UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to __________________________
Commission File Number: 0-18856
DIGITAL BIOMETRICS, INC.
(Exact name of registrant as specified in its charter)
Delaware 41-1545069
(State or other jurisdiction of (I.R.S. Employer 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 January 31, 1997 - 11,362,016 shares
(Class) (Outstanding)
DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED DECEMBER 31, 1996
INDEX
PART I - FINANCIAL INFORMATION:
PAGE
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
BALANCE SHEETS 3
STATEMENTS OF OPERATIONS 4
STATEMENTS OF CASH FLOWS 5
NOTES TO FINANCIAL STATEMENTS 6
ITEM 2. MANAGEMENT'S DISCUSSION AND 15
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
PART II - OTHER INFORMATION:
ITEM 1. LEGAL PROCEEDINGS 23
ITEM 6. (a) EXHIBITS 23
(b) REPORTS ON FORM 8-K 23
SIGNATURES 24
EXHIBIT 11 STATEMENT RE: COMPUTATION OF LOSS 25
PER SHARE
EXHIBIT 27 FINANCIAL DATA SCHEDULE 26
TENPRINTER(R) and the Company's mechanical hand logo have been registered as
trademarks with the U.S. Patent and Trademark Office. The Company has applied
for registration of the SQUID(TM) trademark. In addition, FC-5(TM), FC-6(TM),
FC-7(TM), FC-11(TM), FC-21(TM) and FC-22(TM) are trademarks of the Company.
<TABLE>
<CAPTION>
DIGITAL BIOMETRICS, INC.
BALANCE SHEETS
(UNAUDITED)
December 31, September 30,
1996 1996
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents (note 2) $ 525,043 $ 466,990
Accounts receivable, less allowance for doubtful accounts of $577,884 and
$692,534, respectively 5,630,890 5,676,849
Inventory (note 4) 4,069,566 3,633,659
Prepaid expenses and other costs 376,037 208,349
------------ ------------
Total current assets 10,601,536 9,985,847
------------ ------------
Property and equipment 2,514,674 2,471,754
Less accumulated depreciation and amortization (1,204,079) (1,089,026)
------------ ------------
1,310,595 1,382,728
------------ ------------
Marketable securities (notes 2 and 3) 5,398,844 5,690,371
Patents, trademarks, copyrights and licenses, net of accumulated amortization of
$207,721 and $192,899, respectively 120,712 123,017
Deferred issuance costs on convertible debentures, net of accumulated amortization of
$187,319 and $172,476, respectively (note 7) 100,106 127,408
------------ ------------
$ 17,531,793 $ 17,309,371
============ ============
Current liabilities:
Accounts payable $ 676,592 $ 1,103,174
Line of credit advances (note 5) 2,905,000 1,255,000
Deferred revenue 700,562 649,178
Accrued expenses (note 6) 1,337,422 1,471,908
------------ ------------
Total current liabilities 5,619,576 4,479,260
Convertible debentures (note 7) 2,134,147 2,374,739
------------ ------------
Total liabilities 7,753,723 6,853,999
------------ ------------
Stockholders' equity (note 8):
Common stock, $.01 par value. Authorized, 20,000,000 shares; issued
and outstanding 10,916,485 and 10,777,288 shares, respectively 109,165 107,773
Additional paid-in capital 40,088,974 39,743,380
Unrealized losses on marketable securities (notes 2 and 3) (84,411) (134,753)
Deferred compensation (78,000) (96,000)
Notes receivable from sale of common stock (117,623) (117,623)
Accumulated deficit (30,140,035) (29,047,405)
------------ ------------
Total stockholders' equity 9,778,070 10,455,372
Commitments (note 9)
------------ ------------
$ 17,531,793 $ 17,309,371
============ ============
See accompanying notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
DIGITAL BIOMETRICS, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
December 31,
1996 1995
------------ ------------
<S> <C> <C>
Sales:
Identification systems $ 1,616,314 $ 2,168,871
Maintenance and other services 399,159 350,223
------------ ------------
Total sales 2,015,473 2,519,094
------------ ------------
Cost of sales:
Identification systems 848,697 987,944
Maintenance and other services 556,944 424,234
------------ ------------
Total cost of sales 1,405,641 1,412,178
------------ ------------
Gross margin 609,832 1,106,916
------------ ------------
Selling, general and administrative expenses:
Sales and marketing 525,969 629,676
Engineering and development 688,229 939,874
Depreciation and amortization 82,424 138,659
General and administrative 386,158 482,783
------------ ------------
Total expenses 1,682,780 2,190,992
------------ ------------
Loss from operations (1,072,948) (1,084,076)
Interest income 86,934 202,400
Interest expense (note 11) (106,616) (2,231,658)
------------ ------------
Net loss $ (1,092,630) $ (3,113,334)
============ ============
Loss per common share $ (0.10) $ (0.39)
============ ============
Weighted average common shares outstanding 10,862,607 7,891,840
============ ============
See accompanying notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
DIGITAL BIOMETRICS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
December 31,
------------------------------
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,092,630) $ (3,113,334)
Adjustments to reconcile net loss to net cash used in
operating activities:
Provision for doubtful accounts receivable 5,000 35,000
Deferred compensation amortization 18,000 48,171
Depreciation and amortization 143,815 149,633
Loss on disposal of fixed assets -- 7,360
Interest expense amortization for the
intrinsic value of the beneficial
conversion feature of convertible
debentures -- 1,923,529
Interest expense on debentures converted
into common stock 1,667 16,088
Changes in operating assets and liabilities:
Accounts receivable 40,959 (768,600)
Inventories (435,907) (19,065)
Prepaid expenses (168,107) (114,037)
