-----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, IUbyOyABcrfFQ3lfEel9i6Hvs2bBoTP306/w+5IsMQRG96JVhBn/urvpDc/jrAg3 1MhdCKMbHWqPI13YdPp6DQ== 0000897101-98-000840.txt : 19980817 0000897101-98-000840.hdr.sgml : 19980817 ACCESSION NUMBER: 0000897101-98-000840 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIGITAL BIOMETRICS INC CENTRAL INDEX KEY: 0000868373 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 411545069 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-18856 FILM NUMBER: 98688433 BUSINESS ADDRESS: STREET 1: 5600 ROWLAND RD CITY: MINNETONKA STATE: MN ZIP: 55343 BUSINESS PHONE: 6129320888 MAIL ADDRESS: STREET 2: 5600 ROWLAND RD CITY: MINNETONKA STATE: MN ZIP: 55343 10-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 June 30, 1998 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________________________ to ___________________ Commission File Number: 0-18856 DIGITAL BIOMETRICS, INC. (Exact name of registrant as specified in its charter) Delaware 41-1545069 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 5600 Rowland Road, Minnetonka, Minnesota 55343 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (612) 932-0888 (Registrant's telephone number, including area code) N/A (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. [x] Yes [ ] No Indicate the number of shares of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $.01 par value July 31, 1998 - 12,993,530 shares (Class) (Outstanding) 1 DIGITAL BIOMETRICS, INC. THREE MONTHS ENDED JUNE 30, 1998 INDEX PART I - FINANCIAL INFORMATION: PAGE ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) BALANCE SHEETS 4 STATEMENTS OF OPERATIONS 5 STATEMENTS OF CASH FLOWS 6 NOTES TO FINANCIAL STATEMENTS 7 ITEM 2. MANAGEMENT'S DISCUSSION AND 14 ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS PART II - OTHER INFORMATION: ITEM 1. LEGAL PROCEEDINGS 23 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 24 ITEM 3. DEFAULTS UPON SENIOR SECURITIES 24 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 24 ITEM 5. OTHER INFORMATION 24 ITEM 6. (a) EXHIBITS 25 (b) REPORTS ON FORM 8-K 25 SIGNATURES 26 EXHIBIT 11 STATEMENT RE: COMPUTATION OF LOSS 27 PER SHARE EXHIBIT 27 FINANCIAL DATA SCHEDULE 28 TENPRINTER(R) and SQUID(R) have been registered as trademarks with the U.S. Patent and Trademark Office. The Company has applied for registration of the TRAK-21(TM) trademark. In addition, FC-5(TM), FC-6(TM), FC-7(TM), FC-11(TM), FC-21(TM) and FC-22(TM) are trademarks of the Company. 2 DIGITAL BIOMETRICS, INC. THREE MONTHS ENDED JUNE 30, 1998 SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Except for the historical information contained herein, the matters discussed in this Form 10-Q include forward-looking statements made within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. As provided for under the Private Securities Litigation Reform Act, the Company cautions investors that actual results of future operations may differ from those anticipated in forward-looking statements due to a number of factors, including the Company's ability to achieve profitability, introduce new products and services, build profitable revenue streams around new product and service offerings, maintain loyalty and continued purchasing of the Company's products by existing customers, execute on customer delivery and installation schedules, collect outstanding accounts receivable and manage the concentration of credit and payment timing risks particularly regarding large customers, create and maintain satisfactory distribution and operations relationships with AFIS vendors, attract and retain key employees, secure timely and cost-effective availability of product components, meet increased competition, maintain adequate working capital and liquidity, including the availability of financing as may be required, and upgrade products and develop new technologies. For a more complete description of such factors, see "Cautionary Statements" under Item 7 of the Company's Form 10-K report for the year ended September 30, 1997, filed December 23, 1997 with the Securities and Exchange Commission. 3 DIGITAL BIOMETRICS, INC. BALANCE SHEETS (UNAUDITED)
June 30, September 30, 1998 1997 ------------ ------------ Current assets: Cash and cash equivalents $ 1,448,697 $ 1,891,397 Marketable securities (note 3) -- 154,808 Accounts receivable, less allowance for doubtful accounts of $240,647 and $441,276, respectively 3,868,913 5,161,356 Inventory (note 4) 2,392,816 2,294,593 Prepaid expenses and other costs 203,450 163,594 ------------ ------------ Total current assets 7,913,876 9,665,748 ------------ ------------ Property and equipment 2,153,676 2,027,737 Less accumulated depreciation and amortization (1,253,008) (1,113,185) ------------ ------------ 900,668 914,552 ------------ ------------ Patents, trademarks, copyrights and licenses, net of accumulated amortization of $263,430 and $156,171, respectively 39,537 118,938 Deferred issuance costs on convertible debentures, net of accumulated amortization of $19,220 and $0, respectively (note 7) 84,927 -- ------------ ------------ $ 8,939,008 $ 10,699,238 ============ ============ Current liabilities: Accounts payable $ 1,311,913 $ 1,451,779 Accrued salaries and commissions 322,605 265,707 Accrued warranty 375,060 584,676 Deferred revenue 866,429 677,925 Other accrued expenses (note 6) 695,131 553,903 ------------ ------------ Total current liabilities 3,571,138 3,533,990 Convertible debentures (note 7) 977,573 -- ------------ ------------ Total liabilities 4,548,711 3,533,990 ------------ ------------ Stockholders' equity (note 8): Common Stock, $.01 par value. Authorized, 40,000,000 shares; issued and outstanding 12,993,530 and 12,361,038 shares, respectively 129,935 123,610 Additional paid-in capital 43,415,774 42,439,576 Unrealized losses on marketable securities (note 3) -- (1,639) Deferred compensation (106,500) (73,500) Accumulated deficit (39,048,912) (35,322,799) ------------ ------------ Total stockholders' equity 4,390,297 7,165,248 ------------ ------------ $ 8,939,008 $ 10,699,238 ============ ============
See accompanying notes to financial statements. 4 DIGITAL BIOMETRICS, INC. STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Nine Months Ended June 30, June 30, 1998 1997 1998 1997 ------------ ------------ ------------ ------------ Revenues: Identification systems $ 2,631,941 $ 1,889,894 $ 5,621,190 $ 6,862,651 Maintenance 691,359 422,630 1,890,899 1,213,860 Systems integration services 198,664 -- 309,820 -- ------------ ------------ ------------ ------------ Total revenues 3,521,964 2,312,524 7,821,909 8,076,511 ------------ ------------ ------------ ------------ Cost of revenues: Identification systems 1,664,703 1,310,769 4,201,691 4,646,112 Maintenance 648,262 544,929 1,583,683 1,536,809 Systems integration services 132,302 -- 205,334 -- Non-recurring charges (note 11) -- 1,529,118 -- 1,529,118 ------------ ------------ ------------ ------------ Total cost of revenues 2,445,267 3,384,816 5,990,708 7,712,039 ------------ ------------ ------------ ------------ Gross margin 1,076,697 (1,072,292) 1,831,201 364,472 ------------ ------------ ------------ ------------ Selling, general and administrative expenses: Sales and marketing 518,452 498,019 1,415,045 1,730,447 Engineering and development 757,128 718,802 2,281,800 2,090,741 General and administrative 473,445 523,255 1,406,212 1,372,813 Non-recurring charges (note 11) -- 330,319 -- 330,319 ------------ ------------ ------------ ------------ Total expenses 1,749,025 2,070,395 5,103,057 5,524,320 ------------ ------------ ------------ ------------ Loss from operations (672,328) (3,142,687) (3,271,856) (5,159,848) Other income (expense): Interest income 15,262 70,870 35,409 240,124 Interest expense (note 7) (142,908) (31,494) (427,073) (242,689) Other expense (note 10) (39,797) -- (62,593) (7,417) ------------ ------------ ------------ ------------ Total other income (expense) (167,443) 39,376 (454,257) (9,982) ------------ ------------ ------------ ------------ Net loss $ (839,771) $ (3,103,311) $ (3,726,113) $ (5,169,830) ============ ============ ============ ============ Net loss per common share $ (0.06) $ (0.25) $ (0.29) $ (0.45) ============ ============ ============ ============ Weighted average common shares outstanding 12,988,144 12,296,752 12,632,950 11,574,448 ============ ============ ============ ============
