 are not necessarily indicative of results to be expected for the entire fiscal
year, which ends on June 30, 2005. The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions
that affect the reported amounts therein. Estimates are used for, but not limited to, the
accounting for the allowance for doubtful accounts and sales returns, goodwill and other
intangible asset impairments, inventory allowances, warranty costs, revenue recognition as well
as loss contingencies and restructurings. Actual results could differ from these estimates.  2.
    Revenue Recognition Policy Significant management judgments and estimates are made in connection with the revenues
recognized in any accounting period. The Company must assess whether the fee associated with a
revenue transaction is fixed or determinable and whether or not collection is probable.
Material differences could result in the amount and timing of revenues for any period if
management were to make different judgments or utilize different estimates. Certain of the Companys equipment sales such as its TouchPrint Live Scan Systems generally
require installation subsequent to shipment and transfer of title. The Company recognizes
revenue on such sales in accordance with Staff Accounting Bulletin (SAB) 104, Revenue
Recognition. Revenue related to equipment sales that are contingent on installation is
deferred until installation is complete, title has transferred and customer acceptance has been
obtained. Due to current Company policy and practices, the Company considers acceptance of the
TouchPrint Live Scan Systems contingent upon successful installation of the product. Revenue
related to product sales that require no installation such as the Companys TP3000A and TP3100A
products as well as printers and other peripheral devices including DFR-300, DFR-200 and
FingerScan V20 are recognized in accordance with the terms of the sale, generally upon shipment
and transfer of title by the Company, provided no significant obligations remain and collection
of the receivable is deemed reasonably assured. Revenues from sales of products via authorized
representatives, dealers, distributors or other third party sales channels are recognized at the
time of title transfer, generally upon shipment. Sales of the Companys Integrated Biometric Information Systems (IBIS), and certain other
products, are considered multiple element arrangements and involve the sale of hardware and
services. The Company accounts for multiple element arrangements under Emerging Issues Task
Force Issue No. 00-21, (EITF 00-21) Accounting for Revenue Arrangements with Multiple
Deliverables. Under EITF 00-21, a company must determine whether any or all of the
deliverables of a multiple deliverable agreement can be separated from one another. If
separation is possible, revenue is recognized for each deliverable (based on objective and
reliable evidence of the fair value) as the applicable revenue recognition criteria are achieved
for that specific deliverable. Alternatively, if separation is not possible, revenue
recognition may need to be spread evenly over the performance of all deliverables, or deferred
until all elements of the arrangement have been delivered to the customer. The Company also sells several stand-alone software products including ABIS systems, BioLogon
and software developer kits. Revenue is recognized on software products in accordance with
Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended. The Company
recognizes revenue on software products when persuasive evidence of
an arrangement exists, delivery has occurred, the vendors fee is fixed or determinable and
vendor-specific objective evidence (VSOE) of fair value exists to allocate the total fee to
all undelivered elements of the arrangement and collection is deemed reasonably assured. VSOE
of fair value is established based upon either sales of the element (e.g, maintenance, training
or consulting) in individual transactions, or, in certain cases for maintenance, based upon
substantive renewal rates. In cases where the Company does not have VSOE of fair value for all
delivered elements in the transaction (e.g., for licenses), the fees from these multiple-element
agreements are allocated using the residual value method. In circumstances when the software
and services being sold include services to provide significant production, modification 6




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or
customization of the software, and the services cannot be segregated into separate units of
accounting, the Company accounts for the software sales under SOP 97-2 and SOP 81-1 Accounting
for performance of construction-type and certain production-type contracts. In the cases where
SOP 81-1 is applied, the Company uses the cost-to-cost method of percentage of completion.
Under this method, sales, including estimated earned fees or profits, are recorded based on the
percentage that total costs incurred bear to total estimated costs. Maintenance revenue is
deferred and recognized ratably over the life of the service period of the related agreement. Revenues related to Identix Identification Services (IIS) (See Note 5), which was acquired in
February 2004, are recognized as services are completed.  3.
    Stock Based Compensation The Company accounts for its employee and director stock option plans and employee stock
purchase plans in accordance with provisions of the Accounting Principles Board Opinion (APB)
No. 25, Accounting for Stock Issued to Employees. The Company accounts for stock options
issued to non-employees in accordance with the provisions of Statement of Financial Accounting
Standards (SFAS) No. 123 and Emerging Issues Task Force (EITF) 96-18 Accounting for Equity
Instruments that are Issued to Other Than Employees for Acquiring or in Conjunction with Selling
Goods or Services. As permitted by SFAS No. 123, Accounting for Stock Based Compensation, the
Company continues to measure employee compensation cost for its stock option plans using the
intrinsic value method of accounting. Had compensation cost for the Companys employee stock plans been recognized based upon the
estimated fair value on the grant date under the fair value methodology prescribed by SFAS No.
123, as amended by SFAS No. 148, the Companys net loss and net loss per share would have been
as follows: For the Three Months ended March 31,
    
    
    For the Nine Months ended March 31,2005
    
    
    2004
    
    
    2005
    
    
    2004(in thousands)
    
    
    (in thousands)Net Loss as reported
    
    $
    (1,925
    )
    
    $
    (3,533
    )
    
    $
    (9,523
    )
    
    $
    (13,748
    )Add: Employee stock-based compensation
expense included in reported
net loss
    
    
    
    
    
    
    145
    
    
    
    14
    
    
    
    558Deduct: Total employee stock-based compensation
expense determined under fair value
based method for all awards
    
    
    (1,503
    )
    
    
    574
    
    
    
    (3,756
    )
    
    
    (2,732
    )Proforma net loss
    
    $
    (3,428
    )
    
    $
    (2,814
    )
    
    $
    (13,265
    )
    
    $
    (15,922
    )Net Loss per share:As Reported
    
    $
    (0.02
    )
    
    $
    (0.04
    )
    
    $
    (0.11
    )
    
    $
    (0.16
    )Proforma
    
    $
    (0.04
    )
    
    $
    (0.03
    )
    
    $
    (0.15
    )
    
    $
    (0.18
    )Shares
    
    
    88,834
    
    
    
    86,645
    
    
    
    88,620
    
    
    
    86,267
 In December 2004, the Financial Accounting Standards Board issued SFAS No. 123 (revised
2004), Share-Based Payment. SFAS No. 123R revised SFAS 123, Accounting for Stock-Based
Compensation, and supercedes APB Opinion No. 25, Accounting for Stock Issued to Employees. The
revised statement addresses the accounting for share-based payment
transactions with employees and other third parties, eliminates the ability to account for
share-based payments using APB Opinion No. 25 and requires that the compensation costs relating
to such transactions be recognized in the consolidated statement of operations based upon the
grant-date fair value of those instruments. The revised statement is effective for Identix as of
its first quarter of fiscal year 2006 which begins on July 1, 2005. The Company expects that
adoption of SFAS 123R will result in a significant charge to earnings and is currently
determining the exact charge and the method of adoption of SFAS No. 123R. See the Stock Based
Compensation discussion above, which includes the pro forma impact of recognizing stock-based
compensation under SFAS No. 123, on the Companys net loss and loss per common share for the
three and nine months ended March 31, 2005. 7




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4.
    Discontinued Operations On February 13, 2004, the Company consummated the sale of Identix Public Sector (IPS) to Alion
Science and Technology Corporation (Alion). These operations for the three and nine months ended
March 31, 2004 are presented in the Companys Consolidated Statements of Operations as
discontinued operations. Under the terms of the agreement, upon closing Alion paid the Company
$8,850,000 million in cash. The terms of the sale include the potential for additional future
payments to the Company of up to $500,000 pending satisfaction of certain conditions. As of
March 31, 2005, none of the required conditions for additional payment had been achieved. The
terms of the sale also include an obligation on the part of the Company to indemnify Alion
against liabilities, including for breaches of representations and warranties made by the
Company in the sales agreement, for an amount not to exceed $2,125,000. The following table represents the summarized results for the discontinued operations for the
three and nine months ended March 31: For the three
    
    
    For the Ninemonths ended March
    
    
    Months ended31,
    
    
    March 31,2004
    
    
    2004(in thousands)
    
    
    (in thousands)Revenue
    
    $
    3,302
    
    
    $
    20,078Cost of sales
    
    
    2,564
    
    
    
    17,550Operating expenses
    
    
    1,788
    
    
    
    3,337Net (loss) income
    
    $
    (1,050
    )
    
    $
    (809
    )
  5.
    Acquisition On February 23, 2004, the Company acquired the remaining 50% ownership of Sylvan Identix
Fingerprint Centers (SIFC) from Sylvan Learning Centers. SIFC is now known as Identix
Identification Services (IIS). The Company had previously held a 50% interest in this joint
venture and accounted for its investment under the equity method of accounting. The complete
results of operations of IIS have been included in the Companys consolidated statement of
operations since February 23, 2004. IIS provides services to corporations and government
agencies capturing fingerprints and transmitting the data for applicant background checks. IIS
maintains a network of Identix live scan systems at processing centers across the country where
certified technicians process applicants. In consideration for Sylvans 50% interest in the
joint venture, Identix paid Sylvan $875,000 in cash and paid acquisition costs of $50,000. At
the date of acquisition, Identix had a negative investment in the joint venture of $235,000.
The purchase price was allocated to other intangible assets of $840,000, goodwill of $268,000
and net liabilities of $418,000.  6.
    Credit Facility The Companys existing line of credit was entered into on May 30, 2003 and renewed in October
2004. This line of credit provides for up to the lesser of $15,000,000 or the cash collateral
base or the borrowing base. Borrowings under the line of credit are collateralized by
substantially all of the assets of the Company and bear interest at the banks prime rate of
interest, which was 5.50% at March 31, 2005. The line of credit expires on October 1, 2005.
Until the Company generates positive net income before income taxes for two consecutive fiscal
quarters, the Company will be required to deposit with the lender an amount equal to the sum of
the aggregate outstanding principal amount of all prior advances plus any portion of the line of
credit reserved to support unexpired letters of credit plus the amount of the requested advance
before an advance will be given. In addition, all advances must be used for working capital.
At June 30, 2004 and March 31, 2005 there were no amounts outstanding under this line of credit. The line of credit agreement contains financial, operating and reporting covenants that are not
binding until the Company draws on the line of credit.  7.
    Inventories Inventories are stated at the lower of standard cost (which approximates actual cost determined
on a first-in, first-out method) or market and consisted of the following: 8




