-----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, JgoQDsuhe2SWfj7erOsKt1VW+drBssAxFFsNTT9+j5TTaARK/N/MOMuI/zZyhkiB /xFcqLhScluSoFhBYNV+ZA== 0000897101-99-000801.txt : 19990813 0000897101-99-000801.hdr.sgml : 19990813 ACCESSION NUMBER: 0000897101-99-000801 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990812 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIGITAL BIOMETRICS INC CENTRAL INDEX KEY: 0000868373 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 411545069 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-72031 FILM NUMBER: 99685583 BUSINESS ADDRESS: STREET 1: 5600 ROWLAND RD CITY: MINNETONKA STATE: MN ZIP: 55343 BUSINESS PHONE: 6129320888 MAIL ADDRESS: STREET 1: 5600 ROWLAND RD STREET 2: 5600 ROWLAND RD CITY: MINNETONKA STATE: MN ZIP: 55343 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999 -------------------------------------------------- or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________________ to _______________________ Commission File Number: 0-18856 --------------------------------------------------------- DIGITAL BIOMETRICS, INC. (Exact name of registrant as specified in its charter) Delaware 41-1545069 -------- ---------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 5600 Rowland Road, Minnetonka, Minnesota 55343 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (612) 932-0888 -------------- (Registrant's telephone number, including area code) N/A (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. [x] Yes [ ] No Indicate the number of shares of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $.01 par value July 31, 1999 - 15,402,093 shares ---------------------------- --------------------------------- (Class) (Outstanding) DIGITAL BIOMETRICS, INC. THREE MONTHS ENDED JUNE 30, 1999 INDEX PART I - FINANCIAL INFORMATION: PAGE ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) CONSOLIDATED BALANCE SHEETS 4 CONSOLIDATED STATEMENTS OF OPERATIONS 5 CONSOLIDATED STATEMENTS OF CASH FLOWS 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 18 PART II - OTHER INFORMATION: ITEM 1. LEGAL PROCEEDINGS 19 ITEM 2. CHANGES IN SECURITIES 19 ITEM 3. DEFAULTS UPON SENIOR SECURITIES 19 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 19 ITEM 5. OTHER INFORMATION 19 ITEM 6. (a) EXHIBITS 19 (b) REPORTS ON FORM 8-K 19 SIGNATURES 20 2 DIGITAL BIOMETRICS, INC. THREE MONTHS ENDED JUNE 30, 1999 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 concentration of credit and payment timing risks, particularly those relating to 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, 1998, as amended by the Company's Form 10-K/A filed with the Securities and Exchange Commission on January 28, 1999. 3 DIGITAL BIOMETRICS, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30, September 30, 1999 1998 ------------ ------------ Current assets: Cash and cash equivalents $ 1,145,387 $ 840,616 Accounts receivable, less allowance for doubtful accounts of $285,623 and $296,583, respectively 5,999,053 4,352,197 Inventory (note 4) 2,486,476 2,848,421 Prepaid expenses and other costs 203,001 214,559 ------------ ------------ Total current assets 9,833,917 8,255,793 ------------ ------------ Property and equipment 2,658,572 2,410,172 Less accumulated depreciation and amortization (1,653,545) (1,355,161) ------------ ------------ 1,005,027 1,055,011 ------------ ------------ Patents, trademarks, copyrights and licenses, net of accumulated amortization of $116,078 and $100,656, respectively 16,136 35,785 Deferred issuance costs on convertible debentures, net of accumulated amortization of $49,337 and $29,648, respectively (note 6) 48,551 71,872 ------------ ------------ $ 10,903,631 $ 9,418,461 ============ ============ Current liabilities: Accounts payable $ 1,107,465 $ 1,783,086 Line of credit advances 540,368 111,962 Accrued warranty 465,070 385,422 Deferred revenue 1,142,070 918,291 Other accrued expenses (note 5) 1,630,050 1,239,011 Current installments of capital lease obligations 58,299 34,620 ------------ ------------ Total current liabilities 4,943,322 4,472,392 Capital lease obligations, less current installments 115,342 113,117 Convertible debentures (note 6) 738,522 884,840 ------------ ------------ Total liabilities 5,797,186 5,470,349 ------------ ------------ Stockholders' equity (note 7): Common Stock, $.01 par value. Authorized, 40,000,000 shares; issued and outstanding 15,130,682 and 13,661,832 shares, respectively 151,307 136,618 Additional paid-in capital 45,947,596 44,114,225 Deferred compensation (102,000) (91,500) Accumulated deficit (40,890,458) (40,211,231) ------------ ------------ Total stockholders' equity 5,106,445 3,948,112 ------------ ------------ $ 10,903,631 $ 9,418,461 ============ ============
