As filed with the Securities and Exchange Commission on February 19, 1998
Registration No. 333-43791
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
POST-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
DIGITAL BIOMETRICS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 3571 41-1545069
(State or other Jurisdiction of (Primary Standard (I.R.S. Employer
Incorporation or Organization) Industrial Identification Number)
Classification
Code Number)
5600 ROWLAND ROAD
MINNETONKA, MINNESOTA 55343
(612) 932-0888
(Address and telephone number, including area code, of registrant's
principal executive offices)
JOHN J. METIL
CHIEF OPERATING OFFICER AND CHIEF FINANCIAL OFFICER
5600 ROWLAND ROAD
MINNETONKA, MINNESOTA 55343
(612) 942-9880
(Name and telephone number, including area code, of agent
for service of process)
COPY TO:
AVRON L. GORDON, ESQ.
THOMAS F. STEICHEN, ESQ.
BRIGGS AND MORGAN
PROFESSIONAL ASSOCIATION
2400 IDS CENTER
MINNEAPOLIS, MN 55402
(612) 334-8400
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: From time to time
after the effective date of this Registration Statement.
If any of the securities being registered on Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
THE REGISTRANT HEREBY UNDERTAKES TO AMEND THIS REGISTRATION STATEMENT
ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE
REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND
EXCHANGE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(a), MAY DETERMINE.
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<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED FEBRUARY 19, 1998
DIGITAL BIOMETRICS, INC.
3,771,429 SHARES OF COMMON STOCK
This Prospectus relates to the sale of up to 3,771,429 shares of Common
Stock (the "Shares"), par value $.01 per share (the "Common Stock"), of Digital
Biometrics, Inc. (the "Company") that may be offered for sale for the account of
certain persons as stated herein under the heading "Principal and Selling
Stockholders (the "Selling Shareholders"). The Shares being offered by the
Selling Stockholders hereunder are (i) shares issuable upon conversion of the
Company's 8% Convertible Subordinated Debentures, due December 1, 2000, and
interest thereon, and (ii) shares issuable upon the exercise of certain Common
Stock purchase warrants. No period of time has been fixed within which the
Shares covered by this Prospectus may be offered or sold.
The Company's Common Stock is traded on the Nasdaq National Market
System under the symbol "DBII." On February 13, 1998, the average of the high
and low prices of the Common Stock on the Nasdaq National Market System was
$1.313 per share.
The Selling Stockholders have advised the Company that sales of the
Shares by them, or by their pledgees, donees, transferees or other successors in
interest, may be made from time to time in the over-the-counter market, through
negotiated transactions or otherwise, at market prices prevailing at the time of
sale or at negotiated prices. The Shares may be sold by one or more of the
following methods without limitation: (a) a block trade in which the broker or
dealer so engaged will attempt to sell the Shares as agent but may purchase and
resell a portion of the block as principal to facilitate the transaction; (b)
purchases by a broker or dealer as principal and resale by such broker or dealer
for its account pursuant to this Prospectus; (c) an exchange distribution in
accordance with the rules of such exchange; (d) ordinary brokerage transactions
and transactions in which the broker solicits purchasers; (e) privately
negotiated transactions; (f) short sales; and (g) a combination of any such
method of sale. Sales may be made pursuant to this Prospectus to or through
broker-dealers who may receive compensation in the form of discounts,
concessions or commissions from the Selling Stockholders or the purchasers of
Common Stock for whom such broker-dealer may act as agent or to whom they may
sell as principal, or both (which compensation as to a particular broker-dealer
may be in excess of customary commissions). One or more supplemental
prospectuses will be filed pursuant to Rule 424 under the Securities Act of
1933, as amended (the "Securities Act"), to describe any material arrangements
for the sales of the Shares when such arrangements are entered into by any of
the Selling Stockholders and any other broker-dealers that participate in the
sale of the Shares.
The Selling Stockholders and any broker-dealers or other persons acting
on their behalf in connection with the sale of the Shares may be deemed to be
"underwriters" within the meaning of the Securities Act, and any commissions
received by them and any profit realized by them on the resale of the Shares as
principals may be deemed to be underwriting commissions under the Securities
Act. As of the date hereof, there are no special selling arrangements between
any broker-dealer or other person and any Selling Stockholder.
The Company will not receive any part of the proceeds of any sales of
Shares pursuant to this Prospectus. Pursuant to the terms of registration rights
granted to the Selling Stockholders, the Company will pay all the expenses of
registering the Shares, except for selling expenses incurred by the Selling
Stockholders in connection with this offering, including any fees and
commissions payable to broker-dealers or other persons, which will be borne by
the Selling Stockholders. In addition, such registration rights provide for
certain other usual and customary terms, including indemnification by the
Company of the Selling Stockholders against certain liabilities arising under
the Securities Act. See "Plan of Distribution."
THE SHARES INVOLVE CERTAIN RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE
4 OF THIS PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is ___________, 1998
<PAGE>
TABLE OF CONTENTS
Page
----
Available Information ................................................ 2
Prospectus Summary ................................................... 3
Risk Factors ......................................................... 4
Use of Proceeds ...................................................... 10
Market for the Registrant's Common Equity and Related
Stockholder Matters ................................................ 11
Selected Financial Data .............................................. 12
Capitalization ....................................................... 13
Management's Discussion And Analysis of Financial Condition
And Results of Operations .......................................... 15
Business ............................................................. 21
Management ........................................................... 28
Certain Transactions ................................................. 31
Principal and Selling Stockholders ................................... 32
Description of Capital Stock ......................................... 34
Plan of Distribution ................................................. 37
Legal Matters ........................................................ 38
Experts .............................................................. 38
Index to Consolidated Financial Statements ........................... F-1
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"') and, in
accordance therewith, files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company pursuant to the Exchange
Act may be inspected and copied at the public reference facilities maintained by
the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549 and at the regional offices of the Commission located at Seven World Trade
Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can
also be obtained from the Public Reference Section of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Commission maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission at http://www.sec.gov. In addition, the
Company's Common Stock is quoted on the Nasdaq National Market System. Reports,
proxy and information statements and other information concerning the Company
can be inspected and copied at the Public Reference Room of the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C.
20006.
The Company has filed with the Commission a Registration Statement on
Form S-1 under the Securities Act. This Prospectus does not contain all of the
information, exhibits and undertakings set forth in the Registration Statement,
certain portions of which are omitted as permitted by the rules and regulations
of the Commission. For further information, reference is hereby made to the
Registration Statement which may be inspected and copied in the manner and at
the sources described above.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING "RISK FACTORS" AND THE CONSOLIDATED FINANCIAL STATEMENTS
AND NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. THIS PROSPECTUS
CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE
COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE OR CONTRIBUTE TO SUCH A
DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS,"
ELSEWHERE IN THIS PROSPECTUS AND IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR
THE YEAR ENDED SEPTEMBER 30, 1997.
THE COMPANY
Digital Biometrics, Inc. develops, manufactures, markets and integrates
computer-based products and services for the identification of individuals. The
Company is a leading vendor of products employing "biometric" technology, the
science of identifying individuals by measuring distinguishing biological
characteristics. The Company's principal product is the TENPRINTER(R) system for
"live-scan" fingerprint capture used mainly in law-enforcement applications. The
TENPRINTER is a computer-based system with patented high-resolution optics which
captures, digitizes, prints and transmits forensic-grade fingerprint images.
The Company also offers high-resolution single-fingerprint capture
products for commercial and governmental identification applications. To
capitalize on opportunities outside of its traditional law enforcement market,
the Company recently established a systems integration services business focused
on integrating biometric and other identification technologies into applications
for government and commercial markets.
The Company has also developed a prototype player tracking system for
the gaming industry called TRAK-21(TM). The Company has reached an agreement in
principle with Grand Casinos, Inc. to create a joint venture to carry out the
productization of the TRAK-21 technology. It is anticipated that the joint
venture will be responsible for marketing of the resultant product.
During fiscal 1997, virtually all of the Company's revenues were
derived from sales of TENPRINTER systems and related maintenance fees.
Approximately 89% of customer accounts receivable at September 30, 1997 were
from government agencies, of which 39% was from a single customer. For the last
three fiscal years, sales to three customers in 1997 accounted for 43% of
revenues, sales to two customers in 1996 accounted for 30%, and sales to two
customers in 1995 accounted for 52%. Export sales were 5%, 15% and 21% of total
revenues, for the years ended September 30, 1997, 1996 and 1995, respectively.
The Company's strategy is to continue to market TENPRINTER systems to
law enforcement agencies, but also to expand the Company's product and services
offerings as well as its served markets. The law enforcement market for
live-scan biometric products is well established. The Company believes, however,
that there is increasing interest from other governmental and commercial markets
in using biometric identification technologies and products to improve security
and to assure proper access. The Company intends to aggressively pursue these
emerging opportunities.
The Company was organized in 1985 as a Minnesota corporation under the
name C.F.A. Technologies, Inc., was reincorporated in Delaware in 1986 and
changed its name to Digital Biometrics, Inc. in 1990. The Company's offices and
facilities are located at 5600 Rowland Road, Minnetonka, Minnesota 55343, and
its telephone number is (612) 932-0888.
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TENPRINTER(R), SQUID(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 TRAK-21(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.
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY IS HIGHLY
SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK. PROSPECTIVE INVESTORS SHOULD
CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS, AS WELL AS THE OTHER INFORMATION
CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH AN INVESTMENT IN THE SHARES OF
COMMON STOCK OFFERED HEREBY.
INFORMATION CONTAINED IN THIS PROSPECTUS MAY CONTAIN "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995, WHICH CAN BE IDENTIFIED BY THE USE OF THE FORWARD-LOOKING TERMINOLOGY
SUCH AS "MAY," "WILL," "EXPECT," "ANTICIPATE," "ESTIMATE," OR "CONTINUE" OR THE
NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE TERMINOLOGY. SUCH
STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED. POTENTIAL PURCHASERS
OF THE COMPANY'S COMMON STOCK ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON SUCH
FORWARD-LOOKING STATEMENTS WHICH SPEAK ONLY AS OF THE DATE HEREOF.
CONTINUING LOSSES AND GENERAL BUSINESS RISKS
The Company has incurred net operating losses in each quarter since
inception. As of September 30, 1997, the Company had an accumulated deficit of
$35.3 million. The Company incurred a net loss of $6.3 million for the fiscal
year ended September 30, 1997, a net loss of $1.3 million for the first fiscal
quarter ended December 31, 1997, and anticipates that it will continue to incur
net losses on an annual basis, at least through fiscal 1998. Future operating
results will depend on many factors, including, among others, demand for and
acceptance of the Company's products and services, including ongoing acceptance
of maintenance and other services purchased by existing customers, the ability
of the Company to control costs, the ability of the Company to develop, market
and deploy new products and services and to build profitable revenue streams
around those new offerings, the ability of the Company to manage the
concentration of accounts receivable and other credit risks in large customers,
the ability of the Company to create and maintain satisfactory distribution and
operations relationships with AFIS vendors, the Company's success in attracting
and retaining key personnel, the availability of funding where customer
procurements are dependent on state or federal government grants and general tax
funding, the timely and cost-effective availability of product components, and
the ability of the Company to successfully integrate technologies and businesses
it may acquire in the future. In addition, markets for the Company's products
and services 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. There can be no assurance that the Company's
revenues will grow in future periods or, if they do grow, that the Company will
ever become profitable or generate positive cash flow. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
WORKING CAPITAL AND LIQUIDITY
Due primarily to continuing operating losses, the Company has not
achieved positive cash flow. The Company has been and continues to be reliant on
outside capital to sustain its operations. Although the Company believes that
cash and cash equivalents, accounts receivable and working capital provided from
operations, together with available financing sources, are sufficient to meet
current and foreseeable operating requirements, including the investment
required to capitalize on new business opportunities, such belief is subject to
a number of contingencies beyond the Company's control. Risks related to the
Company's ability to maintain adequate working capital and liquidity include,
among others, the continued availability of bank credit after the expiration of
the Company's current accounts receivable line of credit in January 1998,
renewal of which is expected, but cannot be assured, the availability of future
tranches of capital under the terms of the Company's 8% Convertible Subordinated
Debenture Purchase Agreement entered into in December 1997, and the Company's
ability to satisfy contract requirements to insure payment by customers of
accounts receivable at such times and in such amounts as to enable the Company
to meet its payment obligations. The Company has experienced problems from time
to time in satisfying customer contract requirements and other
<PAGE>
negotiated commitments, particularly with respect to contracts which involve the
delivery of new products or systems. These problems have resulted in substantial
increased costs associated with the installation and service of such systems.
There can be no assurance that additional financing will be available when
required, or that if additional financing is available, that it will be on terms
that are acceptable or favorable to the Company. See Financial Statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
LOCAL GOVERNMENTAL CREDIT CONSIDERATIONS
The Company extends substantial credit to state and local governments
in connection with sales of products to law enforcement agencies. Approximately
89% and 70% of customer accounts receivable at September 30, 1997 and 1996,
respectively, were from government agencies, of which 39% and 40%, respectively,
were from individual customers. Sales to three customers in fiscal 1997
accounted for 43% of revenues; sales to two customers in fiscal 1996 accounted
for 30% of revenues; and sales to two customers in fiscal 1995 accounted for 52%
of revenues. Sales to sizeable customers requiring large and sophisticated
networks of TENPRINTER systems and peripheral equipment often include technical
requirements which may not be fully known at the time of order. In addition,
contracts may specify performance criteria which must be satisfied before the
customer accepts products or services. Collection of accounts receivable may be
dependent on completion of customer requirements, which may be unpredictable and
not fully understood at the time of acceptance of the order by the Company, and
may involve investment of additional Company resources. These investments of
additional resources are accrued when amounts can be estimated but may be
uncompensated and negatively impact profit margins and the Company's liquidity.
LAW ENFORCEMENT MARKET CHARACTERISTICS RESULTING IN IRREGULAR REVENUE CYCLES
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 government procurement processes are expected to
continue to result in irregular and unpredictable revenue cycles for the
Company. In many instances, customer procurements are dependent on the continued
availability of state or federal government grants and general tax funding. The
Company's ability to become profitable will depend on its ability to continually
find new customers for its products and maintain its existing customer base in
an increasingly competitive market.
PUBLIC CONTRACT CONSIDERATIONS
Currently, the Company's products are marketed primarily to law
enforcement agencies. The Company markets directly or on an OEM basis to
customers who supply products to law enforcement agencies. Sales to law
enforcement agencies are dependent on the availability of funding for equipment
purchases, the timing of agency budget and purchasing cycles and political
constraints. As public agencies, prospective purchasers are also subject to
public contract requirements which vary from jurisdiction to jurisdiction.
Future sales to law enforcement agencies will depend on the Company's ability to
meet public contract requirements, certain of which may be onerous or even
impossible for the Company to satisfy. In addition, public contracts frequently
are awarded only after formal competitive bidding processes, which have been and
may continue to be protracted. There can be no assurance that the Company will
be awarded any of the contracts for which its products are bid or, if awarded,
that substantial delays or cancellations of purchases will not result from
protests initiated by losing bidders. Public contracts may contain provisions
that permit cancellation in the event that funds are unavailable to the public
agency. See "Business - Law Enforcement and Regulatory Agency Markets."
<PAGE>
GOVERNMENT STANDARDS AND REQUIREMENTS
Certain of the Company's products are required to meet standards such
as image resolution and image quality as determined by either state and federal
government agencies or other standard setting authorities. These standards have
been subject to change and the Company cannot predict standards that may be
imposed on its products in the future. Failure to meet current or future
standards may adversely affect the business operations of the Company as sales
to government agencies are dependent on compliance with government requirements.
NEED TO UPGRADE PRODUCTS AND DEVELOP NEW TECHNOLOGIES
The ability of the Company to compete successfully in the biometrics
market will depend, in part, upon its ability to continually advance its
technology and to develop and market new products and services. Continued
participation by the Company in the law enforcement market for live-scan systems
requires the investment of Company resources in continuous upgrading of the
Company's products and technology sufficient for the Company to compete and meet
regulatory and statutory standards. There can be no assurance that such
resources will be available to the Company or that the pace of product and
technology development established by management will be adequate to meet the
competitive requirements of the marketplace. See "Business - Products."
GAMING MARKET ENTRY RISKS
The Company has recently announced an agreement in principle with Grand
Casinos, Inc. to form a joint venture for the completion of productization and
subsequent marketing of the resultant product(s) based on TRAK-21 technology.
The terms and conditions of the joint venture have not yet been fully
negotiated. There can be no assurance that a definitive agreement satisfactory
to both parties will be reached. In the event that a joint venture is formed, it
is susceptible to the normal business risks customary to a start-up operation.
In particular, although prototype models of TRAK-21 have been successfully
demonstrated, there can be no assurance that this technology will operate as
required in live casino environments or that products based on TRAK-21
technology will be accepted by customers. In addition, it has not been
determined whether or not the TRAK-21 system will be able to compete, on the
basis of price and performance, with player tracking systems of competitors
whose systems have been marketed for longer periods of time. There can be no
assurance, therefore, that the joint venture, if implemented, will be profitable
to the Company. See "Business - Gaming."
SYSTEMS INTEGRATION AND NEW PRODUCT OPPORTUNITIES
The Company has recently established a systems integration division
designated as its as the Integrated Identification Solutions Division ("IIS").
This is a startup operation with the normal risks attendant to the establishment
of a new business. The ability of this new enterprise to ultimately generate
revenues and profits is as yet undetermined. The Company believes it must invest
significant resources to attract key employees, build a technical infrastructure
and market the capabilities of the division to prospective customers prior to
attracting any significant base of customers. It cannot be known whether
sufficient profits will ultimately be generated to provide a return on this
investment. While the Company believes that it has identified areas of market
opportunity not well served by current participants, competition can be expected
to increase and such potential competitors may have greater financial,
technical, marketing and other resources than the Company. See " - Competition"
and "Business - Competition."
There can be no assurance that the Company will be able to attract and
retain systems integration personnel necessary for the success of IIS, which
depends significantly upon the efforts and performance of its personnel.
<PAGE>
YEAR 2000 IMPACT ON COMPUTER SYSTEMS
Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. These date code
fields will need to accept four digit entries to distinguish 21st century dates
from 20th century dates. As a result, in approximately two years, computer
systems and software used by many companies may need to be upgraded to comply
with such "Year 2000" requirements.
In June 1996, the Company began converting its computer systems
enabling proper processing of transactions in the Year 2000 and beyond. The
operating system vendor has made software upgrades available to make its
software compatible with Year 2000. The Company will also test its application
software to ensure compatibility with Year 2000. The Company presently believes
that, with modifications to existing software and conversions to new software,
Year 2000 compatibility will not pose significant operational problems for the
Company's computer systems as so modified and converted, although there can be
no assurance that unforeseen difficulties or costs will not arise.
LIMITED PROTECTION OF PROPRIETARY TECHNOLOGY
The Company is dependent on proprietary technology. The Company
currently relies upon a combination of patents, copyrights, trademarks and trade
secrets to establish and protect its proprietary rights in its products. The
Company maintains as proprietary the portions of the technology incorporated in
its products. A number of United States patents have been issued to the Company
and additional United States patent applications are pending which cover various
aspects of the TENPRINTER system and SQUID system technologies. Although
additional features of the Company's products may be patentable, the Company has
chosen to preserve these features as trade secrets rather than applying for
patent protection. There can be no assurance that the steps taken by the Company
to protect its proprietary rights will be adequate to prevent misappropriation
of its technology or that the Company's competitors will not independently
develop technologies that are substantially equivalent or superior to the
Company's technology. In addition, the laws of some foreign countries do not
protect the Company's proprietary rights to the same extent as do the laws of
the United States. No assurance can be given that any patents currently held or
issued to the Company in the future will not be challenged, invalidated or
circumvented or that the rights granted thereunder will provide competitive
advantages. Further, patents may be issued in the future to other companies
covering features incorporated into the TENPRINTER system or other products of
the Company.
The Company has incurred substantial costs in seeking enforcement of
its patents and could incur substantial costs in defending itself against patent
infringement claims by others. The Company is not aware of any patents held by
others that would prohibit the use of technology current used by the Company.
Any infringement claims, with or without merit, could be time-consuming, result
in costly litigation, cause product shipment delays or require the Company to
enter into royalty or licensing agreements. Such royalty or licensing
requirements, if required, may not be available on terms acceptable to the
Company or at all, which could have a material adverse effect upon the Company's
business, operating results and financial condition.
The Company has not been successful in enforcing its patent rights
against Identix, Inc. ("Identix"), a competitor, and is appealing an adverse
ruling in pending litigation. See "- Pending Litigation" and "Business - Legal
Proceedings" and " - Proprietary Technology."
