UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 2001
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from________________________to________________________
Commission File Number: 0-18856
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VISIONICS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 41-1545069
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5600 Rowland Road, Minnetonka, Minnesota 55343
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(952) 932-0888
--------------
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days. [x] Yes [ ] No
Indicate the number of shares of each of the issuer's classes of common stock,
as of the latest practicable date.
common stock, $.01 par value January 31, 2002 - 28,841,202 shares
---------------------------- ------------------------------------
(Class) (Outstanding)
1
VISIONICS CORPORATION
THREE MONTHS ENDED DECEMBER 31, 2001
INDEX
PART I - FINANCIAL INFORMATION:
- -------------------------------
PAGE
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATED BALANCE SHEETS 4
CONSOLIDATED STATEMENTS OF OPERATIONS 5
CONSOLIDATED STATEMENTS OF CASH FLOWS 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 20
PART II - OTHER INFORMATION:
- ----------------------------
ITEM 1. LEGAL PROCEEDINGS 21
ITEM 2. CHANGES IN SECURITIES 21
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 21
ITEM 5. OTHER INFORMATION 21
ITEM 6. (a) EXHIBITS 21
(b) REPORTS ON FORM 8-K 21
SIGNATURES 22
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2
VISIONICS CORPORATION
THREE MONTHS ENDED DECEMBER 31, 2001
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Except for the historical information contained herein, the matters
discussed in this Form 10-Q include forward-looking statements made within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. As provided for under the Private Securities
Litigation Reform Act, the Company cautions investors that actual results of
future operations may differ from those anticipated in forward-looking
statements due to a number of factors, including the Company's ability to
maintain profitability, introduce new products and services, build profitable
revenue streams around new product and service offerings, maintain loyalty and
continued purchasing of the Company's products by existing customers, execute on
customer delivery and installation schedules, collect outstanding accounts
receivable and manage the concentration of accounts receivable and other credit
risks associated with selling products and services to governmental entities and
other large customers, create and maintain satisfactory distribution and
operations relationships with automated fingerprint identification system
("AFIS") vendors, attract and retain key employees, secure timely and
cost-effective availability of product components, meet increased competition,
maintain adequate working capital and liquidity, including the availability of
financing as may be required, and upgrade products and develop new technologies.
For a more complete description of such factors, see "Risk Factors" under Item 7
of the Company's Form 10-K report for the year ended September 30, 2001.
3
VISIONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
December 31, September 30,
2001 2001
------------- -------------
Current assets:
Cash and cash equivalents $ 32,343,559 $ 9,716,772
Restricted cash (note 5) 80,915 80,915
Accounts receivable, less allowance for doubtful accounts of $233,000
and $266,000, respectively 5,399,971 6,704,761
Inventory (note 6) 6,604,537 5,999,894
Prepaid expenses and other costs 544,380 452,847
------------- -------------
Total current assets 44,973,362 22,955,189
------------- -------------
Property and equipment 5,178,412 4,775,102
Less accumulated depreciation and amortization (3,250,250) (3,052,603)
------------- -------------
1,928,162 1,722,499
------------- -------------
Software development costs, net of accumulated amortization of $333,288
and $294,338, respectively 644,686 683,635
Other assets, net of accumulated amortization of $74,971 and $71,435,
respectively 53,784 54,556
------------- -------------
$ 47,599,994 $ 25,415,879
============= =============
Current liabilities:
Accounts payable $ 1,375,810 $ 1,690,642
Deferred revenue (note 2) 7,121,155 7,653,552
Other accrued expenses (note 8) 1,055,635 1,460,576
Current installments of notes payable 12,976 16,857
Current installments of capital lease obligations -- 2,406
------------- -------------
Total current liabilities 9,565,576 10,824,033
Deferred revenue, excluding current portion 1,044,703 1,101,614
Notes payable, excluding current installments 9,664 12,258
Capital lease obligations, excluding current installments -- 1,134
------------- -------------
Total liabilities 10,619,943 11,939,039
------------- -------------
Stockholders' equity (note 9):
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 28,799,140 and 25,431,298 shares, respectively 287,991 254,313
Additional paid-in capital 85,183,608 60,090,870
Deferred compensation (107,875) (126,250)
Accumulated deficit (48,382,014) (46,748,577)
Accumulated other comprehensive income (loss) (1,659) 6,484
------------- -------------
Total stockholders' equity 36,980,051 13,476,840
------------- -------------
$ 47,599,994 $ 25,415,879
============= =============
See accompanying notes to consolidated financial statements.
