UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 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 April 30, 1998 - 12,991,530 shares
---------------------------- ----------------------------------
(Class) (Outstanding)
<PAGE>
DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED MARCH 31, 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 13
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
PART II - OTHER INFORMATION:
ITEM 1. LEGAL PROCEEDINGS 20
ITEM 2. CHANGES IN SECURITIES AND
USE OF PROCEEDS 20
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 21
ITEM 5. OTHER INFORMATION 22
ITEM 6. (a) EXHIBITS 22
(b) REPORTS ON FORM 8-K 22
SIGNATURES 23
EXHIBIT 3 AMENDMENT TO CERTIFICATE OF 24
INCORPORATION RELATING TO INCREASE OF
AUTHORIZED COMMON STOCK
EXHIBIT 10 1998 STOCK OPTION PLAN 25
EXHIBIT 11 STATEMENT RE: COMPUTATION OF LOSS 26
PER SHARE
EXHIBIT 27 FINANCIAL DATA SCHEDULE 27
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.
<PAGE>
DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED MARCH 31, 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 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.
<PAGE>
DIGITAL BIOMETRICS, INC.
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, September 30,
1998 1997
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,327,846 $ 1,891,397
Marketable securities (note 3) -- 154,808
Accounts receivable, less allowance for doubtful accounts of $383,583 and
$441,276, respectively 3,741,744 5,161,356
Inventory (note 4) 2,654,483 2,294,593
Prepaid expenses and other costs 67,764 163,594
------------ ------------
Total current assets 7,791,837 9,665,748
------------ ------------
Property and equipment 2,199,838 2,027,737
Less accumulated depreciation and amortization (1,296,305) (1,113,185)
------------ ------------
903,533 914,552
------------ ------------
Patents, trademarks, copyrights and licenses, net of accumulated amortization of
$263,430 and $156,171, respectively 41,027 118,938
Deferred issuance costs on convertible debentures, net of accumulated amortization of
$14,629 and $0, respectively (note 7) 44,218 --
------------ ------------
$ 8,780,615 $ 10,699,238
============ ============
Current liabilities:
Accounts payable $ 1,105,509 $ 1,451,779
Accrued salaries and commissions 271,116 265,707
Accrued warranty 416,050 584,676
Deferred revenue 838,051 677,925
Other accrued expenses (note 6) 588,079 553,903
------------ ------------
Total current liabilities 3,218,805 3,533,990
Convertible debentures (note 7) 488,242 --
------------ ------------
Total liabilities 3,707,047 3,533,990
------------ ------------
Stockholders' equity (note 8):
Common Stock, $.01 par value. Authorized, 20,000,000 shares; issued
and outstanding 12,947,226 and 12,361,038 shares, respectively 129,472 123,610
Additional paid-in capital 43,202,737 42,439,576
Unrealized losses on marketable securities (note 3) -- (1,639)
Deferred compensation (49,500) (73,500)
Accumulated deficit (38,209,141) (35,322,799)
------------ ------------
Total stockholders' equity 5,073,568 7,165,248
------------ ------------
$ 8,780,615 $ 10,699,238
============ ============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
DIGITAL BIOMETRICS, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Identification systems $ 1,299,000 $ 3,356,443 $ 2,989,249 $ 4,972,757
Maintenance 617,649 392,071 1,199,540 791,230
Systems integration services 111,156 -- 111,156 --
------------ ------------ ------------ ------------
Total revenues 2,027,805 3,748,514 4,299,945 5,763,987
------------ ------------ ------------ ------------
Cost of revenues:
Identification systems 1,106,440 2,486,646 2,536,988 3,335,343
Maintenance 550,920 434,936 935,421 991,880
Systems integration services 73,032 -- 73,032 --
------------ ------------ ------------ ------------
Total cost of revenues 1,730,392 2,921,582 3,545,441 4,327,223
------------ ------------ ------------ ------------
Gross margin 297,413 826,932 754,504 1,436,764
------------ ------------ ------------ ------------
Selling, general and administrative expenses:
Sales and marketing 380,092 706,459 896,593 1,232,428
Engineering and development 824,380 633,766 1,524,672 1,371,939
General and administrative 455,201 430,920 932,767 849,558
------------ ------------ ------------ ------------
Total expenses 1,659,673 1,771,145 3,354,032 3,453,925
------------ ------------ ------------ ------------
Loss from operations (1,362,260) (944,213) (2,599,528) (2,017,161)
Other income (expense):
Interest income 8,142 82,320 20,147 169,254
Interest expense (note 7) (190,095) (104,579) (284,165) (211,195)
Other expense (note 10) (18,129) (7,417) (22,796) (7,417)
------------ ------------ ------------ ------------
Total other income (expense) (200,082) (29,676) (286,814) (49,358)
------------ ------------ ------------ ------------
Net loss $ (1,562,342) $ (973,889) $ (2,886,342) $ (2,066,519)
============ ============ ============ ============
Net loss per common share $ (0.12) $ (0.08) $ (0.23) $ (0.18)
============ ============ ============ ============
Weighted average common shares outstanding 12,551,141 11,571,802 12,455,352 11,213,297
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
DIGITAL BIOMETRICS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
March 31,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,886,342) $(2,066,519)
Adjustments to reconcile net loss to net cash used in
operating activities:
Provision for doubtful accounts receivable 5,287 5,000
Deferred compensation amortization 27,937 13,500
Depreciation and amortization 256,143 302,021
Write-off of intangible assets 76,780 --
Loss on disposal of fixed assets 12,613 7,417
Loss from paydowns on marketable securities 1,315
Interest expense amortization for the
intrinsic value of the beneficial
conversion feature of convertible
debentures 250,000 --
Interest expense on debentures converted
into common stock 10,784 212,701
Changes in operating assets and liabilities:
Accounts receivable 1,414,325 (260,215)
Inventories (359,889) 451,867
Prepaid expenses 95,830 (55,172)
Accounts payable (346,270) (320,559)
Deferred revenue 160,126 298,054
Accrued expenses (96,099) (470,981)
----------- -----------
Net cash used in operating activities (1,377,460) (1,882,886)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (220,638) (99,804)
Patents, trademarks, copyrights and licenses (19,985) (20,028)
Proceeds from marketable securities 155,132 752,892
----------- -----------
Net cash provided by (used in) investing activities (85,491) 633,060
----------- -----------
Cash flows from financing activities:
Issuance of convertible debentures, net 899,400 --
Net advances on line of credit -- 1,177,598
----------- -----------
Net cash provided by financing activities 899,400 1,177,598
----------- -----------
Decrease in cash and cash equivalents (563,551) (72,228)
Cash and cash equivalents at beginning of period 1,891,397 466,990
----------- -----------
Cash and cash equivalents at end of period $ 1,327,846 $ 394,762
=========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
DIGITAL BIOMETRICS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
(1) DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
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(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 division (the
"Integrated Identification Solutions Division" or "IIS"), which is focused on
the delivery of solutions to identification problems and other information
systems problems through customized applications development and product
integration for commercial and government markets. Most of the Company's
revenues in the first six 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 financial statements and footnotes thereto
included in the Company's annual report on Form 10-K for the year ended
September 30, 1997.
