UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 1997
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission File Number: 0-18856
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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, 1998 - 12,417,001 shares
---------------------------- ------------------------------------
(Class) (Outstanding)
<PAGE>
DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED DECEMBER 31, 1997
INDEX
PART I - FINANCIAL INFORMATION:
PAGE
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
BALANCE SHEETS 4
STATEMENTS OF OPERATIONS 5
STATEMENTS OF CASH FLOWS 6
NOTES TO FINANCIAL STATEMENTS 7
ITEM 2. MANAGEMENT'S DISCUSSION AND 13
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
PART II - OTHER INFORMATION:
ITEM 1. LEGAL PROCEEDINGS 18
ITEM 2. CHANGES IN SECURITIES 18
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 18
ITEM 5. OTHER INFORMATION 18
ITEM 6. (a) EXHIBITS 19
(b) REPORTS ON FORM 8-K 19
SIGNATURES 20
EXHIBIT 11 STATEMENT RE: COMPUTATION OF LOSS 21
PER SHARE
EXHIBIT 27 FINANCIAL DATA SCHEDULE 22
TENPRINTER(R), SQUID(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-21(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.
<PAGE>
DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED DECEMBER 31, 1997
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Except for the historical information contained herein, the matters
discussed in this Form 10-Q include forward-looking statements made within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. As provided for under the Private Securities
Litigation Reform Act, the Company cautions investors that actual results of
future operations may differ from those anticipated in forward-looking
statements due to a number of factors, including the Company's ability to
achieve profitability, introduce new products and services, build profitable
revenue streams around new product and service offerings, maintain loyalty and
continued purchasing of the Company's products by existing customers, collect
outstanding accounts receivable and manage the concentration of credit and
payment timing risks particularly regarding large customers, create and maintain
satisfactory distribution and operations relationships with AFIS vendors,
attract and retain key employees, secure timely and cost-effective availability
of product components, meet increased competition, maintain adequate working
capital and liquidity and upgrade products and develop new technologies. For a
more complete description of such factors, see "Cautionary Statements" under
Item 7 of the Company's Form 10-K report for the year ended September 30, 1997,
filed December 23, 1997 with the Securities and Exchange Commission.
<PAGE>
DIGITAL BIOMETRICS, INC.
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
December 31, September 30,
1997 1997
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents (note 2) $ 1,204,282 $ 1,891,397
Marketable securities (notes 2 and 3) -- 154,808
Accounts receivable, less allowance for doubtful accounts of $436,510 and
$441,276, respectively 4,786,027 5,161,356
Inventory (note 4) 2,241,785 2,294,593
Prepaid expenses and other costs 184,867 163,594
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Total current assets 8,416,961 9,665,748
------------- -------------
Property and equipment 2,158,732 2,027,737
Less accumulated depreciation and amortization (1,215,711) (1,113,185)
------------- -------------
943,021 914,552
------------- -------------
Patents, trademarks, copyrights and licenses, net of accumulated amortization of
$166,972 and $156,171, respectively 124,231 118,938
Deferred issuance costs on convertible debentures, net of accumulated amortization of
$3,958 and $0, respectively (note 7) 138,542 --
------------- -------------
$ 9,622,755 $ 10,699,238
============= =============
Current liabilities:
Accounts payable $ 738,062 $ 1,451,779
Accrued warranty 480,911 584,676
Deferred revenue 973,471 677,925
Other accrued expenses (note 6) 869,815 819,610
------------- -------------
Total current liabilities 3,062,259 3,533,990
Convertible debentures (note 7) 446,667 --
------------- -------------
Total liabilities 3,508,926 3,533,990
------------- -------------
Stockholders' equity (note 8):
Common Stock, $.01 par value. Authorized, 20,000,000 shares; issued
and outstanding 12,417,001 and 12,361,038 shares, respectively 124,170 123,610
Additional paid-in capital 42,696,458 42,439,576
Unrealized losses on marketable securities (notes 2 and 3) -- (1,639)
Deferred compensation (60,000) (73,500)
Accumulated deficit (36,646,799) (35,322,799)
------------- -------------
Total stockholders' equity 6,113,829 7,165,248
------------- -------------
$ 9,622,755 $ 10,699,238
============= =============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
DIGITAL BIOMETRICS, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1997 1996
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<S> <C> <C>
Revenues:
Identification systems $ 1,690,249 $ 1,616,314
