-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CNHvvbQ7ynYwFL847F63vO5zeqZeUFVhHQfI3q6bGpZNkxhJ3NfSb/D5JDkAM2jy LYYgNUn1f1XJcp5aLTD9jA== 0000897101-97-001293.txt : 19971224 0000897101-97-001293.hdr.sgml : 19971224 ACCESSION NUMBER: 0000897101-97-001293 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 21 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971223 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIGITAL BIOMETRICS INC CENTRAL INDEX KEY: 0000868373 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 411545069 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-18856 FILM NUMBER: 97743593 BUSINESS ADDRESS: STREET 1: 5600 ROWLAND RD CITY: MINNETONKA STATE: MN ZIP: 55343 BUSINESS PHONE: 6129320888 MAIL ADDRESS: STREET 2: 5600 ROWLAND RD CITY: MINNETONKA STATE: MN ZIP: 55343 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 1997 ------------------------------------------------------ [ ] 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 (612) 932-0888 (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] 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 November 30, 1997 - 12,361,038 shares (Class) (Outstanding) The aggregate market value of Common Stock held by non-affiliates as of November 30, 1997: $25,301,911 DOCUMENTS INCORPORATED BY REFERENCE None. TABLE OF CONTENTS FORM 10-K
Page PART I Item 1. Business 3 Item 2. Properties 9 Item 3. Legal Proceedings 9 Item 4. Submission of Matters to a Vote of Security Holders 10 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 10 Item 6. Selected Financial Data 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 8. Financial Statements and Supplementary Data 22 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 36 PART III Item 10. Directors and Executive Officers of the Registrant 37 Item 11. Executive Compensation 39 Item 12. Security Ownership of Certain Beneficial Owners and Management 41 Item 13. Certain Relationships and Related Transactions 42 PART IV Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K 43
TENPRINTER(R), SQUID(R) and the Company's mechanical hand logo have been registered as trademarks with the U.S. Patent and Trademark Office. The Company has applied for registration of the TRAK-21(TM) trademark. In addition, FC-5(TM), FC-6(TM), FC-7(TM), FC-11(TM), FC-21(TM) and FC-22(TM) are trademarks of the Company. EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS DISCUSSED IN THIS FORM 10-K 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, AND INVOLVE RISKS AND UNCERTAINTIES WHICH ARE DESCRIBED MORE FULLY IN THE SECTION BELOW CAPTIONED "CAUTIONARY STATEMENTS." IT IS IMPORTANT TO NOTE THAT THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING STATEMENTS AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE SUCH FORWARD-LOOKING STATEMENTS. PART I ITEM 1. BUSINESS GENERAL Digital Biometrics, Inc. (the "Company") develops, manufactures, markets and integrates computer-based products and services for the identification of individuals. The Company is a leading vendor of products employing "biometric" technology, the science of the identifying individuals by measuring of distinguishing biological characteristics. Digital Biometrics' principal product is the TENPRINTER(R) system for "live-scan" fingerprint capture used mainly in law-enforcement applications. The TENPRINTER is a computer-based system with patented high-resolution optics, which captures, digitizes, prints and transmits forensic-grade fingerprint images. The Company also offers high-resolution single-fingerprint capture products for commercial and governmental identification applications. To capitalize on opportunities outside of its traditional law enforcement market, the Company recently established a systems integration services business focused on integrating biometric and other identification technologies into applications for government and commercial markets. The Company has also developed a prototype player tracking system for the gaming industry called TRAK-21(TM). The Company has reached an agreement in principle with Grand Casinos, Inc., to create a joint venture to carry out the commercialization of the TRAK-21 technology. It is anticipated that the joint venture will be responsible for marketing the resultant product. During fiscal 1997, virtually all of the Company's revenues were derived from sales of TENPRINTER systems and related maintenance fees. Approximately 89% of customer accounts receivable at September 30, 1997, were from government agencies, of which 39% was from a single customer. For the last three fiscal years, sales to three customers in 1997 accounted for 43% of revenues, sales to two customers in 1996 accounted for 30%, and sales to two customers in 1995 accounted for 52%. Export sales were 5%, 15% and 21% of total sales, for the years ended September 30, 1997, 1996 and 1995, respectively. The Company's strategy is to continue to market TENPRINTER systems to law enforcement agencies, and also to expand the Company's product and services offerings, as well as its served markets. The law enforcement market for live-scan biometric products is well established. The Company believes that there is increasing interest from other governmental and commercial markets to use biometric identification technologies and products to improve security and to assure proper access. Digital Biometrics intends to aggressively pursue these emerging opportunities. The Company was incorporated in Minnesota in 1985 under the name C.F.A. Technologies, Inc., was reincorporated in Delaware in 1986 and changed its name to Digital Biometrics, Inc., in 1990. The Company's offices and facilities are located at 5600 Rowland Road, Minnetonka, Minnesota 55343, and its telephone number is (612) 932-0888. BIOMETRIC TECHNOLOGIES Digital Biometrics Inc., develops, manufactures, markets and integrates products in the field of "biometrics," the science of identifying individuals by measuring distinguishing biological characteristics. This field consists of a variety of techniques at various stages of technical maturity and market acceptance. These techniques include fingerprinting, voice recognition, retinal and iris scanning, DNA analysis, facial and hand geometry, and handwriting analysis. A number of these techniques have been incorporated into a variety of computer-based hardware and software measurement technologies. The goal is that, when used with databases of characteristics, which previously have been positively linked to specific individuals, these products enable the positive identification of an individual whose identity is under scrutiny. The Company believes the quality and reliability of the various non-fingerprint techniques range widely. For over a century, fingerprints have been and remain the method of choice to positively identify individuals. Forensic scientists endeavor to match latent fingerprints lifted from crime scenes with the fingerprints of suspected perpetrators. Criminal courts throughout the world accept the testimony of fingerprint experts and countless convictions have been achieved on the basis of fingerprint evidence. The computerization of fingerprint identification methods has greatly increased the speed of criminal identification processes and has been widely accepted in the law enforcement community. As yet, none of the other biometric identification technologies has achieved the degree of acceptance of fingerprints in law enforcement or any other markets. Digital Biometrics currently offers products that employ "forensic-quality" fingerprint capture technologies. Forensic quality refers to the resolution and pixel gray-scale depth of the image. The Company's products have been employed by law enforcement organizations in a number of states and foreign countries since 1988. LAW ENFORCEMENT AND REGULATORY AGENCY MARKETS Fingerprint identification was the first biometric technique to achieve widespread acceptance. Prior to the introduction of sophisticated computer-based fingerprint capture and matching technologies, manually taken fingerprints were manually cross-checked against collections of paper-and-ink fingerprint records to identify individuals and to positively associate them with crime scenes. In the United States, over 8,500,000 fingerprint cards are submitted every year to the Federal Bureau of Investigation (FBI), and thousands are collected by state and local law enforcement agencies. To manage these large quantities of data, computerized databases for fingerprint classification and identification were introduced in the 1970s. These systems, known as Automatic Fingerprint Identification Systems (generally referred to by the acronym "AFIS"), greatly improved the speed and efficiency of fingerprint searches. Current AFIS systems are capable of performing several thousand comparisons of fingerprints per second. These systems present a trained fingerprint examiner with a short list of candidate prints from which the examiner makes a final visual determination of whether two prints are identical. AFIS systems are provided by a number of vendors, including NEC Technologies, Morpho/SAGEM, Printrak, TRW and others. The Company does not provide AFIS systems. With the introduction of AFIS systems, it became apparent that, in practice, the quality of fingerprints taken using the traditional paper-and-ink method was often not adequate to meet the needs of this sophisticated technology. An unacceptably high percentage of conventionally inked fingerprints could not be read properly by AFIS systems because of poor image quality. In response to this problem, Digital Biometrics and its competitors introduced sophisticated computer-based imaging systems to capture and digitize fingerprints. This process yields a much higher level of so-called "minutia" points, which are the basis for the identification techniques used by AFIS systems. The Company's TENPRINTER system consistently generates high quality fingerprint data, which, at the user's option, may be transmitted over telephone lines to AFIS sites, other databases or the FBI, or may be printed out locally and/or at remote locations on any number of card formats. The TENPRINTER system also permits the booking officer to review the quality of the prints as they are being taken, enabling the officer to screen out bad prints without having to redo the entire fingerprint card, thus improving the productivity of the booking process. PRODUCTS THE TENPRINTER SYSTEM The Company's principal product, the TENPRINTER, is designed and marketed mainly as an input device to AFIS systems. Several large manufacturers produce and sell AFIS systems, which are computerized central fingerprint database systems capable of storing fingerprint information for an entire demographic unit such as a city, county, state or country. AFIS systems are designed to facilitate the work of a law enforcement agency's fingerprint technicians. An AFIS system is capable of electronically comparing a given set of fingerprints against all fingerprints in its database and producing a short list of potentially matching candidate prints. A fingerprint technician then visually compares the AFIS results with the fingerprints in question. Optimal use of an AFIS system depends in part on the clarity of the fingerprint images that are input to the AFIS. The TENPRINTER system consistently produces fingerprint images of higher clarity than those achieved by conventional "paper-and-ink" methods and is being marketed as a more accurate input to AFIS systems. The TENPRINTER system is a computer-based inkless live-scan system that electronically captures a fingerprint and creates a digital image. Fingerprints are captured by placing the fingers of a subject on a contact surface of an optical assembly. The optical image is converted into a digital image by an electronic photo-imaging detector. The digital image produced by the TENPRINTER system may be sent directly to the AFIS site by means of telecommunications or may be printed on a law enforcement agency's fingerprint card. In the gray-scale printing technology available with the TENPRINTER system, the printed fingerprint includes the nuances normally seen in a conventional "paper-and-ink" fingerprint. While prices of AFIS systems and live-scan systems vary widely depending on the configuration of the systems, AFIS systems cost from $500,000 to several million dollars, while live-scan systems are priced between approximately $30,000 and $80,000 per unit. The primary target market for the TENPRINTER is state and local law enforcement agencies that have purchased, are purchasing, or have access to AFIS systems. The assistance and support of the AFIS vendor is frequently important in the sale and installation of live-scan systems. Law enforcement agencies submit one copy of a fingerprint card to the FBI for every suspect charged with a felony. Over 8,500,000 such cards are submitted to the FBI each year. As a result, the FBI plays an important role in the fingerprint identification process in the United States. The FBI has put into place an extensive testing process for live-scan systems. When a live-scan system passes the testing process, the FBI will accept cards produced by that live-scan for submission to the FBI's Identification Division and for retention in the Division files. The Company's TENPRINTER system has received accreditation under the FBI Image Quality Standards ("IQS"). To the best of the Company's knowledge, competitors also have received or are in process of receiving such approval. Regulatory standards such as IQS continue to evolve and there can be no assurance that the Company will be able, without significant cost and expense, to comply with future requirements. The FBI has awarded contracts in connection with a multi-phase program of its well-publicized fingerprint automation and revitalization project which, when operational, will involve the paperless utilization of fingerprint data and, ultimately, the capability to eliminate fingerprint cards at the FBI level. The FBI has stated that 62,000 contributors currently submit fingerprint cards to the FBI. The Company believes that when the FBI's new system becomes operational, it may have a positive impact on demand for live-scan equipment. ANCILLARY PRODUCTS The Company's TENPRINTER systems are normally configured in networked environments. Digitized TENPRINTER fingerprint records are frequently transmitted to multiple destinations, including central sites for printing and one or more criminal record databases, including AFIS systems. The Company has developed several ancillary products sold in conjunction with the TENPRINTER which facilitate central printing and remote transmission of digitized fingerprint images. Digital Biometrics also offers various software programs, which enhance the functionality of the TENPRINTER. ASSEMBLY, INSTALLATION AND MAINTENANCE The Company's TENPRINTER systems are assembled from purchased components at its facility in Minnetonka, Minnesota. Other than prototypes, for which the development time may vary, the time required for product delivery averages approximately 60 days from the date a purchase order is received. TENPRINTER systems are installed by Company employees or contractors. Installation has frequently required implementation into customer network configurations, many of which are complex. The Company has historically provided these services at little or no additional charge to the customer. Management intends to negotiate future orders requiring customers to compensate the Company for such services, although there can be no assurance that this will be accepted. Digital Biometrics offers various levels of maintenance service for its equipment, which are delivered by Company employees or third party maintenance providers. These services have historically been provided in the aggregate, below the Company's fully loaded cost. Management intends to change maintenance pricing to achieve profitability, although there can be no assurance that this effort will be successful. SALES AND DISTRIBUTION The Company sells TENPRINTER systems directly to end users through a direct sales force and through partnering relationships with AFIS suppliers, including NEC Technologies and Morpho/SAGEM. Relationships with AFIS vendors are an important means of distribution to many customers and, consequently, are key to the Company. Furthermore, live-scan products must deliver output to AFIS systems, thereby requiring a technical relationship between the Digital Biometrics and AFIS suppliers to assure proper integration of TENPRINTER installations with the requirements of AFIS systems. See the section on "Competition" which follows. OTHER PRODUCTS FOR LAW ENFORCEMENT The SQUID(TM) system is a lightweight, portable, hand-held unit designed for use in the police patrol car. The SQUID system captures "on-the-spot" fingerprints which can then be relayed from the patrol car to a communications center where identification can take place. This product will permit patrol officers to obtain positive identification without transporting suspects to the police station. The SQUID system is being designed and manufactured to specifications of the FBI NCIC 2000 project which is currently planned to be operational in 1999. The SQUID system is currently being marketed on a limited basis. The Company has offered software development services and internally-developed mugshot products to a limited number of customers. COMPETITION The market for live-scan systems is competitive. Live-scan products are offered by several companies including Identix and Printrak. NEC Technologies is both a strategic partner and, in certain circumstances, a competitor. The Company competes in the live-scan market primarily on the basis of image quality, features, performance, service and support, and price. Continued growth in demand for live-scan fingerprint systems may attract additional competition. The vendors of AFIS systems are logical participants in the live-scan market, as evidenced by the entry of Printrak into the live-scan market and the marketing by NEC Technologies of a live-scan product, the LS-21, which includes features and components currently sourced from Identix. Other AFIS vendors and other potential additional competitors could enter the law enforcement market, and may have financial and other resources significantly greater than those of the Company. Also see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Cautionary Statements." SUPPLIERS Digital Biometrics buys substantially all components of the TENPRINTER system from outside suppliers for assembly and testing by the Company. Some of these components are designed by the Company and/or are custom manufactured to its specifications. The Company may specify parts used in such components. The Company inspects and tests incoming parts and components, and conducts test and burn-in procedures on assembled finished products. Certain components used in manufacturing of TENPRINTER systems are currently supplied by a single vendor to obtain volume economies. Secondary sources are available but would take several months to bring into production. Delays in product deliveries to customers could occur until the secondary sources are secured. The Company provides field maintenance services directly and through subcontract arrangements with third parties. COMMERCIAL MARKETS SINGLE FINGERPRINT CAPTURE DEVICES Digital Biometrics has leveraged its expertise in forensic-quality fingerprint capture technology to create two forensic-quality single fingerprint capture devices, the FC-21(TM) and FC-22 (TM). The FC series single fingerprint capture units have been marketed on a limited basis and are priced approximately from $1,250 to $2,500 per unit. Demand for single fingerprint capture devices for commercial applications appears to be growing. The Company is evaluating a more aggressive marketing effort of its FC products in commercial markets. SYSTEMS INTEGRATION In December 1997, the Company formed the Integrated Identification Solutions Division ("IIS") to provide systems integration services to commercial clients. The business objective of this division is to address what the Company believes is growing interest in the integration of biometric identification techniques into commercial applications which require a higher level of security than is currently available through traditional techniques such as personal identification numbers (PINs) and passwords. It is anticipated that this division may also provide integration services to governmental customers including law enforcement organizations. GAMING The Company believes that it has a strong basis for competition in the systems integration business due to its focus on biometric identification. However, the systems integration business is competitive and includes many firms with substantially greater resources then the Company. Digital Biometrics has developed a prototype blackjack table wagering data capture system called TRAK-21. The TRAK-21 system was developed to enable casinos to track the wagering activity of its blackjack patrons. The Company has derived no revenues to-date from this system. In November 1997, the Company announced an agreement in principle with Grand Casinos, Inc., to form a joint venture for the commercialization of this system. It is anticipated that if the system is successfully productized that the joint ventures company will market the system to the gaming industry. There are a variety of companies providing blackjack player tracking information and capabilities to the gaming industry, the most prominent of which is Mikohn Gaming Corporation. The TRAK-21 Player Tracking System uses high-level image processing for automatically calculating wagers, which differentiates TRAK-21 from other systems (including Mikohn's) which use table and chip sensors to track player wagering. Components necessary for the manufacture of TRAK-21 systems are anticipated to be primarily standard parts available from a variety of suppliers. PROPRIETARY TECHNOLOGY The Company owns federally registered trademarks for the mark TENPRINTER, the Company's mechanical hand logo, and SQUID. The Company has applied for trademark registration for TRAK-21. Digital Biometrics owns several U. S. patents and has U. S. patent applications pending which cover technology currently employed in its products. The Company has also filed for patent protection in several foreign countries. Although additional features of the Company's products may be patentable, the Company has chosen to preserve these features as trade secrets rather than applying for patent protection. The Company has obtained signed confidentiality agreements from all employees and from independent consultants who have access to confidential information. The Company is in the appeals process regarding a claim of patent infringement against a competitor. See "Item 3. Legal Proceedings." ENGINEERING AND DEVELOPMENT The Company incurred engineering and development expenses for new product development and enhancements to existing products. For the fiscal years ended September 30, 1997, 1996 and 1995 the company's engineering and development expenses, excluding depreciation and amortization, were $2,526,000, $4,570,000, and $2,855,000, respectively. The Company's engineering and development expenses for fiscal years 1996 and 1995 are net of reimbursement of $87,700 and $772,500, respectively, from a company with which there was a teaming agreement for an international development project. BACKLOG At September 30, 1997, the Company's firm backlog of orders for TENPRINTER systems and related products was approximately $2,282,000, as compared to a backlog of approximately $3,773,000 at September 30, 1996. EMPLOYEES At November 30, 1997, the Company employed 81 persons on a full-time basis, none of whom is represented by a union. Of these persons, six have general management responsibilities and the remainders perform sales, marketing, engineering, customer service, assembly, or administrative functions. From time to time to meet critical demands, the Company has utilized additional individuals to perform services for the Company on a part-time or a consulting basis. Personnel will be hired in the future as the Company deems necessary. The Company believes that its employee relations are good. All employees of the Company have executed agreements which provide for the confidentiality of Company proprietary information and the ownership by the Company of inventions developed using Company resources. ITEM 2. PROPERTIES The Company does not own any real properties. The Company's primary offices and facilities are located in approximately 31,000 square feet of space in an industrial park at 5600 Rowland Road, Minnetonka, Minnesota. The space is occupied under a lease expiring on April 30, 2001, and is believed to be adequate for the Company's current business needs. A field service and sales office is located in Los Angeles, California, in approximately 3,400 square feet of space in an industrial office park. This space is occupied under a lease expiring December 1997. This lease is a year-to-year arrangement, and is currently under negotiation for renewal. ITEM 3. 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/or sale of competing products. The alleged infringement pertains to how rolled fingerprint images are obtained optically and how they are mathematically represented in storage. The Identix TP-600 and TP-900 devices are both alleged to infringe on the DBI patent. This technology is a fundamental aspect of the fingerprint capture task in forensic quality live-scan. The complaint seeks, among other things, an injunction prohibiting further infringement as well as unspecified monetary damages. Identix responded to the complaint alleging, among other purported defenses, non-infringement and patent invalidity. On August 27, 1996, the judge assigned to the case granted a partial summary judgment in favor of Identix dismissing the Company's claims of patent infringement with respect to the Identix Touchprint 600 product line. A predecessor product, the Touchprint 900, received a similar ruling in favor of Identix on December 20, 1996. In January 1997, the Company filed an appeal of the court's decision of non-infringement. These appeals are decided by the Federal Circuit which is a Court of Appeals in Washington D.C. On October 8, 1997, the appeal was argued before the Court. As of December 11, 1997, no appellate decision has been issued. A prediction of the final outcome of the appeal is not possible. In the event the Company does not prevail in this litigation, its competitive position could be adversely affected. Except for the foregoing, there are no material lawsuits pending or, to the Company's knowledge, threatened against the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the stockholders during the three months ended September 30, 1997. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION. The Company's Common Stock is traded on The NASDAQ National Market under the symbol "DBII." The following closing price information is provided for quarterly periods for the past two fiscal years. Fiscal Year ended September 30, 1997 High Low ---- --- First Quarter $3.88 $2.13 Second Quarter 2.94 1.81 Third Quarter 2.81 1.50 Fourth Quarter 2.69 1.56 Fiscal Year ended September 30, 1996 High Low ---- --- First Quarter $ 8.25 $ 5.25 Second Quarter 5.88 2.63 Third Quarter 8.75 3.13 Fourth Quarter 6.63 3.00 As of November 30, 1997, the Company had approximately 7,200 record holders of its Common Stock. The closing price of its Common Stock on November 30, 1997, as reported by the NASDAQ National Market System was $2.094. DIVIDEND POLICY. Holders of Common Stock are entitled to such dividends as may be declared from funds legally available for such purpose by the Board of Directors in its sole discretion. The Company has never paid a dividend on its Common Stock and it is not anticipated that dividends will be paid in the foreseeable future. If and to the extent that any operating profits are realized, the Company intends to retain such profits for operating purposes. TRANSFER AGENT. The Transfer Agent and Registrar for the Company's Common Stock is Norwest Bank, Minneapolis, Minnesota. SALES OF UNREGISTERED SECURITIES. (a) Sales of Debentures and Warrants. On December 1, 1997, the Company sold (i) $500,000 principal amount of 8% Convertible Subordinated Debentures, (the "Debentures"), due December 1, 2000; and (ii) a Warrant dated December 1, 1997, (the "KA Warrant") for the purchase of 15,000 shares of the Company's Common Stock. The Debenture and 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, and issued to MJK a warrant for the purchase of 125,000 shares of the Company's Common Stock (The "MJK Warrant"). The issuance of the MJK Warrant was made in reliance upon the exemption from registration provided in Section 4(2) of the Act. No public offering of the MJK Warrant was involved. The Debentures are convertible into Common Stock of the Company at the lesser of $1.96 per share ("Initial Conversion Price") and .80 multiplied by the average price of the Company's Common Stock for the five trading days immediately preceding the conversion date. The KA Warrants are exercisable at $2.50 per share. The MJK Warrant is exercisable at $2.00 per share. The Company has entered into a Convertible Subordinated Debenture Purchase Agreement pursuant to which up to an aggregate of $2,500,000 of the Debentures may be purchased in separate tranches, of which the Debentures were tranch 1. The Company has agreed to register for resale under the Act the shares of Common Stock issuable upon conversion of the Debentures and the KA Warrants. The Company has granted incidental registration rights under the Act to MJK pursuant to the terms of the MJK Warrant. (b) Issuance of Warrants for Services. In consideration of services rendered or to be rendered, the Company issued warrants to purchase its Common Stock to the following persons or companies:
RELATIONSHIP NUMBERS OF EXERCISE NAME TO COMPANY SHARES PRICE DATE OF ISSUANCE --------------------------- ------------------- ------------- ----------- ------------------ Andcor Companies, Inc. Consultant 20,000 $2.3125 January 27, 1997 C. McKenzie Lewis III Director 8,000 2.125 March 18, 1997 Dennis Wendell Consultant 150,000 1.875 October 23, 1997 Jeffrey Whalen Consultant 50,000 1.875 October 23, 1997 Joseph VanLoy Consultant 50,000 1.875 October 23, 1997
All of the foregoing warrants were issued directly by the Company in reliance of Section 4(2) of the Act. The warrants issued to Andcor Companies, Inc., expire on January 27, 2000, the warrant issued to Mr. Lewis expires on March 18, 2000, and the warrants issued to Messrs. Wendell, Whalen and VanLoy expire on August 17, 2002. (c) Shares Issued to Non-Employee Directors. Effective September 30, 1997, the Company issued 3,000 shares of its Common Stock directly to each of its outside directors, C. McKenzie Lewis III, George Latimer, Steven M. Slavin and Jack A. Klingert. The issuance aggregating 12,000 shares was made in reliance upon the exemption provided in Section 4(2) of the Act, in recognition of services provided by the outside directors, who serve without monetary compensation. The Common Stock was issued to the outside directors in October 1997. (d) Restrictions. The foregoing securities are restricted as to sale or transfer, unless registered under the Act, and contain on certificates issued or to be issued upon exercise, restrictive legends preventing sale, transfer or other disposition unless registered under the Act. In addition, each of the recipients of the warrants received or had access to material information concerning the Company, including, but not limited to, the Company's reports on Forms 10-K, 10-Q and 8-K filed with the Securities and Exchange Commission. ITEM 6. SELECTED FINANCIAL DATA The following selected financial data of the Company as of and for each of the years in the five-year period ended September 30, 1997, has been derived from financial statements audited by KPMG Peat Marwick LLP, independent certified public accountants. The selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the audited financial statements and notes thereto included elsewhere in this Form 10-K.
YEAR ENDED SEPTEMBER 30, ----------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- STATEMENT OF OPERATIONS DATA: Revenues $ 11,419,358 $ 8,327,272 $ 9,098,014 $ 8,005,390 $ 4,603,821 Cost of revenues 8,811,271 6,181,481 5,273,412 4,997,103 2,631,860 Cost of revenues - non-recurring charges 1,529,118 -- -- -- -- ----------------------------------------------------------------------------- Gross margin 1,078,969 2,145,791 3,824,602 3,008,287 1,971,961 ----------------------------------------------------------------------------- Expenses: Sales and marketing 2,057,099 3,369,441 2,394,916 1,786,075 1,157,439 Engineering and development 2,526,346 4,569,751 2,854,592 3,618,385 2,022,521 Depreciation and amortization 319,536 1,049,584 529,687 480,981 143,310 General and administrative 2,043,954 2,753,444 1,700,017 1,296,864 972,644 Non-recurring charges 330,319 -- -- -- -- ----------------------------------------------------------------------------- Total expenses 7,277,254 11,742,220 7,479,212 7,182,305 4,295,914 ----------------------------------------------------------------------------- Loss from operations (6,198,285) (9,596,429) (3,654,610) (4,174,018) (2,323,953) Other income (expense) (77,109) (2,090,474) 330,055 376,703 259,410 ----------------------------------------------------------------------------- Net loss $ (6,275,394) $(11,686,903) $(3,324,555) $(3,797,315) $(2,064,543) ============================================================================= Net loss per common share $ (0.53) $ (1.24) $ (0.43) $ (0.49) $ (0.32) ============================================================================= Weighted average common shares 11,766,220 9,451,015 7,814,144 7,696,551 6,440,341 ============================================================================= AS OF SEPTEMBER 30, ----------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- BALANCE SHEET DATA: Cash and cash equivalents $ 1,891,397 $ 466,990 $ 367,866 $ 592,971 $ 4,485,606 Accounts receivable, net 5,161,356 5,676,849 4,494,301 4,575,807 1,756,128 Inventory 2,294,593 3,633,659 1,875,682 2,539,479 1,660,885 Working capital 6,131,758 5,506,587 13,493,690 11,864,794 14,048,363 Total assets 10,699,238 17,309,371 25,451,666 15,846,448 18,398,215 Long-term obligations -- 2,374,739 8,863,578 -- -- Total liabilities 3,533,990 6,853,999 12,362,412 2,077,368 1,495,057 Stockholders' equity 7,165,248 10,455,372 13,089,254 13,769,080 16,903,158
The Company has paid no cash dividends on its Common Stock. ITEM 7. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS GENERAL This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements include statements regarding intent, belief or current expectations of the Company and its management and are made in reliance upon the safe harbor provisions of the Securities Litigation Reform Act of 1995. Shareholders and prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties that may cause the Company's actual results to differ materially from the results discussed in the forward-looking statements. Reference is made to "Cautionary Statements" below. The Company is a developer, assembler, marketer and integrator of computer-based products and services for the identification of individuals. Most of the Company's sales have been to state and local law enforcement agencies and, to-date, have consisted primarily of TENPRINTER systems and related peripheral equipment, software and services. The law enforcement market and the government procurement process is subject to budgetary, economic and political considerations which may vary significantly from state to state and among different agencies. These market characteristics, along with the recent and continuing development of and competition within the live-scan electronic fingerprint industry, have resulted in and are expected to continue to result in an irregular revenue cycle for the Company; any prediction of future trends is inherently difficult. The Company generally recognizes product sales on the date of shipment, although recognition at some later milestone is not uncommon based on the terms of specific customer contracts. The Company's standard terms of sale are payment due net in thirty days, f.o.b. Digital Biometrics, Inc. Terms of sale and shipment for certain procurements by municipal or other government agencies may, however, be subject to negotiation which consequently may affect the Company's timing and criteria for revenue recognition. Revenue under contracts where a performance bond, collateral or customer acceptance is required is not recognized until collateral requirements have been satisfied and customer acceptance has occurred. In cases where the Company is required to purchase a performance bond or to deposit collateral in accordance with the terms of a contract, the Company's policy is to defer revenues under such contracts until the amount shipped exceeds the amount of the performance collateral or until the security is released by the bonding company. Maintenance revenues are recognized over the life of the contract on a straight-line basis. RESULTS OF OPERATIONS FISCAL 1997 COMPARED TO 1996 Total revenues in 1997 increased by 37% to $11,419,000 from $8,327,000 in 1996, due primarily to an increase in the number of TENPRINTER systems sold, partially offset by volume and trade-in discounts. The increase in identification systems product revenues from $6,821,000 in 1996 to $9,712,000 in 1997 resulted from an increase in sales of TENPRINTER systems, partially offset by volume and trade-in discounts. Product maintenance and service revenues increased from $1,506,000 in 1996 to $1,707,000 in 1997, due primarily to a larger installed base of TENPRINTER systems. Sales to three customers in 1997 accounted for 17%, 14% and 12% of total revenues. Sales to two customers in 1996 accounted for 18% and 12% of total revenues. Gross margins for 1997 and 1996 were 9% and 26% of revenues, respectively. Gross margin for 1997 includes non-recurring charges of $1,529,000 ($0.13 per share) recognized during the third quarter comprised of $838,000 of inventory adjustments substantially due to technical obsolescence, $524,000 of warranty reserve funding for warranty items mainly associated with the introduction and rollout of the S-Series, $132,000 for estimated committed losses on maintenance contracts, and $35,000 for the write-off of tooling. Gross margin for 1996 includes a write-off of $350,000 for excess field service spare parts related to previous generations of TENPRINTER products. Gross margins on identification system product revenues were 19% in 1997 compared to 44% in 1996 (including the impact of the relevant 1997 non-recurring charges). This decrease is due primarily to the impact of 1997 non-recurring charges, volume discounts offered to certain customers, and higher installation and warranty costs on S-Series TENPRINTER systems. Product maintenance and support margins for 1997 (including the impact of relevant 1997 non-recurring changes) and 1996 were (47%) and (57%) of maintenance and support revenues, respectively. Product maintenance costs for 1996 include a write-off of $350,000 for excess field service spare parts related to previous generations of TENPRINTER products. Sales and marketing expenses decreased to 18% of total revenues in 1997 from 40% in 1996, due primarily to higher revenues, reduced demonstration equipment expense, reduced charges for the allowance for doubtful accounts and, to a lesser extent, a reduction in personnel and related expenses during fiscal 1997. Sales and marketing expenses in 1996 include a write-off of $282,000 related to previous generation TENPRINTER system demonstration equipment and a charge of $540,000 related to an increase for the allowance for doubtful accounts. Engineering and development expenses decreased to 22% of total revenues in 1997 from 55% in 1996 largely due to increased revenues and lower S-Series and TRAK-21 development expenses. Engineering and development expenses during 1996 include charges of $374,000 related to adjustments of unreimbursed manufacturing setup costs of an international development project, and are net of reimbursements for international development costs of $88,000. Depreciation and amortization costs for 1996 include a write-off of $549,000 for unamortized software of information systems products no longer actively marketed. General and administrative expenses in 1997 decreased to 18% of total revenues from 33% in 1996 primarily due to higher revenues, reduced legal costs of a patent infringement suit brought by the Company against a competitor and a 1996 charge of $380,000 related to CEO transition costs. Operating expenses during fiscal 1997 include non-recurring and non-cash charges of $330,000 recognized during the third quarter for the write-off of assets with no future value and, to a lesser extent, equipment disposals. Interest income decreased to $230,000 in fiscal 1997 from $586,000 in fiscal 1996, primarily as a result of lower balances of marketable securities. Interest expense decreased to $300,000 in fiscal 1997 from $2,676,000 in fiscal 1996, primarily due to a non-cash charge of $1,924,000 during fiscal 1996 for the intrinsic value of the beneficial conversion feature of the 1995 Convertible Debentures, and to a lesser extent, conversions of the 1995 Convertible Debentures. FISCAL 1996 COMPARED TO 1995 Fiscal 1996 operating results include a fourth quarter charge of $2,474,000 ($0.26 per share) related to a review of strategies and refocusing of the business conducted by prior management. This charge includes severance expenses, write-off of excess and obsolete inventory and demonstration equipment resulting from the introduction of the Company's new S-Series TENPRINTER, an increase in the allowance for doubtful accounts, unreimbursed international development costs and the write-off of unamortized technology rights as a result of the Company's decision in the fourth quarter to no longer pursue the technology acquired in the Design Data acquisition in 1994. Total revenues in 1996 decreased to $8,327,000 from $9,098,000 in 1995, due primarily to the inclusion in 1995 revenues of $1,800,000 in fees related to an international development project. The increase in identification system product revenues from $6,069,000 in 1995 to $6,821,000 in 1996 resulted from an increase in sales of TENPRINTER systems partially offset by lower 1996 average selling prices. Product maintenance and service revenues increased from $1,229,000 in 1995 to $1,506,000 in 1996, due primarily to a larger installed base of TENPRINTER systems. Sales to two customers in 1996 accounted for 18% and 12% of total sales. Sales to two customers in 1995 accounted for 29% and 23% of total revenues. Gross margins for 1996 and 1995 were 26% and 42% of revenues, respectively. Gross margin for 1996 includes a fourth-quarter write-off of $350,000 for excess field service spare parts related to previous generations of TENPRINTER products. Gross margins on identification system product revenues were 44% in 1996 compared with 50% in 1995. This decrease is due primarily to costs related to a six-month delay in the introduction of the S-Series TENPRINTER system. During this six-month period there were only nominal TENPRINTER system deliveries. The fourth quarter in particular was impacted with high initial costs of product introduction, including training and installation of field service providers. Product maintenance and support margins for 1996 and 1995 were (57%) and (34%) of maintenance and support revenues, respectively. The increased costs of product maintenance and support are due primarily to the building of base field service operations. Product maintenance costs for 1996 also include a fourth-quarter write-off of $350,000 for excess field service spare parts related to previous generations of TENPRINTER products. Sales and marketing expenses increased to 40% of total revenues in 1996 from 26% in 1995 due primarily to increased international marketing efforts, S-Series promotional expenses, a fourth-quarter write-off of $282,000 related to previous generation TENPRINTER system demonstration equipment and a fourth-quarter charge of $540,000 related to an increase in the allowance for doubtful accounts. Engineering and development expenses increased to 55% of total revenues in 1996 from 31% in 1995. Engineering and development expenses during 1996 include fourth-quarter charges of $374,000 related to adjustments of unreimbursed manufacturing setup costs of an international development project. After adjustment, engineering and development expenses for 1996 and 1995 are net of reimbursements for international development costs of $87,700 and $772,500, respectively. Depreciation and amortization costs include a fourth-quarter write-off of $549,000 for unamortized software of information systems products no longer actively marketed. General and administrative expenses in 1996 increased to 33% of total sales from 19% in 1995, due primarily to $757,000 of legal costs associated with a patent infringement suit brought by the Company against a competitor and a fourth-quarter charge of $380,000 related to CEO transition costs. Interest income increased to $586,000 in fiscal 1996 from $378,000 in fiscal 1995, primarily as a result of increased levels of marketable securities. Interest expense increased to $2,676,000 in fiscal 1996 from $48,000 in fiscal 1995, due to interest expense on the 1995 Convertible Debentures and a non-cash charge of $1,924,000 for the intrinsic value of the beneficial conversion feature of the 1995 Convertible Debentures. INFLATION The Company does not believe inflation has significantly impacted revenues or expenses. NET OPERATING LOSS CARRYFORWARDS At September 30, 1997, the Company has carryforwards of net operating losses of approximately $30,700,000 that may allow the Company to reduce future income taxes that would otherwise be payable. Of this amount, approximately $2,200,000 relates to compensation associated with the exercise of non-qualified stock options which, when realized, would result in approximately $880,000 credited to additional paid-in capital. The carryforwards expire annually beginning in 1999. The annual limitation on use of net operating losses is calculated by multiplying the value of the corporation immediately prior to the change in ownership by the long-term federal tax exempt rate. A total of $3,700,000 of the net operating loss carryforwards at September 30, 1997, is subject to an annual net operating loss limitation, estimated at $350,000, resulting from the change in control of the Company which occurred, for income tax purposes, on December 14, 1990, the date of the Company's initial public offering. If the limited carryforward amount for any tax year exceeds the regular taxable income for such year, then the unused portion may generally be carried forward to increase the annual limitation for the following year. Utilization of net operating losses aggregating $27,000,000 which were incurred subsequent to the change of ownership are not limited. However, any future ownership change could create a limitation with respect to these loss carryforwards. LIQUIDITY AND CAPITAL RESOURCES GENERAL For the period from the Company's inception in 1985 through September 30, 1997, the Company's cumulative deficit was $35,323,000. Losses are expected to continue until revenues and gross margin from sales of the Company's current and future products and services are sufficient to cover the level of operating expenses required for the Company's operations. The Company's business has included large contract awards from international, state and local law enforcement agencies and it is expected that this will continue. Collection of receivables related to billings of these contract amounts is often protracted. The Company entered into a receivables financing line of credit effective October 1, 1996, for the lesser of eligible receivables or $3,500,000 with Norwest Business Credit. Borrowings under this line of credit are secured by all assets of the Company. The line bears interest at 1.5% above the prime rate (8.5% at September 30, 1997), is payable upon demand and expires in January 1998. The Company elected to use the proceeds from the sale of marketable securities to pay off all borrowings under this line of credit at September 30, 1997. For the period from September 30, 1997, through January 31, 1998, the minimum interest shall be $10,000 per the terms of the agreement. The Company anticipates renewal of the line upon expiration. The Company had a $4,000,000 line of credit with Norwest Bank Minnesota N.A. Borrowings under this line of credit were secured by marketable securities and were limited to 80% of the market value of marketable securities held as collateral by the bank. The Company elected to use the proceeds from the sale of marketable securities during fiscal 1997 to pay off all borrowings under the line at September 30, 1997 and terminate the line. The Company has a $200,000 line of credit with First Bank Minneapolis, secured by cash deposits. Borrowings under the line bear interest at the prime rate and are payable upon demand and expire in March 1998. There were no borrowings under the line at September 30, 1997. ISSUANCE OF 8% CONVERTIBLE SUBORDINATED DEBENTURES AND WARRANTS SUBSEQUENT TO FISCAL YEAR END To provide additional working capital, on December 1, 1997, the Company entered into a convertible subordinated debenture purchase agreement ("Purchase Agreement") with a private investor, providing for the Company's issuance and sale of up to an aggregate of $2,500,000 of 8% Convertible Debentures (the "Debentures") in tranches of $500,000 each. The first tranche was sold on December 1, 1997. Additional tranches may be issued upon request of the Company within 90 days of each previous tranche, if the Company meets conditions to issuance including, but not limited to, conditions requiring the Company to have effective and maintain a registration statement with the Securities and Exchange Commission covering shares issuable upon conversion of the Debentures, and a requirement that the Company's market capitalization be at least $12 million. The initial tranche sold in the amount of $500,000 on December 1, 1997 is convertible in whole or in part at the option of the holder, with accrued interest, into Common Stock, at a conversion price equal to the lesser of the average closing price of the five consecutive trading days preceding the transaction ($1.96 per share) or 80% of the average closing price of the five consecutive trading days preceding the conversion date. Future tranches may be convertible on a similar basis but the conversion prices will be related to the lesser of the market price on the issue date and the market price on the conversion date. The Company has the right, exercisable at any time upon two trading days notice to the purchaser of the debentures given at any time the Company receives a conversion notice and the conversion price in effect in connection with such conversion notice is less than $1.25, to repay, all or any portion of the outstanding principal amount of the debentures which have been tendered for conversion, at a price equal to the sum of 120% of the aggregate principal amount of debentures to be repaid. In connection with the Purchase Agreement, the Company has agreed to issue to the purchaser of the debentures, upon the sale of each tranche warrants to purchase 15,000 of Common Stock exercisable at $2.50 per share up to a maximum of 75,000 shares. Also, in connection with the transaction, the Company paid $40,000 of fees to an investment-banking firm and issued a warrant to purchase 125,000 shares of Common Stock at an exercise price of $2.00 per share. The estimated value of this warrant is $87,500 which is a debt issuance cost to be written off to interest expense over the term of the Debentures. The Purchase Agreement includes a beneficial conversion feature. The intrinsic value of the beneficial conversion feature of each tranche will be allocated to additional paid-in capital with the resulting discount on the debt resulting in a non-cash interest expense charge to earnings (loss) over the vesting period of the conversion feature. The intrinsic value of the conversion feature of the first tranche is $125,000. Net proceeds to the Company will be used for working capital, the development of new business opportunities, and other general corporate purposes. ANALYSIS OF CASH FLOWS FROM OPERATIONS Net cash used in operating activities was $2,652,000 and $9,374,000 for the years ended September 30, 1997 and 1996, respectively. The decrease in cash used in operating activities was primarily a result of the decreased net loss in fiscal 1997 adjusted for changes in operating assets and liabilities. Cash flows from changes in operating assets and liabilities changed from cash used of $3,016,000 in fiscal 1996 to $2,389,000 of cash provided in fiscal 1997. This $5,405,000 change in cash flow from operating assets and liabilities resulted primarily from improved accounts receivable and inventory balances. Net cash provided by investing activities was $5,289,000 for the year ended September 30, 1997, as compared with $757,000 of net cash used in investing activities for the year ended September 30, 1996. The change was primarily due to proceeds from paydowns and sales of marketable securities, and to a lesser extent, reduced capital expenditures in fiscal 1997. Capital expenditures in 1996 were primarily for engineering and manufacturing test fixtures. The Company's business does not require significant amounts of cash for capital expenditures because substantial amounts of the manufacturing and assembly processes utilized in the production of current products are performed by outside vendors, as directed by the Company. Specifically, the Company purchases electronics modules and standard mechanical assemblies from manufacturers of such goods. In addition, sheet metal components, optical components and specialized electronics modules are designed by the Company and manufactured to the Company's proprietary specifications by outside sources. Net cash used in financing activities was $1,213,000 for the year ended September 30, 1997, as compared to net cash provided by financing activities of $10,230,000 in 1996. Borrowings under lines of credit were $1,255,000 at September 30, 1996. On September 29, 1995, the Company completed a private placement to offshore accredited investors of $10,900,000 of 8% Convertible Debentures due September 29, 1998 (the "1995 Debentures"), all of which were converted to 4,237,748 shares of Common Stock as of September 30, 1997. The average conversion price was $2.70 per share. Net proceeds to the Company during fiscal 1996 after placement fees but before legal and other expenses were $10,109,750. Interest accrued on the 1995 Debentures was also payable in Common Stock at the time of conversion at the conversion price as described above. In addition to the cash placement fee, a warrant to purchase 112,893 shares of the Company's Common Stock at $8.40 per share was granted to the placement agent for this offering. The warrant was valued at $112,893, which is reflected as a discount on the 1995 Debentures and was amortized as interest expense over the term of the 1995 Debentures. The intrinsic value of the beneficial conversion feature of $1,923,529 was allocated to additional paid-in capital with the resulting discount on the debt resulting in a non-cash interest expense charge to earnings (loss) over the vesting period of the conversion feature. Net proceeds to the Company were used for working capital, product development and other corporate purposes. At September 30, 1997, the Company had $1,891,000 in cash and cash equivalents and $155,000 in marketable securities, which are classified as available for sale. The unrealized loss on marketable securities was $135,000, at September 30, 1996 and immaterial at September 30, 1997. These marketable securities were collateral for borrowings under a line of credit. Virtually all of the marketable securities were sold during fiscal 1997 with the proceeds used to pay off all borrowings under the Norwest lines of credit. There were no borrowings under lines of credit at September 30, 1997. CAUTIONARY STATEMENTS Information or statements provided by the Company from time to time, including statements contained in this Form 10-K, may contain certain "forward-looking information" including comments regarding anticipated future operations, market opportunities, operating results and financial performance of the Company. The cautionary statements provided below are being made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995 (the "Act") and with the intention of obtaining the benefits of the "safe harbor" provisions of the Act for such forward-looking information. The Company cautions readers that any forward-looking information provided by the Company is not a guarantee of future performance. Any such forward-looking information is subject to risks and uncertainties that may cause actual results to differ materially from those anticipated. Furthermore, the Company assumes no obligation to update such forward-looking information. GENERAL Among the most significant of these risks and uncertainties is the ability of the Company to: * Achieve operating profitability; * Develop and introduce new products and services; * Build profitable revenue streams around these new offerings; * Maintain the loyalty and continued purchasing of the Company's products by existing customers; * 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 the timely and cost-effective availability of components. INCREASED COMPETITION In addition, markets for the Company's products and services are characterized by significant and increasing competition. The Company's financial results may be adversely affected by the actions of existing and future competitors, including the development of new technologies, the introduction of new products, and price reductions by such competitors to gain or retain market share. WORKING CAPITAL AND LIQUIDITY Due primarily to continuing operating losses, the Company has not yet achieved positive cash flow. The Company has been and continues to be reliant on the availability of outside capital to sustain its operations. Management believes that cash and cash equivalents, accounts receivable and working capital provided from operations, together with available financing sources, are sufficient to meet current and foreseeable operating requirements, including the investment required to capitalize on new business opportunities. Risks related to the Company's ability to maintain adequate working capital and liquidity include the continued availability of bank credit after the expiration of the Company's current accounts receivable line of credit in January 1998; the availability of future tranches of capital under the terms of the 1997 Convertible Subordinated Debenture Purchase Agreement (see note 14 to the Financial Statements below); and payment by customers of accounts receivable at such times and in such amounts as to enable the Company to meet its payment obligations. Furthermore, there can be no assurance that further financing may not be required, or, if further financing is required, that it will be available on terms that are acceptable or favorable to the Company. LAW ENFORCEMENT MARKET CHARACTERISTICS RESULT IN IRREGULAR REVENUE CYCLES The Company's performance in any one reporting period is not necessarily indicative of sales trends or future performance. Law enforcement agencies are subject to political and budgetary constraints and the nature of the law enforcement market and government procurement processes are expected to continue to result in irregular and unpredictable revenue cycles for the Company. In many instances, customer procurements are dependent on the continued availability of state or federal government grants and general tax funding. LOCAL GOVERNMENTAL CREDIT CONSIDERATIONS The Company extends substantial credit to state and local governments in connection with sales of products to law enforcement agencies. Approximately 89%, and 70%, respectively, of customer accounts receivable at September 30, 1997 and 1996 were from government agencies, of which 39% and 40%, respectively, were from a single customer. For the years ended September 30, 1997, 1996 and 1995, sales to three customers in 1997 accounted for 43%, two customers in 1996 accounted for 30%, and two customers in 1995 accounted for 52%, respectively, of annual sales. Sales to sizeable customers requiring large and sophisticated networks of TENPRINTER systems and peripheral equipment often include technical requirements which may not be fully known at the time requirements are specified by the customer. In addition, contracts may specify performance criteria, which must be satisfied before the customer accepts the products and services. Collection of accounts receivable may be dependent on completion of customer requirements, which may be unpredictable and not fully understood at the time of acceptance of the order by the Company, and may involve investment of additional Company resources. These investments of additional resources are accrued when amounts can be estimated but may be uncompensated and negatively impact profit margins and the Company's liquidity. NEED TO UPGRADE PRODUCTS AND DEVELOP NEW TECHNOLOGIES Continued participation by the Company in the law enforcement market for live-scan systems requires the investment of Company resources in continuous upgrading of the Company's products and technology sufficient for the Company to compete and to meet regulatory and statutory standards. There can be no assurance that such resources will be available to the Company or that the pace of product and technology development established by management will be appropriate to the competitive requirements of the marketplace. GAMING MARKET RISKS The Company has recently announced an agreement in principle with Grand Casinos, Inc., to form a joint venture for the completion of productization and subsequent marketing of the resultant product(s) based on the Company's TRAK-21 technology. The terms and conditions of the joint venture have not been fully negotiated as of the date of this Form 10-K. There can be no assurance that a definitive agreement satisfactory to both parties will be reached. In the event that a joint venture is formed, it is susceptible to the normal business risks customary to a start-up operation. In particular, although prototype models of TRAK-21 have been successfully demonstrated, there can be no assurance that this technology will operate as required in live casino environments or that products based on TRAK-21 technology will be accepted by customers. In addition, it has not been determined whether or not the TRAK-21 system will be able to compete, on the basis of price and performance, with player tracking systems of competitors whose systems have been marketed for longer periods of time. There can be no assurance, therefore, that the joint venture, if implemented, will be profitable to the Company. SYSTEMS INTEGRATION AND NEW PRODUCT OPPORTUNITIES The Company has recently established a systems integration division designated as the Integrated Identification Solutions Division or "IIS". This is a start-up operation with the normal risks, attendant to the establishment of a new business. The ability of this new enterprise to ultimately generate revenues and profits is as yet undetermined. The Company believes it must invest significant resources to attract key employees, build a technical infrastructure and market the capabilities of the division to prospective customers prior to attracting any significant base of customers. It cannot be known whether sufficient profits will ultimately be generated to provide a return on this investment. While the Company believes that it has identified areas of market opportunity not well served by current participants, competition can be expected to increase, and such potential competitors may have greater resources available than the Company. There can be no assurance that the Company will be able to attract and retain qualified systems integration personnel necessary for the success of the IIS Division, which depends significantly upon the efforts and performance of its personnel. The Company is currently evaluating the investment of resources in product development and marketing related to its FC and SQUID products. The potential impact on the Company's future revenues and profits cannot be determined at this time. YEAR 2000 IMPACT ON COMPUTER SYSTEMS In June 1996, the Company began converting its computer systems enabling proper processing of transactions relating to the year 2000 and beyond. The operating system vendor has made software upgrades available to make its software compatible with the year 2000. The Company will also test its application software to ensure compatibility with the year 2000. The Company presently believes that, with modifications to existing software and converting to new software, the year 2000 will not pose significant operational problems for the Company's computer systems as so modified and converted, although there can be no assurance that unforeseen difficulties or costs may not arise. EFFECT OF CERTAIN ANTI-TAKEOVER LAWS AND STOCKHOLDERS' RIGHTS PLAN Certain provisions of the Delaware General Corporation Law and the Rights Agreement between the Company and Norwest Bank Minnesota, National Association, adopted by the Company effective May 2, 1996 (the "Rights Plan"), may have the effect of discouraging, delaying or preventing a change in control of the Company or unsolicited acquisition proposals. Section 203 of the Delaware General Corporation Law restricts business combinations with interested stockholders without board approval. Pursuant to the Rights Plan, the Company declared a dividend of one common share purchase right (the "Right") for each outstanding share of Common Stock. Each Right will entitle the holder thereof to purchase from the Company after the Distribution Date (as described below), a number of shares of Common Stock to be determined under the Rights Plan at an initial purchase price of $35, subject to adjustment. One additional Right is deemed delivered with each share of Common Stock subsequently issued by the Company. The Rights become exercisable on the first day after the earlier of (i) ten business days after the public announcement of the acquisition by a person or group of 15% or more of the outstanding Common Stock or (ii) ten business days after the commencement, or the first public announcement, of an intention to acquire through tender or exchange offer 15% or more of the outstanding Common Stock (the "Distribution Date"). In the event that the Company does not have sufficient authorized but unissued shares of Common Stock to permit the delivery of the required number of shares upon the exercise in full of the Rights, then each Right shall entitle the holder thereof to purchase the number of shares of Common Stock equal to a fraction determined under the Rights Plan. As of the date hereof, the Company does not have sufficient authorized and unissued shares of Common Stock to fully implement the Rights Plan. The Rights Plan may discourage certain types of transactions involving an actual or potential change in control of the Company which could be beneficial to the Company or its stockholders. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Digital Biometrics, Inc.: We have audited the accompanying balance sheets of Digital Biometrics, Inc. as of September 30, 1997 and 1996, and the related statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended September 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Digital Biometrics, Inc. as of September 30, 1997 and 1996, and the results of its operations and its cash flows for each of the years in the three-year period ended September 30, 1997, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Minneapolis, Minnesota November 21, 1997, except as to note 14(a) which is as of November 24, 1997, and note 14(b) which is as of December 1, 1997 DIGITAL BIOMETRICS, INC. BALANCE SHEETS SEPTEMBER 30, 1997 AND 1996
