-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, K+hCEKZMP7QngG2fqXoSwwfkUQnJRw+iCnUbnV9KmdKryIfRVCf8ydlFPA2vh0CU 0Bvs+YFOg+w4MxIhiCZooA== 0000897101-00-000497.txt : 20000512 0000897101-00-000497.hdr.sgml : 20000512 ACCESSION NUMBER: 0000897101-00-000497 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000511 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIGITAL BIOMETRICS INC CENTRAL INDEX KEY: 0000868373 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 411545069 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-72031 FILM NUMBER: 626169 BUSINESS ADDRESS: STREET 1: 5600 ROWLAND RD CITY: MINNETONKA STATE: MN ZIP: 55343 BUSINESS PHONE: 6129320888 MAIL ADDRESS: STREET 1: 5600 ROWLAND RD STREET 2: 5600 ROWLAND RD CITY: MINNETONKA STATE: MN ZIP: 55343 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2000 -------------------------------------------------- or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________________ to _________________________ Commission File Number: 0-18856 ---------------------------------------------------------- DIGITAL BIOMETRICS, INC. (Exact name of registrant as specified in its charter) Delaware 41-1545069 -------- ---------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 5600 Rowland Road, Minnetonka, Minnesota 55343 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (612) 932-0888 -------------- (Registrant's telephone number, including area code) N/A (Former name, former address and former fiscal year, if changed since last report) 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 filing requirements for the past 90 days. [x] Yes [ ] No Indicate the number of shares of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $.01 par value April 30, 2000 - 16,816,726 shares ---------------------------- ---------------------------------- (Class) (Outstanding) 1 DIGITAL BIOMETRICS, INC. THREE MONTHS ENDED MARCH 31, 2000 INDEX PART I - FINANCIAL INFORMATION: PAGE ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) CONSOLIDATED BALANCE SHEETS 4 CONSOLIDATED STATEMENTS OF OPERATIONS 5 CONSOLIDATED STATEMENTS OF CASH FLOWS 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 18 PART II - OTHER INFORMATION: ITEM 1. LEGAL PROCEEDINGS 19 ITEM 2. CHANGES IN SECURITIES 19 ITEM 3. DEFAULTS UPON SENIOR SECURITIES 19 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 19 ITEM 5. OTHER INFORMATION 19 ITEM 6. (a) EXHIBITS 19 (b) REPORTS ON FORM 8-K 19 SIGNATURES 20 - ---------- 2 DIGITAL BIOMETRICS, INC. THREE MONTHS ENDED MARCH 31, 2000 SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Except for the historical information contained herein, the matters discussed in this Form 10-Q include forward-looking statements made within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. As provided for under the Private Securities Litigation Reform Act, the Company cautions investors that actual results of future operations may differ from those anticipated in forward-looking statements due to a number of factors, including the Company's ability to maintain profitability, introduce new products and services, build profitable revenue streams around new product and service offerings, maintain loyalty and continued purchasing of the Company's products by existing customers, execute on customer delivery and installation schedules, collect outstanding accounts receivable and manage the concentration of accounts receivable and other credit risks associated with selling products and services to governmental entities and other large customers, create and maintain satisfactory distribution and operations relationships with automated fingerprint identification system ("AFIS") vendors, attract and retain key employees, secure timely and cost-effective availability of product components, meet increased competition, maintain adequate working capital and liquidity, including the availability of financing as may be required, and upgrade products and develop new technologies. For a more complete description of such factors, see "Risk Factors" under Item 7 of the Company's Form 10-K report for the year ended September 30, 1999. 3 DIGITAL BIOMETRICS, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (UNAUDITED)
March 31, September 30, 2000 1999 ------------ ------------ Current assets: Cash and cash equivalents $ 5,824,387 $ 3,175,868 Accounts receivable, less allowance for doubtful accounts of $121,000 and $128,587, respectively 5,851,275 7,415,334 Inventory (note 4) 3,632,310 2,972,998 Prepaid expenses and other costs 150,238 195,887 ------------ ------------ Total current assets 15,458,210 13,760,087 ------------ ------------ Property and equipment 3,050,461 2,744,454 Less accumulated depreciation and amortization (2,066,015) (1,783,030) ------------ ------------ 984,446 961,424 ------------ ------------ Patents, trademarks, copyrights and licenses, net of accumulated amortization of $76,912 and $73,019, respectively 32,380 17,054 Deferred issuance costs on convertible debentures, net of accumulated amortization of $66,783 and $66,222, respectively -- 8,216 ------------ ------------ $ 16,475,036 $ 14,746,781 ============ ============ Current liabilities: Accounts payable $ 1,177,160 $ 1,826,451 Deferred revenue 3,368,374 2,319,828 Accrued warranty 612,534 745,104 Accrued installation costs 967,438 1,107,200 Other accrued expenses (note 6) 973,900 1,319,403 Current installments of capital lease obligations 7,062 57,292 ------------ ------------ Total current liabilities 7,106,468 7,375,278 Capital lease obligations, less current installments 24,449 93,077 Convertible debentures -- 148,097 ------------ ------------ Total liabilities 7,130,917 7,616,452 ------------ ------------ Stockholders' equity (note 7): Preferred stock, undesignated, par value $.01 per share, 5,000,000 shares authorized, none issued -- -- Common stock, $.01 par value. Authorized, 40,000,000 shares; issued and outstanding 16,806,726 and 16,017,629 shares, respectively 168,067 160,176 Additional paid-in capital 48,645,501 47,157,996 Deferred compensation (124,500) (75,500) Accumulated deficit (39,344,949) (40,112,343) ------------ ------------ Total stockholders' equity 9,344,119 7,130,329 ------------ ------------ $ 16,475,036 $ 14,746,781 ============ ============
