UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2000
--------------------------------------------------
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
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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)
(952) 932-0888
--------------
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days. [x] Yes [ ] No
Indicate the number of shares of each of the issuer's classes of common stock,
as of the latest practicable date.
Common Stock, $.01 par value July 31, 2000 - 16,819,225 shares
---------------------------- ---------------------------------
(Class) (Outstanding)
1
<PAGE>
DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED JUNE 30, 2000
INDEX
PART I - FINANCIAL INFORMATION:
PAGE
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATED BALANCE SHEETS 4
CONSOLIDATED STATEMENTS OF OPERATIONS 5
CONSOLIDATED STATEMENTS OF CASH FLOWS 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 17
PART II - OTHER INFORMATION:
ITEM 1. LEGAL PROCEEDINGS 17
ITEM 2. CHANGES IN SECURITIES 17
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 17
ITEM 5. OTHER INFORMATION 17
ITEM 6. (a) EXHIBITS 17
(b) REPORTS ON FORM 8-K 17
SIGNATURES 18
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2
<PAGE>
DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED JUNE 30, 2000
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Except for the historical information contained herein, the matters
discussed in this Form 10-Q include forward-looking statements made within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. As provided for under the Private Securities
Litigation Reform Act, the Company cautions investors that actual results of
future operations may differ from those anticipated in forward-looking
statements due to a number of factors, including the Company's ability to
maintain profitability, introduce new products and services, build profitable
revenue streams around new product and service offerings, maintain loyalty and
continued purchasing of the Company's products by existing customers, execute on
customer delivery and installation schedules, collect outstanding accounts
receivable and manage the concentration of accounts receivable and other credit
risks associated with selling products and services to governmental entities and
other large customers, create and maintain satisfactory distribution and
operations relationships with automated fingerprint identification system
("AFIS") vendors, attract and retain key employees, secure timely and
cost-effective availability of product components, meet increased competition,
maintain adequate working capital and liquidity, including the availability of
financing as may be required, and upgrade products and develop new technologies.
For a more complete description of such factors, see "Risk Factors" under Item 7
of the Company's Form 10-K report for the year ended September 30, 1999.
3
<PAGE>
DIGITAL BIOMETRICS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, September 30,
2000 1999
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,072,717 $ 3,175,868
Accounts receivable, less allowance for doubtful accounts of $112,000
and $128,587, respectively 4,785,843 7,415,334
Inventory (note 4) 4,419,663 2,972,998
Prepaid expenses and other costs 297,822 195,887
------------- -------------
Total current assets 13,576,045 13,760,087
------------- -------------
Property and equipment 3,103,033 2,744,454
Less accumulated depreciation and amortization (2,158,794) (1,783,030)
------------- -------------
944,239 961,424
------------- -------------
Other assets 40,361 25,270
------------- -------------
$ 14,560,645 $ 14,746,781
============= =============
Current liabilities:
Accounts payable $ 692,138 $ 1,826,451
Deferred revenue 3,355,246 2,319,828
Other accrued expenses (note 6) 1,534,016 3,171,707
Current installments of capital lease obligations -- 57,292
------------- -------------
Total current liabilities 5,581,400 7,375,278
Capital lease obligations, less current installments -- 93,077
Convertible debentures -- 148,097
------------- -------------
Total liabilities 5,581,400 7,616,452
------------- -------------
Stockholders' equity (note 7):
Preferred stock, undesignated, par value $.01 per share, 5,000,000
shares authorized, none issued -- --
Common stock, $.01 par value. Authorized, 40,000,000 shares; issued
and outstanding 16,819,225 and 16,017,629 shares, respectively 168,192 160,176
Additional paid-in capital 48,665,336 47,157,996
Deferred compensation (109,125) (75,500)
Accumulated deficit (39,745,158) (40,112,343)
------------- -------------
Total stockholders' equity 8,979,245 7,130,329
------------- -------------
$ 14,560,645 $ 14,746,781
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