<PAGE>
DIGITAL BIOMETRICS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 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 67%
and 89%, respectively, of customer accounts receivable at March 31, 1998 and
September 30, 1997 were from government agencies, of which 61% and 39%,
respectively, were from a single customer. Revenues from two customers in the
three-month period ended March 31, 1998 accounted for 24% and 11% of total
revenues, and revenues from three customers in the three-month period ended
March 31, 1997 accounted for 47%, 22% and 11% of total revenues. For the
six-month period ended March 31, 1998, revenues from two customers accounted for
18% and 14% of total revenues. Revenues from two customers during the six-month
period ended March 31, 1997 accounted for 30% and 20% of total revenues. Export
revenues for the three-month period ended March 31, 1998 were 10% of total
revenues as compared to 11% for the same period in 1997. Export revenues for the
six-month period ended March 31, 1998 were 21% as compared to 7% 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:
Six Months Ended
March 31,
1998 1997
-------- --------
Cash paid during the period for interest $ 5,208 $104,937
======== ========
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.
<PAGE>
DIGITAL BIOMETRICS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
(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. There were no realized
losses from sales of marketable securities for the three-month periods ended
March 31, 1998 or 1997. Realized losses from paydowns of marketable securities
were $1,000 for the six-month period ended march 31, 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:
March 31, September 30,
1998 1997
----------- -----------
Components and purchased subassemblies $ 1,052,217 $ 1,054,606
Work in process 1,237,486 699,097
Finished goods 364,780 540,890
----------- -----------
$ 2,654,483 $ 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 March 31, 1998),
is payable upon demand and expires on May 31, 1998. There were no borrowings
under the line at March 31, 1998. The Company anticipates renewal of the line
upon expiration.
(6) OTHER ACCRUED EXPENSES
Other accrued expenses consist of:
March 31, September 30,
1998 1997
----------- -----------
Accrued vacation $ 127,298 121,994
Accrued installation costs 139,650 97,750
Other accrued expenses 321,131 334,159
----------- -----------
$ 588,079 $ 553,903
=========== ===========
<PAGE>
DIGITAL BIOMETRICS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 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.
<PAGE>
DIGITAL BIOMETRICS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
(7) 8% CONVERTIBLE SUBORDINATED DEBENTURES (CONTINUED)
The second $500,000 tranche (the "Tranche 2 Debentures") was sold on
March 11, 1998. 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 during the three-month period ended March 31, 1998 since there was
immediate vesting of the conversion feature. 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.
On March 9 and 10, 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.
During the three-month period ended March 31, 1998, the Company
granted options to acquire 112,000 shares of the Company's common stock 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.
During the three-month period ended March 31, 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 April 8, 1998, the Company adopted the 1998 Stock Option
Plan (the "1998 Plan"). Six hundred thousand (600,000) shares of option stock
are reserved and available under the 1998 Plan. 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.
<PAGE>
DIGITAL BIOMETRICS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
(8) STOCKHOLDERS' EQUITY (CONTINUED)
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 alleges
that Identix has willfully and deliberately infringed a Company patent through
the manufacture, use and 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 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 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 Casino property is anticipated in fiscal
1998. The Company's initial membership interest in the joint venture is 51%. As
the Company does not control the joint venture and is not required to make
additional cash investments, the Company has adopted the equity method in
accounting for the investment. For the three- and six-month periods ended March
31, 1998, the Company's recorded losses 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.
<PAGE>
DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED MARCH 31, 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. 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. Systems
integration services revenues are recognized using the percentage of completion
method. Maintenance revenues are recognized over the life of the contract on a
straight-line basis.
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Total revenues were $2,028,000 for the three months ended March 31,
1998 compared with $3,749,000 for the same prior-year period. Identification
system product revenues were $1,299,000 compared with $3,356,000 in the same
prior-year period. The decrease is due primarily to a decrease in the number of
TENPRINTER systems sold during the three months ended March 31, 1998.
Maintenance revenues were $618,000 for the three months ended March
31, 1998 compared with $392,000 for the same prior-year period, an increase of
58%. 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.
<PAGE>
DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED MARCH 31, 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
Systems integration revenues were $111,000 for the three months
ended March 31, 1998. There were no integration service revenues for the same
prior-year period. Systems integration revenues were generated from the
Company's Integrated Identification Solutions Division which began operations
during the first quarter of fiscal 1998.
For the three-month period ended March 31, 1998, revenues from two
customers accounted for approximately 24% and 11% of total revenues. Revenues
from three different customers during the three months ended March 31, 1997
accounted for approximately 47%, 22% and 11% of total revenues. Export revenues
for the three-month period ended March 31, 1998 were 10% of total revenues
compared to 11% during the same prior-year period.
Overall gross margins for the three months ended March 31, 1998 were
15% as compared with 22% of total revenues for the same prior-year period. Gross
margins on identification system sales were 15% for the three months ended March
31, 1998 compared with 26% in the same prior-year period. This decrease is due
to lower production and higher per unit warranty and installation accruals than
in the prior-year period.
Maintenance margins for the three months ended March 31, 1998 and
1997 were 11% and (11%), 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 March 31,
1998 were 34% of systems integration revenues. As indicated above, systems
integration revenues were generated from the Integrated Identification Solutions
Division which began operations during the first quarter of fiscal 1998.
Sales and marketing expenses for the three-month periods ended March
31, 1998 were $380,000 (19% of total revenues) as compared to $706,000 (19% of
total revenues) for the same prior-year period. The decrease in sales and
marketing costs is due primarily to $276,000 of reduced introductory S-Series
promotional costs. Engineering and development expenses were $824,000 (41% of
total revenues) for the three-month period ended March 31, 1998 compared to
$634,000 (17% of total revenues) for the same period a year ago. This increase
is due primarily to $289,000 for additional personnel-related costs and setup
costs associated with the newly established Integrated Identification Solutions
Division, which was partially offset by $67,000 of reduced development costs for
the TRAK-21 product as a result of the joint venture with Grand Casinos, Inc.
