-----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, E89HQnCGF116YX0zzgkW+byievfTqaJS/D2AqdqfacjMZ1WyzHmBfD0Njf9AgTFB 1S7bJvhGH78630019FgTbA== 0000897101-97-000174.txt : 19970222 0000897101-97-000174.hdr.sgml : 19970222 ACCESSION NUMBER: 0000897101-97-000174 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970214 SROS: NASD 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: 1934 Act SEC FILE NUMBER: 000-18856 FILM NUMBER: 97535365 BUSINESS ADDRESS: STREET 1: 5600 ROWLAND RD CITY: MINNETONKA STATE: MN ZIP: 55343 BUSINESS PHONE: 6129320888 MAIL ADDRESS: 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 December 31, 1996 ---------------------------------- 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 incorporation or organization) Identification No.) 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 January 31, 1997 - 11,362,016 shares (Class) (Outstanding) DIGITAL BIOMETRICS, INC. THREE MONTHS ENDED DECEMBER 31, 1996 INDEX PART I - FINANCIAL INFORMATION: PAGE ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) BALANCE SHEETS 3 STATEMENTS OF OPERATIONS 4 STATEMENTS OF CASH FLOWS 5 NOTES TO FINANCIAL STATEMENTS 6 ITEM 2. MANAGEMENT'S DISCUSSION AND 14 ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS PART II - OTHER INFORMATION: ITEM 1. LEGAL PROCEEDINGS 22 ITEM 6. (a) EXHIBITS 22 (b) REPORTS ON FORM 8-K 22 SIGNATURES 23 EXHIBIT 11 STATEMENT RE: COMPUTATION OF LOSS 24 PER SHARE EXHIBIT 27 FINANCIAL DATA SCHEDULE TENPRINTER(R) and the Company's mechanical hand logo have been registered as trademarks with the U.S. Patent and Trademark Office. The Company has applied for registration of the SQUID(TM) trademark. In addition, FC-5(TM), FC-6(TM), FC-7(TM), FC-11(TM), FC-21(TM) and FC-22(TM) are trademarks of the Company.
DIGITAL BIOMETRICS, INC. BALANCE SHEETS (UNAUDITED) December 31, September 30, 1996 1996 ------------ ------------- Current assets: Cash and cash equivalents (note 2) $ 525,043 $ 466,990 Accounts receivable, less allowance for doubtful accounts of $577,884 and $692,534, respectively 5,630,890 5,676,849 Inventory (note 4) 4,069,566 3,633,659 Prepaid expenses and other costs 376,037 208,349 ------------ ------------ Total current assets 10,601,536 9,985,847 ------------ ------------ Property and equipment 2,514,674 2,471,754 Less accumulated depreciation and amortization (1,204,079) (1,089,026) ------------ ------------ 1,310,595 1,382,728 ------------ ------------ Marketable securities (notes 2 and 3) 5,398,844 5,690,371 Patents, trademarks, copyrights and licenses, net of accumulated amortization of $207,721 and $192,899, respectively 120,712 123,017 Deferred issuance costs on convertible debentures, net of accumulated amortization of $187,319 and $172,476, respectively (note 7) 100,106 127,408 ------------ ------------ $ 17,531,793 $ 17,309,371 ============ ============ Current liabilities: Accounts payable $ 676,592 $ 1,103,174 Line of credit advances (note 5) 2,905,000 1,255,000 Deferred revenue 700,562 649,178 Accrued expenses (note 6) 1,337,422 1,471,908 ------------ ------------ Total current liabilities 5,619,576 4,479,260 Convertible debentures (note 7) 2,134,147 2,374,739 ------------ ------------ Total liabilities 7,753,723 6,853,999 ------------ ------------ Stockholders' equity (note 8): Common stock, $.01 par value. Authorized, 20,000,000 shares; issued and outstanding 10,916,485 and 10,777,288 shares, respectively 109,165 107,773 Additional paid-in capital 38,165,445 37,819,851 Unrealized losses on marketable securities (notes 2 and 3) (84,411) (134,753) Deferred compensation (78,000) (96,000) Notes receivable from sale of common stock (117,623) (117,623) Accumulated deficit (28,216,506) (27,123,876) ------------ ------------ Total stockholders' equity 9,778,070 10,455,372 Commitments (note 9) ------------ ------------ $ 17,531,793 $ 17,309,371 ============ ============ See accompanying notes to financial statements.