4
VISIONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
December 31,
2001 2000
------------ ------------
Revenue:
Live scan identification systems $ 4,177,635 $ 4,802,486
Live scan maintenance 2,462,250 1,718,417
FaceIt license 521,069 381,333
FaceIt services 317,987 296,501
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Total revenue 7,478,941 7,198,737
------------ ------------
Cost of revenue:
Live scan identification systems 2,445,238 3,139,879
Live scan maintenance 1,707,935 1,352,046
FaceIt license 136,643 64,740
FaceIt services 226,996 247,743
------------ ------------
Total cost of revenue 4,516,812 4,804,408
------------ ------------
Gross margin 2,962,129 2,394,329
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Selling, general and administrative expenses:
Sales and marketing 1,405,278 1,136,698
Engineering and development 1,984,795 1,144,911
General and administrative 1,350,054 948,038
Non-recurring charges -- 706,011
------------ ------------
Total expenses 4,740,127 3,935,658
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Loss from operations (1,777,998) (1,541,329)
Other income (expense), net 161,734 71,941
------------ ------------
Loss before income taxes (1,616,264) (1,469,388)
Provision for income taxes 17,173 --
------------ ------------
Loss before accounting change (1,633,437) (1,469,388)
Cumulative effect of change in accounting principle -- (1,435,652)
------------ ------------
Net loss $ (1,633,437) $ (2,905,040)
============ ============
Loss per common share - basic and assuming dilution
- ---------------------------------------------------
Loss before accounting change $ (0.06) $ (0.07)
Cumulative effect of change in accounting principle -- (0.06)
------------ ------------
Net loss per common share $ (0.06) $ (0.13)
============ ============
Weighted average common shares outstanding 27,761,927 23,162,974
============ ============
See accompanying notes to consolidated financial statements.
5
VISIONICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
December 31,
-----------------------------
2001 2000
------------ ------------
Cash flows from operating activities:
Net loss $ (1,633,437) $ (2,905,040)
Adjustments to reconcile net loss to net cash used in
operating activities:
Provision for doubtful accounts receivable (32,995) --
Stock-based compensation 118,140 118,482
Depreciation and amortization 210,319 244,432
Amortization of software development costs 38,949 36,271
Write-off of intangible assets -- 607
Loss on disposal of fixed assets 471 --
Changes in operating assets and liabilities:
Restricted cash -- (625,000)
Accounts receivable 1,337,785 3,416,763
Inventories (604,643) (1,146,673)
Prepaid expenses (91,533) (354,642)
Security deposits and other assets -- 76,310
Accounts payable and accrued expenses (450,028) (956,968)
Deferred revenue (589,308) 1,810,858
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Net cash used in operating activities (1,696,280) (284,600)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (412,916) (310,252)
Patents, trademarks, copyrights and licenses (2,765) (5,386)
------------ ------------
Net cash used in investing activities (415,681) (315,638)
------------ ------------
Cash flows from financing activities:
Principal payments on capital lease obligations (3,540) --
Repayment of notes payable (6,475) (3,592)
Net proceeds from private placement of common stock 18,907,398 --
Exercise of stock options and warrants 5,849,508 109,678
------------ ------------
Net cash provided by financing activities 24,746,891 106,086
------------ ------------
Effect of exchange rates on cash (8,143) 1,216
Increase (decrease) in cash and cash equivalents 22,626,787 (492,936)
Cash and cash equivalents at beginning of period 9,716,772 3,623,574
------------ ------------
Cash and cash equivalents at end of period $ 32,343,559 $ 3,130,638
============ ============
See accompanying notes to consolidated financial statements.