Accounts payable (426,582) 267,054
Deferred revenue 51,384 (105,162)
Accrued expenses (11,304) 82,482
------------ ------------
Net cash used in operating activities (1,873,705) (1,590,881)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (42,920) (179,955)
Patents, trademarks, copyrights and licenses (12,516) (20,071)
Sale of marketable securities before maturity 337,194 --
------------ ------------
Net cash provided by (used in) investing activities 281,758 (200,026)
------------ ------------
Cash flows from financing activities:
Exercise of warrants -- 315,000
Issuance of convertible debentures -- 10,109,750
Net advances (payments) on line of credit 1,650,000 (1,450,000)
------------ ------------
Net cash provided by financing activities 1,650,000 8,974,750
------------ ------------
Increase in cash and cash equivalents 58,053 7,183,843
Cash and cash equivalents at beginning of period 466,990 367,866
------------ ------------
Cash and cash equivalents at end of period $ 525,043 $ 7,551,709
============ ============
See accompanying notes to financial statements.
</TABLE>
DIGITAL BIOMETRICS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(UNAUDITED)
(1) DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Digital Biometrics, Inc., (the Company) was incorporated in Minnesota
in May, 1985 and reincorporated in Delaware in December, 1986. The Company is a
developer, manufacturer and marketer of identification products based on
electro-optical imaging technologies. The Company's principal product, the
TENPRINTER(R) system is a computer-based, inkless "live-scan" fingerprint system
that electronically reads a fingerprint and creates a digital image, which can
then either be printed on an attached printer or transmitted electronically to a
central printing or storage site. The TENPRINTER system is designed for use by,
and is being actively marketed to, law enforcement agencies and other
organizations requiring a high resolution fingerprint image for identification
cards or similar applications.
The Company's performance in any one quarter is not necessarily
indicative of sales trends or future performance. The nature of the law
enforcement market and the government procurement process are expected to
continue to produce an irregular and unpredictable revenue cycle for the
Company.
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions for Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. For further
information, refer to financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended September 30, 1996.
(2) ACCOUNTING POLICIES
INVENTORY
Inventory is valued at standard cost which approximates the lower of
first-in, first-out (FIFO) cost or market.
SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK
The Company extends credit to state and local governments in connection
with sales of products to law enforcement agencies. Approximately 70% of
customer accounts receivable at December 31, 1996 were from government agencies,
of which 26% was from a single customer. For the three-month period ended
December 31, 1996, sales to two customers accounted for 17% and 12% of sales.
Sales to two customers during the three-month period ended December 31, 1995
accounted for 40% and 10% of period sales. Export sales for the three-month
period ended December 31, 1996 were less than 1% as compared to 39% for the same
period in 1995.
MARKETABLE SECURITIES
Marketable securities consist primarily of collateralized mortgage
backed securities (see note 3). The Company has adopted Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt and
Equity Securities (SFAS 115). Under SFAS 115, the Company classifies its
marketable debt securities as available for sale and records these securities at
fair market value. Net realized and unrealized gains and losses are determined
on the specific identification cost basis.
Unrealized gains and losses are reflected as a separate component of
stockholders' equity. A decline in the market value of any available-for-sale or
held-to-maturity security below cost that is deemed other than temporary results
in a charge to operations resulting in the establishment of a new cost basis for
the security. Realized losses on sales of marketable securities are reported as
a reduction in interest income. There were no realized losses on sales of
marketable securities for the three-month periods ended December 31, 1996 or
1995.
PROPERTY AND EQUIPMENT
Furniture and equipment are recorded at cost. Depreciation and
amortization are computed on a straight-line basis over the estimated useful
lives, generally 3 to 5 years. Leasehold improvements are amortized over the
estimated useful life of the asset or lease term whichever is shorter.
PATENTS, TRADEMARKS, COPYRIGHTS AND LICENSES
Costs associated with patents, trademarks and copyrights are
capitalized and amortized over sixty months or the remaining life of the patent,
trademark or copyright, whichever is shorter. The cost of software licenses
related to purchased software are capitalized and amortized over thirty-six
months or the life of the license, whichever is shorter. Management periodically
assesses the amortization period and recoverability of the carrying amount of
intangible assets based upon an estimation of their value and future benefits of
the recorded asset. Management has concluded that the carrying amount of the
intangible assets is realizable.
WARRANTY COSTS
Estimated product warranty costs are accrued at date of shipment.
Accrued warranty costs at December 31, 1996 were $84,000 compared with $129,000
at September 30, 1996.