DIGITAL BIOMETRICS, INC. STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Ended December 31, 1996 1995 ------------ ------------ Sales: Identification systems $ 1,616,314 $ 2,168,871 Maintenance and other services 399,159 350,223 ------------ ------------ Total sales 2,015,473 2,519,094 ------------ ------------ Cost of sales: Identification systems 848,697 987,944 Maintenance and other services 556,944 424,234 ------------ ------------ Total cost of sales 1,405,641 1,412,178 ------------ ------------ Gross margin 609,832 1,106,916 ------------ ------------ Selling, general and administrative expenses: Sales and marketing 525,969 629,676 Engineering and development 688,229 939,874 Depreciation and amortization 82,424 138,659 General and administrative 386,158 482,783 ------------ ------------ Total expenses 1,682,780 2,190,992 ------------ ------------ Loss from operations (1,072,948) (1,084,076) Interest income 86,934 202,400 Interest expense (106,616) (308,129) ------------ ------------ Net loss $ (1,092,630) $ (1,189,805) ============ ============ Loss per common share $ (0.10) $ (0.15) ============ ============ Weighted average common shares outstanding 10,862,607 7,891,840 ============ ============ See accompanying notes to financial statements.
DIGITAL BIOMETRICS, INC. STATEMENTS OF CASH FLOWS (UNAUDITED) Three Months Ended December 31, ------------------------------- 1996 1995 ------------- ------------- Cash flows from operating activities: Net loss $ (1,092,630) $ (1,189,805) Adjustments to reconcile net loss to net cash used in operating activities: Provision for doubtful accounts receivable 5,000 35,000 Deferred compensation amortization 18,000 48,171 Depreciation and amortization 143,815 149,633 Loss on disposal of fixed assets -- 7,360 Interest expense on debentures converted into common stock 1,667 16,088 Changes in operating assets and liabilities: Accounts receivable 40,959 (768,600) Inventories (435,907) (19,065) Prepaid expenses (168,107) (114,037) Accounts payable (426,582) 267,054 Deferred revenue 51,384 (105,162) Accrued expenses (11,304) 82,482 ------------ ------------ Net cash used in operating activities (1,873,705) (1,590,881) ------------ ------------ Cash flows from investing activities: Purchase of property and equipment (42,920) (179,955) Patents, trademarks, copyrights and licenses (12,516) (20,071) Sale of marketable securities before maturity 337,194 -- ------------ ------------ Net cash provided by (used in) investing activities 281,758 (200,026) ------------ ------------ Cash flows from financing activities: Exercise of warrants -- 315,000 Issuance of convertible debentures -- 10,109,750 Net advances (payments) on line of credit 1,650,000 (1,450,000) ------------ ------------ Net cash provided by financing activities 1,650,000 8,974,750 ------------ ------------ Increase in cash and cash equivalents 58,053 7,183,843 Cash and cash equivalents at beginning of period 466,990 367,866 ------------ ------------ Cash and cash equivalents at end of period $ 525,043 $ 7,551,709 ============ ============ See accompanying notes to financial statements.
DIGITAL BIOMETRICS, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 (UNAUDITED) (1) DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION Digital Biometrics, Inc., (the Company) was incorporated in Minnesota in May, 1985 and reincorporated in Delaware in December, 1986. The Company is a developer, manufacturer and marketer of identification products based on electro-optical imaging technologies. The Company's principal product, the TENPRINTER(R) system is a computer-based, inkless "live-scan" fingerprint system that electronically reads a fingerprint and creates a digital image, which can then either be printed on an attached printer or transmitted electronically to a central printing or storage site. The TENPRINTER system is designed for use by, and is being actively marketed to, law enforcement agencies and other organizations requiring a high resolution fingerprint image for identification cards or similar applications. The Company's performance in any one quarter is not necessarily indicative of sales trends or future performance. The nature of the law enforcement market and the government procurement process are expected to continue to produce an irregular and unpredictable revenue cycle for the Company. The accompanying unaudited 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, 1996. (2) ACCOUNTING POLICIES INVENTORY Inventory is valued at standard cost which approximates the lower of first-in, first-out (FIFO) cost or market. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK The Company extends credit to state and local governments in connection with sales of products to law enforcement agencies. Approximately 70% of customer accounts receivable at December 31, 1996 were from government agencies, of which 26% was from a single customer. For the three-month period ended December 31, 1996, sales to two customers accounted for 17% and 12% of sales. Sales to two customers during the three-month period ended December 31, 1995 accounted for 40% and 10% of period sales. Export sales for the three-month period ended December 31, 1996 were less than 1% as compared to 39% for the same period in 1995. MARKETABLE SECURITIES Marketable securities consist primarily of collateralized mortgage backed securities (see note 3). The Company has adopted Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities (SFAS 115). Under SFAS 115, the Company classifies its marketable debt securities as available for sale and records these securities at fair market value. Net realized and unrealized gains and losses are determined on the specific identification cost basis. Unrealized gains and losses are reflected as a separate component of stockholders' equity. A decline in the market value of any available-for-sale or