See accompanying notes to consolidated financial statements. 4 DIGITAL BIOMETRICS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Nine Months Ended June 30, June 30, 1999 1998 1999 1998 ------------ ------------ ------------ ------------ Revenues: Identification systems $ 5,312,409 $ 2,631,941 $ 10,900,850 $ 5,621,190 Maintenance 951,914 691,359 2,663,347 1,890,899 Systems integration services -- 198,664 258,720 309,820 ------------ ------------ ------------ ------------ Total revenues 6,264,323 3,521,964 13,822,917 7,821,909 ------------ ------------ ------------ ------------ Cost of revenues: Identification systems 3,250,108 1,664,703 6,829,253 4,201,691 Maintenance 787,704 648,262 2,120,575 1,583,683 Systems integration services -- 132,302 142,767 205,334 ------------ ------------ ------------ ------------ Total cost of revenues 4,037,812 2,445,267 9,092,595 5,990,708 ------------ ------------ ------------ ------------ Gross margin 2,226,511 1,076,697 4,730,322 1,831,201 ------------ ------------ ------------ ------------ Selling, general and administrative expenses: Sales and marketing 564,501 518,452 1,453,096 1,415,045 Engineering and development 534,961 757,128 1,677,728 2,281,800 General and administrative 652,047 473,445 2,027,499 1,406,212 ------------ ------------ ------------ ------------ Total expenses 1,751,509 1,749,025 5,158,323 5,103,057 ------------ ------------ ------------ ------------ Income (loss) from operations 475,002 (672,328) (428,001) (3,271,856) ------------ ------------ ------------ ------------ Other income (expense): Interest income 3,923 15,262 16,730 35,409 Interest expense (note 6) (45,382) (142,908) (257,749) (427,073) Other expense (10,207) (39,797) (10,207) (62,593) ------------ ------------ ------------ ------------ Total other income (expense) (51,666) (167,443) (251,226) (454,257) ------------ ------------ ------------ ------------ Net income (loss) $ 423,336 $ (839,771) $ (679,227) $ (3,726,113) ============ ============ ============ ============ Net income (loss) per common share $ 0.03 $ (0.06) $ (0.05) $ (0.29) ============ ============ ============ ============ Net income (loss) per common share - assuming dilution $ 0.03 $ (0.06) $ (0.05) $ (0.29) ============ ============ ============ ============ Weighted average common shares outstanding 15,130,682 12,988,144 14,559,270 12,632,950 ============ ============ ============ ============ Weighted average common shares outstanding - assuming dilution 15,243,357 12,988,144 14,559,270 12,632,950 ============ ============ ============ ============
5 DIGITAL BIOMETRICS, INC. STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine months Ended June 30, --------------------------- 1999 1998 ----------- ----------- Cash flows from operating activities: Net loss $ (679,227) $(3,726,113) Adjustments to reconcile net loss to net cash used in operating activities: Provision for doubtful accounts receivable 4,801 5,287 Deferred compensation amortization 43,500 42,939 Depreciation and amortization 446,181 391,820 Write-off of intangible assets 14,694 76,780 Loss on disposal of fixed assets 10,207 48,893 Loss from paydowns on marketable securities -- 1,315 Interest expense amortization for the intrinsic value of the beneficial conversion feature of convertible debentures 125,000 375,000 Interest expense on debentures converted into common stock 24,581 10,784 Changes in operating assets and liabilities: Accounts receivable (1,651,657) 1,287,156 Inventories 361,945 (98,223) Prepaid expenses 11,558 (39,856) Accounts payable (675,621) (139,866) Deferred revenue 223,779 188,504 Accrued expenses 591,545 21,452 ----------- ----------- Net cash used in operating activities (1,148,714) (1,554,128) ----------- ----------- Cash flows from investing activities: Purchase of property and equipment (266,075) (379,421) Proceeds from sale of property and equipment 700 -- Patents, trademarks, copyrights and licenses (5,773) (22,883) Proceeds from marketable securities -- 155,132 ----------- ----------- Net cash used in investing activities (271,148) (247,172) ----------- ----------- Cash flows from financing activities: Exercise of warrants and options -- 4,500 Issuance of convertible debentures, net 450,111 1,354,100 Principal payments on capital lease obligations (43,761) -- Private placements of common stock 889,877 -- Net advances on line of credit 428,406 -- ----------- ----------- Net cash provided by financing activities 1,724,633 1,358,600 ----------- ----------- Increase (decrease) in cash and cash equivalents 304,771 (442,700) Cash and cash equivalents at beginning of period 840,616 1,891,397 ----------- ----------- Cash and cash equivalents at end of period $ 1,145,387 $ 1,448,697 =========== ===========
See accompanying notes to financial statements. 6 DIGITAL BIOMETRICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999 (UNAUDITED) (1) DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION Digital Biometrics, Inc., (the "Company," "Digital Biometrics" or "DBI") develops, manufactures, markets and integrates computer-based products, systems and services for the identification of individuals. In addition, through its Integral Partners subsidiary, the Company is seeking to provide information technology (IT) services related to identification matters to commercial and governmental clients. The Company also participates with Lakes Gaming, Inc. in a joint venture named TRAK 21 Development, LLC, which seeks to develop, test and market an automated wagering tracking system based on technology developed by the Company. Digital Biometrics is a leading provider of products employing "biometric" technology, the science of identifying individuals by measuring distinguishing biological characteristics. The Company's main products are special-purpose, computer-based systems for "live-scan" fingerprint capture. These live-scan systems employ patented, high-resolution optics and specialized hardware and software, combined with industry-standard "off-the-shelf" computer hardware and software, to create highly optimized, special-purpose systems which capture, digitize, print and transmit forensic-grade fingerprint images. Historically, these systems have been purchased by law enforcement agencies as well as civil and commercial buyers. The Company also offers high-resolution, single-fingerprint capture products for commercial and governmental