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March 31,
    
    
    June 30,2005
    
    
    2004Purchased parts and materials
    
    $
    2,846,000
    
    
    $
    1,620,000Work-in-process
    
    
    3,054,000
    
    
    
    4,361,000Finished goods, including spares
    
    
    375,000
    
    
    
    1,190,000$
    6,275,000
    
    
    $
    7,171,000
 During the three and nine months ended March 31, 2005 the Company recorded provisions for
excess and obsolete inventory items in the amount of $504,000 and $1,086,000 respectively and
$2,617,000 and $3,315,000 for the same periods in the prior fiscal year  8.
    Restructuring and other, net At the time of the Companys merger with Visionics in June 2002, Identix recorded restructuring
charges of $18,798,000 for the termination of 110 employees, and the closure of its facilities
in Dublin and Los Gatos California. From the period of June 2002 to June 2004 the Company
incurred total merger costs of $29,864,000. The following is a summary of the charges incurred and payments made from the time of the merger
through June 30, 2004: Activity during the period June 25, 2002 to June 30, 2004Liabilities Satisfied in
    
    
    
    
    
    
    Cash PaymentsConnection with IPS
    
    
    Non-Cash
    
    
    through June 30,
    
    
    Liability as ofTotal Charges
    
    
    Disposition
    
    
    Charges
    
    
    2004
    
    
    June 30, 2004(in thousands)Severance and benefits
    
    $
    8,626
    
    
    $
    
    
    
    $
    900
    
    
    $
    7,606
    
    
    $
    120Lease exit costs
    
    
    15,890
    
    
    
    2,267
    
    
    
    388
    
    
    
    5,635
    
    
    
    7,600Disposal of fixed assets
    
    
    1,664
    
    
    
    
    
    
    
    1,664
    
    
    
    
    
    
    
    Internal merger costs & other
    
    
    3,684
    
    
    
    
    
    
    
    
    
    
    
    3,684
    
    
    
    Total
    
    $
    29,864
    
    
    $
    2,267
    
    
    $
    2,952
    
    
    $
    16,925
    
    
    $
    7,720
 Fiscal 2005 During the nine months ended March 31, 2005, the Company realized a net restructuring gain of
$620,000. The net gain consists of a charge recorded in the first quarter of fiscal 2005 of
$451,000 related to a reduction in the estimated lease recoveries associated with the Los Gatos
facilities lease and a gain of $1,071,000 recorded in the second quarter of fiscal 2005 when the
Company negotiated its release from its Los Gatos facilities lease. In the first quarter,
management believed the charge of $451,000 was necessary because at that time the real estate
markets in Northern California had continued their decline and it was not anticipated that the
Company would be able to negotiate an exit to the lease and no such discussions between the
Company and the lessor had commenced. The gain recorded in the second quarter represented the
difference between the Companys accrued lease exit costs of $6,363,000, on the date of the
release reduced by the negotiated payoff amount and associated transactions costs of $5,292,000.
The lease settlement amount of $5,292,000 was paid in January 2005, and is included in the
total cash payments for lease exit costs of $6,494,000 during the nine months ended March 31,
2005. 9




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##### Table of Contents



The following table represents a summary of restructuring and other, net between June 30, 2004
and March 31, 2005: For the nine months ended March 31, 2005RestructuringRestructuring Liability
    
    
    
    
    
    
    
    
    
    
    Liability as ofas of June 30, 2004
    
    
    Additions/(reductions)
    
    
    Cash Payments
    
    
    March 31, 2005(in thousands)Severance and benefits
    
    $
    120
    
    
    $
    
    
    
    $
    9
    
    
    $
    111* Lease exit costs
    
    
    7,600
    
    
    
    (620
    )
    
    
    6,494
    
    
    
    486Total
    
    $
    7,720
    
    
    $
    (620
    )
    
    $
    6,503
    
    
    $
    597
 The restructuring liability is classified in the consolidated balance sheet based on the
anticipated timing of the respective payments. The remaining lease obligation at March 31,
2005, is for the Dublin California facility and will be paid out through March 2006. The
severance and benefits is related to the anticipated premiums on a life insurance policy for a
former key employee and the payments for this policy will continue until fiscal year 2012. Fiscal 2004 The following table represents a summary of the restructuring and other, net for the nine months
ended March 31, 2004: For the nine months ended March 31, 2004LiabilitiesSatisfied in
    
    
    
    
    
    
    RestructuringRestructuring Liability
    
    
    
    
    
    
    Connection with
    
    
    
    
    
    
    Liability as ofas of June 30, 2003
    
    
    Additions
    
    
    IPS Disposition
    
    
    Cash Payments
    
    
    March 31, 2004(in thousands)Severance and benefits
    
    $
    614
    
    
    $
    250
    
    
    $
    
    
    
    $
    498
    
    
    $
    366Lease exit costs
    
    
    12,151
    
    
    
    610
    
    
    
    2,267
    
    
    
    2,261
    
    
    
    8,233Internal merger costs and other
    
    
    31
    
    
    
    
    
    
    
    
    
    
    
    31
    
    
    
    Total
    
    $
    12,796
    
    
    $
    860
    
    
    $
    2,267
    
    
    $
    2,790
    
    
    $
    8,599
  9.
    Earnings Per Share Basic earnings per share are computed by dividing net income (loss) by the weighted average
number of common shares outstanding during the period. Diluted earnings per share gives effect
to all dilutive potential common shares outstanding during the period, including convertible
preferred stock as well as stock options and warrants, using the treasury stock method. Options and warrants to purchase 8,776,177 and 8,578,000 shares of common stock were outstanding
at March 31, 2005 and 2004, respectively, but were not included in the computation of diluted
net loss per share as their effect was anti-dilutive. Also, 234,558 shares of convertible
preferred stock were converted to common stock during the three months ended March 31, 2004.  10.
    Comprehensive Loss Comprehensive loss for the three and nine months ended March 31, 2005 was $1,933,000 and
$9,529,000 compared to a loss of $3,531,000 and $13,737,000 for the same periods in the prior
fiscal year. Accumulated other comprehensive loss for the Company consisted of unrealized gain
(loss) on available-for-sale marketable securities and cumulative translation adjustments. 10




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##### Table of Contents



11.
    Reportable Segment Data The Companys operating segments are strategic business groups that offer different products and
services and include inter-segment revenues, corporate allocations and administrative expenses.
Revenues are attributed to the reportable segment that is responsible for generating the revenue
and the direct and indirect costs incurred are similarly assigned. Three Months Ended March 31,
    
    
    Nine Months Ended March 31,2005
    
    
    2004
    
    
    2005
    
    
    2004(in thousands)
    
    
    (in thousands)Total revenues:Biometric systems
    
    $
    17,921
    
    
    $
    12,922
    
    
    $
    48,885
    
    
    $
    36,197* Other
    
    
    2,331
    
    
    
    1,569
    
    
    
    6,548
    
    
    
    2,817$
    20,252
    
    
    $
    14,491
    
    
    $
    55,433
    
    
    $
    39,014Operating income/loss:Biometric systems
    
    $
    2,583
    
    
    $
    (8,752
    )
    
    $
    10,950
    
    
    $
    (19,369
    )* Other
    
    
    94
    
    
    
    99
    
    
    
    (35
    )
    
    
    (145
    )$
    2,677
    
    
    $
    (8,653
    )
    
    $
    10,915
    
    
    $
    (19,514
    )
 March 31,
    
    
    June 30,2005
    
    
    2004(in thousands)Identifiable assets:Biometric systems
    
    $
    212,101
    
    
    $
    223,400Other
    
    
    6,582
    
    
    
    5,427$
    218,683
    
    
    $
    228,827
   * Revenue related to IIS is included in the Companys consolidated revenues from the date of acquisition
on February 23, 2004  12.
    Foreign Operations Data In geographical reporting, revenues are attributed to the geographical location of the sales
and service organizations: Three Months Ended March 31,
    
    
    Nine Months Ended March 31,2005
    
    
    2004
    
    
    2005
    
    
    2004(in thousands)
    
    
    (in thousands)Total revenues:United States
    
    $
    16,466
    
    
    $
    11,674
    
    
    $
    48,227
    
    
    $
    34,109International
    
    
    3,786
    
    
    
    2,817
    
    
    
    7,206
    
    
    
    4,905$
    20,252
    
    
    $
    14,491
    
    
    $
    55,433
    
    
    $
    39,014
 March 31,
    
    
    June 30,2005
    
    
    2004(in thousands)* Identifiable long lived assets:United States
    
    $
    1,648
    
    
    $
    2,088International
    
    
    35
    
    
    
    65$
    1,683
    
    
    $
    2,153
   * Long lived assets consist of property and equipment.  13.
    Indemnification Arrangements and Product Warranties The terms of the sale of IPS (see Note 4), include an obligation on the part of the
Company to indemnify Alion against liabilities, including for breaches of representations and
warranties made by the Company in the sales agreement, for an amount not to exceed $2,125,000.
This indemnification expires in February 2006. From time to time, the Company agrees to indemnify its customers against liability if the
Companys products infringe a third partys intellectual property rights. As of March 31, 2005
the Company was not subject to any pending litigation alleging that the Companys products
infringe the intellectual property rights of any third parties. The Company offers a 90-day and one year warranty on various products and services. The
majority of the warranty liability that the Company has recorded is due to the one-year
warranties. The Company estimates the costs that may be incurred under its warranties and
records a liability in the amount of such costs at the time the product is sold. Factors that
affect the Companys warranty liability include the number of units sold, historical and
anticipated rates of warranty claims and cost per claim. The Company periodically assesses the
adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. The amount
of the reserve recorded is equal to the estimated costs to repair or otherwise satisfy the
claim. The following table presents changes in the Companys warranty liability for the nine
months ended March 31, 2005 and 2004: 11