Maintenance and other services 581,891 399,159
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Total revenues 2,272,140 2,015,473
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Cost of revenues:
Identification systems 1,430,548 848,697
Maintenance and other services 384,501 556,944
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Total cost of revenues 1,815,049 1,405,641
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Gross margin 457,091 609,832
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Selling, general and administrative expenses:
Sales and marketing 516,501 525,969
Engineering and development 700,292 738,173
General and administrative 477,566 418,638
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Total expenses 1,694,359 1,682,780
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Loss from operations (1,237,268) (1,072,948)
Other income (expense):
Interest income 12,005 86,934
Interest expense (note 7) (94,070) (106,616)
Loss on disposal of fixed assets (4,667) --
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Total other income (expense) (86,732) (19,682)
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Net loss $ (1,324,000) $ (1,092,630)
============= =============
Net loss per common share $ (0.11) $ (0.10)
============= =============
Weighted average common shares outstanding 12,361,646 10,862,607
============= =============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
DIGITAL BIOMETRICS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
-----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,324,000) $ (1,092,630)
Adjustments to reconcile net loss to net cash used in
operating activities:
Provision for doubtful accounts receivable 9,610 5,000
Deferred compensation amortization 13,500 18,000
Depreciation and amortization 120,479 143,815
Loss on disposal of fixed assets 4,667 --
Loss from paydowns on marketable securities 1,315 --
Interest expense amortization for the
intrinsic value of the beneficial
conversion feature of convertible
debentures 83,334 --
Interest expense on debentures converted
into common stock -- 1,667
Changes in operating assets and liabilities:
Accounts receivable 365,719 40,959
Inventories 52,808 (435,907)
Prepaid expenses (21,273) (168,107)
Accounts payable (713,717) (426,582)
Deferred revenue 295,546 51,384
Accrued expenses (20,618) (11,304)
------------ ------------
Net cash used in operating activities (1,132,630) (1,873,705)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (138,524) (42,920)
Patents, trademarks, copyrights and licenses (16,093) (12,516)
Proceeds from marketable securities 155,132 337,194
------------ ------------
Net cash provided by investing activities 515 281,758
------------ ------------
Cash flows from financing activities:
Issuance of convertible debentures, net 445,000 --
Net advances on line of credit -- 1,650,000
------------ ------------
Net cash provided by financing activities 445,000 1,650,000
------------ ------------
Increase (decrease) in cash and cash equivalents (687,115) 58,053
Cash and cash equivalents at beginning of period 1,891,397 466,990
------------ ------------
Cash and cash equivalents at end of period $ 1,204,282 $ 525,043
============ ============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
DIGITAL BIOMETRICS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(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, marketer and integrator of computer-based products and
services for the identification of individuals. The Company is a leading vendor
of products employing "biometric" technology, the science of the identification
of individuals through the measurement of distinguishing biological
characteristics. The Company's principal product is the TENPRINTER(R) system for
"live-scan" fingerprint capture used mainly in law enforcement applications. The
TENPRINTER(R) is a computer-based system with patented high-resolution optics
which captures, digitizes, prints and transmits forensic-grade fingerprint
images. The Company also offers high-resolution single-fingerprint capture
products for commercial and governmental identification applications. The
Company has also recently established a systems integration services business
(the "Integrated Identification Solutions Division" or "IIS") focused on the
integration of biometric and other identification technologies into applications
for commercial and government markets. Substantially all of the Company's
revenues in the first three months of fiscal 1998 and fiscal 1997 came from
live-scan systems sales, maintenance and applications development services for
the law enforcement market.
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 and
competition within the live-scan electronic fingerprint industry, have resulted
in and are expected to continue to result in an irregular revenue cycle for the
Company; any prediction of future trends is inherently difficult.
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, 1997.
