UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities and Exchange Act of 1934
Date of Report (Date of earliest event reported): __________________
VISIONICS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 0-18856 41-1545069
(State or Other Jurisdiction (Commission File Number) (IRS Employer
of Incorporation) Identification No.)
5600 ROWLAND ROAD
MINNETONKA, MN 55343
(Address of principal executive offices)
(952) 932-0888
(Registrant's telephone number, including area code)
FORMERLY KNOWN AS DIGITAL BIOMETRICS, INC.
(Former name, former address and former fiscal year, if changed since
last report)
AMENDMENT NO. 2 TO FORM 8-K The Registrant hereby amends Item 7 of its Current
Report dated February 27, 2001 on Form 8-K as set forth in the pages attached
hereto.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Amendment to be signed on its behalf by the
undersigned thereunto duly authorized.
Visionics Corporation
By /s/Robert F. Gallagher
Robert F. Gallagher
Vice President & CFO
Dated: June 28, 2001
1
Item 7.
(a) The audited consolidated financial statements of Visionics Corporation and
subsidiaries as of September 30, 2000, 1999 and 1998 and for each of the
years then ended are included herein. Visionics Corporation was merged into
Digital Biometrics, Inc. on February 16, 2001 in a merger accounted for as
a pooling of interest. Subsequent to the merger, Digital Biometrics changed
its name to Visionics Corporation.
Independent Auditors' Report............................................ 3
Consolidated Balance Sheets as of September 30, 2000 and 1999........... 4
Consolidated Statements of Operations for the years ended
September 30, 2000, 1999 and 1998....................................... 5
Consolidated Statements of Stockholders' Equity and Comprehensive
Income (Loss) for the years ended September 30, 2000, 1999 and 1998..... 6
Consolidated Statements of Cash Flows for the years ended
September 30, 2000, 1999 and 1998....................................... 7
Notes to Consolidated Financial Statements.............................. 8
Management's Discussion and Analysis.................................... 22
Independent Auditors' Consent........................................... 34
Signatures.............................................................. 35
2
INDEPENDENT AUDITORS' REPORT
Board of Directors
Visionics Corporation:
We have audited the accompanying supplemental consolidated balance sheets of
Visionics Corporation and subsidiaries (formerly known as Digital Biometrics,
Inc.) as of September 30, 2000 and 1999, and the related supplemental
consolidated statements of operations, stockholders' equity and comprehensive
income, and cash flows for each of the years in the three-year period ended
September 30, 2000. These supplemental consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these supplemental consolidated financial statements based on our
audits. We did not audit the financial statements of Visionics Corporation which
statements reflect total assets constituting 23 percent and total revenues
constituting 11 percent and 14 percent of the related supplemental consolidated
revenues, respectively, of the related supplemental consolidated total assets as
of September 30, 1999, for each of the years in the two-year period ended
September 30, 1999. Those financial statements were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it relates to
amounts included for Visionics Corporation is based solely on the report of
other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
supplemental consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Visionics Corporation and
subsidiaries (formerly known as Digital Biometrics, Inc.) as of September 30,
2000, and the results of their operations and their cash flows for each of the
years in the three-year period ended September 30, 2000, in conformity with
accounting principles generally accepted in the United States of America
applicable after financial statements are issued for a period which includes the
date of consummation of the business combination.
KPMG LLP
Minneapolis, Minnesota
June 12, 2001
3
VISIONICS CORPORATION AND SUBSIDIARIES
(formerly DIGITAL BIOMETRICS, INC.)
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 and 1999
2000 1999
------------ ------------
ASSETS
Cash and cash equivalents $ 3,623,574 $ 6,302,473
Accounts receivable, less allowance for doubtful accounts of $150,800
and $128,587, respectively 9,779,796 7,713,327
Inventory 3,900,754 2,972,998
Prepaid expenses and other costs 269,088 196,652
Deferred income taxes -- 57,000
------------ ------------
Total current assets 17,573,212 17,242,450
Property and equipment 3,986,750 3,256,022
Less accumulated depreciation and amortization (2,616,184) (1,951,112)
------------ ------------
1,370,566 1,304,910
------------ ------------
Capitalized software costs, net of accumulated amortization of $138,544
and $54,371, respectively 839,430 548,702
Other assets, net of accumulated amortization of $149,284 and
$139,241, respectively 122,595 62,701
------------ ------------
$ 19,905,803 $ 19,158,763
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 2,093,384 $ 1,916,664
Deferred revenue 3,956,270 2,530,939
Other accrued expenses 1,760,280 3,203,327
Current installments of notes payable 15,071 --
Current installments of capital lease obligations 2,017 57,292
------------ ------------
Total current liabilities 7,827,022 7,708,222
Convertible debentures -- 148,097
Notes payable, excluding current installments 28,334 --
Deferred revenue, excluding current portion 511,976 638,889
Capital lease obligations, less current installments 3,540 93,077
Deferred income taxes -- 219,000
------------ ------------
Total liabilities 8,370,872 8,807,285
------------ ------------
Stockholders' equity:
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 23,115,781 and 22,254,479 shares, respectively 231,158 222,545
Additional paid-in capital 52,355,044 50,732,062
Deferred compensation (93,750) (75,500)
Accumulated deficit (40,957,320) (40,527,571)
Accumulated other comprehensive loss (201) (58)
------------ ------------
Total stockholders' equity 11,534,931 10,351,478
------------ ------------
$ 19,905,803 $ 19,158,763
============ ============
See accompanying notes to consolidated financial statements.
4
VISIONICS CORPORATION AND SUBSIDIARIES
(formerly DIGITAL BIOMETRICS, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 2000, 1999 and 1998
2000 1999 1998
------------ ------------ ------------
Revenue:
Live scan identification systems $ 17,866,769 $ 18,214,126 $ 8,078,333
Live scan maintenance 5,073,699 3,726,404 2,625,010
Integral Partners -- 258,720 619,348
FaceIt licenses 1,760,056 1,472,729 980,592
FaceIt services 874,536 1,150,585 911,153
------------ ------------ ------------
Total revenue 25,575,060 24,822,564 13,214,436
------------ ------------ ------------
Cost of revenue:
Live scan identification systems 11,202,458 12,034,849 5,973,043
Live scan maintenance 3,616,927 2,776,740 2,195,703
Integral Partners -- 142,767 348,212
FaceIt licenses 182,030 42,079 12,024
FaceIt services 476,273 259,128 451,071
------------ ------------ ------------
Total cost of revenue 15,477,688 15,255,563 8,980,053
------------ ------------ ------------
Gross margin 10,097,372 9,567,001 4,234,383
------------ ------------ ------------
Operating expenses:
Selling, general and development 11,058,234 9,507,355 9,102,321
Non-recurring charges (note 2) 300,162 -- --
------------ ------------ ------------
Total expenses 11,358,396 9,507,355 9,102,321
------------ ------------ ------------
Income (loss) from operations (1,261,024) 59,646 (4,867,938)
Other income (expense):
Interest and dividend income 363,772 180,381 166,883
Interest expense (8,870) (299,397) (597,430)
Other income (expense) 716 (11,833) (253,830)
------------ ------------ ------------
Total other income (expense) 355,618 (130,849) (684,377)
------------ ------------ ------------
Loss before income taxes (905,406) (71,203) (5,552,315)
Provision for (benefit of) income taxes (37,538) 56,974 (123,000)
------------ ------------ ------------
Net loss $ (867,868) $ (128,177) $ (5,429,315)
============ ============ ============
Net loss per common share $ (0.04) $ (0.01) $ (0.29)
============ ============ ============
Net loss per common share - assuming dilution $ (0.04) $ (0.01) $ (0.29)
============ ============ ============
Weighted average common shares outstanding 22,840,110 21,002,687 18,623,263
============ ============ ============
Weighted average common shares outstanding -
assuming dilution 22,840,110 21,002,687 18,623,263
============ ============ ============
See accompanying notes to consolidated financial statements.
5
VISIONICS CORPORATION AND SUBSIDIARIES
(formerly DIGITAL BIOMETRICS, INC.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
Common Stock Additional Deferred Other
---------------------- Paid-in Comp- Accumulated Comprehensive
Shares Amount Capital ensation Deficit Income (Loss) Total
----------------------------------------------------------------------------------------
Balance September 30, 1997 17,543,300 $ 175,433 $ 42,415,225 $ (73,500) $(34,970,079) $ (1,639) $ 7,545,440
Sale of common stock 1,036,452 10,364 3,592,224 -- -- -- 3,602,588
Restricted stock awards 47,304 473 75,466 (75,939) -- -- --
Amortization of deferred compensation -- -- -- 57,939 -- -- 57,939
Exercise of employee stock options 2,000 20 4,480 -- -- -- 4,500
Stock award for retirement plan 55,963 560 86,883 -- -- -- 87,443
Debt conversions 1,195,527 11,955 858,262 -- -- -- 870,217
Issuance of stock options as payment for
services received -- -- 18,108 -- -- -- 18,108
Issuance of warrants in connection with
convertible debentures -- -- 131,450 -- -- -- 131,450
Intrinsic value of beneficial conversion
feature of convertible debentures -- -- 500,000 -- -- -- 500,000
Change in unrealized loss on marketable
securities -- -- -- -- -- 1,639 1,639
Net loss -- -- -- -- (5,429,315) -- (5,429,315)
------------
Total comprehensive loss (5,427,676)
----------------------------------------------------------------------------------------
Balance September 30, 1998 19,880,546 198,805 47,682,098 (91,500) (40,399,394) -- 7,390,009
Restricted stock awards 43,200 432 53,568 (54,000) -- -- --
Amortization of deferred compensation -- -- -- 70,000 -- -- 70,000
Exercise of stock options and warrants 423,966 4,240 603,359 -- -- -- 607,599
Stock award for retirement plan 87,897 879 119,979 -- -- -- 120,858
Debt conversions 1,123,874 11,239 1,219,743 -- -- -- 1,230,982
Private placements 694,996 6,950 880,581 -- -- -- 887,531
Issuance of stock options and warrants as
payment for services received -- -- 35,134 -- -- -- 35,134
Issuance of warrants in connection with
convertible debentures -- -- 12,600 -- -- -- 12,600
Intrinsic value of beneficial conversion
feature of convertible debentures -- -- 125,000 -- -- -- 125,000
Foreign currency translation adjustment -- -- -- -- -- (58) (58)
Net loss -- -- -- -- (128,177) -- (128,177)
------------
Total comprehensive loss (128,235)
----------------------------------------------------------------------------------------
Balance September 30, 1999 22,254,479 222,545 50,732,062 (75,500) (40,527,571) (58) 10,351,478
Restricted stock awards 10,269 102 76,398 (76,500) -- -- --
Amortization of deferred compensation -- -- -- 58,250 -- -- 58,250
Exercise of stock options and warrants 675,853 6,759 1,191,247 -- -- -- 1,198,006
Stock-based compensation -- -- 18,000 -- -- -- 18,000
Stock award for retirement plan 45,855 459 154,302 -- -- -- 154,761
Debt conversions 116,369 1,164 151,760 -- -- -- 152,924
Issuance of stock, stock options and
warrants as payment for services
received 12,956 129 31,275 -- -- -- 31,404
Foreign currency translation adjustment -- -- -- -- -- (143) (143)
Net loss -- -- -- -- (867,868) -- (867,868)
------------
Total comprehensive loss (868,011)
Adjustment to conform fiscal year end of
pooled acquisition -- -- -- -- 438,119 -- 438,119
----------------------------------------------------------------------------------------
Balance September 30, 2000 23,115,781 $ 231,158 $ 52,355,044 $ (93,750) $(40,957,320) $ (201) $ 11,534,931
========================================================================================
See accompanying notes to consolidated financial statements.