6
VISIONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(UNAUDITED)
(1) DESCRIPTION OF BUSINESS
Visionics Corporation ("Visionics" or "Company") is in the business of
empowering identification through the use of biometrics, the science of
identifying individuals by measuring distinguishable physical or behavioral
characteristics. The Company is a leading provider of biometric technologies and
identification information systems that employ "biometric" technology.
Biometrics is used to determine physical access or logical access. Our biometric
identification technology, systems and information technology services enable
customers to identify individuals for physical or logical access; help
commercial employers and government agencies to conduct background checks on
applicants for employment or permits; or verify identity for the purposes of
issuing identification documents, conducting transactions, or conducting
criminal investigations. Our product and service offerings include
computer-based face recognition, fingerprinting, and photographic systems,
software tools, multi-media data storage and communications servers, and the
systems integration and software development services required to deploy and use
these systems.
A majority of the Company's revenues in the three-month periods ended
December 31, 2001 and 2000 were derived from product sales, maintenance, and
applications development services to governmental customers. The Company's sales
have historically included large purchases by a relatively small number of
customers. This concentration of sales among few relatively large customers is
expected to continue in the foreseeable future. Furthermore, the nature of
government markets and procurement processes is expected to result in continued
quarter-to-quarter fluctuations in the Company's revenues and earnings which are
and will continue to be difficult to predict.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts
of its wholly owned subsidiary Visionics Technology Corporation located in New
Jersey and its wholly owned British subsidiary, Visionics Ltd. All material
intercompany accounts and transactions have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions for Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. For
further information, refer to financial statements and footnotes thereto
included in the Company's annual report on Form 10-K for the year ended
September 30, 2001 that has been filed with the SEC.
(b) ACCOUNTING CHANGE
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 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
7
VISIONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(UNAUDITED)
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 was recorded as revenue
again as the equipment was installed in fiscal 2001.
(c) EFFECT OF NEW ACCOUNTING STANDARDS
In August 2001, the Financial Accounting Standards Board issued FASB
Statement No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED
ASSETS (Statement 144), which supersedes both FASB Statement No. 121, ACCOUNTING
FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED
OF (Statement 121) and the accounting and reporting provisions of APB Opinion
No. 30, REPORTING THE RESULTS OF OPERATIONS--REPORTING THE EFFECTS OF DISPOSAL
OF A SEGMENT OF A BUSINESS, AND EXTRAORDINARY, UNUSUAL AND INFREQUENTLY
OCCURRING EVENTS AND TRANSACTIONS (Opinion 30), for the disposal of a segment of
a business (as previously defined in that Opinion). Statement 144 retains the
fundamental provisions in Statement 121 for recognizing and measuring impairment
losses on long-lived assets held for use and long-lived assets to be disposed of
by sale, while also resolving significant implementation issues associated with
Statement 121. For example, Statement 144 provides guidance on how a long-lived
asset that is used as part of a group should be evaluated for impairment,
establishes criteria for when a long-lived asset is held for sale, and
prescribes the accounting for a long-lived asset that will be disposed of other
than by sale. Statement 144 retains the basic provisions of Opinion 30 on how to
present discontinued operations in the income statement but broadens that
presentation to include a component of an entity (rather than a segment of a
business).
The Company has adopted Statement 144 effective October 1, 2001. There
was no material impact on the Company's financial statements with its adoption.
(3) SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK
The Company extends credit to substantially all of its customers.
Approximately 76% of customer accounts receivable at December 31, 2001 were from
government agencies, of which 26% was from one customer. Approximately 85% of
customer accounts receivable at September 30, 2001 were from government
agencies, of which 54% was from three customers. Revenue from two customers in
the three-month period ended December 31, 2001 accounted for 38% of total
revenue, and revenue from one customer in the three-month period ended December
31, 2000 accounted for 20% of total revenue. Foreign revenue for the three-month
period ended December 31, 2001 was 4% of total revenue compared to 2% the same
prior-year period.