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##### Table of Contents



As of March 31,
    
    
    As of March 31,2005
    
    
    2004(in thousands)
    
    
    (in thousands)Balance at June 30,
    
    $
    921
    
    
    $
    374Warranty Expense
    
    
    1,391
    
    
    
    1,044Closed Warranty Claims
    
    
    (922
    )
    
    
    (738
    )Balance at March 31,
    
    $
    1,390
    
    
    $
    680
  14.
    Legal Matters In February 2003, Roger Benson filed a lawsuit against the Company and certain of its affiliated
entities in California Superior Court alleging that in 1998 he was issued a duplicate electronic
fingerprint number that was also held by a convicted felon. The complaint alleged that a live
scan fingerprint imaging machine manufactured by one of the defendants contributed to the
misidentification of Mr. Benson. In February 2005, Mr. Benson voluntarily dismissed his entire
case against all of the defendants. The voluntary dismissal followed Identix successful motion
for, and award of immaterial monetary sanctions against each of Mr. Benson and his attorney. In July 2004, Miguel and Lilia Espinoza filed a purported class action lawsuit against the
Company and certain of its affiliated entities in the State of Oregon. Mr. Espinoza claimed he
was misidentified as a convicted felon and that his misidentification resulted from the issuance
to him of a duplicate fingerprint identification number generated by a live scan system
manufactured by one of the defendants. The entities affiliated with Identix were dismissed from
the action by court order. Subsequently, the Company filed a motion for summary judgment on the
merits. In April 2005, the U.S. Magistrate Judge handling the case granted summary judgment in
favor of Identix stating that the live scan machine in question had correctly assigned different
fingerprint control numbers to Mr. Espinoza and the third party felon. In accordance with
applicable rules of civil procedure, the summary judgment ruling will now be reviewed by a U.S.
District Judge prior to any final entry. Based upon the current disposition of the litigation
discussed above, the Company believes that liabilities and costs arising from these lawsuits
will not have a material adverse impact on the Companys consolidated financial position,
results of operations or cash flows.  15.
    New Accounting Pronouncements In October 2004, the EITF issued EITF Issue No. 04-10, Applying Paragraph 19 of Statement
of Financial Accounting Standards No. 131 in Determining Whether to Aggregate Operating Segments
that do not meet the Quantitative Thresholds. SFAS No. 131 Disclosures about Segments of an
Enterprise and Related Information requires that a public business enterprise report financial
and descriptive information about its reportable operating segments. This issue addresses how to
aggregate operating segments that do not meet the quantitative thresholds in SFAS No. 131. The
effective date of the standard has been delayed. When effective, the adoption of this standard
will require the Company to reexamine how segments are disclosed and will likely result in the
Company identifying its Identix Identification Services (IIS) subsidiary separately as a
reportable segment. Currently, the Company has two segments, Biometric systems and other, with
IIS currently classified as other along with the Companys Legislative Demographic Services
subsidiary. 12




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS Item 2. The statements in this report on Form 10-Q that relate to future plans, events, or performance are
forward-looking statements. Actual results, events and performance may differ materially due to a
variety of factors including the factors described under Risk Factors below. The Company
undertakes no obligation to publicly update these forward-looking statements to reflect events or
circumstances that occur after the date hereof or to reflect the occurrence of unanticipated
events. OVERVIEW Identix Incorporated (Identix or the Company) provides a broad range of fingerprint and facial
recognition technology offerings that empower the identification of individuals who wish to gain
access to information or facilities, conduct transactions and obtain identifications.
Additionally, the Companys products and solution offerings can help identify those who perpetrate
fraud and otherwise pose a threat to public safety. Identix products serve a broad range of
industries and markets most notably, government, law enforcement, aviation, financial, healthcare
and corporate enterprise. A world leader in multi-biometric technology, Identix believes it has
more fingerprint and facial biometric installations worldwide than any other company. During the third quarter of fiscal year 2005, Identix received ABIS System orders totaling $4
million for programs involving international customers, who will use the ABIS system to develop
integrated solutions for nationwide applications such as passenger screening, border protection,
law enforcement, national ID, e-passports and other travel- and access-related programs. Identix
FaceIt technology was integrated into Nikon Corporations latest line of COOLPIX digital cameras.
The licensing agreement between Identix and Nikon covers production for the entire COOLPIX camera
line, which is expected by Nikon to be in the multimillions of camera units. Identix
Identification Services was selected to provide statewide electronic fingerprinting services for
the state of Michigan and also renewed for one year its contract to provide similar services
throughout the state of Tennessee. Identix and Sacramento-based NEC Solutions (America) teamed to
upgrade and expand Indianas statewide live scan network with the newly introduced Identix Live
Scan TouchPrintEnhanced Definition 3000 Series. Indiana placed purchase orders with Identix
totaling approximately $2.0 million from December 2004 to February 2005. CRITICAL ACCOUNTING POLICIES The preparation of financial statements and related disclosures in conformity with accounting
principles generally accepted in the United States of America requires management to make
judgments, assumptions and estimates that affect the amounts reported in the Consolidated Financial
Statements and accompanying notes. Note 1 to the Consolidated Financial Statements in the
Companys Annual Report on Form 10-K for the fiscal year ended June 30, 2004 describes the
significant accounting policies and methods used in the preparation of the Consolidated Financial
Statements. Estimates are used for, but not limited to, the accounting for the allowance for
doubtful accounts and sales returns, goodwill and other intangible asset impairments, inventory
allowances, warranty costs, revenue recognition as well as loss contingencies and restructurings.
Actual results could differ materially from these estimates. Managements Discussion and Analysis
of Financial Condition and Results of Operations in the Companys Annual Report on Form 10-K for
the fiscal year ended June 30, 2004 describes the critical accounting policies that are affected
significantly by judgments, assumptions and estimates used in the preparation of the Consolidated
Financial Statements. At March 31, 2005 the Companys critical accounting policies and estimates
continue to include revenue recognition, allowance for doubtful accounts and sales returns,
goodwill impairments, inventory allowances, warranty costs and loss contingencies and
restructurings. RESULTS OF OPERATIONS Revenues, and Gross Margins Total revenue for the three and nine months ended March 31, 2005, was $20,252,000 and $55,433,000
respectively compared to $14,491,000 and $39,014,000 for the same periods in the prior fiscal year. Product revenue was $12,119,000 and $30,683,000 for the three and nine months ended March 31, 2005,
compared to $6,674,000 and $17,821,000 for the same periods in the prior fiscal year. The increase
in revenue for the three and nine months ended March 31, 2005, is due to an increase in demand of biometric
hardware and software products in both international and domestic markets. These increases in
demand were in government driven programs including national ID, border patrol and law enforcement.
Also, during the three and nine months ended March 31, 2005, Identix experienced increased sales
volume 13




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##### Table of Contents



of its livescan product line compared to the same periods in the prior fiscal year.
Revenues associated with product sales are primarily derived from the sale of hardware and
software. Service revenue for the three and nine months ended March 31, 2005, was $8,133,000 and $24,750,000
compared to $7,817,000 and $21,193,000 for the same periods in the prior fiscal year. The increase
in service revenue for the three and nine months ended March 31, 2005 was driven by the acquisition
of Identix Identification Services (IIS) in February 2004. Service revenue attributed to IIS for
the three and nine months ended March 31, 2005 was $1,682,000 and $5,248,000 compared to $728,000
for the same periods in the prior fiscal year which represents the revenue generated from the date
of acquisition of February 23, 2004 to March 31, 2004. Service revenues are derived from
activities surrounding the servicing of the Companys hardware and software under maintenance
agreements and warranties as well as revenue derived from the Companys IIS subsidiary, which
provides fingerprinting services. The Company also reports its revenue by its operating segments, consisting of biometric systems and
other. Revenue from biometric systems was $17,921,000 and $48,885,000 for the three and nine
months ended March 31, 2005, compared to $12,922,000 and $36,197,000 for the same periods in the
prior fiscal year. The increase in revenue for the three and nine
months ended March 31, 2005 is due to an
increase in sales of biometric hardware and software during the quarter that resulted from growth
in the federal government and international markets. Other segment revenues are comprised of the Companys IIS and Legislative Demographic Services
(LDS) subsidiaries which totaled $2,331,000 and $6,548,000 for the three and nine months ended
March 31, 2005, and $1,569,000 and $2,817,000 for the same periods in the prior fiscal year. The
increase was primarily due to the acquisition of IIS, in the third quarter of fiscal year 2004. For the three and nine months ended March 31, 2005, Identix derived approximately 23% and 26% of
total revenue from contracts relating to the U.S. Federal Government with one government agency
making up 12% and 10% of total revenues during the respective periods. For the three and nine
months ended March 31, 2004, the Company derived 11% and 8% of its revenue from the U.S. Federal
Government with no one agency producing more than 10% of total revenue. The loss of a material
government contract due to budget cuts or otherwise could have a material negative impact on the
Companys financial results. The Company is currently awaiting final results of a recent General Services Administration
post-award audit arising out of the renewal of its GSA Multiple Award Schedule contract. Based on
current information, the Company believes that the results of such audit will not result in a
material adverse finding or adjustment and that such results will not have a material adverse
effect on our business, financial condition or results of operation. International sales accounted for $3,786,000 and $7,206,000 or 19% and 13% of the Companys
revenues for the three and nine months ended March 31, 2005, compared to $2,817,000 and $4,905,000
or 19% and 13% of the Companys revenue for the same periods in the prior fiscal year. The
increase in international revenue is due primarily to two large international sales that occurred
in the third quarter of fiscal 2005 totaling $2,800,000. These sales were partially offset by
other contracts that were present in fiscal 2004 but not fiscal 2005. The Companys international
sales are predominately denominated in U.S. dollars, and the Company monitors its foreign currency
exchange exposure and, if significant, will take action such as hedging transactions, to reduce
foreign exchange risk. To date, the Company has not entered into any hedging transactions. Gross margins on product revenues were 48% and 40% respectively for the three and nine months ended
March 31, 2005, compared to 41% and 42% for the same periods in the prior fiscal year. The
increase in gross margins during the three months ended March 31, 2005 is the result of increased
sales of the Companys higher margin software sales. For the
three months ended March 31, 2005 the Company had
$2,800,000 in software sales that didnt occur in the same period of the prior fiscal year. These
higher margin sales during the current quarter were partially offset by lower margin sales of the
Companys hardware which results in
an overall increase in product gross margin of 7% for the three months ended March 31, 2005. Service gross margins were 25% and 26% respectively for the three and nine months ended March 31,
2005, compared to 3% and 21% for the same periods in the prior fiscal year. The increase in
service gross margin is the result of an inventory reserve related to excess maintenance parts
totaling $2,300,000 that was recorded during the three months ended March 31, 2004. The Company
expects that gross margins may fluctuate in future periods due to changes in the product mix due to
certain products such as the livescan product line requiring a greater amount of maintenance
support than products such as software. In addition, the costs of components and the competition
in the industry will also affect the Companys gross margins. 14




