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, 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 July 31, 1996 - 10,716,997 shares
(Class) (Outstanding)
DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED JUNE 30, 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 13
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
PART II - OTHER INFORMATION:
ITEM 1. LEGAL PROCEEDINGS 20
ITEM 6. (a) EXHIBITS 20
(b) REPORTS ON FORM 8-K 20
SIGNATURES 21
EXHIBIT 11 STATEMENT RE: COMPUTATION OF LOSS 22
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 TRAK-21TM and SQUIDTM trademark. In addition, FC-5TM,
FC-6TM, FC-7TM, FC-11TM, FC-21TM and FC-22TM are trademarks of the Company.
<TABLE>
<CAPTION>
DIGITAL BIOMETRICS, INC.
BALANCE SHEETS
(UNAUDITED)
June 30, September 30,
1996 1995
------------ -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents (note 2) $ 1,105,405 $ 367,866
Receivable from issuance of convertible debentures (note 7) -- 10,109,750
Accounts receivable, less allowance for doubtful accounts of $156,364
and $111,000, respectively 5,426,189 4,494,301
Inventories (note 4) 4,911,117 1,875,682
Prepaid expenses and other costs 196,919 144,925
------------ ------------
Total current assets 11,639,630 16,992,524
------------ ------------
Property and equipment 2,418,792 1,639,319
Less accumulated depreciation and amortization (982,676) (745,602)
------------ ------------
1,436,116 893,717
------------ ------------
Marketable securities (notes 2 and 3) 5,782,339 5,780,707
Patents, trademarks, copyrights and licenses, net of accumulated
amortization of $834,951 and $610,282, respectively 736,800 934,468
Deferred issuance costs on convertible debentures, net of accumulated
amortization of $155,467 and $0, respectively (note 7) 155,034 850,250
------------ ------------
$ 19,749,919 $ 25,451,666
============ ============
Current liabilities:
Accounts payable $ 1,016,990 $ 461,331
Line of credit advances (note 5) -- 1,450,000
Deferred revenue 1,078,445 542,758
Accrued expenses 1,160,558 1,044,745
------------ ------------
Total current liabilities 3,255,993 3,498,834
Convertible debentures (note 7) 2,565,331 10,787,107
------------ ------------
Total liabilities 5,821,324 14,285,941
------------ ------------
Stockholders' equity (note 8):
Common stock, $.01 par value. Authorized, 20,000,000 shares; issued
and outstanding 10,716,997 and 7,833,633 shares, respectively 107,170 78,336
Additional paid-in capital 37,615,738 29,138,225
Unrealized losses on marketable securities (notes 2 and 3) (171,699) (176,477)
Deferred compensation (144,171) (216,684)
Notes receivable from sale of common stock (297,173) (297,173)
Accumulated deficit (23,181,270) (17,360,502)
------------ ------------
Total stockholders' equity 13,928,595 11,165,725
Commitments (note 9)
------------ ------------
$ 19,749,919 $ 25,451,666
============ ============
See accompanying notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
DIGITAL BIOMETRICS, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
June 30, June 30,
1996 1995 1996 1995
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Sales:
Identification systems $ 662,233 $ 890,514 $ 3,715,938 $ 5,314,996
Maintenance and other services 383,454 311,390 1,107,794 890,430
Other -- 1,800,000 -- 1,800,000
------------ ------------ ------------ ------------
Total 1,045,687 3,001,904 4,823,732 8,005,426
------------ ------------ ------------ ------------
Cost of sales:
Identification systems 406,686 471,334 1,907,364 2,596,774
Maintenance and other services 569,118 478,011 1,504,263 1,194,562
Other -- 588,654 -- 588,654
------------ ------------ ------------ ------------
Total 975,804 1,537,999 3,411,627 4,379,990
------------ ------------ ------------ ------------
Gross margin 69,883 1,463,905 1,412,105 3,625,436
------------ ------------ ------------ ------------
Selling, general and administrative expenses:
Sales and marketing 558,686 567,008 1,679,832 1,645,970
Engineering and development 1,079,246 738,467 3,204,244 1,718,257
Depreciation and amortization 136,977 136,463 430,219 387,478
General and administrative 770,229 447,176 1,745,854 1,140,350
------------ ------------ ------------ ------------
Total expenses 2,545,138 1,889,114 7,060,149 4,892,055
------------ ------------ ------------ ------------