General and administrative expenses for the three-month period ended March 31,
1998 were $455,000 (22% of total revenues) as compared to $431,000 (11% of total
revenues) during the same prior-year period. This increase is due primarily to
increased general operating costs and an increase
<PAGE>
DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED MARCH 31, 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
in personnel-related costs to fill a key management position which was vacant
during the prior-year period, partially offset by $48,000 of lower legal costs
related to a patent infringement suit.
Interest income decreased to $8,000 for the three months ended March
31, 1998 from $82,000 for the same period in 1997 due to lower balances of cash
and marketable securities.
Interest expense increased to $190,000 for the three months ended
March 31, 1998 from $105,000 for the same prior-year period, primarily due to a
non-cash charge during the three-month period ended March 31, 1998 of $167,000
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
March 31, 1998 of $1,562,000 ($0.12 per share) as compared with $974,000 ($0.08
per share) for the same prior-year period.
SIX MONTHS ENDED MARCH 31, 1998 COMPARED TO SIX MONTHS ENDED MARCH 31, 1997
Total revenues were $4,300,000 for the six months ended March 31,
1998 compared with $5,764,000 for the same prior-year period. Identification
system product revenues were $2,989,000 compared with $4,973,000 in the same
prior-year period. The decrease is due primarily to a decrease in the number of
TENPRINTER systems sold during the six months ended March 31, 1998.
Maintenance revenues were $1,200,000 for the six months ended March
31, 1998 compared with $791,000 for the same prior-year period, an increase of
52%. 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 $111,000 for the six months ended
March 31, 1998. There were no systems integration revenues for the same
prior-year period. Systems integration revenues were generated from the
Company's Integrated Identification Solutions Division which began operations
during the first quarter of fiscal 1998.
For the six-month period ended March 31, 1998, revenues from two
customers accounted for approximately 18% and 14% of total revenues. Revenues
from two different customers during the six months ended March 31, 1997
accounted for approximately 30% and 20% of total revenues.
<PAGE>
DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED MARCH 31, 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Export revenues for the six-month period ended March 31, 1998 were
21% of total revenues compared to 7% during the same prior-year period.
Overall gross margins for the six months ended March 31, 1998 were
18% as compared with 25% of total revenues for the same prior-year period. Gross
margins on identification system sales were 15% for the six months ended March
31, 1998 compared with 33% in the same prior-year period. This decrease is due
to lower production volume and higher warranty and installation accruals than in
the prior-year period.
Maintenance margins for the six months ended March 31, 1998 and 1997
were 22% and (25%), 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 six months ended March 31, 1998
were 34% of systems integration revenues. As indicated above, systems
integration revenues were generated from the Integrated Identification Solutions
Division which began operations during the first quarter of fiscal 1998.
Sales and marketing expenses for the six-month period ended March
31, 1998 were $897,000 (21% of total revenues) as compared to $1,232,000 (21% of
total revenues) for the same prior-year period. This $335,000 decrease in sales
and marketing costs was due primarily to $276,000 of reduced introductory
S-Series promotional costs and $124,000 of reduced demonstration equipment
costs, partially offset by $76,000 of higher costs for international marketing
and $87,000 of royalty costs on international shipments. Engineering and
development expenses were $1,525,000 (35% of total revenues) for the six-month
period ended March 31, 1998 compared to $1,372,000 (24% of total revenues) for
the same period a year ago. This increase is due primarily to $462,000 for
additional personnel-related costs and setup costs associated with the newly
established Integrated Identification Solutions Division and $59,000 of
increased amortization and write-offs of intangible assets, partially offset by
$168,000 of reduced development costs for the TRAK-21 product as a result of the
joint venture with Grand Casinos, Inc. General and administrative expenses for
the six-month period ended March 31, 1998 were $933,000 (22% of total revenues)
compared to $850,000 (15% of total revenues). This increase is due primarily to
increased general operating costs, $79,000 of increased personnel-related costs
which included severance costs paid to a former executive and costs to fill a
key management position, partially offset by $48,000 of lower legal costs
related to a patent infringement suit.
<PAGE>
DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED MARCH 31, 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Interest income decreased to $20,000 for the six months ended March
31, 1998 from $169,000 for the same period in 1997 due to lower balances of cash
and marketable securities.
Interest expense increased to $284,000 for the six months ended
March 31, 1998 from $211,000 for the same prior-year period, primarily due to
non-cash charges during the six-month period March 31, 1998 of $250,000 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.
INFLATION
The Company does not believe inflation has significantly impacted
revenues or expenses.
NET OPERATING LOSS CARRYFORWARDS
At March 31, 1998, the Company had carryforwards of net operating
losses of approximately $33,700,000 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 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 March 31, 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 $30,000,000
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 March
31, 1998, the Company's cumulative deficit was $38,209,000. 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>
DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED MARCH 31, 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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 March 31, 1998), is payable upon demand and expires in May 1998.
There were no borrowings under the line at March 31, 1998. The Company
anticipates renewal of the line upon expiration.
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.
<PAGE>
DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED MARCH 31, 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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.
The second $500,000 tranche was sold on March 11, 1998 (the "Tranche
2 Debentures"). 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 during the three-month period ended March 31, 1998 since there was
immediate vesting of the conversion feature. 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 $1,377,000 for the six
months ended March 31, 1998 compared with $1,883,000 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 $357,000 in the
prior-year period to cash provided of $868,000 in the six-month period ended
March 31, 1998. This $1,225,000 improvement in cash flow from operating assets
and liabilities resulted primarily from improved accounts receivable
collections.
Net cash used in investing activities was $85,000 for the six months
ended March 31, 1998 as compared with net cash provided by investing activities
of $633,000 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 six months ended March 31,
1998 to support establishment of the IIS Division.
Net cash provided by financing activities was $899,000 during the
six months ended March 31, 1998, as compared to $1,178,000 during the same
prior-year period. This decrease is due primarily to the absence of borrowings
under lines of credit at March 31, 1998 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 March 31, 1998, the Company had $1,328,000 in cash and cash
equivalents. Management believes that cash and cash equivalents, together with
available financing sources, are sufficient to meet current and foreseeable
operating requirements.
