UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________________________ to ___________________
Commission File Number: 0-18856
DIGITAL BIOMETRICS, INC.
(Exact name of registrant as specified in its charter)
Delaware 41-1545069
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5600 Rowland Road, Minnetonka, Minnesota 55343
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(612) 932-0888
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days. [x] Yes [ ] No
Indicate the number of shares of each of the issuer's classes of common stock,
as of the latest practicable date.
Common Stock, $.01 par value July 31, 1998 - 12,993,530 shares
(Class) (Outstanding)
1
<PAGE>
DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED JUNE 30, 1998
INDEX
PART I - FINANCIAL INFORMATION:
PAGE
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
BALANCE SHEETS 4
STATEMENTS OF OPERATIONS 5
STATEMENTS OF CASH FLOWS 6
NOTES TO FINANCIAL STATEMENTS 7
ITEM 2. MANAGEMENT'S DISCUSSION AND 14
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
PART II - OTHER INFORMATION:
ITEM 1. LEGAL PROCEEDINGS 23
ITEM 2. CHANGES IN SECURITIES AND
USE OF PROCEEDS 24
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 24
ITEM 5. OTHER INFORMATION 24
ITEM 6. (a) EXHIBITS 25
(b) REPORTS ON FORM 8-K 25
SIGNATURES 26
EXHIBIT 11 STATEMENT RE: COMPUTATION OF LOSS 27
PER SHARE
EXHIBIT 27 FINANCIAL DATA SCHEDULE 28
TENPRINTER(R) and SQUID(R) 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.
2
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DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED JUNE 30, 1998
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Except for the historical information contained herein, the matters
discussed in this Form 10-Q include forward-looking statements made within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. As provided for under the Private Securities
Litigation Reform Act, the Company cautions investors that actual results of
future operations may differ from those anticipated in forward-looking
statements due to a number of factors, including the Company's ability to
achieve profitability, introduce new products and services, build profitable
revenue streams around new product and service offerings, maintain loyalty and
continued purchasing of the Company's products by existing customers, execute on
customer delivery and installation schedules, collect outstanding accounts
receivable and manage the concentration of credit and payment timing risks
particularly regarding large customers, create and maintain satisfactory
distribution and operations relationships with AFIS vendors, attract and retain
key employees, secure timely and cost-effective availability of product
components, meet increased competition, maintain adequate working capital and
liquidity, including the availability of financing as may be required, and
upgrade products and develop new technologies. For a more complete description
of such factors, see "Cautionary Statements" under Item 7 of the Company's Form
10-K report for the year ended September 30, 1997, filed December 23, 1997 with
the Securities and Exchange Commission.
3
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DIGITAL BIOMETRICS, INC.
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, September 30,
1998 1997
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,448,697 $ 1,891,397
Marketable securities (note 3) -- 154,808
Accounts receivable, less allowance for doubtful accounts of $240,647 and
$441,276, respectively 3,868,913 5,161,356
Inventory (note 4) 2,392,816 2,294,593
Prepaid expenses and other costs 203,450 163,594
------------ ------------
Total current assets 7,913,876 9,665,748
------------ ------------
Property and equipment 2,153,676 2,027,737
Less accumulated depreciation and amortization (1,253,008) (1,113,185)
------------ ------------
900,668 914,552
------------ ------------
Patents, trademarks, copyrights and licenses, net of accumulated amortization of
$263,430 and $156,171, respectively 39,537 118,938
Deferred issuance costs on convertible debentures, net of accumulated amortization of
$19,220 and $0, respectively (note 7) 84,927 --
------------ ------------
$ 8,939,008 $ 10,699,238
============ ============
Current liabilities:
Accounts payable $ 1,311,913 $ 1,451,779
Accrued salaries and commissions 322,605 265,707
Accrued warranty 375,060 584,676
Deferred revenue 866,429 677,925
Other accrued expenses (note 6) 695,131 553,903
------------ ------------
Total current liabilities 3,571,138 3,533,990
Convertible debentures (note 7) 977,573 --
------------ ------------
Total liabilities 4,548,711 3,533,990
------------ ------------
Stockholders' equity (note 8):
Common Stock, $.01 par value. Authorized, 40,000,000 shares; issued
and outstanding 12,993,530 and 12,361,038 shares, respectively 129,935 123,610
Additional paid-in capital 43,415,774 42,439,576
Unrealized losses on marketable securities (note 3) -- (1,639)
Deferred compensation (106,500) (73,500)
Accumulated deficit (39,048,912) (35,322,799)
------------ ------------
Total stockholders' equity 4,390,297 7,165,248
------------ ------------
$ 8,939,008 $ 10,699,238
============ ============
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