See accompanying notes to consolidated financial statements. 4 DIGITAL BIOMETRICS, INC. CONSOLIDATED STATEMENTS OF OPERATION (UNAUDITED)
Three Months Ended Six Months Ended March 31, March 31, 2000 1999 2000 1999 ------------ ------------ ------------ ------------ Revenues: Identification systems $ 3,625,998 $ 4,242,322 $ 9,399,259 $ 5,588,441 Maintenance 1,117,279 879,644 2,186,001 1,711,433 Integral Partners, Inc. -- 68,960 -- 258,720 ------------ ------------ ------------ ------------ Total revenues 4,743,277 5,190,926 11,585,260 7,558,594 ------------ ------------ ------------ ------------ Cost of revenues: Identification systems 1,857,099 2,677,292 5,791,350 3,579,145 Maintenance 841,491 645,958 1,622,634 1,332,871 Integral Partners, Inc. -- 42,263 -- 142,767 ------------ ------------ ------------ ------------ Total cost of revenues 2,698,590 3,365,513 7,413,984 5,054,783 ------------ ------------ ------------ ------------ Gross margin 2,044,687 1,825,413 4,171,276 2,503,811 ------------ ------------ ------------ ------------ Selling, general and administrative expenses: Sales and marketing 553,322 462,570 1,139,351 888,595 Engineering and development 594,048 507,823 1,087,502 1,142,767 General and administrative 640,623 723,972 1,279,821 1,375,452 ------------ ------------ ------------ ------------ Total expenses 1,787,993 1,694,365 3,506,674 3,406,814 ------------ ------------ ------------ ------------ Income (loss) from operations 256,694 131,048 664,602 (903,003) ------------ ------------ ------------ ------------ Other income (expense): Interest income 66,358 6,532 106,453 12,807 Interest expense (888) (47,720) (6,109) (212,367) Other income (expense) (905) -- 2,448 -- ------------ ------------ ------------ ------------ Total other income (expense) 64,565 (41,188) 102,792 (199,560) ------------ ------------ ------------ ------------ Net income (loss) $ 321,259 $ 89,860 $ 767,394 $ (1,102,563) ============ ============ ============ ============ Net income (loss) per common share $ 0.02 $ 0.01 $ 0.05 $ (0.08) ============ ============ ============ ============ Net income (loss) per common share - assuming dilution $ 0.02 $ 0.01 $ 0.04 $ (0.08) ============ ============ ============ ============ Weighted average common shares outstanding 16,603,021 14,727,788 16,366,999 14,269,266 ============ ============ ============ ============ Weighted average common shares outstanding - assuming dilution 18,404,029 14,775,549 17,950,964 14,269,266 ============ ============ ============ ============
See accompanying notes to consolidated financial statements. 5 DIGITAL BIOMETRICS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended March 31, --------------------------- 2000 1999 ----------- ----------- Cash flows from operating activities: Net income (loss) $ 767,394 $(1,102,563) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Provision for doubtful accounts receivable (7,587) (7,731) Deferred compensation amortization 27,500 28,500 Depreciation and amortization 313,837 307,195 Gain on disposal of fixed assets (2,448) -- Interest expense amortization for the intrinsic value of the beneficial conversion feature of convertible debentures -- 125,000 Interest expense on debentures converted into common stock 12,350 24,581 Changes in operating assets and liabilities: Accounts receivable 1,571,646 (975,983) Inventories (659,312) 349,641 Prepaid expenses 45,649 (58,838) Accounts payable (649,291) (585,527) Deferred revenue 1,048,546 186,247 Accrued expenses (463,074) 116,523 ----------- ----------- Net cash provided by (used in) operating activities 2,005,210 (1,592,955) ----------- ----------- Cash flows from investing activities: Purchase of property and equipment (332,158) (138,862) Proceeds from disposal of property and equipment 12,794 -- Patents, trademarks, copyrights and licenses (19,219) (1,268) ----------- ----------- Net cash used in investing activities (338,583) (140,130) ----------- ----------- Cash flows from financing activities: Issuance of convertible debentures, net -- 450,111 Principal payments on capital lease obligations (118,858) (27,098) Private placement of common stock -- 905,154 Exercise of options and warrants 1,100,750 -- Net line of credit advances -- 241,232 ----------- ----------- Net cash provided by financing activities 981,892 1,569,399 ----------- ----------- Increase (decrease) in cash and cash equivalents 2,648,519 (163,686) Cash and cash equivalents at beginning of period 3,175,868 840,616 ----------- ----------- Cash and cash equivalents at end of period $ 5,824,387 $ 676,930 =========== ===========
