-----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, StQPPZuKL6yIFA5vH34XSMBi0CmQv5LChcVe5650f6E0bSfGqON/qQBWfMk4147t KoY9P0eutZukwy89iS65XQ== 0000897101-99-000145.txt : 19990217 0000897101-99-000145.hdr.sgml : 19990217 ACCESSION NUMBER: 0000897101-99-000145 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990216 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-Q SEC ACT: SEC FILE NUMBER: 333-72031 FILM NUMBER: 99542014 BUSINESS ADDRESS: STREET 1: 5600 ROWLAND RD CITY: MINNETONKA STATE: MN ZIP: 55343 BUSINESS PHONE: 6129320888 MAIL ADDRESS: STREET 1: 5600 ROWLAND RD STREET 2: 5600 ROWLAND RD CITY: MINNETONKA STATE: MN ZIP: 55343 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 1998 ------------------------------------------------- or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to __________________________________ Commission File Number: 0-18856 -------------------------------------------------------- DIGITAL BIOMETRICS, INC. (Exact name of registrant as specified in its charter) Delaware 41-1545069 -------- ---------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 5600 Rowland Road, Minnetonka, Minnesota 55343 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (612) 932-0888 -------------- (Registrant's telephone number, including area code) N/A (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. [x] Yes [ ] No Indicate the number of shares of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $.01 par value January 31, 1999 - 14,794,636 shares ---------------------------- ------------------------------------ (Class) (Outstanding) 1 DIGITAL BIOMETRICS, INC. THREE MONTHS ENDED DECEMBER 31, 1998 INDEX PART I - FINANCIAL INFORMATION: PAGE ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) CONSOLIDATED BALANCE SHEETS 4 CONSOLIDATED STATEMENTS OF OPERATIONS 5 CONSOLIDATED STATEMENTS OF CASH FLOWS 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7 ITEM 2. MANAGEMENT'S DISCUSSION AND 12 ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS PART II - OTHER INFORMATION: ITEM 1. LEGAL PROCEEDINGS 20 ITEM 2. CHANGES IN SECURITIES 20 ITEM 3. DEFAULTS UPON SENIOR SECURITIES 20 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 20 ITEM 5. OTHER INFORMATION 20 ITEM 6. (a) EXHIBITS 20 (b) REPORTS ON FORM 8-K 21 SIGNATURES 22 2 DIGITAL BIOMETRICS, INC. THREE MONTHS ENDED DECEMBER 31, 1998 SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Except for the historical information contained herein, the matters discussed in this Form 10-Q include forward-looking statements made within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. As provided for under the Private Securities Litigation Reform Act, the Company cautions investors that actual results of future operations may differ from those anticipated in forward-looking statements due to a number of factors, including the Company's ability to achieve profitability, introduce new products and services, build profitable revenue streams around new product and service offerings, maintain loyalty and continued purchasing of the Company's products by existing customers, execute on customer delivery and installation schedules, collect outstanding accounts receivable and manage the concentration of credit and payment timing risks particularly regarding large customers, create and maintain satisfactory distribution and operations relationships with AFIS vendors, attract and retain key employees, secure timely and cost-effective availability of product components, meet increased competition, maintain adequate working capital and liquidity, including the availability of financing as may be required, and upgrade products and develop new technologies. For a more complete description of such factors, see "Risk Factors" under Item 7 of the Company's Form 10-K report for the year ended September 30, 1998, filed December 29, 1998 with the Securities and Exchange Commission. 3 DIGITAL BIOMETRICS, INC. CONSOLIDATED BALANCE SHEETS
December 31, September 30, 1998 1998 (unaudited) ------------ ------------ Current assets: Cash and cash equivalents (note 2) $ 745,252 $ 840,616 Accounts receivable, less allowance for doubtful accounts of $279,759 and $296,583, respectively 3,172,535 4,352,197 Inventory (note 3) 2,895,291 2,848,421 Prepaid expenses and other costs 215,006 214,559 ------------ ------------ Total current assets 7,028,084 8,255,793 ------------ ------------ Property and equipment 2,490,546 2,410,172 Less accumulated depreciation and amortization (1,465,431) (1,355,161) ------------ ------------ 1,025,115 1,055,011 ------------ ------------ Patents, trademarks, copyrights and licenses, net of accumulated amortization of $94,427 and $100,656, respectively 31,962 35,785 Deferred issuance costs on convertible debentures, net of accumulated amortization of $38,756 and $29,648, respectively (note 6) 89,469 71,872 ------------ ------------ $ 8,174,630 $ 9,418,461 ============ ============ Current liabilities: Accounts payable $ 1,165,762 $ 1,783,086 Line of credit advances (note 4) 129,288 111,962 Accrued warranty 254,025 385,422 Deferred revenue 1,080,190 918,291 Other accrued expenses (note 5) 1,022,728 1,239,011 Current installments of capital lease obligations 35,324 34,620 ------------ ------------ Total current liabilities 3,687,317 4,472,392 Capital lease obligations, less current installments 102,270 113,117 Convertible debentures (note 6) 1,079,049 884,840 ------------ ------------ Total liabilities 4,868,636 5,470,349 ------------ ------------ Stockholders' equity (note 7): Common Stock, $.01 par value. Authorized, 40,000,000 shares; issued and outstanding 14,036,487 and 13,661,832 shares, respectively 140,365 136,618 Additional paid-in capital 44,645,783 44,114,225 Deferred compensation (76,500) (91,500) Accumulated deficit (41,403,654) (40,211,231) ------------ ------------ Total stockholders' equity 3,305,994 3,948,112 ------------ ------------ $ 8,174,630 $ 9,418,461 ============ ============
See accompanying notes to consolidated financial statements. 4 DIGITAL BIOMETRICS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended December 31, 1998 1997 ------------ ------------ Revenues: Identification systems $ 1,346,119 $ 1,690,249 Maintenance 831,789 581,891 Systems integration services 189,760 -- ------------ ------------ Total revenues 2,367,668 2,272,140 ------------ ------------ Cost of revenues: Identification systems 901,853 1,430,548 Maintenance 686,913 384,501 Systems integration services 100,504 -- ------------ ------------ Total cost of revenues 1,689,270 1,815,049 ------------ ------------ Gross margin 678,398 457,091 ------------ ------------ Selling, general and administrative expenses: Sales and marketing 426,025 516,501 Engineering and development 634,944 700,292 General and administrative 651,480 477,566 ------------ ------------ Total expenses 1,712,449 1,694,359 ------------ ------------ Loss from operations (1,034,051) (1,237,268) Other income (expense): Interest income 6,275 12,005 Interest expense (note 7) (164,647) (94,070) Other expense -- (4,667) ------------ ------------ Total other income (expense) (158,372) (86,732) ------------ ------------ Net loss $ (1,192,423) $ (1,324,000) ============ ============ Net loss per common share $ (0.09) $ (0.11) ============ ============ Weighted average common shares outstanding 13,820,713 12,361,646 ============ ============
See accompanying notes to consolidated financial statements. 5 DIGITAL BIOMETRICS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended December 31, ------------------------------- 1998 1997 ------------ ------------ Cash flows from operating activities: Net loss $ (1,192,423) $ (1,324,000) Adjustments to reconcile net loss to net cash used in operating activities: Provision for doubtful accounts receivable (12,361) 9,610 Deferred compensation amortization 15,000 13,500 Depreciation and amortization 148,145 120,479 Loss on disposal of fixed assets -- 4,667 Loss from paydowns on marketable securities -- 1,315 Interest expense amortization for the intrinsic value of the beneficial conversion feature of convertible debentures 125,000 83,334 Interest expense on debentures converted into common stock 9,490 -- Changes in operating assets and liabilities: Accounts receivable 1,192,023 365,719 Inventories (46,870) 52,808 Prepaid expenses (447) (21,273) Accounts payable (617,324) (713,717) Deferred revenue 161,899 295,546 Accrued expenses (254,416) (20,618) ------------ ------------ Net cash used in operating activities (472,284) (1,132,630) ------------ ------------ Cash flows from investing activities: Purchase of property and equipment (80,374) (138,524) Patents, trademarks, copyrights and licenses -- (16,093) Proceeds from marketable securities -- 155,132 ------------ ------------ Net cash provided by (used in) investing activities (80,374) 515 ------------ ------------ Cash flows from financing activities: Issuance of convertible debentures, net 450,111 445,000 Principal payments on capital lease obligations (10,143) -- Net line of credit advances 17,326 -- ------------ ------------ Net cash provided by financing activities 457,294 445,000 ------------ ------------ Decrease in cash and cash equivalents (95,364) (687,115) Cash and cash equivalents at beginning of period 840,616 1,891,397 ------------ ------------ Cash and cash equivalents at end of period $ 745,252 $ 1,204,282 ============ ============