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##### Table of Contents



Research and Development Research and development expense was $3,029,000 and $8,345,000 or 15% of revenues for the three and
nine months ended March 31, 2005, compared to $2,184,000 and $7,207,000 or 15% and 18% of revenues,
respectively, for the same periods in the prior fiscal year. The increase in research and
development expenses is the result of increased engineering personnel costs. Now and in the
foreseeable future, Identix is committed to continue its focus on the investment in research and
development, which is critical to developing new and innovative products intended to allow the
Company to maintain a strong technological position in the industry. Marketing and Selling Marketing and selling expenses were $3,179,000 and $8,744,000 or 16% of revenue for the three and
nine months ended March 31, 2005, compared to $2,746,000 and $8,238,000 or 19% and 21% of revenue
for the same periods in the prior fiscal year. The increase in marketing and selling expense in
the three and nine months ended March 31, 2005 is primarily the result of increased commission
expense of $475,000 and $755,000 respectively. The increase in commissions for the three months
ended March 31, 2005, is due to increased software sales for which the Company pays a commission
rate that is higher than the rate paid on hardware sales. The increase in commissions for the nine
months ended March 31, 2005 is the result of increased sales of both hardware and software. The
decrease in marketing and selling expense for the three and nine months ended March 31, 2005 as a
percent of revenue is due to the Company retaining tight control over its discretionary spending
while revenues increased. General and Administrative General and administrative expense was $3,013,000 and $9,215,000 or approximately 15% and 17% of
revenues for the three and nine months ended March 31, 2005, compared to $3,166,000 and $9,880,000
or approximately 22% and 25% of revenues for the same periods in the prior fiscal year. General
and administrative expense declined while revenue increased during the three and nine months ending
March 31, 2005 as the Company retained tight control over discretionary spending. Despite
expending approximately $219,000 and $444,000 on Sarbanes-Oxely compliance for the three and nine
months ended March 31 2005. These amounts consist of costs of consultants and the Companys
independent registered public accounting firm. Amortization of Acquired Intangible Assets Amortization expense of acquired intangible assets is primarily related to developed technology,
and patents attained through the Companys acquisition of IIS, certain assets of Delean Technology
and Visionics. The amortization expense related to acquired intangible assets was $1,283,000 and
$3,852,000 for the three and nine months ended March 31, 2005, compared to $1,419,000 and
$4,176,000 for the same periods in the prior fiscal year. The decrease is due to an intangible
asset becoming fully amortized in the first quarter of fiscal 2005. For the fourth quarter of
fiscal year 2005, the Company expects amortization expense to remain consistent with the third
quarter of fiscal year 2005. Restructuring and other, net During the nine months ended March 31, 2005, the Company realized a net restructuring gain of
$620,000. The net gain consists of a charge recorded in the first quarter of fiscal 2005 of
$451,000 related to a reduction in the estimated lease recoveries associated with the Los Gatos
facilities lease and a gain of $1,071,000 recorded in the second quarter of fiscal 2005 when the
Company negotiated its release from its Los Gatos facilities lease. In the first quarter,
management believed the charge of $451,000 was necessary because at that time the real estate
markets in Northern California had continued their decline and it was not anticipated that the
Company would be able to negotiate an exit to the lease and no such discussions between the Company
and the lessor had commenced. The gain recorded in the second quarter represented the difference
between the Companys accrued lease exit costs of $6,363,000, on the date of the release reduced by
the negotiated payoff
amount and associated transactions costs of $5,292,000. The lease settlement amount of $5,292,000
was paid in January 2005, and is included in the total cash payments for lease exit costs of
$6,494,000 during the nine months ended March 31, 2005. 15




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##### Table of Contents



The following table represents a summary of restructuring and other, net between June 30, 2004
and March 31, 2005: For the nine months ended March 31, 2005Restructuring
    
    
    
    
    
    
    
    
    
    
    RestructuringLiability as of
    
    
    
    
    
    
    
    
    
    
    Liability as ofJune 30, 2004
    
    
    Additions/(reductions)
    
    
    Cash Payments
    
    
    March 31, 2005(in thousands)Severance and benefits
    
    $
    120
    
    
    $
    
    
    
    $
    9
    
    
    $
    111* Lease exit costs
    
    
    7,600
    
    
    
    (620
    )
    
    
    6,494
    
    
    
    486Total
    
    $
    7,720
    
    
    $
    (620
    )
    
    $
    6,503
    
    
    $
    597
 The restructuring liability is classified in the consolidated balance sheet based on the
anticipated timing of the respective payments. The remaining lease obligation at March 31, 2005,
is for the Dublin California facility and will be paid out through March 2006. The severance and
benefits is related to the anticipated premiums on a life insurance policy for a former key
employee and the payments for this policy will continue until fiscal year 2012. Interest and Other Income, net For the three and nine months ended March 31, 2005, interest and other income, net was $763,000 and
$1,425,000 respectively, compared to $300,000 and $971,000 respectively, for the same periods in
the prior fiscal year. The increase in other income for the three
months ending March 31, 2005 is due to a preacquisition liability that was associated with IIS which was relieved during the third
quarter of fiscal 2005. Equity Interest in Loss of Joint Venture The equity interest in the loss of the joint venture represents the Companys 50% share of the
results of Sylvan Identix Fingerprint Centers, LLC (SIFC) now IIS through February 23, 2004 when
Identix acquired the remaining 50% interest in SIFC. For the three and nine months ended March 31,
2005, the Companys equity interest in the joint venture loss was $0. For the same periods in the
prior fiscal year the Companys equity interest in the joint venture loss was $55,000 and $302,000
respectively. Provision for Income Taxes The Company recorded a provision for income tax expense of $11,000 and $33,000 for the three and
nine months ended March 31, 2005, and a provision of $9,000 and $28,000 for the same periods in
prior fiscal year. The tax amounts recorded for both fiscal years are related to state income
taxes. Discontinued Operations On February 13, 2004, the Company consummated the sale of Identix Public Sector (IPS) to Alion
Science and Technology Corporation (Alion). The operations for the three and nine months ended
March 31, 2004 are presented in the Companys Consolidated Statements of Operations as discontinued
operations. Under the terms of the agreement, upon closing Alion paid the Company $8,850,000
million in cash. The terms of the sale include the potential for additional future payments to the
Company of up to $500,000 pending satisfaction of certain conditions. As of March 31, 2005, none
of the required conditions for additional payment had been achieved. The terms of the sale also
include an obligation on the part of the Company to indemnify Alion against liabilities, including
for breaches of representations and warranties made by the Company in the sales agreement, for an
amount not to exceed $2,125,000. 16




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##### Table of Contents



The following table represents the summarized results for the discontinued operations for the three
and nine months ended March 31, 2005: For the three
    
    
    For the Ninemonths ended March
    
    
    Months ended31,
    
    
    March 31,2004
    
    
    2004(in thousands)
    
    
    (in thousands)Revenue
    
    $
    3,302
    
    
    $
    20,078Cost of sales
    
    
    2,564
    
    
    
    17,550Operating expenses
    
    
    1,788
    
    
    
    3,337Net (loss) income
    
    $
    (1,050
    )
    
    $
    (809
    )
 New Accounting Pronouncements In December 2004, the Financial Accounting Standards Board issued SFAS No. 123 (revised 2004),
Share-Based Payment. SFAS No. 123R revised SFAS 123, Accounting for Stock-Based Compensation, and
supercedes APB Opinion No. 25, Accounting for Stock Issued to Employees. The revised statement
addresses the accounting for share-based payment transactions with employees and other third
parties, eliminates the ability to account for share-based payments using APB Opinion No. 25 and
requires that the compensation costs relating to such transactions be recognized in the
consolidated statement of operations based upon the grant-date fair value of those instruments.
The revised statement is effective for Identix as of its first quarter of fiscal year 2006 which
begins on July 1, 2005. The Company expects that adoption of SFAS 123R will result in a
significant charge to earnings and is currently determining the exact charge and the method of
adoption of SFAS No. 123R. See the Stock Based Compensation discussion in Note 3 to the
Condensed Consolidated Financial Statements, which includes the pro forma impact of recognizing
stock-based compensation under SFAS No. 123, on the Companys net loss and loss per common share
for the three and nine months ended March 31, 2005. In October 2004, the EITF issued EITF Issue No. 04-10, Applying Paragraph 19 of Statement of
Financial Accounting Standards No. 131 in Determining Whether to Aggregate Operating Segments that
do not meet the Quantitative Thresholds. SFAS No. 131 Disclosures About Segments of an Enterprise
and Related Information requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. This issue addresses how to aggregate
operating segments that do not meet the quantitative thresholds in SFAS No. 131. The effective date
of the standard has been delayed. When effective, the adoption of this standard will require the
Company to reexamine how segments are disclosed and will likely result in the Company identifying
its Identix Identification Services (IIS) subsidiary separately as a reportable segment.
Currently, the Company has two segments, Biometric systems and other, with IIS currently classified
as other along with the Companys Legislative Demographic Services subsidiary. Liquidity and Capital Resources The Company financed its operations during the nine months ended March 31, 2005, primarily from its
existing cash and marketable securities as well as cash collected from its operations. As of March
31, 2005, the Companys principal sources of liquidity consisted of $39,770,000 of working capital
including $37,140,000 in cash and cash equivalents and short-term marketable securities. The Companys existing line of credit was entered into on May 30, 2003 and was extended in October
2004. This line of credit
provides for up to the lesser of $15,000,000 or the cash collateral base or the borrowing base.
Borrowings under the line of credit are collateralized by substantially all of the assets of the
Company and bear interest at the banks prime rate of interest, which was 5.50% at March 31, 2005.
The line of credit expires on October 1, 2005. Until the Company generates positive net income
before income taxes for two consecutive fiscal quarters, the Company will be required to deposit
with the lender an amount equal to the sum of the aggregate outstanding principal amount of all
prior advances plus any portion of the line of credit reserved to support unexpired letters of
credit plus the amount of the requested advance before an advance will be given. In addition, all
advances must be used for working capital. At June 30, 2004 and March 31, 2005, there were no
amounts outstanding under this line of credit. The line of credit agreement contains financial, operating and reporting covenants that are not
binding until the Company draws on the line of credit. 17