DIGITAL BIOMETRICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATION
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Identification systems $ 2,598,414 $ 5,312,409 $ 11,997,673 $ 10,900,850
Maintenance 1,303,031 951,914 3,489,032 2,663,347
Integral Partners, Inc. -- -- -- 258,720
------------ ------------ ------------ ------------
Total revenues 3,901,445 6,264,323 15,486,705 13,822,917
------------ ------------ ------------ ------------
Cost of revenues:
Identification systems 1,209,175 3,250,108 7,000,525 6,829,253
Maintenance 932,693 787,704 2,555,327 2,120,575
Integral Partners, Inc. -- -- -- 142,767
------------ ------------ ------------ ------------
Total cost of revenues 2,141,868 4,037,812 9,555,852 9,092,595
------------ ------------ ------------ ------------
Gross margin 1,759,577 2,226,511 5,930,853 4,730,322
------------ ------------ ------------ ------------
Selling, general and administrative expenses:
Sales and marketing 618,605 564,501 1,757,956 1,453,096
Engineering and development 1,025,065 534,961 2,112,567 1,677,728
General and administrative 585,363 652,047 1,865,184 2,027,499
------------ ------------ ------------ ------------
Total expenses 2,229,033 1,751,509 5,735,707 5,158,323
------------ ------------ ------------ ------------
Income (loss) from operations (469,456) 475,002 195,146 (428,001)
------------ ------------ ------------ ------------
Other income (expense):
Interest income 69,921 3,923 176,374 16,730
Interest expense (274) (45,382) (6,383) (257,749)
Other income (expense) (400) (10,207) 2,048 (10,207)
------------ ------------ ------------ ------------
Total other income (expense) 69,247 (51,666) 172,039 (251,226)
------------ ------------ ------------ ------------
Net income (loss) $ (400,209) $ 423,336 $ 367,185 $ (679,227)
============ ============ ============ ============
Net income (loss) per common share $ (0.02) $ 0.03 $ 0.02 $ (0.05)
============ ============ ============ ============
Net income (loss) per common share -
assuming dilution $ (0.02) $ 0.03 $ 0.02 $ (0.05)
============ ============ ============ ============
Weighted average common shares
outstanding 16,815,201 15,130,682 16,515,855 14,559,270
============ ============ ============ ============
Weighted average common shares
outstanding - assuming dilution 16,815,201 15,243,357 18,022,140 14,559,270
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
DIGITAL BIOMETRICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
-----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 367,185 $ (679,227)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Provision for doubtful accounts receivable (16,587) 4,801
Deferred compensation amortization 42,875 43,500
Depreciation and amortization 488,115 446,181
Write-off of intangible assets -- 14,694
(Gain) loss on disposal of fixed assets (2,048) 10,207
Interest expense amortization for the
intrinsic value of the beneficial
conversion feature of convertible
debentures -- 125,000
Interest expense on debentures converted
into common stock 12,350 24,581
Changes in operating assets and liabilities:
Accounts receivable 2,646,078 (1,651,657)
Inventories (1,446,665) 361,945
Prepaid expenses (101,936) 11,558
Accounts payable (1,134,313) (675,621)
Deferred revenue 1,035,418 223,779
Accrued expenses (1,482,930) 591,545
------------ ------------
Net cash provided by (used in) operating activities 407,542 (1,148,714)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (459,548) (266,075)
Proceeds from disposal of property and equipment 12,794 700
Patents, trademarks, copyrights and licenses (29,683) (5,773)
------------ ------------
Net cash used in investing activities (476,437) (271,148)
------------ ------------
Cash flows from financing activities:
Issuance of convertible debentures, net -- 450,111
Principal payments on capital lease obligations (150,369) (43,761)
Private placement of common stock -- 889,877
Exercise of options and warrants 1,116,113 --
Net line of credit advances -- 428,406
------------ ------------
Net cash provided by financing activities 965,744 1,724,633
------------ ------------
Increase in cash and cash equivalents 896,849 304,771
Cash and cash equivalents at beginning of period 3,175,868 840,616
------------ ------------
Cash and cash equivalents at end of period $ 4,072,717 $ 1,145,387
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
DIGITAL BIOMETRICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America 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, 1999.
The consolidated financial statements include the accounts of Digital
Biometrics, Inc. and its wholly owned subsidiary Integral Partners, Inc. All
significant intercompany balances and transactions have been eliminated on
consolidation.