identification applications. The Company's strategy is to continue to market live-scan systems to law enforcement agencies, expand its products and service offerings, and expand into other markets. The law enforcement market for live-scan biometric products is well established. The Company believes there is increasing interest from other governmental and commercial markets to employ biometric identification technologies and products in such areas as applicant processing and enrollment. Digital Biometrics intends to aggressively pursue these emerging opportunities. In addition, the Company established an information technology services business which generated its first revenues in fiscal 1998. This business operated under the name "Integrated Information Solutions" or "IIS" during most of fiscal 1998. It has been renamed Integral Partners, Inc. and incorporated as a wholly owned subsidiary of the Company, effective October 1, 1998. This business is currently focused on the development of revenue opportunities related to identification. A majority of the Company's revenues in the first nine months of fiscal 1999 and fiscal 1998 were derived from live-scan systems sales, maintenance and applications development services to governmental customers. The Company's current and near-term future results of operations are expected to be heavily influenced by the characteristics of governmental markets. Government procurement processes are subject to budgetary, economic and political considerations which may vary significantly among different agencies. These market characteristics, along with the impact of a relatively small number of larger procurements, as well as competitive factors, have resulted in, and may continue to result in, an irregular revenue cycle for the Company; any prediction of future trends in the Company's business is inherently difficult. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with 7 DIGITAL BIOMETRICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999 (UNAUDITED) the instructions for Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. For further information, refer to financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended September 30, 1998, as amended by the Company's Form 10-K/A filed with the Securities and Exchange Commission on January 28, 1999. (2) SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK The Company extends credit to substantially all its customers. Approximately 90% and 71%, respectively, of customer accounts receivable at June 30, 1999 and September 30, 1998 were from government agencies, of which 39% and 42%, respectively, were from a single customer. Revenues from three customers in the three-month period ended June 30, 1999 accounted for 24%, 16% and 14% of total revenues, and revenues from two customers in the three-month period ended June 30, 1998 accounted for 27% and 13% of total revenues. For the nine-month period ended June 30, 1999, revenues from two customers accounted for 28% and 10% of total revenues. Revenues from two customers during the nine-month period ended June 30, 1998 accounted for 20% and 10% of total revenues. Export revenues for the three-month period ended June 30, 1999 were 5% of total revenue compared to less than 1% of total revenues for the same period in 1998. Export revenues for the nine-month period ended June 30, 1999 were 3% of total revenues as compared to 12% for the same period in 1998. (3) STATEMENT OF CASH FLOWS For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments and certificates of deposit purchased with an original maturity date of three months or less to be cash equivalents. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Nine Months Ended June 30, 1999 1998 -------- -------- Cash paid during the period for interest $51,525 $5,249 ======== ======== SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS: The Company entered into capital leases aggregating $69,665 for the purchase of property and equipment during the nine-month period ended June 30, 1999. The Company has issued 642,757 shares of common stock for the conversion of principal aggregating $650,000 of the 1997 Debentures plus $24,581 of accrued interest. For additional supplemental disclosure of non-cash investing and financing activities see notes 6 and 7. 8 DIGITAL BIOMETRICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999 (UNAUDITED) (4) INVENTORY Inventory is valued at standard cost which approximates the lower of first-in, first-out (FIFO) cost or market. Inventory consists of the following: June 30, September 30, 1999 1998 ------------ ------------ Components and purchased subassemblies $1,691,553 $1,119,766 Work in process 565,577 1,006,293 Finished goods 229,346 722,362 ------------ ------------ $2,486,476 $2,848,421 ============ ============ (5) OTHER ACCRUED EXPENSES Other accrued expenses consist of the following: June 30, September 30, 1999 1998 ------------ ------------ Accrued salaries and commissions $ 562,502 $ 370,326 Accrued vacation 194,113 154,424 Accrued installation costs 562,600 355,800 Other accrued expenses 310,835 358,461 ------------ ------------ $1,630,050 $1,239,011 ============ ============ (6) 8% CONVERTIBLE SUBORDINATED DEBENTURES On December 1, 1997, the Company entered into a convertible subordinated debenture purchase agreement ("Purchase Agreement") with a private investor, providing for the Company's issuance and sale of up to an aggregate of $2,500,000 of 8% Convertible Subordinated Debentures (the "1997 Debentures") in tranches of $500,000 each. The first four tranches