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For the nine months ended March 31, 2005, $10,144,000 of cash was used in operating activities.
The cash used in operations consisted primarily of the net loss of $9,523,000; an increase in
accounts receivable of $4,566,000 driven by increased sales partially offset by collections; and
decreased other liabilities of $6,047,000 which was due primarily to the payment of $5,292,000
related to the release of the Companys lease obligations for the Los Gatos facility. These uses
of cash were partially offset by increases in deferred revenue of $2,265,000 related to payment
terms on a software contract causing $1,800,000 of deferred revenue at March 31, 2005 as well as an
increase in maintenance contracts with extended maintenance periods, decreased prepaid expenses and
other assets of $1,248,000 which was primarily the result of the disposal of certificates of
deposit that were being held as collateral for letters of credit; increased accrued compensation of
$1,212,000 due to the timing of the payroll payments; and non-cash charges from depreciation and
amortization of $4,836,000. The cash used in investing activities of $655,000 consisted primarily
of purchases of marketable securities and property and equipment of $19,433,000 and $526,000
respectively. These usages were partially offset by the sale of marketable securities totaling
$19,304,000. Financing activities consisted primarily of stock option exercises and the sale of
stock under employee benefit plans, which generated $2,305,000 in cash. For the nine months ended March 31, 2004, $8,469,000 of cash was used in operating and investing
activities that was offset by the cash generated from investing and financing activities of
$8,273,000 and $1,410,000 respectively. The cash that was generated from investing activities
primarily resulted from sale of the Companys IPS subsidiary as well the acquisition of 100%
interest in SIFC now known as Identix Identification Services (IIS). In addition, the cash
generated from financing activities resulted primarily from the exercise of stock options. The net
result of the Companys cash flow activities resulted in an increase of $1,214,000 of cash and cash
equivalents. The Company currently occupies its Minnesota headquarters under a lease that expires in March 2008,
and is required to pay taxes, insurance, and maintenance as well as monthly rental payments. The
Company also leases space for its corporate research and development lab in New Jersey under a
lease that expires in May 2006, and is required to pay taxes, insurance, and maintenance as well as
monthly rental payments. In addition, the Company leases space in Dublin, California for its
former research, development and engineering department and the lease expires in March 2006. The
Company also leases space in Fairfax, Virginia for a sales office and the LDS headquarters under a
lease that expires in 2009. Further, the Company leases office space for its sales force and
customer support activities under operating leases, which expire at various dates through 2008.
The leases contain escalation provisions requiring rental increases for increases in operating
expense and real estate taxes. Future minimum lease payments for operating leases are as follows: Periods or fiscal years ending June 30:
    
    Occupied
    
    
    Sublet
    
    
    Total2005
    
    $
    520
    
    
    $
    102
    
    
    
    6222006
    
    
    1,887
    
    
    
    386
    
    
    
    2,2732007
    
    
    1,575
    
    
    
    
    
    
    
    1,5752008
    
    
    1,284
    
    
    
    
    
    
    
    1,2842009
    
    
    341
    
    
    
    
    
    
    
    341Thereafter
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    5,607
    
    
    $
    488
    
    
    $
    6,095
 The future minimum payments include $488,000 for sublease income related to the Companys
Dublin, California facility that was vacated in connection with the Companys merger with
Visionics. The Company has accrued for the estimated losses on this lease at March 31, 2005. The
Dublin, California facility is sublet under a lease expiring in March 2006. While the Company believes that existing working capital will be adequate to fund the Companys
current cash requirements for at least the next twelve months, the Company may need to raise
additional debt or equity financing in the future. The Company may not be able to obtain additional
debt or equity financing on favorable terms that are not excessively dilutive to existing
stockholders. Failure to secure additional financing in a timely manner and on favorable terms in
the future could have a material adverse impact on the Companys financial performance and stock
price and require the Company to implement certain cost reduction initiatives and curtail certain
of its operations. 18




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RISK FACTORS This report on Form 10-Q contains forward-looking statements that involve risks and uncertainties.
The Companys business, operating results, financial performance and share price may be materially
adversely affected by a number of factors, including but not limited to the following risk factors,
any one of which could cause actual results to vary materially from anticipated results or from
those expressed in any forward-looking statements made by the Company in this quarterly report on
Form 10-Q or in other reports, press releases or other statements issued from time to time.
Additional factors that may cause our results to vary are set forth in the Companys Annual Report
on Form 10-K. Our business will not grow unless the market for biometric products and services expands both
domestically and internationally. Our revenues are derived from the sale of biometric products and services. Biometric products have
not gained widespread commercial acceptance. We cannot accurately predict the future growth rate,
if any, or the ultimate size of the biometric technology market. The expansion of the market for
our products depends on a number of factors including without limitation:  
    national or international events which increase or decrease the need or interest in biometric products or services;
    the cost, performance and reliability of our products and services and those of our competitors;
    customers perception of the perceived benefit of biometric products and services;
    public perceptions of the intrusiveness of these products and services and the manner in which firms are using the
information collected;
    public perceptions regarding the confidentiality of private information;
    proposed or enacted legislation related to privacy of information;
    customers satisfaction with our products and services; and
    marketing efforts and publicity regarding these products and services. Certain groups have publicly objected to the use of biometric products for some applications
on civil liberties grounds and legislation has been proposed to regulate the use of biometric
security products. From time to time, biometrics technologies have been the focus of organizations
and individuals seeking to curtail or eliminate such technologies on the grounds that they may be
used to diminish personal privacy rights. If such initiatives result in restrictive legislation,
the market for biometric solutions may be adversely affected. Even if biometric solutions gain wide
market acceptance, our products and services may not adequately address the requirements of the
market and may not gain wide market acceptance. We face intense competition from other biometric solution providers as well as identification and
security systems providers. A significant number of established and startup companies are marketing or developing software and
hardware for facial and/or fingerprint biometric products and applications that currently compete
or will compete directly with our current offerings. Some of these companies are marketing or
developing semiconductor or optically based direct contact fingerprint image capture devices, or
retinal blood vessel, iris pattern, hand geometry, voice or various types of facial structure
solutions. If one or more of these competing technologies or approaches were widely adopted, it
would significantly reduce the potential market for our products. Our security and identity related
line of products and applications also compete with non-biometric technologies such as certificate
authorities, smart card security solutions, and traditional key, card, surveillance systems and
passwords. Many competitors offering products that compete with our security and identity related
line of products and applications have significantly more financial and other resources than the
Company. Our facial biometric products face intense competition from a number of competitors who are
actively engaged in developing and marketing facial-based recognition or security products. Among
these competitors are Viisage Technology, Inc., Cognitec Systems GmbH and Imagis
Technologies, Inc. The products designed, developed and sold under our live scan line of
products also face intense competition from a number of competitors, including Smiths Heimann
Biometrics GmbH, and CrossMatch Technologies, Inc., who are actively engaged in developing and
marketing similar products. The biometric security market is a rapidly evolving and intensely competitive market, and we
believe that additional competitors will continue to enter the market and become significant
long-term competitors. We expect competition in the biometrics markets to increase and intensify
in the near term. Companies competing with us may introduce products that are competitively
priced, have increased performance or functionality or incorporate technological advances we have
not yet developed or implemented. Some present and potential competitors have financial, marketing,
research, and manufacturing resources substantially greater than ours. Other players in the
biometric industry who offer complementary products or private label products manufactured by our
direct competitors do have the potential to directly compete with us. Among these companies are
Sagem Morpho, Inc., Cogent, NEC, Printrak International, Inc., (a Motorola company), and Saflink. The biometrics industry is characterized by rapid technological change and requires introduction of
new and enhanced products at competitive prices. 19