<PAGE>
DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED MARCH 31, 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 alleges that Identix has willfully and deliberately
infringed a Company patent through the manufacture, use and 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
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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) On March 9 and 10, 1998, the Company issued an aggregate of
527,225 shares of common stock for the conversion of principal
aggregating $500,000 of 8% Convertible Subordinated Debentures (the
"Tranche 1 Debentures") plus $10,784 of accrued interest at an
average conversion price of $0.97 per share.
<PAGE>
DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED MARCH 31, 1998
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (CONTINUED)
On March 11, the Company sold (i) $500,000 principal
amount of 8% Convertible Subordinated Debentures, (the "Tranche 2
Debentures"), due December 1, 2000; and (ii) a Warrant dated March
11, 1998, (the "Tranche 2 KA Warrant") for the purchase of 15,000
shares of the Company's common stock. The Tranche 2 Debenture and
Tranche 2 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 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. The Tranche
2 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.
<PAGE>
DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED MARCH 31, 1998
PART II - OTHER INFORMATION (CONTINUED)
ITEM 5. OTHER INFORMATION
None
ITEM 6. (a) EXHIBITS
Exhibit 3 Amendment to Certificate of Incorporation Relating to
Increase of Authorized Common Stock
Exhibit 10 1998 Stock Option Plan
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 March 31, 1998.
<PAGE>
DIGITAL BIOMETRICS, INC.
THREE MONTHS ENDED MARCH 31, 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)
May 14, 1998 s/ John J. Metil
----------------------------
John J. Metil
Chief Operating Officer and Chief Financial Officer
EXHIBIT 3.0
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
DIGITAL BIOMETRICS, INC.
DIGITAL BIOMETRICS, INC., a corporation duly organized and existing
under the General Corporation Law of the State of Delaware (the "Corporation"),
does hereby certify that:
I. The amendment to the Corporation's Certificate of Incorporation
set forth below was duly adopted in accordance with the provisions of Section
242 and has been duly adopted by the stockholders of the Corporation, to whom
written notice has been given in accordance with Section 228 of the General
Corporation Law of the State of Delaware.
II. Article FOURTH of the Corporation's Certificate of Incorporation
is amended to read in its entirety as follows:
FOURTH
The total number of shares of stock which the Corporation is
authorized to issue is Forty Million (40,000,000) shares of stock
classified as Common Stock, $.01 par value.
IN WITNESS WHEREOF, Digital Biometrics, Inc. has caused this
Certificate to be executed by James C. Granger and Avron L. Gordon, its
authorized officers, on this 8th day of April, 1998.
/s/ James C. Granger
------------------------------------
James C. Granger
Chief Executive Officer
/s/ Avron L. Gordon
------------------------------------
Avron L. Gordon
Secretary
EXHIBIT 10.0
DIGITAL BIOMETRICS, INC.
1998 STOCK OPTION PLAN
SECTION 1.
DEFINITIONS
As used herein, the following terms shall have the meanings indicated
below:
(a) "Affiliated Entity" means any entity other than a Subsidiary in
which the Company has a material interest, including a joint venture.
(b) "Book Value" shall mean the book value of a share of the Company's
Common Stock derived from the most current available financial
statements of the Company by dividing total stockholders' equity by the
number of shares issued and outstanding and making such adjustment for
results of operations since the date of such financial statements as
the Board of Directors or Committee shall deem appropriate.
(c) "Committee" shall mean a Committee of two or more directors who
shall be appointed by and serve at the pleasure of the Board. As long
as the Company's securities are registered pursuant to Section 12 of
the Securities Exchange Act of 1934, as amended ("Exchange Act"), then,
to the extent necessary for compliance with Rule 16b-3, or any
successor provision, each of the members of the Committee shall be a
"Non-Employee Director." For purposes of this Section l(b)
"Non-Employee Director" shall have the same meaning as set forth in
Rule 16b-3, or any successor provision, as then in effect, of the
General Rules and Regulations under the Exchange Act. In addition, such
directors shall satisfy such requirements of the Internal Revenue Code
for outside directors acting under plans intending to qualify for
exemption under section 162(m)(4)(c) of the Code.
(d) The "Company" shall mean Digital Biometrics, Inc., a Delaware
corporation.
(e) "Exercise Price" shall mean the price per share at which Option
Stock may be purchased in accordance with an option agreement and this
Plan.
(f) "Fair Market Value" shall mean (i) if such stock is reported by the
Nasdaq National Market or Nasdaq SmallCap Market or is listed upon an
established stock exchange or exchanges, the reported closing price of
such stock by the Nasdaq National Market or Nasdaq SmallCap Market or
on such stock exchange or exchanges on the date the option is granted
or, if no sale of such stock shall have occurred on that date, on the
next preceding day on which there was a sale of stock; (ii) if such
stock is not so reported by the Nasdaq National Market or Nasdaq
SmallCap Market or listed upon an established stock exchange, the
average of the closing "bid" and "asked" prices quoted by the National
Quotation Bureau, Inc. (or any comparable reporting service) on the
date the option is granted, or if there are no quoted "bid" and "asked"
prices on such date, on the next preceding date for which there are
such quotes; or (iii) if such stock is not publicly traded as of the
date the option is granted, the per share value as determined by the
Board, or the Committee, in its sole discretion by applying principles
of valuation with respect to all such options.
(g) The "Internal Revenue Code" or "Code" is the Internal Revenue Code
of 1986, as amended from time to time.
(h) "Non-Employee Director" shall mean members of the Board who are not
employees of the Company or any subsidiary.
(i) "Option Stock" or "Stock" shall mean Common Stock of the Company
(subject to adjustment as described in Section 13) reserved for options
pursuant to this Plan.
<PAGE>
(j) The "Optionee" means an employee of the Company or any Subsidiary
to whom an incentive stock option has been granted pursuant to Section
9; a consultant or advisor to or director (including a Non-Employee
Director), employee or officer of the Company or any Subsidiary to whom
a nonqualified stock option has been granted pursuant to Section 10; or
a Non-Employee Director to whom a nonqualified stock option has been
granted pursuant to Section 11.
(k) "Parent" shall mean any corporation which owns, directly or
indirectly in an unbroken chain, fifty percent (50%) or more of the
total voting power of the Company's outstanding stock.
(l) The "Plan" means this Digital Biometrics, Inc. 1998 Stock Option
Plan, as amended hereafter from time to time, including the form of
Option Agreements as they may be modified by the Board from time to
time.
(m) A "Subsidiary" shall mean any corporation of which fifty percent
(50%) or more of the total voting power of outstanding stock is owned,
directly or indirectly in an unbroken chain, by the Company.
SECTION 2.
