Identix Inc.

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Identix Inc.

100 Cooper Court
Los Gatos, California 95032
U.S.A.
Telephone: (408) 335-1400
Fax: (498) 395-8076
Web site: http://www.identix.com

Public Company
Incorporated: 1982
Employees: 404
Sales: $72.7 million (2000)
Stock Exchanges: American
Ticker Symbol: IDX
NAIC: 335999 All Other Miscellaneous Electrical Equipment and Component and Supplies Manufacturing; 334119 Other Computer Peripheral Equipment Manufacturing; 51121 Software Publishers; 541512 Computer Systems Design Services

Identix Inc. is at the forefront of new developments in the area of electronic security and identification. Identix has developed and marketed proprietary technologies which capture, analyze, and reproduce human fingerprints. While the company produces some hardware products, Identix has established itself as a leader in the area of biometrie software—software which measures biological data such as patterns in fingerprints, the hand, and the iris of the eye. Identix products and services are broadly divided into three service areas: Security solutions, imaging solutions, and ANADAC/Government Services. In the area of security, Identix products are used to verify the identity of individuals and to control their access to computer systems, the Internet, intranets, wireless Web networks, e-commerce sites, buildings, secure areas, and the like. Identification is effected by placing a predetermined finger on a touch-sensitive pad connected to a database. The fingerprint of the finger on the touch pad is analyzed and compared with those on file in the database. If there is a match, access is granted. Identix has customers in more than 40 countries for its security applications. Identix imaging applications are used to capture and reproduce forensic quality fingerprints for personal identification and record-keeping. The primary customers for these products are law enforcement agencies. However, they are also used for immigration and employment screening purposes and other kinds of background checks. By 2001, governments in over 30 states and in four foreign countries were using Identix imaging applications. ANADAC/Government Services, administered by ANADAC Identix’s wholly owned subsidiary, provides a variety of consulting services to clients in both the public and private sectors. Identix also uses ANADAC’s relations with various government agencies as a vehicle for selling its products to federal government clients. Its itrust division provides hardware and software which guarantee secure transaction services for Internet and wireless commerce.

1970s Beginnings

Randall Fowler, the founder of Identix Incorporated, was born in rural Kentucky near Louisville. After his graduation from high school in 1957, he has stated, his grandfather thought he would be unlikely to succeed at anything, “Because I didn’t like to plow.” Fowler was talented in math, however, and he worked his way through the University of Louisville with jobs at the A&P market, eventually earning a degree in engineering. He went on to get a doctorate in applied mechanics at Stanford University. By the time the 1970s rolled around Fowler was working at TRW Inc., a company that, among other things, developed spacecraft for the government. The company was encountering difficulties establishing the identities of individuals who were using computers to make credit purchases. Fowler became interested in the problem of personal identification, at first on a purely theoretical basis. He started working on it after work in his spare time with books on identification technology from the library. At that early date, he had no inkling that identification technology would become his life’s work.

He realized early on that electronic identification of individuals was a problem for biometrics—the measurement of biological data—and the key was fingerprints. They were completely unique and did not change over the course of a lifetime. What’s more, fingerprint equipment could be relatively compact. One alternative, retina and iris scanning, was just as accurate, but the equipment was expensive and the process was unpleasant for the person whose eyes the light was analyzing. Another, hand scanners, could be easily tricked. Fowler saw his challenge as the development of a means of reading a fingerprint optically, registering its valleys and ridges and disregarding irrelevant distortions.

Fowler’s work eventually attracted the attention of the Federal Bureau of Investigation (FBI) and, as a result, he was awarded a grant by the Law Enforcement Assistance Administration (LEAA), which Fowler used to set up a company. Times worked against the new firm, however. It lost its government support when the Nixon administration cut the LEAA’s funding. It did not help that at the time the government was Fowler’s only potential customer. The fingerprint technology was extremely expensive, and it would be still years before personal computers would make computers commonplace in homes and offices. Fowler was also becoming aware of the limitations of his knowledge relating to fingerprints, identification, and electronic applications. He closed down the company and went to work for others as a manager and consultant, learning more at each new job. By 1982, he had developed his identification technology to a point where venture capitalists began to see potential. They chipped in $250,000 that year and $2 million in 1983, and Identix was born. The company went public in 1985, despite skepticism from his backers and Wall Street—the entire biometrics industry had rung up only $5 million in sales in all of 1984.

Growth and Expansion in the 1980s

In its first decade Identix focused its energies on developing effective, marketable biometrie technologies. An order for a Identix system from the FBI in early 1985 was encouraging, and other orders began to come in gradually as well. In fall 1987, the kingdom of Saudi Arabia purchased 36 computerized fingerprint identification systems to be used in a defense security center near the capital Riyadh. The head of Chicago’s Rush Presbyterian-St. Luke’s Medical Center’s computer center, frustrated by lost or stolen keys and forgotten passwords, ordered some Identix fingerprint identification equipment in late 1989. In June 1990, the California Department of Justice ordered some 600 Identix machines for city and county law enforcement in the state. That contract, which extended over a five year period, was worth nearly $40 million.