held-to-maturity security below cost that is deemed other than temporary results in a charge to operations resulting in the establishment of a new cost basis for the security. Realized losses on sales of marketable securities are reported as a reduction in interest income. There were no realized losses on sales of marketable securities for the three-month periods ended December 31, 1996 or 1995. PROPERTY AND EQUIPMENT Furniture and equipment are recorded at cost. Depreciation and amortization are computed on a straight-line basis over the estimated useful lives, generally 3 to 5 years. Leasehold improvements are amortized over the estimated useful life of the asset or lease term whichever is shorter. PATENTS, TRADEMARKS, COPYRIGHTS AND LICENSES Costs associated with patents, trademarks and copyrights are capitalized and amortized over sixty months or the remaining life of the patent, trademark or copyright, whichever is shorter. The cost of software licenses related to purchased software are capitalized and amortized over thirty-six months or the life of the license, whichever is shorter. Management periodically assesses the amortization period and recoverability of the carrying amount of intangible assets based upon an estimation of their value and future benefits of the recorded asset. Management has concluded that the carrying amount of the intangible assets is realizable. WARRANTY COSTS Estimated product warranty costs are accrued at date of shipment. Accrued warranty costs at December 31, 1996 were $84,000 compared with $129,000 at September 30, 1996. REVENUE AND REVENUE RECOGNITION Revenues from product sales are generally recognized on the date of shipment. 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 for certain procurements by municipal or other government agencies may, however, be subject to negotiation. In cases where the Company is required to purchase a performance bond or to deposit collateral in accordance with the terms of a contract, the Company's policy is to defer revenues under such contracts until the amount shipped exceeds the amount of the performance collateral or until the security is released by the bonding company. Maintenance revenues are recognized over the life of the contract on a straight-line basis. Revenue under contracts where a performance bond, collateral or customer acceptance is required, is not recognized until collateral requirements have been satisfied and customer acceptance has occurred. The Company's performance for any period is not necessarily indicative of sales trends or future performance. The nature of the law enforcement market and the government procurement process are expected to result in an irregular and unpredictable revenue cycle for the Company. ENGINEERING AND DEVELOPMENT ARRANGEMENTS Engineering and development costs are expensed as incurred. Engineering and development expenses for the three-month period ended December 31, 1995 are net of reimbursements of $462,000 from a company with which there is a teaming agreement on an international development project. STATEMENT OF CASH FLOWS For purposes of the statement 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. Cash equivalents include primarily U.S. Government money market funds and A-1, P-1 rated commercial paper. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Three Months Ended December 31, 1996 1995 -------- ------- Cash paid during the period for interest $37,370 $9,866 ======= ====== For supplemental disclosure of non-cash investing and financing activities see notes 7 and 8. NET LOSS PER COMMON SHARE Net loss per common share is determined by dividing the net loss by the weighted average number of shares of common stock and dilutive common share equivalents outstanding. Common share equivalents have been excluded from the computation of net loss per share as their effect is anti-dilutive. INCOME TAXES The Company has adopted the asset and liability method of accounting for income taxes of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109). Under the asset and liability method, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statement carrying amount and tax basis of assets and liabilities. The Company provides for deferred taxes at the enacted tax rate that is expected to apply when the temporary differences reverse. ACCOUNTING ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (3) MARKETABLE SECURITIES Investments in marketable securities have maturities ranging from 2005 to 2016.The unrealized loss for available-for-sale marketable securities is as follows. December 31, September 30, 1996 1996 ------------ ------------- Fair market value $5,398,844 $5,690,371 Amortized cost 5,483,255 5,825,124 ---------- ---------- Unrealized loss $ (84,411) $ (134,753) ========== ========== (4) INVENTORY Inventory is valued at standard which approximates the lower of first-in, first-out (FIFO) cost or market. Inventory consists of the following: December 31, September 30, 1996 1996 ------------ ------------- Raw materials $1,744,553 $1,934,371 Work in process 682,747 717,696 Finished goods 1,642,266 981,592 ---------- ---------- $4,069,566 $3,633,659 ========== ========== (5) LINES OF CREDIT The Company has a $4,000,000 line of credit with Norwest Bank Minnesota N.A. Borrowings under this line of credit are secured by marketable securities and are limited to the amount of marketable securities held as collateral by the bank. Borrowings under the line were $2,905,000 on December 31, 1996 and bear interest at rates from 7.56% to 8.25%. Depending on the timing of accounts receivable collection, the line may reach the maximum borrowings allowed during fiscal 1997. The line is payable upon demand and expires in May 1997. The Company entered into a receivables financing line of credit effective October 1, 1996 for the lesser of eligible receivables or $3,500,000 with