10-Q 1 visionics020798_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 December 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 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 ---------- 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)

~~PART~~December I31, September 30, 2001 2001 ------------- ~~FINANCIAL~~------------- ~~INFORMATION~~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 ------------- ~~PAGE~~------------- ~~ITEM~~Property 1.and ~~CONSOLIDATED~~equipment ~~FINANCIAL~~5,178,412 ~~STATEMENTS~~4,775,102 Less accumulated depreciation and amortization (~~UNAUDITED~~3,250,250) ~~CONSOLIDATED~~(3,052,603) ~~BALANCE~~------------- ~~SHEETS~~------------- 41,928,162 ~~CONSOLIDATED~~1,722,499 ~~STATEMENTS~~------------- OF------------- ~~OPERATIONS~~Software 5development ~~CONSOLIDATED~~costs, ~~STATEMENTS~~net OFof ~~CASH~~accumulated ~~FLOWS~~amortization 6of ~~NOTES~~$333,288 TOand ~~CONSOLIDATED~~$294,338, ~~FINANCIAL~~respectively ~~STATEMENTS~~644,686 7683,635 ~~ITEM~~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.) ~~MANAGEMENT'S~~7,121,155 ~~DISCUSSION~~7,653,552 ~~AND~~Other ~~ANALYSIS~~accrued OFexpenses ~~FINANCIAL~~(note ~~CONDITION~~8) ~~AND~~1,055,635 ~~RESULTS~~1,460,576 OFCurrent ~~OPERATIONS~~installments 16of ~~ITEM~~notes 3.payable ~~QUANTITATIVE~~12,976 ~~AND~~16,857 ~~QUALITATIVE~~Current ~~DISCLOSURES~~installments ~~ABOUT~~of ~~MARKET~~capital ~~RISK~~lease 24obligations ~~PART~~-- II2,406 ------------- ~~OTHER~~------------- ~~INFORMATION:~~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 ------------- ------------- ~~ITEM~~Total 1.liabilities ~~LEGAL~~10,619,943 ~~PROCEEDINGS~~11,939,039 25------------- ~~ITEM~~------------- 2.Stockholders' ~~CHANGES~~equity IN(note ~~SECURITIES~~9): 25Preferred ~~ITEM~~stock, 3undesignated, par value $.01 ~~DEFAULTS~~per ~~UPON~~share, ~~SENIOR~~5,000,000 ~~SECURITIES~~shares 25authorized, ~~ITEM~~none 4issued -- -- Common stock, $.01 ~~SUBMISSION~~par OFvalue. ~~MATTERS~~Authorized, TO40,000,000 Ashares; ~~VOTE~~issued OFand ~~SECURITY~~outstanding ~~HOLDERS~~28,799,140 and 25,431,298 ~~ITEM~~shares, 5.respectively ~~OTHER~~287,991 ~~INFORMATION~~254,313 25Additional ~~ITEM~~paid-in 6.capital 85,183,608 60,090,870 Deferred compensation (a107,875) ~~EXHIBITS~~(126,250) 25Accumulated deficit (b48,382,014) ~~REPORTS~~(46,748,577) ONAccumulated ~~FORM~~other 8comprehensive income (loss) (1,659) 6,484 -K------------ 25------------- ~~SIGNATURES~~Total 26stockholders' 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)