DEPENDENCE ON SUPPLIERS
Certain of the components included in the Company's products are
obtained from a single supplier. The loss of supply from such supplier or a
significant increase in price from such supplier could have a material adverse
effect on the Company. In addition, the loss of a limited source supplier may
result in the Company having to incur additional development costs to establish
alternative sources. See "Business Suppliers."
<PAGE>
PRODUCT WARRANTY
During the third quarter of fiscal 1997, the Company added $524,000 to
its reserves for product warranty obligations. The Company believes that this
addition to its reserves will be adequate to address customer warranty
obligations arising from past product sales. There is, however, a risk that the
Company may, for unforeseen reasons, be required to repair or replace products
currently installed in customer locations or reimburse customers for products
that fail or are determined not to be in compliance with contractual
requirements or agency rules or regulations, and that actual costs may exceed
the Company's reserves.
RELIANCE ON KEY PERSONNEL
The success of the Company depends significantly upon the efforts of
its key personnel and may, in the future, depend on the ability to attract
additional key personnel. The loss of the services of key employees may have a
materially adverse effect on the Company's business, operating results and
financial condition. See "Business - Employees" and "Management."
COMPETITION
The market for biometric identification devices in general, and the
market for live-scan systems in particular, is characterized by significant and
increasing competition. The most likely sources of additional competition are
(i) entities currently outside the live-scan systems market but otherwise
involved in biometric identification systems or (ii) one or more of the
companies presently manufacturing AFIS systems, which may already be developing,
or which may undertake to develop, a competitive live-scan product. NEC
Technologies, in particular, currently markets a live-scan product, the LS-21,
which includes features and components manufactured by Identix. These
competitors may have financial, technical, marketing and other resources
significantly greater than those of the Company. There can be no assurance that
the Company's products will be able to compete successfully with the products of
its competitors. The Company's business, operating results and financial
condition 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. See "Business - Competition."
MARKETING AND OEM RELATIONSHIPS
The Company has established numerous marketing and/or strategic
relationships with other companies and has sold a significant amount of its
product through OEM relationships. In addition, the Company is pursuing
significant sales opportunities which, in large part, are dependent upon the
efforts of these strategic partners. The loss of one or more of these
relationships may have an adverse material effect on the business operations of
the Company. See "Business - Products."
LEGAL PROCEEDINGS
On June 1, 1995, the Company filed a complaint for patent infringement
against Identix, of Sunnyvale, California, in the United States District Court
for the Northern District of California. The complaint alleged that Identix
willfully and deliberately infringed a Company patent and 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. In
January 1997, the Company filed an appeal of the court's decision of
non-infringement. These appeals are decided by the Federal Circuit which is a
Court of Appeals in Washington D.C. On October 8, 1997, the appeal was argued
before the Court. As of the date of this Prospectus, no appellate decision has
been issued. Further,
<PAGE>
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.
NO CASH DIVIDENDS
The Company has paid no cash dividends on its Common Stock and does not
intend to pay cash dividends in the foreseeable future. The Company presently
intends to retain future earnings, if any, for use in its business.
IMPACT OF SALE OF SHARES; DILUTION DUE TO CONVERSION OF CONVERTIBLE DEBENTURES,
AND EXERCISE OF OPTIONS AND WARRANTS
As of December 31, 1997, the Company had 12,417,001 shares of Common
Stock outstanding, and had warrants and options outstanding to purchase an
additional 1,823,393 shares of Common Stock, a majority of which are exercisable
at prices ranging from $1.5625 to $3.125 per share. In addition, on December 1,
1997, the Company sold $500,000 principal amount of 8% Convertible Subordinated
Debentures due 2000 (the "Debentures") which, if converted at December 1, 1997,
would have resulted in the issuance of 318,878 shares of Common Stock. The
Company may sell up to an additional $2.0 million of the Debentures. The
conversion of such debt would be related to the fair market value of the
Company's Common Stock at the time of issuance or conversion of such debt. The
sale of the Common Stock offered hereby and the sale of additional Common Stock
which may become eligible for sale in the public market from time to time upon
conversion of debt and the exercise of warrants and options could have the
effect of depressing the market price of the Company's Common Stock.
VOLATILITY OF MARKET PRICE OF COMMON STOCK
From September 30, 1995 to December 31, 1997, the market price of the
Company's Common Stock has varied significantly from $8.125 to $1.25 per share.
Fluctuations in the market price may result from many factors, including but not
limited to irregularities in quarter to quarter operating results, general
market conditions, significant events and industry conditions, including
activities of the various government agencies and activities of the Company's
competitors. Some or all of the conditions which affect the market price are
beyond the control of the Company and may result in adverse changes to the price
of the Common Stock.
EFFECT OF CERTAIN ANTI-TAKEOVER LAWS AND STOCKHOLDERS' RIGHTS PLAN
Certain provisions of the Delaware General Corporation Law and the
Rights Agreement between the Company and Norwest Bank Minnesota, National
Association, adopted by the Company effective May 2, 1996 (the "Rights Plan"),
may have the effect of discouraging, delaying or preventing a change in control
of the Company or unsolicited acquisition proposals. Section 203 of the Delaware
General Corporation Law restricts business combinations with interested
stockholders without board approval. Pursuant to the Rights Plan, the Company
declared a dividend of one common share purchase right (the "Right") for each
outstanding share of Common Stock. Each Right will entitle the holder thereof to
purchase from the Company after the Distribution Date (as described below), a
number of shares of Common Stock to be determined under the Rights Plan at an
initial purchase price of $35, subject to adjustment. One additional Right is
deemed delivered with each share of Common Stock subsequently issued by the
Company. The Rights become exercisable on the first day after the earlier of (i)
ten business days after the public announcement of the acquisition by a person
or group of 15% or more of the outstanding Common Stock or (ii) ten business
days after the commencement, or the first public announcement, of an intention
to acquire through tender or exchange offer 15% or more of the outstanding
Common Stock (the "Distribution Date"). In the event that the Company does not
have sufficient authorized but unissued shares of Common Stock to permit the
delivery of the required number of shares upon the exercise in full of the
Rights, then each Right shall entitle the holder thereof to purchase the number
of shares of Common Stock equal to a fraction determined under the
<PAGE>
Rights Plan. As of the date hereof, the Company does not have sufficient
authorized and unissued shares of Common Stock to fully implement the Rights
Plan. The Rights Plan may discourage certain types of transactions involving an
actual or potential change in control of the Company which could be beneficial
to the Company or its stockholders.
USE OF PROCEEDS
The Shares offered hereby will be sold by the Selling Stockholders. The
Company will not receive any of the proceeds from the sale of the Shares by the
Selling Stockholders. See "Principal and Selling Stockholders."
<PAGE>
MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock has been traded on the Nasdaq National
Market System under the symbol "DBII." The following information sets forth the
approximate high and low closing prices for the Common Stock for quarterly
periods indicated as reported by the Nasdaq National Market System. These
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and do not necessarily represent actual transactions.
Fiscal 1996 High Low
----------- -------- ---------
First Quarter $ 8.25 $ 5.25
Second Quarter 5.88 2.63
Third Quarter 8.75 3.13
Fourth Quarter 6.63 3.00
Fiscal 1997 High Low
----------- -------- ---------
First Quarter $ 3.88 $ 2.13
Second Quarter 2.94 1.81
Third Quarter 2.81 1.50
Fourth Quarter 2.69 1.56
Fiscal 1998 High Low
----------- -------- ---------
First Quarter $ 2.50 $ 1.25
Second Quarter (through
February 13, 1998) 1.56 1.25
As of December 31, 1997, the Company had approximately 7,200 record
holders of its Common Stock. The closing price of its Common Stock on February
13, 1998, as reported by the Nasdaq National Market System, was $1.31.
DIVIDEND POLICY
Holders of Common Stock are entitled to such dividends as may be
declared from funds legally available for such purpose by the Board of Directors
in its sole discretion. The Company has never paid a dividend on its Common
Stock and it is not anticipated that dividends will be paid in the foreseeable
future. If, and to the extent that, any operating profits are realized, the
Company intends to retain such profits for operating purposes.
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data of the Company as of and for each
of the years in the five-year period ended September 30, 1997 has been derived
from financial statements audited by KPMG Peat Marwick LLP, independent
certified public accountants. The selected financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the audited financial statements and notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
-----------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $ 11,419,358 $ 8,327,272 $ 9,098,014 $ 8,005,390 $ 4,603,821
Cost of revenues 8,811,271 6,181,481 5,273,412 4,997,103 2,631,860
Cost of revenues - non-recurring charges 1,529,118 -- -- -- --
------------ ------------ ------------ ------------ ------------
Gross margin 1,078,969 2,145,791 3,824,602 3,008,287 1,971,961
------------ ------------ ------------ ------------ ------------
Expenses:
Sales and marketing 2,057,099 3,369,441 2,394,916 1,786,075 1,157,439
Engineering and development 2,526,346 4,569,751 2,854,592 3,618,385 2,022,521
Depreciation and amortization 319,536 1,049,584 529,687 480,981 143,310
General and administrative 2,043,954 2,753,444 1,700,017 1,296,864 972,644
Non-recurring charges 330,319 -- -- -- --
------------ ------------ ------------ ------------ ------------
Total expenses 7,277,254 11,742,220 7,479,212 7,182,305 4,295,914
------------ ------------ ------------ ------------ ------------
Loss from operations (6,198,285) (9,596,429) (3,654,610) (4,174,018) (2,323,953)
Other income (expense) (77,109) (2,090,474) 330,055 376,703 259,410
------------ ------------ ------------ ------------ ------------
Net loss $ (6,275,394) $(11,686,903) $ (3,324,555) $ (3,797,315) $ (2,064,543)
============ ============ ============ ============ ============
Net loss per common share $ (0.53) $ (1.24) $ (0.43) $ (0.49) $ (0.32)
============ ============ ============ ============ ============
Weighted average common shares 11,766,220 9,451,015 7,814,144 7,696,551 6,440,341
============ ============ ============ ============ ============
AS OF SEPTEMBER 30
------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
BALANCE SHEET DATA:
Cash and cash equivalents $ 1,891,397 $ 466,990 $ 367,866 $ 592,971 $ 4,485,606
Accounts receivable, net 5,161,356 5,676,849 4,494,301 4,575,807 1,756,128
Inventory 2,294,593 3,633,659 1,875,682 2,539,479 1,660,885
Working capital 6,131,758 5,506,587 13,493,690 11,864,794 14,048,363
Total assets 10,699,238 17,309,371 25,451,666 15,846,448 18,398,215
Long-term obligations -- 2,374,739 8,863,578 -- --
Total liabilities 3,533,990 6,853,999 12,362,412 2,077,368 1,495,057
Stockholders' equity 7,165,248 10,455,372 13,089,254 13,769,080 16,903,158
</TABLE>
The Company has paid no cash dividends on its Common Stock.
<PAGE>
The following selected financial data of the Company as of the three
month period ended December 31, 1997 has been derived from unaudited financial
statements of the Company. The selected financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the audited financial statements and notes
thereto included elsewhere in this Registration Statement.
DIGITAL BIOMETRICS, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1997 1996
------------- -------------
<S> <C> <C>
Revenues:
Identification systems $ 1,690,249 $ 1,616,314
Maintenance and other services 581,891 399,159
------------- -------------
Total revenues 2,272,140 2,015,473
------------- -------------
Cost of revenues:
Identification systems 1,430,548 848,697
Maintenance and other services 384,501 556,944
------------- -------------
Total cost of revenues 1,815,049 1,405,641
------------- -------------
Gross margin 457,091 609,832
------------- -------------
Selling, general and administrative expenses:
Sales and marketing 516,501 525,969
Engineering and development 700,292 738,173
General and administrative 477,566 418,638
------------- -------------
Total expenses 1,694,359 1,682,780
------------- -------------
Loss from operations (1,237,268) (1,072,948)
Other income (expense):
Interest income 12,005 86,934
Interest expense (94,070) (106,616)
Loss on disposal of fixed assets (4,667) --
------------- -------------
Total other income (expense) (86,732) (19,682)
------------- -------------
Net loss $ (1,324,000) $ (1,092,630)
============= =============
Net loss per common share $ (0.11) $ (0.10)
============= =============
Weighted average common shares outstanding 12,361,646 10,862,607
============= =============
December 31, September 30,
1997 1997
------------- -------------
BALANCE SHEET DATA:
Cash and cash equivalents $ 1,204,282 $ 1,891,397
Accounts receivable, net 4,786,027 5,161,356
Inventory 2,241,785 2,294,593
Working capital 5,354,702 6,131,758
Total assets 9,622,755 10,669,238
Long-term obligations 446,667 --
Total liabilities 3,508,926 3,533,990
Stockholders' equity 6,113,829 7,165,248
</TABLE>
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
December 31, 1997.
December 31, 1997
-----------------
Long-term obligations ......................... $ 446,667
Stockholders' equity:
Common Stock, par value $.01 per share;
20,000,000 shares authorized; 12,417,001
shares issued and outstanding, (1) ..... 124,170
Additional paid-in capital ................ 42,696,458
Deferred compensation expense ............. (60,000)
Unrealized losses on marketable securities --
Accumulated deficit ....................... (36,646,799)
------------
Total stockholders' equity ............. 6,113,829
------------
Total capitalization ............... $ 6,560,496
============
- -----------------
(1) Assumes no exercise of: (a) options outstanding at December 31, 1997 to
purchase 1,182,500 shares of Common Stock; (b) warrants outstanding as
of December 31, 1997; or (c) Common Stock which may be issued upon
conversion of outstanding Debentures or upon conversion of up to
$2,000,000 of additional Debentures which may be issued pursuant to the
Convertible Subordinated Debenture Purchase Agreement. See "Recent
Financing." See "Description of Capital Stock."
RECENT FINANCING
To provide additional working capital, on December 1, 1997, the Company
entered into a convertible subordinated debenture purchase agreement ("Purchase
Agreement") with KA Investment LDC ("KA"), providing for the Company's issuance
and sale of up to an aggregate of $2,500,000 of the Debentures in tranches of
$500,000 each. Debentures in the aggregate principal amount of $500,000 were
sold to KA on December 1, 1997 (the "Tranche 1 Closing"). This Prospectus
relates to Shares which may be sold by KA upon its conversion of the Debentures,
the payment of interest on the Debentures in Shares, exercise of warrants issued
to KA and Miller, Johnson & Kuehn, Incorporated ("MJK"), and is a part of the
Company's registration statement filed pursuant to the Registration Rights
Agreement dated December 1, 1997 (the "Registration Rights Agreement") entered
into by and between the Company and KA. Additional Debentures in the aggregate
principal amount of $500,000 and warrants may be sold by the Company to KA (each
a "Tranche Closing") upon request of the Company within 90 to 120 days of the
Tranche 1 Closing and each additional Tranche Closing, if the Company meets all
conditions to issuance including, but not limited to, conditions requiring the
Company to have effective and maintain a registration statement with the
Commission covering 200% of the shares issuable upon conversion of all of: the
Debentures, payment of interest thereon, and exercise of the warrants, and a
<PAGE>
requirement that the Company's market capitalization be at least $12.0 million.
The Debentures issued to KA on the Tranche 1 Closing are convertible in whole or
in part at the option of KA, with accrued interest, into Common Stock, at a
conversion price equal to the lesser of $1.96 per share or 80% of the average
closing bid price of the Common Stock for the five consecutive trading days
preceding the conversion date of the Debentures. Future tranches may be
convertible on a similar basis but the conversion prices will be related to the
lesser of the market price on the issue date and the market price on the
conversion date of the Debentures. The Company has the right, exercisable at any
time upon two trading days notice to KA given at any time the Company receives a
conversion notice and the conversion price in effect in connection with such
conversion notice is less than $1.25, to repay, from funds legally available
therefor at the time of such repayment, all or any portion of the outstanding
principal amount of the Debentures which have been tendered for conversion, at a
price equal to the sum of 120% of the aggregate principal amount of Debentures
to be repaid. In connection with the Purchase Agreement, the Company has agreed
to issue Debentures to KA upon the sale of each tranche, together with warrants
to purchase 15,000 shares of Common Stock exercisable for up to five years at
$2.50 per share, up to a maximum of 75,000 shares of Common Stock. Net proceeds
to the Company will be used for working capital, business development and other
general corporate purposes.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. These
statements 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 Private 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. See "Risk
Factors."
The Company is a developer, assembler, marketer and integrator of
computer-based products and services for the identification of individuals. 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, software and services.
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 and
competition within 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, therefore, any prediction of future trends is inherently difficult.
The Company generally recognizes product sales on the date of shipment,
although recognition at some later milestone is not uncommon based on the terms
of specific customer contracts. 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 which consequently may affect the Company's
timing and criteria for revenue recognition. Revenue under contracts where a
performance bond, collateral or customer acceptance is required is not
recognized until collateral requirements have been satisfied and customer
acceptance has occurred. 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.
RESULTS OF OPERATIONS
FISCAL 1997 COMPARED TO FISCAL 1996
Total revenues in 1997 increased by 37% to $11,419,000 from $8,327,000
in 1996 due primarily to an increase in the number of TENPRINTER systems sold,
partially offset by volume and trade-in discounts. The increase in
identification system product revenues from $6,821,000 in 1996 to $9,712,000 in
1997 resulted from an increase in sales of TENPRINTER systems, partially offset
by volume and trade-in discounts. Product maintenance and service revenues
increased from $1,506,000 in 1996 to $1,707,000 in 1997, due primarily to a
larger installed base of TENPRINTER systems. Sales to three customers in 1997
accounted for 17%, 14% and 12% of total revenues. Sales to two customers in 1996
accounted for 18% and 12% of total revenues.
Gross margins for 1997 and 1996 were 9% and 26% of revenues,
respectively. Gross margin for 1997 includes non-recurring charges of $1,529,000
($.13 per share) recognized during the third quarter comprised
<PAGE>
of $838,000 of inventory adjustments mainly due to technical obsolescence,
$524,000 of warranty reserve funding for warranty items mainly associated with
the introduction and rollout of the S-Series, $132,000 for estimated committed
losses on maintenance contracts, and $35,000 for the write-off of tooling. Gross
margin for 1996 includes a write-off of $350,000 for excess field service spare
parts related to previous generations of TENPRINTER products.
Gross margins on identification system product revenues were 19% in
1997 compared to 44% in 1996 (including the impact of the relevant 1997
non-recurring charges). This decrease is due primarily to the impact of 1997
non-recurring charges, volume discounts offered to certain customers, and
installation and warranty costs on S-Series TENPRINTER systems.
Product maintenance and support margins for 1997 (including the impact
of relevant 1997 non-recurring changes) and 1996 were (47%) and (57%) of
maintenance and support revenues, respectively. Product maintenance costs for
1996 include a write-off of $350,000 for excess field service spare parts
related to previous generations of TENPRINTER products.
Sales and marketing expenses decreased to 18% of total revenues in 1997
from 40% in 1996 due primarily to higher revenues, reduced demonstration
equipment expense, reduced charges for the allowance for doubtful accounts and,
to a lesser extent, a reduction in personnel and related expenses during fiscal
1997. Sales and marketing expenses in 1996 include a write-off of $282,000
related to previous generation TENPRINTER system demonstration equipment and a
charge of $540,000 related to an increase for the allowance for doubtful
accounts.
Engineering and development expenses decreased to 22% of total revenues
in 1997 from 55% in 1996 largely due to increased revenues and lower S-Series
and TRAK-21 development expenses. Engineering and development expenses during
1996 include charges of $374,000 related to adjustments of unreimbursed
manufacturing setup costs of an international development project, and are net
of reimbursements for international development costs of $88,000.
Depreciation and amortization costs for 1996 include a write-off of
$549,000 for unamortized software of information systems products no longer
actively marketed.
General and administrative expenses in 1997 decreased to 18% of total
revenues from 33% in 1996 primarily due to higher revenues, reduced legal costs
of a patent infringement suit brought by the Company against a competitor and a
1996 charge of $380,000 related to CEO transition costs.
Operating expenses during fiscal 1997 include non-recurring and
non-cash charges of $330,000 recognized during the third quarter for the
write-off of assets with no future value and, to a lesser extent, equipment
disposals.
Interest income decreased to $230,000 in fiscal 1997 from $586,000 in
fiscal 1996, primarily as a result of lower balances of marketable securities.
Interest expense decreased to $300,000 in fiscal 1997 from $2,676,000 in fiscal
1996, primarily due to a non-cash charge of $1,924,000 during fiscal 1996 for
the intrinsic value of the beneficial conversion feature of the 1995 Convertible
Debentures, and to a lesser extent, conversions of the 1995 Convertible
Debentures.