1997 1996 ------------ ------------ Current assets: Cash and cash equivalents $ 1,891,397 $ 466,990 Marketable securities (note 4) 154,808 -- Accounts receivable, less allowance for doubtful accounts of $441,276 and $692,534, respectively 5,161,356 5,676,849 Inventory (note 2) 2,294,593 3,633,659 Prepaid expenses and other costs 163,594 208,349 ------------ ------------ Total current assets 9,665,748 9,985,847 ------------ ------------ Property and equipment (note 3) 2,027,737 2,471,754 Less accumulated depreciation and amortization (1,113,185) (1,089,026) ------------ ------------ 914,552 1,382,728 ------------ ------------ Marketable securities (note 4) -- 5,690,371 Patents, trademarks, copyrights and licenses, net of accumulated amortization of $156,171 and $192,899, respectively (note 1) 118,938 123,017 Deferred issuance costs on convertible debentures, net of accumulated amortization of $196,854 and $172,476, respectively (note 7) -- 127,408 ------------ ------------ $ 10,699,238 $ 17,309,371 ============ ============ Current liabilities: Accounts payable $ 1,451,779 $ 1,103,174 Line of credit advances (note 5) -- 1,255,000 Deferred revenue 677,925 649,178 Accrued warranty 584,676 128,500 Other accrued expenses (note 6) 819,610 1,343,408 ------------ ------------ Total current liabilities 3,533,990 4,479,260 Convertible debentures (note 7) -- 2,374,739 ------------ ------------ Total liabilities 3,533,990 6,853,999 ------------ ------------ Stockholders' equity (note 10): Common Stock, $.01 par value. Authorized, 20,000,000 shares; issued and outstanding 12,361,038 and 10,777,288 shares, respectively 123,610 107,773 Additional paid-in capital 42,439,576 39,743,380 Unrealized losses on marketable securities (note 4) (1,639) (134,753) Deferred compensation (73,500) (96,000) Notes receivable from sale of Common Stock -- (117,623) Accumulated deficit (35,322,799) (29,047,405) ------------ ------------ Total stockholders' equity 7,165,248 10,455,372 Commitments (note 12) ------------ ------------ $ 10,699,238 $ 17,309,371 ============ ============
See accompanying notes to financial statements. DIGITAL BIOMETRICS, INC. STATEMENTS OF OPERATIONS YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
1997 1996 1995 ------------ ------------ ----------- Revenues: Identification systems (note 1) $ 9,712,259 $ 6,821,025 $ 6,069,382 Maintenance and other services 1,707,099 1,506,247 1,228,632 Other -- -- 1,800,000 ------------ ------------ ----------- Total 11,419,358 8,327,272 9,098,014 ------------ ------------ ----------- Cost of revenues: Identification systems (note 1) 6,614,314 3,814,167 3,040,428 Maintenance and other services 2,196,957 2,367,314 1,644,330 Non-recurring charges 1,529,118 -- -- Other -- -- 588,654 ------------ ------------ ----------- Total 10,340,389 6,181,481 5,273,412 ------------ ------------ ----------- Gross margin 1,078,969 2,145,791 3,824,602 ------------ ------------ ----------- Selling, general and administrative expenses: Sales and marketing 2,057,099 3,369,441 2,394,916 Engineering and development 2,526,347 4,569,751 2,854,592 Depreciation and amortization 319,536 1,049,584 529,687 General and administrative 2,043,953 2,753,444 1,700,017 Non-recurring charges 330,319 -- -- --------------------------------------------- Total expenses 7,277,254 11,742,220 7,479,212 ------------ ------------ ----------- Loss from operations (6,198,285) (9,596,429) (3,654,610) Other income (expense): Interest income 230,347 585,708 377,881 Interest expense (note 7) (300,039) (2,676,182) (47,826) Loss on disposal of fixed assets (7,417) -- -- ------------ ------------ ----------- Total other income (expense) (77,109) (2,090,474) 330,055 ------------ ------------ ----------- Net loss $ (6,275,394) $(11,686,903) $(3,324,555) ============ ============ =========== Loss per common share $ (0.53) $ (1.24) $ (0.43) ============ ============ =========== Weighted average common shares outstanding 11,766,220 9,451,015 7,814,144 ============ ============ ===========
See accompanying notes to financial statements. DIGITAL BIOMETRICS, INC. STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Additional Deferred ------------------- Paid-in Comp- Accumulated Shares Amount Capital ensation Other Deficit Total -------------------------------------------------------------------------------------- Balance September 30, 1994 7,787,959 $ 77,880 $28,846,828 $(389,483) $(730,198) $(14,035,947) $ 13,769,080 Restricted stock awards (note 10) 6,360 63 41,937 (42,000) -- -- -- Amortization of deferred compensation -- -- -- 214,799 -- -- 214,799 Exercise of employee stock options 30,500 305 70,550 -- -- -- 70,855 Stock award for retirement plan (note 9) 8,814 88 66,017 -- -- -- 66,105 Change in unrealized loss on marketable securities (note 4) -- -- -- -- 256,548 -- 256,548 Issuance of warrant in connection with convertible debentures (note 7) -- -- 112,893 -- -- -- 112,893 Intrinsic value of beneficial conversion feature of convertible debentures (note 7) -- -- 1,923,529 -- -- -- 1,923,529 Net loss -- -- -- -- -- (3,324,555) (3,324,555) -------------------------------------------------------------------------------------- Balance September 30, 1995 7,833,633 78,336 31,061,754 (216,684) (473,650) (17,360,502) 13,089,254 Restricted stock awards (note 10) 17,456 175 71,825 (72,000) -- -- -- Amortization of deferred compensation -- -- -- 192,684 -- -- 192,684 Stock award for retirement plan (note 9) 16,831 168 94,506 -- -- -- 94,674 Change in unrealized loss on marketable securities (note 4) -- -- -- -- 41,724 -- 41,724 Debt conversion (note 7) 2,751,868 27,519 8,201,870 -- -- -- 8,229,389 Warrant exercise 157,500 1,575 313,425 -- -- -- 315,000 Forgiveness of notes receivable from sale of common stock (note 10) -- -- -- -- 179,550 -- 179,550 Net loss -- -- -- -- -- (11,686,903) (11,686,903) -------------------------------------------------------------------------------------- Balance September 30, 1996 10,777,288 107,773 39,743,380 (96,000) (252,376) (29,047,405) 10,455,372 Restricted stock awards (note 10) 31,072 311 44,689 (18,000) -- -- 27,000 Amortization of deferred compensation -- -- -- 40,500 -- -- 40,500 Exercise of stock options 25,000 250 41,500 -- -- -- 41,750 Stock award for retirement plan (note 9) 41,798 418 88,403 -- -- -- 88,821 Change in unrealized loss on marketable securities (note 4) -- -- -- -- 133,114 -- 133,114 Debt conversion (note 7) 1,485,880 14,858 2,506,341 -- -- -- 2,521,199 Forgiveness of notes receivable from sale of Common Stock (note 10) -- -- -- -- 117,623 -- 117,623 Issuance of warrant as payment for services received (note 1) -- -- 15,263 -- -- -- 15,263 Net loss -- -- -- -- -- (6,275,394) (6,275,394) -------------------------------------------------------------------------------------- Balance September 30, 1997 12,361,038 $123,610 $42,439,576 $ (73,500) $ (1,639) $(35,322,799) $ 7,165,248 ======================================================================================
See accompanying notes to financial statements. DIGITAL BIOMETRICS, INC. STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
1997 1996 1995 ----------- ------------ ----------- Cash flows from operating activities: Net loss $(6,275,394) $(11,686,903) $(3,324,555) Adjustments to reconcile net loss to net cash used in operating activities: Provision for doubtful accounts receivable (98,660) 651,000 48,000 Provision for technological obsolescence -- 631,243 486,738 Deferred compensation amortization and other 207,997 372,234 214,799 Depreciation and amortization 585,622 864,183 551,715 Write-off of intangible assets 20,048 548,788 -- Loss on sale of marketable securities 64,624 -- -- Loss on disposal and write-off of fixed assets and tooling 227,769 8,305 10,071 Interest expense amortization for the intrinsic value of the beneficial conversion feature of convertible -- 1,923,529 -- debentures Interest expense on debentures converted into Common Stock 227,539 329,754 -- Changes in operating assets and liabilities: Accounts receivable 614,153 (1,833,548) 33,506 Inventory 1,339,066 (2,389,220) 177,059 Prepaid expenses and other expenses (5,119) (63,424) (23,144) Accounts payable 348,605 641,843 (352,467) Deferred revenue 28,747 106,420 81,083 Accrued expenses 63,462 521,741 248,955 ----------- ------------ ----------- Net cash used in operating activities (2,651,541) (9,374,055) (1,848,240) ----------- ------------ ----------- Cash flows from investing activities: Purchase of property and equipment (242,613) (849,755) (491,318) Proceeds from disposal of property and equipment -- -- 7,599 Patents, trademarks, copyrights and licenses (70,516) (36,859) (101,966) Sales of marketable securities before maturity 5,602,327 130,043 687,965 ----------- ------------ ----------- Net cash (used in) provided by investing activities 5,289,198 (756,571) 102,280 ----------- ------------ ----------- Cash flows from financing activities: Net line of credit (payments) advances (1,255,000) (195,000) 1,450,000 Exercise of warrants and options 41,750 315,000 70,855 Issuance of convertible debentures -- 10,109,750 -- ----------- ------------ ----------- Net cash (used in) provided by financing activities (1,213,250) 10,229,750 1,520,855 ----------- ------------ ----------- Increase (decrease) in cash and cash equivalents 1,424,407 99,124 (225,105) Cash and cash equivalents at beginning of year 466,990 367,866 592,971 ----------- ------------ ----------- Cash and cash equivalents at end of year $ 1,891,397 $ 466,990 $ 367,866 =========== ============ =========== Supplemental disclosure of cash flow information: Cash paid during the year for interest $ 222,132 $ 13,210 $ 47,826 =========== ============ ===========
See accompanying notes to financial statements. DIGITAL BIOMETRICS, INC. NOTES TO FINANCIAL STATEMENTS (1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Digital Biometrics, Inc., (the "Company") is a developer, manufacturer, marketer and integrator of computer-based products and services for the identification of individuals. The Company is a leading vendor of products employing "biometric" technology, the science of the identification of individuals through the measurement of distinguishing biological characteristics. The Company's principal product is the TENPRINTER(R) system for "live-scan" fingerprint capture used mainly in law enforcement applications. The TENPRINTER(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 and has recently established a systems integration services business focused on the integration of biometric and other identification technologies into applications for government and commercial markets. Substantially all of the Company's revenues in fiscal 1997, 1996 and 1995 came from sales and maintenance of live-scan systems for law enforcement and related applications. STATEMENTS OF CASH FLOWS CASH AND CASH EQUIVALENTS: For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments and certificates of deposit purchased with an original maturity date of three months or less to be cash equivalents. SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: On December 31, 1996 and 1995, the Company issued 41,798 and 16,831 shares, respectively, of Common Stock to satisfy the Company's discretionary matching to employees electing participation in the Company's 401(k) retirement plan. These issuances increased Common Stock and additional paid-in capital by $88,821 and $94,674, respectively, and reduced accrued compensation by the same amount. On January 27, 1997, the Company issued two warrants in payment for services rendered in securing employment of certain executive officers of the Company. Each warrant entitles the holder to purchase 10,000 shares of the Company's Common Stock, exercisable at the price of $2.3125 per share, subject to antidilution provisions of the warrants. These warrants were valued at a combined amount of $15,263. Effective with the acceptance of the resignation of a director, 6,341 shares of restricted Common Stock, which were not yet vested, were forfeited. Effective with their election at the annual stockholders' meeting held on March 18, 1997, the Company granted 25,413 shares of restricted Common Stock to certain of its non-employee directors. The grant resulted in $54,000 in additional Common Stock issued and an equal amount of deferred compensation expense that is being amortized on a straight-line basis over the three-year restricted period. Effective September 30, 1997, the Company granted 12,000 shares of restricted Common Stock to its non-employee directors. The grant resulted in $27,000 in additional Common Stock issued and an equal amount of compensation expense. For the fiscal years ended September 30, 1997 and 1996, the Company has issued 1,485,880 and 2,751,868 shares, respectively, of Common Stock for the conversion of principal aggregating $2,450,000 and 8,450,000, respectively, of the 1995 8% Convertible Debentures plus $228,000 and $329,000, respectively, of accrued interest. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK The Company extends credit to state and local governments in connection with sales of products to law enforcement agencies. Approximately 89% and 70%, respectively, of customer accounts receivable at September 30, 1997 and 1996, were from government agencies, of which 39% and 40%, respectively, was from a single customer. For the years ended September 30, 1997, 1996 and 1995, sales to three customers in 1997 accounted for 43%, sales to two customers in 1996 accounted for 30%, and sales to two customers in 1995 accounted for 52%, respectively, of annual sales. Export revenues were 5%, 15% and 21% of total revenues, for the years ended September 30, 1997, 1996 and 1995, respectively. DIGITAL BIOMETRICS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) MARKETABLE SECURITIES Marketable securities consist of collateralized mortgage-backed securities and U.S. Treasury zero coupon bonds. The Company classifies its marketable debt securities as available for sale and records these securities at fair market value. Net realized and unrealized gains and losses are determined on the specific identification cost basis. Unrealized gains and losses are reflected as a separate component of stockholders' equity. A decline in the market value of any available-for-sale or held-to-maturity security below cost that is deemed other than temporary results in a charge to operations resulting in the establishment of a new cost basis for the security. PATENTS, TRADEMARKS, COPYRIGHTS AND LICENSES Costs associated with patents, trademarks and copyrights are capitalized and amortized over 60 months or the remaining life of the patent, trademark or copyright, whichever is shorter. The cost of software licenses related to purchased software are capitalized and amortized over 36 months or the life of the license, whichever is shorter. Accumulated amortization at September 30, 1997 and 1996, was $156,171 and $192,899, respectively. The Company wrote off $20,048 of unamoritized patents during fiscal 1997 for patents which were abandoned. The Company wrote off $548,788 of unamortized technology rights costs during the fourth quarter of fiscal 1996 as a result of the decision to no longer actively pursue the technology acquired in the Design Data acquisition in 1994. Management periodically assesses the amortization period and recoverability of the carrying amount of intangible assets based upon an estimation of their value and future benefits of the recorded asset. Management has concluded that the carrying amount of the intangible assets is realizable. REVENUE RECOGNITION Revenues from product sales are generally recognized on the date of shipment. The Company's standard terms of sale are payment due net in 30 days, f.o.b. Digital Biometrics, Inc. Terms of sale and shipment for certain procurements by municipal or other government agencies may, however, be subject to negotiation. Revenue under contracts where a performance bond, collateral or customer acceptance is required is not recognized until collateral requirements have been satisfied and customer acceptance has occurred. In cases where the Company is required to purchase a performance bond or to deposit collateral in accordance with the terms of a contract, the Company's policy is to defer revenues under such contracts until the amount shipped exceeds the amount of the performance collateral or until the security is released by the bonding company. Maintenance revenues are recognized over the life of the contract on a straight-line basis. The Company's performance for any period is not necessarily indicative of sales trends or future performance. The nature of the law enforcement market and the government procurement process are expected to result in irregular and unpredictable revenue cycles for the Company. WARRANTY COSTS Estimated product warranty costs are accrued at date of shipment. ADVERTISING COSTS Advertising costs are expensed as incurred. ENGINEERING AND DEVELOPMENT ARRANGEMENTS Engineering and development costs are expensed as incurred. Engineering and development expenses during fiscal 1996 include fourth-quarter charges of $374,000 related to adjustments of unreimbursed manufacturing setup costs related to an international development project. After adjustments, engineering and development expenses for fiscal 1996 are net of a reimbursement of $87,700 from a company with which there was a teaming agreement for an international development project. NET LOSS PER COMMON SHARE Net loss per common share is determined by dividing the net loss by the weighted average number of shares of Common Stock and dilutive common share equivalents outstanding. Common share equivalents have been excluded from the computation of net loss per share, as their effect is anti-dilutive. EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128") which simplifies the standards for computing earnings per share. SFAS No. 128 replaces the presentation of primary earnings per share with a presentation of basic earnings per share, which excludes dilution. SFAS No. 128 must be adopted for financial statements issued for periods ending after December 15, 1997, with earlier application not permitted. All prior-period earnings per share amounts must be restated to conform to SFAS 128. The Company plans to adopt SFAS No. 128 during the first quarter of fiscal 1998. INCOME TAXES The Company has adopted the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statement carrying amount and tax basis of assets and liabilities. The Company provides for deferred taxes at the enacted tax rate that is expected to apply when the temporary differences reverse. STOCK-BASED COMPENSATION Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), was effective for 1996. This statement provides for a fair value based method of accounting for grants of equity instruments to employees. SFAS No. 123 permits entities to continue to apply the intrinsic-value method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"); however, pro forma disclosures of net income (loss) and earnings (loss) per share must be presented as if the fair value based method had been applied in measuring compensation cost. The Company elected to continue with the intrinsic-value method prescribed by APB No. 25 and the pro forma disclosures in Note 10. ACCOUNTING ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (2) INVENTORY Inventory is valued at standard cost, which approximates the lower of first-in, first-out (FIFO) cost or market. Inventory consists of the following: September 30, 1997 1996 ------------------- ------------------- Raw materials $1,054,606 $1,934,371 Work in process 699,097 717,696 Finished goods 540,890 981,592 ------------------- ------------------- $2,294,593 $3,633,659 =================== =================== DIGITAL BIOMETRICS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (3) PROPERTY AND EQUIPMENT Furniture and equipment are recorded at cost. Depreciation and amortization are computed on a straight-line basis over the estimated useful lives, generally three to five. Leasehold improvements are amortized over the estimated useful life of the asset or lease term, whichever is shorter. Property and equipment consist of the following: September 30, 1997 1996 ------------- -------------- Leasehold improvements $ 200,942 $ 172,222 Office furniture and equipment 671,146 835,933 Manufacturing equipment 237,465 193,612 Engineering equipment and tooling 918,184 1,269,987 ------------- -------------- $2,027,737 $2,471,754 ============= ============== (4) MARKETABLE SECURITIES Marketable securities consist primarily of collateralized mortgage-backed securities. Net realized and unrealized gains and losses are determined on the specific identification cost basis. Realized losses from sales of marketable securities during fiscal 1997 were $64,624. Unrealized gains and losses are reflected as a separate component of stockholders' equity. The unrealized loss for available-for-sale marketable securities is as follows: September 30, 1997 1996 ----------------- ----------------- Fair market value $154,808 $5,690,371 Amortized cost 156,447 5,825,124 ----------------- ----------------- Unrealized gain (loss) $ (1,639) $ (134,753) ================= ================= (5) LINES OF CREDIT The Company entered into a receivables financing line of credit effective October 1, 1996, for the lesser of eligible receivables or $3,500,000 with Norwest Business Credit. Borrowings under this line of credit are secured by all assets of the Company. The line bears interest at 1.5% above the prime rate (8.5% at September 30, 1997), is payable upon demand and expires in January 1998. The Company elected to use the proceeds from the sale of marketable securities to pay off all borrowings under the line at September 30, 1997. For the period from September 30, 1997 through January 31, 1998, the minimum interest shall be $10,000 per the terms of the agreement. The Company had a $4,000,000 line of credit with Norwest Bank Minnesota N.A. Borrowings under this line of credit were secured by marketable securities and were limited to 80% of the market value of marketable securities held as collateral by the bank. The Company elected to use the proceeds from the sale of marketable securities to pay off all borrowings under the line at September 30, 1997 and terminate the line. The Company has a $200,000 line of credit with First Bank Minneapolis, secured by cash deposits. Borrowings under the line bear interest at the prime rate and are payable upon demand. The line expires in March 1998. There were no amounts borrowed under the line at September 30, 1997. DIGITAL BIOMETRICS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (6) OTHER ACCRUED EXPENSES September 30, 1997 1996 --------------- --------------- Other accrued expenses consist of: Accrued salaries $ 265,707 $ 442,701 Accrued vacation 121,994 112,665 Accrued interest payable - 205,529 Other accrued expenses 431,909 582,513 --------------- --------------- $ 819,610 $1,343,408 =============== =============== (7) CONVERTIBLE DEBENTURES On September 29, 1995, the Company completed a private placement to offshore accredited investors of $10,900,000 of 8% Convertible Debentures due September 29, 1998 (the "1995 Debentures"). Net proceeds to the Company after placement fees but before legal and other expenses were $10,109,750. The 1995 Debentures were convertible one-third after 45 days, one-third after 75 days and one-third after 105 days at the option of the 1995 Debenture holders. The Company had the right to redeem the debentures prior to conversion. The conversion price was equal to the lesser of $7.00 per common share or 85% of the average trading price for any five consecutive trading days before conversion. Interest accrued on the 1995 Debentures was payable in Common Stock at the time of conversion at the conversion price as described above. In addition to the cash placement fee, a warrant to purchase 112,893 shares of the Company's Common Stock at $8.40 per share was granted to the placement agent for this offering. The warrant was valued at $112,893, which was reflected as a discount on the 1995 Debentures and was amortized as interest expense over the term of the 1995 Debentures. The intrinsic value of the beneficial conversion feature of $1,923,529 was allocated to additional paid-in capital with the resulting discount on the debt resulting in a non-cash interest expense charge to earnings (loss) over the vesting period of the conversion feature. Net proceeds to the Company were used for working capital, product development and other general corporate purposes. All of the 1995 Debentures and accrued interest have been converted into Common Stock during fiscal 1996 and fiscal 1997. The Company has issued 4,237,748 shares of Common Stock for the conversion of principal aggregating $10,900,000 of the Convertible Debentures plus $557,000 of accrued interest at an average conversion price of $2.70 per share. For the fiscal year ended September 30, 1997, the Company has issued 1,485,880 shares of Common Stock for the conversion of principal aggregating $2,450,000 of the 1995 Convertible Debentures plus $228,000 of accrued interest at an average conversion price of $1.80 per share. (8) FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments are recorded in its balance sheet. The carrying amount for cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, line of credit advances and convertible debentures approximate fair value due to the immediate or short-term maturity of these financial instruments. The fair values of investments in marketable securities are based on quoted market prices and are summarized in note 4. (9) RETIREMENT PLAN Effective January 1, 1992, the Company adopted a profit sharing and savings plan (the Plan) classified as a defined contribution plan and qualifying under Section 401(k) of the Internal Revenue Code. The Plan allows employees to defer a portion of their annual compensation through pre-tax contributions to the Plan. At the discretion of the Board of Directors, the Company may make matching contributions up to an amount equal to 50% of the contributions made by each employee, subject to a maximum contribution for each employee of 5% of compensation. The Board may also make other discretionary contributions to the Plan. Matching contributions at September 30, 1997 and 1996 resulted in accrued compensation expense of $88,321 and $81,184, respectively. Matching contributions have been paid through the issuance of Company Common Stock. For the years ended September 30, 1997, 1996 and 1995, the Company incurred $95,958, $102,504 and $66,708 respectively, of expense related to this plan. DIGITAL BIOMETRICS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (10) STOCKHOLDERS' EQUITY CAPITAL STOCK On December 31, 1996 and 1995, the Company issued 41,798 and 16,831 shares, respectively, of Common Stock to satisfy the Company's discretionary matching to employees electing participation in the Company's 401(k) retirement plan. These issuances increased Common Stock and additional paid-in capital by $88,821 and $94,674, respectively. SHAREHOLDER RIGHTS PLAN In May 1996, the Board of Directors adopted a Shareholder Rights Plan. The Plan is designed to enable the Company and its Board of Directors to develop and preserve long-term value for stockholders and to protect stockholders in the event an attempt is made to acquire control of the Company without an offer of fair value to all stockholders. Under the Plan, each stockholder of record beginning at the close of business on May 22, 1996, will receive as a dividend one right for each share of DBI Common Stock held. The rights expire on April 30, 2006. STOCK OPTIONS In order to attract and retain employees and directors, while preserving cash resources, the Company has, since its inception, utilized stock option awards issued through various stock option plans and employment arrangements. As of September 30, 1997, there were issued and outstanding options for 1,182,500 shares of Common Stock issued to employees and directors of which options to purchase 182,467 shares were currently exercisable. On January 14, 1994, two executive officers exercised options for 88,438 and 135,000 shares of Common Stock, respectively, at an exercise price of $1.33 per share. Pursuant to terms of the stock option plans, the Company loaned the total exercise amount to the executive officer in return for non-interest bearing promissory notes, secured by Common Stock issued. The notes are reflected as a reduction of stockholders' equity. In connection with each executive's severance package, $117,623 and $179,550 of notes receivable were forgiven by the Company and recorded as compensation expense in fiscal 1997 and 1996, respectively. Information relating to stock options during fiscal 1997, 1996, and 1995 is as follows: Shares Weighted Under Average Option Price Range Exercise Price ------ ----------- -------------- Unexercised options outstanding - September 30, 1994 574,900 $1.67-$14.75 $10.65 Options granted 339,500 $7.44-$9.00 $7.90 Options exercised (30,500) $2.00-$8.00 $2.32 Options forfeited (35,300) $7.44-$12.00 $10.25 - -------------------------------------------------------------------------------- Unexercised options outstanding - September 30, 1995 848,600 $1.67-$14.75 $9.87 Options granted 110,500 $5.50-$6.25 $5.77 Options exercised - - - Options forfeited (76,500) $7.44-$13.63 $9.56 - -------------------------------------------------------------------------------- Unexercised options outstanding - September 30, 1996 882,600 $1.67-$14.75 $9.38 Options granted 1,001,700 $1.56-$3.13 $2.19 Options exercised (25,000) $1.67 $1.67 Options forfeited (676,800) $2.56-$14.75 $9.80 - -------------------------------------------------------------------------------- Unexercised options outstanding - September 30, 1997 1,182,500 $1.56-$14.75 $3.21 The following table summarizes information concerning options outstanding and exercisable as of September 30, 1997: Outstanding Exercisable ----------- ----------- Number of options 1,182,500 182,467 Weighted average remaining contractual life, in years 8.93 6.11 Weighted average exercise price $3.21 $8.08 The Company applies APB Opinion No. 25 in accounting for options granted under its stock option plans and, accordingly, no compensation cost has been recognized for its stock options in the financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net loss would have increased to the pro forma amounts indicated below: 1997 1996 --------------- ---------------- Net loss - as reported $(6,275,394) $(11,686,903) Net loss - pro forma (6,773,897) (11,688,889) Loss per share - as reported $(0.53) $(1.24) Loss per share - pro forma $(0.58) $(1.24) The pro forma net loss reflects only options granted in 1997 and 1996. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net loss amounts presented above because compensation cost is reflected over the options' vesting period, typically three years, and compensation cost for options granted prior to October 1, 1995, is not considered. Principal assumptions used in applying the option valuation model were as follows: 1997 1996 ---------------- --------------- Risk-free interest rate 5.75% 5.75% Expected life, in years 10 10 Expected volatility 127% 68% Expected dividend yield 0% 0% RESTRICTED STOCK Effective October 1, 1992, the Board of Directors adopted the 1992 Restricted Stock Plan (the "Plan") pursuant to which awards of restricted stock may be made to employees and non-employee directors of the Company. The Plan serves as a means of providing annual bonus amounts to executive employees and as the means of compensation of non-executive directors effective with each director's election at the annual meeting of stockholders. Restricted stock awards vest over a three-year period. The Company awarded 25,413, 17,456 and 8,860 shares, respectively, of Common Stock with a fair market value of $54,000, $72,000 and $72,000, respectively, for the years ended September 30, 1997, 1996 and 1995. Effective September 30, 1997, the Company granted 12,000 shares of restricted Common Stock to its non-employee directors. The grant resulted in $27,000 in additional Common Stock issued and an equal amount of compensation expense. WARRANTS The Company has warrants outstanding at September 30, 1997, for the purchase of 140,893 shares of its Common Stock. The warrants are currently exercisable and expire at various times through September 29, 2000. The exercise prices per share range from $2.125 to $8.40. DIGITAL BIOMETRICS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (11) INCOME TAXES There is no provision for income taxes since a valuation allowance has been established equal to the corresponding net deferred tax asset. At September 30, 1997, the Company has carryforwards of net operating losses and research and development tax credits of $30,700,000 and $827,608, respectively. These carryforwards expire as follows: Net Research and Operating Development Loss Tax Credit ------------------- ------------------ 1999 $ 346,711 $ 15,236 2000 116,546 1,997 2001 - 6,343 2002 547,523 40,774 2003 993,803 68,109 2004 22,477 1,497 2005 1,387,756 - 2006 1,310,521 34,307 2007 2,084,429 63,736 2008 2,248,457 133,548 2009 4,605,122 307,704 2010 2,734,225 154,357 2011 7,268,776 - 2012 7,033,654 - ------------------- ------------------ $30,700,000 $ 827,608 =================== ================== Due to uncertainty of the realization of deferred tax assets, the Company has established a valuation allowance equal to net deferred tax assets. The change in the valuation allowance for the years ended September 30, 1997 and 1996, is as follows: 1997 1996 ----------------- ---------------- Balance at beginning of year $11,328,000 $ 8,099,000 Change in valuation allowance 2,523,000 3,229,000 ----------------- ---------------- $13,851,000 $11,328,000 ================= ================ The current and long-term deferred income tax asset and liability amounts as of September 30, 1997 and 1996, were composed of the following:
1997 1996 ---------------- ---------------- Current and long-term deferred income tax asset resulting from future deductible temporary differences are: Accounts receivable allowance $ 177,000 $ 277,000 Inventory capitalization 28,000 39,000 Other accrued expenses 538,000 704,000 Research and development tax credit carryforwards 828,000 828,000 Net operating loss carryforwards 12,280,000 9,480,000 ---------------- ---------------- 13,851,000 11,328,000 (13,851,000) (11,328,000) ---------------- ---------------- $ 0 $ 0 ================ ================
DIGITAL BIOMETRICS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (11) INCOME TAXES (CONTINUED) The aforementioned carryforwards are subject to the limitation provisions of Internal Revenue Code sections 382 and 383. These sections provide limitations on the availability of net operating losses and credits to offset current taxable income and related income taxes when an ownership change has occurred. The Company's initial public offering in December 1990, resulted in an ownership change pursuant to these provisions and, accordingly, the use of the above carryforwards is subject to an annual limitation. The annual limitation on use of net operating losses is calculated by multiplying the value of the corporation immediately prior to the change in ownership by the long-term federal tax exempt rate. A total of $3,700,000 of the net operating loss carryforwards at September 30, 1997, is subject to the annual net operating loss limitation, estimated at $350,000. If the limited carryforward amount for any tax year exceeds the regular taxable income for such year, then the unused portion may generally be carried forward to increase the annual limitation for the following year. Utilization of net operating losses aggregating $27,000,000 which were incurred subsequent to the change of ownership are not limited. However, any future ownership change could create a limitation with respect to these loss carryforwards. Approximately $2,200,000 of the $30,700,000 net operating loss carryforwards relates to compensation associated with the exercise of non-qualified stock options which, when realized, would result in approximately $880,000 credited to additional paid-in capital. (12) LEASE COMMITMENTS The Company leases its primary office and production facility under an operating lease that expires in April 2001. Annual base rent under the lease agreement is approximately $237,000 and the Company is obligated to pay a pro rata share for property taxes, maintenance and other operating expenses. The Company leases a separate sales and service office in Los Angeles, California, under an operating lease that expires in December 1997, and is on a year-to-year lease arrangement. The Company is currently negotiating the extension of this lease. Rent expense for operating leases for 1997, 1996 and 1995 was $396,800, $329,400 and $338,300, respectively. Future minimum payments on operating leases for the years ending September 30, 1998, 1999, 2000 and 2001, are $354,200, $372,200, $399,300 and $241,700, respectively. (13) LITIGATION On June 1, 1995, the Company filed a complaint for patent infringement against Identix, Inc., of Sunnyvale, California, in the U.S. District Court for the Northern District of California. The complaint alleges that Identix has willfully and deliberately infringed a Company patent through the manufacture, use and/or sale of competing products. The complaint seeks, among other things, an injunction prohibiting further infringement as well as unspecified monetary damages. Identix has responded to the complaint alleging, among other purported defenses, non-infringement and patent invalidity. On August 27, 1996, the judge assigned to the case granted a partial summary judgment in favor of Identix dismissing the Company's claims of patent infringement with respect to Identix's Touchprint 600 product line. A predecessor product, the Touchprint 900, received a similar ruling in favor of Identix on December 20, 1996. During January 1997, the Company filed an appeal of the court's decision of non-infringement. These appeals are decided by the Federal Circuit, which is a Court of Appeals in Washington D.C. On October 8, 1997, the appeal was argued before the Court. As of December 11, 1997, no appellate decision has been issued. A prediction of the final outcome of the appeal is not possible. In the event the Company does not prevail in this litigation, its competitive position could be adversely affected. Except for the foregoing there are no material lawsuits pending or, to the Company's knowledge, threatened against the Company. DIGITAL BIOMETRICS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (14) SUBSEQUENT EVENTS (a) JOINT VENTURE WITH GRAND CASINOS, INC. On November 24, 1997, the Company entered into a letter of intent to form a joint venture with Grand Casinos Inc. to further develop, test and market the TRAK-21 automated player tracking system. It is anticipated that a definitive agreement will be reached before the end of calendar 1997 with deployment of a system band on TRAK-21 technology in a Grand Casino property in 1998. (b) ISSUANCE OF 8% CONVERTIBLE SUBORDINATED DEBENTURES AND WARRANTS To provide additional working capital, on December 1, 1997, the Company entered into a convertible subordinated debenture purchase agreement ("Purchase Agreement") with a private investor, providing for the Company's issuance and sale of up to an aggregate of $2,500,000 of 8% Convertible Debentures ("Debentures") in tranches of $500,000 each. The first tranche was sold on December 1, 1997. Additional tranches may be issued upon request of the Company within 90 days of each previous tranche, if the Company meets all conditions to issuance including, but not limited to, conditions requiring the Company to have effective and maintain a registration statement with the Securities and Exchange Commission covering shares issuable upon conversion of the Debentures and a requirement that the Company's market capitalization be at least $12 million. The initial tranche sold in the amount of $500,000 on December 1, 1997, is convertible in whole or in part at the option of the holder, with accrued interest, into Common Stock, at a conversion equal to the lesser of 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 debentures to be repaid. In connection with the Purchase Agreement, the Company has agreed to issue to the purchaser of the debentures, upon the sale of each tranche warrants to purchase 15,000 of Common Stock exercisable at $2.50 per share up to a maximum 75,000 shares. Also, in connection with the transaction, the Company paid $40,000 of fees to an investment-banking firm and issued a warrant to purchase 125,000 shares of Common Stock at an exercise price of $2.00 per share. The estimated value of this warrant is $87,500 which is a debt issuance cost to be written off to interest expense over the term of the Debentures. The Purchase Agreement includes a beneficial conversion feature. The intrinsic value of the beneficial conversion feature of each tranche will be allocated to additional paid-in capital with the resulting discount on the debt resulting in a non-cash interest expense charge to earnings (loss) over the vesting period of the conversion feature. The intrinsic value of the conversion feature of the first tranche is $125,000. Net proceeds to the Company will be used for working capital, business development and other general corporate purposes. ITEM 9. CHANGES IN & DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING & FINANCIAL DISCLOSURE The Company has not changed its independent auditors nor has the Company had any disagreements with its independent auditors on matters of accounting or financial disclosure. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information regarding the directors and executive officers of the Company. All of the directors of the Company serve until the next annual meeting of stockholders and until their respective successors are elected and qualified.
Name Age Position James C. Granger (1)..................... 51 President, Chief Executive Officer, and Director C. McKenzie Lewis III (1)(2)(3).......... 51 Chairman and Director John J. Metil............................ 47 Chief Operating Officer and Chief Financial Officer Barry A. Fisher.......................... 43 Vice President - Sales, Marketing and Business Development Roman A. Jamrogiewicz.................... 45 Vice President - Engineering Michel R. Halbouty....................... 56 Vice President - Operations Jack A. Klingert (2)(3).................. 68 Director George Latimer (2)(3).................... 62 Director Stephen M. Slavin (1)(2)(3).............. 57 Director
- ---------------------- (1) Member of Nominating Committee. (2) Member of Compensation and Personnel Committee. (3) Member of Audit Committee. JAMES C. GRANGER. Mr. Granger became the Company's President and Chief Executive Officer on January 1, 1997, and was appointed to the Board of Directors of the Company effective January 27, 1997. Prior to joining the Company, Mr. Granger was employed by ADC Telecommunications, Inc., as President of its Access Platforms System between March 1995 and December 1996. Between 1989 and February 1995, Mr. Granger was employed by Sprint/United Telephone, Orlando, Florida, in various senior marketing and management positions. Prior to 1989, Mr. Granger was employed by American Telephone & Telegraph in various management positions. C. MCKENZIE LEWIS III. Mr. Lewis was elected Chairman of the Company's Board of Directors on October 28, 1996, and has served as a Director of the Company since 1997. Between 1986 and 1996, Mr. Lewis served as Chief Executive Officer and President and a director of Computer Network Technology Corporation ("CNT"), a developer and manufacturer of high-performance extended-channel networking systems. Mr. Lewis has over 26 years experience in the computer and data communications industry. Since December 1996, Mr. Lewis has served as Managing General Partner in MMP Partners Limited Partnership, a Minnesota limited partnership engaged primarily in making venture capital investments, and serves on boards of directors of several; privately-held high technology companies. JOHN J. METIL. Mr. Metil has served as the Company's Chief Operating Officer and Chief Financial Officer since joining the Company in April 1997. From August 1992 through April 1997, Mr. Metil served as Executive Vice President with the Zebulon Group, Inc. Previously, he was a co-founder and served as Chief Financial Officer of Tricord Systems, Inc., and held senior finance and corporate development positions at National Computer Systems, Control Data Corporation and Pillsbury Company. BARRY A. FISHER. Mr. Fisher has served as Vice President of Sales, Marketing and Business Development since joining the Company in March 1997. From July 1995 through March 1997, Mr. Fisher served as Vice President of Sales with American Connexions, a national sales management company. From January 1988 through July 1995, he served as Vice President of Sales for Recovery Engineering. From September 1976 through January 1988, he held senior management positions at the Tennant Company. ROMAN A. JAMROGIEWICZ. Mr. Jamrogiewicz has served as Vice President of Engineering since joining the Company in May 1997. From November 1977 through April 1997, Mr. Jamrogiewicz was employed with Alliant Techsystems and served as Business Segment Director and held positions of Director for Advanced Development, Program Director and Director of Software Engineering. MICHEL R. HALBOUTY. Mr. Halbouty has served as Vice President of Operations since joining the Company in May 1997. Mr. Halbouty served as Vice President of Manufacturing with NetStar, Inc., from May 1992 through May 1997. He has also held senior management positions with Lee Data Corporation and Control Data. JACK A. KLINGERT. Mr. Klingert served as the Company's Chairman from 1987 through October 28, 1996, and served as the Company's President and Chief Executive Officer beginning in 1987, retiring January 1997. He has also served as a member of the Company's Board of Directors since 1987. Prior to joining the Company in April 1987, Mr. Klingert, from 1964 to 1987, held a number of senior level management positions with Control Data Corporation. From 1958 to 1964, Mr. Klingert worked on various classified scientific and systems programming projects in the Departments of Theoretical Physics and Computation at the Lawrence Livermore National Laboratories, Livermore, California. GEORGE LATIMER. Mr. Latimer has served on the Company's Board of Directors since 1990. Since November 1995, Mr. Latimer has served as Chief Executive Officer of the National Equity Fund, a syndication of financing for affordable housing in Chicago, Illinois, and a Distinguished Visiting Professor of Urban Studies at Macalester College, Saint Paul, Minnesota. From July 1993 through November 1995, Mr. Latimer was Director, Office of Special Actions, U.S. Department of Housing and Urban Development ("HUD"). From February 1993 through July 1993, Mr. Latimer was employed as a consultant to HUD. From 1990 through 1993, Mr. Latimer was Dean of Hamline University School of Law, Saint Paul, Minnesota. From 1976 through 1990, Mr. Latimer served as the Mayor of Saint Paul, Minnesota. Mr. Latimer is a member of the Board of Directors of Piper Jaffray Investment Trust. STEPHEN M. SLAVIN. Mr. Slavin has served on the Company's Board of Directors since 1986. For more than six years Mr. Slavin has been engaged in the private practice of law as a partner of the firm of Foley & Lardner, Chicago, Illinois. Significant Employee DENNIS F. WENDELL. On October 23, 1997, the Company employed Dennis F. Wendell as General Manager of its Integrated Identification Solutions Division. From May 1995 through September 1997, Mr. Wendell was employed as a Business Director with Anderson Consulting. From September 1992 through April 1995, Mr. Wendell was self-employed as a corporate development consultant. Previously, he was a co-founder and served as Vice President-Software Development and Vice President-Systems Integration at Tricord Systems, Inc., and has held executive and technical positions with Star Technologies, Analysts International and Technalysis. SECTION 16 (a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's directors and officers and the holders of 10% or more of the Company's stock to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of equity securities of the Company. Based on the Company's review of copies of such reports received by it, or written representations from reporting persons, the Company believes that during the period from October 1, 1996, through September 30, 1997 its directors and executive officers filed all reports on a timely basis except as follows: (a) initial reports of ownership on Form 3 were not filed on a timely basis by John J. Metil, Barry A. Fisher, Roman A. Jamrogiewicz and Michel R. Halbouty through inadvertence, but were filed on or before the tenth day of the month following the month of initial employment; (b) securities ownership reports on Form 4 were not filed in a timely basis by outside directors of the Company, C. McKenzie Lewis III , Jack A. Klingert, George Latimer and Stephen M. Slavin with respect to 3,000 shares of Common Stock awarded to each of them by the board of directors as additional compensation effective as of September 30, 1997, and issued in October 1997. The related Form 4 for each reporting person was filed on or before the tenth day of the month following the month of issuance. ITEM 11. EXECUTIVE COMPENSATION The following table sets forth certain information concerning compensation paid by the Company for the last three fiscal years to its Chief Executive Officer and other executive officers whose cash compensation exceeded $100,000 in fiscal year 1997 (collectively, the "Named Officers"). SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ---------------------------------- AWARDS ANNUAL ---------------------------------- COMPENSATION RESTRICTED SECURITIES --------------------------- STOCK UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS($) AWARDS($) OPTIONS(#) COMPENSATION - ------------------------------ ------- ------------ ----------- --------------- --------------- ---------------- James C. Granger(1) 1997 $131,265 $32,816 $ - 250,000 $ - President and Chief Executive Officer Glenn M. Fishbine, Senior Vice President - 1997 120,000 - - - 171,234(2) Technology 1996 116,825 1,600 - 35,000 4,500 1995 110,553 5,650 - 45,000 4,253
(1) Mr. Granger has served as President and Chief Executive Officer of the Company since January 1, 1997. (2) Includes $3,737 in the form of Common Stock paid as a matching contribution under the Company's 401(k) plan, and severance compensation consisting of forgiveness of indebtedness totaling $167,497. STOCK OPTION GRANTS IN FISCAL YEAR 1997
POTENTIAL REALIZABLE VALUE AT ASSUMED NUMBER OF ANNUAL RATES OF STOCK SECURITIES PERCENT OF TOTAL PRICE APPRECIATION FOR UNDERLYING OPTIONS GRANTED EXERCISE OR OPTION TERM(3) OPTIONS TO EMPLOYEES IN BASE PRICE EXPIRATION ---------------------------------- NAME GRANTED(#)(1) FISCAL YEAR ($/SHARE)(2) DATE 5%($) 10%($) - ---------------------- ---------------- ----------------- ---------------- ----------------- ---------------------------------- James C. Granger 250,000 25% $2.125 01/02/07 $334,100 $846,676
(1) Subject to acceleration at the discretion of the Compensation Committee or upon the death or disability of the optionee, each option becomes cumulatively exercisable with respect to 33 1/3% of the shares covered on each of the first three anniversaries of the grant date. (2) Fair market value per share on the date of grant or the effective date, whichever is less, in accordance with the 1990 Stock Option Plan. (3) The 5% and 10% assumed rates of appreciation are mandated by the rules of the Securities and Exchange Commission and do not represent the Company's estimate or projection of the future Common Stock price. AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1997 AND FISCAL YEAR END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS SHARES OPTIONS AT FISCAL YEAR END(#) AT FISCAL YEAR END($)(2) ACQUIRED ON VALUE ---------------------------------- ---------------------------------- NAME EXERCISE(#) REALIZED($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---------------------- ---------------- ----------------- ---------------- ----------------- ---------------------------------- James C. Granger - - - 250,000 - $109,375 Glenn M. Fishbine - - 98,467 38,333 - -
- --------------------------------------- (1) Market value of underlying securities on date of exercise minus the exercise price. (2) Market value of underlying securities at year-end minus the exercise price for in-the-money options. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth as of November 30, 1997, the number of shares of Common Stock owned by (i) each person known to be the beneficial owner of 5% or more of the Common Stock, (ii) each director, nominee for director and executive officer of the Company, and (iii) all officers and directors as a group. Any shares reflected in the following table which are subject to an option or a warrant are deemed to be outstanding for the purpose of computing the percentage of Common Stock owned by the option or warrant holder if exercisable within 60 days from November 30, 1997, but are not deemed to be outstanding for the purpose of computing the percentage of Common Stock owned by any other person. Except as otherwise indicated, each beneficial owner sole voting and investment power over the outstanding shares of which he has beneficial ownership. Unless otherwise noted, the address for the following person is 5600 Rowland Road, Suite 205, Minnetonka, Minnesota 55343-4315. Shares Beneficially Owned (1) Name of Beneficial Owner or Group Number Percent Perkins Capital Management Inc......................... 1,317,250 10.9% 730 East Lake Street Wayzata, MN 55391 Gordon L. Bramah....................................... 1,053,435 9.3% Littlemoor House Eckington, Sheffield S31 9EF England Bramah Limited......................................... 1,052,935 9.3% Littlemoor House Eckington, Sheffield S31 9EF England Jack A. Klingert (2)................................... 120,028 1.0% Stephen M. Slavin (3).................................. 103,501 * 330 North Wabash Avenue Chicago, Illinois 60611 George Latimer (4) .................................... 28,550 * 1600 Grand Avenue St. Paul, MN 55105 C. McKenzie Lewis III (5) ............................. 50,379 * James C. Granger (6)................................... 95,333 * John J. Metil (7)...................................... 1,000 * Barry A. Fisher........................................ - - Roman A. Jamrogiewicz.................................. - - Michel R. Halbouty..................................... - - All officers and directors as a group (9 persons)...... 398,791 3.2% - ----------------------- * Indicates an amount less than one percent (1) The securities "beneficially owned" by a person are determined in accordance with the definition of "beneficial ownership" set forth in the regulations of the Commission and accordingly, may include securities owned by or for, among others, the spouse, children or certain other relatives such person as well as other securities as to which the person has or shares voting or investment power or has the right to acquire within 60 days. The same shares may be beneficially owned by more than one person. (2) Includes 120,028 shares of Common Stock owned by Mr. Klingert. (3) Includes 66,001 shares of Common Stock owned by Mr. Slavin and 37,500 shares of Common Stock that may be acquired subject to options. (4) Includes 21,050 shares of Common Stock beneficially owned by Mr. Latimer and an option for 7,500 shares of Common Stock. (5) Includes 12,579 shares of Common Stock beneficially owned by Mr. Lewis and an option for 37,800 shares of Common Stock. (6) Includes 12,000 shares of Common Stock owned by Mr. Granger and options for 83,333 shares of Common Stock. (7) Includes 1,000 shares of Common Stock owned by Mr. Metil. There are no arrangements known to the Company, which at a later date may result in a change of control of the Company. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS During fiscal year 1997, legal services were provided to the Company by Foley & Lardner, Chicago, Illinois. Mr. Stephen M. Slavin is a partner of such firm and a director of the Company. Pursuant to a transition agreement and general release between the Company and a founder of the Company, Mr. Glenn M. Fishbine, Mr. Fishbine continued to be compensated by the Company at his base salary through the one-month transition period ending November 30, 1997, during which he agreed to provide consulting services and advice to the Company. After the transition period he was compensated by the Company in a lump sum severance payment equal to his base salary for two months. The Company further agreed (i) to forgive, as of September 30, 1997, $167,497 of indebtedness of Mr. Fishbine to the Company, (ii) to release the shares of Common Stock pledged by Mr. Fishbine as collateral to secure payment of Mr. Fishbine's indebtedness to the Company, and (iii) that a stock pledge agreement between Mr. Fishbine and the Company would be terminated. Gordon L. Bramah is the Chairman of the Board of Directors of Bramah Limited ("Bramah"), which is a significant stockholder of the Company. In connection with early stage investments made by Bramah in the Company, the Company granted Bramah an exclusive license in the United Kingdom for the Company's technology. In October 1992, the exclusive license was reacquired by the Company in return for a royalty arrangement whereby Bramah will be paid a 15% royalty on sales of the first $1.0 million of the Company's products in the United Kingdom. As of September 30, 1997, the Company accrued approximately $63,000 for royalties to Bramah on sales in the United Kingdom during fiscal 1997. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Financial Statements Independent Auditors' Report Balance Sheets: September 30, 1997 and 1996 Statements of Operations: Years ended September 30, 1997, 1996 and 1995 Statements of Stockholders' Equity: Years ended September 30, 1997, 1996 and 1995 Statements of Cash Flows: Years ended September 30, 1997, 1996 and 1995 Notes to Financial Statements 2. Exhibits 3.1 The Company's Certificate of Incorporation, as amended (incorporated by reference to the Registrant's Registration Statement on Form S-1, effective March 11, 1993, File No. 33-58650). 3.2 The Company's Bylaws, as amended. 4.1 Specimen Common Stock Certificate (incorporated by reference to the Registrant's Registration Statement on Form S-1, effective August 14, 1991, File No. 33-41080). 4.2 8% Convertible Subordinated Debenture Due December 1, 2000 dated December 1, 1997, between the Company and KA Investments LDC. 4.3 Rights Agreement dated May 2, 1996, between the Company and Norwest Bank, Minnesota, National Association, as Rights Agent (incorporated by reference to the Registrant's Registration on Form 8-A filed with the Securities and Exchange Commission on May 9, 1996, File No. 000-18856). 10.1 Convertible Subordinated Debenture Purchase Agreement dated December 1, 1997, between Company and KA Investments LDC. 10.2 Warrant dated December 1, 1997, between the Company and KA Investments LDC for the purchase of 15,000 shares of the Company's Common Stock. 10.3 Warrant dated December 1, 1997, between the Company and Miller Johnson & Kuehn, Inc. for the purchase of 125,000 shares of the Company's Common Stock. 10.4 Warrant dated March 18, 1997, between the Company and C. McKenzie Lewis III for the purchase of 8,000 shares of the Company's Common Stock. 10.5 Warrant dated August 25, 1997, issued October 23, 1997, between the Company and Dennis Wendell for the purchase of 125,000 shares of the Company's Common Stock. 10.6 Warrant dated September 25, 1997, issued October 23, 1997, between the Company and Jeffrey Whalen for the purchase of 50,000 shares of the Company's Common Stock. 10.7 Warrant dated September 1997, issued December 13, 1997, between the Company and Joseph VanLoy for the purchase of 50,000 shares of the Company's Common Stock. 10.8 Warrant dated January 27, 1997, between the Company and Andcor Companies, Inc. for the purchase of 10,000 shares of the Company's Common Stock. 10.9 Warrant dated January 27, 1997, between the Company and Andcor Companies, Inc. for the purchase of 10,000 shares of the Company's Common Stock. 10.10 Registration Rights Agreement dated December 1, 1997, between the Company and KA Investments LDC. 10.11 Agreement and General Release dated October 1997, between the Company and Glenn M. Fishbine. 10.12 $3.5 million Receivables Financing Line of Credit effective October 1, 1996, between the Company and Norwest Business Credit. 10.13 Lease for Company premises dated November 7, 1989, (incorporated by reference from the Company's Registration Statement on Form S-18, effective December 6, 1990, File No. 33-36939C). 10.14 Amendment to Lease for Company Premises dated March 11, 1996. 10.15 1990 Stock Option Plan, as amended (incorporated by reference to the Registrant's Registration on Form 10-Q filed with the Securities and Exchange Commission on May 15, 1997, File No. 000-18856). 10.16 1992 Restricted Stock Plan (incorporated by reference from the Company's Registration Statement on Form S-1, effective March 11, 1993, File No. 33-58650). 10.17 Form of Director Indemnification Agreement entered into between Registrant and outside directors. 11.1 Computation of Net Earnings (Loss) Per Common Share. 23.1 Consent of KPMG Peat Marwick LLP. 24.1 Power of Attorney. 27.1 Financial Data Schedule. (b) REPORTS ON FORM 8-K. The Company did not file any reports on Form 8-K with the Securities and Exchange Commission during the three-month period ended September 30, 1997. SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS FORM 10-K TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN MINNETONKA, MINNESOTA, ON THIS 23rd DAY OF DECEMBER 1997. DIGITAL BIOMETRICS, INC. (REGISTRANT) /s/ James C. Granger --------------------------------- James C. Granger President and Chief Executive Officer PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS FORM 10-K HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED.