6
VISIONICS CORPORATION AND SUBSIDIARIES
(formerly DIGITAL BIOMETRICS, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2000, 1999 and 1998
2000 1999 1998
------------ ------------ ------------
Cash flows from operating activities:
Net loss $ (867,868) $ (128,177) $ (5,429,315)
Adjustments to reconcile net loss to net cash (used in) provided
by operating activities:
Provision for doubtful accounts receivable 22,213 (157,088) 99,901
Stock-based compensation and other 107,654 105,134 76,047
Depreciation and amortization 802,687 603,899 579,960
Amortization of software development costs 99,290 42,079 12,024
Write-off of intangible assets -- 14,694 76,901
Deferred income taxes (162,000) 45,000 (123,000)
Loss on sale of marketable securities -- -- 189,826
(Gain) loss on disposal and write-off of fixed assets (716) 11,833 51,618
and tooling
Interest expense amortization for the intrinsic value of
the beneficial conversion feature of convertible -- 125,000 500,000
debentures
Interest expense on debentures converted into common 12,350 75,737 25,469
stock
Adjustment to conform fiscal year end of pooled 438,119 -- --
acquisition
Changes in operating assets and liabilities:
Accounts receivable (2,088,682) (3,009,244) 1,196,417
Inventory (927,756) (124,577) (553,828)
Prepaid expenses and other expenses (112,451) (289) (50,965)
Accounts payable and accrued expenses (1,100,566) 1,708,261 525,660
Deferred revenue 1,298,418 2,251,537 240,366
Income taxes payable (11,000) 11,000 --
------------ ------------ ------------
Net cash (used in) provided by operating activities (2,490,308) 1,574,799 (2,582,836)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (862,997) (573,367) (654,834)
Proceeds from disposal of property and equipment 12,794 5,878 1,311
Patents, trademarks, copyrights, licenses and software (427,595) (442,663) (164,598)
Purchase of marketable securities -- -- (3,744,760)
Sales of marketable securities before maturity -- -- 3,711,381
------------ ------------ ------------
Net cash used in investing activities (1,277,798) (1,010,152) (851,500)
------------ ------------ ------------
Cash flows from financing activities:
Net line of credit (payments) advances -- (111,962) 111,962
Proceeds from notes payable 49,142 -- --
Repayment of notes payable (5,737) -- --
Repayment of officers' loan balances -- -- (30,000)
Principal payments on capital lease obligations (152,061) (67,033) (7,212)
Exercise of warrants and stock options 1,198,006 607,599 4,500
Common stock issued in private placements -- 887,531 3,602,588
Issuance of convertible debentures -- 450,111 1,808,800
------------ ------------ ------------
Net cash provided by financing activities 1,089,350 1,766,246 5,490,638
------------ ------------ ------------
Effect of exchange rates on cash (143) (58) --
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents (2,678,899) 2,330,835 2,056,302
Cash and cash equivalents at beginning of year 6,302,473 3,971,638 1,915,336
------------ ------------ ------------
Cash and cash equivalents at end of year $ 3,623,574 $ 6,302,473 $ 3,971,638
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 7,159 $ 65,628 $ 14,147
Cash paid during the year for income taxes 49,000 -- --
============ ============ ============
See accompanying notes to consolidated financial statements.
7
Visionics Corporation and Subsidiaries
(formerly Digital Biometrics, Inc.)
Notes to Consolidated Financial Statements
(1) DESCRIPTION OF BUSINESS
Effective February 16, 2001, Digital Biometrics, Inc. (DBI) merged with
Visionics Corporation. Effective with the merger, DBI changed its name to
Visionics Corporation, (the "Company" or "Visionics"). The accompanying
financial statements reflect the combined results of DBI and Visionics
Corporation under the pooling of interests method of accounting.
The Company is a provider of enabling technology, platforms, products
and systems for biometric identification, with a specific focus on facial
recognition and forensic-quality fingerprint identification.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts
of the Company and its wholly owned subsidiary Visionics Technology Corporation
("VTC") located in New Jersey and its wholly owned British subsidiary, Visionics
Ltd., which commenced operations during 1999. All material intercompany accounts
and transactions have been eliminated in consolidation.
The accompanying financial statements reflect the combined results of
DBI and Visionics Corporation under the pooling of interests method of
accounting. The presentation has the effect of including VTC's and Visionics
Ltd.'s results of operations for the three months ended December 31, 1999 in the
consolidated statements of operations for both the years ended September 30,
2000 and 1999. VTC had revenues of approximately $400,000 and a net loss of
approximately $440,000 for the three months ended December 31, 1999. The fiscal
years ended September 30, 1999 and 1998 for DBI have been combined with the
calendar years of VTC and Visionics Ltd. The Company incurred $300,162 of merger
related expense in the year ended September 30, 2000 which were recorded as
non-recurring charges.
(b) USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America
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.
(c) STATEMENTS OF CASH FLOWS
CASH AND CASH EQUIVALENTS:
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 NON-CASH INVESTING AND FINANCING ACTIVITIES:
Effective with his appointment to the Company's Board of Directors on
December 14, 1999, the Company granted 1,125 shares of restricted common stock
to a non-employee director. The grant resulted in $4,500 in additional common
stock issued and an equal amount of deferred compensation expense that is being
amortized on a straight-line basis over the three-year vesting period.
On December 31, 1999, the Company issued 45,855 shares of common stock
to satisfy the Company's fiscal 2000 discretionary matching to employees
electing participation in the Company's 401(k) retirement plan. On December 31,
1998 and March 16, 1999, the Company issued an aggregate of 87,897 shares of
common stock to satisfy the Company's fiscal 1999 discretionary matching to
employees electing participation in the Company's 401(k) retirement plan. These
issuances increased common stock and additional paid-in capital by $154,761 and
$120,858 for fiscal 2000 and 1999, respectively, and reduced accrued
compensation by the same amount.
8
Visionics Corporation and Subsidiaries
(formerly Digital Biometrics, Inc.)
Notes to Consolidated Financial Statements
Effective with their election at the annual stockholders' meeting held
on February 8, 2000, the Company granted 9,144 shares of restricted common stock
to its non-employee directors. The grant resulted in $72,000 in additional
common stock issued and an equal amount of deferred compensation expense that is
being amortized on a straight-line basis over the three-year vesting period.
Effective with their election at the annual stockholders' meeting held
on March 16, 1999, the Company granted 43,200 shares of restricted common stock
to its non-employee directors. The grant resulted in $54,000 in additional
common stock issued and an equal amount of deferred compensation expense that is
being amortized on a straight-line basis over the three-year vesting period.
Effective with his appointment to the Company's Board of Directors on
February 10, 1998, the Company granted 3,000 shares of restricted common stock
to a non-employee director. The grant resulted in $3,939 in additional common
stock issued and an equal amount of deferred compensation expense that is being
amortized on a straight-line basis over the three-year vesting period.
Effective with their election at the annual stockholders' meeting held
on April 8, 1998, the Company granted 44,304 shares of restricted common stock
to its non-employee directors. The grant resulted in $72,000 in additional
common stock issued and an equal amount of deferred compensation expense that is
being amortized on a straight-line basis over the three-year vesting period.
For the fiscal year ended September 30, 2000, the Company issued
116,369 shares of common stock for the conversion of the remaining principal
aggregating $150,000 of the 1997 Convertible Debentures plus $12,252 of accrued
interest.
For the fiscal year ended September 30, 1999, the Company issued
1,123,874 shares of common stock for the conversion of principal aggregating
$1,250,000 of the 1997 Debentures plus $75,737 of accrued interest.
For the fiscal year ended September 30, 1998, the Company issued
1,195,527 shares of common stock for the conversion of principal aggregating
$1,100,000 of the 1997 Debentures plus $25,469 of accrued interest.
During the fiscal year ended September 30, 1999, the Company acquired
property and equipment in the amount of $69,664 in exchange for capital leases.
During the fiscal year ended September 30, 2000, the Company acquired
property and equipment in the amount of $7,249 in exchange for capital leases.
In March 2000, the Company issued 12,956 shares of common stock for
services provided. Compensation expense in the amount of $8,750 representing the
estimated fair value of common shares issued has been included in the
consolidated statement of operations for the year ended September 30, 2000.
During the year ended September 30, 2000, the Company issued options to
acquire 12,955 shares of the Company's common stock with an exercise price of
$.68 per share for services provided. The Company has recorded compensation
expense in the amount of $3,000 related to the granting of these options for the
year ended September 30, 2000.
During the year ended September 30, 2000, the Company granted a total
of 273,625 options to employees having an exercise price of $1.35 per share when
the estimated fair value of the Company's common stock was $1.95 to $3.09 per
share. Consequently, the Company has recorded compensation expense in the
accompanying consolidated statement of operations for the year ended September
30, 2000 in the amount of $18,000.
9
Visionics Corporation and Subsidiaries
(formerly Digital Biometrics, Inc.)
Notes to Consolidated Financial Statements
(d) CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Research and development costs consist principally of salaries and
benefits paid to the Company's employees in the development of software
products. The Company's policy is to expense all research and development costs
as incurred until technological feasibility is established. Commencing with the
establishment of technological feasibility and concluding at the time the
product is ready for market, software development costs are capitalized.
Technological feasibility is defined as being established when product design
and a working model of the software product has been completed and tested. The
cost of those products that have met the technological feasibility criteria have
been capitalized. Annual amortization of capitalized software development costs
is calculated as the greater of the amount computed using (a) the ratio of
actual revenue from a product to the total of current and anticipated related
revenues from the product or (b) the economic life of the product, estimated to
be five years, on a straight-line basis.
(e) REVENUE RECOGNITION
SOFTWARE LICENSES - Revenues from software licenses are recognized when
all of the following conditions have been satisfied: completion of a written
license arrangement; delivery of the software with no significant post delivery
obligations of the Company; the fee is fixed or determinable; and payment is due
within one year and collection is probable. Revenues from sublicense
arrangements with resellers are recognized upon shipment of the software, if
there are no significant post-delivery obligations, the reseller is
creditworthy, and if the terms of arrangement are such that the payment terms
are not subject to price adjustment, are non-cancelable and non-refundable.
Revenue from sublicensing arrangements with significant post contract customer
support ("PCS") (in excess of one year), including enhancements and upgrades,
where significant vendor specific objective evidence does not exist to allocate
the fee to the software and PCS, are recognized along with the PCS ratably over
the period during which PCS is expected to be provided. Revenues from consulting
services are recognized as work is performed.