See accompanying notes to financial statements. 5 DIGITAL BIOMETRICS, INC. STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended June 30, ---------------------------- 1998 1997 ----------- ----------- Cash flows from operating activities: Net loss $(3,726,113) $(5,169,830) Adjustments to reconcile net loss to net cash used in operating activities: Provision for doubtful accounts receivable 5,287 5,000 Deferred compensation amortization 42,939 27,000 Depreciation and amortization 391,820 445,118 Write-off of intangible assets 76,780 -- Loss on disposal of fixed assets 48,893 227,580 Loss from paydowns on marketable securities 1,315 Interest expense amortization for the intrinsic value of the beneficial conversion feature of convertible debentures 375,000 -- Interest expense on debentures converted into common stock 10,784 274,474 Changes in operating assets and liabilities: Accounts receivable 1,287,156 575,336 Inventories (98,223) 1,331,125 Prepaid expenses (39,856) (119,372) Accounts payable (139,866) (137,979) Deferred revenue 188,504 54,152 Accrued expenses 21,452 262,311 ----------- ----------- Net cash used in operating activities (1,554,128) (2,225,085) ----------- ----------- Cash flows from investing activities: Purchase of property and equipment (379,421) (114,950) Patents, trademarks, copyrights and licenses (22,883) (25,738) Proceeds from marketable securities 155,132 1,219,421 ----------- ----------- Net cash provided by (used in) investing activities (247,172) 1,078,733 ----------- ----------- Cash flows from financing activities: Exercise of warrants and options 4,500 12,525 Issuance of convertible debentures, net 1,354,100 -- Net advances on line of credit -- 985,000 ----------- ----------- Net cash provided by financing activities 1,358,600 997,525 ----------- ----------- Decrease in cash and cash equivalents (442,700) (148,827) Cash and cash equivalents at beginning of period 1,891,397 466,990 ----------- ----------- Cash and cash equivalents at end of period $ 1,448,697 $ 318,163 =========== ===========
See accompanying notes to financial statements. 6 DIGITAL BIOMETRICS, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 1998 (UNAUDITED) (1) DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION Digital Biometrics, Inc. (the "Company") is a provider of biometric identification systems and systems integration services. The Company's traditional, core business is as a developer, manufacturer, marketer and integrator of computer-based products and services for the identification of individuals. The Company is a leading vendor of products employing "biometric" technology, the science of the identification of individuals through the measurement of distinguishing biological characteristics. The Company's principal product is the TENPRINTER(R) system for "live-scan" fingerprint capture used mainly in law enforcement applications. The TENPRINTER(R) is a computer-based system with patented high-resolution optics which captures, digitizes, prints and transmits forensic-grade fingerprint images. The Company also offers high-resolution single-fingerprint capture products for commercial and governmental identification applications. In addition, the Company has established a systems integration division during the current fiscal year (the "Integrated Information Solutions Division" or "IIS"), which is focused on the delivery of solutions to information systems problems, including but not limited to identification problems, through customized applications development and product integration. IIS is targeting commercial and government markets. Most of the Company's revenues in the first nine months of fiscal 1998 and fiscal 1997 came from live-scan systems sales, maintenance and applications development services for the law enforcement market. The Company's current financial results, and the near-term future results, thus may be expected to be heavily influenced by the characteristics of the law enforcement market. The law enforcement market and the government procurement process is subject to budgetary, economic and political considerations which may vary significantly from state to state and among different agencies. These market characteristics, along with the recent and continuing development of and competition within the live-scan electronic fingerprint industry, have resulted in and are expected to continue to result in an irregular revenue cycle for the Company; any prediction of future trends in this business is inherently difficult. The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. For further information, refer to financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended September 30, 1997. 7 DIGITAL BIOMETRICS, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 1998 (UNAUDITED) (2) ACCOUNTING POLICIES SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK The Company extends credit to state and local governments in connection with sales of products to law enforcement agencies. Approximately 88% and 89%, respectively, of customer accounts receivable at June 30, 1998 and September 30, 1997 were from government agencies, of which 53% and 39%, respectively, were from a single customer. Revenues from two customers in the three-month period ended June 30, 1998 accounted for 27% and 13% of total revenues, and revenues from two customers in the three-month period ended June 30, 1997 accounted for 23% and 12% of total revenues. For the nine-month period ended June 30, 1998, revenues from two customers accounted for 20% and 10% of total revenues. Revenues from two customers during the nine-month period ended June 30, 1997 accounted for 23% and 18% of total revenues. Export revenues for the three-month periods ended June 30, 1998 and 1997 were less 1% of total revenues. Export revenues for the nine-month period ended June 30, 1998 were 12% as compared to 5% for the same period in 1997. STATEMENT OF CASH FLOWS For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments and certificates of deposit purchased with an original maturity date of three months or less to be cash equivalents. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Nine Months Ended June 30, 1998 1997 ------ -------- Cash paid during the period for interest $5,249 $162,803 ====== ======== For supplemental disclosure of non-cash investing and financing activities see notes 7 and 8. NET LOSS PER COMMON SHARE Net loss per common share is determined by dividing the net loss by the weighted average number of shares of common stock outstanding for the period. Net loss per common share does not consider common stock equivalents. Diluted earnings per share is not included herein as the impact of common stock equivalents is antidilutive. 8 DIGITAL BIOMETRICS, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 1998 (UNAUDITED) (3) MARKETABLE SECURITIES Marketable securities consist of collateralized mortgage-backed securities. Net realized and unrealized gains and losses are determined on the specific identification cost basis. There were no realized losses from sales of marketable securities for the three-month periods ended June 30, 1998 or 1997. Realized losses from paydowns of marketable securities were $1,000 for the nine-month period ended June 30, 1998. Unrealized gains and losses are reflected as a separate component of stockholders' equity. (4) INVENTORY Inventory is valued at standard which approximates the lower of first-in, first-out (FIFO) cost or market. Inventory consists of the following: June 30, September 30, 1998 1997 ---------- ------------ Components and purchased subassemblies $ 982,319 $1,054,606 Work in process 1,175,282 699,097 Finished goods 235,215 540,890 ---------- ------------ $2,392,816 $2,294,593 ========== ========== (5) LINES OF CREDIT The Company has a receivables financing line of credit for the lesser of eligible receivables or $1,000,000 with Norwest Business Credit. Borrowings under this line of credit are secured by all assets of the Company. The line bears interest at 4.5% above the prime rate (8.5% at June 30, 1998), is payable upon demand and expires on September 30, 1998. There were no borrowings under the line at June 30, 1998. The Company does not anticipate a renewal of the line of credit upon expiration. The Company anticipates that a similar line of credit or other financing will be required in fiscal 1999 to meet working capital requirements. The Company is pursuing the establishment of a line of credit with other lenders, although it has no commitment for such financing as of this date. (6) OTHER ACCRUED EXPENSES Other accrued expenses consist of: June 30, September 30, 1998 1997 -------- -------- Accrued vacation $144,983 121,994 Accrued installation costs 208,545 97,750 Other accrued expenses 341,603 334,159 -------- -------- $695,131 $553,903 ======== ======== 9 DIGITAL BIOMETRICS, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 1998 (UNAUDITED) (7) 8% CONVERTIBLE SUBORDINATED DEBENTURES To provide additional working capital, on December 1, 1997 the Company entered into a convertible subordinated debenture purchase agreement ("Purchase Agreement") with a private investor, providing for the Company's issuance and sale of up to an aggregate of $2,500,000 of 8% Convertible Subordinated Debentures ("Debentures") in tranches of $500,000 each. The first tranche was sold on December 1, 1997 (the "Tranche 1 Debentures"). Additional tranches may be issued upon request of the Company within 90 days of each previous tranche, if the Company meets all conditions to issuance including, but not limited to, conditions requiring the Company to have effective and maintain a registration statement with the Securities and Exchange Commission covering shares issuable upon conversion of the Debentures and a requirement that the Company's market capitalization be at least $12 million. The Tranche 1 Debentures sold in the amount of $500,000 on December 1, 1997 were convertible in whole or in part at the option of the holder, with accrued interest, into common stock, at a conversion price equal to the lesser of the average closing price of the five consecutive trading days preceding the transaction ($1.96 per share) or 80% of the average closing price of the five consecutive trading days preceding the conversion date. Future tranches may be convertible on a similar basis but the conversion prices will be related to the lesser of the market price on the issue date or the market price on the conversion date. The Company has the right, exercisable at any time upon two trading days notice to the purchaser of the Debentures given at any time the Company receives a conversion notice and the conversion price in effect in connection with such conversion notice is less than $1.25, to repay all or any portion of the outstanding principal amount of the Debentures which have been tendered for conversion, at a price equal to the sum of 120% of the aggregate principal amount of Debentures to be repaid. In connection with the Purchase Agreement, the Company has agreed to issue to the purchaser of the Debentures, upon the sale of each tranche, warrants to purchase 15,000 shares of common stock exercisable at $2.50 per share, up to a maximum 75,000 shares. Also in connection with the transaction, the Company paid $40,000 of fees to an investment-banking firm and issued a warrant to purchase 125,000 shares of common stock at an exercise price of $2.00 per share. The estimated value of this warrant is $87,500, which is a debt issuance cost written off to interest expense over the term of the Tranche 1 Debentures. The Purchase Agreement includes a beneficial conversion feature. The intrinsic value of the beneficial conversion feature of each tranche will be allocated to additional paid-in capital with the resulting discount on the debt resulting in a non-cash interest expense charge to earnings over the vesting period of the conversion feature. The intrinsic value of the conversion feature of the Tranche 1 Debenture was $125,000. Net proceeds to the Company are being used for working capital, business development and other general corporate purposes. 10 DIGITAL BIOMETRICS, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 1998 (UNAUDITED) (7) 8% CONVERTIBLE SUBORDINATED DEBENTURES (CONTINUED) The second $500,000 tranche (the "Tranche 2 Debentures") was sold on March 11, 1998. The Company paid $40,000 of fees to an investment-banking firm in connection with the transaction. The intrinsic value of the conversion feature of the Tranche 2 Debentures was $125,000 which resulted in a non-cash interest expense charge to earnings. The Tranche 2 Debentures are convertible into common stock of the Company at the lesser of $1.36 per share ("Tranche 2 Initial Conversion Price") or 80% of the average price of the Company's Common Stock for the five trading days immediately preceding the conversion date. Per the terms of the Purchase Agreement, the Company issued to the purchaser a warrant to purchase 15,000 shares of common stock exercisable at $2.50 per share. The third $500,000 tranche (the "Tranche 3 Debentures") was sold on June 12, 1998. The Company paid $40,000 of fees to an investment-banking firm in connection with the transaction. The intrinsic value of the conversion feature of the Tranche 3 Debentures was $125,000 which resulted in a non-cash interest expense charge to earnings during the three-month period ended June 30, 1998 since there was immediate vesting of the conversion feature. The Tranche 3 Debentures are convertible into common stock of the Company at the lesser of $2.23 per share ("Tranche 3 Initial Conversion Price") or 80% of the average price of the Company's Common Stock for the five trading days immediately preceding the conversion date. Per the terms of the Purchase Agreement, the Company issued to the purchaser a warrant to purchase 15,000 shares of common stock exercisable at $2.50 per share. For the nine-month period ended June 30, 1998, the Company issued an aggregate of 527,225 shares of common stock for the conversion of principal aggregating $500,000 of the Tranche 1 Debentures plus $10,784 of accrued interest at an average conversion price of $0.97 per share. (8) STOCKHOLDERS' EQUITY Effective December 31, 1997, the Company issued 55,963 shares of common stock to satisfy the Company's discretionary matching to employees electing participation in the Company's 401(k) retirement plan. This issuance increased common stock and additional paid-in capital by $87,442 and reduced accrued compensation by the same amount. Effective February 10, 1998, the Company granted 3,000 shares of restricted common stock to one of its non-employee directors. The grant resulted in $3,939 in additional common stock issued and an equal amount of compensation expense. 