10-Q 1 visionics013042-10q.txt VISIONICS CORPORATION FORM 10-Q 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 June 30, 2001 -------------------------------------------------- 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 ---------------------------------------------------------- VISIONICS CORPORATION (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) (952) 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 July 31, 2001 - 24,707,288 shares ---------------------------- --------------------------------- (Class) (Outstanding) 1 VISIONICS CORPORATION THREE MONTHS ENDED JUNE 30, 2001 INDEX
PART I - FINANCIAL INFORMATION: ------------------------------- PAGE ITEM 1. CONSOLIDATED 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 16 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 24 PART II - OTHER INFORMATION: ---------------------------- ITEM 1. LEGAL PROCEEDINGS 25 ITEM 2. CHANGES IN SECURITIES 25 ITEM 3. DEFAULTS UPON SENIOR SECURITIES 25 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 25 ITEM 5. OTHER INFORMATION 25 ITEM 6. (a) EXHIBITS 25 (b) REPORTS ON FORM 8-K 25 SIGNATURES 26 ----------
2 VISIONICS CORPORATION THREE MONTHS ENDED JUNE 30, 2001 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, 2000, Form 8-Ks dated February 15, 2001, April 27, 2001 and June 29, 2001, and Form S-3 filed on July 26, 2001. 3 VISIONICS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30, September 30, 2001 2000 ------------ ------------ Current assets: Cash and cash equivalents $ 7,695,253 $ 3,623,574 Restricted cash (note 5) 80,915 - Accounts receivable, less allowance for doubtful accounts of $185,800 and $150,800, respectively 6,161,647 9,779,796 Inventory (note 6) 6,039,353 3,900,754 Prepaid expenses and other costs 402,483 269,088 ------------ ------------ Total current assets 20,379,651 17,573,212 ------------ ------------ Property and equipment 4,722,819 3,978,102 Less accumulated depreciation and amortization (3,211,742) (2,607,536) ------------ ------------ 1,511,077 1,370,566 ------------ ------------ Software development costs, net of accumulated amortization of $255,389 and $138,543, respectively 722,585 839,430 Patents, trademarks, copyrights, and licenses, net of accumulated amortization of $67,497 and $82,501, respectively 54,689 46,285 Other assets - 76,310 ------------ ------------ $ 22,668,002 $ 19,905,803 ============ ============ Current liabilities: Accounts payable $ 2,417,484 $ 2,093,384 Deferred revenue (note 2) 5,900,423 3,956,270 Other accrued expenses (note 8) 1,535,838 1,760,280 Current installments of notes payable 15,944 15,071 Current installments of capital lease obligations 2,302 2,017 ------------ ------------ Total current liabilities 9,871,991 7,827,022 Deferred revenue, excluding current portion 334,039 511,976 Notes payable, excluding current installments 15,134 28,334 Capital lease obligations, excluding current installments 1,776 3,540 ------------ ------------ Total liabilities 10,222,940 8,370,872 ------------ ------------ Stockholders' equity (note 9): 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 24,645,780 and 23,115,781 shares, respectively 246,458 231,158 Additional paid-in capital 58,421,722 52,355,044 Deferred compensation (52,125) (93,750) Accumulated deficit (46,181,899) (40,957,320) Accumulated other comprehensive income (loss) 10,906 (201) ------------ ------------ Total stockholders' equity 12,445,062 11,534,931 ------------ ------------ $ 22,668,002 $ 19,905,803 ============ ============
See accompanying notes to consolidated financial statements. 4 VISIONICS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Nine Months Ended June 30, June 30, 2001 2000 2001 2000 ------------ ------------ ------------ ------------ Revenue: Live scan identification systems $ 4,960,341 $ 2,598,414 $ 13,072,402 $ 11,997,673 Live scan maintenance 2,063,399 1,303,031 5,718,884 3,489,032 FaceIt license 547,538 450,042 2,350,024 1,190,862 FaceIt service 500,259 149,219 1,172,633 520,937 ------------ ------------ ------------ ------------ Total revenue 8,071,537 4,500,706 22,313,943 17,198,504 ------------ ------------ ------------ ------------ Cost of revenue: Live scan identification systems 3,082,410 1,209,175 8,564,110 7,000,525 Live scan maintenance 1,544,895 932,693 4,291,058 2,555,327 FaceIt license 146,107 48,721 371,437 82,199 FaceIt service 395,095 81,265 889,004 283,703 ------------ ------------ ------------ ------------ Total cost of revenue 5,168,507 2,271,854 14,115,609 9,921,754 ------------ ------------ ------------ ------------ Gross margin 2,903,030 2,228,852 8,198,334 7,276,750 ------------ ------------ ------------ ------------ Selling, general and administrative expenses: Sales and marketing 1,113,396 941,858 3,310,319 2,450,869 Engineering and development 1,270,876 1,370,503 3,539,296 2,959,068 General and administrative 1,011,712 854,504 2,931,064 2,774,633 Non-recurring charges (note 2) 232,474 32,607 2,200,778 32,607 ------------ ------------ ------------ ------------ Total expenses 3,628,458 3,199,472 11,981,457 8,217,177 ------------ ------------ ------------ ------------ Loss from operations (725,428) (970,620) (3,783,123) (940,427) Other income, net 14,565 107,594 117,284 291,399 ------------ ------------ ------------ ------------ Loss before income taxes (710,863) (863,026) (3,665,839) (649,028) Provision for (benefit of) income taxes 27,438 - 123,088 (37,526) ------------ ------------ ------------ ------------ Loss before accounting change (738,301) (863,026) (3,788,927) (611,502) Cumulative effect of change in accounting principle - - (1,435,652) - ------------ ------------ ------------ ------------ Net loss $ (738,301) $ (863,026) $ (5,224,579) $ (611,502) ============ ============ ============ ============ Loss per common share --------------------- Loss before accounting change $ (0.03) $ (0.04) $ (0.16) $ (0.03) Cumulative effect of change in accounting principle - - (0.06) - ------------ ------------ ------------ ------------ Net loss per common share $ (0.03) $ (0.04) $ (0.22) $ (0.03) ============ ============ ============ ============ Loss per common share - assuming dilution ----------------------------------------- Loss before accounting change $ (0.03) $ (0.04) $ (0.16) $ (0.03) Cumulative effect of change in accounting principle - - (0.06) - ------------ ------------ ------------ ------------ Net loss per common share $ (0.03) $ (0.04) $ (0.22) $ (0.03) ============ ============ ============ ============ Weighted average common shares outstanding 23,351,792 23,068,851 23,265,247 22,754,748 ============ ============ ============ ============ Weighted average common shares outstanding - assuming dilution 23,351,792 23,068,851 23,265,247 22,754,748 ============ ============ ============ ============