PURPOSE
The purpose of the Plan is to promote the success of the Company and
any Subsidiary hereafter created or acquired by facilitating the retention of
competent personnel and by furnishing incentive to officers, directors,
employees, consultants, and advisors upon whose efforts the success of the
Company and any Subsidiary will depend.
It is the intention of the Company to carry out the Plan through the
granting of stock options which will qualify as "incentive stock options" under
the provisions of Section 422 of the Internal Revenue Code, or any successor
provision, pursuant to Section 9 of this Plan, and through the granting of
"nonqualified stock options" pursuant to Sections 10 and 11 of this Plan.
Adoption of this Plan shall be and is expressly subject to the condition of
approval by the stockholders of the Company. Any incentive stock options granted
after adoption of the Plan by the Board of Directors shall be treated as
nonqualified stock options if stockholder approval is not obtained within twelve
months after adoption of the Plan by the stockholders of the Company.
SECTION 3.
EFFECTIVE DATE OF PLAN
The Plan shall be effective as of the date of adoption by the Board of
Directors, subject to approval by the stockholders of the Company as required in
Section 2.
SECTION 4.
ADMINISTRATION
The Plan shall be administered by the Board of Directors of the Company
(hereinafter referred to as the "Board") or by a Committee which may be
appointed by the Board from time to time (collectively referred to as the
"Administrator"). The Administrator shall have all of the powers vested in it
under the provisions of the Plan, including but not limited to exclusive
authority (where applicable and within the limitations described herein) to
determine, in its sole discretion, whether an incentive stock option or
nonqualified stock option shall be granted, the individuals to whom, and the
time or times at which, options shall be granted, the number of shares subject
to each option and the option price and terms and conditions of each option. The
Administrator shall have full power and authority to administer and interpret
the Plan, to make and amend rules, regulations and guidelines for administering
the Plan, to prescribe the form and conditions of the respective stock option
agreements (which may vary from Optionee to Optionee) evidencing each option and
to make all other determinations necessary or advisable for the administration
of the Plan. The
<PAGE>
Administrator's interpretation of the Plan, and all actions taken and
determinations made by the Administrator pursuant to the power vested in it
hereunder, shall be conclusive and binding on all parties concerned.
No member of the Board or the Committee shall be liable for any action
taken or determination made in good faith in connection with the administration
of the Plan. In the event the Board appoints a Committee as provided hereunder,
any action of the Committee with respect to the administration of the Plan shall
be taken pursuant to a majority vote of the Committee members or pursuant to the
written resolution of all Committee members.
SECTION 5.
PARTICIPANTS
The Administrator shall from time to time, at its discretion and
without approval of the stockholders, designate those employees, officers,
directors, consultants, and advisors of the Company or of any Subsidiary or
Affiliated Entity to whom nonqualified stock options shall be granted under this
Plan; provided, however, that consultants or advisors shall not be eligible to
receive stock options hereunder unless such consultant or advisor renders bona
fide services to the Company or Subsidiary or Affiliated Entity and such
services are not in connection with the offer or sale of securities in a capital
raising transaction. The Administrator shall, from time to time, at its
discretion and without approval of the stockholders, designate those employees
of the Company or any Subsidiary or Affiliated Entity to whom incentive stock
options shall be granted under this Plan. The Administrator may grant additional
incentive stock options or nonqualified stock options under this Plan to some or
all participants then holding options or may grant options solely or partially
to new participants including persons to whom an offer of employment has been
extended. In designating participants the Administrator shall also determine the
number of shares to be optioned to each such participant. The Board may from
time to time designate individuals as being ineligible to participate in the
Plan.
SECTION 6.
STOCK
The Stock to be optioned under this Plan shall consist of authorized
but unissued shares of Option Stock. Six Hundred Thousand (600,000) shares of
Option Stock shall be reserved and available for options under the Plan;
provided, however, that the total number of shares of Option Stock reserved for
options under this Plan shall be subject to adjustment as provided in Section 13
of the Plan. In the event that any outstanding option under the Plan for any
reason expires or is terminated prior to the exercise thereof, the shares of
Option Stock allocable to the unexercised portion of such option shall continue
to be reserved for options under the Plan and may be optioned hereunder.
SECTION 7.
DURATION OF PLAN
Incentive stock options may be granted pursuant to the Plan from time
to time during a period of ten (10) years from the effective date as defined in
Section 3. Nonqualified stock options may be granted pursuant to the Plan from
time to time after the effective date of the Plan and until the Plan is
discontinued or terminated by the Board. Any incentive stock option granted
during such ten-year period and any nonqualified stock option granted prior to
the termination of the Plan by the Board shall remain in full force and effect
until the expiration of the option as specified in the written stock option
agreement and shall remain subject to the terms and conditions of this Plan.
<PAGE>
SECTION 8.
PAYMENT
Optionees may pay for shares upon exercise of options granted pursuant
to this Plan with cash, personal check, certified check or, if approved by the
Administrator in its sole discretion, Common Stock of the Company valued at such
Stock's then Fair Market Value, or such other form of payment as may be
authorized by the Administrator. The Administrator may, in its sole discretion,
limit the forms of payment available to the Optionee and may exercise such
discretion any time prior to the termination of the option granted to the
Optionee or upon any exercise of the option by the Optionee.
With respect to payment in the form of Common Stock of the Company, the
Administrator may require advance approval or adopt such rules as it deems
necessary to assure compliance with Rule 16b-3, or any successor provision, as
then in effect, of the General Rules and Regulations under the Exchange Act, if
applicable.
The Administrator may permit a participant to elect to pay the Exercise
Price by authorizing a third party to sell Stock (or a sufficient portion
thereof) acquired upon exercise of an Option and remit to the Company a
sufficient portion of the sale proceeds to pay the Exercise price and any tax
withholding resulting from such exercise.
The Administrator may permit all or any part of the Exercise Price and
any withholding taxes to be paid by delivering (on a form prescribed by the
Company) a full-recourse promissory note. The Exercise Price and any withholding
taxes may be paid, in whole or in part, in any other form that is consistent
with applicable laws, regulations and rules.
SECTION 9.