SIGNATURE TITLE /s/ James C. Granger December 23, 1997 - ---------------------------- ----------------- James C. Granger President, Chief Executive Officer Date and Director (principal executive officer) /s/ John J. Metil December 23, 1997 - --------------------------- ----------------- John J. Metil Chief Operating Officer Date Chief Financial Officer (principal financial Officer) /s/ Jack A. Klingert * December 23, 1997 - --------------------------- Jack A. Klingert Director ----------------- Date /s/ George Latimer * December 23, 1997 - --------------------------- ----------------- George Latimer Director Date /s/ C. McKenzie Lewis III * December 23, 1997 - --------------------------- ----------------- C. McKenzie Lewis III Chairman of the Board of Directors Date /s/ Stephen M. Slavin * December 23, 1997 - --------------------------- ----------------- Stephen M. Slavin Director Date * By /s/ John J. Metil December 23, 1997 ------------------------ ----------------- John J. Metil Date Attorney-In-Fact
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE The Board of Directors and Stockholders Digital Biometrics, Inc.: Under date of November 21, 1997, except as to note 14 (a) which is as of November 24, 1997, and note 14 (b) which is as of December 1, 1997, we reported on the balance sheets of Digital Biometrics, Inc., as of September 30, 1997 and 1996, and the related statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended September 30, 1997, as contained in the annual report on Form 10-K for the year 1997. In connection with our audits of the aforementioned financial statements, we also audited the related financial statement schedule as listed in the accompanying index. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG Peat Marwick LLP Minneapolis, Minnesota November 21, 1997, except as to note 14(a) which is as of November 24, 1997, and note 14(b) which is as of December 1, 1997 SCHEDULE II DIGITAL BIOMETRICS, INC. VALUATION AND QUALIFYING ACCOUNTS
Additions --------------------------------- Balance at Charged to Charged to Balance at Beginning of Costs and Other End of Description Year Expenses Accounts Deductions Year - --------------------------------- ------------------ ---------------- ----------------- ----------------- ------------------ Allowance for Doubtful Accounts 1995 $63,000 $48,000 -- -- $111,000 1996 111,000 651,000 (a) -- 69,466 (b) 692,534 1997 692,534 (98,660) -- 152,598 (b) 441,276
(a) Includes fourth quarter charge of $540,000 for possible write-downs in accounts receivable related to contracts for live-scan technology. (b) Write-off of bad debts. EX-3.2 2 BYLAWS EXHIBIT 3.2 AMENDED AND RESTATED BY-LAWS OF DIGITAL BIOMETRICS, INC. ARTICLE I OFFICES SECTION 1. REGISTERED OFFICE. The corporation shall continuously maintain in the State of Delaware a registered office and a registered agent whose office is identical with such registered office. SECTION 2. OTHER OFFICES. The corporation may have other offices, either within or without the State of Delaware, at such place or places as the Board of Directors may from time to time appoint or the business of the corporation may require. ARTICLE II MEETINGS OF STOCKHOLDERS SECTION 1. ANNUAL MEETINGS. An annual meeting of stockholders shall be held, either within or without the State of Delaware, on the third Wednesday in February of each year, for the purpose of electing directors and for the transaction of such other business as may come before the meeting. If the date of the annual meeting shall fall upon a legal holiday, the meeting shall be held on the next succeeding business day. SECTION 2. SPECIAL MEETINGS. Special meetings of stockholders for any purpose other than the election of directors may be held at such time and place, either within or without the State of Delaware, as shall be stated in the notice of the meeting. Special meetings may be called by the President, by the Board of Directors, or by the holders of not less than one-fifth of the outstanding stock of the corporation entitled to vote. SECTION 3. VOTING. Unless otherwise provided in the Certificate of Incorporation, each stockholder shall be entitled to one vote, in person or by proxy, for each share of stock held by such stockholder, but no proxy shall be voted after three years from its date unless such proxy provides for a longer period. A complete list of the stockholders entitled to vote at the ensuing election, arranged in alphabetical order with the address of each and the number of shares held by each, shall be open to the examination of any stockholder for any purpose germane to the meeting during ordinary business hours for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. SECTION 4. QUORUM. Except as otherwise required by law, by the Certificate of Incorporation or by these By-Laws, the presence, in person or by proxy, of stockholders holding meetings of the stockholders. In case a quorum shall not be present at any meeting, a majority in interest of the stockholders entitled to vote thereat, present in person or by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until the requisite amount of stock entitled to vote shall be present. At any such adjourned meeting at which the requisite amount of stock entitled to vote shall be represented, any business may be transacted which might have been transacted at the meeting as originally noticed; but only those stockholders entitled to vote at the meeting as originally noticed shall be entitled to vote at any adjournment or adjournments thereof. SECTION 5. NOTICE OF MEETINGS. Written notice, stating the place, date and time of the meeting, and in the case of a special meeting, the purposes for which the meeting is called, shall be given to each stockholder entitled to vote thereat at his address as it appears on the records of the corporation, not less than ten, or in the case of a merger or consolidation, not less than twenty, nor more than sixty days before the date of the meeting. SECTION 6. STOCKHOLDERS RECORD DATE. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or at any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty nor less than ten, or in the case of a merger or consolidation, not less than twenty, days before the date of such meeting, nor more than sixty days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. SECTION 7. ACTION WITHOUT MEETING. Unless otherwise provided by the Certificate of Incorporation, any action required to be taken at any annual or special meeting of stockholders, or any action which may be taken at any annual or special meeting, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. ARTICLE III DIRECTORS SECTION 1. NUMBER AND TERM. The number of directors shall be not less than five (5) nor more than nine (9), as determined by the Board of Directors from time to time. The directors shall be elected at the annual meeting of the stockholders and each director shall hold office until his successor is elected and qualified, or until his earlier death, resignation or removal. Directors need not be stockholders. SECTION 2. RESIGNATIONS. Any director, member of a committee or other officer may resign at any time. Such resignation shall be made in writing, and shall take effect at the time specified therein, or if no time is specified, at the time of its receipt by the Board of Directors. The acceptance of a resignation shall not be necessary to make it effective. SECTION 3. VACANCIES. Vacancies occurring on the Board of Directors or on any committee of the Board, or new directorships to be filed by reason of an increase in the number of directors may be filled by a majority of the directors then in office, or by a sole remaining director. Each director so chosen shall hold office for the unexpired term and until his successor shall be duly chosen. SECTION 4. REMOVAL. Except as hereinafter provided, any director or the entire Board of Directors may be removed either with or without cause at any time by the affirmative vote of the holders of a majority of all the shares of stock outstanding and entitled to vote at an election of directors, at a special meeting of the stockholders called for that purpose, and the vacancies thus created may be filled, at the meeting held for the purpose of removal, by the affirmative vote of a majority in interest of the stockholders entitled to vote. If the holders of any class or series are entitled to elect one or more directors by the provisions of the Certificate of Incorporation, these provisions shall apply, in respect to the removal without cause of a director or directors so elected, to the vote of the holders of the outstanding shares of that class or series and not to the vote of the outstanding shares as a whole. SECTION 5. POWERS. The Board of Directors shall exercise all of the powers of the corporation except such as are by law, or by the Certificate of Incorporation of the corporation or by these By-Laws conferred upon or reserved to the stockholders. SECTION 6. COMMITTEES. The Board of Directors may, by resolution or resolutions passed by a majority of the whole board, designate one or more committees, each committee to consist of two or more of the directors of the corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of any member of such committee or committees, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors, or in these By-Laws, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the Certificate of Incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or amending the By-Laws of the corporation; and, unless the resolution, these By-Laws, or the Certificate of Incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock. SECTION 7. MEETINGS. An annual meeting of directors for the purpose of electing officers and for the transaction of such other business as may properly come before the meeting, shall be held if a quorum is present, immediately after and at the same place as the annual meeting of the stockholders, without notice other than this by-law; or the time and place of such meeting may be fixed by consent in writing of all the directors. Regular meetings of the directors may be held without notice at such places and times as shall be determined from time to time by resolution of the directors without further notice than said resolution. Special meetings of the board may be called by the Chairman of the Board, the President or the Secretary on the written request of any director on at least two days' notice to each director and shall be held at such place or places as may be determined by the directors, or as shall be stated in the call of the meeting. SECTION 8. COMMUNICATIONS EQUIPMENT. Unless otherwise restricted by the Certificate of Incorporation or these By-Laws, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or any committee, by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. Such participation in a meeting shall constitute presence in person at the meeting. SECTION 9. QUORUM. A majority of the incumbent directors shall constitute a quorum for the transaction of business. If at any meeting of the board there shall be less than a quorum present, a majority of those present may adjourn the meeting from time to time until a quorum is obtained, and no further notice thereof need be given other than by announcement at the meeting which shall be so adjourned. The vote of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors unless the Certificate of Incorporation or these By-Laws shall require the vote of a greater number. SECTION 10. COMPENSATION. Directors shall not receive any stated salary for their services as directors or as members of committees, but by resolution of the board a fixed fee and expenses of attendance may be allowed for attendance at each meeting. Nothing herein contained shall be construed to preclude any director from serving the corporation in any other capacity as an officer, agent or otherwise, and receiving compensation therefor. SECTION 11. ACTION WITHOUT A MEETING. Any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting, if a written consent thereto is signed by all members of the board, or of such committee as the case may be, and such written consent is filed with the minutes of the proceedings of the board or committee. ARTICLE IV OFFICERS SECTION 1. TITLES, ELECTION AND TERM OF OFFICE. The officers of the corporation shall be a President, a Treasurer, and a Secretary. In addition, the Board of Directors may elect a Chairman, a Vice Chairman, and any number of Vice Presidents, Assistant Secretaries and Assistant Treasurers, as they may deem proper. None of the officers of the corporation need be directors. The officers shall be elected annually by the Board of Directors at the first meeting of the Board of Directors held after each annual meeting of stockholders. Each officer shall hold office until his successor is elected and qualified or until his earlier death, resignation or removal. Any officer may resign any time upon written notice to the corporation. Vacancies may be filled or new offices created and filled by the Board of Directors. Any number of offices may be held by the same person. SECTION 2. OTHER OFFICERS AND AGENTS. The Board of Directors may appoint such other officers and agents as it may deem advisable, who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors. SECTION 3. REMOVAL. Any officer elected or appointed by the Board of Directors may be removed by the Board whenever, in its judgment, the best interests of the corporation would be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. SECTION 4. CHAIRMAN. The Board of Directors of the Corporation may elect a Chairman. The Chairman shall be a member of the Board of Directors. The Chairman shall preside at all meetings of the Board of Directors and of the shareholders of the Corporation and shall have and perform such other duties as from time to time may be assigned to him or her by the Board of Directors. SECTION 5. CHIEF EXECUTIVE OFFICER. Subject to the direction of the Board of Directors, the Chief Executive Officer, who may also be designated as the President of the Corporation, shall have overall charge over the business, affairs and policies of the Corporation, including the day-to-day business of the Corporation, and shall have the general powers and duties of supervision and management usually vested in the office of Chief Executive Officer of a corporation. In the absence of the Chairman of the Board of Directors, or if a Chairman of the Board of Directors is not elected, the Chief Executive Officer shall preside at all meetings of the shareholders and the Board of Directors. Unless the Board of Directors shall otherwise authorize, the Chief Executive Officer shall execute bonds, mortgages and other contracts on behalf of the Corporation. SECTION 6. VICE PRESIDENT. The Vice Presidents shall assist the President in the discharge of his duties as the President may direct and shall perform such other duties as may be assigned to them by the President or by the Board of Directors. In the absence of the President, the Vice Presidents shall perform the duties of the President, and when so acting shall have all the powers of and be subject to all the restrictions upon the President. SECTION 7. TREASURER. The Treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate account of receipts and disbursements in books belonging to the corporation. He shall deposit all moneys and other valuables in the name and to the credit of the corporation in such depositaries as may be designated by the Board of Directors. The Treasurer shall disburse the funds of the corporation as may be ordered by the Board of Directors, or the President, taking proper vouchers for such disbursements. He shall render to the President and Board of Directors at the regular meetings of the Board of Directors, or whenever they may request it, an account of all his transactions as Treasurer and of the financial condition of the corporation. If required by the Board of Directors, he shall give the corporation a bond for the faithful discharge of his duties in such amount and with such surety as the Board shall prescribe. SECTION 8. SECRETARY. The Secretary shall give, or cause to be given, notice of all meetings of stockholders and directors, and all other notices required by law or by these By-Laws, and in case of his absence or refusal or neglect so to do, any such notice may be given by any person thereunto directed by the President, or by the directors, or stockholders, upon whose request the meeting is called as provided in these By-Laws. He shall record all the proceedings of the meetings of the stockholders and of the directors in a book to be kept for that purpose, and shall perform such other duties as may be assigned to him by the directors or the President. He shall have the custody of the seal of the corporation and shall affix the same to all instruments requiring it, when authorized by the directors or the President, and attest the same. SECTION 9. ASSISTANT TREASURERS AND ASSISTANT SECRETARIES. Assistant Treasurers and Assistant Secretaries, if any, shall assist the Treasurer and the Secretary, respectively, in the discharge of their duties, and shall have such powers and shall perform such additional duties as shall be assigned to them by the directors. ARTICLE V MISCELLANEOUS SECTION 1. CERTIFICATES OF STOCK. Certificates of stock, signed by the Chairman or Vice Chairman of the Board of Directors, if they are elected, or by the President or a Vice President, and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary, shall be issued to each stockholder certifying the number and class of shares owned by him in the corporation. Any or all of the signatures may be facsimiles. SECTION 2. LOST CERTIFICATES. A new certificate of stock may be issued in the place of any certificate theretofore issued by the corporation, alleged to have been lost or destroyed, and the directors may, in their discretion, require the owner of the lost or destroyed certificates, or his legal representative, to give the corporation a bond, in such sum as they may direct, to indemnify the corporation against any claim that may be made against it on account of the alleged loss of any such certificate, or the issuance of any such new certificate. SECTION 3. TRANSFER OF SHARES. Prior to due presentment of a certificate for shares for registration of transfer the corporation may treat the registered owner of such shares as the person exclusively entitled to vote, to receive notifications and otherwise to have and exercise all the rights and power of an owner. Where a certificate for shares is presented to the corporation with a request to register for transfer, the corporation shall not be liable to the owner or any other person suffering loss as a result of such registration of transfer if (a) there were on or with the certificate the necessary endorsements, and (b) the corporation had no notice of any adverse claims or has discharged any duty to inquire into any known adverse claims. The corporation may require reasonable assurance that said endorsements are genuine and effective and compliance with such other regulations as may be prescribed by or under the authority of the Board of Directors. Where a transfer of shares is made for collateral security, and not absolutely, it shall be so expressed in the entry of transfer if, when the shares are presented, both the transferor and the transferee so request. SECTION 4. DIVIDENDS. The Board of Directors may from time to time declare, and the corporation may pay, dividends on its outstanding stock, in the manner and upon the terms and conditions provided by law and its Certificate of Incorporation. SECTION 5. SEAL. The Board of Directors may provide a corporate seal in appropriate form. SECTION 6. FISCAL YEAR. The fiscal year of the corporation shall begin on the first day of October and end on the last day of September in each year. SECTION 7. CHECKS. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the corporation shall be signed by such officer or officers, agent or agents of the corporation, and in such manner as shall be determined from time to time by resolution of the Board of Directors. SECTION 8. NOTICE AND WAIVER OF NOTICE. Whenever any notice is required to be given by these By-Laws, personal notice is not meant unless expressly so stated, and any notice so required shall be deemed to be sufficient if given by depositing the same in the United States mail, postage prepaid, addressed to the person entitled thereto at his address as it appears on the records of the corporation, and such notice shall be deemed to have been given on the day of such mailing. Stockholders not entitled to vote shall not be entitled to receive notice of any meetings except as otherwise provided by statute. Whenever any notice whatever is required to be given under the provisions of any law, or under the provisions of the Certificate of Incorporation of the corporation or these By-Laws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. ARTICLE VI AMENDMENTS These By-Laws may be amended or altered by the Board of Directors at any meeting. Such authority of the Board of Directors is subject to the power of the stockholders to change or repeal these By-Laws. ARTICLE VII INDEMNIFICATION OF OFFICERS, DIRECTORS EMPLOYEES AND AGENTS SECTION 1. The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees) judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. SECTION 2. The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture,, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and except that no indemnification shall be made in respect to any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. Notwithstanding the foregoing, the corporation shall not be required to indemnify any such person in connection with a proceeding voluntarily initiated by such person unless the proceeding was authorized by a majority of the entire Board of Directors. SECTION 3. Without limiting any right conferred by Sections 1 and 2 of this Article, any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative of any type whatsoever, by reason of the fact that he is or was a director, officer, employee or agent of the corporation, and is or was serving as a fiduciary of, or otherwise rendering services to, any employee benefit plan of or relating to the corporation, shall be indemnified by the corporation against expenses (including, without limitation, attorneys' fees), judgments, fines, penalties, excise taxes, and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding, or in connection with any appeal relating thereto, if he acted in good faith in a manner he reasonably believed to be not opposed to the best interests of the corporation, and with respect to a criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful, except in the case of an action, suit or proceeding by or in the right of the corporation, in relation to matters as to which it shall be adjudicated in such action, suit or proceeding, that such officer, director, employee or agent is liable to the corporation and only to the extent that the judicial determination specified in Section 2 of this Article shall be made. SECTION 4. To the extent that a director, officer, employee or agent of the corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Sections 1, 2 and 3 of this Article VII, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. SECTION 5. Any indemnification under Sections 1, 2 and 3 of this Article VII, shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in Sections 1, 2 and 3. Such determination shall be made (a) by the board of directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (b) if such a quorum is not obtainable, or, even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (c) by the stockholders. SECTION 6. Expenses incurred in defending a civil or criminal action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the director, officer, employee or agent to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the corporation as authorized in this Article. SECTION 7. The indemnification and advancement of expenses provided by or granted pursuant to other Sections of this Article shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any by-law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity, while holding such office. SECTION 8. The indemnification and advancement of expenses provided by, or granted pursuant to, this Article shall, unless otherwise provided when authorized or notified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors or administrators of such person. SECTION 9. The corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of this Article. SECTION 10. For purposes of this Article, references to "the corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had the power and authority to indemnify its directors, officers, employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Article with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. EX-4.2 3 CONVERTIBLE SUBORDINATED DEBENTURE EXHIBIT 4.2 NEITHER THIS DEBENTURE NOR THE SECURITIES INTO WHICH THIS DEBENTURE IS CONVERTIBLE HAVE BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS. THIS DEBENTURE IS SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AND CONVERSION SET FORTH IN A CONVERTIBLE SUBORDINATED DEBENTURE PURCHASE AGREEMENT, DATED AS OF DECEMBER 1, 1997, BETWEEN DIGITAL BIOMETRICS, INC. (THE "COMPANY") AND THE ORIGINAL HOLDER HEREOF. A COPY OF THAT AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF THE COMPANY. No. A-1 U.S. $50,000 DIGITAL BIOMETRICS, INC. 8% CONVERTIBLE SUBORDINATED DEBENTURE DUE DECEMBER 1, 2000 THIS DEBENTURE is one of a series of duly authorized issued debentures in an aggregate principal amount of up to $2,500,000, of Digital Biometrics, Inc., a Delaware corporation and having a principal place of business at 5600 Rowland Road, Minnetonka, Minnesota, 55343 (the "Company"), designated as its 8% Convertible Subordinated Debentures, due December 1, 2000 (the "Debentures"). FOR VALUE RECEIVED, the Company promises to pay to KA INVESTMENTS LDC, or registered assigns (the "Holder"), the principal sum of Fifty Thousand Dollars ($50,000), on or prior to December 1, 2000 or such earlier date as the Debentures are required to be repaid as provided hereunder (the "Maturity Date") and to pay interest to the Holder on the principal sum at the rate of 8% per annum, payable upon conversion as provided hereunder, or on the Maturity Date if not earlier converted. Interest shall accrue daily commencing on the Original Issue Date (as defined in Section 6) until payment in full of the principal sum, together with all accrued and unpaid interest and other amounts which may become due hereunder, has been made. Interest shall be calculated on the basis of a 360-day year and for the actual number of days elapsed. Interest hereunder will be paid to the Person in whose name this Debenture is registered on the records of the Company regarding registration and transfers of the Debentures (the "Debenture Register"). All overdue, accrued and unpaid interest and other amounts due hereunder shall bear interest at the rate of 15% per annum from the date such interest is due hereunder through and including the date of payment. The principal of, and interest on, this Debenture are payable in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts, at the address of the Holder last appearing on the Debenture Register, except that principal paid on December 1, 2000 and interest due hereunder may, at the Company's option, be paid in shares of the Common Stock (as defined in Section 6) calculated based upon the Conversion Price (as defined below) on the Conversion Date, Maturity Date or the date upon which interest shall cease to accrue, as the case may be. All amounts due hereunder shall be paid in cash or Common Stock as provided for herein. Notwithstanding anything to the contrary contained herein, the Company may not, without the prior written consent of the Holder, issue shares of the Common Stock in payment of interest on the principal amount or principal on December 1, 2000 if: (i) the number of shares of Common Stock at the time authorized, unissued and unreserved for all purposes, or held as treasury stock, is insufficient to pay interest or principal hereunder in shares of Common Stock; (ii) such shares are not either registered for resale pursuant to an Underlying Securities Registration Statement (as defined in Section 6) or freely transferable without volume restrictions pursuant to Rule 144 promulgated under the Securities Act of 1933, as amended (the "Securities Act"), as determined by counsel to the Company pursuant to a written opinion letter, addressed to the Holder, in form and substance acceptable to the Holder; (iii) such shares are not listed on the Nasdaq National Market (or the American Stock Exchange, Nasdaq SmallCap Market or The New York Stock Exchange) and any other exchange on which the Common Stock is then listed for trading; or (iv) the issuance of such shares would result in the recipient thereof beneficially owning more than 4.999% of the issued and outstanding shares of Common Stock as determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended. Payment of interest on the Debentures in shares of Common Stock is also subject to the provisions of Section 4(a)(ii). This Debenture is subject to the following additional provisions: Section 1. This Debenture is exchangeable for an equal aggregate principal amount of Debentures of different authorized denominations, as requested by the Holder surrendering the same but shall not be issuable in denominations of less than integral multiplies of Fifty Thousand Dollars ($50,000) unless such amount represents the full principal balance of Debentures outstanding to such Holder. No service charge will be made for such registration of transfer or exchange. Section 2. This Debenture has been issued subject to certain investment representations of the original Holder set forth in the Purchase Agreement (as defined in Section 6) and may be transferred or exchanged only in compliance with the Purchase Agreement. Prior to due presentment to the Company for transfer of this Debenture, the Company and any agent of the Company may treat the person in whose name this Debenture is duly registered on the Debenture Register as the owner hereof for the purpose of receiving payment as herein provided and for all other purposes, whether or not this Debenture is overdue, and neither the Company nor any such agent shall be affected by notice to the contrary. Section 3. Events of Default. "Event of Default", wherever used herein, means any one of the following events (whatever the reason and whether it shall be voluntary or involuntary or effected by operation of law or pursuant to any judgment, decree or order of any court, or any order, rule or regulation of any administrative or governmental body): (a) any default in the payment of the principal of, interest on, or liquidated damages in respect of, this Debenture, free of any claim of subordination, as and when the same shall become due and payable (whether on the Conversion Date or the Maturity Date or by acceleration or otherwise). Notwithstanding anything to the contrary, no Event of Default shall exist upon the occurrence of a default in the payment of interest on this Debenture that the Company cures within five (5) days following receipt of written notice of such default; (b) the Company shall fail to observe or perform any other material covenant, agreement or warranty contained in, or otherwise commit any breach of, this Debenture, the Purchase Agreement or the Registration Rights Agreement (as defined in Section 6), and such failure or breach shall not have been remedied within 10 days after the date on which notice of such failure or breach shall have been given; (c) the Company or any of its subsidiaries shall commence, or there shall be commenced against the Company or any such subsidiary a case under any applicable bankruptcy or insolvency laws as now or hereafter in effect or any successor thereto, or the Company commences any other proceeding under any reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction whether now or hereafter in effect relating to the Company or any subsidiary thereof or there is commenced against the Company or any subsidiary thereof any such bankruptcy, insolvency or other proceeding which remains undismissed for a period of 60 days; or the Company or any subsidiary thereof is adjudicated insolvent or bankrupt; or any order of relief or other order approving any such case or proceeding is entered; or the Company or any subsidiary thereof suffers any appointment of any custodian or the like for it or any substantial part of its property which continues undischarged or unstayed for a period of 60 days; or the Company or any subsidiary thereof makes a general assignment for the benefit of creditors; or the Company shall fail to pay, or shall state that it is unable to pay, or shall be unable to pay, its debts generally as they become due; or the Company or any subsidiary thereof shall call a meeting of its creditors with a view to arranging a composition or adjustment of its debts; or the Company or any subsidiary thereof shall by any act or failure to act indicate its consent to, approval of or acquiescence in any of the foregoing; or any corporate or other action is taken by the Company or any subsidiary thereof for the purpose of effecting any of the foregoing; (d) the Company shall default in any of its obligations under any mortgage, credit agreement or other facility, indenture agreement or other instrument under which there may be issued, or by which there may be secured or evidenced any indebtedness of the Company in an amount exceeding one hundred thousand dollars ($100,000), whether such indebtedness now exists or shall hereafter be created and such default shall result in such indebtedness becoming or being declared due and payable prior to the date on which it would otherwise become due and payable; (e) the Common Stock shall be delisted from the Nasdaq National Market or any other national securities exchange or market on which such Common Stock is listed for trading or suspended from trading thereon without being relisted on the Nasdaq National Market, the Nasdaq SmallCap Market, the American Stock Exchange or New York Stock Exchange or having such suspension lifted, as the case may be, within two Trading Days; or (f) the Company shall be a party to any merger or consolidation pursuant to which the Company shall not be the surviving entity or shall dispose of all or substantially all of its assets in one or more transactions, or shall redeem more than a de minimis number of shares of Common Stock (other than redemptions of Underlying Shares). If during the time that any portion of this Debenture remains outstanding, any Event of Default occurs and is continuing, and in every such case, then the Holders of a majority in interest of the outstanding principal amount of Debentures may, by notice to the Company, declare the full principal amount of this Debenture, together with all accrued but unpaid interest and other amounts owing hereunder, to the date of acceleration, to be, plus the Adjustment Amount (as defined in Section 6) whereupon the same shall become, immediately due and payable in cash (notwithstanding anything herein contained to the contrary) without presentment, demand, protest or other notice of any kind, all of which are waived by the Company, notwithstanding anything herein contained to the contrary, and the Holder may immediately and without expiration of any grace period enforce any and all of its rights and remedies hereunder and all other remedies available to it under applicable law. Such declaration may be rescinded and annulled by Holder at any time prior to payment hereunder. No such rescission or annulment shall affect any subsequent Event of Default or impair any right consequent thereon. Section 4. Conversion. (a)(i) This Debenture shall be convertible into shares of the Common Stock at the option of the Holder in whole or in part at any time and from time to time upon the earlier to occur of (1) the date an Underlying Securities Registration Statement is declared effective by the U.S. Securities and Exchange Commission (the "Commission") and (2) the 90th day after the Original Issue Date, and prior to the close of business on the Maturity Date. The number of shares of Common Stock as shall be issuable upon a conversion hereunder shall be determined by dividing the principal amount of, plus accrued but unpaid interest on, the Debenture to be converted by the Conversion Price (as defined below), each as subject to adjustment as provided hereunder. The Holder shall effect conversions by surrendering the Debentures (or such portions thereof) to be converted, together with the form of conversion notice attached hereto as Exhibit A (the "Holder Conversion Notice") to the Company. Each Holder Conversion Notice shall specify the principal amount of Debentures to be converted and the date on which such conversion is to be effected, which date may not be prior to the date such Holder Conversion Notice is deemed to have been delivered hereunder (the "Holder Conversion Date"). If no Holder Conversion Date is specified in a Holder Conversion Notice, the Holder Conversion Date shall be the date that the Holder Conversion Notice is deemed delivered hereunder. Subject to Sections 4(a)(ii) and 4(b) hereof and Section 3.8 of the Purchase Agreement, each Holder Conversion Notice, once given, shall be irrevocable. If the Holder is converting less than all of the principal amount represented by the Debenture(s) tendered by the Holder with the Holder Conversion Notice, or if a conversion hereunder cannot be effected in full for any reason, the Company shall honor such conversion to the extent permissible hereunder and shall promptly deliver to such Holder (in the manner and within the time set forth in Section 4(b)) a new Debenture for such principal amount as has not been converted. (ii) Certain Regulatory Approval. If on any Conversion Date (A) the Common Stock is listed for trading on the Nasdaq National Market, Nasdaq SmallCap Market or American Stock Exchange, (B) the Conversion Price then in effect is such that the aggregate number of shares of the Common Stock that would then be issuable upon conversion of the entire outstanding principal amount of Debentures, together with any shares of the Common Stock previously issued upon conversion of Debentures and as payment of interest thereunder would equal or exceed 20% of the number of shares of the Common Stock outstanding on the Original Issue Date (such number of shares, up to the number of shares as equals such amount, the "Issuable Maximum"), and (C) the Company has not previously obtained the Stockholder Approval (as defined below), then the Company shall issue to the Holder requesting such conversion the Issuable Maximum and, with respect to any shares of the Common Stock that otherwise would have been issuable to such holder in respect of the Conversion Notice at issue or in respect of payment of interest hereunder in excess of the Issuable Maximum, the Holder shall have the option to require the Company to either (1) as promptly as possible, but in no event later than 90 days after such Conversion Date, convene a meeting of the holders of the Common Stock and obtain the Stockholder Approval or (2) prepay the balance of the aggregate principal amount of the Debentures then outstanding and held by such Holder. The prepayment amount shall equal the Mandatory Prepayment Amount (as defined in Section 6) for Debentures to be prepaid; provided, however, that if the Holder has requested that the Company obtain Stockholder Approval under paragraph (1) above and the Company fails for any reason to obtain such Stockholder Approval within the time period set forth in (1) above, the Company shall be obligated to prepay Debentures in accordance with the provisions of paragraph (2) above, and in such case the interest contemplated by the immediately succeeding sentence shall be deemed to accrue from the Conversion Date. If the Holder has requested that the Company prepay Debentures pursuant to this Section and the Company fails for any reason to pay the prepayment price under (2) above within seven days after the Conversion Date, the Company will pay interest on such prepayment price at a rate of 15% per annum to the converting Holder, accruing from the Conversion Date until the prepayment price plus any accrued interest thereon is paid in full. The entire Mandatory Prepayment Amount, including interest thereon, shall be paid in cash. "Stockholder Approval" means the approval by a majority of the total votes cast on the proposal, in person or by proxy, at a meeting of the stockholders of the Company held in accordance with the Company's Certificate of Incorporation and by-laws, of the issuance by the Company of shares of the Common Stock exceeding the Issuable Maximum as a consequence of the conversion of Debentures into the Common Stock at a price less than the greater of the book or market value on the Original Issue Date as and to the extent required pursuant to Rule 4460(i) of the Nasdaq Stock Market or Rule 713 of the American Stock Exchange (or any successor or replacement provision thereof), as applicable. (iii) Provided that either (a) there has been a "Change of Control" (as defined below) of Tarmachan Capital Management ("Tarmachan") or (b) Irvin Kessler has left Tarmachan or has suffered a voluntary or involuntary material lessening of responsibility as Chairman, this Debenture shall be convertible in whole or in part into a number of shares of Common Stock equal to the Conversion Price at the option of the Company; provided, however, that the Company is not permitted to deliver a Company Conversion Notice (as defined below) at any time when the Underlying Securities Registration Statement is not then effective or shares of Common Stock are not listed for trading. The Company shall effect such conversion by delivering to the Holder a written notice in the form attached hereto as Exhibit B (the "Company Conversion Notice"), which Company Conversion Notice, once given, shall be irrevocable. Each Company Conversion Notice shall specify the principal amount of Debentures to be converted in the case of a conversion at the Maturity Date or the amount of accrued interest being converted in the case of a conversion of accrued interest. The Company shall deliver such Company Conversion Notice at least two (2) Trading Days before the Maturity Date or the date of conversion of the accrued interest (such date is hereinafter referred to as the "Company Conversion Date"). Upon its receipt of a Company Conversion Notice, the Holder shall surrender the principal amount of Debentures subject to such notice at the office of the Company or of any transfer agent for the Debentures or Common Stock. If the Company is converting less than the aggregate principal amount of all Debentures, the Company shall, upon conversion of the principal amount of Debentures subject to such Company Conversion Notice and receipt of the Debentures surrendered for conversion, deliver to the Holder, a replacement Debenture for such principal amount of Debentures as have not been converted. Each of a Holder Conversion Notice and a Company Conversion Notice is sometimes referred to herein as a "Conversion Notice," and each of a "Holder Conversion Date" and a "Company Conversion Date" is sometimes referred to herein as a "Conversion Date." "Change of Control" means, for purposed of this Section 4(a)(iii), the occurrence of an acquisition, after the Original Issue Date, by an individual, group, or legal entity of all of the voting securities of Tarmachan. (b) Not later than three Trading Days after the Conversion Date, the Company will deliver to the Holder (i) a certificate or certificates which shall be free of restrictive legends and trading restrictions (other than those required by Section 3.1(b) of the Purchase Agreement) representing the number of shares of the Common Stock being acquired upon the conversion of Debentures (subject to reduction pursuant to Section 4(a)(ii) hereof and Section 3.1(b) of the Purchase Agreement), (ii) Debentures in a principal amount equal to the principal amount of Debentures not converted; (iii) a bank check in the amount of all accrued and unpaid interest (if the Company has elected to pay accrued interest in cash), together with all other amounts then due and payable in accordance with the terms hereof, in respect of Debentures tendered for conversion and (iv) if the Company has elected to pay accrued interest in shares of the Common Stock, certificates, which shall be free of restrictive legends and trading restrictions (other than those required by Section 3.1(b) of the Purchase Agreement), representing such number of shares of the Common Stock as equals such interest divided by the Conversion Price calculated on the Conversion Date; provided, however, that the Company shall not be obligated to issue certificates evidencing the shares of the Common Stock issuable upon conversion of the principal amount of Debentures until Debentures are either delivered for conversion to the Company or any transfer agent for the Debentures or the Common Stock, or the Holder notifies the Company that such Debenture has been mutilated, lost, stolen or destroyed and complies with Section 9 hereof. The Company shall, upon request of the Holder, use its best efforts to deliver any certificate or certificates required to be delivered by the Company under this Section electronically through the Depository Trust Corporation or another established clearing corporation performing similar functions. If in the case of any Conversion Notice such certificate or certificates, including for purposes hereof, any shares of the Common Stock to be issued on the Conversion Date on account of accrued but unpaid interest hereunder, are not delivered to or as directed by the applicable Holder by the third Trading Day after the Conversion Date, the Holder shall be entitled by written notice to the Company at any time on or before its receipt of such certificate or certificates thereafter, to rescind such conversion, in which event the Company shall immediately return the Debentures tendered for conversion. If the Company fails to deliver to the Holder such certificate or certificates pursuant to this Section, including for purposes hereof, any shares of the Common Stock to be issued on the Conversion Date on account of accrued but unpaid interest hereunder, prior to the fifth Trading Day after the Conversion Date, the Company shall pay to such Holder, in cash, as liquidated damages and not as a penalty, $1,500 for each day thereafter until the Company delivers such certificates. If the Company fails to deliver to the Holder such certificate or certificates pursuant to this Section prior to the 20th day after the Conversion Date, the Company shall, at the Holder's option (i) prepay, from funds legally available therefor at the time of such prepayment, the aggregate of the principal amount of Debentures then held by such Holder, as requested by such Holder, and (ii) pay all accrued but unpaid interest on account of the Debentures for which the Company shall have failed to issue the Common Stock certificates hereunder, in cash. The prepayment amount shall equal the Mandatory Prepayment Amount for the Debentures to be prepaid. If the Holder has required the Company to prepay Debentures pursuant to this Section and the Company fails for any reason to pay the prepayment price within seven days after such notice is deemed delivered hereunder, the Company will pay interest on the prepayment price at a rate of 15% per annum, in cash to such Holder, accruing from such seventh day until the prepayment price and any accrued interest thereon is paid in full. (c) (i) The conversion price (the "Conversion Price") in effect on any Conversion Date shall be the lesser of (a) $1.96 (the "Initial Conversion Price") and (b) .80 multiplied by the Average Price calculated on the Conversion Date; provided, that, (a) if an Underlying Securities Registration Statement is not filed on or prior to the 30th day after the Original Issue Date provided, that if such day is not a Business Day, such 30th day shall be the next succeeding Business Day, or (b) the Company fails to file with the Commission a request for acceleration in accordance with Rule 12d1-2 promulgated under the Securities Exchange Act of 1934, as amended, within five (5) days of the date that the Company is notified (orally or in writing, whichever is earlier) by the Commission that an Underlying Securities Registration Statement will not be "reviewed" or is not subject to further review or comment by the Commission, provided, however that such five (5) day period may be extended in the event that the Company reasonably believes that such Underlying Securities Registration Statement should be amended to include material non-public information, or (c) if the Underlying Securities Registration Statement is not declared effective by the Commission on or prior to the 90th day after the Original Issue Date provided, that, if such day is not a Business Day, such 90th day shall be the next succeeding Business Day, or (d) if such Underlying Securities Registration Statement is filed with and declared effective by the Commission but thereafter ceases to be effective as to all Registrable Securities (as such term is defined in the Registration Rights Agreement) at any time prior to the expiration of the "Effectiveness Period" (as such term as defined in the Registration Rights Agreement), without being succeeded by a subsequent Underlying Securities Registration Statement filed with and declared effective by the Commission within 10 Business Days (as defined in Section 6), or (e) if trading in the Common Stock shall be suspended for any reason for more than two Trading Days, or (f) if the conversion rights of the Holders of Debentures are suspended for any reason or the Holder is not permitted to resell Registrable Securities under the Underlying Securities Registration Statement (any such failure being referred to as an "Event," and for purposes of clauses (a), (c) and (f) the date on which such Event occurs, or for purposes of clause (b) the date on which such five (5) days period is exceeded, or for purposes of clause (d) the date which such 10 Business Day-period is exceeded, or for purposes of clause (e) the date on which such two Trading Day period is exceeded, being referred to as "Event Date"), the Company shall pay to the Holders 1.0% of the product of the principal amount of outstanding Debentures (each Holder being entitled to receive such portion of such amount as equals its pro rata portion of Debentures then outstanding), in cash on the Event Date and an additional 1.0% for each applicable 30 day period thereafter, as liquidated damages. Commencing the 60th day after the Event Date, for each applicable 30 day period thereafter, the Company shall pay to the Holders 3.0% of the product of the principal amount of outstanding Debentures (each Holder being entitled to receive such portion of such amount as equals its pro rata portion of Debentures then outstanding), in cash until such time as the applicable Event is cured provided, that the total amount of liquidated damages the Company shall pay to the Holder pursuant to this Section 5(c)(i) shall not exceed $500,000 in aggregate. (ii) If the Company, at any time while any Debentures are outstanding, (a) shall pay a stock dividend or otherwise make a distribution or distributions on shares of its Common Stock or any other equity or equity equivalent securities payable in shares of the Common Stock, (b) subdivide outstanding shares of the Common Stock into a larger number of shares, (c) combine outstanding shares of the Common Stock into a smaller number of shares, or (d) issue by reclassification of shares of the Common Stock any shares of capital stock of the Company, the Initial Conversion Price shall be multiplied by a fraction of which the numerator shall be the number of shares of the Common Stock (excluding treasury shares, if any) outstanding before such event and of which the denominator shall be the number of shares of the Common Stock outstanding after such event. Any adjustment made pursuant to this Section shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification. (iii) If the Company, at any time while any Debentures are outstanding, shall issue rights or warrants to all holders of the Common Stock (and not to Holders of Debentures) entitling them to subscribe for or purchase shares of the Common Stock at a price per share less than the Per Share Market Value of the Common Stock at the record date mentioned below, the Initial Conversion Price shall be multiplied by a fraction, of which the denominator shall be the number of shares of the Common Stock (excluding treasury shares, if any) outstanding on the date of issuance of such rights or warrants plus the number of additional shares of the Common Stock offered for subscription or purchase, and of which the numerator shall be the number of shares of the Common Stock (excluding treasury shares, if any) outstanding on the date of issuance of such rights or warrants plus the number of shares which the aggregate offering price of the total number of shares so offered would purchase at such Per Share Market Value. Such adjustment shall be made whenever such rights or warrants are issued, and shall become effective immediately after the record date for the determination of stockholders entitled to receive such rights or warrants. However, upon the expiration of any right or warrant to purchase shares of the Common Stock the issuance of which resulted in an adjustment in the Initial Conversion Price pursuant to this Section, if any such right or warrant shall expire and shall not have been exercised, the Initial Conversion Price shall immediately upon such expiration be recomputed and effective immediately upon such expiration be increased to the price which it would have been (but reflecting any other adjustments in the Initial Conversion Price made pursuant to the provisions of this Section 4 after the issuance of such rights or warrants) had the adjustment of the Initial Conversion Price made upon the issuance of such rights or warrants been made on the basis of offering for subscription or purchase only that number of shares of the Common Stock actually purchased upon the exercise of such rights or warrants actually exercised. (iv) If the Company, at any time while Debentures are outstanding, shall distribute to all holders of the Common Stock (and not to Holders of Debentures) evidences of its indebtedness or assets or rights or warrants to subscribe for or purchase any security, then in each such case the Initial Conversion Price at which Debentures shall thereafter be convertible shall be determined by multiplying the Initial Conversion Price in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such distribution by a fraction of which the denominator shall be the Per Share Market Value of the Common Stock determined as of the record date mentioned above, and of which the numerator shall be such Per Share Market Value of the Common Stock on such record date less the then fair market value at such record date of the portion of such assets or evidence of indebtedness so distributed applicable to one outstanding share of the Common Stock as determined by the Board of Directors in good faith; provided, however, that in the event of a distribution exceeding ten percent (10%) of the net assets of the Company, such fair market value shall be determined by a nationally recognized or major regional investment banking firm or firm of independent certified public accountants of recognized standing (which may be the firm that regularly examines the financial statements of the Company) (an "Appraiser") selected in good faith by the holders of a majority in interest of Debentures then outstanding; and provided, further, that the Company, after receipt of the determination by such Appraiser shall have the right to select an additional Appraiser, in good faith, in which case the fair market value shall be equal to the average of the determinations by each such Appraiser. In either case the adjustments shall be described in a statement provided to the holders of Debentures of the portion of assets or evidences of indebtedness so distributed or such subscription rights applicable to one share of the Common Stock. Such adjustment shall be made whenever any such distribution is made and shall become effective immediately after the record date mentioned above. (v) In case of any reclassification of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is converted into other securities, cash or property, the Holder of this Debenture shall have the right thereafter to, at its option, (A) convert the then outstanding principal amount, together with all accrued but unpaid interest and any other amounts then owing hereunder in respect of this Debenture only into the shares of stock and other securities, cash and property receivable upon or deemed to be held by holders of the Common Stock following such reclassification or share exchange, and the Holders of the Debentures shall be entitled upon such event to receive such amount of securities, cash or property as the shares of the Common Stock of the Company into which the then outstanding principal amount, together with all accrued but unpaid interest and any other amounts then owing hereunder in respect of this Debenture could have been converted immediately prior to such reclassification or share exchange would have been entitled or (B) require the Company to prepay, from funds legally available therefor at the time of such prepayment, the aggregate of its outstanding principal amount of Debentures, plus all interest and other amounts due and payable thereon, at a price determined in accordance with Section 5(a). The entire repayment price shall be paid in cash. This provision shall similarly apply to successive reclassifications or share exchanges. (vi) All calculations under this Section 4 shall be made to the nearest cent or the nearest whole share, as the case may be. (vii) Whenever the Initial Conversion Price is adjusted pursuant to any of Section 4(c)(ii) - (v), the Company shall promptly mail to each Holder of Debentures a notice setting forth the Initial Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. (viii) If: A. the Company shall declare a dividend (or any other distribution) on its Common Stock; or B. the Company shall declare a special nonrecurring cash dividend on or a redemption of its Common Stock; or C. the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights; or D. the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock of the Company, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, of any compulsory share of exchange whereby the Common Stock is converted into other securities, cash or property; or E. the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company; then the Company shall cause to be filed at each office or agency maintained for the purpose of conversion of the Debentures, and shall cause to be mailed to the Holders of Debentures at their last addresses as they shall appear upon the stock books of the Company, at least 30 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of the Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange; provided, however, that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice. Holders are entitled to convert Debentures during the 30-day period commencing the date of such notice to the effective date of the event triggering such notice. (d) The Company covenants that it will at all times reserve and keep available out of its authorized and unissued shares of the Common Stock solely for the purpose of issuance upon conversion of the Debentures and payment of interest on the Debentures, each as herein provided, free from preemptive rights or any other actual contingent purchase rights of persons other than the Holders, not less than such number of shares of the Common Stock as shall (subject to any additional requirements of the Company as to reservation of such shares set forth in the Purchase Agreement) be issuable (taking into account the adjustments and restrictions of Section 4(c)) upon the conversion of the outstanding principal amount of the Debentures and payment of interest hereunder. The Company covenants that all shares of the Common Stock that shall be so issuable shall, upon issue, be duly and validly authorized, issued and fully paid, nonassessable and, if the Underlying Securities Registration Statement has been declared effective under the Securities Act, freely tradeable, upon compliance with prospectus delivery requirements and applicable state securities laws. (e) Upon a conversion hereunder the Company shall not be required to issue stock certificates representing fractions of shares of the Common Stock, but may if otherwise permitted, make a cash payment in respect of any final fraction of a share based on the Per Share Market Value at such time. If the Company elects not, or is unable, to make such a cash payment, the holder shall be entitled to receive, in lieu of the final fraction of a share, one whole share of Common Stock. (f) The issuance of certificates for shares of the Common Stock on conversion of the Debentures shall be made without charge to the Holders thereof for any documentary stamp or similar taxes that may be payable in respect of the issue or delivery of such certificate, provided that the Company shall not be required to pay any tax that may be payable in respect of any transfer involved in the issuance and delivery of any such certificate upon conversion in a name other than that of the Holder of such Debentures so converted and the Company shall not be required to issue or deliver such certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. (g) Any and all notices or other communications or deliveries to be provided by the Holders of the Debentures hereunder, including, without limitation, any Conversion Notice, shall be in writing and delivered personally, by facsimile, sent by a nationally recognized overnight courier service or sent by certified or registered mail, postage prepaid, addressed to the Company, at 5600 Rowland Road, Minnetonka, Minnesota 55343 (facsimile number (612) 932-7181), attention Chief Financial Officer, or such other address or facsimile number as the Company may specify for such purposes by notice to the Holders delivered in accordance with this Section. Any and all notices or other communications or deliveries to be provided by the Company hereunder shall be in writing and delivered personally, by facsimile, sent by a nationally recognized overnight courier service or sent by certified or registered mail, postage prepaid, addressed to each Holder of the Debentures at the facsimile telephone number or address of such Holder appearing on the books of the Company, or if no such facsimile telephone number or address appears, at the principal place of business of the holder. Any notice or other communication or deliveries hereunder shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section prior to 4:30 p.m. (Minnetonka time), (ii) the date after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section later than 4:30 p.m. (Minnetonka time) on any date and earlier than 11:59 p.m. (Minnetonka time) on such date, (iii) four days after deposit in the United States mails, (iv) the Business Day following the date of mailing, if send by nationally recognized overnight courier service, or (v) upon actual receipt by the party to whom such notice is required to be given. Section 5. Repayments. (a) The Company shall have the right, exercisable at any time upon 2 Trading Days notice to the Holder of the Debentures given at any time the Company receives a Conversion Notice and the Conversion Price in effect in connection with such Conversion Notice is less than $1.25, to repay, from funds legally available therefor at the time of such repayment, all or any portion of the outstanding principal amount of the Debentures which have been tendered for conversion, at a price equal to the sum of 120% of the aggregate principal amount of Debentures to be repaid. In addition, the Company shall pay the aggregate of all accrued but unpaid interest and other amounts owing in respect of the Debentures to be repaid. The entire repayment price shall be paid in cash. Notwithstanding anything to the contrary contained herein, the Company shall not have the right to repay the Debenture pursuant to this Section 5(a) if repayment of the Debenture is required pursuant to another section of this Debenture or pursuant to the Purchase Agreement. (b) If any portion of the applicable repayment price under Sections 6(a) shall not be paid by the Company within thirty (30) calendar days after the original Conversion Date as set forth in such Conversion Notice, interest shall accrue thereon at the rate of 15% per annum until the repayment price plus all such interest is paid in full (which amount shall be paid as liquidated damages and not as a penalty). In addition, if any portion of such repayment price remains unpaid for more than seven (7) calendar days after the date due, the Holder of the Debentures subject to such repayment may elect, by written notice to the Company given within seven (7) calendar days after the date due, to either (i) demand conversion in accordance with the formula and the time frame therefor set forth in Section 4 of all Debentures for which such repayment price, plus accrued liquidated damages thereof, has not been paid in full (the "Unpaid Repayment Shares"), in which event the Per Share Market Price for such shares shall be the lower of the Per Share Market Price calculated on the date such repayment price was originally due and the Per Share Market Price as of the Holder's written demand for conversion, or (ii) invalidate ab initio such repayment, notwithstanding anything herein contained to the contrary. If the Holder elects option (i) above, the Company shall within three (3) Trading Days of its receipt of such election deliver to the Holder the shares of the Common Stock issuable upon conversion of the Unpaid Repayment Shares subject to such Holder conversion demand and otherwise perform its obligations hereunder with respect thereto; or, if the Holder elects option (ii) above, the Company shall promptly, and in any event not later than three (3) Trading Days from receipt of Holder's notice of such election, return to the Holder all of the Debentures. Notwithstanding anything to the contrary contained herein, the Company may not, without the written consent of the holder, repay Debentures unless both the payment thereof and the retention of such paid cash by the holder is consented to in writing free of any subordination prior thereto by all lenders or holders of any indebtedness or class of securities of the Company who have the right to consent to or force the subordination of such payment. Section 6. Definitions. For the purposes hereof, the following terms shall have the following meanings: "Adjustment Amount" is equal to (i) the aggregate principal amount of Debentures then outstanding multiplied by (A) the average Per Share Market Value for the five Trading Days immediately preceding (1) the applicable Trigger Date or (2) the date of payment of all amounts due as a result of such Event of Default, whichever is greater, divided by (B) the Conversion Price with respect to the aggregate principal amount of Debentures then outstanding calculated on the applicable Trigger Date, minus (ii) the aggregate principal amount of Debentures then outstanding, plus all accrued and unpaid interest thereon and all other amounts due, except for those referred to in (i) above pursuant to the terms hereof. "Average Price" on any date means the average Per Share Market Value for the five (5) Trading Days immediately preceding such date. "Business Day" means any day except Saturday, Sunday and any day which shall be a legal holiday or a day on which banking institutions in the State of Minnesota are authorized or required by law or other government action to close. "Common Stock" means the Company's common stock, $.01 par value per share, of the Company and stock of any other class into which such shares may hereafter have been reclassified or changed. "Mandatory Prepayment Amount" for any Debentures shall equal the sum of (i) the principal amount of Debentures to be prepaid, plus all accrued and unpaid interest thereon, divided by the Conversion Price on (x) the date the Mandatory Prepayment Amount is demanded or (y) the date the Mandatory Prepayment Amount is paid in full, whichever is less, multiplied by the Per Share Market Value on (x) the date the Mandatory Prepayment Amount is demanded or (y) the date the Mandatory Prepayment Amount is paid in full, whichever is greater, and (ii) all other amounts, costs, expenses and liquidated damages due in respect of such Debentures. "Original Issue Date" shall mean December 1, 1997 regardless of the number of transfers of any Debenture and regardless of the number of instruments which may be issued to evidence such Debenture. "Per Share Market Value" on any particular date means (a) the closing bid price per share of the Common Stock on such date on the Nasdaq National Market or other stock exchange or quotation system on which the Common Stock is listed for trading, or (b) if the Common Stock is not listed on the Nasdaq National Market or any other stock exchange or market, the closing bid price per share of the Common Stock on such date on the over-the-counter market, as reported by the OTC Bulletin Board, or (c) if the Common Stock is not quoted on the OTC Bulletin Board, the closing bid price per share of Common Stock on such date on the over-the-counter market as reported by the National Quotation Bureau Incorporated (or any similar organization or agency succeeding its functions of reporting prices), or (d) if the Common Stock is no longer traded on the over-the-counter market and reported by the National Quotation Bureau Incorporated (or any similar organization or agency succeeding its functions of reporting prices), such closing bid price shall be determined by reference to "Pink Sheet" quotes for the relevant conversion period as determined in good faith by the Holder or (c) if the Common Stock is not then publicly traded, the fair market value of a share of Common Stock as determined by an appraiser selected in good faith by the Holders of a majority in interest of the Debentures (the Company, after receipt of the determination by such appraiser, shall have the right to select an additional appraiser, in which case, the fair market value shall be equal to the average of the determinations by each such appraiser). "Person" means a corporation, an association, a partnership, organization, a business, an individual, a government or political subdivision thereof or a governmental agency. "Purchase Agreement" means the Convertible Subordinated Debenture Purchase Agreement, dated as of the Original Issue Date, between the Company and the original Holder of Debentures, as amended, modified or supplemented from time to time in accordance with its terms. "Registration Rights Agreement" means the Registration Rights Agreement, dated as of the Original Issue Date, between the Company and the original Holder of Debentures, as amended, modified or supplemented from time to time in accordance with its terms. "Trading Day" means (a) a day on which the Common Stock is traded on the Nasdaq National Market or other stock exchange or market on which the Common Stock is listed for trading, or (b) if the Common Stock is not listed on the Nasdaq National Market or any stock exchange or market, a day on which the Common Stock is traded in the over-the-counter market, as reported by the OTC Bulletin Board, or (c) if the Common Stock is not quoted on the OTC Bulletin Board, a day on which the Common Stock is quoted in the over-the-counter market or on the pink sheets as reported by the National Quotation Bureau Incorporated or Bloomberg Information Services, Inc., as the case may be (or any similar organization or agency succeeding their respective functions of reporting prices). "Trigger Date" shall mean, (i) with respect to an Event of Default caused by an event described in Section 3(a), the date the payment of principal or interest at issue was due, (ii) with respect to an Event of Default caused by an event described in Section 3(b), the date specified in any other provision of this Debenture, the Purchase Agreement or the Registration Rights Agreement that require prepayment of the outstanding principal amount of this Debenture as a result of an event so contemplated, if not, the date such event becomes an Event of Default pursuant to Section 3(b), and (iii) with respect to an Event of Default caused by an event described in Section 3(c), (d), (e) and (f), the date such event becomes an Event of Default pursuant to such Sections. "Underlying Shares" means the shares of Common Stock into which the Debentures are convertible in accordance with the terms hereof and the Purchase Agreement, in such number as required hereunder. "Underlying Securities Registration Statement" means a registration statement meeting the requirements set forth in the Registration Rights Agreement, covering among other things the resale of the Underlying Shares and naming the Holder as a "selling stockholder" thereunder. Section 7. Except as expressly provided herein, no provision of this Debenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of, and interest on, this Debenture at the time, place, and rate, and in the coin or currency, herein prescribed. This Debenture is a direct obligation of the Company. This Debenture ranks pari passu with all other Debentures now or hereafter issued under the terms set forth herein. The Company may only voluntarily prepay the outstanding principal amount on the Debentures in accordance with Section 5 hereof. Section 8. This Debenture shall not entitle the Holder to any of the rights of a stockholder of the Company, including without limitation, the right to vote, to receive dividends and other distributions, or to receive any notice of, or to attend, meetings of stockholders or any other proceedings of the Company, unless and to the extent converted into shares of Common Stock in accordance with the terms hereof. Section 9. If this Debenture shall be mutilated, lost, stolen or destroyed, the Company shall execute and deliver, in exchange and substitution for and upon cancellation of a mutilated Debenture, or in lieu of or in substitution for a lost, stolen or destroyed debenture, a new Debenture for the principal amount of this Debenture so mutilated, lost, stolen or destroyed but only upon receipt of evidence of such loss, theft or destruction of such Debenture, and of the ownership hereof, and indemnity, if requested, all reasonably satisfactory to the Company. Section 10. (a) This Debenture is subordinated to Senior Debt, which is any Debt of the Company (including, principal, interest or premium) outstanding on the date hereof, or hereafter created, incurred, assumed or guaranteed by the Company and all renewals, amendments, extensions and refundings thereof, except Debt that expressly provides that it is not senior or superior in right of payment to this Debenture. Debt is any indebtedness, contingent or otherwise, in respect of borrowed money (whether or not the recourse of the lender is to the whole of the assets of the Company or any subsidiary or only to a portion thereof), or evidenced by bonds, notes, debentures or similar instruments or letters of credit, or representing the balance deferred and unpaid of the purchase price of any property or interest therein, except any such balance that constitutes a trade payable if, and only to the extent such indebtedness would appear as a liability on the balance sheet of the Company or any subsidiary prepared on a consolidated basis in accordance with generally accepted accounting principles, or any debt owed to any affiliate (including any officer, director or employees thereof) of the Company. The Company agrees, and each holder of this Debenture by accepting this Debenture agrees, to the foregoing subordination. Until Senior Debt is satisfied, the Company shall not, directly or indirectly, make any payment under this Debenture (except for cash payments contemplated by Sections 4(a)(ii), 4(b), 4(c) or 5 hereof; provided, however, that at the time such payments are made there has not been declared an event of default under any instrument representing Senior Debt that has not been cured and provided, further, that such payments under Sections 4(a)(ii), 4(b) 4(c) or 5 hereof will not cause an event of default under any such instruments), or grant any collateral for any of the Debentures or make any distribution of any assets other than shares of Common Stock to the Holder. The Holder shall take no action to enforce payment of the Debenture without the consent of the holders of Senior Debt, provided, however, that the subordination provided hereunder shall in no way limit the Holder's ability to convert Debentures into shares of Common Stock, including after such time as any Event of Default shall be declared hereunder. (b) Should any payment, other than payments contemplated in Section 10(a) above, be received by the Holder, such payment shall be held in trust by the Holder for the benefit of the holders of Senior Debt, and shall be delivered forthwith to the holders of Senior Debt for application to the Senior Debt, in the form received with any necessary endorsement or assignment. Section 11. This Debenture shall be governed by and construed in accordance with the laws of the State of Delaware, without giving effect to conflicts of laws thereof. Section 12. Any waiver by the Company or the Holder of a breach of any provision of this Debenture shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Debenture. The failure of the Company or the Holder to insist upon strict adherence to any term of this Debenture on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Debenture. Any waiver must be in writing. Section 13. If any provision of this Debenture is invalid, illegal or unenforceable, the balance of this Debenture shall remain in effect, and if any provision is inapplicable to any person or circumstance, it shall nevertheless remain applicable to all other persons and circumstances. Section 14. Whenever any payment or other obligation hereunder shall be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day (or, if such next succeeding Business Day falls in the next calendar month, the preceding Business Day in the appropriate calendar month). IN WITNESS WHEREOF, the Company has caused this Debenture to be duly executed by a duly authorized officer as of the date first above indicated. DIGITAL BIOMETRICS, INC. By:________________________ Name: Title: Attest: By:___________________________ Name: Title: EXHIBIT A NOTICE OF CONVERSION AT THE OPTION OF THE HOLDER (To be Executed by the Registered Holder in order to Convert the Debenture) The undersigned hereby elects to convert Debenture No. A-1 into shares of Common Stock, par value $.01 per share (the "Common Stock"), of Digital Biometrics, Inc. (the "Company") according to the conditions hereof, as of the date written below. If shares are to be issued in the name of a person other than undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith such certificates and opinions as reasonably requested by the Company in accordance therewith. No fee will be charged to the holder for any conversion, except for such transfer taxes, if any. Conversion calculations: ---------------------------------------------- Date to Effect Conversion ---------------------------------------------- Principal Amount of Debentures to be Converted ---------------------------------------------- Number of shares of Common Stock to be Issued ---------------------------------------------- Applicable Conversion Price ---------------------------------------------- Signature ---------------------------------------------- Name ---------------------------------------------- Address EXHIBIT B NOTICE OF CONVERSION AT THE ELECTION OF THE COMPANY The undersigned in the name and on behalf of DIGITAL BIOMETRICS, INC. (the "Company") hereby notifies the addressee hereof that the Company hereby elects to exercise its right to convert Debenture No. A-1 into shares of Common Stock, par value $.01 per share (the "Common Stock"), of the Company according to the conditions hereof, as of the date written below. No fee will be charged to the Holder for any conversion hereunder, except for such transfer taxes, if any, which may be incurred by the Company if shares are to be issued in the name of a person other than the person to whom this notice is addressed. Conversion calculations: ---------------------------------------------- Date to Effect Conversion ---------------------------------------------- Principal Amount of Debentures to be Converted ---------------------------------------------- Applicable Conversion Price ---------------------------------------------- Signature ---------------------------------------------- Name: ---------------------------------------------- Address: EX-10.1 4 CONVERTIBLE SUBORDINATED DEBENTURE PURCHASE AGRMT EXHIBIT 10.1 - -------------------------------------------------------------------------------- CONVERTIBLE SUBORDINATED DEBENTURE PURCHASE AGREEMENT Between DIGITAL BIOMETRICS, INC. and KA INVESTMENTS LDC ------------------------------ December 1, 1997 ------------------------------ - -------------------------------------------------------------------------------- CONVERTIBLE SUBORDINATED DEBENTURE PURCHASE AGREEMENT, dated as of December 1, 1997 (this "Agreement"), between Digital Biometrics, Inc., a Delaware corporation (the "Company"), and KA Investments LDC, a Cayman Islands corporation (the "Purchaser"). WHEREAS, subject to the terms and conditions set forth herein, the Company desires to issue and sell to the Purchaser and the Purchaser desires to purchase an aggregate principal amount of $2,500,000 of the Company's to be created 8% Convertible Subordinated Debentures, due December 1, 2000 (the "Debentures"), which are convertible into the Company's common stock, par value $.01 per share (the "Common Stock"). IN CONSIDERATION of the mutual covenants and agreements set forth herein and for good and valuable consideration, the receipt of which is hereby acknowledged, the parties agree as follows: ARTICLE I PURCHASE AND SALE OF DEBENTURES 1.1 Purchase and Sale. Subject to the terms and conditions set forth herein, the Company shall issue and sell to the Purchaser and the Purchaser shall purchase the Debentures, in denominations of $100,000 and integral multiples of $50,000 in excess thereof. 