EQUIPMENT - Revenues from product sales are recognized upon shipment,
installation, or acceptance, based on the particular product and contract terms.
Revenues for professional and systems integration services are recognized using
the percentage of completion method, completed contract method 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.
(f) FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the foreign subsidiary are translated at the
exchange rate in effect at the balance sheet date. Revenues, costs, and expenses
are translated using an average exchange rate. Gains and losses resulting from
translation are accumulated as a separate component of accumulated other
comprehensive loss in stockholders' equity. Gains and losses resulting from
foreign currency transactions are included in the consolidated statements of
operations.
(g) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation of property and
equipment is computed using the double-declining balance and straight-line
methods over the estimated useful lives of the assets, generally 3 to 7 years.
Leasehold improvements are amortized over the shorter of the estimated useful
life of the assets or the term of the lease. Expenditures for major renewals or
betterments that extend the useful lives of equipment are capitalized.
Expenditures for maintenance and repairs are charged to expense as incurred.
(h) PATENTS, TRADEMARKS, COPYRIGHTS AND LICENSES
Costs associated with patents, trademarks and copyrights are
capitalized and amortized over 60 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 36 months or
the life of the license,
10
Visionics Corporation and Subsidiaries
(formerly Digital Biometrics, Inc.)
Notes to Consolidated Financial Statements
whichever is shorter. Accumulated amortization at September 30, 2000 and 1999
was $82,501 and $73,019, respectively. The Company recorded a charge to
operations in 1999 of $14,694 for patents which were abandoned. 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.
(i) LONG-LIVED ASSETS
The Company reviews its long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to future net undiscounted cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to sell.
(j) WARRANTY COSTS
Estimated product warranty costs are accrued when shipments are
recognized as revenue.
(k) ADVERTISING COSTS
Advertising costs are expensed as incurred and aggregated $36,000,
$26,000 and $0, respectively, for the years ended September 30, 2000, 1999 and
1998.
(l) ENGINEERING AND DEVELOPMENT ARRANGEMENTS
Engineering and development costs are expensed as incurred. Engineering
and development expenses for fiscal 2000 and 1999 are net of approximately
$495,000 and $384,000, respectively of costs related to a federally funded
demonstration project grant administered by Hennepin County of Minnesota.
(m) LOSS PER SHARE
Basic loss per share excludes dilution and is computed by dividing the
net loss by the weighted average number of common shares outstanding during the
period. Diluted loss per share includes dilutive stock options and warrants
determined by the treasury stock method and dilutive convertible securities.
(n) INCOME TAXES
The Company has adopted the asset and liability method of accounting
for income taxes. Deferred tax assets and liabilities are recognized for the
expected future tax consequences of temporary differences between the financial
statement carrying amount and tax basis of assets and liabilities. The Company
provides for deferred taxes at the enacted tax rate that is expected to apply
when the temporary differences reverse.
(o) STOCK-BASED COMPENSATION
The Company has adopted the intrinsic-value method for determining the
amount of compensation to be recorded for employee stock grants and the fair
value method for determining the amount of compensation to be recorded for
non-employee grants. Pro forma disclosures of net loss and loss per share are
presented as if the fair-value method had been applied in measuring compensation
cost for employee stock grants.
11
Visionics Corporation and Subsidiaries
(formerly Digital Biometrics, Inc.)
Notes to Consolidated Financial Statements
(p) SEGMENTS OF AN ENTERPRISE
The Company operates in one business segment: the identification
information systems segment.
(q) NEW ACCOUNTING PRONOUNCEMENTS
During 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
which establishes new standards for recognizing all derivatives as either assets
or liabilities, and measuring those instruments at fair value. SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133," changed the effective date to fiscal
years beginning after June 15, 2000. There was no impact on the Company's
financial statements with the adoption of this standard in the quarter ended
December 31, 2000.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101") which provides the staff's views in
applying generally accepted accounting principles to selected revenue
recognition issues. In October 2000, the SEC provided interpretive guidance for
SAB 101. Effective October 1, 2000 the Company adopted the new standard and
changed its method of accounting for certain identification systems revenue.
Since most of the equipment the Company sells includes installation provided by
the Company, under SAB 101, a significant portion of revenue recognition is
deferred until installation, particularly where the equipment is integrated to
an outside network. Prior to October 1, 2000 the Company generally recognized
product revenue on the date of shipment for orders which were f.o.b. origin and
upon delivery for f.o.b. destination. The Company recorded a $1,436,000
cumulative effect of an accounting change in the three-month period ended
December 31, 2000 with the adoption of SAB 101. Under this accounting change,
$3,890,000 of revenue recorded in periods prior to October 1, 2000 will be
recorded as revenue again as the equipment is installed.
(3) SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK
The Company extends credit to substantially all of its customers.
Approximately 93% and 90%, respectively, of customer accounts receivable at
September 30, 2000 and 1999 were from government agencies, of which 33% was from
one customer at September 30, 2000 and 53% from two customers at September 30,
1999. For the years ended September 30, 2000, 1999 and 1998, sales to two
customers in 2000 accounted for 32%, sales to two customers in 1999 accounted
for 38%, and sales to 2 customers in 1998 accounted for 24%, respectively, of
annual sales. Export revenues were less than 1%, 4% and 8% of total revenues,
for the years ended September 30, 2000, 1999 and 1998, respectively.
Accounts receivable at September 30, 2000 and 1999 include $850,568 and
$383,878, respectively, of costs in excess of billings under a federal
government funded development project administered by Hennepin County of
Minnesota.
(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:
September 30, September 30,
2000 1999
------------- -------------
Components and subassemblies $3,210,121 $2,307,600
Work in process 217,211 434,714
Finished goods 473,422 230,684
------------- -------------
$3,900,754 $2,972,998
============= =============
12
Visionics Corporation and Subsidiaries
(formerly Digital Biometrics, Inc.)
Notes to Consolidated Financial Statements
(5) PROPERTY AND EQUIPMENT
Property and equipment, including equipment under capital lease, is
comprised of the following:
September 30,
2000 1999
------------- -------------
Leasehold improvements $ 295,220 $ 284,661
Office furniture and equipment 1,763,470 1,477,772
Manufacturing equipment and
tooling 493,376 457,211
Customer service equipment 605,254 379,156
Engineering equipment 774,648 657,222
Vehicles 54,782 --
------------- -------------
$3,986,750 $3,256,022
============= =============
(6) CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Capitalized software development costs consist of the following:
September 30,
2000 1999
------------- -------------
Capitalized software development
costs $ 977,973 $ 603,073
Less: accumulated depreciation (138,543) (54,371)
------------- -------------
$ 839,430 $ 548,702
============= =============
Amortization of capitalized software development costs in the amount of
$99,290 and $42,079 for the years ended September 30, 2000 and 1999,
respectively, is included in costs of license in the accompanying consolidated
statements of operations.
(7) NOTES PAYABLE
Notes payable at September 30, 2000 in the amount of $43,405 consists
of amounts due pursuant to the financing of certain vehicles owned by the
Company. The notes are payable over a three-year period in monthly installments
of approximately $1,650 including interest at rate per annum of 12% to 13%.
Aggregate principal maturities of the notes for the years ending September 30
are as follows: 2001 - $15,071; 2002 - $17,090; and 2003 - $11,244.
(8) LINE OF CREDIT
The Company has an inventory and receivables financing line of credit
for the lesser of eligible inventory and receivables or $2,000,000. 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 June, 2001. There were no borrowings under this line at
September 30, 2000.
13
Visionics Corporation and Subsidiaries
(formerly Digital Biometrics, Inc.)
Notes to Consolidated Financial Statements
(9) OTHER ACCRUED EXPENSES
Other accrued expenses consists of:
September 30, September 30,
2000 1999
------------- -------------
Accrued salaries, bonuses and
commissions $ 343,958 $ 773,106
Accrued vacation 306,955 195,757
Accrued installation costs 480,500 1,107,200
Accrued warranty costs 301,570 745,104
Other accrued expenses 327,297 382,160
------------- -------------
$1,760,280 $3,203,327
============= =============
(10) CONVERTIBLE DEBENTURES
On December 1, 1997 the Company entered into a convertible subordinated
debenture purchase agreement ("Purchase Agreement") with a private investor,
providing for the Company's issuance and sale of up to an aggregate of
$2,500,000 of 8% Convertible Subordinated Debentures (the "1997 Debentures") in
tranches of $500,000 each. In connection with the Purchase Agreement, the
Company has issued to the purchaser of the debentures warrants to purchase
75,000 shares of common stock at $2.50 per share. Net proceeds to the Company
were used for working capital, business development and other general corporate
purposes.
During fiscal 1998, the Company issued 1,195,527 shares of common stock
for the conversion of principal aggregating $1,100,000 of the 1997 Debentures
plus $25,469 of accrued interest at an average conversion price of $0.94 per
share. The intrinsic value of the beneficial conversion feature aggregated
$500,000 for fiscal 1998 and has been recorded as additional paid-in capital and
interest expense.
During fiscal 1999, the Company issued 1,123,874 shares of common stock
for the conversion of principal aggregating $1,250,000 of the 1997 Convertible
Debentures plus $75,737 of accrued interest at an average conversion price of
$1.18 per share. The intrinsic value of the beneficial conversion feature
aggregated $125,000 for fiscal 1999 and has been recorded as additional paid-in
capital and interest expense.
During fiscal 2000, the Company issued 116,369 shares of common stock
for the conversion of the remaining principal aggregating $150,000 of the 1997
Convertible Debentures plus $12,252 of accrued interest at an average conversion
price of $1.39 per share.
(11) STOCKHOLDERS' EQUITY
FISCAL YEAR ENDING SEPTEMBER 30, 1998
Effective with his appointment to the Company's Board of Directors on
February 10, 1998, the Company granted 3,000 shares of restricted common stock
to a non-employee director. The grant resulted in $3,939 in additional common
stock issued and an equal amount of compensation.
Effective with their election at the annual stockholders' meeting held
on April 8, 1998, the Company granted 44,304 shares of restricted common stock
to its non-employee directors. The grant resulted in $72,000 in additional
common stock issued and an equal amount of deferred compensation expense that is
being amortized on a straight-line basis over the three-year vesting period.
For the fiscal year ended September 30, 1998, the Company issued
1,195,527 shares of common stock for the conversion of principal aggregating
$1,100,000 of the 1997 Debentures plus $25,469 of accrued interest.
14
Visionics Corporation and Subsidiaries
(formerly Digital Biometrics, Inc.)
Notes to Consolidated Financial Statements
During January 1998, the Company sold 1,036,452 shares of common stock
for cash to one shareholder in a private placement for net proceeds of
$3,602,588.
FISCAL YEAR ENDING SEPTEMBER 30, 1999
Effective with their election at the annual stockholders' meeting held
on March 16, 1999, the Company granted 43,200 shares of restricted common stock
to its non-employee directors. The grant resulted in $54,000 in additional
common stock issued and an equal amount of deferred compensation expense that is
being amortized on a straight-line basis over the three-year vesting period.