11 DIGITAL BIOMETRICS, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 1998 (UNAUDITED) (8) STOCKHOLDERS' EQUITY (CONTINUED) During the nine-month period ended June 30, 1998, the Company granted options to acquire an aggregate of 922,500 shares of the Company's common stock pursuant to discretionary stock option awards to employees. These options are exercisable at prices ranging from $1.31 to $2.56 per share and expire between the years 2005 and 2008. During the nine-month period ended June 30, 1998, the Company issued 527,225 shares of common stock for the conversion of principal aggregating $500,000 of the 8% Convertible Subordinated Debentures plus $10,784 of accrued interest. Effective with their election at the annual stockholders' meeting held on April 8, 1998, the Company granted an aggregate of 44,304 shares of restricted common stock to its non-employee directors. The grant resulted in $72,000 in additional common stock issued and an equal amount of deferred compensation expense which is being amortized on a straight-line basis over the three-year restricted period. Also effective with their election, the Company granted options to acquire an aggregate of 60,000 shares of the Company's common stock to its non-employee directors. These options are exercisable at $1.625 per share and expire in 2003. Effective April 8, 1998, the Company adopted the 1998 Stock Option Plan (the "1998 Plan"). The 1998 Plan allows for the grant of options to acquire an aggregate of 600,000 shares of common stock. Participants eligible to receive options under the 1998 Plan include employees, officers, directors, consultants and advisors of the Company or of any subsidiary or affiliated entity subject to the provisions of the 1998 Plan. On April 8, 1998, the shareholders approved an amendment to the Certificate of Incorporation of the Company for an increase in the number of shares of common stock authorized from 20,000,000 to 40,000,000. (9) LITIGATION On June 1, 1995, the Company filed a complaint for patent infringement against Identix, Inc., of Sunnyvale, California, in the U.S. District Court for the Northern District of California. The complaint alleged that Identix willfully and deliberately infringed a Company patent through the manufacture, use and sale of competing products. 12 DIGITAL BIOMETRICS, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 1998 (UNAUDITED) (9) LITIGATION (CONTINUED) On August 27, 1996, the judge assigned to the case granted a partial summary judgment in favor of Identix dismissing the Company's claims of patent infringement with respect to Identix's Touchprint 600 product line. A predecessor product, the Touchprint 900, received a similar ruling in favor of Identix on December 20, 1996. In January 1997, the Company filed an appeal of the court's decision of non-infringement to the United States Court of Appeals for the Federal Circuit in Washington, D. C. On October 8, 1997, the appeal was argued before the Court. On July 2, 1998, the U.S. Court of Appeals upheld the earlier ruling of the Federal District Court that Identix Inc. has not infringed on the Company's patents. The Company anticipates no further charges for legal or other expenses related to the disposition of this suit. Except for the foregoing, there are no material lawsuits pending or, to the Company's knowledge, threatened against the Company. (10) JOINT VENTURE WITH GRAND CASINOS, INC. On March 16, 1998, the Company signed a definitive agreement with Grand Casinos, Inc. forming a new joint venture company to further develop, test and market the TRAK-21 automated player tracking system. Deployment of a system based on TRAK-21 technology in a Grand Casinos property is anticipated in fiscal 1998. The Company's initial membership interest in the joint venture is 51%. The Company has adopted the equity method in accounting for the investment. For the nine-month period ended June 30, 1998, the Company's recorded loss from the joint venture is limited to the carrying amount of its investment of $13,700 and has been recorded as "Other expense" in the Statements of Operations. (11) NON-RECURRING CHARGES Non-recurring charges of $1,859,000 were recorded during the three-month period ended June 30, 1997. Of this amount, $1,529,000 was charged to cost of sales and includes $838,000 of inventory adjustments for technical obsolescence, $524,000 of warranty reserve funding for warranty items mainly associated with the introduction and rollout of the S-Series which were quantified during the quarter, $132,000 for estimated committed losses on maintenance contracts, and $35,000 for the write-off of tooling. Non-recurring charges to operating expenses were $330,000 and include the write-off of assets with no future value, and to a lesser extent, equipment disposals. The net loss per share for the three- and nine-month periods ended June 30, 1997, were negatively impacted by $0.15 and $0.16, respectively, with these non-recurring charges. 13 DIGITAL BIOMETRICS, INC. THREE MONTHS ENDED JUNE 30, 1998 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company is a developer, assembler, marketer and integrator of computer-based products and services for the identification of individuals, and, through its recently-formed Integrated Information Solutions Division, offers systems integration services to commercial and governmental clients. Most of the Company's revenues have been to state and local law enforcement agencies and, to date, have consisted primarily of TENPRINTER systems and related peripheral equipment, software and services. The law enforcement market and the government procurement process is subject to budgetary, economic and political considerations which may vary significantly from state to state and among different agencies. These market characteristics, along with the recent and continuing development of and competition within the live-scan electronic fingerprint industry, have resulted in and are expected to continue to result in an irregular revenue cycle for the Company; any prediction of future trends is inherently difficult. The Company generally recognizes product sales on the date of shipment, although recognition at some later milestone is not uncommon based on the terms of specific customer contracts. The Company's standard terms of