10-Q 1 visionics011555_10q.txt VISIONICS CORPORATION FORM 10-Q 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 March 31, 2001 -------------------------------------------------- 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 ---------------------------------------------------------- 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 April 30, 2001 - 23,311,004 shares ---------------------------- ---------------------------------- (Class) (Outstanding) 1 VISIONICS CORPORATION THREE MONTHS ENDED MARCH 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 15 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 22 PART II - OTHER INFORMATION: ITEM 1. LEGAL PROCEEDINGS 23 ITEM 2. CHANGES IN SECURITIES 23 ITEM 3. DEFAULTS UPON SENIOR SECURITIES 23 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 23 ITEM 5. OTHER INFORMATION 23 ITEM 6. (a) EXHIBITS 23 (b) REPORTS ON FORM 8-K 23 SIGNATURES 24 ---------- 2 VISIONICS CORPORATION THREE MONTHS ENDED MARCH 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, 2000. 3 VISIONICS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)

See accompanying notes to consolidated financial statements. 4 VISIONICS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

See accompanying notes to consolidated financial statements. 5 VISIONICS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

See accompanying notes to consolidated financial statements. 6 VISIONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2001 (UNAUDITED) (1) DESCRIPTION OF BUSINESS Effective February 16, 2001, Digital Biometrics, Inc. (DBI) merged with Visionics Corporation. Concurrent 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 for all periods presented under the pooling of interests method of accounting. The Company 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. 7 VISIONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2001 (UNAUDITED) A majority of the Company's revenues in the three-month periods ended March 31, 2001 and 2000 were derived from live scan systems sales, photographic image capture systems, maintenance and applications development services to governmental customers. The Company's sales have historically included large purchases by a relatively small number of customers. This concentration of sales among few relatively large customers is expected to continue in the foreseeable future. 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., which commenced operations during 1999. All material intercompany accounts and transactions have been eliminated in consolidation. As noted above, Digital Biometrics, Inc. and Visionics Corporation merged effective February 16, 2001 in a merger accounted for as a pooling-of-interest. Expenses of $1,262,293 and $1,968,304, respectively, for the three- and six-month periods ended March 31, 2001 were incurred pursuant to the merger activities and are recorded as non-recurring charges. 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, 2000, Form 8-K dated February 15, 2001 and the related Form 8-K/A, all of which have been filed with the SEC. (b) 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. (c) REVENUE RECOGNITION SOFTWARE LICENSES - Software license revenue 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 license fee is fixed or determinable; and payment is due within one 8 VISIONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2001 (UNAUDITED) year and collection is probable. Revenue 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, 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 - A significant portion of revenue is recognized upon installation, particularly where the equipment is integrated into an outside network. For further explanation, see "accounting change" section of this footnote. (d) 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. (e) 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 has 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. Of this amount $3,865,000 of revenue was recognized during the six-month period ended March 31, 2001. (3) SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK The Company extends credit to substantially all of its customers. Approximately 81% and 93%, respectively, of customer accounts receivable at March 31, 2001 and September 30, 2000 were from government agencies, of which 19% and 33%, respectively, was from one customer. Revenue from one customer in the three-month period ended March 31, 2001 accounted for 13% of total revenue, and revenue from one customer in the three-month period ended March 31, 2000 accounted for 15% of total revenue. Foreign revenue for the three-month period ended March 31, 2001 was 16% of total revenue compared to less than 1% the same prior-year period. Revenue from one customer in the six-month period ended March 31, 2001 accounted for 14% of total revenue, and revenue from two customers in the same prior-year period accounted for 35% of total 9 VISIONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2001 (UNAUDITED) revenue. Foreign revenue for the six-month periods ended March 31, 2001 and 2000 were 9% of total revenue compared to less than 1% 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. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION - CASH PAID FOR: Six Months Ended March 31, 2001 2000 -------- -------- Interest $2,761 $5,011 Income taxes 95,650 -- (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 March 31, 2001 is $499,935. (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: March 31, September 30, 2001 2000 ------------- ------------- Components and subassemblies $3,593,346 $3,210,121 Work in process 842,159 217,211 Finished goods 659,323 473,422 Finished goods shipped to customers awaiting installation 775,749 -- ------------- ------------- $5,870,577 $3,900,754 ============= ============= (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 in June, 2001. There were no borrowings under this line at March 31, 2001. 10 VISIONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2001 (UNAUDITED) (8) OTHER ACCRUED EXPENSES Other accrued expenses consists of: March 31, September 30, 2001 2000 ------------- ------------- Accrued salaries, bonuses and commissions $ 238,243 $ 343,958 Accrued vacation 416,180 306,955 Accrued installation costs 98,000 480,500 Accrued warranty costs 52,400 301,570 Other accrued expenses 514,530 327,297 ------------- ------------- $ 1,319,353 $ 1,760,280 ============= ============= (9) STOCKHOLDERS' EQUITY During the three-month period ended March 31, 2001, the Company granted stock option awards to non-executive employees for the purchase of an aggregate of 67,000 shares of common stock. These options are exercisable at $5.969 per share and expire in 2008. 11 VISIONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2001 (UNAUDITED) (10) NET INCOME (LOSS) PER COMMON SHARE The per share computations are based on the weighted average number of common shares outstanding during the periods.

The following is a summary of those securities outstanding at March 31 for the respective periods, which have been excluded from the calculations because the effect on net income (loss) per common share would not have been dilutive:

12 VISIONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2001 (UNAUDITED) (11) ADDITIONAL CONSOLIDATING FINANCIAL INFORMATION The following financial information reflects the results of operations for the three- and six-month periods ended March 31, 2000 for the merger between Digital Biometrics, Inc. and Visionics Corporation on February 16, 2001. VISIONICS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000 (UNAUDITED)

13 VISIONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2001 (UNAUDITED) VISIONICS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED MARCH 31, 2000 (UNAUDITED)

14 VISIONICS CORPORATION THREE MONTHS ENDED MARCH 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, 2000, 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 - 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. 15 VISIONICS CORPORATION THREE MONTHS ENDED MARCH 31, 2001 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. 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. Prior to October 1, 2000 the Company generally recognized live scan product revenue on the date of shipment for orders which were f.o.b. origin and upon delivery for f.o.b. destination, although recognition at some later milestone was not uncommon based on the terms of specific customer contracts. With the adoption of the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 pertaining to revenue recognition, the Company changed its revenue recognition policy on October 1, 2000 to defer revenue recognition until its live scan products are installed. Revenue for professional services contracts and systems integration services revenues are recognized using the percentage of completion method, completed contract basis or on a time-and-materials basis. Software license revenue 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 license 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 16 VISIONICS CORPORATION THREE MONTHS ENDED MARCH 31, 2001 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 maintenance and repair contracts is recognized over the period of the agreement. Services revenue is recognized when the related services are performed. The Company's standard terms of sale are payment due net in thirty days, f.o.b. Visionics Corporation Terms of sale and shipment may, however, be subject to negotiation and may affect the Company's timing and criteria for revenue recognition. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000 Total revenue increased 31% to $7,044,000 for the three months ended March 31, 2001 compared to $5,369,000 in the same prior-year period. Live scan identification systems revenue declined 9% to $3,310,000 compared to $3,626,000 in the same prior-year period. The decline reflects normal fluctuations inherent in the volatile live scan business. Live scan maintenance revenue was $1,937,000 for the three months ended March 31, 2001 compared to $1,117,000 for the same prior-year period, an increase of 73%. This increase is due primarily to a larger installed base of live scan systems covered by maintenance agreements. FaceIt license revenue increased 162% to $1,421,000 for the three months ended March 31, 2001 compared to $542,000 for the same prior-year period. This increase is primarily due to a one-time license fee for use of FaceIt software for voter registration in Mexico. FaceIt services revenue increased 349% to $376,000 for the three months ended March 31, 2001 compared to $84,000 for the same prior-year period. This increase is primarily due to custom development services provided under a United States government contract. Revenue from one customer in the three-month period ended March 31, 2001 accounted for 13% of total revenue, and revenues from one customer in the same prior-year period accounted for 15% of total revenue. Foreign revenue for the three-month period ended March 31, 2001 was 16% of total revenue including a sale in Mexico compared to less than 1% the same prior-year period. Overall gross margin for the three months ended March 31, 2001 and 2000 was 41% and 49%, respectively. Gross margin on live scan identification systems revenue was 29% for the three months ended March 31, 2001 compared to 49% in the same prior-year period. This decrease is due primarily to higher installation, warranty and product manufacturing costs associated with lower volume during the current year period along with product mix. Live scan maintenance margin for the three months ended March 31, 2001 and 2000 was 28% and 25%, respectively. The maintenance staff does new installations as well as provides maintenance services. The Company has increased staffing in this area to accommodate the growing 17 VISIONICS CORPORATION THREE MONTHS ENDED MARCH 31, 2001 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS install base while still providing excellent installation services. When they are performing installation work, their time is charged to identification cost of sales. Gross margin on FaceIt license revenue decreased to 89% for the three-month period ended March 31, 2001 from 97% during the same prior-year period due primarily to an increase in amortization of software development costs and licensing administration. FaceIt services margin decreased to 34% during the current-year three-month period from 46% during the same prior-year period. The decrease in margin is due primarily to most of the services in the current-year three-month period are being provided for government contracts which have lower billable rates than commercial rates, along with an increase in personnel to accommodate the increase in custom development service contracts and potential opportunities. Sales and marketing expense for the three-month period ended March 31, 2001 was 15% of total revenue compared to 14% for the same prior-year period. The increase in sales and marketing absolute dollars is due primarily to costs in the current-year period associated with a subsidiary in the United Kingdom which was not yet established in the same prior-year period along with an increase in personnel-related costs and promotional activities for IBIS product marketing. Engineering and development expense was 16% of total revenue for the three-month periods ended March 31, 2001 and 2000. The increase in absolute dollars is due primarily to an increase in new product development costs related to IBIS and for the development of a biometric network appliance. Engineering expenses for the three-month periods ended March 31, 2001 and 2000 are net of $212,000 and $76,000, respectively, of costs related to a federally funded demonstration project grant. The Company expects engineering and development expenses to exceed 10% of total revenue through the end of fiscal 2001. General and administrative expenses for the three-month periods ended March 31, 2001 and 2000 were 14% and 18%, respectively, of total revenue. The decrease in general and administrative expenses as a percentage of total revenue is due primarily to the increase in revenue. General and administrative expenses approximate the previous year. Non-recurring charges for the three-month period ended March 31, 2001 of $1,262,000 consists primarily of professional service costs associated with the merger activities with Visionics Corporation. Other income, net decreased to $31,000 for the three months ended March 31, 2001 from $108,000 for the same prior-year period due primarily to a decrease in interest income from lower cash balances and to a lesser extent, costs associated with a joint venture company. The provision of income taxes of $96,000 for the current-year three-month period is due to foreign taxes related to the license revenue applicable to a sale in Mexico. The Company generated a net loss for the three-month period ended March 31, 2001 of $1,581,000, or $0.07 per share loss, as compared to a net income of $158,000, $0.01 per share, for 18 VISIONICS CORPORATION THREE MONTHS ENDED MARCH 31, 2001 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS the same prior-year period. The