The California deal was Identix’s largest order to date, by far. It was seen as a turning point for the company. Between 1982 and 1989 the company sold approximately 1,200 of its fingerprint systems, including one to the Pentagon. Nonetheless the firm had lost money every year of its existence. Despite 1989 sales of $1.8 million, the firm lost $2.5 million that year and was running deeply in the red in 1990. One problem for the company was that the admissibility of electronic fingerprints had never been tested in the courts and the FBI had not yet formally endorsed the system, feeling it was not yet accurate enough. That changed in 1991 when the Bureau finally approved Identix products for use by police departments. The police market would soon be Identix’s largest.

Identix made a major acquisition in October 1992 when it obtained ANADAC Inc. in a stock deal valued at $5.9 million. ANADAC was an Arlington, Virginia-based contractor that had provided systems integration services to the government since its founding in 1981. Identix selected ANADAC as a takeover target because it was looking for a firm that had both experience with large computer systems and contacts in the government—its major client was the Defense Department, in particular the U.S. Navy. With 158 employees and $17.3 million in sales in 1991, ANADAC was 86th on the list of the 100 largest Washington, D.C., area companies, and some observers found it peculiar that a profitable company such as ANADAC would be taken over by Identix, which had never once turned a profit. However, ANADAC was also seen as a company entering a decline. Defense spending was being cut, and as a result ANADAC’s sales were falling. Conversely, the future seemed to hold great things for Identix. Identix also had an investor, Ascom Hasler Ltd. of Switzerland, who was willing to pour money into the company until it hit stride. The acquisition was seen as a good one for stockholders of ANADAC, a company that had few outstanding shares which traded only infrequently. The buyout nearly tripled the value of their holdings. Identix’s presence on the American Stock Exchange, it was also felt, would give their stock more visibility. After the takeover, ANADAC became a fully owned subsidiary of Identix.

New Products and Continued Growth in the 1990s

In the mid-1990s, Identix introduced a variety of innovative new products. The firm announced the Identix Gateway for the Automated Fingerprint Identification System (AFIS), produced by NEC Techologies in August 1994. The Gateway provided more efficient communication of fingerprint data from NEC workstations, which were generally found in police departments and other law enforcement offices, and the central AFIS. In October of that year, the company introduced the TouchPrint 600, a system for high resolution recording of fingerprints that exceeded the FBI’s requirements for high image quality. After a series of rigorous tests, the system received FBI accreditation in March 1995, the first electronic fingerprint system to be so accredited.

Company Perspectives:

Identix, incorporated in August 1982, is the leader in designing, developing, manufacturing, and marketing comprehensive user authentication, security, and identification solutions for the capture and/or comparison of fingerprints. Identix provides solutions for a wide range of applications for markets that include corporate enterprise security, Intranet, extranet, Internet, wireless Web access and security, E-commerce, government, and law enforcement agencies. Identix has more biometrie installations worldwide than any other company, and has formed strategic alliances with industry-leaders including Motorola, Compaq, Toshiba, VeriSign, Novell, Dell, Key Tronic, SCM Micro, Cherry, and Unisys.

In June 1995, Identix was the defendant in a patent infringement suit brought by Digital Biometrics (DBI) of Minnetonka, Minnesota. The plaintiff, suing for damages which were not reported, alleged that some Identix TouchPrint products violated a DBI patent. Identix fought the suit vigorously, calling it “malicious and frivolous” in statements to the press. Its first Touch Print product, the company pointed out, was introduced in 1989, while the Digital Biometric patent was not filed until June 1990. Identix speculated that the suit was an attempt to block an offer to redeem outstanding Identix stock warrants. A year later, in August 1996, a California court ruled that Identix had not infringed the DBI‘s patent. The case was later dismissed by a California Federal District Court which ruled that no Identix TouchPrint system had violated DBI‘s patent, a ruling that was upheld by the U.S. Federal Circuit Court of Appeals in 1998.

In 1995, Identix’s annual sales reached $27 million and its shares were earning about three cents per quarter. Randall Fowler predicted that sales would grow to $40 million in 1996, and nearly double each in the rest of the decade. In March of 1996, Identix acquired Fingerscan Pty Limited for 6.68 million shares of its stock. Fingerscan was an Asian supplier to Identix and had been integrating Identix technology into its security equipment. The acquisition broadened Identix’s marketing presence in Pacific Rim countries. Four months later, the firm purchased Innovative Archival Solutions (IAS) of Springfield, Illinois. IAS, a value-added reseller, was performing fingerprint capture services for various Indiana and Illinois government agencies.

In August 1996, Identix restated its revenues for the previous three quarters, downgrading its second quarter results from earnings of $389,000 to a loss of $4.87 million, and its third quarter from a $4.35 million loss to a $4.87 million loss. The San Francisco Chronicle questioned the reasons for the restatement and established that the company had fudged the delivery date of a $1 million order from Marin and Alameda counties in California. Rather than being shipped at the end of March, as publicized, the orders were actually shipped four and a half months later. The paper suggested that the March announcement was timed to push up the price of Identix’s slumping stock. At least one Identix shareholder also believed that was the case and instigated a class action suit in U.S. District Court, charging that two officers of Identix had made “false and misleading statements” about the company which led to the price of Identix stock being artificially inflated between January and August 1996. For its part, Identix strongly denied any wrong-doing. In December 1997 it reached an undisclosed out-of-court settlement with the plaintiff.