REVENUE AND REVENUE RECOGNITION
Revenues from product sales are generally recognized on the date of
shipment. The Company's standard terms of sale are payment due net in thirty
days, f.o.b. Digital Biometrics, Inc. Terms of sale and shipment for certain
procurements by municipal or other government agencies may, however, be subject
to negotiation. In cases where the Company is required to purchase a performance
bond or to deposit collateral in accordance with the terms of a contract, the
Company's policy is to defer revenues under such contracts until the amount
shipped exceeds the amount of the performance collateral or until the security
is released by the bonding company. Maintenance revenues are recognized over the
life of the contract on a straight-line basis.
Revenue under contracts where a performance bond, collateral or
customer acceptance is required, is not recognized until collateral requirements
have been satisfied and customer acceptance has occurred. The Company's
performance for any period is not necessarily indicative of sales trends or
future performance. The nature of the law enforcement market and the government
procurement process are expected to result in an irregular and unpredictable
revenue cycle for the Company.
ENGINEERING AND DEVELOPMENT ARRANGEMENTS
Engineering and development costs are expensed as incurred. Engineering
and development expenses for the three-month period ended December 31, 1995 are
net of reimbursements of $462,000 from a company with which there is a teaming
agreement on an international development project.
STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments and certificates of deposit purchased with an
original maturity date of three months or less to be cash equivalents. Cash
equivalents include primarily U.S. Government money market funds and A-1, P-1
rated commercial paper.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Three Months Ended
December 31,
1996 1995
----------- ----------
Cash paid during the period for interest $37,370 $9,866
=========== ==========
For supplemental disclosure of non-cash investing and financing
activities see notes 7 and 8.
NET LOSS PER COMMON SHARE
Net loss per common share is determined by dividing the net loss by the
weighted average number of shares of common stock and dilutive common share
equivalents outstanding. Common share equivalents have been excluded from the
computation of net loss per share as their effect is anti-dilutive.
INCOME TAXES
The Company has adopted the asset and liability method of accounting
for income taxes of Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes (SFAS 109). Under the asset and liability method,
deferred tax assets and liabilities are recognized for the expected future tax
consequences of temporary differences between the financial statement carrying
amount and tax basis of assets and liabilities. The Company provides for
deferred taxes at the enacted tax rate that is expected to apply when the
temporary differences reverse.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities, at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(3) MARKETABLE SECURITIES
Investments in marketable securities have maturities ranging from 2005
to 2016.The unrealized loss for available-for-sale marketable securities is as
follows.
December 31, September 30,
1996 1996
-------------- --------------
Fair market value $5,398,844 $5,690,371
Amortized cost 5,483,255 5,825,124
-------------- --------------
Unrealized loss $ (84,411) $ (134,753)
============== ==============
(4) INVENTORY
Inventory is valued at standard which approximates the lower of
first-in, first-out (FIFO) cost or market. Inventory consists of the following:
December 31, September 30,
1996 1996
-------------- --------------
Raw materials $1,744,553 $1,934,371
Work in process 682,747 717,696
Finished goods 1,642,266 981,592
-------------- --------------
$4,069,566 $3,633,659
============== ==============
(5) LINES OF CREDIT
The Company has a $4,000,000 line of credit with Norwest Bank Minnesota
N.A. Borrowings under this line of credit are secured by marketable securities
and are limited to the amount of marketable securities held as collateral by the
bank. Borrowings under the line were $2,905,000 on December 31, 1996 and bear
interest at rates from 7.56% to 8.25%. Depending on the timing of accounts
receivable collection, the line may reach the maximum borrowings allowed during
fiscal 1997. The line is payable upon demand and expires in May 1997.
The Company entered into a receivables financing line of credit
effective October 1, 1996 for the lesser of eligible receivables or $3,500,000
with Norwest Business Credit. Borrowings under this line of credit are secured
by all assets of the Company. There were no borrowings under the line at
December 31, 1996. The line will bear interest at 1.5% above the prime rate, is
payable upon demand and expires in September 1997.
The Company has a $200,000 line of credit with First Bank Minneapolis,
secured by cash deposits. Borrowings under the line bear interest at the prime
rate (8.25% on December 31, 1996), are payable upon demand and expires in March
1997. There were no amounts borrowed under the line at December 31, 1996.
(6) ACCRUED EXPENSES
December 31, September 30,
1996 1996
-------------- --------------
Accrued expenses consist of:
Accrued salaries $ 378,086 $ 442,701
Accrued vacation 98,840 112,665
Accrued interest payable 221,632 205,529
Payroll taxes payable 19,933 55,561
Sales taxes payable 33,224 22,953
Accrued warranty 83,500 128,500
Other accrued expenses 502,207 503,999
-------------- --------------
$1,337,422 $1,471,908
============== ==============
Accrued salaries at December 31, 1996 and September 30, 1996 include
$330,000 for severance costs related to the retirement of the Company's
president and chief executive officer. Other accrued expenses at December 31,
1996 include $73,000 for penalties related to late installation of live-scan
equipment per the terms of a contract with a major customer.