The Company generally recognizes product sales on the date of shipment
for orders which are f.o.b. origin and upon delivery for f.o.b. destination.
Revenue for professional services contracts and systems integration services
revenues are recognized using the percentage of completion method, completed
contract basis or on a time-and-materials basis. Revenues from maintenance and
repair contracts are recognized over the period of the agreement. Services
revenues are recognized when the related services are performed. The Company's
standard terms of sale are payment due net in thirty days, f.o.b. Digital
Biometrics, Inc. Terms of sale and shipment may, however, be subject to
negotiation and may affect the Company's timing and criteria for revenue
recognition.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 which provides the staff's views in applying
generally accepted accounting principles to selected revenue recognition issues.
The Company will be required to adopt the new standard beginning with the fourth
quarter of fiscal 2001. The impact of adoption on the Company's financial
statements has not yet been determined.
(2) SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK
The Company extends credit to substantially all of its customers.
Approximately 96% and 94%, respectively, of customer accounts receivable at June
30, 2000 and September 30, 1999 were from government agencies. At September 30,
1999 53% of accounts receivable from government agencies were from two
customers.
Revenues from one customer in the three-month period ended June 30,
2000 accounted for 17% of total revenues, and revenues from three customers in
the three-month period ended June 30, 1999 accounted for 24%, 16% and 14% of
total revenues. Revenues from two customers in the nine-month period ended June
30, 2000 accounted for 19% and 13% of total revenues, and revenues from two
customers in the nine-month period ended June 30, 1999 accounted for 28% and 10%
of total revenues.
Export revenues for the three-month period ended June 30, 2000 were
less than 1% of total revenues compared to 5% of total revenues for the same
period in 1999. Export revenues for the nine-month period ended June 30, 1999
were less than 1% of total revenues as compared to 3% for the same period in
1999.
(3) STATEMENT OF CASH FLOWS
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments and certificates of deposit purchased with an
original maturity date of three months or less to be cash equivalents.
7
<PAGE>
DIGITAL BIOMETRICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Nine Months Ended
June 30,
2000 1999
---------- -----------
Cash paid during the period for interest $4,672 $51,525
========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
In October 1999, the Company issued 116,369 shares of common
stock for the conversion of the final remaining principal
aggregating $150,000 plus $12,252 of accrued interest at an average
conversion price of $1.39 per share.
(4) INVENTORY
Inventory is valued at standard cost which approximates the lower of
first-in, first-out (FIFO) cost or market. Inventory consists of the following:
June 30, September 30,
2000 1999
------------ ------------
Components and subassemblies $3,074,400 $2,307,600
Work in process 474,897 434,714
Finished goods 870,366 230,684
------------ ------------
$4,419,663 $2,972,998
============ ============
(5) LINE OF CREDIT
Effective January 1, 2000, the Company established an inventory and
receivables financing line of credit for the lesser of eligible inventory and
receivables or $2,000,000 with Associated Bank Minnesota, formerly named
Riverside Bank. Borrowings under this line of credit are secured by all the
assets of the Company. This line of credit replaced the Company's previous line
of credit agreement. The line bears interest at a rate of 0.5% (one half
percent) above the prime rate. The line will expire in November 2000. There were
no borrowings under this line at June 30, 2000.
(6) OTHER ACCRUED EXPENSES
Other accrued expenses consists of:
June 30, September 30,
2000 1999
------------ -------------
Accrued salaries, bonuses and
commissions $ 279,504 $ 773,106
Accrued vacation 301,174 195,757
Accrued warranty 241,965 745,104
Accrued installation costs 412,500 1,107,200
Other accrued expenses 298,873 350,540
------------ -------------
$ 1,534,016 $ 3,171,707
============ =============
8
<PAGE>
DIGITAL BIOMETRICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
(7) STOCKHOLDERS' EQUITY
During the three-month period ended June 30, 2000, the Company granted
stock option awards to executive and non-executive employees for the purchase of
an aggregate of 651,500 shares of common stock. These options are exercisable at
prices from $3.5625 to $4.50 per share and expire in 2007.