Norwest Business Credit. Borrowings under this line of credit are secured by all assets of the Company. There were no borrowings under the line at December 31, 1996. The line will bear interest at 1.5% above the prime rate, is payable upon demand and expires in September 1997. The Company has a $200,000 line of credit with First Bank Minneapolis, secured by cash deposits. Borrowings under the line bear interest at the prime rate (8.25% on December 31, 1996), are payable upon demand and expires in March 1997. There were no amounts borrowed under the line at December 31, 1996. (6) ACCRUED EXPENSES December 31, September 30, 1996 1996 ----------- ------------ Accrued expenses consist of: Accrued salaries $ 378,086 $ 442,701 Accrued vacation 98,840 112,665 Accrued interest payable 221,632 205,529 Payroll taxes payable 19,933 55,561 Sales taxes payable 33,224 22,953 Accrued warranty 83,500 128,500 Other accrued expenses 502,207 503,999 ---------- ----------- $1,337,422 $ 1,471,908 ========== =========== Accrued salaries at December 31, 1996 and September 30, 1996 include $330,000 for severance costs related to the retirement of the Company's president and chief executive officer. Other accrued expenses at December 31, 1996 include $73,000 for penalties related to late installation of live-scan equipment per the terms of a contract with a major customer. (7) CONVERTIBLE DEBENTURES On September 29, 1995, the Company completed a private placement to offshore accredited investors of $10,900,000 of 8% Convertible Debentures due September 29, 1998 (the "Debentures"). Net proceeds to the Company after placement fees but before legal and other expenses were $10,109,750. The Debentures are convertible one third after 45 days, one third after 75 days and one third after 105 days at the option of the Debenture holder. The Company has the right to redeem the debentures prior to conversion. The conversion price is equal to the lesser of $7.00 per common share or 85% of the average trading price for any five consecutive trading days before conversion. Interest accrued on the Debentures is payable in common stock at the time of conversion at the conversion price as described above. In addition to the cash placement fee, a warrant to purchase 112,893 shares of the Company's common stock at $8.40 per share was granted to the placement agent for this offering. The warrant was valued at $112,893, which is reflected as a discount on the Debentures and is being amortized as interest expense over the term of the Debentures. Net proceeds to the Company will be used for working capital, product development and other general corporate purposes. As of December, 1996, the Company has issued 2,849,267 shares of common stock for the conversion of principal aggregating $8,700,000 of the 8% Convertible Debentures plus $353,000 of accrued interest at an average conversion price of $3.18 per share. For the three-month period ended December 31, 1996, the Company has issued 97,399 shares of common stock for the conversion of principal aggregating $250,000 of the 8% Convertible Debentures plus $23,000 of accrued interest at an average conversion price of $2.80 per share. (8) STOCKHOLDERS' EQUITY During the three-month period ended December 31, 1996, the Company granted 119,500 discretionary stock option awards to certain of its executive officers and employees. These options are exercisable at a prices ranging from $2.56 to $3.125 per share and expire in 2006. In addition, effective January 1, 1997 stock option awards of 250,000 shares at $2.125 per share were issued pursuant to an offer of employment to the Company's new President and Chief Executive Officer. Effective December 31, 1996, the Company issued 41,798 shares of common stock to satisfy the Company's discretionary matching to employees electing participation in the Company's 401(k) retirement plan. This issuance increased common stock and additional paid-in capital by $88,821 and reduced accrued compensation by the same amount. (9) LEASE COMMITMENTS The Company leases its primary office and production facility under an operating lease that expires in April, 2001. Annual base rent under the lease agreement is approximately $237,000 and the Company is obligated to pay a pro rata share for property taxes, maintenance and other operating expenses. The Company leases a separate sales and service office in Los Angeles, California under an operating lease that expires in December, 1997 and a sales office in Washington, D.C. on a year-to-year lease arrangement. Rent expense, property taxes, maintenance and other lease operating expenses for the three months ended December 31, 1996 and 1995 was $89,000 and $78,000, respectively. (10) LITIGATION On June 1, 1995, the Company filed a complaint for patent infringement against Identix, Inc., of Sunnyvale, California, in the United States District Court for the Northern District of California. The complaint alleges that Identix has willfully and deliberately infringed a Company patent through the manufacture, use and/or sale of competing products. The complaint seeks, among other things, an injunction prohibiting further infringement as well as unspecified monetary damages. Identix has responded to the complaint alleging, among other purported defenses, non-infringement and patent invalidity. On August 27, 1996, the judge assigned to the case granted a partial summary judgment in favor of Identix dismissing the Company's claims of patent infringement with respect to Identix's Touchprint 600 product line. A predecessor product, the Touchprint 900, received a similar ruling in favor of Identix on December 20, 1996. The Company intends to appeal the court's decision of non-infringement. The interpretation of patents is ultimately decided by a special patent Court of Appeals in Washington D.C. A prediction of the final outcome of the appeal