(7) CONVERTIBLE DEBENTURES
On September 29, 1995, the Company completed a private placement to
offshore accredited investors of $10,900,000 of 8% Convertible Debentures due
September 29, 1998 (the "Debentures"). Net proceeds to the Company after
placement fees but before legal and other expenses were $10,109,750. The
Debentures are convertible one third after 45 days, one third after 75 days and
one third after 105 days at the option of the Debenture holder. The Company has
the right to redeem the debentures prior to conversion. The conversion price is
equal to the lesser of $7.00 per common share or 85% of the average trading
price for any five consecutive trading days before conversion. This beneficial
conversion feature has an intrinsic value of $1,924,000 which has been recorded
as a charge to interest expense. The intrinsic value of the beneficial
conversion feature is to be allocated to additional paid-in capital with the
resulting discount on the debt resulting in a non-cash interest expense charge
to earnings (loss) over the conversion period. Interest accrued on the
Debentures is payable in common stock at the time of conversion at the
conversion price as described above. In addition to the cash placement fee, a
warrant to purchase 112,893 shares of the Company's common stock at $8.40 per
share was granted to the placement agent for this offering. The warrant was
valued at $112,893, which is reflected as a discount on the Debentures and is
being amortized as interest expense over the term of the Debentures. Net
proceeds to the Company will be used for working capital, product development
and other general corporate purposes.
As of December, 1996, the Company has issued 2,849,267 shares of common
stock for the conversion of principal aggregating $8,700,000 of the 8%
Convertible Debentures plus $353,000 of accrued interest at an average
conversion price of $3.18 per share. For the three-month period ended December
31, 1996, the Company has issued 97,399 shares of common stock for the
conversion of principal aggregating $250,000 of the 8% Convertible Debentures
plus $23,000 of accrued interest at an average conversion price of $2.80 per
share.
(8) STOCKHOLDERS' EQUITY
During the three-month period ended December 31, 1996, the Company
granted 119,500 discretionary stock option awards to certain of its executive
officers and employees. These options are exercisable at a prices ranging from
$2.56 to $3.125 per share and expire in 2006. In addition, effective January 1,
1997 stock option awards of 250,000 shares at $2.125 per share were issued
pursuant to an offer of employment to the Company's new President and Chief
Executive Officer.
Effective December 31, 1996, the Company issued 41,798 shares of common
stock to satisfy the Company's discretionary matching to employees electing
participation in the Company's 401(k) retirement plan. This issuance increased
common stock and additional paid-in capital by $88,821 and reduced accrued
compensation by the same amount.
(9) LEASE COMMITMENTS
The Company leases its primary office and production facility under an
operating lease that expires in April, 2001. Annual base rent under the lease
agreement is approximately $237,000 and the Company is obligated to pay a pro
rata share for property taxes, maintenance and other operating expenses. The
Company leases a separate sales and service office in Los Angeles, California
under an operating lease that expires in December, 1997 and a sales office in
Washington, D.C. on a year-to-year lease arrangement. Rent expense, property
taxes, maintenance and other lease operating expenses for the three months ended
December 31, 1996 and 1995 was $89,000 and $78,000, respectively.
(10) LITIGATION
On June 1, 1995, the Company filed a complaint for patent infringement
against Identix, Inc., of Sunnyvale, California, in the United States District
Court for the Northern District of California. The complaint alleges that
Identix has willfully and deliberately infringed a Company patent through the
manufacture, use and/or sale of competing products. The complaint seeks, among
other things, an injunction prohibiting further infringement as well as
unspecified monetary damages. Identix has responded to the complaint alleging,
among other purported defenses, non-infringement and patent invalidity.
On August 27, 1996, the judge assigned to the case granted a partial
summary judgment in favor of Identix dismissing the Company's claims of patent
infringement with respect to Identix's Touchprint 600 product line. A
predecessor product, the Touchprint 900, received a similar ruling in favor of
Identix on December 20, 1996. The Company intends to appeal the court's decision
of non-infringement. The interpretation of patents is ultimately decided by a
special patent Court of Appeals in Washington D.C. A prediction of the final
outcome of the appeal is not possible. However, in the event the Company does
not prevail in this litigation, its competitive position may be materially and
adversely affected.
There are no material lawsuits pending or, to the Company's knowledge,
threatened against the Company.
(11) RESTATEMENT
On March 28, 1997, the Securities and Exchange Commission (SEC) staff
announced its position on the accounting treatment for the issuance of
convertible debt securities with beneficial conversion features such as that
contained in the Company's convertible debentures issued in September 1995. The
SEC staff's announcement requires retroactive determination using the
intrinsic-value method of the beneficial conversion feature. The intrinsic value
of the beneficial conversion features is to be allocated to additional paid-in
capital with the resulting discount on the debt resulting in a non-cash interest
expense charge to earnings (loss) over the vesting period of the conversion
feature.