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In order to compete effectively in the biometrics market, we must continually design, develop and
market new and enhanced products at competitive prices and we must have the resources available to
invest in significant research and development activities. Our future success will depend upon our
ability to address the changing and sophisticated needs of the marketplace. Frequently, technical
development programs in the biometric industry require assessments to be made of the future
directions of technology and technology markets generally, which are inherently risky and difficult
to predict. Delays in introducing new products, services and enhancements, the failure to choose
correctly among technical alternatives or the failure to offer innovative products and services at
competitive prices may cause customers to forego purchases of our products and services and
purchase those of our competitors, and could adversely affect our business operations, financial
results and stock price. Continued participation by us in the market for Live Scan systems that are linked to forensic
quality databases under the jurisdiction of governmental agencies may require the investment of our
resources in upgrading our products and technology for us to compete and to meet regulatory and
statutory standards. We may not have adequate resources available to us or may not adequately keep
pace with appropriate requirements in order to effectively compete in the marketplace. We derive a significant amount of our revenue from government contracts, which are often
non-standard, involve competitive bidding, may be subject to cancellation without penalty and may
produce volatility in earnings and revenue. Our performance in any one reporting period is not necessarily indicative of sale trends or future
operating or earnings performance because of our reliance on a small number of large customers, the
majority of which are government agencies. Government contracts frequently include provisions that
are not standard in private commercial transactions. For example, government contracts may include
bonding requirements and provisions permitting the purchasing agency to cancel the contract for
convenience at any time without penalty in certain circumstances. As public agencies, our
prospective customers are also subject to public agency contract requirements that vary from
jurisdiction to jurisdiction. Some of these requirements may be onerous or impossible to satisfy. In many instances, the procurements of our federal, state and local customers are dependent on the
availability or continued availability of federal, state or local government funds or grants and
general tax funding. Such funding may not be approved or, if approved, it may not be available for
the purchase of our products or solutions, and even if such funding is approved and available, such
funds may be subject to termination at any time at the sole discretion of the government body
providing or receiving such funds. Additionally, public agency contracts are frequently awarded only after formal competitive bidding
processes, which are often protracted. In some cases, unsuccessful bidders for public agency
contracts are provided the opportunity to formally protest certain contract awards through various
agency, administrative and judicial channels. The protest process may delay a successful bidders
contract performance for a number of weeks, months or more, or result in the cancellation of the
contract award entirely. There is a risk that we may not be awarded contracts for which we bid or,
if awarded, that substantial delays or cancellation of purchases may follow as a result of third
party protests. For example, in October 2003, the Company announced that is had been awarded a
Blanket Purchase Order (BPO) from the Department of Homeland Security (DHS) with an estimated
value of approximately $27 million. The award was subsequently protested by one of our competitors
who had been an unsuccessful participant in the bidding process for the BPO. Though the protest
was ultimately resolved in our favor, the protest resulted in substantial delays in DHS
procurement of our technology under the BPO. Similar protests, and similar delays, regarding any
future government contracts of a material nature that may be awarded to us could result in
materially adverse revenue volatility, making management of inventory levels, cash flow and
profitability or loss inherently difficult. Outright loss of any material government contract,
such as the BPO award to us, through the protest process or otherwise, could have a material
adverse effect on our financial results and stock price. Similar to federal government contracts, state and local government agency contracts may be
contingent upon availability of matching funds from federal, state or local entities. State and
local law enforcement and other government agencies are subject to political, budgetary, purchasing
and delivery constraints which may continue to result in quarterly and annual revenues and
operating results that may be irregular and difficult to predict. Such revenue volatility makes
management of inventory levels, cash flow and profitability inherently difficult. In addition, if
we are successful in winning such procurements, there may be unevenness in shipping schedules, as
well as potential delays and changes in the timing of deliveries and recognition of revenue, or
cancellation of such procurements. For the three and nine months ended March 31, 2005, we derived approximately 23% and 26% of our
revenue directly from contracts relating
to the U.S. Federal Government with one agency making up 12% and 10% of total revenues during the
same periods. The loss of a material government contract due to budget cuts or otherwise could
have a severe negative impact on our financial results and stock price. Our financial and operating results often vary significantly from quarter to quarter and may be
negatively affected by a number of factors. Our financial and operating results may fluctuate from quarter to quarter because of the following
reasons:  
    unavailability or delays in authorization of government funding or
cancellations, delays or contract amendments by government agency customers;
    reduced demand for products and services caused, for example, by product offerings from new competitors;
    the inability to timely and successfully (i) complete development of complex designs,
components and products, 20




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(ii) complete new product introductions that may result in improved gross margins,
(iii) manufacture in volume or install certain of our complex products or
(iv) obtain relevant government agency certifications for newly
 introduced products on a timely basis;  
    changes in the mix of products and services we or our distributors sell;
    the readiness of customers to accept delivery of new products on a timely basis;
    protests of federal, state or local government contract awards by competitors;
    unforeseen legal expenses, including litigation and/or administrative protest costs;
    expenses related to acquisitions or mergers;
    impairment charges arising out of our assessments of goodwill and intangibles;
    other one-time financial charges;
    the lack of availability or increase in cost of key components and subassemblies;
    competitive pricing pressures; and
    unpredictable product installation schedules Particularly important is the need to invest in planned technical development programs to maintain
and enhance our competitiveness, and to successfully develop and launch new products and services
on a timely basis. Managing and improving the likelihood of success of such programs requires the
development of budgets, plans and schedules for the execution of these programs and the adherence
to such budgets, plans and schedules. The majority of such program costs are payroll and related
staff expenses, and secondarily materials, subcontractors and promotional expenses. These costs are
very difficult to adjust in response to short-term fluctuations in our revenues, compounding the
difficulty of achieving profitability in the event of a revenue downturn. Our results of operations may be harmed by governmental credit and other policies. We extend substantial credit to federal, state and local governments in connection with sales of
our products and services. Sales to sizeable customers requiring large and sophisticated networks
of fingerprint recognition and Live Scan systems and peripheral equipment often include technical
requirements which may not be fully known at the time requirements are specified by the customer.
In addition, contracts may specify performance criteria that must be satisfied before the customer
accepts the products and services. Collection of accounts receivable may be dependent on completion
of customer requirements, which may be unpredictable, subject to change by the customer, and not
fully understood by us at the time of acceptance of the order, and may involve investment of
additional resources. These investments of additional resources are accrued when amounts can be
estimated but may be uncompensated and negatively affect profit margins and our liquidity. Additionally, without regard to termination of funding, government agencies both domestically and
internationally may successfully assert the right to terminate business or funding relationships
with us at their sole discretion without adequate or any compensation or recourse for us. A security breach or failure in systems that we sell could result in the disclosure of private
personal information that could harm our business by adversely affecting the markets perception of
our products and services. Many of the systems we sell are designed to secure or manage private personal information or
information maintained by governmental agencies. In addition to being costly to repair and causing
delays and other difficulties, a security breach or failure in one of these systems could cause
serious harm to our business as a result of negative publicity or decisions by governmental clients
to limit our access or involvement with this information. The terrorist attacks of September 11, 2001, and the continuing threat of global terrorism, have
increased financial expectations that may not materialize. The September 11, 2001 terrorist attacks, and continuing concerns about global terrorism, may have
created an increase in awareness for biometric security solutions generally. However, it is
uncertain whether the actual level of demand for our biometric products and services will grow as a
result of such increased awareness. Increased demand may not result in an actual increase in our
revenues. In addition, it is uncertain which security solutions, if any, will be adopted as a
result of the terrorism and whether our products will be a part of those solutions. Efforts in the
war against terrorism, the war in Iraq, and the post-war reconstruction efforts in Iraq, may
actually delay funding for the implementation of biometric solutions generally. Even if our
products are considered or adopted as solutions to the terrorism, the level and timeliness of
available funding are unclear. These factors may adversely impact us and create unpredictability in
revenues and operating results. 21




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We may need to raise additional equity or debt financing in the future. While we believe existing working capital will be adequate to fund our operating cash requirements
for at least the next 12 months, we may need to raise additional debt or equity financing in the
future, which may not be available to us. Even if we are successful in raising additional
financing, we may not be able to do so on terms that are not excessively dilutive to existing
stockholders or less costly than existing sources of financing. Failure to secure additional
financing in a timely manner and on favorable terms could have a material adverse effect on our
financial performance and stock price and require us to implement certain cost reduction
initiatives resulting in the curtailment of our operations. Our lengthy and variable sales cycle will make it difficult to predict operating results. Certain of our products often have a lengthy sales cycle while the customer evaluates and
receives approvals for purchase. If, after expending significant funds and effort, we fail to
receive an order, a negative impact on our financial results and stock price could result. It is difficult to predict accurately the sales cycle of any large order for any of our products.
If we do not ship and or install one or more large orders as forecast for a fiscal quarter, our
total revenues and operating results for that quarter could be materially and adversely affected. The substantial lead-time required for ordering parts and materials may lead to inventory problems. The lead-time for ordering parts and materials and building many of our products can be many
months. As a result, we must order parts and materials and build our products based on forecasted
demand. If demand for our products lags significantly behind our forecasts, we may produce more
products than we can sell, which can result in cash flow problems and write-offs or write-downs of
obsolete inventory. We rely in part upon original equipment manufacturers (OEM) and distribution partners to
distribute our products, and we may be adversely affected if those parties do not actively promote
our products or pursue installations that use our equipment. A significant portion of our revenue comes from sales to partners including OEMs, systems
integrators, distributors and resellers. Some of these relationships have not been formalized in
written agreements, and may be subject to termination at any time. Even where these relationships
are formalized in written agreements, the agreements are often terminable with little or no notice
and subject to periodic amendment. We cannot control the amount and timing of resources that our
partners devote to activities on our behalf. We intend to continue to seek strategic relationships to distribute, license and sell certain of
our products. We, however, may not be able to negotiate acceptable relationships in the future and
cannot predict whether current or future relationships will be successful. Loss of sole or limited source suppliers may result in delays or additional expenses. We obtain certain hardware components and complete products, as well as software applications, from
a single source or a limited group of suppliers. We do not have long-term agreements with any of
our suppliers. We will experience significant delays in manufacturing and shipping of products to
customers if we lose these sources or if supplies from these sources are delayed. As a result, we may be required to incur additional development, manufacturing and other costs
to establish alternative sources of supply. It may take several months to locate alternative
suppliers, if required, or to re-tool our products to accommodate components from different
suppliers. We cannot predict if we will be able to obtain replacement components within the time
frames we require at an affordable cost, or at all. Any delays resulting from suppliers failing to
deliver components or products on a timely basis in sufficient quantities and of sufficient quality
or any significant increase in the price of components from existing or alternative suppliers could
have a severe negative impact on our financial results and stock price. Our plan to pursue sales in international markets may be limited by risks related to conditions in
such markets. For the three and nine months ended March 31, 2005 we derived approximately 19% and 13% of our
total revenues from international sales. We currently have a local presence in the United Kingdom. There is a risk that we may not be able to successfully market, sell and deliver our products in
foreign countries. Risks inherent in marketing, selling and delivering products in foreign and international
markets, each of which could have a severe negative impact on our financial results and stock
price, include those associated with:  
    regional economic or political conditions;
    delays in or absolute prohibitions on exporting products resulting
from export restrictions for certain products and technologies,
including crime control products and encryption technology;
    loss of, or delays in importing products, services and intellectual
property developed abroad, resulting from unstable or fluctuating
social, political or governmental conditions;
    fluctuations in foreign currencies and the U.S. dollar; 22