See accompanying notes to consolidated financial statements. 5 VISIONICS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended June 30, -------------------------- 2001 2000 ----------- ----------- Cash flows from operating activities: Net loss $(5,224,579) $ (611,502) Adjustments to reconcile net loss to net cash used in operating activities: Provision for doubtful accounts receivable 35,000 (16,587) Stock-based compensation 166,372 42,875 Depreciation and amortization 606,302 640,442 Amortization of software development costs 116,845 64,763 Deferred income taxes - (162,000) Write-off of intangible assets 608 - Gain on disposal of fixed assets (298) (2,048) Interest expense on debentures converted into common stock - 12,350 Adjustment to conform fiscal year end of pooled acquisition - 438,119 Changes in operating assets and liabilities: Restricted cash (80,915) - Accounts receivable 3,583,149 2,416,197 Inventories (2,138,599) (1,446,665) Prepaid expenses (57,085) (161,551) Accounts payable and accrued expenses 317,722 (2,534,658) Deferred revenue 1,766,216 995,697 Income taxes payable - (11,000) ----------- ----------- Net cash used in operating activities (909,262) (335,568) ----------- ----------- Cash flows from investing activities: Purchase of property and equipment (736,563) (648,612) Proceeds from disposal of property and equipment 1,090 12,794 Software development costs - (320,795) Patents, trademarks, copyrights and licenses (20,054) (29,683) ----------- ----------- Net cash used in investing activities (755,527) (986,296) ----------- ----------- Cash flows from financing activities: Principal payments on capital lease obligations (1,479) (150,369) Repayment of notes payable (12,327) - Proceeds from private placement of common stock 5,462,334 - Exercise of stock options 276,833 1,116,113 ----------- ----------- Net cash provided by financing activities 5,725,361 965,744 ----------- ----------- Effect of exchange rates on cash 11,107 - Increase (decrease) in cash and cash equivalents 4,071,679 (356,120) Cash and cash equivalents at beginning of period 3,623,574 6,302,473 ----------- ----------- Cash and cash equivalents at end of period $ 7,695,253 $ 5,946,353 =========== ===========
See accompanying notes to consolidated financial statements. 6 VISIONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 (UNAUDITED) (1) DESCRIPTION OF BUSINESS Effective February 16, 2001, Digital Biometrics, Inc. (DBI) merged with Visionics Corporation. Concurrent with the merger, DBI changed its name to Visionics Corporation, (the "Company" or "Visionics"). The accompanying financial statements reflect the combined results of DBI and Visionics Corporation for all periods presented under the pooling of interests method of accounting. The Company is a provider of identification technologies and systems that employ "biometric" technology, which is the science of identifying individuals by measuring distinguishing biological characteristics. Through its respective business lines - live scan, FaceIt, IBIS and BNP- the Company delivers enabling technology, platforms, products and systems for biometric identification, with a specific focus on facial recognition and forensic-quality fingerprint identification. The TENPRINTER(R) and FingerPrinter CMS live scan systems are used by government agencies, law enforcement, airports, banks and other commercial institutions in the U.S. 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. 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. Visionics continues to expand this line of business 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 U.S. Postal Service; local and state police; United States armed forces; school districts; financial institutions; utilities; and casinos. The FaceIt technology enables a broad range of products and applications built by partners (original equipment manufacturers "OEMs", value added resellers "VARs" and system integrators). These include enhanced CCTV systems, identity fraud applications and authentication systems for information security, access control, travel, banking and e-commerce. The Company's FaceIt technology product offerings include software development toolkits, run-time licenses and application software. Among the Company's FaceIt technology partners are Polaroid, IBM, Innoventry (joint venture of Wells Fargo Bank and Cash America), and EDS. The IBIS is a mobile identification system that combines expertise in biometric capture and connectivity. The system is capable of capturing both forensic quality fingerprints and photographs for transmission to law enforcement and other legacy databases. IBIS is comprised of software tools, multi-media data storage and communications servers, and the systems integration and software development services that are required to implement identification management systems. The BNP, or Biometric Network Platform, is a technology framework for building scalable biometric solutions. It consists of network ready elements - hardware components, called Biometric Network Appliances ("BNA")s, programming logic for connecting the BNAs to each other or to standard security and information systems, and an enabling biometric technology whose functionalities are encapsulated in the BNA components. The core enabling biometric technology for the BNP is Visionics' FaceIt engine, however, the platform will support other biometrics including fingerprint. By combining the different BNAs with application-specific business logic, a wide range of scalable solutions - such as large database searching, surveillance and enterprise security - can be easily built. 7 VISIONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 (UNAUDITED) A majority of the Company's revenues in the three-month periods ended June 30, 2001 and 2000 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. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts of its wholly owned subsidiary Visionics Technology Corporation located in New Jersey and its wholly owned British subsidiary, Visionics Ltd., which commenced operations during 1999. All material intercompany accounts and transactions have been eliminated in consolidation. As noted above, Digital Biometrics, Inc. and Visionics Corporation merged effective February 16, 2001 in a merger accounted for as a pooling-of-interest. Expenses of $79,000 and $33,000, respectively, for the three-month periods ended June 30, 2001 and 2000 and expenses of $2,048,000 and $33,000, respectively, for the nine-month periods ended June 30, 2001 and 2000 were incurred pursuant to the merger activities and are recorded as non-recurring charges. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with 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, 2000, Form 8-Ks dated February 15, 2001, April 27, 2001 and June 29, 2001, all of which have been filed with the SEC. (b) CAPITALIZED SOFTWARE DEVELOPMENT COSTS Research and development costs consist principally of salaries and benefits paid to the Company's employees in the development of software products. The Company's policy is to expense all research and development costs as incurred until technological feasibility is established. Commencing with the establishment of technological feasibility and concluding at the time the product is ready for market, software development costs are capitalized. Technological feasibility is defined as being established when product design and a working model of the software product has been completed and tested. The costs of those products that have met the technological feasibility criteria have been capitalized. Annual amortization of capitalized software development costs is calculated as the greater of the amount computed using (a) the ratio of actual revenue from a product to the total of current and anticipated related revenues from the product or (b) the economic life of the product, estimated to be five years, on a straight-line basis. 8 VISIONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 (UNAUDITED) (c) REVENUE RECOGNITION SOFTWARE LICENSES - Software license revenue is recognized when all of the following conditions have been satisfied: completion of a written license arrangement; delivery of the software with no significant post delivery obligations of the Company; the license fee is fixed or determinable; and payment is due within one year and collection is probable. Revenue from sublicense arrangements with resellers are recognized upon shipment of the software, if there are no significant post-delivery obligations, the reseller is creditworthy, and if the terms of arrangement are such that the payment terms are not subject to price adjustment, are non-cancelable and non-refundable. Revenue from sublicensing arrangements with significant post contract customer support (PCS) (in excess of one year), including enhancements and upgrades, where significant vendor specific objective evidence does not exist to allocate the fee to the software and PCS, is recognized along with the PCS ratably over the period during which PCS is expected to be provided. Revenue from consulting services is recognized as work is performed. EQUIPMENT - A significant portion of revenue is recognized upon installation, particularly where the equipment is integrated into an outside network. For further explanation, see "accounting change" section of this footnote. (d) FOREIGN CURRENCY TRANSLATION Assets and liabilities of the foreign subsidiary are translated at the exchange rate in effect at the balance sheet date. Revenues, costs, and expenses are translated using an average exchange rate. Gains and losses resulting from translation are accumulated as a separate component of accumulated other comprehensive loss in stockholders' equity. Gains and losses resulting from foreign currency transactions are included in the consolidated statements of operations. (e) ACCOUNTING CHANGE In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101") which provides the staff's views in applying generally accepted accounting principles to selected revenue recognition issues. In October 2000, the SEC provided interpretive guidance for SAB 101. Effective October 1, 2000, the Company adopted the new standard and changed its method of accounting for certain identification systems revenue. Since most of the equipment the Company sells includes installation provided by the Company, under SAB 101, a significant portion of revenue recognition is deferred until installation, particularly where the equipment is integrated to an outside network. Prior to October 1, 2000 the Company generally recognized product revenue on the date of shipment for orders which were f.o.b. origin and upon delivery for f.o.b. destination. The Company recorded a $1,436,000 cumulative effect of an accounting change in the three-month period ended December 31, 2000 with the adoption of SAB 101. Under this accounting change, $3,890,000 of revenue recorded in periods prior to October 1, 2000 will be recorded as revenue again as the equipment is installed. Of this amount $3,865,000 of revenue was recognized during the nine-month period ended June 30, 2001. (f) EFFECT OF NEW ACCOUNTING STANDARDS In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard ("SFAS")No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, as well as all purchase method business combinations completed 9 VISIONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 (UNAUDITED) after June 30, 2001. SFAS No. 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. The Company does not expect a material impact with the adoption of this standard since it currently does not have goodwill to be amortized. (3) SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK The Company extends credit to substantially all of its customers. Approximately 83% of customer accounts receivable at June 30, 2001 were from government agencies, of which 40% was from two customers. Approximately 93% of customer accounts receivable at September 30, 2000 were from government agencies, of which 33% was from one customer. Revenue from one customer in the three-month period ended June 30, 2001 accounted for 37% of total revenue, and revenue from one customer in the three-month period ended June 30, 2000 accounted for 15% of total revenue. Foreign revenue for the three-month period ended June 30, 2001 was 4% of total revenue compared to 3% the same prior-year period. Revenue from one customer in the nine-month period ended June 30, 2001 accounted for 22% of total revenue, and revenue from two customers in the same prior-year period accounted for 29% of total revenue. Foreign revenue for the nine-month periods ended June 30, 2001 and 2000 were 6% and 4%, respectively, of total revenue. (4) 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 - CASH PAID FOR: Nine Months Ended June 30, 2001 2000 --------------- -------------- Interest $ 4,829 $7,724 Income taxes 123,088 - (5) RESTRICTED CASH Pursuant to normal contractual terms of a federally funded development grant, the Company was required to establish either a performance bond or an escrow account equal to the amounts payable to certain major subcontractors for the project aggregating $625,000. Since the Company was in a strong cash position, it chose to establish the escrow and avoid the cost of the performance bond. The amount held in escrow is released upon proof of payment to the subcontractors. The restricted balance as of June 30, 2001 is $80,915. 10 VISIONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 (UNAUDITED) (6) 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:
June 30, September 30, 2001 2000 ---------- ---------- Components and subassemblies $3,575,871 $3,210,121 Work in process 752,294 217,211 Finished goods 545,061 473,422 Finished goods shipped to customers awaiting installation 1,166,127 - ---------- ---------- $6,039,353 $3,900,754 ========== ==========
(7) LINES OF CREDIT The Company has an inventory and receivables financing line of credit for the lesser of eligible inventory and receivables or $2,000,000. 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 on December 31, 2001. There were no borrowings under this line at June 30, 2001. (8) OTHER ACCRUED EXPENSES Other accrued expenses consists of:
June 30, September 30, 2001 2000 ---------- ---------- Accrued salaries, bonuses and commissions $ 353,467 $ 343,958 Accrued vacation 404,397 306,955 Accrued installation costs - 480,500 Accrued warranty costs 160,400 301,570 Accrued vacated facility costs 176,399 32,495 Other accrued expenses 441,175 294,802 ---------- ---------- $1,535,838 $1,760,280 ========== ==========
(9) STOCKHOLDERS' EQUITY During the three-month period ended June 30, 2001, the Company granted stock option awards to non-executive employees for the purchase of an aggregate of 88,750 shares of common stock. These options are exercisable at $4.50 per share and expire in 2008. (10) PRIVATE PLACEMENT On June 29, 2001 the Company closed on a private placement offering of common stock and warrants. A total of 1,302,862 shares were sold to accredited investors at a price of $4.50 each with total net 11 VISIONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 (UNAUDITED) proceeds to the Company of approximately $5.5 million. In addition, the Company issued warrants for 325,715 shares at an exercise price of $5.66 per share and 325,715 warrants at $6.79 per share to the purchasers for no additional consideration. These warrants are callable when the Company's stock price exceeds 150 percent of the warrant price for twenty consecutive trading days. The Company issued additional warrants to purchase up to 26,057 shares of common stock at an exercise price of $7.81 per share to an investment banking firm as partial compensation for services rendered in the private placement. (11) 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 Nine Months Ended June 30, June 30, ---------------------------- ---------------------------- 2001 2000 2001 2000 ------------ ------------ ------------ ------------ Shares outstanding at beginning of period 23,311,004 23,043,576 23,115,781 22,240,229 Shares issued under retirement plan - - 73,923 45,855 Restricted stock awards, net of forfeitures - - - 10,269 Exercise of options and warrants 31,914 25,454 153,214 656,308 Shares issued as payment for services received - 12,956 - 12,956 Shares issued for private placement 1,302,862 - 1,302,862 - Shares issued upon conversion of debentures - - - 116,369 ------------ ------------ ------------ ------------ Shares outstanding at end of period 24,645,780 23,081,986 24,645,780 23,081,986 ============ ============ ============ ============ Weighted average common shares outstanding (A) 23,351,792 23,068,851 23,265,247 22,754,748 Dilutive common shares assumes: Options - - - - Warrants - - - - ------------ ------------ ------------ ------------ Weighted average common shares outstanding - assuming dilution 23,351,792 23,068,851 23,265,247 22,754,748 ============ ============ ============ ============ Net loss $ (738,301) $ (863,026) $ (5,224,579) $ (611,502) ============ ============ ============ ============ Net loss per common share $ (0.03) $ (0.04) $ (0.22) $ (0.03) ============ ============ ============ ============ Net loss per common share - assuming dilution $ (0.03) $ (0.04) $ (0.22) $ (0.03) ============ ============ ============ ============
12 VISIONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 (UNAUDITED) The following is a summary of those securities outstanding at June 30 for the respective periods, which have been excluded from the calculations because the effect on net loss per common share would not have been dilutive:
For the Three-Month Period Ended For the Nine-Month Period Ended June 30, June 30, -------------------------------------- ----------------------------------- 2001 2000 2001 2000 ------------------- ------------------ ----------------- ----------------- Options 3,810,604 3,487,294 3,810,604 3,487,294 Warrants 1,262,504 697,910 1,262,504 697,910
13 VISIONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 (UNAUDITED) (12) ADDITIONAL CONSOLIDATING FINANCIAL INFORMATION The following financial information reflects the results of operations for the three- and nine-month periods ended June 30, 2000 for the merger between Digital Biometrics, Inc. and Visionics Corporation on February 16, 2001. VISIONICS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2000 (UNAUDITED)
DBI (as previously reported) Visionics Combined ------------ ------------ ------------ Revenue: Live scan identification systems $ 2,598,414 $ - $ 2,598,414 Live scan maintenance 1,303,031 - 1,303,031 FaceIt license - 450,042 450,042 FaceIt service - 149,219 149,219 ------------ ------------ ------------ Total revenue 3,901,445 599,261 4,500,706 ------------ ------------ ------------ Cost of revenue: Live scan identification systems 1,209,175 - 1,209,175 Live scan maintenance 932,693 - 932,693 FaceIt license - 48,721 48,721 FaceIt service - 81,265 81,265 ------------ ------------ ------------ Total cost of revenue 2,141,868 129,986 2,271,854 ------------ ------------ ------------ Gross margin 1,759,577 469,275 2,228,852 ------------ ------------ ------------ Selling, general and administrative expenses: Sales and marketing 618,605 323,253 941,858 Engineering and development 1,025,065 345,438 1,370,503 General and administrative 552,756 301,748 854,504 Non-recurring charges 32,607 - 32,607 ------------ ------------ ------------ Total expenses 2,229,033 970,439 3,199,472 ------------ ------------ ------------ Loss from operations (469,456) (501,164) (970,620) Other income (expense), net 69,247 38,347 107,594 ------------ ------------ ------------ Net loss $ (400,209) $ (462,817) $ (863,026) ============ ============ ============ Net loss per common share $ (0.02) $ (0.07) $ (0.04) ============ ============ ============ Net loss per common share - assuming dilution $ (0.02) $ (0.07) $ (0.04) ============ ============ ============ Weighted average common shares outstanding 16,815,201 6,253,650 23,068,851 ============ ============ ============ Weighted average common shares outstanding - assuming dilution 16,815,201 6,253,650 23,068,851 ============ ============ ============