Loss from operations (2,475,255) (425,209) (5,648,044) (1,266,619)
Interest income 125,239 91,646 496,369 286,531
Interest expense (116,734) (11,468) (669,093) (21,476)
------------ ------------ ------------ ------------
Net loss $ (2,466,750) $ (345,031) $ (5,820,768) $ (1,001,564)
============ ============ ============ ============
Loss per common share $ (0.23) $ (0.04) $ (0.65) $ (0.13)
============ ============ ============ ============
Weighted average common shares outstanding
10,565,580 7,830,886 9,011,169 7,807,577
============ ============ ============ ============
See accompanying notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
DIGITAL BIOMETRICS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
June 30,
-------------------------------
1996 1995
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (5,820,768) $ (1,001,564)
Adjustments to reconcile net loss to net cash used in
operating activities:
Provision for doubtful accounts receivable 45,364 39,000
Provision for technological obsolescence -- 486,738
Deferred compensation amortization 144,513 159,752
Depreciation and amortization 653,457 416,581
Loss on disposal of fixed assets 7,773 --
Interest expense on convertible debentures 478,335 --
Changes in operating assets and liabilities:
Accounts receivable (977,252) (1,392,045)
Inventories (3,035,435) 11,907
Prepaid expenses (51,994) (52,797)
Accounts payable 555,659 (161,615)
Deferred revenue 535,687 (74,708)
Accrued expenses 46,575 (213,783)
------------ ------------
Net cash used in operating activities (7,418,086) (1,782,534)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (792,123) (399,941)
Sale of marketable securities -- 686,909
Patents, trademarks, copyrights and licenses (27,002) (95,847)
------------ ------------
Net cash (used in) provided by investing activities (819,125) 191,121
------------ ------------
Cash flows from financing activities:
Exercise of warrants and options 315,000 70,855
Issuance of convertible debentures 10,109,750 --
Line of credit (payments) advances (1,450,000) 1,275,000
------------ ------------
Net cash provided by financing activities 8,974,750 1,345,855
------------ ------------
Increase (decrease) in cash and cash equivalents 737,539 (245,558)
Cash and cash equivalents at beginning of period 367,866 592,971
------------ ------------
Cash and cash equivalents at end of period $ 1,105,405 $ 347,413
============ ============
See accompanying notes to financial statements.
</TABLE>
DIGITAL BIOMETRICS, INC.
NOTES TO FINANCIAL STATEMENTS
(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, 1995.
(2) ACCOUNTING POLICIES
INVENTORY
Inventory is valued at standard cost which approximates the lower of
first-in, first-out (FIFO) cost or market.
MARKETABLE SECURITIES
Marketable securities consist primarily of collateralized mortgage
backed securities. Net realized and unrealized gains and losses are determined
on the specific identification cost basis (see note 3). Unrealized gains and
losses are reflected as a separate component of stockholders' equity. 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 June 30, 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.
REVENUE AND REVENUE RECOGNITION
The Company's identification system sales include the delivery of
integrated hardware and software. Revenues from system 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.
Maintenance costs are expensed as incurred.
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 continue to produce an
irregular and unpredictable revenue cycle for the Company.
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 61% of
customer accounts receivable at June 30, 1996 were from government agencies, of
which 59% was from a single customer. Approximately 39% of customer accounts
receivable at June 30, 1996 were from non-government agencies, of which 83% was
from a single customer.
For the three-month period ended June 30, 1996, sales to one customer
accounted for 19% of total sales. Sales to two customers during the three-month
period ended June 30, 1995 accounted for 60% and 10% of period total sales. For
the nine-month period ended June 30, 1996, sales to two customers accounted for
30% and 10% of total sales. Sales to three customers during the nine-month
period ended June 30, 1995 accounted for 25%, 22% and 10% of period total sales.