(8) NET INCOME (LOSS) PER COMMON SHARE
The per share computations are based on the weighted average number of
common shares outstanding during the periods.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
----------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Shares outstanding at beginning of period 16,806,726 15,130,682 16,017,629 13,661,832
Shares issued under retirement plan -- -- 45,855 87,897
Restricted stock awards, net of forfeitures -- -- 10,269 43,200
Shares issued for private placements -- -- -- 694,996
Exercise of options and warrants 12,499 -- 629,103 --
Shares issued upon conversion of debentures -- -- 116,369 642,757
------------ ------------ ------------ ------------
Shares outstanding at end of period 16,819,225 15,130,682 16,819,225 15,130,682
============ ============ ============ ============
Weighted average common shares outstanding 16,815,201 15,130,682 16,515,855 14,559,270
Dilutive common shares assumes:
Options -- 51,753 1,045,151 --
Warrants -- 60,922 461,134 --
------------ ------------ ------------ ------------
Weighted average common shares outstanding -
assuming dilution 16,815,201 15,243,357 18,022,140 14,559,270
============ ============ ============ ============
Net income (loss) $ (400,209) $ 423,336 $ 367,185 $ (679,227)
============ ============ ============ ============
Net income (loss) per common share $ (0.02) $ 0.03 $ 0.02 $ (0.05)
============ ============ ============ ============
Net income (loss) per common share - assuming
dilution $ (0.02) $ 0.03 $ 0.02 $ (0.05)
============ ============ ============ ============
</TABLE>
9
<PAGE>
DIGITAL BIOMETRICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
The following is a summary of those securities outstanding at June 30
for the respective periods, which have been excluded from the calculations
because the effect on net income (loss) per common share would not have been
dilutive:
<TABLE>
<CAPTION>
For the Three-Month Period For the Nine-Month Period
Ended June 30, Ended June 30,
--------------------------- -------------------------
2000 1999 2000 1999
--------------------------- -------------------------
<S> <C> <C> <C> <C>
Options 2,513,809 1,746,100 103,500 1,982,600
Warrants 697,910 1,070,334 112,893 1,370,389
Convertible debentures -- 760,064 -- 760,064
</TABLE>
10
<PAGE>
DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED JUNE 30, 2000
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
As more fully described in the subsection "Risk Factors" under Item 7
of the Company's Form 10-K report for the year ended September 30, 1999, this
report contains forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These include statements regarding intent,
belief or current expectations of the Company and its management and are made in
reliance upon the "safe harbor" provisions of the Securities Litigation Reform
Act of 1995. Stockholders and prospective investors are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
a number of risks and uncertainties that may cause the Company's actual results
to differ materially from the results discussed in the forward-looking
statements.
Digital Biometrics, Inc., (the "Company," "Digital Biometrics" or
"DBI") is a leading provider of identification information systems that employ
"biometric" technology, which is the science of identifying individuals by
measuring distinguishing biological characteristics. DBI's biometric
identification systems and information technology services enable law
enforcement and other government agencies to identify and manage information
about individuals, and help commercial employers and government agencies to
conduct background checks on applicants for employment, citizenship, permits and
the like. DBI's offerings include computer-based fingerprinting and photographic
systems, software tools, multi-media data storage and communications servers,
and the systems integration and software development services required to
implement identification management systems.
Under new management since 1997, Digital Biometrics has evolved from
essentially a single-product live-scan hardware supplier to an identification
information systems company. DBI continues to expand its product line and
information technology services to further penetrate the law enforcement market,
while introducing new products and services for the emerging
applicant-processing and security markets among commercial and government
customers. Typical customers include: U.S. government agencies, such as the
Immigration and Naturalization Service (INS) and the U.S. Postal Service; local
and state police; the military; school districts; financial institutions;
utilities; and casinos.
The Company's main products are special-purpose, computer-based systems
for "live-scan" fingerprint capture, data transmission and receipt of return
information. These live-scan systems employ patented, high-resolution optics and
specialized hardware and software, combined with industry-standard computer
hardware and software, to create highly optimized, special-purpose systems which
capture, digitize, print and transmit forensic-grade fingerprint and
photographic images along with text, and receive information back.