14 VISIONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 (UNAUDITED) VISIONICS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED JUNE 30, 2000 (UNAUDITED)
DBI (as previously reported Visionics Combined ------------ ------------ ------------ Revenue: Live scan identification systems $ 11,997,673 $ - $ 11,997,673 Live scan maintenance 3,489,032 - 3,489,032 FaceIt license - 1,190,862 1,190,862 FaceIt service - 520,937 520,937 ------------ ------------ ------------ Total revenue 15,486,705 1,711,799 17,198,504 ------------ ------------ ------------ Cost of revenue: Live scan identification systems 7,000,525 - 7,000,525 Live scan maintenance 2,555,327 - 2,555,327 FaceIt license - 82,199 82,199 FaceIt service - 283,703 283,703 ------------ ------------ ------------ Total cost of revenue 9,555,852 365,902 9,921,754 ------------ ------------ ------------ Gross margin 5,930,853 1,345,897 7,276,750 ------------ ------------ ------------ Selling, general and administrative expenses: Sales and marketing 1,757,956 692,913 2,450,869 Engineering and development 2,112,567 846,501 2,959,068 General and administrative 1,832,577 942,056 2,774,633 Non-recurring charges 32,607 - 32,607 ------------ ------------ ------------ Total expenses 5,735,707 2,481,470 8,217,177 ------------ ------------ ------------ Income (loss) from operations 195,146 (1,135,573) (940,427) Other income (expense), net 172,039 119,360 291,399 ------------ ------------ ------------ Income (loss) before income taxes 367,185 (1,016,213) (649,028) Benefit of income taxes - (37,526) (37,526) ------------ ------------ ------------ Net income (loss) $ 367,185 $ (978,687) $ (611,502) ============ ============ ============ Net income (loss) per common share $ 0.02 $ (0.16) $ (0.03) ============ ============ ============ Net income (loss) per common share - assuming dilution $ 0.02 $ (0.16) $ (0.03) ============ ============ ============ Weighted average common shares outstanding 16,515,855 6,238,893 22,754,748 ============ ============ ============ Weighted average common shares outstanding - assuming dilution 18,022,140 6,238,893 22,754,748 ============ ============ ============
15 VISIONICS CORPORATION THREE MONTHS ENDED JUNE 30, 2001 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, 2000, Form 8-Ks dated February 15, 2001, April 27, 2001 and June 29, 2001, and Form S-3 filed on July 26, 2001, 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. Visionics Corporation is a provider of identification technologies and systems that employ "biometric" technology, which is the science of identifying individuals by measuring distinguishing biological characteristics. Through its respective business lines - live scan, FaceIt, IBIS and BNP- the Company delivers enabling technology, platforms, products and systems for biometric identification, with a specific focus on facial recognition and forensic-quality fingerprint identification. The TENPRINTER(R) and FingerPrinter CMS live scan systems are used by government agencies, law enforcement, airports, banks and other commercial institutions in the U.S. 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. 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. Visionics continues to expand this line of business 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 U.S. Postal Service; local and state police; United States armed forces; school districts; financial institutions; utilities; and casinos. The FaceIt technology enables a broad range of products and applications built by partners (original equipment manufacturers "OEMs", value added resellers "VARs" and system integrators). These include enhanced CCTV systems, identity fraud applications and authentication systems for information security, access control, travel, banking and e-commerce. The Company's FaceIt technology product offerings include software development toolkits, run-time licenses and application software. Among the Company's FaceIt technology partners are Polaroid, IBM, Innoventry (joint venture of Wells Fargo Bank and Cash America), and EDS. 16 VISIONICS CORPORATION THREE MONTHS ENDED JUNE 30, 2001 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The IBIS is a mobile identification system that combines expertise in biometric capture and connectivity. The system is capable of capturing both forensic quality fingerprints and photographs for transmission to law enforcement and other legacy databases. IBIS is comprised of software tools, multi-media data storage and communications servers, and the systems integration and software development services that are required to implement identification management systems. The BNP, or Biometric Network Platform, is a technology framework for building scalable biometric solutions. It consists of network ready elements - hardware components, called Biometric Network Appliances ("BNA")s, programming logic for connecting the BNAs to each other or to standard security and information systems, and an enabling biometric technology whose functionalities are encapsulated in the BNA components. The core enabling biometric technology for the BNP is Visionics' FaceIt engine, however, the platform will support other biometrics including fingerprint. By combining the different BNAs with application-specific business logic, a wide range of scalable solutions - such as large database searching, surveillance and enterprise security - can be easily built. Visionics 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 Visionics. This system is intended to track the betting activity of casino patrons playing blackjack. OTHER GENERAL The law enforcement market and government procurement processes are subject to budgetary, economic and political considerations that 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. Prior to October 1, 2000 the Company generally recognized live scan product revenue on the date of shipment for orders which were f.o.b. origin and upon delivery for f.o.b. destination, although recognition at some later milestone was not uncommon based on the terms of specific customer contracts. With the adoption of the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 pertaining to revenue recognition, the Company changed its revenue recognition policy on October 1, 2000 to defer revenue recognition until its live scan products are installed. 