effect on the current-year period for the non-recurring charges of $1,262,000 equates to a $0.05 per share loss. SIX MONTHS ENDED MARCH 31, 2001 COMPARED TO SIX MONTHS ENDED MARCH 31, 2000 Total revenue increased 12% to $14,242,000 for the six months ended March 31, 2001 compared to $12,698,000 in the same prior-year period. Live scan identification systems revenue declined 14% to $8,112,000 compared to $9,399,000 in the same prior-year period. The decline reflects normal fluctuations inherent in the volatile live scan business. Live scan maintenance revenue increased 67% to $3,655,000 for the six months ended March 31, 2001 compared to $2,186,000 for the same prior-year period. This increase is due primarily to a larger installed base of live scan systems covered by maintenance agreements. FaceIt license revenue increased 143% to $1,802,000 for the six months ended March 31, 2001 compared to $741,000 for the same prior-year period. This increase is primarily due to a one-time license fee for use of FaceIt software for voter registration in Mexico. FaceIt services revenue increased 81% to $672,000 for the six months ended March 31, 2001 compared to $372,000 for the same prior-year period. This increase is primarily due to custom development services provided under a United States government contract. Revenue from one customer in the six-month period ended March 31, 2001 accounted for 14% of total revenue, and revenues from two customers in the same prior-year period accounted for 35% of total revenue. Foreign revenue for the six-month period ended March 31, 2001 was 9% of total revenue compared to less than 1% the same prior-year period. Overall gross margin for the six months ended March 31, 2001 and 2000 was 37% and 40%, respectively. Gross margin on live scan identification systems revenue was 32% for the six months ended March 31, 2001 compared to 38% in the same prior-year period. This decrease is due primarily to higher installation, warranty and product manufacturing costs associated with lower volume during the current year period and product mix. Live scan maintenance margin for the six months ended March 31, 2001 and 2000 was 25% and 26%, respectively. Gross margin on FaceIt license revenue decreased to 87% for the six-month period ended March 31, 2001 from 95% during the same prior-year period due primarily to an increase in amortization of software development costs and licensing administration. FaceIt services margin decreased to 27% during the current-year six-month period from 46% during the same prior-year period. The decrease in margin is due primarily to most of the services in the current-year period are being provided for government contracts which have lower billable rates than commercial rates, along with an increase in personnel to accommodate the increase in custom development service contracts and potential opportunities. 19 VISIONICS CORPORATION THREE MONTHS ENDED MARCH 31, 2001 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Sales and marketing expense for the six-month period ended March 31, 2001 was 15% of total revenue compared to 12% for the same prior-year period. The increase in sales and marketing absolute dollars is due primarily to costs in the current-year period associated with a subsidiary in the United Kingdom which was not yet established in the same prior-year period along an increase in personnel-related costs and promotional activities for IBIS product marketing. Engineering and development expense was 16% and 13%, respectively, of total revenue for the six-month periods ended March 31, 2001 and 2000. The increase in absolute dollars is due primarily to an increase in new product development costs related to IBIS and for the development of a biometric network appliance. Engineering expenses for the six-month periods ended March 31, 2001 and 2000 are net of $450,000 and $235,000, respectively, of costs related to a federally funded demonstration project grant. The Company expects engineering and development expenses to exceed 10% of total revenue through the end of fiscal 2001. General and administrative expenses for the six-month periods ended March 31, 2001 and 2000 were 13% and 15%, respectively, of total revenue. The decrease in general and administrative expenses as a percentage of total revenue is due primarily to the increase in revenue. General and administrative expenses are flat with the previous year. Non-recurring charges for the six-month period ended March 31, 2001 of $1,968,000 consists primarily of professional service costs associated with the merger activities with Visionics Corporation. Other income, net decreased to $103,000 for the six months ended March 31, 2001 from $184,000 for the same prior-year period due primarily to a decrease in interest income from lower cash balances and to a lesser extent, costs associated with a joint venture company. The provision of income taxes of $96,000 for the current-year six-month period is due to foreign taxes related to the license revenue applicable to a sale in Mexico. The benefit of income