FISCAL 1996 COMPARED TO FISCAL 1995
Fiscal 1996 operating results include a fourth quarter charge of
$2,474,000 ($.26 per share) related to a review of strategies and refocusing of
the business conducted by prior management. This charge includes severance
expenses, write-off of excess and obsolete inventory and demonstration equipment
resulting from the introduction of the Company's new S-Series TENPRINTER, an
increase in the allowance for doubtful accounts, unreimbursed international
development costs and the write-off of unamortized technology rights
<PAGE>
as a result of the Company's decision in the fourth quarter to no longer pursue
the technology acquired in the Design Data acquisition in 1994.
Total revenues in 1996 decreased to $8,327,000 from $9,098,000 in 1995
due primarily to the inclusion in prior year revenues of $1,800,000 in fees
related to an international development project. The increase in identification
system product revenues from $6,069,000 in 1995 to $6,821,000 in 1996 resulted
from an increase in sales of TENPRINTER systems partially offset by lower 1996
average selling prices. Product maintenance and service revenues increased from
$1,229,000 in 1995 to $1,506,000 in 1996, due primarily to a larger installed
base of TENPRINTER systems. Sales to two customers in 1996 accounted for 18% and
12% of total sales. Sales to two customers in 1995 accounted for 29% and 23% of
total revenues.
Gross margins for 1996 and 1995 were 26% and 42% of revenues,
respectively. Gross margin for 1996 includes a fourth quarter write-off of
$350,000 for excess field service spare parts related to previous generations of
TENPRINTER products.
Gross margins on identification system product revenues were 44% in
1996 compared with 50% in 1995. This decrease is due primarily to costs related
to a six-month delay in the introduction of the S-Series TENPRINTER system.
During this six-month period there were only nominal TENPRINTER system
deliveries. The fourth quarter in particular was impacted with high initial
costs of product introduction, including training and installation of field
service providers.
Product maintenance and support margins for 1996 and 1995 were (57%)
and (34%) of maintenance and support revenues, respectively. The increased costs
of product maintenance and support are due primarily to costs associated with
the establishment of a field service office in Southern California. Product
maintenance costs for 1996 also include a fourth quarter write-off of $350,000
for excess field service spare parts related to previous generations of
TENPRINTER products.
Sales and marketing expenses increased to 40% of total revenues in 1996
from 26% in 1995 due primarily to increased international marketing efforts,
S-Series promotional expenses, a fourth quarter write-off of $282,000 related to
previous generation TENPRINTER system demonstration equipment and a fourth
quarter charge of $540,000 related to an increase in the allowance for doubtful
accounts.
Engineering and development expenses increased to 55% of total revenues
in 1996 from 31% in 1995. Engineering and development expenses during 1996
include fourth quarter charges of $374,000 related to adjustments of
unreimbursed manufacturing setup costs of an international development project.
After adjustment, engineering and development expenses for 1996 and 1995 are net
of reimbursements for international development costs of $88,000 and $773,000,
respectively.
Depreciation and amortization costs include a fourth quarter write-off
of $549,000 for unamortized software of information systems products no longer
actively marketed. General and administrative expenses in 1996 increased to 33%
of total sales from 19% in 1995 due primarily to $757,000 of legal costs
associated with a patent infringement suit brought by the Company against a
competitor and a fourth quarter charge of $380,000 related to CEO transition
costs.
Interest income increased to $586,000 in fiscal 1996 from $378,000 in
fiscal 1995, primarily as a result of increased levels of marketable securities.
Interest expense increased to $2,676,000 in fiscal 1996 from $48,000 in fiscal
1995, due to interest expense on the 1995 8% Convertible Debentures and a
non-cash charge of $1,924,000 for the intrinsic value of the beneficial
conversion feature of the 1995 Convertible Debentures.
INFLATION
The Company does not believe inflation has significantly impacted
revenues or expenses.
<PAGE>
NET OPERATING LOSS CARRYFORWARDS
At September 30, 1997, the Company has carryforwards of net operating
losses of approximately $30,700,000 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 September 30, 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 $27,000,000 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
GENERAL
For the period from the Company's inception in 1985 through September
30, 1997, the Company's cumulative deficit was $35,323,000. Losses are expected
to continue until revenues and gross margin from sales of the Company's current
and future products and services are sufficient to cover the level of operating
expenses required for the Company's operations.
The Company's business has included large contract awards from
international, state and local law enforcement agencies and it is expected that
this will continue. Collection of receivables related to billings of these
contract amounts is often protracted. See "Risk Factors - Working Capital and
Liquidity - Local Government Credit Considerations."
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. The line bears interest at 1.5% above the prime
rate (8.5% at September 30, 1997), is payable upon demand and expires in January
1998. The Company elected to use the proceeds from the sale of marketable
securities to pay off all borrowings under this line of credit at September 30,
1997. For the period from September 30, 1997 through January 31, 1998, the
minimum interest shall be $10,000 per the terms of the agreement. The Company
anticipates renewal of the line upon expiration.
The Company had a $4,000,000 line of credit with Norwest Bank Minnesota
N.A. Borrowings under this line of credit were secured by marketable securities
and were limited to 80% of the market value of marketable securities held as
collateral by the bank. The Company elected to use the proceeds from the sale of
marketable securities during fiscal 1997 to pay off all borrowings under the
line at September 30, 1997 and terminate the line.
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 September 30, 1997), are payable upon demand and expires in March,
1998. There were no borrowings under the line at September 30, 1997.
ISSUANCE OF 8% CONVERTIBLE SUBORDINATED DEBENTURES AND WARRANTS SUBSEQUENT TO
FISCAL YEAR END
To provide additional working capital, the Company entered into the
Purchase Agreement on December 1, 1997,
<PAGE>
providing for the Company's issuance and sale of up to an aggregate of
$2,500,000 of the Debentures in tranches of $500,000 each. Debentures in the
aggregate principal amount of $500,000 were sold to KA on December 1, 1997 (the
"Tranche 1 Closing"). Additional Debentures in the aggregate principal amount of
$500,000 and warrants may be sold by the Company to KA (each a "Tranche
Closing") may be issued upon request of the Company within 90 to 120 days of the
Tranche 1 Closing and each additional Tranche Closing, if the Company meets all
conditions to issuance including, but not limited to, conditions requiring the
Company to have effective and maintain a registration statement with the
Commission covering shares issuable upon conversion of the Debentures, payment
of interest thereon and exercise of the warrants and a requirement that the
Company's market capitalization be at least $12.0 million. The Debentures issued
to KA on the Tranche 1 Closing are convertible in whole or in part at the option
of the holder, with accrued interest, into Common Stock, at a conversion price
equal to the lesser of $1.96 per share or 80% of the average closing bid price
of the Common Stock for the five consecutive trading days preceding the
conversion date of the Debenture. Future tranches may be convertible on a
similar basis but the conversion prices will be related to the lesser of the
market price on the issue date and the market price on the conversion date of
the Debentures. Warrants for the purchase of 15,000 shares of Common Stock are
required to be issued with each tranche. The Company has the right, exercisable
at any time upon two trading days notice to the purchaser of the Debentures
given at any time the Company receives a conversion notice and the conversion
price in effect in connection with such conversion notice is less than $1.25, to
repay, from funds legally available therefor at the time of such repayment, all
or any portion of the outstanding principal amount of the Debentures which have
been tendered for conversion, at a price equal to the sum of 120% of the
aggregate principal amount of Debentures to be repaid. In connection with the
Purchase Agreement, the Company has agreed to issue to the purchaser of the
Debentures, upon the sale of each tranche, warrants to purchase 15,000 shares of
Common Stock exercisable for up to five years at $2.50 per share up to a maximum
of 75,000 shares of Common Stock. Also, in connection with the transaction, the
Company paid $40,000 in fees to an investment banking firm, MJK, and issued a
warrant to purchase 125,000 shares of Common Stock at an exercise price of $2.00
per share (the "MJK Warrant"). The estimated value of this warrant is $87,500
which is a debt issuance cost to be written off to interest expense and over the
term of the Debentures. The Purchase Agreement includes a beneficial conversion
feature. The intrinsic value of the beneficial conversion feature of each
tranche will 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 vesting period of the conversion feature. The intrinsic value of
the conversion feature of the first tranche is $125,000. Net proceeds to the
Company will be used for working capital, the development of new business
opportunities, and other general corporate purposes.
ANALYSIS OF CASH FLOWS FROM OPERATIONS
Net cash used in operating activities was $2,652,000 and $9,374,000 for
the years ended September 30, 1997 and 1996, respectively. The decrease in cash
used in operating activities was primarily a result of the decreased net loss in
fiscal 1997 adjusted for changes in operating assets and liabilities. Cash flows
from changes in operating assets and liabilities changed from cash used of
$3,016,000 in fiscal 1996 to $2,389,000 of cash provided in fiscal 1997. This
$5,405,000 change in cash flow from operating assets and liabilities resulted
primarily from improved accounts receivable and inventory balances.
Net cash provided by investing activities was $5,289,000 for the year
ended September 30, 1997 as compared with $757,000 of net cash used in investing
activities for the year ended September 30, 1996. The change was primarily due
to proceeds from paydowns and sales of marketable securities, and to a lesser
extent, reduced capital expenditures in fiscal 1997. Capital expenditures in
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.
<PAGE>
Net cash used in financing activities was $1,213,000 for the year ended
September 30, 1997 as compared to net cash provided by financing activities of
$10,230,000 in 1996. Borrowings under lines of credit were $1,255,000 at
September 30, 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 "1995 Debentures"), all of which were
converted to 4,237,748 shares of common stock as of September 30, 1997. The
average conversion price was $2.70 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 1995 Debentures was 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 1995 Debentures and was amortized as interest expense over the
term of the 1995 Debentures. The intrinsic value of the beneficial conversion
feature was 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 vesting period of the conversion feature. Net proceeds to the Company
were used for working capital, product development and other corporate purposes.
At September 30, 1997, the Company had $1,891,000 in cash and cash
equivalents and $155,000 in marketable securities which are classified as
available for sale. The unrealized loss on marketable securities was $135,000 at
September 30, 1996 and immaterial at September 30, 1997. These marketable
securities were collateral for borrowings under a line of credit. Virtually all
of the marketable securities were sold during fiscal 1997 with the proceeds used
to pay off all borrowings under the Norwest lines of credit. There were no
borrowings under lines of credit at September 30, 1997.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 1997
GENERAL
The Company is a developer, assembler, marketer and integrator of
computer-based products and services for the identification of individuals. 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, software and services.
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 and
competition within the live-scan electronic fingerprint industry, have resulted
in and are expected to continue to result in an irregular revenue cycle for the
Company; any prediction of future trends is inherently difficult.
The Company generally recognizes product sales on the date of shipment,
although recognition at some later milestone is not uncommon based on the terms
of specific customer contracts. 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 which consequently may affect the Company's
timing and criteria for revenue recognition. Revenue under contracts where a
performance bond, collateral or customer acceptance is required is not
recognized until collateral requirements have been satisfied and customer
acceptance has occurred. 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.
THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
1996
Total revenues were $2,272,000 for the three months ended December 31,
1997 compared with $2,015,000 for the same prior-year period. Identification
system product revenues were $1,690,000 compared with $1,616,000 in the same
prior-year period. The increase is due primarily to an increase in the number of
TENPRINTER systems sold during the three months ended December 31, 1997.
For the three-month period ended December 31, 1997, sales to one
customer accounted for approximately 31% of total revenues. Sales to two
different customers during the three months ended December 31, 1996 accounted
for approximately 17% and 12% of total revenues. Export revenues for the
three-month period ended December 31, 1997 were 32% of total revenues compared
with less than 1% during the same prior-year period.
<PAGE>
RESULTS OF OPERATIONS
Product maintenance and service revenues were $582,000 for the three
months ended December 31, 1997 compared with $399,000 for the same prior-year
period, an increase of 46%. This increase is due primarily to a larger installed
base of TENPRINTER systems covered by maintenance agreements, an increase in
maintenance rates effective with maintenance contract renewals, and an increase
in "time and materials" and similar maintenance revenues.
Overall gross margins for the three months ended December 31, 1997 were
20% as compared with 30% of sales for the same prior-year period. Gross margins
on identification system sales were 15% for the three months ended December 31,
1997 compared with 47% in the same prior-year period. This decrease is due to
low production volume in the three-month period ended December 31, 1997, higher
levels of warranty and installation accruals than in the prior-year period, and
an unfavorable product mix impact.
Product maintenance and service margins for the three months ended
December 31, 1997 and 1996 were 34% and (40%), respectively, of maintenance and
support revenues. The substantial improvement in product maintenance and support
margins is due mainly to the favorable impact of higher revenues, improved
efficiency from utilization of Company employees instead of outside contractors
in providing maintenance services, and accrual offsets established during fiscal
year 1997 for planned losses on a maintenance contract.
Sales and marketing expenses for the three-month period ended December
31, 1997 were 23% of total revenues compared to 26% for the same three-month
prior-year period. The decrease in sales and marketing costs as a percentage of
total revenue is due primarily to higher revenue and a reduction in personnel
and associated employee-related costs, partially offset by higher contractor
costs and accrued royalties on international shipments. Engineering and
development expenses were 31% of total sales for the three-month period ended
December 31, 1997 compared to 37% for the same period a year ago. This decrease
is due primarily to reduced new product development costs related to the
S-Series introduction and to a lesser extent, the increase in revenues,
partially offset by additional personnel-related costs associated with the newly
established Integrated Identification Solutions Division. General and
administrative expenses for the three-month periods ended December 31, 1997 and
1996 were 21% of total revenues.
Interest income decreased to $12,000 for the three months ended
December 31, 1997 from $87,000 for the same period in 1996 due to lower balances
of cash and marketable securities.
Interest expense decreased to $94,000 for the three months ended
December 31, 1997 from $107,000 for the same prior-year period, primarily due to
a reduced balance of 8% convertible debentures outstanding offset by a non-cash
charge during the three-month period ended December
<PAGE>
RESULTS OF OPERATIONS (CONTINUED)
31, 1997 of $83,000 for the intrinsic value of the beneficial conversion feature
of convertible debentures issued on December 1, 1997.
The Company incurred a net loss for the three-month period ended
December 31, 1997 of $1,324,000 ($0.11 per share) as compared with $1,093,000
($0.10 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 December 31, 1997, the Company had carryforwards of net operating
losses of approximately $32,000,000 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 published U.S. Internal Revenue Service long-term
federal tax exempt rate. A total of $3,700,000 of the net operating loss
carryforwards at December 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 $28,300,000
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
GENERAL
For the period from the Company's inception in 1985 through December
31, 1997, the Company's cumulative deficit was $36,647,000. Losses are expected
to continue until revenues and gross margin from sales of the Company's current
and future products and services are sufficient to cover the level of operating
expenses required for the Company's operations.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Company's business has included large contract awards from
international, state and local law enforcement agencies and it is expected that
this will continue. Collection of receivables related to billings of these
contract amounts is often protracted.
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. The line bears interest at 1.5% above the prime
rate (8.5% at December 31, 1997), is payable upon demand and expires in March
1998. For the period from September 30, 1997, through January 31, 1998, the
minimum interest shall be $10,000 per the terms of the agreement. For the period
from February 1, 1998, through March 31, 1998, the minimum interest shall be
$5,000 per the terms of the agreement. There were no borrowings under the line
at December 31, 1997. The Company anticipates renewal of the line upon
expiration.
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 and are payable upon demand. The line expires in March 1998. There were no
borrowings under the line at December 31, 1997.
ISSUANCE OF 8% CONVERTIBLE SUBORDINATED DEBENTURES AND WARRANTS
To provide additional working capital, on December 1, 1997, the Company
entered into a convertible subordinated debenture purchase agreement ("Purchase
Agreement") with a private investor, providing for the Company's issuance and
sale of up to an aggregate of $2,500,000 of 8% Convertible Debentures (the
"Debentures") in tranches of $500,000 each. The first tranche was sold on
December 1, 1997. Additional tranches may be issued upon request of the Company
within 90 days of each previous tranche, if the Company meets conditions to
issuance including, but not limited to, conditions requiring the Company to have
effective and maintain a registration statement with the Securities and Exchange
Commission covering shares issuable upon conversion of the Debentures, and a
requirement that the Company's market capitalization be at least $12 million.
The initial tranche sold in the amount of $500,000 on December 1, 1997 is
convertible in whole or in part at the option of the holder, with accrued
interest, into Common Stock, at a conversion price equal to the lesser of the
average closing price of the five consecutive trading days preceding the
transaction ($1.96 per share) or 80% of the average closing price of the five
consecutive trading days preceding the conversion date. Future tranches may be
convertible on a similar basis but the conversion prices will be related to the
lesser of the market price on the issue date and the market price on the
conversion date. The Company has the right, exercisable at any time upon two
trading days notice to the purchaser of the debentures given at any time the
Company receives a conversion notice and the conversion price in effect in
connection with such conversion notice is less than $1.25, to repay, all or any
portion of the outstanding principal amount of the debentures which have been
tendered for
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
conversion, at a price equal to the sum of 120% of the aggregate principal
amount of debentures to be repaid. In connection with the Purchase Agreement,
the Company has agreed to issue to the purchaser of the debentures, upon the
sale of each tranche warrants to purchase 15,000 of Common Stock exercisable at
$2.50 per share up to a maximum of 75,000 shares. Also, in connection with the
transaction, the Company paid $40,000 of fees to an investment-banking firm and
issued a warrant to purchase 125,000 shares of Common Stock at an exercise price
of $2.00 per share. The estimated value of this warrant is $87,500 which is a
debt issuance cost to be written off to interest expense over the term of the
Debentures. The Purchase Agreement includes a beneficial conversion feature. The
intrinsic value of the beneficial conversion feature of each tranche will 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
vesting period of the conversion feature. The intrinsic value of the conversion
feature of the first tranche is $125,000. Net proceeds to the Company are being
used for working capital, the development of new business opportunities, and
other general corporate purposes.
ANALYSIS OF CASH FLOWS FROM OPERATIONS
Net cash used in operating activities was $1,133,000 for the three
months ended December 31, 1997 compared with $1,874,000 for the same prior-year
period. The decrease in cash used in operating activities was primarily a result
of changes in operating assets and liabilities. Cash flows from changes in
operating assets and liabilities changed from cash used of $950,000 in the
prior-year period to cash used of $42,000 in the three-month period ended
December 31, 1997. This $908,000 improvement in cash flow from operating assets
and liabilities resulted primarily from improved accounts receivable and
inventory balances.
Net cash provided by investing activities was less than $1,000 for the
three months ended December 31, 1997 as compared with $282,000 in the same
prior-year period. The change was primarily due to a decrease in proceeds from
paydowns of marketable securities, and to a lesser extent, increased capital
expenditures during the three months ended December 31, 1997 to support
establishment of the IIS Division.
Net cash provided by financing activities was $445,000 during the three
months ended December 31, 1997, as compared to $1,650,000 during the same
prior-year period. This decrease is due primarily to the absence of borrowings
under lines of credit at December 31, 1997 as compared to the prior year. The
cash provided by financing activities during the current-year period was from
the issuance of 8% convertible subordinated debentures as noted above and in
Note 7.
At December 31, 1997, the Company had $1,204,000 in cash and cash
equivalents.
<PAGE>
BUSINESS
GENERAL
The Company develops, manufactures, markets and integrates
computer-based products and services for the identification of individuals. The
Company is a leading vendor of products employing "biometric" technology, the
science of the identification of individuals through the measurement of
distinguishing biological characteristics. The Company's principal product is
the TENPRINTER system for "live-scan" fingerprint capture used mainly in
law-enforcement applications. The TENPRINTER is a computer-based system with
patented high-resolution optics which captures, digitizes, prints and transmits
forensic-grade fingerprint images. The Company also offers high-resolution
single-fingerprint capture products for commercial and governmental
identification applications and has recently established a systems integration
services business focused on the integration of biometric and other
identification technologies into applications for government and commercial
markets.
During fiscal 1997, virtually all of the Company's revenues were
derived from sales of TENPRINTER systems and related maintenance fees.
Approximately 89% of customer accounts receivable at September 30, 1997 were
from government agencies, of which 39% was from a single customer. For the years
ended September 30, 1997, 1996 and 1995, sales to three customers in 1997
accounted for 43% of revenues, sales to two customers in 1996 accounted for 30%,
and sales to two customers in 1995 accounted for 52%, respectively. Export sales
were 5%, 15% and 21% of total revenues, for the years ended September 30, 1997,
1996 and 1995, respectively.