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
    loss of revenue, property (including intellectual property) and
equipment from expropriation, nationalization, war, insurrection,
terrorism, criminal acts and other political and social risks;
    the overlap of different tax structures;
    seasonal reductions in business activity;
    risks of increases in taxes and other government fees; and
    involuntary renegotiations of contracts with foreign governments. Individual stockholders owning a significant portion of our stock may have the ability to delay or
prevent a change in control or adversely affect the stock price through sales in the open market. As of March 31, 2005, Kern Capital Management LLC and Artemis Investment Management LLC owned
approximately 5% and 2% of the Companys outstanding common stock, respectively. The concentration
of large percentages of ownership in any single stockholder, or in any series of single
stockholders, may delay or prevent change in control of the Company. Additionally, the sale of a
significant number of our shares in the open market by single stockholders or otherwise could
adversely affect our stock price. We may be subject to loss in market share and market acceptance as a result of performance
failures, manufacturing errors, delays or shortages. Performance failure in our products may cause loss of market share, delay in or loss of market
acceptance, additional warranty expense or product recall, or other contractual liabilities. The
complexity of certain of our fingerprint readers makes the manufacturing and assembly process of
such products, especially in volume, complex. This may in turn lead to delays or shortages in the
availability of certain products, or, in some cases, the unavailability of certain products. The
negative effects of any delay or failure could be exacerbated if the delay or failure occurs in
products that provide personal security, secure sensitive computer data, authorize significant
financial transactions or perform other functions where a security breach could have significant
consequences. If a product launch is delayed or is the subject of an availability shortage because
of problems with our ability to manufacture or assemble the product successfully on a timely basis,
or if a product or service otherwise fails to meet performance criteria, we may lose revenue
opportunities entirely and/or experience delays in revenue recognition associated with a product or
service in addition to incurring higher operating expenses during the period required to correct
the defects. There is a risk that for unforeseen reasons we may be required to repair or replace a
substantial number of products in use or to reimburse customers for products that fail to work or
meet strict performance criteria. We carry product liability insurance, but existing coverage may
not be adequate to cover potential claims. We may be subject to repair, replacement, reimbursement and liability claims as a result of
products that fail to work or to meet applicable performance criteria. There is a risk that for unforeseen reasons we may be required to repair or replace a substantial
number of products in use or to reimburse customers for products that fail to work or meet strict
performance criteria. We attempt to limit remedies for product failure to the repair or replacement
of malfunctioning or noncompliant products or services, and also attempt to exclude or minimize
exposure to product and related liabilities by including in our standard agreements warranty
disclaimers and disclaimers for consequential and related damages as well
as limitations on our aggregate liability. From time to time, in certain complex sale or licensing
transactions, we may negotiate liability provisions that vary from such standard forms. There is a
risk that our contractual provisions may not adequately minimize our product and related
liabilities or that such provisions may be unenforceable. We carry product liability insurance, but
existing coverage may not be adequate to cover potential claims. We maintain warranty reserves as
deemed adequate by management. Failure by us to maintain the proprietary nature of our technology, intellectual property and
manufacturing processes could have a material adverse effect on our business, operating results,
financial condition, stock price, and on our ability to compete effectively. We principally rely upon patent, trademark, copyright, trade secret and contract law to establish
and protect our proprietary rights. There is a risk that claims allowed on any patents or
trademarks we hold may not be broad enough to protect our technology. In addition, our patents or
trademarks may be challenged, invalidated or circumvented and we cannot be certain that the rights
granted thereunder will provide competitive advantages to us. Moreover, any current or future
issued or licensed patents, or trademarks, or currently existing or future developed trade secrets
or know-how may not afford sufficient protection against competitors with similar technologies or
processes, and the possibility exists that certain of our already issued patents or trademarks may
infringe upon third party patents or trademarks or be designed around by others. In addition, there
is a risk that others may independently develop proprietary technologies and processes, which are
the same as, substantially equivalent or superior to ours, or become available in the market at a
lower price. In addition, foreign laws treat the protection of proprietary rights differently from laws in the
United States and may not protect our proprietary rights to the same extent as U.S. laws. The
failure of foreign laws or judicial systems to adequately protect our proprietary rights or
intellectual property, including intellectual property developed on our behalf by foreign
contractors or subcontractors may have a material adverse effect on our business, operations,
financial results and stock price. 23




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There is a risk that we have infringed or in the future will infringe patents or trademarks
owned by others, that we will need to acquire licenses under patents or trademarks belonging to
others for technology potentially useful or necessary to us, and that licenses will not be
available to us on acceptable terms, if at all. We may have to litigate to enforce our patents or trademarks or to determine the scope and validity
of other parties proprietary rights. Litigation could be very costly and divert managements
attention. An adverse outcome in any litigation may have a severe negative effect on our financial
results and stock price. To determine the priority of inventions, we may have to participate in
interference proceedings declared by the United States Patent and Trademark Office or oppositions
in foreign patent and trademark offices, which could result in substantial cost and limitations on
the scope or validity of our patents or trademarks. We also rely on trade secrets and proprietary know-how, which we seek to protect by confidentiality
agreements with our employees, consultants, service providers and third parties. There is a risk
that these agreements may be breached, and that the remedies available to us may not be adequate.
In addition, our trade secrets and proprietary know-how may otherwise become known to or be
independently discovered by others. Acquisitions and dispositions of companies, assets or technologies may result in disruptions to our
business. We may from time to time acquire businesses, assets or technologies relating to, or
complementary to, our current strategies or operations, and we may also divest certain businesses
or assets that we consider non-complementary to our current strategies or operations. In March 2004, we acquired certain technology and intellectual property rights of Delean Vision
Worldwide, Inc. In February 2004, we acquired the 50% percent interest in Sylvan Identix
Fingerprint Centers, LLC (SIFC) that we did not own. We subsequently re-named SIFC to Identix
Identification Services, LLC. In February 2004, we sold our wholly owned subsidiary, Identix Public
Sector, Inc., whose business principally consisted of providing project management and facilities
engineering services to government agencies. We acquired certain proprietary software and source
code assets from a third party in October 2002. We merged with Visionics in June 2002 and acquired
Identicator Technology, Inc. in fiscal 1999. We also acquired one company in fiscal 1998 and two
companies in fiscal 1996. These and any other acquisitions, mergers and divestitures by Identix are
and will be accompanied by the risks commonly encountered in such transactions. These risks
include, among other things:  
    exposure to unknown liabilities of acquired companies or assets;
    higher than anticipated acquisition costs and expenses;
    effects of costs and expenses of acquiring and integrating new businesses on our operating results and financial condition;
    effects of consolidated revenue loss associated with dispositions of material subsidiaries or assets;
    effects of costs and expenses of integrating and introducing new technologies;
    the difficulty and expense of assimilating the operations and personnel of the companies;
    disruption of our ongoing business;
    diversion of management time and attention;
    failure to maximize our financial and strategic position by the successful incorporation of acquired technology;
    failure to realize the potential of acquired technologies, complete product development, or properly obtain or secure
appropriate protection of intellectual property rights;
    the maintenance of uniform standards, controls, procedures and policies;
    loss of key employees and customers as a result of changes in management;
    the incurrence of amortization expenses;
    incurring impairment charges arising out of our assessments of goodwill and intangibles; and
    possible dilution to our stockholders. In addition, geographic distances may make integration of businesses or the acquisition of
assets more difficult. We may not be successful in overcoming these risks or any other problems
encountered in connection with any mergers or acquisitions. The manner of accounting for our merger with Visionics Corporation, which was completed in June
2002, may affect our reported results of operations. 24