is not possible. However, in the event the Company does not prevail in this litigation, its competitive position may be materially and adversely affected. There are no material lawsuits pending or, to the Company's knowledge, threatened against the Company. DIGITAL BIOMETRICS, INC. THREE MONTHS ENDED DECEMBER 31, 1996 FACTORS THAT MAY AFFECT OPERATING RESULTS The statements contained in this Report on Form 10-Q that are not purely historical are forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding the Company's expectations, hopes, intentions or strategies regarding the future. All forward looking statements included in this document are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward looking statements, It is important to note that the Company's actual results could differ materially from those in such forward looking statements. Some of the factors that could cause actual results to differ materially are set forth below under the caption "Forward Looking Comments and Matters That May Affect Operating Results." ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company develops, manufactures, assembles and markets identification products based on electro-optical imaging technologies. Most of the Company's sales have been to state and local law enforcement agencies and, to date, have consisted primarily of TENPRINTER systems and related peripheral equipment and software. The nature of the law enforcement market and the government procurement process is subject to budgetary, economic and political considerations which may vary significantly from state to state and among different agencies. These market characteristics, along with the recent and continuing development of the live-scan electronic fingerprint industry, have resulted in and are expected to continue to result in an irregular revenue cycle for the Company and any prediction of future trends is inherently difficult. The Company believes, however, that its principal product line, which is designed to be sold to law enforcement agencies, is a leader in its marketplace. To the extent that funds become available to such customers for procurement purposes, the Company should benefit from the continuing development of this market. The Company generally recognizes product sales on the date of shipment. The Company's standard terms of sale are payment due net in 30 days, f.o.b. the Company. Terms of sale and shipment for certain procurements by municipal or other government agencies may, however, be subject to negotiation. In cases where the Company is required to purchase a performance bond or to deposit collateral in accordance with the terms of a contract, the Company's policy is to defer recognition of revenues from such contracts until the amount shipped exceeds the amount of the performance collateral or until the security is released by the bonding company. Maintenance revenues are recognized over the life of the contract on a straight-line basis. Maintenance costs are expensed as incurred. RESULTS OF OPERATIONS THREE MONTHS ENDED DECEMBER 31, 1996 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 1995 Total sales were $2,015,000 for the three months ended December 31, 1996 compared with $2,519,000 for the same prior-year period. Identification system product sales were $1,616,000 compared with $2,169,000 in 1995. The number of TENPRINTER systems sold during the three months ended December 31, 1996 were 26, compared to 32 in the prior-year period. Included in the 1995 sales were $977,000 for 12 systems sold to an international customer. For the three-month period ended December 31, 1996, sales to two customers accounted for approximately 17% and 12% of total sales. Sales to two customers during the three months ended December 31, 1995 accounted for approximately 40% and 10% of total sales. Product maintenance and service revenues were $399,000 for the three months ended December 31, 1996 compared with $350,000 for the same prior-year period. This increase is due primarily to a larger installed base of TENPRINTER systems. Overall gross margins for the three months ended December 31, 1996 were 30% as compared with 44% of sales for the same prior-year period. Gross margins on identification system sales were 47% in 1996 compared with 54% in 1995. This decrease is due primarily to higher margins on international shipments in the prior-year period. Product maintenance and service margins for the three months ended December 31, 1996 and 1995 were (40%) and (21%), respectively, of maintenance and support revenues. The increased costs of product maintenance and support are due primarily to building of base field service operations to accommodate maintenance of three generations of TENPRINTER systems located in 37 states. Sales and marketing expenses for the three-month period ended December 31, 1996 were 26% of total sales compared to 25% for the same three-month prior-year period. Engineering and development expenses were 34% of total sales for the three-month period ended December 31, 1996 compared to 37% for the same period a year ago. This decrease is due primarily to reduced new product development costs. Engineering and development expenses for the three-month period ending December 31, 1995 are net of reimbursements of $462,000 related to an international development project. General and administrative expenses for the three-month period ended December 31, 1996 and 1995 were 19% of total sales. Interest income decreased to $87,000 for the three months ended December 31, 1996 from $202,000 for the same period in 1995, primarily due to lower balances of cash and marketable securities. Interest expense decreased to $107,000 for the three months ended December 31, 1996 from $308,000 for the same prior-year period, primarily due to the reduced balance of 8% convertible debentures outstanding. The Company incurred a net loss for the three-month period ended December 31, 1996 of $1,093,000 ($0.10 per share) as compared with $1,190,000 ($0.15 per share) for the same prior-year period. INFLATION The Company does not believe inflation has significantly impacted revenues or expenses. NET OPERATING LOSS CARRYFORWARDS At December 31, 1995, the Company had carryforwards of net operating losses of approximately $25,000,000 that may allow the Company to reduce future income taxes that would otherwise be payable. Of this amount approximately $2,200,000 relates to compensation associated with the exercise of non-qualified stock options which, when realized, would result in approximately $880,000 credited to additional paid-in capital. The carryforwards expire annually beginning in 1999. 