sale are payment due net in thirty days, f.o.b. Digital Biometrics, Inc. Terms of sale and shipment for certain procurements by municipal or other government agencies may, however, be subject to negotiation which consequently may affect the Company's timing and criteria for revenue recognition. Revenue under contracts where a performance bond, collateral or customer acceptance is required is not recognized until collateral requirements have been satisfied and customer acceptance has occurred. In cases where the Company is required to purchase a performance bond or to deposit collateral in accordance with the terms of a contract, the Company's policy is to defer revenues under such contracts until the amount shipped exceeds the amount of the performance collateral or until the security is released by the bonding company. Maintenance revenues are recognized over the life of the contract on a straight-line basis. Systems integration services revenues are recognized using the percentage of completion method or on a time-and-materials basis. THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997 Total revenues were $3,522,000 for the three months ended June 30, 1998 compared with $2,313,000 for the same prior-year period. Identification system product revenues were $2,632,000 compared with $1,890,000 in the same prior-year period. The increase is due primarily to an increase in the number of TENPRINTER systems sold during the three months ended June 30, 1998. 14 DIGITAL BIOMETRICS, INC. THREE MONTHS ENDED JUNE 30, 1998 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) RESULTS OF OPERATIONS Maintenance revenues were $691,000 for the three months ended June 30, 1998 compared with $423,000 for the same prior-year period, an increase of 64%. This increase is due primarily to a larger installed base of TENPRINTER systems covered by maintenance agreements, an increase in maintenance rates effective with maintenance contract renewals, and an increase in "time and materials" and similar maintenance revenues. Systems integration revenues were $199,000 for the three months ended June 30, 1998. There were no integration service revenues for the same prior-year period. Systems integration revenues were generated from the Company's Integrated Information Solutions Division, which began operations during the first quarter of fiscal 1998. For the three-month period ended June 30, 1998, revenues from two customers accounted for approximately 27% and 13% of total revenues. Revenues from two customers during the three months ended June 30, 1997 accounted for approximately 23% and 12% of total revenues. Export revenues for the three-month periods ended June 30, 1998 and 1997 were less than 1% of total revenues. Overall gross margins for the three months ended June 30, 1998 were 31% as compared with negative 46% of total revenues for the same prior-year period. Overall gross margins were negatively impacted by 66% during the prior-year three-month period due to non-recurring charges to cost of sales of $1,529,000. These charges included $838,000 of inventory adjustments for technical obsolescence, $524,000 for warranty reserve funding for warranty items mainly associated with the introduction and rollout of the S-Series, $132,000 for estimated committed losses on maintenance contracts, and $35,000 for the write-off of tooling. Gross margins on identification system sales were 37% for the three months ended June 30, 1998 compared with 31% in the same prior-year period. This increase is due to higher sales volume and production levels during the current-year period. Maintenance margins for the three months ended June 30, 1998 and 1997 were 6% and negative 29%, respectively, of maintenance revenues. The substantial improvement in maintenance margins is due mainly to the favorable impact of higher revenues and initiatives to reduce cost and improve efficiency. Systems integration margins for the three months ended June 30, 1998 were 33% of systems integration revenues. As indicated above, systems integration revenues were generated from the Integrated Information Solutions Division, which began operations during the first quarter of fiscal 1998. 15 DIGITAL BIOMETRICS, INC. THREE MONTHS ENDED JUNE 30, 1998 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) RESULTS OF OPERATIONS (CONTINUED) Sales and marketing expenses for the three-month periods ended June 30, 1998 were $518,000 (15% of total revenues) as compared to $498,000 (22% of total revenues) for the same prior-year period. The decrease in sales and marketing costs as a percent of total revenues is due primarily to higher revenues during the current-year period. Engineering and development expenses were $757,000 (21% of total revenues) for the three-month period ended June 30, 1998 compared to $719,000 (31% of total revenues) for the same period a year ago. The decrease in engineering and development costs as a percent of total revenues is due primarily to higher revenues during the current-year period. Engineering and development expenses increased $38,000 during the current-year period compared to the same prior-year period due primarily to $198,000 for personnel-related costs associated with the newly established Integrated Information Solutions Division, partially offset by $40,000 of reduced development costs for the TRAK-21 product as a result of the joint venture with Grand Casinos, Inc. and allocations to product costs. General and administrative expenses for the three-month period ended June 30, 1998 were $473,000 (13% of total revenues) as compared to $523,000 (23% of total revenues) during the same prior-year period. This decrease is due primarily to $58,000 of lower legal costs related to a patent infringement suit. Operating expenses during the three-month period ended June 30, 1997 included non-recurring charges of $330,000 for the write-off of assets with no future value, and to a lesser extent, equipment disposals. Interest income decreased to $15,000 for the three months ended June 30, 1998 from $71,000 for the same period in 1997 due to lower balances of cash and marketable securities. Interest expense increased to $143,000 for the three months ended June 30, 1998 from $31,000 for the same prior-year period, primarily due to a non-cash charge during the three-month period ended June 30, 1998 of $125,000 for the intrinsic value of the beneficial conversion feature of convertible debentures issued during fiscal 1998, partially offset by lower borrowings under lines of credit during the current-year period. The Company incurred a net loss for the three-month period ended June 30, 1998 of $840,000 ($0.06 per share) as compared with $3,103,000 ($0.25 per share) for the same prior-year period. 