<PAGE>
DIGITAL BIOMETRICS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(UNAUDITED)
(2) ACCOUNTING POLICIES
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 73% and 89%,
respectively, of customer accounts receivable at December 31, 1997 and September
30, 1997 were from government agencies, of which 31% and 39%, respectively, were
from a single customer. Sales to one customer in the three-month period ended
December 31, 1997 accounted for 31% of total revenues, and sales to two
customers in the three-month period ended December 31, 1996 accounted for 17%
and 12% of total revenues. Export sales for the three-month period ended
December 31, 1997 were 32% of total revenues as compared to less than 1% for the
same period in 1996.
STATEMENT OF CASH FLOWS
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments and certificates of deposit purchased with an
original maturity date of three months or less to be cash equivalents.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Three Months Ended
December 31,
1997 1996
--------- ---------
Cash paid during the period for interest $3,157 $37,370
========= =========
For supplemental disclosure of non-cash investing and financing activities see
notes 7 and 8.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS No. 128") which simplifies the standards for computing earnings per
share. SFAS No. 128 replaces the presentation of primary earnings per share with
a presentation of basic earnings per share, which excludes dilution. SFAS No.
128 must be adopted for financial statements issued for periods ending after
December 15, 1997, with earlier application not permitted. All prior-period
earnings per share amounts must be restated to conform to SFAS 128. The Company
has adopted SFAS No. 128 during the first quarter of fiscal 1998.
<PAGE>
DIGITAL BIOMETRICS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(UNAUDITED)
(2) ACCOUNTING POLICIES (CONTINUED)
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 outstanding for the period.
Net loss per common share does not consider common stock equivalents. Diluted
earnings per share is not included herein as the impact of common stock
equivalents is antidilutive.
(3) 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. Realized losses from
paydowns of marketable securities were $1,000 for the three-month period ended
December 31, 1997. There were no realized losses from sales of marketable
securities for the three-month period ended December 31, 1996. Unrealized gains
and losses are reflected as a separate component of stockholders' equity.
(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,
1997 1997
------------ -------------
Components and purchased
subassemblies $876,941 $1,054,606
Work in process 841,153 699,097
Finished goods 523,691 540,890
------------ -------------
$2,241,785 $2,294,593
============ =============
(5) LINES OF CREDIT
The Company has a receivables financing line of credit 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. The line
bears interest at 1.5% above the prime rate (8.5% at December 31, 1997), is
payable upon demand and expires in March 31, 1998. For the period from September
30, 1997 through January 31, 1998, the minimum interest shall be $10,000 per the
terms of the agreement. For the period from February 1, 1998 through March 31,
1998, the minimum interest
<PAGE>
DIGITAL BIOMETRICS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(UNAUDITED)
(5) LINES OF CREDIT (CONTINUED)
shall be $5,000 per the terms of the agreement. There were no borrowings under
the line at December 31, 1997. The Company anticipates renewal of the line upon
expiration.
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 and are payable upon demand. The line expires in March 1998. There were no
amounts borrowed under the line at December 31, 1997.
(6) OTHER ACCRUED EXPENSES
December 31, September 30,
1997 1997
------------ ------------
Other accrued expenses consist of:
Accrued salaries and commissions $ 281,312 $ 265,707
Accrued vacation 108,311 121,994
Accrued installation costs 168,900 97,750
Other accrued expenses 311,292 334,159
----------- ------------
$869,815 $819,610
=========== ============
(7) 8% CONVERTIBLE SUBORDINATED DEBENTURES
To provide additional working capital, on December 1, 1997, the Company
entered into a convertible subordinated debenture purchase agreement ("Purchase
Agreement") with a private investor, providing for the Company's issuance and
sale of up to an aggregate of $2,500,000 of 8% Convertible Debentures
("Debentures") in tranches of $500,000 each. The first tranche was sold on
December 1, 1997. Additional tranches may be issued upon request of the Company
within 90 days of each previous tranche, if the Company meets all conditions to
issuance including, but not limited to, conditions requiring the Company to have
effective and maintain a registration statement with the Securities and Exchange
Commission covering shares issuable upon conversion of the Debentures and a
requirement that the Company's market capitalization be at least $12 million.
