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, 1997
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
DIGITAL BIOMETRICS, INC.
(Exact name of registrant as specified in its charter)
Delaware 41-1545069
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5600 Rowland Road, Minnetonka, Minnesota 55343
(Address of principal executive offices) (Zip Code)
(612) 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, 1997 - 12,324,038 shares
(Class) (Outstanding)
DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED MARCH 31, 1997
INDEX
PART I - FINANCIAL INFORMATION:
PAGE
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
BALANCE SHEETS 3
STATEMENTS OF OPERATIONS 4
STATEMENTS OF CASH FLOWS 5
NOTES TO FINANCIAL STATEMENTS 6
ITEM 2. MANAGEMENT'S DISCUSSION AND 15
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
PART II - OTHER INFORMATION:
ITEM 1. LEGAL PROCEEDINGS 24
ITEM 2. CHANGES IN SECURITIES 24
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS 25
ITEM 6. (a) EXHIBITS 26
(b) REPORTS ON FORM 8-K 26
SIGNATURES 27
EXHIBIT 11 STATEMENT RE: COMPUTATION OF LOSS
PER SHARE 28
EXHIBIT 27 FINANCIAL DATA SCHEDULE 29
EXHIBIT 99.1 1990 STOCK OPTION PLAN AS AMENDED 30
TENPRINTER(R) and the Company's mechanical hand logo have been registered as
trademarks with the U.S. Patent and Trademark Office. The Company has applied
for registration of the SQUID(TM) trademark. In addition, FC-5(TM), FC-6(TM),
FC-7(TM), FC-11(TM), FC-21(TM) and FC-22(TM) are trademarks of the Company.
<TABLE>
<CAPTION>
DIGITAL BIOMETRICS, INC.
BALANCE SHEETS
(UNAUDITED)
March 31, September 30,
1997 1996
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents (note 2) $ 394,762 $ 466,990
Accounts receivable, less allowance for doubtful accounts of $557,274 and
$692,534, respectively 5,932,065 5,676,849
Inventory (note 4) 3,181,792 3,633,659
Prepaid expenses and other costs 263,521 208,349
------------ ------------
Total current assets 9,772,140 9,985,847
------------ ------------
Property and equipment 2,450,633 2,471,754
Less accumulated depreciation and amortization (1,206,033) (1,089,026)
------------ ------------
1,244,600 1,382,728
------------ ------------
Marketable securities (notes 2 and 3) 4,937,479 5,690,371
Patents, trademarks, copyrights and licenses, net of accumulated amortization of
$222,077 and $192,899, respectively 113,867 123,017
Deferred issuance costs on convertible debentures, net of accumulated amortization of
$195,197 and $172,476, respectively (note 7) 13,433 127,408
------------ ------------
$ 16,081,519 $ 17,309,371
============ ============
Current liabilities:
Accounts payable $ 782,615 $ 1,103,174
Line of credit advances (note 5) 2,432,598 1,255,000
Deferred revenue 947,232 649,178
Accrued expenses (note 6) 884,205 1,471,908
------------ ------------
Total current liabilities 5,046,650 4,479,260
Convertible debentures (note 7) 343,555 2,374,739
------------ ------------
Total liabilities 5,390,205 6,853,999
------------ ------------
Stockholders' equity (note 8):
Common stock, $.01 par value. Authorized, 20,000,000 shares; issued
and outstanding 12,060,122 and 10,777,288 shares, respectively 120,601 107,773
Additional paid-in capital 40,088,018 37,819,851
Unrealized losses on marketable securities (notes 2 and 3) (108,787) (134,753)
Deferred compensation (100,500) (96,000)
Notes receivable from sale of common stock (117,623) (117,623)
Accumulated deficit (29,190,395) (27,123,876)
------------ ------------
Total stockholders' equity 10,691,314 10,455,372
Commitments and contingencies (notes 8, 9 and 10)
------------ ------------
$ 16,081,519 $ 17,309,371
============ ============
See accompanying notes to financial statements.
</TABLE>
DIGITAL BIOMETRICS, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales:
Identification systems $ 3,356,443 $ 884,834 $ 4,972,757 $ 3,053,705
Maintenance and other services 392,071 374,117 791,230 724,340
------------ ------------ ------------ ------------
Total sales 3,748,514 1,258,951 5,763,987 3,778,045
------------ ------------ ------------ ------------
Cost of sales:
Identification systems 2,486,646 600,008 3,335,343 1,650,862
Maintenance and other services 434,936 423,636 991,880 784,960
------------ ------------ ------------ ------------
Total cost of sales 2,921,582 1,023,644 4,327,223 2,435,822
------------ ------------ ------------ ------------
Gross margin 826,932 235,307 1,436,764 1,342,223
------------ ------------ ------------ ------------
Selling, general and administrative expenses:
Sales and marketing 706,459 491,469 1,232,428 1,121,146
Engineering and development 584,108 1,185,123 1,272,337 2,124,998
Depreciation and amortization 81,604 154,583 164,028 293,242
General and administrative 398,974 492,843 785,132 975,626
------------ ------------ ------------ ------------
Total expenses 1,771,145 2,324,018 3,453,925 4,515,012
------------ ------------ ------------ ------------
Loss from operations (944,213) (2,088,711) (2,017,161) (3,172,789)
Interest income 82,320 168,730 169,254 371,130
Interest expense (104,579) (244,230) (211,195) (552,359)
Loss on disposal of fixed assets (7,417) - (7,417) -
------------ ------------ ------------ ------------
Net loss $ (973,889) $ (2,164,211) $ (2,066,519) $ (3,354,018)
============ ============ ============ ============
Loss per common share $ (0.08) $ (0.26) $ (0.18) $ (0.41)
============ ============ ============ ============
Weighted average common shares outstanding
11,571,802 8,435,781 11,213,297 8,162,324
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
DIGITAL BIOMETRICS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
March 31,
------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,066,519) $ (3,354,018)
Adjustments to reconcile net loss to net cash used in
operating activities:
Provision for doubtful accounts receivable 5,000 37,420
Deferred compensation amortization 13,500 96,342
Depreciation and amortization 302,021 467,039
Loss on disposal of fixed assets 7,417 7,773
Interest expense on debentures converted into
common stock 212,701 152,139
Changes in operating assets and liabilities:
Accounts receivable (260,215) (699,869)
Inventories 451,867 (1,107,273)
Prepaid expenses (55,172) (58,666)
Accounts payable (320,559) 516,586
Deferred revenue 298,054 231,541
Accrued expenses (470,981) 29,927
------------ ------------
Net cash used in operating activities (1,882,886) (3,681,059)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (99,804) (722,829)
Proceeds from marketable securities 752,892 -
Patents, trademarks, copyrights and licenses (20,028) (22,695)
------------ ------------
Net cash provided by (used in) investing activities 633,060 (745,524)
------------ ------------
Cash flows from financing activities:
Exercise of warrants - 315,000
Issuance of convertible debentures - 10,109,750
Net line of credit advances (repayments) 1,177,598 (1,450,000)
------------ ------------
Net cash provided by financing activities 1,177,598 8,974,750
------------ ------------
Increase (decrease) in cash and cash equivalents (72,228) 4,548,167
Cash and cash equivalents at beginning of period 466,990 367,866
------------ ------------
Cash and cash equivalents at end of period $ 394,762 $ 4,916,033
============ ============
</TABLE>
See accompanying notes to financial statements.
DIGITAL BIOMETRICS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
(1) DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Digital Biometrics, Inc., (the Company) was incorporated in Minnesota
in May, 1985 and reincorporated in Delaware in December, 1986. The Company is a
developer, manufacturer and marketer of identification products based on
electro-optical imaging technologies. The Company's principal product, the
TENPRINTER(R) system is a computer-based, inkless "live-scan" fingerprint system
that electronically reads a fingerprint and creates a digital image, which can
then either be printed on an attached printer or transmitted electronically to a
central printing or storage site. The TENPRINTER system is designed for use by,
and is being actively marketed to, law enforcement agencies and other
organizations requiring a high resolution fingerprint image for identification
cards or similar applications.