1.2 The Tranche 1 Closing. (a) Subject to the terms and conditions set forth herein, the Company shall issue and sell to the Purchaser and the Purchaser shall purchase an aggregate principal amount of $500,000 of the Debentures (the "Tranche 1 Debentures") for a purchase price of $500,000 (the "Purchase Price"). The closing of the purchase and sale of the Tranche 1 Debentures (the "Tranche 1 Closing") shall take place at the offices of Robinson Silverman Pearce Aronsohn & Berman LLP ("RSPAB"), 1290 Avenue of the Americas, New York, New York 10104, immediately following the execution hereof or such later date as the parties shall agree. The date of the Tranche 1 Closing is hereinafter referred to as the "Tranche 1 Closing Date." (b) At the Tranche 1 Closing, (i) the Company shall deliver to the Purchaser (1) the Tranche 1 Debentures and the Tranche 1 Warrants (as defined in Section 3.17), each registered in the name of the Purchaser, (2) the legal opinion of Briggs and Morgan P.A., substantially in the form attached hereto as Exhibit C, and (3) all other documents, instruments and writings required to have been delivered at or prior to the Tranche 1 Closing by the Company pursuant to this Agreement, and (b) the Purchaser shall deliver to the Company (1) $500,000, less the fees contemplated in Sections 2.1(l) and 5.1, in immediately available funds by wire transfer to an account designated in writing by the Company for such purpose on or prior to the Tranche 1 Closing Date, and (2) all documents, instruments and writings required to have been delivered at or prior to the Tranche 1 Closing by the Purchaser pursuant to this Agreement. 1.3 The Tranche 2 Closing. (a) Subject to the terms and conditions set forth in this Agreement, the Company shall have the right to deliver a written notice to the Purchaser (a "Subsequent Financing Notice") requiring the Purchaser to purchase Debentures in the aggregate principal amount of up to $500,000 (the "Tranche 2 Debentures") and the Tranche 2 Warrants (as defined in Section 3.15). The Company may not deliver the Subsequent Financing Notice relating to the Tranche 2 Debentures earlier than 75 days nor later than 105 days after the Tranche 1 Closing Date or, if such day is not a Business Day, the next succeeding Business Day. The closing of the purchase and sale of the Tranche 2 Debentures (the "Tranche 2 Closing") shall take place at the offices of RSPAB on such date (which may not, without the consent of the Purchaser, be prior to the fifteenth day after receipt of the Subsequent Financing Notice relating to the Tranche 2 Debentures or, if such day is not a Business Day, the next succeeding Business Day) as the Company may designate in the Subsequent Financing Notice relating to the Tranche 2 Debentures; provided, however, that in no case shall the Tranche 2 Closing take place unless and until the conditions listed in Section 4.1 have been satisfied or waived by the appropriate party and in no event shall the Tranche 2 Closing occur subsequent to the 120th day after the Tranche 1 Closing Date or, if such day is not a Business Day, the next succeeding Business Day (such date, the "Tranche 2 Closing Expiration Date"). The date of the Tranche 2 Closing is hereinafter referred to as the "Tranche 2 Closing Date." (b) At the Tranche 2 Closing, (i) the Company shall deliver to the Purchaser (a) the Tranche 2 Debentures and the Tranche 2 Warrants, each registered in the name of the Purchaser, and (b) all other documents, instruments and writings required to have been delivered at or prior to the Tranche 2 Closing by the Company pursuant to this Agreement, and (ii) the Purchaser shall deliver to the Company (a) an amount equal to the aggregate principal amount of Tranche 2 Debentures to be sold at the Tranche 2 Closing in accordance with this Section less the fees contemplated by Sections 2.1(l) and 5.1, in immediately available funds by wire transfer to an account designated in writing by the Company prior to the Tranche 2 Closing Date and (b) all documents, instruments and writings required to have been delivered at or prior to Tranche 2 Closing by the Purchaser pursuant to this Agreement. 1.4 Tranche 3 Closing. (a) Subject to the terms and conditions set forth in this Agreement, the Company shall have the right to deliver a Subsequent Financing Notice requiring the Purchaser to purchase Debentures in such principal amount as the Company may designate in such notice, which may not be more than $500,000 (the "Tranche 3 Debentures") and the Tranche 3 Warrants (as defined in Section 3.15). The Company may not deliver the Subsequent Financing Notice relating to the Tranche 3 Debentures earlier than 75 days nor later than 105 days after the earlier to occur of the Tranche 2 Closing Date or the Tranche 2 Closing Expiration Date or, if such day is not a Business Day, the next succeeding Business Day. The closing of the purchase and sale of the Tranche 3 Debentures (the "Tranche 3 Closing") shall take place at the offices of RSPAB on such date (which may not, without the consent of the Purchaser, be prior to the fifteenth day after receipt of the Subsequent Financing Notice relating to the Tranche 3 Debentures or, if such day is not a Business Day, the next succeeding Business Day) as the Company may designate in the Subsequent Financing Notice relating to the Tranche 3 Debentures; provided, however, that in no case shall the Tranche 3 Closing take place unless and until the conditions listed in Section 4.1 have been satisfied or waived by the appropriate party and in no event shall the Tranche 3 Closing occur subsequent to the 120th day after the earlier the earlier to occur of the Tranche 2 Closing Date or Tranche 2 Closing Expiration Date or, if such day is not a Business Day, the next succeeding Business Day (such date, the "Tranche 3 Closing Expiration Date"). The date of the Tranche 3 Closing is hereinafter referred to as the "Tranche 3 Closing Date." (b) At the Tranche 3 Closing, (i) the Company shall deliver to the Purchaser (a) the Tranche 3 Debentures and Tranche 3 Warrants, each registered in the name of the Purchaser, and (b) all other documents, instruments and writings required to have been delivered at or prior to the Tranche 3 Closing by the Company pursuant to this Agreement, and (ii) the Purchaser shall deliver to the Company (a) an amount equal to the aggregate principal amount of Tranche 3 Debentures to be sold at the Tranche 3 Closing in accordance with this Section less the fees contemplated by Sections 2.1(l) and 5.1, in immediately available funds by wire transfer to an account designated in writing by the Company prior to the Tranche 3 Closing Date and (b) all documents, instruments and writings required to have been delivered at or prior to Tranche 3 Closing by the Purchaser pursuant to this Agreement. 1.5 Tranche 4 Closing. (a) Subject to the terms and conditions set forth in this Agreement, the Company shall have the right to deliver to the Purchaser a Subsequent Financing Notice requiring the Purchaser to purchase Debentures in such principal amount as the Company may designate in such notice, which may not be more than $500,000 (the "Tranche 4 Debentures") and the Tranche 4 Warrants (as defined in Section 3.15). The Company may not deliver the Subsequent Financing Notice relating to the Tranche 4 Debentures earlier than 75 days nor later than 105 days after the earlier to occur of the Tranche 3 Closing Date or the Tranche 3 Closing Expiration Date or, if such day is not a Business Day, the next succeeding Business Day. The closing of the purchase and sale of the Tranche 4 Debentures (the "Tranche 4 Closing") shall take place at the offices of RSPAB on such date (which may not, without the consent of the Purchaser, be prior to the fifteenth day after receipt of the Subsequent Financing Notice relating to the Tranche 4 Debentures or, if such day is not a Business Day, the next succeeding Business Day) as the Company may designate in the Subsequent Financing Notice relating to the Tranche 4 Debentures; provided, however, that in no case shall the Tranche 4 Closing take place unless and until the conditions listed in Section 4.1 have been satisfied or waived by the appropriate party and in no event shall the Tranche 4 Closing occur after the 120th day after the earlier to occur of the Tranche 3 Closing Date or Tranche 3 Closing Expiration Date or, if such day is not a Business Day, the next succeeding Business Day (such date, the "Tranche 4 Closing Expiration Date"). The date of the Tranche 4 Closing is hereinafter referred to as the "Tranche 4 Closing Date." (b) At the Tranche 4 Closing, (i) the Company shall deliver to the Purchaser (a) the Tranche 4 Debentures and Tranche 4 Warrants, each registered in the name of the Purchaser, and (b) all other documents, instruments and writings required to have been delivered at or prior to the Tranche 4 Closing by the Company pursuant to this Agreement, and (ii) the Purchaser shall deliver to the Company (a) an amount equal to the aggregate principal amount of Tranche 4 Debentures to be sold at the Tranche 4 Closing in accordance with this Section less the fees contemplated by Sections 2.1(l) and 5.1, in immediately available funds by wire transfer to an account designated in writing by the Company prior to the Tranche 4 Closing Date and (b) all documents, instruments and writings required to have been delivered at or prior to Tranche 4 Closing by the Purchaser pursuant to this Agreement. 1.6 Tranche 5 Closing. (a) Subject to the terms and conditions set forth in this Agreement, the Company shall have the right to deliver to the Purchaser a Subsequent Financing Notice requiring the Purchaser to purchase Debentures in such principal amount as the Company may designate in such notice, which may not be more than $500,000 (the "Tranche 5 Debentures") and the Tranche 5 Warrants (as defined in Section 3.15). The Company may not deliver the Subsequent Financing Notice relating to the Tranche 5 Debentures earlier than 75 days nor later than 105 days after the earlier to occur of the Tranche 4 Closing Date or the Tranche 4 Closing Expiration Date or, if such day is not a Business Day, the next succeeding Business Day. The closing of the purchase and sale of the Tranche 5 Debentures (the "Tranche 5 Closing") shall take place at the offices of RSPAB on such date (which may not, without the consent of the Purchaser, be prior to the fifteenth day after receipt of the Subsequent Financing Notice relating to the Tranche 5 Debentures or, if such day is not a Business Day, the next succeeding Business Day) as the Company may designate in the Subsequent Financing Notice relating to the Tranche 5 Debentures; provided, however, that in no case shall the Tranche 5 Closing take place unless and until the conditions listed in Section 4.1 have been satisfied or waived by the appropriate party and in no event shall the Tranche 5 Closing occur after the 120th day after the earlier to occur of the Tranche 4 Closing Date or Tranche 4 Closing Expiration Date or, if such day is not a Business Day, the next succeeding Business Day (such date, the "Tranche 5 Closing Expiration Date"). The date of the Tranche 5 Closing is hereinafter referred to as the "Tranche 5 Closing Date." (b) At the Tranche 5 Closing, (i) the Company shall deliver to the Purchaser (a) the Tranche 5 Debentures and the Tranche 5 Warrants, each registered in the name of the Purchaser, and (b) all other documents, instruments and writings required to have been delivered at or prior to the Tranche 5 Closing by the Company pursuant to this Agreement, and (ii) the Purchaser shall deliver to the Company (a) an amount equal to the aggregate principal amount of Tranche 5 Debentures to be sold at the Tranche 5 Closing in accordance with this Section less the fees contemplated by Sections 2.1(l) and 5.1, in immediately available funds by wire transfer to an account designated in writing by the Company prior to the Tranche 5 Closing Date and (b) all documents, instruments and writings required to have been delivered at or prior to Tranche 5 Closing by the Purchaser pursuant to this Agreement. 1.7 The Tranche 1 Debentures shall be in the form of Exhibit A attached hereto. The Tranche 2 Debentures, Tranche 3 Debentures, Tranche 4 Debentures and Tranche 5 Debentures shall be identical to the Tranche 1 Debentures, except that the definition of "Conversion Price" for such Debentures shall be determined by reference to the applicable Original Issue Date of such Debenture. For purposes of this Agreement, "Conversion Price," "Original Issue Date," "Conversion Date" "Trading Day" and "Per Share Market Value" shall have the meanings set forth in the Debentures; and "Average Price" as at any date shall mean the average Per Share Market Value for the five (5) Trading Days immediately preceding such date. ARTICLE II REPRESENTATIONS AND WARRANTIES 2.1 Representations and Warranties of the Company. The Company hereby represents and warrants to the Purchaser as of the date hereof and as of each Closing Date as follows: (a) Organization and Qualification. The Company is a corporation, duly incorporated, validly existing and in good standing under the laws of the State of Delaware, with the requisite corporate power and authority to own and use its properties and assets and to carry on its business as currently conducted. The Company has no subsidiaries other than as set forth in Schedule 2.1(a) attached hereto (collectively, the "Subsidiaries"). Except as set forth on Schedule 2.1(a), each of the Subsidiaries is a corporation, duly incorporated, validly existing and in good standing under the laws of the jurisdiction of its incorporation, with the requisite corporate power and authority to own and use its properties and assets and to carry on its business as currently conducted. Each of the Company and the Subsidiaries is duly qualified to do business and is in good standing as a foreign corporation in each jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary, except where the failure to be so qualified or in good standing, as the case may be, could not, individually or in the aggregate, (x) adversely affect the legality, validity or enforceability of this Agreement, the Debentures, the Warrants, and the Registration Rights Agreement, dated the date hereof, between the Company and the Purchaser and substantially in the form of Exhibit B attached hereto (the "Registration Rights Agreement," and collectively with this Agreement, the Debentures and the Warrants, the "Transaction Documents"), (y) have a material adverse effect on the results of operations, assets, or financial condition of the Company and the Subsidiaries, taken as a whole, or (z) adversely impair the Company's ability to perform fully on a timely basis its material obligations under any Transaction Document (a "Material Adverse Effect"). (b) Authorization; Enforcement. The Company has the requisite corporate power and authority to enter into and to consummate the transactions contemplated by the Transaction Documents and to otherwise carry out its obligations thereunder. The execution and delivery of each Transaction Document by the Company and the consummation by it of the transactions contemplated thereby have been duly authorized by all necessary action on the part of the Company. Each Transaction Document has been duly executed by the Company and when delivered in accordance with the terms hereof and each Transaction Document shall constitute the legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally the enforcement of, creditors' rights and remedies or by other equitable principles of general application. Neither the Company nor any Subsidiary is in violation of any provision of its respective certificate of incorporation, by-laws or other charter documents (or their foreign equivalents). (c) Capitalization. The authorized, issued and outstanding capital stock of the Company is set forth in Schedule 2.1(c). No shares of Common Stock are entitled to preemptive or similar rights, nor is any holder of the Common Stock entitled to preemptive or similar rights arising out of any agreement or understanding with the Company by virtue of any of the Transaction Documents. Except as disclosed in Schedule 2.1(c), there are no outstanding options, warrants, script rights to subscribe to, calls or commitments of any character whatsoever relating to, or, except as a result of the purchase and sale of the Debentures and Warrants hereunder, securities, rights or obligations convertible into or exchangeable for, or giving any person any right to subscribe for or acquire any shares of Common Stock, or contracts, commitments, understandings, or arrangements by which the Company or any Subsidiary is or may become bound to issue additional shares of Common Stock, or securities or rights convertible or exchangeable into shares of Common Stock. To the knowledge of the Company, except as specifically disclosed in the SEC Documents (as defined below) or Schedule 2.1(c), no Person or group of Persons (as defined below) beneficially owns (as determined pursuant to Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) or has the right to acquire by agreement with or by obligation binding upon the Company beneficial ownership of in excess of 5% of the Common Stock. A "Person" means an individual or corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or subdivision thereof) or other entity of any kind. (d) Issuance of Debentures and Warrants. The Debentures and the Warrants are duly authorized, and, when issued and paid for in accordance with the terms hereof, shall be validly issued, fully paid and nonassessable. The Company has and at all times while the Debentures and the Warrants are outstanding will maintain an adequate reserve of duly authorized shares of Common Stock to enable it to perform its conversion, exercise and other obligations under this Agreement, the Warrants and the Debentures and in no circumstances shall such reserved and available shares of Common Stock be less than the sum of (i) 200% of (A) the number of shares of Common Stock as would be issuable upon conversion in full of the Debentures, assuming such conversion were effected on the Original Issue Date, and (B) the number of shares of Common Stock as are issuable as payment of interest on the Debentures, and (ii) the number of shares of Common Stock as are issuable upon exercise in full of the Warrants. The shares of Common Stock issuable upon conversion of the Debentures, as payment of interest in respect thereof and upon exercise of the Warrants are sometimes referred to herein as the "Underlying Shares," and the Debentures, Warrants and Underlying Shares are, collectively, the "Securities." When issued in accordance with the terms of the Debentures and the Warrants, the Underlying Shares will be duly authorized, validly issued, fully paid and nonassessable. (e) No Conflicts. The execution, delivery and performance of the Transaction Documents by the Company and the consummation by the Company of the transactions contemplated thereby do not and will not (i) conflict with or violate any provision of its certificate of incorporation, bylaws or other charter documents (or their foreign equivalents) (each as amended through the date hereof), (ii) subject to obtaining the consents referred to in Section 2.1(f), conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument (evidencing a Company debt or otherwise) to which the Company is a party or by which any property or asset of the Company is bound or affected, or (iii) result in a violation of any law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or governmental authority to which the Company is subject (including federal and state securities laws and regulations), or by which any property or asset of the Company is bound or affected, except in the case of each of clauses (ii) and (iii), as could not, individually or in the aggregate, have or result in a Material Adverse Effect. The business of the Company is not being conducted in violation of any law, ordinance or regulation of any governmental authority, except for violations which, individually or in the aggregate, could not have or result in a Material Adverse Effect. (f) Consents and Approvals. Neither the Company nor any Subsidiary is required to obtain any consent, waiver, authorization or order of, or make any filing or registration with, any court or other federal, state, local, foreign or other governmental authority or other Person in connection with the execution, delivery and performance by the Company of the Transaction Documents other than (i) the filing of a registration statement (an "Underlying Securities Registration Statement") contemplated by the Registration Rights Agreement with the Commission, which shall be filed in the time period set forth in the Registration Rights Agreement, (ii) the applications for the listing of the Underlying Shares with the Nasdaq National Market (and on each other national securities exchange, market or trading facility on which the Common Stock is then listed), (iii) to the extent required by Section 4(a)(ii) of the Debentures, the "Stockholder Approval" as therein defined, and (iv) other than, in all other cases, where the failure to obtain such consent, waiver, authorization or order, or to give or make such notice or filing, could not have or result in, individually or in the aggregate, a Material Adverse Effect (together with the consents, waivers, authorizations, orders, notices and filings referred to in Schedule 2.1(f), the "Required Approvals"). The Company shall deliver to the Purchaser the Underlying Shares in the manner contemplated hereby and by the Registration Rights Agreement free and clear of all liens and encumbrances of any nature whatsoever. (g) Litigation; Proceedings. Except as specifically disclosed in the SEC Documents (as hereinafter defined), there is no action, suit, notice of violation, proceeding or investigation pending or, to the best knowledge of the Company, threatened against or affecting the Company or any of its Subsidiaries or any of their respective properties before or by any court, governmental or administrative agency or regulatory authority (federal, state, county, local or foreign) which (i) adversely affects or challenges the legality, validity or enforceability of any Transaction Document or the Securities or (ii) could, individually or in the aggregate, have or result in a Material Adverse Effect. Notwithstanding anything to the contrary contained herein, in the event the Company obtains an unfavorable ruling in its patent lawsuit pending against Identix, Inc. pending in the United States District Court for the District of Northern California or decides not to continue pursuing its claim against Identix, Inc., such unfavorable ruling or discontinuance of litigation by the Company shall not be considered, for the purposes of this Agreement, a Material Adverse Effect. (h) No Default or Violation. Neither the Company nor any Subsidiary (i) is in default under or in violation of (or has received notice of a claim that it is in default under or that it is in violation of) any indenture, loan or credit agreement or any other agreement or instrument to which it is a party or by which it or any of its properties is bound, (ii) is in violation of any order of any court, arbitrator or governmental body, or (iii) is in violation of any statute, rule or regulation of any governmental authority, except as could not individually or in the aggregate, have or result in, a Material Adverse Effect. (i) Private Offering. Neither the Company nor any Person acting on its behalf has taken or will take any action which might subject the offering, issuance or sale of the Securities to the registration requirements of Section 5 of the Securities Act of 1933, as amended (the "Securities Act"). (j) SEC Documents. Except as set forth on Schedule 2.1(j), the Company has filed all reports required to be filed by it under the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof, since September 30, 1996, (the foregoing materials being collectively referred to herein as the "SEC Documents" and, together with the Schedules to this Agreement and other documents and information furnished by or on behalf of the Company at any time prior to the Closing, as the "Disclosure Materials") on a timely basis or has received a valid extension of such time of filing and has filed any such SEC Documents prior to the expiration of any such extension. As of their respective dates, the SEC Documents complied in all material respects with the requirements of the Securities Act and the Exchange Act and the rules and regulations of the Commission promulgated thereunder, and none of the SEC Documents, when filed, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements of the Company included in the SEC Documents comply in all material respects with applicable accounting requirements and the rules and regulations of the Commission with respect thereto. Such financial statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved, except as may be otherwise specified in such financial statements or the notes thereto, and fairly present in all material respects the financial position of the Company as of and for the dates thereof and the results of operations and cash flows for the periods then ended, subject, in the case of unaudited statements, to normal year-end audit adjustments. Except as set forth in Schedule 2.1(j), since the date of the financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1996, there has been no event, occurrence or development that has had or that could have or result in a Material Adverse Effect which has not been specifically disclosed in writing to the Purchaser by the Company. The Company last filed audited financial statements with the Commission in connection with its Form 10-K for the fiscal year ended September 30, 1996, and has not received any comments from the Commission in respect thereof. The Schedules to this Agreement furnished by or on behalf of the Company do not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. (k) Investment Company. The Company is not, and is not an "Affiliate person" of, an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (l) Certain Fees. Except for fees payable and warrants issuable to Miller, Johnson & Kuehn, Inc., no fees or commissions will be payable by the Company to any broker, financial advisor, finder, investment banker, or bank with respect to the transactions contemplated hereby. The Purchaser shall have no obligation with respect to such fees or with respect to any claims made by or on behalf of other Persons for fees of a type contemplated in this Section that may be due in connection with the transactions contemplated hereby. The Company shall indemnify and hold harmless the Purchaser, its employees, officers, directors, agents, and partners, and their respective Affiliates (as such term is defined under Rule 405 promulgated under the Securities Act), from and against all claims, losses, damages, costs (including the costs of preparation and attorney's fees) and expenses suffered in respect of any such claimed or existing fees. (m) Solicitation Materials. The Company has not (i) distributed any offering materials in connection with the offering and sale of the Securities other than the Disclosure Materials and any amendments and supplements thereto or (ii) solicited any offer to buy or sell the Securities by means of any form of general solicitation or advertising. (n) Form S-1 Eligibility. The Company is eligible to register securities for resale with the Commission under Form S-1 promulgated under the Securities Act. (o) Exclusivity. The Company shall not issue and sell Debentures to any Person other than the Purchaser and its Affiliates and managed funds, if any. (p) Listing and Maintenance Requirements Compliance. Except as set forth in Schedule 2.1(p), the Company has not in the two years preceding the date hereof received written notice from any stock exchange or market on which the Common Stock is or has been listed (or on which it has been quoted) to the effect that the Company is not in compliance with the listing or maintenance requirements of such exchange or market. (q) Patents and Trademarks. Except as set forth in Schedule 2.1(q), the Company has, or has rights to use, all patents, patent applications, trademarks, trademark applications, service marks, trade names, copyrights, licenses, trade secrets and other intellectual property rights which are necessary for use in connection with its business or which the failure to so have would have a Material Adverse Effect (collectively, the "Intellectual Property Rights"). To the best knowledge of the Company, none of the Intellectual Property Rights infringe on any rights of any other Person, and the Company either owns or has duly licensed or otherwise acquired all necessary rights with respect to the Intellectual Property Rights. The Company has not received any notice from any third party of any claim of infringement by the Company of any of the Intellectual Property Rights, and has no reason to believe there is any basis for any such claim. To the best knowledge of the Company, except as set forth in Schedule 2.1(q), there is no existing infringement by another Person on any of the Intellectual Property Rights. Notwithstanding anything to the contrary contained herein, in the event the Company obtains an unfavorable ruling in its patent lawsuit pending against Identix, Inc. pending in the United States District Court for the District of Northern California or decides not to continue pursuing its claim against Identix, Inc., such unfavorable ruling or discontinuance of litigation by the Company shall not be considered, for the purposes of this Agreement, a Material Adverse Effect. 2.2 Representations and Warranties of the Purchaser. The Purchaser hereby makes the following representations and warranties to the Company: (a) Organization; Authority. The Purchaser is a corporation duly incorporated, validly existing and in good standing under the laws of the jurisdiction of its organization with the requisite power and authority to enter into and to consummate the transactions contemplated by the Transaction Documents and to carry out its obligations thereunder. The acquisition of the Securities by the Purchaser has been duly authorized by all necessary action on the part of the Purchaser. Each of this Agreement and the Registration Rights Agreement has been duly executed and delivered by the Purchaser and constitutes the valid and legally binding obligation of the Purchaser, enforceable against the Purchaser, in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights generally and to general principles of equity. (b) Investment Intent. The Purchaser is acquiring the Securities for its own account for investment purposes only and not with a view to or for distributing or reselling such Securities or any part thereof or interest therein, without prejudice, however, to the Purchaser's right, subject to the provisions of this Agreement and the Registration Rights Agreement, at all times to sell or otherwise dispose of all or any part of such Securities pursuant to an effective registration statement under the Securities Act and in compliance with applicable state securities laws or under an exemption from such registration. (c) Purchaser Status. At the time the Purchaser was offered the Securities, it was, and at the date hereof, it is, and at each Closing Date, it will be, an "accredited investor" pursuant to in Rule 501(a)(3) under the Securities Act. (d) Experience of Purchaser. The Purchaser either alone or together with its representatives, has such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of the prospective investment in the Securities, and has so evaluated the merits and risks of such investment. (e) Ability of Purchaser to Bear Risk of Investment. Purchaser acknowledges that the Securities are speculative investments and involve a high degree of risk and the Purchaser is able to bear the economic risk of an investment in the Securities, and, at the present time, is able to afford a complete loss of such investment. (f) Access to Information. The Purchaser acknowledges receipt of the Disclosure Materials and further acknowledges that it has been afforded (i) the opportunity to ask such questions as it has deemed necessary of, and to receive answers from, representatives of the Company concerning the terms and conditions of the offering of the Securities, and the merits and risks of investing in the Securities; (ii) access to information about the Company and the Company's financial condition, results of operations, business, properties, management and prospects sufficient to enable it to evaluate its investment; and (iii) the opportunity to obtain such additional information which the Company possesses or can acquire without unreasonable effort or expense that is necessary to make an informed investment decision with respect to the investment and to verify the accuracy and completeness of the information contained in the Disclosure Materials. Neither such inquiries nor any other investigation conducted by or on behalf of such Purchaser or its representatives, agents or counsel shall modify, amend or affect such Purchaser's right to rely on the truth, accuracy and completeness of the Disclosure Materials and the Company's representations and warranties contained in the Transaction Documents. (g) Reliance. The Purchaser understands and acknowledges that (i) the Securities are being offered and sold to the Purchaser without registration under the Securities Act in a private placement that is exempt from the registration provisions of the Securities Act and (ii) the availability of such exemption, depends in part on, and the Company will rely upon the accuracy and truthfulness of, the foregoing representations and the Purchaser hereby consents to such reliance. The Company acknowledges and agrees that the Purchaser makes no representations or warranties with respect to the transactions contemplated hereby other than those specifically set forth in this Section 2.2. ARTICLE III OTHER AGREEMENTS OF THE PARTIES 3.1 Transfer Restrictions. (a) The Securities may only be disposed of pursuant to an effective registration statement under the Securities Act, to the Company or pursuant to an available exemption from or in a transaction not subject to the registration requirements thereof. In connection with any transfer of Securities other than pursuant to an effective registration statement or to the Company, the Company may require the transferor thereof to provide to the Company an opinion of counsel experienced in the area of United States securities laws selected by the transferor, the form and substance of which opinion shall be reasonably satisfactory to the Company, to the effect that such transfer does not require registration under the Securities Act. Notwithstanding the foregoing, the Company hereby consents to and agrees to register in its securities transfer register any transfer by the Purchaser to an Affiliate of the Purchaser, or any transfers among Affiliates provided that the transferee certifies to the Company that it is an "accredited investor" as defined in Rule 501(a) under the Securities Act, and such transfer does not otherwise violate any federal or state securities laws. Any such transferee shall have the rights of the Purchaser under this Agreement and the Registration Rights Agreement. (b) The Purchaser agrees to the imprinting, so long as is required by this Section 3.1(b), of the following legends on the Securities: NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE [CONVERTIBLE] [EXERCISABLE] HAVE BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE, IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS. [FOR DEBENTURES ONLY] THIS DEBENTURE IS SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AND CONVERSIONS SET FORTH IN A CONVERTIBLE DEBENTURE PURCHASE AGREEMENT, DATED AS OF DECEMBER 1, 1997, BETWEEN DIGITAL BIOMETRICS, INC. (THE "COMPANY") AND THE ORIGINAL HOLDER HEREOF. A COPY OF THAT AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF THE COMPANY. Underlying Shares shall not contain the legend set forth above if the conversion of such Debentures or exercise of the Warrants or other issuances of Underlying Shares, as the case may be, occurs at any time while an Underlying Securities Registration Statement is effective under the Securities Act or, in the event there is not an effective Underlying Securities Registration Statement at such time, if in the opinion of counsel to the Company experienced in the area of United States securities laws such legend is not required under applicable requirements of the Securities Act (including judicial interpretations and pronouncements issued by the staff of the Commission). The Company may also cause a stop-transfer order to be placed against the Securities with its transfer agent during such time as the legends are on the Securities. The Company agrees that it will provide the Purchaser, upon request, with a certificate or certificates representing Underlying Shares, free from such legend at such time as such legend is no longer required in accordance with this Section. The Company may not make any notation on its records or give instructions to any transfer agent of the Company which enlarge the restrictions of transfer set forth in this Section . 3.2 Acknowledgement of Dilution. The Company acknowledges that the issuance of the Underlying Shares upon (i) conversion of the Debentures and as payment of interest thereon and (ii) exercise of the Warrants may result in dilution of the outstanding shares of Common Stock, which dilution may be substantial under certain market conditions. The Company further acknowledges that, except as provided in Section 4(a)(ii) or Section 5 of the Debentures, its obligation to issue Underlying Shares in accordance with the Debentures and the Warrants is unconditional and absolute regardless of the effect of any such dilution. 3.3 Furnishing of Information. As long as the Purchaser owns Securities, the Company covenants to timely file (or obtain extensions in respect thereof and file within the applicable grace period) all reports required to be filed by the Company after the date hereof pursuant to Section 13(a) or 15(d) of the Exchange Act. If at any time prior to the date on which the Purchaser may resell all of its Underlying Shares without volume restrictions pursuant to Rule 144(k) promulgated under the Securities Act (as determined by counsel to the Company pursuant to a written opinion letter to such effect, addressed and acceptable to the Company's transfer agent for the benefit of and enforceable by the Purchaser), the Company is not required to file reports pursuant to such sections, it will prepare and furnish to the Purchaser and make publicly available in accordance with Rule 144(c) promulgated under the Securities Act annual and quarterly financial statements, together with a discussion and analysis of such financial statements in form and substance substantially similar to those that would otherwise be required to be included in reports required by Section 13(a) or 15(d) of the Exchange Act in the time period that such filings would have been required to have been made under the Exchange Act. The Company further covenants that it will take such further action as any holder of Securities may reasonably request, all to the extent required from time to time to enable such Person to sell Securities without registration under the Securities Act within the limitation of the exemptions provided by Rule 144 promulgated under the Securities Act, including the legal opinion referenced above in this Section. Upon the request of any such Person, the Company shall deliver to such Person a written certification of a duly authorized officer as to whether it has complied with such requirements. 3.4 Copies and Use of Disclosure Materials. The Company consents to the use of the Disclosure Materials and any amendments and supplements thereto by the Purchaser in connection with resales of the Securities other than pursuant to an effective registration statement, subject to any confidentiality requirements in connection therewith. 3.5 Blue Sky Laws. In accordance with the Registration Rights Agreement, the Company shall qualify the Underlying Shares under the securities or Blue Sky laws of such jurisdictions as the Purchaser may reasonably request and shall continue such qualification at all times through the third anniversary of the last Closing Date; provided, however, that neither the Company nor its Subsidiaries shall be required in connection therewith to qualify as a foreign corporation where they are not now so qualified or to take any action that would subject the Company to general service of process in any such jurisdiction where it is not then so subject. 3.6 Integration. The Company shall not and shall use its best efforts to ensure that no Affiliate of the Company shall sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in Section 2 of the Securities Act) that would be integrated with the offer or sale of the Securities in a manner that would require the registration under the Securities Act of the issue offer or sale of the Securities to the Purchaser. 3.7 Increase in Authorized Shares. At such time as the Company would be, if a notice of conversion or exercise (as the case may be) were to be delivered on such date, precluded from (a) converting the full outstanding principal amount of Debentures (and paying any accrued but unpaid interest in respect thereof in shares of Common Stock) that remain unconverted at such date or (b) honoring the exercise in full of the Warrants, due to the unavailability of a sufficient number of shares of authorized but unissued or reacquired Common Stock, the Board of Directors of the Company shall promptly (and in any case within 45 Business Days from such date) prepare and mail to the shareholders of the Company proxy materials requesting authorization to amend the Company's certificate of incorporation to increase the number of shares of Common Stock which the Company is authorized to issue to at least a number of shares equal to the sum of (i) all shares of Common Stock then outstanding, (ii) the number of shares of Common Stock issuable on account of all outstanding warrants, options and convertible securities (other than the Debentures and the Warrants) and on account of all shares reserved under any stock option, stock purchase, warrant or similar plan, (iii) 200% of the number of Underlying Shares as would then be issuable upon a conversion in full of the then outstanding Debentures and as payment of all future interest thereon in shares of Common Stock in accordance with the terms of this Agreement and the Debentures and (iv) such number of Underlying Shares as would then be issuable upon the exercise in full of the Warrants. In connection therewith, the Board of Directors shall (a) adopt proper resolutions authorizing such increase, (b) recommend to and otherwise use its best efforts to promptly and duly obtain stockholder approval to carry out such resolutions (and hold a special meeting of the shareholders no later than the 60th day after delivery of the proxy materials relating to such meeting) and (c) within 5 Business Days of obtaining such shareholder authorization, file an appropriate amendment to the Company's certificate of incorporation to evidence such increase. 3.8 Purchaser Ownership of Common Stock. The Purchaser may not use its ability to convert Debentures or use its ability to acquire shares of Common Stock upon exercise of the Warrants, to the extent that such conversion or exercise would result in the Purchaser beneficially owning (for purposes of Rule 13d-3 under the Exchange Act) more than 4.999% of the outstanding shares of the Common Stock; provided, however, that if ten days shall have elapsed since Purchaser has declared a default under any Transaction Document and such event shall not have been cured to Purchaser's satisfaction prior to the expiration of such ten-day period, the provisions of this Section 3.8 shall be null and void ab initio. Notwithstanding anything to the contrary contained herein, the provisions of this Section shall have no effect on the Company's obligation to issue shares of Common Stock to the Purchaser upon receipt or delivery of any conversion or exercise notice. The terms and conditions of this Section shall not apply to any conversion of Debentures other than at the option of Purchaser. 3.9 Listing and Reservation of Underlying Shares. (a) The Company shall (i) not later than the fifth Business Day following the Closing Date, prepare and file with the Nasdaq National Market (as well as any other national securities exchange or market on which the Common Stock is then listed) an additional shares listing application covering at least the sum of (A) two times the number of Underlying Shares as would be issuable upon a conversion in full of the Debentures, assuming such conversion occurred on the Original Issue Date, (B) the number of Underlying Shares required to pay interest in respect of the Debentures in stock, and (C) the number of Underlying Shares issuable upon exercise in full of the Warrants, (ii) take all steps necessary to cause the such shares to be approved for listing in the Nasdaq National Market (as well as on any other national securities exchange or market on which the Common Stock is then listed) as soon as possible thereafter, and (iii) provide to the Purchaser evidence of such listing, and the Company shall maintain the listing of its Common Stock on such exchange or market. (b) The Company shall maintain a reserve of Common Stock for the issuance upon conversion of Debentures (and for payment of interest thereon) and upon exercise of the Warrants in such amount as to enable the Company to perform its obligations in full under the Transaction Documents, which reserve shall include a number of shares of Common Stock equal to not less than two times the number of shares of Common Stock as would be issuable upon the conversion in full of the Debentures and interest thereon, assuming such conversion occurred on the Original Issue Date (subject to increase as required). 3.10 Conversion Procedures. Exhibit E attached hereto sets forth the procedures with respect to the conversion of the Debentures, including the form of legal opinion, if necessary, that shall be rendered to the Company's transfer agent and such other information and instructions as may be reasonably necessary to enable the Purchaser to exercise its right of conversion smoothly and expeditiously. 3.11 Purchaser's Rights if Trading in Common Stock is Suspended or Delisted. If at any time while the Purchaser (or any assignee thereof) owns any Securities, trading in the shares of the Common Stock is suspended on or delisted from the Nasdaq National Market or any other principal market or exchange for such shares (other than as a result of the suspension of trading in securities on such market or exchange generally or temporary suspensions pending the release of material information) for more than two Trading Days, at the Purchaser's option exercisable by five Business Days prior written notice to the Company, the Company shall repay the entire principal amount of then outstanding Debentures and redeem all then outstanding Underlying Shares then held by the Purchaser, at an aggregate purchase price equal to the sum of (I) the aggregate outstanding principal amount of Debentures then held by the Purchaser plus all accrued but unpaid interest thereon divided by the Conversion Price on the date of the repurchase notice and multiplied by the Average Price preceding (a) the day of such notice or (b) the date of payment in full of the repurchase price calculated under this Section, whichever is greater, (II) the aggregate of all non-principal and interest amounts then payable in respect of all Debentures to be repaid, (III) the number of Underlying Shares then held by such Purchaser multiplied by the Average Price immediately preceding (A) the date of the notice or (B) the date of payment in full by the Company of the repurchase price calculated under this Section, whichever is greater, and (IV) interest on the amounts set forth in I - III above accruing from the 5th Business Day after such notice until the repurchase price under this Section is paid in full at the rate of 15% per annum. 3.12 Notice of Breaches. Each of the Company and the Purchaser shall give prompt written notice to the other of any breach of any representation, warranty or other agreement contained in this Agreement or in the Registration Rights Agreement, as well as any events or occurrences arising after the date hereof and prior to the Closing Date which would reasonably be likely to cause any representation or warranty or other agreement of such party, as the case may be, contained herein to be incorrect or breached as the date thereof. However, no disclosure by either party pursuant to this Section shall be deemed to cure any breach of any representation, warranty or other agreement contained herein or in the Registration Rights Agreement. Notwithstanding the generality of the foregoing, the Company shall promptly notify the Purchaser of any notice or claim (written or oral) that it receives from any lender of the Company to the effect that the consummation of the transactions contemplated hereby and by the Registration Rights Agreement violates or would violate any written agreement or understanding between such lender and the Company, and the Company shall promptly furnish by facsimile to the holders of the Debentures a copy of any written statement in support of or relating to such claim or notice. 3.13 Conversion and Exercise Obligations of the Company. The Company shall honor conversions of the Debentures and exercises of the Warrants and shall deliver Underlying Shares in accordance with the respective terms and conditions and time periods set forth in the Debentures and the Warrants. 3.14 Subsequent Offerings; Certain Company Actions. (a) The Company shall not without the prior written consent of the Purchaser which consent will not be unreasonably withheld or delayed, directly or indirectly offer, sell, grant any option to purchase, or otherwise dispose (or announce any offer, sale, grant any option to purchase or other disposition) of any of its or its Affiliates equity or equity-equivalent securities in a transaction not subject to the registration requirements of the Securities Act or in a transaction not subject to the registration requirements of the Securities Act at a price which is, on the face thereof, or implied therein, less than the market price or fair market value for such securities (a "Private Placement") until the earlier to occur of (i) 60 Trading Days after the Tranche 2 Closing Date or Tranche 2 Closing Expiration Date, as applicable, (any days that the Purchaser is unable to sell Underlying Shares under the Underlying Securities Registration Statement shall be added to such 60 Trading Day period) or (ii) such time as conversions aggregating 85% or more of all outstanding Debentures relating to each Closing have been honored by the Company (as evidenced by a writing executed by each of the Purchaser and the Company), provided, however that notwithstanding anything to the contrary contained herein, in the event the Company consummates a Private Placement at a time after the requirements of subparagraph (i) or (ii) have been satisfied, the Purchaser shall no longer have any obligation to purchase Debentures hereunder. The following offerings and issuances shall not be subject to the restrictions set forth in the immediately preceding sentence: (w) the granting of options or warrants to employees, officers, directors and advisors of the Company, and the issuance of shares of Common Stock upon exercise of options granted, under any stock option plan heretofore or hereinafter duly adopted by the Company, (x) any equity or equity-equivalent private offering (i) entered into prior to the Tranche 1 Closing Date or (ii) arranged by an investment banker that is licensed by the National Association of Securities Dealers, Inc. and which is restricted from resale for a period of at least 180 days, provided, that such 180 day period terminates at least 90 days after the Tranche 5 Closing Date or Tranche 5 Closing Expiration Date, as applicable, (y) any acquisition transaction which is restricted from resale for a period of at least 180 days, provided, that such 180 day period terminates at least 90 days after the Tranche 5 Closing Date or Tranche 5 Closing Expiration Date, as applicable and (z) shares of Common Stock issued upon conversion of Debentures or exercise of the Warrants. (b) As long as Debentures are outstanding, the Company shall not and shall cause the Subsidiaries not to, without the consent of the Purchaser, which consent will not be unreasonably withheld or delayed, (i) amend its certificate of incorporation, bylaws or other charter documents (or their foreign equivalents) (ii) split, combine or reclassify its outstanding capital stock; (iii) declare, authorize, set aside or pay any dividend or other distribution with respect to the Common Stock; (iv) repay, repurchase or offer to repay, repurchase or otherwise acquire shares of its Common Stock; or (v) enter into any agreement with respect to any of the foregoing, in each such case so as to adversely affect rights of the Purchaser. 3.15 The Warrants. At each of the Tranche 1 Closing, Tranche 2 Closing, Tranche 3 Closing, Tranche 4 Closing and Tranche 5 Closing, the Company shall issue to the Purchaser, common stock purchase warrants, in the form of Exhibit D (the "Tranche 1 Warrants, Tranche 2 Warrants, Tranche 3 Warrants, Tranche 4 Warrants and Tranche 5 Warrants" and collectively, the "Warrants"), pursuant to which the Purchaser shall have the right at any time thereafter through the fifth anniversary of the date of issuance thereof, to acquire 15,000 shares of Common Stock at an exercise price per share equal to $2.50. In the event that there is not a Tranche 4 Closing or Tranche 5 Closing, the Company shall issue to the Purchaser the Tranche 4 Warrants and Tranche 5 Warrants on the Tranche 4 Closing Expiration Date and Tranche 5 Closing Expiration Date, respectively, unless the reason there is not a Tranche 4 Closing or Tranche 5 Closing if due solely to a breach of this Agreement by Purchaser. 3.16 Use of Proceeds. The Company shall use all of the proceeds from the placement of the Securities for working capital purposes and not for the satisfaction of any portion of Company debt (except for reductions of the Company's indebtedness to banks under any revolving line of credit) or to redeem Company equity or equity-equivalent securities. Pending application of the proceeds of this placement in the manner permitted hereby the Company will invest such proceeds in interest bearing accounts and/or short-term, investment grade interest bearing securities. ARTICLE IV CONDITIONS 4.1 Conditions Precedent to the Obligation of the Purchasers to Purchase the Tranche 2 Debentures, the Tranche 3 Debentures, the Tranche 4 Debentures and the Tranche 5 Debentures. The obligation of the Purchaser hereunder to acquire and pay for Tranche 2 Debentures, Tranche 3 Debentures, Tranche 4 Debentures and Tranche 5 Debentures is subject to the satisfaction or waiver by the Purchaser at or before the Tranche 2 Closing, Tranche 3 Closing, Tranche 4 Closing and Tranche 5 Closing, as applicable, of each of the following conditions: (a) Tranche 1 Closing. The Tranche 1 Closing shall have occurred. (b) Accuracy of the Company's Representations and Warranties. The representations and warranties of the Company contained herein shall be true and correct in all material respects as of the date when made and as of the Tranche 2 Closing Date, Tranche 3 Closing Date, Tranche 4 Closing Date and Tranche 5 Closing Date, as applicable, as though made on and as of such date; (c) Performance by the Company. The Company shall have performed, satisfied and complied in all material respects with all covenants, agreements and conditions required by the Transaction Documents to be performed, satisfied or complied with by the Company at or prior to the Tranche 2 Closing Date, Tranche 3 Closing Date, Tranche 4 Closing Date and Tranche 5 Closing Date, as applicable; (d) Underlying Securities Registration Statements. The Underlying Securities Registration Statement registering the Registrable Securities (as such term is defined in the Registration Rights Agreement) shall have been declared effective under the Securities Act by the Commission and with respect to each Closing Date, such Underlying Registration Statement shall have remained effective and shall not be subject to any stop order and no stop order shall be pending or threatened as at any Closing Date; (e) No Injunction. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority which prohibits the consummation of any of the transactions contemplated by this Agreement or the Registration Rights Agreement relating to the issuance or conversion of any of the Securities. (f) No Suspensions of Trading in Common Stock. The trading in the Common Stock shall not have been suspended by the Commission or on the Nasdaq National Market (except for any suspension of trading of limited duration solely to permit dissemination of material information regarding the Company and except if, at the time there is any suspension on the Nasdaq National Market, the Common Stock is then listed and approved for trading on the New York Stock Exchange, Nasdaq SmallCap Market or the American Stock Exchange within one (1) Trading Day thereof); (g) Listing of Common Stock. The Common Stock, including the Common Stock duly reserved for issuance upon conversion of the Tranche 2 Debentures, Tranche 3 Debentures, Tranche 4 Debentures and Tranche 5 Debentures, as applicable, shall have been at all times between the Tranche 1 Closing Date, the Tranche 2 Closing Date, the Tranche 3 Closing Date, the Tranche 4 Closing Date and the Tranche 5 Closing Date, as applicable, and on such applicable Closing Date be, listed for trading on the Nasdaq National Market, the American Stock Exchange, New York Stock Exchange or the Nasdaq SmallCap Market. (h) Change of Control. No Change of Control in the Company shall have occurred. "Change of Control" means the occurrence of any of (i) an acquisition after the date hereof by an individual or legal entity of in excess of 40% of the voting securities of the Company, (ii) a replacement of more than one-half of the members of the Company's board of directors which is not approved by those individuals who are members of the board of directors on the date hereof in one or a series of related transactions, (iii) the merger of the Company with or into another entity, consolidation or sale of all or substantially all of the assets of the Company in one or a series of related transactions or (iv) the execution by the Company of an agreement to which the Company is a party or by which it is bound, providing for any of the events set forth above in (i), (ii) or (iii). (i) Legal Opinion. The Company shall have delivered to such Purchaser an opinion of outside legal counsel to the Company in substantially the forms attached hereto as Exhibit C and dated the applicable Closing Date; (j) Required Approvals. All Required Approvals shall have been obtained; (k) Shares of Common Stock. On each of the Tranche 2 Closing Date, Tranche 3 Closing Date, Tranche 4 Closing Date and Tranche 5 Closing Date, as applicable, the Company shall have reserved for issuance to the Purchaser two times the number of Underlying Shares which would be issuable upon conversion in full of the Tranche 2 Debentures, Tranche 3 Debentures, Tranche 4 Debentures, Tranche 5 Debentures and Tranche 5 Debentures, as applicable, assuming such conversion occurred on the Original Issue Date for such Securities; (l) Delivery of Securities. The Company shall have delivered to the Purchaser or an affiliate thereof the Debentures being purchased at such Closing, registered in the name of the Purchaser, each in form satisfactory to the Purchaser; and (m) Performance of Conversion/Exercise Obligations. Through the Tranche 2 Closing Date, Tranche 3 Closing Date, Tranche 4 Closing Date and Tranche 5 Closing Date, as applicable, the Company shall have (a) delivered Underlying Shares upon conversion of Debentures and otherwise performed its obligations in accordance with the terms, conditions and timing requirements of each Debenture and (b) shall have delivered Underlying Shares upon exercise of the Warrants and otherwise performed its obligations in accordance with the terms of the Warrants. (n) Market Capitalization. The Company's "Market Capitalization" shall not have been less than $12,000,000 at or prior to the Tranche 2 Closing Date, Tranche 3 Closing Date, Tranche 4 Closing Date or Tranche 5 Closing Date, as applicable. "Market Capitalization" shall be determined by taking the weighted volume average of the Per Share Market for the fifteen (15) Trading Days immediately prior to each applicable Closing Date and multiplying such fifteen (15) day weighted volume average by the number of outstanding shares of the Company's Common Stock on the date preceding the applicable Closing Date. ARTICLE V MISCELLANEOUS 5.1 Fees and Expenses. Each party shall pay the fees and expenses of its advisers and other experts in connection with the transactions contemplated by this Agreement, except that the Company shall pay at the applicable Closing the legal fees and disbursements of the Purchaser's counsel in connection with the negotiation and preparation of the Transaction Documents in the amount of $15,000, and the Purchaser shall pay such expenses as specified in the Registration Rights Agreement. The Company shall pay all stamp and other taxes and duties levied in connection with the issuance of the Debentures pursuant hereto. The Purchaser shall be responsible for the Purchaser's own tax liability that may arise as a result of the investment hereunder or the transactions contemplated by this Agreement. 5.2 Entire Agreement; Amendments. This Agreement, together with the Exhibits and Schedules hereto, the Debentures and the Warrants contain the entire understanding of the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, oral or written, with respect to such matters. The Exhibits and Schedule to this Agreement are hereby incorporated herein and made part hereof for all purposes as if fully set forth herein. 5.3 Notices. Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section prior to 4:30 p.m. (Minneapolis time) on a Business Day, (ii) the Business Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in the Purchase Agreement later than 4:30 p.m. (Minneapolis time) on any date and earlier than 11:59 p.m. (Minneapolis time) on such date, (iii) the Business Day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. The address for such notices and communications shall be as follows: If to the Company: Digital Biometrics, Inc. 5600 Rowland Road Minnetonka, MN 55343 Facsimile No.: (612) 932-7181 Attn: Chief Financial Officer With copies to: Briggs and Morgan P.A. 2400 IDS Center Minneapolis, MN 55402 Facsimile No.: (612) 334-8650 Attn: Avron L. Gordon If to the Purchaser: KA Investments LDC c/o Tarmachan Capital Management 1712 Hopkins Crossroads Facsimile No.: (612) 542-4284 Attn: Irvin Kessler With copies to: Robinson Silverman Pearce Aronsohn & Berman LLP 1290 Avenue of the Americas New York, NY 10104 Facsimile No.: (212) 541-4630 Attn: Kenneth L. Henderson Scott D. Zucker or such other address as may be designated in writing hereafter, in the same manner, by such Person. 5.4 Amendments; Waivers. No provision of this Agreement may be waived or amended except in a written instrument signed, in the case of an amendment, by both the Company and the Purchaser; or, in the case of a waiver, by the party against whom enforcement of any such waiver is sought. No waiver of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of either party to exercise any right hereunder in any manner impair the exercise of any such right accruing to it thereafter. 5.5 Headings. The headings herein are for convenience only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof. 5.6 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties and their successors and permitted assigns, including any Persons to whom any Purchaser transfers Debentures or Warrants. The assignment by a party of this Agreement or any rights hereunder shall not affect the obligations of such party under this Agreement. 5.7 No Third-Party Beneficiaries. This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns and, other than with respect to permitted assignees under Section 5.6, is not for the benefit of, nor may any provision hereof be enforced by, any other Person. 5.8 Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of Delaware without regard to the principles of conflicts of law thereof. 5.9 Survival. The representations, warranties, agreements and covenants contained in this Agreement shall survive after the last Closing Date and the delivery and conversion of the Debentures. 5.10 Execution. This Agreement may be executed in two or more counterparts, all of which when taken together shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party, it being understood that both parties need not sign the same counterpart. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) the same with the same force and effect as if such facsimile signature page were an original thereof. 5.11 Publicity. The Company and the Purchaser shall consult with each other in issuing any press releases or otherwise making public statements with respect to the transactions contemplated hereby and neither party shall issue any such press release or otherwise make any such public statement without the prior written consent of the other, which consent shall not be unreasonably withheld or delayed, except that no prior consent shall be required if such disclosure is required by law, in which such case the disclosing party shall provide the other party with prior notice of such public statement. Notwithstanding the foregoing, the Company shall not publicly disclose the name of the Purchaser without the prior written consent of the Purchaser, except to the extent required by law, in which case the Company shall provide Purchaser with prior written notice of such public disclosure. 5.12 Severability. In case any one or more of the provisions of this Agreement shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Agreement shall not in any way be affected or impaired thereby and the parties will attempt to agree upon a valid and enforceable provision which shall be a reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Agreement. 5.13 Remedies. Each of the parties to this Agreement acknowledges and agrees that the other parties would be damaged irreparably in the event any of the provisions of this Agreement are not performed in accordance with their specific terms or otherwise are breached. Accordingly, each of the parties hereto agrees that the other parties shall be entitled to an injunction or injunctions to prevent breaches of the provisions of this Agreement and to enforce specifically this Agreement and the terms and provisions of this Agreement in any action instituted in any court of the United States of America or any state thereof having jurisdiction over the parties to this Agreement and the matter, in addition to any other remedy to which they may be entitled, at law or in equity. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK SIGNATURE PAGE FOLLOWS] IN WITNESS WHEREOF, the parties hereto have caused this Debenture Purchase Agreement to be duly executed by their respective authorized persons as of the date first indicated above. Company: DIGITAL BIOMETRICS, INC. By: --------------------------------- Name: Title: Purchaser: KA INVESTMENTS LDC By: --------------------------------- Name: Title: EX-10.2 5 WARRANT EXHIBIT 10.2 NEITHER THIS WARRANT NOR THE SECURITIES INTO WHICH THIS WARRANT IS EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREUNDER AND IN COMPLIANCE WITH APPLICABLE STATE SECURITIES. THIS WARRANT IS SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AND CONVERSION SET FORTH IN A CONVERTIBLE DEBENTURE PURCHASE AGREEMENT, DATED AS OF DECEMBER 1, 1997, BETWEEN DIGITAL BIOMETRICES, INC. (THE "COMPANY") AND THE ORIGINAL HOLDER HEREOF. A COPY OF THAT AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF THE COMPANY. DIGITAL BIOMETRICS, INC. WARRANT Warrant No. 001 Dated December 1, 1997 DIGITAL BIOMETRICS, INC., a Delaware corporation (the "Company"), hereby certifies that, for value received, KA Investments LDC, or its registered assigns ("Holder"), is entitled, subject to the terms set forth below, to purchase from the Company 15,000 shares of Common Stock, par value $.01 per share (the "Common Stock"), of the Company (each such share, a "Warrant Share" and all such shares, the "Warrant Shares") at an exercise price equal to $2.50 per share (as adjusted from time to time as provided in Section 8, the "Exercise Price"), at any time and from time to time from and after the date hereof and through and including December 1, 2002 (the "Expiration Date"), and subject to the following terms and conditions: 1. Registration of Warrant. The Company shall register this Warrant, upon records to be maintained by the Company for that purpose (the "Warrant Register"), in the name of the record Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, and the Company shall not be affected by notice to the contrary. 2. Registration of Transfers and Exchanges. (a) The Company shall register the transfer of any portion of this Warrant in the Warrant Register, upon surrender of this Warrant, with the Form of Assignment attached hereto duly completed and signed, to the Company at the office specified in or pursuant to Section 3(b). Upon any such registration or transfer, a new warrant to purchase Common Stock, in substantially the form of this Warrant (any such new warrant, a "New Warrant"), evidencing the portion of this Warrant so transferred shall be issued to the transferee and a New Warrant evidencing the remaining portion of this Warrant not so transferred, if any, shall be issued to the transferring Holder. The acceptance of the New Warrant by the transferee thereof shall be deemed the acceptance of such transferee of all of the rights and obligations of a holder of a Warrant. (b) This Warrant is exchangeable, upon the surrender hereof by the Holder to the office of the Company specified in or pursuant to Section 3(b) for one or more New Warrants, evidencing in the aggregate the right to purchase the number of Warrant Shares which may then be purchased hereunder. Any such New Warrant will be dated the date of such exchange. 3. Duration and Exercise of Warrants. (a) This Warrant shall be exercisable by the registered Holder on any business day before 5:30 P.M., Minnetonka, Minnesota time, at any time and from time to time on or after the date hereof to and including the Expiration Date. At 5:30 P.M., Minnetonka, Minnesota time on the Expiration Date, the portion of this Warrant not exercised prior thereto shall be and become void and of no value. This Warrant may not be redeemed by the Company. (b) Subject to Sections 2(b), 6 and 11, upon surrender of this Warrant, with the Form of Election to Purchase attached hereto duly completed and signed, to the Company at its address for notice as set forth in Section 11, and upon payment of the Exercise Price multiplied by the number of Warrant Shares that the Holder intends to purchase hereunder, in lawful money of the United States of America, in cash or by certified or official bank check or checks, all as specified by the Holder in the Form of Election to Purchase, the Company shall promptly (but in no event later than 3 business days after the Date of Exercise (as defined herein)) issue or cause to be issued and cause to be delivered to or upon the written order of the Holder and in such name or names as the Holder may designate, a certificate for the Warrant Shares issuable upon such exercise, free of restrictive legends other than as required by the Purchase Agreement of even date herewith between the Holder and the Company. Any person so designated by the Holder to receive Warrant Shares shall be deemed to have become holder of record of such Warrant Shares as of the Date of Exercise of this Warrant. A "Date of Exercise" means the date on which the Company shall have received (i) this Warrant (or any New Warrant, as applicable), with the Form of Election to Purchase attached hereto (or attached to such New Warrant) appropriately completed and duly signed, and (ii) payment of the Exercise Price for the number of Warrant Shares so indicated by the holder hereof to be purchased. (c) This Warrant shall be exercisable either in its entirety or, for a portion of the number of Warrant Shares. If less than all of the Warrant Shares which may be purchased under this Warrant are exercised at any time, the Company shall issue or cause to be issued, at its expense, a New Warrant evidencing the right to purchase the remaining number of Warrant Shares for which no exercise has been evidenced by this Warrant. 4. Piggyback Registration Rights. During the term of this Warrant, the Company may not file any registration statement with the Securities and Exchange Commission at any time when there is not then an effective registration statement covering the resale of the Warrant Shares and naming the holder of this Warrant as a selling stockholder thereunder (other than registration statements of the Company filed on Form S-8 or Form S-4, each as promulgated under the Securities Act of 1933, as amended, pursuant to which the Company is registering securities pursuant to a Company employee benefit plan or pursuant to a merger, acquisition or similar transaction including supplements thereto, but not additionally filed registration statements in respect of such securities), unless the Company provides the Holder with not less than 20 days notice to each of the Holder and Robinson Silverman Peace Aronsohn & Berman LLP, attention Kenneth L. Henderson and Scott D. Zucker, notice of its intention to file such registration statement and provides the Holder the option to include any or all of the applicable Warrant Shares therein. The piggyback registration rights granted to the Holder pursuant to this Section shall continue until all of the Holder's Warrant Shares have been sold in accordance with an effective registration statement or upon the expiration of this Warrant. The Company will pay all registration expenses in connection therewith. 5. Payment of Taxes. The Company will pay all documentary stamp taxes attributable to the issuance of Warrant Shares upon the exercise of this Warrant; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the registration of any certificates for Warrant Shares or Warrants in a name other than that of the Holder, and the Company shall not be required to issue or cause to be issued or deliver or cause to be delivered the certificates for Warrant Shares unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. The Holder shall be responsible for all other tax liability that may arise as a result of holding or transferring this Warrant or receiving Warrant Shares upon exercise hereof. 6. Replacement of Warrant. If this Warrant is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation hereof, or in lieu of and substitution for this Warrant, a New Warrant, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction and indemnity, if reasonably satisfactory to it. Applicants for a New Warrant under such circumstances shall also comply with such other reasonable regulations and procedures and pay such other reasonable charges as the Company may prescribe. 7. Reservation of Warrant Shares. The Company covenants that it will at all times reserve and keep available out of the aggregate of its authorized but unissued Common Stock, solely for the purpose of enabling it to issue Warrant Shares upon exercise of this Warrant as herein provided, the number of Warrant Shares which are then issuable and deliverable upon the exercise of this entire Warrant, free from preemptive rights or any other actual contingent purchase rights of persons other than the Holders (taking into account the adjustments and restrictions of Section 8). The Company covenants that all Warrant Shares that shall be so issuable and deliverable shall, upon issuance and the payment of the applicable Exercise Price in accordance with the terms hereof, be duly and validly authorized, issued and fully paid and nonassessable. 8. Certain Adjustments. The Exercise Price and number of Warrant Shares issuable upon exercise of this Warrant are subject to adjustment from time to time as set forth in this Section 8. Upon each such adjustment of the Exercise Price pursuant to this Section 8, the Holder shall thereafter prior to the Expiration Date be entitled to purchase, at the Exercise Price resulting from such adjustment, the number of Warrant Shares obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of Warrant Shares issuable upon exercise of this Warrant immediately prior to such adjustment and dividing the product thereof by the Exercise Price resulting from such adjustment. (a) If the Company, at any time while this Warrant is outstanding, (i) shall pay a stock dividend or otherwise make a distribution or distributions on shares of its Common Stock (as defined below) or on any other class of capital stock (and not the Common Stock) payable in shares of Common Stock, (ii) subdivide outstanding shares of Common Stock into a larger number of shares, or (iii) combine outstanding shares of Common Stock into a smaller number of shares, the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding before such event and of which the denominator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding after such event. Any adjustment made pursuant to this Section shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision or combination, and shall apply to successive subdivisions and combinations. (b) In case of any reclassification of the Common Stock, any consolidation or merger of the Company with or into another person, the sale or transfer of all or substantially all of the assets of the Company in which the consideration therefor is equity or equity equivalent securities or any compulsory share exchange pursuant to which the Common Stock is converted into other securities or property, then the Holder shall have the right thereafter to exercise this Warrant only into the shares of stock and other securities and property receivable upon or deemed to be held by holders of Common Stock following such reclassification, consolidation, merger, sale, transfer or share exchange, and the Holder shall be entitled upon such event to receive such amount of securities or property of the business combination partner of the Company equal to the amount of Warrant Shares such Holder would have been entitled to had such Holder exercised this Warrant immediately prior to such reclassification, consolidation, merger, sale, transfer or share exchange. The terms of any such consolidation, merger, sale, transfer or share exchange shall include such terms so as to continue to give to the Holder the right to receive the securities or property set forth in this Section 8(b) upon any exercise following any such reclassification, consolidation, merger, sale, transfer or share exchange. (c) If the Company, at any time while this Warrant is outstanding, shall distribute to all holders of Common Stock (and not to holders of this Warrant) evidences of its indebtedness or assets or rights or warrants to subscribe for or purchase any security (excluding those referred to in Sections 8(a), (b) and (d)), then in each such case the Exercise Price shall be determined by multiplying the Exercise Price in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such distribution by a fraction of which the denominator shall be the Exercise Price determined as of the record date mentioned above, and of which the numerator shall be such Exercise Price on such record date less the then fair market value at such record date of the portion of such assets or evidence of indebtedness so distributed applicable to one outstanding share of Common Stock as determined by a nationally recognized or major regional investment banking firm or firm of independent certified public accountants of recognized standing (which may be the firm that regularly examines the financial statements of the Company) (an "Appraiser") mutually selected in good faith by the holders of a majority in interest of the Warrants then outstanding and the Company. Any determination made by the Appraiser shall be final. (d) If, at any time while this Warrant is outstanding, the Company shall issue or cause to be issued rights or warrants to acquire or otherwise sell or distribute shares of Common Stock to all holders of Common Stock for a consideration per share less than the Exercise Price then in effect, then, forthwith upon such issue or sale, the Exercise Price shall be reduced to the price (calculated to the nearest cent) determined by dividing (i) an amount equal to the sum of (A) the number of shares of Common Stock outstanding immediately prior to such issue or sale multiplied by the Exercise Price, and (B) the consideration, if any, received or receivable by the Company upon such issue or sale by (ii) the total number of shares of Common Stock outstanding immediately after such issue or sale. (e) For the purposes of this Section 8, the following clauses shall also be applicable: (i) Record Date. In case the Company shall take a record of the holders of its Common Stock for the purpose of entitling them (A) to receive a dividend or other distribution payable in Common Stock or in securities convertible or exchangeable into shares of Common Stock, or (B) to subscribe for or purchase Common Stock or securities convertible or exchangeable into shares of Common Stock, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. (ii) Treasury Shares. The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the disposition of any such shares shall be considered an issue or sale of Common Stock. (f) All calculations under this Section 8 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. (g) If: (i) the Company shall declare a dividend (or any other distribution) on its Common Stock; or (ii) the Company shall declare a special nonrecurring cash dividend on or a redemption of its Common Stock; or (iii) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights; or (iv) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock of the Company, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property; or (v) the Company shall authorize the voluntary dissolution, liquidation or winding up of the affairs of the Company, then the Company shall cause to be mailed to each Holder at their last addresses as they shall appear upon the Warrant Register, at least 30 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, share exchange, dissolution, liquidation or winding up; provided, however, that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice. 9. Payment of Exercise Price. The Holder may pay the Exercise Price in cash or, in the event that a registration statement covering the resale of the Warrant Shares and naming the holder thereof as a selling stockholder thereunder is not effective for the resale of the Warrant Shares at any time during the term of this Warrant, pursuant to a cashless exercise, as follows: (a) Cash Exercise. The Holder shall deliver immediately available funds; (b) Cashless Exercise. The Holder shall surrender this Warrant to the Company together with a notice of cashless exercise, in which event the Company shall issue to the Holder the number of Warrant Shares determined as follows: X = Y (A-B)/A where: X = the number of Warrant Shares to be issued to the Holder. Y = the number of Warrant Shares with respect to which this Warrant is being exercised. A = the average of the closing sale prices of the Common Stock for the five (5) Trading Days immediately prior to (but not including) the Date of Exercise. B = the Exercise Price. For purposes of Rule 144 promulgated under the Securities Act, it is intended, understood and acknowledged that the Warrant Shares issued in a cashless exercise transaction shall be deemed to have been acquired by the Holder, and the holding period for the Warrant Shares shall be deemed to have been commenced, on the issue date. 10. Fractional Shares. The Company shall not be required to issue or cause to be issued fractional Warrant Shares on the exercise of this Warrant. The number of full Warrant Shares which shall be issuable upon the exercise of this Warrant shall be computed on the basis of the aggregate number of Warrant Shares purchasable on exercise of this Warrant so presented. If any fraction of a Warrant Share would, except for the provisions of this Section 10, be issuable on the exercise of this Warrant, the Company shall, at its option, (i) pay an amount in cash equal to the Exercise Price multiplied by such fraction or (ii) round the number of Warrant Shares issuable, up to the next whole number. 