The initial tranche sold in the amount of $500,000 on December 1, 1997, is
convertible in whole or in part at the option of the holder, with accrued
interest, into Common Stock, at a conversion price equal to the lesser of the
average closing price of the five consecutive trading days preceding the
transaction ($1.96 per share) or 80% of the average closing price of the five
consecutive trading days preceding the conversion date. Future tranches may be
convertible on a similar basis but the conversion prices will be related to the
lesser of the market price on the issue date or the market price on the
conversion date. The Company has the right, exercisable at any time upon two
trading days notice to the purchaser of the debentures given at any time the
Company receives a conversion notice and the conversion price in effect in
connection with such conversion notice is less than $1.25, to repay all or any
portion of the outstanding principal amount of the debentures which have been
tendered for conversion, at a price equal to the sum of 120% of the aggregate
principal amount of debentures to
<PAGE>
DIGITAL BIOMETRICS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(UNAUDITED)
(7) 8% CONVERTIBLE SUBORDINATED DEBENTURES (CONTINUED)
be repaid. In connection with the Purchase Agreement, the Company has agreed to
issue to the purchaser of the debentures, upon the sale of each tranche warrants
to purchase 15,000 of Common Stock exercisable at $2.50 per share up to a
maximum 75,000 shares. Also, in connection with the transaction, the Company
paid $40,000 of fees to an investment-banking firm and issued a warrant to
purchase 125,000 shares of Common Stock at an exercise price of $2.00 per share.
The estimated value of this warrant is $87,500 which is a debt issuance cost to
be written off to interest expense over the term of the Debentures. The Purchase
Agreement includes a beneficial conversion feature. The intrinsic value of the
beneficial conversion feature of each tranche will 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. The intrinsic value of the conversion feature of the first
tranche is $125,000. Net proceeds to the Company are being used for working
capital, business development and other general corporate purposes.
As of December 31, 1997, none of this issuance of 8% Convertible
Debentures has been converted to Common Stock.
(8) STOCKHOLDERS' EQUITY
During the three-month period ended December 31, 1997, the Company
granted 112,000 shares pursuant to discretionary stock option awards to
non-executive employees. These options are exercisable at prices ranging from
$1.56 to $2.06 per share and expire in 2007.
Effective with their acceptance of employment with the Company in
October 1997, warrants to purchase 250,000 shares of Common Stock were issued to
non-executive employees. These warrants are exercisable at $1.875 per share and
expire on August 17, 2002.
Effective December 31, 1997, the Company issued 55,963 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 $87,442 and reduced accrued
compensation by the same amount.
(9) LITIGATION
On June 1, 1995, the Company filed a complaint for patent infringement
against Identix, Inc., of Sunnyvale, California, in the U.S. 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 alleged infringement pertains to how
rolled fingerprint images are obtained optically and how they are mathematically
represented in storage. The Identix TP-600 and TP-900 devices are both alleged
to infringe on the Company patent. This
<PAGE>
DIGITAL BIOMETRICS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(UNAUDITED)
(9) LITIGATION
technology is a fundamental aspect of the fingerprint capture task in forensic
quality live-scan. 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. In January 1997, the Company filed an appeal of
the court's decision of non-infringement. These appeals are decided by the
Federal Circuit which is a Court of Appeals in Washington D.C. On October 8,
1997, the appeal was argued before the Court. As of the date of this filing, no
appellate decision has been issued. Further, a prediction of the final outcome
of the appeal is not possible. In the event the Company does not prevail in this
litigation, its competitive position could be adversely affected.
Except for the foregoing, there are no material lawsuits pending or, to
the Company's knowledge, threatened against the Company.
(10) JOINT VENTURE WITH GRAND CASINOS, INC.
On November 24, 1997, the Company entered into a letter of intent to
form a joint venture with Grand Casinos Inc. to further develop, test and market
the TRAK-21 automated player tracking system. It is anticipated that a
definitive agreement will be reached during the second quarter of fiscal 1998
with deployment of a system based on TRAK-21 technology in a Grand Casino
property also in 1998.