See accompanying notes to consolidated financial statements. 6 DIGITAL BIOMETRICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 (UNAUDITED) (1) DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION Digital Biometrics, Inc., (the "Company," "Digital Biometrics" or "DBI") was incorporated in Minnesota in May, 1985 and reincorporated in Delaware in December, 1986. The principal business of Digital Biometrics is the development, manufacture, marketing and integration of computer-based products and services for the identification of individuals. In addition, through its Integral Partners subsidiary, the Company provides information technology (IT) services to commercial and governmental clients. The Company also participates in a joint venture with Lakes Gaming, Inc. named TRAK 21 Development, LLC, which seeks to develop, test and market an automated wagering tracking system based on technology developed by the Company. Digital Biometrics is a leading provider of products employing "biometric" technology, the science of identifying individuals by measuring distinguishing biological characteristics. The Company's main products are special-purpose, computer-based systems for "live-scan" fingerprint capture. These live-scan systems employ patented, high-resolution optics and specialized hardware and software, combined with industry-standard computer hardware and software, to create highly optimized, special-purpose systems which capture, digitize, print and transmit forensic-grade fingerprint images. Historically, these systems have been purchased primarily by law enforcement agencies, although some systems have been purchased by civil and commercial buyers. The Company also offers high-resolution, single-fingerprint capture products for commercial and governmental identification applications. The Company's strategy is to continue to market live-scan systems to law enforcement agencies, expand its products and service offerings, and expand into other markets. The law enforcement market for live-scan biometric products is well established. The Company believes there is increasing interest from other governmental and commercial markets to employ biometric identification technologies and products in such areas as applicant processing and enrollment. Digital Biometrics intends to aggressively pursue these emerging opportunities. To capitalize on opportunities outside of its traditional law enforcement market, the Company established an information technology services business which generated its first revenues in fiscal 1998. This business operated under the name "Integrated Information Solutions" or "IIS" during most of fiscal 1998. It has been renamed Integral Partners, Inc. and incorporated as a wholly owned subsidiary of the Company, effective October 1, 1998. A majority of the Company's revenues in the first three months of fiscal 1999 and fiscal 1998 were derived from live-scan systems sales, maintenance and applications development services for the law enforcement market. The Company's current and near-term future results of operations are expected to be heavily influenced by the characteristics of the law enforcement market. The law enforcement market and the government procurement process are 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 7 DIGITAL BIOMETRICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 (UNAUDITED) result in an irregular revenue cycle for the Company; any prediction of future trends in this business is inherently difficult. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. For further information, refer to financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended September 30, 1998, as amended by the Company's Form 10-K/A filed with the Securities and Exchange Commission on January 28, 1999. (2) ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the financial statements of Digital Biometrics, Inc. and its wholly owned subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation. 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 79% and 71%, respectively, of customer accounts receivable at December 31, 1998 and September 30, 1998 were from government agencies, of which 25% and 42%, respectively, were from a single customer. Sales to three customers in the three-month period ended December 31, 1998 accounted for 14%, 11% and 11% of total revenues, and sales to one customer in the three-month period ended December 31, 1997 accounted for 31% of total revenues. Export sales for the three-month period ended December 31, 1998 were 1% of total revenues as compared to 32% for the same period in 1997. (2) ACCOUNTING POLICIES (CONTINUED) STATEMENT OF CASH FLOWS For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments and certificates of deposit purchased with an original maturity date of three months or less to be cash equivalents. 8 DIGITAL BIOMETRICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 (UNAUDITED) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Three Months Ended December 31, 1998 1997 -------- -------- Cash paid during the period for interest $ 9,174 $ 3,157 ======== ======== For supplemental disclosure of non-cash investing and financing activities see notes 6 and 7. NET LOSS PER COMMON SHARE Basic loss per share excludes dilution and is computed by dividing the net loss by the weighted average number of common shares outstanding during the period. Diluted loss per share includes dilutive potential common shares including stock options and warrants determined by the treasury stock method and dilutive convertible securities. Due to the antidilutive impact of assumed conversion shares, basic and diluted loss per share are the same. The following is a summary of those securities outstanding at December 31 for the respective periods which have been excluded from the calculations because the effect on net loss per common share would not have been dilutive: 1998 1997 --------- --------- Options 2,154,600 1,269,750 Warrants 605,893 630,893 Convertible debentures 1,029,727 402,500 (3) 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: December 31, September 30, 1998 1998 ------------ ------------ Components and purchased subassemblies $ 903,998 $ 1,119,766 Work in process 1,186,965 1,006,293 Finished goods 804,328 722,362 ------------ ------------ $ 2,895,291 $ 2,848,421 ============ ============ (4) LINE OF CREDIT On September 29, 1998, the Company entered into an inventory and receivables financing line of credit for the lesser of eligible inventory and receivables or $2,000,000 with SPECTRUM Commercial Services. This line replaced an existing line of credit with another lender. Borrowings 9 DIGITAL BIOMETRICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 (UNAUDITED) under this line of credit are secured by all the assets of the Company. The line bears interest at an initial rate of 4% above the prime rate, and may be reduced to 3.25% or 2.50% above the prime rate if certain net income milestones are met. The line bears a minimum interest charge of $5,200 per month, is payable upon demand and expires in September 2000. At December 31, 1998, $129,288 was outstanding on this line of credit. (5) OTHER ACCRUED EXPENSES December 31, September 30, 1998 1998 ------------ ------------ Accrued salaries and commissions $ 260,064 $ 370,326 Accrued vacation 166,933 154,424 Accrued installation costs 289,800 355,800 Other accrued expenses 305,931 358,461 ------------ ------------ $ 1,022,728 $ 1,239,011 ============ ============ (6) 8% CONVERTIBLE SUBORDINATED DEBENTURES On December 1, 1997, the Company entered into a convertible subordinated debenture purchase agreement ("Purchase Agreement") with a private investor, providing for the Company's issuance and sale of up to an aggregate of $2,500,000 of 8% Convertible Subordinated Debentures (the "1997 Debentures") in tranches of $500,000 each. The first four tranches were funded during fiscal 1998. The fifth tranche was funded in November 1998. As of December 31, 1998, the Company has issued 1,502,354 shares of common stock for the conversion of $1,400,000 aggregate principal amount of the 1997 Debentures, plus $34,959 of accrued interest at an average conversion price of $0.96 per share. The intrinsic value of the beneficial conversion feature aggregated $125,000 for the three-month period ending December 31, 1998 and $500,000 for fiscal 1998 and has been recorded as additional paid-in capital and interest expense in the respective periods. The principal amount of the 1997 Debentures outstanding at December 31, 1998 aggregated $1,100,000. (7) STOCKHOLDERS' EQUITY Effective October 1, 1998, the Company issued a warrant in payment for services rendered on behalf of the Company. The related expenses have been recorded and accrued in fiscal 1998. The warrant entitles the holder to purchase up to 15,000 shares of the Company's common stock, at an exercise price of $2.60 per share, subject to certain antidilution provisions contained in of the warrant. The warrant expires in 2003. During the three-month period ended December 31, 1998, the Company granted stock options for the purchase of an aggregate of 158,500 shares of Common Stock to non-executive employees. 10 DIGITAL BIOMETRICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 (UNAUDITED) These options are exercisable at prices ranging from $1.094 to $1.75 per share and expire in 2005. Effective December 31, 1998, the Company issued 67,828 shares of common stock to satisfy the Company's discretionary matching to employees electing participation in the Company's 401(k) retirement plan. This issuance increased common stock and additional paid-in capital by $93,263 and reduced accrued compensation by the same amount. (8) LITIGATION There are no material lawsuits pending or, to the Company's knowledge, threatened against the Company. (9) PRIVATE PLACEMENT On January 8, 1999 the Company closed on a private placement of common stock. A total of 422,219 shares were sold at $1.6579 each with total net proceeds to the Company of approximately $620,000. Warrants to purchase up to an aggregate of 422,219 shares at an exercise price of $1.6579 per share were granted to the purchasers. The Company issued an additional warrant to purchase up to 42,222 shares of common stock at an exercise price of $1.6728 per share to an investment banking firm as compensation for services rendered in the private placement. 