The Company's strategy is to continue to market live-scan systems to
law enforcement agencies and to expand its product and service offerings and the
markets it serves. The law enforcement market for live-scan biometric products
is well established. The Company believes
11
<PAGE>
DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED JUNE 30, 2000
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
there is growing demand from other governmental and commercial markets to employ
identification information technologies in enrollment and applicant processing
applications. Digital Biometrics is aggressively pursuing these emerging
markets.
Also, the Company is engaged in a joint venture with Lakes Gaming,
Inc., formerly known as Grand Casinos, Inc., named TRAK 21 Development, LLC, to
develop, test and market an automated wagering tracking system based on
technology developed by the Company. This system is intended to track the
betting activity of casino patrons playing blackjack.
A majority of the Company's revenues in the three and nine-month
periods ended June 30, 2000 and 1999 were derived from live-scan systems sales,
photographic image capture systems, maintenance and applications development
services to governmental customers. The Company's sales have historically
included large purchases by a relatively small number of customers. This
concentration of sales among few relatively large customers is expected to
continue in the foreseeable future. The law enforcement market and government
procurement processes are subject to budgetary, economic and political
considerations which vary significantly from state to state and among different
agencies. These characteristics, together with the increasing level of
competition within the live-scan electronic fingerprint industry, have resulted
(and are expected to continue to result) in an irregular revenue cycle for the
Company. The quarter-to-quarter fluctuations in the Company's revenues and
earnings will continue to be difficult to predict.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
Total revenues were $3,901,000 for the three months ended June 30, 2000
compared to $6,264,000 for the same prior-year period. Identification systems
revenues were $2,598,000 compared to $5,312,000 in the same prior-year period.
This 51% decrease is due primarily to a decrease in the number of live-scan
systems sold during the three months ended June 30, 2000, partially offset by an
increase in the average selling price per live-scan system, and an increase in
revenues for custom software services.
Maintenance revenues were $1,303,000 for the three months ended June
30, 2000 compared to $952,000 for the same prior-year period, an increase of
37%. This increase is due primarily to a larger installed base of live-scan
systems covered by maintenance agreements.
Revenues from one customer in the three-month period ended June 30,
2000 accounted for 17% of total revenues, and revenues from three customers in
the three-month period ended June 30, 1999 accounted for 24%, 16% and 14% of
total revenues. Export revenues for the three-month period ended June 30, 2000
were less than 1% of total revenues compared to 5% of total revenues for the
same period in 1999.
12
<PAGE>
DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED JUNE 30, 2000
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overall gross margins for the three months ended June 30, 2000 were
45%, as compared to 36% of revenues for the same prior-year period.
Gross margins on identification systems revenues were 53% for the three
months ended June 30, 2000 compared to 39% in the same prior-year period. This
increase is due mainly to lower per-unit installation and training costs
attributable to a favorable geographic concentration of installations, a
$276,000 reduction in accrued installation costs applicable to a favorable
change in an equipment installation obligation, improved per-unit warranty
costs, and a favorable product mix. Gross margins on identification systems
revenues for future periods are expected to approximate historical margins.
Maintenance margins for the three months ended June 30, 2000 and 1999
were 28% and 17%, respectively. The increase in product maintenance and support
margins is due primarily to accrued costs in the prior-year period to implement
Year 2000 compliant software for customers with maintenance contracts.
Sales and marketing expenses for the three-month period ended June 30,
2000 were 16% of total revenues compared to 9% for the same three-month
prior-year period. The increase in sales and marketing costs as a percentage of
total revenue is due primarily to the decrease in revenue. The increase in
absolute dollars of sales and marketing expenses for the current-year
three-month period is due primarily to an increase in new product promotional
activities. Engineering and development expenses were 26% of total revenues for
the three-month period ended June 30, 2000 compared to 9% for the same period a
year ago. This increase is due primarily to decreased revenues and increased new
product development costs, partially offset by an increase in engineering
resources used for cost of sales activity. Engineering expenses for the
three-month periods ending June 30, 2000 and 1999 are net of $128,000 and
$166,000, respectively, of costs related to a Federally funded demonstration
project grant. General and administrative expenses for the three-month periods
ended June 30, 2000 and 1999 were 15% and 10%, respectively, of total revenues.