The Company has also developed a prototype player tracking system for
the gaming industry called TRAK-21. The Company has reached an agreement in
principle with Grand Casinos, Inc. to create a joint venture to carry out the
productization of TRAK-21. It is anticipated that the joint venture will be
responsible for marketing of the resultant product.
The Company's strategy is to continue to market TENPRINTER systems to
law enforcement agencies, but also to expand the Company's product and services
offerings as well as the markets which the Company serves. The law enforcement
market for biometric products is well established. The Company believes that
there is increasing interest from other governmental and commercial markets to
employ biometric identification technologies and products to improve security
and to assure proper access. The Company intends to aggressively pursue these
emerging opportunities.
BIOMETRIC TECHNOLOGIES
The Company develops, manufactures, markets and integrates products in
the field of "biometrics," the science of the identification of individuals
through the measurement of distinguishing biological characteristics. This field
consists of a variety of techniques at various stages of technical maturity and
market acceptance. These techniques include fingerprinting, voice recognition,
retinal and iris scanning, DNA analysis, facial and hand geometry, and
handwriting analysis. A number of these techniques have been incorporated into a
variety of computer-based hardware and software measurement technologies. The
goal is that when used with databases of characteristics, which previously have
been positively linked to specific individuals, these products enable the
positive identification of an individual whose identity is under scrutiny. The
Company believes the quality and reliability of the various non-fingerprint
techniques range widely.
For over a century, fingerprints have been and remain the method of
choice to positively identify individuals. Forensic scientists endeavor to match
latent fingerprints lifted from crime scenes with the fingerprints of suspected
perpetrators. Criminal courts throughout the world accept the testimony of
fingerprint experts and countless convictions have been achieved on the basis of
fingerprint evidence. The computerization of fingerprint identification methods
has greatly increased the speed of criminal identification processes and has
been widely accepted in the law enforcement community. As yet, none of the other
<PAGE>
biometric identification technologies has achieved the degree of acceptance of
fingerprints in law enforcement or any other markets.
The Company currently offers products that employ "forensic-quality"
fingerprint capture technologies. Forensic quality refers to the resolution and
pixel gray-scale depth of the image. The Company's products have been employed
by law enforcement organizations in a number of states and foreign countries
since 1988.
LAW ENFORCEMENT AND REGULATORY AGENCY MARKETS
Fingerprint identification was the first biometric technique to achieve
widespread acceptance. Prior to the introduction of sophisticated computer-based
fingerprint capture and matching technologies, manually taken fingerprints were
manually cross-checked against collections of paper-and-ink fingerprint records
to identify individuals and to positively associate them with crime scenes. In
the United States, over 8,500,000 fingerprint cards are submitted every year to
the Federal Bureau of Investigation (FBI), and thousands are collected by state
and local law enforcement agencies. To manage these large quantities of data,
computerized databases for fingerprint classification and identification were
introduced in the 1970s. These systems, known as Automatic Fingerprint
Identification Systems ("AFIS"), greatly improved the speed and efficiency of
fingerprint searches. Current AFIS systems are capable of performing several
thousand comparisons of fingerprints per second. These systems present a trained
fingerprint examiner with a short list of candidate prints from which the
examiner makes a final visual determination of whether two prints are identical.
AFIS systems are provided by a number of vendors, including NEC
Technologies, Morpho/SAGEM, Printrak, TRW and others. The Company does not
provide AFIS systems.
With the introduction of AFIS systems it became apparent that, in
practice, the quality of fingerprints taken using the traditional paper-and-ink
method was often inadequate to meet the needs of this sophisticated technology.
An unacceptably high percentage of conventionally inked fingerprints could not
be read properly by AFIS systems because of poor image quality. In response to
this problem, the Company and its competitors introduced sophisticated
computer-based imaging systems to capture and digitize fingerprints. This
process yields a much higher level of so-called "minutia" points, which are the
basis for the identification techniques used by AFIS systems.
The Company's TENPRINTER system consistently generates high quality
fingerprint data, which at the user's option, may be transmitted over telephone
lines to any location, including AFIS sites, other databases, or the FBI, or may
be printed out locally and/or at remote locations on any number of card formats.
The TENPRINTER system also permits the booking officer to review the quality of
the prints as they are being taken, enabling the officer to screen out poor
quality prints without having to redo the entire fingerprint card, thus
improving the productivity of the booking process.
The Company's sales have historically included large purchases by a
relatively small number of customers. For the fiscal years ended September 30,
1997, 1996 and 1995 sales to three customers in 1997, two customers in 1996 and
two customers in 1995 accounted for 43%, 30% and 52%, respectively, of annual
revenues. This concentration of sales among few relatively large customers may
continue in the foreseeable future. Furthermore, the nature of the law
enforcement market and the government procurement process is expected to result
in a continued irregular and unpredictable revenue cycle in this business
segment for the Company.
<PAGE>
PRODUCTS
THE TENPRINTER SYSTEM
The Company's principal product, the TENPRINTER, is designed and
marketed mainly as an input device to AFIS systems. Several large manufacturers
produce and sell AFIS systems, which are computerized central fingerprint
database systems capable of storing fingerprint information for an entire
demographic unit such as a city, county, state or country. AFIS systems are
designed to facilitate the work of a law enforcement agency's fingerprint
technicians. An AFIS system is capable of electronically comparing a given set
of fingerprints against all fingerprints in its database and producing a short
list of potentially matching candidate prints. A fingerprint technician then
visually compares the AFIS results with the fingerprints in question. Optimal
use of an AFIS system depends in part on the clarity of the fingerprint images
that are input to the AFIS. The TENPRINTER system consistently produces
fingerprint images of higher clarity than those achieved by conventional
"paper-and-ink" methods and is being marketed as a more accurate input to AFIS
systems.
The TENPRINTER system is a computer-based inkless live-scan system that
electronically captures a fingerprint and creates a digital image. Fingerprints
are captured by placing the fingers of a subject on a contact surface of an
optical assembly. The optical image is converted into a digital image by an
electronic photo-imaging detector. The digital image produced by the TENPRINTER
system may be sent directly to the AFIS site by means of telecommunications or
may be printed on a law enforcement agency's fingerprint cards. In the
gray-scale printing technology available with the TENPRINTER system, the printed
fingerprint includes the nuances normally seen in a conventional "paper-and-ink"
fingerprint.
While prices of AFIS systems and live-scan systems vary widely
depending on the configuration of the systems, AFIS systems cost from $500,000
to several million dollars while live-scan systems are priced between
approximately $30,000 and $80,000 per unit. The primary target market for the
TENPRINTER is state and local law enforcement agencies that have purchased, are
purchasing or have access to, AFIS systems. The assistance and support of the
AFIS vendor is frequently important in the sale and installation of live-scan
systems.
Law enforcement agencies submit one copy of a fingerprint card to the
FBI for every suspect charged with a felony. Over 8,500,000 such cards are
submitted to the FBI each year. As a result, the FBI plays an important role in
the fingerprint identification process in the United States. The FBI has put
into place an extensive testing process for live-scan systems. When a live-scan
system passes the testing process, the FBI will accept cards produced by that
live-scan for submission to the FBI's Identification Division and for retention
in the Division files. The Company's TENPRINTER system has received
accreditation under the FBI Image Quality Standards ("IQS"). To the best of the
Company's knowledge, competitors also have received or are in process of
receiving such approval. Regulatory standards such as IQS continue to evolve and
there can be no assurance that the Company will be able, without significant
cost and expense, to comply with future requirements.
The FBI has awarded contracts in connection with a multi-phase program
of its well-publicized fingerprint automation and revitalization project which,
when operational, will involve the paperless utilization of fingerprint data
and, ultimately, the capability to eliminate fingerprint cards at the FBI level.
The FBI system will accept electronic fingerprint images such as those produced
by live-scan equipment or similar technologies and will replace the current
card-based system in Washington with a new facility in West Virginia. The FBI
has stated that 62,000 contributors currently submit fingerprint cards to the
FBI. The Company believes that when the FBI's new system becomes operational, it
may have a positive impact on demand for live-scan equipment.
<PAGE>
OTHER PRODUCTS FOR LAW ENFORCEMENT
The SQUID(R) system is a lightweight, portable, hand-held unit
designed for use in the patrol car. The SQUID system captures "on-the-spot"
fingerprints which can then be relayed from the patrol car to a communications
center where identification can take place. This product will permit patrol
officers to obtain positive identification without transporting suspects to the
police station. The SQUID system is being designed and manufactured to
specifications of the FBI NCIC 2000 project which is currently planned to be
operational in 1999. The SQUID system is currently being marketed on a limited
basis.
The Company has offered software development services and
internally-developed mugshot products to a limited number of customers.
ANCILLARY PRODUCTS
The Company's TENPRINTER systems are normally configured in networked
environments. Digitized TENPRINTER fingerprint records are frequently
transmitted to multiple destinations, including central sites for printing and
one or more criminal record databases, including AFIS systems. The Company has
developed several ancillary products sold in conjunction with the TENPRINTER
which facilitate central printing and remote transmission of digitized
fingerprint images. The Company also offers various software programs which
enhance the functionality of the TENPRINTER.
ASSEMBLY, INSTALLATION AND MAINTENANCE
The Company's TENPRINTER systems are assembled from purchased
components at its facility in Minnetonka, Minnesota. Other than prototypes, for
which the development time may vary, the time required for product delivery
averages approximately 60 days from the date a purchase order is received.
TENPRINTER systems are installed by Company employees or contractors.
Installation has frequently required implementation into customer network
configurations, many of which are complex. The Company has historically provided
these services at little or no additional charge to the customer. Management
intends to negotiate future orders requiring customers to compensate the Company
for such services, although there can be no assurance that this will be
accepted.
The Company offers various levels of maintenance service for its
equipment, which are delivered by Company employees or third party maintenance
providers. These services have historically been provided, in the aggregate,
below the Company's fully loaded cost. Management intends to change maintenance
pricing to achieve profitability, although there can be no assurance that this
effort will be successful.
SALES AND DISTRIBUTION
The Company sells TENPRINTER systems directly to end users through a
direct sales force and through partnering relationships with AFIS suppliers
including NEC Technologies and Morpho/SAGEM. Relationships with AFIS vendors are
an important means of distribution to many customers and, consequently, are key
to the Company. Furthermore, live-scan products must deliver output to AFIS
systems, thereby requiring a technical relationship between the Company and AFIS
suppliers to assure proper integration of TENPRINTER installations with the
requirements of AFIS systems. See the section on "Competition" which follows.
COMPETITION
The market for live-scan systems is competitive. Live-scan products are
offered by several companies including Identix and Printrak. NEC Technologies is
both a strategic partner and in certain circumstances a
<PAGE>
competitor. The Company competes in the live-scan market primarily on the basis
of image quality, features, performance, service and support and price.
Continued growth in demand for live-scan fingerprint systems may
attract additional competition. The vendors of AFIS systems are logical
participants in the live-scan market, as evidenced by the entry of Printrak into
the live-scan market and the marketing by NEC Technologies of a live-scan
product, the LS-21, which includes features and components currently sourced
from Identix. Other AFIS vendors and other potential additional competitors
could enter the law enforcement market, and may have financial and other
resources significantly greater than those of the Company.
Also see "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
SUPPLIERS
The Company buys substantially all components of the TENPRINTER system
from outside suppliers for assembly and testing by the Company. Some of these
components are designed by the Company and/or are custom manufactured to its
specifications. The Company may specify parts used in such components. The
Company inspects and tests incoming parts and components, and conducts test and
burn-in procedures on assembled finished products. Certain components used in
manufacturing of TENPRINTER systems are currently supplied by a single vendor to
obtain volume economies. Secondary sources are available but would take several
months to bring into production. Delays in product deliveries to customers could
occur until the secondary sources are secured.
COMMERCIAL MARKETS
SINGLE FINGERPRINT CAPTURE DEVICES
Digital Biometrics has leveraged its expertise in forensic-quality
fingerprint capture technology to create two forensic-quality single fingerprint
capture devices, the FC-21(TM) and FC-22(TM). The FC series single fingerprint
capture units have been marketed on a limited basis and are priced approximately
from $1,250 to $2,500 per unit.
Demand for single fingerprint capture devices for commercial
applications appears to be growing. The Company is evaluating a more aggressive
marketing effort of its FC products in commercial markets.
SYSTEMS INTEGRATION
In December 1997, the Company formed the Integrated Identification
Solutions Division to provide systems integration services to commercial
clients. The business objective of this division is to address what the Company
believes is growing interest in the integration of biometric identification
techniques into commercial applications which require heightened security than
is currently available through traditional techniques such as personal
identification numbers (PINs) and passwords. It is anticipated that this
division may also provide integration services to governmental customers
including law enforcement organizations.
The Company believes that it has a strong basis for competition in the
systems integration business due to its focus on biometric identification.
However, the systems integration business is competitive and includes many firms
with substantially greater resources than the Company.
<PAGE>
BACKLOG
At September 30, 1997, the Company's firm backlog of orders for
TENPRINTER systems and related products was approximately $2,282,000, as
compared to a backlog of approximately $3,773,000 at September 30, 1996.
GAMING
Digital Biometrics has developed a prototype blackjack table wagering
data capture system called TRAK-21. The TRAK-21 system was developed to enable
casinos to track the wagering activity of its blackjack patrons. The Company has
derived no revenues to date from this system. In November 1997, the Company
announced an agreement in principle with Grand Casinos, Inc. to form a joint
venture for the commercialization of this system. It is anticipated that if the
system is successfully productized that the joint venture company will market
the system to the gaming industry.
There are a variety of companies providing blackjack player tracking
information and capabilities to the gaming industry, the most prominent of which
is Mikohn Gaming Corporation. The TRAK-21 Player Tracking System uses high-level
image processing for automatically calculating wagers, which differentiates
TRAK-21 from other systems (including Mikohn's) which use table and chip sensors
to track player wagering.
Components necessary for the manufacture of TRAK-21 systems are
anticipated to be primarily standard parts available from a variety of
suppliers.
YEAR 2000 COMPLIANCE
In June 1996, the Company began converting its computer systems
enabling proper processing of transactions in the Year 2000 and beyond. The
operating system vendor has made software upgrades available to make its
software compatible with Year 2000. The Company will also test its application
software to ensure compatibility with Year 2000. The Company presently believes
that, with modifications to existing software and conversions to new software,
Year 2000 compatibility will not pose significant operational problems for the
Company's computer systems as so modified and converted, although there can be
no assurance that unforeseen difficulties or costs will not arise.
PROPRIETARY TECHNOLOGY
The Company owns federally registered trademarks for the marks,
TENPRINTER, the Company's mechanical hand logo, and SQUID. The Company has
applied for a trademark registration for the mark TRAK-21. The Company also
claims trademark rights in the product names FC-5, FC-6, FC-7, FC-11, FC-21 and
FC-22, but has not filed federal trademark applications for such marks.
The Company owns several United States patents and has U.S. patent
applications pending which cover technology currently employed in its products.
The Company has also filed for patent protection in several foreign countries.
Although additional features of the Company's products may be patentable, the
Company has chosen to preserve these features as trade secrets rather than
applying for patent protection. The Company has obtained signed confidentiality
agreements from all employees and from independent consultants who have access
to confidential information.
The Company is in the appeals process regarding a claim of patent
infringement against a competitor. See "Item 3. Legal Proceedings."
<PAGE>
EMPLOYEES
At November 30, 1997, the Company employed 81 persons on a full-time
basis, none of whom is represented by a union. Of these persons, six have
general management responsibilities and the remainder perform sales, marketing,
engineering, customer service, assembly, or administrative functions. From time
to time to meet critical demands, the Company has utilized additional
individuals to perform services for the Company on a part-time or a consulting
basis. Personnel will be hired in the future as the Company deems necessary. The
Company believes that its employee relations are good.
All employees of the Company have executed agreements which provide for
the confidentiality of Company proprietary information and the ownership by the
Company of inventions developed using Company resources.
PROPERTIES
The Company does not own any real properties. The Company's primary
offices and facilities are located in approximately 31,000 square feet of space
in an industrial park at 5600 Rowland Road, Minnetonka, Minnesota. The space is
occupied under a lease expiring on April 30, 2001, and is believed to be
adequate for the Company's current business needs.
A field service and sales office is located in Los Angeles, California
in approximately 3,400 square feet of space in an industrial office park. This
space is occupied under a lease that expired in December 1997. This lease is a
year-to-year arrangement, and is currently under negotiation for renewal.
LEGAL PROCEEDINGS
On June 1, 1995, the Company filed a complaint for patent infringement
against Identix, Inc., of Sunnyvale, California, in the U.S. District Court for
the Northern District of California. The complaint alleges that Identix
willfully and deliberately infringed a Company patent through the manufacture,
use and/or sale of competing products. The alleged infringement pertains to how
rolled fingerprint images are obtained optically and how they are mathematically
represented in storage. The Identix TP-600 and TP-900 devices are both alleged
to infringe on the Company patent. This technology is a fundamental aspect of
the fingerprint capture task in forensic quality live-scan. The complaint seeks,
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 the Identix Touchprint 600 product line. A
predecessor product, the Touchprint 900, received a similar ruling in favor of
Identix on December 20, 1996. In January 1997, the Company filed an appeal of
the court's decision of non-infringement. These appeals are decided by the
Federal Circuit which is a Court of Appeals in Washington D.C. On October 8,
1997, the appeal was argued before the Court. As of the date of this Prospectus
no appellate decision has been issued. Further, 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.
Except for the foregoing, there are no material lawsuits pending or, to
the Company's knowledge, threatened against the Company.
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the
directors and executive officers of the Company. All of the directors of the
Company serve until the next annual meeting of stockholders and until their
respective successors are elected and qualified.
Name Age Position
- -------------------------------- ----- -------------------------------------
James C. Granger (1)............ 51 President, Chief Executive Officer,
and Director
C. McKenzie Lewis III (1)(2)(3). 51 Chairman and Director
John J. Metil................... 47 Chief Operating Officer and Chief
Financial Officer
Barry A. Fisher................. 43 Vice President - Sales, Marketing and
Business Development
Roman A. Jamrogiewicz........... 45 Vice President - Engineering
Michel R. Halbouty.............. 56 Vice President - Operations
Jack A. Klingert (2)(3)......... 68 Director
George Latimer (2)(3)........... 62 Director
Stephen M. Slavin (1)(2)(3)..... 57 Director
John E. Haugo 62 Director
- ----------------------
(1) Member of Nominating Committee.
(2) Member of Compensation and Personnel Committee.
(3) Member of Audit Committee.
JAMES C. GRANGER. Mr. Granger became the Company's President and Chief
Executive Officer on January 1, 1997, and was appointed to the Board of
Directors of the Company effective January 27, 1997. Prior to joining the
Company, Mr. Granger was employed by ADC Telecommunications, Inc. as President
of its Access Platforms System between March 1995 and December 1996. Between
1989 and February 1995, Mr. Granger was employed by Sprint/United Telephone,
Orlando, Florida, in various senior marketing and management positions. Prior to
1989, Mr. Granger was employed by American Telephone & Telegraph in various
management positions.
C. MCKENZIE LEWIS III. Mr. Lewis was elected Chairman of the Company's
Board of Directors on October 28, 1996 and has served as a Director of the
Company since 1994. Between 1986 and 1996, Mr. Lewis served as Chief Executive
Officer and President and a director of Computer Network Technology Corporation
("CNT"), a developer and manufacturer of high performance extended channel
networking systems. Mr. Lewis has over 26 years experience in the computer and
data communications industry. Mr. Lewis is currently Managing General Partner in
MMP Partners Limited Partnership, a Minnesota limited partnership engaged
primarily in making venture capital investments.
JOHN J. METIL. Mr. Metil has served as the Company's Chief Operating
Officer and Chief Financial Officer since joining the Company in April 1997.
From August 1992 through April 1997, Mr. Metil served as Executive Vice
President with the Zebulon Group, Inc. Previously, he was a co-founder and
served as Chief Financial Officer of Tricord Systems, Inc., and held senior
finance and corporate development positions at National Computer Systems,
Control Data Corporation and Pillsbury Company.
<PAGE>
BARRY A. FISHER. Mr. Fisher has served as Vice President of Sales,
Marketing and Business Development since joining the Company in March 1997. From
July 1995 through March 1997, Mr. Fisher served as Vice President of Sales with
American Connexions, a national sales management company. From January 1988
through July 1995, he served as Vice President of Sales for Recovery
Engineering. From September 1976 through January 1988, he held senior management
positions at the Tennant Company.