were funded during fiscal 1998. The fifth tranche was funded in November, 1998. As of June 30, 1999, the Company has issued 1,838,284 shares of common stock for the conversion of $1,750,000 aggregate principal amount of the 1997 Debentures, plus $50,049 of accrued interest at an average conversion price of $0.98 per share. The intrinsic value of the beneficial conversion feature aggregated $125,000 for the nine-month period ending June 30, 1999 and $375,000 for the same nine-month period in fiscal 1998 and has been recorded as additional paid-in capital and interest expense in the respective periods. The principal amount of the 1997 Debentures outstanding at June 30, 1999 aggregated approximately $750,000. (7) STOCKHOLDERS' EQUITY During the three-month period ended June 30, 1999, the Company granted discretionary stock option awards to non-executive employees for the purchase of an aggregate of 42,500 shares of common stock. These options are exercisable at a price of $1.875 per share and expire in 2006. 9 DIGITAL BIOMETRICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999 (UNAUDITED) During the three-month period ended June 30, 1999, the Company granted a discretionary stock option award to a contractor for the purchase of an aggregate of 25,000 shares of common stock. The option is exercisable at a price of $1.875 per share and expires in 2006. (8) NET INCOME (LOSS) PER COMMON SHARE 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 income (loss) per common share would not have been dilutive:
For the Three-Month For the Nine-month Period Ended June 30, Period Ended June 30, ------------------------- ------------------------- 1999 1998 1999 1998 --------- --------- --------- --------- Options 1,746,100 1,957,200 1,982,600 1,957,200 Warrants 1,070,334 560,893 1,370,389 560,893 Convertible debentures 760,064 621,454 760,064 621,454
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, -------------------------- --------------------------- 1999 1998 1999 1998 ----------- ----------- ----------- ----------- Shares outstanding at beginning of period 15,130,682 12,947,226 13,661,832 12,361,038 Shares issued under retirement plan -- -- 87,897 55,963 Restricted stock awards, net of forfeitures -- 44,304 43,200 47,304 Exercise of options and warrants -- 2,000 -- 2,000 Shares issued for private placements -- -- 694,996 -- Shares issued upon conversion of debentures -- -- 642,757 527,225 ----------- ----------- ----------- ----------- Shares outstanding at end of period 15,130,682 12,993,530 15,130,682 12,993,530 =========== =========== =========== =========== Weighted average common shares outstanding 15,130,682 12,988,144 14,559,270 12,632,950 Dilutive common shares assumes: Options 51,753 -- -- -- Warrants 60,922 -- -- -- ----------- ----------- ----------- ----------- Weighted average common shares outstanding - assuming dilution 15,243,357 12,988,144 14,559,270 12,632,950 =========== =========== =========== =========== Net income (loss) $ 423,336 $ (839,771) $ (679,227) $(3,726,113) =========== =========== =========== =========== Net income (loss) per common share $ 0.03 $ (0.06) $ (0.05) $ (0.29) =========== =========== =========== =========== Net income (loss) per common share - assuming dilution $ 0.03 $ (0.06) $ (0.05) $ (0.29) =========== =========== =========== ===========
10 DIGITAL BIOMETRICS, INC. THREE MONTHS ENDED JUNE 30, 1999 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, 1998, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These include statements regarding intent, belief or current expectations of the Company and its management and are made in reliance upon the "safe harbor" provisions of the Securities Litigation Reform Act of 1995. Stockholders and prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties that may cause the Company's actual results to differ materially from the results discussed in the forward-looking statements. Digital Biometrics is a leading provider of products employing "biometric" technology, the science of identifying individuals by measuring distinguishing biological characteristics. The Company's main products are special-purpose, computer-based systems for "live-scan" fingerprint capture. These live-scan systems employ patented, high-resolution optics and specialized hardware and software, combined with industry-standard "off-the-shelf" computer hardware and software, to create highly optimized, special-purpose systems which capture, digitize, print and transmit forensic-grade fingerprint images. Historically, these systems have been purchased by law enforcement agencies as well as civil and commercial buyers. The Company also offers high-resolution, single-fingerprint capture products for commercial and governmental identification applications. The Company's strategy is to continue to market live-scan systems to law enforcement agencies, expand its products and service offerings, and expand into other markets. The law enforcement market for live-scan biometric products is well established. The Company believes there is increasing interest from other governmental and commercial markets to employ biometric identification technologies and products in such areas as applicant processing and enrollment. Digital Biometrics intends to aggressively pursue these emerging opportunities. In addition, the Company established an information technology services business which generated its first revenues in fiscal 1998. This business operated under the name "Integrated Information Solutions" or "IIS" during most of fiscal 1998. It has been renamed Integral Partners, Inc. and incorporated as a wholly owned subsidiary of the Company, effective October 1, 1998. During the quarter ended March 31, 1999, the Company refocused this business from commercial systems integration to the development of revenue opportunities related to identification. The Company is also engaged in a joint venture with Lakes Gaming, Inc. operating under the name of TRAK 21 Development, LLC. This joint venture was created to develop, test and market an automated wagering tracking system which utilizes technology developed by the Company. 