11 DIGITAL BIOMETRICS, INC. THREE MONTHS ENDED DECEMBER 31, 1998 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL As more fully described in the subsection "Risk Factors" under Item 7 of the Company's Form 10-K report for the year ended September 30, 1998, 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 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. Digital Biometrics is a leading provider of products employing "biometric" technology, the science of identifying individuals by measuring distinguishing biological characteristics. The Company's main products are special-purpose, computer-based systems for "live-scan" fingerprint capture. These live-scan systems employ patented, high-resolution optics and specialized hardware and software, combined with industry-standard computer hardware and software, to create highly optimized, special-purpose systems which capture, digitize, print and transmit forensic-grade fingerprint images. Historically, these systems have been purchased mainly by law enforcement agencies, although some systems have been purchased by civil and commercial buyers. The Company also offers high-resolution, single-fingerprint capture products for commercial and governmental identification applications. The Company's strategy is to continue to market live-scan systems to law enforcement agencies, expand its products and service offerings, and expand into other markets. The law enforcement market for live-scan biometric products is well established. The Company believes there is increasing interest from other governmental and commercial markets to employ biometric identification technologies and products in such areas as applicant processing and enrollment. Digital Biometrics intends to aggressively pursue these emerging opportunities. To capitalize on opportunities outside of its traditional law enforcement market, the Company established an information technology services business which generated its first revenues in fiscal 1998. This business operated under the name "Integrated Information Solutions" or "IIS" during most of fiscal 1998. It has been renamed Integral Partners, Inc. and incorporated as a wholly owned subsidiary of the Company, effective October 1, 1998. The Company is engaged in a joint venture with Lakes Gaming, Inc. operating under the name of TRAK 21 Development, LLC. This joint venture was created to develop, test and market an automated wagering tracking system which utilizes technology developed by the Company. The law enforcement market and government procurement processes are subject to budgetary, economic and political considerations which vary significantly from state to state and among different agencies. These characteristics, together with the increasing level of competition 12 DIGITAL BIOMETRICS, INC. THREE MONTHS ENDED DECEMBER 31, 1998 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS within the live-scan electronic fingerprint industry, have resulted (and are expected to continue to result) in an irregular revenue cycle for the Company. The Company generally recognizes product sales on the date of shipment for orders which are f.o.b. origin and upon delivery for f.o.b. destination, although recognition at some later milestone is not uncommon based on the terms of specific customer contracts. Revenue for professional services contracts and systems integration services revenues are recognized using the percentage of completion method or on a time-and-materials basis. 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 and 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. Maintenance revenues are recognized over the life of the contract on a straight-line basis. RESULTS OF OPERATIONS THREE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 1997 Total revenues were $2,368,000 for the three months ended December 31, 1998 compared with $2,272,000 for the same prior-year period. Identification system product revenues were $1,346,000 compared with $1,690,000 in the same prior-year period. The decrease is due primarily to a decrease in the number of TENPRINTER systems sold during the three months ended December 31, 1998. For the three-month period ended December 31, 1998, sales to three customers accounted for approximately 14%, 11% and 11% of total revenues. Sales to a different customer during the three months ended December 31, 1997 accounted for approximately 31% of total revenues. Export revenues for the three-month period ended December 31, 1998 were 1% of total revenues compared with 32% during the same prior-year period. Product maintenance and service revenues were $832,000 for the three months ended December 31, 1998 compared with $582,000 for the same prior-year period, an increase of 43%. This increase is due primarily to a larger installed base of TENPRINTER systems covered by maintenance agreements and an increase in maintenance rates effective with maintenance contract renewals. Systems integration revenues were $190,000 for the three months ended December 31, 1998. There were no integration service revenues for the same prior-year period. Systems integration revenues were generated from the Company's wholly owned subsidiary Integral Partners, Inc., which began operations during the first quarter of fiscal 1998 as a division of the Company. Overall gross margins for the three months ended December 31, 1998 were 29%, as compared with 20% of sales for the same prior-year period. Gross margins on identification system sales were 33% for the three months ended December 31, 1998 compared with 15% in the same prior-year 13 DIGITAL BIOMETRICS, INC. THREE MONTHS ENDED DECEMBER 31, 1998 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS period. This increase is due to lower levels of warranty and installation costs than in the prior-year period, and the effect of a favorable product mix. Product maintenance and support margins for the three months ended December 31, 1998 and 1997 were 17% and 34%, respectively. The decrease in product maintenance and support margins is due mainly to accrual offsets during the three-month period ended December 31, 1997, which were established during fiscal year 1997 for planned losses on a maintenance contract. Systems integration margins for the three months ended December 31, 1998 were 47%. As indicated above, systems integration revenues were generated from its wholly owned subsidiary Integral Partners, Inc., which began operations during the first quarter of fiscal 1998 as a division of the Company. Sales and marketing expenses for the three-month period ended December 31, 1998 were 18% of total revenues compared to 23% for the same three-month prior-year period. The decrease in sales and marketing costs as a percentage of total revenue is due primarily to lower contractor costs and accrued royalties on international shipments. Engineering and development expenses were 27% of total revenues for the three-month period ended December 31, 1998 compared to 31% for the same period a year ago. This decrease is due primarily to reduced new product development costs. General and administrative expenses for the three-month periods ended December 31, 1998 and 1997 were 28% and 21%, respectively, of total revenues. The increase in general and administrative expenses as a percentage of total revenue is due primarily to an increase in personnel-related costs and other general expenses associated with Integral Partners, Inc. Interest income decreased to $6,000 for the three months ended December 31, 1998 from $12,000 for the same period in 1997 due to lower balances of cash and marketable securities. Interest expense increased to $165,000 for the three months ended December 31, 1998 from $94,000 for the same prior-year period, primarily due to an increased balance of 8% convertible debentures outstanding and a $42,000 increase in non-cash charges during the three-month period ended December 31, 1998 for the intrinsic value of the beneficial conversion feature of convertible debentures issued during the period. The Company incurred a net loss for the three-month period ended December 31, 1998 of $1,192,000 ($0.09 per share) as compared with $1,324,000 ($0.11 per share) for the same prior-year period. INFLATION The Company does not believe inflation has significantly affected revenues or expenses. NET OPERATING LOSS CARRYFORWARDS At December 31, 1998, the Company had carryforwards of net operating losses of approximately $36,900,000 that may allow the Company to reduce future income taxes that would 14 DIGITAL BIOMETRICS, INC. THREE MONTHS ENDED DECEMBER 31, 1998 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS otherwise be payable. Of this amount approximately $2,200,000 relates to compensation associated with the exercise of non-qualified stock options which, when realized, would result in approximately $880,000 credited to additional paid-in capital. The carryforwards expire annually beginning in 1999. The annual limitation on use of net operating losses is calculated by multiplying the value of the corporation immediately prior to the change in ownership by the published U.S. Internal Revenue Service long-term federal tax exempt rate. A total of $3,700,000 of the net operating loss carryforwards at December 31, 1998 is subject to an annual net operating loss limitation, estimated at $350,000, resulting from the change in control of the Company which occurred, for income tax purposes, on December 14, 1990, the date of the Company's initial public offering. If the limited carryforward amount for any tax year exceeds the regular taxable income for such year, then the unused portion may generally be carried forward to increase the annual limitation for the following year. Utilization of net operating losses aggregating $33,200,000 which were incurred subsequent to the change of ownership are not limited. However, any future ownership change could create a limitation with respect to these loss carryforwards. LIQUIDITY AND CAPITAL RESOURCES GENERAL For the period from the Company's inception in 1985 through December 31, 1998, the Company's cumulative deficit was $41,404,000. 