11. Notices. Any and all notices or other communications or deliveries hereunder shall be in writing and shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section, (ii) the business day following the date of mailing, if sent by nationally recognized overnight courier service, or (iii) upon actual receipt by the party to whom such notice is required to be given. The addresses for such communications shall be: (1) if to the Company, to 5600 Rowland Road, Minnetonka, Minnesota 55343 or to Facsimile No.: (612) 932-7181 Attention: Chief Financial Officer, or (ii) if to the Holder, to the Holder at the address or facsimile number appearing on the Warrant Register or such other address or facsimile number as the Holder may provide to the Company in accordance with this Section 11. 12. Warrant Agent. (a) The Company shall serve as warrant agent under this Warrant. Upon thirty (30) days' notice to the Holder, the Company may appoint a new warrant agent. (b) Any corporation into which the Company or any new warrant agent may be merged or any corporation resulting from any consolidation to which the Company or any new warrant agent shall be a party or any corporation to which the Company or any new warrant agent transfers substantially all of its corporate trust or shareholders services business shall be a successor warrant agent under this Warrant without any further act. Any such successor warrant agent shall promptly cause notice of its succession as warrant agent to be mailed (by first class mail, postage prepaid) to the Holder at the Holder's last address as shown on the Warrant Register. 13. Miscellaneous. (a) This Warrant shall be binding on and inure to the benefit of the parties hereto and their respective successors and permitted assigns. This Warrant may be amended only in writing signed by the Company and the Holder. (b) Subject to Section 13(a), above, nothing in this Warrant shall be construed to give to any person or corporation other than the Company and the Holder any legal or equitable right, remedy or cause under this Warrant; this Warrant shall be for the sole and exclusive benefit of the Company and the Holder. (c) This Warrant shall be governed by and construed and enforced in accordance with the internal laws of the State of Delaware without regard to the principles of conflicts of law thereof. (d) The headings herein are for convenience only, do not constitute a part of this Warrant and shall not be deemed to limit or affect any of the provisions hereof. (e) In case any one or more of the provisions of this Warrant shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Warrant shall not in any way be affected or impaired thereby and the parties will attempt in good faith to agree upon a valid and enforceable provision which shall be a commercially reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Warrant. IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed by its authorized officer as of the date first indicated above. DIGITAL BIOMETRICS, INC. By: --------------------------------- Name: ------------------------------- Title: ------------------------------ FORM OF ELECTION TO PURCHASE (To be executed by the Holder to exercise the right to purchase shares of Common Stock under the foregoing Warrant) To DIGITAL BIOMETRICS, INC. In accordance with the Warrant enclosed with this Form of Election to Purchase, the undersigned hereby irrevocably elects to purchase ___________ shares of Common Stock ("Common Stock"), par value $.01 per share, of Digital Biometrics, Inc. and encloses herewith $________ in cash or certified or official bank check or checks, which sum represents the aggregate Exercise Price (as defined in the Warrant) for the number of shares of Common Stock to which this Form of Election to Purchase relates, together with any applicable taxes payable by the undersigned pursuant to the Warrant. The undersigned requests that certificates for the shares of Common Stock issuable upon this exercise be issued in the name of PLEASE INSERT SOCIAL SECURITY OR TAX IDENTIFICATION NUMBER - -------------------------------------------------------------------------------- (Please print name and address) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- If the number of shares of Common Stock issuable upon this exercise shall not be all of the shares of Common Stock which the undersigned is entitled to purchase in accordance with the enclosed Warrant, the undersigned requests that a New Warrant (as defined in the Warrant) evidencing the right to purchase the shares of Common Stock not issuable pursuant to the exercise evidenced hereby be issued in the name of and delivered to: - -------------------------------------------------------------------------------- (Please print name and address) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Dated: , Name of Holder: ----------------- ---- (Print) ------------------------------- (By:) (Name:) -------------------------------- (Title:) (Signature must conform in all respects to name of holder as specified on the face of the Warrant) [To be completed and signed only upon transfer of Warrant] FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto ________________________________ the right represented by the within Warrant to purchase ____________ shares of Common Stock of Digital Biometrics, Inc. to which the within Warrant relates and appoints ________________ attorney to transfer said right on the books of Digital Biometrics, Inc. with full power of substitution in the premises. Dated: - ---------------, ---- --------------------------------------- (Signature must conform in all respects to name of holder as specified on the face of the Warrant) --------------------------------------- Address of Transferee --------------------------------------- --------------------------------------- In the presence of: - -------------------------- EX-10.3 6 WARRANT EXHIBIT 10.3 NEITHER THIS WARRANT NOR THE SECURITIES INTO WHICH THIS WARRANT IS EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREUNDER AND IN COMPLIANCE WITH APPLICABLE STATE SECURITIES. DIGITAL BIOMETRICS, INC. WARRANT Warrant No. MJK-1 Dated December 1, 1997 DIGITAL BIOMETRICS, INC., a Delaware corporation (the "Company"), hereby certifies that, for value received, Miller, Johnson & Kuehn, Incorporated, or its registered assigns ("Holder") is entitled, subject to the terms set forth below, to purchase from the Company One Hundred Twenty-Five Thousand (125,000) shares of Common Stock, par value $.01 per share (the "Common Stock"), of the Company (each such share, a "Warrant Share" and all such shares, the "Warrant Shares") at an exercise price equal to $2.00 per share (as adjusted from time to time as provided in Section 8, the "Exercise Price"), at any time and from time to time from and after the date hereof and through and including November 30, 2002 (the "Expiration Date"), and subject to the following terms and conditions: 1. Registration of Warrant. The Company shall register this Warrant, upon records to be maintained by the Company for that purpose (the "Warrant Register"), in the name of the record Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, and the Company shall not be affected by notice to the contrary. 2. Registration of Transfers and Exchanges. (a) The Company shall register the transfer of any portion of this Warrant in the Warrant Register, upon surrender of this Warrant, with the Form of Assignment attached hereto duly completed and signed, to the Company at the office specified in or pursuant to Section 3(b). Upon any such registration or transfer, a new warrant to purchase Common Stock, in substantially the form of this Warrant (any such new warrant, a "New Warrant"), evidencing the portion of this Warrant so transferred shall be issued to the transferee and a New Warrant evidencing the remaining portion of this Warrant not so transferred, if any, shall be issued to the transferring Holder. The acceptance of the New Warrant by the transferee thereof shall be deemed the acceptance of such transferee of all of the rights and obligations of a holder of a Warrant. (b) This Warrant is exchangeable, upon the surrender hereof by the Holder to the office of the Company specified in or pursuant to Section 3(b) for one or more New Warrants, evidencing in the aggregate the right to purchase the number of Warrant Shares which may then be purchased hereunder. Any such New Warrant will be dated the date of such exchange. 3. Duration and Exercise of Warrants. (a) This Warrant shall be exercisable by the registered Holder on any business day before 5:30 P.M., Minnetonka, Minnesota time, at any time and from time to time on or after the date hereof to and including the Expiration Date. At 5:30 P.M., Minnetonka, Minnesota time on the Expiration Date, the portion of this Warrant not exercised prior thereto shall be and become void and of no value. This Warrant may not be redeemed by the Company. (b) Subject to Sections 2(b), 6 and 11, upon surrender of this Warrant, with the Form of Election to Purchase attached hereto duly completed and signed, to the Company at its address for notice as set forth in Section 11, and upon payment of the Exercise Price multiplied by the number of Warrant Shares that the Holder intends to purchase hereunder, in lawful money of the United States of America, in cash or by certified or official bank check or checks, all as specified by the Holder in the Form of Election to Purchase, the Company shall promptly (but in no event later than 5 business days after the Date of Exercise (as defined herein)) issue or cause to be issued and cause to be delivered to or upon the written order of the Holder and in such name or names as the Holder may designate, a certificate for the Warrant Shares issuable upon such exercise, free of restrictive legends other than as required by federal and state securities laws. Any person so designated by the Holder to receive Warrant Shares shall be deemed to have become holder of record of such Warrant Shares as of the Date of Exercise of this Warrant. A "Date of Exercise" means the date on which the Company shall have received (i) this Warrant (or any New Warrant, as applicable), with the Form of Election to Purchase attached hereto (or attached to such New Warrant) appropriately completed and duly signed, and (ii) payment of the Exercise Price for the number of Warrant Shares so indicated by the holder hereof to be purchased. (c) This Warrant shall be exercisable either in its entirety or, for a portion of the number of Warrant Shares. If less than all of the Warrant Shares which may be purchased under this Warrant are exercised at any time, the Company shall issue or cause to be issued, at its expense, a New Warrant evidencing the right to purchase the remaining number of Warrant Shares for which no exercise has been evidenced by this Warrant. 4. Piggyback Registration Rights. (a) If, during the period ending on the earlier of (i) one year after the last exercise of this Warrant or (ii) November 30, 2003, the Company proposes to register under the Securities Act of 1933 (except by a Form S-8 or S-4 registration statement or any successor registration statement, or other similar form of limited applicability) any of its common stock in an offering either on behalf of selling shareholders or itself, it will give written notice to the Holder and holders of any Warrant Shares of its intention to do so and, upon the written request of Holder or a holder of Warrant Shares given within fifteen (15) business days after receipt of such notice (which request shall specify the shares of Common Stock intended to be sold or disposed of by such holder), the Company will use its best efforts to cause to be included in such registration statement proposed to be filed by the Company, the Warrant Shares for resale by the Holder; provided, that the Holder agrees that its shares may be excluded from any underwritten offering if, in the opinion of the underwriter, the inclusion of such Warrant Shares will significantly and adversely affect the proposed underwriting. Any such exclusion shall be on the same basis and pro rata as and with all other selling shareholders in such offering. Notwithstanding the foregoing, in the event the Company proposes to register shares of its common stock on its own behalf, it shall be obligated to provide the notice set forth above to the Holder or the holders of any Warrant Shares on two (2) occasions. The Company may, in its sole discretion, withdraw any such registration statement and abandon the proposed offering in which any such holder had requested to participate, in which case the holders of Warrants and Warrant Shares will be entitled to participate in a registration by the Company as if the withdrawn or abandoned registration statement had never been filed. The Company shall not be obligated to maintain the registration statement in effect for more than twenty-four months. The costs and expenses of any registration under this Section 4, including but not limited to legal fees, special audit fees, printing expenses, filing fees, fees and expenses relating to qualifications under state securities or blue sky laws and the premiums for insurance, if any, incurred by the Company in connection with any registration made pursuant to this Section 4 shall be borne entirely by the Company; provided, however, that any holders participating in such registration shall bear their own underwriting discounts and commissions and the fees and expenses of their own counsel or accountants in connection with any such registration. If any registration shall be underwritten, in whole or in part, the Company may require that all Warrant Stock requested for inclusion in such notification or registration statement be included in the underwriting on the same terms and conditions as the securities otherwise being sold to the underwriters. (b) The Holder agrees that upon receipt of notice from the Company of an occurrence of any event or fact which, in the judgment of the Company's legal counsel, requires a supplement or amendment, including a post-effective amendment to the registration statement or prospectus therein, the Holder will forthwith discontinue any disposition of the Warrant Shares pursuant to the registration statement until the Holder has received copies of the amended registration statement and/or supplemented prospectus, or until it is advised in writing by the Company that the use of the applicable prospectus may be resumed, and, in either case, has received copies of any additional or supplemental filings that are incorporated or deemed to be incorporated by reference in such prospectus or registration statement. The Company agrees that upon the occurrence of an event which, in the opinion of its counsel, requires a supplement or amendment to the registration statement or the prospectus contained therein pursuant to which the Holder is disposing of Warrant Shares, it will as promptly as practicable, but in no event more than 30 days after the occurrence of such event, amend such registration statement or supplement such prospectus and provide copies thereof to the Holder. (c) The Company hereby indemnifies the holder of any Common Stock issued or issuable hereunder, its officers and directors, if any, who control such holder of Common Stock within the meaning of Section 15 of the Securities Act of 1933, as amended, against all losses, claims, damages and liabilities caused by any untrue statement of a material fact contained in any registration statement or prospectus (and as amended or supplemented if the Company shall have furnished any amendments or supplements thereto) or any preliminary prospectus or caused by any omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages or liabilities are caused by any untrue statement or omission contained in information furnished in writing to the Company by the Holder for use therein and the Holder by its acceptance hereof agrees that it will severally indemnify and hold harmless the Company and each of its officers, directors and any underwriter and each person, if any, who controls the Company or any underwriter within the meaning of Section 15 of the Securities Act of 1933, as amended, with respect to losses, claims, damages or liabilities which are caused by any untrue statement or omission contained in information furnished in writing to the Company or any underwriter by such holder expressly for use therein. 5. Payment of Taxes. The Company will pay all documentary stamp taxes attributable to the issuance of Warrant Shares upon the exercise of this Warrant; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the registration of any certificates for Warrant Shares or Warrants in a name other than that of the Holder, and the Company shall not be required to issue or cause to be issued or deliver or cause to be delivered the certificates for Warrant Shares unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. The Holder shall be responsible for all other tax liability that may arise as a result of holding or transferring this Warrant or receiving Warrant Shares upon exercise hereof. 6. Replacement of Warrant. If this Warrant is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation hereof, or in lieu of and substitution for this Warrant, a New Warrant, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction and indemnity, if reasonably satisfactory to it. Applicants for a New Warrant under such circumstances shall also comply with such other reasonable regulations and procedures and pay such other reasonable charges as the Company may prescribe. 7. Reservation of Warrant Shares. The Company covenants that it will at all times reserve and keep available out of the aggregate of its authorized but unissued Common Stock, solely for the purpose of enabling it to issue Warrant Shares upon exercise of this Warrant as herein provided, the number of Warrant Shares which are then issuable and deliverable upon the exercise of this entire Warrant, free from preemptive rights or any other actual contingent purchase rights of persons other than the Holders (taking into account the adjustments and restrictions of Section 8). The Company covenants that all Warrant Shares that shall be so issuable and deliverable shall, upon issuance and the payment of the applicable Exercise Price in accordance with the terms hereof, be duly and validly authorized, issued and fully paid and nonassessable. 8. Certain Adjustments. The Exercise Price and number of Warrant Shares issuable upon exercise of this Warrant are subject to adjustment from time to time as set forth in this Section 8. Upon each such adjustment of the Exercise Price pursuant to this Section 8, the Holder shall thereafter prior to the Expiration Date be entitled to purchase, at the Exercise Price resulting from such adjustment, the number of Warrant Shares obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of Warrant Shares issuable upon exercise of this Warrant immediately prior to such adjustment and dividing the product thereof by the Exercise Price resulting from such adjustment. (a) If the Company, at any time while this Warrant is outstanding, (i) shall pay a stock dividend or otherwise make a distribution or distributions on shares of its Common Stock (as defined below) or on any other class of capital stock (and not the Common Stock) payable in shares of Common Stock, (ii) subdivide outstanding shares of Common Stock into a larger number of shares, or (iii) combine outstanding shares of Common Stock into a smaller number of shares, the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding before such event and of which the denominator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding after such event. Any adjustment made pursuant to this Section shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision or combination, and shall apply to successive subdivisions and combinations. (b) In case of any reclassification of the Common Stock, any consolidation or merger of the Company with or into another person, the sale or transfer of all or substantially all of the assets of the Company in which the consideration therefor is equity or equity equivalent securities or any compulsory share exchange pursuant to which the Common Stock is converted into other securities or property, then the Holder shall have the right thereafter to exercise this Warrant only into the shares of stock and other securities and property receivable upon or deemed to be held by holders of Common Stock following such reclassification, consolidation, merger, sale, transfer or share exchange, and the Holder shall be entitled upon such event to receive such amount of securities or property of the business combination partner of the Company equal to the amount of Warrant Shares such Holder would have been entitled to had such Holder exercised this Warrant immediately prior to such reclassification, consolidation, merger, sale, transfer or share exchange. The terms of any such consolidation, merger, sale, transfer or share exchange shall include such terms so as to continue to give to the Holder the right to receive the securities or property set forth in this Section 8(b) upon any exercise following any such reclassification, consolidation, merger, sale, transfer or share exchange. (c) If the Company, at any time while this Warrant is outstanding, shall distribute to all holders of Common Stock (and not to holders of this Warrant) evidences of its indebtedness or assets or rights or warrants to subscribe for or purchase any security (excluding those referred to in Sections 8(a), (b) and (d)), then in each such case the Exercise Price shall be determined by multiplying the Exercise Price in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such distribution by a fraction of which the denominator shall be the Exercise Price determined as of the record date mentioned above, and of which the numerator shall be such Exercise Price on such record date less the then fair market value at such record date of the portion of such assets or evidence of indebtedness so distributed applicable to one outstanding share of Common Stock as determined by a nationally recognized or major regional investment banking firm or firm of independent certified public accountants of recognized standing (which may be the firm that regularly examines the financial statements of the Company) (an "Appraiser") mutually selected in good faith by the holders of a majority in interest of the Warrants then outstanding and the Company. Any determination made by the Appraiser shall be final. (d) For the purposes of this Section 8, the following clauses shall also be applicable: (i) Record Date. In case the Company shall take a record of the holders of its Common Stock for the purpose of entitling them (A) to receive a dividend or other distribution payable in Common Stock or in securities convertible or exchangeable into shares of Common Stock, or (B) to subscribe for or purchase Common Stock or securities convertible or exchangeable into shares of Common Stock, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. (ii) Treasury Shares. The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the disposition of any such shares shall be considered an issue or sale of Common Stock. (e) All calculations under this Section 8 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. (f) If: (i) the Company shall declare a dividend (or any other distribution) on its Common Stock; or (ii) the Company shall declare a special nonrecurring cash dividend on or a redemption of its Common Stock; or (iii) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights; or (iv) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock of the Company, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property; or (v) the Company shall authorize the voluntary dissolution, liquidation or winding up of the affairs of the Company, then the Company shall cause to be mailed to each Holder at their last addresses as they shall appear upon the Warrant Register, at least 30 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, share exchange, dissolution, liquidation or winding up; provided, however, that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice. 9. Payment of Exercise Price. The Holder may pay the Exercise Price in cash or, in the event that a registration statement covering the resale of the Warrant Shares and naming the holder thereof as a selling stockholder thereunder is not effective for the resale of the Warrant Shares at any time during the term of this Warrant, pursuant to a cashless exercise, as follows: (a) Cash Exercise. The Holder shall deliver immediately available funds; (b) Cashless Exercise. The Holder shall surrender his Warrant to the Company together with a notice of cashless exercise, in which event the Company shall issue to the Holder the number of Warrant Shares determined as follows: X = Y (A-B)/A where: X = the number of Warrant Shares to be issued to the Holder. Y = the number of Warrant Shares with respect to which this Warrant is being exercised. A = the average of the closing sale prices of the Common Stock for the five (5) Trading Days immediately prior to (but not including) the Date of Exercise. B = the Exercise Price. For purposes of Rule 144 promulgated under the Securities Act, it is intended, understood and acknowledged that the Warrant Shares issued in a cashless exercise transaction shall be deemed to have been acquired by the Holder, and the holding period for the Warrant Shares shall be deemed to have been commenced, on the issue date. 10. Fractional Shares. The Company shall not be required to issue or cause to be issued fractional Warrant Shares on the exercise of this Warrant. The number of full Warrant Shares which shall be issuable upon the exercise of this Warrant shall be computed on the basis of the aggregate number of Warrant Shares purchasable on exercise of this Warrant so presented. If any fraction of a Warrant Share would, except for the provisions of this Section 10, be issuable on the exercise of this Warrant, the Company shall, at its option, (i) pay an amount in cash equal to the Exercise Price multiplied by such fraction or (ii) round the number of Warrant Shares issuable, up to the next whole number. 11. Notices. Any and all notices or other communications or deliveries hereunder shall be in writing and shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section, (ii) the business day following the date of mailing, if sent by nationally recognized overnight courier service, or (iii) upon actual receipt by the party to whom such notice is required to be given. The addresses for such communications shall be: (1) if to the Company, to 5600 Rowland Road, Minnetonka, Minnesota 55343 or to Facsimile No.: (612) 932-0888, Attention: Chief Financial Officer, or (ii) if to the Holder, to the Holder at the address or facsimile number appearing on the Warrant Register or such other address or facsimile number as the Holder may provide to the Company in accordance with this Section 11. 12. Warrant Agent. (a) The Company shall serve as warrant agent under this Warrant. Upon thirty (30) days' notice to the Holder, the Company may appoint a new warrant agent. (b) Any corporation into which the Company or any new warrant agent may be merged or any corporation resulting from any consolidation to which the Company or any new warrant agent shall be a party or any corporation to which the Company or any new warrant agent transfers substantially all of its corporate trust or shareholders services business shall be a successor warrant agent under this Warrant without any further act. Any such successor warrant agent shall promptly cause notice of its succession as warrant agent to be mailed (by first class mail, postage prepaid) to the Holder at the Holder's last address as shown on the Warrant Register. 13. Miscellaneous. (a) This Warrant shall be binding on and inure to the benefit of the parties hereto and their respective successors and permitted assigns. This Warrant may be amended only in writing signed by the Company and the Holder. (b) Subject to Section 13(a), above, nothing in this Warrant shall be construed to give to any person or corporation other than the Company and the Holder any legal or equitable right, remedy or cause under this Warrant; this Warrant shall be for the sole and exclusive benefit of the Company and the Holder. (c) This Warrant shall be governed by and construed and enforced in accordance with the internal laws of the State of Minnesota without regard to the principles of conflicts of law thereof. (d) The headings herein are for convenience only, do not constitute a part of this Warrant and shall not be deemed to limit or affect any of the provisions hereof. (e) In case any one or more of the provisions of this Warrant shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Warrant shall not in any way be affected or impaired thereby and the parties will attempt in good faith to agree upon a valid and enforceable provision which shall be a commercially reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Warrant. In Witness Whereof, the Company has caused this Warrant to be duly executed this 1st day of December, 1997. DIGITAL BIOMETRICS, INC. By ------------------------------------------ John J. Metil, Chief Operating Officer and Chief Financial Officer FORM OF ELECTION TO PURCHASE (To be executed by the Holder to exercise the right to purchase shares of Common Stock under the foregoing Warrant) To DIGITAL BIOMETRICS, INC. In accordance with the Warrant enclosed with this Form of Election to Purchase, the undersigned hereby irrevocably elects to purchase ________ shares of Common Stock ("Common Stock"), par value $.01 per share, of Digital Biometrics, Inc. and encloses herewith $__________ in cash or certified or official bank check or checks, which sum represents the aggregate Exercise Price (as defined in the Warrant) for the number of shares of Common Stock to which this Form of Election to Purchase relates, together with any applicable taxes payable by the undersigned pursuant to the Warrant. The undersigned requests that certificates for the shares of Common Stock issuable upon this exercise be issued in the name of PLEASE INSERT SOCIAL SECURITY OR TAX IDENTIFICATION NUMBER ------------------------- - -------------------------------------------------------------------------------- (Please print name and address) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- If the number of shares of Common Stock issuable upon this exercise shall not be all of the shares of Common Stock which the undersigned is entitled to purchase in accordance with the enclosed Warrant, the undersigned requests that a New Warrant (as defined in the Warrant) evidencing the right to purchase the shares of Common Stock not issuable pursuant to the exercise evidenced hereby be issued in the name of and delivered to: - -------------------------------------------------------------------------------- (Please print name and address) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Dated: , Name of Holder: ------------- ---- (Print) ------------------------------------------ (By:) -------------------------------------------- (Name:) (Title:) (Signature must conform in all respects to name of holder as specified on the face of the Warrant) [To be completed and signed only upon transfer of Warrant] FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto _____________________________ the right represented by the within Warrant to purchase _______ shares of Common Stock of Digital Biometrics, Inc. to which the within Warrant relates and appoints __________________________ attorney to transfer said right on the books of Digital Biometrics, Inc. with full power of substitution in the premises. Dated: - -------------------, ------ -------------------------------------------------- (Signature must conform in all respects to name of holder as specified on the face of the Warrant) -------------------------------------------------- Address of Transferee -------------------------------------------------- -------------------------------------------------- In the presence of: - ------------------------ In the presence of: - ------------------------ EX-10.4 7 STOCK PURCHASE WARRANT EXHIBIT 10.4 WARRANT THIS CERTIFICATE AND THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAW, AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF UNTIL EITHER (I) A REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS SHALL HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR (II) THE CORPORATION SHALL HAVE RECEIVED AN OPINION OF COUNSEL ACCEPTABLE TO THE CORPORATION AND ITS COUNSEL THAT AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OR APPLICABLE STATE SECURITIES LAWS IS AVAILABLE IN CONNECTION WITH SUCH OFFER, SALE OR TRANSFER. STOCK PURCHASE WARRANT TO PURCHASE 8,000 SHARES OF COMMON STOCK OF DIGITAL BIOMETRICS, INC. THIS CERTIFIES THAT, for good and valuable consideration, C. McKenzie Lewis, III is entitled to subscribe for and purchase from Digital Biometrics, Inc., a Delaware corporation (the "Company"), at any time after March 18, 1997, to and including March 18, 2007, Eight Thousand (8,000), fully paid and nonassessable shares of the Common Stock of the Company at the price of $2.125 per share (the "Warrant Exercise Price"), subject to the antidilution provisions of this Warrant. The shares which may be acquired upon exercise of this Warrant are referred to herein as the "Warrant Shares." As used herein, the term "Holder" means the initial holder, any party who acquires all or a part of this Warrant as a registered transferee of the initial holder in accordance with the terms of this Warrant, or any record holder or holders of the Warrant Shares issued upon exercise, whether in whole or in part, of the Warrant; the term "Common Stock" means and includes the Company's presently authorized voting common stock, no par value per share, and shall also include any capital stock of any class of the Company hereafter authorized which shall not be limited to a fixed sum or percentage in respect of the rights of the holders thereof to participate in dividends or in the distribution of assets upon the voluntary or involuntary liquidation, dissolution, or winding up of the Company; and the term "Convertible Securities" means any stock or other securities convertible into, or exchangeable for, Common Stock. This Warrant is subject to the following provisions, terms and conditions: 1. Exercise; Transferability. (a) The rights represented by this Warrant may be exercised by the Holder hereof, in whole or in part (but not as to a fractional share of Common Stock), prior to the expiration of this Warrant by written notice of exercise (in the form attached hereto) delivered to the Company at the principal office of the Company and accompanied or preceded by the surrender of this Warrant and payment of the Warrant Exercise Price for such shares. The Holder shall then complete and comply with a subscription agreement in the form requested by the Company. (b) Neither this Warrant nor the Warrant Shares may be sold, assigned, hypothecated, or otherwise transferred other than (i) by will or pursuant to the operation of law, or (ii) pursuant to Section 8 hereof. Further, this Warrant may not be sold, transferred, assigned, hypothecated or divided into two or more Warrants of smaller denominations. Other than by operation of law, there shall be no more than 4 outstanding record holders of this Warrant at any one time. 2. Payment of Warrant Exercise Price. Payment of the Warrant Exercise Price may be made by cash, certified check, cashiers check or wire transfer or a combination thereof, at the election of Holder. 3. Exchange and Replacement. Subject to Sections 1 and 8 hereof, this Warrant is exchangeable upon the surrender hereof by the Holder to the Company at its principal executive office for a new Warrant(s) of like tenor and date representing in the aggregate the right to purchase the number of Warrant Shares purchasable hereunder, each of such new Warrant(s) to represent the right to purchase such number of Warrant Shares (not to exceed the aggregate total number purchasable hereunder) as shall be designated by the Holder at the time of such surrender. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction, or mutilation of this Warrant, and, in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it, and upon surrender and cancellation of this Warrant, if mutilated, the Company will make and deliver a new Warrant of like tenor, in lieu of this Warrant; provided, however, that if the initial Holder shall be such Holder, an agreement of indemnity by such Holder shall be sufficient for all purposes of this Section 3. This Warrant shall be promptly canceled by the Company upon the surrender hereof in connection with any exchange or replacement. The Company shall pay all expenses (other than stock transfer or income taxes) and other charges payable in connection with the preparation, execution, and delivery of Warrant(s) pursuant to this Section 3. 4. Issuance of the Warrant Shares. (a) The Company agrees that the shares of Common Stock purchased hereby shall be and are deemed to be issued to the Holder as of the close of business on the date on which this Warrant shall have been surrendered, the payment made for such Warrant Shares as aforesaid and the subscription agreement is returned to the Company. Subject to the provisions of the next section, certificates for the Warrant Shares so purchased shall be delivered to the Holder within a reasonable time, not exceeding 15 business days after the rights represented by this Warrant shall have been so exercised, such payment surrendered and such agreement returned and, unless this Warrant has expired, a new Warrant representing the right to purchase the number of Warrant Shares, if any, with respect to which this Warrant shall not then have been exercised shall also be delivered to the Holder within such time. (b) Notwithstanding the foregoing, however, the Company shall not be required to deliver any certificate for Warrant Shares upon exercise of this Warrant except in accordance with exemptions from the applicable securities registration requirements or registrations under applicable securities laws. Nothing herein, however, shall obligate the Company to effect registrations under federal or state securities laws. If registrations are not in effect and if exemptions are not available when the Holder seeks to exercise the Warrant, the Warrant exercise period will be extended, if need be, to prevent the Warrant from expiring, until such time as either registrations become effective or exemptions are available, and the Warrant shall then remain exercisable for a period of at least 30 calendar days from the date the Company delivers to the Holder written notice of the availability of such registrations or exemptions. The Holder agrees to execute such documents and make such representations, warranties, and agreements as may be required solely to comply with the exemptions relied upon by the Company, or the registrations made, for the issuance of the Warrant Shares. 5. Covenants of the Company. The Company covenants and agrees that all Warrant Shares will, upon issuance, be duly authorized and issued, fully paid, nonassessable, and free from all taxes (except stock transfer and income taxes), liens, and charges with respect to the issue thereof. The Company further covenants and agrees that during the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized and reserved for the purpose of issue or transfer upon exercise of the subscription rights evidenced by this Warrant a sufficient number of shares of Common Stock to provide for the exercise of the rights represented by this Warrant. 6. Antidilution Adjustment. The provisions of this Warrant are subject to adjustment as provided in this Section 6. (a) The Warrant Exercise Price shall be adjusted from time to time such that in case the Company shall hereafter: i) pay any dividends on any class of stock of the Company payable in Common Stock; ii) subdivide its then outstanding shares of Common Stock into a greater number of shares; or iii) combine outstanding shares of Common Stock, by reclassification or otherwise; then, in any such event, the Warrant Exercise Price in effect immediately prior to such event shall (until adjusted again pursuant hereto) be adjusted immediately after such event to a price (calculated to the nearest full cent) determined by dividing (a) the number of shares of Common Stock outstanding immediately prior to such event, multiplied by the then existing Warrant Exercise Price, by (b) the total number of shares of Common Stock outstanding immediately after such event (including the maximum number of shares of Common Stock issuable in respect of any securities convertible into Common Stock), and the resulting quotient shall be the adjusted Warrant Exercise Price per share. An adjustment made pursuant to this Subsection shall become effective immediately after the record date in the case of a dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or reclassification. If, as a result of an adjustment made pursuant to this Subsection, the Holder of any Warrant thereafter surrendered for exercise shall become entitled to receive shares of two or more classes of capital stock or shares of Common Stock and other capital stock of the Company, the Company's Board of Directors (whose determination shall be conclusive) shall determine the allocation of the adjusted Warrant Exercise Price between or among shares of such classes of capital stock or shares of Common Stock and other capital stock. All calculations under this Subsection shall be made to the nearest cent or to the nearest 1/100 of a share, as the case may be. In the event that at any time as a result of an adjustment made pursuant to this Subsection, the holder of any Warrant thereafter surrendered for exercise shall become entitled to receive any shares of the Company other than shares of Common Stock, thereafter the Warrant Exercise Price of such other shares so receivable upon exercise of any Warrant shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to Common Stock contained in this Section. (b) Upon each adjustment of the Warrant Exercise Price pursuant to Section 6(a) above, the Holder of each Warrant shall thereafter (until another such adjustment) be entitled to purchase at the adjusted Warrant Exercise Price the number of shares, calculated to the nearest full share, obtained by multiplying the number of shares specified in such Warrant (as adjusted as a result of all adjustments in the Warrant Exercise Price in effect prior to such adjustment) by the Warrant Exercise Price in effect prior to such adjustment and dividing the product so obtained by the adjusted Warrant Exercise Price. (c) In case of any capital reorganization or any reclassification of the shares of Common Stock of the Company, or any consolidation or merger to which the Company is a party other than a merger or consolidation in which the Company is the continuing corporation, or in case of any sale or conveyance to another corporation of the property of the Company as an entirety or substantially as an entirety, or in the case of any statutory exchange of securities with another corporation (including any exchange effected in connection with a merger of a third corporation into the Company), there shall be no adjustment under Subsection (a) of this Section above but the Holder of each Warrant then outstanding shall have the right thereafter to convert such Warrant into the kind and amount of shares of stock and other securities and property which it would have owned or have been entitled to receive immediately after such capital reorganization, reclassification, consolidation, merger, statutory exchange, sale, or conveyance had such Warrant been converted immediately prior to the effective date of such consolidation, merger, statutory exchange, sale, or conveyance and in any such case, if necessary, appropriate adjustment shall be made in the application of the provisions set forth in this Section with respect to the rights and interests thereafter of any Holders of the Warrant, to the end that the provisions set forth in this Section shall thereafter correspondingly be made applicable, as nearly as may reasonably be, in relation to any shares of stock and other securities and property thereafter deliverable on the exercise of the Warrant. The provisions of this Subsection shall similarly apply to successive consolidations, mergers, statutory exchanges, sales or conveyances. Prior to consummating any such consolidation, merger or sale, the successor corporation (if other than the Company) resulting from such consolidation or merger, or the corporation purchasing such assets, shall assume by written instrument executed and mailed to the registered Holder hereof at the last address of such Holder appearing on the books of the Company, the obligation to deliver to such Holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such Holder may be entitled to purchase. (d) Upon any adjustment of the Warrant Exercise Price, then, and in each such case, the Company shall give written notice thereof, by first class mail, postage prepaid, addressed to the Holder as shown on the books of the Company, which notice shall state the Warrant Exercise Price resulting from such adjustment and the increase or decrease, if any, in the number of shares of Common Stock purchasable at such price upon the exercise of this Warrant, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. 7. No Voting Rights. This Warrant shall not entitle the Holder to any voting rights or other rights as a shareholder of the Company. 8. Notice of Transfer of Warrant or Resale of the Warrant Shares. (a) Subject to the sale, assignment, hypothecation, or other transfer restrictions set forth in Section 1 hereof, the Holder, by acceptance hereof, agrees to give 7 days written notice to the Company before transferring this Warrant or transferring any Warrant Shares of such Holder's intention to do so, describing briefly the manner of any proposed transfer. Such notice may be provided in the form of Warrant Assignment attached hereto. Promptly upon receiving such written notice, the Company shall present copies thereof to the Company's counsel. If in the reasonable opinion of such counsel, the proposed transfer may be effected without registration or qualification (under any federal or state securities laws), the Company, as promptly as practicable, shall notify the Holder of such opinion, whereupon the Holder shall be entitled to transfer this Warrant or to dispose of Warrant Shares received upon the previous exercise of this Warrant, all in accordance with the terms of the notice delivered by the Holder to the Company; provided that an appropriate legend may be endorsed on this Warrant or the certificates for such Warrant Shares respecting restrictions upon transfer thereof necessary or advisable in the opinion of counsel and satisfactory to the Company to prevent further transfer which would be in violation of Section 5 of the Securities Act of 1933, as amended (the "1933 Act") and applicable state securities laws; and provided further that the prospective transferee or purchaser shall execute such documents and make such representations, warranties and agreements as may be reasonably required solely to comply with the exemptions relied upon by the Company for the transfer or disposition of the Warrant or Warrant Shares. (b) If in the reasonable opinion of the counsel referred to in this Section 8, the proposed transfer or disposition of this Warrant or such Warrant Shares described in the written notice given pursuant to this Section 8 may not be effected without registration or qualification of this Warrant or such Warrant Shares, the Company shall promptly give written notice thereof to the Holder, and the Holder will limit its activities in respect to such as, in the reasonable opinion of such counsel to the Company, are permitted by law. 9. Fractional Shares. Fractional shares shall not be issued upon the exercise of this Warrant, but in any case where the Holder would, except for the provisions of this Section, be entitled under the terms hereof to receive a fractional share, the Company shall, upon the exercise of this Warrant for the largest number of whole shares then called for, pay a sum in cash equal to the sum of (a) the excess, if any, of the Market Price of such fractional share over the proportional part of the Warrant Exercise Price represented by such fractional share, plus (b) the proportional part of the Warrant Exercise Price represented by such fractional share. For purposes of this Section, the term "Market Price" with respect to shares of Common Stock of any class or series means the last reported sale price or, if none, the average of the last reported closing bid and ask prices on any national securities exchange or quoted on the Nasdaq, or if not listed on a national securities exchange or quoted on Nasdaq, the average of the last reported closing bid and ask prices as reported by Metro Data Company, Inc. from quotations by market makers in such Common Stock on the Minneapolis-St. Paul local over-the-counter sales. 10. Representations of the Holder. (a) The Holder acknowledges and represents that Holder understands that this Warrant is illiquid and highly speculative, that Holder is able to bear the economic risk associated with this Warrant, and that Holder believes that this Warrant is a suitable investment for Holder. (b) The Holder acknowledges and represents that Holder has been given access to full and complete information regarding the Company (including the opportunity to meet with Company officers and to review such documents as Holder may have requested in writing) and has utilized such access to Holder's satisfaction for the purpose of obtaining information about the Company. (c) The Holder represents and warrants that this Warrant is being acquired for Holder's own account and without the intention of reselling or redistributing the same. Holder further understands and agrees that the transferability of the Warrant is restricted as described herein. (d) The Holder hereby represents that he is an "accredited investor" within the meaning of Rule 501 of Regulation D under the Securities Act. IN WITNESS WHEREOF, the undersigned have caused this Warrant to be signed this 3rd day of April, 1997. ATTEST: DIGITAL BIOMETRICS, INC. By - ---------------------------------- ------------------------------------ Its Secretary James C. Granger Its Chief Executive Officer ------------------------------------ C. McKenzie Lewis, III NOTICE OF WARRANT EXERCISE (To be signed only upon exercise of Warrant) TO: DIGITAL BIOMETRICS, INC. The undersigned hereby irrevocably elects to exercise the attached Warrant to purchase for cash, _____________ of the shares issuable upon the exercise of such Warrant, and requests that certificates for such shares (together with a new Warrant to purchase the number of shares, if any, with respect to which this Warrant is not exercised) shall be issued in the name of, and be delivered to, ----------------------------------- (Print Name) Please insert social security or other ----------------------------------- identifying number of registered holder of (Address) certificate (_____________) ----------------------------------- Date: _____________________, 199_ Signature* *The signature of the Notice of Exercise of Warrant must correspond to the name as written upon the face of the Warrant in every particular without alteration or enlargement or any change whatsoever. When signing on behalf of a corporation, partnership, trust or other entity, PLEASE indicate your position(s) and title(s) with such entity. WARRANT ASSIGNMENT (To be signed only upon transfer of Warrant) FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto ______________________________ the right represented by the foregoing warrant to purchase Common Stock of DIGITAL BIOMETRICS, INC., to which the foregoing warrant relates and appoints ________________________________ attorney to transfer said right on the books of DIGITAL BIOMETRICS, INC., with full power of substitution in the premises. The manner of the proposed transfer by the undersigned is described briefly in the space below. Dated:______________________________ ------------------------------------ (Signature) ------------------------------------ ------------------------------------ ------------------------------------ (Address) In Presence Of: - ----------------------------------- EX-10.5 8 STOCK PURCHASE WARRANT EXHIBIT 10.5 EXHIBIT A THIS CERTIFICATE AND THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAW, AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF UNTIL EITHER (i) A REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS SHALL HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR (ii) THE COMPANY SHALL HAVE RECEIVED AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY AND ITS COUNSEL THAT AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OR APPLICABLE STATE SECURITIES LAWS IS AVAILABLE IN CONNECTION WITH SUCH OFFER, SALE OR TRANSFER. STOCK PURCHASE WARRANT TO PURCHASE 150,000 SHARES OF COMMON STOCK OF DIGITAL BIOMETRICS, INC. THIS CERTIFIES THAT, for good and valuable consideration, Dennis Wendell is entitled to subscribe for and purchase from Digital Biometrics, Inc., a Delaware corporation (the "Company"), subject to the terms hereof at any time after August 18, 1997, to and including August 17, 2002, One Hundred Fifty Thousand (150,000), fully paid and nonassessable shares of the Company's Common Stock at the price of $1.875 per share (the "Warrant Exercise Price"), subject to the antidilution provisions of this Warrant. The shares which may be acquired upon exercise of this Warrant are referred to herein as the "Warrant Shares." As used herein, the term "Holder" means the initial holder, any party who acquires all or a part of this Warrant as a registered transferee of the initial holder in accordance with the terms of this Warrant, or any record holder or holders of the Warrant Shares issued upon exercise, whether in whole or in part, of the Warrant; the term "Common Stock" means and includes the Company's presently authorized voting common stock, no par value per share, and shall also include any capital stock of any class of the Company hereafter authorized which shall not be limited to a fixed sum or percentage in respect of the rights of the holders thereof to participate in dividends or in the distribution of assets upon the voluntary or involuntary liquidation, dissolution or winding up of the Company; and the term "Convertible Securities" means any stock or other securities convertible into, or exchangeable for, Common Stock. This Warrant is subject to the following provisions, terms and conditions: 1. Exercise; Transferability. (a) Subject to the provisions of Section 2, this Warrant shall be exercisable (i) to the extent of 75,000 shares of Common Stock on the first anniversary of the date of the Independent Contractor Agreement between the Company and Dennis Wendell and to which this Warrant is Exhibit A, and (ii) to the extent of 150,000 Shares on the Second anniversary of such date. (b) The rights represented by this Warrant may be exercised by the Holder hereof, in whole or in part (but not as to a fractional share of Common Stock), prior to the expiration of this Warrant by written notice of exercise (in the form attached hereto) delivered to the Company at the principal office of the Company and accompanied or preceded by the surrender of this Warrant and payment of the Warrant Exercise Price for such Warrant Shares. Holder shall then complete and comply with a subscription agreement in the form requested by the Company. (c) Neither this Warrant nor any Warrant Shares may be sold, assigned, hypothecated, or otherwise transferred other than (i) by will or pursuant to the operation of law, or (ii) pursuant to Section 9 hereof. Further, this Warrant may not be sold, transferred, assigned, hypothecated or divided into two or more Warrants of smaller denominations. Other than by operation of law, there shall be no more than four outstanding Holders of this Warrant at any one time. 2. Condition to Exercise. It shall be a condition to exercise of this Warrant that (a) the Company obtain on or before January 1, 1998, at least $2,000,000 in new or additional debt or equity funding ("Funding") for the purpose of establishing the BIS; and (b) that upon the Company obtaining the Funding, Contractor shall enter into the Employment Agreement with the company in the form of Exhibit A hereto. In no case shall this Warrant be exercisable with respect to any Warrant Shares until such time as the Company obtains Funding. This Warrant shall be null and void if the Company does not receive the Funding on or before __________, 1998. 3. Payment of Warrant Exercise Price. Payment of the Warrant Exercise Price may be made by cash, certified check, cashiers check or wire transfer or a combination thereof, at the election of Holder. 4. Exchange and Replacement. Subject to Sections 1 and 9 hereof, this Warrant is exchangeable upon the surrender hereof by the Holder to the Company at its principal executive office for a new Warrant(s) of like tenor and date representing in the aggregate the right to purchase the number of Warrant Shares purchasable hereunder, each of such new Warrant(s) to represent the right to purchase such number of Warrant Shares (not to exceed the aggregate total number purchasable hereunder) as shall be designated by the Holder at the time of such surrender. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction, or mutilation of this Warrant, and, in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it, and upon surrender and cancellation of this Warrant, if mutilated, the Company will make and deliver a new Warrant of like tenor, in lieu of this Warrant; provided, however, that if the initial Holder shall be such Holder, an agreement of indemnity by such Holder shall be sufficient for all purposes of this Section 4. This Warrant shall be promptly canceled by the Company upon the surrender hereof in connection with any exchange or replacement. The Company shall pay all expenses (other than stock transfer or income taxes) and other charges payable in connection with the preparation, execution, and delivery of Warrant(s) pursuant to this Section 4. 5. Issuance of the Warrant Shares. (a) The Company agrees that the shares of Common Stock purchased hereby shall be and are deemed to be issued to the Holder as of the close of business on the date on which this Warrant shall have been surrendered, the payment made for such Warrant Shares as aforesaid and the subscription agreement is returned to the Company. Subject to the provisions of the next section, certificates for the Warrant Shares so purchased shall be delivered to the Holder within a reasonable time, not exceeding 15 business days after the rights represented by this Warrant shall have been so exercised, such payment surrendered and such agreement returned and, unless this Warrant has expired, a new Warrant representing the right to purchase the number of Warrant Shares, if any, with respect to which this Warrant shall not then have been exercised shall also be delivered to the Holder within such time. (b) Notwithstanding the foregoing, however, the Company shall not be required to deliver any certificate for Warrant Shares upon exercise of this Warrant except in accordance with exemptions from the applicable securities registration requirements or registrations under applicable securities laws. Nothing herein, however, shall obligate the Company to effect registrations under federal or state securities laws. If registrations are not in effect and if exemptions are not available when the Holder seeks to exercise the Warrant, the Warrant exercise period will be extended, if need be, to prevent the Warrant from expiring, until such time as either registrations become effective or exemptions are available, and the Warrant shall then remain exercisable for a period of at least 30 calendar days from the date the Company delivers to the Holder written notice of the availability of such registrations or exemptions. The Holder agrees to execute such documents and make such representations, warranties and agreements as may be required solely to comply with the exemptions relied upon by the Company, or the registrations made, for the issuance of the Warrant Shares. 6. Covenants of the Company. The Company covenants and agrees that all Warrant Shares will, upon issuance, be duly authorized and issued, fully paid, nonassessable, and free from all taxes (except stock transfer and income taxes), liens and charges with respect to the issue thereof. The Company further covenants and agrees that during the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized and reserved for the purpose of issue or transfer upon exercise of the subscription rights evidenced by this Warrant a sufficient number of shares of Common Stock to provide for the exercise of the rights represented by this Warrant. 7. Antidilution Adjustment. The provisions of this Warrant are subject to adjustment as provided in this Section 7. (a) The Warrant Exercise Price shall be adjusted from time to time such that in case the Company shall hereafter: i) pay any dividends on any class of stock of the Company payable in Common Stock; ii) subdivide its then outstanding shares of Common Stock into a greater number of shares; or iii) combine outstanding shares of Common Stock, by reclassification or otherwise; then, in any such event, the Warrant Exercise Price in effect immediately prior to such event shall (until adjusted again pursuant hereto) be adjusted immediately after such event to a price (calculated to the nearest full cent) determined by dividing (a) the number of shares of Common Stock outstanding immediately prior to such event, multiplied by the then existing Warrant Exercise Price, by (b) the total number of shares of Common Stock outstanding immediately after such event (including the maximum number of shares of Common Stock issuable in respect of any securities convertible into Common Stock), and the resulting quotient shall be the adjusted Warrant Exercise Price per share. An adjustment made pursuant to this Subsection shall become effective immediately after the record date in the case of a dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or reclassification. If, as a result of an adjustment made pursuant to this Subsection, the Holder of any Warrant thereafter surrendered for exercise shall become entitled to receive shares of two or more classes of capital stock or shares of Common Stock and other capital stock of the Company, the Company's Board of Directors (whose determination shall be conclusive) shall determine the allocation of the adjusted Warrant Exercise Price between or among shares of such classes of capital stock or shares of Common Stock and other capital stock. All calculations under this Subsection shall be made to the nearest cent or to the nearest 1/100 of a share, as the case may be. In the event that at any time as a result of an adjustment made pursuant to this Subsection, the Holder of any Warrant thereafter surrendered for exercise shall become entitled to receive any shares of the Company other than shares of Common Stock, thereafter the Warrant Exercise Price of such other shares so receivable upon exercise of any Warrant shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to Common Stock contained in this Section. (b) Upon each adjustment of the Warrant Exercise Price pursuant to Section 7(a) above, the Holder of each Warrant shall thereafter (until another such adjustment) be entitled to purchase at the adjusted Warrant Exercise Price the number of shares, calculated to the nearest full share, obtained by multiplying the number of shares specified in such Warrant (as adjusted as a result of all adjustments in the Warrant Exercise Price in effect prior to such adjustment) by the Warrant Exercise Price in effect prior to such adjustment and dividing the product so obtained by the adjusted Warrant Exercise Price. (c) In case of any capital reorganization or any reclassification of the shares of Common Stock of the Company, or any consolidation or merger to which the Company is a party other than a merger or consolidation in which the Company is the continuing corporation, or in case of any sale or conveyance to another corporation of the property of the Company as an entirety or substantially as an entirety, or in the case of any statutory exchange of securities with another corporation (including any exchange effected in connection with a merger of a third corporation into the Company), there shall be no adjustment under Subsection (a) of this Section above but the Holder of each Warrant then outstanding shall have the right thereafter to convert such Warrant into the kind and amount of shares of stock and other securities and property which it would have owned or have been entitled to receive immediately after such capital reorganization, reclassification, consolidation, merger, statutory exchange, sale, or conveyance had such Warrant been converted immediately prior to the effective date of such consolidation, merger, statutory exchange, sale, or conveyance and in any such case, if necessary, appropriate adjustment shall be made in the application of the provisions set forth in this Section with respect to the rights and interests thereafter of any Holders of the Warrant, to the end that the provisions set forth in this Section shall thereafter correspondingly be made applicable, as nearly as may reasonably be, in relation to any shares of stock and other securities and property thereafter deliverable on the exercise of the Warrant. The provisions of this Subsection shall similarly apply to successive consolidations, mergers, statutory exchanges, sales or conveyances. Prior to consummating any such consolidation, merger or sale, the successor corporation (if other than the Company) resulting from such consolidation or merger, or the corporation purchasing such assets, shall assume by written instrument executed and mailed to the registered Holder hereof at the last address of such Holder appearing on the books of the Company, the obligation to deliver to such Holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such Holder may be entitled to purchase. (d) Upon any adjustment of the Warrant Exercise Price, then, and in each such case, the Company shall give written notice thereof, by first class mail, postage prepaid, addressed to the Holder as shown on the books of the Company, which notice shall state the Warrant Exercise Price resulting from such adjustment and the increase or decrease, if any, in the number of shares of Common Stock purchasable at such price upon the exercise of this Warrant, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. 8. No Voting Rights. This Warrant shall not entitle the Holder to any voting rights or other rights as a shareholder of the Company. 9. Change in Control. (a) Notwithstanding any other provision of this Warrant to the contrary, in the event of a Change in Control (as defined below), this Warrant shall become fully exercisable and vested to the fullest extent of the original grant. (b) For the purposes hereof, a "Change in Control" shall mean the happening of any of the following events: (i) The acquisition by any individual, entity or group (collectively, a "Person") (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 30% or more of either (1) the then outstanding shares of Common Stock, or (2) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors; provided, however, that the following acquisitions shall not constitute a Change in Control: (A) any acquisition directly from the Company; (B) any acquisition by the Company; (C) any acquisition by a Person including the participant or with whom or with which the participant is affiliated; (D) any acquisition by a Person or Persons, one or more of which is a member of the Board of Directors or an officer of the Company or an affiliate of any of the foregoing on the effective date of the Change in Control, (E) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company; or (F) any acquisition by any corporation pursuant to a transaction described in clauses (1), (2) and (3) of paragraph (iii) of this Subsection; or (ii) During any period of 24 consecutive months, individuals who, as of the beginning of such period, constituted the entire Board of Directors of the Company cease for any reason to constitute at least a majority of such Board, unless the election, or nomination for election, by the Company's stockholders of each new director was approved by a vote of at least two-thirds (2/3rds) of the Continuing Directors, as hereinafter defined, in office on the date of such election or nomination for election for the new director. For purposes hereof, "Continuing Director" shall mean: (A) any member of the Company's Board of Directors at the close of business on the effective date of the Change in Control; or (B) any member of the Company's Board of Directors who succeeded any Continuing Director described in clause (A) above if such successor's election, or nomination for election, by the Company's stockholders, was approved by a vote of at least two-thirds (2/3rds) of the Continuing Directors then still in office. The term "Continuing Director" shall not, however, include any individual whose initial assumption to office occurs as a result of either an actual or threatened election contest (as such term is used in Rule 14a-11 of Regulation 14A of the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Company's Board of Directors. (iii) Approval by the stockholders of the Company of a reorganization, merger or consolidation, in each case, unless, following such reorganization, merger or consolidation, (1) more than 60% of the then outstanding securities having the right to vote in the election of directors of the corporation resulting from such reorganization, merger or consolidation is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners of the outstanding securities having the right to vote in the election of directors of the Company immediately prior to such reorganization, merger or consolidation, (2) no Person (excluding the Company, any employee benefit plan (or related trust) of the Company or such corporation resulting from such reorganization, merger or consolidation and any Person beneficially owning, immediately prior to such reorganization, merger or consolidation, directly or indirectly, 30% or more of the then outstanding securities having the right to vote in the election of Directors of the Company) beneficially owns, directly or indirectly, 30% or more of the then outstanding securities having the right to vote in the election of the directors of the corporation resulting from such reorganization, merger or consolidation, and (3) at least a majority of the members of the Board of Directors of the corporation resulting from such reorganization, merger or consolidation are Continuing Directors at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation; or (iv) Approval by the stockholders of the Company of (1) a complete liquidation or dissolution of the Company, or (2) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation, with respect to which following such sale or other disposition, (A) more than 60% of the then outstanding securities having the right to vote in the election of directors of such corporation is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners of the outstanding securities having the right to vote in the election of directors of the Company immediately prior to such sale or other disposition of such outstanding securities, (B) no Person (excluding the Company and any employee benefit plan (or related trust) of the Company or such corporation and any Person beneficially owning, immediately prior to such sale or other disposition, directly or indirectly, 30% or more of the outstanding securities having the right to vote in the election of Directors of the Company) beneficially owns, directly or indirectly, 30% or more of the then outstanding securities having the right to vote in the election of directors of such corporation, and (C) at least a majority of the members of the board of directors of such corporation are Continuing Directors at the time of the execution of the initial agreement or action of the Company's Board of Directors providing for such sale or other disposition of assets of the Company. 10. Notice of Transfer of Warrant or Resale of the Warrant Shares. (a) Subject to the sale, assignment, hypothecation, or other transfer restrictions set forth in Section 1 hereof, the Holder, by acceptance hereof, agrees to give seven days written notice to the Company before transferring this Warrant or transferring any Warrant Shares of such Holder's intention to do so, describing briefly the manner of any proposed transfer. Such notice may be provided in the form of Warrant Assignment attached hereto. Promptly upon receiving such written notice, the Company shall present copies thereof to the Company's counsel. If in the reasonable opinion of such counsel, the proposed transfer may be effected without registration or qualification (under any federal or state securities laws), the Company, as promptly as practicable, shall notify the Holder of such opinion, whereupon the Holder shall be entitled to transfer this Warrant or to dispose of Warrant Shares received upon the previous exercise of this Warrant, all in accordance with the terms of the notice delivered by the Holder to the Company; provided that an appropriate legend may be endorsed on this Warrant or the certificates for such Warrant Shares respecting restrictions upon transfer thereof necessary or advisable in the opinion of counsel and satisfactory to the Company to prevent further transfer which would be in violation of Section 5 of the Securities Act and applicable state securities laws; and provided further that the prospective transferee or purchaser shall execute such documents and make such representations, warranties and agreements as may be reasonably required solely to comply with the exemptions relied upon by the Company for the transfer or disposition of the Warrant or Warrant Shares. (b) If in the reasonable opinion of the counsel referred to in this Section 10, the proposed transfer or disposition of this Warrant or such Warrant Shares described in the written notice given pursuant to this Section 10 may not be effected without registration or qualification of this Warrant or such Warrant Shares, the Company shall promptly give written notice thereof to the Holder, and the Holder will limit its activities in respect to such as, in the reasonable opinion of such counsel to the Company, are permitted by law. 11. Fractional Shares. Fractional shares shall not be issued upon the exercise of this Warrant, but in any case where the Holder would, except for the provisions of this Section, be entitled under the terms hereof to receive a fractional share, the Company shall, upon the exercise of this Warrant for the largest number of whole shares then called for, pay a sum in cash equal to the sum of (a) the excess, if any, of the Market Price of such fractional share over the proportional part of the Warrant Exercise Price represented by such fractional share, plus (b) the proportional part of the Warrant Exercise Price represented by such fractional share. For purposes of this Section, the term "Market Price" with respect to shares of Common Stock of any class or series means the last reported sale price or, if none, the average of the last reported closing bid and ask prices on any national securities exchange or quoted on Nasdaq, or if not listed on a national securities exchange or quoted on Nasdaq, the average of the last reported closing bid and ask prices as reported by Metro Data Company, Inc. from quotations by market makers in such Common Stock on the Minneapolis-St. Paul local over-the-counter sales. 