~~June~~Three ~~30,~~Months ~~September~~Ended 30December 31, 2001 2000 ------------ ------------ ~~Current assets~~Revenue: ~~Cash~~Live ~~and~~scan ~~cash~~identification ~~equivalents~~systems $ 74,~~695~~177,~~253~~635 $ 34,~~623~~802,~~574~~486 ~~Restricted~~Live ~~cash~~scan ~~(note~~maintenance ~~5) 80~~2,~~915 - Accounts receivable~~462,250 ~~less allowance for doubtful accounts of $185~~1,~~800 and $150~~718,~~800,~~417 ~~respectively~~FaceIt ~~6,161,647~~license 9521,~~779,796~~069 ~~Inventory (note 6) 6~~381,~~039,353~~333 ~~3,900,754~~FaceIt ~~Prepaid~~services ~~expenses and other costs 402~~317,~~483~~987 ~~269~~296,~~088~~501 ------------ ------------ Total ~~current~~revenue ~~assets 20~~7,~~379~~478,~~651~~941 177,~~573~~198,~~212~~737 ------------ ------------ ~~Property~~Cost ~~and~~of ~~equipment~~revenue: 4Live scan identification systems 2,~~722~~445,~~819~~238 3,~~978~~139,~~102~~879 ~~Less~~Live ~~accumulated~~scan ~~depreciation~~maintenance ~~and~~1,707,935 ~~amortization~~1,352,046 (3FaceIt license 136,~~211~~643 64,~~742)~~740 (2FaceIt services 226,~~607~~996 247,~~536)~~743 ------------ ------------ 1Total cost of revenue 4,~~511~~516,~~077~~812 14,~~370~~804,~~566~~408 ------------ ------------ ~~Software~~Gross ~~development~~margin ~~costs~~2, ~~net of accumulated amortization of $255~~962,~~389~~129 ~~and $138~~2,~~543~~394,329 ~~respectively 722,585 839,430 Patents, trademarks, copyrights, and licenses, net of accumulated amortization of $67,497 and $82,501, respectively 54,689 46,285 Other assets~~ - ~~76,310~~ ------------ ------------ ~~$ 22~~Selling,~~668,002~~ $general ~~19,905,803~~and ~~============~~administrative ~~============ Current liabilities~~expenses: ~~Accounts~~Sales ~~payable~~and $marketing 21,~~417~~405,~~484~~278 ~~$ 2~~1,~~093~~136,~~384~~698 ~~Deferred~~Engineering ~~revenue~~and ~~(note~~development ~~2) 5~~1,~~900~~984,~~423~~795 31,~~956~~144,~~270~~911 ~~Other~~General ~~accrued~~and ~~expenses~~administrative ~~(note 8)~~ 1,~~535~~350,~~838~~054 1948,~~760,280~~038 ~~Current~~Non-recurring ~~installments~~charges of-- ~~notes payable 15~~706,~~944~~011 ~~15,071 Current installments of capital lease obligations 2,302 2,017~~ ------------ ------------ Total ~~current~~expenses ~~liabilities 9~~4,~~871~~740,~~991~~127 73,~~827~~935,~~022~~658 ~~Deferred~~------------ ~~revenue,~~------------ ~~excluding~~Loss ~~current~~from ~~portion~~operations ~~334~~(1,~~039 511~~777,~~976~~998) ~~Notes payable~~(1, ~~excluding current installments 15~~541,~~134~~329) ~~28,334~~Other ~~Capital~~income ~~lease obligations~~(expense), ~~excluding~~net ~~current installments 1~~161,~~776~~734 371,~~540~~941 ------------ ------------ ~~Total~~Loss ~~liabilities~~before 10income taxes (1,~~222~~616,~~940~~264) 8(1,~~370~~469,~~872~~388) Provision for income taxes 17,173 -- ------------ ------------ ~~Stockholders'~~Loss ~~equity~~before ~~(note~~accounting ~~9):~~change ~~Preferred stock~~(1,633,437) ~~undesignated~~(1,469,388) ~~par~~Cumulative ~~value~~effect ~~$.01~~of ~~per~~change ~~share,~~in ~~5,000,000~~accounting ~~shares~~principle ~~authorized, none issued~~ - - ~~Common