ROMAN A. JAMROGIEWICZ. Mr. Jamrogiewicz has served as Vice President of
Engineering since joining the Company in May 1997. From November 1997 through
April 1997, Mr. Jamrogiewicz was employed with Alliant Techsystems and served as
Business Segment Director and held positions of Director for Advanced
Development, Program Director and Director of Software Engineering.
MICHEL R. HALBOUTY. Mr. Halbouty has served as Vice President of
Operations since joining the Company in May 1997. Mr. Halbouty served as Vice
President of Manufacturing with NetStar, Inc., from May 1992 through May 1997.
He has also held senior management positions with Lee Data Corporation and
Control Data.
JACK A. KLINGERT. Mr. Klingert served as the Company's Chairman from
1987 through October 28, 1996, and served as the Company's President and Chief
Executive Officer beginning in 1987, retiring January 1997. Mr. Klingert has
advised the Company that he does not intend to stand for reelection as a
director of the Company in 1998. He has also served as a member of the Company's
Board of Directors since 1987. Prior to joining the Company in April 1987, Mr.
Klingert, from 1964 to 1987, held a number of senior level management positions
with Control Data Corporation. From 1958 to 1964, Mr. Klingert worked on various
classified scientific and systems programming projects in the Departments of
Theoretical Physics and Computation at the Lawrence Livermore National
Laboratories, Livermore, California.
GEORGE LATIMER. Mr. Latimer has served on the Company's Board of
Directors since 1990. From November 1995 through December 1997, Mr. Latimer
served as Chief Executive Officer of the National Equity Fund, a syndication of
financing for affordable housing in Chicago, Illinois. He is a Distinguished
Visiting Professor of Urban Studies at Macalester College, Saint Paul,
Minnesota. From July 1993 to November 1995, Mr. Latimer was Director, Office of
Special Actions, U.S. Department of Housing and Urban Development ("HUD"). From
February 1993 to July 1993, Mr. Latimer was employed as a consultant to HUD.
From 1990 to 1993, Mr. Latimer was Dean of Hamline University School of Law,
Saint Paul, Minnesota. From 1976 to 1990, Mr. Latimer served as the Mayor of
Saint Paul, Minnesota. Mr. Latimer is a member of the Board of Directors of
Piper Jaffray Investment Trust.
STEPHEN M. SLAVIN. Mr. Slavin has served on the Company's Board of
Directors since 1986. For more than six years, Mr. Slavin has been engaged in
the private practice of law as a partner of the firm of Foley & Lardner,
Chicago, Illinois.
JOHN E. HAUGO. Mr. Haugo has been appointed to the Board of Directors
effective February 10, 1998. Since September 1994, Mr. Haugo has been Vice
President and General Manager of the Serving Software Group Business Unit of HBO
and Company. From April 1986 until September 1994, prior to its acquisition by
HBO, Mr. Haugo was founder, Chairman and Chief Executive Officer of Serving
Software, Inc., a provider of health care scheduling and resource management
systems. Mr. Haugo is a director of Global Maintech, Inc.
DIRECTOR COMPENSATION
In 1992 the Board of Directors adopted the Company's 1992 Restricted
Stock Plan. Under such plan, each time a non-employee director is elected or
re-elected to the Board, he or she will be granted the number of shares of
restricted stock equal to $18,000 divided by the fair market value of one share
of Common Stock at the close of business on the day prior to the date of grant.
The Restricted Stock is granted on the date of the annual stockholders' meeting
to each non-employee director elected or re-elected at such meeting.
Non-employee directors were previously compensated with annual stock
option grants of 7,500 shares, exercisable at fair market value on the date of
grant and expiring 10 years after issuance. Such options were granted pursuant
to the Non-Employee Director Stock Option Plan (the "Directors' Plan") at the
time of election or re-election at the annual stockholder's meeting. In
September 1997, the Board awarded 3,000 shares of Common Stock to each of the
Company's outside directors, Stephen M. Slavin, George Latimer, C. McKenzie
Lewis III and Jack A. Klingert.
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning
compensation paid by the Company for the last three fiscal years to its Chief
Executive Officer and other executive officers whose cash compensation exceeded
$100,000 in fiscal year 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
----------------------
ANNUAL COMPENSATION RESTRICTED SECURITIES
NAME AND ------------------- STOCK UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY($) BONUS($) AWARDS($) OPTIONS(#) COMPENSATION
- --------------------------- ------ --------- -------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
James C. Granger(1) 1997 $ 131,265 $ 32,816 $ -- 250,000 $ --
President and Chief
Executive Officer
Glenn M. Fishbine, 1997 120,000 -- -- -- 171,234(2)
Senior Vice President - 1996 116,825 1,600 -- 35,000 4,500
Technology 1995 110,553 5,650 -- 45,000 4,253
</TABLE>
- --------------------
(1) Mr. Granger has served as President and Chief Executive Officer of the
Company since January 1, 1997.
(2) Includes $3,737 in the form of Common Stock paid as a matching
contribution under the Company's 401(k) plan, and severance
compensation consisting of forgiveness of indebtedness totaling
$167,497.
STOCK OPTION GRANTS IN FISCAL YEAR 1997
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF STOCK
SECURITIES PERCENT OF TOTAL PRICE APPRECIATION FOR
UNDERLYING OPTIONS GRANTED EXERCISE OR OPTION TERM(3)
OPTIONS TO EMPLOYEES IN BASE PRICE EXPIRATION ----------------------
NAME GRANTED(#)(1) FISCAL YEAR ($/SHARE)(2) DATE 5%($) 10%($)
- ----------------- -------------- ---------------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
James C. Granger 250,000 25% $2.125 01/02/07 $334,100 $846,676
</TABLE>
- --------------------
(1) Subject to acceleration at the discretion of the Compensation Committee
or upon the death or disability of the optionee, each option becomes
cumulatively exercisable with respect to 33 1/3% of the shares covered
on each of the first three anniversaries of the grant date.
(2) Fair market value per share on the date of grant or the effective date,
whichever is less, in accordance with the 1990 Stock Option Plan.
(3) The 5% and 10% assumed rates of appreciation are mandated by the rules
of the Commission and do not represent the Company's estimate or
projection of the future Common Stock price.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1997
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED ON VALUE OPTIONS AT FISCAL YEAR END(#) AT FISCAL YEAR END($)(2)
NAME EXERCISE(#) REALIZED($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------- ----------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
James C. Granger -- -- -- 250,000 -- $109,375
Glenn M. Fishbine -- -- 98,467 38,333 -- --
</TABLE>
- ----------------------
(1) Market value of underlying securities on date of exercise minus the
exercise price.
(2) Market value of underlying securities at year-end minus the exercise
price for in-the-money options.
TERMINATION OF EMPLOYMENT AND CHANGE-OF-CONTROL ARRANGEMENTS
In fiscal 1997 the Board of Directors of the Company adopted a Change
of Control Plan for the benefit of executive officers, providing for payments
upon the occurrence of a change of control of the Company. Upon a change of
control of the Company, an executive officer will, upon termination of his or
her employment, be entitled to payment of an amount equal to such officer's base
salary immediately prior to the change of control, payable on or before the
30th day following the termination of such officer's employment. An officer is
not entitled to such payment if he or she is offered employment following a
change of control by the successor to the Company or its business, provided such
employment is approximately comparable to his or her employment with the Company
and is at a base salary level comparable to or greater than that paid by the
Company. In the event the employment of an officer is not terminated, or such
officer is offered employment by the successor and is employed, but such
employment is terminated within a period of one year following the change of
control, the officer shall be entitled to payment of an amount equal to his or
her base salary, less compensation actually paid during the period in which he
or she was employed by the Company or a successor subsequent to the change of
control. The change of control payment is limited to an amount not to exceed the
safe harbor under Section 280G of the Internal Revenue Code.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 1997, the Compensation and Personnel Committee was
responsible for making recommendations to the Board as to executive compensation
and stock option grants to executive officers. The members of the Committee
include C. McKenzie Lewis III, Jack A. Klingert, George Latimer and Stephen M.
Slavin. For services related to executive transition and other matters rendered
in ficscal 1997, Mr. Lewis received from the Company cash compensation, a stock
option, and a warrant. Mr. Lewis participated in the meeting at which his
services and compensation were discussed, but abstained from the vote thereon.
See "Certain Relationships and Related Transactions."
<PAGE>
CERTAIN TRANSACTIONS
During fiscal year 1997, legal services were provided to the Company by
Foley & Lardner, Chicago, Illinois. Mr. Stephen M. Slavin is a partner of such
firm and a director of the Company.
Pursuant to a transition agreement and general release between the
Company and a founder of the Company, Mr. Glenn M. Fishbine, Mr. Fishbine
continued to be compensated by the Company at his base salary through the one
month transition period ending November 30, 1997, during which he has agreed to
provide consulting services and advice to the Company. After the transition
period, he was compensated by the Company in a lump sum severance payment equal
to his base salary for two months. The Company has further agreed (i) to
forgive, as of September 30, 1997, $167,497 of indebtedness of Mr. Fishbine to
the Company, (ii) to release the shares of Common Stock pledge by Mr. Fishbine
as collateral to secure payment of Mr. Fishbine's indebtedness to the Company,
and (iii) that a stock pledge agreement between Mr. Fishbine and the Company
would be terminated. In consideration of the foregoing, Mr. Fishbine also agreed
to a one-year non-competition arrangement with the Company.
Gordon L. Bramah is the Chairman of the Board of Directors of Bramah
Limited ("Bramah"), which is a significant stockholder of the Company. In
connection with early stage investments made by Bramah in the Company, the
Company granted Bramah an exclusive license in the United Kingdom for the
Company's technology. In October 1992, the exclusive license was reacquired by
the Company in return for a royalty arrangement whereby Bramah will be paid a
15% royalty on sales of the first $1.0 million of the Company's products in the
United Kingdom. As of September 30, 1997, the Company accrued approximately
$63,000 for royalties to Bramah on sales in the United Kingdom during fiscal
1997.
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth, as of December 31, 1997, the number of
shares of Common Stock beneficially owned by (i) each person known to be the
beneficial owner of five percent or more of the Common Stock, (ii) each
director, (iii) each executive officer named in the Summary Compensation Table
above, (iv) all officers and directors as a group and (v) the Selling
Stockholders, and as adjusted to reflect the sale of the shares of Common Stock
offered hereby. Any shares reflected in the following table which are subject to
an option or a warrant are deemed to be outstanding for the purpose of computing
the percentage of Common Stock owned by the option or warrant holder but are not
deemed to be outstanding for the purpose of computing the percentage of Common
Stock owned by any other person. Except as otherwise indicated, each beneficial
owner has sole voting and investment power over the outstanding shares of which
he has beneficial ownership.
Name of Beneficial Owner or Group Shares Beneficially Owned(1)
- -------------------------------------------------- ----------------------------
Number Percent
---------- ---------
Perkins Capital Management Inc.................... 1,317,250 10.9%
730 East Lake Street
Wayzata, Minnesota 55391
Gordon L. Bramah.................................. 1,053,435 9.3%
Littlemoore House
Eckington, Sheffield S31 9EF
England
Bramah Limited.................................... 1,052,935 9.3%
Littlemoore House
Eckington, Sheffield S31 9EF
England
Jack A. Klingert.................................. 120,028 1.0%
Stephen M. Slavin(2).............................. 103,501 *
330 North Wabash Avenue
Chicago, Illinois 60611
George Latimer(3)................................. 28,550 *
1600 Grand Avenue
St. Paul, Minnesota 55105
C. McKenzie Lewis III(4).......................... 60,579 *
James C. Granger(5)............................... 98,320 *
John J. Metil..................................... 3,280 *
Barry A. Fisher................................... 1,521 *
Roman A. Jamrogiewicz............................. 1,704 *
Michael R. Halbouty............................... -- --
All officers and directors as a group (9 persons). 417,483 3.3%
- --------------------
* Indicates an amount less than one percent.
(1) The securities "beneficially owned" by a person are determined in
accordance with the definition of "beneficial ownership" set forth in
the regulations of the Commission and, accordingly, may include
securities owned by or for, among others, the spouse, children or
certain other relatives such person as well as other securities as to
which the person has or shares voting or investment power or has the
right to acquire within 60 days. The same shares may be beneficially
owned by more than one person.
<PAGE>
(2) Includes 66,001 shares of Common Stock owned by Mr. Slavin and 37,500
shares of Common Stock that may be acquired subject to options.
(3) Includes 21,050 shares of Common Stock beneficially owned by Mr.
Latimer and an option for 7,500 shares of Common Stock.
(4) Includes 12,579 shares of Common Stock beneficially owned by Mr. Lewis
and an option and a warrant for the purchase of an aggregate of 48,000
shares of Common Stock.
(5) Includes 14,987 shares of Common Stock owned by Mr. Granger and options
for the purchase of an aggregate of 83,333 shares of Common Stock.
The following table sets forth, as of the date hereof, the name of each
Selling Stockholder, certain beneficial ownership information with respect to
the Selling Stockholders, and the number of Shares that may be sold from time to
time by each pursuant to this Prospectus. There can be no assurance that all of
the Shares offered hereby will be sold. Because a Selling Stockholder may offer
by this Prospectus all or some part of the Common Stock which he or she holds,
no estimate can be given as of the date hereof as to the amount of Common Stock
actually to be offered for sale by a Selling Stockholder or as to the amount of
Common Stock that will be held by a Selling Stockholder upon the termination of
such offering. See "Plan of Distribution." Shares shown below as beneficially
owned are presented based upon information received from the Selling
Stockholders, or from representatives of the Selling Stockholders, in connection
with the preparation of the Registration Statement on Form S-1, of which this
Prospectus is a part. Shares not outstanding but deemed beneficially owned by
virtue of the right of a person or member of a group to acquire them within 60
days are treated as outstanding only when determining the amount and percentage
owned by such person.
<TABLE>
<CAPTION>
PERCENTAGE OF
OUTSTANDING
SHARES SHARES SHARES
BENEFICIALLY BENEFICIALLY BENEFICIALLY
OWNED SHARES OWNED UPON OWNED UPON
PRIOR TO OFFERED COMPLETION OF COMPLETION OF
NAME OF SELLING STOCKHOLDER OFFERING HEREBY THE OFFERING THE OFFERING
- ---------------------------- ------------ ------- ------------- -------------
<S> <C> <C> <C> <C>
KA Investments LDC 333,878(1) 3,646,429(2) -0- -0-
David B. Johnson 46,875(3) 46,875(3) -0- -0-
Paul R. Kuehn 46,875(3) 46,875(3) -0- -0-
Eldon C. Miller 15,625(3) 15,625(3) -0- -0-
Stanley Rahm 15,625(3) 15,625(3) -0- -0-
</TABLE>
- ------------------
(1) Includes (i) the number of shares of Common Stock issuable upon
conversion of $500,000 of the Debentures purchased in the Tranche 1
Closing (as defined in "Capitalization - Recent Financing") assuming
conversion at the conversion price in effect on December 1, 1997 (which
price will fluctuate from time to time based on changes in the market
price of the Common Stock and provisions in the Debentures, for
determining the conversion price) and (ii) the number of shares
issuable upon exercise of warrants issued to KA in connection with the
Tranche 1 Closing. See "Capitalization - Recent Financing."
(2) Assumes that KA purchases all of the Debentures for an aggregate of
$2,500,000 and converts interest thereon into Common Stock. In order to
provide for (i) fluctuations in the market price of the Common Stock,
(ii) provisions in the Debentures for determining the conversion price
of the Debentures and (iii) shares of Common Stock which may be issued
in payment of interest on the Debentures, the aggregate number of
shares issuable on conversion of the Debentures exceeds the aggregate
number of shares of Common Stock issuable upon conversion of the
Debentures, and interest thereon at conversion price in effect on the
date hereof. The number of shares in this column represents the sum of
(a) 200% of the aggregate number of shares of Common Stock issuable
upon conversion of $2,500,000 of the Debentures and interest thereon,
assuming the Debentures were issued on December 1, 1997 and held to
maturity at the conversion price on that date, and (b) 75,000 shares
issuable upon exercise of warrants issued in connection with the
Debentures.
(3) Assumes the full exercise of the MJK Warrant, which has been assigned
to the Selling Shareholder to the extent of Shares in this column to be
sold. MJK acted as the Company's placement agent in connection with the
private placement of the Debentures with KA in December 1997. In
connection with the private placement, the Company paid commissions to
and reimbursed MJK for certain expenses, and issued the MJK Warrant to
MJK. Except for
<PAGE>
the foregoing, there has been no material relationship between the
Selling Stockholders and the Company or its affiliates within the past
three years.
The Company has agreed to bear all expenses (other than selling
commissions and fees) in connection with the registration and sale of the Shares
being offered by the Selling Stockholders in over-the-counter market
transactions or in negotiated transactions. See "Plan of Distribution."
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
The Company's authorized capital stock consists of 20,000,000 shares of
Common Stock, $.01 par value per share. As of December 31, 1997, the Company had
12,417,001 shares of Common Stock outstanding, had Debentures outstanding
convertible into 318,878 shares of Common Stock (assuming conversion on December
1, 1997) and had warrants and options outstanding to purchase an additional
1,823,393 shares of Common Stock, a majority of which are exercisable at prices
ranging from $1.5625 to $3.125 per share. There are an aggregate of 634,100
shares of Common Stock reserved for the grant of future options under existing
stock option plans.
Holders of shares of Common Stock have no preemptive rights to purchase
additional shares of any class or series of the Company's stock. Holders of
shares of Common Stock do not have cumulative voting rights. All of the issued
and outstanding shares of Common Stock and the shares offered hereby, when
issued and paid for as contemplated herein, are and will be duly authorized and
validly issued, fully paid and nonassessable. Each share of Common Stock
entitles the holder thereof to one vote, in person or by proxy, upon all matters
submitted for a vote by the stockholders of the Company, except to the extent
that such voting rights may be limited by the business combination provisions of
Section 203 of the Delaware General Corporation Law.
The Company is subject to Section 203 of the Delaware General
Corporation Law, which provides that if a person acquires 15% or more of the
stock of a Delaware corporation, such person becomes an "interested stockholder"
and may not engage in a "business combination" with that corporation for a
period of three years. The term "business combination" includes a merger, a sale
of assets or a transfer of stock. The three-year moratorium does not apply if
any of the following conditions are met: (i) the board of directors approves the
acquisition of stock or the business combination before the person becomes an
interested stockholder, (ii) the interested stockholder acquires 85% of the
outstanding voting stock, not counting stock owned by individuals who are
officers and directors of the corporation or (iii) the business combination is
approved after the person becomes an interested stockholder by stockholders
other than the interested stockholder. In addition, an interested stockholder is
free to make a competing business combination proposal if continuing directors
who are in office prior to the date such person becomes an interested
stockholder approve a merger or other transaction involving 50% or more of the
aggregate market value of the corporation's assets or outstanding voting stock
with a person who is not an interested stockholder.
STOCKHOLDER RIGHTS PLAN
On May 2, 1996, the Board of Directors of the Company declared a
dividend of one Common Share purchase right (a "Right") for each outstanding
share of common stock, par value $ .01 per share (the "Common Shares"), of the
Company and authorized the issuance of one Right for each Common Share which
shall become outstanding between the Record Date and the earlier of the
Distribution Date (as hereinafter defined) or the final expiration date of the
Rights. The dividend was paid on May 22, 1996 (the "Record Date"), to the
stockholders of record on that date. Each Right will entitle the registered
holder to purchase from the Company a number of newly issued Common Shares at a
price per share equal to 50% of the current market value of a Common Share on
the Distribution Date. The number of Common Shares purchasable per Right will
equal $35 (the "Purchase Price") divided by 50% of the current
<PAGE>
market price on the Distribution Date. In the event that the number of
authorized but unissued Common Shares is insufficient to permit the exercise of
the Rights in full, then the number of Common Shares issuable upon the exercise
of each Right will be adjusted, as described below. The complete terms of the
Rights are set forth in a Rights Agreement (the "Rights Agreement") between the
Company and Norwest Bank Minnesota, National Association, as Rights Agent (the
"Rights Agent").
The Rights become exercisable on the first day after the Distribution
Date. The Distribution Date is defined as the earlier to occur of (i) ten
business days following a public announcement that a person or group of
affiliated or associated persons (not including the Company, any subsidiary of
the Company, any Person holding Common Shares acquired in a transaction approved
in advance in writing by a majority of the Disinterested Directors of the Board
of Directors of the Company, any employee benefit plan of the Company or its
subsidiaries or any entity holding Common Shares for or pursuant to any such
plan, or any person who beneficially owns 7.5% or more of the Common Shares
outstanding on the 20th day preceding the Record Date, to the extent of such
ownership) (an "Acquiring Person"), has acquired beneficial ownership of 15% or
more of the outstanding Common Shares, or (ii) ten business days following the
commencement of, or announcement of an intention to make, a tender offer or
exchange offer the consummation of which would result in the beneficial
ownership by a person or group of 15% or more of such outstanding Common Shares.