taxes in the amount of $38,000 in the six-month period ended March 31, 2000 relates to reversal of income taxes accrued prior to the merger. The Company generated a net loss for the six-month period ended March 31, 2001 of $4,486,000, or $0.19 per share loss, as compared to a net income of $252,000, $0.01 per share, for the same prior-year period. The effect on the current-year period for the non-recurring charges of $1,968,000 equates to a $0.08 per share loss. INFLATION The Company does not believe inflation has significantly affected revenues or expenses. NET OPERATING LOSS CARRYFORWARDS At March 31, 2001, the Company had carryforwards of net operating losses of approximately $41,000,000 that may allow the Company to reduce future income taxes that would otherwise be 20 VISIONICS CORPORATION THREE MONTHS ENDED MARCH 31, 2001 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 $3,022,000 of the $41,000,000 net operating loss carryforwards relates to compensation associated with the exercise of non-qualified stock options which, when realized, would result in approximately $1,209,000 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 in June, 2001. There were no borrowings under this line at March 31, 2001. At March 31, 2001, the Company had $1,479,000 in cash and cash equivalents and $500,000 of restricted cash. 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. To fully exploit the opportunities presented by the merger between Digital Biometrics, Inc. and Visionics Corporation, 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 Company's business plan will be available on terms acceptable or favorable to Visionics, or on any terms. If Visionics fails to obtain such financing, its business prospects and the market price of Visionics' common stock may be materially adversely affected. ANALYSIS OF CASH FLOWS FROM OPERATIONS Net cash used in operating activities was $1,923,000 for the six months ended March 31, 2001 compared to net cash provided by operating activities of $1,357,000 in the same prior-year period. The decrease in cash flow from operating activities resulted primarily from the net loss incurred during the current-year period, an increase in inventory as a result of a change in revenue recognition pursuant to SAB 101 and the increase in restricted cash associated with a federally funded development grant, partially offset by decreased accounts receivable balances. 21 VISIONICS CORPORATION THREE MONTHS ENDED MARCH 31, 2001 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Net cash used in investing activities decreased to $421,000 for the six months ended March 31, 2001 from $739,000 the same prior-year period due primarily to a decrease in capitalized software development costs. Net cash provided by financing activities was $194,000 for the six-month period ended March 31, 2001 compared to $987,000 during the same prior-year period. Cash from financing activities was provided primarily from stock option exercises. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is subject to foreign currency exposure, primarily with the British Pound and the Euro. At March 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. 22 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 The Company held a Special Meeting of Stockholders on February 15, 2001. Proxies for such meeting were solicited pursuant to Regulation 14A under the Securities Exchange Act of 1934 as amended. At the meeting, sufficient favorable votes were cast to approve the following proposals: * Adopt the Agreement and Plan of Merger, dated as of October 18, 2000, by and among DBI, Visionics Corporation and VC Acquisition Corp., a wholly owned subsidiary of DBI, and the transactions contemplated by the merger agreement, including the merger and DBI's issuance of over 7,000,000 shares of DBI common stock, including shares issuable upon exercise of Visionics stock options to be assumed by DBI. The results of the vote on this proposal were 10,786,956 shares voted for approval; 97,776 shares voted against; 72,328 shares abstaining and no broker non-votes. * Amend DBI's certificate of incorporation to change the name of the corporation to "Visionics Corporation" subject to the completion of the merger. The results of the vote on this proposal were 10,690,463 shares voted for approval; 191,003 shares voted against; 75,594 shares abstaining and no broker non-votes. ITEM 5. OTHER INFORMATION None ITEM 6. (a) EXHIBITS Exhibit 10.18 Change in Terms Agreement dated April 30, 2001 between the Company and Associated Bank Minnesota. (b) REPORTS ON FORM 8-K On February 27, 2001 the Company filed a report on Form 8-K announcing completion of the merger between Digital Biometrics, Inc. and Visionics Corporation along with an amended Certificate of Incorporation to change its name from Digital Biometrics, Inc. to Visionics Corporation. 23 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) May 15, 2001 /s/ Robert F. Gallagher ----------------------------------- Robert F. Gallagher Chief Financial Officer 24

DIGITAL BIOMETRICS INC 10-Q