This increase is due primarily to decreased revenues. The decrease in absolute
dollars of general and administrative expenses for the current-year three-month
period is due primarily to a decrease in bonus accruals.
Interest income increased to $70,000 for the three months ended June
30, 2000 from $4,000 for the same period in fiscal 1999 due to higher cash
balances.
Interest expense decreased to less than $1,000 for the three months
ended June 30, 2000 from $45,000 for the same prior-year period. The decrease is
primarily due to conversion of convertible debentures and no borrowings on a
line of credit during the current-year period.
The Company generated net loss for the three-month period ended June
30, 2000 of $400,000, or $0.02 per share loss, as compared to a net income of
$423,000, or $0.03 per share, for the same prior-year period.
NINE MONTHS ENDED JUNE 30, 2000 COMPARED TO NINE MONTHS ENDED JUNE 30, 1999
Total revenues were $15,487,000 for the nine months ended June 30, 2000
compared to $13,823,000 for the same prior-year period. Identification systems
revenues were $11,998,000 compared to $10,901,000 in the same prior-year period.
This 10% increase is due primarily to an
13
<PAGE>
DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED JUNE 30, 2000
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
increase in the number of live-scan systems sold during the nine months ended
June 30, 2000, an increase in revenues from new product offerings including
photographic imaging systems and palm scanning systems, and an increase in
revenues from customized software services, partially offset by a decrease in
the average selling price per live-scan system.
Maintenance revenues were $3,489,000 for the nine months ended June 30,
2000 compared to $2,663,000 for the same prior-year period, an increase of 31%.
This increase is due primarily to a larger installed base of live-scan systems
covered by maintenance agreements.
There were no revenues generated by the Company's wholly owned
subsidiary Integral Partners, Inc. for the nine months ended June 30, 2000
compared to $259,000 for the same prior-year period.
Revenues from two customers in the nine-month period ended June 30,
2000 accounted for 19% and 13%, respectively, of total revenues. Revenues from
two customers in the same prior-year period accounted for 28% and 10% of total
revenues. Export revenues for the nine-month period ended June 30, 2000 were
less than 1% of total revenues compared to 3% of total revenues in the same
prior-year period.
Overall gross margins for the nine months ended June 30, 2000 were 38%,
as compared to 34% of revenues for the same prior-year period.
Gross margins on identification systems revenues were 42% for the nine
months ended June 30, 2000 compared to 37% in the same prior-year period. This
increase is due primarily to lower production, installation, training and
warranty costs per system and a favorable product mix, partially offset by lower
average selling prices.
Maintenance margins for the nine months ended June 30, 2000 and 1999
were 27% and 20%, respectively. The increase in maintenance margins is due
primarily to accrued costs in the prior-year period to implement Year 2000
compliant software for customers with maintenance contracts.
There was no gross margin generated by Integral Partners, Inc. for the
nine months ended June 30, 2000 compared to 45% gross margin for the same
prior-year period.
Sales and marketing expenses for the nine-month period ended June 30,
2000 and 1999 were 11% of total revenues. The increase in absolute dollars of
sales and marketing expenses for the current-year nine-month period is due
primarily to an increase in personnel-related costs and new product promotional
activities. Engineering and development expenses were 14% of total revenues for
the nine-month period ended June 30, 2000 compared to 12% for the same period a
year ago. The increase is due primarily to an increase in new product
development costs, partially offset by a decrease in engineering expenses
associated with Integral Partners, Inc. and an increase in engineering resources
used for cost of sales activity. Engineering expenses for the nine-month periods
ending June 30, 2000 and 1999 are net of $363,000 and $243,000, respectively, of
costs related to a Federally funded demonstration project grant. General and
administrative expenses for the nine-month periods ended June 30, 2000 and 1999
were 12% and 15%, respectively, of total revenues. The decrease is due primarily
to the increase in revenues, a decrease in legal fees incurred
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DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED JUNE 30, 2000
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
in connection with legal action taken by a competitor against one of the
Company's customers in an unsuccessful effort to prevent the Company's contract
with the customer from proceeding forward and a decrease in personnel-related
costs associated with Integral Partners, Inc. These were partially offset by an
increase in other general administrative expenses.