The Rights will expire on April 30, 2006 (the "Final Expiration Date"), unless
the Final Expiration Date is extended or unless the Rights are earlier redeemed
or exchanged by the Company, in each case, as described below.
In the event that any person becomes an Acquiring Person, each holder
of a Right, other than Rights beneficially owned by the Acquiring Person, will
thereafter have the right to receive upon exercise thereof, at the then current
Purchase Price, a number of Common Shares equal to the result obtained by
dividing the then current Purchase Price by 50% of the market price per Common
Share at the date such person became an Acquiring Person. Under certain
circumstances, other equity and debt securities, property, cash or combinations
thereof, including a combination with Common Shares that are equal in value to
the number of Common Shares for which the Right is exercisable, may be issued in
lieu of Common Shares for which the Right is exercisable. In such event, the
purchase price per Common Share will be fifty percent (50%) of the then current
per share market price of the Common Shares. The Purchase Price payable, and the
number of Common Shares or other securities or property issuable, upon exercise
of the Rights are subject to adjustment from time to time to prevent dilution.
In the event, following the first date of public announcement by the
Company or an Acquiring Person that an Acquiring Person has become such (a
"Shares Acquisition Date"), that the Company is, in effect, acquired in a merger
or other business combination transaction of 50% or more of its consolidated
assets or earning power is sold, proper provision will be made so that each
holder of a Right, other than Rights that were or are beneficially owned by an
Acquiring Person, will thereafter generally have the right to receive, upon the
exercise thereof at the then current exercise price of the Right, that number of
shares of common stock of the acquiring company which at the time of such
transaction will have a market value of two times the exercise price of the
Right.
In the event that the Company does not have sufficient authorized but
unissued Common Shares to permit the delivery of the required number of Common
Shares upon the exercise in full of the Rights, then each Rights Certificate
shall entitle the holder thereof (other than an Acquiring Person) to purchase a
fractional number of the Common Shares then available. At any time prior to the
close of business on the tenth business day after a Shares Acquisition Date, the
Board of Directors of the Company may redeem the Rights in whole, but not in
part, at a price of $ .01 per right (the "Redemption Price") which may be paid
in cash or with Common Shares or other consideration deemed appropriate by the
Board of Directors of the Company. Immediately upon any redemption of the
Rights, the right to exercise the Rights will terminate and the only right of
the holders of Rights will be to receive the Redemption Price. The terms of the
Rights may be amended by the Board of Directors of the Company without the
consent of the holders of the Rights at any time to cure any ambiguity or to
correct or supplement any defective or inconsistent provisions and may,
<PAGE>
prior to the Distribution Date, be amended to change, delete or supplement any
other provision in any manner which the Company may deem necessary or desirable.
After the Distribution Date the terms of the Rights may be amended (other than
to cure ambiguities or correct or supplement defective or inconsistent
provisions) only so long as such amendment shall not adversely affect the
interests of the holders of the Rights (which may not be an Acquiring Person in
whose hands Rights are void). Until a Right is exercised, the holder thereof, as
such, will have no rights as a stockholder of the Company, including without
limitation, the right to vote or to receive dividends.
A copy of the Rights Agreement was filed with the Commission as an
exhibit to the Company's Registration Statement on Form 8-A, dated May 2, 1996.
A copy of the Rights Agreement is available free of charge from the Company.
This summary description of the Rights does not purport to be complete and is
qualified in its entirety by reference to the Rights Agreement.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company's Common Stock is
Norwest Bank Minnesota, National Association, 161 North Concord Exchange, South
St. Paul, Minnesota 55075-0738.
<PAGE>
PLAN OF DISTRIBUTION
The Selling Stockholders may, from time to time, sell all or a portion
of the Shares on the Nasdaq National Market, in privately negotiated
transactions or otherwise, at fixed prices that may be changed, at market prices
prevailing at the time of sale, at prices related to such market prices or at
negotiated prices. The Shares may be sold by the selling Stockholders by one or
more of the following methods, without limitation: (a) block trades in which the
broker or dealer so engaged will attempt to sell the Shares as agent but may
position and resell a portion of the block as principal to facilitate the
transaction, (b) purchases by a broker or dealer as principal and resale by such
broker or dealer for its account pursuant to this Prospectus, (c) an exchange
distribution in accordance with the rules of such exchange, (d) ordinary
brokerage transactions and transactions in which the broker solicits purchasers,
(e) privately negotiated transactions, (f) short sales and (g) a combination of
any such methods of sale. In effecting sales, brokers and dealers engaged by the
Selling Stockholders may arrange for other brokers or dealers to participate.
Brokers or dealers may receive commissions or discounts from the Selling
Stockholders (or, if any such broker-dealer acts as agent for the purchaser of
such shares, from such purchaser) in amounts to be negotiated which are not
expected to exceed those customary in the types of transactions involved.
Broker-dealers may agree with the Selling Stockholders to sell a specified
number of such Shares at a stipulated price per share, and, to the extent such
broker-dealer is unable to do so acting as agent for a Selling Stockholders, to
purchase as principal any unsold Shares at the price required to fulfill the
broker-dealer commitment to the Selling Stockholders. Broker-dealers who acquire
Shares as principal may thereafter resell such Shares from time to time in
transactions (which may involve block transactions and sales to and through
other broker-dealers, including transactions of the nature described above) in
the over-the-counter market or otherwise at prices and on terms then prevailing
at the time of sale, at prices then related to the then-current market price or
in negotiated transactions and, in connection with such resales, may pay to or
receive from the purchasers of such Shares commissions as described above. The
Selling Stockholders may also sell the Shares in accordance with Rule 144 under
the Securities Act, rather than pursuant to this Prospectus.
To the extent required, the amount of the Shares to be sold, purchase
prices, public offering prices, the names of any agents, dealers or
underwriters, and any applicable commissions or discounts with respect to a
particular offer will be set forth by the Company in a Prospectus Supplement
accompanying this Prospectus or, if appropriate, a post-effective amendment to
the Registration Statement. The Selling Stockholders and agents who execute
orders on their behalf may be deemed to be underwriters as that term is defined
in Section 2(11) of the Securities Act and a portion of any proceeds of sales
and discounts, commissions or other seller's compensation may be deemed to be
underwriting compensation for purposes of the Securities Act.
Offers on sales of the Shares have not been registered or qualified
under the laws of any country, other than the United States. In order to comply
with the securities laws of certain states, if applicable, the Shares will be
sold in such jurisdictions only through registered or licensed brokers or
dealers. In addition, in certain states the Shares may not be sold unless they
have been registered or qualified for sale in the applicable state or an
exemption from the registration or qualification requirement is available.
From time to time the Selling Stockholders may engage in short sales,
short sales against the box, puts and calls and other transactions in securities
of the Company or derivatives thereof, and may sell and deliver the Shares in
connection therewith or in settlement of securities loans. From time to time the
Selling Stockholders may pledge their Shares pursuant to the margin provisions
of its customer agreements with its brokers. Upon a default by the Selling
Stockholders, the broker may offer and sell the pledged shares from time to
time.
Under applicable rules and regulations under the Exchange Act, any
person engaged in a distribution of the Shares may not simultaneously engage in
market-making activities with respect to such securities for a period of two to
nine business days prior to the commencement of such distribution. In addition
to and without limiting the foregoing, each Selling Stockholder and any other
person participating in a distribution will be subject to applicable provisions
of the Exchange Act and the rules and regulations thereunder, including without
limitation Rules 10b-2, 10b-6 and 10b-7, which provisions may limit the timing
of purchases
<PAGE>
and sales of any of the Shares by the Selling Stockholders or any such other
person. All of the foregoing may affect the marketability of the Shares and the
brokers' and dealers' ability to engage in market-making activities with respect
to such securities.
The Company has agreed to bear all expenses of registration and
distribution of the Shares being registered, which has been estimated as
$54,500. Any commissions, discounts, concessions or other fees, if any, payable
to broker-dealers in connection with any sale of the Shares will be borne by the
Selling Stockholder selling such Shares.
In accordance with the terms of the Warrants and the Registration
Rights Agreement entered into with KA, the Company has agreed to indemnify the
Selling Stockholders and their control persons with respect to certain
liabilities in connection with the sale of the Shares pursuant to this
Prospectus, including liabilities under the Securities Act and the Exchange Act.
In addition, the Selling Stockholders have agreed to indemnify the Company, its
directors, officers, agents and control persons against certain liabilities
incurred as a result of information provided by the Selling Stockholders for use
in this Prospectus. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted pursuant to the foregoing provisions, the
Company has been informed that, in the opinion of the Commission, such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
LEGAL MATTERS
The validity of the Shares will be passed upon by Briggs and Morgan,
Professional Association, Minneapolis, Minnesota, counsel to the Company.
EXPERTS
The financial statements and financial statement schedule of the
Company as of September 30, 1997 and 1996 and for each of the years in the
three-year period ended September 30, 1997, have been included herein and
elsewhere in the registration statement, in reliance upon the reports of KPMG
Peat Marwick LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report......................................... F-2
Financial Statements:
Balance Sheets as of September 30,
1997 and 1996............................................... F-3
Statements of Operations for the
years ended September 30, 1997, 1996 and 1995............... F-4
Statements of Stockholders' Equity
for the years ended September 30, 1997,
1996 and 1995............................................... F-5
Statements of Cash Flows for
the years ended September 30, 1997, 1996 and 1995........... F-6
Notes to Financial Statements................................... F-7
Balance Sheets (Unaudited) as of December 31,
1997 and September 30, 1997................................. F-18
Statements of Operations (Unaudited) for the
three months ended December 31, 1997 and 1996............... F-19
Statements of Cash Flows (Unaudited) for the
three months ended December 31, 1997 and 1996............... F-20
Notes to Interim Financial Statements (Unaudited) for the
three months ended December 31, 1997........................ F-21
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Digital Biometrics, Inc.:
We have audited the accompanying balance sheets of Digital Biometrics,
Inc. as of September 30, 1997 and 1996, and the related statements of
operations, stockholders' equity and cash flows for each of the years in the
three-year period ended September 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Digital Biometrics,
Inc. as of September 30, 1997 and 1996, and the results of its operations and
its cash flows for each of the years in the three-year period ended September
30, 1997 in conformity with generally accepted accounting principles.
/s/KPMG Peat Marwick LLP
Minneapolis, Minnesota
November 21, 1997, except as to note 14(a) which
is as of November 24, 1997 and note 14(b) which
is as of December 1, 1997
<PAGE>
DIGITAL BIOMETRICS, INC.
BALANCE SHEETS
SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,891,397 $ 466,990
Marketable securities (note 4) 154,808 --
Accounts receivable, less allowance for doubtful accounts
of $441,276 and $692,534, respectively 5,161,356 5,676,849
Inventory (note 2) 2,294,593 3,633,659
Prepaid expenses and other costs 163,594 208,349
------------ ------------
Total current assets 9,665,748 9,985,847
------------ ------------
Property and equipment (note 3) 2,027,737 2,471,754
Less accumulated depreciation and amortization (1,113,185) (1,089,026)
------------ ------------
914,552 1,382,728
------------ ------------
Marketable securities (note 4) -- 5,690,371
Patents, trademarks, copyrights and licenses, net of accumulated
amortization of $156,171 and $192,899, respectively (note 1) 118,938 123,017
Deferred issuance costs on convertible debentures, net of accumulated
amortization of $196,854 and $172,476, respectively (note 7) -- 127,408
------------ ------------
$ 10,699,238 $ 17,309,371
============ ============
Current liabilities:
Accounts payable $ 1,451,779 $ 1,103,174
Line of credit advances (note 5) -- 1,255,000
Deferred revenue 677,925 649,178
Accrued warranty 584,676 128,500
Other accrued expenses (note 6) 819,610 1,343,408
------------ ------------
Total current liabilities 3,533,990 4,479,260
Convertible debentures (note 7) -- 2,374,739
------------ ------------
Total liabilities 3,533,990 6,853,999
------------ ------------
Stockholders' equity (note 10):
Common stock, $.01 par value. Authorized, 20,000,000 shares; issued
and outstanding 12,361,038 and 10,777,288 shares, respectively 123,610 107,773
Additional paid-in capital 42,439,576 39,743,380
Deferred compensation (73,500) (96,000)
Unrealized losses on marketable securities (note 4) (1,639) (134,753)
Notes receivable from sale of Common Stock -- (117,623)
Accumulated deficit (35,322,799) (29,047,405)
------------ ------------
Total stockholders' equity 7,165,248 10,455,372
------------ ------------
Commitments (note 12)
$ 10,699,238 $ 17,309,371
============ ============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
DIGITAL BIOMETRICS, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Identification systems (note 1) $ 9,712,259 $ 6,821,025 $ 6,069,382
Maintenance and other services 1,707,099 1,506,247 1,228,632
Other -- -- 1,800,000
------------ ------------ ------------
11,419,358 8,327,272 9,098,014
------------ ------------ ------------
Cost of revenues:
Identification systems (note 1) 6,614,314 3,814,167 3,040,428
Maintenance and other services 2,196,957 2,367,314 1,644,330
Non-recurring charges 1,529,118 -- --
Other -- -- 588,654
------------ ------------ ------------
10,340,389 6,181,481 5,273,412
------------ ------------ ------------
Gross margin 1,078,969 2,145,791 3,824,602
------------ ------------ ------------
Selling, general and administrative expenses:
Sales and marketing 2,057,099 3,369,441 2,394,916
Engineering and development 2,526,347 4,569,751 2,854,592
Depreciation and amortization 319,536 1,049,584 529,687
General and administrative 2,043,953 2,753,444 1,700,017
Non-recurring charges 330,319 -- --
------------ ------------ ------------
Total expenses 7,277,254 11,742,220 7,479,212
------------ ------------ ------------
Loss from operations (6,198,285) (9,596,429) (3,654,610)
------------ ------------ ------------
Other income (expense):
Interest income 230,347 585,708 377,881
Interest expense (note 7) (300,039) (2,676,182) (47,826)
Loss on disposal of fixed assets (7,417) -- --
------------ ------------ ------------
Total other income (expense) (77,109) (2,090,474) 330,055
------------ ------------ ------------
Net loss $ (6,275,394) $(11,686,903) $ (3,324,555)
============ ============ ============
Loss per common share $ (0.53) $ (1.24) $ (0.43)
============ ============ ============
Weighted average common shares outstanding 11,766,220 9,451,015 7,814,144
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
DIGITAL BIOMETRICS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional
--------------------- Paid-in Deferred Accumulated
Shares Amount Capital Compensation Other Deficit Total
---------- --------- ----------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance September 30, 1994 7,787,959 $ 77,880 $28,846,828 $ (389,483) $ (730,198) $(14,035,947) $ 13,769,080
Restricted stock awards (note 10) 6,360 63 41,937 (42,000) -- -- --
Amortization of deferred compensation -- -- -- 214,799 -- -- 214,799
Exercise of employee stock options 30,500 305 70,550 -- -- -- 70,855
Stock award for retirement plan (note 9) 8,814 88 66,017 -- -- -- 66,105
Change in unrealized loss on marketable
securities (note 4) -- -- -- -- 256,548 -- 256,548
Issuance of warrant in connection with
convertible debentures (note 7) -- -- 112,893 -- -- -- 112,893
Intrinsic value of beneficial
conversion feature of convertible
debentures (note 7) -- -- 1,923,529 -- -- -- 1,923,529
Net loss -- -- -- -- -- (3,324,555) (3,324,555)
---------- --------- ----------- ---------- ---------- ------------ ------------
Balance September 30, 1995 7,833,633 78,336 31,061,754 (216,684) (473,650) (17,360,502) 13,089,254
Restricted stock awards (note 10) 17,456 175 71,825 (72,000) -- -- --
Amortization of deferred compensation -- -- -- 192,684 -- -- 192,684
Stock award for retirement plan (note 9) 16,831 168 94,506 -- -- -- 94,674
Change in unrealized loss on marketable
securities (note 4) -- -- -- -- 41,724 -- 41,724
Debt conversion (note 7) 2,751,868 27,519 8,201,870 -- -- -- 8,229,389
Warrant exercise 157,500 1,575 313,425 -- -- -- 315,000
Forgiveness of notes receivable from
sale of Common Stock (note 10) -- -- -- -- 179,550 -- 179,550
Net loss -- -- -- -- -- (11,686,903) (11,686,903)
---------- --------- ----------- ---------- ---------- ------------ ------------
Balance September 30, 1996 10,777,288 107,773 39,743,380 (96,000) (252,376) (29,047,405) 10,455,372
Restricted stock awards (note 10) 31,072 311 44,689 (18,000) -- -- 27,000
Amortization of deferred compensation -- -- -- 40,500 -- -- 40,500
Exercise of stock options 25,000 250 41,500 -- -- -- 41,750
Stock award for retirement plan (note 9) 41,798 418 88,403 -- -- -- 88,821
Change in unrealized loss on marketable
securities (note 4) -- -- -- -- 133,114 -- 133,114
Debt conversion (note 7) 1,485,880 14,858 2,506,341 -- -- -- 2,521,199
Forgiveness of notes receivable from
sale of Common Stock (note 10) -- -- -- -- 117,623 -- 117,623
Issuance of warrant as payment for
services received (note 1) -- -- 15,263 -- -- -- 15,263
Net loss -- -- -- -- -- (6,275,394) (6,275,394)
---------- --------- ----------- ---------- ---------- ------------ ------------
Balance September 30, 1997 12,361,038 $ 123,610 $42,439,576 $ (73,500) $ (1,639) $(35,322,799) $ 7,165,248
========== ========= =========== ========== ========== ============ ============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
DIGITAL BIOMETRICS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (6,275,394) $(11,686,903) $ (3,324,555)
Adjustments to reconcile net loss to net cash used in
operating activities:
Provision for doubtful accounts receivable (98,660) 651,000 48,000
Provision for technological obsolescence -- 631,243 486,738
Deferred compensation amortization and other 207,997 372,234 214,799
Depreciation and amortization 585,622 864,183 551,715
Write-off of intangible assets 20,048 548,788 --
Loss on sale of marketable securities 64,624 -- --
Loss on disposal and write-off of fixed assets
and tooling 227,769 8,305 10,071
Interest expense amortization for the
intrinsic value of the beneficial
conversion feature of convertible
debentures -- 1,923,529 --
Interest expense on debentures converted into
Common Stock 227,539 329,754 --
Changes in operating assets and liabilities:
Accounts receivable 614,153 (1,833,548) 33,506
Inventory 1,339,066 (2,389,220) 177,059
Prepaid expenses and other expenses (5,119) (63,424) (23,144)
Accounts payable 348,605 641,843 (352,467)
Deferred revenue 28,747 106,420 81,083
Accrued expenses 63,462 521,741 248,955
------------ ------------ ------------
Net cash used in operating activities (2,651,541) (9,374,055) (1,848,240)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (242,613) (849,755) (491,318)
Proceeds from disposal of property and equipment -- -- 7,599
Patents, trademarks, copyrights and licenses (70,516) (36,859) (101,966)
Sales of marketable securities before maturity 5,602,327 130,043 687,965
------------ ------------ ------------
Net cash (used in) provided by investing activities 5,289,198 (756,571) 102,280
------------ ------------ ------------
Cash flows from financing activities:
Net line of credit (payments) advances (1,255,000) (195,000) 1,450,000
Exercise of warrants and options 41,750 315,000 70,855
Issuance of convertible debentures -- 10,109,750 --
------------ ------------ ------------
Net cash (used in) provided by financing activities (1,213,250) 10,229,750 1,520,855
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents 1,424,407 99,124 (225,105)
Cash and cash equivalents at beginning of year 466,990 367,866 592,971
------------ ------------ ------------
Cash and cash equivalents at end of year $ 1,891,397 $ 466,990 $ 367,866
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 222,132 $ 13,210 $ 47,826
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
DIGITAL BIOMETRICS, INC.
NOTES TO FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Digital Biometrics, Inc. (the "Company") is a developer, manufacturer,
marketer and integrator of computer-based products and services for the
identification of individuals. The Company is a leading vendor of products
employing "biometric" technology, the science of the identification of
individuals through the measurement of distinguishing biological
characteristics. The Company's principal product is the TENPRINTER(R) system for
"live-scan" fingerprint capture used mainly in law-enforcement applications. The
TENPRINTER is a computer-based system with patented high-resolution optics which
captures, digitizes, prints and transmits forensic-grade fingerprint images. The
Company also offers high-resolution single- fingerprint capture products for
commercial and governmental identification applications and has recently
established a systems integration services business focused on the integration
of biometric and other identification technologies into applications for
government and commercial markets. Substantially all of the Company's revenues
in fiscal 1997, 1996 and 1995 came from sales and maintenance of live-scan
systems for law enforcement and related applications.