16 DIGITAL BIOMETRICS, INC. THREE MONTHS ENDED JUNE 30, 1998 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) RESULTS OF OPERATIONS (CONTINUED) NINE MONTHS ENDED JUNE 30, 1998 COMPARED TO NINE MONTHS ENDED JUNE 30, 1997 Total revenues were $7,822,000 for the nine months ended June 30, 1998 compared with $8,077,000 for the same prior-year period. Identification system product revenues were $5,621,000 compared with $6,863,000 in the same prior-year period. The decrease is due primarily to a decrease in the number of TENPRINTER systems sold during the nine months ended June 30, 1998. Maintenance revenues were $1,891,000 for the nine months ended June 30, 1998 compared with $1,214,000 for the same prior-year period, an increase of 56%. This increase is due primarily to a larger installed base of TENPRINTER systems covered by maintenance agreements, an increase in maintenance rates effective with maintenance contract renewals, and an increase in "time and materials" and similar maintenance revenues. Systems integration revenues were $310,000 for the nine months ended June 30, 1998. There were no systems integration revenues for the same prior-year period. Systems integration revenues were generated from the Company's Integrated Information Solutions Division which began operations during the first quarter of fiscal 1998. For the nine-month period ended June 30, 1998, revenues from two customers accounted for approximately 20% and 10% of total revenues. Revenues from two customers during the nine months ended June 30, 1997 accounted for approximately 23% and 18% of total revenues. Export revenues for the nine-month period ended June 30, 1998 were 12% of total revenues compared to 5% during the same prior-year period. Overall gross margins for the nine months ended June 30, 1998 were 23% as compared with 5% of total revenues for the same prior-year period. Overall gross margins were negatively impacted by 19% during the prior-year three-month period due to non-recurring charges to cost of sales of $1,529,000. These charges included $838,000 of inventory adjustments for technical obsolescence, $524,000 for warranty reserve funding for warranty items mainly associated with the introduction and rollout of the S-Series, $132,000 for estimated committed losses on maintenance contracts, and $35,000 for the write-off of tooling. Gross margins on identification system sales were 25% for the nine months ended June 30, 1998 compared with 32% in the same prior-year period. This decrease is due to lower sales and production volume, higher engineering product support costs and higher warranty and installation accruals than in the prior-year period. Maintenance margins for the nine months ended June 30, 1998 and 1997 were 16% and negative 27%, respectively, of maintenance revenues. The substantial improvement in maintenance margins is due mainly to the favorable impact of higher revenues and initiatives to reduce cost and improve efficiency. 17 DIGITAL BIOMETRICS, INC. THREE MONTHS ENDED JUNE 30, 1998 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) RESULTS OF OPERATIONS (CONTINUED) Systems integration margins for the nine months ended June 30, 1998 were 34% of systems integration revenues. As indicated above, systems integration revenues were generated from the Integrated Information Solutions Division, which began operations during the first quarter of fiscal 1998. Sales and marketing expenses for the nine-month period ended June 30, 1998 were $1,415,000 (18% of total revenues) as compared to $1,730,000 (21% of total revenues) for the same prior-year period. This $315,000 decrease in sales and marketing costs was due primarily to $262,000 of reduced introductory S-Series promotional costs and $110,000 of reduced demonstration equipment costs, partially offset by $85,000 of higher costs for international marketing and $24,000 of royalty costs on international shipments. Engineering and development expenses were $2,282,000 (29% of total revenues) for the nine-month period ended June 30, 1998compared to $2,091,000 (26% of total revenues) for the same period a year ago. This increase is due primarily to $660,000 for additional personnel-related costs and setup costs associated with the newly established Integrated Information Solutions Division and $59,000 of increased amortization and write-offs of intangible assets, partially offset by $208,000 of reduced development costs for the TRAK-21 product as a result of the joint venture with Grand Casinos, Inc. and approximately $300,000 of additional allocations to product costs. General and administrative expenses for the nine-month period ended June 30, 1998 were $1,406,000 (18% of total revenues) compared to $1,373,000 (17% of total revenues). This increase is due primarily to increased general operating costs, $40,000 of increased personnel-related costs for severance paid to a former executive, partially offset by $106,000 of lower legal costs related to a patent infringement suit. Operating expenses during the nine-month period ended June 30, 1997 included non-recurring charges of $330,000 for the write-off of assets with no future value, and to a lesser extent, equipment disposals. Interest income decreased to $35,000 for the nine months ended June 30, 1998 from $240,000 for the same period in 1997 due to lower balances of cash and marketable securities. Interest expense increased to $427,000 for the nine months ended June 30, 1998 from $243,000 for the same prior-year period, primarily due to non-cash charges during the nine-month period June 30, 1998 of $375,000 for the intrinsic value of the beneficial conversion feature of convertible debentures issued during fiscal 1998, partially offset by lower interest charges from lower borrowings under lines of credit during the current-year period. Other expense increased to $63,000 for the three months ended June 30, 1998 from $7,000 for the same prior-year period, due to $42,000 of loss on disposal of fixed assets and $14,000 of loss recorded from the TRAK-21 joint venture. INFLATION The Company does not believe inflation has significantly impacted revenues or expenses. 18 DIGITAL BIOMETRICS, INC. THREE MONTHS ENDED JUNE 30, 1998 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) RESULTS OF OPERATIONS (CONTINUED) NET OPERATING LOSS CARRYFORWARDS At June 30, 1998, the Company had carryforwards of net operating losses of approximately $34,500,000 that may allow the Company to reduce future income taxes that would otherwise be payable. Of this amount approximately $2,200,000 relates to compensation associated with the exercise of non-qualified stock options which, when realized, would result in approximately $880,000 credited to additional paid-in capital. The carryforwards expire annually beginning in 1999. The annual limitation on use of net operating losses is calculated by multiplying the value of the corporation immediately prior to the change in ownership by the published U.S. Internal Revenue Service long-term federal tax exempt rate. A total of $3,700,000 of the net operating loss carryforwards at June 30, 1998 is subject to an annual net operating loss limitation, estimated at $350,000, resulting from the change in control of the Company which occurred, for income tax purposes, on December 14, 1990, the date of the Company's initial public offering. If the limited carryforward amount for any tax year exceeds the regular taxable income for such year, then the unused portion may generally be carried forward to increase the annual limitation for the following year. Utilization of net operating losses aggregating $30,800,000 which were incurred subsequent to the change of ownership are not limited. However, any future ownership change could create a limitation with respect to these loss carryforwards. LIQUIDITY AND CAPITAL RESOURCES GENERAL For the period from the Company's inception in 1985 through June 30, 1998, the Company's cumulative deficit was $39,049,000. Losses are expected to continue until revenues and