(4) STATEMENT OF CASH FLOWS
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments and certificates of deposit purchased with an
original maturity date of three months or less to be cash equivalents.
8
VISIONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(UNAUDITED)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -
CASH PAID FOR:
Three Months Ended
December 31,
2001 2000
---------- ----------
Interest $ 1,645 $ 1,111
Income taxes 17,173 --
(5) RESTRICTED CASH
Pursuant to normal contractual terms of a federally funded development
grant, the Company was required to establish either a performance bond or an
escrow account equal to the amounts payable to certain major subcontractors for
the project aggregating $625,000. Since the Company was in a strong cash
position, it chose to establish the escrow and avoid the cost of the performance
bond. The amount held in escrow is released upon proof of payment to the
subcontractors. The restricted balance as of December 31, 2001 is $80,915.
(6) 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:
December 31, September 30,
2001 2001
------------ ------------
Components and subassemblies $ 4,052,235 $ 3,595,310
Work in process 670,688 556,279
Finished goods 687,500 417,225
Finished goods shipped to customers
awaiting installation 1,194,114 1,431,080
------------ ------------
$ 6,604,537 $ 5,999,894
============ ============
(7) LINES 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 on March 30, 2003. There were no borrowings under this line at
December 31, 2001.
9
VISIONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(UNAUDITED)
(8) OTHER ACCRUED EXPENSES
Other accrued expenses consists of:
December 31, September 30,
2001 2001
------------ ------------
Accrued salaries, bonuses and
commissions $ 110,618 $ 523,286
Accrued vacation 509,974 411,809
Accrued warranty costs 103,351 135,332
Other accrued expenses 331,692 390,149
------------ ------------
$ 1,055,635 $ 1,460,576
============ ============
(9) STOCKHOLDERS' EQUITY
During the three-month period ended December 31, 2001, the Company
granted stock option awards to employees for the purchase of an aggregate of
612,200 shares of common stock. These options are exercisable at prices ranging
form $13.20 to $15.20 per share and expire in 2008.
On December 31, 2001, the Company issued 18,696 shares of common stock
to satisfy the Company's 2001 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 $269,745 and reduced accrued
compensation by the same amount.
In November 2001, the Company issued options to acquire an aggregate of
20,000 shares of the Company's common stock with an exercise price of $15.41 per
share for services provided. The Company has recorded compensation expense in
the amount of $85,284 related to the granting of these options for the
three-month period ending December 31, 2001.
In October 2001, the Company issued a warrant to purchase up to 25,000
shares of common stock at an exercise price of $13.20 per share as compensation
for services in connection with an equity financing. The warrant expires on
October 23, 2006.
(10) PRIVATE PLACEMENT
On October 11, 2001, the Company closed on a private placement offering
of common stock and warrants. A total of 1,801,800 shares were sold to
accredited investors at a price of $11.10 each. Net proceeds to the Company were
approximately $18,907,000. The Company issued a warrant to purchase up to 36,036
shares of common stock at an exercise price of $16.86 per share to an
investment-banking firm as partial compensation for services rendered in the
private placement. The warrant expires on October 11, 2006.
10
VISIONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(UNAUDITED)
(11) NET INCOME (LOSS) PER COMMON SHARE
The per share computations are based on the weighted average number of
common shares outstanding during the periods.