STATEMENTS OF CASH FLOWS
CASH AND CASH EQUIVALENTS:
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments and certificates of deposit purchased with an
original maturity date of three months or less to be cash equivalents.
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
On December 31, 1996 and 1995, the Company issued 41,798 and 16,831
shares, respectively, of Common Stock to satisfy the Company's discretionary
matching to employees electing participation in the Company's 401(k) retirement
plan. These issuances increased Common Stock and additional paid-in capital by
$88,821 and $94,674, respectively, and reduced accrued compensation by the same
amount.
On 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. These warrants were valued at a
combined amount of $15,263.
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 that is being amortized on a straight-line basis over the three-year
restricted period.
Effective September 30, 1997, the Company granted 12,000 shares of
restricted Common Stock to its non-employee directors. The grant resulted in
$27,000 in additional Common Stock issued and an equal amount of compensation
expense.
<PAGE>
DIGITAL BIOMETRICS, INC.
NOTES TO FINANCIAL STATEMENTS
For the fiscal years ended September 30, 1997 and 1996, the Company has
issued 1,485,880 and 2,751,868 shares, respectively, of Common Stock for the
conversion of principal aggregating $2,450,000 and $8,450,000, respectively, of
the 1995 8% Convertible Debentures plus $228,000 and $329,000, respectively, of
accrued interest.
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 89% and 70%,
respectively, of customer accounts receivable at September 30, 1997 and 1996
were from government agencies, of which 39% and 40%, respectively, was from a
single customer. For the years ended September 30, 1997, 1996 and 1995, sales to
three customers in 1997 accounted for 43%, sales to two customers in 1996
accounted for 30%, and sales to two customers in 1995 accounted for 52%,
respectively, of annual sales. Export sales were 5%, 15% and 21% of total
revenues, for the years ended September 30, 1997, 1996 and 1995, respectively.
MARKETABLE SECURITIES
Marketable securities consist of collateralized mortgage-backed
securities and U.S. Treasury zero coupon bonds. 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.
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.
PATENTS, TRADEMARKS, COPYRIGHTS AND LICENSES
Costs associated with patents, trademarks and copyrights are
capitalized and amortized over 60 months or the remaining life of the patent,
trademark or copyright, whichever is shorter. The cost of software licenses
related to purchased software are capitalized and amortized over 36 months or
the life of the license, whichever is shorter. Accumulated amortization for the
years ended September 30, 1997 and 1996, was $156,171 and $192,899,
respectively. The Company wrote off $20,048 of unamortized patents during fiscal
1997 for patents which were abandoned. The Company wrote off $548,788 of
unamortized technology rights costs during the fourth quarter of fiscal 1996 as
a result of the decision to no longer actively pursue the technology acquired in
the Design Data acquisition in 1994. Management periodically assesses the
amortization period and recoverability of the carrying amount of intangible
assets based upon an estimation of their value and future benefits of the
recorded asset. Management has concluded that the carrying amount of the
intangible assets is realizable.
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. Revenue under contracts where a performance bond, collateral or
customer acceptance is required is not recognized until collateral requirements
have been satisfied and customer acceptance has occurred. 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
<PAGE>
DIGITAL BIOMETRICS, INC.
NOTES TO FINANCIAL STATEMENTS
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.
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.
WARRANTY COSTS
Estimated product warranty costs are accrued at date of shipment.
ADVERTISING COSTS
Advertising costs are expensed as incurred.
ENGINEERING AND DEVELOPMENT ARRANGEMENTS
Engineering and development costs are expensed as incurred. Engineering
and development expenses during fiscal 1996 include fourth-quarter charges of
$374,000 related to adjustments of unreimbursed manufacturing setup costs
related to an international development project. After adjustments, engineering
and development expenses for fiscal 1996 are net of a reimbursement of $87,700
from a company with which there was a teaming agreement for an international
development project.
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.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS No. 128") which simplifies the standards for computing earnings per
share. SFAS No. 128 replaces the presentation of primary earnings per share with
a presentation of basic earnings per share, which excludes dilution. SFAS No.
128 must be adopted for financial statements issued for periods ending after
December 15, 1997, with earlier application not permitted. All prior-period
earnings per share amounts must be restated to conform to SFAS 128. The Company
plans to adopt SFAS No. 128 during the first quarter of fiscal 1998.
INCOME TAXES
The Company has adopted the asset and liability method of accounting
for income taxes. Deferred tax assets and liabilities are recognized for the
expected future tax consequences of temporary differences between the financial
statement carrying amount and tax basis of assets and liabilities. The Company
provides for deferred taxes at the enacted tax rate that is expected to apply
when the temporary differences reverse.
<PAGE>
DIGITAL BIOMETRICS, INC.
NOTES TO FINANCIAL STATEMENTS
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), was effective for 1996. This
statement provides for a fair value based method of accounting for grants of
equity instruments to employees. SFAS No. 123 permits entities to continue to
apply the intrinsic-value method prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"); however,
pro forma disclosures of net income (loss) and earnings (loss) per share must be
presented as if the fair value based method had been applied in measuring
compensation cost. The Company elected to continue with the intrinsic-value
method prescribed by APB No. 25 and the pro forma disclosures in Note 10.
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.
(2) 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:
<TABLE>
<CAPTION>
September 30,
-------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Components and purchased subassemblies $ 1,054,606 $ 1,934,371
Work in process 699,097 717,696
Finished goods 540,890 981,592
----------- -----------
$ 2,294,593 $ 3,633,659
=========== ===========
</TABLE>
(3) PROPERTY AND EQUIPMENT
Furniture and equipment are recorded at cost. Depreciation and
amortization are computed on a straight-line basis over the estimated useful
lives, generally three to five years. Leasehold improvements are amortized over
the estimated useful life of the asset or lease term, whichever is shorter.
Property and equipment consist of the following:
September 30,
--------------------------
1997 1996
----------- -----------
Leasehold improvements $ 200,942 $ 172,222
Office furniture and equipment 671,146 835,933
Manufacturing equipment 237,465 193,612
Engineering equipment and tooling 918,184 1,269,987
----------- -----------
$ 2,027,737 $ 2,471,754
=========== ===========
<PAGE>
DIGITAL BIOMETRICS, INC.
NOTES TO FINANCIAL STATEMENTS
(4) MARKETABLE SECURITIES
Marketable securities consist primarily of collateralized mortgage
backed securities. Net realized and unrealized gains and losses are determined
on the specific identification cost basis. Realized losses from sales of
marketable securities during fiscal 1997 were $64,624. Unrealized gains and
losses are reflected as a separate component of stockholders' equity.
The unrealized loss for available-for-sale marketable securities is as
follows:
September 30,
-----------------------------
1997 1996
---------- -----------
Fair market value $ 154,808 $ 5,690,371
Amortized cost 156,447 5,825,124
---------- -----------
Unrealized gain (loss) $ (1,639) $ (134,753)
========== ===========
(5) LINES OF CREDIT
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. The line bears interest at 1.5% above the prime
rate (8.5% at September 30, 1997), is payable upon demand and expires in
January, 1998. The Company elected to use the proceeds from the sale of
marketable securities to pay off all borrowings under the line at September 30,
1997. For the period from September 30, 1997 through January 31, 1998, the
minimum interest shall be $10,000 per the terms of the agreement.
The Company had a $4,000,000 line of credit with Norwest Bank Minnesota
N.A. Borrowings under this line of credit were secured by marketable securities
and were limited to 80% of the market value of marketable securities held as
collateral by the bank. The Company elected to use the proceeds from the sale of
marketable securities to pay off all borrowings under the line at September 30,
1997 and terminate the line.
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 and are payable upon demand. This line expires in March, 1998. There were
no amounts borrowed under the line at September 30, 1997.
(6) OTHER ACCRUED EXPENSES
September 30,
--------------------------
1997 1996
---------- -----------
Other accrued expenses consist of:
Accrued salaries $ 265,707 $ 442,701
Accrued vacation 121,994 112,665
Accrued interest payable -- 205,529
Other accrued expenses 431,909 582,513
---------- -----------
$ 819,610 $ 1,343,408
========== ===========
<PAGE>
DIGITAL BIOMETRICS, INC.
NOTES TO FINANCIAL STATEMENTS
(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 "1995 Debentures"). Net proceeds to the Company after
placement fees but before legal and other expenses were $10,109,750. The 1995
Debentures were convertible one-third after 45 days, one-third after 75 days and
one third after 105 days at the option of the 1995 Debenture holders. The
Company had the right to redeem the Debentures prior to conversion. The
conversion price was 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 1995 Debentures was 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 was reflected as a discount on the
1995 Debentures and was amortized as interest expense over the term of the 1995
Debentures. The intrinsic value of the beneficial conversion feature of
$1,923,529 was 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 vesting period of the conversion feature. Net proceeds to the
Company were used for working capital, product development and other general
corporate purposes.
All of the 1995 Debentures and accrued interest have been converted
into Common Stock during fiscal 1996 and fiscal 1997. The Company has issued
4,237,748 shares of Common Stock for the conversion of principal aggregating
$10,900,000 of the Convertible Debentures plus $557,000 of accrued interest at
an average conversion price of $2.70 per share. For the fiscal year ended
September 30, 1997, the Company has issued 1,485,880 shares of Common Stock for
the conversion of principal aggregating $2,450,000 of the 1995 Convertible
Debentures plus $228,000 of accrued interest at an average conversion price of
$1.80 per share.
(8) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments are recorded in its balance sheet.
The carrying amount for cash and cash equivalents, accounts receivable, accounts
payable, accrued liabilities, line of credit advances and convertible debentures
approximate fair value due to the immediate or short-term maturity of these
financial instruments. The fair values of investments in marketable securities
are based on quoted market prices and are summarized in note 4.
(9) RETIREMENT PLAN
Effective January 1, 1992, the Company adopted a profit-sharing and
savings plan (the "Plan") classified as a defined contribution plan and
qualifying under Section 401(k) of the Internal Revenue Code. The Plan allows
employees to defer a portion of their annual compensation through pre-tax
contributions to the Plan. At the discretion of the Board of Directors, the
Company may make matching contributions up to an amount equal to 50% of the
contributions made by each employee, subject to a maximum contribution for each
employee of 5% of compensation. The Board may also make other discretionary
contributions to the Plan. Matching contributions at September 30, 1997 and 1996
resulted in accrued compensation expense of $88,321 and $81,184, respectively.
Matching contributions have been paid through the issuance of Company Common
Stock. For the years ended September 30, 1997, 1996 and 1995, the Company
incurred $95,958, $102,504 and $66,708 respectively, of expense related to this
plan.
<PAGE>
DIGITAL BIOMETRICS, INC.
NOTES TO FINANCIAL STATEMENTS
(10) STOCKHOLDERS' EQUITY
CAPITAL STOCK
On December 31, 1996 and 1995, the Company issued 41,798 and 16,831
shares, respectively, of Common Stock to satisfy the Company's discretionary
matching to employees electing participation in the Company's 401(k) retirement
plan. These issuances increased Common Stock and additional paid-in capital by
$88,821 and $94,674, respectively.
STOCKHOLDER RIGHTS PLAN
In May 1996, the Board of Directors adopted a Stockholder Rights Plan.
The Plan is designed to enable the Company and its Board of Directors to develop
and preserve long-term value for stockholders and to protect stockholders in the
event an attempt is made to acquire control of the Company without an offer of
fair value to all stockholders. Under the Plan, each stockholder of record
beginning at the close of business on May 22, 1996, will receive as a dividend
one right for each share of the Company's Common Stock held. The rights expire
on April 30, 2006.
STOCK OPTIONS
In order to attract and retain employees and directors, while
preserving cash resources, the Company has, since its inception, utilized stock
option awards issued through various stock option plans and employment
arrangements. As of September 30, 1997, there were issued and outstanding
options for 1,182,500 shares of Common Stock issued to employees and directors
of which options to purchase 182,467 shares were currently exercisable.
On January 14, 1994, two executive officers exercised options for
88,438 and 135,000 shares of Common Stock, respectively, at an exercise price of
$1.33 per share. Pursuant to terms of the stock option plans, the Company loaned
the total exercise amount to the executive officer in return for non-interest
bearing promissory notes, secured by Common Stock issued. The notes are
reflected as a reduction of stockholders' equity. In connection with each
executive's severance package, $117,623 and $179,550 of notes receivable were
forgiven by the Company and recorded as compensation expense in fiscal 1997 and
1996, respectively.
<PAGE>
DIGITAL BIOMETRICS, INC.
NOTES TO FINANCIAL STATEMENTS
Information relating to stock options during fiscal 1997, 1996 and 1995
is as follows:
Shares Weighted
Under Average
Option Price Range Exercise Price
--------- -------------- --------------
Unexercised options outstanding -
September 30, 1994 574,900 $1.67 - $14.75 $10.65
Options granted 339,500 $7.44 - $ 9.00 $ 7.90
Options exercised (30,500) $2.00 - $ 8.00 $ 2.32
Options forfeited (35,300) $7.44 - $12.00 $10.25
--------- -------------- ------
Unexercised options outstanding -
September 30, 1995 848,600 $1.67 - $14.75 $ 9.87
Options granted 110,500 $5.50 - $ 6.25 $ 5.77
Options exercised -- -- --
Options forfeited (76,500) $7.44 - $13.63 $ 9.56
--------- -------------- ------
Unexercised options outstanding -
September 30, 1996 882,600 $1.67 - $14.75 $ 9.38
Options granted 1,001,700 $1.56 - $ 3.13 $ 2.19
Options exercised (25,000) $1.67 $ 1.67
Options forfeited (676,800) $2.56 - $14.75 $ 9.80
--------- -------------- ------
Unexercised options outstanding -
September 30, 1997 1,182,500 $1.56 - $14.75 $ 3.21
========= ============== ======
The following table summarizes information concerning options
outstanding and exercisable as of September 30, 1997:
Outstanding Exercisable
----------- -----------
Number of options 1,182,500 182,467
Weighted average remaining
contractual life, in years 8.93 6.11
Weighted average exercise price $3.21 $8.08
The Company applies APB Opinion No. 25 in accounting for options
granted under its stock option plans and, accordingly, no compensation cost has
been recognized for its stock options in the financial statements. Had the
Company determined compensation cost based on the fair value at the grant date
for its stock options under SFAS No. 123, the Company's net loss would have
increased to the pro forma amounts indicated below:
1997 1996
----------- ------------
Net loss - as reported $(6,275,394) $(11,686,903)
Net loss - pro forma $(6,773,897) $(11,688,889)
Loss per share - as reported $ (0.53) $ (1.24)
Loss per share - pro forma $ (0.58) $ (1.24)
<PAGE>
DIGITAL BIOMETRICS, INC.
NOTES TO FINANCIAL STATEMENTS
The pro forma net loss reflects only options granted in 1997 and 1996.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net loss amounts presented
above because compensation cost is reflected over the options' vesting period,
typically three years, and compensation cost for options granted prior to
October 1, 1995 is not considered.
Principle assumptions used in applying the option valuation model were
as follows:
1997 1996
---- ----
Risk-free interest rate 5.75% 5.75%
Expected life, in years 10 10
Expected volatility 127% 68%
Expected dividend yield 0% 0%
RESTRICTED STOCK
Effective October 1, 1992, the Board of Directors adopted the 1992
Restricted Stock Plan (the "Plan") pursuant to which awards of restricted stock
may be made to employees and non-employee directors of the Company. The Plan
serves as a means of providing annual bonus amounts to executive employees and
as the means of compensation of non-executive directors effective with each
director's election at the annual meeting of stockholders. Restricted stock
awards vest over a three-year period.
The Company awarded 25,413, 17,456 and 8,860 shares, respectively, of
Common Stock under the Plan with a fair market value of $54,000, $72,000 and
$72,000, respectively, for the years ended September 30, 1997, 1996 and 1995.
Effective September 30, 1997, the Company granted 12,000 shares of
restricted Common Stock outside of the Plan to its non-employee directors. The
grant resulted in $27,000 in additional Common Stock issued and an equal amount
of compensation expense.
WARRANTS
The Company has warrants outstanding at September 30, 1997, for the
purchase of 140,893 shares of its Common Stock. The warrants are currently
exercisable and expire at various times through September 29, 2000. The exercise
prices per share range from $2.125 to $8.40.
<PAGE>
DIGITAL BIOMETRICS, INC.
NOTES TO FINANCIAL STATEMENTS
(11) INCOME TAXES
There is no provision for income taxes since a valuation allowance has
been established equal to the corresponding net deferred tax asset. At September
30, 1997, the Company has carryforwards of net operating losses and research and
development tax credits of $30,700,000 and $827,608, respectively. These
carryforwards expire as follows:
Net Research and
Operating Development
Loss Tax Credit
------------ ----------
1999 $ 346,711 $ 15,236
2000 116,546 1,997
2001 - 6,343
2002 547,523 40,774
2003 993,803 68,109
2004 22,477 1,497
2005 1,387,756 -
2006 1,310,521 34,307
2007 2,084,429 63,736
2008 2,248,457 133,548
2009 4,605,122 307,704
2010 2,734,225 154,357
2011 7,268,776 -
2012 7,033,654 -
------------ ----------
$ 30,700,000 $ 827,608
============ ==========
Due to uncertainty of the realization of deferred tax assets, the
Company has established a valuation allowance equal to net deferred tax assets.
The change in the valuation allowance for the years ended September 30, 1997 and
1996, is as follows:
1997 1996
----------- -----------
Balance at beginning of year $11,328,000 $ 8,099,000
Change in valuation allowance 2,523,000 3,229,000
----------- -----------
$13,851,000 $11,328,000
=========== ===========
The current and long-term deferred income tax asset and liability
amounts as of September 30, 1997 and 1996, were composed of the following:
1997 1996
------------ ------------
Current and long-term deferred income tax asset
resulting from future deductible temporary
differences are:
Accounts receivable allowance $ 177,000 $ 277,000
Inventory capitalization 28,000 39,000
Other accrued expenses 538,000 704,000
Research and development tax credit
carryforwards 828,000 828,000
Net operating loss carryforwards 12,280,000 9,480,000
------------ ------------
13,851,000 11,328,000
(13,851,000) (11,328,000)
------------ ------------
$ 0 $ 0
============ ============
<PAGE>
DIGITAL BIOMETRICS, INC.
NOTES TO FINANCIAL STATEMENTS
The aforementioned carryforwards are subject to the limitation
provisions of Internal Revenue Code sections 382 and 383. These sections provide
limitations on the availability of net operating losses and credits to offset
current taxable income and related income taxes when an ownership change has
occurred. The Company's initial public offering in December 1990, resulted in an
ownership change pursuant to these provisions and, accordingly, the use of the
above carryforwards is subject to an annual limitation. 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 September 30, 1997, is subject to the annual net operating loss
limitation, estimated at $350,000. 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 $27,000,000
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. Approximately $2,200,000 of the $30,700,000 net
operating loss carryforwards 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.
(12) 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 is on a year-to-year
lease arrangement. The Company is currently negotiating the extension of this
lease. Rent expense for operating leases for 1997, 1996 and 1995 was $396,800,
$329,400 and $338,300, respectively. Future minimum payments on operating leases
for the years ending September 30, 1998, 1999, 2000 and 2001 are $354,200,
$372,200, $399,300 and $241,700, respectively.
(13) 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 alleges that
Identix has willfully and deliberately infringed a Company patent through the
manufacture, use and/or sale of competing products. The complaint seeks, among
other things, an injunction prohibiting further infringement as well as
unspecified monetary damages. Identix has 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. These appeals are decided by the
Federal Circuit, which is a Court of Appeals in Washington D.C. On October 8,
1997, the appeal was argued before the Court. As of December 11, 1997, no
appellate decision has been issued. 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.
Except for the foregoing there are no material lawsuits pending or, to
the Company's knowledge, threatened against the Company.
<PAGE>
DIGITAL BIOMETRICS, INC.
NOTES TO FINANCIAL STATEMENTS
(14) SUBSEQUENT EVENTS
(a) JOINT VENTURE WITH GRAND CASINOS, INC.
On November 24, 1997, the Company entered into a letter of intent to
form a joint venture with Grand Casinos Inc. to further develop, test and market
the TRAK-21 automated player tracking system. It is anticipated that a
definitive agreement will be reached in early 1998 with deployment of a system
based on TRAK-21 technology in a Grand Casino property during 1998.