In July 1997, Identix acquired Biometric Applications and Technology Inc. (BA&T), a developer of biometrie and smart card technology with contracts with the Defense Department and the Federal Aviation Administration. In the deal BA&T shareholders were issued 450,000 shares of Identix stock. A month later, in August 1997, the company announced a joint venture with Sylvan Learning Systems Inc. of Baltimore, Maryland. Under the agreement, Identix would provide fingerprint services at nearly 40 of Sylvan’s testing and adult education centers. Before a year had passed the Identix/Sylvan joint venture was also providing fingerprinting services for the Illinois State Agencies, the National Association of Securities Dealers, and United Airlines. Identix imaging systems continued to win new customers. In September 1997, the Immigration and Naturalization Service announced it would buy 400 fingerprint devices. In July 1998, the California state prisons placed an initial order for $1.3 million, and two months later the Detroit Police Department ordered TouchPrint 600 systems worth $1 million.

In May 1998, the firm introduced the Smart-Touch for Unicenter TMG. The Smart-Touch system, developed in cooperation with Computer Associates International Inc., incorporated a point-and-click graphic interface and could be used to access multiple applications in an enterprise with the touch of a finger that lasted less than a second. In October the company introduced a new family of fingerprint verifiers, the TouchSAFE Personal, F3 System Integrator Kit, and TouchNet III. The new readers were developed to operate with personal computer-based desktops and servers. TouchSAFE Personal was a small, compact, and most importantly, affordable device which guaranteed secure access to PCs and networks. The low price made it attractive to a much broader base of business clients.

In April 1999, Identix acquired one of its main competitors, Identicator Inc. of San Bruno California, in a $39.8 million stock deal that included the assumption of $2 million in Identicator debt. Identicator was also a manufacturer of fingerprint verification equipment. It made its first successful inroads into the low-price market when, in 1998, it introduced the first fingerprint reader priced at less than $100. This, in large part, was why Identix decided to make the acquisition—until then it had been unable to crack into the mass market. As a result of the deal, Identix restructured its operations, primarily to reduce duplication.

Challenges in the New Century

In early 1999, Identix and Motorola initiated a cooperative venture to develop products that utilized Motorola chips and Identix technology. The first product of the partnership was released in November of the same year, the DFR 300, an optical fingerprint reader for security applications. In late 2000, when Identix launched a new division for secure transaction services for Internet and wireless commerce, itrust, Motorola invested $3.75 million as a sign of its commitment to the new venture.

Key Dates:

1982:: Randall Fowler founds Identix.
1985:: The FBI orders an Identix fingerprint system.
1990:: The California Department of Justice places a $40 million order for some 600 Identix Identix machines.
1991:: The FBI approves Identix fingerprint systems for use by police departments.
1992:: Identix acquires ANADAC Inc.
1994:: Identix introduces the TouchPrint 600 system.
1995:: The FBI accredits the TouchPrint 600 system.
1997:: Identix acquires Biometric Applications and Tecnology Inc.; Identix and Sylvan Learning Systems form joint venture.
1999:: Identix acquires Identicator Inc.
2000:: Identix introduces its BioLogon software and launches itrust; IDX offers its first itrust product, and Identix is awarded contracts from two major airports.

The company introduced its BioLogon software in January 2000. BioLogon was a biometrie identification system designed to work in conjunction with the Novell Modular Authentication Service and the Novell Directory Service eDirectory. A demonstration of the new software at the launch of Microsoft’s Windows 2000 a month later led to a brief run on Identix stock. The following quarter, nonetheless, Identix announced it had suffered greater quarterly losses than anticipated. The company blamed delayed deliveries of a miniature scanner, the DFR300, in April 2000 as a result of quality control concerns. Later that year, in July, the firm closed a facility in Virginia and cut employees by 10 percent. Identix faced further losses in 2000. It said another planned restructuring, which would centralize its marketing, finance, and customer service departments and cut back its Physical Access work, contribute to making the company profitable by 2002.

In June 2001, the itrust division introduced its first product. It was a security platform that controlled access to information sharing and data transfer in open wired and wireless networks. The platform covered the three most important aspects of security, authentication, authorization, and administration. In July 2001, the firm received a contract from Baltimore/Washington International Airport (BWI). Identix was to supply equipment for employee background checks that would enable BWI to comply with the Airport Security Act of 2000. BWI purchased two fingerprint scanners, making it the seventh airport to adopt Identix technology. The others are Washington Dulles International, Ronald Reagan National, JFK International, Boston Logan International, Chicago O’Hare, and Orlando International Airport.

Principal Subsidiaries

ANADA, Inc.

Principal Divisions

itrust.

Principal Competitors

Printrak International Inc.; SAFLINK Corporation; Keyware Technologies; Viisage Technology, Inc.; Ethentica, Inc.; Loronix Information Systems, Inc.; Visionics Corporation.