stock~~(1, ~~$.01 par value. Authorized~~435,652) ~~40,000,000~~------------ ~~shares; issued and outstanding 24,645,780 and 23,115,781 shares, respectively 246,458 231,158 Additional paid~~-in----------- ~~capital~~Net ~~58,421,722~~loss ~~52,355,044~~$ ~~Deferred compensation~~ (521,~~125) (93~~633,~~750~~437) ~~Accumulated~~$ ~~deficit~~ (462,~~181~~905,~~899~~040) ~~(40,957,320)~~============ ~~Accumulated~~============ ~~other~~Loss ~~comprehensive~~per ~~income~~common ~~(loss)~~share ~~10,906~~- ~~(201)~~basic and assuming dilution ------------ --------------------------------------- ~~Total~~Loss ~~stockholders'~~before ~~equity~~accounting ~~12,445,062~~change ~~11,534,931~~$ (0.06) $ (0.07) Cumulative effect of change in accounting principle -- (0.06) ------------ ------------ Net loss per common share $ ~~22,668,002~~(0.06) $ 19(0.13) ============ ============ Weighted average common shares outstanding 27,~~905~~761,~~803~~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 ~~Nine~~December ~~Months Ended June 30~~31, ~~June 30, 2001 2000 2001 2000~~ ------------ ----------------- 2001 2000 ------------ ------------ ~~Revenue:~~Cash ~~Live~~flows ~~scan~~from ~~identification~~operating ~~systems~~activities: $Net ~~4,960,341~~loss $ 2(1,~~598~~633,~~414~~437) $ ~~13,072,402 $ 11,997,673 Live scan maintenance~~ (2,~~063~~905,~~399~~040) ~~1,303,031~~Adjustments ~~5,718,884~~to ~~3,489,032~~reconcile ~~FaceIt~~net ~~license~~loss ~~547,538~~to ~~450,042~~net ~~2,350,024~~cash ~~1,190,862~~used ~~FaceIt~~in ~~service~~operating ~~500,259~~activities: ~~149,219~~Provision ~~1,172,633~~for ~~520,937~~doubtful ~~------------~~accounts ~~------------~~receivable ~~------------ ------------ Total revenue 8~~(32,~~071,537~~995) ~~4,500,706 22,313,943 17,198,504~~ --~~----------~~ Stock-~~-----------~~based ~~------------~~compensation ~~------------ Cost of revenue: Live scan identification systems 3~~118,~~082,410~~140 1118,~~209,175~~482 ~~8,564,110~~Depreciation ~~7,000,525~~and ~~Live~~amortization ~~scan maintenance 1~~210,~~544,895~~319 ~~932~~244,~~693~~432 ~~4,291,058~~Amortization ~~2,555,327~~of ~~FaceIt~~software ~~license~~development ~~146,107~~costs 4838,~~721~~949 ~~371~~36,~~437~~271 ~~82,199~~Write-off ~~FaceIt~~of ~~service~~intangible ~~395,095~~assets ~~81,265 889,004 283,703~~ --~~----------~~ ~~------------~~607 ~~------------~~Loss ~~------------~~on ~~Total~~disposal ~~cost~~ of ~~revenue~~fixed ~~5,168,507~~assets ~~2,271,854~~471 ~~14,115,609 9,921,754~~ --~~----------~~ ~~------------~~Changes ~~------------~~in ~~------------~~operating ~~Gross~~assets ~~margin~~and ~~2,903,030~~liabilities: ~~2,228,852~~Restricted ~~8,198,334~~cash ~~7,276,750~~ --~~----------~~ ~~------------ ------------ ------------ Selling~~(625,000) ~~general~~Accounts ~~and~~receivable ~~administrative expenses: Sales and marketing~~ 1,~~113~~337,~~396~~785 ~~941,858~~ 3,~~310~~416,~~319~~763 ~~2,450,869~~Inventories ~~Engineering and development 1~~(604,~~270,876~~643) (1,~~370~~146,~~503~~673) ~~3,539,296~~Prepaid ~~2,959,068~~expenses ~~General and administrative 1~~(91,~~011,712~~533) ~~854,504 2,931,064 2,774,633 Non-recurring