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In connection with the Visionics merger, we recorded a substantial amount of goodwill. Generally
accepted accounting principles requires that goodwill be tested for impairment at least annually
and a non-cash charge to earnings must be recognized in the period any impairment of goodwill is
determined. While we did not record an impairment of goodwill in fiscal year 2004, during the
fourth quarter of fiscal year 2003, we recorded an impairment charge to goodwill in the amount of
$154,799,000. Failure to achieve
and maintain
effective internal
controls over
financial reporting
in accordance with
Section 404 of the
Sarbanes-Oxley Act
could have a
material adverse
effect on our
business and stock
price. Pursuant to Section
404 of the
Sarbanes-Oxley Act
of 2002, beginning
with our Annual
Report on Form 10-K
for the fiscal year
ending June 30,
2005, we will be
required to furnish
a report by our
management on our
internal control
over financial
reporting. The
internal control
report must contain
(i) a statement of
managements
responsibility for
establishing and
maintaining
adequate internal
control over
financial
reporting, (ii) a
statement
identifying the
framework used by
management to
conduct the
required evaluation
of the
effectiveness of
our internal
control over
financial
reporting, (iii)
managements
assessment of the
effectiveness of
our internal
control over
financial reporting
as of the end of
our most recent
fiscal year,
including a
statement as to
whether or not
internal control
over financial
reporting is
effective, and (iv)
a statement that
our independent
registered public
accounting firm has
issued an
attestation report
on managements
assessment of
internal control
over financial
reporting. Management
acknowledges
its
responsibility
for internal
controls over
financial
reporting and
seeks to
continually
improve those
controls. In
order to
achieve
compliance
with Section
404 within
the
prescribed
period, we
are engaged
in a process
to document
and evaluate
our internal
control over
financial
reporting,
which is both
costly and
challenging.
In this
regard,
management
will need to
continue to
dedicate
internal
resources,
engage
outside
consultants
and adopt a
detailed work
plan to (i)
assess and
document the
adequacy of
internal
control over
financial
reporting,
(ii) take
steps to
improve
control
processes
where
appropriate,
(iii)
validate
through
testing that
controls are
functioning
as
documented,
and (iv)
implement a
continuous
reporting and
improvement
process for
internal
control over
financial
reporting.
Despite our
efforts, we
can provide
no assurance
as to our, or
our
independent
registered
public
accounting
firm,
conclusions
as of June
30, 2005 with
respect to
the
effectiveness
of our
internal
control over
financial
reporting
under Section
404. There is
a risk that
neither we
nor our
independent
registered
public
accounting
firm will be
able to
conclude at
or around
June 30, 2005
that our
internal
controls over
financial
reporting are
effective as
required by
Section 404.
In connection
with the
Companys
fiscal 2005
third quarter
financial
statements
closing
process,
management of
the Company
and its
Companys
independent
registered
public
accounting
firm
identified a
material
weakness in
the Companys
internal
control over
financial
reporting
relating to
revenue
recognition
on a single
international
sales order
with multiple
revenue
elements.
A
material
weakness is a
significant
deficiency,
or
combination
of
significant
deficiencies,
that results
in more than
a remote
likelihood
that a
material
misstatement
of the annual
or interim
financial
statements
will not be
prevented or
detected.
The
weakness did
not result in
any
restatement
of previously
filed
financial
statements of
the Company
or adjustment
to the
Companys
fiscal 2005
third quarter
financial
statements as
a result of
this material
weakness. In
order to
remediate
this
weakness, the
Company is
taking steps
to improve
its internal
controls over
financial
reporting by
designing a
process to
ensure
accuracy of
revenue
recognition
analysis on
the Companys
complex
customer
arrangements
including
those with
multiple
revenue
elements.
While the
Company
believes it
will
successfully
remediate the
identified
weakness
prior to the
deadline
required by
Section 404,
the failure
by the
Company to
timely and
successfully
remediate the
weakness, or
the failure
of the
Company
and/or our
independent
registered
public
accounting
firm to
conclude at
or around
June 30, 2005
that our
internal
controls over
financial
reporting are
effective as
required by
Section 404
could result
in a material
adverse
reaction in
the financial
markets due
to a loss of
confidence in
the
reliability
of our
financial
statements. Compliance with changing regulation of corporate governance and public disclosure may result in
additional expenses. Changing laws, regulations and standards relating to corporate governance and public disclosure,
including the Sarbanes-Oxley Act of 2002, new SEC regulations and NASDAQ National Market rules, are
creating uncertainty for companies such as ours. These new or changed laws, regulations and
standards are subject to varying interpretations in many cases due to their lack of specificity,
and as a result, their application in practice may evolve over time as new guidance is provided by
regulatory and governing bodies, which could result in continuing uncertainty regarding compliance
matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.
We are committed to maintaining high standards of corporate governance and public disclosure. As a
result, we intend to invest resources to comply with evolving laws, regulations and standards, and
this investment may result in increased general and administrative expenses and a diversion of
management time and attention from revenue-generating activities to compliance activities. If our
efforts to comply with new or changed laws, regulations and standards differ from the activities
intended by regulatory or governing bodies due to ambiguities related to practice, our reputation
may be harmed. Recording compensation expense in connection with stock option grants may cause our profitability
to be reduced significantly. The Financial Accounting Standards Board (FASB) has recently issued an accounting standard, SFAS
123(R), that will require the fair value of all equity-based awards granted to employees be
recognized in the income statement as compensation expense starting in fiscal years that begins
after June 15, 2005. The various methods for determining the fair value of stock options are based
on, among other things, the volatility of the underlying stock. Our stock price has historically
been volatile. Therefore, the adoption of an accounting standard requiring companies to expense
stock options could negatively affect our profitability and may adversely affect our stock price.
Such adoption could also limit our ability to continue to use stock options as an incentive and
retention tool, which could, in turn, hurt our ability to recruit employees and retain existing
employees. If we fail to adequately manage the size of our business, it could have a severe negative
effect on our financial results or stock price. 25




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Our management believes that in order to be successful we must appropriately manage the size of our
business. This may mean reducing costs and overhead in certain economic periods, and selectively
growing in periods of economic expansion. In addition, we will be required to implement
operational, financial and management information procedures and controls that are efficient and
appropriate for the size and scope of our operations. The management skills and systems currently
in place may not be adequate and we may not be able to manage any significant cost reductions or
effectively provide for our growth. If we fail to attract and retain qualified senior executive and key technical personnel, our
business will not be able to expand. We are dependent on the continued availability of the services of our employees, many of whom are
individually key to our future success, and the availability of new employees to implement our
business plans. The market for skilled employees is highly competitive, especially for employees in
technical fields. Although our compensation programs are intended to attract and retain the
employees required for us to be successful, there can be no assurance that we will be able to
retain the services of all our key employees or a sufficient number to execute our plans, nor can
there be any assurance we will be able to continue to attract new employees as required. Our personnel may voluntarily terminate their relationship with us at any time, and competition for
qualified personnel, especially engineers, is intense. The process of locating additional personnel
with the combination of skills and attributes required to carry out our strategy could be lengthy,
costly and disruptive. If we lose the services of key personnel, or fail to replace the services of key personnel who
depart, we could experience a severe negative effect on our financial results and stock price. In
addition, there is intense competition for highly qualified engineering and marketing personnel in
the locations where we principally operate. The loss of the services of any key engineering,
marketing or other personnel or our failure to attract, integrate, motivate and retain additional
key employees could have a material adverse effect on our business, operating and financial results
and stock price. 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk Interest Rate Risk.The Companys exposure to market risk for changes in interest rates
relates primarily to the Companys cash equivalents, marketable securities and line of credit.The
Company does not use derivative financial instruments. The Companys cash equivalents are invested
in money market accounts and high quality bonds with major financial institutions. Due to the
short duration and conservative nature of the Companys cash equivalents and marketable securities,
their carrying value approximates fair market value. The Company has performed an analysis to
assess the potential effect of reasonably possible near-term changes in interest rates. The effect
of such rate changes is not expected to be material to the Companys results of operations, cash
flows or financial condition. If the Company enters into debt obligations it is primarily to support general corporate
purposes including working capital requirements and capital expenditures. The Company is subject
to fluctuating interest rates that may impact, adversely or
otherwise, its results of operation or cash flows for its variable rate lines of credit and
cash equivalents. As noted previously, the Company has not drawn on its line of credit during the
periods presented. Foreign Currency Exchange Rate Risk.Certain of the Companys foreign revenues, cost of
revenues and marketing expenses are transacted in local currencies, primarily the British Pound. As
a result, the Companys results of operations and certain receivables and payables are subject to
foreign exchange rate fluctuations. The Company does not currently hedge against foreign currency
rate fluctuations. Gains and losses from such fluctuations have not been material to the Companys
consolidated results of operations or balance sheet. 
 Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures.Based on their evaluation as of the end of
the period covered by this Quarterly Report on Form 10-Q, our chief executive officer and chief
financial officer have concluded that our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) are ineffective to ensure that
information required to be disclosed by us in reports that we file or submit under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms due to the material weakness
identified as described in the paragraph below. The weakness was related to a single international
sales order with multiple revenue elements and did not result in any restatement of previously
filed financial statements of the Company or adjustment to the Companys fiscal 2005 third quarter
financial statements as a result of this material weakness. A material weakness is a significant
deficiency, or combination of significant deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim financial statements will not be
prevented or detected. Changes in Internal Control Over Financial Reporting.In connection with the Companys
fiscal 2005 third quarter financial statements closing process, management of the Company and the
Companys independent registered public accounting firm identified a material weakness in the
Companys internal control over financial reporting relating to revenue 26




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recognition on a single
international sales order with multiple revenue elements. The weakness did not result in any
restatement of previously filed financial statements of the Company or adjustment to the Companys
fiscal 2005 third quarter financial statements as a result of this material weakness. In order to
remediate the weakness, the Company is currently taking steps to improve its internal controls over
financial reporting by designing a process to ensure the accuracy of revenue recognition related to
complex customer arrangements including those with multiple elements. The Company is in the
process of determining what these improvements in internal controls will consist of, but are
expected to include more formalized procedures regarding the review and approval of information
used to evaluate the appropriate revenue recognition. Except for the foregoing, there were no
changes in our internal control over financial reporting identified in connection with our
evaluation that occurred during our third fiscal quarter that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting. While
the Company believes it will successfully remediate the identified weakness prior to the deadline
required by Section 404, the failure by the Company to timely and successfully remediate the
weakness, or the failure of the Company and/or our independent registered public accounting firm to
conclude at or around June 30, 2005 that our internal controls over financial reporting are
effective as required by Section 404 could result in a material adverse reaction in the financial
markets due to a loss of confidence in the reliability of our
financial statements. 
 PART II OTHER INFORMATION 
 Item 1. Legal Proceedings In February 2003, Roger Benson filed a lawsuit against the Company and certain of its affiliated
entities in California Superior Court alleging that in 1998 he was issued a duplicate electronic
fingerprint number that was also held by a convicted felon. The complaint alleged that a live scan
fingerprint imaging machine manufactured by one of the defendants contributed to the
misidentification of Mr. Benson. In February 2005, Mr. Benson voluntarily dismissed his entire
case against all of the defendants. The voluntary dismissal followed Identix successful motion
for, and award of, immaterial monetary sanctions against each of Mr. Benson and his attorney. In July 2004, Miguel and Lilia Espinoza filed a purported class action lawsuit against the
Company and certain of its affiliated entities in the State of Oregon. Mr. Espinoza claimed he was
misidentified as a convicted felon and that his misidentification resulted from the issuance to him
of a duplicate fingerprint identification number generated by a live scan system manufactured by
one of the defendants. The entities affiliated with Identix were dismissed from the action by
court order. Subsequently, the Company filed a motion for summary judgment on the merits. In
April 2005, the U.S. Magistrate Judge handling the case
granted summary judgment in favor of Identix stating that the live scan machine in question had
correctly assigned different fingerprint control numbers to Mr. Espinoza and the third party felon.
In accordance with applicable rules of civil procedure, the summary judgment ruling will now be
reviewed by a U.S. District Judge prior to any final entry. Based upon the current disposition of
the litigation discussed above, the Company believes that liabilities and costs arising from these
lawsuits will not have a material adverse impact on the Companys consolidated financial position,
results of operations or cash flows. 
 Item 6. Exhibits (a) Exhibits ExhibitNumber
    
    Description31.1
    
    CEO Certification31.2
    
    CFO Certification32
    
    906 Certifications
 27




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SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant, Identix Incorporated, a corporation organized and existing under the laws of the
State of Delaware, has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized, in the City of Minnetonka, State of Minnesota, on May 10, 2005. IDENTIX INCORPORATEDBY:
    /s/ Elissa J. LindsoeElissa J. LindsoeChief Financial Officer 28