See accompanying notes to consolidated financial statements. 6 DIGITAL BIOMETRICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2000 (UNAUDITED) (1) DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION Digital Biometrics, Inc., (the "Company," "Digital Biometrics" or "DBI") is a leading provider of identification information systems that employ "biometric" technology, which is the science of identifying individuals by measuring distinguishing biological characteristics. DBI's biometric identification and information technology services enable law enforcement and other government agencies to identify suspects and manage information on individuals, and help commercial employers and government agencies to conduct background checks on applicants for employment or permits. DBI's offerings include computer-based fingerprinting and photographic systems, software tools, multi-media data storage and communications servers, and the systems integration and software development services required to implement identification information systems. Under new management since 1997, Digital Biometrics has evolved from a single-product, live-scan hardware supplier to an identification information systems company. DBI continues to expand its product line and information technology services to further penetrate the law enforcement market, while introducing new products and services for emerging applicant-processing and security markets among commercial and government customers. DBI's systems are used wherever background identification checks and licensing are needed. Typical customers include: U.S. government agencies, such as the Immigration and Naturalization Service (INS) and the U.S. Postal Service; local and state police; the military; school districts; financial institutions; utilities; and casinos. The Company's main products are special-purpose, computer-based systems for "live-scan" fingerprint capture. These live-scan systems employ patented, high-resolution optics and specialized hardware and software, combined with industry-standard computer hardware and software, to create highly optimized, special-purpose systems which capture, digitize, print and transmit forensic-grade fingerprint and photographic images. Also, the Company is engaged in a joint venture with Lakes Gaming, Inc. (formerly known as Grand Casinos, Inc.), TRAK 21 Development, LLC, to develop, test and market an automated wagering tracking system based on technology developed by the Company. This system is intended to track the betting activity of casino patrons playing blackjack. A majority of the Company's revenues in the three and six-month periods ended March 31, 2000 and 1999 were derived from live-scan systems sales, photographic image capture systems, maintenance and applications development services to governmental customers. The Company's sales have historically included large purchases by a relatively small number of customers. This concentration of sales among few relatively large customers is expected to continue in the foreseeable future. Furthermore, the nature of government markets and procurement processes is expected to result in continued quarter-to-quarter fluctuations in the Company's revenues and earnings which are and will continue to be difficult to predict. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with 7 DIGITAL BIOMETRICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2000 (UNAUDITED) the instructions for Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. For further information, refer to financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended September 30, 1999. The consolidated financial statements include the accounts of Digital Biometrics, Inc. and its wholly owned subsidiary Integral Partners, Inc. All significant intercompany balances and transactions have been eliminated on consolidation. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 which provides the staff's views in applying generally accepted accounting principles to selected revenue recognition issues. The Company will be required to adopt the new standard beginning with the first quarter of fiscal 2001. The impact of adoption on the Company's financial statements has not yet been determined. (2) SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK The Company extends credit to substantially all of its customers. Approximately 91% of customer accounts receivable at March 31, 2000 were from government agencies of which 16% was from one customer. Approximately 94% of customer accounts receivable at September 30, 1999 were from government agencies of which 53% were from two customers. Revenues from one customer in the three-month period ended March 31, 2000 and 1999 accounted for 17% and 42%, respectively, of total revenues. Revenues from two customers in the six-month period ended March 31, 2000 accounted for 23% and 15% of total revenues, and revenues from one customer in the six-month period ended March 31, 1999 accounted for 32% of total revenues. Export revenues for the three and six-month periods ended March 31, 2000 and March 31, 1999 were less than 1% of total revenues. (3) STATEMENT OF CASH FLOWS For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments and certificates of deposit purchased with an original maturity date of three months or less to be cash equivalents. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Six Months Ended March 31, 2000 1999 ---------- --------- Cash paid during the period for interest $4,397 $30,425 ========== ========= 8 DIGITAL BIOMETRICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2000 (UNAUDITED) SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS: In October 1999, the Company issued 116,369 shares of common stock for the conversion of the final remaining principal aggregating $150,000 plus $12,252 of accrued interest at an average conversion price of $1.39 per share. For additional supplemental disclosure of other non-cash investing and financing activities see note 7. (4) INVENTORY Inventory is valued at standard cost which approximates the lower of first-in, first-out (FIFO) cost or market. Inventory consists of the following: March 31, September 30, 2000 1999 ------------ ------------ Components and subassemblies $2,628,715 $2,307,600 Work in process 315,333 434,714 Finished goods 688,262 230,684 ------------ ------------ $3,632,310 $2,972,998 ============ ============ (5) LINE OF CREDIT Effective January 1, 2000, the Company established an inventory and receivables financing line of credit for the lesser of eligible inventory and receivables or $2,000,000 with Associated Bank, formerly named Riverside Bank. Borrowings under this line of credit are secured by all the assets of the Company. This line of credit replaced the Company's previous line of credit agreement. The line bears interest at a rate of 0.5% (one half percent) above the prime rate. The line will expire in November 2000. There were no borrowings under this line at March 31, 2000. (6) OTHER ACCRUED EXPENSES Other accrued expenses consists of: March 31, September 30, 2000 1999 ------------ ------------ Accrued salaries, bonuses and commissions $ 416,526 $ 773,106 Accrued vacation 252,274 195,757 Other accrued expenses 305,100 350,540 ------------ ------------ $ 973,900 $1,319,403 ============ ============ 9 DIGITAL BIOMETRICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2000 (UNAUDITED) (7) STOCKHOLDERS' EQUITY During the three-month period ended March 31, 2000, the Company granted stock option awards to non-executive employees for the purchase of an aggregate of 28,500 shares of common stock. These options are exercisable at a price of $7.875 per share and expire in 2007. Effective with their election at the annual stockholders' meeting held on February 8, 2000 the Company granted an aggregate of 9,144 shares of restricted common stock to its non-employee directors. The grant resulted in $72,000 of additional common stock issued and an equal amount of deferred compensation expense that is being amortized on a straight-line basis over the three-year vesting period. Also effective with their election, the Company granted options to acquire an aggregate of 60,000 shares of the Company's common stock to its non-employee directors. These options are exercisable at $7.875 per share and expire in 2005. (8) NET INCOME (LOSS) PER COMMON SHARE The per share computations are based on the weighted average number of common shares outstanding during the periods.
Three Months Ended Six Months Ended March 31, March 31, ---------------------------- ---------------------------- 2000 1999 2000 1999 ------------ ------------ ------------ ------------ Shares outstanding at beginning of period 16,269,476 14,036,487 16,017,629 13,661,832 Shares issued under retirement plan -- 20,069 45,855 87,897 Restricted stock awards, net of forfeitures 9,144 43,200 10,269 43,200 Shares issued for private placements -- 694,996 -- 694,996 Exercise of options and warrants 528,106 -- 616,604 -- Shares issued upon conversion of debentures -- 335,930 116,369 642,757 ------------ ------------ ------------ ------------ Shares outstanding at end of period 16,806,726 15,130,682 16,806,726 15,130,682 ============ ============ ============ ============ Weighted average common shares outstanding 16,603,021 14,727,788 16,366,999 14,269,266 Dilutive common shares assumes: Options 1,262,216 27,444 1,066,072 -- Warrants 538,792 317 517,893 -- ------------ ------------ ------------ ------------ Weighted average common shares outstanding - assuming dilution 18,404,029 14,775,549 17,950,964 14,269,266 ============ ============ ============ ============ Net income (loss) $ 321,259 $ 89,860 $ 767,394 $ (1,102,563) ============ ============ ============ ============ Net income (loss) per common share $ 0.02 $ 0.01 $ 0.05 $ (0.08) ============ ============ ============ ============ Net income (loss) per common share - assuming dilution $ 0.02 $ 0.01 $ 0.04 $ (0.08) ============ ============ ============ ============
10 DIGITAL BIOMETRICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2000 (UNAUDITED) The following is a summary of those securities outstanding at March 31 for the respective periods, which have been excluded from the calculations because the effect on net income (loss) per common share would not have been dilutive:
For the Three-Month Period Ended For the Six-Month Period Ended March 31, March 31, -------------------------------- -------------------------------- 2000 1999 2000 1999 -------------------------------- -------------------------------- Options 90,500 1,892,545 103,500 2,195,600 Warrants 112,893 1,070,334 112,893 1,370,389 Convertible debentures -- 749,677 -- 749,677