charges~~ (~~note 2~~354,642) ~~232,474~~Security ~~32,607~~deposits ~~2,200,778~~and ~~32,607~~other ~~------------~~assets --~~----------~~ ~~------------~~76,310 ~~------------~~Accounts ~~Total~~payable and accrued expenses 3(450,~~628,458~~028) 3(956,~~199,472~~968) 11Deferred revenue (589,~~981,457~~308) 81,~~217~~810,~~177~~858 ------------ ------------ ~~------------~~Net ~~------------~~cash ~~Loss~~used ~~from~~in ~~operations~~operating ~~(725,428)~~activities (~~970~~1,~~620) (3~~696,~~783,123~~280) (~~940~~284,~~427~~600) ~~Other income, net 14,565 107,594 117,284 291,399~~ ------------ ------------ ~~------------~~Cash ~~------------~~flows ~~Loss~~from ~~before~~investing ~~income~~activities: ~~taxes~~Purchase of property and equipment (~~710~~412,~~863~~916) (~~863~~310,~~026~~252) (3Patents,~~665,839)~~ ~~(649~~trademarks,~~028)~~ ~~Provision~~copyrights ~~for~~and ~~(benefit~~licenses of(2,765) ~~income taxes 27,438 - 123,088~~ (375,~~526~~386) ------------ ------------ ~~------------~~Net ~~------------~~cash ~~Loss~~used ~~before~~in ~~accounting~~investing ~~change~~activities (~~738~~415,~~301~~681) (~~863~~315,~~026~~638) ~~(3,788,927) (611,502) Cumulative effect of change in accounting principle~~ - - ~~(1,435,652)~~ - ---------~~---~~ ------------ ~~------------~~Cash ~~------------~~flows ~~Net~~from ~~loss~~financing $activities: ~~(738,301)~~Principal $payments ~~(863,026)~~on $capital ~~(5,224,579)~~lease $obligations (~~611~~3,~~502~~540) ~~============ ============ ============ ============ Loss per common share~~ --~~-------------------~~ ~~Loss~~Repayment ~~before~~of ~~accounting~~notes ~~change~~payable $ (~~0.03~~6,475) $ (~~0.04~~3,592) $Net ~~(0.16)~~proceeds $from ~~(0.03)~~private ~~Cumulative~~placement ~~effect~~ of ~~change~~common instock ~~accounting~~18,907,398 ~~principle~~ - - ~~(0.06)~~Exercise -of ~~------------~~stock ~~------------~~options and warrants 5,849,508 109,678 ------------ ------------ Net ~~loss~~cash ~~per~~provided ~~common~~by ~~share~~financing $activities ~~(0.03)~~24,746,891 $106,086 ~~(0.04) $ (0.22) $ (0.03) ============ ============ ============ ============ Loss per common share~~ - ~~assuming dilution~~ ----------- ------------~~------------------~~ ~~Loss~~Effect ~~before~~of ~~accounting~~exchange ~~change~~rates $on cash (~~0.03~~8,143) $1,216 Increase (~~0.04~~decrease) $in ~~(0.16)~~cash $and ~~(0.03)~~cash ~~Cumulative~~equivalents ~~effect~~22,626,787 of(492,936) ~~change~~Cash inand ~~accounting~~cash ~~principle~~equivalents -at -beginning ~~(0.06)~~of -period ~~------------~~9,716,772 ~~------------~~3,623,574 ------------ ------------ ~~Net~~Cash ~~loss~~and ~~per~~cash ~~common~~equivalents ~~share~~at $end ~~(0.03)~~of $period ~~(0.04)~~ $ ~~(0.22) $ (0.03) ============ ============ ============ ============ Weighted average common shares outstanding 23~~32,~~351~~343,~~792~~559 ~~23,068,851~~$ 233,~~265~~130,~~247~~638 ~~22,754,748~~ ============ ============ ~~============ ============ Weighted average common shares outstanding - assuming dilution 23,351,792 23,068,851 23,265,247 22,754,748 ============ ============ ============ ============~~