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 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. On September 29, 1998, the Company entered into an inventory and receivables financing line of credit for the lesser of eligible inventory and receivables or $2,000,000 with SPECTRUM Commercial Services. This line replaced an existing line of credit with another lender. Borrowings under this line of credit are secured by all the assets of the Company. The line bears interest at an initial rate of 4% above the prime rate, and may be reduced to 3.25% or 2.50% above the prime rate if certain net income milestones are satisfied. The line bears a minimum interest charge of $5,200 per month, is payable upon demand and expires in September 2000. At December 31, 1998, $129,288 was outstanding on this line of credit. 15 DIGITAL BIOMETRICS, INC. THREE MONTHS ENDED DECEMBER 31, 1998 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ISSUANCE OF 8% CONVERTIBLE SUBORDINATED DEBENTURES AND WARRANTS On December 1, 1997 the Company entered into a convertible subordinated debenture purchase agreement ("Purchase Agreement") with a private investor, providing for the Company's issuance and sale of up to an aggregate of $2,500,000 of 8% Convertible Subordinated Debentures (the "1997 Debentures") in tranches of $500,000 each. The first four tranches were funded during fiscal 1998. The fifth tranche was funded in November 1998. ANALYSIS OF CASH FLOWS FROM OPERATIONS Net cash used in operating activities was $472,000 for the three months ended December 31, 1998 compared with $1,133,000 for the same prior-year period. The decrease in cash used in operating activities was primarily a result of the smaller net loss for the current-year period, adjusted for changes in operating assets and liabilities. Cash provided from changes in operating assets and liabilities were $435,000 in the three-month period ended December 31, 1998 as compared to cash used of $42,000 in the same prior-year period. This $477,000 change in cash flow from operating assets and liabilities resulted primarily from improved collections of accounts receivable, a higher inventory balance to support the Company's increased backlog, decreased accounts payable balances and decreased warranty and installation accruals, respectively, during the current-year period. Net cash used in investing activities was $80,000 for the three months ended December 31, 1998 as compared with less than $1,000 of net cash provided by investing activities in the same prior-year period. The change was primarily due to a decrease in proceeds from marketable securities, and decreased capital expenditures and patent costs. Net cash provided by financing activities was $457,000 during the three months ended December 31, 1998, as compared to $445,000 during the same prior-year period. This increase is due primarily to an increase in borrowings under a line of credit at December 31, 1998 as compared to the prior year partially offset by payments made on capital lease obligations during the current-year period. At December 31, 1998, the Company had $745,000 in cash and cash equivalents. Based on sales and operating forecasts management believes that cash and cash equivalents, together with available financing sources, are adequate to meet current operating requirements. However, any prediction of future sales is inherently difficult. Additional financing may be required if sales and operating results are different from forecasts. The Company has identified potential sources for such additional financing, in the event that it is required; however, there can be no assurance that such sources will, in fact, provide the Company with such financing on terms that are acceptable to the Company, if at all. 16 DIGITAL BIOMETRICS, INC. THREE MONTHS ENDED DECEMBER 31, 1998 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS YEAR 2000 PHENOMENON Computers, software and other equipment utilizing microprocessors that use only two digits to identify a year in a date field may be unable to accurately process certain date-based information, including correct leap year recognition, at or after the year 2000. This is commonly referred to as the "Year 2000" phenomenon. Digital Biometrics is evaluating the potential effect of the Year 2000 phenomenon on its business. INTERNAL SYSTEMS The Company is evaluating and reviewing all the Company's internal systems that could pose Year 2000 risks, and the Company intends to correct problems as they are identified. The Company is requesting Year 2000 readiness statements from each of its major suppliers of hardware and software products used for internal business applications, including computer and network equipment, telephone equipment, facility date-sensitive hardware, process date-sensitive hardware, and software. The Company will continue to review internal system requirements and to correct Year 2000 deficiencies as they are identified. The Company believes that the majority of its internal information systems are Year 2000 compliant, such that they will be able to distinguish accurately between 20th century and 21st century dates, and that the cost of converting or replacing those that are not Year 2000 compliant will not be material in relation to the Company's financial position or results of operations. However, there can be no assurance that unforeseen difficulties or costs will not arise. Furthermore, the information systems of the Company's suppliers and customers may not be Year 2000 compliant, and it is possible that various business functions which require the interaction of the Company's systems with those of suppliers or customers will fail or malfunction in the Year 2000. The potential effect and related costs of the failure of the Company's information systems suppliers to address Year 2000 issues in the products supplied to the Company is not known at this time, but such failure may have a material adverse affect on DBI. The Company believes that hardware and software products for its internal systems are available for purchase from alternative suppliers should its current vendors fail to conform to Year 2000 compliance. VENDOR PRODUCTS FOR MANUFACTURING The Company is also in the process of contacting its critical suppliers, manufacturers, and other vendors to determine if their operations and the products and services that they provide to the Company are Year 2000 compliant. Where practicable, the Company will develop contingency plans to lessen its risks with respect to the failure of third parties to be Year 2000 ready. However, such failure, including failures of any contingency plans, remains a possibility and may have a material adverse affect on the Company's results of operations and financial condition. 17 DIGITAL BIOMETRICS, INC. THREE MONTHS ENDED DECEMBER 31, 1998 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COMPANY PRODUCTS Management believes that all of the Company's products shipped beginning January, 1999, are and will continue to be Year 2000 compliant. The Company evaluated products sold prior to this date for Year 2000 suitability, the specific nature of possible non-compliance, and the potential impact on DBI's customers. The results are being communicated to the Company's customers in writing as product generations are evaluated. Evaluation of the 1133S TENPRINTER has been completed with notification of compliance communicated to the Company's customers in writing in January, 1999. The Company presently anticipates that the evaluation of the 1133R TENPRINTER product will be completed and results communicated to customers by February 28, 1999. Based on results of tests to date, the Company has concluded that 1133S TENPRINTER systems shipped prior to January, 1999, are not Year 2000 compliant with respect to certain date-sensitive functions, but can be made compliant with software modifications. These modifications require changes to the operating system of the affected products. The 1133S operating system is sourced from an outside vendor, and then augmented by DBI to meet the particular requirements of DBI's products. Consequently, achieving Year 2000 compliance requires obtaining certain operating system modifications from the operating system vendor, which are in turn incorporated by the Company into its applications and then distributed by the Company to its customers and installed by them. Year 2000 upgrades for the 1133S TENPRINTER will be provided to customers with DBI maintenance agreements free of any additional charge. Owners of non-compliant 1133S TENPRINTER systems that do not have maintenance agreements with the Company may purchase Year 2000 upgrade software and installation services from the Company. In addition, based on test results to date, the Company has also determined that models of the TENPRINTER prior to the 1133S are not Year 2000 compliant with respect to certain date-sensitive functions. The Company is testing Year 2000 compliance on legacy software releases on a product-by-product basis, and will communicate to customers the specific functions which may not perform properly. As with the 1133S, the underlying operating systems of prior models of the TENPRINTER were sourced from outside vendors. These operating systems are no longer being supported by the vendors. Thus, no vendor assistance for Year 2000 upgrading is available to Digital Biometrics, making the task of upgrading these operating systems for Year 2000 compliance very difficult and uneconomical. Some customers may continue to use non-compliant TENPRINTERs by avoiding the use of non-compliant date-sensitive functions. To the best of the Company's knowledge, the Company has no obligation to upgrade models of its TENPRINTER product prior to the 1133S to Year 2000 compliance, and the Company has no present plans to develop or offer any such upgrades to bring to full Year 2000 compliance. In the event that the Company is required to offer Year 2000 compliance on TENPRINTER systems prior to the 1133S without compensation, the Company may be materially adversely affected. Customers with non-compliant systems may purchase the Company's TENPRINTER 1133S or DBI FingerPrinter CMS systems. It is possible that the Company's revenue may be adversely affected if current and prospective customers divert spending to correct or replace information systems which are not Year 2000 compliant. 