11 DIGITAL BIOMETRICS, INC. THREE MONTHS ENDED MARCH 31, 2000 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL As more fully described in the subsection "Risk Factors" under Item 7 of the Company's Form 10-K report for the year ended September 30, 1999, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These include statements regarding intent, belief or current expectations of the Company and its management and are made in reliance upon the "safe harbor" provisions of the Securities Litigation Reform Act of 1995. Stockholders and prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties that may cause the Company's actual results to differ materially from the results discussed in the forward-looking statements. Digital Biometrics, Inc., (the "Company," "Digital Biometrics" or "DBI") is a leading provider of identification information systems that employ "biometric" technology, which is the science of identifying individuals by measuring distinguishing biological characteristics. DBI's biometric identification systems and information technology services enable law enforcement and other government agencies to identify and manage information about individuals, and help commercial employers and government agencies to conduct background checks on applicants for employment or permits. DBI's offerings include computer-based fingerprinting and photographic systems, software tools, multi-media data storage and communications servers, and the systems integration and software development services required to implement identification management systems. Under new management since 1997, Digital Biometrics has evolved from essentially a single-product live-scan hardware supplier to an identification information systems company. DBI continues to expand its product line and information technology services to further penetrate the law enforcement market, while introducing new products and services for the emerging applicant-processing and security markets among commercial and government customers. Typical customers include: U.S. government agencies, such as the Immigration and Naturalization Service (INS) and the U.S. Postal Service; local and state police; the military; school districts; financial institutions; utilities; and casinos. The Company's main products are special-purpose, computer-based systems for "live-scan" fingerprint capture. These live-scan systems employ patented, high-resolution optics and specialized hardware and software, combined with industry-standard computer hardware and software, to create highly optimized, special-purpose systems which capture, digitize, print and transmit forensic-grade fingerprint and photographic images. The Company's strategy is to continue to market live-scan systems to law enforcement agencies and to expand its product and service offerings and the markets it serves. The law enforcement market for live-scan biometric products is well established. The Company believes there is growing demand from other governmental and commercial markets to employ identification 12 DIGITAL BIOMETRICS, INC. THREE MONTHS ENDED MARCH 31, 2000 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS information technologies in enrollment and applicant processing applications. Digital Biometrics is aggressively pursuing these emerging markets. Also, the Company is engaged in a joint venture with Lakes Gaming, Inc., formerly known as Grand Casinos, Inc., named TRAK 21 Development, LLC, to develop, test and market an automated wagering tracking system based on technology developed by the Company. This system is intended to track the betting activity of casino patrons playing blackjack. The law enforcement market and government procurement processes are subject to budgetary, economic and political considerations which vary significantly from state to state and among different agencies. These characteristics, together with the increasing level of competition within the live-scan electronic fingerprint industry, have resulted (and are expected to continue to result) in an irregular revenue cycle for the Company. The Company generally recognizes product sales on the date of shipment for orders which are f.o.b. origin and upon delivery for f.o.b. destination, although recognition at some later milestone is not uncommon based on the terms of specific customer contracts. Revenue for professional services contracts and systems integration services revenues are recognized using the percentage of completion method, completed contract basis or on a time-and-materials basis. Revenues from maintenance and repair contracts are recognized over the period of the agreement. Services revenues are recognized when the related services are performed. The Company's standard terms of sale are payment due net in thirty days, f.o.b. Digital Biometrics, Inc. Terms of sale and shipment may, however, be subject to negotiation and may affect the Company's timing and criteria for revenue recognition. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999 Total revenues were $4,743,000 for the three months ended March 31, 2000 compared to $5,191,000 for the same prior-year period. Identification systems revenues were $3,626,000 compared to $4,242,000 in the same prior-year period. This 15% decrease is due primarily to a decrease in the number of live-scan systems sold during the three months ended March 31, 2000, partially offset by an increase in the average selling price per live-scan system, an increase in revenues from new product offerings including the Company's photographic image systems, server-level products and palm scanners, and an increase in revenues for custom software services. Maintenance revenues were $1,117,000 for the three months ended March 31, 2000 compared to $880,000 for the same prior-year period, an increase of 27%. This increase is due primarily to a larger installed base of live-scan systems covered by maintenance agreements. There were no revenues generated by the Company's wholly owned subsidiary Integral Partners, Inc. for the three months ended March 31, 2000 compared to $69,000 for the same prior-year period. 