As a result of this SEC announcement, the Company is restating its
fiscal 1996, results to reflect the in-the-money beneficial conversion feature
of the convertible debentures which were issued by the Company in September
1995. An additional charge of $1,923,529 has been recorded in fiscal 1996, for
the in-the-money beneficial conversion feature which vested during the first
quarter of fiscal 1996. As a result, interest expense, net loss and net loss per
share for the three-month period ended December 31, 1995 were restated from
$308,129, $1,189,805 and $0.15 to $2,231,658, $3,113,334 and $0.39,
respectively. This restatement had no effect on cash flows or total
stockholders' equity.
DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED DECEMBER 31, 1996
FACTORS THAT MAY AFFECT OPERATING RESULTS
The statements contained in this Report on Form 10-Q/A that are not
purely historical are forward looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934, including statements regarding the Company's expectations, hopes,
intentions or strategies regarding the future. All forward looking statements
included in this document are based on information available to the Company on
the date hereof, and the Company assumes no obligation to update any such
forward looking statements, It is important to note that the Company's actual
results could differ materially from those in such forward looking statements.
Some of the factors that could cause actual results to differ materially are set
forth below under the caption "Forward Looking Comments and Matters That May
Affect Operating Results."
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company develops, manufactures, assembles and markets
identification products based on electro-optical imaging technologies. Most of
the Company's sales have been to state and local law enforcement agencies and,
to date, have consisted primarily of TENPRINTER systems and related peripheral
equipment and software.
The nature of the law enforcement market and the government procurement
process is subject to budgetary, economic and political considerations which may
vary significantly from state to state and among different agencies. These
market characteristics, along with the recent and continuing development of the
live-scan electronic fingerprint industry, have resulted in and are expected to
continue to result in an irregular revenue cycle for the Company and any
prediction of future trends is inherently difficult. The Company believes,
however, that its principal product line, which is designed to be sold to law
enforcement agencies, is a leader in its marketplace. To the extent that funds
become available to such customers for procurement purposes, the Company should
benefit from the continuing development of this market.
The Company generally recognizes product sales on the date of shipment.
The Company's standard terms of sale are payment due net in 30 days, f.o.b. the
Company. Terms of sale and shipment for certain procurements by municipal or
other government agencies may, however, be subject to negotiation. In cases
where the Company is required to purchase a performance bond or to deposit
collateral in accordance with the terms of a contract, the Company's policy is
to defer recognition of revenues from such contracts until the amount shipped
exceeds the amount of the performance collateral or until the security is
released by the bonding company. Maintenance revenues are recognized over the
life of the contract on a straight-line basis. Maintenance costs are expensed as
incurred.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1996 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
1995
Total sales were $2,015,000 for the three months ended December 31,
1996 compared with $2,519,000 for the same prior-year period. Identification
system product sales were $1,616,000 compared with $2,169,000 in 1995. The
number of TENPRINTER systems sold during the three months ended December 31,
1996 were 26, compared to 32 in the prior-year period. Included in the 1995
sales were $977,000 for 12 systems sold to an international customer.
For the three-month period ended December 31, 1996, sales to two
customers accounted for approximately 17% and 12% of total sales. Sales to two
customers during the three months ended December 31, 1995 accounted for
approximately 40% and 10% of total sales.
Product maintenance and service revenues were $399,000 for the three
months ended December 31, 1996 compared with $350,000 for the same prior-year
period. This increase is due primarily to a larger installed base of TENPRINTER
systems.
Overall gross margins for the three months ended December 31, 1996 were
30% as compared with 44% of sales for the same prior-year period. Gross margins
on identification system sales were 47% in 1996 compared with 54% in 1995. This
decrease is due primarily to higher margins on international shipments in the
prior-year period.
Product maintenance and service margins for the three months ended
December 31, 1996 and 1995 were (40%) and (21%), respectively, of maintenance
and support revenues. The increased costs of product maintenance and support are
due primarily to building of base field service operations to accommodate
maintenance of three generations of TENPRINTER systems located in 37 states.
Sales and marketing expenses for the three-month period ended December
31, 1996 were 26% of total sales compared to 25% for the same three-month
prior-year period. Engineering and development expenses were 34% of total sales
for the three-month period ended December 31, 1996 compared to 37% for the same
period a year ago. This decrease is due primarily to reduced new product
development costs. Engineering and development expenses for the three-month
period ending December 31, 1995 are net of reimbursements of $462,000 related to
an international development project. General and administrative expenses for
the three-month period ended December 31, 1996 and 1995 were 19% of total sales.
Interest income decreased to $87,000 for the three months ended
December 31, 1996 from $202,000 for the same period in 1995, primarily due to
lower balances of cash and marketable securities.
Interest expense decreased to $107,000 for the three months ended
December 31, 1996 from $2,232,000 for the same prior-year period, primarily due
to a non-cash charge for the three-month period ended December 31, 1995 of
$1,924,000 for the intrinsic value of the beneficial conversion feature of the
convertible debentures, and to a lesser extent, the reduced balance of 8%
convertible debentures outstanding.
The Company incurred a net loss for the three-month period ended
December 31, 1996 of $1,093,000 ($0.10 per share) as compared with $3,113,000
($0.39 per share) for the same prior-year period.
INFLATION
The Company does not believe inflation has significantly impacted
revenues or expenses.