Export sales were less than 1% for the three-month period ended June 30, 1996
and 60% for the same period in 1995. Export sales were 25% for the nine-month
period ended June 30, 1996 and 24% for the same period in 1995.
ENGINEERING AND DEVELOPMENT ARRANGEMENTS
Engineering and development costs are expensed as incurred. Engineering
and development expenses for the three-month period ended June 30, 1995 are net
of reimbursements of $164,000 from a company with which there is a teaming
agreement on an international development project. Engineering and development
expenses for the nine-month periods ended June 30, 1996 and 1995 are net of
reimbursements of $462,000 and $599,000, respectively.
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:
Nine Months Ended
June 30,
1996 1995
-------- -------
Cash paid during the period for interest $9,866 $21,746
======== =======
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. Common share equivalents have
been excluded from the computation of net loss per share as their effect is
anti-dilutive.
INCOME TAXES
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.
(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.
June 30, September 30,
1996 1995
----------- -------------
Fair market value $5,782,339 $5,780,707
Amortized cost 5,954,038 5,957,184
=========== ==========
Unrealized loss $ (171,699) $ (176,477)
=========== ==========
(4) INVENTORIES
Inventory is valued at standard which approximates the lower of
first-in, first-out (FIFO) cost or market. Inventories consist of the following.
June 30, September 30,
1996 1995
---------- -------------
Raw materials $3,076,062 $1,187,955
Work in process 1,292,211 197,947
Finished goods 542,844 489,780
========== ==========
$4,911,117 $1,875,682
========== ==========
Certain of the Company's components used in the manufacture of its
TENPRINTER system are currently supplied by a single vendor. Secondary sourcing
is not expected to be available for the next several months. Delays in product
deliveries to customers may occur should the supplier be unable to deliver the
components.
(5) LINE OF CREDIT
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 June 30, 1996), is payable upon demand. The line expires in March
1997. There were no amounts borrowed under the line at June 30, 1996.
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 bear interest at the prime rate (8.25% on June
30, 1996) and are payable upon demand. The line and expires in May 1997. There
were no amounts borrowed under the line at June 30, 1996.
(6) ACCRUED EXPENSES
Accrued expenses consist of:
June 30, September 30,
1996 1995
---------- -------------
Salaries $ 178,595 $ 127,281
Vacation 136,668 105,734
Interest 163,914 2,799
Payroll taxes 197,422 500,000
Sales taxes 13,351 34,818
Warranty 60,800 58,100
Professional services 264,053 21,392
Other 145,755 194,621
=========== ===========
$1,160,558 $1,044,745
=========== ===========
(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 a 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 are being used for working capital, product development
and other general corporate purposes.
As of June 30, 1996, the Company has issued 2,691,577 shares of common
stock for the conversion of principal aggregating $8,250,000 of the 8%
Convertible Debentures plus $281,000 of accrued interest at an average
conversion price of $3.17 per share.
(8) STOCKHOLDERS' EQUITY
Effective December 31, 1995 the Company issued 16,831 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 $94,674 and resulted in
compensation expense of the same amount.
Effective with their election at the annual stockholders' meeting held
on February 21, 1996, the Company granted 17,456 shares of restricted common
stock to its non-employee directors. The grant resulted in $72,000 in additional
common stock issued and an equal amount of deferred compensation expense which
is being amortized on a straight-line basis over the three-year restricted
period.
In December, 1995 and May, 1996 the Company granted discretionary stock
option awards to certain of its officers and employees. The aggregate number of
shares issuable upon exercise of these options is 110,500. These options are
excisable at prices from $6.125 to $6.25 per share and expire in 2005 and 2006.
In May, 1996 the Board of Directors adopted a Shareholder Rights Plan
("the Plan"). The Plan is designed to enable the Company and its Board of
Directors to develop and preserve long term values for stockholders and to
protect stockholders in the event an attempt is made to acquire control of the
Company without an offer of fair value to all stockholders. Under the Plan, each
stockholder of record beginning at the close of business on May 15, 1996, will
receive as a dividend one right for each share of DBI common stock held.