The Company's performance in any one quarter is not necessarily
indicative of sales trends or future performance. The nature of the law
enforcement market and the government procurement process are expected to
continue to produce an irregular and unpredictable revenue cycle for the
Company.
The accompanying unaudited 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, 1996.
The presentation of fiscal year 1996 operating results includes
reclassifications between "identification systems" cost of sales and
"maintenance and other services" cost of sales to reflect comparability to
fiscal year 1997 classification.
(2) ACCOUNTING POLICIES
SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK
The Company extends credit to state and local governments in connection
with sales of products to law enforcement agencies. Approximately 86% of
customer accounts receivable at March 31, 1997 were from government agencies. At
March 31, 1997, approximate 28% of customer accounts receivable was from a
single governmental customer. For the three-month period ended March 31, 1997,
sales to three customers accounted for 47%, 22% and 11% of sales. Sales to two
customers during the three-month period ended March 31, 1996 accounted for 21%
and 10% of period sales. For the six-month period ended March 31, 1997, sales to
two customers accounted for 30% and 20% of sales. Sales to two customers during
the six-month period ended March 31, 1996 accounted for 33% and 10% of period
sales. Export sales for the three-month period ended March 31, 1997 were 11% of
period sales as compared to 18% for the same period in 1996. Export sales for
the six-month period ended March 31, 1997 were 7% of period sales as compared to
32% for the same period in 1996.
MARKETABLE SECURITIES
Marketable securities consist primarily of collateralized mortgage
backed securities (see note 3). The Company has adopted Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt and
Equity Securities (SFAS 115). Under SFAS 115, the Company classifies its
marketable debt securities as available for sale and records these securities at
fair market value. Net realized and unrealized gains and losses are determined
on the specific identification cost basis.
WARRANTY COSTS
Estimated product warranty costs are accrued at date of shipment.
Accrued warranty costs at March 31, 1997 were $120,000 compared with $129,000 at
September 30, 1996.
REVENUE AND REVENUE RECOGNITION
Revenues from product sales are generally recognized on the date of
shipment. The Company's standard terms of sale are payment due net in thirty
days, f.o.b. Digital Biometrics, Inc. Terms of sale and shipment for certain
procurements by municipal or other government agencies may, however, be subject
to negotiation. In cases where the Company is required to purchase a performance
bond or to deposit collateral in accordance with the terms of a contract, the
Company's policy is to defer revenues under such contracts until the amount
shipped exceeds the amount of the performance collateral or until the security
is released by the bonding company. Maintenance revenues are recognized over the
life of the contract on a straight-line basis.
For contracts where a performance bond, collateral or customer
acceptance is required, revenue is not recognized until collateral requirements
have been satisfied and customer acceptance has occurred. The Company's
performance for any period is not necessarily indicative of sales trends or
future performance. The nature of the law enforcement market and the government
procurement process are expected to result in an irregular and unpredictable
revenue cycle for the Company.
ENGINEERING AND DEVELOPMENT ARRANGEMENTS
Engineering and development costs are expensed as incurred. Engineering
and development expenses for the six-month period ended March 31, 1996 are net
of reimbursements of $462,000 from a company with which there was a teaming
agreement on an international development project.
STATEMENT OF CASH FLOWS
For purposes of the statement 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. Cash
equivalents include primarily U.S. Government money market funds and A-1, P-1
rated commercial paper.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Six Months Ended
March 31,
1997 1996
-------- --------
Cash paid during the period for interest $104,937 $ 9,866
======== ========
For supplemental disclosure of non-cash investing and financing
activities see notes 7 and 8.
NET LOSS PER COMMON SHARE
Net loss per common share is determined by dividing the net loss by the
weighted average number of shares of common stock and dilutive common share
equivalents outstanding. Common share equivalents have been excluded from the
computation of net loss per share as their effect is anti-dilutive.
INCOME TAXES
The Company has adopted the asset and liability method of accounting
for income taxes of Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes (SFAS 109). Under the asset and liability method,
deferred tax assets and liabilities are recognized for the expected future tax
consequences of temporary differences between the financial statement carrying
amount and tax basis of assets and liabilities. The Company provides for
deferred taxes at the enacted tax rate that is expected to apply when the
temporary differences reverse.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities, at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(3) MARKETABLE SECURITIES
Investments in marketable securities have maturities ranging from 2005
to 2016.The unrealized loss for available-for-sale marketable securities is as
follows.
March 31, September 30,
1997 1996
----------- -----------
Fair market value $ 4,937,479 $ 5,690,371
Amortized cost 5,046,266 5,825,124
----------- -----------
Unrealized loss $ (108,787) $ (134,753)
=========== ===========
Unrealized gains and losses are reflected as a separate component of
stockholders' equity. A decline in the market value of any available-for-sale or
held-to-maturity security below cost that is deemed other than temporary results
in a charge to operations resulting in the establishment of a new cost basis for
the security. Realized losses on sales of marketable securities are reported as
a reduction in interest income. There were no realized losses on sales of
marketable securities for the three and six-month periods ended March 31, 1997
or 1996.
(4) INVENTORY
Inventory is valued at standard which approximates the lower of
first-in, first-out (FIFO) cost or market. Inventory consists of the following:
March 31, September 30,
1997 1996
---------- ----------
Raw materials $1,922,452 $1,934,371
Work in process 852,592 717,696
Finished goods 406,748 981,592
---------- ----------
$3,181,792 $3,633,659
========== ==========
(5) LINES OF CREDIT
The Company has a $4,000,000 line of credit with Norwest Bank Minnesota
N.A. Borrowings under this line of credit are secured by marketable securities
and are limited to 80% of the market value of the marketable securities held as
collateral by the bank. Borrowings under the line were $2,125,000 on March 31,
1997 and bear interest at rates from 7.67% to 8.5%. Depending on the timing of
accounts receivable collection, the line may reach the maximum borrowings
allowed during fiscal 1997. The line is payable upon demand and expires in May
1997. The Company anticipates the line will be renewed upon expiration.
The Company entered into a receivables financing line of credit
effective October 1, 1996 for the lesser of eligible receivables or $3,500,000
with Norwest Business Credit. Borrowings under this line of credit are secured
by all assets of the Company. Borrowings under the line were $308,000 at March
31, 1997 and bear interest at 1.5% above the prime rate (8.5% at March 31,
1997), are payable upon demand and expires in September 1997.
The Company has a $200,000 line of credit with First Bank Minneapolis,
secured by cash deposits. Borrowings under the line bear interest at the prime
rate (8.5% on March 31, 1997), are payable upon demand and expires in March
1998. There were no amounts borrowed under the line at March 31, 1997.
(6) ACCRUED EXPENSES
March 31, September 30,
1997 1996
---------- ----------
Accrued expenses consist of:
Accrued salaries $ 350,125 $ 442,701
Accrued vacation 97,564 112,665
Accrued interest payable 54,225 205,529
Payroll taxes payable 76,345 55,561
Sales taxes payable 2,128 22,953
Accrued warranty 120,100 128,500
Other accrued expenses 183,718 503,999
---------- ----------
$ 884,205 $1,471,908
========== ==========
Accrued salaries at March 31, 1997 and September 30, 1996 include
$107,000 and $330,000, respectively, for severance costs related to the
retirement of the Company's former president and chief executive officer.
(7) CONVERTIBLE DEBENTURES
On September 29, 1995, the Company completed a private placement to
offshore accredited investors of $10,900,000 of 8% Convertible Debentures due
September 29, 1998 (the "Debentures"). Net proceeds to the Company after
placement fees but before legal and other expenses were $10,109,750. The
Debentures are convertible one third after 45 days, one third after 75 days and
one third after 105 days at the option of the Debenture holder. The Company has
the right to redeem the debentures prior to conversion. The conversion price is
equal to the lesser of $7.00 per common share or 85% of the average trading
price for any five consecutive trading days before conversion. Interest accrued
on the Debentures is payable in common stock at the time of conversion at the
conversion price as described above. In addition to the cash placement fee, a
warrant to purchase 112,893 shares of the Company's common stock at $8.40 per
share was granted to the placement agent for this offering. The warrant was
valued at $112,893, which is reflected as a discount on the Debentures and is
being amortized as interest expense over the term of the Debentures. Net
proceeds to the Company is being used for working capital, product development
and other general corporate purposes.