gross margin from sales of the Company's current and future products and services are sufficient to cover the level of operating expenses required for the Company's operations. The Company's business has included large contract awards from international, state and local law enforcement agencies and it is expected that this will continue. Collection of receivables related to billings of these contract amounts is often protracted. The Company has a receivables financing line of credit for the lesser of eligible receivables or $1,000,000 with Norwest Business Credit. Borrowings under this line of credit are secured by all assets of the Company. The line bears interest at 4.5% above the prime rate (8.5% at June 30, 1998), is payable upon demand and expires in September 1998. There were no borrowings under the line at June 30, 1998. The Company does not anticipate a renewal of the line of credit upon expiration. The Company anticipates that a similar line of credit or other financing will be required in fiscal 1999 to meet working capital requirements. The Company is pursuing the establishment of a line of credit with other lenders, although it has no commitment for such financing as of this date. 19 DIGITAL BIOMETRICS, INC. THREE MONTHS ENDED JUNE 30, 1998 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) ISSUANCE OF 8% CONVERTIBLE SUBORDINATED DEBENTURES AND WARRANTS To provide additional working capital, on December 1, 1997, the Company entered into a convertible subordinated debenture purchase agreement ("Purchase Agreement") with a private investor, providing for the Company's issuance and sale of up to an aggregate of $2,500,000 of 8% Convertible Subordinated Debentures (the "Debentures") in tranches of $500,000 each. The first tranche was sold on December 1, 1997 (the "Tranche 1 Debentures"). Additional tranches may be issued upon request of the Company within 90 days of each previous tranche, if the Company meets conditions to issuance including, but not limited to, conditions requiring the Company to have effective and maintain a registration statement with the Securities and Exchange Commission covering shares issuable upon conversion of the Debentures, and a requirement that the Company's market capitalization be at least $12 million. The Tranche 1 Debentures sold in the amount of $500,000 on December 1, 1997 was convertible in whole or in part at the option of the holder, with accrued interest, into common stock, at a conversion price equal to the lesser of the average closing price of the five consecutive trading days preceding the transaction ($1.96 per share) or 80% of the average closing price of the five consecutive trading days preceding the conversion date. Future tranches may be convertible on a similar basis but the conversion prices will be related to the lesser of the market price on the issue date and the market price on the conversion date. The Company has the right, exercisable at any time upon two trading days notice to the purchaser of the Debentures given at any time the Company receives a conversion notice and the conversion price in effect in connection with such conversion notice is less than $1.25, to repay all or any portion of the outstanding principal amount of the Debentures which have been tendered for conversion, at a price equal to the sum of 120% of the aggregate principal amount of the Debentures to be repaid. In connection with the Purchase Agreement, the Company has agreed to issue to the purchaser of the Debentures, upon the sale of each tranche warrants to purchase 15,000 shares of common stock exercisable at $2.50 per share up to a maximum of 75,000 shares. Also, in connection with the transaction, the Company paid $40,000 of fees to an investment banking firm and issued a warrant to purchase 125,000 shares of common stock at an exercise price of $2.00 per share. The estimated value of this warrant is $87,500 which is a debt issuance cost written off to interest expense over the term of the Tranche 1 Debentures. The Purchase Agreement includes a beneficial conversion feature. The intrinsic value of the beneficial conversion feature of each tranche will be allocated to additional paid-in capital with the resulting discount on the debt resulting in a non-cash interest expense charge to earnings over the vesting period of the conversion feature. The intrinsic value of the conversion feature of the Tranche 1 Debentures was $125,000. Net proceeds to the Company are being used for working capital, the development of new business opportunities, and other general corporate purposes. 20 DIGITAL BIOMETRICS, INC. THREE MONTHS ENDED JUNE 30, 1998 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) The second $500,000 tranche was sold on March 11, 1998 (the "Tranche 2 Debentures"). The Company paid $40,000 of fees to an investment-banking firm in connection with the transaction. The intrinsic value of the conversion feature of the Tranche 2 Debentures was $125,000 and resulted in a non-cash interest expense charge to earnings. The Tranche 2 Debentures are convertible into common stock of the Company at the lesser of $1.36 per share or 80% of the average price of the Company's Common Stock for the five trading days immediately preceding the conversion date. Per the terms of the Purchase Agreement, the Company issued to the purchaser a warrant to purchase 15,000 shares of Common Stock exercisable at $2.50 per share. The third $500,000 tranche (the "Tranche 3 Debentures") was sold on June 12, 1998. The Company paid $40,000 of fees to an investment-banking firm in connection with the transaction. The intrinsic value of the conversion feature of the Tranche 3 Debentures was $125,000 which resulted in a non-cash interest expense charge to earnings during the three-month period ended June 30, 1998. The Tranche 3 Debentures are convertible into common stock of the Company at the lesser of $2.23 per share or 80% of the average price of the Company's Common Stock for the five trading days immediately preceding the conversion date. Per the terms of the Purchase Agreement, the Company issued to the purchaser a warrant to purchase 15,000 shares of common stock exercisable at $2.50 per share. ANALYSIS OF CASH FLOWS FROM OPERATIONS Net cash used in operating activities was $1,554,000 for the nine months ended June 30, 1998 compared with $2,225,000 for the same prior-year period. The decrease in cash used in operating activities was primarily a result of a decrease in net loss for the current-year period, partially offset by changes in operating assets and liabilities. Cash flows from changes in operating assets and liabilities changed from cash provided of $472,000 in the prior-year period, excluding the effect of non-recurring charges, to cash provided of $1,219,000 in the nine-month period ended June 30, 1998. This $747,000 increase in cash flow from operating assets and liabilities resulted primarily from improved collections of receivables during the current-year period. Net cash used in investing activities was $247,000 for the nine months ended June 30, 1998 as compared with net cash provided by investing activities of $1,079,000 in the same prior-year period. The change was primarily due to a decrease in proceeds from sales of marketable securities, and to a lesser extent, increased capital expenditures during the nine months ended June 30, 1998 