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

Nine Months Ended June 30, -------------------------- 2001 2000 ----------- ----------- Cash flows from operating activities: Net loss $(5,224,579) $ (611,502) Adjustments to reconcile net loss to net cash used in operating activities: Provision for doubtful accounts receivable 35,000 (16,587) Stock-based compensation 166,372 42,875 Depreciation and amortization 606,302 640,442 Amortization of software development costs 116,845 64,763 Deferred income taxes - (162,000) Write-off of intangible assets 608 - Gain on disposal of fixed assets (298) (2,048) Interest expense on debentures converted into common stock - 12,350 Adjustment to conform fiscal year end of pooled acquisition - 438,119 Changes in operating assets and liabilities: Restricted cash (80,915) - Accounts receivable 3,583,149 2,416,197 Inventories (2,138,599) (1,446,665) Prepaid expenses (57,085) (161,551) Accounts payable and accrued expenses 317,722 (2,534,658) Deferred revenue 1,766,216 995,697 Income taxes payable - (11,000) ----------- ----------- Net cash used in operating activities (909,262) (335,568) ----------- ----------- Cash flows from investing activities: Purchase of property and equipment (736,563) (648,612) Proceeds from disposal of property and equipment 1,090 12,794 Software development costs - (320,795) Patents, trademarks, copyrights and licenses (20,054) (29,683) ----------- ----------- Net cash used in investing activities (755,527) (986,296) ----------- ----------- Cash flows from financing activities: Principal payments on capital lease obligations (1,479) (150,369) Repayment of notes payable (12,327) - Proceeds from private placement of common stock 5,462,334 - Exercise of stock options 276,833 1,116,113 ----------- ----------- Net cash provided by financing activities 5,725,361 965,744 ----------- ----------- Effect of exchange rates on cash 11,107 - Increase (decrease) in cash and cash equivalents 4,071,679 (356,120) Cash and cash equivalents at beginning of period 3,623,574 6,302,473 ----------- ----------- Cash and cash equivalents at end of period $ 7,695,253 $ 5,946,353 =========== ===========

June 30, September 30, 2001 2000 ---------- ---------- Components and subassemblies $3,575,871 $3,210,121 Work in process 752,294 217,211 Finished goods 545,061 473,422 Finished goods shipped to customers awaiting installation 1,166,127 - ---------- ---------- $6,039,353 $3,900,754 ========== ==========

June 30, September 30, 2001 2000 ---------- ---------- Accrued salaries, bonuses and commissions $ 353,467 $ 343,958 Accrued vacation 404,397 306,955 Accrued installation costs - 480,500 Accrued warranty costs 160,400 301,570 Accrued vacated facility costs 176,399 32,495 Other accrued expenses 441,175 294,802 ---------- ---------- $1,535,838 $1,760,280 ========== ==========

Three Months Ended Nine Months Ended June 30, June 30, ---------------------------- ---------------------------- 2001 2000 2001 2000 ------------ ------------ ------------ ------------ Shares outstanding at beginning of period 23,311,004 23,043,576 23,115,781 22,240,229 Shares issued under retirement plan - - 73,923 45,855 Restricted stock awards, net of forfeitures - - - 10,269 Exercise of options and warrants 31,914 25,454 153,214 656,308 Shares issued as payment for services received - 12,956 - 12,956 Shares issued for private placement 1,302,862 - 1,302,862 - Shares issued upon conversion of debentures - - - 116,369 ------------ ------------ ------------ ------------ Shares outstanding at end of period 24,645,780 23,081,986 24,645,780 23,081,986 ============ ============ ============ ============ Weighted average common shares outstanding (A) 23,351,792 23,068,851 23,265,247 22,754,748 Dilutive common shares assumes: Options - - - - Warrants - - - - ------------ ------------ ------------ ------------ Weighted average common shares outstanding - assuming dilution 23,351,792 23,068,851 23,265,247 22,754,748 ============ ============ ============ ============ Net loss $ (738,301) $ (863,026) $ (5,224,579) $ (611,502) ============ ============ ============ ============ Net loss per common share $ (0.03) $ (0.04) $ (0.22) $ (0.03) ============ ============ ============ ============ Net loss per common share - assuming dilution $ (0.03) $ (0.04) $ (0.22) $ (0.03) ============ ============ ============ ============

For the Three-Month Period Ended For the Nine-Month Period Ended June 30, June 30, -------------------------------------- ----------------------------------- 2001 2000 2001 2000 ------------------- ------------------ ----------------- ----------------- Options 3,810,604 3,487,294 3,810,604 3,487,294 Warrants 1,262,504 697,910 1,262,504 697,910