18 DIGITAL BIOMETRICS, INC. THREE MONTHS ENDED DECEMBER 31, 1998 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COST OF YEAR 2000 COMPLIANCE TO THE COMPANY The estimated cost of the Company's software development to assure Year 2000 compliance of its 1133S TENPRINTER and future DBI products will be in the range of $50,000 to $75,000. The Company believes that most Year 2000 compliance upgrades to be provided to customers under maintenance agreements can be installed by modem, with only a limited number of on-site customer installations required. The Company believes that the cost to implement the software upgrades will be between $100,000 to $150,000 in total. If unplanned development issues or unplanned customer installation problems arise, the cost to complete Year 2000 compliance may exceed these estimates and have a material adverse affect on the Company's results of operations. The Company is creating a web site at www.digitalbiometrics.com containing additional information about the Year 2000 issue and the Company's compliance program. Achieving Year 2000 compliance is dependent on a number of factors, many of which are not within the Company's control. In the event that the above assessment of the Company's situation regarding Year 2000 issues is found to be incorrect on subsequent analysis, the Company's business and its results of operations may be materially adversely affected. 19 DIGITAL BIOMETRICS, INC. THREE MONTHS ENDED DECEMBER 31, 1998 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS There are no material lawsuits pending or, to the Company's knowledge, threatened against the Company. ITEM 2. CHANGES IN SECURITIES (a) Not applicable. (b) Not applicable. (c) Effective October 1, 1998, the Company issued a warrant in payment for services rendered in securing employment of certain employees of the Company. No underwriter or broker-dealer was involved in connection with such issuance, nor was any commission or discount paid or allowed in connection therewith. The registrant believes the issuance of the warrant was exempt from registration under Securities Act of 1933, as amended, pursuant to Section 4(2) thereof as a transaction not involving a public offering. The warrant entitles the holder to purchase 15,000 shares of the Company's common stock, exercisable at the price of $2.60 per share, subject to customary antidilution provisions of the warrant. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. (a) EXHIBITS Exhibit 10.1 Securities Purchase Agreement, dated as of January 8, 1999, by and among the Company and the Purchasers identified therein. Exhibit 10.2 Registration Rights Agreement, dated as of January 8, 1999, by and among the Company and the Purchasers identified therein. Exhibit 10.3 Form of Common Stock Purchase Warrant issued to purchasers of Digital Biometrics, Inc. common stock in January 1999 private placement. Exhibit 11.0 Statement re: Computation of loss per share. Exhibit 27 Financial Data Schedule. 20 DIGITAL BIOMETRICS, INC. THREE MONTHS ENDED DECEMBER 31, 1998 (b) REPORTS ON FORM 8-K There were no reports on Form 8-K filed by the Company during the three-month period ended December 31, 1998. 21 DIGITAL BIOMETRICS, INC. THREE MONTHS ENDED DECEMBER 31, 1998 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DIGITAL BIOMETRICS, INC. ------------------------ (Registrant) February 12, 1999 s/John J. Metil --------------------------- John J. Metil Executive Vice President, Chief Operating Officer and Chief Financial Officer 22 EX-10.1 2 SECURITIES PURCHASE AGREEMENT EXHIBIT 10.1 - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT Between DIGITAL BIOMETRICS, INC. and KA INVESTMENTS LDC ------------------------------ January 8, 1999 ------------------------------ - -------------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT, dated as of January 8, 1999 (this "Agreement"), between Digital Biometrics, Inc., a Delaware corporation (the "Company"), and the parties who have executed this Agreement and whose names appear on Schedule 1 attached hereto (each party listed on Schedule 1 attached hereto a "Purchaser" and collectively, the "Purchasers"). WHEREAS, subject to the terms and conditions set forth herein, the Company desires to issue and sell to the Purchasers and the Purchasers desire to purchase an aggregate of 422,219 shares (the "Shares") of 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 SHARES 1.1 Purchase and Sale. Subject to the terms and conditions set forth herein, the Company shall issue and sell to each Purchaser, and each Purchaser shall purchase from the Company, the number of Shares set forth next to such Purchaser's name on Schedule 1 attached hereto, for an aggregate purchase price of $699,996.54 (the "Purchase Price"). 1.2 The Closing. (a) The closing of the purchase and sale of the Shares (the "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 Closing is hereinafter referred to as the "Closing Date." (b) At the Closing, (i) the Company shall deliver to each Purchaser (1) a stock certificate, registered in the name of such Purchaser or such Purchaser's designee, representing the number of Shares to be acquired at Closing by such Purchaser (which number is set forth opposite such Purchaser's name on Schedule 1 hereto), (2) a Warrant (as defined in Section 3.15), each registered in such Purchaser's name or the name of such Purchaser's designee, (3) the legal opinion of Maslon Edelman Borman & Brand, substantially in the form attached hereto as Exhibit B, and (3) all other documents, instruments and writings required to have been delivered at or prior to the Closing by the Company pursuant to this Agreement, including, without limitation, an executed original of the Registration Rights Agreement, dated the date hereof, among the Company and the Purchasers in the form of Exhibit A hereto (the "Registration Rights Agreement"), and (b) each Purchaser shall deliver to the Company (1) the amount set forth opposite such Purchaser's name on Schedule 1 hereto, less the fees contemplated in Section 4.1, in immediately available funds by wire transfer to an account designated in writing by the Company for such purpose on or prior to the Closing Date, and (2) all documents, instruments and writings required to have been delivered at or prior to the Closing by such Purchaser pursuant to this Agreement, including without limitation, an executed Registration Rights Agreement. ARTICLE II REPRESENTATIONS AND WARRANTIES 2.1 Representations and Warranties of the Company. The Company hereby represents and warrants to the Purchasers as of the date hereof 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 the Securities (as defined below) or any of this Agreement, the Shares, the Warrant, or the Registration Rights Agreement, (collectively, 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). -2- (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 Warrant 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 the Securities. The Securities 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 Warrant is outstanding will maintain an adequate reserve of duly authorized shares of Common Stock to enable it to perform its exercise and other obligations under this Agreement and the Warrant and in no circumstances shall such reserved and available shares of Common Stock be less than 100% of the number of shares of Common Stock as are issuable upon exercise in full of the Warrant. The shares of Common Stock issuable upon exercise of the Warrant is sometimes referred to herein as the "Underlying Shares," and the Shares, Warrant and Underlying Shares are, collectively, the "Securities." When issued in accordance with the terms of the Warrant, 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 -3- 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 Shares and 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), and (iii) 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 Purchasers the Shares and 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. (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. Assuming the accuracy of the representations and warranties of the Purchasers set forth in Sections 2.2(b)-(g), the offer, issuance and sale of the Securities to the Purchasers as contemplated hereby are exempt from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act"). Neither the Company nor any Person acting on its -4- 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. (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, 1998, 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 Purchasers 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, 1998, 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" (as defined in Rule 405 under the Securities Act) 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 Purchasers 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 -5- hold harmless the Purchaser, their respective 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-3 Eligibility. The Company is eligible to register securities for resale with the Commission under Form S-3 promulgated under the Securities Act. (o) 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. (p) 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. 