13 DIGITAL BIOMETRICS, INC. THREE MONTHS ENDED MARCH 31, 2000 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Revenues from one customer in the three-month periods ended March 31, 2000 and 1999 accounted for 17% and 42%, respectively, of total revenues. Export revenues for the three-month periods ended March 31, 2000 and 1999 were less than 1% of total revenues. Overall gross margins for the three months ended March 31, 2000 were 43%, as compared to 35% of revenues for the same prior-year period. Gross margins on identification systems revenues were 49% for the three months ended March 31, 2000 compared to 37% in the same prior-year period. This increase is due mainly to a favorable product mix, lower per-unit installation and training costs attributable mainly to a favorable geographic concentration of installations, and improved per-unit warranty costs. Maintenance margins for the three months ended March 31, 2000 and 1999 were 25% and 27%, respectively. The decrease in maintenance margins is due primarily to initial costs associated with the establishment of remote field service locations to support the growth of the live-scan systems installation base. There was no gross margin generated by Integral Partners, Inc. for the three months ended March 31, 2000 compared to 39% gross margin for the same prior-year period. Sales and marketing expenses for the three-month period ended March 31, 2000 were 12% of total revenues compared to 9% for the same three-month prior-year period. The increase in sales and marketing costs as a percentage of total revenue is due to an increase in sales and marketing expenses and to the decrease in revenue. The increase in absolute dollars of sales and marketing expenses for the current-year three-month period is due primarily to an increase in personnel-related costs and new product promotional activities. Engineering and development expenses were 13% of total revenues for the three-month period ended March 31, 2000 compared to 10% for the same period a year ago. This increase is due primarily to decreased revenues and increased new product development costs, partially offset by decreased engineering expenses associated with Integral Partners, Inc. and increased billable custom software services. Engineering expenses for the three-month periods ending March 31, 2000 and 1999 are net of $212,000 and $77,000, respectively, of costs related to a Federally funded demonstration project grant. The Company expects continued increases in absolute dollars for engineering and development expenses in future periods. General and administrative expenses for the three-month periods ended March 31, 2000 and 1999 were 14% of total revenues. The decrease in absolute dollars for general and administrative expenses is due primarily to a decrease in legal fees incurred in connection with legal action taken by a competitor against one of the Company's customers in an unsuccessful effort to prevent the Company's contract with the customer from proceeding forward and a decrease in personnel-related costs associated with Integral Partners, Inc. Interest income increased to $66,000 for the three months ended March 31, 2000 from $7,000 for the same period in fiscal 1999 due to higher cash balances. 14 DIGITAL BIOMETRICS, INC. THREE MONTHS ENDED MARCH 31, 2000 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Interest expense decreased to less than $1,000 for the three months ended March 31, 2000 from $48,000 for the same prior-year period. The decrease is primarily due to conversion of convertible debentures and reduced borrowings on a line of credit. The Company generated net income for the three-month period ended March 31, 2000 of $321,000, or $0.02 per share, as compared to a net income of $90,000, or $0.01 per share, for the same prior-year period. SIX MONTHS ENDED MARCH 31, 2000 COMPARED TO SIX MONTHS ENDED MARCH 31, 1999 Total revenues were $11,585,000 for the six months ended March 31, 2000 compared to $7,559,000 for the same prior-year period. Identification systems revenues were $9,399,000 compared to $5,588,000 in the same prior-year period. This 68% increase is due primarily to an increase in the number of live-scan systems sold during the six months ended March 31, 2000, an increase in revenues from new product offerings including photographic imaging systems, server-level products and palm scanning systems, and an increase in revenues from customized software services, partially offset by a decrease in the average selling price per live-scan system. Maintenance revenues were $2,186,000 for the six months ended March 31, 2000 compared to $1,711,000 for the same prior-year period, an increase of 28%. This increase is due primarily to a larger installed base of live-scan systems covered by maintenance agreements. There were no revenues generated by the Company's wholly owned subsidiary Integral Partners, Inc. for the six months ended March 31, 2000 compared to $259,000 for the same prior-year period. Revenues from two customers in the six-month period ended March 31, 2000 accounted for 23% and 15%, respectively, of total revenues. Revenues from one customer in the same prior-year period accounted for 32% of total revenues. Export revenues for the six-month periods ended March 31, 2000 and 1999 were less than 1% of total revenues. Overall gross margins for the six months ended March 31, 2000 were 36%, as compared to 33% of revenues for the same prior-year period. Gross margins on identification systems revenues were 38% for the six months ended March 31, 2000 compared to 36% in the same prior-year period. This increase is due primarily to lower production and warranty costs per system, partially offset by lower average selling prices. Maintenance margins for the six months ended March 31, 2000 and 1999 were 26% and 22%, respectively. The increase in maintenance margins is due primarily to the increase in maintenance revenues and decrease in maintenance costs per system due to economies of scale from a larger installed base of live-scan systems. There was no gross margin generated by Integral Partners, Inc. for the six months ended March 31, 2000 compared to 45% gross margin for the same prior-year period. 