12. Representations of the Holder. (a) The Holder acknowledges and represents that Holder understands that this Warrant is illiquid and highly speculative, that Holder is able to bear the economic risk associated with this Warrant, and that Holder believes that this Warrant is a suitable investment for Holder. (b) The Holder acknowledges and represents that Holder has been given access to full and complete information regarding the Company (including the opportunity to meet with Company officers and to review such documents as Holder may have requested in writing) and has utilized such access to Holder's satisfaction for the purpose of obtaining information about the Company. (c) The Holder represents and warrants that this Warrant is being acquired for Holder's own account and without the intention of reselling or redistributing the same. The Holder further understands and agrees that the transferability of the Warrant is restricted as described herein. (d) The Holder hereby represents that he is an "accredited investor" within the meaning of Rule 501 of Regulation D under the Securities Act. IN WITNESS WHEREOF, the undersigned have caused this Warrant to be signed this ___ day of August, 1997. ATTEST: DIGITAL BIOMETRICS, INC. Its Secretary By - ------------------------------- ---------------------------------- James C. Granger Its Chief Executive Officer ------------------------------------- Dennis Wendell NOTICE OF WARRANT EXERCISE (To be signed only upon exercise of Warrant) TO: DIGITAL BIOMETRICS, INC. The undersigned hereby irrevocably elects to exercise the attached Warrant to purchase for cash, _____________ of the shares issuable upon the exercise of such Warrant, and requests that certificates for such shares (together with a new Warrant to purchase the number of shares, if any, with respect to which this Warrant is not exercised) shall be issued in the name of, and be delivered to, ------------------------------------- (Print Name) ------------------------------------- Please insert social security or other (Address) identifying number of registered holder of certificate (_____________) ------------------------------------- Date: _____________________, 199__ Signature* *The signature of the Notice of Exercise of Warrant must correspond to the name as written upon the face of the Warrant in every particular without alteration or enlargement or any change whatsoever. When signing on behalf of a corporation, partnership, trust or other entity, PLEASE indicate your position(s) and title(s) with such entity. WARRANT ASSIGNMENT (To be signed only upon transfer of Warrant) FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto ______________________________ the right represented by the foregoing warrant to purchase Common Stock of DIGITAL BIOMETRICS, INC., to which the foregoing warrant relates and appoints ________________________________ attorney to transfer said right on the books of DIGITAL BIOMETRICS, INC., with full power of substitution in the premises. The manner of the proposed transfer by the undersigned is described briefly in the space below. Dated:______________________________ ------------------------------------ (Signature) ------------------------------------ ------------------------------------ ------------------------------------ (Address) In Presence Of: - ----------------------------------- EX-10.6 9 STOCK PURCHASE WARRANT EXHIBIT 10.6 THIS CERTIFICATE AND THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAW, AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF UNTIL EITHER (I) A REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS SHALL HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR (II) THE COMPANY SHALL HAVE RECEIVED AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY AND ITS COUNSEL THAT AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OR APPLICABLE STATE SECURITIES LAWS IS AVAILABLE IN CONNECTION WITH SUCH OFFER, SALE OR TRANSFER. STOCK PURCHASE WARRANT TO PURCHASE 50,000 SHARES OF COMMON STOCK OF DIGITAL BIOMETRICS, INC. THIS CERTIFIES THAT, for good and valuable consideration, Jeffrey Whalen is entitled to subscribe for and purchase from Digital Biometrics, Inc., a Delaware corporation (the "Company"), subject to the terms hereof at any time after August 18, 1997, to and including August 17, 2002, Fifty Thousand (50,000), fully paid and nonassessable shares of the Company's Common Stock at the price of $1.875 per share (the "Warrant Exercise Price"), subject to the antidilution provisions of this Warrant. The shares which may be acquired upon exercise of this Warrant are referred to herein as the "Warrant Shares." As used herein, the term "Holder" means the initial holder, any party who acquires all or a part of this Warrant as a registered transferee of the initial holder in accordance with the terms of this Warrant, or any record holder or holders of the Warrant Shares issued upon exercise, whether in whole or in part, of the Warrant; the term "Common Stock" means and includes the Company's presently authorized voting common stock, no par value per share, and shall also include any capital stock of any class of the Company hereafter authorized which shall not be limited to a fixed sum or percentage in respect of the rights of the holders thereof to participate in dividends or in the distribution of assets upon the voluntary or involuntary liquidation, dissolution or winding up of the Company; and the term "Convertible Securities" means any stock or other securities convertible into, or exchangeable for, Common Stock. This Warrant is subject to the following provisions, terms and conditions: 1. Exercise; Transferability. (a) Subject to the provisions of Section 2, this Warrant shall be exercisable (i) to the extent of 25,000 shares of Common Stock on the first anniversary of the date of the Independent Contractor Agreement between the Company and Jeffrey Whalen and to which this Warrant is Exhibit A, and (ii) to the extent of 25,000 Shares on the Second anniversary of such date. (b) The rights represented by this Warrant may be exercised by the Holder hereof, in whole or in part (but not as to a fractional share of Common Stock), prior to the expiration of this Warrant by written notice of exercise (in the form attached hereto) delivered to the Company at the principal office of the Company and accompanied or preceded by the surrender of this Warrant and payment of the Warrant Exercise Price for such Warrant Shares. Holder shall then complete and comply with a subscription agreement in the form requested by the Company. (c) Neither this Warrant nor any Warrant Shares may be sold, assigned, hypothecated, or otherwise transferred other than (i) by will or pursuant to the operation of law, or (ii) pursuant to Section 9 hereof. Further, this Warrant may not be sold, transferred, assigned, hypothecated or divided into two or more Warrants of smaller denominations. Other than by operation of law, there shall be no more than four outstanding Holders of this Warrant at any one time. 2. Condition to Exercise. It shall be a condition to exercise of this Warrant that (a) the Company obtain on or before January 1, 1998, at least $2,000,000 in new or additional debt or equity funding ("Funding") for the purpose of establishing the BIS; and (b) that upon the Company obtaining the Funding, Contractor shall enter into the Employment Agreement with the company in the form of Exhibit A hereto. In no case shall this Warrant be exercisable with respect to any Warrant Shares until such time as the Company obtains Funding. This Warrant shall be null and void if the Company does not receive the Funding. 3. Payment of Warrant Exercise Price. Payment of the Warrant Exercise Price may be made by cash, certified check, cashiers check or wire transfer or a combination thereof, at the election of Holder. 4. Exchange and Replacement. Subject to Sections 1 and 9 hereof, this Warrant is exchangeable upon the surrender hereof by the Holder to the Company at its principal executive office for a new Warrant(s) of like tenor and date representing in the aggregate the right to purchase the number of Warrant Shares purchasable hereunder, each of such new Warrant(s) to represent the right to purchase such number of Warrant Shares (not to exceed the aggregate total number purchasable hereunder) as shall be designated by the Holder at the time of such surrender. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction, or mutilation of this Warrant, and, in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it, and upon surrender and cancellation of this Warrant, if mutilated, the Company will make and deliver a new Warrant of like tenor, in lieu of this Warrant; provided, however, that if the initial Holder shall be such Holder, an agreement of indemnity by such Holder shall be sufficient for all purposes of this Section 4. This Warrant shall be promptly canceled by the Company upon the surrender hereof in connection with any exchange or replacement. The Company shall pay all expenses (other than stock transfer or income taxes) and other charges payable in connection with the preparation, execution, and delivery of Warrant(s) pursuant to this Section 4. 5. Issuance of the Warrant Shares. (a) The Company agrees that the shares of Common Stock purchased hereby shall be and are deemed to be issued to the Holder as of the close of business on the date on which this Warrant shall have been surrendered, the payment made for such Warrant Shares as aforesaid and the subscription agreement is returned to the Company. Subject to the provisions of the next section, certificates for the Warrant Shares so purchased shall be delivered to the Holder within a reasonable time, not exceeding 15 business days after the rights represented by this Warrant shall have been so exercised, such payment surrendered and such agreement returned and, unless this Warrant has expired, a new Warrant representing the right to purchase the number of Warrant Shares, if any, with respect to which this Warrant shall not then have been exercised shall also be delivered to the Holder within such time. (b) Notwithstanding the foregoing, however, the Company shall not be required to deliver any certificate for Warrant Shares upon exercise of this Warrant except in accordance with exemptions from the applicable securities registration requirements or registrations under applicable securities laws. Nothing herein, however, shall obligate the Company to effect registrations under federal or state securities laws. If registrations are not in effect and if exemptions are not available when the Holder seeks to exercise the Warrant, the Warrant exercise period will be extended, if need be, to prevent the Warrant from expiring, until such time as either registrations become effective or exemptions are available, and the Warrant shall then remain exercisable for a period of at least 30 calendar days from the date the Company delivers to the Holder written notice of the availability of such registrations or exemptions. The Holder agrees to execute such documents and make such representations, warranties and agreements as may be required solely to comply with the exemptions relied upon by the Company, or the registrations made, for the issuance of the Warrant Shares. 6. Covenants of the Company. The Company covenants and agrees that all Warrant Shares will, upon issuance, be duly authorized and issued, fully paid, nonassessable, and free from all taxes (except stock transfer and income taxes), liens and charges with respect to the issue thereof. The Company further covenants and agrees that during the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized and reserved for the purpose of issue or transfer upon exercise of the subscription rights evidenced by this Warrant a sufficient number of shares of Common Stock to provide for the exercise of the rights represented by this Warrant. 7. Antidilution Adjustment. The provisions of this Warrant are subject to adjustment as provided in this Section 7. (a) The Warrant Exercise Price shall be adjusted from time to time such that in case the Company shall hereafter: i) pay any dividends on any class of stock of the Company payable in Common Stock; ii) subdivide its then outstanding shares of Common Stock into a greater number of shares; or iii) combine outstanding shares of Common Stock, by reclassification or otherwise; then, in any such event, the Warrant Exercise Price in effect immediately prior to such event shall (until adjusted again pursuant hereto) be adjusted immediately after such event to a price (calculated to the nearest full cent) determined by dividing (a) the number of shares of Common Stock outstanding immediately prior to such event, multiplied by the then existing Warrant Exercise Price, by (b) the total number of shares of Common Stock outstanding immediately after such event (including the maximum number of shares of Common Stock issuable in respect of any securities convertible into Common Stock), and the resulting quotient shall be the adjusted Warrant Exercise Price per share. An adjustment made pursuant to this Subsection shall become effective immediately after the record date in the case of a dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or reclassification. If, as a result of an adjustment made pursuant to this Subsection, the Holder of any Warrant thereafter surrendered for exercise shall become entitled to receive shares of two or more classes of capital stock or shares of Common Stock and other capital stock of the Company, the Company's Board of Directors (whose determination shall be conclusive) shall determine the allocation of the adjusted Warrant Exercise Price between or among shares of such classes of capital stock or shares of Common Stock and other capital stock. All calculations under this Subsection shall be made to the nearest cent or to the nearest 1/100 of a share, as the case may be. In the event that at any time as a result of an adjustment made pursuant to this Subsection, the Holder of any Warrant thereafter surrendered for exercise shall become entitled to receive any shares of the Company other than shares of Common Stock, thereafter the Warrant Exercise Price of such other shares so receivable upon exercise of any Warrant shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to Common Stock contained in this Section. (b) Upon each adjustment of the Warrant Exercise Price pursuant to Section 7(a) above, the Holder of each Warrant shall thereafter (until another such adjustment) be entitled to purchase at the adjusted Warrant Exercise Price the number of shares, calculated to the nearest full share, obtained by multiplying the number of shares specified in such Warrant (as adjusted as a result of all adjustments in the Warrant Exercise Price in effect prior to such adjustment) by the Warrant Exercise Price in effect prior to such adjustment and dividing the product so obtained by the adjusted Warrant Exercise Price. (c) In case of any capital reorganization or any reclassification of the shares of Common Stock of the Company, or any consolidation or merger to which the Company is a party other than a merger or consolidation in which the Company is the continuing corporation, or in case of any sale or conveyance to another corporation of the property of the Company as an entirety or substantially as an entirety, or in the case of any statutory exchange of securities with another corporation (including any exchange effected in connection with a merger of a third corporation into the Company), there shall be no adjustment under Subsection (a) of this Section above but the Holder of each Warrant then outstanding shall have the right thereafter to convert such Warrant into the kind and amount of shares of stock and other securities and property which it would have owned or have been entitled to receive immediately after such capital reorganization, reclassification, consolidation, merger, statutory exchange, sale, or conveyance had such Warrant been converted immediately prior to the effective date of such consolidation, merger, statutory exchange, sale, or conveyance and in any such case, if necessary, appropriate adjustment shall be made in the application of the provisions set forth in this Section with respect to the rights and interests thereafter of any Holders of the Warrant, to the end that the provisions set forth in this Section shall thereafter correspondingly be made applicable, as nearly as may reasonably be, in relation to any shares of stock and other securities and property thereafter deliverable on the exercise of the Warrant. The provisions of this Subsection shall similarly apply to successive consolidations, mergers, statutory exchanges, sales or conveyances. Prior to consummating any such consolidation, merger or sale, the successor corporation (if other than the Company) resulting from such consolidation or merger, or the corporation purchasing such assets, shall assume by written instrument executed and mailed to the registered Holder hereof at the last address of such Holder appearing on the books of the Company, the obligation to deliver to such Holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such Holder may be entitled to purchase. (d) Upon any adjustment of the Warrant Exercise Price, then, and in each such case, the Company shall give written notice thereof, by first class mail, postage prepaid, addressed to the Holder as shown on the books of the Company, which notice shall state the Warrant Exercise Price resulting from such adjustment and the increase or decrease, if any, in the number of shares of Common Stock purchasable at such price upon the exercise of this Warrant, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. 8. No Voting Rights. This Warrant shall not entitle the Holder to any voting rights or other rights as a shareholder of the Company. 9. Change in Control. (a) Notwithstanding any other provision of this Warrant to the contrary, in the event of a Change in Control (as defined below), this Warrant shall become fully exercisable and vested to the fullest extent of the original grant. (b) For the purposes hereof, a "Change in Control" shall mean the happening of any of the following events: (i) The acquisition by any individual, entity or group (collectively, a "Person") (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 30% or more of either (1) the then outstanding shares of Common Stock, or (2) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors; provided, however, that the following acquisitions shall not constitute a Change in Control: (A) any acquisition directly from the Company; (B) any acquisition by the Company; (C) any acquisition by a Person including the participant or with whom or with which the participant is affiliated; (D) any acquisition by a Person or Persons, one or more of which is a member of the Board of Directors or an officer of the Company or an affiliate of any of the foregoing on the effective date of the Change in Control, (E) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company; or (F) any acquisition by any corporation pursuant to a transaction described in clauses (1), (2) and (3) of paragraph (iii) of this Subsection; or (ii) During any period of 24 consecutive months, individuals who, as of the beginning of such period, constituted the entire Board of Directors of the Company cease for any reason to constitute at least a majority of such Board, unless the election, or nomination for election, by the Company's stockholders of each new director was approved by a vote of at least two-thirds (2/3rds) of the Continuing Directors, as hereinafter defined, in office on the date of such election or nomination for election for the new director. For purposes hereof, "Continuing Director" shall mean: (A) any member of the Company's Board of Directors at the close of business on the effective date of the Change in Control; or (B) any member of the Company's Board of Directors who succeeded any Continuing Director described in clause (A) above if such successor's election, or nomination for election, by the Company's stockholders, was approved by a vote of at least two-thirds (2/3rds) of the Continuing Directors then still in office. The term "Continuing Director" shall not, however, include any individual whose initial assumption to office occurs as a result of either an actual or threatened election contest (as such term is used in Rule 14a-11 of Regulation 14A of the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Company's Board of Directors. (iii) Approval by the stockholders of the Company of a reorganization, merger or consolidation, in each case, unless, following such reorganization, merger or consolidation, (1) more than 60% of the then outstanding securities having the right to vote in the election of directors of the corporation resulting from such reorganization, merger or consolidation is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners of the outstanding securities having the right to vote in the election of directors of the Company immediately prior to such reorganization, merger or consolidation, (2) no Person (excluding the Company, any employee benefit plan (or related trust) of the Company or such corporation resulting from such reorganization, merger or consolidation and any Person beneficially owning, immediately prior to such reorganization, merger or consolidation, directly or indirectly, 30% or more of the then outstanding securities having the right to vote in the election of Directors of the Company) beneficially owns, directly or indirectly, 30% or more of the then outstanding securities having the right to vote in the election of the directors of the corporation resulting from such reorganization, merger or consolidation, and (3) at least a majority of the members of the Board of Directors of the corporation resulting from such reorganization, merger or consolidation are Continuing Directors at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation; or (iv) Approval by the stockholders of the Company of (1) a complete liquidation or dissolution of the Company, or (2) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation, with respect to which following such sale or other disposition, (A) more than 60% of the then outstanding securities having the right to vote in the election of directors of such corporation is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners of the outstanding securities having the right to vote in the election of directors of the Company immediately prior to such sale or other disposition of such outstanding securities, (B) no Person (excluding the Company and any employee benefit plan (or related trust) of the Company or such corporation and any Person beneficially owning, immediately prior to such sale or other disposition, directly or indirectly, 30% or more of the outstanding securities having the right to vote in the election of Directors of the Company) beneficially owns, directly or indirectly, 30% or more of the then outstanding securities having the right to vote in the election of directors of such corporation, and (C) at least a majority of the members of the board of directors of such corporation are Continuing Directors at the time of the execution of the initial agreement or action of the Company's Board of Directors providing for such sale or other disposition of assets of the Company. 10. Notice of Transfer of Warrant or Resale of the Warrant Shares. (a) Subject to the sale, assignment, hypothecation, or other transfer restrictions set forth in Section 1 hereof, the Holder, by acceptance hereof, agrees to give seven days written notice to the Company before transferring this Warrant or transferring any Warrant Shares of such Holder's intention to do so, describing briefly the manner of any proposed transfer. Such notice may be provided in the form of Warrant Assignment attached hereto. Promptly upon receiving such written notice, the Company shall present copies thereof to the Company's counsel. If in the reasonable opinion of such counsel, the proposed transfer may be effected without registration or qualification (under any federal or state securities laws), the Company, as promptly as practicable, shall notify the Holder of such opinion, whereupon the Holder shall be entitled to transfer this Warrant or to dispose of Warrant Shares received upon the previous exercise of this Warrant, all in accordance with the terms of the notice delivered by the Holder to the Company; provided that an appropriate legend may be endorsed on this Warrant or the certificates for such Warrant Shares respecting restrictions upon transfer thereof necessary or advisable in the opinion of counsel and satisfactory to the Company to prevent further transfer which would be in violation of Section 5 of the Securities Act and applicable state securities laws; and provided further that the prospective transferee or purchaser shall execute such documents and make such representations, warranties and agreements as may be reasonably required solely to comply with the exemptions relied upon by the Company for the transfer or disposition of the Warrant or Warrant Shares. (b) If in the reasonable opinion of the counsel referred to in this Section 10, the proposed transfer or disposition of this Warrant or such Warrant Shares described in the written notice given pursuant to this Section 10 may not be effected without registration or qualification of this Warrant or such Warrant Shares, the Company shall promptly give written notice thereof to the Holder, and the Holder will limit its activities in respect to such as, in the reasonable opinion of such counsel to the Company, are permitted by law. 11. Fractional Shares. Fractional shares shall not be issued upon the exercise of this Warrant, but in any case where the Holder would, except for the provisions of this Section, be entitled under the terms hereof to receive a fractional share, the Company shall, upon the exercise of this Warrant for the largest number of whole shares then called for, pay a sum in cash equal to the sum of (a) the excess, if any, of the Market Price of such fractional share over the proportional part of the Warrant Exercise Price represented by such fractional share, plus (b) the proportional part of the Warrant Exercise Price represented by such fractional share. For purposes of this Section, the term "Market Price" with respect to shares of Common Stock of any class or series means the last reported sale price or, if none, the average of the last reported closing bid and ask prices on any national securities exchange or quoted on Nasdaq, or if not listed on a national securities exchange or quoted on Nasdaq, the average of the last reported closing bid and ask prices as reported by Metro Data Company, Inc. from quotations by market makers in such Common Stock on the Minneapolis-St. Paul local over-the-counter sales. 12. Representations of the Holder. (a) The Holder acknowledges and represents that Holder understands that this Warrant is illiquid and highly speculative, that Holder is able to bear the economic risk associated with this Warrant, and that Holder believes that this Warrant is a suitable investment for Holder. (b) The Holder acknowledges and represents that Holder has been given access to full and complete information regarding the Company (including the opportunity to meet with Company officers and to review such documents as Holder may have requested in writing) and has utilized such access to Holder's satisfaction for the purpose of obtaining information about the Company. (c) The Holder represents and warrants that this Warrant is being acquired for Holder's own account and without the intention of reselling or redistributing the same. The Holder further understands and agrees that the transferability of the Warrant is restricted as described herein. (d) The Holder hereby represents that he is an "accredited investor" within the meaning of Rule 501 of Regulation D under the Securities Act. IN WITNESS WHEREOF, the undersigned have caused this Warrant to be signed this ___ day of September, 1997. ATTEST: DIGITAL BIOMETRICS, INC. By - ---------------------------------- ---------------------------------- Its Secretary James C. Granger Its Chief Executive Officer ---------------------------------- NOTICE OF WARRANT EXERCISE (To be signed only upon exercise of Warrant) TO: DIGITAL BIOMETRICS, INC. The undersigned hereby irrevocably elects to exercise the attached Warrant to purchase for cash, _____________ of the shares issuable upon the exercise of such Warrant, and requests that certificates for such shares (together with a new Warrant to purchase the number of shares, if any, with respect to which this Warrant is not exercised) shall be issued in the name of, and be delivered to, ----------------------------------- (Print Name) Please insert social security or other ----------------------------------- identifying number of registered holder of (Address) certificate (_____________) ----------------------------------- Date: _____________________, 199_ Signature* *The signature of the Notice of Exercise of Warrant must correspond to the name as written upon the face of the Warrant in every particular without alteration or enlargement or any change whatsoever. When signing on behalf of a corporation, partnership, trust or other entity, PLEASE indicate your position(s) and title(s) with such entity. WARRANT ASSIGNMENT (To be signed only upon transfer of Warrant) FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto ______________________________ the right represented by the foregoing warrant to purchase Common Stock of DIGITAL BIOMETRICS, INC., to which the foregoing warrant relates and appoints ________________________________ attorney to transfer said right on the books of DIGITAL BIOMETRICS, INC., with full power of substitution in the premises. The manner of the proposed transfer by the undersigned is described briefly in the space below. Dated:______________________________ ------------------------------------ (Signature) ------------------------------------ ------------------------------------ ------------------------------------ (Address) In Presence Of: - ----------------------------------- EX-10.7 10 STOCK PURCHASE WARRANT EXHIBIT 10.7 THIS CERTIFICATE AND THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAW, AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF UNTIL EITHER (I) A REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS SHALL HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR (II) THE COMPANY SHALL HAVE RECEIVED AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY AND ITS COUNSEL THAT AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OR APPLICABLE STATE SECURITIES LAWS IS AVAILABLE IN CONNECTION WITH SUCH OFFER, SALE OR TRANSFER. STOCK PURCHASE WARRANT TO PURCHASE 50,000 SHARES OF COMMON STOCK OF DIGITAL BIOMETRICS, INC. THIS CERTIFIES THAT, for good and valuable consideration, Joseph VanLoy is entitled to subscribe for and purchase from Digital Biometrics, Inc., a Delaware corporation (the "Company"), subject to the terms hereof at any time after August 18, 1997, to and including August 17, 2002, Fifty Thousand (50,000), fully paid and nonassessable shares of the Company's Common Stock at the price of $1.875 per share (the "Warrant Exercise Price"), subject to the antidilution provisions of this Warrant. The shares which may be acquired upon exercise of this Warrant are referred to herein as the "Warrant Shares." As used herein, the term "Holder" means the initial holder, any party who acquires all or a part of this Warrant as a registered transferee of the initial holder in accordance with the terms of this Warrant, or any record holder or holders of the Warrant Shares issued upon exercise, whether in whole or in part, of the Warrant; the term "Common Stock" means and includes the Company's presently authorized voting common stock, no par value per share, and shall also include any capital stock of any class of the Company hereafter authorized which shall not be limited to a fixed sum or percentage in respect of the rights of the holders thereof to participate in dividends or in the distribution of assets upon the voluntary or involuntary liquidation, dissolution or winding up of the Company; and the term "Convertible Securities" means any stock or other securities convertible into, or exchangeable for, Common Stock. This Warrant is subject to the following provisions, terms and conditions: 1. Exercise; Transferability. (a) Subject to the provisions of Section 2, this Warrant shall be exercisable (i) to the extent of 25,000 shares of Common Stock on the first anniversary of the date of the Independent Contractor Agreement between the Company and Joseph VanLoy and to which this Warrant is Exhibit A, and (ii) to the extent of 25,000 Shares on the Second anniversary of such date. (b) The rights represented by this Warrant may be exercised by the Holder hereof, in whole or in part (but not as to a fractional share of Common Stock), prior to the expiration of this Warrant by written notice of exercise (in the form attached hereto) delivered to the Company at the principal office of the Company and accompanied or preceded by the surrender of this Warrant and payment of the Warrant Exercise Price for such Warrant Shares. Holder shall then complete and comply with a subscription agreement in the form requested by the Company. (c) Neither this Warrant nor any Warrant Shares may be sold, assigned, hypothecated, or otherwise transferred other than (i) by will or pursuant to the operation of law, or (ii) pursuant to Section 9 hereof. Further, this Warrant may not be sold, transferred, assigned, hypothecated or divided into two or more Warrants of smaller denominations. Other than by operation of law, there shall be no more than four outstanding Holders of this Warrant at any one time. 2. Condition to Exercise. It shall be a condition to exercise of this Warrant that (a) the Company obtain on or before January 1, 1998, at least $2,000,000 in new or additional debt or equity funding ("Funding") for the purpose of establishing the BIS; and (b) that upon the Company obtaining the Funding, Contractor shall enter into the Employment Agreement with the company in the form of Exhibit A hereto. In no case shall this Warrant be exercisable with respect to any Warrant Shares until such time as the Company obtains Funding. This Warrant shall be null and void if the Company does not receive the Funding. 3. Payment of Warrant Exercise Price. Payment of the Warrant Exercise Price may be made by cash, certified check, cashiers check or wire transfer or a combination thereof, at the election of Holder. 4. Exchange and Replacement. Subject to Sections 1 and 9 hereof, this Warrant is exchangeable upon the surrender hereof by the Holder to the Company at its principal executive office for a new Warrant(s) of like tenor and date representing in the aggregate the right to purchase the number of Warrant Shares purchasable hereunder, each of such new Warrant(s) to represent the right to purchase such number of Warrant Shares (not to exceed the aggregate total number purchasable hereunder) as shall be designated by the Holder at the time of such surrender. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction, or mutilation of this Warrant, and, in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it, and upon surrender and cancellation of this Warrant, if mutilated, the Company will make and deliver a new Warrant of like tenor, in lieu of this Warrant; provided, however, that if the initial Holder shall be such Holder, an agreement of indemnity by such Holder shall be sufficient for all purposes of this Section 4. This Warrant shall be promptly canceled by the Company upon the surrender hereof in connection with any exchange or replacement. The Company shall pay all expenses (other than stock transfer or income taxes) and other charges payable in connection with the preparation, execution, and delivery of Warrant(s) pursuant to this Section 4. 5. Issuance of the Warrant Shares. (a) The Company agrees that the shares of Common Stock purchased hereby shall be and are deemed to be issued to the Holder as of the close of business on the date on which this Warrant shall have been surrendered, the payment made for such Warrant Shares as aforesaid and the subscription agreement is returned to the Company. Subject to the provisions of the next section, certificates for the Warrant Shares so purchased shall be delivered to the Holder within a reasonable time, not exceeding 15 business days after the rights represented by this Warrant shall have been so exercised, such payment surrendered and such agreement returned and, unless this Warrant has expired, a new Warrant representing the right to purchase the number of Warrant Shares, if any, with respect to which this Warrant shall not then have been exercised shall also be delivered to the Holder within such time. (b) Notwithstanding the foregoing, however, the Company shall not be required to deliver any certificate for Warrant Shares upon exercise of this Warrant except in accordance with exemptions from the applicable securities registration requirements or registrations under applicable securities laws. Nothing herein, however, shall obligate the Company to effect registrations under federal or state securities laws. If registrations are not in effect and if exemptions are not available when the Holder seeks to exercise the Warrant, the Warrant exercise period will be extended, if need be, to prevent the Warrant from expiring, until such time as either registrations become effective or exemptions are available, and the Warrant shall then remain exercisable for a period of at least 30 calendar days from the date the Company delivers to the Holder written notice of the availability of such registrations or exemptions. The Holder agrees to execute such documents and make such representations, warranties and agreements as may be required solely to comply with the exemptions relied upon by the Company, or the registrations made, for the issuance of the Warrant Shares. 6. Covenants of the Company. The Company covenants and agrees that all Warrant Shares will, upon issuance, be duly authorized and issued, fully paid, nonassessable, and free from all taxes (except stock transfer and income taxes), liens and charges with respect to the issue thereof. The Company further covenants and agrees that during the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized and reserved for the purpose of issue or transfer upon exercise of the subscription rights evidenced by this Warrant a sufficient number of shares of Common Stock to provide for the exercise of the rights represented by this Warrant. 7. Antidilution Adjustment. The provisions of this Warrant are subject to adjustment as provided in this Section 7. (a) The Warrant Exercise Price shall be adjusted from time to time such that in case the Company shall hereafter: i) pay any dividends on any class of stock of the Company payable in Common Stock; ii) subdivide its then outstanding shares of Common Stock into a greater number of shares; or iii) combine outstanding shares of Common Stock, by reclassification or otherwise; then, in any such event, the Warrant Exercise Price in effect immediately prior to such event shall (until adjusted again pursuant hereto) be adjusted immediately after such event to a price (calculated to the nearest full cent) determined by dividing (a) the number of shares of Common Stock outstanding immediately prior to such event, multiplied by the then existing Warrant Exercise Price, by (b) the total number of shares of Common Stock outstanding immediately after such event (including the maximum number of shares of Common Stock issuable in respect of any securities convertible into Common Stock), and the resulting quotient shall be the adjusted Warrant Exercise Price per share. An adjustment made pursuant to this Subsection shall become effective immediately after the record date in the case of a dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or reclassification. If, as a result of an adjustment made pursuant to this Subsection, the Holder of any Warrant thereafter surrendered for exercise shall become entitled to receive shares of two or more classes of capital stock or shares of Common Stock and other capital stock of the Company, the Company's Board of Directors (whose determination shall be conclusive) shall determine the allocation of the adjusted Warrant Exercise Price between or among shares of such classes of capital stock or shares of Common Stock and other capital stock. All calculations under this Subsection shall be made to the nearest cent or to the nearest 1/100 of a share, as the case may be. In the event that at any time as a result of an adjustment made pursuant to this Subsection, the Holder of any Warrant thereafter surrendered for exercise shall become entitled to receive any shares of the Company other than shares of Common Stock, thereafter the Warrant Exercise Price of such other shares so receivable upon exercise of any Warrant shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to Common Stock contained in this Section. (b) Upon each adjustment of the Warrant Exercise Price pursuant to Section 7(a) above, the Holder of each Warrant shall thereafter (until another such adjustment) be entitled to purchase at the adjusted Warrant Exercise Price the number of shares, calculated to the nearest full share, obtained by multiplying the number of shares specified in such Warrant (as adjusted as a result of all adjustments in the Warrant Exercise Price in effect prior to such adjustment) by the Warrant Exercise Price in effect prior to such adjustment and dividing the product so obtained by the adjusted Warrant Exercise Price. (c) In case of any capital reorganization or any reclassification of the shares of Common Stock of the Company, or any consolidation or merger to which the Company is a party other than a merger or consolidation in which the Company is the continuing corporation, or in case of any sale or conveyance to another corporation of the property of the Company as an entirety or substantially as an entirety, or in the case of any statutory exchange of securities with another corporation (including any exchange effected in connection with a merger of a third corporation into the Company), there shall be no adjustment under Subsection (a) of this Section above but the Holder of each Warrant then outstanding shall have the right thereafter to convert such Warrant into the kind and amount of shares of stock and other securities and property which it would have owned or have been entitled to receive immediately after such capital reorganization, reclassification, consolidation, merger, statutory exchange, sale, or conveyance had such Warrant been converted immediately prior to the effective date of such consolidation, merger, statutory exchange, sale, or conveyance and in any such case, if necessary, appropriate adjustment shall be made in the application of the provisions set forth in this Section with respect to the rights and interests thereafter of any Holders of the Warrant, to the end that the provisions set forth in this Section shall thereafter correspondingly be made applicable, as nearly as may reasonably be, in relation to any shares of stock and other securities and property thereafter deliverable on the exercise of the Warrant. The provisions of this Subsection shall similarly apply to successive consolidations, mergers, statutory exchanges, sales or conveyances. Prior to consummating any such consolidation, merger or sale, the successor corporation (if other than the Company) resulting from such consolidation or merger, or the corporation purchasing such assets, shall assume by written instrument executed and mailed to the registered Holder hereof at the last address of such Holder appearing on the books of the Company, the obligation to deliver to such Holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such Holder may be entitled to purchase. (d) Upon any adjustment of the Warrant Exercise Price, then, and in each such case, the Company shall give written notice thereof, by first class mail, postage prepaid, addressed to the Holder as shown on the books of the Company, which notice shall state the Warrant Exercise Price resulting from such adjustment and the increase or decrease, if any, in the number of shares of Common Stock purchasable at such price upon the exercise of this Warrant, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. 8. No Voting Rights. This Warrant shall not entitle the Holder to any voting rights or other rights as a shareholder of the Company. 9. Change in Control. (a) Notwithstanding any other provision of this Warrant to the contrary, in the event of a Change in Control (as defined below), this Warrant shall become fully exercisable and vested to the fullest extent of the original grant. (b) For the purposes hereof, a "Change in Control" shall mean the happening of any of the following events: (i) The acquisition by any individual, entity or group (collectively, a "Person") (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 30% or more of either (1) the then outstanding shares of Common Stock, or (2) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors; provided, however, that the following acquisitions shall not constitute a Change in Control: (A) any acquisition directly from the Company; (B) any acquisition by the Company; (C) any acquisition by a Person including the participant or with whom or with which the participant is affiliated; (D) any acquisition by a Person or Persons, one or more of which is a member of the Board of Directors or an officer of the Company or an affiliate of any of the foregoing on the effective date of the Change in Control, (E) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company; or (F) any acquisition by any corporation pursuant to a transaction described in clauses (1), (2) and (3) of paragraph (iii) of this Subsection; or (ii) During any period of 24 consecutive months, individuals who, as of the beginning of such period, constituted the entire Board of Directors of the Company cease for any reason to constitute at least a majority of such Board, unless the election, or nomination for election, by the Company's stockholders of each new director was approved by a vote of at least two-thirds (2/3rds) of the Continuing Directors, as hereinafter defined, in office on the date of such election or nomination for election for the new director. For purposes hereof, "Continuing Director" shall mean: (A) any member of the Company's Board of Directors at the close of business on the effective date of the Change in Control; or (B) any member of the Company's Board of Directors who succeeded any Continuing Director described in clause (A) above if such successor's election, or nomination for election, by the Company's stockholders, was approved by a vote of at least two-thirds (2/3rds) of the Continuing Directors then still in office. The term "Continuing Director" shall not, however, include any individual whose initial assumption to office occurs as a result of either an actual or threatened election contest (as such term is used in Rule 14a-11 of Regulation 14A of the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Company's Board of Directors. (iii) Approval by the stockholders of the Company of a reorganization, merger or consolidation, in each case, unless, following such reorganization, merger or consolidation, (1) more than 60% of the then outstanding securities having the right to vote in the election of directors of the corporation resulting from such reorganization, merger or consolidation is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners of the outstanding securities having the right to vote in the election of directors of the Company immediately prior to such reorganization, merger or consolidation, (2) no Person (excluding the Company, any employee benefit plan (or related trust) of the Company or such corporation resulting from such reorganization, merger or consolidation and any Person beneficially owning, immediately prior to such reorganization, merger or consolidation, directly or indirectly, 30% or more of the then outstanding securities having the right to vote in the election of Directors of the Company) beneficially owns, directly or indirectly, 30% or more of the then outstanding securities having the right to vote in the election of the directors of the corporation resulting from such reorganization, merger or consolidation, and (3) at least a majority of the members of the Board of Directors of the corporation resulting from such reorganization, merger or consolidation are Continuing Directors at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation; or (iv) Approval by the stockholders of the Company of (1) a complete liquidation or dissolution of the Company, or (2) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation, with respect to which following such sale or other disposition, (A) more than 60% of the then outstanding securities having the right to vote in the election of directors of such corporation is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners of the outstanding securities having the right to vote in the election of directors of the Company immediately prior to such sale or other disposition of such outstanding securities, (B) no Person (excluding the Company and any employee benefit plan (or related trust) of the Company or such corporation and any Person beneficially owning, immediately prior to such sale or other disposition, directly or indirectly, 30% or more of the outstanding securities having the right to vote in the election of Directors of the Company) beneficially owns, directly or indirectly, 30% or more of the then outstanding securities having the right to vote in the election of directors of such corporation, and (C) at least a majority of the members of the board of directors of such corporation are Continuing Directors at the time of the execution of the initial agreement or action of the Company's Board of Directors providing for such sale or other disposition of assets of the Company. 10. Notice of Transfer of Warrant or Resale of the Warrant Shares. (a) Subject to the sale, assignment, hypothecation, or other transfer restrictions set forth in Section 1 hereof, the Holder, by acceptance hereof, agrees to give seven days written notice to the Company before transferring this Warrant or transferring any Warrant Shares of such Holder's intention to do so, describing briefly the manner of any proposed transfer. Such notice may be provided in the form of Warrant Assignment attached hereto. Promptly upon receiving such written notice, the Company shall present copies thereof to the Company's counsel. If in the reasonable opinion of such counsel, the proposed transfer may be effected without registration or qualification (under any federal or state securities laws), the Company, as promptly as practicable, shall notify the Holder of such opinion, whereupon the Holder shall be entitled to transfer this Warrant or to dispose of Warrant Shares received upon the previous exercise of this Warrant, all in accordance with the terms of the notice delivered by the Holder to the Company; provided that an appropriate legend may be endorsed on this Warrant or the certificates for such Warrant Shares respecting restrictions upon transfer thereof necessary or advisable in the opinion of counsel and satisfactory to the Company to prevent further transfer which would be in violation of Section 5 of the Securities Act and applicable state securities laws; and provided further that the prospective transferee or purchaser shall execute such documents and make such representations, warranties and agreements as may be reasonably required solely to comply with the exemptions relied upon by the Company for the transfer or disposition of the Warrant or Warrant Shares. (b) If in the reasonable opinion of the counsel referred to in this Section 10, the proposed transfer or disposition of this Warrant or such Warrant Shares described in the written notice given pursuant to this Section 10 may not be effected without registration or qualification of this Warrant or such Warrant Shares, the Company shall promptly give written notice thereof to the Holder, and the Holder will limit its activities in respect to such as, in the reasonable opinion of such counsel to the Company, are permitted by law. 11. Fractional Shares. Fractional shares shall not be issued upon the exercise of this Warrant, but in any case where the Holder would, except for the provisions of this Section, be entitled under the terms hereof to receive a fractional share, the Company shall, upon the exercise of this Warrant for the largest number of whole shares then called for, pay a sum in cash equal to the sum of (a) the excess, if any, of the Market Price of such fractional share over the proportional part of the Warrant Exercise Price represented by such fractional share, plus (b) the proportional part of the Warrant Exercise Price represented by such fractional share. For purposes of this Section, the term "Market Price" with respect to shares of Common Stock of any class or series means the last reported sale price or, if none, the average of the last reported closing bid and ask prices on any national securities exchange or quoted on Nasdaq, or if not listed on a national securities exchange or quoted on Nasdaq, the average of the last reported closing bid and ask prices as reported by Metro Data Company, Inc. from quotations by market makers in such Common Stock on the Minneapolis-St. Paul local over-the-counter sales. 12. Representations of the Holder. (a) The Holder acknowledges and represents that Holder understands that this Warrant is illiquid and highly speculative, that Holder is able to bear the economic risk associated with this Warrant, and that Holder believes that this Warrant is a suitable investment for Holder. (b) The Holder acknowledges and represents that Holder has been given access to full and complete information regarding the Company (including the opportunity to meet with Company officers and to review such documents as Holder may have requested in writing) and has utilized such access to Holder's satisfaction for the purpose of obtaining information about the Company. (c) The Holder represents and warrants that this Warrant is being acquired for Holder's own account and without the intention of reselling or redistributing the same. The Holder further understands and agrees that the transferability of the Warrant is restricted as described herein. (d) The Holder hereby represents that he is an "accredited investor" within the meaning of Rule 501 of Regulation D under the Securities Act. IN WITNESS WHEREOF, the undersigned have caused this Warrant to be signed this ___ day of September, 1997. ATTEST: DIGITAL BIOMETRICS, INC. By - ---------------------------------- ----------------------------------- Its Secretary James C. Granger Its Chief Executive Officer ----------------------------------- Joseph VanLoy NOTICE OF WARRANT EXERCISE (To be signed only upon exercise of Warrant) TO: DIGITAL BIOMETRICS, INC. The undersigned hereby irrevocably elects to exercise the attached Warrant to purchase for cash, _____________ of the shares issuable upon the exercise of such Warrant, and requests that certificates for such shares (together with a new Warrant to purchase the number of shares, if any, with respect to which this Warrant is not exercised) shall be issued in the name of, and be delivered to, ----------------------------------- (Print Name) Please insert social security or other ----------------------------------- identifying number of registered holder of (Address) certificate (_____________) ----------------------------------- Date: _____________________, 199_ Signature* *The signature of the Notice of Exercise of Warrant must correspond to the name as written upon the face of the Warrant in every particular without alteration or enlargement or any change whatsoever. When signing on behalf of a corporation, partnership, trust or other entity, PLEASE indicate your position(s) and title(s) with such entity. WARRANT ASSIGNMENT (To be signed only upon transfer of Warrant) FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto ______________________________ the right represented by the foregoing warrant to purchase Common Stock of DIGITAL BIOMETRICS, INC., to which the foregoing warrant relates and appoints ________________________________ attorney to transfer said right on the books of DIGITAL BIOMETRICS, INC., with full power of substitution in the premises. The manner of the proposed transfer by the undersigned is described briefly in the space below. Dated:______________________________ ------------------------------------ (Signature) ------------------------------------ ------------------------------------ ------------------------------------ (Address) In Presence Of: - ----------------------------------- EX-10.8 11 STOCK PURCHASE WARRANT EXHIBIT 10.8 ANDCOR WARRANT NO. 1 THIS CERTIFICATE AND THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAW, AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF UNTIL EITHER (I) A REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS SHALL HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR (II) THE CORPORATION SHALL HAVE RECEIVED AN OPINION OF COUNSEL ACCEPTABLE TO THE CORPORATION AND ITS COUNSEL THAT AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OR APPLICABLE STATE SECURITIES LAWS IS AVAILABLE IN CONNECTION WITH SUCH OFFER, SALE OR TRANSFER. STOCK PURCHASE WARRANT TO PURCHASE 10,000 SHARES OF COMMON STOCK OF DIGITAL BIOMETRICS, INC. THIS CERTIFIES THAT, for good and valuable consideration, Andcor Companies, Inc., or its registered assignees, is entitled to subscribe for and purchase from Digital Biometrics, Inc., a Delaware corporation (the "Company"), at any time after January 27, 1997, to and including January 27, 2000, Ten Thousand (10,000), fully paid and nonassessable shares of the Common Stock of the Company at the price of $2.3125 per share (the "Warrant Exercise Price"), subject to the antidilution provisions of this Warrant. The shares which may be acquired upon exercise of this Warrant are referred to herein as the "Warrant Shares." As used herein, the term "Holder" means the initial holder, any party who acquires all or a part of this Warrant as a registered transferee of the initial holder in accordance with the terms of this Warrant, or any record holder or holders of the Warrant Shares issued upon exercise, whether in whole or in part, of the Warrant; the term "Common Stock" means and includes the Company's presently authorized voting common stock, no par value per share, and shall also include any capital stock of any class of the Company hereafter authorized which shall not be limited to a fixed sum or percentage in respect of the rights of the holders thereof to participate in dividends or in the distribution of assets upon the voluntary or involuntary liquidation, dissolution, or winding up of the Company; and the term "Convertible Securities" means any stock or other securities convertible into, or exchangeable for, Common Stock. This Warrant is subject to the following provisions, terms and conditions: 1. Exercise; Transferability. (a) The rights represented by this Warrant may be exercised by the Holder hereof, in whole or in part (but not as to a fractional share of Common Stock), prior to the expiration of this Warrant by written notice of exercise (in the form attached hereto) delivered to the Company at the principal office of the Company and accompanied or preceded by the surrender of this Warrant and payment of the Warrant Exercise Price for such shares. The Holder shall then complete and comply with a subscription agreement in the form requested by the Company. (b) Neither this Warrant nor the Warrant Shares may be sold, assigned, hypothecated, or otherwise transferred other than (i) by will or pursuant to the operation of law, or (ii) pursuant to Section 8 hereof. Further, this Warrant may not be sold, transferred, assigned, hypothecated or divided into two or more Warrants of smaller denominations. Other than by operation of law, there shall be no more than 4 outstanding record holders of this Warrant at any one time. 2. Payment of Warrant Exercise Price. Payment of the Warrant Exercise Price may be made by cash, certified check, cashiers check or wire transfer or a combination thereof, at the election of Holder. 3. Exchange and Replacement. Subject to Sections 1 and 8 hereof, this Warrant is exchangeable upon the surrender hereof by the Holder to the Company at its principal executive office for a new Warrant(s) of like tenor and date representing in the aggregate the right to purchase the number of Warrant Shares purchasable hereunder, each of such new Warrant(s) to represent the right to purchase such number of Warrant Shares (not to exceed the aggregate total number purchasable hereunder) as shall be designated by the Holder at the time of such surrender. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction, or mutilation of this Warrant, and, in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it, and upon surrender and cancellation of this Warrant, if mutilated, the Company will make and deliver a new Warrant of like tenor, in lieu of this Warrant; provided, however, that if the initial Holder shall be such Holder, an agreement of indemnity by such Holder shall be sufficient for all purposes of this Section 3. This Warrant shall be promptly canceled by the Company upon the surrender hereof in connection with any exchange or replacement. The Company shall pay all expenses (other than stock transfer or income taxes) and other charges payable in connection with the preparation, execution, and delivery of Warrant(s) pursuant to this Section 3. 4. Issuance of the Warrant Shares. (a) The Company agrees that the shares of Common Stock purchased hereby shall be and are deemed to be issued to the Holder as of the close of business on the date on which this Warrant shall have been surrendered, the payment made for such Warrant Shares as aforesaid and the subscription agreement is returned to the Company. Subject to the provisions of the next section, certificates for the Warrant Shares so purchased shall be delivered to the Holder within a reasonable time, not exceeding 15 business days after the rights represented by this Warrant shall have been so exercised, such payment surrendered and such agreement returned and, unless this Warrant has expired, a new Warrant representing the right to purchase the number of Warrant Shares, if any, with respect to which this Warrant shall not then have been exercised shall also be delivered to the Holder within such time. (b) Notwithstanding the foregoing, however, the Company shall not be required to deliver any certificate for Warrant Shares upon exercise of this Warrant except in accordance with exemptions from the applicable securities registration requirements or registrations under applicable securities laws. Nothing herein, however, shall obligate the Company to effect registrations under federal or state securities laws. If registrations are not in effect and if exemptions are not available when the Holder seeks to exercise the Warrant, the Warrant exercise period will be extended, if need be, to prevent the Warrant from expiring, until such time as either registrations become effective or exemptions are available, and the Warrant shall then remain exercisable for a period of at least 30 calendar days from the date the Company delivers to the Holder written notice of the availability of such registrations or exemptions. The Holder agrees to execute such documents and make such representations, warranties, and agreements as may be required solely to comply with the exemptions relied upon by the Company, or the registrations made, for the issuance of the Warrant Shares. 5. Covenants of the Company. The Company covenants and agrees that all Warrant Shares will, upon issuance, be duly authorized and issued, fully paid, nonassessable, and free from all taxes (except stock transfer and income taxes), liens, and charges with respect to the issue thereof. The Company further covenants and agrees that during the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized and reserved for the purpose of issue or transfer upon exercise of the subscription rights evidenced by this Warrant a sufficient number of shares of Common Stock to provide for the exercise of the rights represented by this Warrant. 6. Antidilution Adjustment. The provisions of this Warrant are subject to adjustment as provided in this Section 6. (a) The Warrant Exercise Price shall be adjusted from time to time such that in case the Company shall hereafter: i) pay any dividends on any class of stock of the Company payable in Common Stock; ii) subdivide its then outstanding shares of Common Stock into a greater number of shares; or iii) combine outstanding shares of Common Stock, by reclassification or otherwise; then, in any such event, the Warrant Exercise Price in effect immediately prior to such event shall (until adjusted again pursuant hereto) be adjusted immediately after such event to a price (calculated to the nearest full cent) determined by dividing (a) the number of shares of Common Stock outstanding immediately prior to such event, multiplied by the then existing Warrant Exercise Price, by (b) the total number of shares of Common Stock outstanding immediately after such event (including the maximum number of shares of Common Stock issuable in respect of any securities convertible into Common Stock), and the resulting quotient shall be the adjusted Warrant Exercise Price per share. An adjustment made pursuant to this Subsection shall become effective immediately after the record date in the case of a dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or reclassification. If, as a result of an adjustment made pursuant to this Subsection, the Holder of any Warrant thereafter surrendered for exercise shall become entitled to receive shares of two or more classes of capital stock or shares of Common Stock and other capital stock of the Company, the Company's Board of Directors (whose determination shall be conclusive) shall determine the allocation of the adjusted Warrant Exercise Price between or among shares of such classes of capital stock or shares of Common Stock and other capital stock. All calculations under this Subsection shall be made to the nearest cent or to the nearest 1/100 of a share, as the case may be. In the event that at any time as a result of an adjustment made pursuant to this Subsection, the holder of any Warrant thereafter surrendered for exercise shall become entitled to receive any shares of the Company other than shares of Common Stock, thereafter the Warrant Exercise Price of such other shares so receivable upon exercise of any Warrant shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to Common Stock contained in this Section. (b) Upon each adjustment of the Warrant Exercise Price pursuant to Section 6(a) above, the Holder of each Warrant shall thereafter (until another such adjustment) be entitled to purchase at the adjusted Warrant Exercise Price the number of shares, calculated to the nearest full share, obtained by multiplying the number of shares specified in such Warrant (as adjusted as a result of all adjustments in the Warrant Exercise Price in effect prior to such adjustment) by the Warrant Exercise Price in effect prior to such adjustment and dividing the product so obtained by the adjusted Warrant Exercise Price. (c) In case of any capital reorganization or any reclassification of the shares of Common Stock of the Company, or any consolidation or merger to which the Company is a party other than a merger or consolidation in which the Company is the continuing corporation, or in case of any sale or conveyance to another corporation of the property of the Company as an entirety or substantially as an entirety, or in the case of any statutory exchange of securities with another corporation (including any exchange effected in connection with a merger of a third corporation into the Company), there shall be no adjustment under Subsection (a) of this Section above but the Holder of each Warrant then outstanding shall have the right thereafter to convert such Warrant into the kind and amount of shares of stock and other securities and property which it would have owned or have been entitled to receive immediately after such capital reorganization, reclassification, consolidation, merger, statutory exchange, sale, or conveyance had such Warrant been converted immediately prior to the effective date of such consolidation, merger, statutory exchange, sale, or conveyance and in any such case, if necessary, appropriate adjustment shall be made in the application of the provisions set forth in this Section with respect to the rights and interests thereafter of any Holders of the Warrant, to the end that the provisions set forth in this Section shall thereafter correspondingly be made applicable, as nearly as may reasonably be, in relation to any shares of stock and other securities and property thereafter deliverable on the exercise of the Warrant. The provisions of this Subsection shall similarly apply to successive consolidations, mergers, statutory exchanges, sales or conveyances. Prior to consummating any such consolidation, merger or sale, the successor corporation (if other than the Company) resulting from such consolidation or merger, or the corporation purchasing such assets, shall assume by written instrument executed and mailed to the registered Holder hereof at the last address of such Holder appearing on the books of the Company, the obligation to deliver to such Holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such Holder may be entitled to purchase. (d) Upon any adjustment of the Warrant Exercise Price, then, and in each such case, the Company shall give written notice thereof, by first class mail, postage prepaid, addressed to the Holder as shown on the books of the Company, which notice shall state the Warrant Exercise Price resulting from such adjustment and the increase or decrease, if any, in the number of shares of Common Stock purchasable at such price upon the exercise of this Warrant, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. 7. No Voting Rights. This Warrant shall not entitle the Holder to any voting rights or other rights as a shareholder of the Company. 8. Notice of Transfer of Warrant or Resale of the Warrant Shares. (a) Subject to the sale, assignment, hypothecation, or other transfer restrictions set forth in Section 1 hereof, the Holder, by acceptance hereof, agrees to give 7 days written notice to the Company before transferring this Warrant or transferring any Warrant Shares of such Holder's intention to do so, describing briefly the manner of any proposed transfer. Such notice may be provided in the form of Warrant Assignment attached hereto. Promptly upon receiving such written notice, the Company shall present copies thereof to the Company's counsel. If in the reasonable opinion of such counsel, the proposed transfer may be effected without registration or qualification (under any federal or state securities laws), the Company, as promptly as practicable, shall notify the Holder of such opinion, whereupon the Holder shall be entitled to transfer this Warrant or to dispose of Warrant Shares received upon the previous exercise of this Warrant, all in accordance with the terms of the notice delivered by the Holder to the Company; provided that an appropriate legend may be endorsed on this Warrant or the certificates for such Warrant Shares respecting restrictions upon transfer thereof necessary or advisable in the opinion of counsel and satisfactory to the Company to prevent further transfer which would be in violation of Section 5 of the Securities Act of 1933, as amended (the "1933 Act") and applicable state securities laws; and provided further that the prospective transferee or purchaser shall execute such documents and make such representations, warranties and agreements as may be reasonably required solely to comply with the exemptions relied upon by the Company for the transfer or disposition of the Warrant or Warrant Shares. (b) If in the reasonable opinion of the counsel referred to in this Section 8, the proposed transfer or disposition of this Warrant or such Warrant Shares described in the written notice given pursuant to this Section 8 may not be effected without registration or qualification of this Warrant or such Warrant Shares, the Company shall promptly give written notice thereof to the Holder, and the Holder will limit its activities in respect to such as, in the reasonable opinion of such counsel to the Company, are permitted by law. 9. Fractional Shares. Fractional shares shall not be issued upon the exercise of this Warrant, but in any case where the Holder would, except for the provisions of this Section, be entitled under the terms hereof to receive a fractional share, the Company shall, upon the exercise of this Warrant for the largest number of whole shares then called for, pay a sum in cash equal to the sum of (a) the excess, if any, of the Market Price of such fractional share over the proportional part of the Warrant Exercise Price represented by such fractional share, plus (b) the proportional part of the Warrant Exercise Price represented by such fractional share. For purposes of this Section, the term "Market Price" with respect to shares of Common Stock of any class or series means the last reported sale price or, if none, the average of the last reported closing bid and ask prices on any national securities exchange or quoted on the Nasdaq, or if not listed on a national securities exchange or quoted on Nasdaq, the average of the last reported closing bid and ask prices as reported by Metro Data Company, Inc. from quotations by market makers in such Common Stock on the Minneapolis-St. Paul local over-the-counter sales. 10. Representations of the Holder. (a) The Holder acknowledges and represents that Holder understands that this Warrant is illiquid and highly speculative, that Holder is able to bear the economic risk associated with this Warrant, and that Holder believes that this Warrant is a suitable investment for Holder. (b) The Holder acknowledges and represents that Holder has been given access to full and complete information regarding the Company (including the opportunity to meet with Company officers and to review such documents as Holder may have requested in writing) and has utilized such access to Holder's satisfaction for the purpose of obtaining information about the Company. (c) The Holder represents and warrants that this Warrant is being acquired for Holder's own account and without the intention of reselling or redistributing the same. Holder further understands and agrees that the transferability of the Warrant is restricted as described herein. (d) The Holder hereby represents that it is an "accredited investor" within the meaning of Rule 501 of Regulation D under the Securities Act. IN WITNESS WHEREOF, the undersigned have caused this Warrant to be signed this ____ day of ________, 1997. ATTEST: DIGITAL BIOMETRICS, INC. By - -------------------------------- ----------------------------------- Its Secretary James C. Granger Its Chief Executive Officer ANDCOR COMPANIES, INC. By ---------------------------------- Its: ---------------------------- NOTICE OF WARRANT EXERCISE (To be signed only upon exercise of Warrant) TO: DIGITAL BIOMETRICS, INC. The undersigned hereby irrevocably elects to exercise the attached Warrant to purchase for cash, _____________ of the shares issuable upon the exercise of such Warrant, and requests that certificates for such shares (together with a new Warrant to purchase the number of shares, if any, with respect to which this Warrant is not exercised) shall be issued in the name of, and be delivered to, ---------------------------------- (Print Name) Please insert social security or other ---------------------------------- identifying number of registered holder of (Address) certificate (_____________) ---------------------------------- Date: _____________________, 199_ Signature* *The signature of the Notice of Exercise of Warrant must correspond to the name as written upon the face of the Warrant in every particular without alteration or enlargement or any change whatsoever. When signing on behalf of a corporation, partnership, trust or other entity, PLEASE indicate your position(s) and title(s) with such entity. WARRANT ASSIGNMENT (To be signed only upon transfer of Warrant) FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto ______________________________ the right represented by the foregoing warrant to purchase Common Stock of DIGITAL BIOMETRICS, INC., to which the foregoing warrant relates and appoints ________________________________ attorney to transfer said right on the books of DIGITAL BIOMETRICS, INC., with full power of substitution in the premises. The manner of the proposed transfer by the undersigned is described briefly in the space below. Dated:______________________________ ------------------------------------ (Signature) ------------------------------------ ------------------------------------ ------------------------------------ (Address) In Presence Of: - ----------------------------------- EX-10.9 12 STOCK PURCHASE WARRANT EXHIBIT 10.9 ANDCOR WARRANT NO. 2 THIS CERTIFICATE AND THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAW, AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF UNTIL EITHER (I) A REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS SHALL HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR (II) THE CORPORATION SHALL HAVE RECEIVED AN OPINION OF COUNSEL ACCEPTABLE TO THE CORPORATION AND ITS COUNSEL THAT AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OR APPLICABLE STATE SECURITIES LAWS IS AVAILABLE IN CONNECTION WITH SUCH OFFER, SALE OR TRANSFER. STOCK PURCHASE WARRANT TO PURCHASE 10,000 SHARES OF COMMON STOCK OF DIGITAL BIOMETRICS, INC. THIS CERTIFIES THAT, for good and valuable consideration, Andcor Companies, Inc., or its registered assignees, is entitled to subscribe for and purchase from Digital Biometrics, Inc., a Delaware corporation (the "Company"), at any time after January 27, 1997, to and including January 27, 2000, Ten Thousand (10,000), fully paid and nonassessable shares of the Common Stock of the Company at the price of $2.3125 per share (the "Warrant Exercise Price"), subject to the antidilution provisions of this Warrant. The shares which may be acquired upon exercise of this Warrant are referred to herein as the "Warrant Shares." As used herein, the term "Holder" means the initial holder, any party who acquires all or a part of this Warrant as a registered transferee of the initial holder in accordance with the terms of this Warrant, or any record holder or holders of the Warrant Shares issued upon exercise, whether in whole or in part, of the Warrant; the term "Common Stock" means and includes the Company's presently authorized voting common stock, no par value per share, and shall also include any capital stock of any class of the Company hereafter authorized which shall not be limited to a fixed sum or percentage in respect of the rights of the holders thereof to participate in dividends or in the distribution of assets upon the voluntary or involuntary liquidation, dissolution, or winding up of the Company; and the term "Convertible Securities" means any stock or other securities convertible into, or exchangeable for, Common Stock. This Warrant is subject to the following provisions, terms and conditions: 1. Exercise; Transferability. (a) The rights represented by this Warrant may be exercised by the Holder hereof, in whole or in part (but not as to a fractional share of Common Stock), prior to the expiration of this Warrant by written notice of exercise (in the form attached hereto) delivered to the Company at the principal office of the Company and accompanied or preceded by the surrender of this Warrant and payment of the Warrant Exercise Price for such shares. The Holder shall then complete and comply with a subscription agreement in the form requested by the Company. (b) Neither this Warrant nor the Warrant Shares may be sold, assigned, hypothecated, or otherwise transferred other than (i) by will or pursuant to the operation of law, or (ii) pursuant to Section 8 hereof. Further, this Warrant may not be sold, transferred, assigned, hypothecated or divided into two or more Warrants of smaller denominations. Other than by operation of law, there shall be no more than 4 outstanding record holders of this Warrant at any one time. 2. Payment of Warrant Exercise Price. Payment of the Warrant Exercise Price may be made by cash, certified check, cashiers check or wire transfer or a combination thereof, at the election of Holder. 3. Exchange and Replacement. Subject to Sections 1 and 8 hereof, this Warrant is exchangeable upon the surrender hereof by the Holder to the Company at its principal executive office for a new Warrant(s) of like tenor and date representing in the aggregate the right to purchase the number of Warrant Shares purchasable hereunder, each of such new Warrant(s) to represent the right to purchase such number of Warrant Shares (not to exceed the aggregate total number purchasable hereunder) as shall be designated by the Holder at the time of such surrender. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction, or mutilation of this Warrant, and, in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it, and upon surrender and cancellation of this Warrant, if mutilated, the Company will make and deliver a new Warrant of like tenor, in lieu of this Warrant; provided, however, that if the initial Holder shall be such Holder, an agreement of indemnity by such Holder shall be sufficient for all purposes of this Section 3. This Warrant shall be promptly canceled by the Company upon the surrender hereof in connection with any exchange or replacement. The Company shall pay all expenses (other than stock transfer or income taxes) and other charges payable in connection with the preparation, execution, and delivery of Warrant(s) pursuant to this Section 3. 4. Issuance of the Warrant Shares. (a) The Company agrees that the shares of Common Stock purchased hereby shall be and are deemed to be issued to the Holder as of the close of business on the date on which this Warrant shall have been surrendered, the payment made for such Warrant Shares as aforesaid and the subscription agreement is returned to the Company. Subject to the provisions of the next section, certificates for the Warrant Shares so purchased shall be delivered to the Holder within a reasonable time, not exceeding 15 business days after the rights represented by this Warrant shall have been so exercised, such payment surrendered and such agreement returned and, unless this Warrant has expired, a new Warrant representing the right to purchase the number of Warrant Shares, if any, with respect to which this Warrant shall not then have been exercised shall also be delivered to the Holder within such time. (b) Notwithstanding the foregoing, however, the Company shall not be required to deliver any certificate for Warrant Shares upon exercise of this Warrant except in accordance with exemptions from the applicable securities registration requirements or registrations under applicable securities laws. Nothing herein, however, shall obligate the Company to effect registrations under federal or state securities laws. If registrations are not in effect and if exemptions are not available when the Holder seeks to exercise the Warrant, the Warrant exercise period will be extended, if need be, to prevent the Warrant from expiring, until such time as either registrations become effective or exemptions are available, and the Warrant shall then remain exercisable for a period of at least 30 calendar days from the date the Company delivers to the Holder written notice of the availability of such registrations or exemptions. The Holder agrees to execute such documents and make such representations, warranties, and agreements as may be required solely to comply with the exemptions relied upon by the Company, or the registrations made, for the issuance of the Warrant Shares. 