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. Software license revenue is recognized when all of the following conditions have been satisfied: completion of a written license arrangement; delivery of the software with no significant post delivery obligations of the Company; the license fee is fixed or determinable; and payment is due within one year and collection is probable. Revenue from sublicense arrangements with resellers is recognized upon shipment of the software, if there are no significant post-delivery obligations, the reseller is creditworthy, and if the terms of arrangement are such that the payment terms are not 17 VISIONICS CORPORATION THREE MONTHS ENDED JUNE 30, 2001 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS subject to price adjustment, are non-cancelable and non-refundable. Revenue from sublicensing arrangements with significant post contract customer support (PCS) (in excess of one year), including enhancements and upgrades, where significant vendor specific objective evidence does not exist to allocate the fee to the software and PCS, is recognized along with the PCS ratably over the period during which PCS is expected to be provided. Revenue from maintenance and repair contracts is recognized over the period of the agreement. Service revenue is recognized when the related service is performed. The Company's standard terms of sale are payment due net in thirty days, f.o.b. Visionics Corporation 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 JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000 Total revenue increased 79% to $8,072,000 for the three months ended June 30, 2001 compared to $4,501,000 in the same prior-year period. Live scan identification systems revenue increased 91% to $4,960,000 compared to $2,598,000 in the same prior-year period. The increase is primarily due to an increase in the number of live scan system installations, partially offset by a difference in product mix. These systems are primarily sold to government agencies. The nature of government markets and procurement processes result in unpredictable quarter-to-quarter fluctuations. Live scan maintenance revenue was $2,063,000 for the three months ended June 30, 2001 compared to $1,303,000 for the same prior-year period, an increase of 58%. This increase is due primarily to a larger installed base of live scan systems covered by maintenance agreements. FaceIt license revenue increased 22% to $548,000 for the three months ended June 30, 2001 compared to $450,000 for the same prior-year period. This increase is primarily due to an increase in license revenue generated from its subsidiary in the United Kingdom. FaceIt service revenue increased 235% to $500,000 for the three months ended June 30, 2001 compared to $149,000 for the same prior-year period. This increase is primarily due to custom development services provided under a United States government contract. Revenue from one customer in the three-month period ended June 30, 2001 accounted for 37% of total revenue, and revenues from one customer in the same prior-year period accounted for 15% of total revenue. Foreign revenue for the three-month period ended June 30, 2001 and 2000 was 4% and 3%, respectively, of total revenue. Overall gross margin for the three months ended June 30, 2001 and 2000 was 36% and 50%, respectively. Gross margin on live scan identification systems revenue was 38% for the three months ended June 30, 2001 compared to 53% in the same prior-year period. Gross margins benefited the prior-year period from a reduction in accrued installation costs applicable to a favorable change in an 18 VISIONICS CORPORATION THREE MONTHS ENDED JUNE 30, 2001 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS equipment installation obligation, lower per-unit warranty costs and a favorable product mix. In addition, the Company recorded a charge for excess inventory during the current-year period that negatively impacted gross margin on live scan identification systems revenue by 3%. Live scan maintenance margin for the three months ended June 30, 2001 and 2000 was 25% and 28%, respectively. The maintenance staff does new installations as well as provides maintenance services. The Company has increased staffing in this area to accommodate the growing install base while still providing excellent installation services. When they are performing installation work their time is charged to identification cost of sales. Gross margin on FaceIt license revenue decreased to 73% for the three-month period ended June 30, 2001 from 89% during the same prior-year period due primarily to an increase in licensing administration costs. FaceIt service margin decreased to 21% during the current-year three-month period from 46% during the same prior-year period. The decrease in margin is due primarily to most of the services in the current-year three-month period are being provided for government contracts which have lower billable rates than commercial rates, along with an increase in personnel to accommodate the increase in custom development service contracts and potential opportunities. Sales and marketing expense for the three-month period ended June 30, 2001 was 14% of total revenue compared to 21% for the same prior-year period. The increase in sales and marketing absolute dollars is due primarily to personnel-related costs associated with the increase in revenue along with promotional activities for new product marketing. The Company expects sales and marketing expenses to be in a similar range to the current quarter for the remainder of the year. Engineering and development expense was 16% of total revenue for the three-month period ended June 30, 2001 compared to 30% of total revenue in the same prior-year period. The decrease in engineering and development expenses as a percentage of total revenue is due primarily to the increase in revenue. The decrease in absolute dollars is due primarily to an increase in billable customer contracts for FaceIt services, partially offset by an increase in new product development costs related to IBIS and for the development of the biometric network platform. Engineering expenses for the three-month period ended June 30, 2001 are net of $54,000 of costs related to a federally funded demonstration project grant. The Company expects engineering and development expenses to be in a similar range to the current quarter for the remainder of the year. General and administrative expenses for the three-month periods ended June 30, 2001 and 2000 were 13% and 19%, respectively, of total revenue. The decrease in general and administrative expenses as a percentage of total revenue is due