2.2 Representations and Warranties of the Purchasers. Each Purchaser hereby, severally and not jointly, makes the following representations and warranties to the Company: (a) Organization; Authority. Such 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 such Purchaser has been duly authorized by all necessary action on the part of such Purchaser. Each of this Agreement and the Registration Rights Agreement has been duly executed and delivered by such Purchaser and constitutes the valid and legally binding obligation of such Purchaser, enforceable against such Purchaser, in accordance with its terms, subject to bankruptcy, insolvency, -6- 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. Such 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 such 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's Status. At the time such Purchaser was offered the Securities, it was, and at the date hereof, it is an "accredited investor" pursuant to in Rule 501(a)(3) under the Securities Act. (d) Experience of Purchaser. Such 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. Such Purchaser acknowledges that the Securities are speculative investments and involve a high degree of risk and such Purchasers is able to bear the economic risk of an investment in the Securities, and, at the pre sent time, is able to afford a complete loss of such investment. (f) Access to Information. Such 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. Such Purchaser understands and acknowledges that (i) the Securities are being offered and sold to such 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 -7- and truthfulness of, the foregoing representations and such Purchaser hereby consents to such reliance. The Company acknowledges and agrees that the Purchasers 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 Purchasers to an Affiliate of such 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 Purchasers under this Agreement and the Registration Rights Agreement. (b) The Purchasers 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 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. The legend set forth above shall be removed from the Shares and the Company shall cause its transfer agent to issue a certificate or certificates without any legend (upon surrender of the -8- legended certificates duly endorsed) to each holder of the Shares upon which it is stamped if (i) such Securities are registered for resale under the Securities Act or (ii) such legend is not required pursuant to Rule 144 promulgated under the Securities Act. Underlying Shares shall not contain the legend set forth above nor any other legend if the exercise of the Warrant or other issuances of Underlying Shares 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 Purchasers, 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 Acknowledgment of Dilution. The Company acknowledges that the issuance of the Underlying Shares upon exercise of the Warrant 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 its obligation to issue Underlying Shares in accordance with the Warrant is unconditional and absolute regardless of the effect of any such dilution. 3.3 Furnishing of Information. As long as any 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 Purchasers may resell all of their 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 Purchasers 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. -9- 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 Purchasers 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 Purchasers may reasonably request and shall continue such qualification at all times through the third anniversary of the 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 Purchasers. 3.7 Increase in Authorized Shares. At such time as the Company would be, if a notice of exercise were to be delivered on such date, precluded from honoring the exercise in full of the Warrant, 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 Warrant) and on account of all shares reserved under any stock option, stock purchase, warrant or similar plan and (iii) such number of Underlying Shares as would then be issuable upon the exercise in full of the Warrant. 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 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 number of Shares and the number of Underlying Shares issuable upon exercise in full of the Warrant, (ii) take all steps -10- 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 Purchasers 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 exercise of the Warrant 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 the number of shares of Common Stock as would be issuable upon the exercise of the Warrant in full. 3.9 [INTENTIONALLY OMITTED] 3.10 Notice of Breaches. Each of the Company and each 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 each 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 Shares a copy of any written statement in support of or relating to such claim or notice. 3.11 Exercise Obligations of the Company. The Company shall honor exercises of the Warrant and shall deliver Underlying Shares in accordance with the terms and conditions and time periods set forth in the Warrant. 3.12 Subsequent Offerings; Certain Company Actions. (a) The Company shall not without the prior written consent of each 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 60 Trading Days after the Effectiveness Date (as defined in the Registration Rights Agreements) (any days that any Purchaser is unable to sell Underlying Shares under the Underlying Securities Registration Statement following the Effectiveness Date shall be added to such 60 Trading Day period). The following offerings and -11- issuances shall not be subject to the restrictions set forth in the immediately preceding sentence: (x) 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, (y) any equity or equity- equivalent private offering entered into prior to the Closing Date and (z) shares of Common Stock issued upon exercise of the Warrant. (b) As long as Warrant is outstanding, the Company shall not and shall cause the Subsidiaries not to, without the consent of each 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 any Purchaser. 3.13 The Warrant. At the Closing, the Company shall issue to each Purchaser, a common stock purchase warrant, in the form of Exhibit C (the "Warrant"), pursuant to which the Purchasers shall have the right at any time thereafter through the fifth anniversary of the date of issuance thereof, to acquire the number of shares of Common Stock set forth opposite such Purchaser's name on Schedule 1 hereto. 3.14 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 MISCELLANEOUS 4.1 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 Purchasers' counsel in connection with the negotiation and preparation of the Transaction Documents in the amount of $15,000, and the Purchasers 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 Securities. Each Purchaser shall be responsible for such Purchaser's own tax liability that may arise as a result of the investment hereunder or the transactions contemplated by this Agreement. -12- 4.2 Entire Agreement; Amendments. This Agreement, together with the Exhibits and Schedules hereto, the Registration Rights Agreement and the Warrant 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. 4.3 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: Maslon Edelman Borman & Brand 3300 Norwest Center 90 South Seventh Street Minneapolis, MN 55402 Facsimile No.: (612) 672-8397 Attn: Philip Tilton If to the Purchasers: to the addresses set forth on Schedule 1 hereto 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 or such other address as may be designated in writing hereafter, in the same manner, by such Person. -13- 4.4 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 the Company and each of the Purchasers; 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. 4.5 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. 4.6 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 its Warrant. The assignment by a party of this Agreement or any rights hereunder shall not affect the obligations of such party under this Agreement. 4.7 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 4.6, is not for the benefit of, nor may any provision hereof be enforced by, any other Person. 4.8 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. 4.9 Survival. The representations, warranties, agreements and covenants contained in this Agreement shall survive after the Closing Date and the delivery and exercise of the Warrant. 4.10 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. 4.11 Publicity. The Company and each 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 -14- shall not publicly disclose the name of any Purchaser without the prior written consent of such Purchaser, except to the extent required by law, in which case the Company shall provide Purchasers with prior written notice of such public disclosure. 4.12 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. 4.13 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] -15- IN WITNESS WHEREOF, the parties hereto have caused this Securities Purchase Agreement to be duly executed by their respective authorized persons as of the date first indicated above. Company: DIGITAL BIOMETRICS, INC. By: /s/ John J. Metil ------------------------------------- Name: John J. Metil Title: Executive Vice President Purchasers: KA INVESTMENTS LDC By: /s/ Irwin R. Kessler ------------------------------------- Name: Irwin R. Kessler Title: Managing Partner PYRAMID PARTNERS, L.P. /s/ Richard C. Perkins ---------------------------------------- Perkins Capital Management, Inc. its General Partner By: Richard C. Perkins, President Tax Identification Number: 41-1736366 INDUSTRICORP & CO., INC. FBO Twin City Carpenters Pension Plan /s/ Karen McKernas ---------------------------------------- By: Union Bank & Trust, Its Assistant Vice President ---------------------------------------- Piper Jaffray as Custodian FBO Richard C. Perkins IRA /s/ Richard C. Perkins ---------------------------------------- Richard C. Perkins Tax Identification Number: 41-1422918 Robert G. Allison /s/ Richard C. Perkins ---------------------------------------- Robert G. Allison Perkins Capital Management Inc., Attorney-in-Fact By: Richard C. Perkins, Vice President Tax Identification Number: ###-##-#### David M. Westrum, TTEE FBO David M. Westrum Revocable Living Trust U/A DTD 6-1-97 /s/ Richard C. Perkins ---------------------------------------- David M. Westrum Perkins Capital Management Inc., Attorney-in-Fact By: Richard C. Perkins, Vice President Tax Identification Number: ###-##-#### Piper Jaffray as Custodian FBO David H. Potter IRA /s/ Daniel S. Perkins ---------------------------------------- David H. Potter Perkins Capital Management Inc., Attorney-in-Fact By: Daniel S. Perkins, Vice President Tax Identification Number: 41-1422918 Piper Jaffray as Custodian FBO James G. Peters IRA /s/ Daniel S. Perkins ---------------------------------------- James G. Peters Perkins Capital Management Inc., Attorney-in-Fact By: Daniel S. Perkins, Vice President Piper Jaffray as Custodian FBO Patrice M. Perkins IRA /s/ Daniel S. Perkins ---------------------------------------- Patrice M. Perkins Perkins Capital Management Inc., Attorney-in-Fact By: Daniel S. Perkins, Vice President Tax Identification Number: 41-1422918 Piper Jaffray as Custodian FBO Daniel S. Perkins IRA /s/ Daniel S. Perkins ---------------------------------------- Daniel S. Perkins Tax Identification Number: 41-1422918 Schedule I