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 long-term federal tax exempt rate. A total of $3,700,000 of the net operating loss carryforwards at December 31, 1996 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 $21,300,000 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 BACKGROUND For the period from the Company's inception in 1985 through December 31, 1996, limited revenues have resulted from product sales and at December 31, 1996, the Company's cumulative deficit was $28,217,000. Losses are expected to continue until the market development and acceptance of the technology incorporated into the Company's products provides product sales sufficient to cover the Company's operating expenses. The Company's business has included large contract awards from international, state and local law enforcement agencies and it is expected that this trend will continue. Collection of receivables related to billings of these contract amounts is often protracted as technical requirements specified by the customer may be modified via contract addendums. As of December 31, 1996, approximately $2,916,000 was due from such customers. CURRENT AND FUTURE OPERATIONS The Company's performance in any one reporting period is not necessarily indicative of sales trends or future performance. The nature of the law enforcement market and the government procurement process are expected to continue to result in an irregular and unpredictable revenue cycle for the Company. Net cash used in operating activities was $1,874,000 for the three months ended December 31, 1996 compared with $1,591,000 for the same prior-year period. The increase in cash used in operating activities was primarily a result of a smaller net loss during the three-month period in 1996 adjusted for changes in operating assets and liabilities. Cash flows from changes in operating assets and liabilities changed from cash used of $657,000 during the prior-year three-month period to $950,000 of cash used during the same current-year period. This $293,000 change in cash flow from operating assets and liabilities resulted primarily from the lower accounts receivable and accounts payable balances and higher inventory balances on December 31, 1996. Net cash provided by investing activities was $282,000 for the three months ended December 31, 1996 as compared with $200,000 net cash used in investing activities for the same prior-year period. Capital expenditures for the three-months ended December 31, 1995 were primarily for engineering and manufacturing test fixtures. The Company's business does not require significant amounts of cash for capital expenditures because substantial amounts of the manufacturing and assembly processes utilized in the production of current products are performed by outside vendors, as directed by the Company. Specifically, the Company purchases electronics modules and standard mechanical assemblies from manufacturers of such goods. In addition, sheet metal components, optical components and specialized electronics modules are designed by the Company and manufactured to the Company's specifications by outside sources. Net cash provided by financing activities was $1,650,000 for the three months ended December 31, 1996 due to borrowings on lines of credit. Net cash provided by financing activities was $8,975,000 for the three months ended December 31, 1995, due to cash received from the issuance of 8% convertible debentures and repayments of outstanding borrowings on lines of credit. Borrowings under lines of credit were $2,905,000 at December 31, 1996. There were no borrowings under lines of credit on December 31, 1995. On September 29, 1995, the Company completed a private placement to offshore accredited investors of $10,900,000 of 8% Convertible Debentures due September 29, 1998 (the "Debentures"), of which $8,700,000 were converted to 2,849,267 shares of common stock as of December 31, 1996. The average conversion price was $3.18 per share. Net proceeds to the Company during fiscal 1996 after placement fees but before legal and other expenses were $10,109,750. Interest accrued on the Debentures is also payable in common stock at the time of conversion at the conversion price as described above. In addition to the cash placement fee, a warrant to purchase 112,893 shares of the Company's common stock at $8.40 per share was granted to the placement agent for this offering. The warrant was valued at $112,893, which is reflected as a discount on the Debentures and is being amortized as interest expense over the term of the Debentures. Net proceeds to the Company were used for working capital, product development and other corporate purposes. At December 31, 1996, the Company had $525,000 in cash and cash equivalents and $5,399,000 in marketable securities, which are classified as available for sale. The unrealized loss on marketable securities at December 31, 1996 was $84,000. These marketable securities are collateral for borrowings under a line of credit. The Company has a $4,000,000 line of credit with Norwest Bank Minnesota N.A. Borrowings under this line of