DIGITAL BIOMETRICS, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Identification systems $ 2,631,941 $ 1,889,894 $ 5,621,190 $ 6,862,651
Maintenance 691,359 422,630 1,890,899 1,213,860
Systems integration services 198,664 -- 309,820 --
------------ ------------ ------------ ------------
Total revenues 3,521,964 2,312,524 7,821,909 8,076,511
------------ ------------ ------------ ------------
Cost of revenues:
Identification systems 1,664,703 1,310,769 4,201,691 4,646,112
Maintenance 648,262 544,929 1,583,683 1,536,809
Systems integration services 132,302 -- 205,334 --
Non-recurring charges (note 11) -- 1,529,118 -- 1,529,118
------------ ------------ ------------ ------------
Total cost of revenues 2,445,267 3,384,816 5,990,708 7,712,039
------------ ------------ ------------ ------------
Gross margin 1,076,697 (1,072,292) 1,831,201 364,472
------------ ------------ ------------ ------------
Selling, general and administrative expenses:
Sales and marketing 518,452 498,019 1,415,045 1,730,447
Engineering and development 757,128 718,802 2,281,800 2,090,741
General and administrative 473,445 523,255 1,406,212 1,372,813
Non-recurring charges (note 11) -- 330,319 -- 330,319
------------ ------------ ------------ ------------
Total expenses 1,749,025 2,070,395 5,103,057 5,524,320
------------ ------------ ------------ ------------
Loss from operations (672,328) (3,142,687) (3,271,856) (5,159,848)
Other income (expense):
Interest income 15,262 70,870 35,409 240,124
Interest expense (note 7) (142,908) (31,494) (427,073) (242,689)
Other expense (note 10) (39,797) -- (62,593) (7,417)
------------ ------------ ------------ ------------
Total other income (expense) (167,443) 39,376 (454,257) (9,982)
------------ ------------ ------------ ------------
Net loss $ (839,771) $ (3,103,311) $ (3,726,113) $ (5,169,830)
============ ============ ============ ============
Net loss per common share $ (0.06) $ (0.25) $ (0.29) $ (0.45)
============ ============ ============ ============
Weighted average common shares outstanding 12,988,144 12,296,752 12,632,950 11,574,448
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
DIGITAL BIOMETRICS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(3,726,113) $(5,169,830)
Adjustments to reconcile net loss to net cash used in
operating activities:
Provision for doubtful accounts receivable 5,287 5,000
Deferred compensation amortization 42,939 27,000
Depreciation and amortization 391,820 445,118
Write-off of intangible assets 76,780 --
Loss on disposal of fixed assets 48,893 227,580
Loss from paydowns on marketable securities 1,315
Interest expense amortization for the
intrinsic value of the beneficial
conversion feature of convertible
debentures 375,000 --
Interest expense on debentures converted
into common stock 10,784 274,474
Changes in operating assets and liabilities:
Accounts receivable 1,287,156 575,336
Inventories (98,223) 1,331,125
Prepaid expenses (39,856) (119,372)
Accounts payable (139,866) (137,979)
Deferred revenue 188,504 54,152
Accrued expenses 21,452 262,311
----------- -----------
Net cash used in operating activities (1,554,128) (2,225,085)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (379,421) (114,950)
Patents, trademarks, copyrights and licenses (22,883) (25,738)
Proceeds from marketable securities 155,132 1,219,421
----------- -----------
Net cash provided by (used in) investing activities (247,172) 1,078,733
----------- -----------
Cash flows from financing activities:
Exercise of warrants and options 4,500 12,525
Issuance of convertible debentures, net 1,354,100 --
Net advances on line of credit -- 985,000
----------- -----------
Net cash provided by financing activities 1,358,600 997,525
----------- -----------
Decrease in cash and cash equivalents (442,700) (148,827)
Cash and cash equivalents at beginning of period 1,891,397 466,990
----------- -----------
Cash and cash equivalents at end of period $ 1,448,697 $ 318,163
=========== ===========
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
DIGITAL BIOMETRICS, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
(1) DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Digital Biometrics, Inc. (the "Company") is a provider of biometric
identification systems and systems integration services.
The Company's traditional, core business is as 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.
In addition, the Company has established a systems integration division
during the current fiscal year (the "Integrated Information Solutions Division"
or "IIS"), which is focused on the delivery of solutions to information systems
problems, including but not limited to identification problems, through
customized applications development and product integration. IIS is targeting
commercial and government markets.
Most of the Company's revenues in the first nine months of fiscal 1998
and fiscal 1997 came from live-scan systems sales, maintenance and applications
development services for the law enforcement market. The Company's current
financial results, and the near-term future results, thus may be expected to be
heavily influenced by the characteristics of 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 in this business 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 financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended September 30, 1997.