to support establishment of the IIS Division. Net cash provided by financing activities was $1,359,000 during the nine months ended June 30, 1998, as compared to $998,000 during the same prior-year period. This increase is due primarily to $1,354,000 from the issuance of 8% Convertible Subordinated Debentures during the current-year as noted above and in Note 7, partially offset by the absence of borrowings under lines of credit at June 30, 1998 as compared to $985,000 of borrowings the prior year. 21 DIGITAL BIOMETRICS, INC. THREE MONTHS ENDED JUNE 30, 1998 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) At June 30, 1998, the Company had $1,449,000 in cash and cash equivalents. Management believes that cash and cash equivalents, together with available financing sources, are sufficient to meet current operating requirements. The Company anticipates that a line of credit or other financing will be required in fiscal 1999 to meet working capital requirements. The Company is pursuing the establishment of a line of credit with other lenders, although it has no commitment for such financing as of this date. 22 DIGITAL BIOMETRICS, INC. THREE MONTHS ENDED JUNE 30, 1998 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On June 1, 1995, the Company filed a complaint for patent infringement against Identix, Inc., of Sunnyvale, California, in the U.S. District Court for the Northern District of California. The complaint alleged that Identix willfully and deliberately infringed a Company patent through the manufacture, use and sale of competing products. On August 27, 1996, the judge assigned to the case granted a partial summary judgment in favor of Identix dismissing the Company's claims of patent infringement with respect to Identix's Touchprint 600 product line. A predecessor product, the Touchprint 900, received a similar ruling in favor of Identix on December 20, 1996. In January 1997, the Company filed an appeal of the court's decision of non-infringement to the United States Court of Appeals for the Federal Circuit in Washington, D. C. On October 8, 1997, the appeal was argued before the Court. On July 2, 1998, the U.S. Court of Appeals upheld the earlier ruling of the Federal District Court that Identix Inc. has not infringed on the Company's patents. The Company anticipates no further charges for legal or other expenses related to the disposition of this suit. Except for the foregoing, there are no material lawsuits pending or, to the Company's knowledge, threatened against the Company. 23 DIGITAL BIOMETRICS, INC. THREE MONTHS ENDED JUNE 30, 1998 PART II - OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (c) On June 12, the Company sold (i) $500,000 principal amount of 8% Convertible Subordinated Debentures, (the "Tranche 3 Debentures"), due December 1, 2000; and (ii) a Warrant dated June 12, 1998, (the "Tranche 3 KA Warrant") for the purchase of 15,000 shares of the Company's common stock. The Tranche 3 Debenture and Tranche 3 KA Warrant were issued to KA Investments LDC, an accredited investor, in a private placement transaction, in reliance upon Section 4(2) under the Securities Act of 1933, as amended (the "Act"). No public offering or general solicitation of investors was involved in connection with the transaction. In connection with the transaction, the Company employed the services of Miller, Johnson & Kuehn, Incorporated ("MJK"), an investment banking firm, as placement agent, and paid MJK commissions of $40,000. The Tranche 3 Debentures are convertible into common stock of the Company at the lesser of $2.23 per share ("Tranche 3 Initial Conversion Price") or 80% of the average price of the Company's Common Stock for the five trading days immediately preceding the conversion date. The Tranche 3 KA Warrant is exercisable at $2.50 per share. Net proceeds to the Company are being used for working capital, the development of new business opportunities, and other general corporate purposes. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company held its Annual Meeting of Stockholders on April 8, 1998. Proxies for such meeting were solicited pursuant to Regulation 14A under the Securities Exchange Act of 1934 as amended. At the meeting, sufficient favorable votes were cast to approve each of the following of management's proposals: * Adopt an Amendment to the Certificate of Incorporation of the Company for an increase in the number of shares of common stock authorized from 20,000,000 to 40,000,000. The results of the vote on this proposal were 10,752,999 shares voted for approval; 605,441 shares voted against; 81,115 shares abstaining and no broker non-votes. * Adopt the Company's 1998 Stock Option Plan and reserve 600,000 shares of common stock for which options may be granted. The results of the vote on this proposal were 10,297,293 shares voted for approval; 639,042 shares voted against; 138,680 shares abstaining and 364,540 broker non-votes. ITEM 5. OTHER INFORMATION None 24 DIGITAL BIOMETRICS, INC. THREE MONTHS ENDED JUNE 30, 1998 PART II - OTHER INFORMATION (CONTINUED) ITEM 6. (a) EXHIBITS Exhibit 11 Statement re: Computation of loss per share Exhibit 27 Financial Data Schedule (b) REPORTS ON FORM 8-K There were no reports on Form 8-K filed by the Company during the three-month period ended June 30, 1998. 25 DIGITAL BIOMETRICS, INC. THREE MONTHS ENDED JUNE 30, 1998 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DIGITAL BIOMETRICS, INC. (Registrant) August 13, 1998 s/John J. Metil -------------------------------- John J. Metil Chief Operating Officer and Chief Financial Officer 26 EX-11.0 2 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 Nine Months Ended June 30, June 30, ------------------------------ ------------------------------ 1998 1997 1998 1997 ------------ ------------ ------------ ------------ Shares outstanding at beginning of period 12,947,226 12,060,122 12,361,038 10,777,288 Shares issued under retirement plan -- -- 55,963 41,798 Restricted stock awards, net of forfeitures 44,304 -- 47,304 19,072 Exercise of options and warrants 2,000 7,500 2,000 7,500 Shares issued from debenture and related interest conversion -- 263,916 527,225 1,485,880 ------------ ------------ ------------ ------------ Shares outstanding at end of period 12,993,530 12,331,538 12,993,530 12,331,538 ============ ============ ============ ============ Weighted average shares outstanding (A) 12,988,144 12,296,752 12,632,950 11,574,448 ============ ============ ============ ============ Net loss $ (839,771) $ (3,103,311) $ (3,726,113) $ (5,169,830) ============ ============ ============ ============ Basic loss per common share $ (0.06) $ (0.25) $ (0.29) $ (0.45) ============ ============ ============ ============
(A) Stock options and other common share equivalents are not included in the calculation of the net loss per common share for the three- and nine-month periods ended June 30, 1998 and 1997 as their effect is antidilutive. 27 EX-27 3 FINANCIAL DATA SCHEDULE
5 0000868373 DIGITAL BIOMETRICS, INC. 1 U.S. DOLLARS 9-MOS SEP-30-1998 OCT-01-1997 JUN-30-1998 1 1,448,697 0 4,109,560 240,647 2,392,816 7,913,876 2,153,676 1,253,008 8,939,008 3,571,138 977,573 0 0 129,935 4,260,362 8,939,008 5,621,190 7,821,909 4,201,691 5,990,708 5,103,057 0 427,073 (3,726,113) 0 (3,726,113) 0 0 0 (3,726,113) (0.29) (0.29)
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