11 DIGITAL BIOMETRICS, INC. THREE MONTHS ENDED JUNE 30, 1999 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The law enforcement market and government procurement processes are subject to budgetary, economic and political considerations which vary significantly from state to state and among different agencies. These characteristics, together with the increasing level of competition within the live-scan electronic fingerprint industry, have resulted (and are expected to continue to result) in an irregular revenue cycle for the Company. The Company generally recognizes product sales on the date of shipment for orders which are f.o.b. origin and upon delivery for f.o.b. destination, although recognition at some later milestone is not uncommon based on the terms of specific customer contracts. Revenue for professional services contracts and systems integration services revenues are recognized using the percentage of completion method or on a time-and-materials basis. The Company's standard terms of sale are payment due net in thirty days, f.o.b. Digital Biometrics, Inc. Terms of sale and shipment may, however, be subject to negotiation and may affect the Company's timing and criteria for revenue recognition. 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. Maintenance revenues are recognized over the life of the contract on a straight-line basis. RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998 Total revenues were $6,264,000 for the three months ended June 30, 1999 compared to $3,522,000 for the same prior-year period. Identification system product revenues were $5,312,000 compared to $2,632,000 in the same prior-year period. This 102% increase is due primarily to an increase in the number of live-scan systems sold during the three months ended June 30, 1999. For the three-month period ended June 30, 1999, sales to three customers accounted for approximately 24%, 16% and 14% of total revenues. Sales to two customers during the three months ended June 30, 1998 accounted for approximately 27% and 13% of total revenues. Export revenues for the three-month period ended June 30, 1999 were 5% of total revenues compared to less than 1% of total revenues for the same period in 1998. Product maintenance and service revenues were $952,000 for the three months ended June 30, 1999 compared to $691,000 for the same prior-year period, an increase of 38%. This increase is due primarily to a larger installed base of live-scan systems covered by maintenance agreements and, to a lesser extent, an increase in maintenance rates effective with maintenance contract renewals and revenue from additional services. There were no systems integration revenues for the three months ended June 30, 1999 compared to $199,000 for the same prior-year period, due to the impact of refocusing Integral Partners, Inc. on identification-related opportunities. Systems integration revenues during the prior-year period were generated from the Company's wholly owned subsidiary Integral Partners, Inc., which began operations during the first quarter of fiscal 1998 as a division of the Company. 12 DIGITAL BIOMETRICS, INC. THREE MONTHS ENDED JUNE 30, 1999 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overall gross margins for the three months ended June 30, 1999 were 36%, as compared to 31% of revenues for the same prior-year period. Gross margins on identification system revenues were 39% for the three months ended June 30, 1999 compared to 37% in the same prior-year period. This improvement is due to lower product costs, economies of scale and lower levels of warranty costs than in the prior-year period. Product maintenance and support margins for the three months ended June 30, 1999 and 1998 were 17% and 6%, respectively. The increase in product maintenance and support margins is due to the 38% increase in revenues and lower maintenance and support costs. Product maintenance and support margins for the three months ended June 30, 1999 are net of $150,000 (16% margin impact) of accrued costs to implement Year 2000 compliant software for customers with maintenance contracts. There was no gross margin generated from systems integration for the three months ended June 30, 1999 compared to 33% the same prior-year period. Sales and marketing expenses for the three-month period ended June 30, 1999 were 9% of total revenues compared to 15% for the same three-month prior-year period. The decrease in sales and marketing costs as a percentage of total revenue is due primarily to the increase in revenues. Engineering and development expenses were 9% of total revenues for the three-month period ended June 30, 1999 compared to 21% for the same period a year ago. This decrease is due primarily to increased revenues and reduced system integration engineering costs. General and administrative expenses for the three-month periods ended June 30, 1999 and 1998 were 10% and 13%, respectively, of total revenues. The decrease in general and administrative expenses as a percentage