15 DIGITAL BIOMETRICS, INC. THREE MONTHS ENDED MARCH 31, 2000 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Sales and marketing expenses for the six-month period ended March 31, 2000 were 10% of total revenues compared to 12% for the same six-month prior-year period. The decrease in sales and marketing costs as a percentage of total revenue is due primarily to the increase in revenues. The increase in absolute dollars of sales and marketing expenses for the current-year six-month period is due primarily to an increase in personnel-related costs and new product promotional activities. Engineering and development expenses were 9% of total revenues for the six-month period ended March 31, 2000 compared to 15% for the same period a year ago. The decrease is due primarily to an increase in revenues, an increase in billable engineering activities and a decrease in engineering expenses associated with Integral Partners, Inc., partially offset by an increase in new product development costs. Engineering expenses for the six-month periods ending March 31, 2000 and 1999 are net of $450,000 and $77,000, respectively, of costs related to a Federally funded demonstration project grant. The Company expects continued increases in absolute dollars for engineering and development expenses in future periods. General and administrative expenses for the six-month periods ended March 31, 2000 and 1999 were 11% and 18%, respectively, of total revenues. The decrease is due primarily to the increase in revenues. The decrease in absolute dollars for general and administrative expenses is due primarily to a decrease in legal fees incurred in connection with legal action taken by a competitor against one of the Company's customers in an unsuccessful effort to prevent the Company's contract with the customer from proceeding forward and a decrease in personnel-related costs associated with Integral Partners, Inc., partially offset by an increase in other general administrative expenses. Interest income increased to $106,000 for the six months ended March 31, 2000 from $13,000 for the same period in fiscal 1999 due to higher cash balances. Interest expense decreased to $6,000 for the six months ended March 31, 2000 from $212,000 for the same prior-year period. The decrease is primarily due to a $125,000 non-cash charge during the prior-year six-month period for the intrinsic value of the beneficial conversion feature of convertible debentures, conversion of convertible debentures and reduced borrowings on a line of credit. The Company generated net income for the six-month period ended March 31, 2000 of $767,000, or $0.05 per share, as compared to a net loss of $1,103,000, or $0.08 per share loss, for the same prior-year period. INFLATION The Company does not believe inflation has significantly affected revenues or expenses. NET OPERATING LOSS CARRYFORWARDS At March 31, 2000, the Company had carryforwards of net operating losses of approximately $34,700,000 that may allow the Company to reduce future income taxes that would otherwise be payable. Of this amount approximately $2,723,000 relates to compensation associated with the exercise of non-qualified stock options which, when realized, would result in credited to additional 16 DIGITAL BIOMETRICS, INC. THREE MONTHS ENDED MARCH 31, 2000 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS paid-in capital. The carryforwards expire annually beginning in 2003. The annual limitation on use of net operating losses is calculated by multiplying the value of the corporation immediately prior to the change in ownership by the published U.S. Internal Revenue Service long-term federal tax exempt rate. A total of $3,000,000 of the net operating loss carryforwards at March 31, 2000 is subject to an annual net operating loss limitation, estimated at $350,000, resulting from the change in control of the Company which occurred, for income tax purposes, on December 14, 1990, the date of the Company's initial public offering. If the limited carryforward amount for any tax year exceeds the regular taxable income for such year, then the unused portion may generally be carried forward to increase the annual limitation for the following year. Utilization of net operating losses aggregating $31,700,000 which were incurred subsequent to the change of ownership are not limited. However, any future ownership change could create a limitation with respect to these loss carryforwards. LIQUIDITY AND CAPITAL RESOURCES GENERAL Effective January 1, 2000, the Company established an inventory and receivables financing line of credit for the lesser of eligible inventory and receivables or $2,000,000 with Associated Bank, formerly named Riverside Bank. Borrowings under this line of credit are secured by all the assets of the Company. The line bears interest at a rate of 0.5% (one half percent) above the prime rate. The line will expire in November 