On December 31, 1998 and March 16, 1999, the Company issued an
aggregate of 87,897 shares of common stock to satisfy the Company's fiscal 1999
discretionary matching to employees electing participation in the Company's
401(k) retirement plan. The issuance increased common stock and additional
paid-in capital by $120,858 for fiscal 1999 and reduced accrued compensation by
the same amount.
For the fiscal year ended September 30, 1999, the Company issued
1,123,874 shares of common stock for the conversion of principal aggregating
$1,250,000 of the 1997 Debentures plus $75,737 of accrued interest.
FISCAL YEAR ENDING SEPTEMBER 30, 2000
Effective with his appointment to the Company's Board of Directors on
December 14, 1999, the Company granted 1,125 shares of restricted common stock
to a non-employee director. The grant resulted in $4,500 in additional common
stock issued and an equal amount of deferred compensation expense that is being
amortized on a straight-line basis over the three-year vesting period.
Effective with their election at the annual stockholders' meeting held
on February 8, 2000, the Company granted 9,144 shares of restricted common stock
to its non-employee directors. The grant resulted in $72,000 in additional
common stock issued and an equal amount of deferred compensation expense that is
being amortized on a straight-line basis over the three-year vesting period.
On December 31, 1999, the Company issued 45,855 shares of common stock
to satisfy the Company's fiscal 2000 discretionary matching to employees
electing participation in the Company's 401(k) retirement plan. The issuance
increased common stock and additional paid-in capital by $154,761 for fiscal
2000 and reduced accrued compensation by the same amount.
In March 2000, the Company issued 12,956 shares of common stock for
services provided. Compensation expense in the amount of $8,750 representing the
estimated fair value of common shares issued has been included in the
consolidated statement of operations for the year ended September 30, 2000.
For the fiscal year ended September 30, 2000, the Company issued
116,369 shares of common stock for the conversion of the remaining principal
aggregating $150,000 of the 1997 Convertible Debentures plus $12,252 of accrued
interest.
SHAREHOLDER RIGHTS PLAN
In May 1996, the Board of Directors adopted a shareholder rights plan.
The shareholder rights plan is designed to enable the Company and its Board of
Directors to develop and preserve long-term value for stockholders and to
protect stockholders in the event an attempt is made to acquire control of the
Company without an offer of fair value to all stockholders. Under the
shareholder rights plan, each stockholder of record beginning at the close of
business on May 22, 1996, will receive as a dividend one right for each share of
Visionics common stock held. The rights expire on April 30, 2006.
15
Visionics Corporation and Subsidiaries
(formerly Digital Biometrics, Inc.)
Notes to Consolidated Financial Statements
STOCK OPTIONS
In order to attract and retain employees and directors, while
preserving cash resources, the Company has, since its inception, utilized stock
option awards issued through various stock option plans and employment
arrangements. All of VTC's stock options and related exercise prices have been
converted to the appropriate number of Digital Biometrics, Inc. shares and
exercise prices and are reflected in the footnotes and tables that follow.
As of September 30, 2000, options to purchase 3,435,252 shares of
common stock were issued and outstanding to employees and directors and options
to purchase 25,000 shares were issued and outstanding to a contractor. Of these
grants, 1,349,362 shares were exercisable at September 30, 2000.
During fiscal 2000, 1999 and 1998, the Company granted options to
acquire an aggregate of 12,956, 25,000 and 45,000, respectively, to
non-employees and recorded non-cash expense of $22,654, $15,134 and $18,108,
respectively, in each fiscal year.
Details of the status of stock options as of and for each of the years
the three-year period ended September 30, 2000 are shown in the table below:
Shares Weighted-
Under Average
Option Price Range Exercise Price
------------- --------------- ----------------
Unexercised options outstanding -
September 30, 1997 1,182,500 $1.56 - 14.75 $3.21
Options granted 1,248,136 0.19 - 2.56 1.63
Options exercised (2,000) 2.25 2.25
Options forfeited (239,584) 0.19 - 14.75 6.43
- -------------------------------------------------------------------------------------------------------
Unexercised options outstanding -
September 30, 1998 2,189,052 0.19 - 13.63 1.96
Options granted 606,316 0.68 - 2.94 1.30
Options exercised (144,551) 0.19 - 2.06 1.76
Options forfeited (377,125) 0.29 - 13.63 1.94
- -------------------------------------------------------------------------------------------------------
Unexercised options outstanding -
September 30, 1999 2,273,692 0.19 - 9.50 1.80
Options granted 1,657,962 0.68 - 7.88 3.11
Options exercised (282,790) 0.19 - 2.56 1.72
Options forfeited (188,620) 0.19 - 1.25 1.29
- -------------------------------------------------------------------------------------------------------
Unexercised options outstanding -
September 30, 2000 3,460,244 $0.19 - 9.50 $2.47
============
At September 30, 2000, the weighted average exercise price and weighted
average remaining contractual life of outstanding options was $2.47 and 7.24
years, respectively.
16
Visionics Corporation and Subsidiaries
(formerly Digital Biometrics, Inc.)
Notes to Consolidated Financial Statements
The following table summarizes information with respect to options
outstanding and exercisable as of September 30, 2000:
Options Outstanding Options Exercisable
--------------------------------------- ----------------------------------------
Weighted Weighted
Average Weighted Average Weighted
Remaining Average Remaining Average
Range of Number of Contractual Exercise Number of Contractual Exercise
Exercise Prices Shares Life (years) Price Shares Life (years) Price
---------------------------------------------------------- ----------------------------------------
$0.00 - $0.99 590,645 8.67 $ 0.64 155,792 8.11 $ 0.61
$1.00 - $1.99 1,208,163 7.36 1.67 547,205 6.54 1.76
$2.00 - $2.99 653,436 6.59 2.24 610,103 6.51 2.21
$3.00 - $3.99 244,250 7.68 3.40 40,000 6.08 3.13
$4.00 - $4.99 564,750 6.55 4.49 - - -
Over $5.00 199,000 5.87 6.58 7,500 1.38 9.50
--------------------------------------- ----------------------------------------
3,460,244 7.24 $ 2.47 1,360,600 6.66 $ 1.91
======================================= ========================================
The Company applies APB Opinion No. 25 in accounting for options
granted to employees and directors under its stock option plans and,
accordingly, no compensation cost has been recognized for its stock options
granted to its employees or directors in the financial statements. Had the
Company determined compensation cost based on the fair value at the grant date
for its stock options under SFAS No. 123, the Company's net loss would have
changed to the pro forma amounts indicated below:
2000 1999 1998
----------------------------------------------------
Net loss - as reported $ 867,868 $ 128,177 $ 5,429,315
Net loss - pro forma $ 2,212,954 $ 788,627 $ 6,174,321
Net loss per share - as reported $ 0.04 $ 0.01 $ 0.29
Net loss per share - pro forma $ 0.10 $ 0.04 $ 0.33
Principal assumptions used in applying the option valuation model were
as follows:
2000 1999 1998
----------------------------------------------------
Risk-free interest rate 5.00-6.00% 5.00-5.20% 4.50-5.00%
Expected life, in years 5-10 5-10 5-10
Expected volatility (DBI only) 89% 138% 83%
Expected volatility (Visionics only) 80% 0% 0%
Expected dividend yield 0% 0% 0%
WARRANTS
The Company has warrants outstanding at September 30, 2000, for the
purchase of 585,017 shares of its common stock. All the warrants are exercisable
and expire at various times through March 29, 2004. The exercise prices per
share range from $1.31 to $2.60.
(12) PRIVATE PLACEMENTS
On January 8, 1999 the Company closed on a private placement offering
of common stock and warrants. A total of 422,219 shares were sold to accredited
investors at a price of $1.6579 each with total net proceeds to the Company of
approximately $600,000. Warrants to purchase up to an aggregate of 422,219
17
Visionics Corporation and Subsidiaries
(formerly Digital Biometrics, Inc.)
Notes to Consolidated Financial Statements
shares at an exercise price of $1.6579 per share were granted to the purchasers
for no additional consideration. The Company issued an additional warrant to
purchase up to 42,222 shares of common stock at an exercise price of $1.6728 per
share to an investment-banking firm as partial compensation for services
rendered in the private placement.
On March 31, 1999 the Company closed on a private placement offering of
common stock and warrants. A total of 272,777 shares were sold to accredited
investors at a price of $1.3138 each with total net proceeds to the Company of
approximately $300,000. Warrants to purchase up to an aggregate of 272,777
shares at an exercise price of $1.3138 per share were granted to the purchasers
for no additional consideration. The Company issued an additional warrant to
purchase up to 27,278 shares of common stock at an exercise price of $1.3269 per
share to an investment-banking firm as partial compensation for services
rendered in the private placement.
(13) INCOME TAXES
Income tax expense (benefit) attributable to loss from operations
consists of the following:
Years ended September 30,
--------------------------------------------------------
2000 1999 1998
---------------- --------------- ---------------
Current:
Federal $ (54,643) $ 11,974 $ --
State (15,895) -- --
Foreign 33,000 -- --
---------------- --------------- ---------------
(37,538) 11,974 --
---------------- --------------- ---------------
Deferred:
Federal -- 63,000 (95,000)
State -- (18,000) (28,000)
---------------- --------------- ---------------
-- 45,000 (123,000)
---------------- --------------- ---------------
Total income tax expense (benefit) $ (37,538) $ 56,974 $ (123,000)
================ =============== ===============
The income tax expense (benefit) differed from the amount computed by
applying the U.S. federal income tax rate of 34% to loss before income taxes as
a result of the following:
Years ended September 30,
----------------------------------------------------------
2000 1999 1998
---------------- --------------- -----------------
Computed "expected" tax benefit $ (307,838) $ (24,209) $ (1,887,787)
State income tax, net of federal benefit (52,393) (4,167) (332,706)
Change in valuation allowance 549,689 149,300 2,140,700
Foreign withholding tax 33,000 -- --
Foreign tax credit available (33,000) -- --
Research and development tax credit available (175,000) (148,170) (139,140)
Other (51,996) 84,220 95,933
---------------- --------------- -----------------
$ (37,538) $ 56,974 $ (123,000)
================ =============== =================
18
Visionics Corporation and Subsidiaries
(formerly Digital Biometrics, Inc.)
Notes to Consolidated Financial Statements
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities as of September 30, 2000 and
September 30, 1999 is presented below:
2000 1999
------------------ ------------------
Deferred tax assets:
Net operating loss carryforward $ 14,725,116 $ 13,840,000
Capital loss carryforward 75,291 --
Tax credits 1,230,000 1,055,000
Accounts payable and accrued expenses 377,841 423,800
Deferred revenue 329,904 339,000
Accounts receivable allowance 50,000 52,000
Inventory capitalization 47,000 36,000
Other 411,000 571,000
------------------ ------------------
Total gross deferred tax assets 17,246,152 16,316,800
Valuation allowance (16,690,689) (16,141,000)
------------------ ------------------
Net deferred tax assets 555,463 175,800
------------------ ------------------
Deferred tax liabilities:
Accounts receivable 204,188 118,800
Capitalized software development costs 335,268 219,000
Depreciation and amortization 16,007
------------------ ------------------
Total gross deferred tax liabilities 555,463 337,800
------------------ ------------------
Net deferred tax asset (liability) $ -- $ (162,000)
================== ==================
The change in the valuation allowance for the years ended September 30,
2000, 1999 and 1998 is as follows:
2000 1999 1998
----------------- ----------------- -----------------
Balance at beginning of year $16,141,000 $15,991,700 $13,851,000
Change in valuation allowance 549,689 149,300 2,140,700
----------------- ----------------- -----------------
$16,690,689 $16,141,000 $15,991,700
================= ================= =================
Based on the level of historical taxable income and projections for
future taxable income over the periods in which the deferred tax assets are
deductible, management does not believe that it is more likely than not the
Company will realize the full benefits of these deductible differences.