NET OPERATING LOSS CARRYFORWARDS
At December 31, 1995, the Company had carryforwards of net operating
losses of approximately $25,000,000 that may allow the Company to reduce future
income taxes that would otherwise be payable. Of this amount approximately
$2,200,000 relates to compensation associated with the exercise of non-qualified
stock options which, when realized, would result in approximately $880,000
credited to additional paid-in capital. The carryforwards expire annually
beginning in 1999. The annual limitation on use of net operating losses is
calculated by multiplying the value of the corporation immediately prior to the
change in ownership by the long-term federal tax exempt rate. A total of
$3,700,000 of the net operating loss carryforwards at December 31, 1996 is
subject to an annual net operating loss limitation, estimated at $350,000,
resulting from the change in control of the Company which occurred, for income
tax purposes, on December 14, 1990, the date of the Company's initial public
offering. If the limited carryforward amount for any tax year exceeds the
regular taxable income for such year, then the unused portion may generally be
carried forward to increase the annual limitation for the following year.
Utilization of net operating losses aggregating $21,300,000 which were incurred
subsequent to the change of ownership are not limited. However, any future
ownership change could create a limitation with respect to these loss
carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
BACKGROUND
For the period from the Company's inception in 1985 through December
31, 1996, limited revenues have resulted from product sales and at December 31,
1996, the Company's cumulative deficit was $30,140,000. Losses are expected to
continue until the market development and acceptance of the technology
incorporated into the Company's products provides product sales sufficient to
cover the Company's operating expenses.
The Company's business has included large contract awards from
international, state and local law enforcement agencies and it is expected that
this trend will continue. Collection of receivables related to billings of these
contract amounts is often protracted as technical requirements specified by the
customer may be modified via contract addendums. As of December 31, 1996,
approximately $2,916,000 was due from such customers.
CURRENT AND FUTURE OPERATIONS
The Company's performance in any one reporting period is not
necessarily indicative of sales trends or future performance. The nature of the
law enforcement market and the government procurement process are expected to
continue to result in an irregular and unpredictable revenue cycle for the
Company.
Net cash used in operating activities was $1,874,000 for the three
months ended December 31, 1996 compared with $1,591,000 for the same prior-year
period. The increase in cash used in operating activities was primarily a result
of a smaller net loss during the three-month period in 1996 adjusted for changes
in operating assets and liabilities. Cash flows from changes in operating assets
and liabilities changed from cash used of $657,000 during the prior-year
three-month period to $950,000 of cash used during the same current-year period.
This $293,000 change in cash flow from operating assets and liabilities resulted
primarily from the lower accounts receivable and accounts payable balances and
higher inventory balances on December 31, 1996.
Net cash provided by investing activities was $282,000 for the three
months ended December 31, 1996 as compared with $200,000 net cash used in
investing activities for the same prior-year period. Capital expenditures for
the three-months ended December 31, 1995 were primarily for engineering and
manufacturing test fixtures. The Company's business does not require significant
amounts of cash for capital expenditures because substantial amounts of the
manufacturing and assembly processes utilized in the production of current
products are performed by outside vendors, as directed by the Company.
Specifically, the Company purchases electronics modules and standard mechanical
assemblies from manufacturers of such goods. In addition, sheet metal
components, optical components and specialized electronics modules are designed
by the Company and manufactured to the Company's specifications by outside
sources.
Net cash provided by financing activities was $1,650,000 for the three
months ended December 31, 1996 due to borrowings on lines of credit. Net cash
provided by financing activities was $8,975,000 for the three months ended
December 31, 1995, due to cash received from the issuance of 8% convertible
debentures and repayments of outstanding borrowings on lines of credit.
Borrowings under lines of credit were $2,905,000 at December 31, 1996. There
were no borrowings under lines of credit on December 31, 1995. On September 29,
1995, the Company completed a private placement to offshore accredited investors
of $10,900,000 of 8% Convertible Debentures due September 29, 1998 (the
"Debentures"), of which $8,700,000 were converted to 2,849,267 shares of common
stock as of December 31, 1996. The average conversion price was $3.18 per share.
The Debentures include a beneficial conversion feature with an intrinsic value
of $1,924,000 which has been recorded as a charge to interest expense during the
three-month period December 31, 1995. The intrinsic value of the beneficial
conversion feature is to be allocated to additional paid-in capital with the
resulting discount on the debt resulting in a non-cash interest expense charge
to earnings (loss) over the conversion period. Net proceeds to the Company
during fiscal 1996 after placement fees but before legal and other expenses were
$10,109,750. Interest accrued on the Debentures is also payable in common stock
at the time of conversion at the conversion price as described above. In
addition to the cash placement fee, a warrant to purchase 112,893 shares of the
Company's common stock at $8.40 per share was granted to the placement agent for
this offering. The warrant was valued at $112,893, which is reflected as a
discount on the Debentures and is being amortized as interest expense over the
term of the Debentures. Net proceeds to the Company were used for working
capital, product development and other corporate purposes.