The rights expire on April 30, 2006.
(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 $400,000, including 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 August, 1996 and a sales office in Washington, D.C. on a
year-to-year lease arrangement. Rent expense for the nine months ended June 30,
1996 and 1995 was $246,000 and $250,000, 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. This
lawsuit is in its discovery stage and any specific outcome is not yet
determinable.
There are no material lawsuits pending or, to the Company's knowledge,
threatened against the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company develops, manufactures, assembles and markets
identification systems based on electro-optical imaging technologies. Most of
the Company's sales have been to state and local law enforcement agencies. To
date, the Company's sales 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 JUNE 30, 1996 COMPARED TO THREE MONTHS ENDED JUNE 30, 1995
Total revenues were $1,046,000 for the three months ended June 30, 1996
compared with $3,002,000 for the same period in 1995. Identification system
product sales were $662,000 in 1996 compared with $891,000 in 1995, a decrease
of 26%. This decrease resulted primarily from a decrease in the number of
TENPRINTER systems sold from 17 during the three-month period in the prior-year
to 8 during the current-year period. The decrease in units sold is directly
related to a transition during the quarter to a new generation "S Series"
TENPRINTER system and a decision by management to delay deliveries of the new
system to the last half of the current fiscal year. Initial deliveries are being
scheduled to allow sufficient time for training of installation personnel as
well as field service technicians.
Product maintenance and service revenues were $383,000 for the three
months ended June 30, 1996 compared with $311,000 for the same period in 1995.
This increase is due primarily to a larger installed base of TENPRINTER systems.
Other revenues for the three months ended June 30, 1995 include a
one-time fee of $1,800,000 related to an international development project.
For the three-month period ended June 30, 1996, sales to one customer
accounted for approximately 19% of total sales. Sales to two customers during
the three months ended June 30, 1995 accounted for approximately 60% and 10% of
total sales.
Overall gross margins for the three months ended June 30, 1996 were 7%
as compared with 49% of sales for the same period in 1995. Gross margins on
identification system sales were 39% in 1996 compared with 47% in 1995. This
decrease was due primarily to higher manufacturing costs per TENPRINTER system
produced. The higher cost per unit was due primarily to decreased economies of
scale from the decreased number of systems manufactured and sold during the
three-month period ended June 30, 1996.
Product maintenance and service margins for the three months ended June
30, 1996 and 1995 were (48)% and (54)% of maintenance and support revenues,
respectively. Costs of product maintenance and support are due primarily to
building of base field service operations to accommodate maintenance of
TENPRINTER systems now located in 37 states.
Gross margins on revenues related to the international development
project, net of resulting estimated costs of inventory technology obsolescence
was 67% during the three-month period ended June 30, 1995. It is not anticipated
that the contribution from international development projects of this type will
continue.
Sales and marketing expenses for the three-month period ended June 30,
1996 were 53% of total sales compared to 19% for the same three-month period in
1995. This increase is due primarily to the lower sales level and international
marketing efforts. Engineering and development expenses were 103% of total sales
for the three-month period ended June 30, 1996 compared to 25% for the same
period a year ago. The 1996 increase is due primarily to the lower sales level
and new product development efforts. Engineering and development expenses for
the three-month period ending June 30, 1995 is net of reimbursements of $164,000
related to an international development project. General and administrative
expenses for the three-month period ended June 30, 1996 were 74% of total sales
compared to 15% for the same period in 1995. This increase is due primarily to
the lower sales level and increased legal expenses related to the patent
infringement lawsuit.
Interest income increased to $125,000 for the three months ended June
30, 1996 from $92,000 for the same period in 1995, primarily due to cash
received from the private placement of 8% convertible debentures issued on
September 29, 1995.
Interest expense increased to $117,000 for the three months ended June
30, 1996 from $11,000 for the same period in 1995, primarily due to accrued
interest expense on the 8% convertible debentures issued on September 29, 1995.