Accordingly, the Company has provided a valuation allowance against the net
deferred tax assets as of September 30, 2000 and September 30, 1999. As of
September 30, 2000, the Company has reported net operating loss carryforwards,
research and development tax credits and foreign tax credits of approximately
$36,789,000, $1,197,000 and $33,000, respectively. These carryforwards expire at
various times through year 2020.
The aforementioned carryforwards are subject to the limitation
provisions of Internal Revenue Code sections 382 and 383. These sections provide
limitations on the availability of net operating losses and credits to offset
current taxable income and related income taxes when an ownership change has
occurred. The Company's initial public offering in December 1990 resulted in an
ownership change pursuant to these provisions and, accordingly, the use of
approximately $3,300,000 of the above carryforwards is subject to an annual
limitation, estimated at $350,000. At this time the remaining NOL limitation
with respect to the 1990 ownership change is approximately $375,000. Any future
ownership change could create a limitation with respect to loss carryforwards
not currently subject to an annual limitation. Approximately $2,770,000 of the
$36,789,000 net operating loss carryforwards relates to compensation associated
with the exercise of non-qualified stock options which, when realized, would
result in approximately $1,108,000 credited to additional paid-in capital.
19
Visionics Corporation and Subsidiaries
(formerly Digital Biometrics, Inc.)
Notes to Consolidated Financial Statements
(14) LEASES
The Company is obligated under a capital lease for certain equipment
that expires in 2003. At September 30, 2000, the gross amount of property and
equipment and related accumulated amortization recorded under this capital lease
was $7,249 and $2,645, respectively. Amortization of assets held under capital
leases is included with depreciation expense.
Future minimum lease payments under non-cancelable operating leases
(with initial or remaining lease terms in excess of one year) and future minimum
capital lease payments as of September 30, 2000 are as follows:
Capital Operating
Year ending September 30 leases leases
-------------------------------------------------------------------------------------------------
2001 $ 2,844 $ 1,085,719
2002 2,844 1,298,236
2003 1,185 1,278,198
2004 -- 1,227,389
Thereafter -- 4,228,753
-------------------------------
Total minimum lease payments 6,873 $ 9,118,295
================
Less amount representing interest (at 17.7%) 1,316
--------------
Present value of net minimum capital lease payments 5,557
Less current installments of obligations under capital lease 2,017
--------------
Obligations under capital lease, excluding current installments $ 3,540
==============
On October 6, 2000, the Company amended its lease for office space in
Jersey City, New Jersey to provide for additional space and to extend its lease
term. As a result of this amendment, office rent expense will increase from
approximately $186,000 per year to approximately $240,000 per year, commencing
on June 1, 2001 through May 31, 2006. The additional increase in rent expense
has been included in the table above.
The Company leases its primary office and production facility in
Minnetonka, Minnesota, under an operating lease that expires in March 2008. The
lease was amended on November 21, 2000 to provided for additional space
commencing on April 1, 2001. Annual base rent under the lease agreement
increases from approximately $423,000 to $620,000 over the term of the lease and
is included in the table above. In addition, the Company is obligated to pay a
pro rata share for property taxes, maintenance and other operating expenses
which is also included in the table above.
The Company leases a facility in Maple Grove, Minnesota under an
operating lease that expires in June 2003. Annual base rent under the lease
agreement is approximately $77,200 and the Company is obligated to pay a pro
rata share for property taxes, maintenance and other operating expenses. The
Company subleases this office space to another company.
The Company leases a sales and service office in Ontario, California
under an operating lease that expires in May 2002. Annual base rent under the
lease agreement is approximately $57,100.
The Company leases general office equipment under operating leases that
expire at various times through August 2003.
20
Visionics Corporation and Subsidiaries
(formerly Digital Biometrics, Inc.)
Notes to Consolidated Financial Statements
Rent expense under these leases for the years ended September 30, 2000,
1999 and 1998 amounted to $856,790, $634,545 and $515,288, respectively. The
office space leases provide for escalations based upon the general operating
costs incurred by the lessor. Each lease is renewable for defined periods at the
"Market Value Rent" at the time of renewal.
(15) CONTINGENCIES
The Company is involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.
(16) JOINT VENTURE WITH LAKES GAMING, INC.
On March 16, 1998, the Company entered into an agreement with Lakes
Gaming, Inc., formerly Grand Casinos, Inc., forming a joint venture company
named TRAK 21 Development, LLC, to productize, test and market the TRAK-21
blackjack table wagering data capture and player tracking system. Deployment of
test systems based on TRAK-21 technology was initiated in fiscal 1999. The
Company's initial membership interest in the joint venture is 51%. The Company
has adopted the equity method of accounting for the investment. The Company has
no additional responsibility to fund the LLC. No loss from the joint venture was
recorded on the Company's consolidated statements of operations for the years
ended September 30, 2000 and 1999 since the Company is not required to and did
not provide additional funding to the LLC since 1998. For the year ended
September 30, 1998, the Company's loss from the joint venture was limited to the
historical carrying amount of its investment of $13,700 and was recorded as
"other expense" in the fiscal 1998 consolidated statements of operations.
(17) RETIREMENT PLAN
The Company currently sponsors two profit sharing and savings plans.
One plan is for the original Digital Biometrics, Inc. ("the Company") employees
and the other is for the original Visionics Corporation ("the Subsidiary")
employees.
Effective January 1, 1992, the Company adopted a profit sharing and
savings plan classified as a defined contribution plan and qualifying under
Section 401(k) of the Internal Revenue Code. The Retirement Plan allows
employees to defer a portion of their annual compensation through pre-tax
contributions to the Retirement Plan. At the discretion of the Board of
Directors, the Company may make matching contributions up to an amount equal to
50% of the contributions made by each employee, subject to a maximum
contribution for each employee of 5% of compensation. The Board may also make
other discretionary contributions to the Retirement Plan.
The Subsidiary sponsors a 401(k) profit sharing plan. Employees are
eligible to participate after three months of employment and having obtained age
21. At its discretion, the Subsidiary may make contributions which are allocated
to eligible participants. Participants are fully vested in all amounts credited
to their account. Participants may borrow against their accounts to a maximum of
$50,000 or one-half of their vested aggregate account. Subsidiary contributions
for the years ended September 30, 2000, 1999 and 1998 were $64,997, $52,612 and
$20,000, respectively.
Matching contributions at September 30, 2000 and 1999 resulted in
accrued compensation expense of $192,806 and $126,938 for the Company,
respectively. Matching contributions have been paid through the issuance of
Company common stock. For the years ended September 30, 2000, 1999 and 1998, the
Company and Subsidiary combined incurred $285,626, $190,557 and $124,264
respectively, of expense related to this plan.
21
VISIONICS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Visionics Corporation is a provider of identification technologies and
systems that employ "biometric" technology, which is the science of identifying
individuals by measuring distinguishing biological characteristics. Through its
respective business lines - FaceIt, live scan, IBIS and BNP- the Company
delivers enabling technology, platforms, products and systems for biometric
identification, with a specific focus on facial recognition and forensic-quality
fingerprint identification.
The FaceIt technology enables a broad range of products and
applications built by partners (original equipment manufacturers "OEMs", value
added resellers "VARs" and system integrators). These include enhanced CCTV
systems, identity fraud applications and authentication systems for information
security, access control, travel, banking and e-commerce. The Company's FaceIt
technology product offerings include software development toolkits, run-time
licenses and application software. Among the Company's FaceIt technology
partners are Polaroid, IBM, Innoventry (joint venture of Wells Fargo Bank and
Cash America), and EDS.
The TENPRINTER(R) and FingerPrinter CMS live scan systems are used by
government agencies, law enforcement, airports, banks and other commercial
institutions in the U.S. to identify suspects and manage information on
individuals, and help commercial employers and government agencies to conduct
background checks on applicants for employment or permits. 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. Visionics
continues to expand this line of business 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 U.S. Postal Service; local
and state police; United States armed forces; school districts; financial
institutions; utilities; and casinos.
The IBIS is a mobile identification system that combines expertise in
biometric capture and connectivity. The system is capable of capturing both
forensic quality fingerprints and photographs for transmission to law
enforcement and other legacy databases. IBIS is comprised of software tools,
multi-media data storage and communications servers, and the systems integration
and software development services that are required to implement identification
management systems.
The BNP, or Biometric Network Platform, is a technology framework for
building scalable biometric solutions. It consists of network ready elements -
hardware components, called Biometric Network Appliances (BNA)s, programming
logic for connecting the BNAs to each other or to standard security and
information systems, and an enabling biometric technology whose functionalities
are encapsulated in the BNA components. The core enabling biometric technology
for the BNP is Visionics' FaceIt engine, however, the platform will support
other biometrics including fingerprint. By combining the different BNAs with
application-specific business logic, a wide range of scalable solutions - such
as large database searching, surveillance and enterprise security - can be
easily built.
Visionics 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 Visionics. This system is intended to track the betting
activity of casino patrons playing blackjack.
22
Results of Operations
Effective February 16, 2001, Digital Biometrics, Inc. (DBI) merged with
Visionics Corporation ("Subsidiary" or "VTC"). Effective with the merger, DBI
changed its name to Visionics Corporation, (the "Company" or "Visionics"). The
accompanying financial statements reflect the combined results of DBI and
Visionics Corporation under the pooling of interests method of accounting. The
presentation has the effect of including Subsidiary's results of operations for
the three months ended December 31, 1999 in the consolidated statements of
operations for both the years ended September 30, 2000 and 1999. VTC had
revenues of approximately $400,000 and a net loss of approximately $440,000 for
the three months ended December 31, 1999. The fiscal years ended September 30,
1999 and 1998 for DBI have been combined with the calendar years of VTC and
Visionics Ltd.
FISCAL 2000 COMPARED TO FISCAL 1999
Total revenue in 2000 of $25,575,000 increased 3% from 1999 revenue of
$24,823,000. The increase in total revenue was due primarily to a 36% increase
in live scan maintenance revenue and a 20% increase in FaceIt licenses revenue,
partially offset by a decrease in the number of live scan systems sold and a 24%
decline in FaceIt services revenue. The decrease in live scan identification
systems revenue to $17,867,000 in 2000 from $18,214,000 in 1999 resulted from a
decrease in the number of live scan systems sold, partially offset by an
increase in integration and professional services revenue including custom
software development. Live scan maintenance revenue increased to $5,074,000 in
2000 from $3,726,000 in 1999, due primarily to a larger installed base of live
scan systems covered by maintenance agreements and, to a lesser extent,
increases in contract renewal rates. The growth in FaceIt licenses revenue to
$1,760,000 in 2000 from $1,473,000 in 2000 is a result of the Company's larger
product offering and expanding customer base. FaceIt services revenue in 1999 of
$1,151,000 benefited from a large contract to assist a commercial customer with
developing an application encapsulating the Company's technology. There was not
a similarly large commercial contract in fiscal 2000 resulting in FaceIt
services revenue decreasing to $875,000 as compared to the prior year period.