TERMS AND CONDITIONS OF INCENTIVE STOCK OPTIONS
Each incentive stock option granted pursuant to this Section 9 shall be
evidenced by a written stock option agreement (the "Option Agreement"). The
Option Agreement shall be in such form as may be approved from time to time by
the Administrator and may vary from Optionee to Optionee; provided, however,
that each Optionee and each Option Agreement shall comply with and be subject to
the following terms and conditions:
(a) Number of Shares and Option Price. The Option Agreement shall state
the total number of shares covered by the incentive stock option. To
the extent required to qualify the Option as an incentive stock option
under Section 422 of the Internal Revenue Code, or any successor
provision, the Exercise Price per share shall not be less than one
hundred percent (100%) of the Fair Market Value of the Common Stock per
share on the date the Administrator grants the option; provided,
however, that if an Optionee owns stock possessing more than ten
percent (10%) of the total combined voting power of all classes of
stock of the Company or of its Parent or any Subsidiary, the option
price per share of an incentive stock option granted to such Optionee
shall not be less than one hundred ten percent (110%) of the Fair
Market Value of the Common Stock per share on the date of the grant of
the option. The Administrator shall have full authority and discretion
in establishing the option price and shall be fully protected in so
doing.
(b) Term and Exercisability of Incentive Stock Option. The term during
which any incentive stock option granted under the Plan may be
exercised shall be established in each case by the Administrator. To
the extent required to qualify the Option as an incentive stock option
under Section 422 of the Internal Revenue Code, or any successor
provision, in no event shall any incentive stock option be exercisable
during a term of more than seven (7) years after the date on which it
is granted; provided, however, that if an Optionee owns stock
possessing more than ten percent (10%) of the total combined voting
power of all classes of stock of the Company or of its parent or any
Subsidiary, the incentive stock option granted to such Optionee shall
be exercisable during a term of not more than five (5) years after the
date on which it is granted.
<PAGE>
(c) The Option Agreement shall state when the incentive stock option
becomes exercisable and shall also state the maximum term during which
the option may be exercised. In the event an incentive stock option is
exercisable immediately, the manner of exercise of the option in the
event it is not exercised in full immediately shall be specified in the
Option Agreement subject to Section 13, the Administrator may
accelerate the exercisability of any incentive stock option granted
hereunder which is not immediately exercisable as of the date of grant.
(d) Other Provisions. The Option Agreement authorized under this
Section 9 shall contain such other provisions as the Administrator
shall deem advisable. Any such Option Agreement shall contain such
limitations and restrictions upon the exercise of the option as shall
be necessary to ensure that such option will be considered an
"incentive stock option" as defined in Section 422 of the Internal
Revenue Code or to conform to any change therein.
SECTION 10.
TERMS AND CONDITIONS OF NONQUALIFIED STOCK OPTIONS
Each nonqualified stock option granted pursuant to this Section 10
shall be evidenced by a written Option Agreement. The Option Agreement shall be
in such form as may be approved from time to time by the Administrator and may
vary from Optionee to Optionee; provided, however, that each Optionee and each
Option Agreement shall comply with and be subject to the following terms and
conditions:
(a) Number of Shares and Option Price. The Option Agreement shall state
the total number of shares covered by the nonqualified stock option.
The option price per share shall be one hundred percent (100%) of the
Fair Market Value of the Common Stock per share on the date the
Administrator grants the option; provided, however, that the option
price may not be less than the higher of the Fair Market Value of the
Book Value of the Common Stock per share on the date of grant.
(b) Term and Exercisability of Nonqualified Stock Option. The term
during which any nonqualified stock option granted under the Plan may
be exercised shall be established in each case by the Administrator,
but shall not exceed seven (7) years. The Option Agreement shall state
when the nonqualified stock option becomes exercisable and shall also
state the term during which the option may be exercised. In the event a
nonqualified stock option is exercisable immediately, the manner of
exercise of the option in the event it is not exercised in full
immediately shall be specified in the stock option agreement subject to
Section 13, the Administrator may accelerate the exercisability of any
nonqualified stock option granted hereunder which is not immediately
exercisable as of the date of grant.
(c) Withholding. The Company or its Subsidiary shall be entitled to
withhold and deduct from future wages of the Optionee all legally
required amounts necessary to satisfy any and all withholding and
employment-related taxes attributable to the Optionee's exercise of a
nonqualified stock option. In the event the Optionee is required under
the Option Agreement to pay the Company, or make arrangements
satisfactory to the Company respecting payment of, such withholding and
employment-related taxes, the Administrator may, in its discretion and
pursuant to such rules as it may adopt, permit the Optionee to satisfy
such obligation, in whole or in part, by electing to have the Company
withhold shares of Common Stock otherwise issuable to the Optionee as a
result of the option's exercise equal to the amount required to be
withheld for tax purposes. Any stock elected to be withheld shall be
valued at its Fair Market Value, as of the date the amount of tax to be
withheld is determined under applicable tax law. The Optionee's
election to have shares withheld for this purpose shall be made on or
before the date the option is exercised or, if later, the date that the
amount of tax to be withheld is determined under applicable tax law.
Such election shall be approved by the Administrator and otherwise
comply with such rules as the Administrator may adopt to assure
compliance with Rule 16b-3, or any successor provision, as then in
effect, of the General Rules and Regulations under the Securities
Exchange Act of 1934, if applicable.
<PAGE>
(d) Other Provisions. The Option Agreement authorized under this
Section 10 shall contain such other provisions as the Administrator
shall deem advisable.
SECTION 11.
GRANTING OF OPTIONS TO NON-EMPLOYEE DIRECTORS
(a) Upon initial election and each re-election to Board by the
stockholders at an annual meeting of the Company, commencing with the
annual meeting of the stockholders held in 1998, each Non-Employee
Director who, on and after the date this Plan is approved by the
Company's stockholders, is elected or re-elected as a director of the
Company by the stockholders or whose term of office continues after a
meeting of stockholders at which directors are elected shall, as of the
date of such re-election or stockholder meeting (the "Grant Date"),
automatically be granted an option to purchase fifteen thousand
(15,000) shares of the Common Stock at an option price per share equal
to 100% of the Fair Market Value of the Common Stock on the date of
such election, re-election or stockholder meeting. Options granted
pursuant to this subsection (a) shall be exercisable in full after the
earlier of: (a) the Non-Employee Director's service on the Board
through the next succeeding annual meeting, or (b) the Non-Employee
Director's service on the Board for at least twelve months following
the Grant Date.
(b) No director shall receive more than one option pursuant to
subsection (a) of this Section 11 in any one fiscal year. All options
granted pursuant to this Section 11 shall be designated as nonqualified
options and shall be subject to the same terms and provisions as are
then in effect with respect to granting of nonqualified options to
officers and employees of the Company except that the option shall
expire on the earlier of (i) twelve (12) months after the Optionee
ceases to be a director (except by death) and (ii) five years after the
date of grant. Notwithstanding the foregoing, in the event of the death
of a Non-Employee Director, any option granted to such Non-Employee
Director pursuant to this Section 11 may be exercised at any time
within six (6) months of the death of such Non-Employee Director or on
the date on which the option, by its terms expires, whichever is
earlier.