As of March 31, 1997, the Company has issued 3,973,832 shares of common
stock for the conversion of principal aggregating $10,500,000 of the 8%
Convertible Debentures plus $509,000 of accrued interest at an average
conversion price of $2.77 per share. For the six-month period ended March 31,
1997, the Company has issued 1,221,964 shares of common stock for the conversion
of principal aggregating $2,050,000 of the 8% Convertible Debentures plus
$215,000 of accrued interest at an average conversion price of $1.85 per share.
In the three-month period ended March 31, 1997, the Company issued 1,124,565
shares of common stock upon the conversion of principal aggregating $1,800,000
of the 8% Convertible Debentures plus $192,000 of accrued interest at an average
conversion price of $1.77 per share. The remaining $400,000 of convertible
debentures and related accrued interest of $49,000 were converted to 263,916
shares of common stock during April, 1997.
On March 28, 1997, the Securities and Exchange Commission (SEC) staff
announced its position on the accounting treatment for the issuance of
convertible debt securities with beneficial conversion features such as that
contained in the Company's convertible debentures issued in September 1995. The
SEC staff's announcement requires retroactive determination using the
intrinsic-value method of the beneficial conversion feature. The intrinsic value
of the beneficial conversion features is to be allocated to additional paid-in
capital with the resulting discount on the debt resulting in a non-cash interest
expense charge to earnings (loss) over the conversion period. Accordingly, the
Company is in the process of computing the financial impact of this announcement
and will be issuing revised fiscal 1996 financial statements. The resulting
revisions will have no impact on reported net stockholders' equity or cash flows
for any prior period presented, nor will there be any impact on fiscal 1997
financial reports.
(8) STOCKHOLDERS' EQUITY
During the three-month period ended December 31, 1996, the Company
granted 119,500 discretionary stock option awards to certain of its executive
officers and employees. These options are exercisable at prices ranging from
$2.56 to $3.125 per share and expire in 2006.
Effective December 31, 1996, the Company issued 41,798 shares of common
stock to satisfy the Company's discretionary matching to employees electing
participation in the Company's 401(k) retirement plan. This issuance increased
common stock and additional paid-in capital by $88,821 and reduced accrued
compensation by the same amount.
Effective January 1, 1997, stock option awards of 250,000 shares
exercisable at $2.125 per share were issued pursuant to an offer of employment
to the Company's new President and Chief Executive Officer.
Effective January 27, 1997, the Company issued two warrants in payment
for services rendered in securing employment of certain executive officers of
the Company. Each warrant entitles the holder to purchase 10,000 shares of the
Company's common stock, exercisable at the price of $2.3125 per share, subject
to antidilution provisions of the warrants.
Effective March 17, 1997, a stock option award of 75,000 shares
exercisable at $2.31 per share was issued to an executive officer pursuant to an
offer of employment.
Effective with the acceptance of the resignation of a director, 6,341
shares of restricted common stock which were not yet vested were forfeited.
Effective with their election at the annual stockholders' meeting held
on March 18, 1997, the Company granted 25,413 shares of restricted common stock
to certain of its non-employee directors. The grant resulted in $54,000 in
additional common stock issued and an equal amount of deferred compensation
expense which is being amortized on a straight-line basis over the three-year
restricted period.
Effective March 18, 1997, the Company authorized a warrant to C.
McKenzie Lewis III pursuant to his re-election to the Board of Directors of the
Company. This warrant was authorized in lieu of restricted common shares. The
warrant entitles Mr. Lewis to purchase 8,000 shares of the Company's common
stock, exercisable at the price of $2.125 per share. The warrant vests over a
three-year period.
(9) LEASE COMMITMENTS
The Company leases its primary office and production facility under an
operating lease that expires in April, 2001. Annual base rent under the lease
agreement is approximately $237,000 and the Company is obligated to pay a pro
rata share for property taxes, maintenance and other operating expenses. The
Company leases a separate sales and service office in Los Angeles, California
under an operating lease that expires in December, 1997 and a sales office in
Washington, D.C. on a month-to-month lease arrangement. Rent expense, property
taxes, maintenance and other lease operating expenses for the six months ended
March 31, 1997 and 1996 was $205,000 and $165,000, respectively.
(10) LITIGATION
On June 1, 1995, the Company filed a complaint for patent infringement
against Identix, Inc., of Sunnyvale, California, in the United States District
Court for the Northern District of California. The complaint alleged that
Identix has willfully and deliberately infringed a Company patent through the
manufacture, use and/or sale of competing products. The complaint sought, among
other things, an injunction prohibiting further infringement as well as
unspecified monetary damages. Identix responded to the complaint alleging, among
other purported defenses, non-infringement and patent invalidity.
On August 27, 1996, the judge assigned to the case granted a partial
summary judgment in favor of Identix dismissing the Company's claims of patent
infringement with respect to Identix's Touchprint 600 product line. A
predecessor product, the Touchprint 900, received a similar ruling in favor of
Identix on December 20, 1996. During January 1997, the Company filed an appeal
of the court's decision of non-infringement. The interpretation of patents will
ultimately be decided by the special patent Court of Appeals in Washington D.C.
However, a prediction of the final outcome of the appeal is not possible. In the
event the Company does not prevail in this litigation, its competitive position
could be adversely affected.
There are no other material claims pending or, to the Company's
knowledge, threatened against the Company.
FACTORS THAT MAY AFFECT OPERATING RESULTS
The statements contained in this Report on Form 10-Q that are not
purely historical are forward looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934, including statements regarding the Company's expectations, hopes,
intentions or strategies regarding the future. All forward looking statements
included in this document are based on information available to the Company on
the date hereof, and the Company assumes no obligation to update any such
forward looking statements, It is important to note that the Company's actual
results could differ materially from those in such forward looking statements.
Some of the factors that could cause actual results to differ materially are set
forth below under the caption "Forward Looking Comments and Matters That May
Affect Operating Results."
DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED MARCH 31, 1997
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company develops, manufactures, assembles and markets
identification products based on electro-optical imaging technologies. Most of
the Company's sales have been to state and local law enforcement agencies and,
to date, have consisted primarily of TENPRINTER systems and related peripheral
equipment and software.
The nature of the law enforcement market and the government procurement
process is subject to budgetary, economic and political considerations which may
vary significantly from state to state and among different agencies. These
market characteristics, along with the recent and continuing development of the
live-scan electronic fingerprint industry, have resulted in and are expected to
continue to result in an irregular revenue cycle for the Company and any
prediction of future trends is inherently difficult. The Company believes,
however, that its principal product line, which is designed to be sold to law
enforcement agencies, is a leader in its marketplace. To the extent that funds
become available to such customers for procurement purposes, the Company should
benefit from the continuing development of this market.
The Company generally recognizes product sales on the date of shipment.
The Company's standard terms of sale are payment due net in 30 days, f.o.b. the
Company. Terms of sale and shipment for certain procurements by municipal or
other government agencies may, however, be subject to negotiation. In cases
where the Company is required to purchase a performance bond or to deposit
collateral in accordance with the terms of a contract, the Company's policy is
to defer recognition of revenues from such contracts until the amount shipped
exceeds the amount of the performance collateral or until the security is
released by the bonding company. Maintenance revenues are recognized over the
life of the contract on a straight-line basis. Maintenance costs are expensed as
incurred.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
Total sales were $3,749,000 for the three months ended March 31, 1997
compared with $1,259,000 for the same prior-year period. Identification system
product sales were $3,356,000 compared with $885,000 in 1996. The increase is
due primarily to an increase in the number of TENPRINTER systems sold during the
three months ended March 31, 1997, offset by volume discounts offered to two
customers. Limited sales of peripheral and networking equipment occurred during
the current year three-month period as compared to the prior year period.
For the three-month period ended March 31, 1997, sales to three
customers accounted for approximately 47%, 22% and 11% of total sales. Sales to
two customers during the three months ended March 31, 1996 accounted for
approximately 21% and 10% of total sales. Export sales for the three-month
period ended March 31, 1997 were 11% of period sales as compared to 18% for the
same period in 1996.