Three Months Ended
December 31,
----------------------------
2001 2000
------------ ------------
Shares outstanding at beginning of period 25,431,298 23,115,781
Shares issued under retirement plan 18,696 73,923
Exercise of options and warrants 1,547,346 63,633
Shares issued for private placement 1,801,800 --
------------ ------------
Shares outstanding at end of period 28,799,140 23,253,337
============ ============
Weighted average common shares outstanding -
basic and diluted 27,761,927 23,162,974
Net loss $ (1,633,437) $ (2,905,040)
============ ============
Net loss per common share - basic and
diluted $ (0.06) $ (0.13)
============ ============
The following is a summary of those securities outstanding at December
31 for the respective periods, which have been excluded from the calculations
because the effect on net loss per common share is anti-dilutive:
For the Three-Month Period
Ended December 31,
---------------------------
2001 2000
---------------------------
Options 2,877,562 3,799,044
Warrants 579,834 585,017
11
VISIONICS CORPORATION
THREE MONTHS ENDED DECEMBER 31, 2001
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
As more fully described in the subsection "Risk Factors" under Item 7
of the Company's Form 10-K report for the year ended September 30, 2001 and Form
S-3 filed on October 30, 2001, this report contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These include
statements regarding intent, belief or current expectations of the Company and
its management and are made in reliance upon the "safe harbor" provisions of the
Securities Litigation Reform Act of 1995. Stockholders and prospective investors
are cautioned that any such forward-looking statements are not guarantees of
future performance and involve a number of risks and uncertainties that may
cause the Company's actual results to differ materially from the results
discussed in the forward-looking statements.
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 - live scan, FaceIt, 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.
We have evolved from essentially a single-product live scan hardware
supplier to an identification information systems company. We have two
established product lines and two product lines in various stages of
development.
FINGERPRINT LIVE SCAN - These systems combine patented, high-resolution
optics and specialized hardware and software with industry-standard computers.
They capture, digitize and transmit forensic-grade fingerprint images and
related data to large-scale databases. The database systems, along with
fingerprint matching algorithms, are maintained on equipment supplied by other
vendors called Automated Fingerprint Identification Systems ("AFIS"). Images
submitted to these databases must be in compliance with federally mandated image
quality standards. If an AFIS finds a match, the Company's systems will receive
a return message of the identity and background of the individual being checked.
Visionics' live scan systems are normally configured in network environments.
The integration of our systems into complex information networks is frequently
crucial to the delivery of the appropriate information to meet a customer's
requirements. Our 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. 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.
12
VISIONICS CORPORATION
THREE MONTHS ENDED DECEMBER 31, 2001
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FACEIT(R) FACE RECOGNITION - FaceIt(R) is an award-winning facial
recognition software engine that allows computers to rapidly and accurately
detect and recognize faces. FaceIt(R) is a core technology that enables a broad
range of products and applications built by developers and 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. Our FaceIt(R) technology product offerings include
software development toolkits, run-time licenses and application software.
FaceIt(R) technology partners include IBM Informix and EDS.
IDENTIFICATION BASED INFORMATION SYSTEM ("IBIS") - IBIS is a patented
wireless, real-time mobile identification system that combines expertise in
biometric capture and connectivity. The system is capable of capturing
photographs and forensic quality fingerprints 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. A complete management reporting database and audit trail is
included. The IBIS system has been undergoing testing in Hennepin County,
Minnesota and in the cities of Redlands and Ontario in California.
BIOMETRIC NETWORK PLATFORM ("BNP") - The BNP is a development stage
technology framework for building scalable biometric solutions. The BNP is made
up of the following:
Biometric Network Appliances ("BNAs") - BNAs are individual hardware
components within the BNP platform. Each component is dedicated to performing a
specific task such as capturing a facial image, creating a biometric template,
and matching the images against a database. Each BNA within a network contains
programming logic for connecting to each other or to standard security and
information systems. Today the BNAs are enabled by the Company's FaceIt(R)
technology, however, eventually we intend to support other biometrics including
fingerprint.
Application-Specific Business Logic - While the BNAs are dedicated to
performing one specific task surrounding identification, the business logic
tells what action should be taken based on either a match being made or not. For
example, in some applications, a positive match may allow someone to gain access
to an area, while in another application, it may restrict access of the person
identified.
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. The Company has
developed an off-the-shelf system based on the BNP, called FaceIt(R) ARGUS, for
surveillance applications in order to meet market demand and help promote the
BNP concept overall. The Company expects its partners to develop other scalable
applications using the BNAs by creating their own application-specific business
logic.