At December 31, 1996, the Company had $525,000 in cash and cash
equivalents and $5,399,000 in marketable securities, which are classified as
available for sale. The unrealized loss on marketable securities at December 31,
1996 was $84,000. These marketable securities are collateral for borrowings
under a line of credit.
The Company has a $4,000,000 line of credit with Norwest Bank Minnesota
N.A. Borrowings under this line of credit are secured by marketable securities
and are limited to the amount of marketable securities held as collateral by the
bank. Borrowings under the line were $2,905,000 on December 31, 1996 and bear
interest at rates from 7.56% to 8.25%. Depending on the timing of accounts
receivable collection, the line may reach the maximum borrowings allowed during
fiscal 1997. The line is payable upon demand and expires in May 1997.
The Company entered into a receivables financing line of credit
effective October 1, 1996 for the lesser of eligible receivables or $3,500,000
with Norwest Business Credit. Borrowings under this line of credit are secured
by all assets of the Company. There were no borrowings under the line at
December 31, 1996. The line will bear interest at 1.5% above the prime rate, is
payable upon demand and expires in September 1997.
The Company has a $200,000 line of credit with First Bank Minneapolis,
secured by cash deposits. Borrowings under the line bear interest at the prime
rate (8.25% on December 31, 1996), are payable upon demand and expires in March
1997. There were no amounts borrowed under the line at December 31, 1996.
FORWARD LOOKING COMMENTS AND MATTERS THAT MAY AFFECT OPERATING RESULTS
Except for the historical information contained in this Form 10-Q/A,
the matters discussed herein are forward looking statements made within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, and involve risks and uncertainties, including
development and market acceptance of the Company's products and the availability
of new employees experienced in the present and contemplated markets. Other
factors that may affect future performance of the Company include successful
expansion of distribution channels for products through OEM's and others;
changes in general economic conditions; availability of funding where customer
procurements are dependent on state or federal government grants and general tax
funding; concentrations of accounts receivable and other credit risk in single
large customers; or cost and availability of components. In addition, markets
for the Company's products are characterized by significant and increasing
competition, and the Company's financial results may be adversely affected by
the actions of existing and future competitors, including the development of new
technologies, the introduction of new products, and price reductions by such
competitors to gain or retain market share. It is important to note that the
Company's actual results could differ materially from those in such forward
looking statements and the Company assumes no obligation to update such forward
looking statements.
Due primarily to continuing operating losses, the Company has not yet
achieved positive cash flow. Management believes that cash and cash equivalents,
investments, accounts receivable and working capital provided from operations,
together with available financing sources, are sufficient to meet current and
foreseeable operating requirements, however additional financing may be
required. There can be no assurance that additional financing, should it be
required, will be available at terms acceptable to the Company.
As of December 31, 1996, the balance of 8% Convertible Debentures was
$2,200,000. The Debentures are convertible at the option of the Debenture
holder. The Company has the right to redeem the debentures prior to conversion.
The conversion price is equal to the lesser of $7.00 per common share or 85% of
the average trading price for any five consecutive trading days before
conversion. Interest accrued on the Debentures is payable in common stock at the
time of conversion at the conversion price as described above. Conversion of
debentures and accrued interest into shares of common stock of the Company may
negatively impact and increase the volatility of the price of the common stock.
LAW ENFORCEMENT AND REGULATORY AGENCY MARKET
The Company has worked with NEC in Tokyo, Japan since late 1993 in
pursuit of a fingerprint system for the National Police Agency of Japan (NPA).
During the fourth quarter of fiscal 1996, the formal Teaming Agreement has, by
its original terms, expired and the Company has since been in discussions with
NEC as to the nature of the joint business relationship going forward. NEC
currently owes the Company $1.2 million related to deliveries under the previous
agreement, payment of which has been delayed by NEC pending negotiations as to
the future business relationship. Discussions are ongoing as to the timing of
payment of this amount.
In connection with a recent live-scan bid in the state of Texas, NEC,
an AFIS vendor and long-standing customer and business partner of the Company,
announced upon award to NEC by the State of Texas that NEC intends to enter and
compete directly with the Company in the live-scan marketplace. In addition, the
price bid by NEC to the State of Texas was approximately 40% less than that bid
by the Company and other competitors. It is possible other AFIS vendors or
systems integrators will employ similar strategies or tactics and these present
or future competitors have financial and other resources significantly greater
than that of the Company.
The Company's performance in any one reporting period is not
necessarily indicative of sales trends or future performance. Law enforcement
agencies are subject to political and budgetary constraints and the nature of
the law enforcement market and the government procurement process are expected
to continue to result in an irregular and unpredictable revenue cycle for the
Company. For the three-month period ended December 31, 1996, sales to two
customers accounted for 17% and 12% of sales. Sales to two customers during the
three-month period ended December 31, 1995 accounted for 40% and 10% of period
sales. Export sales for the three-month period ended December 31, 1996 were less
than 1% as compared to 39% for the same period in 1995.