(b) ISSUANCE OF 8% CONVERTIBLE SUBORDINATED DEBENTURES AND WARRANTS
To provide additional working capital, on December 1, 1997, the Company
entered into a convertible subordinated debenture purchase agreement ("Purchase
Agreement") with a private investor, providing for the Company's issuance and
sale of up to an aggregate of $2,500,000 of 8% Convertible Subordinated
Debentures ("Debentures") in tranches of $500,000 each. The first tranche was
sold on December 1, 1997. Additional tranches may be issued upon request of the
Company within 90 days of each previous tranche, if the Company meets all
conditions to issuance including, but not limited to, conditions requiring the
Company to have effective and maintain a registration statement with the
Securities and Exchange Commission covering shares issuable upon conversion of
the Debentures and a requirement that the Company's market capitalization be at
least $12 million. The initial tranche sold in the amount of $500,000 on
December 1, 1997, is convertible in whole or in part at the option of the
holder, with accrued interest, into Common Stock, at a conversion equal to the
lesser of $1.96 per share or 80% of the average closing price of the five
consecutive trading days preceding the conversion date of the Debentures. Future
tranches may be convertible on a similar basis but the conversion prices will be
related to the lesser of the market price on the issue date and the market price
on the conversion date. The Company has the right, exercisable at any time upon
two trading days notice to the purchaser of the Debentures given at any time the
Company receives a conversion notice and the conversion price in effect in
connection with such conversion notice is less than $1.25, to repay all or any
portion of the outstanding principal amount of the Debentures which have been
tendered for conversion, at a price equal to the sum of 120% of the aggregate
principal amount of Debentures to be repaid. In connection with the Purchase
Agreement, the Company has agreed to issue to the purchaser of the Debentures,
upon the sale of each tranche, warrants to purchase 15,000 of Common Stock
exercisable at $2.50 per share up to a maximum 75,000 shares. Also, in
connection with the transaction, the Company paid $40,000 of fees to an
investment banking firm and issued a warrant to purchase 125,000 shares of
Common Stock at an exercise price of $2.00 per share. The estimated value of
this warrant is $87,500, which is a debt issuance cost to be written off to
interest expense over the term of the Debentures. The Purchase Agreement
includes a beneficial conversion feature. The intrinsic value of the beneficial
conversion feature of each tranche will 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 vesting period of the conversion
feature. The intrinsic value of the conversion feature of the first tranche is
$125,000. Net proceeds to the Company will be used for working capital, business
development and other general corporate purposes.
<PAGE>
DIGITAL BIOMETRICS, INC.
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
December 31, September 30,
1997 1997
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents (note 2) $ 1,204,282 $ 1,891,397
Marketable securities (notes 2 and 3) -- 154,808
Accounts receivable, less allowance for doubtful accounts of $436,510 and
$441,276, respectively 4,786,027 5,161,356
Inventory (note 4) 2,241,785 2,294,593
Prepaid expenses and other costs 184,867 163,594
------------- -------------
Total current assets 8,416,961 9,665,748
------------- -------------
Property and equipment 2,158,732 2,027,737
Less accumulated depreciation and amortization (1,215,711) (1,113,185)
------------- -------------
943,021 914,552
------------- -------------
Patents, trademarks, copyrights and licenses, net of accumulated amortization of
$166,972 and $156,171, respectively 124,231 118,938
Deferred issuance costs on convertible debentures, net of accumulated amortization of
$3,958 and $0, respectively (note 7) 138,542 --
------------- -------------
$ 9,622,755 $ 10,699,238
============= =============
Current liabilities:
Accounts payable $ 738,062 $ 1,451,779
Accrued warranty 480,911 584,676
Deferred revenue 973,471 677,925
Other accrued expenses (note 6) 869,815 819,610
------------- -------------
Total current liabilities 3,062,259 3,533,990
Convertible debentures (note 7) 446,667 --
------------- -------------
Total liabilities 3,508,926 3,533,990
------------- -------------
Stockholders' equity (note 8):
Common Stock, $.01 par value. Authorized, 20,000,000 shares; issued
and outstanding 12,417,001 and 12,361,038 shares, respectively 124,170 123,610
Additional paid-in capital 42,696,458 42,439,576
Unrealized losses on marketable securities (notes 2 and 3) -- (1,639)
Deferred compensation (60,000) (73,500)
Accumulated deficit (36,646,799) (35,322,799)
------------- -------------
Total stockholders' equity 6,113,829 7,165,248
------------- -------------
$ 9,622,755 $ 10,699,238
============= =============
</TABLE>
See accompanying notes to interim financial statements.
<PAGE>
DIGITAL BIOMETRICS, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1997 1996
------------- -------------
<S> <C> <C>
Revenues:
Identification systems $ 1,690,249 $ 1,616,314
Maintenance and other services 581,891 399,159
------------- -------------
Total revenues 2,272,140 2,015,473
------------- -------------
Cost of revenues:
Identification systems 1,430,548 848,697
Maintenance and other services 384,501 556,944
------------- -------------
Total cost of revenues 1,815,049 1,405,641
------------- -------------
Gross margin 457,091 609,832
------------- -------------
Selling, general and administrative expenses:
Sales and marketing 516,501 525,969
Engineering and development 700,292 738,173
General and administrative 477,566 418,638
------------- -------------
Total expenses 1,694,359 1,682,780
------------- -------------
Loss from operations (1,237,268) (1,072,948)
Other income (expense):
Interest income 12,005 86,934
Interest expense (note 7) (94,070) (106,616)
Loss on disposal of fixed assets (4,667) --
------------- -------------
Total other income (expense) (86,732) (19,682)
------------- -------------
Net loss $ (1,324,000) $ (1,092,630)
============= =============
Net loss per common share $ (0.11) $ (0.10)
============= =============
Weighted average common shares outstanding 12,361,646 10,862,607
============= =============
</TABLE>
See accompanying notes to interim financial statements.
<PAGE>
DIGITAL BIOMETRICS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
-----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,324,000) $ (1,092,630)
Adjustments to reconcile net loss to net cash used in
operating activities:
Provision for doubtful accounts receivable 9,610 5,000
Deferred compensation amortization 13,500 18,000
Depreciation and amortization 120,479 143,815
Loss on disposal of fixed assets 4,667 --
Loss from paydowns on marketable securities 1,315 --
Interest expense amortization for the
intrinsic value of the beneficial
conversion feature of convertible
debentures 83,334 --
Interest expense on debentures converted
into common stock -- 1,667
Changes in operating assets and liabilities:
Accounts receivable 365,719 40,959
Inventories 52,808 (435,907)
Prepaid expenses (21,273) (168,107)
Accounts payable (713,717) (426,582)
Deferred revenue 295,546 51,384
Accrued expenses (20,618) (11,304)
------------ ------------
Net cash used in operating activities (1,132,630) (1,873,705)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (138,524) (42,920)
Patents, trademarks, copyrights and licenses (16,093) (12,516)
Proceeds from marketable securities 155,132 337,194
------------ ------------
Net cash provided by investing activities 515 281,758
------------ ------------
Cash flows from financing activities:
Issuance of convertible debentures, net 445,000 --
Net advances on line of credit -- 1,650,000
------------ ------------
Net cash provided by financing activities 445,000 1,650,000
------------ ------------
Increase (decrease) in cash and cash equivalents (687,115) 58,053
Cash and cash equivalents at beginning of period 1,891,397 466,990
------------ ------------
Cash and cash equivalents at end of period $ 1,204,282 $ 525,043
============ ============
</TABLE>
See accompanying notes to interim financial statements.
<PAGE>
DIGITAL BIOMETRICS, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
DECEMBER 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, marketer and integrator of computer-based products and
services for the identification of individuals. The Company is a leading vendor
of products employing "biometric" technology, the science of the identification
of individuals through the measurement of distinguishing biological
characteristics. The Company's principal product is the TENPRINTER(R) system for
"live-scan" fingerprint capture used mainly in law enforcement applications. The
TENPRINTER(R) is a computer-based system with patented high-resolution optics
which captures, digitizes, prints and transmits forensic-grade fingerprint
images. The Company also offers high-resolution single-fingerprint capture
products for commercial and governmental identification applications. The
Company has also recently established a systems integration services business
(the "Integrated Identification Solutions Division" or "IIS") focused on the
integration of biometric and other identification technologies into applications
for commercial and government markets. Substantially all of the Company's
revenues in the first three months of fiscal 1998 and fiscal 1997 came from
live-scan systems sales, maintenance and applications development services for
the law enforcement market.
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 and
competition within the live-scan electronic fingerprint industry, have resulted
in and are expected to continue to result in an irregular revenue cycle for the
Company; any prediction of future trends is inherently difficult.
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 the audited financial statements and footnotes included
elsewhere herein for the year ended September 30, 1997.
<PAGE>
DIGITAL BIOMETRICS, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
DECEMBER 31, 1997
(UNAUDITED)
(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 73% and 89%,
respectively, of customer accounts receivable at December 31, 1997 and September
30, 1997 were from government agencies, of which 31% and 39%, respectively, were
from a single customer. Sales to one customer in the three-month period ended
December 31, 1997 accounted for 31% of total revenues, and sales to two
customers in the three-month period ended December 31, 1996 accounted for 17%
and 12% of total revenues. Export sales for the three-month period ended
December 31, 1997 were 32% of total revenues as compared to less than 1% for the
same period in 1996.
STATEMENT OF CASH FLOWS
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments and certificates of deposit purchased with an
original maturity date of three months or less to be cash equivalents.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Three Months Ended
December 31,
1997 1996
--------- ---------
Cash paid during the period for interest $3,157 $37,370
========= =========
For supplemental disclosure of non-cash investing and financing activities see
notes 7 and 8.
EARNINGS (LOSS) PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS No. 128") which simplifies the standards for computing earnings per
share. SFAS No. 128 replaces the presentation of primary earnings per share with
a presentation of basic earnings per share, which excludes dilution. SFAS No.
128 must be adopted for financial statements issued for periods ending after
December 15, 1997, with earlier application not permitted. All prior-period
earnings per share amounts must be restated to conform to SFAS 128. The Company
has adopted SFAS No. 128 during the first quarter of fiscal 1998.
<PAGE>
DIGITAL BIOMETRICS, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
DECEMBER 31, 1997
(UNAUDITED)
(2) ACCOUNTING POLICIES (CONTINUED)
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 outstanding for the period.
Net loss per common share does not consider common stock equivalents. Diluted
earnings per share is not included herein as the impact of common stock
equivalents is antidilutive.
(3) MARKETABLE SECURITIES
Marketable securities consist primarily of collateralized
mortgage-backed securities. Net realized and unrealized gains and losses are
determined on the specific identification cost basis. Realized losses from
paydowns of marketable securities were $1,000 for the three-month period ended
December 31, 1997. There were no realized losses from sales of marketable
securities for the three-month period ended December 31, 1996. Unrealized gains
and losses are reflected as a separate component of stockholders' equity.
(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:
December 31, September 30,
1997 1997
------------ -------------
Components and purchased
subassemblies $876,941 $1,054,606
Work in process 841,153 699,097
Finished goods 523,691 540,890
------------ -------------
$2,241,785 $2,294,593
============ =============
(5) LINES OF CREDIT
The Company has a receivables financing line of credit 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. The line
bears interest at 1.5% above the prime rate (8.5% at December 31, 1997), is
payable upon demand and expires in March 31, 1998. For the period from September
30, 1997 through January 31, 1998, the minimum interest shall be $10,000 per the
terms of the agreement. For the period from February 1, 1998 through March 31,
1998, the minimum interest
<PAGE>
DIGITAL BIOMETRICS, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
DECEMBER 31, 1997
(UNAUDITED)
(5) LINES OF CREDIT (CONTINUED)
shall be $5,000 per the terms of the agreement. There were no borrowings under
the line at December 31, 1997. The Company anticipates renewal of the line upon
expiration.
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 and are payable upon demand. The line expires in March 1998. There were no
amounts borrowed under the line at December 31, 1997.
(6) OTHER ACCRUED EXPENSES
December 31, September 30,
1997 1997
------------ ------------
Other accrued expenses consist of:
Accrued salaries and commissions $ 281,312 $ 265,707
Accrued vacation 108,311 121,994
Accrued installation costs 168,900 97,750
Other accrued expenses 311,292 334,159
----------- ------------
$869,815 $819,610
=========== ============
(7) 8% CONVERTIBLE SUBORDINATED DEBENTURES
To provide additional working capital, on December 1, 1997, the Company
entered into a convertible subordinated debenture purchase agreement ("Purchase
Agreement") with a private investor, providing for the Company's issuance and
sale of up to an aggregate of $2,500,000 of 8% Convertible Debentures
("Debentures") in tranches of $500,000 each. The first tranche was sold on
December 1, 1997. Additional tranches may be issued upon request of the Company
within 90 days of each previous tranche, if the Company meets all conditions to
issuance including, but not limited to, conditions requiring the Company to have
effective and maintain a registration statement with the Securities and Exchange
Commission covering shares issuable upon conversion of the Debentures and a
requirement that the Company's market capitalization be at least $12 million.
The initial tranche sold in the amount of $500,000 on December 1, 1997, is
convertible in whole or in part at the option of the holder, with accrued
interest, into Common Stock, at a conversion price equal to the lesser of the
average closing price of the five consecutive trading days preceding the
transaction ($1.96 per share) or 80% of the average closing price of the five
consecutive trading days preceding the conversion date. Future tranches may be
convertible on a similar basis but the conversion prices will be related to the
lesser of the market price on the issue date or the market price on the
conversion date. The Company has the right, exercisable at any time upon two
trading days notice to the purchaser of the debentures given at any time the
Company receives a conversion notice and the conversion price in effect in
connection with such conversion notice is less than $1.25, to repay all or any
portion of the outstanding principal amount of the debentures which have been
tendered for conversion, at a price equal to the sum of 120% of the aggregate
principal amount of debentures to
<PAGE>
DIGITAL BIOMETRICS, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
DECEMBER 31, 1997
(UNAUDITED)
(7) 8% CONVERTIBLE SUBORDINATED DEBENTURES (CONTINUED)
be repaid. In connection with the Purchase Agreement, the Company has agreed to
issue to the purchaser of the debentures, upon the sale of each tranche warrants
to purchase 15,000 of Common Stock exercisable at $2.50 per share up to a
maximum 75,000 shares. Also, in connection with the transaction, the Company
paid $40,000 of fees to an investment-banking firm and issued a warrant to
purchase 125,000 shares of Common Stock at an exercise price of $2.00 per share.
The estimated value of this warrant is $87,500 which is a debt issuance cost to
be written off to interest expense over the term of the Debentures. The Purchase
Agreement includes a beneficial conversion feature. The intrinsic value of the
beneficial conversion feature of each tranche will 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 vesting period of the
conversion feature. The intrinsic value of the conversion feature of the first
tranche is $125,000. Net proceeds to the Company are being used for working
capital, business development and other general corporate purposes.
As of December 31, 1997, none of this issuance of 8% Convertible
Debentures has been converted to Common Stock.
(8) STOCKHOLDERS' EQUITY
During the three-month period ended December 31, 1997, the Company
granted 112,000 shares pursuant to discretionary stock option awards to
non-executive employees. These options are exercisable at prices ranging from
$1.56 to $2.06 per share and expire in 2007.
Effective with their acceptance of employment with the Company in
October 1997, warrants to purchase 250,000 shares of Common Stock were issued to
non-executive employees. These warrants are exercisable at $1.875 per share and
expire on August 17, 2002.
Effective December 31, 1997, the Company issued 55,963 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 $87,442 and reduced accrued
compensation by the same amount.
(9) LITIGATION
On June 1, 1995, the Company filed a complaint for patent infringement
against Identix, Inc., of Sunnyvale, California, in the U.S. District Court for
the Northern District of California. The complaint alleges that Identix has
willfully and deliberately infringed a Company patent through the manufacture,
use and/or sale of competing products. The alleged infringement pertains to how
rolled fingerprint images are obtained optically and how they are mathematically
represented in storage. The Identix TP-600 and TP-900 devices are both alleged
to infringe on the Company patent. This
<PAGE>
DIGITAL BIOMETRICS, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
DECEMBER 31, 1997
(UNAUDITED)
(9) LITIGATION
technology is a fundamental aspect of the fingerprint capture task in forensic
quality live-scan. The complaint seeks, among other things, an injunction
prohibiting further infringement as well as unspecified monetary damages.
Identix has 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. In January 1997, the Company filed an appeal of
the court's decision of non-infringement. These appeals are decided by the
Federal Circuit which is a Court of Appeals in Washington D.C. On October 8,
1997, the appeal was argued before the Court. As of the date of this filing, no
appellate decision has been issued. Further, 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.
Except for the foregoing, there are no material lawsuits pending or, to
the Company's knowledge, threatened against the Company.
(10) JOINT VENTURE WITH GRAND CASINOS, INC.
On November 24, 1997, the Company entered into a letter of intent to
form a joint venture with Grand Casinos Inc. to further develop, test and market
the TRAK-21 automated player tracking system. It is anticipated that a
definitive agreement will be reached during the second quarter of fiscal 1998
with deployment of a system based on TRAK-21 technology in a Grand Casino
property also in 1998.
<PAGE>
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER DESCRIBED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE SELLING STOCKHOLDERS. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF OR SINCE THE DATE OF ANY DOCUMENTS INCORPORATED
HEREIN BY REFERENCE. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES
DESCRIBED IN THIS PROSPECTUS OR AN OFFER OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL.
---------------------
TABLE OF CONTENTS
---------------------
Page
Available Information.................................... 2
Prospectus Summary....................................... 3
Risk Factors............................................. 4
Use of Proceeds.......................................... 10
Market for the Registrant's Common Equity and
Related Stockholder Matters.............................. 11
Selected Financial Data.................................. 12
Capitalization........................................... 13
Management's Discussion And Analysis of Financial
Condition And Results of Operations...................... 14
Business................................................. 21
Management............................................... 28
Certain Transactions..................................... 31
Principal and Selling Stockholders....................... 32
Description of Capital Stock............................. 34
Plan of Distribution..................................... 37
Legal Matters............................................ 38
Experts.................................................. 38
Index to Consolidated Financial Statements............... F-1
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
3,771,429 SHARES
DIGITAL BIOMETRICS, INC.
COMMON STOCK
------------------------
PROSPECTUS
------------------------
_______________, 1998
- -------------------------------------------------------------------------------
<PAGE>
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS.
Exhibit
23.2 Independent Certified Public Accountants Report on Financial
Statement Schedule and consent of KPMG Peat Marwick LLP.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-1 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of Minneapolis, Minnesota on the 17th day of February
1998.
DIGITAL BIOMETRICS, INC.
By /s/ James C. Granger
-------------------------------------
James C. Granger
Chief Executive Officer and President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints James C. Granger and John J. Metil, or
either of them (with full power to act alone), as his true and lawful
attorneys-in-fact and agents, with full powers of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments (including post-effective amendments)
to this Registration Statement, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, full power and
authority to do and perform each and every act and thing requisite or necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated.
Signature Title Date
- --------- ----- ----
/s/ James C. Granger
- ------------------------
James C. Granger Chief Executive Officer, February 17, 1998
President and Director
(Principal Executive Officer)
/s/ John J. Metil
- ------------------------
John J. Metil Chief Operating Officer and February 17, 1998
Chief Financial Officer
*
- ------------------------
Stephen M. Slavin Director February 17, 1998
*
- ------------------------
George Latimer Director February 17, 1998
*
- ------------------------
C. McKenzie Lewis III Director February 17, 1998
*
- ------------------------
Jack A. Klingert Director February 17, 1998
*By: /s/ John J. Metil
- ------------------------
John J. Metil
Attorney-In-Fact
EXHIBIT 23.2
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT'S REPORT ON FINANCIAL STATEMENT
SCHEDULE AND CONSENT
The Board of Directors and Stockholders
Digital Biometrics, Inc.:
The audits referred to in our report dated November 21, 1997, except as
to note 14(a) which is as of November 24, 1997, and note 14(b) which is as of
December 1, 1997, included the related financial statement schedule as of
September 30, 1997 and for each of the years in the three-year period ended
September 30, 1997, included in the registration statement. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement schedule
based on our audits. In our opinion, such financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
We consent to the use of our reports included herein, and to the
references to our firm under the headings "Selected Financial Data" and
"Experts" in the Prospectus.
/s/KPMG Peat Marwick LLP
Minneapolis, Minnesota
February 19, 1998