Number Number of Purchaser Purchase Price of Shares Underlying Shares - --------- -------------- --------- ----------------- 1. KA Investments LDC $300,000.00 180,952 180,952 c/o Tarmachan Capital Management 1712 Hopkins Crossroads Minnetonka, MN 55305 Facsimile No.: (612) 542-4284 Attn: Irvin Kessler 2. Pyramid Partners, L.P. $99,999.55 60,317 60,317 c/o Perkins Capital Management, Inc. 730 East Lake Street Wayzata, MN 55391 3. Twin City Carpenters Pension Plan $99,999.55 60,317 60,317 c/o Perkins Capital Management, Inc. 730 East Lake Street Wayzata, MN 55391 4. Richard C. Perkins IRA $34,999.93 21,111 21,111 2125 Hollybush Road Hamel, MN 55340 5. Robert G. Allison $34,999.93 21,111 21,111 c/o Perkins Capital Management, Inc. 730 East Lake Street Wayzata, MN 55391 6. David W. Westrum $29,999.70 18,095 18,095 c/o Perkins Capital Management, Inc. 730 East Lake Street Wayzata, MN 55391 7. David H. Potter IRA $24,999.47 15,079 15,079 c/o Perkins Capital Management, Inc. 730 East Lake Street Wayzata, MN 55391
Number Number of Purchaser Purchase Price of Shares Underlying Shares - --------- -------------- --------- ----------------- 8. James G. Peters IRA $24,999.47 15,079 15,079 c/o Perkins Capital Management, Inc. 730 East Lake Street Wayzata, MN 55391 9. Patrice M. Perkins IRA $24,999.47 15,079 15,079 2125 Hollybush Road Harmel, MN 55340 10. Daniel S. Perkins IRA $24,999.47 15,079 15,079 55 Landmark Drive Long Lake, MN 55356
EX-10.2 3 REGISTRATION RIGHTS AGREEMENT EXHIBIT 10.2 REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (this "Agreement") is made and entered into as of January 8, 1999, between Digital Biometrics, a Delaware corporation (the "Company"), and the parties who have executed this Agreement and whose names appear on Schedule 1 hereto (each party listed on Schedule 1 hereto, a "Purchaser" and collectively, the "Purchasers"). This Agreement is made pursuant to the Securities Purchase Agreement, dated as of the date hereof among the Company and the Purchasers (the "Purchase Agreement"). The Company and the Purchasers 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. "Closing Date" shall have the meaning set forth in the Purchase Agreement. "Commission" means the U.S. Securities and Exchange Commission. "Common Stock" means the Company's Common Stock, $.01 par value per share. "Effectiveness Date" means the 90th day following the 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 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 the Purchasers on the Closing Date pursuant to the terms of the Purchase Agreement. "Registrable Securities" means the (i) Shares purchased by the Purchasers on the Closing Date pursuant to the Purchase Agreement and (ii) the shares of Common Stock issuable upon exercise in full of the Purchaser Warrants. The Registration Statement shall cover at least such number of shares of Common Stock as equals the sum of (x) the number of Shares issued on the Closing Date and (2) the number of shares of Common Stock issuable upon exercise in full of the Warrant. "Registration Delay Payments" shall have the meaning set forth in Section 2(c). -2- "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. "Shares" shall have the meaning set forth in the Purchase Agreement. "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. "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 -3- 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. (c) If (i) a Registration Statement covering the Registrable Securities is not filed on or before the Filing Date (if the Company files such Registration Statement without affording the Holder the opportunity to review and comment on the same as required by Section 3(a) hereof, the Company shall not be deemed to have satisfied this clause (i)), or (ii) the Company fails to file with the Commission a request for acceleration in accordance with Rule 12d1-2 promulgated under the Exchange Act within five (5) days of the date that the Company is notified (orally or in writing, whichever is earlier) by the Commission that a Registration Statement will not be "reviewed" or is not subject to further review, provided, however, that such five (5) day period may be extended in the event that the Company reasonably believes that such Registration Statement should be amended to include material non-public information; or (iii) a Registration Statement covering the Registrable Securities is not declared effective by the Commission on or before the Effectiveness Date, or (iv) after the Registration Statement has been declared effective by the Commission, the Registration Statement is either not effective as to the Registrable Securities throughout the applicable Effectiveness Period (unless such Registration Statement is succeeded by a subsequent Registration Statement filed with and declared effective by the Commission within 10 Business Days) or the Holders are not permitted for any reason to make sales thereunder during such period, or (v) an amendment to the Registration Statement is not filed by the Company with the Commission within ten (10) days of the Commission's notifying the Company that such amendment is required in order for the Registration Statement to be declared effective (any such failure or breach being referred to as an "Event," and for purposes of clauses (i), (iii) and (iv) the date on which such Event occurs, or for purposes of clause (ii) the date on which such five (5) day period is exceeded, or for purposes of -4- clause (v) the date on which such ten (10) day period is exceeded, being referred to as "Event Date"), then, in any such case, as partial relief for the damages suffered therefrom by the Holders (which remedy shall not be exclusive of any other remedies available at law or in equity), the Company shall pay to the Holders 1.0% of aggregate purchase price paid by such Holder (or its predecessor-in-interest) on the Closing Date for such Holder's Shares pursuant to the Purchase Agreement, 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 aggregate purchase price paid by such Holder (or its predecessor-in-interest) on the Closing Date for such Holder's Shares pursuant to the Purchase Agreement, 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 $[300,000] in aggregate. The payments to which a Holder shall be entitled pursuant to this Section are referred to herein as "Registration Delay Payments." Registration Delay Payments shall be calculated on a cumulative basis. 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). -5- (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 -6- 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 -7- 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 -8- 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. -9- (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. (p) 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. (q) 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), (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 and (iii) so long as a Registration Statement covering all of the Registrable Securities is effective and all of the Holders are permitted to make sales of Registrable Securities under such Registration Statement, such Holder will only sell the Registrable Securities that it holds pursuant to such Registration Statement or in accordance with Rule 144 promulgated under the Securities Act. Each Holder shall indemnify and hold harmless the Company and its officers, directors and agents, to the fullest extent permitted by applicable law, from and against any and all losses, claims, damages, liabilities, costs and expenses, as incurred, arising out of or relating to the breach by such Holder of its obligations under this Section 3(r). (r) 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 Pro spectus 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 Pro spectus or Registration Statement. -10- 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 -11- 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. -12- (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 (regard less 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 -13- 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), no Purchaser shall not be required to contribute, in the aggregate, any amount in excess of the amount by which the proceeds actually received by such Purchaser from the sale of the Registrable Securities subject to the Proceeding exceeds the amount of any damages that such 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. -14- (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 -15- 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: Maslon Edelman Borman & Brand 3300 Norwest Center 90 South Seventh Street Minneapolis, MN 55402 Facsimile No.: (612) 672-8397 Attn: Philip Tilton If to the Purchasers: to the addresses set forth on Schedule 1 hereto -16- 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 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. Each 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 each 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 such Purchaser to any assignee or transferee of all or a portion of the Shares, the Purchaser Warrants or the Registrable Securities without the consent of the Company if: (i) such 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 Purchasers' (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. -17- (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 Agree ment 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 restric tion. 