Product maintenance and service revenues were $392,000 for the three
months ended March 31, 1997 compared with $374,000 for the same prior-year
period. This increase is due primarily to a larger installed base of TENPRINTER
systems.
Overall gross margins for the three months ended March 31, 1997 were
22% as compared with 19% of sales for the same prior-year period. Gross margins
on identification system sales were 26% for the three months ended March 31,
1997 compared with 32% in 1996. Gross margins on identification system sales
were negatively impacted by 18% due to volume discounts during the current-year
period, offset in part by a higher volume of sales as compared to the prior
year.
Product maintenance and service margins for the three months ended
March 31, 1997 and 1996 were (11%) and (13%), respectively, of maintenance and
support revenues.
Sales and marketing expenses for the three-month period ended March 31,
1997 were 19% of total sales compared to 39% for the same three-month prior-year
period. This decrease is due primarily to higher volume of sales offset by
higher promotional costs during the current-year three-month period. Engineering
and development expenses were 16% of total sales for the three-month period
ended March 31, 1997 compared to 94% for the same period a year ago. This
decrease is due primarily to higher volume of sales, reduced new product
development costs and cost containment measures during the current three-month
period. General and administrative expenses for the three-month periods ended
March 31, 1997 and 1996 were 11% and 39%, respectively, of total sales. This
decrease is due primarily to higher volume of sales and reduced legal expenses
related to a patent infringement suit during the current three-month period.
Depreciation and amortization costs decreased to $82,000 for the three
months ended March 31, 1997 from $155,000 for the same prior-year period,
primarily due to reduced software amortization costs of information systems
products that was written off during the fourth quarter of fiscal year 1996.
Interest income decreased to $82,000 for the three months ended March
31, 1997 from $169,000 for the same period in 1996, primarily due to lower
balances of cash and marketable securities.
Interest expense decreased to $105,000 for the three months ended March
31, 1997 from $244,000 for the same prior-year period, primarily due to the
reduced balance of 8% convertible debentures outstanding.
The Company incurred a net loss for the three-month period ended March
31, 1997 of $974,000 ($0.08 per share) as compared with $2,164,000 ($0.26 per
share) for the same prior-year period.
SIX MONTHS ENDED MARCH 31, 1997 COMPARED TO SIX MONTHS ENDED MARCH 31, 1996
Total sales were $5,764,000 for the six months ended March 31, 1997
compared with $3,778,000 for the same prior-year period. Identification system
product sales were $4,973,000 compared with $3,054,000 in 1996. The increase is
due primarily to an increase in the number of TENPRINTER systems sold during the
six months ended March 31, 1997, offset by volume discounts offered to two
customers. Limited sales of peripheral and networking equipment occurred during
the current-year six-month period as compared to the same prior-year period.
For the six-month period ended March 31, 1997, sales to two customers
accounted for approximately 30% and 20% of total sales. Sales to two customers
during the six months ended March 31, 1996 accounted for approximately 33% and
10% of total sales. Export sales for the six-month period ended March 31, 1997
were 7% of period sales as compared to 32% for the same period in 1996.
Product maintenance and service revenues were $791,000 for the six
months ended March 31, 1997 compared with $724,000 for the same prior-year
period. This increase is due primarily to a larger installed base of TENPRINTER
systems.
Overall gross margins for the six months ended March 31, 1997 were 25%
as compared with 36% of sales for the same prior-year period. Gross margins on
identification system sales were 33% for the six months ended March 31, 1997
compared with 46% in 1996. Gross margins on identification system sales were
negatively impacted by 11% due to volume discounts during the current-year
period.
Product maintenance and service margins for the six months ended March
31, 1997 and 1996 were (25%) and (8%), respectively, of maintenance and support
revenues. The decrease in product maintenance and service margins during the
current-year period is due primarily to an increase in maintenance and service
cost compared to the prior year due primarily to a larger installed base.
Sales and marketing expenses for the six-month period ended March 31,
1997 were 21% of total sales compared to 30% for the same six-month prior-year
period. This decrease is due primarily to higher volume of sales offset by
higher promotional costs during the current-year six-month period. Engineering
and development expenses were 22% of total sales for the six-month period ended
March 31, 1997 compared to 56% for the same period a year ago. This decrease is
due primarily to higher volume of sales and reduced new product development
costs during the current six-month period. Engineering and development expenses
for the six-month period ending March 31, 1996 are net of reimbursements of
$462,000 related to an international development project. General and
administrative expenses for the six-month periods ended March 31, 1997 and 1996
were 14% and 26%, respectively, of total sales. This decrease is due primarily
to higher volume of sales and reduced legal expenses related to a patent
infringement suit during the current six-month period.
Depreciation and amortization costs decreased to $164,000 for the six
months ended March 31, 1997 from $293,000 for the same prior-year period,
primarily due to reduced software amortization costs of information systems
products that was written off during the fourth quarter of fiscal year 1996.
Interest income decreased to $169,000 for the six months ended March
31, 1997 from $371,000 for the same period in 1996, primarily due to lower
balances of cash and marketable securities.
Interest expense decreased to $211,000 for the six months ended March
31, 1997 from $552,000 for the same prior-year period, primarily due to the
reduced balance of 8% convertible debentures outstanding.
The Company incurred a net loss for the six-month period ended March
31, 1997 of $2,067,000 ($0.18 per share) as compared with $3,354,000 ($0.41 per
share) for the same prior-year period.
INFLATION
The Company does not believe inflation has significantly impacted
revenues or expenses.
NET OPERATING LOSS CARRYFORWARDS
At March 31, 1997, the Company had carryforwards of net operating
losses of approximately $26,500,000 that may allow the Company to reduce future
income taxes that would otherwise be payable. Of this amount approximately
$2,200,000 relates to compensation associated with the exercise of non-qualified
stock options which, when realized, would result in approximately $880,000
credited to additional paid-in capital. The carryforwards expire annually
beginning in 1999. The annual limitation on use of net operating losses is
calculated by multiplying the value of the corporation immediately prior to the
change in ownership by the long-term federal tax exempt rate. A total of
$3,700,000 of the net operating loss carryforwards at March 31, 1997 is subject
to an annual net operating loss limitation, estimated at $350,000, resulting
from the change in control of the Company which occurred, for income tax
purposes, on December 14, 1990, the date of the Company's initial public
offering. If the limited carryforward amount for any tax year exceeds the
regular taxable income for such year, then the unused portion may generally be
carried forward to increase the annual limitation for the following year.
Utilization of net operating losses aggregating $22,800,000 which were incurred
subsequent to the change of ownership are not limited. However, any future
ownership change could create a limitation with respect to these loss
carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
BACKGROUND
For the period from the Company's inception in 1985 through March 31,
1997, limited revenues have resulted from product sales and at March 31, 1997,
the Company's cumulative deficit was $29,190,000. Losses are expected to
continue until the market development and acceptance of the technology
incorporated into the Company's products provides product sales sufficient to
cover the Company's operating expenses.
CURRENT AND FUTURE OPERATIONS
The Company's business has included large contract awards from
international, state and local law enforcement agencies and it is expected that
this trend will continue. Collection of receivables related to billings of these
contract amounts is often protracted. As of March 31, 1997, approximately
$4,220,000 was due from such customers.
The Company's performance in any one reporting period is not
necessarily indicative of sales trends or future performance. The nature of the
law enforcement market and the government procurement process are expected to
continue to result in an irregular and unpredictable revenue cycle for the
Company.
Net cash used in operating activities was $1,883,000 for the six months
ended March 31, 1997 compared with $3,681,000 for the same prior-year period.
The decrease in cash used in operating activities was primarily a result of a
smaller net loss during the six-month period in 1997 adjusted for changes in
operating assets and liabilities. Cash flows from changes in operating assets
and liabilities changed from cash used of $1,088,000 during the prior-year
six-month period to $357,000 of cash used during the same current-year period.
This $731,000 change in cash flow from operating assets and liabilities resulted
primarily from lower inventory and accounts payable balances on March 31, 1997.