<PAGE>
DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED DECEMBER 31, 1997
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company is a developer, assembler, marketer and integrator of
computer-based products and services for the identification of individuals. 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, software and services.
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 and
competition within the live-scan electronic fingerprint industry, have resulted
in and are expected to continue to result in an irregular revenue cycle for the
Company; any prediction of future trends is inherently difficult.
The Company generally recognizes product sales on the date of shipment,
although recognition at some later milestone is not uncommon based on the terms
of specific customer contracts. 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 which consequently may affect the Company's
timing and criteria for revenue recognition. Revenue under contracts where a
performance bond, collateral or customer acceptance is required is not
recognized until collateral requirements have been satisfied and customer
acceptance has occurred. 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.
THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
1996
Total revenues were $2,272,000 for the three months ended December 31,
1997 compared with $2,015,000 for the same prior-year period. Identification
system product revenues were $1,690,000 compared with $1,616,000 in the same
prior-year period. The increase is due primarily to an increase in the number of
TENPRINTER systems sold during the three months ended December 31, 1997.
For the three-month period ended December 31, 1997, sales to one
customer accounted for approximately 31% of total revenues. Sales to two
different customers during the three months ended December 31, 1996 accounted
for approximately 17% and 12% of total revenues. Export revenues for the
three-month period ended December 31, 1997 were 32% of total revenues compared
with less than 1% during the same prior-year period.
<PAGE>
DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED DECEMBER 31, 1997
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
Product maintenance and service revenues were $582,000 for the three
months ended December 31, 1997 compared with $399,000 for the same prior-year
period, an increase of 46%. This increase is due primarily to a larger installed
base of TENPRINTER systems covered by maintenance agreements, an increase in
maintenance rates effective with maintenance contract renewals, and an increase
in "time and materials" and similar maintenance revenues.
Overall gross margins for the three months ended December 31, 1997 were
20% as compared with 30% of sales for the same prior-year period. Gross margins
on identification system sales were 15% for the three months ended December 31,
1997 compared with 47% in the same prior-year period. This decrease is due to
low production volume in the three-month period ended December 31, 1997, higher
levels of warranty and installation accruals than in the prior-year period, and
an unfavorable product mix impact.
Product maintenance and service margins for the three months ended
December 31, 1997 and 1996 were 34% and (40%), respectively, of maintenance and
support revenues. The substantial improvement in product maintenance and support
margins is due mainly to the favorable impact of higher revenues, improved
efficiency from utilization of Company employees instead of outside contractors
in providing maintenance services, and accrual offsets established during fiscal
year 1997 for planned losses on a maintenance contract.
Sales and marketing expenses for the three-month period ended December
31, 1997 were 23% of total revenues compared to 26% for the same three-month
prior-year period. The decrease in sales and marketing costs as a percentage of
total revenue is due primarily to higher revenue and a reduction in personnel
and associated employee-related costs, partially offset by higher contractor
costs and accrued royalties on international shipments. Engineering and
development expenses were 31% of total sales for the three-month period ended
December 31, 1997 compared to 37% for the same period a year ago. This decrease
is due primarily to reduced new product development costs related to the
S-Series introduction and to a lesser extent, the increase in revenues,
partially offset by additional personnel-related costs associated with the newly
established Integrated Identification Solutions Division. General and
administrative expenses for the three-month periods ended December 31, 1997 and
1996 were 21% of total revenues.
Interest income decreased to $12,000 for the three months ended
December 31, 1997 from $87,000 for the same period in 1996 due to lower balances
of cash and marketable securities.
Interest expense decreased to $94,000 for the three months ended
December 31, 1997 from $107,000 for the same prior-year period, primarily due to
a reduced balance of 8% convertible debentures outstanding offset by a non-cash
charge during the three-month period ended December
<PAGE>
DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED DECEMBER 31, 1997
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
31, 1997 of $83,000 for the intrinsic value of the beneficial conversion feature
of convertible debentures issued on December 1, 1997.