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. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK SIGNATURE PAGE FOLLOWS] IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first written above. Company: DIGITAL BIOMETRICS, INC. By: /s/ John J. Metil ------------------------------------- Name: John J. Metil Title: Executive Vice President Purchasers: KA INVESTMENTS LDC By: /s/ Irwin R. Kessler ------------------------------------- Name: Irwin R. Kessler Title: Managing Partner PYRAMID PARTNERS, L.P. /s/ Richard C. Perkins ---------------------------------------- Perkins Capital Management, Inc. its General Partner By: Richard W. Perkins, President Tax Identification Number: 41-1736366 INDUSTRICORP & CO., INC. FBO Twin City Carpenters Pension Plan /s/ Karen McKernas ---------------------------------------- By: Union Bank & Trust, Its Assistant Vice President ---------------------------------------- Piper Jaffray as Custodian FBO Richard C. Perkins IRA /s/ Richard C. Perkins ---------------------------------------- Richard C. Perkins Tax Identification Number: 41-1422918 Robert G. Allison /s/ Richard C. Perkins ---------------------------------------- For: Robert G. Allison Perkins Capital Management Inc., Attorney-in-Fact By: Richard C. Perkins, Vice President Tax Identification Number: ###-##-#### David M. Westrum, TTEE FBO David M. Westrum Revocable Living Trust U/A DTD 6-1-97 /s/ Richard C. Perkins ---------------------------------------- For: David M. Westrum Perkins Capital Management Inc., Attorney-in-Fact By: Richard C. Perkins, Vice President Tax Identification Number: ###-##-#### Piper Jaffray as Custodian FBO David H. Potter IRA /s/ Daniel S. Perkins ---------------------------------------- David H. Potter Perkins Capital Management Inc., Attorney-in-Fact By: Daniel S. Perkins, Vice President Tax Identification Number: 41-1422918 Piper Jaffray as Custodian FBO James G. Peters IRA /s/ Daniel S. Perkins ---------------------------------------- James G. Peters Perkins Capital Management Inc., Attorney-in-Fact By: Daniel S. Perkins, Vice President Piper Jaffray as Custodian FBO Patrice M. Perkins IRA /s/ Daniel S. Perkins ---------------------------------------- Patrice M. Perkins Perkins Capital Management Inc., Attorney-in-Fact By: Daniel S. Perkins, Vice President Tax Identification Number: 41-1422918 Piper Jaffray as Custodian FBO Daniel S. Perkins IRA /s/ Daniel S. Perkins ---------------------------------------- Daniel S. Perkins Tax Identification Number: 41-1422918 Schedule I Purchaser Purchase Price - --------- -------------- 1. KA Investments LDC $300,000 c/o Tarmachan Capital Management 1712 Hopkins Crossroads Minnetonka, MN 55305 Facsimile No.: (612) 542-4284 Attn: Irvin Kessler 2. Pyramid Partners, L.P. $100,000 c/o Perkins Capital Management, Inc. 730 East Lake Street Wayzata, MN 55391 3. Twin City Carpenters Pension Plan $100,000 c/o Perkins Capital Management, Inc. 730 East Lake Street Wayzata, MN 55391 4. Richard C. Perkins IRA $35,000 2125 Hollybush Road Hamel, MN 55340 5. Robert G. Allison $35,000 c/o Perkins Capital Management, Inc. 730 East Lake Street Wayzata, MN 55391 6. David W. Westrum $30,000 c/o Perkins Capital Management, Inc. 730 East Lake Street Wayzata, MN 55391 7. David H. Potter IRA $25,000 c/o Perkins Capital Management, Inc. 730 East Lake Street Wayzata, MN 55391 Purchaser Purchase Price - --------- -------------- 8. James G. Peters IRA $25,000 c/o Perkins Capital Management, Inc. 730 East Lake Street Wayzata, MN 55391 9. Patrice M. Perkins IRA $25,000 2125 Hollybush Road Harmel, MN 55340 10. Daniel S. Perkins IRA $ 25,000 55 Landmark Drive Long Lake, MN 55356 EX-10.3 4 FORM OF COMMON STOCK PURCHASE 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. THIS WARRANT IS SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AND EXERCISE SET FORTH IN A SECURITIES PURCHASE AGREEMENT, DATED AS OF JANUARY 8, 1999, 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. DIGITAL BIOMETRICS, INC. WARRANT Warrant No. 001 Dated January 8, 1999 DIGITAL BIOMETRICS, INC., a Delaware corporation (the "Company"), hereby certifies that, for value received, _________________, or its registered assigns ("Holder"), is entitled, subject to the terms set forth below, to purchase from the Company 180,952 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 $1.6579 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 January 8, 2004 (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) -2- 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, 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. -3- 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. -4- 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 multiplying the Exercise Price in effect immediately prior thereto by a fraction, the numerator of which shall be the sum of (i) the number of shares of Common Stock outstanding immediately prior to such issuance, and (ii) the number of shares of Common Stock which the aggregate consideration received (or to be received, assuming exercise or conversion in full of such rights, warrants and convertible securities) for the issuance of such additional shares of Common Stock would purchase at the Exercise Price, and the denominator of which shall be the sum of the number of shares of Common Stock outstanding immediately after the issuance of such additional shares. Such adjustment shall be made successively whenever such an issuance is made. (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 -5- 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, -6- 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 one of the following manners: (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. Certain Exercise Restrictions. (a) The Holder agrees not to exercise this Warrant to the extent such exercise would result in the Holder beneficially owning (as determined in accordance with Section 13(d) of the Exchange Act and the rules thereunder) in excess of 4.999% of the then issued and outstanding shares of Common Stock, including shares issuable upon exercise of this Warrant after application of this Section. The Holder shall have the sole authority and obligation to determine -7- whether the restriction contained in this Section applies. The provisions of this Section may be waived by the Holder (but only as to itself and not to any other holders of the other Warrant) upon not less than 75 days prior notice to the Company (in which case, the Holder shall make such filings with the Commission, including under Regulation 13D or 13G, as are required by applicable law). (b) The Holder also agrees not to exercise this Warrant to the extent such exercise would result in the Holder beneficially owning (as determined in accordance with Section 13(d) of the Exchange Act and the rules thereunder) in excess of 9.999% of the then issued and outstanding Common Stock, including shares issuable upon exercise of this Warrant after application of this Section. The Holder shall have the sole authority and obligation to determine whether the restriction contained in this Section applies. The provisions of this Section may be waived by the Holder (but only as to itself and not to any other holders of the Other Warrant) upon not less than 75 days prior notice to the Company. 11. 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. 12. 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. 13. 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 -8- 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. 14. 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. -9- 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-11.0 5 STATEMENT RE: COMPUTATION OF LOSS PER SHARE EXHIBIT 11.0 DIGITAL BIOMETRICS, INC. STATEMENT RE: COMPUTATION OF LOSS PER SHARE The per share computations are based on the weighted average number of common shares outstanding during the periods.
Three Months Ended December 31, --------------------------------- 1998 1997 ------------- ------------- Shares outstanding at beginning of period 13,661,832 12,361,038 Shares issued under retirement plan 67,828 55,963 Shares issued upon conversion of debentures 306,827 -- ------------- ------------- Shares outstanding at end of period 14,036,487 12,417,001 ============= ============= Weighted average shares outstanding (A) 13,820,713 12,361,646 ============= ============= Net loss $ (1,192,423) $ (1,324,000) ============= ============= Loss per common share - basic and diluted $ (0.09) $ (0.11) ============= =============
(A) Stock options, warrants and other assumed conversion shares are not included in the calculation of the net loss per common share as their effect is antidilutive. EX-27 6 FINANCIAL DATA SCHEDULE
5 0000868373 DIGITAL BIOMETRICS INC 1 3-MOS SEP-30-1999 OCT-01-1998 DEC-31-1998 745,252 0 3,452,294 279,759 2,895,291 7,028,084 2,490,546 1,465,431 8,174,630 3,687,317 1,079,049 0 0 140,365 3,165,629 8,174,630 1,346,119 2,367,668 901,853 1,689,270 1,712,449 0 164,647 (1,192,423) 0 (1,192,423) 0 0 0 (1,192,423) (0.09) (0.09)
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