5. Covenants of the Company. The Company covenants and agrees that all Warrant Shares will, upon issuance, be duly authorized and issued, fully paid, nonassessable, and free from all taxes (except stock transfer and income taxes), liens, and charges with respect to the issue thereof. The Company further covenants and agrees that during the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized and reserved for the purpose of issue or transfer upon exercise of the subscription rights evidenced by this Warrant a sufficient number of shares of Common Stock to provide for the exercise of the rights represented by this Warrant. 6. Antidilution Adjustment. The provisions of this Warrant are subject to adjustment as provided in this Section 6. (a) The Warrant Exercise Price shall be adjusted from time to time such that in case the Company shall hereafter: i) pay any dividends on any class of stock of the Company payable in Common Stock; ii) subdivide its then outstanding shares of Common Stock into a greater number of shares; or iii) combine outstanding shares of Common Stock, by reclassification or otherwise; then, in any such event, the Warrant Exercise Price in effect immediately prior to such event shall (until adjusted again pursuant hereto) be adjusted immediately after such event to a price (calculated to the nearest full cent) determined by dividing (a) the number of shares of Common Stock outstanding immediately prior to such event, multiplied by the then existing Warrant Exercise Price, by (b) the total number of shares of Common Stock outstanding immediately after such event (including the maximum number of shares of Common Stock issuable in respect of any securities convertible into Common Stock), and the resulting quotient shall be the adjusted Warrant Exercise Price per share. An adjustment made pursuant to this Subsection shall become effective immediately after the record date in the case of a dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or reclassification. If, as a result of an adjustment made pursuant to this Subsection, the Holder of any Warrant thereafter surrendered for exercise shall become entitled to receive shares of two or more classes of capital stock or shares of Common Stock and other capital stock of the Company, the Company's Board of Directors (whose determination shall be conclusive) shall determine the allocation of the adjusted Warrant Exercise Price between or among shares of such classes of capital stock or shares of Common Stock and other capital stock. All calculations under this Subsection shall be made to the nearest cent or to the nearest 1/100 of a share, as the case may be. In the event that at any time as a result of an adjustment made pursuant to this Subsection, the holder of any Warrant thereafter surrendered for exercise shall become entitled to receive any shares of the Company other than shares of Common Stock, thereafter the Warrant Exercise Price of such other shares so receivable upon exercise of any Warrant shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to Common Stock contained in this Section. (b) Upon each adjustment of the Warrant Exercise Price pursuant to Section 6(a) above, the Holder of each Warrant shall thereafter (until another such adjustment) be entitled to purchase at the adjusted Warrant Exercise Price the number of shares, calculated to the nearest full share, obtained by multiplying the number of shares specified in such Warrant (as adjusted as a result of all adjustments in the Warrant Exercise Price in effect prior to such adjustment) by the Warrant Exercise Price in effect prior to such adjustment and dividing the product so obtained by the adjusted Warrant Exercise Price. (c) In case of any capital reorganization or any reclassification of the shares of Common Stock of the Company, or any consolidation or merger to which the Company is a party other than a merger or consolidation in which the Company is the continuing corporation, or in case of any sale or conveyance to another corporation of the property of the Company as an entirety or substantially as an entirety, or in the case of any statutory exchange of securities with another corporation (including any exchange effected in connection with a merger of a third corporation into the Company), there shall be no adjustment under Subsection (a) of this Section above but the Holder of each Warrant then outstanding shall have the right thereafter to convert such Warrant into the kind and amount of shares of stock and other securities and property which it would have owned or have been entitled to receive immediately after such capital reorganization, reclassification, consolidation, merger, statutory exchange, sale, or conveyance had such Warrant been converted immediately prior to the effective date of such consolidation, merger, statutory exchange, sale, or conveyance and in any such case, if necessary, appropriate adjustment shall be made in the application of the provisions set forth in this Section with respect to the rights and interests thereafter of any Holders of the Warrant, to the end that the provisions set forth in this Section shall thereafter correspondingly be made applicable, as nearly as may reasonably be, in relation to any shares of stock and other securities and property thereafter deliverable on the exercise of the Warrant. The provisions of this Subsection shall similarly apply to successive consolidations, mergers, statutory exchanges, sales or conveyances. Prior to consummating any such consolidation, merger or sale, the successor corporation (if other than the Company) resulting from such consolidation or merger, or the corporation purchasing such assets, shall assume by written instrument executed and mailed to the registered Holder hereof at the last address of such Holder appearing on the books of the Company, the obligation to deliver to such Holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such Holder may be entitled to purchase. (d) Upon any adjustment of the Warrant Exercise Price, then, and in each such case, the Company shall give written notice thereof, by first class mail, postage prepaid, addressed to the Holder as shown on the books of the Company, which notice shall state the Warrant Exercise Price resulting from such adjustment and the increase or decrease, if any, in the number of shares of Common Stock purchasable at such price upon the exercise of this Warrant, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. 7. No Voting Rights. This Warrant shall not entitle the Holder to any voting rights or other rights as a shareholder of the Company. 8. Notice of Transfer of Warrant or Resale of the Warrant Shares. (a) Subject to the sale, assignment, hypothecation, or other transfer restrictions set forth in Section 1 hereof, the Holder, by acceptance hereof, agrees to give 7 days written notice to the Company before transferring this Warrant or transferring any Warrant Shares of such Holder's intention to do so, describing briefly the manner of any proposed transfer. Such notice may be provided in the form of Warrant Assignment attached hereto. Promptly upon receiving such written notice, the Company shall present copies thereof to the Company's counsel. If in the reasonable opinion of such counsel, the proposed transfer may be effected without registration or qualification (under any federal or state securities laws), the Company, as promptly as practicable, shall notify the Holder of such opinion, whereupon the Holder shall be entitled to transfer this Warrant or to dispose of Warrant Shares received upon the previous exercise of this Warrant, all in accordance with the terms of the notice delivered by the Holder to the Company; provided that an appropriate legend may be endorsed on this Warrant or the certificates for such Warrant Shares respecting restrictions upon transfer thereof necessary or advisable in the opinion of counsel and satisfactory to the Company to prevent further transfer which would be in violation of Section 5 of the Securities Act of 1933, as amended (the "1933 Act") and applicable state securities laws; and provided further that the prospective transferee or purchaser shall execute such documents and make such representations, warranties and agreements as may be reasonably required solely to comply with the exemptions relied upon by the Company for the transfer or disposition of the Warrant or Warrant Shares. (b) If in the reasonable opinion of the counsel referred to in this Section 8, the proposed transfer or disposition of this Warrant or such Warrant Shares described in the written notice given pursuant to this Section 8 may not be effected without registration or qualification of this Warrant or such Warrant Shares, the Company shall promptly give written notice thereof to the Holder, and the Holder will limit its activities in respect to such as, in the reasonable opinion of such counsel to the Company, are permitted by law. 9. Fractional Shares. Fractional shares shall not be issued upon the exercise of this Warrant, but in any case where the Holder would, except for the provisions of this Section, be entitled under the terms hereof to receive a fractional share, the Company shall, upon the exercise of this Warrant for the largest number of whole shares then called for, pay a sum in cash equal to the sum of (a) the excess, if any, of the Market Price of such fractional share over the proportional part of the Warrant Exercise Price represented by such fractional share, plus (b) the proportional part of the Warrant Exercise Price represented by such fractional share. For purposes of this Section, the term "Market Price" with respect to shares of Common Stock of any class or series means the last reported sale price or, if none, the average of the last reported closing bid and ask prices on any national securities exchange or quoted on the Nasdaq, or if not listed on a national securities exchange or quoted on Nasdaq, the average of the last reported closing bid and ask prices as reported by Metro Data Company, Inc. from quotations by market makers in such Common Stock on the Minneapolis-St. Paul local over-the-counter sales. 10. Representations of the Holder. (a) The Holder acknowledges and represents that Holder understands that this Warrant is illiquid and highly speculative, that Holder is able to bear the economic risk associated with this Warrant, and that Holder believes that this Warrant is a suitable investment for Holder. (b) The Holder acknowledges and represents that Holder has been given access to full and complete information regarding the Company (including the opportunity to meet with Company officers and to review such documents as Holder may have requested in writing) and has utilized such access to Holder's satisfaction for the purpose of obtaining information about the Company. (c) The Holder represents and warrants that this Warrant is being acquired for Holder's own account and without the intention of reselling or redistributing the same. Holder further understands and agrees that the transferability of the Warrant is restricted as described herein. (d) The Holder hereby represents that it is an "accredited investor" within the meaning of Rule 501 of Regulation D under the Securities Act. IN WITNESS WHEREOF, the undersigned have caused this Warrant to be signed this ____ day of ________, 1997. ATTEST: DIGITAL BIOMETRICS, INC. By - -------------------------------- ----------------------------------- Its Secretary James C. Granger Its Chief Executive Officer ANDCOR COMPANIES, INC. By ---------------------------------- Its: ---------------------------- NOTICE OF WARRANT EXERCISE (To be signed only upon exercise of Warrant) TO: DIGITAL BIOMETRICS, INC. The undersigned hereby irrevocably elects to exercise the attached Warrant to purchase for cash, _____________ of the shares issuable upon the exercise of such Warrant, and requests that certificates for such shares (together with a new Warrant to purchase the number of shares, if any, with respect to which this Warrant is not exercised) shall be issued in the name of, and be delivered to, ---------------------------------- (Print Name) Please insert social security or other ---------------------------------- identifying number of registered holder of (Address) certificate (_____________) ---------------------------------- Date: _____________________, 199_ Signature* *The signature of the Notice of Exercise of Warrant must correspond to the name as written upon the face of the Warrant in every particular without alteration or enlargement or any change whatsoever. When signing on behalf of a corporation, partnership, trust or other entity, PLEASE indicate your position(s) and title(s) with such entity. WARRANT ASSIGNMENT (To be signed only upon transfer of Warrant) FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto ______________________________ the right represented by the foregoing warrant to purchase Common Stock of DIGITAL BIOMETRICS, INC., to which the foregoing warrant relates and appoints ________________________________ attorney to transfer said right on the books of DIGITAL BIOMETRICS, INC., with full power of substitution in the premises. The manner of the proposed transfer by the undersigned is described briefly in the space below. Dated:______________________________ ------------------------------------ (Signature) ------------------------------------ ------------------------------------ ------------------------------------ (Address) In Presence Of: - ----------------------------------- EX-10.10 13 REGISTRATION RIGHTS AGREEMENT EXHIBIT 10.10 REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (this "Agreement") is made and entered into as of December 1, 1997, between Digital Biometrics, a Delaware corporation (the "Company"), and KA Investments LDC, a Cayman Islands corporation (the "Purchaser"). This Agreement is made pursuant to the Convertible Subordinated Debenture Purchase Agreement, dated as of the date hereof between the Company and the Purchaser (the "Purchase Agreement"). The Company and the Purchaser hereby agree as follows: 1. Definitions Capitalized terms used and not otherwise defined herein that are defined in the Purchase Agreement shall have the meanings given such terms in the Purchase Agreement. As used in this Agreement, the following terms shall have the following meanings: "Advice" shall have meaning set forth in Section 3(o). "Affiliate" means, with respect to any Person, any other Person that directly or indirectly controls or is controlled by or under common control with such Person. For the purposes of this definition, "control," when used with respect to any Person, means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise; and the terms "affiliated," "controlling" and "controlled" have meanings correlative to the foregoing. "Business Day" means any day except Saturday, Sunday and any day which shall be a legal holiday or a day on which banking institutions in the state of Minnesota generally are authorized or required by law or other government actions to close. "Commission" means the U.S. Securities and Exchange Commission. "Common Stock" means the Company's Common Stock, $.01 par value per share. "Debentures" means the Company's series of 8% Convertible Debentures in the aggregate principal amount of $2,500,000 issued to and/or to be issued to the Purchaser on the Tranche 1 Closing Date, Tranche 2 Closing Date, Tranche 3 Closing Date, Tranche 4 Closing Date and Tranche 5 Closing Date, pursuant to the Purchase Agreement. "Effectiveness Date" means the 90th day following the Tranche 1 Closing Date or, if such day is not a Business Day, the Effectiveness Date shall be the next succeeding Business Day. "Effectiveness Period" shall have the meaning set forth in Section 2(a). "Exchange Act" means the U.S. Securities Exchange Act of 1934, as amended. "Filing Date" means the 30th day following the Tranche 1 Closing Date or, if such day is not a Business Day, the succeeding Business Day. "Holder" or "Holders" means the holder or holders, as the case may be, from time to time of Registrable Securities. "Indemnified Party" shall have the meaning set forth in Section 5(c). "Indemnifying Party" shall have the meaning set forth in Section 5(c). "Losses" shall have the meaning set forth in Section 5(a). "Person" means an individual or a corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or political subdivision thereof) or other entity of any kind. "Proceeding" means an action, claim, suit, investigation or proceeding (including, without limitation, an investigation or partial proceeding, such as a deposition), whether commenced or threatened. "Prospectus" means the prospectus included in the Registration Statement (including, without limitation, a prospectus that includes any information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A promulgated under the Securities Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Registrable Securities covered by the Registration Statement, and all other amendments and supplements to the Prospectus, including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference in such Prospectus. "Purchaser Warrants" means the Common Stock purchase warrants issued to and/or to be issued to the Purchaser on the Tranche 1 Closing Date, Tranche 2 Closing Date, Tranche 3 Closing Date, Tranche 4 Closing Date and Tranche 5 Closing Date, in accordance with the terms of the Purchase Agreement. "Registrable Securities" means the shares of Common Stock issuable upon (a) conversion in full of the Debentures, (b) exercise in full of the Purchaser Warrants and the warrants issued by the Company to Miller, Johnson & Kuehn, Inc. in connection with the Purchase Agreement, and (c) payment of interest in respect of the Debentures; provided, however that in order to account for the fact that the number of shares of Common Stock that are issuable upon conversion of Debentures is determined in part upon the market price of the Common Stock at the time of conversion, Registrable Securities contemplated by clause (a) of this definition shall be deemed to include not less than 200% of the number of shares of Common Stock into which the Debentures are convertible assuming such conversion occurred on the Tranche 1 Closing Date. The initial Registration Statement shall cover at least such number of shares of Common Stock as equals the sum of (x) 200% of the number of shares of Common Stock into which the Debentures are convertible, assuming such conversion occurred on the Tranche 1 Closing Date, (y) interest thereon and (2) the number of shares of Common Stock contemplated in clause (b) of this definition with respect to warrants. The Company shall be required to file an additional Registration Statement or amend the Registration Statement, if not effective, to the extent that the actual number of shares of Common Stock into which Debentures are convertible, plus shares issuable upon payment of interest as described above and shares issuable upon exercise of the warrants included therein exceeds the number of shares of Common Stock initially registered, the Company shall have 30 days to file such additional Registration Statement after notice of the requirement thereof, which the Holder may give at such time when the number of shares of Common Stock as are issuable upon conversion of Debentures exceeds 200% of the number of shares of Common Stock into which the Debentures are convertible, assuming such conversion occurred on the Tranche 1 Closing Date. "Registration Statement" means the registration statement contemplated by Section 2(a) (covering such number of Registrable Securities and any additional Registration Statements contemplated in the definition of Registrable Securities), including (in each case) the Prospectus, amendments and supplements to such registration statement or Prospectus, including pre- and post-effective amendments, all exhibits thereto, and all material incorporated by reference or deemed to be incorporated by reference in such registration statement. "Rule 158" means Rule 158 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule. "Rule 415" means Rule 415 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule. "Securities Act" means the Securities Act of 1933, as amended. "Special Counsel" means the law firm acting as counsel to the Holders, for which the Holders will be reimbursed by the Company pursuant to Section 4. "Tranche 1 Closing Date" shall have the meaning set forth in the Purchase Agreement. "Underwritten Registration or Underwritten Offering" means a registration in connection with which securities of the Company are sold to an underwriter for reoffering to the public pursuant to an effective registration statement. 2. Shelf Registration (a) On or prior to the Filing Date the Company shall prepare and file with the Commission a "Shelf" Registration Statement covering all Registrable Securities for an offering to be made on a continuous basis pursuant to Rule 415. The Registration Statement shall be on Form S-3 promulgated under the Securities Act or, if the Company is not then permitted to register the resale of Registrable Securities on Form S-3, the Registration Statement shall be on such other appropriate form in accordance herewith. The Company shall use its best efforts to cause the Registration Statement to be declared effective under the Securities Act as promptly as possible after the filing thereof, but in any event prior to the Effectiveness Date, and to keep such Registration Statement continuously effective under the Securities Act until the date which is three years after the date that such Registration Statement is declared effective by the Commission or such earlier date when all Registrable Securities covered by such Registration Statement have been sold or may be sold without volume restrictions pursuant to Rule 144(k) promulgated under the Securities Act, as determined by the counsel to the Company pursuant to a written opinion letter to such effect, addressed to the Company's transfer agent (the "Effectiveness Period"); provided, however, that the Company shall not be deemed to have used its best efforts to keep the Registration Statement effective during the Effectiveness Period if it voluntarily takes any action that would result in the Holders not being able to sell all of the Registrable Securities covered by such Registration Statement during the Effectiveness Period, unless such action is required under applicable law or the Company has filed a post-effective amendment to the Registration Statement and the Commission has not declared it effective. (b) If the Holders of a majority of the Registrable Securities so elect, an offering of Registrable Securities pursuant to the Registration Statement may be effected in the form of an Underwritten Offering. In such event, the investment banker that will administer the offering will be selected by the Holders of a majority of the Registrable Securities to be included in such offering. In connection with any Underwritten Offering, if the managing underwriters advise the Company and the participating Holders in writing that in their opinion the amount of Registrable Securities proposed to be sold in such Underwritten Offering exceeds the amount of Registrable Securities which can be sold in such Underwritten Offering, there shall be included in such Underwritten Offering the amount of such Registrable Securities which in the opinion of such managing underwriters can be sold, and such amount shall be allocated pro rata among the Holders proposing to sell Registrable Securities in such Underwritten Offering. No Holder may participate in any Underwritten Offering hereunder unless such Holder (i) agrees to sell its Registrable Securities on the basis provided in any underwriting agreements approved by the Persons entitled hereunder to approve such arrangements and (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such arrangements. 3. Registration Procedures In connection with the Company's registration obligations hereunder, the Company shall: (a) Prepare and file with the Commission on or prior to the Filing Date, a Registration Statement (and any additional Registration Statements as may be required hereunder) in accordance with Section 2(a), and cause the Registration Statement to become effective and remain effective as provided herein; provided, however, that not less than five (5) Business Days prior to the filing of the Registration Statement or any related Prospectus or any amendment or supplement thereto (including any document that would be incorporated or deemed to be incorporated therein by reference), the Company shall (i) furnish to the Holders, their Special Counsel and any managing underwriters, copies of all such documents proposed to be filed, which documents (other than those incorporated or deemed to be incorporated by reference) will be subject to the review of such Holders, their Special Counsel and such managing underwriters, and (ii) cause its officers and directors, counsel and independent certified public accountants to respond to such inquiries as shall be necessary, in the opinion of respective counsel to such Holders and such underwriters, to conduct a reasonable investigation within the meaning of the Securities Act. The Company shall not file the Registration Statement or any such Prospectus or any amendments or supplements thereto if the Holders of a majority of the Registrable Securities, their Special Counsel, or any managing underwriters, shall reasonably object in writing within three (3) Business Days of their receipt thereof (provided, that any days that shall elapse after the date the Holders of a majority of the Registrable Securities, their Special Counsel, or any managing underwriters provides the Company such objection and the date such party approves the filing of the Registration Statement shall not count towards determining the Filing Date or the Effectiveness Date). (b) (i) Prepare and file with the Commission such amendments, including post-effective amendments, to the Registration Statement as may be necessary to keep the Registration Statement continuously effective as to all Registrable Securities for the Effectiveness Period and prepare and file with the Commission such additional Registration Statements in order to register for resale under the Securities Act all of the Registrable Securities; (ii) cause the related Prospectus to be amended or supplemented by any required Prospectus supplement, and as so supplemented or amended to be filed pursuant to Rule 424 (or any similar provisions then in force) promulgated under the Securities Act; (iii) respond as promptly as practicable to any comments received from the Commission with respect to the Registration Statement or any amendment thereto and promptly provide the Holders true and complete copies of all correspondence from and to the Commission relating to the Registration Statement; and (iv) comply with the provisions of the Securities Act and the Exchange Act with respect to the disposition of all Registrable Securities covered by the Registration Statement during the applicable period in accordance with the intended methods of disposition by the Holders thereof set forth in the Registration Statement as so amended or in such Prospectus as so supplemented. (c) Notify the Holders of Registrable Securities to be sold, their Special Counsel and any managing underwriters immediately (and, in the case of (i)(A) below, not less than five (5) days prior to such filing) and (if requested by any such Person) confirm such notice in writing no later than one (1) Business Day following the day (i)(A) when a Prospectus or any Prospectus supplement or post-effective amendment to the Registration Statement is proposed to be filed; (B) whenever the Commission notifies the Company whether there will be a "review" of such Registration Statement; (C) whenever the Company receives (or representatives of the Company receive on its behalf) any oral or written comments from the Commission in respect of a Registration Statement (copies or, in the case of oral comments, summaries of such comments shall be promptly furnished by the Company to the Holders; and (D) with respect to the Registration Statement or any post-effective amendment, when the same has become effective; (ii) of any request by the Commission or any other Federal or state governmental authority for amendments or supplements to the Registration Statement or Prospectus or for additional information; (iii) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement covering any or all of the Registrable Securities or the initiation of any Proceedings for that purpose; (iv) if at any time any of the representations and warranties of the Company contained in any agreement (including any underwriting agreement) contemplated hereby ceases to be true and correct in all material respects; (v) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction, or the initiation or threatening of any Proceeding for such purpose; and (vi) of the occurrence of any event that makes any statement made in the Registration Statement or Prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires any revisions to the Registration Statement, Prospectus or other documents so that, in the case of the Registration Statement or the Prospectus, as the case may be, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. In addition, the Company shall furnish the Holders with copies of all intended written responses to the comments contemplated in clause (i)(C) of this Section 3(c) no later than one Business Day in advance of the filing of such responses with the Commission so that the Holder shall have the opportunity to comment thereon. (d) Use its best efforts to avoid the issuance of, or, if issued, obtain the withdrawal of (i) any order suspending the effectiveness of the Registration Statement or (ii) any suspension of the qualification (or exemption from qualification) of any of the Registrable Securities for sale in any jurisdiction, at the earliest practicable moment. (e) If requested by any managing underwriter or the Holders of a majority in interest of the Registrable Securities to be sold in connection with an Underwritten Offering, (i) promptly incorporate in a Prospectus supplement or post-effective amendment to the Registration Statement such information as such managing underwriters and such Holders reasonably agree should be included therein and (ii) make all required filings of such Prospectus supplement or such post-effective amendment as soon as practicable after the Company has received notification of the matters to be incorporated in such Prospectus supplement or post-effective amendment; provided, however, that the Company shall not be required to take any action pursuant to this Section 3(e) that would, in the opinion of counsel for the Company, violate applicable law or be materially detrimental to the business prospects of the Company. (f) Furnish to each Holder, their Special Counsel and any managing underwriters, without charge, at least one conformed copy of each Registration Statement and each amendment thereto, including financial statements and schedules, all documents incorporated or deemed to be incorporated therein by reference, and all exhibits to the extent requested by such Person (including those previously furnished or incorporated by reference) promptly after the filing of such documents with the Commission. (g) Promptly deliver to each Holder, their Special Counsel, and any underwriters, without charge, as many copies of the Prospectus or Prospectuses (including each form of prospectus) and each amendment or supplement thereto as such Persons may reasonably request; and the Company hereby consents to the use of such Prospectus and each amendment or supplement thereto by each of the selling Holders and any underwriters in connection with the offering and sale of the Registrable Securities covered by such Prospectus and any amendment or supplement thereto. (h) Prior to any public offering of Registrable Securities, use its best efforts to register or qualify or cooperate with the selling Holders, any underwriters and their Special Counsel in connection with the registration or qualification (or exemption from such registration or qualification) of such Registrable Securities for offer and sale under the securities or Blue Sky laws of such jurisdictions as any Holder or underwriter reasonably requests in writing, to keep each such registration or qualification (or exemption therefrom) effective during the Effectiveness Period and to do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the Registrable Securities covered by a Registration Statement; provided, however, that the Company shall not be required to qualify generally to do business in any jurisdiction where it is not then so qualified or to take any action that would subject it to general service of process in any such jurisdiction where it is not then so subject or subject the Company to any material tax in any such jurisdiction where it is not then so subject. (i) Cooperate with the Holders and any managing underwriters to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold pursuant to a Registration Statement, which certificates shall be free of all restrictive legends, and to enable such Registrable Securities to be in such denominations and registered in such names as any such managing underwriters or Holders may request at least two Business Days prior to any sale of Registrable Securities. (j) Upon the occurrence of any event contemplated by Section 3(c)(vi), as promptly as practicable, prepare a supplement or amendment, including a post-effective amendment, to the Registration Statement or a supplement to the related Prospectus or any document incorporated or deemed to be incorporated therein by reference, and file any other required document so that, as thereafter delivered, neither the Registration Statement nor such Prospectus will contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (k) Use its best efforts to cause all Registrable Securities relating to such Registration Statement to be listed on the Nasdaq National Market and any other securities exchange, quotation system, market or over-the-counter bulletin board, if any, on which similar securities issued by the Company are then listed as and when required pursuant to the Purchase Agreement. (l) In the case of an Underwritten Offering, enter into such agreements (including an underwriting agreement in form, scope and substance as is customary in Underwritten Offerings) and take all such other actions in connection therewith (including those reasonably requested by any managing underwriters and the Holders of a majority of the Registrable Securities being sold) in order to expedite or facilitate the disposition of such Registrable Securities, and whether or not an underwriting agreement is entered into, (i) make such representations and warranties to such Holders and such underwriters as are customarily made by issuers to underwriters in underwritten public offerings, and confirm the same if and when requested; (ii) obtain and deliver copies thereof to each Holder and the managing underwriters, if any, of opinions of counsel to the Company and updates thereof addressed to each selling Holder and each such underwriter, in form, scope and substance reasonably satisfactory to any such managing underwriters and Special Counsel to the selling Holders covering the matters customarily covered in opinions requested in Underwritten Offerings and such other matters as may be reasonably requested by such Special Counsel or such underwriters; (iii) immediately prior to the effectiveness of the Registration Statement or at the time of delivery of any Registrable Securities sold pursuant thereto (at the option of the underwriters), obtain and deliver copies to the Holders and the managing underwriters, if any, of "cold comfort" letters and updates thereof from the independent certified public accountants of the Company (and, if necessary, any other independent certified public accountants of any subsidiary of the Company or of any business acquired by the Company for which financial statements and financial data is, or is required to be, included in the Registration Statement), addressed to each Person and in such form and substance as are customary in connection with Underwritten Offerings; (iv) if an underwriting agreement is entered into, the same shall contain indemnification provisions and procedures no less favorable to the selling Holders and the underwriters, if any, than those set forth in Section 6 (or such other provisions and procedures acceptable to the managing underwriters, if any, and holders of a majority of Registrable Securities participating in such Underwritten Offering; and (v) deliver such documents and certificates as may be reasonably requested by the Holders of a majority of the Registrable Securities being sold, their Special Counsel and any managing underwriters to evidence the continued validity of the representations and warranties made pursuant to clause 3(l)(i) above and to evidence compliance with any customary conditions contained in the underwriting agreement or other agreement entered into by the Company. (m) Make available for inspection by the selling Holders, any representative of such Holders, any underwriter participating in any disposition of Registrable Securities, and any attorney or accountant retained by such selling Holders or underwriters, at the offices where normally kept, during reasonable business hours, all financial and other records, pertinent corporate documents and properties of the Company and its subsidiaries, and cause the officers, directors, agents and employees of the Company and its subsidiaries to supply all information in each case requested by any such Holder, representative, underwriter, attorney or accountant in connection with the Registration Statement; provided, however, that any information that is determined in good faith by the Company in writing to be of a confidential nature at the time of delivery of such information shall be kept confidential by such Persons, unless (i) disclosure of such information is required by court or administrative order or is necessary to respond to inquiries of regulatory authorities; (ii) disclosure of such information, in the opinion of counsel to such Person, is required by law; (iii) such information becomes generally available to the public other than as a result of a disclosure or failure to safeguard by such Person; or (iv) such information becomes available to such Person from a source other than the Company and such source is not known by such Person to be bound by a confidentiality agreement with the Company. (n) Comply with all applicable rules and regulations of the Commission and make generally available to its security holders earning statements satisfying the provisions of Section 11(a) of the Securities Act and Rule 158 not later than 45 days after the end of any 12-month period (or 90 days after the end of any 12-month period if such period is a fiscal year) (i) commencing at the end of any fiscal quarter in which Registrable Securities are sold to underwriters in a firm commitment or best efforts Underwritten Offering and (ii) if not sold to underwriters in such an offering, commencing on the first day of the first fiscal quarter of the Company after the effective date of the Registration Statement, which statement shall cover said 12-month period, or end shorter periods as is consistent with the requirements of Rule 158. (o) The Company may require each selling Holder to furnish to the Company such information regarding the distribution of such Registrable Securities as is required by law to be disclosed in the Registration Statement or any amendment thereto or any supplement to the Prospectus and the Company may exclude from such registration the Registrable Securities of any such Holder who unreasonably fails to furnish such information within a reasonable time after receiving such request. If the Registration Statement refers to any Holder by name or otherwise as the holder of any securities of the Company, then such Holder shall have the right to require (i) the inclusion therein of language, in form and substance reasonably satisfactory to such Holder, to the effect that the ownership by such Holder of such securities in not to be construed as a recommendation by such Holder of the investment quality of the Company's securities covered thereby that such Holder will assist in meeting any future financial requirements of the Company , or (ii) if such reference to such Holder by name or otherwise is not required by the Securities Act or any similar Federal statute then in force, the deletion of the reference to such Holder in any amendment or supplement to the Registration Statement filed or prepared subsequent to the time that such reference ceases to be required. Each Holder agrees by its acquisition of such Registrable Securities that (i) it will not offer or sell any Registrable Securities under the Registration Statement until it has received copies of the Prospectus as then amended or supplemented as contemplated in Section 3(g) and notice from the Company that such Registration Statement and any post-effective amendments thereto have become effective as contemplated by Section 3(c) and (ii) it will comply with the prospectus delivery requirements of the Securities Act as applicable to it in connection with sales of Registrable Securities pursuant to the Registration Statement. Each Holder agrees by its acquisition of such Registrable Securities that, upon receipt of a notice from the Company of the occurrence of any event of the kind described in Section 3(c)(ii), 3(c)(iii), 3(c)(iv), 3(c)(v) or 3(c)(vi), such Holder will forthwith discontinue disposition of such Registrable Securities until such Holder's receipt of the copies of the supplemented Prospectus and/or amended Registration Statement contemplated by Section 3(j), or until it is advised in writing (the "Advice") by the Company that the use of the applicable Prospectus may be resumed, and, in either case, has received copies of any additional or supplemental filings that are incorporated or deemed to be incorporated by reference in such Prospectus or Registration Statement. 4. Registration Expenses (a) All fees and expenses incident to the performance of or compliance with this Agreement by the Company shall, except as and to the extent specified in Section 4(b), be borne by the Company whether or not pursuant to an Underwritten Offering and whether or not the Registration Statement is filed or becomes effective and whether or not any Registrable Securities are sold pursuant to the Registration Statement. The fees and expenses referred to in the foregoing sentence shall include, without limitation, (i) all registration and filing fees (including, without limitation, fees and expenses (A) with respect to filings required to be made with The Nasdaq Stock Market, Inc. and the Nasdaq National Market and each other securities exchange or market or over-the-counter bulletin board on which Registrable Securities are required hereunder to be listed and (B) in compliance with state securities or Blue Sky laws (including, without limitation, fees and disbursements of counsel for the underwriters or Holders in connection with Blue Sky qualifications of the Registrable Securities and determination of the eligibility of the Registrable Securities for investment under the laws of such jurisdictions as the Holders of a majority of Registrable Securities may reasonably designate)), (ii) printing expenses (including, without limitation, expenses of printing certificates for Registrable Securities and of printing prospectuses if the printing of prospectuses is requested by the managing underwriters, if any, or by the holders of a majority of the Registrable Securities included in the Registration Statement), (iii) messenger, telephone and delivery expenses, (iv) fees and disbursements of counsel for the Company and Special Counsel for the Holders, in the case of the Special Counsel, to a maximum amount of $7,500, (v) Securities Act liability insurance, if the Company so desires such insurance, and (vi) fees and expenses of all other Persons retained by the Company in connection with the consummation of the transactions contemplated by this Agreement. In addition, the Company shall be responsible for all of its internal expenses incurred in connection with the consummation of the transactions contemplated by this Agreement (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit, the fees and expenses incurred in connection with the listing of the Registrable Securities on any securities exchange as required hereunder. (b) If the Holders require an Underwritten Offering pursuant to the terms hereof, the Holders shall be responsible for all costs, fees and expenses in connection therewith, except for the fees and disbursements of the Company's legal counsel and accountants, which shall be borne by the Company. 5. Indemnification (a) Indemnification by the Company. The Company shall, notwithstanding any termination of this Agreement and without limitation as to time, indemnify and hold harmless each Holder, the officers, directors, agents (including any underwriters retained by such Holder in connection with the offer and sale of Registrable Securities), brokers (including brokers who offer and sell Registrable Securities as principal as a result of a pledge or any failure to perform under a margin call of Common Stock), investment advisors and employees of each of them, each Person who controls any such Holder (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) and the officers, directors, agents and employees of each such controlling Person, to the fullest extent permitted by applicable law, from and against any and all losses, claims, damages, liabilities, costs (including, without limitation, costs of preparation and attorneys' fees) and expenses (collectively, "Losses"), as incurred, arising out of or relating to any untrue or alleged untrue statement of a material fact contained in the Registration Statement, any Prospectus or any form of prospectus or in any amendment or supplement thereto or in any preliminary prospectus, or arising out of or relating to any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein (in the case of any Prospectus or form of prospectus or supplement thereto, in light of the circumstances under which they were made) not misleading, except to the extent, but only to the extent, that such untrue statements or omissions are based solely upon information regarding such Holder or any such underwriter furnished in writing to the Company by or on behalf of such Holder expressly for use therein, which information was reasonably relied on by the Company for use therein or to the extent that such information relates to such Holder or such Holder's proposed method of distribution of Registrable Securities and was reviewed and expressly approved in writing by such Holder expressly for use in the Registration Statement, such Prospectus or such form of Prospectus or in any amendment or supplement thereto. The Company shall notify the Holders promptly of the institution, threat or assertion of any Proceeding of which the Company is aware in connection with the transactions contemplated by this Agreement. (b) Indemnification by Holders. Each Holder shall, severally and not jointly, indemnify and hold harmless the Company, its directors, officers, agents and employees, each Person who controls the Company (within the meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the directors, officers, agents or employees of such controlling Persons, to the fullest extent permitted by applicable law, from and against all Losses (as determined by a court of competent jurisdiction in a final judgment not subject to appeal or review) arising solely out of or based solely upon any untrue statement of a material fact or alleged untrue statement of material fact contained in the Registration Statement, any Prospectus, or any form of prospectus, or arising solely out of or based solely upon any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading to the extent, but only to the extent, that such untrue statement or omission is contained in any information so furnished in writing by such Holder to the Company specifically for inclusion in the Registration Statement or such Prospectus and that such information was reasonably relied upon by the Company for use in the Registration Statement, such Prospectus or such form of prospectus or to the extent that such information relates to such Holder or such Holder's proposed method of distribution of Registrable Securities and was reviewed and expressly approved in writing by such Holder expressly for use in the Registration Statement, such Prospectus or such form of Prospectus. In no event shall the liability of any selling Holder hereunder be greater in amount than the dollar amount of the net proceeds received by such Holder upon the sale of the Registrable Securities giving rise to such indemnification obligation. (c) Conduct of Indemnification Proceedings. If any Proceeding shall be brought or asserted against any Person entitled to indemnity hereunder (an "Indemnified Party"), such Indemnified Party promptly shall notify the Person from whom indemnity is sought (the "Indemnifying Party") in writing, and the Indemnifying Party shall assume the defense thereof, including the employment of independent outside counsel reasonably satisfactory to the Indemnified Party and the payment of all fees and expenses incurred in connection with defense thereof; provided, that the failure of any Indemnified Party to give such notice shall not relieve the Indemnifying Party of its obligations or liabilities pursuant to this Agreement, except (and only) to the extent that it shall be finally determined by a court of competent jurisdiction (which determination is not subject to appeal or further review) that such failure shall have proximately and materially adversely prejudiced the Indemnifying Party. An Indemnified Party shall have the right to employ separate counsel in any such Proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party or Parties unless: (1) the Indemnifying Party has agreed in writing to pay such fees and expenses; or (2) the Indemnifying Party shall have failed promptly to assume the defense of such Proceeding and to employ counsel reasonably satisfactory to such Indemnified Party in any such Proceeding; or (3) the named parties to any such Proceeding (including any impleaded parties) include both such Indemnified Party and the Indemnifying Party, and such Indemnified Party shall have been advised by counsel that a conflict of interest is likely to exist if the same counsel were to represent such Indemnified Party and the Indemnifying Party (in which case, if such Indemnified Party notifies the Indemnifying Party in writing that it elects to employ separate counsel at the expense of the Indemnifying Party, the Indemnifying Party shall not have the right to assume the defense thereof and such counsel shall be at the expense of the Indemnifying Party), provided, however that the Indemnifying Party shall only be responsible for the fees and expenses of one law firm as separate counsel for the Indemnified Party. The Indemnifying Party shall not be liable for any settlement of any such Proceeding effected without its written consent, which consent shall not be unreasonably withheld. No Indemnifying Party shall, without the prior written consent of the Indemnified Party, effect any settlement of any pending Proceeding in respect of which any Indemnified Party is a party, unless such settlement includes an unconditional release of such Indemnified Party from all liability on claims that are the subject matter of such Proceeding. All fees and expenses of the Indemnified Party (including reasonable fees and expenses to the extent incurred in connection with investigating or preparing to defend such Proceeding in a manner not inconsistent with this Section) shall be paid to the Indemnified Party, as incurred, within 10 Business Days of written notice thereof to the Indemnifying Party (regardless of whether it is ultimately determined that an Indemnified Party is not entitled to indemnification hereunder; provided, that the Indemnifying Party may require such Indemnified Party to undertake to reimburse all such fees and expenses to the extent it is finally judicially determined that such Indemnified Party is not entitled to indemnification hereunder). (d) Contribution. If a claim for indemnification under Section 5(a) or 5(b) is unavailable to an Indemnified Party because of a failure or refusal of a governmental authority to enforce such indemnification in accordance with its terms (by reason of public policy or otherwise), then each Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such Losses, in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party and Indemnified Party in connection with the actions, statements or omissions that resulted in such Losses as well as any other relevant equitable considerations. The relative fault of such Indemnifying Party and Indemnified Party shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission of a material fact, has been taken or made by, or relates to information supplied by, such Indemnifying Party or Indemnified Party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such action, statement or omission. The amount paid or payable by a party as a result of any Losses shall be deemed to include, subject to the limitations set forth in Section 5(c), any reasonable attorneys' or other reasonable fees or expenses incurred by such party in connection with any Proceeding to the extent such party would have been indemnified for such fees or expenses if the indemnification provided for in this Section was available to such party in accordance with its terms. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 5(d) were determined by pro rata allocation or by any other method of allocation that does not take into account the equitable considerations referred to in the immediately preceding paragraph. Notwithstanding the provisions of this Section 5(d), the Purchaser shall not be required to contribute, in the aggregate, any amount in excess of the amount by which the proceeds actually received by the Purchaser from the sale of the Registrable Securities subject to the Proceeding exceeds the amount of any damages that the Purchaser has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. The indemnity and contribution agreements contained in this Section are in addition to any liability that the Indemnifying Parties may have to the Indemnified Parties. 6. Miscellaneous (a) Remedies. In the event of a breach by the Company or by a Holder, of any of their obligations under this Agreement, each Holder or the Company, as the case may be, in addition to being entitled to exercise all rights granted by law and under this Agreement, including recovery of damages, will be entitled to specific performance of its rights under this Agreement. The Company and each Holder agree that monetary damages would not provide adequate compensation for any losses incurred by reason of a breach by it of any of the provisions of this Agreement and hereby further agrees that, in the event of any action for specific performance in respect of such breach, it shall waive the defense that a remedy at law would be adequate. (b) No Inconsistent Agreements. Except as set forth on Schedule 6(b) annexed hereto, neither the Company nor any of its subsidiaries has, as of the date hereof, nor shall the Company or any of its subsidiaries, on or after the date of this Agreement, enter into any agreement with respect to its securities that is inconsistent with the rights granted to the Holders in this Agreement or otherwise conflicts with the provisions hereof. Except as set forth on Schedule 6(b) annexed hereto, neither the Company nor any of its subsidiaries has previously entered into any agreement granting any registration rights with respect to any of its securities to any Person. Without limiting the generality of the foregoing, without the written consent of the Holders of a majority of the then outstanding Registrable Securities, the Company shall not grant to any Person the right to request the Company to register any securities of the Company under the Securities Act unless the rights so granted are subject in all respects to the prior rights in full of the Holders set forth herein, and are not otherwise in conflict or inconsistent with the provisions of this Agreement. (c) No Piggyback on Registrations. Except as set forth on Schedule 6(c) annexed hereto, neither the Company nor any of its security holders (other than the Holders in such capacity pursuant hereto) may include securities of the Company in the Registration Statement other than the Registrable Securities, and the Company shall not enter into any agreement providing any such right to any of its securityholders. (d) Piggy-Back Registrations. If at any time during the Effectiveness Period there is not an effective Registration Statement and the Company shall determine to prepare and file with the Commission a registration statement relating to an offering for its own account or the account of others under the Securities Act of any of its equity securities, other than on Form S-4 or Form S-8 (each as promulgated under the Securities Act) or their then equivalents relating to equity securities to be issued solely in connection with any acquisition of any entity or business or equity securities issuable in connection with stock option or other employee benefit plans, then the Company shall send to each holder of Registrable Securities written notice of such determination and, if within twenty (20) days after receipt of such notice, any such holder shall so request in writing, the Company shall include in such registration statement all or any part of the Registrable Securities such holder requests to be registered, except that if, in connection with any Underwritten Offering for the account of the Company the managing underwriter(s) thereof shall impose a limitation on the number of shares of Common Stock which may be included in the registration statement because, in such underwriter(s)' judgment, such limitation is necessary to effect an orderly public distribution of securities covered thereby, then the Company shall be obligated to include in such registration statement only such limited portion of the Registrable Securities for to which such holder has requested inclusion hereunder. Any exclusion of Registrable Securities shall be made pro rata among the holders seeking to include Registrable Securities, in proportion to the number of Registrable Securities sought to be included by such holders; provided, however, that the Company shall not exclude any Registrable Securities unless the Company has first excluded all outstanding securities the holders of which are not entitled by right to inclusion of securities in such registration statement; and provided, further, however, that, after giving effect to the immediately preceding proviso, any exclusion of Registrable Securities shall be made pro rata with holders of other securities having the right to include such securities in such registration statement. No right to registration of Registrable Securities under this Section shall be construed to limit any registration otherwise required hereunder. (e) Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the same shall be in writing and signed by the Company and the Holders of at least a majority of the then outstanding Registrable Securities; provided, however, that, for the purposes of this sentence, Registrable Securities that are owned, directly or indirectly, by the Company, or an Affiliate of the Company are not deemed outstanding. Notwithstanding the foregoing, a waiver or consent to depart from the provisions hereof with respect to a matter that relates exclusively to the rights of Holders and that does not directly or indirectly affect the rights of other Holders may be given by Holders of at least a majority of the Registrable Securities to which such waiver or consent relates; provided, however, that the provisions of this sentence may not be amended, modified, or supplemented except in accordance with the provisions of the immediately preceding sentence. (f) Notices. Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section prior to 4:30 p.m. (Minnetonka time) on a Business Day, (ii) the Business Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in the Purchase Agreement later than 4:30 p.m. (Minnetonka time) on any date and earlier than 11:59 p.m. (Minnetonka time) on such date, (iii) the Business Day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. The address for such notices and communications shall be as follows: If to the Company: Digital Biometrics, Inc. 5600 Rowland Road Minnetonka, MN 55343 Facsimile No.: (612) 932-7181 Attn: Chief Financial Officer With copies to: Briggs and Morgan P.A. 2400 IDS Center Minneapolis, MN 55402 Facsimile No.: (612) 334-8650 Attn: Avron L. Gordon If to the Purchaser: KA Investments LDC c/o Tarmachan Management 1712 Hopkins Crossroads Minnetonka, MN 55305 Facsimile No.: (612) 542-4244 Attn: Irvin Kessler With copies to: Robinson Silverman Pearce Aronsohn& Berman LLP 1290 Avenue of the Americas New York, NY 10104 Facsimile No.: (212) 541-4630 Attn: Kenneth L. Henderson Scott D. Zucker If to any other Person who is then the registered Holder: To the address of such Holder as it appears in the stock transfer books of the Company or such other address as may be designated in writing hereafter, in the same manner, by such Person. (g) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of each of the parties and shall inure to the benefit of each Holder. The Company may not assign its rights or obligations hereunder without the prior written consent of each Holder. The Purchaser may assign its rights hereunder in the manner and to the Persons as permitted under the Purchase Agreement. (h) Assignment of Registration Rights. The rights of the Purchaser hereunder, including the right to have the Company register for resale Registrable Securities in accordance with the terms of this Agreement, shall be automatically assignable by the Purchaser to any assignee or transferee of all or a portion of the Debentures, the Purchaser Warrants and other warrants referenced in the definition of Registrable Securities or the Registrable Securities without the consent of the Company if: (i) the Purchaser agrees in writing with the transferee or assignee to assign such rights, and a copy of such agreement is furnished to the Company within a reasonable time after such assignment, (ii) the Company is, within a reasonable time after such transfer or assignment, furnished with written notice of (a) the name and address of such transferee or assignee, and (b) the securities with respect to such registration rights are being transferred or assigned, (iii) at or before the time the Company receives the written notice contemplated by clause (ii) of this Section, the transferee or assignee agrees in writing with the Company to be bound by all of the provisions of this Agreement, and (iv) such transfer shall have been made in accordance with the applicable requirements of the Purchase Agreement. The rights to assignment shall apply to the Purchaser's (and to subsequent) successors and assigns. (i) Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and, all of which taken together shall constitute one and the same Agreement. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid binding obligation of the party executing (or on whose behalf such signature is executed) the same with the same force and effect as if such facsimile signature were the original thereof. (j) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without regard to principles of conflicts of law. (k) Cumulative Remedies. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. (l) Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their reasonable efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable. (m) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first written above. DIGITAL BIOMETRICS, INC. By: -------------------------------- Name: Title: KA INVESTMENTS LDC By: -------------------------------- Name: Title: EX-10.11 14 AGREEMENT AND GENERAL RELEASE EXHIBIT 10.11 AGREEMENT AND GENERAL RELEASE This Agreement and General Release ("Agreement") is entered into this _____ day of October, 1997, by and between Glenn M. Fishbine ("Executive") and Digital Biometrics, Inc. (the "Company"). WHEREAS, Executive has resigned from his position as Senior Vice President, Technology, of the Company effective October 7, 1997; WHEREAS, Executive has agreed to continue his employment with the Company through November 30, 1997 on a transitional basis as provided below, and to resign from his employment with the Company as of such date; and WHEREAS, Executive and the Company desire fully and finally to settle all matters or issues that exist or that might arise out of Executive's employment with Company, and the termination thereof, NOW, THEREFORE, in consideration of the mutual promises contained herein, Executive and Company agree as follows: 1. Resignation and Separation. Executive resigns from his position as Senior Vice President, Technology, effective at the close of business on October 7, 1997 (the "Resignation Date"). From and after his Resignation Date, Executive will continue to render services to the Company on a full-time basis though and including October 31, 1997. Executive shall remain in the employment of the Company through and including November 30, 1997, after which Executive resigns from employment with the Company. During the period from the date hereof through November 30, 1997 (the "Transition Period"), Executive shall continue to be compensated at his current base salary payable at regular payroll intervals. Executive's employment with Company shall terminate at 6:00 o'clock P.M. on the last day of the Transition Period (the "Termination Date"). In the event Executive has any accrued vacation remaining unused as of the Termination Date, he shall receive payment in lieu of such vacation. The Company agrees to pay to Allen and Associates, for Executive's benefit, a one-time placement service fee of $500.00. 2. Services Between October 31, 1997 and November 30, 1997. During the period following October 31, 1997 and through November 30, 1997, Executive shall have no specific employment responsibilities or authority and will not, unless requested by the Company, report for employment. Executive agrees, however, to be available to consult in person or by telephone during such period, on any matters within the scope of Executive's employment duties to date. Such consultation shall be for no additional compensation, other than as set forth in Section 1 of this Agreement. 3. Severance Pay Following Transition Period. Following the Transition Period, and provided he complies with the terms of this Agreement, Executive will be entitled to receive from the Company a lump sum severance payment equal to Executive's current base compensation for two months (the "Severance Payment"). Except as hereinafter provided, no further severance payments will be made to Executive. 4. Resolution of Indebtedness. As additional consideration to Executive in connection with this Agreement, the Company agrees to forgive and discharge Executive's indebtedness to the Company evidenced by Executive's two Promissory Notes to the Company dated January 14, 1994, and one note dated December 31, 1996 (the "Notes") on condition of his compliance with the terms of this Agreement. In addition, and also conditioned upon Executive's compliance with the terms of this Agreement, the Company agrees to forgive the amount of $8,446.73 paid by the Company on behalf of Executive for taxes payable by Executive on account of his purchase of restricted stock which vested on September 1, 1996. It is further agreed that 40,000 shares of the Company's Common Stock owned by Executive currently being held by the Company as security for the Notes evidenced by the Company's Common Stock certificates numbered DBI 3162 through DBI 3170, for 5,000 shares each, shall be released to Executive upon the expiration of the twenty-one (21) day period specified in Section 7(d) of this Agreement. The Company agrees to provide to Executive accounting support relating to this Agreement or the payments made hereunder, in the event Executive becomes involved in a federal or state income tax audit, but such support shall not include tax or legal advice. 5. Return of Property. Executive shall return to the Company all files, records, documents, drawings, plans or other property of the Company in Executive's possession within ten (10) days following the Termination Date. 6. Transfer of Property to Executive. On or before the Termination Date, the Company agrees to transfer to Executive, for no additional consideration from Executive: (a) the laptop computer currently utilized by Executive, and (b) a manufactured example or demonstration unit of the NPC Tenprinter currently in the Company's inventory. The latter product is transferred to Executive on an as-is basis without support or warranty of any kind. The laptop computer to be transferred to Executive is similarly transferred to Executive on an as-is basis, but with any related and applicable manufacturer's warranty. 7. Release of Claims by Executive. (a) As an essential inducement to Company to enter into this Agreement, and as consideration for the foregoing promises of Company, Executive, for himself, his successors and assigns, hereby fully and completely releases and waives any and all claims, complaints, rights, causes of action or demands of whatever kind, whether known or unknown or suspected to exist by Executive, which he has or may have against Company and its predecessors, successors, assigns, subsidiaries and affiliates, and all officers, directors, shareholders, employees and agents of those persons and companies ("the Released Parties") arising out of or relating to any actions, conduct, promises, statements, decisions, or events occurring on or prior to the date of execution of this Agreement, including, without limitation, Executive's employment with Company, the resignations documented by this Agreement and the ultimate termination of his employment with Company contemplated by this Agreement. Executive further agrees that he will not, except as otherwise expressly permitted by applicable federal law or regulation, institute or authorize any other party, either governmental or otherwise, to institute any administrative or legal proceedings against the Released Parties as a result of any claims of any kind or character which Executive might have arising from or related to his employment with Company, the resignations documented by this Agreement, the ultimate termination of his employment with Company contemplated by this Agreement, and the nature and substance of the disputes giving rise to this Agreement. Notwithstanding the foregoing, Executive's release shall not affect his rights under the terms of this Agreement itself or his rights to indemnity under applicable law, the Company's By-Laws or any indemnification agreement previously entered into by Executive and the Company. (b) Executive's release of claims is intended to extend to and include claims of any kind arising under the Minnesota Human Rights Act, Minn. Stat. Section 363.01 et seq., Title VII of the Civil Rights Act of 1964, as amended, 42 U.S.C. ss.2000e et seq., the Age Discrimination in Employment Act, 29 U.S.C. Section 621 et seq., the Americans with Disabilities Act, 42 U.S.C. ss.ss. 12101 et seq., Minnesota Statutes ss.ss. 181.932 et seq. and any other federal, state or local statute, Executive Order, or ordinance prohibiting employment discrimination or otherwise relating to employment, as well as any claim for breach of contract, wrongful discharge, breach of any express or implied promise, misrepresentation, fraud, retaliation, violation of public policy, infliction of emotional distress, defamation, promissory estoppel, equitable estoppel, invasion of privacy or any other theory, whether legal or equitable. (c) Executive has been informed of his right to revoke this Agreement insofar as it extends to potential claims under the Age Discrimination in Employment Act by informing Company of his intent to revoke this Agreement within seven (7) calendar days following the date appearing with his signature below (the "Execution Date"). Executive has likewise been informed of his right to rescind this release insofar as it relates to potential claims under the Minnesota Human Rights Act by written notice to Company within fifteen (15) calendar days following the Execution Date. Executive has further been informed and understands that any such rescission must be in writing and hand-delivered to Company or, if sent by mail, postmarked within the applicable time period, sent by certified mail, return receipt requested, and addressed as follows: James C. Granger Chief Executive Officer Digital Biometrics, Inc. 5600 Rowland Road Minnetonka, MN 55343-4315 Executive and Company agree that if Executive exercises his right of rescission, this Agreement shall be entirely null and void and Executive shall return to Company any consideration paid or benefit received pursuant to this Agreement contemporaneously with the delivery of rescission notice. (d) Executive has also been informed that the terms of this Agreement will be open for acceptance and execution by him for a period of twenty-one (21) days during which time he may consider whether to accept this Agreement. Executive and Company agree that any changes to this Agreement made prior to signing do not restart the 21-day period. 8. Release of Claims by Company. Company hereby releases and discharges Executive and his heirs, successors and assigns, from any and all claims, demands, actions, liabilities, damages or rights of any kind, whether known or unknown or suspected to exist by Company, which it ever had or may now have against Executive and his heirs, successors and assigns, or any of them, arising out of or resulting from any matter, fact or thing occurring prior to the Execution Date, including, without limitation, claims pursuant to any federal, state, or local laws, regulations or other requirements or common law, provided, however, the Company's release does not apply to or affect in any way claims which might be made by reason of any intentional misconduct or criminal act by Executive. 9. Nondisclosure. Executive agrees that he will keep the financial terms of this Agreement confidential and will not disclose such information to any person other than his legal counsel, immediate family members, financial or tax consultants for professional use only in connection with Executive's affairs, or as may be required in response to a proper inquiry by a government agency, subpoena or court order or as may be required by applicable law. Company agrees that it will keep the financial terms of this Agreement confidential and will not disclose such information to any persons other than: (1) to Company's officers, directors or employees in the ordinary course and scope of their duties, Company's legal counsel, accountants, auditors, or tax advisors, or (2) as may be required to satisfy all disclosure and reporting requirements applicable to it as a publicly traded company, or (3) in response to a proper inquiry by a government agency, subpoena or court order or as may be required by applicable law. In the event either party believes disclosure may be required in response to a court order, subpoena or valid inquiry by a government agency, it will give the other party sufficient notice prior to disclosure to permit such other party to seek, at its own expense, to prevent or limit such disclosure. 10. Non-Disparagement. The Company's officers, directors and managing agents will not make remarks disparaging of Executive. Executive will not make any remarks disparaging of the Company, its officers, directors or managing agents. 11. Indemnity; Cooperation in Legal Actions. (a) Company shall indemnify Executive against any claims arising from or related to his employment with Company to the full extent allowed by Company By-laws, any written indemnification agreement and Delaware law, in connection with any action or proceeding against Executive, whether pending or threatened, for which Company is obliged to indemnify Executive. Executive shall cooperate fully, and without additional compensation, with Company in the defense of any action, suit, claim or proceeding commenced or threatened against him and in the defense of any action, suit, claim or proceeding commenced or threatened against Company in conjunction with any action, suit, claim or proceeding commenced or threatened against him. (b) In addition to the foregoing, following the Termination Date, Executive agrees to provide assistance to Company (hereinafter "Litigation Support") as may be reasonably requested by Company or its attorneys in connection with the litigation of any action, suit, claim or proceeding involving Company, whether now pending or to be commenced, which arises out of or its related to any matters in which Executive was involved or for which he was responsible during the term of his employment with Company. The Company will compensate Executive for his Litigation Support services at the rate of $65.00 per hour and reimburse Executive for all reasonable travel and lodging expenses. 12. Consulting Services Following Termination Date. From and after the Termination Date, Executive agrees to consult with the Company as needed and requested by the Company from time to time. Such consultation shall relate to the general areas of work in which Executive was engaged while an employee of the Company. Unless another rate is agreed to by Executive and the Company, the fees of Executive for such consulting services shall be $1,001 per eight hour day. In performing such services for the Company, Executive shall be in the relationship of an independent contractor, and not as an employee of the Company. Executive acknowledges and agrees, however, that his services as a consultant and all works created by him shall be considered work made for hire, and all works, patents, improvements, inventions, discoveries, processes, formulae, techniques, know-how, trade secrets and intellectual property rights, whether or not patentable or registerable under copyright or similar statutes (collectively, "Inventions"), directly connected with the business of the Company, its subsidiaries or affiliates, authored or made by him while consulting with the Company are the property of the Company. Executive shall assign to the Company all of Executive's rights, title and interest in and to any Inventions which have arisen pursuant to his consulting with the Company, or may arise during the term of his employment with the Company, and relate to the business of the Company. Executive agrees to execute and deliver to the Company, promptly upon request, any documents which the Company may request to evidence the Company's ownership of and exclusive rights in such Inventions. 13. Abandoned Patents. The Company acknowledges that Executive may have been named as an inventor on one or more patent applications or patents issued to, or owned by, the Company. The parties hereto acknowledge that renewal or maintenance fees or annuities may periodically be due and payable on pending applications and issued patents on which Executive is named as an inventor. Should the Company determine that it no longer wishes to pay a renewal or maintenance fee or annuity for a particular pending patent application or issued patent, then the Company will use reasonable efforts to notify Executive of its decision prior to the due date of any such fee. Executive may elect to pay such fee or annuity at his option. Upon presentation to the Company of proof of payment of such fee by Executive, the Company will assign all of its rights, title and interest in and to the pending patent application or issued patent to Executive. It is understood and agreed that the assignment of any particular pending patent application or issued patent by the Company to Executive shall not be deemed to be an assignment of any counterpart patent application or issued patent. Notwithstanding the foregoing, the failure of the Company to notify Executive of its intent not to pay any renewal or maintenance fee on any pending patent application or issued patent shall not give rise to any claim or cause of action against the Company in favor of Executive or any other person for damages, and Executive waives and covenants not to sue the Company for any alleged damages or losses resulting from the failure of the Company to give such notice to Executive. The rights contained in this Section shall not be assignable by Executive. 14. Non-Competition. (a) Executive agrees, in consideration of this Agreement and specifically the payments, covenants and benefits provided by the Company in Sections 3, 4, 6 and 8, that during the period from the date hereof through October 31, 1998, he will not, except for the services provided herein, directly or indirectly: (i) enter into or engage in any business of the type and character of the Covered Business (as hereinafter defined), whether as an employee, consultant, partner or joint venturer, or as an officer, director, adviser or shareholder of a corporation; (ii) call upon any of the persons, firms, associations, corporations, organizations or governmental units listed in Exhibit A for the purpose of soliciting, selling, diverting, taking away, transferring or interfering with, the Company's business or prospective business with such persons; or (iii) solicit, attempt to solicit or otherwise cause any employee of the Company to terminate employment with the Company. For the purposes of this Agreement, the term "Covered Business" of the Company refers to the development, manufacture, marketing or sale of: (a) Tenprinter fingerprint identification systems for identifying, verifying, printing or electronically processing or transmitting fingerprints, or (b) hand-held or portable fingerprint and mug shot systems, including, but not limited to, systems competitive with the Squid, SR, VR or FR products or series of products of the Company. Executive recognizes and acknowledges that the Company's proprietary technology is valuable on a world-wide basis and not limited to a particular geographic area and therefore that the restrictions imposed by this Section 14 must be without geographic limitation. 