The Company incurred a net loss for the three-month period ended
December 31, 1997 of $1,324,000 ($0.11 per share) as compared with $1,093,000
($0.10 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, 1997, the Company had carryforwards of net operating
losses of approximately $32,000,000 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 published U.S. Internal Revenue Service long-term
federal tax exempt rate. A total of $3,700,000 of the net operating loss
carryforwards at December 31, 1997 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 $28,300,000
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
GENERAL
For the period from the Company's inception in 1985 through December
31, 1997, the Company's cumulative deficit was $36,647,000. Losses are expected
to continue until revenues and gross margin from sales of the Company's current
and future products and services are sufficient to cover the level of operating
expenses required for the Company's operations.
<PAGE>
DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED DECEMBER 31, 1997
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Company's business has included large contract awards from
international, state and local law enforcement agencies and it is expected that
this will continue. Collection of receivables related to billings of these
contract amounts is often protracted.
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. The line bears interest at 1.5% above the prime
rate (8.5% at December 31, 1997), is payable upon demand and expires in March
1998. For the period from September 30, 1997, through January 31, 1998, the
minimum interest shall be $10,000 per the terms of the agreement. For the period
from February 1, 1998, through March 31, 1998, the minimum interest shall be
$5,000 per the terms of the agreement. There were no borrowings under the line
at December 31, 1997. The Company anticipates renewal of the line upon
expiration.
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 and are payable upon demand. The line expires in March 1998. There were no
borrowings under the line at December 31, 1997.
ISSUANCE OF 8% CONVERTIBLE SUBORDINATED DEBENTURES AND WARRANTS
To provide additional working capital, on December 1, 1997, the Company
entered into a convertible subordinated debenture purchase agreement ("Purchase
Agreement") with a private investor, providing for the Company's issuance and
sale of up to an aggregate of $2,500,000 of 8% Convertible Debentures (the
"Debentures") in tranches of $500,000 each. The first tranche was sold on
December 1, 1997. Additional tranches may be issued upon request of the Company
within 90 days of each previous tranche, if the Company meets conditions to
issuance including, but not limited to, conditions requiring the Company to have
effective and maintain a registration statement with the Securities and Exchange
Commission covering shares issuable upon conversion of the Debentures, and a
requirement that the Company's market capitalization be at least $12 million.
The initial tranche sold in the amount of $500,000 on December 1, 1997 is
convertible in whole or in part at the option of the holder, with accrued
interest, into Common Stock, at a conversion price equal to the lesser of the
average closing price of the five consecutive trading days preceding the
transaction ($1.96 per share) or 80% of the average closing price of the five
consecutive trading days preceding the conversion date. Future tranches may be
convertible on a similar basis but the conversion prices will be related to the
lesser of the market price on the issue date and the market price on the
conversion date. The Company has the right, exercisable at any time upon two
trading days notice to the purchaser of the debentures given at any time the
Company receives a conversion notice and the conversion price in effect in
connection with such conversion notice is less than $1.25, to repay, all or any
portion of the outstanding principal amount of the debentures which have been
tendered for
<PAGE>
DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED DECEMBER 31, 1997
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
conversion, at a price equal to the sum of 120% of the aggregate principal
amount of debentures to be repaid. In connection with the Purchase Agreement,
the Company has agreed to issue to the purchaser of the debentures, upon the
sale of each tranche warrants to purchase 15,000 of Common Stock exercisable at
$2.50 per share up to a maximum of 75,000 shares. Also, in connection with the
transaction, the Company paid $40,000 of fees to an investment-banking firm and
issued a warrant to purchase 125,000 shares of Common Stock at an exercise price
of $2.00 per share. The estimated value of this warrant is $87,500 which is a
debt issuance cost to be written off to interest expense over the term of the
Debentures. The Purchase Agreement includes a beneficial conversion feature. The
intrinsic value of the beneficial conversion feature of each tranche will 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. The intrinsic value of the conversion
feature of the first tranche is $125,000. Net proceeds to the Company are being
used for working capital, the development of new business opportunities, and
other general corporate purposes.