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. Visionics has no material ongoing
liability as a result of the joint venture. Visionics' financial results would
not be materially impacted if TRAK 21 Development, LLC were dissolved.
13
VISIONICS CORPORATION
THREE MONTHS ENDED DECEMBER 31, 2001
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OTHER GENERAL
The law enforcement market and government procurement processes are
subject to budgetary, economic and political considerations that vary
significantly from state to state and among different agencies. These
characteristics, together with the increasing level of competition within the
live scan electronic fingerprint industry, have resulted (and are expected to
continue to result) in an irregular revenue cycle for the Company.
ACCOUNTING POLICIES
In preparing the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America,
management must make decisions which impact the reported amounts and the related
disclosures. Such decisions include the selection of the appropriate accounting
principles to be applied and the assumptions on which to base accounting
estimates. In reaching such decisions, management applies judgment based on its
understanding and analysis of the relevant circumstances. Note 1 to the
consolidated financial statements provides a summary of the significant
accounting policies followed in the preparation of the financial statements.
The Company's critical accounting policies include the following:
REVENUE RECOGNITION
- -------------------
SOFTWARE LICENSES - Revenue from software licenses is 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. Revenue from sublicense arrangements
with resellers is 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, is recognized along with the PCS ratably over the period during which
PCS is expected to be provided. Revenue from consulting services is recognized
as work is performed.
EQUIPMENT - Revenue from product sales is usually recognized upon
installation, although recognition may from time to time occur at a different
time based on the terms of specific customer contracts.
SERVICES - Revenue for professional and systems integration services is
recognized using the percentage of completion method, completed contract method
or on a time-and-materials basis. Revenue from maintenance and repair contracts
is recognized over the period of the agreement. Service revenue is recognized
when the related service is performed.
Deferred revenue represents amounts that the Company has billed to
customers pursuant to contractual terms and does not meet the Company's policy
for recognizing revenue.
14
VISIONICS CORPORATION
THREE MONTHS ENDED DECEMBER 31, 2001
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company sometimes receives grant funding. If the grant is to pursue
technological advances where the Company will be investing its own monies
simultaneously with the grant funding, the funds are recorded as an offset to
the development costs. If the grant received represents full funding, the
funding is recorded as revenue and the associated costs as cost of sales using
the percentage of completion contract accounting method.
WARRANTY COSTS
- --------------
Estimated product warranty costs for live scan systems are accrued when
the revenue is recognized and is based on its experience. Revenue for live scan
systems is usually recognized at time of installation.
VALUATION OF ACCOUNTS RECEIVABLE
- --------------------------------
Management reviews accounts receivable to determine which are doubtful
of collection. In making the determination of the appropriate allowance for
doubtful accounts, management considers the Company's history of write-offs,
relationships with its customers, and the overall credit worthiness of its
customers.
VALUATION OF INVENTORY
- ----------------------
Management reviews obsolescence to determine that inventory items
deemed obsolete are appropriately reserved. In making the determination
management considers the Company's history of write-offs, future sales of
related products, and quantity of inventory at the balance sheet date assessed
against each parts past usage rates and future expected usage rates.
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
costs 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2001 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
2000
Total revenue increased 4% to $7,479,000 for the three months ended
December 31, 2001 compared to $7,199,000 in the same prior-year period. Live
scan identification systems revenue
15
VISIONICS CORPORATION
THREE MONTHS ENDED DECEMBER 31, 2001
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
decreased 13% to $4,178,000 compared to $4,802,000 in the same prior-year
period. The decrease is primarily due to a decrease in the number of live scan
system installations, partially offset by a favorable product mix. These systems
are primarily sold to government agencies. The nature of government markets and
procurement processes result in unpredictable quarter-to-quarter fluctuations.
Live scan maintenance revenue was $2,462,000 for the three months ended
December 31, 2001 compared to $1,718,000 for the same prior-year period, an
increase of 43%. This increase is due primarily to a larger installed base of
live scan systems covered by maintenance agreements.