credit are secured by marketable securities and are limited to the amount of marketable securities held as collateral by the bank. Borrowings under the line were $2,905,000 on December 31, 1996 and bear interest at rates from 7.56% to 8.25%. Depending on the timing of accounts receivable collection, the line may reach the maximum borrowings allowed during fiscal 1997. The line is payable upon demand and expires in May 1997. The Company entered into a receivables financing line of credit effective October 1, 1996 for the lesser of eligible receivables or $3,500,000 with Norwest Business Credit. Borrowings under this line of credit are secured by all assets of the Company. There were no borrowings under the line at December 31, 1996. The line will bear interest at 1.5% above the prime rate, is payable upon demand and expires in September 1997. The Company has a $200,000 line of credit with First Bank Minneapolis, secured by cash deposits. Borrowings under the line bear interest at the prime rate (8.25% on December 31, 1996), are payable upon demand and expires in March 1997. There were no amounts borrowed under the line at December 31, 1996. FORWARD LOOKING COMMENTS AND MATTERS THAT MAY AFFECT OPERATING RESULTS Except for the historical information contained in this Form 10-Q, the matters discussed herein are 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, and involve risks and uncertainties, including development and market acceptance of the Company's products and the availability of new employees experienced in the present and contemplated markets. Other factors that may affect future performance of the Company include successful expansion of distribution channels for products through OEM's and others; changes in general economic conditions; availability of funding where customer procurements are dependent on state or federal government grants and general tax funding; concentrations of accounts receivable and other credit risk in single large customers; or cost and availability of components. In addition, markets for the Company's products are characterized by significant and increasing competition, and the Company's financial results may be adversely affected by the actions of existing and future competitors, including the development of new technologies, the introduction of new products, and price reductions by such competitors to gain or retain market share. It is important to note that the Company's actual results could differ materially from those in such forward looking statements and the Company assumes no obligation to update such forward looking statements. Due primarily to continuing operating losses, the Company has not yet achieved positive cash flow. Management believes that cash and cash equivalents, investments, accounts receivable and working capital provided from operations, together with available financing sources, are sufficient to meet current and foreseeable operating requirements, however additional financing may be required. There can be no assurance that additional financing, should it be required, will be available at terms acceptable to the Company. As of December 31, 1996, the balance of 8% Convertible Debentures was $2,200,000. The Debentures are convertible at the option of the Debenture holder. The Company has the right to redeem the debentures prior to conversion. The conversion price is equal to the lesser of $7.00 per common share or 85% of the average trading price for any five consecutive trading days before conversion. Interest accrued on the Debentures is payable in common stock at the time of conversion at the conversion price as described above. Conversion of debentures and accrued interest into shares of common stock of the Company may negatively impact and increase the volatility of the price of the common stock. LAW ENFORCEMENT AND REGULATORY AGENCY MARKET The Company has worked with NEC in Tokyo, Japan since late 1993 in pursuit of a fingerprint system for the National Police Agency of Japan (NPA). During the fourth quarter of fiscal 1996, the formal Teaming Agreement has, by its original terms, expired and the Company has since been in discussions with NEC as to the nature of the joint business relationship going forward. NEC currently owes the Company $1.2 million related to deliveries under the previous agreement, payment of which has been delayed by NEC pending negotiations as to the future business relationship. Discussions are ongoing as to the timing of payment of this amount. In connection with a recent live-scan bid in the state of Texas, NEC, an AFIS vendor and long-standing customer and business partner of the Company, announced upon award to NEC by the State of Texas that NEC intends to enter and compete directly with the Company in the live-scan marketplace. In addition, the price bid by NEC to the State of Texas was approximately 40% less than that bid by the Company and other competitors. It is possible other AFIS vendors or systems integrators will employ similar strategies or tactics and these present or future competitors have financial and other resources significantly greater than that of the Company. The Company's performance in any one reporting period is not necessarily indicative of sales trends or future performance. Law enforcement agencies are subject to political and budgetary constraints and the nature of the law enforcement market and the government procurement process are expected to continue to result in an irregular and unpredictable revenue cycle for the Company. For the three-month period ended December 31, 1996, sales to two customers accounted for 17% and 12% of sales. Sales to two customers during the three-month period ended December 31, 1995 accounted for 40% and 10% of period sales. Export sales for the three-month period ended December 31, 1996 were less than 1% as compared to 39% for the same period