7
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DIGITAL BIOMETRICS, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998
(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 88% and 89%,
respectively, of customer accounts receivable at June 30, 1998 and September 30,
1997 were from government agencies, of which 53% and 39%, respectively, were
from a single customer. Revenues from two customers in the three-month period
ended June 30, 1998 accounted for 27% and 13% of total revenues, and revenues
from two customers in the three-month period ended June 30, 1997 accounted for
23% and 12% of total revenues. For the nine-month period ended June 30, 1998,
revenues from two customers accounted for 20% and 10% of total revenues.
Revenues from two customers during the nine-month period ended June 30, 1997
accounted for 23% and 18% of total revenues. Export revenues for the three-month
periods ended June 30, 1998 and 1997 were less 1% of total revenues. Export
revenues for the nine-month period ended June 30, 1998 were 12% as compared to
5% for the same period in 1997.
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:
Nine Months Ended
June 30,
1998 1997
------ --------
Cash paid during the period for interest $5,249 $162,803
====== ========
For supplemental disclosure of non-cash investing and financing activities see
notes 7 and 8.
NET LOSS PER COMMON SHARE
Net loss per common share is determined by dividing the net loss by the
weighted average number of shares of common stock 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.
8
<PAGE>
DIGITAL BIOMETRICS, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
(3) MARKETABLE SECURITIES
Marketable securities consist of collateralized mortgage-backed
securities. Net realized and unrealized gains and losses are determined on the
specific identification cost basis. There were no realized losses from sales of
marketable securities for the three-month periods ended June 30, 1998 or 1997.
Realized losses from paydowns of marketable securities were $1,000 for the
nine-month period ended June 30, 1998. 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:
June 30, September 30,
1998 1997
---------- ------------
Components and purchased subassemblies $ 982,319 $1,054,606
Work in process 1,175,282 699,097
Finished goods 235,215 540,890
---------- ------------
$2,392,816 $2,294,593
========== ==========
(5) LINES OF CREDIT
The Company has a receivables financing line of credit for the lesser
of eligible receivables or $1,000,000 with Norwest Business Credit. Borrowings
under this line of credit are secured by all assets of the Company. The line
bears interest at 4.5% above the prime rate (8.5% at June 30, 1998), is payable
upon demand and expires on September 30, 1998. There were no borrowings under
the line at June 30, 1998. The Company does not anticipate a renewal of the line
of credit upon expiration. The Company anticipates that a similar line of credit
or other financing will be required in fiscal 1999 to meet working capital
requirements. The Company is pursuing the establishment of a line of credit with
other lenders, although it has no commitment for such financing as of this date.
(6) OTHER ACCRUED EXPENSES
Other accrued expenses consist of:
June 30, September 30,
1998 1997
-------- --------
Accrued vacation $144,983 121,994
Accrued installation costs 208,545 97,750
Other accrued expenses 341,603 334,159
-------- --------
$695,131 $553,903
======== ========
9
<PAGE>
DIGITAL BIOMETRICS, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
(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 Subordinated
Debentures ("Debentures") in tranches of $500,000 each. The first tranche was
sold on December 1, 1997 (the "Tranche 1 Debentures"). 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 Tranche 1 Debentures sold in the
amount of $500,000 on December 1, 1997 were 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 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 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 written off to
interest expense over the term of the Tranche 1 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 over the vesting period of the conversion
feature. The intrinsic value of the conversion feature of the Tranche 1
Debenture was $125,000. Net proceeds to the Company are being used for working
capital, business development and other general corporate purposes.
10
<PAGE>
DIGITAL BIOMETRICS, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
(7) 8% CONVERTIBLE SUBORDINATED DEBENTURES (CONTINUED)
The second $500,000 tranche (the "Tranche 2 Debentures") was sold on
March 11, 1998. The Company paid $40,000 of fees to an investment-banking firm
in connection with the transaction. The intrinsic value of the conversion
feature of the Tranche 2 Debentures was $125,000 which resulted in a non-cash
interest expense charge to earnings. The Tranche 2 Debentures are convertible
into common stock of the Company at the lesser of $1.36 per share ("Tranche 2
Initial Conversion Price") or 80% of the average price of the Company's Common
Stock for the five trading days immediately preceding the conversion date. Per
the terms of the Purchase Agreement, the Company issued to the purchaser a
warrant to purchase 15,000 shares of common stock exercisable at $2.50 per
share.
The third $500,000 tranche (the "Tranche 3 Debentures") was sold on
June 12, 1998. The Company paid $40,000 of fees to an investment-banking firm in
connection with the transaction. The intrinsic value of the conversion feature
of the Tranche 3 Debentures was $125,000 which resulted in a non-cash interest
expense charge to earnings during the three-month period ended June 30, 1998
since there was immediate vesting of the conversion feature. The Tranche 3
Debentures are convertible into common stock of the Company at the lesser of
$2.23 per share ("Tranche 3 Initial Conversion Price") or 80% of the average
price of the Company's Common Stock for the five trading days immediately
preceding the conversion date. Per the terms of the Purchase Agreement, the
Company issued to the purchaser a warrant to purchase 15,000 shares of common
stock exercisable at $2.50 per share.