of total revenue is due primarily to an increase in revenues, offset by increased personnel-related costs and increased expenses associated with Integral Partners, Inc. Interest income decreased to $4,000 for the three months ended June 30, 1999 from $15,000 for the same period in 1998 due to lower cash balances. Interest expense decreased to $45,000 for the three months ended June 30, 1999 from $143,000 for the same prior-year period, primarily due to a $125,000 non-cash charge during the prior-year three-month period for the intrinsic value of the beneficial conversion feature of convertible debentures. The Company generated net income for the three-month period ended June 30, 1999 of $423,000 ($0.03 per share) as compared to a net loss of $840,000 ($0.06 per share) for the same prior-year period. NINE MONTHS ENDED JUNE 30, 1999 COMPARED TO NINE MONTHS ENDED JUNE 30, 1998 Total revenues were $13,823,000 for the nine months ended June 30, 1999 compared to $7,822,000 for the same prior-year period. Identification system product revenues were $10,901,000 compared to $5,621,000 in the same prior-year period. This 94% increase is due primarily to an increase in the number of live-scan systems sold during the nine months ended June 30, 1999. 13 DIGITAL BIOMETRICS, INC. THREE MONTHS ENDED JUNE 30, 1999 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS For the nine-month period ended June 30, 1999, sales to two customers accounted for approximately 28% and 10% of total revenues. Sales to two customers during the nine months ended June 30, 1998 accounted for approximately 20% and 10% of total revenues. Export revenues for the nine-month period ended June 30, 1999 were 3% of total revenues compared to 12% during the same prior-year period. Product maintenance and service revenues were $2,663,000 for the nine months ended June 30, 1999 compared to $1,891,000 for the same prior-year period, an increase of 41%. This increase is due primarily to a larger installed base of TENPRINTER systems covered by maintenance agreements and, to a lesser extent, an increase in maintenance rates effective with maintenance contract renewals. Systems integration revenues were $259,000 for the nine months ended June 30, 1999 compared to $310,000 for the same prior-year period. Systems integration revenues were generated from the Company's wholly owned subsidiary Integral Partners, Inc., which began operations during the first quarter of fiscal 1998 as a division of the Company. Overall gross margins for the nine months ended June 30, 1999 were 34%, as compared to 23% of revenues for the same prior-year period. Gross margins on identification system revenues were 37% for the nine months ended June 30, 1999 compared to 25% in the same prior-year period. This improvement is due to lower product costs, economies of scale and lower levels of warranty and installation costs than in the prior-year period. Product maintenance and support margins for the nine months ended June 30, 1999 were 20%, and 1998 were 16%. The increase in product maintenance and support margins during the current fiscal year period is due to the 41% increase in revenues, partially offset by $150,000 of accrued costs to implement Year 2000 compliance as required by customer contracts. Systems integration margins for the nine months ended June 30, 1999 were 45%, as compared to 34% for the same prior-year period. Sales and marketing expenses for the nine-month period ended June 30, 1999 were 11% of total revenues compared to 18% for the same nine-month prior-year period. The decrease in sales and marketing costs as a percentage of total revenue is due primarily to the increase in revenues. Engineering and development expenses were 12% of total revenues for the nine-month period ended June 30, 1999 compared to 29% for the same period a year ago. This decrease is due primarily to increased revenues, reduced new product development expenses and reduced systems integration engineering costs due to refocusing Integral Partners on identification-related opportunities. General and administrative expenses for the nine-month periods ended June 30, 1999 and 1998 were 15% and 18%, respectively, of total revenues. The decrease in general and administrative expenses as a percentage of total revenue is due primarily to an increase in revenues, partially offset by increased legal costs, increased personnel-related costs and increased general expenses associated with Integral Partners, Inc. Interest income decreased to $17,000 for the nine months ended June 30, 1999 from $35,000 for the same period in 1998 due to lower cash balances and lower interest rates. 14 DIGITAL BIOMETRICS, INC. THREE MONTHS ENDED JUNE 30, 1999 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Interest expense decreased to $258,000 for the nine months ended June 30, 1999 from $427,000 for the same prior-year period, primarily due to a $250,000 decrease in non-cash charges during the nine-month period ended June 30, 1999 for the intrinsic value of the beneficial conversion feature of convertible debentures issued, partially offset by an increase in borrowings under a line of credit and an increase in interest on capital leases. The Company incurred a net loss for the nine-month period ended June 30, 1999 of $679,000 ($0.05 per share) as compared to a net loss of $3,726,000 ($0.29 per share) for the same prior-year period. INFLATION The Company does not believe inflation has significantly affected revenues or expenses. NET OPERATING LOSS CARRYFORWARDS At June 30, 1999, the Company had carryforward