Net cash provided by investing activities was $633,000 for the six
months ended March 31, 1997 as compared with $746,000 net cash used in investing
activities for the same prior-year period. Net cash provided by investing
activities during the current six-month period includes $753,000 from the
proceeds from marketable securities. Capital expenditures for the six-months
ended March 31, 1996 were primarily for engineering and manufacturing test
fixtures. The Company's business does not require significant amounts of cash
for capital expenditures because substantial amounts of the manufacturing and
assembly processes utilized in the production of current products are performed
by outside vendors, as directed by the Company. Specifically, the Company
purchases electronics modules and standard mechanical assemblies from
manufacturers of such goods. In addition, sheet metal components, optical
components and specialized electronics modules are designed by the Company and
manufactured to the Company's specifications by outside sources.
Net cash provided by financing activities was $1,178,000 for the six
months ended March 31, 1997 due to borrowings on lines of credit. Net cash
provided by financing activities was $8,975,000 for the six months ended March
31, 1996, due to cash received from the issuance of 8% convertible debentures
and repayments of outstanding borrowings on lines of credit. Borrowings under
lines of credit were $2,433,000 at March 31, 1997. There were no borrowings
under lines of credit on March 31, 1996.
On September 29, 1995, the Company completed a private placement to
offshore accredited investors of $10,900,000 of 8% Convertible Debentures due
September 29, 1998 (the "Debentures"), of which $10,500,000 were converted to
3,973,832 shares of common stock as of March 31, 1997. The average conversion
price was $2.77 per share. Net proceeds to the Company during fiscal 1996 after
placement fees but before legal and other expenses were $10,109,750.
Interest accrued on the Debentures is also payable in common stock at
the time of conversion at the conversion price as described above. In addition
to the cash placement fee, a warrant to purchase 112,893 shares of the Company's
common stock at $8.40 per share was granted to the placement agent for this
offering. The warrant was valued at $112,893, which is reflected as a discount
on the Debentures and is being amortized as interest expense over the term of
the Debentures. Net proceeds to the Company were used for working capital,
product development and other corporate purposes. The remaining $400,000 of
convertible debentures and related accrued interest of $49,000 were converted to
263,916 shares of common stock during April, 1997.
At March 31, 1997, the Company had $395,000 in cash and cash
equivalents and $4,937,000 in marketable securities, which are classified as
available for sale. The unrealized loss on marketable securities at March 31,
1997 was $109,000. These marketable securities are collateral for borrowings
under a line of credit.
The Company has a $4,000,000 line of credit with Norwest Bank Minnesota
N.A. Borrowings under this line of credit are secured by marketable securities
and are limited to 80% of the market value of marketable securities held as
collateral by the bank. Borrowings under the line were $2,125,000 on March 31,
1997 and bear interest at rates from 7.67% to 8.5%. Depending on the timing of
accounts receivable collection, the line may reach the maximum borrowings
allowed during fiscal 1997. The line is payable upon demand and expires in May
1997. The Company anticipates the line will be renewed upon expiration.
The Company entered into a receivables financing line of credit
effective October 1, 1996 for the lesser of eligible receivables or $3,500,000
with Norwest Business Credit. Borrowings under this line of credit are secured
by all assets of the Company. Borrowings under the line were $308,000 at March
31, 1997 and bear interest at 1.5% above the prime rate (8.5% at March 31,
1997), is payable upon demand and expires in September 1997.
The Company has a $200,000 line of credit with First Bank Minneapolis,
secured by cash deposits. Borrowings under the line bear interest at the prime
rate (8.5% on March 31, 1997), are payable upon demand and expires in March
1998. There were no amounts borrowed under the line at March 31, 1997.
ACCOUNTING TREATMENT FOR CONVERTIBLE DEBENTURES
On March 28, 1997, the Securities and Exchange Commission (SEC) staff
announced its position on the accounting treatment for the issuance of
convertible debt securities with beneficial conversion features such as that
contained in the Company's convertible debentures issued in September 1995. The
SEC staff's announcement requires retroactive determination using the
intrinsic-value method of the beneficial conversion feature. The intrinsic value
of the beneficial conversion features is to be allocated to additional paid-in
capital with the resulting discount on the debt resulting in a non-cash interest
expense charge to earnings (loss) over the conversion period. Accordingly, the
Company is in the process of computing the financial impact of this announcement
and will be issuing revised fiscal 1996 financial statements. The resulting
revisions will have no impact on reported net stockholders' equity or cash flows
for any prior period presented, nor will there be any impact on fiscal 1997
financial reports.
FORWARD LOOKING COMMENTS AND MATTERS THAT MAY AFFECT OPERATING RESULTS
Except for the historical information contained in this Form 10-Q, the
matters discussed herein are 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, and involve risks and uncertainties, including development
and market acceptance of the Company's products and the availability of new
employees experienced in the present and contemplated markets. Other factors
that may affect future performance of the Company include successful expansion
of distribution channels for products through OEM's and others; changes in
general economic conditions; availability of funding where customer procurements
are dependent on state or federal government grants and general tax funding;
concentrations of accounts receivable and other credit risk in single large
customers; or cost and availability of components. In addition, markets for the
Company's products are characterized by significant and increasing competition,
and the Company's financial results may be adversely affected by the actions of
existing and future competitors, including the development of new technologies,
the introduction of new products, and price reductions by such competitors to
gain or retain market share. It is important to note that the Company's actual
results could differ materially from those in such forward looking statements
and the Company assumes no obligation to update such forward looking statements.
Due primarily to continuing operating losses, the Company has not yet
achieved positive cash flow. Management believes that cash and cash equivalents,
investments, accounts receivable and working capital provided from operations,
together with available financing sources, are sufficient to meet current and
foreseeable operating requirements, however additional financing may be
required. There can be no assurance that additional financing, should it be
required, will be available at terms acceptable to the Company.
LAW ENFORCEMENT AND REGULATORY AGENCY MARKET
The Company's performance in any one reporting period is not
necessarily indicative of sales trends or future performance. Law enforcement
agencies are subject to political and budgetary constraints and the nature of
the law enforcement market and the government procurement process are expected
to continue to result in an irregular and unpredictable revenue cycle for the
Company.
The Company extends credit to state and local governments in connection
with sales of products to law enforcement agencies. Approximately 86% of
customer accounts receivable at March 31, 1997 were from government agencies. At
March 31, 1997, approximate 28% of customer accounts receivable was from a
single governmental customer. Sales to this and other customers requiring large
and sophisticated networks of TENPRINTER systems and peripheral equipment often
include technical requirements which are not fully known at the time
requirements are specified by the customer. In addition, contracts may specify
performance criteria which is required to be satisfied before the customer
accepts the products and services. The Company does not record revenue for these
products and services until acceptance criteria have been satisfied.
It is often not known until installation is in process if older and
often obsolete communication lines and local area networks will accommodate the
large amount of computer data transmitted by the TENPRINTER systems and related
peripherals. Generally, it is only upon completion of customer requirements,
which time periods are unpredictable and which may involve investment of
additional Company resources, that accounts receivable are collected. These
investments of additional resources are accrued when amounts can be estimated
but however, may be uncompensated and, other than increased customer loyalty,
negatively impact profit margins and the Company's liquidity.
GAMING AND OTHER COMMERCIAL MARKETS
The Company has only recently began marketing products to the gaming
industry and has not yet completed production level systems of TRAK-21. Although
prototype models of TRAK-21 have been successfully demonstrated in laboratory
conditions, there can be no assurance that scheduled beta tests in live casino
environments will be successful. In addition, it has not been determined whether
or not the TRAK-21 system will be able to compete, on the basis of price and
performance, with player tracking systems of competitors whose systems have been
marketed for longer periods of time and whose financial and other resources are
far greater than that of the Company.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 1, 1995, the Company filed a complaint for
patent infringement against Identix, Inc., of Sunnyvale,
California, in the United States District Court for the
Northern District of California. The complaint alleged that
Identix has willfully and deliberately infringed a Company
patent through the manufacture, use and/or sale of competing
products. The complaint sought, among other things, an
injunction prohibiting further infringement as well as
unspecified monetary damages. Identix responded to the
complaint alleging, among other purported defenses,
non-infringement and patent invalidity.