Revenue from two customers in 2000 accounted for 32% of total revenue.
Revenue from two customers in 1999 accounted for 38% of total revenue.
Total gross margins for 2000 and 1999 were 39% of revenue.
Gross margins on live scan identification systems revenue were 37% in 2000
compared to 34% in 1999. This improvement is due primarily to lower levels of
warranty and installation costs resulting from a favorable negotiation
pertaining to a customer contract requirement, economies of scale of
infrastructure costs and a favorable geographical concentration of systems. The
favorable contract negotiation and improved efficiencies resulted in a $421,000
reduction of the estimated accrued costs at September 30, 1999.
Live scan maintenance margins for 2000 and 1999 were 29% and 25% of
maintenance and support revenue, respectively. The improvement in maintenance
margins is due mainly to a 36% increase in maintenance revenue from the larger
installed base and, to a lesser extent, reduced costs resulting from the
establishment of regional customer service operations, and $150,000 of accrued
costs in the prior year to implement Year 2000 compliant software for customers
with maintenance contracts.
FaceIt licenses margin decreased to 90% in 2000 from 97% in 1999 due
primarily to an increase in amortization of software development costs.
Gross margin on FaceIt services decreased to 46% in 2000 from 77% in 1999
due primarily to the decrease in commercial services revenues which carried a
higher margin the earlier year.
Management believes gross margins in future years will be at or above
historical levels.
Sales, general and development expenses for 2000 and 1999 were 43% and 38%,
respectively, of total revenue. The increase in sales, general and development
expenses is due primarily to an increase in personnel-related costs, new product
development costs and promotional activities for new products, partially offset
by a decrease in engineering expenses associated with Integral Partners, Inc.
and an increase in billable professional services. Throughout 1999 and 2000, the
Company continued increasing its staffing levels to establish its business
partnerships, its marketing channels and pursue market opportunities. Sales and
marketing expenses for fiscal 1999 are net of a $157,000 allowance for doubtful
accounts reserve adjustment as a result of improved accounts receivable
collections. Engineering expenses for the years ending September 30, 2000 and
1999 are net of $495,000 and $384,000, respectively, of costs related to a
federal government funded demonstration project grant. The Company expects an
increase in absolute dollars for sales, general and development expenses in
future years.
23
Non-recurring charges in fiscal 2000 include $300,000 of legal and other
professional services costs associated with the merger transaction with
Subsidiary. The Company expects merger-related costs for the transaction in
fiscal 2001 to range between $2,000,000 and $2,200,000.
Interest and dividend income increased to $364,000 in fiscal 2000 from
$180,000 in fiscal 1999 due to higher average cash balances . Interest expense
decreased to $9,000 in fiscal 2000 from $299,000 in fiscal 1999 primarily due to
a $125,000 non-cash charge during the prior year 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.
Income tax benefit of $38,000 for fiscal 2000 compares to a provision for
income taxes of $57,000 in fiscal 1999. This reduction in income taxes is due
primarily to the increased loss in fiscal 2000. The income tax benefit is low in
relationship to the Company's loss before income taxes because the Company is in
a net operating loss carryforward position for tax purposes.
The Company generated net loss for fiscal 2000 of $868,000, or $.04 loss
per share, as compared to a net loss of $128,000, or $.01 loss per share, for
fiscal 1999.
FISCAL 1999 COMPARED TO 1998
Total revenue in 1999 of $24,823,000 increased significantly from 1998
revenue of $13,214,000. The 88% increase in total revenue was due primarily to
an increase in the number of live scan systems sold, a 42% increase in
maintenance revenue and a 39% increase in FaceIt revenues, partially offset by a
decrease in live scan systems integration revenue. The increase in live scan
identification systems revenue to $18,214,000 in 1999 from $8,078,000 in 1998
resulted from an increase in the number of live scan systems sold, partially
offset by an increase in volume and trade-in discounts. Live scan maintenance
revenue increased to $3,726,000 in 1999 from $2,625,000 in 1998, due primarily
to a larger installed base of live scan systems covered by maintenance
agreements and, to a lesser extent, increases in contract renewal rates, and an
increase in revenue from services not covered by maintenance agreements.
Integral Partners revenue decreased to $259,000 for 1999 from $619,000 in 1998.
Integral Partners, Inc., a wholly owned subsidiary of the Company, began
operations during the first quarter of fiscal 1998 and was curtailed in 1999.
FaceIt licenses revenue increased 50% to $1,473,000 for 1999 from $981,000 in
1998. The increase in FaceIt licenses revenue was due primarily to increased
sales and license fees to value added resellers. FaceIt services revenue
increased 26% to $1,151,000 for 1999 from $911,000 in 1998 due primarily to a
large contract to assist a commercial customer with developing an application
encapsulating the Company's technology.
Revenue from two customers in 1999 accounted for 38% of total revenue.
Revenue from two customers in 1998 accounted for 24% of total revenue.
Total gross margin for 1999 and 1998 was 39% and 32% of revenue,
respectively.
Gross margin on live-scan identification systems revenue was 34% in 1999
compared to 26% in 1998. This improvement is due primarily to economies of
scale, lower levels of warranty and installation costs and lower product costs
than in fiscal 1998, partially offset by increased volume and trade-in
discounts.
Maintenance margins for 1999 and 1998 were 25% and 16% of maintenance and
support revenue, respectively. The improvement in maintenance margins is due
mainly to a 42% increase in maintenance revenue from the larger installed base
and, to a lesser extent, reduced costs resulting from the establishment of
regional customer service operations. The increase is partially offset by
$150,000 of costs to implement Year 2000 compliance as required by customer
contracts.
FaceIt licenses margin of 97% in 1999 decreased slightly from 1998 margin
of 99% due primarily to an increase in amortization of software development
costs.
24
Gross margin on FaceIt services increased to 77% in 1999 from 50% in 1998
due primarily to higher margins from an increase in commercial services
revenues.
Sales, general and development expenses for 1999 and 1998 were 38% and 69%,
respectively, of total revenue. The decrease in sales, general and development
expenses as a percentage of total revenue is due primarily to the increase in
revenue, reduced systems integration engineering costs due to refocusing
Integral Partners on identification-related opportunities, reduced new product
development expenses not covered by development grants, and to a lesser extent,
lower costs for both international marketing and systems integration activity.
This was partially offset by increased personnel-related costs and general
expenses (subsequently curtailed) associated with Integral Partners, Inc.,
increased incentive compensation accruals and increased legal costs incurred in
connection with legal action taken by a competitor against one of the Company's
customers. The competitor's efforts were unsuccessful in preventing the
Company's contract with the customer from proceeding forward. Sales and
marketing expenses for 1999 are net of a $157,000 allowance for doubtful
accounts reserve adjustment as a result of improved accounts receivable
collections. Engineering and development expenses for fiscal 1999 are net of
$384,000 of costs related to a federally funded demonstration project grant.
Interest and dividend income increased to $180,000 in fiscal 1999 from
$167,000 in fiscal 1998, due primarily to higher returns on marketable
investments and cash and cash equivalents. Interest expense decreased to
$299,000 in fiscal 1999 from $597,000 in fiscal 1998, primarily due to a
$375,000 decrease in non-cash charges for the intrinsic value of the beneficial
conversion feature of convertible debentures, partially offset by an increase in
borrowings under a line of credit and an increase in interest on increased
capital lease balances during fiscal 1999.
The Company generated a net loss for fiscal 1999 of $128,000, or $.01 loss
per share, as compared to a net loss of $5,429,000 , or $.29 loss per share, for
fiscal 1998. Income tax expense of $57,000 for 1999 compares to a benefit for
income taxes of $123,000 in 1998. The increase in income taxes is due primarily
to an increase in the valuation allowance relating to the possibility the
Company may be unable to recognize the benefit of the deferred tax asset. The
increase in the valuation allowance more than offsets the income tax benefit
form the pre-tax loss.
INFLATION.
Visionics does not believe inflation has significantly impacted revenue or
expenses.
BACKLOG
On September 30, 2000, the Company's backlog of orders for live scan
systems and related products, excluding contracted maintenance, was
approximately $2,806,000, as compared to a backlog of approximately $5,406,000
at September 30, 1999. The Company's backlog on September 30, 2000 for its
FaceIt(R) license fees, royalties and contracted services was approximately
$2,785,000, as compared to a backlog of approximately $388,000 at September 30,
1999.
NET OPERATING LOSS CARRYFORWARDS
At September 30, 2000, the Company had carryforwards of net operating
losses of approximately $36,789,000 that may allow the Company to reduce future
income taxes that would otherwise be payable. The carryforwards are subject to
the limitation provisions of Internal Revenue Code sections 382 and 383. These
sections provide limitations on the availability of net operating losses and
credits to offset current taxable income and related income taxes when an
ownership change has occurred. The Company's initial public offering in December
1990 resulted in an ownership change pursuant to these provisions and,
accordingly, the use of approximately $3,300,000 of the above carryforwards is
subject to an annual limitation, estimated at $350,000. At this time the
remaining net operating loss limitation with respect to the 1990 ownership
change is approximately $375,000. Any future ownership change could create a
limitation with respect to loss carryforwards not currently subject to an annual
limitation. Approximately $2,770,000 of the $36,789,000 net operating loss
carryforwards relates to compensation associated with the exercise of
non-qualified stock options which, when realized, would result in approximately
$1,108,000 credited to additional paid-in capital.
25
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
For the period from the Company's inception in 1985 through September 30,
2000, the Company's cumulative deficit was $40,957,000. On a consolidated annual
basis, the Company has not yet generated its first net income.
At September 30, 2000, the Company had $3,624,000 in cash and cash
equivalents. Visionics is an early-stage company in an emerging market.
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
available financing sources, are sufficient to meet current and foreseeable
operating requirements of the Company's business as it has existed historically.
The merger of Visionics and Digital Biometrics, Inc. has substantially increased
the Company's need for capital, necessitating that the Company seek further
financing. To fully exploit the opportunities presented by the merger, such as
joint product development and entry into new markets, additional capital will be
required. There can be no assurance, however, that the financing necessary to
pursue the combined company's business plan will be available on terms
acceptable or favorable to the Company, or on any terms. If the Company fails to
obtain such financing, its business prospects and the market price of the
Company's common stock may be materially adversely affected.
Furthermore, management may from time to time determine that the
competitive position of Visionics may be enhanced through substantial and
increased investments in product and technology development programs and/or
marketing initiatives. Management may determine to make such investments despite
its assessment that gross margin during the investment period will be less than
the expenses to be incurred, thus resulting in an anticipated loss during the
period.