of net operating losses of approximately $35,700,000 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 carryforward expires 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 published U.S. Internal Revenue Service long-term federal tax exempt rate. A total of $3,700,000 of the net operating loss carryforward at June 30, 1999 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 $32,000,000 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 carryforward. LIQUIDITY AND CAPITAL RESOURCES GENERAL The Company anticipates additional working capital requirements for operations and capital improvements to fulfill deliveries of its current backlog of customer orders. To meet these needs, the Company has established an inventory and receivables financing line of credit for the lesser of eligible inventory and receivables or $2,000,000 with SPECTRUM Commercial Services. Borrowings under this line of credit are secured by all the assets of the Company. The line bears interest at an initial rate of 4% above the prime rate, and may be reduced to 2.50% above the prime rate if certain net income milestones are satisfied. The line bears a minimum interest charge of $5,200 per month, is payable 15 DIGITAL BIOMETRICS, INC. THREE MONTHS ENDED JUNE 30, 1999 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS upon demand and expires in September 2000. At June 30, 1999, approximately $540,000 was outstanding on this line of credit. At June 30, 1999, the Company had $1,145,000 in cash and cash equivalents. Based on the Company's sales and operating forecasts, management believes that cash and cash equivalents, together with available financing sources, will be adequate to meet current operating requirements. However, any prediction of future sales and resulting cash flows is inherently difficult. Additional financing may be required if sales and operating results are different from that currently forecasted. The Company has identified potential sources for such additional financing in the event that it is required; however, there can be no assurance that such sources will provide the Company with additional financing on terms that are acceptable to the Company, or on any terms. YEAR 2000 PHENOMENON Computers, software and other equipment utilizing microprocessors that use only two digits to identify a year in a date field may be unable to accurately process certain date-based information, including correct leap year recognition, at or after the year 2000. This is commonly referred to as the "Year 2000" phenomenon. Digital Biometrics is addressing the potential effects of the Year 2000 phenomenon on its business. INTERNAL SYSTEMS The Company has evaluated and reviewed Company internal systems that could pose Year 2000 risks, and the Company is correcting problems as they are identified. The Company has requested and received Year 2000 readiness statements from each of its major suppliers of hardware and software products used for internal business applications, including computer and network equipment, telephone equipment, facility date-sensitive hardware, process date-sensitive hardware, and software. The Company will monitor internal system requirements and correct Year 2000 deficiencies as deemed necessary. The Company believes that the majority of its internal information systems are Year 2000 compliant, such that they will be able to distinguish accurately between 20th century and 21st century dates, and that the cost of converting or replacing those that are not Year 2000 compliant will not be material in relation to the Company's financial position or results of operations. However, there can be no assurance that unforeseen difficulties or costs will not arise. Although the Company has received Year 2000 readiness statements from each of its major suppliers, it is possible that various business functions which require the interaction of the Company's systems with those of suppliers or customers will fail or malfunction in the Year 2000. The potential effect and related costs of the failure of the Company's information systems suppliers to address Year 2000 issues in the products supplied to the Company is not known at this time, but such failure may have a material adverse affect on DBI. The Company believes that hardware and software products for its internal systems are available for purchase from alternative suppliers should its current vendors fail to conform to Year 2000 compliance. 16 DIGITAL BIOMETRICS, INC. THREE MONTHS ENDED JUNE 30, 1999 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS VENDOR PRODUCTS FOR MANUFACTURING The Company has received correspondence from most of its vendors and all of its critical suppliers, manufacturers, and other vendors as to Year 2000 readiness of their operations and the products and services that they provide to the Company. The Company is currently developing contingency plans to lessen its risks with respect to the failure of third parties to be Year 2000 ready. However, such failure, including failures of any contingency plans, remains a possibility and may have a material adverse affect on the Company's results of operations and financial condition. COMPANY PRODUCTS Management believes that all of the Company's new products shipped beginning January, 1999, are and will continue to be Year 2000 compliant. The Company evaluated products sold prior to this date for Year 2000 suitability, the specific nature of possible non-compliance, and the potential impact on DBI's customers. The results have been communicated to the Company's customers in writing