FaceIt license revenue increased 37% to $521,000 for the three months
ended December 31, 2001 compared to $381,000 for the same prior-year period.
Approximately $80,000 of this increase was generated from an increase revenue
from its subsidiary in the United Kingdom.
FaceIt service revenue increased 7% to $318,000 for the three months
ended December 31, 2001 compared to $297,000 for the same prior-year period.
This increase is primarily due to providing custom development services to
additional customers. FaceIt service revenue in the prior-year three-month
period was primarily provided under one United States government contract.
Revenue from two customers in the three-month period ended December 31,
2001 accounted for 38% of total revenue, and revenues from one customer in the
same prior-year period accounted for 20% of total revenue. Foreign revenue for
the three-month period ended December 31, 2001 and 2000 was 4% and 2%,
respectively, of total revenue.
Overall gross margin for the three months ended December 31, 2001 and
2000 was 40% and 33%, respectively.
Gross margin on live scan identification systems revenue was 41% for
the three months ended December 31, 2001 compared to 35% in the same prior-year
period. Gross margins benefited the current-year period from a favorable product
mix and, to a lesser extent, lower product warranty costs.
Live scan maintenance margin for the three months ended December 31,
2001 and 2000 was 31% and 21%, respectively. This increase is due in part to
improved product reliability. The maintenance staff does new installations as
well as provides maintenance services. The Company has increased staffing in
this area to accommodate the growing install base. When they are performing
installation and warranty work their time is charged to identification cost of
sales.
Gross margin on FaceIt license revenue decreased to 74% for the
three-month period ended December 31, 2001 from 83% during the same prior-year
period due primarily to an increase in personnel-related costs for licensing
administration and post contract customer support.
FaceIt service margin increased to 29% during the current-year
three-month period from 16% during the same prior-year period. The increase in
margin is due primarily to services provided to commercial customers that have
higher billable rates than government contracts. FaceIt service revenue in the
prior-year three-month period was primarily provided under one United States
government contract.
16
VISIONICS CORPORATION
THREE MONTHS ENDED DECEMBER 31, 2001
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Sales and marketing expense for the three-month period ended December
31, 2001 was $1,405,000 or 19% of total revenue compared to $1,137,000 or 16% of
total revenue for the same prior-year period. The increase in sales and
marketing expense is due primarily to an increase in personnel and promotional
activities for new product marketing. The Company expects sales and marketing
expenses to be in a similar range in the second quarter of fiscal 2002, dropping
to 14 to 16 percent of total revenue during the second half of the fiscal year.
Engineering and development expense was $1,985,000 or 27% of total
revenue for the three-month period ended December 31, 2001 compared to
$1,145,000 or 16% of total revenue in the same prior-year period. The increase
in expense is due primarily to an increase in personnel and new product
development costs related to IBIS, the biometric network platform and other new
products. In addition, there was a decrease in billable customer contracts for
custom software development. Engineering expenses for the three-month periods
ended December 31, 2001 and 2000 are net of $21,000 and $159,000, respectively,
of costs related to a federally funded demonstration project grant. The Company
expects engineering and development expenses to be in a similar range in the
second quarter of fiscal 2002, dropping to 13 to 15 percent of total revenue
during the second half of the fiscal year.
General and administrative expense for the three-month periods ended
December 31, 2001 was $1,350,000 or 18% of total revenue compared to $948,000 or
13% of total revenue in the same prior-year period. The increase in expense is
due primarily to legal costs associated with licensing agreements, professional
recruitment services and a $85,000 non-cash charge for the valuation of stock
options granted to a contractor. The Company expects general and administrative
expenses to be in a similar dollar range in the second quarter of fiscal 2002,
with a decrease as a percent of total revenue during the second half of the
fiscal year.
Non-recurring charges for the three-month period ended December 31,
2000 of $706,000 consist primarily of professional service costs associated with
merger activities.
Other income, net increased to $162,000 for the three months ended
December 31, 2001 from $72,000 for the same prior-year period due primarily to
an increase in interest income from higher cash balances.