primarily to the increase in revenue. The increase in absolute dollars is due primarily to personnel-related costs and professional services. The Company expects general and administrative expenses to be in a similar range to the current quarter for the remainder of the year. Non-recurring charges for the three-month period ended June 30, 2001 increased to $232,000 from $33,000 the same prior-year period. Non-recurring charges in the current-year period of 19 VISIONICS CORPORATION THREE MONTHS ENDED JUNE 30, 2001 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS $153,000 are for the remaining lease commitments, net of anticipated sublease receipts, for cancellation of a sublease in the current period by an unrelated third party for a company-leased facility. The remaining non-recurring charges consist primarily of professional service costs associated with the merger activities. Other income, net decreased to $15,000 for the three months ended June 30, 2001 from $108,000 for the same prior-year period due primarily to a decrease in interest income from lower cash balances. The provision of income taxes of $27,000 for the current-year three-month period is due to state income taxes. The Company generated a net loss for the three-month period ended June 30, 2001 of $738,000, or $0.03 per share loss, as compared to a net loss of $863,000, or $0.04 per share loss, for the same prior-year period. The effect on the current-year three-month period for the non-recurring charges of $232,000 equates to a $0.01 per share loss. NINE MONTHS ENDED JUNE 30, 2001 COMPARED TO NINE MONTHS ENDED JUNE 30, 2000 Total revenue increased 30% to $22,314,000 for the nine months ended June 30, 2001 compared to $17,199,000 in the same prior-year period. Live scan identification systems revenue increased 9% to $13,072,000 compared to $11,998,000 in the same prior-year period due primarily to an increase in the number of live scan system installations. Live scan maintenance revenue increased 64% to $5,719,000 for the nine months ended June 30, 2001 compared to $3,489,000 for the same prior-year period. This increase is due primarily to a larger installed base of live scan systems covered by maintenance agreements. FaceIt license revenue increased 97% to $2,350,000 for the nine months ended June 30, 2001 compared to $1,191,000 for the same prior-year period. This increase is primarily due to a one-time license fee for use of FaceIt software for voter registration in Mexico and, to a lesser extent, an increase in revenue generated from its subsidiary in the United Kingdom. FaceIt service revenue increased 125% to $1,173,000 for the nine months ended June 30, 2001 compared to $521,000 for the same prior-year period. This increase is primarily due to custom development services provided under a United States government contract. Revenue from one customer in the nine-month period ended June 30, 2001 accounted for 22% of total revenue, and revenues from two customers in the same prior-year period accounted for 29% of total revenue. Foreign revenue for the nine-month period ended June 30, 2001 was 6% of total revenue compared to 4% the same prior-year period. Overall gross margin for the nine months ended June 30, 2001 and 2000 was 37% and 42%, respectively. Gross margin on live scan identification systems revenue was 34% for the nine months ended June 30, 2001 compared to 42% in the same prior-year period. Gross margins benefited the prior- 20 VISIONICS CORPORATION THREE MONTHS ENDED JUNE 30, 2001 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS year period from a reduction in accrued installation costs applicable to a favorable change in an equipment installation obligation, lower per-unit warranty costs and a favorable product mix. Live scan maintenance margin for the nine months ended June 30, 2001 and 2000 was 25% and 27%, respectively. Gross margin on FaceIt license revenue decreased to 84% for the nine-month period ended June 30, 2001 from 93% during the same prior-year period due primarily to an increase in amortization of software development costs and licensing administration. FaceIt service margin decreased to 24% during the current-year nine-month period from 46% during the same prior-year period. The decrease in margin is due primarily to most of the services in the current-year period are being provided for government contracts which have lower billable rates than commercial rates, along with an increase in personnel to accommodate the increase in custom development service contracts and potential opportunities. Sales and marketing expense for the nine-month period ended June 30, 2001 was 15% of total revenue compared to 14% for the same prior-year period. The increase in sales and marketing absolute dollars is due primarily to costs in the current-year period associated with a subsidiary in the United Kingdom which commenced operations during part of the same prior-year period along an increase in personnel-related costs and promotional activities for new product marketing. The Company expects sales and marketing expenses to be in a similar range to the current quarter for the remainder of the year. Engineering and development expense was 16% and 17%, respectively, of total revenue for the nine-month periods ended June 30, 2001 and 2000. The increase in absolute dollars is due primarily to an increase in new product development costs related to IBIS and for the development of the biometric network platform. Engineering expenses for the nine-month periods ended June 30, 2001 and 2000 are net of $289,000 and $363,000, respectively, of costs related to a federally funded demonstration project grant. The Company expects engineering and development expenses to be in a similar range to the current quarter for the remainder of fiscal 2001. General and administrative expenses for the nine-month periods ended June 30, 2001 and 2000 were 13% and 16%, respectively, of total revenue. The decrease in general and administrative expenses as a percentage of total revenue is due primarily to the increase in revenue. The increase in absolute dollars of general and administrative expenses is due primarily to an increase in personnel-related costs and professional services. The Company expects general and administrative expenses to be in a similar range to the current quarter for the remainder of the year. Non-recurring charges for the nine-month period ended June 30, 2001 and 2000 were $2,201,000 and $33,000, respectively. The non-recurring charges consist primarily of professional service costs associated with the merger activities with Visionics Corporation. Non-recurring charges in the current-year quarter of $153,000 are for the remaining lease commitments, net of anticipated sublease receipts, for cancellation of a sublease in the current period by an unrelated third party for a company-leased facility. 