The Company incurred a net loss for the three-month period ended June
30, 1996 of $2,467,000 ($0.23 per share) as compared with $345,000 ($0.04 per
share) for the same period in 1995.
NINE MONTHS ENDED JUNE 30, 1996 COMPARED TO NINE MONTHS ENDED JUNE 30, 1995
Total revenues were $4,824,000 for the nine months ended June 30, 1996
compared with $8,005,000 for the same period in 1995. Identification system
product sales were $3,716,000 compared with $5,315,000 in 1995. The number of
TENPRINTER systems sold during the nine months ended June 30, 1996 were 48,
compared to 68 in the prior-year period. Included in the 1996 sales were
$1,178,000 for 12 systems and system add-ons sold to an international customer.
Product maintenance and service revenues were $1,108,000 for the nine
months ended June 30, 1996 compared with $890,000 for the same period in 1995.
This increase is due primarily to a larger installed base of TENPRINTER systems.
Other revenues for the three months ended June 30, 1995 include a
one-time fee of $1,800,000 related to an international development project.
For the nine-month period ended June 30, 1996, sales to two customers
accounted for approximately 30% and 10% of total sales. Sales to three customers
during the nine months ended June 30, 1995 accounted for approximately 25%, 22%
and 10% of total sales.
Overall gross margins for the nine months ended June 30, 1996 were 29%
as compared with 45% of sales for the same period in 1995. Gross margins on
identification system sales were 49% in 1996 compared with 51% in 1995. This
decrease was due primarily to a decrease in the number of TENPRINTER systems
sold, offset by higher margins on international shipments in fiscal 1996.
Product maintenance and service margins for the nine months ended June
30, 1996 and 1995 were (36)% and (34)% of maintenance and support revenues,
respectively. The increased costs of product maintenance and support are due
primarily to building of base field service operations to accommodate
maintenance of TENPRINTER systems now located in 37 states.
Sales and marketing expenses for the nine-month period ended June 30,
1996 were 35% of total sales compared to 21% for the same nine-month period in
1995. This increase is primarily due to the lower sales level and international
marketing efforts. Engineering and development expenses were 66% of total sales
for the nine-month period ended June 30, 1996 compared to 21% for the same
period a year ago. The 1996 increase is due primarily to the lower sales level
and new product development efforts. Engineering and development expenses for
the nine-month periods ending June 30, 1996 and 1995 are net of reimbursements
of $462,000 and $599,000, respectively, related to an international development
project. General and administrative expenses for the nine-month period ended
June 30, 1996 were 36% of total sales compared to 14% for the same period in
1995. This increase is due primarily to the lower sales level and increased
legal expenses related to the patent infringement lawsuit.
Interest income increased to $496,000 for the nine months ended June
30, 1996 from $287,000 for the same period in 1995, primarily due to cash
received from the private placement of 8% convertible debentures issued on
September 29, 1995.
Interest expense increased to $669,000 for the nine months ended June
30, 1996 from $21,000 for the same period in 1995, primarily due to accrued
interest expense on the 8% convertible debentures issued on September 29, 1995.
The Company incurred a net loss for the nine-month period ended June
30, 1996 of $5,821,000 ($0.65 per share) as compared with $1,002,000 ($0.13 per
share) for the same period in 1995.
INFLATION
The Company does not believe inflation has significantly impacted
revenues or expenses.
NET OPERATING LOSS CARRYFORWARDS
At June 30, 1996, the Company had carryforwards of net operating losses
of approximately $21,900,000 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 June 30, 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 $18,200,000 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 June 30,
1996, limited revenues have resulted from product sales and at June 30, 1996,
the Company's cumulative deficit was $23,181,000. 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.
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.
The Company extends credit to state and local governments in connection
with sales of products to law enforcement agencies. Approximately 61% of
customer accounts receivable at June 30, 1996 were from government agencies, of
which 59% was from a single customer. Approximately 39% of customer accounts
receivable at June 30, 1996 were from non-government agencies, of which 83% was
from a single customer.
Net cash used in operating activities was $7,418,000 for the nine
months ended June 30, 1996 compared with $1,783,000 for the same period in 1995.