The provision of income taxes of $17,000 for the current-year
three-month period is due to state income taxes.
The Company generated a net loss for the three-month period ended
December 31, 2001 of $1,633,000, or $0.06 per share loss, as compared to a net
loss of $2,905,000, or $0.13 per share loss, for the same prior-year period. The
cumulative effect of the change in accounting principle resulted in a $0.06 per
share loss during the prior-year three-month period. The effect on the
prior-year three-month period for the non-recurring charges of $706,000 equates
to a $0.03 per share loss.
INFLATION
The Company does not believe inflation has significantly affected
revenues or expenses.
17
VISIONICS CORPORATION
THREE MONTHS ENDED DECEMBER 31, 2001
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
NET OPERATING LOSS CARRYFORWARDS
At December 31, 2001, the Company had carryforwards of net operating
losses of approximately $51,427,000 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. Any future ownership change could create a
limitation with respect to loss carryforwards not currently subject to an annual
limitation. Approximately $11,108,000 of the $51,427,000 net operating loss
carryforwards relates to compensation associated with the exercise of
non-qualified stock options which, when realized, would result in approximately
$4,443,000 credited to additional paid-in capital.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
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. 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 on March 30, 2003.
There were no borrowings under this line at December 31, 2001.
At December 31, 2001, the Company had $32,344,000 in cash and cash
equivalents and $81,000 of restricted cash. On October 11, 2001, the Company
closed on a private placement offering of common stock and warrants. A total of
1,801,800 shares were sold to accredited investors at a price of $11.10 each.
Net proceeds to the Company approximated $19 million. 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.
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 $1,696,000 for the three
months ended December 31, 2001 compared to $285,000 in the same prior-year
period. Cash flow from operating activities benefited the current year-period
from a reduction in the net loss and a smaller increase in inventory, the
prior-year period benefited from more customer prepayments of maintenance
services and accounts receivable collections.
18
VISIONICS CORPORATION
THREE MONTHS ENDED DECEMBER 31, 2001
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Net cash used in investing activities increased to $416,000 for the
three months ended December 31, 2001 from $316,000 the same prior-year period
due primarily to an increase in the purchase of equipment to support new product
development, computer equipment, and leasehold improvements.
Net cash provided by financing activities was $24,747,000 for the
three-month period ended December 31, 2001 compared to $106,000 during the same
prior-year period. Cash from financing activities during the current-year period
was provided primarily from a private placement of common stock that closed on
October 11, 2001, and to a lesser extent, stock option and warrant exercises.
19
VISIONICS CORPORATION
THREE MONTHS ENDED DECEMBER 31, 2001
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain market risks with our $2 million line of
credit of which there were no borrowings outstanding at December 31, 2001. The
line bears interest at a rate of one half percent (0.5%) above the prime rate.
The Company is subject to foreign currency exposure, primarily with the British
Pound and the Euro. At December 31, 2001 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.
20
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material lawsuits pending or, to the Company's
knowledge, threatened against the Company.
ITEM 2. CHANGES IN SECURITIES
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. (a) EXHIBITS
Exhibit 10.20 Change in Terms Agreement dated December 19, 2001
between the Company and Associated Bank Minnesota.
Exhibit 10.21 Business Loan Agreement dated December 19, 2001
between the Company and Associated Bank Minnesota.
(b) REPORTS ON FORM 8-K
The Company filed a report on Form 8-K with the Securities and
Exchange Commission on October 18, 2001 announcing that it closed on
a private placement offering of common stock and warrants. A total
of 1,801,800 shares were sold to accredited investors at a price of
$11.10 each with total net proceeds to the Company of approximately
$19.0 million. The Company issued warrants to purchase up to 36,036
shares of common stock at an exercise price of $16.86 per share to
an investment-banking firm as partial compensation for services
rendered in the private placement.
21
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)
February 14, 2002 /s/ Robert F. Gallagher
--------------------------
Robert F. Gallagher
Chief Financial Officer
22