For the nine-month period ended June 30, 1998, the Company issued an
aggregate of 527,225 shares of common stock for the conversion of principal
aggregating $500,000 of the Tranche 1 Debentures plus $10,784 of accrued
interest at an average conversion price of $0.97 per share.
(8) STOCKHOLDERS' EQUITY
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.
Effective February 10, 1998, the Company granted 3,000 shares of
restricted common stock to one of its non-employee directors. The grant resulted
in $3,939 in additional common stock issued and an equal amount of compensation
expense.
11
<PAGE>
DIGITAL BIOMETRICS, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
(8) STOCKHOLDERS' EQUITY (CONTINUED)
During the nine-month period ended June 30, 1998, the Company granted
options to acquire an aggregate of 922,500 shares of the Company's common stock
pursuant to discretionary stock option awards to employees. These options are
exercisable at prices ranging from $1.31 to $2.56 per share and expire between
the years 2005 and 2008.
During the nine-month period ended June 30, 1998, the Company issued
527,225 shares of common stock for the conversion of principal aggregating
$500,000 of the 8% Convertible Subordinated Debentures plus $10,784 of accrued
interest.
Effective with their election at the annual stockholders' meeting held
on April 8, 1998, the Company granted an aggregate of 44,304 shares of
restricted common stock to its non-employee directors. The grant resulted in
$72,000 in additional common stock issued and an equal amount of deferred
compensation expense which is being amortized on a straight-line basis over the
three-year restricted period. Also effective with their election, the Company
granted options to acquire an aggregate of 60,000 shares of the Company's common
stock to its non-employee directors. These options are exercisable at $1.625 per
share and expire in 2003.
Effective April 8, 1998, the Company adopted the 1998 Stock Option Plan
(the "1998 Plan"). The 1998 Plan allows for the grant of options to acquire an
aggregate of 600,000 shares of common stock. Participants eligible to receive
options under the 1998 Plan include employees, officers, directors, consultants
and advisors of the Company or of any subsidiary or affiliated entity subject to
the provisions of the 1998 Plan.
On April 8, 1998, the shareholders approved an amendment to the
Certificate of Incorporation of the Company for an increase in the number of
shares of common stock authorized from 20,000,000 to 40,000,000.
(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 alleged that Identix
willfully and deliberately infringed a Company patent through the manufacture,
use and sale of competing products.
12
<PAGE>
DIGITAL BIOMETRICS, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
(9) LITIGATION (CONTINUED)
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 to the United States Court of Appeals
for the Federal Circuit in Washington, D. C. On October 8, 1997, the appeal was
argued before the Court. On July 2, 1998, the U.S. Court of Appeals upheld the
earlier ruling of the Federal District Court that Identix Inc. has not infringed
on the Company's patents. The Company anticipates no further charges for legal
or other expenses related to the disposition of this suit.
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 March 16, 1998, the Company signed a definitive agreement with Grand
Casinos, Inc. forming a new joint venture company to further develop, test and
market the TRAK-21 automated player tracking system. Deployment of a system
based on TRAK-21 technology in a Grand Casinos property is anticipated in fiscal
1998. The Company's initial membership interest in the joint venture is 51%. The
Company has adopted the equity method in accounting for the investment. For the
nine-month period ended June 30, 1998, the Company's recorded loss from the
joint venture is limited to the carrying amount of its investment of $13,700 and
has been recorded as "Other expense" in the Statements of Operations.
(11) NON-RECURRING CHARGES
Non-recurring charges of $1,859,000 were recorded during the
three-month period ended June 30, 1997. Of this amount, $1,529,000 was charged
to cost of sales and includes $838,000 of inventory adjustments for technical
obsolescence, $524,000 of warranty reserve funding for warranty items mainly
associated with the introduction and rollout of the S-Series which were
quantified during the quarter, $132,000 for estimated committed losses on
maintenance contracts, and $35,000 for the write-off of tooling. Non-recurring
charges to operating expenses were $330,000 and include the write-off of assets
with no future value, and to a lesser extent, equipment disposals.
The net loss per share for the three- and nine-month periods ended June
30, 1997, were negatively impacted by $0.15 and $0.16, respectively, with these
non-recurring charges.
13
<PAGE>
DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED JUNE 30, 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company is a developer, assembler, marketer and integrator of
computer-based products and services for the identification of individuals, and,
through its recently-formed Integrated Information Solutions Division, offers
systems integration services to commercial and governmental clients. Most of the
Company's revenues 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.
Systems integration services revenues are recognized using the
percentage of completion method or on a time-and-materials basis.