On August 27, 1996, the judge assigned to the case
granted a partial summary judgment in favor of Identix
dismissing the Company's claims of patent infringement with
respect to Identix's Touchprint 600 product line. A
predecessor product, the Touchprint 900, received a similar
ruling in favor of Identix on December 20, 1996. During
January 1997, the Company filed an appeal of the court's
decision of non-infringement. The interpretation of patents
will ultimately be decided by the special patent Court of
Appeals in Washington D.C. However, a prediction of the final
outcome of the appeal is not possible. In the event the
Company does not prevail in this litigation, its competitive
position could be adversely affected.
There are no other material claims pending or, to the
Company's knowledge, threatened against the Company.
ITEM 2 CHANGES IN SECURITIES
(a) Not applicable.
(b) Not applicable.
(c)
Effective January 27, 1997, the Company issued two
warrants in payment for services rendered in securing
employment of certain executive officers of the Company. No
underwriter or broker-dealer was involved in connection with
such issuance, nor was any commission or discount paid or
allowed in connection therewith. The registrant claims that
the issuance of the warrant was exempt from registration under
Securities Act of 1933, as amended pursuant to Section 4(2)
thereof as a transaction not involving a public offering. Each
warrant entitles the holder to purchase 10,000 shares of the
Company's common stock, exercisable at the price of $2.3125
per share, subject to customary antidilution provisions of the
warrants.
Effective March 18, 1997, the Company authorized a
warrant to C. McKenzie Lewis III pursuant to re-election to
the Board of Directors for the Company. No underwriter or
broker-dealer was involved in connection with such issuance,
nor was any commission or discount paid or allowed in
connection therewith. The registrant claims that the issuance
of the warrant was exempt from registration under Securities
Act of 1933, as amended pursuant to Section 4(2) thereof as a
transaction not involving a public offering. The warrant
entitles Mr. Lewis to purchase 8,000 shares of the Company's
common stock, exercisable at the price of $2.125 per share,
subject to customary antidilution provisions of the warrant.
The warrant vests over a three-year period.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
(a) Not applicable.
(b) Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders
on March 18, 1997. 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 each of the following of management's
proposals:
* Adopt an amendment to the Company's 1990 Stock Option
Plan to, among other things, increase the number of shares
for which options may be granted under such plan from
1,500,000 to 2,000,000. The amendment received 8,240,509
shares voted for approval; 1,951,302 shares voted against;
100,262 shares abstaining and 42,000 broker non-votes.
* Ratify KPMG Peat Marwick LLP, independent certified
public accountants, as auditors of the Company for its
fiscal year ending September 30, 1997. KPMG Peat Marwick
LLP received 10,109,532 shares voted for approval; 189,880
shares voted against; 34,661 shares abstaining and no
broker non-votes.
The proposal to adopt an Amended and Restated
Certificate of Incorporation of the Company to provide, among
other things, for an increase in the number of shares of
Common Stock authorized from 20,000,000 to 50,000,000 and to
authorize the issuance of up to 5,000,000 shares of preferred
stock was not passed. The results of the vote on this proposal
were 4,464,588 shares voted for; 1,929,556 shares voted
against; 95,829 shares abstaining and 3,869,100 broker
non-votes.
ITEM 6. (a) EXHIBITS
Exhibit 11 Statement re: Computation of loss per share
Exhibit 27 Financial Data Schedule
Exhibit 99.1 1990 Stock Option Plan as amended
(b) REPORTS ON FORM 8-K
On February 11, 1997, the Company filed a report on
Form 8-K related to the conversion of $750,000 of 8%
Convertible Debentures and $76,482 of accrued interest into
428,504 shares of the Company's common stock.
On February 18, 1997, the Company filed a report on
Form 8-K related to the conversion of $100,000 of 8%
Convertible Debentures and $10,893 of accrued interest into
62,144 shares of the Company's common stock.
On February 25, 1997, the Company filed a report on
Form 8-K related to the conversion of $100,000 of 8%
Convertible Debentures and $11,123 of accrued interest into
68,140 shares of the Company's common stock.
On March 5, 1997, the Company filed a report on Form
8-K related to the conversion of $800,000 of 8% Convertible
Debentures and $89,775 of accrued interest into 548,750 shares
of the Company's common stock.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIGITAL BIOMETRICS, INC.
(Registrant)
May 14, 1997 s/ John J. Metil
-----------------------
John J. Metil
Chief Financial Officer
EXHIBIT 11.0
DIGITAL BIOMETRICS, INC.
STATEMENT RE: COMPUTATION OF LOSS PER SHARE
The per share computations are based on the weighted average number of common
shares outstanding during the periods.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
------------------------------ ------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Shares outstanding at beginning of period 10,916,485 8,221,445 10,777,288 7,833,633
Shares issued under retirement plan -- -- 41,798 16,831
Restricted stock awards, net of forfeitures 19,072 17,456 19,072 17,456
Exercise of options and warrants -- -- -- 157,500
Shares issued from debenture and related
interest conversion 1,124,565 1,135,288 1,221,964 1,348,769
------------ ------------ ------------ ------------
Shares outstanding at end of period 12,060,122 9,374,189 12,060,122 9,374,189
============ ============ ============ ============
Weighted average shares outstanding (A) 11,571,802 8,435,781 11,213,297 8,162,324
============ ============ ============ ============
Net loss $ (973,889) $ (2,164,211) $ (2,066,519) $ (3,354,018)
============ ============ ============ ============
Loss per common share $ (0.08) $ (0.26) $ (0.18) $ (0.41)
============ ============ ============ ============
</TABLE>
(A) Stock options and other common share equivalents are not included in the
calculation of the net loss per common share for the three- and six-month
periods ended March 31, 1997 and 1996 as their effect is antidilutive.
EXHIBIT 99.1
DIGITAL BIOMETRICS, INC.
1990 STOCK OPTION PLAN
AS AMENDED
ARTICLE I
PURPOSE
The purpose of this 1990 Stock Option Plan is to provide additional
incentive to certain Employees who are making and can continue to make
substantial contributions to the success of Digital Biometrics, Inc. ("DBI") by
providing them with an opportunity to acquire a proprietary interest in DBI
through the grant and exercise of Incentive Stock Options and Non-qualified
Stock Options to purchase shares of DBI common stock. It is the judgment of
DBI's Board of Directors that the acquisition of a proprietary interest in DBI
by certain Employees will increase their personal interest in its growth and
progress, thereby promoting the interests of DBI.
ARTICLE II
DEFINITIONS
The following words and terms, as used in the Plan, shall have the
respective meanings hereinafter set forth unless a different meaning is clearly
required by the context. Whenever appropriate, words used in the singular shall
be deemed to include the plural, and the masculine gender shall be deemed to
include the feminine gender.
2.1 BOARD. The Board of Directors of DBI.
2.2 CODE. The Internal Revenue Code of 1986, as now in effect or
as hereafter amended.
2.3 COMMITTEE. The Compensation and Personnel Committee of the
Board.
2.4 COMMON STOCK. The common stock of DBI.
2.5 EMPLOYEE. Any individual employed by and receiving
compensation from DBI or related Company.
2.6 EXCHANGE ACT. The Securities Exchange Act of 1934, as now in
effect or hereafter amended.
2.7 INCENTIVE STOCK OPTIONS. Options designated by the Committee
as qualifying under Code Section 422.
2.8 NON-QUALIFIED STOCK OPTIONS. Options designated by the
Committee as not qualifying under Code Section 422.
2.9 OPTION. An option to purchase a specific number of shares of
Common Stock for a specific purchase price granted by the
Committee pursuant to the Plan.
2.10 OPTION PRICE. The purchase price per share of Common Stock
pursuant to any Option granted under the Plan.
2.11 OPTIONEE. An Employee who is granted an Option by the
Committee pursuant to the Plan.
2.12 PARENT. Any corporation that is, with respect to DBI, a
"parent corporation," whether now or hereafter existing, as
defined in Code Section 424(e).