15. Confidentiality. Executive hereby confirms, recognizes and acknowledges that the business of the Company is highly competitive and that during the course of his employment with the Company he has had access to all of its proprietary and confidential information. Executive therefore covenants and agrees, and in consideration of this Agreement covenants, agrees and reaffirms, that for a period of five (5) years from and after the date of this Agreement, he will treat and protect as confidential and proprietary information of the Company all business plans, technology plans, patent applications, patent rights, inventions, intellectual property rights, techniques, know-how, trade secrets, software, technical designs, trademarks, trademark rights, trade names, trade name rights, copyrights, customer and supplier lists and other business and financial information of the Company which is not otherwise publicly known or available. Executive agrees that he will not disclose or publish the foregoing without the written consent of the Company. 16. Improvements, Patents, Etc. Executive hereby acknowledges and agrees that all patents, improvements, inventions, discoveries, processes, formulae, techniques, know-how, trade secrets and other intellectual property rights, whether or not patentable or registerable under copyright or similar statutes (collectively, "Inventions"), directly connected with the business of the Company, its subsidiaries or affiliates, authored or made by him while in the employment of the Company are the property of the Company; and the Company at its discretion and expense may undertake promotion and exploitation of such Inventions acquired by it. Executive may, at his sole discretion, upon the Company's request, assist the Company in such promotion and exploitation under the terms set forth in Section 12. Executive shall assign to the Company all of Executive's rights, title and interest in and to any Inventions which have arisen pursuant to his employment by the Company, or may arise during the term of his employment with the Company, and relate to the business of the Company. Executive agrees to execute and deliver to the Company, promptly upon its request, any documents which the Company may reasonably request to evidence the Company's ownership of and exclusive rights in such Inventions. Pursuant to Minnesota Statutes ss. 181.78, Executive is notified that Executive's obligations to assign or offer to assign any of the Executive's rights in an Invention to the Company shall not apply to an Invention for which no equipment, supplies, facility or trade secret information of the Company was used and which was developed entirely on the Executive's own time, and (i) which does not relate (a) directly to the business of the Company or (b) to the Company's actual or demonstrably anticipated research or development, or (ii) which does not result from any work performed by the Executive for the Company. Any provision which purports to apply to such an Invention is to that extent against the public policy of this state and is to that extent void and unenforceable. 17. Communications. There shall be no communication by Executive or the Company to third parties concerning Executive's separation until such time as an appropriate press release (to be approved by Executive and by James C. Granger on behalf of the Company's Board of Directors) shall have been issued. Thereafter, internal communication to the Company's employees shall be made in terms to be mutually agreed upon. Any communications to third parties thereafter shall be in terms consistent with the substance of the press release described above. 18. Entire Agreement, Amendment. Executive acknowledges that the only consideration for signing this Agreement are the terms stated herein and that no other promises or agreements of any kind have been made to him by any person or entity whatsoever to cause him to sign this Agreement. The payments provided for in this Agreement are to be made for, among other things, full satisfaction of any claim, right or entitlement of Executive to compensation or benefits of any kind, whether in the form of salary, fringe benefits, bonus, stock options, commissions, incentive pay, severance pay, damages or otherwise. The foregoing shall not be deemed to release, or operate as a waiver of, any rights which Executive may have to exercise any stock option previously granted, in accordance with its terms. All payments from the Company to Executive shall be subject to all legally required reporting, withholding, deductions and taxation. Executive acknowledges that the Company has made no representation whatsoever to him regarding the appropriate tax treatment of any payments or benefits to be received by him under the terms of this Agreement. Executive and Company agree that this Agreement is the entire agreement between them, that it supersedes any prior agreements regarding any of the subject matter of the Agreement, and that any such prior agreements are now null and void. This Agreement can be modified only in a writing which must be signed by both Executive and Company to be effective. 19. No Admission of Wrongdoing. Executive and Company agree that this Agreement is not an admission by Company, the Released Parties, or Executive of any wrongdoing or of any acts that might be considered a violation of federal, state or local law, with respect to the employment of Executive or otherwise, and that this Agreement should not be interpreted as such. 20. Headings. Paragraph headings used herein are for convenience only and are not part of this Agreement and shall not be used in construing it. 21. Assignment, Successors. Executive may not assign any of his rights or delegate any of his duties or obligations under this Agreement. The rights and obligations of Company under this Agreement shall inure to the benefit of and be binding upon the successors (by purchase, merger, consolidation or otherwise) and assigns of Company. 22. Governing Law. The validity, interpretation, construction, performance, enforcement and remedies of or relating to this Agreement, and the rights and obligations of the parties hereunder, shall be governed by the laws of the State of Minnesota. 23. Opportunity to Review. Executive represents that he has read this Agreement and agrees to all of the conditions and obligations set forth. Further, Executive represents that he has had adequate time to consider the terms of this Agreement, that he is voluntarily and without duress entering into this Agreement with full understanding of its meaning, and that he has consulted extensively with legal counsel of his choosing for advice in connection with this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement by their signatures below. ------------------------------ Glenn M. Fishbine DIGITAL BIOMETRICS, INC. By --------------------------- James C. Granger Its Chief Executive Officer EX-10.12 15 CREDIT AND SECURITY AGREEMENT EXHIBIT 10.12 CREDIT AND SECURITY AGREEMENT Dated as of September 30, 1996 DIGITAL BIOMETRICS, INC., a Delaware corporation (the "Borrower"), and NORWEST BUSINESS CREDIT, INC., a Minnesota corporation (the "Lender"), hereby agree as follows: ARTICLE I Definitions Section 1.1 Definitions. For all purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires: "Accounts" means the aggregate unpaid obligations of customers and other account debtors to the Borrower arising out of the sale or lease of goods or rendition of services by the Borrower on an open account or deferred payment basis, whether now existing or hereafter arising. "Advance" has the meaning given in Section "Base Rate" means the rate of interest publicly announced from time to time by Norwest Bank Minnesota, National Association as its "base rate" or, if such bank ceases to announce a rate so designated, any similar successor rate designated by the Lender. "Book Net Worth" means the aggregate of the common stockholders' equity of the Borrower, determined in accordance with GAAP. "Borrowing Base" means, at any time and subject to change from time to time in the Lender's sole discretion, the lesser of: (a) the Maximum Line; or (b) (i) 75% of Eligible Accounts minus (ii) $100,000. "Collateral" has the meaning given in Section . "Default Rate" means an annual rate equal to 3% over the Floating Rate, which rate shall change when and as the Floating Rate changes. "Eligible Accounts" means only all unpaid Accounts arising from the sale of product from Borrower's "TENPRINTER S-Series" product line, net of any credits, which have been designated by the Borrower as Eligible Accounts, except the following shall not in any event be deemed Eligible Accounts: (1) That portion of Accounts over 120 days past installation date, as evidenced by a certificate of installation signed by the account debtor; (2) That portion of Accounts that are disputed or subject to a claim of offset or a contra account; (3) That portion of Accounts not yet earned by the final delivery of goods or rendition of services, as applicable, by the Borrower to the customer, as evidenced by a certificate of installation signed by the account debtor; (4) Accounts owed by an account debtor located outside the United States which are not backed by a bank letter of credit assigned to the Lender, in the possession of the Lender and acceptable to the Lender in all respects, in its sole discretion; (5) Accounts owed by an account debtor that is the subject of bankruptcy proceedings or has gone out of business; (6) Accounts owed by a shareholder, subsidiary, affiliate, officer or employee of the Borrower; (7) Accounts not subject to a duly perfected security interest in favor of the Lender or which are subject to any lien, security interest or claim in favor of any Person other than the Lender; (8) That portion of Accounts that have been restructured, extended, amended or modified; (9) That portion of Accounts that constitutes finance charges, service charges or sales or excise taxes; (10) Accounts owed by an account debtor, regardless of whether otherwise eligible, if 10% or more of the total amount due under Accounts from such debtor is ineligible under clauses (1), (2) or (8) above; and (11) Accounts, or portions thereof, otherwise deemed ineligible by the Lender in its sole discretion. "Event of Default" has the meaning specified in Section . "Floating Rate" means an annual rate equal to the sum of the Base Rate plus one and one-half percent (1.5%) which annual rate shall change when and as the Base Rate changes. "GAAP" means generally accepted accounting principles, applied on a basis consistent with the accounting practices applied in the financial statements described in Section . "Inventory" means all of the Borrower's inventory, as such term is defined in the UCC, whether now owned or hereafter acquired. "Loan Documents" means this Agreement, the Note, the Disclosure and the Security Documents and any and all other related instruments, agreements and documents. "Maximum Line" means $3,500,000. "Note" means the Borrower's revolving promissory note, payable to the order of the Lender in form and content satisfactory to Lender. "Obligations" means each and every debt, liability and obligation of every type and description which the Borrower may now or at any time hereafter owe to the Lender, including all indebtedness arising under this Agreement, the Note or any other loan or credit agreement or guaranty between the Borrower and the Lender, whether now in effect or hereafter entered into. "Person" means any individual, corporation, partnership, joint venture, limited liability company, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Security Documents" means the Collateral Account Agreement and the Lockbox Agreement, each of even date herewith and by and among the Borrower, the Lender and Norwest Bank Minnesota, National Association and any and all other documents, instruments and agreements executed by the Borrower or any other party and delivered to the Lender as amended form time to time, as security for the Obligations. "Security Interest" has the meaning given in Section . "Termination Date" has the meaning given in Section 2.4. "UCC" means the Uniform Commercial Code as in effect from time to time in the State of Minnesota. ARTICLE II Amount and Terms of the Credit Facility Section 2.1 Revolving Advances. The Lender may, in its sole discretion, make advances to the Borrower from time to time from the date this Agreement is signed and delivered to the Termination Date, on the terms and subject to the conditions herein set forth (each an "Advance"). The Lender shall not consider any request for an Advance if, after giving effect to such requested Advance, the sum of the outstanding and unpaid Advances would exceed the Borrowing Base. The Borrower's obligation to pay the Advances shall be evidenced by the Note. Within the limits set forth in this Section , the Borrower may request Advances, prepay, and request additional Advances. The Borrower shall make each request for an Advance to the Lender before 11:00 a.m. (Minneapolis time) of the day of the requested Advance. Requests may be made in writing or by telephone. Section 2.2 Interest; Default Interest. (a) Revolving Note. Except as set forth in Sections and the outstanding principal balance of the Advances shall bear interest at the Floating Rate. All interest shall be payable monthly in arrears on the first day of the month and on demand. (b) Minimum Interest Charge. Notwithstanding the interest payable pursuant to Section , the Borrower shall pay to the Lender interest of not less than $70,000 per year during the term of this Agreement, and on each anniversary of this Agreement the Borrower shall pay any deficiency between such minimum interest charge and the amount of interest otherwise calculated under Sections and . (c) Default Interest Rate. From the first day of any month during which Borrower is not in compliance with its agreements set forth in this Agreement or the Note, in the Lender's discretion and without waiving any of its other rights and remedies, the outstanding principal balance of the Advances shall bear interest at the Default Rate. Section 2.3 Closing and Extension Fees. The Borrower agrees to pay the Lender a closing fee of $26,250, to be paid on February 1, 1997. If this Agreement is extended pursuant to Section 2.4 hereof, Borrower agrees to pay the Lender an extension fee of one-half percent (.50 %) of the Maximum Line, to be paid upon the effective date of any such extension. Section 2.4 Discretionary Nature of Credit Facility; Termination Date, Extension. THE LENDER MAY AT ANY TIME AND FOR ANY REASON REFUSE TO MAKE AN ADVANCE AND/OR DEMAND PAYMENT OF THE ADVANCES AND TERMINATE THIS AGREEMENT WHETHER BORROWER IS OR IS NOT IN COMPLIANCE WITH THIS AGREEMENT. The Lender need not show that an adverse change has occurred in the Borrower's condition, financial or otherwise, in order to refuse to make any requested Advance or to demand payment of the Advances. This Agreement shall remain in effect until the one year anniversary of the date of this Agreement and such anniversary date is herein referred to as a "Termination Date". This Agreement may be extended for additional one year periods only upon written agreement by the Lender and the Borrower, in which case the one year anniversary of any such extension shall also be referred to as a "Termination Date". Section 2.5 Termination by Borrower. (a) Termination by Borrower. The Borrower may terminate this Agreement at any time subject to payment and performance of all Obligations, may obtain any release or termination of the Security Interest to which the Borrower is otherwise entitled by law by (1) giving at least 30 days' prior written notice to the Lender of the Borrower's intention to terminate this Agreement, and (2) paying the Lender a prepayment fee in accordance with Section 2.5(b) if the Borrower terminates this Agreement effective as of any date other than the Termination Date. (b) Prepayment Fee. If the Borrower desires to terminate this Agreement as of a Termination Date but without giving at least 30 days' prior written notice thereof, or any date other than a Termination Date after giving at least 30 days' prior written notice to the Lender of the Borrower's intention to do so, it shall pay to the Lender a prepayment fee of the greater of (i) 1% of the Maximum Line or (ii) the Minimum Interest Charge pursuant to subsection 2.2(b) above, prorated for the number of days remaining until a Termination Date; provided that (i) no prepayment penalty shall be due if the Borrower shall prepay the Obligations solely from cash flow generated from the Borrower's operations and (ii) no prepayment fee shall be required if the prepayment is wholly made pursuant to a refinancing with another "Norwest@ affiliated entity. Section 2.6 Mandatory Prepayment. Without notice or demand, if the outstanding principal balance of the Advances shall at any time exceed the Borrowing Base, the Borrower shall immediately prepay the Advances to the extent necessary to eliminate such excess. Section 2.7 Advances Without Request. The Borrower hereby authorizes the Lender, in its discretion, at any time or from time to time without the Borrower's request, to make Advances to pay accrued interest, fees, uncollected items that have been applied to the Obligations, and other Obligations due and payable from time to time. ARTICLE III Security Interest Section 3.1 Grant of Security Interest. The Borrower hereby grants to the Lender a security interest (the "Security Interest") in the following collateral (the "Collateral"), as security for the payment and performance of the Obligations: INVENTORY: All inventory of Borrower, as such term is defined in the UCC, whether now owned or hereafter acquired, whether consisting of whole goods, spare parts or components, supplies or materials, whether acquired, held or furnished for sale, for lease or under service contracts or for manufacture or processing, and wherever located; and ACCOUNTS AND OTHER RIGHTS TO PAYMENT: Each and every right of Borrower to the payment of money, whether such right to payment now exists or hereafter arises, whether such right to payment arises out of a sale, lease or other disposition of goods or other property, out of a rendering of services, out of a loan, out of the overpayment of taxes or other liabilities, or otherwise arises under any contract or agreement, whether such right to payment is created, generated or earned by Borrower or by some other person who subsequently transfers such person's interest to Borrower, whether such right to payment is or is not already earned by performance, and howsoever such right to payment may be evidenced, together with all other rights and interests (including all liens and security interests) which Borrower may at any time have by law or agreement against any account debtor or other obligor obligated to make any such payment or against any property of such account debtor or other obligor; all including all of Borrower's rights to payment in the form of all present and future accounts, contract rights, loans and obligations receivable, chattel papers, bonds, notes and other debt instruments, tax refunds and rights to payment in the nature of general intangibles; and EQUIPMENT: All of the Borrower's goods and equipment, as such term is defined in the UCC whether now or hereafter owned, including all present and future machinery, vehicles, furniture, manufacturing equipment, shop equipment, office and recordkeeping equipment, parts, tools, supplies, and including specifically the goods described in any equipment schedule or list herewith or hereafter furnished to the Lender by the Borrower; FINANCIAL ASSETS: All securities, securities entitlements, financial assets and certificates of deposit of Borrower, and all funds of Borrower on deposit with and all property in the possession of the Secured Party or any depository institution, each whether now owned or hereafter acquired; and GENERAL INTANGIBLES: All of the Borrower's general intangibles, as such term is defined in the UCC, whether now owned or hereafter acquired, including all present and future contract rights, patents, patent applications, copyrights, trademarks, trade names, trade secrets, customer or supplier lists and contracts, manuals, operating instructions, permits, franchises, the right to use the Borrower's name, and the goodwill of Borrower's business; and PROCEEDS: Together with all substitutions and replacements for and products of any of the foregoing property and together with proceeds of any and all of the foregoing property and, in the case of all tangible property, together with all accessions and together with (i) all accessories, attachments, parts, equipment and repairs now or hereafter attached or affixed to or used in connection with any such tangible property, and (ii) all warehouse receipts, bills of lading and other documents of title now or hereafter covering such tangible property. Section 3.2 Notification of Account Debtors and Other Obligors. The Lender may at any time (either before or after the occurrence of an Event of Default) notify any account debtor or other person obligated to pay the amount due that such right to payment has been assigned or transferred to the Lender for security and shall be paid directly to the Lender. The Borrower will join in giving such notice if the Lender so requests. At any time after the Borrower or the Lender gives such notice to an account debtor or other obligor, the Lender may, but need not, as the Borrower's agent and attorney-in-fact, notify the United States Postal Service to change the address for delivery of the Borrower's mail to any address designated by the Lender, otherwise intercept the Borrower's mail, and receive, open and dispose of the Borrower's mail, applying all Collateral as permitted under this Agreement and holding all other mail for the Borrower's account or forwarding such mail to the Borrower's last known address. Section 3.3 Occupancy. (a) The Borrower hereby irrevocably grants to the Lender the right to take possession of each premises where Borrower conducts its business and has any rights of possession (the "Premises") at any time after the occurrence and during the continuance of an Event of Default. (b) The Lender may use the Premises only to hold, process, manufacture, sell, use, store, liquidate, realize upon or otherwise dispose of goods that are Collateral and for other purposes that the Lender in good faith considers related. (c) The Lender's right to hold the Premises shall terminate upon the earlier of payment in full of all Obligations, or final sale or disposition of all goods constituting Collateral and delivery of all such goods to purchasers. (d) The Lender shall not be obligated to pay or account for any rent or other compensation for the possession or use of any of the Premises; provided, however, that if the Lender does pay or account for any rent or other compensation for the possession or use of any of the Premises, the Borrower shall reimburse the Lender promptly for the full amount thereof. Section 3.4 License/Maintenance of Intellectual Property. The Borrower hereby grants to the Lender a non-exclusive, worldwide and royalty-free license to use or otherwise exploit all trademarks, franchises, trade names, copyrights and patents owned by or licensed to the Borrower for the purpose of selling, leasing or otherwise disposing of any or all Collateral following an Event of Default. The Borrower shall not sell, transfer, assign (by operation of law or otherwise), exchange, lease, license, allow to go abandoned or otherwise dispose of all or any portion of said intellectual property and shall maintain and protect all of such property in accordance with all applicable state, federal and foreign laws. Section 3.5 Filing a Copy. A carbon, photographic, or other reproduction of this Agreement or of a financing statement signed by Borrower is sufficient as a financing statement. ARTICLE IV Conditions of Lending In view of the fact that Advances may be made in the sole discretion of the Lender, this Agreement does not set forth conditions precedent to Advances. The Lender will advise the Borrower of the Lender's documentation and other requirements before considering any Advance. ARTICLE V Representations and Warranties The Borrower represents and warrants to the Lender as follows: Section 5.1 Name; Locations; Tax ID No., Subsidiaries. During its existence, the Borrower has done business solely under its corporate name as set forth herein and under such trade names and such other corporate names as disclosed to Lender in writing before this Agreement is signed and delivered. The address of Borrower's chief executive office and principal place of business and its federal tax identification number are set forth below its signature to this Agreement. All Inventory is located at that location or at one of the other locations disclosed to Lender in writing before this Agreement is signed and delivered. The Borrower has no subsidiaries except as disclosed to Lender in writing before this Agreement is signed and delivered. Section 5.2 Financial Condition; No Adverse Change. Before this Agreement was signed and delivered, the Borrower furnished the Lender certain of its unaudited financial statements certified by the Borrower. Those statements fairly present the Borrower's financial condition as of the dates indicated therein and the results of its operations for the periods then ended and were prepared in accordance with generally accepted accounting principles. Since the date of the most recent financial statements, there has been no material adverse change in the business, properties or condition (financial or otherwise) of the Borrower. ARTICLE VI Affirmative Covenants of the Borrower So long as the Advances or any other obligations shall remain unpaid, the Borrower will comply with the requirements in this Article, unless the Lender shall otherwise consent in writing. Section 6.1 Reporting Requirements. The Borrower will deliver to the Lender each of the following in form and detail acceptable to the Lender: (a) as soon as available, and in any event within 90 days after the end of each fiscal year of the Borrower, the Borrower's audited financial statements prepared in accordance with GAAP; (b) as soon as available and in any event within 15 days after the end of each month, an unaudited/internal balance sheet and statement of income and retained earnings of the Borrower as at the end of and for such month and for the year to date period then ended, prepared in accordance with GAAP, subject to year-end audit adjustments, together with a compliance certificate in the form attached to this Agreement or such other form as Lender may require; (c) within 10 days after the end of each month, agings of the Borrower's accounts receivable and accounts payable as of the end of such month; (d) as soon as available and in any event no later than 15 days following the receipt thereof by the Borrower, a copy of the bank account statements of the Borrower as of the last day of each month from each bank with which Borrower maintains a checking account, such statements to be provided to the Lender directly by each such bank or by the Borrower with respect to a bank that is unwilling to send them to the Lender; (e) weekly, on such day of the week as Lender may determine, agings of the Borrower's accounts receivable arising from the sale of Borrower's "TENPRINTER S-Series" product line, together with a schedule of such accounts receivable that are not Eligible Accounts. (f) from time to time, with reasonable promptness, any and all receivables schedules, collection reports, deposit records, equipment schedules, copies of invoices to account debtors, shipment documents and delivery receipts for goods sold, and such other material, reports, records or information as the Lender may request; (g) within three days of Borrower's payment of or deposit for taxes, including but not limited to payroll taxes, proof of such payment in form acceptable to the Lender; and (h) at least thirty (30) days before the beginning of each of Borrower's fiscal years, projections of Borrower's monthly balance sheets and income statements for such fiscal year Section 6.2 Inspection. Upon the Lender's request, the Borrower will permit any officer, employee, attorney, agent or accountant for the Lender to audit, review, make extracts from or copy any and all records of the Borrower and to inspect the Collateral at all times during ordinary business hours. Section 6.3 Account Verification. The Borrower will at any time and from time to time upon request of the Lender send requests for verification of Accounts or notices of assignment to account debtors and other obligors. The Borrower authorizes the Lender to verify Accounts directly with account debtors or other obligors from time to time, including on a daily basis (and the Borrower understands the Lender intends to do so by telephone and/or in writing). Section 6.4 No Other Liens. The Borrower will keep all Collateral free and clear of all security interests, liens and encumbrances except the Security Interest, purchase money security interests in equipment, the security interest of Norwest Bank Minnesota, N.A. in the Borrower's financial assets, and other security interests approved by the Lender in writing. Section 6.5 Insurance. The Borrower will at all times keep all tangible Collateral insured against risks of fire (including so-called extended coverage), theft, collision (for Collateral consisting of motor vehicles) and such other risks and in such amounts as the Lender may reasonably request, with a lender's loss payable clause in favor of Lender to the extent of its interest. Section 6.6 Lockbox; Collateral Account. The Borrower has provided the Lender with agreements regarding a lockbox and a collateral account in connection with the collection of Accounts. Section 6.7 Minimum Book Net Worth. The Borrower will at all times maintain during each period described below, a Book Net Worth (on an unconsolidated, Borrower-only basis), determined as of the end of each month, of at least the amount set forth opposite such period: Period Minimum Book Net Worth ------ ---------------------- September, 1996 $10,400,000 October, 1996 through December, 1996 $ 9,050,000 January, 1997 through March, 1997 $ 8,600,000 April, 1997 through August, 1997 $ 8,200,000 September, 1997 $ 8,500,000 Provided, however, that if Borrower's net worth shall increase by reason of the issuance of capital stock (including the conversion of subordinated debt to capital stock), the minimum book net worth amounts shown above shall thereafter be adjusted by the amount of such increase. If the Borrower's Book Net Worth as reported on the final audited financial statements for September 30, 1996 shall differ by $50,000 or more from $10, 455,000 as reported by Borrower to Lender, the Lender shall have the right to amend the Minimum Book Net Worth amounts shown above. Section 6.8 No Sale or Transfer of Collateral and Other Assets. The Borrower will not sell, lease, assign, transfer or otherwise dispose of (i) the stock of any subsidiary, (ii) all or a substantial part of its assets, or (iii) any Collateral or any interest therein (whether in one transaction or in a series of transactions) to anyone other than the sale of Inventory in the ordinary course of business. Section 6.9 Place of Business; Name. The Borrower will not change the location of its chief executive office or principal place of business from that disclosed pursuant to Section . The Borrower will not permit any tangible Collateral to be located in any state or area in which, in the event of such location, a financing statement covering such Collateral would be required to be, but has not in fact been, filed in order to perfect the Security Interest. The Borrower will not change its name. Section 6.10 Management Compensation. The Borrower will not increase the compensation , including salary, bonuses and all other forms of compensation (excepting, however, compensation in the form of the Borrower's capital stock or stock options), of its Senior Management Employees, individually or in the aggregate, by more than 10% in any of Borrower's fiscal years. For the purposes of this Section 6.10, "Senior Management Employees" shall mean Jack A. Klingert, Donald E. Berg, Glenn M. Fishbine, Louis C. Petsolt, Paul J. Skritp, and any person who replaces such employee. ARTICLE VII Events of Default, Rights and Remedies Section 7.1 Events of Default. An "Event of Default" as used herein shall mean any of the following: (a) Failure to pay the Note when demanded, and in this connection Borrower hereby waives presentment, notice of dishonor and protest; (b) A petition shall be filed by or against the Borrower under the United States Bankruptcy Code naming the Borrower as debtor; (c) Default in the performance, or breach, of any covenant or agreement of the Borrower contained in this Agreement or any other Loan Document. Section 7.2 Rights and Remedies. As provided in Section 2.5, the Lender may, at any time and for any reason, refuse to make any requested Advance or demand payment of the Advances. Upon such demand or upon the occurrence of an Event of Default or at any time thereafter, the Lender may exercise any or all of the following rights and remedies: (a) The Lender may exercise and enforce any and all rights and remedies available upon default to a secured party under the UCC, including the right to take possession of Collateral, or any evidence thereof, proceeding without judicial process or by judicial process (without a prior hearing or notice thereof, which the Borrower hereby expressly waives) and the right to sell, lease or otherwise dispose of any or all of the Collateral, and in connection therewith, the Borrower will on demand assemble the Collateral and make it available to the Lender at a place to be designated by the Lender which is reasonably convenient to both parties; (b) the Lender may exercise any other rights and remedies available to it by law or agreement. The remedies provided hereunder are cumulative. Section 7.3 Certain Notices. If notice to the Borrower of any intended disposition of Collateral or any other intended action is required by law in a particular instance, such notice shall be deemed commercially reasonable if given (in the manner specified in Section ) at least 10 calendar days before the date of intended disposition or other action. ARTICLE VIII Miscellaneous Section 8.1 Addresses for Notices, Etc. Except as otherwise expressly provided herein, all notices, requests, demands and other communications provided for hereunder shall be in writing and shall be (a) personally delivered, (b) sent by first class United States mail, (c) sent by overnight courier of national reputation, or (d) transmitted by telecopy, in each case addressed or telecopied to the party to whom notice is being given at its address or telecopy number as set forth below its signature to this Agreement. Section 8.2 Costs and Expenses. The Borrower agrees to pay on demand all costs and expenses (including legal fees) incurred by the Lender in connection with the Loan Documents, and any other document or agreement related thereto, and the transactions contemplated hereby, including wire transfer and ACH charges, the cost of credit reports, overadvance fees, the expense of any on-site auditors (not to exceed the then current standard applicable rate, which on the date of this Agreement is $400 per day per auditor plus out of pocket expenses), and fees and expenses in enforcing this Agreement. Section 8.3 Indemnity. In addition to the payment of expenses pursuant to Section , the Borrower agrees to indemnify, defend and hold harmless the Lender, and any of its participants, parent corporations, subsidiary corporations, affiliated corporations, successor corporations, and all present and future officers, directors, employees, attorneys and agents of the foregoing (the "Indemnitees") from and against any of the following (collectively, "Indemnified Liabilities"): (1) any and all transfer taxes, documentary taxes, assessments or charges made by any governmental authority by reason of the execution and delivery of this Agreement and the other Loan Documents or the making of the Advances; (2) any and all liabilities, losses, damages, penalties, judgments, suits, claims, costs and expenses of any kind or nature whatsoever (including, without limitation, the reasonable fees and disbursements of counsel) in connection with any investigative, administrative or judicial proceedings, whether or not such Indemnitee shall be designated a party thereto, which may be imposed on, incurred by or asserted against any such Indemnitee, in any manner related to or arising out of or in connection with the making of the Advances, this Agreement and the other Loan Documents or the use or intended use of the proceeds of the Advances; and (3) any claim, loss or damage to which any Indemnitee may be subjected as a result of any violation of any federal, state, local or other governmental statute, regulation, law, or ordinance dealing with the protection of human health and the environment. If any investigative, judicial or administrative proceeding arising from any of the foregoing is brought against any Indemnitee, the Borrower, or counsel designated by the Borrower and satisfactory to the Indemnitee, will resist and defend such action, suit or proceeding to the extent and in the manner directed by the Indemnitee. Each Indemnitee will use its best efforts to cooperate in the defense of any such action, suit or proceeding. If the foregoing undertaking to indemnify, defend and hold harmless may be held to be unenforceable because it violates any law or public policy, the Borrower shall nevertheless make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which is permissible under applicable law. The Borrower's obligation under this Section shall survive the termination of this Agreement and the discharge of the Borrower's other obligations hereunder. Section 8.4 Binding Effect; Assignment; Sharing of Information. The Loan Documents shall be binding upon and inure to the benefit of the Borrower and the Lender and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights thereunder or any interest therein without the prior written consent of the Lender. Without limitation of the Lender's right to share information regarding the Borrower and its Affiliates with Lender's participants, accountants, lawyers and other advisors, the Lender may share at any time with Norwest Corporation, and all direct and indirect subsidiaries of Norwest Corporation, any and all information the Lender may have in its possession regarding the Borrower and its Affiliates, and the Borrower waives any right of confidentiality it may have with respect to such sharing of information. Section 8.5 Governing Law; Jurisdiction, Venue; Waiver of Jury Trial. This Agreement and the Note shall be governed by and construed in accordance with the laws (other than conflict laws) of the State of Minnesota. Each party consents to the personal jurisdiction of the state and federal courts located in the State of Minnesota in connection with any controversy related to this Agreement, waives any argument that venue in any such forum is not convenient and agrees that any litigation initiated by any of them in connection with this Agreement shall be venued in either the District Court of Hennepin County, Minnesota located in Minneapolis, Minnesota, or the United States District Court, District of Minnesota, Fourth Division. THE PARTIES WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED ON OR PERTAINING TO THIS AGREEMENT. [SIGNATURE PAGE FOLLOWS] IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of the date first above written. NORWEST BUSINESS CREDIT, INC. DIGITAL BIOMETRICS, INC. By By -------------------------------- ----------------------------- Jack A. Klingert, Its President Warren G. Lindman Its President Its Assistant Vice President Address: Address: Norwest Center 5600 Rowland Road Sixth Street and Marquette Avenue Suite 205 Minneapolis, Minnesota 55479-0152 Minnetonka, Minnesota 55343 Telecopy No. (612) 673-8589 Telecopy No. (612) 932-7181 Federal Tax ID No. 41-1712687 Federal Tax I.D. No. 41-1545069 [Signature Page to Credit and Security Agreement] COMPLIANCE CERTIFICATE To: Warren G. Lindman Norwest Business Credit, Inc. Date: __________________, 199___ Subject: Digital Biometrics, Inc. Financial Statements In accordance with our Credit and Security Agreement dated as of September 30, 1996 (the "Credit Agreement"), attached are the financial statements of Digital Biometrics, Inc. (the "Borrower") as of and for ________________, 19___ (the "Reporting Date") and the year-to-date period then ended (the "Current Financials"). All terms used in this certificate have the meanings given in the Credit Agreement. I certify that the Current Financials have been prepared in accordance with GAAP, subject to year-end audit adjustments, and fairly present the Borrower's financial condition as of the date thereof. Events of Default. (Check one): |_| The undersigned does not have knowledge of the occurrence of a Default or Event of Default under the Credit Agreement. |_| The undersigned has knowledge of the occurrence of a Default or Event of Default under the Credit Agreement and attached hereto is a statement of the facts with respect to thereto. Representation and Warranties. (Check one): |_| The undersigned hereby reaffirms the representations and warranties as set forth in the Credit Agreement, each of which are true and correct as of the date hereof. |_| The undersigned hereby reaffirms the representations and warranties set forth in the Credit Agreement, each of which are true and correct as of the date hereof except as described in the statement attached hereto. Financial Covenants. I further hereby certify as follows: 1. Minimum Book Net Worth. Pursuant to Section of the Credit Agreement, as of the Reporting Date, the Borrower's Book Net Worth was $____________, which |_| satisfies |_| does not satisfy the requirement that such amount be not less than $_____________ on the Reporting Date as set forth in table below: Period Minimum Book Net Worth ------ ---------------------- September, 1996 $10,400,000 October, 1996 through December, 1996 $ 9,050,000 January, 1997 through March, 1997 $ 8,600,000 April, 1997 through August, 1997 $ 8,200,000 September, 1997 $ 8,500,000 Attached hereto are all relevant facts in reasonable detail to evidence, and the computations of the financial covenants referred to above. These computations were made in accordance with GAAP. DIGITAL BIOMETRICS, INC. By ------------------------------------------------- Donald E. Berg Its Vice President of Finance and Administration EX-10.14 16 LEASE AMENDMENT EXHIBIT 10.14 LEASE AMENDMENT This agreement is made the 13th day of March 1996, between Rowland Pond Investors, a Minnesota Partnership (hereinafter called LANDLORD) and CFA Technologies, dba Digital Biometrics, Inc. (hereinafter called TENANT). Whereas, by lease dated November 7, 1989 and as further amended December 29, 1989, May 1, 1991, May 19, 1993, October 8, 1993 and August 4, 1994, landlord leased to Tenant the real property together with the building and improvements then erected thereon, located at Rowland Pond Center, 5600 and 5610 Rowland Road, in the City of Minnetonka, the State of Minnesota, all as more particularly described in said Lease and Amendments. Therefore, in consideration of the mutual covenants herein contained, and other good and valuable consideration, it is covenanted and agreed between the parties that the aforesaid Lease and Amendments be modified and amended as follows: Leased Space and Building The space is identified as Suites 205, 230, 225/220 and 165, Rowland Pond Center. Comprised of 33,382 sq. ft. of which 25,282 sq. ft. is office space and 8,100 sq. ft. is warehouse/service area. Lease Term The lease term shall be five (5) years commencing on May 1, 1996. Rates Months 1 through 36 $19,757.00 Monthly Base Rent Months 37 through 60 $21,999.00 Monthly Base Rent Additional Rent The net rentable area of Rowland Pond Center is 119,079 sq. ft. Tenant's proportionate share for purposes of allocating real estate taxes, assessments and operating expenses shall be increased to 28.03%. Leased Space The space will be taken as built. Expansion Option The Tenant is given the first right to lease Suite 240 as it becomes available commencing May 1, 1996. This space consists of 3,300 sq. ft. Tenant shall lease the space as built at the current market rates for Rowland Pond Center at that time. Tenant is given ten (30) days to accept or reject the space upon notification from Landlord of its availability. Tenant Improvements Allowance/Improvements Landlord will pay for rooftop air conditioning and hearing units for Suite 230 in the amount of $13,300.00 upon full execution of this Lease Amendment. Landlord will, at its sole March 13, 1996 Page 2 expense, replace carpet as indicated on attached Exhibit "A", upon Tenant schedule with 30 day prior notice to Landlord. Tenant will be responsible to move all of its personal property to facilitate this carpeting. Cancellation Option Tenant may cancel the Lease for Suite 165, comprised of 2,433 sq. ft. of which 2082 sq. ft. is office space and 341 sq. ft. is warehouse/service area, any time after May 1, 1996 by giving Landlord 60 days prior written notice of Tenant's intent to cancel the lease for this portion of their leased space. Upon cancellation Tenant's base rent and additional rent shall be reduced proportional to the rent being paid at that time. Option to Renew Provided Tenant is not in default under the terms and conditions of this Lease, the tenant shall have the first option to renew this lease for one five year period under the same terms and conditions of the original lease except the base rent shall be at the then fair market rent for Rowland Pond Center at that time (Rates will be based on the average per square foot rates of the four most current leases signed at Rowland Pond). Tenant shall give 180 day prior written notice of its intent to exercise this option. Landlord's Option The Landlord shall have the option to delay occupancy by Tenant of Suite 220/225 for a period of four months, changing the lease commencement date for 220/225 from May 1, 1996 to September 1, 1996. Tenant's monthly base rent shall be reduced by $4,464 per month from the quoted rates in this lease amendment for the months of May through August 1996. Tenant's proportional additional rent shall change from 28.03% to 21.63% for this period. Landlord shall grant Tenant a credit towards base rent of $2,000 for the month of May 1996. March 13, 1996 Page 3 This Amendment shall supersede any contrary or conflicting information contained in the original Lease between Landlord and Tenant dated November 7, 1989. All other terms and conditions of the original Lease shall remain in full force and effect. ROWLAND POND INVESTORS CFA TECHNOLOGIES, INC. dba: DIGITAL BIOMETRICS, INC. By By ----------------------------------- ---------------------------------- Its Its -------------------------------- -------------------------------- Date Date --------------------------------- -------------------------------- EX-10.17 17 INDEMNIFICATION AGREEMENT DIGITAL BIOMETRICS, INC. INDEMNIFICATION AGREEMENT This Indemnification Agreement is made as of the 2nd day of January, 1997, by and between Digital Biometrics, Inc., a Delaware corporation (the "Company"), and James C. Granger (the "Indemnitee"). WHEREAS, Indemnitee is a member of the Board of Directors of the Company; WHEREAS, it may be difficult to retain directors of the Company unless such persons are adequately indemnified against liabilities incurred and claims made in connection with or arising out of the performance of their duties as directors of the Company; WHEREAS, in addition to the indemnification to which Indemnitee is entitled under the Certificate of Incorporation (the "Certificate") and the Bylaws of the Company (the "Bylaws"), the Company intends to attempt to obtain at its sole expense insurance protecting its officers and directors, including Indemnitee, against certain losses arising out of actual or threatened actions, suits or proceedings to which such persons may be made or threatened to be made parties. However, as a result of circumstances having no relation to, and beyond the control of, the Company and Indemnitee, there can be no assurance of the continuation or renewal of that insurance. WHEREAS, to induce Indemnitee to continue to serve as a member of the Board of Directors of the Company, the Company has determined that is in its best interests to assure Indemnitee of the protection currently provided by the Certificate, the Bylaws and directors' and officers' insurance, and to indemnify Indemnitee to the fullest extent provided by law. NOW, THEREFORE, in consideration of the premises and the covenants contained herein, the Company and Indemnitee do hereby covenant and agree to the foregoing as follows: 1. Services. Subject to the provisions of Indemnitee's written agreement with the Company, if any, Indemnitee agrees to serve as a director of the Company so long as he is duly elected and qualified in accordance with the applicable provisions of the Certificate and the Bylaws. Subject to the provisions of Indemnitee's Agreement with the Company, if any, Indemnitee may at any time and for any reason resign from such position (subject to any other contractual obligation imposed by operation of law). 2. Initial Indemnity. (a) The Company shall indemnify Indemnitee to the fullest extent provided by applicable law and to such greater extent as applicable law may thereafter from time to time permit when he was or is a party or is threatened to be made party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Company), by reason of the fact that he is or was or had agreed to become a director of the Company, or is or was serving or had agreed to serve at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against all costs, charges and expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by Indemnitee in connection with the defense or settlement thereof or any appeal therefrom, if Indemnitee acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Company, and, with respect to any criminal action or proceedings, had no reasonable cause to believe his conduct was unlawful. (b) The Company shall indemnify Indemnitee to the fullest extent provided by applicable law and to such greater extent as applicable law may thereafter from time to time permit when he was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding by or in the right of the Company to procure a judgment in its favor by reason of the fact that he is or was or had agreed to become a director of the Company, or is or was serving or had agreed to serve at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against all costs, charges and expenses (including attorneys' fees) judgments, fines and amounts paid in settlement actually and reasonably incurred by Indemnitee in connection with the defense or settlement thereof or any appeal therefrom if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Company, and except that no indemnification shall be made in respect of any claim, issue or matter as to which Indemnitee shall have been adjudged to be liable to the Company unless and only to the extent that the Court of Chancery or the court in which such action, suit or proceeding was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for such amounts which the Court of Chancery or such other court shall deem proper. (c) The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that Indemnitee did not act in good faith and in a manner which Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had reasonable cause to believe that Indemnitee's conduct was unlawful. (d) To the extent that Indemnitee has been successful on the merits or otherwise, including without limitation the dismissal of an action without prejudice, in defense of any action, suit or proceeding referred to in Sections 2(a) or 2(b) hereof or in defense of any claim, issue or matter therein, he shall be indemnified against costs, charges and expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. (e) Any indemnification under Sections 2(a) or 2(b) (unless ordered by a court) shall be made by the Company only as authorized in the specific case upon a determination, in accordance with Sections 2(e) and 4 hereof or any applicable provision of the Certificate, the Bylaws, other agreement, resolution or otherwise, that indemnification of Indemnitee is proper in the circumstances because he has met the applicable standard of conduct set forth in Sections 2(a) or 2(b). Such determination shall be made (1) by the Board of Directors of the Company (the "Board") by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (ii) if such a quorum of disinterested directors is not available or, even if obtainable a quorum of disinterested directors so directs, by independent legal counsel (designated in the manner provided below in this Section (e)) in a written opinion, or (iii) by the stockholders of the Company (the "Stockholders"). Independent legal counsel shall be designated by vote of a majority of the disinterested directors; provided, however that if the Board is unable or falls to so designate, such designation shall be made by Indemnitee subject to the approval of the Company (which approval shall not be unreasonably withheld). Independent legal counsel shall not be any person or firm who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee's rights under this Agreement. The Company agrees to pay the reasonable fees and expenses of such independent legal counsel and to indemnify fully such counsel against costs, charges and expenses (including attorneys' and others' fees and expenses) actually and reasonably incurred by such counsel in connection with this Agreement or the opinion of such counsel pursuant hereto. (f) All expenses (including without limitation attorneys' fees) incurred by Indemnitee in his capacity as a director of the Company in defending any civil, criminal, administrative or investigative action, suit or proceeding shall be paid by the Company in advance of the final disposition of such action, suit or proceeding in the manner prescribed by Section 4(b) hereof. (g) If Indemnitee was entitled to indemnification under this Agreement as to only a portion of the amounts actually incurred by Indemnitee in the investigation, defense, appeal or settlement of any action, suit or proceeding but not for the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion thereof to which he is entitled. (h) The Company shall not adopt any amendment to the Certificate or the Bylaws the effect of which would be to deny, diminish or encumber Indemnitee's rights to indemnity pursuant to the Certificate, the Bylaws, the General Corporation Law of the State of Delaware (the "GCL") or any other applicable law as applied to any act or failure to act occurring in whole or in part prior to the date (the "Effective Date") upon which the amendment was approved by the Board or the Stockholders, as the case may be. In the event that the Company shall adopt any amendment to the Certificate or By-Laws the effect of which is to so deny, diminish or encumber Indemnitee's rights to indemnity, such amendment shall apply only to acts or failures to act occurring entirely after the Effective Date thereof. 3. Additional Indemnification. (a) Pursuant to Section 145(f) of the GCL, without limiting any right which Indemnitee may have pursuant to Section 2 hereof, the Certificate, the Bylaws, the GCL, any policy of insurance or otherwise, but subject to the limitations on the maximum permissible indemnity which may exist under applicable law at the time of any request for indemnity hereunder determined as contemplated by Section 4(a) hereof, the Company shall indemnify Indemnitee against any amount which he is or becomes legally obligated to pay relating to or arising out of any claim made against him because of any act, failure to act or neglect or breach of duty, including any actual or alleged error, misstatement or misleading statement, which he commits, suffers, permits or acquiesces in while acting in his capacity as a director of the Company, or, at the request of the Company, as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise. The payments which the Company is obligated to make pursuant to this Section 3 shall include, without limitation, damages, judgments, settlements and charges, costs, expenses, expenses of investigation and expenses of defense of legal actions, suits, proceedings or claims and appeals therefrom, and expenses of appeal, attachment or similar bonds; provided, however that the Company shall not be obligated under this Section 3(a) to make any payment in connection with any claim against Indemnitee: (i) to the extent of any fine or similar governmental imposition which the Company is prohibited by applicable law from paying which results from a final, nonappealable order; or (ii) to the extent based upon or attributable to Indemnitee gaining in fact a personal profit to which he was not legally entitled, including without limitation profits made from the purchase and sale by Indemnitee of equity securities of the Company which are recoverable by Company pursuant to Section 16(b) of the Securities Exchange Act of 1934, as amended, and profits arising from transactions in publicly traded securities of the Company which were effected by Indemnitee in violation of Section 10(b) of the Securities Exchange Act of 1934, as amended, including Rule 10b-5 promulgated thereunder; or (iii) subject to the provisions of Section 7(c) hereof, to the extent based upon or attributable to any actions, suits or proceedings initiated or brought voluntarily by Indemnitee and not by way of defense, but indemnification may be provided by the Company if the Board finds it to be appropriate. The determination of whether Indemnitee shall be entitled to indemnification under this Section 3(a) may be, but shall not be required to be, made in accordance with Section 4(a) hereof. If that determination is so made, it shall be binding upon the Company and Indemnitee for all purposes. (b) All expenses (including without limitation attorneys' fees) incurred by Indemnitee in defending any actual or threatened civil or criminal action, suit, proceeding or claim shall be paid by the Company in advance of the final disposition thereof as authorized in accordance with Section 4(b) hereof. 4. Certain Procedures Relating to indemnification and Advancement of Expenses. (a) Except as otherwise permitted or required by the GCL, for purposes of pursuing his rights to indemnification under Sections 2(a), 2(b) or 3(a) hereof, as the case may be, Indemnitee may, but shall not be required to, (i) submit to the Board a sworn statement of request for indemnification substantially in the form of Exhibit I attached hereto and made a part hereof (the "Indemnification Statement") and (ii) present to the Company reasonable evidence of all expenses for which payment is requested. Submission of an Indemnification Statement to the Board shall create a presumption that Indemnitee is entitled to indemnification under Sections 2(a), 2(b) or 3(a) hereof, as the case may be, and the Board shall be deemed to have determined that Indemnitee is entitled to such indemnification unless within 30 calendar days after submission of the Indemnification Statement the Board shall determine by vote of a majority of the directors at a meeting at which a quorum is present, based upon clear and convincing evidence (sufficient to rebut the foregoing presumption), and Indemnitee shall have received notice within such.period in writing of such determination that Indemnitee is not so entitled to indemnification, which notice shall disclose with particularity the evidence in support of the Board's determination. The foregoing notice shall be sworn to by all persons who participated in the determination and voted to deny indemnification. The provisions of this Section 4(a) are intended to be procedural only and shall not affect the right of Indemnitee to indemnification under this Agreement, and any determination by the Board that Indemnitee is not entitled to indemnification and any failure to make the payments requested in the Indemnification Statement shall be subject to judicial review as provided in Section 7 hereof. (b) For purposes of determining whether to authorize advancement of expenses pursuant to Section 2(f) hereof, Indemnitee shall submit to the Board a sworn statement of request for advancement of expenses substantially in the form of Exhibit 2 attached hereto and made a part hereof (the "Undertaking"), affirming that (1) he has reasonably incurred or will reasonably incur actual expenses in defending an actual civil or criminal action, suit, proceeding or claim and (ii) he undertakes to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Company under this Agreement or otherwise. For purposes of requesting advancement of expenses pursuant to Section 3(b) hereof, Indemnitee may, but shall not be required to, submit an Undertaking or such other form of request as he determines to be appropriate (an "Expense Request"). Upon receipt of an Undertaking or Expense Request, as the case may be, the Board shall within 10 calendar days authorize immediate payment of the expenses stated in the Undertaking or Expense Request, as the case may be, whereupon such payments shall immediately be made by the Company. No security shall be required in connection with any Undertaking or Expense Request and any Undertaking for Expense Request shall be accepted without reference to Indemnitee's ability to make repayment. 5. Subrogation; Duplication of Payments. (a) In the event of any payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable the Company effectively to bring suit to enforce such rights. (b) The Company shall not be liable under this Agreement to make any payment in connection with any claim made against Indemnitee to the extent Indemnitee has actually received payment (under any insurance policy, the Certificate, the Bylaws or otherwise) of the amounts otherwise payable hereunder; provided, however, that such portions, if any, of any proceeds of any such insurance policy that are required to be reimbursed to the insurance carrier under the terms of its insurance policy shall not be deemed to be payments to Indemnitee hereunder. 6. Director and Executive Officer Liability Insurance. The Company shall, from time to time, make the good faith determination whether or not it is practicable for the Company to obtain and maintain a policy or policies with reputable insurance companies covering certain liabilities that may be incurred by its directors and executive officers. Notwithstanding the foregoing,, the Company shall have no obligation to obtain or maintain such insurance if the Company determines in good faith that such insurance is not reasonably available, if the premium costs for such insurance are disproportionate to the amount of coverage provided, if the coverage provided by such insurance is limited by exclusions so as to provide an insufficient benefit, or if Indemnitee is covered by similar insurance maintained by a parent or subsidiary of the Company. The Indemnitee shall be entitled to the protection of any such insurance policies the Company may elect to maintain generally for the benefit of its directors and officers (and to the extent the Company maintains such an insurance policy or policies, the Indemnitee shall be covered by such policy or policies in accordance with its or their terms, to the maximum extent of the coverage available for any officer or director of the Company). 7. Enforcement. (a) If a claim for indemnification or advancement of expenses made to the Company pursuant to this Agreement is not paid in full by the Company within 30 calendar days after a written claim has been received by the Company, Indemnitee may at any time thereafter bring suit against the Company to recover the unpaid amount of the claim. (b) In any action brought under Section 7(a) hereof, it shall be a defense to a claim for indemnification pursuant to Sections 2(a) or 2(b) hereof (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the Undertaking, if any is required, has been tendered to the Company) that Indemnitee has not met the standards of conduct which make it permissible under the GCL for the Company to indemnify Indemnitee for the amount claimed, but the burden of proving such defense shall be on the Company. Neither the failure of the Company (including the Board, independent legal counsel or the Stockholders) to have made a determination that indemnification of Indemnitee is proper in the circumstances because he has met the applicable standard of conduct set forth in the GCL, nor an actual determination by the Company (including the Board, independent legal counsel or the Stockholders) that Indemnitee has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that Indemnitee has not met the applicable standard of conduct. (c) It is the intent of the Company that Indemnitee not be required to incur the expenses associated with the enforcement of his rights under this Agreement by litigation or other legal action because the cost and expense thereof would substantially detract from the benefits intended to be extended to Indemnitee hereunder. Accordingly, if it should appear to Indemnitee that the Company has failed to comply with any of its obligations under the Agreement or in the event that the Company or any other person takes any action to declare the Agreement void or unenforceable, or institutes any action, suit or proceeding designed (or having the effect of being designed) to deny, or to recover from, Indemnitee the benefits intended to be provided to Indemnitee hereunder, the Company irrevocably authorizes Indemnitee from time to time to retain counsel of his choice, at the expense of the Company as hereafter provided, to represent Indemnitee in connection with the initiation or defense of any litigation or other legal action, whether by or against the Company or any director, officer, stockholder or other person affiliated with the Company, in any jurisdiction. Regardless of the outcome thereof, the Company shall pay and be solely responsible for any and all costs, charges and expenses, including without limitation attorneys' and others' fees and expenses, reasonably incurred by Indemnitee (i) as a result of the Company's failure to perform this Agreement or any provision thereof or (ii) as a result of the Company or any person contesting the validity or enforceability of this Agreement or any provision thereof as aforesaid. 8. Merger, Consolidation or Sale of Assets. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to a significant portion of the business and/or assets of the Company such that there is effectively a change in control of the Company or a material diminution in the ability of the Company to perform this Agreement, as a condition to any such transaction, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if rio such succession had taken place. Such assumption agreement shall be in form and substance satisfactory to Indemnitee. The Company shall give Indemnitee 30 days prior notice of any transaction that would result in such a succession and the opportunity to review the documentation that confirms the successor's obligation to assume and agree to perform this Agreement. Executed copies of such documentation shall be delivered to Indemnitee upon completion of any such transaction. 9. Nonexclusivity and Severability. (a) The right to indemnification provided by this Agreement shall not be exclusive of any other rights to which Indemnitee may be entitled under the Certificate, the Bylaws, the GCL, any other statute, insurance policy, agreement, vote of stockholders or of directors or otherwise, both as to actions in his official capacity and as to actions in another capacity while holding such office, and shall continue after Indemnitee has ceased to be a director, officer, employee or agent and shall inure to the benefit of and be enforceable by his heirs, personal or legal representatives, executors, administrators, devisees, legatees, distributees and successors. If Indemnitee should die while any amounts would still be payable to Indemnitee hereunder if Indemnitee had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Indemnitee's devisee, legatee, or other designee, or if there be no such designee, to Indemnitee's estate. (b) If any provision of this Agreement or the application of any provision hereof to any person or circumstances is held invalid, unenforceable or otherwise illegal, the remainder of this Agreement and the application of such provision to other persons or circumstances shall not be affected, and the provision so held to be invalid, unenforceable or otherwise illegal shall be reformed to the extent (and only to the extent) necessary to make it enforceable, valid and legal. 10. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without giving effect to the principles of conflict or law thereof. 11. Modification; Survival. This Agreement contains the entire agreement of the parties relating to the subject matter hereof. This Agreement may be modified only by an instrument in writing signed by both parties hereto. The provisions of this Agreement shall survive the death, disability or incapacity of Indemnitee or the termination of Indemnitee's service as a director, executive officer or director and executive officer of the Company and shall inure to the benefit of Indemnitee's heirs, personal or legal representatives, executors, administrators, devisees, legatees, distributees and successors. 12. Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if (i) delivered by hand and receipted for by the party to whom said notice or other communication shall have been directed, or (ii) mailed by certified or registered mall, with postage prepaid, on the third business day after the date on which it is so mailed: If to Indemnitee, to him at the following address: If to the Company, to it at the following address: Digital Biometrics, Inc. 5600 Rowland Road, Suite 205 Minnetonka, Minnesota 55343 Attention: Donald E. Berg Vice President and Chief Financial Officer 13. Certain Terms. For purposes of this Agreement, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on Indemnitee with respect to any employee benefit plan; references to "serving at the request of the Company" shall include any service as a director, officer, employee or agent of the Company which imposes duties on, or involves services by, Indemnitee with respect to an employee benefit plan, its participants or beneficiaries; references to the singular shall include the plural and vice versa, and if Indemnitee acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan he shall be deemed to have acted in a manner "not opposed to the best interest of the Company" as referred to herein. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first above written. DIGITAL BIOMETRICS, INC. By /s/ James C. Granger Its ----------------------------- /s/ James C. Granger ---------------------------------------- Signature of Director ---------------------------------------- Print Name of Director Exhibit 1 INDEMNIFICATION STATEMENT STATE OF __________________________ ) ) ss. COUNTY OF __________________________ ) I, _______________________________, being first duly sworn, do depose and say as follows: 1. This Indemnification Statement is submitted pursuant to the Indemnification Agreement, dated as of ______________, 199_ between Digital Biometrics, Inc., a Delaware corporation (the "Company"), and the undersigned. 2. I am requesting indemnification against charges, costs, expenses (including attorneys' fees), judgments, fines and amounts paid in settlement, all of which (collectively, "Liabilities") have been or will be incurred by me in connection with an actual or threatened action, suit, proceeding or claim to which I am a party or am threatened to be made a party. 3. With respect to all matters related to any such action, suit, proceeding or claim, I am entitled to be indemnified as herein contemplated pursuant to the aforesaid Indemnification Agreement. 4. Without limiting any other rights which I have or may have, I am requesting indemnification against Liabilities which have or may arise out of: _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ ________________________________ Signature Subscribed and sworn to before me, a Notary Public in and for said County and State, this ______ day of _____________________, 199_. ________________________________ Notary Public [Seal] My commission expires the ____ day of ________________, 199_. Exhibit 2 INDEMNIFICATION STATEMENT STATE OF __________________________ ) ) ss. COUNTY OF __________________________ ) I, _______________________________, being first duly sworn, do depose and say as follows: 1. This Indemnification Statement is submitted pursuant to the Indemnification Agreement, dated as of ______________, 199_ between Digital Biometrics, Inc., a Delaware corporation (the "Company"), and the undersigned. 2. I am requesting advancement of certain costs, charges and expenses which I have incurred or will incur in defending an actual or pending civil or criminal action, suit, proceeding or claim. 3. I hereby undertake to repay this advancement of expenses if it shall ultimately be determined that I am not entitled to be indemnified by the Company under the aforesaid Agreement or otherwise. 4. The costs, charges and expenses for which advancement is requested are, in general, all expenses related to ______________________________________ _______________________________________________________________________________. ________________________________ Signature Subscribed and sworn to before me, a Notary Public in and for said County and State, this ______ day of _____________________, 199_. ________________________________ Notary Public [Seal] My commission expires the ____ day of ________________, 199_. DRAFT RESOLUTION AUTHORIZING INDEMNIFICATION AGREEMENT RESOLVED, that the form of Indemnification Agreement attached hereto as Exhibit A (the "Indemnification Agreement") is hereby authorized and approved, and the Company's President and the Vice President, Finance and Administration are, and each of them is, hereby authorized and directed to execute and deliver the Indemnification Agreement to each of the Company's directors, on behalf of the Company, in the form or substantially in the form attached hereto as Exhibit A, but with such changes therein, additions thereto and deletions therefrom, if any, as the officer executing the same shall approve, and such approval shall be conclusively evidenced by the execution of the Indemnification Agreement by such officer on behalf of the Company. RESOLVED, that the Company's President and the Vice President, Finance and Administration are, and each of them is, hereby authorized and directed to prepare, execute, deliver and file all such other and further instruments and to take such other further action as officers, or either of them, may deem necessary or desirable in connection with execution of the Indemnification Agreement by the Company and each of its directors, and the execution by such officers, or either of them, of any such instrument(s) or the doing by one or more of them of any act in connection with the foregoing matters shall conclusively establish their authority therefor from the Company and the approval and ratification by the Company of the instruments so executed and the action so taken. FURTHER RESOLVED, that all actions taken prior to this date by the officers of the Company, or any of them, for and on behalf of the Company in respect of said Indemnification Agreement, are in all respects ratified, approved and confirmed. EX-11.1 18 COMPUTATION OF LOSS PER SHARE EXHIBIT 11.1 DIGITAL BIOMETRICS, INC. STATEMENT RE: COMPUTATION OF LOSS PER SHARE
YEARS ENDED SEPTEMBER 30, --------------------------------------------- 1997 1996 1995 ------------ ------------ ----------- Shares outstanding at beginning of year 10,777,288 7,833,633 7,787,959 Shares awarded for retirement plan 41,798 16,831 8,814 Restricted stock awards, net 31,072 17,456 6,360 Exercise of stock options and warrants 25,000 157,500 30,500 Shares issued upon conversion of debentures 1,485,880 2,751,868 -- ------------ ------------ ----------- Shares outstanding at end of year 12,361,038 10,777,288 7,833,633 ============ ============ =========== Weighted average shares outstanding (a) 11,766,220 9,451,015 7,814,144 ============ ============ =========== Net loss $ (6,275,394) $(11,686,903) $(3,324,555) ============ ============ =========== Loss per common share and common and common share equivalents $ (0.53) $ (1.24) $ (0.43) ============ ============ ===========
(a) Stock options and other common share equivalents are not included in the calculation of the net loss per common share as their effect is antidilutive. EX-23.1 19 INDEPENDENT AUDITORS' CONSENT EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT The Board of Directors Digital Biometrics, Inc.: We consent to incorporation by reference in the registration statements (Numbers 33-41510, 33-63984, 33-90900 and 333-34725) on Form S-8 of Digital Biometrics, Inc., of our reports dated November 21, 1997, except as to note 14(a) which is as of November 24, 1997, and note 14 (b) which is as of December 1, 1997, relating to the balance sheets of Digital Biometrics, Inc., as of September 30, 1997 and 1996, and the related statements of operations, stockholders' equity and cash flows and the related financial statement schedule for each of the years in the three-year period ended September 30, 1997, which reports appear in the September 30, 1997, Annual Report on Form 10-K of Digital Biometrics, Inc., and to the reference to our firm under the heading "Selected Financial Data" in the Company's September 30, 1997, Annual Report on Form 10-K which is incorporated by reference in the registration statements. KPMG Peat Marwick LLP Minneapolis, Minnesota December 23, 1997 EX-24.1 20 POWER OF ATTORNEY EXHIBIT 24.1 POWER OF ATTORNEY The undersigned Director of Digital Biometrics, Inc., a Delaware corporation, hereby constitutes and appoints James C. Granger and John J. Metil or either of them as Attorney-in-Fact in their respective name, place and stead to execute Digital Biometric's Annual Report on Form 10-K for the fiscal year ended September 30, 1997, together with any and all subsequent amendments thereof, in their respective capacities as President, Chief Executive Officer and Director, and Chief Operating Officer and Chief Financial Officer, and hereby ratifies all that either said Attorney-in-Fact may do by virtue thereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal this 17th day of December, 1997. /s/ George Latimer ------------------------ George Latimer, Director POWER OF ATTORNEY The undersigned Chairman of the Board of Directors of Digital Biometrics, Inc., a Delaware corporation, hereby constitutes and appoints James C. Granger and John J. Metil or either of them as Attorney-in-Fact in their respective name, place and stead to execute Digital Biometric's Annual Report on Form 10-K for the fiscal year ended September 30, 1997, together with any and all subsequent amendments thereof, in their respective capacities as President, Chief Executive Officer and Director, and Chief Operating Officer and Chief Financial Officer, and hereby ratifies all that either said Attorney-in-Fact may do by virtue thereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal this 17th day of December, 1997. /s/ C. McKenzie Lewis III --------------------------- C. McKenzie Lewis III, Chairman of the Board of Directors POWER OF ATTORNEY The undersigned Director of Digital Biometrics, Inc., a Delaware corporation, hereby constitutes and appoints James C. Granger and John J. Metil or either of them as Attorney-in-Fact in their respective name, place and stead to execute Digital Biometric's Annual Report on Form 10-K for the fiscal year ended September 30, 1997, together with any and all subsequent amendments thereof, in their respective capacities as President, Chief Executive Officer and Director, and Chief Operating Officer and Chief Financial Officer, and hereby ratifies all that either said Attorney-in-Fact may do by virtue thereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal this 17th day of December, 1997. /s/ Stephen M. Slavin ------------------------ Stephen M. Slavin, Director POWER OF ATTORNEY The undersigned Director of Digital Biometrics, Inc., a Delaware corporation, hereby constitutes and appoints James C. Granger and John J. Metil or either of them as Attorney-in-Fact in their respective name, place and stead to execute Digital Biometric's Annual Report on Form 10-K for the fiscal year ended September 30, 1997, together with any and all subsequent amendments thereof, in their respective capacities as President, Chief Executive Officer and Director, and Chief Operating Officer and Chief Financial Officer, and hereby ratifies all that either said Attorney-in-Fact may do by virtue thereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal this 17th day of December, 1997. /s/ Jack A. Klingert ------------------------ Jack A. Klingert, Director EX-27 21 FINANCIAL DATA SCHEDULE
5 0000868373 DIGITAL BIOMETRICS INC 1 12-MOS SEP-30-1997 OCT-01-1996 SEP-30-1997 1,891,397 154,808 5,602,632 441,276 2,294,593 9,665,748 2,027,737 1,113,185 10,699,238 3,533,990 0 0 0 123,610 7,041,638 10,699,238 9,712,259 11,419,358 6,614,314 10,340,389 7,277,254 0 230,347 (6,275,394) 0 (6,275,394) 0 0 0 (6,275,394) (0.53) (0.53)
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