ANALYSIS OF CASH FLOWS FROM OPERATIONS
Net cash used in operating activities was $2,490,000 for fiscal 2000
compared to net cash provided by operating activities of $1,575,000 for 1999.
This unfavorable cash flow impact resulted primarily from an increase in the net
loss during the current-year period, an increase in accounts receivable, an
increase in inventory and a decrease in accounts payable.
Net cash used in investing activities was $1,278,000 for fiscal 2000
compared to $1,010,000 for 1999. The increase was due primarily to an increase
in purchases of property and equipment to accommodate investment in the
business.
Net cash provided by financing activities was $1,089,000 for fiscal 2000
compared to $1,766,000 for fiscal 1999. Cash from financing activities was
provided primarily from the exercise of stock options.
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 on June 30, 2001. There were
no borrowings under this line at September 30, 2000.
Risks related to the Company's ability to maintain adequate working capital
and liquidity include the continued availability of credit under the Company's
line of credit, the availability of vendor credit, and payment by customers of
accounts receivable at such times and in such amounts as to enable the Company
to meet its payment obligations. Additional financing may be required if sales
and operating results are different from those currently forecasted. The Company
has identified potential sources for such additional financing in the event that
it is required; however, there can be no assurance that such sources will
provide the Company with additional financing on terms that are acceptable or
favorable to the Company, or on any terms.
26
ISSUANCE OF 8% CONVERTIBLE SUBORDINATED DEBENTURES AND WARRANTS
On December 1, 1997 the Company entered into a convertible subordinated
debenture purchase agreement with a private investor providing for the Company's
issuance and sale of up to $2,500,000 aggregate principal amount of 8%
Convertible Subordinated Debentures ("1997 Convertible Debentures") in tranches
of $500,000 each. The first four tranches were funded during fiscal 1998. The
fifth tranche was funded in November 1998.
During fiscal 1998, the Company issued 1,195,527 shares of common stock
pursuant to the conversion of $1,100,000 aggregate principal amount of 1997
Convertible Debentures plus $25,469 of accrued interest at an average conversion
price of $0.94 per share.
During fiscal 1999, the Company issued 1,123,874 shares of common stock
pursuant to the conversion of $1,250,000 aggregate principal amount of 1997
Convertible Debentures plus $75,737 of accrued interest at an average conversion
price of $1.18 per share.
During October 1999 (fiscal 2000), the Company issued 116,369 shares of
common stock for the conversion of the remaining $150,000 principal amount of
1997 Convertible Debentures plus $12,252 of accrued interest at an average
conversion price of $1.39 per share.
PRIVATE PLACEMENTS
The Company completed two private placement offerings of common stock and
warrants during fiscal 1999. An aggregate of 694,996 shares were sold to
accredited investors at prices from $1.3138 to $1.6579 per share with total net
proceeds to the Company of approximately $900,000. Warrants to purchase up to an
aggregate of 694,996 shares of common stock at the same per share prices were
granted to the purchasers for no additional consideration, of which an aggregate
of 453,729 shares were issued upon exercises as of September 30, 2000. The
Company issued additional warrants to purchase up to 69,500 shares of common
stock at exercise prices from $1.3269 to $1.6728 per share to an
investment-banking firm as partial compensation for services rendered in the
private placement offerings, of which an aggregate of 64,500 shares were issued
upon exercises as of September 30, 2000.
During January 1998, the Company sold 1,036,452 shares of common stock for
cash to one shareholder. This private placement netted proceeds of $3,602,588.
NEW ACCOUNTING PRONOUNCEMENTS
During 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes new standards for recognizing all derivatives as either assets or
liabilities, and measuring those instruments at fair value. SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133," changed the effective date to fiscal
years beginning after June 15, 2000. There was no impact on the Company's
financial statements with the adoption of this standard in the quarter ended
December 31, 2000.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101") which provides the staff's views in
applying generally accepted accounting principles to selected revenue
recognition issues. In October 2000, the SEC provided interpretive guidance for
SAB 101. Effective October 1, 2000 the Company adopted the new standard and
changed its method of accounting for certain identification systems revenue.
Since most of the equipment the Company sells includes installation provided by
the Company, under SAB 101, a significant portion of revenue recognition is
deferred until installation, particularly where the equipment is integrated to
an outside network. Prior to October 1, 2000 the Company generally recognized
product revenue on the date of shipment for orders which were f.o.b. origin and
upon delivery for f.o.b. destination. The Company recorded a $1,436,000
cumulative effect of an accounting change in the three-month period ended
December 31, 2000 with the adoption of SAB 101. Under this accounting change,
$3,890,000 of revenue recorded in periods prior to October 1, 2000 will be
recorded as revenue again as the equipment is installed.
27
RISK FACTORS
Information or statements provided by the Company from time to time,
including statements contained in this Form 10-K, may contain certain
"forward-looking statements," including comments regarding anticipated future
operations, market opportunities, operating results and financial performance of
the Company. The Company's future operating performance and share price are
influenced by many factors, including factors which may be treated in
forward-looking statements. The Company cautions readers that any
forward-looking statements made by the Company or any of its representatives in
this Form 10-K or in any other reports, filings, press releases, speeches or
other comments, are not a guarantee of future performance. Any such
forward-looking statements are subject to risks and uncertainties that may cause
actual results to differ materially from those which may be projected on the
basis of such forward-looking statements. Furthermore, the Company assumes no
obligation to update such forward-looking statements.
Among the risks and uncertainties which may affect future performance are
those described below. These risk factors are being set forth pursuant to the
provisions of the Private Securities Litigation Reform Act of 1995 (the "Reform
Act") with the intention of obtaining the benefits of the "safe harbor"
provisions of the Reform Act for such forward-looking statements.
GENERAL
The following factors are among the most significant risks and
uncertainties which may affect the future performance of the business of
Visionics:
* The ability of the Company to manage its operations in light of
historic and expected volatility and unpredictability in its
quarterly and annual revenue;
* The financial impact of investments required to maintain and
enhance the competitiveness of the Company, as well as the
financial impact of investments to develop and enter new markets
and to develop and introduce new products and services;
* The ability of the Company to maintain operating profitability;
* Competitive technological advances to which the Company is unable
to respond in a timely manner or at all;
* The ability of the Company to develop, introduce and build
revenue and profit streams based on new products and services in
existing and emerging markets;
* Maintenance of the loyalty and continued purchasing of the
Company's products by existing customers;
* Execution on customer commitments, including the fulfillment of
delivery and installation schedules as may be established,
modified, accelerated or delayed by customers or the Company, and
the implementation on time and within specifications of special
features and functionality required by various customer
contracts;
* Litigation or threatened litigation;
* Challenges of contract awards by competitors resulting in legal
expenses and potential delays or reversals of customer purchase
commitments;
28
* Collection of outstanding accounts receivable;
* Management of the concentration of accounts receivable and other
credit risks associated with selling products and services to
governmental entities and other large customers;
* Availability of adequate working capital and liquidity, including
the availability of additional financing as may be required;
* Creation and maintenance of satisfactory distribution and
operations relationships with third parties, including automated
fingerprint identification systems vendors, systems integrators
and other product providers;
* Attraction and retention of key employees due in particular to
the general shortage of technical employees and intense
competition for their services; and
* Continuance of the timely and cost-effective availability of
components and subassemblies.
VISIONIC'S FINANCIAL PERFORMANCE MAY BE ADVERSELY AFFECTED BY COMPETITION;
ANTICIPATED GROWTH IN THE MARKETS FOR THE COMPANY'S PRODUCTS AND SERVICES MAY
NOT MATERIALIZE.
Markets for the Company's products and services are characterized by
significant and increasing competition. 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. Adverse
consequences on Visionics may include the diminution of revenue and revenue
opportunities, price reductions, and the need to incur additional costs to
respond to the actions of competitors.
Furthermore, Visionics' expectations of future opportunities and
investments to capitalize on such opportunities are based on assumptions about
growth in the size of the market for identification systems and related products
and services. As this is a relatively new market, such assumptions and forecasts
are inherently difficult to make, and actual market growth may be substantially
different than the Company currently anticipates. Market growth depends on many
factors, including factors not within the control of the Company, including but
not limited to international market expansion, growth in applicant processing
markets, and replacement cycles for products currently in use.
VISIONICS MAY BE UNABLE TO DEVELOP NEW PRODUCTS AND SERVICES AS ANTICIPATED.
Visionics intends to grow in part through the introduction of new products
and services in current and new markets. There can be no assurance that such new
products and services can be developed in a timely fashion, within allotted
budgets, or at all, nor can there be any assurance that such new products and
services will be accepted by the intended customers at profitable price levels
or at all.
PARTS AND SUBASSEMBLIES USED IN OUR MANUFACTURING OPERATIONS MAY NOT BE
AVAILABLE WHEN NEEDED.
Certain components and subassemblies used in the manufacture of Visionics'
systems are sourced from single suppliers. In the event that these suppliers are
unable to provide the Company with its requirements, or were to change pricing
significantly, the Company's results of operations could be materially and
adversely affected.
VISIONICS WILL NEED ADDITIONAL FINANCING WHICH MAY NOT BE AVAILABLE TO VISIONICS
ON REASONABLE TERMS OR ANY TERMS.
To fully exploit the opportunities presented by the merger with Visionics,
such as joint product development and entry into new markets, additional capital
will be required. There can be no assurance, however, that the financing
necessary to pursue the combined company's business plan will be available on
terms acceptable or favorable to Visionics, or on any terms. If the Company
fails to obtain such financing, its business prospects and the market price of
Visionics' common stock may be materially adversely affected.
29
Management believes that cash, cash equivalents, and other working capital
provided from operations, together with available financing sources, are
sufficient to meet current operating requirements of the business of Visionics
as it has existed historically. However, risks related to the Company's ability
to maintain adequate working capital and liquidity include the continued
availability of credit under the Company's line of credit which expires on June
30, 2001, the continued availability of vendor credit as needed, payment by
customers of accounts receivable at such times and in such amounts as to enable
the Company to meet its payment obligations, and continued profitable operating
results. In the event the above or other liquidity risks materialize, Visionics
may be unable to sustain its operations from the sources of working capital
available to it.
Furthermore, management may from time to time determine that the
competitive position of Visionics may be enhanced through substantial and
increased investments in product and technology development programs and/or
marketing initiatives. Management may determine to make such investments despite
its assessment that gross profit during the investment period will be less than
the expenses to be incurred, thus resulting in an anticipated loss during the
period.
VISIONICS' RELIANCE ON GOVERNMENTAL AGENCY CUSTOMERS HAS PRODUCED VOLATILITY IN
REVENUE AND EARNINGS.
Visionics' performance in any one reporting period is not necessarily
indicative of sales trends or future operating or earnings performance. During
most quarters, the Company's revenue is concentrated in a relatively small
number of large customers, the majority of which are government agencies.