DBI (as previously reported) Visionics Combined ------------ ------------ ------------ Revenue: Live scan identification systems $ 2,598,414 $ - $ 2,598,414 Live scan maintenance 1,303,031 - 1,303,031 FaceIt license - 450,042 450,042 FaceIt service - 149,219 149,219 ------------ ------------ ------------ Total revenue 3,901,445 599,261 4,500,706 ------------ ------------ ------------ Cost of revenue: Live scan identification systems 1,209,175 - 1,209,175 Live scan maintenance 932,693 - 932,693 FaceIt license - 48,721 48,721 FaceIt service - 81,265 81,265 ------------ ------------ ------------ Total cost of revenue 2,141,868 129,986 2,271,854 ------------ ------------ ------------ Gross margin 1,759,577 469,275 2,228,852 ------------ ------------ ------------ Selling, general and administrative expenses: Sales and marketing 618,605 323,253 941,858 Engineering and development 1,025,065 345,438 1,370,503 General and administrative 552,756 301,748 854,504 Non-recurring charges 32,607 - 32,607 ------------ ------------ ------------ Total expenses 2,229,033 970,439 3,199,472 ------------ ------------ ------------ Loss from operations (469,456) (501,164) (970,620) Other income (expense), net 69,247 38,347 107,594 ------------ ------------ ------------ Net loss $ (400,209) $ (462,817) $ (863,026) ============ ============ ============ Net loss per common share $ (0.02) $ (0.07) $ (0.04) ============ ============ ============ Net loss per common share - assuming dilution $ (0.02) $ (0.07) $ (0.04) ============ ============ ============ Weighted average common shares outstanding 16,815,201 6,253,650 23,068,851 ============ ============ ============ Weighted average common shares outstanding - assuming dilution 16,815,201 6,253,650 23,068,851 ============ ============ ============

DBI (as previously reported Visionics Combined ------------ ------------ ------------ Revenue: Live scan identification systems $ 11,997,673 $ - $ 11,997,673 Live scan maintenance 3,489,032 - 3,489,032 FaceIt license - 1,190,862 1,190,862 FaceIt service - 520,937 520,937 ------------ ------------ ------------ Total revenue 15,486,705 1,711,799 17,198,504 ------------ ------------ ------------ Cost of revenue: Live scan identification systems 7,000,525 - 7,000,525 Live scan maintenance 2,555,327 - 2,555,327 FaceIt license - 82,199 82,199 FaceIt service - 283,703 283,703 ------------ ------------ ------------ Total cost of revenue 9,555,852 365,902 9,921,754 ------------ ------------ ------------ Gross margin 5,930,853 1,345,897 7,276,750 ------------ ------------ ------------ Selling, general and administrative expenses: Sales and marketing 1,757,956 692,913 2,450,869 Engineering and development 2,112,567 846,501 2,959,068 General and administrative 1,832,577 942,056 2,774,633 Non-recurring charges 32,607 - 32,607 ------------ ------------ ------------ Total expenses 5,735,707 2,481,470 8,217,177 ------------ ------------ ------------ Income (loss) from operations 195,146 (1,135,573) (940,427) Other income (expense), net 172,039 119,360 291,399 ------------ ------------ ------------ Income (loss) before income taxes 367,185 (1,016,213) (649,028) Benefit of income taxes - (37,526) (37,526) ------------ ------------ ------------ Net income (loss) $ 367,185 $ (978,687) $ (611,502) ============ ============ ============ Net income (loss) per common share $ 0.02 $ (0.16) $ (0.03) ============ ============ ============ Net income (loss) per common share - assuming dilution $ 0.02 $ (0.16) $ (0.03) ============ ============ ============ Weighted average common shares outstanding 16,515,855 6,238,893 22,754,748 ============ ============ ============ Weighted average common shares outstanding - assuming dilution 18,022,140 6,238,893 22,754,748 ============ ============ ============

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