2.13 PLAN. The Digital Biometrics, Inc. 1990 Stock Option Plan as
set forth herein, as may be amended from time to time
hereafter.
2.14 RELATED COMPANY. Any corporation that is, along with DBI, a
member of a parent-subsidiary controlled group of
corporations, as defined in Code Section 1563(a)(1).
2.15 STOCKHOLDERS. The present stockholders or future stockholders,
as the case may be, of DBI.
2.16 SUBSIDIARY. Any corporation that is, with respect to DBI, a
"subsidiary corporation," whether now or hereafter existing,
as defined in Code Section 424(f).
ARTICLE III
SHARES SUBJECT TO PLAN
3.1 The total number of shares of Common Stock which are available for
the granting of Incentive Stock Options and Non-qualified Stock Options shall be
an aggregate of 2,000,000 shares, subject to adjustment as provided below. In
the event of a capital adjustment resulting from a stock dividend (other than a
stock dividend in lieu of an ordinary cash dividend), stock split,
reorganization, spin-off, split-up or consolidation, combination or exchange of
shares or the like, the number of shares of Common Stock subject to the Plan and
the number of shares under Option in outstanding option agreements shall be
adjusted in a manner consistent with such capital adjustment; provided, however,
that no such adjustment shall require DBI to issue any fractional shares and the
adjustment shall be limited accordingly. The price of any shares under Option
shall be adjusted so that there will be no change in the aggregate purchase
price payable upon exercise of any such Option. The determination of the
Committee as to any adjustment shall be final.
3.2 At all times during the term of this Plan, DBI shall reserve for
issuance and delivery such number of shares of Common Stock as will be
sufficient to satisfy the requirements hereof.
3.3 If an Option granted under the Plan shall terminate, expire or be
cancelled for any reason without having been exercised in full by the Optionee,
the unpurchased shares of the Common Stock subject to the Option shall become
available for the granting of Options to other eligible Employees.
ARTICLE IV
ADMINISTRATION
4.1 The Plan shall be administered by the Committee. The Committee
shall consist of not less than two members of the Board who are "disinterested
persons" as defined in Rule 16b-3 under the Exchange Act. A majority of the
members of the Committee shall constitute a quorum. All determinations of the
Committee shall be made by at least a majority of its members. Any decision or
determination reduced to writing and signed by all of the members of the
Committee shall be fully as effective as if it had been made by a unanimous vote
at a meeting duly called and held.
4.2 In accordance with the provisions of the Plan, the Committee shall
select the Employees to whom options shall be granted, shall determine the
number of shares subject to each Option, the time at which the Option is to be
granted, the type of Option, the Option period, the Option price and the manner
in which the Option becomes exercisable, and shall establish such other
provisions of the option agreements as the Committee may deem necessary or
desirable; provided, however, that any Option granted to an Employee who is
subject to the provisions of Section 16 of the Exchange Act on the date of the
grant shall not become exercisable (except as otherwise contemplated by Article
XI hereof or as otherwise specifically set forth in the option agreement) until
at least six months elapse from the date of grant. More than one Option may be
granted to the same Employee.
4.3 The Committee may adopt such rules and regulations for carrying out
the Plan as it may deem proper and in the best interests of DBI. The
interpretation of any provision of the Plan by the Committee and any
determination on the matters referred to in this Article IV shall be final.
4.4 No member of the Committee shall be liable for any action or
determination made in good faith with respect to the Plan.
ARTICLE V
ELIGIBILITY
Each Employee who is considered to be a key administrative, managerial,
executive or technical employee, as determined in the sole discretion of the
Committee, shall be eligible to be granted Options under the Plan.
ARTICLE VI
OPTION PRICE; OPTION GRANT
6.1 The purchase price per share of Common Stock subject to an Option
shall be fixed by the Committee, but shall not be less than the fair market
value of the Common Stock on the date such Option is granted, as determined
pursuant to Section 6.3 below.
6.2 Notwithstanding Section 6.1 above, the purchase price per share of
Common Stock subject to any Incentive Stock Option issued to an Employee who
owns stock possessing more than ten percent (10%) of the total combined voting
power of all classes of stock of DBI or of a Parent or Subsidiary on the date
such Incentive Stock Option is granted shall be one-hundred-ten percent (110%)
of the fair market value of such Common Stock on the date such Incentive Stock
Option is granted, as determined pursuant to Section 6.3 below.
6.3 For purposes of the Plan, the fair market value of a share of
Common Stock subject to an Option on the date such Option is granted shall be:
(i) If there is a market for such Common Stock on a stock
exchange, in an over-the-counter market, or otherwise, the
mean between the highest and lowest quoted selling prices on
the date of grant.
(ii) If there are no sales on the date of grant but were sales on
dates within a reasonable period both before and after the
date of grant, the fair market value is determined by taking a
weighted average of the means between the highest and lowest
sales prices on the nearest date before and the nearest date
after the date of grant. The average is to be weighted
inversely by the respective numbers of trading days between
the selling dates and the date of grant.
(iii) Any other method which determines, in the Committee's
discretion, fair market value of an option on date of grant in
accordance with the requirements of Code Section 422(b)(4) and
422(c)(1).
ARTICLE VII
ANNUAL LIMITATION ON OPTION EXERCISE
The aggregate fair market value of the Common Stock (determined at the
time the Option is granted) with respect to which Incentive Stock Options are
exercisable for the first time by an Employee during any calendar year, under
all Incentive Stock Option Plans of DBI, or any Parent or Subsidiary, shall not
exceed $100,000.
ARTICLE VIII
LIMITATION ON GRANTING OF OPTIONS
Any Options granted pursuant to the Plan must be granted within ten
(10) years from the earlier of the date the Plan is adopted by the Board or
approved by the Stockholders.
ARTICLE IX
NON-TRANSFERABILITY OF OPTIONS
Options granted pursuant to the Plan shall be non-transferable and
non-assignable by the Optionee other than by will or the laws of descent and
distribution and can only be exercised by an Optionee during the Optionee's
lifetime, except as otherwise provided in Article XI below in the event of the
death of the Optionee prior to the exercise of an Option.
ARTICLE X
EXERCISE OF OPTIONS
Any Option granted pursuant to this Plan must be fully exercised, or
else it shall terminate, within ten (10) years from the date that the Option is
granted, or such shorter period as the Committee may specify in granting the
Option; provided that any Incentive Stock Option issued to an Employee who owns
stock possessing more than ten percent (10%) of the total combined voting power
of all classes of stock of DBI or a Parent or a Subsidiary on the date such
Option is granted must terminate within a maximum of five (5) years from the
date such Option is granted; and provided further that the Committee shall, in
its sole discretion, have the authority to extend the period during which a
Non-qualified Stock Option granted under the Plan may be exercised, subject to
the provisions elsewhere contained in this Article X.
ARTICLE XI
EFFECT OF TERMINATION OF EMPLOYMENT, DISABILITY OR DEATH
All rights of an Optionee to exercise Options under the Plan , except
as otherwise provided herein in cases of death or disability, shall terminate
(i) in the case of Incentive Stock Options, three (3) months after the Optionee
ceases to be employed by DBI or a Related Company, or (ii) in the case of
Non-qualified Stock Options, three (3) months after the Optionee ceases to be
employed by DBI or a Related Company, or such other period as the Committee
shall determine. Options granted under the Plan may be exercised, if otherwise
timely within three (3) months (or such other period of time not exceeding
twelve (12) months as determined by the Committee) from the date of termination
of the Optionee's status as an employee of the Company by reason of Optionee's
disability. In the case of the death of an Optionee, any unexercised Option
granted to him under the Plan may be exercised by the Optionee's estate, the
person designated in such Optionee's last will and testament or his
heirs-at-law; provided, however, that such Option must be exercised no later
than one (1) year after the date of the death of the Optionee; and provided
further that the Optionee was entitled to exercise such Option on the date of
his death. Notwithstanding anything to the contrary contained herein, an Option
may not be exercised after the date of its termination pursuant to Article X
above.