SECTION 12.
TRANSFER OF OPTION
Except as otherwise provided by the Administrator, awards under the
Plan are not transferable other than as designated by the Participant by will or
by the laws of descent and distribution.
SECTION 13.
RECAPITALIZATION, SALE, MERGER, EXCHANGE
OR LIQUIDATION
In the event of an increase or decrease in the number of shares of
Common Stock resulting from a subdivision or consolidation of shares or the
payment of a stock dividend or any other increase or decrease in the number of
shares of Common Stock effected without receipt of consideration by the Company,
the number of shares of Option Stock reserved under Section 6 hereof and the
number of shares of Option Stock covered by each outstanding option and the
price per share thereof shall be adjusted to reflect such change. Additional
shares which may be credited pursuant to such adjustment shall be subject to the
same restrictions as are applicable to the shares with respect to which the
adjustment relates.
In the event of an acquisition of the Company through the sale of
substantially all of the Company's assets and the consequent discontinuance of
its business or through a merger, consolidation, exchange, reorganization,
reclassification, extraordinary dividend, divestiture or liquidation of the
Company (collectively referred to as a "transaction"), the Board may provide for
one or more of the following:
<PAGE>
(a) the complete termination of this Plan and cancellation of
outstanding options not exercised prior to a date specified by the
Board (which date shall give Optionees a reasonable period of time in
which to exercise the options prior to the effectiveness of such
transaction);
(b) that the continuing corporation or entity surviving the
transaction shall (i) assume options previously granted under this Plan
or (ii) issue new options in substitution for options granted under
this Plan so that an Optionee shall have the right thereafter, by
exercising any such option (or any new option substituted therefor), to
purchase the kind and amount of stock and other securities and property
receivable upon such merger or consolidation or other transaction as if
the Optionee had purchased all of the Option Stock subject to the
option immediately prior to the date of the contract closing of such
transaction;
(c) that Optionees holding outstanding incentive or
nonqualified options shall receive, with respect to each share of
Option Stock subject to such options, as of the effective date of any
such transaction, cash in an amount equal to the excess of the Fair
Market Value of such Option Stock on the date immediately preceding the
effective date of such transaction over the option price per share of
such options; provided that the Board may, in lieu of such cash
payment, distribute to such Optionees shares of stock of the Company or
shares of stock of any corporation succeeding the Company by reason of
such transaction, such shares having a value equal to the cash payment
herein;
(d) that all outstanding options shall become immediately
exercisable, whether or not such options had become exercisable prior
to the transaction; provided, however, that if the acquiring party
seeks to have the transaction accounted for on a "pooling of interests"
basis and, in the opinion of the Company's independent certified public
accountants, accelerating the exercisability of such options would
preclude a pooling of interests under generally accepted accounting
principles, the exercisability of such options shall not accelerate; or
(e) such other arrangements with respect to outstanding
options as the Board shall deem to be in the best interest of the
Company.
The Board may restrict the rights of or the applicability of this
Section 13 to the extent necessary to comply with Section 16(b) of the
Securities Exchange Act of 1934, the Internal Revenue Code or any other
applicable law or regulation. The grant of an option pursuant to the Plan shall
not limit in any way the right or power of the Company to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structure or to merge, exchange or consolidate or to dissolve, liquidate, sell
or transfer all or any part of its business or assets.
SECTION 14.
SECURITIES LAW COMPLIANCE
No shares of Common Stock shall be issued pursuant to the Plan unless
and until there has been compliance, in the opinion of Company's counsel, with
all applicable legal requirements, including without limitation, those relating
to securities laws and stock exchange listing requirements. As a condition to
the issuance of Option Stock to Optionee, the Administrator may require Optionee
to (i) represent that the shares of Option Stock are being acquired for
investment and not resale and to make such other representations as the
Administrator shall deem necessary or appropriate to qualify the issuance of the
shares as exempt from the Securities Act of 1933 and any other applicable
securities laws, and (ii) represent that Optionee shall not dispose of the
shares of Option Stock in violation of the Securities Act of 1933 or any other
applicable securities laws.
As a further condition to the grant of any incentive or nonqualified
stock option or the issuance of Option Stock to Optionee, Optionee agrees to the
following:
(a) In the event the Company advises Optionee that it plans an
underwritten public offering of its Common Stock in compliance with the
Securities Act of 1933, as amended, and the underwriter(s) seek to
impose restrictions under which certain stockholders may not sell or
contract to sell or grant any option to buy
<PAGE>
or otherwise dispose of part or all of their stock purchase rights of
the underlying Common Stock, Optionee will not, for a period not to
exceed 180 days from the prospectus, sell or contract to sell or grant
an option to buy or otherwise dispose of any incentive or nonqualified
stock option granted to Optionee pursuant to the Plan or any of the
underlying shares of Common Stock without the prior written consent of
the underwriter(s) or its representative(s).
(b) In the event the Company makes any public offering of its
securities and determines in its sole discretion that it is necessary
to reduce the number of issued but unexercised stock purchase rights so
as to comply with any states securities or Blue Sky law limitations
with respect thereto, the Board of Directors of the Company shall have
the right (i) to accelerate the exercisability of any incentive or
nonqualified stock option and the date on which such option must be
exercised, provided that the Company gives Optionee prior written
notice of such acceleration, and (ii) to cancel any options or portions
thereof which Optionee does not exercise prior to or contemporaneously
with such public offering.
(c) In the event of a transaction (as defined in Section 13 of the
Plan) which is treated as a "pooling of interests" under generally
accepted accounting principles, Optionee will comply with Rule 145 of
the Securities Act of 1933 and any other restrictions imposed under
other applicable legal or accounting principles if Optionee is an
"affiliate" (as defined in such applicable legal and accounting
principles) at the time of the transaction, and Optionee will execute
any documents necessary to ensure compliance with such rules.
The Company reserves the right to place a legend on any stock
certificate issued upon exercise of an option granted pursuant to the Plan to
assure compliance with this Section 14.
SECTION 15.