as product generations were evaluated. Evaluation of the 1133S TENPRINTER has been completed with notification of compliance communicated to the Company's customers in writing in January, 1999. The evaluation of the 1133R TENPRINTER product has been completed and the results were communicated to customers in April, 1999. Based on results of tests to date, the Company has concluded that 1133S TENPRINTER systems shipped prior to January, 1999, were not Year 2000 compliant with respect to certain date-sensitive functions, but can be made compliant with software modifications. These modifications require changes to the operating system of the affected products. The 1133S operating system is sourced from an outside vendor, and then augmented by DBI to meet the particular requirements of DBI's products. Consequently, achieving Year 2000 compliance requires obtaining certain operating system modifications from the operating system vendor, which are in turn incorporated by the Company into its applications and then distributed by the Company to its customers. Year 2000 upgrades for the 1133S TENPRINTER are being provided to customers with DBI maintenance agreements free of any additional charge. Owners of non-compliant 1133S TENPRINTER systems that do not have maintenance agreements with the Company may purchase Year 2000 upgrade software and installation services from the Company. In addition, based on test results to date, the Company has also determined that models of the TENPRINTER prior to the 1133S are not Year 2000 compliant with respect to certain date-sensitive functions. The Company has tested Year 2000 compliance on legacy software releases on a product-by-product basis, and is communicating to customers the specific functions which may not perform properly. As with the 1133S, the underlying operating systems of prior models of the TENPRINTER were sourced from outside vendors. These operating systems are no longer being supported by the vendors. Thus, no vendor assistance for Year 2000 upgrading is available to Digital Biometrics, making the task of upgrading these operating systems for Year 2000 compliance very difficult and uneconomical. Some customers may continue to use non-compliant TENPRINTERs by avoiding the use of non-compliant date-sensitive functions. To the best of the Company's knowledge, the Company has no obligation to upgrade models of its TENPRINTER product prior to the 1133S to Year 2000 compliance, and the Company has no present plans to develop or offer any such upgrades to 17 DIGITAL BIOMETRICS, INC. THREE MONTHS ENDED JUNE 30, 1999 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS bring to full Year 2000 compliance. In the event that the Company is required to offer Year 2000 compliance on TENPRINTER systems prior to the 1133S without compensation, the Company may be materially adversely affected. Customers with non-compliant systems may purchase the Company's TENPRINTER 1133S or DBI FingerPrinter CMS systems. It is possible that the Company's revenue may be adversely affected if current and prospective customers divert spending to correct or replace information systems which are not Year 2000 compliant. COST OF YEAR 2000 COMPLIANCE TO THE COMPANY The estimated cost of the Company's software development to assure Year 2000 compliance of its 1133S TENPRINTER and future DBI products will be in the range of $50,000 to $75,000. The Company believes that most Year 2000 compliance upgrades to be provided to customers under maintenance agreements will be installed on-site. The Company believes that the cost to implement the software upgrades will be between $125,000 to $175,000 in total. If unplanned development issues or unplanned customer installation problems arise, the cost to complete Year 2000 compliance may exceed these estimates and have a material adverse affect on the Company's results of operations. Additional information about the Year 2000 issue and the Company's compliance program will be added to the Company's web site at www.digitalbiometrics.com. Achieving Year 2000 compliance is dependent on a number of factors, many of which are not within the Company's control. In the event that the above assessment of the Company's situation regarding Year 2000 issues is found to be incorrect on subsequent analysis, the Company's business and its results of operations may be materially adversely affected. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. 18 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS There are no material lawsuits pending or, to the Company's knowledge, threatened against the Company. ITEM 2. CHANGES IN SECURITIES (a) Not applicable. (b) Not applicable. (c) Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. (a) EXHIBITS Exhibit 27 Financial Data Schedule. (b) REPORTS ON FORM 8-K There were no reports on Form 8-K filed by the Company during the three-month period ended June 30, 1999. 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DIGITAL BIOMETRICS, INC. ------------------------ (Registrant) August 12, 1999 /s/ John J. Metil ----------------------------------------- John J. Metil Executive Vice President, Chief Operating Officer and Chief Financial Officer 20 EX-27 2 FINANCIAL DATA SCHEDULE
5 9-MOS SEP-30-1999 OCT-01-1998 JUN-30-1999 1,145,387 0 6,284,676 285,623 2,486,476 9,833,917 2,658,572 1,653,545 10,903,631 4,943,322 738,522 0 0 151,307 4,955,138 10,903,631 10,900,850 13,822,917 6,829,253 9,092,595 5,158,323 0 257,749 (679,227) 0 (679,227) 0 0 0 (679,227) (0.05) (0.05)
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