ARTICLE XII
METHOD OF EXERCISE OF OPTIONS
12.1 Options shall be exercised by delivering a written notice of
exercise to DBI. Each such notice shall state the number of shares of Common
Stock in respect to which the Option is being exercised and must be signed by
the Optionee, and in the event the Option is being exercised by any person other
than the Optionee, be accompanied by proof, satisfactory to counsel for DBI, of
the right of such person to exercise the Option under the terms of this Plan,
and must be accompanied by full payment of the purchase price for the number of
shares of Common Stock specified in such notice, together with all applicable
Federal, state and local taxes. Full payment of the purchase price and any
applicable taxes may be accomplished by (i) the payment of cash or its
equivalent; (ii) with the consent of the Committee (as set forth in the option
agreement or otherwise), by tendering previously acquired shares of Common Stock
(valued at their fair market value as of the date of exercise, as determined by
the Committee consistent with the method of valuation set forth in Section 6.3
above); or (iii) with the consent of the Committee (as set forth in the option
agreement or otherwise), by any combination of the means of payment set forth in
subparagraphs (i) and (ii). For purposes of this Section 12.1, the term
"previously acquired shares of Common Stock" shall only include Common Stock
owned by the Employee prior to the exercise of the Option for which payment is
being made and shall not include shares of Common Stock which are being acquired
pursuant to the exercise of said Option. No shares shall be issued until full
payment therefor has been made.
12.2 DBI may deduct and withhold from any cash otherwise payable to the
Optionee (whether payable as salary, bonus or other compensation) such amount as
may be required for the purpose of satisfying DBI's obligation to withhold
Federal, state or local taxes. Further, in the event the amount so withheld is
insufficient for such purpose, DBI may require that the Optionee pay to DBI upon
its demand or otherwise make arrangements satisfactory to DBI for payment of
such amount as may be requested by DBI in order to satisfy its obligation to
withhold any such taxes.
12.3 With the consent of the Committee (as set forth in the option
agreement or otherwise), an Optionee may be permitted to satisfy DBI's
withholding tax requirements by electing to have DBI withhold shares of Common
Stock otherwise issuable to the Optionee or to deliver to DBI shares of Common
Stock having a fair market value on the date income is recognized pursuant the
exercise of an Option equal to the amount required to be withheld. The election
shall be made in writing and shall be made according to such rules and in such
form as the Committee may determine.
12.4 An Option shall not be deemed to have been exercised unless all
the provisions of Sections 12.1 and 12.2 above shall have been complied with,
and for all purposes, the date of exercise of the Option shall be the date on
which notice of exercise is delivered to DBI. DBI shall make immediately
delivery of certificates for the shares of Common Stock subject to the Option;
provided, however, that if any law or regulation requires DBI to take any action
with respect to the shares of Common Stock specified in such notice before the
issuance thereof, then the date of delivery shall be extended for the period
necessary. No Optionee shall be, or be deemed to be, the holder of any Common
Stock subject to an Option unless and until certificates for the shares of such
Common Stock are issued to him.
12.5 DBI shall not be required, upon the exercise of any Option, to
issue or deliver any shares of Common Stock prior to completion of such
registration or other qualification of such Common Stock under any state or
federal law, rule or regulation as DBI shall determine to be necessary.
12.6 Common Stock shall not be issued or delivered by DBI upon the
exercise of any Option unless the exercise of such Option and the issuance of
Common Stock thereto shall comply, in the sole judgment of DBI, with all
relevant provisions of law, including without limitation the Securities Act of
1933, as amended, and rules and regulations promulgated thereunder. Without
limiting the generality of the foregoing, DBI, in its sole determination, may
require any Optionee to represent and warrant at the time of any exercise of an
Option that the Common Stock to be issued and delivered thereunder is being
purchased only for investment and without any present intention to sell or
distribute such common stock.
ARTICLE XIII
MERGER OR CONSOLIDATION
In the event of any merger or consolidation of DBI with another
corporation (other than a merger with a subsidiary in which merger DBI is the
continuing corporation and which does not result in any change of the
outstanding shares of Common Stock issuable upon the exercise of an Option
granted under the Plan), as a condition thereto, DBI and its Board shall (1)
cause the continuing corporation to assume any Options previously granted under
the Plan, (2) cause the continuing corporation to issue new options in
substitution therefore so that an Optionee shall have the right thereafter, by
exercising any such Option (or any new option substituted therefore), to
purchase the kind and amount of stock and other securities and property
receivable upon such merger or consolidation as if the Optionee had purchased
all of the Common Stock subject to the Option immediately prior to the date of
the contract closing of such merger or consolidation, (3) determine that the
Optionee shall have the right to exercise the Option as to all of the Optioned
Stock, including shares as to which the Option would not otherwise be
exercisable, (4) cause the continuing corporation to pay to each Optionee, for
each Option held by the Optionee, the difference between the Option Price per
share and the per share price paid to Stockholders pursuant to the merger or
consolidation, or (5) make such other arrangements with respect to outstanding
Options as the Board shall deem to be in the best interest of the Company,
provided that no such arrangements shall adversely affect the rights of
Optionees under the outstanding Options. For purposes of (1) and (2), the excess
of the aggregate fair market value of the Common Stock or other securities
subject to any Option previously granted under the Plan (or any new Option
substituted therefore) immediately after the merger or consolidation over the
aggregate purchases price of the Common Stock or securities subject thereto
shall not be more than the excess of the aggregate fair market value of all
shares of Common Stock subject to the Option immediately before such merger or
consolidation over the aggregate purchase price of such shares under the Option,
and after the merger or consolidation, the assumption of any Option previously
granted under the plan (or any new option substituted therefore) shall not give
the Optionee additional benefits which he or she did not have under the Option,
or deprive him of benefits which he or she had under the Option, immediately
prior to such merger or consolidation.
If the Board makes an Option fully exercisable in lieu of assumption or
substitution in the event of a merger or sale of assets, the Board shall notify
the Optionee that the Option shall be fully exercisable for a period of thirty
(30) days from the date of such notice, and the Option will terminate upon the
expiration of such period.
The Committee may also grant Options having terms and provisions which
vary from those specified in the Plan provided that any Options granted pursuant
to this Article are granted in substitution for, or in connection with the
assumption of, existing options granted by another corporation and assumed or
otherwise agreed to be provided for by DBI pursuant to or by reason of a
transaction involving a corporate merger, consolidation, acquisition or other
combination or reorganization to which DBI is a party.
ARTICLE XIV
AMENDMENT
14.1 DBI shall have the right at any time to amend the Plan by action
of its Board without obtaining the approval of the Stockholders of DBI. Any
amendment to the Plan shall be set forth in writing.
14.2 Notwithstanding anything to the contrary contained herein, the
Board shall not amend the Plan without obtaining the approval of the
Stockholders if such amendment.
(a) increases the number of shares of Common Stock that may be
granted as Options under the Plan (except for increases
pursuant to Section 3.1);
(b) materially modifies the eligibility requirements of Article V;
(c) permits the grant of Options with an Option Price that is less
than the fair market value of the shares of Common Stock
subject thereto (as determined pursuant to Article VI above);
(d) permits the exercise of Options without full payment for the
share of Common Stock as to which the Option is exercised at
the time of purchase; or
(e) is otherwise required by the rules or regulations promulgated
under the Exchange Act in order for the Plan to remain
qualified under Rule 16b-3 or any successor provisions under
the Exchange Act.
Any amendment of the Plan shall not, without the consent of the Optionee, impair
any rights or obligations under any Option previously granted to the Optionee.
ARTICLE XV
TERMINATION
DBI shall have the right at any time to terminate the Plan by action of
its Board without obtaining the approval of the stockholders, provided however,
that termination of the Plan shall not affect the rights of Optionees under
Options previously granted to them and all unexpired Options shall continue in
force and operation after termination of the Plan except as they may lapse or be
terminated by their terms and conditions.
ARTICLE XVI
NOTICE
Any notice to DBI required under this Plan shall be in writing and
shall be sent by registered mail, return receipt requested, to the following
address:
Digital Biometrics, Inc.
5600 Rowland Road
Minnetonka, MN 55343
Attention: President
ARTICLE XVII
EFFECTIVE DATE
The Plan shall be effective as of January 1, 1990.
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