ANALYSIS OF CASH FLOWS FROM OPERATIONS
Net cash used in operating activities was $1,133,000 for the three
months ended December 31, 1997 compared with $1,874,000 for the same prior-year
period. The decrease in cash used in operating activities was primarily a result
of changes in operating assets and liabilities. Cash flows from changes in
operating assets and liabilities changed from cash used of $950,000 in the
prior-year period to cash used of $42,000 in the three-month period ended
December 31, 1997. This $908,000 improvement in cash flow from operating assets
and liabilities resulted primarily from improved accounts receivable and
inventory balances.
Net cash provided by investing activities was less than $1,000 for the
three months ended December 31, 1997 as compared with $282,000 in the same
prior-year period. The change was primarily due to a decrease in proceeds from
paydowns of marketable securities, and to a lesser extent, increased capital
expenditures during the three months ended December 31, 1997 to support
establishment of the IIS Division.
Net cash provided by financing activities was $445,000 during the three
months ended December 31, 1997, as compared to $1,650,000 during the same
prior-year period. This decrease is due primarily to the absence of borrowings
under lines of credit at December 31, 1997 as compared to the prior year. The
cash provided by financing activities during the current-year period was from
the issuance of 8% convertible subordinated debentures as noted above and in
Note 7.
At December 31, 1997, the Company had $1,204,000 in cash and cash
equivalents.
<PAGE>
DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED DECEMBER 31, 1997
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
U.S. 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 alleged infringement pertains to how rolled fingerprint
images are obtained optically and how they are mathematically
represented in storage. The Identix TP-600 and TP-900 devices are both
alleged to infringe on the Company patent. This technology is a
fundamental aspect of the fingerprint capture task in forensic quality
live-scan. 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. In January
1997, the Company filed an appeal of the court's decision of
non-infringement. These appeals are decided by the Federal Circuit
which is a Court of Appeals in Washington D.C. On October 8, 1997, the
appeal was argued before the Court. As of the date of this filing, no
appellate decision has been issued. Further, a prediction of the final
outcome of the appeal is not possible. In the event the Company does
not prevail in this litigation, its competitive position could be
adversely affected.
Except for the foregoing, there are no material lawsuits
pending or, to the Company's knowledge, threatened against the Company.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
<PAGE>
DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED DECEMBER 31, 1997
PART II - OTHER INFORMATION (CONTINUED)
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, 1997.
<PAGE>
DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED DECEMBER 31, 1997
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIGITAL BIOMETRICS, INC.
(Registrant)
February 13, 1998 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,
-------------------------------
1997 1996
------------- -------------
<S> <C> <C>
Shares outstanding at beginning of period 12,361,038 10,777,288
Shares issued under retirement plan 55,963 41,798
Shares issued from debenture and related interest conversion -- 97,399
------------- -------------
Shares outstanding at end of period 12,417,001 10,916,485
============= =============
Weighted average shares outstanding (A) 12,361,646 10,862,607
============= =============
Net loss $ (1,324,000) $ (1,092,630)
============= =============
Basic loss per common share $ (0.11) $ (0.10)
============= =============
</TABLE>
(A) Stock options and other common share equivalents are not included in the
calculation of the net loss per common share for the three-month periods ended
December 31, 1997 and 1996 as their effect is antidilutive.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000868373
<NAME> DIGITAL BIOMETRICS INC
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,204,282
<SECURITIES> 0
<RECEIVABLES> 5,222,537
<ALLOWANCES> 436,510
<INVENTORY> 2,241,785
<CURRENT-ASSETS> 8,416,961
<PP&E> 2,158,732
<DEPRECIATION> 1,215,711
<TOTAL-ASSETS> 9,622,755
<CURRENT-LIABILITIES> 3,062,259
<BONDS> 446,667
0
0
<COMMON> 124,170
<OTHER-SE> 5,989,659
<TOTAL-LIABILITY-AND-EQUITY> 9,622,755
<SALES> 1,690,249
<TOTAL-REVENUES> 2,272,140
<CGS> 1,430,548
<TOTAL-COSTS> 1,815,049
<OTHER-EXPENSES> 1,694,359
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 94,070
<INCOME-PRETAX> (1,324,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,324,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,324,000)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