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
Total revenues were $3,522,000 for the three months ended June 30, 1998
compared with $2,313,000 for the same prior-year period. Identification system
product revenues were $2,632,000 compared with $1,890,000 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 June 30, 1998.
14
<PAGE>
DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED JUNE 30, 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
Maintenance revenues were $691,000 for the three months ended June 30,
1998 compared with $423,000 for the same prior-year period, an increase of 64%.
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.
Systems integration revenues were $199,000 for the three months ended
June 30, 1998. There were no integration service revenues for the same
prior-year period. Systems integration revenues were generated from the
Company's Integrated Information Solutions Division, which began operations
during the first quarter of fiscal 1998.
For the three-month period ended June 30, 1998, revenues from two
customers accounted for approximately 27% and 13% of total revenues. Revenues
from two customers during the three months ended June 30, 1997 accounted for
approximately 23% and 12% of total revenues. Export revenues for the three-month
periods ended June 30, 1998 and 1997 were less than 1% of total revenues.
Overall gross margins for the three months ended June 30, 1998 were 31%
as compared with negative 46% of total revenues for the same prior-year period.
Overall gross margins were negatively impacted by 66% during the prior-year
three-month period due to non-recurring charges to cost of sales of $1,529,000.
These charges included $838,000 of inventory adjustments for technical
obsolescence, $524,000 for 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 margins on identification system sales were 37% for the three
months ended June 30, 1998 compared with 31% in the same prior-year period. This
increase is due to higher sales volume and production levels during the
current-year period.
Maintenance margins for the three months ended June 30, 1998 and 1997
were 6% and negative 29%, respectively, of maintenance revenues. The substantial
improvement in maintenance margins is due mainly to the favorable impact of
higher revenues and initiatives to reduce cost and improve efficiency.
Systems integration margins for the three months ended June 30, 1998
were 33% of systems integration revenues. As indicated above, systems
integration revenues were generated from the Integrated Information Solutions
Division, which began operations during the first quarter of fiscal 1998.
15
<PAGE>
DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED JUNE 30, 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Sales and marketing expenses for the three-month periods ended June 30,
1998 were $518,000 (15% of total revenues) as compared to $498,000 (22% of total
revenues) for the same prior-year period. The decrease in sales and marketing
costs as a percent of total revenues is due primarily to higher revenues during
the current-year period. Engineering and development expenses were $757,000 (21%
of total revenues) for the three-month period ended June 30, 1998 compared to
$719,000 (31% of total revenues) for the same period a year ago. The decrease in
engineering and development costs as a percent of total revenues is due
primarily to higher revenues during the current-year period. Engineering and
development expenses increased $38,000 during the current-year period compared
to the same prior-year period due primarily to $198,000 for personnel-related
costs associated with the newly established Integrated Information Solutions
Division, partially offset by $40,000 of reduced development costs for the
TRAK-21 product as a result of the joint venture with Grand Casinos, Inc. and
allocations to product costs. General and administrative expenses for the
three-month period ended June 30, 1998 were $473,000 (13% of total revenues) as
compared to $523,000 (23% of total revenues) during the same prior-year period.
This decrease is due primarily to $58,000 of lower legal costs related to a
patent infringement suit.
Operating expenses during the three-month period ended June 30, 1997
included non-recurring charges of $330,000 for the write-off of assets with no
future value, and to a lesser extent, equipment disposals.
Interest income decreased to $15,000 for the three months ended June
30, 1998 from $71,000 for the same period in 1997 due to lower balances of cash
and marketable securities.
Interest expense increased to $143,000 for the three months ended June
30, 1998 from $31,000 for the same prior-year period, primarily due to a
non-cash charge during the three-month period ended June 30, 1998 of $125,000
for the intrinsic value of the beneficial conversion feature of convertible
debentures issued during fiscal 1998, partially offset by lower borrowings under
lines of credit during the current-year period.
The Company incurred a net loss for the three-month period ended June
30, 1998 of $840,000 ($0.06 per share) as compared with $3,103,000 ($0.25 per
share) for the same prior-year period.
16
<PAGE>
DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED JUNE 30, 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
NINE MONTHS ENDED JUNE 30, 1998 COMPARED TO NINE MONTHS ENDED JUNE 30, 1997
Total revenues were $7,822,000 for the nine months ended June 30, 1998
compared with $8,077,000 for the same prior-year period. Identification system
product revenues were $5,621,000 compared with $6,863,000 in the same prior-year
period. The decrease is due primarily to a decrease in the number of TENPRINTER
systems sold during the nine months ended June 30, 1998.
Maintenance revenues were $1,891,000 for the nine months ended June 30,
1998 compared with $1,214,000 for the same prior-year period, an increase of
56%. 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.
Systems integration revenues were $310,000 for the nine months ended
June 30, 1998. There were no systems integration revenues for the same
prior-year period. Systems integration revenues were generated from the
Company's Integrated Information Solutions Division which began operations
during the first quarter of fiscal 1998.