in 1995. The Company extends credit to state and local governments in connection with sales of products to law enforcement agencies. Approximately 70% of customer accounts receivable at September 30, 1996 were from government agencies, of which 40% was from a single customer. Sales to this and other customers requiring large and sophisticated networks of TENPRINTER systems and peripheral equipment often include technical requirements which are not fully known at the time requirements are specified by the customer. In addition, contracts may specify performance criteria which is required to be satisfied before the customer accepts the products and services. The Company does not record revenue for these products and services until acceptance criteria have been satisfied. It is often not known until installation is in process if older and often obsolete communication lines and local area networks will accommodate the large amount of computer data transmitted by the TENPRINTER systems and related peripherals. Due to the inherent difficulties for customers to receive additional funding to upgrade facilities, hardware and/or communication lines to the required level, collection of amounts due the Company for these systems often occurs over longer periods of time during which the customer processes contract amendments which allow the Company to charge the customer for additional requested services. It is only upon completion of customer requirements, which time periods are unpredictable and which may involve investment of additional Company resources, that accounts receivable are collected. These investments of additional resources are accrued when amounts can be estimated but however, may be uncompensated and, other than increased customer loyalty, negatively impact profit margins and the Company's liquidity. GAMING AND OTHER COMMERCIAL MARKETS The Company has only recently began marketing products to the gaming industry and has not yet completed production level systems of TRAK-21. Although prototype models of TRAK-21 have been successfully demonstrated in laboratory conditions, there can be no assurance that scheduled beta tests in live casino environments will be successful. In addition, it has not been determined whether or not the TRAK-21 system will be able to compete, on the basis of price and performance, with player tracking systems of competitors whose systems have been marketed for longer periods of time and whose financial and other resources are far greater than that of the Company. DIGITAL BIOMETRICS, INC. THREE MONTHS ENDED DECEMBER 31, 1996 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On June 1, 1995, the Company filed a complaint for patent infringement against Identix, Inc., of Sunnyvale, California, in the United States District Court for the Northern District of California. The complaint alleges that Identix has willfully and deliberately infringed a Company patent through the manufacture, use and/or sale of competing products. The complaint seeks, among other things, an injunction prohibiting further infringement as well as unspecified monetary damages. Identix has responded to the complaint alleging, among other purported defenses, non-infringement and patent invalidity. On August 27, 1996, the judge assigned to the case granted a partial summary judgment in favor of Identix dismissing the Company's claims of patent infringement with respect to Identix's Touchprint 600 product line. A predecessor product, the Touchprint 900, received a similar ruling in favor of Identix on December 20, 1996. The Company intends to appeal the court's decision of non-infringement. The interpretation of patents is ultimately decided by a special patent Court of Appeals in Washington D.C. A prediction of the final outcome of the appeal is not possible. However, in the event the Company does not prevail in this litigation, its competitive position may be materially and adversely affected. There are no material lawsuits pending or, to the Company's knowledge, threatened against the Company. ITEM 6. (a) EXHIBITS Exhibit 11 Statement re: Computation of loss per share 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 December 31, 1996. 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) February 13, 1997 /s/ James C. Granger ------------------------------------- James C. Granger President and Chief Executive Officer EX-11 2 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11.0 DIGITAL BIOMETRICS, INC. STATEMENT RE: COMPUTATION OF LOSS PER SHARE The per share computations are based on the weighted average number of common shares outstanding during the periods.
Three Months Ended December 31, ------------------------------ 1996 1995 ------------ ------------ Shares outstanding at beginning of period 10,777,288 7,833,633 Shares issued under retirement plan 41,798 16,831 Exercise of warrants -- 157,500 Shares issued from debenture and related interest conversion 97,399 213,481 Shares outstanding at end of period 10,916,485 8,221,445 ============ ============ Weighted average shares outstanding (A) 10,862,607 7,891,840 ============ ============ Net loss $ (1,092,630) $ (1,189,805) ============ ============ Loss per common share $ (0.10) $ (0.15) ============ ============
(A) Stock options and other common share equivalents are not included in the calculation of the net loss per common share for the three months ended December 31, 1996 and 1995 as their effect is antidilutive. EX-27 3 FINANCIAL DATA SCHEDULE
5 0000868373 DIGITAL BIOMETRICS, INC. 3-MOS SEP-30-1997 OCT-01-1996 DEC-31-1996 525,043 5,398,844 6,208,774 577,884 4,069,566 10,601,536 2,514,674 1,204,079 17,531,793 5,619,576 2,134,147 0 0 109,165 9,668,905 17,531,793 1,616,314 2,015,473 848,697 1,405,641 1,682,780 0 106,616 (1,092,630) 0 (1,092,630) 0 0 0 (1,092,630) (0.10) (0.10)
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