21 VISIONICS CORPORATION THREE MONTHS ENDED JUNE 30, 2001 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Other income, net decreased to $117,000 for the nine months ended June 30, 2001 from $291,000 for the same prior-year period due primarily to a decrease in interest income from lower cash balances. The provision of income taxes of $123,000 for the current-year nine-month period is due primarily to foreign taxes related to the license revenue applicable to a sale in Mexico and, to a lesser extent, state income taxes. The benefit of income taxes in the amount of $38,000 in the nine-month period ended June 30, 2000 relates to reversal of income taxes accrued prior to the merger. The Company incurred a net loss for the nine-month period ended June 30, 2001 of $5,225,000, or $0.22 per share loss, as compared to a net loss of $612,000, $0.03 per share loss, for the same prior-year period. The effect on the current-year period for the non-recurring charges of $2,201,000 equates to a $0.09 per share loss. INFLATION The Company does not believe inflation has significantly affected revenues or expenses. NET OPERATING LOSS CARRYFORWARDS At June 30, 2001, the Company had carryforwards of net operating losses of approximately $41,000,000 that may allow the Company to reduce future income taxes that would otherwise be payable. The carryforwards are subject to the limitation provisions of Internal Revenue Code sections 382 and 383. These sections provide limitations on the availability of net operating losses and credits to offset current taxable income and related income taxes when an ownership change has occurred. The Company's initial public offering in December 1990 resulted in an ownership change pursuant to these provisions and, accordingly, the use of approximately $3,300,000 of the above carryforwards is subject to an annual limitation, estimated at $350,000. At this time the remaining net operating loss limitation with respect to the 1990 ownership change is approximately $375,000. Any future ownership change could create a limitation with respect to loss carryforwards not currently subject to an annual limitation. Approximately $3,055,000 of the $41,000,000 net operating loss carryforwards relates to compensation associated with the exercise of non-qualified stock options which, when realized, would result in approximately $1,222,000 credited to additional paid-in capital. LIQUIDITY AND CAPITAL RESOURCES GENERAL 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 Minnesota. 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 on December 31, 2001. There were no borrowings under this line at June 30, 2001. 22 VISIONICS CORPORATION THREE MONTHS ENDED JUNE 30, 2001 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS At June 30, 2001, the Company had $7,695,000 in cash and cash equivalents and $81,000 of restricted cash. Historically, the Company has been reliant on the availability of outside capital to sustain its operations. 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 business as it has existed historically. On June 29, 2001 the Company closed on a private placement offering of common stock and warrants with total net proceeds to the Company of approximately $5.5 million. To fully exploit the opportunities presented by the merger between Digital Biometrics, Inc. and Visionics Corporation, such as joint product development and entry into new markets, additional capital may be required. There can be no assurance, however, that the financing necessary to pursue the Company's business plan will be available on terms acceptable or favorable to Visionics, or on any terms. If Visionics fails to obtain such financing, its business prospects and the market price of Visionics' common stock may be materially adversely affected. ANALYSIS OF CASH FLOWS FROM OPERATIONS Net cash used in operating activities was $909,000 for the nine months ended June 30, 2001 compared to $336,000 in the same prior-year period. The decrease in cash flow from operating activities resulted primarily from the net loss incurred during the current-year period and an increase in inventory, partially offset by a decrease in accounts receivable balances. Net cash used in investing activities decreased to $756,000 for the nine months ended June 30, 2001 from $986,000 the same prior-year period due primarily to a decrease in capitalized software development costs, partially offset by an increase in the purchase of computer equipment and for leasehold improvements. Net cash provided by financing activities was $5,725,000 for the nine-month period ended June 30, 2001 compared to $966,000 during the same prior-year period. Cash from financing activities during the current-year period was provided primarily from a private placement of common stock that closed on June 29, 2001, and to a lesser extent, stock option exercises. 23 VISIONICS CORPORATION THREE MONTHS ENDED JUNE 30, 2001 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is subject to foreign currency exposure, primarily with the British Pound and the Euro. At June 30, 2001 the Company's exposure to foreign currency fluctuations is not significant and primarily related to the Company's translation adjustment to convert its United Kingdom subsidiary into U.S. dollars. 24 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 None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company held its Annual Meeting of Stockholders on July 26, 2001. 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 proposal: o Adopt an Amendment to the 1998 Stock Option Plan to increase the number of shares of common stock authorized for issuance thereunder from 1,400,000 to 3,400,000. The results of the vote on this proposal were 12,728,935 shares voted for approval; 1,367,201 shares voted against; 153,627 shares abstaining and no broker non-votes. ITEM 5. OTHER INFORMATION None ITEM 6. (a) EXHIBITS Exhibit 10.19 Change in Terms Agreement dated June 29, 2001 between the Company and Associated Bank Minnesota. (b) REPORTS ON FORM 8-K On April 27, 2001 and June 29, 2001 the Company filed amended current reports on Form 8-K/A providing supplemental financial information pertaining to the merger between Digital Biometrics, Inc. and Visionics Corporation. 25 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. VISIONICS CORPORATION --------------------- (Registrant) August 14, 2001 /s/ Robert F. Gallagher ----------------------------------- Robert F. Gallagher Chief Financial Officer 26