For the nine-month period ended June 30, 1998, revenues from two
customers accounted for approximately 20% and 10% of total revenues. Revenues
from two customers during the nine months ended June 30, 1997 accounted for
approximately 23% and 18% of total revenues. Export revenues for the nine-month
period ended June 30, 1998 were 12% of total revenues compared to 5% during the
same prior-year period.
Overall gross margins for the nine months ended June 30, 1998 were 23%
as compared with 5% of total revenues for the same prior-year period. Overall
gross margins were negatively impacted by 19% during the prior-year three-month
period due to non-recurring charges to cost of sales of $1,529,000. These
charges included $838,000 of inventory adjustments for technical obsolescence,
$524,000 for 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 margins on identification system sales were 25% for the nine
months ended June 30, 1998 compared with 32% in the same prior-year period. This
decrease is due to lower sales and production volume, higher engineering product
support costs and higher warranty and installation accruals than in the
prior-year period.
Maintenance margins for the nine months ended June 30, 1998 and 1997
were 16% and negative 27%, respectively, of maintenance revenues. The
substantial improvement in maintenance margins is due mainly to the favorable
impact of higher revenues and initiatives to reduce cost and improve efficiency.
17
<PAGE>
DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED JUNE 30, 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Systems integration margins for the nine months ended June 30, 1998
were 34% of systems integration revenues. As indicated above, systems
integration revenues were generated from the Integrated Information Solutions
Division, which began operations during the first quarter of fiscal 1998.
Sales and marketing expenses for the nine-month period ended June 30,
1998 were $1,415,000 (18% of total revenues) as compared to $1,730,000 (21% of
total revenues) for the same prior-year period. This $315,000 decrease in sales
and marketing costs was due primarily to $262,000 of reduced introductory
S-Series promotional costs and $110,000 of reduced demonstration equipment
costs, partially offset by $85,000 of higher costs for international marketing
and $24,000 of royalty costs on international shipments. Engineering and
development expenses were $2,282,000 (29% of total revenues) for the nine-month
period ended June 30, 1998compared to $2,091,000 (26% of total revenues) for the
same period a year ago. This increase is due primarily to $660,000 for
additional personnel-related costs and setup costs associated with the newly
established Integrated Information Solutions Division and $59,000 of increased
amortization and write-offs of intangible assets, partially offset by $208,000
of reduced development costs for the TRAK-21 product as a result of the joint
venture with Grand Casinos, Inc. and approximately $300,000 of additional
allocations to product costs. General and administrative expenses for the
nine-month period ended June 30, 1998 were $1,406,000 (18% of total revenues)
compared to $1,373,000 (17% of total revenues). This increase is due primarily
to increased general operating costs, $40,000 of increased personnel-related
costs for severance paid to a former executive, partially offset by $106,000 of
lower legal costs related to a patent infringement suit.
Operating expenses during the nine-month period ended June 30, 1997
included non-recurring charges of $330,000 for the write-off of assets with no
future value, and to a lesser extent, equipment disposals.
Interest income decreased to $35,000 for the nine months ended June 30,
1998 from $240,000 for the same period in 1997 due to lower balances of cash and
marketable securities.
Interest expense increased to $427,000 for the nine months ended June
30, 1998 from $243,000 for the same prior-year period, primarily due to non-cash
charges during the nine-month period June 30, 1998 of $375,000 for the intrinsic
value of the beneficial conversion feature of convertible debentures issued
during fiscal 1998, partially offset by lower interest charges from lower
borrowings under lines of credit during the current-year period.
Other expense increased to $63,000 for the three months ended June 30,
1998 from $7,000 for the same prior-year period, due to $42,000 of loss on
disposal of fixed assets and $14,000 of loss recorded from the TRAK-21 joint
venture.
INFLATION
The Company does not believe inflation has significantly impacted
revenues or expenses.
18
<PAGE>
DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED JUNE 30, 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
NET OPERATING LOSS CARRYFORWARDS
At June 30, 1998, the Company had carryforwards of net operating losses
of approximately $34,500,000 that may allow the Company to reduce future income
taxes that would otherwise be payable. Of this amount approximately $2,200,000
relates to compensation associated with the exercise of non-qualified stock
options which, when realized, would result in approximately $880,000 credited to
additional paid-in capital. The carryforwards expire annually beginning in 1999.
The annual limitation on use of net operating losses is calculated by
multiplying the value of the corporation immediately prior to the change in
ownership by the 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 June
30, 1998 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 $30,800,000 which were incurred
subsequent to the change of ownership are not limited. However, any future
ownership change could create a limitation with respect to these loss
carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
For the period from the Company's inception in 1985 through June 30,
1998, the Company's cumulative deficit was $39,049,000. 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.