Visionics is subject to significant quarter-to-quarter fluctuations in revenue,
which are frequently very difficult to predict. Such revenue volatility makes
management of inventory levels, cash flow and profitability inherently
difficult. Factors which lead to revenue fluctuations include variations in the
availability of large procurements and variations in the success of Visionics in
winning such procurements. In the event Visionics is successful in winning such
procurements, there may be planned unevenness in shipping schedules, as well as
potential delays and schedule changes in the timing of deliveries and
recognition of revenue, or cancellation of such procurements. Also, law
enforcement and other government agencies are subject to political, budgetary,
purchasing and delivery constraints which Visionics expects may continue to
result in quarterly and annual revenue and operating results which may be
irregular and difficult to predict.
OTHER FACTORS ALSO CONTRIBUTE TO VOLATILITY IN VISIONICS' OPERATING RESULTS.
In addition to potential volatility due to market characteristics just
described, Visionics' financial results may be affected by many other factors
which are difficult to predict, including but not limited to: changes in the mix
of products sold; changes in the availability and pricing of components and
subassemblies; increases required in development and marketing expenses to
address opportunities or competitive pressures in the market; and unforeseen
legal expenses.
Particularly noteworthy is the need to invest in planned technical
development programs to maintain and enhance the competitiveness of Visionics,
and to develop and launch new products and services. To improve the
manageability and likelihood of success of such programs requires the
development of budgets, plans and schedules for the execution of these programs
and the adherence to such budgets, plans and schedules. The majority of such
program costs are payroll and related staff expenses, and secondarily materials,
subcontractors, promotional expenses and the like. These costs are very
difficult to adjust in response to short-term fluctuations in the revenue of
Visionics, compounding the difficulty of achieving profitability in the event of
a revenue downturn.
Furthermore, management may from time to time determine that the
competitive position of Visionics may be enhanced through substantial and
increased investments in product and technology development programs and/or
marketing initiatives. Management may determine to make such investments despite
its assessment that gross profit during the investment period will be less than
the expenses to be incurred, thus resulting in an anticipated loss during the
period. Such planned losses may be particularly difficult to manage in light of
the volatility of Visionics' revenue stream discussed above.
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VISIONICS' SUCCESS DEPENDS IN PART ON THE EFFORTS AND SUCCESS OF THIRD PARTIES
OVER WHICH VISIONICS HAS NO CONTROL.
In addition to its direct marketing activities, Visionics markets its
products and services through various distributions and other cooperative
relationships with third parties such as AFIS suppliers and systems integrators.
In many cases, the sale of Visionics products or services is dependent on the
success of such third parties in winning contested procurements, in executing on
their own responsibilities under agreements with customers and in doing so in a
timely manner, and in the effectiveness of their selling efforts on behalf of
Visionics' products. At times, such third party distributors may offer products
of Visionics' competitors as well.
VISIONICS' RESULTS OF OPERATIONS ARE SUBJECT TO GOVERNMENTAL CREDIT, FUNDING AND
OTHER RELATED FACTORS.
Visionics extends substantial credit to federal, state and local
governments in connection with sales of the Company's products and services.
Approximately 93% and 90%, respectively, of customer accounts receivable at
September 30, 2000 and 1999, were from government agencies, of which 33% was
from one customer at September 30, 2000 and 53% were from two customers at
September 30, 1999. For the years ended September 30, 2000, 1999 and 1998,
revenue from two customers in 2000 accounted for 32%, revenue from two customers
in 1999 accounted for 38%, and revenue from two customers in 1998 accounted for
24%, respectively, of total revenue. Sales to sizeable customers requiring large
and sophisticated networks of live scan systems and peripheral equipment often
include technical requirements which may not be fully known at the time
requirements are specified by the customer. In addition, contracts may specify
performance criteria which must be satisfied before the customer accepts the
products and services. Collection of accounts receivable may be dependent on
completion of customer requirements, which may be unpredictable, subject to
change by the customer, and not fully understood at the time of acceptance of
the order by Visionics, and may involve investment of additional Visionics
resources. These investments of additional resources are accrued when amounts
can be estimated but may be uncompensated and negatively impact profit margins
and the Company's liquidity. Furthermore, in many instances, customer
procurements are dependent on the availability or continued availability of
state or federal government grants and general tax funding. Such funding may be
subject to termination at any time at the sole discretion of the government body
providing or receiving such funds. Additionally, without regard to termination
of funding, government agencies both domestically and internationally may
successfully assert the right to terminate business or funding relationships
with Visionics at their sole discretion without adequate or any compensation or
recourse for Visionics.
VISIONICS' ONGOING SUCCESS IS DEPENDENT UPON THE CONTINUED AVAILABILITY OF
CERTAIN KEY EMPLOYEES.
Visionics is dependent in its operations on the continued availability of
the services of its employees, many of whom are individually key to the
Company's current and future success, and the availability of new employees to
implement the company's growth plans. The market for skilled employees is highly
competitive, especially for employees in technical fields. While Visionics'
compensation programs are intended to attract and retain the employees required
for the Company to be successful, there can be no assurance that Visionics will
be able to retain the services of all of its key employees or a sufficient
number to execute on its plans, nor can there be any assurances that Visionics
will be able to continue to attract new employees as required.
WE MAY BE UNABLE TO UPGRADE OUR PRODUCTS AND DEVELOP AND INCORPORATE NEW
TECHNOLOGIES AS REQUIRED TO EFFECTIVELY COMPETE IN OUR INDUSTRY.
Visionics competes in markets characterized by continual and rapid
technological change. Frequently, technical development programs of Visionics
require assessments to be made of the future directions of technology and
technology markets generally, which are inherently risky and difficult to
predict. Failure to choose correctly among technical alternatives may result in
material adverse effects on the competitive position, revenue, required spending
levels and profitability of Visionics.
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The competitive nature of Visionics' markets requires continual investment
in upgrading of the Company's product and service offerings. There can be no
assurance that the pace of Visionics' development efforts will be sufficient to
maintain competitiveness.
Continued participation by Visionics in the market for live scan systems
which are linked to forensic-quality databases under the jurisdiction of
governmental agencies may require the investment of Visionics resources in
upgrading of the Company's products and technology for Visionics to compete and
to meet regulatory and statutory standards. There can be no assurance that such
resources will be available to Visionics or that the pace of product and
technology development established by management will be appropriate to the
competitive requirements of the marketplace.
OUR JOINT VENTURE WITH LAKES GAMING, INC. IS SUBJECT TO ALL THE RISKS INHERENT
IN A START-UP BUSINESS.
On March 16, 1998, Visionics entered into an agreement with Lakes Gaming,
Inc. (formerly Grand Casinos, Inc.) forming a joint venture, TRAK 21
Development, LLC, to productize, test and market the TRAK-21 blackjack wagering
data capture and player tracking system. The joint venture is susceptible to the
normal business risks customary to a start-up operation. In particular, although
prototype models of TRAK-21 have been successfully demonstrated, there can be no
assurance that this technology will operate as required in live casino
environments or that products based on TRAK-21 technology will be accepted by
customers. 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. Therefore, can be no assurance that the joint venture
will be profitable to Visionics.
Risks Relating to the Merger with Visionics Corporation
VISIONICS MAY NOT REALIZE THE ANTICIPATED BENEFITS OF THE MERGER.
The anticipated benefits of the merger may not be achieved unless certain
operations of Digital Biometrics, Inc. and Visionics are successfully
integrated, including aspects of the two companies' research and development and
marketing operations. The transition to a combined company will require
substantial management attention and the process of coordination of the
operations, especially research and development and marketing, may be
complicated by the necessity of combining personnel in different locations with
disparate business backgrounds and corporate cultures. In addition, combining
the two organizations could cause the interruption of, or a loss of momentum in,
the activities of either or both of the companies' businesses. Any difficulties
experienced in the transition process and any loss of or interruption in
business as a result of the diversion of resources to pursue the integration of
the organizations could have an adverse effect on the combined operations.
Even if Digital Biometrics, Inc. is successful in integrating its
operations with those of Visionics, all or many of the anticipated benefits of
the merger may not be realized. The board of directors believes the merger will
permit the combined company to achieve a level of success neither company is
capable of attaining on its own. However, there can be no assurance that the
merger will enhance DBI's profitability or otherwise benefit its stockholders,
including the former shareholders of Visionics who received shares of DBI common
stock in the merger. In the event that the merger benefits fail to materialize,
the market price of Visionics' common stock may be materially adversely
affected.
COSTS INCURRED IN CONNECTION WITH THE MERGER WILL HAVE AN ADVERSE EFFECT ON
VISIONICS' PROFITABILITY.
Visionics incurred substantial costs and expenses in connection with the
merger, a large portion of which was incurred during the first six months of
fiscal 2001. Visionics accounted for the merger using the pooling of interests
method, pursuant to which all such costs and expenses related to the merger will
be immediately charged against Visionics' earnings rather than capitalized and
amortized to expense over an extended period. Consequently, Visionics' near-term
profitability will be adversely affected, potentially resulting in a reduction
of the market price of its common stock.
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VISIONICS EXPECTS TO INCUR SIGNIFICANT COSTS AND EXPENSES TO INTEGRATE THE
OPERATIONS OF THE TWO COMPANIES, NEGATIVELY AFFECTING VISIONICS' SHORT-TERM
PROFITABILITY.
Visionics' management anticipates that the process of integrating the two
companies' operations will require the immediate investment of substantial
resources. Financial benefits flowing from the merger, if any, are not expected
to be realized until fiscal 2002. Consequently, the integration process will
likely have an adverse effect on Visionics' short-term profitability and,
potentially, the market price of its common stock.
VISIONICS' CUSTOMERS MAY PERCEIVE THE MERGER AS COMPETITIVELY THREATENING.
Visionics' customers are primarily original equipment manufacturers,
application developers and system integrators who license Visionics' enabling
technology. DBI sells its products and services directly to end users, primarily
law enforcement agencies. Some of Visionics' customers may mistakenly perceive
DBI's sales practices as a competitive threat to their businesses and withdraw
from further interaction with Visionics, adversely affecting the business and
prospects of the combined company.
MARKET RISKS
The Company is exposed to certain market risks with its $2 million line of
credit of which there were no borrowings outstanding at September 30, 2000. The
line bears interest at a rate of one half (0.5%) above the prime rate. The
Company is subject to foreign currency exposure, primarily with the British
Pound and the Euro. The Company's exposure to foreign currency fluctuations is
not significant and primarily related to the Company's translation adjustment to
convert its United Kingdom subsidiary into U.S. dollars.
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INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Visionics Corporation:
We consent to incorporation by reference in the registration statements (Numbers
333-72031 and 333-77379) on Form S-3 and (Numbers 33-41510, 33-63984, 33-90900,
333-38562, 333-34725 and 333-59067) on Form S-8 of Visionics Corporation, of our
report dated June 12, 2001 relating to the consolidated supplemental balance
sheets of Visionics Corporation and subsidiary, as of September 30, 2000 and
1999, and the related consolidated supplemental statements of operations,
stockholders' equity and comprehensive income (loss), and cash flows for each of
the years in the three-year period ended September 30, 2000.
KPMG LLP
Minneapolis, Minnesota
June 26, 2001
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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.
VISIONICS CORPORATION
---------------------
(Registrant)
June 28, 2001 /s/ Robert F. Gallagher
-------------------------------
Robert F. Gallagher
Chief Financial Officer
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