The Company extends credit to state and local governments in connection
with sales of products to law enforcement agencies. Approximately 70% of
customer accounts receivable at September 30, 1996 were from government
agencies, of which 40% was from a single customer. Sales to this and other
customers requiring large and sophisticated networks of TENPRINTER systems and
peripheral equipment often include technical requirements which are not fully
known at the time requirements are specified by the customer. In addition,
contracts may specify performance criteria which is required to be satisfied
before the customer accepts the products and services. The Company does not
record revenue for these products and services until acceptance criteria have
been satisfied.
It is often not known until installation is in process if older and
often obsolete communication lines and local area networks will accommodate the
large amount of computer data transmitted by the TENPRINTER systems and related
peripherals. Due to the inherent difficulties for customers to receive
additional funding to upgrade facilities, hardware and/or communication lines to
the required level, collection of amounts due the Company for these systems
often occurs over longer periods of time during which the customer processes
contract amendments which allow the Company to charge the customer for
additional requested services. It is only upon completion of customer
requirements, which time periods are unpredictable and which may involve
investment of additional Company resources, that accounts receivable are
collected. These investments of additional resources are accrued when amounts
can be estimated but however, may be uncompensated and, other than increased
customer loyalty, negatively impact profit margins and the Company's liquidity.
GAMING AND OTHER COMMERCIAL MARKETS
The Company has only recently began marketing products to the gaming
industry and has not yet completed production level systems of TRAK-21. Although
prototype models of TRAK-21 have been successfully demonstrated in laboratory
conditions, there can be no assurance that scheduled beta tests in live casino
environments will be successful. In addition, it has not been determined whether
or not the TRAK-21 system will be able to compete, on the basis of price and
performance, with player tracking systems of competitors whose systems have been
marketed for longer periods of time and whose financial and other resources are
far greater than that of the Company.
DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED DECEMBER 31, 1996
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 1, 1995, the Company filed a complaint for patent
infringement against Identix, Inc., of Sunnyvale, California, in
the United States District Court for the Northern District of
California. The complaint alleges that Identix has willfully and
deliberately infringed a Company patent through the manufacture,
use and/or sale of competing products. The complaint seeks, among
other things, an injunction prohibiting further infringement as
well as unspecified monetary damages. Identix has responded to the
complaint alleging, among other purported defenses,
non-infringement and patent invalidity.
On August 27, 1996, the judge assigned to the case granted
a partial summary judgment in favor of Identix dismissing the
Company's claims of patent infringement with respect to Identix's
Touchprint 600 product line. A predecessor product, the Touchprint
900, received a similar ruling in favor of Identix on December 20,
1996. The Company intends to appeal the court's decision of
non-infringement. The interpretation of patents is ultimately
decided by a special patent Court of Appeals in Washington D.C. A
prediction of the final outcome of the appeal is not possible.
However, in the event the Company does not prevail in this
litigation, its competitive position may be materially and
adversely affected.
There are no material lawsuits pending or, to the Company's
knowledge, threatened against the Company.
ITEM 6. (a) EXHIBITS
Exhibit 11 Statement re: Computation of loss per share
Exhibit 27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed by the Company
during the three-month period ended December 31, 1996.
DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED DECEMBER 31, 1996
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIGITAL BIOMETRICS, INC.
(Registrant)
July 11, 1997 s/John J. Metil
---------------------------------
John J. Metil
Chief Financial Officer and Chief Operating Officer
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.
<TABLE>
<CAPTION>
Three Months Ended
December 31,
------------------------------
1996 1995
------------ ------------
<S> <C> <C>
Shares outstanding at beginning of period 10,777,288 7,833,633
Shares issued under retirement plan 41,798 16,831
Exercise of warrants -- 157,500
Shares issued from debenture and related interest conversion 97,399 213,481
------------ ------------
Shares outstanding at end of period 10,916,485 8,221,445
============ ============
Weighted average shares outstanding (A) 10,862,607 7,891,840
============ ============
Net loss $ (1,092,630) $ (3,113,334)
============ ============
Loss per common share $ (0.10) $ (0.39)
============ ============
(A) Stock options and other common share equivalents are not included in the
calculation of the net loss per common share for the three months ended December
31, 1996 and 1995 as their effect is antidilutive.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<CIK> 0000868373
<NAME> DIGITAL BIOMETRICS INC
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 525,043
<SECURITIES> 5,398,844
<RECEIVABLES> 6,208,774
<ALLOWANCES> 577,884
<INVENTORY> 4,069,566
<CURRENT-ASSETS> 10,601,536
<PP&E> 2,514,674
<DEPRECIATION> 1,204,079
<TOTAL-ASSETS> 17,531,793
<CURRENT-LIABILITIES> 5,619,576
<BONDS> 2,134,147
0
0
<COMMON> 109,165
<OTHER-SE> 9,668,905
<TOTAL-LIABILITY-AND-EQUITY> 17,531,793
<SALES> 1,616,314
<TOTAL-REVENUES> 2,015,473
<CGS> 848,697
<TOTAL-COSTS> 1,405,641
<OTHER-EXPENSES> 1,682,780
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 106,616
<INCOME-PRETAX> (1,092,630)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,092,630)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,092,630)
<EPS-PRIMARY> (0.10)
<EPS-DILUTED> (0.10)
</TABLE>