The Company has a receivables financing line of credit for the lesser
of eligible receivables or $1,000,000 with Norwest Business Credit. Borrowings
under this line of credit are secured by all assets of the Company. The line
bears interest at 4.5% above the prime rate (8.5% at June 30, 1998), is payable
upon demand and expires in September 1998. There were no borrowings under the
line at June 30, 1998. The Company does not anticipate a renewal of the line of
credit upon expiration. The Company anticipates that a similar line of credit or
other financing will be required in fiscal 1999 to meet working capital
requirements. The Company is pursuing the establishment of a line of credit with
other lenders, although it has no commitment for such financing as of this date.
19
<PAGE>
DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED JUNE 30, 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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 (the "Debentures") in tranches of $500,000 each. The first tranche
was sold on December 1, 1997 (the "Tranche 1 Debentures"). 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 Tranche 1
Debentures sold in the amount of $500,000 on December 1, 1997 was 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 conversion, at a price equal to the
sum of 120% of the aggregate principal amount of the 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 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 written
off to interest expense over the term of the Tranche 1 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 over the vesting period of the conversion
feature. The intrinsic value of the conversion feature of the Tranche 1
Debentures was $125,000. Net proceeds to the Company are being used for working
capital, the development of new business opportunities, and other general
corporate purposes.
20
<PAGE>
DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED JUNE 30, 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The second $500,000 tranche was sold on March 11, 1998 (the "Tranche 2
Debentures"). The Company paid $40,000 of fees to an investment-banking firm in
connection with the transaction. The intrinsic value of the conversion feature
of the Tranche 2 Debentures was $125,000 and resulted in a non-cash interest
expense charge to earnings. The Tranche 2 Debentures are convertible into common
stock of the Company at the lesser of $1.36 per share or 80% of the average
price of the Company's Common Stock for the five trading days immediately
preceding the conversion date. Per the terms of the Purchase Agreement, the
Company issued to the purchaser a warrant to purchase 15,000 shares of Common
Stock exercisable at $2.50 per share.
The third $500,000 tranche (the "Tranche 3 Debentures") was sold on
June 12, 1998. The Company paid $40,000 of fees to an investment-banking firm in
connection with the transaction. The intrinsic value of the conversion feature
of the Tranche 3 Debentures was $125,000 which resulted in a non-cash interest
expense charge to earnings during the three-month period ended June 30, 1998.
The Tranche 3 Debentures are convertible into common stock of the Company at the
lesser of $2.23 per share or 80% of the average price of the Company's Common
Stock for the five trading days immediately preceding the conversion date. Per
the terms of the Purchase Agreement, the Company issued to the purchaser a
warrant to purchase 15,000 shares of common stock exercisable at $2.50 per
share.
ANALYSIS OF CASH FLOWS FROM OPERATIONS
Net cash used in operating activities was $1,554,000 for the nine
months ended June 30, 1998 compared with $2,225,000 for the same prior-year
period. The decrease in cash used in operating activities was primarily a result
of a decrease in net loss for the current-year period, partially offset by
changes in operating assets and liabilities. Cash flows from changes in
operating assets and liabilities changed from cash provided of $472,000 in the
prior-year period, excluding the effect of non-recurring charges, to cash
provided of $1,219,000 in the nine-month period ended June 30, 1998. This
$747,000 increase in cash flow from operating assets and liabilities resulted
primarily from improved collections of receivables during the current-year
period.
Net cash used in investing activities was $247,000 for the nine months
ended June 30, 1998 as compared with net cash provided by investing activities
of $1,079,000 in the same prior-year period. The change was primarily due to a
decrease in proceeds from sales of marketable securities, and to a lesser
extent, increased capital expenditures during the nine months ended June 30,
1998 to support establishment of the IIS Division.
Net cash provided by financing activities was $1,359,000 during the
nine months ended June 30, 1998, as compared to $998,000 during the same
prior-year period. This increase is due primarily to $1,354,000 from the
issuance of 8% Convertible Subordinated Debentures during the current-year as
noted above and in Note 7, partially offset by the absence of borrowings under
lines of credit at June 30, 1998 as compared to $985,000 of borrowings the prior
year.
21
<PAGE>
DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED JUNE 30, 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
At June 30, 1998, the Company had $1,449,000 in cash and cash
equivalents. Management believes that cash and cash equivalents, together with
available financing sources, are sufficient to meet current operating
requirements. The Company anticipates that a line of credit or other financing
will be required in fiscal 1999 to meet working capital requirements. The
Company is pursuing the establishment of a line of credit with other lenders,
although it has no commitment for such financing as of this date.
22
<PAGE>
DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED JUNE 30, 1998
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 1, 1995, the Company filed a complaint for
patent infringement against Identix, Inc., of Sunnyvale,
California, in the U.S. District Court for the Northern
District of California. The complaint alleged that Identix
willfully and deliberately infringed a Company patent through
the manufacture, use and sale of competing products.