RIGHTS AS A STOCKHOLDER
An Optionee (or the Optionee's successor or successors) shall have no
rights as a stockholder with respect to any shares covered by an option until
the date of the issuance of a stock certificate evidencing such shares. No
adjustment shall be made for dividends (ordinary or extraordinary, whether in
cash, securities or other property), distributions or other rights for which the
record date is prior to the date such stock certificate is actually issued
(except as otherwise provided in Section 13 of the Plan).
SECTION 16.
AMENDMENT OF THE PLAN
The Board may from time to time, insofar as permitted by law, suspend
or discontinue the Plan or amend it in any respect; provided, however, that no
such revision or amendment, except as is authorized in Section 13, shall impair
the terms and conditions of any option which is outstanding on the date of such
revision or amendment to the material detriment of the Optionee without the
consent of the Optionee. An amendment shall be subject to approval by the
stockholders of the Company only if such approval is required for compliance
with the requirements of any applicable law, rule or regulation.
SECTION 17.
NO OBLIGATION TO EXERCISE OPTION
The granting of an option shall impose no obligation upon the Optionee
to exercise such option. Further, the granting of an option hereunder shall not
impose upon the Company or any Subsidiary any obligation to retain the Optionee
in its employ for any period.
<PAGE>
SECTION 18.
LIMITATION ON PAYMENTS
Any provision of the Plan to the contrary notwithstanding, in the event
that the independent auditors most recently selected by the Board (the
"Auditors") determine that any payment or transfer by the Company under the Plan
to or for the benefit of a Participant (a "Payment") would be nondeductible by
the Company for federal income tax purposes because of the provisions concerning
"excess parachute payments' in section 280G of the Code, than the aggregate
present value of all Payments shall be reduced (but not below zero) to the
Reduced Amount; provided that the Committee, at the time of that such Award
shall not be so reduced and shall not be subject to this Section 18. For
purposes of this Section 18, the "Reduced Amount" shall be the amount, expressed
as a present value, which maximizes the aggregate present value of the Payments
without causing any Payment to be nondeductible by the Company because of
section 280G of the Code.
(a) If the Auditors determine that any Payment would be nondeductible
by the Company because of section 280G of the Code, then the Company
shall promptly give the Participant notice to that effect and a copy of
the detailed calculation thereof and of the Reduced Amount, and the
Participant may then elect, in his or her sole discretion, which and
how much of the Payments shall be eliminated or reduced (as long as
after such election the aggregate present value of the Payments equals
the Reduced Amount) and shall advise the Company in writing of his or
her election within 10 days of receipt of notice. If no such election
is made by the Participant within such 10-day period, then the Company
may elect which and how much of the Payments shall be eliminated or
reduced (as long as after such election the aggregate present value of
the Payments equals the Reduced Amount) and shall notify the
Participant promptly of such election. For purposes of this Section 18,
present value shall be determined in accordance with section 280G(d)(4)
of the Code. All determinations made by the Auditors under this Section
18 shall be binding upon the Company and the Participant and shall be
made within 60 days of the date when a Payment becomes payable or
transferable. As promptly as practicable following such determination
and the elections hereunder, the Company shall pay or transfer to or
for the benefit of the Participant such amounts as are then due to him
or her under the Plan and shall promptly pay or transfer to or for the
benefit of the Participant in the future such amounts as become due to
him or her under the Plan.
(b) As a result of uncertainty in the application of section 280G of
the Code at the time of an initial determination by the Auditors
hereunder, it is possible that Payments will have been made by
additional Payments which will not have been made by the Company could
have been made (an "Underpayment"), consistent in each case with the
calculation of the Reduced Amount hereunder. In the event that the
Auditors, based upon that assertion of a deficiency by the Internal
Revenue Service against the Company or the Participant which the
Auditors believe has a high probability of success, determine that an
Overpayment has been made, such Overpayment shall be treated for all
purposes as a loan to the Participant which he or she shall repay to
the Company, together with interest at the applicable federal rate
provided in section 7872(f)(2) of the Code; provided, however, that no
amount shall be payable by the Participant to the Company if and to the
extent that such payment would not reduce the amount which is subject
to taxation under section 4999 of the Code. In the event that the
Auditors determine that an Underpayment has occurred, such Underpayment
shall promptly be paid or transferred by the Company to or for the
benefit of the Participant, together with interest at the applicable
federal rate provided in section 7872(f)(2) of the Code.
EXHIBIT 11.0
DIGITAL BIOMETRICS, INC.
STATEMENT RE: COMPUTATION OF LOSS PER SHARE
The per share computations are based on the weighted average number of common
shares outstanding during the periods.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
----------------------------- -----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Shares outstanding at beginning of period 12,417,001 10,916,485 12,361,038 10,777,288
Shares issued under retirement plan -- -- 55,963 41,798
Restricted stock awards, net of forfeitures 3,000 19,072 3,000 19,072
Shares issued from debenture and related
interest conversion 527,225 1,124,565 527,225 1,221,964
------------ ------------ ------------ ------------
Shares outstanding at end of period 12,947,226 12,060,122 12,947,226 12,060,122
============ ============ ============ ============
Weighted average shares outstanding (A) 12,551,141 11,571,802 12,455,352 11,213,297
============ ============ ============ ============
Net loss $ (1,562,342) $ (973,889) $ (2,886,342) $ (2,066,519)
============ ============ ============ ============
Basic loss per common share $ (0.12) $ (0.08) $ (0.23) $ (0.18)
============ ============ ============ ============
</TABLE>
(A) Stock options and other common share equivalents are not included in the
calculation of the net loss per common share for the three- and six-month
periods ended March 31, 1998 and 1997 as their effect is antidilutive.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000868373
<NAME> DIGITAL BIOMETRICS INC
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 1,327,846
<SECURITIES> 0
<RECEIVABLES> 4,125,327
<ALLOWANCES> 383,583
<INVENTORY> 2,654,483
<CURRENT-ASSETS> 7,791,837
<PP&E> 2,199,838
<DEPRECIATION> 1,296,305
<TOTAL-ASSETS> 8,780,615
<CURRENT-LIABILITIES> 3,218,805
<BONDS> 488,242
0
0
<COMMON> 129,472
<OTHER-SE> 4,944,096
<TOTAL-LIABILITY-AND-EQUITY> 8,780,615
<SALES> 2,989,249
<TOTAL-REVENUES> 4,299,945
<CGS> 2,536,988
<TOTAL-COSTS> 3,545,441
<OTHER-EXPENSES> 3,354,032
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 284,165
<INCOME-PRETAX> (2,886,342)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,886,342)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,886,342)
<EPS-PRIMARY> (0.23)
<EPS-DILUTED> (0.23)
</TABLE>