2000. This line of credit replaced the Company's previously outstanding line of credit. There were no borrowings under this line of credit at March 31, 2000. For the period from the Company's inception in 1985 through March 31, 2000, the Company's cumulative deficit was $39,345,000. The Company generated its first net income during fiscal 1999. At March 31, 2000, the Company had $5,824,000 in cash and cash equivalents. Historically, the Company has been reliant on the availability of outside capital to sustain its operations. However, the Company's operations have experienced positive cash flow, excluding external financing, since the third quarter of fiscal 1999. Management believes that cash, cash equivalents, and other working capital provided from operations, together with available financing sources, are sufficient to meet current and foreseeable operating requirements of the Company's current business. Additional capital may be required if the Company seeks to expand into new business areas. ANALYSIS OF CASH FLOWS FROM OPERATIONS Net cash provided by operating activities was $2,005,000 for the six months ended March 31, 2000 compared to $1,593,000 of net cash used in the same prior-year period. This favorable cash flow impact resulted primarily from the net income generated during the current-year period, an increase in deferred maintenance revenue and a reduced balance of accounts receivable, partially offset by decreases in installation and warranty accruals, and an increase in inventory during the current-year period. 17 DIGITAL BIOMETRICS, INC. THREE MONTHS ENDED MARCH 31, 2000 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Net cash used in investing activities was $339,000 for the six months ended March 31, 2000 compared to $140,000 of cash used in investing activities the same prior-year period. The increase was due primarily to purchases of computer equipment to support the customer service organization and investments in marketing demonstration equipment. Net cash provided by financing activities was $982,000 for the six-month period ended March 31, 2000 compared to $1,569,000 during the same prior-year period. Cash from financing activities was provided primarily from stock option exercises during the current-year period and from private placements of common stock and the issuance of convertible debentures during the prior-year period. YEAR 2000 PHENOMENON Computers, software and other equipment utilizing microprocessors that use only two digits to identify a year in a date field may be unable to accurately process certain date-based information, including correct leap year recognition, at or after January 1, 2000. This is commonly referred to as the "Year 2000" phenomenon. The Company did not encounter any material financial or operational impact on its internal systems, products or procurements from vendors relating to the Year 2000 phenomenon. The Company believes its revenues during the first six months of fiscal 2000 were adversely affected by current and prospective customers who delayed procurements, installation and other activities related to purchases of products and services of the Company in order to evaluate and/or correct Year 2000 issues with other vendors. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in the Company's market risks since September 30, 1999. 18 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS There are no material lawsuits pending or, to the Company's knowledge, threatened against the Company. ITEM 2. CHANGES IN SECURITIES (a) Not applicable. (b) Not applicable. (c) Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES No changes since September 30, 1999 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company held its Annual Meeting of Stockholders on February 8, 2000. Proxies for such meeting were solicited pursuant to Regulation 14A under the Securities Exchange Act of 1934 as amended. At the meeting, sufficient favorable votes were cast to approve the following management proposals: * Adopt an Amendment to the 1992 Restricted Stock Plan to increase the number of shares of common stock authorized for issuance thereunder from 250,000 to 350,000. The results of the vote on this proposal were 6,184,041 shares voted for approval; 379,051 shares voted against; 106,568 shares abstaining and 8,367,401 broker non-votes. * Adopt an Amendment to the 1998 Stock Option Plan to increase the number of shares of common stock authorized for issuance thereunder from 600,000 to 1,400,000. The results of the vote on this proposal were 6,027,440 shares voted for approval; 523,597 shares voted against; 118,623 shares abstaining and 8,367,401 broker non-votes. ITEM 5. OTHER INFORMATION None ITEM 6. (a) EXHIBITS Exhibit 27 Financial Data Schedule. (b) REPORTS ON FORM 8-K There were no reports on Form 8-K filed by the Company during the three-month period ended March 31, 2000. 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DIGITAL BIOMETRICS, INC. ------------------------ (Registrant) May 11, 2000 /s/ John J. Metil ----------------- John J. Metil Executive Vice President, Chief Operating Officer and Chief Financial Officer 20 EX-27 2 FINANCIAL DATA SCHEDULE
5 0000868373 DIGITAL BIOMETRICS INC 6-MOS SEP-30-2000 OCT-01-1999 MAR-31-2000 5,824,387 0 5,972,275 121,000 3,632,310 15,458,210 3,050,461 2,066,015 16,475,036 7,106,468 0 0 0 168,067 9,176,052 16,475,036 9,399,259 11,585,260 5,791,350 7,413,984 3,506,674 0 6,109 767,394 0 767,394 0 0 0 767,394 0.05 0.05
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