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 to the United States Court of Appeals for the
Federal Circuit in Washington, D. C. On October 8, 1997, the
appeal was argued before the Court. On July 2, 1998, the U.S.
Court of Appeals upheld the earlier ruling of the Federal
District Court that Identix Inc. has not infringed on the
Company's patents. The Company anticipates no further charges
for legal or other expenses related to the disposition of this
suit.
Except for the foregoing, there are no material
lawsuits pending or, to the Company's knowledge, threatened
against the Company.
23
<PAGE>
DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED JUNE 30, 1998
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) On June 12, the Company sold (i) $500,000 principal amount
of 8% Convertible Subordinated Debentures, (the "Tranche 3
Debentures"), due December 1, 2000; and (ii) a Warrant dated
June 12, 1998, (the "Tranche 3 KA Warrant") for the purchase
of 15,000 shares of the Company's common stock. The Tranche 3
Debenture and Tranche 3 KA Warrant were issued to KA
Investments LDC, an accredited investor, in a private
placement transaction, in reliance upon Section 4(2) under the
Securities Act of 1933, as amended (the "Act"). No public
offering or general solicitation of investors was involved in
connection with the transaction. In connection with the
transaction, the Company employed the services of Miller,
Johnson & Kuehn, Incorporated ("MJK"), an investment banking
firm, as placement agent, and paid MJK commissions of $40,000.
The Tranche 3 Debentures are convertible into common stock of
the Company at the lesser of $2.23 per share ("Tranche 3
Initial Conversion Price") or 80% of the average price of the
Company's Common Stock for the five trading days immediately
preceding the conversion date. The Tranche 3 KA Warrant is
exercisable at $2.50 per share. Net proceeds to the Company
are being used for working capital, the development of new
business opportunities, and other general corporate purposes.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders
on April 8, 1998. Proxies for such meeting were solicited
pursuant to Regulation 14A under the Securities Exchange Act
of 1934 as amended. At the meeting, sufficient favorable votes
were cast to approve each of the following of management's
proposals:
* Adopt an Amendment to the Certificate of Incorporation of
the Company for an increase in the number of shares of
common stock authorized from 20,000,000 to 40,000,000. The
results of the vote on this proposal were 10,752,999
shares voted for approval; 605,441 shares voted against;
81,115 shares abstaining and no broker non-votes.
* Adopt the Company's 1998 Stock Option Plan and reserve
600,000 shares of common stock for which options may be
granted. The results of the vote on this proposal were
10,297,293 shares voted for approval; 639,042 shares voted
against; 138,680 shares abstaining and 364,540 broker
non-votes.
ITEM 5. OTHER INFORMATION
None
24
<PAGE>
DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED JUNE 30, 1998
PART II - OTHER INFORMATION (CONTINUED)
ITEM 6. (a) EXHIBITS
Exhibit 11 Statement re: Computation of loss per share
Exhibit 27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed by the Company
during the three-month period ended June 30, 1998.
25
<PAGE>
DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED JUNE 30, 1998
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIGITAL BIOMETRICS, INC.
(Registrant)
August 13, 1998 s/John J. Metil
--------------------------------
John J. Metil
Chief Operating Officer and Chief Financial Officer
26
EXHIBIT 11.0
DIGITAL BIOMETRICS, INC.
STATEMENT RE: COMPUTATION OF LOSS PER SHARE
The per share computations are based on the weighted average number of common
shares outstanding during the periods.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------------ ------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Shares outstanding at beginning of period 12,947,226 12,060,122 12,361,038 10,777,288
Shares issued under retirement plan -- -- 55,963 41,798
Restricted stock awards, net of forfeitures 44,304 -- 47,304 19,072
Exercise of options and warrants 2,000 7,500 2,000 7,500
Shares issued from debenture and related interest
conversion -- 263,916 527,225 1,485,880
------------ ------------ ------------ ------------
Shares outstanding at end of period 12,993,530 12,331,538 12,993,530 12,331,538
============ ============ ============ ============
Weighted average shares outstanding (A) 12,988,144 12,296,752 12,632,950 11,574,448
============ ============ ============ ============
Net loss $ (839,771) $ (3,103,311) $ (3,726,113) $ (5,169,830)
============ ============ ============ ============
Basic loss per common share $ (0.06) $ (0.25) $ (0.29) $ (0.45)
============ ============ ============ ============
</TABLE>
(A) Stock options and other common share equivalents are not included in the
calculation of the net loss per common share for the three- and nine-month
periods ended June 30, 1998 and 1997 as their effect is antidilutive.
27
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000868373
<NAME> DIGITAL BIOMETRICS, INC.
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
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0
0
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</TABLE>