Interest income increased to $176,000 for the nine months ended June
30, 2000 from $17,000 for the same period in fiscal 1999 due to higher cash
balances.
Interest expense decreased to $6,000 for the nine months ended June 30,
2000 from $258,000 for the same prior-year period. The decrease is primarily due
to a $125,000 non-cash charge during the prior-year nine-month period for the
intrinsic value of the beneficial conversion feature of convertible debentures,
conversion of convertible debentures and no borrowings on the line of credit
during the current-year period.
The Company generated net income for the nine-month period ended June
30, 2000 of $367,000, or $0.02 per share, as compared to a net loss of $679,000,
or $0.05 per share loss, for the same prior-year period.
INFLATION
The Company does not believe inflation has significantly affected
revenues or expenses.
NET OPERATING LOSS CARRYFORWARDS
At June 30, 2000, the Company had carryforwards of net operating losses
of approximately $35,600,000 that may allow the Company to reduce future income
taxes that would otherwise be payable. Of this amount approximately $2,730,000
relates to compensation associated with the exercise of non-qualified stock
options which, when realized, would result in approximately $1,092,000 credited
to additional paid-in capital. The carryforwards expire annually beginning in
2003. The Company's net operating loss carryforwards that are subject to
limitation on use pursuant to the Internal Revenue Code Section 382 due to prior
ownership changes. 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. Future ownership change could create a limitation with
respect to these loss carryforwards.
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DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED JUNE 30, 2000
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
Effective January 1, 2000, the Company established an inventory and
receivables financing line of credit for the lesser of eligible inventory and
receivables or $2,000,000 with Associated Bank Minnesota, formerly named
Riverside Bank. Borrowings under this line of credit are secured by all the
assets of the Company. The line bears interest at a rate of 0.5% (one half
percent) above the prime rate. The line will expire in November 2000. This line
of credit replaced the Company's previously outstanding line of credit. There
were no borrowings under this line of credit at June 30, 2000.
For the period from the Company's inception in 1985 through June 30,
2000, the Company's cumulative deficit was $39,745,000. The Company generated
its first net income during fiscal 1999.
At June 30, 2000, the Company had $4,073,000 in cash and cash
equivalents. Historically, the Company has been reliant on the availability of
outside capital to sustain its operations. Management believes that cash, cash
equivalents, and other working capital provided from operations, together with
the available line of credit, are sufficient to meet current and foreseeable
operating requirements of the Company's current business. Additional capital may
be required if the Company seeks to expand into new business areas.
ANALYSIS OF CASH FLOWS FROM OPERATIONS
Net cash provided by operating activities was $408,000 for the nine
months ended June 30, 2000 compared to $1,149,000 of net cash used in the same
prior-year period. This favorable cash flow impact resulted primarily from the
net income generated during the current-year period, an increase in deferred
maintenance revenue and a reduced balance of accounts receivable, partially
offset by decreases in installation and warranty accruals, a reduced balance of
accounts payable and an increase in inventory during the current-year period.
Net cash used in investing activities was $476,000 for the nine months
ended June 30, 2000 compared to $271,000 of cash used in investing activities
the same prior-year period. The increase was due primarily to purchases of
computer equipment to support the customer service organization and investments
in marketing demonstration equipment.
Net cash provided by financing activities was $966,000 for the
nine-month period ended June 30, 2000 compared to $1,725,000 during the same
prior-year period. Cash from financing activities was provided primarily from
stock option exercises during the current-year period and from private
placements of common stock and the issuance of convertible debentures during the
prior-year period.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the Company's market risks since
September 30, 1999.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material lawsuits pending or, to the
Company's knowledge, threatened against the Company.
ITEM 2. CHANGES IN SECURITIES
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
No changes since September 30, 1999
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. (a) EXHIBITS
Exhibit 27 Financial Data Schedule.
(b) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed by the
Company during the three-month period ended June 30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIGITAL BIOMETRICS, INC.
------------------------
(Registrant)
August 11, 2000 /s/ John J. Metil
-----------------
John J. Metil
Executive Vice President,
Chief Operating Officer and
Chief Financial Officer
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