This increase in cash used in operating activities was primarily a result of a
larger net loss during the nine-month period in 1996 as well as an increase in
accounts receivable balances due primarily to international shipments and an
increase in inventory from purchases for the new TENPRINTER Series-S production
line.
Net cash used in investing activities was $819,000 for the nine months
ended June 30, 1996 as compared with net cash provided by investing activities
of $191,000 for the same period in 1995. Capital expenditures in 1996 and 1995
were primarily for engineering and manufacturing leasehold improvements and 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 $8,975,000 for the nine
months ended June 30, 1996 as compared with $1,346,000 for the same period in
1995. The increase is due to cash received from the issuance of 8% convertible
debentures and repayments of outstanding borrowings on lines of credit. There
were no borrowings under lines of credit at June 30, 1996. Historically, the
Company has relied primarily on sales of common stock to satisfy its financing
requirements.
At June 30, 1996, the Company had $1,105,000 in cash and cash
equivalents and $5,782,000 in marketable securities. The unrealized loss on
marketable securities at June 30, 1996 was $172,000.
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 June 30, 1996). The line is payable upon demand and expires in
March 1997. There were no amounts borrowed under the line at June 30, 1996.
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 bear interest at the prime rate (8.25% on June
30, 1996). The line is payable upon demand and expires in May 1997. There were
no amounts borrowed under the line at June 30, 1996.
Management believes that cash and cash equivalents, marketable
securities and cash generated from operations, together with available financing
sources, are sufficient to meet current and foreseeable operating requirements.
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.
This lawsuit is in its discovery stage and any specific
outcome is not yet determinable.
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 during the three-month
period ended June 30, 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)
August 12, 1996 /s/ Donald E. Berg
----------------------------------------
Donald E. Berg
Chief Financial Officer
<TABLE>
<CAPTION>
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 Nine Months Ended
June 30, June 30,
------------------------------ ------------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Shares outstanding at beginning of period 9,374,189 7,823,633 7,833,633 7,787,959
Shares issued under retirement plan -- -- 16,831 8,814
Restricted stock awards, net of forfeitures -- -- 17,456 6,360
Exercise of options and warrants -- 10,000 157,500 30,500
Shares issued from debenture conversion 1,342,808 -- 2,691,577 --
------------ ------------ ------------ ------------
Shares outstanding at end of period 10,716,997 7,833,633 10,716,997 7,833,633
============ ============ ============ ============
Weighted average shares outstanding (A) 10,565,580 7,830,886 9,011,169 7,807,577
============ ============ ============ ============
Net loss $ (2,466,750) $ (345,031) $ (5,820,768) $ (1,001,564)
============ ============ ============ ============
Loss per common share $ (0.23) $ (0.04) $ (0.65) $ (0.13)
============ ============ ============ ============
(A) Stock options and other common share equivalents are not included in the
calculation of the net loss per common share for the three- and nine-month
periods ended June 30, 1996 and 1995 as their effect is antidilutive.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000868373
<NAME> DIGITAL BIOMETRICS INC.
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 1,105,405
<SECURITIES> 5,782,339
<RECEIVABLES> 5,582,553
<ALLOWANCES> 156,364
<INVENTORY> 4,911,117
<CURRENT-ASSETS> 11,639,630
<PP&E> 2,418,792
<DEPRECIATION> 982,676
<TOTAL-ASSETS> 19,749,919
<CURRENT-LIABILITIES> 3,255,993
<BONDS> 2,565,331
0
0
<COMMON> 107,170
<OTHER-SE> 13,821,425
<TOTAL-LIABILITY-AND-EQUITY> 19,749,919
<SALES> 3,715,938
<TOTAL-REVENUES> 4,823,732
<CGS> 1,907,364
<TOTAL-COSTS> 3,411,627
<OTHER-EXPENSES> 7,060,149
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 669,093
<INCOME-PRETAX> (5,820,768)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,820,768)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,820,768)
<EPS-PRIMARY> (0.65)
<EPS-DILUTED> (0.65)
</TABLE>
